Effects of Alteration of a Negotiable Instrument

Category: Law on Negotiable Instruments

Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument  is  materially  altered  without  the  assent  of  all  parties liable  thereon,  it  is  avoided,  except  as  against  a  party  who  has
himself  made,  authorized,  or  assented  to  the   alteration  and subsequent indorsers. But when an  instrument has been materially altered and is  in the hands  of  a  holder  in  due  course  not  a  party  to  the  alteration,  he may enforce payment thereof according to its original tenor.
 

RIGHTS OF ONE NOT HOLDER IN DUE COURSE

•      Where an instrument has been materially altered, it is avoided in the hands of one who is not a holder in due course as against a prior party who has not assented to the alteration
 

WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE COURSE

1.    A party who has made the material alteration
2.    A party who has authorized the material alteration

3.    A party who has assented to the material alteration
4.    Any subsequent indorsers
 

RIGHTS OF HOLDER IN DUE COURSE

•      He may enforce the instrument in its original tenor
•      He  could  recover  the  altered  tenor  to  any  party  who  has  made, authorized  or  assented  the  alteration,  or  any  subsequent  indorser  of the instrument
 
NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT ALTERATION
 

RIGHT TO COLLECT ORIGINAL CONSIDERATION

•      When the alteration wasn't fraudulently done, the holder may recover the original consideration
 
WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE RIGHT TO HAVE HIS ACCOUNT DEBITED WITH CORRECT AMOUNT ONLY
 
BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND MUST NOTIFY  THE  COLLECTING  BANKS  WITHIN  24  HOURS  OF  ALTERATION  OF CHECKS