NEGOTIABLE INSTRUMENTS LAW

(Act No. 2031)

Applicability of the Law
The NIL applies only to negotiable instruments that meet the requisites laid
down in Section 1 of the law. Otherwise, any case not provided for shall be
governed by the provisions of existing legislation or in default thereof, by
the rules of the law merchant (Under Sec. 196, the law merchant refers to
the custom of merchants or rules that have been developed under common
law, consisting primarily of usages of trade previously proven in court or
ratified by legal decisions). The Civil Code applies only to supply any
deficiencies in cases not covered by the Act.
TIP: It is advised that one memorizes the two most important provisions of
the NIL: Sec. 1 (Forms of negotiable instruments) and Sec. 52 (What
constitutes a holder in due course)

MICHAEL A. OSMEA v. CITIBANK (2004)

The Negotiable Instruments Law was enacted for the purpose
of facilitating, not hindering or hampering transactions in commercial
paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to
meet the necessities in a single case

Negotiable Instrument
It is a transferable instrument containing an unconditional promise or order
to pay to a holder or to the order of a holder upon issue, possession,
demand or at a specified time
Written contract for the payment of money, by its form intended as
substitute for money and intended to pass from hand to hand to give the
HDC the right to hold the same and collect the sum due.
Instruments are negotiable when they conform to all the requirements
prescribed by the NIL (Act 2031, 03 February 1911).
Negotiable instruments shall produce the effect of payment only when they
have been encashed or when through the fault of the creditor they have been
impaired. (Art. 1249, CC) BUT a CHECK which has been cleared and
credited to the account of the creditor shall be equivalent to a delivery to the
creditor of cash.

 Functions and Importance of Negotiable Instruments

1. Although considered as medium for payment of obligations, negotiable
instruments are not legal tender (Sec. 60; Article 1249, NCC; New Central
Bank Act, R.A. 7653). However, they are recognized substitutes for money
as its negotiability allows it be transferred from one hand to another,
subject however to the financial ability of the parties to honor the
instrument.
2. They constitute, checks particularly, as the media of exchange for most
commercial transactions. The ability to purchase is thereby increased
without need for actual money to be produced and delivered.
3. They serve as a medium of credit transaction. They enable the transaction
of business as the party to whom they are delivered can treat the promises
contained therein as cash.
Characteristics of Negotiable Instruments
1. Negotiability - right of transferee to hold the instrument and collect the sum
due
2. Accumulation of secondary contracts - instrument is negotiated from
person to person

Negotiable vs. Non-negotiable

Negotiable
Contains all the requisites of Sec. 1 of
the NIL
Transferred by negotiation
HDC may have better rights than
transferor
Prior parties warrant payment

Non-negotiable

Does not contain all the requisites of

Sec. 1 of the NIL
Transferred by assignment
Transferee acquires rights only of his
transferor
Prior parties merely warrant legality of
title
Transferee has right of recourse Transferee has no right of recourse
against intermediate parties
Life of a Negotiable Instrument
1. issue

2. negotiation
3. presentment for acceptance in certain bills
4. acceptance
5. dishonor by or acceptance
6. presentment for payment
7. dishonor by nonpayment
8. notice of dishonor
9. protest in certain cases
10. discharge

Continuation of Negotiable character

Until
1. restrictively indorsed
2. discharged by payment or otherwise

1. FORMS AND INTERPRETATION

Doubt resolved in favour of negotiability; Purpose
Where the meaning is doubtful, the courts have adopted the policy of
resolving in favour of the negotiability of the instrument.
The purpose obviously is to encourage the free circulation of the negotiable
paper because of the admittedly indispensable function that they perform in
commercial business transactions in any given country and the world at large.
Guiding Principle
The basic GUIDING PRINCIPLE as laid down in Section 10 of the NIL is that
the instrument need not follow the language of the law, but the terms must be
sufficient to clearly indicate an intention to conform to the requirements of the
law. Hence, the use of a foreign language or grammatical errors does not
destroy negotiability.
NOTE THOUGH the EXCEPTION FOUND IN SECTION 8 of the NIL
pertaining to an instrument payable to order where literal compliance with the
law is necessary.
Illustrations:

1. The following promissory note is not negotiable because it is neither

payable to order or to bearer
RECEIEVED P10,000 payable after World War II.
(Sgd. B)

2. Conformity with all requirements of NIL makes an instrument a bill of

exchange, even if acceptance is not made since the alter is important only in
determination of liabilities of parties. (See: Phil. Bank of Commerce v.
Aruego, 102 SCRA 530 (1981)

A. REQUISITES OF NEGOTIABILITY
All negotiable instruments, briefly stated, are a contractual obligation to
pay money. However, whether or not an instrument is negotiable depends
entirely on its form and content.
In determining the negotiability of an instrument, the following must be
considered:
1) The whole of the instrument;
2) Only what appears on the face of the instrument; and
3) The provisions of the Negotiable Instruments Law especially Section 1
thereof which gives the requirements of negotiability.
In determining whether the instrument is negotiable, only the instrument
itself and no other, must be examined and compared with the requirements
stated in Sec. 1, NIL.
If it appears on the instrument that it lacks one of the requirements, it is not
negotiable and the provisions of the NIL do not govern the instrument. The
requirement lacking cannot be supplied by using a separate instrument in
which that requirement which is lacking appears.
Form of Negotiable Instruments
An instrument to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty. (Sec. 1, NIL)

1. It must be in writing
a. Physical Integrity of Whole Instrument the negotiability of an instrument
must be determined only from the face of the document itself and not
elsewhere (Des Moines Savings Bank v. Arthur, 163 la. 205, 143 NW 556).

CALTEX V. CA (1992)
The negotiability or non-negotiability of an instrument is
determined from the face of the instrument itself. The duty of the
court in such case is to ascertain, not what the parties may have
secretly intended but what is the meaning of the words they have
used.
b. A commercial transaction may be verbal unless the law requires a written
document for its validity. Writing is required for negotiable instruments.
Hence, there can be no verbal promissory note nor a bill of exchange. In
short, the requisites for the validity of a negotiable instrument are: (a)
consent, (b) consideration, (c) subject matter, and form.
c. As a general rule, bills, notes and other instruments of similar nature are not
subject to be varied or contradicted by parol or extrinsic evidence pursuant
to the rule that long experience that written evidence is so much more
certain and accurate than that which rests in fleeting memory only, that it
would be unsafe, when parties have expressed the terms of their contract in
writing, to admit weaker evidence to control and vary the stronger and to
show that the parties intended a different contract from that expressed in the
writing signed by them BUT if there is an allegation of fraud in the
execution of promissory note, such as when the note having a face value of
P50,000.00 was alleged to have been signed by the makers at only
P5,000.00, where a parol contemporaneous agreement was the inducing and
moving cause of the written contract, it may be shown by parol evidence;
but it must be established by clear and convincing evidence, mere

preponderance of evidence not even being adequate (Inciong v. Court of

Appeals, 257 SCRA 578)
"In writing" - includes print; written or typed
and signed by the maker or drawer.
a. Any inscription or even stamping will suffice provided that it is meant to
function as the signature of the party
b. Persons who write their names on the face of a note are makers and are
liable as such, and their solidary liability is made certain by the presence of
the phrase joint and several. (Republic Planters Bank vs. CA, 216 SCRA
738)
The signature of the maker of a note or the drawer of a bill is usually affixed
at the lower right hand corner of the instrument
No person liable on the instrument whose signature does not appear thereon.
One who signs in a trade or assumed name liable to same extent as if he had
signed in his own name. (Sec. 18, NIL)
Signature of party may be made by duly authorized agent; no particular
form of appointment necessary. (Sec. 19, NIL)
Signature, binding so long it is intended or adopted as the signature of the
signer or made with his authority.

2. It must contain an unconditional promise or order to pay a sum certain in

money.
A. ORDER OR PROMISE TO PAY
a. PROMISSORY NOTE:
i.
PROMISE TO PAY: should be express on the face of the instrument
ii. Word "promise" is not absolutely necessary.
Any expression
equivalent to a promise is sufficient.
iii. Mere acknowledgment of a debt insufficient
b. BILLS OF EXCHANGE:
i.
Order - command or imperative direction; the instrument, by its
nature, demanding a right.
ii. Words which are equivalent to an order are sufficient.
iii. A mere request or authority to pay does not constitute an order.

iv.

Although the mere use of polite words like "please" does not of itself
deprive the instrument of its characteristics as an order, its language
must clearly indicate a demand upon the drawee to pay.

B. UNCONDITIONAL
a. The promise or order to pay, to be unconditional, must be unqualified.
b. Sec.
3, NIL: An unqualified order or promise to pay is
unconditionalthough coupled with:
An indication of a particular fund out of which reimbursement is to
be made, or a particular account to be debited with the amount
UNCONDITIONAL: Mere indication of the particular fund out of
which reimbursement is to be made, or an indication of a
particular account to be debited with the amount

A statement of the transaction which gives rise to the instrument.

UNCONDITIONAL: Mere recital of the transaction or
consideration for which the instrument was issued
However, the fact that the condition appearing on the instrument
has been fulfilled will not convert it into a negotiable one.

But an order or promise to pay out of a particular fund is not

unconditional
CONDITIONAL: when reference to the fund clearly indicates an
intention that such fund alone should be the source of payment
General Rule: The promise or order should not depend on a contingent
event. If it is conditional, it is non-negotiable.
Exceptions:
a. Indication of particular fund from which the acceptor disburses
himself after payment
b. Statement of the transaction which gives rise to the instrument. (Sec.
3, NIL)
But an order or promise to pay out of a particular fund is not
unconditional
a. An unconditional promise or order to pay is required because the purpose of
a negotiable instrument is to take the place of money. Hence, if the
instrument may or may not mature, no one will have faith on negotiable
instrument embodying it. Thus, the promise or order must be ABSOLUTE.

b. Any word equivalent to an order would suffice, and words of courtesy

would not be inconsistent with the order; however, a mere request or
authorization would not be enough.
c. The promise must be found in the instrument itself, the mere existence of a
debt does not amount to a promise. The use of the word order is deemed
equivalent to promise.
d. An acknowledgement of debt becomes a promise to pay by addition of
words implying a promise of payment, such as payable on a given day,
payable on demand, paid when called for, I.O.U. (Jimenez v. Bucoy,
103 Phil. 40 [1958])
e. Nature of Condition (Art. 1179, Civil code) a distinction must be made
between a condition (a future and uncertain event which may or may not
happen) and a period (one that is certain to happen though the time when it
will happen is not known). An instrument embodying an obligation that is
subject to a condition is non-negotiable; whereas, that with an obligation
subject to a period is negotiable.
Illustrations:
1.
Pay to A or order P500 if it rains on 28 June 2012
(Sgd.) B

If it rains on 28 June 2012 is a condition, one which may or may

not happen. The instrument is non-negotiable. Under the last
sentence of Section 4 of the NIL, if it indeed rains on 28 June 2012
and the condition is thereby fulfilled, the instrument which was
originally conditional and non-negotiable does no thereby become
negotiable by the fulfillment of the condition.

10 days after X dies, pay A or order P500.

(Sgd.) B

When X will die is not certain, but X is sure to die. This is a period.
The instrument is negotiable
2. Under Section 39 of theNIL, a condition in the endorsement would not
destroy negotiability of the instrument. Thus:

Pay A or order P500

(Sgd.) B

[at the back]

Pay to X if it rains on 28 June 2012
(Sgd.) A
B, upon presentment for payment, may pay immediately ignoring
whether the condition is fulfilled. Should B choose to pay immediately
and the condition is not fulfilled, then the quasi-contract of solution
indebiti arises (Article 2154, Civil Code).
Under Section 3(a) of the NIL an indication of a particular account to
be debited with the amount does not make the promise or order conditional.
We have to distinguish between the use of the words fix and indicate. If
the instrument fixes the fund from where payment has to be made, so that
payment cannot be made from other funds, the instrument is not negotiable.
But if the instrument merely indicates the fund from where payment is to be
made, so that the obligor will still be liable even if the indicated fund is
depleted, then the instrument is negotiable.
NOTE: (a) a check of itself does not operate as an assignment of any part
of the funds to the credit of the drawer with the bank, and the bank is not
liable to the holder, unless and until it accepts or certifies the check.
(Section 189) (b) A treasury warrant is not a negotiable instrument because
it is to be paid from a particular fund (Abubakar v. Auditor General, 81
Phil. 359 [1948]; Metropolitan Bank v. CA [1991]) (c) Indication of a

particular fund out of which reimbursement is to be made. (d) a statement of

the transaction which give rise to the instrument like Section 3 (b) like:

Pay to A or order P500arising from our rice deal

(Sgd.) B

See: Elizalde & Co. V. Binan Trans. Co. (CA) 58 O.G. 5886 (1960)
Reference in a promissory note to some extrinsic agreement, in order to
destroy its negotiability, must be such as to indicate unmistakably that
the paper is to be burdened with conditions of that agreement. When the
reference is a simple recital of the consideration for which the paper was
given, or is a mere mention of origin of the transaction, its negotiability
is not affected.
C. A SUM CERTAIN IN MONEY
1.

2.

3.

Sec. 2, NIL: The sum payable is a sum certain, even if:

a. With interest;
b. By stated installments;
c. By stated installments with acceleration clause (a provision that upon
default in payment of any installment/interest, the whole shall
become due);
d. With exchange, whether at a fixed rate or at the current rate; or
e. With costs of collection or attorney's fee, in case payment not made
at maturity
A sum is certain if from the face of the instrument it can be
mathematically computed.
A stipulation to pay a higher rate of interest if the note is not paid or a
lower rate if it is paid on or before maturity does not render the
instrument non-negotiable.

D. MUST BE PAYABLE IN MONEY

1. Capable of being transformed into money.
2. NON NEGOTIABLE: an instrument which contains an order or promise
to do an act in addition to the payment of money

BUT If the order or promise gives the holder an election to require

something to be done in lieu of payment of money, an instrument
otherwise negotiable would not be affected thereby. (Sec. 5, NIL)
But if the option is with the maker or person primarily liable, instrument
is NOT negotiable.
4. Kind of current money does not affect negotiability. Since the value of
the note can by a simple mathematical computation be expressed in the
value of the lawful money of the latter country (Incitti v Ferrante, 1933,
US Jur)
5. Obligations in foreign currency may be discharged in Philippine
currency based on the prevailing rate at the time of payment, pursuant to
RA 8183 (Asia World Recruitment v NLRC, 1999).
3.

a. The sum certain when what is to be paid is a fixed amount of money or

alternatively, if from the face of the instrument it can be mathematically
computed. Under Section 2, the sum is still certain even when it is (a) with
interest stipulated through Usury Law now ineffective. (Liam Law v.
Olympic Sawmill co., 129 SCRA 439 [1984]; CB Circular No. 905, s. 1982
OG 7336). (b) By stated instalments, though the instalments must not only
be stated, but the maturity of each instalment must be fixed or determinable
(c) by stated instalments, with Acceleration Clause (d) With either fixed or
current rate of exchange, or payable in foreign exchange Uniform Currency
Law, R.A. 529, repealed by R.A. 8183) (e) With costs of collection or
attorneys fees, in cases where payment is not made at maturity NOTE
THOUGH that at maturity, the instrument is no longer fully negotiable since
any transferee acquiring it would not be a holder in due course under
Sections 52 and 58.
b. Section 2 illustrates instances where the sum payable is still a sum certain.
This must be correlated with Section 5 which provides that an instrument
which contains an order or promise to do any act in addition to the payment
of money is not negotiable. Thus in the following illustration, the
instrument is not negotiable, to wit:
Pay A or order P500 or 5 sacks of rice
(Sgd.) B

However, under Sec. 5 (d), the instrument is not rendered non-negotiable if

it is the holder who is given an election to require something to be done in
lieu of payment of money, thus, in the following illustration, the instrument
if negotiable because the obligation of the maker/acceptor to pay in a sum
certain, if the holder so chooses, is still absolute, to wit:

Pay A or order P500 but the holder may demand delivery of

5 sacks of rice
(Sgd.) B

Illustrations:
As provided for under Section 2, the following are still negotiable
instruments, to wit:
1.
Pay to A or order P500 with interest at 12% per annum
2.
Pay to A or order P500payable in monthly instalments of
P100

3.
1.
Pay to A or order P500 in monthly instalments of P100 and
failure to pay one instalment will make the entire fall due
immediately
4.
Pay to A or order and in the event of litigation, I agree to

pay court costs and attorneys fees.

5.
Pay A or order P500
(Sgd.) B

The paragraph of Section 2 on foreign exchange is deemed to have been

amended to by Rep. Acts 529 and 4100. The instrument is valid but what is
void is the obligation to pay in foreign currency (See: Arrietta v. NARIC, 10
SCRA 79 [1964]).
While the agreement to pay in foreign exchange is declared null and void and of
no effect, what the law specifically prohibits is payment in currency other than
legal tender; it does not defeat a creditors claim for payment, but to be made in
lawful Philippine legal tender. (See: Ponce v. Court of Appeals 90 SCRA 533
[1979]).
Where the parties stipulate payment in foreign currency, the rate of exchange is
determined not at the time of making of the instrument but at the time of
payment, and not the rate at the time the obligation was incurred. (See Kalalo
v. Luz 34 SCRA 337 [1970])
3. It must be payable on demand, or at a fixed or determinable future time.
TIME OF PAYMENT MUST BE CERTAIN
Purpose: Informing the holder of the instrument of the date when he may
enforce payment thereof.
An instrument may be payable:
1.

on demand
a. when expressed to be payable on demand, or at sight, or on presentation;
(Sec. 7, NIL)
b. when no time for payment expressed, (Sec. 7, NIL)
c. Special Rule: where an instrument is issued, accepted or indorsed when
overdue, it is, as regards the person so issuing, accepting, or indorsing it,
payable on demand or at a fixed or determinable future time

d. when its expressed to be payable at a fixed period after date or sight, or

on or before a fixed or determinable future time fixed therein,
e. Where an instrument is issued, accepted or indorsed when overdue, it is,
as regards to the person so issuing, accepting, or indorsing it, payable on
demand.
Illustration:
(a) On demand pay to A or order P500)
(b) At sight pay to A or order P500. (This applies only to a bill of
exchange.)
(c) On presentation pay to A or order P500. (This applies only to a bill of
exchange).
(d) Pay to A or order. (No date expressed.)
(e) 10 days after date (16 April 2012) pay to A or order P500. (Provided,
that this instrument is issued, accepted or endorsed when overdue, as far as
the person issuing, accepting o indorsing is concerned, the instrument is
payable on demand.)
Demand instruments: Holder may call for payment any time; maker has an
option to pay at any time, and the refusal of the holder to accept payment
will terminate the running of interest, if any, but the obligation to pay the
note remains.
2.

at a fixed time
o Only on the stipulated date, and not before, may the holder demand its
payment.
o Should he fail to demand payment, the instrument becomes overdue but
remains valid and negotiable. It is merely converted to a demand
instrument.

3.

at a determinable future time

o Determinable future time, if expressed to be payable (Sec. 4, NIL):
1.)
At a fixed period after date of sight;
2.)
On or before a fixed or determinable future time specified
therein;
3.)
On or at a fixed period after the occurrence of a specified
event which is certain to happen, though the time of happening be
uncertain.
Illustrations:
a. At a fixed period after date or sight

 10 days after date pay to A or order P500

(Sgd.) B

10 days after sight pay to A or order P500

(Sgd.) B
b. On or before a fixed or determinable future time specified therein:

On or before 9 July 2014 pay to a or order P500

(Sgd.) B

c. On or at a fixed period after the occurrence of a specified event which is

certain to happen, though the time of happening be uncertain

10 days after X dies pay to A or order P500

(Sgd.) B
The specification before a special event, would render the instrument nonnegotiable because the date of maturity can be determined only after the
note has become overdue.
A stipulation that the instrument shall be paid when my means permit me to
do so although by law would constitute a period would still render the
instrument non-negotiable because the instrument is not deemed payable at a
fixed or determinable future since the term of the period would have to be
set by the courts under Articles 1180 and 1197, Civil Code.
d. Instrument payable upon a contingency is not negotiable, and the
happening of the event does not cure the defect. (West Point Banking Co. v.
Gaunt, 34 ALR 862).

4.

5.

Effect of acceleration provisions

o If option (absolute or conditional) to accelerate maturity is on the maker,
still NEGOTIABLE.
Maker may pay earlier than the date fixed but this option, if
exercised, would be a payment in advance of a legal liability to pay.
It is still payable on the date fixed, and holder has no right to enforce
payment against the maker before such date.
o If option to accelerate is on the holder:
If option can be exercised only after the happening of a specified
event/act over which he has no control (conditional), still
NEGOTIABLE.
If option is unconditional, time of payment is rendered uncertain,
NOT negotiable.
o Other instances where instrument still NEGOTIABLE:
When option given to the holder to accelerate the maturity of an
installment note upon failure of the maker to pay any installment
when due.
Acceleration, automatic upon default.
Acceleration by operation of law.
Provisions extending time of payment
o General rule: Negotiability not affected. Effect is similar with that of an
acceleration clause at the option of the maker.
Negotiability not affected, even if the holder is given the option to
extend time of payment by mere inaction or indulgence for an
indefinite time depending on his will, because with or without this
provision, the holder may always choose to be indulgent.
o Exception: Where a note with a fixed maturity provides that the maker
has the option to extend time of payment until the happening of
contingency, instrument NOT negotiable. The time for payment may
never come at all.

4. It must be payable to order or to bearer/ Must contain Words of Negotiability

An instrument is payable to order under Section 8 when:
(a) Drawn payable to the order of a specified person or to him or his order.
The payee is not the maker, drawer or drawee

Pay to A or order P500

(Sgd.) B

[A is neither maker, drawer or drawee.]

(b) Drawn payable to the drawee as payee. Here being both the drawee and
the payee, the drawee can pay himself upon maturity from the funds
belonging to the drawer in his possession; once accepted is equivalent to
a promissory note in favour of the drawer.

Pay to C or order P500

(Sgd.) B
(c) Maker as payee. Here, the maker promises as follows: I promise to
pay to the order of myself, P10,000. The instrument is not complete
until the maker endorses under Section 184.

Pay to B or order P500

(Sgd.) B
[Under Sec. 184, this instrument is not complete until
endorsed by maker.]

(d) Drawn payable to the order of the drawer or his order

[Check]
Pay to B or order P500
(Sgd.) B
To: PNB
[this means that B has a deposit with PNB and he wants to
withdraw the amount indicated.]

(e) two or more payees jointly, or one or more several payees

Pay to A and X or order P500

(Sgd.) B
[Since the conjunction or is used, then the endorsement of
either A or X will be sufficient for the negotiation of the
instrument.]

(f) the holder of an office for the time being

Pay to City Treasurer of Baguio City or order

In case the instrument is endorsed, then it will be like this:

City Treasurer of Baguio City

By: ___________________

(g) When the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty. This requirement
is imposed as if there is no payee, there is NOBODY WHO COULD
GIVE THE ORDER OR AUTHORITY TO COLLECT. THERE IS NO
ONE WHO CAN ENDORSE THE DOCUMENT AND CAN THUS BE
SAID TO BE NOT NEGOTIABLE.
It would seem in Equitable Banking Corp. V. IAC, 161 SCRA 518
(1988), the contravention of this rule (such as when the check is payable to
Equitable Banking Corporation order of A/C of Cavilled Enterprises, Inc.)
would not render the instrument non-negotiable but would merely place the

burden of ambiguity to the person who caused it under Art. 1377 of the
Civil Code.
Order Instrument, negotiation requires delivery and indorsement of the
transferor.
o When instrument is payable to order: Drawn payable to the order of a
specified person or to him or his order (Sec. 8, NIL).
o Without the words "to order" or "to the order of," the instrument is
payable only to the person designated therein and is therefore nonnegotiable. (Campos, as cited in Consolidated Plywood Industries v
IFC Leasing, 1987)
Subject to the rules in Section 13, 14 and 15 on incomplete instruments,
leaving the payee blank may make the instrument non-negotiable. This is
because an instrument payable to order may be negotiated only by
endorsement and delivery.
There are only two ways to make an instrument payable to order, as
provided under Sec. 8

Pay to a or order
(Sgd.) B

Pay to the order of A.

(Sgd.) B
words of negotiability - serve as an expression of consent that the instrument
may be transferred.
o But the instrument need not follow the language of the law; any term
which clearly indicates an intention to conform with the legal
requirements is sufficient.
TRADERS ROYAL BANK V. CA (1997)
The language of negotiability which characterize a negotiable paper
as a credit instrument is its freedom to circulate as a substitute for

money. Hence, freedom of negotiability is the touchtone relating to

the protection of holders in due course, and the freedom of
negotiability is the foundation for the protection which the law
throws around a holder in due course.
Postal money order, not negotiable, because it does not contain words of
negotiability.
Where words "or bearer" printed on a check are cancelled by the drawer,
instrument not negotiable.
Under Section 9, a negotiable instrument is PAYABLE TO BEARER:
(a) When it is expressed to be so payable to bearer:

Pay to bearer P500.

(Sgd.) B

I promise to pay the bearer the sum..

(Sgd.) B
(b) When it is expressed to be so payable to bearer:

Pay to A or bearer P500.

(Sgd.) B

(b) When it is expressed to be so payable to bearer:

Pay to A or bearer P500.

(Sgd.) B

(c)when it is payable to the order of a fictitious or non-existing person, and

such fact was known to the person making it so payable:

Pay to John Doe or order P500.

(Sgd.) B
The clause and such fact is known to the person making it so payable,
does not require that it should be the maker himself who is chargeable with
the notice. Otherwise, the whole provisions would be ineffective in
practically every case where the purpose of the person drawing the check
was fraudulent. Mueller & . Martin v. Liberty Ins. Bank, 219 S.W., 465,
187 Ky 44 [1920]).
(d) when the name of the payee does not purport to be name of any person:

Pay to cash or order P500

(Sgd.) B
There is no need to use order or equivalent word to qualify the instrument.
A check payable to the order of cash is payable to bearer and the bank
may pay it to the person presenting it for payment without the drawers
endorsement. (Ang Tek Lian v. CA, 87 Phil. 383 [1950]).
(e) when the only or last endorsement is an endorsement in blank
(b) When it is expressed to be so payable to bearer:

Pay to A or order P500.

(Sgd.) B
[and the only or last endorsement at the back is a blank.]
Bearer means the person in possession of a bill or a note which is payable to
bearer. (Sec. 191). A person who steals an instrument payable to bearer is a
bearer. (Mass. Nat. Bank v. Marshall, 25 Pac. 214).

(a) Words equivalent to bearer are: Assignee, holder (Wilson

County v. Third Nat. Bank of Nashville, 103 US 770); Possessor,
on return of this certificate properly endorsed (Felton v. Commercial
Nat. Bank, 177 NE 52), Order of the bearer (American National
Bank v. Kerley, 220 Pac 116, 32 ALR 262).
(b) Words unaccepted as equivalent to bearer: To X or his collector,
To X or his agent, To bearer B. (Weaver v. Scott, 32 Iowa 22)
A bearer instrument may be negotiated by mere delivery. When a bearer
instrument is not delivered for purposes of negotiation but physically
delivered merely as security for another obligation, there is no negotiation in
the sense of transfer of legal title to the instrument and would constitute the
subsequent holder merely as a holder for value and not a holder in due
course. Accordingly, a negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for. (See: Caltex
(Phils) v. Court of appeals 212 SCRA 448 [1992])

ANG TEK LIAN v. CA (1950)

A check drawn payable to the order of cash is a check payable
to bearer, and the bank may pay it to the person presenting it for
payment without the drawer's indorsement.
A check payable to bearer is authority for payment to the
holder. Where the check is in the ordinary form and is payable to
bearer, so that no indorsement is required, a bank, to which it is
presented for payment, need not have the holder identified, and is not
negligent in failing to do so.
5. IN BILLS OF EXCHANGE, Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein with reasonable certainty.
a. Maker and drawer
Sign the instrument at the lower right-hand corner.
b. Payee
When negotiating, sign at the back; same with indorsers.
a. Drawee

 Name usually at the lower left-hand corner, or across the top.

The purpose of this requirement is to enable the payee or the holder to know
upon whom he has to call for acceptance or payment
If it is not clear in what capacity the person signed, said person is considered
an indorser
Bill may be addressed to two or more drawees jointly, whether partners or
not, but not to two or more drawees in the alternative or in succession
Bill may be treated as a PN, at option of holder, where
a. drawer and drawee are same person
b. drawee is fictitious/incapacitated
Note however, that under Section 14, the omission of drawee may be filled
in later on.

Requisites of Negotiable Note (PN)

1.
2.
3.
4.

Be in writing signed by the drawer

Contains an unconditional promise or order to pay a sum certain in money
Be payable on demand or at a fixed determinable future time
Be payable to order or to bearer (Sec. 1, NIL)

Requisites of a Negotiable Bill (BOE)

It must:
1.
2.
3.
4.
5.

Be in writing signed by the drawer

Contains an unconditional promise or order to pay a sum certain in money
Be payable on demand or at a fixed determinable future time
Be payable to order or to bearer
The drawee must be named or otherwise indicated with reasonable certainty
(Sec. 1, NIL)

Notes on Section 1:
a. In order to be negotiable, there must be a writing of some kind, else there
would be nothing to be negotiated or passed from hand to hand. The writing
may be in ink, print or pencil. It may be upon parchment, cloth, leather or
any other substitute of paper.

b. It must be signed by the maker or drawer. It may consist of mere initials or

even numbers, but the holder must prove that what is written is intended as a
signature of the person sought to be charged.
c. The Bill must contain an order, something more than the mere asking of a
favor.
d. Sum payable must be in money only. It cannot be made payable in goods,
wares, or merchandise or in property.
e. A drawees name may be filled in under Section 14 of the NIL

Provisions Not Affecting Negotiability (Sec. 5 NIL)

Gen. Rule: An instrument is rendered non-negotiable if it contains an
order/promise to do any act in addition to the payment of money as what
transpires is that while the promise or order to pay money, the other thing
would have to be assigned.
Exception: negotiability not affected by provisions which
1. Authorize sale of collateral security in case the instrument be not paid at
maturity, The additional act is to be done after the date of maturity of the
instrument and when it is no longer negotiable
2. authorize confession of judgment if instrument not paid at maturity.
Confession of judgment clauses are void as being against public policy to
give a person his day in court; however, such nullity does not affect the
negotiability of the instrument. See: National Bank v. Manila Oil Refining
Co., 43 Phil. 444 [1922].
Where an agreement stipulates for the confession of judgment prior to any
actual litigation the stipulation is void for being contrary to public policy.
However, if the creditor sues, the debtor can go to court and only then
confess judgment. This is valid if done by the debtor himself. See: Traders
Insurance v. Dy Eng Biok, 104 Phil. 806 91958)
PNB v. MANILA OIL REFINING (1922)
In this case, the note contains a provision that in case that it
would not be paid at maturity, the "maker authorizes any attorney to
appear and confess judgment thereon."
The Court ruled that said judgment note is illegal and
inoperative as such is against public policy. It noted that it is in
derogation of the constitutional safeguards (a day in court). Such
judgment note can only be valid if given express legislative sanction.

 There are two kinds of judgements by confession: a) cognovit actionem

b) relicta verification
3. waives benefit of any law intended for advantage/protection of obligor.
Examples: Waiver of notice of Dishonor under Section 110, Waiver of
Protest under Section 111, Presentment for Payment under Section 70.
4. Gives holder an election to require something to be done in lieu of money (if
in addition to money not NI)
If the choice lies with the debtor, the instrument is rendered non-negotiable.
THE TEST: The test of negotiability is whether or not the promise would
give rise to a cause of action for breach of contract if the additional act is not
done. If it does, the instrument is rendered non-negotiable.

Omissions Not Affecting Negotiability (Sec. 6, NIL)

The following omissions do not affect the validity and negotiability of an
instrument
a. Non-dating of the instrument
b. Non-specification of value given, or that any value had been given
c. Non-specification of place where it is drawn or place where it is payable
d. Bears a seal
e. Designation of particular kind of currency in which payment is to be made
Under Sec. 52, a requisite for a holder in due course is that instrument is
complete and regular on its face. Section 6 therefore provides for certain
omissions that do not destroy completeness or regularity, as other portions of
the law supplement these omissions. Thus:

Pay to a or order P500

(Sgd.) B

This instrument has omissions: (a) no date; (B) no place of payment; and (c) no
statement of value received.
No Date: This is supplied by Sec. 17 (c) which states that where instrument is
not dated, it will be considered dated as of time it was issued.

No Place of Payment: This is supplied by Sec. 73 which provides: Where no

place of payment is specified, but the address of person to make payment is
given in the instrument and it is there presented;
Where no place of payment is specified and no address is given and instrument
is presented at usual place of business or residence of person to make payment;
In any other case if presented to person to make payment wherever he can be
found, or if presented at his last known place of business or residence.
No statement of Value Received: Supplied by Sec. 24 which provides that
every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration and every person whose signature appears thereon to
have become a party for value.

B. KINDS OF NEGOTIABLE INSTRUMENTS

Common
The most common kinds of negotiable instruments in commercial
transactions are the promissory note, bill of exchange, and bank check.
Actually, the negotiable instruments law deals only with two kinds or
types of instruments, namely:
a) promissory notes or those in which the issuer has ordered a third person
to pay; and
b) Bills of exchange or those in which the issuer has ordered a third person
to pay.
Note: Checks are also discussed in the law but they are really a special form
or kind of bill of exchange and not another kind of negotiable
instrument.
>> Check: bill of exchange drawn on a bank payable on demand.
1. Promissory note - a promise to pay money
It is 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

 The ORIGINAL parties to a promissory note are:

1. Promissor/maker one who makes the promise and signs the
instrument)
2. Payee - person to whom the promise to pay is made. party whom the
promise is made or instrument is payable
And SUBSEQUENTLY, the holder (as defined in Section 191 is the
person to whom the instrument is delivered to, he may be the payee or
any subsequent person holding the note (or bill) by delivery or by
delivery and endorsement.
where a note is drawn to the makers own order, not complete until
indorsed by him (Sec. 184, NIL).
PARTIES IN A PROMISSORY NOTE:
2. Bill of exchange - an order made by one person to another to pay money to
a third person.
It is 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 period of
time a sum certain in money to order or to bearer.
The ORIGINAL parties are:
1. Drawer - person who draws up the bill and gives the order to pay
money to a third party
2. Drawee party whom whom the bill is drawn. He is the person to
whom the bill is addressed and is ordered to pay. Under Section 62,
he becomes an ACCEPTOR when he indicates a willingness to
accept responsibility for the payment of the bill.
3. Payee party whose favor the bill is drawn or is payable to
SUBSEQUENTLY, the holder (as defined in section 191 is the
person to whom the instrument is delivered to, may be the payee or
any subsequent person holding the note (or bill) by delivery or by
delivery and indorsement)

Table of Differences between Negotiable Instruments

Promissory Note
Unconditional promise to pay
Involves 2 parties: maker and payee
Maker is primarily liable

Bill of Exchange
Unconditional order to pay
Involves 3 parties: drawer, payee,
drawee/acceptor
Drawee/acceptor is primarily liable

Maker is primarily liable and NO

conditions precedent is required

Secondarily liable: indorsers and

persons negotiating by mere delivery
Only 1 presentment - for payment
No need to present for acceptance
If payable on demand, it must be
presented for payment within a
reasonable time after its issuance
Life of a promissory note: issue,
negotiation, indorsements,
presentment for payment, dishonor by
non-payment, notice of dishonor and
discharge

Bill of Exchange
Drawee may be any person
Payable on demand or at a fixed or
determinable future time
It is necessary that it be presented for
acceptance

Drawers liability is secondary and

attaches ONLY upon compliance with
condition precedent:
a) Presentment
b) dishonor
c) Proceedings (for dishonoring)
Secondarily liable: drawer, indorsers
and persons negotiating by mere
delivery
Generally 2 presentments - for
acceptance and for payment
Needs to be presented for acceptance
in some cases as required by law
If payable on demand, it must be
presented for payment within a
reasonable time from its last
negotiation
Life of a bill of exchange: issue,
negotiation, indorsements,
presentment for acceptance, dishonor
by non-acceptance, presentment by
payment, dishonor by non-payment,
notice of dishonor and discharge

Check
Always drawn upon a bank
Always payable on demand

Not necessary that it be presented for

acceptance (it is presented at once for
payment
It is not necessary that drawer has Drawn on deposit
money with the drawee
Must be presented for payment within a Must be presented for payment within a
reasonable time after last negotiation
reasonable time after its issue (g
months)

Special
There are, to be sure, many various kinds of negotiable instruments. An
analysis of the many variations will reveal, however, that they belong to one
or the other of the types mentioned.
Some other instruments held as negotiable instrument are: certificates of
deposits, bank notes, due bills, bonds and bankers acceptances, while others
are types of bill of exchange.

Other Kinds of Negotiable Instruments:

a. certificates of deposits
b. trade acceptances
c. bonds in the nature of promissory notes
d. drafts which are bills of exchange drawn by 1 bank to another
e. letters of credit
Trust Receipt - a security transaction intended to aid in the financing of
importers and retailers who do not have sufficient funds to finance their
transaction and acquire credit except to use as collateral the merchandise
imported.

II. COMPLETION AND DELIVERY

There are always two steps involved in the issuance of every

negotiable instrument, namely:
1. The mechanical act of writing the instrument completely and in accordance
with the requirements of Section one; and
2. The delivery of the complete instrument by the maker or the drawer to the
payee or holder with the intention of giving effect to it.
Such instrument, complete and delivered, is negotiable and may be enforced
accordingly.
Delivery and Issuance
Delivery means transfer of possession of instrument by the maker or drawer,
with intent to transfer title to the payee and recognize him as holder
thereof. (de la Victoria v. Burgos)

A. NI incomplete and revocable until delivery for the purpose of giving

effect thereto as between:
1. immediate parties
2. a remote party other than holder in due course (Sec. 16, NIL)
B. delivery, to be effectual, must be made by or under the authority of the
party making / drawing / accepting/indorsing
C. delivery may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property in the
instrument
D. PRESUMPTION OF DELIVERY
1. 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
2. if it is in the hands of a HDC, the presumption is conclusive
3. Should an undelivered instrument come into the hands of a holder in
due course, the maker is liable to him regardless of any proof of the
lack of valid delivery.
Rules on delivery of negotiable instruments
1) delivery is essential to the validity of any negotiable instrument
2) as between immediate parties or those in like cases, delivery must be with
intention of passing title
3) an instrument signed but not completed by the drawer or maker and
retained by him is invalid as to him for want of delivery even in the hands of
a holder in due course
4) but there is prima facie presumption of delivery of an instrument signed but
not completed by the drawer or maker and retained by him if it is in the
hands of a holder in due course. This may be rebutted by proof of nondelivery.
5) an instrument entrusted to another who wrongfully completes it and
negotiates it to a holder in due course, delivery to the agent or custodian is
sufficient delivery to bind the maker or drawer.
6) If an instrument is completed and is found in the possession of another,
there is prima facie evidence of delivery and if it be a holder in due course,
there is conclusive presumption of delivery.
7) delivery may be conditional or for a special purpose but such do not affect
the rights of a holder in due course.

GEMPESAW v CA (1993)
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for the purpose
of giving effect thereto. The first delivery of the instrument, complete
in form, to the payee who takes it as a holder, is called issuance of
the instrument. Without the initial delivery of the instrument from the
drawer of the check to the payee, there can be no valid and binding
contract and no liability on the instrument.

A. INSERTION OF DATE
When date may be inserted
Where an instrument expressed to be payable at a fixed period after date is
issued undated, or where the acceptance of an instrument payable at a fixed
period after sight is undated, any holder may insert therein the true date of
issue or acceptance, and the instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so inserted is to be
regarded as the true date.
1. Where an instrument is payable at a fixed period after date but is issued
undated.
2. Where an instrument is payable at a fixed period after sight but the
acceptance is undated. (Sec. 13, NIL)
Presumption as to Date
1. Importance of Date of Instrument:
determining when instrument,
endorsement or acceptance is due (maturity); and determing prescription of
a cause of action
2. Date is not an essential element of negotiability
3. An undated instrument is considered to be dated as of the time it was issued
under Section 17
4. When an instrument or acceptance or endorsement thereon is dated, such
date is deemed prima facie to be the true date of the making, drawing, or
acceptance, or endorsement, as the case may be under Section 11, to be
read with Section 53 and 7

5. The instrument is not invalid for the reason only that it is ante-dated or post
dated, provided this is not done for illegal or fraudulent purpose. The
person to whom instrument s dated is delivered acquires the title thereto as
of the date of delivery under Section 12.
Ante-dating is when the instrument contains a date earlier than the true date
of issuance, while postdating is when the instrument contains a date later
than the true date of issuance.
6. WHEN HOLDER IS AUTHORIZED TO PUT A DATE ON THE
INSTRUMENT under Section 13, where an instrument expressed to be
payable at a fixed period after date is issued undated or where the
acceptance of an instrument payable at a fixed period after sight is undated,
any holder may insert thereon the true date of the issue or acceptance and
the instrument shall be payable accordingly.
Effects:
Any holder may insert therein the true date of issue or acceptance and the
instrument shall be payable accordingly. It is necessary that the date of issue
or acceptance, as the case may be, be specified so as to determine the date of
maturity. The reason is that unless the true date is inserted, one will not
know when the instrument will be due.
This is important especially in an instrument that is payable on demand
(Section 71, in order to determine whether holder is a holder in due course
since one of the requisites of such is that he become holder thereof before it
was overdue (See Section 53).
The insertion of a wrong date does not avoid the instrument in the hands of
a subsequent holder in due course. but as to him, the date so inserted (even
if it be the wrong date) is to be regarded as the true date. The insertion of a
wrong date avoids the instrument as to person making such inserting (Bank
of Houston v. Day, 145 Mo. Appl. 410, 122 SW 756). The reason being that
the one who signs such instrument furnishes the means of fraud and is thus
stopped to deny liability thereon.

Example:
1) When instrument is expressed to be payable at a fixes period after date, but
it is issued undated

I promise to pay P (no date) or order P1,000.00 thirty days after

date.
(Sgd.) B

Or
10 days after date Pay A or order P500
(Sgd.) B
In the case, the date of maturity cannot be determined unless we know
the true date of issue of the note. The true date may be inserted not only by
P but also by any holder after him. But if the holder inserts the wrong date,
the maker shall be liable on wrong date a penalty for his neglect in leaving
the instrument undated
2) When acceptance of instrument payable at a fixed period after sight is
undated

Pay to P or order P1,000.00 thirty days after sight

(Sgd.) B
To: W
The bill is accepted by W who writes the word accepted across the
instrument but the acceptance was made undated.
Under Section 13, P or any holder may insert the true date of acceptance.
The date of acceptance must be the date when the bill was presented to the
drawee and not the date when it was actually accepted by him.
Or

10 days after sight, pay A or order P500

(Sgd.) B

To: C
Accepted
Sgd. C

Holder is authorized to insert the proper date of acceptance. But if he

inserts wrong date, acceptor shall be liable on this wrong date as a penalty
for his neglect in leaving his acceptance undated.
DOES NOT APPLY TO an instrument payable on demand, although
undated, for its maturity is already fixed NEITHER to an undated bill of
exchange payable at a fixed period after sight (Example: 30 days after
sight) BUT if it s the acceptance that is undated, the insertion is necessary
because the period is to be counted from sight not date of issue.

INSERTION OF A WRONG DATE

Rule:
If there is a date and it is changed, apply Sec.124 on ALTERATION OF AN
INSTRUMENT.
Alteration of instrument effect Any material alteration of the instrument
without the assent of all parties liable on such instrument would result in the
discharge of the instrument. Except, as against parties who has made ,
authorized , or consented to the alteration and all parties subsequent to him
who are considered as regular indorser .

B. COMPLETION OF BLANKS

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. (Sec. 14,
NIL)
Where only a signature on a blank paper was delivered:
a. It was delivered by the person making it in order that it may be
converted into a negotiable instrument
b. The holder has prima facie authority to fill it up as such for any amount.
(Sec. 14 NIL)
in the case of the signature in blank, delivery with intent to convert it into a
negotiable instrument is required. Mere possession is not enough.
if the instrument is wanting in any material particular, mere possession of
the instrument is enough to presume prima facie authority to fill it up.
material particular may be an omission which will render the instrument
non-negotiable (e.g. name of payee), an omission which will not render the
instrument non-negotiable (e.g. date)
The law speaks of material particular or any particular proper to be inserted
in a negotiable instrument to make it complete.
The authority to complete is not an authority to alter. So, the holder has no
authority to change the amount after it has been filled in or to insert words
or order or or bearer after the name of the payee.
a) It must be filled up strictly in accordance with the authority given
and within a reasonable time.
It must be shown that the purpose is to convert the said blank
paper into a negotiable instrument.
b) If negotiated to a holder in due course, it is valid and effectual for
all purposes as though it was filled up strictly in accordance with
the authority given and within reasonable time. (Sec. 14 NIL)
The authority to fill up is limited by the following:
a. When completed, it may be enforced upon the parties thereto only if
it was filled strictly in accordance with the authority given
b. The filling up must be within a reasonable time

NOTE: If the signature on a paper is given only for autograph

purposes and the same is converted into a NI, this will amount to
forgery, constituting thus a valid defense even against a HDC
This provision contemplates delivered instruments, so the person in
possession cannot be a thief or a finder but a person in lawful possessionone to whom the instrument has been delivered.
In order that any such instrument, when completed, may be enforced against
any person who became a party thereto prior to its completion:
a. must be filled up strictly in accordance w/ AUTHORITY given
b. within a REASONABLE TIME in determining what is reasonable
time, regard is to be had to the (1) nature of the instrument, (2) usage
of trade or business (if any) with respect to such instruments, and 3)
the facts of the particular case
BUT if negotiated to HDC, may enforce it as if it had been filled up
properly
What details may be filled up?
a. Amount, as to a signed blank paper
b. Date (Sec 13, NIL: The insertion of a wrong date does not void
the instrument in the hands of a subsequent holder in due course)
c. Place of payment
d. Name of payee

C. INCOMPLETE AND UNDELIVERED INSTRUMENTS

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. (Sec. 15, NIL)
Who may be estopped from raising the real defense under Sec 15?
A drawee bank whose negligent custody of the checks, after partial
execution, contributed to its escape.

Example:
M makes a note for P1,000.00 with the name of the payee in blank and
keeps it in his drawer. P steals the note and inserts his name as payee and
then indorses the note to A, A to B, B to C, and C to D, a holder in due
course. Can d enforce the note against M?
No, because the law is specific that the instrument is not a valid contract in
the hands of any holder. And the phrase any holder includes a holder in
due course. As the signature of M was placed thereon before delivery, he
does not assume any responsibility whatsoever.
In this case a real defense exists. The instrument may be considered a
forgery insofar as M is concerned since both the two steps in the
execution of a negotiable instrument are not complied with. There is,
however, a prima facie presumption of delivery which M must rebut by
proof to the contrary.
Defense available to parties prior to delivery the invalidity of the above
instrument is only with reference to the parties whose signatures appear
on the instrument before and not after delivery.

D. COMPLETE BUT UNDELIVERED INSTRUMENTS

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
may be; and, in such case, the delivery may be shown to have been conditional,
or for a special 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 prior 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. (Sec.
16, NIL)

a. CONCLUSIVE presumption of a valid delivery where the instrument is in

the hands of a HDC
b. PRIMA FACIE presumption of a valid delivery where the instrument is no
longer in the possession of a party whose signature appears thereon (Sec. 16,
NIL)
Rules where instrument mechanically complete
1) Undelivered -- Every contract on a negotiable instrument even if it is
completely written is incomplete and revocable until delivery for the
purpose of giving effect thereto.
Example:
M makes a note payable to the order of P and keeps it in his drawer.
In the absence of delivery, the instrument though complete in all its
particulars, there is no contract. M does not assume any liability. P does not
acquire any right against M who may revoke, cancel or tear it up with or
without any reason.
2) In possession of party other than a holder in due course If a complete
instrument is found in the possession of an immediate party or a remote
party other than the holder in due course, there is a prima facie
presumption of delivery but subject to rebuttal.
Example:
Suppose in the preceding example, P steals the note and then indorses it
to A, A to B, B to C, and C to D. D has knowledge that the note was stolen
by P.
In this case, P and D are immediate parties (immediate means privity not
proximity) and d is not a holder in due course.
3) Delivered conditionally or for a special purpose - If delivery was made or
authorized, it may be shown to have been conditional, or for a special
purpose only and not for the purpose of transferring the property to the
instrument.
There must be the intention to transfer ownership when delivery is made.
4) In the hands of a holder in due course if a complete instrument is in the
hands of holder in due course, a valid delivery thereof by all parties prior to
him is conclusively presumed.

III. RULES OF INTERPRETATION

Rules of Construction (Sec. 17)
Where the language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
a. Where the sum payable is expressed in words and also in figures and there
is a discrepancy between the two, the sum denoted by the words is the sum
payable; but if the words are ambiguous or uncertain, reference may be had
to the figures to fix the amount
When there is a discrepancy between the sum expressed in words and the
sum expressed in figures, the former controls
Example:
A promissory note reading one hundred pesos in its body and P1,
000.00 in the margin is good only for P100.00.
The reasons for the rule are: first, the figures in the margin form no part
of the instrument and are simply an abridgement of the amount payable
for convenience or reference; second, it is easier to change the figures or
to commit a mistake on them than when the amount is written in words.
When the words are ambiguous or uncertain, reference may be had to the
figures to determine the true amount.
Example:
If a check bears the figures P365.00 and the amount written is three
sixty-five pesos, the marginal figures control.
b. Where the instrument provides for the payment of interest, without
specifying the date from which interest is to run, the interest runs from the
date of the instrument, and if undated, from the issue thereof
If the date when the stipulated interest is to run is not specified, the
interest runs from the date of the instrument or from the date of its issue
if undated.
Example:
A promissory note payable with interest at 18% per annum from... will
earn interest runs from the date of the instrument or from the date of its
issue.

c. Where the instrument is not dated, it will be considered dated as of the time
it was issued
Issue means the first delivery of the instrument complete in form, to a
person who takes it as holder.
The date appearing in the instrument is deemed prima facie the true date
of its issue, acceptance, or indorsement.
Under Section 17 (c), the instrument is not dated.
d. Where there is a conflict between the written and printed provisions of the
instrument, the written provisions prevail
In case of conflict between the written and printed provisions, the former
prevail.
The reason is that the written words are deemed to express the true
intention of the maker or drawer because they are placed there by him.
e. Where the instrument is ambiguous that there is doubt whether it is a bill or
a note, the holder may treat it as either at his election
Example of this situation is when a bill of exchange where the drawer
and the drawee are one and the same person.
f. Where a signature is so placed upon the instrument that it is not clear in
what capacity the person making the same intended to sign, he is to be
deemed
an
indorser
In case of doubt in what capacity the person making the instrument
intended to sign, he is to be deemed an indorser.
Example:
A promissory note payable to the order of P is signed by M as maker.
If P writes his name across the face of the note, P will be deemed an
indorser. P cannot be an acceptor because the instrument is not a bill of
exchange.
- The signature of the maker of a note or the drawer of a bill is usually
affixed at the lower right hand corner of the instrument.
- The drawees name is usually written on the lower left hand corner.

- The holder negotiates the instrument by signing on the back thereof.

This rule applies only when there is a doubt due to the ambiguous
location of the signature.
g. Where an instrument containing the word I promise to pay is signed by
two or more persons, they are deemed to be jointly and severally liable
An instrument with the words I promise to pay signed by two or more
persons gives rise to solidary liability.
An instrument with the words we promise to pay signed by two or
more persons gives rise to joint liability.
An instrument with the words I/We promise to pay A or order P500.00
signed by two or more persons gives rise to solidary liability since I
dominates (See: PNB v. Concepcion mining, 5 SCRA 745 [1962])

EVANGELISTA V. MERCATOR FINANCE (2003)

Where two promissory notes, both employing the terms I promise to
pay, were each signed by two or more persons, a solidary (joint and
several) liability on each note is created on the part of the signors.

IV. SIGNATURE

General rule:
A person whose signature does not appear on the instrument is not liable.

Exception:
a. Where a person signs in a trade or assumed name (Sec. 18, NIL);
b. The principal is liable if a duly authorized agent signs on his own behalf
(Sec. 19, NIL);
c. In case of forger (Sec. 23, NIL) the forger is liable even if his signature
does not appear on the instrument;
d. Where the acceptor makes his acceptance of a bill on a separate paper (Sec.
134, NIL); and
e. Where a person makes a written promise to accept a bill before it is drawn.
(Sec 135, NIL)
f.

A. SIGNING IN TRADE NAME

Liability of person signing in trade or assumed name
No person is liable on the instrument whose signature does not appear
thereon, except as herein otherwise expressly provided. But one who signs in a
trade or assumed name will be liable to the same extent as if he had signed in
his own name. (Sec. 18, NIL)
It is necessary, however, that the party who signed intended to be bound by
his signature.
A note signed in the business name by the proprietor of the business is
governed by the 2nd sentence of Section 18 making the person so signing
liable to the same extent as if he had signed his name.
The rule is not really an exception to the general rule but rather it is an
instance where a persons business name serves the same purpose that
would be served by his signature.
B. SIGNATURE OF AGENT
Signature by agent; authority; how shown
The signature of any party may be made by a duly authorized agent. No
particular form of appointment is necessary for this purpose; and the authority
of the agent may be established as in other cases of agency. (Sec. 19, NIL)
The authority of the agent may be shown, as in other cases of agency, to
have been given orally or in writing subject to the provisions of the Statute
of Frauds.
Liability of person signing as agent and so forth
Where the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a representative
capacity, he is not liable on the instrument if he was duly authorized; but the
mere addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal, does not exempt him
from personal liability. (Sec. 20, NIL)
Requisites:
a. he must be duly authorized

b. he must add words to his signature indicating that he signs as an agent or

words known as DESCRIPTIO PERSONAE
he must disclose his principal (Sec. 20 NIL). If an agent does not disclose
his principal, the agent is personally liable on the instrument.
Example:
Victor Morales
By:
(Sgd.) Robert Plant
Agent
Or
(Sgd.) Robert Plant
As agent of Victor Morales
Signature by procuration
A signature by "procuration" operates as 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 within the actual limits of his authority. (Sec. 21, NIL)
Effects:
1. The principal in only bound if the agent acted within the limits of the
authority given
2. The person who takes the instrument is bound to inquire into the extent
and nature of the authority given. (Sec. 21 NIL)
instead of per procuration it may be expressed this way: per pro.,
P.P. or pp.
C. INDORSEMENT BY MINOR OR CORPORATION

Effect of Indorsement by infant or corporation

The indorsement or assignment of the instrument by a corporation or by an
infant passes the property therein, notwithstanding that from want of capacity,
the corporation or infant may incur no liability thereon. (Sec. 22, NIL)
No liability attached to the infant or the corporation
The instrument is still valid and the indorsee acquires title

MINOR
As a general rule, contracts entered into by a minor are voidable at his
instance or at the instance of his guardian.
a) While a minor is not bound by his indorsement for lack of capacity, he is,
however, not incapacitated to transfer certain rights. Minority is not a
personal defense which may be set up by parties other than the minor;
but it is a real defense available to the minor.
b) A minor may be held bound by his signature in an instrument where he is
guilty of actual fraud committed by specifically stating that he is of age
when, in fact he is not.

OTHER INCAPACITATED PERSONS

Other persons, besides minor, who have no capacity to give consent are
insane or demented persons and deaf-mutes who do not know how to write.
As far as such persons themselves are concerned, their capacity is a real
defense, that is, it is available even against a holder in due course.

CORPORATION
Effects of indorsement by a corporation
As regards corporation, Section 22 applies to cases where the corporation
has committed ultra vires acts or acts beyond its power.
It has been held that a corporation is not liable on notes in a suit thereon by
an indorsee, where the corporation is without capacity to make the contract in
fulfillment of which they were executed.
One who deals with officers or agents of a corporation is bound to know, at
his peril, their powers and extent of their authority.

D. FORGERY

Forged signature, effect of

When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain
the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority. (Sec. 23, NIL)
Section 23 applies only to forged signatures or signatures made without
authority

 Alterations such as to amounts or like fall under section 124

By forgery is meant the counterfeit-making or fraudulent alteration of any
writing, and may consist in the signing of anothers name or the alteration
of an instrument in the name, amount, description of the person and the like
with intent thereby to defraud.
Effects:
a. Wholly inoperative Only the signature forged or made without
authority is inoperative, the instrument or other signatures which are
genuine are not affected
b. No right to retain
c. No right to give a discharge
d. No right to enforce payment can be acquired.
Exception:
1. The party against whom it is sought to be enforced is precluded from
setting up the forgery or want of authority.
2. Where the forged signature is not necessary to the holders title in which
case the forgery may be disregarded.
The instrument can be enforced by holders to whose title the forged
signature is not necessary

Forms of forgery
a) fraud in factum
b) duress amounting to fraud
c) fraudulent impersonation

Persons precluded from setting up the defense of forgery

Those precluded from setting up the defense of forgery may be divided into
two general classes. They are:
a) Those who by their acts, silence, or negligence, are estopped from setting
up the defense of forgery; and
b) Those who warrant or admit the genuineness of the signatures in
question, namely:
i. Indorsers;
ii. Acceptors; and
iii. Persons negotiating by delivery.

 if endorsers signature is forged, loss will be borne by the forger and parties
subsequent thereto
drawee bank is not conclusively presumed to know the signature of the
indorser. The responsibility falls on the bank which last guaranteed the
indorsement and not the drawee bank.
Where the payees signature is forged, payments made by the drawee bank
to collecting bank is ineffective. No debtor/creditor relationship is created.
An agency to collect is created between the person depositing and the
collecting bank. Drawee bank may recover from collecting bank who may
in turn recover from the person depositing.

Rules on liabilities of parties on a forged instrument

In a Promissory Note
1. a party whose indorsement is forged on a note payable to order and all
parties prior to him including the maker cannot be held liable by any
holder
2. a party whose indorsement is forged on a note originally payable to
bearer and all parties prior to him including the maker may be held liable
by a holder in due course provided that it was mechanically complete
before the forgery
3. a maker whose signature was forged cannot be held liable by any holder.
In a Bill Of Exchange
1. the drawers account cannot be charged by the drawee where the drawee
paid
2. the drawer has no right to recover from the collecting bank
3. the drawee bank can recover from the collecting bank
4. the payee can recover from the drawer
5. the payee can recover from the recipient of the payment, such as the
collecting bank
6. the payee cannot collect from the drawee bank
7. the collecting bank bears the loss but can recover from the person to
whom it paid
8. if payable to bearer, the rules are the same as in PN.
9. if the drawee has accepted the bill, the drawee bears the loss and his
remedy is to go after the forger
10. if the drawee has not accepted the bill but has paid it, the drawee cannot
recover from the drawer or the recipient of the proceeds, absent any act
of negligence on their part.

Cases on Forgery

PNB v QUIMPO (1988)

A bank is bound to know the signatures of its depositors. If
bank pays a forged check it must be considered as making the
payment out of its own funds and cannot charge the account of the
depositor whose signature was forged.

SAMSUNG CONSTRUCTION CO., INC. VS. FAR EAST BANK

AND TRUST CO. AND CA (2004)
Consequently, if a bank pays a forged check, it must be considered as
paying out of its funds and cannot charge the amount so paid to the
account of the depositor. A bank is liable, irrespective of its good
faith, in paying a forged check.
i.

Extensions Of The Price v Neal Doctrine: The bar to

recovery (Price v Neal doctrine) is extended to overdrafts
and stop payment orders
1) Overdraft occurs when a check is issued for an amount
more than what the drawer has in deposit with the
drawee bank. RULE: The drawee who pays the holder
of the bill cannot recover from the holder what he paid
under mistake
2) Stop Payment Order is one issued by the drawer of a
check countermanding his first order to the drawee
bank to pay the check. RULE: The drawee bank is
bound to follow the order, provided it is received prior
to its certification or payment of the check
3) SOME EXCEPTIONS:
o If the payment to holder is a legitimate debt of the
drawer which the holder in due course could have
recovered from the drawer anyway.
o If the stop order comes after the bank has certified or
accepted the check, the bank is under the legal duty to
pay the holder and will not be liable to the drawer for
doing so.

ii.

Effect Of Negligence Of Depositor - If proximate cause of

loss, the bank (drawee) is not liable
1)

2)

It is the duty of the depositor/drawer to carefully

examine banks statements, cancelled checks, his check
stubs, and other pertinent records within a reasonable
time and to report any errors without unreasonable
delay.
If a drawer/depositors negligence and delay should
cause a bank to honor a forged check, drawer cannot
later complain should bank refuse to recredit his
account.

ILUSORIO vs CA (2002)
True, it is a rule that when a signature is forged or made without the
authority of the person whose signature it purports to be, the check is
wholly inoperative.
However, the rule does provide for an exception, namely: unless the
party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority. In the instant
case, it is the exception that applies. Petitioner is precluded from
setting up the forgery, assuming there is forgery, due to his own
negligence in entrusting to his secretary his credit cards and
checkbook including the verification of his statements of account.

SAMSUNG CONSTRUCTION CO., INC. VS. FAR EAST BANK

AND TRUST CO. AND CA (2004)
The general rule remains that the drawee who has paid upon
the forged signature bears the loss.
The exception to this rule arises only when negligence can be
traced on the part of the drawer whose signature was forged, and the
need arises to weigh the comparative negligence between the drawer
and the drawee to determine who should bear the burden of loss.
Still, even if the bank performed with utmost diligence, the
drawer whose signature was forged may still recover from the bank
as long as he or she is not precluded from setting up the defense of
forgery. After all, Section 23 of the Negotiable Instruments Law

plainly states that no right to enforce the payment of a check can arise
out of a forged signature. Since the drawer, Samsung Construction,
is not precluded by negligence from setting up the forgery, the
general rule should apply.
a. Indorsement:
When it is the signature of the indorser that is forged, the
drawee and drawer CAN recover vs holder
1) The drawee can recover the amount paid by him in
cases where only an indorsement has been forged .
This is because drawee makes no warranty as to the
genuineness of any indorsement.
2) Generally, the drawee may only recover from the
holder. Should he fail to do so(for instance due to
insolvency) he cannot recoup his loss by charging it to
the drawers account
3) Although a depositor/drawer owes a duty to his drawee
bank to examine his cancelled checks, he has no
similar duty as to forged indorsements.
4) The drawer, as soon as he comes to know of the a
forged indorsement should promptly notify the drawee
bank

REPUBLIC vs EBRADA
65 SCRA 680 (1975)
Issue: The liability of endorser is conditioned on the validity
of the bill of exchange or promissory note. The endorsers obligation
being accessory is valid only if the principal obligation is valid.
Where an instrument with maker or drawer signature is forged and he
refuses to pay, may the holder go after the indorser?
Held: Yes, the indorser is liable. The forgery did not nullify
the instrument. The person whose signature was forged is of course
not liable. But the instrument itself is valid, and hence, the accessory
obligation of indorsement (which is similar to a guaranty) is valid.
Drawee can recover. It is not supposed to be the duty of the
drawee to ascertain whether the signatures of the payee or indorsers
are genuine or not.

iii.

When drawee may recover from DRAWER

1) Where the instrument is originally a bearer instrument,
because the indorsement can be disregarded as being
unnecessary to the holders title
2) Indorsement forged by an employee or agent of the
drawer
3) If due to the drawers negligence/delay, the forgery is
not discovered until it is too late for the bank to recover
from the holder or the forger

GEMPESAW v CA, PBC

While there is no duty resting on the drawer to look for forged
indorsements on his cancelled checks, a depositor is under a duty to
set up an accounting system and business procedure as are
reasonably calculated to prevent or render the forgery of
indorsements difficult, particularly by the depositors own
employees.
As a rule the drawee bank who has paid the check with forged
indorsement, cannot charge the drawers account for the amount of
the said check. An exception to this rule is where the drawer is guilty
of such negligence which causes the bank to honor the check.
a. When drawee may not recover from holder
1) Where the instrument is originally a bearer instrument ,
because the indorsement can be disregarded as being
unnecessary to the holders title
2) If drawee fails to act promptly , if he delays in
informing the holder whom he paid
b. Between Drawee Bank and Collecting Bank
1) Collecting bank only liable for forged indorsements and
not forgeries of the drawer or makers signature. (PNB
v CA, 1968)
2) The collecting bank or last indorser generally suffers
the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that
the act of presenting the check for payment to the
drawee is an assertion that the party making the

3)

4)

5)

6)

presentment had done its duty to ascertain the

genuineness of the indorsements. (BPI v CA, 1992)
In presenting the checks for clearing the collecting
agent, made an express guarantee on the validity of all
the prior endorsements. ( BDO v Equitable bank)
The drawee bank is not similarly situated as the
collecting bank because the former makes no warranty
as to the genuineness of any indorsement. The drawee
banks duty is but to verify the genuineness of the
drawers signature and not of the indorsement because
the drawer is its client.
Where the negligence of the drawee bank is the
proximate cause of the collecting banks payment of a
check with a forged indorsement, the drawee bank may
be held liable to the collecting bank .
When both are guilty of negligence, the degree of
negligence of each will be weighed in considering the
amount of loss which each should bear. (refer to BPI v
CA, 1992)

GREAT EASTERN LIFE v HONGKONG & SHANGHAI BANK

(1922)
Where a check is drawn payable to the order of one person and is
presented to a bank by another and purports upon its face to have
been duly indorsed by the payee of the check , it is the duty of the
bank to know that the check was duly indorsed by the original payee
and where the bank pays the amount of the check to a 3rd person ,
who has forged the signature of the payee , the loss falls upon the
bank who cashed the check , and its remedy is against the person to
whom it paid the money.

BPI v CA (1992)
Section 23 of the NIL has 2 parts. The first part states the
general rule that a forged signature is wholly inoperative and
payment made through or under such signature is ineffectual. The
second part admits of exception. In this jurisdiction, the negligence of
the party invoking the forgery is an exception to the general rule.
Both drawee and collecting bank were negligent in the
selection and supervision of their employees resulting in the

encashment of the checks by the impostor. Both banks were not able
to overcome the presumption of negligence in the selection and
supervision of their employees
Considering the comparative negligence of the parties, the demands
of substantive justice are satisfied by allocating the loss and the costs
on a 60-40 ratio.

ASSOCIATED BANK v CA (1996)

By reason of the statutory warranty of a general indorser in
Section 66 of the Negotiable Instruments Law, a collecting bank
which indorses a check bearing a forged indorsement and presents it
to the drawee bank guarantees all prior indorsements, including the
forged indorsement. It warrants that the instrument is genuine, and
that it is valid and subsisting at the time of his indorsement. Because
the indorsement is a forgery, the collecting bank commits a breach of
this warranty and will be accountable to the drawee bank. This
liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank was not negligent,
it would still be liable to the drawee bank because of its indorsement.

PCIB v. CA (2001)
A bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making
inquiries with regard to them, cannot hold the proceeds against the
drawee when the proceeds of the checks were afterwards diverted to
the hands of a third party. In such cases the drawee bank has a right
to believe that the cashing bank (or the collecting bank) had, by the
usual proper investigation, satisfied itself of the authenticity of the
negotiation of the checks.
Thus, one who encashed a check which had been forged or diverted
and in turn received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success of the fraud
practiced on the drawee bank.

V. CONSIDERATION
ABSENCE or failure of consideration is a matter of defense as against any
person not a HDC.

 PARTIAL FAILURE of consideration is a defense pro tanto whether the

failure is an ascertained and liquidated amount or otherwise .

Consideration
an inducement to a contract, that is, the cause, price or impelling influence
which induces a contracting party to enter into the contract.
In actions based upon a negotiable instrument, it is unnecessary to aver or
prove consideration, for consideration is imported and presumed from the
fact that it is a negotiable instrument. The presumption exists whether the
words "value received" appear on the instrument or not (Ong v People,
2000)

Presumption of Consideration
Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears thereon to
have become a party thereto for value. (Sec. 24, NIL)
The presumption is only prima facie. It may, therefore, be rebutted or
disproved by evidence to the contrary.
Example:
M issued in favor of P a promissory note which recites:
Thirty days after date, I promise to pay P or order the amount of P1,
000.00. (Sgd.) M.
On the back of the note the following indorsement appears:
Pay to A. (Sgd.) P.
Although the promissory note does not mention the consideration, the law
presumes that m must have received a consideration for the note and that the
same is lawful. If M claims otherwise, then, he has the burden to rebut the
presumption.
Similarly, it is presumed that P, as an indorser received some valuable
consideration from A. A need not prove that he paid for the note. If P claims
otherwise, he must prove his allegation.

Value, what constitutes?

Value is any consideration sufficient to support a simple contract. An
antecedent or pre-existing debt constitutes value; and is deemed such whether
the instrument is payable on demand or at a future time. (Sec. 25, NIL)

Effect of Want of Consideration

Absence or failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of consideration is a
defense pro tanto, whether the failure is an ascertained and liquidated amount
or
otherwise.
(Sec.
28,
NIL)
absence of consideration is where no consideration was intended to pass.
failure of consideration implies that consideration was intended but that it
failed to pass
a drawee who accepts the bill cannot allege want of consideration against
the drawer

BAYANI VS. PEOPLE (2004)

Under Section 28 of the Negotiable Instruments Law (NIL),
absence or failure of consideration is a matter of defense only as
against any person not a holder in due course.
Moreover, Section 24 of the NIL provides the presumption of
consideration. Such presumption cannot be overcome by the
petitioners bare denial of receipt of the [consideration].

VI. ACCOMODATION PARTY

Liability of accommodation party

An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on
the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party. (Sec. 29,
NIL)

 the accommodated party cannot recover from the accommodation party

want of consideration cannot be interposed by the accommodation party
an accommodation maker may seek reimbursement from a co-maker even in
the absence of any provision in the NIL; the deficiency is supplied by the
New Civil Code.
he may do this even without first proceeding against the debtor provided:
a. he paid by virtue of judicial demand
b. principal debtor is insolvent

MAULINI v. SERRANO (1914)

In accommodation indorsement, the indorser makes the
indorsement for the accommodation of the maker. Such an
indorsement is generally for the purpose of better securing the
payment of the note, i.e. he lends his name to the maker not to the
holder. An accommodation note is one which the accommodation
party has put his name, without consideration, for the purpose of
accommodation some other party who is to use it and is expected to
pay it.

ANG TIONG v. TING (1968)

It is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the instrument.
Nor is it correct to say that the holder for value is not a holder in due
course merely because at the time he acquired the instrument, he
knew that the indorser was only an accommodation party.
The fact that the accommodation party stands only as a surety in
relation to the maker is a matter of concern exclusively between
accommodation indorser & accommodated party. It is immaterial to
the claim of a holder for value. The liability of the accommodation
party remains primary & unconditional.

SADAYA v. SEVILLA (1967)

The solidary accommodation maker who made payment has the right
of contribution from his co-accommodation maker. This right
springs from an implied promise between the accommodation makers
to share equally the burdens that may ensue from their having

consented to stamp their signatures on the promissory note. The

following are the rules on reimbursement:
1. A solidary accommodation maker of a note may demand from the
principal debtor reimbursement for the amount he paid to the
payee; and
2. A solidary accommodation maker who pays on the note may
directly demand reimbursement from his co-accommodation
maker without first directing his action against the principal
debtor provided that :
(a) he made the payment by virtue of a judicial demand or
(b) the principal debtor is insolvent.

TRAVEL-ON, INC. v. CA
Travel-On was entitled to the benefit of the statutory
presumption that it was a HDC, that the checks were supported by
valuable consideration. The only evidence private respondent offered
was his own testimony that he had issued the checks to Travel-On as
payee to "accommodate" its General Manager; this claim was in fact
a claim that the checks were merely simulated, that private
respondent did not intend to bind himself thereon. Only evidence of
the clearest and most convincing kind will suffice for that purpose.

CRISOLOGO-JOSE v. CA.
Section 29 of the NIL does not apply to corporations which
are accommodation parties because the issue or indorsement of
negotiable paper by a corporation without consideration is ultra vires.
Hence, one who has taken the instrument with knowledge of the
accommodation cannot recover against a corporation accommodation party EXCEPT if the officer or agent of the corp.
was specifically authorized to execute or indorse the paper for the
accommodation of a third person.
Corporate officers, such as the president and vice-president, have no
power to execute for mere accommodation a NI of the corporation for
their individual debts or transactions in which the corporation has no
legitimate concern. It is the signatories thereof that shall be
personally liable therefor.

AGRO CONGLOMERATES v CA (2000)

An accommodation party is a person who has signed the
instrument as maker, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person and is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument
knew (the signatory) to be an accommodation party. He has the right,
after paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them has in effect become
one of principal and surety, the accommodation party being the
surety.

VII. NEGOTIATION

What constitutes negotiation

An instrument is negotiated when it is transferred from one person to
another in such manner as to constitute the transferee the holder thereof.
If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder and completed by
delivery. (Sec. 30, NIL)

There is no negotiation if the transfer does not make the transferee the holder of
the instrument.
Thus, if M makes a note payable to P or order and P delivers it without
indorsement to A, negotiation is not effected because A, by such transfer, does
not become the holder of the note.

A. DISTINGUISHED FROM ASSIGNMENT

While a negotiable instrument may be either negotiated or assigned, a nonnegotiable instrument can only be assigned or transferred, not negotiated.
The other distinctions are:
1. Negotiation refers only to negotiable instruments, while assignment refers
generally to an ordinary contract;
2. In negotiation, the transferee is a holder, while in assignment, the transferee
is an assignee;

3. A holder in due course is subject only to real defenses, while an assignee is

subject to both real and personal defenses;
4. A holder in due course may acquire a better title than that of a prior party,
while generally an assignee merely steps into the shoes of the assignor;
5. A general indorser warrants the solvency of prior parties, while an assignor
does not warrant the solvency of prior parties unless expressly stipulated or
the insolvency is known to him;
6. An indorser is not liable unless there be presentment and notice of dishonor,
while an assignor is liable even without notice of dishonor; and
7. Negotiation is governed by Negotiable Instruments Law, while assignment is
governed by Article 1624 to 1635 of the Civil Code.
B. MODES OF NEGOTIATION
There are three basic methods of transferring a negotiable instrument:
1) Issue is the first delivery of the instrument complete in form, to a person
who takes it as holder. It is the first transfer of an instrument to a payee;
2) Negotiation, as defined, operates to make the transferee of a negotiable
instrument the holder thereof. It ordinarily involves indorsement (in regard
to other than bearer paper) so that negotiation and indorsement are often
used interchangeably; and
3) Assignment means a transfer of the title to the instrument, with the assignee
generally taking only such title as his assignor has, subject to all defenses
available against his assignor. It is the less usual method which may or may
not involve an indorsement in the sense of a writing on the back of the
instrument.

Methods of Negotiation
The methods by which an instrument is negotiated depends upon whether
the instrument is payable to order or to bearer.
1) Instruments payable to order Where the instrument is payable to order,
there are two steps required for its negotiation; first, an indorsement by the
payee or present holder, and secondly, its delivery to the next holder.

 An instrument payable to order is payable to the payee named therein or

to the indorsee or the person ordered or authorized by the payee to
collect.
This order or authority is made by means of indorsement followed by
delivery of the instrument to the indorsee.
2) Instrument payable to bearer - If the instrument is payable to bearer, it is
negotiated by mere delivery without indorsement.
Section 191, paragraph 4 defines bearer as the person in possession of a
bill or note which is payable to bearer.
Any person in possession of an instrument payable to bearer is always the
bearer thereof although he may have no legal right thereto.
If the instrument is negotiated to a holder in due course, the latter may
acquire a better title than that of the transferor
SESBREO v. CA (1993)
A NI may, instead of being negotiated, ALSO be assigned or transferred. A nonNI may not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument.

VIII. RIGHTS OF THE HOLDER

Classes of Holders
In an ascending order of rights, the classes are:
a) Holder simply under Section 51;
b) Holder for Value under Section 26; and
c) Holder in due course under Section 52 and 57.

RIGHTS OF HOLDER IN DUE COURSE

1.
2.

3.
4.

to sue on the instrument in his own name (Sec. 51, NIL)

to receive payment on the instrument discharges the instrument (Sec.
51, NIL)
holds instrument free of any defect of title of prior parties (Sec. 57, NIL)
free from defenses available to prior parties among themselves (Sec.57,
NIL)

may enforce payment of instrument for full amount, against all parties
liable (Sec.57, NIL)
If in the hand of any holder other than a Holder in Due Course, vulnerable
to same defenses as if non-negotiable.
5.

A. HOLDER IN DUE COURSE

Three Kinds of Due Course Holding
a. HDC under Sec. 52
b. HDC under Sec 58 : A holder who derives title to the instrument through
a HDC has all the rights of the latter even though he himself satisfies
none of the requirements of due course holding (Campos & Campos)
c. HDC under Sec 59 (presumption): every holder is deemed prima facie to
be a holder in due course

What constitutes a holder in due course

A holder in due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it. (Sec. 52,
NIL)
1. That it is complete and regular upon its face
An instrument is complete if it contains all the requisites for making it a
negotiable one, even if it may have blanks as to non-essentials.
It is incomplete when it is wanting in any material particular or particular
proper to be inserted in a NI without w/c the same will not be complete.
2. That he became the holder of it before it was overdue and without
notice that it had been previously dishonored, if such was the fact
OVERDUE
The ff. cannot be HDCs: (Sec. 53, NIL)

i. A holder who became such after the date of maturity of the

instrument (instrument is overdue);
ii. In case of demand instruments, a holder who negotiates it after an
unreasonable length of time after its issue
Instruments with fixed maturity but subject to acceleration: ultimate date of
maturity is the date of maturity for the purpose of determining whether a
purchaser is a HDC
Undated instruments: Prima facie presumption that it was negotiated before
it was overdue (Sec 45,NIL)
NOTE: An overdue instrument is still negotiable, but it is subject to the
defense existing at the time of the transfer.
DISHONOR
a. Non-acceptance
- Occurs when drawee refuses to accept the order of the drawer as stated
in the bill
- Applicable only to bills of exchange
- May occur before the date of maturity of the bill
b. Non-payment
- Occurs when the party primarily liable fails to pay at the date of
maturity
- Date of Maturity
1) payable after sightdate of presentment
2) Payable on the occurrence of a specified eventdate is fixed by
happening of event
An instrument is not invalid for the reason only that it is ANTE-DATED
OR POST-DATED provided not done for an illegal or fraudulent
purpose. The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery. (Sec.12, NIL)
3. That he took it in good faith AND for value:
HOLDER FOR VALUE - (a) Where value has at any time been given for
the instrument, the holder is deemed a HFV in respect to all parties who
become such prior to that time (Sec.26, NIL) and (b) Where the holder has a
lien on the instrument, he is deemed a HFV to the extent of his lien (Sec.27,
NIL).

a.

b.

PRESUMPTION Every NI is deemed prima facie issued for valuable

consideration; and every person whose signature appears thereon to have
become a party thereto for value (Sec. 24, NIL)
VALUE - any consideration sufficient to support a simple contract. An
antecedent or pre-existing debt constitutes value, whether the instrument
is payable on demand or at a future time. (Sec.25, NIL)

GOOD FAITH
a. Holder must have taken the instrument in good faith and that at the time
it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
b. NOT a Holder in GOOD FAITH
i. Holder acted in bad faith
ii. Holder had NOTICE OF DEFECT
1) ACTUAL KNOWLEDGE
SEC 56. WHAT CONSTITUTES NOTICE OF
DEFECTTo constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating
the same, the person to whom it is negotiated must have
had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the
instrument amounted to bad faith.
It is therefore sufficient that the buyer of a note had notice
or knowledge that the note was in some way tainted with
fraud. It is not necessary that he should know the
particulars of the fraud.
2) SUSPICIOUS CIRCUMSTANCES
a. BAD FAITH - does not require actual knowledge of the
exact fraud that was practiced; knowledge that there was
something wrong about the assignors acquisition of title is
sufficient.
b. The burden is upon the defendant to show that
notwithstanding the SUSPICIOUS CIRCUMSTANCES, it
acquired the check in actual good faith. (De Ocampo &
Co. v. Gatchalian)
o
Purchase of an instrument at a DISCOUNT does not, of
itself, constitute bad faith. However, if the instrument is
pruchased at a heavy discount, this fact together with other
facts, may be taken into account in deciding the issue of
purchase in good faith. (Ham v. Meritt)

VICENTE R. DE OCAMPO & CO. v. GATCHALIAN, ET. AL.

(1961)
In order to show that the defendant had knowledge of such
facts that his action in taking the instrument amounted to bad faith, it
is not necessary to prove that the defendant knew the exact fraud that
was practiced upon the plaintiff by the defendants assignor, it being
sufficient to show that the defendant had notice that there was
something wrong about the assignors acquisition of title,
although he did not have notice of the particular wrong that was
committed.
The fact is that it acquired possession of the instrument under
circumstances that should have put it to inquiry as to the title of the
holder who negotiated the check to it. The burden was, therefore,
placed upon it to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith.
One line of cases had adopted the test of the reasonably
prudent man and the other that of actual good faith. It would seem
that it was the intent of the Negotiable Instruments Act to harmonize
this disagreement by adopting the latter test. Negligence on the part
of the plaintiff, or suspicious circumstances sufficient to put a
prudent man on inquiry, will not of themselves prevent a recovery,
but are to be considered merely as evidence bearing on the question
of bad faith.

STATE INVESTMENT HOUSE v. IAC (1989)

A check with 2 parallel lines in the upper left hand corner
means that it could only be deposited and may not be converted to
cash. Consequently, such circumstance should put the payee on
inquiry and upon him devolves the duty to ascertain the holders title
to the check or the nature of his possession. Failing in this respect,
the payee is declared guilty of gross negligence amounting to legal
absence of good faith and as such the consensus of authority is to the
effect that the holder of the check is not a holder in good faith.

YANG v. CA (2003)
Where Mr. A obtained by fraud from Mr. B crossed checks
payable to Mr. C, which Mr. C innocently receives from Mr. A for
value, Mr. C is still a holder in good faith despite the fact that the
checks were crossed. The crossing of a check does not impair the
negotiability of an instrument nor necessarily preclude its holder
from being a holder in due course. The crossing of a check only
means that it could only be deposited and may not be converted into
cash. Thus, such should put the holder on inquiry and upon him
devolves the duty to ascertain the holders title to the check or nature
of his possession.
The effects are that:
1. The check may not be encashed but only deposited in the bank.
2. The check may be negotiated only once to one who has an
account with a bank.
3. The act of crossing serves as a warning to the holder that the check
was issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose. Otherwise, he would not
be a holder in due course.
Where the holder Mr. C, as in this case, did not have knowledge of
Mr. As fraudulent actions on Mr. B, and the fact that he was the
payee in said check, he was legally warranted to deposit the
instrument in his account with the drawee bank. Mr. C was a holder
in good faith.

CONSOLIDATED PLYWOOD v. IFC (1987)

A FINANCING COMPANY that is the indorsee of a note
issued by a buyer payable to the seller of goods is NOT a holder in
good faith as to the buyer. In case the goods sold turn out to be
defective, it cannot recover the purchase price of the goods from the
buyer. The TEST OF PROXIMITY to the transaction was applied in
this case. Where the financing company was privy to the initial

transaction, it was bound with notice of the warranties attaching to

the transaction. It ACTIVELY PARTICIPATED in the transaction,
thus it cannot be a holder in good faith. This is the protective
doctrine favoring the interests of individual dealers over those of
financing companies.
NOTE: The instrument in this case was non-negotiable, so the active
participation discussion was merely obiter.

SALAS v. Court of Appeals (1990)

Salas defaulted in payments for motor vehicle, the purchase of
which was financed by Filinvest. On demand, his defense was that
the purchase was invested with fraud on the sellers part. Filinvest
(the financing company) was held to be a holder in good faith,
despite privity to the allegedly fraudulent sale. Salas defenses were
good only against the seller-indorser, and where the note was
negotiable and validly negotiated to Filinvest, the latter was a holder
in good faith, and may recover from Salas.
Note: This is the less protective doctrine not so much favorable
to dealers but as compared to Consolidated, the rule here was actually
in the ratio decidendi and not mere obiter.
4. That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it
title DEFECTIVE when (Sec. 55, NIL):
a. instrument / signature obtained by fraud, duress, force or fear or other
unlawful means OR for an illegal consideration; or
b. instrument is negotiated in breach of faith, or fraudulent circumstances
NOTICE of infirmity or defect
a.
actual knowledge of the infirmity or defect OR knowledge of such facts
that his action in taking the instrument amounted to bad faith (Sec.56,
NIL)
b. Notice to an AGENT is chargeable against the principal.
c.
INSUFFICIENT NOTICE
i. CONSTRUCTIVE NOTICE (ex. notice of defenses disclosed by
public records, doctrine of lis pendens) is insufficient to charge a
purchaser of a NI with notice.

 Just as a purchaser of a negotiable instrument is not put on

inquiry, neither is he charged with notice of defenses or
equities disclosed by public records, nor is he affected by the
doctrine of lis pendens. However, notice to an agent is
chargeable against the principal.
ii.

Notice of an ACCOMODATION PARTY is not notice of a defect.

Thus, an accomodation party (one who has signed the
instrument as maker, drawer, acceptor or endorser, without
receiveing value therefor, and for the purpose of lending his
name to some other person) is liable on the instrument,
notwithstanding the fact that the holder knew him to be an
accomodation party.

RIGHT of a transferee who receives NOTICE of any infirmity or defect

BEFORE he has PAID THE FULL amount for the instrument
i. He will be deemed a HDC only to the extent of the amount therefore
paid by him (Sec.54, NIL)

When person not deemed holder in due course

Where an instrument payable on demand is negotiated on an unreasonable
length of time after its issue, the holder is not deemed a holder in due
course. (Sec. 53, NIL)
DISADVATAGE OF BEING A NON HDC:
The Negotiable Instruments Law does not provide that a holder not in due
course cannot recover on the instrument. The disadvantage of not being a
holder in due course is that the negotiable instrument is subject to defenses
as if it were non-negotiable. One such defense is absence or failure of
consideration. (Atrium Mgt v de Leon, 2001)

Notice before full amount is paid

Where the transferee receives 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, he will be deemed a holder in due course
only to the extent of the amount therefore paid by him. (Sec. 54, NIL)

Right of holder in due course

A holder in due course holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount
thereof against all parties liable thereon. (Sec. 57, NIL)

Who is deemed holder in due course

Every holder is deemed prima facie to be a holder in due course; 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 holder in due course. But the lastmentioned rule does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title. (Sec. 59, NIL)
General Rule: Prima facie presumption in favor of holder
Exception: Burden is reversed (burden on holder to prove that he or some
person under whom he claims acquired title as HDC) when it is shown that the
title of any person who has negotiated instrument was defective
Exception to exception: There will be no reversal if the party being made
liable became bound prior to the acquisition of such defective title (i.e., where
defense is not his own) presumption in favor of holder
PRESUMPTION IN FAVOR OF DUE COURSE HOLDING
Every holder is deemed prima facie to be a holder in due course. However,
this presumption arises only in favor of a person who is a holder as defined
in Section 191 of the Negotiable Instruments Law, meaning a payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
(Yang v CA, 2003)

B. DEFENSES AGAINST THE HOLDER

When subject to original defense

In the hands of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-negotiable. But a
holder who derives his title through a holder in due course, and who is not
himself a party to any fraud or illegality affecting the instrument, has all the

rights of such former holder in respect of all parties prior to the latter. (Sec. 58,
NIL)
KINDS OF DEFENSES
1. real defense they are those available against ALL parties, both immediate
or remote, including holders in due course ; They are those which attach to
the instrument itself on the principle that the right sought to be enforced
never existed and generally, disclose an absence of one of the essential
elements of a contract.
2. personal defense grows out of the agreement or conduct of a particular
person in regard to the instrument which renders it inequitable FOR HIM,
though holding the legal title, to enforce it against the party sought to be
made liable; not available against a HDC can be raised only against
holders not on due course. Here, the true contract appears , but for some
reason , the defendant is excused from the obligation to perform.

Personal Defenses and Real Defenses

Real Defenses

Personal Defense

1. Fraudulent Alteration by holder

1. Innocent alteration or spoliation
2.
Want of delivery of incomplete 2. Want of delivery of complete instrument
instrument
3. Duress amounting to forgery
3. Acquisition of the instrument by force,
duress or fear
4. Fraud in factum or in esse contractus
4. Fraud in inducement
5. Minority

5. intoxication

6. Marriage in case of a wife

6. Mistake

7. Insanity where the insane person has a 7. insanity where there is no notice of
insanity
guardian appointed by the court
8. Ultra vires acts of a corporation where 8. ultra vires acts of corporations
its charter or by statue, it is prohibited from
issuing commercial paper
9. Want of authority of agent

9. Want of authority of the agent where he

has apparent authority

10. Execution of instrument

public enemies

between 10. Acquisition of the instrument for an

illegal consideration

11. Illegality of contract made by statue

12. Forgery

13. Prescription
14. Discharge at or after maturity
15. Other infirmities appearing on the face
of the instrument

11. illegality of contract where form or

consideration is illegal
12. Filling up the blanks contrary to
authority given or not within reasonable
time
13. Usury
14. Discharge by payment or renunciation
or release before maturity
15. Absence or failure of consideration
16. Insertion of wrong date where payable
at a fixed period after date and issued
undated; or at a fixed period after sight
and acceptance is undated
17. Set off between immediate parties
18. Negotiation under circumstances
amounting to fraud
19. Discharge of party secondarily liable by
discharging prior party
20. Negotiation in breach of faith
21. Acquisition of the instrument by
unlawful means

REAL DEFENSES
1. Fraudulent alteration by holder (Sec. 124, 1st sentence; Sec. 125)
2. Want of delivery of incomplete instrument (Sec. 15)
The fact that an incomplete instrument, completed without authority, had
not been delivered, is a defense even against a holder in due course.
delivery is not conclusively presumed where the instrument is
incomplete
defense of the maker is to prove non-delivery of the incomplete
instrument.
3. Duress amounting to forgery
As where one takes the hands of another and forces him to sign his name
(Espy v. Bank, 18 Wall. 604; First Nat. Bank v. northwestern Bank, 28
N.E. 729);
4. Fraud in factum or in esse contractus

5. Minority
Incapacity is a REAL defense but available only to the incapacitated
party (ex. minor or corporation); the indorsement or assignment of the
instrument by a corp. or by an infant passes the property therein,
notwithstanding that from want of capacity, the corp. or infant may incur
no liability thereon. (Sec.22, NIL)
6. Marriage in case of a wife
7. Insanity where the insane person has a guardian appointed by the court
8. Ultra vires acts of a corporation where its charter or by statue, it is
prohibited from issuing commercial paper
9. Want of authority of agent, apparent and real
10. Execution of instrument between public enemies
11. Illegality of contract made by statue or declared by law (See Art. 1409
NCC); except where the maker or drawer is himself a party to the illegality;
thus a note for gambling debt (an illegal consideration) is a mere personal
defense (see Sec. 55).
12. Forgery
13. Prescription (see Arts. 1140-1142, 1144-1147, Civil Code)
14. Other infirmities appearing on the face of the instrument (Sec. 52);
15. Discharge at or after maturity (Sec. 88, 118, 121, 122).
PERSONAL DEFENSES
1. Innocent alteration or spoliation (see Sec. 124 [last sentence], 125).
Spoliation is an alteration made by a stranger to an instrument. If the
original meaning can be ascertained, the holder in due course may recover
according to its original tenor
2. Want of delivery of complete instrument (Sec. 16)
3. Acquisition of the instrument (not signature by force, duress or fear
4. Simple fraud in inducement (Sec. 55)
5. Intoxication
6. Mistake
7. Insanity where there is no notice of insanity
8. Ultra vires acts of corporations
9. Want of authority of the agent where he has apparent authority
10. Acquisition of the instrument for an illegal consideration
11. Illegality of contract where form or consideration is illegal
12. Filling up the blanks contrary to authority given or not within reasonable
time (Sec. 28)
This is a personal defense only because provision states that if any
instrument so completed is negotiated to a holder in due course, it is
valid and effectual for all purposes

13. Usury because the contract of loan itself is not void but only the agreed
interest (see Sec. 7, Usury Law; Art. 1413, Civil code
14. Discharge by payment or renunciation or release before maturity (Sec. 50,
121, 122)
15. Absence or failure of consideration
Absence or failure of consideration may be set up against a holder not a
holder in due course as a personal defense
the defense of want of consideration is ineffective against a holder in due
course
16. Insertion of wrong date where payable at a fixed period after date and issued
undated; or at a fixed period after sight and acceptance is undated (Sec. 13);
17. Set off between immediate parties (see Sec. 58)
18. Negotiation under circumstances amounting to fraud
19. Discharge of party secondarily liable by discharging prior party (Sec. 20 [c])
20. Negotiation in breach of faith
21. Acquisition of the instrument by unlawful means

RODRIGUEZ v MARTINEZ (1905)

Maker cannot be relieved from the obligation of paying the
holder the amount of the note alleged to have been executed for an
unlawful consideration. (Illegality is personal, so defense only
against a holder not in due course)
The holder paid the value of the note to its former holder. He
did so without being aware of the fact that the note had an unlawful
origin. He accepted note in good faith, believing the note was valid
and absolutely good. The maker even assured the holder before the
purchase that the note was good and that he would pay it at a
discount .
SOMETIMES REAL, SOMETIMES PERSONAL
1. Forgery
In general, a REAL defense
PERSONAL if the party against whom it is sought to enforce such right
is precluded from setting up forgery/want of authority
2. Material alteraltion
PERSONAL defense when used to deny liability according to the
original tenor of the instrument
Real defense when relied on to deny liability according to the altered
terms

3. Fraud
REAL DEFENSE
o fraud in execution / fraud in factum: did not know that paper was a
Negotiable Instrument when it was signed
o not liable to ANY holder
PERSONAL DEFENSE
o Fraud in inducement: knows it is Negotiable Instrument but deceived
as to value/terms
Available as a defense against non-HDC
o Fraud in factum accompanied by NEGLIGENCE of maker or signer
Where the signor does not know the nature of the instrument he
signs, but where, by the exercise of ordinary care, he could have
discovered it.
4. Duress
In general, PERSONAL defense
REAL if duress so serious as to give rise to a real defense for lack of
contractual intent.
There may be cases where the duress employed is so serious that it will
give rise to a real defense because of the lack of contractual intent.
Although the signer may know what he is signing, there may be wanting
the intent or willingness to be bound. Then it becomes a real defense
5. Illegality of contract where form or consideration is illegal
In general, a PERSONAL defense even if Art. 1409 of the New Civil
Code provides that a contract with an illegal cause is void.
REAL when the law expressly provides for illegality as a real defense
(Statutory declaration of illegality)

IX. LIABILITIES OF PARTIES

Classification of parties according to liability
The parties to a negotiable instrument may be classified according to their
liability as follows:
Parties primarily liable:
1. person who by the terms of the instrument is absolutely required to pay the
same.
a. Maker of promissory note
b. Acceptor of bill of exchange
2. unconditionally liable; duty bound to pay the holder at date of maturity,
WON holder demands payment from him, and he is not relieved from

liability even if the instrument should become overdue due to failure of

holder to make such demand.
Parties secondarily liable:
1. SECONDARY PARTIES:
a. Indorsers, both note and bill
b. Drawer of bill
2. Conditionally liable; not bound to pay unless the following has been fulfilled
a. Due presentment or demand from primary party for payment or
acceptance;
b. Dishonor by such party; and
c. Taking of proceedings required by law after dishonor.
PAYMENT: PRESENTMENT AND TENDER
> Presentment for payment not necessary to charge primary party
> if the instrument is, by its terms, payable at a special place, and he is able
and willing to pay it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. (Sec. 70, NIL)

A. MAKER

Liability of MAKER
The maker of a negotiable instrument, by making it, engages that he will pay
it according to its tenor, and admits the existence of the payee and his then
capacity to indorse. (Sec. 60, NIL)
The maker promises to pay it according to its tenor
Admits existence of payee and his then capacity to indorse
a. Therefore, PRECLUDED from setting up the following defenses:
i. the payee is a fictitious person
ii. the payee was insane, a minor, or a corporation acting ultra vires

B. DRAWEE AND ACCEPTOR

Liability of DRAWER
The drawer by drawing the instrument admits the existence of the payee and
his then capacity to indorse; and engages that, on due presentment, the
instrument will be accepted or paid, or both, according to its tenor, and that if
it be dishonored and the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder or to any subsequent indorser who

may be compelled to pay it. But the drawer may insert in the instrument an
express stipulation negativing or limiting his own liability to the holder. (Sec.
61, NIL)
C. ACCEPTOR
Liability of Acceptor
The acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse. (Sec. 62, NIL)
Drawee is not liable unless he accepts the bill and in doing so, he engages to
pay the bill according to the tenor of his acceptance, and admits the
following:
iii. existence of drawer
iv. genuineness of his signature
v. his capacity and authority to draw the instrument
vi. existence of payee and his then capacity to endorse
b. Meaning of "according to the tenor of his acceptance"
i. Majority and prevailing view: Where alteration consists in raising the
amount payable, acceptor liable to HDC only as to its original
amount; if the alteration of payee's name, paying banks cannot charge
drawer's account with the amount of the check because its duty is to
pay only according to the order of the drawer.
ii. Common law rule: Acceptor of altered check not liable to innocent
holder except for the original amount
D. INDORSER
When a Person Deemed Indorser
A person placing his signature upon an instrument otherwise than as maker,
drawer, or acceptor, is deemed to be indorser unless he clearly indicates by
appropriate words his intention to be bound in some other capacity. (Sec. 63,
NIL)
Liability of Irregular Indorser
Where a person, not otherwise a party to an instrument, places thereon his
signature in blank before delivery, he is liable as indorser, in accordance with
the following rules:

(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. (Sec. 64,NIL)
Liability of General Indorser
Every indorser who indorses without qualification, warrants to all
subsequent holders in due course:
(a) That the instrument is genuine and in all respects what it purports to
be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That the instrument is, at the time of his indorsement, valid and
subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it. (Sec. 66, NIL)
Liability of Indorser where paper negotiable by delivery
Where a person places his indorsement on an instrument negotiable by
delivery, he incurs all the liability of an indorser. (Sec. 67, NIL)
Order in which indorsers are liable
As respect one another, indorsers are liable prima facie in the order in
which they indorse; but evidence is admissible to show that, as between or
among themselves, they have agreed otherwise. Joint payees or joint indorsees
who indorse are deemed to indorse jointly and severally. (Sec. 68, NIL)

E. WARRANTIES
Warranty where negotiation by delivery and so forth
Every person negotiating an instrument by delivery or by a qualified
indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor
of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person
negotiating public or corporation securities other than bills and notes. (Sec. 65,
NIL)
Both of the qualified indorser and one negotiating by delivery do not assume
to pay the instrument in the event of dishonor unless the dishonor is based
on any of the four implied warranties enumerated in Section 65. They are in
fact merely assigning a credit.
in case of negotiation by delivery only, warranty only extends in favor of
immediate transferee
Example 1:
M makes a promissory note payable to bearer and delivers the same to P
Warranties of the maker.
The maker, by making the note as such, warrants the existence of the payee
and his then capacity to indorse.
Defenses precluded - The maker is consequently precluded from asserting as
a defense that the payee is non-existent and is incapable.

Example 2:
M issues a promissory note to P for 1,000.00 payable on demand. P indorses
the note to A.
Upon being sued by A, M cannot say that the agreement between him and P
was to pay only P700.00. Neither can he allege that P is non-existent or
fictitious person. He is also precluded from setting up such defenses as
minority, insanity or ultra vires act of a corporation.
Warranties of the acceptor
The acceptor, by signing the bill as such, WARRANTS:
1. The existence of the payee and his then capacity to indorse. In addition,
2. He also admits the existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the bill.
Defenses precluded - The acceptor is consequently precluded from
asserting as a defense that:
a. the drawer is fictitious or non-existent
b. the drawers signature is a forgery
c. he has no funds in his hands belonging to the drawer with which to pay
the bill
d. the drawer has overdrawn his account
e. the drawer has no capacity to contract or has no authority to draw the
bill
MATTERS NOT ADMITTED The acceptor does not admit the:
a. Genuineness of the indorsers signature because it is only the signature of
the drawer that he warrants
b. He cannot be charged with knowledge of the want of genuineness of any
other part of the instrument or of the title of the holder.
Warranties of irregular indorser
Section 64 provides only for the parties to whom an irregular indorser is
liable.
His warranties are the same as those of a general indorser under Section 66
in as much as his indorsement is in blank which, in itself, is an indorsement
without qualification.
Warranties of a qualified indorser and one negotiating by delivery

 Every person negotiating an instrument by delivery or by a qualified

indorsement warrants that:
1. The Instrument genuine, in all respects what it purports to be
2. That he has a good title
3. That all prior parties had capacity to contract
4. That he had no knowledge of any fact which would impair validity of
instrument or render it valueless
Note: In case of negotiation by delivery only, warranty only extends in
favor of immediate transferee
Negotiation by delivery under Section 65 means that indorsement is not
necessary because the instrument is payable to bearer. The words by
delivery, therefore, refer to a holder who negotiates the instrument in the
same condition in which he received it, making no indorsement at all.
So, a blank indorser of an instrument does not negotiate it by delivery as
his liability would be governed by Section 66.
A qualified indorsement is made by adding to the indorsers signature the
words without recourse or any words of similar import which means
without resort to a person who is secondarily liable after the default of
person who is primarily liable.
Warranties of a General or Unqualified Indorser
1)
2)
3)
4)

That the instrument is genuine;

That he has good title;
Capacity of prior parties;
That the instrument is at time of indorsement valid and subsisting and on
due presentment, it shall be accepted or paid, or both, according to tenor
5) And if it be dishonored, and necessary proceedings on dishonor be duly
taken, he will pay the amount to holder, or to any subsequent indorser who
may be compelled to pay it.

X. PRESENTMENT FOR PAYMENT

Presentment
It is defined as:
a. the production of a bill of exchange to the drawee for his acceptance, or
to the drawee or acceptor for payment; or
b. the production of a promissory note to the party liable for its payment.
(Windham Bank v. Norton, 22 comm. 213, 56 am. Dec. 297).

It consists of:
a. a personal demand for payment at a proper place
b. the bill or note must be ready to be exhibited if required and surrendered
upon payment.
A. NECESSITY OF PRESENTMENT FOR PAYMENT

Where necessary
Presentment for payment is necessary in order to charge the drawer and
endorsers. (Sec. 70, NIL). Without presentment, the persons secondarily liable
are discharged.
For Promissory Notes: it is necessary that: Presentment for payment must
be made to the person primarily liable (Sec. 71, NIL);
- If the note is dishonored by nonpayment, notice of dishonor by
nonpayment must be given to the person secondarily liable (Sec. 80,
NIL), unless excused

In All Other Cases: it is necessary that

- Protest for nonpayment by drawee is necessary to charge an acceptor for
honor (Sec. 167, NIL);
- Protest for nonpayment by the acceptor for honor is also required. (Sec.
170, NIL).
Where NOT necessary
General rule:
Presentment for payment is not necessary to charge persons primarily liable
on the instrument. (the person primarily liable on the instrument is the
person who by the terms of the instrument is absolutely required to pay the
same under Section 192). This pertains to the maker of a promissory note and
the acceptor of a bill of exchange.
Note: if instrument is, by its terms, payable at a special place and the
person primarily liable is able and willing to pay it there at maturity, such
ability and willingness are equivalent to tender of payment on his part. (Sec. 70
NIL). This pertains to a situation where the instrument is payable at a
particular institution or office, such as a bank and not when the instrument is
payable in a certain locality.

Presentment for Payment is Necessary to charge persons secondarily liable

Exception:
a. to charge the person primarily liable on the instrument (Sec. 70, NIL)
b. to charge the drawer where he has no right to expect or require that the
drawee or acceptor will pay the instrument. (Sec. 79, NIL)
c. to charge an indorser where the instrument was made or accepted for his
accommodation and he has no reason to expect that the instrument will be
paid if presented. (Sec. 80, NIL)
Under Section 79 and 80 of the Negotiable Instruments Law, only
the drawer or indorser are not discharged. All other parties
secondarily liable are discharged
d. Excused (Sec. 82, NIL):
1) Where, after the exercise of reasonable diligence, presentment cannot be
made;
2) Where the drawee is a fictitious person;
3) By waiver of presentment, express or implied.
e. when a bill is dishonored by nonacceptance immediate right to recourse
accrues to holder (Sec. 151, NIL)
f. in case of waiver of protest, whether in the case of a foreign bill of exchange
or other NI deemed to be a waiver not only of a formal protest but also of
presentment and notice of dishonor. (Sec. 111, NIL)

When Presentment Must Be Made

1. Instrument on a Fixed or Determinable Future Time/ Not payable on
demand Presentment must be made on the day it falls due. Presentment
before maturity is improper.
(a) Every negotiable instrument is payable at the time fixed therein without
grace (Sec. 85, NIL).

(b) When the day of maturity falls upon a Sunday or a holiday, the
instrument is payable on the next succeeding business day (Sec. 85,
NIL).
(c) When the day of maturity is on a Saturday, presentment for payment
shall be made on the next succeeding business day; except that demand
instrument may, at the option of the holder, be presented for payment
before 12:00 oclock noon on Saturday when that entire day is not a
holiday (Sec. 85, NIL).
(d) Where the instrument is payable at a fixed period after date, after sight,
or after the happening of a specified event, the time of payment is
determined by excluding the day from which the time is to begin to run,
and by including the date of payment. (Sec. 86, NIL).
Illustration:
18 June 2001
10 days after date Pay A or order P500.
(Sgd.) B
Present this on 28 June 2001 for payment because that is its due
date
GENERAL RULE: Presentment for payment must be made on due date
of instrument
EXCEPTION: If the due date falls on a Saturday, present instrument on
Monday next
REASON: Obligor is entitled to the full day to make payment. But
since Saturday is half day work and the banks would be closed in the
afternoon, and the following day is a Sunday, he should have until
Monday to pay. The law wants to give the person primarily liable one
whole day to look for money.
EXCEPTION TO EXCEPTION: If the instrument is payable on
demand, the instrument can be presented on a Saturday. The reason is
that the holder could have presented it on any day.
2. Instrument Payable on Demand within a reasonable time after its issue

(a) In case of note, it must be presented for payment within a reasonable

time from issue;
(b) In case of a bill of exchange, it must be presented for payment within a
reasonable time from last negotiation.
The last negotiation is the last transfer for value. Subsequent transfers
between banks for purposes of collection are not negotiations within this
section.
Reasonable time has been defined as so much time as is necessary under
the circumstances for a reasonable prudent and diligent man to do,
conveniently, what the contract or duty requires should be done, having a
regard for the rights and possibility of loss, if any, to the other party.
(Far East Realty Investment Inc. vs. CA, 166 SCRA 256, 1994 BEQ)
3. demand bill of exchange within a reasonable time after the last
negotiation. (Sec. 71, NIL) (NOTE: though reasonable time from last
negotiation, it may be unreasonable time from issuance thus holder may not
be HDC under sec. 71)
Check - must be presented for payment within reasonable time after its
issue or drawer will be discharged from liability thereon to extent of loss
caused by delay

How time computed

When payable at a (1) fixed period after date, (2) after sight, or (3) after
that happening of a specified event, exclude day from which the time
is to begin to run, include date of payment. (Sec. 86, NIL)
Where the day, or the last day for payment falls on a Sunday or on a
holiday may be done on the next succeeding secular or business day.
(Sec. 194, NIL)

PNB v. SEETO (1952)

On 13 March, Seeto indorsed to PNB-Surigao a bearer check
dated 10 March drawn against PBC-Cebu. PNB-Surigao mailed the
check to its Cebu branch on 20 March & was presented to the drawee
bank on 09 April. The check was dishonored for insufficient funds
because the delay in presentment cause the exhaustion of the drawer's
funds. Indorser Seeto asked that the suit be deferred while he made

inquiries. He assured PNB that he would refund the value in case of

dishonor.
HELD: The indorser is discharged from liability by reason of the
delay in the presentment for payment, under 84.
Drawer had enough funds when he issued the check because his
subsequent checks drawn against the same bank had been encashed.
The assurances of refund by the indorser are the ordinary obligation
of an indorser which are discharged by the unreasonable delay in
presentation of the check.

PAPA v A.U. VALENCIA (1998)

Granting that petitioner had never encashed the check, his
failure to do so for more than ten (10) years undoubtedly resulted in
the impairment of the check through his unreasonable and
unexplained delay.
While it is true that the delivery of a check produces the effect of
payment only when it is cashed, the rule is otherwise if the debtor is
prejudiced by the creditors unreasonable delay in presentment. The
acceptance of a check implies an undertaking of due diligence in
presenting it for payment, and if he from whom it is received sustains
loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given.
It has, likewise, been held that if no presentment is made at all,
the drawer cannot be held liable irrespective of loss or injury unless
presentment is otherwise excused. This is in harmony with Article
1249 of the Civil Code under which payment by way of check or
other negotiable instrument is conditioned on its being cashed, except
when through the fault of the creditor, the instrument is impaired.
The payee of a check would be a creditor under this provision and if
its non-payment is caused by his negligence, payment will be deemed
effected and the obligation for which the check was given as
conditional payment will be discharged.

Where DELAY excused

When the delay is caused by circumstances beyond the control of the holder
and not imputable to his default, misconduct, or negligence; when the cause of
delay ceases to operate, presentment must be made with reasonable diligence
(Sec. 81,NIL)

Manner of Presentment
The instrument must be exhibited; when paid, must be delivered up to the
party paying it. (Sec. 74, NIL)

CHAN WAN v. TAN KIM(1960)

Tan Kim drew specially crossed checks payable to bearer. Chan
Wan presented the checks for payment to the drawee bank but they
were dishonored due to insufficient funds. Chan Wan seeks recovery
on these checks.
HELD: Checks crossed specially to China Banking should have been
presented for payment by that bank, not by Chan Wan. Inasmuch as
Chan Wan presented them for payment himself, there was no proper
presentment & the liability did not attach to the drawer.
But there was due presentment as clearance endorsements by China
Bank can be found at the back of the checks. However, some of the
checks were stamped account closed.
As Chan Wan filed to indicate how the checks reached his hands, the
court held him not to be a holder in due course who can still recover
on the checks but subject to personal defenses, such as lack of
consideration.

ASSOCIATED BANK v. CA & REYES (1992)

Different department stores issued crossed checks bearing "for
payee's account only" payable to Melissa's RTW. Sayson, acting
without authority, deposited & encashed the checks with Associated
Bank.
HELD: Citing State Investment House v IAC, the effects of crossing
a check are:
1. check may not be encashed but only deposited in the bank;
2. check may be negotiated only one -- to one who has an account
with a bank; and
3. the act of crossing the check serves as a warning to the holder that
the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose.

The effects of crossing a check relate to the mode of presentment for

payment.
The law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining
their genuineness & regularity.
B. PARTIES TO WHOM PRESENTMENT FOR PAYMENT SHOULD BE
MADE

What constitutes a sufficient presentment. (Sec. 72, NIL)

Presentment for payment, to be sufficient, must be made
1. By the holder, or by some person authorized to receive payment on his
behalf.
(a) Presentment for payment of a promissory note by a bank having it for
collection is sufficient. (Caine v. Foreman, 289 Pac. 929).
(b) Instrument must be exhibited to the person from whom payment is
demanded, and when it is paid must be delivered up to the party paying
it. (Sec. 74). Demand over the telephone therefore cannot constitute
proper presentment.
First Acceptance v. Dimayuga
11 SCRA 114 (1967)
The instrument must be exhibited in order that the maker or
the acceptor may be able to determine the genuineness of the
instrument, the right of the holder to receive payment, and so
that he may immediately reclaim possession upon paying the
amount. Non-exhibition or surrender would not constitute due
presentment to charge drawer and endorsers.
(c) The makers right to exhibition of a note is waived when he does not
demand to see the note and he refuses payment on some other grounds.
(Greensteen v. Kucharski. 140 Atl. 482; Foster East Jordan Realty Co.,
177 N.W. 987).
2. At a reasonable hour on a business day
3. To the person primarily liable or if absent to any person found at the place
where presentment is made
4. Where Notice must be Sent: Where a party has added an address to his
signature, notice of dishonor must be sent to that address; but if he has not
given such address, then the notice must be sent as follows:

(a) Either to the post office nearest to his place of residence or to the post
office where he is accustomed to receive his letters; or
(b) If he lives in one place, and has his place or business in another, notice
may be sent to either place; or
(c) If he is sojourning in another place, notice may be sent to the place
where he is so sojourning.
But where the notice is actually received by the party within the time
specified by law, it will be sufficient, though not sent in accordance with
the requirement of this section. (Section 108, NIL).
By Whom:

the holder, or by some person authorized to receive payment on

his behalf;
Only the holder or one authorized by him has the right to make presentment
for payment

Time: reasonable hour on a business day;

where instrument payable at bank. must be made during banking hours,
UNLESS the person to make payment has no funds there to meet it at any
time during the day, in which case presentment at any hour before the bank
is closed on that day is sufficient (Sec. 75, NIL)
Presentment cannot be made on a Sunday or holiday
If the instrument is payable on demand
a) if it is a note presentment must be made within reasonable time after
issue
b) if it is a bill - presentment must be made within reasonable time after
last negotiation.
Place: proper place as herein defined: (Sec. 73, NIL)
1) place of payment specified at place of payment;
2) no place of payment specified but address of the person to make payment is
given in the instrument at the address given;
3) no place of payment and no address is given at the usual place of business
or residence of the person to make payment;
4) in any other case wherever person to make payment can be (1) found, or if
presented (2) at his last known place of business or residence

TO WHOM PRESENTMENT OF PAYMENT SHOULD BE MADE:

(1) Person primarily liable on the instrument, or if he is absent or inaccessible
Presentment for payment is made to the maker, or acceptor. Not to the
person secondarily liable.

Hence:
1. For Promissory Notes: it is necessary that: Presentment for
payment must be made to the person primarily liable (Section 71);
If the note is dishonored by nonpayment, notice of dishonor by
nonpayment must be given to the person secondarily liable (Sec.
80), unless excused
2.

In All Other Cases: it is necessary that

Protest for nonpayment by drawee is necessary to charge an
acceptor for honor (Sec. 167);
Protest for nonpayment by the acceptor for honor is also required.
(Sec. 170).
Acts needed to charge persons secondarily liable:
a) Presentment for payment/acceptance
b) Dishonor by non-payment/non-acceptance
c) Notice of dishonor to secondary parties

(2) To any person found at the place where the presentment is made.
where principal debtor is dead and no place of payment is specified to
his personal representative, IF any AND IF he can be found with the
exercise of reasonable diligence (Sec. 76, NIL)
where persons primarily liable are partners and no place of payment is
specified, presentment for - to any one of them, even though there has
been a dissolution of the firm. (Sec. 77, NIL)
joint debtors and no place of payment is specified - to them all (Sec. 78,
NIL)
If payable at the special place, and the person liable is willing to pay
there at maturity, such willingness and ability is equivalent to tender of
payment.
C. DISPENSATION WITH PRESENTMENT FOR PAYMENT
Presentment not required to charge the drawer:
a. He has no right to expect
b. He has no right to require that the drawee or acceptor will pay (Sec 79, NIL)
Presentment not required to charge the indorser where:
a. The instrument was made or accepted for his accommodation
b. He has no reason to expect that the instrument will be paid if presented (Sec.
80, NIL)

 Only the drawer or indorser are not discharged. All other parties
secondarily liable are discharged.
When delay in making presentment is excused
Delay in making presentment for payment is excused when the delay is
caused by circumstances beyond the control of the holder and not imputable
to his default, misconduct, or negligence.
When the cause of delay ceases to operate, presentment must be made with
reasonable diligence. (Sec. 81, NIL)
When presentment for payment is excused
Presentment for payment is excused:
1. Where, after the exercise of reasonable diligence, presentment, as required
by this Act, cannot be made;
2. Where the drawee is a fictitious person;
3. By waiver of presentment, express or implied. (Sect. 82, NIL)
What is excused is the failure to make presentment. There is no need to
make any presentment versus under section 81 (delay in presentment)
presentment for payment is still required after the cause of delay has ceased.
D. DISHONOR BY NON-PAYMENT
The instrument is dishonored by non-payment when:
1. It is duly presented for payment and payment is refused or cannot be
obtained; or
2. Presentment is excused and the instrument is overdue and unpaid. (Sec. 83,
NIL)
Liability of person secondarily liable, when instrument dishonored
Subject to the provisions of this Act, when the instrument is dishonored by
non-payment, an immediate right of recourse to all parties secondarily liable
thereon accrues to the holder.
(Sec. 84)
EFFECTS OF DISHONOR BY NON-PAYMENT: An immediate right
of recourse to all parties secondarily liable accrues to the holder (Sec.
84)
Parties cease to be secondarily liable and become principal debtors.
Liability becomes the same as that of the original obligors.

 Is the drawer an indispensible party to a suit against the indorsers in case

of dishonor of the instrument by nonpayment?
After an instrument is dishonored by non-payment, indorsers cease to be
merely secondarily liable; they become principal debtors whose liability
becomes identical to that of the original obligor. The holder of a negotiable
instrument need not even proceed against the maker before suing the indorser.
Hence, the drawer is not an indispensible party in an action against the indorser
of the checks. (TUAZON VS. HEIRS OF RAMOS, G.R. No. 156262 14 July
2005)

XI. NOTICE OF DISHONOR

By notice of dishonor is meant bringing either verbally or by writing, to the
knowledge of the drawer or indorser of an instrument, the fact that a specified
negotiable instrument, upon proper proceedings taken, has not been accepted or
hasnt been paid, and that the party notified is expected to pay it.

A. PARTIES TO BE NOTIFIED
To whom notice of dishonor MUST be given (Sec. 89, NIL)
Except as herein otherwise provided, when a negotiable instrument has been
dishonored by non-acceptance or non-payment, notice of dishonor must be given
to:
1. The drawer and to each indorser
2. Any drawer or indorser to whom such notice is not given is discharged.

GULLAS v. PNB (1935)

Gullas indorsed the treasury warrant which was sold to PNB.
Gullas also maintained an account with the bank. The warrant was
subsequently dishonored by the Insular Treasurer. The bank sent
notices of dishonor to by mail to Gullas which could not be delivered
to him at that time because he was in Manila. The bank set off
Gullas' deposits as payment of the warrant. This resulted in the nonpayment of checks he had issued.
HELD: A notice of dishonor is necessary to charge an indorser &
that the right of action against him does not accrue until the notice is
given.

As a general rule, a bank has a right of set off of the deposits in its
hands for the payment of any indebtedness to it on the part of a
depositor. However, prior to the mailing of notice of dishonor &
without awaiting any action by Gullas, the bank made use of the
money standing in his account to make good for the treasury warrant.
Gullas was merely an indorser & notice should actually have been
given to him in order that he might protect his interests.
To whom notice MAY BE given?
1. To his principal, in case of an instrument dishonored in the hands of an
agent (Sec. 94, NIL)
2. To the party himself or his agent in that behalf (Sec. 97, NIL)
When notice is given to an agent, he must be duly authorized to receive
notice of dishonor, otherwise, the notice is not valid.
3. Where party is dead and death known to the party giving notice (1) MUST
be given to a personal representative, if there be one, and if with reasonable
diligence, he can be found; (2) no personal representative MAY be sent to
the last residence or last place of business of the deceased. (Sec. 98, NIL)
4. Partners to any one partner, even though there has been a dissolution.
(Sec. 99, NIL)
a. Persons jointly liable. to each of them unless one of them has authority
to receive such notice for the others. (Sec. 100, NIL)
b. Bankrupt. where a party has been adjudged a bankrupt or insolvent, or
has made an assignment for the benefit of creditors, notice may be given
either to the party himself or to his trustee or assignee (Sec. 101, NIL)

H & BC v. Peoples Bank

35 SCRA 140 (1970)
The period within which to clear checks at the clearing house of the
Central Bank was 24 hours (i.e, any forgery must be discovered and
reported within 24 hours). Hongkong and Shanghai Banks
representative whether the check was in fact genuine.
Shanghai Bank said yes. This had to be done within 24 hours. Two
months later, the forgery was discovered and Hongkong and shanghai
Bank sought to recover, but this was denied by the court. Because
the period of clearing has been extended to 180 days, but once any

alteration is discovered, the same must be reported within 24 hours

after discovery.
B. PARTIES WHO MAY GIVE NOTICE OF DISHONOR

By Whom Given
o (1) By or on behalf of the holder or (2) any party to the instrument who
may be compelled to pay it to the holder, and who, upon taking it up,
would have a right to reimbursement from the party to whom the notice
is given (Sec. 90, NIL)
o Notice of dishonor may be given by an agent either in his own name or
in the name of any party entitled to give notice, whether that party be his
principal or not (Sec. 91, NIL)
o Where instrument has been dishonored in hands of agent, he may either
himself give notice to the parties liable thereon, or he may give notice to
his principal (as if agent were holder) (Sec. 94, NIL)

By Whom Given
Notice of Dishonor may be given:
1. By or on behalf of the holder
2. By or on behalf of any party who:
a. Is a party to the instrument and might be compelled to pay the
instrument.
b. To a holder who having taken it up would have a right of
reimbursement from the party to whom notice is given. (Sec. 90,
NIL)
Notice of dishonor may be given by any agent either:
a. in his own name; or
b. in the name of any party entitled to give notice, whether that party be his
principal or not. (Sec. 91, NIL)
Where instrument has been dishonored in hands of agent, he may either
himself give notice to:
1. the parties liable thereon; or
2. to his principal (within the same time as if agent was an independent
holder) (Sec. 94, NIL)

Q. DOES FAILURE TO GIVE NOTICE OF DISHONOR OF A

PREVIOUS INSTALLMENT
TO
PERSONS
SECONDARILY
LIABLE ALSO DISCHARGE THEM ON THE SUCCEEDING
INSTALLMENTS?
A. It depends on whether the instrument contains an acceleration clause
RULE WHERE THERE IS NO ACCELERATION CLAUSE
Where the instrument contains no acceleration clause, failure to
give notice of dishonor on previous installment doesnt discharge
drawers and indorsers as to the succeeding installments, and
therefore, the holder can file an action against them for such
succeeding installments, notice is given
The reason is that each separate installment is equivalent to another note
RULE WHERE THERE IS AN ACCELERATION CLAUSE
It depends whether the clause is optional or automatic
If it is automatic, failure to give notice of dishonor as to a
previous installment will discharge the persons secondarily liable as
to the succeeding installments
If it is optional and it is not exercised, the rule would be the same as
where there is no acceleration clause
C. EFFECT OF NOTICE
Effect of notice on behalf of holder
Where notice is given by or on behalf of the holder, it inures to the benefit of
all subsequent holders and all prior parties who have a right of recourse
against the party to whom it is given. (Sec. 92, NIL)

Effect where notice is given by a party entitled thereto

Where notice is given by or on behalf of a party entitled to give notice, it
inures to the benefit of the holder and all parties subsequent to the party to
whom notice is given. (Sec. 93, NIL)

In whose favor notice operates

1. when given by/on behalf of holder: insures to benefit of
a. all subsequent holders and
b. all prior parties who have a right of recourse vs. the party to whom its
given

2. where notice given by/on behalf of a party entitled to give notice: insures for
benefit of
a. holder , and
b. all parties subsequent to party to whom notice given
General rule: Any drawer or indorser to whom such notice is not given is
discharged.
Exceptions:
a. Waiver (Sec. 109, NIL)
b. Notice is dispensed (Sec. 112, NIL)
c. Not necessary to Drawer (Sec. 114, NIL)
d. Not necessary to Indorser (Sec. 115, NIL)
If notice is delayed, delay may be excused (Sec. 113, NIL)
D. FORM OF NOTICE
Form of notice (Sec. 96, NIL)
The notice may be:
1. in writing; or
2. merely oral
Contents: may be given in any terms which sufficiently
1. identify the instrument, and
2. indicate that it has been dishonored by non-acceptance or non-payment.
It may in all cases be given:
1. by delivering it personally; or
2. through the mails.
The ff. notice still sufficient: (Sec. 95, NIL)
(1) a written notice, not signed
(2) insufficient written notice, supplemented and validated by verbal
communication
(3) instrument suffering from misdescription UNLESS the party to whom the
notice is given is in fact misled thereby.
TIME WITHIN WHICH NOTICE GIVEN

1. Notice may not be given before the maturity of the instrument. Notice
may be given on the date of maturity, provided that instrument has been
presented for payment and it has been dishonored.
2. Where Parties Reside in Same Place: where the person given and the
person to receive notice reside in the same place, notice must be given
within the following periods:
(a) If given at the place of businss of the person to receive notice it must
be given before the close of business hours on the day following:
(b) If given by mail it must be deposited in the post office in time to
reach him in usual course on the day following. (Sec. 103, NIL).
Same place refers to the corporate limits of a town or city where the
presentment is made or where the holder resides.
3. Where Parties Reside in Different Place: Where the person giving and
the person to receive notice reside in different place, the notice must be
given within the following periods:
(a) If sent by mail, it must be deposited in the post office in time to go
by mail the day following the day of the dishonor, or if there be no
mail at a convenient hour or that day, by the next mail thereafter;
(b) If given otherwise than through post office, then within the time that
notice would have been received in due course of mail, if it had been
deposited in post office within the time specified. (Sec. 104, NIL).
NOTE: these provisions are similar to Art. 54 of the Code of
Commerce which provides: contracts entered into through
correspondence shall be perfected from the time an answer is made
accepting the propositions by which the latter may be modified.
4. Where a party receives notice of dishonor, he has, after the receipt of
such notice, the same time for giving notice to antecedent parties that the
holder has after the dishonor. (sec. 107, NIL).

E. WAIVER
When Waiver of Dishonor May Be Made (Sec. 109, NIL)
1. Before the time of giving notice has arrived, such as express waiver
in the body of the instrument or added to the signature of the party; or
2. After omission to give due notice
> Waiver of notice may be expressed or implied
- Waiver may be implied from acts, declarations, or silence

 Whom Affected by Waiver in General (Sec. 110, NIL)

The persons affected by waiver depends upon whether the waiver is in the
instrument itself or is written above the signature of the indorser
If the waiver is embodied in the instrument itself, it is binding upon all
parties
If the waiver is written above the signature of an indorser, it binds him
only
Waiver of Protest
Whether in the case of foreign bill of exchange or other negotiable
instrument, is deemed to be a waiver not only of a formal protest but also of
presentment and notice of dishonor. (Sec. 111, NIL).
PROTEST:
1. Where any negotiable instrument has been dishonored, it may be
protested for non-acceptance or non-payment, as the case may be (Sec.
118, NIL).
2. But protest is not required except I the case of foreign bills of exchange
(Sec. 118, NIL).
3. Distinctions between Inland Bill and Foreign Bill:
An inland bill of exchange bill of exchange is a bill which is or on its
face, purports to be, both drawn and payable within the Philippines. Any
other bill is foreign bill which is one which is, or on its face purports to be
drawn or payable outside the Philippines. (Sec. 129, NIL).
A foreign bill of exchange is one:
(a) Drawn in the Philippines but payable outside the Philippines.
(b) Payable in the Philippines but drawn outside the Philippines
NOTE: Unless the contrary appears on the face of the bill of exchange, the
holder may treat it as an inland bill of exchange.
4. Under Sec. 118 NIL, verbal notice of dishonor is s sufficient in case of
promissory note and inland bill of exchange. But with respect to a
foreign bill of exchange, a protest is needed.
Where presentment for payment is waived, notice of dishonor is also
waived
But where notice of dishonor is waived, presentment for payment is
not waived
Where protest is waived, notice and presentment is waived

TAN LEONCO v GO INQUI(1907)

In exchange for the abaca from Tan Leonco's plantations, Go Inqui
drew a bill of exchange against Lim Uyco. Upon presentment of the
draft, it was refused payment due to a stop order from the drawer.
The bill was not protested.
HELD: The action is not brought upon the bill of exchange which
was used only as evidence of the indebtedness. Under these
conditions, protest & notice of nonpayment are unnecessary in order
to render the drawer liable.
NOTE: The ruling of the Court on protest is merely obiter dictum.

When Delay In notice allowed

Delay in giving notice of dishonor is excused when the delay is caused by
circumstances beyond the control of the holder, and not imputable to his
default, misconduct, or negligence. When the cause of delay ceases to operate,
notice must be given with reasonable diligence. (Sec. 113, NIL).

When Notice Need Not Be Given to Drawer

Notice of dishonor is not required to be given to the drawer in any of the
following cases:
(a) Where the drawer and drawee are the same person;
(b) When the drawee is a fictitious person or a person not having capacity to
contract;
(c) When the drawer is the person to whom the instrument is presented for
payment
(d) Where the drawer has no right to expect or require that the drawee or
acceptor will honor the instrument;
(e) Where the drawer has countermanded payment (Sec. 114, NIL).

STATE INVESTMENT HOUSE v CA (1993)

Moulic issued 2 checks to Victoriano as security for pieces of jewelry
to be sold on commission. Victoriano negotiated these checks to
State Investment. As Moulic failed to sell the jewelry, she returned
them to Victoriano. However, she failed to retrieve her checks.
Moulic withdrew her funds from the drawee bank.
Upon
presentment, the checks were dishonored.

HELD: State Investment is a holder in due course & is not subject to

the personal defense of lack of consideration.
There is no need to serve the drawer a notice of dishonor because
she was responsible for the dishonor of her checks. After
withdrawing her funds, she could not have expected her checks to be
honored.
Where not necessary to charge endorser
Notice of dishonor is not required to be given to an endorser in either of the
following cases:
(a) When the drawee is a fictitious person or does not have capacity to
contract and the endorser was aware of this at the time of endorsement;
(b) Where the endorser is the person to whom the instrument is presented for
payment;
(c) Where the instrument was made or accepted for his accommodation (Sec.
115, NIL).
Where due notice of dishonor by non-acceptance has been given, notice of
subsequent dishonor by non-payment is not necessary unless in the meantime
instrument has been accepted. (Sec. 116, NIL).
Effect of omission to Give notice of Acceptance
An omission to give notice of dishonor by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the omission. (Sec.
117, NIL).
F. DISPENSATION WITH NOTICE
When notice of dishonor is dispensed with
Notice of dishonor is dispensed with when, after the exercise of reasonable
diligence, it cannot be given to or does not reach the parties sought to be
charged. (Sec. 112, NIL)
Delay in giving notice; how excused (Section 113, NIL)
Delay in giving notice of dishonor is excused when the delay is caused by
circumstances beyond the control of the holder and not imputable to his default,
misconduct, or negligence.

When the cause of delay ceases to operate, notice must be given with
reasonable diligence.
When political disturbances interrupt and obstruct the ordinary
negotiations of trade, they constitute a sufficient excuse for want
of presentment or notice, upon the same principle that controls in cases
of military operations or interdictions of commerce, or prevalence of a
malignant, contagious, infectious disease.

Instances when Notice of Dishonor Not Necessary to Drawer (Sec. 114,

NIL)
a.
b.
c.
d.

Drawer and drawee same person

Drawee is a fictitious/incapacitated person
Drawer is the person to whom presentment for payment is made
Drawer has no right to expect that the drawee will accept/pay the
instrument

Instances when Notice Not Required to Indorser (Sec. 115, NIL)

a. drawee was a fictitious/incapacitated person and the indorser was aware of

such at the time of indorsement

b. indorser is the person to whom instrument was presented for payment
c. instrument made/accepted for his accommodation
G. EFFECT OF FAILURE TO GIVE NOTICE
Effect of omission to give notice of non-acceptance
An omission to give notice of dishonor by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the omission. (Sec.
117, NIL)

XII. DISCHARGE OF NEGOTIABLE INSTRUMENT

It is the release of all parties, whether primary or secondary, from the
obligation on the instrument; It renders the instrument non-negotiable.
A. DISCHARGE OF NEGOTIABLE INSTRUMENT

How may a Negotiable Instrument be Discharged (Sec. 119, NIL):

1. By payment in due course by or on behalf of principal debtor;

a.
b.
c.
d.

by whom made
at or after maturity
to the holder thereof
in good faith and without notice that his title is defective

Discharge of the instrument discharges all the parties thereto

Payment must be in due course, and by the principal debtor or on his
behalf
If payment is not made by the principal debtor, payment only cancels the
liability of the payor and those obligated after him but does not discharge
the instrument.
Payment by an accommodation party does not discharge the instrument.
That the post-dated checks were merely issued as security is not a
ground for the discharge of the instrument as against a holder in due
course. For the only grounds are those outlined in Section 119 of the
Negotiable Instruments Law. The intentional cancellation contemplated
under par. C, Sec. 119 is that the cancellation effected by destroying the
instrument either by tearing it up, burning it, or writing the word
canceled on the instrument. The drawing and negotiation of a check
have certain effects aside from the transfer of title or the incurring of
liability in regard to the instrument by the transferor. The holder who
takes the negotiated paper makes a contract with the parties on the face
of the instrument. There is an implied representation that funds or credit
are available for the payment of the instrument in the bank upon which it
is drawn. Consequently, the withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of
holders in due course. (State Investment vs. CA; 217 SCRA 32)
2. By payment in due course by party accommodated where party is made/
accepted for accommodation
3. By the intentional cancellation thereof by holder
a cancellation made unintentionally, or under a mistake or without the
authority of the holder, is inoperative But where an instrument or any
signature thereon appears to have been cancelled the burden of proof lies on
the party who alleges that the cancellation was made unintentionally, or
under a mistake or without authority. (Sec. 123, NIL).
4. By any other act which discharges a simple contract for payment of money: (a
remission; (b) novation; (c) confusion or merger.
As to the other modes: payment is already in (a) or (b); loss of a negotiable
instrument will not extinguish liability. Compensation is not available so
long as an obligation is evidenced by a negotiable instrument.

 PRESUMPTION: when the principal debtor becomes the holder of the

instrument at or after majority in his own right. If a private document
evidencing an obligation is in the possession of the debtor, the presumption
is that the debtor has paid such an obligation.

State Investment v. CA
217 SCRA 32 (1993)
The fact that post dated checks were issued merely as security is not a
ground for the discharge of the checks as against a holder in due
course.
The intentional cancellation contemplated under Sec. 119 on NIL for
the discharge of an instrument is the cancellation effected by
destroying the instrument either by tearing it up, burning it, or writing
the work cancelled on the instrument, and certainly requires the
element in the holder in intentionally cancelling it. Cancellation
cannot be presumed by failure to recover the instrument.
The discharge of the instrument would necessarily carry with it the
discharge of the persons primarily liable thereon.
5. When the principal debtor becomes holder of instrument at or after maturity in
his own right (See Ang vs. Associated Bank, et. Al., G.R. No. 146511,
September 5, 2007)
6. renunciation of holder: (Sec. 122, NIL)
holder may expressly renounce his rights vs. any party to the instrument,
before or after its maturity
absolute and unconditional renunciation of his rights against PRINCIPAL
DEBTOR made at or after maturity discharges the instrument
renunciation does not affect rights of HDC w/o notice.
Renunciation must be in writing unless instrument delivered up to person
primarily liable thereon
7. material alteration review Sec. 125, NIL: what constitutes material alteration
(Sec. 124, NIL: material alteration w/o assent of all parties liable avoids
instrument except as against party to alteration and subsequent indorsers)
Payment by Principal Debtor
In order to discharge the instrument, the payment must be

1. a payment in due course,

2. a payment made by the principal debtor
PRINCIPAL DEBTOR - Person ultimately bound to pay the debt
If payment is made before the date of maturity, the instrument is not
discharged as the payment is not in due course
Where payment is made by a party who is not a primary obligor or an
accommodation party, his payment only conceals his own liability and
those who are obligated after him. All prior parties primarily or
secondarily liable on the bill, are liable to such a payer, and the payer
may cancel indorsements subsequent to his own and reissue the
paper, and it will be valid as against the prior parties.
Payment by Third Persons
If payment is made by a third person, the instrument is not discharged
because payment is not made by the person principally liable
Not any one who desires may pay the instrument and then recover of the
maker. He must be a person who has in some way made himself liable for
the payment of the instrument.
EXCEPTION:
Where an instrument has been protested and
someone voluntarily makes payment supra protest or for honor. And
if the instrument was to give money in payment, the instrument
is discharged.
Summary of Discharge by Payment
1. Payment by a person ultimately liable, whatever his position in the
paper, is a discharge of the instrument
2. Payment by an accommodation party isnt a discharge of the
instrument, whatever his position thereon and whether the
indorsement be regular or anomalous
3. Payment by the drawer or indorser is not a discharge of the instrument.

B. DISCHARGE OF PARTIES SECONDARILY LIABLE

When persons secondarily liable on the instrument are discharged
1. By any act which discharges the instrument
2. By the intentional cancellation of his signature by the holder

a) No consideration is necessary to support a discharge by intentional

cancellation of an endorsers signature by holder.
3. By the discharge of a prior party
(a) Discharge of a party by intentional cancellation of his signature also
operates to discharge parties subsequent to the party discharged.
(b) The rule only applies to discharge by the act of the holder and not to
discharges by operation of law, such as insolvency.
4. By a valid tender or payment made by a prior party
5. By a release of the principal debtor unless the holders right of recourse
against the party secondarily liable is expressly reserved
6. By any agreement binding upon the holder to extend the time of payment or
to postpone the holders right to enforce the instrument unless made with
the assent of the party secondarily liable or unless the right of recourse
against such party is expressly reserved. (Sec. 120, NIL)
7. Failure to make due presentment (Sec. 70, 144)
8. Failure to give notice of dishonor
9. Certification of check at instance of holder
10. Reacquisition by prior party
where instrument negotiated back to a prior party, such party may reissue
and further negotiate, but not entitled to enforce payment vs. any
intervening party to whom he was personally liable
where instrument is paid by party secondarily liable, its not discharged, but
a. the party so paying it is remitted to his former rights as regard to all
prior parties
b. and he may strike out his own and all subsequent indorsements, and
again negotiate instrument, except
where its payable to order of 3rd party and has been paid by drawer
where its made/accepted for accommodation and has been paid by party
accommodated
In the discharging of persons secondarily liable:
(a) The liability of a party secondarily liable is subsidiary.
(b) His liability is similar (but not exactly the same) to that of a guarantor.

(c) Endorsers are liable in the order in which they endorse.

GENERAL PROCEDURES TO CHARGE PERSON SECONDARILY
LIABLE:
1. In the three cases required by law, presentment for acceptance to the
drawee or negotiation within a reasonable time after acquisition is required
(Secs. 143 and 144, NIL), unless excused. (Sec. 148, NIL). In all other
cases, there is no need for presentment for acceptance.
2. If bill is dishonored by non-acceptance: (a) notice of dishonor by nonacceptance must be given to persons secondarily liable (Sec. 80) unless
excused (Sec. 117); and (b) in case of foreign bills, protest for dishonor by
non-acceptance must be made, unless excused (Secs. 117 and 159, NIL).
3. But if the bill is accepted, or if the bill is not required to be presented for
acceptance, it must be presented for payment to the persons primarily liable
(Sec. 71, NIL), unless excused. (Sec. 82, NIL).
4. If the bill is dishonored by nonpayment then:
A notice of dishonor by nonpayment must also be given to persons
secondarily liable (Sec. 80, NIL), unless excused; and
In case of foreign bill a protest for dishonor by nonpayment must be made
(Sec. 152, NIL), unless excused.

C. RIGHT OF PARTY WHO DISCHARGED INSTRUMENT

Right of party who discharges instrument (Sec. 121, NIL)
Where the instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former rights (e.g. right
to Collect) as regard all prior parties and he may strike out his own and all
subsequent indorsements and again negotiate the instrument (to new partiesbut not to subsequent parties) except:
1) Where the bill of exchange is payable to the order of a third person and
has been paid by the drawer himself; and
2) Where it was made or accepted for accommodation and has been paid by
the party accommodated.
The party secondarily liable who pays will have the effect of discharging
the party paying

 The party paying is remitted to his former rights against parties prior to
him; if he was formerly a holder in due course, even if at the time of
payment he already had notice of the defects of the title, he can enforce
his rights against any of the prior parties free from defenses.
D. RENUNCIATION BY HOLDER
As a Rule:
The holder may expressly renounce his rights against any party to the
instrument before, at, or after its maturity. (Sec. 122, NIL)
An absolute and unconditional renunciation of his rights against the
principal debtor made at or after the maturity of the instrument
discharges the instrument.
However:
A renunciation does not affect the rights of a holder in due course
without notice.
A renunciation must be in writing unless the instrument is delivered up
to the person primarily liable thereon. [Section 122, Negotiable
Instruments Law]
Renunciation by a holder discharges an instrument when:
a.
b.
c.
d.

it is absolute and unconditional

made in favor of a person primarily liable
made at or after maturity of the instrument
in writing or the instrument is delivered up to the person primarily
liable (Sec. 122, NIL )

Section 122, NIL applies only to renunciation by the unilateral act of the
holder without consideration and in cases where the instrument is not
delivered up to the person intended to be released
Renunciationact of surrendering a right or claim without recompense but
it can be applied with equal propriety to the relinquishing of a
demand upon an agreement supported by a consideration
if renounced in favor of a party secondarily liable, only he is exonerated
from liability and all parties subsequent to him
discharge by novation is allowed

XIII. MATERIAL ALTERATION

Material Alteration - Any change in the instrument which affects or changes the
liability of the parties in any way.
A. CONCEPT
There is no distinction between fraudulent and innocent alteration
An alteration is said to be material if it alters the effect of the instrument. In
other words, a material alteration is one which changes the items which are
required to be stated under Sec.1, NIL. ( PNB v. CA et al. 256 SCRA 491)
What constitutes a material alteration
Under Section 125 NIL, any alteration which changes the following are
considered material alterations:
1.
2.
3.
4.
5.
6.

The date;
The sum payable, either for principal or interest;
The time or place of payment:
The number or the relations of the parties;
The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is specified,
or any other change or addition which alters the effect of the instrument in
any respect, is a material alteration. (See also Metropolitan Bank and
Trust Company vs. Cabilzo, G.r. No. 154469, December 6, 2006)

Does the alteration on the serial number of the check constitute material
alteration?
A serial number is an item which is not an essential requisite for
negotiability under Sec. 1 of NIL, and which does not affect the right of the
parties, hence its alteration is not material. (PNB v. CA, 256 SCRA 491,
1999 BEQ)
No. The alteration on the serial numbers do not constitute material
alteration within the contemplation of the Negotiable instruments Law. An
alteration is said to be material if it alters the effect of the instrument. It
means an authorized change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized addition of words or
numbers or other change to an incomplete instrument relating to the

obligation of a party. In other words, a material alteration is one which

changes the items which are required to be stated under Section 1 of the NIL
(THE INTERNATIONAL CORPORATE BANK, INC. v. COURT OF
APPEALS, G.R. No. 129910, September 5, 2006)
B. EFFECT OF MATERIAL ALTERATION
General rule:
When materially altered, without the consent of all parties liable, the
instrument is avoided except as against:
1. The party who has made the alteration
2. The party who authorized or assented to the alteration.
3. Subsequent indorsers
Exception:
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. [Section 124, Negotiable Instruments
Law; See also Metropolitan Bank and Trust Company vs. Cabilzo, G.R. No.
154469, December 6, 2006]
The EFFECTS of alteration:
1. Alteration by a PARTY
Material alteration by the holder discharged the instrument and all prior
parties thereto who did not give their consent to such alteration.
Whether the alteration made is favorable or unfavorable to the party
making the alteration, no distinction as to the effect is made. The intent of
the law is to preserve the integrity of the negotiable instrument.
2. Alteration by a STRANGER ( SPOLIATION)
If subsequently negotiated to a non-Holder in Due CourseA material
alteration avoids the instrument as against any prior party who has not
assented to the alteration.
If subsequently negotiated to a Holder in Due CourseHe may enforce
payment thereof according to its original tenor regardless of whether the
alteration was innocent or fraudulent.

 Cases on Material Alteration:

MONTINOLA v PNB (1951)

The insertion of the words Agent Philippine National Bank
converted the bank from a mere drawee to a drawer and therefore
changes its liability, constitutes material alteration of the instrument
without consent of the parties liable thereon and so discharges the
instrument. Drawee bank is not liable.

HONGKONG & SHANGHAI BANK v PEOPLES BANK (1970)

The failure of the drawee bank to call the attention of the
collecting bank as to such alteration until after the lapse of 27 days
would negate whatever right it might have had. The remedy of the
drawee bank is against the party responsible for the forgery or
alteration.

REPUBLIC BANK v CA (1991)

The collecting bank is protected by the24-hour clearing house
rule from the liability to refund the amount paid by the drawee bank.
[Note: A much recent Circular changed the point of reckoning for
the return of the altered check from within 24 hours from the clearing
to within 24 hours from the discovery of the alteration]

ASSOCIATED BANK v CA (1996)

The rule mandates that the checks be returned within twentyfour hours after discovery of the forgery but in no event beyond the
period fixed by law for filing a legal action. The rationale of the rule
is to give the collecting bank (which indorsed the check) adequate
opportunity to proceed against the forger. If prompt notice is not
given, the collecting bank may be prejudiced and lose the opportunity
to go after its depositor.
FROM DRAWER: drawee has no right to seek reimbursement
from drawer for its erroneous payment

METROBANK v CABILZO (2006)

In addition, the bank on which the check is drawn, known as
the drawee bank, is under strict liability to pay to the order of the
payee in accordance with the drawers instructions as reflected on the
face and by the terms of the check. Payment made under materially
altered instrument is not payment done in accordance with the
instruction of the drawer.
When the drawee bank pays a materially altered check, it
violates the terms of the check, as well as its duty to charge its
clients account only for bona fide disbursements he had made.
Since the drawee bank, in the instant case, did not pay according to
the original tenor of the instrument, as directed by the drawer, then it
has no right to claim reimbursement from the drawer, much less, the
right to deduct the erroneous payment it made from the drawers
account which it was expected to treat with utmost fidelity.

BPI v BUENAVENTURA (2005)

It [the bank] should be able to detect alterations, erasures,
superimpositions or intercalations thereon, for these instruments are
prepared, printed and issued by itself, it has control of the drawer's
account, and it is supposed to be familiar with the drawer's signature.
It should possess appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments
There is nothing inequitable in such a rule for if in the regular
course of business the check comes to the drawee bank which, having
the opportunity to ascertain its character, pronounces it to be valid
and pays it, as in this case, it is not only a question of payment under
mistake, but payment in neglect of duty which the commercial law
places upon it, and the result of its negligence must rest upon it.
REMEDY: Unless a forgery or alteration is attributable to the
fault or negligence of the drawer himself, the remedy of the drawee
bank that negligently clears a forged and/or altered check for
payment is against the party responsible for the forgery or alteration,
otherwise, it bears the loss. (BPI v Buenaventura, 2005)

XIV. ACCEPTANCE
A. DEFINITION

Acceptance is the signification by the drawee of his assent to the order of

the drawer. It is an act by which a person on whom the BOE is drawn assents
to the request of the drawer to pay it. (Sec. 132, NIL)
The term, ACCEPTANCE refers only to a bill of exchange. A
promissory note is not to be presented for acceptance.
The purpose of an acceptance is to bind the DRAWEE, because the
drawee does not become a party unless he accepts. Upon an acceptance
by the drawee, he becomes an ACCEPTOR and the bill, in effect
becomes a note. The drawee assumes the liability of a maker who is
primarily liable.
FORMAL REQUISITES OF ACCEPTANCE:
a. the signification by the drawee of his assent to the order of the drawer
b. "Acceptance" completed by delivery or notification (Sec. 19, NIL)
c. in writing and signed by the drawee; must not express that the
drawee will perform his promise by any other means than the
payment of money. (Sec.132, NIL); does not change the implied
promise of acceptor to pay only in money
o Thus, there is no valid oral or implied acceptance except in case of
Sec. 137 (Constructive Acceptance)
B. MANNER
Manner of acceptance
1. Actual/Express Acceptance
Requisites of actual acceptance:
a. In writing and signed by the drawee.
b. Must not express that the drawee will perform his promise by any other
means than the payment of money. (Section 132, NIL)
c. The acceptance must be communicated or delivered to the holder
A HOLDER OF A BILL PRESENTING THE SAME FOR ACCEPTANCE
HAS THE RIGHT TO:
1) Require that acceptance be written on the bill and, if such request is
refused, may treat the bill as dishonored (Sec. 133, NIL)
Where an acceptance is written on a paper other than the bill itself, it
does not bind the acceptor except in favor of a person to whom it is

shown and who, on the faith thereof, receives the bill for value.
(Section 134, NIL)
2) Refuse to accept a qualified acceptance and may treat it as dishonored
(Sec. 142, NIL)

SUMCAD v. PROVINCE OF SAMAR

1956
There was implied acceptance in view of the circumstances of
the case (furnishing of photostatic copies, presentment for
certification) by voluntary assuming the obligation of holding so
much deposit as would be sufficient to cover the amount of the
check.
2. Constructive Acceptance:
Where the drawee to whom the bill has been delivered
1. destroys it OR
2. refuses within 24 hrs after such delivery or within such time as is
given, to return the bill accepted or not. (Sec. 137, NIL)
- Drawee becomes primarily liable as an acceptor.
_ Mere retention is equivalent to acceptance

Where bill is duly presented and is not accepted within prescribed time,
the person presenting it must treat the bill as dishonored by
nonacceptance or he loses right of recourse against the drawer and
indorsers. (Sec. 150, NIL)

If there is not demand for the return of the bill and the drawee keeps it
until after the expiration of said period without expressly accepting or
refusing it; two views:
a. Constitutes constructive notice
b. Constitutes dishonor because Sec.137, NIL uses the word
"refuses"
- Acceptance, if given, will retroact to date of presentation.

3. General Acceptance
A general acceptance assents without qualification to the order of the
drawer.

 What constitutes a general acceptance

An acceptance to pay at a particular place is a general acceptance
unless it expressly states that the bill is to be paid there only and not
elsewhere. (Sec. 140, NIL)
4. Qualified Acceptance
A qualified acceptance in express terms varies the effect/tenor of the bill
as drawn. (Sec. 139, NIL)
An acceptance is qualified which is:
1. Conditional; which makes payment by the acceptor dependent on the
fulfillment of a condition therein stated;
2. Partial; an acceptance to pay part only of the amount for which the
bill is drawn;
3. Local; an acceptance to pay only at a particular place;
4. Qualified as to time;
5. The acceptance of some, one or more of the drawees but not of all.
(Sec. 141, NIL)
So if a bill for P500,000 was accepted but only for P300,000, the
acceptance is deemed to be a qualified one because the acceptance
was not in accordance with the tenor of the bill. The acceptor will then
be liable for the amount of P300,000 which is the tenor of his
acceptance, not for P500,000 which is the tenor of the bill.

WHAT MAY
CIRCUMSTANCES?

THE

HOLDER

DO

UNDER

THE

Rights of parties as to qualified acceptance

1. The holder may refuse to take a qualified acceptance and if he
does not obtain an unqualified acceptance, he may treat the bill as
dishonored by non-acceptance. (He now must furnish the parties
secondarily liable, a notice of dishonor)
2. Where a qualified acceptance is taken, the drawer and indorsers are
discharged from liability on the bill unless they have expressly or
impliedly authorized the holder to take a qualified acceptance, or
subsequently assent thereto.

3. When the drawer or an indorser receives notice of a qualified

acceptance, he must, within a reasonable time, express his dissent to the
holder or he will be deemed to have assented thereto. (Sec. 142, NIL)

ACCEPTANCE ON A SEPARATE INSTRUMENT

Extrinsic acceptance - acceptance is written on a paper other than the bill
itself; doesnt bind the acceptor except in favor of a person to whom it is
shown and who, on the faith thereof, receives the bill for value. (Sec. 134,
NIL); acceptance of an existing bill
Virtual acceptance - unconditional promise in writing to accept a bill
before it is drawn; deemed an actual acceptance in favor of every person
who, upon the faith thereof, receives the bill for value. (Sec. 135, NIL);
acceptance of future bill
In both cases, the acceptance must clearly and unequivocally identify the
bill to which the acceptance refers.

C. TIME FOR ACCEPTANCE

Time allowed drawee to accept
The drawee is allowed twenty-four hours after presentment in which to
decide whether or not he will accept the bill; the acceptance, if given, dates as
of the day of presentation. (Sec. 136, NIL)
A bill may be accepted:
a. before it has been signed by the drawer, or
b. while otherwise incomplete, or
c. when it is overdue, or
d. after it has been dishonored by a previous refusal to accept, or by non
payment.
But when a bill payable after sight is dishonored by non-acceptance and
drawee subsequently accepts it, the holder, in the absence of different
agreement, is entitled to have bill accepted as of date of the 1st
presentment. (Sec. 138, NIL); Sec. 138, NIL allows acceptance to be
made while the bill is incomplete.
D. RULES GOVERNING ACCEPTANCE
24-Hour Clearing House Rule (1996 BEQ)
The Central Bank, in accordance with its rule-making authority issued the
24-hour clearing house rule. Whatever remedy the plaintiff has would lie not

against the defendant bank but as against the party responsible for changing
the name of the payee. Its failure to call the attention of defendant bank as to
such alteration until the lapse of 27 days would, in the light of the above
Central Bank Circular, negate whatever right it may have had against
defendant bank (Hong Kong and Shanghai Banking Corp. vs. Peoples
Republic Bank and Trust co., 35 SCRA 140)
The 24-hour clearing house rule is a valid rule applicable to commercial
banks. It is true that when an endorsement is forged, the collecting bank or last
endorser, as a general rule, bears the loss. But the unqualified endorsement of
the collecting bank on the check should be read together with the 24-hour
regulation on clearing house operation. Thus, when the drawee bank fails to
return a forged or altered check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from liability (Republic Bank
vs. CA; 196 SCRA 100).
Under the clearing house rules, the failure to return within the
prescribed time will be deemed payment or acceptance of the check.
A bill of exchange does not need to be presented for acceptance at all times,.
In order to know whether or not presentment for acceptance is necessary, you
have to look at the bill.
When presentment for acceptance is necessary:
a.
If necessary to fix the maturity of the bill
b.
If it is expressly stipulated that it shall be presented for acceptance
c.
If the bill is drawn payable elsewhere than the residence or place of
business of the drawee (Sec. 143 NIL)
So when the bill is written as Pay at sight.. the drawee must see the bill
first and he can only see the bill if it is to be presented for acceptance. Also if
the bill is written as : Pay. 30 days after sight, the bills maturity date is 30
dates after the drawee sees the bill. Hence, it must be presented for
acceptance. If the drawees place of business is in Manila and the bill is drawn
payable in Cavite, then it must be presented for acceptance.
If by the terms, the bill is to be presented for acceptance, then it must be
presented. If the bill needs a presentment for acceptance, then it must be
so presented. If it is not presented for acceptance, the drawer and the
indorsers will be discharged from liability. Therefore, the holder must
present it for acceptance or he negotiates the bill within a reasonable
time

 Liability of drawee retraining or destroying bill

Where a drawee to whom a bill is delivered for acceptance destroys the
same, or refuses within twenty-four hours after such delivery or within such
other period as the holder may allow, to return the bill accepted or nonaccepted to the holder, he will be deemed to have accepted the same. (Sec. 137,
NIL)
Acceptance of incomplete bill
A bill may be accepted before it has been signed by the drawer, or while
otherwise incomplete, or when it is overdue, or after it has been dishonored by
a previous refusal to accept, or by non payment. But when a bill payable after
sight is dishonored by non-acceptance and the drawee subsequently accepts it,
the holder, in the absence of any different agreement, is entitled to have the bill
accepted as of the date of the first presentment. (Section 138, NIL)

XV. PRESENTMENT FOR ACCEPTANCE

It is the production of a Bill of Exchange to the drawee for his acceptance.
Purpose:
To get acceptance of the drawer for purpose of making him primarily liable
as an acceptor. Presentment is also prerequisite to the accrual of secondary
liability against the drawer and the indorsers.
A. TIME/PLACE/MANNER OF PRESENTMENT

The REQUISITES of Presentment:

1. Made within reasonable time - is meant not more than 6 months from the
date of issue. Beyond said period, it is unreasonable time and the check
becomes stale.
2. By holder or his agent
3. At a reasonable hour on a business day
4. Before bill overdue.
5. To the drawee or some person authorized to accept or refuse acceptance
on his behalf; and
a. bill addressed to drawees not partners, MUST be made to them all unless
one has authority to accept or refuse acceptance for all;

b. drawee is dead, MAY be made to his personal representative;

c. drawee has been adjudged a bankrupt or an insolvent or has made an
assignment for the benefit of creditors, MAY be made (1) to him or (2)
to his trustee or assignee.
When is presentment for acceptance must be made?
In the following cases:
1. Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of the
instrument; or
2. Where the bill expressly stipulates that it shall be presented for acceptance;
or
3. Where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee.
In no other case is presentment for acceptance necessary in order to
render any party to the bill liable. (Sec. 143, NIL)
Presentment; how made
Presentment for acceptance must be made by or on behalf of the holder at a
reasonable hour, on a business day and before the bill is overdue, to the drawee
or some person authorized to accept or refuse acceptance on his behalf; and
1. Where a bill is addressed to two or more drawees who are not partners,
presentment must be made to them all unless one has authority to accept or
refuse acceptance for all, in which case presentment may be made to him
only;
2. Where the drawee is dead, presentment may be made to his personal
representative;
3. Where the drawee has been adjudged a bankrupt or an insolvent or has
made an assignment for the benefit of creditors, presentment may be made
to him or to his trustee or assignee. (Sec. 145, NIL)
On what days presentment may be made (Sec. 146, NIL)
A bill may be presented for acceptance on any day on which negotiable
instruments may be presented for payment under the provisions of Sections 72
and 85 of the Negotiable Instruments Law. When Saturday is not otherwise a
holiday, presentment for acceptance may be made before twelve o'clock noon
on that day.
Sec. 72, NIL at a reasonable hour on a business day
Sec. 85, NIL

at the time fixed therein without grace.

Instruments falling due or becoming payable on Saturday - next
succeeding business day
EXCEPT instruments payable on demand [at the option of the
holder] before twelve o'clock noon on Saturday WHEN that
entire day is not a holiday.

Presentment where time is insufficient

Where the holder of a bill drawn payable elsewhere than at the place of
business or the residence of the drawee has no time, with the exercise of
reasonable diligence, to present the bill for acceptance before presenting it for
payment on the day that it falls due, the delay caused by presenting the bill for
acceptance before presenting it for payment is excused and does not discharge
the drawers and indorsers. (Sec. 147, NIL)
Where presentment is excused
Presentment for acceptance is excused and a bill may be treated as
dishonored by non-acceptance in either of the following cases:
1. Where the drawee is dead, or has absconded, or is a fictitious person or a
person not having capacity to contract by bill.
2. Where, after the exercise of reasonable diligence, presentment cannot be
made.
3. Where, although presentment has been irregular, acceptance has been
refused on some other ground. (Sec. 148, NIL)
B. EFFECT OF FAILURE TO MAKE PRESENTMENT
When failure to present releases drawer and indorser)
Except as herein otherwise provided, the holder of a bill which is required
to be presented for acceptance must either present it for acceptance or
negotiate it within a reasonable time. If he fails to do so, the drawer and all
indorsers are discharged. (Sec. 144, NIL)

C. DISHONOR BY NON-ACCEPTANCE
When dishonored by non-acceptance
A bill is dishonored by non-acceptance:

1. When it is duly presented for acceptance and such an acceptance as is

prescribed by this Act is refused or cannot be obtained; or
2. When presentment for acceptance is excused and the bill is not accepted.
(Sec. 149)
Duty of holder where bill not accepted
must treat the bill as dishonored by nonacceptance or he loses the right of
recourse against the drawer and indorsers. (Sec. 150, NIL)
Rights of a holder where bill not accepted
immediate right of recourse against the drawer and indorsers and no
presentment for payment is necessary. (Sec. 151, NIL)
To whom notice of dishonor must be given
Except as herein otherwise provided, (1) to the drawer and (2) to each
indorser, and any drawer or indorser to whom such notice is not given is
discharged. (Sec.89, NIL)
Effect of omission to give notice of non-acceptance
does not prejudice the rights of a HDC subsequent to the omission. (Sec.
117, NIL)
XVI. PROMISSORY NOTES

Promissory note, defined

A negotiable promissory note within the meaning of this Act is 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. Where a note is drawn to the
maker's own order, it is not complete until indorsed by him. (Sec. 184, NIL)
Parties:
a. Maker one who makes a promise and sign the instrument
b. Payee one to whom the promise is made or the instrument is payable.

What factors would negate personal liability on the part of corporate

officers who signed a promissory note for a loan obtained by the
corporation?
The inference that they signed in their individual capacities would be
negated by the following facts:
a) The name and address of the corporation appeared on the space provided for
Maker/Borrower;
b) The officers had only had one set of signatures on the instrument, when
there should have been two, if indeed they have intended to be bound
solidarily the first as representatives of the corporation, and the second as
themselves in their individual capacities;
c) They did not sign under the spaces provided for co-maker, and neither
where their addresses reflected there; and
d) At the back of the promissory note, they signed above the words authorized
representative.
Requisites of a Negotiable Note (PN): Key: (SUDO)
It must:
a. be in writing signed by the drawer
b. contains an unconditional promise or order to pay a sum certain in money
c. be payable on demand or at a fixed determinable future time
d. be payable to order or to bearer (Sec. 1 NIL)
Kinds of promissory notes
1. Certificate of deposit
2. Bond
3. Bank note
4. Due bill
5. Mortgage note
6. Title-retaining note
7. Judgment note
OTHER FORMS OF PROMISSORY NOTE
1. Due bill , An instrument whereby one person acknowledges his
indebtedness to another and promises to pay a sum certain in money .
2. Bonds, which are in the nature of PN.
3. Certificate of Deposit issued by banks payable to depositor or his order, or
to bearer
Promissory Note vs. Bill of Exchange

Promissory Note

Bill of Exchange

Unconditional promise
Involves 2 parties
Maker primarily liable
Only 1 presentment - for payment

Unconditional order
Involves 3 parties
Drawer only secondarily liable
Generally 2 presentments - for
acceptance and for payment
A bill drawn payable to drawer's own a note drawn payable to maker's own
order is complete without indorsement
order is not complete until indorsed by
him
must be presented for acceptance in there is no need of presentment
some cases
Reasonable time from last negotiation
reasonable time from issue

XVII. CHECKS
A. DEFINITION
Check defined
A check is a bill of exchange drawn on a bank payable on demand. For a
check to be negotiable, it must conform to the requirements in Sec. 1 of the
Negotiable Instruments Law.
Checks have the character of negotiability, but at the same time, they may
constitute evidence of indebtedness in the amounts stated in the faces of those
instruments (Go v. Bacaron, 472 SCRA 229, 2007 BEQ)
Except as herein otherwise provided, the provisions of this Act applicable to
a bill of exchange payable on demand apply to a check. (Sec. 185, NIL)
A check of itself does not operate as an assignment of any part of the funds
to the credit of the drawer with the bank, and the bank, is not liable to the
holder, unless and until it accepts or certifies the check.
A check is payable on demand even when not so stated on its face.
A check is supposed to be drawn against a previous deposit of funds, while
an ordinary need not be drawn against a deposit.
A check need not be presented for acceptance.

 Promissory Note vs. Check

Promissory Note

CHECK

- There are two (2) parties, the maker

and the payee
- May be drawn against any person, not
necessarily a bank
- May be payable on demand or at a
fixed or determinable future time
- A promise to pay

- There are three (3) parties, the drawer,

the drawee bank and the payee
- Always drawn against a bank
-Always payable on demand
- An order to pay

B. KINDS
Kinds of Check
1. Ordinary Check
2. Cashiers Check, - One drawn by the cashier of a bank in the name of the
bank against the bank itself payable to a third person or order.
A cashier's check is a primary obligation of the issuing bank and
accepted in advance by its mere issuance.
3. Certified check , A personal check with guaranteed funds to cover the
payment of the check.
The certification is an agreement whereby the bank against whom a
check is drawn undertakes to pay it on any future time when presented
for payment.
The Certification is equivalent to acceptance and operates as an
assignment of a part of the funds to the creditors.
Discuss the effects of certifying a check
The effects are:
b. It is equivalent to acceptance and is the operative act that makes the
bank liable.
c. It amounts to the assignment of the funds of the drawer in the hands
of the drawee.
d. If obtained by the holder, persons secondarily liable are discharged
4. Voucher Check

5. Travellers Check
6. Managers Check
A check drawn by the manager of a bank in the name of the bank against
the bank itself payable to a third person. .It is similar to a cashiers
check both as to effect and use. A cashiers check is a check of the
banks cashier on his own or another check. In effect, it is a bill of
exchange drawn by the cashier of a bank upon the bank itself, and
accepted in advance by the act of its issuance. It is really the banks
own check and may be treated as a promissory note with the bank as a
maker. The check becomes the primary obligation of the bank which
issues it and constitutes its written promise to pay upon demand. The
mere issuance of it is considered an acceptance thereof. (EQUITABLE
PCI vs. ONG 15 September 2006)
7. Crossed Check ( 2004, 2005 BEQ)
A Crossed Check under accepted banking practice, crossing a check is
done by writing two parallel lines diagonally on the left top portion of
the checks. The crossing is special where the name of the bank or a
business institution is written between the two parallel lines, which mean
that the drawee should pay only with the intervention of that company.
The crossing is special where the name of the bank or a business
institution is written between the two parallel lines, which means that the
drawee should pay only with the intervention of that company.
A check which in addition to the usual contents of an ordinary check
contains also the name of a certain banker or business entity through
whom it must be presented for payment.
State the Effects of crossing a check (1996, 2005 BEQ):
In order to preserve the credit worthiness of checks, jurisprudence has
pronounced that crossing of a check should have the following effects:
a. That the check may not be encashed; it may only be deposited with
the bank;
b. That the check may be negotiated only once to a person who has an
account with the bank; and
c. That the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course. (Bataan Cigar v. CA 280
SCRA 643; BPI vs. CA G.R. No. 136202, January 25, 2007)

ASSOCIATED BANK v. CA & REYES

1992
Different department stores issued crossed checks bearing "for payee's
account only" payable to Melissa's RTW. Sayson, acting without authority,
deposited & encashed the checks with Associated Bank.
HELD: Citing State Investment House v IAC, the effects of crossing a
check are:
1. check may not be encashed but only deposited in the bank;
2. check may be negotiated only one -- to one who has an account with a
bank; and
2. the act of crossing the check serves as a warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he
has received the check pursuant to that purpose.
The effects of crossing a check relate to the mode of presentment for
payment.
The law imposes a duty of diligence on the collecting bank to scrutinize
checks deposited with it, for the purpose of determining their genuineness &
regularity.
*Note: Crossed Checks vs. Cancelled Checks (2004 BEQ)
A crossed check is one with two parallel lines drawn diagonally across
its face or across a corner thereof. On the other hand, a cancelled check is
one marked or stamped "paid" and/or "cancelled" by or on behalf of a
drawee bank to indicate payment thereof.
*

State Investment House v IAC (GR 72764 13Jul1989), the SC

considered a crossed check as subjecting a subsequent holder thereof to
the contractual covenants of the payor and the payee.

2. Kinds of Crossed Check:

3. CROSSSED SPECIALLY- The same name of a particular bank or
company is written or appears between them. Tan parallel lines in which
case the drawee-bank must pay the check only upon presentment by such
bank or company (Chan Wan v. Tan Kim 109 Phil 706) on penalty of
being made to pay again by the rightful owner should the first payment
prove to have been erroneous.
4. CROSSED GENERALLY- only the words and Co. are written
between the parallel lines or when none at all is written at all between
said lines.

 The Court has taken judicial cognizance of the practice that a check
with 2 parallel lines in the upper left hand corner means that it could
only be deposited and not converted into cash.
IRON CLAD RULE prohibits the countermanding of payment of
certified checks. (Rep. v. PNB, Dec. 1, 1961)
*Note: The holder must be a holder in due course before the stop payment
order may not be successfully invoked against him. (Mesina v. IAC, 146
SCRA 497, 505)
8. Memorandum Check.
A check in which is written the word "memorandum," "memo" and "mem"
signifying that the drawer engages to pay the bona fide holder absolutely, and
not upon a condition to pay upon presentment of maturity and if due notice of
presentment and non-payment should be given.
It is a check given by a borrower to a lender for the amount of a short loan,
with the understanding that it is not to be presented at the bank, but will be
redeemed by the maker himself when the loan falls due and which
understanding is evidenced by writing the word "memorandum," "memo" or
"mem" on the check.
9. Forged Checks (2006 BEQ)
The legal consequences when a bank honors a forged check are as follows:
When Drawers Signature is Forged: Drawee-bank by accepting the check
cannot set up the defense of forgery, because by accepting the instrument, the
drawee bank admits the genuineness of signature of drawer (BPI Family Bank
vs. Buenaventura G.R. no. 148196, September 30, 2005; Section 23, NIL)
Q. IS DRAWEE BANK LIABLE IF IT PAYS A FORGED
CHECK?
Answer: Yes. A bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. A bank is bound to know the signatures of
its customers; and if it pays a forged check, it must be considered as
making the payment out of its funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was forged.
(See Citibank vs. Sps. Cabamongan, G.R. No. 146918, May 2, 2006)

 Unless a forgery is attributable to the fault or negligence of the drawer

himself, the REMEDY OF THE DRAWEE-BANK IS AGAINST THE
PARTY RESPONSIBLE FOR THE FORGERY. Otherwise, draweebank bars the loss
(BPI Family Bank vs. Buenaventura G.R. no.
148196, September 30, 2005)
A drawee-bank paying on a forged check must be considered as paying
out of its funds and cannot charge the amount to the drawer (Samsung
Construction Co. Phils., v. Far East Bank, G.R. No. 129015, August
13, 2004)
If the drawee-bank has charged drawers account, the latter can recover
such amount from the drawee-bank (Associated Bank v. Court of
Appeals, G.R. No. 107382, January 31, 1996, Bank of P.I. v. Case
Montessori Internationale, G.R. No. 149454, May 28, 2004).
However, the drawer may be precluded or stopped from setting up the
defense of forgery as against the drawee-bank, when it is shown that the
drawer himself had been guilty of gross negligence as to have facilitated
the forgery (Metropolitan Waterworks v. Court of Appeals, G.R. No. L62943, 143 SCRA 20, July 14, 1986).
Note:
In the prosecution for violation of B>P. 22 (Bouncing Checks Law), the
accused must prove that the check was not for a valuable consideration,
otherwise he will be held civilly liable because every negotiable
instrument is deemed prima facie to have been issued for a valuable
consideration, and every person whose signature appears thereon to have
become a party thereto for value. (Section 24, NIL; see also Svendsen
vs. People, G.R. No. 175381, February 26, 2008)
C. PRESENTMENT FOR PAYMENT
(1) TIME
Within what time a check must be presented?
A check must be presented for payment within a reasonable time after its
issue or the drawer will be discharged from liability thereon to the extent of the
loss caused by the delay. (Sec. 186, NIL) Hence, if no loss or injury is shown,
the drawer is not discharged.

CRYSTAL v. CA
1976
Crystal used a check in paying the redemption price of the property
sold at an execution sale. The value of the check had never been
realized because it had either been dishonored or become stale. The
validity of the redemption is in question.
HELD: If the check had been dishonored, the redemption is void.
But if it had only become stale through no fault of the redemptioner,
then it would be unfair to deprive him of the rights he had acquired as
redemptioner, particularly if the value of the check has otherwise
been received or realized. There is a strong showing that the party
had already been paid in full.

VILLANUEVA VS. NITE,

G.R. No. 148211, 25 July 2006
Can the holder sue the drawee bank if the latter refuses payment of a
check notwithstanding sufficiency of funds?
Held: NO. a check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank, and the
bank is not liable to the holder, unless and until it accepts or certifies
the check (Sec. 189). Thus, if a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the payee-holder cannot
sue the bank. The payee-holder should instead sue the drawer who
might in turn sue the bank. Section 189 is a sound law based on logic
and established legal principles; no privity of contract exists between
the drawee-bank and the payee.
Explain the meaning of check kiting
It refers to the wrongful practice of taking advantage of the float, the time
that elapses between the deposit of the check in one bank and its collection at
another. In anticipation of the dishonor of the check that was deposited, the
original check will be replaced with another worthless check (Notes and Cases
on Banks, Negotiable Instruments and other commercial Documents, Aquino
2006 ed)

(2) EFFECT OF DELAY

Presentment should be made within a reasonable time (not more than 6 months
from the date of issue) Beyond said period, it is unreasonable time and the
check becomes stale and under Sec. 186 NIL the drawer will be discharged
from liability thereon to the extent of the loss caused by the delay.
ARCEO, JR. VS. PEOPLE OF THEPHILIPPINES,
G.R. No. 142641 (17 July 2006)
The check was presented to the drawee bank 120 days from the date
thereof. Determine if the drawer has been discharged from the duty
to maintain sufficient funds therefore?
HELD: NO. According to current banking practice, the reasonable
period within which to present a check to the drawee bank is six
months; thereafter, the check becomes stale and the drawer is
discharged from liability thereon to the extent of the loss caused by
the delay. Thus, presentment of the check to the drawee bank 120
days (four months) after its issue was still within the allowable
period. The drawer was freed neither from the obligation to keep
sufficient funds in his account nor from liability resulting from the
dishonor of the check.

BANK OF AMERICA, NT AND SA

vs.
ASSOCIATED CITIZEN BANK ET AL/ASSOCIATED
CITIZENS BANK VS. BA FINANCE CORPORATION, ET.
AL.
G.R. NOS. 141001/141018, May 21, 2009
On 6 October 1978, BA-Finance Corporation (BA-Finance)
entered into a transaction with Miller Offset Press, Inc. (Miller),
through the latters authorized representatives, i.e., Uy Kiat Chung,
Ching Uy Seng, and Uy Chung Guan Seng. BA-Finance granted
Miller a credit line facility through which the latter could assign or
discount its trade receivables with the former. On 20 October 1978,
Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng
executed a Continuing Suretyship Agreement with BA-Finance
whereby they jointly and severally guaranteed the full and prompt
payment of any and all indebtedness which Miller may incur with
BA-Finance.

Miller discounted and assigned several trade receivables to

BA-Finance by executing Deeds of Assignment in favor of the latter.
In consideration of the assignment, BA-Finance issued four checks
payable to the "Order of Miller Offset Press, Inc." with the notation
"For Payees Account Only." These checks were drawn against Bank
of America. Account No. 989 is a joint bank account under the
names of Ching Uy Seng and Uy Chung Guan Seng. Associated
Bank stamped the checks with the notation "all prior endorsements
and/or lack of endorsements guaranteed," and sent them through
clearing. Later, the drawee bank, Bank of America, honored the
checks and paid the proceeds to Associated Bank as the collecting
bank.
Miller failed to deliver to BA-Finance the proceeds of the
assigned trade receivables. Consequently, BA-Finance filed a
Complaint against Miller for collection of the amount
of P731,329.63 which BA-Finance allegedly paid in consideration of
the assignment.
a) Is Bank of America liable to pay BA-Finance the amount of the
four checks?
b) Is Associated Bank liable to reimburse Bank of America the
amount of the four checks
d) Are Ching Uy Seng and/or Uy Chung Guan Seng liable to pay
Associated Bank the amount of the four checks?
HELD:
a) Yes. The bank on which a check is drawn, known as the drawee
bank, is under strict liability, based on the contract between the
bank and its customer (drawer), to pay the check only to the payee
or the payees order. The drawers instructions are reflected on
the face and by the terms of the check. When the drawee bank
pays a person other than the payee named on the check, it does
not comply with the terms of the check and violates its duty to
charge the drawers account only for properly payable items.
Thus, the Court ruled in Philippine National Bank v. Rodriguez
G.R. No. 170325, September 26, 2008, that a drawee should
charge to the drawers accounts only the payables authorized by
the latter; otherwise, the drawee will be violating the instructions

of the drawer and shall be liable for the amount charged to the
drawers account.
Among the different types of checks issued by a drawer is the
crossed check. The Negotiable Instruments Law is silent with
respect to crossed checks, although the Code of Commerce makes
reference to such instruments. The Court has taken judicial
cognizance of the practice that a check with two parallel lines in
the upper left hand corner means that it could only be deposited
and could not be converted into cash. Thus, the effect of crossing
a check relates to the mode of payment, meaning that the drawer
had intended the check for deposit only by the rightful person,
i.e., the payee named therein. The crossing may be "special"
wherein between the two parallel lines is written the name of a
bank or a business institution, in which case the drawee should
pay only with the intervention of that bank or company, or
"general" wherein between two parallel diagonal lines are written
the words "and Co." or none at all, in which case the drawee
should not encash the same but merely accept the same for
deposit. In Bataan Cigar v. Court of Appeals, the Court
enumerated the effects of crossing a check as follows: (a) the
check may not be encashed but only deposited in the bank; (b) the
check may be negotiated only once to one who has an account
with a bank; and (c) the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check
pursuant to that purpose; otherwise, he is not a holder in due
course.
In this case, the four checks were drawn by BA-Finance and
made payable to the "Order of Miller Offset Press, Inc." The
checks were also crossed and issued "For Payees Account Only."
Clearly, the drawer intended the check for deposit only by Miller
Offset Press, Inc. in the latters bank account. Thus, when a
person other than Miller, i.e., Ching Uy Seng, a.k.a. Robert
Ching, presented and deposited the checks in his own personal
account (Ching Uy Sengs joint account with Uy Chung Guan
Seng), and the drawee bank, Bank of America, paid the value of
the checks and charged BA-Finances account therefor, the
drawee Bank of America is deemed to have violated the
instructions of the drawer, and therefore, is liable for the amount
charged to the drawers account.

b) Yes. A collecting bank where a check is deposited, and which

endorses the check upon presentment with the drawee bank, is an
endorser. Under Section 66 of the Negotiable Instruments Law,
an endorser warrants "that the instrument is genuine and in all
respects what it purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that the instrument is at
the time of his endorsement valid and subsisting." The Court has
repeatedly held that in check transactions, the collecting bank or
last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is
an assertion that the party making the presentment has done its
duty to ascertain the genuineness of the endorsements.
When Associated Bank stamped the back of the four checks
with the phrase "all prior endorsements and/or lack of
endorsement guaranteed," that bank had for all intents and
purposes treated the checks as negotiable instruments and,
accordingly, assumed the warranty of an endorser. Being so,
Associated Bank cannot deny liability on the checks. In Banco de
Oro Savings and Mortgage Bank v. Equitable Banking
Corporation, The Court held that:
x x x the law imposes a duty of diligence on the collecting
bank to scrutinize checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank
being primarily engaged in banking holds itself out to the public
as the expert and the law holds it to a high standard of conduct. x
x x In presenting the checks for clearing and for payment, the
defendant [collecting bank] made an express guarantee on the
validity of "all prior endorsements." Thus, stamped at the back of
the checks are the defendants clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff [drawee] would
not have paid on the checks. No amount of legal jargon can
reverse the clear meaning of defendants warranty. As the
warranty has proven to be false and inaccurate, the defendant is
liable for any damage arising out of the falsity of its
representation.
Associated Bank was also clearly negligent in disregarding
established banking rules and regulations by allowing the four
checks to be presented by, and deposited in the personal bank

account of, a person who was not the payee named in the checks.
The checks were issued to the "Order of Miller Offset Press,
Inc.," but were deposited, and paid by Associated Bank, to the
personal joint account of Ching Uy Seng (a.k.a. Robert Ching)
and Uy Chung Guan Seng. It could not have escaped Associated
Banks attention that the payee of the checks is a corporation
while the person who deposited the checks in his own account is
an individual. Verily, when the bank allowed its client to collect
on crossed checks issued in the name of another, the bank is
guilty of negligence. As ruled by The Court in JaiAlai Corporation of the Philippines v. Bank of the Philippine
Islands 160 Phil., 741, 747-748 (1975), one who accepts and
encashes a check from an individual knowing that the payee is a
corporation does so at his peril. Accordingly, we hold that
Associated Bank is liable for the amount of the four checks and
should reimburse the amount of the checks to Bank of America.
c) Yes. It is well-settled that a person who had not given value for the
money paid to him has no right to retain the money he
received. The Court, therefore, quotes with approval the ruling of
the Court of Appeals in its decision:
It appearing, however, from the evidence on record that since
Ching Uy Seng and/or Uy Chung Guan Seng received the
proceeds of the checks as they were deposited in their personal
joint account with Associated Bank, they should, therefore, be
obliged to reimburse Associated Bank for the amount it has to pay
to Bank of America, in line with the rule that no person should be
allowed to unjustly enrich himself at the expense of another.