Mercantile Reviewer UP 2016 NEGO PDF

MERCANTILE LAW
NEGOTIABLE
INSTRUMENTS LAW
PAGE 10 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW
I. Definition shall be legal tender in amounts not exceeding

Fifty pesos (P50.00) for denominations of
Twenty-five centavos and above, and in
A. DEFINITION AND PURPOSE amounts not exceeding Twenty pesos
• Written contract for the payment of (P20.00) for denominations of Ten centavos or
less.
money, by its form and on its face,
intended as substitute for money and
intended to pass from hand to hand to
give the holder in due course (HDC) the • Although considered as medium for
right to hold the same and collect the payment of obligations, negotiable
sum due. instruments are not legal tender.
• Instruments are negotiable when they • Negotiable instruments shall produce the
conform to all the requirements effect of payment only when they have
prescribed by the Negotiable Instruments been encashed or when through the fault
Law (NIL; Act 2031, 03 February 1911). of the creditor they have been impaired.
[Art. 1249, Civil Code]
• However, the fact that an instrument
does not meet the foregoing requisites • BUT a CHECK which has been cleared and
will not affect its validity, the only credited to the account of the creditor
consequence being that it will be shall be equivalent to a delivery to the
governed not by the NIL but by the creditor of cash.
general law on contracts. (Campos)
• Settled is the rule that payment must be
made in legal tender. A check is not legal
tender and, therefore, cannot constitute a
Negotiable Instrum ents Not Legal
valid tender of payment. Since a
tender
negotiable instrument is only a substitute
Art. 1249, Civil Code. The payment of debts in for money and not money, the delivery of
money shall be made in the currency such an instrument does not, by itself,
stipulated, and if it is not possible to deliver operate as payment. Mere delivery of
such currency, then in the currency which is checks does not discharge the obligation
legal tender in the Philippines. under a judgment. The obligation is not
extinguished and remains suspended
The delivery of promissory notes payable to until the payment by commercial
order, or bills of exchange or other mercantile document is actually realized. [BPI vs.
documents shall produce the effect of Royeca, G.R. No. 176664 (2008)]
payment only when they have been cashed, or
when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the

original obligation shall be held in the
abeyance. (1170)
Sec. 52, New Central Bank Act. Legal Tender

Power. - All notes and coins issued by the
Bangko Sentral shall be fully guaranteed by
the Government of the Republic of the
Philippines and shall be legal tender in the
Philippines for all debts, both public and
private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins
PAGE 11 OF 320
II. Forms and something in written form that can be

transferred from person to person. (Abad)
Interpretation
SIGNED
A. REQUISITES OF NEGOTIABILITY General Rule: No person is liable on the

instrument whose signature does not appear
(Most Frequently Asked since 1992; Last
thereon.
appeared in 2013)
Note:
Sec. 1, Negotiable Instruments Law (NIL). Form
of negotiable instruments. - An instrument to • One who signs in a trade or assumed
be negotiable must conform to the following name will be liable to the same extent as
requirements: if he had signed in his own name. [Sec. 18,
(a) It must be in writing and signed by the NIL]
maker or drawer;
• Signature of any party may be made by
(b) Must contain an unconditional duly authorized agent; no particular form
promise or order to pay a sum certain
of appointment necessary. [Sec. 19, NIL]
in money;
(c) Must be payable on demand, or at a • Signature is binding and may be in one’s
fixed or determinable future time; handwriting, printed, engraved,
(d) Must be payable to order or to bearer; lithographed or photographed so long as
and it is intended or adopted as the signature
(e) Where the instrument is addressed to of the signer or made with his authority.
a drawee, he must be named or (Campos)
otherwise indicated therein with
reasonable certainty. • Signature may appear on any part of the
instrument. However, if the signature is
so placed upon the instrument that it is
Note: Sections 184 and 126 define a not clear in what capacity the person
promissory note and a bill of exchange using intended to sign, he is deemed an
the requisites listed in Section 1. indorser. [Sec. 17 (f), NIL]
A.1. IN WRITING AND SIGNED BY THE A.2. CONTAINING AN UNCONDITIONAL

MAKER OR DRAWER PROMISE TO PAY OR ORDER TO PAY A
SUM CERTAIN IN MONEY
Sec. 18, NIL. Liability of person signing in trade
or assumed name. - No person is liable on the Sec. 3, NIL. When promise is unconditional. -
instrument whose signature does not appear An unqualified order or promise to pay is
thereon, except as herein otherwise expressly unconditional within the meaning of this Act
provided. But one who signs in a trade or though coupled with:
assumed name will be liable to the same
(a) An indication of a particular fund out
extent as if he had signed in his own name.
of which reimbursement is to be made
or a particular account to be debited
with the amount; or
IN W RITING
(b) A statement of the transaction which
What is considered "In writing" - includes gives rise to the instrument.
print; written or typed. Section 191 of the NIL
provides that the word “’written’ includes But an order or promise to pay out of a
printed, and ‘writing’ includes print.” particular fund is not unconditional.
Rationale for requirement: Since an

instrument is a document, there must be
PAGE 12 OF 320
UNCONDITIONAL • As to promissory note: Promise to pay

should be express on the face of the
• The promise or order to pay, to be
instrument. (Campos)
unconditional, must be unqualified.
(Campos) o The word "promise" is not
absolutely necessary. Any
• Must not be dependent upon a expression equivalent to a
contingent event that is not certain to promise is sufficient.
happen. (Abad) (Campos)
• The fact that the condition appearing on o Mere acknowledgment of a
the instrument has been fulfilled will not debt is insufficient. (Campos)
convert it into a negotiable one. [Sec. 4,
NIL] • As to bill of exchange: Order –
command made by the drawer
• An instrument which contains an order or addressed to the drawee ordering the
promise to do an act in addition to the latter to pay the payee or the holder a
payment of money (with the exception of sum certain in money; the instrument
certain acts enumerated in Sec. 5 of the is, by its nature, demanding a right.
NIL) is not negotiable.
o Words which are equivalent
• An instrument where the maker or the to an order are sufficient.
person primarily liable has the option to
require something to be done in lieu of o A mere request or authority to
payment of money is not negotiable. But pay does not constitute an
it is negotiable if the option to require order. Although the mere use
something to be done in lieu of payment of polite words like "please"
of money is with the holder.[Campos] does not of itself deprive the
instrument of its
characteristics as an order, its
language must clearly
Fund indicate a demand upon the
Particular Fund
for Reimbursement drawee to pay.
(conditional)
(unconditional)
The drawee pays the The drawee pays SUM PAYABLE MUST BE CERTAIN
payee from his own directly from the
funds. Afterwards, particular fund Sec. 2, NIL. What constitutes certainty as to
the drawee pays indicated. sum. - The sum payable is a sum certain within
himself from the the meaning of this Act, although it is to be
indicated fund. paid:
Indicated fund is not Particular fund (a) with interest; or

the direct source of indicated is the direct (b) by stated installments; or
payment. source of payment. (c) by stated installments, with a
(Sundiang and provision that, upon default in
Aquino) payment of any installment or of
interest, the whole shall become due;
or
(d) with exchange, whether at a fixed rate
When conditional: A negotiable instrument is or at the current rate; or
conditional when reference to the fund clearly (e) with costs of collection or an
indicates an intention that such fund alone attorney's fee, in case payment shall
should be the source of payment. not be made at maturity.
[Metropolitan Bank vs. CA, G.R. No. 88866
(1991)]
ORDER OR PROMISE TO PAY
PAGE 13 OF 320
Note: A sum is certain if from the face of the interest, if any, but the obligation to pay the
instrument it can be determined even if it note remains.
requires mathematical computation.
(Sundiang and Aquino)
AT A FIXED TIME
PAYABLE IN MONEY • Only on the stipulated date, and not

before, may the holder demand its
• The instrument must be capable of being payment.
transformed into money, since negotiable
instruments are intended to be • Should he fail to demand payment, the
substitutes for money instrument becomes overdue but remains
valid and negotiable. It is merely
• “Money” as used in the law is not converted to a demand instrument with
necessarily limited to “legal tender” as respect to the person who issued,
defined by law but includes any particular accepted, or indorsed it when overdue.
kind of current money. [Sec. 6(e), NIL and [Sec. 7, NIL]
PNB v. Zulueta, G.R. No. L-7271 (1957)]
• An agreement to pay in foreign currency AT A DETERMINABLE FUTURE TIME
is valid. (RA 8183)
Sec. 4, NIL. Determinable future time; what
• An instrument payable in personal
property like merchandise, shares of constitutes. - An instrument is payable at a
determinable future time, within the meaning
stock or gold is non-negotiable.
of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
A.3. PAYABLE ON DEMAND, OR AT A
(b) On or before a fixed or determinable
FIXED OR DETERMINABLE FUTURE TIME
future time specified therein; or
Rationale: to inform the holder of the
(c) On or at a fixed period after the
instrument of the date when he may enforce
payment thereof. occurrence of a specified event which
is certain to happen, though the time
of happening be uncertain.
ON DEMAND An instrument payable upon a contingency is
not negotiable, and the happening of the
Sec. 7, NIL. When payable on demand. - An event does not cure the defect.
instrument is payable on demand:
(a) When it is so expressed to be payable

on demand, or at sight, or on Note: It is required that the maturity of the
presentation; or instrument can be absolutely determined
with certainty. (Abad)
(b) In which no time for payment is
expressed. Examples:
• At a fixed period after date or sight, e.g.,
Where an instrument is issued, accepted, or “30 days after date.”
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, • On or before a fixed or determinable
payable on demand. future time specified therein, e.g.,
“payable on or before December 1, 2000”
• On or at a fixed period after the
Note: The holder may call for payment any occurrence of a specified event which is
time; and the maker has an option to pay at certain to happen, though the time of
any time. The refusal of the holder to accept happening be uncertain, e.g., “payable
payment will terminate the running of within 60 days after the death of Jose”
PAGE 14 OF 320
Effect of Acceleration Provisions A.4. PAYABLE TO ORDER OR TO BEARER

• If option (absolute or conditional) to • The negotiability or non-negotiability of
accelerate maturity is on the maker, the an instrument is determined from the
instrum ent is still negotiable. (Campos) face of the instrument itself. [Caltex vs.
CA, G.R. No. 97753 (1992)]
• If option to accelerate is on the holder
and can be exercised only after the • Therefore, the instrument must contain
happening of a specified event/act over words of negotiability. (2012 Bar
which he has no control (conditional), the Question) For example:
instrument is still negotiable. (Campos)
o “Pay to the order of Juan Cruz”, or
Note: If option on the part of the holder is “I promise to pay to the order of
absolute, the instrument is non-negotiable. Juan Cruz”
o “Pay to Juan Cruz or bearer”, or “I
promise to pay Juan Cruz or
Insecurity Clauses
bearer”
Provisions in the contract which allow the
holder to accelerate payment “if he deems • Instrument need not follow the language
himself insecure.” The instrument is rendered of the law, but any term which clearly
non-negotiable. (Sundiang and Aquino) indicates an intention to conform to the
legal requirements is sufficient.
Provisions extending tim e of paym ent

PAYABLE TO ORDER
General rule: Negotiability not affected.
Effect is similar with that of an acceleration Sec. 8, NIL. When payable to order. - The
clause at the option of the maker. (Campos) instrument is payable to order where it is
drawn payable to the order of a specified
Exception: Where a note with a fixed person or to him or his order. It may be drawn
maturity provides that the maker has the payable to the order of:
option to extend time of payment until the
happening of contingency, the instrument is (a) A payee who is not maker, drawer, or
NOT negotiable. The time for payment may drawee; or
never come at all. (b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
Extension Clauses (e) One or some of several payees; or
(f) The holder of an office for the time
An instrument is payable at a definite time if being.
by its terms, it is payable at a definite time Where the instrument is payable to order, the
subject to extension at the option of the payee must be named or otherwise indicated
holder, ot to an extension to a further definite therein with reasonable certainty.
time at the option of the maker or acceptor or
automatically upon or after a specified event
or act. (Sundiang and Aquino)
Note: Without the words "to order" or "to the
order of" the instrument is payable only to
Paym ent on Installm ents the person designated therein and is
therefore non-negotiable. [Consolidated
If the instrument states that the amount shall Plywood Industries vs. IFC Leasing, G.R. No.
be paid in two equal installments, the second 72593 (1987)]
being payable pm a fixed date, the
instrument can be considered negotiable
since the first installment would then be
payable on demand. (Vitug)
PAGE 15 OF 320
PAYABLE TO BEARER presenting it for payment without the

drawer's indorsement. [Ang Tek Lian vs.
Sec. 9, NIL. When payable to bearer. - The CA, G.R. No. L-2516 (1950)]
instrument is payable to bearer:
(a) When it is expressed to be so payable;
or W here the Maker is the Payee
(b) When it is payable to a person named • In effect making himself liable to himself.
therein or bearer; or Thus, the instrument produces no legal
(c) When it is payable to the order of a effect.
fictitious or non-existing person, and
such fact was known to the person • It will produce legal effects only once the
making it so payable; or payee-maker indorses the instrument to
(d) When the name of the payee does not another person because such
purport to be the name of any person; indorsement will then give rise to rights
or and obligations. (Abad)
(e) When the only or last indorsement is
an indorsement in blank.
A.5. DRAWEE MUST BE NAMED OR
DESIGNATED WITH REASONABLE
Exam ples: CERTAINTY
(1) Expressed to be so payable - "I promise • Applies only to a bill of exchange.

to pay the bearer the sum" • A bill may be addressed to two or more
(2) Payable to a person named therein or drawees jointly whether they are partners
bearer -"Pay to A or bearer" or not, but not to two or more drawees in
the alternative or in succession. [Sec. 128,
(3) Payable to the order of a fictitious person NIL]
or non-existing person, and such fact was
known to the person making it so payable • Examples:
- “Pay to John Doe or order"
o “To Juan Cruz and Jose Reyes” –
(4) Name of payee does not purport to be the negotiable
name of any person – "Pay to cash"; "Pay
o “To Juan Cruz or Jose Reyes” – not
to sundries." negotiable; no certainty as to
(5) Only or last indorsement is an drawee
indorsement in blank.
B. DETERMINATION OF
Fictitious Payee Rule NEGOTIABILITY
• It is not necessary that the person
referred to in the instrument is really non- • In determining the negotiability of an
existent or fictitious to make the instrument, the instrument in its entirety
instrument payable to bearer. The person and by what appears on its face must be
to whose order the instrument is made considered. It must comply with the
payable may in fact be existing but he is requirements of Sec. 1 of the Negotiable
still fictitious or non-existent under Sec. Instruments Law. [Caltex Phils. v. CA, G.R.
9(c) of the NIL if the person making it so No. 97753 (1992)]
payable does not intend to pay the
specified persons. [PNB v. Rodriguez, G.R. • The acceptance of a bill of exchange is
No. 170325 (2008)] not important in the determination of its
negotiability. The nature of acceptance is
• A check drawn payable to the order of important only on the determination of
"CASH" is a check payable to bearer, and the kind of liabilities of the parties
the bank may pay it to the person
PAGE 16 OF 320
involved. [PBCOM vs. Aruego, G.R. Nos. Manila Oil Refining, G.R. No. L-18103
L-25836-37 (1993)] (1922)]
Omissions and
Additional Provisions
Provisions That Do
That Do Not Affect
Not Affect
Negotiability
Negotiability
(1) Non-dating of the (1) Authorizes the

instrument sale of collateral
securities on
(2) Non-specification
default;
of value given, or
that any value (2) Authorizes
had been given confession of
judgment on
(3) Non-specification
default;
of place where it
is drawn or place (3) Waives the benefit
where it is of law intended to
payable protect the
debtor; or
(4) Bears a seal
(4) Allows the
(5) Designation of
creditor the
particular kind of
option to require
currency in which
something in lieu
payment is to be
of money. (Sec. 5)
made. (Sec. 6)
Note: Negotiability is
affected when
instrument contains a
promise or order to do
any act in addition to
the payment of
money.
Note:
• A confession of judgment is provision
given by the maker authorizing the
plaintiff's attorney to sign judgment and
issue execution for the value of the
instrument, costs, and attorney's fees.
This is also called a judgment cognivit
actionem. If accompanied by withdrawal
of plea, it is called judgment relicta
verificatione.
• A confession of judgment is not
recognized in our country, as it is against
public policy. It denies due process, and
deprives the right of appeal. [PNB v.
PAGE 17 OF 320
III. Kinds of Negotiable B.1. KINDS OF BILLS OF EXCHANGE

(1) Draft – used synonymously with bill of
Instruments exchange although it normally refers to a
bill of exchange used in documentary
exchange like letters of credit
A. PROMISSORY NOTE transactions.
(2) Inland and foreign bill – an Inland
Sec. 184, NIL. Promissory note, defined. - A bill is a bill which is, or on its face
negotiable promissory note within the purports to be, both drawn and payable
meaning of this Act is an unconditional within the Philippines. Any other bill is a
promise in writing made by one person to foreign bill.
another, signed by the maker, engaging to pay (3) Time draft – draft that is payable at a
on demand, or at a fixed or determinable fixed date.
future time, a sum certain in money to order or
to bearer. Where a note is drawn to the (4) Sight or dem and draft – payable
maker's own order, it is not complete until when the holder presents it for payment.
indorsed by him. (5) Trade acceptance – used in contracts
of sale where the seller as drawer orders
the buyer (as drawee) to pay a sum
A.1. KINDS OF PROMISSORY NOTES certain to the same seller (payee).
(1) Certificate of deposit – a form of (6) Banker’s acceptance – a time draft
promissory note which is a written across the face which the drawee has
acknowledgment of a bank of its receipt written the word accepted. (Sundiang
of a certain sum with a promise to repay and Aquino)
the same. (7) Check - A bill of exchange drawn on a
(2) Bonds – a certificate or evidence of a bank payable on demand (Sec. 185). It is
debt on which the issuing company or the most common form of bill of
governmental body promises to pay the exchange.
bondholders a specified amount of
interest for a specified length of time, and
to repay the loan on the expiration date. B.2. INSTANCES WHEN A BILL OF
EXCHANGE MAY BE TREATED AS A
(3) Debenture – a promissory note or bond PROMISSORY NOTE
backed by the general credit of a
corporation and usually not secured by a (2011 and 2015 Bar Question)
mortgage or lien on any specific property.
Sec. 130, NIL. When bill may be treated as
promissory note. - Where in a bill the drawer and
drawee are the same person or where the
drawee is a fictitious person or a person not
B. BILL OF EXCHANGE having capacity to contract, the holder may treat
the instrument at his option either as a bill of
Sec. 126, NIL. Bill of exchange, defined. - A bill exchange or as a promissory note.
of exchange is an unconditional order in
writing addressed by one person to another, Sec. 17, NIL. Construction where instrument is
signed by the person giving it, requiring the ambiguous. - Where the language of the
person to whom it is addressed to pay on instrument is ambiguous or there are omissions
demand or at a fixed or determinable future therein, the following rules of construction apply:
time a sum certain in money to order or to x---x
bearer. (Sec. 126)
(e) Where the instrument is so ambiguous that
there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
PAGE 18 OF 320
x---x IV. Completion and

(1) The drawer and the drawee are the same Delivery
person;
(2) Drawee is a fictitious person; A. STEPS IN THE EXECUTION OF
(3) Drawee does NOT have the capacity to NEGOTIABLE INSTRUMENTS
contract (Sec. 130, NIL)
(4) Where the bill is drawn on a person who (1) Writing of the instrument completely in
is legally absent; accordance with the requisites of
negotiability under Sec. 1.
(5) Where the instrument is so ambiguous
that there is doubt whether it is a bill or (2) Delivery of the instrument by the maker
note, the holder may treat it as either at or the drawer to the payee in order to give
his election (Sec. 17[e], NIL) legal effect thereto. (Abad)
Note: It may sometimes be difficult to locate
the boundary line between a complete and an
Promissory Note Bill of Exchange incomplete instrument... It would seem that if
an instrument contains all the requisites for
Unconditional Unconditional order making it a negotiable one, it should be
promise considered as complete though it in fact may
Involves two parties Involves three parties have blanks as to non-essentials... (Campos)
Maker is primarily Drawer is only
liable secondarily liable
B. INSERTION OF DATE
Only one Two presentments:
presentment: for for acceptance and for
(2012 Bar Question)
payment payment
Sec. 13, NIL. When date may be inserted. -
Bill of Exchange Check Where an instrument expressed to be payable
at a fixed period after date is issued undated,
Not necessarily It is necessary that a or where the acceptance of an instrument
drawn on a deposit. check be drawn on a payable at a fixed period after sight is
The drawee need not bank deposit. undated, any holder may insert therein the
be a bank Otherwise, there true date of issue or acceptance, and the
would be fraud. instrument shall be payable accordingly. The
Death of a drawer of a Death of the drawer of insertion of a wrong date does not avoid the
BOE, with the a check, with the instrument in the hands of a subsequent
knowledge of the knowledge of the holder in due course; but as to him, the date so
bank, does not revoke bank, revokes the inserted is to be regarded as the true date.
the authority of the authority of the
drawee to pay. banker to pay.
Any holder may insert the true date of issue
or acceptance of an instrument where:
May be presented for Must be presented for
payment within payment within a (1) The instrument is expressed to be
reasonable time after reasonable time after payable at a fixed period after date is
its last negotiation. its issue. issued undated; or
May be payable on Always payable on (2) The acceptance of an instrument
demand or at a fixed demand payable at a fixed period after sight is
or determinable undated.
future time
PAGE 19 OF 320
C. EFFECT OF ANTE-DATING AND In this case a real defense exists and not even
POST-DATING a holder in due course can recover on the
instrument, for the law is specific that it is not
a valid contract in the hands of any holder.
Sec. 12, NIL. Ante-dated and post-dated. - The (Campos)
instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided Note: A drawee bank whose negligent
custody of the checks, after partial execution,
this is not done for an illegal or fraudulent
purpose. The person to whom an instrument contributed to its escape, is estopped from
so dated is delivered acquires the title thereto raising the real defense under Sec. 15 of the
NIL. (Campos)
as of the date of delivery.
F. COMPLETE AND UNDELIVERED

D. COMPLETION OF BLANKS
INSTRUMENTS
Sec. 14, NIL. Blanks; when may be filled. -

Sec. 16, NIL. Delivery; when effectual; when
Where the instrument is wanting in any
presumed. - Every contract on a negotiable
material particular, the person in possession
thereof has a prima facie authority to complete instrument is incomplete and revocable until
delivery of the instrument for the purpose of
it by filling up the blanks therein. And a
giving effect thereto. As between immediate
signature on a blank paper delivered by the
parties and as regards a remote party other
person making the signature in order that the
than a holder in due course, the delivery, in
paper may be converted into a negotiable
order to be effectual, must be made either by
instrument operates as a prima facie authority
or under the authority of the party making,
to fill it up as such for any amount. In order,
drawing, accepting, or indorsing, as the case
however, that any such instrument when
may be; and, in such case, the delivery may be
completed may be enforced against any
shown to have been conditional, or for a
person who became a party thereto prior to its
special purpose only, and not for the purpose
completion, it must be filled up strictly in
of transferring the property in the instrument.
accordance with the authority given and within
But where the instrument is in the hands of a
a reasonable time. But if any such instrument,
holder in due course, a valid delivery thereof by
after completion, is negotiated to a holder in
all parties prior to him so as to make them
due course, it is valid and effectual for all
liable to him is conclusively presumed. And
purposes in his hands, and he may enforce it
as if it had been filled up strictly in accordance where the instrument is no longer in the
possession of a party whose signature appears
with the authority given and within a
thereon, a valid and intentional delivery by him
reasonable time.
is presumed until the contrary is proved.
E. INCOMPLETE AND UNDELIVERED

• Non-delivery of a complete instrument is
INSTRUMENTS a personal defense. (Campos)
• Delivery of an instrument is a prerequisite
Sec. 15, NIL. Incomplete instrument not for liability. If the instrument is complete
delivered. - Where an incomplete instrument in all its particulars, but is not delivered,
has not been delivered, it will not, if completed there is no contract. However if the
and negotiated without authority, be a valid instrument is no longer in the possession
contract in the hands of any holder, as against of a party who has signed it, a delivery is
any person whose signature was placed presumed until the contrary is proved.
thereon before delivery. (Campos)
• If the holder of the instrument is a holder
in due course, the instrument is not
merely prima facie deemed delivered, but
PAGE 20 OF 320
this fact is conclusively presumed. Thus, evidence that there was no

(Campos) authority or that the authority granted
has been exceeded may be presented by
• Until the same is delivered, the the maker in order to avoid liability under
instrument remains revocable. the instrument. [Patrimonio v. Gutierrez
and Marasigan, G.R. No. 187769 (2014)]
G. INCOMPLETE AND DELIVERED (2) The instrument must be filled up strictly
INSTRUMENTS (SEC. 14, NIL) in accordance with the authority given
and within reasonable time
(1) Holder has prima facie authority to fill up (3) HDC may enforce the instrument as if
the instrument, but he must first prove filled up according to (2) above.
that he has the authority to fill up. For
such presumption to apply, issuance is
necessary. This provision merely raises a personal
defense. (Campos)
Note: Prima facie authority to complete
the check does not extend to its use (i.e.,
subsequent transfer or negotiation) once H. COMPLETE AND DELIVERED
the check is completed. Only the INSTRUMENTS
authority to complete the check is
presumed. The law’s use of the term
"prima facie" underscores the fact that In a complete and delivered instrument,
the authority which the law accords to a rights and liabilities under the negotiable
holder is a presumption juris tantum only; instruments law attach.
hence, subject to subject to contrary proof.
Section 14 Section 15 Section 16
Delivery
Delivered Undelivered Undelivered
Completeness
(1) Wanting in any material

particular; Mechanically incomplete Mechanically incomplete
(2) Blank paper with signature
Authority of Person in Possession
(1) Prima facie authority to

complete it by filling up the May negotiate if delivered to him
blanks; No authority to complete and/or by or under the authority of the
(2) Signature operates as a prima negotiate party making, indorsing, drawing,
facie authority to fill it up for any or accepting
amount
When Enforceable
Delivery is made by or under

Filled up strictly in accordance
authority of the party making,
with authority given and within a Not enforceable
indorsing, drawing, or accepting,
reasonable time
as the case may be
PAGE 21 OF 320
Kind of Defense
Personal Real Personal
Rights of Holder
Can enforce the instrument. Here,

(1) If HDC, he can enforce the the instrument is in the hands of a
instrument as completed as HDC, a valid delivery thereof by all
against parties prior or parties prior to him so as to make
subsequent to the completion; them liable to him is conclusively
(2) If not a HDC, he can enforce None in the hands of any holder. presumed. Where the instrument
the instrument as completed only is no longer in the possession of a
against parties subsequent to the party whose signature appears
completion but not against those thereon, a valid and intentional
prior thereto. delivery to him is presumed until
the contrary is proved.
PAGE 22 OF 320
V. Signature signature words indicating that he signs for or

on behalf of a principal or in a representative
capacity, he is not liable on the instrument if
Sec. 18, NIL. Liability of person signing in trade he was duly authorized; but the mere addition
or assumed name. - No person is liable on the of words describing him as an agent, or as
instrument whose signature does not appear filling a representative character, without
thereon, except as herein otherwise expressly disclosing his principal, does not exempt him
provided. But one who signs in a trade or from personal liability.
assumed name will be liable to the same
extent as if he had signed in his own name.
Signature of any party may be made by duly
authorized agent, established as in ordinary
General rule: One whose signature does agency.
not appear on the instrument shall not be
liable thereon.
B.1. LIABILITY OF AN AGENT
Exceptions:
General rule: Where a person adds to his
(1) The principal who signs through an agent signature words indicating that he signs on
(2) The forger behalf of a principal, then he is not liable if he
was duly authorized.
(3) One who indorses in a separate
instrument (allonge) OR where an Exceptions:
acceptance is written on a separate paper (1) Mere addition of words describing
(4) One who signs his assumed or trade him as an agent WITHOUT disclosing
name his principal [Sec. 20, NIL]
(5) A person negotiating by delivery (as in the (2) Where a broker or agent negotiates
case of a bearer instrument) is liable only an instrument without indorsement,
to his immediate indorsee. he incurs all liabilities in Sec. 65 of the
NIL, unless he discloses name of
principal and the fact that he is only
A. SIGNING IN TRADE NAME acting as an agent. [Sec. 69, NIL]
One who signs in a trade or assumed name Requisites to negative personal

will be liable to the same extent as if he had liablity of agent:
signed in his own name [Sec. 18, NIL]
(1) He must be duly authorized;
(2) He must act within the scope of his
B. SIGNATURE OF AGENT authority
(3) He must indicate in the instrument that
Sec. 19, NIL. Signature by agent; authority; he is signing merely as agent; and
how shown. - The signature of any party may
be made by a duly authorized agent. No (4) He must disclose his principal.
particular form of appointment is necessary for
this purpose; and the authority of the agent
may be established as in other cases of C. SIGNATURE PER PROCURATION
agency. (2011 Bar Question)
• A signature per procuration operates as
notice to the holder that the agent has a
Sec. 20, NIL. Liability of person signing limited authority to sign, and the
as agent, and so forth. - Where the principal is bound only in case the agent
instrument contains or a person adds to his
PAGE 23 OF 320
in so signing acted within the actual the forgery or want of authority.

limits of his authority [Sec. 21, NIL]
• According to the majority rule, the words
“per proc” or “procuration” must appear Counterfeit making or fraudulent alteration of
on the note for this rule in Section 21 to any writing, which may consist of:
be applicable (Campos) (1) Signing of another’s name with intent to
defraud; or
D. INDORSEMENT BY MINOR OR (2) Alteration of an instrument in the name,
CORPORATION amount, name of payee, etc. with intent
to defraud.
• The indorsement or assignment of the

instrument by a corporation or by an General rule: When a signature is forged or
infant (minor) passes the property therein, made without the authority of the person,
notwithstanding that from want of only the forged signature (not the instrument
capacity, the corporation or infant may itself and the other genuine signatures) is
incur no liability thereon. [Sec. 22, NIL] wholly inoperative
• The provision does not change the rule in Effects:
civil law on minor's contracts, which
(1) No right to retain the instrument
provides that a contract enetered into by
(2) No right to give a discharge therefor
a minor is voidable, and the minor cannot
(3) No right to enforce payment thereof
be held liable thereon unless he ratifies it
against any party thereto can be acquired
upon reaching majority.
through or under such signature
• However, under Section 22 of the NIL, Exception: The party against whom it is
should the minor indorse a negotiable sought to be enforced is precluded from
instrument, although he cannot be held setting up the forgery or want of authority as
liable on his contract of indorsement, title a defense. [Sec. 23, NIL]
to the instrument passes to his indorsee
and the latter can rightfully recover from
the maker, free from the defense of F.1 PERSONS PRECLUDED FROM SETTING
minority. (Campos) UP DEFENSE OF FORGERY (CAMPOS)
• REAL defense but available only to the (1) Those who warrant or admit the
incapacitated party (i.e. the minor or the genuineness of the signature in question.
corporation). This includes indorsers, persons
negotiating by delivery and acceptors.
(2) Those who, by their acts, silence, or
F. FORGERY negligence, are estopped from setting up
(3rd Most Frequently Asked Since 1992) the defense of forgery.
(2006, 2008, 2010, 2011 2015 Bar Question) (3) Those who are negligent.
Sec. 23, NIL. Forged signature; effect of. -
When a signature is forged or made without F.2 RULES ON FORGERY
the authority of the person whose signature it
purports to be, it is wholly inoperative, and no F.2.A. PROMISSORY NOTE
right to retain the instrument, or to give a Maker’s signature forged
discharge therefor, or to enforce payment
thereof against any party thereto, can be (1) Maker is not liable because he never
acquired through or under such signature, became a party to the instrument.
unless the party against whom it is sought to (2) Indorsers subsequent to forgery are liable
enforce such right is precluded from setting up because of their warranties.
(3) Party who made the forgery is liable.
PAGE 24 OF 320
[Associated Bank vs. CA, G.R. No. 107382

(1996)]
Payee’s signature forged
(4) Indorsers subsequent to forgery are liable
(1) Payee is not liable.
(such as collecting bank or last endorser)
(2) Maker is still liable. (REASON:
Indorsement is not necessary to title and (5) Party who made the forgery is liable
the maker engages to pay holder)
Payee’s signature forged
(3) Indorsers subsequent to forgery are liable.
(4) Party who made the forgery is liable. (1) Payee is not liable
(2) Drawer is still secondarily liable
Indorser’s signature forged
(3) Drawee is liable if it paid or accepted
(1) Maker, payee, indorser whose signature/s the instrument [Sec. 62, NIL; Price v.
was/were forged, and all indorsers Neal, 3 Burr. 1354 (1762)], but it may
preceding the forgery are not liable. pass liability back through the
(2) Indorsers subsequent to forgery are liable. collection chain
(3) Party who made the forgery is liable.
(4) Indorsers subsequent to forgery are
liable (such as collecting bank)
F.2.B. BILL OF EXCHANGE
(5) Party who made the forgery is liable
Drawer’s signature forged
Indorser’s signature forged
(1) Drawer is not liable because he was never
(1) Drawer, payee, indorser whose
a party to the instrument.
signature/s was/were forged and all
(2) Drawee is liable if it paid or accepted the indorsers preceding the forgery are
instrument (no recourse to drawer) not liable.
because he admitted the genuineness of
(2) Drawee is liable if it paid or accepted
the drawer’s signature [Sec. 62, NIL; Price
the instrument [Sec. 62, NIL; Price v.
v. Neal, 3 Burr. 1354 (1762)]
Neal, 3 Burr. 1354 (1762)]
(3) Drawee cannot recover from the
(3) Indorsers subsequent to forgery are
collecting bank because there is no privity
liable. (such as collecting bank)
between the collecting bank and the
drawer. The collecting bank does not give (4) Party who made the forgery is liable.
any warranty re: the drawer’s signature.
SUMMARY OF RULES ON FORGERY AS TO PROMISSORY NOTES

Order Instrument Bearer Instrument
Maker’s Signature Forged
Maker is not liable because he never became a party

Same
to the instrument.
Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.
Payee’s Signature Forged
Maker and payee not liable. Maker is liable.
Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.
PAGE 25 OF 320
Indorser’s Signature Forged

Maker, payee and indorser whose signature was Maker is liable. Indorsement is not necessary to
forged are not liable. pass title and the maker engages to pay any bearer
of the instrument.
Indorsers subsequent to forgery are liable because Only the indorser whose signature was forged can
of their warranties. raise the defense of forgery against a HDC.
SUMMARY OF RULES ON FORGERY AS TO BILLS OF EXCHANGE

Drawer’s Signature Forged
Drawer is not liable because he was never a party to
Same
the instrument.
Drawee-acceptor is liable, without recourse to
Drawee-acceptor is liable if it paid. It cannot recover
drawer, if it paid because he admitted the genuiness
from the collecting bank because it is bound to
of the drawer’s signature.
know the drawer’s signature since the latter is its
depositor.
Drawee also cannot recover from the collecting
bank because there is no privity of contract between
The drawee may recover from the drawer when the
the collecting bank and the drawer. The collecting
latter’s negligence is the proximate cause of the loss
bank does not give any warranty regarding the
or contributed thereto.
signature of the drawer.
Indorsers subsequent to forgery (such as collecting Indorsers may be made liable to those persons who
bank or last endorser) are liable. obtain title through their indorsements.
Payee’s Signature Forged
Drawer, drawee and payee not liable. Drawer is liable (his indorsement is not necessary to
pass title).
Cut-off rule applies.
Drawee is liable (no privity between drawer and
Indorsers subsequent to forgery (such as collecting payee because indorsement of payee is not
bank) are liable without prejudice to their right to necessary).
proceed against the forger.
Payee is not liable.
Collecting bank is liable because of warranty.

However, it may recover from the person who forged
the indorsement on the check and deposited or
encashed the same.
Indorser’s Signature Forged
Drawer, payee and indroser whose signatures were Drawer is liable even if special indorsement was
forged are not liable. forged because indorsement is not necessary to
title.
Cut-off rule does not apply.
Drawee is liable if it paid. Drawee is liable.
Indorsers subsequent to forgery (such as collecting Indorser whose signature was forged is liable
bank) are liable. because indorsement is not necessary to title.
PAGE 26 OF 320
G. ACCEPTANCE AND PAYMENT Rule: The drawee who pays the holder of the
UNDER MISTAKE bill cannot recover from the holder what he
paid under mistake. (Campos)
Sec. 62, NIL. Liability of acceptor. - The b) Stop Paym ent Order is one issued by
the drawer of a check countermanding
acceptor, by accepting the instrument,
engages that he will pay it according to the his first order to the drawee bank to pay
the check.
tenor of his acceptance and admits:
(1) The existence of the drawer, the Rule: The drawee bank is bound to follow the
genuineness of his signature, and his order, provided it is received prior to its
certification or payment of the check.
capacity and authority to draw the
instrument; and (Campos)
(2) The existence of the payee and his

then capacity to indorse. (3) Effects of Negligence of Depositor
• If such negligence of the depositor was
the proximate cause of the loss, the
(1) W hen the drawee accepts or pays a drawee-bank would NOT be liable.
forged instrum ent
• The negligence of the depositor/drawer
• Price v. Neal doctrine: As between equally would consist of the failure to to carefully
innocent persons, the drawee who pays examine bank statements, cancelled
money on, or accepts, a check or draft the checks, his check stubs, and other
signature on which was forged CANNOT pertinent records within a reasonable
recover the money from the one who time and to report any errors without
received it. The drawee is bound to know unreasonable delay to the drawee bank.
the signature of its depositor.
• If a drawer/depositor’s negligence and
• A bank is bound to know the signatures of delay should cause a bank to honor a
its depositors. If a bank pays a forged forged check, the drawer cannot later
check it must be considered as making complain should bank refuse to recredit
the payment out of its own funds and his account. (Campos)
cannot charge the account of the
depositor whose signature was forged.
[PNB vs. Quimpo, G.R. No. L-53194 (4) Effect of Paym ent under Forged
(1988)] Indorsements
• A bank is liable, irrespective of its good • In the case of a drawee's acceptance or
faith, in paying a forged check. [Samsung payment of a bill on which only an
vs. Far East Bank, G.R. No. 129015 INDORSEMENT has been forged, the
(2004)] drawee can recover the amount paid out
by him. RATIONALE: The drawee makes
no warranty as to the genuineness of any
(2) Extensions of Price v. Neal indorsement. (Campos)
doctrine
The bar to recovery on the part of a drawee
who pays money on, or accepts, a check or (5) Effect of negligence of drawee in
draft, is extended to overdrafts and stop inform ing recipient of forgery
payment orders.
• The rule is that a drawee's acceptance or
a) Overdraft occurs when a check is issued payment of a bill on which only an
for an amount more than what the INDORSEMENT has been forged is not a
drawer has in deposit with the drawee bar to his right to recover the amount
bank. paid out by him; however, there is an
exception to this rule.
PAGE 27 OF 320
• If it is shown that the drawee on learning o However, it should be noted that as

of the forgery did not give prompt notice an exception to the rule that a drawee
of it to the holder and that damage bank is not liable for a forged
resulted to said holder, recovery by the indorsement, when the negligence of
drawee is barred [Clearfield Trust Co. vs. the drawee bank is the proximate
US, 318 U.S. 363 (1943)] cause of the collecting bank’s
payment of a check with a forged
indorsement, the drawee bank may
(6) Effect of negligence of drawer in be held liable to the collecting bank.
case of forged indorsem ent on checks o Furthermore, when both the
• The drawer, as soon as he comes to know collecting bank and the drawee bank
of a forged indorsement should promptly are guilty of negligence, the degree of
notify the drawee bank. Otherwise, negligence of each will be weighed in
should his negligent delay be the considering the amount of loss which
proximate cause of any subsequent loss each should bear. [BPI vs. CA, G.R. No.
to the bank, the latter may properly 102383 (1992)]
charge it to the drawer's account.
(7) Com paring the liability of a

collecting bank and a drawee bank
• A collecting bank is only liable for forged
indorsements and not forgeries of the
drawer or maker’s signature. [PNB vs. CA,
G.R. No. L-26001 (1968)]
o Rationale: In presenting the checks
for clearing, the collecting agent
made an express guarantee on the
validity of “all the prior
endorsements.”
• 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
had done its duty to ascertain the
genuineness of the indorsements. [BPI vs.
CA, G.R. No. 102383 (1992)]
• A drawee bank is not liable for forged
indorsements.
o Rationale: The drawee bank is not
similarly situated as the collecting
bank because the former makes no
warranty as to the genuineness of any
indorsement. The drawee bank’s duty
is but to verify the genuineness of the
drawer’s signature and not of the
indorsement because only the drawer
is its client.
PAGE 28 OF 320
VI. Consideration
B. BURDEN OF PROOF -
Sec. 25, NIL. Value, what constitutes. — Value PRESUMPTION OF CONSIDERATION
is any consideration sufficient to support a
simple contract. An antecedent or pre-existing Sec. 24, NIL. Presumption of consideration. -
debt constitutes value; and is deemed such Every negotiable instrument is deemed prima
whether the instrument is payable on demand facie to have been issued for a valuable
or at a future time. consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
Because of the presumption, it is immaterial
otherwise requires:
whether or not “for value received” appears in
x---x
the instrument.
"Value" means valuable consideration;
x---x
C. EFFECT OF WANT OF
“Value” and “consideration” are generally
convertible terms. However, they may have CONSIDERATION
different implications.
“Consideration” is the proper term when the Sec. 28, NIL. Effect of want of consideration. -
payee of a note sues the maker, or the payee Absence or failure of consideration is a matter
of a bill sues the drawer, or an indorsee sues of defense as against any person not a holder
his immediate indorser. in due course; and partial failure of
consideration is a defense pro tanto, whether
“Value” is the proper term when a holder the failure is an ascertained and liquidated
sues any party to the instrument with whom amount or otherwise.
he himself has not dealt, the term “value” is
more appropriate.
An antecedent or pre-existing debt Absence or failure of consideration is a
constitutes value; and is deemed such matter of defense as against any person not a
whether the instrument is payable on holder in due course, hence, it is a personal
demand or at a future time. [Sec. 25, NIL] defense.
Value need not be full and a holder will be Partial failure of consideration is a defense
one for value even if he gave less than the pro tanto, meaning a defense to the extent of
face value of the instrument, provided the the failure. (Abad)
intention of the transferor is to transfer the
full amount represented by the instrument.
Effect of an illicit or unlawful
consideration: Illicit or illegal
A. WHO IS A HOLDER FOR VALUE consideration does not affect the negotiability
(HFV)? of the instrument as validity of consideration
is not one of the requisites of a negotiable
instrument. It is merely constitutes a defect of
1. A holder of an instrument for which value, title hence such illegality of consideration is
which need not be in full, has been given
merely a personal defense which cannot be
at any given time but only with respect to raised against a holder in due course. [Sec. 55
all parties who have become parties to
and 57, NIL] [2009 bar question]
the instrument prior to the time at which
value has been given. [Sec 26, NIL]
2. A holder who has a lien on the instrument
but only to the extent of his lien. [Sec 27,
NIL] (2011 Bar Question)
PAGE 29 OF 320
VII. Accommodation accommodation party. [Stelco Marketing

Corp. v. CA, G.R. No, 96160 (1992)]
Party
B. ACCOMMODATION PARTY AS
Sec. 29, NIL. Liability of accommodation SURETY
party. - An accommodation party is one who
has signed the instrument as maker, drawer, • An accommodation party is generally
acceptor, or indorser, without receiving value regarded as a surety for the party
therefor, and for the purpose of lending his accommodated.
name to some other person. Such a person is
• When the accommodation party makes
liable on the instrument to a holder for value,
payment to holder of the note, he has the
notwithstanding such holder, at the time of
right to sue the accommodated party for
taking the instrument, knew him to be only an
reimbursement. [Cañeda v. CA, G.R. No.
accommodation party.
81322 (1990)]
• Note: A corporation cannot act as an
Accom modation Party
accommodation party. The issue or
(1) Must be a party to the instrument, endorsement of negotiable instruments
signing as maker, drawer, acceptor, or by a corporation without consideration
indorser; and for the accommodation of another is
ultra vires [Crisologo v. CA, G.R. No.
(2) Must not have receieved value therefor;
80599 (1989)]
and
(3) Signed for the purpose of lending his
Accom modation Party v. Regular
name to some other person.
Party
A. LIABILITY OF AN ACCOMMODATION Accommodation Party Regular Party

PARTY Purpose
• Whether the liability is primary or Signs instrument for
secondary will depend on whether he the purpose of Does not sign the
signs as a maker, acceptor, drawer or lending his name or instrument for the
indorser. credit to some other same purpose
person
• The holder for value to whom the Value Received
instrument thus executed is subsequently
negotiated has a right of recourse against Signs the intrument Signs the instrument
the accommodation party in spite of the without receiving for value
former’s knowledge that no consideration value therefor
passed between the accommodation and Absence or Failure of Consideration as Defense
accommodated parties. [Sec. 28, NIL]
Cannot avail of the Can avail of said
• Does this mean that the accommodation defense of absence or defense against a
party is liable to a holder even if he is not failure of person not a holder in
a holder in due course, provided he is a consideration against due course
holder for value? The Supreme Court has a holder not in due
ruled that an accommodation party is course
liable ONLY to a HOLDER IN DUE Right to Sue
COURSE. However, the mere fact that the
holder knew of the accommodation does After paying the May not sue any
not prevent him from being a holder in holder, may sue the subsequent party for
due course in order to recover from the accommodated party reimbursement
for reimbursement
PAGE 30 OF 320
and completed by delivery.
VIII. Negotiation B.1. BY DELIVERY – IF PAYABLE TO

BEARER
Sec. 30, NIL. What constitutes negotiation. - Sec. 191, NIL. Definition and meaning of
An instrument is negotiated when it is terms. - In this Act, unless the contract
transferred from one person to another in such otherwise requires:
manner as to constitute the transferee the x---x
holder thereof. If payable to bearer, it is "Delivery" means transfer of possession,
negotiated by delivery; if payable to order, it is actual or constructive, from one person to
negotiated by the indorsement of the holder another;
and completed by delivery. x---x
"Issue" means the first delivery of the
instrument, complete in form, to a person who
A. NEGOTIATION DISTINGUISHED takes it as a holder;
FROM ASSIGNMENT x---x
Delivery means transfer of possession of

Transfer is a broader term than negotiation. If instrument by the maker or drawer, with
an instrument is transferred without intent to transfer title to the payee and
negotiation, the transfer is a mere recognize him as holder thereof
assignment which constitutes the transferee
as a mere assignee, not a holder, subject to Issuance is the FIRST delivery of the
all defenses existing among prior parties. instrument complete in form to a person who
Transfer thus includes both an ordinary takes it as a holder.
assignment and a negotiation. (Campos)
Requisites
Negotiation Assignment (1) Mechanical act of writing the instrument
completely and in accordance with the
The transfer of the The transferee does requirements of Section 1 of the NIL; and
instrument from one not become a holder,
person to another so nor can he become a (2) The delivery of the complete instrument
as to constitute the holder in due course; by the maker or drawer, with the
transferee the holder and he merely steps intention of giving effect to it, to the
thereof. [Sec.30, NIL] into the shoes of the payee or holder.
transferor. As such,
any defense available
against the transferor Presumption of delivery
is available against • Where the instrument is no longer in the
the transferee. possession of a party whose signature
appears thereon, a valid and intentional
delivery by him is presumed until the
B. MODES OF NEGOTIATION contrary is proved [Sec. 16, NIL]
• If it is in the hands of a holder in due
Sec. 30, NIL. What constitutes negotiation. - course, the presumption of a valid
An instrument is negotiated when it is delivery is conclusive [Sec. 16, NIL]
transferred from one person to another in such
manner as to constitute the transferee the
holder thereof. If payable to bearer, it is Presumption as to date
negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder • Date is not an essential element of
negotiability; it is not included in the
PAGE 31 OF 320
requirements for an instrument to be • CANNOT indorse a part only of the

negotiable under Sec. 1 of the NIL. amount payable; BUT if the instrument
has been paid in part, then the
• An undated instrument is considered to
instrument may be indorsed as to the
be dated as of the time it was issued [Sec.
residue [Sec. 32, NIL] (2012 Bar Question)
17 (c), NIL]
• CANNOT transfer the instrument to two
or more indorsees severally [Sec. 32, NIL]
B.2. BY INDORSEMENT COMPLETED BY
DELIVERY – IF PAYABLE TO ORDER • If not an indorsement of the entire
instrument, the transfer remains valid,
Sec. 191, NIL. Definition and meaning of but as a mere assignment which subjects
terms. - In this Act, unless the contract the holder to all defenses on the
otherwise requires: instrument (Campos)
x---x
"Indorsement" means an indorsement
completed by delivery; (4) If name misspelled in
x---x indorsement, indorsement will be
prim a facie deemed not valid.
B.2.A. INDORSEM ENT; HOW DONE Sec. 43, NIL. Indorsement where name is
misspelled, and so forth. - Where the name of
Sec. 31, NIL. Indorsement; how made. - The a payee or indorsee is wrongly designated or
indorsement must be written on the misspelled, he may indorse the instrument as
instrument itself or upon a paper attached therein described adding, if he thinks fit, his
thereto. The signature of the indorser, without proper signature.
additional words, is a sufficient indorsement.
• The indorsement should be made by the

(1) W here placed – The indorsement holder in the manner he was designated,
must be written [Sec. 31, NIL]: otherwise the signature will prima facie
(a) On the instrument itself [Sec. 31, NIL] , or not be a valid indorsement of the
instrument [Sec 43, NIL]
(b) On a separate piece of paper attached to
the instrument called “allonge”[Sec. 31, NIL]
(5) Indorsem ent where there are joint
payees
(2) Signature of the indorser,
without additional words, is a • Where the instrument is payable or
sufficient indorsement [Sec. 31, NIL] indorsed to “A and B,” they are joint
payees and an indorsement by either A or
B only will not constitute a valid
(3) Must be of the ENTIRE instrum ent negotiation, UNLESS the one indorsing is
authorized by the other. (Campos)
Sec. 32, NIL. Indorsement must be of entire
instrument. - The indorsement must be an • But where the instrument is payable to “A
indorsement of the entire instrument. An or B”, they payees are merely in the
indorsement which purports to transfer to the alternative, and either one may valdily
indorsee a part only of the amount payable, negotiate the same. (Campos)
or which purports to transfer the instrument
to two or more indorsees severally, does not
operate as a negotiation of the instrument. C. KINDS OF INDORSEMENT
But where the instrument has been paid in
part, it may be indorsed as to the residue.
Sec. 33, NIL. Kinds of indorsement. - An
indorsement may be either special or in blank;
PAGE 32 OF 320
and it may also be either restrictive or qualified • Specifies the person to whom/to whose
or conditional. order the instrument is to be payable; and
the indorsement of such indorsee is
necessary to further negotiation.
Four bases of classification of • A special indorser is liable to all
indorsem ents under the NIL: subsequent holders, unless the
(1) Special or in blank instrument is an originally bearer
instrument, in which case he is liable only
(2) Restrictive or Non-Restrictive to those who take title through his
(3) Qualified or unqualified indorsement. [Sec. 40, NIL]
(4) Conditional or unconditional • An instrument, payable to bearer, and

indorsed specially, may nevertheless be
All of the four bases of classification coexist further negotiated by delivery. [Sec 40,
with each other; thus, an indorsement may be NIL]
special and qualified at the same time. It may
also be special and unqualified, special and • Originally bearer instrument always
restrictive, special, unrestrictive and remains a bearer instrument. (Sundiang
unqualified and so on. (Campos) and Aquino)
C.1. AS TO MANNER OF FUTURE METHOD Blank

OF NEGOTIATION
• Specifies no indorsee, instrument so
Sec. 34, NIL. Special indorsement; indorsed is payable to bearer, and may be
indorsement in blank. - A special indorsement negotiated by delivery
specifies the person to whom, or to whose • The holder may convert a blank
order, the instrument is to be payable, and the indorsement into a special indorsement
indorsement of such indorsee is necessary to by writing over the signature of the
the further negotiation of the instrument. An indorser in blank any contract consistent
indorsement in blank specifies no indorsee, with the character of the indorsement.
and an instrument so indorsed is payable to [Sec 35, NIL]
bearer, and may be negotiated by delivery.
• An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
Sec. 40, NIL. Indorsement of instrument reconverted into an order instrument by a
payable to bearer. - Where an instrument, subsequent special indorsement
payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as C.2. AS TO TITLE TRANSFERRED
indorser to only such holders as make title
through his indorsement. Sec. 36, NIL. When indorsement restrictive. -
An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the
Sec. 35, NIL. Blank indorsement; how changed instrument; or
to special indorsement. - The holder may
convert a blank indorsement into a special (b) Constitutes the indorsee the agent of
indorsement by writing over the signature of the indorser; or
the indorser in blank any contract consistent (c) Vests the title in the indorsee in trust
with the character of the indorsement. for or to the use of some other
persons.
But the mere absence of words implying power
Special to negotiate does not make an indorsement
PAGE 33 OF 320
restrictive.
(1) Qualified
• Constitutes indorser as mere assignor of
Sec. 37, NIL. Effect of restrictive indorsement; title
rights of indorsee. - A restrictive indorsement • Made by adding the words “without
confers upon the indorsee the right: recourse”, “sans recourse,” “indorser not
(a) to receive payment of the instrument; holder,” “at the indorser’s own riske,” and
other terms of similar import. [Sec. 38,
(b) to bring any action thereon that the NIL].
indorser could bring;
• But this does not mean that the
(c) to transfer his rights as such indorsee, transferee only has the rights of an
where the form of the indorsement assignee; transfer remains a negotiation
authorizes him to do so. and transferee can still be a holder
But all subsequent indorsees acquire only the capable of acquiring a title free from
title of the first indorsee under the restrictive defenses of prior parties.
indorsement. Effects:
1. Relieves the qualified indorser of his
(1) Restrictive – Such indorsement either: liability to pay the instrument should the
maker be unable to pay
(a) Prohibits further negotiation of
instrument 2. The qualified indorser does not guarantee
the solvency of the maker, but merely his
(b) Constitutes indorsee as agent of legal title to the instrument
indorser
3. A qualified indorsement does not impair
Vests title in indorsee in trust for another [Sec the negotiable charater of the
36, NIL] intstrument
(2) Non-qualified
RIGHTS OF RESTRICTIVE INDORSEE
• Receive payment C.4. AS TO PRESENCE/ABSENCE OF
• Bring any action thereon that the indorser EXPRESS LIMITATIONS
could bring.
Sec. 39, NIL. Conditional indorsement. - Where
• Transfer his rights as such indorsee, but an indorsement is conditional, the party
all subsequent indorsees acquire only the required to pay the instrument may disregard
title of first indorsee under restrictive the condition and make payment to the
indorsement. [Sec 37, NIL] indorsee or his transferee whether the
condition has been fulfilled or not. But any
(2) Non-restrictive
person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person
C.3. AS TO KIND OF LIABILITY ASSUMED
indorsing conditionally.
BY INDORSER
Sec. 38, NIL. Qualified indorsement. - A
qualified indorsement constitutes the indorser (1) Conditional
a mere assignor of the title to the instrument.
It may be made by adding to the indorser's • Additional condition annexed to
signature the words "without recourse" or any indorser’s liability; such condition must
words of similar import. Such an indorsement be expressed
does not impair the negotiable character of • Where an indorsement is conditional, a
the instrument. party required to pay the instrument may
PAGE 34 OF 320
disregard the condition, and make

payment to the indorsee or his transferee, IX. Rights of the Holder
whether condition has been fulfilled or
not. A. DEFINITION OF A HOLDER
• But any person to whom an instrument so
indorsed is negotiated, will hold the same, Sec. 191, NIL. Definition and meaning of terms.
or the proceeds thereof, subject to the - In this Act, unless the contract otherwise
rights of the person indorsing requires:
conditionally. [Sec. 39, NIL]
x---x
"Holder" means the payee or indorsee of a bill
(2) Unconditional or note who is in possession of it, or the bearer
thereof;
C.5. OTHER KINDS OF INDORSEMENT
(1) Absolute – One by which the indorser
A.1. RIGHTS OF A HOLDER
binds himself to pay, upon no other
condition than the failure of prior parties A holder is a payee or indorsee of a bill or
to do so, and of due notice to him of such note who is in possession of it, or the bearer
failure thereof [Sec. 191, NIL]. He has the following
rights [Sec. 51, NIL]:
(2) Joint – All must indorse when an
instrument is payable to the order of two (1) To sue on the instrument in his
or more payees or indorsees who are not own nam e
partners. [Sec. 41, NIL]
• Unindorsed instruments: Section. 49, NIL.
Exceptions: Transfer without indorsement; effect of.
Where the holder of an instrument
• Where the payee or indorsee are partners; payable to his order transfers it for value
and
without indorsing it, the transfer vests in
• Where the payee or indorsee indorsing the transferee such title as the transferor
has authority to indorse for the others. had therein, and the transferee acquires
in addition, the right to have the
(3) Irregular – A person who, not otherwise indorsement of the transferor. But for the
a party to an instrument, places thereon purpose of determining whether the
his signature in blank before delivery. transferee is a holder in due course, the
[Sec. 64, NIL] negotiation takes effect as of the time
when the indorsement is actually made.
Liability of Irregular Indorser: Note: This section applies only to an
instrument payable to the order of the
• If the instrument is payable to the order transferor. This cannot apply to bearer
of a third person, he is liable to the payee instruments.
and to all subsequent parties.
• Cancellation of indorsement: Section 48,
• If the instrument is payable to the order NIL. Striking out indorsement. The holder
of the maker or drawer, or is payable to may at any time strike out any
bearer, he is liable to all parties indorsement which is not necessary to his
subsequent to the maker or drawer. title. The indorser whose indorsement is
• If he signs for the accommodation of the struck out, and all indorsers subsequent
payee, he is liable to all parties to him, are thereby relieved from liability
subsequent to the payee. [NIL, Sec. 64] on the instrument.
• Indorsement by agent: Section 20, NIL.
Liability of person signing as agent, and so
forth. Where the instrument contains or a
PAGE 35 OF 320
person adds to his signature words some person under whom he claims acquired
indicating that he signs for or on behalf of the title as holder in due course. But the last-
a principal or in a representative capacity, mentioned rule does not apply in favor of a
he is not liable on the instrument if he party who became bound on the instrument
was duly authorized; but the mere prior to the acquisition of such defective title.
addition of words describing him as an
agent, or as filling a representative
character, without disclosing his principal, B.1. WHO ARE HOLDERS IN DUE COURSE
does not exempt him from personal
(1) Holder in due course [HDC] under Sec. 52,
liability.
NIL
(2) Payment in due course to the
(2) HDC under Sec. 58, NIL: A holder who
holder discharges instrum ent
DERIVES title to the instrument through
a HDC has all the rights of the latter even
though he himself satisfies none of the
B. HOLDER IN DUE COURSE [HDC] requirements of due course holding
(2nd Most Frequently Asked since 1992)
HDC under Sec. 59, NIL
[presum ption]: Every holder is deemed
Sec. 52, NIL. What constitutes a holder in due prima facie to be a holder in due course
course. - A holder in due course is a holder Sec. 191 of the NIL defines holder as the
who has taken the instrument under the payee or indorsee of a bill or note, who is in
following conditions: possession of it, or the bearer thereof. The
(a) That it is complete and regular upon word “holder” in the first clause of Sec. 52
its face; and in the second subsection thereof may be
(b) That he became the holder of it replaced by the definition in Sec. 191 so as to
before it was overdue, and without read “a holder in due course is a payee or an
notice that it has been previously indorsee in possession, etc.” [De Ocampo vs.
dishonored, if such was the fact, Gatchalian, G.R. No. L-15126 (1961)]
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to B.2. THE SIGNIFICANCE OF DUE COURSE
him he had no notice of any infirmity HOLDING
in the instrument or defect in the title • The question of whether a holder is a
of the person negotiating it. holder in due course or not is significant
only when there is an existing defense
Sec. 58, NIL. When subject to original between prior parties. (Campos)
defense. - In the hands of any holder other • A holder in due course can acquire a
than a holder in due course, a negotiable better title than his predecessors because
instrument is subject to the same defenses as he takes the instrument free from any
if it were non-negotiable. But a holder who defect of title of prior parties. He is
derives his title through a holder in due furthermore free from defenses available
course, and who is not himself a party to any to prior parties among themselves.
fraud or illegality affecting the instrument, (Campos)
has all the rights of such former holder in
respect of all parties prior to the latter. • A holder not in due course, on the other
hand, takes the instrument subject to all
defenses because he is treated as a
Section 59, NIL. Who is deemed holder in due transferee of a non-negotiable paper.
course. - Every holder is deemed prima facie Real defenses, however, which attach to
to be a holder in due course; but when it is the instrument itself would be available
shown that the title of any person who has even against a holder in due course.
negotiated the instrument was defective, the (Campos)
burden is on the holder to prove that he or
PAGE 36 OF 320
B.3. RIGHTS OF A HOLDER IN DUE B.4. REQUISITES OF A HOLDER IN DUE

COURSE COURSE
Sec. 51, NIL. Right of holder to sue; payment. Sec. 52, NIL. What constitutes a holder in due
- The holder of a negotiable instrument may course.- A holder in due course is a holder
to sue thereon in his own name; and payment who has taken the instrument under the
to him in due course discharges the following conditions:
instrument.
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
Sec. 57, NIL. Rights of holder in due course. - before it was overdue, and without
A holder in due course holds the instrument
notice that it has been previously
free from any defect of title of prior parties, dishonored, if such was the fact;
and free from defenses available to prior
(c) That he took it in good faith and for
parties among themselves, and may enforce value;
payment of the instrument for the full (d) That at the time it was negotiated to
amount thereof against all parties liable
him, he had no notice of any infirmity
thereon. in the instrument or defect in the title
of the person negotiating it.
Sec. 58, NIL. When subject to original
defense. - In the hands of any holder other These four requisites must concur. If any one
than a holder in due course, a negotiable of them is absent, the holder cannot be
instrument is subject to the same defenses as considered a holder in due course. (Campos)
if it were non-negotiable. But a holder who
derives his title through a holder in due
course, and who is not himself a party to any B.4.A. COM PLETE AND REGULAR
fraud or illegality affecting the instrument, UPON ITS FACE
has all the rights of such former holder in An instrument is incomplete when it is
respect of all parties prior to the latter. wanting in any material particular or
particular proper to be inserted in a
negotiable instrument without which the
(1) To sue on the instrument in his own name same will not be complete. (De Leon)
[Sec. 51, NIL]
(2) To receive payment on the instrument
[Sec. 51, NIL] B.4.B. BECAM E THE HOLDER BEFORE
OVERDUE AND W ITHOUT NOTICE OF
(3) Holds instrument free of any defect of PREVIOUS DISHONOR
title of prior parties [Sec. 57, NIL]
“Overdue” – The Following Cannot Be
(4) Free from defenses available to prior Holders in Due Course:
parties among themselves [Sec. 57, NIL]
(a) A holder who became such after the
(5) May enforce payment of instrument for date of maturity of the instrument
full amount, against all parties liable [instrument is overdue; Sec. 53, NIL]
[Sec. 57, NIL]
(b) In case of demand instruments: a
holder who negotiates it after an
unreasonable length of time after its
issue [Sec. 53, NIL]
The fact that the instrument is overdue is a
strong indication that it was dishonored and
the law puts the potential holder on inquiry
as to whether it was dishonored and the
reason therefor. (Campos)
PAGE 37 OF 320
An instrument may be dishonored either by “Value”

non-acceptance or by non-payment.
(1) Any consideration sufficient to support a
(1) Dishonor by non-acceptance – takes simple contract [Sec. 25, NIL]
place when the drawee refuses to accept
(2) An antecedent or pre-existing debt
the order of the drawer as stated in the
constitutes value, whether the instrument
bill. Can refer only to a bill of exchange.
is payable on demand or at a future time
(2) Dishonor by non-paym ent – takes [Sec. 25, NIL]
place when the party primarily liable fails
to pay the instrument at the date of
maturity. (Campos) “Holder For Value”
(1) Where value has at any time been given
for the instrument, the holder is deemed
Notes:
a holder for value in respect to all parties
(1) An overdue instrument is still negotiable, who become such prior to that time [Sec.
but it is subject to the defenses (real and 26, NIL]; and
personal) existing at the time of the
(2) Where the holder has a lien on the
transfer.
instrument, he is deemed a HFV to the
(2) As to what constitutes a reasonable time, extent of his lien [Sec .27, NIL]
regard is to be had to the nature of the
The holder is a holder for value only to the
instrument, the usage of trade or
extent that the consideration agreed upon
business with respect to such instrument,
has been paid, delivered, or performed.
and the facts of the particular case. [Sec.
193, NIL]
A negotiable instrument may be given as a
(3) An instrument is not invalid for the
gift to the indorsee or transferee. In such
reason only that it is ante-dated or
cases, whatever defenses can be set up
postdated provided it is not done for an
against the transferor can also be set up
illegal or fraudulent purpose. The person
against the transferee, but where the holder
to whom an instrument so dated is
gave valuable consideration for the note and
delivered acquires the title thereto as of
the other requisites of Sec. 52 are present, he
the date of delivery [Sec. 12, NIL]
will be free from such defenses.
(4) Instruments with fixed maturity
Value need not be full and a holder will be
but subject to acceleration: ultimate
one for value even if he gave less than the
date of maturity is the date of maturity for
face value of the instrument, provided that
the purpose of determining whether a
intention of the transferor is to transfer the
purchaser is a HDC
full amount represented by the instrument.
(5) Undated instrum ents: Prima facie (Campos)
presumption that it was negotiated
Presumption: Every negotiable instrument
before it was overdue [Sec. 45, NIL]
is deemed prima facie issued for valuable
consideration; and every person whose
signature appears thereon is deemed to have
B.4.C. THAT HE TOOK IT IN GOOD
become a party thereto for value. [Sec. 24,
FAITH AND FOR VALUE
NIL]
“Good Faith”
Such presumption cannot be overcome by the
Holder must have taken the instrument in petitioner’s bare denial of receipt of the
good faith and that at the time it was consideration. [Bayani v. People, G.R. No.
negotiated to him he had no notice of any 154947 (2004)]
infirmity in the instrument or defect in the
title of the person negotiating it. (Campos)
B.4.D. NO NOTICE OF INFIRMITY IN
THE INSTRUMENT OR DEFECT IN THE
PAGE 38 OF 320
TITLE OF THE PERSON NEGOTIATING “Suspicious circumstances”

IT
General rule: A purchaser of an instrument
“Defective title” is not required to investigate every suspicious
circumstance; failure to investigate such
Sec. 55, NIL. When title defective. – The title
circumstances does not constitute him as
of a person who negotiates an instrument is
being in bad faith or having a notice of defect.
defective within the meaning of this act when
(Campos)
he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or Rationale: The general principle that a
other unlawful means, or for an illegal purchaser who has knowledge of certain facts
consideration, or when he negotiates it in is put on inquiry does not operate to its full
breach of faith, or under such circumstances extent in the law of negotiable instruments.
as amount to a fraud. Negotiable instruments are usually issued in
pursuance of commercial transactions where
time is of the essence. To require
Title is defective when [Sec. 55, NIL] investigation of every suspicious
circumstance would hamper their function of
(1) instrument/signature obtained by fraud,
facilitating exchange; thus negligence in
duress, force or fear or other unlawful
tracking down a suspicious circumstance
means OR for an illegal consideration; or
which would put a prudent man on inquiry is
(2) instrument is negotiated in breach of not of itself sufficient to prevent recovery.
faith, or fraudulent circumstances (Campos)
Exceptions:
Title is not defective when at the time it was (a) Suspicious circumstances together
negotiated to him, he had no notice of: with other circumstances, may be
admitted as evidence of bad faith.
(1) any infirmity in instrument
(b) Where the suspicious circumstances
(2) any defect in title of person negotiating
are so cogent and obvious
A check with 2 parallel lines in the upper left
Note: Due course holding is not affected by hand corner means that it could only be
the holder’s acquisition of knowledge after he deposited and may not be converted to cash.
has taken the instrument. Consequently, such circumstance should put
the payee on inquiry and upon him devolves
To constitute notice of an infirmity in the
the duty to ascertain the holders’ title to the
instrument or defect in the title of the person
check or the nature of his possession. Failing
negotiating the same, the person to whom it
in this respect, the payee is declared guilty of
is negotiated must have had actual
gross negligence amounting to legal absence
knowledge of the infirmity or defect, or
of good faith and as such the consensus of
knowledge of such facts that his action in
authority is to the effect that the holder of the
taking the instrument amounted to bad faith.
check is not a holder in good faith. [State
[Sec. 56, NIL]
Investment House vs. IAC, G.R. No. 72764
A transferee who receives notice of any (1989)]
infirmity or defect before he has paid the full
amount for the instrument will be deemed a
HDC only to the extent of the amount
therefore paid by him [Sec.54, NIL]
Gross negligence in itself would not

constitute notice since it is not the equivalent
of actual knowledge nor of bad faith.
PAGE 39 OF 320
B.5. PRESUMPTION IN FAVOR OF DUE Holder in Due Course Not Holder in Due
COURSE HOLDING Course
Every holder is deemed prima facie to be a
Rights
holder in due course. [Sec. 59, NIL]
(1) Burden shifts when it is shown that the Has the right to Has the right to
title of any person who has negotiated enforce payment, sue enforce payment, sue
the instrument was defective. Holder in his own name, and in his own name, and
must then prove that he or some person negotiate the negotiate the
under whom he claims acquired the title instrument instrument
as a holder in due course.
(2) But the last mentioned rule does not
apply in favor of a party who became C. DEFENSES AGAINST THE HOLDER
bound on the instrument prior to the
acquisition of such defective title.
Real Defenses Personal Defenses
Those which Attach to

B.6. HOLDER NOT IN DUE COURSE the instrument itself
Those wherein a true
(1) One who became a holder of an and generally disclose
contract appears, but
instrument without any, some or all of the an absence of one of
where for some
requisites under Sec. 52 of the NIL the essential
reason, such as fraud,
elements of a contract
(2) With respect to demand instruments, if it the defendant is
or where the admitted
is negotiated an unreasonable length of excused from the
contract is void for all
time after its issue, the holder is deemed obligation to perform
purposes for reasons
not a holder in due course. [Sec. 53, NIL]
of public policy
Rights of a holder not in due course
[Sec. 51, NIL] Available against all Can be raised only
holders, including against holders not in
(1) To sue on the instrument under in his holders in due course due course
own name
(2) To enforce the instrument Forgery, incapacity, Those mentioned in
fraud in the execution, Sec. 55 (fraud, duress,
The only disadvantage of a holder who is not some types of duress, force and fear, other
a holder in due course is that the negotiable and lack of delivery of unlawful means,
instrument is subject to defenses as if it were an incomplete illegal consideration,
non-negotiable. [Chan Wan vs. Tan Kim, G.R. instrument negotiating in breach
No. L-15380 (1960)] of faith), want of
consideration,
incompleteness of the
Holder in Due Course Not Holder in Due instrument, lack of
Course delivery of a
completed instrument
Compliance with Requisites
All the requisites Not all of the

under Sec. 52, NIL are requisites under Sec.
complied with 52 are complied with
Defenses
His rights can only be His rights can be

defeated by real defeated by real and
defenses personal defenses
PAGE 40 OF 320
X. Liabilities of Parties genuineness of his signature and his

capacity and authority to draw the
instrument, and
Primary liability: The unconditional (b) The existence of the payee and his
promise attaches the moment the maker then capacity to indorse.
makes the instrument while the acceptor’s
assent to the unconditional order attaches
the moment he accepts the instrument. No A drawee has no liability on the bill until and
further act is necessary in order for the unless he accepts the same.
liability to accrue. Presentment for payment
Unconditionally liable; the acceptor is duty-
is all that is necessary.
bound to pay the holder at date of maturity,
WON holder demands payment from him,
and he is not relieved from liability even if the
A. PARTIES PRIMARILY LIABLE instrument should become overdue due to
failure of holder to make such demand.
Sec. 192, NIL. Person primarily liable on (Campos)
instrument. – The person “primarily” liable
on an instrument is the person who by the
terms of the instrument is absolutely required Requisites for a valid acceptance
to pay the same. All other parties are
(a) It must be in writing;
“secondarily” liable.
(b) It must be signed by the drawee; and
(c) It must not change the implied promise of
A.1. MAKER the acceptor to pay only in money. [Sec.
Sec. 60, NIL. Liability of maker. – The maker 132, NIL]
of a negotiable instrument by making it
Note: A bill may be accepted even after it is
engages that he will pay it according to its overdue or dishonored, since an instrument
tenor, and admits the existence of the payee does not lose its negotiability by the mere
and his then capacity to indorse. fact that its maturity date has passed or that
the drawee has refused to accept or pay it.
(Campos)
The term “maker” applies only to the
promissory note.
B. PARTIES SECONDARILY LIABLE
By signing the note, the maker also
represents to the world that the payee named
has the capacity to indorse at the time of the Secondary liability: A party secondarily
making of such note and thus represents that liable is not bound to pay unless the
the named payee can transfer a good and following have been fulfilled:
valid title to the note by indorsement. The
maker is therefore precluded from setting up (a) Due presentment or demand to the
such defenses as minority or insanity of the primary party
payee or ultra vires act of a payee-corporation. (b) Dishonor by such party
(Campos)
(c) Notice of dishonor to secondary party,
and, in cases of foreign bills of exchange,
A.2. ACCEPTOR protest of the bill
Presentment means that the instrument is
Sec. 62, NIL. Liability of acceptor. – The
presented at maturity to the party primarily
acceptor by accepting the instrument
liable for the purpose of obtaining payments
engages that he will pay it according to the
thereof. Without this presentment, the
tenor of his acceptance; and admits:
secondary parties cannot be held liable
(a) The existence of the drawer, the
PAGE 41 OF 320
should the primary party have refused to pay take, he will pay the amount thereof to the
upon such presentment. (Campos) holder, or to any subsequent indorser who
may be compelled to pay it.
B.1. DRAWER
W ho is a qualified indorser? One who is
Sec. 61, NIL. Liability of drawer. – The drawer
constituted as a mere assignor of the title to
by drawing the instrument admits the
existence of the payee and his then capacity the instrument by adding to his signature the
words "without recourse" or any words of
to indorse; and engages that on due
similar import.
presentment the instrument will be accepted
or paid, or both, according to its tenor, and A qualified indorser does not assume the
that if it be dishonored, and the necessary liability to pay the instrument since he is
proceedings on dishonor be duly taken, he merely an assignor of the title to the
will pay the amount thereof to the holder, or instrument. However, he becomes liable once
to any subsequent indorser who may be he breaches a warranty.
compelled to pay it. but the drawer ay insert
in the instrument an express stipulation
negativing or limiting his own liability to the W ho is a general or unqualified
holder. indorser? Every person who indorses
without qualification [Sec. 66, NIL]
A person placing his signature upon an
The drawer warrants the existence of the
instrument other than as a maker, drawer, or
payee and the latter’s capacity to indorse the
acceptor unless he indicates by appropriate
instrument at the time of its issuance.
words his intention to be bound in some other
(Campos)
capacity [Sec. 63, NIL]
A person, who places his signature on an
B.2. INDORSERS instrument negotiable by delivery, incurs all
the liabilities of an indorser [Sec. 67, NIL]
The following indorsers assume the liability
to pay the instrument: The general indorser makes two contracts:
(1) General or Unqualified Indorser; and (1) An assignment or sale of the
instrument; and
(2) Irregular Indorser
(2) A special contract of indorsement
B.2.A. GENERAL OR UNQUALIFIED

INDORSER B.2.B. IRREGULAR INDORSER
(2011 Bar Question) When a person not otherwise a party to an
instrument, places thereon his signature in
Sec. 66, NIL. Liability of general indorser. –
blank before delivery, he is liable as an
Every indorser who indorses without
indorser, in accordance with these rules:
qualification, warrants to all subsequent
holders in due course: (1) Instrument payable to order of
3rd person: liable to payee and to
(a) The matters and things mentioned in
all subsequent parties
subdivisions [a],[b] and [c] of the next
preceding section; (2) Instrument payable to the
(b) That the instrument is at the time of order of m aker/drawer, or
his indorsement valid and subsisting. payable to bearer: liable to all
And in addition, he engages that on due parties subsequent to maker/drawer
presentment, it shall be accepted or paid, or
(3) Signs for accom m odation of
both, as the case may be, according to its
payee: liable to all parties
tenor, and that if it be dishonored, and the subsequent to payee [Sec. 64, NIL]
necessary proceedings on dishonor be duly
PAGE 42 OF 320
XI. Warranties
B.3. ORDER OF LIABILITY AMONG
INDORSERS
The primary or secondary liability of the
Sec. 68, NIL. Order in which indorsers are
liable. – As respects one another, indorsers parties should be distinguished from their
are liable prima facie in the order in which warranties.
they indorse; but evidence is admissible to (1) Primary or secondary liability of the
show that as between or among themselves parties makes them liable to pay the
they have agreed otherwise. Joint payees or sum certain in money stated in the
joint indorsees who indorse are deemed to instrument.
indorse jointly and severally.
(2) Warranties are affirmations of the
fact on the part of the parties that
impose no direct obligation to pay in
Among themselves, indorsers are liable prima
the absence of breach thereof.
facie in the order they indorse.
(Aquino)
Sec. 68 does not bind the holder, and he may
In case of breach of warranties, the person
sue any of the indorsers, regardless of the
who breached the same may either be liable
order of their indorsement. (Campos)
or he may be barred from asserting a
particular defense.
Promissory Note Bill of Exchange
No person primarily A. MAKER’S WARRANTIES

liable to pay until and
unless the drawee (1) The maker admits the existence of the
Maker is the person accepts the order of payee AND
primarily liable the drawer to pay; (2) His then capacity to indorse [Sec. 60, NIL]
when the drawee
accepts, he becomes
the acceptor
B. DRAWER’S WARRANTIES
Indorsers are Drawer and indorsers
secondarily liable. are secondarily liable (1) The drawer admits the existence of the
payee AND
(2) His then capacity to endorse
C. ACCEPTOR’S WARRANTIES
(1) As to the drawer, the acceptor admits:

(a) His existence
(b) Genuineness of his signature
(c) Capacity and authority to draw the
instrument
(2) As to the payee, the acceptor admits:
(a) His existence
(b) His then capacity to indorse [Sec. 62,
NIL]
PAGE 43 OF 320
The acceptor is precluded from setting up

certain defenses by reason of his warranties XII. Presentment for
like the defense that the drawer is a minor or
the signature of the drawer is forged. Payment
(Aquino)
A. PRESENTMENT; MEANING
D. GENERAL INDORSER’S
WARRANTIES Presentment for payment is the presentation
of the instrument, whether a note or a bill, to
the person primarily liable for the purpose of
(1) That the instrument is genuine in and
demanding and obtaining payment thereof.
in all respects what it purports to be (Campos)
(2) That he has a good title to it
(1) The production of a Bill of Exchange to
(3) That all prior parties had capacity to the drawer or acceptor for payment; or
contract
(2) The production of a Promissory Note to
(4) That the instrument is, at the time of the party liable for payment.
his indorsement, valid and subsisting
[Sec. 66, NIL]
These warranties are in favor of all
B. DATE AND TIME OF PRESENTMENT
subsequent holders in due course. [Ang Tiong
v. Ting, G.R. No. L-26767 (1968)] Sec. 72, NIL. What constitutes sufficient
presentment. - Presentment for payment, to
be sufficient, must be made:
E. QUALIFIED INDORSER’S (a) By the holder, or by some person
WARRANTIES authorized to receive payment on his
behalf;
(1) That the instrument is genuine in and in (b) At a reasonable hour on a business
all respects what it purports to be day;
(c) At a proper place as herein defined;
(2) That he has a good title to it (d) To the person primarily liable on the
(3) That all prior parties had capacity to instrument, or if he is absent or
contract inaccessible, to any person found at
the place where the presentment is
(4) That he has no knowledge of any fact made.
which would impair the validity of the
instrument or render it valueless. [Sec. 68,
NIL] (1) Bearing fixed m aturity/not
payable on demand – on the day it
falls due [Secs. 71 and 85, NIL]
(2) Payable on demand – within a
reasonable time after its issue [Sec. 7,
NIL]
(3) Dem and bill of exchange – within a
reasonable time after the last negotiation.
[Sec. 71, NIL]
Presentment for payment cannot be made on
a Sunday or legal holiday, and if the note
matures on such a day, since the maker
cannot be compelled to pay sooner than he
promised, the note or bill will have to be
presented on the next business day. (Campos)
PAGE 44 OF 320
XIII. Notice of Dishonor Notice of dishonor may be given either to the

party himself or to his agent in that behalf.
[Sec. 97, NIL]
Notice of dishonor is bringing either verbally
or in writing, to the knowledge of the drawer A.2. IF GIVEN BY AGENT
or the indorser of the instrument, the fact
that a specified negotiable instrument, upon Where the instrument has been dishonored in
proper proceedings taken, has not been the hands of an agent, he may either himself
accepted, or has not been paid, and that the give notice to the parties liable thereon, or he
party notified is expected to pay it. [Martin v. may give notice to his principal. [Sec. 94, NIL]
Brown, 75 Ala. 442]
Notice given by holder or his agent to party or A.3. IF PARTY IS DEAD
parties secondarily liable that the instrument
was dishonored by: The notice must be given to a personal
representative, if there be one, and if with
(1) Non-acceptance by the drawee of a reasonable diligence, he can be found.
bill; or
If there be no personal representative, notice
(2) Non-payment by the acceptor of a may be sent to the last residence or last place
bill; or of business of the deceased. [Sec. 98, NIL]
(3) Non-payment by the maker of a note
[Sec. 89, NIL]
A.4. TO PARTNERS
Requisites:
Where the parties to be notified are partners,
(a) Given by holder or his agent, or by notice to any one partner is notice to the firm,
any party who may be compelled by even though there has been a dissolution.
the holder to pay [Sec. 90, NIL] [Sec. 99, NIL]
(b) Given to secondary party or his agent
[Sec. 97, NIL]
A.5. TO JOINT PARTIES
(c) Given within the periods provided by
law [Sec. 102, NIL] Notice to joint parties who are not partners
must be given to each of them, unless one of
(d) Given at the proper place [Secs. 103 them has authority to receive such notice for
and 104, NIL] the others. [Sec. 10, NIL]
A. PARTIES TO BE NOTIFIED A.6. TO BANKRUPT

Where a party has been adjudged a bankrupt
(1) Non-acceptance [bill] – to
or an insolvent, or has made an assignment
persons secondarily liable, namely,
for the benefit of creditors, notice may be
the drawer and indorsers as the case
given either to the party himself or to his
may be
trustee or assignee. [Sec. 101]
(2) Non-paym ent (both bill and
note) – to indorsers
B. WHEN GIVEN
Note: Notice must be given to persons Notice may be given as soon as the
secondarily liable. Otherwise, such parties instrument is dishonored [Sec. 102, NIL]
are discharged. Notice may be given to the
party himself or to his agent.
C. WHEN NOT NECESSARY TO GIVE TO
A.1. TO WHOM IN GENERAL DRAWER
PAGE 46 OF 320
(2011 Bar Question) The notice may be given by or on behalf of the

holder, or by or on behalf of any party to the
instrument who might be compelled to pay it
Notice of dishonor is not required to be given to the holder, and who, upon taking it up,
to the drawer in any of the following cases: would have a right to reimbursement from
the party to whom the notice is given. [Sec.
(1) Drawer and drawee are the same;
90, NIL]
(2) Drawee is a fictitious person or not having
the capacity to contract;
F.1. WHO SHOULD GIVE
(3) Drawer is the person to whom the
instrument is presented for payment; (1) Holder
(4) The drawer has no right to expect or (2) Agent or representative of holder.
require that the drawee or acceptor swill
(3) Any party who may be compelled to
honor the instrument;
pay like indorsers.
(5) Where the drawer has countermanded
(4) Agent of any party who may be
payment [Sec. 114, NIL]
compelled. [Sec. 90, NIL]
D. WHEN NOT NECESSARY TO GIVE TO

G. EFFECT OF NOTICE
INDORSER Notice of dishonor is required to charge
(2011 Bar Question) parties secondarily liable.
Upon valid notice of dishonor, immediate
Notice of dishonor is not required to be given right of recourse against the indorser arises. It
to an indorser in the following cases: is as if the indorser becomes primarily liable
in the sense that the holder need not claim
(1) Drawee is a fictitious person or does payment from the person primarily liable
not have the capacity to contract, and (Sundiang and Aquino)
indorser was aware of that fact at the
time he indorsed the instrument;
(2) Indorser is the person to whom the H. FORM OF NOTICE
instrument is presented for payment; The notice may be:
(3) Instrument was made or accepted for (1) In writing; or
his accommodation. [Sec. 115, NIL]
(2) Merely oral
The notice may be given in any terms which:
E. WHO WILL BENEFIT (1) Sufficiently identify the instrument;
If given by or on behalf of the holder: and
(1) All subsequent holders (2) Indicate that it has been dishonored
(2) All prior parties (as to holder) who have a by non-acceptance or non-payment
right of recourse against the party to It may in all cases be given by delivering it
whom it is given. [Sec. 92, NIL] personally or through the mails. [Sec. 96 NIL]
If given by the indorser:
(1) Holder No misdescription of the amount, or of the
(2) All parties subsequent to the party to date, or of the name of the parties, or of the
whom notice is given. [Sec. 93, NIL] time the paper falls due, or other defect will
vitiate the notice of dishonor, unless it
F. PARTIES WHO MAY GIVE NOTICE OF misleads the party to whom it is sent.
DISHONOR (Campos)
PAGE 47 OF 320
I. WAIVER
XIV. Discharge of
Notice of dishonor may be waived either
before the time of giving notice has arrived or
Negotiable Instrument
after the omission to give due notice, and the
waiver may be expressed or implied. [Sec. 109, Discharge: The release of all parties,
NIL] whether primary or secondary, from the
Where the waiver is embodied in the obligation on the instrument. It renders the
instrument itself, it is binding upon all instrument without force and effect and,
parties; but, where it is written above the consequently, non-negotiable (De Leon)
signature of an indorser, it binds him only.
[Sec. 110, NIL]
A. DISCHARGE OF NEGOTIABLE
INSTRUMENT
J. DISPENSATION WITH NOTICE
Notice of dishonor is dispensed with: Sec. 119, NIL. Instrument; How discharged. - A
(1) When party to be notified knows about negotiable instrument is discharged:
the dishonor, actually or constructively (1) By payment in due course by or on behalf
[Secs. 114-117, NIL] of the principal debtor;
(2) If waived [Sec. 109, NIL] (2) By payment in due course by the party
(3) When after due diligence, it cannot be accommodated, where the instrument is
given [Sec. 112, NIL] made or accepted for his
accommodation;
(3) By the intentional cancellation thereof by
K. EFFECT OF FAILURE TO GIVE the holder;
NOTICE (4) By any other act which will discharge a
simple contract for the payment of
Failure to give notice to parties secondarily money;
liable discharges such parties
(5) When the principal debtor becomes the
An omission to give notice of dishonor by holder of the instrument at or after
non-acceptance does not prejudice the rights maturity in his own right.
of a holder in due course subsequent to the
omission [Sec. 117, NIL]
Note: A holder in due course cannot be B. BY PAYMENT IN DUE COURSE
prejudiced by the failure or neglect of a (2000 Bar Question)
previous holder to give notice of dishonor by
Sec. 51, NIL. Right of Holder to Sue for
non-acceptance.
Payment. – The holder of a negotiable
A dishonor by non-payment necessarily instrument may sue thereon in his own name;
presupposes the instrument has matured, and payment to him in due course discharges
and therefore, no holder subsequent thereto the instrument.
can be a holder in due course. Such dishonor
by non-payment will thus prejudice al
subsequent holders. (Campos) Sec. 88, NIL. What Constitutes Payment in
Due Course. - Payment is made in due course
when it is made at or after the maturity of the
payment to the holder thereof in good faith
and without notice that his title is defective.
(Sec. 88)
PAGE 48 OF 320
Requisites: C. BY INTENTIONAL CANCELLATION

(1) Payment must be made at or after (2011 Bar Question)
maturity. Sec. 123, NIL. Cancellation; Unintentional;
(2) Payment must be made to the holder. Burden of Proof. - A cancellation made
unintentionally or under a mistake or without
(3) Payment must be made in good faith and the authority of the holder, is inoperative; but
without notice that holder’s title is where an instrument or any signature thereon
defective. appears to have been cancelled, the burden
• Payment should be in money in order to of proof lies on the party who alleges that the
effect its discharge. (Campos) cancellation was made unintentionally or
under a mistake or without authority.
• If payment is made before maturity and
the note is negotiated to a HDC, the latter • The burden of proving that a cancellation
may recover on the instrument. was made unintentionally or by mistake
or through fraud, is on the person
• Payment to one of several payees or claiming its effectiveness. Cancellation is
indorsees in the alternative discharges presumed to be intentional. (Campos)
the instrument, but payment to one of
several joint payees or joint indorsers is • Cancellation need not be supported by
not a discharge. The party receiving consideration and is effective even
payment must have been authorized by without notice to the primary party.
others to receive payment.
By whom m ade:
D. BY OTHER ACTS THAT DISCHARGE A
(1) Payment in due course by or on behalf of SIMPLE CONTRACT
the principal debtor.
(2) Payment in due course by party FOR PAYMENT OF MONEY
accommodated where party is made/
accepted for accommodation whether or Any other act which discharges a simple
not he appears to be a party to the contract for payment of money.
instrument. Sec. 1231, Civil Code. Obligations are
• If payment is not made by the parties extinguished by:
enumerated, it would constitute a (1) Payment or performance;
purchase or negotiation and the
instrument would remain outstanding. xxx
(3) By condonation or remission of the debt;
• Principal debtor: includes the maker
and the acceptor. (4) By the confusion or merger of the rights of
a debtor;
• If the primary party is an accommodation
party, like a guarantor or a surety, (5) By compensation;
payment by him does not discharge the (6) By novation
instrument. [Fox v. Kroeger, 119 Tex. 511
(1931)] Other causes of extinguishment of
obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this
Code.
PAGE 49 OF 320
E. BY REACQUISITION OF PRINCIPAL (4) By a valid tender or payment made by

DEBTOR IN HIS OWN RIGHT a prior party;
Principal debtor becomes holder of (5) By a release of the principal debtor
instrument at or after maturity in his own unless the holder's right of recourse against
right and not as an agent or for and in behalf the party secondarily liable is expressly
of another. reserved;
• Reacquisition must be at or after maturity (6) By any agreement binding upon the
for the instrument to be discharged, holder to extend the time of payment or to
otherwise the instrument may be further postpone the holder's right to enforce the
negotiated. (Campos) instrument unless made with the assent of
the party secondarily liable or unless the right
of recourse against such party is expressly
F. BY MATERIAL ALTERATION reserved.
Section 125, NIL. What constitutes a material

OTHER GROUNDS
alteration. - Any alteration which changes:
(1) Failure to make due presentment
(1) Date
(2) Sum payable, either for principal or Sec. 144, NIL. When Failure to Present
Releases Drawer and Indorsers. - Except as
interest
herein otherwise provided, the holder of a bill
(3) Time or place of payment which is required by the next preceding
(4) Number or relations of the parties section to be presented for acceptance must
(5) Medium or currency in which payment either present it for acceptance or negotiate it
is to be made within a reasonable time. If he fails to do so,
(6) Or which adds a place of payment the drawer and all indorsers are discharged.
where no place of payment is
specified
(2) Failure to give notice of dishonor
(7) Or any other change or addition
which alters the effect of the (3) Certification of check at instance of
instrument in any respect holder
Sec. 188, NIL. Effect where the holder of check
procures it to be certified. - Where the holder
Material alteration without assent of all
of a check procures it to be accepted or
parties liable avoids instrument except as
certified, the drawer and all indorsers are
against party to alteration and subsequent
discharged from liability thereon.
indorsers [Sec. 124, NIL] (2011 Bar Question)
(4) Reacquisition by prior party

G. DISCHARGE OF PARTIES
SECONDARILY LIABLE Sec. 121, NIL. Right of party who discharges
instrument. - Where the instrument is paid by
a party secondarily liable thereon, it is not
Sec. 120, NIL. When Persons Secondarily discharged; but the party so paying it is
Liable on, Discharged.- A person secondarily remitted to his former rights as regard all
liable on the instrument is discharged: prior parties, and he may strike out his own
(1) By any act which discharges the and all subsequent indorsements and against
instrument; negotiate the instrument, except:
(2) By the intentional cancellation of his (a) Where it is payable to the order of a
signature by the holder; third person and has been paid by the
drawer; and
(3) By the discharge of a prior party;
(b) Where it was made or accepted for
PAGE 50 OF 320
accommodation and has been paid by third person, and has been paid by the
the party accommodated. drawer;
(2) Where it was made or accepted for
accommodation, and has been paid by
• Where instrument negotiated back to a the party accommodated.
prior party, such party may reissue and
further negotiate, but he is not entitled
to enforce payment against any
• The discharge of a secondary party is not
intervening party to whom he was
the same as the discharge of the
personally liable
instrument. The discharge of the
instrument prevents subsequent holders
from becoming holders in due course.
Sec. 50, NIL. When prior party may negotiate
instrument. - Where an instrument is
negotiated back to a prior party, such party
I. RENUNCIATION BY HOLDER
may, subject to the provisions of this Act,
reissue and further negotiable the same. But
he is not entitled to enforce payment thereof Sec. 122, NIL. Renunciation by Holder. - The
against any intervening party to whom he holder may expressly renounce his rights
was personally liable. against any party to the instrument before,
at, or after its maturity. An absolute and
unconditional renunciation of his rights
• Where instrument is paid by party against the principal debtor made at or after
secondarily liable, it is not discharged, the maturity of the instrument discharges the
but instrument. But a renunciation does not
affect the rights of a holder in due course
(a) the party so paying it is remitted to without notice. A renunciation must be in
his former rights as regard to all prior writing, unless the instrument is delivered up
parties to the person primarily liable thereon.
(b) and he may strike out his own and all
subsequent indorsements, and again
negotiate instrument, except: where Two forms of renunciation
it is payable to order of 3rd party and (1) A written declaration to that effect; or
has been paid by drawer or where it’s
made/accepted for accommodation (2) By surrender of the instrument to the
and has been paid by party primary party.
accommodated
To Whom Made Effect

(5) By taking a qualified acceptance
At or after maturity in Discharges the
favor of principal instrument
H. RIGHT OF PARTY WHO
debtor
DISCHARGED INSTRUMENT
At or after maturity in Discharge only such
Sec. 121, NIL. Where the instrument is paid by favor of any party party and the parties
a party secondarily liable thereon, it is not subsequent to him
discharged; but the party so paying it is
remitted to his former rights as regards to all
prior parties, and he may strike out his own
and all subsequent indorsements, and again • Need not be supported by consideration.
negotiate the instrument, except:
(1) Where it is payable to the order of a
PAGE 51 OF 320
XV. Material Alteration HDC, he may enforce payment

thereof according to its original tenor
regardless of whether the alteration
A. CONCEPT was innocent or fraudulent.
(2) Alteration by a stranger
• Any change in the instrument which (spoliation) (2011 Bar Question)-
affects or changes the liability of the the effect is the same as where the
parties in any way. alteration was made by a party
wherein a HDC can recover on the
• Any alteration which changes the date, original tenor of the instrument. [Sec.
sum payable, time or place of payment, 124, NIL]
number of relation of the parties, or
medium of currency of payment where
none is specified or which alters the effect
of the instrument in any respect [PNB v.
CA, GR No. L-26001 (1968)]
• An alteration is said to be material if it
alters the effect of the instrument. In
other words, a material alteration is one
which changes the items which are
required to be stated under Sec. 1 of the
NIL (ibid.)
B. CHANGES IN THE FOLLOWING

CONSTITUTE MATERIAL ALTERATIONS
[Sec. 125, NIL]
(1) Date
(2) Sum payable, either for principal or
interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment is
to be made
(6) That which adds a place of payment
where no place of payment is specified
(7) Any other change or addition which
alters the effect of the instrument in any
respect.
C. EFFECT OF MATERIAL ALTERATION
(1) Alteration by a party – Avoids the

instrument except as against the
party who made, authorized, or
assented to the alteration and
subsequent indorsers. However, if an
altered instrument is negotiated to a
PAGE 52 OF 320
XVI. Acceptance and, if such request is refused, may treat the

bill as dishonored”
Effects: When an acceptance is written on a
A. DEFINITION paper than the bill itself, it does not bind the
acceptor except in favor of a person to whom
Acceptance: an acceptance completed by it is shown and who, on the faith thereof,
delivery or notification. [Sec. 191, NIL] The receives the bill for value.
signification by the drawee of his assent to
the order of the drawer. [Sec. 132, NIL]
E. MANNER
B. REQUISITES E.1. EXPRESS ACCEPTANCE

[Sec. 132, NIL]
Must be in writing and signed by the drawee
(1) In writing and must not express that the drawee will
(2) Signed by the drawee perform his promise by any other means than
the payment of money. [Sec. 132, NIL]
(3) Does not express that the drawee will
perform his promise by and other means If request for a written acceptance is refused,
than the payment of money the holder may treat the bill as dishonored
[Sec. 13, NIL]
C. KINDS OF ACCEPTANCE
E.2. IMPLIED ACCEPTANCE
(1) General – assents without qualification
to the order of the drawer [Sec. 139, NIL] (1) If the drawee refuses to return the
instrument within 24 hours after it was
(2) Qualified –which in express terms
delivered for acceptance.
varies the effect of the bill as drawn [Secs.
141 & 142, NIL]: (2) If the drawee destroys the same.
(a) Conditional – makes payment by (3) If the drawee makes an unconditional
the acceptor dependent on the promise in writing before the instrument is
fulfillment of a condition therein drawn, with respect to every person who,
stated upon the faith thereof, receives the bill for
value.
(b) Partial – an acceptance to pay part
only of the amount for which the bill
is drawn.
F. TIME FOR ACCEPTANCE
(c) Local – an acceptance to pay only at [Sec. 136, NIL]
a particular place.
• The drawee is allowed twenty-four hours
(d) Qualified as to time after presentment in which to decide
(e) The acceptance of some one or more whether or not he will accept the bill.
of the drawees but not of all. • The acceptance, if given, dates as of the
day of presentation.
D. PROOF OF ACCEPTANCE
(Sundiang and Aquino) G. RULES GOVERNING ACCEPTANCE
The written acceptance may be in the
instrument itself or in a separate instrument. Implication of payment without acceptance
However, under Sec. 133, “the holder of a bill by a drawee [FEBTC vs. Gold Palace Jewellery
presenting the same for acceptance may Co,, Nachura, G.R. No. 168274 (2008)]
require the acceptance be written on the bill,
PAGE 53 OF 320
• The NIL explicitly provides that the

acceptor, by accepting the instrument,
XVII. Presentment for
engages that he will pay it according to
the tenor of his acceptance. Acceptance
• This provision applies with equal force in
case the drawee pays a bill without having A. REQUISITES:
previously accepted it.
(1) By the holder, or by some person
• His actual payment of the amount in the
authorized to receive payment on his
check implies not only his assent to the
behalf;
order of the drawer and a recognition of
his corresponding obligation to pay the (2) At a reasonable hour on a business
aforementioned sum, but also, his clear day;
compliance with that obligation.
(3) At a proper place as herein defined;
• Actual payment by the drawee is greater (4) To the person primarily liable on the
than his acceptance, which is merely a instrument, or if he is absent or
promise in writing to pay. The payment of inaccessible, to any person found at the
a check includes its acceptance. place where the presentment is made.
General rule: Presentment for acceptance
Right to unqualified acceptance is not necessary in order to render any party
to the bill liable. [Sec. 143, NIL]
• The holder may refuse to take a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the B. WHEN PRESENTMENT FOR
bill as dishonored by non-acceptance.
ACCEPTANCE NECESSARY:
• Where a qualified acceptance is taken,
the drawers and indorsers are discharged Presentment for acceptance must be made:
from liability on the bill unless they have
expressly or impliedly authorized the (1) Where the bill is payable after sight, or
holder to take a qualified acceptance, or in any other case, where presentment
subsequently assent thereto. for acceptance is necessary in order to
fix the maturity of the instrument; or
• When the drawer or indorser receives
notice of a qualified acceptance, he must, (2) Where the bill expressly stipulates that
within a reasonable time, express his it shall be presented for acceptance; or
dissent to the holder or he will be deemed (3) Where the bill is drawn payable
to have assented thereto. elsewhere than at the residence or place
• However, acceptance is presumed to be of business of the drawee.[Sec. 143, NIL]
unqualified or absolute. (Sundiang and Note: It is not necessary to present a check
Aquino) for acceptance because it is not one of those
required under Sec. 143.
C. WHEN PRESENTMENT FOR

ACCEPTANCE EXCUSED:
Presentment for acceptance is excused and a

bill may be treated as dishonored by non-
acceptance in either of the following cases:
(1) Where the drawee is dead, or has
absconded, or is a fictitious person or a
PAGE 54 OF 320
person not having capacity to contract by on demand may, at the option of the holder
bill. be presented for payment before twelve
o’clock noon on Saturday when that entire day
(2) Where, after the exercise of reasonable
is not a holiday. [Sec. 85, NIL]
diligence, presentment cannot be made.
(3) Where, although presentment has been
irregular, acceptance has been refused on F. HOW MADE
some other ground. [Sec. 148,NIL] [Sec. 145, NIL]
In general:
D. TIME/PLACE/MANNER OF (1) By or on behalf of the holder
PRESENTMENT (2) At a reasonable hour
D.1. WHEN MADE (3) On a business day

(4) Before the bill is overdue
A bill may be presented for acceptance on
any day on which negotiable instruments may (5) To the drawee or his agent
be presented for payment under the
provisions of Sections 72 and 85 of this Act.
When Saturday is not otherwise a holiday, W here a bill is addressed to 2 or m ore
presentment for acceptance may be made drawees who are not partners –
before twelve o'clock noon on that day. [Sec. presentment must be made to them all XPT.
146, NIL] One has authority to accept/refuse for all
E. WHAT CONSTITUTES SUFFICIENT W here the drawee is dead –

PRESENTMENT? presentment may be made to his personal
representative
Presentment for payment, to be sufficient,
must be made: W here the drawee has been adjudged
(1) By the holder, or by some person a bankrupt or insolvent or has m ade
authorized to receive payment on his an assignm ent for the benefit of
behalf; creditors – presentment may be made to
him or to his trustee or assignee.
(2) At a reasonable hour on a business day;
(3) At the proper place as herein defined
[Sec. 73, NIL]; G. EFFECT OF FAILURE TO MAKE
(4) To the person primarily liable on the PRESENTMENT
instrument or if he is absent or
inaccessible, to any person found at the Failure to make presentment discharges the
place where the presentment is made. drawer and all indorsers. [Sec. 144, NIL]
[Sec. 72, NIL]
H. DISHONOR BY NON-ACCEPTANCE
Time of maturity: Every negotiable
instrument is payable at the time fixed therein W hen dishonored by non-acceptance:
without grace. When they day of maturity A bill is dishonored by non-acceptance:
falls upon Sunday, or a holiday, the
instrument is payable on the next succeeding (1) When it is duly presented for acceptance
business day. Instruments falling due or and such an acceptance as is prescribed
becoming payable on Saturday are to be by this Act is refused or cannot be
presented for payment on the next succeeding obtained; or
business day, except that instrument payable
PAGE 55 OF 320
(2) When presentment for acceptance is

excused and the bill is not accepted. [Sec. XVIII. Promissory Notes
149, NIL]
A promissory note is:
Duty of holder: Where a bill is duly (1) An unconditional promise in writing
presented for acceptance and is not accepted
within the prescribed time, the person (2) Made by one person to another
presenting it must treat the bill as (3) Signed by the maker
dishonored by non-acceptance or he
(4) Engaging to pay on demand, or at a fixed
loses the right of recourse against the drawer
or determinable future time
and indorsers. [Sec. 150, NIL]
(5) A sum certain in money to order or to
bearer
Effect: When a bill is dishonored by non-
(6) Where a note is drawn to the maker's own
acceptance, an immediate right of recourse
order, it is not complete until indorsed by
against the drawer and indorsers accrues to
him. [Sec. 184, NIL]
the holder and no presentment for payment is
necessary. [Sec. 151, NIL] There are originally 2 parties in a promissory
note:
(1) Maker – party who executes the written
promise to pay.
(2) Payee – party in whose favor the
promissory note is made payable.
PAGE 56 OF 320
XIX. Checks discharged from liability. [Sec. 188,

NIL]
(c) A check of itself does not operate as
A. DEFINITION an assignment of any part of the
funds to the credit of the drawer with
A check is a bill of exchange drawn on a bank the bank, and the bank is not liable to
payable on demand. Except as herein the holder unless and until it accepts
otherwise provided, the provisions of this Act or certifies the check. [Sec. 189, NIL]
applicable to a bill of exchange payable on (5) Crossed Check – The NIL is silent with
demand apply to a check. [Sec. 185, NIL] respect to crossed checks, although the
Code of Commerce makes reference to
such instruments.
B. KINDS
Article 541 of the Code of Commerce
states: “The maker or any legal holder of
(1) Cashier’s Check – One drawn by the a check shall be entitled to indicate
cashier of a bank, in the name of the bank therein that it be paid to a certain banker
against the bank itself payable to a third or institution, which he shall do by writing
person. It is a primary obligation of the across the face the name of said banker
issuing bank and accepted in advance or institution, or only the words ‛and
upon issuance. [Tan vs. CA, G.R. No. company.”
108555 (1994)]
Under usual practice, crossing a check is
(2) Manager’s Check – A check drawn by done by placing two parallel lines
the manager of a bank in the name of the diagonally on the left top portion of the
bank itself payable to a third person. It is check. [State Investment House vs. IAC,
similar to the cashier’s check as to the G.R. No. 72764 (1989)]
effect and use.
• In issuing a manager’s check, the bank
assumed the liabilities of the acceptor Types: Special and General
under Sec. 62, NIL. [Equitable PCI Bank v. The crossing may be special wherein between
Ong, G.R. No. 156207 (2006)] the two parallel lines is written the name of a
(3) Memorandum Check – A check given bank or a business institution, in which case
by a borrower to a lender for the amount the drawee should pay only with the
of a short loan, with the understanding intervention of that bank or company, or
that it is not to be presented at the bank, crossing may be general wherein between two
but will be redeemed by the maker parallel diagonal lines are written the words
himself when the loan falls due and "and Co." or none at all as in the case at bar,
which understanding is evidenced by in which case the drawee should not encash
writing the word “memorandum”, “memo” the same but merely accept the same for
or “mem” on the check. deposit.
(4) Certified Check – An agreement

whereby the bank against whom a check C. EFFECTS
is drawn undertakes to pay it at any
future time when presented for payment
[Sec. 187, NIL] (1) The check may not be encashed; it may
only be deposited with the bank;
(a) Certification is equivalent to
acceptance. [Sec. 187, NIL] (2) The check may be negotiated only once to
a person who has an account with the
(b) Where the holder of a check procures bank; and
it to be accepted or certified, the
drawer and all indorsers are (3) It serves as a warning to a holder that the
check has been issued for a definite
PAGE 57 OF 320
purpose. [Bataan Cigar vs. CA, G.R. No.

93048 (1994)]
D. PRESENTMENT FOR PAYMENT
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. The bank
is not liable to the holder, unless and until it
accepts or certifies the check. [Sec. 189, NIL]
D.1. TIME
When to present? A check must be presented
for payment within reasonable time after its
issue.
E. EFFECT OF DELAY
The drawer will be discharged from liability

thereon to the extent of the loss caused by
the delay. [Sec. 186, NIL]
Certification of checks: An agreement

whereby the bank against whom a check is
drawn, undertakes to pay it at any future time
when presented for payment
Effects:
(1) Equivalent to acceptance [Sec. 187, NIL]
and is the operative act that makes banks
liable
(2) Assignment of the funds of the drawer in
the hands of the drawee [Sec. 189, NIL]
(3) If obtained by the holder, discharges the
persons secondarily liable thereon [Sec.
188, NIL]
Refusal of drawee bank to certify: The

holder has no action against the bank but he
has a right of action against the drawer. The
drawer in turn has right of action against the
bank based on the original contact of deposit
between them.
PAGE 58 OF 320

Mercantile Reviewer UP 2016 NEGO PDF

Uploaded by

Copyright:

Available Formats

Mercantile Reviewer UP 2016 NEGO PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mercantile Reviewer UP 2016 NEGO PDF

Uploaded by

Copyright:

Available Formats

MERCANTILE LAW

I. Definition shall be legal tender in amounts not exceeding

In the meantime, the action derived from the

Sec. 52, New Central Bank Act. Legal Tender

II. Forms and something in written form that can be

A. REQUISITES OF NEGOTIABILITY General Rule: No person is liable on the

A.1. IN WRITING AND SIGNED BY THE A.2. CONTAINING AN UNCONDITIONAL

Rationale for requirement: Since an

UNCONDITIONAL • As to promissory note: Promise to pay

Indicated fund is not Particular fund (a) with interest; or

PAYABLE IN MONEY • Only on the stipulated date, and not

(a) When it is so expressed to be payable

Effect of Acceleration Provisions A.4. PAYABLE TO ORDER OR TO BEARER

Provisions extending tim e of paym ent

PAYABLE TO BEARER presenting it for payment without the

(1) Expressed to be so payable - "I promise • Applies only to a bill of exchange.

(1) Non-dating of the (1) Authorizes the

III. Kinds of Negotiable B.1. KINDS OF BILLS OF EXCHANGE

x---x IV. Completion and

F. COMPLETE AND UNDELIVERED

Sec. 14, NIL. Blanks; when may be filled. -

E. INCOMPLETE AND UNDELIVERED

this fact is conclusively presumed. Thus, evidence that there was no

Section 14 Section 15 Section 16

Delivered Undelivered Undelivered

(1) Wanting in any material

Authority of Person in Possession

(1) Prima facie authority to

Delivery is made by or under

Personal Real Personal

Can enforce the instrument. Here,

V. Signature signature words indicating that he signs for or

One who signs in a trade or assumed name Requisites to negative personal

in so signing acted within the actual the forgery or want of authority.

• The indorsement or assignment of the

[Associated Bank vs. CA, G.R. No. 107382

SUMMARY OF RULES ON FORGERY AS TO PROMISSORY NOTES

Maker’s Signature Forged

Maker is not liable because he never became a party

Payee’s Signature Forged

Maker and payee not liable. Maker is liable.

Order Instrument Bearer Instrument

Indorser’s Signature Forged

SUMMARY OF RULES ON FORGERY AS TO BILLS OF EXCHANGE

Collecting bank is liable because of warranty.

(2) The existence of the payee and his

• If it is shown that the drawee on learning o However, it should be noted that as

(7) Com paring the liability of a

VII. Accommodation accommodation party. [Stelco Marketing

A. LIABILITY OF AN ACCOMMODATION Accommodation Party Regular Party

and completed by delivery.

VIII. Negotiation B.1. BY DELIVERY – IF PAYABLE TO

Delivery means transfer of possession of

requirements for an instrument to be • CANNOT indorse a part only of the

• The indorsement should be made by the

(4) Conditional or unconditional • An instrument, payable to bearer, and

C.1. AS TO MANNER OF FUTURE METHOD Blank

disregard the condition, and make

B.3. RIGHTS OF A HOLDER IN DUE B.4. REQUISITES OF A HOLDER IN DUE