After securing a Pl million loan from B, A drew in B’s favor a bill of exchange with C as drawee. The bill reads: “October 1, 2016. Pay to the order of B the sum of P1 million. To: C (drawee). Signed, A.” A then delivered the bill to B who, however, lost it. It turned out that it was stolen by D, B’s brother. D lost no time in forging B’s signature and negotiated it to E who acquired it for value and in good faith.
May E recover on the bill from C, the drawee? Explain. (5%)
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E cannot recover on the bill from C, the drawee. Under Section 23 of the Negotiable Instruments Law, when a signature is forged, it is wholly inoperative, and no right to enforce payment against any
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Quick check
Under Section 23 of the Negotiable Instruments Law (Act No. 2031), what is the legal effect of a forged endorsement on an order instrument?
Under Section 23, a forged endorsement is wholly inoperative and confers no rights under the instrument.
Under Section 127 of Act No. 2031, when does a drawee become liable on a bill of exchange?
Under Section 127, a drawee is not liable on a bill unless and until he accepts the same.
Why is E barred from recovering payment on the bill from C, the drawee?
E cannot recover because the forged signature passed no title and C never accepted the bill.
How is an instrument payable to order validly negotiated under Section 30 of Act No. 2031?
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Which primary statute governs negotiable instruments, forged endorsements, and drawee liabilities in the Philippines?
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Learn more about these topics
1. Forged Signature Effect
Under Section 23 of the Negotiable Instruments Law (Act Number 2031), when a signature on a negotiable instrument is forged or made without authority, the forged signature is wholly inoperative. No right to retain the instrument, give a discharge, or enforce payment against any party can be acquired under such forged signature. Consequently, a holder who acquires an order instrument through a forged endorsement obtains no title or enforceable rights against prior parties, even if he acquired it in good faith and for value.
2. Drawee Liability Rule
Under Section 127 of Act Number 2031, a bill of exchange does not operate as an assignment of funds in the hands of the drawee available for payment, and the drawee is not liable on the bill unless and until he accepts the same. Prior to acceptance, a drawee is a stranger to the bill and incurs no contractual liability to the holder. Even absent forgery, a holder cannot compel an unaccepting drawee to pay the bill upon presentment.
3. Order Instrument Negotiation
Under Section 30 of the Negotiable Instruments Law, an instrument payable to order is negotiated by the endorsement of the holder completed by delivery. The payee is the original holder of an order instrument, and his genuine endorsement is an indispensable legal prerequisite for passing valid title. Where the payee's signature is forged, the endorsement is legally void. A subsequent transferee receives no valid title and cannot enforce payment against the non-accepting drawee.