Negotiable Instruments
Negotiable Instruments
Negotiable Instruments
-One who has taken the instrument: RIGHTS OF A HOLDER IN DUE COURSE (Section 57)
(a) That is complete and regular on its face 1. Sue on the instrument in his own name
(b) Becomes the holder of it before it was 2. Receive payment and if the payment is in due
overdue, and without notice that it has course, the instrument is discharged
been previously dishonored, if such was 3. Holds the instrument free from any defect of
the fact title of prior parties
(c) Took it in good faith and for value 4. Holds the instrument free from defenses
(d) At the time it was negotiated to him, he available to prior parties among themselves
had no notice of any infirmity in the 5. Enforce payment of the instrument for the
instrument or defect in the title of the full amount thereon
person negotiating it.
EVERY HOLDER IS DEEMED PRIMA FACIE TO BE A PERSONAL DEFENSES- those which grow out of
HOLDER IN DUE COURSE. (Section 59) the agreement or conduct of a particular person
When he is shown that the title of any in regard to the instrument which renders it
person who has negotiated the instrument was inequitable for him, though holding the legal
defective, the burden is on the holder to title, to enforce it against the party sought to
prove that he or some person under whom he be made liable but which are not available
claims acquired title as holder in due course. against holders in due course or holders through
the latter.
WHEN TITLE IS DEFECTIVE (Section 55) It is affects the validity of the agreement for
1. In the acquisition -when he obtained the which the instrument was issued.
instrument or any signature thereto by fraud
duress or force and fear or other unlawful Examples:
means, or for illegal consideration. 1. Filling of wrong date
2. Filling up of blanks not in accordance
2. In the negotiation -when he negotiates the with the authority given and within
instrument in breach of faith, or under such reasonable time
circumstance amounting to fraud. 3. Want of delivery or complete instrument
4. Absence or failure or consideration
*What constitutes Notice of Defect (Section 56) 5. Simple fraud or fraud in inducement
- Actual knowledge of the infirmity or defect 6. Acquisition of instrument by duress,
- Knowledge of such facts that his action in force or fear
taking the instrument amounted to bad faith.
7. Acquisition of instrument by unlawful as a mere transferee or does not satisfy the
means requirements of a holder in due course.
8. Acquisition of instrument for an illegal LIABILITIES OF PARTIES
consideration A person becomes a party to an instrument by
9. Negotiation of breach of faith signing his name thereon.
10. Negotiation under circumstances that GR: No person is liable on an instrument
amounts to fraud unless his signature appears thereon.
11. Innocent alteration or spoliation Exceptions:
(alteration by a stranger) (a) Where a person signs in a trade
12. Set-off between immediate parties or assumed name (Section 18)
13. Discharge by payment or renunciation or (b) The principal is liable if a
release before maturity duly authorized agents signs on
14. Discharge of party secondarily liable by his own behalf. (Section 19)
discharge of prior party (c) In case of forgery, the forger
is liable even if his signature
Real and Personal defenses are subject to does not appear on the
estoppel. Through estoppel, an admission or instrument
representation is rendered conclusive upon the (d) Where the acceptor makes his
person making it and it cannot be denied or acceptance of a bill on a
disproved as against the person relying thereof. separate paper. (Section 134)
(e) Where a person makes a written
promise to accept a bill before
IMMEDIATE PARTIES- those that are in direct it is drawn. (Section 135)
contractual relation to each other; those who
know of the conditions and limitations placed PRIMARILY LIABLE SECONDARILY LIABLE
upon the delivery of the instrument. -those who, by the terms -those who face only
of the instrument, are potential secondary
REMOTE PARTIES one who takes title to an absolutely required to liability on the
instrument by negotiation from either the pay the same instrument.
original payee or any subsequent holder; those - Maker of a - Indorser of a note
who are not in direct contractual relation to promissory note or bill
each other. - Acceptor of a bill - Drawer of a bill
of exchange
Example: - Certifier of a
Maker Payee A B check
(a) Immediate party: Maker and Payee are NOT LIABLE
immediate parties. - Drawee: until he accepts the instrument in
-but when P delivers to X, an intermediary, which case he becomes an acceptor.
and X delivers the instrument to P for
value, M and P are not immediate parties.
Immediacy signifies privity and not mere LIABILITIES OF A MAKER (Section 60)
proximity. -by making the promissory note:
(b) Remote party: M and A, M and B, P and B. (a) He engages that he will pay it according
(c) Prior party: M, P and A are prior parties to its tenor
with respect to B. (b) Admits the existence of the payee and
his then capacity to indorse it
FRAUD IN FACTUM FRAUD IN INDUCEMENT
A person without The signer knew what A person placing his name on the face of a
negligence signs an he was signing but was note is prima facie a maker and he is presumed
instrument which was, induced by fraud to to have acted with care and to have signed the
in fact, a negotiable sign. (PERSONAL) instrument in question with full knowledge of
instrument, but was its contents.
deceived as to the
character of the
instrument and without LIABILITIES OF A DRAWER (Section 61)
knowledge of it. (REAL) -by drawing a bill:
(a) Admits the existence of the payee and
his then capacity to indorse
RIGHTS OF TRANSFEREE (b) Engages that on due presentment, the
(a) Not a holder in due course- his rights are instrument will be accepted or paid
those of a transferee of a non-negotiable according to its tenor
instrument so that he is not free from (c) In case of dishonor, he will pay the
personal defenses amount thereof to the holder, or to the
(b) From a holder in due course- has all the subsequent indorser who may be compelled
rights of the latter even though he himself to pay it.
(e) Engages that on due presentment, it
Note: The drawer may insert in the instrument an shall be accepted or paid according
express stipulation negativing or limiting his to its tenor.
own liability to the holder, while the maker may (f) In case of dishonor, he will pay
not do so. the amount thereof to the holder,
or to the subsequent indorser who
may be compelled to pay it.
LIABILITIES OF AN ACCEPTOR (Section 62)
-by accepting the instrument: His liabilities as a warrantor is distinct
(a) Engages that he will pay it according to from his liability to pay the instrument. As
the tenor of his acceptance warrantor, his liability is unconditional. No
(b) Admits the existence of the drawer steps are necessary to fix an indorser
(c) Admits the existence of his signature liability for breach of warranty.
(d) Admits the existence of his capacity and
authority to draw the instrument Example:
(e) Admits the existence of the payee and R (P3000) P (changed it to P8,000) A (GF)
his then capacity to indorse. B (HDC)
In this case, B can recover a judgment against
Before Acceptance: not liable thereon R, the drawer in the amount of P3,000 and a
After Acceptance: he becomes an acceptor and judgment against A in the amount of P5,000 for
is virtually in the same position as a maker breach of the warranty of genuineness. A is
of a note. liable notwithstanding the fact that he had no
knowledge of the forgery.
Example:
ISSUE- The first delivery of the instrument Maker---P(steals and inserted his name as
complete in form, to a person who takes it payee) A B C D (holder in due course)
as a holder. *D cannot enforce the note to M. As the
signature of M was placed thereon before
delivery, he does not assume any
DELIVERY transfer of possession,
responsibility. There is however a prima
actual or constructive, from one
facie presumption of delivery, which M must
person to another.
rebut by proof to the contrary.
If a complete instrument is found in the The instrument may be enforced only against a
possession of an immediate party or a remote party prior to completion if filled up strictly
party other than a holder in due course, there in accordance with the authority given and
is a prima facie presumption of delivery but within a reasonable time.
subject to rebuttal.
The defense that the instrument has not been
filled up in accordance with the authority given
If a complete instrument is in the hands of a and within the reasonable time is NOT available
holder in due course, a valid delivery thereof as against a holder in due course.
by all parties prior to him is conclusively
Example:
presumed.
M authorized P to put only P10,000.00
P put P12,000.00 A B C
When delivery is made, it is presumed to be
made with the intention to transfer ownership of (a) If C is not a holder in due course
the instrument to the payee. - C cannot collect from M
- However it may be shown between (b) If C is a holder in due course
immediate parties that the delivery was - C can collect from M.
- The defense that P exceeded his authority is
conditional or for special purpose. not available against a holder in due course.
LIABILITY OF PERSONS SIGNING IN TRADE OR ASSUMED GR: not bound by his indorsement for lack of
NAME (Section 18) capacity
One who signs in a trade or assumed name is Except: when he is guilty of actual
liable as if he signed his own name. fraud, committed by stating that he is
- It is necessary however that the party of age, when in fact, he is not.
who signed intended to be bound by his
signature. (b) Other incapacitated persons
The incapacity is a real defense.
He is not bound to restore anything he
SIGNATURE BY AGENT (Section 19) has received by virtue of the contract.
The signature of any party may be made by a Except: to the extent to which he
duly authorized agent. has been benefitted thereby.
No particular form of appointment is (Art.1399, Civil Code)
necessary for this purpose.
The authority of the agent may be (c) Corporations
established as in other cases of agency. -not bound for ultra vires acts and acts
beyond its powers.
LIABILITY OF PERSON SIGNING AS AGENT (Section 20)
In order that an agent who signs a negotiable
instrument may escape personal liability, he
must be: FORGERY (Section 23)
(a) duly authorized GR: the forged signature is inoperative
(b) adds words to his signature indicating No right to retain the instrument
that he signs as an agent No right to give discharge
No right to enforce payment
(c) discloses his principal. EXCEPT:
1. If precluded from setting up forgery or
If the agent signs an instrument in want of authority as defense.
his own name and discloses no principal,
a) Those who by their act, silence
he is personally bound and evidence to or negligence are estopped from
the contrary may not be admitted to
setting up defense of forgery
relieve him from personal liability. b) Those who warrant or admit the
- As between immediate parties,
extrinsic evidence may be admitted to genuineness of the signature is
shown the real character of the question:
transaction. - Indosers
- Acceptors
- Persons negotiating by delivery.
RESTRICTIVE INDORSEMENT
Assignment- the transfer of the title to the (a) Prohibits the further negotiation of the
instrument, with the assignee generally taking instrument
only such title as his assignor has subject to (b) Constitutes the indorsee the agent of
all defenses available against his assignor. indorser
(c) Vests the title in the indorsee in trust
NEGOTIATION ASSIGNMENT for or to the use of some other person.
Refers only to Refers generally to an
negotiable instruments ordinary contract Mere absence of words implying power to
Transferee is an negotiate does not make an indorsement
Transferee is a holder restrictive.
assignee
Holder in due course Assignee is subject to
is subject to real both real and personal Effects:
defenses only defenses It confers upon the indorsee the right to:
(a) Receive the payment of the instrument
Holder in due course
Assignee merely steps (b) Bring any action thereon that the
may acquire a better
into the shoes of the indorser could bring
title than the
assignor (c) Transfer his rights as such indorsee,
transferor
where the form of the indorsement
General indorser Assignor does not
authorizes him to do so.
warrants solvency of warrant it unless
prior parties stipulated
QUALIFIED INDORSEMENT
Indorser is liable
Assignor is liable even -constitutes the indorser as mere assignor of
only when there is
without notice of the title to the instrument.
presentment and notice
dishonor How? by adding to the indorsers
of dishonor
signature the words without
Governed by the NIL Governed by Civil Code
recourse or any words of similar
import.
Whether negotiation or assignment, payment by
negotiable instrument is merely conditional. It is
subject to the condition that it be converted into Effects:
cash at maturity. 1. He is secondarily liable for breach of
his warranties as an indorser.
2. He is liable if the instrument is
dishonored by non-acceptance or non-
INDORSEMENT-the writing of the name of the payment due to:
payee in the instrument with the intent either
- Forgery
to transfer title to the same, or to strengthen
- Lack of good title to the
the security of the holder by assuming a
instrument indorsed
contingent liability for its future payment, or
- Lack of capacity to contract on
both.
the part of prior parties
- The fact that the instrument is
Place of indorsement:
1. On the instrument itself valueless or not valid at the
2. Upon a paper attached thereto (allonge)
time of indorsement which fact Every indorsement is presumed prima facie to
was known to him. have been made at the place where the instrument
ABSOLUTE INDORSEMENTS is issued; except when the contrary appears.
-one by which the indorser binds himself to CONTINUATION OF NEGOTIATION (Section 47)
pay, upon no other condition than the An instrument negotiable in its origin
failure of the prior parties to do so, and continues to be negotiable until:
of due notice to him of such failure. 1. it has been restrictively indorsed, or
2. discharged by payment or otherwise.
CONDITIONAL INDORSEMENTS
-one by which the indorser imposes some
other conditions to his liability or on the STRIKING OUT OF INDORSEMENT (Section 48)
indorsees right to collect the proceeds of The holder may at any time strike out any
the instrument. indorsement which is not necessary to his title.
A party required to pay the instrument may Effect: The indorser whose indorsement is
disregard the condition and make payment to struck out, and all indorsers subsequent to
indorsee or his transferee. him are thereby relieved from liability on the
instrument.
The person who receives the payment will hold
(a) Bearer Instrument
the proceeds subject to the right of conditional
-holder may strike out all indorsements because
indorser. they are not necessary to his title.
- merely holds the proceeds in trust and does
not become the owner thereof until the
(b) Order Instrument
condition is fulfilled.
-cannot strike out the payees indorsement
because an order instrument cannot be validly
JOINT INDORSEMENT negotiated without his indorsement.
- Where an instrument is payable to the
order of two or more payees or indorsees
who are not partners, all must indorse TRANSFER WITHOUT INDORSEMENT (Section 49)
unless the one indorsing has authority (Applicable only to payable to order)
to indorse for the others. - Where the holder of a bill payable to order
transfers it for value without indorsing it,
INDORSEMENT WHERE INSTRUMENT DRAWN OR INDORSED the transferee cannot negotiate the bill by
TO A PERSON AS CASHIER (Section 42) indorsing it to another.
- deemed prima facie to be payable to the bank
of corporation of which he is such officer; If the transferor has legal title, transferee
and may be negotiated by either indorsement
of the bank or corporation, or the
acquires:
indorsement of the officer. 1. Such title
2. Right to have the indorsement of the
INDORSEMENT WHERE THE NAME IS MISSPELLED (Sec. 43) transferor
- Where the name of a payee or indorsee is 3. Right to maintain legal action the maker
wrongly designated or misspelled, he may or acceptor or other party liable to the
indorse the instrument as therein described, transferor.
adding if he thinks fit, his proper
signature.
A person may correct a spelling error only if the REACQUIRER (Section 50)
intention of the maker or drawer was that the If a prior party reacquires an instrument
instrument should be payable to the person making the before maturity, he may negotiate the same
correction. further. But after paying the holder, he may not
claim payment from any of the intervening
INDORSEMENT IN REPRESENTATIVE CAPACITY (Sec.44) parties.
- Where any person in under obligation to
indorse in a representative capacity, he may Limitations:
indorse in such terms as to negative personal A prior party cannot further negotiate the
liability. instrument:
- See Sec.20 re liabilities.
1) Where it is payable to the order of a
third person, and has been paid by the
TIME OF INDORSEMENT (Section 45) drawer
Every negotiation is deemed prima facie to 2) Where it was made or accepted for
have been effected before the instrument was accommodation and has been paid by the
overdue. party accommodated
EXCEPT when an indorsement bears a date
after the maturity of the instrument.
3) Where the instrument is discharged when
acquired by prior party.
PLACE OF INDORSEMENT (Section 46)