NEGOTIABLE INSTRUMENTS LAW

T/F

1. TRUE
- Section 29 provides that an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to
be only an accommodation party.

2. TRUE

Section 125 defines what will constitute a material alteration. It is 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.

A material alteration avoids the instrument in the hands of one who is not a holder in due course as against any prior party who
has not assented to the alteration. But if an altered instrument is negotiated to a holder in due course, he may enforce payment
thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. (see Sec. 62.)

3. TRUE

With regard to parties whose signature appeared prior to delivery, the non-delivery of an incomplete instrument is a valid defense,
not only between the original parties but also against a holder in due course. It is therefore a real defense, available even against
a holder in due course.

Page | 1
ANSWER:

The instrument is not declared totally void nor are the genuine signatures thereon rendered inoperative. IT IS ONLY
THE FORGED SIGNATURE THAT IS DECLARED INOPERATIVE. Hence: rights still exist and may be enforced by virtue of
the instrument as between parties whose signatures were not forged.

 Where the bill is payable to order, the party whose indorsement is forged, is not liable to any holder even a holder
in due course. The forged indorsement is wholly inoperative. A, whose indorsement was forged, cannot be held
liable on the instrument to B.
 Where the signature of the payee was forged, the collecting bank is liable to the payee and must bear the loss
because it is its legal duty to ascertain that the payee’s endorsement was genuine before cashing the check.
Eastwest bank is liable to A and must bear the loss. The bank should have ascertained the indorsement that it is
genuine.
 If the drawee pays under a forged indorsement, the drawer is not liable on the bill and the drawee may not debit
the drawer’s account. If it does, it shall have to recredit the amount of the check to the account of the drawer. A
bank is bound to know the signature of its customers (drawers), and if it pays a forged check it must be considered
as making the payment out of its own funds and cannot ordinarily charge the amount so paid to the account of
the depositor (see Sec. 189). Since Union Bank paid the instrument, XYZ shall not be liable on the bill. In this case,
XYZ has the right to ask Union Bank to recredit the amount of the check to his account.
 Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to payee. XYZ cannot
go after Eastwest Bank.
 Drawee bank can recover from the collecting bank. Union Bank can recover from Eastwest Bank.
 Payee can recover from drawer as he still retained his claim of debt against drawer. A can still recover from XYZ.
 Payee cannot collect from drawee bank, unless the latter shall accept or certify the check, without such
specification or acceptance there is no privity of contract between the drawee bank and the payee. A cannot
collect from Union Bank.
 Collecting bank bears the loss but can recover from person to whom it has paid check. Eastwest Bank bears the
loss but can recover from B, the forger.

TRUE OR FALSE
 A stranger to the negotiable instrument cannot give notice of dishonor. – true (unless he is acting as an agent)
 For payment to be considered as having been made in due course, it must only be paid at the date of maturity of the
instrument. – false before maturity also
 A negotiable instrument is dishonored by non-payment when presentment is excused and it is overdue and unpaid. - true
 Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the
drawee or acceptor will pay the instrument. – notice of dishonor
 A person secondarily liable on the instrument is discharged by the discharge of a prior party. - true
 Notice of dishonor may not be required to be given to an indorser. – false unless in 3 instances
 Indorsers are liable in the order determined by the holder of the instrument. – false, in which they endorse
 An accommodation party will only be liable to a holder for value if the latter did not know that at his taking of the instrument
that he was an accommodation party. – false, notwithstanding

Page | 2
ANSWER:

To be negotiable, an instrument must conform to the following requirements:

1. It must be in writing;
2. It must be signed by maker or drawer;
3. It must contain an unconditional promise or order to pay a sum certain in money;
4. It must be payable on demand, or at a fixed or determinable future time;
5. It must be payable to order or to bearer; and
6. Where it is a bill of exchange, drawee must be named or otherwise indicated therein with reasonable certainty.

A. The note is in writing.

The note is signed by the maker.
The note contains an unconditional promise to pay P10, 000.00, a sum certain in money.
The note is payable on or before July 1, 2006, a fixed or determinable future time.
The note is payable to X or order.

The note is negotiable. It is a kind of special note, a mortgage note.

B. The bill is in writing.

The bill is signed by the drawer.
The bill contains an unconditional order to pay P10, 000.00, a sum certain in money.
The bill is payable on or before July 1, 2006, a fixed or determinable future time.
The bill is payable to X or order.
The drawee is named, who is Z.

The bill is negotiable. It is a form of a bill of exchange. Trade acceptance is a draft or bill of exchange drawn by the
seller on the purchaser of goods and accepted by the latter by signing it as drawee. If the instrument is drawn against
a bank instead of the purchaser, it is called banker's acceptance.

HENCE, BOTH INSTRUMENTS ARE NEGOTIABLE.

Page | 3
ANSWER:

No.

William may not enforce the promissory note against Ramon.

Under the NIL, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto. If there is no delivery, there is no contract. No liability is incurred, the payee does not acquire any
right.

Since the note is forged and payable to order

 the party whose indorsement is forged is not liable to any holder even a holder in due course. The indorsement being forged,
it is inoperative.
 The other parties, including the maker, prior to the party whose signature is forged are not also liable to any holder. The
instrument being payable to order, it can be negotiated only by indorsement completed by delivery. But since the
indorsement is forged, it is inoperative and, therefore, it cannot operate to transfer any right or title over the instrument.
 Holder did not acquire any rights to retain the note, give discharge therefore, or enforce payment as against party whose
signature is forged and parties prior to him, including maker.
 Any transferee of forger merely acquires whatever rights he had against prior parties, hence, transferee likewise acquires no
rights against prior parties

Since the note was not delivered to Jaime, the payee, there is no contract and the payee does not acquire any right thereto.
The Indorsement, as it was forged, does not create liability of the maker of the note, Ramon.

George signed a blank check which he inadvertently left on top of his desk. The check was then stolen by Maria, his secretary,
who filled in the amount of PHP 50,000.00 and made it payable to Juana Dela Cruz or order. Maria, then indorsed the check
in the name of Juana Dela Cruz and passed it to Manuel, thereafter Manuel negotiated the check to Antonio, then Antonio to
Edgar, and Edgar to Fernando. Can Fernando enforce the check against George? (2 pts)

No.

Under the NIL, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto. If there is no delivery, there is no contract. No liability is incurred, the payee does not acquire any
right.

Fernando cannot enforce the check as it is not a valid contract in the hands of any holder

Suppose Fernando is a holder in due course, will your answer be the same? (2 pts)

Yes, my answer will be the same. As regards parties whose signature appeared prior to delivery, the non-delivery of an incomplete
instrument is a valid defense, not only between the original parties but also against a holder in due course. It is therefore a real
defense, available even against a holder in due course.

Can Fernando enforce liability against Maria? (2 pts)

As regards parties whose signature appeared after delivery, the instrument is valid and enforceable

Fernando can enforce liability against Maria because she was the forger, the one ultimately liable for the wrong committed.

When may the holder of a bill of exchange consider the negotiable instrument as a promissory note? (2 pts)

A bill of exchange may be treated as a promissory note in the following instances:

a. The drawee is a fictitious person or a person not having the capacity to contract;
b. The drawer and the drawee are one and the same person;
Page | 4
 c. Where the instrument are so ambiguous that there is a doubt as to whether the instrument is a bill or a note, the holder
may treat it either as a bill or note, at the option of the holder. (Sections 130 and 17 of NIL)

An indorsement of a promissory note for PHP 10,000.00 states: Pay to Juan, PHP 7,500.00. What would be the effect of such
an indorsement? (2 pts) Can Juan be considered as the holder of the promissory note?(2 pts)

The note will be invalidated.

Under Section 32, the endorsement must be of the entire instrument. Otherwise, the indorsement is not valid, but would only
constitute a valid assignment binding between the parties. The REASON is that the instrument must be delivered and there cannot
be partial delivery of an instrument.

THE EXCEPTION is when an instrument has already been paid in part, it may be endorsed to the residue.

NOTE: That an indorsement which purports to transfer to the indorsee a part only of the amount payable does not operate as a
negotiation of the instrument; it operates merely as an assignment. SEE: Montinola v. PNB, 88 Phil. 178 [1951]

No. Juan cannot be considered a holder. He is an assignee.

In payment of computers he had purchased, Pedro drew a check upon the Philippine National Bank for PHP 100,000.00
payable to the order of AceTech, the seller in Manila. He sent the check by mail. Later, for valuable consideration, AceTech
indorsed the check “without recourse” to Juan. The latter indorsed it in blank for consideration to Pablo, who in turn sold it
for PHP 80,000.00 by delivery to Richard. The computers were never forwarded to Pedro. Richard eventually presented the
check to PNB but payment was refused because Pablo had not indorsed it.

Is the Bank right in so refusing? (2 pts)

No. The bank cannot refuse payment because Richard has the right to enforce payment of the instrument as a transferee of
Pablo. Any transferee acquires whatever rights the transferor may have.

If Richard gave due notice to AceTech, may he recover from the latter? (2 pts)

No.
Acetech is a qualified indorser because he adds the words without recourse in his endorsement. This serves as an ordinary
equitable assignment, and Acetech is a mere assignor of the title to the instrument.
Acetech cannot be made secondarily liable to the instrument because of the limitation.
The qualified endorser guarantees only the genuineness of the instrument but does not guarantee its payment. He will be
liable only if signature of the maker turns out to be a forgery. He will not be liable if maker refuses to pay.

If Richard gave due notice to Pedro, may he recover from the latter even if the computers were never delivered? (2 pts)

Yes. A drawer shall be secondarily liable in case of refusal of the drawee to pay after proper notice of dishonor is given.

May Richard recover from Juan? (2 pts)

Yes. Endorsers shall be secondarily liable in case of refusal of the drawee to pay after proper notice of dishonor is given.

May he recover from Pablo? (2 pts)

Yes. A drawer shall be secondarily liable in case of refusal of the drawee to pay after proper notice of dishonor is given.

Jack makes a note for PHP 25,000.00 payable to the order of Jill. Jill negotiates the note to John, who is aware that Jack is not
a party for value. Can Jack avoid payment to John upon maturity by claiming absence of consideration? Assuming Jack is liable
to pay, may he recover the amount from Jill? (3 pts)

No. The absence or failure of consideration is a matter of defense as against any person not a holder in due course.

Page | 5
 John is not a holder in due course because at the time it was negotiated to him, he had notice of the infirmity of want of
consideration.

Under Section 52, a holder in due course is one who has taken the instrument under the following conditions:

a. That it is complete and regular on its face.

b. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if
such was the fact.
c. That he took it in good faith and for value.
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.

Noel is the holder of a note issued by Tony, which was indorsed in succession by Dan, Ike, and Arnel. What is the effect of a
renunciation by Noel in favor of Ike? If the renunciation is in favor of Tony? (3 pts)

RENUNCIATION BY HOLDER: Holder may expressly renounce his rights against any party to the instrument before, at, or after its
maturity.

An absolute and unconditional renunciation of Noel’s rights before, at or after maturity, in favor of a secondary party such as Ike
discharges only the secondary parties and all subsequent to him. Hence, Arnel is discharged by the renunciation.

If the renunciation is made at or after the maturity of the instrument, in favor of Tony, the principal debtor, it discharges the
instrument.

A renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing, except when
the instrument is delivered up to the person primarily liable thereon.

A bill of exchange reads: “Pay to the order of Lito PHP 10,000.00 and reimburse yourself from my lottery winnings”. It is
addressed to Victor as drawee and is signed by Cesar. Is the bill of exchange a negotiable instrument? (3 pts)

To be negotiable, an instrument must conform to the following requirements:

1. It must be in writing;
2. It must be signed by maker or drawer;
3. It must contain an unconditional promise or order to pay a sum certain in money;
4. It must be payable on demand, or at a fixed or determinable future time;
5. It must be payable to order or to bearer; and
6. Where it is a bill of exchange, drawee must be named or otherwise indicated therein with reasonable certainty.

The instrument is negotiable. All the requirements are present. An unqualified order or promise to pay is unconditional though
coupled with an indication of particular fund out of which reimbursement is to be made or a particular account to be debited with
the amount.

Here, the drawee pays the payee from his own funds. The drawee pays himself from the particular fund indicated. It is negotiable
because the particular fund indicated is not the direct source of payment

Who is a holder in due course? Will the defense of want of delivery of a complete instrument as provided for under Section
15 of the Negotiable Instruments Law hold against a holder in due course? (4 pts)

Under Section 52, a holder in due course is one who has taken the instrument under the following conditions:
e. That it is complete and regular on its face.
f. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if
such was the fact.
g. That he took it in good faith and for value.
h. 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.

Page | 6
Under Sec. 15, if an incomplete instrument is not delivered (for the purpose of negotiation), it will not, if completed and
negotiated, without authority, be a valid contract in the hands of any holder (even in the hands of a holder in due course), as
against any person whose signature was placed thereon before delivery. Thus, Sec. 15 gives a real defense.

X, as drawer, drew a bill of exchange on Y, as drawee, payable to the order of Z, as payee. X issues the bill to Z for value. Z
presents the bill to Y for acceptance but it is dishonored by non-acceptance. No notice of dishonor by non-acceptance was
given to X. Subsequently, Z negotiated the bill to Juan, an indorsee, who had no knowledge of prior dishonor. Y again
dishonored the bill. Juan immediately gives notice of dishonor to X, and subsequently sues him for collection. X contends that
he has been discharged from liability due to the failure of Z, a prior holder, to give notice of dishonor? Is X correct? (3 pts)

No.

Under the NIL, an omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due
course subsequent to the omission. (Sec. 117).

The failure of Z to give notice of dishonor to X discharges the latter from liability as against Z but does not discharge X of his
liability as to a holder in due course.

Bong makes a note payable to Manny or order. Manny indorses the note to Dino. Tyrone finds the note and indorses the note
to John by forging Dino’s signature. Assuming John is a holder in due course. Discuss the liabilities of the parties on the note.
(4 pts)

John cannot enforce the instrument against Bong and Manny because John’s right against them are cut off by the forged
signature of Dino which is wholly inoperative. John could acquire rights against Bong and Manny to the instrument only
through the forged signature of Dino.
Neither can John enforce the note against Dino because Dino’s signature is wholly inoperative. Dino has no privity with
John. Under Section 23, John acquired no right to retain, discharge, or enforce payment of the note under the forged
signature of Dino.
Of course, Joh has a right of recourse against Tyrone, the forger.
Dino can recover from Bong and Manny because his rights against them were not affected by the forgery. The signatures
of Bong and Manny are genuine and they are liable to Dino on their contract.

How is a negotiable instrument discharged? (10 pts)

ANSWER:

Discharge is the release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders
the instrument without force and effect, and consequently, it can no longer be negotiated.

Methods for discharge of instrument

1. By payment in due course by or behalf of the principal debtor;
2. By payment in due course by the party accommodated, where the instrument is made or accepted for accommodation;
3. By the intentional cancellation of the instrument by the holder thereof;
4. By any other act which will discharge a simple contract for the payment of money:
(a) remission;
(b) novation;
(c) confusion or merger.
NOTE: Loss of the negotiable instrument will not extinguish liability; compensation is not available so long as an obligation is
evidenced by a negotiable instrument (Villanueva, 2009).
5. Reacquisition by principal debtor in his own right. Reacquisition must be:
a. By the principal debtor
b. In his own right
c. At or after date of maturity (instrument is discharged; if made before, it may be renegotiated) (NIL, Sec. 119).

Page | 7