UNION COLLEGE OF LAGUNA

Santa Cruz, Laguna

BUSINESS LAW 4
(Negotiable Instrument)
(SPECIAL SUBJECT)

MIDTERM

Goemer A. Resurreccion
BSBA – Marketing Management

Dr. Mona Lisa E. Dabao

Instructor
THE NEGOTIABLE INSTRUMENTS LAW
I. FORM AND INTERPRETATION

Section 1. Form of negotiable instruments. - An instrument to be negotiable must

conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.
Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within
the meaning of this Act, although it is to be paid:
(a) with interest; or

(b) by stated installments; or

(c) by stated installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due; or

(d) with exchange, whether at a fixed rate or at the current rate; or

(e) with costs of collection or an attorney's fee, in case payment shall not be made at
maturity.
Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with:
(a) An indication of a particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional.
Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a
determinable future time, within the meaning of this Act, which is expressed to be
payable:
(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein; or

(c) On or at a fixed period after the occurrence of a specified event which is certain to
happen, though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the
event does not cure the defect.

Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains

an order or promise to do any act in addition to the payment of money is not
negotiable. But the negotiable character of an instrument otherwise negotiable is not
affected by a provision which:
(a) authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or

(b) authorizes a confession of judgment if the instrument be not paid at maturity; or

(c) waives the benefit of any law intended for the advantage or protection of the
obligor; or

(d) gives the holder an election to require something to be done in lieu of payment of
money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an
instrument are not affected by the fact that:
(a) it is not dated; or

(b) does not specify the value given, or that any value had been given therefor; or

(c) does not specify the place where it is drawn or the place where it is payable; or

(d) bears a seal; or

(e) designates a particular kind of current money in which payment is to be made.

But nothing in this section shall alter or repeal any statute requiring in certain cases the
nature of the consideration to be stated in the instrument.

Sec. 7. When payable on demand. - An instrument is payable on

demand:
(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, payable on demand.

Sec. 8. When payable to order. - The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

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

Sec. 9. When payable to bearer. - The instrument is payable to

bearer:
(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact
was known to the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any
person; or

(e) When the only or last indorsement is an indorsement in blank.

Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this
Act, but any terms are sufficient which clearly indicate an intention to conform to the
requirements hereof.

Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any
indorsement thereon is dated, such date is deemed prima facie to be the true date of
the making, drawing, acceptance, or indorsement, as the case may be.
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.

Sec. 17. Construction where instrument is ambiguous. - Where the language of the
instrument is ambiguous or there are omissions therein, the following rules of
construction apply:
(a) Where the sum payable is expressed in words and also in figures and there is a
discrepancy between the two, the sum denoted by the words is the sum payable; but if
the words are ambiguous or uncertain, reference may be had to the figures to fix the
amount;

(b) Where the instrument provides for the payment of interest, without specifying the
date from which interest is to run, the interest runs from the date of the instrument,
and if the instrument is undated, from the issue thereof;

(c) Where the instrument is not dated, it will be considered to be dated as of the time it
was issued;

(d) Where there is a conflict between the written and printed provisions of the
instrument, the written provisions prevail;

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note,
the holder may treat it as either at his election;

(f) Where a signature is so placed upon the instrument that it is not clear in what
capacity the person making the same intended to sign, he is to be deemed an endorser;

(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.

Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the
instrument whose signature does not appear thereon, except as herein otherwise
expressly provided. But one who signs in a trade or assumed name will be liable to the
same extent as if he had signed in his own name.

Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be
made by a duly authorized agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be established as in other cases of
agency.
Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument
contains or a person adds to his signature words indicating that he signs for or on behalf
of a principal or in a representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an agent, or as filling
a representative character, without disclosing his principal, does not exempt him from
personal liability.

Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as

notice that the agent has but a limited authority to sign, and the principal is bound only
in case the agent in so signing acted within the actual limits of his authority.

Sec. 22. Effect of indorsement by infant or corporation - The indorsement or assignment

of the instrument by a corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the corporation or infant may incur no
liability thereon.

Sec. 23. Forged signature; effect of. - When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and
no right to retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

II. 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. 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.
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 tan to, 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 endorser, 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.

III. NEGOTIATION
Sec. 30. What constitutes negotiation. - 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 bearer, it is negotiated by delivery; if payable to order,
it is negotiated by the indorsement of the holder and completed by delivery.

Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument
itself or upon a paper attached thereto. The signature of the endorser, without
additional words, is a sufficient indorsement.

Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an

indorsement of the entire instrument. An indorsement which purports to transfer to the
endorsee a part only of the amount payable, or which purports to transfer the
instrument to two or more endorsees 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.

Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it
may also be either restrictive or qualified or conditional.

Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies

the person to whom, or to whose order, the instrument is to be payable, and the
indorsement of such endorsee is necessary to the further negotiation of the instrument.
An indorsement in blank specifies no endorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.

Sec. 35. Blank indorsement; how changed to special indorsement. - 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.

Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:

(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the endorsee the agent of the endorsers; or

(c) Vests the title in the endorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an
indorsement restrictive.

Sec. 37. Effect of restrictive indorsement; rights of endorsee. - A restrictive indorsement

confers upon the endorsee the right:
(a) to receive payment of the instrument;

(b) to bring any action thereon that the indorser could bring;

(c) to transfer his rights as such endorsee, where the form of the indorsement
authorizes him to do so.
But all subsequent endorsees acquire only the title of the first endorsee under the
restrictive indorsement.

Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a

mere assignor of the title to the instrument. It may be made by adding to the endorser’s
signature the words "without recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character of the instrument.

Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party

required to pay the instrument may disregard the condition and make payment to the
endorsee or his transferee whether the condition has been fulfilled or not. But any
person to whom an instrument so indorsed is negotiated will hold the same, or the
proceeds thereof, subject to the rights of the person indorsing conditionally.

Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable

to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as indorser to only such holders as make title
through his indorsement.

Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is
payable to the order of two or more payees or endorsees who are not partners, all must
indorse unless the one indorsing has authority to indorse for the others.

Sec. 42. Effect of instrument drawn or indorsed to a person as

cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other
fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank
or corporation of which he is such officer, and may be negotiated by either the
indorsement of the bank or corporation or the indorsement of the officer.

Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a
payee or endorsee is wrongly designated or misspelled, he may indorse the instrument
as therein described adding, if he thinks fit, his proper signature.

Sec. 44. Indorsement in representative capacity. - Where any person is under obligation
to indorse in a representative capacity, he may indorse in such terms as to negative
personal liability. robles virtual law library

Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date
after the maturity of the instrument, every negotiation is deemed prima facie to have
been effected before the instrument was overdue.

Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every
indorsement is presumed prima facie to have been made at the place where the
instrument is dated.

Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin

continues to be negotiable until it has been restrictively indorsed or discharged by
payment or otherwise.

Sec. 48. Striking out indorsement. - The holder may at any time strike out any
indorsement which is not necessary to his title. The indorser whose indorsement is
struck out, and all endorsers’ subsequent to him, are thereby relieved from liability on
the instrument.

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument
payable to his order transfers it for value without indorsing it, the transfer vests in the
transferee such title as the transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually made.

Sec. 50. When prior party may negotiate instrument. - Where an instrument is
negotiated back to a prior party, such party may, subject to the provisions of this Act,
reissue and further negotiable the same. But he is not entitled to enforce payment
thereof against any intervening party to whom he was personally liable.

IV. RIGHTS OF THE HOLDER

Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to
sue thereon in his own name; and payment to him in due course discharges the
instrument.

Sec. 52. What constitutes a holder in due course. - 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 has
been previously dishonored, if such was the fact;

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

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Sec. 53. When person not deemed holder in due course. - Where an instrument payable
on demand is negotiated on an unreasonable length of time after its issue, the holder is
not deemed a holder in due course.

Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any
infirmity in the instrument or defect in the title of the person negotiating the same
before he has paid the full amount agreed to be paid therefor, he will be deemed a
holder in due course only to the extent of the amount therefore paid by him.

Sec. 55. When title defective. - The title of a person who negotiates an instrument is
defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an
illegal consideration, or when he negotiates it in breach of faith, or under such
circumstances as amount to a fraud.

Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument amounted to bad faith.

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. robles virtual law library
Sec. 58. When subject to original defense. - In the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable. But a holder who derives his title through a holder in due course,
and who is not himself a party to any fraud or illegality affecting the instrument, has all
the rights of such former holder in respect of all parties prior to the latter.

Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be
a holder in due course; but when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to prove that he
or some person under whom he claims acquired the title as holder in due course. But
the last-mentioned rule does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title.

V. LIABILITIES OF PARTIES
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages
that he will pay it according to its tenor, and admits the existence of the payee and his
then capacity to indorse.

Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the
existence of the payee and his then capacity to indorse; and engages that, on due
presentment, the instrument will be accepted or paid, or both, according to its tenor,
and that if it be dishonored and the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder or to any subsequent indorser who may be
compelled to pay it. But the drawer may insert in the instrument an express stipulation
negating or limiting his own liability to the holder.

Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that
he will pay it according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.
Sec. 63. When a person deemed indorser. - A person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser
unless he clearly indicates by appropriate words his intention to be bound in some other
capacity.

Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an
instrument, places thereon his signature in blank before delivery, he is liable as indorser,
in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liable to the payee
and to all subsequent parties.

(b) If the instrument is payable to the order of the maker or drawer, or is payable to
bearer, he is liable to all parties subsequent to the maker or drawer.

(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent
to the payee.
Sec. 65. Warranty where negotiation by delivery and so forth. — Every person
negotiating an instrument by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder
other than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to a person negotiating
public or corporation securities other than bills and notes.

Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification,
warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and

(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or
both, as the case may be, according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay it.

Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person
places his indorsement on an instrument negotiable by delivery, he incurs all the liability
of an indorser.

Sec. 68. Order in which endorsers are liable. - As respect one another, endorsers’ are
liable prima facie in the order in which they indorse; but evidence is admissible to show
that, as between or among themselves, they have agreed otherwise. Joint payees or
joint endorsees who indorse are deemed to indorse jointly and severally. robles virtual
law library

Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an
instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-
five of this Act, unless he discloses the name of his principal and the fact that he is acting
only as agent.