ORDER INSTRUMENT

NEGOTIATION:

One, which on its face, is payable to the order

of a specified person. It can be negotiated only
by the indorsement of the holder, completed
with delivery, unless the last or only
indorsement is in blank or to bearer.

The transfer of an instrument from one person

to another as to constitute the transferee the
holder thereof.

Roxas, Oriental Mindoro

June 9, 2012
Pay to Luli or order
P10,000.00.
Zandra
To: Gio

If payable to bearer, it is negotiated by mere

delivery.
If payable to order, it is negotiated by the
indorsement of the holder completed by
delivery.
Mere physical transfer of possession is not
delivery. The physical act of transferring
possession to constitute delivery must be
coupled with the intent to transfer title.
DELIVERY:

Pay to Zyril or order.

Luli

(written at the back of the instrument)

After receiving the instrument from Zandra, Luli
indorsed the instrument to Zyril, who in turn delivered
the instrument to Mei who paid value therefor in good
faith.
Upon maturity, Mei presented the instrument for
payment to the drawee, Gio, who refused to pay the
same. Mei gave notice of dishonor to Zandra, Luli and
Zyril. Can Mei collect from Zandra?
Answer:
No. Mei is not a holder in due course because
the instrument is payable to order. To negotiate it,
there must be an indorsement completed by delivery.
This is so because the only and last indorsement is a
special indorsement. The instrument is an order
instrument.
It would be different if the last or only
indorsement is in blank or to bearer, in which case the
order instrument can be negotiated by mere delivery.

It is the transfer of possession with intent to

transfer title. It consists of placing the
transferee in possession of the instrument,
accompanied by the intent to transfer title.
Section 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 the instrument so dated is
delivered acquires the title thereto as of the
date of delivery.
Q: Does ante-dating or post-dating make an
instrument invalid or non-negotiable?
A: No, post-dating or ante-dating does not
affect the validity or negotiability of an
otherwise valid and negotiable instrument as
long as it is not done for an illegal or fraudulent
purpose.
KINDS OF DEFENSES
1. Real or Legal
These are defenses which go to the very
foundation of the instrument. The right sought
to be enforced under the instrument has never

existed or has ceased to exist. The defenses are

available even against a holder in due course.
2. Personal or Equitable
These defenses arise out of the
agreement or conduct of a particular person
with respect to the instrument in relation to the
immediate party or parties.
They are available only against
immediate parties or persons in privity with
him, that is, persons who are not holders in due
course.
Example No. 1:

Zandra issued a blank check, left it in his

drawer and entrusted it to his housekeeper
Manang. Manang filled it up in her favor and
negotiated it to Luli who is a holder in due
course.
As between Zandra and Manang, they
are immediate parties. They are in privity. There
was an agreement that was breached so it was
a personal defense.
As for Luli, who took the check under
the requisites of Section 52 (Rights of a Holder
in Due Course), the personal defense is not
available against him as a holder in due course
and not an immediate party.
Example No. 2:
Zandra issued a blank check, left it in his
drawer but was stolen by her housekeeper
Manang. Manang filled it up in her favor and
negotiated it to Luli who is a holder in due
course.
There is now a personal defense
available to Zandra against Manang. Even Luli
who took the instrument for value and good
faith from Manang cannot enforce the
instrument against Zandra.

The defect went to the very foundation

of the instrument, as if no instrument existed at
all. If there is no instrument, there is no right to
enforce, In this example, there is a real or legal
defense.
In the first example, the defense is
personal between Zandra and Manang as there
was breach of trust.
In the second example, Luli cannot
enforce a right against Zandra since in this case,
the instrument was stolen and there was no
contract binding on Zandra because the
instrument was incomplete and undelivered. In
the contemplation of the law, there is no
instrument that existed as far as Zandra is
concerned. Of course, since Manang signed and
negotiated it to Luli, Luli can enforce the
instrument against Manang.
Section 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.
Mechanically incomplete but delivered
instrument.
Personal defense.

Section 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.
Mechanically incomplete and undelivered
instrument.
Real defense.

drawer or maker without specifying the names

of the payee or the amount thereof.
A blank instrument may be lacking in some
material particulars but not the drawers or
makers signature because if it is entirely blank
including the drawers or makers signature, it
is not yet an instrument. It is just a piece of
paper. For a blank instrument to exist, the least
that must be done is that the instrument must
be signed.
What is the effect of an incomplete instrument
which is not delivered?

Section 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
maybe; and, in such case, the delivery may be
shown to have been conditional, or for a
specific 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 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.
Mechanically complete but undelivered
instrument. = Personal defense.
What is an incomplete instrument?
It is an instrument that is lacking in material
particulars like the name of the payee and the
amount of the instrument. In other words, it is
an instrument which has been signed by the

An incomplete undelivered instrument

if completed and negotiated, without authority,
will not be a valid contract in the hands of any
holder, as against any person whose signature
was placed thereon before deliver. (Section 15,
NIL)
What is the effect of an incomplete instrument
which is delivered?
It constitutes as prima facie authority to
the person in possession of the instrument to
fill up the blanks to complete it. If the
instrument is filled up strictly in accordance
with the authority given and within a
reasonable time, it can be enforced against any
person who became a party thereto prior to its
completion
However, if the instrument is filled up
not in accordance with the authority given, a
holder who is not a holder in due course cannot
enforce the instrument against a party prior to
such completion.
But if 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.
(Section 14, NIL)

If the instrument is constructively

delivered, although incomplete, a holder in due
course may claim against the drawer or a
person whose signature appears thereon prior
to delivery.
If Zandra signs a check without indicating the
name of the payee and without specifying the
amount, and then delivers it to Luli, it means
that Luli has the authority to fill up the name of
the payee and the amount in accordance with
the understanding between Zandra and her.
If the instruction of Zandra to Luli is only to put
the amount of P10,000.00 and the name of Gio,
but Luli fills up the space for the payee with her
name and writes the amount of P100,000.00
on the space for the amount of the instrument,
and then negotiated it to Gio who pays value
therefor in good faith, Gio is thus a holder in
due course. He can enforce it even against
Zandra to the amount of P100,000.00.
Between Gio and Zandra the doctrine of
comparative negligence applies. Since it is the
negligence of Zandra in giving it to Luli the blank
check that constitutes the proximate cause of
the loss, Gio should not be made to suffer the
loss.
As between two innocent parties, the party
whose negligence is the proximate cause of the
loss must bear the loss. Between Zandra and
Gio who are both innocent parties, it is the
negligence of Zandra which Enabled Luli to
commit breach of trust. So Zandra is liable to
Gio for the amount of P100,000.00.
Problem:
Zandra signed a check and placed it in
her drawer. Before she went on vacation, she
told Luli that she has a check in the drawer to
be used in case there is a need to pay
household expenses such as telephone, electric
and water bills and Luli can use it by filling up

the name of the payee and the amount needed

before negotiating the instrument.
Immediately after Zandra left, Luli got
hold of the check, filled up the space for the
payee with her own name and wrote the
amount of P10,000.00, and then indorsed and
delivered it to Gio who paid the value therefor
in good faith. As soon as Zandra knew about it,
she gave a stop payment order to the drawee
bank.
When Gio presented the instrument for
payment, the bank dishonored it. Gio gave the
notice of dishonor to Zandra and Luli. Can Gio
run after Zandra? Explain briefly.
Answer:
Yes. This is an incomplete instrument
but there was constructive delivery, or at least
an implied authority on the part of Luli to fill up
the check.
Under the doctrine of constructive
delivery, Zandra cannot escape liability.
Moreover, Luli is an employee of Zandra. So,
Zandra is responsible for the acts of the agent.
The doctrine of comparative negligence
also applies. Between two innocent persons,
the one whose negligence is the proximate
cause of the loss should suffer the loss.
Considering that Luli is an employee of Zandra
and it was the act of Zandra that made it
possible for Luli to take hold of the check, as
between Zandra and Gio, it is Zandra who
should be liable for the loss.
Q: Under the facts in the preceding problem,
can Zandra raise the personal defense of breach
of trust on the part of Luli against Gio?
A: No. Gio is a holder in due course and such
personal defense is not available in favor of
Zandra against Gio. The matter of breach of
trust is between Zandra and Luli, that is Zandra

can make Luli liable for the amount of the

check.
Q: Under the facts in the preceding problem,
suppose that Gio proceeded to negotiate the
instrument to Mei and, at the time of
negotiation, Mei knew about the breach of trust
on the part of Luli. Can Mei collect from Zandra
after giving the requisite notice of dishonor?
A: Yes. While Mei is not a holder in due course
because she knew of the breach of trust, she
paid value for the instrument and was not a
part of the breach of trust. Moreover, Mei took
the instrument from Gio who is a holder in due
course, therefore, has all the rights of a holder
in due course.
As such Mei is not subject to the personal
defense on the part of Zandra concerning the
breach of trust committed by Luli. Such rule is
for the protection of a holder in due course who
will be stuck up with the instrument if the rule
is otherwise as no person will deal with the
instrument in that case.
AMBIGUOUS INSTRUMENT: RIGHT OF HOLDER
FOR VALUE

liability of the maker is direct and primary.

There is no need for giving notice of dishonor as
far as the maker is concerned, although the
indorsers, who are secondarily liable, are
discharged.
Liability of person signing in trade or assumed
name:
He is liable to the same extent as if he had
signed in his own name. (Section 18; NIL)
Liability of person signing as an agent:
He is not liable on the instrument if he was duly
authorized and discloses his principal. (Section
20; NIL)
The requisites to be complied by an agent in
order to escape personal liability are:
1. He must be duly authorized;
2. He must sign in a representative
capacity; and
3. He must disclose his principal.
Examples:
Zandra. By: Luli

Q: What is the right of a holder for value when

the instrument is so ambiguous that there is
doubt whether it is a bill or a note?

Luli for Zandra

A: Where the instrument is so ambiguous that

there is doubt whether it is a bill or a note, the
holder may treat the instrument either as a bill
or as a note, at his election. (Section 17(e), NIL)

For Zandra; Luli, agent.

If treated as a bill of exchange and the

holder failed to give notice of dishonor or to
make protest, as the case may be, within the
time specified by law, the parties secondarily
liable like the drawer and the indorsers are
discharged.
If treated as a note, failure to give
notice of dishonor or to make protest does not
affect the right of the holder because the

Luli, agent of Zandra

Zandra by Luli, p.p. (per procuration;

Section 21: the agent has limited authority, and
liable only to that extent)