LAW ON NEGOTIABLE

INSTRUMENTS
MR. SAM BARBO, JR.
LAW ON NEGOTIABLE
INSTRUMENTS

CONSIDERATION
 SECTION 24

Presumption of consideration. - 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 thereto
for value. 
 SECTION 24

 Consideration.
 An inducement to a contract, that is the cause, price
or impelling influence which induces a contracting
parties to enter into a contract.
 SECTION 24

 Every negotiable instrument is deemed prima facie to

have been issued for a valuable consideration.

 Effects:
 every person whose signature appears thereon is a
party for value
 presumption is disputable (only prima facie)
 SECTION 25

Value, what constitutes. — Value is any consideration

sufficient to support a simple contract. An antecedent
or pre-existing debt constitutes value; and is deemed
such whether the instrument is payable on demand
or at a future time.
 SECTION 25

 Value is any consideration sufficient to support a simple

contract.
 A valuable consideration need not to be adequate. It is
sufficient if it is a valuable one.
 An antecedent or pre-existing debt constitutes value;
and is deemed such whether the instrument is payable
on demand or at a future time.
 SECTION 26

What constitutes holder for value. - Where value has at any

time been given for the instrument, the holder is deemed a
holder for value in respect to all parties who become such
prior to that time.
 SECTION 26
 Holder for value.
 Is one who has given a valuable consideration for the
instrument or negotiated to him.

 The holder is deemed as such not only as regards the party

whom value has given by him but also in respect to all
those who became parties prior to the time when value
was given.
 SECTION 27

When lien on instrument constitutes holder for

value. — Where the holder has a lien on the
instrument arising either from contract or by
implication of law, he is deemed a holder for value
to the extent of his lien.
 SECTION 27

 Lien
 A right given to another by the owner of property to
secure a debt, or one created by law in favor of
certain creditors.
 A lien is an encumbrance on one person’s property to
secure a debt the property owner owes to another
person.
 SECTION 27

 Where a holder has lien on instrument

 One who has taken a negotiable instrument as collateral
security for a debt has a lien on the instrument.
 SECTION 27

 Where a holder has lien on instrument

1. If the amount of the instrument is more than the debt
secured by such instrument, the pledge is a holder for
value to the extent of his lien. He can collect the full value
of the instrument, and apply the same to the payment of
the debt but he must deliver the surplus to the pledgor.
 SECTION 27

 Where a holder has lien on instrument

2. If, between the pledgor and the party liable on the
instrument, there are existing defenses, then the pledgee
can collect on the instrument only to the extent of the
amount of the debt.
 SECTION 27

 Where a holder has lien on instrument

3. If the amount of the istrument is less than or the same as
the debt secured by such instrument, the pledgee is a
holder for value for the full amount and may, therefore,
recover all.
 SECTION 28

Effect of want of consideration. - Absence or failure

of consideration is a matter of defense as against
any person not a holder in due course; and partial
failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated
amount or otherwise.
 SECTION 28

 Absence of consideration
 Means a total lack of any valid consideration for the
contract, in consequence of which the alleged contract
must fail.
 SECTION 28

 Absence of consideration
 As between the parties, there can be no recovery on the
note as ther is absence of consideration.
 But if the payee indorses the instrument, a holder in due
course, then the holder in due course can recover from the
maker because absence of consideration is only a personal
defense not available against a holder in due course.
 SECTION 28

 Failure of consideration
 Means the failure or refusal of one of the parties to do,
perform or comply with the consideration agreed upon.
 In other words, something was agreed upon as
consideration but for some cause, such agreed
consideration failed to materialize.
 SECTION 28
 Absence or failure of consideration is a matter of defense
as against any person not a holder in due course; and
partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated
amount or otherwise.

 Absence or failure of consideration is a personal defense

available only against a holder not in due course.
 SECTION 28
 Absence or failure should be distinguished from
inadequate consideration.

 Essentially, a person who signs as maker, drawer,

acceptor or indorser without receiving any consideration,
signs as an accommodation party merely for the purpose
of lending the credit of his name. Such accommodation
party cannot set up lack of consideration against any
holder, even as to one who is not a holder in due course.
 SECTION 28

 After paying on the instrument, the accommodation party

shall have a right to obtain reimbursement from the party
accommodated since the relation between them is in
effect that of principal and surety, the accommodation
party being the surety.
 SECTION 28
 Absence of consideration is where no consideration was
intended to pass.
 Failure of consideration implies that consideration was
intended by that it failed to pass
 The defense of want of consideration is ineffective against
a holder in due course
 A drawee who accepts the bill cannot allege want of
consideration against the drawer
 SECTION 29

Liability of accommodation party. - An accommodation party

is one who has signed the instrument as maker, drawer,
acceptor, or indorser, 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 for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
 SECTION 29

Liability of accommodation party. - An accommodation party

is one who has signed the instrument as maker, drawer,
acceptor, or indorser, 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 for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
 SECTION 29

 Accommodation bill or note

 Is one to which the accomodation party has put his
name, without consideration, for the purpose of
accomodating some other party who is to use it, and it
expected to pay it.
 In other words, it is a loan of one’s credit.
 SECTION 29
 Accommodation party
 Is one who has signed the instrument as maker, drawer,
acceptor or indorser, without receiving value therefor
and for the purpose of lending his name to some other
person. He usually expects that not he, but the
accomodation party, willpay the bill or note when it falls
due.
 SECTION 29
 Accommodated party
 Is one in whose favor a person, without receiving value
therefore, signs an instrument for the purpose of lending
his credit and enabling said party to raise money upon it.
 He impliedly agrees to take up the instrument at its
maturity and to indemnify the accomodation party
against the consequences of non-payment.
 SECTION 29
 Example
 B is in need of Php 100,000.00 but he cannot find
anyone the lend him. S, a high school classmate, who is
wiling to accommodate him by letting B borrow on his
credit.
 S signs a promissory note payable to B, receiving no
consideration therefore,
 B the indorses the note to J which discounts the note
because of S credit.
 SECTION 29

 Example
o Promissory note is an accomodation note.
o S is the accomodation party
o B is the accomodated party
 SECTION 29

 Example
o B cannot enforce the note against S should B pay J
because B gave no consideration to S and he was
merely accomodated by S.
 SECTION 29

 Liability of Accomodation Party to a holder

 an accommodation party is liable to the holder for value
notwithstanding that such holder knew that of the
accommodation.
 After making payment to the holder, the accomodation party
may recover from the accomodated party for reimbursement.
 SECTION 29

 Liability of Accomodation Party to a holder

 The relation between them, is in effect, that of principal
debtor and surety.
 The accomodation party in lending his name, being surety for
the accomodated party being the principal debtor..
 SECTION 29
 Without Receiving Value therefor
 The law uses the words without receiving value therefor as
one of the requisites in order that person may be considered
an accomodation party.
 This does not mean, however, that one cannot be an
accomodation party merely because he has received some
consideration for the use of his name.
 Therefor refers to the instrument itself and not the use of the
name by way of accomodation.
 SECTION 29

 Kinds of Accomodation Party

1. Accomodation Maker – signs a promisory note (maker)
2. Accomodation Drawer – signs a bill of exchange
3. Accomodation Acceptor – accepts a bill drawn on him
4. Accomodation Indorser – simply signs as indorser in blank
 SECTION 29

 Accomodation Party and Regular Party Distinguished

1. Accomodation party signs an instrument with receiving a
value therefor, while a regular party signs the instrument
for value (Sec. 24)
2. An accomodation party signs an instrument for the
purpose of lending his name to some other person (Sec.
29), while regular party does not sign for that purpose.
 SECTION 29

 Accomodation Party and Regular Party Distinguished

3. An accomodation party may always show by parol
evidence that he is only such, while regular party cannot
disclaim or limit his personal liabillity as appearing on the
instrument by parol evidence.
o Parol refers to verbal expressions or words. Verbal
evidence, such as the testimony of a witness at trial.
 SECTION 29
 Accomodation Party and Regular Party Distinguished
4. An accomodation party cannot avail of the defense of
absence or failure of consideration against a holder not in
due course, while a regular party may avail of said defense
against a holder not in due course.
5. An accomodation party, after paying the holder, may sue
for reimbursment the accomodated party, although a
subsequent party, whie a regular party may not sue any
subsequent party for reimbursement.
 ACTIVITY

1. What are the kinds of indorsement. Discuss briefy each.

2. Discuss the effects of indorsing an instrument originally
payable to bearer.
3. Discuss the effects of a transfer without endorsement,