NIL WWW 9-22-18
 Bearer Instrument:
FORGERY
PROMISSORY NOTE:
Forged: Signature of endorser.
 Order Instrument
Holder in Due Course and Holder NOT in Due
Course (Shelter Principle does not apply):
 Parties prior to forgery of the
endorsement may NOT be held liable.
They can raise the real defense of
forgery.
 Parties subsequent to forgery may be
held liable because of warranty that the
instrument is genuine and in all respects
what it purports to be AND that he has
good title to it.
 Bearer Instrument
 Holder in Due Course: holder can go
after maker. Forgery is NOT necessary
to the title of the holder and both the
real defense of forgery and the personal
defense of a complete but undelivered
instrument CANNOT be raised.
 Holder NOT in Due Course (shelter
principle does not apply): holder cannot
compel maker to pay.
While maker cannot raise the real
defense of forgery because the
signature is not necessary to the title of
the holder, he is not precluded from
raising the personal defense of a
complete but undelivered instrument.
BILL OF EXCHANGE:
Forged: Signature of drawer.
 Order Instrument:
 Drawer: CANNOT be held liable by
holder because he can always raise
real defense of forgery.
 Drawee: if accepted prior to forgery,
NOT liable. If accepted after forgery,
liable because of warranty of the
genuineness of drawer’s signature.
 Drawer: Same rules as order
instrument. Also, there is no privity of
contract between drawer & holder.
 Drawee: Same rules as order
instrument.
Forged: Signature of endorser.
Same as rules above.
Forged: Signature of drawee.
 Drawer: NOT liable.
 Drawee: CANNOT be held liable. He is NOT
a party to the instrument and can raise the
real defense of forgery.
So who should be held liable? The parties
after the forgery because of their
warranties (i.e. instrument is genuine in all
respects what it purports to be & that they
have good title to it). Parties prior to
forgery can raise the real defense of
forgery unless precluded to do so (e.g.
negligence).
NOTE: if banks involved
Forged: Signature of drawer.
 General Rule: Drawee Bank liable
because of its warranty.
 Exception: Drawer Bank negligent.
However, negligence by drawer
does NOT automatically exonerate
drawee from liability. At best,
negligence only taken into
consideration by the Court in
apportioning loss/damages.
Forged: Signature of endorser.
 General Rule: Collecting Bank
liable. But bank NOT precluded
from going after prior parties.
 Exception: Drawee Bank negligent
(e.g. failure to advise collecting
bank w/in 24 hrs. from clearing of
check re: the forgery).
 NOTE: Minority involved.
 Effect: does NOT avoid the
instrument. Gives rise to the real
defense of minority on part of
minor. Defense is personal to him
(i.e. only the minor can raise the
defense).
NOTE: Ultra Vires acts involved.
 Effect: does NOT avoid the
instrument. Gives rise to the real
defense of ultra vires acts on part of
corporation. Defense is personal to
it (i.e. only the corp. can raise the
defense). Signatory becomes
personally liable.
 If agent is signatory: NOT liable if
principal AND capacity of agent
placed in signature.
e.g. X corporation signed by Mr. A,
agent
NOTE: Signing by procuration.
By procuration means there is a limit
to authority granted (e.g. authority
granted is merely for collection).
Doesn’t make instrument non-
negotiable.
 Effect: There is a limit as to the
liability and it requires the person
dealing with instrument to inquire
as to limit. Same effects with
crossed checks.
CONSIDERATION
Definition: One which can support any simple
contract. Must be one of value (i.e. sufficient to
support a simple contract).
General Rule: instrument presumed issued WITH
consideration if silent as to whether issued with or
without consideration.
Possible considerations:
 Goods of any kind
 Past debt
 Cash
 Past/concurrent services (future services
render the instrument conditional
therefore, non-negotiable)
Instrument Issued for Consideration:
 Full: issuer for consideration has lien on the
instrument equal to the value of the
consideration.
 Partial: person who received the
instrument has to hold the proceeds up to
the portion where NO consideration was
given in trust for party who gave the
instrument. Portion w/out consideration
becomes subject to a defense pro tanto
(i.e. prorated).
Example: A owes B P500,000. A then gives
B an instrument worth P800,000. Upon
collection, B must hold P300,000 in trust
for A.
NOTE: Mere generosity, affection, and love
are NOT valuable considerations.
Instrument Issued for No Consideration:
 Effect: does NOT render instrument
invalid. Personal defense of want of
consideration available to party who
issued the instrument without
consideration AND/OR parties prior to
want of consideration.
Suppose:
 Failure of Consideration: personal defense
Example: X gave a check to Y for a genuine
diamond ring. But Y gave X a fake ring.
Here, there is failure of consideration. Can
X be compelled to pay on the check?
NO. X can raise the personal
defense of failure of consideration.
However if the check was endorsed by Y to
a holder in due course, then defense
cannot be raised.
 Illegal Consideration: personal defense
(same as if no consideration at all)
Example: X gave Y a check to become his
mistress. Y negotiated the instrument to Z
who doesn’t know about the arrangement.
Can Z go after X?
 YES, because X is precluded from
raising the defense of illegal consideration
since he is the one who caused the
illegality.
What if: X issued the instrument to Y for a
valid consideration. Y then gave it to Z, his
mistress. Z then negotiated the
instrument to A. Can A compel X to pay?
NO, because X can raise the personal
defense of want of consideration because
he is a party prior to the want of
consideration (but only against a holder
NOT in due course). But A can go after Y,
the one who caused the illegality of
consideration.
Instrument Issued in Accommodation of Another:
 Rule on Liability
 As to third parties: accommodation party
primarily liable.
 Between accommodation &
accommodated party: accommodated
party primarily liable.
Example: X, a very wealthy person, issued a
check for no consideration to Y, his good
friend with a poor credit standing so that Y
can buy construction materials from
Atlantic Hardware. Atlantic accepted the
check because it bore X’s signature. Who is
primarily liable?
As to Atlantic Hardware, X, the
accommodation party is primarily liable.
As between X and Y, Y the accommodation
party is primarily liable.
What if Y gave X P5,000 for the use of his
name. Who is primarily liable as between
X and Y?
Y would still be primarily liable because the
consideration Y gave X is consideration for
the use of his name and NOT for the
instrument itself.
NOTE:
 All holders in due course are holders
for value but NOT all holders for value
are holders in due course.
 The liability of an accommodation
party is to any holders for value, NOT
necessarily holders in due course.
However, holder for value that is NOT
a holder in due course is still
susceptible to personal defenses.
NEGOTIATION
 Happens when instrument is delivered or
delivered with endorsement, depending
on type of instrument.
 There is negotiation when the purpose of
transferring the instrument is to constitute
the transferee to be a holder.
 If transfer is NOT for purpose of
constituting transferee as holder, then
there is NO negotiation which is a personal
defense (want of delivery).
What if instrument was delivered without
endorsement? What’s the effect?
Constitutes mere assignment, NOT
negotiation. The rules of Civil Code will
apply, NOT the NIL.
What if an order instrument was
delivered without endorsement but with
the intention to make the receiver a
holder?
Gives rise on the part of the transferee to
compel the transferor to endorse the
instrument.
How to make an endorsement?
Transferor indicates (ordinarily on the back of
the instrument) his signature and person to
whom instrument is to be delivered.
Example: To Y, signed X.
 Blank endorsement: converts order
instrument into a bearer instrument.
NOTE: endorsement CAN be made on
a separate paper called an allonge.
What if blank endorsement converted
to special endorsement?
Effect: Bearer instrument converted
back to an order instrument.
 Restrictive endorsement: only Sec. 36
(A) renders instrument non-
negotiable. Sec. 36 (B) & Sec. 36 (C)
just limits rights of subsequent
endorsees. (daghan kaayong rules )