San Beda College * Compiled Notes in Negotiable Instruments Law * By Atty.

Oliver Cachapero Jr (OCJ)

NEGOTIABLE INSTRUMENT

It is a written contract for the payment of money which is intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a holder in due course the right to hold the instrument free
from defenses available to prior parties

An oral arrangement cannot be considered a negotiable instrument

If the instrument is payable to goods, wares, properties, labor or service, corporate stocks, checks, it is no longer
negotiable because the same is not in payment of money; their value is not standard since it fluctuates

GOVERNING LAW

1) Negotiable Instruments Law (NIL);

2) Provisions of Code of Commerce which were not impliedly repealed by the NIL;
3) Civil Code which applies suppletorily;
4) Decisions of the Courts in the United States and England

The NIL was enected on February 3, 1911 and it was never amended since then

If the instrument is non-negotiable, what applies is the Civil Code and applicable special laws

FUNCTIONS OF NEGOTIABLE INSTRUMENTS

1) It operates as a substitute for money;

2) It is a means of creating and transferring credit;
3) It facilitates the sale of goods;
4) It increases the purchasing medium in circulation

DISTINCTIVE FEATURES OF NEGOTIABLE INSTRUMENTS

1) Negotiability;
2) Accumulation of secondary contracts

Negotiability is an attribute whereby a NI passes or may pass from hand to hand similar to money, so as to give the
HIDC the right to hold the instrument and collect the sum free from defenses

LEGAL TENDER

According to Section 52 of the New Central Bank Act, only notes and coins issued by the Bangko Sentral ng
Pilipinas (BSP) are considered legal tender. Nevertheless, a check that has been cleared and credited to the account
of the creditor shall be equivalent to delivery to the creditor of cash.

NEGOTIABILITY VS ASSIGNABILITY

a) Assignability pertains to contracts in general while Negotiability pertains to negotiable instruments (NI);
b) One who takes an instrument by assignment takes the instrument subject to the defenses obtaining among the
original parties (he merely steps into the shoes of the transferor) while a person who takes the instrument by
negotiation takes it free from personal defenses available among parties

NEGOTIABLE INSTRUMENT VS NON-NEGOTIABLE INSTRUMENT

a) Only NIs are governed by the NIL, if it is not negotiable, NIL only applies by analogy;
b) NIs can be transferred by negotiation or by assignment while non-NIs can be transferred only by assignment;
c) A transferee of a NI can be a holder in due course, while a transferee of a non-NI can never be a holder in due
course but remains to be an assignee;
d) In NI, the transferee takes the NI free from personal defenses, while in non-NI, all defenses available to prior
parties may be raised against the last transferee;

ARE THE FF. COMMERCIAL PAPERS NEGOTIABLE INSTRUMENT

a) Crossed Check – Yes. Because it complies with Section 1 of the NIL

b) Trade Acceptance – Yes. It is a kind of bill of exchange
c) Money Order – No. It is governed by Postal Rules and Regulations which may be inconsistent with NIL
d) Bill of Lading – No. It represents goods, not money
e) Warehouse Receipt – No. It represents goods, not money
f) Pawn Ticket – No. It represents the pawned article and not money
g) Trust Receipt – No. It is an evidence of ownership of goods, not money

KINDS OF NEGOTIABLE INSTRUMENTS

1. Bill of Exchange (BOE)

2. Promissory Note (PN)
3. Check

Bill of Exchange
P10,000.00 Makati City
October 21, 2013

Thirty days after sight, pay to the order of Juan Dela Cruz the amount of
ten thousand pesos (P10,000.00). Value received and charged to the
account of:

To: Maria Clara

Makati City

(Sgd.) Pedro Santos

Promissory Note
P10,000.00 Makati City
October 21, 2013

For the value received, I promise to pay to the order of Juan Dela Cruz the
amount of ten thousand pesos (P10,000.00) on or before December 1,
2013, atPhilippine National Bank, Makati City.

(Sgd.) Pedro Santos

 Check
October 21, 2013

Pay to the order of Juan Dela Cruz the sum of ten thousand pesos
(P10,000.00).

To: Philippine National Bank

Makati City

(Sgd.) Pedro Santos

DISTINCTION BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE

a) Unconditional promise vs unconditional order;

b) Involves two parties vs involves three parties;
c) Maker is primarily liable vs Drawer is secondarily liable;
d) Only one presentment vs two presentments needed

DISTINCTION BETWEEN A BILL OF EXCHANGE AND A CHECK

a) Not drawn on a deposit, hence, it is not necessary that a drawer of a BOE should have funds in the hands of the
drawee vs it is necessary that a check is drawn on a deposit, otherwise, there would be fraud;
b) Death of the drawer of a BOE with the knowledge of the bank does not revoke the authority of the banker to
pay vs Death of the drawer of a check with the knowledge of the bank revokes the authority of the banker to pay;
c) May be presented for payment within a reasonable time after its last negotiation vs may be presented for payment
within a reasonable time after its last issue

PERSONS/PARTIES INVOLVED

Maker, Payee, Drawer, Drawee, Acceptor, Holder, Referee in Case of Need

INCIDENTS IN LIFE OF NEGOTIABLE INSTRUMENTS

1. issue
2. negotiation
3. presentment for acceptance (in certain kinds of BOE)
4. acceptance
5. dishonour by non-acceptance
6. presentment for payment
7. dishonour by non-payment
8. notice of dishonour
9. discharge

REQUISITES OF NEGOTIABILITY

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) It must be payable on demand or at a fixed or determinable future time
4) It must be payable to order or to bearer
5) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty
Requisite #5 applies only to Bills of Exchange

HOW IS THE NEGOTIABILITY OF AN INSTRUMENT DETERMINED

1. by considering the whole of the instrument;

2. by considering what appears on the face of the instrument;
3. by complying with the provisions of Sec 1 of the NIL

Illustration #1
P10,000.00 Makati City
October 21, 2013

For the value received, I promise to pay to the order of Juan Dela Cruz the
amount of ten thousand pesos (P10,000.00) on or before December 1,
2013, subject to the terms and stipulations contained in the Deed of Sale
executed by us to date, at Philippine National Bank, Makati City.

(Sgd.)Pedro Santos
Illustration #1 is not negotiable because it does not comply with #2 (by considering what appears on the face of the
instrument)

IT MUST BE IN WRITING

Written includes printed and the terms may be written on any kind of materials as long as it is a substitute of paper

SIGNED BY THE MAKER OR DRAWER

Illustration #2
P10,000.00 Makati City
October 21, 2013

For the value received, I promise to pay to the order of Juan Dela Cruz the
amount of ten thousand pesos (P10,000.00) on or before December 1,
2013, at Philippine National Bank, Makati City.

X
Pedro Santos

Illustration #2 still complies with Section 1 of NIL. It is not necessary that the signature is the usual signature of the
maker. As long as it is intended to be the signature of the maker

PROMISE OR ORDER TO PAY

The words “promise” or “order” need not appear on the instrument to make it negotiable. It would be sufficient as
long as the words written indicate a promise or order to pay. Example: “payable”, “paid when called for”, “due to A
or order” and the like

Mere acknowledgment of the debt or mere request or mere authority to pay is not sufficient. It must be a promise
or order to pay.

PROMISE OR ORDER MUST BE UNCONDITIONAL

It is unconditional if there is an indication of a particular fund out of which reimbursement is to be made.

Hence, it is conditional if it is:

1. To be paid out of a particular fund;
2. Payable upon a contingency

An instrument which states that the maker promises to pay “as soon as his means permit him to do so” is not
negotiable because the same makes the payment conditional

PAYABLE IN SUM CERTAIN IN MONEY

When it can be ascertained by mere mathematical computation

If the instrument is payable in foreign bill (i.e. dollar, yen) it is still negotiable under R.A. 8183

Illustration #3
P10,000.00 Makati City
October 21, 2013

For the value received, I promise to deliver to Juan Dela Cruz or bearer the
amount of ten thousand pesos (P10,000.00) or a sack of rice, at my option,
on or before December 1, 2013, at Philippine National Bank, Makati City.

(Sgd)Pedro Santos

Illustration #4
P10,000.00 Makati City
October 21, 2013

For the value received, I promise to pay to Juan Dela Cruz or bearer the
amount of ten thousand pesos (P10,000.00) or a sack of rice, at the option
of the holder, on or before December 1, 2013, at Philippine National Bank,
Makati City.

(Sgd)Pedro Santos

Illustration #3 is non-negotiable because the option is given to the debtor; while Illustration #4 is negotiable
because the option is given to the creditor

Stated instalments require that the amount to be paid for each instalment and the date for every instalment must be
fixed or at least determinable

PAYABLE ON DEMAND

1. When it is so expressed to be payable on demand or at sight or on presentation;

2. In which no time for payment is expressed;
3. Where an instrument is issued, accepted, or indorsed when overdue, it is as regards the persons so issuing,
accepting or indorsing it, payable on demand

The instrument is payable on demand if it should be paid the moment it is presented for payment
PAYABLE AT A FIXED TIME

Example: Payable on January 1, 2014

PAYABLE AT A DETERMINABLE FUTURE TIME

1. At a fixed period after date or sight (ex. 20 days after date);

2. On or before a fixed or determinable future time specified therein (ex. Payable on or before Jan 1 2014);
3. 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 (ex. Payable within 5 days from the death of Mr. X)

PAYABLE TO ORDER

For an instrument payable to order to be negotiable, it must be either any of the following: “payable to order of Mr
A”, “payable to order of Mr A or bearer”, “payable to Mr A or order”

An instrument payable to order cannot be negotiated without indorsement

PAYABLE TO BEARER

1. When it is expressed to be so payable;

2. When it is payable to a person named therein or bearer;
3. When it is payable to the order of a fictitious person or non-existing person and such fact was known to the
person making it so payable;
4. When the name of the payee does not purport to be the name of any person (ex. pay to cash);
5. When the only or last indorsement is an indorsement in blank

Payable to “bearer A” is payable to a specified person, hence, non-negotiable; same with payable to “A or his agent”

in #3, it is not required that the person is actually fictitious or non-existent. As long as the drawer does not intend
the payee to have any right over the instrument, even if the payee is actually existing, it is payable to bearer

OMISSIONS THAT DO NOT AFFECT NEGOTIABILITY

1. Not dated (referring to the date of issuance);

2. Does not specify the value given or that any value had been given therefor
3. Does not specify the place where it is drawn or the place where it is payable
4. Bears a seal
5. Designates a particular kind of current money in which payment is to be made
6. Addressed to more than one drawees jointly

Illustration #5
P10,000.00 Makati City
October 21, 2013

For the value received, we jointly and severally promise to pay to the ITM
Corporation the amount of ten thousand pesos (P10,000.00), the said
principal sum to be payable equally in 24 monthly instalments starting July
15, 2013 and every 15th of the month thereafter until fully paid at
Philippine National Bank, Makati City.

(Sgd)Pedro Santos
OTHER CONSTRUCTIONS AND INTERPRETATIONS

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 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 to from which the interest
is to run, the instrument 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 provision
prevails;
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 the 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 deemed to be 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

PRESUMPTION OF CONSIDERATION

Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every
person whose signature appears thereon to have become a party thereto for value

Said presumption is disputable and not conclusive

WHAT CONSTITUTES VALUE

A consideration sufficient to support a simple contract. This includes antecedent debts and a lien on the instrument

A consideration founded on love and affection is a good consideration but does not constitute such valuable
consideration as is sufficient of itself to support the obligation of a bill or note

ACCOMMODATION PARTY

A person who signs the instrument as maker, drawer, acceptor or indorser but does not receive value therefore, for
the purpose of lending his name to some other person

Requistes:
1. He must be a party to the instrument signing as maker, drawer, acceptor or indorser;
2. He must not receive value therefor; and
3. He must sign for the purpose of lending his name or credit

#2 requisite pertains to the value by virtue of the instrument, hence, not receiving payment for lending his name
thereof

A corporation cannot be an accommodation party since a corporation cannot issue or indorse a negotiable
instrument without consideration and for the accommodation of another, the same being an ultra vires act

The relationship between the accommodation party and the accommodated party is one of principal and surety;
principal is the accommodated and surety is the accommodation party
An AP can either be primary or secondary liable on the instrument based on what capacity he is signing for

If A is the accommodation party and B is the accommodated party, while C is a holder in due course, A can validly
refuse paying C on the ground that there is absence of consideration between him (A) and B. But A cannot refuse
payment on the ground that he did not receive any consideration from the instrument.

If P, the president of X Corporation, accommodated his friend A by signing as drawer in a check and VP, the vice
president of the corporation, co-signed the check. The check was delivered to B but the same was dishonoured for
lack of funds, X Corporation cannot be held liable. It is P and VP who should be held liable and in their personal
capacities, not as President or Vice President of X Corporation

DISTINCTIONS BETWEEN REAL AND PERSONAL DEFENSES

Real or (1)Absolute Defenses, attach to the instrument and (2)are available against all holders, whether in due
course or not, (3)but only by the party or parties entitled to raise them.

Personal or (1)Equitable Defenses are available only against the holder who stands in privity with the party who is
entitled to set up or (2)those who are not or do not have the rights of a holder in due course.

HOLDER IN DUE COURSE

A holder could be the payee or indorsee in an order instrument; while a holder could be a payee or bearer in a
bearer instrument

REQUISITES (Section 52 of the NIL):

A Holder who has taken the instrument under the following conditions:
(1) That it is complete and regular upon its face;
(2) That he became the holder of it before it was overdue and without notice that it has been previously
dishonoured, if such was the fact;
(3) That he took it in good faith and for value
(4) 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;

Even if you are not a HIDC, you are still a creditor and the obligation to be paid by the instrument still subsists.
The only disadvantage of being a non HIDC is that you are subject to defenses as if it were non-negotiable – real as
well as personal

NEGOTIATION

When it is transferred from one person to another so 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

An instrument payable to bearer which is specially indorsed may nevertheless be further negotiated by delivery since
a bearer instrument is always a bearer instrument. But any person indorsing specially is liable as indorser but only to
holders who secured title from such indorsement.

INDORSEMENT

By affixing the signature either (1)on the instrument itself; or (2)on a separate piece of paper attached to the
instrument called “allonge”

WARRANTY OF A GENERAL INDORSER (Sec. 66 of the NIL):

(1) That the instrument is genuine and in all respects what it purports to be;
(2) That he has a good title to it;
(3) That all prior parties had capacity to contract;
(4) That the instrument is, at the time of the endorsement, valid and subsisting
It also engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its
tenor; and if it be dishonoured and the necessary proceedings on dishonour be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

TO WHOM WARRANTIES EXTEND

If bearer instrument, extends only to immediate transferee

If order instrument: (1)subsequent holders in due course; (2)persons who derive their title from holders in due
course; (3)immediate transferees even if not a holder in due course

A makes a note payable to P or order. P, on the other hand, negotiated the instrument by indorsement to C, then C
to D, then D to E, the current holder. To enforce payment, E should go after A, the party primarily liable. If A
refuses to pay, E, now, can go after any of the indorsers (P, C or D) since they are the parties secondarily liable.

A makes a note payable to bearer. He negotiates this thru delivery to B, then B delivers it to C, C delivers it to D,
then the same to H, the current holder. (A---B---C---D---H). Who is the person primarily liable? It is A since it is a
promissory note. So, H can go after A for payment. But if A refuses for a valid reason, H can go after D only, the
party to whom H has a privity and considered the immediate party since the instrument is a bearer instrument and
there are no indorsements made.

A makes a promissory payable to bearer and delivers the same to B. B, however, indorses it to C. C, without
indorsing the instrument, delivers the same to H. Can H hold A liable? Yes, since a bearer instrument is always a
bearer instrument. Even if there was an indorsement, the instrument remains to be a bearer instrument and A
undertakes to pay the bearer of the instrument. Indorsement is not necessary to derive title in a bearer instrument

WHAT ARE THE DIFFERENT DEFENSES

PERSONAL DEFENSES REAL DEFENSES

1. Failure or absence of consideration 1. Minority (available only to minor)
2. Illegal consideration 2. Forgery
3. Non-delivery of complete instrument 3. Non-delivery of incomplete instrument
4. Conditional delivery of complete instrument 4. Material alteration
5. Fraud in inducement 5. Ultra vires act of corporation
6. Filling up blank not within authority 6. Fraud in factum or esse contractus
7. Duress or intimidation 7. Illegality (if declared void for any purpose)
8. Filling up blank beyond reasonable time 8. Vicious force or violence
9. Transfer in breach of faith 9. Want of authority
10. Mistake 10. Prescription
11. Insertion of a wrong date 11. Discharge in insolvency
12. Ante-dating or post-dating for illegal fraudulent
purpose

TWO STEPS IN PREPARING A NEGOTIABLE INSTRUMENT

1. Mechanical act of writing and complying with the requisites of Sec. 1 of NIL
2. Delivery
WHEN DATE MAY BE INSERTED (SEC. 13)

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 HIDC; but as to him, the
date so inserted is to be regarded as the true date.

A makes a note payable to B or bearer and the same is payable 60 days after date. A delivers it to B and B delivers it
to C, the current holder. The instrument, however, is not dated. Who can insert the date? The holder, C, can insert
date. What if C inserted a wrong date then later on delivered it to D, then D to E, E to F, F to G and G to H who
knew that the date inserted is a wrong date. If H enforces payment of the instrument against A, the party primarily
liable, A can refuse payment since the defense of insertion of a wrong date is a personal defense and it can be raised
against a non-HIDC. H is a non-HIDC. But if H is a HIDC, A cannot refuse payment.

INCOMPLETE BUT DELIVERED (SEC. 14)

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.

Material particulars are as follows: omission that will render the instrument non-negotiable like name of the payee or
that of the drawee; as well as omission that will not render the instrument non-negotiable like date, rate of interest,
place of payment

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 as a prima facie authority to fill it out 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 (1)filled up strictly in accordance with the authority given and
(2)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 up strictly in accordance with the authority given
and within a reasonable time.

Reasonable time would depend on the (1)nature of the instrument (2)usage of trade or business (3)facts of the
particular case

A fan of Marian Rivera, A, asked her to autograph a blank paper. Later on, A added on top of the signature the
following: “Marian Rivera promises to pay the bearer P1M.” Does it create a prima facie authority for A to fill up
the paper? NO because the person whose signature appears thereon had no intention of converting the blank
instrument into a NI.

D authorizes P to write the amount of P10,000 on the check. But P wrote P100,000 thereon. The same was
dishonoured by Drawee B. How much can D be held liable? NONE, since the instrument was not filled out in
accordance with the authority given and since it is a personal defense, it can be set up against P, a non-HIDC.

What if P negotiates it to A, a HIDC. How much can A recover? The whole P100,000 since for him, the instrument
has been filled out in accordance with the authority given.

INCOMPLETE AND UNDELIVERED (SEC. 15)

Where an incomplete instrument has not been delivere, it will not, if completed and negotiated without authority, be
a valid contract in the hands of any holder, as against any person whose signature was placed thereon before
delivery

A signed a blank check but X stole it then filled out with the amount and named himself as payee. X indorsed it to
to C to D to E then to F, the current holder who is a HIDC. Can H enforce the instrument against A since it is his
signature that appears on the instrument? NO since his signature appears thereon prior to delivery and the defense
of incomplete and undelivered is a real defense which can be raised against any kind of holder. To whom, then, can
H enforce the payment? X as the thief or C, D, E, F as indorsers.

COMPLETE BUT UNDELIVERED (SEC. 16)

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 remote party other than a HIDC, the 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 HIDC, 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 signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is proved.

A signs a promissory note payable to B or bearer. Before delivery, however, A misplaced the note. X found it
somewhere, then he negotiated it by delivery to B, who took the note in bad faith. Can B enforce payment against
A? Yes since A is the party primarily liable, but A can raise the personal defense of want of delivery which can be
set up against a non-HIDC like B.

CONDITIONAL DELIVERY

If the condition is attached on the delivery, the instrument is still negotiable. However, if the condition is attached
on the promise or order to pay, the instrument, this time, is non-negotiable.

A makes a note in favour of B with the understanding that delivery will not be complete until B passes the Bar
Exams. The instrument is still negotiable but it is subject to the personal defense of conditional delivery.

LOST INSTRUMENT

If a drawer loses the instrument, so as to avoid negligence, what should he do? No title to a lost bill or note is
vested in the finder; but the owner of the lost instrument must observe due diligence such as informing the drawee
bank in case of a bill that the instrument is lost and should not pay to anyone therefore

FRAUD

(1)fraud in factum or fraud in esse contractus and (2)fraud in inducement

First one is present when a person is induced to sign an instrument not knowing its character as a note or a bill.
Example: a blind person who was made to sign a piece of paper he believes to be a credit application although it is
really a promissory note; it is a real defense. Here, there was no intention on the part of the blind person to make a
negotiable instrument.
Second one is present when a person who signs the instrument intends to sign the same as a negotiable instrument
but was induced to do so only through fraud, hence, his consent was vitiated by fraud; a personal defense. Example:
A sells to B what he represents to B as a diamond ring, which in fact is only glass. B issues to A a check. Here, there
is an intention (of B) to issue an instrument.

FAILURE, ABSENCE OF, OR ILLICIT CONSIDERATION

These are only personal defenses, but with respect to illegality, it could be a real defense if the law declares the
instrument void for any purpose

A bill of exchange was issued because of the love and affection of the drawer for the payee. Can the drawer be held
secondarily liable on the instrument? NO, while the love and affection may be a good consideration, it is not a
valuable consideration. The defense of absence of consideration may be raised, the payee being a non-HIDC. This
general rule applies between a drawer and a payee. But what if payee indorses it to A, B, C and D, a HIDC. Can D
hold the drawer secondarily liable? YES, because absence of consideration is only a personal defense.

MINORITY OR INCAPACITY OR WANT OF AUTHORITY

It includes ultra vires act of a corporation (beyond the powers)

They are real defenses, but in case of minority or incapacity, it can only be raised by the party suffering minority or
incapacity

M makes a note payable to X (a minor) or bearer. X indorses it to A, the current holder who is a HIDC. Can A hold
X, a minor, liable? NO, he can raise the defense of minority which is a real defense. Can A hold M liable? YES. Can
A raise the real defense of minority? NO since it is only X who can raise the said defense. Besides, by making the
instrument, M admits the existence of the payee and his capacity to indorse.

PRESCRIPTION

The prescriptive period for filing a claim based on negotiable instruments is ten years from the time the cause of
action accrued. So, if the payee did not encash a check for more than 10 years, the check is already impaired thru
the payee’s unreasonable and unexplained delay in encashing it. BUT, the contractual obligation remains.

FORGERY

WHAT ARE THE EFFECTS OF FORGERY?

1. The signature is wholly inoperative

2. No right to retain the instrument
3. No right to give a discharge by virtue of the instrument
4. No right to enforce payment against any party

Except when the party is precluded from setting up the forgery

IS THE INSTRUMENT WHOLLY INOPERATIVE IF THE SIGNATURE APPEARING THEREON IS

FORGED?

No, only the forged signature is wholly inoperative. Instrument and genuine signatures remain valid.

WHO ARE THOSE PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY?

 1. Those who warrant such as the indorser, acceptor
2. Those who are estopped by virtue of their act, silence, omission or negligence
3. The forger, himself
4. Party negotiating by delivery in a bearer instrument

WHEN THE DRAWER/MAKER’S SIGNATURE IS FORGED

X forged the signature of A, making it appear that A draws a bill payable to X or order and drawn against
drawee bank B.

X indorsed the said instrument to C, to D, then to E, the current holder who took it in good faith and for
value.

Can B be held liable? (YES/NO)

What if B accepted the bill and paid, can he ask reimbursement from A by debiting the account of A for the
amount it paid? (NO)

To whom should B ask payment? (X)

What if B dishonoured the instrument, can E hold A liable? (NO)

To whom should E enforce payment? (X, C and D)

WHEN AN INDORSER’S SIGNATURE IS FORGED AND THE INSTRUMENT IS PAYABLE TO ORDER

A makes a note payable to B or order

B indorsed the instrument to C, in whose hands it is stolen by X

X forged C’s signature and indorsed it to E. E indorsed the instrument to F, a HIDC

Can F hold A liable? (NO, cut-off rule)

Can F hold B liable, he being an indorser? (NO, cut-off rule)

Can enforce payment against C? (NO)

To whom should F validly enforce payment? (X and E)

Now, can C still enforce payment against A or B? (Yes, he being the real owner, but before payment,
instrument must be surrendered so he also has the right to recover possession of the instrument from F)

WHEN AN INDORSER’S SIGNATURE IS FORGED AND THE INSTRUMENT IS PAYABLE TO

BEARER

A makes a note payable to B or bearer.

A, then, delivers the note to B, B delivers it to C.

 Thereafter, X obtains possession of the note fraudulently. He indorsed the note to D by forging the
signature of C. D indorsed the instrument as well to E, the current holder who took it in good faith and for
value.

Can E hold A liable? (YES, indorsement is not necessary in the title of E)

Can E hold B liable? (NO, not immediate party, hence, no privity, not cut-off rule)

Can E hold C liable? (NO)

Who can E hold liable? (X and D)

Why D, it is a bearer instrument and indorsement is not necessary to pass title? (Immediate party)

What if E is not a HIDC, can he still enforce liability against A? (NO this time since A can raise the defense
of want of delivery, it being a personal defense)

DRAWEE ACCEPTS THEN LATER ON REFUSES

A draws a bill against B payable to the order of P

Bill was stolen by X before delivery to P and forged the signature of A. X indorsed it to C, C indorsed it to
H, who knew that the instrument was the product of forgery

B accepted the bill. When H was about to encash the instrument, B discovered that the signature of A was a
forgery and so he now refused to pay.

Can B validly refuse payment? (NO)

Who can be held liable then? (X and C)

NEGLIGENCE ON THE PART OF THE PERSON WHOSE SIGNATURE IS FORGED

A appears to be the maker of a promissory note but the truth is his signature is forged by X. The said note is
payable to B or bearer.

C wants to buy the note but before buying it, he asked A if the signature appearing thereon is his signature.

A says it is his signature.

Can C collect from A? (YES, A is estopped from setting up the defense of forgery)

WITH A COLLECTING BANK

D draws a bill payable to the order of P and it is drawn against X drawee bank

Before delivery to P, the bill was stolen by T

 T then forged the signature of P

T opened an account with Y collecting bank and deposited the check

Y bank forwarded the check for clearing. Check was cleared by X bank and paid it to Y bank

T withdrew the entire amount from Y bank and disappeared in a blink of an eye

Discuss the liabilities of each party.

Can X debit the amount paid on the account of D? (NO since it is not the order of P and cut off rule)

To whom can drawee ask reimbursement of the amount it paid? (T, as forger or Y, collecting bank since by
forwarding the instrument for clearing, it acted as a last indorser)

If drawee erroneously debited the amount paid against the account of drawer, what is the recourse of D?
From Y? (NO, no privity) From X? (YES since it is the one which debited the amount but drawee has a
recourse from Y)

Can P, the original payee, still recover? (YES, but not based on the instrument but on the contractual
obligation of D) Can he go after X and Y? (NO, no privity)

So, who bears the loss? (Y, as between two negligent banks, the one which made the loss possible should
bear the loss)

MATERIAL ALTERATION

WHAT IS MATERIAL ALTERATION?

It is any alteration which changes the date, sum payable, time or place of payment, number or relation of parties, or
medium or currency of payment, or adds a place of payment where none is specified or which alters the effect of
the instrument in any respect

WHAT’S THE EFFECT?

Avoids the instrument but a HIDC can enforce it according to its original tenor.

EXCEPTIONS?
except as against the (1)party who made, authorized, or assented to the alteration and (2)subsequent indorsers.

IS ALTERATION OF SERIAL NUMBER OF A CHECK A MATERIAL ALTERATION?

NO. it does not alter the effect of the instrument, nor does it modify in any respect the obligation of a party. It does
not change the items which are required to be stated under Sec 1 of NIL

EXAMPLE OF MATERIAL ALTERATION

Example would be substituting the word ‘or bearer’ for ‘order’, change of date from which interest is to run, adding
the word ‘with interest’, altering the maturity of the note

IS IT A REAL OR PERSONAL DEFENSE?

It is a PARTIAL real defense because although it can be raised against any holder, a HIDC can still enforce the
instrument according to its original tenor.

DISTINGUISH MATERIAL ALTERATION FROM FORGERY

forgery applies to forged signature or signature without authority, if alteration of those mentioned under sec. 124, it
is material alteration
WHAT IF THE ALTERATION MADE IT MORE BENEFICIAL TO THE PARTIES
It is still alteration because the law does not distinguish and the purpose is to uphold the integrity of the instrument

M – maker
P – payee

M made a note payable to the order of P for P5,000.

P altered it and made it P50,000.

P negotiated it to A, B and C, who in good faith and for value took the instrument.

Q: Can C enforce the instrument against M? (YES)

Q: How much? (P5,000 only, original tenor)

Q: if refused to pay, to whom can C enforce payment and how much? (P, A, B; P50,000)

Q: What if C is not a HIDC, can he enforce payment against M? (NO)

Q: So he cannot enforce the instrument to anyone now that he is a non-HIDC? (to P, A and B as indorsers)

“Rejoice in hope, be patient in tribulation, be constant in prayer.”