CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

Points to be considered (as per DS 09-12-18)

COMMERCIAL LAW (define)

 branch of private law which regulates the juridical relations arising from commercial acts.
 Two (2) main divisions of commercial law
1. Commercial Contracts
2. Commercial Transactions

GOVERNING LAWS
1. Negotiable Instruments Law (Act No. 2031)
- apply only to negotiable instruments;
- if NOT NEGOTIABLE, provisions of Civil Code (CC) shall apply.

2. Code of Commerce
- Before NIL, negotiable instruments were governed by Arts. 439 – 566 of the Code of
commerce.
- Now, it governs those that were not impliedly repealed by the NIL

- PROVISIONS OF CODE OF COMMERCE IN EFFECT (MATOLM)

1. M-erchant’s Book of Merchants (Secs. 1-63)
2. A-quentas en Participacion (Secs. 239-243)
3. T-ransfer of Non-negotiable Credits (Secs. 347 & 348)
4. O-verland Transportation (Secs. 349-379)
5. L-etters of Credit (Secs. 567-572)
6. M-aritime Commerce (Secs. 573-869)

- NO LONGER IN EFFECT – now in the Civil Code (SPALG)

1. S-ales
2. P-artnership
3. A-gency
4. L-oan
5. G-uarantees

3. Civil Code (RA 386)

- SUPPLETORY EFFECT: Art. 18. In matters which are governed by the Code of
Commerce and special laws, their deficiency shall be supplied by the provisions of this
code.

ARE NEGOTIABLE INSTRUMENTS LEGAL TENDER?

 Ans: NO – they are mere substitute for money.
 Definiton:
a. NEGOTIABLE INSTRUMENT is a written contract for the payment of money intended
as a SUBSTITUTE FOR MONEY and it passes or may pass from one hand to another in
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

such manner as to give the holder, if he is a holder in due course, the right to enforce
payment against all parties liable to him.
b. LEGAL TENDER is the kind of currency which the law compels a debtor to accept in
payment of a debt, be it public or private, provided it is tendered in the right amount.
 SECTION 52 of the CENTRAL BANK ACT (RA 7653) – all notes and coins issued by the
Bangko Sentral ng Pilipinas shall be fully guaranteed by the government of the Philippines
and shall be legal tender in the payment of all debts both public and private.
 CIRCULAR 537 of the BSP (series of 2006) – coins in the denominations of P1, P5, P10
coins, up to P1,000, and those 25cents below up to P100.

MAIN FEATURES OF A NEGOTIABLE INSTRUMENT

1. Negotiability – transferred from one person to another so as to constitute the transferee
a holder (SEC 30 – what constitutes negotiation)
2. Accumulation of Secondary Contract – indorsers become liable not only to their
immediate transferees, but also to any holder or any party.

NEGOTIATION vs. ASSIGNMENT (EFFECTS) – p103 of book for extensive discussion

NEGOTIATION
 NIL
 Negotiable Instruments
 Transferee is a holder who may be a
holder in due course
 Can acquire better right
 Free from personal defense if HIDC
ASSIGNMENT
 NCC
 Contracts in general
 Transferee is mere assignee who can
never be HIDC
 Merely steps in the shoes of transferor
 Always subject to personal defense

MEMORIZE
 SEC 126 (BOE defined) – A bill of exchange is an unconditional order in writing addressed
by one person to another, signed by the person giving it, requiring the person to whom it
is addressed to pay on demand or at a fixed determinable future time a sum certain in
money to order or bearer.
 SEC 184 (PN defined) – a promissory note is an unconditional promise in writing made by
one person to another, signed by the maker, engaging to pay on demand, or at a fixed
determinable future time, a sum certain in money to order or to bearer. (Where a note is
drawn to the maker’s own order, it is not COMPLETE until indorsed by him.
 SEC 185 (Check defined) – a check is a bill of exchange drawn on a bank payable on
demand.

WHEN ARE CHECKS PRESENTED FOR PAYMENT

 Ans: SEC 186 – a check must be presented for payment within a REASONABLE TIME AFTER
ITS ISSUE or the drawer will be discharged from liability thereon to the EXTENT OF THE
LOSS CAUSED BY THE DELAY.
 PRESCRIPTION of action for written contract (e.g. if NI is issued in lieu of a contract) is
used – 10 years (NCC)
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

 Check art 1249 (2) of NCC on impairment clause: “the delivery of promissory notes
payable to order, or bills of exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired.
 Current bank practice is to require presentment within 6 months from issuance
(otherwise, it becomes a STALE CHECK)
 Up to what extent is the drawer discharged because of the delay? EXTENT OF THE LOSS
CAUSED BY THE DELAY, NOT THE WHOLE OBLIGATION (e.g. bank insolvency)

IMPORTANT SECTIONS/ PROVISIONS

 RULES ON AMBIGUITY (Sec 17) (see outline)
 SEC 1 (in relation to Secs 2-9) (see outline)
 SEC 6 (in relation to Sec 13) (see outline)
 Sec 9(e) in relation to Sec 40 (see outline)

 Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated
back to a prior party, such party may, subject to the provisions of this Act, reissue and
further negotiable the same. But he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable.

 SEC 52 – Requisites of a Holder in Due Course

- That the instrument is complete and regular in its face
- That he became the holder before it becomes overdue and without notice that it has
previously been dishonored, if such was the fact
- That he took it in good faith and for value
- That at the time it was negotiated to him, he has no notice of infirmity in the
instrument or defect of the title of the person negotiating it.

 SEC 57 (including real and personal defenses)

Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free
from any defect of title of prior parties, and free from defenses available to prior parties
among themselves, and may enforce payment of the instrument for the full amount
thereof against all parties liable thereon.

REAL DEFENSES PERSONAL DEFENSES

 Minority (ONLY TO MINORS)  Failure or Absence of
 Forgery consideration
 Non-Delivery of Incomplete  Illegal consideration
Instrument (SEC 15)  Non-delivery of Complete
 Material Alteration Instrument
 Ultra Vires Acts of Corporations  Conditional Delivery of complete
 Fraud in Factum or Esse Contractus instrument
 Fraud in inducement
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

 Illegality – if declared void for any  Filling up blanks not within

purpose. authority
 Vicious Force or Violence  Duress or Intimidation
 Want of Authority  Filling up blank beyond reasonable
 Prescription time
 Discharge in Insolvency  Transfer in breach of faith
 Mistake
 Insertion of a wrong date
 Ante-dating or post-dating for
illegal or fraudulent purpose.

 REQUIREMENTS IF PAYABLE ON INSTALLMENTS (SEC 2)

1. The date of each installment must be fixed or at least determinable
2. The amount to be paid for each installment

 SEC 7 (when payable on demand)

- last paragraph is important: “when an instrument is issued, accepted, or indorsed
WHEN OVERDUE, it is, as regards the person so issuing, accepting, or indorsing it,
PAYABLE ON DEMAND”
- will apply only to immediate parties (?) – sabi ni DS

 SEC 130 (when bill may be treated as promissory note)

- when there is doubt whether the instrument is a bill or a note
- which one is more advantageous (PN- as there is already a party primarily liable)

 BILLS IN SET (SECS 179-181)

 SECS 60-62: liability of the parties
 SECS14-16 (mechanical act of writing completed by delivery)

REQUIREMENTS OF PARTY (ies) SIGNING AS AGENT – so as not to make them liable (SEC 19-20)
 Duly authorized
 Indicate that he is signing as a mere agent
 Discloses the name of his principal

WHEN DELAY OR PRESENTMENT IS EXCUSED (kinopy ko lang to sa p.381 ng book)

Where the holder of a bill drawn payable elsewhere than the place of business or the
residence of the drawer has no time, WITH THE EXERCISE OF REASONABLE DILIGENCE, to present
the bill for acceptance before presenting it for payment on the day that it falls dues, the delay
caused by presenting the bill for acceptance before presenting it for payment is excused and does
not discharge the drawers and indorsers.
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

TRANSFER WITHOUT INDORSEMENT (SEC 49)

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to
his order 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 the
indorsement of the transferor. But for the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of the time when the indorsement is actually
made.

 Transfer vests in the transferee such title as the transferor had therein (steps only into
the shoes of the transferor, cannot acquire better right)
 But, shall have the right to have the indorsement of the transferor
 In determining if HIDC: negotiation takes effect as of the time the indorsement is actually
made.

KINDS OF INDORSEMENT (know also the liabilities)

1. Blank and Special Indorsement (Sec 34)
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the
person to whom, or to whose order, the instrument is to be payable, and the indorsement
of such indorsee is necessary to the further negotiation of the instrument. An
indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to
bearer, and may be negotiated by delivery.

- BLANK INDORSEMENT: no indorsee specified; only affixing the signature of the

indorser
- SPECIAL INDORSEMENT: Designates the Indorsee

Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification,
warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or

both, as the case may be, according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay it.

2. Qualified Indorsement (Sec 38)

Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere
assignor of the title to the instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character of the instrument.
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

- By his qualified indorsement, the indorser disclaims his liability to any holder or
subsequent party who might be compelled to pay by another. He is only liable for
breach of warranties under section 65 of the NIL. Usually he negatives liability by
placing a notation “without recourse” or “sans recourse” in his special or blank
indorsement.

Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating
an instrument by delivery or by a qualified indorsement
warrants:chanroblesvirtuallawlibrary
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.

But when the negotiation is by DELIVERY only, the warranty extends in favor of no holder
other than the immediate transferee (NOT ALL PRIOR PARTIES).

The provisions of subdivision (c) of this section do not apply to a person negotiating public
or corporation securities other than bills and notes.

3. Conditional Indorsement (Sec 39)

Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party
required to pay the instrument may disregard the condition and make payment to the
indorsee or his transferee whether the condition has been fulfilled or not. But any person
to whom an instrument so indorsed is negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person indorsing conditionally.
(REMEMBER: ang conditional dito yung indorsement, hindi yung instrument. SO, IT DOES
NOT AFFECT NEGOTIABILITY)

4. Restrictive Indorsement (Sec 36)

Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an
indorsement restrictive.

Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement

confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so.
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

But all subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement.

PAYABLE TO THE ORDER OF THE BEARER (conflicting views)

 Personal opinion of DS: should be considered as BEARER INSTRUMENT
 Check the summary of rules and doctrines as discussed in the case of American National
Bank vs Joe Kerley.

MATERIAL ALTERATION
 What Constitutes (Sec 125)
Sec. 125. What constitutes a material alteration. - Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is a
material alteration.

 What are the effects? Negotiability is concerned?

Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a
party who has himself made, authorized, or assented to the alteration and subsequent
indorsers.
But when an instrument has been materially altered and is in the hands of a holder
in due course not a party to the alteration, he may enforce payment thereof according to
its original tenor.

 When is it material? When is it immaterial?

 In relation to Sec 23: Forgery

Sec. 23. Forged signature; effect of. - When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority.
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

EFFECTS OF FORGERY
I. PROMISSORY NOTE
1. Signature of the MAKER
a. MAKER
- is NOT liable to ALL SUBSEQUENT PARTIES (whether order of bearer)
- WHOLLY INOPERATIVE and no right to enforce payment against the maker is obtained
by any holder (SEC 23, NIL)

b. Indorser - indorsers AFTER forgery are still secondarily liable to the holder. [Sec 65 (1)
– that the instrument is genuine and in all respect what it purports to be]

2. Signature of the INDORSER

a. Order instruments
- When signature of PAYEE is forged, instrument cannot be enforced against the maker
and payee (indorsers AFTER forgery are still liable because of the warranty)

b. Bearer instruments (Note: signature of payee and holder is NOT necessary)

- MAKER may still be liable to a HIDC even if an indorsement is forged AFTER the
issuance of the note (SEC 60 – according to its tenor)
- INDORSER shall only be liable to those who acquire title through their indorsement
(Holder do not acquire title through their indorsement AFTER forgery)

II. BILL OF EXCHANGE

1. Signature of the DRAWER
- Drawer is not liable (whether order or bearer instrument)
- If there is negligence on the drawee – he may be liable.

2. Signature of the INDORSER

a. Order Instruments
- SUBSEQUENT HOLDER (after forgery) – cannot enforce payment against the drawer,
drawee, payee. May still be secondarily liable to the holder.
- Indorsers PRIOR to forgery: NOT LIABLE
- CUT OFF RULE: parties after the forgery are cut-off from the parties prior to the
forgery.

b. Bearer Instruments
- HOLDER can recover from DRAWER if a special indorsement was forged as the forged
signature is unnecessary for his title.
- DRAWEE can charge the account of the drawer
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

DRAWEE BANK vs. COLLECTING BANK (read case of Jai Alai)

 Drawee Bank
- Bound to know the signature of its client, the drawer.
- Is liable if it encashed checks bearing the forged signature of the drawer. (In such case,
NO recourse against the collecting bank)
 Collecting Bank
- Receive checks merely for collection and deposit
- Cannot be expected to know or ascertain the genuineness of all prior indorsements
- DRAWER cannot recover from collecting bank (NO PRIVITY)

MENTIONED CASES (Doctrines)

1. PECO vs Soriano (Negotiability) - PMOs

HINT: Buy 10 postal money orders which were at first offered to be paid by private check
(but it was stolen when the private check was not accepted)

ISSUE: WON Postal Money Order is a NEGOTIABLE INSTRUMENT

HELD: NO. in establishing and operating a postal money order system, the government is
not engaging in commercial transactions but merely exercises a governmental power for
the public benefit.
- Suggested answer in the book taken from PECO vs SORIANO (p.44): It does not contain
an unconditional promise or order to pay required in Sec 1(b) of the NIL. Regulations
or restrictions are imposed on PMO which are consistent with the character of
Negotiable Instruments. For instance, the rules and regulations on PMO usually
provide for not more than one indorsement. They also provide that they may be
withheld under a variety of circumstances.

2. Caltex Phil vs. CA and Security Bank and Trust Co. (Negotiability) - CTDs

HINT: 280 Certificate of Time Deposit delivered to Caltex for purchase of fuel products
but declared the same as lost (to procure another copy of CTD and further negotiate it to
another)

ISSUE: WON Certificate of Time Deposit is a NEGOTIABLE INSTRUMENT

HELD: YES. The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The documents provide that the amounts deposited shall be repayable to
the depositor. And who, according to the document, is the depositor? It is the "bearer."
The documents do not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him. Rather, the amounts are to be repayable to
the bearer of the documents or, for that matter, whosoever may be the bearer at the
time of presentment.
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

(Consider na din natin yung issue on recovery. SC held that the petitioner cannot recover
considering the Private Respondent bank acquired better right. This is with regard to the
provisions of Art. 2095 and 2096 of the NCC – Incorporeal rights evidence by NI which are
pledged should be INDORSED. A pledge shall only produce effect if it appears in a public
instrument. Eh hindi naman napanotarized ng Petitioner yung claim nila tapos hindi pa
na-indorse yung CTD sa kanila. Correlate it with Sec 27 of the NIL which talks about lien
on instrument of holder for value)

3. Jai Alai vs BPI (Forgery)

HINT: 3 crossed checks (P8,030.58) payable to Inter-island Gas Service (IGS), Inc and
drawn upon drawee-banks (PBC, CBC, PNB); Sales-agent of IGS, who is a regular bettor of
Jai Alai, indorsed (under forged signatures) the check to the latter which was then
deposited to Respondent Bank (collecting bank).

ISSUE: WON BPI had the right to debit from petitioner’s account the value of the checks
with the forged indorsements.

HELD: YES. the respondent acted within legal bounds when it debited the petitioner's
account. When the petitioner deposited the checks with the respondent, the nature of
the relationship created at that stage was one of agency, that is, the bank was to collect
from the drawees of the checks the corresponding proceeds. It must be noted further
that three of the checks in question are crossed checks, namely, exhs. 21, 25 and 27,
which may only be deposited, but not encashed; yet, the petitioner negligently accepted
them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer
instruments would not, in our view, exculpate the petitioner from liability with respect to
them. The fact that they are bearer checks and at the same time crossed checks should
have aroused the petitioner's suspicion as to the title of Ramirez over them and his
authority to cash them

4. Ramon Ilusorio vs. CA (Forgery)

HINT: Secretary who were entrusted of credit cards, checkbook and blank checks of
petitioner (Manila Banking Corporation) – drawn 17 checks

ISSUE: WON the petitioner can set up the defense of FORGERY

HELD: NO. It is a rule that when a signature is forged or made without the authority of the
person whose signature it purports to be, the check is wholly inoperative. No right to
retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party, can be acquired through or under such signature. However, the rule
does provide for an exception, namely: "unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority." In the
instant case, it is the exception that applies. In our view, petitioner is precluded from
CUNANAN 2S NEGOTIABLE INSTRUMENTS LAW (NIL)

setting up the forgery, assuming there is forgery, due to his own negligence in entrusting
to his secretary his credit cards and checkbook including the verification of his statements
of account. (Sec 23, NIL)

5. Bataan Cigar vs. CA and State Investment House Inc. (Checks)

HINT: 3 unpaid checks (crossed) BCCFI issued to George king for payment of tobacco
leaves, which were subsequently sold (checks) at a discount with SIHI.
Issue: WON SIHI, a second indorser, a holder of crossed checks, is a holder in due course

HELD: NO
- In order to preserve the credit worthiness of checks, jurisprudence has pronounced
that crossing of a check should have the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check may be negotiated only once
— to one who has an account with a bank; (c) and the act of crossing the check serves
as warning to the holder that the check has been issued for a definite purpose so that
he must inquire if he has received the check pursuant to that purpose, otherwise, he
is not a holder in due course.
- It is then settled that crossing of checks should put the holder on inquiry and upon
him devolves the duty to ascertain the indorser's title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law, 13 and as such the consensus of authority is to the effect that the
holder of the check is not a holder in due course.

6. De Ocampo vs. Gatchalian (HIDC)

HINT: A check in the amount of P600 used to pay for a prospective car, but the check was
used as payment of the hospital bills of the wife of Manuel Gonzales.

ISSUE: WON the petitioner is considered as HIDC

HELD: NO. As holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title, and for this reason
the presumption that it is a holder in due course or that it acquired the instrument in good
faith does not exist. And having presented no evidence that it acquired the check in good
faith, it (payee) cannot be considered as a holder in due course. In other words, under the
circumstances of the case, instead of the presumption that payee was a holder in good
faith, the fact is that it acquired possession of the instrument under circumstances that
should have put it to inquiry as to the title of the holder who negotiated the check to it.
The burden was, therefore, placed upon it to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith. (Secs 52 & 59, NIL)