Negotiable Instruments

- One of the universal laws

- Took effect in 1911
- Commercial law is progressive; its dynamic. The way we do commerce or
business is dynamic. That even the laws cannot catch up with the
development of commerce.

Q: Why are we studying Negotiable instruments when it is already obsolete?

A: It is one of the universal laws. We have to have a law that is consistent and
similar with other countries. Because commerce and commercial transactions
are worldwide.

Q: Are Trade and Commerce the same?

A: No, they are different. Trade is merely an exchange between a merchant and
a customer in exchange for cash or its equivalent; merely an exchange of goods
and services for money or its equivalent. It can be Bilateral trade (between two
persons or entities) or multilateral trade (multiple traders). Commerce on the
other hand involves banks, insurance, transportation, warehouse, and many
other things during the transaction between parties in trade. All the things that
would facilitate exchange between and among people of services and money
or cash or its equivalent, all in all they are called commerce.

Commercial Laws
- A body of law that regulates the conduct of persons, merchants, and businesses
who are engaged in trade, sales, and commerce.

Governing Laws
- Act No. 2031 otherwise known as the Negotiable Instruments Law (NIL)
[this is only applicable to negotiable instruments it does not cover non
negotiable instruments]
- Code of Commerce
- Civil Code
 1
2 kind of Instruments (or document involved in commercial
transactions) 1. Negotiable
2. Non-negotiable
Note: The first thing to do is to determine whether a document is a Negotiable
Instrument.

Q: How do you determine if the document is negotiable or not? A: The

negotiability and non-negotiability of a document is to be determined from the
writing of the instrument; from the face of the instrument itself (i.e. the
provisions, conditions stated therein).

Note: If the document is payable to a specific person, it is covered by the general

provisions of the New Civil Code, not the NIL.

Assignment vs. Negotiation

Negotiable instruments can be transferred from one person to another through
assignment, if it is a non-negotiable instrument it can be transferred from one
person to another through negotiation.

Concept of Negotiable Instrument

Functions of NIL
1. It is a substitute for money that can be transferred (from cash to non-cash
transactions)
2. It is a medium of exchange
3. It is a credit instrument which credit circulation
- it is an instrument which acknowledged credit which is available for
circulation]
- Ex. Promissory notes can be transferred from person A to B or even to
C by discounting, etc.
4. It increase purchasing power in circulation
- it is not cash but it still has purchasing power
 5. It is proof of transaction
- Ex. You enter into a contract of lease, the lessor requires the lessee to give
him 12 post dated checks (special kind of a bill of exchange). The check is

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not only an acknowledgement of the credit to the lessor, it is also a proof of
transaction. That the lessee entered into a contract of lease.

Q: Are Negotiable instruments legal tender?

A: Negotiable instruments are not legal tender because they are not considered
as currency. They are merely substitute for money; they do not act as money.
They are not money, hence negotiable instruments are not legal tender.

Legal Tender: The currency authorized by law as payment for an

obligation. It is authorized to extinguish an obligation. Hence, you can
compel the creditor to receive it as payment.
- Bills and Coins authorized by the state to act as currency.

Example: A (debtor or obligor) owes 1M to B (creditor or obligee). There is a

cheque worth 1M, is the check considered a legal tender?
The check is not a legal tender because negotiable instruments are merely
substitutes for money (they are not money). A check is not money; it
doesn’t act as money.

Note:
- Since check is not legal tender, you cannot compel the creditor to accept a check as
payment of money.
- (If the creditor refuses to accept your payment, you can deposit it to the court and it
will extinguish the obligation)

Q: A (debtor or obligor) owes 1M to B (creditor or obligee). A pays the entire

amount in coins. Can A compel the creditor to accept the 1M coins? Is it legal
tender?
A: No, even if it is a coin to act as legal tender. It is improper because there is a
limitation for the use of coins.
NOTE: 1, 5, 10 peso coins are only considered legal tender if it does not exceed Php
1,000.

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Classes of Negotiable Instruments
1. Promissory Note [MEMORIZE]
- An unconditional promise in writing made by one person to another signed by
the maker, engaging to pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or bearer. Where the note is drawn to
the maker’s own order, it is not complete until endorsed by him (Section 184.
NIL)

Original Parties
a. Payee (creditor): the person receiving the money; who the note is address
to
b. Maker (payor): the one promising

2. Bill of Exchange
- An unconditional order in writing addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed to pay
upon demand or at a fixed or determinable future time a sum certain in money
to order or to bearer (Section 126, NIL).
Original Parties
a. Payee (the benificiary): to whom the document is originally addressed to
be paid
b. Drawer: the one giving the order and the person signing
c. Drawee: the person to whom the order is given, and who will pay later
on (siya yung magbabayad)

NOTE: The drawee is being ordered, but in order for him to be liable to the
instrument he needs to accept. If he does not accept he will not be liable.
Acceptance should be in writing. Once he accepts the instruments, the
drawee is now called the Acceptor. And as such he is now primarily liable
 to the instrument.

3. Check — as a special kind of a Bill of Exchange

- A bill of exchange drawn on a bank payable on demand (Section 185,

NIL) 4

- When a bank certifies a check it agrees in advance to (a) accept the check when
it is presented for payment (b) pay the check out of the funds set aside for the
customer’s account (Section 189,187, 188 NIL).
Note: When the bank commits a mistake they are liable to their mistake.

Characteristics of Negotiable Instruments

1. Negotiability: the capacity to transfer a document from one person to
another, so that the transferee will become the holder of instrument. [Negotiable
instruments can be transferred from one person to another; transfer = negotiation]

Negotiation: The acts of transferring the negotiable instrument from one

person to another so that the transferee will become the holder of the
negotiable instruments.

Holder: they have rights under the law (technical term).

2. Accumulation of secondary contracts

- Since an instrument can be transferred from one person to another, then the
transferors are secondarily liable to the person or the holder with whom they
transferred the instrument.
- There are instances wherein even if you are not the immediate transferor you
are still liable to the holder.

Negotiable Instruments Compared with Other Papers

**Assignment
Document of Title
Letter of Credit
Certificate of Stock
Postal Money Order
Treasury Warrant

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CASES
1. Phil. Education Comp. vs. Soriano (39 SCRA 587)
Issue: Whether postal money orders are negotiable instruments Ruling: No,
because it is given by the government. It is authorized by the government, and
the government is not involved in commercial transactions. Hence, these are not
commercial documents. Negotiable instruments are for commercial transactions,
trade and commerce.

2. Tibajia Jr., vs. CA (223 SCRA 163)

Issue: Whether a Cashier’s check is legal tender?
Ruling: No, checks are not legal tender. Checks and other negotiable
instruments are merely substitute for money. They are not money, hence they
are not legal tender

3. Philippine Airline vs. CA (181 SCRA 557)

Issue: Whether payment to the absconding sheriff by CHECK in his name
operate to satisfy the judgement debt?
Ruling: No. If you give a check, it is not tantamount to payment. Checks have
the effect of payment only after they are enchased (under civil code).

Incidents in the Life of a Negotiable Instrument

(overview)
1. Issue: the act of signing the instrument, putting it in writing and delivering it
to the payee or drawee
2. Negotiation: it can be transferred from one person to another
Two kinds
a. If payable to bearer (whoever holds the instrument; bearer instrument):
can be negotiated by mere delivery.
b. If payable to order (there is a specific person indicated; order instrument):
to negotiate it you must endorse and deliver it.

Indorsement: (dorsal — at the back) the act of signing at the back of the
instrument and addressing the instrument to another person

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3. (for Bill of Exchange) Presentment of Acceptance: the act of presenting or
exhibiting the instrument to the drawee for his acceptance which he can either
accept or not. If he accepts he becomes the acceptor and he becomes primarily
liable to the instrument. If he does not accept, the instrument is dishonored by
non-acceptance. If it is dishonored you have to inform the other parties. Hence,
all of those who are secondarily liable will now be liable to the instrument.

4. Presentment for Payment: The person who will pay is the person who is
primarily liable (maker; acceptor).
Two possibilities
a. The person primarily liable will pay
b.The person primarily liable will not pay (dishonored for non-payment):
inform those who are secondary liable that the instrument is not being paid.
Note: if a foreign negotiable instrument is dishonoured you can “protest” (made
by a notary public).

5. Death (discharge) — end. Once it is paid all the liabilities therein is

extinguished.

Q: When will you consider an instrument to be a negotiable instrument?

A: Requisites of Negotiability (Section 1, NIL) [MEMORIZE]
1. It must be in writing and signed by the maker or drawer;
2. It must contain an unconditional promise or order to pay a sum
 certain in money;
3. Must be payable on demand or at a fixed or determinable future
time;
4. Must be payable to order or to bearer; and
5. Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
Note: he must be named or indicated with reasonable certainty to know who
is primarily liable for the instrument.

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First Requisite: It must be in writing and signed by the maker or drawer - There is no
form required by the law, as to the form of the instrument, as long as it is
written and signed by the maker and drawer
- An unsigned document does not give any effect at all. It does not make
the person named therein liable. Hence, the act of signing is the operative
act of making the person liable. It is the beginning of the life of a
negotiable instrument.
- Without the signature the document is merely a peace of paper

Q: Does your signature matter, what if the sign is like this (+) ? A: If
that is the customary signature of the person, it doesn’t matter. No one
can dictate how you can affix your signature.

Q: What if due to disability a person cannot sign an instrument? A:

Fingerprints are accepted, because a fingerprint is a unique pattern which
makes a person unique from other animals in the world.
- It cannot be oral, because you cannot pass it down from one person to
another. If it is not in writing it is susceptible to manipulation. Thus it
cannot be accepted as a negotiable instrument (a lot of people suffers from
amnesia).

Second Requisite: It must contain an unconditional promise or order to pay a sum

certain in money.
Situation: Promise to pay Pedro the amount of 1B pesos if I am going to graduate
in college.
Q: Is the example negotiable? Will it pass the test of
negotiability?
A: No, because the document is conditional; it is not
unconditional. If there is a condition, the holder will not have
the free will to present it for payment. The document is barred
with “question marks”. It cannot be negotiated because there
are doubts over the document.

Note: How can you negotiate something, if you know that there
is a chance you might not be able to get paid?
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Period: A future event which is certain to happen.
Condition: A future and an uncertain event (may or may not
happen) — this is the reason why in order for an instrument to be
negotiable it must be unconditional.
Unconditional: unqualified order of promise to pay.

- Relate it to Section 2 and 3 of NIL

Sec. 3. When promise is unconditional. - An unqualified order or
promise to pay is unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to be debited
with the amount; or
(b) A statement of the transaction which gives rise to the
instrument.
But an order or promise to pay out of a particular fund is not
unconditional.

NOTE:
- Take note of the word reimbursement, because if the promise is
to pay out of a particular fund, it is not a reimbursement. -
Example: Your own bank account — payment out of that fund is
not negotiable because if payment is out of a particular fund then,
 there is a condition. The condition is that for as long as there is
money in there. What if there is no money? Then it will make the
instrument “useless”.
- Hence, if you are going to indicate a particular fund, it is only
for reimbursement. The drawer or the acceptor will pay but he
will reimburse himself out of a particular fund. Payment is out
of the question.

(b) A statement of the transaction which gives rise to the instrument —

this will not affect negotiability.

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Example: I promise to pay X 1Million as payment of the contract of
sale we entered into regarding this specific vehicle. This does not
affect the negotiability of the contract, for the instrument is
still unconditional.

- It must be a sum certain in money — it must be in money. Because if it

is not in money then it is not a negotiable instrument.
Example: I promise to pay you 4 husbands; this is not a negotiable
instruments because husbands is not money.
• A sum certain in money ideally must be stated in the currency
of the Philippines, clearly.
• Interest is also a certain amount of money because you can
compute interest — certainty of the amount can still be
known.

- Acceleration Clause (“Sec 2 (c): by stated installments, with a provision that,

upon default in payment of any installment or of interest, the whole shall become
due”) — if the credit is payable on instalment and the debtor fail to pay
one instalment, it can be agreed that absence payment of one instalment
will make the entire amount due and demandable. [Accelerates the due
date of the instrument]
Q: Will it affect its negotiability?
A: Yes, the amount is still certain.
 Q: When the instrument is not stated in Philippine currency
or it is stated in Philippine Currency but there is an exchange,
upon payment it should be paid with other currency. Will it
affect negotiability?
A: No, because exchange rates is determinable. The amount is
still certain

Note: Currencies are like shares of stock, their value differs

every now and then, but you can still determine its value any
time.

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SUMMARY:
- If you indicate that an instrument is to be paid out of a particular fund, then
that is a non-negotiable instrument.
- Section 1 is the doorway to everything; if you don’t understand this you will
not understand NEGO.

[September 1, 2020 — EPISODE 6]

NOTES:
- For a promissory note there are 4 requisites; for a bill of exchange there are 5. -
Remember Section 1, because if the instrument does not pass the negotiability
tests under this section, then NIL will not apply — [S — U — D — O — R] - The
first question to always ask when answering a question in this subject is, “did
it pass the test in section 1”? Because if it doesn’t the law on negotiable
instruments will not apply.

CASES:
1. Metropolitan Bank and Trust Company vs. CA, February 18, 1991 — 194
SCRA 169
Issue: Whether treasury warrants are negotiable instruments? Ruling: SC
said no. Treasury warrants is not a negotiable instrument. In this case the
document itself is stamped as not negotiable. That alone will caution
everybody that the instrument is not negotiable because it is stated in its
face that it is not negotiable. Treasury warrants are payable out of a
 particular fund (in the case fund 501). It is payable on a particular treasury
account, thus it does not make it negotiable. And, when the government
issues a treasury warrants they are not entering into commercial
transactions. The government s not involved in comercial transcations.
Hence, the Treasury warrants is not negotiable.

Treasury warrants: documents acknowledging liability by the

government — it is payable out of the national government’s
treasury account. Evidence of indebtedness of the government
to be payable at a certain time.

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2. Caltex Philippines vs. CA, — 212 SCRA 448
Issue: Whether CTD’s (Certificate of Time Deposits) are negotiable
instruments?
Ruling: SC interpreted the CTD as a bearer instrument. Since the depositor
is not named, it can pertain to anybody. Thus, the depositor is likened to a
bearer making the CTD negotiable.

Third Requisite: It must be payable on demand or at a fixed or determinable future

time
- Payable on demand: anytime — if you need it you can ask for payment; -
On sight: Once you see them, you can also demand payment - Fixed date or
future time: set the time as to the payability of the instrument.
- On presentation: payable upon presentation
- No time for payment is expressed: the instrument is payable on demand
- Read Section 4 and 7 of NIL
Sec. 7. When payable on demand. - An instrument is payable
on demand:
(a) When it is so expressed to be payable on demand, or at sight,
or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand.

NOTE: When it is Overdue: only as regards to the person

issueng it or accepting it, or indorsing it, then the instrument is
payable on demand.
Example: When a person executes a bill of exchange in favor of
another or order for Php. 100,000 payable on January 30, 2021
addressed to the drawee. If the person delivered the bill after January
30, 2021, when the instrument is overdue, as regards the person who
executed it, the instrument is payable on demand.

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Sec. 4. Determinable future time; what constitutes. - An
instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable: (a) At a
fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified
therein; or

(c) On or at a fixed period after the occurrence of a specified

event which is certain to happen, though the time of happening
be uncertain.
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect.

NOTE:
Example:
a. (Death) I promise to pay A 1Million pesos after the death of the
president of the Philippines [it is certain to happen — it is still
considered as a determinable future time]

Contingency: An event that may or may not happen [like

condition]

b. Tokyo Olympics, it is scheduled to happen this year. But it didn’t

 happen, because of the current situation.
- The things which has doubts or uncertainty as to the
happening of the event makes it an event that is considered
a “contingency”. The occurrence of it, will not cure the
defect of it being non-negotiable, because it still put doubts
on the instrument.

Q: What if the document says that it is payable “on or before

_______.” How will you interpret this instrument? A: There are
two schools of thought regarding this:
a. This is payable upon demand because the time for
payment is not expressed.
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b. This is an incomplete document, hence the holder can
complete it (this is not always the case — will discuss it more
later).

Fourth Requisite: It must be payable to order or to bearer

1. When payable to bearer (Sec. 9, NIL) — whoever, holds the instrument, it
is payable to him. [Negotiate: DELIVERY]
a. rule when instrument is payable to a fictitious person

2. When payable to order [Negotiate: INDORSEMENT AND DELIVERY]

a. to whose order the instrument may br made payable (Sec. 8, NIL)

- Read Sec. 8 and 9

Sec. 8. When payable to order. - The instrument is payable to
order where it is drawn payable to the order of a specified person
or to him or his order. It may be drawn payable to the order of: (a)
A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
 Where the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable certainty.

NOTE:
- Ratio for the last paragraph: For purposes of indorsement — in
order to negotiate the instrument there should be a name.
- Since it is named to a specific person, the payee should be
named.
- What if it is payable or drawn to the payee as payable? Here
being both the drawee and the payee, the drawee can pay
himself upon maturity from the funds belonging to the drawer
in his possession: once accepted is equivalent to a promissory

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note in favor of the drawer. [In short, MERGER? — the drawee and drawer
is one]
- Drawer as payee: this authorizes the drawee to pay the drawer/himself.
The situation is that the drawer has funds with the drawee and he wants to
withdraw the funds for himself.
- Maker as payee: Here the maker promises as follows “I promise to pay to
the order of myself, 1M”: the instrument is not complete until the maker
endorses under Section 184 (Where a note is drawn to the maker’s own order, it
is not complete until indorsed by him).
- Q: Is it possible that the maker can draw an instrument making him as
the payee?
- A:
- Q: Is it possible for an instrument to be payable to two or more payees
jointly?
- A: Yes. The endorsement of all is required unless one has been
authorized by the others. When it is payable to one or some of several
payees, the endorsement of any one will be sufficient.

Sec. 9. When payable to bearer. - The instrument is payable to bearer:

(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or (c) When it is
payable to the order of a fictitious or non-existing person, and such fact
was known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any
person; or
(e) When the only or last indorsement is an indorsement in blank. 15

NOTE:
- When the instrument is initially an order instrument. The name
of the endorser or endorsee is blank — it is merely blank. In this
case, the instrument is payable to bearer.
- The effect of bearer instrument is that the instrument is payable
to whoever is in possession or is the holder of the bill.
Although, when “bearer” precedes the name of the person
specified in the bill, the instrument is non-negotiable.
- Example: Pay to bearer Augustin Laban the amount of 1 Million (the
word bearer or order here precedes the name of the person. It is only
payable to the specific person in the instrument. Hence, it is non
negotiable.)
- When it is payable to the order of a fictitious or non-existing
person, the instrument’s being payable to bearer depends on
the intention of the person making it so payable.
- Example: It is payable to Juan dela Cruz, a person or the symbol of the
Filipino race. If the intention is easily deduced that the payee is clearly
fictitious, as when: it is payable to Superman, the instrument is
payable to bearer.
- The instrument in order to be considered negotiable must
contain the so-called “words of negotiability. It must be payable
to order or bearer” [Salas vs. CA, 181 SCRA 296]
- Without order or bearer in the instrument it makes it non
negotiable.
 CASES:
1. Ang Tek Lian vs. CA, 87 Phil. 383
Issue: Whether a check payable to cash needs indorsement
Ruling: No, because cash does not purport to be a name of the
person and these facts makes the instrument a bearer instrument.
As such, it does not need indorsement., it only needs delivery to
be negotiated.
2. PNB vs. Rodriguez, G.R. No, 160325, September 26, 2008 As a
rule, if the payee is fictitious or not intended to be the true
recipient of the proceeds of the check it is considered as a bearer
16
instrument according to Secs 8 and 9 of the NIL. The distinction
lies in the manner of their negotiation. An order instrument from
the payee or holder requires endorsement. A bearer instrument
does not require endorsement, it is only negotiated by mere
delivery — negotiable by mere delivery.

[September 2, 2020 — EPISODE 7]

Fifth Requisite: Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.

If there are omissions or things not included in the instrument, there are 2
possibilities:
1. negate the instrument’s negotiability
2. It will not
there are omissions that will not affect the negotiability of the instrument.

[Sec 6: Omission that do not affect negotiability]

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character
of an instrument are not affected by the fact that:
(a) it is not dated; or
(b) does not specify the value given, or that any value had been given
therefor; or
(c) does not specify the place where it is drawn or the place where it is
 payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in which payment is
to be made.
But nothing in this section shall alter or repeal any statute requiring in certain
cases the nature of the consideration to be stated in the instrument.

NOTE:
**GENERAL RULE: DATE is not necessary for negotiability
- Rules regarding dates:

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a. The fact that the instrument is not dated is addressed by Sec
17(c) which states that where instrument is not dated, it will
be considered dated as of time it was issued.
b. Where the instrument or an acceptance or any endorsement
thereon is dated, such date is deemed prima facie to be the
true date of the making, drawing, acceptance, or
indorsement as the case may be (Sec 11, NIL).

**EXCEPTION (When DATE IS IMPORTANT)

- The importance of the date of instrument is that it is determinative
of:

a. When instrument, indorsement or acceptance is due or its

maturity
b. prescription of a cause of action

**When you see dates on exams, the number one thing to

remember is PRESCRIPTION of causes of action!

- This is important especially in an instrument that is payable

on demand, in order to determine whether the holder is a holder
in due course since one of the requisites of such is that he became
 holder thereof before it was overdue (Sec. 71 and 53).

- Where an instrument is expressed to be payable at a fixed

period after date is issued undated, or where the acceptance of
an instrument payable at a fixed period after sight us undated,
any holder may insert therein the true date of issue or
acceptance, and the instrument shall be payable accordingly.

- The insertion of a wrong date does not avoid the instrument in

the hands of a subsequent holder in due course; but as to him,
the date so inserted is to be regarded as the true date (Sec 13).
example: for the first holder the wrong date is not
applicable to him; but for the second person, it is
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applicable to him because he believes that it is the true
date.

SITUATION 1: When instrument is expressed to be

payable at a fixed period after date, but it is issued undated
“10 days after date pay A or order Php. 500,000”
Ans: The holder of such an instrument is authorized to
insert the correct date. But if the holder inserts the
wrong date, the maker shall be liable on wrong date
— as regards with the subsequent maker in due
course —as penalty for his neglect in leaving the
instrument undated.

SITUATION 2: Where acceptance of instrument

payable at a fixed period after sight is undated: “10
days after sight, pay A or order Php. 500”
Ans: The holder is authorized to insert the proper date
of acceptance. But if he inserts wrong date, acceptor
shall be liable on this wrong date as a penalty for his
neglect in leaving his acceptance undated.
- Once there is presentment at sight, the drawee shall
count the date. Since, the drawee now the acceptor
 failed to put the date of the acceptance, and the
holder puts the wrong date — the drawee or
acceptor shall bear liability.

- PURPOSE: DATES ARE FOR DETERMINING DUE

DATES.

Sec 6 (b) discussed

- Like any contract, a negotiable instrument must be supported by
valuable consideration
- Under the law valuable consideration is pressumed, but it is only a
prima facie evidence which can be rebbutted by other pieces of
evidence.
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- The facts that the instrument does not specifit the value given or that
any value had been given therefore is addressed by sec 24 which
provides the basic rule that “every negotiable instrument is
deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon
to have become a party for value”
Even if the instrument does not specify that you have issued the
instrument for a valuable consideration it is presumed that you
issued the instrument in return for a valuable consideration. If
there are controversies, present evidence stating that this
instrument was issued with lack of valuable consideration — as
regards the instrument on it self on its face, then it is presumed.
If it does not specify the value given it does not affect
negotiability.

- Value is any consideration sufficient to support a simple contract.

An antecedent or pre-existing debt contributes value; and is
deemed such whether the instrument is payable on demand or at
a future time (Sec 25, NIL).

Sec 6 (e) discussed

- (e) You do not have to specify the currency because it is
understood that when the instrument is made or drawn in a
particular place it is automatic that the currency payable in that
particular place is the currency payable. Hence, even if the currency
is not specified it will not affect negotiability
- Sec 73 provides:
(a) Where no place of payment is specified, but the address of
person to mae the payment is given in the instrument and
it is there presented
(b) Where no place of payment is specified but the address of
the person to make payment is given in the instrument
and it is there presented;

20
(c) Where no place of payment is specified and no address is
given and the instrument is presented at the usual place
of business or residence of the person to make payment
- The fact that the instrument bears a seal is not significant as it is a
mere formality (notarial seal example). A seal is merely a formality.

CASES:
1. Ponce vs. CA, 90 SCRA 533: The fact that the instrument
designates a particular kind of current money in which payment is
to be made is possible, the agreement to pay in foreign exchange
when declared null and void and of no effect, does not defeat a
creditor’s claim of payment, but to be made in lawful Philippine
legal tender.
- Relate to RA 529
- Even if the stipulation as regards a currency is void, it
doesn’t affect the creditor’s claim for payment. It doesn’t
mean you are excused from payment (only the
stipulation as to the currency is void).

2. Kalalo vs. Luz, 34 SCRA 337: The parties stipulate payment in

 foreign currency, the rate of exchange is determined not at the
time of making of the instrument, but at the time of payment,
and not the rate at the time the obligation was incurred.

** Other provisions that do not affect negotiability, even though it is included in

the instrument
- Section 5, NIL
a. Sale of Collateral Securities
b. Confession of Judgment
c. Waiver of benefits
d. Option to require something in lieu of payment

21
NOTE:
Q: What if the instrument provides for an act aside from payment of
money?
A: It makes the instrument non-negotiable. It gives doubt on the
instrument.

Example: A promise to pay 1M AND drive him to Metro Manila. This

will make the instrument non-negotiable because there is a possibility
that the maker will not comply with the act. (What if he meets an
accident and he can no longer drive? It puts doubt to the instrument)

Confession of Judgment discussed

In case you authorise your lawyer to confess judgment in court. If the
instrument is not paid, this is against public policy, because you are
depriving the person a day in court to present evidence or to be listened
to by the court (this is a violation of public policy). Even though this
stipulation is void, it does not make the whole instrument void or non
negotiable. It is only the stipulation that is considered void. If there is an
authority to confess judgment, that stipulation is void, but it will not
 render the whole instrument void; thus it will not affect negotiability.

Waiver of benefits discussed

“I waive the right for demand”, this will not affect negotiability

Option to require something in lieu of payment discussed - Read with the

first sentence “do any act in addition to the payment of money” - It is not the
call of the person primarily liable, but the call of the holder
to require payment of money — to let the maker or drawer, do
something in lieu of payment of money.
- The call is in the hands of the holder, hence, it does not affect
negotiability.

22
CASE:
**PNB vs. Manila Oil Refining and By-Products Company, 43 Phil 445
ISSUE: Whether provisions in notes authorizing attorneys to appear and
confess judgments against makers should not be recognized in
Philippine jurisdiction by implication.
RULING: It is against public policy, thus void. Yes it may be true that it
will lessen the time of the court with certain cases, of the cost of
litigation, etc., but in the end it will deprive the makers of their day in
court to be heard.
- Even if the stipulation of confession of judgment authorizing the
lawyers to do so is void, it will not affect the rightful claim of the
creditor to demand payment. It will not make the whole instrument
void.

[September 7, 2020 — EPISODE 8]

Recap
- The Rules of Omissions in the instruments
- Provisions in the instruments that does not affect the negotiability
 instruments, i.e. the sale of a collateral securities, confessions of judgements. As
regards of confessions of judgements that you just authorized a lawyer to
enter your plea of guilty in court, we said that, that is against public policy.
- Q: What are the other provisions that effecting negotiability? - A: Waiver of
benefits or option to requires something in lieu of payment of money, Sec 5, NIL
along with Sec 6.
- When the instrument provide for an acts, aside from payment of money, then
he said that, that instrument is not negotiable.
- Omissions — those not indicated in the instrument

The Contents of the Instruments

What if there are inconsistencies of conflicting details on the instruments? What
are the rules regarding that?

The Rules of Interpretation of the Instruments

- Granting that there is ambiguity. Then let us look some rules regarding in its
interpretation. This also for purposes of uniformity and standardizing the
23
interpretation of the instrument; the rule is still applicable until now. When it
comes to interpretation of commercial documents, not necessarily negatioble
instruments, but for other commercial documents going around the market,
these rules are also applicable to them. Hence, it is also important.

- Section 17, NIL: Construction where instrument is ambiguous. - Where the

language of the instrument is ambiguous or there are omissions therein, the
following rules of construction apply:
(a) Where the sum payable is expressed in words and also in figures
and there is a discrepancy between the two, the sum denoted by the
words is the sum payable; but if the words are ambiguous or
uncertain, reference may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of interest, without
specifying the date from which interest is to run, the interest runs from
the date of the instrument, and if the instrument is undated, from the
issue thereof;
(c) Where the instrument is not dated, it will be considered to be dated
as of the time it was issued;
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt whether
it is a bill or note, the holder may treat it as either at his election; (f)
Where a signature is so placed upon the instrument that it is not clear
in what capacity the person making the same intended to sign, he is to
be deemed an indorser;
(g) Where an instrument containing the word "I promise to pay" is
signed by two or more persons, they are deemed to be jointly and
severally liable thereon.

Sec 17 (a) explained

If you look at the cheque, there is a space for amount in words and
there is also a space for the amount in figures. You spell out the words
and then there’s an open and close parenthesis and there are the
amount in figure.

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Q: What if theres a discrepancy between the two, the amount in
words and in figures? Which should be prevail?
A: Under our rules, not merely on commercial documents, but also in
contracts. If there is discrepancy between the amount of words and
figures and the amount in words will prevail because it is harder to
commit a mistake when you write them or you spell it out in words.
That is why the words are given more credence.
- Conversely speaking, when the words are ambiguous or uncertain
there are times that it cannot also read the amount in words, then
the reference may be had to the figure to fix the amount in the
instrument. But if the words ambiguous, then go to the amount
figures.
- This is important not only in negotiable instrument but also in
commercial instruments, documents, also in contracts , ordinary
contracts.

Sec 17 (b) explained

- The instrument does not provide, when the interest will start to
accrue, or when the instrument will start to run?
- If you compute the instrument, when will you start? What if the
instrument does not provide from such date?
- If the instrument is dated then you start computing with the date in
the instrument. So if the instrument is dated, the interest will start to
run or to accrue with the date specified in the instrument. Because
in ordinary contracts, you provide when the interest are to be
accruing. [THE DATE IS THE ONE TO BE USED]
- What if the instrument is not dated? It will not affect the negotiability
of the instrument, why? Because, even if the instrument is not
dated, it is presume to be dated at the date of issue. In computing
interest if the instrument is not dated, then there’s no problem. You
start counting from the date of issue.
- Take note, regarding sum certain in money, even if provides interests
then it is considered a payable with a some certain in money. Why?
Because she can compute.

25
Sec 17 (d) explained
Q: What if there is conflict to the face of the instrument, between
written or printed provision of the negotiable instrument? A: Then
our rules say that the written provisions prevail, because if you are
going to write we are more assured of your real intentions. If it is
written by the person concerned, we are more assured of his/her real
intentions, and it is harder to commit mistake when you are writing
thus, the written provisions of the instrument prevails over printed
ones.

** Succesion
Holographic wheel is entirely written by the descendent, and it has more
value that the one is printed.

Sec 17 (d) explained

Two kinds/classification of Negotiable Instrument
1. Promissory note
2. Bill of exchange
(take note, the rules are different).

Q: How about the totality of the instrument is so ambiguous, that

there’s a doubt that it is bill or a note? What if there’s doubt by
merely in looking of the instrument, you don’t know if it is
promissory note or bill of exchange.
A: The rule says that, it is now up to the holder, whether he/she will
treat it as a promissory note or bill of exchange; it’s the holder’s call.

Example: I promise to pay Peter or order Php. 1M signed by Paul.

Explanation:
- Up to that point it is clearly as promissory note, up the point when
Paul signed it , it is a promissory note. However, in this case, there is
an addition to present it to Mary which is as to form applicable to a
bill of exchange.

26
- In a bill of exchange there is person called the drawee — it is the
person to whom the instrument is being ordered. The drawee will
be the one to accept the instrument.
- In this case, the 1st part is promissory note, and if you look up the
totality there’s an indication that it could be also be the bill of
exchange, because you have to present the instrument to Mary.
- The rule says that it is in the option of the holder whether to treat it
as a promissory note or a bill of exchange —it’s the call of the
holder.

Sec 17 (f) explained

- Signature
- Where a signature is placed from the instrument that it is not clear in
what capacity of person making the same is intended to sign, he is
to be deemed an endorser as regards a signature in negotiable
 instruments.
Q: Who is the person who should sign a promissory note? A: There is
only one, the original party, the maker. And the maker is expected to
sign in front of the instrument. At the front of the instrument the
maker is the one who should sign on their, and nobody else, that’s the
rule ideally.
Q: Who is the person who should sign a promissory note? A: In a bill
of exchange, the person who should sign at the front are drawer and
the drawee. That once he accepts the instrument and signs it he will be the
acceptor. The acceptor of the instrument is the one primary liable of the
instrument. In the bill of exchange, there are 2 signatures that you see
in front. Back of the instrument, promissory note and bill of exchange
is the same, at the back of the instrument, if there is signature, they are
signatures of indorsement — indorsers; from the root word, dorsal
which means at the back. Indorser’s signatures are found at the back of
the instrument — those are the rules as regards signature.
Summary
Front- either the maker, the drawer or the acceptor.
Back- indorsers

27
Q: What if there is uncertainty to the signatures found in the
instrument?
Ex. What if sa promisorry note may pirma sa harap aside from the maker. For
the bill of exhange aside from the drawer or acceptor there is another
signature.
A: The rule says, that if there is a doubt, or the signature is not clear, as
regards his capacity to the instrument, then he is deemed to be an
endorser.
- Relate this topic with our rules in civil law: in any stipulation
in case of doubt, then the provision that requires lesser
obligation that entails lesser rights will be presume (Not
absolute, merely a presumption).
- Consistent also, with our negotiable instruments law, in case
there is doubt on the signature, let’s look at the capacity who
assumes lesser liability — and who assumes lesser liability?
 indorsers, ecause endorsers are merely secondarily liable, or
even not liable at all. The one who are primarily liable to the
instrument are the maker and the acceptor. If there is a
signature in front, aside from the maker and the acceptor
then he is deemed to be the endorser.
- As regards the positioning of the signature, the signature of
the maker usually is found at the lower right-hand corner.
And the drawee is at the left lower left hand corner of the
instrument. When it comes to negotiations or transfer of the
instrument through indorsement they are found at the back.
- NOTE: As regards signature, it could happened, that
signatures found at the front of the promissory note are the
makers, co-maker.

CASES:
Astro Electronic Corporation vs. Phil. Export and Foreign
Loan Guarantee Corp
ISSUE: Whether Roxas who signed promissory notes as
president and in his personal capacity be solidarily liable with
Astro Electronic Corp.

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FACTS: In this case, Roxas is the president of the Astro Elec Co.
they got loan from 1 entity, Phil trust co, and the amt 3M
covered by 3 promissory notes. Roxas signed the promissory
note in front in his capacity as the president of Astro and signed
also in his personal capacity.

The problem is, if you are signing as the president of your

corporation your corporation is primarily liable, you are just
doing your job as the president, but here there are 2 signatures.
He also signed it in his personal capacity.

Now, they are suing him also, saying that Roxas is solidarity
liable with astro corporation because of his signature. Are they
correct?
 RULING: Yes, because persons who write their name on the
face of the promissory notes are makers, promising that they
will pay to the order of the payee or any holder according to its
tenor.
If it is promissory note. If one signs in front then he is signing as
a maker. But the general rule says, if there Is doubt as to the
signature he will be deemed as the endorser — this is only a
presumption. If they look at it, with the totality of the
circumstances that you’re making yourself solidarily liable.

Sec 17 (f) explained

Q: What are the rules when there are 2 people signing at the front of the
instrument on a promissory note and the word say “I promise to pay”? A:
They are deemed to be solidarily liable (jointly and severally liable) because
the word I is controlling.

**OBLICON
In any contract or stipulation, or any interpretation if contracts, we said that
as the General rule, the obligation of 2 or more obligors are joint.

29
Exception, solidarity liability will only come in, when it is expressly
stipulated or when the nature of the obligations requires solidary liability.

Q: What is the other instance when the solidary liability is

applicable? Or when the nature of the obligations requires such. A:
It is expressly provided by law. That in case it says on the promissory
note that, “I promise to pay” then even though there are 2 or more
people who are signing the instrument. Their liability is solidary. The
creditor or the person who should collect on the instrument can go to
anyone of them and can collect the whole amount from any one of
them.
Example 1: I promise to pay A or order 5M and then signed by 2 people (B
and C). The interpretation of this instrument is that B and C are solidary
liable to the instrument. Either B or C should pay the whole amount of
obligations.
- In civil law, even if the obligation is solidary the person who pays the
whole obligations has the right also to reimburse from the other
obligors, subject to other rules on civil law on reimbursement.

Example 2: I promise to pay A 5M, signed by B and C.

Q: What could be their obligations?
A: First, before you answer you have to make sure that the instrument
should comply with section 1 or the requisites of negotiability, if you
answer yes then apply the law, apply negotiables instruments law. Then
apply other provisions of rules, other law, like the general law of civil law.

Q: Is this a negotiable instrument?

A: No, it is not payable to order or bearer. It is payable to specific person.
Hence, it is non negotiable, so in this case, I promise to pay A 5M, the
liability is…

Q: What is the liability of b and c?

A: The liability is Joined, the provisions of negotiable instruments law does
not applied, because it is not negotiable instrument.

30
Example 3: I/We promise to pay A or order Php500.00 signed by B and C In this
case, the word I is controlling, just like the case of PNB vs Concepcion
Mining. The supreme court expressly stated that “I” dominates. It is read as
I promise to pay. Look also, Republic Planters Bank vs CA, these are the
cases of I promise to Pay — that their obligations is Solidary.
ISSUE: Whether the corporate treasure is liable for the amount in the
promissory notes?
RULING: The term is I promise to pay signed by the treasurer on behalf of
the corporations. The corporations and the treasure are solidary liable
because of the word “I promise to pay. “

**same cases
Sps. Evanghelita vs. Mercator
Ilano vs. Honorable Espanol
 **Those are the ways or rules to interpret an instrument in case there are
doubts or ambiguities on the contents of the instrument.
**STUDY IT WELL BECAUSE IT WILL ALSO APPLY TO OTHER
CONTRACTS
[September 8, 2020 — EPISODE 9]
Recap
- Rules on the interpretation of Negotiable instruments [Sec 17] - The Life of a
Negotiable Instrument — It starts with the (1) issuance. The issuance of the
instruments is partly with mechanical act writing of instruments, and giving it to the
first holder. If it is a promissory note give it to the payee if it is a bill of exchange, you
give it to the drawee who will accept the instrument. The next step is (2) negotiation,
this is merely the transfer of an instrument from one person to another , in such
a way that the person who will received the instrument will now be considered
holder. Holder, is a technical term which implies rights as against previous
holders, those people who are primarily liable to the instrument.

Q: What are the rights?

A: The rights to receive a payment; right against defenses (in a
negotiable instruments people may have their reason for not paying or for
31
not accepting etc and we call that defeses — like vitiation of consent or
forgery or lack of delivery).

POINT: Negotiation simply means the transfer of the instrument

from one person to the another — the person who receives will
become the holder.

The Negotiation
- If you have commercial document or instrument.
Q: What are the modes of transfer? How do you transfer that
document to another person?
A1: By Assignment, it is the transfer of rights whether real or
personal rights to another person called the assignee. The assignee
will just simply be put in the position of the assignor and acquires
no greater right than the assignor.
 Assignor: the person transferring a right over a real or personal
property
Assignee: the person where the right is transferred.

- If we go to Negotiation — the transferee, the holder, may have

greater rights over his immediate transferor. It's different with
assignment because the assignee will be subjected to real or
personal defenses — the person can have an excuse for non
payment.

- Assignment is the method of transferring a negotiable or non

negotiable instrument. If it is a negotiable instrument then it is a
method of transferring a negotiable instrument other than by
indorsement. **In order to transfer an instrument. If it is payable for
bearer it is payable to order there must be indorsement delivery. If you
did not do it that then it is assignment.

A2: By Operation of Law, the transfer of an instrument without

assignment or negotiation because it is over by operation of law.

32
Example: death, the dead cannot assign or negotiate the instrument but it
has to be transfer to somebody else, hence it is transferred by the operation
of law [the death of the person transfers to the heirs his assets].

A3: By Bankruptcy of the Holder, in case after the process of

bankruptcy and the court will render a decision granting the
application for bankruptcy of a certain person, then all his assets
will be transferred to the control of their creditor. So in this case by
operational of law, if there’s a decision granting the application for
bankruptcy then by the operation of law, all his rights over his personal or
real assets will be transferred now to (usually) creditors.

NOTE: Under the normal and expected circumstance, negotiation

should take place (general rule) — nonetheless, you can still transfer
a negotiable instrument through other modes as discussed above.
A4: By Negotiation, the transfer of a negotiable instrument — you
cannot transfer a non-negotiable instrument — from one person to
another in such a manner as to constitute the transferee the holder of
the instrument [Sec. 30, NIL — What constitute negotiation].

Sec. 30. What constitutes negotiation. - An instrument is negotiated

when it is transferred from one person to another in such manner as
to constitute the transferee the holder thereof. If payable to bearer, it
is negotiated by delivery; if payable to order, it is negotiated by the
indorsement of the holder and completed by delivery.

NOTE:
- If the instrument is originally payable to bearer, it will always be
payable to bearer [all throughout his life]. If the instrument is
payable to order, it could be transformed into a bearer instrument.

- EVEN IF THERE IS INDORSEMENT AND DELIVERY FOR AS

LONG AS IT IS A BEARER INSTRUMENT YOU CAN STILL

33
NEGOTIATE IT THROUGH DELIVERY BECAUSE A BEARER
INSTRUMENT WILL ALWYAS BE A BEARER INSTRUMENT.
SUMMARY

Negotiation Assignment

Applies to negotiable instrument Applies to contracts in general — including

negotiable instruments
The general indorser warrants the
Transferee becomes the holder, as solvency of other parties.
such he is entitled to rights i.e. From a to d, d is now the holder. If d
transfers the instrument to e, d warrants
Holder in dues course — subject only the solvency of prior parties
to real defenses Transferee becomes a mere assignee
i.e (real defense). If you forged the and he cannot have rights more than
signature of the maker. what the assignor have.
 solvency of prior parties unless there
A person who takes the assignment is
is a stipulation to the contrary or he
subject to both real and personal
knows of such insolvency
defenses.
i.e. Vitiated consent, lack of delivery, etc

An assignor does not warrant the

Solvency — your assets are more than your liabilities. You have
enough assets to pay your liabilities.
Insolvent — your liabilities are more than your assets. In case you
are declared insolvent, since your assets cannot pay for all your
liabilities, the court will order that all your assets will be under the
control of all your creditor (bahala na sila sinogn maunang
mababayran).

continuation

Negotiation Assignment

Presentment and notice of dishonor is

required to make an indorser liable.
Assignor is liable even without notice
or dishonor
- For Bill of Particulars = Drawer
- For Promissory Note = Maker

34

Governed by NIL Governed by Civil Code (Article 1624-1635)

CASES
1. Sesbreño vs. CA [READ!!]
Issue: Whether a non-negotiable promissory note be assigned? Ruling:
Yes, through assignment — THE ASSIGNEE ACQUIRES NO BETTER
TITLE OR RIGHT THAN THE ASSIGNOR. Non-negotiable instrument
can be transferred by way of assignment

2. Consolidated Plywood Inc. vs IFC Leasing (149 SCRA 448) Issue: Whether the
promissory note is negotiable (EFFECTS). Ruling: No, because it does not
 provide that it is payable to order or bearer. It does not pass section 1 of
NIL. It does not have the words of negotiability. It does not require with the
requisites of negotiability under sec 1, hence, it is non-negotiable. As such,
you can only transfer it through assignment and not negotiation.

[September 10, 2020 — EPISODE 10]

Recap:
- Transfer of instrument (assignment, by operation of law, negotiation [for
negotiable instruments])
- Negotiations vs. Assignments

Negotiation
- It only applies to negotiable instruments or the instruments that have passed
the requisites of negotiability on Sec 1.

Q: How does negotiation takes place?

A: Sec 30, NIL — An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it
is negotiated by the indorsement of the holder and completed by delivery.

35
Payable to Bearer
- [Read Sec. 40 in relation to sec 30]
- Where an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders as make title through his
indorsement.
NOTE: If it is bearer instrument you just delivery, no need to sign anything in
the instrument.

Q: What if the holder negotiated the instrument not by mere delivery but
by indorsing it, what is the effect?
A: Since it is a bearer instrument it can still be negotiated by delivery because
 a bearer instrument is always a bearer instrument. Even if there is a special
indorsement, you can still negotiate it by mere delivery. The implication of
special indorsement is that, the person indorsing it specially is liable as
indorser not only to such holder with whom he indorsed as make title to his
indorsement. All of those holders that can trace titles to his special
indorsement he is liable.
- An instrument payable to bearer is not converted into an instrument
payable to order by being indorsed specially. However, the person
who indorsed specially is liable only to those holders who can trace
their title to the instrument by a series of unbroken indorsements
from such special indorser.
- Even if it is indorsed spec

Payable to Order
- Relate Section 30 and 49
- Refresher: “If the contract is completed by delivery, what is that kind of
obligation?” —> REAL OBLIGATION
- In negotiable instruments, if it is payable to order you negotiate it by
indorsement and is completed by delivery.
- Scenario: What if it is an order instrument and the holder failed to indorse it,
he just delivered? —> [SECTION 49] Where the holder of an instrument
payable to his order transfers it for value without indorsing it, the transfer
vests in the transferee such title as the transferor had therein, and the
36
transferee acquires in addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of the time when the
indorsement is actually made. —> The holder is not a holder in due course
because the negotiation is incomplete. He merely acquires the title of the
transferor and the right to have the indorsement of the transferor, in order to
complete negotiation. —> the holder becomes a holder in due course only
when the indorsement is actually made, and that’s where negotiation is
complete.
- Without the indorsement he cannot be considered a “holder” within the
definitionder Sec. 191 and thus, cannot negotiate it. He also cannot be
 considered a “bearer” since the instrument is not payable to bearer.
- Incomplete negotiation cannot convert the instrument into bearer instrument.
It is merely Equitable Assignment.

Equitable Assignment: the transfer of an order instrument

without indorsement where the transferee acquires the instrument
subject to defenses and equities available among prior parties.

Indorsement
- The writing of the name of the payee on the instrument with the intent either
to transfer the title to the same, or to strengthen the security of the holder
assuming a contingent liability for its future payment, or both.

How is Indorsement made?

- Read Sections 31 and 32
- [Sec. 31] The indorsement must be written on the instrument itself or upon a
paper attached thereto. The signature of the indorser, without additional
words, is a sufficient indorsement. —> In actuality for checks, you need to
put your name, address, and other personal details about you.
- [Sec. 32] The indorsement must be an indorsement of the entire instrument.
An indorsement which purports to transfer to the indorsee a part only of the
amount payable, or which purports to transfer the instrument to two or more
indorsees severally, does not operate as a negotiation of the instrument. But
where the instrument has been paid in part, it may be indorsed as to the
37
residue. —> If you only indorse part and parcel of the instrument. i.e. the
amount in the instrument is 1000 and you only indorse 500, that is not indorsement
because in indorsement, you should cover the whole instrument. —> You cannot
also indorse, if it is paid to two or more person severally, in this case, it is not
a valid indorsement. Such is the case in order to avoid MULTIPLICITY OF
SUITS.—> These are not valid indorsements.
- EXCEPTION: When there is partial payment to the instrument, the holder can
merely indorse the remaining amount of the obligation.

[REDISCUSSED —> WHERE IS THE INDORSEMENT

MADE] a. On the instrument itself
- As a matter of practice, an indorsement is written at the back of the
instrument (referred to as the dorsal portion) or in front (as long as
you indicate that you are an indorser —> doubt rule). However, it
may be written or made on the face of the instrument itself.
b. On a separate paper
- Must be attached thereto to make such paper an integral part of the
instrument. The separate paper is called an allonge.

c. The signature of the indorser, without additional words, is a sufficient

indorsement. This is actually a blank indorsement. —> ideally you
should also name the transferee (Pay to so and so)
Example: “The face of a promissory note by Rudy Tramp shows the
following:
I promise to pay Pablo Escobar or order the sum of Php.
10,000,000.00 Sgd. Rudy Tramp”
- The indorsement may be made by Pablo Escobar at the back of the
promissory note — this is sufficient indorsement.
d. As to scope of the indorsement (Sec 32): It must be of the entire
instrument. Accordingly, the following do not operate as negotiation
of the instrument;
- An indorsement which purports to transfer to the indorsee a part
only of the amount payable. This is to prevent multiplicity of
suits. —> EXCEPTION: If the instrument has been paid in part, it
may be indorsed as to the residue.
38
- An indorsement which purports to transfer the instrument to two
or more indorsees severally.

Example: “The face of the promissory note made by Sam Gabriel shows the
following:
I promise to pay Sans Miguel or order the sum of Php. 10M
Sgd. Sam Gabriel”

**At the instrument there is an indorsement which states “Pay to

Antonio Trillo Php. 10 M
Sdg. Sans Miguel”
NOTE: The above is a valid indorsement because it is an
indorsement of the whole instrument. So also are these
indorsements. “Pay to Antonio Trillo or order Php, 10M”; “Pay to
Antonio Trillo”; Pay to Antonio Trillo or order”
**At the instrument there is an indorsement which states “Pay to
Antonio Trillo Php. 7 M
Sdg. Sans Miguel”
NOTE: The above is not a valid indorsement since it purports to
transfer to the indorsee only a part of the amount payable. However,
the indorsement is valid if the amount of Php. 3M had already been
paid on the instrument by Sam Gabriel, the maker.

** At the instrument there is an indorsement which states “Pay to

Antonio Trillo Php. 7 M and Bernardo Prado Php. 3M
Sdg. Sans Miguel”
NOTE: The above is not a valid indorsement since it transfers the
note to two or more persons separately. This is to prevent
multiplicity of suits.

** At the instrument there is an indorsement which states “Pay to

Antonio Trillo and Bernardo Prado
Sdg. Sans Miguel”
NOTE: The above is a valid indorsement. Should they wish to
negotiate the instrument further, Antonio Trillo and Bernardo
39
Prado must both indorse it unless they are partners or one is
authorized to indorse for both of them (Sec. 41).

** Partnership: in partnership there is mutual agency, that each partner is

the agent of one another — the act of one partner is the act of the other. So
even if there are two partners, even if one will act, then it is considered the
act of another.
[Section 41] Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse unless the one
indorsing has authority to indorse for the others.

CASES:
1. Metrobank vs. BA Finance Corp., G.R. No. 179952; December 4,
2009
FACTS: A checks payable to the order of X and Y was deposited to a
bank (collecting bank) with the indorsement of X. X subsequently
withdrew the entire proceeds thereof. State the implications.

RULING: Where the instrument is payable to the order of two or

more payees or indorsees who are not partners, all must indorse
unless the one indorsing has authority to indorse for the others. The
payment of an instrument over a missing indorsement is the
equivalent of payment of a forged indorsement or an authorized
indorsement in itself in the case of joint payees.

**What is the effect when there is a collecting bank? A: A collecting

bank, where a check is deposited and which indorses the check
upon presentment with the drawee bank, is an indorser. This is
because in indorsing the check to the drawee bank, the collecting
bank stamps the back of the check with the phrase “all prior
indorsements and/or lack of indorsement guaranteed”, and, for all
intents and purposes, treats the check as a negotiable instrument;
hence, assumes the warranty, the drawee bank would not have been
the value of the subject check.
40
Drawee Bank — The bank where the money is coming from.
Collecting Bank — The bank collecting the check

NOTE: The collecting bank or last indorser, generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
indorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the
 presentment has done it duty to ascertain the genuineness of prior
indorsements. [Who will suffer the loss in case of mistakes — the
collecting bank]

Kinds of Diligence
a. Ordinary
b. Diligence of a good father of a family
c. Extraordinary

Kinds of Indorsement
a. Special and Blank (Sec. 34 & 35, NIL)
b. Conditional (Sec. 39 NIL)
c. Qualified (Sec. 38 NIL)
d. Restrictive (Sec. 36 & 37, NIL)

[September 15, 2020 — EPISODE 11]

Recap
- The modes of transfer
- Negotiation
- Indorsement and its rules
- Start with Sec 41.

CASES:
2. Villanueva vs. NITE (GR. no. 148211, July 25, 2006)
Issue: Can a holder sue the bank if the latter refuses payment of a check
notwithstanding sufficiency of funds?
41
Ruling: No, the banks are liable only when they accepts and certifies the
instrument — in the bill of exchange we state that the drawee is only liable if he
accepts it, without acceptance then the bill of exchange is considered to be dishonored
by non-acceptance. A check for that matter is a special kinds of bill of exchange. The
rules are similar. Hence, you cannot compel the bank to encash the check even
if there is sufficiency of funds in the depositor’s account. The bank has the
right to reject or refuse payment.
 A check of itself does not operate as an assignment of any part of the funds to
the credit of the drawer bank, and the bank is not liable to the holder unless it
accepts or certifies the check (Sec 189). Thus, if a bank refuses to pat a check
(notwithstanding the sufficiency of funds), the payee holder cannot sue the
bank. the payee-holder should instead sue the drawer who might in turn sue
the bank. Section 189 is a sound law based on logic and established legal
principles; no privity of contract exists between the drawee-bank and the
payee.

Check Kiting Explained

- Refers to the wrongful practice of taking advantage of the float, the time
elapses between the deposit of the check in one bank and its collection to
another. In anticipation of the dishonor of the check that was deposited, the original
check will be replaced with another worthless check.
- Floating time = clearing time
- Check clearing (CICS):
• The Banko Sentral ng Pilipinas (BSP) said the Philippine Clearing Housing
Corp (PCHC) is set to implement the clearing of checks via electronic
through the CICS
• Under the CICS, only the digital images of checks and their electronic
payment information will be transmitted to the paying bank, allowing a
shorter turnaround time for funds to be created to the depositors’ accounts
(January 20, 2017).

Kinds of Indorsement (Sec 33, NIL)

a. Special Indorsement
42
- Specifies the person to whom or to whose order, the instrument s to be
payable, and the indorsement of such indorsee is necessary to the
further negotiation of the instrument.

b. Indorsement in Blank
- An indorsement in blank specifies no indorsee, and an instrument so
 indorsed is payable to bearer, and may be negotiated by delivery. - Effect:
The instrument payable to order becomes payable to bearer. Hence, it can
be negotiated through delivery
- Sec. 35. Blank indorsement; how changed to special indorsement. - The
holder may convert a blank indorsement into a special indorsement
by writing over the signature of the indorser in blank any contract
consistent with the character of the indorsement [21:00].
- The holder may convert a blank indorsement into a special indorsement
by writing over the signature of the indorser in blank any contract
consistent with the character of the indorsement. In this case, the
holder may write his name over the signature of the indorser making it
appear that the latter indorsed the instrument to him.
- However, the holder cannot write anything over the signature of the
indorser which is not consistent with the character of the indorsement.
Hence, the holder cannot write over the signature of the indorser the
following, among others: “Protest waived” or “Notice of dishonor
waived”, as they are material alterations of the contract created
thereby.

c. Conditional (Sec. 39 NIL)

- Where an indorsement is conditional, the party required to pay the
instrument may disregard the condition and make payment to the
indorsee or his transferee whether the condition has been fulfilled or
not. But any person to whom an instrument so indorsed is negotiated
will hold the same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally.
- Condition = (F + U) —> Future and Uncertain event which may or may
not happen

43
- A conditional indorsement is one which is dependent upon a
contingent event that may or may not happen
Example: “Pay to X, or order if it rains on 12, 2020”
- If the instrument at its face is originally negotiable, a conditional
indorsement will not render it non-negotiable. In other words, a
 negotiable instrument which has been indorsed conditionally will
continue to remain negotiable notwithstanding the presence of the
conditional indorsement.
- What is conditional is only the indorsement, not the promise or order
to pay. Hence it will not make the instrument non-nehotiable. - In
conditional indorsement, the party primarily liable on the instrument
may disregard the condition and pay the instrument even if the condition
has not been fulfilled.
- In such a case, the instrument is discharged and the person primarily
liable thereon is freed from any further liability on the instrument; but
the recipient of the payment will have to hold the same in trust for the
party who made the conditional indorsement.

d. Qualified (Sec. 38 NIL)

- A qualified indorsement constitutes the indorser a mere assignor of the
title to the instrument. It may be made by adding to the indorser's
signature the words "without recourse/ sans recourse“ or any words
of similar import (“at your own risk”). Such an indorsement does not
impair the negotiable character of the instrument.
- Without recourse: means without resort to a person who is secondarily
liable after the default of person who is primarily liable. The qualified
indorser guarantees only the genuineness of the instrument but does
not guarantee its payment —> He will be liable only if signature of the
maker turns out to be a forgery. He will not be liable if maker refuses to
pay.
- This kind of an indorsement will not destroy the negotiability of the
instrument.
- However, the indorsement merely makes the indorser an assignor of his
title to the instrument.

44
Sec 65, NIL: Every person negotiating an instrument by
delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it
purports to be;
 (b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair
the validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty
extends in favor of no holder other than the immediate
transferee.

NOTE:
- If a qualified indorser violates any of this, he can be liable. - If
the primary liable person fails to pay the instrument, then, you
cannot bind the qualified indorser — this is because of the
qualified indorser.
- Consequently, if the instrument is not genuine or that it is a
forgery, the qualified indorser is liable for the warranties.
- If the qualified indorser does not have good title to the
instrument; or that prior parties did not have capacity to
contract. e.g. by reason of minority; or that he has knowledge
of facts which would impair the validity of the instrument or
render it valueless — he will be liable to those warranties.
- A qualified indorser, as a rule, cannot be held liable if the
instrument is dishonored by reason of the bankruptcy or
insolvency of the party primarily liable thereon.
- However, if he had knowledge of the bankruptcy or
insolvency at the time he indorsed the instrument qualifiedly,
he is liable thereon for violating his warranty.

e. Restrictive (Sec. 36 & 37, NIL)

- An indorsement is restrictive which either: (a) Prohibits the further
negotiation of the instrument; or (b) Constitutes the indorsee the
agent of the indorser; or (c) Vests the title in the indorsee in trust for
45
or to the use of some other persons. But the mere absence of words
implying power to negotiate does not make an indorsement restrictive. -
The indorsee is merely in trust of the instrument. He is not a holder who
can further negotiate — that is why it is restrictive, it restricts the further
indorsement of the instrument.
- Restrictive Indorsement is one where the transferee of the instrument
does not acquire the full rights of the owner of the instrument as
holder thereof — he does not acquire the title of the holder because he
can no longer negotiate it.
- The 3 types of restrictive indorsement:
a. Prohibits the further negotiation of the instrument
Example:
“Pay to Marina only”
Sgd. Antonio
** The instrument becomes payable to specified person
only. Hence, it is no longer negotiable.
b. Constitutes the indorsee the agent of the indorser [Agency type of
indorsement — as when the indorsee becomes the agent of the
indorser]
Example:
“Pay to Marina for collection”
Sgd. Antonio
**The agent here is not the holder. S/he is merely doing
something for and in behalf of Antonio.
**The indorsement makes Marina an agent of Antonio but only
for purposes of collecting the proceeds of the instrument.

c. Vests the title in the indorsee in trust for or to the use of some other
persons [Trust type of indorsement]
Example:
“Pay to Marina in trust for Ada”
Sgd. Antonio
** Ada is the beneficiary Marina will only collect payment in trust of
Ada. In this case Marina cannot use the proceeds of the instrument for
her own use.
46
** The indorsement passes title to Marina but she holds the
same in trust for Ada. In this example, Marina cannot use the
 proceeds of the instrument for her own use and benefit. She
doesn’t own the proceeds. The equitable title belongs to Ada.

- Effect of Restrictive Indorsement (Sec 37)

A restrictive indorsement confers upon the indorsee the
right:chanroblesvirtuallawlibrary
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring; (c) to
transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.

ILLUSTRATION
a. To receive payment
- The holder in a restrictive indorsement has the right to
receive payment of the instrument, unless the
character of the indorsement is inconsistent with such
right.
- Hence, if the agency type of indorsement is only “for
deposit”, the holder in this case may not receive
payment of the instrument but must merely deposit
the instrument for and in behalf of the indorser.

b. To bring any action

- The holder can bring any suit on the instrument that
the indorser can bring.
- However, the defense availbale against the indorser
can also be brought against the holder, even if the
holder brings the suit in his own name.

47
c. To transfer his rights when authorized by the form of the
 indorsement
- The holder in a restrictive instrument can further
negotiate the instrument if the indorsement contains
the words of negotiability; otherwise, the holder
cannot do so.
Example: “Pay to Marina for collection”
Sgd. Antonio
**This restrictive indorsement contains the words of
negotiability as the instrument is payable to order.
**It means that the instrument is payable to Marina or
to whomever Marina shall order to be paid as payee.
**Hence, in this restrictive indorsement Marina can
still negotiate the instrument to another, but the latter
shall acquire only the rights of Marina, that is to collect
for and in behalf of the indorser who restrictively
indorsed the instrument.
** The transferee of Marina can acquire no better rights
than Marina.

[September 17, 2020 — EPISODE 12]

Q: When is a person deemed an indorser?

A: [Sec 63] A person placing his signature upon an instrument otherwise than as
maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates
by appropriate words his intention to be bound in some other capacity.

NOTE:
- A person who signs an instrument not as maker, drawer or acceptor
is deemed to have signed as an indorser. If it is not clear in what
capacity a person signed the instrument, he is deemed to be an
indorser.

48
 - If a person wants to be bound in some other capacity, he must clearly
indicate by appropriate words the limits of his liability on the
instrument.

1. An indorser may vary the terms of his liability.

a. He may indorse “sans recourse” and limit his ability on the
instrument —> qualified
b. The endorser may “guarantee payment” in which case he may not
be released from liability even if there is no presentment for
payment and notice of dishonor, although he remains to be
secondarily liable after exhaustion of the principal debtor’s assets.
c. The indorser may also sign as a surety, in which case he becomes
jointly or severally liable with the principal debtor (the maker or
the acceptor) without regard to appropriate presentment for
payment. Notice of dishonor and exhaustion of the assets of the
principal debtor.

CREDITS: Types of credit —> Guarantee or Surety?

** In a contract of guarantee one person binds himself to pay
the creditor in case the person primarily liable does (fails) not
pay. —> the person who is binding to pay is secondarily liable
(guarantor)

** In surety, when one binds himself solidarily with the person

primarily liable —> When a person binds himself to be solidarily
liable with the person primarily liable.

** In a negotiable instrument, an indorser may sign as a surety

to be solidarily liable with the person primarily liable to the
instrument (the maker or the acceptor) —> LOOK AT C ABOVE
—> indorsers are secondarily liable, but you can vary liability
by making yourself solidarily liable with those who are
primarily liable to the instrument.

49
 d. If a person signs an instrument “For purposes of identification
only”, he incurs no liability on the instrument. [IMPORTANT]

2. OTHER RULES ON INDORSEMENT

a. Irregular Indorsement [Section 64]
- Irregular ing the sense that it is outside the regular way of indorsing
it

Q: Who is an irregular indorser?

A: [SECTION 64] Where a person, not otherwise a party to an
instrument, places thereon his signature in blank before delivery, he is
liable as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is
liable to the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or
drawer, or is payable to bearer, he is liable to all parties
subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to
all parties subsequent to the payee. [IMPORTANT TAKE NOTE
OF THIS —> refer to 14:00 of Episode 13]

NOTE:
- Once you put your signature, there is now an inherent liability
on your part.
- The irregular indorser is secondarily liable. All of those who
holda the instrument after delivery of the maker or drawer, the
irregular indorser will be liable.
- Accommodation Party: One who signs the instrument without
consideration. You are making yourself liable without receiving
any valuable consideration at all.
- TAKE NOTE OF THE LIABILITY —> LIABLE AS AN
INDORSER
- Your signature appears thereon but you are not a maker or a
drawer, you are an irregular indorser. You are not an indorser
because to be an indorser you have to indorse after delivery
 50
[September 22, 2020 — EPISODE 13]

Other rules on signature on the instrument

1. Only persons whose signatures appear on the instrument are liable thereon
• Those who signed in the instrument is liable, in any capacity
• Once you affix your signature in a commercial document you are also
making yourself liable on the document/instrument.

2. Even if the name of a person appears on the instrument but absent his signature, he
cannot be held liable thereon. For instance, the name of the drawee is written on the
instrument but because his signature is nowhere in the instrument, the drawee is not liable
for the amount of the instrument.
• The manner of affixing your signature or act of putting your signature in
the instrument is the operative act that makes you liable to the instrument •
Paramount rule: You are not liable to the instrument unless you singed.

3. Ordinarily, on the face of the instrument (in the front) can be found the signatures of
the maker, drawer, and acceptor.

4. At the back of the instrument, we usually find the signature of the payee as first
indorser; and so on by other parties in the sequential order of their participation as
indorsers of the instrument. Every indorser is liable to all subsequent indorsers as
a general rule. However, this rule is not observed in the case of an irregular
indorser.
- Example: “Pay to the order of Agustin Laban or Order”
- Root-word of indorser is “Dorsal” —> at the back

5. An irregular indorser is so called because his signature is out of place. Instead of the
expected signature of a party to the instrument, the signature of the irregular
indorser is found in its place. (hindi kasi dapat andoon yung signature niya)
- For instance, where we expect the signature of the payee as first indorser,
but we find instead the signature of the irregular indorser as first
indorser and the signature of the payee as second indorser.
** Ordinarily the payee named in the instrument is the first indorser, kasi the
instrument will be delivered to the payee. And it is up to him whether he will
negotiate it or he will just wait for the maturity date and then encash it.
NOTE:
- Liability refer to Sec 64 (IMPORTANT)
- Indorser, the liability is secondary; the maker and the acceptor are the
 one primarily liable.

51
- The maker is the one expected to pay in the instrument because he is the
one promising to pay; or the acceptor because he is the one who
accepted to pay the instrument (bill of exchange).

Requisite of an Irregular Indorser (WHO IS AN IRREGULAR INDORSER, refer

below — MEMORIZE)
1. He is not otherwise a party to the instrument
2. He signs the instrument in blank; and
3. He signs before delivery of the instrument; otherwise, if after delivery, Sec. 64 will not
apply. He would then be deemed to incur the liabilities of a party negotiating by
delivery.

OTHER RULES ON INDORSEMENT (P 50 continuation)

a. Indorsement of an instrument payable to bearer
- Just deliver no need for indorsement
- Ex: A check it says “cash”, it is payable to bearer, whoever holds it can encash it. -
Read Sec 40 “Indorsement of instrument payable to bearer. - Where an
instrument, payable to bearer, is indorsed specially, it may nevertheless be
further negotiated by delivery; but the person indorsing specially is liable as
indorser only to such holders as make title through his indorsement.” - A bearer
instrument is always a bearer instrument.
- A person who indorse it specially or specifically will be liable to those people
who can trace their title because of or through his indorsement.
- Signature is crucial. Don’t just sign any instrument.

b. Where instrument is payable to two or more persons

- “Pay to the order of A and B”
- Sec 41: “Indorsement where payable to two or more persons. - Where an
instrument is payable to the order of two or more payees or indorsees who are
not partners, all must indorse unless the one indorsing has authority to
indorse for the others.”
- Sec 8(d): “When payable to order. - The instrument is payable to order where it is
drawn payable to the order of a specified person or to him or his order. It may
be drawn payable to the order of: Two or more payees jointly ”
- In case of Indorsement, all the joint payees must indorse; otherwise, if only one
of them indorsed and the others did not, the one who indorsed is deemed to
have indorsed only his share in the instrument. This indorsement will not
constitute a negotiation of the instrument but merely an assignment of a portion of the
 instrument because Section 32 hereof requires for negotiation to take place that
the indorsement must be for the entirety of the instrument —> this will lead to
multiplicity of suits.

52
- Exception: when one of the joint payees has the authority to indorse for the
others. Also with partnership —> If the joint payees are partners the act of one
partner binds the other. —> They are agents of one another, they represent one
another, hence the act of one will bind the other (MUTUAL AGENCY).

c. Instrument is drawn or indorsed to a person as cashier

- Sec 42 “Effect of instrument drawn or indorsed to a person as cashier. - Where an
instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of
a bank or corporation, it is deemed prima facie to be payable to the bank or
corporation of which he is such officer, and may be negotiated by either the
indorsement of the bank or corporation or the indorsement of the officer.”
- If the instrument, promissory note or bill of exchange, is addressed to a cashier of
a bank or a corporation, it is deemed to be prima facie payable to the bank or
Corporation of which he is an officer.
- A cashier cannot say that it is hers/his

Prima facie:
- On its face (lower echelon of evidence)
- It is a presumption, it can be over turned by other evidence; it can be
rebutted by other evidence.
Example:
“Pay to the Order of the Cashier, Toyota Motors Corporation the sum of Php.
5,000,000

Signed Marco
To: Alfonso”
- The prima facie presumption is that the bill of exchange is payable to
Toyota Motors Corporation. Thus, the bill may be negotiated by the
cashier or by any officer of Toyota Motors
- In as much as the presumption is only prima facie in character, it
admits of proof to the contrary. Thus, it may be shown by contrary
evidence that the instrument is payable to the cashier in his personal
capacity and not to the corporation.
- You can present “exculpatory” evidence that will rebut.

d. Where name of payee or indorsee is misspelled

- This happens often, specially kapag walang ID yung tao,
 - Sec 43 “Indorsement where name is misspelled, and so forth. - Where the name of
a payee or indorsee is wrongly designated or misspelled, he may indorse the
instrument as therein described adding, if he thinks fit, his proper signature.”

53
- This does not make the instrument void. You can put the correct spelling of your
name and sign it.
Example:
“I promise to pay Edmond Li or order the sum of Php. 5, 000, 000.00 upon
demand Signed (Sgd) Perry Uy”
** The correct name of the payee is Edmond Lee. Since his name is misspelled
Edmond Lee must indorse the note by signing as “Edmond Li” as erroneously
written and add, as he may wish, his correct name afterwards.
**Right name and Signature lang sa baba —> it does not affect the validity of the
indorsement or the instrument

e. Indorsement in a representative capacity

- You are indorsing it in behalf of so and so (pwede to) —> SPA
- You sign the instrument not for your own sake but for the sake of other persons.
You can still indorse as long as you are authorized and you are acting within the
limits of the authority given to you. In this case the principal is bound to your
actions.
- If you signed and you did not put that you are signing as an agent or in a
representative capacity, you will be liable personally. In order to negate this, you
have to specify that you are in fact acting in a representative capacity Example: “I
will sign for Diosdado Macapagal” <— must be like this
- Sec 44 “Indorsement in representative capacity. - Where any person is under
obligation to indorse in a representative capacity, he may indorse in such terms
as to negative personal liability. ”
- note the requirements for an agent to be able to negative personal liability.

NOTE: When a broker or other agent negotiates an instrument without

indorsement, he incurs all the liabilities prescribed by Section 65, unless he
discloses the name of his principal and the fact that he is acting only as agent

** SEC 69: This section refers to an instrument payable to bearer which is

negotiated by mere delivery by an agent or broker. In such a case, if the name of
his principal and the fact that he is only an agent are not disclosed, he will be
personally liable on the instrument in the same manner as an indorser who
negotiated by mere delivery
f. Presumption as to the time of indorsement
- Very important in order to consider the holder as a holder in due course. - To be
considered as a holder in due course you must have received the instrument before
it was overdue. Hence, time of indorsement is very important.

54
EXCEPTION: When the indorsement is dated after the maturity of the
instrument.
- Sec 45 “Time of indorsement; presumption. - Except where an indorsement
bears date after the maturity of the instrument, every negotiation is deemed
prima facie to have been effected before the instrument was overdue.”
- Indorsement is deemed prima facie to be indorsemd before it became over due
(kung walang date yung indorsement)

g. Place of Indorsement
- For venue of action
- Sec 46 “Place of indorsement; presumption. - Except where the contrary
appears, every indorsement is presumed prima facie to have been made at the
place where the instrument is dated.”
- The prima facie presumption that the indorsement was made at the place where
the instrument was dated is important in order to determine what law will
apply as different states may have different laws.
- EXCEPTION: if it is shown by contrary evidence that the instrument was dated
in one place and the indorsement thereof occurred in another place.

h. Striking out of Indorsement

- Sec. 48. Striking out indorsement — The holder may at any time strike out any
indorsement which is not necessary to his title. The indorser whose
indorsement is struck out, and all indorsers subsequent to him, are thereby
relieved from liability on the instrument.
- You can only strike out indorsements as long as it is not necessary to your title. -
You will have a problem once you strike out indorsements that are necessary for
the title. You cannot trace where you got the title to the instrument (this is a
defense against you).

[September 28, 2020 — EPISODE 14]

ILLUSTRATION
- As adverted to elsewhere, an instrument payable to bearer can be negotiated by
mere delivery. Even if a bearer instrument is indorsed specially, the same
 continues to be negotiated by mere delivery. Hence, the special indorsement of
a bearer instrument is not necessary to the title of the holder. Such being the
case, the holder may strike out said indorsement at any time.

- An instrument payable to order can be negotiated by indorsement completed by

delivery. However, if the only or last indorsement is an indorsement in blank the
order instrument is converted to one which is payable to bearer.

55
- In order words, the order instrument becomes a bearer instrument due to the
blank indorsement. In this case, all special indorsements subsequent to the blank
indorsements may be stricken out by the holder because they are not necessary
to this tile. This is because the holder then will be deemed to have acquired title
to the instrument thru the blank indorsement.

- When the order instrument is converted into a bearer instrument due to blank
indorsement, you can strike out past indorsement after the delivery, after it
became a bearer instrument because you can always claim the title to the person
who have indorsed it to you by way of delivery only (once it became a bearer
instrument)

- However, in the case of an instrument payable to order with special

indorsements all the way up to the holder, the latter cannot strike out any of
the special indorsements because all of them are necessary to his title. This is
so because the holder must be able to trace his title to the instrument through an
unbroken chain of indorsements. (You cannot break this because all of this is
necessary to your title)

Example:
A, maker, executed a promissory note in favor of B or order, payee. B negotiated by special
indorsement completed by delivery to C; C negotiated by blank indorsement (it converts the
instrument into a bearer instrument) and delivered the note to D; D negotiated by special
indorsement and delivered the note to E; E to F, holder.

** In this example, although the instrument is originally payable to order, the same
became a bearer instrument due to the blank indorsement of C. At this point, the
note can now be negotiated by mere delivery. F, holder can strike out the
indorsements E and D because they are not necessary to his title. F can trace his
title to C (who converted the instrument to a bearer instrument which can be
merely delivered by delivery). After the indorsement of E and D are stricken out,
what will remain is the blank indorsement of C. It will appear therefore that F
acquired title to the instrument thru the blank indorsement of C.
 RATIO: their indorsement are not necessary to the title of F kaya pwedeng i-strike
out.

Effect of Striking out an indorsement

1. (Sec 48) The indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the instrument.

56
- In the same manner, all subsequent indorsers will likewise be discharged from
liability. This is so for reasons of equity because by discharging a prior party, the
subsequent party will be deprived of the right to ran after the prior party in the
event the holder holds him liable thereon.
- In the same example given above, let us suppose that F struck out only the
indorsement of D and did not strike out the indorsement of E. By striking out
the indorsement of D, E is automatically also relieved from liability on the
instrument (under the law).
- This is only fair because by the voluntary act of F, D is now relieved from liability
and E cannot now go against D. For reasons of Equity, and in fairness to E, the
latter should also be relieved from liability.

i. Transfer of an order instrument without indorsement

- Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument
payable to his order transfers it for value without indorsing it, the transfer vests in the
transferee such title as the transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually made.

Q: What is the effect of transfer without indorsement? Despite of the fact

that it is an order instrument?
A: It is not a valid negotiation. It is merely an assignment not negotiation.

- In this case, he is not a holder in due course because there is no valid negotiation. He
only becomes a holder in due course from the time indorsement is made.

CASE:
1. Metropol (Bacolod) Financing vs. Sambok Motors Co., 120 SCRA 864 1983
[READ THE CASE]

FACTS: Sambok indorsed a promissory note to Metropol. Sambok motors issued a

motor vehicle to their customer, the customer issued checks to them. Sambok indorsed it
to Metropol Financing. There is a default in payment. The customer of Sambok failed to
pay despite demand, and worst he died. Thus, he can no longer collect. When Sambok
indorsed it to Metropol, they indorsed it with the words “with recourse”

ISSUE: Whether Sambok motors is a qualified indorser, thus it is not liable upon the
failure of payment of the maker?

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RULING: No. A qualified indorsement constitutes the indorser a mere assignor of the
title to the instrument. It may be made by adding to the indorser’s signature the words
“without recourse” or any words of similar import. Such indorsement relieves the
indorser of the general obligation to pay if the instrument is dishonored but not of the
liability arising from warranties on the instrument as provided by Sec 65 of NIL.

However, Sambok indorsed the note “with recourse” and even waived the notice of
demand, dishonor, protest, and presentment.

2. Gempesaw vs. CA, 213 SCRA 622

FACTS: Gempesaw is an owner of many department store, since he has a bookkeeper.
He issued a lot of checks that he signed without any details at all. The bookkeeper
issued the checks and made the amount bigger. Hence, there is forgery

ISSUE: Who will bear the loss resulting from the forged indorsements?

RULING: The drawer will bear the loss.

As a rule, a drawee bank who has paid a check on which an indorsement has been
forged cannot charge the drawer’s account for the amount of said check. An exception to
the rule is where the drawer is guilty of such negligence which causes the bank to
honour such checks.
Gempesaw did not exercise prudence in taking steps that a careful and prudent
businessman would take in circumstances to discover discrepancies in her account. Her
negligence was the proximate cause of her loss, and under Sec 23 of the NIL, is
precluded from using forgery as a defense
In the light of any case not provided for in the Act that is to be governed by the
provisions of existing legislation, pursuant to Sec 196 of the NIL, the bank may be held
liable for damages in accordance with Article 1170 of the Civil Code. The drawee bank,
in its failure to discover the fraud committed by its employee and in contravention
banking rules in allowing a chief accountant to deposit the checks bearing second
indorsements, was adjudged liable to share the loss with Gempesaw on a 50:50 ratio.

Signatures and Forgery of the Instrument

 GENERAL RULE: no person can be held liable on the instrument if his signature doe
snot appear thereon.
** Even if your name appears on the instrument but you did not sign, you will not
be held liable to the instrument

1. As to the maker, he assumes the liability of the maker upon preparation of the note.
His liability as a maker arises when he receives valuable consideration, he signs
the instrument and delivers it to the holder for negotiation.

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NOTE: The holder should seek payment from the maker

2. As to the drawer, he must sign the instrument, receive valuable consideration and
deliver the instrument to the holder for the purpose of negotiation.
- In a bill of exchange it is the acceptor who is primarily liable — drawer is only
secondarily liable
- The premise is that the drawer has funds to the drawee (or acceptor), wherein the
holder can get the payment from

3. As to an acceptor, before he signs, he is a mere drawee, and has no liability because

his signature does not appear on the instrument. He must sign in order to be held
liable, and his status is then changed from a mere drawee to an acceptor. He is not
liable as an acceptor unless he receives valuable consideration, signs the instrument
and delivers it to the holder for the purpose of negotiation.

4. As to an indorser, his position is similar to that of a guarantor if he did not sign. He

must receive valuable consideration, sign and deliver the instrument for the purpose
of negotiation before he can be made liable.

[October 1, 2020 — EPISODE 15]

Signatures and Forgery of the Instrument (FAVOURITES IN THE BAR)

NOTE:
- When you talk about signature and forgery, they come hand in hand. You can only forge a signature. -
GENERAL RULE: The general rule is that no person can be held liable on the instrument if his
signature does not appear thereon.
- A thumb mark is also accepted for those people who don’t know how to read and write. - You
will never be liable in a document or instrument if your signature does not appear thereon.

1. As to a maker, he assumes the liability of maker upon preparation of the note. His liability as a
maker arises when he receives valuable consideration, he signs the instrument and delivers it to
the holder for negotiation.

NOTE:
- In order for the maker to be liable, he must sign the instrument and delivers the instrument for
negotiation. If you are the maker, in order for you to be liable, you must prepare the
instrument, sign the instrument and you must deliver.
- If you did not deliver the note, then another problem arises.
2. As to a drawer, he must sign the instrument, receive valuable consideration and deliver the
instrument to the holder for the purpose of negotiation.

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- Even if you prepare a bill of exchange and sign it, if there is no intention to deliver you will not be
liable just the same.
Q: What if one person prepared a promissory note and bills of exchanged, signed it
and kept the instrument in his drawer and he did not deliver it, now somebody stole
it? [This will be elaborated later]
A: There is a problem here, thus the drawee must sign the instrument and deliver it, for the
purpose of negotiation

3. As to an acceptor, before he signs, is a mere drawee, and has no liability because his signature
does not appear on the instrument. He must sign in order to be liable, and his status is then
changed from a mere drawee to an acceptor. He is not liable as an acceptor unless he receives
valuable consideration, signs the instrument and delivers it to the holder for the purpose of
negotiation.

Q: In a bill of exchange, the drawer will identify the drawee. The drawee is supposed
to pay and the drawer names the drawee. Is the drawee liable?
A: No, you will not liable as a drawee because your signature does not appear in the
document.

Q: What if the drawee accepts the instrument and signed it?

A: Then he is no longer a drawee but an acceptor. As a drawee, he will not be held liable
because he did not sign the instrument. Upon signature of the drawee, his status is changed
from drawee to acceptor. As an acceptor you are primarily liable to the instrument.

IN SHORT: A drawee must sign in the instrument for him to be liable. ONCE SIGNED
THE DRAWEE IS NOW THE ACCEPTOR

Take note without delivery there is another problem (take note of the delivery).

4. As to an indorser, his position is similar with that of a guarantor. He must receive valuable
consideration, sign and deliver the instrument, for the purpose of negotiation before he can be
made liable.

- Indorses are those who got the instruments and negotiate it with another. We said that indorsers are
 not primarily liable to the instrument but secondarily liable.
- Indorsors are similar to guarantors.
- Guarantor is a person who promise to pay the debt of another if the person primarily liable fails to
pay.

Example: In a contract of loan, if one person is contracting a loan from the creditor,
sometimes the creditor needs assurance and he will require you a guarantor who is another
person not taking up the loan but he promises the creditor to pay if the principal fails to
pay.

60
- An indorser is like a guarantor. They are only secondarily liable on the instrument. As an indorser he
must receive valuable consideration, sign and deliver the instrument for purposes of negotiation in
order for him to be held liable.
- If he signed the instrument and did not deliver, again that is another problem.

Effect of Indorsement or Assignment of Infant (Minor) or a Corporation

NOTE: For purposes of this law, “infant” will refer to “minor”

Sec. 22. Effect of indorsement by infant or corporation- The indorsement or assignment of the
instrument by a corporation or by an infant passes the property therein, notwithstanding that
from want of capacity, the corporation or infant may incur no liability thereon.
- That an indorsement or assignment of an instrument by corporation ultra vires or by an infant
passes the property therein, notwithstanding that from want of capacity, the corporation or infant
may incur no liability thereon [they are real defenses, they can use it as a defense in order to
avoid liability] (SECTION 22, NIL — ultra vires).
- When you talk about corporation, it is an artificial being created by law and it can only act within
the bounds of its authority given by the state.
Example: If you put up a lending corporation, then your authority is only limited to lending
only and all inherent or incidental lending transactions. As a lending corporation, you cannot
engage in transportation business. That is what ultra vires.
- Ultra vires act beyond or outside the authority.
- If a corporation endorses and it is within its authority, then it is valid.
- Corporation ultra vires and infant will not incur liability and can use incapacity as a real
defense to incur no liability. (Take note of this)
- You have learned in civil law that contracts entered into by a minor is voidable (valid until
annulled) because there is vitiation of consent. In this case, when the minor or corporation ultra
vires indorses the instrument, it is valid until annulled hence, it passes property therein.
- On the part of the minor or corporation ultra vires, it may excuse themselves from criminal
liability.
- In both instances, endorsements are voidable –valid until annulled- so that they pass good
title. Therefore, parties prior to minor or corporation cannot escape liability by setting up as
defense the incapacity of one of endorsers.
 - Parties prior to the minor or corporation ultra vires cannot escape liability by setting up the
defense of incapacity. This defense available to the minor and the corporation is a defense
personal only to them and cannot be pass on.
- Other parties to the instrument cannot use your want of capacity as their own defense, because
minority and lack of authority is something personal t the minor and the corporation

1. Indorsement or assignment by a minor

- Title to the instrument passes. However, the minor does not incur liability on the instrument
even to a holder in due course because of his lack of capacity is a complete or real defense. -
This rule is applicable to those incapable of giving consent such as insane or demented persons
and deaf mutes who do not know how to read and write. (Art. 1327 CCP)

61
2. Indorsement by a corporation
- Where the indorsement or assignment made by a corporation is ultra – vires, title to the
instrument likewise passes although the corporation may incur no liability thereon.

Example 1: Juan executed a promissory note, payable to Jose, a minor, who then endorses
the note to John, then to Max, the holder. Max may not be able to hold Jose liable, but he
may proceed against Juan due to his warranty (Sec 60 to 65) that the payee exists and his
then capacity to endorse and as against John, who warrants that the instrument is valid
and subsisting. The exception to this rule is the presence of actual fraud committed by
the minor or the corporation. As when the minor fraudulently claimed that he is not a
minor.

Juan (Maker of PN) payable to —> JOSE MINOR (PAYEE), indorses the note to —>
JOHN, indorses it to —> MAX (HOLDER).

Example 2 (indorser is a minor): M makes a promissory note payable to the order of P. He

issues the same to P who indorses it to A, a minor. A indorses the not to B, B endorses it to
C, C endorses it to D, and D indorses it to H, holder.
Q: What is the effect of this indorsement of the minor?

M (Maker) —>P (Payee) —>A (Minor) —> B —> C —> D —> H (Holder)

A: As to the holder H, whether holder in due course or not, he may collect from M and P
who cannot raise the defense that A is minor because A’s indorsement passes the title to
the instrument (sec 22).

Also, if M fails to pay, H, whether a holder in due course or not, may collect from B, C,
and D because as indorsers, they are secondarily liable and they warrant “that all prior
parties had capacity to contract.” Note memorize section 65 and 66 (Warranties).

H, even if he is a holder in due course, may not collect from A because A’s minority is a
 real defense (defense that can be used even against a holder in due course). Then
again, EXCEPT in case of FRAUD

Example 3 (payee is a minor): M makes a promissory note payable to the order of P, a

minor. He issues a note to P who indorses it to A , A to B, B to C, C to D and D to H,
Holder.

M —> P(Minor & Payee: babayaran) —> A —> B —> C —> D —>H

Q: May the holder collect from the maker?

A: Yes, M the maker is primarily liable to the instrument; he is the one promising to pay
the holder. (two reasons) First M, by making the instrument admits the existence of the

62
payee and his then capacity to indorse (Sec. 60). Second, the indorsement of P although he
is a minor passes title (Sec. 22, NIL). Thus, H the holder has good title to the instrument.

Q: Can the holder collect from indorsers A, B, C and D?

A: Yes, A, B, C and D as indorsers are liable on their warranty that all prior parties had the
capacity to contract. They cannot use P’s minority as a defense, because it is real and
personal defense.

Q: May the holder collect from P?

A: No, P is not liable because his minority is a real defense (SECTION 22).

[MEMORIZE SEC 60, 65, and 66]

Example 4 (maker is the minor): Suppose it is M who is the minor. Will he be liable under
the instrument?
A: No, because his minority is a real defense, However, if the person primarily liable has a
real defense, then the holder can go to those secondarily liable. He can go to indorsers who
will be liable on their warranty that all prior parties had capacity to contract.

GENERAL RULE ON SIGNATURE: No person can held liable on the instrument if his signature
does not appear thereon. Even if your name is there but you did not sign the document, you will not be
held liable.

EXCEPTIONS:
1. One who signs in a trade or assumed name will be liable to the same extent as if he had signed
in his own name (Section 18).

NOTE:
- You use the alias “tiongsan Harrison” and signed it, even though it is not your name, the person
 signed to the same extent as if he had signed in his own name.
- Sec. 18. Liability of person signing in trade or assumed name. – No person is liable on the
instrument whose signature does not appear thereon, except as herein otherwise
expressly provided. But one who signs in a trade or assumed name will be liable to the
same extent as if he had signed in his own name.

2. When an authorized agent signs for and on behalf of his principal, the principal is liable
although his signature does not appear on the instrument (Section 20).

NOTE:
- If you assigned an agent to do an act on your behalf, the agent acts based on the authority you
had given him, in good faith and he disclosed his principal or indicated that he is acting within
the authority you gave him, then the effect is it is as if you are the one personally doing the
acts. The agent is not liable.

63
- Sec. 20. Liability of person signing as agent, and so forth- Where the instrument contains
or a person adds to his signature words indicating that he signs for or on behalf of a
principal or in a representative capacity, he is not liable on the instrument if he is duly
authorized; but the mere addition of words describing him as an agent, or as filing a
representative character, without disclosing the principal, does not exempt him from
personal liability.
- For an agent not to be liable, the following must concur:
a. He must be duly authorized
b. He adds the words to his signature describing himself as an agent
c. He discloses the name of the principal (Sec. 20).
d. He must be within the scope of his authority. (Art. 1881, CCP)
Example (authority) : As an agent, you can sign for the principal not more than 500,000
but you indorse something that is worth 1,000,000. Then you are liable as an agent
because you acted beyond your authority.

Example 2:
Pablo Patricio (Principal)

By: Angelo Alvarez (Sgd)

Agent

SGD Angelo Alvarez as agent

Of Pablo Patricio

[October 3, 2020 — EPISODE 16]

GENERAL RULE ON SIGNATURE: No person can held liable on the instrument if his signature
does not appear thereon. Even if your name is there but you did not sign the document, you will not be
held liable.

CONTINUATION OF EXECPTIONS
3. Procuration, concept:
“Procuration” means the act of appointing another as one’s agent or attorney.

NOTE:
- When you say attorney-in-fact, it is not necessary that he is a lawyer. However, if attorney-in
law it must be a lawyer.
- Sec. 21. Signature by procuration; effect of. A signature by “procuration’ operates as
notice that the agent has but a limited authority to sign, and the principal is bound only
in case the agent in so signing acted within the limits of his authority.
- If you say there per proc, then you name the agent. It means that the agent has a limited
capacity to sign, and that the principal is bound only in case the agent in so signing acted
64
within the limits of his authority. The person assigning him as the agent will only be liable if
the agent acted within the actual limits of his authority.

Effect by Signature by ”procuration” (reiteration)

- A signature by procuration operates as a notice that the agent has but a limited authority to sign
and the principal is bound only in case the agent is so signing acted within the actual limits of
his authority. (Sec. 21, NIL).

Example: (Pablo Patricio as Principal and Angelo Alvarez as agent)

(Sgd) Pablo Patricio Per. Procuration: Angelo Alvarez

Or
Sgd) Pablo Patricio
Per. Proc.: Angelo Alvarez

Or
(Sgd) Pablo Patricio
P.P. : Angelo Alvarez

NOTE:
- Pablo Patricio is telling the whole world that his agent Angelo Alvarez has limited capacity
to sign.
- P.P. or Per. Proc, or Per Procuration —> serves as a warning that the person signing has a
limited authority to sign
 - The signature of a party made by a duly authorized agent who indicated that he signs for or
in behalf of a principal or in a representative capacity. However, the mere addition of
words without disclosing the principal does not exempt him from personal liability. A
signature by “procuration” operates as notice that the agent has limited liability to sign and
the principal shall only be bound if the agent acted within the actual limits of his authority.
- The agency requires no form unless the law provides otherwise.

4. In an acceptance by a separate instrument. The separate paper is called “Allonge”

NOTE:
- When there is acceptance in a separate instrument, if you are drawee, for example, and you
accepted in a separate instrument (which is called allonge) even if your signature does not
appear on the main instrument, because your acceptance is in another instrument, which is
part of the main instrument, you are still liable.

65
5. When there is an unconditional promise in writing to accept a bill before it is drawn (Section
135, NIL).

NOTE:
- Before a drawer a prepares an instrument and here is another person accepting the
instrument before it is drawn or prepared in writing, then that person, even if he did not sign
the instrument as an acceptor, then he is liable.
- Section 135: Promise to accept; when equivalent to acceptance - An unconditional
promise in writing to accept a bill before it is drawn is deemed an actual acceptance in
favour of every person who, upon the faith thereof, receives the bill for value.
- Thus, even if a person did no sign on the bill itself, as long as he promise to accept before
the instrument drawn, he is still liable.
- NOTE THE WORD BEFORE. If the document is drawn after, then he will only be liable if
he signs it.
- Before the document is drawn, there is no document to sign. However the person may accept
the instrument by stating in writing the unconditional promise to accept the bill. - The idea
here is that, a bill of exchange is not yet drawn, hence he cannot sign it yet. Hence, he can put
it in writing (Sec 135) —> which is to be prepared by the drawer.

6. Where a person negotiates a bearer instrument by delivery.

NOTE: (MEMORIZE 66, 65, and 60 —> SEC 1)

- Even if it is a bearer instrument negotiated by mere delivery, the indorser here is subjected
under warranty under Section 65.
 - Section 65: Warranty where negotiation by delivery and so forth — Ever persons
negotiating an instrument by delivery or by a qualified indorsement warrants: a) That
the instrument is genuine and in all respects what it purports to be; b) That he has
good title to it; c) That all prior parties had capacity to contract; d) That he has no
knowledge of any fact which would impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warrants extends in favour of no
holder that the immediate transferee. (beyond the immediate person you are indorsing,
you are no longer liable —> kasi hindi mo naman kilala yung mga subsequent holders and
indorsers)
The provision of subdivision (c) of this section do not apply to a person negotiating
public or corporation securities other than bills and notes.
Meaning of the above provision:
a. The instrument is genuine, it is not an object of forgery
b. The person delivering has good title to it, you took good title to it. Now, you are
indorsing it so that the indorsee will have a good title to it
c. As an indorser you are warranting that every party has the capacity to contract, no one
is a minor
d. (explainable)

66
- In this case, for exception number 6, since it is a bearer instrument, you do not know the
maker of the instrument. As a holder, you only know the immediate person who transferred
the document. Thus, the warranty is only to the immediate transferee.

7. Where the drawee destroys a bill or refuses within 24 hours to return the bill accepted or not
accepted.

NOTE:
- As a drawee, he will not be liable to the instrument if he does not accept or put his signature
in the document. If he signs the document, he becomes an acceptor thus, he will be held
liable.
- If the drawee destroy or fails to act within 24 hours on the document, he will be held liable
as an acceptor.
- Section 137. Liability of drawee returning or destroying bill. Where a drawee to whom
a bill is delivered for acceptance destroys the same, or refuses within 24 hours after
such delivery or within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have accepted the same.

8. Where a person forges the signature of another, the forger is liable.

Example: my name is there in the instrument, and the forger sign the instrument. It appears
that my signature is there and not the forger’s. Even if he did not sign the instrument with his
own signature under a different name, he will be held liable.
 NOTE:
- Here you are committing a crime hence you should be held liable even if you did not sign
using your own signature.
- Ang point lang here is “because you are a forger, even if your signature does not appear
in the instrument itself, you will be held liable”
- SEC. 23. Forged signature; effect of. – When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and
no right to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or under such
signature, unless the party against who it is sought to enforce such right is precluded
from setting up the forgery or want of authority.

Q: What/Who is an accommodation party?

A: Sec. 29 Liability of accommodation party. An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, (MDAI) without receiving value therefor, and for
the purpose of lending his name to some other person. Such a person is liable on the instrument
to a holder or value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party. (regardless kung alam nung party nung kinuha niya yung instrument na
accomodation party yung nag bigay or hindi liable pa din yung accomodation party)

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Q: What is the liability of the accommodation party?
A: He is liable to a holder for value regardless at the time of taking the instrument, knew him to be only
an accommodation party.
Example: I took an instrument for value and I knew that the maker of the PN is merely an
accommodation party.
Q: Can I make that person liable?
A: Yes, under section 29, regardless whether if I knew that he is an accommodation party
or not, he is still liable.

Rule: If your signature appears on the instrument, you are still liable even if you are
merely an accommodation party.

Q: What is forgery?
A: By forgery is meant the counterfeit (falsification) making or fraudulent alteration of any writing, and
may consist in the signing of another’s name, or the alteration of an instrument in the name, amount,
description, of the person and the like, with intent to defraud.

Example: If you change the name of the payee, or if you change the amount in the
instrument, or change the name of the agent, etc., with the intent to defraud, that is forgery.
(ITATANONG SA EXAM, MGA ULOPONG YUNG DEFINITION; MEMORIZE THIS)
NOTE:
- SEC. 23. Forged signature; effect of. – When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no right
to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the party against
who it is sought to enforce such right is precluded from setting up the forgery or want of
authority.
- The exception to Sec. 23 is Estoppel. Upon knowing that his signature is forged and did not contest
it, that person is precluded from setting up forgery.
- The rule on forgery under Section 23 applies only to a signature that is forged or made without
authority of the person whose signature it purports to be.
- Different rule will apply if the person changes the amount, name, etc of the document. - The forger,
in cases of forgery, who forges the signature of another person is liable on the instrument even if his
actual signature does not appear thereon as the law provides that when a signature is forged or made
without authority of the person whose signature it purports to be, it is wholly inoperative, and no right
to retain the instrument or give discharge therefore, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless the party against whom it is sought to
be enforced is precluded from setting up forgery or want of authority.

68
Q:What are the effects of forgery?
Answer:
a) The instrument is not declared totally void nor are the genuine signatures thereon rendered
inoperative. It is only the forged signature that is declared inoperative. It is only the forged
signature that is declared inoperative. Hence: rights still exist and may be enforced by virtue of
the instrument as between parties whose signatures were not forged, and
NOTE: The entire instrument is not void. It is only the forged instrument

b) A forged instrument just prevents any subsequent party from acquiring any rights as against
any party whose name appears prior to the forgery. There is no right to retain the
instrument, or to give discharge or to enforce as between subsequent parties but no one can
acquire a right as against parties prior to the forgery, who also have rights and may enforce
them as against each other.

NOTE:
- At this point, all the people after the forgery will not have a right against those people who
had the instrument before the forgery.
- Those parties prior to the forgery are excluded from liability. Prior parties may not be liable
to the instrument.
Example: My name as the maker was forged, up to that point you cannot make me liable.
 (may example sa page 70, look at the note)

The exception to the effects is when a party against who the instrument is being enforced is precluded
from setting up forgery (as a defense).

a. Those who by their acts, silence and inaction or negligence are estopped from setting up the
defense of forgery.
b. Those who warrant or admit the genuineness of the signature in question as follows: 1. The
acceptor, who admits, among other matters, the genuineness of the signature of the drawer.
(Sec. 62)
2. The indorsers, who warrant, among other matters that the instrument is genuine and in all
respects what it purports to be. (Sec 65 and 66)
3. Those negotiating by mere delivery, who warrant, among other matters, that the instrument
is genuine and in all respects what it purports to be. (Sec. 65).

Mentioned above are precluded from setting up forgery.

ILLUSTRATION:
a) The indorsers of instrument payable to order.
As when: A maker executed a promissory note payable to the order of B (payee). B lost the note. X
Found it, signed the name of B and negotiated the instrument to C, then C to D, and D to E, holder.

A (Maker of PN) —> B(PAYEE and lost the note) —> X(found the note and signed the name of
B) —> C —> D —> E (Holder).

69
**When it comes to indorsement, usually the payee named therein is the first indorser, kasi
maidedeliver sakanya. If I am going to make a promissory note in your favor, I will name you as the
payee, I will deliver it to you, since you will be the one to collect payment if you do not negotiate it.
Hence, if you negotiate it you will be the first indorser.

NOTE:
- E can go against D, C and X, the forger. They are precluded from putting up the defense of forgery
because as general indorsers they warrant that the instrument is genuine and in all respects
what it purports to be and that the instrument is valid and subsisting. X is deemed to have signed
in an assumed name and therefore, has the same warranties as a general indorser.
- X is committing a crime hence, he is liable — X is the forger, should not be excused from liability
because that is injustice. The person committing the crime first and foremost should be liable - X as
a forger can be still held liable even his signature is not there as mentioned in the exceptions above.
- However, E cannot go against B because B neither signed the instrument, nor authorized X
to sign for him. (B is a prior party to forgery, “all those party prior to the forgery is exempt
from liability”)
- So, also E cannot go against A, maker, because the forged signature of B is wholly inoperative
and did not validly transfer title over the instrument to C. Thus, insofar as A concerned, what
C acquired are only the rights of a forger which was transferred to D and hence E, holder.
 Therefore, E has no right to retain the instrument or to enforce payment thereof as against A.
- A and B are prior parties to the forgery and thus, they are precluded from liability on the
instrument. (please see effect of forgery)

IN cases of this nature, the “cut-off formula” may be used to determine the liability of parties to
the holder of the instrument.

A(maker) — >B ( Payee and signature was forged) — > X (FORGERY and CUT-OFF) —> C —
> D —> E (Holder)

** Yung naka green wala ng liability

** Yung black yung forgery sakanila, sila sila na ang mag uusap.

NOTE:
- By virture of the cut-off formula, all parties prior to the forgery has no liability thus, A and B
has no liability and the holder cannot go against them. C and D can be held liable (Sec. 65) - The
“cut-off” is at the point where the forgery occurred. All those above the cut-off cannot be
held liable by the holder. All those below the cut-off are liable to the holder.

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[October 6, 2020 — EPISODE 17]

GENERAL RULE ON SIGNATURE: No person can held liable on the instrument if his signature
does not appear thereon. Even if your name is there but you did not sign the document, you will not be
held liable.

NOTE:
- Sec 23 talks only about forged signature as to other alterations on the day, amount,
name, is separate.
- SEC 23: When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain
the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature,
[EXCEPTION] unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
- From the time there is forgery, that is the time you implement the cut-off. All the
parties that came after the cut-off, will be held liable as regards the holder. And
those parties above the cut off will not be held liable. (take note the cut off method is
not a legal basis —> wag mong isagot sa exam!! ahahhaha —> use the provisions of law
 daw)

(CONTINUATION OF THE ILLUSTRATION IN EPISODE 16)

b. The forgery of the indorsement of a party in an instrument payable to bearer because
such forged indorsement is not necessary to the title of the holder since bearer
instruments can be negotiated by mere delivery.

Q: Does the forgery has an effect?

A: No, because such forged indorsement is not necessary to the title of the holder since
bearer instruments can be negotiated by mere delivery. Even if there is a special
indorsement, you can strike it out because indorsement is immaterial, not necessary for
title.

c. The acceptor in a bill of exchange

NOTE: The acceptor also warrants the genuineness of the instrument

Example: X (forger) executed a bill of exchange by signing the name of Y as drawer, making
himself (X) as payee of the instrument and addressed the bill to Z as drawee. Then X (forger
payee) negotiated the bill to A who presents the instrument to Z for acceptance. Z accepts and
signs the bill as acceptor.

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Q: What is the effect of Z’s Acceptance?
A: Z cannot later on refuse to pay the bill by putting up the defense of forgery of the
signature drawer as he is precluded from putting up the defense of forgery as by his
acceptance, Z warrants the genuineness of the signature of the drawer.

d. Those under estoppel by their declaration, act or omission.

CIVIL LAW: The liability of a person as regards estoppel (relate) —> once you made the
representation or declaration to an innocent 3rd person, later on you can no longer deny such
declaration.

Example: As when X (forger) executed a promissory note by signing the name of Y as maker,
making himself (X) as payee of the instrument. Then X (forger-payee) negotiates the note to
A; but before accepting the note, A asks Y if everything is in order with the note to which Y
says: “Yes, that’s okay” (there is an admission).

Q: What is the effect?

A: In this case, Y is precluded from putting up the defense of forgery because by his
declaration, he is estopped from denying the validity of the instrument. (This is to
 protect the interest of an innocent third party/person)

Forgery distinguished from Material Alteration

A forgery pertains to a signature of a party, while a material alteration (sec 125) is any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest (it will affect the maturity and the due date
of an instrument)
(c) The time or place of payment (to determine due date)
(d) The number or the relations of the parties (it will affect the liability of the parties) (e) The
medium or currency in which payment is to be made (if this is change there would be a
discrepancy as to the amount — i.e. you change the dollar to yen);
(f) Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is a material
alteration (you put conditions when there shouldn’t be — it changes/alters the instrument).

NOTE:
- Aside from these there could be alterations but they are not material
- If it is not material alterations it will not have any effect to the instrument - Sec 124:
Where a negotiable instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers. (same

72
principle with cut-off as discussed in forgery) But, when an instrument has been
materially altered and is in the hands of a holder in due course, not a party to the
alteration, he may enforce payment thereof according to its original tenor.

Example: A issued a promissory note in the amount of Php. 10,000 payable to the order of B,
payee. B negotiated to C who convinced B that he be allowed to change the amount of Php.
40,000 so he can pay his debts to D. Thereafter, C negotiated to D; D to E, the holder.

Q: Can E go against D?
A: Yes, because D is a subsequent indorser. As such D warrants that the instrument is
what it purports to be and that it is valid and subsisting. Hence, D is estopped from
denying the validity of the instrument.

Q: Can E go against C?
A: Yes, because C was the one who altered the instrument and also because of his
warranties as a general indorser.

Q: Can E go against B?
A: Yes, because B assented to the alteration; and also because of his warranties (he is
 a payee and an indorser).

Q: Can E go against A?
A: It depends on whether E is a holder in due course or not. If E is not a holder in
due course, the instrument is avoided to him. Hence, E cannot go against A.
However, E is a holder in due course, E may enforce the instrument according to its
original tenor. Hence, E may go against A but only for Php. 10,000, the original tenor
of the instrument. (Apply 124)
NOTE: E can only go against A as to the original tenor and NOT on the altered one. This is to
safeguard innocent parties.

Q: Who is a holder in due course? [MEMORIZE: COGI]

A: Section 52: What constitutes a holder in due course. - A holder in due course is a holder
who has taken the instrument under the following conditions:
(a) That it is Complete and regular upon its face;
(b) That he became the holder of it before it was Overdue, and without notice that it has
been previously dishonored, if such was the fact;
(c) That he took it in Good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any Infirmity in the
instrument or defect in the title of the person negotiating it.

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NOTE: In order for you to be considered a holder in due course you must comply with
COGI

Q: What are the rights of a holder in due course?

A: Sec 57: Rights of holder in due course - A holder in due course holds the instrument free
from any defect of title of prior parties, and free from defenses available to prior parties
among themselves, and may enforce payment of the instrument for the full amount thereof
against all parties liable thereon.

Example: A is the drawer and B is the payee. Suppose the instrument is a bill of exchange and
the bill is addressed to X as a drawee.

Q: Is X, drawee liable?
A: No, because X as drawee is not a party to the instrument until he accepts. Note: You
will not be liable if you are a drawee, unless you accepts and signs the instrument.
Then you will be an acceptor.

Suppose X, accepts, and as it passes along there is an alteration from 10,000 it becomes
40,000 Q: Is X as acceptor liable? If so for how much? If not, why not?
 A: Yes, he is liable, because by accepting the instrument you are accepting that the
drawer is existing and the signature is genuine.

(Two schools of thoughts)

1. Maintians that the acceptor X is liable only according to the original tenor of the
instrument which in this case is 10,000.
2. Asserts that the acceptor is liable according to the tenor of his acceptance. Thus, if X
accepted prior to the alteration of the instrument he would be liable to only for Php.
10,000 because that is the tenor of his acceptance. However, if X accepted after the
alteration of the instrument, he would be liable for Php. 40,000 because that is the
tenor of his acceptance.

Note: The second view is a better view. The second example is different from the
first example; it is a bill of exchange, hindi siya yung gumawa inaccept niya lang so
parang may estoppel in the acceptor’s part kasi in the first place if you accept aware ka sa
laman nung instrument dapat.

Spoliation: When the material alteration of the instrument is made by a stranger (he is not a
party to the instrument — saw saw de jk).

74
Q: What is the meaning of the Shelter Rule?
A: Section 58: When subject to original defense. - In the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it were non
negotiable. But a holder who derives his title through a holder in due course, and who is
not himself a party to any fraud or illegality affecting the instrument, has all the rights of
such former holder in respect of all parties prior to the latter.

Note: You are being sheltered by the holder in due course

 75
FINALS
[October 26, 2020 — EPISODE 18]

**Reiteration of Episode 17 (with additional information)

Forgery Distinguished from Material Alteration

Forgery usually talks about signature. If somebody uses your signature without your
authority, then that is forgery.

Section 125 (NIL): A forgery pertains to a signature of a party, while a material

alteration is any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or
any other change or addition which alters the effect of the instrument in any
respect, is a material alteration.

Note: Any changes here will change the original tenor or content of the instrument, but the
law zeroes in on material alteration.

Example: Wrong grammar. It may change the content of the instrument but it is not a
material alteration. Enumeration of Section 125 tells us what changes is material
alteration. Other alteration not included in Section 125 is not material. Thus, the
law of NIL will not apply to those alteration.

RULE: Where a negotiable instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.

NOTE:
- Similar with the “cut-off limit” subsequent indorsers are liable (Warranty). - It is
avoided except to those who altered the instrument or consented to the material
alteration; after cut-off they are still liable.
- Example 1: You put in the instrument the amount different from that intended —> it is
avoided; except to the person who authorized, assented the alteration —> as well as
subsequent indorsers.
- Take note of warranties of indorsers. It will still apply to material alteration.

76

- Example 2: The sum payable is 100K, X altered the instrument and the amount became
1M, then X indorsed it to Y (subsequent indorser), Y is now liable to 1M.

But when an instrument has been materially altered and is in the hands of a holder in due
course, not a party to the alteration, he may enforce payment thereof according to its
original tenor (Section 124)
NOTE:
- It is avoided to prior party, BUT even if you are a prior party, prior to the
alteration, when the holder is a holder in due course he may still enforce the
instrument to its original tenor.
- Example: I am the maker and X (indorser) altered the amount of the instrument. If a
holder in due course comes to me with the altered instrument. How shall I pay? If the
person is a holder in due course, then the maker is only liable for the original tenor. I
promised to pay 100K I can only pay you this amount (example: original amount
100,000 pero dinagdagan ng tatlong zero, naging 1M, 100,000 lang pwede singilin.)
However, if the person is not a holder in due course, it can be avoided
- Sec. 124. Alteration of instrument; effect of. – Where a negotiable instrument is
materially altered without the assent of all parties liable thereon, it is avoided,
except as against a party who has himself made, authorized, or assented to the
alteration and subsequent indorsers. But when an instrument has been
materially altered and is in the hands of a holder in due course, not a party to
the alteration, he may enforce payment thereof according to its original tenor

Consequently, the liabilities of the parties to the instrument may be illustrated

as follows:
As when: A issued a promissory note in the amount of P10,000 payable to the
order of B, payee. B negotiated C who convinced B that he be allowed to change
the amount to P40,000 so he can pay his debts to D. Thereafter, C negotiated to
D; D to E, Holder.

A (maker) > B (assented) > C (altered) > D > E (holder)

Q1: Can E go against D? How much?

A: Yes, because D is a subsequent indorser. (Warranty and Sec. 124)
He is liable for P40,000.00. (warranty). As such, D warrants that the instrument
is what it purports to be and that it is valid and subsisting. Hence, D is estopped
from denying the validity of the instrument.

Q2: Can E go against C?

A: Yes, because C was the one who altered the instrument; and also because of
his warranties as general indorser.
Note: You are the culprit so the more that you are liable to the altered
amount 77
Q3. Can E go against B?
A: Yes, because B assented to the alteration; and also because of his warranties.
(MEMORIZE RULE 124. ANDOON RULES REGARDING LIABILITY and
EXCEPTIONS)
 Q4. Can E go against A?
A: It depends whether E is a holder in due course or not. If E is not a holder in
due course, the instrument is avoided as to him; hence, E cannot go against A.
However, IF E is not a holder in due course, E may enforce the instrument
according to its original tenor; hence, E may go against A but only for P10,000,
the original tenor of the instrument.

Q: WHO IS A HOLDER IN DUE COURSE? [MEMORIZE “COGI”]

A: Section 52: What constitutes a holder in due course. - A holder in due course is a holder
who has taken the instrument under the following conditions:
(a) That it is Complete and regular upon its face;
(b) That he became the holder of it before it was Overdue, and without notice that it has
been previously dishonored, if such was the fact;
(c) That he took it in Good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any Infirmity in the
instrument or defect in the title of the person negotiating it.

NOTE: A holder in due course received the document with the enumerations above.
(WALANG MALI SA DOCUMENT). Take note of this because liability of holder will differ
depending whether he is a holder in due course or not.

Q: WHAT ARE THE RIGHTS OF A HOLDER IN DUE COURSE? [MEMORIZE] A: SEC.

57. Rights of holder in due course.— A holder in due course holds the instrument free
from any defect of title of prior parties, and payee from defenses available to prior parties
among themselves. and may enforce payment of the instrument for the full amount thereof
against all parties liable thereon.

NOTE: A holder in due course holds the instrument:

1. Free from any defect of title of prior parties, and
2. Free from any defenses available to prior parties among themselves, and 3. May
enforce payment of the instrument for the full amount thereof against all parties liable
thereon.

Example: Same example above but the instrument is a bill of exchange. Add another party,
X as drawee.

78
Q1: Is X drawee, liable?
A: No, because X as drawee is not a party to the instrument until he accepts. (Even
his name is indicated in the instrument but he did not sign or accepts it, he is not
liable.)
 Note: No one is liable to the instrument unless he/she affixed his/her signature

Q2: Suppose X accepts, is X as acceptor liable? If so, for how much? If not, why
not?
A: There are two schools of thought in this regard.
First view maintains that the acceptor X is liable only according to the
original tenor of the instrument which, in this case is P10,000.00
Second view asserts that the acceptor is liable according to the tenor of his
acceptance.
Thus, if X accepted prior to the alteration of the instrument, he would be liable
only for P10,000.00 because that is the tenor of his acceptance. However, if X
accepted after the alteration of the instrument, he would be liable for P40,000.00
because that is the tenor of his acceptance.

The second view is the better view. (Both views are correct but the second view
is better. Take note how much you accepted and that is the amount that you
would be liable to).

When the material alteration of the instrument is made by a stranger, it is

called spoliation

Q: WHAT IS THE MEANING OF “SHELTER RULE”?

A: A holder who is not a holder in due course but derives his title through a holder in due
course, and who is not himself a party to any fraud or illegality affecting the instrument, has
all the rights of such former holder in respect of all parties prior to the latter.

SEC. 58. When subject to original defenses.— In the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable. But a holder who derives his title through
a holder in due course, and who is not himself a party to any fraud or illegality
affecting the instrument, has all the rights of such former holder in respect of all
parties prior to the latter.

Q:Who is a person NOT deemed a holder in due course?

A: SEC. 53. When person not deemed holder in due course.— Where course an instrument
payable on demand is negotiated an unreasonable length of time after its issue, the holder
is not deemed a holder in due course.

79
NOTE: For checks, we have spoiled checks; you are given a maximum of 6 months to
en-chash the checks
 READ DE OCAMPO VS. GATCHALIAN 03 SCRA 596
YANG vs CA G.R. no . 138074
(ISSUES DITO IS WHETHER HOLDER IN DUE COURSE SILA)
Lalabas sa quiz or exam iyong case.

[October 27, 2020 — EPISODE 19]

Completeness of Instrument and Delivery
Ideal Scenario: The maker or the drawer will prepare the instrument completely, the
signatures are there, then deliver. Ideally, the first person to receive the instrument upon
delivery is the payee (who is named therein); and the first indorser under natural circumstances
is the payee.

Note: Delivery Sparks the life into the negotiable instrument.

Concept of Incomplete Instrument but Delivered

Q: What if the instrument is an incomplete instrument and it is delivered? What is the
rule?
A: Where the instrument is wanting in any material particular, the person in possession
thereof has a prima facie authority to complete it by filing up the blanks therein. And a
signature on a blank paper delivered by the person making the signature in order that the
paper may be converted into a negotiable instrument operates a prima facie authority to fill
up as such for any amount. In order, however, that any such instrument when completed may
be enforced against any person who became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given and within a reasonable time.

Example: If I deliver an instrument which is incomplete, the amount was not stated; the
payee has a prima facie authority to complete it by filing up the blanks therein.
Note: It is “prima facie”, it is not conclusive. I can provide evidence that he (payee)
is not authorized to complete the instrument.

Note:
- If it is given to you, it is presumed that you were given the prima facie authority
to fill in the document and to complete it for it to become a negotiable
instrument.
- However, there are 2 conditions: a) It must be strictly in accordance to the
authority given; and b) within reasonable time (what is reasonable is dependent on
the usage and circumstances).

80