Negotiable Instruments Law

Commercial Law Review
Negotiable Instruments Law

NEGOTIABLE INSTRUMENTS LAW (Act No. *This is the main function of negotiable
2031) instruments.
*Either negotiable or non-negotiable
PRELIMINARY CONSIDERATIONS:
instrument, it is a substitute for money.
A. Governing Laws Both are in lieu of money.
1. The Negotiable Instruments Law *relate this with legal tender
2. The Code of Commerce 2. It is a means of creating and transferring
3. The New Civil Code credit
3. It facilitates the sale of goods
B. Concept of Negotiable Instrument 4. It increases the purchasing medium in
Negotiable Instruments is a written circulation
contract for the payment of the money Q: Which one is the best or better substitute
which is intended as a substitute for money for money? Why?
and passes from one person to another as A: Negotiable instrument.
money, in such a manner as to give a holder Reasons:
in due course the right to hold the 1. Negotiability and
instrument free from defenses available to 2. Accumulation of secondary contracts.
prior parties.
E. Characteristics of Negotiable Instrument
C. Classes of Negotiable Instrument 1. Negotiability it is that attribute or
1. Promissory Note property whereby a bill or note or check
Sec. 184 of the Negotiable Instruments may pass from hand to hand similar to
Law provides that: A negotiable money, so as to give the holder in due
promissory note within the meaning of course the right to hold the instrument
this Act is an unconditional promise in and to collect the sum payable for
writing made by one person to another, himself free from defenses.
signed by the maker, engaging to pay *This attribute is very important.
on demand, or at a fixed or 2. Accumulation of secondary contracts
determinable future time, a sum certain secondary contracts are picked up and
in money to order or to bearer. Where a carried along with them as they are
note is drawn to the makers own order, negotiated from one person to another,
it is not complete until indorsed by or in the course of negotiation of a
him. negotiable instrument, a series of
*Personal engagement on the part of the juridical ties between the parties thereto
maker. arise either by law or by privity.
2. Bill of Exchange *There must be further negotiation for
Sec. 126 of the Negotiable Instruments secondary contracts exist.
Law provides that: A bill of exchange *Converted to obligors because of their
is an unconditional order in writing indorsements
addressed by one person to another,
signed by the person giving it, requiring F. Negotiable Instruments compared with
the person to whom it is addressed to other papers (document of title, letter of
pay on demand or at a fixed or credit, certificate of stock, pawn ticket,
determinable future time a sum certain postal money order, treasury warrant)
in money to order or to bearer. Document of title includes any bill of
*There is only an order directing other lading, dock warrant, quedan, or
party to pay the instrument. warehouse receipt or order for delivery of
goods, or any other document used in the
D. Functions of Negotiable Instrument ordinary course of business in the sale or
1. It operates as a substitute of money transfer of goods, as proof of possession or
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control of goods, or authorizing or requirements: (a) It must be in writing and
purporting to authorize the possessor of the signed by the maker or drawer; (b) must
document to transfer or receive either by contain an unconditional promise or order
indorsement or by delivery, goods to pay a sum certain in money; (c) must be
represented by such document (Article 1636 payable on demand, or at a fixed or
of the New Civil Code) determinable future time; (d) must be
Letter of Credit is an engagement by a bank payable to order or to bearer; and (e) where
or other person made at the request of a the instrument is addressed to a drawee, he
customer that the issuer will honor drafts or must be named or otherwise indicated
other demands for payment upon therein with reasonable certainty.
compliance with the conditions specified in Q: What principle do we follow in
the credit. determining the instrument as negotiable or
Certificate of Stock is a non-negotiable not?
instrument because it does not contain an A: Negotiability is shown on the face of the
unconditional promise or order to pay a instrument.
sum certain in money. Requisites:
Pawn Ticket is a non-negotiable document 1. Must be in writing and signed by the
because it does not represent money but the maker or drawer
pawned articles. Q: Why should it be in writing?
Postal Money Order is a non-negotiable A: In order for the instrument to be used
instrument because it is governed by postal for negotiation.
rules and regulations which may be Rationale: For the achievement of the
inconsistent with the Negotiable purpose of the negotiable instrument
Instruments Law and it can only be law.
negotiated once. *It must be signed by the maker or
Treasury Warrant is a non-negotiable drawer. Rationale: To be bound by the
instrument because it is payable out of a contract.
particular fund. 2. Must contain an unconditional promise
or order to pay a sum certain in money
G. Legal tender character Rationale why the law requires that the
Q: Does negotiable instrument has legal promise or order be unconditional:
tender power? Because no one will accept the same if
A: NO. the transferee does not know the
Q: What is legal tender? certainty of the event that will happen.
A: Legal tender is that kind of money that Hence, uncertainty will defeat the very
the law compels a creditor to accept in purpose of the negotiable instrument
payment of his debt when tendered by the law, i.e., substitute for money.
debtor in the right amount. *Mere recital does not negate
*Coins/notes circulated by the Bangko negotiability of the instrument.
Sentral ng Pilipinas. Q: What is a condition?
Q: What attribute that legal tender has that A: A contingent event, happening of
negotiable instrument do not have? which is uncertain, event which may or
A: Element of compulsion. may not happen.
*In alternative obligation, for
FORM AND INTERPRETATION OF negotiability purposes, the option must
NEGOTIABLE INSTRUMENTS: be left in the hands of the creditor for it
A. Requisites of negotiability to be negotiable.
Sec. 1 of the Negotiable Instruments Law *If the option is left in the hands of the
provides that: An instrument to be debtor, it is non-negotiable.
negotiable must conform to the following
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a. Promise or order to pay must be With interest; or (b) By stated
unconditional installments; or (c) By stated
i. Reference to transaction installments, with a
Sec. 3 of the Negotiable provision that, upon default
Instrument Law provides in payment of any
that: An unqualified order installment or of interest, the
or promise to pay is whole shall become due; or
unconditional within the (d) With exchange, whether
meaning of this Act though at a fixed rate or at the
coupled with: (a) An current rate; or (e) With costs
indication of a particular of collection or an attorneys
fund out of which fee, in case payment shall not
reimbursement is to be made be made at maturity.
or a particular account to be ii. Payment of interest
debited with the amount; or Q: Why is there a need to
(b) A statement of the pay interest?
transaction which gives rise A: For the consumption of
to the instrument. But an the money owned by a
order or promise to pay out person but was not used by
of a particular fund is not him.
unconditional. iii. Payment by installments
ii. Source or payment or Stated Installments the
account to be debited dates of each installment
Fund for Particular Fund must be fixed or at least
Reimbursement for Payment determinable and the
The drawee There is only amount to be paid for each
pays the payee one act the
installment must be stated.
from his own drawee pays
funds directly from the Things to be written in the
afterwards the particular fund negotiable instrument
drawee pays indicated regarding payment by
himself from the installments:
particular fund 1. Amount of each
Particular fund Particular fund instalments
indicated is not indicated is the *must be determinable
the direct source direct source of
2. Maturity Date
of payment payment
*Particular fund for payment iv. Acceleration clause
depends on the sufficiency of Acceleration clause renders
the funds whole debt due and
*Extrinsic and collateral demandable upon failure of
matter negates negotiability. the obligor to comply with
b. Payable in sum certain in money certain conditions.
i. Provisions which do not *relate to doctrine of
affect certainty of sum indivisibility of contract.
v. Payment with exchange
payable
*It must be the prevailing
Sec. 2 of the Negotiable
Instrument Law provides rate of conversion or fixed
that: The sum payable is a rate that is well known.
sum certain within the *Does not affect the
meaning of this Act, negotiability of the
although it is to be paid: (a)
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instrument because the sum happening is
remains certain. uncertain
vi. Payment of attorneys fees *If the instrument is demandable
*Due to the default of the based on period the negotiability of
obligor, obligee was forced to the instrument is still not affected.
engage the services of a *Paragraph (c) is one with a period.
lawyer. 4. Payable to order or bearer
3. Payable on demand or at a fixed or *These are words of negotiability
determinable future time Q: What is the implication of these
a. When payable on demand words?
Sec. 7 of the Negotiable A: There is a proper authorization for
Instruments Law provides that: An further negotiation by the maker or
instrument is payable on demand: drawer.
(a) When it is so expressed to be a. When payable to bearer
payable on demand, or at sight, or Sec. 9 of the Negotiable Instrument
on presentation; or (b) In which no Law provides that: The instrument
time for payment is expressed. is payable to bearer: (a) When it is
Where an instrument is issued, expressed to be so payable; or (b)
accepted, or indorsed when When it is payable to a person
overdue, it is, as regards the person named therein or bearer; or (c)
so issuing, accepting, or indorsing it, When it is payable to the order of a
payable on demand. fictitious or non-existing person, and
*It is the holder of the instrument such fact was known to the person
that has the call in case the making it so payable; or (d) When
negotiable instrument is silent, i.e., it the name of the payee does not
stated no maturity date. purport to be the name of any
b. When payable at determinable person; or (e) When the only or last
future time indorsement is an indorsement in
Sec. 4 of the Negotiable blank.
Instruments Law provides that: An Principle: Once a bearer always a
instrument is payable at a bearer instrument.
determinable future time, within the *This principle applies only to an
meaning of this Act, which is instrument that was originally
expressed to be payable: (a) At a issued as bearer instrument.
fixed period after date or sight; or i. Rule when instrument is
(b) On or before a fixed or payable to a fictitious person
determinable future time specified *Upon its face, it is an order
therein; or (c) On or at a fixed period instrument but because it is
after the occurrence of a specified named to fictitious or non-
event which is certain to happen, existing person it is
though the time of happening be converted to a bearer
uncertain. An instrument payable instrument.
upon a contingency is not *Fictitious person or non-
negotiable, and the happening of the existing person cannot
event does not cure the defect. endorse.
With a With a Period *The person to whose order
Condition the instrument is made
Uncertain to Certain to payable may in fact be
happen happen though existing but he is still
the date of fictitious or non-existent
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under Sec. 9(c) of the and not to the person
negotiable instrument law if holding it.
the person making it so 5. Omissions that do not affect
payable does not intend to negotiability Sec. 6 of the Negotiable
pay the specified person. Instrument Law provides that: The
b. When payable to order validity and negotiable character of an
*The payee of instrument payable to instrument are not affected by the fact
order must be a person in being, that: (a) it is not dated; or (b) does not
natural or legal, and ascertained at specify the value given, or that any
the time of issue. value had been given therefor; or (c)
i. To whose order the does not specify the place where it is
instrument may be made drawn or the place where it is payable;
payable or (d) bears a seal; or (e) designates a
Sec. 8 of the Negotiable particular kind of current money in
Instrument Law provides which payment is to be made. But
that: The instrument is nothing in this section shall alter or
payable to order where it is repeal any statute requiring in certain
drawn payable to the order cases the nature of the consideration to
of a specified person or to be stated in the instrument.
him or his order. It may be Does not specify the value given or
drawn payable to the order that any value had been given therefor
of: (a) A payee who is not *Consideration is always presumed.
maker, drawer, or drawee; or Basis: Sec. 24 of the Negotiable
(b) The drawer or maker; or Instrument Law provides that: Every
(c) The drawee; or (d) Two or negotiable instrument is deemed prima
more payees jointly; or (e) facie to have been issued for a valuable
One or some of several consideration; and every person whose
payees; or (f) The holder of signature appears thereon to have
an office for the time being. become a party thereto for value.
Where the instrument is Does not specify the place where it is
payable to order, the payee drawn or the place where it is payable
must be named or otherwise *The New Civil Code is applied
indicated therein with suppletorily.
reasonable certainty. Bears a seal
A payee who is not *This is for authentication purposes.
maker, drawer, or A particular kind of current money
drawee in which payment is to be made
*The payee may be a *It is still negotiable because it would
juridical person. still be considered payable in money.
Q: How can it be Foreign currency is convertible to
negotiated further? Philippine money which is legal tender
A: By indorsement of the in the Philippines.
person authorized by the 6. Additional provisions not affecting
corporation. negotiability
The holder of an office Sec. 5 of the Negotiable Instrument
for the time being Law provides that: An instrument
*It is not necessary to which contains an order or promise to
name the person holding do any act in addition to the payment of
the position since it is money is not negotiable. But the
payable to the office itself negotiable character of an instrument
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otherwise negotiable is not affected by a B. Rules to be followed in interpreting
provision which: (a) authorizes the sale negotiable instruments
of collateral securities in case the Sec. 17 of the Negotiable Instrument Law
instrument be not paid at maturity; or provides that: Where the language of the
(b) authorizes a confession of judgment instrument is ambiguous or there are
if the instrument be not paid at omissions therein, the following rules of
maturity; or (c) waives the benefit of any construction apply: (a) Where the sum
law intended for the advantage or payable is expressed in words and also in
protection of the obligor; or (d) gives the figures and there is a discrepancy between
holder an election to require something the two, the sum denoted by the words is
to be done in lieu of payment of money. the sum payable; but if the words are
But nothing in this section shall validate ambiguous or uncertain, reference may be
any provision or stipulation otherwise had to the figures to fix the amount; (b)
illegal. Where the instrument provides for the
a. Sale of collateral securities payment of interest, without specifying the
Q: Is the authority to sale includes date from which interest is to run, the
the authority to appropriate for interest runs from the date of the
himself? instrument, and if the instrument is
A: NO. It constitutes pactum undated, from the issue thereof; (c) Where
commissorium. It is an unjust the instrument is not dated, it will be
enrichment. considered to be dated as of the time it was
Q: What is the meaning of sale of issued; (d) Where there is a conflict between
collateral securities? the written and printed provisions of the
A: Contemplates securities added to instrument, the written provisions prevail;
the obligation to pay. (e) Where the instrument is so ambiguous
b. Confession of judgment that there is doubt whether it is a bill or
*This is void by reason of public note, the holder may treat it as either at his
policy but still it is negotiable. election; (f) Where a signature is so placed
*In effect, such provision is upon the instrument that it is not clear in
considered not existing. what capacity the person making the same
*It waives his right to due process; intended to sign, he is to be deemed an
his right of a day in court. indorser; (g) Where an instrument
Case: PNB v Manila Oil Refinery containing the word "I promise to pay" is
c. Waiver of benefit signed by two or more persons, they are
*Pertains to benefits granted by the deemed to be jointly and severally liable
Negotiable Instrument Law. thereon.
Q: What are the benefits that can be *This rule is applicable only in case of
waived but the negotiability of the ambiguity and there is doubt.
instrument is not affected?
NEGOTIATION:
A: 1. Presentment for payment; 2.
Notice of dishonor; 3. Protest A. Modes of transfer
d. Holder is given the option to do 1. Negotiation an instrument is
something in lieu of payment of negotiated when it is transferred from
money one person to another in such manner as
*If it is the obligor or debtor is given to constitute the transferee the holder
the option to choose what to be done thereof.
it is not negotiable because it is 2. Assignment a method of transferring
conditional thus requisites for a non-negotiable instrument whereby
negotiability is not complied with. the assignee is merely placed in the
position of the assignor and acquires the
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instrument subject to all defenses that A: Because the engagement is to pay the
might have been set up against the amount of the instrument to holder or to
original payee. any subsequent holders.
*If the instrument is a non-negotiable the Q: If the instrument is originally issued as
only transfer that can be made is by an order instrument and was subsequently
assignment. negotiated, does it always require
indorsement and delivery?
B. Concept of negotiation; distinguished from A: IT DEPENDS. If the indorsement is
assignment special, it is necessary that there is
Sec. 30 of the Negotiable Instrument Law indorsement and delivery, however, if the
provides that: An instrument is negotiated indorsement is blank, delivery alone is
when it is transferred from one person to sufficient.
another in such manner as to constitute the
transferee the holder thereof. If payable to D. Concept of delivery
bearer, it is negotiated by delivery; if Sec. 16 of the Negotiable Instrument Law
payable to order, it is negotiated by the provides that: Every contract on a
indorsement of the holder and completed negotiable instrument is incomplete and
by delivery. revocable until delivery of the instrument
for the purpose of giving effect thereto. As
Assignment Negotiation between immediate parties and as regards a
Pertains to contracts Pertains to
remote party other than a holder in due
in general negotiable
instruments course, the delivery, in order to be effectual,
Assignee takes the Holder in due must be made either by or under the
instrument subject to course takes it free authority of the party making, drawing,
the defenses from personal accepting, or indorsing, as the case may be;
obtaining among the defenses available and, in such case, the delivery may be
original parties among the parties shown to have been conditional, or for a
Assignee steps into Holder in due
special purpose only, and not for the
the shoes of the course may acquire
assignor and merely a better right than purpose of transferring the property in the
acquires whatever the right of the instrument. But where the instrument is in
rights the assignor transferor the hands of a holder in due course, a valid
may have delivery thereof by all parties prior to him
Governed by the Governed by the so as to make them liable to him is
Civil Code Negotiable conclusively presumed. And where the
Instrument Law
instrument is no longer in the possession of
a party whose signature appears thereon, a
C. Ways of negotiation (in case of order or valid and intentional delivery by him is
bearer instrument) presumed until the contrary is proved.
1. If payable to bearer, it is negotiated by Delivery is the transfer of possession of the
mere delivery instrument by the maker or drawer with the
2. If payable to order, it is negotiated by intention to transfer title to the payee and
indorsement and delivery recognize him as holder thereof.
Q: Why cant indorsement be avoided by *Delivery is always a common requirement.
original payee?
A: Because by indorsement, it is the original E. Indorsement
payees order to the maker to pay the 1. Concept
transferee. Indorsement is a legal transaction
Q: Why indorsement is not necessary in effected by the writing of ones name at
bearer instrument? the back of the instrument or upon a
paper (allonge) attached thereto with or
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without additional words specifying the *In special indorsement,
person whom or to whose order the indorsement and delivery is
instrument is to be payable whereby one necessary.
not only transfers legal title to the paper Example:
transferred but likewise enters into an
Front (Back) Pay to C
implied guaranty that the instrument FFr
will be duly paid. Sgd B
*This is a mechanical act
2. How made b. Blank
Sec. 31 of the Negotiable Instrument Sec. 35 of the Negotiable
Law provides that: The indorsement Instrument Law provides that: The
must be written on the instrument itself holder may convert a blank
or upon a paper attached thereto. The indorsement into a special
signature of the indorser, without indorsement by writing over the
additional words, is a sufficient signature of the indorser in blank
indorsement. any contract consistent with the
Sec. 32 of the Negotiable Instrument character of the indorsement.
Law provides that: The indorsement *In blank indorsement, only delivery
must be an indorsement of the entire is necessary.
instrument. An indorsement which Example
purports to transfer to the indorsee a
Front
Back (Back)
part only of the amount payable, or
which purports to transfer the Sgd B
instrument to two or more indorsees
severally, does not operate as a When is the indorsement effective:
negotiation of the instrument. But where a. Conditional
the instrument has been paid in part, it Sec. 39 of the Negotiable
may be indorsed as to the residue. Instrument Law provides that:
3. Kinds Where an indorsement is
*These words: specified, restrictive, conditional, the party required to
conditional, qualified are associated pay the instrument may disregard
words; they can be used the condition and make payment to
interchangeably. the indorsee or his transferee
How further negotiation of an order whether the condition has been
instrument be made: fulfilled or not. But any person to
a. Special whom an instrument so indorsed is
Sec. 34 of the Negotiable negotiated will hold the same, or the
Instrument Law provides that: A proceeds thereof, subject to the
special indorsement specifies the rights of the person indorsing
person to whom, or to whose order, conditionally.
the instrument is to be payable, and Q: What is suspended?
the indorsement of such indorsee is A: The very indorsement is
necessary to the further negotiation suspended thus the right of the
of the instrument. An indorsement indorsee is made to depend on the
in blank specifies no indorsee, and happening of the event.
an instrument so indorsed is payable Example:
to bearer, and may be negotiated by A B ---- C
delivery. b. Unconditional
What are the liabilities of an
indorser:
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a. Qualified *Vests the title in the indorsee in
Sec. 38 of the Negotiable trust for or to the use of some other
Instrument Law provides that: A persons
qualified indorsement constitutes -the beneficial title belongs to other
the indorser a mere assignor of the person whereas the legal title
title to the instrument. It may be remains with the beneficiary.
made by adding to the indorser's -The relationship exists is a trustee-
signature the words "without trustor relationship.
recourse" or any words of similar Sec. 37 of the Negotiable
import. Such an indorsement does Instrument Law provides that: A
not impair the negotiable character restrictive indorsement confers upon
of the instrument. the indorsee the right: (a) to receive
*This indorsement is confined to payment of the instrument; (b) to
warranties. bring any action thereon that the
*In this kind of indorsement, Sec. 65 indorser could bring; (c) to transfer
of the Negotiable Instrument is his rights as such indorsee, where
applicable. the form of the indorsement
b. Unqualified authorizes him to do so. But all
*Indorsement of this kind makes the subsequent indorsees acquire only
indorsee liable for warranties and the title of the first indorsee under
held the indorsee secondarily liable the restrictive indorsement.
in case of dishonor. *It does not follow that if the
*Sec. 66 of the Negotiable instrument is restrictively indorsed
Instrument Law is applicable in this the liability is qualified.
kind of consideration. b. Unrestrictive
What are the rights of indorsee: 4. Other rules on indorsement
a. Restrictive a. in a representative capacity
Sec. 36 of the Negotiable Sec. 44 of the Negotiable
Instrument Law provides that: An Instrument Law provides that:
indorsement is restrictive which Where any person is under
either: (a) Prohibits the further obligation to indorse in a
negotiation of the instrument; or (b) representative capacity, he may
Constitutes the indorsee the agent of indorse in such terms as to negative
the indorser; or (c) Vests the title in personal liability.
the indorsee in trust for or to the use b. Presumption as to time of
of some other persons. But the mere indorsement
absence of words implying power to Sec. 45 of the Negotiable
negotiate does not make an Instrument Law provides that:
indorsement restrictive. Except where an indorsement bears
*Prohibits the further negotiation of date after the maturity of the
the instrument instrument, every negotiation is
- the beneficial and legal title is both deemed prima facie to have been
on the indorser. effected before the instrument was
*Constitutes the indorsee the agent overdue.
of the indorser c. Place of indorsement
- the indorser has the legal title Sec. 46 of the Negotiable
while the beneficial title remains Instrument Law provides that:
with the principal. Except where the contrary appears,
-the relationship exists here is every indorsement is presumed
principal-agent relationship. prima facie to have been made at the
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place where the instrument is *This section applies only to
dated. instruments which are originally
d. Striking out of indorsement payable to bearer.
Sec. 48 of the Negotiable Example: A issued to B a bearer
Instrument Law states that: The note, B wants to negotiate it to C. B
holder may at any time strike out asked you how he can validly
any indorsement which is not negotiate the bearer instrument? The
necessary to his title. The indorser answer is by mere delivery.
whose indorsement is struck out, Q: Is there a change in the liabilities
and all indorsers subsequent to him, of a person who indorses a bearer
are thereby relieved from liability on instrument?
the instrument. A: YES. He is liable as an indorser
*The striking of indorsement is under Sec. 67 of the Negotiable
under the discretion of the holder Instrument Law.
and not of the indorser. Q: Is there any liability attaches to
e. Transfer indorsement of an the person who negotiates the
instrument payable to bearer instrument by mere delivery?
Sec. 40 of the Negotiable A: YES. Sec 65 second paragraph but
Instrument Law states that: Where confined to warranties only.
an instrument, payable to bearer, is f. Where instrument is payable to 2 or
indorsed specially, it may more persons
nevertheless be further negotiated Sec. 41 of the Negotiable
by delivery; but the person Instrument Law states that: Where
indorsing specially is liable as an instrument is payable to the order
indorser to only such holders as of two or more payees or indorsees
make title through his who are not partners, all must
indorsement. indorse unless the one indorsing has
Example: authority to indorse for the others.
Note payable to bearer g. Instrument is drawn or indorsed to a
A B C D person as cashier
B indorsed the instrument to C Sec. 42 of the Negotiable
Q: Does the indorsement affect the Instrument Law states that: Where
instrument? an instrument is drawn or indorsed
A: NO. Even if there is an to a person as "cashier" or other
indorsement, it does not change the fiscal officer of a bank or
fact that the instrument is a bearer corporation, it is deemed prima facie
one thus it can be negotiated by to be payable to the bank or
mere delivery. corporation of which he is such
Q: Is the indorser of the bearer officer, and may be negotiated by
instrument liable? What is his either the indorsement of the bank
liability? or corporation or the indorsement of
A: YES. He is liable in case of breach the officer.
of warranty. He is liable as indorser h. Where name of payee or indorsee is
for the fact that he indorses a bearer misspelled
instrument. Sec. 43 of the Negotiable
*Indorsement on a bearer Instrument Law states that: Where
instrument does not affect the nature the name of a payee or indorsee is
of the instrument because a bearer wrongly designated or misspelled,
instrument is always a bearer he may indorse the instrument as
instrument.
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therein described adding, if he A: At the time indorsement was
thinks fit, his proper signature. made. There is no retroactive effect.
i. Indorsement of an order of *The requisites of a holder in due
instrument without indorsement course must be present up to the
Sec. 49 of the Negotiable actual and valid negotiation took
Instrument Law provides that: place.
Where the holder of an instrument 5. Negotiation by a prior party
payable to his order transfers it for Sec. 50 of the Negotiable Instrument
value without indorsing it, the Law states that: Where an instrument
transfer vests in the transferee such is negotiated back to a prior party, such
title as the transferor had therein, party may, subject to the provisions of
and the transferee acquires in this Act, reissue and further negotiable
addition, the right to have the the same. But he is not entitled to
indorsement of the transferor. But enforce payment thereof against any
for the purpose of determining intervening party to whom he was
whether the transferee is a holder in personally liable.
due course, the negotiation takes
HOLDERS:
effect as of the time when the
indorsement is actually made. A. General concept of holder
Q: A issued an instrument payable Sec. 191 of the Negotiable Instrument Law
to the order of B, B wants to states that: "Holder" means the payee or
negotiate it to C. How negotiation be indorsee of a bill or note who is in
validly made? possession of it, or the bearer thereof.
A: Indorsement and delivery *If payable to bearer, holder means the
Q: A issued an order instrument to person who is in possession thereof.
B, B transferred it to C only by Q: Can a named payee be called a holder?
delivery without indorsing it. Is A: YES. If the instrument is in his
there any legal implication on the possession.
gesture made by B? Presumption: There was a valid delivery.
A: YES. Under Sec. 49 of the Advantage of being a holder in due course:
Negotiable Instrument, there is an Can give shelter/protection to the
equitable assignment. subsequent holders.
Q: Does the holder of the instrument
has any other right? B. Holder in due course
A: YES. He has the right to have the Sec. 52 of the Negotiable Instrument Law
indorsement of the transferor. This provides that: A holder in due course is a
right is applicable only if the holder who has taken the instrument under
instrument is negotiable. He can file the following conditions: (a) That it is
a case for specific performance. complete and regular upon its face; (b) That
Q: Why is the date of indorsement he became the holder of it before it was
material? overdue, and without notice that it has been
A: To determine the date of due previously dishonored, if such was the fact;
course holding. (c) That he took it in good faith and for
Q: A issued a negotiable instrument value; (d) That at the time it was negotiated
to B, B negotiated it to C. The to him, he had no notice of any infirmity in
delivery took effect on May 1, 2008 the instrument or defect in the title of the
and the indorsement took effect on person negotiating it.
June 1, 2008. When was there a valid *Requisites on Sec. 52 boils down to good
negotiation? faith and innocence of the holder.
Page 11
*This is equivalent to innocent buyer in the usage of trade or business
good faith under New Civil Code. practice (if any), with respect to such
1. Instrument complete and regular instruments, and the facts of the
*Complete: all necessary details that particular case.
define the necessary rights thereto and 3. Notice of infirmity or defect
all the requisites of Sec. 1 must be Sec. 54 of the Negotiable Instrument
present. Law provides that: Where the
*Regular: there must be no visible transferee receives notice of any
alterations/changes upon the face of the infirmity in the instrument or defect in
instrument. the title of the person negotiating the
*These are alterations that are obvious same before he has paid the full amount
in the naked eye. agreed to be paid therefor, he will be
2. Taken before overdue deemed a holder in due course only to
*If the instrument is overdue, it is also a the extent of the amount therefore paid
notice that it has been dishonored. by him.
*An instrument is overdue after the date *There is defective in the title when
of maturity. there is error in the indorsement and/or
*It is very unusual to negotiate an in delivery.
instrument that has been matured Q: Even if the instrument suffer
because such instrument should have infirmities, is there a possibility that the
been discharged. holder be a holder in due course?
a. Rule in case of installment A: YES. If he has no knowledge of the
instruments infirmity.
*When the instrument contains an Sec. 55 of the Negotiable Instrument
acceleration clause, knowledge of Law provides that: The title of a person
the holder at the time of acquisition who negotiates an instrument is
thereof that one installment or defective within the meaning of this Act
interest, or both, as the case may be, when he obtained the instrument, or
is unpaid, is notice that the any signature thereto, by fraud, duress,
instrument is overdue. or force and fear, or other unlawful
*One who purchases in good faith means, or for an illegal consideration, or
an instrument upon which the when he negotiates it in breach of faith,
interest is overdue is a holder in due or under such circumstances as amount
course. But where, by the terms of to a fraud.
the instrument, the principal was to Q: What are the circumstances that
become due upon default of the render title defective?
payment of interest, one who takes A: When he obtained the instrument or
the instrument upon which the any signature thereto by: 1. Fraud; 2.
interest is overdue is not a holder in Duress; 3. Force and fear; 4. Other
due course. unlawful means; 5. For an illegal
b. Rule in case of demand instruments consideration; 6. Negotiate it in breach
Sec. 53 of the Negotiable of faith; and 7. Under such
Instrument Law provides that: circumstances as amount to a fraud.
Where an instrument payable on Example:
demand is negotiated on an A B C
unreasonable length of time after its On the part of A, the issuance of the
issue, the holder is not deemed a instrument is involuntary because of the
holder in due course. presence of any circumstances
*In demand instrument, mentioned in Sec. 55. thus making Bs
reasonableness test is applied. It is title defective.
Page 12
Q: Can C still be called a holder in due who has negotiated the instrument was
course? defective, the burden is on the holder to
A: YES. As long as he has no knowledge prove that he or some person under whom
of the defect in the title of the person he claims acquired the title as holder in due
negotiating it to him. course. But the last-mentioned rule does not
Sec. 56 of the Negotiable Instrument apply in favor of a party who became
Law provides that: To constitutes bound on the instrument prior to the
notice of an infirmity in the instrument acquisition of such defective title.
or defect in the title of the person *The presumption expressed in this section
negotiating the same, the person to arises only in favor of a person who is a
whom it is negotiated must have had holder in the sense defined in Sec. 191 of the
actual knowledge of the infirmity or Negotiable Instrument Law, i. e., a payee or
defect, or knowledge of such facts that indorsee who is in possession of the draft,
his action in taking the instrument or the bearer thereof.
amounted to bad faith. Q: How important is the statutory
*Infirmities must include things that are presumption?
wrong with the instrument itself. These A: The holder of the instrument need not
are infirmities not visible to the naked prove that he is a holder in due course.
eye. *The burden to prove shifted to the other
*As long as he has knowledge of the party.
infirmity due course holding is not
present. D. Rights of holders in due course
Q: How can we reconcile the 1st Sec. 57 of the Negotiable Instrument Law
requirement and the 4th requirement? provides that: A holder in due course
A: The first requirement pertains to holds the instrument free from any defect of
infirmities visible to the naked eye title of prior parties, and free from defenses
whereas the fourth requirement pertains available to prior parties among themselves,
to infirmities not visible to the naked and may enforce payment of the instrument
eye. for the full amount thereof against all
Example: parties liable thereon.
The instrument contains
all E. Shelter Rule
necessary details except Sec. 58 of the Negotiable Instrument Law
for the amount, A provides that: In the hands of any holder
instructed B to fill the other than a holder in due course, a
instrument of the any negotiable instrument is subject to the same
amount but upto P50,000 defenses as if it were non-negotiable. But a
only. B inserted P80,000. holder who derives his title through a
B negotiated it to C. holder in due course, and who is not
Q: Can C detect the infirmity upon its himself a party to any fraud or illegality
face? affecting the instrument, has all the rights of
A: NO such former holder in respect of all parties
4. Good faith prior to the latter.
5. Holder for value Requisites:
1. That the holder derived his title from a
C. Presumption of due course holding holder in due course.
Sec. 59 of the Negotiable Instrument Law 2. That he himself is not a party to any
provides that: Every holder is deemed fraud or illegality affecting the
prima facie to be a holder in due course; but instrument.
when it is shown that the title of any person Example:
Page 13
A B C D E F accept or pay, or it shall be accepted
E is a holder in due course both, the instrument or paid or both as
E negotiated the instrument to F who is not to the payee or to the case may be
any one to whom it according to its
a holder in due course.
is negotiated tenor and that if it be
To subsequent holder, F is considered to be
according to its dishonored and the
a holder in due course because he was tenor. necessary
sheltered by E who is a holder in due proceedings on
course. dishonor be duly
*The determination of whether there is due taken he will pay the
course holding or not is material only when amount thereof to
the payee or to
there is a personal defense.
whom it is
Q: Is it worth comparing the holders in due negotiated or to any
course and the one who derived title from subsequent indorser
the holder in due course? who may be
A: YES. compelled to pay it.
Advantages: Absolutely liable Conditionally liable
Holder in due A person derived
course title from a holder B. Liability distinguished from warranty
in due course Warranty consists of a partys undertaking
Always a holder in Holder in due course that at the time of his negotiation he had
due course to all to all prior parties title to the instrument and it is valid and
prior parties. except to the person
subsisting.
Always with who negotiated the
freedom against instrument to him -This is an affirmation/assertion/admission
defenses and that certain things are true.
defective title Q: Are all parties had warranties?
Shelter rule is Shelter rule is not A: YES.
applicable applicable Q: Is engagement to pay common to all
General Rule: Equitable defenses can be parties?
interposed against a person not a holder in A: NO.
due course. Distinction:
Exception: Shelter rule, i. e., Section 58 of Liability Warranties
the Negotiable Instrument Law. It is material to It is immaterial to
determine whether know whether the
LIABILITY OF PARTIES: the person is person is primarily
primarily or or secondarily liable
Q: What is your understanding of parties liable? secondarily liable
When do you say a party is liable?
A: A person is liable when he in obligated to C. Liability and/or warranty of parties
perform a particular prestation. Liability in general
Q: What are the liabilities of the parties according a. Warranty
to its nature? b. Engagement to pay
A: 1. Warranties; 2. Engagement to pay ( primary; Promissory Bill of
secondary) Note Exchange
Primary Maker Acceptor
A. Primary and secondary liability, Secondary General General
distinguished Indorser Indorser
Distinction: and
Primary Liability Secondary Liability drawer
The engagement of a An engagement by a *If the holders cause of action is
party to an party to an primary engagement, due
instrument that on instrument that on presentment and dishonor
its due date he will its due presentment proceedings are irrelevant.
Page 14
*If the holders cause of action is due presentment, the instrument will be
breach of warranty, due accepted or paid, or both, according to
presentment and dishonor its tenor, and that if it be dishonored
proceedings are irrelevant. and the necessary proceedings on
*If the holders cause of action is dishonor be duly taken, he will pay the
secondary engagement to pay, due amount thereof to the holder or to any
presentment and dishonor subsequent indorser who may be
proceedings are relevant. compelled to pay it. But the drawer may
Q: Is liability on warranties common insert in the instrument an express
to all? stipulation negativing or limiting his
A: YES. own liability to the holder.
Persons that had no engagement to *Due presentment means not only any
pay: presentment but presentment in
1. Qualified Indorsers accordance with law.
2. Persons negotiating by delivery *Necessary proceedings on dishonor
means proceedings must be one within
Promissory Note Bill of Exchange
accordance with law.
Maker (Sec. 60) Drawer (Sec. 61)
*Drawer is conditionally liable
Acceptor (Sec.
62) a. Relationship with drawee
Indorser Indorser b. Relationship with collecting bank
a. General a. General 3. Acceptor
(Sec. 66) b. Qualified Sec. 62 of the Negotiable Instrument
b. Qualified Law states that: The acceptor, by
(Sec. 65) accepting the instrument, engages that
Persons Persons
he will pay it according to the tenor of
negotiating by negotiating by
delivery (Sec. 65) delivery his acceptance and admits: (a) The
Q: Can the drawee be forced to be existence of the drawer, the genuineness
held liable? of his signature, and his capacity and
A: NO. As long as he do not accepts authority to draw the instrument; and
the instrument. (b) The existence of the payee and his
*The drawee cannot be compelled to then capacity to indorse.
accept the negotiable instrument. *Acceptor is primarily liable
*If the refusal amounted to tortious Sec. 127 of the Negotiable Instrument
act, the drawee may be held liable Law states that: A bill of itself does not
but not based on contract. operate as an assignment of the funds in
the hands of the drawee available for
1. Maker the payment thereof, and the drawee is
Sec. 60 of the Negotiable Instrument not liable on the bill unless and until he
Law provides that: The maker of a accepts the same.
negotiable instrument, by making it, 4. Indorsers
engages that he will pay it according to a. General indorsers
its tenor, and admits the existence of the Sec. 66 of the Negotiable
payee and his then capacity to indorse. Instrument Law states that: Every
*Maker is primarily liable indorser who indorses without
2. Drawer qualification, warrants to all
Sec. 61 of the Negotiable Instrument subsequent holders in due course:
Law provides that: The drawer by (a) The matters and things
drawing the instrument admits the mentioned in subdivisions (a), (b),
existence of the payee and his then and (c) of the next preceding section;
capacity to indorse; and engages that, on and (b) That the instrument is, at the
Page 15
time of his indorsement, valid and 5. Parties negotiating by mere delivery
subsisting; And, in addition, he Sec. 65 of the Negotiable Instrument
engages that, on due presentment, it Law provides that: Every person
shall be accepted or paid, or both, as negotiating an instrument by delivery or
the case may be, according to its by a qualified indorsement warrants: (a)
tenor, and that if it be dishonored That the instrument is genuine and in all
and the necessary proceedings on respects what it purports to be; (b) That
dishonor be duly taken, he will pay he has a good title to it; (c) That all prior
the amount thereof to the holder, or parties had capacity to contract; (d) That
to any subsequent indorser who he has no knowledge of any fact which
may be compelled to pay it. would impair the validity of the
*General indorsers are liable for instrument or render it valueless. But
warranties and they are secondarily when the negotiation is by delivery
liable for engagement to pay. only, the warranty extends in favor of
b. Qualified indorsers no holder other than the immediate
Sec. 65 of the Negotiable transferee. The provisions of
Instrument Law states that: Every subdivision (c) of this section do not
person negotiating an instrument by apply to a person negotiating public or
delivery or by a qualified corporation securities other than bills
indorsement warrants: (a) That the and notes.
instrument is genuine and in all 6. Other cases
respects what it purports to be; (b) a. Irregular indorser
That he has a good title to it; (c) That Sec. 64 of the Negotiable
all prior parties had capacity to Instrument Law states that: Where
contract; (d) That he has no a person, not otherwise a party to an
knowledge of any fact which would instrument, places thereon his
impair the validity of the instrument signature in blank before delivery,
or render it valueless. But when the he is liable as indorser, in
negotiation is by delivery only, the accordance with the following rules:
warranty extends in favor of no (a) If the instrument is payable to the
holder other than the immediate order of a third person, he is liable to
transferee. The provisions of the payee and to all subsequent
subdivision (c) of this section do not parties.
apply to a person negotiating public (b) If the instrument is payable to
or corporation securities other than the order of the maker or drawer, or
bills and notes. is payable to bearer, he is liable to all
*Qualified indorsers are liable for parties subsequent to the maker or
warranties drawer. (c) If he signs for the
c. Order of liability accommodation of the payee, he is
Sec. 68 of the Negotiable liable to all parties subsequent to the
Instrument Law states that: As payee.
respect one another, indorsers are b. Indorser of bearer instrument
liable prima facie in the order in Sec. 67 of the Negotiable
which they indorse; but evidence is Instrument Law provides that:
admissible to show that, as between Where a person places his
or among themselves, they have indorsement on an instrument
agreed otherwise. Joint payees or negotiable by delivery, he incurs all
joint indorsees who indorse are the liability of an indorser.
deemed to indorse jointly and c. Accommodation party
severally.
Page 16
Sec. 29 of the Negotiable incomplete 2. Want of
Instrument Law states that: An instrument delivery of
accommodation party is one who 3. Duress complete
has signed the instrument as maker, amounting to instrument
forgery 3. Insertion of
drawer, acceptor, or indorser,
4. Fraud in wrong date
without receiving value therefor, factum or in an
and for the purpose of lending his fraud in esse instrument
name to some other person. Such a contractus 4. Filling up of
person is liable on the instrument to 5. Minority blank
a holder for value, notwithstanding 6. Insanity contrary to
7. Ultra vires authority
such holder, at the time of taking the
acts of a given or not
instrument, knew him to be only an
corporation within
accommodation party. 8. Want of reasonable
*The liability of an accommodation authority of time
party depends on how they agent 5. Fraud in
participate in the instrument. 9. Illegality inducement
d. Agents signing in behalf of the 10.Forgery 6. Duress or
11.Prescription fear
principal
7. Illegal
Sec. 19 of the Negotiable consideratio
Instrument Law provides that: The n
signature of any party may be made 8. Negotiation
by a duly authorized agent. No in breach of
particular form of appointment is faith
necessary for this purpose; and the 9. Mistake
10. Ante-dating
authority of the agent may be
or post
established as in other cases of dating for
agency. illegal or
fraudulent
DEFENSES: purposes
11. Abuse of
A. Real and Personal Defenses, distinguished
authority
Distinctions: 12. Conditional
Real Defense Personal Defense delivery of
Stronger defense Weakest defense complete
Those that attach to Those which are instrument
the instrument itself available only Q: In a creditor-debtor relationship, who is
and are available against a person not interested in the existence of a defense?
against all holders, a holder in due
A: Debtor. Reason: Presence of a defense
whether in due course or a
course or not but subsequent holder exonerate the liability of the debtor.
only by the parties who stands in Kinds:
entitled to raise them privity with him 1. Real defense
(Absolute defense) (Equitable defense) 2. Personal defense
Cannot be enforced Can be enforced Q: Why are real defenses stronger than the
by the holder because there is an personal defense?
because there is no existing contract but
A: Because there is no contract exists on his
contract to enforce subject to defense
part.
The following are The following are
real defenses: personal defences:
1. Material 1. Absence or B. Real defenses
alteration failure of 1. Minority and ultra vires acts (Sec 22)
2. Want of consideratio Sec. 22 of the Negotiable Instrument
delivery of n Law provides that: The indorsement or
Page 17
assignment of the instrument by a against whom it is sought to enforce
corporation or by an infant passes the such right is precluded from setting up
property therein, notwithstanding that the forgery or want of authority.
from want of capacity, the corporation *What is inoperative is only the
or infant may incur no liability thereon. signature and not the instrument.
Examples: Parties precluded from raising forgery
a. A, a minor, issued a promissory note as defense:
to B; B negotiated it to C; C to D then 1. Person negotiating by delivery
D to E. 2. Prior parties/indorsers
Q: What defense is available to A?
A: Minority a. Forgery of makers signature
Q: Why is it a real defense? *Maker cannot be held liable by any
A: Because of his lack of capacity. holder.
Q: What recourse is available to the Reason: The purported maker is not
holder? a party to the instrument as his
A: Go after the indorsers forged instrument is inoperative and
b. A issued a negotiable instrument to no right to retain, enforce or
B, a minor. discharge the note may be acquired
Q: Can A use minority as a defense? against him.
A: NO. As maker, he admits the b. Of indorsers signature
existence of the payee and his then *The indorsement is inoperative
capacity to indorse. thus it cannot effect any transfer of
2. Non-delivery of an incomplete any rights to the holder.
instrument Example:
Sec. 15 of the Negotiable Instrument A (maker) B C D E
Law provides that: Where an Bs signature was forged
incomplete instrument has not been Q: Can A raise the defense of
delivered, it will not, if completed and Forgery?
negotiated without authority, be a valid A: YES.
contract in the hands of any holder, as Q: Can E go after B?
against any person whose signature was A: NO.
placed thereon before delivery. Recourse: Go after C or D
3. Fraud in factum *Cut-off rule is applicable.
*The person who signs the instrument Indorsement is necessary for the
lacks knowledge of the character or transfer of title.
essential terms of the instrument. But Example:
the defense is not available if the party XABCDE
involved had reasonable opportunity to Q: Can the acceptor admits the
obtain such knowledge. genuineness of the signature of the
4. Forgery and want of authority payee?
Sec. 23 of the Negotiable Instrument A: NO.
Law provides that: When a signature is Q: Can a drawee refuse payment of
forged or made without the authority of a bill of exchange bearing a forged
the person whose signature it purports indorsement?
to be, it is wholly inoperative, and no A: YES. Cut-off rule applies
right to retain the instrument, or to give Cases: Associated Bank v CA; PNB
a discharge therefor, or to enforce v CA; Republic v Ebrada
payment thereof against any party c. Of drawers signature
thereto, can be acquired through or *In cases involving a forged check,
under such signature, unless the party where the drawers signature is
Page 18
forged, the drawer can recover from assented to the alteration and
the drawee bank. No drawee bank subsequent indorsers.
has a right to pay a forged check. If But when an instrument has been
it does, it shall have to re-credit the materially altered and is in the hands of
amount of the check to the account a holder in due course not a party to the
of the drawer. alteration, he may enforce payment
Reason: The drawee bank is bound thereof according to its original tenor.
to know the signature of the drawer Q: Why is this a partial defense only?
since the drawer is its customer. A: Because the holder in due course
Example: may still demand payment but
X A (drawer) B C D E according to its original tenor.
(holder) Sec. 125 of the Negotiable Instrument
Drawers signature was forged Law states that: Any alteration which
Q: Can drawee accept a bill of changes:
exchange bearing forged signature (a) The date;
of the drawer? (b) The sum payable, either for principal
A: NO. or interest;
Q: What is the implication of (c) The time or place of payment:
accepting bill of exchange bearing a (d) The number or the relations of the
forged signature of the drawer? parties;
A: Sec. 62 of the Negotiable (e) The medium or currency in which
Instrument Law. Once accepted, payment is to be made;
drawee cannot raise forgery as a (f) Or which adds a place of payment
defense. where no place of payment is specified,
Recourse: Go after the last or any other change or addition which
holder/collecting bank. alters the effect of the instrument in any
*Collecting bank assumes the role of respect, is a material alteration.
an indorser. *The underlined phrase is what we call
Case: Gempesaw v CA catch-all clause
*Cut-off rule is not applicable Q: What is the condition/term of the
General Rule: Drawee bank is liable instrument at the time it was altered?
for the loss. A: The instrument is materially
Exception: There is fault/negligence complete.
on the part of the drawer 6. Extinctive prescription
d. Forgery of bearer instruments
*In bearer instruments, the signature C. Personal defenses
of the payee or holder is *Determination of whether the person is a
unnecessary to pass title to the holder in due course or not is material.
instrument. Hence, where the Q: Why this defense is treated as a weak
indorsement is a forgery, only the defense?
person whose signature is forged A: Because only holders not in due course
can raise the defense of forgery can raise these defenses.
against a holder in due course. 1. Ante-dating or post dating
5. Material alteration (partial real defense) Sec. 12 of the Negotiable Instrument
Sec. 124 of the Negotiable Instrument Law provides that: The instrument is
Law provides that: Where a negotiable not invalid for the reason only that it is
instrument is materially altered without ante-dated or post-dated, provided this
the assent of all parties liable thereon, it is not done for an illegal or fraudulent
is avoided, except as against a party purpose. The person to whom an
who has himself made, authorized, or instrument so dated is delivered
Page 19
acquires the title thereto as of the date of a prima facie authority to fill it up as
delivery. such for any amount. In order, however,
2. Insertion of wrong date that any such instrument when
Sec. 13 of the Negotiable Instrument completed may be enforced against any
Law provides that: Where an person who became a party thereto
instrument expressed to be payable at a prior to its completion, it must be filled
fixed period after date is issued up strictly in accordance with the
undated, or where the acceptance of an authority given and within a reasonable
instrument payable at a fixed period time. But if any such instrument, after
after sight is undated, any holder may completion, is negotiated to a holder in
insert therein the true date of issue or due course, it is valid and effectual for
acceptance, and the instrument shall be all purposes in his hands, and he may
payable accordingly. The insertion of a enforce it as if it had been filled up
wrong date does not avoid the strictly in accordance with the authority
instrument in the hands of a subsequent given and within a reasonable time.
holder in due course; but as to him, the *It is inequitable for a person to set up
date so inserted is to be regarded as the this defense against more innocent
true date. party.
Principle: One who made possible to Q: Is there any recourse to the holder?
the infirmity shall bear the loss A: YES. To ran against the indorsers
Example: *Subsequent indorsers cannot put up
the defense of good faith.
_______ Example:
10 days after date The amount is
___________
The true date is June 1, 2008 maturity The authority to fill the amount is upto
date will be June 11, 2008 P50,000 only
The date inserted is May 25, 2008 the ABCDE
maturity date will be June 4, 2008 B inserted an amount of P80,000
ABCDE Q: Is there a defense?
If E is a holder in due course and A is A: YES.
the maker, though both E and A are Q: Can it be used?
innocent, A shall suffer the consequence A: IT DEPENDS. Depending whether
for he made possible to the loss the holder is a holder in due course or
If E is not a holder in due course and A not.
is the maker, E is not innocent but A is *If holder in due course the defense
innocent thus E cannot held A liable. cannot be raised.
3. Filling up blanks beyond authority *If holder not in due course he can use it
(Abuse of Authority) as a defense.
Sec. 14 of the Negotiable Instrument Reason: The holder not in due course is
Law states that: Where the instrument not an innocent party as far as the
is wanting in any material particular, maker is concern thus the contract is
the person in possession thereof has a avoided.
prima facie authority to complete it by Recourse: Go after the immediate
filling up the blanks therein. And a transferor in case of bearer instrument
signature on a blank paper delivered by or the indorsers in case of order
the person making the signature in instrument.
order that the paper may be converted 4. Want of delivery of a complete
into a negotiable instrument operates as instrument
Page 20
Sec. 16 of the Negotiable Instrument course; and partial failure of
Law states that: Every contract on a consideration is a defense pro tanto,
negotiable instrument is incomplete and whether the failure is an ascertained and
revocable until delivery of the liquidated amount or otherwise.
instrument for the purpose of giving *Defense pro tanto means that the
effect thereto. As between immediate person is not totally exonerated from
parties and as regards a remote party liability; he is liable upto the amount he
other than a holder in due course, the benefited.
delivery, in order to be effectual, must *Partial failure of consideration is a
be made either by or under the personal defense and can be raised
authority of the party making, drawing, against a holder not in due course.
accepting, or indorsing, as the case may *The general indorser is liable for breach
be; and, in such case, the delivery may of warranty, i.e., his warranty that at the
be shown to have been conditional, or time of his indorsement the instrument
for a special purpose only, and not for is valid and existing.
the purpose of transferring the property *With regard to person negotiating by
in the instrument. But where the delivery and qualified indorser, his
instrument is in the hands of a holder in liability depends on whether or not he
due course, a valid delivery thereof by has knowledge of the invalidity of the
all parties prior to him so as to make instrument.
them liable to him is conclusively Example:
presumed. And where the instrument is A issued a promissory note sans
no longer in the possession of a party consideration to B.
whose signature appears thereon, a Q: Can B collect to A?
valid and intentional delivery by him is A: NO.
presumed until the contrary is proved. B indorsed the note to C then C to D and
Example: D to E.
A issued a complete instrument but he Q: Could C be a holder in due course?
has no intention of negotiating it yet A: YES. As long as he has no knowledge
B got the instrument accidentally of the fact that there was infirmity in the
B negotiated it to C then C to D and D to instrument.
E Q: Is a defense exists in favor of A?
E is a holder in due course What kind of defense?
Q: Can C be a holder in due course? A: YES. It is a personal defense
A: YES. As long as he has no knowledge Q: Can A successfully raise it? Why?
of the infirmity A: NO. One who made the infirmity
Q: Between E and A, can A raise the possible shall bear the loss.
defense? 6. Simple fraud, duress, intimidation, force
A: NO. Because the defense is a or fear, illegality of consideration,
personal defense. breach of faith
Principle: One who makes the infirmity Sec. 55 of the Negotiable Instrument
possible shall bear the loss. Law provides that: The title of a person
Recourse: Go after the indorsers who negotiates an instrument is
Reason: Breach of warranty, i.e., that defective within the meaning of this Act
they had good title to the instrument. when he obtained the instrument, or
5. Absence or failure of consideration any signature thereto, by fraud, duress,
Sec. 28 of the Negotiable Instrument or force and fear, or other unlawful
Law provides that: Absence or failure means, or for an illegal consideration, or
of consideration is a matter of defense as when he negotiates it in breach of faith,
against any person not a holder in due
Page 21
or under such circumstances as amount 1. Presentment for acceptance or
to a fraud. negotiation within a reasonable time
Sec. 56 of the Negotiable Instrument after it was acquired (Sec. 143)
Law states that: To constitutes notice of 2. If dishonored by non-acceptance:
an infirmity in the instrument or defect 2.1. Notice of dishonor should be
in the title of the person negotiating the given to the indorsers and
same, the person to whom it is drawer
negotiated must have had actual 2.2. If the bill is a foreign bill, there
knowledge of the infirmity or defect, or must be a protest for dishonor by
knowledge of such facts that his action non-acceptance
in taking the instrument amounted to 3. If the bill is accepted:
bad faith. 3.1. Presentment for payment to the
Sec. 57 of the Negotiable Instrument acceptor should be made
Law provides that: A holder in due 3.2. If the bill is dishonored upon
course holds the instrument free from presentment for payment:
any defect of title of prior parties, and 3.2.1. Notice of dishonor upon
free from defenses available to prior presentment for payment
parties among themselves, and may 3.2.2. If the bill is a foreign bill,
enforce payment of the instrument for protest for dishonor by
the full amount thereof against all non-acceptance must be
parties liable thereon. made
ENFORCEMENT OF LIABILITY:
C. Presentment for payment
A. Parties primarily liable and parties 1. Concept of presentment
secondarily liable Presentment is the production of a bill
Primarily Liable Secondarily Liable of exchange to the drawee for his
Maker Drawer acceptance or to the drawee or acceptor
Acceptor General Indorsers for payment or the production of a
Qualified Indorsers promissory note to the party liable for
the payment of the same.
B. General steps in enforcing liability 2. Requisites for sufficiency
1. Presentment Sec. 72 of the Negotiable Instrument
2. Dishonor Law provides that: Presentment for
Promissory Note payment, to be sufficient, must be made:
1. Presentment for payment must be (a) By the holder, or by some person
made within the required period to authorized to receive payment on his
the maker (Sec. 70) behalf; (b) At a reasonable hour on a
2. Notice of Dishonor (Sec. 89) business day; (c) At a proper place as
Example: herein defined; (d) To the person
MABCDE primarily liable on the instrument, or if
Q: In a case where the cause of action is he is absent or inaccessible, to any
for payment, is presentment and person found at the place where the
dishonor essential? presentment is made.
A: YES. a. Date of presentment
Q: If the holder is running after the Sec. 71 of the Negotiable
indorsement for breach of warranty, is Instrument Law states that: Where
presentment and dishonour essential? the instrument is not payable on
A: NO. demand, presentment must be made
Bill of Exchange on the day it falls due. Where it is
payable on demand, presentment
Page 22
must be made within a reasonable no funds there to meet it at
time after its issue, except that in the any time during the day, in
case of a bill of exchange, which case presentment at
presentment for payment will be any hour before the bank is
sufficient if made within a closed on that day is
reasonable time after the last sufficient.
negotiation thereof. b. Place of presentment
i. Rule in determining Sec. 73 of the Negotiable
maturity date Instrument Law provides that:
Sec. 85 of the Negotiable Presentment for payment is made
Instrument Law provides at the proper place: (a) Where a
that: Every negotiable place of payment is specified in the
instrument is payable at the instrument and it is there presented;
time fixed therein without (b) Where no place of payment is
grace. When the day of specified but the address of the
maturity falls upon Sunday person to make payment is given in
or a holiday, the instruments the instrument and it is there
falling due or becoming presented; (c) Where no place of
payable on Saturday are to payment is specified and no address
be presented for payment on is given and the instrument is
the next succeeding business presented at the usual place of
day except that instruments business or residence of the person
payable on demand may, at to make payment; (d) In any other
the option of the holder, be case if presented to the person to
presented for payment make payment wherever he can be
before twelve o'clock noon found, or if presented at his last
on Saturday when that entire known place of business or
day is not a holiday. residence.
ii. Rule in computing time i. Rule in if payable at a special
Sec. 86 of the Negotiable place
Instrument Law provides Sec. 70 of the Negotiable
that: When the instrument Instrument Law states that:
is payable at a fixed period Presentment for payment is
after date, after sight, or after not necessary in order to
that happening of a specified charge the person primarily
event, the time of payment is liable on the instrument; but
determined by excluding the if the instrument is, by its
day from which the time is to terms, payable at a special
begin to run, and by place, and he is able and
including the date of willing to pay it there at
payment. maturity, such ability and
iii. Rule in if payable at a bank willingness are equivalent to
Sec. 75 of the Negotiable a tender of payment upon his
Instrument Law states that: part. But except as herein
Where the instrument is otherwise provided,
payable at a bank, presentment for payment is
presentment for payment necessary in order to charge
must be made during the drawer and indorsers.
banking hours, unless the c. Presentment to the party primarily
person to make payment has liable
Page 23
i. How presentment made charge the drawer where he has no right
Sec. 74 of the Negotiable to expect or require that the drawee or
Instrument Law states that: acceptor will pay the instrument.
The instrument must be Sec. 80 of the Negotiable Instrument
exhibited to the person from Law states that: Presentment is not
whom payment is required in order to charge an indorser
demanded, and when it is where the instrument was made or
paid, must be delivered up to accepted for his accommodation and he
the party paying it. has no reason to expect that the
ii. Rule in case party primarily instrument will be paid if presented.
liable is already dead Sec. 82 of the Negotiable Instrument
Sec. 76 of the Negotiable Law states that: Presentment for
Instrument Law states that: payment is excused: (a) Where, after the
Where the person primarily exercise of reasonable diligence,
liable on the instrument is presentment, as required by this Act,
dead and no place of cannot be made; (b) Where the drawee
payment is specified, is a fictitious person; (c) By waiver of
presentment for payment presentment, express or implied.
must be made to his personal 4. When delay in presentment excused
representative, if such there Sec. 81 of the Negotiable Instrument
be, and if, with the exercise Law provides that: Delay in making
of reasonable diligence, he presentment for payment is excused
can be found. when the delay is caused by
iii. Presentment to partners circumstances beyond the control of the
Sec. 77 of the Negotiable holder and not imputable to his default,
Instrument Law provides misconduct, or negligence. When the
that: Where the persons cause of delay ceases to operate,
primarily liable on the presentment must be made with
instrument are liable as reasonable diligence.
partners and no place of
payment is specified, D. Notice of dishonor
presentment for payment 1. When dishonor of the instrument
may be made to any one of occurs:
them, even though there has a. Dishonor by non-payment
been a dissolution of the Sec. 83 of the Negotiable
firm. Instrument Law states that: The
iv. Presentment to joint debtors instrument is dishonored by non-
Sec. 78 of the Negotiable payment when: (a) It is duly
Instrument Law states that: presented for payment and payment
Where there are several is refused or cannot be obtained; or
persons, not partners, (b) Presentment is excused and the
primarily liable on the instrument is overdue and unpaid.
instrument and no place of Q: What are the implications of the
payment is specified, notices sent to drawer/general
presentment must be made indorsers?
to them all. A: Secondary liability
3. Instances where presentment is excused Example:
Sec. 79 of the Negotiable Instrument ABCDE
Law provides that: Presentment for E sent notice of dishonor to D alone
payment is not required in order to
Page 24
Q: What is the effect of notice given writing or merely oral and may be given
to D? in any terms which sufficiently identify
A: Others are discharge. the instrument, and indicate that it has
Principle: Parties not given a notice been dishonored by non-acceptance or
are discharge. non-payment. It may in all cases be
b. Dishonor by non-acceptance given by delivering it personally or
Sec. 149 of the Negotiable through the mails.
Instrument Law provides that: A 4. To whom notice is given
bill is dishonored by non- a. Party secondarily liable or agent
acceptance: (a) When it is duly Sec. 97 of the Negotiable
presented for acceptance and such Instrument Law provides that:
an acceptance as is prescribed by Notice of dishonor may be given
this Act is refused or can not be either to the party himself or to his
obtained; or (b) When presentment agent in that behalf.
for acceptance is excused and the bill b. Notice where party is dead
is not accepted. Sec. 98 of the Negotiable
2. Who should give notice Instrument Law states that: When
a. Holder any party is dead and his death is
Sec. 90 of the Negotiable known to the party giving notice,
Instrument Law provides that: The the notice must be given to a
notice may be given by or on behalf personal representative, if there be
of the holder, or by or on behalf of one, and if with reasonable
any party to the instrument who diligence, he can be found. If there
might be compelled to pay it to the be no personal representative, notice
holder, and who, upon taking it up, may be sent to the last residence or
would have a right to last place of business of the
reimbursement from the party to deceased.
whom the notice is given. c. Notice to partners
b. Agent Sec. 99 of the Negotiable
Sec. 91 of the Negotiable Instrument Law provides that:
Instrument Law states that: Notice Where the parties to be notified are
of dishonor may be given by any partners, notice to any one partner is
agent either in his own name or in notice to the firm, even though there
the name of any party entitled to has been a dissolution.
given notice, whether that party be d. Notice to persons jointly liable
his principal or not. Sec. 100 of the Negotiable
c. Party who may be compelled to pay Instrument Law provides that:
Sec. 90 of the Negotiable Notice to joint persons who are not
Instrument Law provides that: The partners must be given to each of
notice may be given by or on behalf them unless one of them has
of the holder, or by or on behalf of authority to receive such notice for
any party to the instrument who the others.
might be compelled to pay it to the e. Notice to bankrupt
holder, and who, upon taking it up, Sec. 101 of the Negotiable
would have a right to Instrument Law states that: Where
reimbursement from the party to a party has been adjudged a
whom the notice is given. bankrupt or an insolvent, or has
3. Form of Notice made an assignment for the benefit
Sec. 96 of the Negotiable Instrument of creditors, notice may be given
Law states that: The notice may be in
Page 25
either to the party himself or to his (a) When the drawee is a fictitious
trustee or assignee. person or person not having capacity to
5. When notice is excused contract, and the indorser was aware of
Sec. 109 of the Negotiable Instrument that fact at the time he indorsed the
Law provides that: Notice of dishonor instrument;
may be waived either before the time of (b) Where the indorser is the person to
giving notice has arrived or after the whom the instrument is presented for
omission to give due notice, and the payment;
waiver may be expressed or implied. (c) Where the instrument was made or
Sec. 110 of the Negotiable Instrument accepted for his accommodation.
Law states that: Where the waiver is 6. When there is delay in giving notice
embodied in the instrument itself, it is Sec. 113 of the Negotiable Instrument
binding upon all parties; but, where it is Law states that: Delay in giving notice
written above the signature of an of dishonor is excused when the delay is
indorser, it binds him only. caused by circumstances beyond the
Sec. 111 of the Negotiable Instrument control of the holder and not imputable
Law states that: A waiver of protest, to his default, misconduct, or
whether in the case of a foreign bill of negligence. When the cause of delay
exchange or other negotiable ceases to operate, notice must be given
instrument, is deemed to be a waiver with reasonable diligence.
not only of a formal protest but also of
presentment and notice of dishonor. DISCHARGE OF INSTRUMENTS:
Sec. 112 of the Negotiable Instrument A. Concept of Discharge
Law states that: Notice of dishonor is Discharge means a release of all parties,
dispensed with when, after the exercise whether primary or secondary, from the
of reasonable diligence, it cannot be obligations arising thereunder. It renders
given to or does not reach the parties the instrument without force and effect and
sought to be charged. consequently, it can no longer be
Sec. 114 of the Negotiable Instrument negotiated.
Law provides that: Notice of dishonor
*Applies to the instrument or to the source
is not required to be given to the drawer
of liability.
in either of the following cases:
(a) Where the drawer and drawee are
B. How instrument is discharge
the same person; Sec. 119 of the Negotiable Instrument Law
(b) When the drawee is fictitious person provides that: A negotiable instrument is
or a person not having capacity to discharged: (a) By payment in due course
contract; by or on behalf of the principal debtor; (b)
(c) When the drawer is the person to By payment in due course by the party
whom the instrument is presented for accommodated, where the instrument is
payment; made or accepted for his accommodation;
(d) Where the drawer has no right to (c) By the intentional cancellation thereof by
expect or require that the drawee or the holder; (d) By any other act which will
acceptor will honor the instrument; discharge a simple contract for the payment
(e) Where the drawer has of money; (e) When the principal debtor
countermanded payment. becomes the holder of the instrument at or
Sec. 115 of the Negotiable Instrument after maturity in his own right.
Law provides that: Notice of dishonor
1. Payment in due course
is not required to be given to an Sec. 88 of the Negotiable Instrument
indorser in either of the following cases: Law provides that: Payment is made in
due course when it is made at or after
Page 26
the maturity of the payment to the *Although these ways discharge the
holder thereof in good faith and without instrument as between immediate
notice that his title is defective. parties, they will not do so in the hands
a. By the principal debtor of a holder in due course.
Sec. 119 (a) of the Negotiable 4. Principal debtor becomes a holder
Instrument Law states that: A
negotiable instrument is discharged: C. Discharge of persons secondarily liable
(a) By payment in due course by or Sec. 120 of the Negotiable Instrument Law
on behalf of the principal debtor; x x provides that: A person secondarily liable
x on the instrument is discharged: (a) By any
b. By the accommodated party act which discharges the instrument; (b) By
Sec. 119 (b) of the Negotiable the intentional cancellation of his signature
Instrument Law provides that: A by the holder; (c) By the discharge of a prior
negotiable instrument is discharged: party; (d) By a valid tender or payment
x x x (b) By payment in due course made by a prior party; (e) By a release of the
by the party accommodated, where principal debtor unless the holder's right of
the instrument is made or accepted recourse against the party secondarily liable
for his accommodation; x x x is expressly reserved; (f) By any agreement
2. Intentional cancellation binding upon the holder to extend the time
a. Rule in case of unintentional of payment or to postpone the holder's right
cancellation to enforce the instrument unless made with
Sec. 123 of the Negotiable the assent of the party secondarily liable or
Instrument Law states that: A unless the right of recourse against such
cancellation made unintentionally or party is expressly reserved.
under a mistake or without the
authority of the holder, is CHECKS:
inoperative but where an instrument A. Checks defined
or any signature thereon appears to Sec. 185 of the Negotiable Instrument Law
have been cancelled, the burden of provides that: A check is a bill of exchange
proof lies on the party who alleges drawn on a bank payable on demand.
that the cancellation was made Except as herein otherwise provided, the
unintentionally or under a mistake provisions of this Act applicable to a bill of
or without authority. exchange payable on demand apply to a
3. Any act that discharge simple contracts check.
*The law on Obligations and Contracts *Checks need not be presented for
will apply. acceptance
Article 1231 of the New Civil Code *Checks are always payable on demand
provides that: Obligations are *Checks are always drawn against a bank
extinguished: (1) By payment or *In case of refusal by drawee bank, payee or
performance: (2) By the loss of the thing holder cannot compel drawee bank to pay
due: (3) By the condonation or remission because there is no privity of contract.
of the debt; (4) By the confusion or Recourse: Serve notice of dishonour to
merger of the rights of creditor and drawer; ran after the drawer
debtor; (5) By compensation; (6) By B. Distinguished from Draft
novation. Other causes of
extinguishment of obligations, such as Other Bill of Check
annulment, rescission, fulfillment of a Exchange
resolutory condition, and prescription, Not drawn on a It is necessary that a
are governed elsewhere in this Code. deposit. It is not check is drawn on a
necessary that a previous deposit.
Page 27
drawer of a Bill of Otherwise, there September 2000, additional anti-money
Exchange should would be fraud. laundering rules and regulations for
have funds in the Always bank as a banks are hereby issued as follows:
hands of the drawee. drawee, need not be
Section 1. Issuance of Cashiers,
Exist for circulation presented for
Managers or Certified Checks. Banks
acceptance. Exist for
immediate payment shall not issue cashiers, managers or
Death of the drawer Death of the drawer certified checks or other similar
of a Bill of Exchange of a check, with the instruments payable to cash, bearer,
with the knowledge knowledge by the fictitious payee or numbered account.
of the bank, does not bank, revokes the When the person purchasing the above-
revoke the authority authority of the
mentioned instruments is not a regular
of the banker to pay. banker to pay.
bank client, the issuing bank shall
May be presented Must be presented
for payment within a for payment within require the purchaser to present his/her
reasonable time after a reasonable time proof of residence together with his/her
its last negotiation. after its issue. drivers license, passport, employment
Checks become stale I.D. or other photo identification card. A
after 6 months from register for cashiers, managers or
issue.
certified checks issued shall be
maintained by the bank. Section 2.
C. Relationship between drawer, drawee and
Sanction. Any violations of the
payee
provision of this Circular shall be
Drawer is a secondarily liable; admits the
subject to a fine of P30,000 per
existence of a payee and his capacity to
transaction.
indorse and engages that the instrument
BSP Circular No. 291 series 2001
will be accepted or paid by the party
provides that: The Monetary Board, in
primarily liable and engages that if the
its Resolution No. 707 dated 10 May
instrument is dishonored and proper
2001 decided to authorize the issuance
proceedings are brought he will pay to the
of cashiers, managers or certified
party entitled to be paid.
checks or other similar instruments in
Drawee primarily liable; engages to pay
blank or payable to cash, bearer or
according to the tenor of his acceptance;
numbered account as an exception from
admits the existence of the drawer, the
the provisions of Circular no. 259,
genuineness of his signature and his
subject to the following conditions: a.
capacity and authority to draw the
That the amount of each check shall not
instrument and admits the existence of the
exceed P10,000.00; b. That the buyer of
payee and his capacity to indorse.
the check is properly identified as
Payee the person who is named to
required under Circular No. 259 dated
received the payment. The one who can
29 September; c. That a register of said
indorse for further negotiation.
checks shall be maintained with the
following minimum information: 1.
D. Kinds of check
Date issued; 2. Amount; 3. Name of
1. Cashiers and managers check a bill of
buyer; 4. Date paid; 5. If the aggregate
exchange drawn by a bank upon itself,
instruments purchased by the same
and is accepted by its issuance.
person within any thirty (30) day period
*Treated as good as cash.
amounts to at least fifty thousand pesos
*The drawee and the drawer are one
(P50,000), the purpose of the buyer
and the same.
should be stated.; d. That banks which
BSP Circular 259 series of 2000
issue as well as those which accept as
provides that: Pursuant to Monetary
deposits, said cashiers, managers or
Board Resolution No. 1494 dated 1
certified checks or other similar
Page 28
instruments issued in blank or payable Article 541 of the Code of Commerce
to cash, bearer or numbered account provides that: The maker of any legal
shall take such measure(s) as may be holder of a check shall be entitled to
necessary to ensure that said indicate therein that it be paid to a
instruments are not being used/resorted certain banker or institution, which he
to by the buyer or depositor in shall do by writing across the face the
furtherance of a money-laundering name of said banker or institution, or
activity; e. That the deposit of said only the words "and company".
instruments shall be subject to the same a. Effects of crossing a check
requirements/scrutiny applicable to 1. The check may not be encashed
cash deposits; f. That transactions but only deposited in the bank
involving said instruments should be 2. The check may be negotiated
accordingly reported to the Bangko only once to one who has an
Sentral ng Pilipinas if there is reasonable account with the bank
ground to suspect that said transactions 3. The act of crossing serves as a
are being used to launder funds of warning to the holder that the
illegitimate origin. check has been issued for a
2. Certified check one drawn by a definite purpose so that he may
depositor upon funds to his credit in a inquire if he has received the
bank which a proper officer of the bank check pursuant to that purpose.
certifies will be paid when duly 4. Memorandum and travellers check
presented for payment. Memorandum Check is in the form of
*There is a guarantee that upon an ordinary check, with the word
presentment it will be accepted. memorandum, memo or mem
*It is accepted in advance. written across its face, signifying that
*Certification is equivalent to the maker or drawer engages to pay the
acceptance. bona fide holder absolutely, without
*It is forbidden to issue a stop order any condition concerning its
payment. presentment. Such check is an evidence
Sec. 187 of the Negotiable Instrument of debt against the drawer, and
Law provides that: Where a check is although it may not be intended to be
certified by the bank on which it is presented, has the same effect as an
drawn, the certification is equivalent to ordinary check, and if passed to a third
an acceptance. person, will be valid in his hands like
Sec. 188 of the Negotiable Instrument any other check.
Law provides that: Where the holder of Travellers Check instruments
a check procures it to be accepted or purchased from banks, express
certified, the drawer and all indorsers companies, or the like, in various
are discharged from liability thereon. denominations, which can be used like
Sec. 189 of the Negotiable Instrument cash upon second signature by the
Law provides that: A check of itself purchaser. It has the characteristics of a
does not operate as an assignment of cashiers check of the issuer. It requires
any part of the funds to the credit of the the signature of the purchaser at the
drawer with the bank, and the bank is time he buys it and also at the time he
not liable to the holder unless and until uses it that is when he obtains the
it accepts or certifies the check. check from the bank and also at the time
3. Crossed Check done by writing two he delivers the same to the
parallel lines diagonally on the left top establishment that will be paid thereby.
portion of the checks.
E. When required to be presented for payment
Page 29
Sec. 186 of the Negotiable Instrument Law
provides that: A check must be presented
for payment within a reasonable time after
its issue or the drawer will be discharged
from liability thereon to the extent of the
loss caused by the delay.
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

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