NEGOTIABLE INSTRUMENTS LAW

NEGOTIABLE INSTRUMENT
...maybe a bank check, a promissory note, a bill of
exchange or any other written security document that
can be transferred by indorsement plus delivery or in
some other cases by delivery only
Section 8. WHEN PAYABLE TO ORDER
An instrument is payable to order when it is drawn
1. To the order of a specified person
Pay to the order of A
2.

To him or his order

Pay to A or order

Section 9. WHEN PAYABLE TO BEARER

Payable to order or bearer

Necessary as to mode of transfer of instrument

Payable to order indorsement + delivery
Payable to bearer delivery only

Q: What if what was delivered was a blank paper bearing the

signature of the supposed make?
A: One can raise fraud as a defense (Section 58) and
cannot be held liable
Section 15. INCOMPLETE AND NO DELIVERY

The maker can set up real defense and the

question as to whether the holder is in due course
or not is irrelevant
Example: Secretary/ Agent used an incomplete check
ABC is the payee, A is the drawer and Metrobank is the
drawee
The instrument was negotiated to SM with BDO as the
collecting bank
Can Metrobank debit to Novals account?
Section 16. COMPLETE BUT NO DELIVERY
***There is a presumption that there was valid delivery

Q: How is indorsement done?

A:

Section 13. WHEN DATE MAY BE INSERTED

When instrument needs to be dated, then just insert true
date

A B C D
Q: B did not insert true date and then indorsed it to C who
subsequently indorsed it to D. Upon maturity of the
instrument based on the false date, may D claim against A?
A: It depends if D is a holder in due course or not. A has a
personal defense against a holder who is not in due course
and thus the latter cannot claim from A. But if D is a holder in
due course then he may claim from A and the date affixed or
inserted in the instrument shall be regarded as true date as
to him (D).
Section 14. INCOMPLETE BUT DELIVERED
Legal consequence: Payee is with the authority to fill the
instrument
Q: B is given by A the authority to fill up only 10,000 but the
former instead wrote 100,000 in the document
The instrument was then indorsed and delivered to C
Where will C collect the amount upon maturity?
A: Will depend if C is a holder in due course or not.

HOLDER IN
DUE COURSE
NOT A HOLDER
IN DUE
COURSE

AMOUNT
Collect from A the
amount
of
100,000
Collect from B the
amount
of
100,000

RATIONALE

Personal
Defense on the
part of A - lack
of authority
Indorser warrants
the genuineness
of the document
and
what
it
purports

To know whether maker is primary liable, there

must first be a determination of whether bearer/
holder is a holder in due course or not
If holder in due course then he may still claim from
maker.
If not a holder in due course then he may claim
only from the subsequent indorsers who are
secondary liable. Maker can set up personal
defense

TAKE NOTE: delivery must be to the payee; and with

the intent to the be bound to the legal effects of the
negotiable instrument
Section 18
GR: he whose signature does not appear in the instrument is
not liable
Exception: if what was indicated was merely a trade name
Section 23. FORGED INSTRUMENTS
***A forged document is not necessarily invalidated. It is only
inoperative against the person whose signature it purports to
be
A B C D E F
Q: The signature of the maker is forged. Will the promissory
note be considered void in itself?
A: No. It is only inoperative as to the person whose
signature is forged. Thus, the promissory note is still valid
and it can be enforced against B, C, D and E but not against
A whose signature was forged
Republic vs Ebrada
A check was issued to Martin Lorenzo. It subsequently
underwent indorsements resulting to four transfers. It was
however found out that when the check was issued, Martin
was already dead for eleven years.
The court ruled that it was wholly inoperative only as to the
forged signature. Mauricia was held liable and made to pay
since an indorsement is a guarantee of the genuineness of
the instrument and what it purports to be.
PROMISSORY NOTE
Order Instrument

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NEGOTIABLE INSTRUMENTS LAW

A B C D E F

B. Holder
A B C D E F

A. Makers signature is forged

Inoperative as to the maker

Q: Can E collect from A upon the maturity of the
instrument?
A: E cannot collect from A since the document is
inoperative as to the maker. E may however
recover from B, C and D who are indorsers of the
document
B. Indorsers signature is forged
Special Indorsement
TO C:
(Sgd) B:

vs

Blank Indorsement
Only signature

Q: The signature of C is forged by D, to whom will

F collect payment?
A: F may collect from D and E following the Cutoff Rule. There was no order made.
Cut off rule: Parties before the forgery are
excluded. Those who are included warrants the
genuineness of the document and what it purports
to be (Republic vs Ebrada)

If Bs signature is forged, F can claim from A and E.

The cut off rule does not apply. There is no need of transfer.
The signature is immaterial. (The maker and the person
who delivered him the instrument)
Those who cannot set up the defense of forgery
1. Parties who warrant or admit the genuineness of
the signature in question:
a. Indorsers;
b. Acceptors; and
c. Persons negotiating by delivery (Section
65)
Example: Section 62 = the drawee
2.

BILLS OF EXCHANGE/ CHECKS

Parties: Drawer, Payee and Drawee
Scenario: Drawer orders Drawee to pay Payee or its order
***In a bill of exchange, the primarily liable is the drawee.
Take note of the chain of liability
A. Drawers Signature is forged

Where the instrument is payable to order at the

time of the forgery,such as the checks in this case,
the signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same
instrument. When the holder'sindorsement is
forged, all parties prior to the forgery may raise
the real defense of forgery against all parties
subsequent thereto. (Associated Bank vs CA)
Associated Bank vs CA
Drawer Province of tarlac
Drawee bank PNB
Payee Conception Hospital
Collecting bank Associated Bank
Tarlac paid to Hospital. Payment was made
through Pangilinan who forged the
signature/indorsement of Conception Hospital.
Pangilinan indorsed to Associated Bank and
subsequently indorsed to PNB. Forgery was done
in the payee
C on the other hand may claim from A and B on
the basis of Equity of Ownership
Bearer Instrument
***A bearer instrument does not require indorsements.
Transfer is done through DELIVERY only
In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is
forged can raise the defense of forgery against a holder in
due course. (Associated Bank vs CA)
A. Maker

If the signature of the maker is forged, it is wholly

inoperative as to the maker. The maker can raise
the defense of forgery

Those who by their acts, silence or negligence are

estopped from setting up the defense of forgery

November 25, 2015

Pay to the order of B P10,000

(sgd) A
To: ABC Bank
Cebu City

Q: if As signature is forged, and B successfully withdraw the

amount, can ABC debit it in As account?
A: No
Q: What if it was successfully debited, can A ask for
reimbursement from ABC bank?
A: Yes
The general rule is to the effect that a forged signature is
wholly inoperative, and payment made through or under
such signature is ineffectual or does not discharge the
instrument. If payment is made, the drawee cannot charge it
to the drawers account. (Samsung vs Far Eastern Bank)
The prime duty of a bank is to ascertain the genuineness of
the signature of the drawer or the depositor on the check
being encashed. It is expected to use reasonable business
prudence in accepting and cashing a check presented to
it. (PNB vs Quimpo)
The chain of liability will end at the drawee ie. Section 62.
When the bank receives the check then it warrants to the
genuineness of the account. If drawee pays out from a
forged signature then he must reimburse it to the drawer
ORDER INSTRUMENT
B. Signature of the Payee is Forged (indorsement is forged)
***It will not render the instrument non-negotiable

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Q: (refer to above check) What if C stole the check and

forged the signature of B and deposited it to PNB Bank.
***PNB bank will collect from ABC bank (PNB Bank is a
collecting bank who acts now as an indorser)
A: A can ask reimbursement from ABC who can
subsequently ask reimbursement from PNB (indorser). At the
same time, ABC cant file a case against C due to absence
of privy.

An accommodation party is a person that receives an

instrument in absence of consideration of that instrument
Example:
A asked C to sign as his surety to be allowed to loan a
specific amount
I promised to pay KIA Phils. Motor or order 1,000,000 on
December 25, 2016

Rationale: an indorser warrants the genuineness of the

document and in all respect what it purports to be (Section
65 and Section 66)
Desirable Short-cut: (Wesmont Bank vs Ong, GR 132560)
For its part, respondent Ong leans on the ruling of the trial
court and the Court of Appeals which held that the suit of
Ong against the petitioner bank is a desirable shortcut to
reach the party who ought in any event to be ultimately
liable. As a general rule, a bank who has obtained
possession of a chek upon an unauthorized or forged
indorsement of the payees signature and who collects the
amount of the check from the drawee is liable for the
proceeds thereof to the payee. Theory of said rule is that the
collecting banks possession of such check is wrongful

Accommodated Party -> (Sgd) A

Accommodation Party -> (sgd) C
***Kia can claim from C regardless of absence of
consideration. C cannot claim defense of absence/lack of
consideration. He may however ask reimbursement from A
after he paid.

When indorsed by C to KIA then he becomes an

accommodation indorser
I promised to pay C or order 1,000,000 on
December 25, 2016

Section 127 states that the Bill of Exchange is not an

Assignment of Funds

(Sgd) A
C becomes an Accommodation drawer

Take note of the chain of liability

Pay to A or order 1,000,000 on December
25, 2016

Section 24. PRESUMPTION OF CONSIDERATION

Every negotiable instrument is presumed to have been
issued with a valuable consideration

(Sgd) C

Consideration in the context of negotiable instrument

(Section 25) - Value is any consideration sufficient to support
a simple contract
Q: What constitutes a holder for value?
A: Section 26
Section 26. WHAT CONSTITUTES FOR VALUE
In the absence of consideration, it doesnt make the
instrument illegal
A B C D
E is considered a holder for value, even if value is only given
at the time of C, D still is a holder for value in respect to all
parties ie as to A and B
Section 27. WHERE A HOLDER HAS A LIEN ON
INSTRUMENT
I PROMISE TO PAY B OR ORDER P10,000 ON DEC. 25,
2015
SGD. A
B owes C and indorses the promissory note to C. However if
the debt is only at P5000
GR: you must indorse the entire instrument
Thus, C may take the instrument and return the P5000 to B
on the maturity and payment of A of the debt
Section 29. ACOMMODATION PARTY
Liability is solidary. Acts as a surety where the principle of
exhaustion does not apply unlike that of a guaranty

To: ABC Bank

Requisites of an accommodation party:
1. Signs an instrument without receiving any value
thereof
2. Signs an instrument for the purpose of lending his
name to some other person
3.
4. Cannot avail of the defense of absence or failure
of consideration against a holder not in due course
5.
Section 119. Instrument; how discharged
xxxx
(b) By payment in due course by the party accommodated,
where the instrument is made or accepted for
accommodation
Section 30. WHAT CONSTITUTES NEGOTIATION

In negotiation there must be an intention

Even if an instrument is negotiable, it can be

transferred in three ways
1. Assignment
2. Operation of law
3. Negotiation
a) Payable
to
order

indorsement + delivery
b) Payable to bearer delivery
only

F
Q:
Can an instrument which is non- negotiable be
transferred/ negotiated?

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A: No, because negotiability will only apply to negotiable

instruments. This may however be transferred through
assignment
Assignment vs Negotiation

Assignment covers all kinds of instruments;

Negotiation applies only to negotiable instruments

(1624-1645) Civil code is applicable to assignment

while the Negotiable Instruments Law governs
negotiable instruments

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The spring cannot rise above its source In

assignment, the assignee cannot avail defenses
that are not available for its assignor. In
negotiation you are free from all defenses if you
are a holder in due course
Assignor doesnt warrant unlike indorsers
Negotiation, no formal contract is required unlike
assignments where a contract is required to bind
third persons