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

Concept of Negotiable Instrument

Functions of NIL
1. It is a substitute for money that can be transferred (from cash
to non-cash transactions) from one person to another.
2. It is a medium of exchange
3. It is used as a credit instrument
- 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 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 or guaranteed by
the State as payment for an obligation. It is authorized to
extinguish an obligation. Hence, you can compel the creditor to
receive it as payment.

NOTE: Legal tender is he currency which a debtor could

legally compel his creditor to accept it as payment when
tendered in the right amount.

- 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
Is a substitute for 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)
-Checks are not legal tender until encashed.

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 which is a 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 Php1,000.00 when tendered.
0.10/0.50/0.01 cents are legal tender if it does not exceed 100.00
when tendered.

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; whom the
note is addressed to or whom the note is supposed to be paid.
b. Maker (payor): the one promising to pay

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 beneficiary): to whom the document is originally
addressed to be paid
b. Drawer: the one giving the order and the person signing the bill
c. Drawee: the person to whom the order is given, and who will
pay later
(Drawee becomes primarily liable if he accepts the bill)

NOTE: The drawee is being ordered, but in order for him to be

liable to the instrument he needs to accept it. If he does not
accept he will not be liable. Then the bill is dishonored by non-
acceptance.

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)

- 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.
Banks are required to exercise more than extraordinary diligence.
Suppose a check payable to A was stolen by B and was
successfully encashed, may the drawer sue the bank? YES,
because there should be no margin of error by the banks, they
are to exercise more than extraordinary diligence when paying
out. Drawee bank becomes liable to the drawer if it has paid the
bill other than the person it was supposed to be paid.
But suppose, a blank check was stolen from A by B and was
successfully encashed, can the drawer still sue the bank? NO,
because a blank check is a bearer instrument hence it is
negotiated by mere delivery.

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: is a technical term under this law and they have rights
such as to accept payment.
A holder is the person in possession of the instrument free from
personal defenses.

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- the assignee merley steps into the shoes of
the transferor.
Letter of Credit: letter requesting one person to make
advances to a third person on the credit of the writer.
Certificate of Stock: A corporation stating the person is
the owner of a designated number of shres of stok. There
is no unconditional promise/order present.
Postal Money Order: Order for the payment of money to
the payee named drawn by one post office upon another.
Treasury Warrant: is a government warrant for the
payment of money payable out of a specific fund or
appropriation.

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 until encashed.

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. Issuance: 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 must be indorsed and
delivered.

Indorsement: (dorsal — at the back) the act of signing at the

back of the
instrument and addressing the instrument to another person

3. Presentment of Acceptance (for Bill of Exchange only): 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, then it will be discharged.
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 dishonored 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]-
“SUDOR”
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 will accept the instrument.

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 piece of paper.
- As a General Rule, only those signatures appearing thereon will
be liable. What is important is that, the signature of the person
appearing intends to be bound by the instrument.

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. Any mark is considered as a signature so long as the
person making it intends to be bound by it.

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 haha)

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?

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 because payment is done first and then reimbursement
follows. Reimbursement is returning back what has been paid.

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

instrument — this will not affect negotiability.
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 instrument because husbands are 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 installment and the debtor fail to pay one installment, it can be
agreed that absence payment of one installment will make the
entire amount due and demandable. [Accelerates the due date or
payment of the instrument]

Q: Will it affect its negotiability?

A: No, 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.

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.

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:
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. 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 is not involved in commercial transactions.
Hence, the Treasury warrants are 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.

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

issuing 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.

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 of the event be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure the
defect.

NOTE: A contingency is a thing that makes the event uncertain or

raises doubt to it.

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 have doubts or uncertainty as to the
happening of the event make 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 or
b. This is an incomplete document; hence the holder can
complete it

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

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 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: Yes but he must indorse it first to be complete

- 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.

NOTE:
- When the instrument is initially an order instrument but the
name of the indorser or indorsee 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 Agustin 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 a
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
instrument according to Sec 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.

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 if 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:
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 is 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 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 presumed, but it is only
a prima facie evidence which can be rebutted by other pieces of
evidence.
- The facts that the instrument does not specify 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 itself 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 make 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;
(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
(d) In any other case if presented to the person to make payment
wherever he can be found or if presented at his last known place
of business or residence.

- 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

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 authorize 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 heard 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 is non negotiable”
- 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.

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.
Q: What is the other provisions that effecting negotiability? –
A: Waiver of benefits or option to require 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 interpretation of the instrument; the rule is
still applicable until now. When it comes to interpretation of
commercial documents, not necessarily negotiable 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.
Q: What if there’s a discrepancy between the two, the
amount in words and in figures? Which should be
prevailing?
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 a date
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 presumed 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
sum certain in money. Why? Because she can compute.

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.

** Succession
Holographic will 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.
- 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 bill of exchange?

A: In a bill of exchange, the person who should sign at the front
are the 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. At the 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 — indorser; 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.

Q: What if there is uncertainty to the signatures found in

the instrument?
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 indorser.
- Relate this topic with our rules in civil law: in any
stipulationmin case of doubt, then the provision that requires
lesser obligation or that entails lesser rights will be presumed
(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, because 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 happen 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.
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.

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
negotiable 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.
Q: What is the liability of b and c?
A: The liability is joint, the provisions of negotiable instruments
law does not apply, because it is not negotiable instrument.

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 corporation. The corporation and the treasure are
solidary liable because of the word “I promise to pay. “
**same cases
Sps. Evanghelita vs. Mercator
Ilano vs. Honorable Espanol

Q: What are the rights of a holder?

A: The rights to receive a payment; right against defenses (in a
negotiable instruments people may have their reason for not
paying or for not accepting etc and we call that defenses — like
vitiation of consent or forgery or lack of delivery).
POINT: Negotiation simply means the transfer of the instrument
from one person to another — the person who receives will
become the holder.
MODES OF TRANSFER:
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.
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 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

Transferee becomes the holder, as Transferee becomes a mere assignee

such he is entitled to rights and he cannot have rights more than
what the assignor have.

Holder in due course — subject only A person who takes the assignment is
to real defenses subject to both real and personal
i.e (real defense). If you forged the defenses.
signature of the maker. i.e. Vitiated consent, lack of delivery, etc

The general indorser warrants the An assignor does not warrant the
solvency of other parties. solvency of prior parties unless there
i.e. From a to d, d is now the holder. If d is a stipulation to the contrary or he
transfers the instrument to e, d warrants knows of such insolvency
the solvency of prior parties

Presentment and notice of dishonor is Assignor is liable even without notice

required to make an indorser liable. or dishonor
- For Bill of Particulars = Drawer
- For Promissory Note = Maker

Governed by NIL Governed by Civil Code (Article 1624-

1635)

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.

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.

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.

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 deliver, 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. He is liable to all of those holders that
can trace their titles to his special indorsement.
- 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 indorsement from such
special indorser.

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 (this is assignment), and the
transferee acquires in addition, the right to have the
indorsement of the transferor (this is Equitable
assignment). 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 definition under 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.
>>>END of Midterms<<<

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?
- [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.
(THE ATTACHED PAPER IS CALLED AN ALLONGE)
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.

What is the scope of indorsement?

- [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
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.

NOTE:

1. 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.

2. 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”

The above is a valid indorsement because it is an indorsement of

the whole instrument.

“Pay to Antonio Trillo or order Php, 10M”;

“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”
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”

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”
The above is a valid indorsement. Should they wish to negotiate
the instrument further, Antonio Trillo and Bernardo 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 unauthorized indorsement in itself in the case of joint
payees.

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

ANS: 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.

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)

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?
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 pay 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
- Specifies the person to whom or to whose order, the instrument
is to be payable, and the indorsement of such indorsee is
necessary for the further negotiation of the instrument.

b. Indorsement in Blank
- An indorsement in blank specifies no indorsee making the
instrument so indorsed payable to bearer, and may be negotiated
by mere 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.
- 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.
- 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-negotiable.
- 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.

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 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.
** 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.

TRUST (ART 1440): A person who establishes a trust is called the

trustor; one whom confidence is reposed as regards property for
the benefit of another person is known as the trustee; and the
person for whose benefit the trust has been created is referred to
as the beneficiary.
Effect of Restrictive Indorsement (Sec 37)
A restrictive indorsement confers upon the indorsee the right:
(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 available against the indorser can also be
brought against the holder, even if the holder brings the suit in
his own name.
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 or order 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.

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.
- 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 liability 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 fails to pay. —>
the person who is binding to pay is secondarily liable is the
guarantor. Guarantor guarantees solvency of the debtor.
** In surety, when one binds himself solidarily with the person
primarily. The surety pays when the principal debtor does not
pay. He guarantees the debt of the debtor.
** 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)
—> indorsers are secondarily liable, but you can vary liability
by making yourself solidarily liable with those who are
primarily liable to the instrument.
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]
- 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.
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 hold 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.
- 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

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 signed.
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, because
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
ones primarily liable.
- 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.

- 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.”
- 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—> 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.

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 indorsed before it became over
due
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).

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.
- 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 title. 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.
- 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?
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 honor 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 (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.
- 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
exchange, 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.
- 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
for 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)
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 note 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.
First M, by making the instrument admits the existence of the 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.
- 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

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 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.

5. When there is an unconditional promise in writing to accept a bill

before it is drawn (Section 135, NIL).
NOTE:
- Before a drawer 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 favor 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 favor of no
holder that the immediate transferee. (beyond the immediate person
you are indorsing, you are no longer liable)

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)

- 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.
- “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
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.

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.

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.
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).

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).

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.
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
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.

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 use the provisions of law)

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.

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”
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.
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.
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 )
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

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.
- 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 3: 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
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.
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.
NOTE: For checks, we have spoiled checks; you are given a maximum of 6
months to en-cash the checks

READ DE OCAMPO VS. GATCHALIAN 03 SCRA 596

YANG vs CA G.R. no . 138074
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).