LECTURE NOTES ON NEGOTIABLE INSTRUMENTS Act No. 2031
APPLICABILITY OF THE LAW
It applies only to negotiable instruments that meet the requirements laid down in Section 1 of the law. Otherwise, any case not provided for shall be governed by the provisions of existing legislation, or in default thereof, by the rules of the law merchant (Under Section 196, the law merchant refers to the custom of merchants or rules that have been developed under common law, consisting of primarily of usages of trade previously proven in court or ratified by legal decisions. It is also known as the Custom of Merchants). Thus, the Civil Code, the Bouncing Check Law and the Revised Penal Code provisions on Estafa applies only to supply any deficiencies in cases not covered by the Act.
1. In the case of GSIS vs. Court of Appeals, 170 SCRA 533, the Supreme Court on the issue as to whether private respondents were accommodation parties under Section 29, it said that the arguments were misplaced as the promissory note executed was not negotiable because it was not payable to order or to bearer.
WHAT IS A NEGOTIABLE INSTRUMENT
It is a transferable instrument containing an unconditional promise or order to pay to a holder or to the order of a holder upon issue, possession, demand or at a specified time.
COMMON KINDS OF NEGOTIABLE INSTRUMENTS
1. Promissory Note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money or to bearer. The ORIGINAL parties to a promissory note are the maker (one who makes the promise and signs the instrument ), the payee ( party to whom the promise is made or instrument is payable), and SUBSEQUENTLY, the holder ( as defined in Section 191 is the person to whom the instrument is delivered to, he may be payee or any subsequent person holding the note (or bill) by delivery or by delivery and endorsement.
2. Bill of Exchange under Section 126 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 period of time a sum certain in money to order or bearer. The ORIGINAL parties are the drawer ( he draws up the bill and gives the order to pay money to a third party) drawee ( the party upon whom the bill is drawn. He is the person to whom the bill is addressed and is ordered to pay. Under Section 62, he becomes an ACCEPTOR when he indicates a willingness to accept responsibility for the payment of the bill), and the payee ( the partying whose favor the bill is drawn or is payable to) SUBSEQUENTLY, the holder ( as defined in Section 191 is the person to whom the instrument is delivered to, he may be payee or any subsequent person holding the note (or bill) by delivery or by delivery and endorsement.
2.1 Note that a check is not another kind of negotiable instrument, rather it is a form of a bill of exchange.
Table of Differences between Negotiable Instruments
PN BOE
2 parties: maker and payee 3 parties: drawer, payee, drawee/acceptor
Promise to pay Order to pay
Maker is primarily liable Drawee/acceptor is primarily liable Secondarily liable: indorsers and
persons negotiating by mere delivery Secondary liable: drawer, indorsers andpersons negotiating by mere delivery Maker is liable primarily and NO
conditions precedent is required Drawer’s liability is secondary and attaches ONLY upon compliance with conditions precedent:
a) Presentment b) Dishonor
c) Proceedings (for dishonoring)
No need to present for acceptance Needs to be presented for acceptance in some cases as required by law Life of a promissory note: issue,
negotiation, indorsements,
presentment for payment, dishonor by non-payment, notice of dishonor and discharge
Life of a bill of exchange: issue, negotiation, indorsements,
presentment for acceptance, dishonor by non-acceptance, presentment by payment, dishonor by non-payment, notice of dishonor and discharge If payable on demand, it must be
presented for payment within a reasonable time after its issuance
If payable on demand, it must be presented for payment within a
reasonable time from it last negotiation
Drawee may be any person Always drawn upon a bank Payable on demand or at fixed or
determinable future time Always payable on demand It is necessary that it be presented for
acceptance Not necessary that it be presented for acceptance (it is presented at once for payment)
It is not necessary that drawer has
money with the drawee Drawn on deposit Must be presented for payment within
a reasonable time after last negotiation Must be presented for payment within a reasonable time after its issue (6 mos.)
FUNCTIONS AND IMPORTANCE OF NEGOTIABLE INSTRUMENTS
1. While not legal tender (Article 1249, Civil Code and Section 52 of the New Central Bank Act, RA 7653 which provides that only notes and coins issued by it possess legal tender power, and as for coins up to PHP 50.00 for denominations of 25 centavos and above and up to PHP 10.00 for denominations of 10 centavos and below), they are recognized substitutes for money as its negotiability allows it be transferred from one hand to another, subject however to the financial ability of the parties to honor the instrument.
1.1 Note though that in Fortunado vs. Court of Appeals, 196 SCRA 26, the delivery of checks is sufficient in the exercise of the right of redemption. The right of redemption is a privilege and is not an ordinary obligation. Hence Article 1249 does not apply.
2. They constitute, checks particularly, as the media of exchange for most commercial transactions. The ability to purchase is thereby increased without need for actual money to be produced and delivered.
3. They serve as a medium of credit transaction. They enable the transaction of business as the party to whom they are delivered can treat the promises contained therein as cash.
3.1 Note also Section 60 of RA 7653 that states that checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor. Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to delivery to the creditor of cash. TWO DISTINCTIVE FEATURES OF NEGOTIABLE INSTRUMENTS
1. Negotiability which allows instruments, negotiable in character to be transferred from one person to another so as to constitute the transferee as a holder.
2. Accumulation of secondary contracts because the indorsers of the instrument become secondarily liable not only to their immediate transferee but also to any holder, subject to valid defenses.
There is thus greater security brought upon the instrument as whoever takes it has greater chances of recovery as more people are liable on the instrument and consequently, raises its level of acceptability.
FORMAL REQUISITES OF NEGOTIABLE INSTRUMENTS
A negotiable instrument is primarily a contractual obligation to pay money, whose negotiability depends on its form and content as dictated by Section 1 which provides for the formal requisites of a negotiable instrument, thus:
1. It must be in writing;
2. It must be signed by maker or drawer;
3. It must contain an unconditional promise or order to pay a sum certain in money;
4. It must be payable on demand, or at a fixed or determinable future time; 5. It must be payable to order or to bearer; and
6. Where it is a bill of exchange, drawee must be named or otherwise indicated therein with reasonable certainty.
The basic GUIDING PRINCIPLE as laid down in Section 10 is that the instrument need not follow the language of the law, but the terms must be sufficient to clearly indicate an intention to conform to the requirements of the law. Hence, the use of a foreign language or grammatical errors does not destroy negotiability.
NOTE THOUGH the EXCEPTION FOUND IN SECTION 8 pertaining to an instrument payable to order, where literal compliance with the law is necessary Illustrations:
1. The following promissory note is not negotiable because it is neither payable to order or to bearer:
SEE: Jimenez v. Bucoy 103 Phil. 40 (1958)
2. Conformity with all requirements of NIL makes an instrument a bill of exchange, even if acceptance is not made since the latter is important only in determination of liabilities of parties. SEE: Phil. Bank of Commerce v. Aruego 102 SCRA 530 (1981)
A. INSTRUMENT MUST BE IN WRITING
“Received P10,000.00 payable after World War II.”
1. Physical integrity of Whole Instrument – the negotiability of an instrument must be determined only from the face of the document itself and not elsewhere. (Des Moines Savings Bank v. Arthur, 163 la. 205, 143 NW 556)
2. A commercial transaction may be verbal unless the law requires a written document for its validity. Writing is required for negotiable instruments. Hence, there can be no verbal promissory note nor a verbal bill of exchange. In short, the requisites for the validity of a negotiable instrument are: (a) consent, (b) consideration, (c) subject matter, and (d) form.
3. As a general rule, bills, notes and other instruments of similar nature are not subject to be varied or contradicted by parol or extrinsic evidence pursuant to the rule that “long experience that written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a different contract from that expressed in the writing signed by them BUT if there is an allegation of fraud in the execution of promissory note, such as when the note having a face value of – P50,000.00 was alleged to have been signed by the makers at only P5,000.00, where parol contemporaneous agreement was the inducing and moving cause of the written contract, it may be shown by parol evidence; but it must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate. (Inciong v. Court of Appeals, 257 SCRA 578)
B. IT MUST BE SIGNED BY MAKER OR DRAWER
1. Any inscription or even stamping will suffice provided that it is meant to function as the signature of the party.
2. Persons who write their names on the face of a note are makers and are liable as such, and their solidary liability is made certain by the presence of the phrase “joint and several.” (Republic Planters Bank v. CA, 216 SCRA 738)
C. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY
1. An unconditional promise or order to pay is required because the purpose of a negotiable instrument is to take the place of money. Hence, if the instrument may or may not mature, no one will have faith on negotiable instrument embodying it. Thus, the promise or order must be ABSOLUTE.
2. Any word equivalent to an order would suffice, and words of courtesy would not be inconsistent with the order; however, a mere request or authorization would not be enough.
3. The promise must be found in the instrument itself; the mere existence of a debt does not amount to a promise. The use of the word “order” is deemed equivalent to promise.
4. An acknowledgment of debt becomes a promise to pay by addition of words implying a promise of payment, such as “payable on a given day,” “payable on demand,” “paid when called for,” “I.O.U.” (Jimenez v. Bucoy, 103 Phil. 40 [1958]).
5. Nature of Condition (Art. 1179, Civil Code) – A distinction must be made between a condition (a future and uncertain event which may or may not happen)
and a period (one that is certain to happen though the time when it will happen is not known). An instrument embodying an obligation that is subject to a condition is non-negotiable; whereas, that with an obligation subject to a period is negotiable.
Illustrations:
1.
“If it rains on 28 June 2002” is a condition, one which may or may not happen. The instrument is non-negotiable. Under the last sentence of Sec. 4, if it indeed rains on 28 June 2002 and the condition is thereby fulfilled, the instrument which was originally conditional and non-negotiable does not thereby become negotiable by the fulfillment of the condition.
When X will die is not certain, but X is sure to die. This is a period. The instrument is negotiable.
2. Under Sec. 39, a condition in the endorsement would not destroy negotiability of the instrument. Thus:
B, upon presentment for payment, may pay immediately ignoring whether the condition is fulfilled. Should B choose to pay immediately and the condition is not fulfilled, then the quasi-contract of solutio indebiti arises. (Article 2154, Civil Code).
3. Under Section 3(a) an “indication of a particular account to be debited with the amount” does not make the promise or order conditional. We have to
“Pay to A or order P500 if it rains on 28 June 2002.”
(Sgd.) “B”
“10 days after X dies, pay A or order P500.” (Sgd.) “B”
“Pay A or order P500.”
(Sgd.) “B”
[At the back:]
“Pay to X if it rains on 28 June 2002.”
distinguish between the use of the words “fix” and “indicate.” If the instrument fixes the fund from where payment has to be made, so that payment cannot be made from other funds, the instrument is not negotiable. But if the instrument merely indicates the fund from where payment is to be made, so that the obligor will still be liable even if the indicated fund is depleted, then the instrument is negotiable. NOTE: (a) A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check. (Section 189) (b) A treasury warrant is not a negotiable instrument because it is to be paid from a particular fund. (Abubakar v. Auditor General, 81 Phil. 359 [1948]) (c) Indication of a particular fund out of which reimbursement is to be made. (d) A statement of the transaction which gives rise to the instrument under Section 3(b) like:
SEE: Elizalde & Co., Inc. v. Biñan Trans. Co. (CA) 58 O.G. 5886 (1960)
Reference in a promissory note to some extrinsic agreement, in order to destroy its negotiability, must be such as to indicate unmistakably that the paper is to be burdened with conditions of that agreement. When the reference is a simple recital of the consideration for which the paper was given, or is a mere mention of origin of the transaction, its negotiability is not affected.
D. TO PAY A SUM CERTAIN IN MONEY:
1. The sum is certain when what is to be paid is a fixed amount of money or alternatively, if from the face of the instrument it can be mathematically computed. Under Section 2, the sum is still certain even when it is (a) With interest stipulated THOUGH Usury Law now ineffective. (Liam Law v. Olympic Sawmill Co., 129 SCRA 439 [1984]; CB Circular No. 905, s. 1982, 78 OG 7336). (b) By stated installments, though the installments must not only be stated, but the maturity of each installment must be fixed or determinable. (c) By stated installments, with Acceleration Clause (d) With either fixed or current rate of exchange, or payable in foreign exchange (Uniform Currency Law, R.A. 529, repealed by R.A. 8183). (e) With costs of collection or attorney’s fees, in cases where payment is not made at maturity NOTE THOUGH that at maturity, the instrument is no longer fully negotiable since any transferee acquiring it would not be a holder in due course under Sections 52 and 58.
2. Section 2 illustrates instances where the sum payable is still a sum certain. This must be correlated with Section 5 which provides that “an instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable.” Thus, in the following illustration, the instrument is not negotiable, to wit:
However, under Sec. 5(d), the instrument is not rendered non-negotiable if it is the holder who is given an election to require something to be done in lieu of payment of money. Thus, in the following illustration, the instrument if negotiable
“Pay to A or order P500 arising from our rice deal.”
(Sgd.) “B”
“Pay A or order P500 or 5 sacks of rice.”
because the obligation of the maker/acceptor to pay in a sum certain, if the holder so chooses, is still absolute, to wit:
Illustrations
As provided for under Sec. 2, the following are still negotiable instruments, to wit: 1. 2. 3. 4. 5.
The paragraph of Section 2 on foreign exchange is deemed to have been amended by Rep. Acts 529 and 4100. The instrument is valid but what is void is the obligation to pay in foreign currency. SEE: Arrieta v. NARIC, 10 SCRA 79 [1964]).
While the agreement to pay in foreign exchange is declared null and void and of no effect, what the law specifically prohibits is payment in currency other than legal tender; it does not defeat a creditor’s claim for payment, but to be made in lawful Philippine legal tender. SEE: Ponce v. Court of Appeals 90 SCRA 533 (1979)
Where the parties stipulate payment in foreign currency, the rate of exchange is determined not at the time of making of the instrument but at the time of payment, and not the rate at the time the obligation was incurred. SEE: Kalalo v. Luz 34 SCRA 337 (1970)
“Pay A or order P500 but the holder may demand delivery of 5 sacks of rice.”
(Sgd.) “B”
“Pay to A or order P500 with interest at 12% per annum.”
“Pay to A or order P500 in monthly installments of P100 and failure to pay one installment will make the entire fall due immediately.”
“Pay to A or order P500 payable in monthly installments of P100.”
“Pay to A or order P500 and in the event of litigation, I agree to pay court costs and attorney’s fees.”
E. IT MUST BE PAYABLE ON DEMAND, OR AT A FIXED OR DETERMINABLE FUTURE TIME
1. Under Section 7, an instrument is payable on demand (a) when expressed to be payable on demand, or at sight, or on presentation (b) when no time for payment is expressed (c) Special Rule: When an instrument is issued, accepted, or endorsed when overdue, it is, as regards the person so issuing, accepting or indorsing it, payable on demand.
2. Illustrations on payable on demand : (a) “On demand pay to A or order P500.”
(b) “At sight pay to A or order P500.” (This applies only to a bill of exchange.) (c) “On presentation pay to A or order P500.” (This applies only to a bill of exchange.)
(d) “Pay to A or order.” (No date expressed.)
(e) “10 days after date (16 April 2002) pay to A or order P500.” (Provided, That this instrument is issued, accepted or endorsed when overdue, as far as the person issuing, accepting or indorsing is concerned, the instrument is payable on demand.)
3. A DETERMINABLE FUTURE TIME as provided by Section 4 is: (a) At a fixed period after date or sight.
(b) On or before a fixed or determinable future time specified therein.
(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.
The specification “before” a specified event, would render the instrument non-negotiable because the date of maturity can be determined only after the note has become overdue.
A stipulation that the instrument shall be paid “when my means permit me to do so” although by law would constitute a period would still render the instrument non-negotiable because the instrument is not deemed payable at a “fixed or
“10 days after date pay to A or order P500.” (Sgd.) “B” “10 days after sight pay to A or order P500.” (Sgd.) “B”
On or before 9 July 2004 pay to A or order P500.”
(Sgd.) “B”
10 days after X dies pay to A or order P500.” (Sgd.) “B”
determinable future” since the term of the period would have to be set by the courts under Articles 1180 and 1197, Civil Code.
(d) Instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (West Point Banking Co. v. Gaunt, 34 ALR 862).
F. IT MUST BE PAYABLE TO ORDER OR TO BEARER: 1. An instrument is payable to order under Section 8 when:
(a) Drawn payable to the order of a specified person or to him or his order. The payee is not the maker, drawer or drawee.
(b) Drawn payable to the drawee as payee. Here being both the drawee and the payee, the drawee can pay himself upon maturity from the funds belonging to the drawer in his possession: once accepted is equivalent to a promissory note in favor of the drawer.
(c) Maker as payee. Here the maker promises as follows “ I promise to pay to the order of myself, 10,000” : the instrument is not complete until the maker endorses under Section 184.
(d) Drawer as payee: this authorizes the drawee to pay himself/drawer. “Pay to A or order P500.”
(Sgd.) “B”
[A is neither maker, drawer or drawee.]
“Pay to B or order P500.” (Sgd.) “B”
[Under Sec. 184, this instrument is not complete until endorsed by maker.]
“Pay to C or order P500.” (Sgd.) “B” “To: C”
[B can demand C to pay himself because B has money or credit with C.]
[Check]
“Pay to B or order P500.” (Sgd.) “B” “To: PNB”
[This means that B has a deposit with PNB and he wants to withdraw the amount indicated.]
(e) Two or more payees jointly, or one or more several payees.
(f) The holder of an office for the time being.
In case the instrument is endorsed, then it will be like this: “Pay to A and X or order P500.”
(Sgd.) “B”
[Since the conjunction “and” is used in the above-illustrated instrument, then the endorsements of both A and X are necessary for the negotiation of the instrument.]
“Pay to A or X or order P500.” (Sgd.) “B” [Since the conjunction “or” is used, then the endorsement of either A or X will be sufficient for the negotiation of the instrument.]
“Pay to City Treasurer of Baguio City or order
P500.”
(g) When the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. This requirement is imposed as if there is no payee, there is NOBODY WHO COULD GIVE THE ORDER OR AUTHORITY TO COLLECT. THERE IS NO ONE WHO CAN ENDORSE THE DOCUMENT AND CAN THUS BE SAID TO BE NOT NEGOTIABLE.
It would seem in Equitable Banking Corp. v. IAC, 161 SCRA 518 (1988), the contravention of this rule (such as when the check is payable to “Equitable Banking Corporation order of A/C of Cavilled Enterprises, Inc.”) would not render the instrument non-negotiable but would merely place the burden of ambiguity to the person who caused it under Art. 1377 of the Civil Code.
2. Subject to the rules in Sections 13, 14 and 15 on incomplete instruments, leaving the payee blank may make the instrument non-negotiable. This is because an instrument payable to order may be negotiated only by endorsement and delivery.
3. There are only two ways to make an instrument payable to order, as provided under Sec. “8”
4. Under Section 9, a negotiable instrument is payable to bearer: (a) When it is expressed to be so payable to bearer:
(b) When it is payable to a person named therein or bearer: “Pay to A or order.”
(Sgd.) “B” “Pay to the order of A.”
(Sgd.) “B”
“Pay to bearer P500.” (Sgd.) “B”
“Pay to A or bearer P500.” (Sgd.) “B”
City Treasurer of Baguio City “By:__________
(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:
The clause “and such fact is known to the person making it so payable,” does not require that it should be the maker himself who is chargeable with the notice. Otherwise, “the whole provisions would be ineffective in practically every case where the purpose of the person drawing the check was fraudulent.” (Mueller & Martin v. Liberty Ins. Bank, 219 S.W. 465, 187 Ky 44 [1920]).
(d) When the name of the payee does not purport to be name of any person.
There is no need to use “order” or equivalent word to qualify the instrument. A check payable to the order of “cash” is payable to bearer and the bank may pay it to the person presenting it for payment without the drawer’s endorsement. (Ang Tek Lian v. CA, 87 Phil. 383 [1950]).
(e) When the only or last endorsement is an endorsement in blank.
5. Bearer means the person in possession of a bill or a note which is payable to bearer. (Sec. 191). A person who steals an instrument payable to bearer is a “bearer.” (Mass. Nat. Bank v. Marshall, 25 Pac. 214).
(a) Words equivalent to “bearer” are: “Assignee,” “holder” (Wilson County v. Third Nat. Bank of Nashville, 103 US 770); “Possessor”; “on return of this certificate properly endorsed” (Felton v. Commercial Nat. Bank, 177 NE 52);“Order of the bearer” (American National Bank v. Kerley, 220 Pac 116, 32 ALR 262).
(b) Words unaccepted as equivalent to “bearer”: “To X or his collector”; “To X or his agent”; “To bearer B.” (Weaver v. Scott, 32 Iowa 22)
“Pay to John Doe or order P500.” (Sgd.) “B”
“Pay to cash or order P500.” (Sgd.) “B”
“Pay to A or order P500.” (Sgd.) “B”
(And the only or last endorsement at the back is a blank.)
6. A bearer instrument may be negotiated by mere delivery. When a bearer instrument is not delivered for purposes of negotiation but physically delivered merely as security for another obligation, there is no negotiation in the sense of transfer of legal title to the instrument and would constitute the subsequent holder merely as a holder for value and not a holder in due course. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. SEE: Caltex (Phils.) v. Court of Appeals 212 SCRA 448 (1992)
G. IN BILLS OF EXCHANGE, DRAWEE MUST BE NAMED OR OTHERWISE INDICATED THEREIN WITH REASONABLE CERTAINTY
1. The purpose of this requirement is to enable the payee or the holder to know upon whom he has to call for acceptance or payment.
2. Note however, that under Section 14, the omission of drawee may be filled in later on.
WHAT PROVISIONS IN A NEGOTIABLE INSTRUMENT DO NOT AFFECT NEGOTIABILITY
The general rule under Section 5 is that an instrument is rendered non negotiable if it contains a promise or order to do anything in addition to the payment of money as what transpires is that while the promise or order to pay money, the other thing would have to be assigned BUT BY WAY OF EXCEPTION, the following provisions do not affect negotiability
1. Authorizes the sale of collateral securities in case the instrument be not paid at maturity. The additional act is to be done after the date of maturity of the instrument and when it is no longer negotiable.
2. Authorizes a confession of judgment if the instrument be not paid at maturity.
Confession of judgment clauses are void as being against public policy to give a person his day in court; however, such nullity does not affect the negotiability of the instrument. SEE: National Bank v. Manila Oil Refining Co., 43 Phil. 444 [1922].
Where an agreement stipulates for the confession of judgment prior to any actual litigation the stipulate is void for being contrary to public policy. However, if the creditor sues, the debtor can go to court and only then confess judgment. This is valid if done by the debtor himself. SEE: In Traders Insurance v. Dy Eng Biok, 104 Phil. 806 (1958)
3. Waives the benefit of any law intended for advantage or protection of obligor. Examples: Waiver of Notice of Dishonor under Section 110, Waiver of Protest under Section111, Presentment for Payment under Section 70
4. Gives holder an election to require something to be done in lieu of payment of money.
BUT nothing in Section 5 shall be validate a provision or stipulation that is otherwise illegal.
The TEST: 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.
WHAT OMISSIONS IN A NEGOTIABLE INSTRUMENT DO NOT AFFECT VALIDITY AND NEGOTIABILITY
The following omissions do not affect the validity and negotiability of an instrument
1. Non-dating of instrument.
2. Non-specification of value given, or that any value has been given. 3. Non-specification of place where it is drawn or place where it is payable. 4. Bears a seal.
5. Designation of particular kind of currency in which payment is to be made. Under Sec. 52, a requisite for a holder in due course is that instrument is “complete and regular” on its face. Section 6 therefore provides for certain omissions that do not destroy completeness or regularity, as other portions of the law supplement these omissions. Thus:
This instrument has omissions: (a) no date; (b) no place of payment; and (c) no statement of value received.
Note Date: This is supplied by Sec. 17(c) which states that where instrument is not dated, it will be considered dated as of time it was issued.
No Place of Payment: This is supplied by Sec. 73 which provides:Where no place of payment is specified, but the address of person to make the payment is given in the instrument and it is there presented;
Where no place of payment is specified and no address is given and instrument is presented at usual place of business or residence of person to make payment; In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence.
No Statement of Value Received: Supplied by Sec. 24 which provides that “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 for value.”
“Pay to A or order P500.” (Sgd.) “B”:
WHAT ARE THE RULES OF CONSTRUCTION COVERING NEGOTIABLE INSTRUMENTS
Under Section 17, the following rules of construction are provided:
1. The sum expressed in words takes precedence over the sum expressed in numbers; except where the words are ambiguous or uncertain, then reference to the figures should be made.
2. Where interest is stipulated, without specification of the starting date, the interest runs from the date of the instrument, and if undated, from the issue thereof.
3. An undated instrument is considered to be dated as of time it is issued. 4. Written provisions prevail over printed provisions of instrument.
5. Where the instrument is ambiguous as to whether it is a note or a bill, the holder may treat it as either at his election.
6. When the capacity of signatory is not clear, he is to be deemed an endorser. The signature of the maker is usually affixed at the lower right hand corner while that of the drawee is at the lower left hand corner, the holder negotiates by signing at the back thereof. If a doubt arises, he is deemed an endorser an assumes the least liability.
7. “I promise to pay” when signed by two or more persons is deemed to be jointly and severally signed, i.e., solidary liability.
(a) BAR QUESTION: What is the liability of B and C?
ANSWER: Joint because the above instrument is not a negotiable instrument, thus the general rule under civil law of joint liability applied in the absence of stipulation that liability should be solidary.
(b) If the instrument reads:
“I promise to pay A or order P500.” (Sgd.) “B” (Sgd.) “C” Liability of B and C is solidary.
“Promise to pay A P500.00.”
Held: B and C are liable solidarily since “I” dominates. SEE: PNB v. Concepcion Mining, 5 SCRA 745 (1962)
STEPS IN THE ISSUANCE OF A NEGOTIABLE INSTRUMENT The steps in the issuance of a negotiable instrument are:
1. The act of writing the instrument completely and in accordance with Section 1 of the NIL.
2. The delivery of the complete instrument by the maker or the drawer to the payee or holder with the intention of giving effect to it
FORM, INTERPRETATION AND ISSUANCE OF NEGOTIABLE INSTRUMENTS
A. PRESUMPTION AS TO DATE:
1. Importance of Date of Instrument: Determining when instrument, endorsement or acceptance is due (maturity); and Determining prescription of a cause of action.
2. Date is not an essential element for negotiability.
3. An undated instrument is considered to be dated as of the time it was issued under Section 17.
4. Where an instrument or acceptance or endorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or endorsement, as the case may be under Section 11, to be read with Sections 53 and 71.
This is important especially in an instrument that is payable on demand (Section 71), in order to determine whether holder is a holder in due course since one of the requisites of such is that he became holder thereof before it was overdue. (See Section 53).
5. The instrument is not invalid for the reason only that it is ante- dated or post-dated, provided this is not done for illegal or fraudulent purpose. The person to whom instrument so dated is delivered acquires the title thereto as of the date of delivery under Section 12.
“I/We promise to pay A or order P500.00.” (Sgd.) “B & C”
Ante-dating is when the instrument contains a date earlier than the true date of issuance, while post-dating is when the instrument contains a date later than the true date of issuance.
6. WHEN HOLDER IS AUTHORIZED TO PUT A DATE ON THE INSTRUMENT- under Section 13, 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.
Illustrations:
(a) When instrument is expressed to be payable at a fixed period after date, but it is issued undated:
“10 days after date pay A or order P500.” (Sgd.) “B”
The holder of such an instrument is authorized to insert the correct date. But if the holder inserts the wrong date, the maker shall be liable on wrong date as penalty for his neglect in leaving the instrument undated.
(b) Where acceptance of instrument payable at a fixed period after sight is undated:
“10 days after sight, pay A or order P500.” (Sgd.) “B” “To: C”
“Accepted (Sgd. “C”)
Holder is authorized to insert the proper date of acceptance. But if he inserts wrong date, acceptor shall be liable on this wrong date as a penalty for his neglect in leaving his acceptance undated.
DOES NOT APPLY TO an instrument payable on demand, although undated, for its maturity is already fixed NEITHER to an undated bill of exchange payable at a fixed period after sight (Example: 30 days after sight) BUT if it is the acceptance that is undated, the insertion is necessary because the period is to be counted from sight not date of issue.
The RATIONALE for the rule is that if the true date is not allowed to be inserted, one will not know when the instrument will be due.
ALSO, the insertion of the 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. The insertion of wrong date avoids the instrument as to person making such insertion. (Bank of Houston v. Day, 145 Mo. Appl. 410, 122 SW 756). The reason being that the one who signs such instrument furnishes the means of fraud and is thus estopped to deny liability thereon.
B. CONCEPT OF DELIVERY:
1. Before a discussion of Sections 14, 15, and 16, the concept of delivery must be understood because the making, drawing , accepting , and indorsing of an instrument has for one of its common elements THE DELIVERY OF THE INSTRUMENT FOR THE PURPOSE OF NEGOTIATION, and the other is, VALUABLE CONSIDERATION.
LIKE SO:
Making – B prepares a promissory note, he assumed the liability of maker. When will B’s liability as maker arise? B is not liable unless he receives valuable consideration and before B can be liable as maker, he must sign the instrument and deliver it to A for negotiation. If the instrument is not delivered, he is not liable.
Drawing – When is B liable as drawer? B must sign the instrument, receive valuable consideration and deliver the instrument to A for the purpose of negotiation.
Acceptance – C, before he signs, is a mere drawee, and has no liability because his signature does not appear on the instrument. He must sign in order to be liable, and his status is then changed from a mere drawee to an acceptor. C is not liable as an acceptor unless he receives valuable consideration, signs the instrument and delivers it to the holder for the purpose of negotiation.
Indorsement – The position of the indorser is – similar with that of a guarantor. A, as indorser, must receive valuable consideration, sign and deliver the instrument, for the purpose of negotiation before he can be made liable.
2. “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. Therefore, where checks have not yet been delivered to payee, they do not belong to him and cannot be the subject of garnishment by payee’s creditors. SEE: De la Victoria v. Burgos 62 SCAD 112, 245 SCRA 374 (1995)
3. Every contract on negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto.
“Issue” is the first delivery of the instrument complete in form, to a person who takes it as a holder. (Sec. 191).
“Delivery” is the transfer of possession, actual or constructive, from one person to another (Sec. 191), e.g., mailing the note with proper address, etc.
Where instrument is no longer in possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved under Section 16. However, in the hands of holder in due course, a valid delivery thereof by all prior parties is conclusively presumed.
4. 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 party making, drawing, accepting, or indorsing, as the case may be. In such cases, delivery may be shown to have been conditional, or for a special purpose only, and not for purpose of transfer.
“Immediate parties” are those who are immediate in the sense of knowing or being held to know the conditions or limitations placed upon delivery of instrument. (Liberty Trust Co. v. Tilton, 105 NE 605). It means privity, no proximity. (Howard Nat. Bank v. Wilson, 120 Atl. 889).
5. For 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. (Sec. 16).
Illustrations:
“Pay to A or order P500.” [At the back] (Sgd.) “B” (1) “Pay to X.” (Sgd.) “A” (4) “Pay to A or order P500. “To C: “B” (2) “Accepted (Sgd.) “C” (3)
Under Sec. 14, an incomplete instrument is delivered but the amount thereof is left in blank. Thus:
“Pay to A or order P_______.” (Sgd.) “B”
If the above instrument has been delivered by B to A for the purpose of negotiation, then A or any subsequent holder has the authority to insert any amount. On the other hand, should no such delivery have taken place, such an authority to fill the blank does not exist. Nevertheless, if after the amount is filled (whether with or without authorization), 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 filed up strictly in accordance with the authority given and within a reasonable time. Thus, Sec. 14 gives only a personal, not real defense.
Under Sec. 15, if an incomplete instrument is not delivered (for the purpose of negotiation), it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder (even in the hands of a holder in due course), as against any person whose signature was placed thereon before delivery. Thus, Sec. 15 gives a real defense.
Section 16 provides that once instrument (which is complete) is in the hands of holder in due course, delivery is conclusively presumed.
CATEGORIZING HOLDERS
1. HOLDER- under Section 191, he is the PAYEE or INDORSEE of a biil or note, who is in possession of it, or the BEARER thereof. Under Section 51, the rights of a holder are to sue on the instrument in his name, and receive payment , and if payment is in due course (Under Section 88 when made at or after maturity of the instrument to the holder thereof in good faith and without notice that title is defective. NOTE the TIME OF PAYMENT and that the maker or acceptor be in GOOD FAITH) discharges the instrument. Example: Pledgee of an instrument .
2. HOLDER FOR VALUE- Under Section 26, he is one who has given a valuable consideration for the instrument issued or negotiated to him. He is such not only as regards the party to whom value has been given but also in respect to all those who became parties prior to the time when value is given. Example: If the maker issues a note to the payee without consideration, it is subsequently endorsed by the payee to another without consideration, and is subsequently indorsed with consideration, the last endorsee is deemed to be a holder for value not only as to his indorser, but all other parties subsequent to the indorsement. EFFECT IS: If the holder for value is also a holder in due course, he may enforce payment on the instrument against all parties. IF NOT, prior parties can set up the defense of absence of consideration.
3. HOLDER IN DUE COURSE- Under Section 52, he is one who has taken the instrument under the following conditions:
a. That it is complete and regular on its face. Complete means that the instrument is not wanting in any material particular, while Regular means that there is no visible or apparent alteration on the face of the instrument
b. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact. Before it is overdue means before maturity.
c. That he took it in good faith and for value. Good faith means that he has no knowledge of the facts which render it dishonest for him to take the negotiable paper BUT the knowledge required is not that necessary to show exact truth but such that tends to show that there was something wrong with the transaction. 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. The title of the person negotiating it is defective when he obtains (OR ACQUIRES) the instrument or any signature thereto by FRAUD, DURESS, OR FORCE OR FEAR OR OTHER UNLAWFUL MEANS, OR FOR AN ILLEGAL CONSIDERATION-OR- when he NEGOTIATES the instrument in BREACH OF FAITH (Example: negotiation after he has been paid) or CIRCUMSTANCES AMOUNTING TO FRAUD (Example: negotiation with knowledge that it will not be paid)
Under Section 53- A PERSON WHO IS THE HOLDER OF AN INSTRUMENT PAYABLE ON DEMAND WHO NEGOTIATES IT AFTER AN UNREASONABLE LENGTH OF TIME IS NOT DEEMED A HOLDER IN DUE COURSE. What is reasonable time is determined with regard to the nature of the instrument, usage of trade or the business, and the facts of each particular case under Section 193.
Under Section 59, there is a prima facie presumption that every holder is a holder in due course BUT the burden of proof shifts when it is shown that the title of the person negotiating the instrument is defective BUT it does not apply to a party who became bound on the instrument prior to the acquisition of defective title.
PARTIES MAY BE IMMEDIATE, REMOTE OR PRIOR
Parties are immediate when they are in direct contractual relationship with each other, they are remote if they are not in direct contractual relation to each other, and they are prior parties if they became such prior to a subsequent party.
AVAILABLE DEFENSES WHICH MAY BE INTERPOSED TO AN ACTION UPON A NEGOTIABLE INSTRUMENT
There are two basic kinds of defenses that may be interposed, they are:
REAL DEFENSES- they are those available against all parties, both immediate or remote, including holders in due course. They are such because they attach to the instrument itself.
Examples of real defenses:
a. Incapacity as far as the incapacitated person is concerned (see Art. 1327, ibid.);
b. Illegality of contract when declared by law (see Art. 1409, ibid.); except where the maker or drawer is himself a party to the illegality; thus, a note for a gambling debt (an illegal consideration) is a mere personal defense (see Sec. 55);
c. Want of delivery of incomplete instrument (Sec. 15); d. Forgery (Sec. 23);
e. Want of authority, apparent and real (ibid.);
f. Duress amounting to forgery as where one takes the hands of another and forces him to sign his name (Espy v. Bank, 18 Wall. 604; First Nat. Bank v. Northwestern Bank, 28 N.E. 729);
g. Fraud in factum or fraud in esse contractus (Sec. 14);
h. Fraudulent alteration b holder (Secs. 124, 1st sentence; 125.);
i. Prescription (see Arts. 1140-1142, 1144-1147, Civil Code.);
j. Other infirmities appearing on the face of the instrument (Sec. 52.); and k. Discharge at or after maturity. (Secs. 88, 118, 121, 122.)
PERSONAL DEFENSES - are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him, though holding the legal title, to enforce it against the party sought to be made liable but which are not available against a holder in due course. (see Sec. 55). They are called “personal defenses” because they are available only against that person or subsequent holder who stands in privity with him. (Ogden,
op.cit., p. 309). In other words, they can used only between original parties or immediate parties or against one who is not a holder in due course.
Examples of personal defenses: a. Filling of wrong date (Sec. 13);
b. Filling up of blanks not in accordance with the authority given and within reasonable time (Sec. 28);
c. Want of delivery of complete instrument (Sec. 16); d. Absence or failure of consideration (Sec. 28); e. Simple fraud or fraud in inducement (Sec. 55);
f. Acquisition of instrument (not signature) by duress, or force and fear (ibid); g. Acquisition of instrument by unlawful means (ibid);
h. Acquisition of instrument for an illegal consideration (ibid); i. Negotiation of breach of faith (ibid);
j. Negotiation under circumstances that amounts to fraud (ibid);
k. Innocent alteration or spoliation. (see Secs. 124 [last sentence], 125). Spoliation is an alteration made by a stranger to an instrument. If the original meaning can be ascertained, the holder in due course may recover according to its original tenor;
l. Set-off between immediate parties (see Sec. 58);
m. Discharge by payment or renunciation or release before maturity (Secs. 50, 121, 122);
n. Discharge of party secondarily liable by discharge of prior party (Sec. 20[c]);
o. Usury – because the contract of loan itself is not void but only the agreed interest (see Sec. 7, Usury Law; Art. 1413, Civil Code; and
p. Want of authority but agent has apparent authority. (see Art. 1869, ibid)
NEGOTIABLE INSTRUMENT THAT IS INCOMPLETE WHICH HAS BEEN DELIVERED
Section 14 applies to an incomplete instrument which has been delivered by the maker or drawer to the payee or the holder, the rules related thereto are:
1. Where the instrument is lacking in any material particular, person in possession thereof has prima facie authority to complete it by filling-up the blanks therein. A MATERIAL PARTICULAR is any particular proper to be inserted in a
negotiable instrument to make it complete, like blanks for date, due date, name of the payee, amount, or rate of interest
2. The signature on a blank paper delivered by person making the signature in order that paper may be converted into a negotiable instrument operates as prima facie authority to fill it up as such for any amount. It MUST BE SHOWN that the purpose of delivery was to convert the said blank paper into a negotiable instrument. If such purpose is absent, the person whose signature appears thereon will not be liable, even to a holder in due course.
3. In order that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be: (a) filled-up strictly in accordance with the authority given; and (b) within a reasonable time IN THIS CASE, ONE MUST DISTINGUSH BETWEEN ONE WHO IS NOT A HOLDER IN DUE COURSE AND ONE WHO IS A HOLDER IN DUE COURSE. Note that if not a holder in due course, there can be enforcement only if both (a) and (b) are present. If a holder in due course, the defense that it was filled contrary to the authorization is not available. It is thus only a PERSONAL DEFENSE.
NOTE: In all the above cases, there is an intention to issue a negotiable instrument. But if a signature on a paper is given only for autograph purposes and the same is converted into a negotiable instrument, this will amount to forgery, constituting thus a valid defense even against a holder in due course. Whether or not the instrument is filled up in accordance with the authority given, remember that endorsers are liable on their warranties.
INCOMPLETE INSTRUMENT NOT DELIVERED
Section 15 applies to an instrument that is incomplete and undelivered.
1. 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.
2. With regards parties whose signature appeared prior to delivery, the non-delivery of an incomplete instrument is a valid defense, not only between the original parties but also against a holder in due course. It is therefore a real defense, available even against a holder in due course.
3. With regards parties whose signature appeared after delivery, the instrument is valid and enforceable.
Example:
A makes a note, with the name of the payee in blank. X steals the note and inserts his name as payee. He then indorses it to Y, then Y to Z, who is a holder in due course. Z cannot enforce the note as it is not a valid contract in the hands of any holder.
Considering that A’s signature was placed thereon before delivery, he does not assume any responsibility whatsoever. Such is a REAL DEFENSE- ALTHOUGH A must rebut the prima facie presumption of delivery by proof to the contrary.
X is liable as an indorser and as the party responsible for the theft, completion and negotiation of the instrument.
Y is also liable as an indorser as his signature appears on the instrument after delivery.
4. The maker or drawer may however be estopped from claiming the above defense if there should be negligence on his part.
5. It was ruled that while drawer of a check owed a duty to the bank on which the check was drawn to guard against the escape of a check signed in blank which had been stolen, he owed no such duty to the purchaser of the check and therefore, the drawer cannot be held liable to such purchaser provided that the incomplete instrument was not yet delivered. (Linicks v. Nuttwig & Co., 140 App. Div. 265).
MECHANICALLY COMPLETE BUT UNDELIVERED (Sec. 16):
Section 16 applies to an instrument that is mechanically complete but is not delivered:
1. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto.
2. 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. (The term “immediate parties” refers to persons who know or are presumed to know the conditions or limitations placed upon the delivery of the instrument, excluding a holder in due course.)
3. The delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property (title) in the instrument.
4. Where instrument is in the hands of 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.
5. Where the instrument is no longer in possession of the party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.
NOTE: Delivery of an instrument need not be actual; it may be constructive. Thus, is has been held that depositing a note by mail with intent to transmit it to payee in the usual way is a delivery in contemplation of law.
Example:
Maker/Drawer makes/draws a note or a bill, payable to the order of the payee. It is complete in all respects.
If there is no delivery, there is no contract. No liability is incurred, the payee does not acquire any right
If the note/bill is stolen by the payee, who endorses it to A, who in turn endorses it to B, who in turn endorses it to C.
If C is aware of the theft, as against him and the payee, the maker/drawer may prove that there was no delivery or that delivery was not authorized as they are immediate parties against whom a claim that delivery to be effectual must be made either by or under the authority of the person making, drawing, or indorsing as the case may be
If the note/bill was delivered or authorized, it may be shown to have been conditional, or for a special purpose AND NOT for transferring title.
If the maker/drawer delivers to the payee, under a condition that it is for safekeeping only. The payee cannot enforce the note. THIS DOES NOT APPLY TO ONE WHO IS NOT AN IMMEDIATE PARTY, like an indorsee, who may now enforce the note/bill as against the maker/drawer. The same is true, if the maker/drawer delivers the note/bill to an agent, who in turn does not inform the payee of the condition.
If the note/bill is in the hands of a holder in due course, the maker/drawer cannot prove the theft or delivery under a condition, as there is a conclusive presumption of delivery. NOTE: THE PHRASE- until delivery of the instrument for the purpose of giving effect thereto WOULD TEND TO EXCUSE THE MAKER/DRAWER IF THERE WAS NO ACTUAL DELIVERY FOR ANY PURPOSE OF THE INSTRUMENT AND ABSENT ANY FAULT OR NEGLIGENCE, EQUITY DICTATES THAT HE NOT BE HELD LIABLE.
As far as signatures, if the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery is presumed until the contrary is proven.
6. Where the debtor who drew two checks payable to his creditor but never delivered them, but that a third-party was able to collect the proceeds of the checks by forging the endorsement of the creditor-payee, the creditor did not gain standing against any person to recover on the checks since he acquired no interest over them by reason of delivery. SEE: Development Bank of Rizal v. Sim Wei, 219 SCRA 736 (1993)
SIGNATURES AND FORGERY
The rules to determine liability as far as signatories and in cases of forgery are as follows:
1. The GENERAL RULE: Under Section 18, no person is liable upon an instrument whose signature does not appear thereon. The EXCEPTIONS ARE: a. Trade Name – One who signs using a trade or assumed name will be liable to the extent as if he had signed in his own name under Section 18
b. Rules on Signature of Agent – Signature of any party may be made by a duly authorized agent. No special form of agency is required under Section 19. The rule is if the instrument contains or a person adds to his signature that he signs for or in behalf of a principal, or in a representative capacity, HE IS NOT
LIABLE IF HE WAS DULY AUTHORIZED BUT THE MERE ADDITION OF SUCH WORDS OR INDICATION OF SUCH DOES NOT EXEMPT HIM FROM PERSONAL LIABILITY IF THE PRINCIPAL IS NOT DISCLOSED. Note: That a signature by “procuration” (e.g., “Juan de la Cruz, per procuration: Pedro de la Cruz”) operates as notice that the agent has but limited authority to sign, and principal is bound only in case agent in so signing acted within the actual limits of his authority under Section 21.
“B” by “X” – Principal is disclosed. So long as agent X signed within the scope of his authority, he is not personally liable on the instrument.
“by X” – Agent X signs for an undisclosed principal, the agent becomes personally liable but he can evade his personal liability by disclosing his principal and so long as he signed within the scope of his authority. If X does not disclose his principal, he is personally liable.
“B pp X” – Agent signs by procuration. This is notice to the whole world that the agent is signing with very limited authority.
c. Under Section 134 – Acceptance of a bill of exchange on a separate piece of paper.
d. Under Section 135 – Unconditional promise in advance to accept a bill of exchange before it is drawn; the promise must be in writing.
NOTE;Under Section 22, an indorsement or assignment of instrument by corporation or by infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.
The contract of endorsement of an infant is not void, and that his endorse has the right to enforce payment from all parties prior to the infant endorser; the incapacity of the infant cannot be availed of by prior parties. (Murray v. Thompson, LRA 1917B 1172, 188 SW 578). However, it does not destroy the right of such an infant endorser to disaffirm under rules of infancy. (Ibid.)
In both instances, endorsements are voidable – valid until annulled – so that they pass good title. Therefore, parties prior to minor or corporation cannot escape liability by setting up as defense the incapacity of one of endorsers.
Before a discussion of the rules, it is best to classify the kinds of forgeries that can take place , they are:
1. IN A PROMISSORY NOTE: forgery of the maker’s signature and forgery of an indorsement.
2. IN A BILL OF EXCHANGE: forgery of the drawer’s signature, either with acceptance by the drawee or without acceptance but is paid by the drawee and forgery of an indorsement in the bill
THE EFFECTS ARE:
1. The instrument is not declared totally void nor are the genuine signatures thereon rendered inoperative. IT IS ONLY THE FORGED SIGNATURE THAT IS DECLARED INOPERATIVE. Hence: rights still exist and may be enforced by virtue of the instrument as between parties whose signatures were not forged.
2. A forged instrument just prevents any subsequent party from acquiring any rights as against any party whose name appears prior to the forgery. Rights will exist and may be enforced as between subsequent parties BUT no one can acquire a right as against parties prior to the forgery, who also have rights and may enforce them as against each other.
Example:
M makes a note payable to the order of P. P indorses it to A. X Obtains possession of the note fraudulently and indorses it to B, by forging A’s signature. B indorses to C. Thus, the indorsements are as follows:
Pay to A (Sgd.) P Pay to B (Sgd.) A (forged by X) Pay to C (Sgd.) B
a. C cannot enforce the instrument against M and P because C’s right against them are cut off by the forged signature of A which is wholly inoperative. C could acquire rights against M or P to the instrument only through the forged signature of A.
b. Neither can C enforce the note against A because A’s signature is wholly inoperative. A has no privity with C. Under Section 23, C acquired no right to retain, discharge, or enforce payment of the note under the forged signature of A. c. But C may go against B whose signature is genuine and, therefore, operative. B is a general indorser who wanted to C that the instrument is genuine and was valid and subsisting at the time of B’s indorsement. (see Sec. 65 and 66.)
d. Of course, B or C has a right of recourse against X, the forger;
e. A can recover from M and P because his rights against them were not affected by the forgery. The signatures of M and P are genuine and they are liale to A on their contract.
3. The rights of the parties in cases of forged indorsements are:
a. Where note payable to order. – the party whose indorsement is forged is not liable to any holder even a holder in due course. The indorsement being forged, it is inoperative.
The other parties, including the maker, prior to the party whose signature is forged are not also liable to any holder. The instrument being payable to order, it can be negotiated only by indorsement completed by delivery. But since the indorsement is forged, it is inoperative and, therefore, it cannot operate to transfer any right or title over the instrument.
Holder did not acquire any rights to retain the note, give discharge therefore, or enforce payment as against party whose signature is forged and parties prior to him, including maker.
Any transferee of forger merely acquires whatever rights he had against prior parties, hence, transferee likewise acquires no rights against prior parties
b. Where note payable to bearer. – Where the note, mechanically complete, is originally payable to bearer, the party whose indorsement is forged is liable to a holder in due course, but not to one who is not a holder in due course. The other parties, including the maker, prior to the party whose signature is forged, may also be held liable by one who is not a holder in due course.
The reason is that the instrument being originally payable to bearer, it can be negotiated by mere delivery. (Section 30.). In other words, indorsement is not necessary to the title of the holder. Hence, even if the indorsement is forged, the forgery may be disregarded. The forged indorsement does not prevent the transfer of title since the holder may just strike out the forged indorsement. (Sec. 48). The only defense available is want of delivery but this defense can be raised only against a holder not in due course. (Sec. 16).
c. Where bill payable to order. – Where the bill is payable to order, the party whose indorsement is forged, is not liable to any holder even a holder in due course. The forged indorsement is wholly inoperative.
Where the signature of the payee was forged, the collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payee’s endorsement was genuine before cashing the check.
If the drawee pays under a forged indorsement, the drawer is not liable on the bill and the drawee may not debit the drawer’s account. If it does, it shall have to recredit the amount of the check to the account of the drawer. A bank is bound to know the signature of its customers (drawers), and if it pays a forged check it must be considerd as making the payment out of its own funds and cannot ordinarily charge the amount so paid to the account of the depositor (see Sec. 189).
Where, however, the checks are received merely for collection and deposit, the bank, as agent, cannot be expected to know or ascertain the genuineness of al prior indorsements. (Jai-Alai Corp vs. Bank of P.I., 66 SCRA 29 [1975].) But by stamping on checks accepted by it for deposit its guarantee that “all prior endorsements and/or lack of endorsements guaranteed, a collecting/presenting bank thereby makes the assurance that it has ascertained the genuineness of all prior indorsements. (Associated Bank vs. Court of Appeals, supra.) So even if the indorsement on the check deposited by the collecting bank’s client is forged, the collecting bank is bound by its warranties as an indorser and cannot set up the defense of forgery as against the drawee-bank. (Associated Bank vs. Court of Appeals, supra.)
Apropos, the matter of forgery in indorsements, the collecting bank, or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements. (see Philippine National Bank vs National City Bank, 63 Phil. 711 [1936]
Where the drawer of a check delivers it to an impostor mistakenly believing him to be the payee named in the check, the indorsement of the check by the impostor is not a forgery, and the drawer is liable to a bona fide holder or any subsequent indorser who may be compelled to pay it. (Burrows vs. Wester Union Tel. Co., 86 Minn. 499, 90 N.W. 1111; see Sec. 61)
d. Where bill payable to bearer. – In case the bill is originally payable to bearer, the drawee may debit the drawer’s account in spite of the forged indorsement. The reason is that the forged indorsement is not necessary to the title of the holder. The drawee cannot recover from the holder.
e. The endorser is liable on the instrument although the signature of the payee is forged because the endorser by his endorsement guaranteed that the instrument is genuine, therefore, impliedly, that the instrument is valid, otherwise, there would be nothing for the endorser to guarantee. SEE: Republic Bank v. Ebrada 65 SCRA 680 (1975)
5. The exceptions to the rule are:
a. Is when a party is precluded from setting up forgery as a defense under Section 23. The parties precluded from setting up the defense of forgery are: 1. Those who by their acts, silence or negligence, are ESTOPPED from setting up the defense of forgery.
2. Those who warrant or admit the genuineness of the signature in question (i.e., endorsers, persons negotiating by delivery, and acceptors of bills of exchange);
b. When forged signature is unnecessary to the title of the holder as when the endorsement is forged on an instrument payable to bearer.
Facts: Two (2) of the Company’s Citibank checks were prepared made payable to the Commissioner of Internal Revenue (CIR), which were both crossed checks. The checks were turned around by the Company’s confidential employees and were forged to facilitate deposit with PCIBank in exchange for PCIBank manager’s checks, in collusion with an organized syndicate. PCIBank now wants to hold Company liable for the forged checks, the act of fraud being facilitated by its confidential employees.
Held: Although the employees of Company initiated the transactions attributable to an organized syndicate, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Company’s negligence, if any, could not be characterized as the proximate cause of injury to the parties.The Company’s Board of Directors did not confirm the request to recall forged Citibank Checks No. SN-04867, and the instruction to replace the said checks with PCIBank’s manager’s check was not in the ordinary course of business which could have prompted PCIBank to validate the same.Given these circumstances, the mere fact that was committed by the drawer-payor’s confidential employee, who by virtue of his position has unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle PCIBank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. This rule likewise applied to
