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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
ACT NO. 2031
February 03, 1911
THE NEGOTIABLE INSTRUMENTS LAW
I. FORM AND INTERPRETATION
Section 1. Form of negotiable instruments. -An instrument
to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order
to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty.
What are the requisites for a negotiable note?
A Promissory note, to be negotiable , must conform to the
following requirements:
1. it must be in writing and signed by the maker;2. Must contain an unconditional promise to pay a sum
certain in money
3. must be payable on demand or at a fixed ordeterminable future time
4. must be payable to order or bearerWhat are the requisites of a negotiable bill?
A bill of exchange, to be negotiable, must conform to the
following requirements:
1. in writing and signed by the drawer2. contain an unconditional; order to pay a sum certain
in money
3. payable on demand or at a fixed or determinablefuture time
4. payable to order or bearer5. the drawee must be named or otherwise indicated
therein with reasonable certainty
What is meant by in writing and signed by the maker or
drawer?
The instrument must in writing for if it were not
there would be nothing to be negotiated or passed from hand
to hand. The medium in which it is written and where it is
written is not important. It may be in ink, print or pencil. It
may be in parchment, cloth, leather or any other substitute of
paper. What is important is it is in writing and such writing is
capable of being transferred or negotiated. (e.g. A note
written on a blackboard is not negotiable). In signing, the
maker thereby binds himself to be liable for the note (Sec. 18
It may be the makers full name or his surname only or
signature. It may be in initials or numbers. But , where the
name is not signed, the holder must prove that what is
written is intended as the signature of the person sought to
be charged. In fact, for as long as it be shown that such was
adopted and used by the maker as his signature, it is
sufficient. (Note: he who makes it possible for the
commission of fraud, bears the loss).
What is meant by an unconditional promise/order to pay a
sum certain in money?
The promise to pay must be on the note itself although it
is not necessary to use the word promise. It is enough that
1. equivalent words be used such as agree, wilpay, shall pay; or that
2. words implying a promise are contained in theinstrument such as Good to or payable on
demand (e.g. Good to X or order P10.)
Mere acknowledgement of a debt is not enough but an
acknowledgment followed by the phrase to be paid implies
a promise to pay. ( I acknowledge a debt of P10 to be paid on
demand) Further, an instrument which stated Due X or
order on demand P10 is negotiable because to be paid
though not stated, is required by the sense of the statement.
Similarly, it is not necessary that the word order be used
Equivalent words or those which show the drawer will that
the money should be paid are sufficient. All that must be
remembered is that the BOE is more than mere asking of a
favor and that it is an instrument demanding a right. Thus, a
mere requests to pay or mere authorization to ay is not
enough to render it negotiable for it gives a discretion
whether or not to pay. To be unconditional or absolute, the
order or promise to pay must not be subject to a condition
a contingent event). If the event is certain to happen, it is not
contingent nor is it a condition. Under Art. 1179 of the NCC, a
condition is a (1) future and uncertain event; or (2) a past
event unknown to the parties (See also Sec. 3 for further
meaning).
The amount of money to be paid must be
determinable (at the time of issue) by inspection and mus
be stated plainly on the face of the instrument. The sum is
certain even is mathematical computation is still neededbecause the amount to be paid is still ascertainable from the
instrument alone without reference to any outside source
(see also Sec. 2). The payment must be for a sum of money .
To be negotiable, the bill or note must not be payable in
goods, wares, property or service nor in bonds, stocks, checks
or foreign bills. The reason for the requirement is that money
is the one standard of value in actual business. Exception to
this rule is Sec. 5d. an instrument payable in money or goods,
services et. at the option of the holder. Further, while R.A
529 requires that the discharge of obligations be in lega
tender of the Philippines the instruments negotiability and
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validity are not affected by the fact that another currency is
stipulated (Sec. 6e) In such case, the indemnity to be allowed
should be expressed in Phil. Currency on the basis of the
current rate of exchange at the time of payment. But, to be
negotiable, the instrument must state the denomination in
which it is to be payable.
When is an instrument payable on demand?
In accordance with Sec. 7, a note is payable on demand:
1. When it is so expressed to be payable on demand orat sight or on presentation;
2. when no time for payment is expressed;3. when an instrument is issued, accepted or indorsed
when overdue- as to the party so issuing, accepting
or indorsing, it is payable on demand.
When is an instrument payable at a fixed or determinable
future time?
It is payable at a fixed time when a date is specified.But where the date is given as Dec. 2, it is not fixed because
the time of payment is not determinable as the year is not
given.
In accordance with Sec. 4, an instrument is payable at a
determinable future time when it is expressed to be payable-
1. at a fixed period after date or sight; or2. on or before a fixed or determinable future time
specified therein; or
3. on or at a fixed period after the occurrence of aspecified event which is certain to happen though
the time of happening be uncertain.
When is an instrument payable to order? To bearer?
In accordance with Sec. 9b, an instrument is payable to
bearer when
1. it is expressed to be so payable;2. it is payable to a specified person or bearer;3. it is payable to the order of a fictitious or non-
existing person and this fact is known to the maker
or drawer;
4. when the name of the payee does not purport to bethe name of any person;
5. when the only or last indorsement is an indorsementin blankIt is not important that the words order or bearer be
used. It is sufficient that words of similar import are put
in its place. (e.g. Pay to B or assigns or assignees or
holder or possessor). A note payable to the order or
bearer is payable to order and such instrument may be
negotiated only by bearers indorsement. (The bearer is
the payee.)
When is the indication of the drawees name sufficient?
It is sufficient that the name of the person on whom
a bill is drawn should appear on the face of the
instrument. Otherwise, the instrument would not be
negotiable. But, under Sec. 14, the drawees name may
be omitted and be filled in under implied authority like
any other blank. (REMEMBER: Sec. 14 refers to the
incomplete but delivered instruments and that the
authority to fill up should be in strict accordance with
the authority given). Also, an acceptance by the drawee
may supply the omission of a designation and renders
said instrument negotiable.
Sec. 2. What constitutes certainty as to sum. - The sum
payable is a sum certain within the meaning of this Act
although it is to be paid:
1. with interest; or2. by stated installments; or(c) by stated installments, with a provision that
upon default in payment of any installment or o
interest, the whole shall become due; or
(d) with exchange, whether at a fixed rate or at thecurrent rate; o
(e) with costs of collection or an attorney's fee, in
case payment shall not be made at maturity.
What is the rule regarding the sum payable being definite
and certain?
Since a NI is a device intended to take the place of
money, it is therefore essential that it represents a fixed
amount of money. The amount of money must be
determinable by inspection and must be stated plainly on the
face/ body of the instrument.
When can it be said that the sum is certain despite the
stipulation of interest?
A stipulation of interest does not render the sum to
be paid as uncertain because given the interest rate, the
amount due can be easily computed. Provided the principa
sum is certain, the amount due becomes a matter o
mathematical computation ascertainable from the face o
the instrument alone. Further, where interest is stipulated
but not specified (as to rate), the note is still negotiable and
the rate is to be understood to be the legal rate which is 12%
for loans or forbearance of money.
What is an escalation clause? A de-escalation clause?
An escalation clause is a stipulation in an agreement
pertaining to a loan or forbearance of money, goods or
credits providing that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of
interest, is increased by law or by the Monetary Board. De-
escalation clause is stipulation in the agreement that the rate
of interest agreed upon shall be reduced if the maximum rate
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of interest is decreased by law or by the Monetary Board. The
escalation clause is valid if there is also a de-escalation clause
in the agreement.
What are the requirements as regards payment of
installments?
1. The amount of installment must be stated (the sum payable for each installment mustnot be uncertain. It can be ascertainable.)
2. The maturity date of each installment mustbe fixed or determinable.
What is the rule on acceleration clause?
An instrument, which is to be paid in, stated installment is not
rendered non-negotiable despite a provision that upon
default of any installment or of interest, the whole amount
shall become due. Such is called an acceleration clause
because it hastens the payment of the whole note. The failure
to pay any installment renders the balance of the amount
immediately due and demandable. An acceleration clause
does not make the instrument payable upon a contingency
(thus, non-negotiable) since payment is surely to be made
and its time of payment is surely come. In a sense, it is
deemed to be payable on or before a fixed or determinable
future time specified therein (sec.4b)
What is the rule on provisions for exchange?
Exchange is defined to be the difference in value of the same
amount of money in different countries. The exchange may
be at the (1) current rate, or at a (2) fixed rate indicated
therein. Such provision does not render the instrument non-negotiable because while the rate of exchange is not always
the same and while it is technically true that resort must be
had to extrinsic evidence to ascertain what it is, yet the
current rate of exchange between 2 places at a particular
date is a matter of common commercial knowledge, or at
least easily ascertained by any one so that the parties can
always, without difficulty, ascertain the exact amount
necessary to discharge the paper. It must be remembered
that this provision applies only to instruments drawn in one
country and payable in another. Where an instrument is
drawn in one country and payable in the same country, there
can be no exchange, so a provision for payment of exchange
may be disregarded.
Why doesnt a stipulation for attorneys fees render the sum
uncertain?
Although such a stipulation will make the sum payable after
maturity uncertain, it will not affect the certainty of the sum
payable at maturity and, therefore will not affect the
negotiability of the instrument in which it is stipulated. The
purpose of the stipulation is not to give the lender a larger
compensation for the loan than the law allows, but to
safeguard the lender against future loss or damage by being
compelled to retain counsel to institute judicial proceedings
to collect his debt. The provision refers only to reasonable
attorneys fees.
What is the effect of negotiable after the note is overdue?
After the date of maturity, the instrument will no longer be
negotiable in the full commercial sense, that is, in the sense
that any transferee acquiring it would not be a holder in due
course, as he acquire the instrument after it is overdue. Since
the transferee would not be a holder in due course (HIDC), he
would hold the instrument subject to the defenses as if it
were non-negotiable.
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.
What are the difference between par A. and the last par. of
sec 3.?
In the first case, the particular fund indicated is not the direct
source of payment. It is only the source of reimbursement
The payment of the instrument is not made subject to the
condition of availability or sufficiency of funds in the said
account. Here, the drawee first pays the payee from his own
funds, then, afterwards, the drawee pays himself from the
funds indicated. The order or promise to pay is upon the
general credit of the drawer or the maker. In the second case
the particular fund indicated is the direct source of payment
Here, there is only one act, which is that the drawee pays
directly from the fund indicated. The payment is, thussubject to the condition that the funds indicated are
sufficient. But the funds indicated may or may not be
sufficient so that the instrument is rendered non-negotiable
because payment is conditional.
Eg. 1st
case- pays to B or order P10 and reimburses yourself
out of the money in your hands.
2nd
case- pays to B or order P10 out of my part of the
estate.
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But, where the sum payable is to be paid out of a particular
fund yet payment is not restricted to such fund alone,
negotiability is not destroyed. Eg. Pay to B or order P10 out of
the monthly rental due from A and secured to be paid by my
BPI account. Similarly, where the instrument indicates a
particular account to be debited with the amount, the
instrument remains unconditional and negotiable. The
instrument, in this case, is to be first paid and afterwards, the
particular account will be debited. The payment is not subject
to the sufficiency of account to be debited. Eg. Pay to B or
order P10 and charge the same to my account.
What is a statement of transaction?
Instruments are not issued without any transaction
upon which they are based. The statement of transaction is
the reason giving rise to the issuance of the instrument and
the mere fact that it. Is stated in the instrument will not make
the promise or order conditional. Eg. Pay to B or order P10 for
payment of a debt.
But where the promise or order is made subject to
the terms and conditions of the transaction stated, then the
instrument is rendered non-negotiable. Besides would be
contrary to the rule that the negotiability of an instrument
(whether there is an un-conditional order or promise) must
be determined only from the document itself and not
elsewhere. Eg. I promise to pay B or order P10 subject to the
terms contained in the contract between A & C. Normally, an
instruments negotiability is not affected by the fact that it is
secured by a mortgage. But, where such provision become in
the note will render the amount uncertain or where such
provisions become part of the note, even though they are notin the note itself, the instrument is rendered non-negotiable.
Thus, where the note is not only secured by a mortgage but
also made subject to its provisions, the note is non-
negotiable.
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:
At a fixed period after date or sight; or(b) On or before a fixed or determinable future time
specified therein; or(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect.
What does at a fixed period after sight mean?
After sight means after the drawee has seen the instrument
upon presentments doe acceptance. The instrument becomes
payable after a fixed period subsequent to date of
presentment to the drawee.
What is the rule on the occurrence of a specified events?
It is essential that the specified event must be certain to
happen although the time of happening is uncertain. If the
event specified is not certain to happen, then it is a condition
and the instrument would be rendered non-negotiable, it is
payable upon a contingency and, according to the law, the
happening of the contingency or condition does not cure the
defect.
When an instrument states, I promise to pay X or order
P1000, 10 days after Ys death. Sgd.z. is this instrument
negotiable and why?
The instrument is negotiable because payment is still certain
to be made (unconditionally), i.e. Ys death will surely
happen.
But if in the previous example, Z promises to pay 10 days
before the death of Y, would such instrument be negotiable?
No, because the maturity is uncertain (as no one can telexactly when another person will die). Further, when Y is
already dead, the instrument will already be over due and wil
not be negotiable in its full commercial sense.
Sec. 5.Additional provisions not affecting negotiability.- An
instrument which contains an order or promise to do any act
in addition to the payment of money is not negotiable. But
the negotiable character of an instrument otherwise
negotiable is not affected by a provision which:
authorizes the sale of collateral securities incase the instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the
instrument be not paid at maturity; or
(c) waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) gives the holder an election to require
something to be done in lieu of payment of money.
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But nothing in this section shall validate any
provision or stipulation otherwise illegal.
What is the general rule as regards the requirement of
additional acts contained in an instrument?
The general rule is that an instrument must not contain an
order or promise to do any act in addition to payment ofmoney. Otherwise the instrument would be rendered non-
negotiable. But the rest of negotiability is whether or not the
promise to do any additional act would give rise to a cause of
action for breach of contract if the said act is not done, if it
does, the instrument is rendered non-negotiable. Eg. I
promise to pay X or order P1000 and 1 horse. Such is non-
negotiable because it contains an additional act to be
performed aside from payment of money. Eg. . I promise to
pay X or order P1000 and a horse. Such is also non-negotiable
because the choice to pay money or deliver the horse is at
the option of the debtor. But, if the phrase at the option of
X is added to the instrument, such is negotiable because the
option lies with the holder rendering the sum payable still
certain.
What are the exceptions to the general rule?
The negotiable character of an instrument otherwise
negotiable is not affected by a provision which-
1. Authorizes the sale of collateral securities in case offailure to pay- the additional act to be performed is
to be executed after the date of maturity. Before the
date of maturity, no additional act is to beperformed except the payment of money. Eg. I
promise to pay X or order P100 on the December
31,1950 provided that if I fail to do so, X may sell the
rin I delivered to secure payment of the note. Sgd. A.
2. Authorizes a confession of judgment if theinstrument be not paid- the additional act is to be
performed after the date of maturity when the
instrument ceases to be negotiable in its full
commercial sense. A power of attorney to confess
judgment anytime before maturity renders a note
non-negotiable. Further, in the Philippines,confessions of judgment have been declared void as
against public policy because
a. They enlarge the field for fraud. 2.Promissor bargains away his day in court
and the effect of the instrument is to strike
down the right of appeal accorded by the
statute. But while the provision as to
confession of judgment is not rendered
valid (because it is illegal) by virtue of the
last par. of sec.5, the instrument is never
the less negotiable.
(c). Waives the benefit of any law intended for the
advantage or protection of the
obligator- such as the rights to (1) presentment for
payment (sec.70); (2) notice of honor (sec.110); (3
protest (sec.111). These being rights, they may be waived
unless the waiver be contrary to law, public policy, etc
(art.6 of NCC.)
(d) Gives the holder an election to require something
other than money- even if there is an additional act, the
instrument still remains negotiable provided that the
right to choose is in the hands of the holder.
Sec. 6. Omissions; seal; particular money. -The validity and
negotiable character of an instrument are not affected by
the fact that:
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.
What is the rule on payment in other currencies (par. e)?
Even if the money in which the instrument is to be
payable is not legal tender, provided is current money or
foreign money which has a fixed value in relation to the
money of the country in which the instrument is payable, the
negotiability of the instrument is not affected, as it is stil
considered payable in money.
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; o
(b) In which no time for payment is expressed.
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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.
Give example of the above.
Ex. 1) of when it is expressed to be payable on demand
I promise to pay on demand P 1,000 to X or bearer.
Sgd. A.
-- Instead of on demand the words on sight or on
presentation may be used. The words at sight are not
ordinarily used in promissory notes.
2) Of when no time for payment is expressed
Pay to X or order P1, 000 to Y. sgd. Z.
-- Where the instrument contains a blank space for the
date but no date is indicated, it has been held to be payable
on demand. However, it may be properly considered as an
incomplete instrument and may fall under the provisions if
sec.14 or 15 depending upon how it was delivered (or not).
3. Of the last par.a. as regards the person so issuing
A note dated July 30, 1984 and payable 30
days after date is issued on August 4,1984.
b. as regards the person so acceptingA bill payable on August 20,1984 is
accepted by the drawee on August 21,1984.
c. as regards the indorserA note payable 30 days after August 1,
1984 is indorsed on September 2,1984.
--After the date of maturity, the instrument can no longer
be negotiated as to make the partios who acquire the
instrument after the date of maturity holders in sue course
because they become holders thereof with notice that it is
already overdue, as it can be determined from the face of theinstrument itself. It is payable in demand only as between the
immediate parties.
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, ordrawee; 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
What does payable to order mean?
In BOE, it means that the drawee orders the drawee
to pay the payee indicated or if not him, to anybody
designated by him. Such designation is made by indorsement
of the payee. In PN, the maker promises to pay the payee
indicated or if not him, to anybody designated by him
through (also) indorsement. It does not mean that a bill is
necessarily payable to order because it contains an
unconditional order to pay. A BOE may either be payable to
order or to bearer. Similarly, a PN may also be payable toorder or bearer.
What is the rule on naming the payee?
The law requires that the payee must be named or
otherwise indicated with reasonable certainty. The payee o
an instrument payable to order must be a person in being
natural or legal, and ascertained at the time of issue. If there
is no payee indicated, no one could indorse the instrument
Consequently, it is useless to consider it as negotiable.
NOTES: 1) Where the instrument is payable to the order o
the drawer and it is acceptable by the drawee, the instrument
is equivalent to a promissory note by the acceptor in favor if
the drawer.
2) Being joint payees is indicated by the
conjunction and.
Eg. I promise to pay A and B or order P100
sgd. X.
3) Being solidary payees is indicated by the
conjunction or.
Eg. I promise to pay to the order of A or B
P100. sgd. X.
4) Example of par. f Pay to the order o
Cashier of U.P. P10.
Is the following instrument payable to order: Pay to the
order of Ms. Laya P100. sgd. Coach.?
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Yes, because the instrument is payable to the order of a
specified person or to him or his order.
When can an instrument originally payable to order become
one payable to bearer?
Under sec.98, when the only or last indorsement is an
indorsement in blank.
What is the rule re: the conversion of order noted to bearer
notes?
The rule is once a bearer instrument, always a bearer
instrument. This rule refers to instruments originally payable
to bearer. But an order instrument may be converted to a
bearer instrument by blank endorsement of the payee or last
endorsee. It may again be converted to an order instrument,
by virtue of sec. 35, by writing over the signature in blank anycontract not inconsistent with the character of the
endorsement.
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 ornon-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.
What is the rule re: fictitious or non-existing persons?
This provision has 2 requisites: (1) the payee named
must be fictitious or non-existent; and (2) the one making the
instrument so payable must know him to be fictitious or non-
existing. The first requisite must be qualified. The words
fictitious person are not limited to persons having no real
existence. An existing person may be considered a fictitious
payee, depending upon the intention of the one making or
drawing the instrument. Fictitious person means never
intended who has no right to the instrument because the
drawer or maker never intended for it to be payable to the
said person. The want of interest in the payee is not the
controlling consideration in determining whether an
instrument is payable to bearer, as payable to a fictitious
person. Rather, it is the intention the maker or drawer not to
make said person the payee. Thus, it does not matter
whether the name of the payee used by the drawer or maker
be that of one living or dead or one who never existed. The
name is fictitious when it is feigned or pretended and a non
existent person is one who does not exist in the sense that he
was not intended to be payee by the drawer. Thus, an
instrument made payable to the order of non-existing person
or of a person having no interest in the transaction where the
makers believes that such person exist and has an interest in
the transaction and intends that he shall receive the same, is
not payable to a fictitious person or to bearer. Only if such
maker, knowing the person to be non-existing, neve
intended it to be paid to the designated person, can the
instrument be payable to a fictitious person or to a bearer.
NOTES: 1) Under the NIL, a check drawn payable to the orderof cash is a check payable to bearer.,and the bank may pay
it to the person presenting it for payment without the
drawers endorsement.
2) In sec.9e, the instrument contemplated is
one originally payable to order. It becomes payable
to bearer where: (a) there is only one endorsement
and such is in blank: or (b) there are severa
endorsement but the last one is in blank. But, a
blank endorsement cannot make a non-negotiable
instrument (because payable to a specified person
negotiable. The word indorsement refers only to
negotiable instruments.
Sec. 10. Terms, when sufficient. - The instrument need not
follow the language of this Act, but any terms are sufficient
which clearly indicate an intention to conform to the
requirements hereof.
NOTES:It is advisable to use the words of the law in order to
avoid uncertainty. However, under Sec. 10, it is not necessary
to use the exact words of the law. The substance of the
transaction rather than the form is the criterion for the
negotiability.
Sec. 11. Date, presumption as to.- Where the instrument o
an acceptance or any indorsement 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.
NOTES:Sec, 11 applies to 3 cases: (1) the instrument contains
the date of issue, in which case it is presumed to be the true
date of making or drawing; (2) in an accepted bill o
exchange, the acceptance is dated; in which case it is
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presumed to bethe true date of acceptance; (3) an
instrument is indorsed and the indorsement is dated, in
which case it is presumed to be the true date of
indsorsement. But all such presumptions may be rebutted by
competent proof to the contrary. The burden of proving
belongs to the persons who disputes the veracity of the dates
indicated.
Sec. 12. Ante-dated and post-dated. -The instrument is not
invalid for the reason only that it is ante-dated or post-
dated, provided this is not done for an illegal or fraudulent
purpose. The person to whom an instrument so dated is
delivered acquires the title thereto as of the date of
delivery.
What is the rule on ante-dating and post-dating?
Sec. 12 contemplates ante-dating or post dating
where the parties have mutually agreed to such dating. An
instrument is post-dated when the date written thereon is
later than the true date of its issuance or delivery. Aninstrument is ante- dated when the date written thereon is
earlier than the true date of its issuance or delivery. The
general rule on such instrument is that an ante-dated or post-
dated instrument is not rendered invalid or non-negotiable by
that fact alone. It may be negotiated before or after the date
given as long as it is not negotiated after its maturity. The
only limitation is that the ante-dating or post-dating is not
done for illegal and fraudulent purposes. Further, title to the
instrument is not acquired as of the date written on the
instrument but rather as of the actual date of delivery.
Sec. 13. When date may be inserted.- Where an instrument
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.
Is the date necessary to an instrument?
Under Sec. 6, the date is not necessary for the
negotiability of the instrument. However, the date may be
necessary; (1) where an instrument is payable at a fixedperiod after date but is issued updated; and (2) where an
instrument is payable at a fixed period after sight but the
acceptance is updated. In these 2 cases, any holder may
insert the true date of issue or acceptance.
Rhoda issues an undated instrument to Sioson, does the fact
that is undated affect is negotiability?
No. sioson can just fill in the true date of issues in order to
determine the date of maturity. But, the instruments
negotiability is not affected in accordance with sec. 6.
In the same example, suppose Sioson puts a false date on the
instrument and negotiates it to Lyn, an innocent party. What
are the effects?
The date Sioson inserted is void, but as to Lyn, she canenforce it against Rhoda as the performer is a subsequent
holder in due course. Remember the rule is that between 2
innocents, the one who made possible the commission of the
wrong bears the loss. Also, as to Sioson, the instrument
becomes void. This being in accordance with this section as
well as with sec. 12, that ante or post dating (which ever case
for fraudulent purposes renders the instrument void.
Sec. 14. Blanks; when may be filled.- Where the instrument
is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it
by filling up the blanks therein. And a signature on a blank
paper delivered by the person making the signature in orde
that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill it 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. But if any such
instrument, after completion, is negotiated to a holder in
due course, it is valid and effectual for all purposes in his
hands, and he may enforce it as if it had been filled upstrictly in accordance with the authority given and within a
reasonable time.
What are the 2 steps in execution of NI?
The mechanical act of writing the instrumentcompletely and in accordance with sec. 1, of NI
and
The delivery of the instrument with the intention ofgiving effect to it.
To what step does sec. 14 refer?
Sec. 14 refers to instrument that are not complete on its face
but delivered by the maker/drawer. It applies to cases where
the instrument is incomplete but delivered. The first step is
thus, not fully satisfied.
What are the 2 cases referred to in sec. 14? What are the
rules on each case?
1. PRIMA FACIE AUTHORITY TO FILL UP BLANKS-
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Where the instrument is wanting in any material
particular, the person in possession thereof has a
prima facie authority to complete it by filling up to
the blanks therein.
a. Material particular- may either be aparticular the omission of which will render
the instrument non-negotiable
Eg. Of (a)name of payee, of the drawer
Of (b)date, rate of interest, place of payment
any particular proper to be inserted in a negotiable
instrument to make it complete (given the circumstances
of the instrument)
o GIVEN 2 FACTS: (1) there is want of materialparticular in the instrument; and (2) there is
possession by a person other than the drawer or
maker THEN- the law presumes agency or
authority to fill up the blanks.
2 PRIMA FACIE AUTHORITIES TO FILL UP TO ANY
AMOUNT-
A signature in a blank paper delivered by a
person making the signature in order that the proper
may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as
such for any amount.
1) GIVEN 2 FACTS: (1) A signature in a blank paper, and(2) the paper is delivered with the intention of
having converted into a NI (mere possession not
being enough) THEN- the law presumes
authority to fill up to any amount.
2) But, to hold PRIOR (before completion) parties liableTo a person filling up and to holder not a HIDC- (1)
the blank must be filled up strictly in accordance
with the authority given and (2) filled up within areasonable time. (Reasonable time depends on the
nature of the instrument, the usage of the trade or
business and the facts of a particular case sec. 193.)
so much so that lack of one of the two would
result in a failure to enforce the instrument
against said parties.
To a holder who is a HIDC- it is necessary that either
was followed for being a HIDG, he takes the note
(sec. 52)
o Complete and regular on its face;o Before it was overdue and without notice or
dishonor
o In good faith and valueo Without notice of infirmity in the
instrument or defect in the title of the
owner.
The maker or drawer cannot blamean innocent party for a mistake
which he himself made possible
(for not completing the notice).
THUS, failure to fill up strictly in accordance with authority
given and within a reasonable time is- a personal defense
This is so because it is available as a defense only as against
those holders not HIDC (including the person filling up). The
maker or drawer is not liable to them. But, as to HIDC, it is
not a valid defense. The maker is still liable despite the error.
WITH REGARD TO PARTIES AFTER FILLING UP, they are
estopped or precluded from claiming that the notice was not
filled up strictly in accordance with the authority given. As to
them, they negotiate the instrument for the value filled up
strictly.
Suppose: Toby executed a note I promise to pay Erwin or
order-------. Sdg. Toby then gave Erwin the note authorizing
him to place any amount not exceeding P5, 000. But Erwin
placed P10, 000 and negotiated it to Ian. Can Ian go against
Erwin? Can Ian go against Toby?
As to Erwin, being a party to the completion and having
negotiated the note for such value, Erwin, regardless of
whether Ian is a HIDC or not, can be held liable for the value
As to Toby, if Ian is not HIDC, Toby cannot be held liable for
the erroneous completion (Toby), the holder must be a HIDC
the note would be valid and effectual as if it had been
completed in strict accordance with the authority given and
within a reasonable time. While it is true that Toby did not
authorize such amount, by his negligence in making the
fraudulent act possible, he rather the Ian- an innocent party
must suffer the consequences of its acts.
If Ian, pretending to be a fan of Erap, secures his autograph
on a blank piece of paper and, then, writes a promissory
note over it, may Ian enforce the note? If Ian negotiate itToby, may the latter enforce the note against Erap?
Both may not enforce the note. Sec. 14, while it allows for the
filling up of a blank paper with a signature, does not give such
authority when the said paper with no intention of it being
converted to a NI. It does not matter whether Toby is HIDC or
not. Tobys remedy would be to go after Ian, the endorser.
Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a validcontract in the hands of any holder, as against any person
whose signature was placed thereon before delivery.
What is the rule on incomplete and undelivered instrument?
Here, both stances in the execution of a NI are wanting. The
non-delivery of an incomplete instrument renders the note
unenforceable as against the person whose signature was
placed thereon and is a valid defense, not only between the
original parties but also against a HIDC. The law does not
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make a distinction when it says that it is not a valid contract
in the hands of any holder which includes a HIDC. It is, thus,
a real defense as it is available even as against a HIDC.
However, the invalidity of the instrument is only with
reference to parties whose signature appears on the
instrument prior to delivery. As to parties whose signatures
appear on the instrument after delivery, the instrument may
be invalid.
Suppose Toby, before he could complete a note, placed the
said paper between the pages of his book. Erwin who
borrowed the book and finds the said note, completes it,
signs Tobys name and negotiates it to Ian. Ian negotiates it
to Jon. Can Jon go against Ian?
As the note was incomplete and undelivered, Toby has a real
defense as against Jon. It does not matter whether Jon is a
HIDC or not. As to Toby, there was never any valid contract to
make him liable. But, Jon can still go against Erwin and Ian as
they are considered to be parties whose signature appear
after the delivery (Erwins signature would appear as an
instrument.)All notes when presented for payment arew persumed
to be complete and delivered. The purpose of sec. 14, 15 &
16 is to show what defenses are available to makers/drawers
upon the presentment of these instruments. For example, in
the hands of a HIDC when the note is originallly incomplete
and undelivered such presumption is only prima facie. Proof
of non-delivery may be presented to rebut the presumption.
In contrast, if the note was mechanically but undelivered, the
presumpiton is conclusive as to a HIDC. No proof may be
presentewd to rebut it.
It has been held that where the custody of the
incomplete instrument has been entrusted to another who
wrongfully completes and negotiates the note to a HIDC,
delivery to the agent is asufficient delivery to bind the drawer
or maker.
Thus, the defense is only a personal defense. The one who
being held liable may only show lack of delivery if and when
the holder is not a HIDC (may either an immediate party or a
holder not a HIDC). Once the holder proves that he is a HIDC,
the defense is no longer available.
What is meant by immediate parties
The termimmediate parties is confined to those who are
immediate, in the sense of knowing or bieng held know the
conditions or limitations placed upon the delivery of the
instrument. It means privity not proximity. The cretirion is
whether or not the party in question knows of the conditions
or limitationas placed upon delivery or the facts that the
instrument was not delivered but stolen. Thus, if a party
knows of such conditions or limitation, he is an immediate
party even if he is physically remote (eg. Maker indorsee
who knows)n (NOTE: While proximity is not the critirion, it is
highly improbable that the next party physically will not know
such conditions or limitations).
What may the maker, drawer, indorser show as against the
immediate party or a holder not a HIDC?
As against such parties, he may prove that: (1) no delivery
was made; or (2) if there was a delivery, it was not
authorized; or if the delivery was made or authorized, the
delivery was conditional or for a special purpose and not for
the purpose of transferring the title to the instrument. In
conditional deliveries, what is conditional is the delivery, not
the promise or order to pay. If the promise or order to pay is
conditional, the instrument is rendered non-negotiable. Eg. A
deliver the note to B with the condition that the delivery be
binding only if Cs signature was secured. The delivery is not
binding on A until Cs signature appears thereon. (The
promise or order to pay remains unconditional on the face.)
As to special purposes, if a delivers a bearer instrument to B
for (1) safekeeping or (2) for collection, B cannot enforce the
note against A.
What is the rule on lost or stolen instrument?
As soon as the owner discover that he has lost a NI, he should
instantly give notice of the lose to all parties on such paper
and inform them not to pay the amount to any one except to
the loser or is order. This is especially important in bearer
instrument (but may also apply to order instrument). No title
to a lost bill or note vest in the finder and the owner when he
has identified it, may maintain ero an action where the
defendant found an article and refused to return it to the
owner) against the finder. If the finder has negotiated it and
has received value for it, an action for money be maintained
against him for such use. A party liable will net be discharged
if he pays the amount to the holder of the lost instrument
before maturity or if he had notice of the loss unless the
holder is a HID. (in such case, the party liable should recover
from the finder).
Sec. 16. Delivery; when effectual; when presumed. - Every
contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as
regards a remote party other than a holder in due coursethe delivery, in order to be effectual, must be made either
by or under the authority of the party making, drawing
accepting, or indorsing, as the case may be; and, in such
case, the delivery may be shown to have been conditional,
or for a special purpose only, and not for the purpose of
transferring the property in the instrument. But where the
instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make
them liable to him is conclusively presumed. And where the
instrument is no longer in the possession of a party whose
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signature appears thereon, a valid and intentional delivery
by him is presumed until the contrary is proved.
What is the general rule in Sec. 16?
Every contract on a NI even if it is completely written
is incomplete and revocable until its delivery. Before delivery,
the maker or drawer can revoke, cancel or tear up the
instrument. The payee named therein acquires no right until
the instrument is delivered to him. Delivery is essential to the
validity of any NI. An undelivered instrument is inoperative
because delivery is a prerequisite of liability. However, if a
complete instrument is found in the possession of an
immediate party or a remote party other than a HIDC, there is
a prima facie presumption of delivery but subject to rebuttal.
If the holder is a HIDC the presumption becomes conclusive
and not subject to rebuttal.
If the note is found with immediate party or a holder
not a HIDC, the one being held liable can show that delivery
was not made either him or under his authority. (Deliverymay be made by the maker/ drawer himself or through an
authorized agent. Delivery may also mean issuance.) But, if
the note is with a HIDC, the one being held liable cannot
prove such because he is conclusively presumed to have
delivered it. Thus, is a maker denies having delivered a
complete note, the holder must only show that he is a HIDC
and the former can no longer prove his accusation.
Sec. 17. 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 inwords 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 runsfrom 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 "
promise to pay"is signed by two or more persons
they are deemed to be jointly and severally liable
thereon.
The rules stated shall not be availed of if the terms of the
instrument in question are clear and admit of no doubt. It is
only when the instrument in question is ambiguous, doubtfu
or obscure or when there are omissions therein will the rules
apply.
EXAMPLE OF THE RULES:(a) Where a PN reads twelve pesos in its body and P
1,200 (in figures) at the margin, the note is good only
for P 12. The reasons are: (a) the figures in the
margin do not form part of the instrument and is
only for convenience: (b) it is easier to change the
figures or to commit a mistake than a sum in words
But when the words are ambiguous or uncertain as
when the letter Y in eighty thousand is unclear
(with P8,000 on margin) or when the note is payable
for one pesos ( with P 100 on margin) or P365 is
written as three sixty five pesos, the margina
figures control.
(b) Where the note stipulates that the amount to bepaid is with interest at ______% from____, it is
deemed payable from the date in the note or if issue
at the legal rate.
(c) Where the note states I promise to pay to the ruleof J.M ONLY P 10. sgd. X. with J.M ONLY in
handwriting, the note is non-negotiable as it is
payable to a specified person only. The handwritten
words prevail because the written words are
deemed to express the true intention of the maker
because they are written by him while the printed
words are printed with no contract in view.
(d) Where a note states I promise to pay Erwin or ordeP 10. sgd. Toby. Ian, the payee or holder may treatit as either a note or bill according to his preference.
(e) Usually, the signature of the maker/drawer is placedin the lower right hand corner if the face, the
acceptor across the face and the indorser at the
back. Where it is not clear which if the three a
person belongs as he signs on the margins, he is
presumed to be an indorser.
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(f) Where a note states I promise to pay C or orderP10. sgd. A&B., the makers are deemed to be
solidarily bound.
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.
What is the general rule? Exceptions?
GENERAL RULE: A person whose signature does not appear
on the instrument cannot be held liable thereon
EXCEPTIONS:
(1) The principal is liable if duly authorized agent signson his own behalf (Sec. 19);
(2) In case of forgery is liable even if his signature doesnot appear on the instrument (Sec. 23);
(3) Where a person sought to be charged signs on paperseparate from the instrument itself, as in an allegealthough the allege may be considered a part of the
instrument, or where an acceptance is written on
another paper other than the bill (Sec. 134 & 135);
(4) Where a person signs under an assumed or tradename- not really an exception, rather an instance
where a persons business name serves the same
purpose as his signature. There must be an intention
to be found by signing the trade name.
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be
established as in other cases of agency.
a. The party may sign personally or thru anagent. Agency may be oral or written
authority. It may be proved by oral or
written evidence, unless specific provisions
of the general law require otherwise (eg.
Statute of Frauds).
Sec. 20. Liability of person signing as agent, and so forth.-
Where the instrument contains or a person adds to hissignature 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 was duly authorized; but the mere
addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal,
does not exempt him from personal liability.
What are the requisites for an agent to escape liability?
(1) The agent must be duly authorized.
(2) Must add words to his signature indicating that hesigns as an agent, that is, for or on behalf of a
principal.
(3) Must disclose his principal.EXAMPLES
Of no.2 - Jose Cruz by Pedro Vega Pedro Vega as
agent of Jose Cruz
Of no.3sdg. Pedro Vega, agent Vega is liable as
he fails to disclose his principal (even if he acts within his
authority). Agent is deemed as merely a descriptive word,
also trustee, administrator one is not relieved from
liability by adding descriptive words.
Of no. 3the disclosure of the principal in order to
relieve the agent need not be in signature (can be in the
body). Eg. I promise to pay X or order P100 for money
loaned to Y & Co. sgd. J, Treasurer. The principal is obvious.
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 incase the agent in so signing acted within the actual limits of
his authority.
What is the authority of an agent by procuration?
This agent has but a limited authority to sign and he must act
within the limits of his authority. The words per proc. or
p.p.serves as a notice to whole world that the agent has
but a limited authority. It is the duties of the 3rd person
dealing with such agent ascertain the limits of the agents
authority. He must remember that he is dealing at his own
risk.
FORM: Jose Cruz (principal), per proc.: Pedro Vega (agent)
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.
What is the rule: a minor or corporation indorsing?
Ordinarily, a minor cannot give consent to contracts and acontrast entered into by him is avoidable. In the case of
corporations, they cannot perform acts beyond the escape of
their authority. Such acts would be ultra vires Never the less,
if a minor or a corporation endorsee an instrument, the
endorsee acquires titles to it and can enforce it agains the
maker or acceptor or other parties prior to the minor.
Suppose: Lyn prepares a note for Paz, I promise to pay Paz
or order P1, 000. sdg. Lynn But Paz is only a minor. Paz
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negotiated the instrument to Lawrence. Can he hold Lynn
liable Paz?
Lawrence can hold Lynn liable because he acquires title to the
instrument by virtue of sec. 22. The instrument is validly his.
But Lawrence cannot hold Paz liable because Paz has a valid
defenseher minority. Minority is real defense in the sense
that the Paz may use it as against any holder (even a HIDC).
But, Lynn cannot make use of the same defense as it ispersonal to the minorPaz. Further, as maker, Lynn warrants
the existence of the thing as well as the capacity of the payee
to enter into the contract. The maker is therefore precluded
from putting up the defense that the payee had no capacity.
Sec. 22 is also applicable to endorsements by lunatics,
imbeciles, and other incapacitated parties.
Sec. 23. Forged signature; effect of. - When a signature is
forged or made without the authority of the person whosesignature 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 whom it is sought to enforce such
right is precluded from setting up the forgery or want of
authority.
What is forgery?
By forgery is meant the counterfeit making or fraudulentalteration of any writing, and may consist in the signing of
anothers name or the alteration of an in strument in the
name, amount, description of the person and the likes, with
intent to defraud. The intent to defraud distinguishes forgery
from innocent alterations and spoliation.
What are the forgeries not referred to in sec. 23?
- fraud in factumor fraud in esse contractus.Here, there is fraud in the sense that ther was
really no intention to issue an instrument. As itamounts to forgery, it has the effects of forgery
such that it is a real defense.
eg. B obtains the signature of A by
telling A that it is only for autograph
purposes or that it is for some
document (other than a NI) then B
converts the paper into a NI. The fraud
here amounts to forgery.
This must be distinguished from fraud in document
because the letter is only a personal defense as
there really was an intention of issuing an
instrument. Eg. A sell to B a diamond rings showing
the merchandise to A. But it is only glass. A makes
out a check in Bs favor for it. While the consent is
vitiated, thus rendering the contract voidable, there
was still intent to issue a check. The defense is only
available as against the party who perpetrated.
- Duress amounting to fraudordinarily, duress isa personal defense. The only
exception is if it amounts to forgery as when someone
forcibly takes ones hands
and affixes that the persons signature. Here, there is a
real defense as there was no intention of issuing a
negotiable instrument.
- Fraudulent impersonationin such cases, themaker/drawer is said to have a/double intent.
First he intends to make the instrument payable
to the person before him or in front of himthe
person is he is dealing with regardless of
whoever he is. The 2nd
intent is that he intends
that it be payable not to the person in front of
him but to the real personthe payee that this
person says he is. In general, the rule is if the 1st
intent was present the maker/drawer is liable.
So, what is important is the determination of
who the payee intended is.
Eg. A person approaches me and says, I am Pablo
I have a check in my favor for P10, 000. But the person is
really Pedro. Now I issue a check in the name of Pablo.
What is my intention?
1st : I intend to the check to the person in
front of meto the person I am
dealing with. It does not matter whether his name is
Pablo or Pedro. I am making
the transaction because of what he offers regardless
of his identity.
2nd
: I intend to make the check payable to
the real Pablothe person who
Pedro says he is.
(a) The 1stintent governs because of the theory ofactual intent and of stopped or negligence. If the
check is encashed, the bank, in paying Pedro
would merely give due course to my real intent
that it be paid to the person I directly dealt
with and to whom I intended it to be paid to.
Secondly, because the bank is innocent as I am
too, and as between two innocent parties, the
one who was negligent must be bear the loss. I
was negligent is not ascertaining his identity. I
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am stopped to deny my real intent because it
was within my power to ascertain but that I
failed to do so.
(b) The 1stintent cannot rule when themaker/drawer issues to a person an instrument
where the person before him purports only to
be an agent of the intend payee (given: maker
wasnt negligent).
What type of forgery does sec. 23 refer to?
Sec. 23says, when a signature is forged it applies
therefore only to (1) forged signatures (forger does not
purport to be an agent of the person whose signature he has
forged) or (2) signatures made without the authority of the
person whose signature it purports to be (forger purports to
be agent but has no authority). If the problem is something
else other than the signature, then sec. 23 will not apply. If
what was changed was the amount or the name of the payee,
sec. 124 on material alternation rather than sec. 23 should
apply.
What are the three fundamental rules as to the effect of
a forged signature?
that the signature forged or made without
authority is wholly inoperative;
that no right to retain the instrument, or to
give discharge therefore or enforce
payment thereof against any party thereto
can be acquired through or under such asignature forged or made without authority.
That, nevertheless, as against a party
preclude from setting up to the forgery or
want of authority, the signature forged or
made without authority is operative, and,
rights to retain the instrument the
instrument, to give discharge therefore , or
to enforce payment thereof, can be
acquired through or under the signature
forged or made without the authority.
What is meant by it is wholly inoperative?The word it refers to forged signature, not to the
whole instrument. It means that the forged signature cannot
be used to transfer title ever that the instrument to another
person. The forged signature cannot operate to transfer title
to another. Because the signature is inoperative, the holder
never acquires valid title to the instrument so that it is a real
defense as against any holder.
EXCEPTIONS:
1) but, only the signature forged or made withoutauthority is stated by the law to be inoperative,
neither the instrument nor the genuine signatures
are rendered inoperative. Proof that the one of
several signatures in a note was forged does not
necessarily avoid the note as to those whose
signatures as are genuinesuch as those who
actively procured the forgery or had knowledge.
2) further, the instrument can be enforced by holdersto whose title ever the instrument the forged
signature is not necessary., such as, an endorsement
of an instrument which on its faco is payable to
bearer. Whether an indorsement on a not necessary
for the holders title is genuine or forged is
immaterial to his right to recover such instruments
can be negotiated by mere delivery so that the
forged signature is irrelevant to his title.
PROBLEM: A made a Promissory note I promise to pay B
or order P1, 000. sdg A. A is the maker and B is thepayee. B however lost the instrument. C found it and
simulated the signature of B and negotiated the
instrument to D. D negotiated it to E. Can E go against A,
B, C, D? Explain.
ANSWER:
First, does this problem involved sec. 23, forgery of
a signature? Obviously, it does. Second, find out where
the forgery occurred. In this case, the forgery occurred at
the point of C. So this is the cut-off point. All those below
or subsequent to the cut-off point. Are liable to theholder. All those above or prior to the cut-off point are
not liable to the holder.
Visually
A } not liable
B } not liable
---------------------- cut-off point
C } liable
D } liable
E } holder(1) as to D, under sec. 23, D is preclude from setting up
the defense of forgery. This is because, under sec. 65
& 66, an indorser warrants that an instrument is
genuine and in all respects what it purports it to be.
In other words, when D negotiated the note to E, in
effect, he said, the instrument is genuine and it is
valid. Having impliedly said this, he cannot
thereafter say that the instrument is invalid. He is
stopped by his own warranty.
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As to C, being the forger, he is guilty of a
criminal offense and is liable for all the
consequence of his criminal act. But, more than
that, under sec. 18 as an exception to the
general rule, the forger is liable as he is deemed
to have signed under a trade name or assumed
name. Thus, the forger has the same warranty
as the general indorser. Otherwise, the forger
would be occupying a position better than of a
general indorser.
(1) As to B, because under sec. 10 A person wheresignature does not appear thereon is not liable on
the instrument. B did not sign. Somebody signed for
him without his authority. His signature does not
appear on the instrument and thus, he cannot be
liable thereon. Moreover, under sec. 23, the forged
signature (made by C) is totally or wholly
inoperative. Therefore, no title was validly
transferred from B to C to D to E. therefore E
acquired only the right that cannot be upheld as
against B and any party prior to the forgery, it being
wholly inoperative, there is no right even to retain
the instrument or to enforce payment thereof
against any party thereto.
(2) As to A, insofar as A is concerned, the signatureforged is wholly inoperative and therefore it did not
validly transfer title to the instrument to E. And E as
against A has no right to retain the instrument ant to
enforce payment thereof. (Further, A bound himself
to pay the order of B. E cannot be regarded as such.
SUPPOSE: In problem 1, the note was a bearer instrument but
C, in forging Bs signature, indicated that it was payable to
him in the back was put Pay to D. sgd.C. D negotiated it to
E, Pay to E. sgd.D Can E now go against A,B,C,D?
(1) Sec. 23 applies only the instrument payable to ordernot to those payable to bearer. The forged signature
of B is not necessary to the title of the holder. The
holder can even cross out all those indorsement not
necessary (sec. 48). Once an instrument is payable to
bearer, it will always remain a bearer instrument not
withstanding the special indorsement. If the crosses
them out, it will be as if the note was delivered
directly in him. Therefore. E can hold A, B, C, D.
While the cut-off point rule is used above in
the situation of an indorser, it is also
applicable to forgeries of a
makers/drawers signature such that all
parties such that all parties below the cut-
off point (all parties subsequent to the
maker/drawer) can be held liable but not
the maker/drawer. Further, under sec. 18
he whose signature does not appea
thereon is not liable on the instrument.
Who are precluded from setting up the defense of forgery?
Those who warrant or admit the genuineness of the
signature in question:
indorserwhether general or qualified, warrant that theinstrument is
genuine and in all respects what it
purports to be (sec. 65 & 66)
person negotiating by mere deliveryalso by sec. 65. Acceptorsby accepting the bills, he admits genuineness
Those who, by their acts, silence or negligence are
stopped from setting up the defense of forgery.
Whenever a party has, by his own declaration, act
or omission, intentionally and deliberately led
another in believe that his or anothers signature in
an instrument is genuine, an to act upon such belief,
he cannot, in any litigation, a rising out of such
declaration, act or omission, be permitted to set up
the forgery of such signature. Stopped arises from:
(1) a declaration;(2) an act;(3) omission or negligence(such as unreasonable
delay)
What are the causes of forgery in general?
I. Forgery of promissory notes:
i. forgery of an endorsement in thenote;
2.)forgery of the makers signature
II. forgery of bills of exchange:
a) forgery of an indorsement in the bill;b) forgery of the drawers signature.
a. with acceptance by the drawee, orb. without such acceptance but the bill is paid
by the drawee.
The cut-off point rule discussed above is a
sufficient guide to see who can be held liable on
instruments payable to order whether the forgery
is of the indorsement or makers/drawers
signature. What remains to be discussed is the
liability of the drawee in bills where the
indorsement is forged. (below)
As mentioned, when the note/bill is payable to
bearer, sec. 23 is not applicable but a holder who
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is a HIDC can recover not by virtue of sec. 16
(given the instrument is complete).
As to the acceptor, his acceptance precludes him
from setting up the defense of forgery by virtue of
his warranties in accepting. Also, in paying without
previous acceptance, the drawee cannot collect
from the drawer nor the recipient HIDC. The
acceptor is deemed constructively negligent in
failing to meet its obligation to know itscustomers (drawer) signature. The basis of such
liability is not that payment is tantamount to
acceptance but that of his negligence. (Here it is
the drawers signature which is forged).
What rules used govern checks?
The same rule used for the other NI the cut-off point rule
with the exception of the determination of the drawee
banks liability vis--vis each other.
METRO BANK VS. FNCB(118 SCRA 537)
Cunanan & Co. drew a check for P 50, 000 with FNCB as the
drawee in favor of Manila Polo Club. By unknown
circumstances, Sales was able to obtain the check, altered the
same (making it payable to cash and for P 50, 000) and
deposited it with Metro Bank. MB then sent the check to the
CB clearing house with stamp on the back: Metro Bank
clearedoffice all prior endorsement and/ or lack of
endorsement guaranteed. the check cleared the same dayand FNCB paid MB the P 50, 000. Within 6 days, Sales whose
account was credited with the amount, withdrew the money.
But before the last withdrawal, MB, alarmed at the activity of
the account, clarified the matter with FNCB which gave its
approval. Upon receipt of the check, Cunanan notified FNCB
of the alternation. FNCB asked MB to reimburse the amount
but the latter refused. Who is liable?
SC declared that under CBC no. 9, the drawee bank
(FNCB) must return the check within 24 hrs. from receiving it
from the CB clearing house to the collecting bank for any
defect such as an alteration. The stamped guarantee of MB
must be read with CBC no.? That the liability of the collectingbank on such stamp is limited to the said 24 hrs. Here, FNCB
returned the check only after 9 days. Further, the approval
given by FNCB of the last withdrawal shows the drawees
negligence and stopps them from claiming otherwise. FNCB IS
LIABLE.
CBC No. 9 has been superseded by CBC No. 580
(1997). Under 580 the attention of the collecting
bank must be called within 24 hrs. from the date of
discovery of the fraud, forgery or material alteration.
If the case happened at present, MB would have to
reimburse FNCB for the amount.
This case, strictly speaking, involves material
alteration and is not applicable to Sec. 23 except as
tro the liabilities of the drawee bank and the
collecting bank in cases falling within the scope of
Sec. 23.
Therefore, if the drawee bank is vigilant as to inform
the collecting bank within 24 hrs. from discovery,
the liability for forged checks will lie with the latter.
The remedy of the collecting bank is to insure itself
against such losses. If the public cannot hold the
collecting bank liable, it will no longer use checks but
rather cash. Commercial transaction s will bog down.
Consequently, the economy will stand still and the
banks will suffer. The drawee bank is liable only for
the signature of the drawer. It is only to such party
that the bank has privity with. The collecting bank
has privity with the depositor who is the principal
culprit in the case. Thus, it has duty of diligence.
II. CONSIDERATION
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemedprima facieto have been issued for a
valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
What does this section provide?
Under this Section, the mere introduction o
negotiation of a note raises a disputable presumption of a
sufficient consideration . It is unnecessary to aver or prove
consideration, for consideration is imported and presumed
from the fact that it is a NI. The person (maker/drawer or
indorser) claiming that a payee or indorsee did not give
valuable consideration for an instrument must prove that
there really was no valuable consideration given.
Sec. 25. Value, what constitutes. Value is any
consideration sufficient to support a simple contract. An
antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on demand
or at a future time.
What is valuable consideration?
Consideration means inducement to a contract that
is, the cause, motive, price or impelling influence which
induces a contracting party to enter into a contract. Valuable
consideration consists either in some right, interests, profit or
benefit accruing to the party who makes the contract, or so
forbearance, detriment, loss or some responsibility to act or
labor, or service given, suffered or undertaken by the othe
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side. Consideration founded on (1) love and affection, or (2)
upon gratitude, is good consideration, but does not
constitute such valuable consideration as is sufficient to
support the obligation of a bill or note, as between original
parties. Included on this are gifts, services without
expectation of compensation, moral obligations. These are
not valuable consideration contemplated by the NIL.,
although the same are considered so by the Civil Code. A
valuable consideration need not be adequate. It is sufficient if
it is a valuable one.
Sec. 26. What constitutes holder for value. - Where value
has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who
become such prior to that time.
What is a holder for value?
One who gives valuable consideration for an
instrument issued or negotiated to him is a holder for value.
ILLUSTRATION: A, maker, B, payee. B indorses to C, C to D, Dto E, holder. Between A & B no valuable consideration.
Between B & C valuable consideration is given. Between D &
E it is not known whether value was given. E is a holder for
value as to A, B and C because at Cs time there was valuable
consideration given and A, B, and C were partiers prior to the
time when value had been given. As to D, it is not known.
Sec. 27. When lien on instrument constitutes holder for
value. Where the holder has a lien on the instrument
arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.
Suppose: Erwin, out of love and affection, issued a
promissory note in favor of Anne Marie, I promise to pay
Anne Marie or order P1,000.00. sgd. Erwin. As a birthday
gift. But Anne Marie owes Peter P6000.00. Because of the
persistence of Peter for AM to pay him, she surrenders the
instrument to him. Peter is now the holder. Can Peter go
against Erwin?
Given the lack of valuable consideration between
Anne Marie and Erwin applying Sec. 27, Peter is considered a
holder for value to the extent of his debt or lien- P600 and
can go against Erwin for such amount. As to the P400
remaining, as Peter is not considered a holder for value tosuch extent, he may not collect it. Absence of consideration,
being a personal defense (Sec. 28), can be used as against
those not HIDC. Since being a holder for value is one of the
requisites of a HIDC, Peter can not be considered as HIDC and
thus, the defense of lack of consideration is available to Erwin
as against Peter. HOWEVER, if sufficient consideration existed
between Anne Marie and Erwin, Peter may collect the entire
sum subject to the obligation to return the excess to AM. But,
also, if the defense of Erwin is a real defense, Peter may not
recover from the instrument despite his lien.
Sec. 28. Effect of want of consideration. -Absence or failure
of consideration is a matter of defense as against any person
not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is
an ascertained and liquidated amount or otherwise.
What is absence of consideration? Failure of consideration?
Distinguish the two.
Absence of consideration is a total lack of any valid
consideration such as when the consideration for commercia
paper is clearly fraudulent. Failure of consideration is the
neglect or failure of one of the parties to give, to do or to
perform the consideration agreed upon. Want or absence of
consideration embraces transactions where no consideration
was intended to pass while failure of consideration was
contemplated but that it failed to pass.
Illustrate partial failure of consideration.
Suppose that in a note for P1,000.00 the extent of
want of consideration is only P600.00 That is, B., payee, gave
A, maker valuable consideration to the extent of P400.00. A
can interpose want of consideration pro tanto, o
proportionate- only to the extent of P600.00. C, holder, if he
is not a HIDC, can only collect from A P400.00. But, if he were
a HIDC, he can collect the entire amount.
What kind of defense is absence or failure of consideration?
Failure or absence of consideration , whether tota
or partial, can be interposed as a defense only against
persons not HIDC but not against HIDC. These defenses are
therefore, only personal or equitable defenses.
Sec. 29. Liability of accommodation party. - An
accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be
only an accommodation party.
What is an accommodation party?
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor or indorser without
receiving value therefore, and for the purpose of lending his
name to some other person. The requisites therefore are : (1
he must be a party to the instrument, signing as maker
drawer, acceptor or indorser; (2) he must not receive value
therefore; and (3) he must sign for the purpose of lending his
name or credit. Thus, it is not a valid defense that the
accommodation party did not receive any valuable
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consideration when he executed the instrument as the law
requires such absence. (In contrast, under the Civil Law, the
absence of consideration renders the contract defective.) The
placing on the note of the words value received does not
negate the character of the note as an accommodation
paper. The phrase without receiving value therefore means
without receiving value by virtue of the instrument and not as
it apparently is supposed to mean, without receiving payment
for lending his name.
ILLUSTRATION:
1. ACCOMODATION MAKER- A wanted to borrowmoney from B. But B would not lend the money to A
because of the formers bad reputation. A would
only lend B the money if the lat