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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. (Section 28)

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Want of consideration embraces transactions or instances where none

was intended to pass, while failure of consideration implies that
valuable consideration, moving from obligee to obligor, was
contemplated.

Thus, in case of absence of consideration, no valuable consideration has

been agreed upon or it is illegal and therefore, void.

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Absence of consideration is also manifested by the presence of immoral

or fraudulent consideration like a note given for future illicit cohabitation.

Example
A made a promissory note for P100,000 payable to B or order in
consideration for killing A’s wife. The consideration is illegal and
therefore, there is absence of consideration.

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Failure of consideration
On the other hand, there is failure of consideration when a valid consideration
has been agreed upon but there was failure to execute or give the consideration
contemplated by the parties.

Example
Where a note is given to a payee in consideration of his undertaking to surrender
prior notes given by the maker to the payee, failure of the payee to surrender
prior notes establishes a failure or consideration for the new note, regardless of
whether there was any consideration for the prior notes or not. Likewise, there is
failure of consideration for a note given in consideration of an agreement to
construct works which were not constructed.
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What kind of defense is absence or failure of

consideration?
It is a personal defense because it is not available against a holder in due
course. Thus, a holder in due course may recover thereon regardless of the
consideration which may or may not have passed between the original maker or
drawer and the payee and therefore as against a holder in due course, want or
failure of consideration in the original execution of a bill, note, or other negotiable
instrument is not a defense (State Investment House, Inc. v. Court of Appeals,
G.R. No. L-101163, Jan. 11, 1993).

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ACCOMMODATION PARTY
An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefore,
and for the purpose of lending his name to some other person.
Such 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 (Section 29).

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Can an accommodation party raise the defense of

absence or failure of consideration?
An accommodation party CANNOT RAISE the absence or failure of
consideration because such kind does not really receive value for lending his
name. He shall be liable to a holder for value, notwithstanding that such holder
knew him to be only an accommodation party (Section 29). Thus, where one of
the signers of a joint and several promissory note affixes his signature thereto for
the accommodation of his co-maker and the payee advances the face value of
the note to the accommodated party at the time of the creation of the note, the
consideration for the note, as regards both makers, is the money so advanced to
the accommodated party; and it cannot be said that the note is lacking in
consideration as to the accommodating party because he himself received none
of the money. It is enough that value was given for the note at the time of its
creation (Acuna v. Veloso, 50 Phil. 241).
89

• Delivery means transfer of possession of instrument by the maker or drawer,

with intent to transfer title to the payee and recognize him as holder thereof.
(de la Victoria v. Burgos )
• Delivery, to be effectual, must be made by or under the authority of the party
making / drawing / accepting/indorsing
• 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

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It is the transfer of a negotiable instrument from one person to another made in

such a manner as to constitute the transferee the holder thereof (Section 30).
T R A N S F E R S

ISSUANCE NEGOTIATION
(SUBSEQUENT TRANSFERS)
(FIRST DELIVERY or
TRANSFER)

M P A B C D

HOLDER

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Who is a holder?
"Holder" means the payee or indorsee of a bill or note who is in possession of
it or the bearer thereof (Section 190).
Requisites
The requisites to be a holder are:
a) He must be the payee or indorsee of a bill or note, and
b) He must be in possession of it or the bearer thereof.

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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.

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• An indorsement is the signature of the payee or holder of a negotiable on the

back of the instrument in evidence of his transfer to it. (10 CJS 961)

Allonge
• It is a paper attached or annexed to the instrument on which subsequent
indorsements may be written which will have the same effect as if written on
the instrument itself, such paper being deemed a part thereof.

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• The indorsement must be written on the instrument itself or on a paper attached

thereto (allonge). The signature of the indorser, without additional words, is sufficient
indorsement. (Sec.31, NIL )
• Indorser generally enters into two contracts (Implied contracts by Indorser):
• sale or transfer of instrument
• to pay instrument in case of default of maker
• Indorsement must be of entire instrument (can’t be indorsement of only part of
amount payable, nor can it be to two or more indorsees severally. But okay to indorse
residue of partially paid instrument) (Sec. 32, NIL )

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Power to indorse
The power to negotiate a bill or note is the power to indorse and deliver to
another, so that the right of action thereon shall pass to the indorser or holder,
and such transfer can be made only by the payee or the legal holder, or by
his agent. Where the instrument is payable to joint payees, such as "A and B",
an indorsement of only one of them will not constitute a valid indorsement
unless the one indorsing has the authority of the other. But where the
instrument is payable to payees in the alternative such as "A or B", either one
of them may negotiate the instrument.

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Indorsement and Assignment distinguished

INDORSEMENT ASSIGNMENT
speaks of negotiable instruments. involves non-negotiable instruments;

is broader as it includes indorsement

itself.

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The indorsement must be an indorsement of the entire instrument. An

indorsement which purports to transfer to the indorsee a part only of
the amount payable, or which purports to transfer the instrument to
two or more indorsees severally, does not operate as a negotiation
of the instrument. But where the instrument has been paid in part, it
may be indorsed as to the residue (Section 32).

The reason is that the law will not permit an entire instrument to be
divided into parts so as to subject the party liable to several actions
thereon.
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Indorsement of part of amount payable. A note payable to “X” or order for

P100,000 was indorsed by “X” as follows:

"To Y for P60,000 only. (Sgd.) X."

Such indorsement is not valid because it was for a part of the amount payable
only. However, if P40,000 had already been paid by the maker, then it could
be indorsed for the balance of P60,000.

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1. As to manner of future method of 3. As to kind of liability assumed by

negotiation: indorser
1. Special 1. Qualified
2. Blank 2. Unqaulified
2. As to kind of title transferred 4. As to presence/absence of express
1. Restrictive limitations put by indorser upon
2. Non-restrictive primary obligor’s privileges of paying
the holder
1. Conditional
2. Unconditional
5. Other Classifications

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1. As to manner of future method of negotiation

(Sec. 35, NIL):
a. SPECIAL – specifies the person to whom/to whose order the instrument is to be payable; indorsement
of such indorsee is necessary to further negotiation.
a. A special indorser is liable to all subsequent holders, unless the instrument is an originally bearer
instrument, in which case he is liable only to those who take title through his indorsement (Sec 40,
NIL)
b. BLANK – specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated by
delivery
a. a person who negotiates by mere delivery is liable only to his immediate transferee.
b. the holder may convert a blank indorsement into a special indorsement by writing over the
signature of the indorser in blank any contract consistent with the character of the indorsement

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• An order instrument may be converted into a bearer instrument by means of a

blank indorsement.
• But a bearer instrument remains as such whether it has been indorsed specially
or in blank. It is the liability of the indorser which is affected.

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Example of a special indorsement

The note payable to “X” or order was indorsed as follows,
“To “A”. (Sgd.) “X“.

Or, the indorsement could be,

"Pay to A“;
"Pay to A or order,"
or
"Pay to the order of A,"

with the signature of the indorser.

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These indorsements are special since they specify the name of the indorsee. A special
indorsement, however, does not require the words, "or order," since the indorsement
transfers the bill or note with all its original incidents, including its negotiability. To
further negotiate the instrument, the indorsement of A is necessary.

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On the other hand, if the indorsement were as follows,

"(Sgd.) X,"

the indorsement is an indorsement in blank as the name of the indorsee has not been
specified. Such indorsement converts the instrument into a bearer instrument since the
only indorsement is an indorsement in blank (Section 9), and may be negotiated by mere
delivery (Section 34).

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2. As to kind of title transferred:

RESTRICTIVE – such indorsement either:
• Prohibits further negotiation of the instrument,
• Constitutes indorsee as agent of indorser, or
• Vests title in indorsee in trust for another

• Rights of indorsee in restrictive indorsement

• receive payment ofinstrument
• Bring any action thereon that indorser could bring
• Transfer his rights as such indorsee, but all subsequent indorsees acquire only title
of first indorsee under restrictive indorsement

NON-RESTRICTIVE

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3. As to kind of liability assumed by indorser

QUALIFIED
• Constitutes indorser as mere assignor of title (eg. “without recourse”) (Sec. 38, NIL).
• But this does not mean that the transferee only has the rights of an assignee. Transfer
remains a negotiation and transferee can still be a holder capable of acquiring a title
free from defenses of prior parties.
• It relieves the qualified indorser of his liability to pay the instrument should the
maker be unable to pay at maturity.

UNQUALIFIED

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4. As to presence/absence of express limitations put by

indorser upon primary obligor’s privileges of paying the
holder:
CONDITIONAL – additional condition annexed to indorser’s liability. (Sec. 39, NIL )
• Where an indorsement is conditional, a party required to pay the instrument may disregard
the condition, and make payment to the indorsee or his transferee, whether condition has
been fulfilled or not
• Any person to whom an instrument so indorsed is negotiated will hold the same/proceeds
subject to rights of person indorsing conditionally

UNCONDITIONAL

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5. Other classifications
a. Absolute – One by which the indorser binds himself to pay, upon no other
condition than the failure of prior parties to do so, and of due notice to him of
such failure
b. Joint - Where instrument payable to the order of two or more payees or indorsees
not partners, all must indorse, unless the one indorsing has authority to endorse
for the others (Sec. 41, NIL)
c. Irregular - Where a person, not otherwise a party to the instrument, places
thereon his signature in blank before delivery, he is liable as indorser

109

Question:
“A” issued a promissory note payable to “B” or order. “B” indorsed the note to “C”, upon his
marriage to “D“. “C” and “D” are not yet married.

1. What kind of indorsement is this?

2. When should payment be made and what is the effect of payment prior to fulfilment of the
condition?

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Answer:

1. The indorsement is conditional since it is subject to the marriage of “C” to “D”,

an event which is future and uncertain.

2. “A”, the maker may disregard the condition and pay “C” prior to his marriage
to “D”. However, “C” shall hold the proceeds of the note subject to the rights
of “B” who made the conditional indorsement. Or, the maker may refuse to
pay until the condition has been fulfilled (Section 39).

111

Question:
“X” made a note payable to “A” or bearer. “A” delivered the note to “B”. Instead of merely
delivering the instrument, “B” indorsed it to “C” or order. “C” indorsed it to “D“. “D”
delivered it without indorsement to “E”.

What are the liabilities of “A”, “B”, “C” and “D”?

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Bearer Note:

Delivery Delivery Ind. Ind. Delivery

X A B C D E

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Answer:

Since “A” negotiated the instrument by mere delivery, he is liable as a person negotiating the
instrument by delivery only to “B”, his immediate transferee (Section 65). “B” shall be liable
as an indorser only to “C” and “D” as the latter got title over the instrument through “B's”
indorsement. “C” is likewise liable only to “D” as an indorser for the same reason. “D” is liable
as a person negotiating the instrument by delivery to “E”. “E” cannot hold “A” liable because a
person negotiating by delivery is liable only to his immediate transferee (Section 65). “E”
cannot hold “B” and “C” liable since the former did not get his title to the instrument through
the indorsement of “B” and “C” but through the delivery of “D” (Section 40, 2nd phrase).

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Indorsement by Collecting Bank

• holder deposits check with a bank other than the drawee, would in
effect be negotiating the check to such bank, since he would have to
indorse the check before the bank will accept it for deposit. In most
cases, the bank is acting as a mere collecting agent.

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Negotiation by Joint or Alternative Payees or

Indorsees
All must indorse, unless the one indorsing has authority to endorse for the
others

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Unindorsed instruments
A. Such title as transferor had therein, subject to defenses and equities
available to prior parties
Ex: Transferee can sue the transferor, though he does not thereby automatically
become a HDC (Furbee v. Furbee, 1936 )

B. Right to have indorsement of transferor, after which, he becomes a

holder or possibly a HDC
For purposes of determining whether or not the transferee becomes a HDC after
securing the transferor’s indorsement, note that Sec. 52 must be met at the time of the
negotiation, i.e., when indorsement is actually made.

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Cancellation of Indorsements
Holder may strike out indorsements not necessary to his title. The
endorser whose endorsement was struck out, and all endorsers
subsequent to him, are relieved from liability on the instrument (Sec. 48,
NIL )

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Indorsement by Agent
Agent should make it plain that he is signing in behalf of a principal
otherwise he may be made personally liable (Sec 20, NIL)

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