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NEGOTIABLE INSTRUMENTS LAW (Act No.

2031) Q: Which one is the best or better substitute for


money? Why?
PRELIMINARY CONSIDERATIONS: A: Negotiable instrument.
A. Governing Laws Reasons:
1. The Negotiable Instruments Law 1. Negotiability and
2. The Code of Commerce 2. Accumulation of secondary contracts.
3. The New Civil Code
E. Characteristics of Negotiable Instrument
B. Concept of Negotiable Instrument 1. Negotiability it is that attribute or
Negotiable Instruments is a written contract for property whereby a bill or note or check
the payment of the money which is intended as may pass from hand to hand similar to
a substitute for money and passes from one money, so as to give the holder in due
person to another as money, in such a manner course the right to hold the instrument and
as to give a holder in due course the right to to collect the sum payable for himself free
hold the instrument free from defenses from defenses.
available to prior parties. *This attribute is very important.
2. Accumulation of secondary contracts
C. Classes of Negotiable Instrument secondary contracts are picked up and
1. Promissory Note
carried along with them as they are
Sec. 184 of the Negotiable Instruments Law
negotiated from one person to another, or
provides that: A negotiable promissory
in the course of negotiation of a negotiable
note within the meaning of this Act is an
instrument, a series of juridical ties
unconditional promise in writing made by
between the parties thereto arise either by
one person to another, signed by the maker,
law or by privity.
engaging to pay on demand, or at a fixed or
*There must be further negotiation for
determinable future time, a sum certain in
secondary contracts exist.
money to order or to bearer. Where a note *Converted to obligors because of their
is drawn to the makers own order, it is not indorsements
complete until indorsed by him.
*Personal engagement on the part of the F. Negotiable Instruments compared with other
maker. papers (document of title, letter of credit,
2. Bill of Exchange certificate of stock, pawn ticket, postal money
Sec. 126 of the Negotiable Instruments Law
order, treasury warrant)
provides that: A bill of exchange is an Document of title includes any bill of lading,
unconditional order in writing addressed by dock warrant, quedan, or warehouse receipt or
one person to another, signed by the person order for delivery of goods, or any other
giving it, requiring the person to whom it is document used in the ordinary course of
addressed to pay on demand or at a fixed or business in the sale or transfer of goods, as
determinable future time a sum certain in proof of possession or control of goods, or
money to order or to bearer. authorizing or purporting to authorize the
*There is only an order directing other party
possessor of the document to transfer or
to pay the instrument.
receive either by indorsement or by delivery,
D. Functions of Negotiable Instrument goods represented by such document (Article
1. It operates as a substitute of money 1636 of the New Civil Code)
*This is the main function of negotiable Letter of Credit is an engagement by a bank or
instruments. other person made at the request of a customer
*Either negotiable or non-negotiable that the issuer will honor drafts or other
instrument, it is a substitute for money. demands for payment upon compliance with
Both are in lieu of money. the conditions specified in the credit.
*relate this with legal tender Certificate of Stock is a non-negotiable
2. It is a means of creating and transferring instrument because it does not contain an
credit unconditional promise or order to pay a sum
3. It facilitates the sale of goods certain in money.
4. It increases the purchasing medium in
circulation

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Pawn Ticket is a non-negotiable document 2. Must contain an unconditional promise or
because it does not represent money but the order to pay a sum certain in money
pawned articles. Rationale why the law requires that the
Postal Money Order is a non-negotiable promise or order be unconditional:
instrument because it is governed by postal Because no one will accept the same if the
rules and regulations which may be inconsistent transferee does not know the certainty of
with the Negotiable Instruments Law and it can the event that will happen. Hence,
only be negotiated once. uncertainty will defeat the very purpose of
Treasury Warrant is a non-negotiable the negotiable instrument law, i.e.,
instrument because it is payable out of a substitute for money.
particular fund. *Mere recital does not negate negotiability
of the instrument.
G. Legal tender character Q: What is a condition?
Q: Does negotiable instrument has legal tender A: A contingent event, happening of which
power? is uncertain, event which may or may not
A: NO. happen.
Q: What is legal tender? *In alternative obligation, for negotiability
A: Legal tender is that kind of money that the
purposes, the option must be left in the
law compels a creditor to accept in payment of
hands of the creditor for it to be negotiable.
his debt when tendered by the debtor in the *If the option is left in the hands of the
right amount. debtor, it is non-negotiable.
*Coins/notes circulated by the Bangko Sentral a. Promise or order to pay must be
ng Pilipinas. unconditional
Q: What attribute that legal tender has that i. Reference to transaction
negotiable instrument do not have? Sec. 3 of the Negotiable
A: Element of compulsion. Instrument Law provides that:
An unqualified order or
FORM AND INTERPRETATION OF NEGOTIABLE
promise to pay is unconditional
INSTRUMENTS:
within the meaning of this Act
A. Requisites of negotiability though coupled with: (a) An
Sec. 1 of the Negotiable Instruments Law indication of a particular fund
provides that: An instrument to be negotiable out of which reimbursement is
must conform to the following requirements: (a) to be made or a particular
It must be in writing and signed by the maker or account to be debited with the
drawer; (b) must contain an unconditional amount; or (b) A statement of
promise or order to pay a sum certain in money; the transaction which gives rise
(c) must be payable on demand, or at a fixed or to the instrument. But an order
determinable future time; (d) must be payable or promise to pay out of a
to order or to bearer; and (e) where the particular fund is not
instrument is addressed to a drawee, he must unconditional.
be named or otherwise indicated therein with ii. Source or payment or account
reasonable certainty. to be debited
Q: What principle do we follow in determining
the instrument as negotiable or not? Fund for Particular Fund
A: Negotiability is shown on the face of the Reimbursement for Payment
instrument. The drawee pays There is only one
the payee from act the drawee
Requisites:
his own funds pays directly from
1. Must be in writing and signed by the maker afterwards the the particular
or drawer drawee pays fund indicated
Q: Why should it be in writing? himself from the
A: In order for the instrument to be used for particular fund
negotiation. Particular fund Particular fund
Rationale: For the achievement of the indicated is not indicated is the
purpose of the negotiable instrument law. the direct source direct source of
*It must be signed by the maker or drawer. of payment payment
Rationale: To be bound by the contract.
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*Particular fund for payment *It must be the prevailing rate
depends on the sufficiency of of conversion or fixed rate that
the funds is well known.
*Extrinsic and collateral matter *Does not affect the
negates negotiability. negotiability of the instrument
b. Payable in sum certain in money because the sum remains
i. Provisions which do not affect certain.
certainty of sum payable vi. Payment of attorneys fees
Sec. 2 of the Negotiable *Due to the default of the
Instrument Law provides that: obligor, obligee was forced to
The sum payable is a sum engage the services of a lawyer.
certain within the meaning of 3. Payable on demand or at a fixed or
this Act, although it is to be determinable future time
paid: (a) With interest; or (b) By a. When payable on demand
stated installments; or (c) By Sec. 7 of the Negotiable Instruments
stated installments, with a Law provides that: An instrument is
provision that, upon default in payable on demand: (a) When it is so
payment of any installment or expressed to be payable on demand, or
of interest, the whole shall at sight, or on presentation; or (b) In
become due; or (d) With which no time for payment is
exchange, whether at a fixed expressed. Where an instrument is
rate or at the current rate; or (e) issued, accepted, or indorsed when
With costs of collection or an overdue, it is, as regards the person so
attorneys fee, in case payment issuing, accepting, or indorsing it,
shall not be made at maturity. payable on demand.
ii. Payment of interest *It is the holder of the instrument that
Q: Why is there a need to pay has the call in case the negotiable
interest? instrument is silent, i.e., it stated no
A: For the consumption of the maturity date.
money owned by a person but b. When payable at determinable future
was not used by him. time
iii. Payment by installments Sec. 4 of the Negotiable Instruments
Stated Installments the dates Law provides that: An instrument is
of each installment must be payable at a determinable future time,
fixed or at least determinable within the meaning of this Act, which is
and the amount to be paid for expressed to be payable: (a) At a fixed
each installment must be period after date or sight; or (b) On or
stated. before a fixed or determinable future
Things to be written in the time specified therein; or (c) On or at a
negotiable instrument fixed period after the occurrence of a
regarding payment by specified event which is certain to
installments: happen, though the time of happening
1. Amount of each instalments be uncertain. An instrument payable
*must be determinable
upon a contingency is not negotiable,
2. Maturity Date
and the happening of the event does
iv. Acceleration clause
Acceleration clause renders not cure the defect.
whole debt due and
With a Condition With a Period
demandable upon failure of the
Uncertain to Certain to happen
obligor to comply with certain happen though the date of
conditions. happening is
*relate to doctrine of uncertain
indivisibility of contract. *If the instrument is demandable based
v. Payment with exchange on period the negotiability of the
instrument is still not affected.
*Paragraph (c) is one with a period.
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4. Payable to order or bearer may be drawn payable to the
*These are words of negotiability order of: (a) A payee who is not
Q: What is the implication of these words? maker, drawer, or drawee; or (b)
A: There is a proper authorization for
The drawer or maker; or (c) The
further negotiation by the maker or drawer.
drawee; or (d) Two or more
a. When payable to bearer
Sec. 9 of the Negotiable Instrument payees jointly; or (e) One or
some of several payees; or (f)
Law provides that: The instrument is
payable to bearer: (a) When it is The holder of an office for the
time being. Where the
expressed to be so payable; or (b) When
it is payable to a person named therein instrument is payable to order,
the payee must be named or
or bearer; or (c) When it is payable to
the order of a fictitious or non-existing otherwise indicated therein
with reasonable certainty.
person, and such fact was known to the
A payee who is not maker,
person making it so payable; or (d)
drawer, or drawee
When the name of the payee does not
*The payee may be a
purport to be the name of any person;
juridical person.
or (e) When the only or last Q: How can it be negotiated
indorsement is an indorsement in further?
blank. A: By indorsement of the
Principle: Once a bearer always a person authorized by the
bearer instrument. corporation.
*This principle applies only to an The holder of an office for
instrument that was originally issued as the time being
bearer instrument. *It is not necessary to name
i. Rule when instrument is the person holding the
payable to a fictitious person position since it is payable
*Upon its face, it is an order
to the office itself and not
instrument but because it is
to the person holding it.
named to fictitious or non- 5. Omissions that do not affect negotiability
existing person it is converted Sec. 6 of the Negotiable Instrument Law
to a bearer instrument. provides that: The validity and negotiable
*Fictitious person or non-
character of an instrument are not affected
existing person cannot endorse.
by the fact that: (a) it is not dated; or (b)
*The person to whose order the
does not specify the value given, or that any
instrument is made payable
value had been given therefor; or (c) does
may in fact be existing but he is
not specify the place where it is drawn or
still fictitious or non-existent
the place where it is payable; or (d) bears a
under Sec. 9(c) of the
seal; or (e) designates a particular kind of
negotiable instrument law if the
current money in which payment is to be
person making it so payable
made. But nothing in this section shall alter
does not intend to pay the
or repeal any statute requiring in certain
specified person.
b. When payable to order cases the nature of the consideration to be
*The payee of instrument payable to stated in the instrument.
order must be a person in being, natural Does not specify the value given or that
or legal, and ascertained at the time of any value had been given therefor
*Consideration is always presumed. Basis:
issue.
i. To whose order the instrument Sec. 24 of the Negotiable Instrument Law
may be made payable provides that: Every negotiable instrument
Sec. 8 of the Negotiable is deemed prima facie to have been issued
Instrument Law provides that: for a valuable consideration; and every
The instrument is payable to person whose signature appears thereon to
order where it is drawn payable have become a party thereto for value.
to the order of a specified Does not specify the place where it is
person or to him or his order. It drawn or the place where it is payable
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*The New Civil Code is applied suppletorily. d. Holder is given the option to do
Bears a seal something in lieu of payment of money
*This is for authentication purposes. *If it is the obligor or debtor is given the
A particular kind of current money in option to choose what to be done it is
which payment is to be made not negotiable because it is conditional
*It is still negotiable because it would still thus requisites for negotiability is not
be considered payable in money. Foreign complied with.
currency is convertible to Philippine money
which is legal tender in the Philippines. B. Rules to be followed in interpreting negotiable
6. Additional provisions not affecting instruments
negotiability Sec. 17 of the Negotiable Instrument Law
Sec. 5 of the Negotiable Instrument Law provides that: Where the language of the
provides that: An instrument which instrument is ambiguous or there are omissions
contains an order or promise to do any act therein, the following rules of construction
in addition to the payment of money is not apply: (a) Where the sum payable is expressed
negotiable. But the negotiable character of in words and also in figures and there is a
an instrument otherwise negotiable is not discrepancy between the two, the sum denoted
affected by a provision which: (a) authorizes by the words is the sum payable; but if the
the sale of collateral securities in case the words are ambiguous or uncertain, reference
instrument be not paid at maturity; or (b) may be had to the figures to fix the amount; (b)
authorizes a confession of judgment if the Where the instrument provides for the payment
instrument be not paid at maturity; or (c) of interest, without specifying the date from
waives the benefit of any law intended for which interest is to run, the interest runs from
the advantage or protection of the obligor; the date of the instrument, and if the
or (d) gives the holder an election to require instrument is undated, from the issue thereof;
something to be done in lieu of payment of (c) Where the instrument is not dated, it will be
money. But nothing in this section shall considered to be dated as of the time it was
validate any provision or stipulation issued; (d) Where there is a conflict between
otherwise illegal. the written and printed provisions of the
a. Sale of collateral securities instrument, the written provisions prevail; (e)
Q: Is the authority to sale includes the
Where the instrument is so ambiguous that
authority to appropriate for himself?
there is doubt whether it is a bill or note, the
A: NO. It constitutes pactum
holder may treat it as either at his election; (f)
commissorium. It is an unjust
Where a signature is so placed upon the
enrichment.
Q: What is the meaning of sale of instrument that it is not clear in what capacity
collateral securities? the person making the same intended to sign,
A: Contemplates securities added to the he is to be deemed an indorser; (g) Where an
obligation to pay. instrument containing the word "I promise to
b. Confession of judgment pay" is signed by two or more persons, they are
*This is void by reason of public policy deemed to be jointly and severally liable
but still it is negotiable. thereon.
*In effect, such provision is considered *This rule is applicable only in case of ambiguity
not existing. and there is doubt.
*It waives his right to due process; his
right of a day in court. NEGOTIATION:
Case: PNB v Manila Oil Refinery
c. Waiver of benefit A. Modes of transfer
*Pertains to benefits granted by the 1. Negotiation an instrument is negotiated
Negotiable Instrument Law. when it is transferred from one person to
Q: What are the benefits that can be another in such manner as to constitute the
waived but the negotiability of the transferee the holder thereof.
instrument is not affected? 2. Assignment a method of transferring a
A: 1. Presentment for payment; 2. non-negotiable instrument whereby the
Notice of dishonor; 3. Protest assignee is merely placed in the position of
the assignor and acquires the instrument

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subject to all defenses that might have been delivery, however, if the indorsement is blank,
set up against the original payee. delivery alone is sufficient.
*If the instrument is a non-negotiable the only
transfer that can be made is by assignment. D. Concept of delivery
Sec. 16 of the Negotiable Instrument Law
B. Concept of negotiation; distinguished from provides that: Every contract on a negotiable
assignment instrument is incomplete and revocable until
Sec. 30 of the Negotiable Instrument Law delivery of the instrument for the purpose of
provides that: An instrument is negotiated giving effect thereto. As between immediate
when it is transferred from one person to parties and as regards a remote party other
another in such manner as to constitute the than a holder in due course, the delivery, in
transferee the holder thereof. If payable to order to be effectual, must be made either by or
bearer, it is negotiated by delivery; if payable to under the authority of the party making,
order, it is negotiated by the indorsement of the drawing, accepting, or indorsing, as the case
holder and completed by delivery. may be; and, in such case, the delivery may be
shown to have been conditional, or for a special
Assignment Negotiation purpose only, and not for the purpose of
Pertains to contracts Pertains to negotiable
transferring the property in the instrument. But
in general instruments
where the instrument is in the hands of a holder
Assignee takes the Holder in due course
instrument subject to takes it free from in due course, a valid delivery thereof by all
the defenses obtaining personal defenses parties prior to him so as to make them liable to
among the original available among the him is conclusively presumed. And where the
parties parties instrument is no longer in the possession of a
Assignee steps into Holder in due course party whose signature appears thereon, a valid
the shoes of the may acquire a better
and intentional delivery by him is presumed
assignor and merely right than the right of
acquires whatever the transferor until the contrary is proved.
Delivery is the transfer of possession of the
rights the assignor
may have instrument by the maker or drawer with the
Governed by the Civil Governed by the intention to transfer title to the payee and
Code Negotiable Instrument recognize him as holder thereof.
Law *Delivery is always a common requirement.

E. Indorsement
C. Ways of negotiation (in case of order or bearer 1. Concept
instrument) Indorsement is a legal transaction effected
1. If payable to bearer, it is negotiated by mere by the writing of ones name at the back of
delivery the instrument or upon a paper (allonge)
2. If payable to order, it is negotiated by attached thereto with or without additional
indorsement and delivery words specifying the person whom or to
Q: Why cant indorsement be avoided by whose order the instrument is to be payable
original payee? whereby one not only transfers legal title to
A: Because by indorsement, it is the original the paper transferred but likewise enters
payees order to the maker to pay the into an implied guaranty that the
transferee. instrument will be duly paid.
Q: Why indorsement is not necessary in bearer *This is a mechanical act
instrument? 2. How made
A: Because the engagement is to pay the Sec. 31 of the Negotiable Instrument Law
amount of the instrument to holder or to any provides that: The indorsement must be
subsequent holders. written on the instrument itself or upon a
Q: If the instrument is originally issued as an paper attached thereto. The signature of
order instrument and was subsequently the indorser, without additional words, is a
negotiated, does it always require indorsement sufficient indorsement.
and delivery? Sec. 32 of the Negotiable Instrument Law
A: IT DEPENDS. If the indorsement is special, it provides that: The indorsement must be an
is necessary that there is indorsement and indorsement of the entire instrument. An

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indorsement which purports to transfer to transferee whether the condition has
the indorsee a part only of the amount been fulfilled or not. But any person to
payable, or which purports to transfer the whom an instrument so indorsed is
instrument to two or more indorsees negotiated will hold the same, or the
severally, does not operate as a negotiation proceeds thereof, subject to the rights
of the instrument. But where the of the person indorsing conditionally.
instrument has been paid in part, it may be Q: What is suspended?
indorsed as to the residue. A: The very indorsement is suspended
3. Kinds thus the right of the indorsee is made to
*These words: specified, restrictive, depend on the happening of the event.
conditional, qualified are associated words; Example:
they can be used interchangeably. A B ---- C
How further negotiation of an order b. Unconditional
What are the liabilities of an indorser:
instrument be made:
a. Qualified
a. Special
Sec. 38 of the Negotiable Instrument
Sec. 34 of the Negotiable Instrument
Law provides that: A qualified
Law provides that: A special
indorsement constitutes the indorser a
indorsement specifies the person to
mere assignor of the title to the
whom, or to whose order, the
instrument. It may be made by adding
instrument is to be payable, and the
to the indorser's signature the words
indorsement of such indorsee is
"without recourse" or any words of
necessary to the further negotiation of
similar import. Such an indorsement
the instrument. An indorsement in
does not impair the negotiable
blank specifies no indorsee, and an
character of the instrument.
instrument so indorsed is payable to
*This indorsement is confined to
bearer, and may be negotiated by
warranties.
delivery. *In this kind of indorsement, Sec. 65 of
*In special indorsement, indorsement
the Negotiable Instrument is applicable.
and delivery is necessary. b. Unqualified
Example: *Indorsement of this kind makes the
indorsee liable for warranties and held
FFr
Front (Back) Pay to C the indorsee secondarily liable in case
of dishonor.
Sgd B
b. Blank *Sec. 66 of the Negotiable Instrument
Sec. 35 of the Negotiable Instrument Law is applicable in this kind of
Law provides that: The holder may consideration.
convert a blank indorsement into a What are the rights of indorsee:
special indorsement by writing over the a. Restrictive
Sec. 36 of the Negotiable Instrument
signature of the indorser in blank any
Law provides that: An indorsement is
contract consistent with the character
restrictive which either: (a) Prohibits the
of the indorsement.
*In blank indorsement, only delivery is further negotiation of the instrument;
necessary. or (b) Constitutes the indorsee the
Example agent of the indorser; or (c) Vests the
title in the indorsee in trust for or to the
Back use of some other persons. But the
Front (Back)
mere absence of words implying power
Sgd B to negotiate does not make an
When is the indorsement effective:
a. Conditional indorsement restrictive.
*Prohibits the further negotiation of the
Sec. 39 of the Negotiable Instrument
Law provides that: Where an instrument
- the beneficial and legal title is both on
indorsement is conditional, the party
the indorser.
required to pay the instrument may
*Constitutes the indorsee the agent of
disregard the condition and make
the indorser
payment to the indorsee or his
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- the indorser has the legal title while whose indorsement is struck out, and
the beneficial title remains with the all indorsers subsequent to him, are
principal. thereby relieved from liability on the
-the relationship exists here is principal- instrument.
agent relationship. *The striking of indorsement is under
*Vests the title in the indorsee in trust the discretion of the holder and not of
for or to the use of some other persons the indorser.
-the beneficial title belongs to other e. Transfer indorsement of an instrument
person whereas the legal title remains payable to bearer
with the beneficiary. Sec. 40 of the Negotiable Instrument
-The relationship exists is a trustee- Law states that: Where an instrument,
trustor relationship. payable to bearer, is indorsed specially,
Sec. 37 of the Negotiable Instrument it may nevertheless be further
Law provides that: A restrictive negotiated by delivery; but the person
indorsement confers upon the indorsee indorsing specially is liable as indorser
the right: (a) to receive payment of the to only such holders as make title
instrument; (b) to bring any action through his indorsement.
thereon that the indorser could bring; Example:
(c) to transfer his rights as such Note payable to bearer
indorsee, where the form of the A B C D
indorsement authorizes him to do so. B indorsed the instrument to C
Q: Does the indorsement affect the
But all subsequent indorsees acquire
instrument?
only the title of the first indorsee under
A: NO. Even if there is an indorsement,
the restrictive indorsement.
it does not change the fact that the
*It does not follow that if the
instrument is a bearer one thus it can
instrument is restrictively indorsed the
be negotiated by mere delivery.
liability is qualified.
Q: Is the indorser of the bearer
b. Unrestrictive
4. Other rules on indorsement instrument liable? What is his liability?
a. in a representative capacity A: YES. He is liable in case of breach of
Sec. 44 of the Negotiable Instrument warranty. He is liable as indorser for the
Law provides that: Where any person fact that he indorses a bearer
is under obligation to indorse in a instrument.
representative capacity, he may indorse *Indorsement on a bearer instrument
in such terms as to negative personal does not affect the nature of the
liability. instrument because a bearer
b. Presumption as to time of indorsement instrument is always a bearer
Sec. 45 of the Negotiable Instrument instrument.
Law provides that: Except where an *This section applies only to
indorsement bears date after the instruments which are originally
maturity of the instrument, every payable to bearer.
negotiation is deemed prima facie to Example: A issued to B a bearer note, B
have been effected before the wants to negotiate it to C. B asked you
instrument was overdue. how he can validly negotiate the bearer
c. Place of indorsement instrument? The answer is by mere
Sec. 46 of the Negotiable Instrument delivery.
Law provides that: Except where the Q: Is there a change in the liabilities of a
contrary appears, every indorsement is person who indorses a bearer
presumed prima facie to have been instrument?
made at the place where the A: YES. He is liable as an indorser under
instrument is dated. Sec. 67 of the Negotiable Instrument
d. Striking out of indorsement Law.
Sec. 48 of the Negotiable Instrument Q: Is there any liability attaches to the
Law states that: The holder may at any person who negotiates the instrument
time strike out any indorsement which by mere delivery?
is not necessary to his title. The indorser
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A: YES. Sec 65 second paragraph but A: YES. Under Sec. 49 of the Negotiable
confined to warranties only. Instrument, there is an equitable
f. Where instrument is payable to 2 or assignment.
more persons Q: Does the holder of the instrument
Sec. 41 of the Negotiable Instrument has any other right?
Law states that: Where an instrument A: YES. He has the right to have the
is payable to the order of two or more indorsement of the transferor. This right
payees or indorsees who are not is applicable only if the instrument is
partners, all must indorse unless the negotiable. He can file a case for
one indorsing has authority to indorse specific performance.
for the others. Q: Why is the date of indorsement
g. Instrument is drawn or indorsed to a material?
person as cashier A: To determine the date of due course
Sec. 42 of the Negotiable Instrument holding.
Law states that: Where an instrument Q: A issued a negotiable instrument to
is drawn or indorsed to a person as B, B negotiated it to C. The delivery took
"cashier" or other fiscal officer of a bank effect on May 1, 2008 and the
or corporation, it is deemed prima facie indorsement took effect on June 1,
to be payable to the bank or 2008. When was there a valid
corporation of which he is such officer, negotiation?
and may be negotiated by either the A: At the time indorsement was made.
indorsement of the bank or corporation There is no retroactive effect.
*The requisites of a holder in due
or the indorsement of the officer.
h. Where name of payee or indorsee is course must be present up to the actual
misspelled and valid negotiation took place.
Sec. 43 of the Negotiable Instrument 5. Negotiation by a prior party
Sec. 50 of the Negotiable Instrument Law
Law states that: Where the name of a
states that: Where an instrument is
payee or indorsee is wrongly designated
negotiated back to a prior party, such party
or misspelled, he may indorse the
may, subject to the provisions of this Act,
instrument as therein described adding,
reissue and further negotiable the same.
if he thinks fit, his proper signature.
i. Indorsement of an order of instrument But he is not entitled to enforce payment
without indorsement thereof against any intervening party to
Sec. 49 of the Negotiable Instrument whom he was personally liable.
Law provides that: Where the holder
HOLDERS:
of an instrument payable to his order
transfers it for value without indorsing A. General concept of holder
it, the transfer vests in the transferee Sec. 191 of the Negotiable Instrument Law
such title as the transferor had therein, states that: "Holder" means the payee or
and the transferee acquires in addition, indorsee of a bill or note who is in possession of
the right to have the indorsement of the it, or the bearer thereof.
transferor. But for the purpose of *If payable to bearer, holder means the
determining whether the transferee is a person who is in possession thereof.
holder in due course, the negotiation Q: Can a named payee be called a holder?
takes effect as of the time when the A: YES. If the instrument is in his possession.
Presumption: There was a valid delivery.
indorsement is actually made.
Advantage of being a holder in due course: Can
Q: A issued an instrument payable to
give shelter/protection to the subsequent
the order of B, B wants to negotiate it to
holders.
C. How negotiation be validly made?
A: Indorsement and delivery
B. Holder in due course
Q: A issued an order instrument to B, B
Sec. 52 of the Negotiable Instrument Law
transferred it to C only by delivery
provides that: A holder in due course is a
without indorsing it. Is there any legal
holder who has taken the instrument under the
implication on the gesture made by B?
following conditions: (a) That it is complete and
regular upon its face; (b) That he became the
9
holder of it before it was overdue, and without to such instruments, and the facts of
notice that it has been previously dishonored, if the particular case.
such was the fact; (c) That he took it in good 3. Notice of infirmity or defect
faith and for value; (d) That at the time it was Sec. 54 of the Negotiable Instrument Law
negotiated to him, he had no notice of any provides that: Where the transferee
infirmity in the instrument or defect in the title receives notice of any infirmity in the
of the person negotiating it. instrument or defect in the title of the
*Requisites on Sec. 52 boils down to good faith person negotiating the same before he has
and innocence of the holder. paid the full amount agreed to be paid
*This is equivalent to innocent buyer in good therefor, he will be deemed a holder in due
faith under New Civil Code. course only to the extent of the amount
1. Instrument complete and regular therefore paid by him.
*Complete: all necessary details that define *There is defective in the title when there is
the necessary rights thereto and all the error in the indorsement and/or in delivery.
requisites of Sec. 1 must be present. Q: Even if the instrument suffer infirmities,
*Regular: there must be no visible is there a possibility that the holder be a
alterations/changes upon the face of the holder in due course?
instrument. A: YES. If he has no knowledge of the
*These are alterations that are obvious in infirmity.
the naked eye. Sec. 55 of the Negotiable Instrument Law
2. Taken before overdue provides that: The title of a person who
*If the instrument is overdue, it is also a negotiates an instrument is defective within
notice that it has been dishonored. the meaning of this Act when he obtained
*An instrument is overdue after the date of
the instrument, or any signature thereto, by
maturity.
fraud, duress, or force and fear, or other
*It is very unusual to negotiate an
unlawful means, or for an illegal
instrument that has been matured because
consideration, or when he negotiates it in
such instrument should have been
breach of faith, or under such circumstances
discharged.
as amount to a fraud.
a. Rule in case of installment instruments
*When the instrument contains an Q: What are the circumstances that render
title defective?
acceleration clause, knowledge of the
A: When he obtained the instrument or any
holder at the time of acquisition thereof
signature thereto by: 1. Fraud; 2. Duress; 3.
that one installment or interest, or
Force and fear; 4. Other unlawful means; 5.
both, as the case may be, is unpaid, is
For an illegal consideration; 6. Negotiate it
notice that the instrument is overdue.
*One who purchases in good faith an in breach of faith; and 7. Under such
circumstances as amount to a fraud.
instrument upon which the interest is
Example:
overdue is a holder in due course. But
A B C
where, by the terms of the instrument, On the part of A, the issuance of the
the principal was to become due upon instrument is involuntary because of the
default of the payment of interest, one presence of any circumstances mentioned
who takes the instrument upon which in Sec. 55. thus making Bs title defective.
the interest is overdue is not a holder in Q: Can C still be called a holder in due
due course. course?
b. Rule in case of demand instruments A: YES. As long as he has no knowledge of
Sec. 53 of the Negotiable Instrument the defect in the title of the person
Law provides that: Where an negotiating it to him.
instrument payable on demand is Sec. 56 of the Negotiable Instrument Law
negotiated on an unreasonable length provides that: To constitutes notice of an
of time after its issue, the holder is not infirmity in the instrument or defect in the
deemed a holder in due course. title of the person negotiating the same, the
*In demand instrument, reasonableness person to whom it is negotiated must have
test is applied. It is the usage of trade or had actual knowledge of the infirmity or
business practice (if any), with respect defect, or knowledge of such facts that his

10
action in taking the instrument amounted to instrument free from any defect of title of prior
bad faith. parties, and free from defenses available to
*Infirmities must include things that are prior parties among themselves, and may
wrong with the instrument itself. These are enforce payment of the instrument for the full
infirmities not visible to the naked eye. amount thereof against all parties liable
*As long as he has knowledge of the thereon.
infirmity due course holding is not present.
Q: How can we reconcile the 1st E. Shelter Rule
requirement and the 4th requirement? Sec. 58 of the Negotiable Instrument Law
A: The first requirement pertains to provides that: In the hands of any holder other
infirmities visible to the naked eye whereas than a holder in due course, a negotiable
the fourth requirement pertains to instrument is subject to the same defenses as if
infirmities not visible to the naked eye. it were non-negotiable. But a holder who
Example: 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
The instrument contains all parties prior to the latter.
Requisites:
necessary details except for
1. That the holder derived his title from a
the amount, A instructed B
holder in due course.
to fill the instrument of the
2. That he himself is not a party to any fraud
any amount but upto
or illegality affecting the instrument.
P50,000 only. B inserted
Example:
P80,000. B negotiated it to
A B C D E F
C.
E is a holder in due course
Q: Can C detect the infirmity upon its face?
E negotiated the instrument to F who is not a
A: NO
4. Good faith holder in due course.
5. Holder for value To subsequent holder, F is considered to be a
holder in due course because he was sheltered
C. Presumption of due course holding by E who is a holder in due course.
Sec. 59 of the Negotiable Instrument Law *The determination of whether there is due
provides that: Every holder is deemed prima course holding or not is material only when
facie to be a holder in due course; but when it is there is a personal defense.
shown that the title of any person who has Q: Is it worth comparing the holders in due
negotiated the instrument was defective, the course and the one who derived title from the
burden is on the holder to prove that he or holder in due course?
some person under whom he claims acquired A: YES.
the title as holder in due course. But the last- Advantages:
mentioned rule does not apply in favor of a
Holder in due course A person derived title
party who became bound on the instrument
from a holder in due
prior to the acquisition of such defective title. course
*The presumption expressed in this section Always a holder in due Holder in due course
arises only in favor of a person who is a holder course to all prior to all prior parties
in the sense defined in Sec. 191 of the parties. Always with except to the person
Negotiable Instrument Law, i. e., a payee or freedom against who negotiated the
indorsee who is in possession of the draft, or defenses and instrument to him
the bearer thereof. defective title
Q: How important is the statutory presumption? Shelter rule is Shelter rule is not
A: The holder of the instrument need not prove applicable applicable
General Rule: Equitable defenses can be
that he is a holder in due course.
*The burden to prove shifted to the other party. interposed against a person not a holder in due
course.
D. Rights of holders in due course Exception: Shelter rule, i. e., Section 58 of the
Sec. 57 of the Negotiable Instrument Law Negotiable Instrument Law.
provides that: A holder in due course holds the
11
LIABILITY OF PARTIES: Primary Maker Acceptor
Secondary General General
Q: What is your understanding of parties liable? When Indorser Indorser
do you say a party is liable? and
A: A person is liable when he in obligated to perform a drawer
particular prestation. *If the holders cause of action is
Q: What are the liabilities of the parties according to its primary engagement, due presentment
nature? and dishonor proceedings are
A: 1. Warranties; 2. Engagement to pay ( primary; irrelevant.
secondary) *If the holders cause of action is breach
of warranty, due presentment and
A. Primary and secondary liability, distinguished dishonor proceedings are irrelevant.
Distinction: *If the holders cause of action is
secondary engagement to pay, due
Primary Liability Secondary Liability presentment and dishonor proceedings
The engagement of a An engagement by a
are relevant.
party to an instrument party to an instrument
Q: Is liability on warranties common to
that on its due date he that on its due
will accept or pay, or presentment it shall be all?
both, the instrument accepted or paid or A: YES.
to the payee or to any both as the case may Persons that had no engagement to
one to whom it is be according to its pay:
negotiated according tenor and that if it be 1. Qualified Indorsers
to its tenor. dishonored and the 2. Persons negotiating by delivery
necessary proceedings
on dishonor be duly Promissory Note Bill of Exchange
taken he will pay the Maker (Sec. 60) Drawer (Sec. 61)
amount thereof to the Acceptor (Sec. 62)
payee or to whom it is Indorser Indorser
negotiated or to any a. General a. General
subsequent indorser (Sec. 66) b. Qualified
who may be b. Qualified
compelled to pay it. (Sec. 65)
Absolutely liable Conditionally liable Persons Persons
negotiating by negotiating by
B. Liability distinguished from warranty delivery (Sec. 65) delivery
Warranty consists of a partys undertaking that Q: Can the drawee be forced to be held
at the time of his negotiation he had title to the liable?
instrument and it is valid and subsisting. A: NO. As long as he do not accepts the
-This is an affirmation/assertion/admission that instrument.
certain things are true. *The drawee cannot be compelled to
Q: Are all parties had warranties? accept the negotiable instrument.
A: YES. *If the refusal amounted to tortious act,
Q: Is engagement to pay common to all parties?
the drawee may be held liable but not
A: NO.
based on contract.
Distinction:
1. Maker
Liability Warranties
Sec. 60 of the Negotiable Instrument Law
It is material to It is immaterial to
determine whether know whether the provides that: The maker of a negotiable
the person is primarily person is primarily or instrument, by making it, engages that he
or secondarily liable secondarily liable will pay it according to its tenor, and admits
the existence of the payee and his then
C. Liability and/or warranty of parties capacity to indorse.
Liability in general *Maker is primarily liable
a. Warranty 2. Drawer
b. Engagement to pay Sec. 61 of the Negotiable Instrument Law
provides that: The drawer by drawing the
Promissory Bill of
instrument admits the existence of the
Note Exchange
payee and his then capacity to indorse; and
12
engages that, on due presentment, the holder, or to any subsequent indorser
instrument will be accepted or paid, or who may be compelled to pay it.
both, according to its tenor, and that if it be *General indorsers are liable for
dishonored and the necessary proceedings warranties and they are secondarily
on dishonor be duly taken, he will pay the liable for engagement to pay.
amount thereof to the holder or to any b. Qualified indorsers
Sec. 65 of the Negotiable Instrument
subsequent indorser who may be compelled
Law states that: Every person
to pay it. But the drawer may insert in the
negotiating an instrument by delivery or
instrument an express stipulation negativing
by a qualified indorsement warrants: (a)
or limiting his own liability to the holder.
*Due presentment means not only any That the instrument is genuine and in all
presentment but presentment in respects what it purports to be; (b) That
accordance with law. he has a good title to it; (c) That all prior
*Necessary proceedings on dishonor means parties had capacity to contract; (d)
proceedings must be one within accordance That he has no knowledge of any fact
with law. which would impair the validity of the
*Drawer is conditionally liable instrument or render it valueless. But
a. Relationship with drawee when the negotiation is by delivery only,
b. Relationship with collecting bank the warranty extends in favor of no
3. Acceptor
holder other than the immediate
Sec. 62 of the Negotiable Instrument Law
transferee. The provisions of subdivision
states that: The acceptor, by accepting the
(c) of this section do not apply to a
instrument, engages that he will pay it
person negotiating public or
according to the tenor of his acceptance
corporation securities other than bills
and admits: (a) The existence of the drawer,
and notes.
the genuineness of his signature, and his
*Qualified indorsers are liable for
capacity and authority to draw the
warranties
instrument; and (b) The existence of the c. Order of liability
payee and his then capacity to indorse. Sec. 68 of the Negotiable Instrument
*Acceptor is primarily liable Law states that: As respect one
Sec. 127 of the Negotiable Instrument Law
another, indorsers are liable prima facie
states that: A bill of itself does not operate
in the order in which they indorse; but
as an assignment of the funds in the hands
evidence is admissible to show that, as
of the drawee available for the payment
between or among themselves, they
thereof, and the drawee is not liable on the
have agreed otherwise. Joint payees or
bill unless and until he accepts the same.
joint indorsees who indorse are deemed
4. Indorsers
to indorse jointly and severally.
a. General indorsers
Sec. 66 of the Negotiable Instrument 5. Parties negotiating by mere delivery
Sec. 65 of the Negotiable Instrument Law
Law states that: Every indorser who
provides that: Every person negotiating an
indorses without qualification, warrants
instrument by delivery or by a qualified
to all subsequent holders in due course:
indorsement warrants: (a) That the
(a) The matters and things mentioned in
instrument is genuine and in all respects
subdivisions (a), (b), and (c) of the next
what it purports to be; (b) That he has a
preceding section; and (b) That the
good title to it; (c) That all prior parties had
instrument is, at the time of his
capacity to contract; (d) That he has no
indorsement, valid and subsisting; And,
knowledge of any fact which would impair
in addition, he engages that, on due
the validity of the instrument or render it
presentment, it shall be accepted or
valueless. But when the negotiation is by
paid, or both, as the case may be,
delivery only, the warranty extends in favor
according to its tenor, and that if it be
of no holder other than the immediate
dishonored and the necessary
transferee. The provisions of subdivision (c)
proceedings on dishonor be duly taken,
of this section do not apply to a person
he will pay the amount thereof to the
negotiating public or corporation securities
other than bills and notes.
13
6. Other cases Real Defense Personal Defense
a. Irregular indorser Stronger defense Weakest defense
Sec. 64 of the Negotiable Instrument Those that attach to Those which are
Law states that: Where a person, not the instrument itself available only against
otherwise a party to an instrument, and are available a person not a holder
places thereon his signature in blank against all holders, in due course or a
whether in due course subsequent holder
before delivery, he is liable as indorser,
or not but only by the who stands in privity
in accordance with the following rules: parties entitled to with him (Equitable
(a) If the instrument is payable to the raise them (Absolute defense)
order of a third person, he is liable to defense)
the payee and to all subsequent parties. Cannot be enforced by Can be enforced
the holder because because there is an
(b) If the instrument is payable to the there is no contract to existing contract but
enforce subject to defense
order of the maker or drawer, or is
The following are real The following are
payable to bearer, he is liable to all defenses: personal defences:
parties subsequent to the maker or 1. Material 1. Absence or
drawer. (c) If he signs for the alteration failure of
accommodation of the payee, he is 2. Want of consideration
liable to all parties subsequent to the delivery of 2. Want of
payee. incomplete delivery of
b. Indorser of bearer instrument instrument complete
Sec. 67 of the Negotiable Instrument 3. Duress instrument
amounting to 3. Insertion of
Law provides that: Where a person
forgery wrong date in
places his indorsement on an 4. Fraud in an instrument
instrument negotiable by delivery, he factum or 4. Filling up of
incurs all the liability of an indorser. fraud in esse blank contrary
c. Accommodation party contractus to authority
Sec. 29 of the Negotiable Instrument 5. Minority given or not
Law states that: An accommodation 6. Insanity within
party is one who has signed the 7. Ultra vires acts reasonable
instrument as maker, drawer, acceptor, of a time
corporation 5. Fraud in
or indorser, without receiving value
8. Want of inducement
therefor, and for the purpose of lending authority of 6. Duress or fear
his name to some other person. Such a agent 7. Illegal
person is liable on the instrument to a 9. Illegality consideration
holder for value, notwithstanding such 10. Forgery 8. Negotiation in
holder, at the time of taking the 11. Prescription breach of faith
9. Mistake
instrument, knew him to be only an
10. Ante-dating or
accommodation party.
post dating for
*The liability of an accommodation
illegal or
party depends on how they participate fraudulent
in the instrument. purposes
d. Agents signing in behalf of the principal 11. Abuse of
Sec. 19 of the Negotiable Instrument authority
Law provides that: The signature of 12. Conditional
any party may be made by a duly delivery of
authorized agent. No particular form of complete
instrument
appointment is necessary for this
Q: In a creditor-debtor relationship, who is
purpose; and the authority of the agent
interested in the existence of a defense?
may be established as in other cases of
A: Debtor. Reason: Presence of a defense
agency.
exonerate the liability of the debtor.
DEFENSES: Kinds:
1. Real defense
A. Real and Personal Defenses, distinguished 2. Personal defense
Distinctions:
14
Q: Why are real defenses stronger than the such right is precluded from setting up the
personal defense? forgery or want of authority.
A: Because there is no contract exists on his *What is inoperative is only the signature
part. and not the instrument.
Parties precluded from raising forgery as
B. Real defenses defense:
1. Minority and ultra vires acts (Sec 22) 1. Person negotiating by delivery
Sec. 22 of the Negotiable Instrument Law 2. Prior parties/indorsers
provides that: The indorsement or
a. Forgery of makers signature
assignment of the instrument by a *Maker cannot be held liable by any
corporation or by an infant passes the holder.
property therein, notwithstanding that from Reason: The purported maker is not a
want of capacity, the corporation or infant party to the instrument as his forged
may incur no liability thereon. instrument is inoperative and no right
Examples: to retain, enforce or discharge the note
a. A, a minor, issued a promissory note to
may be acquired against him.
B; B negotiated it to C; C to D then D to b. Of indorsers signature
E. *The indorsement is inoperative thus it
Q: What defense is available to A? cannot effect any transfer of any rights
A: Minority
to the holder.
Q: Why is it a real defense?
Example:
A: Because of his lack of capacity.
A (maker) B C D E
Q: What recourse is available to the holder?
Bs signature was forged
A: Go after the indorsers
Q: Can A raise the defense of Forgery?
b. A issued a negotiable instrument to B, a
A: YES.
minor. Q: Can E go after B?
Q: Can A use minority as a defense? A: NO.
A: NO. As maker, he admits the existence of Recourse: Go after C or D
the payee and his then capacity to indorse. *Cut-off rule is applicable. Indorsement
2. Non-delivery of an incomplete instrument is necessary for the transfer of title.
Sec. 15 of the Negotiable Instrument Law Example:
provides that: Where an incomplete XABCDE
instrument has not been delivered, it will Q: Can the acceptor admits the
not, if completed and negotiated without genuineness of the signature of the
authority, be a valid contract in the hands of payee?
A: NO.
any holder, as against any person whose
Q: Can a drawee refuse payment of a
signature was placed thereon before
bill of exchange bearing a forged
delivery.
indorsement?
3. Fraud in factum
A: YES. Cut-off rule applies
*The person who signs the instrument lacks
Cases: Associated Bank v CA; PNB v CA;
knowledge of the character or essential
Republic v Ebrada
terms of the instrument. But the defense is c. Of drawers signature
not available if the party involved had *In cases involving a forged check,
reasonable opportunity to obtain such where the drawers signature is forged,
knowledge. the drawer can recover from the
4. Forgery and want of authority drawee bank. No drawee bank has a
Sec. 23 of the Negotiable Instrument Law
right to pay a forged check. If it does, it
provides that: When a signature is forged
shall have to re-credit the amount of
or made without the authority of the
the check to the account of the drawer.
person whose signature it purports to be, it Reason: The drawee bank is bound to
is wholly inoperative, and no right to retain know the signature of the drawer since
the instrument, or to give a discharge the drawer is its customer.
therefor, or to enforce payment thereof Example:
against any party thereto, can be acquired X A (drawer) B C D E
through or under such signature, unless the (holder)
party against whom it is sought to enforce Drawers signature was forged
15
Q: Can drawee accept a bill of exchange effect of the instrument in any respect, is a
bearing forged signature of the drawer? material alteration.
A: NO. *The underlined phrase is what we call
Q: What is the implication of accepting catch-all clause
bill of exchange bearing a forged Q: What is the condition/term of the
signature of the drawer? instrument at the time it was altered?
A: Sec. 62 of the Negotiable Instrument A: The instrument is materially complete.
Law. Once accepted, drawee cannot 6. Extinctive prescription
raise forgery as a defense.
Recourse: Go after the last C. Personal defenses
*Determination of whether the person is a
holder/collecting bank.
*Collecting bank assumes the role of an holder in due course or not is material.
Q: Why this defense is treated as a weak
indorser.
Case: Gempesaw v CA defense?
*Cut-off rule is not applicable A: Because only holders not in due course can
General Rule: Drawee bank is liable for raise these defenses.
the loss. 1. Ante-dating or post dating
Exception: There is fault/negligence on Sec. 12 of the Negotiable Instrument Law
the part of the drawer provides that: The instrument is not invalid
d. Forgery of bearer instruments for the reason only that it is ante-dated or
*In bearer instruments, the signature of post-dated, provided this is not done for an
the payee or holder is unnecessary to illegal or fraudulent purpose. The person to
pass title to the instrument. Hence, whom an instrument so dated is delivered
where the indorsement is a forgery, acquires the title thereto as of the date of
only the person whose signature is delivery.
forged can raise the defense of forgery 2. Insertion of wrong date
against a holder in due course. Sec. 13 of the Negotiable Instrument Law
5. Material alteration (partial real defense) provides that: Where an instrument
Sec. 124 of the Negotiable Instrument Law expressed to be payable at a fixed period
provides that: Where a negotiable after date is issued undated, or where the
instrument is materially altered without the acceptance of an instrument payable at a
assent of all parties liable thereon, it is fixed period after sight is undated, any
avoided, except as against a party who has holder may insert therein the true date of
himself made, authorized, or assented to issue or acceptance, and the instrument
the alteration and subsequent indorsers. shall be payable accordingly. The insertion
But when an instrument has been of a wrong date does not avoid the
materially altered and is in the hands of a instrument in the hands of a subsequent
holder in due course not a party to the holder in due course; but as to him, the
alteration, he may enforce payment thereof date so inserted is to be regarded as the
according to its original tenor. true date.
Q: Why is this a partial defense only? Principle: One who made possible to the
A: Because the holder in due course may infirmity shall bear the loss
still demand payment but according to its Example:
original tenor.
Sec. 125 of the Negotiable Instrument Law
_______
states that: Any alteration which changes:
(a) The date; 10 days after date
(b) The sum payable, either for principal or
The true date is June 1, 2008 maturity date
interest;
(c) The time or place of payment: will be June 11, 2008
(d) The number or the relations of the The date inserted is May 25, 2008 the
parties; maturity date will be June 4, 2008
(e) The medium or currency in which ABCDE
If E is a holder in due course and A is the
payment is to be made;
(f) Or which adds a place of payment where maker, though both E and A are innocent, A
no place of payment is specified, or any shall suffer the consequence for he made
other change or addition which alters the possible to the loss
16
If E is not a holder in due course and A is the 4. Want of delivery of a complete instrument
maker, E is not innocent but A is innocent Sec. 16 of the Negotiable Instrument Law
thus E cannot held A liable. states that: Every contract on a negotiable
3. Filling up blanks beyond authority (Abuse of instrument is incomplete and revocable
Authority) until delivery of the instrument for the
Sec. 14 of the Negotiable Instrument Law purpose of giving effect thereto. As
states that: Where the instrument is between immediate parties and as regards a
wanting in any material particular, the remote party other than a holder in due
person in possession thereof has a prima course, the delivery, in order to be effectual,
facie authority to complete it by filling up must be made either by or under the
the blanks therein. And a signature on a authority of the party making, drawing,
blank paper delivered by the person making accepting, or indorsing, as the case may be;
the signature in order that the paper may and, in such case, the delivery may be
be converted into a negotiable instrument shown to have been conditional, or for a
operates as a prima facie authority to fill it special purpose only, and not for the
up as such for any amount. In order, purpose of transferring the property in the
however, that any such instrument when instrument. But where the instrument is in
completed may be enforced against any the hands of a holder in due course, a valid
person who became a party thereto prior to delivery thereof by all parties prior to him
its completion, it must be filled up strictly in so as to make them liable to him is
accordance with the authority given and conclusively presumed. And where the
within a reasonable time. But if any such instrument is no longer in the possession of
instrument, after completion, is negotiated a party whose signature appears thereon, a
to a holder in due course, it is valid and valid and intentional delivery by him is
effectual for all purposes in his hands, and presumed until the contrary is proved.
he may enforce it as if it had been filled up Example:
strictly in accordance with the authority A issued a complete instrument but he has
given and within a reasonable time. no intention of negotiating it yet
*It is inequitable for a person to set up this B got the instrument accidentally
defense against more innocent party. B negotiated it to C then C to D and D to E
Q: Is there any recourse to the holder? E is a holder in due course
A: YES. To ran against the indorsers Q: Can C be a holder in due course?
*Subsequent indorsers cannot put up the A: YES. As long as he has no knowledge of
defense of good faith. the infirmity
Example: Q: Between E and A, can A raise the
defense?
A: NO. Because the defense is a personal
The amount is
defense.
___________
The authority to fill the amount is upto Principle: One who makes the infirmity
P50,000 only possible shall bear the loss.
ABCDE Recourse: Go after the indorsers
B inserted an amount of P80,000 Reason: Breach of warranty, i.e., that they
Q: Is there a defense? had good title to the instrument.
A: YES. 5. Absence or failure of consideration
Q: Can it be used? Sec. 28 of the Negotiable Instrument Law
A: IT DEPENDS. Depending whether the
provides that: Absence or failure of
holder is a holder in due course or not.
consideration is a matter of defense as
*If holder in due course the defense cannot
against any person not a holder in due
be raised.
course; and partial failure of consideration
*If holder not in due course he can use it as
a defense. is a defense pro tanto, whether the failure is
Reason: The holder not in due course is not an ascertained and liquidated amount or
an innocent party as far as the maker is otherwise.
*Defense pro tanto means that the person
concern thus the contract is avoided.
Recourse: Go after the immediate is not totally exonerated from liability; he is
transferor in case of bearer instrument or liable upto the amount he benefited.
the indorsers in case of order instrument.
17
*Partial failure of consideration is a personal and may enforce payment of the instrument
defense and can be raised against a holder for the full amount thereof against all
not in due course. parties liable thereon.
*The general indorser is liable for breach of
warranty, i.e., his warranty that at the time ENFORCEMENT OF LIABILITY:
of his indorsement the instrument is valid
A. Parties primarily liable and parties secondarily
and existing.
liable
*With regard to person negotiating by
delivery and qualified indorser, his liability Primarily Liable Secondarily Liable
depends on whether or not he has Maker Drawer
knowledge of the invalidity of the Acceptor General Indorsers
instrument. Qualified Indorsers
Example:
A issued a promissory note sans B. General steps in enforcing liability
consideration to B. 1. Presentment
Q: Can B collect to A? 2. Dishonor
A: NO. Promissory Note
B indorsed the note to C then C to D and D 1. Presentment for payment must be
to E. made within the required period to the
Q: Could C be a holder in due course? maker (Sec. 70)
A: YES. As long as he has no knowledge of 2. Notice of Dishonor (Sec. 89)
the fact that there was infirmity in the Example:
instrument. MABCDE
Q: Is a defense exists in favor of A? What Q: In a case where the cause of action is for
kind of defense? payment, is presentment and dishonor
A: YES. It is a personal defense essential?
Q: Can A successfully raise it? Why? A: YES.
A: NO. One who made the infirmity possible
Q: If the holder is running after the
shall bear the loss.
indorsement for breach of warranty, is
6. Simple fraud, duress, intimidation, force or
presentment and dishonour essential?
fear, illegality of consideration, breach of
A: NO.
faith
Sec. 55 of the Negotiable Instrument Law Bill of Exchange
1. Presentment for acceptance or
provides that: The title of a person who
negotiation within a reasonable time
negotiates an instrument is defective within
after it was acquired (Sec. 143)
the meaning of this Act when he obtained
2. If dishonored by non-acceptance:
the instrument, or any signature thereto, by 2.1. Notice of dishonor should be given
fraud, duress, or force and fear, or other to the indorsers and drawer
unlawful means, or for an illegal 2.2. If the bill is a foreign bill, there must
consideration, or when he negotiates it in be a protest for dishonor by non-
breach of faith, or under such circumstances acceptance
as amount to a fraud. 3. If the bill is accepted:
Sec. 56 of the Negotiable Instrument Law 3.1. Presentment for payment to the
states that: To constitutes notice of an acceptor should be made
infirmity in the instrument or defect in the 3.2. If the bill is dishonored upon
title of the person negotiating the same, the presentment for payment:
person to whom it is negotiated must have 3.2.1. Notice of dishonor upon
had actual knowledge of the infirmity or presentment for payment
3.2.2. If the bill is a foreign bill,
defect, or knowledge of such facts that his
protest for dishonor by non-
action in taking the instrument amounted to
acceptance must be made
bad faith.
Sec. 57 of the Negotiable Instrument Law
C. Presentment for payment
provides that: A holder in due course holds
1. Concept of presentment
the instrument free from any defect of title Presentment is the production of a bill of
of prior parties, and free from defenses exchange to the drawee for his acceptance
available to prior parties among themselves, or to the drawee or acceptor for payment or
18
the production of a promissory note to the day from which the time is to
party liable for the payment of the same. begin to run, and by including
2. Requisites for sufficiency the date of payment.
Sec. 72 of the Negotiable Instrument Law iii. Rule in if payable at a bank
provides that: Presentment for payment, Sec. 75 of the Negotiable
to be sufficient, must be made: (a) By the Instrument Law states that:
holder, or by some person authorized to Where the instrument is
receive payment on his behalf; (b) At a payable at a bank, presentment
reasonable hour on a business day; (c) At a for payment must be made
proper place as herein defined; (d) To the during banking hours, unless
person primarily liable on the instrument, the person to make payment
or if he is absent or inaccessible, to any has no funds there to meet it at
person found at the place where the any time during the day, in
presentment is made. which case presentment at any
a. Date of presentment hour before the bank is closed
Sec. 71 of the Negotiable Instrument on that day is sufficient.
Law states that: Where the instrument b. Place of presentment
is not payable on demand, presentment Sec. 73 of the Negotiable Instrument
must be made on the day it falls due. Law provides that: Presentment for
Where it is payable on demand, payment is made at the proper place:
presentment must be made within a (a) Where a place of payment is
reasonable time after its issue, except specified in the instrument and it is
that in the case of a bill of exchange, there presented; (b) Where no place of
presentment for payment will be payment is specified but the address of
sufficient if made within a reasonable the person to make payment is given in
time after the last negotiation thereof. the instrument and it is there
i. Rule in determining maturity presented; (c) Where no place of
date payment is specified and no address is
Sec. 85 of the Negotiable given and the instrument is presented
Instrument Law provides that: at the usual place of business or
Every negotiable instrument is residence of the person to make
payable at the time fixed payment; (d) In any other case if
therein without grace. When presented to the person to make
the day of maturity falls upon payment wherever he can be found, or
Sunday or a holiday, the if presented at his last known place of
instruments falling due or business or residence.
becoming payable on Saturday i. Rule in if payable at a special
are to be presented for place
payment on the next Sec. 70 of the Negotiable
succeeding business day except Instrument Law states that:
that instruments payable on Presentment for payment is
demand may, at the option of not necessary in order to charge
the holder, be presented for the person primarily liable on
payment before twelve o'clock the instrument; but if the
noon on Saturday when that instrument is, by its terms,
entire day is not a holiday. payable at a special place, and
ii. Rule in computing time he is able and willing to pay it
Sec. 86 of the Negotiable there at maturity, such ability
Instrument Law provides that: and willingness are equivalent
When the instrument is to a tender of payment upon his
payable at a fixed period after part. But except as herein
date, after sight, or after that otherwise provided,
happening of a specified event, presentment for payment is
the time of payment is necessary in order to charge the
determined by excluding the drawer and indorsers.
19
c. Presentment to the party primarily accommodation and he has no reason to
liable expect that the instrument will be paid if
i. How presentment made presented.
Sec. 74 of the Negotiable Sec. 82 of the Negotiable Instrument Law
Instrument Law states that: states that: Presentment for payment is
The instrument must be excused: (a) Where, after the exercise of
exhibited to the person from reasonable diligence, presentment, as
whom payment is demanded, required by this Act, cannot be made; (b)
and when it is paid, must be Where the drawee is a fictitious person; (c)
delivered up to the party paying By waiver of presentment, express or
it. implied.
ii. Rule in case party primarily 4. When delay in presentment excused
liable is already dead Sec. 81 of the Negotiable Instrument Law
Sec. 76 of the Negotiable provides that: Delay in making
Instrument Law states that: presentment for payment is excused when
Where the person primarily the delay is caused by circumstances
liable on the instrument is dead beyond the control of the holder and not
and no place of payment is imputable to his default, misconduct, or
specified, presentment for negligence. When the cause of delay ceases
payment must be made to his to operate, presentment must be made
personal representative, if such with reasonable diligence.
there be, and if, with the
exercise of reasonable D. Notice of dishonor
diligence, he can be found. 1. When dishonor of the instrument occurs:
iii. Presentment to partners a. Dishonor by non-payment
Sec. 77 of the Negotiable Sec. 83 of the Negotiable Instrument
Instrument Law provides that: Law states that: The instrument is
Where the persons primarily dishonored by non-payment when: (a)
liable on the instrument are It is duly presented for payment and
liable as partners and no place payment is refused or cannot be
of payment is specified, obtained; or (b) Presentment is excused
presentment for payment may and the instrument is overdue and
be made to any one of them, unpaid.
Q: What are the implications of the
even though there has been a
notices sent to drawer/general
dissolution of the firm.
iv. Presentment to joint debtors indorsers?
Sec. 78 of the Negotiable A: Secondary liability
Example:
Instrument Law states that:
ABCDE
Where there are several E sent notice of dishonor to D alone
persons, not partners, primarily Q: What is the effect of notice given to
liable on the instrument and no D?
place of payment is specified, A: Others are discharge.
presentment must be made to Principle: Parties not given a notice are
them all. discharge.
3. Instances where presentment is excused b. Dishonor by non-acceptance
Sec. 79 of the Negotiable Instrument Law Sec. 149 of the Negotiable Instrument
provides that: Presentment for payment is Law provides that: A bill is dishonored
not required in order to charge the drawer by non-acceptance: (a) When it is duly
where he has no right to expect or require presented for acceptance and such an
that the drawee or acceptor will pay the acceptance as is prescribed by this Act
instrument. is refused or can not be obtained; or (b)
Sec. 80 of the Negotiable Instrument Law When presentment for acceptance is
states that: Presentment is not required in excused and the bill is not accepted.
order to charge an indorser where the 2. Who should give notice
instrument was made or accepted for his a. Holder

20
Sec. 90 of the Negotiable Instrument to be notified are partners, notice to
Law provides that: The notice may be any one partner is notice to the firm,
given by or on behalf of the holder, or even though there has been a
by or on behalf of any party to the dissolution.
instrument who might be compelled to d. Notice to persons jointly liable
pay it to the holder, and who, upon Sec. 100 of the Negotiable Instrument
taking it up, would have a right to Law provides that: Notice to joint
reimbursement from the party to whom persons who are not partners must be
the notice is given. given to each of them unless one of
b. Agent them has authority to receive such
Sec. 91 of the Negotiable Instrument notice for the others.
Law states that: Notice of dishonor e. Notice to bankrupt
may be given by any agent either in his Sec. 101 of the Negotiable Instrument
own name or in the name of any party Law states that: Where a party has
entitled to given notice, whether that been adjudged a bankrupt or an
party be his principal or not. insolvent, or has made an assignment
c. Party who may be compelled to pay for the benefit of creditors, notice may
Sec. 90 of the Negotiable Instrument be given either to the party himself or
Law provides that: The notice may be to his trustee or assignee.
given by or on behalf of the holder, or 5. When notice is excused
by or on behalf of any party to the Sec. 109 of the Negotiable Instrument Law
instrument who might be compelled to provides that: Notice of dishonor may be
pay it to the holder, and who, upon waived either before the time of giving
taking it up, would have a right to notice has arrived or after the omission to
reimbursement from the party to whom give due notice, and the waiver may be
the notice is given. expressed or implied.
3. Form of Notice Sec. 110 of the Negotiable Instrument Law
Sec. 96 of the Negotiable Instrument Law states that: Where the waiver is embodied
states that: The notice may be in writing or in the instrument itself, it is binding upon all
merely oral and may be given in any terms parties; but, where it is written above the
which sufficiently identify the instrument, signature of an indorser, it binds him only.
and indicate that it has been dishonored by Sec. 111 of the Negotiable Instrument Law
non-acceptance or non-payment. It may in states that: A waiver of protest, whether in
all cases be given by delivering it personally the case of a foreign bill of exchange or
or through the mails. other negotiable instrument, is deemed to
4. To whom notice is given be a waiver not only of a formal protest but
a. Party secondarily liable or agent also of presentment and notice of
Sec. 97 of the Negotiable Instrument dishonor.
Law provides that: Notice of dishonor Sec. 112 of the Negotiable Instrument Law
may be given either to the party himself states that: Notice of dishonor is dispensed
or to his agent in that behalf. with when, after the exercise of reasonable
b. Notice where party is dead diligence, it cannot be given to or does not
Sec. 98 of the Negotiable Instrument reach the parties sought to be charged.
Law states that: When any party is Sec. 114 of the Negotiable Instrument Law
dead and his death is known to the provides that: Notice of dishonor is not
party giving notice, the notice must be required to be given to the drawer in either
given to a personal representative, if of the following cases:
there be one, and if with reasonable (a) Where the drawer and drawee are the
diligence, he can be found. If there be same person;
no personal representative, notice may (b) When the drawee is fictitious person or
be sent to the last residence or last a person not having capacity to contract;
place of business of the deceased. (c) When the drawer is the person to whom
c. Notice to partners the instrument is presented for payment;
Sec. 99 of the Negotiable Instrument (d) Where the drawer has no right to expect
Law provides that: Where the parties or require that the drawee or acceptor will
honor the instrument;
21
(e) Where the drawer has countermanded thereof in good faith and without notice
payment. that his title is defective.
Sec. 115 of the Negotiable Instrument Law a. By the principal debtor
provides that: Notice of dishonor is not Sec. 119 (a) of the Negotiable
required to be given to an indorser in either Instrument Law states that: A
of the following cases: negotiable instrument is discharged: (a)
(a) When the drawee is a fictitious person or By payment in due course by or on
person not having capacity to contract, and behalf of the principal debtor; x x x
the indorser was aware of that fact at the b. By the accommodated party
time he indorsed the instrument; Sec. 119 (b) of the Negotiable
(b) Where the indorser is the person to Instrument Law provides that: A
whom the instrument is presented for negotiable instrument is discharged: x x
payment; x (b) By payment in due course by the
(c) Where the instrument was made or party accommodated, where the
accepted for his accommodation. instrument is made or accepted for his
6. When there is delay in giving notice accommodation; x x x
Sec. 113 of the Negotiable Instrument Law 2. Intentional cancellation
states that: Delay in giving notice of a. Rule in case of unintentional
dishonor is excused when the delay is cancellation
caused by circumstances beyond the control Sec. 123 of the Negotiable Instrument
of the holder and not imputable to his Law states that: A cancellation made
default, misconduct, or negligence. When unintentionally or under a mistake or
the cause of delay ceases to operate, notice without the authority of the holder, is
must be given with reasonable diligence. inoperative but where an instrument or
any signature thereon appears to have
DISCHARGE OF INSTRUMENTS: been cancelled, the burden of proof lies
on the party who alleges that the
A. Concept of Discharge
Discharge means a release of all parties, cancellation was made unintentionally
whether primary or secondary, from the or under a mistake or without
obligations arising thereunder. It renders the authority.
3. Any act that discharge simple contracts
instrument without force and effect and
*The law on Obligations and Contracts will
consequently, it can no longer be negotiated.
apply.
*Applies to the instrument or to the source of
Article 1231 of the New Civil Code provides
liability.
that: Obligations are extinguished: (1) By
B. How instrument is discharge payment or performance: (2) By the loss of
Sec. 119 of the Negotiable Instrument Law the thing due: (3) By the condonation or
provides that: A negotiable instrument is remission of the debt; (4) By the confusion
discharged: (a) By payment in due course by or or merger of the rights of creditor and
on behalf of the principal debtor; (b) By debtor; (5) By compensation; (6) By
payment in due course by the party novation. Other causes of extinguishment of
accommodated, where the instrument is made obligations, such as annulment, rescission,
or accepted for his accommodation; (c) By the fulfillment of a resolutory condition, and
intentional cancellation thereof by the holder; prescription, are governed elsewhere in this
(d) By any other act which will discharge a Code.
simple contract for the payment of money; (e) *Although these ways discharge the
When the principal debtor becomes the holder instrument as between immediate parties,
of the instrument at or after maturity in his own they will not do so in the hands of a holder
right. in due course.
1. Payment in due course 4. Principal debtor becomes a holder
Sec. 88 of the Negotiable Instrument Law
C. Discharge of persons secondarily liable
provides that: Payment is made in due
Sec. 120 of the Negotiable Instrument Law
course when it is made at or after the
provides that: A person secondarily liable on
maturity of the payment to the holder
the instrument is discharged: (a) By any act
which discharges the instrument; (b) By the
22
intentional cancellation of his signature by the Drawer is a secondarily liable; admits the
holder; (c) By the discharge of a prior party; (d) existence of a payee and his capacity to indorse
By a valid tender or payment made by a prior and engages that the instrument will be
party; (e) By a release of the principal debtor accepted or paid by the party primarily liable
unless the holder's right of recourse against the and engages that if the instrument is
party secondarily liable is expressly reserved; (f) dishonored and proper proceedings are brought
By any agreement binding upon the holder to he will pay to the party entitled to be paid.
extend the time of payment or to postpone the Drawee primarily liable; engages to pay
holder's right to enforce the instrument unless according to the tenor of his acceptance; admits
made with the assent of the party secondarily the existence of the drawer, the genuineness of
liable or unless the right of recourse against his signature and his capacity and authority to
such party is expressly reserved. draw the instrument and admits the existence
of the payee and his capacity to indorse.
CHECKS: Payee the person who is named to received
the payment. The one who can indorse for
A. Checks defined
further negotiation.
Sec. 185 of the Negotiable Instrument Law
provides that: A check is a bill of exchange D. Kinds of check
drawn on a bank payable on demand. Except as 1. Cashiers and managers check a bill of
herein otherwise provided, the provisions of exchange drawn by a bank upon itself, and
this Act applicable to a bill of exchange payable is accepted by its issuance.
on demand apply to a check. *Treated as good as cash.
*Checks need not be presented for acceptance *The drawee and the drawer are one and
*Checks are always payable on demand the same.
*Checks are always drawn against a bank BSP Circular 259 series of 2000 provides
*In case of refusal by drawee bank, payee or that: Pursuant to Monetary Board
holder cannot compel drawee bank to pay Resolution No. 1494 dated 1 September
because there is no privity of contract. 2000, additional anti-money laundering
Recourse: Serve notice of dishonour to drawer; rules and regulations for banks are hereby
ran after the drawer issued as follows: Section 1. Issuance of
B. Distinguished from Draft Cashiers, Managers or Certified Checks.
Banks shall not issue cashiers, managers or
Other Bill of Exchange Check certified checks or other similar instruments
Not drawn on a It is necessary that a payable to cash, bearer, fictitious payee or
deposit. It is not check is drawn on a numbered account. When the person
necessary that a previous deposit. purchasing the above-mentioned
drawer of a Bill of Otherwise, there
instruments is not a regular bank client, the
Exchange should have would be fraud.
issuing bank shall require the purchaser to
funds in the hands of Always bank as a
the drawee. drawee, need not be present his/her proof of residence together
Exist for circulation presented for with his/her drivers license, passport,
acceptance. Exist for employment I.D. or other photo
immediate payment identification card. A register for cashiers,
Death of the drawer of Death of the drawer of managers or certified checks issued shall be
a Bill of Exchange with a check, with the
maintained by the bank. Section 2.
the knowledge of the knowledge by the
Sanction. Any violations of the provision of
bank, does not revoke bank, revokes the
the authority of the authority of the this Circular shall be subject to a fine of
banker to pay. banker to pay. P30,000 per transaction.
May be presented for Must be presented for BSP Circular No. 291 series 2001 provides
payment within a payment within a that: The Monetary Board, in its Resolution
reasonable time after reasonable time after No. 707 dated 10 May 2001 decided to
its last negotiation. its issue. Checks authorize the issuance of cashiers,
become stale after 6
managers or certified checks or other
months from issue.
similar instruments in blank or payable to
C. Relationship between drawer, drawee and cash, bearer or numbered account as an
payee exception from the provisions of Circular no.
23
259, subject to the following conditions: a. bank, and the bank is not liable to the
That the amount of each check shall not holder unless and until it accepts or certifies
exceed P10,000.00; b. That the buyer of the the check.
check is properly identified as required 3. Crossed Check done by writing two parallel
under Circular No. 259 dated 29 lines diagonally on the left top portion of
September; c. That a register of said checks the checks.
shall be maintained with the following Article 541 of the Code of Commerce
minimum information: 1. Date issued; 2. provides that: The maker of any legal
Amount; 3. Name of buyer; 4. Date paid; 5. holder of a check shall be entitled to
If the aggregate instruments purchased by indicate therein that it be paid to a certain
the same person within any thirty (30) day banker or institution, which he shall do by
period amounts to at least fifty thousand writing across the face the name of said
pesos (P50,000), the purpose of the buyer banker or institution, or only the words
should be stated.; d. That banks which "and company".
a. Effects of crossing a check
issue as well as those which accept as
1. The check may not be encashed but
deposits, said cashiers, managers or
only deposited in the bank
certified checks or other similar instruments 2. The check may be negotiated only
issued in blank or payable to cash, bearer or once to one who has an account
numbered account shall take such with the bank
measure(s) as may be necessary to ensure 3. The act of crossing serves as a
that said instruments are not being warning to the holder that the
used/resorted to by the buyer or depositor check has been issued for a definite
in furtherance of a money-laundering purpose so that he may inquire if he
activity; e. That the deposit of said has received the check pursuant to
instruments shall be subject to the same that purpose.
requirements/scrutiny applicable to cash 4. Memorandum and travellers check
deposits; f. That transactions involving said Memorandum Check is in the form of an
instruments should be accordingly reported ordinary check, with the word
to the Bangko Sentral ng Pilipinas if there is memorandum, memo or mem written
reasonable ground to suspect that said across its face, signifying that the maker or
transactions are being used to launder drawer engages to pay the bona fide holder
funds of illegitimate origin. absolutely, without any condition
2. Certified check one drawn by a depositor concerning its presentment. Such check is
upon funds to his credit in a bank which a an evidence of debt against the drawer, and
proper officer of the bank certifies will be although it may not be intended to be
paid when duly presented for payment. presented, has the same effect as an
*There is a guarantee that upon ordinary check, and if passed to a third
presentment it will be accepted. person, will be valid in his hands like any
*It is accepted in advance. other check.
*Certification is equivalent to acceptance. Travellers Check instruments purchased
*It is forbidden to issue a stop order
from banks, express companies, or the like,
payment.
in various denominations, which can be
Sec. 187 of the Negotiable Instrument Law
used like cash upon second signature by the
provides that: Where a check is certified by
purchaser. It has the characteristics of a
the bank on which it is drawn, the
cashiers check of the issuer. It requires the
certification is equivalent to an acceptance.
Sec. 188 of the Negotiable Instrument Law signature of the purchaser at the time he
provides that: Where the holder of a check buys it and also at the time he uses it that
procures it to be accepted or certified, the is when he obtains the check from the bank
drawer and all indorsers are discharged and also at the time he delivers the same to
from liability thereon. the establishment that will be paid thereby.
Sec. 189 of the Negotiable Instrument Law
E. When required to be presented for payment
provides that: A check of itself does not
Sec. 186 of the Negotiable Instrument Law
operate as an assignment of any part of the
provides that: A check must be presented for
funds to the credit of the drawer with the
24
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.

F. Effect of death of drawer


*In case of death of the drawer, the bank may
refuse payment provided that there was a
proper notice of the death of the drawer given
to bank.

G. Pertinent Philippine Clearing House Corporation


rules

25

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