1

(3) Civil Code has no effect on its provisions

COMLAW 2 NOTES except to supply any deficiency in cases not
Negotiable Instruments (Sec. 1 – 10) covered by the Act
Application & Purpose (4) Enacted for the purpose of facilitating, not
Characteristics / Features
hindering or hampering transactions in
Function & Importance – Theory
Forms of Negotiable Instruments commercial paper
CHAPTER 1 – FORM & INTERPRETATION
Modern Relevance & Characteristics
Section 1-10 – Negotiable Instruments
Section 11-23 – Continuation of Negotiable Instruments  As a Substitute for Money
Section 24-29 – Consideration Banko central circulars – involving checks and their
endorsements

◉ Brief Introduction Although they do not constitute legal tender, and are
not money, they are used as a substitute for money.

Act. 2031: Negotiable Instruments Law A negotiable instrument differs from money, however,
in that the former is valuable or worthless depending
Based on the Article 3 of the Uniform Commercial upon the financial ability of the parties to them.
Code of the United States of America:
 As a medium of exchange for most
 Means an unconditional promise or order to pay commercial transactions
a fixed amount of money, with or without Considered as Substitute for money – but is not a
interest or other charges described in the Legal Tender
promise or order
Most negotiable papers are media of exchange for
 Written contract for the payment of money most commercial transactions – they increase the
purchasing medium in circulation
 Intended as a substitute for money – passes
from one person to another  As a medium of credit transactions
 ; in such a manner as to give a holder in due The purpose of negotiability is to allow men of
course the right to hold the instrument free from undoubted credit to carry on a business enterprise
under promissory notes, bills of exchange and checks
defenses available to prior parties.
– treating promises as cash

 The instrument must comply Section 1 of the

Note.
Negotiable Instruments Law (to be
considered negotiable)  Check is primarily used for immediate payment
 Ordinary Bill of Exchange, Promissory Note are
History intended for the circulation of credits
Clarify Example in Page 4
 U.S. Uniform Negotiable Instruments Act of
1896 – Act 2031 is mostly copied from this law
 Negotiability
 U.S. Uniform Commercial Code – replaced the
Uniform Negotiable Instruments Act of 1896 – An instrument is negotiable when it transfers from
1952 one hand to another.
It is not a mere transfer but a deliberate and with
 Code of Commerce – law that governed intention to give or transfer.
Negotiable Instruments Law
Where there is proper negotiation, person who holds
it as a consequence of delivery is called a “holder”.
 Act. No. 2031 – took effect on June 2, 1911
Therefore, negotiation is the transfer of a negotiable
Application & Purpose instrument for the purpose of making the transferee
the holder of the negotiable instrument
(1) Covers the entire subject of negotiable
instruments
Non-Negotiable Negotiable
(2) Controlling in all cases to which it is applicable
To specified person To order or bearer
 2

to order – it is payable to a
specific person in their order
and can be transferred by Subject to defenses among Take it free from personal
endorsement. the original parties obtaining defenses available among the
parties
Bearer – its payable to
whoever holds it, and
ownership can be transferred It is necessary to allege and Consideration is presumed
by delivery. prove consideration to and need not be alleged and
maintain action on a common proved
law instrument
Transfer by assignment Transfer by negotiation

Indorser is not liable on his

Transferee is assignee. Transferee is holder. Unlike indorsement unless there be
Assignee is similar to an assignee, a holder is in presentation for payment at
subrogee due course is free from all maturity and prompt notice of
personal defenses available dishonor in case of donor
Therefore, assignee only among parties.
acquires the totality of the
right of the transferor. One of the big advantages of Assignor in good faith does A general indorser is
the holder is that he can get not warrant the solvency of secondarily liable for any
rights better or superior to the debtor unless it has been cause which the party
those rights of his immediate expressly stipulated or unless primarily liable on a
transferor. the insolvency was prior to negotiable instrument does
the assignment and of not or cannot pay.
common knowledge
He warrants the solvency of
EXAMPLE the person primarily liable.

The qualified indorser and the

Non-negotiable Scenario: person negotiating by mere
delivery have limited access
 Imagine you lend your friend $100 and give them a written
to secondary liability
promise that they'll pay you back. You later decide to
transfer this promise to another person, Sarah.
 Sarah becomes an assignee, similar to someone stepping
into your shoes. However, she only gets the rights you had  Accumulation of Secondary Contracts
– if your friend had any defenses against paying you back,
Sarah inherits those defenses. Sec. 62-66 – every endorsement from one person to
another, it makes another contract (also known as a
Negotiable Scenario: secondary contract)

 You have a $100 check, and you decide to transfer it to ◉ Classes of Negotiable Instruments
Sarah. In this case, Sarah becomes a holder, holding the
check as a means of payment. Sec. 1 Notes of Negotiable Instruments
 If Sarah is a holder in due course, she gets special
privileges. Even if there were issues or defenses between
126 – Bill of Exchange Defined.
you and the person who wrote the check, those issues
□ an unconditional order in writing a
don't affect Sarah. She gets a cleaner, more protected
claim to the $100. □ addressed by one person to another
□ signed by the person giving it,
Advantage Scenario for Holder: □ requiring the other person to whom it is addressed to
- You receive a check from a reliable source and transfer it to pay on demand or at a fixed or determinable future
Sarah, who becomes the holder. The original check writer, time
however, owes money to someone else. □ a sum certain in money to order or to bearer.

- Sarah, being a holder, can potentially have a superior claim to 184 – Promissory Note Defined
the money compared to your claim. This means Sarah might
have a stronger right to the funds than you did when you □ (Negotiable) is an unconditional promise in writing
initially received the check. □ made by one person to another
□ signed by the maker
Assignability Negotiability □ engaging to pay on demand, or at a fixed or
determinable future time
pertains to contracts in Pertains only to negotiable □ a sum certain in money
general instruments
 3

□ to order or to bearer. Commercial Papers with limited negotiability

□ Where a note is drawn to the maker’s own order, it is
not complete until indorsed by him (1) Document of title
- Receipt or order for the delivery of goods
185 – Check Defined - Includes any bill of lading, dock warrant, quedan,
warehouse receipt
□ is a bill of exchange
- Though it is negotiable, when the goods are
□ drawn on a bank deliverable to the bearer or order, it is without an
□ payable on demand. unconditional promise or order to pay a sum
certain in money
Except as herein otherwise provided, the provisions of
this Act applicable to a bill of exchange payable on (2) Letter of Credit
demand apply to a check - It is in favor of a specified person and not to
order;
- But drafts issued in connection with letter of credit
are negotiable instruments
Comparison of Negotiable Instruments
(3) Trust receipt
Bill of Exchange Promissory Note
- A document of security pursuant to which a bank
Unconditional order or Unconditional promise to pay acquires “security interest” in the goods under
command to pay trust receipt
- The transaction involves a loan feature
represented by a letter of credit and a security
Involves three parties Involves two parties feature which is in the covering trust receipt
which secures an indebtedness.
Drawer Secondarily Liable Maker Primarily Liable
(4) Certificate of Stock
- It is a muniment of title to a given share in the
Generally, two presentments: One presentment: (for assets of a corporation
Acceptance, & for payment payment)
- It is also without an unconditional promise or
order to pay a sum certain in money

Bill of Exchange Checks (5) Pawn Ticket

- It is not a negotiable instrument under the
May not be drawn against a Always drawn upon a bank or negotiable instruments law nor a negotiable
bank banker document of title under Articles 1507

◉ CHAPTER 1 – FORM & INTERPRETATION

May be payable on demand, Always payable on demand
or at a fixed or at a ◉ REQUISITES OF NEGOTIABILITY 1
determinable future time

Section 1. Form of Negotiable Instruments. – An

Must be presented for Not needed to be presented instrument to be negotiable must conform to the
acceptance for acceptance following requirements:

(a) It must be in writing and signed by the maker or

Need not drawn on a deposit Drawn on a deposit drawer;

(b) Must contain an unconditional promise or order

Death of a drawer of an Death of a drawer of a check, to pay a sum certain in money; (sec. 2 & 3)
ordinary bill of exchange does with knowledge by the banks,
not revoke the authority of the revokes the authority of the
banker to pay banker to pay (c) Must be payable on demand, or at fixed or
determinable future time; (sec. 4)

May be presented for Must be presented for (d) Must be payable to order or to bearer; and (sec.
payment within a reasonable payment within a reasonable 7,8 and 9)
time after its last negotiation time after its issue
(e) Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty.
 4

Commercial Paper.
Section c & d applies Section c-e apply to bills of
- Refers to written promises or obligations that arise out of exchange
commercial transactions from the use of such
instruments as promissory notes and bills of Subsection (a)
exchange.
 Maker person issuing a promissory note
- All paper is either negotiable or non-negotiable  Drawer to the person issuing a bill of exchange

Negotiable Instrument. a.1 - instrument must be in writing

- is a contractual obligation to pay money. - must be in writing, or reduced to a tangible form;
- The negotiability and non-negotiability of an instrument otherwise, nothing could be negotiated or passed from
depends on its form & content. hand to hand

- An instrument which possesses all the elements of - Writing includes not only that which has been written on
negotiability provided in sec. 1 of the Negotiable paper and with a pen or pencil but also that which is in
instruments law. print (sec. 191) or has been typed.
- Does not cover other types of negotiable documents - Can be made upon leather, cloth or any other substitute
e.g., sale or transfer of goods for paper as long as it is movable in nature.

The negotiable instrument law cannot come into operation - No such thing as an oral negotiable instrument.
unless the document in existence is of the character described
in Section 1 of the Law - Negotiability or non-negotiability of an instrument is
determined from the writing or
Formal Requirements of Negotiability in that is from the face of an instrument itself
General:
- As they have constituted the writing to be the only
(1) The whole of the instrument; outward expression of their meaning, no other words
are to be added to it or substituted in its stead –
(2) Only what appears on the face of the instrument; must be clear and direct.
(3) The provisions of the negotiable instruments law
– especially Section 1 thereof gives the a.2 – signed by the maker or drawer
requirements of negotiability
- general rule:
lower right-hand corner of the instrument
Note.
allowed; top, middle or bottom of the margin
 A valid instrument is not necessarily negotiable.
 Every negotiable instrument is presumed to be a - May be placed anywhere and will remain valid so long as
contract, but not every contract is a negotiable it appears that a person intended to make the
instrument instrument his own
- Signature is Prima Facie Evidence of his intention to be
Formal Requirements Explained
bound either as the maker or drawer.
The requisites enumerated in Section 1 are deemed essential
for the security of commercial transactions as they enable Note.
one to tell at a glance whether or not an instrument is
Prima Facie Evidence – the proof of the first
negotiable.
fact permits
Negotiability Requisites for
- If signature is not clear in what capacity the person
 Promissory Note subsection (a) – (d)
intended to sign, he is deemed an indorser and not a
 Bil of Exchange subsection (a) – (e)
maker or drawer.
Promissory Note Bills of Exchange - It may be printed, type-written, engraved, photographed
Requirements indicated in All subsections are necessary or lithographed
subsections a-d for negotiability
- Use of pencil is undesirable as it is easy to tamper the
writing
The maker issues the The drawer issues a bill
promissory note
- Where the genuineness of the signature of the maker or
drawer is denied, the party against whom it operates
Unconditional Promise Unconditional Order
 5

must provide some evidence of its invalidity because A bare acknowledgement of indebtedness alone is not
the signature is presumed valid. a negotiable instrument. – does not constitute a promise
to pay.
- ; the party asserting its validity must then provide proof
However, if words of negotiability are added, the
of its genuineness in long hand instrument is negotiable although it contains no express
promissory words since the written promise to pay may be
- Preferably the full name or the surname should appear fairly inferred therefrom.
BUT the initials of a person or any mark will be
sufficient provided that such signature or mark used  Order to Pay
as a substitute and the maker or drawer intends to be
bound - It is also not necessary that the words order in a bill of
exchange to satisfy the requirement
– On contrary; must provide some evidence of - Any other words equivalent to an order or which show
the signature’s invalidity the drawer’s will that the money should be paid are
sufficient
Case scenario:
- The language used in the law is not a request.
Signed by a maker, indicating an X signature in an The drawer does not merely ask or even expect the
instrument drawee to pay. He DEMANDS that the drawee make
Valid. Since it is signed by the maker itself. payment
No requisite for a witness, but preferably must have for
security purposes. - It is immaterial whether the drawee obeys the order to
pay or not – the negotiability of a bill depends upon the
terms of the order
Subsection (b)
 Promissory Note unconditional promise
 Bill of Exchange unconditional order
 When Unconditional
- The promise or order must be unconditional, it must
b.1 – contain unconditional promise not be subject to any condition or contingency except
implied conditions of presentment, protests, and
notices of dishonors as provided in law
◉ PROMISE TO PAY 3
- Note or Bill must be payable absolutely
Section 3. When promise is unconditional. — An
unqualified order or promise to pay is unconditional
within the meaning of this Act, though coupled with— Terms not Affecting Unconditional Liability.
(a) An indication of a particular fund out of which
- The mere indication of the particular fund out of which
reimbursement is to be made, or a particular account to
reimbursement is to be made, or an indication of a
be debited with the amount; or
particular account to be debited with the amount does
not render the promise or order conditional.
(b) A statement of the transaction which gives rise to the
(applicable to bills of exchange only)
instrument. But an order or promise to pay out of a
particular fund is not unconditional.
A negotiable instrument remains negotiable despite
- In order that a promissory note may be negotiable, it a statement of the transaction which gives rise to it
must contain an unconditional promise to pay.
- Additional terms appearing on an instrument do not
- It is not essential, however that the word “promise” make the promise or order conditional if the duty to pay
should be used. is unaffected by such terms
Words sufficient enough to constitute a promise
to pay; 1. Indication of a Particular Fund for
Reimbursement
 “payable”
 “To be paid” - An instrument which mentions a particular fund out of a
 “I agree to pay” reimbursement is to be made negotiable because the
 “I guaranty to pay” order to pay is not rendered conditional. – The
 “M obliges himself to pay” drawee is not limited to the money in his hands
 “Good for” belonging to the drawer
 “Due on demand” - The fund indicated is not the direct source of
payment but only the source of reimbursement which
is an act subsequent to the payment.
 6

Funds for Particular Fund for regardless of what the terms of that contract
Reimbursement Payment actually are

Drawee pays the Payee from There is only one act; The Note: Negotiability is determined from what appears on
his own funds; afterwards, the Drawee pays directly from the its face alone and not elsewhere
Drawee pays himself from the particular fund indicated.
particular fund Subject to a condition
b.2 – must be payable in a sum certain in money
(sec. 2,5, & 6)
Particular fund indicated is Particular Fund indicated is
not the direct source of the direct source of - Reason for requirement is because money is the one
payment payment standard value in actual business
- Money always measures the rise and fall, and
Indication in the Instrument Indication in the instrument remains the same
does not affect the makes the promise or order
unconditional nature of the conditional - money includes legal tender – which a debt, or other
promise or order obligation calling for money, may be lawfully paid, if
the contract does not specify the medium of payment
2. Indication of a Particular Fund out of which gold, silver, bank notes are not money.
payment is made
see comments under Section 2, 5 & 6.
- An instrument payable out of a particular or specific fund
is non-negotiable because the amount to be paid is
1. UNDER SECTION 2
made to depend upon the adequacy of the fund
designated. ◉ CERTAINTY OF SUM PAYABLE 2

- The fund specified is the direct source of payment and SEC. 2. Certainty as to sum; what constitutes.—The sum
the measure of liability. payable sum is a sum certain within the meaning of this
Act, although it is to be paid—
- It is immaterial whether or not the fund actually exists or (a) With interest; or
is yet to be created. (b) By stated installments; or
(c) By stated installments, with a provision that upon
- The instrument remains non-negotiable even the default in payment of any installment or of interest the
fund is found to be sufficient at maturity whole shall become due; or
(d) With exchange, whether at a fixed rate or at the
- The test of negotiability is whether the instrument carries current rate; or
the general personal credit of the maker or drawer. (e) With costs of collection or an attorney's fee, in case
payment shall not be made at maturity.
3. Statement of Transaction which gives rise to
Instrument Since a negotiable instrument is a device intended to
take the place of money, it is, therefore, essential
- Instruments are issued by reason of the transaction upon that it represents a fixed amount to be paid wholly
which they are based in money

- The mere recital of the consideration for which the The amount to be paid must be stated plainly on the
instrument was issued or mere reference to a separate face of the instrument and must be determinable
agreement out of which the instrument has risen, does from the face of the instrument itself without
not make it conditional. Such kind of reference has reference to any outside source
no adverse.
It meets the sum certain requirement if the holder
4. Terms and Conditions contained in another can determine from the instrument itself the amount
paper he is entitled to receive at maturity

- Not negotiable because the obligation to pay is  The Sum is not rendered uncertain by a clause in
burdened with the terms and conditions of another the instrument that is to be paid with
contract, subjecting recovery on the instrument to
defenses available under the contract.  Interest
A provision for increased interest rate if the note is not to be
- This will require an examination of the said contract paid at maturity or for a reduced rate if payment is made at or
to determine the rights and obligations under the before maturity or for payment of interest on interests does not
instrument – such instrument is non-negotiable destroy negotiability
 7

◉ ACTS IN ADDITION TO MONEY 5

Ex. “I promise to pay P or order P10,000.00 with interest at
15% annum, from date until paid; 12% if paid when due”
SEC. 5. Additional provisions not affecting
negotiability. —An instrument which contains an order
 Stated Installments
or promise to do any act in f addition to the payment of
Does not affect negotiability money is not negotiable. But the negotiable character
Stated installments within the meaning of this section, means of an instrument otherwise negotiable is not affected by
that: a provision which—
1. Interest of each installment
2. Due date of each installment must be fixed in the (a) Authorizes the sale of collateral securities in case
instrument the instrument be not paid at maturity; or
(b) Authorizes a confession of judgment if the
 Exchange
instrument be not paid at maturity; or
Payable in foreign currency. (c) Waives the benefit of any law intended for the
advantage or protection of the obligor; or
It is the charge for the expense of providing funds at the place
(d) Gives the holder an election to require something
where the instrument is payable to meet the instrument which
is issued at another place. – it may be fixed or at a current rate
to be done in lieu of payment of money. But nothing in
this section shall validate any provision or stipulation
Does not affect negotiability because the value of foreign otherwise illegal.
currency at any given time may be determined easily
If the instrument is an inland or domestic bill, that is, both
- As a general rule, the instrument is non-negotiable if it
drawn and payable at the same place, there can be no
exchange so that a stipulation for payment in exchange may be
contains a promise or order to do any act in addition to
disregarded. the payment of money

Under R.A, No. 8183 – monetary obligations must be in Ex. “I promise to pay P or order P2000 and to deliver an IPad”
Philippine Currency
Exceptions
Parties may agree otherwise
 Costs of Collection or Attorney’s Fees (1) Sale of Collateral Securities
The additional act is to be performed after the date of
A provision which includes the costs of collection or attorney’s maturity of the instrument and when it is no longer
fees upon default does not render the instrument non- considered negotiable in a full commercial sense.
negotiable Until the date of maturity, the promise is to pay money
The sum in money is still certain only.

The fees written may be reduced by the courts should they be (2) Confession of Judgement
unconscionable or unreasonable.4
A written acknowledgement by the defendant of his
indebtedness or liability to the plaintiff.
 Acceleration Clause
An acceleration clause is a common provision found in It enables the holder to obtain a judgement without
contracts whereby the debtor promises that should they default the delay usually incident to a lawsuit as it eliminates
on any installment or interest, the whole amount due shall the necessity of trial
become due.
Not allowed under our laws. Denies the person his
In other words, it is a penalty clause which requires the day in court.
payment of the whole amount including interest upon
failure to pay an installment. Given after the action is brought to save expenses is
valid and may be considered as a voluntary
Ex. “Upon default payment of any installment or interest, the settlement of the case
whole sum shall become due and payable”
Waiver of Benefit Granted by Law
If note provides for an acceleration at the option of the holder,
the instrument is non-negotiable. > Waiver of Protest
> Waiver of Presentment for payment
> Waiver of Demand
Does not destroy the negotiability

(3) Election of Holder to require some other Act

Choice of the Holder = Negotiable
Choice of the Promisor = Non-negotiable
2. UNDER SECTION 5 3. UNDER SECTION 6
 8

◉ OMMISSION OF DATE 6
There is no requirement under sec. 1. Thus, the
SEC. 6. Omissions; seal; particular money. —The negotiability of the instrument remains
validity and negotiable character of an instrument are not
affected by the fact that— Should the place of presentment be unavailable, it is
presumed to be payable at the place of residence or
(a) It is not dated; or business of the maker or drawer
(b) Does not specify the value given, or that any value
has been given therefor; or PRESENCE OF A SEAL
(c) Does not specify the place where it is drawn or the
place where it is payable; or Under our laws there is no prohibition of seals on
(d) Bears a seal; or negotiable instruments. Negotiability remains U.S.A. law
(e) Designates a particular kind of current money in prohibits seals on negotiable instruments
which payment is to be made.
EFFECT OF DESIGNATION OF PARTICULAR
But nothing in this section shall alter or repeal any KIND OF CURRENT MONEY PAYABLE
statute requiring in certain cases the nature of the
consideration to be stated in the instrument. Money, as used in the law, is not necessarily limited to
“legal tender” as defined by law.
A date is generally not necessary. The omission thereof
does not render the instrument non-negotiable. It includes any particular kind of current money or foreign
money which has fixed value in relation to our money.
It will be dated as of the time it was issued.

If there is a date stated but there is no such date in the Subsection (c)
calendar, the law will deem the nearest date of the
month the date intended must be payable on demand, or at a fixed, or
determinable future time
 When date is necessary
Where said date is tied to the date of issue (undated ◉ TIME OF PAYMENT 4
note is payable thirty days after date)

Where interest is stipulated for the purpose of SEC. 6. Determinable future time; what constitutes. – An
determining when the interest is to run instrument is payable at a future determinable time,
within the meaning of this Act, which is expressed to be
In the case of promissory note, the date of issue, and in payable –
the case of the bill of exchange, the date of the last
negotiation thereof for the purpose of determining whether a) At a fixed period
a party acted within a reasonable time in making b) On or before a fixed or determinable future time
presentment for payment. specified therein; or
c) On or at a fixed period after the occurrence of a
Instruments may be ante-dated or post-dated specified event which is certain to happen, though the
time of happening be uncertain.
 No Date – What Happens
An instrument payable upon a contingency is not
The holder may insert the true date
negotiable, and the happening of the event does not
The insertion of a wrong date does not avoid the cure the defect.
instrument in the hands of an innocent third party who may
enforce the same notwithstanding the improper date Instrument must be Payable at a fixed or
determinable future time or on demand (sec.4)
OMMISSION OF VALUE
Instrument Payable at all events
Value does not refer to the sum of money to be paid
It is an essential requirement for negotiability of an
It refers to the reason for issuance of negotiable instrument that its payment will certainly become due
instrument. – It is not necessary to state that value has and demandable one time or other, though it is
been received for the instrument because consideration uncertain when that time will come
is presumed
On Demand/After Sight = after the instrument is seen
by the drawee upon presentment for acceptance or
accepted by the drawee
OMMISSION OF PLACE
 9

A term or time instrument is payable only upon the A holder has an immediate right of payment for the
arrival of the time for payment money promised or ordered to be paid.

CONTINGENCY.  NO TIME EXPRESSED

an instrument which is only payable on a
contingency is not-negotiable because it does When no time for payment is expressed, a
not appear on its face whether or not it will be negotiable instrument automatically becomes
paid. payable on demand

Uncertain future event or an event which may or  Payable on demand as regards the Maker
may not happen  Payable on demand as regards the Acceptor
 Payable on demand as regards the Indorser
Determinable future time
Check book for examples
 Payable at a fixed time – On Sept 12, 2023
Subsection (d)
 Payable at fixed period after date - 30 days after
Must be payable to order or bearer; and
Sept 12, 2023
 Payable at fixed date after sight. – 10 days after 1. UNDER SECTION 8;
sight
 Payable on or before a fixed time. – on or before ◉ PAYABLE TO ORDER 8
Sept 12, 2023
Sec. 8 When payable to order. – The instrument
 Payable on or before a determinable future time. On is payable to order where it is drawn payable to
or before my death the order of a specified person or to him or his
 Payable on the occurrence of a specified event. On order. It may be drawn payable to the order of –
the death of my cat
(a) A Payee who is not maker, drawer or drawee; or
 Payable after the occurrence of a specified event. (b) The drawer or maker; or
10 days after the death of my beloved cat. (c) The drawee; or
(d) Two or more payees jointly; or
(e) One or more several payees; or
◉ PAYABLE ON DEMAND 7 (f) The holder of an office for the time being

Sec. 7. When payable on demand. – An instrument is Where the instrument is payable to order the payee
payable on demand – must be named or otherwise indicated therein with
reasonable certainty
(a) Where it is expressed to be payable on
demand, or at sight or on presentation; or When is it PAYABLE TO ORDER?
 To the order of a specified person; or
(b) In which no time for payment is expressed.
 To him or his order,
Where an instrument is issued, accepted, or
Ex. Pay to X or order P5,000
indorsed when overdue, it is as regards the person
Pay to X P5,000
so issuing, accepting or indorsing it, payable on
demand.
ORDERS
- an instrument payable on demand is due and payable It is not essential that the words “to the order of” or “or
immediately after delivery. It is a present debt due at order” be used.
once
The words “to P and assigns” have been held to be
 EXPRESSED TO BE PAYABLE ON DEMAND equivalent words which will render the instrument
negotiable.
Instead of “on demand” the words “at sight” or “on
presentation” or “on call” may be used. It should be noted that in an order instrument, a
specified person must always be named therein
ON DEMAND – Promissory notes before or after the word order. Without anyone to give an
AT SIGHT – Bills of Exchange order the instrument becomes non-negotiable.
It is sufficient if the payee though not named is
An overdue instrument is necessarily a demand paper.
described with reasonable certainty.
Check Book for examples of the ff:
 10

1. To order of payee who is not the maker capable of indorsing, he cannot expect the instrument
2. To order of payee who is not the drawer to circulate through the indorsement of the payee, and
3. To order of payee who is not the drawee therefore, he must have intended the same to be
4. To order of drawer. transferred by mere delivery just like an instrument
payable to bearer.
5. To order of Maker
6. To order of drawee 4. Payable to order of a non-existing person.
7. To order of two or more payees jointly 5. Name of payee not name of person
8. To order of one or some of several payees 6. Only indorsement in blank.
9. To order of holder of an office for the time being 7. Last indorsement in blank.

2. UNDER SECTION 9; BLANK INDORSEMENT

◉ PAYABLE TO BEARER 9 A Blank indorsement, however, cannot make a non-

negotiable instrument, because payable to a specified
Sec. 9 When payable to bearer. – The instrument person, negotiable as a bearer instrument.
is payable to bearer –
“Indorser” would be able to change the tenor of the
(a) When it is expressed to be so payable; or whole instrument.
(b) When it is payable to a person named therein or
bearer; or The word indorsement as used by the law refers only to
(c) When it is payable to the order of a fictitious or negotiable instrument
non-existing person, and such fact was known to
the person making it so payable; or
(d) When the name of the payee does not purport to ◉ CRITERION OF NEGOTIABILITY 10
be the name of any person; or Sec. 10. Terms, when sufficient. – The instrument
(e) When the only or last indorsement is an need not follow the language of this Act, but any
indorsement in blank. terms are sufficient which clearly indicate an
intention to conform to the requirements thereof.
When an instrument is payable to bearer, payment to
any person in possession thereof in good faith and
without notice that his title is defective, at or after
Criterion of Negotiability
maturity, discharges the instrument. It is not required to use the exact words of the law.
Delivery alone is enough to effect negotiation of the The substance rather than its form is the criterion of
instrument. negotiability.
Whoever possesses it is the bearer. As long as the clear intention of the parties to make the
instrument negotiable can be determined, the law will
For added security, the holder may require give it force and effect.
indorsement of the instrument.
Mere defect in language or grammatical error does not
An instrument that fails to qualify as an order render an instrument non-negotiable.
instrument is nonetheless negotiable if it is payable
to bearer.
◉ DATE OF NEGOTIABLE INSTRUMENT 11
Check Book for examples of the ff:
Sec. 11. Date, presumption as to. –
1. Expressed to be so payable
Where the instrument or an acceptance or any
2. Payable to person named therein or bearer
indorsement thereon is dated, such date is deemed
3. Payable to order of a fictitious person prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be.
The bill is payable to bearer and not to order because
Mr. X is a fictitious person. A name is fictitious when it
is feigned or pretended.
This legal provision applies to three cases:

A fictitious person is meant to be one who, though 1. The instrument contains the date of issue
named as payee in an instrument, has no right to it The date placed is deemed prima facie – the true
because the maker or drawer so intended and it
matters not, whether the name of the payee used by
date of the making or drawing of the instrument
him be that one living or dead, or one who never
existed.
2. In an accepted bill of exchange and the
acceptance is dated
The maker or drawer knows that the payee is not
 11

The date is deemed prima facie – the true date of otherwise persons secondarily liable may be released
acceptance from its liability.

3. In an indorsed instrument and the indorsement (2) Importance of the date.

is dated
The date is essential for the purpose of determining
The date is deemed prima facie – the true date of whether a party has acted within a reasonable time –
indorsement does not refer to the negotiability of the instrument.

DISPUTABLE PRESUMTION
The date on the instrument is presumed to be true and ◉ ANTE-DATED & POST-DATED 12
correct in date.
Sec. 12. Ante-dated and postdated.
However, this is a disputable presumption and any
person who has an interest in that instrument is free to The Instrument is not Invalid for the reason only that it Is
dispute such presumption – but as to a holder in due antedated or postdated, provided this is not done for an
course, this presumption is conclusive Illegal or fraudulent purpose. The person to whom an
Instrument so dated is delivered acquires the title thereto
The person who disputes the presumption has the as of the date of delivery.
burden to establish such claim.
 Ante-Dated.
* Prima Facie – At first sight When the date written thereon is earlier than the true
* Holder in Due course – any person who receives or holds a
date of its issuance or delivery.
negotiable instrument in good faith and in exchange of value;
without any notice or suspicion that it is overdue or was  Post-Dated.
previously dishonored – such a holder is entitled to payment When the date written thereon is later than the true date
by the creator of that negotiable instrument. of its issuance or delivery.

Either does not render invalidity or non-negotiability

Generally, date is not essential to make an instrument by that fact alone – it may be negotiated before or after
negotiable (sec.6[a]). This is true of instruments which the date given as long as it is not negotiated after its
are payable at a fixed future date and which do not maturity
stipulate for the payment of interest.
LIMITATIONS
However, the date is necessary to determine the
maturity (but not negotiability) of the instrument: Ante/Postdating a check does not affect negotiability
unless its objective is unlawful
(a) Instrument is payable at a fixed period after the
date  An example of illegal ante-dating is that done to
conceal the charge of usurious interest.
“Thirty days after the date, I promise to pay or order of
P10,000” Situation: A borrower takes out a loan from a lender at a
high-interest rate that exceeds legal limits.
The date of issue is material to determine the date of
maturity or date from which to start counting thirty days. To conceal the usurious interest charges, the borrower
ante-dates the check given to the lender to make it
(b) Instrument is payable at a fixed period after sight appear as if the loan was issued earlier than it actually
or presentment was.

“Pay P or order 10,000 thirty days after sight (or after  An example of illegal post-dating is to issue a
presentment)” post-dated check in payment of an obligation
because of insufficiency of funds without bona fide
The date of presentment is necessary to determine when intention to cover the amount of the check
the sixty-day period will commence.
Situation: A business owner writes a post-dated check
PAYABLE ON DEMAND to a supplier for payment of goods purchased. However,
at the time of writing the check, the business owner
An instrument payable on demand need not be dated knows there are insufficient funds in the account to cover
since it is demandable at any time. the payment.
(1) Date of Issue or Last negotiation. The post-dated check is given to the supplier with the
intention of delaying payment until funds become
Sec. 71 – Promissory note must be presented for
payment under a reasonable time after its issuance,
 12

available, rather than with the genuine intent to cover the APPLICATION TO OTHER CASES
amount owed.
Payable on Demand. This section does not apply to an
instrument payable on demand although undated, for its
Sec. 12 seems to contemplate instruments which are maturity already fixed, being due immediately.
ante-dated or post-dated by the parties in accordance
with a mutual agreement to that effect. Bill of Exchange. The insertion of the true date of such
acceptance is necessary if thirty days is to be counted
The person to whom the instrument so dated is not from the date of issue but from sight or
delivered acquires title or ownership over it, not as of acceptance.
the date it bears but as of the date it is delivered.

◉ WHEN DATE MAY BE INSERTED 13 Dishonesty of Author

Sec. 13. When date may be inserted. - Where an In the case of the dishonesty committed by the
instrument expressed to be payable at a fixed period author of the dishonesty, the instrument is avoided as
after date is issued undated, to him or any one claiming under him.

or where the acceptance of an instrument payable at a If the instrument is avoided as to the author of the
fixed period after sight is undated, dishonesty, he can recover from the maker because only
the negotiability of the instrument is avoided but not the
any holder may insert therein the true date of issue or whole instrument.
acceptance, and the instrument shall be payable
accordingly. The instrument may then be enforced as a debt
instrument under the Civil Code.
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due As to a holder in due course, the date appearing on
course; but as to him, the date so inserted is to be the instrument is conclusively the date of issuance.
regarded as the true date.
To what the provision applies: RATIONALE
Date of instrument is not essential for negotiability, and
The reason for the rule is that “one who signs such an
date is only critical when;
instrument furnishes the means of fraud and is estopped to
deny his liability thereon. The insertion of a wrong date
 Instrument is payable after a fixed date
constitutes material alteration in in Sec. 125 (a)
 Or payable after sight
Example: The true date in this case is August 10, 2023 but was
 If there is no date, no one will never know when the left unwritten
true due date is
"I promise to pay P (no date) or order P10,000.00 thirty days
 Filling in the missing element of date is delegated to after date
the holder
sgd. R
 Note. This section only refers to a missing date – If P dates it August 1, 2023 to hasten the day of maturity, then
date here pertains to the due date of the instrument. the note is avoided insofar as P is concerned because the
instrument ante-dated for a fraudulent purpose.

WHEN DATE IS INSERTED. However, if P after inserting the wrong date, indorses the
instrument to A, as a holder in due course, has the right to
Authorizes the holder to put a date in (2) cases; enforce payment on August 31, 2023 and not on September 9,
2023 because as to him the date so inserted August 1, 2023
(1) Where an instrument is payable at a fixed will be regarded as the true date.
period after date but is issued undated; and

(2) Where an instrument is payable at a fixed ◉ INCOMPLETE & DELIVERED 14

period after sight but the acceptance is
This section applies ONLY to an incomplete instrument
undated
which has been delivered by the maker or the drawer to
the payee or holder.
Any holder may insert therein the true date of issue or
acceptance and the instrument shall be payable
Sec. 14. Blanks; when may be filled. - Where the
accordingly.
instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority
Unless the true date is inserted, one will not know
to complete it by filling up the blanks therein.
when the instrument will be due.
 13

And a signature on a blank paper delivered by the First Scenario

person making the signature in order that the paper may
be converted into a negotiable instrument operates as a The first kind involves a writing which although
prima facie authority to fill it up as such for any amount. containing blanks, is so far completed that it is an
instrument, i.e., where the writing recites enough of the
In order, however, that any such instrument when formalities to make evident the intention to make the
completed may be enforced against any person who writing operate as negotiable instrument.
became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given In such case, “any person in possession thereof has
and within a reasonable time. a prima facie authority to complete it by filling up the
blanks therein.” This contemplates a delivered
But if any such instrument, after completion, is instrument, and not an undelivered instrument which is
negotiated to a holder in due course, it is valid and covered by Section 15.
effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in accordance Prima Facie Evidence – upon initial examination, a
with the authority given and within a reasonable time. legal claim has sufficient evidence to proceed to trial or
judgement
Steps in Issuance of Negotiable Instrument
(a) Material Particular – it may be defined as any
There are two steps involved in the issuance of particular proper to be inserted in a negotiable
every negotiable instrument, namely; instrument to make it complete.
1. The mechanical act of writing the instrument (b) The holder may fill up blanks for date, due date,
completely and in accordance with the name of payee, amount or rate of interest – but
requirements of Section 1; and has no authority to change the amount after it
2. The delivery of the complete instrument by has been filed.
the maker or the drawer to the payee or holder
with the intention of giving effect to it. There is a presumption that the blank was filled up in
accordance with the authority given and within a
Such instrument, complete and delivered, is negotiable reasonable time.
and may be enforced accordingly.
Second Scenario
 Delivery of the instrument means transfer of
The second kind of writing is one which is so far
possession, actual or constructive, from one person
incomplete that it is not an instrument in this case,
to another.
two conditions must be present before the presumption
 Without the initial delivery of the instrument from of authority to complete may arise:
the maker to the payee, there can be no liability on
said instrument.  Delivery of the instrument; and
 The delivery must have been for the purpose of
 Thus, if the maker gives the instrument to another converting it into a negotiable instrument.
for mere safekeeping, there is no delivery within the
meaning of the above provision. For liability to be established, it's essential that the
signer of a document intends for it to be a negotiable
 However, once the instrument is no longer in the instrument.
possession of the person who has signed it, a
Without this intention, the maker is not liable even to
valid delivery by him is presumed, until the contrary
a holder in due course after it was converted as a
is proved, and as to the holder in due course, the
negotiable instrument.
presumption is conclusive, provided the instrument
is complete. Signed Blank Paper.
Issue or issuance of the instrument. first delivery of  The law provides that there is prima facie authority
the instrument complete in form to fill it up for any amount.
WHAT IS COVERED BY SEC.14  It is believed that it includes authority to fill in other
It covers two kinds of writings: blanks, specially to all missing requirements
1. Incomplete instruments, and necessary to make it a negotiable instrument
2. A blank paper or a paper so far incomplete that it
does not constitute an instrument within the  Whether it is an incomplete instrument or a mere
meaning of the definition of this term, but signed signed blank paper therefore, the authority extends
to the insertion of the date, place of payment, the
 14

amount, the name of the payee, and the time of

Illegal Consideration Forgery
payment.

Non-delivery of complete Non-delivery of incomplete

The requirements for a blank sheet to become a instrument instrument
negotiable instrument is that;
 The maker must sign a blank sheet of paper, Conditional delivery of Material Alteration
complete instrument
 With intent to convert to a negotiable instrument,
and Ultra Vires acts of a
 Must deliver the sheet Fraud in inducement corporation

Authority to Complete the Instrument Filing up the blank not within Fraud in factum or in esse
authority contractus
The material particular referred to here may be:
Duress or intimidation Illegality – if declared void for any
(1) A Particular omission of which will render the purpose
instrument non-negotiable (e.g., name of the
payee or the name of the drawer); or Filling up blank beyond Vicious Force or violence
reasonable time
(2) A Partcular omission of which will not render
the instrument non-negotiable (e.g., date, rate of Transfer in breach of faith or trust Want of Authority
interest, place of payment)
Mistake Prescription

The law presumes from facts Discharge of insolvency

Insertion of wrong date
1. want of a material particular in the instrument
2. possession thereof by a person
Antedating or postdating for
3. that such person had authority to fill up the blank illegal or fraudulent purpose

 The law doesn't insist on intentionally delivering a

document to turn it into a negotiable paper. Rather, it Holder in Due Course (Sec. 52)
requires the document to be in someone else's possession
apart from the creator.
Sec. 52. What constitutes a holder in due course. - A
 When this happens, along with any missing details, the holder in due course is a holder who has taken the
law assumes there's authority to complete the document. instrument under the following conditions:

The law thus presumes the existence of the authority to (a) That it is complete and regular upon its face;
fill the instrument up to any amount from the following
facts; (b) That he became the holder of it before it was
overdue, and without notice that it has been
1. Signature on blank paper previously dishonored, if such was the fact;
2. That the person signing in blank delivers it in order
that the paper may be converted into a negotiable (c) That he took it in good faith and for value;
instrument. Mere possession by a person is not enough.
(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in
the title of the person negotiating it.

Personal Defense – Real Defense – Rights of a Holder in Due Course.

Equitable Defense Absolute Defense
The defense isn't valid against a holder in due
Are available only against the Attached to the instrument course.
holder who stands in privity and are available against all
with the party who is entitled holders, whether in due According to the law, when the instrument is complete
to set up the defense, or course or not, but only by the and delivered to such a holder, it's considered valid and
against those who are not or party or parties entitled to enforceable as if filled out correctly and promptly.
do not have the rights of a raise them
holder in due course This defense is only applicable on a personal or
equitable basis.
Failure or Absence of
Minority
Consideration
 15

Instrument Delivered in Blank. and, in such case, the delivery may be shown to have
been conditional, or for a special purpose only, and not
 If someone isn't a holder in due course, they for the purpose of transferring the property in the
can't enforce an instrument against a party instrument.
before it's completed strictly as authorized and within
a reasonable time. But where the instrument is in the hands of a holder in
due course, a valid delivery thereof by all parties prior to
 To enforce an incompletely filled but delivered him so as to make them liable to him is conclusively
instrument, two conditions must be met. If either presumed.
condition is missing, the instrument can't be
enforced. And where the instrument is no longer in the possession
of a party whose signature appears thereon, a valid and
 Even if the instrument was completed improperly, intentional delivery by him is presumed until the contrary
parties who negotiate it afterward are still liable on is proved.
the completed instrument because they're estopped
from claiming it wasn't filled out correctly.  The law provides that every contract on a
negotiable instrument is incomplete and
 Determining what constitutes a "reasonable time" revocable until delivery of the instrument for the
depends on factors like the instrument's nature, purpose of giving effect thereto. And no rights,
trade or business practices, and specific properly speaking, arise in respect to an instrument
circumstances. So, the term is relative and case- until it is delivered.
specific.
 Issue is the first delivery of the instrument,
complete in form, to a person who takes it as a
◉ INCOMPLETE & UNDELIVERED 15 holder.

Sec. 15. Incomplete instrument not delivered. -  Delivery and issuance are used interchangeably.
Where an incomplete instrument has not been delivered,
it will not, if completed and negotiated without authority,  Delivery and issuance may be made either by the
be a valid contract in the hands of any holder, as against maker or drawer himself or through a duly
any person whose signature was placed thereon before authorized agent and may be made either to the
delivery. payee himself or to his duly authorized agent.

Rules when instrument incomplete &  Before delivery, the maker or drawer can revoke,
undelivered cancel or tear up the instrument.

(1) Defense against a holder in due course. The payee named in the instrument acquires no
right until the instrument is delivered to him.
The fact that an incomplete instrument, completed
without authority and had not been delivered, is a Delivery between immediate parties and remote
defense against a holder in due course parties (except holders in due course) must be:

(2) Defense available to parties prior to delivery 1. Made by the party creating the instrument or someone
authorized by them.
The invalidity of the above instrument is only with
reference to the parties whose signatures appear 2.Delivery can be conditional or for a specific purpose
on the instrument before and not after delivery. without transferring property in the instrument.

Immediate parties are those who are directly involved

◉ COMPLETE & UNDELIVERED 16 and aware of any conditions or limitations on the delivery
of the instrument. It's about knowledge, not physical
Sec. 16. Delivery; when effectual; when presumed. proximity.
- Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the If a party knows about the conditions or limitations on
purpose of giving effect thereto. delivery, even if they're physically distant, they're
considered immediate. Conversely, if they're unaware,
As between immediate parties and as regards a remote they're not immediate parties, even if they're physically
party other than a holder in due course, the delivery, in close (Remote Parties)
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;
 16

When a complete instrument is held by a holder ◉ CONSTRUCTION 17

in due course:
Sec. 17. Construction where instrument is
 A valid delivery by all prior parties is ambiguous. - Where the language of the instrument is
conclusively presumed. ambiguous or there are omissions therein, the following
 Conclusive presumption means no evidence to rules of construction apply:
the contrary is allowed.
(a)Where the sum payable is expressed in words and
For parties to be liable to the holder in due course, a
also in figures and there is a discrepancy between the
valid delivery by all prior parties is also conclusively
two, the sum denoted by the words is the sum payable;
presumed.
but if the words are ambiguous or uncertain, reference
may be had to the figures to fix the amount;
When the instrument is no longer in the
possession of a signer: (b) Where the instrument provides for the payment of
interest, without specifying the date from which interest
 A valid and intentional delivery by that signer is
is to run, the interest runs from the date of the
presumed until proven otherwise.
instrument, and if the instrument is undated, from the
This presumption exists: issue thereof;

 In favor of immediate parties who are not (c) Where the instrument is not dated, it will be
holders in due course until proven otherwise. considered to be dated as of the time it was issued;
 Against such parties, it can be proven that:
(d) Where there is a conflict between the written and
1. No delivery occurred.
printed provisions of the instrument, the written
2. If delivery happened, it wasn't authorized.
provisions prevail;
3. If delivery occurred or was authorized, it was
conditional or for a specific purpose, not to
(e) Where the instrument is so ambiguous that there is
transfer property in the instrument.
doubt whether it is a bill or note, the holder may treat it
as either at his election;
Personal Defense
(f) Where a signature is so placed upon the instrument
Under Section 16, a possible defense for a party facing that it is not clear in what capacity the person making the
charges is that: same intended to sign, he is to be deemed an indorser;
The instrument wasn't delivered, or if it was, the
delivery wasn't authorized, or was conditional, or for a
special purpose. (g) Where an instrument containing the word "I promise
to pay" is signed by two or more persons, they are
This defense is termed "want of delivery of a deemed to be jointly and severally liable thereon.
mechanically complete instrument."
However, this defense doesn't apply against a holder Rules of Construction –
in due course because: in case of Ambiguity or Omission
 Proof of lack of delivery, unauthorized delivery, Subsection a.
conditional delivery, or delivery for a special
purpose is not allowed. (1) Sum expressed in words & figures are different
The figures in the margin form no part of the
 In the hands of a holder in due course, valid and
instrument and are simply an abridgement of the
intentional delivery of a mechanically complete
amount payable – sum denoted by words is the
but undelivered instrument is conclusively
sum payable
presumed.
(2) If words are ambiguous or uncertain
This defense can be used against immediate parties
and remote parties who are not holders in due If Words are uncertain, reference may be had to the
course because: figures to determine the true amount.

The presumption of valid and intentional delivery Subsection b.

is rebuttable for them.
(3) Date when stipulated interest to run not
Thus, this defense is only a personal defense. specified

The stipulated interest to run is not specified;

Date of the instrument (if given)
 17

Date the instrument was issued (if no date) 1. Where a person signs in a traded or assumed
name (Sec.18, par.2);
Furthermore, if no rate of interest is mentioned, it will
draw interest at the legal rate 2. The principal is liable if a duly authorized agent
signs on his own behalf (Sec. 19)
Subsection c.
3. In case of forgery (Sec.23), the forger is liable
(4) When the instrument is undated even if his signature does not appear on the
An undated instrument is considered dated as of the instrument;
date of its issue 4. Where the acceptor makes his acceptance of a
bill on a separate paper (Sec.134.) and
Subsection d.
5. Where a person makes a written promise to
(5) Written and printed words in conflict
accept a bill before it is drawn. (Sec.135)
In case of conflict between the written and printed
provisions, the former prevail
◉ SIGNATURE BY AGENT 19
Since written words are deemed to express the true
intention of the maker or drawer because they are Sec. 19. Signature by agent; authority; how shown. –
placed there by himself
The signature of any party may be made by a duly
Subsection e. authorized agent. No particular form of appointment is
necessary for this purpose; and the authority of the
(6) Whether instrument bill or note in doubt agent may be established as in other cases of agency.

In case of doubt as to whether an instrument is a bill HOW AUTHORITY IS PROVEN

or note, the holder may treat either at his election.
Authority of the agent may be shown, as in other cases
Subsection f. of agency, to have been given orally or in writing subject
(7) Capacity where the person signed in doubt to the provisions of the Statute of Frauds.
When there is doubt due to the ambiguous location
It has been held competent for the agent to sign simply
of the signature – the party who signs are
the principals’ name and to show his authority to do so
considered as an indorser (who assumes the least
by other evidence.
liability)

Subsection g. ◉ AGENT LIABILITY 20

(8) Instruments signed by two or more persons Sec. 20. Liability of person signing as agent, and so
Liability can either be joint or solidary forth. –
Where the instrument contains or a person adds
 I promise to pay (solidary) to his signature words indicating that he signs for or on
 We promise to pay (joint) behalf of a principal or in a representative capacity, he is
not liable on the instrument if he was duly authorized; but
◉ TRADE NAME OR ASSUMED NAME 18 the mere addition of words describing him as an agent,
or as filling a representative character, without disclosing
General Rule: Only persons whose signatures appear his principal, does not exempt him from personal
on an instrument are liable thereon. liability.

Sec. 18. Liability of person signing in trade or In order that an agent who signs a negotiable
assumed name. - instrument may escape personal liability, the following
are the requisites;
No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise 1. He is duly authorized
expressly provided.
2. He adds words to his signature indicating that he
But one who signs in a trade or assumed name will be signs as an agent, that is for or on behalf of a
liable to the same extent as if he had signed in his own principal, or in a representative capacity; and
name.
3. He discloses his principal
Exceptions – isn't exactly an exception to the usual rule.
Instead, it's a case where a person's business name acts
just like their signature would.
 18

EFFECTS ON NON-DISCLOSURE  While a minor is not bound by his indorsement for

lack of capacity, he is, however, not incapacitated to
The mere addition of descriptive words without transfer certain rights.
disclosing the principal will not relieve the signer
from personal liability.  Minority is not even a personal defense which may
be set up by parties other than the minor; but it is a
 Therefore, one who signs an instrument in a real defense available to the minor.
representative capacity but without disclosing his
principal will still be personally liable although he
 This rule may apply to other persons who are
adds to his signature the word “agent” or “trustee”
incapacitated to contract (insane, demented
 As between immediate parties, evidence may be persons, deaf-mutes – who do not know how to
presented to show the real character of transaction, write)
i.e., that the signer acted a mere agent and the
payee knew of this fact  A minor may be held bound by his signature in an
instrument where he is guilty of an actual fraud
committed by specifically stating that he is of age,
◉ PROCURATION 21 when in fact he is not.

Sec. 21. Signature by procuration; effect of. - A signature Example: M issues a negotiable instrument payable to
by "procuration" operates as notice that the agent has the order of P, a minor. P indorses the instrument to A.
but a limited authority to sign, and the principal is bound M becomes liable to A because the indorsement by P
only in case the agent in so signing acted within the passes title to A.
actual limits of his authority.
But if M cannot pay and a sues P, the latter may raise
Procuration. the defense of minority to escape liability. P may even
disaffirm his indorsement and recover the instrument
The acts by which a principal gives power to from A.
another to act in his place as he could himself.
Ordinarily understood in the same sense as Corporation
agency or proxy, for the one who signs is merely acting  Sec. 22 applies to cases where the corporation has
as agent for another. committed acts beyond their purpose or authority
(ultra vires acts).
Effect of Signature by Procuration.
 It has been held that a corporation is not liable on
 The term procuration has a special and technical notes in a suit thereon by an indorsee, where the
meaning. corporation is without capacity to make the contract
in fulfillment of which they were executed.
 It gives warning that the agent has but limited  One who deals with officers or agents of a
authority, so that it is the duty of the person dealing corporation is bound to know, at his own peril, their
with him to inquire into the extent of his authority. powers and extent of their authority.
 The principal is not bound if the agent has
exceeded the actual limits of his authority. ◉ FORGERY 23
Sec. 23. Forged signature; effect of. -
When a signature is forged or made without the
◉ CORPORATION & INFANTS 22 authority of the person whose signature it purports to be,
it is wholly inoperative, and no right to retain the
Sec. 22. Effect of indorsement by infant or instrument, or to give a discharge therefor, or to enforce
corporation. The indorsement or assignment of the payment thereof against any party thereto, can be
instrument by a corporation or by an infant passes the acquired through or under such signature,
property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no liability unless the party against whom it is sought to enforce
thereon. such right is precluded from setting up the forgery or
want of authority.
Effect of Indorsement by Incapacitated
Forgery.
As a general rule, contracts entered into by minors are is meant the counterfeit-making or fraudulent
voidable at his instance or at the instance of his guardian alteration of any writing and may consist in the signing
of another’s name or the alteration of an instrument in
 19

the name, amount, description of the person and the like,

with intent thereby to defraud. Rights of Parties in Cases of Forged Indorsements

Section 23 applies only to forged signatures or (1) Where note payable to order.
signatures made w/o authority of the person whose
signature purports to be. The party whose indorsements is forged is not
liable to any holder, even a holder in due course.
If consisting in the alteration in the amount – Sec. 124 It is inoperative.
applies.
The other parties including the maker, prior to the
It is not necessary that the forger attempt to imitate or party whose signature is forged, are also not liable
simulate the signature being forged. to any holder.

Example of Forgery under Negotiable Instruments The instrument being payable to order, it can be
negotiated only by indorsement completed by
For instance, a signature given for autograph purpose delivery.
but converted into a negotiable instrument is considered
forged. But since the indorsement is forged, it is inoperative
The signature may have been genuine but for the and, therefore, it cannot operate to transfer any
purpose of giving effect to or being bound on a right or title over the instrument.
negotiable instrument. Hence the signature is wholly
inoperative. It creates no right and imposes no
obligation. (2) Where note payable to bearer.
Where the note, mechanically complete, is originally
Real Defense / Application payable to bearer, the party whose indorsement is
forged is liable to a holder in due course, but not
 Forgery is a real defense. to one who is not a holder in due course.
 A person whose signature to an instrument was
forged was never a party and never consented to the The other parties, including the maker, prior to the
contract which allegedly gave rise to such party whose signature is forged, may also be held
instrument. liable by one who is not a holder in due course.

 Since his signature does not appear on the The reason being that the instrument is a bearer
instrument, he cannot be held liable thereon by instrument and can be negotiated by mere delivery.
anyone, not even by a holder in due course.
In other words, indorsement is not necessary to the
Section 23 deals title of the holder. Hence even if the indorsement
is forged, the forgery may be disregarded.
1. Where the signature on the instrument is affixed
by one who purports to be an agent, but who (3) Where bill payable to order.
does not have the authority to bind the alleged
principal; and Where the bill is payable to order, the party
whose indorsement is forged is not liable to any
2. Where the signature is affixed by one who does holder, even a holder in due course.
not claim to act as an agent and who has no
authority to bind the apparent signer. The forged indorsement is wholly inoperative.

If the drawee pays under a forged indorsement, the

Effect of Forgery drawer is not liable on the bill and the drawee
may not debit the drawer’s account.
 When a signature is forged or made without the
authority of the person whose signature it purports to A bank is bound to know the signature of its
be, it is wholly inoperative customers and if it pays a forged check,

and no right to retain the instrument, or to give a It must be considered as making the payment out of
discharge therefor, or to enforce payment thereof its own funds and cannot ordinarily charge the
against any party thereto, can be acquired through amount so paid to the account of the depositor
or under such signature whose name was forged.

 unless the party against whom it is sought to Where, however, the checks are received merely
enforce such right is precluded from setting up for collection and deposit, the bank, as agent,
the forgery or want of authority. cannot be expected to know or ascertain the
genuineness of all prior indorsements.
 20

account.
(4) Were bill payable to bearer.
The bank that accepted the check is responsible even to
In case the bill is originally payable to bearer, the
the person it was meant for and the person who wrote
drawee may debit the drawer’s account in spite
the check.
of the forged indorsement.
The reason is that the forged indorsement is not What does the Bank do
necessary to the title of the holder
The bank where a check is deposited can hold the
depositor accountable. The depositor, by endorsing the
Rules in Relation to Forgery check during deposit, guarantees its validity.

1. If a signature is forged on a document, it doesn't However, this responsibility is waived if the drawee bank,
invalidate the entire document or any genuine where the check is from, wasn't negligent and didn't
signatures. engage in actions that would prevent them from denying
a forged endorsement.
2. When a signature is forged on a document, not only is
the person whose signature was forged not responsible, If it's unclear that the check with a forged endorsement
but also the people who signed before them. So, if was processed by the collecting bank, only the drawee
there's a forged signature on an order document, it bank can be held responsible.
doesn't count as the drawer's instruction.
Jurisprudence where the S.C. rules that the
3. Even if a signature is forged, there are cases where drawer of a check is precluded from invoking
some parties might still be held responsible: forgery
- Those who can't claim forgery because of their actions (1) A drawer who discovered the loss of his
or negligence. checkbook but did not notify the drawee bank
- Those who vouched for the authenticity of signatures, of such loss should bear the damage caused by
like endorsers and acceptors. the subsequent payment of the checks in which the
signature of the drawer had been forged.
- Those who claim forgery unnecessarily, without
affecting the ownership of the document. (Security Bank and Trust Corp. vs. Triumph
Lumber and Construction Corp., G.R. No. 126696,
4. If a signature is forged on a promissory note, it doesn't January 21, 1999)
count, and the person who owes the money can use this
as a defense. (2) The drawer is precluded from setting up forgery
due to his own negligence when he accorded
However, anyone who endorses the note after the his secretary unusual degree of trust and
forgery is still responsible. Similarly, if the endorsement unrestricted access to his credit card,
of the payee on a bill of exchange is forged, the bank passbooks, check books, bank statement
doesn't have to pay. including custody and possession of cancelled
checks and reconciliation of accounts.
5. If a payee's signature is forged on a check, the bank
can't take money from the account of the person who When the drawer had introduced his secretary to
wrote the check. The bank has to cover the loss. the bank for purposes of reconciliation of his
account, the said secretary became a familiar
This applies even if there are multiple payees, but only figure in the bank and whenever the bank verifiers
one endorsed it. The bank that accepted the check is call the office of the drawer, it is the same
responsible to the bank that issued it for any forged secretary who answers and confirms the checks.
endorsements, as it guarantees the validity of all
previous endorsements. (Ilusorio vs. CA, G.R. No. 139130, November
27,2002)
6. If someone's signature is forged on a check, the bank
can't take money from that person's account. (3) Where over a period of two years, a depositor
signed checks prepared by her book keeper
Also, the bank can't make the bank that accepted the without ascertaining the correctness of their
check pay because the bank that originally got the check amounts, did not examine and reconcile the bank
has to guarantee the signature is real. statements and cancelled checks, failed to set-up
an accounting, procedures to monitor check
7. If a check is deposited into an account that doesn't issuance.
belong to the person it's meant for, without permission,
the bank can't take money from the check writer's
 21

In this case of Gempesaw, however, the Supreme

Court also found the drawee liable because it  If there's a loss, the collecting bank usually bears it
violated its internal policies against acceptance of because it's responsible for verifying previous
second endorsed checks and consequently ruled endorsements.
the loss occasioned or caused by such negligence
should be divided equally between the depositor Reimbursement from Depositor:
and the drawee bank. (Gempesaw vs. CA, G.R.
No. 92244, February 9, 1993.)  The collecting bank can recover from the depositor
who deposited the check and got the money.
The drawer must share one-half of the loss  This ensures fairness and prevents unjust
when it substantially contributed to it by enrichment.
continuing to release the check to the forger
although the drawer knew that he was no longer Deducting from Depositor's Account:
under the employ of the payee. (Ibid)
 The collecting bank may deduct from the depositor's
(4) The drawer must partly bear the loss account because the depositor warrants the check's
occasioned by its negligence when it clothed genuineness.
its accountant/bookkeeper with apparent
authority to transact business with the drawee Collecting Bank bears the loss
bank, then did not examine its monthly bank
statement and report discrepancy to the bank. Loss in Check Transactions:
The greater proportion of the loss, however, was
borne by the bank because of its negligence when  The collecting bank usually suffers losses because it
it did not properly verify the genuineness of the must verify previous endorsements.
signatures in the applications for manager’s  Presenting the check for payment implies verifying
checks, which were forged by the drawer’s endorsements.
accountant.

The court allocated the damages between the Drawee Bank's Recovery:
bank and the depositor on a 60-40 ratio (PNB vs.  If any of the collecting bank's warranties are false,
FF Cruz and Company, G.R. No. 173259, July 25, the drawee bank can recover from it.
2011)
Liability Chain:
Who is liable in case of forgery of the Payee’s
 The drawee bank is liable to the drawer but can seek
Indorsement?
reimbursement from the collecting bank.
 The prevailing and consistent ruling now of the  The collecting bank can then seek recourse from
Supreme Court is that the collecting bank generally those responsible for the unauthorized payments.
bears the loss in case of forgery of the payee’s
indorsement, without prejudice to its right of Forged Payee's Endorsement:
recourse against the depositor/forger.
 If the payee's endorsement is forged, the Sequence
of Recovery Rule applies, not Comparative
Sequence Recovery Rule Negligence.
Drawee Bank's Liability: Convenience Rule
 If the drawee bank pays someone other than the
payee or their endorsee, it breaks the check's terms Direct Action Against Collecting Bank:
and must restore the funds taken from the drawer's
 Payee can bypass complex liability chains and sue
account.
the collecting bank directly.
Recovery from Collecting Bank:  If the collecting bank is ultimately liable, why not
 The drawee bank can seek reimbursement from the allow direct action?
collecting bank.
Collecting Bank's Liability:
Collecting Bank's Responsibilities:  Whether by sequence of recovery or convenience
 The collecting bank, where the check is deposited, is rule, collecting bank bears liability for forged payee's
like an endorser. endorsement.

 It guarantees the genuineness of the check and prior  Possessing a check with forged endorsement is
endorsements. wrongful.
 22

Trust Responsibility: Consideration of the Parties.

 Collecting bank holds proceeds in trust for the  Maker/Drawer – who is presumed to have received
rightful owner due to forged endorsement. value

 Negligence in verifying the endorsement contributes  Drawee – who accepted the instrument because the
to liability. maker/drawer received value, and

Legal Shift:  Indorser – who also accepted the instrument for the
same reason as the drawee
 Past rulings suggesting payee must have the check
to sue collecting bank are outdated. ◉ VALUE 25

 Newer Supreme Court decisions allow payee to sue Sec. 25. Value, what constitutes. — Value is any
based on collecting bank's negligence and its trust consideration sufficient to support a simple contract.
responsibility. An antecedent or pre-existing debt constitutes value; and
is deemed such whether the instrument is payable on
How to Prove demand or at a future time.
Forgery must be proven with clear and convincing Adequacy.
evidence. It is not presumed. A person who questions
A valuable consideration need not be
the genuineness and authenticity of a signature
adequate. It is sufficient if it is a valuable one.
appearing on an instrument has the burden of proving
that the signature is a forgery.
This law presumes that the person issuing the
instrument is capable of managing his affairs and the
Additional Information – Section 124 mere inadequacy of the consideration is not a sufficient
ground for relief unless there is fraud, mistake or
undue influence.
◉ CONSIDERATION
Antecedent or Pre-existing Debt.
◉ PRESUMPTION OF CONSIDERATION 24 An antecedent or pre-existing debt is a
Section 24. Presumption of Consideration. – valuable consideration.
Every negotiable instrument is deemed prima facie to The debt may be that of a third person and the
have been issued for a valuable consideration; discharge of such debt is a valuable consideration for a
and every person whose signature appears thereon to negotiable instrument.
have become a party thereto for value.
Example. M owes P10,000 payable today. M fails to pay
Consideration. in cash. He issues a check for that amount to P who
is the immediate, direct, or essential reason accepts the check.
which induces a party to enter into a contract Here, the consideration for the check is a pre-existing debt of M .

ex.: in contract of sale, the consideration for the seller is the Liberality as a Consideration.
price of the buyer, and the object sold
Liberality as a general rule cannot support a
Presumption; Nature civil contract because consideration is measurable in
Like all contracts, a negotiable instrument must money.
have a consideration or cause. It is not necessary, Those that are purely emotional cannot support
however, that the consideration be expressly stated a simple contract. If the instrument was given as a gift,
in the instrument the instrument was not validly issued because there was
no consideration.
The presumption is that it has been issued for a
legal valuable consideration and that every person
whose signature appears thereon has become a party ◉ HOLDER FOR VALUE 26
there for value.
Sec. 26. What constitutes holder for value. - Where
The presumption is only prima facie and thus may be value has at any time been given for the instrument, the
disapproved. holder is deemed a holder for value in respect to all
parties who become such prior to that time.
 23

Holder for Value. 5. If, between the pledgor and the party liable on the
Is one who has given a valuable consideration instrument, there are existing defenses, then the
for the instrument issued or negotiated to him. pledgee can collect on the instrument only to the
extent of the amount of the debt.
The holder is considered as such not only to the
party whom value has been given by him, but also to all If the defenses of the party liable on the instrument are
the parties prior to the time when value was given. real defenses, then the pledgee can recover nothing
upon the instrument.
A holder is presumed to be a holder for value
until disproven.
◉ WANT OF CONSIDERATION 28
Related Provisions
Sec. 28. Effect of want of consideration. - Absence or
Sec. 52 - Holder in due course. A holder in due course
failure of consideration is a matter of defense as against
must be a holder for value.
any person not a holder in due course;
Sec. 58 – The want of consideration in an instrument
and partial failure of consideration is a defense pro tanto,
may be used as a personal defense against persons
whether the failure is an ascertained and liquidated
who were aware of such a defect. Cannot be used
amount or otherwise.
against a holder in due course.
In this context “Pro Tanto” means
◉ LIEN 27 “To such extent; to that extent; for so much”

Sec. 27. When lien on instrument constitutes holder Often refers to a partial satisfaction of a debt or claim
for value. — Where the holder has a lien on the
instrument arising either from contract or by implication Meaning of Absence or want of Consideration
of law, he is deemed a holder for value to the extent of
his lien. Absence of consideration means a total lack of any valid
consideration for the contract, in consequence of which
Definition of Lien. the alleged contract must fail.
Is a charge on property usually for the payment
of some debt or obligation. Example. M makes a Promissory note to P in payment
for a parcel of land which does not exist.
Is a qualified right or a proprietary interest, which
may be exercised over the property of another.  As between M and P, P cannot enforce the PN there
being no consideration at all
It is a right which the law gives to have a debt
satisfied out of a particular thing.  If the PN falls to a holder in due course, the HIDC
may recover from M because absence of
It signifies a legal claim or charge on property, consideration is only a personal defense.
either real or personal, as a collateral or security for the
payment of some debt or obligation. Failure of Consideration.
Effect of a Lien in an instrument - Means the failure or refusal of one of the parties to do,
perform, or comply within the consideration agreed
1. One who has taken a negotiable instrument as
upon.
collateral security for a debt has a lien on the
instrument. - There is consideration but for one reason or another, it
cannot be complied with.
2. The person who has a lien is only a holder for value
up to the extent of his lien because he was never
meant to be the owner of the instrument. Lack of Consideration Failure of Consideration

3. If the amount of the instrument is more than the debt Total lack of any valid Neglect or failure of one of the
consideration. parties to give, to do or to
secured, the pledgee is a holder for value to the
perform the consideration
extent of his lien. agreed upon.
He can collect the full value of the instrument and
apply the same to the payment of the debt but he Embraces transactions where Implies that the giving of
must deliver the surplus to the pledgor. no consideration was valuable consideration was
intended to pass. contemplated but it failed to
4. If the amount of the instrument is less than or the pass
same as the debt secured, the pledgee is a holder for
value for the full amount and may recover all.
Remedy is to annul the Remedies are (1) recission of
 24

instrument the instrument as to value that time of taking the instrument knew him only an
was failed to receive (2) accommodation party.
Specific Performance - Absence of consideration is not a defense for the
accommodation party

◉ ACCOMODATION PARTY 29 - He may seek reimbursement from the accommodated

party.
Sec. 29. Liability of accommodation party. - An
accommodation party is one who has signed the ◉ NEGOTIATION 30
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of Section 30. What constitutes negotiation. - An
lending his name to some other person. instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the
Such a person is liable on the instrument to a holder for transferee the holder thereof.
value, notwithstanding such holder, at the time of taking
the instrument, knew him to be only an accommodation If payable to bearer, it is negotiated by delivery; if
party. payable to order, it is negotiated by the indorsement of
the holder and completed by delivery.
 Accommodation bill or note – one to which the
accommodation party has put his name, without Methods of Transfer under NIL
consideration,
1. ISSUE
for the purpose of accommodating some other party The first delivery of the instrument in complete
who is to use it, and is expected to it. It is a loan of form, to a person who takes it as a holder.
one’s credit. (Exception is issuing an incomplete instrument
under sec. 14). It is the first transfer of an
 Accommodation party – one who has signed the instrument to a payee.
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor and for the purpose 2. NEGOTIATION
of lending his name to another party. Operates to make the transferee of a negotiable
instrument the holder thereof. It ordinarily
 Accommodated Party - Is one whose favor a involves indorsement (in regard to other than
person, without receiving value therefor, signs an bearer instrument) so that “negotiation” and
instrument the purpose of lending his credit and “indorsement” are often changed
enabling said party to raise money upon it. interchangeably; and

He impliedly agrees to take up the instrument at 3. ASSIGNMENT

maturity and to indemnify the accommodation party the transfer of title to an instrument, with the
against the consequences of non-payment. assignee generally taking only such title of rights
as his assignor has, subject to all defenses
Requisites. available against his assignor.
The transfer of a non-negotiable instrument
1. He must be party to the instrument, signing as maker, always constitutes an assignment.
drawer, acceptor, or indorser.
Methods of Negotiation
2. He must not have received any value therefor;
Methods of transfer depends on whether the instrument
3. He must sign for the purpose of lending his name or is payable to order or to bearer.
credit.
1. Instruments Payable to Order – There are two
This means that he should not have received steps required for its negotiation:
consideration for the issuance, acceptance, or
endorsement, of the instrument he accommodated. 1.1. An indorsement by the payee or present
holder,
The fact that he may receive consideration from the
1.2. Its delivery to the next holder
party accommodated does not negate his being an
accommodation party. An instrument payable to order is payable to the
payee named therein or to the indorsee or the
Liability of an Accommodation Party. person ordered or authorized by the payee to collect.

- Liable on the instrument to a holder in value (not a 2. Instrument Payable to Bearer – It is negotiated by
holder in due course) notwithstanding holder at the mere delivery alone without indorsement.
 25

[Sec. 191 (4) defines “bearer” as the person in subject only to real real and personal
possession of a bill o note which is payable to defenses defenses.
bearer]
A HIDC may acquire a An assignee merely steps
Any person in possession of an instrument payable better title or greater into the shoes of the
to bearer is always the bearer therefor, although he rights under the assignor
may no legal right thereto. instrument than those
possessed by the
Negotiation, to be valid, must be done voluntarily transferor or a prior party

An instrument acquired illegally may be transferred

A general indorser Assignor does not warrant
to an innocent purchaser for value.
warrants the solvency of the solvency of prior
prior parties parties unless expressly
Delivery means transfer of possession, actual or
stipulated or the insolvency
constructive, from one person to another.
is known to him
Payment of Instrument by Drawee –
not Negotiation Indorser is not liable Assignor is liable even
unless there be without notice of dishonor
 Payment by the drawee is not a negotiation and presentment and notice of
does not make the drawee a holder within Sec. 30 dishonor
Governed by the NIL Governed by Arts. 1624-
 Although there is physical transfer of the bill or 1635 of the Civil Code
check, the payment of such extinguishes the
instrument.
Transfers by Operation of Law
(1) The bank is neither the payee nor indorsee
The full title to an instrument may pass without either
The check is extinguished and cannot be put in
assignment, indorsement, or delivery, that is, by
circulation again so as to bind the drawer or
operation of law,
indorser
(1) by death of the holder, where the title vests in his
(2) The writing of the name of the holder on the
personal representative, or
back of the check before surrendering it for
payment to the drawee-bank is not an (2) by bankruptcy of the holder, where title vests in
indorsement. his assignee or trustee, or

Effect of Delivery of order instrument without (3) upon the death of a joint payee or indorsee, in
indorsement which case the general rule is that the title vests at once
in the surviving payee or indorsee.
- The transfer operates as an ordinary assignment and the
assignee is merely placed in the position of the
assignor, the former acquiring the instrument subject to
◉ INDORSEMENT 31
all defenses, real and personal, available against the
latter Section 31. Indorsement; how made. - The
Indorsement must be written on the instrument
- Without the indorsement, the transferee would not be the itself or upon a paper attached thereto.
holder of the instrument, he not being the payee,
The signature of the indorser, without additional words,
indorsee or the bearer thereof.
is a sufficient indorsement.
- When indorsement is subsequently obtained, the Indorsement.
transfer operates as a negotiation only as of the time is the writing of the name of the payee on the
the indorsement is actually made instrument with the intent either to transfer the title to the
same, or to strengthen the security of the holder by
NEGOTIATION ASSIGNMENT assuming a contingent liability for its future payment, or
Refers only to negotiable Refers generally to an both.
instruments ordinary contract Indorsement alone without delivery conveys
no title and creates no holder. Indorsement in
accordance with Sec. 191 (8) means an indorsement
Transferee is a holder Transferee is an assignee completed by delivery. It applies to both bills and
notes.
A holder in due course is Assignee is subject to both
 26

The payee by signing (indorsing) the instrument and Sec. 32. Indorsement must be of entire instrument. -
delivering to another person (in payment of a debt the The indorsement must be an indorsement of the entire
payee owes to him or for any other reason) becomes an instrument. An indorsement which purports to transfer to
indorser. The person who receives the indorsed the indorsee a part only of the amount payable, or which
instrument is the indorsee. He can indorse the purports to transfer the instrument to two or more
instrument to someone else and thus becomes an indorsees severally, does not operate as a negotiation of
indorser as well. the instrument.

But where the instrument has been paid in part, it may

Nature of Indorsement be indorsed as to the residue.
 An indorsement is not only a mode of transfer. It is
also a contract  The general rule is that the indorsement must be of
the whole instrument.
 Every indorser is a new drawer and the terms are  This is because the bill or note is delivered to the
found on the face of the instrument indorsee and there cannot be partial delivery on
one instrument.
 There is an added obligation upon the
instrument aside from what appears upon the face  Another reason is to avoid multiplicity of suits or
of the instrument. actions in court.
 Partial negotiation of an instrument renders it
 The general indorser, in effect, states to every non-negotiable.
person who follows him:
 The transaction would be considered an
“This instrument will be paid by the maker, if a note, assignment; subject to all defenses available
or accepted by the drawee or paid by the acceptor, if
a bill. EXCEPTIONS

If it is dishonored by non-payment or non- If part of the amount has already been paid, the unpaid
acceptance and you give me notice thereof, I will balance may be indorsed as this is expressly
pay it.” authorized by law.

This, in effect, is the contract of the general indorser. For example, a note payable by installments, where
some installments have been paid, the instrument may
Necessity of Indorsement still be negotiated for the remaining unpaid installments.
This provision also does not prohibit discounting.
1. Indorsement is essential to the execution of an Discounting refers to paying for less than the value
instrument payable to the order of the maker or drawer. shown on the instrument itself.
2. It is also essential to the negotiation of an order
instrument, not of a bearer instrument. Indorsement to Multiple Payees or Indorsees

3. It is not necessary to a mere assignment of a  An indorsement to two or more persons of

negotiable or non-negotiable instrument. different interests does not operate as a
negotiation of the instrument because the causes of
Place of Indorsement action are split or divided.
 Indorsement to two persons is valid so long as
 “Indorsa” – writing on the back. the parties are joint or have the same interest. The
 Usually, an indorsement is placed on the back.
indorsement to succeeding indorsees must be done
 It may also be written on the face of the instrument. by all the indorsees prior.
 The place is not essential. Intention of the parties is
 Instruments payable to two or more alternative
material to determining whether or not it is an
indorsement. payees is merely an assignment.

 It may also be made on a piece of paper physically

attached to the instrument as to become part of it, ◉ KINDS OF INDORSEMENT 33
the paper is known as an "allonge”.
Sec. 33 Kinds of indorsement. - An indorsement may
 Allonge means “rider” be either special or in blank; and it may also be either
restrictive or qualified or conditional.
◉ INDORSEMENT IN ENTIRETY 32
 27

Classification of Indorsement necessary to the further negotiation of the instrument

(Sec.34)
1. As to methods
 Special IF the instrument is ORIGINALLY PAYABLE TO
 blank
2. As to the kind of title transferred: BEARER, it may nevertheless be further negotiated by
 Restrictive mere delivery even if the original bearer indorsed it
 Non-restrictive specially.

3. As to scope of liability of indorser: The special indorser is liable only to such holders as
 Qualified make title through his indorsement.
 Unqualified or general

4. As to presence or absence of limitations Blank Indorsement

 Conditional
 Unconditional A blank indorsement is one which specifies no
particular indorsee\. Such an indorsement generally
5. Other kinds of indorsement: consists only of the signature of the payee or indorser.
 Joint
 Successive
 Irregular or anomalous An instrument so indorsed is payable to bearer and
 Facultative whoever possesses it may be negotiated by the
indorser by delivery alone regardless of whether the
Negotiability of Instruments after Indorsement instrument is originally payable to bearer or not.
Once an instrument as issued satisfies all the
requirements of negotiability under Sec.1 of the NIL, ◉ BLANK; SPECIAL INDORSEMENT 35
no indorsement, even restrictive ones, can negate its
negotiable status. Sec. 35. Blank Indorsement; how changed to special
indorsement. — The holder may convert a blank
indorsement into a special indorsement by writing over
◉ SPECIAL INDORSEMENT 34
the signature of the indorser in blank any contract
Sec. 34. Special indorsement; indorsement in blank. consistent with the character of the indorsement.
- A special indorsement specifies the person to whom, or
to whose order, the instrument is to be payable, and the  Under Sec. 35, an instrument made payable to bearer by
indorsement of such indorsee is necessary to the further an indorsement in blank may be converted into an
negotiation of the instrument. order instrument by writing over the signature of the
indorser in blank any contract not inconsistent with
An indorsement in blank specifies no indorsee, and an the character of the indorsement.
instrument so indorsed is payable to bearer, and may be
negotiated by delivery. Example:
 M makes a note payable to P or order.
 Special indorsement is one where the name of the
payee is specified. It is also known as specific  P indorses it specially to A. A indorses it in blank to B.
indorsement or indorsement in full. Special and According. to Sec.9(e) this makes the instrument a
blank indorsements are “unqualified indorsements.” bearer instrument.
 To convert it back to an order instrument, B may
 Forms: specially indorse it to another person.
 One that specifies the person to whom the
instrument is payable, i.e., “Pay to A”; and  B may write the words Pay to B in order before or on top
 One that specifies the person to whose of the signature of A to protect himself from possible
order the instrument is to be payable, i.e.” loss of title due to theft. (Contract not inconsistent with
Pay to the order of A” or “Pay to A order” the character of the indorsement.)

 Followed by the signature of the indorser.

◉ RESTRICTIVE INDORSEMENT 36
 Unlike in the case of the instrument itself, it is not
necessary to use the words of negotiability on the Sec. 36. When indorsement restrictive. —An
indorsement. indorsement is restrictive which either —
(a) Prohibits the further negotiation of the instrument;
or
(b) Constitutes the indorsee the agent of the indorser;
- IF the instrument is ORIGINALLY PAYABLE TO or
ORDER, and it is negotiated by the payee by special (c) Vests the title in the indorsee in trust for or to the use
indorsement, the indorsement of the indorsee is of some other person.
 28

But the mere absence of words implying power to Pay to A for collection only
negotiate does not make an indorsement restrictive.
Pay to A for Deposit.

In this scenario, A does not acquire title over the

instrument. The indorsements also prohibit further
Restrictive Indorsement negotiation of the instrument.

Vests Title In Indorsee for the Benefit of the Indorser

 Appropriate words may be added which prohibit or limit
or a Third Party
the further negotiation of an instrument.
“Pay to A in trust for B”
 A restrictive indorsement is one so worded that it
either prohibits entirely the further negotiation of an “Pay to A as trustee for P’
instrument or restricts its further negotiation to a
particular person or for a particular purpose; or “Pay to A as agent of P”
modifies the rights of the holders or the liabilities of the
indorser. “Pay to A for my use”

“Pay to A for the use of B”

Limits Rights of Indorsee
The indorsement transfers the legal title to the
 By means of a restrictive indorsement, an indorser instrument to A as trustee for B or P, the beneficial
notifies all prospective holders that the indorsee has owner.
only the authority to deal with the instrument as thereby
directed and that the indorsee has only a restrictive title They give notice that the paper cannot be negotiated by
thereto. A for his own debt or for his own benefit.

But an indorsement that uses the words negotiability “or

 Thus, by such indorsement an indorser can safeguard
order” indicates that A may still negotiate the instrument.
his interests by limiting the rights of the indorsee
whenever he should find it necessary to entrust
negotiable paper to another. ◉ EFFECT OF RESTRICTIVE 37
Destroys negotiability of Instrument Sec. 37. Effect of restrictive indorsement; rights of
indorsee. - A restrictive indorsement confers upon the
 Such indorsement destroys the negotiability of the
indorsee the right:
instrument and bars further negotiation to a holder in
due course. (a) to receive payment of the instrument;
 A restrictive indorsee is not a holder in due course in
(b) to bring any action thereon that the indorser could
the strict sense of that term or in his own right, and
bring;
defenses available against the indorser are not cut off
by the transfer of the instrument under such an
(c) to transfer his rights as such indorsee, where the
indorsement, in the absence of waiver or estoppel.
form of the indorsement authorizes him to do so.
 All subsequent indorsees acquire only the title of the But all subsequent indorsees acquire only the title of the
first indorsee under the restrictive indorsement. first indorsee under the restrictive indorsement.
Example – Prohibits further Negotiation
Rights of Indorsee in Restrictive Indorsement
“Pay to A only”
Under any form of restrictive indorsement, the indorsee
“Pay to A and to no other person” may receive payment on the instrument; sue thereon in
In this kind of restrictive indorsement, the prohibition to his own name; and also negotiate the instrument except
transfer or negotiate must be written in express words when it is prohibited in the indorsement.
at the back of the instrument, so that any subsequent However, the rights of the indorsees subsequent to the
party may be forewarned that it ceases to be negotiable. first indorsee are subject to the terms of the restrictive
Example – Constitutes Indorsee Agent of Indorser indorsement.

◉ QUALIFIED INDORSEMENT 38
“Pay to A for collection”

Pay to A for collection and remittance”

 29

Sec. 38. Qualified indorsement. - A qualified But any person to whom an instrument so indorsed is
indorsement constitutes the indorser a mere assignor of negotiated will hold the same, or the proceeds thereof,
the title to the instrument. It may be made by adding to subject to the rights of the person indorsing conditionally.
the indorser's signature the words "without recourse" or
any words of similar import. Such an indorsement does  A conditional indorsement is one by which the
not impair the negotiable character of the instrument. indorser imposes some condition to his liability
or on the indorsees right to collect the proceeds
of the instrument.
 A qualified indorsement is one which
constitutes the indorser a mere assignor of the
title to the instrument.  Has no effect on the further negotiation of the
instrument. The party required to pay, if he
 The words used to indicate a qualified chooses, may make payment, disregarding the
indorsement are usually “without recourse”, condition without incurring any liability because
“sans recourse” or words of similar meaning like he is expressly authorized to do so under Sec.
“sans recourse indorsees own risk” or “indorser 39.
not holder” to either a blank or special
indorsement.  But the person who received payment will hold
the proceeds subject to the right of the
 The word “recourse” in ordinary legal and conditional indorser.
commercial usage means a resort to a person
who is secondarily liable after default of the  A conditional indorsement does not prohibit
person who is primarily liable. the further negotiation of the instrument
regardless of whether the condition has been
 Does not affect the negotiability of an fulfilled or not.
instrument; only shows an unwillingness to be
answerable for the solvency of prior parties.
◉ PAYABLE TO BEARER INDORSED 40
Effects of Qualified Indorsement
Sec. 40. Indorsement of instrument payable to
1. It makes the indorser, a mere assignor to the bearer. - Where an instrument, payable to bearer, is
instrument because he does not guarantee payment by indorsed specially, it may nevertheless be further
him when maker or acceptor default in payment. negotiated by delivery; but the person indorsing specially
is liable as indorser to only such holders as make title
2. It merely limits his liability. He is secondarily liable for through his indorsement.
breach of his warranties as an indorser under Sec. 65.
Warranty liability is still present even if the indorsement  This section applies only to instruments originally
is qualified unless such indorsement specifically payable to bearer.
excludes warranties.
 This does not apply where the paper is originally
He remains liable for dishonor by non-acceptance or made payable to order and indorsed in blank
non-payment due to
because by Section 9, a note or bill which upon its
(a)forgery,
face, is payable to order, becomes payable to bearer
(b) lack of good title to the instrument indorsed,
(c) lack of capacity to contract on the part of prior parties; only when the last indorsement is in blank.
or
(d) the fact the instrument was valueless or not valid at ONCE A BEARER INSTRUMENT, ALWAYS A
the time of the indorsement which fact was known to
BEARER INSTRUMENT
him.
 An instrument payable to bearer is not converted
Not liable if dishonor was by reason of insolvency of the
into an instrument payable to order by being
person primarily liable
indorsed specially.
◉ CONDITIONAL INDORSEMENT 39  The indorsee may further negotiate the instrument
by mere delivery.
Sec. 39. Conditional indorsement. - Where an
indorsement is conditional, the party required to pay the
instrument may disregard the condition and make  The person indorsing specially is liable only to those
payment to the indorsee or his transferee whether the holders who can trace their title to the instrument by
condition has been fulfilled or not. a series of unbroken indorsements from such special
indorser. His liability shall be that of a general
indorser as provided in Sec.66
 30

officer, and may be negotiated by either the indorsement

of the bank or corporation or the indorsement of the
EXAMPLES officer.
M makes a promissory not payable to P or bearer and
delivers it to P.

P specially indorses the instrument to A.  Deemed prima facie payable to the institution
represented by the cashier referred to in the
A specially indorses it to B indorsement.
B further negotiates the instrument to C by mere  It may then be negotiated by the institution
delivery. through any of its duly authorized officers.
In this case, P is liable to A and also to B as a general  The presumption established in this section may
indorser under Sec. 66. be disproved by sufficient evidence to the
contrary.
C obtains his title through negotiation by delivery of
the instrument by B and not through the indorsements  It may be shown that the instrument really
of P and A. Hence P and A are not liable to C. But B belongs to the cashier personally as the real
would be liable to C under Section 65. creditor of the maker or drawer.

◉ PAYABLE TO TWO OR MORE 41 ◉ MISSPELLED 43

Sec. 41. - Indorsement where payable to two or more
Sec. 43. Indorsement where name is misspelled, and
persons. - Where an instrument is payable to the order
so forth. - Where the name of a payee or indorsee is
of two or more payees or indorsees who are not
wrongly designated or misspelled, he may indorse the
partners, all must indorse unless the one indorsing
instrument as therein described adding, if he thinks fit,
has authority to indorse for the others.
his proper signature.
 Under Sec. 8(d), an instrument may be payable to HOW IS IT INDORSED
the order of “two or more payees jointly”. Under
Section 8(e), an instrument may be payable to the
 The indorsee or payee may indorse the same by the
order of “one or some of several payees”
wrong name but adding his proper signature.
 Section 41 does not apply if the instrument is  The indorsee or payee may indorse the same by
payable to two or more payees severally. This is writing his signature with the wrong spelling.
governed by Sec. 8(e) and may be negotiated by
any of such alternative payees irrespective of the  The holder paying or giving value for the instrument
share corresponding to each in the instrument. may require the payee or indorsee to sign in both
Anyone of such parties in possession of the names.
instrument is the holder.
◉ REPRESENTATIVE 44
 If the instrument is payable to the order of two or
more payees or indorsees, all must indorse in order Sec. 44. Indorsement in representative capacity. -
for the transaction to operate as a negotiation. If only Where any person is under obligation to indorse in a
one indorses, his indorsee would have no right of representative capacity, he may indorse in such terms as
action for said indorsement would be contrary to the to negative personal liability.
provisions of Sec. 32
Refer to Sec. 20
Exception (l) In order that an agent who signs a negotiable
1. Where the payees or indorsees are partners; and instrument may escape personal liability, the following
2. Where the payee or indorsee indorsing has authority are the requisites:
to indorse for others A. He is duly authorized;
B. He adds words to his signature indicating that he
◉ CASHIER OR FISCAL OFFICER 42 signs as an agent, that is, for or on behalf of a principal,
or in a representative capacity; and
Sec. 42. Effect of instrument drawn or indorsed to a C. He discloses his principal.
person as cashier. - Where an instrument is drawn or
indorsed to a person as "cashier" or other fiscal officer of ◉ TIME OF INDORSEMENT 45
a bank or corporation, it is deemed prima facie to be
payable to the bank or corporation of which he is such
 31

Sec. 45. Time of indorsement; presumption. - Except negotiable when it is discharged by any of the different
where an indorsement bears date after the maturity of ways enumerated under Sec. 119
the instrument, every negotiation is deemed prima facie
to have been affected before the instrument was 1. Payment in due course by or on behalf of the principal
overdue. debtor
2. Payment in due course by the party accommodated
3. By intentional cancellation thereof by the holder
Presumption as to time of indorsement 4. By any other act which will discharge a simple contract
for the payment of money;
 Important because of Sec. 52; For a holder to be
5. When the principal debtor becomes the holder of the
considered a holder in due course he must have instrument at or after maturity in his own right.
taken the instrument before it was overdue.
 If the indorsement bears a date, the presumption is ◉ STRIKING OUT INDORSEMENT 48
that it is the true date.
Sec. 48. Striking out indorsement. - The holder may at
 If the indorsement is without a date, the presumption any time strike out any indorsement which is not necessary
is that it was negotiated before maturity. to his title. The indorser whose indorsement is struck out,
and all indorsers subsequent to him, are thereby relieved
 The one who alleges that the indorsement was
from liability on the instrument.
affected after maturity has the burden of proof.
When a Holder may strike out indorsement
◉ PLACE OF INDORSEMENT 46
1. Instrument payable to BEARER ON ITS FACE may be
negotiated by mere delivery without indorsement.
Sec. 46. Place of indorsement; presumption. - Except
where the contrary appears, every indorsement is
In case it is indorsed, it remains a bearer instrument
presumed prima facie to have been made at the place and may be further negotiated by mere delivery.
where the instrument is dated.
By virtue of Section 48, the holder may strike out all
In the absence of evidence to the contrary, an
intervening indorsements or any of them for none of
indorsement is presumed to have been made at the
them is necessary to his title.
place where the instrument is dated. Rebuttable.
2. An instrument originally payable to Order – may be
◉ NEGOTIABLE CHARACTER 47
negotiated only by the indorsement of the payee
Sec. 47. Continuation of negotiable character. - An completed by delivery. When the indorsement is
instrument negotiable in its origin continues to be special, the indorsement of the special indorsee is
negotiable until it has been restrictively indorsed or necessary to the further negotiation of the instrument.
discharged by payment or otherwise.
When the indorsement is in blank, the instrument
 An instrument negotiable in origin is always becomes payable to bearer and may be negotiated
negotiable. by mere delivery.

 This is true although the negotiable instrument is An instrument originally payable to order becomes
already overdue, payable to bearer when the only or last
indorsement is in blank.
 but any holder who acquires the instrument can no
longer be a holder in due course in accordance with
When a blank indorsement is followed by special
Section 52(b)
indorsements, the holder may strike out the special
Exceptions: indorsements AFTER the blank indorsement
(1) When the instrument has been restrictively because they are not necessary to his title.
indorsed; or
The indorser whose indorsement is cancelled and all
(2) When it has been discharged by payment or
indorsers subsequent to him are relieved from their
otherwise.
liability on the instrument.
 It should be remembered that not every restrictive BUT THE INDORSER MAY NOT STRIKE OUT THE
indorsement prohibits further negotiation of the PAYEE’S INDORSEMENT. Since the indorsement is
instrument.
payable to order, it cannot be validly negotiated without
 Payment is not the only way of discharging an his indorsement.
instrument. A negotiable instrument ceases to be
 32

◉ TRANSFER W/O INDORSEMENT 49 If a prior party reacquires an instrument before maturity, he

may negotiate the same further. But after paying the
Sec. 49. Transfer without indorsement; effect of. - holder, he may not claim payment from any of the
Where the holder of an instrument payable to his order intervening parties. This is to avoid multiplicity of suits.
transfers it for value without indorsing it, the transfer vests
in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have Limitations on Renegotiation
the indorsement of the transferor.
In the following cases, a prior party cannot further negotiate
But for the purpose of determining whether the transferee the instrument:
is a holder in due course, the negotiation takes effect as of
the time when the indorsement is actually made.  Where it is payable to the order of a third person,
and has been paid by the drawer.
Effects
 Where it was made or accepted for
accommodation and has been paid by the party
Section 49 is applicable only to an instrument payable
accommodated.
to order. It contemplates a situation where the payee or
indorsee delivers said instrument for value without,  In other cases, where the instrument is discharged
however, indorsing it. when acquired by a prior party.

The negotiation takes effect as of the time the

indorsement is actually made for the purpose of ◉ RIGHTS OF A HOLDER; PAYMENT 51
determining whether or not the transferee is a holder in
due course. Sec. 51. The holder of a negotiable instrument may sue
thereon his own name; and payment to him in due course
Hence, if the assignee had notice of a defect prior to the discharges the instrument
actual indorsement contemplated in this section, he cannot
be a holder in due course of the instrument as the Holder.
negotiation of the instrument takes place when the The payee or indorsee of a bill or note, who is in
instrument is actually indorsed. possession of it, or the bearer thereof.
1. The transaction operates as an equitable assignment Includes not only persons possessing bearer instruments
and the transferee acquires the instrument subject to but also payees and indorsees possessing order
defenses and equities available among prior parties. instruments.
2. He cannot negotiate it.
Class of Holders.
1. Holders Simply
3. If the transferor had legal title, the transferee acquires
2. Holders for Value (Sec. 26)
such title and, in addition, the right to have the
3. Holders in due course (Sec. 52 & 57)
indorsement of the transferor.
Ordinary Holders or mere holder.
- The transferee qualifies as a holder upon receiving the
Any holder who does not meet all the conditions to
indorsement and thus is capable of negotiating the
qualify as a holder in due course.
instrument further
- Before the indorsement is made, the transferee is not a The negotiable instrument is subject to any and every
holder defense or defect in the instrument, whether real or
personal, as if it were non-negotiable.
◉ PRIOR PARTY 50
It remains negotiable under his hands.
Sec. 50. When prior party may negotiate instrument. -
Under Sec. 58 & 59, a holder who derives his title from a
Where an instrument is negotiated back to a prior party,
holder in due course is given the same rights.
such party may, subject to the provisions of this Act,
reissue and further negotiate the same.
He is not necessarily the owner of the instrument.
But he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable. Rights of a Holder in General

Right of Prior Party to Negotiate 1. He may sue on the instrument in his name;
2. He may receive payment and if the payment is in due
This refers to a reacquire or a holder who negotiates an course, the instrument is discharged.
instrument and then subsequently reacquires it.
 33

- a holder, even though he be a holder only for collection Bad Faith must have actual knowledge of facts
may sue his own name. Similarly, the pledge of a note
may sue as he is deemed “holder” within this section. Crossed Check – a person who takes a crossed
check w/o making further inquiries is not a holder in
due course.

(6) Holder for Value

Right of a Transferee of unendorsed instrument Any consideration sufficient to support a simple
contract is value
- If the transfer vests in the transferee, such title as the Not necessary to be adequate
transferor had, and if the transferor had legal title, this
must pass by the transfer although subject to defenses Accommodation Parties
The holder is subject to personal defenses If
Necessity of being a Holder in due course there is notice of infirmity – since the holder did not
receive any consideration from the instrument
- It is not necessary that the holder is a holder in due
course before he can enforce payment especially if ◉ NOTICE BEFORE FULL AMOUNT PAID 54
there are no defenses available to parties
EFFECT
- If there are no defenses, the distinction between a holder
in due course and who is not is immaterial (1) No amount has yet been paid
The holder is relieved from the obligation to make a
payment
◉ HOLDER IN DUE COURSE 52
(2) An amount has been paid
- Only negotiation can operate as a valid transfer to
Considered a holder in due course, only to the
make the transferee a holder in due course
extent of the amount therefor paid to him
- The holder of a non-negotiable instrument – a mere
When it is not applicable
assignee subject to defenses
(1) It does not apply where the holder has given for the
- A part indorsee – considered merely as an assignee paper his promise, when he has incurred liability to
a third person – entitled to same protection
- Prima Facie Presumption – the holder of a negotiable
instrument is a holder in due course
◉ TITLE IS DEFECTIVE 55
Payee and drawee as a holder in due course
- The drawee does not, by paying a bill becomes a holder Defective Title.
in due course To cover all those situations which are known as
personal or equitable defenses and also to cover those
(1) Holder equites of ownership where there is a breach of faith in
Not a holder negotiation.
possessor of a check payable to a diff. person
drawee who took the instrument When title of a person is defective
(1) In acquisition
(2) Complete and Regular
Obtained the instrument or any signature thereto
Free from material alteration
by fraud, or unlawful means
(3) Taking before Overdue (2) In negotiation
Installment instruments Negotiated the instrument in breach of faith in
A purchaser after the maturity of the first such circumstances that amount to fraud.
installment with notice that it was unpaid –
overdue Good Faith taker and negotiation

◉ DEMAND INSTRUMENT 53
◉ WHAT CONSTITUTES A DEFECT 56
(4) Notice of Infirmity and Defect
Will destroy due course holding. - The transferee must have actual knowledge of the
(5) Good Faith infirmity or defect
Honesty in fact in the transaction concerned.
(1) Mere negligence to make inquiries not sufficient
Absence of suspicious circumstances
 34

Not equivalent of either actual knowledge or bad Affects the validity of the agreement for which
faith. – Mere suspicious circumstances may not the instrument was issued.
be enough either.
 Fraud in Factum (real defense)
(2) Knowledge amounting to bad faith a person w/o negligence, has signed an instrument
Holder had actual knowledge, coupled with the which was in fact, a negotiable instrument, but was
means of readily informing himself of the facts, deceived as to the character of the instrument
abstained from making inquiries – intentional real defense because there is no contract, the
ignorance to bad faith person did know that he was signing

(3) Effect of notice of defect  Fraud in Inducement

Knowledge of notice at the time of taking an Quantity, quality, value or character of the
instrument, destroys the status of a holder in due consideration of the instrument.
course
The person knew that he was signing, but was induced
◉ RIGHTS OF A HOLDER IN DUE COURSE 57 by fraud to sign

(1) He may sue the instrument in his own name A personal defense because it does not prevent a
(2) He may receive payment, and if the payment is in due contract.
course, the instrument is discharged
(3) He holds the instrument free from defect of title of prior Rights of not a holder in due course
parties
(4) He holds the instrument free from defenses available to (1) He may sue the instrument in his own name
prior parties
(5) He may enforce payment of the instrument for the full (2) He may receive payment, and if the payment is
amount thereof against all parties liable thereon in due course, the instrument is discharged

The defenses referred to in Section 57 that cannot be set (3) He is entitled to the instrument but holds it
up against a holder in due course are so called personal subject to the same defenses as if it were non-
defenses. negotiable

◉ SUBJECT TO ORIGINAL DEFENSE 58 (4) He has a right of the holders in due course from
whom he derives his title in respect of all parties,
Prior Parties prior to such holder.
Immediate Parties
Remote Parties
Rights of a Purchaser from a HIDC
Defense.
Are grounds or reasons pleaded or offered by (1) Rights of a mere transferee – of a non-negotiable
the defendant in a case, showing why the plaintiff, as a instrument, he is not free from personal defenses
matter of law or fact, should not be given the relief he
seeks. (2) Rights of a transferee from a holder in due course
– a holder who derives his title from a holder in due
(1) Real Defense course has all the rights of the latter even though he
Those assertable against all parties, both himself is a mere transferee
immediate and remote
 He derives his title from a holder in due course
These are attached to the instrument itself.  He himself is not a party to any fraud

May still be enforced against persons who may

not avail the defense. ◉ WHO IS DEEMED A HIDC 59
(2) Personal Defense - Every holder is deemed prima facie to be a holder in due
Those available to prior parties, not good against course – a payee, or indorsee or the bearer thereof in
a holder in due course possession of the instrument
Every defense under ordinary contact law There is no presumption that a person through whose
hands an instrument has passed was a holder in due
Asserted against ordinary holders, but not to course.
holders in due course
(1) Proof of being a holder
 35

He does not have to prove that he acquired the

instrument, under all circumstances required under
section 52.

(2) Burden of proof on holder, where indorser’s

title defective