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REVIEW NOTES
NEGOTIABLE INSTRUMENTS LAW
Atty. Jonathan B. Tambol
(BLT, SLU-SABM)

Features of a NI:
1.
-

I. CONCEPTS
NEGOTIABLE INSTRUMENTS (NI)
- A written contract for the payment of money which complies
with the requirements of Sec. 1 of the Negotiable Instruments
Law (NIL), which by its form and on its face, is intended as a
substitute for money and passes from hand to hand as money,
so as to give the holder in due course (HDC) the right to hold
the instrument free from defences available to prior parties.
Functions:
1. Substitute for money;
2. Supplement the currency of the government;
3. Increase the purchasing medium.

Legal Tender kind of money which the law compels a creditor


to accept in payment of his debt when tendered by the debtor in
the right amount
A NI although intended to be a substitute for money, is not
legal tender, hence, delivery of instrument does not operate as
payment. However, a check that has been cleared and credited
to the account of the creditor shall be equivalent to delivery to
the creditor of cash. Hence, a check shall produce the effect of
payment only when it has been encashed or when through the
fault of the creditor it has been impaired.

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2.
-

Negotiability
The essence of negotiability which characterizes a negotiable
paper as a credit instrument lies in its freedom to circulate
freely as a substitute for money.
Accumulation of Secondary Contracts
When NIs are transferred through negotiation, secondary
contracts are accumulated because the indorsers become
secondarily liable not only to their immediate transferees, but
also to an y holder.

Kinds of NI:
A. Promissory Note (PN) an unconditional promise, in writing,
made by one person to another, signed by the maker engaging
to pay, on demand or at a fixed or determinable future time, a
sum certain in money, to order or to bearer (Sec. 184)
B. Bill of Exchange (BE) an unconditional order, in writing,
addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay,
on demand or at a fixed or determinable future time, a sum
certain in money, to order or to bearer (Sec. 126)
C. Check a BE drawn on a bank payable on demand; also the
most common form of BE (Sec. 185)

The only difference is that a check is usually certified to, not


accepted by the drawee bank. But certification is considered to
be equivalent to acceptance.

Other Forms of NI:


1. Certificate of deposit issued by banks, payable to the depositor
or his order, or to bearer;
2. Bonds, which are in the nature of promissory notes;
3. Debentures;
4. Drafts, which are BE drawn by one bank upon another;
5. Trade acceptance.
These instruments must comply with Sec. 1, NIL.
NOTE: on the applicable law
General Rule The provisions of the NIL are not applicable if the
instrument involved is not negotiable.
Exception Deed of Assignment of shares which was signed in blank to
facilitate future assignment of the same shares (similar to Sec. 14)
Non-Negotiable Instruments:
1. Treasury Warrant
2. Postal Money Orders
3. Letter of Credit
4. Trust Receipt
5. Negotiable Document of Title
6. Bill of Lading
7. Warehouse Receipt
Parties to a Negotiable Instrument:

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A. Promissory Note
1. Maker party who executes the written promise to pay;
2. Payee party in whose favor the PN is made payable
August 30, 2015
Baguio City
I promise to pay JBT or order the amount of
Three Hundred Thousand Pesos (P300,000.00) three
months after date.
Sgd. ABC
ABC maker
JBT payee
B. Bill of Exchange
1. Drawer party who executes the written order to pay;
2. Drawee party who is commanded or ordered by the
drawer to pay a sum certain in money;
3. Payee party in whose favour the bill is drawn or is
payable
August 30, 2015
Baguio City
Pay to the order of JBT the amount of
Three Hundred Thousand Pesos (P300,000.00).
Sgd. ABC
To: MDT
Bakakeng Norte, Baguio City
ABC drawer
JBT payee
MDT drawee

Other Parties to a NI:


1.
2.
3.
4.

Indorser a person placing his signature upon an instrument


otherwise than as maker, drawer, or acceptor
Indorsee in the case of instrument payable to order
Persons negotiating by mere delivery
Persons to whom the instrument is negotiated by mere delivery,
in case the instrument is payable to bearer

Distinctions:
A. NI vs. NNI
Negotiable Instruments

Non-Negotiable Instruments
1. Applicable Law
Only NI is governed by the NIL.
Application of the NIL is only by
analogy
2. Transferability
By negotiation or by assignment
By assignment only
3. Transferee
Can be a HDC if all the
Remains to be an assignee and can
requirements are complied with
never be a HDC
4. Defenses
HDC takes the NI free from
All defenses available to prior
personal defences
parties may be raised against the
last transferee
5. Nature of Title
Requires clean title, one that is free Transferee acquires a derivative
from any infirmities in the
title only
instrument and defects of title of
prior transferors
B. NI vs. NDT

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Negotiable Instrument
Negotiable Doc. of Title
1. Applicability of Sec. 1, NIL
Has all the requisites of Sec. 1, NIL Does not have these requisites
2. Nature
Is itself the property with value
Mere evidence of title
3. Subject
Money
Goods
4. Rights Acquired
If HDC, may acquire rights over
A holder can never acquire rights
the instrument better than his
to the document better than his
predecessors
predecessors
5. Liability in case of Dishonor
A holder of NI may run after the
Intermediate parties are not
secondary parties for payment if
secondarily liable if the document
dishonored by the party primarily is dishonored.
liable.
C. PN vs. BE
Promissory Note

Bill of Exchange
Nature
Unconditional promise
Unconditional order
2. Number of Parties
Two (2)
Threee (3)
3. Liability of Creator
Maker is primarily liable.
Drawer is only secondarily liable.
4. Presentment
Only one presentment for
Two: a.) for acceptance; b.) for
payment
payment
5. Right to Limit Liability
Maker of note may not insert an
Drawer may insert in the
express stipulation limiting or
instrument an express stipulation
negating his own liability to the
limiting or negating his own
holder.
liability to the holder (Sec. 61)
1.

D. BE vs. C
Bill of Exchange

Check
1. To whom instrument Drawn
May or may not be drawn on the
Always drawn on a bank or
bank
banker
2. Drawn on Deposit
Need not be drawn on a deposit,
Drawn on deposit, otherwise, if it
hence it is not necessary that the
is not drawn on deposit, there
drawer of a BE should have funds
would be fraud.
in the hands of the drawee
3. When Payable
On demand, or at a fixed or
Always payable on demand
determinable future time
4. Presentment
Must be presented for acceptance
Need not be presented for
acceptance, however, if the holder
requests and the banker desires,
he may accept
5. When Presentment made
May be presented for payment
Must be presented for payment
within reasonable time after its
within a reasonable time after its
last negotiation
issue
6. Effect of Acceptance/Certification
If accepted drawer/indorser
If certified drawer/indorsers are
remains liable
discharged
7. Effect of Drawers Death
Death of a drawer of a BE, with
Death of the drawer of a check,
the knowledge of the bank, does
with the knowledge of the bank,
not revoke the authority of the
revokes the authority of the
drawee to pay.
banker to pay.

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II. NEGOTIABILITY
REQUISITES OF NI: (SUDOR)
1.
2.
3.
4.
5.

Must be in writing and signed by the maker or drawer;


Must contain an unconditional promise or order to pay a sum
certain in money;
Must be payable on demand or at a fixed or determinable
future time;
Must be payable to order or to bearer; and
When the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty
(Sec. 1)

III. INTERPRETATION OF NI (Sec. 17)


1.
2.
3.
4.
5.
6.
7.

Words prevail over figures.


Interest stipulated runs from the date of the instrument or, if
undated, from its issue.
If undated, the instrument is deemed dated at its issue.
Written words prevail over printed provisions.
When there is doubt whether the instrument is a bill or note, the
holder, at his election, may treat it either as a bill or as a note.
When it is not clear in what capacity a person signs, he is
deemed an indorser.
When two or more persons sign We promise to pay, their
liability is joint (each liable for his part) but if they sign I
promise to pay, the liability is solidary (each can be compelled
to comply with the entire obligation).

Note: It is only when the instrument in question is ambiguous, doubtful


or obscure or when there are omissions therein that the rules in this
section apply.

position of the assignor and acquires the instrument subject to


all defences that might have been set up against the original
payee

IV. TRANSFER & NEGOTIATION

Assignment vs. Negotiation


Assignment
Negotiation
1. Applicable Law
Governed by the Civil Code
Governed by the NIL
2. Type of Transaction
Pertains to contracts in general Pertains to NI
3. Nature of the Transferee
Transferee is a mere assignee.
Transferee is a holder who
may be a HDC.
4. Rights acquired
Assignee steps into the shoes
HDC may acquire a better
of the assignor and merely
right than the right of the
acquires whatever rights the
transferor
assignor may have.
5. Availability of Defenses
Assignee takes the instrument HDC takes it free from
subject to the defences
personal defences available
obtaining among the original
among the parties.
parties.

Incidents in the Life of NI:


1. Issuance
2. Negotiation
3. Presentment for acceptance, in certain kinds of BE
4. Acceptance
5. Dishonor by Non-Acceptance
6. Presentment for Payment
7. Dishonor by Non-Payment
8. Notice of Dishonor
9. Discharge

Modes of Transfer
1.

2.

Negotiation the transfer of the instrument from one person to


another so as to constitute the transferee a holder thereof (Sec.
30)
a.) By indorsement completed by delivery (instrument payable
to order); or
b.) By mere delivery (instrument payable to bearer)
Effect: it makes the transferee the holder of the instrument.
Assignment a method of transferring a non-negotiable
instrument whereby the assignee is merely placed in the

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3.

By operation of Law The full title to a bill may pass without


assignment, indorsement, or delivery:
a.) By the death of the holder, where the title vests in his
personal representatives;
b.) By the bankruptcy of the holder, where the title vests in his
assignee or trustee;

c.) Upon the death of a joint payee or indorsee, in which case


the title vests in the surviving payee or indorsee in general.
How Negotiation Takes Place
1.
-

Issuance
It is the first delivery of the instrument, complete in form, to a
person who takes it as a holder. (Sec. 191)
Steps:
a.) Mechanical act of writing the instrument completely and in
accordance with the requirements of Sec. 1; and
b.) Delivery of the complete instrument by the maker or
drawer to the payee or holder with the intention of giving
effect to it.
Delivery transfer of possession with intent to transfer title
(Sec. 16)

4.
-

2.

3.

Subsequent Negotiation (Sec. 30)


a.) Payable to bearer by mere delivery
b.) Payable to order by indorsement completed by delivery
In both cases, delivery must be intended to give effect to the
transfer of instrument
Incomplete Negotiation of Order Instrument (Sec. 49)
There is delivery and payment of value but no indorsement.
Rights of Transferee for Value:
a.) Acquires only the rights of the transferor; and
b.) Right to require the transferor to indorse the instrument.
However, transferees in this situation do not enjoy the
presumption of ownership in favor of holders because mere

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possession of a NI does not of itself conclusively establish either


the right of the possessor to receive payment, or of the right of
one who has made payment to be discharged from liability.
For the purpose of determining whether the transferee is a
HDC, the negotiation takes effect as of the time when the
indorsement is made.
Indorsement, How Made
The indorsement must be written on the instrument itself or
upon a paper attached thereto (allonge). The signature of the
indorser without additional words is sufficient. (Sec. 31)
Where the indorsement is written in an allonge, the same must
be tacked or pasted on the instrument so as to become part of it;
otherwise, it cannot be considered an allonge.
Indorsement may be made in any form, as long as it is meant to
be an indorsement.
An indorsement is not only a mode of transfer, it is also a
contract.

Indorsement as a Contract
- Unless the indorsement is qualified (Sec. 65), every indorser is a
new obligor and the terms are found on the face of the bill or
note, with the additional obligation that if the instrument is
dishonoured by non-payment or non-acceptance, and notice is
given to the indorser, the latter will pay for it.
But a qualified indorser is liable in case of breach of warranties.
(Sec. 65)
General Rule: Indorsement must be of the entire instrument.

An indorsement which purports to transfer to the indorsee a


part only of the amount payable does not operate as a
negotiation of the instrument; it operates merely as an
assignment.
Exception: Where instrument has been paid in part, it may be indorsed
as to the residue. (Sec. 32)
Note: An indorsement which purports to transfer the instrument to two
or more indorsees severally does not operate as a negotiation of the
instrument. (Sec. 32)

c.) If originally payable to bearer, it can be further negotiated


by mere delivery, even if the original bearer negotiated it by
special indorsement.
3.

Absolute one by which the indorser binds himself to pay:


a.) Upon no other condition than failure of prior parties to do
so; and
b.) Upon due notice to him of such failure.

4.

Conditional right of the indorsee is made to depend on the


happening of a contingent event. Party required to pay may
disregard the conditions. (Sec. 39)
Conditional indorsement does not render an instrument nonnegotiable but if the condition is on the face of the instrument,
the condition renders it non-negotiable as the promise or order
therein would not be unconditional.

Kinds of Indorsement:
1.

Special specifies the person to whom or to whose order, the


instrument is to be payable (Sec. 34)

2.

Blank specifies no person to whom or to whose order the


instrument is to be payable
Rules on Blank Indorsement:
a.) If originally payable to order and negotiated by special
indorsement, it can be further negotiated by indorsement
completed by delivery.
b.) If originally payable to order and negotiated by blank
indorsement, it can be negotiated further by mere delivery.
o Effects of Blank Indorsement:
i.)
To make the instrument payable to bearer;
ii.)
May be converted to special indorsement by
writing over the signature of indorser in blank
any contract consistent with character of
indorsement (Sec. 35)

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5.

Restrictive when it either:


a.) Prohibits further negotiation of the instrument; or
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
Note: Mere absence of words implying power to negotiate
does not make an indorsement restrictive. (Sec. 36)
The omission of words of negotiability in the indorsement does
not affect the negotiability of the instrument. But such omission
in the body thereof will render the instrument non-negotiable.
Effect of Restrictive Indorsement:
It confers upon the indorsee the right to:

b.) A qualified indorsement does not impair the negotiable


character of the instrument. (Sec. 38)
c.) A qualified indorser is liable to all the parties who derive
their title through his indorsement.

a.) Receive payment of the instrument;


b.) Bring any action thereon that the indorser could bring;
c.) Transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so.
6.

Qualified constitutes the indorser a mere assignor of the title


to the instrument (Sec. 38)
How made: by adding to the indorsers signature words like
sans recourse, without recourse, indorser not holder, at
the indorsers own risk, other terms of similar import.
Without recourse means without resort to a person
secondarily liable after the default of the person primarily
liable.
Qualified indorsement is usually resorted to if the indorser
wants to transfer his rights over the instrument but does not
want to assume responsibilities under the secondary contract.
Effects of QI:
a.) A qualified indorser has limited liability, i.e., he is liable for
breach of warranty if the instrument is dishonored by nonacceptance or non-payment due to:
1. Forgery warranty as to genuineness;
2. Lack of good title on the part of the indorser warranty
as to good title;
3. Lack of capacity to indorse on the part of prior parties
warranty as to capacity to contract; or
4. Fact that at the time of the indorsement, the instrument
was valueless or not valid, and he knew of the fact
warranty as to ignorance of certain facts

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7.

Joint indorsement payable to the order of 2 or more persons


(Sec. 41)
General Rule: Where the instrument is payable to two or more
payees, all must indorse in order that the instrument may be
validly negotiated.
Reason: to make it an indorsement of the entire
instrument because if only one indorses, he passes only his part
of the instrument.
Exceptions:
a.) Where the payees or indorsees indorsing has the authority
to indorse for the others, and
b.) Where the payees or indorsees are partners (Sec. 41)

8.

Irregular a person who, not otherwise a party to an


instrument, places thereon his signature in blank before
delivery (Sec. 64)
Liability of Irregular Indorser:
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.

Presumption as to Time of Indorsement


General Rule: Negotiation is deemed prima facie to have been effected
before the instrument is overdue.
Exception: if the indorsement bears a date after the maturity of
the instrument (Sec. 45)
If the indorsement bears a date, the presumption would be that
the date written is the true date.
Presumption as to Place of Indorsement
Except where the contrary appears, every indorsement is presumed to
have been made at the place where the instrument is dated. (Sec. 46)
Renegotiation of Prior Parties (Sec. 50)
- Where an instrument is negotiated back to a prior party, such
party may reissue and further negotiate the same. But he is not
entitled to enforce payment thereof against any intervening
party to whom he was personally liable.
Reason: to avoid circuitousness of suits.
Limitations A prior party cannot renegotiate the instrument:
1. Where it is payable to the order of a third person, and has been
paid by the drawer;
2. Where it was made or accepted for accommodation, and has
been paid by the party accommodated.
Striking Out Indorsement
- The holder may, at any time, strike out any indorsement which
is not necessary to his title.
Effect: The indorser whose indorsement is struck out, and all
indorsers subsequent to him are thereby relieved from liability on
the instrument (Sec. 48)

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If the instrument is negotiated by special indorsement, the


holder has no right to strike out such indorsement nor can he
convert the special indorsement into a blank indorsement.

Continuation of Negotiable Character


General Rule: An instrument which is negotiable shall continue to be
such until it has been
1. Restrictively indorsed refers only to the first kind (Sec. 36a)
because this is the only type of restrictive indorsement that
completely destroys the negotiability of the instrument.
2. Discharged by payment or otherwise (Sec. 47) must be
understood to be payment made at or after maturity because if
the payment be made before maturity thereof, the person so
paying can still renegotiate or reissue the instrument. Hence,
payment before maturity does not destroy negotiability.
Consideration for the Issuance and Subsequent Transfer
- Every NI is deemed prima facie to have been issued for a
valuable consideration. Every person whose signature appears
thereon is presumed to have become a party thereto for value.
(Sec. 24)
- Consideration is not relevant to the negotiability of an
instrument but is significant on the question of whether or not
one is a HDC.
Value any consideration sufficient to support a simple contract. (Sec.
25)
It includes:
1. An antecedent or pre-existing debt;
2. Value previously given (Sec. 25);

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3.

Lien arising from contract or by operation of law but the holder


is deemed a holder for value to the extent of his lien. (Sec. 27).

Effects of Want of Consideration (Sec. 28)


Absence of Consideration

Failure of Consideration

Definition
It is the total lack of any valid
It is the neglect or failure of one of
consideration.
the parties to give, to do or to
perform the consideration agreed
upon
Type of Transactions Involved
Embraces transactions where no
Implies that the giving of valuable
consideration was intended to
consideration was contemplated
pass
but that it failed to pass
Both are valid defenses against a person not a holder in due
course. These defenses are therefore only personal or equitable.
- Partial failure of consideration is merely a defense pro tanto
(only to that extent), whether the failure is an ascertained or
liquidated amount or otherwise. (Sec. 28)
Note: The drawee, by accepting unconditionally the bill, becomes liable
to the holder, and therefore cannot allege want of consideration
between him and the drawer.
Reason: The holder is a stranger as regards the transaction
between the drawer and the drawee, and if the holder has given value
to the drawer and has no knowledge of any equity between the drawer
and the drawee, he is in the same situation as an indorsee in good faith.
-

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Consideration founded on love and affection or upon gratitude


is good consideration but does not constitute such valuable
consideration as is sufficient of itself to support the obligation of
a bill or a note.

V. HOLDERS

A holder is a payee or indorsee of a bill or a note who is in


possession of it or the bearer thereof entitled to receive the sum
for which it calls. (Sec. 191)

Classes of Holders:
1. Simple Holders (Sec. 51) the instrument is subject to the same
defenses as if it were non-negotiable; he may enforce the
instrument and receive payment therefore
2. Holders for Value (Sec. 26) a holder is a HFV if the
instrument was indorsed to him by his immediate transferor to
pay for the obligation that was extended to the latter.
3. Holders in Due Course (Sec. 52 & 57)

Importance of the Classification: Each class of holders has


defenses which are available to one class and which may not be
available to other classes.

Rights of Holders in General (Sec. 51)


1. May sue thereon in his own name;
2. Payment to him in due course discharges the instrument
Payment in Due Course payment made:
a.) At or after the maturity of the instrument;
b.) To the holder thereof;

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c.) In good faith; and


d.) Without notice that his title is defective.
The only disadvantage of a holder who is not a holder in due
course is that the negotiable instrument is subject to defenses as
if it were non-negotiable.

Holder in Due Course


- A holder who has taken the instrument under the following
conditions: (COGI)
1. That the instrument is complete and regular upon its face;
2. That he has become a holder of it before being overdue and
without notice that it had been previously dishonored, if such
was the fact;
3. That he has taken it in good faith and for value;
4. 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 (Sec. 52)

Defects in the title result from the acquisition or the negotiation


of the instrument.
a.) In the acquisition thereof, the title of a person becomes
defective when he obtains the instrument or any signature
thereto by:
1.) Fraud;
2.) Force, duress or fear;
3.) Other unlawful means;
4.) For an illegal consideration.
b.) In the negotiation thereof, the title becomes defective when
he negotiates it in:
1.) Breach of faith; or

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2.) Under such circumstances that amount to fraud. (Sec.


55)

Infirmities include things that are wrong with the instrument


itself as distinguished from those things that are lacking in the
contracts on the instruments. Such infirmities are found in
situations arising under Sections 13, 14, 15, 16, 21, and 23.

Who is Deemed a HDC


- Every holder of a NI is deemed prima facie a HDC. However,
this presumption arises only in favor of a person who is a
holder as defined in Sec. 191.
- 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 HDC.
Rights of a HDC:
1. May sue on the instrument in his own name;
2. May receive payment and if payment is in due course, the
instrument is discharged;
3. Holds the instrument free from any defect of title of prior
parties and free from personal defenses available to parties
among themselves;
4. May enforce payment of the instrument for the full amount
thereof against all parties liable thereon (Sec. 51 & 57)
Exceptions:
a.) When the holder is a HFV only to the extent of his lien
HDC only to that extent (Sec. 27);

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b.) When the holder acquired 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 HDC only to the extent of
the amount paid (Sec. 54);
c.) In case of alteration as to amount HDC may enforce
payment only according to its original tenor (Sec. 124)
Holder Not in Due Course
- One who became a holder of an instrument without any, some
or all of the requisites under Sec. 52
With respect to demand instruments, if it is negotiated at an
unreasonable length of time after its issue, the holder is deemed
not a holder in due course. (Sec. 53)
In determining what is unreasonable length of time regard must
be given to:
a.) The nature of the instrument;
b.) The usage of trade or business with respect to such
instruments; and
c.) The facts of the particular cases (Sec. 193)
Rights of a HNDC:
1. May sue on the instrument in his own name;
2. May receive payment and if the payment is in due course, the
instrument is discharged;
3. Holds the instrument subject to the same defenses as if it were
non-negotiable;
4. If he derives his title through a HDC and if he is not a party to
any fraud or illegality affecting the instrument, he has all the

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rights of such former holder in respect of all parties prior to the


latter (Shelter Rule)
If there are no defenses, the distinction between a HDC and
HNDC is immaterial.

General Rule: If a holder is not a HDC, he is subject to the same


defenses as if it were non-negotiable. In other words, a HNDC is subject
to both real and personal defenses available to parties primarily or
secondarily liable.
Exception: If he derives his title through a HDC and if he is not a party
to any fraud or illegality affecting the instrument, he has all the rights of
such former holder in respect of all parties prior to the latter. (Shelter
Rule)
Exception to the Exception: The rule under Sec. 58 does not apply if the
holder was a previous HNDC who had subsequently repurchased the
instrument either personally or through an agent.
Reason: a holder who is not a holder in due course cannot
improve his situation by reacquiring the instrument.
Accommodation
- A legal arrangement under which a person called the
accommodation party lends his name and credit to another
called the accommodation party, without any consideration
Requisites of Accommodation Party (AP):
1. Must be a party to the instrument, signing as maker, drawer,
acceptor or indorser;
2. Must not receive value therefor; and

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3.

Must sign for the purpose of lending his name or credit. (Sec.
29)
Without receiving value therefor means without receiving any value
by virtue of the instrument. Thus, the person to whom the instrument
thus executed is subsequently negotiated has a right of recourse against
the accommodation party in spite of the formers knowledge that no
consideration passed between the accommodation and accommodated
parties. (Sec. 29)

Availability of absence or failure of consideration as a defense


Cannot avail of the defense of
Can avail of said defense against a
absence or failure of consideration person not a holder in due course
against a HNDC
Right to Sue
After paying the holder, may sue
May not sue any subsequent party
for reimbursement the
for reimbursement
accommodated party.

Relation Between Accommodation Party and Accommodated Party


- When the accommodation party makes payment to the holder
of the note, it has the right to sue the accommodated party for
REIMBURSEMENT since the relation between them is in effect
that of Principal and Surety, the accommodation party being the
surety.
- However, the accommodated party cannot recover from the
accommodation party because as between them, absence of
consideration is a defense.

Specific Rights of Accommodation Party:


1. To revoke accommodation;
2. To reimbursement from an accommodated party after making
the payment;
3. To contribution from other solidary accommodation parties, if
any
An accommodation party may demand contribution from his
co-accommodation party without first directing his action
against the principal debtor provided:
a.) He made the payment by virtue of judicial demand; or
b.) The principal debtor is insolvent.

Accommodation Party vs. Regular Party


Accommodation Party
Regular Party
Purpose for Signing
Lending his name or credit to
Not for such purpose
some other person
Value received
Without receiving value therefor
For value
Availability of Parole Evidence
May always show by parole
Cannot disclaim or limit his
evidence that he is only such a
personal liability as appearing on
party
the instrument by parole evidence

Nego Notes - JBT

Liability of an Accommodation Party


- Liable on the instrument to a HFV notwithstanding such holder,
at the time of the taking of the instrument, knew him to be only
an accommodation party. Hence, as regards an accommodation
party, the 4th condition (lack of notice of infirmity in the
instrument or defect in the title of the persons negotiating it),
has no application.
- Exception: If the accommodation party is a corporation.

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