Negotiable-instruments-law.docx

NEGOTIABLE INSTRUMENTS LAW PROFESSOR SEBASTIAN A REVIEWER BY

LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN

DLSU LAW

INTRODUCTION

ORIGIN

Agbayani: The Negotiable Instrument Law is a creature of the law merchant, from which it was imported into England and crystallized in the English common law. It was codified in that country in 1882 by what is known as the Bills of Exchange Act. In the United States there was, prior to the drafting of the Negotiable Instrument Law, a codification of the law in some states but there was nothing looking towards a codification for all the states of the Union. The earliest codification for an individual state is found in the California Code of 1372. At a conference of commissioners from nineteen states held in 1895, a resolution was adopted requesting the

committee on commercial laws to procure a draft bill relating to commercial paper based on the Bill of Exchange Act. In 1896, the draft, as amended, was adopted by the conference and recommended for general enactment by the state Legislatures. Campos: The use of negotiable instruments originated from the merchants and traders of the Middle Ages, more specifically among the Florentine and Venetian merchants along the Adriatic Sea. The bill of exchange was devised to facilitate the contract of cambium and to avoid the risks of transporting money. Sebastian: The Negotiable Instrument Law is a compilation of commercial practice developed in Europe. It was necessary for traders to come up with a substitute medium of exchange because trade was flourishing. There was hardly enough government coins to sustain the production of mint. In those days, bank notes (or paper bills) were non-existent. Due to scarcity of coins, promissory notes and bills of exchange came about. This compilation of rules have evolved from ancient trading practices. In 1882, UK enacted the Bill of Exchange Act. On or about that time, the US also codified a verbatim reproduction of the Uniform Negotiable Instrument Law. The Americans brought the Negotiable Instrument Law to the Philippines which we copied verbatim. It has not been amended since 1911. PURPOSE Agbayani: 1) To produce uniformity in the laws of the different states upon this important subject, so that the citizens of each state might know the rules which would be applied on their notes, checks and other negotiable paper in every other state in which the law was enacted, since it was impossible for the commercial purchaser in any state to know all the details affecting the negotiability of paper governed by the laws of all the other states. 2) To preserve the law as nearly as possible as it then existed. Sebatian: Rules in Negotiable Instruments Law are universally the same. Thus, it enables trade with other people anywhere he goes or transacts. CONCEPT OF NEGOTIABILITY Sebastian: An instrument is negotiable when it transfers from one hand to another. It is not just a mere transfer but a deliberate and with intention to give or transfer. Where there is proper negotiation, the person who holds it as a consequence of delivery is called a “holder”. Therefore, negotiation is the transfer of a negotiable instrument for the purpose of making the transferee the holder of the negotiable instrument. Assignability Negotiability

more comprehensive term and pertains only to a special class of pertains to contracts in general contracts – negotiable instruments subject to the defenses obtaining takes it free from personal defenses among the original parties available among the parties Non-Negotiable Instrument SOCIETAS it is necessary to allegeLEX and prove consideration is presumed and need VERITAS.an VNITAS . VIRTVS . be alleged tonot specified person consideration to maintain action and proved on a common law instrument transfer by assignment Indorser isisassignee. not liable Transferee Assigneeonis his indorsement unless there be similar to a subrogee. Therefore, presentation for payment at maturity assignee only acquires the totality of andright prompt notice of dishonor in case the of the transferor.

Negotiable Instrument 1 to order or bearer transfer by negotiation Transferee is holder. Unlike an assignee, a holder is in due course is free from all personal defenses available among the parties. Thus,

unless it has been expressly stipulated or unless the insolvency was prior to the assignment and of common knowledge party primarily liable on a negotiable instrument does not or cannot pay. He warrants the solvency of the person primarily liable. The qualified indorser and the person negotiating by mere delivery have limited secondary liability. Campos: The Negotiable Instruments Law divides negotiable instruments into two main groups: the promissory note and the bill of exchange. The first evidences a promise to pay money, while the bill of exchange is an order made by one person to another to pay money to a third person. The most commonly used for of bill of exchange is the check, wherein the one who issued it order his bank to pay the person named on the check. A check is always payable on demand. Promissory Note – A negotiable promissory note is an unconditional promise There are two contracts in a negotiable instrument. First there is the issuance of a negotiable instrument and the second is the underlying transaction. The underlying transaction is the reason for the issuance of the negotiable instrument. However, in transferring the negotiable instrument, you only look at the issuance of the negotiable instrument and there is no need to consider the underlying transaction. APPLICATION OF THE LAW in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixe or determinable future time, a sum certain in money to order or to bearer. (Sec. 184) Agbayani: A promissory note is essentially a promise in writing to pay on demand or at a fixed or determinable future time a sum certain in money. Ang Tiong v. Ting – Having arisen from a bank check which indisputably a negotiable instrument, the present case is, therefore, in so far as the indorsee is concerned vis-à-vis Non-Negotiable Negotiable the indorser, governed by the Negotiable Instrument law (see Secs. 1 and 185). Article I promise to pay X P 100.00 on I promise to pay X, or order P 100.00 2071 of the new Civil Code is hereby completely irrelevant and can have no application September 1, 2012. on September 1, 2012. whatsoever. (sgd.) (sgd.) Agbayani: An instrument which does not comply with the requirement of the Negotiable Instrument Law is a simple contract in writing and is merely an evidence of such intangible Maker Maker rights as may have been created by the assent of the parties. If, however, it conforms to the requirements of the Negotiable Instruments Law, the instrument is itself the contract In this note the person paid is This note can pass from hand to hand; and not just a mere evidence of rights. It is a mercantile specialty.

specified.

and was intended to circulate. This

can be negotiated X Should prior any to Campos: The Negotiable Instruments law applies only to negotiable instruments, to those instruments which conform with the requisites laidnote down by section one of theby law. due date.law X may indorse this note by of said requisites be absent the instrument would not be negotiable and would therefore not governed by the Negotiable Instruments Law but by general on contracts. writing “Pay to Y or order. (sgd.) X”.

Sebastian: For the Negotiable Instrument Law to apply, the instrument must comply with the requisites under Section 1. Otherwise, the Civil Code shall apply. TYPES OF NEGOTIABLE INSTRUMENTS Agbayani: The Negotiable Instruments Law deals with three kinds of negotiable instruments, namely: (1) promissory notes, (2) bills of exchange, and (3) checks, which are also bills of exchange, but of a special kind.

Campos: There are usually two parties to a promissory note: the promissor, called the maker; and the payee, the person to whom the promise to pay is made. Bills of Exchange – 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 or determinable future time a sum certain in money to order or to bearer. (Sec. 126) Agbayani: A bill of exchange is essentially an order or a command in writing addressed to someone requiring him to pay a sum certain in money. (Agbayani) Campos: The person who gives the order to pay in a bill of exchange is referred to as the drawer; the addressee of the order is the drawee, and the person to whom the payment to be made is the payee. Sebastian: A bill of exchange is similar to a promissory note with one difference, it is an order to pay. The function of a bill of exchange is that it is a substitute for money. It allows making payment without even touching the actual money.

Checks – A check is a bill of exchange drawn on a bank payable on demand. (Sec. 185) Sebastian: A check is only one of the many types of bills of exchange. Rules governing bills of exchange are slightly modified when we talk of checks. Another type of bill of exchange is a draft which is exactly like a check; however, it need not be directed to a bank. It is an order to pay given to a person which is not necessarily a bank. Therefore, a check is a special draft which is directed to a bank. DISTINCTIONS AMONG VARIOUS TYPES OF INSTRUMENTS Bill of Exchange an order or command to pay an order not because it is payable to order but because, by its terms, it orders or commands the drawee to pay money to a payee or bearer

Promissory Note a promise to pay a promissory note does not become a bill by reason that it is payable to order

Bill of Exchange may not be drawn against a bank may be payable on demand or at a fixed or determinable future time must be presented for acceptance

Checks always drawn upon a bank or banker always payable on demand

need not drawn on a deposit death of a drawer of an ordinary bill of exchange does not revoke the authority of the banker to pay may be presented for payment within a reasonable time after its last negotiation

not needed to be presented for acceptance drawn on a deposit death of a drawer of a check, with knowledge by the banks, revokes the authority of the banker to pay must be presented for payment within a reasonable time after its issue

CONCEPT OF REAL AND PERSONAL DEFENSES Sebastian: A real defense is one raised against all persons, including holders in due course. While a personal defense is one that can be raised except against a holder in due course. GENERAL PROVISIONS Sec. 190. Short title. - This Act shall be known as the Negotiable Instruments Law. Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires: "Acceptance" means an acceptance completed by delivery or notification; "Action" includes counterclaim and set-off; "Bank" includes any person or association of persons carrying on the business of banking, whether incorporated or not; "Bearer" means the person in possession of a bill or note which is payable to bearer; "Bill" means bill of exchange, and "note" means negotiable promissory note; "Delivery" means transfer of possession, actual or constructive, from one person to another; "Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof;

"Indorsement" means an indorsement completed by delivery; "Instrument" means negotiable instrument; "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder; "Person" includes a body of persons, whether incorporated or not; "Value" means valuable consideration; "Written" includes printed, and "writing" includes print. Sec. 192. Persons primarily liable on instrument. - The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable.

Sec. 193. Reasonable time, what constitutes. - In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. Sec. 194. Time, how computed; when last day falls on holiday. - Where the day, or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday, the act may be done on the next succeeding secular or business day. Sec. 195. Application of Act. - The provisions of this Act do not apply to negotiable instruments made and delivered prior to the taking effect hereof. Sec. 196. Cases not provided for in Act. - Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant. Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent with this Act are hereby repealed. Sec. 198. Time when Act takes effect. - This Act shall take effect ninety days after its publication in the Official Gazette of the Philippine Islands shall have been completed. FORMS OF NEGOTIABLE INSTRUMENTS Sec. 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Promissory Note 1)

Bill of Exchange 1) it must be in writing and signed by the drawer 2) it must contain an unconditional order to pay a sum certain in money 3) it must be payable on demand, or at a fixed or determinable future time 4) it must be payable to order or bearer 5) the drawee must be EITHER:  named OR  with reasonable certainty (student of apc is not certain) = to know to whom he is to cal for acceptance or payment

it must be in writing and signed by the maker 2) it must contain an unconditional promise to pay a sum certain in money 3) it must be payable on demand, or at a fixed or determinable future time 4) it must be payable to order or GR: No drawee name = non nego to bearer EXCEPTION: Section 14, the drawee’s name may be omitted and be filled in under implied authority like any other blank. And, an acceptance may supply -may be TIME or the omission of a designation. 4 LEX SOCIETAS VERITAS. VNITAS. VIRTVS.DEMAND instrument I authorize (drawee) to pay… = non- after issued or negotiable instrument. delivered, after issued or delivered, additional parties may additional parties be involved may be involved

De Leon: Commercial Paper: written debt commercial transactions either BOE or PN All paper or instrument is either nego or non nego Negotiable Instruments Law – cannot come into operation without document in existence is of Sec1 character Doesn’t involve sale or transfer of goods Every nego instrument is presumed a contract Kinds: either BOE or PN Reason to determine negotiability: Gauge risks involved in taking it as security for obligation

Agbayani: The formalities required are essential for the security of mercantile transactions. They distinguish the negotiable instrument from the ordinary non- transferrable written contract. The negotiability of an instrument is to be determined: (1) by Section 1; (2) by considering the whole of the instrument; and (3) by what appears on the face of the instrument and not elsewhere. Lacking one = non nego The requirement lacking CANNOT be supplied by using a separate instrument in which that requirement which is lacking appears. Campos: The fact that an instrument does not meet the foregoing requisites will not affect its validity, the only consequence being that it will be governed not by the Negotiable Instruments Law but by the general law on contracts. Sebastian: In civil law, form is not an essential ingredient for the validity of a contract. N e g o t i a b l e i n s t r u m e n t ent, which is also a contract, form is an essential ingredient for its negotiability. MUST BE IN WRITING Agbayani: In order to be negotiable, there must be a writing of some kind, for, if the instrument were not in writing, there would be nothing to be negotiated from hand to hand. (tangible form) Oral form: NON NEGO, difficult to determine liability and creates danger of fraud

Campos: “In writing” includes “print”, “ p e n c i l o r p e n ” , “ t y p e d ” Sebastian: If the instrument is not in writing, there would be nothing to be negotiated or passed from hand to hand. Delivery is necessary; no delivery, no issuance. Therefore, the medium of the negotiable instrument should be transferrable from hand to hand. Reason:  Presentation of an instrument that can be passed from hand to hand.  Drawer/Maker want evidence of the note or the bill or evidence of an indorsement. SIGNATURE De Leon: Generally, signature is placed on lower right hand. But ANYWHERE is binding, as long as it appears that a person intended to make the instrument as his own. Signature is PRIMAFACIE that he intends to be bound as maker or drawer. LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

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Signature is placed where intention is not clear in what capacity to sign = He is deemed an INDORSER. Signature is presumed valid Burden of proof of invalidity: party against

Agbayani: The full name is preferably written. At least, the surname should appear and, generally, the signature usually is by writing the signers’ name. But it may consist of initials or even numbers. (sufficient already) But, where the name is not signed, the holder must prove that what is written is intended as a signature of the person sought to be charged. The name may be printed, typewritten, stamped, engraved, photographed or lithographed. But in such case, it must be shown to have been adopted and used by the party as his signature. Campos: The signature is binding whether it is in one’s handwriting, or printed, engraved, lithographed or photographed, so long as it is intended or adopted as the signature of the signer or made with his authority. It will be valid and binding so long as the intention to make the instrument the maker’s or drawer’s is shown. The maker of a note or the drawer of a bill must sign the instrument and his signature is usually written at the lower right hand corner thereof. The drawee’s name is usually written on the lower left hand corner, although in checks the bank’s name sometimes appears across the top. The payee and the successive indorsees negotiate the instrument by signing on the back. As long as the parties to the bill or note comply with these long established and recognized customs, it would be clear in what capacity the parties signed. However, once a party to an instrument deviates from the commercial usage with respect to the place of signature, and it is not clear from the instrument in what capacity he signs, ambiguity arises. The law solves this by considering such a person as an indorser, and not as a maker or drawer. Sebastian: Identification of the maker or drawer is not an element of negotiability. Thus, only the customary signature, at least, of the maker or drawer is necessary. Garcia v Lacuesta (90 Phil 489) – Where a cross appearing in a document is not the usual signature of a person, that cross cannot be considered as a valid signature. Sebastian: An electronic signature is equivalent to the functional signature, subject to the precautions set by law. Legal Recognition of Electronic Documents. – Electronic documents shall have the legal effect, validity or enforceability as any other document or legal writing, and (a) Where the law requires a document to be in writing, that requirement is met by an electronic document if the said electronic document maintains its integrity and reliability and can be authenticated so as to be usable for subsequent reference, in that (i) The electronic document has remained complete and unaltered, apart from the addition of any endorsement and any authorized change, or any change which arises in the normal course of communication, storage and display; and (ii) The electronic document is reliable in the light of the purpose fo

LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

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which it was generated and in the light of all the relevant circumstances. (b) Paragraph (a) applies whether the requirement therein is in the form of an obligation or whether the law simply provides consequences for the document not being presented or retained in its original form. (c) Where the law requires that a document be presented or retained in its original form, that requirement is met by an electronic document if (i) There exists a reliable assurance as to the integrity of the document from the time when it was first generated in its final form; and (ii) That document is capable of being displayed to the person to whom it is to be presented: Provided, That no provision of this Act shall apply to vary any and all requirements of existing laws on formalities required in the execution of documents for their validity. For evidentiary purposes, an electronic document shall be the functional equivalent of a written document under existing laws. This Act does not modify any statutory rule relating to the admissibility of electronic data messages or electronic documents, except the rules relating to authentication and best evidence. (Sec. 7, Electronic Commerce Act of 2000) Legal Recognition of Electronic Signatures. - An electronic signature on the electronic document shall be equivalent to the signature of a person on a written document if that signature is proved by showing that a prescribed procedure, not alterable by the parties interested in the electronic document, existed under which (a) A method is used to identify the party sought to be bound and toindicate said party’s access to the electronic document necessary for his consent or approval through the electronic signature; (b) Said method is reliable and appropriate for the purpose for which the electronic document was generated or communicated, in the light of all the circumstances, including any relevant agreement; (c) It is necessary for the party sought to be bound, in order to proceed further with the transaction, to have executed or provided the electronic signature; and (d) The other party is authorized and enabled to verify the electronic signature and to make the decision to proceed with the transaction authenticated by the same. (Sec. 8, Electronic Commerce Act of 2000) Presumption Relating to Electronic Signatures. - In any proceedings involving an electronic signature, it shall be presumed that (a) The electronic signature is the signature of the person to whom it correlates; and (b) The electronic signature was affixed by that person with the intention of signing or approving the electronic document unless the person relying on the electronically signed electronic document knows or has notice of defects in or unreliability of the signature or reliance on the electronic signature is not reasonable under the circumstances. (Sec. 9, Electronic Commerce Act of 2000) Agbayani: The signature of the maker or drawer is usually written at the bottom right hand corner. The location of the signature is not material. What is important is that it appears therefrom that the person intended to make it his own.

PROMISE TO PAY AND ORDER TO PAY Agbayani:

Promise to Pay The promise to pay must be on the instrument itself, although it is not necessary to use the word “promise.” It is enough (1) that the words of equivalent meaning are used, or (2) that the promise is implied from promissory words contained in the instrument. But a promise to pay cannot be implied from the mere existence of a debt. Instead of promise, the words “agree,” “will pay,” “shall pay,” “good,” “due” and the like may be used. A mere admission that the debt is due is not sufficient because such admission it only evidences the existence of a debt. In addition to the acknowledgement of indebtedness, there must be other words expressing the intention to pay or from which may be implied such as an intention to pay.

Order to Pay A bill is an instrument demanding a right. It is, however, not necessary that the word “order” be used. Any words which are equivalent to an order or which show the drawer’s will that the money should be paid, are sufficient to make the instrument a bill of exchange. A mere authorization to pay or request to pay is not negotiable because it gives a discretion to the drawee to pay or not to pay.

The words “order” and “bearer” are usually referred to as words of negotiability. However, they may also be used to imply a promise.

Campos: The instrument must contain a promise or an order to pay. Mere acknowledgement of a debt does not constitute a promise. There should be an express promise on the face of the instrument to pay the money. However, the

word “promise” is not absolutely necessary. Any expression equivalent to a promise is sufficient. In a bill of exchange, words which are equivalent to an order are sufficient. A mere request or authority to pay does not constitute an order. The instrument is by its nature demanding a right. Sebastian: A promise to pay is a written commitment of the maker to pay a sum of money to the payee or payee’s order. It constitutes an obligation. On the other hand, order to pay is a directive to pay/settle an obligation but, in fact, it instructs another person to make the payment. The bill makes an order for the settlement of an obligation. In this case, the drawee of the bill is the debtor to the drawer. Under the Civil Code, creditors are not required to accept payments from third parties. Under the Negotiable Instruments Law, creditors may be required. CONCEPT OF A SUM CERTAIN IN MONEY De Leon: Money includes all legal tenderd(legallycompel creditor to accept) Money is one standard of value in business. All other commodities may rise and fall in value, money measures this rise and fall and stays the same, Agbayani: The amount of money to be paid must be determinable by inspection and must be stated plainly on the phase of the instrument, and, like the denomination of money, must be stated in the body of the instrument. A note or bill, if it is to be negotiable, cannot be made payable in goods, wares, or merchandise, or in property, or in labor or services. So also, an instrument is not negotiable if it is made payable in bonds, corporate stock, state paper, scrip, checks, foreign bills. The real reason for the requirement that negotiable instruments must be payable in money is obviously is that money is the one standard of value in actual business. All other commodities may rise and fall in value but in theory, at least, money always remain measures this rise and fall and remains the same. Campos: The amount payable must be certain. An instrument cannot function properly as a substitute for money unless the amount for which it stands for is specified and definite. An agreement to pay interest does not however render the sum uncertain. The exact amount thereof can be computed without looking beyond the instrument. The sum is certain although it is payable in installments as long as the latter are “stated” – (1) the amount of each installment and (2) due date of each installment. Neither will an acceleration provision based on default render the sum uncertain. In order to be negotiable, an instrument must be payable in money. Since negotiable instruments are intended to be substitutes for money, to properly perform such function they must necessarily be capable of being transformed into money if the holder so wishes. Thus, an instrument is not negotiable if payable in personal property like merchandise, or shares of stock, or even gold. If a contract contains a stipulation that payment is to be made in a currency other than Philippine currency, such stipulation will be ineffective and the obligation can be discharged only in legal tender. But the negotiability of such instrument will not be affected by such stipulation. An instrument which contains an order or promise to do an act in addition to the payment of money is not negotiable. This rule helps to retain simplicity of form which is absolutely necessary to the free use of negotiable instrument in the place of money. But if the order or promise gives the holder an election to require something to be done in lieu of money, an instrument otherwise negotiable would not be affected thereby. Sebastian: “a sum certain” is a definite amount. It must definite because negotiable instruments are substitutes for money. Thus, it must be for a specified amount of money. One cannot draw a negotiable instrument that is not payable in money. A negotiable instrument must be equal to money, not a commodity. However, where an instrument entitles holder to demand something else in lieu of money, negotiable character is not affected because it remains to be payable in money. In this case, the conversion should not have been made by the obligor. Once conversion is made, the instrument ceases to be negotiable.

NON NEGOTIABLE INSTRUMENT: Lacking sec 1 requisites OR negotiable in inception but lost its negotiability May not be negotiated but can be transferred or assigned unless there’s express prohibition against transfer or assignment on face of instrument

a. b.

Governed by provision of Civil Code Transfer or assignment pass only rights Check payable to a specified person ex. “Pay to Pedro” When endorsement prohibits further negotiation of instrument ceases to be negotiable because

NOTE ON PN: 1. Ten thousand pesos essential. 10,000 (figures) is not essential, just convenient 2. Place and date isn’t essential EXCEPT in cases where dte is necessary to determine due date or interest or whether holder is barred by statute of limitations like prescription 3. For value received is assumed, may be omitted No consideration = donation 4. I promise to pay = absolute or unconditional promise to pay (essential) Equivalent meaning: a. I bind myself to pay b. I will pay c. Good to *name* or order d. Due to *name* or order e. I acknowledge to be indebted to *name * or order f. To the order of g. Or order 5. Mere acknowledgement WITHOUT words BEARER or ORDER does not satisfy requirement 6. I agree to pay = non nego 7. May be payable to bearer 8. Not all instruments are payable at fixed future time. It can be “after date” or “after expiration of a certain period”, or “demand” 9. No time for payment is expressed = payable on demand 10. Payee need not be specified if bearer instrument 11. Place of payment is not essential. Place may be made in anywhere agreed. 12. Note may be signed by several persons EITHER “ jointly” or “jointly and severally”

NOTES ON BOE: 1. Required in its inception atleast 3 parties. 2. Parties need not to be distinct. Drawer may draw on himself payable to his own order. a. Drawer-drawee b. Drawer-payee 3. Payee may be specifically designated or may be an office or title or unspecified (same with PN) 4. Drawee is to whom bill is addressed. 5. Drawee assumes liability ONLY when he ACCEPTS by WRITING the word “ACCEPTED” and signing his name on face thereof. 6. Drawee CEASES to be a drawee and becomes ACCEPTOR when he indicates his willingness to pay bill. (bank in checks) 7. Acceptor becomes primarily liable like maker on note, drawer becoming only a surety 8. “Charge the same to the account of” –means amount to be paid is charged against drawer (this may be omitted) 9. “pay to” – unconditional order to pay 10. (Sgd) drawer – closer to body 11. Purpose of BOE: Drawer has funds in hands of drawee 12. Drawee refuse to accept when he has funds for the purpose = he becomes LIABLE to DRAWER for the DAMAGES and harm done to his credit. 13. Drawer has no funds in drawee = presumed that drawer had made arrangements with drawee so that he will honor bill. And that drawee will look to drawer for reimbursement and not to a bonafide holder 14. In order for drawee to be liable to drawer, there must be an arrangement obligating drawee to honor order of drawer or an existing debtor-creditor rel. The drawee owes drawer a debt, and drawer orders to pay to a 3rd party. Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or

(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

Notes: a. b. c. d. e. f. g. h. i. j. k.

To assure clarity To assure certainty in determining value of instrument Must be stated plainly on face of instrument Must be determinable from face without reference to outside source Sum certain = determine from instrument amount he is entitled to receive in maturity Instrument calls for an act = non nego bc it’s a substitute for money Basic test: holder can determine by calculation amount payable when due PN giving maker right to ascertain amount payable = non nego Promise to pay in two installments = not nego Acceleration dependent on maker = nego (on holder= non nego) Acceleration clause ONLY HAPPENS when there’s non payment on due date

Payment of Interest and the Usury Law (Act 2655) Agbayani: The addition of interest does not make the sum uncertain because, by mere mathematical computation, the amount to be paid on the maturity is ascertainable

Sebastian: Payment of interest does not make the sum uncertain because it can be calculated arithmetically. Default Interest Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (Art. 2212, Civil Code) Agbayani: When interest is stipulated but not specified, the interest shall be the legal rate, which is 12% for loans and forbearance of money. Where interest is not stipulated, the legal interest will be paid when the debtor incurs delay. Sebastian: If no interest is specified in the instrument, civil law will apply. Currency of Payment Agbayani: A bill or note may be made payable in denominations of foreign money, currency or coins. However, the instrument should express the specific denomination of money when it is payable in the money of a foreign country in order that the courts may be able to ascertain its equivalent value; otherwise, it is not negotiable. Foreign Currency Uniform Currency Act All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. (R. A. 8183) Legal Tender The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. (Art. 1249, Civil Code) Sebastian: Payment under the Negotiable Instruments Law can be in any legal currency, unlike in the Civil Code where monetary obligations may only be settled by paying in legal tender. A negotiable instrument can be denominated in any currency, although the fulfillment of the instrument can be frustrated. Nonetheless, the lack of source of currency is not a ground for the negotiable instrument to lose its negotiability. In Negotiable Instruments Law, what matters in the value of money, not the certainty of amount. Thus, fluctuation of the exchange rate does not make the sum represented uncertain. Unlike the Civil Code, in Negotiable Instruments Law, you can write an instrument ordering to pay a sum in foreign currency. Enforcement of such currency should also be paid in foreign currency. If the drawer cannot produce the foreign currency, the instrument is considered to be dishonored/defaulted. But if the currency is not available, it can be converted to legal tender. After the Uniform Currency Law, all foreign currency obligations are automatically converted to legal tender. But this was repealed by RA 8183. Therefore, undertaking to pay an obligation in foreign currency, you can be made to pay in foreign currency with only a single defense available – stipulation to pay in a currency that is not locally available. With Exchange Exchange - charge for the expense of providing funds at the place where instrument is payable to meet the instrument wc is issued at another place Agbayani: The sum payable is a sum certain even if it is to be paid with exchange, whether at a fixed rate or at the current rate because the rate of exchange between two places at a particular date is a matter of common commercial knowledge, or at least easily ascertained by any one so that the parties can always, without difficulty, ascertain the exact amount necessary to discharge the paper. Exchange is the difference in value of the same amount of money in different countries. The exchange may be at the current rate or at a fixed rate. Drawn in one country and payable in another = payment with exchange Drawn and payable in same country = no exchange = provision may be disregarded. Sebastian: A promise to pay in one currency but the medium of payment is another does not make the amount payable uncertain because, at any point, you can determine how much you will pay simply by computing for it. Effect of Installment Payments

Agbayani: The sum payable is a sum certain within the meaning of this act, although it is to be paid by stated installments. Consequently, an instrument containing such a stipulation would not thereby render non-negotiable. But the installments: (1) must be stated and (2) the maturity of each installment must be fixed or determinable. This last qualification is required in order to comply with the requisite that the instrument, if not payable on demand, must be payable at a fixed or determinable future time.

An acceleration clause is a provision that upon default in payment of any installment or of interest, the whole shall become due. An instrument containing an acceleration clause would not render it non-negotiable. Sebastian: Payment in installments does not destroy negotiability of the instrument because certainty is not destroyed. However, when writing an installment note, the installment schedule should clearly be stated. When the installment is to paid and how much the installment should be specified. Installments do not need to be equal. It can be in various amounts per installments. What is important is that there is no doubt on the due date and amount due on each installment and the total amount due at the end. Heffron: When the installment payments should start should also be specified. Effect of Payment of Unliquidated Amounts

Payment of Attorney’s Fees Agbayani: An instrument may stipulate that cost of collection and/or attorney’s fees shall be paid by the debtor in addition to the principal in case the instrument shall not be paid at maturity. The legality of such a stipulation is expressly recognized in Section 2, and impliedly in the New Civil Code. Such a stipulation is not void as usurious, even when added to a contract for the payment of the highest rate of interest permissible. It may, of course, be made to conceal usury. But that is a matter of proof to be determined in each case. *Attorney’s fee may be reduced if not reasonable. The purpose reasonable attorney’s fee to safeguard the lender against future loss or damage by being compelled to retain counsel to institute judicial proceedings to collect his debt. Although such stipulation will make the sum payable after maturity uncertain, it will not affect the certainty of the sum payable at maturity and, therefore will not affect negotiability of the instrument in which it is stipulated. After the date of maturity, the instrument will no longer be negotiable, in the sense that any transferee acquiring it would not be a holder in due course, as he would acquire the instrument after it is overdue. Since the tranferee would not be a holder in due course, he would hold the instrument subject to defenses, as if it were non-negotiable. Consequently, even if the amount to be paid after the date of maturity becomes uncertain by the payment of attorney’s fees and costs of collection, the negotiability will not be impaired as the uncertainty occurs after maturity. But in the absence of stipulation, attorney’s fees and expenses other than judicial costs, cannot be recovered, subject to the exceptions provided in the law. Legal Tender 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. In the meantime, the action derived from the original obligation shall be held in the abeyance. (Art. 1249, Civil Code) Agbayani: Legal tender is that kind of money which the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount. A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. The obligation is not extinguished and remains suspended until payment by commercial document is actually realized. In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in money and unless parties so agree, a debtor has no right, except at his own peril, to substitute something in lieu of cash as medium of payment of his debt. Even treasury certificates are not legal tender except for those payment of taxes and public debts.

The validity and negotiable character of an instrument are not affected by the fact that it designates a particular kind of current money in which payment is to be made. But where the instrument is made payable in the paper or currency of a particular bank, specifically and absolutely, and without reference to the currency or value of the paper, it is held not to be for the payment of money and is not negotiable. UNCONDITIONALITY OF PROMISE OR ORDER TO PAY Agbayani: It is not enough that there be a promise or an order. The promise or order must also be unconditional or absolute. This means that it must not be subject to a condition. A condition is (1) a future event that may or may not happen, or (2) a past event which is unknown to the parties. It is distinguished from an even that is certain to happen, even though the time of its happening is not known. Thus, an instrument subject to an event that is certain to happen is negotiable.

Campos: As a rule, unless the reference to the fund clearly indicates an instrument that such fund alone should be the source of payment, courts usually decide in favor of negotiability. Neither does the recital of the transaction for which the instrument was issued make the promise or order conditional. The latter is not expressly qualified by such transaction. Information is merely given There are two cases: (1) the drawee pays the payee from his own funds; afterwards (2) the drawee pays himself from the particular fund indicated. There is only one act, namely, (1) the drawee pays directly from the particular fund indicated. that the instrument was issued in connection with the transaction. The fact that the condition appearing on the instrument has been fulfilled will not convert it into a negotiable one. Sebastian: An instrument is a substitute for money and must, therefore, operate like money. A condition is a future or uncertain event, or a past event unknown to the parties which could either give rise to an obligation or it could terminate/resolve an obligation. The promise/order to pay can never be conditional be cause if there is a condition, the instrument may or may not become a substitute for money. Thus, it is no longer negotiable. If a promise to pay is unconditional, it means that there are no “ifs” or “buts”. A note is an outright and direct promise to pay. Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. Notes on PN: 1. Promise – not essential as a word, pwede equivalent like (“Payable” “to be paid”I agree to pay” “M obliges himself to pay” “Good for” due on demand” 2. Bare acknowledgement is non nego (IOU, due P 1000, due P or bearer. 3. Should be.. (“due P or bearer, IOU 1000 to be paid on sept 30, due P or or bearer) Notes on BOE: 1. Not necessary the word “order” (let the bearer, drawee will much oblige drawer to pay P or order” 2. Language is a demand, not requests like (I authorize u to pay, I wish you would pay” 3. Using polite words such as please doesn’t convert order to request 4. Immaterial whether drawee obeys order or not. Negotiability depends on terms on order.

UNCONDITIONAL PN/BOE: No condition and/or contingency EXCEPT:  Conditions on PRESENTMENT  PROTESTS  NOTICE OF DISHONOR Becomes contract if there’s condition Even if an instrument has condition that is very likely to occur, even if did occur, STILL NON NEGO Additional terms like consideration received DOES NOT make it conditional if duty to pay is unaffected by temrs REASON: o To enhance ability of instrument to circulate freely and to be acceptable

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Source of Funding or Reimbursement Agbayani: Unconditional when there’s indication of a particular fund out of which reimbursement is to be made. Reason: Not direct source of money, not limited, onlu a source BOE since it only takes place when payment by another has been made Conditional when there’s indication out of a particular fund The particular fund indicated is the direct source of payment and measure of liability Depends on existence/adequacy of fund Immaterial where fund actually exists or yet to be created Still non nego when fund is sufficient in maturity TEST OF NEGO:whether instrument carries general personal credit of maker/drawer Ex. Pay out of the.. *Language used is ambiguous or obscure = court decides negotiability *subject to terms and conditions regardless of terms = NON NEGO *states cause/consideration/arrangement which give rise to transaction = negotiable Fund for Reimbursement Fund for Payment There are two There is only one act, namely, cases: (1) the drawee pays directly (1) the drawee from the particular fund pays the payee indicated. from his own funds; afterwards (2) the drawee pays himself from the particular fund indicated. Where the payment to the payee is directly from the funds indicated, the payment is subject to the condition that the funds indicated are sufficient. But the funds indicated may or may not by sufficient. In other words, when a particular fund is indicated out of which the payment is to be directly made, the order would be conditional. On the other hand, where the fund is merely for purpose of subsequent reimbursement, the order or promise is not subject to the sufficiency of the funds. The order or promise is upon the general credit of the drawee or maker. It may, however, be argued that, if the drawer has no money in the hands of the drawee out of which reimbursement could be made, the drawee may refuse to accept or pay the bill. This is true. But whether a bill of exchange is negotiable or not does not depend upon the drawee’s willingness and ability to pay. It depends upon the tenor of the terms of the order. If the bill absolutely requires the drawee to pay, then the order in the bill is unconditional. Sebastian: Reimbursement does not affect negotiability because it has nothing to do with the note. Reimbursement here refers to whoever pays the holder of the instrument (i.e. in a bill the drawer instructs the drawee to pay the payee). By simply identifying the source of reimbursement, the instrument is still negotiable because the existence of the source of reimbursement is not conditional. The instrument is still negotiable but the lack of funds will mean that the drawee will refuse payment. LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

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But if the instrument stipulates a specific account as source of payment, this will be non-negotiable because the instrument becomes conditional, i.e. the existence of the account or its sufficiency is the condition. Meaning, the instrument will only be paid if the account exists or if it is sufficiently funded. Van Tassel v. McGrail – Agbayani: After making a note which was negotiable in form, the parties signed the following written agreement on the same paper: “It is herein provided and agreed that the above note is to be paid from the proceeds obtained from the sale of lots in the town of Vanors, and that one-forth of the proceeds of al sales of the lots are to be applied to the payment of said note and interest and until the same is paid.” The promise to pay is unconditional. Sebastian: The US Court said that the promise to pay is unconditional because the provision was not considered to be part of the note which had a separate signature.

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Keck v. Yakima Savings – Agbayani: A country bond payable “out of Yakima County Road Refunding Bond Fund and secured to be paid by taxes and assessments,” etc., was held negotiable because it was not restricted to the road fund. Sebastian: Theoretically, the security, e.g. taxes, will never run out of money. However, to be safe, the instrument in this case is non-negotiable because the instrument specified the source of payment. Particular Account to be Debited Agbayani: An instrument containing an indication of a particular account to be debited = non-negotiable because the instrument is to be paid first and, afterwards, the particular account indicated will be debited. It doesn’t depend its adequacy on particular fund Sebastian: Even if reimbursement of the payment is to be debited from a particular account, negotiability is not impaired because “debiting is merely the source of payment.” Statement of Underlying Transaction Agbayani: As a rule, instruments are not issued without any transaction upon which they are based. However, the mere fact that a transaction gives rise to the instrument is stated in the instrument will not make the promise or order conditional. But where the promise or order is made subject to the terms and conditions of the transaction stated, then, the instrument is rendered non- negotiable. To destroy negotiability of the instrument, the reference to the collateral contract must show that the obligation to pay is burdened with the condition of the contract. Sebastian: A note that tells the maker is a debtor and the payee is a creditor does or that the maker makes a promise to pay based on a loan agreement does not destroy its negotiability. CONCEPT OF FUTURE OR DETERMINABLE FUTURE TIME Agbayani: An instrument, to be negotiable, must be payable either (1) on demand or (2) at a fixed or determinable future time. If it is not either, the instrument is not negotiable. Campos: The requirement as to certainty of time of payment is for the purpose of informing the holder of the instrument of the date when he may enforce the payment thereof. Before such time, he cannot compel the maker of the note or the acceptor of the bill to pay, unless there is a valid acceleration provision. Sebastian: To be negotiable, there must be a definite day on which one will be able to collect on an instrument. A determinable future time is expressed under (a), (b) and (c). Ideally, a negotiable instrument should be payable on a fixed date but it may be payable at a determinable future time. The test whether it is payable at a determinable future time is when the time to pay is ascertainable without the need to negotiable further with the maker as to the date. Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a “determinable future time”, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) “On” or at a fixed period “after” the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. Notes: 1. 2. 3. 4. 5.

checks are payable at demand essential that it will become certainly due and demandable Reason: to enforce instrument (know when obligation will rise, be liable, ) Payable at contingency – non nego After date – after date of issuance LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

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6. Year of maturity be stated, otherwise although certain time, can be undetermined 7. BEFORE specified event- non nego 8. Pay if his father die in 5 years = non nego (remove 5 yrs= nego) Payable After Date or After Sight Agbayani: After sight means after the drawee has seen the instrument upon presentation for acceptance. If the instrument is a promissory note, the date of maturity is determined by counting the period from the date of its issuance. ~60~ days from it is presented to drawee. Sebastian: After sight refers to a bill of exchange. Presentment is necessary because it is essential to check if the signature of the maker/drawer is authentic and the drawee has every right to scertain wether or not the order to pay is genuine. From the time the drawee sees the instrument, he can either accept the instrument or reject it. By accepting it, the order of the maker was accepted and becomes the party liable on the bill of exchange. The drawee is not a party to the transaction until the instrument is accepted. A usance draft is an instrument payable at a fixed period after sight. This is used in banks. A bank or drawee is not liable to an instrument until it accepts it. A bank may dishonor an instrument for insufficient funds but it may still honor it, resulting in an overdraft facility. On or Before a Specific Date Sebastian: The phrase “on or before” gives the person liable a chance to pay on any other day before the due date. Payment date is still certain because it merely stipulates the debtor has the option to make a pre-payment at any time before the absolute due date. Rehabilitation Finance Corporation v. CA – At the outset, it should be noted that the makers of the promissory note quoted above promised to pay the obligation evidenced thereby “on or before October 31, 1951.” Although the full amount of said obligation was not demandable prior to October 31, 1951, in view of the provision of the note relative to the payment in ten (10) annual installments, it is clear, therefore, that the makers or debtors were entitled to make a complete settlement of the obligation at any time before said date. Fixed Period After the Occurrence of a Specified Event Sebastian: The phrase “on or after” means it cannot be on or before. The event described herein is that it will certainly happen but you just don’t know when (i.e. death).

Extension of Due Date Sebastian: By simply not making a demand for the presentment of the negotiable instrument, the instrument is no longer negotiable in its full commercial sense because the holder can no longer be a holder in due course since there is already a default (i.e. the note is already past due). State Bank of Halstad v. Bilstad – The notes in suit provided for an extension of time for one year on the condition therein named. The time at which they eventually become due was therefore fixed and certain. The only uncertainty as to the time or fact of payment was whether they should be paid at a particular time in one year, or at the date named in the next year. Section 3060-a4 expressly says that a note that is payable at a determinable future time, or that is payable on or before a fixed period after the occurrence of a specified event, which is certain to happen, is negotiable. These provisions clearly provide for flexibility in fixing the time of payment, provided only that there shall certainly come a time when the note is, by its terms, due. In other words, they recognize the right of the parties to an instrument to contract for their mutual benefit, and say in effect that, if the contract is made certainly to be performed at some definite time in the future, its negotiability is not destroyed. A determinable future time as used in the second, can mean nothing else than a time that can be certainly determined after the execution of the note. The contingency will render a note non-negotiable under the last clause of the section clearly means an even which may or may not happen. A contingency is, in law, an uncertain future event, and, as a contingency may never happen, a note payable only upon the happening thereof may never come due. Security Bank of Sioux City v. Gunderson – The promissory note in suit contains the following language: “The makers, indorsers, guarantors of this note, and the sureties hereon severally waive presentment for payment, protest and notice of dishonor, and consent that the time of its payment may be extended without notice, all defenses on the ground of any extension of time of payment being hereby expressly waived.” LEX SOCIETAS 13 VERITAS. VNITAS. VIRTVS.

In First National Bank of Pomeroy v. Buttery, the Court held that this phrase does not express an agreement to extend time, but leaves the matter of extension optional with the holder, and not obligatory upon him, and the note of its face fixes the time when it becomes due. The obvious purpose of the provision taken as a whole was merely to relieve the holder of the paper from the burdens made necessary by the rigid requirements of the mercantile law in order to secure the continued liability of the indorsers and sureties upon the paper. Therefore what was meant by the stipulation as to the extension of time was simply that in case the holder and the maker should agree upon an extension, the sureties and indorsers should not be discharged. The holder and maker of any note may at anytime agree upon an extension; therefore the fact that they have that right does not affect the negotiability of the paper. Sebastian: Time extension does not destroy negotiability provided that it is at the option of the holder/creditor. What destroys negotiability is the option of extension being given to the debtor because the certainty of the date is made uncertain. Effect of Acceleration Clause and Material Adverse Change Clause (MAC) Agbayani: There are certain notes containing acceleration provisions. These provisions (1) make it possible for the maker to pay the instrument at an earlier date or (2) make it possible the holder to require payment of the instrument at an earlier date. An illustration of the first class is the so-called ‘payable on or before a certain date’ note. Illustrations of the latter class are those instruments that: 1) contain acceleration clauses on the maker’s default in payment of installments or of interest, or on the happening of an extrinsic event; 2) contain, in notes secured by collateral, a provision that the maker shall supply additional collateral in case of depreciation in the value of the original deposit, with the holder’s right to declare the note due immediately on failure to make good the depreciation; or 3) contain provisions for acceleration where holder deems himself insecure.

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The first is covered by Section 2(b). There is a conflict of authority with regards to the second. The better view of the two maintain that the stipulation in question does not render the instrument containing it non-negotiable because from the standpoint of expediency as encouraging circulation and of business custom on account of their common acceptance by the commercial world, such clauses should be interpreted as not affecting negotiability. There is also a conflict of authority with regards the third. The better view of the two maintain that these cases holding an instrument payable at a fixed time but accelerable at the option of the payee or holder still negotiable because such instruments are certainly payable on or before a fixed time specified therein. Campos: Where the option to accelerate the maturity of the instrument is on the maker, the negotiability of the instrument is not affected, whether such option is absolute or conditional. But where the acceleration is at the option of the holder, whether such acceleration provision renders the instrument non-negotiable depends on the nature of the provision. If the option can be exercised by the holder only upon the happening of a specified event or act over which he has no control, then the negotiable character of the instrument is not affected. Where the holder’s right to exercise the option is unconditional, the time of payment is rendered uncertain and the instrument would not be negotiable. However, where the option given to the holder to accelerate the maturity of an installment note upon failure of the maker to pay any installment when due does not affect the negotiability of the instrument. Acceleration of the maturity of the instrument by operation of law does not affect its negotiability. Sebastian: Every time we use an acceleration clause, it refers to an obligation that is suspended by a term. The obligation is not immediately to be performed, but at some future time. Its function is to accelerate/advance the performance of obligation prior to the stipulated due date. In many cases, it is used when the obligation is to be performed in installments. It is used to accelerate installments payable when there is default in payment of one of the installments. The theory behind an acceleration clause is this: when a payment obligation is staggered on a monthly/ installment basis, default of one installment is indicative of inability to continue with further payments on a timely basis. If one installment is missed, there is a probability that the other installments will be missed. It is used to deter a default. Once there is default, one loses the benefit of the term. However, default is not the only source of accelerating the obligation. It is also possible that the note is current but the acceleration clause is triggered by a collateral default. A note secured by a mortgage, it does not lose negotiability because the collateral arrangement is a separate undertaking from the obligation under the note. The function of the mortgage is to strengthen the enforceability of the note. Where there is a breach of the collateral arrangement, there will be a breach of the note. But negotiability is not destroyed by acceleration of the collateral. In effect, one will be required to pay the obligation immediately and lose the benefit of the term. It is not unusual to find a negotiable instrument with an acceleration clause that is triggered by a mere feeling of insecurity on the part of the creditor. When somebody lends money, his concern is to recover what he lent. Recourse against the collateral is secondary, but gives a higher level of comfort that you can still recover in case of default. The longer the period of the payment, the greater is the risk taken by the creditor. If at any time there is a material adverse change in the nature of the undertaking, a creditor has right to accelerate. This is known as Material Adverse Change Clause (MAC). When the change in circumstance is adverse, creditor is entitled to call in the obligation. If a negotiable instrument carries an acceleration clause where the ground is a MAC, its negotiability is not impaired because, with or without the MAC clause, there is still a due date of the instrument. It merely gives the holder to make a pre-emptive strike to collect the value of the note before things go sour. In summary, an acceleration clause, a collateral default or an insecurty of the holder will not affect negotiability. For instance a note is payable at a future time and the maker dies today. The holder may file a claim against the estate of the deceased regardless of the due date on the note. The rule is that an acceleration by operation of law also does not affect negotiability. PAYABLE TO ORDER OR TO BEARER Agbayani: An instrument is not negotiable unless made payable to a person or his “order” or to “bearer” or unless words of similar or equivalent import are used such as “assigns” or “assignees,” or “holder.” Where the instrument is payable only to a specified person, it is not payable to order. Campos: The instrument in order to be considered negotiable must contain the so called “words of negotiability” – must be payable to order or bearer. These

words serve as an expression of consent that the instrument may be transferred. This consent is indispensable since the maker assumes greater risks under a negotiable instrument than under a non-negotiable one. Under Sec. 10 however, the instrument need not follow the language of the law, but any term which clearly indicates an intention to conform to the legal requirements is sufficient. Sebastian: “order” or “bearer” are critical words that define negotiability. These words connote that the instrument is transferrable from one person to another. Order means payable to payee or who payee identifies. Bearer means payable to whoever has possession of the instrument. If the person is specified without these words, the instrument is non-negotiable but not necessarily void. PROVISIONS NOT AFFECTING NEGOTIABILITY Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: (a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) xxx (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. Agbayani: GR: Instrument is NON NEGO when there’c an act in addition to money Base on fact that, while one can be indorsed, other would have to be assigned Test of Negotiability Agbayani: The test of negotiability is whether or not the promise would give rise to a cause of action for breach of contract if the additional act is not done. If it does, the instrument is rendered non-negotiable. Sebastian: If he breach if the additional act results to a cause of action for breach of contract, the instrument is no longer negotiable. Effect of Conjunctive Obligations Sebastian: In a negotiable instrument, there must be no obligation other than the payment of money. When it is conjunctive, and the other is not in the nature of payment of a sum of money, the negotiability is impaired. 1.

Negotiability of Secured Instruments

Agbayani: If maker will provide additional collateral that would be an additional act to the promise to pay money = non-negotiable If holder demand collateral and, failure to furnish it accelerates the instrument which are clearly negotiable, being merely accelerable on the non- performance of an optional act. Sale of collateral securities, in case the instrument is not paid, be paid at maturity = NEGOTIABLE Reason: because the additional act to be performed is to be executed after the date of maturity, when the instrument ceases to be negotiable in the full commercial sense. Before the date of maturity, no additional act is to be performed except the payment of the money. Hence, before and until the date of maturity, the promise to pay is to pay money only. Otherwise, the instrument would be non-negotiable. Campos: The negotiable character of an instrument otherwise negotiable is not affected by a provision which authorizes the sale of collateral securities in case the instrument be not paid at maturity. Thus, not only may the instrument state that the note is secured by the pledged or mortgaged property, but also that the collateral may be sold for discharging the instrument itself. Authority of holder to sell the collateral before the maturity = non-negotiable because it gives the holder an option to accelerate the maturity of the instrument, thus rendering the time of payment uncertain.

Sebastian: Consider this: “I promise to pay X or order P1,000,000 subject to the terms and conditions of the mortgage.” Under this note, the payment is subject to the terms of the mortgage; hence, non-negotiable. When you introduce a collateral default in a negotiable instrument, bear in mind that the payment obligation in the negotiable instrument must never be subject to the conditions of the mortgage. The moment there is union between the negotiable instrument and the mortgage, negotiability is impaired. On the other hand, an isntrument will still be negotiable if it merely says that is secured by a mortgage or holder has a right to accelerate in case colateral default. The sale of collateral securities in case the instrument is not paid at maturity enhances the enforcement of the instrument. This is a separate undertaking and has nothing to do with the enforcement of the instrument. Thus, foreclosure of a security has nothing to do with negotiability. When the note is secured by a collateral, the payment obligation under the note should not be based on the collateral, otherwise negotiability is destroyed. 2.

Confession of Judgment Written acknowledgement by the defendant of his indebtedness or liability to plaintiff. It enables the holder to obtain a judgment without deay usually incident to a lawsuit sd it eliminates necessity of a trial Given after action is brought to save expenses is valid Sebastian: Confession of judgment has 2 forms: 1) cognotiv actionem – a stipulation whereby defendant authorizes plaintiff or his counsel to confess judgment for the sum being claimed by the plaintiff. In this case, the decision is rendered by the court immediately because the debtor is empowered to confess to a judgment on his behalf. 2) relicta verificatione – after a plea of not guilty is made, one withdraws it and judgment is immediately promulgated. Confession of judgments are void under Philippine Law. PNB v Manila Oil Refining and By-Products Co. Inc. (43 Phil 444) – Section 5(b) of the Negotiable Instrument Law providing that the negotiable character of an instrument otherwise negotiable is not affected by a provision which authorizes a confession of judgment if the instrument cannot be paid at maturity, cannot be taken to sanction judgments by confession because it is a portion of a uniform law which merely provides that, in jurisdictions were judgment notes are recognized, such clauses shall not affect the negotiable character of the instrument. Moreover, the same section of the Negotiable Instruments Law concludes with these words: “But nothing in this section shall validate any provision or stipulation otherwise illegal.” The judgment note was held to be void as against public policy, because they enlarge the field of fraud, because under these instruments the promissory bargains away his right to a day in court, and because of the effect of the instrument is to strike down the right of appeal accorded by statute. The Court was of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated by our law. We are further of the opinion that provisions in notes authorizing attorneys to appear and confess judgments against makes should not be recognized in this jurisdiction by implication and should only be considered as valid when given express legislative sanction. 3.

Waiver of Debtor’s Rights

Agbayani: Another exception is that the negotiable character of an instrument otherwise negotiable is not affected by a provision which waives the benefits of any law intended for the advantage or protection of the obligor. Benefits intended for the advantage or protection of the obligor are the rights to (1) presentment for payment (2) notice of dishonor, and (3) protest. All of these may be waived. 4.

Acts Exercisable at Option of the Holder Holder’s option so holder will still have an option to choose money If maker’s option = NON NEGO Agbayani The last exception to the general rule is that the negotiable character of an instrument otherwise negotiable is not affected by a provision which gives the holder an election to require something to be done in lieu of payment of money. Under this, even if there is an additional act, the instrument still remains to be negotiable provided that the right to choose between payment of money or the performance of the additional act is in the hands of the holder. But if the choice to pay money or to do the additional act is in the hands of the debtor, the instrument is rendered non-negotiable.

Sebastian: If the option is given to the holder, the instrument is still negotiable. Thus, a holder can demand novation provided that option was given to him. It must be remembered that the holder must make sure that the other act that will substitute payment of money is not illegal. OMISSION IN A NEGOTIABLE INSTRUMENT Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (a) it is not dated; or (b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. Sebastian: If something is not included in Section 1, their omission will not affect the negotiability of the instrument. Effect of Omission of Date De Leon: When date is not in calendar, sept 31? The law assumes nearest date sept 30 In the case of PN (issuance date) or BOE (last nego) for purpose of determining whether party acted in reasonable time in making presentment for payment. Holder may insert true date andin caase wrong date, it can be enforced by innocent third party Agbayani: No date = still nego. There are, however, cases where the date is necessary to fix the date of maturity Campos: If it is not dated, and the date is necessary(maturity is tied up with issuance,w/ interest,) to fix the maturity of the instrument, the law fills in the gap and considers the date of issue as the date of the instrument, and allows any holder to insert the true date. Sebastian: Even if the date is not an element of negotiability, this does not mean that the date is irrelevant. Regardless, whether or not the instrument is negotiable, one may still determine the due date. Relate this provision with Section 13 where the date is necessary to fix the date of maturity. Thus, if the instrument is negotiable, the remedy to the missing date of issuance is under Section 13. The holder has the authority to insert a date in the instrument but the date must be the true date of issue, which means that such date was on which the instrument was delivered to him by the drawer or maker. If the holder was a holder in due course, the written date is conclusively presumed to be the date of issue on the instrument. Thus, as to a holder in due course, the false date will be conclusively be a correct date. However, if the instrument was transferred to another person past the due date of the instrument, the holder may not be considered a holder in due course. If the holder is not a holder in due course, the drawee may interpose personal defenses. If he is, the drawee cannot use personal defenses. If the instrument is non-negotiable, the Civil Code provision will apply, where in the court will fix the date of issuance under Article 1197 of the Civil Code. Effect of Omission of Value Agbayani: Usually, all that is stated in the instrument is that it is being issued for “value received,” without specifying what the value is. Nevertheless, even where the value given is not specified, still the instrument is not rendered non- negotiable. As a matter of fact, it is not even necessary to state that value has been received because consideration is presumed. Under paragraph (b), the law authorizes that the value given need not be specified. However, under the last paragraph of this section, where a statute requires that a particular contract specify the value given, the value given under such contract must be specified. There seems, however, to be no statute of this kind in the Philippines. Sebastian: Looking at Section 24, there is a presumption that for every issuance of an instrument, value was given. This presumption persists until proven otherwise. Consideration in Civil Law likewise applies: “the cause need not be stated in the contract. It is presumed to exist unless otherwise shown.” 4. Effect of Omission of Place De leon: presentment of payment shall be made when no place is specified Presumption: residence/business of maker/drawer Campos: The purpose of specifying a certain place of payment is to fix the place at which the holder must present the instrument for payment. It is an important, though not essential, feature of the instrument. If no place is mentioned, the law again fills in the gap by providing that presentment should be made at the address of the person who is to pay, if such address is stated; if not, at the place of business or residence of the person to make payment.

Sebastian: Place of issuance is important to know so that one will know where to file a criminal case. It is also important to know so that one does not have to look for the person who issued the check. However, even assuming there is no place of payment written, Section 73, whichpertains to presentment, says that you can present at the (1) address of the person who is to make payment if such is indicated; or (2) if there is no address, make presentment at the usual place of business or residence; or (3) make presentment wherever you can find him or last known address. 5. Where Instrument Bears a Seal Other country – with seal – non nego Advisable to have bill or note in public instrument to be included in preferred credits Agbayani: At common law, a sealed instrument is rendered non-negotiable and becomes subject to the rule governing contracts under seal. Under the Negotiable Instrument Law, however, that is no longer true. Hence, even if the instrument is sealed, the fact alone will not make non-negotiable. Sebastian: Whether or not an instrument is sealed will not affect its negotiability because a seal is irrelevant in our jurisdiction since we do not have any law on seals. 6.

Particular Kind of Current Money

Agbayani: As already stated under Section 1, even if the money in which the instrument is to be payable is not legal tender, provided that it is current money or foreign money which has a fixed value in relation to the money of the country in which the instrument is payable, still the negotiability of the instrument is not affected, as the instrument would still be considered payable in money. INSTRUMENTS PAYABLE ON DEMAND Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.

Notes: 1.payable on demand to immediate and subsequent parties 2. 2nd par – immediate parties since holder and not holder in due course 3. overdue instrument- necessarily demand paper 4. holder has immediate right of payment for money promised or ordered to be paid 5. instrument payable on demand – due and payable after delivery 5. time instruments- not payable on demand Examples(on demand) 1 after sight 2. on presentation 3. On call 4. anytime called for

Agbayani: Instead of “on demand” the words “on sight” or “on presentation” may be used. The words “at sight”, however, are not ordinarily used in promissory notes.

When a promissory note expresses “no time for payment,” it is deemed payable on demand. Where a blank for time for payment is unfilled, the instrument has been held to be payable on demand. However, it may properly be considered an incomplete instrument and may fall under the provisions of Sections 14, 15 or 16, depending upon how the instrument is delivered. Moreover, a note payable “on ” was held payable on demand. It must be remembered that after the date of maturity, the instrument can no longer be negotiated as to make the parties who acquire the instrument after the date of maturity holders in due course because they become holders thereof with notice that it is already overdue, as this can be determined from the face of the instrument itself. The last paragraph of Section 7 means that the instrument is payable on demand only as between the immediate parties. Sebastian: An instrument payable on demand is payable at any time on demand of the payee or holder. In a bill of exchange, before the drawee can be liable, he must accept it. If he does not accept the instrument, that instrument is dishonored by non-acceptance. At that particular time, drawer will become liable to the payee or holder. The drawer’s liability is secondary and he can only be ran after if the drawee dishonored the instrument. If the drawee accepts, the payee or holder must make a demand before he is paid. When the payee or holder demands for payment, it is essential that he brings the instruments. If he fails to, the drawee may dishonor his demand. The moment the payee or holder brings the instrument to the drawee, the latter must inspect the instrument and check if it is genuine. Then he should pay. A negotiable instrument is a substitute for money and the due date need not be expressed. INSTRUMENTS PAYABLE TO ORDER Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (Pay to the order of myself/Promise to pay to the order of myself” (c) The drawee; or (pay to the order of yourself) (d) Two or more payees jointly; or (pay to the order of P and A) (e) One or some of several payees; or (pay to the order of P, A or B 1k) (f) The holder of an office for the time being. (pay to the order of Commissioner of Internal Revenue. Pay to the order of Treasurer in a bank) Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Notes: 1. 2. 3. 4. 5.

Essential words: to the order of, or order, to bearer, to P and assigns(or similar intention) An instrument is payable to order where it is drawn payable To the order of specified person “pay to p” not an order instru – non nego To him or his order Note payable to order of maker is NOT COMPLETE until INDORSED “to the order….” Payee is not named = NON NEGO Payee named with reasonable certainty = NEGO

Agbayani: Among others, the instrument in order to be considered negotiable must contain so-called words of negotiability. Under this section, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person whom he has indorsed and delivered the same. Without the words “or order” or “to the order of”, the instrument is payable only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely “step into the shoes” of the person designated in the instrument and will thus be open to all defenses available against the latter. Campos: There must always be a specified person named in the instrument. It means the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed or delivered the same. Without the words “to order” or “to the order of” the instrument is payable only to the person designated therein and is therefore non-negotiable. Sebastian: When an instrument is payable to order, the promise to pay is towards the payee or at his instruction. This indicates that the ultimate payee of the instrument need not be the payee because he can transfer his rights to another person. This indicates the negotiability of the instrument and if this is missing, the instrument cannot be negotiable. As far as the maker is concerned, he issues an instrument that is intended to pass from hand to hand. Designation of Payee

Agbayani: Under the last paragraph of this section, the law requires that the payee must be named or otherwise indicated with reasonable certainty. The payee of an instrument payable to order must be a person in being, natural or legal, and ascertained at the time of issue. If there is no payee, where the instrument is payable to order, no one could indorse the instrument. Consequently, it is useless to consider it negotiable. Where blank for name of payee is unfilled, the instrument is not payable to order because the payee is not named, neither is he designated with reasonable certainty. However, it may be considered by Sections 14, 15 and 16, depending upon how it is delivered.

Campos: In Sec. 8(f), the payee is certain. Such an instrument is capable of 3 interpretations: (3) xxx The payee may be the person who happens to be secretary at any particular moment – thereby making the instrument a “floating promise.” The third view is the most acceptable because the payee is certain and easily determinable and such interpretation is most probably what the lawmaker had in mind in using the words “for the time being.” The name of the payee being misspelled or wrongly designated does not affect the negotiability of the instrument. Under Sec. 43, it is provided that “where the name of the payee is wrongly designated or misspelled, he may indorse the instrument as therein described, adding, if he thinks fit, his proper signature.” Sebastian: An instrument wherein the maker/drawer and the payee are one in same person is not void under the Negotiable Instruments Law. If the instrument is a note, that person is ultimately liable for the note and, as an indorser, also warrants that if he cannot pay, he will pay as an indorser. If the instrument is a bill, the person is in effect telling the drawee to pay him. Until the drawee accepts, the drawee is not liable for the instrument. Assuming there is acceptance, if the drawee cannot pay, the drawer, who is the payee and indorerser at the same time, will be liable primarily and secondarily. Thus, in both instances, there are 2 liabilities created – one as maker and one as indorser. When the instrument is made payable to the holder for the time being, the person who can indorse such instrument is the incumbent person occupying the office at a particular time. If the name of the payee was wrongly spelled, one must write the misspelled name and there after indorse it to the correctly spelled name. INSTRUMENTS PAYABLE TO BEARER Sec. 9. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (pay to bearer) (b) When it is payable to a person named therein or bearer; or (pay to P or bearer) (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (pay to john doe or order) (d) When the name of the payee does not purport to be the name of any person; or (pay to the order of superman) (pay to the order or cash/money/sundries/ cash or order) (e) When the only or last indorsement is an indorsement in blank. (indorser writes his name lang), (indorser in blank by payee and last indorsement is BLAK) *a-b order instruments *c-e bearer instruments Fictitous person = feigned or pretended, named has payee but has no right because the maker or drawer so intended and it matters not whether re name of the payee used by him be that one living or dead or never existed Reason: payee isn’t capable o indorsing, he can’t circulate instrument Payable to bearer, P – non nego since bearer is definite person **Read last par page 52 Sebastian: When an instrument is payable to bearer, it is payable to who is in physical possession of a bill or note OR legally qualifies. Who is in physical possession of the instrument can indorse, present for payment and collect the proceeds of the instrument. Bearer instruments need not to be indorsed because it is negotiated by mere delivery. Thus, forgery of an indorsement cannot be raised as a defense by the maker or drawer. When the last indorsement is an indorsement in blank, the instrument becomes bearer instrument. Payment to any person IN GOOD FAITH and WITHOUT NOTICE that his TITLE IS DEFECTIVE AT/AFTER MATURITY DISCHARGES the instrument. Delivery alone NEGOTIATES INSTRUMENT. Whoover possesses it is the bearer. Holder may require indorsement of instrument. Instrument that fails to qualify as an order instrument is negotiable if payable to bearer.

Concept of a Fictitious Person Agbayani: The words “fictitious person” are not limited to persons having no real existence. An existing person may be considered a fictitious payee, depending upon the intention of the one making or drawing the instrument. The words “fictitious person” mean to be a person who has no right to the instrument because the drawer or maker of it so intended, and, therefore,

it does not matter whether the name of the payee used by the drawer or maker be that of one living or dead, or one who never existed. The name is fictitious when it is feigned or pretended and a non-existent person is one who does not exist in the sense that he was not intended to be the payee by the drawer. Campos: That the payee is a fictitious or non-existing person must be known to the maker or drawer. The theory is that since the payee is not capable of indorsing and since the maker or drawer knew of this fact, he must have intended the instrument to be transferred by mere delivery. If the maker or drawer is not aware that the person he named as payee is fictitious or non-existent, then the instrument is not a bearer instrument but an order one. Obviously, there is no one who can indorse it, so in effect it cannot be validly negotiated. Sebastian: The concept of a fictitious person is not limited to a fictional person or a person who does not exist at all. A person who actually exists can be construed as a fictitious person depending on the intention of the maker or drawer. A fictitious person can include one who actually exists but has no right to the instrument simply because the drawer or maker did not intend that person did not intend for that person to have a right to that instrument. Thus, the true test of fictitious person arises not from the existence of the individual, but it will depend on the intention of the drawer or maker. When a transaction arose from a feigned transaction, the intention of the issuer controls. A check payable to a deceased person is not necessarily a check issued to a fictitious person. If the maker/drawer believes that the payee is alive, the payee is not considered fictitious. Clearly, drawer intended that the payee will have a right to the instrument. As a consequence, not issued to a fictitious person, it is not payable to bearer. If the instrument is made payable to the estate of a deceased person, it is an instrument payable to order. Limjoco v. Intestate Estate of Fragante – Within the philosophy of the present legal system and within the framework of the Constitution, the estate of Pedro O. Fragante should be considered an artificial or juridical person for the purposes of the settlement and distribution of his estate, which of course, include the exercise during the juridical administration thereof of those rights and the fulfillment of those obligations of his which survived after his death. Agbayani: The estate of a deceased person is a juridical person in a limited way. Nazareno v. Court of Appeals – The estate of a deceased person is a juridical entity that has a personality of its own. Sebastian: I do not like how this statement was phrased by the Supreme Court. EXACT WORDS OF LAW NEED NOT BE USED Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Agbayani: It is advisable to use the words of the law in order to avoid uncertainty and doubt. However, it is not necessary to use the exact words of law. Indeed, an instrument may be valid and negotiable though written in a foreign language. Sebastian: Although the law does not require that a negotiable instrument be in a document written in the language known to the drawer or maker, an instrument needs to be in a language known to the drawer or maker because all contracts require an intelligent consent. Therefore, signing a note written in a foreign language not known to the drawer or maker may be a personal defense. Defect in language or grammatical error DOES NOT render it non nego. (“him self order” can be “himself or order”)

DATE OF A NEGOTIABLE INSTRUMENT Relevance Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. Agbayani: This legal provision applies to three cases: 1) the instrument contains the date of issue – the date placed is deemed prima facie the true date of the making or drawing of the instrument 2) in an accepted bill of exchange and the acceptance is dated – the date placed is deemed prima facie the true date of acceptance 3) in an indorsed instrument and the indorsement is dated – the date placed is deemed prima facie the true date of indorsement

Sebastian: The date on the instrument is presumed to be the true and correct date. However, this is a disputable presumption and any person who has an interest in that instrument is free to dispute such presumption. But as to a holder in due course, this presumption is conclusive. Notes: 1. 2. 3. 4. 5. 6.

Generally date is NOT ESSENTIAL to negotiability. Date is necessary when: Payable at fixed period after date Fixed period after sight (since date of presentation) Hewho claims other daye os trie date has burden to establish claim. PN must be paid within reasonable time after issue, BOE within reasonable time after last negotiation. Otherwise persons secondarily liable may be released from their liability. Date is essential to determine “reasonable time” BUT NOT TO NEGOTIABILITY. Reasonable time – generally a question of fact depending on circumstances

Ante-dating and Post-dating of Instrument Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. ALLOWES TO NEGOTIATE BEFORE OR AFTER DATE, as long as NOT AFTER MATURITY The person to whom instrument so dated is delivered acquires title as of date of delivery. Illegal or fraud purpose – instrument is INVALID Postdated example: check in payment of obligation WITHOUT BONAFIDE INTENTION to cover amount In case payee is aware, drawer is not gui;ty of estafa. Agbayani: An instrument is ante-dated when the date written thereon is earlier than the true date of its issuance or delivery. An instrument is post-dated when the date written thereon is later than the true date if its issuance or delivery. An ante-dated or post-dated instrument is not rendered invalid or non-negotiable by that fact alone. It may be negotiated before or after the date given as long as it is not negotiated after its maturity. The only limitation is that the ante-dating or post-dating is not done for illegal and fraudulent means, such as, evading the Usury Law. The person to whom the instrument is delivered acquires title or ownership over it, not as of the date written on the instrument, but as to the date of actual delivery. Triphonoff v. Sweeney – It makes no difference whether a check be postdated or antedated, it is still payable according to its express terms. The drawing of a postdated check is an everyday occurrence in the commercial world, and the uniform understanding of the parties is that, when a check is postdated, it is payable on the day it purports to be drawn, even though it be negotiated beforehand. The contention of the defendants is that the instrument was not a check, for the reason that it was not payable on demand and that the same was not negotiable. We incline to the belief that the instrument was a check, payable on demand on or after April 15, 1911. This conclusion is in harmony with cases wherein it is held that a postdated instrument of this nature is a check, and not a bill of exchange, which would authorize the holder to present the same for acceptance prior to the time when it would be payable.

Sebastian: Ante/postdating a check does not affect negotiability unless its objective is unlawful. Insertion of Date Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. Two cases: 1. Fixed period after date but is issued undated 2. Fixed period after sight but acceptance is undated Holder may insert true date of oissue or acceptance and instrument shall be paid accordingly. Date of acceptance is when BILL IS PRESENTED not when ACTUALLY ACCEPTED. Effect of insertion of wrong date: 1. With knowledge- becomes non negotiable as to the one inserted the wrong date, BUT NOT TO subsequent holder in due course who may enforce regardless of improper date 2. As to subsequent holder in due course – constitutes material alteration. Even if date is wrong, it is regarded as TRUE DATE. [if note’s true date is January1 toFeb 1. Then P inserts wrong date Dec 15, and indorses it to A, A who in good faith, has right to enforce payment in January 15.]

Sebastian: The date of the instrument is not essential for negotiability. The two instances when date is critical is when the instrument is payable after a fixed date or payable after sight. If there is no date, one will never know when the due date is. Filling in the missing element of date is delegated to the holder. Take note that this section only refers to a missing date. It does not refer to any other element of a negotiable instrument. The date here pertains to the due date of the instrument. In the case of the dishonesty committed by the author of the dishonesty, the instrument is avoided as to him. If the instrument is avoided as to the author of the dishonesty, he can recover from the maker because only the negotiability of the instrument is avoided but not the whole instrument. The instrument may then be enforced as a debt instrument under the Civil Code. As to a holder in due course, the date appearing on the instrument is conclusively the date of issuance. COMPLETION AND DELIVERY OF INSTRUMENTS Agbayani: There are two steps in the execution of a negotiable instrument, namely: (1) the act of writing the instrument completely and in accordance with Section 1, and (2) the delivery of the instrument with the intention of giving effect to it. Campos: Delivery of the instrument means transfer of possession, actual or constructive, from one person to another. It may thus be accomplished by manual transfer of possession or by any other act manifesting intent to transfer of possession. Without the initial delivery of the instrument from the maker to the payee, there can be no liability on said instrument. Moreover, such delivery must be intended to give effect to the instrument. Thus, if the maker gives the instrument to another for mere safekeeping, there is no delivery within the meaning of the above provision. However, once the instrument is no longer in the possession of the person who has signed it, a valid delivery by him is presumed, until the contrary is proved, and as to the holder in due course, the presumption is conclusive, provided the instrument is complete. The first delivery of the instrument complete in form, to a person who takes it as a holder, is called the issue or issuance of the instrument. Sebastian: there are two steps necessary to make a negotiable instrument. The first step is to write the instrument. Having written the instrument and complied with Section 1, the negotiable instrument is not yet complete. The second step is delivery. This is the more important step in giving life to the negotiable instrument. There are two types of delivery. It is called issuance when the delivery is from the author to the first transferor. Upon delivery, the instrument comes to life. Is called deliveries when the delivery is from the payee to the first endorser. INCOMPLETE BUT DELIVERED INSTRUMENTS Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be

converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, andhe may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Agbayani: Bills and notes are sometimes executed in blank and delivered to another to fill in and negotiate either for his own benefit or that of the maker. Such instruments are, therefore, incomplete but delivered. Campos: This provision merely raises a personal defense. It covers two kinds of writings: (1) incomplete instruments, and (2) a blank paper or a paper so far incomplete that it does not constitute an instrument within the meaning of the definition of this term, but signed. The first kind involves a writing which although containing blanks, is so far completed that it is an instrument, i.e., where the writing recites enough of the formalities to make evident the intention to make the writing operate as negotiable instrument. In such case, “any person in possession thereof has a prima facie authority to complete it by filling up the blanks therein.” This contemplates a delivered instrument, and not an undelivered instrument which is covered by Section 15. The second kind of writing is one which is so far incomplete that it is not an instrument. in this case, two conditions must be present before the presumption of authority to complete may arise: (1) delivery of the instrument, and (2) the delivery must have been for the purpose of converting it into a negotiable instrument. Thus if the paper or writing is delivered without such intention, its subsequent conversion into a negotiable instrument will not render the person signing liable to anybody, not even a holder in due course. The presence of such intention must be proven by the possessor of the instrument. As to a signed blank paper, the law provides that there is prima facie authority to fill it up for any amount. It is believed that it includes authority to fill in other blanks, specially to all missing requirements necessary to make it a negotiable instrument, since otherwise it would not be such an instrument. Whether it is an incomplete instrument or a mere signed blank paper therefore, the authority extends to the insertion of the date, place of payment, the amount, the name of the payee, and the time of payment. While Sec. 14 is broad enough to include the matter of filling in blanks for the time of payment, Sec. 13 deals with more particularity on some aspects of this right. The insertion of a wrong date, by one having knowledge of the true date of issue, will avoid the instrument as to him, but the innocent party may enforce the same notwithstanding the improper date. The authority to fill in the blanks or to complete the instrument is limited as to time. According to Sec. 14, in order to be enforceable against a party prior to completion, it must be filled in within a reasonable time. Such “reasonable time” must be reckoned from the time of the issuance of the instrument and not from the time of each successive negotiation, because the interest involved is that of the issuer. In determining what is reasonable time, Section 193 provides that “regard is to be had to the nature of the instrument, the usage of trade or business (if any) with respect to such instruments, and the facts of the particular case.” However, it should be noted that whether unreasonable time has elapsed or not would be immaterial, if the used had expressly fixed the time within which completion may be made. Sebastian: The missing element here must be a material particular. Either one of the missing material particulars may be corrected by Section 14. An instrument that is non-negotiable at inception may become negotiable because of Section 14. However, the correction of the missing date cannot be corrected by Section 14, but may be corrected by Section 13. Authority to Complete the Instrument Agbayani: The material particular referred to here may be: (1) a particular omission of which will render the instrument non-negotiable (e.g. name of the payee or the name of the drawer); or (2) a particular omission of which will not render the instrument non-negotiable (e.g. date, rate of interest, place of payment). The law presumes from two facts: (1) want of a material particular in the instrument, and (2) possession thereof by a person, a third fact (3) that such person had authority to fill up the blank. It will be noted that the law does not seem to require the delivery of the instrument with intent to have it converted into a negotiable paper. The law merely requires that it be in the possession of a person other than the drawer or maker, and from such possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks. The law thus presumes the existence of the authority to fill the instrument up to any amount from the following two facts: (1) a signature on a blank paper and (2) that the person signing in blank delivers it in order that the paper may be converted into a negotiable instrument. Mere possession by a person is not enough. Sebastian: The holder is presumably given the authority to fill the missing element. What is presumed is given that the instrument is incomplete, the maker or drawer made a delivery. Consequently, the person to who it is delivered is presumed given the authority to fill it up. Rights of a Holder in Due Course Agbayani: Under this section, the defense of parties prior to completion is that it is not filled up within a reasonable time. However, such defense is available only against holders who are not holders in due course. The defense is not available against a holder in due course because under the law, in the hands of

such a holder, the complete but delivered instrument is “valid and effective for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.” The defense is, therefore, a personal or equitable defense. Sebastian: A holder in due course can enforce the instrument against parties prior to completion regardless of the validity of the elements filled up by the prior holders. Thus, this is a personal defense. Instruments Delivered in Blank Agbayani: One who is not a holder in due course cannot enforce the instrument against a party prior to the completion of the instrument if the instrument is not filled up strictly in accordance with the authority given and within reasonable time. The law provides that in order that one who is not a holder in due course may enforce mechanically incomplete but delivered instrument, the two requisites must exist. The implication is that when one or both of the requisites are absent, the instrument may not be enforced. Although an instrument was completed not in accordance with the authority given, the parties negotiating after completion are liable on the completed instrument because they are estopped or precluded from claiming that the note was not filled up strictly in accordance with the authority given. In determining what is a “reasonable time” or an “unreasonable time,” regard is had to the nature of the instrument, the usage of trade or business (if any) with respect to such instrument and the facts of the particular case. In other words, the term is very relative. Sebastian: Another incomplete instrument in this section is a blank piece of paper that is signed. It may be filled up in accordance with the instructions and within a reasonable time. After which, the instrument may be enforced againt prior parties; otherwise, the instrument cannot be enforced. The requirements for a blank sheet to become a negotiable instrument is that (1) the maker must sign a blank sheet of paper, (2) with intent to convert to a negotiable instrument, and (3) must deliver the sheet. INCOMPLETE AND UNDELIVERED INSTRUMENTS Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Agbayani: An incomplete instrument is not valid against the party before its 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. The law does not make any distinction between a holder in due course and who is not because the law used the phrase “any holder” which includes a holder in due course. The defense of “want of delivery of a mechanically incomplete instrument” is, thus, a real defense. However, the invalidity of the instrument is only with reference to the parties whose signatures appear on the instrument prior to delivery. As to parties whose signatures appear on the instrument after delivery, the instrument may be valid. Under Section 16, the delivery is conclusively presumed where an instrument is in the hands of the holder in due course. The provision of Section 16 that a valid delivery is in the hands of a holder in due course must be read in connection with Section 15, and Section 16 does not apply in the case of an incomplete instrument completed and negotiated without authority. Section 16 applies to a mechanically completed instrument not delivered, while Section 15 applies to a mechanically incomplete instrument not delivered. But where an incomplete and undelivered instrument is in the hands of a holder in due course, there is a prima facie presumption of delivery which the maker may rebut by proof of nondelivery. This presumption must, however, be distinguished from the presumption where an undelivered mechanically complete instrument is in the hands of a holder in due course, in which the presumption of valid delivery is note merely prima facie but conclusive. Furthermore, where the custody of the incomplete instrument has been entrusted to another, who wrongfully completes and negotiates it to a holder in due course, delivery to the agent or custodian is a sufficient delivery to bin the drawer or maker. Campos: This contemplates an instrument which is not only undelivered but also incomplete. In this case, a real defense exists and not even a holder in due course can recover on the instrument, for the law is specific that it is not a valid contract in the hands of any holder. The conclusive presumption of delivery under Sec. 16 cannot apply, although possession of an incomplete instrument raises prima facie presumption of delivery. If an instrument contains all the requisites for making it a negotiable one, it should be considered as complete though it in fact may have blanks as to non- essentials, so as to give rise to a conclusive presumption of delivery in favor of a holder in due course. Sebastian: This is a real defense.

As a rule, one cannot enforce the instrument whose signature appeared before delivery. But if the incompleteness is cured by the authority given by the maker to an agent, Section 15 will not be applicable. Also, there are cases where Section 15 is not applied where the doctrine of estoppel is involved. Pavilis v Farmers Union Livestock Commission – The check in controversy was an incomplete instrument when stolen and cannot be enforced in the absence of conduct on the part of the drawer creating an estoppel. While there can be no question that the provisions of the Negotiable Instruments Law do not prevent an inquiry into the question of the negligent custody of an incomplete instrument, and, that, if as a result of negligence such instrument comes into the hands of a holder in due course, the latter may recover, yet we cannot say under the facts and circumstances of the instant case that defendant was negligent. The loss did not result from completion and negotiation of the check by one entrusted with its possession, and we are not concerned with a breach of duty as between a depositor and drawee. It does not appear that that the defendant company had reason to mistrust its employee and anticipate the wrongful taking by him of a check signed in blank, the subsequent completion and negotiation. The drawer owes the duty to use due care in the execution of checks, but it does not follow as a legal conclusion that signers of checks in blank assume the risk of liability in all cases where such instruments are wrongfully taken, completed and negotiated. To hold that a person is negligent in having in his possession a check signed in blank would require something more than the exercise of ordinary care. Weiner v Pennsylvania Co. – In the instant case the plaintiff signed the check in blank, thus putting it in the power of an unauthorized person to fill it in and present it for payment. The depositor’s act made the loss possible and caused it, and enabled the thief to commit the fraud. The depositor-plaintiff’s acts in this respect are a bar and an estoppel in her suit against the drawee bank, thus preventing any recovery on her part. To hold otherwise would require the bank to communicate with the drawer as each check was presented, in order to find out if delivery was intended. This is too much to be expected; and to place the burden of loss or its chance on the depository if it does not interview the maker, is neither fair nor compatible with public interest. Campos: How does this case compare with Pavilis case? The court in effect holds that mere signing of a check in blank is negligence which will make the drawer liable to the drawee bank in case it is successfully encashed without having been validly delivered. Is this holding inconsistent with the last sentence in the Pavilis case? Linick v A.J. Nutting & Co. – The delivery of a promissory note by the maker is necessary to a valid inception of the contract. The possession of such a note by the payee or indorsee is prima facie evidence of delivery, but if it appears that the note has never been actually delivered, and that without any confidence, or negligence, or fault of the maker, but by force of fraud, it was put in circulation, there can be no recovery upon it, even when in the hands of an innocent holder. COMPLETE BUT UNDELIVERED INSTRUMENTS Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in 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; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Agbayani: The law provides that every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. And no rights, properly speaking, arise in respect to an instrument until it is delivered. Issue is the first delivery of the instrument, complete in form, to a person who takes it as a holder. Delivery and issuance are used interchangeably. Delivery and issuance may be made either by the maker or drawer himself or through a duly authorized agent, and may be made either to the payee himself or to his duly authorized agent. Before delivery, the maker or drawer can revoke, cancel or tear up the instrument. The payee named in the instrument acquires no right until the instrument is delivered to him. The term immediate parties is confined to those who are immediate, in the sense of knowing or being held to know the conditions or limitations placed upon the delivery of the instrument. It means privity, not proximity. In other words, the criterion is whether or not the party in question knows of the conditions or limitations placed upon the delivery or the fact that the instrument was not

delivered but stolen. If the party in question knows, he is an immediate party even if he is physically remote. On the other hand, if he does not know, he is not an immediate party even if he is the next party physically. Under the law where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. However, as against an immediate party who is not a holder in due course, the presumption will exist in his favor only until the contrary is proven. In other words, the presumption is rebuttable as against an immediate party or a remote party who is not a holder in due course and, as against him, it may proved that: 1) no delivery was made; 2) if the delivery was made, it was not authorized; 3) if the delivery was made or authorized, the delivery was conditional or for a special purpose and not for the purpose of transferring the property in the instrument. Campos: Non-delivery of a complete instrument is only a personal defense. Delivery of an instrument is a prerequisite for liability. If the instrument is complete in all its particulars, but is not delivered, there is no contract. However, if the instrument is no longer in the possession of a party who has signed it, a delivery is presumed until the contrary is proved. If the holder is a holder in due course, the instrument is not merely prima facie deemed delivered, but this fact is conclusively presumed. Thus, if a complete instrument is stolen from the maker or drawer, and negotiated to a holder in due course, such maker or drawer cannot set up a defense of non-delivery because it is a personal defense available only between immediate parties and as regards remote parties who are not holders in due course. Sebastian: Delivery is the transfer of possession, actual or constructive, from one person to another. For delivery to be effectual, must be done by making or endorsing under the authority of the person making, endorsing, drawing or accepting. When a person delivers an instrument, the delivery can be conditional, unconditional or for a specific purpose only. As a general rule, when the instrument is no longer in the possession of the party who signed, there is a prima facie presumption that the party who signed it intentionally delivered it. In respect to a holder in due course, there is already a conclusive presumption of delivery. However, for immediate and remote parties, to be effectual, delivery must be made by the drawer, maker, acceptor or endorser, or under their authority. Immediate parties are those parties who has knowledge of the circumstances surrounding the delivery of the instrument. They are remote when they have no knowledge and there is no privity of contract. The presumption may be raised against remote parties because of the guaranties made under Section 65 and 66. In so far as this provision protects the holder in due course, it is a personal defense. What is conclusive is only the delivery. It does not preclude the maker from interposing any other defenses. This provision is subject to the application of estoppel. Delivery Subject to Conditions Agbayani: The following is an example of a conditional delivery: “A makes a complete note in favor of B, with the understanding that it is not to become binding on A until it is also signed by C. If B files an action on the note without any additional proof, the presumption is that it was delivered validly and intentionally. But as B knows of the condition placed upon the delivery, he is an immediate party. Consequently, the presumption is rebuttable, and A can show that the delivery was conditional and if the condition is not fulfilled, he cannot be held liable by B.” It is to be noted that what is conditional here is the delivery, not the promise or order to pay. Otherwise, the instrument is rendered non-negotiable. Delivery for Special Purposes Agbayani: The following is an example of delivery for a special purpose: “A delivers a complete note payable to bearer signed by him to B for (1) safekeeping or (2) for collection only. B cannot enforce the note against A, as A can prove that the note was delivered only for a special purpose. Presumption of Delivery as to Holder In Due Course Agbayani: Where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties to him is conclusively presumed. A presumption is said to be conclusive when contrary proof is barred. It must be remembered that the bills or notes dealt with in this section are mechanically complete. As already stated, under Section 15, an incomplete and undelivered instrument is not valid even in the hands of a holder in due course as against a party prior to delivery. In Re Marten’s Estate – Every contract on a negotiable instrument for the purpose of giving effect thereto. This was the common law rule.

Obviously, the note here sued upon could not be made the basis of a valid claim against the estate unless there was a legal delivery of same, during the lifetime of the decedent. Our decisions, relative to the analogous situations, are reviewed in the recent case of Orris v. Whipple, where in we state: “All there is to show delivery in the case is that the deed was prepared and executed by Miss Aken; that she told others that she wanted the plaintiffs to have the property and that

she prepared papers for providing. She put the deeds in her safety deposit box and retained the key. We do not think these admitted facts show a legal delivery of the deed in question.” The position taken by this court in the Orris case is controlling here. SUMMARY OF RULES ON DELIVERY OF NEGOTIABLE INSTRUMENTS Sebastian: Delivery of a negotiable instrument is necessary. Between immediate parties, delivery must be made with intention to pass title. Where the intention is for some other things, then it is not the delivery contemplated by law. incomplete but delivered HIDC NOT HIDC Holder can enforce the Holder can enforce instrument instrument as completed as completed only against parties subsequent against parties prior or to the completion but not subsequent to completion. against those prior thereto. incomplete and undelivered Holder can enforce instrument as contemplated only against parties subsequent to the delivery but not against those prior thereto. Possession gives rise to a Possession does not give prima facie presumption of rise to any presumption of delivery which the maker or delivery. drawer may rebut by proof of non-delivery. complete but undelivered Possession gives rise to a Possession gives rise to a prima facie presumption of conclusive presumption of delivery. delivery which the maker or drawer may rebut by proof of non-delivery.

RULES OF CONSTRUCTION Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. Agbayani: The rules stated in this section shall not be availed of if the terms of the instrument in question are clear and admit of no doubt. It is only when the instrument in question is ambiguous, doubtful or obscure, or when there are omissions therein that the rules stated in the section apply. Continental Illinois Bank v. Clement – The Negotiable Instruments Law provides that where an instrument containing words “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon. If an instrument worded in a singular is executed by several, the obligation is a joint and several one. LIABILITY OF PERSONS SIGNING AN INSTRUMENT SIGNING UNDER A TRADE OR ASSUMED NAME Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. Agbayani: The rule stated here is that a person whose signature does not appear on the instrument is not liable Thus, a drawee who has accepted the bill of exchange is not liable on the instrument. Thus, also, one whose name does not appear on the note cannot be held liable thereon even though the payee knew at the time of making the note that the obligation was that of a person other than the maker. So also, where a note was signed by one individual, a person associated with him in a joint oil enterprise for the benefit of which money was borrowed, was not liable on the note since undisclosed principal may not be held liable on negotiable paper executed by the agent in his own name. The following are the exceptions to the general rule: 1) where a duly authorized agent signs for a person, that person is liable. 2) Where a person sought to be charged forges the signature of another person, the forger is liable even if his signature does not appear thereon. 3) Where a person sought to be charged signs on a paper separate from the instrument itself, as an allonge, although the allonge may be considered as part of the instrument; or where an acceptance is written on a paper other than the bill itself, under Section 134 and 135. Sebastian: As a rule, if there is no signature, there can be no liability. Another exception is where the person uses an assumed name or trade name – one may become a party to a negotiable instrument by any designation he desires. SIGNING AS AN AGENTQ Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency.

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Agbayani: As already stated, the party may sign personally or through an agent. The agency may be oral or written. There is no particular form required by the law and the agency may be proved by oral or written evidence, unless specific provisions of the general law, such as, the statute of frauds, require otherwise.

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Sebastian: If the agent had authority to issue the instrument, the intention of the agent is the intention of the principal. If the agent did not have authority, he cannot bind the principal and his transaction will become unenforceable unless the principal ratifies it. Insular Drug v. PNB (58 Phil 684) – The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman without authority to collect money belonging to his principal does not have implied authority to indorse the checks received in payment. Any person taking checks made payable to a corporation which can act only by agents, does so at his peril and must abide by the consequences if the agent who indorses the same is without authority. When a bank accepts the indorsements on checks made out to a drug company of a salesman of the drug company and the indorsements of the saleman’s wife and clerk, and credits the checks to the personal account of the salesman and his wife, permitting them to make withdrawals, the bank makes itself responsible to the drug company for the amounts represented by the checks, unless it is pleaded and proved that after the money was withdrawn from the bank, it passed to the drug company which thus suffered no loss. Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. Agbayani: In order to escape personal liability on the instrument, an agent must: 1) be duly authorized; 2) adds words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or in a representative capacity; and 3) disclose his principal. Officers of the government and other public corporations are not held to the same rule of agency by which, in exceeding their authority, they bind themselves; everyone having dealings with a public officer is supposed to know the legal limitations of his agency so that when the public officer, in innocent mistake of law, makes an unauthorized contract in the name of the public corporation, neither he nor the corporation is bound. Sebastian: Under this section an agent is under the obligation to disclose the identity of his principal. Therefore, depending on the nature of the instrument signed by the agent, it is possible that the agent may or may not have the obligation to disclose his principal. SIGNATURE BY PROCURATION Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Agbayani: A signature per procuration constitutes a warning that the agent has but a limited authority, and, therefore, a person who takes the instrument is bound at his peril to inquire into the extent and nature of the agent’s authority, and this applies to every person. INDORSEMENT BY INFANT OR CORPORATION Sec. 22. Effect of indorsement by infant or corporation. - The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. Agbayani: Ordinarily, a minor cannot give consent to contracts and a contract entered to him is voidable. In the case of corporations, [directors and officers] cannot perform acts beyond the scope of their authority. Such acts would be ultra vires acts. Nevertheless, if a minor or a corporation indorses an instrument, the indorsee acquires title to it and can enforce it against the maker or acceptor or other parties prior to the minor. Such prior parties cannot escape liability by setting up a defense the incapacity of the indorser. This section is also applicable to indorsements by lunatics, imbeciles, and other incapacitated persons. Sebastian: An indorsement by corporations or minors pass property regardless of lack of capacity but there will be no liability incurred. They may give ownership, but no liability. Murray v. Thompson – In stipulating that the indorsement of the instrument by an infant “passes property therein,” it was meant to provide that the contract of indorsement is not void, and that his indorsee has the right to enforce payment from all parties prior to the infant indorser. Incapacity of the minor cannot be availed of by prior parties. LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

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The purchaser and indorsee of a not is not a bona fide holder as against an infant

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indorser, and that the latter may disaffirm and recover the note from the possession of the former, who takes with constructive notice of the incapacity.

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. Agbayani: By forgery is meant the counterfeit making or fraudulent alteration of any writing. It may consist in the signing of another’s name, or the alteration of an instrument in the name, amount, description of the person and the like, with intent to defraud. The intent to defraud distinguishes forgery from innocent alterations and spoliation. Section 23 applies only to forged signatures or signatures made without the authority of the person whose signature purports to be. Consequently, if the forgery consists of alteration in the amount, Section 23 does not apply. Such alterations are covered by Section 124. It is not necessary that the forger attempt to imitate or simulate the signature being forged. Campos: Forgery is a real defense. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. Since his signature does not appear on the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Section 23 deals with two sets of situations: 1) Where the signature on the instrument is affixed by one who purports to be an agent, but who does not have the authority to bind the alleged principal; and 2) Where the signature is affixed by one who does not claim to act as an agent and who has no authority to bind the apparent signer. The signature in both cases is “wholly inoperative” and no one can gain title to the instrument through it. Sebastian: Forgery is the affixing of the counterfeit signature of maker, drawer, indorser, or drawee; or a material alteration of an instrument, particularly to the amount or name of the payee. In some cases, alteration of date can be a forgery as when making it appear that the instrument is not yet past due. Material alteration are those alterations made to material elements or those that are important to an instrument.

Fraudulent alteration is merely one of the two forms of forgery. Although, generally, what is usually forged is the signature. The maker/drawer, drawee and indorser are the only people who can sign in the negotiable instrument. Any other person’s signature that is forged is irrelevant. The two general types of forgeries are the (1) counterfeiting of signature, and (2) material alteration under Section 124. Material alteration is a form of forgery. The counterfeiting of the signature may be done (1) by an authorized agent of the person whose signature is forged, or (2) by a person who is a total stranger. If it is done by an authorized agent, it must be determined if the agent acted within or outside the scope of his authority. When an agent affixes the signature of the person to an instrument without being empowered to do so, then there is forgery by an agent. This is a functional equivalent of unenforceable contract in Civil Law. If it is not done by an agent, the person does not even represent himself to be the agent of the person whose signature is forged. Thus, such person cannot claim any authority to affix any signature. Forgery can be invoked even if the signature is authentic. FRAUD IN FACTUM Agbayani: Fraud in factum or fraud in esse contractus amounts to forgery and is a real defense. The following is an illustration of fraud in factum: B obtains the signature of A by telling A that it is only for autograph instrument. The fraud here amounts to fraud. Here, there is no intention to issue an instrument. Sebastian: There is fraud in factum if there was no intention to issue an instrument. Although the signature is mechanically genuine, there is want of intent. Fraud in factum, however, will never apply to a check because when you sign a check, you know for what purpose is that signature. Fraud in factum is a real defense. However, one cannot raise this defense if he is charged with negligence. Thus, an essential element is that the person whose signature appears on the instrument should have exercised ordinary diligence and did not contribute to the imposition of the forgery. The test is whether or not the signature is procured in such manner as to be voluntary by the maker. If it is, then there is liability. The person raising the defense must present competent proof that the signature affixed was without negligence on his part. An indorsee is not obliged to ask the genuineness of the note because his protection is the warranty of an indorser. The indorser can also claim under this. He is not primarily laible but will still be covered under the warranties under Section 66. Where a signature is affixed on a blank paper w/o intent to create an instrument, and something is written to make it appear that the signatory is a drawer, maker, indorser, or payee, there is fraud in factum. FRAUD IN INDUCEMENT Agbayani: Fraud in inducement does not amount to forgery and is only a personal defense. The following is an illustration of fraud in inducement: A sells to B what he represents to be as a diamond ring, which in fact is only glass. B issues to A a check. The check is not a forgery. The fraud here is in inducing B to issue the check. Here, there is an intention of B to issue an instrument. FRAUD IN CIVIL LAW There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (Art. 1338, Civil Code) DURESS AMOUNTING TO FORGERY Agbayani: Ordinarily, duress is merely a personal defense. But where it amounts to forgery, it is a real defense, as where A takes B’s hand and forces him to sign his name. Sebastian: There must be violence or intimidation that results in the affixing of a genuine signature to an instrument. While the signature was genuine, it was surrounded by circumstances with violence or intimidation. In this case, there was want of intention to execute an instrument or to indorse. FRAUDULENT IMPERSONATION LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

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Agbayani: Suppose that X represents himself to be Juan Cruz, when in fact he is not. By this misrepresentation, X obtains from Y a note payable to the order of Juan Cruz. Then X indorses the note, signing “Juan Cruz.” This is forgery depending upon whom Y intended to pay. If Y intended that proceeds of the note will go to X, the person dealing with him, named at that time Juan Cruz, then X’s signature of the name “Juan Cruz” is not a forgery. But if Y intended that the proceeds of the note will go to the real Juan Cruz and not X, but to whom Y issued the note on the belief that X was Juan Cruz, then X’s signature of “Juan Cruz” would be a forgery. Sebastian: In fraudulent impersonation, there is no intention to issue the instrument to the person to who it was given to. Thus, what is controlling is that one though the person in front of him is the person entitled to the instrument.

LEX SOCIETAS VERITAS. VNITAS. VIRTVS.

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The person raising this defense must demonstrate that he is not guilty of negligence or that it was not his negligence that allowed the commission of the forgery. Theory of Double Intent Agbayani: In these fraudulent impersonation cases, the maker or drawer of the instrument may be said to have a double intent. First, he intends to make the instrument payable to the person before him or to the person writing at the other end of the line, in case the negotiation is by correspondence. Second, he intends to make the instrument payable to the person who he believes the stranger to be. To use the illustration, Y here may be said to have a double intent. First, he intends to make the instrument payable to X, the person before him. And, second, he intends to make the instrument payable to Juan Cruz who he believes X, the stranger, to be. The first is the controlling intent except where the name of the payee was already known to the maker or drawer, or was more particularly identified, by some designation, description or title, in which case the second becomes the controlling intent. Consequently, in the illustration, it would ordinarily be held that X is the indented payee, and therefore, X’s signature of “Juan Cruz” would ordinarily not constitute a forgery but the signature of an assumed name. The theory commonly invoked in throwing the loss on the drawer is that the drawee, in paying the paper, or the holder, in taking it upon the indorsement of the impostor in the name of which the payee was described, carries out the intention that the drawer entertained at the time of the delivery of the paper to the impostor, although that intention was conceived in consequence of fraud of the impostor as to his identity and ownership of the property which represented the consideration. (Theory of Actual Intent) Another theory invoked is the maxim that as between two innocent persons, the one whose act was the cause of the loss should bear the consequences. (Theory of Estoppel) There is a distinction between cases where the paper is delivered to the impostor as payee and cases where the paper is delivered to the impostor upon his representation, in the belief that he is agent of the person named as payee, although the latter is a fictitious person, or at least a person who has no connection with the transaction. In the absence of negligence on the drawer’s part, as between the drawer and drawee or between the drawer and a holder in due course, the loss falls on the drawee or the purchaser, as the case may be, ratherthan on the drawer, where the impostor represented himself to be the agent of the payee, and not the payee himself. The doctrine of actual intent does not apply because the drawer did not regard the individual to whom he delivered the check as the payee but merely as the agent of the payee.