BILLS, NOTES AND COMMERCIAL

PAPERS
 
MICHAEL T.M. NUÑEZ

BLOCK A 2016  
2 BILLS, NOTES AND COMMERCIAL PAPERS
 
 
 
 
 
 
 
 
 
 
 
 
 
This reviewer is primarily made for the use of law students taking up this
subject under professor Rogelio Quevedo. It mostly follows the format of
the textbook Notes and Selected cases in Negotiable Instruments Law by
Campos and Lopez-Campos, but this also contains comments by other
prominent authors on the subject, discussions in class, as well as personal
observations by the author. Any prejudice caused by this work in a recit,
quiz, or exam is purely incidental.

-Michael T.M. Nunez

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 
 PART ONE: enormous amount of currency due to the
REQUISITES OF prevalence of robbers. Thus, these instruments
were created in order to facilitate exchanges of
NEGOTIABILITY
money without the risks of transportation.

    The use of these papers meant that the merchants

The Negotiable Instruments Law is the only law perfect in itself.
relied purely on the assurance of the other that the
-Rubén F. Balane instrument would make good the promise or order
to pay. Thus a practice evolved among them under
Concept of Negotiability which certain holders of instruments in specific
forms were permitted to enforce contracts in their
Definition of Negotiability own name free of defenses.
Negotiability is the ability of a document
(instrument) to effect a transfer that is free of legal Kinds of Negotiable Instruments
defenses.
2
Promissory note - it is a document that evidences a
The negotiability of an instrument ensures that a promise to pay money. It includes the certificates of
holder who acquires it (provided the requisites are deposits and bonds.
present) acquires a title that may be better than the
3
original parties. This is an exception to the maxim: Bill of exchange - it is an order made by one
"The spring cannot rise above the source." person to another to pay money to a third person.
The most common form of a BoE is a check.
Thus, a negotiable instrument is a document that Another common form of a bill of exchange is a
conforms to Section 1 of the Negotiable bank draft.
1
Instruments Law.
Table 1.2: Distinctions between notes and bills of
Table 1.1: Difference between Negotiable and Non- exchange:
Negotiable Instruments: With respect Notes Bills of
Negotiable Non-Negotiable to: Exchange
Instruments Instruments Nature of Unconditional Unconditional
Follows the requisites of Does not follow the transaction promise order
Section 1 requisites of Section 1 Parties primarily The maker None. Unless
Transferred by Transferred by liable the drawee
negotiation assignment accepts
Holder has better rights Holder merely "steps into Parties The prior The drawer and
than the transferor the shoes" of the secondarily indorsers prior indorsers
transferor liable
Prior parties warrant Prior parties warrant title Presentments Only one: Two
payment needed (as a Presentment for presentments:
Transferee has right of Transferee has no right of general rule) payment Presentment for
recourse against recourse. acceptance
intermediate parties Presentment for
payment
Purpose and Origin of Negotiable
Instruments

Negotiable instruments are basically used as

substitutes for money. In the olden days, when the
medium of exchange was in precious metals, the
merjants merchants found it dangerous to carry

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  2
 
 Hereinafter
 referred
 to
 as
 PN
 
1 Act
 2031;
 hereinafter
 referred
 to
 as
 NIL.
 
  3
 Hereinafter
 referred
 to
 as
 BoE
 
 
 
4 BILLS, NOTES AND COMMERCIAL PAPERS
Form of Negotiable Instruments
SECTION 1. Form of Negotiable Instruments. – An
instrument to be negotiable must conform to the
following requirements:
a) It must be in writing and signed by the maker or
drawer;
b) Must contain an unconditional promise or order to
pay a sum certain in money;
c) Must be payable on demand, or at a fixed or
determinable future timel
d) Must be payable to order or bearer; and
e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
PN: only a, b, c, and d are essential for negotiability
BoE: all five requisites are needed.
For an instrument to be negotiable, the
requirements provided by Section 1 of the NIL must
be apparent ON THE FACE of the instrument.
1. The instrument must be in writing and
signed BY THE DRAWER... or maker.
The requirement that the instrument be in writing is
essential so that it may be transferred from person
to person.
The signature does not have to be the full name of
the maker or drawer, any mark or sign, even a
thumbmark will suffice so long as it is intended to
be the signature of the party to the instrument.
2. Unconditional Promise or Order to Pay
The promise or order to pay must not be
dependent on a contingent event that is not certain
to happen. If the payment of an instrument is
dependent on an event that is uncertain to happen,
the promise to pay is conditional and the
negotiability of the instrument is destroyed.
MICHAEL T.M. NUÑEZ
The happening of the uncertain event does not cure
the defect.
If the promise or order to pay is dependent on an
event that is certain to happen although not known
when (i.e., a term), the instrument is still negotiable.
SECTION 3. When promise is unconditional. – An
unqualified order or promise to pay s unconditional
within the meaning of this Act although coupled with–
a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to
be debited with the amount;
b) A statement of the transaction which gives rise to
the instrument.
But an order or promise to pay out of a particular
fund is not unconditional.
Examples:
a. Indication of particular fund out of which
reimbursement is to be made (negotiable)
November 20, 2014
Pay to X or order the sum of P10, 000.00.
Reimburse yourself from the proceeds of my
hacienda.
To: Y (Sgd.) Z
a.1. Indication of particular fund where payment is to be
made (non-negotiable, seen in last paragraph of Section
3)
November 20, 2014
Pay to X or order the sum of P10, 000.00 out of
the rents that may be collected from the
tenants in my apartment.
To: Y (Sgd.) Z
The first example is negotiable because Y will pay X out of
his own funds hence the order to pay is unconditional.
Only Y's reimbursement is designated out of a particular
fund.
In the second example, the payment to X is paid out of a
particular fund, which may not be realized at all. This
A2016 PROF. ROGELIO QUEVEDO
 BILLS, NOTES AND COMMERCIAL PAPERS 5

 
makes the order conditional and thus destroys the (c) By stated installments, with a provision that,
negotiability of the instrument. upon default in payment of any installment or of
interest, the whole shall become due; or
b. Statement of the transaction (d) With exchange, whether at a fixed rate or at the
current rate; or
I promise to pay X or order 10 pesos as per
contract of sale of toasted siopao on (e) With costs of collection or an attorney's fee, in
case payment shall not be made at maturity.
November 20, 2014

Sgd. Y a. Interest

It does not destroy negotiability, as the sum

The inclusion of the words "as per contract" does not payable can be ascertained by computing
affect the negotiability of the instrument as it merely the value of the amount due including
indicates that the promise or order is made as
interest.
consideration for the contract.

b. Stated Installments
The negotiability of the instrument is destroyed
when the promise or order is made contingent on
4 To remain negotiable, the instrument must
the terms of the contract.
state: (a) each installment; and (b) the
Powell v. Greenleaf maturity of every installment.
In order to destroy negotiability, the reference to a
collateral contract must show that the obligation to pay is c. Stated installment with acceleration clause -
burdened with the conditions of that contract. Where the
promise to pay is made subject to some other contract The acceleration merely hastens the
referred to, the obligation is conditional and negotiability maturity of the instrument.
is destroyed.
d. With exchange -
3. Sum Certain in Money
Foreign currency does not affect
The principal amount to be paid must be certain, negotiability as the equivalent in legal
and it must be payable in terms of money only as a tender may be ascertained. However, the
general rule. foreign exchange must be current money
5
which is capable of conversion.
The amount to be paid must be a fixed sum of
money, which must be in legal tender. An Incitti v. Ferrante
instrument is not negotiable if it is payable in The negotiable character of an instrument is not affected
personal property, merchandise, or goods. by the fact that it "designates a particular kind of current
money in which payment is to be made." Foreign currency
An instrument that contains an order to act in is only another form of expression for the equivalent in
legal tender.
addition to the payment of money is not negotiable.

SECTION 2. What constitutes certainty as to sum. – The 4. Certainty of Time of Payment

sum payable is a sum certain within the meaning of this
Act, although it is to be paid:
A negotiable instrument must be payable either:
(a) With interest; or
• On demand - under section 7, an instrument is
(b) By stated installments; or payable on demand where (a) it is expressed

                                                                                                                                                                                                                               
4  Powell  v.  Greenleaf   5  Incitti  v.  Ferrante  

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

6 BILLS, NOTES AND COMMERCIAL PAPERS
 
to be payable on sight or presentation; or (b)
where no time for payment is expressed. The words "to order" or "bearer" are the words of
negotiability, which express that the maker or
• At a fixed time - when an instrument is payable drawer is consenting to the instrument being
on a fixed date, the holder may only demand transferred to another.
payment on that date. When the date
indicated is in the past, the instrument does This consent is required because the maker
not lose its negotiable character but assumes greater risks under a negotiable
converts the instrument into a demand instrument. He assumes a greater risk because the
instrument. defenses he usually has are not available against a
holder in due course.
• On a determinable future time - under section 4,
determinable future time is taken to mean Table 1.4. Distinctions between order and bearer
(a) at a fixed period after date or sight; (b) on instruments:
or before a fixed or determinable future With respect Order Bearer
to:
time specified; or (c) on or at a fixed period
Transfer Indorsement Mere delivery
or determinable future time after the and delivery
occurrence of a specified event which is Liability of Indorsers Indorsers
certain to happen though the time of Parties secondarily merely warrant
happening is uncertain. liable on the the instrument
instrument
Table 1.3. Effect of acceleration provision:
At the option of the At the option of the These words of negotiability must be present on the
MAKER HOLDER face of the instrument. The absence of such words
If conditional, If conditional on event 6
renders the instrument non-negotiable.
negotiability not affected where holder has no
control, negotiability not
affected. Wetlaufer v. Baxter
A note that does not contain the words "to order" or
If absolute, negotiability If absolute, the time of "bearer" is still valid. It's just non-negotiable. Without the
is likewise not affected. payment is rendered words of negotiability purchasers take the bill or note
uncertain. Negotiability subject to all defenses which were available to the original
destroyed. parties.

Utah State National Bank v. Smith

5. Parties must be designated with
An instrument in fact payable "on or before" a certain
date is negotiable. If there is an option by the payee to
certainty
accelerate in case of payment by installments, it is still
negotiable because the time of payment may be fixed at a. The drawer or maker
any reasonable time after the default of the maker. The
note is still payable at a determinable future time. Must sign the instrument and the signature
must be written at the bottom-right corner
Halstad v. Bilstad of the instrument.
In a note where it extends the time of payment
dependent on a condition (in this case the amount of
harvest), the time of payment is still determinate since the
b. The drawee
only uncertainty is whether the note would be due in one
year or the year after that. The law allows flexibility in
fixing the time of payment, provided that there will Indicated at the bottom-left corner of the
certainly come a time when the instrument will be due. instrument (though in the case of checks, the

5. Payable to Order or Bearer

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
 Consolidated
 Plywood
 v.
 IFC
 Leasing
 
MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 

bank sometimes indicates its name at the
top).
c. The payee and the successive indorsees
Their signatures are written at the back of
the instrument.
d. Parties that deviate from the commercial usage
with respect to the place of signature
An ambiguity arises; and absent any
indication of the capacity in which a party
signed, the law resolves it by considering
such person an indorser.
SECTION. 8. When payable to order. - The instrument is
payable to order where it is drawn payable to the order
of a specified person or to him or his order. It may be
drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being
Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with
reasonable certainty.
Examples:
X - maker/drawer; Y - drawee; Z - payee
a. Payee who is not maker, drawer, or drawee
"I promise to pay Z or order the sum of 1 peso"
(Sgd.) X
b. The drawer or maker
"Pay to the order of myself the sum of 1 peso."
To: Y (Sgd.) X
c. The drawee
"Pay to the order of yourself the sum of 1 peso."
To: Y (Sgd.) X
MICHAEL T.M. NUÑEZ
BILLS, NOTES AND COMMERCIAL PAPERS 7
d. Two payees jointly (indorsement must be joint)
"Pay to order of Z and Z1 the sum of 10 pesos"
To: Y (Sgd.) X
e. One or some of several payees in the alternative (one
indorsement is sufficient)
"Pay to the order of Z or Z1 the sum of 10 pesos"
To: Y (Sgd.) X
e. Holder of an office for the time being
"I promise to pay the LSG president or order 100 pesos"
(Sgd.) X
• First interpretation: "holder of office at maturity" -
this interpretation renders the instrument non-
negotiable since the identity of the holder of the
office at maturity is uncertain.
• Second interpretation: "holder of the office at the
issuance of the note" - not desirable since the
person will continue to be the payee even if he
no longer holds the office.
• Third interpretation: "holder of the office at a
particular time" - most acceptable, the payee is
certain and this interpretation is consistent with
the legislative intent. In this case, the "LSG
president" is the one holding the office at a
certain time, such as when the note is presented
for payment, or the time it is indorsed.
SECTION 9. When payable to bearer. – The instrument is
payable to bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
(c) When it is payable to the order of a fictitious or
non-existing person, and such fact was known to the
person making it so payable; or
(d) When the name of the payee does not purport to be
the name of any person; or
(e) When the only or last indorsement is an
indorsement in blank.
Examples:
"I promise to pay X or bearer" - negotiable.
A2016 PROF. ROGELIO QUEVEDO
8 BILLS, NOTES AND COMMERCIAL PAPERS
"I promise to pay bearer, X" - non-negotiable, since
the word bearer is not used as a word of
negotiability but to describe X.
"I promise to pay Bruce Wayne or order" -
negotiable bearer instrument since Bruce Wayne is
a fictitious person, unless the maker thinks that
Bruce Wayne is a real person (in which case it is an
order instrument).
"Pay to the order of Mr. CASH" - it assumes that the
drawer, by using an impersonal name, intends the
instrument to be a bearer instrument (unless he
meant a relative of Johnny Cash).
Ang Tek Lian v. CA
Pay to "cash" makes the bill payable to bearer and the
drawee bank need not obtain any indorsement but may
pay it to the person presenting without any indorsement.
SECTION 128. Bill addressed to more than one drawee. –
A bill may be addressed to more than one drawee
jointly, whether they are partners or not; but not to two
or more drawees in the alternative or in succession.
Examples:
Bill 1 - "Pay to order of X the sum of 100 pesos"
To: Y and Z (Sgd.) A
Bill 2 - "Pay to order of X the sum of 100 pesos"
To: Y or Z (Sgd.) A
Bill 1 is negotiable while Bill 2 is not. This is because
by naming drawees in the alternative, Bill 2 has
rendered the identity of the drawee uncertain. Not
only did Bill 2 fail to conform to Section 128, it had
actually failed to conform to Section 1(e).
SECTION 130. When the Bill may be treated as a
promissory note. – Where in a bill the drawer and
drawee are the same person, or where the drawee is a
fictitious person, or a person not having a capacity to
contract, the holder may treat the instrument, at his
option, either as a bill of exchange or a promissory note.
The rationale for this rule is that when there is a
fictitious or incapacitated drawee, or no drawee at
all, there's no person who can be held primarily
liable on a BoE.
MICHAEL T.M. NUÑEZ
The law assumes that by not naming a drawee, the
drawer binds himself to be primarily liable; hence
the bill can be treated as a PN.
If the bill is negotiated as a bill and a third party
accepts the bill even if no drawee is indicated, that
third party is held primarily liable as an acceptor. As
to the party who issued the bill, he cannot be held
liable as a drawer since the bill is converted to a PN
with the acceptor as maker.
Provisions not Affecting Negotiability
SECTION 5. Additional provisions not affecting
Negotiability. – An instrument which contains an order
or promise to do any act in addition to payment of
money is not negotiable.
But the negotiable character of the instrument
otherwise negotiable is not affected by a provision
which:
(a) Authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
(b) Auhorizes a confession of judgment if the
instrument be not paid at maturity; or
(c) Waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) Gives the holder an election to require something
to be done in lieu of payment of money.
But nothing in this section shall validate any provision
or stipulation otherwise illegal.
Re. (a): The negotiable instrument may state that
the promise or order is secured by pledged or
mortgaged property, and the foreclosure and sale
of such collateral discharges the instrument.
Confession of Judgment
A provision given by the maker authorizing the
plaintiff's attorney to sign judgment and issue
execution for the value of the instrument, costs, and
attorney's fees. This is also called a judgment
cognivit actionem. If accompanied by withdrawal of
plea, it is called judgment relicta verificatione.
A2016 PROF. ROGELIO QUEVEDO
 BILLS, NOTES AND COMMERCIAL PAPERS 9

 
Re. (b): A confession of judgment is not recognized
7
in our country, as it is against public policy. It Re. (c): The designation of a place is essential to
denies due process, and deprives the right of determine where the instrument must be
appeal. presented for payment. If no place is indicated, the
law provides that presentment must be made at the
Re. (d): The election must be lodged with the holder. address of the person who is to pay, if indicated; if
If the maker is the one who has the option, then the not, at the place of business of the person to make
11
instrument is not negotiable as it violates Section payment.
1(b).
Re. (d): A seal forms part of the signature if the
SECTION 6. Omissions; seal; particular money. – The instrument is issued by a corporation.
validity and negotiable character of an instrument is not
affected by the fact that:
Re. (e): see "Sum Certain in Money," supra.
(a) It is not dated; or
Rules of Construction
(b) Does not specify the value given, or that any value
had been given therefor; or
SECTION 17. Construction where instrument is
(c) Does not specify the place where it is drawn or the ambiguous. - Where the language of the instrument is
place where it is payable; or ambiguous or there are omissions therein, the following
rules of construction apply:
(d) Bears a seal; or
(a) Where the sum payable is expressed in words and
(e) Designates a particular kind of current money in also in figures and there is a discrepancy between the
which payment is to be made. two, the sum denoted by the words is the sum payable;
but if the words are ambiguous or uncertain, reference
But nothing in this section shall alter or repeal any may be had to the figures to fix the amount;
statute requiring in certain cases the consideration to be
stated in the instrument. (b) Where the instrument provides for the payment of
interest, without specifying the date from which interest
is to run, the interest runs from the date of the
The omissions listed in this section do not affect instrument, and if the instrument is undated, from the
negotiability of the instrument because they are not issue thereof;
required by Section 1.
(c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
Re. (a): The fact that the instrument is not dated
does not affect negotiability unless it is needed to (d) Where there is a conflict between the written and
determine the reasonable time for presentment or printed provisions of the instrument, the written
provisions prevail;
to determine the maturity of the instrument.
(e) Where the instrument is so ambiguous that there is
If the date is needed to determine the maturity of doubt whether it is a bill or note, the holder may treat it
as either at his election;
the instrument, the law considers the date of issue
8
as the date of the instrument and allows any (f) Where a signature is so placed upon the instrument
9
holder to insert the true date. However, if a wrong that it is not clear in what capacity the person making
date is inserted, the instrument is not avoided in the same intended to sign, he is to be deemed an
indorser;
the hands of a holder in due course but as to him,
10
the date so inserted is regarded as the true date. (g) Where an instrument containing the word "I
promise to pay is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.
Re. (b): Consideration is presumed in a negotiable
instrument.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
 PNB
 v.
 Manila
 Oil
 Refining
 
8
 NIL,
 Section
 17(c).
 
9
 Ibid.,
 Section
 13.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
 Ibid.
 cf.
 Section
 124.
 
  11
 Ibid,
 Section
 73.
 
 

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

1 BILLS, NOTES AND COMMERCIAL PAPERS
 
0
Examples:

a. Discrepancy in words and figures.

November 20, 2014

Pay to the order of: X P 10,000.00

The amount of: One thousand pesos only.

ABC Bank (Sgd.) Z

In this example, the words written shall prevail.

Therefore, the check is valid only up to one thousand
pesos.

November 20, 2014

Pay to the order of: CASH P 250.00
The amount of: Two fifty pesos only.

ABC Bank (Sgd.) X

Here the ambiguity is on the words appearing on the

instrument. "Two fifty" may mean 2.50 or 250. In this
case, therefore, the value of the check follows the
figure.

Re. (b) and (c) - see notes on Section 6, supra.

Re. (g) - If the note is in plural form where it says "we

promise to pay," then the parties are liable jointly.

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 
 BILLS, NOTES AND COMMERCIAL PAPERS 1
  1
PART TWO: The delivery of the instrument must be made with
TRANSFER the authority of the maker/drawer. Delivery effected
through an agent does not take effect until the
agent delivers the instrument to the payee.

Delivery and Issuance

If delivery of the instrument is made by mail, it is
considered sufficient delivery.
Definition
Delivery is the transfer of possession from one Presumption of Delivery
person to another. It may be the manual transfer or
When the instrument is no longer in the hands of a
the manifestation of intent to transfer possession of
party whose signature appears thereon, there is a
the instrument. The first delivery of an instrument
prima facie presumption that the instrument is
complete in form to another person who takes it as
validly and intentionally delivered. However, if the
a holder is called the issuance.
instrument is in the hands of a holder in due
course, the valid delivery of the instrument is
Requisites of Delivery conclusively presumed.

i. Actual delivery - Without the initial delivery of

the instrument from the maker/drawer to the
Negotiation
payee, no liability can arise on the
12 Definition
instrument.
The transfer of a negotiable instrument made in
such a manner as to make the transferee a holder
ii. Intent to deliver - There must also be intent to
deliver. No liability arises if the possession is and possibly a holder in due course.
transferred to another if the purpose is mere
safekeeping. If an instrument is transferred without valid
negotiation, the transfer is a mere assignment and
In Re. Marten's Estate the transferee merely steps into the shoes of this
A note sued upon could not be made the basis of a valid immediate predecessor. The transferee is called an
claim on the estate unless there was a legal delivery of assignee instead of a holder and is subject to the
the same during the lifetime of the decedent. defenses available to the original parties. (See Table
1.1, supra.)
SECTION 16. Delivery; when effectual; when presumed. -
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the
Methods of Negotiation
purpose of giving effect thereto. As between immediate
parties and as regards a remote party other than a SECTION 30. What constitutes negotiation. - An
holder in due course, the delivery, in order to be instrument is negotiated when it is transferred from one
effectual, must be made either by or under the authority person to another in such manner as to constitute the
of the party making, drawing, accepting, or indorsing, as transferee the holder thereof. If payable to bearer, it is
the case may be; and, in such case, the delivery may be negotiated by delivery; if payable to order, it is
shown to have been conditional, or for a special purpose negotiated by the indorsement of the holder and
only, and not for the purpose of transferring the completed by delivery.
property in the instrument. But where the instrument is
in the hands of a holder in due course, a valid delivery
thereof by all parties prior to him so as to make them In an order instrument, negotiation is done by
liable to him is conclusively presumed. And where the indorsement coupled with delivery. The holder
instrument is no longer in the possession of a party indorses the instrument by signing at the back.
whose signature appears thereon, a valid and
intentional delivery by him is presumed until the
contrary is proved. The indorsement of an instrument produces two
contracts:

                                                                                                               
12  In  Re.  Marten's  Estate  

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

1 BILLS, NOTES AND COMMERCIAL PAPERS
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1) The transfer of title to the subsequent holder;
and
2) the agreement of the indorser to answer for the
default of the party primarily liable on the
instrument.
In a bearer instrument, mere delivery is sufficient to
constitute a valid negotiation. The transferor does
not warrant that he will pay in case the party
primarily liable defaults, although he assumes that
the liability of a transferor or seller.
The indorsement of a bearer instrument means
that the one who signs at the back can be held
liable not only for the warranty but also payment in
case of default.
Sec. 31. Indorsement; how made. - The indorsement
must be written on the instrument itself or upon a paper
attached thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.
General rule: The indorsement of an instrument
must be written at the back.
Expception: In cases where there is no more space
at the back of the instrument for more
indorsements, further indorsements may be made
on a separate paper called an allonge, which must
be firmly attached to the original instrument.
Clark v. Thompson
In the use of an allonge is allowable only when the back of
the instrument itself was so covered with previous
indorsements that convenience or necessity required
additional space for further indorsement.
Specific Rules
1. Misspelled Name
SECTION 43. Indorsement where name is misspelled,
and so forth. - Where the name of a payee or indorsee is
wrongly designated or misspelled, he may indorse the
instrument as therein described adding, if he thinks fit,
his proper signature.
Say a PN was written "I promise to pay Brad Pete
20,000 pesos" and the name was misspelled. The
MICHAEL T.M. NUÑEZ
payee must indorse the instrument using the name
"Brad Pete" but adding his correct name "Brod
Pete" after the indorsement.
If he does not follow Section 43, the indorsement is
not deemed valid because there is no proof that
Brod Pete and "Brad Pete" are the same person,
following the ruling in Young v. Hembree.
2. Indorsement must be of the entire
instrument
SECTION 32. Indorsement must be of entire instrument.
– The indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer
to the indorsee a part only of the amount payable, or
which purports to transfer the instrument to two or
more indorsees severally, does not operate as a
negotiation of the instrument. But where the
instrument has been paid in part, it may be indorsed as
to the residue.
The purpose of this provision is to protect the
obligors from more than one action on the
instrument.
Examples:
A PN was drawn up as follows -
"I promise to pay B or order 100 pesos"
(Sgd.) A
The same was then indorsed by B in this manner -
"Pay to C 25 pesos and to D 75 pesos"
(Sgd.) B
There is no valid negotiation because this is a case
of negotiation to two or more parties severally. C
cannot further negotiate the 25 pesos and neither
can D negotiate the 75.
If the indorsement was like this:
"Pay to C and D"
(Sgd.) B
Here there is a valid negotiation, albeit joint. Though
C and D will only receive 50 pesos each, the note
was negotiated in its entirety. Also, they can further
negotiate the note but both their indorsements are
required.
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SECTION 34. Special indorsement; indorsement in
What if the PN like this... blank. - A special indorsement specifies the person to
whom, or to whose order, the instrument is to be
payable, and the indorsement of such indorsee is
"I promise to pay B or order 100 pesos, payable in 5
necessary to the further negotiation of the instrument.
equal installments from December 2014 - April An indorsement in blank specifies no indorsee, and an
2015" instrument so indorsed is payable to bearer, and may be
(Sgd.) A negotiated by delivery.

...and was indorsed like so in February-

No words of negotiation are required in a
special indorsement. The name of the indorsee
"Pay to C remaining balance of 40 pesos"
(Sgd.) B
shall suffice. If the indorsement is special, the
indorsement of the special indorsee is
The negotiation is valid because the provision allows necessary for further negotiation.
the negotiation of an instrument that has been
partially paid with respect to the residue. When an order instrument is indorsed in blank,
it is converted to a bearer instrument and can
The partial indorsement of an instrument does not be further negotiated by mere delivery.
render the same void, but is treated as a mere
assignment which subjects the holder to all SECTION 35. Blank indorsement; how changed to
defenses on the instrument. Even so, if the parties special indorsement. - The holder may convert a blank
indorsement into a special indorsement by writing over
are several, neither of them can sue on the
the signature of the indorser in blank any contract
instrument without bringing the other as a party to consistent with the character of the indorsement.
the action.
In the case of order instruments, the method
3. Kinds of Indorsements of further negotiation is always controlled by
the last indorsement.
SECTION 33. Kinds of indorsement. - An indorsement
may be either special or in blank; and it may also be
either restrictive or qualified or conditional. This section will not apply in the case of
originally bearer instruments.
The classification of indorsements modifies the
SECTION 40. Indorsement of instrument payable to
rights of the holders and the liabilities of the
bearer. - Where an instrument, payable to bearer, is
indorsers. indorsed specially, it may nevertheless be further
negotiated by delivery; but the person indorsing
Table 2.1. Basis of Classification specially is liable as indorser to only such holders as
Special and Blank Affects the method of make title through his indorsement.
indorsement further negotiation.
Qualified and Affects the scope of Section 40 only applies to originally bearer
Unqualified liability of the indorser. instruments. The nature of a bearer instrument
indorsement does not change even when it is negotiated by
Conditional and Affects the presence or
Unconditional absence of express special indorsement coupled with delivery.
indorsements limitations put by the
indorser upon the primary If the instrument is originally an order
obligor's privileges of instrument and indorsed in blank, it is
paying the holder.
converted to a bearer instrument and may be
Restrictive Affects the kind of title
indorsements transferred to the further negotiated by mere delivery. However if
indorsee. such instrument is specially indorsed, it is
converted back to an order instrument.
a. Special and Blank
A person who negotiates by mere delivery is
liable only to the immediate transferee. A

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

1 BILLS, NOTES AND COMMERCIAL PAPERS
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special indorser is liable to all subsequent
holders; except when the instrument is an
original bearer instrument, then the last
sentence of Section 40 kicks in, and he is only
liable to those who take title through his
indorsement.
Example:
A (maker of bearer instrument )to B
B to C (delivery)
C to D (indorsement)
D to E (indorsement)
E to F (delivery)
B is liable to C only because of the rule we just
laid down. C is liable to D and E because they
take title through his indorsement. Same goes
with D with regard to E.
What about F, who can he go after? Only E,
because the instrument was negotiated to him
by mere delivery. He did not take title through C
and D.
b. Qualified and Unqualified Indorsement
SECTION 38. Qualified indorsement. - A qualified
indorsement constitutes the indorser a mere assignor of
the title to the instrument. It may be made by adding to
the indorser's signature the words "without recourse" or
any words of similar import. Such an indorsement does
not impair the negotiable character of the instrument.
The qualification must be express. Without the
words of qualification, the indorsement is
presumed to be unqualified.
When the indorser writes the word "without
recourse," he rids himself of the obligation to
pay the holder in case the person primarily
liable defaults on the obligation. He, however,
continues to warrant title to the instrument.
Though the liability of the qualified indorser is
extinguished, the negotiability of the
instrument is not affected. Hence, the indorsee
is still a holder in due course and he may
further negotiate the instrument.
Fay v. Witte
MICHAEL T.M. NUÑEZ
The payee's name appearing on the back of the note, it is
assumed that he is an unqualified indorser. In order to be
a qualified indorser, the denial of recourse must be found
in express words.
c. Conditional and Unconditional indorsements
SECTION 39. Conditional indorsement. – Where an
indorsement is conditional, a party required to pay the
instrument may disregard the condition, and make
payment to the indorsee or his transferee, whether the
condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated, will hold
the same, or the proceeds thereof, subject to the rights
of the person indorsing conditionally.
Even if termed as such, an unconditional
indorsement actually contains two implied
conditions:
1) Due demand or presentment must be
made on the party primarily liable; and
2) A notice of dishonor must be sent to the
indorser.
Ergo, a conditional indorsement is an
indorsement where additional conditions are
annexed to the indorser's liability in addition to
the implied ones stated above.
The conditionality of the indorsement does not
affect negotiability since the original promise to
pay remains unconditional.
Only the liability of that particular indorser is
conditional. All holders subsequent take the
instrument subject to the condition.
In the case of the party primarily liable, he may
disregard the condition even if the same has
not been fulfilled. So, even if there is a
conditional indorsement by indorser X that
says, "Pay to Y, provided he migrates to the US
some time in 2015," and Y does not do so, the
maker may still proceed to pay Y.
When the instrument is discharged this way,
however, Y holds the payment in trust for X and
if he does not migrate to the US in 2015, he is
liable to pay X because it is as if the
A2016 PROF. ROGELIO QUEVEDO

 
indorsement did not happen, and X is the last
holder.
d. Restrictive indorsements
SECTION 36. When indorsement restrictive. – An
indorsement is restrictive, which either:
(a) Prohibits the firther negotiation of the instrument.
(b) Constitutes the indorsee as the agent of the
indorser.
(c) Vests the title in the indorsee in trust for or to the
use of some other person.
But the mere absence of words implying the power to
negotiate does not make and indorsement restrictive.
Section 36 lays down the three classes of
restrictive indorsements.
The first is an indorsement that prohibits further
negotiation of an instrument. When an
indorsement says, "Pay to Pedro only (sgd.)
Juan," further negotiation is prohibited since
the instrument becomes payable to a specific
person.
The second class is an agency type of
indorsement. "Pay to Pedro for collection (Sgd.)
Juan," is the most common form of this class of
restrictive indorsement. This makes Pedro an
agent of Juan for purposes of collecting
payment.
The third class is the trust type of indorsement.
"Pay to Pedro in trust for Tomas (sgd.) Juan," is
an example of this. Since Pedro holds the
payment in trust for Tomas, he cannot use the
funds.
SECTION 37. Effect of Restrictive Indorsement; rights of
indorsee. – A restrictive indorsement confers upon the
transferee the right:
(a) To receive payment of the instrument;
(b) To bring any action thereon that the indorser could
bring;
(c) To transfer his rights as such form of indorsee,
where the form of the indorsement authorizes him to do
so.
MICHAEL T.M. NUÑEZ
BILLS, NOTES AND COMMERCIAL PAPERS 1
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But all subsequent indorsees acquire only the title of
the first indorsee under the restrictive indorsement.
Let's go back to the previous agency type
indorsement example:
Under Section 37, Pedro may receive payment
or sue for collection in his own name. However,
no title passes to him. Pedro may further
negotiate the instrument but his subsequent
indorsees cannot have a title antagonistic to
his principal, Juan. They merely become
Pedro's sub-agents.
Leonardi v. Chase National Bank
Indorsement "for deposit" on a check is restrictive and
indicated that the forwarding bank was merely an agent
for collection and not an owner of the instrument.
4. Indorsement to or by a collecting bank
The holder of a check may go to the drawee bank
either to cash it or to deposit it to his credit. No
problem with that, since the effect is that of
payment and the instrument is discharged.
It's a bit more complicated if the holder has a BPI
check and deposits it with BDO, because he is in
effect negotiating the check to BDO.
This indorsement may be of two kinds:
a. Indorsement "for collection" - this is a
straightforward restrictive indorsement. The
bank is the collecting agent of the payee.
b. Indorsement "for deposit" - there are
conflicting interpretations:
• The first is that it is also a restrictive
indorsement (same as an indorsement
for collection).
• The second interpretation is that it is
"non-restrictive," the bank has in effect
purchased the check and the payment
is deposited in the account of the
depositor.
In most cases, the bank is merely a collecting agent.
The indorsement is, however, in blank and no words
of restriction are indicated in the check. The
restrictions are actually found in the deposit slip,
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which states the capacity of the bank as collecting the individual presenting the check is not engaged
agent. in any business, he is required to establish the
identity of the indorser, and upon the establishment
The case of Leonardi v. Chase National Bank has of his identity the record of his identification shall
ruled that the indication of the words “for deposit” is be kept for 5 years.
a restrictive indorsement and the bank is a mere
collecting agent. Rationale of the circular: to curb suspicious
transactions that may be classified as money
When the collecting bank forwards the check to the laundering.
drawee bank, it guarantees all prior indorsements.
Thus, in cases where the check is deposited by a According to Sir Q: This BSP circular is not
forger, the collecting bank is obliged to return to the tantamount to an amendment of the NIL. Checks
drawee bank the amount it had received through can still be negotiated by indorsement, it's just that
13
the check. banks won't accept them upon presentment.

5. Restriction on Second Indorsement of 6. Joint or Alternative Payees or Indorsees

Checks
SECTION 41. Indorsement where payable to two or
BSP CIRCULAR NO. 706, SECTION X806.2.k. Second more persons. – Where an instrument is payable to the
Endorsed Checks. – A covered institution shall enforce order of two or more payees or indorsees who are not
stricter guidelines in the acceptance of second-endorsed partners, all must indorse, unless the one indorsing has
checks including the application of enhanced due authority for the others.
diligence to ensure that they are not being used as
instruments for money laundering or other illegal a. Joint payees or indorsers
activities.

For this purpose, a covered institution shall limit the "Pay to the order of A and B."
acceptance of second-endorsed checks from properly
identified customers and only after establishing that the
General rule?
nature of the business of said customer justifies, or at
least makes practical, the deposit of second-endorsed A and B must indorse jointly.
check. In case of isolated transactions involving
deposits of second-endorsed checks by customer who If A and B are partners?
are not engaged in trade or business, the true and full
identity of the first endorser shall be established and Determine first the capacity of A and B whether
the record of the identification shall also be kept for five they are payees or indorsers.
(5) years.
If they are payees, remember that the context of
A second-endorsed check is defined as a check the NIL is common law, where a partnership has no
endorsed by a payee to be deposited to an account personality distinct from the partners. Thus, when a
other than the payee’s account. note issued or indorsed as above, the general rule
will apply even if they are partners. The proper way
As a matter of due diligence, banks are wary of is to designate the firm name as payee, like "Pay to
second-indorsed checks because of the risks AB Co."
attendant to the validity of such indorsements.
If they are indorsers, A or B's indorsement alone is
With the issuance of BSP Circular 706, banks are sufficient. Presumption is that both of them have
now required, as a general rule, not to accept authority to bind the partnership. Note that it must
second-indorsed checks. It is upon the person be clearly stated in the indorsement that it is the
presenting to prove that the nature of his business partnership that is indorsing: "Pay to X by AB Co.
justifies the deposit of second endorsed checks. If (sgd.) A"

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
 Banco
 de
 Oro
 v.
 Equitable
 Bank
 
MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 

 
b. Alternative Payees or Indorsers
"Pay to the order of A or B."
The one in possession of the instrument is the
holder and he may indorse the instrument alone.
This is without prejudice to the holder's obligation
to account to his alternative payee.
7. Indorsement by Agent
SECTION 44. Indorsement in representative capacity. –
Where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as
to negative personal liability.
The authority of the agent need not be in writing.
However, the agent must indicate that he is signing
in behalf of the principal so that he may not be held
personally liable.
Example:
I promise to pay B or order 50 pesos
(Sgd.) A
"Pay to C"
A by D, agent.
Unindorsed Instruments
SECTION 49. Transfer without indorsement; effect of. –
Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer
vests in the transferee such title as the transferor had
therein, and the transferee acquires, in addition the
indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when
the indorsement was actually made.
Applies only to an order instrument.
In case the transferor had title, the transferee
acquires such, but he is subject to the defenses and
equities available among the previous parties since
the transfer is a mere assignment.
The transferee in this situation, however, acquires
the right to compel the transferor to indorse the
instrument to him. As to what kind of indorsement
 Simpson
 v.
 First
 National
 Bank
 of
 Roseburg
 Furbee
 v.
 Furbee
MICHAEL T.M. NUÑEZ
BILLS, NOTES AND COMMERCIAL PAPERS 1
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is given, it is an unqualified one unless there is an
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agreement to the contrary.
If the transferor had no valid title, and the
transferee acquires knowledge that the former had
no title when he acquired the indorsement, the
15
transferee acquires no title.
Simpson v. First National Bank of Roseburg
When the instrument is transferred without indorsement,
the transferee acquires, in addition to the title of the
transferor, the right to have the indorsement of the
transferor. This is not only to effect transfer of title but
also to preserve the negotiability of the instrument. Such
right is to an unqualified indorsement, unless the parties
agree on a lesser kind.
Furbee v. Furbee
When a bill is transferred without indorsement, and when
the indorsement is given the transferee had knowledge of
the lack of title of the transferor, the transferee acquires
no title to the bill.
Cancellation of Indorsements
SECTION 48. Striking out indorsements. –The holder
may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement
is struck out and all indorsers subsequent to him are
hereby relieved from liability on the instrument.
In original bearer instruments, the bearer may
cancel out any indorsements on the back of the
instrument because they are not essential to his
title. This is because a bearer instrument is
negotiable by mere delivery.
The situation is different for order instruments.
Example:
"Pay to B" (sgd. A)
"Pay to C" (sgd. B)
(Sgd.) C - blank indorsement to D.
"Pay to E" (sgd. D)
"Pay to F" (sgd. E)
"Pay to B" (sgd. F)
14
15
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May D cancel C's indorsement? NO, because C's Continuation of Negotiable Character
indorsement is necessary to his title.
SECTION 47. Continuation of negotiable character. - An
May F cancel D and E's indorsements? NO. In an instrument negotiable in its origin continues to be
original order instrument, the last indorsement negotiable until it has been restrictively indorsed or
controls further negotiation. Even if the blank discharged by payment or otherwise.
indorsement by C converted it to a bearer
instrument, since the instrument was indorsed from Duh?
D to E by special indorsement, the instrument was
converted back to an order instrument making E's
indorsement necessary to F's title.

May E cancel D's indorsement? YES. D's indorsement

is not necessary to E's title because the last
indorsement was a blank indorsement, therefore D
could have validly negotiated to E by mere delivery.

In this example the instrument found its way back to

B. Here B may cancel his indorsement, as well as
those of C, D, E, and F. This is because he has no
rights against subsequent parties.

Presumptions as to Indorsements

SECTION 45. Time of indorsement; presumption. –

Except where an indorsement bears date after the
maturity of the instrument, every negotiation is deemed
prima facie to have been effected before the instrument
is overdue.

This provision is important because a holder in due

course must have acquired the instrument before it
is overdue. This is also because most indorsements
are not dated.

Exception: the instrument is actually dated after it is

overdue.

SECTION 46. Place of indorsement; presumption. –

Except where the contrary appears, every indorsement is
presumed prima facie to have been made at the place
where the instrument is dated.

The place of dating becomes material in case of

conflict of laws.

Exception: The instrument is dated in one place and

indorsement occurred in another.

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 

 
PART THREE:
HOLDER IN DUE COURSE
The Holder
SECTION 52. What constitutes a holder in due course. –
A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular on its face;
(b) That he became the holder of it before it was
overdue, and without notice that it had previously been
dishonored, if such was the fact,
(c) That he took it for good faith and for value;
(d) That at the time it was negotiated to him he had no
notice if any infirmity in the instrument or defect in the
title of the person negotiating it.
Definition of Holder
The holder means the payee or indorsee of a bill or
note, who is in possession of it, the bearer thereof.
As owner of the instrument, the holder has the right
to enforce payment thereof; and if refused, to sue
thereon in his own name.
Every holder is deemed prima facie a holder in due
course. Anyone who alleges otherwise has the
burden of proof to show that the holder did not
acquire the instrument under the conditions
enumerated in Section 52.
State Investment House v. IAC
Holder who presented for payment is not a holder in due
course because the checks were crossed and he was not
the party authorized to present the same. While he is not
a holder in due course, he may still sue for the value of
the checks but they are subject to defenses as if they
were non-negotiable.
Presumption of due course holding
SECTION 59. Who is deemed a holder in due course. –
Every holder is deemed prima facie to be a holder in due
course; but when it is shown that the title of any person
who has negotiated the instrument was defective, the
burden is on the holder to prove that he or some person
under whom he claims acquired the title as holder in due
course. But the last mentioned rule does not apply in
MICHAEL T.M. NUÑEZ
BILLS, NOTES AND COMMERCIAL PAPERS 1
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favor of a party who became bound on the insrument
prior to the acquisition of such defective title.
Before the plaintiff may avail of the presumption, he
must first prove that he is a holder. To do so he
must prove the existence of the obligation, the
genuineness of the signature of the drawer or
maker, and the genuineness of the signatures of the
prior indorsers.
1. Complete and Regular on its face
To be complete, all the essential requisites as to
form and material particulars must be seen on the
face of the instrument. (See Part One: Requisites of
Negotiability, supra.)
Regular means that there is no indication of any
alteration in the instrument when the holder
received it.
SECTION 124. Alteration of instrument; effect of. –
Where a negotiable instrument is materially altered
without the assent of all parties liable thereon, it is
avoided, except as against a party who has himself
made, authorized, or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered and
is in the hands of a holder in due course not a party to
the material alteration, he may enforce payment thereof
according to its original tenor.
SECTION 125. What constitutes a material alteration. –
Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number of the relations of the parties;
(e) The medium or currency in which payment is to be
made;
(f) Or which adds a place of payment, where no place of
payment is specified, or any other change or addition
which alters the effect of the instrument in any respect,
is a material alteration.
A purchaser of a materially altered instrument is put
into inquiry as to all defenses and equities, whether
or not connected to the alteration.
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If the unauthorized alteration is bot apparent and
material, not only is the holder is deprived of the An overdue instrument is an instrument purchased
rights of a holder in due course, the instrument is outside of the reasonable time after its issue. As to
avoided. what constitutes reasonable time, we refer to
Section 193 of the NIL:
Example:
SECTION 193. Reasonable time, what constitutes. – In
November 20, 2014 determining what is a "reasonable time" regard is to be
I promise to pay X or order the amount of P had to the nature of the instrument, the usage of the
100,000 six months from date trade or business with respect to such instruments, and
the facts of the particular case.
(Sgd.) W

X negotiated the note to Y who, with X's consent,

changed the amount to P 1,00,000. Y negotiated
to Z, Z negotiated to A, holder.
Can A go against Z? YES. Z is a subsequent
indorser who warrants the validity of the
instrument. He is estopped from denying the
regularity of the note.
Can A go against Y? YES. Y is the one who altered
the instrument.
Can A go against X? YES. X assented to the
alteration.
With respect to instruments with fixed date of
maturity but subject to acceleration, the date of
maturity for determining whether a purchaser is a
holder in due course is the ultimate date of
maturity.
Example:
November 28, 2014
I promise to pay X or order the sum of 10,000 pesos in 10
monthly installments at the 28th of every month until
September 28, 2015. In the event that I fail to pay the
installment when due, the whole amount shall be
demandable.

Can A go against maker W? It depends. If A is

Sgd. Y
NOT a holder in due course, the instrument is
avoided, because W was not a party to the
alteration. If A is a holder in due course, A may In this case, when Y fails to pay X on April 2015, the
enforce the note according to the original tenor. remaining amount P 6,000 shall be due and demandable
in April. However, the holder who acquires the instrument
2. Holder Before Maturity And Before in May is deemed to be a holder in due course if he has
Notice Of Dishonor no knowledge of the acceleration.

When a holder receives an overdue instrument, If the instrument is undated, the presumption is
there is a presumption that it has been dishonored that it was negotiated before it was overdue, and it
and he is put into inquiry was to whether it was is upon the party denying that the holder is a holder
indeed dishonored and the reason for such in due course to prove the allegation.
dishonor.
The fact that an instrument has been antedated or
Table 3.1. Date of maturity, how fixed. postdated does not put the holder on inquiry on
When payable Date of maturity the negotiability of such instrument.
On date indicated in the On such date indicated
instrument SECTION 12. Antedated or Postdated. The instrument is
After sight Date of presentment not invalid for the reason only that it is antedated or
Occurrence of an event Date of occurrence of postdated, provided this is not done for an illegal or
certain to happen such event fraudulent purpose. The person to whom an instrument
is so dated is delivered, acquires the title thereto as the
date of delivery.
Note that an instrument is not overdue on the date
of its maturity.
MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO
 
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A postdated check is payable either at the fixed or When a holder receives an instrument for a value
determinable future time specified on the less than that of the face value, such discount does
instrument. not violate this requisite if the intention of the
transferor is to transfer the full value of the
A bank has no right to debit the amount of a instrument.
postdated check against the depositor's account
before the date of the check. SECTION 26. What constitutes a holder for value. –
Where value has at any time been given for the
instrument, the holder is deemed a holder for value in
The issuance of a postdated check in payment of an respect to all parties who became such prior to that
obligation without having sufficient funds in the time.
bank renders the issuer liable for estafa.
Example:
Dishonor may either be by non-acceptance or non-
payment. 1) X issues note for 1,000 pesos to B without
consideration
Table 3.2 Distinction between non-acceptance and non-
payment B to C (w/o consideration)
Non-acceptance Non-payment C to D (w/ consideration)
Refers only to bills of May happen for both bills
exchange and notes D is a holder for value not only with regard to C but also
Drawee refuses to accept The maker of the note or to X and B.
the order of payment as acceptor of the bill fails to
stated in the bill pay the instrument 2) X issues note for 1,000 pesos to Y without
May occur even before Occurs at the date of consideration.
the date of maturity maturity.
Y to Z for value
3. Holder in Good Faith and for Value Z to A as a gift

Holder for Value
SECTION 24. Presumption of consideration. – Every
negotiable instrument is deemed prima facie to have
been issued for valuable consideration; and every person
whose signature appears thereon to have become a
party thereto for value.
SECTION 25. Consideration; what constitutes. – Value is
any consideration sufficient to support a simple
contract. an antecedent or preexisting debt constitutes
value; and is deemed such whether the instrument is
payable on demand or at a future time.
A is a holder for value with regard to X and Y but NOT to
Z.
SECTION 27. When lien on instrument constitutes
holder for value. – Where the holder has a lien on the
instrument, arising either from contract or by
implication of law, he is deemed a holder for value to
the extent of his lien.
Examples:
1) W indorses to X a P/N valued at 800 pesos as collateral
for his debt of 1000 pesos.

Value and consideration are generally convertible

X may recover the whole amount from W as he is a holder
terms, but with different implications. for value for the full amount of the P/N.

Consideration is used where the payee of a note
sues the maker/drawer or when an indorsee sues
his immediate indorser.
Value is more appropriate where a holder sues any
party he has not dealt with.
2) A indorses to B a P/N valued at 1000 pesos as collateral
for his debt of 800 pesos.
B may recover the whole amount of 1000 pesos but he
holds the 200 pesos merely as a trustee in favor of
whoever is entitled to it. He is a holder for value only to
the extent of his lien which is 800 pesos.

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3) M indorses to N a P/N valued at 1000 pesos as
collateral for his debt of 800 pesos but there are existing
defenses among the prior parties.
N may recover if he does not know of these prior
defenses. In such case only the amount of his lien may be
recovered.
Holder in Good Faith
To be a holder in good faith, the holder must have
taken the instrument in good faith and without
notice of any defect in the title of the person
negotiating it.
Note that the knowledge of defect must be at the
time of negotiation. If knowledge is acquired
afterwards, due course holding is not affected.
SECTION 55. When title defective.– The title of a person
who negotiates an instrument is defective within the
meaning of this act when he obtained the instrument, or
any signature thereto, by fraud, duress, or force and
fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of
faith, or under such circumstances as amount to a fraud.
SECTION 56. What constitutes a notice of defect. – To
constitute a notice of an infirmity in the instrument or a
defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the
instrument amounts to bad faith.
The notice of defect must be actual. The purchaser
of an instrument is not charged with notice of
defenses or equities disclosed by public records.
However, notice to an agent is notice to the
principal.
a. Effect of suspicious circumstances
Good faith or bad faith can only be proven
through circumstantial evidence, as they are
states of mind.
Since time is of the essence in commercial
transactions, the negligence in tracking
down a suspicious circumstance is not in
itself a bar to recovery.
MICHAEL T.M. NUÑEZ
What is determinative of bad faith is actual
suspicion by the holder and not the mere
existence of suspicious circumstances.
It is sufficient that the holder knows that the
instrument is tainted with fraud. There is no
need to know the actual nature of the
fraud.
Unaka v. Butler
To constitute notice of infirmity in an instrument, or
defect of title of the person negotiating the same, the
person to whom it is negotiated must have actual
knowledge of the infirmity or knowledge of such facts that
his action in taking the instrument amounted to bad faith.
b. Financing Company Not A Party In Good
Faith
In installment sales, the finance company
pays the full price of the property sold and
the note is indorsed to it by the seller. In
these transactions the financing company is
considered by the courts to be a party to
the contract of sale and is therefore not a
party in good faith as to the buyer. Thus,
the financing company is subject to the
defenses available against the seller.
Commercial Credit Corp. v. Orange County
(Cited in Consolidated Plywood v. IFC Leasing) A financing
company, rather than being a purchaser of the
instrument after its execution, is to all intents and
purposes a party to the agreement and instrument from
the beginning. Thus, it cannot be regarded as a holder in
due course. (Note: the case of Salas v. CA only adopted
the Consolidated Plywood ruling only insofar as the words
of negotiability were concerned. The Court held that
plaintiff should have impleaded the financing company)
SECTION 54. Notice before full amount paid. – Where
the transferee receives notice of any infirmity in the
instrument or any defect in the title of the person
negotiating the same before he has paid the full amount
agreed to be paid therefor, he will be deemed a holder in
due course only to the extent of the amount theretofore
paid by him.
The effect of notice after partial payment has been
made makes the purchaser a holder in due course
as to such amount paid by him. If he had paid the
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remainder despite the notice, he cannot recover obligation with the clinic), the plaintiff is not deemed to be
such amount. a holder in due course since he is in bad faith.

Simple example: Purchaser from Holder in Due Course

A issues B a P/N for 1,000 pesos as a gift (Note defective
as it has no consideration)
B negotiated to C who paid 600 pesos.
The next day, C found out that the note had no
consideration. Despite that, he paid B the balance.
SECTION 58. When subject to original defenses. in the
hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses
as if it were non- negotiable. But a holder who derives
his title from a holder in due course, and who is not
himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in
respect of all parties prior to the latter.

In this case C can only recover from A 600 pesos since he

A person who purchased a negotiable instrument
was a holder in due course as to that amount only.
from a holder in due course will be free of all legal
defenses even if he has notice of defect in title.
Section 54 will only apply if the discovery of the
infirmity results in the relief from further obligations
This is because such purchaser derives his title from
to make payment. it will not apply where the holder
the holder in due course.
has given a promise which he must perform.

Hamm v. Meritt
Exceptions:
The fact that the holder bought the instrument at a
discount is not sufficient to show that the holder is not a a. Purchaser was a party to the fraud or
bona fide purchaser. illegality affecting the instrument.
b. A holder who reacquires from a holder in
due course and at the first time held title he
Other Factors Affecting Due Course
had knowledge of the defenses (In effect he
Holding is trying to cut off the maker's defenses by
transferring it to a holder in due course and
Payee as Holder in Due Course then buying it back to avail of Section 58).

A payee may become a holder in due course if he

does not deal directly with the maker. There may be
circumstances under which he is insulated from the
maker or drawer by a third party.

Example:

A draws a check in blank as to the payee and gives

instructions to his agent to fill in the name of the payee B.
Agent instead fills in C's name and delivers it to him, who
takes it for value and without notice.

C, despite being a payee, is free from A's defenses

because he did not deal directly with A.

De Ocampo v. Gatchalian
In certain cases, the payee, though an immediate party,
may be deemed a holder in due course. However, since
there are suspicious circumstances that should have put
him on inquiry, (such as the fact that the drawer had no

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

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PART FOUR: The general law on contracts regarding minority
DEFENSES AND EQUITIES applies to negotiable instruments.

Minority is a real defense available only to the minor

and cannot be availed of by the other parties.
The liability of parties to a negotiable instrument
depends on whether there are defenses or claims Section 22 will also apply to corporations and other
of ownership existing thereto. parties who have no capacity to give consent to a
contact such as insane persons, and deaf-mutes
Table 4.1. Kinds of Defenses who cannot read nor write.
Real Defenses Personal Defenses
Available against all Can only be raised against Example:
holders, including holders holders not in due course.
in due course. A issues note to B, minor.
Attaches to the A true contract appears
instrument and goes into but for some reason, the
B indorses to C
the essential requisites of defendant is excused
contracts. from his obligation to
perform. C indorses to D, holder.

Can A set up the defense of B's minority? NO. Under

Table 4.2. Classification of Defenses
Section 22, B's indorsement passes the title of the
Real Personal May be Real
instrument.
or Personal
Incapacity Illegality Material
Alteration In case A cannot pay, can D go after B? NO. Since B is a
Forgery Duress Fraud minor he can set up the defense of minority under the
Incomplete Non-delivery Civil Code.
instrument
No Can D go against C? YES. B validly passed title to C, and C
consideration warrants the capacity of all prior indorsers.

Table 4.3. Kinds of Equities
Legal Title
May recover possession
even from a holder in due
course.
Equitable Title
May only recover from
holders not in due course.
If D has knowledge of B's minority at the time he took the
instrument, can he go against A? YES. Section 22 cures
the defect by allowing title to pass to the indorsee.
Illegality

Incapacity SECTION 55. When title defective.– The title of a person

SECTION 22. Effect of indorsement by infant or
corporation.– The indorsement or assignment of the
instrument by an infant passes the property therein,
notwithstanding that from want of capacity the
corporation or infant may incur no liability thereon.
who negotiates an instrument is defective within the
meaning of this act when he obtained the instrument, or
any signature thereto, by fraud, duress, or force and
fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of
faith, or under such circumstances as amount to a fraud.

This is a personal defense not available against

If a minor indorses an instrument, he cannot be
held liable on his contract of indorsement but he
passes title to the indorsee and the latter may
recover from the party primarily liable free from the
defense of minority.
holders in due course.
Since it is a ground for void contracts, it should be a
real defense, but Section 55 of the NIL treats it as a
mere personal defense.

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 

 
Only parties involved in the illegality of the
consideration are adversely affected by such defect.
For example, gambling notes are unenforceable
between the original parties due to illegal
consideration but a holder in due course may
recover the full amount.
Forgery
SECTION 23. Forged signature, effect of. – When a
signature is forged or made without authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or
under such signature unless the party against whom it is
sought to enforce such right is precluded from setting
up the forgery for want of authority.
Forgery is a real defense and may be set up against
a holder in due course.
Only the signature, and not the instrument, is
rendered wholly inoperative.
The only exception is where the party is precluded
from setting up forgery or want of authority.
Example:
A makes a P/N payable to B or order. B indorses to C. D
steals the note and indorses to E by forging C's signature.
E indorses to F, holder in due course.
Pay to C
(sgd.) B
Pay to E
(sgd.) C (forged)
Pay to F
(sgd.) E
Can F go against A or B? NO. His rights against A and B
are cut off by C's forged signature.
Can F go against C? NO, unless C is precluded form
setting up the defense of forgery,
Can F go against E? YES, because E warrants the
genuineness of the indorsements.
MICHAEL T.M. NUÑEZ
BILLS, NOTES AND COMMERCIAL PAPERS 2
5
Can C go against A or B? YES, because he is the true
owner of the note.
Can C recover the note from F? YES, becuase even if F is a
holder in due course, F has no right to retain the
instrument under Section 23.
In a bearer instrument, the holder may still recover
because the indorsements are not necessary to his
title. However if there is an indorsement
subsequent to the forged one, the holder has a
right of recourse against the subsequent indorser.
Acceptance and Payment Under Mistake
When the drawee, without detecting the forgery,
accepts and pays the bill, he cannot charge the
amount thereof to the drawer's account. His only
recourse is to recover the money from the forger.
The drawee is bound to know the signature of the
drawer, and must therefore bear the loss in case it
turns out to be forged.
SECTION 62. Liability of acceptor. – The acceptor by
accepting the instrument engages that he will pay it
according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument;
(b) The existence of the payee and hid capacity to
indorse.
The effect of Section 62 is that the acceptor is
precluded from setting up the defense of forgery.
Under the doctrine of Price v. Neal, Section 62 would
apply to accepted bills, as well as to bills paid
without prior acceptance.
Price v. Neal
Bills were negotiated by a forger to a holder for value. The
drawee now seeks to recover from the holder. The Court
did not allow the drawee to recover since it was
incumbent upon him to inquire into the bill. The drawee is
expected to know the signature of the drawer. Because of
the drawee's negligence, he must bear the loss because
the party against whom he has a right to recover (the
forger) was already dead
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Table 4.4. Extensions of the Price v. Neal Doctrine
Overdrafts The drawee cannot
recover the amount
mistakenly paid to the
payee but may go against
the drawer.
Stop payment orders Its oversight in paying the
check despite the stop
payment order precludes
the drawee from
reclaiming the amount. If
the payee is fraudulent,
the drawer may recover
the amount from the
drawee.
Summary of rules as to forged bills of exchange:
o The drawer’s account cannot be charged by
the drawee where the drawee paid
o The drawer has no right to recover from the
collecting bank
o The drawee bank can recover from the
collecting bank
o The payee can recover from the drawer
o The payee can recover from the recipient of
the payment, such as the collecting bank
o The payee cannot collect from the drawee
bank
o The collecting bank bears the loss but can
recover from the person to whom it paid
o If payable to bearer, the rules are the same
as in P/N.
o If the drawee has accepted the bill, the
drawee bears the loss and his remedy is to
go after the forger
o If the drawee has not accepted the bill but
has paid it, the drawee cannot recover from
the drawer or the recipient of the proceeds,
absence any act of negligence on their part.
Negligence of the Depositor
It is the duty of the depositor to carefully examine
his bank statements and report errors to the bank
without reasonable delay.
If the proximate cause of wrongful payment is the
negligence of the drawer, he cannot complain if the
bank refuses to recredit his account.
MICHAEL T.M. NUÑEZ
In the case of series of forgeries by employees of
the depositor, if the negligence of the depositor
should delay discovery of the forgery, it is the
depositor who bears the loss.
Forged Indorsements
The drawee is not bound to know the genuineness
of the indorser's signature.
The drawee may recover the amount mistakenly
paid from the holder who received the check
through a forged indorsement.
If the drawee fails to recover the amount paid to the
holder, he cannot recoup his loss by charging the
drawer's account.
Exception: If the instrument is an original bearer
instrument, the drawee may debit the drawer's
account in spite of the forged indorsement because
it is unnecessary to the holder's title.
Table 4.5. Effect of negligence of banks
Negligence of drawee Both drawee and
is proximate cause collecting bank
negligent
Drawee bank is liable to Degree of negligence
collecting bank for the weighed in considering
amount paid on a check the amount of loss each
with a forged should bear.
indorsement.
Great Eastern Life v. HSBC
Banks paid upon a forged indorsement. The banks were
held to have no right to debit the account of the drawer
because under Section 23, a forged signature is wholly
inoperative and their only recourse is to go against the
forger. HSBC and PNB were held solidarily liable for the
loss.
Jai Alai v. BPI
Petitioner deposited a forged check with BPI who then
collected the amount from the drawee bank. Drawee
found out that the indorsements were forged and asked
BPI to return the amount. BPI debited petitioner's
account. The court held that the relationship between Jai-
alai and BPI was that of agency and not debtor-creditor
since the checks were not converted to cash. Because the
payment under a forged indorsement was ineffectual, it
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was proper for BPI to debit the proceeds from the
account of Jai-alai. Table 4.6. Original tenor v. Tenor of Acceptance
Section 124 Section 62
BDO v. Equitable The holder in due course The drawee must pay
When a collecting bank forwards a check to the drawee, it may only recover according to the tenor of
guarantees all prior indorsements. Therefore, when a according to the original his acceptance. (That is,
tenor. the altered amount.)
check turns out to be forged, the collecting bank must
Majority view - assent to Minority view - the NIL's
return the proceeds to the drawee.
the order of the drawer words must be taken in
means assent to his their natural and common
The drawer, unlike his duty to examine for his actual order and not to his meaning. 17
forged signature, has no duty to examine his checks apparent order.16
for forged indorsements.
Fraud
However, under the case of Detroit Piston Ring v.
Wayne County , the drawee may charge the drawer's Depending on the type of fraud, it may be either a
account if through the latter's negligent delay he personal or real defense.
fails to discover the forgery until it's too late for the
bank to recover from the holder or forger. Fraud in the inducement - the signer knows
he is signing a negotiable instrument but
The drawer, then, has a duty to immediately inform deceived as to its value or terms. It is a
the drawee if he discovers that there is a forged personal defense and cannot be set up
indorsement. against a holder in due course.

Gempesaw v. CA Fraud in the execution - the signer does not

Forgery as a defense can extend to forged indorsements know he is signing a negotiable instrument.
but there was negligence on the drawer's part so she was It is a real defense and cannot be held liable
not allowed to raise it. PBCom was also adjudged to be to any holder, even one in due course.
negligent for violating internal rules as well as failure of
the audit to detect the fraud, and therefore was the
Duress
proximate cause of the loss. Gempesaw and bank
ordered to bear the loss on a 50-50 basis.
It is generally a personal defense.
Exception: Duress employed is so serious as that it
Material Alteration will give rise to a real defense since there is no
contractual intent.
A material alteration may either be a:
Non-delivery
Personal defense - when used to deny liability
according to the original tenor of the instrument.
Complete Instrument
Real defense - when relied on to deny liability
It is only a personal defense, thus, when a complete
according to the altered terms.
instrument intended for safekeeping is stolen and
falls into the hands of a holder in due course, the
When a drawee pays an altered check, he is
maker cannot set up the defense of non-delivery.
precluded from charging the drawer's account and
must bear the loss, except if the drawer is negligent.
Under Section 16, the fact of delivery is a conclusive
presumption.
The rule on forged indorsements and material
alterations with respect to the drawer's negligence                                                                                                                
is the same. 16  NIL,  §§  132,  139.  
17  Wells  Fargo  v.  Bank  of  Italy  

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In this case any person who has lawful possession
Incomplete Instrument of the instrument may fill in the blanks.

Non-delivery of an incomplete instrument is a real Blank Paper That Is Signed

defense.
SECTION 15. Incomplete instrument not delivered. –
Where an incomplete instrument has not been delivered
it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder,
as against any person whose signature was placed
thereon before delivery.
This is a paper that is so incomplete that it is not an
instrument.
Here a person has prima facie authority to convert
the paper into a negotiable instrument, provided
that he satisfies these requisites:

In order to determine the completeness of the a. Delivery of the instrument

instrument, look at the details that are missing. If
those details are essential, then the instrument is
incomplete.
Unlike complete instruments, the presumption of
delivery is only prima facie.
Incomplete Instrument
SECTION 14. Blanks, when may be filled. – Where the
instruments is wanting in any material particular, the
person in possession thereof has a prima facie authority
to complete it by filling up the blanks therein. And a
signature on a blank paper delivered by the person
making the signature in order that the paper may be
converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount.
In order, however, that any such instrument, when
completed, may be enforced against any person who
became a party thereto prior to its completion, it must
be filled up strictly in accordance with the authority
given and within a reasonable time. But if any such
instrument after completion, is negotiated to a holder in
due course, it is valid and effectual for all purposes in his
hands, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and
within a reasonable time.
This is a personal defense that covers two kinds of
writings:
b. Intention to convert the paper into a
negotiable instrument.
The time for the completion of the instrument is
limited by "within a reasonable time." If it had been
completed after a long period had elapsed, the
holder cannot recover on the instrument.
Like with other personal defenses, it cannot be set
up against a holder in due course.
Want of Consideration
SECTION 28. Effect of want of consideration. – Absence
or failure of consideration is matter of defense as
against any person not a holder in due course; and
partial failure of consideration is a defense pro tanto
whether the failure is an ascertained and liquidated
amount or otherwie.
This is a personal defense. Against a holder in due
course, the presumption of consideration is
conclusive.
When it comes to partial consideration - as against
a holder (not in due course), the holder cannot
recover to the extent of the price of the undelivered
portion.

1) Incomplete instruments
2) A blank paper that is signed

Incomplete Instruments

The instrument is incomplete but the formal

requisites of a negotiable instrument are present.

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 

 
PART FIVE:
LIABILITY OF PARTIES
Liability of Primary Parties
SECTION 192. Persons primarily liable on instrument. -
The person "primarily" liable on an instrument is the
person who, by the terms of 29 he instrument, is
absolutely required to pay the same. All other parties
are "secondarily" liable.
SECTION 70. Effect of want of demand on principal
debtor. - Presentment for payment is not necessary in
order to charge the person primarily liable on the
instrument; but if the instrument is, by its terms,
payable at a special place, and he is able and willing to
pay it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. But
except as herein otherwise provided, presentment for
payment is necessary in order to charge the drawer and
indorsers.
Parties primarily liable:
BILLS, NOTES AND COMMERCIAL PAPERS 2
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Because the maker warrants the existence of the
payee and his capacity to indorse, the maker is
precluded from setting up the defense of minority
or insanity of the payee.
The Drawee
SECTION 127. Bill not an assignment of funds in hands
of drawee. - A bill of itself does not operate as an
assignment of the funds in the hands of the drawee
available for the payment thereof, and the drawee is not
liable on the bill unless and until he accepts the same.
SECTION 189. When check operates as an assignment. -
A check of itself does not operate as an assignment of
any part of the funds to the credit of the drawer with the
bank, and the bank is not liable to the holder unless and
until it accepts or certifies the check.
A drawee on a bill of exchange is not liable on the
instrument until he accepts it. Not even a holder in
due course can compel him to pay before his
acceptance.

P/N - the maker. This rule is laid down in Section 127, as the mere
BoE - None, unless the drawee accepts the bill in issuance of the bill is not an assignment of funds in
which he becomes an acceptor. the hands of the drawee.

Parties secondarily liable: Although the drawee is not liable until he accepts,
the drawee who refuses to accept a bill despite the
P/N - the prior indorsers. drawer having sufficient funds may be liable for
18
BoE - the drawer and prior indorsers. breach of contract based on tort.

Table 5.1. Obligations of parties The damages recoverable may be to the extent of
Parties Primarily Parties Secondarily the injury suffered by the drawer or the mere
Liable Liable 19
damage to his business reputation.
Unconditionally liable Conditionally liable
Duty to pay upon maturity, Will only be liable if there SECTION 62. Liability of acceptor. – The acceptor by
whether there has been has been presentment for accepting the instrument engages that he will pay it
demand or not. payment or acceptance, according to the tenor of his acceptance and admits:
notice of dishonor, and
proceedings upon (a) The existence of the drawer, the genuineness of his
dishonor. signature and his capacity and authority to draw the
instrument, and
The Maker
(b) The existence of the payee and his capacity to
indorse.
SECTION 60. Liability of maker. - The maker of a
negotiable instrument, by making it, engages that he
will pay it according to its tenor, and admits the With regard to the meaning of "tenor of his
existence of the payee and his then capacity to indorse. acceptance," see table 4.6, supra.
                                                                                                               
Applies only to a P/N. 18  Singson  v.  BPI  
19  Araneta  v.  Bank  of  America  

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

3 BILLS, NOTES AND COMMERCIAL PAPERS
 
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SECTION 137. Liability of drawee returning or
destroying bill. - Where a drawee to whom a bill is
Requisites of Acceptance delivered for acceptance destroys the same, or refuses
within twenty-four hours after such delivery or within
SECTION 132. Acceptance; how made, by and so forth. - such other period as the holder may allow, to return the
The acceptance of a bill is the signification by the bill accepted or non-accepted to the holder, he will be
drawee of his assent to the order of the drawer. The deemed to have accepted the same.
acceptance must be in writing and signed by the drawee.
SECTION 150. Duty of holder where bill not accepted. -
It must not express that the drawee will perform his
Where a bill is duly presented for acceptance and is not
promise by any other means than the payment of
accepted within the prescribed time, the person
money.
presenting it must treat the bill as dishonored by non-
acceptance or he loses the right of recourse against the
SECTION 133. Holder entitled to acceptance on face of
drawer and indorsers.
bill. - The holder of a bill presenting the same for
acceptance may require that the acceptance be written
on the bill, and, if such request is refused, may treat the The 24-hour period is counted from delivery and
bill as dishonored.
not from demand for return of the bill.
SECTION 138. Acceptance of incomplete bill. - A bill may
be accepted before it has been signed by the drawer, or Table 5.2. Summary of Rules
while otherwise incomplete, or when it is overdue, or Acts of drawee Effect
after it has been dishonored by a previous refusal to Returns the bill w/in 24 Holder may treat the bill
accept, or by non payment. But when a bill payable after hrs. without accepting as dishonored
sight is dishonored by non-acceptance and the drawee Destroys the instrument Accepted unless
subsequently accepts it, the holder, in the absence of
destruction is
any different agreement, is entitled to have the bill
accepted as of the date of the first presentment.
unintentional
Returns with statement of Dishonored
refusal to accept
The requisites of a valid acceptance are: Refuses to return the bill Constructive acceptance
after demand
Keeps the bill beyond the One view - drawee
1. It must be in writing - the word accepted period but no demand for deemed to have
must be written. return accepted.
2. It must be signed by the drawee (it is held
that in certain cases the signature alone is Contra. - Not an
sufficient) acceptance but a
dishonor of the bill
3. It must not change the promise of the
acceptor to pay only in money.
Acceptance on Separate Instrument

While not an essential requisite of acceptance, if the

drawee refuses to make the acceptance on the bill
itself, the holder may treat the bill as dishonored.
Under Section 138, the bill may be accepted while
incomplete. It may also be accepted even when
overdue or dishonored.
Constructive Acceptance
SECTION 134. Acceptance by separate instrument. -
Where an acceptance is written on a paper other than
the bill itself, it does not bind the acceptor except in
favor of a person to whom it is shown and who, on the
faith thereof, receives the bill for value.
SECTION 135. Promise to accept; when equivalent to
acceptance. - An unconditional promise in writing to
accept a bill before it is drawn is deemed an actual
acceptance in favor of every person who, upon the faith
thereof, receives the bill for value.

SECTION 136. Time allowed drawee to accept. - The

drawee is allowed twenty-four hours after presentment
in which to decide whether or not the will accept the bill;
the acceptance, if given, dates as of the day of
presentation.
When the acceptance is written on a separate
instrument such as a letter, it is called an extrinsic
acceptance.

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 
 BILLS, NOTES AND COMMERCIAL PAPERS 3
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When there is a promise to accept a future bill, it is the holder or he will be deemed to have assented
thereto.
called a virtual acceptance. This acceptance must at
always be unconditional.
General acceptance is self-explanatory.
In both cases, the acceptance must indicate the bill
Examples of qualified acceptance:
to which it refers.
a. Conditional
The key element is reliance on the promise to accept
the bill. The drawee, therefore, cannot escape "Accepted as soon as proceeds of sale of goods are
liability by arguing that the holder for value did not available"
see the separate instrument.
This acceptance does not affect negotiability because the
Subsequent holders acquire the rights of the relying acceptance, and not the order to pay, is conditional.
party.
b. Partial

Kinds of Acceptance "Accepted for 200 pesos only" (The bill was for 1000
pesos)
SECTION 139. Kinds of acceptance. - An acceptance is
either general or qualified. A general acceptance assents c. Local
without qualification to the order of the drawer. A
qualified acceptance in express terms varies the effect "Accepted, payment to be made in Landbank, UP Branch"
of the bill as drawn.

SECTION 140. What constitutes a general acceptance. - d. As to time

An acceptance to pay at a particular place is a general
acceptance unless it expressly states that the bill is to "Accepted, payment to be made one month from date"
be paid there only and not elsewhere. (Bill is payable in 15 days)

SECTION 141. Qualified acceptance. – An acceptance is e. As to drawee

qualified, which is:

(a) Conditional, that is to say, which makes payment by "Pay to the order of X, 100 pesos only. "
an acceptor dependent on the fulfillment of a condition
therein stated; To: X, Y, Z Sgd. W

(b) Partial, that is to say, an acceptance to part only of "Accepted, for the amount of 100 pesos."
the amount for which the bill is drawn;
Sgd. X, Y
(c) Local, that is to say, an acceptance to pay at a
particular place; Rights of the Parties as to Qualified
Acceptance
(d) Qualified as to time;

(e) The acceptance of some one or more of the The holder of the instrument may insist on an
drawees, but not of all. unqualified acceptance. If the drawee refuses the
holder may treat the bill as dishonored.
SECTION 142. Rights of parties as to qualified
acceptance. - The holder may refuse to take a qualified
acceptance and if he does not obtain an unqualified If the holder assents to the qualified acceptance, he
acceptance, he may treat the bill as dishonored by non- must inform the drawer and prior indorsers. If he
acceptance. Where a qualified acceptance is taken, the fails to do so, the parties secondarily liable are
drawer and indorsers are discharged from liability on the
bill unless they have expressly or impliedly authorized discharged.
the holder to take a qualified acceptance, or
subsequently assent thereto. When the drawer or an
indorser receives notice of a qualified acceptance, he
must, within a reasonable time, express his dissent to

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

3 BILLS, NOTES AND COMMERCIAL PAPERS
 
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Certification Refusal does not Refusal constitutes
constitute dishonor dishonor
SECTION 185. Check, defined. - A check is a bill of
exchange drawn on a bank payable on demand. Except Sir Q: In practice, banks do not certify personal
as herein otherwise provided, the provisions of this Act checks. They prefer to issue manager's checks,
applicable to a bill of exchange payable on demand
which produce the effect of payment because these
apply to a check.
are checks drawn on the bank itself.
SECTION 187. Certification of check; effect of. - Where a
check is certified by the bank on which it is drawn, the PAL v. CA
certification is equivalent to an acceptance.
Payment by check will not extinguish a judgment debt
SECTION 188. Effect where the holder of check procures where it is made payable not to the judgment creditor but
it to be certified. - Where the holder of a check procures to the sheriff who later absconds with the funds.
it to be accepted or certified, the drawer and all
indorsers are discharged from liability thereon.

SECTION 189. When check operates as an assignment. - Liability of Secondary Parties

A check of itself does not operate as an assignment of
any part of the funds to the credit of the drawer with the
bank, and the bank is not liable to the holder unless and According to Section 70, presentment for payment
until it accepts or certifies the check. is necessary to charge the drawer and prior
indorsers.
A check is a bill of exchange, but unlike ordinary bills
21
it is always payable on demand and always drawn Liability of Drawer
on a bank.
SECTION 61. Liability of drawer. - The drawer by drawing
If it is not payable on demand or not drawn on a the instrument admits the existence of the payee and
his then capacity to indorse; and engages that, on due
bank, it is not a check. presentment, the instrument will be accepted or paid, or
both, according to its tenor, and that if it be dishonored
A check is not legal tender. It is considered as and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder or to
conditional payment and payment will be
any subsequent indorser who may be compelled to pay
considered only when the check has been honored it. But the drawer may insert in the instrument an
20
by payment or certification. express stipulation negativing or limiting his own
liability to the holder.
Certification is an agreement by which a bank
promises to pay the check at anytime it is presented In order to hold the drawer liable, the ff. conditions
for payment. must be met:

• If at the instance of the drawer - secondary 1. Presentment

parties not discharged. 2. Dishonor
• If at instance of holder - secondary parties 3. Proceedings for dishonor (notice of
are discharged. dishonor or protest)

Table 5.3. Certification v. Acceptance PNB v. Picornell

Certification Acceptance Picornell warranted, as drawer of the bill, that it would be
Bank not obliged to certify Drawee not obliged to accepted upon proper presentment and paid in due
accept. course, and as it was not paid, he became liable to the
Imposes primary liability Imposes primary liability payment of its value to the holder thereof, which is the
on bank on acceptor plaintiff bank.
May release parties Does not release
secondarily liable secondary parties
                                                                                                               
                                                                                                                21  Liability  of  the  drawer  for  bouncing  checks  will  not  be  

20  NCC,  Article  1249.   included.  

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 

 
He cannot set up the defense of want of consideration
since the bank is a holder in due course.
Liability of Qualified Indorsers and One
Negotiating by Mere Delivery
SECTION 65. Warranty; where negotiation by delivery,
and so forth.– Every person negotiating an instrument
by mere delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects
what it purports to be;
(b) That he has good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it
valueless.
But when the negotiation is by mere delivery only, the
warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do not
apply to persons negotiating public or corporation
securities other than bills and notes.
Unlike general indorsers, qualified indorsers are not
liable to pay the holder upon dishonor of the
instrument.
Their liabilities are that of a seller, for the warranties
enumerated in Section 65.
These liabilities extend only to the immediate
transferee and not to subsequent holders, even in
due course.
Liability of General Indorsers
SECTION 66. Liability of general indorsers. – Every
indorser who indorses without qualification, warrants to
all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding section;
(b) That the instrument is at the time of his
indorsement valid and subsisting.
And in addition, he engages that on due presentment,
it shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored, and
the necessary proceedings for dishonor be duly taken,
MICHAEL T.M. NUÑEZ
BILLS, NOTES AND COMMERCIAL PAPERS 3
3
he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.
SECTION 67. Liability of indorser where paper
negotiable by delivery.— Where a person places his
indorsement on an instrument negotiable by delivery,
he incurs all the liability of an indorser.
SECTION 63. When a person deemed indorser. - A
person placing his signature upon an instrument
otherwise than as maker, drawer, or acceptor, is deemed
to be indorser unless he clearly indicates by appropriate
words his intention to be bound in some other capacity.
Table 5.4. General v. Qualified indorsers
General Qualified
Liable for both payment Liable only for warranties
and warranties
Liability extends to all Liability extends only to
subsequent transferees immediate transferee.
Among themselves, indorsers are liable in the order
in which they indorse, unless among themselves
they have agreed otherwise.
Liability of Accommodation Party
SECTION 29. Liability of accommodation party. - An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation
party.
An accommodation party is someone who lends his
name to some other person in the capacity of a
maker, drawer, acceptor, or indorser.
No need for the accommodation party to receive
anything.
The liability of an accommodation party is that of a
surety.
The party accommodated cannot go against the
accommodation party; but the accommodation
party can demand reimbursement from the person
he accommodated.
The accommodation party cannot go against his co-
accommodation maker.
A2016 PROF. ROGELIO QUEVEDO
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capacity, but principal agent's personal laibility
undisclosed (No prejudice to action
Maulini v. Serrano against principal)
Agent discloses Agent presumptively
An accommodation note is one to which the
principal but does not liable, parol evidence may
accommodation party has put his name, without
indicate that he is an be presented to show he
consideration, for the purpose of accommodating some agent is an agent
other party who is to use it and is expected to pay it. But Agent indicates Parol evidence admissible
where, however, an indorsement is made as a favor to the capacity and names a to exonerate agent from
indorsee, and where the only consideration for such third party who might personal liability.
indorsement passes from the indorser to the indorsee, be his principal
the situation is not one creating an accommodation Agent acts without Agent personally liable
indorsement. authority in
negotiating the
instrument
Liability of an Agent Agent signs by Holder must inquire into
procuration extent of agent's authority
SECTION 19. Signature by agent; authority; how shown. at his peril. Principal not
- The signature of any party may be made by a duly liable if agent exceeds
authorized agent. No particular form of appointment is authority
necessary for this purpose; and the authority of the
agent may be established as in other cases of agency.
Presentment for Acceptance
SECTION 20. Liability of person signing as agent, and so
forth. - Where the instrument contains or a person adds
to his signature words indicating that he signs for or on SECTION 143. When presentment for acceptance must
behalf of a principal or in a representative capacity, he is be made.– Presentment for acceptance must be made:
not liable on the instrument if he was duly authorized;
but the mere addition of words describing him as an (a) Where the bill is payable after sight, or in any other
agent, or as filling a representative character, without case where presentment for acceptance is necessary in
disclosing his principal, does not exempt him from order to fix the maturity of the instrument; or
personal liability.
SECTION 21. Signature by procuration; effect of. - A (b) Where the bill expressly stipulates that it shall be
signature by "procuration" operates as notice that the presented for acceptance; or
agent has but a limited authority to sign, and the
principal is bound only in case the agent in so signing (c) Where the bill is payable elsewhere than at the
acted within the actual limits of his authority. residence or place of business of the drawee.

SECTION 69. Liability of an agent or broker. - Where a In no other case is presentment for acceptance
broker or other agent negotiates an instrument without necessary in order to render any party to the bill liable.
indorsement, he incurs all the liabilities prescribed by
Section Sixty-five of this Act, unless he discloses the SECTION 144. When failure to present releases drawer
name of his principal and the fact that he is acting only and indorser. - Except as herein otherwise provided, the
as agent. holder of a bill which is required by the next preceding
section to be presented for acceptance must either
present it for acceptance or negotiate it within a
Table 5.5. Summary of Rules reasonable time. If he fails to do so, the drawer and all
Agent signs but Agent personally liable, indorsers are discharged.
principal undisclosed undisclosed principal not
liable
Agent does not sign Agent liable under Section Only BoE need to be presented for acceptance.
but principal 65 for warranty
undisclosed Section 143 enumarates the instances where the
Agent signs but does Agent personally liable acceptance of a bill is necessary.
not indicate his and not allowed to prove
representative he was an agent (Without
Example:
capacity prejudice to action
against principal
Agent discloses his Parol evidence not
representative admissible to aviod

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 
 BILLS, NOTES AND COMMERCIAL PAPERS 3
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November 28, 2014 If the drawee is dead, presentment to the
representative is only permissive, as presentment is
Pay to the order of X the amount of P1,000 payable in
excused under Section148.
30 days.

To: Y Sgd. Z SECTION 148. Where presentment excused.–

In this case the bill must be presented to drawer Y for
acceptance because the matuirty of the bill will be 30
days from the acceptance of Y.
Presentment must be made within a reasonable
period, or else the parties secondarily liable may be
discharged.
Presentment for acceptance is excused and a bill may be
treated as dishonored by non-acceptance in either of the
following cases:
(a) Where the drawee is dead, or has absconded or is a
fictitious person or a person not having capacity to
contract by bill.
(b) Where after the exercise of reasonable diligence,
presentment cannot be made.

(c) Where although presentment has been regular,

Checks do not need to be presented for acceptance acceptance has been refused on some other ground.
because they are bills payable on demand. Again,
SECTION 147. Presentment, where time is insufficient.–
the rule is that the banks prefer to issue manager's
Where the holder of a bill drawn payable elsewhere than
checks instead of accepting or certifying personal at the place of business or the residence of the drawee
checks. has no time, with the exercise of reasonable diligence,
to present the bill for acceptance before presenting it
for payment on the day that it falls due, the delay
SECTION 145. Presentment how made. – Presentment
caused by presenting the bill for acceptance before
for acceptance may be made by or on behalf of the
presenting it for payment is excused and does not
holder at a reasonable hour on a business day, and
discharge the drawers and indorsers.
before a bill is overdue, to the drawee or some person
authorized to accept or refuse acceptance on his behalf;
and Re. (a): In this case the holder has the option to
treat the instrument either as a bill or a P/N.
(a) Where a bill is addressed to two or more drawees,
who are not partners, presentment must be made to Therefore, no acceptance is necessary.
them all, unless one has authority to accept or refuse
acceptance for all, in which case presentment must be Re. (b): In case of fortuitous event, such as delay of
made to him only;
mails, the non-presentment within a reasonable
(b) Where the drawee is dead, presentment may be time is excused.
made to his personal representative; Re. (c): If the presentment is irregular (such as when
it is presented on a holiday) and the drawee refuses
(c) Where the drawee has been adjudged a bankrupt or
insolvent, or has made an assignment for the benefit of on another ground other than irregularity (such as
creditors, presentment may be made to him or his insufficient funds), the payee may treat the bill as
trustee or assignee. dishonored.
SECTION146. On what days presentment may be made.
- A bill may be presented for acceptance on any day on Dishonor by Non-Acceptance
which negotiable instruments may be presented for
payment under the provisions of Sections seventy-two
and eighty-five of this Act. When Saturday is not Table 5.6. Effects of Dishonor by Non-acceptance
otherwise a holiday, presentment for acceptance may be Provision Effect
made before twelve o'clock noon on that day. Section 149 Bill is dishonored when
acceptance is refused,
Presentment must be made by the proper party even when presentment for
acceptance is excused
presenting, to the proper party under Section 145, Section 150 When the bill is not
or else the non-acceptance will not constitute accepted within the
dishonor. prescribed time, the holder
must treat the bill as
dishonored or else he loses
his right of recourse
MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO
3 BILLS, NOTES AND COMMERCIAL PAPERS
 
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against parties secondarily The relationship between drawer and drawee is that
liable. of contract. Generally, therefore, the drawee is
Section 151 Where a bill is dishonored,
expected to assent to the order of the drawer of the
he has an immediate right
of recourse against bill.
drawers and indorsers. No
presentment for payment However, there are instances when the drawer has
necessary. no right to expect the drawee to pay the
Section 89 Notice of dishonor must be
instrument, such as when there are insufficient
given to drawer or
indorsers. Any drawer or funds. In this case, the drawer is not discharged
indorser to whom such even if there has been no presentment for
notice is not given is payment.
discharged.
Section 117 Ommission to give notice of SECTION 80. When presentment not required to charge
dishonor does not the indorser. - Presentment is not required in order to
prejudice the right of holder charge an indorser where the instrument was made or
in due course subsequent accepted for his accommodation and he has no reason
to the omission. to expect that the instrument will be paid if presented.

Presentment for Payment Two requisites must concur:

SECTION 70. Effect of want of demand on principal
debtor. - Presentment for payment is not necessary in
order to charge the person primarily liable on the
instrument; but if the instrument is, by its terms,
payable at a special place, and he is able and willing to
pay it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. But
except as herein otherwise provided, presentment for
payment is necessary in order to charge the drawer and
indorsers.
Presentment for payment is the presentation of the
instrument to the person primarily liable for the
purpose of obtaining payment.
a. The instrument was made or accepted for
the indorser's accommodation.
b. Indorser has no reason to expect payment
of the instrument.
For example, when the indorser knew that the
maker was insolvent when he indorsed the
instrument, he still has the right to demand
presentment, unless the instrument was amde or
accepted for his accommodation.
Lesson learned from Sections 79-80: Kung walang
karapatan o dahilang mag-expect, huwag humirit.

Presentment for payment is not needed to charge

the parties primarily liable because the maker or
acceptor is olbiged to pay even if there is no
demand.
SECTION 82. When presentment may be dispensed
with.– Presentment for payment is dispensed with:
(a) Where after the exercise of reasonable diligence
presentment as required by this Act cannot be made;

It is necessary, however, in order to charge the
parties secondarily liable.
Tender of payment by the primary parties
discharges the secondary parties.
SECTION 79. When presentment not required to charge
the drawer. - Presentment for payment is not required in
order to charge the drawer where he has no right to
expect or require that the drawee or acceptor will pay
the instrument.
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied;
SECTION 111. Waiver of protest. - A waiver of protest,
whether in the case of a foreign bill of exchange or other
negotiable instrument, is deemed to be a waiver not
only of a formal protest but also of presentment and
notice of dishonor.

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 
 BILLS, NOTES AND COMMERCIAL PAPERS 3
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Again, where the drawee is a fictitious person the Demand bill - The reasonable time for presentment
bill may be treated as a note and therefore runs from the last negotiation. Thus, when the bill is
presentment is no longer necessary. issued in November 2015 and the date of last
indorsement is April 2016, the reasonable period
Waiver of presentment may be implied from the runs from April 2016.
acts of the drawer.
Checks
The waiver of the drawer or indorser must be wih
knowledge of the fact that would release him from SECTION 186. – Within what time a check must be
liability. presented. - A check must be presented for payment
within a reasonable time after its issue or the drawer
will be discharged from liability thereon to the extent of
SECTION 71. Presentment where instrument is not the loss caused by the delay.
payable on demand and where payable on demand. -
Where the instrument is not payable on demand,
presentment must be made on the day it falls due. Table 5.7. Effects of delay in presentment of checks
Where it is payable on demand, presentment must be As to drawer Discharged to the extent
made within a reasonable time after its issue, except of his loss caused by the
that in the case of a bill of exchange, presentment for delay
payment will be sufficient if made within a reasonable As to indorsers Fully discharged
time after the last negotiation thereof. (reasonable time
computed from last
SECTION 85. Time of maturity. - Every negotiable negotiation)22
instrument is payable at the time fixed therein without
As to acceptor Check is stale and
grace. When the day of maturity falls upon Sunday or a
holiday, the instruments falling due or becoming
therefore may refuse to
payable on Saturday are to be presented for payment on accept. Courts must
the next succeeding business day except that inquire as to reason for
instruments payable on demand may, at the option of delay.23
the holder, be presented for payment before twelve
o'clock noon on Saturday when that entire day is not a SECTION 81. When delay in making presentment is
holiday. excused. - Delay in making presentment for payment is
excused when the delay is caused by circumstances
beyond the control of the holder and not imputable to
Instrument not Payable on Demand his default, misconduct, or negligence. When the cause
of delay ceases to operate, presentment must be made
In determining the date of presentment, the date of with reasonable diligence.
maturity indicated on the instrument shall be
followed. Notice that the requirement to make presentment
is revived when the circumstance is abated.
A specified event may be used as a point in time to
determine from when the period should run. The PNB v. Seeto
event must not be one that destroys negotiability. There is no authority sustaining the proposition that an
indorser is not discharged from liability for an
unreasonable delay in presentment for payment.
Suit on the date of maturity is premature, because
the party upon whom the instrument is presented
The indorser is discharged because of PNB's
has the whole day to pay the instrument. unreasonable delay not only from the date of issue but
also from the date of last negotiation.
Demand Instruments
Crystal v. CA
Demand note - The reasonable time for presentment Dishonor and becoming stale of a check produces
runs from the date of issuance, regardless of the different effects. If a check is dishonored the redemption
date of subsequent indorsements.
                                                                                                               
22  Based  on  general  rules  for  BoE  
23  Crystal  v.  CA    

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3 BILLS, NOTES AND COMMERCIAL PAPERS
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is invalid whole if it was merely stale, the Courts must look
into the circumstances of non-presentment.
SECTION 74. Instrument must be exhibited. - The
instrument must be exhibited to the person from whom
payment is demanded, and when it is paid, must be
delivered up to the party paying it.
SECTION 72. What constitutes a sufficient
presentment.- Presentment for payment, to be
sufficient, must be made:
(a) By the holder, or by some person authorized to
receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or
if he is 38bsent or inaccessible, to any person found at
the place where the presentment is made.
Presentment must be made by the holder or the
person authorized by him to receive payment.
For crossed checks, the payee or holder should
deposit the check in his own bank so the latter may
make the proper presentment.
The instrument must be exhibited for the benefit of
the maker in order that he may know that the one
demanding payment is the holder of the
instrument.
When presentment is waived, exhibition is no
longer necessary.
SECTION 73. Place of presentment. - Presentment for
payment is made atthe proper place:
(a) Where a place of payment is specified in the
instrument and it is there presented;
(b) Where no place of payment is specified but the
address of the person to make payment is given in the
instrument and it is there presented;
(c) Where no place of payment is specified and no
address is given and the instrument is presented at the
usual place of business or residence of the person to
make payment;
(d) In any other case if presented to the person to
make payment wherever he can be found, or if
MICHAEL T.M. NUÑEZ
presented at his last known place of business or
residence.
Presentment must be made by the proper party at
the proper place in order to charge indorsers.
Where there is no usual place of residence or
business stated in the instrument, the holder has 3
options:
1. Wherever the proper party may be found
2. Last known place of business
3. Last known residence.
SECTION 76. Presentment where principal debtor is
dead. - Where the person primarily liable on the
instrument is dead and no place of payment is specified,
presentment for payment must be made to his personal
representative, if such there be, and if, with the exercise
of reasonable diligence, he can be found.
SECTION 77. Presentment to persons liable as
partners.- Where the persons primarily liable on the
instrument are liable as partners and no place of
payment is specified, presentment for payment may be
made to any one of them, even though there has been a
dissolution of the firm.
SECTION 78. Presentment to joint debtors. - Where
there are several persons, not partners, primarily liable
on the instrument and no place of payment is specified,
presentment must be made to them all.
Self- explanatory.
Dishonor by Non-Payment
SECTION 83. When instrument dishonored by non-
payment.– The instrument is dishonored by non-
payment when:
(a) It is duly presented for payment and payment is
refused or cannot be obtained; or
(b) Presentment is excused and the instrument is
overdue and unpaid.
SECTION 84. Liability of person secondarily liable, when
instrument dishonored. - Subject to the provisions of
this Act, when the instrument is dishonored by non-
payment, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder.
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Even when there is an immediate right to recourse,
the requisite of notice of dishonor is still essential to
charge the parties secondarily liable.
SECTION 89. To whom notice of dishonor must be
given.- Except as herein otherwise provided, when a
negotiable instrument has been dishonored by non-
acceptance or non-payment, notice of dishonor must be
given to the drawer and to each indorser, and any drawer
or indorser to whom such notice is not given is
discharged.
The notice of dishonor may be made verbally or in
writing.
Accomodation parties are entitled to notice of
dishonor even in the capacity of a maker. A joint
maker is a party primarily liable, and therefore no
need for notice of dishonor as to him.
SECTION 95. When notice sufficient. - A written notice
need not be signed and an insufficient written notice
may be supplemented and validated by verbal
communication. A misdescription of the instrument
does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby.
SECTION 96. Form of notice. - The notice may be in
writing or merely oral and may be given in any terms
which sufficiently identify the instrument, and indicate
that it has been dishonored by non-acceptance or non-
payment. It may in all cases be given by delivering it
personally or through the mails.
The notice must:
1. Identify the instrument dishonored
2. Make the fact known that it was duly
presented and dishonored either by non-
acceptance or non-payment
SECTION 102. Time within which notice must be given. -
Notice may be given as soon as the instrument is
dishonored and, unless delay is excused as hereinafter
provided, must be given within the time fixed by this
Act.
SECTION 103. Where parties reside in same place. -
Where the person giving and the person to receive
notice reside in the same place, notice must be given
within the following times:
(a) If given at the place of business of the person to
receive notice, it must be given before the close of
business hours on the day following.
MICHAEL T.M. NUÑEZ
BILLS, NOTES AND COMMERCIAL PAPERS 3
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(b) If given at his residence, it must be given before
the usual hours of rest on the day following.
(c) If sent by mail, it must be deposited in the post
office in time to reach him in usual course on the day
following.
SECTION 104. Where parties reside in different places. -
Where the person giving and the person to receive
notice reside in different places, the notice must be
given within the following times:
(a) If sent by mail, it must be deposited in the post
office in time to go by mail the day following the day of
dishonor, or if there be no mail at a convenient hour on
last day, by the next mail thereafter.
(b) If given otherwise than through the post office,
then within the time that notice would have been
received in due course of mail, if it had been deposited
in the post office within the time specified in the last
subdivision.
SECTION 105. When sender deemed to have given due
notice. - Where notice of dishonor is duly addressed and
deposited in the post office, the sender is deemed to
have given due notice, notwithstanding any miscarriage
in the mails.
SECTION 106. Deposit in post office; what constitutes. -
Notice is deemed to have been deposited in the post-
office when deposited in any branch post office or in any
letter box under the control of the post office
department.
SECTION 107. Notice to subsequent party; time of. -
Where a party receives notice of dishonor, he has, after
the receipt of such notice, the same time for giving
notice to antecedent parties that the holder has after
the dishonor.
SECTION 113. Delay in giving notice; how excused. -
Delay in giving notice of dishonor is excused when the
delay is caused by circumstances beyond the control of
the holder and not imputable to his default, misconduct,
or negligence. When the cause of delay ceases to
operate, notice must be given with reasonable diligence.
The time of notice must be immediately after
dishonor.
Example:
Holder C presents the note to maker A on Monday. A
does not pay, and instead promised C that he will pay on
Friday. On Friday, A absconded. C sends a notice of
dishonor to indorser B charging him as laible for the note.
Was there valid notice of dishonor? NO. The notice of
dishonor should have been sent on Monday since that
was when non-payment happened.
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Where it is proven that the notice was duly
addressed and deposited on the post office, the
holder is conclusively deemed to have given notice.
Although non-receipt does not discharge an
indorser, it may be admitted on the question of
whether the notice was mailed in the first place.
SECTION 108. Where notice must be sent. - Where a
party has added an address to his signature, notice of
dishonor must be sent to that address; but if he has not
given such address, then the notice must be sent as
follows:
(a) Either to the post-office nearest to his place of
residence or to the post-office where he is accustomed
to receive his letters; or
(b) If he lives in one place and has his place of
business in another, notice may be sent to either place;
or
(c) If he is sojourning in another place, notice may be
sent to the place where he is so sojourning.
But where the notice is actually received by the party
within the time specified in this Act, it will be sufficient,
though not sent in accordance with the requirement of
this section.
SECTION 90. By whom given. - The notice may be given
by or on behalf of the holder, or by or on behalf of any
party to the instrument who might be compelled to pay
it to the holder, and who, upon taking it up, would have
a right to reimbursement from the party to whom the
notice is given.
SECTION 91. Notice given by agent. – Notice of dishonor
may be given by any agent either in his own name or in
the name of any party entitled to given notice, whether
that party be his principal or not.
SECTION 94. When agent may give notice. - Where the
instrument has been dishonored in the hands of an
agent, he may either himself give notice to the parties
liable thereon, or he may give notice to his principal. If
he gives notice to his principal, he must do so within the
same time as if he were the holder, and the principal,
upon the receipt of such notice, has himself the same
time for giving notice as if the agent had been an
independent holder.
A holder, whether he is the owner of the instrument
or not, may give notice of dishonor. Thus, a
restrictive indorsee who is a trustee or collecting
agent may send a valid notice.
MICHAEL T.M. NUÑEZ
A prior indorser may give notice of dishonor to
parties prior to him because he is a party that may
be compelled to pay the instrument. This is so he
can set up his right of reimbursement if he pays the
instrument.
SECTION 98. Notice where party is dead. - When any
party is dead and his death is known to the party giving
notice, the notice must be given to a personal
representative, if there be one, and if with reasonable
diligence, he can be found. If there be no personal
representative, notice may be sent to the last residence
or last place of business of the deceased.
If the party's death is known to the holder, then he
is put on inquiry to find out whether there is a
personal representative or not. If he neglects to do
so, notice to last place of residence is ineffective to
charge the estate.
If he does not know about the death, Section 108 is
sufficient.
SECTION 100. Notice to persons jointly liable. - Notice
to joint persons who are not partners must be given to
each of them unless one of them has authority to
receive such notice for the others.
SECTION 101. Notice to bankrupt. - Where a party has
been adjudged a bankrupt or an insolvent, or has made
an assignment for the benefit of creditors, notice may
be given either to the party himself or to his trustee or
assignee.
If jointly liable - notice to all parties necessary.
If joint and several - notice to one will discharge
those not notified.
SECTION 92. Effect of notice on behalf of holder. -
Where notice is given by or on behalf of the holder, it
inures to the benefit of all subsequent holders and all
prior parties who have a right of recourse against the
party to whom it is given.
SECTION 93. Effect where notice is given by party
entitled thereto. - Where notice is given by or on behalf
of a party entitled to give notice, it inures to the benefit
of the holder and all parties subsequent to the party to
whom notice is given.
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Example:
The following are indorsers of a note:
A
B - Notice of dishonor is not required to be given to the
C drawer in either of the following cases:
D
E - holder who gives notice and subsequently negotiates
the note to
F (b) When the drawee is fictitious person or a person
If E gave notice to B and C, it will inure to the benefit of F.
If C pays the instrument, he does not need to give a new
notice of dishonor to go against B because E's notice also
operates in favor of C.
If C notifies A, even if E did not send notice to A, E may still
collect from A by virtue of C's notice if he fails to collect
from C.
The notice of C to A also inures to the benefit of F
because F is a party subsequent.
Of course, D is discharged because no one notified him.
SECTION 112. When notice dispensed with.– Notice of
dishonor is dispensed with when, after the exercise of
reasonable diligence, it cannot be given to or does not
reach the parties sought to be charged.
Even if there has been a miscarriage of the notice,
the notice is deemed sent as long as the holder
exercised due diligence.
SECTION 116. Notice of non-payment where acceptance
refused. - Where due notice of dishonor by non-
acceptance has been given, notice of a subsequent
dishonor by non-payment is not necessary unless in the
meantime the instrument has been accepted.
Presentment for payment is no longer necessary
after the notice of dishonor for non-acceptance has
been given because liability had already attached.
SECTION 109. Waiver of notice. - Notice of dishonor may
be waived either before the time of giving notice has
arrived or after the omission to give due notice, and the
waiver may be expressed or implied.
SECTION 110. Whom affected by waiver. - Where the
waiver is embodied in the instrument itself, it is binding
upon all parties; but, where it is written above the
signature of an indorser, it binds him only.
MICHAEL T.M. NUÑEZ
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Waiver may be made before or after maturity of the
instrument, and may be express or implied.
SECTION 114. When notice need not be given to drawer.
(a) Where the drawer and drawee are the same person;
not having capacity to contract;
(c) When the drawer is the person to whom the
instrument is presented for payment;
(d) Where the drawer has no right to expect or require
that the drawee or acceptor will honor the instrument;
(e) Where the drawer has countermanded payment.
such prior to that time.
This section is a rehash of previous rules.
Re. (a): Notice is not needed because the holder
may treat the bill as a P/N which makes the drawee
primarily liable.
Re. (b): Same as (a).
Re. (c): Demand for payment constitutes notice of
dishonor.
Re. (d): See notes on presentment for payment,
supra.
Re. (e): Drawer need not be notified because he was
the one who caused the non-payment.
SECTION 115. When notice need not be given to
indorser. — Notice of dishonor is not required to be
given to an indorser in either of the following cases:
(a) When the drawee is a fictitious person or person not
having
capacity to contract, and the indorser was aware of that
fact at the time he indorsed the instrument;
(b) Where the indorser is the person to whom the
instrument is presented for payment;
(c) Where the instrument was made or accepted for his
accommodation.
The rules in this section are similar to Section 114,
supra.
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Protest
Definition
Protest is the testimony of a proper person, usually
a notary in the form of an affidavit, that the regular
legal steps to fix the liability of drawer and indorsers
have been taken.
SECTION 152. In what cases protest necessary. - Where
a foreign bill appearing on its face to be such is
dishonored by non-acceptance, it must be duly
protested for non-acceptance, by non-acceptance is
dishonored and where such a bill which has not
previously been dishonored by nonpayment, it must be
duly protested for nonpayment. If it is not so protested,
the drawer and indorsers are discharged. Where a bill
does not appear on its face to be a foreign bill, protest
thereof in case of dishonor is unnecessary.
SECTION 129. Inland and foreign bills of exchange. - An
inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within the
Philippines. Any other bill is a foreign bill. Unless the
contrary appears on the face of the bill, the holder may
treat it as an inland bill.
SECTION 157. Protest both for non-acceptance and non-
payment. - A bill which has been protested for non-
acceptance may be subsequently protested for non-
payment.
When is protest necessary:
a. Where a foreign bill is dishonored for non-
acceptance.
b. Where a foreign bill is dishonored for non
payment.
c. Where a dishonored bill has been accepted
for honor, prior to presentment for
payment to the acceptor for honor.
d. Where the bill contains a referee in case of
need, prior to presentment for payment to
him.
e. Where a bill is protested for better security.
SECTION 153. Protest; how made. - The protest must be
annexed to the bill or must contain a copy thereof, and
must be under the hand and seal of the notary making it
and must specify:
(a) The time and place of presentment;
(b) The fact that presentment was made and the
manner thereof;
MICHAEL T.M. NUÑEZ
(c) The cause or reason for protesting the bill;
(d) The demand made and the answer given, if any, or
the fact that the drawee or acceptor could not be found.
Steps in protest:
1. The notary presents the instrument and
demands acceptance or payment.
2. If refused, he makes a minute on the
instrument or his own official record.
3. On the same day or afterwards, the notary
extends his protest by embodying in a
certificate the facts of protest, his acts of
making presentment, demand and in giving
notice of dishonor.
4. The notary appends his official seal.
The certificate of protest has the same use as a
deposition.
SECTION 154. Protest, by whom made. - Protest may be
made by:
(a) A notary public; or
(b) By any respectable resident of the place where the
bill is dishonored, in the presence of two or more
credible witnesses.
What constitutes a respectable resident in this
jurisdiction, we do not know.
SECTION 155. Protest; when to be made. - When a bill is
protested, such protest must be made on the day of its
dishonor unless delay is excused as herein provided.
When a bill has been duly noted, the protest may be
subsequently extended as of the date of the noting.
SECTION 156. Protest; where made. - A bill must be
protested at the place where it is dishonored, except
that when a bill drawn payable at the place of business
or residence of some person other than the drawee has
been dishonored by nonacceptance, it must be
protested for nonpayment at the place where it is
expressed to be payable, and no further presentment for
payment to, or demand on, the drawee is necessary.
The protest must be made on the day the bill is
dishonored; otherwise, the parties secondarily liable
are discharged.
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The extended certificate of protest need not be
made on the same day as the dishonor if the notary
had made a notation on the instrument on that day.
SECTION 158. Protest before maturity where acceptor
insolvent. - Where the acceptor has been adjudged a
bankrupt or an insolvent or has made an assignment for
the benefit of creditors before the bill matures, the
holder may cause the bill to be protested for better
security against the drawer and indorsers.
Protest for better security is an obsolete practice.
The purpose of this section is to merely inform the
drawer to arrange for payment on the bill if the
acceptor has become insolvent before maturity.
SECTION 159. When protest dispensed with. - Protest is
dispensed with by any circumstanceswhich would
dispense with notice of dishonor. Delay in noting or
protesting is excused when delay is caused by
circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence.
When the cause of delay ceases to operate, the bill must
be noted or protested with reasonable diligence.
Same rules as with notice of dishonor.
SECTION 111. Waiver of protest. - A waiver of protest,
whether in the case of a foreign bill of exchange or other
negotiable instrument, is deemed to be a waiver not
only of a formal protest but also of presentment and
notice of dishonor.
SECTION 160. Protest where bill is lost and so forth. -
When a bill is lost or destroyed or is wrongly detained
from the person entitled to hold it, protest may be made
on a copy or written particulars thereof.
Self-explanatory.
SECTION 161. When bill may be accepted for honor. -
When a bill of exchange has been protested for dishonor
by non-acceptance or protested for better security and
is not overdue, any person not being a party already
liable thereon may, with the consent of the holder,
intervene and accept the bill supra protest for the honor
of any party liable thereon or for the honor of the person
for whose account the bill is drawn. The acceptance for
honor may be for part only of the sum for which the bill
is drawn; and where there has been an acceptance for
honor for one party, there may be a further acceptance
by a different person for the honor of another party.
Definition
MICHAEL T.M. NUÑEZ
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Acceptance for honor is one which is undertaken by
a stranger before the bill is overdue, after the bill
has been protested for dishonor by non-acceptance
or better security for honor of any party liable.
Requisites for acceptance for honor:
a. Acceptor for honor must be a stranger and
not a party already liable;
b. Acceptor for honor must appear before
notary public and declare his acceptance
for honor;
c. The bill is not overdue;
d. Bill must have been priorly protested;
e. Must have consent of the holder.
Again, this is an obsolete practice.
SECTION 171. Who may make payment for honor. -
Where a bill has been protested for non-payment, any
person may intervene and pay it supra protest for the
honor of any person liable thereon or for the honor of
the person for whose account it was drawn.
Unlike acceptance for honor where only a stranger
to the bill may do it, anybody can pay for honor.
Likewise, the payment for honor must be made
before a notary.
The purpose of a payment for honor is so that the
holder may be immediately satisfied. But the parties
liable must pay the payor for honor.
This practice is rendered obsolete by letters of
credit.
Bills in Set
SECTION 178. Bills in set constitute one bill. - Where a
bill is drawn in a set, each part of the set being
numbered and containing a reference to the other parts,
the whole of the parts constitutes one bill.
SECTION 179. Right of holders where different parts are
negotiated. - Where two or more parts of a set are
negotiated to different holders in due course, the holder
whose title first accrues is, as between such holders, the
true owner of the bill. But nothing in this section affects
the right of a person who, in due course, accepts or pays
the parts first presented to him.
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SECTION 180. Liability of holder who indorses two or If the bill was negotiated to Y first before Z. Y is the true
more parts of a set to different persons. - Where the owner of the bill, but if Z presents the bill before Y does,
holder of a set indorses two or more parts to different drawee B is not liable to Y.
persons he is liable on every such part, and every
indorser subsequent to him is liable on the part he has
himself indorsed, as if such parts were separate bills. If Y and Z negotiate their parts, then they will be liable as
if they were separate bills.
SECTION 181. Acceptance of bill drawn in sets. - The
acceptance may be written on any part and it must be If B accepts the bills separately, he will be liable for all of
written on one part only. If the drawee accepts more them as if they were separate instruments.
than one part and such accepted parts negotiated to
different holders in due course, he is liable on every such
In all of these scenarios, drawer A is liable for only one bill.
part as if it were a separate bill.

SECTION 182. Payment by acceptor of bills drawn in

sets. - When the acceptor of a bill drawn in a set pays it
without requiring the part bearing his acceptance to be
delivered up to him, and the part at maturity is
outstanding in the hands of a holder in due course, he is
liable to the holder thereon.

SECTION 183. Effect of discharging one of a set. - Except

as herein otherwise provided, where any one part of a
bill drawn in a set is discharged by payment or
otherwise, the whole bill is discharged.

Illustration:    

Exchange for P1,000 November 28, 2014

Pay to X or order the sum of P1,000 (Second and Third

unpaid), thirty days after sight.

To: B Sgd. A

 
Exchange for P1,000 November 28, 2014

Pay to X or order the sum of P1,000 (First and Third

unpaid), thirty days after sight.

To: B Sgd. A

 
Exchange for P1,000 November 28, 2014

Pay to X or order the sum of P1,000 (First and second

unpaid), thirty days after sight.

To: B Sgd. A

If payee X separately negotiates two parts of the bill to Y

and Z, he will be liable on al three parts as if they were
separate instruments.

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

 

 
PART SIX:
DISCHARGE
Discharge of Principal Debtor
Definition
Discharge means the extinguishment of the
obligations arising under the negotiable instrument.
It relieves all parties, whether primary or secondary,
from further liability.
SECTION 119. Instrument; how discharged. – A
negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the
principal debtor;
(b) By payment in due course of the party
accommodated, where the instrument is made or
accepted for accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other at which will discharge a simple
contract for the payment of money;
(d) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
1. Payment In Due Course
SECTION 51. Right of the holder to sue; payment. – The
holder of a negotiable instrument may sue thereon in
his own name; and payment to him in due course
discharges the instrument.
SECTION 88. What constitutes payment in due course. –
Payment is made in due course when it is made at or
after the maturity of the instrument to the holder
thereof in good faith and without notice that his title is
defective.
Payment must be made in money or legal tender,
since the obligation under a negotiable instrument
is a promise or order to pay a sum certain in
money.
Payment must be made by or on behalf the
principal debtor, or else it will constitute a purchase
or negotiation of the instrument.
Parties involved:
MICHAEL T.M. NUÑEZ
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The drawee - payment by the drawee is not
a literal discharge under Section 119 since
he is not the principal debtor in a bill of
exchange. However, his payment will still
constitute a discharge since he is acting as
the representative of the drawer.
Accommodation party - he is not a principal
debtor and therefore his payment will not
discharge the instrument. He may sue on
the debt itself, ant not merely for
reimbursement as a guarantor/surety.
2. Intentional Cancellation
Section 123. Cancellation; unintentional; burden of
proof. – A cancellation made unintentionally, or under a
mistake or without the authority of the holder, is
inoperative; but where an instrument or any signature
thereon appears to have been cancelled the burden of
proof lies in the party who alleges that the cancellation
was made unintentionally, or under a mistake or without
authority.
Cancellation is made by destroying the negotiable
instrument, or stamping words of cancellation on its
face.
Whenever an instrument appears to be cancelled,
the presumption is that such cancellation is
intentional. The burden of proving that such
cancellation was unintentional is on the party
alleging it.
3. Any other act that will discharge a
contract
Article 1231 (NCC). – Obligations are extinguished by:
(1) Payment or performance;
(2) By loss of the thing due;
(3) By condonation or remission of a debt;
(4) By confusion or merger of the rights of the creditor
or debtor;
(5) By compensation;
(6) By novation.
Other causes for extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in
this code.
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Aside from the causes enumerated in Article 1231
of the Civil Code, an instrument may also be
discharged by rendition of services, transfer of
property, foreclosure of the mortgage or
acceptance of a part as full settlement.
4. Reacquisition of the principal debtor in
his own right
Requisites:
a. Principal debtor acquires at or after
maturity.
b. Reacquisition must be in his own right.
If the principal debtor reacquires the instrument
before maturity, it does not result in a discharge,
and he may further negotiate the instrument
There are instances when the principal debtor
reacquires but not in his own right: as agent,
pledgee, etc.
5. Renunciation of holder
SECTION 122. Renunciation by holder. – The holder may
expressly renounce his rights against any party to the
instrument, before, or after its maturity. An absolute
and unconditional renunciation of his rights against the
principal debtor made at or after the maturity of the
instrument, discharges the instrument. But a
renunciation does not affect the rights of a holder in due
course without notice. A renunciation must be in
writing, unless the instrument is delivered up to the
person primarily liable thereon.
Two ways of renouncing:
a. Written declaration to that effect
b. Surrender of the instrument to the party
primarily liable.
Effect of renunciation:
If made in favor of principal debtor - instrument is
discharged, provided that such renunciation is
absolute and unconditional.
MICHAEL T.M. NUÑEZ
If made in favor of any party - it will discharge only
such party and parties subsequent but not the
instrument.
As to the holder in due course - renunciation has
no effect if he takes it without notice of the
renunciation.
Discharge of Secondary Parties
SECTION 12O. When parties secondarily liable on,
discharged. – A person secondarily liable on the
instrument is discharged:
a) By any act which discharges the instrument;
b) By the intentional cancellation of his signature by
the holder
c) By the discharge of a prior party;
d) By a valid tender of payment made by a prior party.
e) By a release of the principal debtor, unless the
holder's right of recourse against the party secondarily
liable is expressly reserved;
f) By any agreement binding upon the holder to extend
the time of payment, or to postpone the holder's right to
enforce the instrument, unless made with the assent of
the party secondarily liable, or unless the right of
recourse against such party is expressly reserved.
1. By discharge of the instrument
See previous section, supra.
Note, that discharge of the instrument discharges
the parties secondarily liable, but discharge of the
parties secondarily liable does not discharge the
instrument.
2. By intentional cancellation of signature
See notes on Striking out indorsements, supra.
3. By the discharge of a prior party
This applies to discharge of a prior party by virtue of
the act of the holder and not by operation of law.
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4. Tender of Payment by Prior Party if G enforces payment from C, C may go after B or A, but
not to D, E, and F.
Where an instrument is payable at a bank, the fact
that the maker had money deposited is not valid
tender of payment. There must be intention to
apply the money to the payment of the instrument.

5. Release of Principal Debtor

General rule: release of principal debtor releases

parties secondarily liable.

Exception: Right of recourse is expressly reserved.

6. Extension of Time of Payment

General Rule: Effect of discharge

Exception: Right of recourse expressly reserved or

party secondarily liable assented to the extension of
time.

Other Grounds for Discharge of Secondary

Parties

a. Renunciation by holder
b. Taking a qualified acceptance
c. Failure to make presentment
d. Failure to give notice of dishonor
e. Certification at the instance of holder

Effect of Reacquisition

SECTION 50. When prior party may negotiate

instrument. - Where an instrument is negotiated back to
a prior party, such party may, subject to the provisions
of this Act, reissue and further negotiable the same.
But he is not entitled to enforce payment thereof
against any intervening party to whom he was
personally liable.

Example:

A (maker) to B
B to C
C to D
D to E
E to F
F to C
C to G (holder)

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO

4 BILLS, NOTES AND COMMERCIAL PAPERS
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PART SEVEN:
OTHER FORMS OF
COMMERCIAL PAPER
Certificate of Deposit
A receipt of a bank for certain sum of money
received upon deposit.
Generally framed as to constitute a promissory
note.
If such certificate conforms to Section 1, it is a
negotiable instrument.
It is more of an investment paper since it is not
issued attendant to a commercial transaction.
Bonds and Debentures
Evidences of indebtedness issued by the
government, municipal, and other public
corporations, and by all sorts of private
corporations.
They run for long periods of time, and assure
regular income to holders in the form of annual
interest. This interest is evidenced by coupons.
Negotiable bonds are governed by the NIL as
evidenced by Section 65, supra.
Drafts and Letters of Credit
A bank draft is a bill of exchange used to facilitate
transactions between persons physically remote
from each other.
A letter of credit is one whereby a person requests
another person to advance money or give credit to
a third person and promises that he will repay the
same the person making the advancement, or
accept bills drawn upon himself for the like amount.
CODE OF COMMERCE, ARTICLE 567. Letters of credit are
those issued by one merchant to another for the
purpose of attending to a commercial transaction.
MICHAEL T.M. NUÑEZ
ARTICLE 568. The essential conditions of letters of
credit shall be:
1. To be issued in favor of a definite person and not to
order.
2. To be limited to a fixed and specified amount, or to
one or more undetermined amount, but all within a
maximum limit of which has to be stated exactly.
ARTICLE 569. The drawer of a letter of credit shall be
liable to the person on whom it was issued for the
amount paid by virtue thereof, within the maximum
fixed therein.
Letters of credit may not be protested even they should
not be paid, nor shall the bearer thereof acquire any
right of action by reason of such non-payment against
the person who issued it.
The person paying shall have the right to demand the
proof of the identity of the person in whose favor the
letter of credit was issued.
ARTICLE 570. The drawer of a letter of credit may annul
it, informing the bearer and the person to whom it is
addressed of such revocation.
ARTICLE 571. The bearer of a letter of credit shall pay
the amount received to the drawer without delay.
Should he not do so, an action involving execution may
be brought to recover it, with legal interest and the
current exchange in the place where it is repaid.
ARTICLE 572. If the bearer of a letter of credit does not
make use thereof within the period agreed upon with
the drawer, or, in default of a period fixed, within six
months, counted form its date, in any point in the
Philippines, and within twelve months anywhere outside
thereof, it shall be void in fact and in law.
Under these provisions, a letter of credit is not a
negotiable instrument because it does not fulfill the
requisites of Section 1.
Certificate of Stock
The certificate of stock does not contain any order
or promise to pay in money; therefore it is not
negotiable.
It is instead quasi-negotiable in character because
the transferee is decreed a better title than his
transferor.
A purchaser in good faith and for value without
notice of defect is protected in his acquisition.
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The only exception is if the certificate of stock was

stolen while signed in blank. In this case the holder
cannot acquire a better title than the owner.

Negotiable Documents of Title

A document of title to goods includes bills of lading,

dock warrants, quedans, or warehouse receipts.

These documents are governed by Articles 1507-

1520 of the Civil Code.

Table 6.1. Negotiable instruments v. Negotiable

Documents of Title
Negotiable Documents of Title
Instruments
Form governed by Section Form not governed by
1 of NIL Section 1of NIL
Right to recourse against No recourse against
intermediate parties intermediate parties
secondarily liable
Holder in due course has Transferee merely steps
better rights than into the shoes of the
transferor transferor
Order or promise to pay Subject is goods
money
Instrument itself is Instrument is merely
property of value evidence of title

MICHAEL T.M. NUÑEZ A2016 PROF. ROGELIO QUEVEDO