NOTES IN NEGOTIABLE INSTRUMENTS

DEFINITION
A negotiable instrument is written contract for the payment of money which complies with the
requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute
for money and passes from hand to hand as money, so as to give the holder in due course
(HDC) the right to hold the instrument free from defenses available to prior parties.

REQUISITES OF NEGOTIABLE INSTRUMENTS

A. It must be in writing and signed by the maker or drawer

- Section 191 of NIL provides that written includes “printed” and writing includes
“print”. Thus, it is necessary to have the instrument written or printed in durable
paper.
- It must be in writing or reduced to tangible form; otherwise nothing could be
negotiated or passed from hand to hand
- The signature of the maker or a drawer is a prima facie evidence of his intention
to be bound as such. What is important is the intention of the D or M.

B. Must contain an unconditional promise or order to pay a sum certain in money

- The promise in a promissory note or order in BOE to pay a sum certain in money
must not contain a condition. Otherwise, the instrument becomes not negotiable.

- To constitute a good promissory note, no precise words of contract are

necessary, provided they amount in legal effect to a promise to pay.

C. Must be payable on demand or at a fixed or determinable future time

PAYABLE ON DEMAND

1. When it is expressed to be payable on demand, or at sight, or on presentation

2. Or when no time for payment is expressed
3. When overdue

PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME

1. At a fixed period after date or sight; or

2. On or before a fixed or determinable future time specified therein
3. On or at a fixed period after the occurrence of a specified event, which is certain
to happen, though the time of happening is uncertain.

D. Must be payable to order or to bearer

Words of Negotiability- are words such as “payable to order or to bearer” and they serve as
an expression of consent that the instrument may be transferred.
 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 maybe drawn payable to the order of:

1. A payee who is not maker, drawer, drawee

2. The drawer or maker or;
3. The drawee
4. Two or more payees jointly; or
5. One or some several payees; or
6. The holder of an office for the time being

Note: Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

PAYABLE TO BEARER

1. When it is expressed to be so payable; or

2. When it is payable to a person named therein or the bearer
3. 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
4. When the name of the payee does not purport to be the name of any person; or
5. When the only or last indorsement was in blank.

E. Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty

Note: This requirement applies only to bills of exchange and checks in order for the holder to
know whom he or she will present the instrument for acceptance or payment.

PNB vs. JOSE M. ARUEGO

Jose Aruego publishes a periodical called “World Current Events.” To facilitate payment of the
printing, Aruego obtained a credit accommodation from the Philippine Bank of Commerce. For
every printing of the periodical, the printer (Encal Press and Photo-Engraving) collected the cost
of printing by drawing a draft against the bank, said draft being sent later to Aruego for
acceptance. As an added security for the payment of the amounts advanced to the printer, the
bank also required Aruego to execute a trust receipt in favor of the bank wherein Aruego
undertook to hold in trust for the bank the periodicals and to sell the same with the promise to
turn over to the bank the proceeds of the sale to answer for the payment of all obligations arising
from the draft. The bank instituted an action against Aruego to recover the cost of printing of the
latter’s periodical for the period of 28 August 1950 to 14 March 1951.
Issue : Whether or not the drafts were bills of exchange or mere pieces of evidence of
indebtedness.

Whether or not the defendant (Jose Aruego) is personally liable.

Held : Under the Negotiable Instruments Law, 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. As long as a commercial paper conforms with the
definition of a bill of exchange, that paper is considered a bill of exchange. The nature of
acceptance is important only in the determination of the kind of liabilities of the parties involved,
but not in the determination of whether a commercial paper is a bill of exchange or not.

To answer if Aruego is personally liable, Section 20 of the Negotiable Instruments Law provides that
"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 filing a
representative character, without disclosing his principal, does not exempt him from personal
liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he
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was signing as a representative of the Philippine Education Foundation Company. He merely
signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.

NATIONAL BANK V. MANILA OIL REFINING

FACTS:
Manila Oil has issued a promissory note in favor of National Bank which included a
provision on a confession of judgment in case of failure to pay obligation. Indeed, Manila Oil
has failed to pay on demand. This prompted the bank to file a case in court, wherein an
attorney associated with them entered his appearance for the defendant. To this the defendant
objected.

HELD:
Warrants of attorney to confess judgment aren’t authorized nor contemplated by our
law as they are void against public policy, for they enlarge the field for fraud, because under
these instruments the promissor bargains away his right to a day in court, and because the
effect of the instrument is to strike down the right of appeal accorded by the statute. Thus,
provisions in notes authorizing attorneys to appear and confess judgments against makers
should not be recognized in our jurisdiction by implication and should only be considered as
valid when given express legislative sanction.
Ang Tek Lian vs. CA

Facts:
Ang Tek Lian knowing that he had no funds therefor, drew a check upon China Banking
Corporation payable to the order of “cash”. He delivered it toLee Hua Hong in exchange for
money. The check was presented by Lee Hua hong to the drawee bank for payment, but it w3as
dishonored for insufficiency of funds. With this, Ang Tek Lian was convicted of estafa.

Issue:
Whether or not the check issued by Ang Tek Lian that is payable to the order to “cash”
and not have been indorsed by Ang Tek Lian, making him not guilty for the crime of estafa.

Held:
No. Under Sec. 9 of NIL a check drawn payable to the order of “cash” is a check payable
to bearer and the bank may pay it to the person presenting it for payment without the drawer’s
indorsement. However, if the bank is not sure of the bearer’s identity or financial solvency, it has
the right to demand identification or assurance against possible complication, such as forgery of
drawer’s signature, loss of the check by the rightful owner, raising of the amount payable, etc.
But where the bank is satisfied of the identity or economic standing of the bearer who tenders
the check for collection, it will pay the instrument without further question; and it would incur no
liability to the drawer in thus acting.

ADDT’L NOTES FOR NEGOTIABILITY

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.

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.

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, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a reasonable time.

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.

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

INTERPRETATION

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

(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.

CONSIDERATION

Sec. 24. Presumption of consideration- Every negotiable instrument is deemed prima

facie to have been issued for a valuable consideration; and every person whose
signature appears thereon to have become a party thereto for value.
- Sec 24 of the NIL creates a presumption that every party to an instrument acquired the
same for a consideration or value. However the presumption is only prima facie. It can
be rebutted by proof to the contrary.

Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a
simple contract. An antecedent or pre-existing debt constitutes value; and is deemed
such whether the instrument is payable on demand or at a future time.

Sec. 26. What constitutes holder for value. - Where value has at any time been given for
the instrument, the holder is deemed a holder for value in respect to all parties who
become such prior to that time.

Holder- it means the payee or indorsee of a bill or note who is in possession of it or the bearer
thereof.

Sec. 52 — A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a
lien on the instrument arising either from contract or by implication of law, he is deemed
a holder for value to the extent of his lien.

Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter

of defense as against any person not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is an ascertained and liquidated
amount or otherwise.

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

Requisites of an accommodation party

1. He must be a party to he instrument, signing as maker, drawer, acceptor or indorser;
2. He must not receive value therefore
3. He must sign for the purpose of lending his name or credit to some other person.

Note: The relation between an accommodation party and the accommodated party is one of
principal and surety--the accommodation party being the surety. As such, he is deemed an
original promissor and debtor from the beginning. The surety’s liability to the creditor is
immediate, primary, and absolute.

FUNCTION
1. Substitute for money
2. Medium of exchange for most commercial transactions particularly in credit transactions
3. Credit instrument which increases credit circulation
4. Increase purchasing medium in circulation
5. Evidence of transaction

CHARACTERISTICS
1. Negotiability

- it is that attribute or property whereby a bill or note or check may pass from hand
to hand similar to money, so as to give the holder in due course the right to hold
the instrument and to collect the sum payable for himself free from defenses

- If payable to bearer, it is negotiated by delivery, If payable to order it is negotiated

by the indorsement of the holder completed by delivery.
 2. Accumulation of Secondary contract

- It means that as negotiable instruments are transferred from one person to

another, secondary contracts are accumulated

KINDS OF NEGOTIABLE INSTRUMENTS

1. Promissory Note (PN) – an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to bearer (Sec. 184).

2. Bill of Exchange (BE) - 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).

3. Check - a bill of exchange drawn on a bank payable on demand (Sec. 185)

INSTANCES WHEN BILL TREATED AS A NOTE (section 130)

1. Drawer and drawee are the same person.

2. Drawee is a fictitious person.
3. Drawee has no capacity to contract.
4. When an instrument is so ambiguous (open to one or more interpretations), the holder
may treat it either as a BILL or a NOTE.

Note: The holder may treat the instrument, at his option, either as a bill of exchange and a
promissory note

KINDS OF CHECKS

1. Manager’s / Cashier’s Check

- drawn by a bank on itself and therefore, it is a primary obligation of the bank.
- It is accepted in advance by the act of its issuance and is not subject to
countermand by the payor after indorsement.
- The bank’s manager signs the manager's check while the cashier's check is
signed by the bank cashier.
2. Memorandum Check
- it is like an ordinary check except that the word “memorandum,” “mem” or
“memo” is written upon the face of the check, signifying that the drawer engages
to pay the bona fide(genuine, authentic) holder absolutely, and not upon a
condition to pay upon presentment at maturity and if due notice of the
presentment and non-payment should be given.
- This check is not to be presented for payment, but will be redeemed by the
drawer himself.
3. Certified Check
 - one drawn by a depositor upon funds to his credit in a bank which a proper officer
of the bank certifies that it will be paid when duly presented for payment
4. Traveler’s check
- one upon which the purchaser’s signature must appear twice – at the time he
buys it and also at the time he uses it. It has the characteristics of a cashier’s
check of the issuer.
5. Crossed check (1995, 1996, 2004, 2005 Bar Exams)
- A check with 2 parallel lines on the upper left hand corner means that it could
only be deposited and not converted into cash.
- when 2 parallel lines are drawn across its face or across a corner thereof. If the
name of a bank appears between the parallel lines, the check is said to be
specially crossed, and payment should be made only if presented by the named
bank. If no name appears between the parallel lines, the check is said to be
generally crossed, and payment should be made only upon presentment by
some bank.

Effects of crossing a check:

a. That the check may not be encashed but only deposited in the bank;

b. That the check may be negotiated only once to one who has an account with a
bank; and

c. That the act of crossing the check serves as a warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he has
received the check

6. Stale check
- one which has not been presented for payment within a reasonable time after its
issue.

Promissory Note vs. Bill of exchange

PROMISSORY NOTE BILL OF EXCHANGE

- Unconditional promise to pay - Unconditional order

- Two parties are involved (maker and - Three parties involved (Drawer,
payee) Drawee, Payee)
- Maker is primarily liable - Drawer is secondarily liable

Check vs. Bill of Exchange

 CHECK BILL OF EXCHANGE

- A check is drawn on a bank - A bill of exchange may or may not

be drawn on a bank.

- A check is payable on demand - A bill of exchange is payable on

Demand or at a fixed determinable
future time.

- A check need not be presented for - A bill of exchange is required to be

acceptance presented for acceptance
(a) where the bill is payable after
sight, or in any other case, where
presentment for acceptance is
necessary in order to fix the maturity
of the instrument; or
(b) where the bill expressly
stipulates that it shall be presented
for acceptance; or
(c) where the bill is drawn payable
elsewhere than at the residence or
place of business of the drawee.

- Where the bill of exchange is not

- A check must be presented within a payable on demand, it must be
reasonable time after its issue presented for payment on the day it
falls due. Where it is payable on
demand, presentment for payment
will be sufficient if made within a
reasonable time after the last
negotiation thereof.

- Where a holder of a check procures - When a bill of exchange is

(obtains, secure, ensure) it to be dishonored by non-payment, an
accepted or certified, the drawer and immediate right of recourse to all
all indorsers are discharged from the parties secondarily liable thereon
liability thereon accrues to the holder.

Examples of a non-negotiable instrument

1. Postal Money Order- payment order for a pre-specified amount of money.

 2. Treasury Warrant- an authorization that a payment be made from a public treasury,
usually in the form of a check.
3. Certificate of Stock- a legal document that certifies ownership of a specific number of
shares or stock in a corporation
4. Letter of Credit- payment mechanism used in international trade to provide an economic
guarantee from a creditworthy bank to an exporter of goods.
5. Bill of Lading- document issued by a carrier to acknowledge receipt of cargo for
shipment.
6. Warehouse Receipts- provides the exchange with documentation that the goods
authorized for sale are available and ready for transfer to a buyer.

BATAAN CIGAR VS. CA

FACTS

Petitioner BCCFI issued crossed checks to George King in consideration of tobacco bales,
which the latter sold to respondent SIHI (State Investment House, Inc.) at a discounted price.
George King failed to deliver the consideration. BCCFI ordered to stop payment. SIHI failed to
encash the crossed checks.

ISSUE

Whether or not respondent SIHI here have shown legal absence of good faith.

RULING

YES. In failing to inquire about crossed checks, the holder SIHI is declared guilty of gross
negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law, and as such the consensus of authority is to the effect that the holder of the
check is not a holder in due course.

The Negotiable Instruments Law states what constitutes a holder in due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument under the
following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.

According to commentators, the negotiability of a check is not affected by its being crossed,
whether specially or generally. It may legally be negotiated from one person to another as
long as the one who encashes the check with the drawee bank is another bank, or if it is
 10
specially crossed, by the bank mentioned between the parallel lines. This is specially true
in England where the Negotiable Instrument Law originated.

TRADERS ROYAL BANK VS. COURT OF APPEALS

FACTS

- Filriters through a Detached Agreement transferred ownership to Philfinance a Central

Bank Certificate of Indebtedness.
- It was only through one of its officers by which the CBCI was conveyed without
authorization from the company.
- Petitioner and Philfinance later entered into a Repurchase agreement, on which
petitioner bought the CBCI from Philfinance.
- The latter agreed to repurchase the CBCI but failed to do so.
- When the petitioner tried to have it registered in its name in the CB, the latter didn't want
to recognize the transfer.

HELD:

The CBCI is not a negotiable instrument. The instrument provides for a promise to pay the
registered owner Filriters. Very clearly, the instrument was only payable to Filriters. It lacked
the words of negotiability which should have served as an expression of the consent
that the instrument may be transferred by negotiation.

The language of negotiability which characterize a negotiable paper as a credit

instrument is its freedom to circulate as a substitute for money. Hence, freedom of
negotiability is the touchstone relating to the protection of holders in due course, and the
freedom of negotiability is the foundation for the protection, which the law throws around a
holder in due course. This freedom in negotiability is totally absent in a certificate of
indebtedness as it merely acknowledges to pay a sum of money to a specified person or
entity for a period of time.
The transfer of the instrument from Philfinance to TRB was merely an assignment, and is
not governed by the negotiable instruments law. The pertinent question then is—was the
transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to
TRB, in accord with existing law, so as to entitle TRB to have the CBCI registered in its name
with the Central Bank? Clearly shown in the record is the fact that Philfinance’s title
over CBCI is defective since it acquired the instrument from Filriters fictitiously. Although
the deed of assignment stated that the transfer was for ‘value received‘, there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI from
Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is
a complete nullity. Furthermore, the transfer wasn't in conformity with the regulations set by
the CB. Giving more credence to rule that there was no valid transfer or assignment to
petitioner.

LIFE OF NEGOTIABLE INSTRUMENT

Issuance

- The first delivery of the instrument complete in form to the payee, who takes it as the
holder is called the issuance of the negotiable instrument.

Negotiation

- Sec 30 NIL, an instrument is negotiated when it is transferred from one person to

another in such manner as to constitute the transferee the holder thereof. If payable to
the bearer, it is negotiated by delivery. If payable to order, it is negotiated by the
indorsement of the holder completed by delivery.
- Methods of negotiation 1. Payable to order (Indorsement followed by delivery) 2. Payable
to bearer (can be negotiated by mere delivery thereof)

Methods of transfer of a negotiable instrument

1. Issue- the first delivery of the instrument complete in form, to a person who take it as a
holder.
 2. Negotiation- operates to make the transferee of a negotiable instrument the holder
thereof.
3. Assignment- involves a transfer of rights under a contract. Note that the transfer of a
non-negotiable instrument always constitute an assignment. The assignee taking only
the right as his assignor has subject to all defenses available to his assignor.

Presentment for acceptance

- Refers to presenting a bill of exchange to a drawee named therein for his acceptance
and agreement to pay the bill, usually at some time in the future.

Acceptance

- It is the signification by the drawee of his assent to the order of the drawer

REQUISITES FOR ACCEPTANCE (SEC. 132 NIL)

1. The acceptance must be in writing

2. It must be signed by the drawee
3. It must express that the drawee will perform his promise to pay money
4. It must be completed by the delivery of the bill of exchange by the acceptor to the

ABNORMAL NEGOTIABLE 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, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a reasonable time.
STEPS IN ISSUANCE (EXECUTION) OF A NEGOTIABLE INSTRUMENTS
1. The mechanical act of writing the instrument completely and in accordance with the
requirements in sec 1; and
2. The delivery of the incomplete instrument by the maker or drawer to the payee or holder
with the intention of giving effect thereto.

RULES WHERE AN INSTRUMENT INCOMPLETE BUT UNDELIVERED (SEC 14)

1. Authority to fill up the blanks- the holder or person in possession has prima facie
authority to complete an incomplete instrument by filling up the blanks therein.

a. Material particular- It may be defined as any particular proper to be inserted in a

negotiable instrument to make it complete, and the power to fill in the blanks
extends, therefore to every complete feature of the instrument. (Ex. blanks for
date, due date, payee’s name, amount, or rate of interest)

b. The authority to complete is not an authority to alter.

2. Authority to put any amount- A signature on a blank paper delivered in order that it
may be converted into a negotiable instrument operates a prima facie authority to fill it up as
such for any amount. However, it must be filled up strictly in accordance with the authority
given at a reasonable time.

3. Right against a party prior to completion- The instrument may be enforced only
against a party prior to completion if filled up strictly in accordance with the authority given
and with reasonable time.

a. the person in possession thereof has a prima facie authority to complete it by

filling up the blanks therein.
b. 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.

4. Right of holder in due course- The defense in particular that the instrument had not
been filled up in accordance with the authority given and with reasonable time is not
available against a holder in due course.

HOLDER IN DUE COURSE

Sec. 52 — A holder in due course is a holder who has taken the instrument under the
following conditions:

(a) That it is complete and regular upon its face;

 (b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

RIGHTS

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

RIGHTS OF A HOLDER IN DUE COURSE

1. He may sue on the instrument.

2. He may receive payment and if the payment is in due course, the instrument is discharged

3. He holds the instrument free from any defect of title of prior parties and free from
defenses available to prior parties among themselves

4. And he may enforce payment of the instrument for the full amount thereof against all
parties liable thereto

Note: Only real defenses may be set-up against a holder in due course

Note: “Payment in due course” means payment in accordance with the apparent tenor of
the instrument in good faith and without negligence to any person in possession thereof
under circumstances which do not afford a reasonable ground for believing that he is not
entitled to receive payment of the amount therein mentioned.

REAL DEFENSES- those that are available against all holders.

Ex.

1. Forgery (23)
2. Want of delivery of incomplete instrument. (Sec 15)

PERSONAL DEFENSES- Those that are not available against a holder in due course.

Ex.

1. Filling up blank not within authority (sec. 14)

2. Want of delivery of complete instrument (sec. 16)
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.

RULES WHERE INSTRUMENT IS INCOMPLETE AND UNDELIVERED

1. Defense even against a holder in due course- The fact that an incomplete instrument
completed without authority, had not been delivered, is a defense against a holder in due
course.
2. Defense available to parties prior to delivery- The invalidity of the above instrument is
only with reference to the parties whose signatures appear before the delivery of the
instrument and not after delivery.

Note: as indorsers, they warrant that the instrument is genuine and in all respects what it
purports to be (Sec. 65-66)

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

Rules in Presumption of Delivery

1. If 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 is
conclusively presumed. (Conclusive presumption- - one which cannot be
contradicted.)

2. 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. (It
is a disputable presumption it may be controverted by an evidence to the
contrary)
3. In the possession of party other than a holder in due course
- If a complete instrument is found in the possession of an immediate party other
than a holder in due course, there is prima facie presumption of delivery but
subject to rebuttal.
- Immediate parties are parties that have a direct contractual relationship between
each other in the sense of having or being held to know of the conditions or
limitations placed upon delivery of the instrument.
- Remote parties are parties who are not in direct contractual relation to each
other.

Effects of Complete but Undelivered Instrument

- An undelivered instrument is inoperative because delivery is a prerequisite to liability.

Thus in order to be effectual, the delivery 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.

FORGERY

- By forgery is meant the counterfeit-making or fraudulent alteration of any writing, and

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 thereby to defraud.

Application of Section 23.

(1) Two (2) cases.

- This provision applies only to two(2) cases:

(a) Where the signature on the instrument is affixed by one who does not claim to act as
an agent and who has no authority to bind the person whose signature he has forged
and;

(b) Where the signature is affixed by one who purports to be an agent but has no
authority to bind the alleged principal.

(2) Effect of forged signature.

- In both cases, the signature is wholly inoperative and so no right can be acquired
through the forged signature. Forgery is, therefore, a real defense even against a holder
in due course. (see Sec. 58.)
(3) Proof of forgery. -
- Forgery must be proven with clear and convincing evidence. It is not presumed. A
person who questions the genuineness and authenticity of a signature appearing on an
instrument has the burden of proving that the signature is a forgery.

Extent of the effect of forgery.

- Section 23 does not purport to declare the instrument totally void nor the genuine
signatures thereon inoperative. It is only the forged or unauthorized signature that is
declared to be inoperative.
- In other words, rights may still exist and be enforced by virtue of such instrument as to
those whose signatures thereto are found to be genuine.

CUT-OFF RULE

It does NOT render the instrument void. The signature is wholly inoperative, and no right to
retain the instrument, or to give a discharge thereof, or to enforce payment thereof against any
party to it, is acquired through or under such signature. (Cut‐off rule)

Exceptions to the general rule.

- There are two (2) exceptions to the general rule that no right or title can be acquired to a
negotiable instrument through or under a forged or unauthorized signature, namely:

(1) If the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority (Sec. 23.); and

(2) Where the forged signature is not necessary to the holder's title, in which case the
forgery may be disregarded. (see Sec. 48.)

Persons precluded from setting up the defense of forgery.

Those precluded from setting up the defense of forgery

may be divided into two (2) general classes. They are:

(1) Those who by their acts, silence, or negligence, are estopped from setting up the defense of
forgery; and

(2) Those who warrant or admit the genuineness of the signatures in question, namely:

a. Indorsers
b. acceptors and;
c. persons negotiating by delivery (sec. 65)
FALSIFICATION OF PRIVATE DOCUMENT

- an act whereby a person who, without proper authority alters a legislative bill, resolution,
or ordinance, enacted or approved or pending approval by either House of the
Legislature or any provincial board or municipal council.

- Article 172 punishes the crime of Falsification of a Private Document with the penalty of
prision correccional in its medium and maximum periods with a duration of two (2) years,
four (4) months and one 1 day to six 6 years. There being no aggravating or mitigating
circumstances, the penalty should be imposed in its medium period, which is three (3)
years, six (6) months and twenty-one (21) days to four (4) years, nine (9) months and ten
(10) days. (Leonila Batulanon v. People of the Philippines)

SWINDLING
- The act of obtaining money or property by fraud or deceit.

Article 171. Falsification by public officer, employee or notary or ecclesiastic minister. -

The penalty of prision mayor and a fine not to exceed P5,000 pesos shall be imposed upon any
public officer, employee, or notary who, taking advantage of his official position, shall falsify a
document by committing any of the following acts:

1. Counterfeiting or imitating any handwriting, signature or rubric;

2. Causing it to appear that persons have participated in any act or proceeding when they did
not in fact so participate;

3. Attributing to persons who have participated in an act or proceeding statements other than
those in fact made by them;

4. Making untruthful statements in a narration of facts;

5. Altering true dates;

6. Making any alteration or intercalation in a genuine document which changes its meaning;

7. Issuing in an authenticated form a document purporting to be a copy of an original document

when no such original exists, or including in such a copy a statement contrary to, or different
from, that of the genuine original; or

8. Intercalating any instrument or note relative to the issuance thereof in a protocol, registry, or
official book.
The same penalty shall be imposed upon any ecclesiastical minister who shall commit any of
the offenses enumerated in the preceding paragraphs of this article, with respect to any record
or document of such character that its falsification may affect the civil status of persons.

Article 172. Falsification by private individual and use of falsified documents. - The
penalty of prision correccional in its medium and maximum periods and a fine of not more than
P5,000 pesos shall be imposed upon:

1. Any private individual who shall commit any of the falsifications enumerated in the next
preceding article in any public or official document or letter of exchange or any other kind of
commercial document; and

2. Any person who, to the damage of a third party, or with the intent to cause such damage, shall
in any private document commit any of the acts of falsification enumerated in the next preceding
article.

Any person who shall knowingly introduce in evidence in any judicial proceeding or to the
damage of another or who, with the intent to cause such damage, shall use any of the false
documents embraced in the next preceding article, or in any of the foregoing subdivisions of this
article, shall be punished by the penalty next lower in degree.