Negotiable Instruments Law Summary

6 2005 CENTRALIZED BAR OPERATIONS
NEGOTIABLE INSTRUMENTS LAW (NIL)

(Act No. 2031, effective June 2, 1911)
I. GENERAL CONCEPTS with NI as they are negotiated

from one person to another; or
NEGOTIABLE INSTRUMENT (NI) in the course of negotiation of
A written contract for the payment of negotiable instruments, a series
money which complies with the of juridical ties between the
requirements of Sec. 1 of the NIL, which parties thereto arise either by
by its form and on its face, is intended law or by privity.
as a substitute for money and passes
from hand to hand as money, so as to Applicability:
give the holder in due course (HDC) the General Rule: The provisions of the
right to hold the instrument free from NIL are not applicable if the instrument
defenses available to prior parties. involved is not negotiable.
(Reviewer on Commercial Law, Exception: In the case of Borromeo
Professors Sundiang and Aquino) vs. Amancio Sun, 317 SCRA 176, the SC
Functions: (Bar Review Materials in applied Section 14 of the NIL by analogy
Commercial Law, Jorge Miravite, 2002 in a case involving a Deed of Assignment
ed.) of shares which was signed in blank to
1. To supplement the currency of facilitate future assignment of the same
the government. shares. The SC observed that the
2. To substitute for money and situation is similar to Section 14 where
increase the purchasing medium. the blanks in an instrument may be filled
Legal tender That kind of up by the holder, the signing in blank
money which the law compels a creditor being with the assumed authority to do
to accept in payment of his debt when so.
tendered by the debtor in the right The NIL was enacted for the purpose
amount. of facilitating, not hindering or
Note: A NI although intended to be a hampering transactions in commercial
substitute for money, is not legal tender. paper. Thus, the statute should not be
However, a check that has been cleared tampered with haphazardly or lightly.
and credited to the account of the Nor should it be brushed aside in order
creditor shall be equivalent to delivery to meet the necessities in a single case.
to the creditor of cash. (Sec. 60, NCBA) (Michael Osmea vs. Citibank, G.R. No.
Features: (Reviewer on Commercial 141278, March 23, 2004 Callejo J.)
Law, Professors Sundiang and Aquino)
1. Negotiability That attribute or Kinds of NI
property whereby a bill or note 1. PROMISSORY NOTE (PN)
or check may pass from hand to An unconditional promise in writing by
hand similar to money, so as to one person to another signed by the
give the holder in due course the maker engaging to pay on demand or at
right to hold the instrument and a fixed or determinable future time, a
to collect the sum payable for sum certain in money to order or to
himself free from defenses. bearer. (Sec. 184)
The essence of
negotiability which 2. BILL OF EXCHANGE (BE)
characterizes a negotiable An unconditional order in writing
paper as a credit instrument addressed by one person to another,
lies in its freedom to signed by the person giving it, requiring
circulate freely as a the person to whom it is addressed to
substitute for money. pay on demand or at a fixed or
(Firestone Tire vs. CA, 353 determinable future time a sum certain
SCRA 601) in money to order or to bearer. (Sec.
2. Accumulation of Secondary 126)
Contracts Secondary contracts
are picked up and carried along
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics). Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
CHECK - A bill of exchange drawn on DISTINCTIONS

a bank payable on demand. (Sec. 185). It PROMISSORY BILL OF
is the most common form of bill of NOTE EXCHANGE
exchange. Unconditional Unconditional
promise order
OTHER FORMS OF NI Involves 2 parties Involves 3 parties
1. Certificate of deposit issued by Maker is primarily Drawer is only
banks, payable to the depositor or liable secondarily liable
his order, or to bearer Only one Two presentments:
2. Trade acceptance presentment: for for acceptance and
payment for payment
3. Bonds, which are in the nature of
promissory notes
4. Drafts, which are bills of exchange NEGOTIABLE NON-NEGOTIABLE
drawn by one bank upon another INSTRUMENTS INSTRUMENTS
5. Debenture Only NI are Application of the
governed by the NIL is only by
All of these must comply with Sec. 1, NIL. analogy.
NIL. Transferable by Transferable only by
Note: Letters of credit are not negotiation or by assignment
negotiable because they are issued to a assignment.
specified person. A transferee can be A transferee remains
a HDC if all the to be an assignee
Instances when a BE may be treated as requirements are and can never be a
a PN complied with HDC
a. The drawer and the drawee are A holder in due All defenses
the same person; or course takes the NI available to prior
b. Drawee is a fictitious person; or free from personal parties may be
defenses raised against the
c. Drawee does not have the
last transferee
capacity to contract. (Sec. 130) Requires clean Transferee acquires
d. Where the bill is drawn on a title, one that is a derivative title
person who is legally absent; free from any only. (Notes and
e. Where the bill is ambiguous (Sec. infirmities in the Cases on Banks,
17[e]) instrument and Negotiable
defects of title of Instruments and
Parties to a NI prior transferors. other Commercial
1. Promissory Note (Notes and Cases on Documents, Timoteo
Banks, Negotiable B. Aquino)
a. Maker one who makes
Instruments and
promise and signs the instrument other Commercial
b. Payee party to whom the Documents,
promise is made or the Timoteo B. Aquino)
instrument is payable. Solvency of debtor is Solvency of debtor is
2. Bill of Exchange in the sense not guaranteed under
a. Drawer one who gives guaranteed by the Art. 1628 of the NCC
the order to pay money to a indorsers because unless expressly
they engage that the stipulated. (Notes
third party instrument will be and Cases on Banks,
b. Drawee person to accepted, paid or Negotiable
whom the bill is addressed and both and that they Instruments and
who is ordered to pay. He will pay if the other Commercial
becomes an acceptor when he instrument is Documents, Timoteo
indicates his willingness to pay dishonored. (Notes B. Aquino)
and Cases on Banks,
the bill Negotiable
c. Payee party in whose Instruments and
favor the bill is drawn or is other Commercial
payable. Documents, Timoteo
B. Aquino)

CHAIRPERSONS
San Beda College of Law
8
MEMORY AID IN COMMERCIAL LAW
NEGOTIABLE NEGOTIABLE manner of to order, if

INSTRUMENT DOCUMENT OF indorsement. indorsed specially.
TITLE A holder in due The indorsee, even
Subject is money Subject is goods course may obtain if holder in due
Is itself the The document is a title better than that course, obtains
property with mere evidence of of the one who only such title as
value title the things of negotiated the the person who
value being the instrument to him. caused the deposit
goods mentioned in had over the goods.
the document
Has all the Does not have these ASSIGNMENT NEGOTIATION
requisites of Sec. 1 requisites Pertains to contracts Pertains to NI
of NIL in general
A holder of NI may Intermediate parties Holder takes the Holder in due
run after the are not secondarily instrument subject course takes it free
secondary parties liable if the to the defenses from personal
for payment if document is obtaining among the defenses available
dishonored by the dishonored. original parties among the parties
party primarily Governed by the Governed by the
liable. Civil Code NIL
A holder, if a A holder can never
holder in due acquire rights to the II. NEGOTIABILITY
course, may document better Form of NI: (Sec. 1) Key: WUPOA
acquire rights over than his 1. Must be in Writing and signed by the
the instrument predecessors.
maker or drawer;
better than his
predecessors. 2. Must contain an Unconditional
promise or order to pay a sum
certain in money;
BILLOF EXCHANGE CHECK
Not necessarily It is necessary that
3. Must be Payable on demand, or at a
drawn on a deposit. a check be drawn fixed or determinable future time;
The drawee need not on a bank deposit. 4. Must be payable to Order or to
be a bank Otherwise, there bearer; and
would be fraud. 5. When the instrument is addressed to
a drawee, he must be named or
Death of a drawer of Death of the
otherwise indicated therein with
a BOE, with the drawer of a check,
knowledge of the with the reasonable certainty.
bank, does not knowledge of the
revoke the authority bank, revokes the Determination of negotiability:
of the drawee to authority of the a. Whole instrument
pay. banker to pay. b. What appears on the face of the
May be presented for Must be presented instrument
payment within for payment within c. Requisites enumerated in Sec.1 of the
reasonable time a reasonable time NIL
after its last after its issue.
d. Should contain words or terms of
negotiation.
negotiability. (Gopenco, Commercial
May be payable on Always payable on Law Bar Reviewer, cited in Aquino, p.
demand or at a fixed demand 23)
or determinable
future time In determining the negotiability of an
instrument, the instrument in its
NEGOTIABLE NEGOTIABLE entirety and by what appears on its face
INSTRUMENT WAREHOUSE must be considered. It must comply
RECEIPT with the requirements of Sec. 1 of the
If originally payable If payable to NIL. (Caltex Phils. v. CA, 212 SCRA 448)
to bearer, it will bearer, it will be
always remain so converted into a The acceptance of a bill of exchange
payable regardless of receipt deliverable is not important in the determination of
COMMERCIAL LAW COMMITTEE
CHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT
HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario
(Transportation Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel
Gatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)
its negotiability. The nature of Particular fund Particular fund

acceptance is important only on the indicated is NOT the indicated is the
determination of the kind of liabilities of direct source of direct source of
payment but only the payment.
the parties involved (PBCOM vs. Aruego, source of
102 SCRA 530) reimbursement.
REQUISITES OF NEGOTIABILITY Postal money orders are not negotiable

a. It must be writing and signed by the instruments. Some of the restrictions
maker or drawer imposed by postal laws and regulations
Any kind of material that substitutes are inconsistent with the character of
paper is sufficient. negotiable instruments. (Phil. Education
With respect to the signature, it is Co. vs. Soriano, 39 SCRA 587)
enough that what the maker or drawer
affixed shows his intent to authenticate Treasury warrants are non-negotiable
the writing. (Notes and Cases on Banks, because there is an indication of the
Negotiable Instruments and other fund as the source of payment of the
Commercial Documents, Timoteo B. disbursement. (Metrobank vs. CA, 194
Aquino) SCRA 169)
b. Unconditional Promise or Order to
pay a sum certain in money Payable in sum certain in money
Unconditional promise or order An instrument is still negotiable
Where the promise or order is made although the amount to be paid is
to depend on a contingent event, it is expressed in currency that is not legal
conditional, and the instrument involved tender so long as it is expressed in
is non-negotiable. The happening of the money. (PNB vs. Zulueta, 101 Phil 1071,
event does not cure the defect. Sec.6 (e)).
The unconditional nature of the The certainty is however not affected
promise or order is not affected by: although to be paid:
a) An indication of a particular fund out a. With interest; or
of which reimbursement is to be b. By stated installments; or
made, or a particular account to be c. By stated installments with an
debited with the amount; or acceleration clause;
b) A statement of the transaction which d. With exchange; or
gives rise to the instrument e. With cost of collection or
Where the promise or order is subject attorneys fees. (Sec. 2)
to the terms and conditions of the
transaction stated, the instrument is The dates of each installment must be
rendered non-negotiable. The NI must be fixed or at least determinable and the
burdened with the terms and conditions amount to be paid for each installment.
of that agreement to destroy its A sum is certain if the amount to be
negotiability. (Cesar Villanueva, unconditionally paid by the maker or
Commercial Law Review, 2004 ed.) drawee can be determined on the face
But an order or promise to pay out of of the instrument and is not affected by
a particular fund is NOT unconditional. the fact that the exact amount is arrived
(Sec. 3) at only after a mathematical
computation. (Notes and Cases on
FUND FOR PARTICULAR FUND Banks, Negotiable Instruments and other
REIMBURSEMENT FOR PAYMENT Commercial Documents, Timoteo B.
Drawee pays the There is only one
payee from his own act- the drawee pays
Aquino)
funds; afterwards, directly from the
the drawee pays particular fundACCELERATION INSECURITY EXTENSION
himself from the indicated. Payment CLAUSE CLAUSE CLAUSE
particular fund is subject to the A clause that Provisions in Clauses in
indicated. condition that the renders whole the contract the face of
fund is sufficient. debt due and which the
demandable allows the instrument
CHAIRPERSONS
10
upon failure of holder to that extend DEMAND FIXED OR

obligor to accelerate the maturity DETERMINABLE
comply with payment if dates; FUTURE TIME
certain he deems a. At the a. Where expressed a. At a fixed period
conditions. himself option of to be payable on after date or sight;
insecure. the holder; demand, at sight or b. On or before a
b. Extension on presentation; fixed or
to a further b. Where no period determinable future
definite of payment is stated; time specified
time at the c. Where issued, therein; or
option of accepted, or c. On or at a fixed
the maker indorsed after period after the
or acceptor maturity (only as occurrence of a
c. Automa between immediate specified event,
tically upon parties). (Sec. 7) which is certain to
or after a happen, though the
specified time of happening is
act or uncertain. (Sec. 4)
event.
Instrument is Instrument Instrument
still negotiable is rendered is still If the day and the month, but not the
non- negotiable year of payment is given, it is not
negotiable (Notes and negotiable due to its uncertainty.
because the Cases on (Pandect of Commercial Law and
holders Banks, Jurisprudence, Justice Jose Vitug, 1997
whim and Negotiable ed.)
caprice Instruments
prevail and other d. Payable to Order or to Bearer
without the Commercial
Payable to Order
fault and Documents,
control of Timoteo B. The instrument is payable to order
the maker Aquino) where it is drawn payable to the order of
a specified person, or to him or his
order. (Sec. 8)
EXTENSION EXTENSION UNDER The payee must be named or
CLAUSE SEC. 120(f) otherwise indicated therein with
Stated on the face of Agreement binding the reasonable certainty.
the instrument holder; The instrument may be made payable
a. To extend the time to the order of:
of payment or a. A payee who is not the maker,
b. Postpone the drawer or drawee
holders right to
enforce the instrument b. The drawer or maker
Parties are bound Binds the person c. The drawee
because they took the secondarily liable (and d. 2 or more payees jointly
instrument knowing therefore cannot be e. One or some of several payees
that there is an discharged from f. The holder of an office for a
extension clause liabilities if: time being
a. He consents or
b. Right of recourse is
Payable to Bearer
expressly reserved. The instrument is payable to bearer:
(Notes and Cases on a. When it is expressed to be so
Banks, Negotiable payable; or
Instruments and other b. When it is payable to a person
Commercial named therein or to bearer; or
Documents, Timoteo
B. Aquino) c. When it is payable to the order of a
fictitious or non-existing person, and
c. Payable on Demand or at fixed such fact was known to the person
making it so payable; or
or determinable future time
PAYABLE ON PAYABLE AT A
HEADS:
d. When the name of the payee does given; the instrument is

not purport to be the name of any c. It does not not negotiable.
person; or specify the place (Sec. 5)
e. When the only or last indorsement is where it is drawn or EXCEPTIONS:
where it is payable; a. Authorizes the
an indorsement in blank. (Sec. 9)
d. It bears a seal; sale of
e. It designates a collateral
Note: An instrument originally payable particular kind of securities on
to bearer can be negotiated by mere current money in default;
delivery even if it is indorsed especially. which payment is to b. Authorizes
If it is originally a BEARER instrument, be made. (Sec. 6) confession of
it will always be a BEARER instrument. judgment on
As opposed to an original order default;
instrument becoming payable to bearer, c. Waives the
benefit of law
if the same is indorsed specially, it can
intended to
NO LONGER be negotiated further by protect the
mere delivery, it has to be indorsed. debtor; or
d. Allows the
A check that is payable to the order of creditor the
cash is payable to bearer. Reason: The option to
name of the payee does not purport to require
be the name of any person. (Ang Tek something in
Lian vs. CA, 87 Phil. 383) lieu of money.
FICTITIOUS PAYEE RULE

It is not necessary that the person III. INTERPRETATION OF NEGOTIABLE
referred to in the instrument is really INSTRUMENTS (Sec. 17)
non-existent or fictitious to make the
instrument payable to bearer. The a. Discrepancy between the
person to whose order the instrument is amount in figures and that in
made payable may in fact be existing words the words prevail, but if
but he is till fictitious or non-existent the words are ambiguous,
under Sec. 9(c) of the NIL if the person reference will be made to the
making it so payable does not intend to figures to fix the amount.
pay the specified persons. (Reviewer on b. Payment for interest is provided
Commercial Law, Professors Sundiang for interest runs from the date
and Aquino) of the instrument, if undated,
from issue thereof.
e. Identification of Drawee c. Instrument undated consider
Applicable only to a bill of exchange date of issue.
A bill may be addressed to 2 or more d. Conflict between written and
drawees jointly whether they are printed provisions written
partners or not but not to 2 or more provisions prevail.
drawees in the alternative or in e. When the instrument is so ambiguous
succession. (Sec. 128) that there is doubt whether it is
a bill or note, the holder may
OMISSIONS & ADDITONAL treat it as either at his election;
PROVISIONS THAT PROVISONS NOT f. If one signs without indicating in
DO NOT AFFECT AFFECTING what capacity he has affixed his
NEGOTIABILITY NEGOTIABILITY signature, he is considered an
indorser.
a. It is not dated; GENERAL RULE: If g. If two or more persons sign We
b. It does not some other act is promise to pay, their liability is
specify the value required other than joint (each liable for his part)
given or that any or in addition to but if they sign I promise to
pay, the liability is solidary
value has been payment of money,
(each can be compelled to
CHAIRPERSONS
12
comply with the entire b. Subsequent Negotiation

obligation). (Sec. 17) 1. If payable to bearer, a
negotiable instrument may
IV. TRANSFER AND NEGOTIATION be negotiated by mere
delivery.
INCIDENTS IN THE LIFE OF A NI (1 2. If payable to order, a NI may
Agbayani, 1992 ed.) be negotiated by
a. Issue indorsement completed by
b. Negotiation delivery
c. Presentment for acceptance, in Note: In both cases, delivery must be
certain kinds of Bills of Exchange intended to give effect to the transfer of
d. Acceptance instrument. (Development Bank vs. Sima
h. Dishonor by non-acceptance Wei, 219 SCRA 736)
i. Presentment for payment c. Incomplete negotiation of order
j. Dishonor by non-payment instrument
k. Notice of dishonor Where the holder of an instrument
l. Discharge payable to his order transfers it for value
without indorsing it, the transfer vests in
MODES OF TRANSFER the transferee such title as the
a. Negotiation the transfer of the transferor had therein and he also
instrument from one person to another acquires the right to have the
so as to constitute the transferee as indorsement of the transferor. But for
holder thereof. (Sec.30) the purpose of determining whether the
b. Assignment The transferee does not transferee is a holder in due course, the
become a holder and he merely steps negotiation takes effect as of the time
into the shoes of the transferor. Any when the indorsement is made. (Sec. 49)
defense available against the transferor d. Indorsement
is available against the transferee. Legal transaction effected by the
(Notes and Cases on Banks, Negotiable affixing one's signature at the:
Instruments and other Commercial a. Back of the instrument or
Documents, Timoteo B. Aquino) b. Upon a paper (allonge) attached
Assignment may be effected whether thereto with or without
the instrument is negotiable or non- additional words specifying the
negotiable. (Sesbreo vs. CA, 222 SCRA person to whom or to whose
466) order the instrument is to be
payable whereby one not only
HOW NEGOTIATION TAKES PLACE transfers legal title to the
a. Issuance first delivery of the paper transferred but likewise
instrument complete in form to a person enters into an implied guaranty
who takes it as a holder. (Sec. 191) that the instrument will be duly
paid (Sec. 31)
Steps: GENERAL RULE: Indorsement must
1. Mechanical act of writing be of the entire instrument.
the instrument completely EXCEPTION: Where instrument has
and in accordance with the been paid in part, it may be indorsed
requirements of Section 1; as to the residue. (Sec. 32)
and
2. The delivery of the Kinds of Indorsement:
complete instrument by the A. SPECIAL Specifies the person to
maker or drawer to the whom or to whose order, the instrument
payee or holder with the is to be payable (Sec. 34)
intention of giving effect to B. BLANK Specifies no indorsee:
it. (The Law on Negotiable 1. Instrument becomes payable to
Instruments with Documents bearer and may be negotiated by
of Title, Hector de Leon, delivery (Sec. 34)
2000 ed.)
HEADS:
2. May be converted to special partners, all must indorse unless

indorsement by writing over the authority is given to one. (Sec. 41)
signature of indorser in blank 4. Where a person is under obligation to
any contract consistent with indorse in a representative capacity, he
character of indorsement (Sec. may indorse in such terms as to negative
35) personal liability. (Sec. 44)
C. ABSOLUTE One by which indorser
binds himself to pay: RENEGOTIATION TO PRIOR PARTIES
1. Upon no other condition than (Sec. 50)
failure of prior parties to do so; Where an instrument is negotiated
2. Upon due notice to him of such back to a prior party, such party may
failure. reissue and further negotiate the same.
D. CONDITIONAL Right of the indorsee But he is not entitled to enforce
is made to depend on the happening of a payment thereof against any intervening
contingent event. Party required to pay party to whom he was personally liable.
may disregard the conditions. (Sec. 39) Reason: To avoid circuitousness of suits.
E. RESTRICTIVE An indorsement is
restrictive, when it either: STRIKING OUT INDORSEMENT
a. Prohibits further negotiation of The holder may at any time strike out
the instrument; or any indorsement which is not necessary
b. Constitutes the indorsee the to his title. The indorser whose
agent of the indorser; or indorsement is struck out, and all
c. Vests the title in the indorsee in indorsers subsequent to him, are thereby
trust for or to the use of some relieved from liability on the instrument.
other persons. But mere absence (Sec. 48)
of words implying power to
negotiate does not make an CONSIDERATION FOR THE ISSUANCE
indorsement restrictive. (Sec. AND SUBSEQUENT TRANSFER
36) Every NI is deemed prima facie to
F. QUALIFIED Constitutes the indorser have been issued for a valuable
a mere assignor of the title to the consideration. Every person whose
instrument. (Sec. 38) signature appears thereon is presumed
It is made by adding to the indoser's to have become a party thereto for
signature words like "sans recourse, value. (Sec. 24)
without recourse", "indorser not What constitutes value:
holder", "at the indorser's own risk", etc. a. An antecedent or pre-existing debt
G. JOINT Indorsement payable to 2 or b. Value previously given
more persons (Sec. 41) c. Lien arising from contract or by
H. IRREGULAR A person who, not operation of law. (Sec. 27)
otherwise a party to an instrument,
places thereon his signature in blank V. HOLDERS
before delivery (Sec. 64)
HOLDER
Other rules on indorsement; A payee or endorsee of a bill or note
1. Negotiation is deemed prima facie to who is in possession of it or the bearer
have been effected before the thereof. (Sec. 191)
instrument is overdue except if the
indorsement bears a date after the RIGHTS OF HOLDERS IN GENERAL
maturity of the instrument. (Sec. 45) (Sec. 51)
2. Presumed to have been made at the a . May sue thereon in his own name
place where the instrument is dated b. Payment to him in due course
except when the place is specified. (Sec. discharges the instrument
46) The only disadvantage of a holder who
3. Where an instrument is payable to the is not a holder in due course is that the
order of 2 or more payees who are not negotiable instrument is subject to

CHAIRPERSONS
14
defenses as if it were non-negotiable. GENERAL RULE: Failure to make

(Chan Wan vs. Tan Kim, 109 Phil. 706) inquiry is not evidence of bad faith.
EXCEPTIONS:
Holder In Due Course (HDC) 1. Where a holders title is defective or
A holder who has taken the suspicious that would compel a
instrument under the following reasonable man to investigate, it cannot
conditions: KEY: C O V I be stated that the payee acquired the
1. Instrument is complete and regular check without the knowledge of said
upon its face; defect in the holders title and for this
2. Became a holder before it was reason the presumption that it is a
overdue and without notice that it holder in due course or that it acquired
had been previously dishonored; the instrument in good faith does not
3. For value and in good faith; and exist. (De Ocampo vs. Gatchalian, 3
4. At the time he took it, he had no SCRA 596)
notice of any infirmity in the 2. Holder to whom cashiers check is not
instrument or defect in the title of indorsed in due course and negotiated
the person negotiating it. (Sec. 52) for value is not a holder in due course.
(Mesina v. IAC)
Rights of a HDC: Rights of a holder not in due course:
1. May sue on the instrument in his own 1. It can enforce the instrument and sue
name; under it in his own name.
2. May receive payment and if payment 2. Prior parties can avail against him any
is in due course, the instrument is defense among these prior parties and
discharged; prevent the said holder from collecting
3. Holds the instrument free from any in whole or in part the amount stated in
defect of title of prior parties and the instrument
free from defenses available to Note: If there are no defenses, the
parties among themselves; and distinction between a HDC and one who
4. May enforce payment of the is not a HDC is immaterial. (Notes and
instrument for the full amount Cases on Banks, Negotiable Instruments
thereof against all parties liable and other Commercial Documents,
thereon. (Secs. 51 and 57) Timoteo B. Aquino)
Every holder of a negotiable SHELTER RULE

instrument is deemed prima facie a A holder who derives his title through
holder in due course. However, this a holder in due course, and who is not
presumption arises only in favor of a himself a party to any fraud or illegality
person who is a holder as defined in affecting the instrument, has all the
Section 191 of the NIL. The weight of rights of such former holder in respect of
authority sustains the view that a payee all prior parties to the latter. (Sec. 58)
may be a holder in due course. Hence,
the presumption that he is a prima facie ACCOMMODATION
holder in due course applies in his favor. A legal arrangement under which a
(Cely Yang vs. Court of Appeals, G.R. No. person called the accommodation party,
138074, August 15, 2003) lends his name and credit to another
called the accommodated party,
Holder Not In Due Course without any consideration.
One who became a holder of an Accommodation Party (AP)
instrument without any, some or all of Requisites:
the requisites under Sec. 52 of the NIL. 1. The accommodation party must sign
With respect to demand instruments, as maker, drawer, acceptor, or
if it is negotiated an unreasonable length indorser;
of time after its issue, the holder is 2. He must not receive value therefor;
deemed not a holder in due course. and
(Sec.53) 3. The purpose is to lend his name or
credit. (Sec. 29)
HEADS:
Note: without receiving value consideration moving to the principal

therefor, means without receiving alone being sufficient. (Spouses Eduardo
value by virtue of the instrument. Evangelista vs. Mercator Finance Corp,
(Clark vs. Sellner, 42 Phil. 384) G.R. No. 148864, August 21, 2003)
Effects: The person to whom the
instrument thus executed is VI. PARTIES WHO ARE LIABLE
subsequently negotiated has a right of PRIMARY AND WARRANTIES OF
recourse against the accommodation SECONDARY PARTIES
party in spite of the formers knowledge LIABILITY OF
that no consideration passed between PARTIES
the accommodation and accommodated Makes the parties Impose no direct
parties. (Sec. 29) liable to pay the obligation to pay in
Rights & Legal Position: sum certain in the absence of
1. AP is generally regarded as a surety money stated in the breach thereof. In
for the party accommodated; instrument. case of breach, the
2. When AP makes payment to holder person who
of the note, he has the right to sue breached the same
may either be
the accommodated party for
liable or barred
reimbursement. (Agro from asserting a
Conglomerates, Inc. vs. CA, 348 particular defense.
SCRA 450) Conditioned on Does not require
Liability: Liable on the instrument to presentment and presentment and
a holder for value notwithstanding such notice of dishonor notice of dishonor.
holder at the time of the taking of the (Campos and Lopez- (Campos and
instrument knew him to be only an Campos, Negotiable Lopez-Campos,
accommodation party. Hence, As Instruments Law, Negotiable
regards, an AP, the 4th condition, i.e., 1994 ed.) Instruments Law,
1994 ed.)
lack of notice of infirmity in the
instrument or defect in the title of the
1. Primarily Liable (Sec. 60 and 62,
persons negotiating it, has no
NIL)
application. (Stelco Marketing Corp. vs.
Court of Appeals, 210 SCRA 51) MAKER ACCEPTOR OR
Rights of APs as against each other: DRAWEE
A. Engages to pay A. Engages to pay
May demand contribution from his co-
according to the according to the
accommodation party without first tenor of the tenor of his
directing his action against the principal instrument; and acceptance;
debtor provided: B. Admits the B. Admits the
a. He made the payment by virtue existence of the existence of the
of judicial demand; or payee and his drawer, the
b. The principal debtor is insolvent. capacity to indorse. genuineness of his
The relation between an signature and his
accommodation party is, in effect, one capacity and
of principal and surety the authority to draw
the instrument;
accommodation party being the surety. and
It is a settled rule that a surety is bound C. Admits the
equally and absolutely with the principal existence of the
and is deemed an original promissory and payee and his
debtor from the beginning. The liability capacity to
is immediate and direct. (Romeo Garcia indorse.
vs. Dionisio Llamas, G.R. No. 154127,
December 8, 2003) A bill of itself
Well-entrenched is the rule that the does not operate as
an assignment of
consideration necessary to support a funds in the hands
surety obligation need not pass directly of the drawee
to the surety, a consideration need not available for the
pass directly to the surety, a
CHAIRPERSONS
16
payment thereof
and the drawee is 3. Limited Liability (Sec. 65; Metropol
not liable unless Financing v. Sambok, 120 SCRA
and until he 864)
accepts the same
(Sec.127)
QUALIFIED PERSON
INDORSER NEGOTIATING BY
2. Secondarily Liable (Sec. 61, 64 and DELIVERY
Every person A. Warranties same
66, NIL)
negotiating as those of
DRAWER GENERAL IRREGULAR
instrument by qualified indorsers;
INDORSER INDORSER delivery or by a and
A. Admits A. Warrants A person, qualified B. Warranties
the all not endorsement extend to
existence of subsequent otherwise a warrants that: immediate
the payee HDC - party to an A. Instrument is transferee only.
and his a. That the instrument, genuine and in all
capacity to instrument is places his respects what it
indorse; genuine and signature
in all respect purports to be;
B. Engages thereon in B. He has good title
what it
that the blank to it;
purports to
instrument before C. All prior parties
be
will be b. He has delivery. had capacity to
accepted or good title to (Sec. 64) contract;
paid by the it; A. If D. He has no
party c. All prior instrument knowledge of any
primarily parties had payable to fact which would
liable; and capacity to the order impair the validity
C. Engages contract of a 3rd of the instrument or
that if the d. The person, he render it valueless.
instrument instrument is liable to
is is, at the the payee
dishonored time of and
and proper endorse- subsequent
proceedings ment, valid parties.
are brought, and B. If PERSON GENERAL
he will pay subsisting. instrument NEGOTIATING BY INDORSER
B. Engages MERE DELIVERY
to the party payable to
that the
entitled to
instrument
order of OR BY QUALIFIED
be paid. maker or INDORSEMENT
will be
accepted or drawer or No secondary There is secondary
paid, or to bearer, liability; but is liability, and
both, as the he is liable liable for breach of warranties
case may be, to all warranty
according to parties Warrants that he Warrants that the
its tenor; and subsequent has no knowledge of instrument is, at
C. If the to the any fact which the time of his
instrument is maker or would impair the indorsement, valid
dishonored drawer. validity of the and subsisting
and C. If he instrument or
necessary signs for render it valueless
proceedings accommo-
on dishonor dation of
be duly the payee,
taken, he he is liable
will pay to ORDER OF LIABILITY
to all
the party
parties There is no order of liability among
entitled to
be paid.
subsequent the indorsers as against the holder. He is
to the free to choose to recover from any
payee. indorser in case of dishonor of the
instrument. (Notes and Cases on Banks,
HEADS:
Negotiable Instruments and other appointed by the instrument for an

Commercial Documents, Timoteo B. court; illegal consideration;
Aquino) 8. Ultra vires acts 9. Negotiation in
As respect one another, indorsers are of a corporation breach of faith;
9. Want of 10. Negotiation under
liable prima facie in the order in which
authority of agent; circumstances that
they indorse unless the contrary is 10. Execution of amount to fraud;
proven (Sec.68) instrument 11. Mistake;
GENERAL RULE: One whose signature between public 12. Intoxication
does not appear on the instrument shall enemies; (according to better
not be liable thereon. 11. Illegality if authority);
EXCEPTIONS: declared void for 13. Ultra vires acts of
1. The principal who signs through an any purpose corporations where
agent is liable; 12. Forgery. the corporation has
the power to issue
2. The forger is liable;
negotiable paper but
3. One who indorses in a separate the issuance was not
instrument (allonge) or where an authorized for the
acceptance is written on a separate particular purpose for
paper is liable; which it was issued;
4. One who signs his assumed or trade 14. Want of authority
name is liable; and of agent where he has
5. A person negotiating by delivery (as in apparent authority;
the case of a bearer instrument) is 15. Insanity where
there is no notice of
liable to his immediate indorsee.
insanity on the part of
the one contracting
VII. DEFENSES with the insane
REAL DEFENSES PERSONAL person; and
DEFENSES 16. Illegality of
Those that attach Those which are contract where the
to the instrument available only against form or consideration
itself and are a person not a holder is illegal.
available against in due course or a
all holders, subsequent holder who EFFECTS OF CERTAIN DEFENSES
whether in due stands in privity with A. MINORITY
course or not, but him. (a.k.a. equitable
Negotiation by a minor passes title to
only by the parties defenses)
entitled to raise
the instrument. (Sec.22). But the minor
them. (a.k.a hu8is not liable and the defense is
absolute defenses) personal to him
1. Material 1. Absence or failure
Alteration; of consideration, B. ULTRA VIRES ACTS
2. Want of partial or total; A real defense but the negotiation
delivery of 2. Want of delivery of passes title to the instrument. (Sec. 22)
incomplete complete instrument; Note: A corporation cannot act as an
instrument; 3. Insertion of wrong accommodation party. The issuance or
3. Duress date in an instrument;
indorsement of negotiable instrument by
amounting to 4. Filling up of blank
forgery; contrary to authority a corporation without consideration and
4. Fraud in given or not within for the accommodation of another is
factum or fraud in reasonable time; ultra vires. (Crisologo-Jose v. CA, 117
esse contractus; 5. Fraud in SCRA 594)
5. Minority inducement;
(available to the 6. Acquisition of C. INCOMPLETE AND UNDELIVERED NI
minor only); instrument by force, (Sec. 15)
6. Marriage in the duress, or fear;
case of a wife; 7. Acquisition of the
If completed and negotiated without
7. Insanity where instrument by authority, not a valid contract against a
the insane person unlawful means; person who has signed before delivery of
has a guardian 8. Acquisition of the the contract even in the hands of HDC

CHAIRPERSONS
18
but subsequent indorsers are liable. This Any change in the instrument which
is a real defense. affects or changes the liability of the
D. INCOMPLETE BUT DELIVERED NI parties in any way.
(Sec. 14) Effects:
1. Holder has prima facie authority to 1. Alteration by a party Avoids the
fill up the instrument. instrument except as against the
2. The instrument must be filled up party who made, authorized, or
strictly in accordance with the assented to the alteration and
authority given and within subsequent indorsers.
reasonable time However, if an altered instrument
3. HDC may enforce the instrument as is negotiated to a HDC, he may
if filled up according to no. 2. enforce payment thereof according
to its original tenor regardless of
E. COMPLETE BUT UNDELIVERED NI whether the alteration was innocent
(Sec. 16) or fraudulent.
1. Between immediate parties and
those who are similarly situated, Note: Since no distinction is made, it
delivery must be coupled with the does not matter whether it is
intention of transferring title to the favorable or unfavorable to the party
instrument. making the alteration. The intent of
2. As to HDC, it is conclusively the law is to preserve the integrity
presumed that there was valid of the negotiable instruments.
delivery; and
3. As against an immediate party and 2. Alteration by a stranger (spoliation)-
remote party who is not a HDC, the effect is the same as where the
presumption of a valid and alteration is made by a party which a
intentional delivery is rebuttable. HDC can recover on the original
tenor of the instrument. (Sec. 124)
F. FRAUD
FRAUD IN FACTUM FRAUD IN Changes in the following constitute
OR FRAUD IN ESSES material alterations:
INDUCEMENT CONTRACTUS a. Date;
OR FRAUD IN b. Sum payable, either for principal
EXECUTION or interest;
The person who signs The person is c. Time or place of payment;
the instrument induced to sign an d. Number or relations of the
intends to sign the instrument not parties;
same as a NI but was knowing its e. Medium or currency in which
induced by fraud character as a bill payment is to be made;
or note f. That which adds a place of
payment where no place of
G. ABSENCE OR FAILURE OF payment is specified; and
CONSIDERATION (Sec. 28) g. Any other change or addition
Personal defense to the prejudiced which alters the effect of the
party and available against any person instrument in any respect. (Sec.
not HDC. 125)
H. PRESCRIPTION A serial number is an item which

Refers to extinctive prescription and is not an essential requisite for
may be raised even against a HDC. Under negotiability under Sec. 1, NIL, and
the Civil Code, the prescriptive period of which does not affect the rights of
an action based on a written contract is the parties, hence its alteration is
10 years from accrual of cause of action. not material. (PNB vs. CA, 256 SCRA
491)
I. MATERIAL ALTERATION

HEADS:
Comparison of sections 14, 15 and 16 of the negotiable instruments law
Section 14 Section 15 Section 16

Undelivered
Delivery Delivered Undelivered Note: Delivery may be made for a
conditional or for a special purpose
only and not for the purpose of
transferring the property in the
instrument
Completeness 1. Wanting in any material 1. Blank paper with Mechanically incomplete Mechanically complete
particular signature
Authority of person 1. Prima facie authority to 1.Signature operates as a No authority to complete and/or May negotiate if delivered to him by
in possession complete it by filling up prima facie authority to negotiate instrument or under the authority of the party
the blanks therein fill it up as such for any making, indorsing, drawing or
amount accepting, as the case may be.
When enforceable If filled up strictly in accordance with authority given Not enforceable When delivery is made by or under
and within a reasonable time authority of the party making,
indorsing, drawing or accepting, as
the case may be.
Kind of defense Personal Real Personal

Can enforce the instrument.
Rights of holder 1. If HDC, he can enforce the instrument as None in the hands of any holder. Note: Where the instrument is in the
completed against parties prior or subsequent to However, the invalidity of the hands of a HDC, a valid delivery
the completion instrument is only with reference to thereof by all parties prior to him so
2. If not a HDC, he can enforce the instrument as parties whose signatures appear on as to make them liable to him is
completed only against parties subsequent to the the instrument after delivery, the conclusively presumed. Where the
completion but not against those prior thereto. instrument is valid. instrument is no longer in the
possession of a party whose signature
appears thereon, a valid and
intentional delivery to him is
presumed until the contrary is
proved.
J. FORGERY liable.
Counterfeit making or fraudulent Payees a. Maker and a. Maker is
alteration of any writing, which may signature payee not liable.
consist of: forged liable. (Indorsement
1. Signing of anothers name with b. Indorsers is not
subsequent to necessary to
intent to defraud; or
forgery are title and the
2. Alteration of an instrument in the liable. maker engages
name, amount, name of payee, etc. c. Party who to pay holder)
with intent to defraud. (1 Agbayani, made the b. Party who
1992 ed.) forgery is made the
GENERAL RULE: When a signature is liable. forgery is
forged or made without the authority of liable
the person, the signature (not Indorsers a. Maker, a. Maker is
instrument itself and the genuine signature payee and liable.
forged indorser whose (indorsement
signatures) is wholly inoperative
signature was is not
Legal Effects: forged is not necessary to
1. No right to retain the instrument liable. title and the
2. To give a discharge therefore b. Indorsers maker engages
3. To enforce payment thereof subsequent to to pay the
against any party thereto, can forgery are holder)
be acquired through or under liable. b. Indorser
such signature (Because of whose
EXCEPTION: Unless the party against their signature was
whom it is sought to enforce such right is warranties) forged not
c. Party who liable to one
precluded from setting up the forgery or
made the who is not a
want of authority. (Sec. 23) forgery is HDC provided
liable. the instrument
Persons precluded from setting up is
defense of forgery mechanically
1. Those who warrant or admit the complete
genuineness of the signature in before the
question. This includes indorsers, forgery.
persons negotiating by delivery and c. Party who
made the
acceptors.
forgery is
2. Those who, by their acts, silence, or liable.
negligence, are estopped from
setting up the defense of forgery.
B. Bills of Exchange
RULES ON FORGERY Order Bearer
A. Promissory Notes Instrument Instrument
Order Bearer Drawers a. Drawer is a. Drawer is
Instrument Instrument signature not liable not liable.
Makers a. Maker is not a. Maker is not forged because he b. Drawee is
signature liable because liable. was never a liable if it paid.
forged he never b. Party who party to the Drawee cannot
became a made the instrument. recover from
party to the forgery is b. Drawee is the collecting
instrument. liable. liable if it paid bank.
b. Indorsers c. Indorsers (no recourse c. Party who
subsequent to may be made to drawer) made the
forgery are liable to those because he forgery is
liable because persons who admitted the liable.
of their obtain title genuiness of
warranties. through their the drawers
c. Party who indorsements. signature.
the made the Drawee cannot
forgery is recover from
the collecting A. STEPS TO CHARGE THE PARTIES
bank because LIABLE
there is no a. Primary Liability
privity The unconditional promise attaches
between the
the moment the maker makes the
collecting
bank and the instrument while the acceptors assent
drawer. The to the unconditional order attaches the
latter does not moment he accepts the instrument. No
give any further act is necessary in order for the
warranty liability to accrue. Presentment for
regarding the payment is all that is necessary. (Notes
signature of and Cases on Banks, Negotiable
the drawer. Instruments and other Commercial
(Associated
Documents, Timoteo B. Aquino)
Bank vs. CA)
c. Indorsers
b. Secondary Liability
subsequent to 1. Steps in promissory note
forgery liable (indorsers)
(such as a. Presentment for
collecting payment to the maker.
bank or last b. Notice of dishonor should
endorser) be given, if dishonored
d. Party who by non-payment.
made the
2. Steps in bill of exchange
forgery is
liable
a. Presentment for acceptance in
Payees a. Drawer, a. Drawer is the following instances:
signature drawee and liable a. Where the bill is payable
forged payee not b. Drawee is after sight, or when it is
liable. liable necessary in order to fix
b. Indorsers c. Payee is not the maturity of the
subsequent to liable instrument;
forgery are d. Collecting b. Where the bill expressly
liable. (such as bank is liable stipulates that it shall be
collecting because of
presented for
bank) warranty
c. Party who e. Party who acceptance;
made the made the c. Where the bill is drawn
forgery is forgery is liable payable elsewhere than
liable at the residence or place
Indorsers a. Drawer, a. Drawer is of business of the
signature payee and liable. drawee. (Sec. 143)
forged indorser whose (indorsement Note: In all the above cases, the holder
signature was not necessary to
forged not title)
must either present the bill for
liable. b. Drawee is acceptance or negotiate it within a
b. Drawee is liable. reasonable time; otherwise, the drawer
liable if it paid. c. Indorser and all indorsers are discharged. (Sec.
c. Indorsers whose signature 144)
subsequent to was forged is 2. If dishonored by non-acceptance;
forgery are liable because
liable. (such as indorsement is
a. Notice of dishonor given to
collecting bank) not necessary to drawer and indorsers.
d. Party who title. b. Protest in case of a foreign bill.
made the d. Party who 3. If bill is accepted:
forgery is made the a. Presentment for payment to the
liable. forgery is liable. acceptor.
4. If dishonored upon presentment for
payment
VIII. ENFORCEMENT OF LIABILITY a. Notice of dishonor to persons
secondarily liable.
b. Protest for dishonor by non- 2. In order to charge an indorser when
payment in case of foreign bill. the instrument was made or
accepted for his accommodation and
B. PRESENTMENT he has no reason to expect that the
The production of a BE to the drawee instrument will be paid if presented.
for his acceptance, or to the drawee or (Sec. 80)
acceptor for payment or the production When delay in making presentment or
of a PN to the party liable for the of giving notice is excused:
payment of the same. (Sec. 70) 1. When caused by circumstances
beyond the control of the holder; and
PRESENTMENT FOR PAYMENT 2. Not imputable to his default,
Consists of: misconduct, or negligence. (Sec. 81)
1. Personal demand for payment at the When presentment for payment is
proper place; and excused:
2. Readiness to exhibit the instrument 1. After exercise of reasonable
if required, and to receive payment diligence, it cannot be made;
and to surrender the instrument if 2. Drawee is a fictitious person;
the debtor is willing to pay. 3. Express or implied waiver. (Sec. 82)
Requisites:
1. Made by the holder or any person Exhibition
authorized to receive payment on his Purposes:
behalf; 1. To enable the debtor to determine
2. At a reasonable hour on a business the genuineness of the instrument
day; and the right of the holder to
3. At a proper place; receive payment; and
4. To the person primarily liable or if 2. To enable him to reclaim possession
he is absent or inaccessible, to any upon payment.
person found at the place where the When excused:
presentment is made. (Sec. 72) 1. When debtor does not demand to see
When should be made: the instrument but refuses payment
1. PN payable on demand: within on some other grounds, and
reasonable time after its issue; 2. When the instrument is lost or
2. BE payable on demand: within destroyed.
reasonable time after its last
negotiation; Special cases
3. Instrument payable on a specified 1. Instrument payable at a bank Must
date: on the date it falls due. (Sec. be made during banking hours unless
71) there are no funds to meet it at any time
Proper place: during the day, presentment at any hour
1. Place specified; before the bank is closed on that day is
2. Address of the person to make sufficient. (Sec. 75)
payment is given, in case no place is 2. Person liable is dead May be made
specified; to his personal representative, if there
3. Usual place of business or residence be one, and if he can be found. (Sec. 76)
of the person to make payment, in
case no place is specified and no C. PRESENTMENT FOR ACCEPTANCE
address is given; When required:
4. In any other case, wherever the a. Where the bill is payable after
person to make payment can be sight, or when it is necessary in order
found, or at his last known place of to fix the maturity of the instrument;
business or residence. (Sec. 73) b. Where the bill expressly stipulates
When not required: that it shall be presented for
1. In order to charge the drawer where acceptance;
he has no right to expect or require c. Where the bill is drawn payable
that the drawee or acceptor will pay elsewhere than at the residence or
the instrument;(Sec. 79)
place of business of the drawee. (Sec. 2. QUALIFIED - which in express terms
143) varies the effect of the bill as
How made: drawn.
a. Where a bill is addressed to 2 or more a. Conditional - makes payment by
drawees who are not partners, the acceptor dependent on the
presentment must be made to all fulfillment of a condition therein
b. Where drawee is dead, presentment stated.
may be made to his personal b. Partial - an acceptance to pay
representative part only of the amount for
c. Where the drawee is adjudged a which the bill is drawn.
bankrupt, insolvent or made an a. Local - an acceptance to pay
assignment to his creditors, presentment only at a particular place.
may be made to him or his trustee or b. Qualified as to time
assignee c. The acceptance of some one or
When excused: more of the drawees but not of
1. Where the drawee is dead, or has all. (Sec. 141)
absconded, or is a fictitious person Form:
or a person not having capacity to 1. Must be made by or on behalf of the
contract by bill; holder;
2. After exercise of reasonable 2. At a reasonable hour on a business
diligence, presentment cannot be day;
made; 3. Before the bill is overdue; and
3. Although presentment has been 4. To the drawee or some person
irregular, acceptance has been authorized to accept or refuse to
refused on some other ground. (Sec. accept on his behalf.
148)
If bill is duly presented for acceptance Implied Acceptance
and it is not accepted within the If after 24 hours, the drawee fails to
prescribed time, the person presenting it return the instrument. He is also deemed
must treat the bill as dishonored by non- to have accepted the instrument when
acceptance or he loses the right of he destroys the same.
recourse against the drawer and
indorsers. (Sec. 150) E. NOTICE OF DISHONOR
Notice given by holder or his agent to
D. ACCEPTANCE party or parties secondarily liable that
The signification by the drawee of his the instrument was dishonored by non-
assent to the order of the drawer. acceptance by the drawee of a bill or by
It is the act by which the drawee non-payment by the acceptor of a bill or
manifests his consent to comply with the by non-payment by the maker of a note.
request contained in the bill of exchange (Sec. 89)
directed to him. Requisites:
Form: Must be in writing and signed 1. Given by holder or his agent, or by
by the drawee and must not express that any party who may be compelled by
the drawee will perform his promise by the holder to pay (Sec. 90);
any other means than the payment of 2. Given to secondary party or his
money. (Sec. 132) agent (Sec. 97);
The holder of the bill presenting the 3. Given within the periods provided by
same for acceptance may require that law (Sec. 102); and
the acceptance be written on the bill, 4. Given at the proper place (Secs. 103
and if such request is refused, may treat and 104)
the bill as dishonored. (Sec. 133) When dispensed with:
Kinds: 1. When party to be notified knows
1. GENERAL - assents without about the dishonor, actually or
qualification to the order of the constructively (Secs. 114-117);
drawer. 2. If waived (Sec. 109); and
3. When after due diligence, it cannot to the holder and no presentment for
be given (Sec. 112). payment is necessary. (Sec. 151)
How given:
1. By bringing verbally or Effect of lack of notice of dishonor on
2. By writing to the knowledge of the NI which are payable in installments
person liable the fact that a 1. No acceleration clause failure to
specified instrument, upon proper give notice of dishonor on a previous
proceedings taken, has not been installment does not discharge
accepted or has not been paid, and drawers and indorsers as to
that the party notified is expected succeeding installments.
to pay it. 2. With acceleration clause failure to
To whom given: give notice of dishonor as to previous
1. Non-acceptance (bill) to persons installment will discharge the
secondarily liable, namely, the persons secondarily liable as to the
drawer and indorsers as the case succeeding installments.
may be.
2. Non-payment (both bill and note) To whose benefit does a notice of
indorsers. dishonor inure
Note: Notice must be given to 1. When given by or on behalf of a
persons secondarily liable. holder:
Otherwise, such parties are a. All parties prior to the holder,
discharged. Notice may be given to who have a right of recourse
the party himself or to his agent. against the party to whom the
By whom given: notice is given; and
1. The holder b. All holders subsequent to the
2. Another on behalf of the holder holder giving notice. (Sec. 92)
3. Any party to the instrument who may 2. When given by or on behalf of a
be compelled to pay it to the holder, party entitled to give notice:
and who would have a right of a. The holder; and
reimbursement from the party to b. All parties subsequent to the
whom notice is given. (Sec. 90) party to whom notice is given.
(Sec. 93)
DISHONOR BY NON-PAYMENT
1. Payment is refused or cannot be Dishonor in the hands of an Agent
obtained after due presentment for Agent can do either of the following:
payment; 1. Directly give notice to persons
2. Presentment is excused and the secondarily liable thereon; or
instrument is overdue and unpaid. 2. Give notice to his principal. In
(Sec. 83) such case, he must give notice
within the time allowed by law
Effect: There is an immediate right of as if he were a holder. (Sec. 94)
recourse by the holder against persons
secondarily liable. However, notice of A party giving notice is deemed to have
dishonor is generally required. (Sec. 84) given due notice where:
1. The notice of dishonor is duly
DISHONOR BY NON-ACCEPTANCE addressed, and
Instances: 2. Deposited in the post-office,
1. When it is duly presented for even when there is miscarriage
acceptance and such an acceptance of mail. (Sec. 105)
is refused or cannot be obtained; or
2. When presentment for acceptance is Where a party receives notice of
excused, and the bill is not dishonor, he has, after the receipt of
accepted. (Sec. 149) such notice, the same time for giving
Effect: Immediate right of recourse notice to antecedent parties that the
against the drawer and indorsers accrues holder has after the dishonor. (Sec. 107)
Waiver of Notice of Dishonor
Either before the time of giving An omission to give notice of dishonor
notice, or after the omission to give due by non-acceptance does not prejudice
notice. Waiver may be expressed or the rights of a holder in due course
implied. (Sec. 109) subsequent to the omission. (Sec. 117)
As to who are affected by an express
waiver depends on where the waiver is F. FOREIGN BILL OF EXCHANGE
written: 1. Drawn in the Philippines but payable
1. If it appears in the body or on outside the Philippines.
the face of the instrument, it binds 2. Payable in the Philippines but drawn
all parties; but outside the Philippines.
2. If it is written above the
signature of an indorser, it binds INLAND BE FOREIGN BE
him only. (Sec. 110) A bill which or on its One which is or on
face purports to be its face purports to
Notice of dishonor is not required to be both drawn and be drawn or payable
given to the drawer in any of the ff. payable within the outside the
Philippines. Philippines.
cases:
1. Drawer and drawee are the
same; NOTICE OF PROTEST
2. Drawee is a fictitious person or DISHONOR
not having the capacity to Required in inland Required in foreign
contract; bill bill
3. Drawer is the person to whom
the instrument is presented for May be oral or Always written
payment; written
4. The drawer has no right to May be made by a Made by a notary
expect or require that the party or agent public or a
respectable resident
drawee or acceptor will honor
in the presence of
the instrument; witness
5. Where the drawer has Made in residence of Made in the place of
countermanded payment. (Sec. parties dishonor
114)
PROTEST
Notice of dishonor is not required to be The formal instrument executed
given to an indorser in the ff. cases: usually by a notary public certifying that
1. Drawee is a fictitious person or the legal steps necessary to fix the
does not have the capacity to liability of the drawee and the indorsers
contract, and indorser was have been taken.
aware of that fact at the time he Who makes:
indorsed the instrument; 1. A notary public; or
2. Indorser is the person to whom 2. Any respectable resident of the
the instrument is presented for place where the bill is dishonored, in
payment; the presence of 2 or more credible
3. Instrument was made or witnesses. (Sec. 154)
accepted for his
accommodation. (Sec. 115) Protest for better security One
made by the holder of a bill after it has
If an instrument is not accepted by been accepted but before it matures,
the drawee, there is no sense presenting against the drawer and indorsers, where
it again for payment, and notice of the acceptor has been adjudged a
dishonor must at once be given. If there bankrupt or an insolvent, or has made an
was acceptance, presentment for assignment for the benefit of the
payment is still required and if payment creditors. (Sec. 158)
is refused, there is a need for notice of Protest is necessary only in case of
dishonor. (Sec. 116) foreign bills of exchange, which have
been dishonored by non-acceptance or the benefit of the person for whose
non-payment, as the case may be. If it account it was drawn. (Secs. 171-177)
is not so protested, the drawer and Requisites:
indorsers are discharged. (Sec. 118) 1. The bill has been dishonored by non-
payment;
ACCEPTANCE FOR HONOR 2. It has been protested for non-
An undertaking by a stranger to a bill payment;
after protest for the benefit of any party 3. Payment supra protest (another term
liable thereon or for the honor of the for payment for honor because prior
person for whose account the bill is protest for non-payment is required)
drawn which acceptance inures also to is made by any person, even by a
the benefit of all parties subsequent to party thereto;
the person for whose honor it is 4. The payment is attested by a
accepted, and conditioned to pay the notarial act of honor which must be
bill when it becomes due if the original appended to the protest or form an
drawee does not pay it. (Secs. 161-170) extension of it;
Requisites: 5. The notarial act must be based on
1. The bill must have been protested the declaration made by the payor
for dishonor by non-acceptance or for honor or his agent of his
for better security; intention to pay the bill for honor
2. The acceptor for honor must be a and for whose honor he pays.
stranger and not a party already
liable on the instrument; Note: If the above formalities are not
3. Bill must not be overdue; complied with, payment will operate as
4. Acceptance for honor must be with a mere voluntary payment and the payor
the consent of the holder of the will acquire no right to full
instrument. reimbursement against the party for
Formal requisites: whose honor he pays.
1. Must be in writing;
2. Must indicate that it is an In payment for honor, the payee
acceptance for honor; cannot refuse payment. If he refuses,
3. Signed by the acceptor for honor; he cannot recover from the parties who
4. Must contain an express or implied would have been discharged had he
promise to pay money; accepted the same. In acceptance for
5. The accepted bill for honor must be honor, the holders consent is necessary.
delivered to the holder. The payor for honor is given the right
to receive both the bill and the protest
ORDINARY ACCEPTANCE obviously to enable him to enforce his
ACCEPTANCE FOR HONOR rights against the parties who are liable
No previous protest Previous protest is to him.
is required required
Consent of holder is Consent of holder BILLS IN SET
implied is required One composed of several parts, each
Drawee is acceptor Acceptor must be part being numbered and containing a
stranger to the bill reference to the other parts, the whole
Acceptor is Acceptor is of the parts constituting but one bill.
primarily liable secondarily liable
Purpose: It is usually availed of in
cases where a bill had to be sent to a
distant place through some conveyance.
If each part is sent by different means of
PAYMENT FOR HONOR conveyances, the chance that at least
Payment made by a person, whether a one part of the set would reach its
party to the bill or not, after it has been destination would be greater.
protested for non-payment, for the
benefit of any party liable thereon or for Rights of holders where parts are
negotiated separately
1.If both are HDC, the holder whose
title first accrues is considered the RENUNCIATION (Sec. 122)
true owner of the bill. The act of surrendering a right or
2.But the person who accepts or pays claim without recompense, but it can be
in due course shall not be applied with equal propriety to the
prejudiced. (Sec. 179) relinquishing of a demand upon an
agreement supported by a consideration.
Obligations of holder who indorses 2 or (1 Agbayani 1992 ed.)
more parts of the bill in set Effects:
1.The person shall be liable on every 1. A renunciation in favor of a
such part; secondary party may be made by the
2.Every indorser subsequent to him is holder before, at or after maturity
liable on the part he has himself of the instrument. The effect is to
indorsed, as if such parts were discharge only such secondary party
separate bills. (Sec. 180) and all parties subsequent to him
but the instrument itself remains in
IX. DISCHARGE force.
2. A renunciation in favor of the
DISCHARGE OF NI principal debtor may be effected at
A release of all parties, whether or after maturity. The effect is to
primary or secondary, from the discharge the instrument and all
obligations arising thereunder. It parties thereto provided the
renders the instrument without force renunciation is made unconditionally
and effect and, consequently, it can no and absolutely.
longer be negotiated. (The Law on Note: In either case, renunciation does
Negotiable Instruments with Documents not affect the rights of a holder in due
of Title, Hector de Leon, 2000 ed.) course without notice.
Instances:
1. By payment in due course by or on CANCELLATION
behalf of the principal debtor; It includes the act of tearing, erasing,
2. Payment by accommodated party; obliterating, or burning. It is not limited
3. Intentional cancellation by the to writing of the word cancelled, or
holder; paid, or drawing of criss-cross lines
4. By any act which will discharge a across the instrument. (Sec. 123) It may
simple contract for the payment of be made by any other means by which
money; (Sec. 119) the intention to cancel the instrument
5. When the principal debtor becomes may be evident.
the holder of the instrument at or
after maturity in his own right. DISCHARGE OF PERSONS SECONDARILY
LIABLE
PAYMENT IN DUE COURSE 1. By any act which discharges the
Requisites: instrument;
1. Payment must be made at or after 2. By the intentional cancellation of his
maturity. signature by the holder;
2. Payment must be made to the 3. By the discharge of a prior party;
holder. 4. By a valid tender of payment made
3. Payment must be made in good faith by a prior party;
and without notice that the holders 5. By the release of the principal
title is defective. (Sec. 88) debtor, unless the holders right of
recourse against the party
secondarily liable is expressly
By whom made: reserved;
a. By maker or acceptor; or 6. By any agreement binding upon the
b. Surety if a primary party; or holder to extend the time of
c. By an agent on behalf of the payment or to postpone the holders
principal
right to enforce the instrument. drawer and all indorsers are discharged
(Sec. 120) from liability thereon. (Sec. 186)
In the following cases, the 5. Refusal of drawee bank to certify
agreement to extend the time The holder has no action against the
of payment does not discharge a bank but he has a right of action against
party secondarily liable: the drawer. The drawer in turn has right
a) where the extension of time is of action against the bank based on the
consented to by such party; original contact of deposit between
b) where the holder expressly them.
reserves his right of recourse
against such party. Crossed Check
Payment at or after maturity by a A check which in addition to the usual
party secondarily liable does not contents of an ordinary check contains
discharge the instrument. It only also the name of a certain banker or
cancels his own liability and that of the business entity through whom it must be
parties subsequent to him. (Sec. 121) presented for payment.
Effects:
X. CHECKS a) That the check may not be
A bill of exchange drawn on a bank encashed; it may only be deposited
payable on demand (Sec. 185) with the bank;
b) That the check may be negotiated
CONCEPTS: only once to a person who has an
1. Certification of Checks account with the bank; and
An agreement whereby the bank c) That it serves as a warning to the
against whom a check is drawn, holder that the check has been
undertakes to pay it at any future time issued for a definite purpose.
when presented for payment. (Bataan Cigar vs. CA, 230 SCRA 643)
Effects:
a. Equivalent to acceptance (Sec. The NIL is silent with respect to
187) and is the operative act crossed checks, although the Code of
that makes banks liable Commerce makes reference to such
b. Assignment of the funds of the instrument. Nonetheless, this Court has
drawer in the hands of the taken judicial cognizance of the practice
drawee (Sec. 189) that a check with 2 parallel lines in the
c. If obtained by the holder, upper left hand corner means that it
discharges the persons could only be deposited and not
secondarily liable thereon (Sec. converted into cash. The effects of
188) crossing a check thus, relates to the
2. A check of itself does not operate as mode of payment, meaning that the
an assignment of any part of the funds to drawer had intended the check for
the credit of the drawer with the bank. deposit only by the rightful person, i.e.,
The bank is not liable to the holder, the payee named therein. (Cely Yang vs.
unless and until it accepts or certifies Court of Appeals, G.R. No. 138074,
the check. (Sec. 189) August 15, 2003)
3. A check must be presented for
payment within reasonable time after its IRON CLAD RULE
issue or the drawer will be discharged Prohibits the countermanding of
from liability thereon to the extent of payment of certified checks. (Republic
the loss caused by the delay. (Sec. 186) of the Philippines vs. PNB)
Reasonable time: (Sec. 193, NIL) Note: The holder must be a holder in
a. Nature of the instrument due course before the stop payment
b. Usage of business or trade order may not be successfully invoked
c. The facts of the particular case against him. (Mesina vs. IAC, 146 SCRA
4. Where the holder of a check procures 497, 505)
it to be accepted or certified, the
TYPES OF CHECKS (Cesar Villanueva, with the understanding that it is not to
Commercial Law Review, 2004 ed.) be presented at the bank, but will be
redeemed by the maker himself when
a. Cashiers Check the loan falls due and which
One drawn by the cashier of a bank, understanding is evidenced by writing
in the name of the bank against the bank the word memorandum, memo or
itself payable to a third person. It is a mem on the check.
primary obligation of the issuing bank
and accepted in advance upon issuance. d. Certified Check
(Tan vs. CA, 239 SCRA 310) An agreement whereby the bank
against whom a check is drawn
b. Managers Check undertakes to pay it at any future time
A check drawn by the manager of a when presented for payment. (Sec. 187)
bank in the name of the bank itself
payable to a third person. It is similar to
the cashiers check as to the effect and
use.
c. Memorandum Check
A check given by a borrower to a
lender for the amount of a short loan,

Negotiable Instruments Law Summary

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Negotiable Instruments Law Summary

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6 2005 CENTRALIZED BAR OPERATIONS

NEGOTIABLE INSTRUMENTS LAW (NIL)

I. GENERAL CONCEPTS with NI as they are negotiated

CHECK - A bill of exchange drawn on DISTINCTIONS

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

NEGOTIABLE NEGOTIABLE manner of to order, if

its negotiability. The nature of Particular fund Particular fund

REQUISITES OF NEGOTIABILITY Postal money orders are not negotiable

upon failure of holder to that extend DEMAND FIXED OR

d. When the name of the payee does given; the instrument is

FICTITIOUS PAYEE RULE

comply with the entire b. Subsequent Negotiation

2. May be converted to special partners, all must indorse unless

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

defenses as if it were non-negotiable. GENERAL RULE: Failure to make

Every holder of a negotiable SHELTER RULE

Note: without receiving value consideration moving to the principal

Negotiable Instruments and other appointed by the instrument for an

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

H. PRESCRIPTION A serial number is an item which

COMMERCIAL LAW COMMITTEE

Section 14 Section 15 Section 16

Kind of defense Personal Real Personal

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