BUSINESS LAW LAW REVIEW NOTES ON: NEGOTIABLE INSTRUMENTS LAW
A) Basi Basicc Con Conce cept ptss
(1) What are are negotia negotiable ble instrume instruments? nts? (a) They are are written contracts for the payment of money ; by its form, intended as a substitute for money and intended to pass from hand to hand, to give the holder in due course the right to hold the same and collect the sum due. (2) haracteris haracteristics tics of negotiable negotiable instrume instruments! nts! (a) "egotiabili "egotiability ty # right of transferee transferee to hold the instrume instrument nt and collect collect the sum due (b) $ccumu $ccumulat lation ion of second secondary ary contract contractss # instru instrumen mentt is negoti negotiate ated d from from person person to person (%) What are the the phases in the the life of a negotiable negotiable instrume instrument? nt? (a) &ssuance &ssuance # first delivery delivery of the instrument, instrument, complete complete in form, to a person person 'ho taes it as a holder (ec. 1*1) (b) "egotiation # transfer transfer of the instrument and title thereof to another person 1. &ndorsement &ndorsement 'ith deliver delivery y, in case of of order order instrume instruments. nts. a. &ndors &ndorsemen ementt # a signatur signaturee on the instrume instrument nt by the previo previous us holder holder thereof thereof 'ith the intent of transferring title thereto to a subse+uent party. 2. ere ere delive delivery ry,, in case case of beare bearerr instrum instrument ents. s. (c) -resentment -resentment for accept acceptance ance in certain certain bills bills (ec. 1%) 1%) (d) $cceptance $cceptance # one completed completed by delivery delivery and notification notification (ec. 1*1) 1*1) (e) /ishono /ishonorr by non0acce non0accepta ptance nce (f) -resen -resentmen tmentt for for paym payment ent (g) /ishonor /ishonor by non0paymen non0paymentt (h) "otice "otice of disho dishono nor r (i) -rotest -rotest in certain certain cases cases (ec. (ec. 11, 11, 12 12 and 134) 134) (5) /ischar /ischarge ge (ec (ec.. 1, 1, 11*) 11*) () What are the differences differences bet'een negotiable instruments instruments and non0negotiable instruments? instruments? Negotiable inst!"ents
Non#negotiable inst!"ents
ontains all the re+uisites of ec. 1 of /oes not contain all the re+uisites of the "&6 ec. 1 of the "&6 Transferred by negotiation
Transferred by assignment
7older in due course may have better Transferee ac+uires rights only of his rights than transferor transferor -rior partie ties 'arrant paym ayment
-rior par partie ties merely 'ar 'arrant legality ity of title
Trans ransfe fere reee has has righ rightt of reco recour urse se Transferee has no right of recourse against intermediate parties () What are the differences differences bet'een negotiable negotiable instruments instruments and negotiable negotiable documents of title? Negotiable inst!"ents
Negotiable $oc!"ents o% title
ontains all the re+uisites of ec. 1 of /oes not contain all the re+uisites of the "&6 ec. 1 of the "&6 7ave 7ave righ rightt of recou ecourrse agai agains nstt "o secondary liability of intermediate intermediate parties 'ho are parties secondarily liable 7older in due course may have better Transferee merely steps into the shoes rights than transferor of transferor ub5ect is money
ub5ect is goods
Business Law Review – Notes and Materials Compiled by Atty. Atty. Glen . . Ardo!a" C#A C#A #art – Ne$otiable %nstruments Law #a$e 1 of 16
&nstrument itself is property of value
&nstrument is merely evidence of title; thing of value are the goods mentioned in the document
(3) What is a promissory note? (a) &t is an unconditional promise to pay in 'riting by one person to another, signed by the maer, engaging to pay on demand or at a fi8ed or determinable future time a s um certain in money to order or bearer. When the note is dra'n to maer9s o'n order, it is not complete until indorsed by him. (ec. 1, "&6 1) (b) The parties to a promissory note are (1) the maer and the (2) payee. (4) What is a bill of e8change? (a) &t is an unconditional order in 'riting addressed by one person to another, signed by the person giving it, re+uiring the person to 'hom it is addressed to pay on demand or at a fi8ed or determinable future time a sum certain in money to order or bearer. (ec. 123) (b) The parties to a promissory note are (1) the dra'er, (2) the payee and (%) the dra'ee:acceptor. () What are the differences bet'een a promissory note and a bill of e8change? &o"isso' Note
Bill o% e(cange
ontains an unconditional promise to ontains an unconditional order to pay pay &nvolves t'o (2) parties
&nvolves three (%) parties
aer primarily liable
/ra'er only secondarily liable
nly one presentment needed # for
What are the distinctions bet'een a chec and a bill of e8change? Cec*
Bill o% e(cange
$l'ays dra'n upon a ban or a ay or may not be dra'n against a baner ban $l'ays payable on demand
ay be payable on demand or at a fi8ed or determinable future time
"ot necessary that it be presented for "ecessary that it be presented for acceptance acceptance /ra'n on a deposit
"ot dra'n on a deposit
The death of a dra'er of a chec, The death of the dra'er of the 'ith no'ledge by the bans, revoes ordinary bill does not revoe the the authority of the baner to pay authority of the dra'ee to pay ust be presented for payment 'ithin ay be presented for payment 'ithin a reasonable time after its issue (3 a resonable time after its last months) negotiation (11)What are the distinctions bet'een a promiss ory note and a chec? &o"isso' note
Cec*
There are t'o (2) parties! the maer There are three (%) parties! the dra'er, and the payee the dra'ee ban and the payee ay be dra'n against any person, not $l'ays dra'n against a ban 1All citaons refer to the Negoable Instruments Law (Act No. 2031) unless otherwise stated. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 2 of 16
necessarily a ban ay be payable on demand or at a $l'ays payable on demand fi8ed or determinable future time ontains a promise to pay
ontains an order to pay
(a) &f a chec is crossed , this signifies that the chec9s proceeds shall only be deposited and not encashed and released to the holder. &t adds a layer of security for the dra'er in order to ensure that only the proper party shall receive payment, as the manner of transfering the funds through ban accounts can be traced through the ban system. (b) &f the dra'er to a chec 'ould lie to secure the payment of the chec (in order to avoid its dishonor and conse+uent liability under the provisions of >.-. 22 or the >ouncing hecs 6a'), he may obtain a certified chec. &t is a ind of chec 'hose payment is ensured by the ban, signifying that available funds 'ill cover the amount of the chec upon its presentment to the dra'ee. Technically, 'hat the dra'ee actually does is to purchase a certified chec 'ith the dra'ee ban (by payment of a nominal ban fee) and depositing the amount of the chec 'ith the ban. uch amount 'ill not be credited to the dra'er9s account but 'ill be set aside by the ban in a fund, 'hich it 'ill use to reimburse itself once it has made payment of the certified chec. (12) ther forms of negotiable instruments include (1) certificates of deposits, (2) trade acceptances, (%) bonds in the nature of promissory notes, () drafts 'hich are bills of e8change dra'n by one ban on another, and () letters of credit. (1%) What is a trust receipt? (a) &t is a security transaction intended to aid in the financing of importers and retailers 'ho do not have sufficient funds to finance t heir transaction and ac+uire credit e8cept to use as collateral for the merchandise imported. B) Re+!isites o% Negotiabilit'
(1) What are the re+uisites of negotiability? (a) $ccording to ec. 1 of the "&6, (a)n instrument to be negotiable must conform to the follo'ing re+uirements (nemonic 0 W@-$)! 1. &t must be in 'riting and signed by the maer or dra'er; 2. &t must contain an unconditional promise or order to pay a sum certain in money; %. &t must be payable on demand or at a fi8ed or determinable future time; . &t must be payable to order or bearer; and . Where the instrument is addressed to a dra'ee, he must be named or other'ise indicated therein 'ith reasonable certainty. (b) $ promissory note must possess the first four () re+uisites, 'hereas a bill of e8change must possess all five () re+uisites. (c) &n order to be negotiable, there must be a 'riting of some ind, else there 'ould be nothing to be negotiated or passed from hand to hand. The 'riting may be in in, print or pencil. &t may be upon parchment, cloth, leather, or any substitute of paper. (d) &t must be signed by the maer or dra'er. &t may consist of mere initials or even numbers, but the holder must prove that 'hat is 'ritten is intended as a signature of the person sought to be charged. The signature may appear in any part of the instrument, 'hether at the top, middle or bottom or at the margins. 1. "ote, ho'ever, that if the signature is so placed upon the instrument that it is not clear in 'hat capacity the person intended to sign, he is deemed an indorser only and not a maer or dra'er. (ec. 14) 2. Where the genuineness of the signature of the maer or dra'er is denied, the signature is nevertheless presumed valid. The maer or dra'er must provide some evidence of the signature9s invalidity. (e) The bill of e8change must contain an order, something more than the mere asing of a favor. (f) The sum payable must be in money only. &t cannot be made payable in goods, 'ares, or merchandise or in property. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 3 of 16
1. The promise or order may designate a particular ind of current money in 'hich payment is to be made. (ec. 3AeB) 2. The term money properly includes all legal tender. a. "ote, ho'ever, that money as used in the la' is not necessarily limited to legal tender as defined by la'. (g) $ dra'ee9s name may be filled in under ec. 1. 1. 6ie the dra'ee, the payee must be named 'ith reasonable certainty if the instrument is payable to order (ec. , par. 2) (2) 7o' is negotiability determined? (a) &t is determined! 1. by the provisions of the "&6, particularly ec. 1 thereof; 2. by considering the 'hole instrument; %. by 'hat appears on the face of the instrument and not else'here. (b) While the 'riting may be read in the light of surrounding circumstances in order to more perfectly understood the intent of the parties, yet as they have constituted the 'riting to be the only out'ard e8pression of their meaning, no other 'ords are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain not 'hat the parties may have secretly intended as contradistinguished from 'hat their 'ords e8press, but 'hat is the meaning of the 'ords they have used. (alte8 A-hils.B, &nc. vs. ourt of $ppeals, 212 C$ A1**2B.) (%) Dor the sum to be deemed certain, the holder must be able to determine from the instrument itself the amount he is entitled to receive at maturity. (a) @nder ec. 2, the sum is deemed certain even if it is to be paid! 1. 'ith interest. a. &f the interest rate is not specified, it shall be the legal rate of 3E ($rt. 22=*, "e' ivil ode; see also >- ircular "o. 4**01%) 2. in installments. %. in installments 'ith acceleration clause. a. $n acceleration clause is a provision that upon default in payment of any installment or of interest, the 'hole shall become due and demandable. b. The acceleration must be at the option of the maer and not the holder. &f it is the latter, the instrument is non0negotiable as the sum 'ould not be certain. . 'ith e8change, 'hether at a fi8ed or current rate. a. The e8change rate itself must be determinable, other'ise the sum cannot be made certain. b. This provision is applicable only to forei$n bills (i.e. dra'n in one country and payable in another). &t does not apply to inland or domestic bills by virtue of C.$. "o. 1%, 'hich mandates that all monetary obligation must be paid in -hilippine currency 'hich is legal tender in the -hilippines. . 'ith costs of collection or an attorney9s fee, in case payment shall not be made at maturity. (b) @ntil the instrument matures the amount payable is certain, and it may, therefore, tae the place of money; 'hen it becomes overdue, the amount to 'hich the holder is entitled becomes uncertain but in this case, it has already ceased to perform the office of money. 7ence, anything 'hich only renders the sum payable uncertain after the instrument has ceased to be a substitute for money but 'hich in no 'ise affected it before such time, cannot impair its negotiability. (c) &f an instrument be for a specified sum of money, and also for the payment of something else, the value of 'hich is not ascertained but depends upon e8trinsic evidence, it 'ould not be negotiable. () The promise or order to pay must be unconditional, i.e. it is un+ualified and not dependent on any uncertain, contingent event. (a) Fven if the condition or event is very liely to occur, or indeed, even if, in fact, did occur subse+uently, the instrument remains non0negotiable, although it 'ould, of course, become payable at that time. (b) 7o'ever, pursuant to ec. %, it may contain! 1. an indication of a particular fund out of 'hich reimbursement is to be made, or a particular account to be debited 'ith the amount. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 4 of 16
a. >ut if the particular fund indicated is to be used for payment of the instrument, then it is non0negotiable, as payment thereof 'ould be conditioned on the e8istence and sufficiency of such fund. 2. a statement of the transaction 'hich gives rise to the instrument. a. "ormally, the 'ords used to this effect is for value received. "ote that it is not necessary that the transaction be mentioned in the instrument, as the holder is presumed to hold the instrument for value unless other'ise proved. b. &f the promise or order is sub5ect to or governed by the terms and conditions of our contract e8ecuted by us on GGGGG, the instrument is not negotiable because the obligation to pay is burdened 'ith the terms and conditions of another contract, sub5ecting recovery on the &nstrument to defenses available under the contract. (c) &n addition, the 'ords used must indicate the obligatory nature of the instrument, and must indicate a assumption of full responsibility for the payment thereof. $ mere promise implied by la' from the e8istence of an indebtedness, and not from any promissory language, is not sufficient. (d) &n the case of an order to pay, it must be in the nature of a command or imperative direction, and, therefore, a mere re+uest 'hich merely ass a favor (lie & re+uest you to pay, or & 'ish you 'ould pay, or & authoriHe you to pay, or & hope you 'ill pay) supplication, or authority does not constitute an order for it does not import a right to as and a duty to obey. () The instrument is payable at a determinable future time if the payment 'ill certainly become due and payable one time or other, though it may be uncertain 'hen that time 'ill come. (a) $ccording to ec. , an instrument is payable at a determinable future time if it is e8pressed to be payable! 1. $t a fi8ed period after date or sight; a. After si$ht means after the instrument is seen by the dra'ee upon presentment for acceptance (see ec. 1%AaB.), or accepted by the dra'ee. 2. n or before a fi8ed or determinable future time specified therein; %. n or at a fi8ed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncertain. a. $ common e8ample of the last instance is the death of a person. >ut, the condition of a person attaining a certain age, or obtaining a certain degree or distinction 'ith a reasonable certainty of success, still maes the promise or order conditional, and therefore the instrument non0negotiable. (b) $n instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (ec. , par. 2) (c) &f an instrument is payable on demand or (at a fi8ed or determinable future time), the payee is given unrestricted po'er to declare the instrument due at any time before maturity. The e8ercise of his right is not dependent upon nor does it gro' out of any act, promise, or agreement of the maer. &n other 'ords, it is a contingency over 'hich the maer has no control. This uncontrollable option of the payee, it has been held, renders the note non0negotiable because it renders the time of payment uncertain. 1. 7o'ever, the instrument is not rendered non0negotiable 'here the holder9s right to e8ercise the option depends upon the happening of a specified event or contingency over 'hich he has no control. (see ec. 2AcB) (d) $ provision in the instrument to the effect that the maer may e8tend payment from due date does not affect its negotiability as such instrument is the same as one payable on or before. The note 'ould become due in any event, although the e8act time could not be determined at the time of its e8ecution. The time at 'hich the note must eventually become due is, therefore, fi8ed and certain. (e) $ promise to pay 'hen able or as soon as & can renders the instrument non0 negotiable because the period to pay is non0determinable. 1. "ote that even if 'e apply $rt. 11*4 in relation to $rt. 11= of the ", the instrument is still non0negotiable because the period shall be determined by court action, 'hich imposes a condition upon the instrument for its payment, rendering it non0negotiable though the period is no' made certain. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 5 of 16
(3) vs. anila il Cefining I >y0-roducts o., % -hil. A1*22B.) c. "ote that a confession of 5udgment should be distinguished from! i) co$novit actionem # a 'ritten confession of action by the defendant acno'ledging his indebtedness to the plaintiff after the action has been filed. &t is valid in our 5urisdiction. ii) relicta verificationem # a confession of 5udgment by 'ithdra'al of defense. &t is also valid in our 5urisdiction. (&t is also commonly e8ercised by filing an affidavit of desistance.) %. 'aiver of benefit granted by la' a. $s such, a 'aiver of notice of dishonor (ec. 1=* and 11=), of protest (ec. 111), of presentment for payment or demand (ec. 4=), or e8emption from attachment or e8ecution does not destroy the negotiability of an instrument. . election of holder to re+uire some other act a. &f the option is 'ith the promissor , the instrument is non0 negotiable because the holder cannot compel him to mae payment in money. (4) @nder ec. 3, the validity or negotiability of an instrument is not affected by the fact that! (a) it is not dated; 1. $n undated instrument shall be deemed dated as of the time it is issued. (ec. 14AcB). $n instrument has no inception until delivery. (ec. 1*1, par. 3) 2. The date of issue or acceptance may be inserted in accordance 'ith ec. 1%! (1) 'here the instrument is e8pressed to be payable at a fi8ed period after date; or (2) 'here the acceptance of an instrument payable at a fi8ed period after sight is undated. a. The insertion of a. 'rong date in an undated instrument by one having no'ledge of the true date of issue or acceptance 'ill avoid the instrument as to him or any one claiming under him but not as to a subse+uent holder in due course 'ho may enforce the same not'ithstanding the improper date. &n the hands of a holder in due course, the date inserted, even if 'rong, is to be regarded as the true date. %. &f the interest is stipulated 'ithout specifying the date from 'hich interest is to run, it shall run from the date of the instrument, and if the instrument is undated, from the date of issue thereof (ec. 14AbB). . Dor the purpose of determining 'hether a party acted 'ithin a reasonable time in maing presentment for payment! a. a promissory note re+uires a date of issue to be indicated therein (ec. 4=, 41) b. a bill of e8change re+uires a date of the last negotiation thereof ( %bid., also ec. 1) . &nstruments may be ante0dated or post0dated. (ec. 12) Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 6 of 16
a.
(b)
(c)
(d)
(e)
$nte0dating or post0dating an instrument does not render it invalid or non0 negotiable by that fact alone, provided this is not done for an illegal or fraudulent purpose. &t may be negotiated before or after the date given as long as it is not negotiated after its maturity. does not specify the value given, or that any value has been given therefor; 1. onsideration is presumed though it may not be stated. (ec. 2; see $rt. 1%, ") 2. This is not to say that consideration in connection 'ith a negotiable instrument is not essential. The la' refers to the 'ording of the instrument not the lac of supporting consideration 'hich if proved 'ill relieve the maer of the obligation to pay 'hen presented for payment by the payee himself. does not specify the place 'here it is dra'n or the place 'here it is payable; 1. &n such a case, ec. 4% applies. Thus, payment may be made! a. 'here the person to mae payment resides, if his address is given in the instrument; b. in his usual place of business is, if there is no address given for the person; c. 'herever he may be found or at his last no'n place of business or residence, in any other case. bears a seal; 1. There is no difference in legal effect bet'een sealed and unsealed private 'ritings in our 5urisdiction. 2. &t is advisable, ho'ever, to have a bill or note appear in a public instrument so that it 'ill be included among the preferred credits 'ith respect to other property of the debtor. (see $rt. 22AB, ") designates a particular ind of current money in 'hich payment is to be made. 1. The instrument is still negotiable although it is payable in foreign money 'hich is not current in the -hilippines if the obligation may be discharged in pesos of e+uivalent amount.
() When is an instrument payable on demand? (a) &f the instrument is not yet due, as regards all parties, immediate or subse+uent, the instrument is payable on demand if! 1. it is e8pressed to be payable on demand, or at sight, or on presentation; or 2. there is no time for payment e8pressed. (b) &f the instrument is overdue and it is thus issued, accepted or indorsed, as regards immediate parties # in particular, the person issuing, accepting or indorsing the instrument # it is payable on demand. 1. The reason here is because bet'een immediate parties there is no difference bet'een a holder in due course and a person not a holder in due course. (ee ec. 2) 2. $n overdue instrument is necessarily a demand paper. $ holder has an immediate right of payment for the money promised or ordered to be paid. (*) When is an instrument payable to order? (a) &t is payable to order 'here it is dra'n payable to the order of a specified person or to him or his order. (ec. ) $s such, it may be made payable to the order of! 1. a payee 'ho is not the maer, dra'er or dra'ee; 2. the dra'er or maer; %. the dra'ee; . t'o or more payees 5ointly; a. in case of indorsement, both payees must indorse the instrument, unless (1) they are partners or (2) the one indorsing has authority to indorse for the others. (ec. 1) . one or more of several payees; a. indorsement by any of the payees is sufficient in this case. 3. the holder of an office for the time being. (b) "ote that if the instrument is payable to order, the payee must be named or other'ise indicated therein 'ith reasonable certainty. 1. &f there is no payee, there is nobody 'ho could give the order or authority to collect. &n other 'ords, there 'ould be nobody 'ho could indorse the instrument (see ecs. %=, *AcB.) and, therefore, there is no point considering it negotiable. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 7 of 16
2. The trade name of the payee may be used. (1=) When is an instrument payable to bearer? (a) &t is payable to bearer! 1. 'hen it is e8pressed to be so payable; 2. 'hen it is payable to a person named therein or bearer; %. 'hen it is payable to the order of a fictitious or non&e'istin$ person, and such fact was (nown to the person maing it so payable; a. The 'ord fictitious is not limited to a person having no real e8istence, as other'ise the 'ord non0e8isting 'ould have been sufficient 'ithout more. $ fictitious person is meant to be one 'ho, though named or specified as payee in an instrument, has no right to it because the maer or dra'er so intended and it matters not, therefore, 'hether the name of the payee used by him be that one living or dead, or one 'ho never e8isted. b. &f the payee is not the intended recipient of the proteeds of the instrument, the payee is considered a fictitious payee and the chec is a bearer instrument. &n a fictitious0payee situation, the dra'ee0ban, in the absence of bad faith or gross negligence, is absolved from liability and the dra'er of the chec bears the loss. This rule protects the depositary ban and assigns the loss to the dra'er of the chec 'ho 'as in a better position to prevent the loss in the first place. (-hilippine "ational >an v. CodrigueH, 33 C$ 1% A2==B.) . 'hen the name of the payee does not purport to be the name of any person; a. &n maing an instrument payable to an impersonal payee, the maer or dra'er intends the same to be payable to bearer. 6ie the fictitious payee bearer instrument, the indorsement of this bearer instrument by the payee is impossible. . 'hen the only or last indorsement is an indorsement in blan. a. $n indorsement in blan is one 'here the indorser merely signs his name 'ithout indicating the name of the indorsee. b. Fssentially, 'hat this does is to convert an order instrument into a bearer one. C) Abno"alities,-e%iciencies in te Inst!"ent
(1) What are the steps in the issuance of a negotiable instrument? (a) There are t'o (2) steps involved in the issuance of every negotiable instrument, namely! 1. the mechanical act of 'riting the instrument completely and in accordance 'ith the re+uirements of ec. 1; and 2. the delivery of the instrument by the maer or dra'er to the payee or holder 'ith the intention of giving effect to it. (b) uch instrument, complete and delivered, is negotiable and may be enforced accordingly (2) $ subse+uent holder in due course (see ec. 2) is not affected by the follo'ing deficiencies! (a) &ncomplete but delivered instrument (ec. 1) (b) omplete but undelivered instrument (ec. 13) (c) omplete and delivered instrument issued 'ithout consideration or a consideration consisting of a promise 'hich 'as not fulfilled (ec. 2) 1. &n all three cases above, the deficiency creates a mere personal defense 'hich does not affect the title of the holder in due course. (%) $ subse+uent holder in due course is affected by the follo'ing abnormality:deficiency! (a) &ncomplete and undelivered instrument (ec. 1) (b) The maer or dra'er9s signature is forged (ec. 2%) 1. This time, the above circumstances create a real defense 'hich is available against all parties to the instrument, including a holder in due course. 2 () To 'hat ind of incomplete instruments does ec. 1 apply? 2or bre!it"# a holder in due course shall be referred to hereina$er as %I&'. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 8 of 16
(a) When considering ec. 1, it is important to bear in mind the distinction bet'een t'o classes of instruments! 1. Those in 'hich obvious blans are left at the time they are made or indorsed, of such a character as manifestly to indicate that the instruments are incomplete until such blans shall be filled up; a. ne 'ho signs or indorses such an instrument is liable to bona fide holders thereof on the doctrine of implied authority. ("ational F8change >an v. 6ester, 1* ".J. 3) 2. Those 'hich are apparently complete, containing blans only because the 'ritten matter does not so fully occupy the entire paper as to preclude the insertion of additional 'ords or figures, or both. a. The liability for the amount of the instrument 'hich has been increased by filling up unoccupied spaces therein is placed upon the doctrine of negligence. ( %bid.) (b) ec. 1 applies only to instruments 'hich are (1) 'anting in any material particular, or (2) 'here only a signature on a blan paper is delivered. &f the instrument as it originally appears is already complete on its face, ec. 1 does not apply, and any person or holder 'ho introduces other matters into the instrument thereby increasing liability therefor shall be himself liable for it e8cept if he acted 'ith authority. () What is a material particular? (a) &t may be defined as any particular proper to be inserted in a negotiable instrument to mae it complete. (6inthlicum v. >agby, 1=2 $tl **4) 1. The 'ord material, as used in ection 1, is not synonymous 'ith necessary so as to restrict the right of filling a blan to something essential to a complete negotiable instrument. (Kohnson v. 7oover, 114 ".W. 244.) 2. The authority to complete is not an authority to alter. (ec. 12) (b) The po'er to fill in the blans e8tends to every incomplete feature of the instrument. (c) $ signature on a blan paper delivered in order that it may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. (3) -rior to completion, may an incomplete instrument be enforced against any party thereto? (a) The instrument as such may only be enforced if! 1. filled up strictly in accordance 'ith the authority given; and 2. 'ithin a reasonable time. (b) &f an instrument is incomplete 'hen delivered, the holder has prima facie authority to fill up the blans thereon. &f a blan paper is delivered by the person maing the signature, the holder has prima facie authority to fill it up for any amount if the person maing the signature intended to convert it into a negotiable instrument. &n either case, the presumption is that the blan 'as filled up in accordance 'ith the authority given and 'ithin a reasonable time. (ec. 1*%) (c) The person 'ho signed his name has the burden to rebut the presumption of agency by contrary proof of 'ant of authority, or proving that the authority granted 'as e8ceeded. uch reasonable time for filling up the instrument is to be reconed from the time of the issuance of the instrument because the interest involved is that of the issuer, and not from the time of each successive negotiation. (d) The defense that the instrument had not been filled up in accordance 'ith the authority given and 'ithin a reasonable time is not available as against a 7&/. &t raises merely a personal defense. (4) &f an instrument is incomplete and undelivered, may it be enforced against any party if completed and negotiated? (a) The ans'er should be +ualified in accordance 'ith ec. 1. The fact that the instrument is undelivered is crucial # if the deficiency is filled up 'ithout authority, it operates as a real defense available even against a 7&/. (ec. ) (b) "ote that there is still a presumption of delivery as far as a 7&/ is concerned. The maer or dra'er should rebut such presumption in order to escape liability. (c) The invalidity of the above instrument is only 'ith reference to the parties 'hose signatures appear on the instrument before and not after delivery. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 9 of 16
1. Therefore, an indorser to the instrument 'ho negotiated the same after the instrument has been apparently completed and delivered is liable therefor. The defense abovementioned is not available to them as against any subse+uent party. () &f an instrument is complete but undelivered, may it be enforced against any party thereto? (a) Fvery contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. (ec. 13) (b) &f the instrument, complete in its terms, is in the hands of a subse+uent party! 1. $ valid and intentional delivery is presumed until the contrary is proved. 2. &f he is a 7&/, a valid delivery thereof by all parties prior to him so as to mae them liable is conclusively presumed. a. >ut in a case, for e8ample, 'here there 'as no actual delivery to anyone for any purpose by the maer of a promissory note 'ho 'as a victim of theft or robbery committed in his house and there 'as nothing to sho' any fault or negligence on his part, it 'ould be unreasonable to hold him liable even to an innocent holder for value. $ note in the hands of the maer, albeit complete, is, in la', but a blan piece of paper. &ts 'rongful seiHure cannot create against his 'ill a valid contract 'here none e8isted before. %. &f they are immediate parties and:or the subse+uent party is not a 7&/, the delivery in order to be effectual must be made either by or under the authority of the party maing, dra'ing, accepting or indorsing, as the case may be; and in such case the delivery may be sho'n to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. a. The phrase immediate parties, as used in this section, has a broader meaning than its literal signification. &t refers to those 'ho are 9immediate9 in the sense of having or being held to no' of the conditions or limitations placed upon the delivery of the instrument. &n other 'ords, it contemplates privity not pro8imity, (see ec. ) b. Remote parties are parties 'ho are not in direct contractual relation to each other, (see ec. ) >ut if they are chargeable, for e8ample, 'ith no'ledge or notice of any infirmities in the instrument or defect in the title of the person negotiating the same (see ec. 3), they 'ill be considered as immediate parties for purposes of ec. 13. (c) The place 'here the instrument 'as 'ritten, signed, or dated does not necessarily fi8 or determine the place 'here it 'as e8ecuted. What is of decisive importance is the delivery thereof. The delivery of the instrument is the final act essential to its consummation as an obligation. (-eople v. Jaibut, 43 C$ 32 A1*44B; 6im v. ourt of $ppeals, 21 C$ = A1**B) (d) $ brief summary of the rules above follo's! 1. &f the instrument is incomplete and undelivered, it is invalid even against a 7&/ for 'ant of delivery. There is ho'ever a prima facie presumption of delivery if it is in the hands of a 7&/, 'hich may be rebutted by proof of non0delivery. 2. &f an instrument is incomplete but delivered (i.e. in the possession of another), there is a prima facie authority to complete it by the holder thereof. &f it is 'rongfully completed, it is nonetheless enforceable if delivered to a 7&/. %. &f an instrument is complete but undelivered, it is not enforceable at all. &f found in the possession of another, there is a prima facie presumption of delivery. &f he is a 7&/, the presumption becomes conclusive. -) A"big!ities in te Inst!"ent
(1) Where the language of the instrument is ambiguous or there are omissions therein, the follo'ing rules of construction shall apply (ec. 14)! (a) 'here there is a difference bet'een the sum in figures and in 'ords, the sum in 'ords is the sum payable; e8cept if the sum in 'ords is itself ambiguous or uncertain, in 'hich case the sum in figures is controlling. (b) payment of interest is presumed to start from the date of the instrument; if undated, from the date of its issue. (c) if undated, it is presumed to be dated as of the time it is issued. Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 10 of 16
(d) 'here there is conflict bet'een the 'ritten and printed provisions, the 'ritten ones prevail. (e) if there is doubt as to 'hether the instrument is a bill or note, it may be treated as either by the holder. (f) if it is unclear in 'hat capacity a person signed the instrument, he is deemed an indorser. 1. ne 'ho signed in the place of the maer9s name is not an indorser. The provision applies only to cases of doubt arising out of the location of the signature. (an v. ariner, 1=* ".W. 4.) -arol evidence is not admissible to sho' that he intended to be an indorser, not a maer. (6umbermens "at. >an v. ampbell, 121 -. 24.) (g) if an instrument contains the 'ords & promise to pay and it is signed by t'o or more persons, they are deemed to be 5ointly and severally liable thereon (i.e. solidarity bet'een debtors is presumed). 1. This means that anyone of the signers may be held liable for the 'hole amount of the instrument. (-hilippine "ational >an vs. onception ining o., C$ 4= A1*32B) 2. >ut 'e promise to pay signed by t'o maers imparts only 5oint liability. &n a 5oint obligation, there are as many debts as there are debtors, each debt being considered distinct and separate from each other, (see $rts. 12=4, 12=, ivil ode.) (2) &t must be emphasiHed that the rules in this section are applicable only 'hen the instrument in +uestion is ambiguous or uncertain or 'hen there are omissions therein. &f the terms are clear, the instrument must be enforced as it reads. E) Signat!es in te Inst!"ent
(1) an, -hil. 3% A1*%%B) i) The general authority besto'ed upon an agent to transact the business of his principal does not imply an authority to accept or indorse bills so as to charge the principal. The po'er to mae or indorse negotiable paper must be e8pressly granted; it is sub5ect to strict interpretation and must be perfomed in strict conformity 'ith the terms thereof. d. $ny person 'ho accepts for cash checs made payable to a corporation, 'hich can act only by agents, 'ithout maing any in+uiry as to the authority of the individual to e8change checs belonging to said payee0corporation, does so at his peril, and must abide by the conse+uences if the s upposed agent 'ho indorses the same is 'ithout authority. (Kai0$lai orp. of the -hil. vs. >an of -.&., 33 C$ 2* A1*4B) e. &f the agent signs a note or bill in his o'n name and discloses no principal, he is personally bound, and evidence to the contrary may not be admitted to relieve him from personal liability, (see an, 1 Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 11 of 16
C$ 1 A1*33B; see The -hil. >an of ommerce v. $ruego, 1=2 C$ %= A1*1B) i) The rule is not absolute. $s bet'een immediate parties, e8trinsic evidence may be admitted to sho' the real character of the transaction. f. $ signature by procuration (i.e. the act by 'hich a principal gives po'er to another to act in his place as he could himself) operates as a 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 'ithin the actual limits of his authority. (ec. 21) i) igning by procuration is normally e8pressed thus! per procuration, per pro., per proc, -.-. or --. %. in case of forgery (ec. 2%) a. >y for$ery is meant the counterfeit0maing or fraudulent alteration of a 'riting, and may consist in the signing of another9s name or the alteration of an instrument in the name, amount, description of the person and the lie, 'ith intent thereby to defraud. i) The intent to defraud distinguishes forgery from innocent alteration and spoliation. b. "ote that in cases of forgery, it is only the forged signature that is 'holly inoperative, and not the instrument. c. utoff Cule # -arties prior to the forged signature are cut0off from the parties after the forgery in the sense that prior parties cannot be held liable and can raise the defense of forgery. The holder can only enforce the instrument against parties 'ho became such after the forgery. $lthough rights may e8ist bet'een and among the parties subse+uent to the forged indorsement, not one of them can ac+uire rights against parties prior to the forgery. uch forged signature cuts off the rights of all subse+uent parties as against parties prior to the forgery. (Gempesaw v. CA, <.C. "o. *22, Debruary *, 1**%) The e8ceptions to the cutoff rule are! i) -ersons 'ho 'arrant the genuineness of the signature in +uestion, such as indorsers, acceptors, and persons 'ho negotiate by mere delivery; and ii) Those 'ho by their acts, silence or negligence are estopped from setting up the defense of forgery. d. ome of the rules regarding forgery are summariHed as follo's! i) &f the forged signature is that of the maer in a promissory note or the dra'er in a bill of e8change, they shall not be liable on the instrument; the same rule is true 'hether it is an order or bearer instrument. ubse+uent indorsers to an order instrument are liable; if a special indorsement is found in a bearer instrument, it 'ill operate to create a specific liability on his part as regards the person obtaining title through his indorsement. The dra'ee in a bill of e8change is liable if he paid; this is because he admitted the genuineness of the dra'er9s signature in so paying (and, in the case of dra'ee bans, they are presumed to no' the signature of the dra'er0depositor and cannot later on refute liability by asserting its forgery). ii) &f the forged signature is that of the payee, he shall not be liable on the instrument e8cept if it is a bearer instrument (because his indorsement is not necessary in order to negotiate the instrument, as mere delivery is sufficient); ubse+uent indorsers to an order instrument are liable; if a special indorsement is found in a bearer instrument, it 'ill operate to create a specific liability on his part as regards the person obtaining title through his indorsement. The maer 'ill not be liable in an order instrument, due to the cut0off rule; the same is true for the dra'er or dra'ee. The dra'ee is liable in a bearer instrument because there is no privity of contract bet'een the payee and the dra'ee, as all that is needed is for the dra'ee to honor the instrument on the strength of the genuineness of the dra'er9s signature.
Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 12 of 16
iii) &f the forged signature is that of the indorser, he shall not be liable on the instrument e8cept if it is a bearer instrument (again, because his indorsement is not necessary in order to negotiate the instrument); ubse+uent indorsers to an order instrument are liable; if a special indorsement is found in a bearer instrument, it 'ill operate to create a specific liability on his part as regards the person obtaining title through his indorsement. The cutoff rule applies to all indorsers, hence, all indorsers prior to the forged indorsement shall not be liable. The maer 'ill not be liable in an order instrument, due to the cut0off rule; the same is true for the dra'er or dra'ee. The dra'ee is liable in a bearer instrument because there is no privity of contract bet'een the indorser and the dra'ee, as all that is needed is for the dra'ee to honor the instrument on the strength of the genuineness of the dra'er9s signature. iv) The rule on striing out indorsements (ec. ) has a significant effect on the liability for forgery (note that the indorsement to be struc out must not be necessary to the holder9s title; e8amples include indorsements in a bearer instrument, or indorsements in an order instrument that has reverted bac to a prior indorser:party). When a forged indorsement has been struc out, it serves to e8cuse the indorsers subse+uent to the forged indorsement, in a 'ay operating as an e8ception to the cutoff rule. 7o'ever, in order that parties prior to the forged indorsement may be held liable on the instrument, the holder must inform them of his intention to strie out the forged indorsement; if they do not give their consent to it, such refusal shall operate as an assertion of their defense against liability through the cutoff rule; hence, the holder 'ill not be able to collect on those prior parties. This obviously only applies to an order instrument; if it 'ere a bearer instrument, the forged signature could be stricen out 'ithout any interruption on t he title of the holder and, thus, he could collect from all prior parties. v) &n all cases, the forger is al'ays liable. The party from 'hom the holder obtained payment 'ould be legally subrogated to the claim against the forger. f course, the holder can immediately go after the forger 'ithout going after any party to the instrument first. . 'here the acceptor maes his acceptance of a bill on a separate paper (ec. 1%) . 'here a person maes a 'ritten promise to accept a bill before it is drawn (ec. 1%)
(b) The indorsement or assi$nment of the instrument by a corporation or an infant (minor) passes the property therein, not'ithstanding that from the 'ant of capacity the corporation or infant may incur no liability thereon. (ec. 22) 1. $s a general rule, contracts entered into by a minor are voidable. ($rts. 1%24, 1%2*, 1%*=, ") a. $ minor is not bound by his indorsement for lac of capacity. 7e is, ho'ever, not incapacitated to transfer certain rights. ection 22 merely provides that the indorsement of an infant is not void and that his incapacity is not a defense in favor of prior parties, and does not tae a'ay the infant9s right to disaffirm his indorsement and recover the instrument even against an innocent indorsee or subse+uent holder for value. i) "ote that minority is a real defense available to the minor himself to escape liability. >ut it cannot be used or set up by any other party as a personal defense. (ee ecs. 4 and ) ii) $ minor, ho'ever, may be held bound by his signature in an instrument 'here he is guilty of actual fraud committed by specifically stating that he is of age 'hen, in fact, he is not. (see ercado v. Fspiritu, %4 -hil. 21 A1*14B) b. The rule in ection 22 applies to other incapacitated persons as 'ell. ther persons, besides minors, 'ho have no capacity to give consent are insane or demented persons and deaf0mutes 'ho do not no' ho' to 'rite. ($rt. 1%24, ") Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 13 of 16
2. $s regards corporations, ection 22 applies to cases 'here the corporation has committed ultra vires acts or acts beyond its po'ers. &t has been held that a corporation is not liable on notes in a suit thereon by an indorsee, 'here the corporation is 'ithout capacity to mae the contract in fulfillment of 'hich they 'ere e8ecuted. (-earce vs. adison I &.C. o., 21 7o' A@B 1) ne 'ho deals 'ith the officers or agents of a corporation is bound to no' their po'ers and the e8tent of their authority. ($le8ander v. auld'ell, % ".J. =) (2) $n accomodation party, or one 'ho has signed the instrument as maer, dra'er, acceptor or indorser 'ithout receiving value therefor and for the purpose of lending his name to some other person, is liable on the instrument to a holder for value not'ithstanding such holder, at the time of the taing of the instrument, ne' him to be only an accommodation party. (ec.2*) (a) "ote that as regards an accommodation party, the th condition under ec. 2 of the "&6, i.e. lac of notice of infirmity in the instrument or defect in the title of the person negotiating it, has no application. ()telco Mar(etin$ Corp. v. CA, <.C. "o. *313=, Kune 14, 1**2) 1. $s such, it 'ould be absurd for the accommodation party to interpose the defense of lac of consideration against a holder of the instrument, even one 'ho is not a holder in due course, in order to escape liability. (b) The accomodated party shall reimburse the accommodation party 'hen the latter maes payment to the holder of the notes. They have the right to be reimbursed since the relation bet'een them is that of a principal and surety, the accommodation party being the surety. ( An$ v. Associated Ban( , <.C. "o. 1311, eptember , 2==4) (%) &ndorsement is an act made by a party to the negotiable instrument, signified by his signing on the instrument itself or on a separate paper called the allon$e, 'hich operates to transfer to the indorsee the title to the instrument. (a) $n indorsement is actually a manifestation of consent by the indorser to enter into a contract 'ith the indorsee to the effect of transfering his rights over the instrument, 'ith the accompanying 'arranties and liabilities attaching to the indorser as re+uired by la'. (b) The types of indorsement are as follo's! 1. onditional # the right of the indorsee is made to depend on the happening of a contingent event, although the party re+uired to pay may disregard the conditions. (ec. %*) 2. Cestrictive # an indorsement is restrictive, 'hen it either! a. prohibits further negotiation of the instrument; b. constitutes the indorsee as the agent of the indorser (e.g. indorsement for deposit); or c. vests the title in the indorsee in trust for or to the use of some other persons. %. $bsolute # one imposing no other conditions upon the indorser9s liability to pay, other than failure of prior parties to pay the instrument and receipt of due notice. . >lan # specifies no indorsee. . pecial # specifies the person to 'hom or to 'hose order the instrument is to be payable. (ec. %) 3. Lualified # constitutes the indorser a mere assignor of the title to the instrument. (ec. %) This is usually done by adding 'ords such as sans recourse or 'ithout recourse. 4. Koint # indorsement payable to the order of t'o or more persons. (ec. 1) $s a general rule, all of the payees must indorse in order that the instrument may be validly negotiated, e8cept! a) 'here the payee or indorsee has authority to indorse for the others; or b) 'here the payees or indorsees are partners. . &rregular # one made by a person not other'ise a party to the instrument. (ec. 3) .) /ol$e
(1) $ holder is a payee or indorsee of a bill or note 'ho is in possession of it or the bearer thereof entitled to recceive the sum for 'hich it calls. (ec. 1*1) Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 14 of 16
(2) @nder ec. 2, a holder in due course (herein referred to as 7&/), is a holder 'ho has taen the instrument under the follo'ing conditions (nemonic # D&)! (a) That the instrument is complete and regular upon its face; 1. $n instrument is incomplete 'hen it is 'anting in any material particular re+uired to be inserted in a negotiable instrument. (ec. 1) a. $ material particular refers any item 'hich may modify in any respect the obligation of a party to the instrument. This is also relevant in case of material alteration; technically speaing, a material alteration is one 'hich changes a material particular, and hence a change in the items re+uired to be stated under ec. 1 of the "&6. (ee also ec. 12) (b) That he became the holder of it before it was overdue, and 'ithout notice that it had been previously dishonored, if such 'as the fact; 1. $ holder 'ho taes an overdue instrument if put on in+uiry although he is not actually a'are of any e8isting defense of a prior party. 2. "ote that a negotiable instrument may still be negotiated even if it is overdue. 7o'ever, the effect 'ould be to! a) mae the instrument payable on demand; and b) render the holder to be one not i n due course e8cept if he had no no'ledge of the fact that it 'as overdue. (c) That he had taen in good faith and for value; 1. $lthough good faith on the part of the holder is presumed, such presumption is destroyed if the payee or the indorsee ac+uired possession of the instrument under circumstances that should have put him to in+uiry as to the title of the holder 'ho negotiated the instrument. ( *e +campo v. Gatchalian" et.al." <.C. "o. 601123, "ovember %=, 1*31) (d) That at the time of its negotiation to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. 1. "otice to holder covers only situations 'here the holder had actual or chargeable no'ledge of the infirmity or defects, or no'ledge of such facts that his action in taing in instrument amounted to bad faith. (ec. 3) 2. /efects in the title results in the ac+uisition or negotiation of the instrument! a. /efects in the ac+uisition of the instrument may result from obtaining it or any signature thereto by! a) fraud; b) force or duress; c) other unla'ful means; d) illegal consideration. b. /efects in the negotiation arise 'hen it is negotiated! a) in breach of faith; or b) under such circumstances that amount to fraud (ec. ) (%) Tae note of the so called shelter rule under ec. ! a holder 'ho derives his title through a holder in due course, and 'ho is not himself a party to any fraud or ille$ality affectin$ the instrument , has all the rights of such former holder in respect of all parties prior to the latter. (a) "ote that the shelter rule does not apply if the holder is a previous one 'ho is not a holder in due course 'ho repurchased or reac+uires the instrument either personally or through his agent. G) -iscage o% a Negotiable Inst!"ent
(1) "ote that the nomenclature used in ec. 11* is dischar$e, not e8tinguishment. The reason for this is because the latter is used principally to refer to the e8tinction of liability on obligations; ho'ever, the discharge of a negotiable instrument does not automatically result into e8tinguishment of obligations contracted through it. What discharge of the instrument simply does is to release all parties, 'hether primary or secondary, from payment therefor, rendering the instrument 'ithout force and effect and thereby non0 negotiable. (2) $ negotiable instrument is discharged! (a) by payment in due course by or on behalf of the principal debtor; 1. -ayment by a secondarily0liable party to the instrument does not discharge it, even if it is overdue; the reason is because the instrument may any'ay be negotiated thereafter by the paying party. The paying party is instead subrogated to the rights of a creditor as against all prior parties. (ec. 121) Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 15 of 16
(b)
(c)
(d)
(e)
(f)
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2. -ayment by a primarily0liable party discharges the instrument because as to him, the liability borne of the instrument has no' been e8tinguished. This assumes, of course, that he 'ould not negotiate it further. %. -ayment in due course should follo' the three aspects of payment! identity" inte$rity and indivisibility. by payment of an an accomodated party; 1. "ote that it is payment by the accommodated party that discharges it, not the accommodation party. &f the accommodation party pays the instrument, he has a right of recourse based on the instrument (and, incidentally, his act of accommodation) against the accommodated party. by intentional cancellation by the holder; 1. This re+uires the concurrence of the follo'ing re+uisites! a. The holder is the proper party to 'hom payment could have been made to discharge the instrument (i.e. he is a principal creditor to the instrument); b. The cancellation is of such nature that the instrument cannot be negotiated anymore in its final form; c. The cancellation 'as made 'ith animus revocandi (i.e. 'ith intent to cancel or destroy); and d. The cancellation 'as made no'n to the party principally liable on the instrument. 2. &f the cancellation 'as made by a party 'ho 'as not a principal creditor to the instrument, it shall not be discharged, and the principal creditor may as that a replacement negotiable instrument be constituted by the maer or dra'er in his favor. by any act 'hich 'ill discharge a simple contract for the payment of money (i.e. mutuum); 1. "ote that a negotiable instrument is a physical manifestation of the obligations incurred throughout its negotiations; as such, the e8tinguishment of the principal contract supported by the instrument 'ill discharge the instrument. 2. $ny of the modes of e8tinguishment available in the la's on obligations and contracts are applicable here. 'hen the principal debtor becomes the holder of the instrument at or after maturity in his o'n right; 1. &f the principal debtor obtains the instrument through some legal means but not as a holder thereof, or not in his o'n right as a creditor to the instrument, then the instrument is not discharged. 2. "ote that this mode ('hich is, technically, the concept of mer$er as it is defined in the la' on obligations) is available only 'hen the principal debtor becomes the holder at or after maturity. btaining the instrument prior to the maturity date does not discharge it because the instrument can still be validly negotiated at that point. renouncement by the holder in favor of the principal debtor if made unconditionally and absolutely. 1. uch renouncement in favor of the principal debtor must be in 'riting, made at or after maturity, and made unconditionally and absolutely. (ec. 122) a. $s part of the nature of unconditional renouncement, the instrument has to be surrendered to the principal debtor. 2. &f the renouncement is in favor of a secondary debtor to the instrument, the instrument is not discharged and the secondary debtor is subrogated to the rights of the holder0creditor to the instrument. Bedan Red Boo( ,-/0 Commercial Law )oriano" 1idelito R.0 Notes in Business Law 2,-/3 )undian$" 4ose R. and A5uino" 6imoteo B.0 Reviewer on Commercial Law 2,-73
# EN- O. BUSINESS LAW REVIEW NOTES ON: NEGOTIABLE INSTRUMENTS LAW #
Business Law Review – Notes and Materials Compiled by Atty. Glen . Ardo!a" C#A #art – Ne$otiable %nstruments Law #a$e 16 of 16
