2015 11 11 Draft BL 102 NEGO

MANUEL S.
ENVERGA UNIVERSITY FOUNDATION

College of Business and Accountancy
Lucena City, Province of Quezon
A Course Guide1 on
BL 102: NEGOTIABLE INSTRUMENTS2
by Atty. Jose Maria B. Duhaylongsod
PRELIMINARY MATTERS
COURSE DESCRIPTION:
This course presents an in-depth study of the nature, kinds, and effects of
Negotiable Instruments as defined in Act No 2031, but will also use other
related legal provisions and cases decided by the Supreme Court for a
proper understanding of the foregoing concepts and development of the
skills to apply these in real-life scenarios. The lessons shall be presented in
the manner organized herein, which is designed to provide the students
with an overview of the relevant laws and the Philippine legal system which
will guide them in the study of legal principles relating to the subject
matter, by exposing them to relevant primary and secondary materials and
facilitating discussions on the application of these principles upon actual or
hypothetical cases. Lastly, the subject matter is cumulative by nature; thus,
each lesson is necessarily integrated unto the next, culminating in a
comprehensive final exam.
REFERENCES:
Mandatory:
Students are expected to have a copy of Act No. 2031, otherwise known as
“The Negotiable Instruments Law” (1911), at all times during class. They
are also required to have with them respective copies of all other assigned
laws, cases and readings in the Course Guide, as well as other materials
declared to be mandatory by the professor during the course.
The assigned cases refer to Decisions and Resolutions of the Supreme Court
of the Philippines, collectively referred to as “Jurisprudence.” Copies of
which may be found online at the following sites:
Publisher Web Address

Supreme Court of the Philippines http://sc.judiciary.gov.ph/jurisprudence/
Arellano Law Foundation (Lawphil http://www.lawphil.net/judjuris/judjuris.
Project) html
Chan Robles Virtual Law Library http://www.chanrobles.com/cralawscde
cisions.htm
PhilippineLaw.info http://philippinelaw.info/jurisprudence/i
ndex.html
1★
’11 J.D., second honors, Ateneo Law School; ’07 A.B. POS., Ateneo de Manila University.
This is patterned, based on and lifted from the Outline for Negotiable Instruments by Atty.
Alexander C. Dy as used during our 2011 Commercial Review Class at the Ateneo Law
School and primarily supplemented by VILLANUEVA, Cesar L., COMMERCIAL LAW REVIEW
(2013). The same has been rearranged and slightly edited to suit the students’ needs for
purely educational purposes.
2
ACT NO. 2013 “The Negotiable Instruments Law” (1911) [“NIL”]
Negotiable Instruments
Act No. 2031 (1911)
November 2014
Optional:
The professor does not prescribe a single textbook; but should the students
desire, they may use any of the books on the subject to aid them in
understanding the lessons. However, it should be understood that the latter,
as they are merely optional references, shall not be invoked as basis for
exemption from reading the mandatory references.
2 MSEUF-CBA (2nd Sem., SY 2014-15)

Act No. 2031 (1911)
November 2014
PART ONE3
OBJECTIVE: Part One seeks to introduce students to the NIL and will provide
them with topics which require, on one hand, “codal heavy” analysis, and on
the other, those which are “case heavy” in nature. At its conclusion,
students, should be able to identify instruments that fall within the
definition of Act No. 2031 by using newly-learned skills in appreciating the
law as well jurisprudence.
1. NATURE AND COVERAGE
1.1. NIL IS A COMPLETE LAW4
1.1.1. Coverage
The NIL applies only to negotiable instruments (“NI”) and covers the
entire subject of NI and must be treated as a complete body of law upon the
subject and controlling on all cases to which it is applicable.5
1.1.2. Exceptions6
1.1.2.1. Crossed-checks
ARTS. 443 TO 556 OF THE CODE OF COMMERCE OF 1888. THE

EFFECTS OF CROSSING A CHECK.7 Among the different types of checks
issued by a drawer is the crossed check. The Negotiable Instruments Law is
silent with respect to crossed checks, although the Code of Commerce
makes reference to such instruments. This Court has taken judicial
cognizance of the practice that a check with two parallel lines in the upper
left hand corner means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates to the mode
of payment, meaning that the drawer had intended the check for deposit
only by the rightful person, i.e., the payee named therein. The crossing may
be "special" wherein between the two parallel lines is written the name of a
bank or a business institution, in which case the drawee should pay only
with the intervention of that bank or company, or "general" wherein
between two parallel diagonal lines are written the words "and Co." or none
at all, in which case the drawee should not encash the same but merely
accept the same for deposit. In Bataan Cigar v. Court of Appeals, we
enumerated the effects of crossing a check as follows: (a) the check may not
be encashed but only deposited in the bank; (b) the check may be
negotiated only once – to one who has an account with a bank; and (c) the
act of crossing the check serves as a warning to the holder that the check
has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose; otherwise, he is not a holder in
due course.8
1.1.2.2. Letters of Credit
3
Covers the First Quarter of the Second Semester
4
Unless otherwise indicated, the cited legal provisions pertain to the NIL
5
VILLANUEVA, at 382 citing Bank of Italy v. Symmes 118 Cal. Appl. 716 5 P.2d 956
6
see also Sec. 195-196
7
JMBD: This topic will be discussed further at a future time.
8
Bank of America, NT & SA v. Associated Citizens Bank et al., G.R. Nos. 141001 & 141018,
21 May 2009
Act No. 2031 (1911)
November 2014
LETTERS OF CREDIT ARE NOT NIS WITHIN THE NIL. The letter of
credit evolved as a mercantile specialty, and the only way to understand all
its facets is to recognize that it is an entity unto itself. The relationship
between the beneficiary and the issuer of a letter of credit is not strictly
contractual, because both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable right. Nor is it a third-
party beneficiary contract, because the issuer must honor drafts drawn
against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank’s customer cannot draw on the letter, it
does not function as an assignment by the customer to the beneficiary. Nor,
if properly used, is it a contract of suretyship or guarantee, because it
entails a primary liability following a default. Finally, it is not in itself a
negotiable instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often negotiable.
READ: Transfield Philippines v. Luzon Hydro Corporation et al., G.R.
No. 146717, 22 November 2004
1.1.2.3. Shares of Stock (Stock Certificates)
STOCK CERTIFICATES. Besides, in Philippine jurisprudence, a

certificate of stock is not a negotiable instrument. "Although it is sometime
regarded as quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery, it is well-settled that it is non-
negotiable, because the holder thereof takes it without prejudice to such
rights or defenses as the registered owner/s or transferror's creditor may
have under the law, except insofar as such rights or defenses are subject to
the limitations imposed by the principles governing estoppel." (De los
Santos vs. McGrath, 96 Phil. 577).9
1.1.2.4. Postal Money Orders
POSTAL MONEY ORDERS. It is not disputed that our postal statutes

were patterned after statutes in force in the United States. For this reason,
ours are generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of any special
reason justifying a departure from this policy or practice. The weight of
authority in the United States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers
National Bank, 30 Fed. 912), the reason behind this rule being that, in
establishing and operating a postal money order system, the government is
not engaging in commercial transactions but merely exercises a
governmental power for the public benefit. x x x It is to be noted in this
connection that some of the restrictions imposed upon money orders by
postal laws and regulations are inconsistent with the character of
negotiable instruments. For instance, such laws and regulations usually
provide for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances (49 C.J. 1153).10
1.1.2.5. Treasury Warrants
TREASURY WARRANTS ARE NOT NIS. But this treasury warrant is not
within the scope of the negotiable instruments law. For one thing, the
document bearing on its face the words "payable from the appropriation for
food administration," is actually an order for payment out of "a particular
9
Tan v. Securities and Exchange Commission, et al., G.R. No. 95696, 03 March 1992
10
Philippines Education Co., Inc. v. Soriano et al., G. R. No. L-22405, 30 June 1971
Act No. 2031 (1911)
November 2014
fund," and is not unconditional, and does not fulfill one of the essential
requirements of a negotiable instrument. (Section 3 last sentenced and
section 1[b] of the Negotiable Instruments Law.) In the United States,
government warrants for the payment of money are not negotiable
instruments nor commercial proper.11
1.1.3. Cases on Origin and Applicability:
1.1.3.1. Osmena v. Citibank & Tan, G.R. No. 141278, 23

March 2004
1.1.3.2. BPI v. Court of Appeals & Marasigan, G.R. No.
120639, 25 September 1998
1.1.3.3. Roman Catholic Bishop of Malolos Inc. v. IAC &
Roses-Francisco Realty, G.R. No. 72110, 16 November
1990
1.2. FUNCTION
1.2.1. General Rule

SEC. 60 OF THE NEW CENTRAL BANK ACT (“NCBA”). Checks
representing demand deposits do not have legal tender power and their
acceptance in the payment of debts, both public and private, is at the option
of the creditor. EX: cashier’s or manager’s check, vacillating ruling.
MANAGER’S CHECK IS NOT LEGAL TENDER. READ: Pabugais v.
Sahijwani, G.R. No. 156846, 23 February 2004
1.2.2. Exceptions.
1.2.2.1. Sec. 60 of the NCBA: Check which has been cleared and
credited to creditor’s account shall be equivalent to delivery
the creditor of cash.
SOMETIMES A CHECK IS CONSIDERED AS GOOD AS CASH. It is a well-
known and accepted practice in the business sector that a Cashier's Check
is deemed as cash. Moreover, since the said check had been certified by the
drawee bank, by the certification, the funds represented by the check are
transferred from the credit of the maker to that of the payee or holder, and
for all intents and purposes, the latter becomes the depositor of the drawee
bank, with rights and duties of one in such situation. Where a check is
certified by the bank on which it is drawn, the certification is equivalent to
acceptance. Said certification "implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been set apart
for its satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good then,
and shall continue good, and this agreement is as binding on the bank as its
notes in circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of certifying a
check, as regards both parties, is to enable the holder to use it as money."
When the holder procures the check to be certified, "the check operates as
an assignment of a part of the funds to the creditors." Hence, the exception
to the rule enunciated under Section 63 of the Central Bank Act to the
effect "that a check which has been cleared and credited to the account of
the creditor shall be equivalent to a delivery to the creditor in cash in an
amount equal to the amount credited t o his account" shall apply in this
case.12
11
Abubakar v. The Auditor General, G.R. No. L-1405, 31 July 1948
Act No. 2031 (1911)
November 2014
NEVERTHELESS, the mere issuance of a manager’s check does not ipso
facto work as an automatic transfer of funds to the account of the payee. In
case the procurer of the manager’s or cashier’s check retains custody of the
instrument, does not tender it to the intended payee, or fails to make an
effective delivery, we find that Sec. 16, on undelivered instruments under
the Negotiable Instruments Law, is applicable.13
1.2.2.2. Art. 1249 of the Civil Code of the Philippines.
Payment thru mercantile documents (i.e., NI) shall produce
effect of payment only when: a) they have been encashed; or,
b) through the fault of the creditor they have been impaired.
STALE CHECKS. A stale check is one which has not been presented for
payment within a reasonable time after its issue. It is valueless and,
therefore, should not be paid. Under the negotiable instruments law, an
instrument not payable on demand must be presented for payment on the
day it falls due. When the instrument is payable on demand, presentment
must be made within a reasonable time after its issue. In the case of a bill
of exchange, presentment is sufficient if made within a reasonable time
after the last negotiation thereof.14
IMPAIRMENT IS NOT DISHONOR. Surely, for a check to the dishonored

upon presentment on the one hand, and to be state for not being presented
at all in time, on the other, are incompatible developments that naturally
have variant legal consequences. Thus, if needed the check in question had
been dishonored, then there can be no doubt that petitioner's redemption
was null and void. On the oher hand, if it had only become stale, then it
becomes imperative that the circumstances that caused its non-presentment
be determined, for if this was not due to the fault of the petitioner, then it
would be unfair to deprive him of the rights he had acquired as
redemptioner, particularly, the value of the check has otherwise been
received or realized by the party concerned.15
1.3. PRINCIPAL FEATURES OF NI
1.3.1. Negotiability
NATURE. The language of negotiability which characterize a
negotiable paper as a credit instrument is its freedom to circulate as a
substitute for money. Hence, freedom of negotiability is the touchtone
relating to the protection of holders in due course, and the freedom of
negotiability is the foundation for the protection which the law throws
around a holder in due course (11 Am. Jur. 2d, 32). This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to
pay a sum of money to a specified person or entity for a period of time. “The
accepted rule is that the negotiability or non-negotiability of an instrument
is determined from the writing, that is, from the face of the instrument
itself. In the construction of a bill or note, the intention of the parties is to
control, if it can be legally ascertained. While the writing may be read in the
light of surrounding circumstance in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the writing
to be the only outward and visible expression of their meaning, no other
12
New Pacific Timber v. Seneris, G.R. No. 41764, 19 December 1980; but see Roman
Catholic Bishop of Malolos v. IAC G.R. No. 72110, 16 November 1990
13
Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation & Luz R.
Bakunawa, G.R. No. 192413, 13 June 2012
14
The International Corporate Bank v. Sps. Gueco, G.R. No. 141968, 12 February 2001
15
Crystal v. CA, G.R. No. L-35767, 18 June 1976
Act No. 2031 (1911)
November 2014
words are to be added to it or substituted in its stead. The duty of the court
in such case is to ascertain, not what the parties may have secretly intended
as contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be
determined by what they said.”16
1.3.2. Accumulation of Secondary Contracts
NEGOTIATION IS NOT ASSIGNMENT. Firstly, it is important to bear in
mind that the negotiation of a negotiable instrument must be distinguished
from the assignment or transfer of an instrument whether that be
negotiable or non-negotiable. Only an instrument qualifying as a negotiable
instrument under the relevant statute may be negotiated either by
indorsement thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument may,
however, instead of being negotiated, also be assigned or transferred. The
legal consequences of negotiation as distinguished from assignment of a
negotiable instrument are, of course, different. A non-negotiable instrument
may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the
face of the instrument: “The words "not negotiable," stamped on the face of
the bill of lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by assignment; the assignee
taking subject to the equities between the original parties.”17
1.3.3. Holder in Due Course
WHAT IS A HIDC? The NIL defines a HIDC under Sec. 52 and further
states in Sec. 59 that every holder is deemed prima facie a holder in due
course. However, when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to
prove that he or some person under whom he claims, acquired the title as
holder in due course.18
CONSEQUENCES OF NOT BEING A HIDC. However, the fact that

respondents are not holders in due course does not automatically mean that
they cannot recover on the check. The Negotiable Instruments Law does not
provide that a holder who is not a holder in due course may not in any case
recover on the instrument. The only disadvantage of a holder who is not in
due course is that the negotiable instrument is subject to defenses as if it
were non-negotiable.19
1.4. MISCELLANEOUS PROVISIONS
1.4.1. DEFINITIONS AND RULES GOVERNING KINDS

OF NI
1.4.1.1. Promissory Notes20 (MEMORIZE: Sec. 184)

JURISPRUDENTIAL DEFINITION. A promissory note is a solemn
acknowledgment of a debt and a formal commitment to repay it on the date
16
Traders Royal Bank v. Court of Appeals et al., G.R. No. 93397, 03 March 1997 citing
Caltex v. Court of Appeals, 121 SCRA 448
17
Sesbreño v. Court of Appeals, G.R. No. 89252, 24 May 1993
18
Bataan Cigar and Cigarette Factory, Inc. v. CA and State Investment House Inc., G.R. No.
93048, 03 March 1994
19
Dino v. Sps. Loot, G.R. No. 170912, 19 April 2010
20
Sec. 184
Act No. 2031 (1911)
November 2014
and under the conditions agreed upon by the borrower and the lender. A
person who signs such an instrument is bound to honor it as a legitimate
obligation duly assumed by him through the signature he affixes thereto as
a token of his good faith. If he reneges on his promise without cause, he
forfeits the sympathy and assistance of this Court and deserves instead its
sharp repudiation.21
1.4.1.2. Bills of Exchange22 (MEMORIZE: Sec. 126)
1.4.1.2.1. Checks23 (MEMORIZE: Sec.185)
JURISPRUDENTIAL DEFINITION. An ordinary check refers to a bill of
exchange drawn by a depositor (drawer) on a bank (drawee), requesting the
latter to pay a person named therein (payee) or to the order of the payee or
to the bearer, a named sum of money. The issuance of the check does not of
itself operate as an assignment of any part of the funds in the bank to the
credit of the drawer. Here, the bank becomes liable only after it accepts or
certifies the check. After the check is accepted for payment, the bank would
then debit the amount to be paid to the holder of the check from the
account of the depositor-drawer. x x x There are checks of a special type
called manager’s or cashier’s checks. These are bills of exchange drawn by
the bank’s manager or cashier, in the name of the bank, against the bank
itself. Typically, a manager’s or a cashier’s check is procured from the bank
by allocating a particular amount of funds to be debited from the depositor’s
account or by directly paying or depositing to the bank the value of the
check to be drawn. Since the bank issues the check in its name, with itself
as the drawee, the check is deemed accepted in advance. Ordinarily, the
check becomes the primary obligation of the issuing bank and constitutes
its written promise to pay upon demand.24
A manager’s check is one drawn by the bank’s manager upon the
bank itself. It is similar to a cashier’s check both as to effect and use. A
cashier’s check is a check of the bank’s cashier on his own or another
check. In effect, it is a bill of exchange drawn by the cashier of a bank upon
the bank itself, and accepted in advance by the act of its issuance.[29] It is
really the bank’s own check and may be treated as a promissory note with
the bank as a maker.[30] The check becomes the primary obligation of the
bank which issues it and constitutes its written promise to pay upon
demand. The mere issuance of it is considered an acceptance thereof. If
treated as promissory note, the drawer would be the maker and in which
case the holder need not prove presentment for payment or present the bill
to the drawee for acceptance. 25 (READ: Rizal Commercial Banking
Corporation v. Hi-tri Development Corporation & Bakunawa, G.R. No.
192413, 13 June 2012)
1.4.1.2.2. Bills in Set26
1.4.1.3. Other Types of Negotiable Instruments
1.4.1.3.1. Drafts
DEFINITION. A draft is a form of a bill of exchange used mainly in

21
Dela Rama Co V. Admiral United Savings Bank, G.R. No. 154740, 16 April 2008
22
Sec. 126-183
23
Sec. 185-189; see also Sec. 443-556 of the Code of Commerce of the Philippines (1888)
24
Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation & Luz R.
Bakunawa, G.R. No. 192413, 13 June 2012
25
The International Corporate Bank v. Sps. Gueco, G.R. No. 141968, 12 February 2001,
supra.
26
Sec. 178-183
Act No. 2031 (1911)
November 2014
transactions between persons physically remote from each other. It is an
order made by one person, say the buyer of goods, addressed to a person
having in his possession funds of such buyer ordering the addressee to pay
the purchase price to the seller of the goods. Where the order is made by
one bank to another, it is referred to as a bank draft. 27 To begin with, we
may say that a demand draft is a bill of exchange payable on demand (Arnd
vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50;
Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as a
bill of exchange, a draft is said to be, like the former, an open letter of
request from, and an order by, one person on another to pay a sum of money
therein mentioned to a third person, on demand or at a future time therein
specified (13 Words and Phrases, 371). As a matter of fact, the term "draft"
is often used, and is the common term, for all bills of exchange. And the
words "draft" and "bill of exchange" are used indiscriminately (Ennis vs.
Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98,
100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275). On the other hand, a bill
of exchange within the meaning of our Negotiable Instruments Law (Act No.
2031) does not operate as an assignment of funds in the hands of the
drawee who is not liable on the instrument until he accepts it. This is the
clear import of Section 127. It says: "A bill of exchange of itself does not
operate as an assignment of the funds in the hands of the drawee available
for the payment thereon and the drawee is not liable on the bill unless and
until he accepts the same." In other words, in order that a drawee may be
liable on the draft and then become obligated to the payee it is necessary
that he first accepts the same. In fact, our law requires that with regard to
drafts or bills of exchange there is need that they be presented either for
acceptance or for payment within a reasonable time after their issuance or
after their last negotiation thereof as the case may be (Section 71, Act
2031). Failure to make such presentment will discharge the drawer from
liability or to the extent of the loss caused by the delay (Section 186, Ibid.)28
1.4.1.4. Certificates of Time Deposit
RATIONALE. On this score, the accepted rule is that the negotiability

or non-negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself. 9 In the construction of a bill or note,
the intention of the parties is to control, if it can be legally ascertained. 10
While the writing may be read in the light of surrounding circumstances in
order to more perfectly understand the intent and meaning of the parties,
yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or
substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished
from what their words express, but what is the meaning of the words they
have used. What the parties meant must be determined by what they said.
11 Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
27
Bank of the Philippines Islands v. Commissioner of Internal Revenue, G.R. No. 137002, 27
July 2006
28
Republic of the Philippines v. Philippine National Bank et al., G.R. No. L-16106, 30
December 1961
Act No. 2031 (1911)
November 2014
presentment.29
1.4.2. General Provisions
1.4.2.1. Title of the Act,30 Application and Cases Not Provided

For,31 Repeals,32 and Effectivity33
1.4.2.2. Definition and Meaning of Terms34
1.4.2.2.1. Reasonable Time
WHAT IS REASONABLE? [I]n determining what is a “reasonable time,”
regard is to be had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts of the particular
case. The test is whether the payee employed such diligence as a prudent
man exercises in his own affairs.35
2. FORMAL REQUISITES OF NEGOTIABLE INSTRUMENTS

(MEMORIZE: Sec.1)
NEGOTIABILITY ON ITS FACE. On this score, the accepted rule is that

the negotiability or non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument itself. 9 In the
construction of a bill or note, the intention of the parties is to control, if it
can be legally ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the intent
and meaning of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning, no other words
are to be added to it or substituted in its stead. The duty of the court in such
case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning
of the words they have used. What the parties meant must be determined by
what they said.36
SUBSTANTIAL COMPLIANCE.37 As long as a commercial paper conforms

with the definition of a bill of exchange, that paper is considered a bill of
exchange.38 The nature of acceptance is important only in the determination
of the kind of liabilities of the parties involved, but not in the determination
of whether a commercial paper is a bill of exchange or not.39
2.1. IT MUST BE IN WRITING40
2.1.1. Why in Writing:

29
Caltex (Phils.) v. Court of Appeals & Security Bank and Trust Company, G.R. No. 97753,
10 August 1992
30
Sec. 190
31
Sec. 195-196
32
Sec. 197
33
Sec. 198
34
Sec. 191-194
35
The International Corporate Bank v. Sps. Gueco, G.R. No. 141968, 12 February 2001,
supra
36
Caltex (Phils.) v. Court of Appeals and Security Bank and Trust Company, G.R. No. 97753,
10 August 1992
37
Sec. 10; but see Sec. 8
38
JMBD: This principle also applies to promissory notes and other instruments covered by
the NIL.
39
The Philippine Commerce Bank v. Aruego, G.R. Nos. L-25836-37, 31 January 1981; see
also, Sps. Violago v. BA Finance Corporation & Violago, G.R. No. 158262, 21 July 2008
40
Sec. 1(a)
Act No. 2031 (1911)
November 2014
TO PREVENT FRAUD. What is required is that agreement be in writing
as the rule is in fact founded on "long experience that written evidence is so
much more certain and accurate than that which rests in fleeting memory
only, that it would be unsafe, when parties have expressed the terms of their
contract in writing, to admit weaker evidence to control and vary the
stronger and to show that the parties intended a different contract from
that expressed in the writing signed by them."[11] Thus, for the parol
evidence rule to apply, a written contract need not be in any particular
form, or be signed by both parties.[12] As a general rule, bills, notes and
other instruments of a similar nature are not subject to be varied or
contradicted by parol or extrinsic evidence.41
WHEN FORM IS ESSENTIAL TO VALILIDITY. Contracts shall be
obligatory, in whatever form they may have been entered into, provided all
the essential requisites for their validity are present. However, when the
law requires that a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that requirement
is absolute and indispensable. In such cases, the right of the parties stated
in the following article cannot be exercised. 42
2.1.2. “Physical Integrity of Whole Instrument” Rule states
that negotiability determined only from face of NI itself and not
elsewhere.43
2.2. IT MUST BE SIGNED BY MAKER OR DRAWER44
2.2.1. General Rule is that [n]o person is liable on the

instrument whose signature does not appear thereon. 45 But, to be
considered as a signature, no particular form is required - any
inscription, stamping will be sufficient.
FORM AND LOCATION. What is essential is that the signer has intended
to adopt the signature on the instrument as his own and to obligate himself
for its payment. It may be the full name, surname only, or even initials. It
can also come in any other form, using any tool of inscription, printed, typed
or even stamped. The important thing really is that the maker or drawer
intends to be bound by it.46
2.2.2. Exceptions
2.2.2.1. Trade or assumed name47
2.2.2.2. By agent48
2.3. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR

ORDER49
2.3.1. Why? This is due to the purpose - NIs are

substitutes for money, medium of exchange for commercial and
credit transactions, and are means of immediate payment.50
2.3.2. Form: The promise or order must be expressly
41
Inciong, Jr. v. CA & Phil. Bank of Communications, G.R. No. 96405, 26 June 1996
42
CIVIL CODE, Art. 1356 et seq.
43
VILLANUEVA, at 388 citing Des Moines Saving Bank v. Arthur, 163 Ia 205, 143 NW 556
44
Sec. 1(a)
45
Sec. 18
46
DE LEON, Hector S., THE PHILIPPINE NEGOTIABLE INSTRUMENTS LAW, at pp. 15
47
Sec. 18
48
Sec. 19-21
49
Sec. 1(b)
50
DE LEON, at p. 4

Act No. 2031 (1911)
November 2014
found on the NI itself, as mere existence of debt does not amount
to a promise.51
2.3.2.1. No specific words are required (i.e., “Good for” or “Due”
or “I will pay”) and words of courtesy will not destroy
negotiability (“X will oblige Y by paying”), but a mere request
or authorization is not enough.
2.3.2.2. A mere acknowledgment of debt is not a promise to pay
within the NIL, except if the date of payment is mentioned
(“payable on”); or, words of negotiability are used used (“Due
to X or order”)
WHEN IS AN ACKNOWLEDGEMENT OF DEBT IS A PROMISE TO PAY. "An
acknowledgment may become a promise by the addition of words by which
a promise of payment is naturally implied, such as, "payable," "payable" on
a given day, "payable on demand," "paid . . . when called for," . . . (10 Corpus
Juris Secundum p. 523.) "To constitute a good promissory note, no precise
words of contract are necessary, provided they amount, in legal effect, to a
promise to pay. In other words, if over and above the mere acknowledgment
of the debt there may be collected from the words used a promise to pay it,
the instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst.
sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . . "Due A. B. $325,
payable on demand," or, "I acknowledge myself to be indebted to A in $109,
to be paid on demand, for value received," or, "I O. U. $85 to be paid on May
5th," are held to be promissory notes, significance being given to words of
payment as indicating a promise to pay." 1 Daniel Neg. Inst. see. 39, and
cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.) 52
2.3.3. Nature of condition:
2.3.3.1. If NI payable upon a contingency (“if it rains”), it is not
negotiable.53 However, if the condition is imposed on an
indorsement,54 that does not destroy negotiability.55
CONDITIONS. Every obligation whose performance does not depend
upon a future or56 uncertain event, or upon a past event unknown to the
parties, is demandable at once.57
2.3.3.2. If obligation subject to period (“10 days after X dies”),
even if exact date not known, then it is negotiable.58
PERIODS. A day certain is understood to be that which must
necessarily come, although it may not be known when.59
2.3.4. When promise is unconditional
2.3.4.1. An indication of a particular fund out of which
reimbursement is to be made or a particular account to be
debited with the amount.60 But, an order or promise to pay
51
VILLANUEVA, at pp 389-390
52
Pacifica Jimenez v. Jose Bucoy, G.R. No. L-10221, 28 February 1958
53
Sec. 4
54
see discussions on Sec. 30 et seq.
55
Sec. 39
56
JMBD: This is traditionally understood as being “and” and not “or” otherwise it there will
be a conflict with the legal definition of a period; see CIVIL CODE, Art. 1193.
57
CIVIL CODE, Art. 1179; see also Art. 1193 (“If the uncertainty consists in whether the day
will come or not, the obligation is conditional x x x”)
58
Sec. 4 (c)
59
CIVIL CODE, Art. 1193
60
Sec. 3 (a)
Act No. 2031 (1911)
November 2014
out of a particular fund is not unconditional.61
MEANING. A distinction must be made between the meaning of the
words “fix” and “indicate.” If the instrument fixes the fund from where the
payment has to be made, so the payment cannot be made from other funds,
this destroys negotiability. On the other hand, if the instrument merely
indicates the fund from where the payment is to be made, so that the
obligor (payor) will still be liable even if the indicated fund is depleted, then
the instrument is still negotiable.62 Thus, a check is negotiable while a
treasury warrant is not.63
2.3.4.2. A statement of the transaction which gives rise to the NI.64
EXTRINSIC REFERENCE. Reference in a promissory note to some
extrinsic agreement, in order to destroy its negotiability, must be such as to
indicate that the paper is to be burdened with conditions of that agreement.
When reference to a simple recital of the consideration of which the paper
was given, or is a mere mention of the origin of the transaction, its
negotiability is unaffected.65
2.3.4.3.
2.3.5. Additional provisions not affecting
negotiability66
2.3.5.1. Authorizes the sale of collateral securities in case the NI
be not paid at maturity;
2.3.5.2. Authorizes the confession of judgment if the NI be not
paid at maturity;
STIPULATION IS VOID BEING CONTRARY TO PUBLIC POLICY. We are of
the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments
against makers should not be recognized in this jurisdiction by implication
and should only be considered as valid when given express legislative
sanction.67 We agree with the appellee that this kind of clauses are void and
unenforceable, as against public policy, "because they enlarge the field for
fraud, because in these instruments the promissor bargains away his right
to a day in court and because the effect of the instrument is to strike down
the right of appeal accorded by the statute." However, if the creditor sues,
the debtor can go to court and only then confess judgment. This is valid if
done by the debtor himself.68
2.3.5.3. Waives the benefit of any law intended for the advantage
or protection of the obligor; or,
2.3.5.4. Gives the holder an election to require something to be
done in lieu of payment of money.
2.3.6. When not negotiable
61
Sec. 3 last ¶
62
VILLANUEVA, at p. 391
63
see § 1.4.1.2.1 supra, and § 2.3.6.1 infra.
64
Sec. 3 (b)
65
VILLANUEVA, at p. 392 citing Elizalde & Co., Inc. v. Biñan Trans. Co. (CA) 58 O.G. 5886
(1960)
66
Sec. 5
67
Philippine National Bank v. Manila Oil Refining & By-Products Company, Inc., G.R. No. L-
18103, 08 June 1922
68
VILLANUEVA, at p.404 citing Traders Insurance and Surety Company v. Dy Eng Giok et al.,
G.R. No. L-9073, 17 November 1978
Act No. 2031 (1911)
November 2014
2.3.6.1. Order or promise to pay out of a particular fund is not
unconditional.69
TREASURY WARRANTS ARE NOT NIS. But this treasury warrant is not
within the scope of the negotiable instruments law. For one thing, the
document bearing on its face the words "payable from the appropriation for
food administration," is actually an order for payment out of "a particular
fund," and is not unconditional, and does not fulfill one of the essential
requirements of a negotiable instrument. (Section 3 last sentenced and
section 1[b] of the Negotiable Instruments Law.) In the United States,
government warrants for the payment of money are not negotiable
instruments nor commercial proper1.70
2.3.6.2. If reference to transaction which gives rise to the NI
subjects the NI to the conditions of such agreement, not
negotiable.71
2.3.6.3. NI contains an order or promise to do any act in addition
to the payment of money is not negotiable72
2.3.6.4. But nothing in this section shall validate provision or
stipulation otherwise illegal.73
2.4. TO PAY A SUM CERTAIN IN MONEY74
2.4.1. What constitutes certainty as to sum? The sum

payable is certain within the meaning of NIL although it is
to be paid:75
2.4.1.1. With interest
USURY LAW IS STILL IN EXISTENCE BUT EFFECTIVELY SUSPENDED. The
power of the CB to effectively suspend the Usury Law pursuant to P.D. No.
1684 has long been recognized and upheld in many cases. As the Court
explained in the landmark case of Medel v. CA,36 citing several cases, CB
Circular No. 905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter’s effectivity;"37 that "a CB Circular cannot
repeal a law, [for] only a law can repeal another law;"38 that "by virtue of
CB Circular No. 905, the Usury Law has been rendered ineffective;"39 and
"Usury has been legally non-existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon."40 76
2.4.1.2. By stated installments;
2.4.1.3. By stated installments, with a provision that, upon default
in payment of any installment or of interest, the whole shall
become due;
ACCELERATION CLAUSE. It appears that the promissory note was
secured by a mortgage providing that, in case the mortgagor failed or
refused to pay any amortization, "all the other amortizations shall then be
and become due and payable and the mortgagee may forthwith foreclose
69
Sec. 3, last ¶
70
Abubakar v. The Auditor General, G.R. No. L-1405, 31 July 1948
71
§ 2.3.4.3 supra
72
Sec. 5 (d)
73
Sec. 5, last ¶
74
Sec. 1 (b); please relate to Sec. 5
75
Sec. 2 (a) et seq.
76
Advocates for Truth in Lending & Olaguer v. Bangko Sentral Monetary Board et al., G.R.
No. 192986, 15 January 2013; see also, Act No. 2655 as amended by Presidential Decree
No. 1684; Central Bank Circular No. 905 series of 1982.
Act No. 2031 (1911)
November 2014
this mortgage in accordance with law". This is considered by the bank
merely as optional acceleration clause for its sole benefit. While the bank
was thus granted a permissive right to foreclose the mortgage, it is obvious
that said permissive right did not prevent all the amortizations from
becoming due and payable, because the covenant is that, upon failure to
pay one amortization, all the others "Shall then be and become due and
payable", again in mandatory vein. Under the law, the right of the bank to
sue the debtor for the whole mortgage debt had accrued when the fourth
installment was not paid, in the absence, as in this case, of any agreement
on the part of the bank that it was waiving the acceleration clause. We need
not resort to American authorities, since under article 1150 of the Civil
Code, the prescriptive period for all kinds of actions shall be counted from
the day the action may be brought. There is no pretense herein that the
bank ever had waived its right to sue for the entire obligation under the
acceleration clause or for any unpaid installment and gave corresponding
notice thereof to the debtor, such that the latter would be sure that no
action could yet be filed against him Even the citation from 54 C.J.S., p. 90,
invoked by the bank in its favor, acknowledges that "there is authority to the
contrary."77
2.4.1.4. With exchange, whether at a fixed rate or at the current
rate;
REPUBLIC ACT NO. 529 AND 4100 WAS REPEALED BY REPUBLIC ACT
8183. But now we have Republic Act No. 529 which expressly declares such
stipulations as contrary to public policy, void and of no effect. And, as We
already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael
& Co., Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement
to pay an obligation in a currency other than Philippine legal tender, the
same is null and void as contrary to public policy (Republic Act 529), and
the most that could be demanded is to pay said obligation in Philippine
currency "to be measured in the prevailing rate of exchange at the time the
obligation was incurred (Sec. 1, idem)." 78
EXCHANGE RATE AT THE TIME OF PAYMENT. It follows that the
provision of Republic Act 529 which requires payment at the prevailing rate
of exchange when the obligation was incurred cannot be applied. Republic
Act 529 does not provide for the rate of exchange for the payment of
obligation incurred after the enactment of said Act. The logical Conclusion,
therefore, is that the rate of exchange should be that prevailing at the time
of payment. This view finds support in the ruling of this Court in the case of
Engel vs. Velasco & Co. 2 3 where this Court held that even if the obligation
assumed by the defendant was to pay the plaintiff a sum of money
expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of
judgment rather than at the rate of exchange prevailing on the date of
defendant's breach.79
THE PARTICULAR KIND OF CURRENT MONEY PAYMENT SHOULD BE
MADE. The validity and negotiability of the instrument is not affected
thereby.80
2.4.1.5. With costs of collection or any attorney’s fee, in case
77
Intestate Estate of Ubat & Soriano v. Ubat de Montes et al and Philippine National Bank,
G.R. No. L-11633, 31 January 1961
78
Arieta v. NARIC & Manila Underwriters Insurance Co., Inc., G.R. No. L-15645, 31 January
1964
79
Kalalo v. Luz, G.R. No. L-27782, 31 July 1970
80
Sec. 6 (e)
Act No. 2031 (1911)
November 2014
payment shall not be made at maturity.
NATURE OF INSTRUMENT AT MATURITY. The instrument is no longer
fully negotiable since the transferee acquiring it would not be a holder in
due course.81
2.5. IT MUST BE PAYABLE ON DEMAND, OR AT A FIXED

OR DETERMINABLE FUTURE TIME82
2.5.1. When Payable on Demand83

2.5.1.1. When it is so expressed to be payable on demand, or at
sight, or on presentation.
2.5.1.2. In which no time for payment is expressed (silent as to
when payable).
2.5.1.3. Where an instrument is issued, accepted, or indorsed
when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand. (Note: for
prior parties, it may be already overdue.)
2.5.2. When Payable at a Determinable Future Time84

2.5.2.1. Payable at a fixed period after date or sight.
2.5.2.2. Payable on or before a fixed or determinable future time
specified therein.
2.5.2.3. On or at a fixed period after the occurrence of a specified
event which is certain to happen, though the time of
happening be uncertain.85
AFTER, NOT BEFORE. If the instrument indicates “before” instead of

“after,” then it becomes non-negotiable because the date of maturity can
only be ascertained after it becomes overdue.86
2.5.3. When Not Negotiable
2.5.3.1. “On or before” a fixed date or determinable future time

scenarios:
2.5.3.1.1. It is still negotiable if it contains acceleration clause
due to non-payment of installments.87
2.5.3.1.2. If it contains a clause that if the holder feels

insecure, he can ask the maker to put up additional
securities, failing which, holder can accelerate the date of
maturity – 2 views:
2.5.3.1.2.1. not negotiable because date of maturity
uncertain
2.5.3.1.2.2. negotiable because undertaking to put up a
security is merely an accessory obligation, and is
within the control of the maker – better view
2.5.3.1.3. If it contains a clause that if a holder feels insecure,
81
Sec. 52 and 58
82
Sec. 1 (c)
83
Sec. 7
84
Sec. 4
85
see §§ 2.3.3 et seq.
86
VILLANUEVA, at p. 396
87
Sec. 2 (c)
Act No. 2031 (1911)
November 2014
he can accelerate the date of maturity – 2 views
2.5.3.1.3.1. not negotiable because date of maturity
uncertain, since option to pay on or before should be
with maker, here it is within the control of the holder
– better view
2.5.3.1.3.2. negotiable since it still qualifies as “on or
before”
2.5.3.2. It is not negotiable if it indicates “before” the occurrence

of a specified event which is certain to happen, because the
date of maturity can be determined only after the note has
become overdue.
2.5.3.3. Not negotiable of payable upon a contingency 88 (i.e.,
postal money order, because while “pay to the order of”,
bureau of posts may refuse to pay on numerous grounds.)
2.5.3.4. “When my means permit me to do so” although by law will
constitute a period, it is still not negotiable because the
courts will have to fix the period89
2.6. IT MUST BE PAYABLE TO ORDER OR TO BEARER 90

(MEMORIZE Sec. 8-9)
2.6.1. When Payable to Order91

2.6.1.1. Where it is drawn payable to the order of a specified
person or to him or his order. It may be drawn payable to the
order of:
2.6.1.1.1. Payee who is not maker, drawer, or drawee
2.6.1.1.2. Drawer92 or maker93
2.6.1.1.3. Drawee
2.6.1.1.4. Two or more payees jointly
2.6.1.1.5. One or some of several payees
2.6.1.1.6. The holder of an office for the time being
2.6.1.2. When payable to order, the payee must be named or

otherwise indicated therein with reasonable certainty.94
REASONABLE CERTAINTY. Because the check was drawn “Equitable

Banking Corporation order of A/C of Caville Enterprise, Inc.,” the payee
ceased to be indicated with reasonable certainty in contravention of Section
8 of the Negotiable Instruments Law. 3 As worded, it could be accepted as
deposit to the account of the party named after the symbols "A/C," or
payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc.,
with the latter being the ultimate beneficiary. That ambiguity is to be taken
contra proferentem that is, construed against NELL who caused the
ambiguity and could have also avoided it by the exercise of a little more
care. Thus, Article 1377 of the Civil Code provides [t]he interpretation of
88
Sec. 4
89
VILLANUEVA, at p. 396; see CIVIL CODE, Art. 1180 (“When the debtor binds himself to pay
when his means permit him to do so, the obligation shall be deemed to be one with a
period, subject to the provisions of Article 1197.”)
90
Sec. 1 (d)
91
Sec. 8
92
JMBD: If in the instrument the drawer is also the payee and it is accepted, it becomes
equivalent to a promissory note in favor of the drawer.
93
Sec. 184 (“x x x Where a note is drawn to the maker's own order, it is not complete until
indorsed by him.”)
94
VILLANUEVA, at p. 397: If the payee is left blank, the rules in Sec. 13, 14, 15 shall govern.
Act No. 2031 (1911)
November 2014
obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.95
2.6.2. When Payable to Bearer96
2.6.2.1. Bearer means the person in possession of a bill or note
which is payable to bearer. 97 The NI is payable to bearer
when:
2.6.2.1.1. It is expressed to be so payable.
2.6.2.1.2. It is payable to a person named therein or bearer.98
2.6.2.1.3. It is payable to the order of a fictitious or non-
existing person, and such fact was known to the person
making it so payable.99
FICTITIOUS. A review of US jurisprudence yields that an actual,

existing, and living payee may also be “fictitious” if the maker of the check
did not intend for the payee to in fact receive the proceeds of the check.
This usually occurs when the maker places a name of an existing payee on
the check for convenience or to cover up an illegal activity.[14] Thus, a
check made expressly payable to a non-fictitious and existing person is not
necessarily an order instrument. If the payee is not the intended recipient
of the proceeds of the check, the payee is considered a “fictitious” payee
and the check is a bearer instrument. x x x In a fictitious-payee situation,
the drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as a
bearer instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the check by
placing his indorsement thereon. And since the maker knew this limitation,
he must have intended for the instrument to be negotiated by mere delivery.
Thus, in case of controversy, the drawer of the check will bear the loss. This
rule is justified for otherwise, it will be most convenient for the maker who
desires to escape payment of the check to always deny the validity of the
indorsement. This despite the fact that the fictitious payee was purposely
named without any intention that the payee should receive the proceeds of
the check.[15]100 The US Supreme Court held in Mueller that when the
person making the check so payable did not intend for the specified payee
to have any part in the transactions, the payee is considered as a fictitious
payee. The check is then considered as a bearer instrument to be validly
negotiated by mere delivery. x x x Thus, the US Supreme Court held that
Liberty Insurance Bank, as drawee, was authorized to make payment to the
bearer of the check, regardless of whether prior indorsements were genuine
or not. x x x However, there is a commercial bad faith exception to the
fictitious-payee rule. A showing of commercial bad faith on the part of the
drawee bank, or any transferee of the check for that matter, will work to
strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts
dishonestly, and is a party to the fraudulent scheme.
2.6.2.1.4. The name of the payee does not purport to be the
name of any person.
PAY TO CASH. Where a check is made payable to the order of "cash",
95
Equitable Banking Corporation v. IAC and Co, G.R. No. 74451, 25 May 1988
96
Sec. 9
97
Sec. 191
98
VILLANUEVA, at p. 402 these are not payble to bearer: Not negotiable, “X or his collector”,
“X or his agent”, “Bearer X”
99
JMBD: What is controlling is not whether the payee exists, but whether the person
issuing intended to issue NI to such payee.
100
Philippine National Bank v. Rodriguez, G.R. No. 170325, 26 September 2008 citing
Act No. 2031 (1911)
November 2014
the word cash "does not purport to be the name of any person", and hence
the instrument is payable to bearer. The drawee bank need not obtain any
indorsement of the check, but may pay it to the person presenting it without
any indorsement. . . . (Zollmann, Banks and Banking, Permanent Edition,
Vol. 6, p. 494.)101
2.6.2.1.5. The only or last indorsement is an indorsement in
blank102
2.6.3. Importance of Distinction: How NI
Negotiated103
2.6.3.1. Payable to Order – indorsement and delivery
2.6.3.2. Payable to Bearer – delivery
DISTINCTION. The distinction between bearer and order instruments

lies in their manner of negotiation. Under Section 30 of the NIL, an order
instrument requires an indorsement from the payee or holder before it may
be validly negotiated. A bearer instrument, on the other hand, does not
require an indorsement to be validly negotiated. It is negotiable by mere
delivery.104
INTENT TO NEGOTIATE PREVAILS. Contrary to what respondent court

held, the CTDs are negotiable instruments. The documents provide that the
amounts deposited shall be repayable to the depositor. And who, according
to the document, is the depositor? It is the "bearer." The documents do not
say that the depositor is Angel de la Cruz and that the amounts deposited
are repayable specifically to him. Rather, the amounts are to be repayable to
the bearer of the documents or, for that matter, whosoever may be the
bearer at the time of presentment. x x x Petitioner's insistence that the
CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from
one person to another in such a manner as to constitute the transferee the
holder thereof, 21 and a holder may be the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the legal title
to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of Angel de la Cruz (and we even
disregard the fact that the amount involved was not disclosed) could at the
most constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for. 105
2.7. IF NI IS A BILL OF EXCHANGE, DRAWEE MUST BE

NAMED OR OTHERWISE INDICATED THEREIN WITH REASONABLE
CERTAINTY106
2.7.1. Why? To determine to whom must the instrument be

101
Ang Tek Lian v. Court of Appeals, G.R. No. L-2516, 25 September 1950
102
Sec. 34 and 35
103
Sec. 30
104
Philippine National Bank v. Rodriguez, G.R. No. 170325, 26 September 2008
105
Caltex (Phils.) v. Court of Appeals and Security Bank and Trust Company, G.R. No.
97753, 10 August 1992
106
Sec. 1 (e)
Act No. 2031 (1911)
November 2014
presented for acceptance/payment. HOWEVER, “[w]here the
instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by
filling up the blanks therein. And a signature on a blank paper
delivered by the person making the signature in order that the
paper may be converted into a negotiable instrument operates as
a prima facie authority to fill it up as such for any amount. x x
x.”107
2.8. OTHER MATTERS
2.8.1. Cases on Requisites of Negotiability (READ ALL)

2.8.1.1. Caltex v. Court of Appeals & Security Bank, G.R. No.
97753, 10 August 1992
2.8.1.2. Traders Royal Bank v. Court of Appeals et al. G.R.
No. 93397, 03 March 1997
2.8.1.3. Consolidated Plywood Industries, Inc., et al. v. IFC
Leasing and Acceptance Corporation G.R. No. 72593, 30
April 1987
2.8.1.4. Garcia v. Llamas G.R. No. 154127, 08 December 2003
2.8.2. Terms, when Sufficient: The instrument need not follow

the language of this Act, but any terms are sufficient which
clearly indicate an intention to conform to the requirements
hereof. 108
2.8.3. Provisions and Omissions not affecting Validity

and/or Negotiability of the Instrument109
2.8.3.1. If it is not dated, considered dated as of time issued110
2.8.3.2. If it does not specify value given, consideration is
presumed111
2.8.3.3. If it does not specify place where drawn or place where
payable, apply the default rules112
2.8.3.4. It bears a seal.113
2.8.3.5. It designates a particular currency in which payment is to
be made.
2.8.4. Rules of Construction when the instrument is

ambiguous or there are omissions therein114
2.8.4.1. Generally, the sum expressed in words prevail over the
sum expressed in numbers, but not when the words
themselves are ambiguous.
2.8.4.2. Interest stipulated but with no indication of starting date,
it will run from the date of the instrument or, if undated, from
the time of issue.
2.8.4.3. Undated NI considered dated as of time issued.
107
Sec. 14
108
Sec. 10
109
Sec. 5 and 6
110
Sec. 6 (a) in relation to Sec. 17 (c)
111
Sec. 6 (b) in relation to Sec. 24
112
Sec. 6 (b) in relation to Sec. 73 (i.e., address given in NI; usual business/residence
address; where found/last known business/residence address)
113
DE LEON, p. 50 (“At common law, a sealed instrument is non-negotiable and is subject to
the rule governing contracts under seal. Under Philippine law, there is no distinction.”)
114
Sec. 17
Act No. 2031 (1911)
November 2014
2.8.4.4. Written provisions prevail over printed provisions.
2.8.4.5. If NI ambiguous whether PN or BoE, holder may treat it as
either.
2.8.4.6. If capacity of signatory not clear, deemed an indorser.
2.8.4.7. “I promise to pay” signed by 2 or more, deemed joint and
several (solidary).115
3. ISSUANCE OF NEGOTIABLE INSTRUMENTS
3.1. DEFINITIONS
3.1.1. Issue116 means the first delivery of the

instrument, complete in form, to a person who takes it as a holder.
3.1.2. Delivery117 is the transfer of possession actual or
constructive, from one person to another.
3.2. COMPLETENESS
3.2.1. Why: It is necessary to conform to formal

requirements under Sec. 1 so the instrument can be deemed
negotiable.
3.2.2. Date is not an essential element of negotiability;
however, it may become necessary (but not to make NI
negotiable) to determine its maturity, when interest is to begin to
run and reckoning point of prescription of the action.
3.2.2.1. Reasonable Time
NI PAYABLE ON DEMAND. If it is negotiated at an unreasonable time after

issue, holder is not deemed HIDC.118 Furthermore, its presentment for
payment must be made within reasonable time after issue, EXCEPT for a
BoE, where presentment for payment is sufficient if made within a
reasonable time after last negotiation.119
3.2.3. Generally, when the instrument is dated, the NIL

creates a REBUTTABLE PRESUMPTION - if the NI, acceptance, or any
indorsement is dated, such date is deemed prima facie120 to be the
true date of making, drawing, acceptance, indorsement.121
IN FACT, even when the instrument is ante- or post-dated, the general

rule is that the NI not invalid solely by reason of ante- or post-dating and
the person to whom it is delivered acquires title thereto as of the date of
delivery. HOWEVER, that does not apply if the ante- or post-dating was done
115
CIVIL CODE, Art. 1207 et seq.
116
Sec. 191
117
Sec. 191
118
Sec. 53
119
Sec. 71
120
“Evidence good and sufficient on its face. Such evidence as, in the judgment of the law,
is sufficient to establish a given fact, or the group or chain of facts constituting the party’s
claim or defense, and which if not rebutted or contradicted, will remain sufficient. Evidence
which, if unexplained or uncontradicted, is sufficient to sustain a judgment in favor of the
issue it supports, but which may be contradicted by other evidence.” see Wa-Acon v. People
of the Philippines G.R. No. 164575, 06 December 2006 citing H. Black, et al., BLACK’S
LAW DICTIONARY 1190 (6th ed.,1990)
121
Sec. 11
Act No. 2031 (1911)
November 2014
out of an illegal or fraudulent purpose (i.e., circumvent laws on usury). 122
BUT NOTE that the latter does not affect a HIDC (PD).123
NATURE OF DELIVERY TO PASS TITLE. Note however that delivery as

the term is used in the aforementioned provision means that the party
delivering did so for the purpose of giving effect thereto.[12] Otherwise, it
cannot be said that there has been delivery of the negotiable instrument.
Once there is delivery, the person to whom the instrument is delivered gets
the title to the instrument completely and irrevocably.124
3.2.4. On the other hand, if the instrument is undated, its

validity not affected125 and it is GENERALLY considered as dated at
time it was issued.126
HOWEVER, there are instances when the true date may be inserted,
i.e., where NI is expressed to be payable at a fixed period after date and
where acceptance of NI payable at a fixed period after sight and that means
that the NI shall be payable accordingly on that date. BUT, if the inserted
date is wrong, this avoids the NI as to the person inserting the wrong date,
BUT NOT against a HIDC, as to him, the date so inserted is to be regarded
as the true date (PD).127
3.2.5. If the instrument has blanks,128 these may be

filled but must be within the authority given and within a
reasonable time.129
INSTRUMENT IS WANTING IN MATERIAL PARTICULAR. The person in

possession has prima facie authority to complete it by filling up blanks, if
the omission which will make instrument non-negotiable (i.e., name of
payee, name of drawer); or, the omission which will not render instrument
non-negotiable (i.e., date, place of payment, rate of interest).130
SIGNATURE ON BLANK PAPER. If this is delivered by the person

making the signature in order that the paper may be converted into a NI,
this also operates as a prima facie authority to fill it up as such for any
amount (i.e., blank check). 131
EFFECT OF WANT OF AUTHORITY. The NI may not be enforced against

person who became party to NI prior to its completion (not even to extent of
authority given), except if NI, after completion, is negotiated to HIDC, then
it is valid and effectual for all purposes in his hands. 132
122
Sec. 12
123
Sec. 13 (“x x x The insertion of a wrong date does not avoid the instrument in the hands
of a subsequent holder in due course; but as to him, the date so inserted is to be regarded
as the true date.”)
124
San Miguel Corporation v. Puzon, G.R. No. 167567, 22 September 2010
125
Sec. 6 (a)
126
Sec. 17 (c)
127
Sec. 13
128
Sec. 14; see VILLANUEVA, p. 413 (“In all the above cases, there is an intention to issue a
negotiable instrument. But if a signature on a piece of paper is given only for autograph
purposes and the same is converted into a negotiable instrument, this is will amount to
forgery, constituting a valid defense even against a holder in due course. Whether or not
the instrument is filled up in accordance with the authority given, remember that endorsers
are liable on their warranties.”)
129
Sec. 193
130
Sec. 14
131
Sec. 14
132
Sec. 14
Act No. 2031 (1911)
November 2014
3.3. DELIVERY133
3.3.1. Why? The NIL states that every contract on a NI is

incomplete and revocable until delivery of the NI for purpose of
giving effect thereto.134
JURISPRUDENTIAL DEFINITION. As ordinarily understood, delivery

means the transfer of the possession of the instrument by the maker or
drawer with intent to transfer title to the payee and recognize him as the
holder thereof. 7 x x x In Tiro v. Hontanosas 8 we ruled that “[t]he salary
check of a government officer or employee such as a teacher does not
belong to him before it is physically delivered to him. Until that time the
check belongs to the government. Accordingly, before there is actual
delivery of the check, the payee has no power over it; he cannot assign it
without the consent of the Government.” As a necessary consequence of
being public fund, the checks may not be garnished to satisfy the judgment.
9135
3.3.2. GENERALLY, delivery, in order to be effective,

must be made either by or done under authority of party making,
drawing, accepting, or indorsing and done for the purpose of
transferring the property in the NI (not for a conditional or
special purpose only i.e., safekeeping or collection). 136 HOWEVER,
the provides PRESUMPTIONS OF VALID AND INTENTIONAL
DELIVERY:
3.3.2.1. If NI no longer in possession of party whose signature

appears thereon – prima facie presumption, but subject to
rebuttal
3.3.2.2. As between immediate parties (not just proximity, includes

privity)137 and a remote party other than HIDC – prima facie
presumption, but subject to rebuttal.
3.3.2.3. If NI in hands of HIDC – conclusive presumption, by all

parties prior to him so as to make them liable to him.
3.3.2.4. If NI is incomplete and undelivered, presumption will not

apply: NI will not, if completed and negotiated without
authority, be valid in hands of any holder as against any
person whose signature was placed thereon before delivery138
3.4. CASES OF DEFECTIVE ISSUANCE (MEMORIZE:

Sec. 14-16)
3.4.1. Incomplete but Delivered NI (PD)
BLANKS; WHEN MAY BE FILLED. Where the instrument is wanting in

any material particular, the person in possession thereof has a prima facie
133
see Sec. 191 “Issue” and “Delivery”
134
Sec. 16
135
VILLANUEVA, at p. 408 citing De La Victoria v. Burgos, G.R. No. 111190, 27 June 1995
(citations omitted)
136
Sec. 16
137
VILLANUEVA, at p. 409 citing Howard National Bank v. Wilson, 120 Atl. 889
138
Sec. 15
Act No. 2031 (1911)
November 2014
authority to complete it by filling up the blanks therein. And a signature on
a blank paper delivered by the person making the signature in order that
the paper may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be filled
up strictly in accordance with the authority given and within a reasonable
time. But if any such instrument, after completion, is negotiated to a holder
in due course, it is valid and effectual for all purposes in his hands, and he
may enforce it as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.139
3.4.2. Incomplete and Undelivered NI (RD)
INCOMPLETE INSTRUMENT NOT DELIVERED. Where an incomplete

instrument has not been delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery.140
3.4.3. Complete but Undelivered NI (PD)
DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED. Every contract on a

negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between immediate
parties and as regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing, as the case
may be; and, in such case, the delivery may be shown to have been
conditional, or for a special purpose only, and not for the purpose of
transferring the property in the instrument. But where the instrument is in
the hands of a holder in due course, a valid delivery thereof by all parties
prior to him so as to make them liable to him is conclusively presumed. And
where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved.141
3.4.3.1. READ: De La Victoria v. Burgos & Sebreno, G.R. No.

111190, 27 June 1995
139
Sec. 14
140
Sec. 15
141
Sec. 16
Act No. 2031 (1911)
November 2014
PART TWO142
OBJECTIVE: This part seeks to amplify the students’ knowledge on NIs by

going deeper into the significance of Sec. 1 by introducing the concepts of
forgery and alteration as well as the effects thereof. Thereafter, the
concepts of consideration and negotiation will be explained under the ambit
of commercial law, which shall serve as the foundation of and transition
device towards Part Three.
4. SIGNATURE AND FORGERY (MEMORIZE Sec. 18, 23, 124-125)
4.1. RULES ON SIGNATORIES
GENERALLY: No person is liable on the instrument whose signature

does not appear thereon.143 EXCEPT: Persons signing in trade or assumed
name,144 Agent signing for principal145 Signature appears on paper separate
from NI (allonge)146 i.e., acceptance of BoE on a separate piece of paper 147
and unconditional written promise in advance to accept BoE before it is
drawn148 Forger149 Estoppel150 and if NI can be negotiated by mere
delivery151
4.1.1. Rules on Signature of Agent
REQUISITES OF VALIDITY. The agent must be duly authorized (no

form necessary)152 (BUT if signature by procruration, it is notice that agent
has limited authority153), indicate that he is signing as agent AND the
identity of his principal.154
4.1.1.1. Effects of absence of requisites of validity
UNDISCLOSED PRINCIPAL. Where the agent signs his name but

nowhere in the instrument has he disclosed the fact that he is acting in a
representative capacity or the name of the third party for whom he might
have acted as agent, the agent is personally liable to take holder of the
instrument and cannot be permitted to prove that he was merely acting as
agent of another and parol or extrinsic evidence is not admissible to avoid
the agent's personal liability.155
142
Covers the Second Quarter of the Second Semester
143
Sec. 18
144
Sec. 18
145
Sec. 19-21
146
Sec. 31; see also I AGBAYANI, Aguedo F., COMMENTARIES AND JURISPRUDENCE ON THE
COMMERCIAL LAWS OF THE PHILIPPINES (1992), p. 256 (“Where the indorsement is written on
paper attached to the instrument, such paper is called an “allonge”)
147
Sec. 134
148
Sec. 135
149
Sec. 23
150
Sec. 23 (x x x “unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.”)
151
Sec. 65
152
Sec. 19
153
Sec. 21
154
Sec. 20
155
Republic Planters Bank v. Court of Appeals & Canlas, G.R. No. 93073, 21 December
1992 citing Crocker National Bank vs. Say, 209 Cal. 436; 288 P. 69 (1930); Dayries vs.
Lindsly, 54 So. 791 (1911); Granada vs. PNB, 18 SCRA 1 (1966).
Act No. 2031 (1911)
November 2014
WANT OF AUTHORITY OF AGENT. GENERALLY: principal not bound
beyond authority of agent (RD) EXCEPT: if agent has apparent authority
(PD). READ: Francisco v. Court of Appeals et al., G.R. No. 116320, 29
November 1999
4.1.2. Rules for Incapacitated:
WANT OF CAPACITY. Indorsement or assignment by corporation or

infant passes the property therein, notwithstanding that, from want of
capacity, corporation or infant not liable thereon.156
4.1.2.1. Corporation (ultra vires)
DISTINCTION. Absolutely prohibited by its charter or statute from

issuing any commercial paper under any circumstances 157 (RD) and it has
power to issue NI but issuance was not authorized for the particular
purpose for which it was issued (PD)
4.1.2.2. Minority
GENERALLY: minor not liable (RD); EXCEPT: Active

misrepresentation (estoppel), Retention of fruits and benefits and
Ratification158
NATURE OF CONTRACT OF ENDORSEMENT. This contract of an infant is

not void, and that his endorsee has the right to enforce payment from all
parties prior to the infant endorser; the incapacity of the infant cannot be
availed of by prior parties. However, that does not destroy the right of such
infant endorser to disaffirm under the rules of infancy.159
4.1.2.3. Other incapacity
4.1.2.3.1. Insanity
GENERALLY: Insanity where the insane person has a guardian

appointed by the court (RD); EXCEPT where there is no notice of insanity
(PD)160
4.1.2.3.2. Intoxication (PD)
4.2. FORGERY
4.2.1. Definition and Coverage
FORGERY. The counterfeit making or fraudulent alteration of any

writing i.e., if signature is forged or made without authority of person
whose signature it purports to be (RD)161 HOWEVER, forgery of a material
particular other than signature then it is an alternation not a forgery. 162
156
Sec. 22; see also VILLANUVA, p. 412 (“In both instances, endorsements are voidable –
valid until annulled – so good title is passed. Parties prior to corporation/minor cannot
escape liability by setting up as defense the incapacity of one of the endorsers.”)
157
Sec. 22
158
Sec. 22
159
VILLANUVA, p. 412 citing Murray v. Thompson, LRA 1917B, 188 SE 578
160
by analogy Sec. 22
161
Sec. 23
162
Sec. 124
Act No. 2031 (1911)
November 2014
FRAUD. GENERALLY Fraud in factum/fraud in esse contractus (RD)

amounts to forgery since no intent to issue NI (e.g., autograph)163 BUT NOT
Fraud in inducement (PD) 164 does not amount to forgery since intent to
issue NI, although defrauded.
DURESS AMOUNTING TO FORGERY. Duress amounting to forgery (RD)

amounts to forgery since no intent to sign NI (e.g., hand forced)165 BUT
Ordinary duress, force or fear (PD)166 does not amount to forgery since
intent to sign NI, although pressured
FRAUDULENT IMPERSONATION, TWO CASES. If intent is to pay the real

person (RD)167 because signature of impostor is forgery BUT if intent is to
pay the person he is dealing with not forgery since impostor will be merely
signing in assumed name.168
4.2.2. Effects of Forgery
4.2.2.1. General Rule
NIL, SEC. 23. When signature is forged or made without authority of

person whose signature it purports to be, it (the forged signature, not the
NI) is wholly inoperative. Therefore, there is no right to: Retain the NI, give
a discharge therefor and Enforce payment thereof against any party
thereto can be acquired through or under such signature.
4.2.2.2. Exception: Unless party against whom it is sought to

enforce such right is precluded from setting up the forgery or
want of authority,169 namely:
CONTRARY TO WARRANTY. Those who warrant or admit the

genuineness of the signature in question i.e., Acceptor, 170 Person negotiating
by delivery or by qualified indorsement171 and General Indorser172
GUILTY OF NEGLIGENCE. Those who by their acts, silence or negligence

are estopped173 from setting up the defense of forgery.
FORGED SIGNATURE UNNECESSARY. When forged signature is

unnecessary to the tile of the holder as when the indorsement is forged on a
NI payable to bearer174 and here the NI may nevertheless be further
negotiated by delivery.
4.2.3. Instances of Forgery
163
Sec. 23
164
Sec. 55
165
Sec. 23
166
Sec. 55
167
Sec. 23
168
Sec. 18
169
Sec. 23
170
Sec. 62(a): admits existence of drawer and genuineness of his signature
171
Sec. 65(a): warrants that NI is genuine and in all respects what it purports to be
172
Sec. 66(a): warrants the matters and things mentioned in Sec. 65(a)
173
CIVIL CODE, Art. 1431 et seq. (“Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon.”)
174
Sec. 40
Act No. 2031 (1911)
November 2014
4.2.3.1. Promissory Notes175
4.2.3.1.1. Indorsement
PAYABLE TO ORDER. The party whose indorsement is forged and

parties prior to him, including the maker, cannot be held liable, whether or
not he is a HIDC because the forged signature, which is wholly inoperative,
is the only means by which title to the NI is acquired.
PAYABLE TO BEARER. The party whose indorsement is forged and

parties prior to him including the maker may be held liable only by a HIDC,
provided that the instrument was mechanically complete before the forgery.
This is because the forged signature is not necessary to acquire title but the
defense of lack of delivery is still a PD against those who are not HIDC.
4.2.3.1.2. Maker’s signature: the Maker cannot be held

liable on the PN by ANY holder, even a HIDC.
HOWEVER, INDORSERS REMAIN LIABLE. It is clear from the provision

that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that
the existence of one forged signature therein will render void all the other
negotiations of the check with respect to the other parties whose signature
are genuine? x x x In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W.
590, where a check has several indorsements on it, it was held that it is only
the negotiation based on the forged or unauthorized signature which is
inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged
indorsement that should be declared inoperative. This means that the
negotiation of the check in question from Martin Lorenzo, the original
payee, to Ramon R. Lorenzo, the second indorser, should be declared of no
affect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to
Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to
the defendant-appellant who did not know of the forgery, should be
considered valid and enforceable, barring any claim of forgery.176
4.2.3.2. Bills of Exchange177
4.2.3.2.1. Indorsement
4.2.3.2.2. Drawer’s signature
WITH ACCEPTANCE BY DRAWEE. The drawee, by accepting, cannot set

up the defense of forgery, because the when the drawer accepted the
instrument, he admitted the genuineness of the signature of the drawer.
PAYMENT IS NOT ACCEPTANCE. In National Bank vs. First National

Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere
promise to pay a check is binding on a bank, why should not the absolute
payment of the check have the same effect? In response, it is submitted that
the two things, — that is acceptance and payment, — are entirely different.
If the drawee accepts the paper after seeing it, and then permits it to go
into circulation as genuine, on all the principles of estoppel, he ought to be
prevented from setting up forgery to defeat liability to one who has taken
175
VILLANUEVA, p. 421
176
Republic Bank v. Ebrada, G.R. No. L-40796, 31 July 1975
177
VILLANUEVA, p. 421 et seq.
Act No. 2031 (1911)
November 2014
the paper on the faith of the acceptance, or certification. On the other hand,
mere payment of the paper at the termination of its course does not act as
an estoppel. The attempt to state a general rule covering both acceptance
and payment is responsible for a large part of the conflicting arguments
which have been advanced by the courts with respect to the rule.
(Annotation at 12 A. L. R., 1090 1921].)178
4.2.3.2.2.1. Without acceptance but the BoE is paid

by drawee
DRAWEE BEARS THE LOSS. Unless a forgery or alteration is

attributable to the fault or negligence of the drawer himself, the remedy of
the drawee bank that negligently clears a forged and/or altered check for
payment is against the party responsible for the forgery or alteration,
otherwise, it bears the loss.179 A bank is bound to know the signatures of its
customers; and if it pays a forged check, it must be considered as making
the payment out of its own funds, and cannot ordinarily charge the amount
so paid to the account of the depositor whose name was forged (READ: San
Carlos Mining Co., Ltd. v. BPI & China Banking Corporation, G.R. No.
L-37467, 11 December 1933).
DRAWER CAN RECOVER FROM DRAWEE. In cases involving a forged
check, where the drawer’s signature is forged, the drawer can recover from
the drawee bank. No drawee bank has a right to pay a forged check. If it
does, it shall have to recredit the amount of the check to the account of the
drawer. The liability chain ends with the drawee bank whose responsibility
it is to know the drawer’s signature since the latter is its customer. (READ:
Associated Bank v. Hon. Court of Appeals et al., G.R. No. 107382, 31
January 1996). BUT DRAWER MUST NOT BE NEGLIGENT. Even if the
twenty-three (23) checks in question are considered forgeries, considering
the petitioner's gross negligence, it is barred from setting up the defense of
forgery under Section 23 of the Negotiable Instruments Law.180
DRAWEE VS COLLECTING BANK. GENERALLY: As what transpired in
this case, petitioner banks accommodated Yu Kio, being a valued client and
the president of Pipe Master, and accepted the crossed checks. They
stamped at the back thereof that “all prior indorsements and/or lack of
indorsements are guaranteed.” In so doing, they became general
endorsers. Under Section 66 of the Negotiable Instruments Law, an
endorser warrants “that the instrument is genuine and in all respects what
it purports to be; that he has a good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his
indorsement valid and subsisting.” x x x In Associated Bank v. Court of
Appeals,[6] we held that the collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the genuineness of all
prior indorsements and is privy to the depositor who negotiated the check.
x x PBCom, as the drawee bank, cannot be held liable since it mainly relied
on the express guarantee made by petitioners, the collecting banks, of all
prior indorsements. x x x Evidently, petitioner banks disregarded
established banking rules and procedures. They were negligent in
accepting the checks and allowing the transaction to push through. In Jai-
178
Philippines National Bank v. the National City Bank of New York et al., G.R. No. L-43596,
31 October 1936
179
Bank of the Philippine Islands v. Buenaventura et al., G.R. No 148196, 30 September
2005
180
Metropolitan Waterworks and Sewerage System v. Court of Appeals & Philippine
National Bank, G.R. No. L-62943, 14 July 1986
Act No. 2031 (1911)
November 2014
Alai Corp. of the Phil. v. Bank of the Phil. Islands,[7] we ruled that one who
accepts and encashes a check from an individual knowing that the payee is
a corporation does so at his peril. Therefore, petitioner banks are liable to
respondent Filipinas Orient. x x x In fine, it must be emphasized that the
law imposes on the collecting bank the duty to diligently scrutinize the
checks deposited with it for the purpose of determining their genuineness
and regularity. The collecting bank, being primarily engaged in banking,
holds itself out to the public as the expert on this field, and the law thus
holds it to a high standard of conduct.[8] Since petitioner banks’
negligence was the direct cause of the misappropriation of the checks, they
should bear and answer for respondent Filipinas Orient’s loss, without
prejudice to their filing of an appropriate action against Yu Kio. 181 EXCEPT:
The 24-hour clearing house rule is a valid rule applicable to commercial
banks (Republic v. Equitable Banking Corporation, 10 SCRA 8 [1964];
Metropolitan Bank & Trust Co. v. First National City Bank, 118 SCRA 537).
x x x It is true that when an endorsement is forged, the collecting bank or
last endorser, as a general rule, bears the loss (Banco de Oro Savings &
Mortgage Bank v. Equitable Banking Corp., 167 SCRA 188). But the
unqualified endorsement of the collecting bank on the check should be read
together with the 24-hour regulation on clearing house operation
(Metropolitan Bank & Trust Co. v. First National City Bank, supra). Thus,
when the drawee bank fails to return a forged or altered check to the
collecting bank within the 24-hour clearing period, the collecting bank is
absolved from liability.182
4.2.4. Cases (READ ALL)
4.2.4.1. Bank of the Philippine Islands v. Casa Montessori

Internationale & Yabut, G.R. No. 149454, 28 May 2004
4.2.4.2. Samsung Construction Company Philippines, Inc. v.
Far East Bank and Trust Company & Court of Appeals,
G.R. No. 129015, 13 August 2004
4.2.4.3. Philippine National Bank v. The National City Bank
of New York et al., G.R. No. L-43596, 31 October 1936
4.2.4.4. Philippine National Bank v. The Court of Appeals &
Philippine Commercial and Industrial Bank, G.R. No. L-
26001, 29 October 1968
4.2.4.5. Republic of the Philippines v. Equitable Banking
Corporation, G.R. No. L-15894, 30 January 1964
4.2.4.6. Traders Royal Bank v. Radio Philippines Network,
Inc. et al., G.R. No. 138510, 10 October 2002
4.2.4.7. Philippine Commercial International Bank v. Court
of Appeals et al., G.R. No. 121413, 29 January 2001
4.2.4.8. The Great Eastern Life Insurance Co. v. Hongkong &
Shanghai Banking Corporation & Philippine National
Bank, G.R. No. L-18657, 23 August 1922
4.2.4.9. Gempesaw v. The Honorable court of Appeals &
Philippine Bank of Communications, G.R. No. 92244, 09
February 1993
4.2.4.10. Associated Bank & Cruz v. Honorable Court of
Appeals & Reyes, G.R. No. 89802, 07 May 1992
4.2.4.11. Jai Alai Corporation of the Philippines v. Bank
of the Philippine Islands, G.R. No. L-29432, 06 August
181
Metropolitan Bank and Trust Company v. Philippine Bank of Communications et al., G.R.
No. 141208, 18 October 2007
182
Republic Bank v. Court of Appeals & First National City Bank, G.R. No. 42725, 22 April
1991
Act No. 2031 (1911)
November 2014
1975
4.2.4.12. Metropolitan Bank & Trust Company v. Court of
Appeals et al., G.R. No. 88866, 18 February 1991
4.3. ALTERATION
4.3.1. Definition and Coverage
4.3.1.1. GENERALLY any change in or addition to a NI is an

alteration and there is no distinction between fraudulent and
innocent alteration.183
4.3.1.2. Alteration is MATERIAL184 (READ: Bank of America NT

& SA v. Philippine Racing Club, G.R. No. 150228, 30 July
2009) if it alters the effect of the NI, such as changes in:
4.3.1.2.1. date
4.3.1.2.2. sum payable, either for principal or interest
4.3.1.2.3. The time or place of payment
4.3.1.2.4. The number or the relation of the parties
4.3.1.2.5. The medium or currency in which payment is to be
made
4.3.1.2.6. Adds a place of payment where no place of payment
is specified
4.3.1.2.7. Any other change or addition which alters the effect
of the instrument in any respect
4.3.1.3. Alteration is NOT MATERIAL if it does not alter the

effect of the NI.
CHANGE IN SERIAL NUMBER OF CHECK. An alteration is said to be

material if it alters the effect of the instrument.[7] It means an unauthorized
change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a
party.[8] In other words, a material alteration is one which changes the
items which are required to be stated under Section 1 of the Negotiable
Instrument Law. x x x The case at the bench is unique in the sense that what
was altered is the serial number of the check in question, an item which, it
can readily be observed, is not an essential requisite for negotiability under
Section 1 of the Negotiable Instruments Law. The aforementioned
alteration did not change the relations between the parties. The name of
the drawer and the drawee were not altered. The intended payee was the
same. The sum of money due to the payee remained the same. x x x
Petitioner, thus cannot refuse to accept the check in question on the ground
that the serial number was altered, the same being an immaterial or
innocent one. READ: Philippine National Bank v. Court of Appeals et
al., G.R. No. 107508, 25 April 1996.185
4.3.2. Effect of Material Alteration
EFFECTS ON INSTRUMENT AND RULES ON LIABILITY. GENERALLY
183
VILLANUEVA, p. 429
184
Sec. 125
185
JMBD: Note that this case contains several examples of material and immaterial
alterations; see also The International Corporate Bank, Inc. v. Court of Appeals &
Philippine National Bank, G.R. No. 129910, 05 September 2006
Act No. 2031 (1911)
November 2014
where NI is materially altered without assent of all parties liable thereon, it
is avoided (RD) EXCEPT NI may be enforced against a party who has
himself made, authorized or assented to the alteration and subsequent
indorsers BUT if materially-altered NI is in hands of HIDC not party to
alteration, HIDC may enforce payment thereof according to the original
tenor.186
4.3.3. READ: Montinola v. The Philippine National

Bank et al., G.R. No. L-2861, 26 February 1951
5. CONSIDERATION
5.1. CONSIDERATION
5.1.1. Definitions
VALUE means “valuable consideration” (could be obligation to give, to

do, or not to do; but not liberality) 187 and is any consideration sufficient to
support a simple contract. 188 An antecedent or pre-existing debt constitutes
value; and is deemed as such whether the instrument is payable on demand
or at a future time.189
JURISPRUDENTIAL DEFINITION OF CONSIDERATION. Consideration is

defined as some right, interest, benefit, or advantage conferred upon the
promissor, to which he is otherwise not lawfully entitled, or any detriment,
prejudice, loss, or disadvantage suffered or undertaken by the promisee
other than to such as he is at the time of consent bound to suffer.190
5.1.2. Importance: The four fundamental contracts of

making, drawing, accepting and indorsing MUST be supported by
valuable consideration; the exception is with regard to an
accommodation party.191
5.1.3. Presumptions
PRIMA FACIE. Every NI is deemed prima facie to have been issued for
valuable consideration and every person whose signature appears thereon
is deemed prima facie to have become a party thereto for value.192
5.1.4. Effects of Absence or Failure (PD)
PERSONAL DEFENSE. Absence or failure is a defense as against any

person not a HIDC BUT partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and liquidated amount or
otherwise.193
186
Sec. 124
187
Sec. 191
188
JMBD: This is synonymous to the term “cause” as used in civil law; see CIVIL CODE, Art
1350 (“In onerous contracts the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other; in remuneratory ones, the service
or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality
of the benefactor.”)
189
Sec. 25
190
Olegario & Victorino v. Court of Appeals et al., G.R. No. 104892, 14 November 1994
191
VILLANUEVA, p. 431
192
Sec. 24
193
Sec. 28
Act No. 2031 (1911)
November 2014
5.1.5.1. Travel-on, Inc. v. Court of Appeals & Miranda, G.R.

No. L-56169, 26 June 1992
5.1.5.2. Yang v. Honorable Court of Appeals et al., G.R. No.
138074, 15 August 2003
5.2. HOLDER FOR VALUE
DEFINITION. A HFV is one who gives valuable consideration for a NI

issued or negotiated to him and where value has at any time been given for
the NI, the holder is deemed a HFV in respect to all parties who become
such prior to that time.194 ALSO, where the holder has a lien on the NI
arising either from contract or by implication of law, he is deemed a HFV to
the extent of his lien.195
5.2.1. Importance
5.2.1.1. To be HIDC, a holder who took the NI for value.196
5.2.1.2. An accommodation party liable to HFV, notwithstanding
knowledge of HFV of such fact.197
5.3. ACCOMMODATION PARTY
DEFINITION. An accommodation party is one who has signed the NI as

maker, drawer, acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person AND is liable on
NI to a HFV, notwithstanding that such HFV, at the time of taking the
instrument, knew him to be only an accommodation party. 198
5.3.1.1. Lim v. Saban, G.R. No. 163720, 16 December 2004

5.3.1.2. Prudencio & Prudencio v. The Honorable Court of
Appeals et al., G.R. No. 34539, 14 July 1986Maulini et
al., v. Serrano, G.R. No. L-8844, 16 December 1914
5.3.1.3. Sadaya v. Sevilla, G.R. No. L-17845, 27 April 1967
6. NEGOTIATION
6.1. CONCEPT OF NEGOTIATION
6.1.1. Definition: There is negotiation when the NI

is transferred from one person to another in such manner as to
constitute the transferee the holder thereof.199
6.1.2. Three Types of Transfer

6.1.2.1. Assignment – Assignee is merely placed in position of
assignor and acquires the instrument subject to all the
defenses that might have been set up against the original
194
Sec. 26
195
Sec. 27
196
Sec. 52 (c)
197
Sec. 29
198
Sec. 29
199
Sec. 30
Act No. 2031 (1911)
November 2014
payee.200
6.1.2.2. Operation of Law – such as by succession, by insolvency.
6.1.2.3. Negotiation
6.1.3. Methods of Negotiation201

6.1.3.1. NI payable to bearer, by delivery only
6.1.3.2. NI payable to order, by indorsement of holder and by
delivery
6.2. INDORSEMENT
6.2.1. Requisites
6.2.1.1. Indorsement (signature of indorser, without additional

words, is sufficient) must be written on NI itself, or upon a
paper attached thereto.202
6.2.1.2. Indorsement must be of entire NI.203
RULES. GENERALLY an indorsement which purports to transfer to

the indorsee a part only of the amount payable, or which purports to
transfer the NI to two or more indorsees severally, does not operate as
negotiation of the NI. EXCEPT where NI has been paid in part, it may be
indorsed as to the residue.
6.2.2. Importance
6.2.2.1. Creates liability on the part of indorser i.e., Irregular

Indorser,204 Qualified Indorser,205 General Indorser206 and
Indorser if NI negotiable by delivery 207
6.2.2.2. An indorsement is necessary for valid negotiation of NI

payable to order208
6.2.3. Indorsement of NI Payable to Bearer. The NI

may nevertheless be further negotiated by delivery, but the
person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.209
6.2.4. Effect of Transfer Without Indorsement
LACK OF INDORSEMENT. Transferee acquires only rights of the

transferor; defenses available against transferor will also be available
against transferee BUT the latter has right to require transferor to indorse
the NI. The time or reckoning point for determining whether transferee is
HIDC is as of time of actual indorsement, not at time of delivery.210
200
JMBD: Take note that an assignment is actually a sale.
201
Sec. 30
202
Sec. 31
203
Sec. 32
204
Sec. 64
205
Sec. 65
206
Sec. 66
207
Sec. 67
208
Sec. 30 and 49
209
Sec. 40
210
Sec. 49
Act No. 2031 (1911)
November 2014
6.2.5. Kinds of Indorsement211
SPECIAL. Specifies the person to whom, or to whose order, the

instrument the NI is payable212 and indorsement of indorsee is necessary for
further negotiation of the NI213
BLANK. Specifies no indorsee and converts NI to one payable to

bearer, which may be negotiated by mere delivery. 214 BUT the holder may
still convert this to a special indorsement by writing over the signature of
the indorser in blank any contract consistent with the character of the
indorsement.215
RESTRICTIVE. An indorsement that either: prohibits further

negotiation of NI (mere absence of words on power to negotiate not
restrictive) i.e., “Pay to X only”, constitutes indorsee as indorser’s agent.
i.e., “Pay to X as agent”, or, vests title in indorsee in trust for or to use of
other persons. i.e., “Pay to X as trustee”. 216 An indorsement of this nature
confers upon indorsee right to: receive payment of NI, bring any action
thereon that indorser can bring and transfer his rights as such indorsee,
where the form of indorsement authorizes him to do so; at the same time,
all subsequent indorsees acquire only title of first indorsee under restrictive
indorsement.217
QUALIFIED. By adding to indorser’s signature words “without

recourse” or other words of similar import (without resort to a person
secondarily liable after default of person primarily liable). 218 This does not
destroy negotiability BUT constitutes indorser a mere assignor of title to the
NI; hence, limited liability (but still subject to certain warranties).219
CONDITIONAL. When the indorsement is made subject to a condition,

the party required to pay NI may disregard condition and make payment to
indorseee or his transferee whether condition has been fulfilled or not BUT
any person to whom NI so indorsed is negotiated will hold NI, or proceeds
thereof, subject to the rights of person indorsing conditionally.220
6.2.6. Other Rules on Indorsements
6.2.6.1. Payable to two or more payees (who are not partners), all
must indorse unless the one indorsing is authorized by
others.221
6.2.6.2. Payable to “cashier” (or other fiscal officer of bank or
corporation), the NI deemed prima facie to be payable to
bank or corporation of which he is such officer and may be
negotiated by either indorsement of bank or corporation or
indorsement of officer.222
211
Sec. 33
212
Sec. 34
213
Sec. 34
214
Sec. 34
215
Sec. 35
216
Sec. 36
217
Sec. 37
218
Sec. 38
219
Sec. 65
220
Sec. 39
221
Sec. 41
222
Sec. 42
Act No. 2031 (1911)
November 2014
6.2.6.3. Misspelling or wrong designation of payee, the payee may
indorse NI adding, if he deems fit, the proper signature223
6.2.6.4. Representative capacity: If person under obligation to
indorse in representative capacity, he may indorse in such
terms as to negative personal liability.224
6.2.6.5. Time of indorsement225
PRESUMPTION. GENERALLY every negotiation is deemed prima facie

to have been effected before NI was overdue. EXCEPT where indorsement
bears date after maturity of NI.226
6.2.6.6. Place of indorsement227 –

RULES AND PRESUMPTIONS. This is used to determine governing law
and GENERALLY every indorsement is deemed prima facie to have been
made at place where NI is dated EXCEPT where contrary appears.
6.2.7. Striking Out Indorsements
PROCESS AND EFFECTS. Holder may at any time strike out any
indorsement which is not necessary to his title and the indorser whose
indorsement is struck out, and all indorsers subsequent to him, are thereby
relieved from liability on the NI.228
6.3. DELIVERY229
6.4. COMMON PROVISIONS
6.4.1. Continuation of Negotiable Character 230 -- An

instrument negotiable in its origin continues to be negotiable until
it is either: restrictively indorsed (but only if it prohibits further
negotiation);231 or, discharged by payment or otherwise.
AFTER MATURITY. There are two views: first, negotiability ceases

after maturity; and second, negotiability continues after maturity (better
view), except that a transferee who takes NI after maturity is subject to
defenses between original parties (because he is considered a holder with
notice).
6.4.2. When Prior Party May Negotiate NI – Where a NI

is negotiated back to a prior party, such party may, subject to NIL,
reissue and further negotiate the NI, BUT he is not entitled to
enforce payment thereof against any intervening party to whom
he was personally liable.232
223
Sec. 43
224
Sec. 44
225
JMBD: This is important in determining if holder is a HIDC; see Sec. 52 (b)
226
Sec. 45
227
Sec. 46
228
Sec. 48
229
Sec. 191 (“’Delivery’ means transfer of possession, actual or constructive, from one
person to another.”); supra
230
Sec. 47
231
Sec. 36 (a)
232
Sec. 50
Act No. 2031 (1911)
November 2014
PART THREE233
OBJECTIVE: This part proceeds from the lessons of the previous ones and
relates such to the different holders of the NI and their respective rights in
relation to prior parties. Necessarily, the lesson progresses to a discussion
of the defenses available and the determination of liabilities.
7. RIGHTS OF HOLDERS
7.1. SIMPLE HOLDER
7.1.1. Definition: “holder” means payee or indorsee

of a bill or note who is in possession of it, or the bearer thereof. 234
TRANSFEREE OF UNINDORSED NI PAYABLE TO ORDER. Transfer vests in

transferee such title as transferor had in NI.235
7.1.2. Rights
RIGHT TO SUE IN OWN NAME AND DISCHARAGE OF INSTRUMENT. He may

sue on NI in his own name (even if holder only in representative capacity or
for collection or as pledgee of NI) AND Payment to him in due course
discharges the NI (therefore, even if holder is not a HIDC, he may still
recover, albeit subject to defenses as if it were non-negotiable).236
PAYMENT SHOULD BE IN DUE COURSE. Payment is made in due course if

it is made: at or after maturity of NI; to holder thereof; and, in good faith
and without notice that holder’s title is defective.237
NI IS SUBJECT TO ORIGINAL DEFENSES.238 GENERALLY: In the hands on

any holder other than HIDC, a NI is subject to same defenses as if it were
non-negotiable. EXCEPT: A holder who derives his title through a HIDC
and who is not himself a party to any fraud or illegality affecting the NI, has
all the rights of such HIDC in respect of all parties prior to such HIDC.
7.2. HOLDER FOR VALUE
7.2.1. Definition:
HOLDER FOR VALUE. Where value has at any time been given for the
instrument, the holder is deemed a holder for value in respect to all parties
who become such prior to that time.239
VALUE. Value is any consideration sufficient to support a simple

contract. An antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on demand or at a future
time.240
7.2.2. Rights
233
Covers the Third Quarter of the Second Semester
234
Sec. 191
235
Sec. 49
236
Sec. 51
237
Sec. 88
238
Sec. 58
239
Sec. 27
240
Sec. 26
Act No. 2031 (1911)
November 2014
RIGHT TO SUE IN OWN NAME AND DISCHARAGE OF INSTRUMENT. HFV

may sue on NI in his own name and payment to him in due course
discharges the NI.241
ACCOMMODATION PARTY IS LIABLE. An accommodation party is liable

on NI to a HFV, notwithstanding that such HFV, at the time of taking the
instrument, knew him to be only an accommodation party.242
7.3. HOLDER IN DUE COURSE (HIDC)
7.3.1. Definition
7.3.1.1. What constitutes a HIDC243 (MEMORIZE: Sec. 52)
7.3.1.1.1. One who took the NI complete and regular

upon its face
IF INCOMPLETE, distinguish between material particular which

renders NI incomplete,244 as opposed to omission which does not affect
validity or negotiability of NI.245
IF IRREGULAR, distinguish between material alteration246 as opposed

to alteration which is not material.
7.3.1.1.2. One who became holder before NI was overdue,

and without notice that it has been previously
dishonored, if such was the fact
IF OVERDUE (AFTER DATE OF MATURITY), this carries strong indication

that it has been dishonored, i.e., If payable on demand, presentment must
be made within reasonable time after its issue for PNs, 247 or after the last
negotiation thereof if BoE, since date of maturity is determined by date of
presentment;248 When NI payable on demand is negotiated un unreasonable
length of time after its issue, holder is not deemed HIDC;249
DETERMINATION OF REASONABLE TIME. This depends on nature of NI,

usage of trade or business, facts particular to case. 250 BUT SEE B.P. 22,251
which seems to make 90 days a reasonable period within which to leave
funds in bank to answer for a check.252
DISHONOR OF NI DOES NOT NECESSARILY NEGATE HIDC. If

dishonored, holder must have notice of dishonor (thus, if dishonor does not
appear on face of NI, holder may still be HIDC)
241
Sec. 51
242
Sec. 29
243
Sec. 52
244
Sec. 14
245
Sec. 6
246
Sec. 124-125
247
Sec. 71
248
Sec. 143 (a)
249
Sec. 53
250
Sec. 193
251
Batas Pambansa Bilang 22 “AN ACT PENALIZING THE MAKING OR DRAWING AND ISSUANCE
OF A CHECK WITHOUT SUFFICIENT FUNDS OR CREDIT AND FOR OTHER PURPOSES” (1979) [BP
22]
252
BP 22, Sec. 2
Act No. 2031 (1911)
November 2014
7.3.1.1.3. One who took it in good faith and for value
GOOD FAITH OF THE INDORSEE OR TRANSFEREE. To negate GF, actual

knowledge is not required, it is enough sufficient that facts are known
which show that something is wrong with transaction.253
FOR VALUE. A discount does not prevent holder from being a HIDC,
unless discount unusually large and/or other suspicious circumstances.254
7.3.1.1.4. One who, at the time NI was negotiated to him,

had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it
DEFECTS IN TITLE Cover situations which at common law were known

as equitable defenses255 while INFIRMITIES include things wrong with NI
itself, as distinguished from those lacking in the contracts, not the NI.256
WHEN TITLE DEFECTIVE. The title of a person who negotiates a NI is

defective: IN ACQUISITION, when he obtained the NI, or any signature
thereof, by fraud, duress, or force and fear, or other unlawful means, or for
an illegal consideration; or, IN NEGOTIATION, when he negotiates it in breach
of faith, or under such circumstances as amount to fraud.257
NOTICE OF DEFECT. The person (or his agent) to whom NI is

negotiated must have had: actual knowledge of the infirmity or defect; or,
knowledge of such facts that his action in taking the NI amounted to bad
faith.258 BUT, if notice comes before amount is fully paid, the transferee
will be deemed a HIDC only to the extent of the amount therefor paid by
him.259
7.3.1.2. Who is deemed HIDC?
PRESUMED HIDC. GENERALLY: Every holder deemed prima facie to

be HIDC, EXCEPT when it is shown that title of person who has negotiated
the NI is defective, burden is on holder to prove that he or some other
person under whom he claims acquired the title as HIDC, BUT NOT when
the party who became bound on NI prior to acquisition of defective title. 260
HOLDER ACQUIRING FROM HIDC. A holder who derives his title

through a HIDC AND who is not himself a party to any fraud or illegality
affecting the NI, has all the rights of such HIDC in respect of all parties
prior to such HIDC.261
253
Sec. 56
254
Sec. 25
255
Sec. 55; But the term “defenses” in the general sense includes common law defenses
outside of those covered under Sec. 55, i.e., mistake; absence or failure of consideration
(Sec. 28); minority and other forms of incapacity to contract (Sec. 22); lack of authority of
agent (Sec. 19)
256
i.e., insertion of wrong date (Sec. 13); incomplete but delivered NI (Sec. 14); incomplete
and undelivered NI (Sec. 15), complete but undelivered NI (Sec. 16); agent signing per
procuration beyond scope of his authority (Sec. 21); forgery (Sec. 23); material alteration
(Secs. 124 and 125)
257
Sec. 55
258
Sec. 56
259
Sec. 54
260
Sec. 59
261
Sec. 58
Act No. 2031 (1911)
November 2014
7.3.1.3. Who can be HIDC?
PAYEE. Based on proper interpretation of NIL as a whole, payee may,

even if NI is not negotiated (but rather issued) to him, a payee may be a
HIDC, BUT NOT a DRAWEE, because he is not even a holder, and since
the drawee, upon acceptance and payment of the NI, thereby strips NI of all
its negotiability.
7.3.2. Rights of HIDC
RIGHT
TO SUE, DISCHARGE, AND FREEDOM FROM DEFECTS OF TITLE
AND DEFENSES IN ENFORCEMENT. A HIDC ay sue thereon in his own name
and payment to him in due course discharges the instrument; 262 holds NI
free from any defect of title of prior parties and defenses available to prior
parties among themselves;263 and, GENERALLY may enforce payment of NI
for the full amount thereof against all parties liable thereon, 264 EXCEPT: if
NI paid in part, may be indorsed as to residue; 265 there is notice of infirmity
in NI or defect in title of person negotiating NI before amount is fully
paid;266 and, in cases of material alteration.267
7.3.2.1. READ: Vicente de Ocampo & Co., v. Gatchalian et al.,

G.R. No. L-15126, 30 November 1961
7.4. DEFENSES268
7.4.1. Real or Legal Defenses (RD)
DEFINITION AND NATURE. These defenses are those which attach to

the instrument itself or the res, and can be set up against the whole world,
including a holder in due course. Here the right sought to be enforced has
never existed or ceased to exist – a case where the contract is not merely
voidable, but void. HOWEVER, the instrument can still be enforced against
other parties because real defenses can only be invoked by those to whom
these are available.
7.4.1.1. Want of delivery of incomplete NI – Sec. 15; Want of

authority of agent; Minority – Sec. 22; Ultra vires act of
corporation absolutely prohibited by its charter or statute
from issuing NI under any circumstances – Sec. 22; Insanity
where insane has court appointed guardian – Sec. 22 by
analogy; Forgery – Sec. 23; Fraud in factum/Fraud in esse
contractus – Sec. 23 by analogy; Duress amounting to forgery
– Sec. 23 by analogy; Material Alteration – Sec. 12;
Execution of NI between public enemies; Illegality of contract
where it is the contract or NI itself which is expressly made
illegal by statute
7.4.2. Personal or Equitable Defenses (PD)
262
Sec. 51
263
Sec. 57
264
Sec. 57
265
Sec. 33
266
Sec. 54
267
Sec. 124
268
AGBAYANI, p. 297 et seq.
Act No. 2031 (1911)
November 2014
DEFINITION AND NATURE. These are defenses that grow out of the
agreement or conduct of a particular person with regard to the instrument
which renders it inequitable for him, though holding legal title, to enforce it
against the defendant, but which are not available against bono fide
purchasers for value without notice. These are “personal” because they are
available only against that person or a subsequent holder who stands in
privity to him.
7.4.2.1. Insertion of wrong date – Sec. 13; Incomplete but

delivered NI – Sec. 14; Want of delivery of complete NI – Sec.
16; Want of authority of agent where he has apparent
authority; Ultra vires act of corporations where corporation
has power to issue NIs but the issuance was not authorized
for the particular purpose; Insanity where there is no notice
of insanity on the part of person contracting with the insane;
Intoxication; Absence or failure of consideration, partial or
total – Sec. 28; Fraud in inducement – Sec. 55; Acquisition of
NI by force, duress, or fear – Sec. 55; Acquisition of NI for an
illegal consideration – Sec. 55; Negotiation in breach of faith
– Sec. 55; Negotiation under circumstances that amount to
fraud – Sec. 55; Mistake; Illegality of contract where form or
consideration is illegal
8. LIABILITIES OF PARTIES
8.1. PRIMARY VS. SECONDARY LIABILITY (MEMORIZE:

Sec. 60-62, 65-66)
PRIMARILY LIABLE are Persons who, by the terms of NI, are absolutely
required to pay the same,269 i.e., Maker (PN) and Acceptor (BoE); WHILE
those SECONDARILY LIABLE are all other parties to NI,270 i.e, Drawer and
Indorsers.
8.1.1. Importance of Distinction: Failure to take

any of the two steps (presentment for payment and notice of
dishonor) will discharge persons secondarily liable.
8.2. LIABILITY OF MAKER
8.2.1. Definition: Maker is the person who issues the PN
8.2.2. Liability: Maker of NI, by making it ENGAGES that

he will pay NI according to its tenor (primary liability) AND
ADMITS the existence of payee (cannot set up defense that
payee is fictitious) and payee’s capacity to indorse (cannot set up
defense that payee is insane, minor, corporation acting utra
vires).271
8.2.3. READ: Astro Electronics Corp. & Roxas v.

Philippine Export and Foreign Loan Guarantee Corporation,
G.R. No. 136729, 23 September 2003
8.3. LIABILITY OF DRAWER

269
Sec. 192
270
Sec. 192
271
Sec. 60
Act No. 2031 (1911)
November 2014
8.3.1. Definition: Drawer is the person who issues the

BoE
8.3.2. Liability: Drawer, by drawing NI ENGAGES that:

(secondary liability) on due presentment, the NI will be accepted
or paid, or both, according to its tenor, AND if the NI is
dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder or to any
subsequent indorser who may be compelled to pay it. At the same
time, the drawer ADMITS the existence of payee and payee’s
capacity to indorse BUT drawer may insert in NI an express
stipulation negativing or limiting his own liability to holder.272
8.4. LIABILITY OF ACCEPTOR
8.4.1. Definition: Acceptor is the Drawee who accepts

BoE
8.4.2. Liability: Acceptor, by accepting NI ENGAGES that

he will pay NI according to tenor of his acceptance (primary
liability) AND ADMITS the existence of drawer (cannot set up
defense that drawer is fictitious), genuineness of drawer’s
signature (cannot set up defense that drawer’s signature is a
forgery), capacity and authority of drawer to draw the NI (cannot
set up defense of want of consideration between him and drawer),
existence of payee and payee’s capacity to indorse273
TWO KINDS OF ACCEPTANCE. GENERAL, when drawee assents

without qualification to the order of the drawer;274 and, QUALIFIED when
drawee in express terms varies the effect of the BoE as drawn.275
LIABILITY
OF ACCEPTOR (GENERAL) IF ALTERATION OF BOE AFTER
ISSUANCE BUT BEFORE ACCEPTANCE. 276 There are two (2) views, either, since
acceptance is general, liable based on his acceptance of BoE as altered; or,
Since acceptance is assent to the order of the drawer (Sec. 139), then liable
based on original tenor of BoE – better view.
8.5. LIABILITY OF INDORSERS
8.5.1. Who is Liable as Indorser
8.5.1.1. Indorser277 - A person placing his signature upon NI

otherwise than as maker, drawer, or acceptor, is deemed
indorser unless he clearly indicates by appropriate words his
intention to be bound in some other capacity (no parol
evidence allowed).
8.5.1.2. Irregular Indorser278 – A person, not otherwise a party to
272
Sec. 61
273
Sec. 62
274
Sec. 139-140
275
Sec. 139, 141
276
see Sec. 124-125
277
Sec. 63
278
Sec. 64
Act No. 2031 (1911)
November 2014
a NI, places thereon his signature in blank before delivery
(applies whether first delivery, i.e., issuance, or subsequent
delivery), he is liable as indorser, in accordance with the
following RULES: If NI is payable to order of a third person,
he is liable to the payee and to all subsequent parties; if NI is
payable to the order of maker or drawer, or is payable to
bearer, he is liable to all parties subsequent to the maker or
drawer; and, if he signs for the accommodation of the payee,
he is liable to all parties subsequent to the payee.
8.5.1.3. Indorser where NI negotiable by delivery - A person

placing his indorsement on NI negotiable by delivery incurs
all the liabilities of an indorser279
8.5.1.4. Joint Indorsees - Joint payees or joint indorsees who

indorse are deemed to indorse jointly and severally.280
8.5.1.5. Agent or Broker – A broker or agent negotiating NI

without indorsement incurs all liabilities for Qualified
Indorsers,281 unless principal’s name and his acting only as
agent disclosed.282
8.5.2. Liability of General Indorser 283: An indorser who

indorses without qualification: ENGAGES that (secondary
liablity): on due presentment, the NI will be accepted or paid, or
both, according to its tenor AND if NI is dishonored and the
necessary proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder or to any subsequent indorser who
may be compelled to pay it. He also WARRANTS to all
subsequent HIDC (includes person deriving title from HIDC and
immediate transferees, but not remote holders who are not
HIDC), that: the NI is genuine and in all respects what it purports
to be (cannot set up defense of prior forgeries or material
alterations), he has good title to it (cannot set up defense of prior
parties’ defective title), all prior parties had capacity to contract
(cannot set up defense of incapacity of prior parties), and, the NI,
at time of his indorsement, is valid and subsisting (cannot set up
defense that person primarily liable is insolvent or did not receive
consideration)
8.5.3. Liability of Qualified Indorser284: An indorser who

indorses by qualified indorsement WARRANTS (to all subsequent
holders who derive title from his indorsement) that the NI is
genuine and in all respects what it purports to be, he has good
title to it, that all prior parties had capacity to contract, except
that this warranty does not apply to a person negotiating public or
corporation securities other than bills or notes, and, that he has
no knowledge of any fact which would impair the validity of the NI
or render it valueless (therefore, he may not be liable for breach
of warranty
279
Sec. 67
280
Sec. 68
281
see Sec. 65
282
Sec. 69
283
Sec. 66
284
Sec. 55; NOTE: The liability of Qualified Indorser is based on breach of warranties, and
not because person primarily liable refuses to pay.
Act No. 2031 (1911)
November 2014
8.5.4. Liability of Person Negotiating By Delivery 285: A

person who negotiates NI by delivery WARRANTS the same
things as a Qualified Indorser, but the warranty EXTENDS ONLY
TO THE IMMEDIATE TRANSFEREE.
8.5.5. Order in Which Indorsers Liable286
ORDER OF LIABILITY. GENERALLY. As respect one another, indorsers

liable prima facie in order in which they indorse; BUT, evidence is
admissible to show that, as between or among themselves, they have agreed
otherwise. NOTE that the order in which indorsers are liable is inter se
(among themselves), but does NOT apply to the holder.
285
Sec. 65; NOTE: The liability of person negotiating by delivery is based on breach of
warranties, and not because person primarily liable refuses to pay.
286
Sec. 68
Act No. 2031 (1911)
November 2014
PART FOUR287
OBJECTIVE: This part focuses on the procedure by which the liability of

persons upon the NI is enforced, by the holder or any other person legally
entitled to be paid. Accurately pinpointing who will be ultimately liable, as
well as setting-up the proper defenses, will require considerable
discernment and correct application of all the concepts and principles from
the first three parts. Part four is the logical conclusion to the learning
experience herein set forth.
9. PROCEDURES TO CHARGE PERSONS SECONDARILY LIABLE ON

NI
9.1. IN GENERAL
9.1.1. No Steps Necessary to Charge Persons

Primarily Liable on NI
PRIMARY LIABILITY. Presentment for payment is not necessary in

order to charge the person primarily liable on the instrument 288 i.e., PN:
The maker, by making NI, engages that he will pay it according to its
tenor289 and BoE: The acceptor, by accepting NI, engages that he will pay it
according to the tenor of his acceptance.290
9.1.2. Necessary Steps to Charge Persons Secondarily

Liable For Promissory Notes
SECONDARY LIABILITY, GENERALLY. PN must be presented for payment

to person primarily liable291 within period required,292 UNLESS presentment
for payment is not required to charge indorsers,293 or excused.294
DISHONOR BY NON-PAYMENT. If PN dishonored by non-payment,295 an

immediate right of recourse against persons secondarily liable accrues to
holder.296 Thus, notice of dishonor by non-payment must be given to
persons secondarily liable297 within time required,298 UNLESS notice of
dishonor is waived,299 dispensed with,300 or not necessary to be given to
indorsers.301

Liable For Bills of Exchange
PRESENTMENT FOR ACCEPTANCE. GENERALLY this is required in the

287
Covers the Fourth Quarter of the Second Semester
288
Sec. 70
289
Sec. 60
290
Sec. 62 and 132; see process of acceptance supra
291
Sec. 70
292
Sec. 71
293
Sec. 80
294
Sec. 82
295
Sec. 83
296
Sec. 84
297
Sec. 89
298
Sec. 102
299
Sec. 109
300
Sec. 112
301
Sec. 115
Act No. 2031 (1911)
November 2014
three cases provided by law302 AND presentment for acceptance to the
drawee OR negotiation within a reasonable time from acquisition, 303
UNLESS excused.304
DISHONOR BY NON-ACCEPTANCE. If BoE dishonored by non-

acceptance,305 an immediate right of recourse against persons secondarily
liable accrues to holder, and no presentment for payment is necessary. 306
The holder must then treat bill as dishonored by non-acceptance, 307 thus,
notice of dishonor by non-acceptance must be given to persons secondarily
liable,308 UNLESS notice of dishonor by non-acceptance is: waived,309
dispensed with,310 not necessary to be given to drawer, 311 or not necessary
to be given to indorsers.312
NOTICES OF DISHONOR, PROTESTS. If due notice of dishonor by non-

acceptance has been given, subsequent notice of dishonor by non-payment
is not necessary UNLESS in the meantime, NI has been accepted. 313 An
omission to give notice of dishonor by non-acceptance does not prejudice
rights of HIDC subsequent to omission). 314 If BoE appears on its face to be a
foreign BoE,315 it must be duly protested316 for non-acceptance,317 UNLESS
protest is waived318 or dispensed with.319
ACCEPTED OR EXCUSED THEREFROM. If BoE is accepted, or if it is not

required to be presented for acceptance, it must be presented for payment
to person primarily liable,320 within period required,321 UNLESS
presentment for payment is not required to charge drawer, 322 not required
to charge indorsers,323 or excused.324
DISHONOR BY NON-PAYMENT. If BoE dishonored by non-payment,325 an

immediate right of recourse against persons secondarily liable accrues to
302
Sec. 143
303
Sec. 144
304
Sec. 148
305
Sec. 149
306
Sec. 151
307
Sec. 150
308
Sec. 89
309
Sec. 109
310
Sec. 112
311
Sec. 114
312
Sec. 115
313
Sec. 116
314
Sec. 117
315
Sec. 129 (“Inland and foreign bills of exchange. - An inland bill of exchange is a bill
which is, or on its face purports to be, both drawn and payable within the Philippines. Any
other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder
may treat it as an inland bill.”)
316
Sec. 153 (“Protest; how made. - The protest must be annexed to the bill or must contain
a copy thereof, and must be under the hand and seal of the notary making it and must
specify: (a) The time and place of presentment; (b) The fact that presentment was made
and the manner thereof; (c) The cause or reason for protesting the bill; (d) The demand
made and the answer given, if any, or the fact that the drawee or acceptor could not be
found.”); see also Sec. 154-160
317
Sec. 152
318
Sec. 111
319
Sec. 159
320
Sec. 70
321
Sec. 71
322
Sec. 79
323
Sec. 80
324
Sec. 82
325
Sec. 83
Act No. 2031 (1911)
November 2014
holder.326 Thus, notice of dishonor by non-payment must be given to
persons secondarily liable327 within time required,328 UNLESS notice of
dishonor is waived329 dispensed with330 not necessary to be given to
drawer331 or not necessary to be given to indorsers.332 If BoE appears on its
face to be a foreign BoE, it must be duly protested for non-payment, 333
UNLESS protest is waived334 or dispensed with.335

Liable in Other Cases (Acceptor For Honor)
9.1.4.1. Presentment for payment and Notice of

Dishonor
AGREEMENT OF ACCEPTOR FOR HONOR. The acceptor for honor, by

such acceptance, engages that he will, on due presentment, pay the bill
according to the terms of his acceptance provided it shall not have been
paid by the drawee and provided also that is shall have been duly presented
for payment and protested for non-payment and notice of dishonor given to
him.336
9.1.4.2. Protest for non-payment
PROTEST OF BILL ACCEPTED FOR HONOR, AND SO FORTH. Where a

dishonored bill has been accepted for honor supra protest or contains a
referee in case of need, it must be protested for non-payment before it is
presented for payment to the acceptor for honor or referee in case of
need.337
9.2. PRESENTMENT FOR PAYMENT
9.2.1. When Necessary: But except as herein otherwise

provided, presentment for payment is necessary in order to
charge the drawer and indorsers 338 (to charge persons secondarily
liable on NI).
9.2.2. When Not Required
NO NEED FOR PRESENTMENT. When not required to charge drawer:

where drawer has no right to expect or require that drawee or acceptor will
pay NI,339 when not required to charge indorser: where NI was made or
accepted for his accommodation and he has no reason to expect that NI will
be paid if presented,340 or when excused,341 i.e., where, after exercise of
326
Sec. 84
327
Sec. 89
328
Sec. 102
329
Sec. 109
330
Sec. 112
331
Sec. 114
332
Sec. 115
333
Sec. 152
334
Sec. 111
335
Sec. 159
336
Sec. 165
337
Sec. 167
338
Sec. 70
339
Sec. 79
340
Sec. 80
341
Sec. 82
Act No. 2031 (1911)
November 2014
reasonable diligence, presentment cannot be made, when drawee is a
fictitious person, or by waiver of presentment, express or implied.
9.2.3. Period to Make Presentment342
NOT PAYABLE ON DEMAND. It must be made on day it falls due, i.e.,

time of maturity is at time fixed in NI without grace and if day of maturity
falls on Saturday, Sunday or holiday, on next succeeding business day, 343 or,
if payable at fixed period after date, after sight, or after happening of
specified event, time of payment determined by excluding day from which
time begins to run, and including date of payment.344
PAYABLE ON DEMAND. It must be made within a reasonable time after

its issue, EXCEPT if BoE, presentment sufficient if within a reasonable time
after last negotiation and at option of holder, may be presented before 12
noon on Saturday if not holiday.345
DELAY IN PRESENTMENT. If delay is excused by circumstances beyond

control of holder and not imputable to his default, misconduct, or
negligence, it must be made with reasonable diligence when cause of delay
ceases to operate.346
9.2.4. What Constitutes Sufficient Presentment347
9.2.4.1. By holder, or by some person authorized to receive

payment on his behalf
9.2.4.2. At a reasonable hour on a business day i.e., if payable at a
bank, during banking hours, unless person to make payment
has no funds there to meet it at any time during the day, in
which case, before bank is closed on that day.348
9.2.4.3. At a proper place as herein defined, i.e., place specified in
NI, if none, address of person to make payment given in NI, if
none, usual place of business or residence of person to make
payment, or, in other cases, wherever person to make
payment can be found or at his last known place of business
or residence.349 Take note that if NI is made payable at a
bank, it is equivalent to an order to the bank to pay the same
for the account of the principal debtor.350
9.2.4.4. To the person primarily liable on NI, or if he is absent or
inaccessible, to any person found at the place where the
presentment is made OTHERWISE, if principal debtor is
dead and no place specified – to his personal representative,
if any and if can be found with reasonable diligence, 351 if
persons primarily liable are liable as partners and no place
specified – to any one of them, even if firm dissolved, 352 if
several persons, not partners, are primarily liable and no
342
Sec. 71
343
Sec. 85
344
Sec. 86
345
Sec. 85
346
Sec. 81
347
Sec. 72
348
Sec. 75
349
Sec. 73
350
Sec. 87
351
Sec. 76
352
Sec. 77
Act No. 2031 (1911)
November 2014
place specified – to all of them353 and NI must be exhibited to
person from whom payment is demanded.354
9.2.5. If NI is Paid
REQUIREMENTS AND EFFECTS. Payment in due course is payment

made at or after maturity, to holder thereof in good faith and without notice
that his title is defective;355 and, if payment is in due course, the NI is
discharged thereby.356 Take note that the NI must be delivered up to party
paying it.357
9.2.6. If NI is Dishonored By Non-Payment
DISHONOR BY NON-PAYMENT. This occurs when: the NI is duly

presented for payment and payment is refused or cannot be obtained; or,
when presentment is excused and the NI is overdue and unpaid358
CONSEQUENCES RELATIVE TO HOLDER. The immediate right of

recourse to all parties secondarily liable on NI accrues to the holder, 359 but
the latter is obligated to give notice of dishonor to drawer and to each
indorser; otherwise, the NI will be discharged.360
9.2.6.1. READ: Tuazon et al., v. Heirs of Ramos, G.R. No.

156262, 14 July 2005
9.3. NOTICE OF DISHONOR
9.3.1. When Necessary: Except as otherwise herein

provided, when NI dishonored by non-acceptance or non-payment,
notice of dishonor must be given to drawer and to each indorser,
and any drawer or indorser to whom notice is not given is
discharged.361
9.3.2. When Not Required
9.3.2.1. Waiver: Notice of dishonor may be waived either before

time of giving notice has arrived or after omission to give
notice, and waiver may be waived or implied. 362 If waiver on
Ni itself, binding on all parties; if written above signature of
indorser, binding on him only.363 Take note that a wavier of
protest is deemed waiver not only of formal protest but also of
presentment and notice of dishonor.364
9.3.2.2. Notice is dispensed with when, after exercise of

reasonable diligence, it cannot be given to or does not reach
353
Sec. 78
354
Sec. 74
355
Sec. 88
356
Sec. 119
357
Sec. 74
358
Sec. 83
359
Sec. 84
360
Sec. 89
361
Sec. 89
362
Sec. 109
363
Sec. 110
364
Sec. 111
Act No. 2031 (1911)
November 2014
the parties sought to be charged.365
9.3.2.3. Notice is not required to charge drawer when: the drawer

and drawee one and the same person, the drawee is fictitious
person or person not having capacity to contract, the drawer
is person to whom NI is presented for payment, the drawer
has no right to expect or require that drawee or acceptor will
honor the NI; or, the drawer has countermanded payment.366
9.3.2.4. Notice is not required to charge indorser when: the

drawee is fictitious person or person not having capacity to
contract, and indorser was aware at time of indorsement, the
indorser is a person to whom NI is presented for payment; or,
when NI was made or accepted for indorser’s
accommodation.367 Take note also, that if due notice of
dishonor by non-acceptance has been given, subsequent
notice of dishonor by non-payment is not necessary unless in
the meantime, NI has been accepted; 368 and, that an omission
to give notice of dishonor by non-acceptance does not
prejudice rights of HIDC subsequent to omission.369
9.3.3. Period to Give Notice: Notice may be given as

soon as the instrument is dishonored and, unless delay is excused
as hereinafter provided, must be given within the time fixed by
this Act (basically as soon as Ni is dishonored). 370 And if a party
received notice of dishonor, he has, after such receipt, same time
to give notice to antecedent parties.371 The period differs when the
parties resides in the same372 or different373 places.
DELAY IN SENDING NOTICE. If delay is excused by circumstances

beyond control of holder and not imputable to his default, misconduct, or
negligence it must be done with reasonable diligence when cause of delay
ceases to operate.374
9.3.4. What Constitutes Sufficient Notice
9.3.4.1. By whom given: The notice may be given by or on behalf

of the holder, or by or on behalf of any party to the instrument
who might be compelled to pay it to the holder, and who,
upon taking it up, would have a right to reimbursement from
the party to whom the notice is given.375
BY OR ON BEHALF OF HOLDER. Inures to benefit of all subsequent

holders and all prior parties who have right of recourse against party to
whom notice is given.376
365
Sec. 112
366
Sec. 114
367
Sec. 115
368
Sec. 116
369
Sec. 117
370
Sec. 102
371
Sec. 107
372
Sec. 103
373
Sec. 104
374
Sec. 113
375
Sec. 90
376
Sec. 92
Act No. 2031 (1911)
November 2014
BY OR ON BEHALF OF ANY PARTY TO NI WHO MIGHT BE COMPELLED TO
PAY IT TO HOLDER AND, WHO UPON TAKING IT UP, WOULD HAVE A RIGHT OF
REIMBURSEMENT FROM PARTY TO WHOM NOTICE IS GIVEN. Inures to benefit
of the holder and all parties subsequent to the party to whom notice is
given.377
BY AGENT. Notice of dishonor may be given by any agent either in his

own name or in name of any party entitled to give notice, whether that
party is his principal or not.378 And if NI dishonored in hands of agent, he
may either himself give notice to parties liable, or give notice to his
principal. If he give notice to principal, he must do so within same time as
if holder, and principal, upon receipt of such notice, has himself same time
to give notice as if agent had been independent holder.379
9.3.4.2. Form and contents: It may be in writing or merely oral

and may be given in any terms which sufficiently identify the
instrument, and indicate that it has been dishonored by non-
acceptance or non-payment.380 The notice need not be signed
and insufficient written notice may be supplemented and
validated by verbal communication (even misdescription of NI
does not vitiate notice unless party notified is misled
thereby).381
9.3.4.3. How notice is delivered: Delivery of the notice can be

made either personally; or, by mail.382
9.3.4.4. To whom given: GENERALLY to party himself or his

agent on his behalf383 EXCEPT if party to be notified is dead
and death is known to party giving notice – to his personal
representative, if any, and if can be found with reasonable
diligenc; or, if there is none, then last residence or place of
business of deceased.384 NOTE ALSO that if parties to be
notified are partners – to any one of them, even if firm
dissolved;385 or, if joint parties to be notified are not partners
–to each of them, unless one is authorized to receive for
others;386 or, if party is bankrupt – to party himself, or to his
trustee or assignee.387
9.3.4.5. Where notice must be sent
WHERE NOTICE IS TO BE SENT. Where a party has added an address to

his signature, notice of dishonor must be sent to that address; but if he has
377
Sec. 93
378
Sec. 91
379
Sec. 94
380
Sec. 96
381
Sec. 95
382
Sec. 96; For rules on delivery by mail, see also Sec. 105 (“When sender deemed to have
given due notice. - Where notice of dishonor is duly addressed and deposited in the post
office, the sender is deemed to have given due notice, notwithstanding any miscarriage in
the mails.”) and 106 (“Deposit in post office; what constitutes. - Notice is deemed to have
been deposited in the post-office when deposited in any branch post office or in any letter
box under the control of the post-office department.”)
383
Sec. 97
384
Sec. 98
385
Sec. 99
386
Sec. 100
387
Sec. 101
Act No. 2031 (1911)
November 2014
not given such address, then the notice must be sent as follows: (a) Either
to the post-office nearest to his place of residence or to the post-office
where he is accustomed to receive his letters; or (b) If he lives in one place
and has his place of business in another, notice may be sent to either place;
or (c) If he is sojourning in another place, notice may be sent to the place
where he is so sojourning. But where the notice is actually received by the
party within the time specified in this Act, it will be sufficient, though not
sent in accordance with the requirement of this section.388
9.3.5. READ: Gullas v. The Philippine National Bank,

G.R. No. L-43191, 13 November 1935
9.4. PRESENTMENT FOR ACCEPTANCE
9.4.1. When Required: Presentment for acceptance must

be made ONLY in the following cases: where BoE is payable after
sight, or in any other case where presentment for acceptance is
necessary in order to fix the maturity of the NI; where BoE
expressly stipulates that it shall be presented for acceptance;
and, where BoE is drawn payable elsewhere than at residence or
place of business of drawee.389
9.4.2. Where Excused: Presentment for acceptance is

excused and a BoE may be treated as dishonored by non-
acceptance: where drawee is dead, has absconded, is a fictitious
person, or a person not having capacity to contract by BoE;
where, after exercise of reasonable diligence, presentment cannot
be made; and, where, although presentment has been irregular,
acceptance has been refused on some other ground.390
9.4.3. Effect of Failure to Present: Except as herein

otherwise provided, if BoE not presented for acceptance or
negotiated within a reasonable time, drawers and indorsers are
discharged.391
9.4.4. What Constitutes Sufficient Presentment392
RULES. GENERALLY it should be made by and behalf of holder at a

reasonable hour on a business day 393 before BoE is overdue394 to drawee or
some other person authorized to accept or refuse acceptance on his behalf.
EXCEPT if drawee is dead - to his personal representative; or, if two or
more drawees who are not partners – to all of them, unless one is
authorized to receive for others; or, if bankrupt - to him or to his trustee or
assignee
9.4.5. If BoE is Accepted
9.4.5.1. Definition. Acceptance is signification of drawee of his

assent to order of drawer. 395 This is necessary because a BoE
388
Sec. 108
389
Sec. 143
390
Sec. 148
391
Sec. 144
392
Sec. 145
393
Sec. 146; see also Sec. 72 and 85
394
see Sec. 147 for instances when delay is excused
395
Sec. 132
Act No. 2031 (1911)
November 2014
not assignment of funds in hands of drawee, and drawee not
liable on BoE unless and until he accepts it.396
9.4.5.2. What constitutes sufficient acceptance: The

Acceptance must be in writing, signed by drawee and must
not express that drawee will perform his promise by any other
means than payment of money.397
WHERE ACCEPTANCE IS MADE. On the face of bill: The holder may

require acceptance to be written on BoE;398 if made on separate instrument:
It does not bind acceptor except in favor of person to whom it is shown and
who, on faith thereof, receives BoE for value.399
PROMISE TO ACCEPT. An unconditional promise in writing to accept

BoE before it is drawn is deemed actual acceptance in favor of every person
to whom it is shown and who, on faith thereof, receives BoE for value.400
9.4.5.3. Period to accept: Drawee has 24 hours after

presentment in which to decide, and the acceptance, if given,
dates as of day of presentation.401
WHEN BOE DEEMED ACCEPTED. Where a drawee to whom a bill is

delivered for acceptance destroys the same, or refuses within twenty-four
hours after such delivery or within such other period as the holder may
allow, to return the bill accepted or non-accepted to the holder, he will be
deemed to have accepted the same.402
9.4.5.4. Kinds of acceptance403
GENERAL. Assents without qualification to order of drawer and

acceptance to pay at particular place, is general, UNLESS it is only in such
place and not elsewhere.404
QUALIFIED. In express terms varies effect of BoE as drawn, i.e.,

Conditional (pay only upon fulfillment of condition); Partial (pay only part of
amount); Local (pay only at a particular place); Qualified as to time; or,
some or one of drawees, but not all. 405 EFFECTS OF QUALIFIED. If qualified
acceptance is taken, drawer and indorsers discharged from liability on BoE
unless they expressly or impliedly authorized, or subsequently assented to,
holder taking qualified acceptance. Thus, drawer or indorser receiving
notice of qualified acceptance must, within reasonable time, dissent;
otherwise, deemed to have assented.406
ACCEPTANCE OF INCOMPLETE BILL. A bill may be accepted before it

has been signed by the drawer, or while otherwise incomplete, or when it is
396
Sec. 127
397
Sec. 132
398
Sec. 133
399
Sec. 134
400
Sec. 135
401
Sec. 136
402
Sec. 137
403
Sec. 139; but see Sec. 137
404
Sec. 140
405
Sec. 141; but see Sec. 128 (“A bill may be addressed to two or more drawees jointly,
whether they are partners or not; but not to two or more drawees in the alternative or in
succession.”)
406
Sec. 142
Act No. 2031 (1911)
November 2014
overdue, or after it has been dishonored by a previous refusal to accept, or
by non payment. But when a bill payable after sight is dishonored by non-
acceptance and the drawee subsequently accepts it, the holder, in the
absence of any different agreement, is entitled to have the bill accepted as
of the date of the first presentment.407
9.4.6. Dishonored By Non-Acceptance
INSTANCES OF DISHONOR BY NON-ACCEPTANCE. When it is duly

presented for acceptance and such an acceptance as prescribed by NIL is
refused or cannot be obtained;408 When presentment for acceptance is
excused and the BoE is not accepted;409 If holder requests that acceptance
be written on BoE and drawee refuses, holder may treat BoE as
dishonored;410 and, Holder may refuse to take qualified acceptance and
treat BoE as dishonored by non-acceptance.411
HOLDER’S RIGHTS AND DUTY IF BOE DISHONORED BY NON-

ACCEPTANCE. An immediate right of recourse against the drawer and
indorsers accrues to the holder and no presentment for payment is
necessary412 BUT holder presenting BoE must treat BoE as dishonored by
non-acceptance; otherwise, he loses right of recourse against the drawer
and indorsers.413
9.4.7. Effects of Crossing a Check
9.4.7.1. READ: Philippine Commercial International Bank v.

Court of Appeals & Ford Philippines, Inc. G.R. No.
121413, 29 January 2001
9.4.7.2. READ: Traders Royal Bank v. Radio Philippines
Network et al., G.R. No. 138510, 10 October 2002
9.4.7.3. READ: Pio Baretto Realty Deelopment Corporation v.
Court of Appeals et al., G.R. No. 132362, 28 July 2001
9.4.8. NOW Accounts
9.4.8.1. READ: People of the Philippines v. Reyes et al., G.R.

No. 154159, 31 March 2005
9.4.8.2. READ: Associated Bank v. Tan, G.R. No. 156940, 14
December 2004
9.5. PROTEST
9.5.1. When Required
ONLY TO FOREIGN BILLS. Where a foreign bill414 appearing on its face

to be such is dishonored by non-acceptance, it must be duly protested for
407
Sec. 138
408
Sec. 149 (a)
409
Sec. 149 (b)
410
Sec. 133
411
Sec. 142
412
Sec. 151
413
Sec. 150
414
see Sec. 129 (“Inland and foreign bills of exchange. - An inland bill of exchange is a bill
which is, or on its face purports to be, both drawn and payable within the Philippines. Any
other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder
may treat it as an inland bill.”)
Act No. 2031 (1911)
November 2014
non-acceptance, by non-acceptance is dishonored and where such a bill
which has not previously been dishonored by nonpayment, it must be duly
protested for nonpayment. If it is not so protested, the drawer and indorsers
are discharged. Where a bill does not appear on its face to be a foreign bill,
protest thereof in case of dishonor is unnecessary.415
9.5.2. When Dispensed With: In any circumstances

which would dispense with notice of dishonor.416
9.5.3. Effect of Lack of Protest: Drawer and indorsers

discharged417
9.5.4. When Optional: Where the acceptor has been

adjudged a bankrupt or an insolvent or has made an assignment
for the benefit of creditors before the bill matures, the holder may
cause the bill to be protested for better security against the
drawer and indorsers.418
9.5.5. Period to Protest
RULES. GENERALLY when a bill is protested, such protest must be

made on the day of its dishonor UNLESS delay is excused as herein
provided.419 Delay in noting or protesting is excused when delay is caused
by circumstances beyond the control of the holder and not imputable to his
default, misconduct, or negligence. When the cause of delay ceases to
operate, the bill must be noted or protested with reasonable diligence.420
9.5.6. What Constitutes Sufficient Protest
9.5.6.1. By whom made: By notary public; or by any respectable

resident of place where BoE dishonored, in presence of two or
more credible witnesses.421
9.5.6.2. How made – Sec. 153: Protest must be annexed to BoE

and contain copy thereof, and must be under hand and seal of
notary making it, and must specify: (a) Time and place of
presentment; (b) Fact that presentment was made and
manner thereof; (c) Cause or reason for protesting BoE; and
(d) Demand made and answer given, if any, or fact that
drawee or acceptor cannot be found422
PROTEST BOTH FOR NON-ACCEPTANCE AND NON-PAYMENT. A bill which

has been protested for non-acceptance may be subsequently protested for
non-payment.423
PROTEST WHERE BILL IS LOST AND SO FORTH. When a bill is lost or

destroyed or is wrongly detained from the person entitled to hold it, protest
415
Sec. 152
416
Sec. 159; see Sec. 109-117
417
Sec. 152
418
Sec. 158
419
Sec. 155; note that “x x x When a bill has been duly noted, the protest may be
subsequently extended as of the date of the noting.”
420
Sec. 159
421
Sec. 154
422
Sec. 153
423
Sec. 157
Act No. 2031 (1911)
November 2014
may be made on a copy or written particulars thereof.424
9.5.6.3. Where made: GENERALLY a bill must be protested at

the place where it is dishonored, EXCEPT that when a bill
drawn payable at the place of business or residence of some
person other than the drawee has been dishonored by
nonacceptance, it must be protested for non-payment at the
place where it is expressed to be payable, and no further
presentment for payment to, or demand on, the drawee is
necessary.425
9.5.7. If Accepted for Honor426

9.5.8. If Paid for Honor427
10. DISCHARGE OF NI
10.1. DISCHARGE OF NI428
10.1.1. By payment in due course on or behalf of the

principal debtor.
RIGHT OF PARTY SECONDARILY LIABLE WHO DISCHARGES INSTRUMENT.

GENERALLY where NI is paid by a party secondarily liable, it is not
discharged, but party so paying it is remitted to his former rights as regards
prior parties and may strike out his own and all subsequent indorsements
and again negotiate the NI, EXCEPT where it is payable to order of a third
person and has been paid by drawer; or, where it was made or accepted for
accommodation and has been paid by party accommodated.429
10.1.2. By payment in due course by the party

accommodated, where the NI is made or accepted for his
accommodation
10.1.3. By the intentional cancellation thereof by the

holder.
CANCELLATION; UNINTENTIONAL; BURDEN OF PROOF. A cancellation

made unintentionally or under a mistake or without the authority of the
holder, is inoperative but where an instrument or any signature thereon
appears to have been cancelled, the burden of proof lies on the party who
alleges that the cancellation was made unintentionally or under a mistake
or without authority.430
10.1.4. By any other act which will discharge a simple

contract for the payment of money.
RENUNCIATION BY HOLDER. GENERALLY a holder may expressly

renounce his rights against any party to NI before, at, or after its maturity.
The Renunciation must be in writing UNLESS NI is delivered up to person
primarily liable thereon. An absolute and unconditional renunciation of
424
Sec. 160
425
Sec. 156
426
Sec. 161-170
427
Sec. 171-177
428
Sec. 119
429
Sec. 121
430
Sec. 123
Act No. 2031 (1911)
November 2014
rights against principal debtor made at or after maturity of NI discharges
NI. HOWEVER a renunciation does not affect HIDC without notice.
10.1.5. When the principal debtor becomes the holder

of the NI at or after maturity in his own right
10.2. DISCHARGE OF PERSONS SECONDARILY LIABLE ON NI431
10.2.1. By any act which discharges the NI

10.2.2. By intentional cancellation of his signature by
432
holder.
10.2.3. By discharge of prior party
10.2.4. By valid tender of payment made by prior party
10.2.5. By release of principal debtor unless holder’s
right of recourse against party secondarily liable is
expressly reserved
10.2.6. By any agreement binding upon holder to
extend time of payment or to postpone holder’s right to
enforce the NI unless made with assent of party secondarily
liable or unless holder’s right of recourse against such
party is expressly reserved
-End-
431
Sec. 120
432
see Sec. 123

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MANUEL S.

ENVERGA UNIVERSITY FOUNDATION

Publisher Web Address

2 MSEUF-CBA (2nd Sem., SY 2014-15)

1. NATURE AND COVERAGE

1.1. NIL IS A COMPLETE LAW4

ARTS. 443 TO 556 OF THE CODE OF COMMERCE OF 1888. THE

1.1.2.2. Letters of Credit

1.1.2.3. Shares of Stock (Stock Certificates)

STOCK CERTIFICATES. Besides, in Philippine jurisprudence, a

1.1.2.4. Postal Money Orders

POSTAL MONEY ORDERS. It is not disputed that our postal statutes

1.1.2.5. Treasury Warrants

1.1.3. Cases on Origin and Applicability:

1.1.3.1. Osmena v. Citibank & Tan, G.R. No. 141278, 23

1.2.1. General Rule

IMPAIRMENT IS NOT DISHONOR. Surely, for a check to the dishonored

1.3. PRINCIPAL FEATURES OF NI

CONSEQUENCES OF NOT BEING A HIDC. However, the fact that

1.4. MISCELLANEOUS PROVISIONS

1.4.1. DEFINITIONS AND RULES GOVERNING KINDS

1.4.1.1. Promissory Notes20 (MEMORIZE: Sec. 184)

1.4.1.3. Other Types of Negotiable Instruments

DEFINITION. A draft is a form of a bill of exchange used mainly in

1.4.1.4. Certificates of Time Deposit

RATIONALE. On this score, the accepted rule is that the negotiability

1.4.2. General Provisions

1.4.2.1. Title of the Act,30 Application and Cases Not Provided

2. FORMAL REQUISITES OF NEGOTIABLE INSTRUMENTS

NEGOTIABILITY ON ITS FACE. On this score, the accepted rule is that

SUBSTANTIAL COMPLIANCE.37 As long as a commercial paper conforms

2.1. IT MUST BE IN WRITING40

2.1.1. Why in Writing:

2.2.1. General Rule is that [n]o person is liable on the

2.3. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR

2.3.1. Why? This is due to the purpose - NIs are

11 MSEUF-CBA (2nd Sem., SY 2014-15)

2.4. TO PAY A SUM CERTAIN IN MONEY74

2.4.1. What constitutes certainty as to sum? The sum

2.5. IT MUST BE PAYABLE ON DEMAND, OR AT A FIXED

2.5.1. When Payable on Demand83

2.5.2. When Payable at a Determinable Future Time84

AFTER, NOT BEFORE. If the instrument indicates “before” instead of

2.5.3. When Not Negotiable

2.5.3.1. “On or before” a fixed date or determinable future time

2.5.3.1.2. If it contains a clause that if the holder feels

2.5.3.1.3. If it contains a clause that if a holder feels insecure,

2.5.3.2. It is not negotiable if it indicates “before” the occurrence

2.6. IT MUST BE PAYABLE TO ORDER OR TO BEARER 90

2.6.1. When Payable to Order91

2.6.1.2. When payable to order, the payee must be named or

REASONABLE CERTAINTY. Because the check was drawn “Equitable

FICTITIOUS. A review of US jurisprudence yields that an actual,

DISTINCTION. The distinction between bearer and order instruments

INTENT TO NEGOTIATE PREVAILS. Contrary to what respondent court

2.7. IF NI IS A BILL OF EXCHANGE, DRAWEE MUST BE

2.7.1. Why? To determine to whom must the instrument be

2.8. OTHER MATTERS

2.8.1. Cases on Requisites of Negotiability (READ ALL)

2.8.2. Terms, when Sufficient: The instrument need not follow

2.8.3. Provisions and Omissions not affecting Validity

2.8.4. Rules of Construction when the instrument is

3. ISSUANCE OF NEGOTIABLE INSTRUMENTS