1

LECTURE NOTES ON NEGOTIABLE INSTRUMENTS pay on demand or at a fixed or determinable

Act No. 2031 period of time a sum certain in money to order or
bearer.

PN BOE The ORIGINAL parties are the drawer (he draws

2 parties: maker 3 parties: drawer, up the bill and gives the order to pay money to a third
and payee payee, party) drawee (the party upon whom the bill is drawn. He is
drawee/acceptor the person to whom the bill is addressed and is ordered to
Promise to pay Order to pay pay. Under Section 62, he becomes an ACCEPTOR when
Maker is primarily Drawee/acceptor he indicates a willingness to accept responsibility for the
liable is primarily liable payment of the bill), and the payee (the partying whose
Secondarily liable: Secondary liable: favor the bill is drawn or is payable to) SUBSEQUENTLY, the
indorsers and drawer, indorsers holder (as defined in Section 191 is the person to whom the
persons negotiating and persons instrument is delivered to, he may be payee or any
by mere delivery negotiating by mere subsequent person holding the note (or bill) by delivery or
delivery by delivery and endorsement.
APPLICABILITY OF THE LAW
Note: that a check is not another kind of negotiable
It applies only to negotiable instruments that meet instrument, rather it is a form of a bill of exchange.
the requirements laid down in Section 1 of the law.
Otherwise, any case not provided for shall be governed by Table of Differences between Negotiable
the provisions of existing legislation, or in default thereof, Instruments
by the rules of the law merchant (Under Section 196, the Maker is liable primarily and Drawer’s liability is
law merchant refers to the custom of merchants or rules NO conditions precedent is secondary and attaches
that have been developed under common law, consisting required ONLY upon compliance with
of primarily of usages of trade previously proven in court or conditions precedent:
ratified by legal decisions. It is also known as the Custom of a) Presentment
Merchants). Thus, the Civil Code, the Bouncing Check Law b) Dishonor
and the Revised Penal Code provisions on Estafa applies c) Proceedings (for
only to supply any deficiencies in cases not covered by the dishonoring)
Act.
No need to present for Needs to be presented for
 In the case of GSIS vs. Court of Appeals, 170 SCRA acceptance acceptance in some cases as
533, the Supreme Court on the issue as to required by law
whether private respondents were Life of a promissory note: Life of a bill of exchange:
accommodation parties under Section 29, it said issue, negotiation, issue, negotiation,
that the arguments were misplaced as the indorsements, presentment indorsements, presentment
promissory note executed was not negotiable for payment, dishonor by for acceptance, dishonor by
because it was not payable to order or to bearer. non-payment, notice of non-acceptance,
dishonor and discharge presentment by payment,
WHAT IS A NEGOTIABLE INSTRUMENT dishonor by non-payment,
notice of dishonor and
It is a transferable instrument containing an discharge
unconditional promise or order to pay to a holder or to the If payable on demand, it If payable on demand, it
order of a holder upon issue, possession, demand or at a must be presented for must be presented for
specified time. payment within a reasonable payment within a reasonable
time after its issuance time from it last negotiation
COMMON KINDS OF NEGOTIABLE INSTRUMENTS

1. Promissory Note is an unconditional promise in BOE Check

writing made by one person to another, signed by
Drawee may be any person Always drawn upon a bank
the maker, engaging to pay on demand, or at a
fixed or determinable future time, a sum certain in Payable on demand or at Always payable on demand
money or to bearer. fixed or determinable future
time
The ORIGINAL parties to a promissory note are the It is necessary that it be Not necessary that it be
maker (one who makes the promise and signs the presented for acceptance presented for acceptance (it
instrument), the payee (party to whom the promise is is presented at once for
made or instrument is payable), and SUBSEQUENTLY, the payment)
holder (as defined in Section 191 is the person to whom It is not necessary that Drawn on deposit
the instrument is delivered to, he may be payee or any drawer has money with the
subsequent person holding the note (or bill) by delivery or drawee
by delivery and endorsement. Must be presented for Must be presented for
payment within a reasonable payment within a reasonable
2. Bill of Exchange under Section 126 is an time after last negotiation time after its issue (6 mos.)
unconditional order in writing addressed by one
person to another, signed by the person giving it,
requiring the person to whom it is addressed to

FUNCTIONS AND IMPORTANCE OF NEGOTIABLE
INSTRUMENTS
1. While not legal tender (Article 1249, Civil Code and
Section 52 of the New Central Bank Act, RA 7653 which
provides that only notes and coins issued by it possess
legal tender power, and as for coins up to PHP 50.00 for
denominations of 25 centavos and above and up to PHP
10.00 for denominations of 10 centavos and below), they
are recognized substitutes for money as its negotiability
allows it be transferred from one hand to another, subject
however to the financial ability of the parties to honor the
instrument.
1.1 Note though that in Fortunado vs. Court of
Appeals, 196 SCRA 26, the delivery of checks is sufficient in
the exercise of the right of redemption. The right of
redemption is a privilege and is not an ordinary obligation.
Hence Article 1249 does not apply.
2. They constitute, checks particularly, as the media
of exchange for most commercial transactions. The ability
to purchase is thereby increased without need for actual
money to be produced and delivered.
3. They serve as a medium of credit transaction.
They enable the transaction of business as the party to
whom they are delivered can treat the promises contained
therein as cash.
3.1 Note also Section 60 of RA 7653 that states that
checks representing demand deposits do not have legal
tender power and their acceptance in the payment of
debts, both public and private, is at the option of the
creditor. Provided, however, that a check which has been
cleared and credited to the account of the creditor shall be
equivalent to delivery to the creditor of cash.
TWO DISTINCTIVE FEATURES OF NEGOTIABLE
INSTRUMENTS
1. Negotiability which allows instruments,
negotiable in character to be transferred from one person
to another so as to constitute the transferee as a holder.
2. Accumulation of secondary contracts
because the indorsers of the instrument become
secondarily liable not only to their immediate transferee
but also to any holder, subject to valid defenses.
There is thus greater security brought upon the instrument
as whoever takes it has greater chances of recovery as
more people are liable on the instrument and
consequently, raises its level of acceptability.
FORMAL REQUISITES OF NEGOTIABLE
INSTRUMENTS
A negotiable instrument is primarily a contractual
obligation to pay money, whose negotiability depends on
its form and content as dictated by Section 1 which
provides for the formal requisites of a negotiable
instrument, thus:
1. It must be in writing and signed by maker or
drawer;
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2. It must contain an unconditional promise or
order to pay a sum certain in money;
3. It must be payable on demand, or at a fixed or
determinable future time;
4. It must be payable to order or to bearer; and
5. Where it is a bill of exchange, drawee must be
named or otherwise indicated therein with
reasonable certainty.
The basic GUIDING PRINCIPLE as laid down in Section 10
is that the instrument need not follow the language of the
law, but the terms must be sufficient to clearly indicate an
intention to conform to the requirements of the law.
Hence, the use of a foreign language or grammatical errors
does not destroy negotiability.
NOTE THOUGH the EXCEPTION FOUND IN SECTION 8
pertaining to an instrument payable to order, where literal
compliance with the law is necessary
Illustrations:
1. The following promissory note is not negotiable
because it is neither payable to order or to bearer:
“Received P10,000.00 payable after World War II.”
SEE: Jimenez v. Bucoy 103 Phil. 40 (1958)
2. Conformity with all requirements of NIL makes an
instrument a bill of exchange, even if acceptance is not
made since the latter is important only in determination of
liabilities of parties. SEE: Phil. Bank of Commerce v. Aruego
102 SCRA 530 (1981)
A. INSTRUMENT MUST BE IN WRITING
 Physical integrity of Whole Instrument – the
negotiability of an instrument must be determined
only from the face of the document itself and not
elsewhere. (Des Moines Savings Bank v. Arthur,
163 La. 205, 143 NW 556)
 A commercial transaction may be verbal unless
the law requires a written document for its validity.
Writing is required for negotiable instruments.
Hence, there can be no verbal promissory note nor
a verbal bill of exchange.
In short, the requisites for the validity of a
negotiable instrument are:
a. Consent
b. Consideration
c. subject matter
d. Form
 As a general rule, bills, notes and other
instruments of similar nature are not subject to be
varied or contradicted by parol or extrinsic
evidence pursuant to the rule that “long
experience that written evidence is so much more
certain and accurate than that which rests in
fleeting memory only, that it would be unsafe,
when parties have expressed the terms of their

contract in writing, to admit weaker evidence to
control and vary the stronger and to show that the
parties intended a different contract from that
expressed in the writing signed by them BUT if
there is an allegation of fraud in the execution of
promissory note, such as when the note having a
face value of – P50,000.00 was alleged to have
been signed by the makers at only P5,000.00,
where parol contemporaneous agreement was the
inducing and moving cause of the written contract,
it may be shown by parol evidence; but it must be
established by clear and convincing evidence,
mere preponderance of evidence not even being
adequate. (Inciong v. Court of Appeals, 257 SCRA
578)
B. IT MUST BE SIGNED BY MAKER OR DRAWER
 Any inscription or even stamping will suffice
provided that it is meant to function as the
signature of the party.
 Persons who write their names on the face of a
note are makers and are liable as such, and their
solidary liability is made certain by the presence of
the phrase “joint and several.” (Republic Planters
Bank v. CA, 216 SCRA 738)
C. IT MUST CONTAIN AN UNCONDITIONAL
PROMISE OR ORDER TO PAY A SUM CERTAIN
IN MONEY
 An unconditional promise or order to pay is
required because the purpose of a negotiable
instrument is to take the place of money. Hence, if
the instrument may or may not mature, no one
will have faith on negotiable instrument
embodying it. Thus, the promise or order must be
ABSOLUTE.
 Any word equivalent to an order would suffice, and
words of courtesy would not be inconsistent with
the order; however, a mere request or
authorization would not be enough.
 The promise must be found in the instrument
itself; the mere existence of a debt does not
amount to a promise. The use of the word “order”
is deemed equivalent to promise.
 An acknowledgment of debt becomes a promise
to pay by addition of words implying a promise of
payment, such as “payable on a given day,”
“payable on demand,” “paid when called for,”
“I.O.U.” (Jimenez v. Bucoy, 103 Phil. 40 [1958]).
 Nature of Condition (Art. 1179, Civil Code) –
A distinction must be made between a condition (a
future and uncertain event which may or may not
happen) and a period (one that is certain to
happen though the time when it will happen is not
known). An instrument embodying an obligation
that is subject to a condition is non-negotiable;
whereas, that with an obligation subject to a
period is negotiable.
Illustrations:
1.
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“Pay to A or order P500 if it rains on 28 June 2002.”
(Sgd.) “B”
“If it rains on 28 June 2002” is a condition, one which may
or may not happen. The instrument is non-negotiable.
Under the last sentence of Sec. 4, if it indeed rains on 28
June 2002 and the condition is thereby fulfilled, the
instrument which was originally conditional and non-
negotiable does not thereby become negotiable by the
fulfillment of the condition.
“10 days after X dies, pay A or order P500.”
(Sgd.) “B”
When X will die is not certain, but X is sure to die. This is a
period. The instrument is negotiable.
2. Under Sec. 39, a condition in the endorsement
would not destroy negotiability of the instrument. Thus:
“Pay A or order P500.”
(Sgd.) “B”
[At the back:]
“Pay to X if it rains on 28 June 2002.”
(Sgd.) “A”
B, upon presentment for payment, may pay immediately
ignoring whether the condition is fulfilled. Should B choose
to pay immediately and the condition is not fulfilled, then
the quasi-contract of solutio indebiti arises. (Article 2154,
Civil Code).
3. Under Section 3(a) an “indication of a particular
account to be debited with the amount” does not
make the promise or order conditional. We have to
distinguish between the use of the words “fix” and
“indicate.” If the instrument fixes the fund from
where payment has to be made, so that payment
cannot be made from other funds, the instrument
is not negotiable. But if the instrument merely
indicates the fund from where payment is to be
made, so that the obligor will still be liable even if
the indicated fund is depleted, then the instrument
is negotiable.
NOTE:
a. A check of itself does not operate as an
assignment of any part of the funds to the
credit of the drawer with the bank, and the
bank is not liable to the holder, unless and
until it accepts or certifies the check. (Section
189)
b. A treasury warrant is not a negotiable
instrument because it is to be paid from a
particular fund. (Abubakar v. Auditor General,
81 Phil. 359 [1948])
c. Indication of a particular fund out of which
reimbursement is to be made.
d. A statement of the transaction which gives
rise to the instrument under Section 3(b)
like:

“Pay to A or order P500 arising from our rice deal.”
(Sgd.) “B”
SEE: Elizalde & Co., Inc. v. Biñan Trans. Co. (CA) 58 O.G.
5886 (1960)
Reference in a promissory note to some extrinsic
agreement, in order to destroy its negotiability, must be
such as to indicate unmistakably that the paper is to be
burdened with conditions of that agreement. When the
reference is a simple recital of the consideration for which
the paper was given, or is a mere mention of origin of the
transaction, its negotiability is not affected.
D. TO PAY A SUM CERTAIN IN MONEY:
 The sum is certain when what is to be paid is a
fixed amount of money or alternatively, if from the
face of the instrument it can be mathematically
computed.
Under Section 2, the sum is still certain even
when it is
a. With interest stipulated THOUGH Usury Law
now ineffective. (Liam Law v. Olympic Sawmill
Co., 129 SCRA 439 [1984]; CB Circular No.
905, s. 1982, 78 OG 7336).
b. By stated installments, though the
installments must not only be stated, but the
maturity of each installment must be fixed or
determinable.
c. By stated installments, with Acceleration
Clause
d. With either fixed or current rate of exchange,
or payable in foreign exchange (Uniform
Currency Law, R.A. 529, repealed by R.A.
8183).
e. With costs of collection or attorney’s fees, in
cases where payment is not made at maturity
NOTE THOUGH that at maturity, the
instrument is no longer fully negotiable since
any transferee acquiring it would not be a
holder in due course under Sections 52 and
58.
 Section 2 illustrates instances where the sum
payable is still a sum certain. This must be
correlated with Section 5 which provides that “an
instrument which contains an order or promise to
do any act in addition to the payment of money is
not negotiable.” Thus, in the following illustration,
the instrument is not negotiable, to wit:
“Pay A or order P500 or 5 sacks of rice.”
(Sgd.) “B”
However, under Sec. 5(d), the instrument is not rendered
non-negotiable if it is the holder who is given an election to
require something to be done in lieu of payment of money.
Thus, in the following illustration, the instrument if
negotiable because the obligation of the maker/acceptor to
pay in a sum certain, if the holder so chooses, is still
absolute, to wit:
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“Pay A or order P500 but the holder may demand delivery of 5
sacks of rice.”
(Sgd.) “B”
Illustrations
As provided for under Sec. 2, the following are still
negotiable instruments, to wit:
1.
“Pay to A or order P500 with interest at 12% per annum.”
2.
“Pay to A or order P500 payable in monthly installments of
P100.”
3.
“Pay to A or order P500 in monthly installments of P100 and
failure to pay one installment will make the entire fall due
immediately.”
4.
“Pay to A or order P500 and in the event of litigation, I
agree to pay court costs and attorney’s fees.”
5.
“Pay A or order $500.”
The paragraph of Section 2 on foreign exchange is deemed
to have been amended by Rep. Acts 529 and 4100. The
instrument is valid but what is void is the obligation to pay
in foreign currency. SEE: Arrieta v. NARIC, 10 SCRA 79
[1964]).
While the agreement to pay in foreign exchange is declared
null and void and of no effect, what the law specifically
prohibits is payment in currency other than legal tender; it
does not defeat a creditor’s claim for payment, but to be
made in lawful Philippine legal tender. SEE: Ponce v. Court
of Appeals 90 SCRA 533 (1979)
Where the parties stipulate payment in foreign currency,
the rate of exchange is determined not at the time of
making of the instrument but at the time of payment, and
not the rate at the time the obligation was incurred. SEE:
Kalalo v. Luz 34 SCRA 337 (1970)
E. IT MUST BE PAYABLE ON DEMAND, OR AT A
FIXED OR DETERMINABLE FUTURE TIME
Under Section 7, an instrument is payable on
demand
a. when expressed to be payable on demand, or at
sight, or on presentation
b. when no time for payment is expressed
Special Rule: When an instrument is issued, accepted,
or endorsed when overdue, it is, as regards the person
 5
so issuing, accepting or indorsing it, payable on “Pay to A or order P500.”
demand. (Sgd.) “B”
[A is neither maker, drawer or drawee.]
Illustrations on payable on demand:

(a) “On demand pay to A or order P500.”

b. Drawn payable to the drawee as payee. Here
(b) “At sight pay to A or order P500.” (This applies only to a
being both the drawee and the payee, the drawee
bill of exchange.)
can pay himself upon maturity from the funds
(c) “On presentation pay to A or order P500.” (This
belonging to the drawer in his possession: once
applies only to a bill of exchange.)
accepted is equivalent to a promissory note in
(d) “Pay to A or order.” (No date expressed.)
favor of the drawer.
(e) “10 days after date (16 April 2002) pay to A or order
P500.” (Provided, That this instrument is issued, “Pay to C or order P500.”
accepted or endorsed when overdue, as far as the (Sgd.) “B”
person issuing, accepting or indorsing is concerned, “To: C”
the instrument is payable on demand.) [B can demand C to pay himself because B has money or
credit with C.]
A DETERMINABLE FUTURE TIME as provided by
Section 4 is:
c. Maker as payee. Here the maker promises as
follows “ I promise to pay to the order of myself,
(a) At a“10 days
fixed after after
period date pay
datetoorAsight.
or order P500.”
10,000” : the instrument is not complete until the
(Sgd.) “B” maker endorses under Section 184.

“10 days after sight pay to A or order P500.” d. Drawer as payee: this authorizes the drawee to
pay himself/drawer.
(Sgd.) “B” “Pay to B or order P500.”

(f) On or before a fixed or determinable future time (Sgd.) “B”

specified therein.
On or before 9 July 2004 pay to A or order P500.” e. Two or more payees jointly, or one or more several
(Sgd.) “B” payees.
(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though the time [Check]
of happening be uncertain. “Pay to B or order P500.”
(Sgd.) “B”
10 days after X dies pay to A or order P500.
(Sgd.) “B” “To: PNB”

The specification “before” a specified event, would render [This means that B has a deposit with PNB and he
the instrument non-negotiable because the date of wants to withdraw the amount indicated.]
maturity can be determined only after the note has
become overdue.
(f) The holder of an office for the time being.
A stipulation that the instrument shall be paid “when my
means permit me to do so” although by law would “Pay to A or X or order P500.”
constitute a period would still render the instrument non-
negotiable because the instrument is not deemed payable (Sgd.) “B”
at a “fixed or determinable future” since the term of the
period would have to be set by the courts under Articles [Since the conjunction “or” is used, then the endorsement of
1180 and 1197, Civil Code. either A or X will be sufficient for the negotiation of the
instrument.]
(d) Instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect. (West Point Banking Co. v. Gaunt, 34 ALR 862).
“Pay to A and X or order P500.”
F. IT MUST BE PAYABLE TO ORDER OR TO
(Sgd.) “B”
BEARER:
[Since the conjunction “and” is used in the above-illustrated
An instrument is payable to order under Section 8 when:
instrument, then the endorsements of both A and X are
necessary for the negotiation of the instrument.]
a. Drawn payable to the order of a specified person
or to him or his order. The payee is not the maker,
drawer or drawee.
In case the instrument is endorsed, then it will be like this:

“Pay to City Treasurer of Baguio City or order

P500.”
(Sgd.) “B”

City Treasurer of Baguio City
“By:__________
(g) When the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty. This requirement
is imposed as if there is no payee, there is
NOBODY WHO COULD GIVE THE ORDER OR
AUTHORITY TO COLLECT. THERE IS NO ONE WHO
CAN ENDORSE THE DOCUMENT AND CAN THUS
BE SAID TO BE NOT NEGOTIABLE.
It would seem in Equitable Banking Corp. v. IAC, 161 SCRA
518 (1988), the contravention of this rule (such as when
the check is payable to “Equitable Banking Corporation
order of A/C of Cavilled Enterprises, Inc.”) would not render
the instrument non-negotiable but would merely place the
burden of ambiguity to the person who caused it under Art.
1377 of the Civil Code.
 Subject to the rules in Sections 13, 14 and 15
on incomplete instruments, leaving the payee
blank may make the instrument non-negotiable.
This is because an instrument payable to order
may be negotiated only by endorsement
and delivery.
There are only two ways to make an instrument payable to
order, as provided under Sec. “8”
“Pay to A or order.”
(Sgd.) “B”
“Pay to the order of A.”
(Sgd.) “B”
Under Section 9, a negotiable instrument is payable to
bearer:
(a) When it is expressed to be so payable to bearer:
“Pay to bearer P500.”
(Sgd.) “B”
(b) When it is payable to a person named therein or
bearer:
“Pay to A or bearer P500.”
(Sgd.) “B”
(c) When it is payable to the order of a fictitious or
non-existing person, and such fact was known to the
person making it so payable:
“Pay to John Doe or order P500.”
(Sgd.) “B”
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The clause “and such fact is known to the person making it
so payable,” does not require that it should be the maker
himself who is chargeable with the notice. Otherwise, “the
whole provisions would be ineffective in practically every
case where the purpose of the person drawing the check
was fraudulent.” (Mueller & Martin v. Liberty Ins. Bank, 219
S.W. 465, 187 Ky 44 [1920]).
(d) When the name of the payee does not purport to
be name of any person.
“Pay to cash or order P500.”
(Sgd.) “B”
There is no need to use “order” or equivalent word to
qualify the instrument. A check payable to the order of
“cash” is payable to bearer and the bank may pay it to the
person presenting it for payment without the drawer’s
endorsement. (Ang Tek Lian v. CA, 87 Phil. 383 [1950]).
(e) When the only or last endorsement is an
endorsement in blank.
“Pay to A or order P500.”
(Sgd.) “B”
(And the only or last endorsement at the back is
a blank.)
 Bearer means the person in possession of a bill or
a note which is payable to bearer. (Sec. 191). A
person who steals an instrument payable to
bearer is a “bearer.” (Mass. Nat. Bank v. Marshall,
25 Pac. 214).
- Words equivalent to “bearer” are: “Assignee,”
“holder” (Wilson County v. Third Nat. Bank of
Nashville, 103 US 770); “Possessor”; “on return of
this certificate properly endorsed” (Felton v.
Commercial Nat. Bank, 177 NE 52);“Order of the
bearer” (American National Bank v. Kerley, 220
Pac 116, 32 ALR 262).
- Words unaccepted as equivalent to “bearer”: “To X
or his collector”; “To X or his agent”; “To bearer B.”
(Weaver v. Scott, 32 Iowa 22)
 A bearer instrument may be negotiated by
mere delivery. When a bearer instrument is not
delivered for purposes of negotiation but
physically delivered merely as security for another
obligation, there is no negotiation in the sense of
transfer of legal title to the instrument and would
constitute the subsequent holder merely as a
holder for value and not a holder in due course.
Accordingly, a negotiation for such purpose cannot
be effected by mere delivery of the instrument
since, necessarily, the terms thereof and the
subsequent disposition of such security, in the
event of non-payment of the principal obligation,
must be contractually provided for. SEE: Caltex
(Phils.) v. Court of Appeals 212 SCRA 448 (1992)

G. IN BILLS OF EXCHANGE, DRAWEE MUST BE
NAMED OR OTHERWISE INDICATED THEREIN
WITH REASONABLE CERTAINTY
 The purpose of this requirement is to enable the
payee or the holder to know upon whom he has to
call for acceptance or payment.
Note however, that under Section 14, the omission of
drawee may be filled in later on.
WHAT PROVISIONS IN A NEGOTIABLE INSTRUMENT
DO NOT AFFECT NEGOTIABILITY
The general rule under Section 5 is that an instrument is
rendered non negotiable if it contains a promise or order to
do anything in addition to the payment of money as what
transpires is that while the promise or order to pay money,
the other thing would have to be assigned BUT BY WAY OF
EXCEPTION, the following provisions do not affect
negotiability
a. Authorizes the sale of collateral securities in case
the instrument be not paid at maturity. The
additional act is to be done after the date of
maturity of the instrument and when it is no longer
negotiable.
b. Authorizes a confession of judgment if the
instrument be not paid at maturity.
Confession of judgment clauses are void as being
against public policy to give a person his day in court;
however, such nullity does not affect the negotiability of
the instrument. SEE: National Bank v. Manila Oil Refining
Co., 43 Phil. 444 [1922].
Where an agreement stipulates for the confession
of judgment prior to any actual litigation the stipulate is
void for being contrary to public policy. However, if the
creditor sues, the debtor can go to court and only then
confess judgment. This is valid if done by the debtor
himself. SEE: In Traders Insurance v. Dy Eng Biok, 104 Phil.
806 (1958)
c. Waives the benefit of any law intended for
advantage or protection of obligor. Examples:
Waiver of Notice of Dishonor under Section 110,
Waiver of Protest under Section111, Presentment
for Payment under Section 70
d. Gives holder an election to require something to
be done in lieu of payment of money.
BUT nothing in Section 5 shall be validate a provision or
stipulation that is otherwise illegal.
The TEST: The test of negotiability is whether or not the
promise would give rise to a cause of action for breach of
contract if the additional act is not done. If it does, the
instrument is rendered non-negotiable.
WHAT OMISSIONS IN A NEGOTIABLE INSTRUMENT
DO NOT AFFECT VALIDITY AND NEGOTIABILITY
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The following omissions do not affect the validity and
negotiability of an instrument
1. Non-dating of instrument.
2. Non-specification of value given, or that any value
has been given.
3. Non-specification of place where it is drawn or
place where it is payable.
4. Bears a seal.
5. Designation of particular kind of currency in which
payment is to be made.
Under Sec. 52, a requisite for a holder in due course is that
instrument is “complete and regular” on its face. Section
6 therefore provides for certain omissions that do not
destroy completeness or regularity, as other portions of the
law supplement these omissions. Thus:
“Pay to A or order P500.”
(Sgd.) “B”:
This instrument has omissions: (a) no date; (b) no place of
payment; and (c) no statement of value received.
Note Date: This is supplied by Sec. 17(c) which states
that where instrument is not dated, it will be considered
dated as of time it was issued.
No Place of Payment: This is supplied by Sec. 73 which
provides: Where no place of payment is specified, but the
address of person to make the payment is given in the
instrument and it is there presented;
Where no place of payment is specified and no address is
given and instrument is presented at usual place of
business or residence of person to make payment;
In any other case if presented to the person to make
payment wherever he can be found, or if presented at his
last known place of business or residence.
No Statement of Value Received: Supplied by Sec. 24
which provides that “every negotiable instrument is
deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears
thereon to have become a party for value.”
WHAT ARE THE RULES OF CONSTRUCTION
COVERING NEGOTIABLE INSTRUMENTS
Under Section 17, the following rules of construction are
provided:
1. The sum expressed in words takes precedence
over the sum expressed in numbers; except where the
words are ambiguous or uncertain, then reference to the
figures should be made.
2. Where interest is stipulated, without specification
of the starting date, the interest runs from the date of the
instrument, and if undated, from the issue thereof.

3. An undated instrument is considered to be dated
as of time it is issued.
4. Written provisions prevail over printed provisions
of instrument.
5. Where the instrument is ambiguous as to whether
it is a note or a bill, the holder may treat it as either at his
election.
6. When the capacity of signatory is not clear, he is
to be deemed an endorser. The signature of the maker is
usually affixed at the lower right hand corner while that of
the drawee is at the lower left hand corner, the holder
negotiates by signing at the back thereof. If a doubt arises,
he is deemed an endorser and assumes the least liability.
7. “I promise to pay” when signed by two or more
persons is deemed to be jointly and severally signed, i.e.,
solidary liability.
“I promise to pay A or order P500.”
(Sgd.) “B”
(Sgd.) “C”
 Liability of B and C is solidary.
(a) BAR QUESTION: What is the liability of B and C?
“Promise to pay A P500.00.”
(Sgd.) “B & C”
ANSWER: Joint because the above instrument is not a
negotiable instrument, thus the general rule under civil law
of joint liability applied in the absence of stipulation that
liability should be solidary.
(b) If the instrument reads:
“I/We promise to pay A or order P500.00.”
(Sgd.) “B & C”
Held: B and C are liable solidarily since “I” dominates. SEE:
PNB v. Concepcion Mining, 5 SCRA 745 (1962)
STEPS IN THE ISSUANCE OF A NEGOTIABLE
INSTRUMENT
The steps in the issuance of a negotiable instrument are:
1. The act of writing the instrument completely and
in accordance with Section 1 of the NIL.
2.
The delivery of the complete instrument by the
maker or the drawer to the payee or holder with
the intention of giving effect to it
FORM, INTERPRETATION AND ISSUANCE OF
NEGOTIABLE INSTRUMENTS
A. PRESUMPTION AS TO DATE:
 Importance of Date of Instrument: Determining
when instrument, endorsement or acceptance is
8
due (maturity); and Determining prescription of a
cause of action.
 Date is not an essential element for negotiability.
 An undated instrument is considered to be dated
as of the time it was issued under Section 17.
 Where an instrument or acceptance or
endorsement thereon is dated, such date is
deemed prima facie to be the true date of the
making, drawing, acceptance, or endorsement, as
the case may be under Section 11, to be read with
Sections 53 and 71.
This is important especially in an instrument that is payable
on demand (Section 71), in order to determine whether
holder is a holder in due course since one of the requisites
of such is that he became holder thereof before it was
overdue. (See Section 53).
 The instrument is not invalid for the reason only
that it is ante- dated or post-dated, provided this is
not done for illegal or fraudulent purpose. The
person to whom instrument so dated is delivered
acquires the title thereto as of the date of delivery
under Section 12.
Ante-dating is when the instrument contains a date earlier
than the true date of issuance, while post-dating is when
the instrument contains a date later than the true date of
issuance.
 WHEN HOLDER IS AUTHORIZED TO PUT A DATE
ON THE INSTRUMENT- under Section 13, where an
instrument expressed to be payable at a fixed
period after date is issued undated, or where the
acceptance of an instrument payable at a fixed
period after sight is undated, any holder may
insert therein the true date of issue or acceptance,
and the instrument shall be payable accordingly.
Illustrations:
(a) When instrument is expressed to be payable at a
fixed period after date, but it is issued undated:
“10 days after date pay A or order P500.”
(Sgd.) “B”
The holder of such an instrument is authorized to insert the
correct date. But if the holder inserts the wrong date, the
maker shall be liable on wrong date as penalty for his
neglect in leaving the instrument undated.
(b) Where acceptance of instrument payable at a
fixed period after sight is undated:
“10 days after sight, pay A or order
P500.”

(Sgd.) “B”
“To: C”
“Accepted
(Sgd. “C”)
Holder is authorized to insert the proper date of
acceptance. But if he inserts wrong date, acceptor shall be
liable on this wrong date as a penalty for his neglect in
leaving his acceptance undated.
DOES NOT APPLY TO an instrument payable on demand,
although undated, for its maturity is already fixed NEITHER
to an undated bill of exchange payable at a fixed period
after sight (Example: 30 days after sight) BUT if it is the
acceptance that is undated, the insertion is necessary
because the period is to be counted from sight not date of
issue.
The RATIONALE for the rule is that if the true date is not
allowed to be inserted, one will not know when the
instrument will be due.
ALSO, the insertion of the wrong date does not avoid the
instrument in the hands of a subsequent holder in due
course, but as to him, the date so inserted is to be
regarded as the true date. The insertion of wrong date
avoids the instrument as to person making such insertion.
(Bank of Houston v. Day, 145 Mo. Appl. 410, 122 SW 756).
The reason being that the one who signs such instrument
furnishes the means of fraud and is thus estopped to deny
liability thereon.
B. CONCEPT OF DELIVERY:
Before a discussion of Sections 14, 15, and 16,
the concept of delivery must be understood
because the making, drawing, accepting, and
indorsing of an instrument has for one of its
common elements THE DELIVERY OF THE
INSTRUMENT FOR THE PURPOSE OF
NEGOTIATION, and the other is, VALUABLE
CONSIDERATION.
LIKE SO:
Making – B prepares a promissory note, he
assumed the liability of maker. When will B’s liability as
maker arise? B is not liable unless he receives valuable
consideration and before B can be liable as maker, he must
sign the instrument and deliver it to A for negotiation. If the
instrument is not delivered, he is not liable.
Drawing – When is B liable as drawer? B must
sign the instrument, receive valuable consideration and
deliver the instrument to A for the purpose of negotiation.
Acceptance – C, before he signs, is a mere
drawee, and has no liability because his signature does not
appear on the instrument. He must sign in order to be
liable, and his status is then changed from a mere drawee
9
to an acceptor. C is not liable as an acceptor unless he
receives valuable consideration, signs the instrument and
delivers it to the holder for the purpose of negotiation.
Indorsement – The position of the indorser is –
similar with that of a guarantor. A, as indorser, must
receive valuable consideration, sign and deliver the
instrument, for the purpose of negotiation before he can be
made liable.
“Delivery” means transfer of possession
of instrument by the maker or drawer, with intent
to transfer title to the payee and recognize him as
holder thereof. Therefore, where checks have not
yet been delivered to payee, they do not belong to
him and cannot be the subject of garnishment by
payee’s creditors. SEE: De la Victoria v. Burgos
62 SCAD 112, 245 SCRA 374 (1995)
 Every contract on negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto.
“Issue” is the first delivery of the
instrument complete in form, to a person who
takes it as a holder. (Sec. 191).
“Delivery” is the transfer of possession,
actual or constructive, from one person to another
(Sec. 191), e.g., mailing the note with proper
address, etc.
Where instrument is no longer in possession of a party
whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved
under Section 16. However, in the hands of holder in due
course, a valid delivery thereof by all prior parties is
conclusively presumed.
 As between immediate parties, and as regards a
remote party other than a holder in due course,
the delivery, in order to be effectual, must be
made either by or under the authority of party
making, drawing, accepting, or indorsing, as the
case may be. In such cases, delivery may be
shown to have been conditional, or for a special
purpose only, and not for purpose of transfer.
“Immediate parties” are those who are immediate in
the sense of knowing or being held to know the conditions
or limitations placed upon delivery of instrument. (Liberty
Trust Co. v. Tilton, 105 NE 605). It means privity, no
proximity. (Howard Nat. Bank v. Wilson, 120 Atl. 889).
5. For a holder in due course, a valid delivery thereof
by all parties prior to him so as to make them liable to him
is conclusively presumed. (Sec. 16).
Illustrations:
“Pay to A or order P500 [At the back]
(Sgd.) “B” (1) .” “Pay to X.”
(Sgd.) “A”
(4)

“Pay to A or order P500.
“To C: “B” (2)
“Accepted(Sgd.) “C” (3)
Under Sec. 14, an incomplete instrument is
delivered but the amount thereof is left in blank. Thus:
“Pay to A or order P_______.”
(Sgd.) “B”
If the above instrument has been delivered by B to
A for the purpose of negotiation, then A or any subsequent
holder has the authority to insert any amount. On the other
hand, should no such delivery have taken place, such an
authority to fill the blank does not exist. Nevertheless, if
after the amount is filled (whether with or without
authorization), 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 filed up strictly in
accordance with the authority given and within a
reasonable time. Thus, Sec. 14 gives only a personal, not
real defense.
Under Sec. 15, if an incomplete instrument is not
delivered (for the purpose of negotiation), it will not, if
completed and negotiated, without authority, be a valid
contract in the hands of any holder (even in the hands of a
holder in due course), as against any person whose
signature was placed thereon before delivery. Thus, Sec. 15
gives a real defense.
Section 16 provides that once instrument (which is
complete) is in the hands of holder in due course, delivery
is conclusively presumed.
CATEGORIZING HOLDERS
HOLDER- under Section 191, he is the PAYEE or
INDORSEE of a bill or note, who is in possession of it, or the
BEARER thereof. Under Section 51, the rights of a holder
are to sue on the instrument in his name, and receive
payment, and if payment is in due course (Under Section
88 when made at or after maturity of the instrument to the
holder thereof in good faith and without notice that title is
defective. NOTE the TIME OF PAYMENT and that the maker
or acceptor be in GOOD FAITH) discharges the instrument.
Example: Pledgee of an instrument.
HOLDER FOR VALUE- under Section 26, he is one who
has given a valuable consideration for the instrument
issued or negotiated to him. He is such not only as regards
the party to whom value has been given but also in respect
to all those who became parties prior to the time when
value is given. Example: If the maker issues a note to the
payee without consideration, it is subsequently endorsed
by the payee to another without consideration, and is
subsequently indorsed with consideration, the last
endorsee is deemed to be a holder for value not only as to
his indorser, but all other parties subsequent to the
indorsement.
EFFECT IS: If the holder for value is also a holder in due
course, he may enforce payment on the instrument against
all parties. IF NOT, prior parties can set up the defense of
absence of consideration.
10
HOLDER IN DUE COURSE- Under Section 52, he is one
who has taken the instrument under the following
conditions:
a. That it is complete and regular on its face.
Complete means that the instrument is not
wanting in any material particular, while Regular
means that there is no visible or apparent
alteration on the face of the instrument
b. That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact. Before
it is overdue means before maturity.
c. That he took it in good faith and for value. Good
faith means that he has no knowledge of the facts
which render it dishonest for him to take the
negotiable paper BUT the knowledge required is
not that necessary to show exact truth but such
that tends to show that there was something
wrong with the transaction.
d. That at the time it was negotiated to him he had
no notice of any infirmity in the instrument or
defect in the title of the person negotiating it. The
title of the person negotiating it is defective when
he obtains (OR ACQUIRES) the instrument or any
signature thereto by FRAUD, DURESS, OR FORCE
OR FEAR OR OTHER UNLAWFUL MEANS, OR FOR
AN ILLEGAL CONSIDERATION- OR- when he
NEGOTIATES the instrument in BREACH OF FAITH
(Example: negotiation after he has been paid) or
CIRCUMSTANCES AMOUNTING TO FRAUD
(Example: negotiation with knowledge that it will
not be paid)
Under Section 53- A PERSON WHO IS THE HOLDER OF AN
INSTRUMENT PAYABLE ON DEMAND WHO NEGOTIATES IT
AFTER AN UNREASONABLE LENGTH OF TIME IS NOT
DEEMED A HOLDER IN DUE COURSE. What is reasonable
time is determined with regard to the nature of the
instrument, usage of trade or the business, and the facts of
each particular case under Section 193.
Under Section 59, there is a prima facie presumption that
every holder is a holder in due course BUT the burden of
proof shifts when it is shown that the title of the person
negotiating the instrument is defective BUT it does not
apply to a party who became bound on the instrument
prior to the acquisition of defective title.
PARTIES MAY BE IMMEDIATE, REMOTE OR PRIOR
Parties are immediate when they are in direct contractual
relationship with each other, they are remote if they are not
in direct contractual relation to each other, and they are
prior parties if they became such prior to a subsequent
party.
AVAILABLE DEFENSES WHICH MAY BE INTERPOSED
TO AN ACTION UPON A NEGOTIABLE INSTRUMENT
There are two basic kinds of defenses that may be
interposed, they are:
REAL DEFENSES- they are those available against all
parties, both immediate and remote, including holders in

due course. They are such because they attach to the
instrument itself.
Examples of real defenses:
a. Incapacity as far as the incapacitated person is
concerned (see Art. 1327, ibid.);
b. Illegality of contract when declared by law (see
Art. 1409, ibid.); except where the maker or
drawer is himself a party to the illegality; thus, a
note for a gambling debt (an illegal consideration)
is a mere personal defense (see Sec. 55);
c. Want of delivery of incomplete instrument (Sec.
15);
d. Forgery (Sec. 23);
e. Want of authority, apparent and real (ibid.);
f. Duress amounting to forgery as where one takes
the hands of another and forces him to sign his
name (Espy v. Bank, 18 Wall. 604; First Nat. Bank
v. Northwestern Bank, 28 N.E. 729);
g. Fraud in factum or fraud in esse contractus (Sec.
14);
h. Fraudulent alteration b holder (Secs. 124, 1 st
sentence; 125.);
i. Prescription (see Arts. 1140-1142, 1144-1147, Civil
Code.);
j. Other infirmities appearing on the face of the
instrument (Sec. 52.); and
k. Discharge at or after maturity. (Secs. 88, 118, 121,
122.)
PERSONAL DEFENSES - are those which grow out of the
agreement or conduct of a particular person in regard to
the instrument which renders it inequitable for him, though
holding the legal title, to enforce it against the party sought
to be made liable but which are not available against a
holder in due course. (see Sec. 55). They are called
“personal defenses” because they are available only
against that person or subsequent holder who stands in
privity with him. (Ogden, op.cit., p. 309). In other words,
they can used only between original parties or immediate
parties or against one who is not a holder in due course.
Examples of personal defenses:
a. Filling of wrong date (Sec. 13);
b. Filling up of blanks not in accordance with the
authority given and within reasonable time (Sec.
28);
c. Want of delivery of complete instrument (Sec. 16);
d. Absence or failure of consideration (Sec. 28);
e. Simple fraud or fraud in inducement (Sec. 55);
f. Acquisition of instrument (not signature) by
duress, or force and fear (ibid);
g. Acquisition of instrument by unlawful means
(ibid);
h. Acquisition of instrument for an illegal
consideration (ibid);
i. Negotiation of breach of faith (ibid);
j. Negotiation under circumstances that amounts to
fraud (ibid);
k. Innocent alteration or spoliation. (see Secs. 124
[last sentence], 125). Spoliation is an alteration
made by a stranger to an instrument. If the
original meaning can be ascertained, the holder in
due course may recover according to its original
tenor;
l. Set-off between immediate parties (see Sec. 58);
11
m. Discharge by payment or renunciation or release
before maturity (Secs. 50, 121, 122);
n. Discharge of party secondarily liable by discharge
of prior party (Sec. 20[c]);
o. Usury – because the contract of loan itself is not
void but only the agreed interest (see Sec. 7,
Usury Law; Art. 1413, Civil Code; and
p. Want of authority but agent has apparent
authority. (see Art. 1869, ibid)
NEGOTIABLE INSTRUMENT THAT IS INCOMPLETE
WHICH HAS BEEN DELIVERED
Section 14 applies to an incomplete instrument which has
been delivered by the maker or drawer to the payee or the
holder, the rules related thereto are:
1. Where the instrument is lacking in any
material particular, person in possession thereof has prima
facie authority to complete it by filling-up the blanks
therein. A MATERIAL PARTICULAR is any particular
proper to be inserted in a negotiable instrument to make it
complete, like blanks for date, due date, name of the
payee, amount, or rate of interest
2. The signature on a blank paper delivered
by person making the signature in order that paper may be
converted into a negotiable instrument operates as prima
facie authority to fill it up as such for any amount. It MUST
BE SHOWN that the purpose of delivery was to convert the
said blank paper into a negotiable instrument. If such
purpose is absent, the person whose signature appears
thereon will not be liable, even to a holder in due course.
3. In order that any such instrument when
completed may be enforced against any person who
became a party thereto prior to its completion, it must be:
a. filled-up strictly in accordance with the
authority given; and
b. Within a reasonable time
- IN THIS CASE, ONE MUST DISTINGUSH BETWEEN
ONE WHO IS NOT A HOLDER IN DUE COURSE AND
ONE WHO IS A HOLDER IN DUE COURSE.
Note that if not a holder in due course, there can
be enforcement only if both (a) and (b) are
present. If a holder in due course, the defense that
it was filled contrary to the authorization is not
available. It is thus only a PERSONAL DEFENSE.
NOTE: In all the above cases, there is an intention to issue
a negotiable instrument. But if a signature on a paper is
given only for autograph purposes and the same is
converted into a negotiable instrument, this will amount to
forgery, constituting thus a valid defense even against a
holder in due course.
Whether or not the instrument is filled up in accordance
with the authority given, remember that endorsers are
liable on their warranties.
INCOMPLETE INSTRUMENT NOT DELIVERED
Section 15 applies to an instrument that is incomplete
and undelivered.

1. 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.
2. With regards parties whose signature appeared
prior to delivery, the non-delivery of an incomplete
instrument is a valid defense, not only between the original
parties but also against a holder in due course. It is
therefore a real defense, available even against a holder in
due course.
3. With regards parties whose signature appeared
after delivery, the instrument is valid and enforceable.
Example:
A makes a note, with the name of the payee in blank. X
steals the note and inserts his name as payee. He then
indorses it to Y, then Y to Z, who is a holder in due course.
Z cannot enforce the note as it is not a valid contract in the
hands of any holder.
Considering that A’s signature was placed thereon before
delivery, he does not assume any responsibility
whatsoever. Such is a REAL DEFENSE- ALTHOUGH A must
rebut the prima facie presumption of delivery by proof to
the contrary.
X is liable as an indorser and as the party responsible for
the theft, completion and negotiation of the instrument.
Y is also liable as an indorser as his signature appears on
the instrument after delivery.
4. The maker or drawer may however be estopped
from claiming the above defense if there should be
negligence on his part.
5. It was ruled that while drawer of a check owed a
duty to the bank on which the check was drawn to guard
against the escape of a check signed in blank which had
been stolen, he owed no such duty to the purchaser of the
check and therefore, the drawer cannot be held liable to
such purchaser provided that the incomplete instrument
was not yet delivered. (Linicks v. Nuttwig & Co., 140 App.
Div. 265).
MECHANICALLY COMPLETE BUT UNDELIVERED (Sec.
16):
Section 16 applies to an instrument that is mechanically
complete but is not delivered:
1. Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument
for the purpose of giving effect thereto.
2. As between immediate parties, and as regards a
remote party other than a holder in due course, the
delivery in order to be effectual, must be made either by or
under the authority of the party making, drawing,
accepting or indorsing, as the case may be. (The term
“immediate parties” refers to persons who know or are
presumed to know the conditions or limitations placed
upon the delivery of the instrument, excluding a holder in
due course.)
12
3. The delivery may be shown to have been
conditional, or for a special purpose only, and not for the
purpose of transferring the property (title) in the
instrument.
4. Where instrument is in the hands of holder in due
course, a valid delivery thereof by all parties prior to him so
as to make them liable to him is conclusively presumed.
5. Where the instrument is no longer in possession of
the party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is
proved.
NOTE: Delivery of an instrument need not be actual; it
may be constructive. Thus, is has been held that depositing
a note by mail with intent to transmit it to payee in the
usual way is a delivery in contemplation of law.
Example:
Maker/Drawer makes/draws a note or a bill, payable to the
order of the payee. It is complete in all respects.
If there is no delivery, there is no contract. No liability is
incurred, the payee does not acquire any right
If the note/bill is stolen by the payee, who endorses it to A,
who in turn endorses it to B, who in turn endorses it to C.
If C is aware of the theft, as against him and the payee, the
maker/drawer may prove that there was no delivery or that
delivery was not authorized as they are immediate parties
against whom a claim that delivery to be effectual must be
made either by or under the authority of the person
making, drawing, or indorsing as the case may be
If the note/bill was delivered or authorized, it may be shown
to have been conditional, or for a special purpose AND NOT
for transferring title.
If the maker/drawer delivers to the payee, under a
condition that it is for safekeeping only. The payee cannot
enforce the note. THIS DOES NOT APPLY TO ONE WHO IS
NOT AN IMMEDIATE PARTY, like an indorsee, who may now
enforce the note/bill as against the maker/drawer. The
same is true, if the maker/drawer delivers the note/bill to
an agent, who in turn does not inform the payee of the
condition.
If the note/bill is in the hands of a holder in due course, the
maker/drawer cannot prove the theft or delivery under a
condition, as there is a conclusive presumption of delivery.
NOTE: THE PHRASE- until delivery of the instrument for the
purpose of giving effect thereto WOULD TEND TO EXCUSE
THE MAKER/DRAWER IF THERE WAS NO ACTUAL DELIVERY
FOR ANY PURPOSE OF THE INSTRUMENT AND ABSENT ANY
FAULT OR NEGLIGENCE, EQUITY DICTATES THAT HE NOT BE
HELD LIABLE.
As far as signatures, if the instrument is no longer in the
possession of a party whose signature appears thereon, a
valid and intentional delivery is presumed until the contrary
is proven.

6. Where the debtor who drew two checks payable to
his creditor but never delivered them, but that a third-party
was able to collect the proceeds of the checks by forging
the endorsement of the creditor-payee, the creditor did not
gain standing against any person to recover on the checks
since he acquired no interest over them by reason of
delivery. SEE: Development Bank of Rizal v. Sim Wei,
219 SCRA 736 (1993)
SIGNATURES AND FORGERY
The rules to determine liability as far as signatories and in
cases of forgery are as follows:
1. The GENERAL RULE: Under Section 18, no
person is liable upon an instrument whose
signature does not appear thereon.
The EXCEPTIONS ARE:
a. Trade Name – One who signs using a trade or
assumed name will be liable to the extent as if he had
signed in his own name under Section 18
b. Rules on Signature of Agent – Signature of any
party may be made by a duly authorized agent. No special
form of agency is required under Section 19. The rule is if
the instrument contains or a person adds to his signature
that he signs for or in behalf of a principal, or in a
representative capacity, HE IS NOT LIABLE IF HE WAS DULY
AUTHORIZED BUT THE MERE ADDITION OF SUCH WORDS
OR INDICATION OF SUCH DOES NOT EXEMPT HIM FROM
PERSONAL LIABILITY IF THE PRINCIPAL IS NOT DISCLOSED.
Note: That a signature by “procuration” (e.g., “Juan de la
Cruz, per procuration: Pedro de la Cruz”) operates as notice
that the agent has but limited authority to sign, and
principal is bound only in case agent in so signing acted
within the actual limits of his authority under Section 21.
“B” by “X” – Principal is disclosed. So long as agent X
signed within the scope of his authority, he is not
personally liable on the instrument.
“by X” – Agent X signs for an undisclosed principal, the
agent becomes personally liable but he can evade his
personal liability by disclosing his principal and so long as
he signed within the scope of his authority. If X does not
disclose his principal, he is personally liable.
“B pp X” – Agent signs by procuration. This is notice to the
whole world that the agent is signing with very limited
authority.
c. Under Section 134 – Acceptance of a bill of
exchange on a separate piece of paper.
d. Under Section 135 – Unconditional promise in
advance to accept a bill of exchange before it is drawn; the
promise must be in writing.
NOTE; Under Section 22, an indorsement or assignment of
instrument by corporation or by infant passes the property
therein, notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon.
13
The contract of endorsement of an infant is not void, and
that his endorse has the right to enforce payment from all
parties prior to the infant endorser; the incapacity of the
infant cannot be availed of by prior parties. (Murray v.
Thompson, LRA 1917B 1172, 188 SW 578). However, it
does not destroy the right of such an infant endorser to
disaffirm under rules of infancy. (Ibid.)
In both instances, endorsements are voidable – valid until
annulled – so that they pass good title. Therefore, parties
prior to minor or corporation cannot escape liability by
setting up as defense the incapacity of one of endorsers.
Before a discussion of the rules, it is best to classify the
kinds of forgeries that can take place, they are:
1. IN A PROMISSORY NOTE: forgery of the maker’s
signature and forgery of an indorsement.
2. IN A BILL OF EXCHANGE: forgery of the drawer’s
signature, either with acceptance by the drawee or without
acceptance but is paid by the drawee and forgery of an
indorsement in the bill
THE EFFECTS ARE:
1. The instrument is not declared totally void nor are
the genuine signatures thereon rendered inoperative. IT IS
ONLY THE FORGED SIGNATURE THAT IS DECLARED
INOPERATIVE. Hence: rights still exist and may be enforced
by virtue of the instrument as between parties whose
signatures were not forged.
2. A forged instrument just prevents any subsequent
party from acquiring any rights as against any party whose
name appears prior to the forgery. Rights will exist and may
be enforced as between subsequent parties BUT no one
can acquire a right as against parties prior to the forgery,
who also have rights and may enforce them as against
each other.
Example:
M makes a note payable to the order of P. P indorses it to
A. X Obtains possession of the note fraudulently and
indorses it to B, by forging A’s signature. B indorses to C.
Thus, the indorsements are as follows:
Pay to A
(Sgd.) P
Pay to B
(Sgd.) A (forged by X)
Pay to C
(Sgd.) B
a. C cannot enforce the instrument against M and P
because C’s right against them are cut off by the forged
signature of A which is wholly inoperative. C could acquire
rights against M or P to the instrument only through the
forged signature of A.

b. Neither can C enforce the note against A because
A’s signature is wholly inoperative. A has no privity with C.
Under Section 23, C acquired no right to retain, discharge,
or enforce payment of the note under the forged signature
of A.
c. But C may go against B whose signature is
genuine and, therefore, operative. B is a general indorser
who wanted to C that the instrument is genuine and was
valid and subsisting at the time of B’s indorsement. (See
Sec. 65 and 66.)
d. Of course, B or C has a right of recourse against X,
the forger;
e. A can recover from M and P because his rights
against them were not affected by the forgery. The
signatures of M and P are genuine and they are liable to A
on their contract.
3. The rights of the parties in cases of forged
indorsements are:
a. Where note payable to order. – The party
whose indorsement is forged is not liable to any holder
even a holder in due course. The indorsement being
forged, it is inoperative.
The other parties, including the maker, prior to the party
whose signature is forged are not also liable to any holder.
The instrument being payable to order, it can be
negotiated only by indorsement completed by delivery.
But since the indorsement is forged, it is inoperative and,
therefore, it cannot operate to transfer any right or title
over the instrument.
Holder did not acquire any rights to retain
the note, give discharge therefore, or
enforce payment as against party whose
signature is forged and parties prior to
him, including maker.
Any transferee of forger merely acquires whatever rights
he had against prior parties, hence, transferee likewise
acquires no rights against prior parties
b. Where note payable to bearer. – Where the
note, mechanically complete, is originally payable to
bearer, the party whose indorsement is forged is liable to a
holder in due course, but not to one who is not a holder in
due course. The other parties, including the maker, prior to
the party whose signature is forged, may also be held liable
by one who is not a holder in due course.
The reason is that the instrument being originally payable
to bearer, it can be negotiated by mere delivery. (Section
30.). In other words, indorsement is not necessary to the
title of the holder. Hence, even if the indorsement is
forged, the forgery may be disregarded. The forged
indorsement does not prevent the transfer of title since the
holder may just strike out the forged indorsement. (Sec.
48). The only defense available is want of delivery but this
defense can be raised only against a holder not in due
course. (Sec. 16).
14
c. Where bill payable to order. – Where the bill is
payable to order, the party whose indorsement is forged, is
not liable to any holder even a holder in due course. The
forged indorsement is wholly inoperative.
Where the signature of the payee was forged, the
collecting bank is liable to the payee and must bear the
loss because it is its legal duty to ascertain that the payee’s
endorsement was genuine before cashing the check.
If the drawee pays under a forged indorsement, the drawer
is not liable on the bill and the drawee may not debit the
drawer’s account. If it does, it shall have to recredit the
amount of the check to the account of the drawer. A bank
is bound to know the signature of its customers (drawers),
and if it pays a forged check it must be considered as
making the payment out of its own funds and cannot
ordinarily charge the amount so paid to the account of the
depositor (see Sec. 189).
Where, however, the checks are received merely for
collection and deposit, the bank, as agent, cannot be
expected to know or ascertain the genuineness of al prior
indorsements. (Jai-Alai Corp vs. Bank of P.I., 66 SCRA 29
[1975].) But by stamping on checks accepted by it for
deposit its guarantee that “all prior endorsements and/or
lack of endorsements guaranteed, a collecting/presenting
bank thereby makes the assurance that it has ascertained
the genuineness of all prior indorsements. (Associated
Bank vs. Court of Appeals, supra.) So even if the
indorsement on the check deposited by the collecting
bank’s client is forged, the collecting bank is bound by its
warranties as an indorser and cannot set up the defense of
forgery as against the drawee-bank. (Associated Bank vs.
Court of Appeals, supra.)
Apropos, the matter of forgery in indorsements, the
collecting bank, or last indorser generally suffers the loss
because it has the duty to ascertain the genuineness of all
prior indorsements considering that the act of presenting
the check for payment to the drawee is an assertion that
the party making the presentment has done its duty to
ascertain the genuineness of the indorsements. (See
Philippine National Bank vs National City Bank, 63 Phil. 711
[1936]
Where the drawer of a check delivers it to an impostor
mistakenly believing him to be the payee named in the
check, the indorsement of the check by the impostor is not
a forgery, and the drawer is liable to a bona fide holder or
any subsequent indorser who may be compelled to pay it.
(Burrows vs. Wester Union Tel. Co., 86 Minn. 499, 90 N.W.
1111; see Sec. 61)
d. Where bill payable to bearer. – In case the bill is
originally payable to bearer, the drawee may debit the
drawer’s account in spite of the forged indorsement. The
reason is that the forged indorsement is not necessary to
the title of the holder. The drawee cannot recover from the
holder.
e. The endorser is liable on the instrument although
the signature of the payee is forged because the endorser
by his endorsement guaranteed that the instrument is
genuine, therefore, impliedly, that the instrument is valid,
otherwise, there would be nothing for the endorser to
guarantee. SEE: Republic Bank v. Ebrada 65 SCRA 680
(1975)

5. The exceptions to the rule are:
a. Is when a party is precluded from setting up
forgery as a defense under Section 23. The parties
precluded from setting up the defense of forgery
are:
1. Those who by their acts, silence or
negligence, are ESTOPPED from setting
up the defense of forgery.
2. Those who warrant or admit the
genuineness of the signature in question
(i.e., endorsers, persons negotiating by
delivery, and acceptors of bills of
exchange);
b. When forged signature is unnecessary to the title
of the holder as when the endorsement is forged
on an instrument payable to bearer.
Facts: Two (2) of the Company’s Citibank checks were
prepared made payable to the Commissioner of Internal
Revenue (CIR), which were both crossed checks. The
checks were turned around by the Company’s confidential
employees and were forged to facilitate deposit with PCI
Bank in exchange for PCI Bank manager’s checks, in
collusion with an organized syndicate. PCI Bank now wants
to hold Company liable for the forged checks, the act of
fraud being facilitated by its confidential employees.
Held: Although the employees of Company initiated the
transactions attributable to an organized syndicate, their
actions were not the proximate cause of encashing the
checks payable to the CIR. The degree of Company’s
negligence, if any, could not be characterized as the
proximate cause of injury to the parties. The Company’s
Board of Directors did not confirm the request to recall
forged Citibank Checks No. SN-04867, and the instruction
to replace the said checks with PCI Bank’s manager’s check
was not in the ordinary course of business which could
have prompted PCI Bank to validate the same. Given these
circumstances, the mere fact that was committed by the
drawer-payor’s confidential employee, who by virtue of his
position has unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle
PCI Bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the
drawer. This rule likewise applied to checks fraudulently
negotiated or diverted by confidential employees who hold
them in their possession. PCI Bank v. Court of Appeals
350 SCRA 446 (2001)
6. Section 23 on forgery only covers forged
signature, or signature made without the authority of the
person whose signature it purports to be. Forgeries that
consist of other alterations are covered by Sec. 124.
(c) Effects of Forgery under Sec. 23 of NIL
Associated Bank v. Court of Appeals
67 SCAD 487, 252 SCRA 620 (1996)
Checks having forged indorsements should be
differentiated from forged checks or checks
bearing the forged signature of the drawer. Under
Sec. 23 of NIL, a forged signature, whether it be
that of the drawer or the payee, is wholly
15
inoperative and no one can gain title to the
instrument through it. A person whose signature
was forged was never a party and never consented
to the contract which allegedly gave rise to such
instrument. Section 23 does not avoid the
instrument but only the forged signature.
Therefore, a forged indorsement does not operate
as the payee’s endorsement.
The exception to the general rule in Sec. 23 is
where “a party against whom it is sought to
enforce a right is precluded from setting up the
forgery or want of authority.” Parties who warrant
or admit the genuineness of the signature in
question and those, who by their acts, silence or
negligence are estopped from setting up the
defense of forgery, are precluded from using this
defense. Indorsers, persons negotiating by delivery
and acceptors are warrantors of the genuineness
of the signature on the instrument.
In bearer instruments, signature of payee or
holder is unnecessary to pass the title to the
instrument; hence, when the indorsement is a
forgery, only the person whose signature is forged
can raise the defense of forgery against a holder in
due course.
PNB v. Court of Appeals
25 SCRA 693 (1968)
When in a check the signature of the drawer is
forged, as between the drawee and collecting
bank, the drawee bank shall sustain the loss, since
the collecting bank does not guarantee the
signature of the drawer, and in fact the payment of
the check by the drawee bank constitutes the
proximate negligence since it was the primary duty
of the drawee bank to know the signature of its
client-drawer.
Manila Lighter Transportation, Inc. v. CA
182 SCRA 251 (1990)
A collecting bank is not guilty of negligence
over a forged indorsement on checks for it has no
way of ascertaining the authority of the
endorsement and when it caused the checks to
pass through the clearing house before allowing
withdrawal of the proceeds thereof.
Republic Bank v. Court of Appeals
196 SCRA 100 (1991)
When drawee bank therefore fails to return a
forged or altered check to collecting bank within
the 24-hour clearing period, collecting bank is
absolved from liability.
Associated Bank v. Court of Appeals
67 SCAD 487, 252 SCRA 620 (1996)
In cases involving a forged check, where
drawer’s signature is forged, drawer can recover
from the drawee bank. No drawee bank has a right
to pay a forged check. If it does, it shall have to

recredit the amount of check to the account of
drawer. The liability chain ends with drawee bank
whose responsibility it is to know the drawer’s
signature since the latter is its customer.
NOTE: It must be remembered that the foregoing
rules are qualified by the rules precluding the
setting up of the defense of forgery by warranty, as
in the case of parties negotiating an instrument
subsequent to forgery, or by estoppel, as in the
case of negligence. Parties negotiating by
endorsement and delivery, or by mere delivery
subsequent to the forgery are precluded from
setting up the defense of forgery and may be held
liable under their warranties stated under Secs. 65
and 66.
(b) Forgery of Indorsement:
(1) Drawer’s account cannot be charged by
drawee, and if charged, drawer can recover from
the drawee bank. (Galino v. PNB, [CA] 51 OG 410).
(2) Drawer has no cause of action against
collecting bank, since the duty of collecting bank is
only to payee. Also, drawer suffers no damage
since drawer can recover amount paid from
drawee bank, which has no right to charged
drawer’s account.
(3) Even with sending of bank statement by
drawee bank to drawer, the latter is not estopped
since it would be a case where the drawer’s own
signature was forged in one of its checks and
therefore the receipt of the statement would be an
appraisal of the forgery.
(4) Drawee bank can recover from the collecting
bank. (Great Eastern Life Ins. Co. v. Hongkong &
Shanghai Bank, 43 Phil. 678 [1922]).
(5) Payee can recover from drawer as he still
retained his claim of debt against drawer.
(6) Payee can also recover from recipient of
payment, such as collecting bank.
(7) Collecting bank is liable to payee. The
possession of check on forged or unauthorized
indorsement is wrongful and when the money had
been collected on the check, the bank or other
person or corporation can be held as for moneys
had or received, and proceeds are held for the
rightful owners of payment and may be recovered
by them.
(8) Payee cannot collect from drawee bank, unless
the latter shall accept or certify the check, without
such specification or acceptance there is no privity
of contract between the drawee bank and the
payee.
(9) Collecting bank bears the loss but can recover
from person to whom it has paid check.
Gempesaw v. Court of Appeals
218 SCRA 682 (1993)
16
Although as a rule a drawee-bank which has
paid a check on which an indorsement has been
forged cannot charge drawer’s account for the
amount of said check, an exception to such rule
applies where drawer was guilty of such
negligence which causes the bank to honor such a
check, as when the drawer negligently or fails
either to discover or to report promptly the fact of
such forgery to the drawee-bank.
(c) Delineating Liability for Forged
Indorsements on Checks Payable to Order:
Associated Bank v. Court of Appeals, 252
SCRA 620 (1996), laid down the following rules
delineating the consequences, rights and liabilities
of parties in case of forged indorsements on
checks payable to order, thus:
(1) When instrument is payable to order at the
time of forgery, the signature of its rightful holder is
essential to transfer title to the same instrument.
When holder’s indorsement is forged, all parties
prior to the forgery may raise the real defense of
forgery against all parties subsequent thereto.
(2) An indorser of an order instrument warrant
“that the instrument is genuine and in all respects
what it purports to be; that he has a good title to it;
that all prior parties had capacity to contract; and
that the instrument is at the time of his
endorsement valid and subsisting. He cannot
interpose the defense that signatures prior to him
are forged.
(3) The collecting bank where a check is deposited
and which endorses the check upon presentment
with drawee bank, is such an indorser. So even if
the indorsement on the check deposited by the
bank’s client is forged, collecting bank is bound by
its warranties as an indorser and cannot set up
defense of forgery as against drawee bank.
(4) The bank on which a check is drawn (drawee
bank) is under strict liability to pay the check to the
order of the payee. The drawer’s instructions are
reflected on the face and by the terms of the
check. Payment under a forged endorsement is not
to the drawer’s order. When drawee bank pays a
person other than the payee, it does not comply
with the terms of the check and violates its duty to
charge its customer’s (drawer) account only for
properly payable items. Since drawee bank did not
pay a holder or other person entitled to receive
payment, it had no right to reimbursement from
the drawer. The general rule then is that the
drawee bank may not debit the drawer’s accound
and is not entitled to indemnification from drawer.
The risk of loss must perforce fall on drawee bank.
(5) However, if drawee bank can prove a failure by
customer/drawer to exercise ordinary care that
substantially contributed to the making of forged
signature, drawer is precluded from asserting
forgery.

(6) If at the same time drawee bank was also
negligent to the point of substantially contributing
to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the
negligent bank.
(7) The chain of liability does not end with drawee
bank. The drawee bank may not debit the account
of drawer but may generally pass liability back
through the collection chain to the party who took
from forger and, of course, to forger himself, if
available. In order words, drawee bank can seek
reimbursement or a return of the amount it paid
from the presentor bank or person.
(8) Theoretically, presentor bank or person can
demand reimbursement from the person who
endorsed the check to it and so on. The loss falls
on the party who took the check from the forger, or
on the forger himself.
Since a forged indorsement is inoperative,
the collecting bank had no right to be paid by the
drawee bank. The former must necessarily return
the money paid by the latter because it was paid
wrongfully.
More importantly, by reason of the statutory
warranty of a general indorser in Sec. 66 of NIL, a
collecting bank which indorses a check bearing a
forged endorsement and presents it to the drawee
bank guarantees all prior indorsements, including
the forged indorsement. It warrants that the
instrument is genuine, and that it is valid and
subsisting at the time of his indorsement. Because
endorsement is a forgery, collecting bank commits
a breach of this warranty and will be accountable
to drawee bank. This liability scheme operates
without regard to fault on the part of
collecting/presenting bank. Even if the latter bank
was not negligent, it would still be liable to drawee
band because of its endorsement.
7. NEGLIGENCE DISCUSSED:
(a) The depositor’s negligence or
conduct which would stop him must be the
proximate cause of the payment by depository
upon forged indorsement.
(b) A depositor (drawer) is generally
under a duty to his depository (drawee) to examine
returned vouchers notify it within reasonable time
of any mistakes or inaccuracies in amounts of
checks or forgeries of depositor’s signature.
(c) Doctrine of Comparative
Negligence – Constructive negligence of the bank
if overcome by the active negligence of paying
banks in not using the ordinary precautions which
are used by banks, namely, demanding
identifications of person presenting the check, etc.
(d) Basic Rule in Estoppel by
Negligence – Where the loss, which must be
borne by one of the two parties alike innocent of
forgery can be traced to the neglect or fault of
either, it is reasonable that one through whose
17
name the fraud was committed must bear the loss,
even if he is innocent of the fraud.
(e) Indorsers warrant genuineness of
prior indorsements. But drawee is not entitled to
the benefit of endorsement’s warranty because e
is held not to be a holder in due course. As to him,
it is as if there is no indorsement, but the
instrument was payable to bearer, and the
ordinary rules apply depending upon the presence
or absence of negligence.
xxx
1. Where the signature on the instrument is
affixed by one who does not claim to act as an
agent and who has no authority to bind the person
whose signature he has forged; and
2. Where the signature is affixed by one who
purports to be an agent but has no authority to
bind the alleged principal.
In both cases, the signature is wholly
inoperative and so no right can be acquired
through the forged signature. Payment made
“through or under such forged signature” is
ineffectual and does not discharge the Instrument.
A person whose signature was forged as maker,
drawer, payee or indorsee of a note or check was
never a party or never gave his consent to the
contract which gave rise to the instrument. Since
his signature does not appear in the instrument,
he cannot be held liable thereon by anyone.
(Gempesaw vs. Court of Appeals, 218 SCRA 682
[1993].) Forgery is, therefore, a real defense even
against a holder in due course. (see Sec. 58)
EFFECT OF A MATERIAL ALTERATION
Under Section 124, 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
alteration, he may enforce payment thereof according to its
original tenor.
CONSEQUENTLY, the effects of an alteration of the
instrument are:
(1) Alteration by a party. – The effect of a material
alteration by the holder is to discharge the instrument and
all prior parties thereto who did not give their consent to
such alteration. Since no distinction is made, it does not
matter whether it is favorable or unfavorable to the party
making the alteration.
The law however makes certain exceptions as to the effect
of material alteration. It does not discharge the instrument
as against: (a) a party who has made the alteration, and (b)
a party who authorized or assented to the alteration, and
(c) indorsers who indorsed subsequent to the alteration.
EXAMPLE:
M makes a promissory note for P3, 000.00 payable
to P or order. P negotiates the note to A who, with the

consent of P, raises the amount to P8,000.00 and
thereafter indorses it to B, B to C, and C to D, under
circumstances which make D not a holder in due course.
The note is discharged as against M; hence, D
cannot enforce it as against M even for the original tenor. A,
however, would be liable to D for P8, 000.00 as he is the
party who himself made the alteration although D is not a
holder in due course. Moreover, as indorser, A warrants
that the instrument is genuine and in all respects what it
purports to be. (Secs. 65 and 66.)
P would also be liable to D for P8, 000.00 as he
authorized the alteration
B and C are liable to D because they are
subsequent indorsers.
(2) Alteration by a stranger. – When the material
alteration of the instrument is made by a stranger, it is
called spoliation.
(3) Right of holder in due course. – A material
alteration avoids the instrument in the hands of one who is
not a holder in due course as against any prior party who
has not assented to the alteration. But if an altered
instrument is negotiated to a holder in due course, he may
enforce payment thereof according to its original tenor
regardless of whether the alteration was innocent or
fraudulent. (See Sec. 62.)
EXAMPLE:
In the example given, if D were a holder in due
course, he could enforce the instrument against M for P3,
000.00, its original tenor. (See Sec. 14.) Of course, D can
recover from P, A, B, or C P8, 000.00 should M dishonor the
instrument.
WHEN ALTERATION IS MATERIAL
Section 125 defines what will constitute a material
alteration. It is 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 or 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.
CONSIDERATION FOR THE ISSUANCE OF
NEGOTIABLE INSTRUMENT
1. Under Section 24, 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.
2. Under Section 25, value is any consideration
sufficient to support a simple contract. An anteceded or
pre-existing debt constitutes value; and is deemed such
whether the instrument is payable on demand or at a
future time.
18
3. Under Section 27, where a holder has a lien on the
instrument, arising from a contract or by implication of law,
he is deemed a holder for value to the extent of his lien. HE
IS ONE WHO HAS TAKEN A NEGOTIABLE INSTRUMENT AS
COLLATERAL SECURITY FOR A DEBT
The effects are:
1. If the amount of the instrument is more than the
debt secured by such instrument, the pledgee is a holder
for value to the extent of his lien. He can collect the full
value of the instrument, and apply the same to the
payment of the debt but he must deliver the surplus to the
pledgor. (See Art. 2118, Civil Code.)
Example:
M makes a promissory note for P1, 000.00 to the
order of P who pledges it to A to secure the payment of P’s
debt of P800.00. The note is indorsed and delivered by P to
A. (See Art. 2095, ibid.)
In this case, A is a holder for value to the extent of
P800.00 which is also the extent of his lien. On the
maturity of the note, even if the debt of P800.00 is not yet
due (see Art. 2118, ibid.), A may recover the full amount of
P1, 000.00, holding the surplus for P, the pledgor.
2. If, between the pledgor and the party liable on the
instrument, there are existing defenses, then the pledgee
can collect on the instrument only to the extent of the
amount of the debt.
Example:
If M has defenses against P, indorser, such as
absence or failure of consideration (Sec. 28), A can collect
only P800.00 on the note even if he is a holder in due
course. As the note in the hands of M is void, all that ought
to be recovered by A is the amount due on the loan.
3. If the amount of the instrument is less than or the
same as the debt secured by such instrument, the pledge
is a holder for value for the full amount and may, therefore,
recover all.
Example:
Supposing that the amount of the instrument is
P700.00 then A is a holder for value for the full amount of
P700.00 and is entitled to recover to that extent.
4. If the defenses of the party liable on the
instrument are real defenses, then the pledgee can recover
A nothing upon the instrument.
Example:
If the signature of M is a forgery, A can collect
nothing from M because M’s signature is inoperative. As
against M, A acquired no right to enforce payment of the
note. (Sec. 23.) Forgery is a real defense. (See Sec. 57)
WHEN CONSTITUTES BEING A HOLDER FOR VALUE
Under Section 26, a HOLDER FOR VALUE is one who has
given a valuable consideration for the instrument issued or

negotiated to him. He is such not only as regards the party
to whom value has been given but also in respect to all
those who became parties prior to the time when value is
given. Example: If the maker issues a note to the payee
without consideration, it is subsequently endorsed by the
payee to another without consideration, and is
subsequently indorsed with consideration, the last
endorsee is deemed to be a holder for value not only as to
his indorser, but all other parties subsequent to the
indorsement.
WHAT IS THE EFFECT OF WANT OF CONSIDERATION
The absence or failure of consideration is a matter of
defense as against any person not a holder in due course;
and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated
amount or otherwise.
Meaning of absence or want of consideration.
Absence of consideration means a total lack of any valid
consideration for the contract, in consequence of which the
alleged contract must fall. (Klein v. Roteman, 6 Ohio App.
145.)
Example:
M makes a promissory note to P in payment for a
parcel of land which does not exist.
As between the parties, there can be no recovery
on the note a there is absence of consideration. But if P
indorses the note to A, a holder in due course, A can
recover from M because absence of consideration is only a
personal defense not available against a holder in due
course.
Meaning of failure of consideration.
Failure of consideration means the failure or refusal of one
of the parties to do, perform or comply with the
consideration agreed upon. In other words, something was
agreed upon as consideration but for some cause, such
agreed consideration failed to materialize.
WHO IS AN ACCOMODATION PARTY
Section 29 provides that 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.
1. Accommodation bill or note is one to which the
accommodation party has put his name, without
consideration, for the purpose of accommodating some
other party who is to use it, and is expected to pay it.
(Brown Carriage Co. v. Dowd, 71 S.E. 721.) In other words,
it is a loan of one’s credit. (Burr vs. Beckler, 106 N.E. 206)
An accommodation paper creates no obligation
upon delivery to the accommodated party and is of no
19
legal efficacy and creates no obligation until delivered or
negotiated to a holder for value.
2. Accommodated party is one in whose favor a
person, without receiving value therefor, signs an
instrument for the purpose of lending his credit and
enabling said party to raise money upon it. (Sec. 29) He
impliedly agrees to take up the instrument at maturity and
to indemnify the accommodation party against the
consequences of non-payment.
Liability of accommodation party to a holder.
1. Absence of consideration not a defense. – Section
29, by clear mandate makes the accommodation party
“liable on the instrument to a holder for value
notwithstanding such holder at the time of taking the
instrument knew him (the signatory) to be only an
accommodation party,” in whatever capacity he signed the
instrument, whether primarily or secondarily. This means
that absence of consideration between the accommodation
party and the accommodated party does not of itself
constitute a valid defense against a holder for value even
though he knew of it when he became a holder. (See Ang
Tiong vs. Lorenzo Ting, 22 SCRA 713 [1968]; Republic Bank
vs. Ebrada, 65 SCRA 680 [1975]
2. Accommodation party in effect a surety. – In
lending his name to an accommodated party, the
accommodation party is, in effect, a surety. (Philippine
Bank of Commerce vs. Aruego, 102 SCRA 530 [1981]).
However, unlike in a contract of suretyship, the liability of
the accommodation party remains not only primary but
also unconditional to a holder for value such that even if
the accommodated party receives an extension of the
period for payment without the consent of the
accommodation party, the latter is still liable for the whole
obligation an such extension does not release him because
as far as a holder for value is concerned, he is a solidary co-
debtor. (Prudencio vs. Court of Appeals, 103 SCRA 7
[1986]; see People vs. Maniego, 148 SCRA 30 [1987].)
It will then be noted that Section 29 is an
exception to Section 28. But Section 29 should not be
construed as to allow a holder for value, not otherwise a
holder in due course, to recover against an accommodation
party in the light of other sections (Secs. 16, 55, 58) of the
Negotiable Instruments Law. In other words, except the
defense of absence of consideration between the
accommodation party and the accommodated party, the
accommodation party is liable to a holder in due course.
Rights of accommodation party.
1. Right to revoke accommodation – since a
signature for accommodation is gratuitous, it may be
revoked or rescinded by cancellation or by notice to those
interested at any time before the instrument ha been
negotiated for value. But once the instrument has been
negotiated for value, the accommodation party is liable
according to the face of his undertaking, the same as if he
were financially interested in the transaction.
2. Right to reimbursement from accommodated
party – after making payment to the holder, the
accommodation party has a right to obtain reimbursement
from the accommodated party. The relation between them
is, in effect, that of principal and surety, the

accommodation party being the surety. (Phil. National Bank
vs. Maza and Macenas, 48 Phil. 207 [1915]; People vs.
Maniego, 148 SCRA 31 [1987]; Caneda Jr. vs. Court of
Appeals, 181 SCRA 762 [1990]. As between the
accommodation party and the accommodated party, the
latter is expected to pay the instrument directly to the
holder. The accommodated party is the real debtor.
Hence, the cause of action is not on the instrument but on
an implied contract of reimbursement.
3. Right to contribution from other solidary
accommodation maker – where the solidary
accommodation maker paid to the bank, the balance due
on a promissory note, he may seek contribution from the
other solidary accommodation makers in the absence of a
contrary agreement between them, and subject to the
conditions imposed by law. This right springs from an
implied promise between the accommodation makers to
share equally the burden resulting from the execution of
the note. They are joint guarantors of the principal debtor.
(Sadaya vs. Sevilla, supra; see Art. 2073, Civil Code; Sec.
196.)
KINDS OF ACCOMODATION PARTIES
“An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or indorser.”
(Sec. 29)
Examples:
1. Accommodation maker – M, as accommodation
party, issues a promissory note payable to P who may then
negotiate it to A.
2. Accommodation drawer – M, as accommodation
party, signs a bill of exchange with P as payee, and P may
indorse the same to A.
3. Accommodation acceptor – M, as accommodation
party, accepts a bill drawn on him by P in favor of himself
and P may indorse the same to A.
4. Accommodation indorser – M, as
accommodation party, simply signs as an indorser in blank,
the bill or note made by P in favor of A, before it is delivered
to A. (see Sec. 63)
ACCOMMODATION PARTY AND REGULAR PARTY
DISTINGUISHED
The following are the differences:
1. An accommodation party signs an instrument
without receiving value therefor, while a regular party signs
the instrument for value (Sec. 24);
2. An accommodation party signs an instrument for
the purpose of lending his name to some other person
(Sec. 29), while a regular party does not sign for that
purpose;
3. An accommodation party may always show by
parol evidence that he is only such, while a regular party
cannot disclaim or limit his personal liability as appearing
on the instrument by parol evidence (see Maulini vs.
Serrano, 28 Phil. 640 [1914]; Velasco vs. Liuan & Co., 43
Phil. 195 [1922]);
20
4. An accommodation party cannot avail of the
defense of absence or failure of consideration against a
holder not in due course, while a regular party may avail of
said defense against a holder not in due course; and
5. An accommodation party, after paying the holder,
may sue for reimbursement the accommodated party,
although a subsequent party, while a regular party may not
sue any subsequent party for reimbursement. (Phil.
National Bank vs. Maza & Macenas, 48 Phil. 207 [1925])
NEGOTIATION
CONCEPT OF NEGOTIATION
Under Section 30 an instrument is negotiated when it is
transferred from one person to another in such a manner
as to constitute the transferee the holder of the instrument.
A “holder” means the payee or endorsee of a bill or note
who is in possession of it or the bearer thereof.
MANNER OF TRANSFER OF INSTRUMENTS
1. By Assignment – Generally for non-negotiable
instruments. In assignment, the assignee is merely placed
in the position of the assignors and acquires the instrument
subject to all the defenses that might have been set up
against original payee.
2. By Operation of Law – Such as by succession, by
insolvency. Upon the death of a joint payee or indorsee, in
which case the general rule is that title vests at once in the
surviving payee or indorsee.
3. By Negotiation
METHODS OF NEGOTIATION
Negotiable Instruments may be negotiated by:
1. By indorsement and delivery if payable to order
2. By delivery if payable to bearer
a
WHAT IS AN INDORSEMENT
It is the writing of the name of the indorser on the
instrument with the intent to transfer title to the same.
Indorsement is not only a mode of transfer, it is also a
contract. Every indorser is a new drawer and the terms are
found on the face of the bill or note, with the additional
obligation that if the instrument is dishonored by non-
payment or non-acceptance, and notice is given to the
endorser, the latter will pay for it.
WHERE IS SHOULD AN INDORSEMENT BE
CONTAINED
1. Under Section 31, 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.
2. An indorsement is usually written at back of
instrument and may be made any form (eg. print,

typewritten, rubber stamp) as long as meant to be an
endorsement.
3. Under Section 32, the indorsement must be of the
entire instrument. Otherwise, the indorsement is not valid,
but would only constitute a valid assignment binding
between the parties. The REASON is that the instrument
must be delivered and there cannot be partial delivery of
an instrument.
Also, when an indorsement purports to transfer the
instrument to two or more indorsees severally (instead of
jointly), the same is not valid endorsement. The REASON is
that the cause of action on the instrument will be split or
divided.
THE EXCEPTION is when an instrument has already been
paid in part, it may be endorsed to the residue.
NOTE: That an indorsement which purports to transfer to
the indorsee a part only of the amount payable does not
operate as a negotiation of the instrument; it operates
merely as an assignment. SEE: Montinola v. PNB, 88 Phil.
178 [1951]
KINDS OF INDORSEMENTS
1. SPECIAL INDORSEMENT – it qualifies the person to
whom or to whose order the instrument is payable, and the
indorsement of such endorsee is necessary to the further
negotiation of the instrument (Section 34)
“Pay to X.”
(Sgd.) “A”
a. If X (the endorsee) wants to further negotiate the
instrument, he must sign it at the back.
b. However, when the instrument is originally
payable to bearer, it can further be negotiated by mere
delivery, even if the original bearer negotiated it by special
endorsement but the person indorsing specially shall be
liable as endorser to only such holders as make title
through his endorsement (Section 40).
This rule does not apply to instruments originally payable
to order, but because the only or last indorsement is an
indorsement in blank.
Section 40, when read with Section 9, shows that of the five
(5) kinds of bearer instruments discussed under Sec. 9,
Section 40 applies only to the first four types, those that
are payable to bearer on their face. These four types of
bearer instrument, even if endorsed specially, they retain
their character as bearer instrument and may still be
negotiated by mere delivery; the special endorsement may
be ignored.
NOTE: Under Sec. 67, where an instrument payable to
bearer is negotiated by indorsement and delivery, the
person signing (through his signature was not necessary
for negotiation) is liable as a special endorser.
2. BLANK INDORSEMENT – it specifies no endorsee,
and the instrument so endorsed is payable to bearer and
may be negotiated by mere delivery. (Section 34)
21
a. The holder may convert a blank indorsement into
a special indorsement by writing over the signature of the
endorser in blank any contract consistent with the
character of the endorsement.
3. ABSOLUTE INDORSEMENT – one by which the
endorser binds himself to pay, upon no other condition
than the failure of prior parties to do so and of due notice to
him of such failure.
4. CONDITIONAL INDORSEMENT– the party required
to pay the instrument may disregard the condition and
make payment to the endorsee or his transferee whether
the condition has been fulfilled or not. But any person to
whom an instrument so endorsed is negotiated will hold
the same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally. (Section 39)
Illustration:
“Pay to X PHP500 if it rains on 28 June 2002.”
(Sgd.) “B”
X may present the instrument for payment before 28 June
2002, but B may tell X to: Wait for 28 June 2002 OR Pay X
PHP500; but if it does not rain on 28 June 2002, X must
return the money on the principle of solution indebiti.
5. RESTRICTIVE INDORSEMENT – such indorsement
either: (a)Prohibits further negotiation of instrument
(b)Constitutes endorsee the agent of endorser (c)Vest title
in endorsee in trust for or to the use of some other person.
But mere absence or words implying power to negotiate
does not make an indorsement restrictive. (Section 36)
a. EFFECT OF RESTRICTIVE INDORSEMENT: It confers
upon the endorsee the right –(a) To receive payment of
the instrument;(b)To bring any action thereon that the
endorser could bring;(c) To transfer his rights as such
endorsee, where the form of the indorsement authorizes
him to do so. (Section 37)
But all subsequent indorsees acquire only the title of the
first indorsee under the restrictive indorsement.
Illustrations:
(a) “Pay to X only”
(b) “Pay to X as agent”
(c) “Pay to X in trust”
Under letter (a), it completely destroys the negotiable
character of the instrument and it may no longer be
negotiated.
Under letter (b), the rights of X to negotiate is limited
because the same must be within the scope of his
authority as agent.
Under letter (c), X may negotiate the instrument only
within the scope of his authority as trustee.
b. Section 47 must be correlated with Sec. 36
(restrictive indorsement), Sec. 88 (payment) and Sec. 119
(discharge of an instrument)

Illustration:
“One year from date, pay to A or order PHP500.”
“June 28, 2002 (Sgd.) “B”
General Rule: An instrument which is negotiable in origin
continues to be negotiable until it has been:
(a) restrictively endorsed;
(b) paid at or after maturity.
When referring to “restrictive indorsement,” we refer only
to the first kind: Pay to X only; because this is the only type
of restrictive indorsement that completely destroys the
negotiability of the instrument.
When referring to payment, this must be understood to be
payment made at or after maturity of the negotiable
instrument. Because if payment is made before maturity
thereof, the person so paying can still renegotiate or
reissue the instrument. In other words, payment before
maturity does not destroy negotiability.
6. QUALIFIED INDORSEMENT constitutes endorser a
mere assignor of the title to the instrument. It may be
made by adding to the endorser’s signature the words
“without recourse” or “sans recourse” or other terms of
similar import. (Section 38)
a. “Without recourse” means without resort to a
person who is secondarily liable after the default of person
who is primarily liable.
b. Qualified endorser has limited liability, i.e., he is
liable if the instrument is dishonored by non-acceptance or
nonpayment due to:
- Forgery
- Lack of good title on the part of the endorser;
- Lack of capacity to endorse on the part of the
prior parties;
- The fact that at the time of the endorsement, the
instrument was valueless or not valid, and he knew of that
fact.
Illustration:
“Pay to X PHP500 without recourse.”
(Sgd.) “A”
The qualified endorser guarantees only the genuineness of
the instrument but does not guarantee its payment. He
will be liable only if signature of the maker turns out to be a
forgery. He will not be liable if maker refuses to pay.
In case of qualified endorsement, the consideration is less
than in general endorsement. For an instrument of PHP500
for example, the qualified endorser may have paid only
PHP200. If B’s (maker) signature is forged, he will be liable
for PHP200 only as he paid that much only to guarantee
genuineness. This is the difference between general and
qualified endorsements.
When Warranties of Qualified Endorser Cannot Prevail:
Bank of P.I. v. Court of Appeals
326 SCRA 641 (2000)
22
Facts: Depositor, by way of accommodation,
allowed the deposit of a check in his savings account after
he had endorsed the same. He executed a blank
withdrawal slip to allow the accommodated party to
withdraw the amount of the check deposited as soon as it
has been cleared and upon presentation of the passbook.
The amount were withdrawn prior to the clearance of the
check, which turned out alter to be counterfeit. The bank
seeks to recover from the depositor on the basis of his
endorsement of the check which the bank relied upon in
servicing the withdrawal before there was an actual
clearance thereof.
Held: The bank cannot be allowed to recover
against the depositor. While ordinarily, the depositor could
have been held liable on the basis of his warranties, since a
person negotiating an instrument by delivery or by
qualified endorsement are:
a. that the instrument is genuine and in all respects
what it purports to be;
b. That he has a good title to it; and
c. that all prior parties had capacity to contract.
Nevertheless, the circumstances of the case
shows that the immediate cause for the loss was the failure
of the bank to exercise the extraordinary diligence required
of banks when dealing with the accounts of their
depositors, especially in allowing withdrawal of the amount
prior to the clearing of the check and without the
presentation of the passbook.
7. JOINT INDORSEMENT is where an instrument is
payable to the order of two or more payees or indorsees
who are not partners, all must endorse, unless the one
indorsing has authority to endorse for the others. (Section
41)
a. This rule does not apply to indorsements payable
to two or more payees severally (e.g., “Pay to the order of A
or B”), which under Section 8(c) may be negotiated by the
endorsement of one payee.
Illustration:
[Indorsements at the back]
“Pay to X or Y.” “Pay to X P200 to Y P300.”
(Sgd.) “A” (Sgd.) “A”
Both of these indorsements are
prohibited.
Compare this with Sec. 8: “Pay to A or X or order P500,”
which may be indorsed by A alone or by X alone. The
instrument may be payable in the alternative but the
endorsement to two or more persons is void. If payable in
the alternative on its face, the instrument is less confusing;
but when the indorsement is alternative there would be
confusion.
b. Section 41 states “but who are not partners” but
this clause should be ignored because it contemplates the
American Law on Partnership, where the partners are
solidarily liable and hence only one partner may be made

liable to collect the whole amount so that only one needs to
sign the indorsement.
This is different from Philippine Law which provides that
partners are jointly liable; hence, both must sign the
endorsement.
8. IRREGULAR INDORSEMENT is where a person, not
otherwise a party to an instrument, places thereon his
signature in blank before delivery, he is liable as an
endorser. (Section 64)
EFFECTS OF STRIKING OUT AN INDORSEMENT
A holder may at any time strike out any endorsement
which is not necessary to his title. The endorser whose
endorsement is truck out, and all endorsees subsequent to
him, are thereby relieved from liability on the instrument.
(Section 48)
EFFECT OF A TRANSFER WITHOUT AN
INDORSEMENT
Any transfer of an instrument without an indorsement shall
have the following effects:
1. Transferee acquires only the rights of transferor,
the defense available against the transferor will also be
available against the transferee.
2. Transferee has also the right to require the
transferor to endorse the instrument.
3. The time for determining whether the transferee is
a holder in due course is as of the time of actual
endorsement, not at the time of delivery. (Section 49)
OTHER INDORSEMENTS
1. Payable to Cashier – where the instrument is
drawn or indorsed to a person as “cashier” or other fiscal
officer of a bank or corporation, it is deemed – prima facie
to be payable to the bank or the corporation of which he is
such officer, and may be negotiated by either the
indorsement of the bank or corporation, or the indorsement
of the officer. (Section 42)
2. Misspelling – where the name of a payee or
endorsee is wrongly designated or misspelled, he may
indorse the instrument as therein described adding, if he
thinks fit, his proper signature. (Section 43)
3. 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
(i.e., disclose his principal or sign the principal’s name)
(Section 44)
TIME, PLACE, CONTINUATION OF NEGOTIATION
Time of Indorsement – 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 was overdue. (Section 45). This
presumption is rebuttable.
23
Place of Indorsement – except where the contrary
appears, every indorsement is presumed prima facie to
have been made at the place where the instrument is
dated. (Section 46)
Continuation of Negotiable Character – an instrument
negotiable in origin, continues to be negotiable until it has
been restrictively endorsed or discharged by payment or
otherwise. (Section 47)
When Prior Party May Negotiate – where an instrument
is negotiated back to a prior party, such party may reissue
and further negotiate the same. But he is not entitled to
enforce payment thereof against any intervening party to
whom he was personally liable. (Section 50)
RIGHTS OF A HOLDER
1. The rights of a SIMPLE HOLDER are:
a. He may sue thereon in his own name
b. payment to him in due course will discharge the
instrument
2. The rights of a HOLDER IN DUE COURSE are:
a. He may sue on the instrument
b. to receive payment on the instrument and
payment in due course will discharge the
instrument
c. Under Section 57, he holds the instrument free
from any defect in title of prior parties
d. he holds the instrument free from defenses
available to prior parties among themselves
e. Enforce payment on the instrument to the full
amount against all parties liable thereon.
LIABILITIES OF THE MAKER
1. The liabilities of the MAKER are:
a. he will pay the note according to its tenor
b. the payee exists, and
c. the payee has capacity to endorse.
The maker is thus PRECLUDED from setting up the
defenses that the payee is fictitious or that payee was
insane, a minor or a corporation acting ultra vires
(Section 60).
2. The nature of the liability of the maker is primary and
unconditional.
3. If there are joint makers, their liability is solidary.
LIABILITIES OF THE DRAWER
By signing his name on the bill as DRAWER, he ADMITS
that
a. the payee exists
b. payee has capacity to endorse
c. drawee will accept or pay or both according to the
tenor of the bill
d. in case of non-acceptance or non-payment, the drawer
will pay (Section 61)
NOTE that the drawer’s obligation to pay is not absolute.
The bill must be dishonored and the necessary proceedings
of dishonor must be duly taken.
He may insert an express stipulation negating or limiting
his own liability.

The nature of the drawer’s liability is thus secondary in
favor of
a. the holder, and
b. Any of the endorsers intervening between the
holder and the drawer who is compelled to pay by
the holder.
LIABILITIES OF THE ACCEPTOR
1. The ACCEPTOR by accepting (Under Section 132
mean assent to the order of the drawer) the instrument
a. Engages that he will pay it according to the tenor
of his acceptance NOT the tenor of the instrument
BUT if the tenor of the acceptance is GENERAL,
under Sections 139 and 140, the tenor of the bill is
the same as that of the acceptance.
b. Admits the existence of the drawer, genuineness
of the signature of the drawer, capacity and
authority of the drawer to draw the instrument,
and the existence and capacity to endorse of the
payee. CONSEQUENTLY, he is precluded from
setting up the defenses that the drawer is non-
existent or fictitious, that drawer’s signature is a
forgery, and want of consideration between him
and the drawer
2. In case of an alteration before acceptance, the
prevailing view is that he is liable only up to the original
tenor of the bill prior to acceptance. The basis is Section
132.
3. The nature of the liability of the acceptor is
primary.
LIABILITIES OF AN INDORSER
 An indorser is one who has placed his signature
upon an instrument other than as the maker,
drawer or acceptor UNLESS he clearly indicates by
appropriate words his intention to be bound in
some other capacity.
An IRREGULAR INDORSER (one who places his signature
in blank before delivery) is liable as follows:
a. in an order instrument, he is liable to the payee
and to all subsequent parties
b. in a bearer instrument, or payable to order of the
maker or drawer, he is liable to all parties
subsequent to the maker or drawer
c. if he signs for accommodation of the payee, he is
liable to all parties subsequent to the payee
(Section 64)
A QUALIFIED INDORSER (one who endorses without
recourse), warrants that:
a. That the instrument is genuine (does not
guaranty payment).
b. That he had 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.
NOTE: These liabilities of a qualified endorser are the same
as those of a person who negotiates an instrument payable
to bearer by delivery alone. But when the negotiation, is
24
by delivery only, the warranty extends in favor of no holder
other than the immediate transferee.
Illustration:
“Payable to A or bearer P500.00”
(Sgd.) “B”
This is delivered physically to X, X delivers it to Y. X is liable
to Y alone but X’s liability refers to the four items above
mentioned. He is not liable for payment because under
Sec. 18, in as much as X’s signature does not appear, he is
not liable thereon.
A GENERAL INDORSER (one who endorses without
qualification, warrants to all subsequent holders in due
course:
a. That the instrument is genuine and in all respects
what it purports to be
b. That he has a good title to it
c. That all prior parties had capacity to contract
d. That the instrument is at the time of his
endorsement valid and subsisting.
This warranty does not run in favor of holders who
are parties of the illegal transaction. (Burke v.
Smith, 75 Atl. 114) (e) He engages that on due
presentment, the instrument shall be accepted or
paid, or both, as he case may be, according to its
tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder, or to
any subsequent endorser who may be compelled
to pay it.
 Where a person places his endorsement on an
instrument negotiable by delivery he incurs all
liabilities of an endorser. (Sec. 67)
ORDER IN WHICH INDORSERS ARE LIABLE – as
respect one another, indorsers are liable – prima facie in
the order in which they endorse; but evidence is admissible
to show that as between or among themselves they have
agreed otherwise. Joint-payees or joint-endorsees who
indorse are deemed to endorse jointly and severally. (Sec.
68)
a. The foregoing rules does not apply to a holder in
due course, to whom the indorsers are liable in
any order
b. Every indorser is liable to all endorsers subsequent
to him, but not those indorsers prior to him.
Illustration:
“Pay to A or order P500.00” [Indorsements:]
_________________
(Sgd.) “B” “Pay to X.”
(Sgd.) “A” (1)
_________________
“Pay to Y.”
(Sgd.) “X” (2)
_________________
“Pay to Z.”
(Sgd. “Y” (3)

Z as holder of the instrument may present
payment.
If B refuses to pay, Z can ask Y to pay; Y can
collect from others in the order in which they endorse.
Under Sec. 84, where the instrument is dishonored
by non-payment, an immediate right of recourse to all
parties secondarily liable thereon accrues to the holder.
There is no need to follow the order of endorsements.
When is the order of endorsement followed?
When not?
1. Before dishonor: accessory, subsidiary
2. After dishonor: (a) principal
(b) solidary
1. Before dishonor, the obligation of an endorser is
only accessory. Z, the holder, must seek payment from B
first. After dishonor by non-payment, Sec. 84 provides that
an immediate right of recourse to all parties secondarily
liable thereon accrues to the holder But if B refuses to pay,
he dishonors the instrument.
2. . Hence, A, X and Y are now liable principally, Z,
the holder, can choose to go after any or all of them. After
dishonor, the liability of A, X and Y becomes joint and
several. Z, at his option, may sue any or all of them. Sec.
68 provides that if Z goes after X alone and X pays the
P500, it is the right of X to ask A and Z to reimburse, and
who is liable to one another in the order in which they are
endorsed.
PROCEDURE TO MAKE PERSONS SECONDARILY
LIABLE TO PAY
1. The parties primarily liable are the Maker – in a
promissory note and the Acceptor – in a bill of exchange.
2. The parties who are secondarily liable are the
Drawer and an Indorser.
To make parties secondarily liable requires (a) presentment
for payment to the Maker or the Acceptor and (b) notice of
dishonor. The absence of either will discharge persons
secondarily liable.
PRESENTMENT FOR PAYMENT
It is defined as: (a) the production of a bill of exchange to
the drawee for his acceptance, or to the drawee or
acceptor for payment; or (b) the production of a promissory
note to the party liable for its payment. (Windham Bank v.
Norton, 22 Conn. 213, 56 Am. Dec. 297).
1. Presentment for payment is not necessary in order
to charge the person primarily liable on the instrument
(The “person primarily liable” on the instrument is the
person who by the terms of the instrument is absolutely
required to pay the same under Section 192). This pertains
to the maker of a promissory note and the acceptor of a bill
of exchange.
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2. But if instrument is, by its terms, payable at a
special place and the person primarily liable is able and
willing to pay it there at maturity, such ability and
willingness are equivalent to tender of payment on his part.
(Section 70). This pertains to a situation where the
instrument is payable at a particular institution or office,
such as a bank and not when the instrument is payable in a
certain locality.
3. Presentment for payment is necessary to charge
the drawer and endorsers. (Section 70). Without
presentment, the persons secondarily liable are
discharged.
3. For Promissory Notes: it is necessary that:
Presentment for payment must be made to the person
primarily liable (Sec. 71);
 If the note is dishonored by nonpayment, notice
of dishonor by nonpayment must be given to the
person secondarily liable (Sec. 80), unless
excused.
4. In All Other Cases: it is necessary that –
 Protest for nonpayment by drawee is necessary
to charge an acceptor for honor (Sec. 167);
 Protest for nonpayment by the acceptor for
honor is also required. (Sec. 170).
GENERAL PROCEDURES TO CHARGE PERSON
SECONDARILY LIABLE:
1. In the three cases required by law, presentment for
acceptance to the drawee or negotiation within a
reasonable time after acquisition is required (Secs. 143 and
144), unless excused. (Sec. 148). In all other cases, there is
no need for presentment for acceptance.
2. If bill is dishonored by non-acceptance: (a) notice of
dishonor by non-acceptance must be given to persons
secondarily liable (Sec. 80) unless excused (Sec. 117); and
(b) in case of foreign bills, protest for dishonor by non-
acceptance must be made, unless excused. (Secs. 117 and
159).
3. But if the bill is accepted, or if the bill is not required to
be presented for acceptance, it must be presented for
payment to the persons primarily liable (Sec. 71), unless
excused. (Sec. 82).
4. If the bill is dishonored by nonpayment then:
 A notice of dishonor by nonpayment must also
be given to persons secondarily liable (Sec. 80),
unless excused; and
 In case of foreign bill a protest for dishonor by
nonpayment must be made (Sec. 152), unless
excused.
WHEN PRESENTMENT MUST BE MADE
1. Instrument on a Fixed or Determinable Future
Time – Presentment must be made on the day it falls due.
Presentment before maturity is improper.

(a) Every negotiable instrument is payable at the time fixed
therein without grace. (Sec. 85).
(b) When the day of maturity falls upon a Sunday or a
holiday, the instrument is payable on the next succeeding
business day. (Sec. 85).
(c) When the day of maturity is on a Saturday, presentment
for payment shall be made on the next succeeding
business day; except that demand instrument may, at the
option of the holder, be presented for payment before
12:00 o’clock noon on Saturday when that entire day is not
a holiday. (Sec. 85).
(d) Where the instrument is payable at a fixed period after
date, after sight, or after the happening of a specified
event, the time of payment is determined by excluding the
day from which the time is to begin to run, and by including
the date of payment. (Sec. 86).
Illustration:
“18 June 2002”
Present this on 28 June 2002 for payment
“10 days after date Pay A or order P500.” because
that is its due
date.
(Sgd.) “B”
GENERAL RULE: Presentment for payment must
be made on due date of instrument.
EXCEPTION: If the due date falls on a Saturday,
present instrument on Monday next.
REASON: Obligor is entitled to the full day to make
payment. But since Saturday is half day work and the
banks would be closed in the afternoon, and the
following day is a Sunday, he should have until Monday
to pay. The law wants to give the person primarily liable
one whole day to look for money.
EXCEPTION TO EXCEPTION: If the instrument is
payable on demand, the instrument can be presented on
a Saturday. The reason is that the holder could have
presented it on any day.
2. Instrument Payable on Demand:
(a) In case of note, it must be presented for
payment within a reasonable time from issue;
(b) In case of a bill of exchange, it must be
presented for payment within a reasonable
time from last negotiation.
 The last negotiation is the last transfer for
value. Subsequent transfers between banks
for purposes of collection are not negotiations
within this section.
WHAT CONSTITUTES SUFFICIENT PRESENTMENT (Sec. 72):
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Presentment for payment, to be sufficient, must be
made –
1. By the holder, or by some person authorized to receive
payment on his behalf.
(a) Presentment for payment of a promissory
note by a bank having it for collection is
sufficient. (Caine v. Foreman, 289 Pac. 929).
(b) Instrument must be exhibited to the person
from whom payment is demanded, and when
it is paid must be delivered up to the party
paying it. (Sec. 74). Demand over the
telephone therefore cannot constitute proper
presentment.
First Acceptance v. Dimayuga
11 car 114 (1967)
The instrument must be
exhibited in order that the maker or the
acceptor may be able to determine the
genuineness of the instrument, the right
of the holder to receive payment, and so
that he may immediately reclaim
possession upon paying the amount. Non-
exhibition or surrender would not
constitute due presentment to charge
drawer and endorsers.
(c) The maker’s right to exhibition of a note is
waived when he does not demand to see the
note and he refuses payment on some other
grounds. (Greensteen v. Kucharski, 140 Atl.
482; Foster East Jordan Realty Co., 177 N.W.
987).
2. at a reasonable hour on a business day.
5. Where Notice Must Be Sent: Where a party has
added an address to his signature, notice of
dishonor must be sent to that address; but if he
has not given such address, then the notice must
be sent as follows:
(a) Either to the post office nearest to his
place of residence or to the post office
where he is accustomed to receive his
letters; or
(b) If he lives in one place, and has his place
or business in another, notice may be
sent to either place; or
(c) If he is sojourning in another place, notice
may be sent to the place where he is so
sojourning.
But where the notice is actually received
by the party within the time specified by law,
it will be sufficient, though not sent in
accordance with the requirement of this
section. (Sec. 108).

TO WHOM NOTICE GIVEN: Notice of dishonor may be given
either to the party himself or to his agent in that behalf.
(Sec. 97).
1. When notice is given to an agent, he must be duly
authorized to receive notice of dishonor;
otherwise, the notice is not valid.
2. Notice to Party Dead: When a party is dead, and
his death is known to the party giving notice,
notice must be given to 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 deceased.
(Sec. 98).
3. Notice to Partners: Where the parties to be notified
are partners, notice to any one partner is notice to
the firm, even though there has been dissolution.
(Sec. 99).
4. Notice of Persons Jointly Liable: Notice to joint
parties who are not partners must be given to
each of them, unless one of them has authority to
receive notice for the others. (Sec. 100).
5. Notice of 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. (Sec. 101).
H & BC v. Peoples Bank
35 SCRA 140 (1970)
The period within which to clear checks at the
clearing house of the Central Bank was 24 hours
(i.e., any forgery must be discovered and
reported within 24 hours). Hongkong and
Shanghai Bank’s representative whether the
check was in fact genuine.
Shanghai Bank said yes. This had to be done
within 24 hours. Two months later, the forgery
was discovered and Hongkong and Shanghai
Bank sought to recover, but this was denied by
the court. Because the period of clearing has
been extended to 180 days, but once any
alteration is discovered, the same must be
reported within 24 hours after discovery.
TIME WITHIN WHICH NOTICE GIVEN:
1. Notice may not be given before the maturity of the
instrument. Notice may be given on the date of
maturity, provided that instrument has been
presented for payment and it has been
dishonored.
2. Where Parties Reside in Same Place: Where the
person given and the person to receive notice
reside in the same place, notice must be given
within the following periods:
(a) If given at the place of business of the person
to receive notice, it must be given before the
close of business hours on the day following;
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(b) If given by mail it must be deposited in the
post office in time to reach him in usual
course on the day following. (Sec. 103).
 “Same place” refers to the corporate limits
of a town or city where the presentment is
made or where the holder resides.
3. Where Parties Reside in Different Place: Where the
person giving and the person to receive notice
reside in different place, the notice must be given
within the following periods:
(a) If sent by mail, it must be deposited in the
post office in time to go by mail the day
following the day of the dishonor, or if there
be no mail at a convenient hour or that day,
by the next mail thereafter;
(b) If given otherwise than through post office,
then within the time that notice would have
been received in due course of mail, if it had
been deposited in post office within the time
specified. (Sec. 104).
NOTE: These provisions are similar to Art. 54 of
the Code of Commerce which provides:
“Contracts entered into through
correspondence shall be perfected from the
time an answer is made accepting the
propositions by which the latter may be
modified.”
4. Where a party receives notice of dishonor, he has,
after the receipt of such notice, the same time for
giving notice to antecedent parties that the holder
has after the dishonor. (Sec. 107).
WAIVER OF NOTICE:
1. Notice of dishonor may be waive, either before the
time of giving notice has arrived or after the
omission to given due notice, and the waiver may
be expressed or implied. (Sec. 109).
2. 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 endorser, it binds him only. Sec.
110).
3. Waiver of Protest: A waiver of protest, whether in
the case of foreign bill of exchange or other
negotiable instrument, is deemed to be a waiver
not only of a formal protest but also of
presentment and notice of dishonor. (Sec. 111).
4. When Notice is Dispensed With: Notice of dishonor
is dispensed with when, after exercise or
reasonable diligence, it can not be given to or does
not reach parties sought to be charged. (Sec. 112).
5. When Delay in Notice Allowed: Delay in giving
notice of dishonor is excused when the delay is
caused by circumstances beyond the control of
the holder, and not imputable to his default,
misconduct, or negligence. When the cause of

delay ceases to operate, notice must be given with
reasonable diligence. (Sec. 113).
6. When Notice Need Not Be Given to Drawer: Notice
of dishonor is not required to be given to the
drawer in any of the following cases;
(a) Where the drawer and drawee are the same
person;
(b) When the drawee is a fictitious person or a
person not having capacity to contract;
(c) When the drawer is the person to whom the
instrument is presented for payment;
(d) Where the drawer has not right to expect or
require that the drawee or acceptor will honor
the instrument;
(e) Where the drawer has countermanded
payment. (Sec. 114).
7. When Notice need not be given to Endorser:
Notice of dishonor is not required to be given to an
endorser in either of the following cases:
(a) When the drawee is a fictitious person or does
not have capacity to contract and the
endorser was aware of this at the time of
endorsement;
(b) Where the endorser is the person to whom
the instrument is presented for payment;
(c) Where the instrument was made or accepted
for his accommodation. (Sec. 115).
8. Where due notice of dishonor by non-acceptance
has been given, notice of subsequent dishonor by
nonpayment is not necessary unless in the
meantime instrument has been accepted. (Sec.
116).
9. Effect of Omission to Give Notice of Non-
Acceptance: An omission to give notice of dishonor
by non-acceptance does not prejudice the rights of
a holder in due course subsequent to the
omission. (Sec. 117).
PROTEST:
1. Where any negotiable instrument has been
dishonored, it may be protested for non-
acceptance or nonpayment, as the case may be.
(Sec. 118).
2. But protest is not required except in the case of
foreign bills of exchange. (Sec. 118).
3. Distinctions between Inland Bill and Foreign Bill:
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 which is one which is, or on its face
purports to be drawn or payable outside the
Philippines. (Sec. 129).
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A foreign bill of exchange is one:
(a) Drawn in the Philippines but payable outside
the Philippines.
(b) Payable in the Philippines but drawn outside
the Philippines.
NOTE: Unless the contrary appears on
the face of the bill of exchange,
the holder may treat it as an
inland bill of exchange.
4. Under Sec. 118, verbal notice of dishonor is
sufficient in case of promissory note and inland bill
of exchange. But with respect to a foreign bill of
exchange, a protest is needed.
DISCHARGE OF NEGOTIABLE INSTRUMENTS
A. DEFINITION: It is the release of all parties, whether
primary or secondary, from the obligation on the
instrument; discharge renders the instrument non-
negotiable.
B. HOW NEGOTIABLE INSTRUMENTS DISCHARGED.
(Sec. 119). A negotiable instrument is discharged:
1. by payment in due course by or behalf of the
principal debtor;
2. by payment in due course by the party
accommodated, where the instrument is made or
accepted for accommodation;
3. by the intentional cancellation of the instrument
by the holder thereof;
4. By any other act which will discharge a simple
contract for the payment of money:
a. remission;
b. novation;
c. Confusion or merger.
As to the other modes: payment is
already in (a) and (b); loss of a negotiable
instrument will not extinguish liability;
compensation is not available so long as an
obligation is evidenced by a negotiable
instrument.
PRESUMPTION: When the principal debtor
becomes the holder of the
instrument at or after maturity in
his own right. If a private
document evidencing an
obligation is in the possession of
the debtor, the presumption is
that the debtor has paid such an
obligation.
State Investment House v. CA
217 SCRA 32 (1993)
The fact that post-dated checks were issued
merely as security is not a ground for the discharge
of the checks as against a holder in due course.

The intentional cancellation contemplated
under Sec. 119 on NIL for the discharge of an
instrument is the cancellation effected by destroying
the instrument either by tearing it up, burning it, or
writing the work “cancelled” on the instrument, and
certainly requires the element in the holder in
intentionally canceling it. Cancellation cannot be
presumed by failure to recover the instrument.
The discharge of the instrument would
necessarily carry with it the discharge of the persons
primarily liable thereon.
C. WHEN PERSONS SECONDARILY LIABLE
INSTRUMENT ARE DISCHARGED (Sec. 120):
1. By any act which discharges the instrument.
2. By the intentional cancellation of his signature by
the holder.
(a) No consideration is necessary to support a
discharge by intentional cancellation of an
endorser’s signature by holder.
3. By discharge of a prior party.
(a) Discharge of a party by intentional
cancellation of his signature also operates to
discharge parties subsequent to the party
discharged.
(b) The rule only applies to discharge by the act
of the holder and not to discharges by
operation of law, such as insolvency.
4. By a valid tender of payment made by a prior
party.
5. By a release of the principal debtor, unless the
holder’s right of recourse against the party
secondarily liable is expressly reserved.
6. By any agreement binding upon the holder to
extend the time of payment or to postpone the
holder’s right to enforce the instrument.
EXCEPT: (a) When made with the consent of
other party
secondarily liable;
(b) Unless the right of recourse against such party is
expressly reserved.
7. In the discharging of persons secondarily liable:
(a) The liability of a party secondarily liable is
subsidiary.
(b) His liability is similar (but not exactly the
same) to that of a guarantor.
(c) Endorsers are liable in the order in which they
endorse.
D. PAYMENT BY PARTY SECONDARILY LIABLE: Where
the instrument is paid by a party secondarily liable
thereon, the instrument is not discharged.
29
However, the party so paying is remitted to his
former rights as regards all prior parties, and he
may strike out his own and all subsequent
endorsements, and again negotiate the
instrument.
EXCEPT:
(a) Where it is payable to the order of a third
person, and had been paid by the drawer; and
(b) Where it was made or accepted for
accommodation and has been paid by the
ON party accommodated. (Sec. 121).
1. The party secondarily liable who pays will have the
effect of discharging the party paying.
2. The party paying is remitted to his former rights
against parties prior to him; if he was formerly a
holder in due course, even if at the time of
payment he already had notice of the defects of
title, he can enforce his rights against any of the
prior parties free from defenses.
E. RENUNCIATION BY HOLDER: Holder may expressly
renounce his rights against any party to the
instrument before, at, or after its maturity. (Sec.
122).
1. An absolute and unconditional renunciation of his
rights against the principal debtor made at or after
the maturity of the instrument discharges the
instrument. (Sec. 122).
2. A renunciation does not affect the rights of a
holder in due course without notice. (Sec. 122).
3. A renunciation must be in writing, except when the
instrument is delivered up to the person primarily
liable thereon. (Sec. 122).
F. UNINTENTIONAL CANCELLATION: A cancellation
made unintentionally, or under a mistake or
without the authority of the holder, is inoperative.
(Sec. 123).
1. But where an instrument or any signature thereon
appears to have been cancelled the burden of
proof lies on the party who alleges that the
cancellation was made unintentionally, or under a
mistake or without authority. (Sec. 123).
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