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SECTION 1. Form of negotiable instruments.

– may appear in any part thereof whether at the top, middle

An instrument to be negotiable must conform to the or bottom or at the margin
following requirements: - signature: prima facie evidence of his intention to be
bound as either maker or drawer
a. It must be in writing and signed by the maker
- Not clear in what capacity the person intended to sign:
or drawer; indorser
b. Must contain an unconditional promise or
order to pay a sum certain in money; Must contain an unconditional promise or order to
c. Must be payable on demand, or at a fixed or pay:
determinable future time; - not subject to a condition
d. Must be payable to order or to bearer; and - negotiable instrument as an absolute undertaking to pay
rather than a mere acknowledgement of an obligation
e. Where the instrument is addressed to a
drawee, he must be named or otherwise pay a sum certain in money:
indicated therein with reasonable certainty - fixed amount in amount
- seen in the instrument: amount must be clearly stated
Commercial paper – written promises or obligations that
arise out of commercial transactions from the use of such Must be payable on demand, or at a fixed or
instruments as promissory notes and bills of exchange determinable future time
- simple promise to pay money
- NEGOTIABLE: if it satisfies certain formal requirements Must be payable to order or to bearer

Nature of negotiable instrument: a special kind or type of Where the instrument is addressed to a drawee, he
written contract which serves as an instrument of trade or must be named or otherwise indicated therein with
credit and transferable from hand-to-hand like money reasonable certainty:
- the drawer must be named or identified
NEGOTIABLE INSTRUMENT – an instrument which
possesses all the elements of negotiability provided in Non-negotiable instrument – an instrument which does
Section of the NIL not meet the requirements laid down to qualify an
instrument as a negotiable one, or an instrument which in
Applicability of formal requirements: its inception was negotiable but has lost its quality of
subsection (a), (b), promissory note negotiability
(c), (d)
subsection (a) – (e) bill of exchange Money – a medium of exchange authorized or adopted
subsection (a) maker – the drawer – the by a government as part of its currency
person person
issuing a issuing a bill PROMISSORY NOTE – unconditional promise in writing
promissory of exchange made by one person to another, signed by the maker,
subsection (b) “unconditional “unconditional engaging to pay on demand, or at a fixed or determinable
promise” – order” – bill of future time, a sum certain in money to another or his order
promissory exchange or to bearer
subsection (c) and (d) applicable to each of the two Two Parties:
kinds of instruments (bill of 1. Maker – the one who makes the promise and
exchange and promissory signs the instrument
note) 2. Payee – the party to whom the promise is made
subsection (e) bills of exchange or the instrument is payable

It must be in writing: Example:

- intentionally reduced in tangible form Payable to Order
- must be prepared on a material capable of preserving August 30, 2016
the writing if they are to be capable of circulating for a Manila
period of time to serve their credit and currency function P10,000.00
For value received, I promise to pay to the order
signed by the maker or drawer: of Alfredo M. Almeda the sum of Ten Thousand Pesos on
- General Rule: the signature of the maker or drawer is or before September 30, 2016 at his house at Pateros
placed at the lower right hand corner of the instrument, it Manila.
(Sgd). Arsenio F. Flores
Payable to bearer: SECTION 2. Certainty as to sum; what constitutes. –
August 30, 2016 The sum payable is a sum certain within the meaing
Manila of the Act, although it is to be paid –
a. With interest; or
Two months after date, I promise to pay to Alfredo
M. Almeda or bearer the sum of Ten Thousand Pesos. b. By stated installments; or
(Sgd.) Arsenio F. Flores c. By stated installments, with a provision that
upon default in payment of any installment or
BILL OF EXCHANGE – an unconditional order in writing of interest the whole shall become due; or
addressed by one person to another, signed by the d. With exchange, whether at a fixed rate or at
person giving it, requiring the person to whom it is the current rate; or
addressed to pay on demand or at a fixed or determinable
e. With costs of collection or an attorney’s fee,
future time a sum certain in money to order or to bearer
in case payment shall not be made at maturity.
Three Parties:
a. Drawer – the person who issues and draws the Sum certain: if the holder can determine from the
order bill instrument itself the amount he is entitled to receive at
- gives the order to pay money to a third party maturity
- does not pay directly
b. Drawee – party upon whom the bill is drawn It represents a fixed amount to be paid wholly in money
- the person to whom the bill addressed and who ascertainable from the instrument itself
is ordered to pay
- an acceptor when he indicates a willingness to Stated installments:
accept responsibility for the payment of the bill a. the interest of each installment
- ex. banks b. the due date of each installment must be fixed in
c. Payee – the party whose favor the bill is originally the instrument
An instrument is negotiable if, by its terms, it is payable at
Example: a definite time subject to extension at the option of the
December 30. 2016 holder, or to extension to a further definite time at the
Manila option of the maker or acceptor or automatically upon or
P10,000 after a specified event
Thirty days after date, pay to Alfredo M. Almeda 1. If the right is given to the holder, the time of
(payee) or order the sum of Ten Thousand Pesos. Value payment need not contain a new fixed maturity
received and charge the same to the account of date or then length of extension does not have to
(Sgd.) Jovencio F. Cinco (drawer) be specified
To Domingo M. Lantican (drawee) 2. If the obligor is the one given the right, the interest
College. Los Banos of the extension must be specified
Sum to be paid with exchange:
- payable in foreign currency
- Exchange: the charge for the expense of providing funds
at the place where the instrument is payable to cover such
instrument which is issued at another place


SECTION 3. When promise is unconditional. – After sight – after the instrument is seen by the drawee
An unqualified order or promise to pay is upon presentment for acceptance, or accepted by the
unconditional within the meaning of this Act, though drawee
coupled with –
Payable on or before a fixed time
a. An indication of a particular fund out of which - necessary that the year of maturity be sated, otherwise,
reimbursement is to be made, or a particular the time of payment of the instrument, although payable
account to be debited with the amount; or at a certain time is not determinable
b. A statement of the transaction which gives
rise to the instrument. Determinable future time – a definite time upon or after
But an order or promise to pay out of a particular fund the occurrence of an event which is certain to happen
is not conditional.
Contingency – an uncertain future event which may or
may not happen
Unconditional Ex.
- must not be subject to any condition or contingency 1. Payable at a fixed time – “I promise to pay P or
order the sum of P10,000 on December 10, 2016”
PROMISSORY NOTE 2. Payable at a fixed period after date – “On or
- Implied promise to pay: “payable” “to be paid” “I agree to before sixty days after date, I promise to pay P or
pay” “I guaranty to pay” order the sum of P10,000”
- Words of negotiability: “due P or order” “due P or bearer” 3. Payable at a fixed period after sight – “Sixty days
after sight, pay to the order of P the sum of
- An order to pay: “Let the bearer” “[drawee] will much 4. Payable on or before a fixed time – “On or before
oblige [drawer] to pay P or order” December 10, 2016, I promise to pay P or order
5. Payable on or before a determinable future time
– “On or before the start of the next school
SECTION 4. Determinable future time; what semester, I promised to pay P or order P10,000”
constitutes. – 6. Payable on the occurrence of a specified event –
An instrument is payable at a determinable future “I promised to pay P or order the sum of P10,000
time, within the meaning of this Act, which is upon the death of his father”
expressed to be payable – 7. Payable after the occurrence of a specified event
a. At a fixed period after date or sight; or – “Thirty days after the death of his father, I
promise to pay P or order the sum of P10,000”
b. On or before a fixed period after the
8. Payable upon a contingency – “Pay to the order
occurrence of a specified event which is of P the sum of P10,000 upon his reaching the
certain to happen, though the time of age of majority”
happening be uncertain.
An instrument payable upon contingency is not
negotiable, and the happening of the event does not
cure the defect.

Payable at all events

Payable upon contingency = not negotiable

- it does not appear on its face whether or not it will ever
be paid

Payment certain: the payment will certainly become due

and demandable one time or other, though it may be
uncertain when that time will come. And there is certainty
as to the time when the instrument is payable on demand,
or at a fixed or determinable future time.
- Reason: so that the holder will know when he may
enforce the instrument; when statute of limitation will
arise, the person liable, when he may be required to pay
SECTION 5. Additional provisions not affecting SECTION 6. Omissions; seal; particular money. –
negotiability. – The validity and negotiable character of an
An instrument which contains an order or promise to instrument are not affected by the fact that –
do any act in addition to the payment of money is not a. It is not dated; or
negotiable. But the negotiable character of an b. Does not specify the value given, or that any
instrument otherwise negotiable is not affected by a value has been give therefor; or
provision which – c. Does not specify the place where it is drawn
a. Authorizes the sale of collateral securities In or the place where it is payable; or
case the instrument be not paid at maturity; or d. Bears a seal; or
b. Authorizes a confession of judgment if the e. Designates a particular kind of current money
instrument be not paid at maturity; or in which payment is to be made.
c. Waives the benefit of any law intended for the But nothing in this section shall alter or repeal any
advantage or protection of the obligor; or statute requiring in certain cases the nature of the
d. Gives the holder an election to require consideration to be stated in the instrument.
something to be done in lieu of payment of
But nothing in this section shall validate any Where date is necessary:
provision or stipulation otherwise illegal. a. where said date is tied to the date of issue
b. where interest is stipulated for the purpose of
determining when the interest is to run
c. in the case of the promissory note, the date of
General Rule: The instrument is non-negotiable if it
issue, and in the case of bill of exchange, the date
contains a promise or order to do any act in addition to the
of the last negotiation thereof, for the purpose of
payment of money
determining whether a party acted within a
reasonable time in making presentment for
1. Sale of collateral securities - ex. “I promise to pay
P or order the sum of P30,000 on November 25,
Effect of omission of place:
2013 secured by a ring I delivered to him by way
a. An instrument is presumed to have been made
of pledge and which he could sell should I fail to
where it is date
pay him at maturity
b. A note that does not specify the place of payment
2. Confession of judgment – an acknowledgment by
is presumed to be payable at the place of
the debtor at hi debt to another is justly due
residence of the maker
- enables the holder to obtain a judgment without
c. If the place of execution or payment is not stated,
delay usually incident to a lawsuit, all defense,
it is presumed to be the maker’s or drawer’s place
eliminates the necessity of a trial, and right of
of business or his home.
Cognavit Actionem Relicta Verificationem
“he has confessed action” “his pleading being
- a written confession of abandoned”
action by the defendant - a confession of
acknowledging his judgment by withdrawal
indebtedness to the of the defense
plaintiff after the action
has been flied
- valid
- given after the action is
brought to save expenses
3. Waiver of benefit granted by law – ex. “Pay bearer
P10,000. Notice of dishonor waived.”
4. Election of holder to require some other act – ex.
“I promise to pay P or order P15,000 or an air
conditioner at the option of the holder”


SECTION 7. When payable on demand. – 3. to order of payee who is not the drawee –
An instrument is payable on demand – “ Pay to the order of P P10,000
a. Where it is expressed to be payable on (Sgd.) R
To W (drawee)
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed 4. to order of drawer
when overdue, it is, as regards the person so issuing, “ Pay to the order of myself P10,000
accepting, or indorsing it, payable on demand. (Sgd.) R
To W (drawee)
Payable on demand: due and payable immediately after
5. to order of maker
“ I promise to pay to the order of myself P10,000
(Sgd.) M”
1. Expressed to be payable on demand – “I promise
6. to order of drawee
to pay to bearer on demand P10,000”
“ Pay to the order of yourself P10,000
2. No time for payment is expressed – “Pay to P or
(Sgd.) R
order P10,000”
To W (drawee)

7. to order of two or more payees jointly

SECTION 8. When payable to order. –
“Pay to the order of P and A P`10,000”
The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or 8. to order of one or some of several payees
his order. It may be drawn payable to the order of – “Pay to the order of P, A, or B P`10,000”
a. A payee who is not maker, drawer, or drawee;
or 9. to order of holder of an office for the time being
b. The drawer or maker; or Pay to the order of the CIR
c. The drawee; or
- a specified person must always be named therein
d. Two or more payees jointly; or either before or after the word “order”
e. One or more several payees; or - no payee, there is no body who could give
f. The holder of an office for the time being order or authority
Where the instrument is payable to order the payee - sufficient if the payee, though not named, is
must be named or otherwise indicated therein with described with reasonable certainty
reasonable certainty.

“to the order of” “or order” “or bearer” “to bearer”
- an expression of consent transferred, to whoever the
payee orders, allowing further negotiation

PAYABLE TO ORDER – where it is drawn payable: (a) to

the order of a specified person; or (b) to him or his order

1. to order of payee who is not the maker –
“ I promise to pay P10,000 to the order of P
(Sgd.) M”

2. to order of payee who is not the drawer -

“ Pay to the order of P P10,000
(Sgd.) R”


SECTION 9. When payable to bearer. – said country is that Postal money orders are not
The instrument is payable to bearer – negotiable instruments inasmuch as the establishment of
a. When it is expressed to be so payable; or a postal money order is an exercise of governmental
power for the public’s benefit. Furthermore, some of the
b. When it is payable to a person named therein
restrictions imposed upon money order by postal laws
or bearer; or and regulations are inconsistent with the character of
c. When it is payable to the order of a fictitious negotiable instruments. For instance, postal money
or non-existing person, and such fact was orders may be withheld under a variety of circumstances,
known to the person making it so payable; or and which are restricted to not more than one
d. When the name of the payee does not purport indorsement.
to be the name of any person; or
e. When the only or last indorsement is an
indorsement in blank.
DOCTRINE: The negotiability or non-negotiability of an
instrument is determined from the writing on the face of
BEARER – the person in possession of a bill or note the instrument itself.
which is payable to bearer
ISSUE: Respondent bank issued 280 certificates of time
Payable to bearer: may be transferred by delivery without deposit (CTDs) in favor of Angel dela Cruz who delivered
indorsement and payment to any person in possession the same to herein petitioner in connection with his
thereof in good faith and without notice that his title is purchased fuel products. Eventually, dela Cruz executed
defective, at or after maturity, discharges the instrument and delivered an Affidavit of Loss for the reissuance of the
CTDs. Dela Cruz later on obtained a loan from respondent
bank and negotiated the said CTDs, executing a Deed of
Assignment of Time Deposit which stated, among others,
CASES: that the bank has full control of the indicated time deposits
PHILIPPINE EDUCATION CO. VS. SORIANO from and after date of the assignment and may set-off
DOCTRINE: Postal Money Orders are not negotiable such and apply the same to the payment of amount or
instruments. In establishing and operating a postal money amounts that may be due on the loan upon maturity.
order system, the government is not engaged in
commercial transactions but is merely exercising a Petitioner then went to the Sucat branch for verification of
governmental power for the public benefit. Restrictions the CTDs declared lost, alleging that the same were
upon postal money orders imposed by postal laws and delivered to herein petitioner as “security for purchases
regulations are inconsistent with the character of made with Caltex Philippines, Inc.” and requested that the
negotiable instruments as defined under Sec.1, NIL CTDs be pre-terminated, which was refused by the
respondent bank due to the failure of petitioner to present
FACTS: Enrique Montinola sought to purchase from the requested documents to prove such allegation. Petitioner
Manila Post Office 10 money orders (P200 each), offering then filed a complaint in the RTC, which was dismissed.
to pay for them with a private check. Montinola was able On appeal, the CA affirmed the decision of the RTC. Thus,
to leave the building with his check and the 10 money the present petition. ISSUE: WON the CTDs are
orders without the knowledge of the teller. Upon considered negotiable? HELD: Yes. A sample text of the
discovery, message was sent to all postmasters and certificates of time deposit is reproduced below:
banks involving the unpaid money orders. One of the
money orders was received by the Philippine Education SECURITY BANK
6778 Ayala Ave., Makati
Co. as part of its sales receipt. It was deposited by the No. 90101 Metro Manila, Philippines
company with the Bank of America, which cleared it with CERTIFICATE OF DEPOSIT
Rate 16%
the Bureau of Post. The Postmaster, through the Chief of
the Money Order Division of the Manila Post Office Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify
that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
informed the bank of the irregular issuance of the money THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00
order. The bank debited the account of the company. The CTS Pesos, Philippine Currency, repayable to said depositor 731 days.
company moved for reconsideration. after date, upon presentation and surrender of this certificate, with
interest at the rate of 16% per cent per annum.
ISSUE: WON postal money orders are negotiable
(Sgd. Illegible) (Sgd. Illegible) AUTHORIZED SIGNATURES

HELD: No. Philippine postal statutes are patterned from Section 1, of Act No. 2031, otherwise known as the
those of the United States, and the weight of authority in Negotiable Instruments Law, enumerates the requisites
for an instrument to become negotiable. The CTDs in
question undoubtedly meet the requirements of the law unconditional" and the warrants themselves non-
for negotiability. The accepted rule is that the negotiability negotiable. Metrobank cannot contend that by indorsing
or non- negotiability of an instrument is determined from the warrants in general, Golden Savings assumed that
the writing, that is, from the fact of the instrument itself. they were "genuine and in all respects what they purport
Contrary to what respondent court held (that the CTDs are to be," in accordance with Section 66 of the Negotiable
payable to the “depositor” which is Angel dela Cruz), the Instruments Law. The simple reason is that this law is not
documents provide that the amounts deposited shall be applicable to the non-negotiable treasury warrants. The
repayable to the depositor. And who, according to the indorsement was made by Gloria Castillo not for the
document is the depositor? It is the “bearer”. The purpose of guaranteeing the genuineness of the warrants
documents do not say that the depositor is Angel dela but merely to deposit them with Metrobank for clearing.
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 SESBRENO VS. CA
matter, whosoever may be the bearer at the time of DOCTRINE: A non-negotiable document may not be
presentment. negotiated; but it may be assigned or transferred, absent
an express prohibition against assignment or transfer
written on the face of the instrument. [A] note, though not
negotiable, may be transferred by assignment, the
METROPOLITAN BANK & TRUST CO. VS. CA assignee taking it being subject to the equities between
DOCTRINE: The indication of a particular fund as the the original parties
source of payment makes the order to pay conditional. An
order or promise to pay out of a particular fund is ‘not FACTS: Petitioner Sesbreno made a money market
unconditional’, as stated in Sec.3, NIL placement in the amount of P300,000 with the Philippine
Underwriters Finance Corporation (PhilFinance), with a
FACTS: Eduardo Gomez opened an account with Golden term of 32 days. PhilFinance issued to Sesbreno (1) the
Savings and deposited over a period of two months 38 Certificate of Confirmation of Sale of a Delta Motor
treasury warrants. They were all drawn by the Philippine Corporation Promissory Note, (2) the Certificate of
Fish Marketing Authority and purportedly signed by its Securities Delivery Receipt indicating the sale of the note
General Manager and counter-signed by its Auditor. Six with notation that said security was in the custody of
of these were directly payable to Gomez while the others Pilipinas Bank, and (3) post-dated checks drawn against
appeared to have been indorsed by their respective the Insular Bank of Asia and America for P304,533.33
payees, followed by Gomez as second indorser. On payable on March 13, 1981. The checks were dishonored
various dates all these warrants were subsequently for having been drawn against insufficient funds. Pilipinas
indorsed by Gloria Castillo as Cashier of Golden Savings Bank never released the note, nor any instrument related
and deposited to its Savings Account in the Metrobank. thereto, to Sesbreno; but Sesbreno learned that the Delta
They were then sent for clearing by the branch office to Promissory Note maturing on 6 April 1981, has a face
the principal office of Metrobank, which forwarded them to value of P2,300,833.33 with PhilFinance as payee and
the Bureau of Treasury for special clearing. After being Delta Motors as maker; and was stamped “non-
told to wait several times, Gloria Castillo and Gomez negotiable” on its face. PhilFrance was later on placed
made subsequent withdrawals at Metrobank with the under the custody of the Securities and Exchange
impression that the treasury warrants had been cleared. Commission. As Sesbreno was unable to collect his
Metrobank informed Golden Savings that 32 of the investment and interest thereon, he filed an action for
warrants had been dishonored by the Bureau of Treasury damages against Delta Motors and Pilipinas Bank. Delta
and demanded the refund by Golden Savings of the Motors contends that said promissory note was not
amount it had previously withdrawn, to make up the deficit intended to be negotiated or otherwise transferred by
in its account. The demand was rejected. Philfinance as manifested by the word "non-negotiable"
stamped across the face of the Note. The trial court and
ISSUE: WON treasury warrants are negotiable the CA dismissed petitioner’s complaint and appeal,
instruments? respectively, for lack of cause of action. If anything,
petitioner has a cause of action against Philfrance, which,
HELD: No. The treasury warrants in question are not however, was not impleaded.
negotiable instruments. Clearly stamped on their face is
the word "non-negotiable." Moreover, it is indicated that ISSUE: WON the non-negotiability of a promissory note
they are payable from a particular fund, to wit, Fund 501. prevents its assignment?
Sections 1 and 3 of the Negotiable Instruments Law
especially underscored this requirement. The indication of HELD: No. A negotiable instrument, instead of being
Fund 501 as the source of the payment to be made on the negotiated, may also be assigned or transferred. The
treasury warrants makes the order or promise to pay "not legal consequences of negotiation and assignment of the


instrument are different. A non- negotiable instrument SECTION 10. Terms, when sufficient. –
may not be negotiated but may be assigned or The instrument need not follow the language of this
transferred, absent an express prohibition against Act, but any terms are sufficient which clearly
assignment or transfer written in the face of the
indicate an intention to conform to the requirements
instrument. The subject promissory note, while marked
"non-negotiable," was not at the same time stamped "non- thereof.
transferable" or "non-assignable." It contained no
stipulation which prohibited Philfinance from assigning or
transferring such note, in whole or in part.
SECTION 11. Date, presumption as to. –
Where the instrument or an acceptance or any
indorsement thereon is dated, such date is deemed
DOCTRINE: Withdrawal slips are not negotiable
instruments. The essence of negotiability which prima facie to be the true date of the making, drawing,
characterizes a negotiable paper as a credit instrument acceptance, or indorsement, as the case may be.
lies in its freedom to circulate freely as a substitute for
money. Withdrawal slips lack this character.

SECTION 12 Ante-dated and post-dated. –

The instrument is not invalid for the reason only that
DOCTRINE: Where a check is made payable to the order
of ‘cash’, the word ‘cash’ does not purport to be the name it is ante-dated or post-dated, provided this is not
of any person and hence the instrument is payable to done for an illegal or fraudulent purpose. The person
bearer. The drawee-bank may pay it to the person to whom an instrument so dated is delivered acquires
presenting it without need of obtaining any endorsement the title thereto as of the date of delivery.

FACTS: Knowing he had no funds therefor, petitioner Ang

Tek Lian drew a check upon the China Banking
Corporation for the sum of P4,000, payable to the order of
“cash”. He delivered it to Lee Hua Hong in exchange for SECTION 13. When date may be inserted. - Where an
money which the latter handed in the act. The next instrument expressed to be payable at a fixed period
business day, the check was presented by Lee Hua Hong after date is issued undated, or where the acceptance
to the drawee bank for payment, but it was dishonored for of an instrument payable at a fixed period after sight
insufficiency of funds, the balance of the deposit of Ang is undated, any holder may insert therein the true date
Tek Lian on both dates being P335 only. Petitioner was
of issue or acceptance, and the instrument shall be
sued for estafa. In his defense, however, he argues that
as the check had been made payable to “cash” and had payable accordingly. The insertion of a wrong date
not been endorsed by Ang Tek Lian, the defendant is not does not avoid the instrument in the hands of a
guilty of the offense charged. subsequent holder in due course; but as to him, the
date so inserted is to be regarded as the true date.
ISSUE: WON a check payable to “cash” needs

HELD: NO. Under the Negotiable Instruments Law (sec.

9 [d], a check drawn payable to the order of “cash” is a
check payable to bearer, and the bank may pay it to the
person presenting it for payment without the drawer’s
indorsement. Where a check is made payable to the order
of ‘cash’, 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.


SECTION 30. What constitutes negotiation. – Negotiation Assignment
An instrument is negotiated when it is transferred - only to negotiable - refers generally to an
from one person to another in such manner as to instruments ordinary contract
constitute the transferee the holder thereof. If payable - transferee is a holder - transferee is an
to bearer, it is negotiated by delivery; if payable to
- holder in due course is - assignee is subject to
order, it is negotiated by the indorsement of the subject only to real both real and personal
holder and completed by delivery. defenses defenses
- HDC may acquire a - assignee merely steps
better title or greater rights into the shoes of the
Transfer – the process by which property is delivered by under the instrument than assignor
one person to another those possessed by the
transferor or a prior party
Three methods of transferring a negotiable instrument: - general indorser - assignor does not
1. Issue – the first delivery of the instrument, warrants the solvency of warrant the solvency of
complete in form, to a person who takes it as prior parties prior parties, unless
holder expressly stipulated or the
- first transfer of an instrument to a payee insolvency is known to
2. Negotiation – involves indorsement him
- makes it possible for the transferee to acquire a - indoser is not liable - assignor is liable even
better right to a negotiable instrument that the unless there be without note of dishonor
transferor had presentment and notice of
3. Assignment – less usual method, which may or dishonor
may not involve an indorsement in the sense of - governed by NIL - governed by Artl. 1624 to
writing on the back of the instrument 1635
NEGOTIATION – the transfer of a negotiable instrument Indorsement completed by delivery
from one person to another made in such a manner as to - Delivery is presumed from possession
constitute the transferee the holder thereof.

Payable to order Negotiable by delivery

with necessary SECTION 31. Indorsement; how made. –
The indorsement must be written on the instrument
Payable to bearer Delivery alone is sufficient
itself or upon a paper attached thereto. The signature
to constitute negotiation
of the indorser, without additional words, is a
Holder – the payee or indorser of a bill or note, who is in sufficient indorsement.
possession of it, or the bearer thereof

Delivery – transfer of possession actual or constructive INDORSEMENT – writing of the name of the payee on the
from one person to another instrument with the intent either to transfer the title to the
same, or to strengthen the security of the holder by
Assignment – a transfer of the title to the instrument with assuming a contingent liability for its future payment or
the assignee generally taking only such title as his both
assignor has, subject to all defenses available against his
1. conveys the title to the instrument
A bill or note, whether negotiable or non-negotiable, may 2. implied guaranty that the person primarily liable
be transferred by assignment cannot pay, the indorser will pay
- Assignment involves a transfer of rights under a contract
- When negotiation takes place, the transferee becomes Indorser – payee by signing (indorsing) the instrument
a holder and delivering it to another person
- Without the indorsement, the transferee would not be the
holder in the instrument Indorsee – person who receives the indorsed instrument

An indorsement involves the certainty of:

a. identity of the indorser
b. the genuineness of his signature


- must be written SECTION 34. Special indorsement; indorsement in
- signature of the indorser = sufficient blank. –
- Special indorsement: the name of the indorsee is A special indorsement specifies the person to whom,
specified or to whose order, the instrument is to be payable,
and the indorsement of such indorsee is necessary to
Place of indorsement the further negotiation of the instrument. An
1. On the instrument itself – writing on the back indorsement in blank specifies no indorsee, and an
- place not essential instrument so indorsed is payable to bearer, and may
- intention of the parties be negotiated by delivery.
2. Upon a paper attached thereto – allonge: the
indorsement on a slip of paper physically
attached to the instrument so as to become part SPECIAL INDORSEMENT: the name of the indorsee is
of it specified

Forms of SI:
a. One that specifies the person to whom the
SECTION 32. Indorsement must be of entire instrument is payable
instrument. – b. One that specifies the person to whose order the
The indorsement must be an indorsement of the instrument is to be payable
entire instrument. An indorsement which purports to
1. If the instrument is originally payable to order and
transfer to the indorsee a part only of the amount it is negotiated by the payee by special
payable, or which purports to transfer the instrument indorsement, the indorsement of the indorsee is
to two or more indorsees severally, does not operate necessary to the further negotiation of the
as a negotiation of the instrument. But where the instrument.
instrument has been paid in part, it may be indorsed 2. If the instrument is originally payable to bearer, it
as to the residue. may nevertheless be further negotiated by mere
delivery even if the original bearer indorsed it
specially but the special indorser is liable only to
such holders as make title through his
GENERAL RULE: An indorsement must be an
indorsement of the entire instrument
- Reason: to avoid multiplicity of suits
BLANK INDORSEMENT: one which specifies no
particular indorsee
- consists only the signature of the payee or indorser on
the back of the instrument
SECTION 33. Kinds of indorsement. –
An indorsement may be either special or in blank; and
it may also be either restrictive or qualified or
conditional. SECTION 35. Blank indorsement; how changed to
special indorsement. –
The holder may convert a blank indorsement into a
special indorsement by writing over the signature of
the indorser in blank any contract consistent with the
character of the indorsement.

An instrument made payable to bearer by an indorsement

in blank may be converted into an order instrument by
writing over the signature of the indorser in blank any
contract not inconsistent with the character of the
- a bearer instrument always remains a bearer instrument
by mere delivery whether the last indorsement is blank or
a special one.


SECTION 36. When indorsement restrictive. – SECTION 38. Qualified indorsement. –
An indorsement is restrictive which either: A qualified indorsement constitutes the indorser a
a. Prohibits the further negotiation of the mere assignor of the title to the instrument. It may be
instrument; or made by adding to the indorser's signature the words
b. Constitutes the indorsee the agent of the "without recourse" or any words of similar import.
indorser; or Such an indorsement does not impair the negotiable
c. Vests the title in the indorsee in trust for or to character of the instrument.
the use of some other persons.
But the mere absence of words implying power to
negotiate does not make an indorsement restrictive. QUALIFIED INDORSEMENT – one which constitutes the
indorser a mere assignor of the title to the instrument
- limits the liability of the indorser
RESTRICTIVE INDORSEMENT – it either prohibits - “without recourse” “sans recourse” “at indosee’s own
entirely the further negotiation of an instrument or restricts risk” “indorser not holder”
its further negotiation to a particular person or for a - shows the unwillingness to be answerable for
particular purpose; or modifies the right of the holders or the insolvency of prior parties
the liabilities of the indorser - example: “Pay to the order of A without recourse on me”

An indorser notifies all prospective holders that the Recourse – resort to a person who is secondary liable
indorsee has only the authority to deal with the instrument after the default of the person who is primarily liable
as thereby directed and that the indorsee has only a
restriction thereto A special or blank indorsement indicates that the indorser,
- destroys the negotiability of the instrument and bars in addition to transferring little to the instrument, is
further negotiation to a HDC guaranteeing its payment if the holder is unable to obtain
payment from the maker, acceptor, or drawer at maturity
Examples: - merely to limit his liability
1. Prohibits further negotiation – “Pay to A only” - not liable to the indorsee if the instrument is
2. Constitutes indorsee agent of indorser –“Pay to A dishonored, for some other reason like insolvency
for collection of the person primarily liable
3. Vests title in indorsee for the benefit of the - secondary liable for breach of his warranties
indorser of the a third party – “Pay to A in trust for - he is liable if the instrument is dishonored by
B” non-acceptance or non-payment due to:
1. forgery
2. lack of good title to the instrument
SECTION 37. Effect of restrictive indorsement; rights 3. lack of capacity to contract on the part
of indorsee. – of prior parties
4. the fact that the indorsement was
A restrictive indorsement confers upon the indorsee
valueless and not valid at the time of the
the right: indorsement
a. to receive payment of the instrument;
b. to bring any action thereon that the indorser
could bring;
c. to transfer his rights as such indorsee, where
the form of the indorsement authorizes him to
do so.
But all subsequent indorsees acquire only the title of
the first indorsee under the restrictive indorsement.

The indorsee may receive payment on the instrument;

sue there on in his name and also negotiate the
instrument except when it is prohibited.


SECTION 39. Conditional indorsement. – SECTION 41. Indorsement where payable to two or
Where an indorsement is conditional, the party more persons. –
required to pay the instrument may disregard the Where an instrument is payable to the order of two or
condition and make payment to the indorsee or his more payees or indorsees who are not partners, all
transferee whether the condition has been fulfilled or must indorse unless the one indorsing has authority
not. But any person to whom an instrument so to indorse for the others.
indorsed is negotiated will hold the same, or the
proceeds thereof, subject to the rights of the person
indorsing conditionally. If the instrument is payable to the order of 2 or more
payees or indorsees, all must indorse in order for the
transaction to operate as a negotiation
ABSOLUTE INDORSEMENT – one by which the indorser
binds himself to pay upon no other condition than the
1. Where the payees or indorsees are partners
failure of prior parties to do so, and of due notice to him of
2. Where the payee or indorsee indorsing has
such failure
authority to indorse for the others
indorser imposes some other conditions to his liability or
on the indorsee’s right to collect the proceeds of the
SECTION 42. Effect of instrument drawn or indorsed
- Special Indorsement to a person as cashier. –
- does not prohibit the further negotiation of the instrument Where an instrument is drawn or indorsed to a person
regardless of whether the condition has been fulfilled or as "cashier" or other fiscal officer of a bank or
not corporation, it is deemed prima facie to be payable to
- binding only between the indorser and the indorsee the bank or corporation of which he is such officer,
and may be negotiated by either the indorsement of
the bank or corporation or the indorsement of the
SECTION 40. Indorsement of instrument payable to officer.
bearer. –
Where an instrument, payable to bearer, is indorsed
The cashier of a bank, the president of a corporation or
specially, it may nevertheless be further negotiated any other administrative officer, as secretary or treasure
by delivery; but the person indorsing specially is may be expressly authorized to issue negotiable paper for
liable as indorser to only such holders as make title the corporation
through his indorsement. - presumption may be disproved by sufficient evidence to
the contrary

An instrument payable to bearer is not converted into an

instrument payable to order by being indorsed specially
and, therefore, the indorsee may further negotiate the SECTION 43. Indorsement where name is misspelled,
instrument by mere delivery and so forth. –
- liable only to those holders who can trace their title to the Where the name of a payee or indorsee is wrongly
instrument by a series of unbroken indorsements from designated or misspelled, he may indorse the
such special indorser
instrument as therein described adding, if he thinks
Bearer – indorsement – Bearer fit, his proper signature.

Indorsed – still a bearer instrument – further negotiated

through delivery The payee may sign his name in the same way as it
appears in the instrument but signature in both names
PAYABLE TO BEARER may be required by a person paying or giving value for the
- Payable to order becomes payable to bearer only when instrument.
the last indorsement is in blank - A person may correct a spelling error only if the intention
of the maker or drawer was that the instrument should be
payable to the person making the correction


SECTION 44. Indorsement in representative capacity. General rule: A paper which is non-negotiable in its
– inception continues to be non-negotiable
Where any person is under obligation to indorse in a - However, if it indorsed to “order” or “bearer”, it becomes
as between the indorser and subsequent holders
representative capacity, he may indorse in such
terms as to negative personal liability.

SECTION 48. Striking out indorsement. –

Agent The holder may at any time strike out any
indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all
SECTION 45. Time of indorsement; presumption. – indorsers subsequent to him, are thereby relieved
Except where an indorsement bears date after the from liability on the instrument.
maturity of the instrument, every negotiation is
deemed prima facie to have been effected before the
The holder may strike out all intervening indorsements or
instrument was overdue.
any of them for none of them is necessary of his title.

PAYABLE TO ORDER: may be negotiated only by the

HDC – taken the instrument before it was overdue indorsement of the payee completed by delivery
- an instrument which upon its face is payable to order,
If the indorsement bears a date, the presumption is that it becomes payable to when the only or last indorsement is
is the true date. in blank
- without a date: presumption – negotiated before maturity - Special indorsement: cannot strike out – the
indorsement of the special indorsee is necessary to
further negotiation
- Blank indorsement: payable to bearer – negotiated by
SECTION 46. Place of indorsement; presumption. - mere delivery
Except where the contrary appears, every
indorsement is presumed prima facie to have been
made at the place where the instrument is dated.
SECTION 49. Transfer without indorsement; effect of.

An indorsement is presumed to have been made at the Where the holder of an instrument payable to his
place where the instrument is dated order transfers it for value without indorsing it, the
transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the
SECTION 47. Continuation of negotiable character. –
transferor. But for the purpose of determining
An instrument negotiable in its origin continues to be
whether the transferee is a holder in due course, the
negotiable until it has been restrictively indorsed or
negotiation takes effect as of the time when the
discharged by payment or otherwise.
indorsement is actually made.

GENERAL RULE: An instrument negotiable when issued,

is always negotiable until paid, irrespective of the form of - only to an instrument payable to order
indorsement on the instrument. - transferee - transferor

1. When the instrument has been restrictively
2. When it has been discharged by payment or

Conversion from non-negotiable to negotiable instrument:


SECTION 50. When prior party may negotiate Prima facie presumption – Holder of negotiable
instrument. – instrument is a HDC
Where an instrument is negotiated back to a prior
DRAWER = not a HDC
party, such party may, subject to the provisions of
- on the acceptance and payment of the instrument, strips
this Act, reissue and further negotiable the same. But it of all negotiability and reduces it to a mere voucher or
he is not entitled to enforce payment thereof against proof of payment
any intervening party to whom he was personally
liable. it is complete and regular upon its face
INCOMPLETE INSTRUMENT – when it is wanting in any
material particular or particular proper to be inserted in a
If a prior party reacquires an instrument before maturity negotiable instrument without which the same will not be
he may negotiate the same further. But after paying the complete
holder, he may not claim payment from any of the
intervening parties IRREGULAR INSTRUMENT – alteration, tampering or
erasure must be visible or apparent on the face of the
LIMITATIONS: instrument
1. Where it is payable to the order of a third person,
and has been paid by the drawer holder of it before it was overdue
2. Where it was made or accepted for Overdue – after the date of maturity
accommodation and has been paid by the party
accommodated without notice that it has been previously dishonored
3. Where the instrument is discharged when Dishonor by non- Dishonor by non-payment
acquired by a prior party acceptance
- bill of exchange - take place at the time of
- may occur even before
SECTION 52. What constitutes a holder in due course. the date of its maturity

A holder in due course is a holder who has taken the took it in good faith
Good faith – of the indorsee or transferee
instrument under the following conditions:
- honesty in fact in the transaction concerned without
a. That it is complete and regular upon its face; knowledge or notice or any material fact which would
b. That he became the holder of it before it was render it dishonest to take the instrument
overdue, and without notice that it has been
previously dishonored, if such was the fact; Bad faith – must have actual knowledge of the infirmity or
c. That he took it in good faith and for value; defect or knowledge of such facts which render it
d. That at the time it was negotiated to him, he dishonest for him to take a particular negotiable paper
had no notice of any infirmity in the Effects of Crossing a Check:
instrument or defect in the title of the person a. The check may not be encashed but only
negotiating it. deposited in the bank;
b. The check may be negotiated only once – to one
who has an account with a bank; and
Holder – payee or indorsee of a bill or note, who is in c. The act of crossing the check serves as warning
possession of it, or the bearer thereof to the holder that the check has been issued for a
definite purpose so that he must inquire if he has
HOLDER IN DUE COURSE – a holder who took the received the check pursuant to that purpose,
instrument under the conditions enumerated in Section otherwise, he is not a holder in due course.
- takes the instrument free of most defenses, or adverse for value
claims to it by other parties a. To the extent that the agreed consideration has
been performed or that he acquires a security
Only a negotiation can operate as a valid transfer to make interest in or a lien on the instrument otherwise
the transferee a HDC than legal process
b. When he takes the instrument in payment of or as
All the 4 conditions must concur security for an antecedent claim against any
- Absent of one: not HDC, but assignee of a contract person whether or not the claim is due


c. When he gives a negotiable instrument for it or - reasonable time: reckoned from the time of the issuance
makes an irrevocable commitment to a third of the instrument
Personal defense
- not available against HDC

SECTION 14. Blanks; when may be filled. –

Where the instrument is wanting in any material SECTION 15. Incomplete instrument not delivered. –
particular, the person in possession thereof has a Where an incomplete instrument has not been
prima facie authority to complete it by filling up the delivered, it will not, if completed and negotiated
blanks therein. And a signature on a blank paper without authority, be a valid contract in the hands of
delivered by the person making the signature in order any holder, as against any person whose signature
that the paper may be converted into a negotiable was placed thereon before delivery.
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 Defense even against HDC
thereto prior to its completion, it must be filled up - any holder
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 SECTION 65. Warranty where negotiation by delivery
hands, and he may enforce it as if it had been filled up and so forth. —
strictly in accordance with the authority given and Every person negotiating an instrument by delivery or
within a reasonable time. by a qualified indorsement warrants:
a. That the instrument is genuine and in all
respects what it purports to be;
INCOMPLETE BUT DELIVERED b. That he has a good title to it;
c. That all prior parties had capacity to contract;
Steps in Issuance of Negotiable instrument: d. That he has no knowledge of any fact which
1. the mechanical act of writing the instrument would impair the validity of the instrument or
completely and in accordance with the
render it valueless.
2. the delivery of the complete instrument by the But when the negotiation is by delivery only, the
maker or the drawer to the payee or holder with warranty extends in favor of no holder other than the
the intention of giving effect to it immediate transferee.
The provisions of subdivision (c) of this section do
The holder or the person in possession has prima facie not apply to a person negotiating public or
authority to complete an incomplete instrument by filling
corporation securities other than bills and notes.
up the blanks
- Material particular: any particular proper to be inserted
in a negotiable instrument to make it complete
A signature on a blank paper delivered in order that it may
be converted into a negotiable instrument operates as NEGOTIATION BY DELIVERY – payable to bearer:
prima facie authority to fill it up indorsement is not necessary
- Requisites of authority to any amount
BY DELIVERY – a holder who negotiates the instrument
• intention should to convert paper to negotiable
in the same condition in which he received it, making no
indorsement at all.
• filled in accordance with authority and within
reasonable time
The indorser is liable to a subsequent holder for payment
of the instrument if the maker’s or acceptor’s signature
The instrument may be enforced only against a party prior
was obtained by fraud
to completion if filled up strictly in accordance with the
- he warrants the instrument is genuine and in all respect
authority given and with a reasonable time
what it is as represented to be
Section 65: runs to any person to whom the instrument
Liability of the one who - extends in favor only of has been negotiated
negotiates by mere his immediate transferee Conditions precedent to make indorser liable:
delivery 1. Due presentment for payment or acceptance to
Qualified indorser - liable to all subsequent the maker or acceptor must be made
holders who make title 2. If the instrument is dishonored, the necessary
through his indorsement proceedings on dishonor be duly take
for a breach of any of his
warranties Indorser Drawer
Both secondary liable
the instrument is genuine and in all respects what it Party to either a note or Bill only
purports to be – covers all the defects in the instrument bill
affecting the validity thereof Does not make any Makes such admission
- last indorser will be liable for the amount indicated in the admission regarding the
negotiable instrument even if a previous indorsement was existence of the payee
forged and his capacity then to
• EXCEPTION: when the issuance of the check indorse
itself was attended with negligence Has warranties Makes no warranties, but
o the collecting bank is generally liable, the he engages to pay after
issuing bank is just a liable or more than certain conditions are
where the subject check was negligently complied with
issued Conditional liability

General Indorser Irregular Indorser

Makes either a blank or Always makes a blank
SECTION 66. Liability of general indorser. – special indorsement indorsement
Every indorser who indorses without qualification, Indorses the instrument Indorses before its
warrants to all subsequent holders in due course: after its delivery to the delivery to the payee
a. The matters and things mentioned in payee
subdivisions (a), (b), and (c) of the next Liable only to parties Liable to the payee and
subsequent to him subsequent parties unless
preceding section; and
he signs for the
b. That the instrument is, at the time of his accommodation of the
indorsement, valid and subsisting; payee in which case he is
And, in addition, he engages that, on due liable only to all parties
presentment, it shall be accepted or paid, or both, as subsequent to the payee
the case may be, according to its tenor, and that if it
be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser
who may be compelled to pay it.

valid and subsisting

- indorser merely warrants that he has no knowledge of
any fact which would invalidate the instrument or render it

Depository Bank – first bank to take an item even though

it is also the payor bank unless the item is present for
immediate payment over the counter
- bank to which a check is transferred for deposit in an
account at such bank, even if the check is physically
received and indorsed first by another bank

Collecting Bank – any bank handling an item for collection


SECTION 16. Delivery; when effectual; when SECTION 17. Construction where instrument is
presumed. – ambiguous. –
Every contract on a negotiable instrument is Where the language of the instrument is ambiguous
incomplete and revocable until delivery of the or there are omissions therein, the following rules of
instrument for the purpose of giving effect thereto. As construction apply:
between immediate parties and as regards a remote a. Where the sum payable is expressed in words
party other than a holder in due course, the delivery, and also in figures and there is a discrepancy
in order to be effectual, must be made either by or between the two, the sum denoted by the
under the authority of the party making, drawing, words is the sum payable; but if the words are
accepting, or indorsing, as the case may be; and, in ambiguous or uncertain, reference may be
such case, the delivery may be shown to have been had to the figures to fix the amount;
conditional, or for a special purpose only, and not for b. Where the instrument provides for the
the purpose of transferring the property in the payment of interest, without specifying the
instrument. But where the instrument is in the hands date from which interest is to run, the interest
of a holder in due course, a valid delivery thereof by runs from the date of the instrument, and if the
all parties prior to him so as to make them liable to instrument is undated, from the issue thereof;
him is conclusively presumed. And where the c. Where the instrument is not dated, it will be
instrument is no longer in the possession of a party considered to be dated as of the time it was
whose signature appears thereon, a valid and issued;
intentional delivery by him is presumed until the d. Where there is a conflict between the written
contrary is proved. and printed provisions of the instrument, the
written provisions prevail;
e. Where the instrument is so ambiguous that
COMPLETE, UNDELIVERED there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
Every contract on negotiable instrument even if it is
completely written is incomplete and revocable until its f. Where a signature is so placed upon the
delivery for the purpose of giving effect it it instrument that it is not clear in what capacity
the person making the same intended to sign,
Delivery – transfer of possession, actual or constructive, he is to be deemed an indorser;
from one person to another with intent to transfer thereto g. Where an instrument containing the word "I
promise to pay" is signed by two or more
Issue – the first delivery of the instrument, complete in
persons, they are deemed to be jointly and
form, to a person who takes it as a holder
severally liable thereon.
Holder – the payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof

If a complete instrument is found in possession of an

intermediate party or a remote party other than a HDC,
there is prima facie presumption of delivery


PRESUMED – if the instrument is no longer in the
possession of the person who signed it and it is complete
in terms

Immediate parties – those who are “immediate” in the

sense of having or being held to know of the conditions or
limitations placed upon the delivery

Remote parties – parties who are not in direct contractual

relation to each other


SECTION 18. Liability of person signing in trade or SECTION 20. Liability of person signing as agent, and
assumed name. – so forth. –
No person is liable on the instrument whose signature Where the instrument contains or a person adds to
does not appear thereon, except as herein otherwise his signature words indicating that he signs for or on
expressly provided. But one who signs in a trade or behalf of a principal or in a representative capacity,
assumed name will be liable to the same extent as if he is not liable on the instrument if he was duly
he had signed in his own name. authorized; but the mere addition of words describing
him as an agent, or as filling a representative
character, without disclosing his principal, does not
General Rule: Only persons who signatures appear on a exempt him from personal liability.
instrument are liable thereon

In order that an agent who signs a negotiable instrument
a. Where a person signs in a trade or assumed
may escape personal liability, the following are the
b. The principal is liable if a duly authorized agent
1. He is duly authorized;
signs on his behalf
2. He adds words to his signature indicating that he
c. In case of forgery, the forger is liable even if his
signs as agent, that is, for or on behalf of a
signature does not appear on the instrument
principal, or in a representative capacity;
d. Where the acceptor makes his acceptance of a
3. He discloses his principal.
bill on a separate paper
e. Where a person makes a written promise to
accept a bill before it is drawn
SECTION. 21. Signature by procuration; effect of. –
A signature by "procuration" operates as notice that
SECTION 19. Signature by agent; authority; how the agent has but a limited authority to sign, and the
shown. – principal is bound only in case the agent in so signing
The signature of any party may be made by a duly acted within the actual limits of his authority.
authorized agent. No particular form of appointment
is necessary for this purpose; and the authority of the
Procuration – the act by which a principal gives power to
agent may be established as in other cases of agency. another to act in his place as he could himself
- agency or proxy for the one who signs in merely acting
as agent for another
The maker or drawer may sign the instrument personally
or by another duly authorized by him

SECTION 22. Effect of indorsement by infant or

corporation. –
The indorsement or assignment of the instrument by
a corporation or by an infant passes the property
therein, notwithstanding that from want of capacity,
the corporation or infant may incur no liability


CASES: However, the mere fact that he has done these does not
DEVELOPMENT BANK OF RIZAL VS. SIMA WEI give rise to any liability on his part, until and unless the
DOCTRINE: The payee of a negotiable instrument check is delivered to the payee or his representative. A
acquires no interest thereto until its delivery to him. negotiable instrument, of which a check is, is not only a
Delivery of an instrument means transfer of possession, written evidence of a contract right but is also a species of
actual or constructive, from one person to another with property. Just as a deed to a piece of land must be
intent of transferring title thereto. However, it does not delivered in order to convey title to the grantee, so must a
follow that the drawer of an undelivered instrument is negotiable instrument be delivered to the payee in order
freed from the liability of the principal contract which gave to evidence its existence as a binding contract. Section 16
rise thereto of the Negotiable Instruments Law, which governs
checks, provides in part: “Every contract on a negotiable
FACTS: In consideration for a loan extended by petitioner instrument is incomplete and revocable until delivery of
Bank to respondent Sima Wei, the latter executed and the instrument for the purpose of giving effect thereto”.
delivered to the former a promissory note, engaging to Thus, the payee of a negotiable instrument acquires no
pay the petitioner Bank or order the amount of interest with respect thereto until its delivery to him.
P1,820,000.00 on or before June 24, 1983 with interest at Delivery of an instrument means transfer of possession,
32% per annum. Sima Wei made partial payments on the actual or constructive, from one person to another.
note, leaving a balance of P1,032,450.02. On November Without the initial delivery of the instrument from the
18, 1983, Sima Wei issued two crossed checks payable drawer to the payee, there can be no liability on the
to petitioner Bank drawn against China Banking instrument. Moreover, such delivery must be intended to
Corporation, bearing respectively the serial numbers give effect to the instrument. The allegations of the
384934, for the amount of P550,000.00 and 384935, for petitioner in the original complaint show that the two (2)
the amount of P500,000.00. The said checks were China Bank checks, numbered 384934 and 384935, were
allegedly issued in full settlement of the drawer's account not delivered to the payee, the petitioner herein. Without
evidenced by the promissory note. These two checks the delivery of said checks to petitioner-payee, the former
were not delivered to the petitioner-payee or to any of its did not acquire any right or interest therein and cannot
authorized representatives. For reasons not shown, these therefore assert any cause of action, founded on said
checks came into the possession of respondent Lee Kian checks, whether against the drawer Sima Wei or against
Huat, who deposited the checks without the petitioner- the Producers Bank or any of the other respondents. In
payee's indorsement (forged or otherwise) to the account the original complaint, petitioner Bank, as plaintiff, sued
of respondent Plastic Corporation, at the Balintawak respondent Sima Wei on the promissory note, and the
branch, Caloocan City, of the Producers Bank. Cheng Uy, alternative defendants, including Sima Wei, on the two
Branch Manager of the Balintawak branch of Producers checks. On appeal from the orders of dismissal of the
Bank, relying on the assurance of respondent Samson Regional Trial Court, petitioner Bank alleged that its
Tung, President of Plastic Corporation, that the cause of action was not based on collecting the sum of
transaction was legal and regular, instructed the cashier money evidenced by the negotiable instruments stated
of Producers Bank to accept the checks for deposit and to but on quasi-delict — a claim for damages on the ground
credit them to the account of said Plastic Corporation, of fraudulent acts and evident bad faith of the alternative
inspite of the fact that the checks were crossed and respondents. This was clearly an attempt by the petitioner
payable to petitioner Bank and bore no indorsement of the Bank to change not only the theory of its case but the
latter. Hence, petitioner filed the complaint as aforestated. basis of his cause of action. It is well-settled that a party
cannot change his theory on appeal, as this would in
ISSUE: WON petitioner Bank has a cause of action effect deprive the other party of his day in court.
against any or all of the defendants, in the alternative or Notwithstanding the above, it does not necessarily follow
otherwise? that the drawer Sima Wei is freed from liability to petitioner
Bank under the loan evidenced by the promissory note
HELD: A cause of action is defined as an act or omission agreed to by her. Her allegation that she has paid the
of one party in violation of the legal right or rights of balance of her loan with the two checks payable to
another. The essential elements are: (1) legal right of the petitioner Bank has no merit for, as We have earlier
plaintiff; (2) correlative obligation of the defendant; and (3) explained, these checks were never delivered to
an act or omission of the defendant in violation of said petitioner Bank. And even granting, without admitting, that
legal right. The normal parties to a check are the drawer, there was delivery to petitioner Bank, the delivery of
the payee and the drawee bank. Courts have long checks in payment of an obligation does not constitute
recognized the business custom of using printed checks payment unless they are cashed or their value is impaired
where blanks are provided for the date of issuance, the through the fault of the creditor. None of these exceptions
name of the payee, the amount payable and the drawer's were alleged by respondent Sima Wei. Therefore, unless
signature. All the drawer has to do when he wishes to respondent Sima Wei proves that she has been relieved
issue a check is to properly fill up the blanks and sign it. from liability on the promissory note by some other cause,


petitioner Bank has a right of action against her for the person giving it, requiring the person to whom it is
balance due thereon. However, insofar as the other addressed to pay on demand or at a fixed or determinable
respondents are concerned, petitioner Bank has no privity future time a sum certain in money to order or to bearer.
with them. Since petitioner Bank never received the As long as a commercial paper conforms with the
checks on which it based its action against said definition of a bill of exchange, that paper is considered a
respondents, it never owned them (the checks) nor did it bill of exchange. The nature of acceptance is important
acquire any interest therein. Thus, anything which the only in the determination of the kind of liabilities of the
respondents may have done with respect to said checks parties involved, but not in the determination of whether a
could not have prejudiced petitioner Bank. It had no right commercial paper is a bill of exchange or not.
or interest in the checks which could have been violated
by said respondents. Petitioner Bank has therefore no ISSUE2: WON Aruego is personally liable?
cause of action against said respondents, in the
alternative or otherwise. If at all, it is Sima Wei, the HELD: YES. Firstly, Section 20 of the Negotiable
drawer, who would have a cause of action against her co- Instruments Law provides that "Where the instrument
respondents, if the allegations in the complaint are found contains or a person adds to his signature words
to be true. indicating that he signs for or on behalf of a principal or in
a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere
PBCOM VS. JOSE ARUEGO addition of words describing him as an agent or as filing a
DOCTRINE: A party who signs a bill of exchange as an representative character, without disclosing his principal,
agent, but failed to disclose his principal becomes does not exempt him from personal liability." An
personally liable for the drafts he accepted. inspection of the drafts accepted by the defendant shows
that nowhere has he disclosed that he was signing as a
FACTS: Herein plaintiff instituted against an action representative of the Philippine Education Foundation
against defendant for the recovery of the total sum of Company. He merely signed as follows: "JOSE ARUEGO
money plus interests and attorney’s fees. The complaint (Acceptor) (SGD) JOSE ARGUEGO For failure to
filed by the Philippine Bank of Commerce contains disclose his principal, Aruego is personally liable for the
twenty-two (22) causes of action referring to twenty-two drafts he accepted. Secondly, an accommodation party is
(22) transactions entered into by the said Bank and one who has signed the instrument as maker, drawer,
Aruego on different dates. The sum sought to be indorser, without receiving value therefor and for the
recovered represents the cost of the printing of "World purpose of lending his name to some other person. Such
Current Events," a periodical published by the defendant. person is liable on the instrument to a holder for value,
To facilitate the payment of the printing the defendant notwithstanding such holder, at the time of the taking of
obtained a credit accommodation from the plaintiff. Thus, the instrument knew him to be only an accommodation
for every printing of the "World Current Events," the printer party. In lending his name to the accommodated party, the
collected the cost of printing by drawing a draft against the accommodation party is in effect a surety for the latter. He
plaintiff, said draft being sent later to the defendant for lends his name to enable the accommodated party to
acceptance. As an added security for the payment of the obtain credit or to raise money. He receives no part of the
amounts advanced to printer, the plaintiff bank also consideration for the instrument but assumes liability to
required defendant Aruego to execute a trust receipt in the other parties thereto because he wants to
favor of said bank wherein said defendant undertook to accommodate another. In the instant case, the defendant
hold in trust for plaintiff the periodicals and to sell the signed as a drawee/acceptor. Under the Negotiable
same with the promise to turn over to the plaintiff the Instrument Law, a drawee is primarily liable. Thus, if the
proceeds of the sale of said publication to answer for the defendant who is a lawyer, he should not have signed as
payment of all obligations arising from the draft. an acceptor/drawee. In doing so, he became primarily and
Defendant filed an answer interposing for his defense that personally liable for the drafts.
he signed the drafts in a representative capacity, that he
signed only as accommodation party and that the drafts
signed by him were not really bills of exchange but mere FRANCISCO V. CA
pieces of evidence of indebtedness because payments DOCTRINE: The NIL provides that where any person is
were made before acceptance. under obligation to endorse in a representative capacity,
he may endorse in such terms as to negative personal
ISSUE1: WON the drafts Aruego signed were bills of liability. An agent, when so signing, should indicate that
exchange? he is merely signing on behalf of the principal and must
disclose the name of his principal; otherwise he shall be
HELD: YES. Under the Negotiable Instruments Law, a bill held personally liable.
of exchange is an unconditional order in writing
addressed by one person to another, signed by the


SECTION 23. Forged signature; effect of. – was forged cannot recover the money from one who
When a signature is forged or made without the received it
authority of the person whose signature it purports to
When a bank receives money to be checked out by a
be, it is wholly inoperative, and no right to retain the
depositor, it is to be paid only as the depositor shall order.
instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, Where the note is payable to order, the party whose
can be acquired through or under such signature, indorsement is forged is not liable to any holder even a
unless the party against whom it is sought to enforce HDC.
such right is precluded from setting up the forgery or - indorsement is inoperative
want of authority.
Where the note is payable to bearer, the party whose
indorsement is forged is liable to a HDC, but not to the
one who is not a HDC.
FORGERY – counterfeit-making or fraudulent alteration
of a writing, and may consist in the signing of another’s
name or the alteration of an instrument in the name,
amount, description of a person and the like, with intent
SECTION 24. Presumption of consideration. –
thereby to defraud
Every negotiable instrument is deemed prima facie to
Two cases: have been issued for a valuable consideration; and
a. Where the signature on the instrument is affixed every person whose signature appears thereon to
by one who does not claim to act as an agent and have become a party thereto for value.
who has no authority to bind the person whose
signature he has forged;
b. Where the signature is affixed by one who Consideration – an inducement to a contract, that is, the
purports to be an agent but has no authority to cause, price or impelling influence which induces a
bind the alleged principal contracting party to enter into the contract

The signature is wholly inoperative and so no right can be NI must have consideration or cause
acquired through the forged signature
- not the entire instrument Presumption: it has been issued for a valuable
consideration and that every person who signature
Proof of forgery: proven clearly and convincingly appears thereon has become a party thereto for value

GENERAL RULE: No right or title can be acquired to a

negotiable instrument through or under forged or
unauthorized signature SECTION 25. Value, what constitutes. —
Value is any consideration sufficient to support a
Exceptions: simple contract. An antecedent or pre-existing debt
1. If the party against whom it is sought to enforce constitutes value; and is deemed such whether the
such right is precluded from setting up the forgery instrument is payable on demand or at a future time.
or want of authority
2. Where the forged signature is not necessary to
the holder’s title in which case the forgery may be Value – valuable consideration
Valuable consideration – may in general terms be said
Persons precluded from setting up the defense of forgery: to be consist either in some right, interest, profit or benefit
a. Those who by their acts, silence, or negligence, accruing to the party who makes the contract, or some
are estopped from setting up the defense of forbearance, detriment, loss, responsibility, act, labor or
forgery service.
b. Those who warrant or admit the genuineness of
the signatures in question Sufficient if the consideration was a benefit conferred
i. indorsers upon a third person or a detriment suffered by the promise
ii. acceptors
iii. persons negotiating by delivery Consideration – any prestation sufficient to support any
contract in favor of the party to an instrument
As between equally innocent persons, the drawee who
pays money on a check or draft the signature on which Antecedent or pre-existing debt
SECTION 26. What constitutes holder for value. – purportedly by its cashiers were forgeries. The drawers of
Where value has at any time been given for the the checks demanded reimbursement from the drawee-
instrument, the holder is deemed a holder for value in banks, who in turn demanded from BPI. BPI thus debited
the value of the checks against petitioner's current
respect to all parties who become such prior to that
account and forwarded to the latter the checks containing
time. the forged indorsements which petitioner refused to

Holder for value – one who has given a valuable ISSUE: WON BPI had the right to debit from petitioner's
consideration for the instrument issued or negotiated to current account the value of the checks with the forged
him indorsements?

HELD: Yes. BPI acted within legal bounds when it debited

the petitioner's account. When the petitioner deposited
SECTION 27. When lien on instrument constitutes the checks with the respondent, the nature of the
holder for value. — relationship created at that stage was one of agency, that
Where the holder has a lien on the instrument arising is, the bank was to collect from the drawees of the checks
either from contract or by implication of law, he is the corresponding proceeds. It is true that the respondent
deemed a holder for value to the extent of his lien. had already collected the proceeds of the checks when it
debited the petitioner's account, so that following the rule
in Gullas vs. Philippine National Bank 2 it might be argued
that the relationship between the parties had become that
of creditor and debtor as to preclude the respondent from
SECTION 28. Effect of want of consideration. –
using the petitioner's funds to make payments not
Absence or failure of consideration is a matter of
authorized by the latter. It is our view nonetheless that no
defense as against any person not a holder in due
creditor-debtor relationship was created between the
course; and partial failure of consideration is a
parties. Since the indorsements were forgeries, they are
defense pro tanto, whether the failure is an
inoperative, the payment made by the drawee banks
ascertained and liquidated amount or otherwise.
therefore is inoperative and relationship of a creditor and
debtor was not created. Having indorsed the checks to
respondent bank, petitioner is deemed to have given the
Absence of consideration – a total lack of any valid
warranty prescribed in Section 66 of the NIL that every
consideration for the contract, in consequence of which
single one of those checks "is genuine and in all respects
the alleged contract must fail
what it purports to be." BPI, being the collecting bank is
liable to the drawee banks when it submitted the checks
Failure of consideration – failure or refusal of one of the
for clearing. The petitioner was, moreover, grossly
parties to do, perform, or comply with the consideration
recreant in accepting the checks in question from
Ramirez. It could not have escaped the attention of the
petitioner that the payee of all the checks was a
corporation — the Inter- Island Gas Service, Inc. Yet, the
petitioner cashed these checks to a mere individual who
was admittedly a habitue at its jai-alai games without
DOCTRINE: The collecting bank which endorsed the
checks to the drawee-bank for clearing, should be liable
to the latter for reimbursement because the endorsement
of the checks had been forged prior to delivery. The
payments made by the drawee-bank to the collecting
bank on account of the forged checks were ineffective
because the creditor-debtor relationship between the
depositor and the collecting bank had not been validly

FACTS: Petitioner deposited 10 checks in its current

account with BPI which were acquired from Antonio
Ramirez, a regular jai-alai bettor and a sales agent of the
Inter-Island Gas. All the checks were payable to Inter-
Island Gas Service, Inc. or order. After the checks had
been submitted to Inter-bank clearing, Inter-Island Gas
discovered that all the indorsements made on the checks
REPUBLIC BANK VS. EBRADA plaintiff Bank for payment. Indorsers own credulity or
DOCTRINE: It is only the negotiation predicated on the recklessness or misplaced confidence was the sole cause
forged instrument that should be declared inoperative. of the loss. Why should he be permitted to shift the loss
The negotiation of the check in question between the due to his own fault in assuming the risk, upon the
parties after the immediate parties to the forgery should drawee, simply because of the accidental circumstance
be considered valid and enforceable, barring any claim of that the drawee afterwards failed to detect the forgery
forgery. when the check was presented for payment.

FACTS: This is a case of what appeared to be an indorsed

check by one Martin Lorenzo who turned out to be dead MWSS VS. CA
since 1952. The forged signature of the deceased DOCTRINE: Petitioner MWSS was guilty of gross
appeared at the dorsal portion of the check indorsed in negligence in the printing of its personalized checks. The
favor of one Ramon Lorenzo. From Ramon Lorenzo the drawee-bank PNB cannot be faulted for not having
same was indorsed to one Delia Dominguez and then detected the fraudulent encashment of the checks
from Dominguez to herein respondent Ebrada. because the printing of MWSS’s personalized checks was
Subsequently, Ebrada encashed the same in 1963 at not done under its supervision and control. MWSS was in
herein petitioner Republic Bank's main office in Escolta. a better position to detect and prevent the fraudulent
Upon informing petitioner Republic Bank, however, that encashment.
the payee's (Lorenzo) indorsement was a forgery, the
Bureau of Treasury requested the Bank to refund them FACTS: 23 checks were deposited by the payees Dizon,
the amount given to Ebrada. The Bank sued Ebrada upon Sison and Mendoza in their respective current accounts
the latter’s refusal to return the money of the forged check. with the PCIB and PBC. Thru the Central Bank Clearing,
these checks were presented for payment by PBC and
ISSUE: WON Ebrada is liable to return the money paid to PCIB to the defendant PNB, and were paid. At the time of
him by Republic Bank subject of a forged check and may their presentation to PNB, these checks bear the standard
the petitioner recover the proceeds given? indorsement which reads 'all prior indorsement and/or
lack of endorsement guaranteed.' Subsequent
HELD: It is clear from the provision of Section 23 of the investigation however, conducted by the NBI showed that
NIL that where the signature on a negotiable instrument if Raul Dizon, Arturo Sison and Antonio Mendoza were all
forged, the negotiation of the check is without force or fictitious persons. NWSA addressed a letter to PNB
effect. But does this mean that the existence of one forged requesting the immediate restoration to its Account No. 6,
signature therein will render void all the other negotiations of the total sum of P3,457,903.00 corresponding to the
of the check with respect to the other parties whose total amount of these twenty-three (23) checks claimed by
signature are genuine? No. Applying the principle of NWSA to be forged and/or spurious checks.
Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, it can be
safely concluded that it is only the negotiation predicated ISSUE: WON THE DRAWEE BANK WAS LIABLE FOR
on the forged indorsement that should be declared THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE
inoperative. This means that the negotiation of the check INSTRUMENTS LAW?
in question from Martin Lorenzo, the original payee, to
Ramon R. Lorenzo, the 2nd indorser, should be declared HELD: The NBI does not declare or prove that the
of no effect, but the negotiation of the aforesaid check signatures appearing on the questioned checks are
from Ramon R. Lorenzo to Adelaida Dominguez, the 3rd forgeries. These reports did not touch on the inherent
indorser, and from Adelaida Dominguez to the defendant- qualities of the signatures which are indispensable in the
appellant who did not know of the forgery, should be determination of the existence of forgery. There must be
considered valid and enforceable, barring any claim of conclusive findings that there is a variance in the inherent
forgery. Being the last indorser, however, Ebrada characteristics of the signatures and that they were
warrants that she has good title to the check subject of written by two or more different persons. Forgery cannot
this action. The petitioner, drawee of the check can be presumed. It must be established by clear, positive,
recover from the holder [Ebrada] the money paid to the and convincing evidence. This was not done in the
latter on a forged instrument. It is not supposed to be its present case. Even if the twenty-three (23) checks in
duty to ascertain whether the signatures of the payee or question are considered forgeries, considering the
indorsers are genuine or not. This is because the indorser petitioner's gross negligence, it is barred from setting up
is supposed to warrant to the drawee that the signatures the defense of forgery under Section 23 of the Negotiable
of the payee and previous indorsers are genuine, Instruments Law. One factor which facilitates this fraud
warranty not extending only to holders in due course. was the delay in the reconciliation of bank (PNB)
Ebrada, upon receiving the check in question from statements with the NAWASA bank accounts. The
Dominguez, was duty-bound to ascertain whether the records likewise show that the petitioner failed to provide
check in question was genuine before presenting it to appropriate security measures over its own records


thereby laying confidential records open to unauthorized clearing items." No doubt transactions on non-negotiable
persons. We cannot fault the respondent drawee Bank for checks are within the ambit of its jurisdiction. The term
not having detected the fraudulent encashment of the check as used in the said Articles of Incorporation of
checks because the printing of the petitioner's PCHC can only connote checks in general use in
personalized checks was not done under the supervision commercial and business activities. It cannot be
and control of the Bank. Under the circumstances, conceived to be limited to negotiable checks only. Checks
therefore, the petitioner was in a better position to detect are used between banks and bankers and their
and prevent the fraudulent encashment of its checks. customers, and are designed to facilitate banking
operations. It is of the essence to be payable on demand,
because the contract between the banker and the
BANCO DE ORO SAVINGS VS. EQUITABLE BANKING customer is that the money is needed on demand.
CORP. Further, the participation of the two banks, petitioner and
DOCTRINE: Having stamped its guarantee of ‘all prior private respondent, in the clearing operations of PCHC is
endorsements and/or lack of endorsements’, the a manifestation of their submission to its jurisdiction.
collecting bank is estopped from claiming otherwise.
Whenever any bank treats the signature at the back of the ISSUE 2: How does principle of estoppel apply?
check as an endorsement, and thus guarantees the
same, it is liable. The drawer cannot be held liable for the HELD: Petitioner is estopped from raising the defense of
negligence of the collecting bank. There is no privity nonnegotiability of the checks in question. It stamped its
between the drawer and the collecting bank. guarantee on the back of the checks and subsequently
presented these checks for clearing and it was on the
FACTS: Manager's checks (Checks) having an aggregate basis of these endorsements by the petitioner that the
amount of P45,982.23 and payable to certain member proceeds were credited in its clearing account. The
establishments of Visa Card. Subsequently, the Checks principle of estoppel effectively prevents the defendant
were deposited with the defendant (respondent Equitable) from denying liability for any damages sustained by the
to the credit of its depositor (Aida Trencio’s account). plaintiff which, relying upon an action or declaration of the
Following normal procedures, and after stamping at the defendant, paid on the Checks. The same principle of
back of the Checks the usual endorsements (All prior estoppel effectively prevents the defendant from denying
and/or lack of endorsement guaranteed), Equitable sent the existence of the Checks. The petitioner by its own acts
the checks for clearing through the Philippine Clearing and representation cannot now deny liability because it
House Corporation (PCHC). Accordingly, BDO paid the assumed the liabilities of an endorser by stamping its
Checks; its clearing account was debited for the value of guarantee at the back of the checks. The petitioner having
the Checks and defendant's clearing account was stamped its guarantee of "all prior endorsements and/or
credited for the same amount. Thereafter, BDO lack of endorsements" (Exh. A-2 to F-2) is now estopped
discovered that the endorsements appearing at the back from claiming that the checks under consideration are not
of the Checks, purporting to be that of the payees, were negotiable instruments. The checks were accepted for
forged and/or unauthorized or otherwise belong to deposit by the petitioner stamping thereon its guarantee,
persons other than the payees. Pursuant to the PCHC in order that it can clear the said checks with the
Clearing Rules and Regulations, it presented the Checks respondent bank. By such deliberate and positive attitude
directly to Equitable for the purpose of claiming of the petitioner it has for all legal intents and purposes
reimbursement from the latter. However, Equitable treated the said cheeks as negotiable instruments and
refused to do so. After an exhaustive investigation and accordingly assumed the warranty of the endorser when
hearing, the Arbiter rendered a decision in favor of BDO it stamped its guarantee of prior endorsements at the back
and against Equitable ordering the PCHC to debit the of the checks. It led the said respondent to believe that it
clearing account of the defendant (E), and to credit the was acting as endorser of the checks and on the strength
clearing account of the plaintiff (B) of the foregoing of this guarantee said respondent cleared the checks in
amount with interest at the rate of 12% per annum from question and credited the account of the petitioner.
date of the complaint. The Board of Directors of the PCHC Petitioner is now barred from taking an opposite posture
affirmed the decision of the Arbiter. Hence this petition. by claiming that the disputed checks are not negotiable
ISSUE 1: Were the subject checks nonnegotiable and if
not, does it fall under the ambit of the power of the PCHC?
OR Does the PCHC has jurisdiction over the controversy
involved in view of petitioner’s claim that the subject
matter of the case (the Checks) was not negotiable.

HELD: Yes. As provided in the articles of incorporation of

PCHC, its operation extend to "clearing checks and other


DOCTRINE: As a rule, a drawee bank who has paid a DOCTRINE: The drawee-bank cannot debit the account
check on which an endorsement has been forged cannot of the drawer because it paid checks which bore forged
charge the drawer’s account for the amount of said check. endorsements. However, if the drawer was negligent to
An exception to the rule is where the drawer is guilty of the point of contributing substantially to the loss, then the
such negligence which causes the bank to honor such a drawee-bank can charge the drawer’s account. If both the
check or checks. drawee- bank and the drawer were negligent, the loss
should be apportioned between them
FACTS: Natividad Gempesaw issued checks, prepared
by her bookkeeper, a total of 82 checks in favor of several ISSUE: WON Private Respondent Merle Reyes, doing
supplies. Most of the checks for amounts in excess of business under the name and style Melissa’s RWT, has a
actual obligations as shown in their corresponding cause of action against petitioners Associated Bank and
invoices. It was only after the lapse of more than 2 years Conrado Cruz for their encashment and payment to
did she discovered the fraudulent manipulations of her another person of certain crossed checks issued in her
bookkeeper. It was also learned that the indorsements of favor?
the payee were forged, and the checks were brought to
the chief accountant of Philippine Bank of Commerce (the HELD: Yes. Under accepted banking practice, crossing a
Drawee Bank, Buendia Branch) who deposited them in check is done by writing two parallel lines diagonally on
the accounts of Alfredo Romero and Benito Lam. the left top portion of the checks. The crossing is special
Gempesaw made demand upon the bank to credit the where the name of a bank or a business institution is
amount charged due the checks. The bank refused. written between the two parallel lines, which means that
Hence, the present action. the drawee should pay only with the intervention of that
company. The crossing is general where the words
ISSUE: Who shall bear the loss resulting from the forged written between the two parallel lines are "and Co." or "for
indorsements? payee's account only," as in the case at bar. This means
that the drawee bank should not encash the check but
HELD: As a rule, a drawee bank who has paid a check on merely accept it for deposit. In State Investment House
which an indorsement has been forged cannot charge the Inc vs. IAC (supra, p. 19), the Court declared the effects
drawer’s account for the amount of said check. An of crossing a check. The effects therefore of crossing a
exception to the rule is where the drawer is guilty of such check relate to the mode of its presentment for payment.
negligence which causes the bank to honor such checks. Under Sec. 72 of the Negotiable Instruments Law,
Gempesaw did not exercise prudence in taking steps that presentment for payment, to be sufficient, must be made
a careful and prudent businessman would take in by the holder or by some person authorized to receive
circumstances to discover discrepancies in her account. payment on his behalf. Who the holder or authorized
Her negligence was the proximate cause of her loss, and person is depends on the instruction stated on the face of
under Section 23 of the Negotiable Instruments Law, is the check. The six checks in the case at bar had been
precluded from using forgery as a defense. On the other crossed and issued "for payee's account only." This could
hand, the banking rule banning acceptance of checks for only signify that the drawers had intended the same for
deposit or cash payment with more than one indorsement deposit only by the person indicated, to wit, Melissa's
unless cleared by some bank officials, does not invalidate RTW. There being no evidence that the crossed checks
the instrument; neither does it invalidate the negotiation were actually received by the private respondent, she
or transfer of said checks. The only kind of indorsement would have a right of action against the drawer
which stops the further negotiation of an instrument is a companies, which in turn could go against their respective
restrictive indorsement which prohibits the further drawee banks, which in turn could sue the herein
negotiation thereof, pursuant to Section 36 of the petitioner as collecting bank. In a similar situation, it was
Negotiable Instruments Law. In light of any case not held that, to simplify proceedings, the payee of the illegally
provided for in the Act that is to be governed by the encashed checks should be allowed to recover directly
provisions of existing legislation, pursuant to Section 196 from the bank responsible for such encashment
of the Negotiable Instruments Law, the bank may be held regardless of whether or not the checks were actually
liable for damages in accordance with Article 1170 of the delivered to the payee.
Civil Code. The drawee bank, in its failure to discover the
fraud committed by its employee and in contravention
banking rules in allowing a chief accountant to deposit the
checks bearing second indorsements, was adjudged
liable to share the loss with Gempesaw on a 50:50 ratio.


MBTC v. FiRST NATIONAL BANK account. The trial court decided in favor of Ford. In this
DOCTRINE: The failure of FNCB as drawee-bank to petition, PCIB claims that the action of Ford had
inform the collecting bank, Metrobank, about the prescribed because of its inability to seek judicial relief
alteration of in question until after the lapse of 9 days seasonably, considering that the alleged negligent act
negates whatever right it might have had against took place prior to December 19, 1977 but the relief was
Metrobank in the light of Central Bank Circular No.9, as sought only in 1983, or seven years thereafter.
amended by Circular No.138, which requires all items
cleared on a particular clearing to be returned not later ISSUE: WON Ford’s cause of action has prescribed,
than 3:30PM on the following business day. While it is true hence, cannot recover anymore from PCIB?
that Metrobank endorsed the check, such an
endorsement must be read together with the 24-hour rule HELD: The statute of limitations begins to run when the
on Clearing House Operations of the Central Bank bank gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged
drawer as a voucher with a statement of his account. An
REPUBLIC BANK V. CA action upon a check is ordinarily governed by the statutory
DOCTRINE: It is true that when an endorsement is forged, period applicable to instruments in writing. Our laws on
the collecting bank or last endorser, as a general rule, the matter provide that the action upon a written contract
bears the loss. But the unqualified endorsement of the must be brought within ten years from the time the right of
collecting bank should be read together with the 24-hour action accrues. Hence, the reckoning time for the
rule on clearing house regulations. When the drawee prescriptive period begins when the instrument was
bank fails to return a forged or altered check to the issued and the corresponding check was returned by the
collecting bank within the 24- hour clearing period, the bank to its depositor. Applying the same rule, the cause
collecting bank is absolved from liability. of action for the recovery of the proceeds of Citibank
would normally be a month after December 19, 1977,
when Citibank paid the face value of the check in the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK amount of P4,746,114.41. Since the original complaint for
VS. CA the cause of action was filed on January 20, 1984, barely
DOCTRINE: The mere fact that the forgery was six years had lapsed. Thus, Ford's cause of action to
committed by a drawer-payor’s confidential employee or recover the amount was seasonably filed within the period
agent, who by virtue of his position had unusual facilities provided by law. Hence, PCIB was declared solely
for perpetrating the fraud and imposing the forged paper responsible for the loss of the proceeds of Citibank in the
upon the bank, does not entitle the bank to shift the loss amount P4,746,114.41, which shall be paid together with
to the drawer-payor, in the absence of circumstances 6% interest thereon to Ford from the date when the
raising estoppel against the drawer. original complaint was filed until said amount is fully paid.
A bank is liable for the fraudulent acts or representations
of an office or agent acting within the scope of his
employment or authority. But in this case, responsibility ILUSTRIO V. CA
for negligence does not lie on the collecting bank’s DOCTRINE: It is a rule that when a signature is forged or
shoulders alone. Citibank, as drawee-bank was likewise made without the authority of the person whose signature
negligent, and must also answer for the damages suffered is forged or made without the authority of the person
by the drawer because of the contractual relationship whose signature it purports to be, the check is wholly
between it and the latter. Thus, invoking the doctrine of inoperative. However, the rule does provide for an
comparative negligence, both PCI and Citibank are exception, namely: ‘unless the party against whom it is
equally liable. sought to enforce such right is precluded from setting up
the forgery or want of authority.’ In the instant case, it is
FACTS: Ford Philippines filed actions to recover from the the exception that applies. Petitioner is precluded from
drawee bank Citibank and collecting bank PCIB the value setting up the forgery, assuming there is forgery, due to
of several checks payable to the Commissioner of Internal his own negligence in entrusting to his secretary his credit
Revenue as payment of percentage or manufacturer's cards and checkbook including the verification of his
sales taxes. What prompted this action was the drawing statements of account
of a check by Ford, which it deposited to PCIB as payment
and was debited from their Citibank account. It was later
on found out that the payment wasn’t received by the
Commissioner. Meanwhile, according to the NBI report,
one of the checks issued by Ford was withdrawn from
PCIB for alleged mistake in the amount to be paid. This
was replaced with manager’s check by PCIB, which were
allegedly stolen by a syndicate and deposited in their own


SAMSUNG CONSTRUCTION VS. FAR EAST BANK yet the bank is liable to the depositor if it pays the check.
DOCTRINE: The bare fact that the forgery was committed The Court recognize that Section 23 of the Negotiable
by an employee of the party whose signature was forged Instruments Law bars a party from setting up the defense
cannot necessarily imply that such party’s negligence was of forgery if it is guilty of negligence. Yet, we are unable
the cause of the forgery. Employers do not possess the to conclude that Samsung Construction was guilty of
preternatural gift of cognition as to the evil that may lurk negligence in this case. The appellate court failed to
within the hearts and minds of their employees. explain precisely how the Korean accountant was
negligent or how more care and prudence on his part
FACTS: Petitioner maintained a current account with would have prevented the forgery. We cannot sustain this
respondent bank. The sole signatory to petitioner’s "tar and feathering" resorted to without any basis. When
account was Jong Kyu Lee ("Jong"), its Project Manager, the bank receives the deposit, it impliedly agrees to pay
while the checks remained in the custody of the ONLY UPON THE DEPOSITOR’S ORDER. When the
company’s accountant, Kyu Yong Lee ("Kyu"). A certain Bank pays a check, on which the depositor’s signature is
Roberto Gonzaga presented for payment FEBTC Check a forgery, it has failed to comply with its contract in this
to the bank. The check, payable to cash and drawn respect.
against Samsung Construction’s current account, was in
the amount of P999, 500.00. After the bank teller
ascertained that there were enough funds to cover the
check and compared the signature as contained in the
specimen signature, the bank teller forwarded the check
with two other bank branch officers, who counterchecked
the signature. One of the bank officers noticed Sempio,
the assistant accountant of Samsung Construction, was
also in the bank and when asked, Sempio vouched for the
genuineness of Jong’s signature. The following day, Kyu
examined the balance of the bank account and
discovered that a check amounting to P999, 500.00 had
been encashed. Aware that he had not prepared such a
check for Jong’s signature, Kyu perused the checkbook
and found that the last blank check was missing. He
reported the matter to Jong, who then proceeded to the
bank. Jong learned of the encashment of the check, and
realized that his signature had been forged. Samsung
Construction filed before the RTC against respondent
bank for violation of Section 23 of the Negotiable
Instruments Law who ruled in favor of Samsung
Construction while the CA reversed the RTC Decision and
absolved FEBTC from any liability. The Court of Appeals
invoked the ruling in PNB v. National City Bank of New
York that, if a loss, which must be borne by one or two
innocent persons, can be traced to the neglect or fault of
either, such loss would be borne by the negligent party,
even if innocent of intentional fraud. (equity principle).

ISSUE: WON Samsung Construction was precluded from

setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law?

HELD: No. On the premise that Jong’s signature was

indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such
liability attaches even if the bank exerts due diligence and
care in preventing such faulty discharge. Forgeries often
deceive the eye of the most cautious experts; and when a
bank has been so deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its
being deceived. The forgery may be so near like the
genuine as to defy detection by the depositor himself, and