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NEGOTIABLE INSTRUMENTS LAW 7. A HDC takes the NI 7. All defenses

(Act No. 2031) free from personal available to prior
defenses. parties may be raised
I. GENERAL CONCEPTS against the last
Negotiable Instrument (2005 Bar Exam) - a
written contract for the payment of money which Kinds of Negotiable Instruments: (2002 Bar
complies with the requirements of Sec. 1 of the Exam)
NIL, which by its form and on its face, is intended
as a substitute for money and passes from hand to 1. Promissory Note (PN) – an unconditional
hand as money, so as to give the holder in due promise in writing made by one person to
course (HDC) the right to hold the instrument free another, signed by the maker, engaging to pay
from defenses available to prior parties. (Reviewer on demand, or at a fixed or determinable
on Commercial Law, Sundiang and Aquino) future time, a sum certain in money to order or
to bearer (Sec. 184).
Functions of Negotiable Instrument:
1. Substitute for money 2. Bill of Exchange (BE) - an unconditional order
2. Medium of exchange in writing addressed by one person to another,
3. Credit instrument which increases credit signed by the person giving it, requiring the
circulation person to whom it is addressed to pay on
4. Increase purchasing medium in circulation demand or at a fixed or determinable future
5. Evidence of transaction time a sum certain in money to order or to
bearer (Sec. 126).
Two Distinctive Features/Characteristics of NI:
(2005 Bar Exam) 3. Check - a bill of exchange drawn on a bank
1. Negotiability - it is that attribute or property payable on demand (Sec. 185).
whereby a bill or note or check may pass from
hand to hand similar to money, so as to give Kinds:
the holder in due course the right to hold the • Manager’s / Cashier’s Check – drawn by a
instrument and to collect the sum payable for bank on itself and therefore, it is a primary
himself free from defenses. obligation of the bank.
o It is accepted in advance by the act of
2. Accumulation of Secondary Contracts - its issuance and is not subject to
secondary contracts are picked up and carried countermand by the payor after
along with Negotiable Instruments as they are indorsement.
negotiated from one person to another; or in o The bank’s manager signs manager’s
the course of negotiation of negotiable check while cashier’s check is signed
instruments, a series of juridical ties between by the bank cashier.
the parties thereto arise either by law or by • Memorandum Check – it is like an
privity. The indorsers become secondarily ordinary check except that the word
liable to the holder. “memorandum,” “mem” or “memo” is
written upon the face of the check,
Distinctions between Negotiable Instruments signifying that the drawer engages to pay
and Non-Negotiable Instruments the bona fide holder absolutely, and not
upon a condition to pay upon presentment
NEGOTIABLE NON-NEGOTIABLE at maturity and if due notice of the
INSTRUMENTS INSTRUMENTS presentment and non-payment should be
1. Must contain all 1. Does not contain all given. This check is not to be presented
requisites of Sec.1 requisites of Sec.1 for payment, but will be redeemed by the
2. Transferable by 2. Transferable by drawer himself.
negotiation and assignment only • Certified Check – one drawn by a
assignment depositor upon funds to his credit in a
bank which a proper officer of the bank
3. HDC can have 3. A transferee
certifies will be paid when duly presented
rights better than his acquires no better right
for payment
transferor than his transferor
• Traveler’s check – one upon which the
4. Prior parties warrant 4. Prior parties do not
holder’s signature must appear twice, one
payment. warrant payment but
to be affixed by him at the time it is issued
merely the legality of
and the second for counter-signature, to
his title
be affixed by him in the presence of the
5. Governed by NIL 5. NIL applies only by payee before it is paid, otherwise it is
analogy incomplete
6. Transferee can be a 6. Transferee is • Crossed check (1995, 1996, 2004, 2005
HDC. assignee only and Bar Exams) – when 2 parallel lines are
cannot be a HDC drawn across its face or across a corner
thereof. If the name of a bank appears
between the parallel lines, the check is
said to be specially crossed, and payment
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

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should be made only if presented by the 4. A holder of NI may 4. Intermediate parties

named bank. If no name appears between run after the are not secondarily
the parallel lines, the check is said to be secondary parties liable if the
generally crossed, and payment should be for payment if document is
made only upon presentment by some dishonored by the dishonored
bank. party primarily liable
• Effects of crossing a check:
a. That the check may not be PROMISSORY BILL OF EXCHANGE
encashed but only deposited in NOTE
the bank; 1.Unconditional 1.Unconditional order
b. That the check may be promise
negotiated only once to one who 2. Involves 2 parties 2.Involves 3 parties on
has an account with a bank; and on its face its face
c. That the act of crossing the check 3. Person who issues 3. Person who issues is
serves as a warning to the holder is the maker the drawer
that the check has been issued
4. Maker is primarily 4. Drawer is only
for a definite purpose so that he
liable secondarily liable
must inquire if he has received
5. Party primarily liable 5. Party primarily liable
the check pursuant to that
is the maker is the acceptor
• Stale check – one which has not been 6. One presentment 4. Could be two
presented for payment within a reasonable only: for payment presentments: for
time after its issue. acceptance and for
Iron Clad Rule: Prohibits the countermanding of
payment of certified checks (Republic of the When a BILL may be treated as a NOTE:
Philippines v. PNB. GR No. 16106. December 1, 1. Drawer and drawee are the same person.
1961). But the holder must be a HIDC (Mesina v. 2. Drawee is a fictitious person.
IAC, 145 SCRA 497) 3. Drawee has no capacity to contract.
4. When instrument is so ambiguous, the holder
Bills in Set: one composed of several parts, each may treat it either as a BILL or a NOTE.
part numbered and containing a reference to the
other parts, the whole of the parts constituting but BILLOF EXCHANGE CHECK
one bill. 1.Not necessarily 1.It is necessary that a
drawn on a deposit. check is drawn on a
Rights of holders where parts are negotiated The drawee need bank deposit. The
separately: not be a bank. drawee is always a
1. If both are HIDC, the holder whose title first bank.
accrues is considered the true owner of the 2.Death of a drawer 2.Death of the drawer
bill. of a BOE, with the of a check, with the
2. But the person who accepts or pays in due knowledge of the knowledge of the
course shall not be prejudiced. bank, does not bank, revokes the
revoke the authority authority of the banker
Obligations of holder who indorses 2 or more parts of the drawee to pay to pay
of the Bill in Set: 3. May be presented 3. Must be presented
1. The person shall be liable on every such part. for payment within a for payment within a
2. Every indorser subsequent to him is liable on reasonable time after reasonable time after
the part he has himself indorsed, as if such its last negotiation its issue.
parts were separate bills. because it may be
further negotiated
Distinctions between a Negotiable Instrument 4.May be payable on 4. Always payable on
and a Negotiable Document of Title (2005 Bar demand or at a fixed demand
Exam) or determinable
future time
NEGOTIABLE NEGOTIABLE 5. Presentment for 5. Need not be
INSTRUMENT DOCUMENT OF acceptance may be presented for
TITLE required (Sec. 143) acceptance
1. Subject is money 1. Subject is goods
2. Is itself the property 2. The document is a Other Forms of Negotiable Instruments
with value mere evidence of 1. Certificate of deposit issued by banks, payable
title – the things of to the depositor or his order, or to bearer
value being the 2. Trade acceptance
goods mentioned in 3. Bonds, which are in the nature of promissory
the document notes
3. Has all the requisites 3. Does not have 4. Drafts, which are bills of exchange drawn by
of Sec. 1 of NIL these requisites one bank upon another
! All of these must comply with Sec. 1, NIL

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

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Note: Postal Money Order, Treasury Warrant, II. NEGOTIABILITY

Certificate of Stock, Letter of Credit, Bill of Lading
and Warehouse Receipts are not negotiable Requisites of Negotiability (Sec. 1, NIL) (1996
instruments. Bar Exam)
a. It must be in writing and signed by the maker
Legal Tender or drawer;
That kind of money that the law compels a creditor b. Must contain an unconditional promise or
to accept in payment of a debt when tendered by order to pay a sum certain in money;
the debtor in the right amount. Under Sec. 52 of c. Must be payable on demand, or at a fixed or
RA 7653, all notes and coins issued by the BSP determinable future time;
shall be legal tender in the Philippines. d. Must be payable to order or to bearer; and
e. Where the instrument is addressed to a
Legal Tender Power of: drawee, he must be named or otherwise
Notes – no limit as to amount indicated therein with reasonable certainty.
Coins – Note: Do not be confused with the word “order”
a. P1, P5 and P10 – up to P1,000 under “b” and “d”
b. P0.25 and below – up to P100
(BSP Circular No. 537, Series of 2006) 1. Must be in writing, signed by the maker or
Note: A negotiable instrument (including check) - Otherwise it cannot be a substitute for money.
although intended to be a substitute for money, is - Signature may be in any form like initial or
not legal tender. mark. No particular location.

SEC. 60. Legal Character. _ Checks representing 2. Must contain an unconditional promise or order
demand deposits do not have legal tender power to pay a sum certain in money;
and their acceptance in the payment of debts, both
public and private, is at the option of the creditor: Certainty of sum payable
Provided, however, That a check which has been The sum payable is a sum certain although it is to
cleared and credited to the account of the creditor be paid:
shall be equivalent to a delivery to the creditor of a. With interest; or
cash in an amount equal to the amount credited to b. By stated installments; or
his account. (RA 7653) c. By stated installments, with a provision
that, upon default in payment of any
Incidents in “Life” of Negotiable Instrument installment or of interest, the whole shall
1. Preparation and signing become due; or
2. Issue d. With exchange, whether at a fixed rate or
3. Negotiation at the current rate; or
4. Presentment for acceptance, in certain kinds e. With costs of collection or an attorney's
of bills of exchange fee, in case payment shall not be made at
5. Acceptance maturity. (sec. 2)
6. Dishonor by non-acceptance
7. Presentment for payment " Interest stipulated but not specified – legal
8. Dishonor by non-payment interest.
9. Notice of dishonor " Interest not stipulated – legal interest will be
10. Protest, in some cases paid when the debtor incurs in delay (Art.
11. Discharge 2209, NCC)
" Interest due shall earn legal interest from the
Issue - the first delivery of the instrument, time it is judicially demanded (Art. 2212, NCC)
complete in form, to a person who takes it as a
holder. Note: NI need not be payable in legal tender.

Delivery - transfer of possession, actual or When promise or order unconditional

constructive, from one person to another An unqualified order or promise to pay is
unconditional though coupled with:
Holder – refers to the: a. An indication of a particular fund out of
a. If ORDER instrument - The payee or which reimbursement is to be made or a
indorsee of a bill or note who is in particular account to be debited with the
possession of it, or amount; or
b. If BEARER instrument - The bearer b. A statement of the transaction which gives
thereof (sec.191) rise to the instrument.

Bearer - the person in possession of a bill or note " Mere acknowledgment insufficient.
which is payable to bearer. " An order or promise to pay out of a particular
fund is not unconditional because, in effect, it
is subject to the condition that the fund is

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

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FUND FOR PARTICULAR FUND b. Maker shall supply additional collateral in

REIMBURSEMENT FOR PAYMENT case of depreciation of the value of the
1. Drawee pays the 1. There is only one original deposit, and upon default, the
payee from his own act-the drawee note shall become due.
funds; afterwards, pays directly from c. Contains provisions for acceleration where
the drawee pays the particular fund holder deems himself insecure (Insecurity
himself from the indicated. Clause)
particular fund Payment is subject
indicated. to the condition Extension Clause
that the fund is - Clause in NI that extend the maturity dates. “An
sufficient. instrument is payable at a definite time if by its
2. Particular fund 2. Particular fund terms it is payable at a definite time subject to
indicated is NOT the indicated is the extension at the option of the holder, or to
direct source of direct source of extension to a further definite time at the option of
payment but only payment. the maker or acceptor or automatically upon or
the source of after a specified act or event.” (Subsection 3-
reimbursement. 109(1)(d) of the Uniform Commercial Code of the
United States; Aquino, Timoteo B., Notes and
Cases on Banking Law and Negotiable
3. Payable on demand or at a fixed or Instruments Law Vol. I, 2009, p. 50.)
determinable future time; - Different from Sec. 120(f)

Certainty of time of payment When payable on demand (Sec. 7):

An instrument is payable at a determinable future a. When it is so expressed to be payable on
time which is expressed to be payable: demand, or at sight, or on presentation; or
a. At a fixed period after date or sight; or b. In which no time for payment is
b. On or before a fixed or determinable future expressed.
time specified therein; or
c. On or at a fixed period after the occurrence of Note: Where an instrument is issued, accepted, or
a specified event which is certain to happen, indorsed when overdue, it is, as regards the
though the time of happening be uncertain. person so issuing, accepting, or indorsing it,
payable on demand.
" After sight means after the drawee has seen
the NI upon presentment for acceptance. 4. Payable to order or to bearer
" The event must necessarily happen. If
conditional, not negotiable. When payable to order (Sec. 8)
" An instrument payable upon a contingency is The instrument is drawn payable:
not negotiable, and the happening of the event a. To the order of a specified person or
does not cure the defect. (Sec. 4) b. To him or his order.
" A promise to pay “when able,” “as soon as I " The payee must be named or otherwise
can”, etc., without specification of an absolute indicated therein with reasonable certainty.
date is not negotiable. However, there is a " It may be drawn payable to the order of:
difference of opinion as to whether it is a a. A payee who is not maker, drawer, or
conditional promise or an absolute promise to drawee; or
pay at an unreasonable time: b. The drawer or maker; or
a. Under the first view, negotiability is c. The drawee; or
destroyed both by the condition and by d. Two or more payees jointly (“AND”); or
want of a fixed time for payment; e. One or some of several payees (“OR”); or
b. Under the second view, by the general f. The holder of an office for the time being.
principle that a promise to pay within a
reasonable time is not so certain as to When payable to bearer (Sec. 9)
render an instrument negotiable. a. When it is expressed to be so payable; or
b. When it is payable to a person named
Aftersight Draft - payable only after the expiration therein or bearer; or
of the stipulated period from acceptance (legal c. When it is payable to the order of a
sight). fictitious or non-existing person, and such
fact was known to the person making it so
Acceleration Notes payable; or
- provisions which make it possible for the maker d. When the name of the payee does not
to pay the NI at an earlier date or make it possible purport to be the name of any person; or
for the holder to require payment of the NI at an e. When the only or last indorsement is an
earlier date. indorsement in blank.
1st Class – On or before a certain date Fictitious Payee Rule
2nd Class – - If an actual, existing and living payee is not the
a. renders whole debt due and demandable intended recipient of the proceeds of the
upon failure of obligor to comply with check, the payee is considered a “fictitious”
certain conditions (Acceleration Clause) payee and the check is a bearer instrument.
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

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Hence, even if the signature of the payee was d. gives the holder an election to require
forged, the collecting bank and drawee bank something to be done in lieu of payment of
are relieved of liability. money.
- Theory: One cannot expect a fictitious payee
to indorse. Hence, the issuer must have ! Confession of judgment – a written
intended for the NI to be negotiated by mere statement signed by the defendant, setting
delivery. forth the basis of liability and authorizing the
- The loss falls on the drawer. entry of judgment thereon.
- Burden: The check is presumed to be an order ! Kinds of confession of judgment
instrument and it is up to the person making a. cognivit actionem – literally means “he has
the contrary allegation to prove otherwise. confessed action”. It is a written
(PNB v. Rodriguez, et al. G.R. No. 170325, 26 confession of action by the defendant
September 2008) acknowledging his indebtedness to the
- In the US, the rule is used to counteract the plaintiff after the action has been filed. It is
effect of forged indorsements on the right of given after the action is brought to save
the holder to enforce payment against the expenses.
drawer or maker. b. relicta verificationem – literally means “his
- The rule intends to remove the group of cases pleadings being abandoned.” It is
involving a dishonest employee from the confession of judgment by withdrawal of
tradition “forged indorsement doctrine” and the defense.
imposes the loss on the employer who hires
and fails to properly control the dishonest Note: However, warrants of attorney to confess
agent, rather than on banks which collect and judgment before action is begun, are not
pay checks with forged indorsement. authorized nor contemplated by our law. They are
- Bad Faith Exception: A showing of commercial void as against public policy because: [i] they
bad faith on the part of the drawee bank, or enlarge the field for fraud; [ii] the promisor
any transferee will work to strip it of this bargains away his right to a day in court; and [iii]
defense. the effect is to strikedown the right of appeal
accorded by statute. The NIL does not sanction
5. Identification of the drawee nor validated any provision otherwise illegal.
" Where the instrument is addressed to a
drawee (meaning in a bill of exchange), he Omissions and Provisions that do not affect
must be named or otherwise indicated with Negotiability (Sec. 6)
reasonable certainty. The holder must know to The validity and negotiable character of an
whom he should present it for acceptance instrument are not affected by the fact that:
and/or payment; otherwise, the purpose of a. it is not dated; or
negotiable instrument as a tool in commercial b. does not specify the value given, or that any
dealings will be greatly hampered. (Reviewer value had been given therefore; or
on Commercial Law, Sundiang and Aquino) c. does not specify the place where it is drawn or
the place where it is payable; or
" A bill may be addressed to more than one d. bears a seal; or
drawee jointly, whether they are partners or e. designates a particular kind of current money
not; but not to two or more drawees in the in which payment is to be made.
alternative or in succession. (Sec. 128)
" if it is not dated, the instrument will be
Factors that Determine Negotiability: considered to be dated as of the time it was
1. The whole instrument itself issued.
2. Only what appears on the face of the Cases where date is important:
instrument a. If necessary to fix the date of maturity of NI
3. Provisions of the NIL, Sec.1 b. If NI is payable on demand – to determine
W/N the NI was presented within a reasonable
Additional provisions not affecting period of time from issue/last negotiation
negotiability. c. If NI is interest bearing
General Rule: the instrument is non-negotiable if it
contains a promise or order to do any act in " consideration for the instrument is presumed.
addition to the payment of money. (Art. 154 NCC & Sec. 25 NIL)
Test: If the promise would give rise to a cause of " Sec. 73 specifies where presentment for
action for breach of contract if the additional act is payment should be made when the place of
not done, the instrument is not negotiable. payment is not specified
Exceptions: " In common law, a sealed instrument is not
a. authorizes the sale of collateral securities in negotiable & is governed contracts under seal
case the instrument be not paid at maturity;
b. authorizes a confession of judgment if the Rules of construction:
instrument be not paid at maturity; a. Where the sum payable is expressed in words
c. waives the benefit of any law intended for the and also in figures and there is a discrepancy
advantage or protection of the obligor; or between the two, the sum denoted by the
words is the sum payable; but if the words are

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

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ambiguous or uncertain, reference may be III. TRANSFER AND NEGOTIATION

had to the figures to fix the amount;
b. Where the instrument provides for the Types of transfers:
payment of interest, without specifying the 1. Assignment - transfer of title to the instrument,
date from which interest is to run, the interest with the assignee generally taking only such
runs from the date of the instrument, and if the title as his assignor has, subject to all
instrument is undated, from the issue thereof; defenses available against his assignor;
c. Where the instrument is not dated, it will be 2. Negotiation - transfer of a negotiable
considered to be dated as of the time it was instrument from one person to another made
issued; in such a manner as to constitute the
d. Where there is a conflict between the written transferee the holder thereof
and printed provisions of the instrument, the 3. By Operation of Law – such as by succession,
written provisions prevail; by insolvency.
e. Where the instrument is so ambiguous that
there is doubt whether it is a bill or note, the Distinctions between Negotiation and
holder may treat it as either at his election; Assignment
f. Where a signature is so placed upon the
instrument that it is not clear in what capacity NEGOTIATION ASSIGNMENT
the person making the same intended to sign, 1. Refers only to 1. Refers generally to
he is to be deemed an indorser; negotiable an ordinary
g. Where an instrument containing the word "I instruments; contract;
promise to pay" is signed by two or more 2. The transferee is a 2. The transferee is an
persons, they are deemed to be jointly and holder; assignee;
severally liable thereon. 3. A holder in due 3. An assignee is
course is subject subject to both real
Consideration only to real and personal
" Presumption of consideration. - every defenses; defenses;
negotiable instrument is deemed prima facie 4. A holder in due 4. Generally, an
to have been issued for a valuable course may acquire assignee merely
consideration; and every person whose a better right than steps into the shoes
signature appears thereon to have become a that of a prior party of the assignor;
party thereto for value. 5. A general indorser 5. An assignor does
" Value - any consideration sufficient to support warrants the not warrant the
a simple contract. An antecedent or pre- solvency of prior solvency of prior
existing debt constitutes value; and is deemed parties; parties unless
such whether the instrument is payable on expressly stipulated
demand or at a future time. or the insolvency is
" Holder for value – one who has given a known to him;
valuable consideration for the instrument 6. An indorser is not 6. An assignor is liable
issued or negotiated to him. liable unless there even without notice
be presentment and of dishonor;
• What constitutes holder for value: notice of dishonor;
where value has at any time been given 7. Negotiation is 7. Governed by Arts.
for the instrument, the holder is deemed a governed by the NIL. 1624 to 1635 (on
holder for value in respect to all parties assignment of
who become such prior to that time. credits) of the Civil
• where the holder has a lien on the Code.
instrument arising either from contract or
by implication of law, he is deemed a Methods of negotiation
holder for value to the extent of his lien. 1. Order Instrument –Indorsement AND Delivery.
2. Bearer Instrument – Delivery only.
" Effect of want of consideration: a matter of
defense as against any person not a holder in Indorsement - legal transaction effected by the
due course; and partial failure of consideration writing of one's own name at the:
is a defense pro tanto, whether the failure is a. back of the instrument or
an ascertained and liquidated amount or b. upon a paper (allonge) attached thereto.
otherwise. " General Rule: indorsement must be of the
entire instrument (but partial indorsement may
Absence of consideration – total lack of any constitute a valid assignment binding between
valid consideration for the contract is only a the parties).
personal defense. Exception: where instrument has been paid in
part, it may be indorsed as to the residue.
Failure of consideration – failure or refusal or
one party to do, perform or comply with the Negotiable: Pay to X AND Y; Pay to X OR Y
consideration agreed upon is also only a Not Negotiable: Pay to X P600 and to Y P400
personal defense.

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 6 of 19

" Kinds of indorsement: payment will hold the proceeds

a. Special - specifies the person to whom or subject to the right of the conditional
to whose order, the instrument is to be indorser.
payable (sec. 34) f. Absolute - one by which indorser binds
b. Blank - specifies no indorsee: himself to pay:
• Instrument is payable to bearer and i. upon no other condition than failure of
may be negotiated by delivery (sec. prior parties to do so; and
34) ii. upon due notice to him of such failure.
• May be converted to special g. Joint - indorsement of instrument payable
indorsement by writing over the to 2 or more persons; all must indorse in
signature of indorser in blank any order for the transaction to operate as a
contract consistent with character of negotiation.
indorsement. • Pay to X AND Y; Both must indorse
c. Restrictive - when the indorsement either: • Pay to X OR Y: any one
i. Prohibits further negotiation of the • Exceptions to the rule requiring joint
instrument; or indorsement:
ii. Constitutes the indorsee the agent of a. Where the payees or indorsees
the indorser; or are partners; and
iii. Vests the title in the indorsee in trust b. Where the payee or indorsee
for or to the use of some other indorsing has authority to indorse
persons. But mere absence of words for the others.
implying power to negotiate does not h. Irregular - a person who, not otherwise a
make an indorsement restrictive. party to an instrument, places thereon his
! All subsequent indorsees acquire only signature in blank before delivery.
the title of the first indorsee under the
restrictive indorsement. (sec. 37) " Rules on Indorsements:
d. Qualified - constitutes the indorser a mere
assignor of the title to the instrument. (sec. • Effect of transfer without indorsement:
38) a. transfer vests in the transferee such title
• made by adding to the indorser's as the transferor had therein (assignment),
signature words like "sans recourse,” and
“without recourse", "indorser not b. the right to have the indorsement of the
holden", "at the indorser's own risk", transferor.
etc. # For the purpose of determining
• The purpose of this kind of whether the transferee is a holder in
indorsement is to transfer title without due course, the negotiation takes
guaranteeing payment by the primary effect as of the time when the
party. indorsement is actually made.
• It does not mean, however, that the # Applicable only to order instruments
qualified indorser incurs no liability at
all. The effect is merely to limit his • Indorsement of a bearer instrument: where an
liability. He is liable for breach of is instrument, payable to bearer, is indorsed
warranties as an indorser under Sec. specially, it may nevertheless be further
65. Thus, he is liable if the instrument negotiated by delivery; but the person
is dishonored by NON-ACCEPTANCE indorsing specially is liable as indorser to only
or NON-PAYMENT due to: such holders as make title through his
a. forgery; indorsement.
b. lack of good title to the instrument Note: The rule only applies to originally bearer
indorsed; instruments. If it is originally a BEARER
c. lack of capacity to contract on the instrument, it will always be a BEARER
part of prior parties; or instrument. As opposed to an original order
d. the fact that the instrument was instrument becoming payable to bearer, if the
valueless or not valid at the time same is indorsed specially, it can NO
of the indorsement which fact was LONGER be negotiated further by mere
known to him. delivery, it has to be indorsed.
e. Conditional - right of the indorsee is made
to depend on the happening of a • Striking out indorsements: the holder may
contingent event at any time strike out any indorsement,
• Party required to pay may disregard which is not necessary to his title. The
the conditions. indorser whose indorsement is struck out
• This kind of indorsement has no effect and all indorsers subsequent to him, are
on the further negotiation of the thereby relieved from liability on the
instrument. The party required to pay, instrument.
if he chooses, may make payment, # If the instrument is payable to bearer on its
disregarding the condition without face, then whether or not there are
incurring any liability because he is indorsements on the back of the
expressly authorized to do so under instrument would be immaterial to the title
Sec. 39. But the person who received of the bearer, who is presumptively the
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 7 of 19

owner and holder by his mere possession a. actual knowledge of the infirmity or
of such instrument. None of the defect, or
indorsement would be necessary to it’s b. knowledge of such facts that his
title since mere delivery would have been action in taking the instrument
sufficient to transfer title from one holder amounted to bad faith. (sec. 56)
to another. " Notice before full amount is paid - where
# Where the instrument is payable to order the transferee receives notice of any infirmity
on its face, the situation is different. First, in the instrument or defect in the title of the
the indorsement of a special indorsee is person negotiating the same before he has
necessary for the further negotiation of the paid the full amount agreed to be paid, he will
instrument. Second, the last indorsement be deemed a holder in due course only to the
controls the method of further negotiation. extent of the amount paid by him.
• When prior party (reacquirer) may negotiate: " When person not deemed a holder in due
where an instrument is negotiated back to a course - where an instrument payable on
prior party, such party may reissue and further demand is negotiated on an unreasonable
negotiate the same. But he is not entitled to length of time after its issue, the holder is not
enforce payment thereof against any deemed a holder in due course.
intervening party to whom he was personally • Reasonable time, what constitutes. -
liable. regard is to be had to the
# In the following cases, a prior party cannot a. nature of the instrument,
further negotiate the instrument: b. the usage of trade or business
1. Where it is payable to the order of a with respect to such instruments,
third person, and has been paid by the and the
drawer; c. facts of the particular case.
2. Where it was made or accepted for • Effect: in the hands of any holder other
accommodation and has been paid by than a holder in due course, a negotiable
the party accommodated; instrument is subject to the same
3. In other cases, where the instrument defenses as if it were non-negotiable
is discharged when acquired by a
prior party. " General Rule: every HOLDER is deemed
prima facie to be a holder in due course. But
IV. HOLDERS holder must prove first that he is a holder.
Exception: when it is shown that the title of
Classes of holders: any person who has negotiated the instrument
1. simple holder (sec. 51) was defective, the burden is on the holder to
2. holder for value (sec. 26) prove that he or some person under whom he
3. holder in due course (sec.52, 57) claims acquired the title as holder in due
course (shifting of burden of proof).
Holder in Due Course (1996, 1998, 2000 Bar Limitation: the last-mentioned rule does not
Exams) apply in favor of a party who became bound
A holder who has taken the instrument under the on the instrument prior to the acquisition of
following conditions: such defective title (Burden not Shifted) (Sec.
a. That it is complete and regular upon its face; 59).
b. That he became the holder of it before it was " Rights of a holder in due course:
overdue, and without notice that it has been a. he may sue on the instrument in his own
previously dishonored, if such was the fact; name;
c. That he took it in good faith and for value; b. he may receive payment and if payment is
d. That at the time it was negotiated to him, he in due course, the instrument is
had no notice of any infirmity in the instrument discharged.
or defect in the title of the person negotiating c. holds the instrument free from any defect
it. of title of prior parties,
" When title defective - The title of a person d. holds the instrument free from defenses
who negotiates an instrument is defective available to prior parties among
when he: themselves, and
I. obtained the instrument or any signature e. may enforce payment of the instrument for
thereto, by/for (manner of acquisition): the full amount thereof against all parties
a. fraud liable thereon.
b. duress, or force and fear
c. other unlawful means " Payment in due course is payment made:
d. illegal consideration a. at or after the maturity of the instrument
b. to the holder thereof
II. negotiates the NI (manner of negotiation) c. in good faith and without notice that his
e. in breach of faith title is defective.
f. under such circumstances amounting
to fraud. " Shelter Rule:
a. A HNIDC who derives his title from a
" What constitutes notice of defect. - The HIDC, AND
person to whom it is negotiated must have:
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 8 of 19

b. who is not himself a party to any fraud or “ARTICLE 4. Definition of Terms. — For
illegality affecting the instrument, has all purposes of this Act, the term:
the rights of such former holder in respect
of all parties prior to the latter. “xxx xxx xxx

" Rights of a Holder NOT in Due Course “n) ‘Consumer’ means a natural person who
1. He may sue on the instrument in his is a purchaser, lessee, recipient or prospective
own name; purchaser, lessor or recipient of consumer
2. He may receive payment and if the products, services or credit.
payment is in due course, the
instrument is discharged; “o) ‘Consumer credit’ means any credit
3. He is entitled to the instrument but extended by a creditor to a consumer for the sale
holds it subject to the same defenses or lease of any consumer product or service under
as if it were non-negotiable; and which part or all of the price or payment therefor is
4. He has all the rights of the holder in payable at some future time, whether in full or in
due course from whom he derived his installments.
title in respect of all parties prior to
such holder, provided he is not himself “xxx xxx xxx
a party to any fraud or illegality
affecting the instrument. “q) ‘Consumer products and services’ means
goods, services and credits, debts or obligations
Can a finance company be a HIDC? which are primarily for personal, family, household
or agricultural purposes, which shall include but
No – Consolidated Plywood & Industries, Inc. v. not limited to food, drugs, cosmetics, and devices.
IFC Leasing and Acceptance Corporation, 149
SCRA 448 (1987) “xxx xxx xxx

Yes – Juanita Salas v. CA, 181 SCRA 296 (1990) “s) "Consumer transaction" means (1) (i) a
sale, lease, assignment, award by chance, or
No – Great Asian Sales Center Corporation v. other disposition of consumer products, including
Court of Appeals, G.R. No. 105774, 25 April 2002 chattels that are intended to be affixed to land, or
(The SC said the solution is for FC to make the of services, or of any right, title, or interest therein,
consumer sign a separate contract and to enforce except securities as defined in the Securities Act
the obligation based on contract instead of the NI) and contracts of insurance under the Insurance
Code, or (ii) a grant of provision of credit to a
(Effectively) No – Art. 146, RA 7394 (Consumer consumer for purposes that are primarily personal,
Act, 1992), at least insofar as consumer loans are family, household or agricultural, or (2) a
concerned solicitation or promotion by a supplier with respect
to a transaction referred to in clause (1).”
“ARTICLE 146. Sale of Consumer
Products On Installment Payment. — In a V. LIABILITIES OF PARTIES
consumer credit sale other than one pursuant to
an open-end credit plan, the obligation of the Persons primarily liable on instrument: the
consumer to whom credit is being extended shall person who, by the terms of the instrument, is
be evidenced by a single instrument which shall absolutely required to pay the same. All other
include, in addition to the disclosures required by parties are "secondarily" liable.
this act, the signature of the seller and the person
to whom credit is extended, the date it was signed, LIABILITY WARRANTY
a description of the property sold and a description 1. Conditioned on 1. Not conditioned.
of any property transferred as a trade-in. The presentment &
instrument evidencing the credit shall contain a notice of dishonor.
clear and conspicuous typewritten notice to the
person to whom credit is being extended that: 2. Action accrues only 2. Action accrues
“a) he should not sign the instrument if it upon maturity/ once there is
contains any blank space; dishonor. breach.
“b) he is entitled to a reasonable return of the
precomputed finance charge if the balance is 1. Parties Primarily Liable
prepaid; and a. Maker (Sec. 60)
“c) he is entitled to an exact, true copy of the • engages to pay according to the tenor
agreement. of the instrument; and
“In cases where the instrument will be sold • admits the existence of the payee and
at a discount to a bank, financing company or his then capacity to indorse at the time
other lender, the said transferee shall be of the making of the note.
subject to all claims and defenses which the • A person placing his name on the face
debtor could assert against the seller of of a note is prima facie a maker and
consumer products obtained hereto or with the liable as such; and he is presumed to
proceeds thereof.” (emphasis supplied.) have acted with care and to have

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 9 of 19

signed the instrument with full makes the same warranties as an

knowledge of its contents. acceptor. It cannot, after certification,
question the genuineness of the
b. Acceptor (Sec. 62) drawer’s signature. If it discovers that
• engages to pay according to the tenor such signature is forged subsequent to
of his acceptance; certification but prior to payment, it
• admits: cannot refuse to pay on the check. If its
1. the existence of the drawer, discovery comes after it has paid the
2. the genuineness of his signature check, it cannot recover back what it
and paid on the ground of mistaken payment
3. his capacity and authority to draw unless the holder is guilty of fraud or
the instrument; and negligence.
4. the existence of the payee and his • If a drawee-bank accepts or pays a
then capacity to indorse. check despite a stop payment order
from the drawer, through oversight or
Important: The drawee is not liable to the otherwise, it cannot refuse to pay the
payee or holder until he accepts the holder or recover what has been paid;
instrument, or certifies the check (Secs. neither may it debit the drawer’s account
127 & 189). unless the acceptance or payment was
made prior to the receipt of the order.
Exception: In HSBC v. Catalan, 440 • The liabilities of an acceptor applies to a
SCRA 498 (2004), the Supreme Court drawee who pays without accepting the
ruled that although the payee may not sue instrument.
the drawee based on the check, the payee
may sue the drawee based on tort under 2. Parties Secondarily Liable
Art. 19 of the NCC. The payee may sue a. Drawer (Sec. 61)
for abuse of right so long as he can prove: • admits the existence of the payee and
(a) that there is a legal right or duty; (b) his capacity to indorse;
which is exercised in bad faith; and (c) for • engages that the instrument will be
the sole intent of prejudicing or injuring accepted or paid or both according to
another. According to the Supreme Court, its tenor; and
the allegations in Catalan’s amended • engages that if the instrument is
complaint warrant an action for tort, dishonored and proper proceedings
particularly: are brought, he will pay to the party
a. the unwarranted failure of the bank to entitled to be paid.
pay the checks despite the repeated
assurance of the drawer as to the b. General Indorser (Sec. 66)
authenticity of the checks and • Warrants:
frequent directives to pay the value 1. genuineness of the instrument;
thereof to Catalan; and 2. his good title to it;
b. the bank failed to inform the payee of 3. capacity to contract of prior
the reasons for its continued inaction parties; and
and non-payment. 4. instrument is valid and subsisting.
Note: The bank was not sued on the value • engages that the instrument will be
of the checks, but for how it acted in accepted or paid or both according to
relation to Catalan’s claim for payment. its tenor; and
• engages that if the instrument is
Original Tenor is altered before dishonored and proper proceedings
acceptance are taken, he will pay to the party
1st View: Altered tenor is tenor of entitled to be paid.
2nd View: Original tenor is tenor of c. Irregular Indorser – a person, not
acceptance. Acceptance is the otherwise a party to an instrument, places
signification by the drawee of his assent to his signature thereon in blank before
the order of the drawer. The order of the delivery.
drawer is the original tenor, not the altered Rules:
tenor. What “tenor of his acceptance” • If instrument payable to the order of a
means is whether the same is general or 3rd person, he is liable to the payee
qualified acceptance (Sec. 139). and subsequent parties.
• If instrument payable to order of
• Acceptor admits the genuineness of maker or drawer, he is liable to all
drawer’s signature, not indorsers’. parties subsequent to the maker or
• Where a check is certified by a bank, it drawer.
is equivalent to an acceptance. Since • If he signs for accommodation of the
certification is equivalent to acceptance, payee, he is liable to all parties
a bank which has certified a check subsequent to the payee.
whether at the request of the holder or
of a drawer, has the same liabilities and d. Acceptor for Honor
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 10 of 19

6. A person negotiating by delivery (as in the

GENERAL IRREGULAR case of a bearer instrument) is liable to his
INDORSER INDORSER immediate indorsee.
1. Makes either a 1. Always makes a 7. In the case of constructive acceptance
blank or special blank indorsement;
indorsement; Parties who are not liable although his signature
2. Indorses the 2. Indorses before its appear on the NI:
instrument after its delivery; 1. Persons covered by Sec. 15 (Incomplete and
delivery to the payee; undelivered NI)
3. Liable only to 3. Liable to the payee 2. Minor or incapacitated persons
parties subsequent to and subsequent 3. Agent
him parties unless he signs 4. Person whose signature was forged.
for the accommodation
of the payee in which Requisites for an Agent to escape liability:
case he is liable only 1. must be duly authorized;
to all parties 2. add words to his signature indicating that he
subsequent to the signs as an agent, that is, for or on behalf of a
payee. principal, or in a representative capacity; and
3. disclose his principal.
3. Parties with Limited Liability (sec. 65;
Metropol Financing v. Sambok, 120 SCRA " A signature by “procuration” operates as
864) notice that the agent has but a limited
c. Qualified Indorser - warrants that: authority to sign, and the principal is bound
# instrument is genuine and in all only in case the agent in so signing acted
respects what it purports to be; within the actual limits of his authority. (sec.
# he has good title to it; 21)
# all prior parties had capacity to " Indorsement or assignment of the NI by a
contract; corporation or by an infant passes the property
# he has no knowledge of any fact therein, notwithstanding that from want of
which would impair the validity of the capacity, the corporation or infant may incur
instrument or render it valueless. no liability thereon. (sec. 22)

d. Persons Negotiating by Delivery Accomodation Party (1996, 1998, 2005 Bar

# warranties same as those of qualified Exams)
indorsers, but extend to immediate One who has signed the instrument as maker,
transferee only. drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his
Negotiating by Mere name to some other person.
delivery or by Qualified General Indorser " Can receive payment for lending his name.
Indorsement " Indorser must lend his name to the maker, and
1. No secondary liability; 1. With secondary not to the holder (Maulini v. Serrano, 28 Phil.
liability; 640)
2. Warrants that he has 2. Warrants that " Liability: such a person is liable on the
no knowledge of any the instrument is, instrument to a holder for value,
fact, which would at the time of his notwithstanding such holder, at the time of
impair the validity of indorsement, taking the instrument, knew him to be only an
the instrument or valid and accommodation party.
render it valueless. subsisting. " Effects:
1. accommodation party is generally
4. Other parties who may be liable regarded as a surety for the party
General Rule: One whose signature does not 2. When accommodation party makes
appear on the instrument shall not be liable payment to holder of the note, he has the
thereon (Sec. 18). right to sue the accommodated party for
Parties who may be liable although his signature
does not appear on the NI: " Rights of accommodation parties as against
1. The principal who signs through an agent each other: the other may demand
2. One who signs his assumed or trade name is contribution from his co-accommodation party
liable without first directing his action against the
3. The forger principal debtor provided:
4. Persons whose signatures were forged, but 1. he made the payment by virtue of judicial
are precluded from setting up the defense of demand; or
forgery 2. the principal debtor is insolvent.
5. One who indorses in a separate instrument (Sadaya v. Sevilla, 19 SCRA 924; Art. 2073,
(allonge) NCC)

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 11 of 19

Note: A corporation cannot act as an 9. Negotiation in breach of faith

accommodation party. The issuance or 10. Negotiation under circumstances that
indorsement of negotiable instrument by a amount to fraud
corporation without consideration and for the 11. Mistake
accommodation of another is ultra vires. 12. Intoxication (according to better authority);
(Crisologo v. CA, 117 SCRA 594). 13. Ultra vires acts of corporations where the
corporation has the power to issue
Order of liability of indorsers: negotiable paper but the issuance was not
1. among themselves – indorsers are liable authorized for the particular purpose for
prima facie in the order in which they indorse; which it was issued
but evidence is admissible to show that, as 14. Want of authority of agent where he has
between or among themselves, they have apparent authority
agreed otherwise (sec. 68) 15. Insanity where there is no notice of
2. The holder – indorsers are liable in any order insanity on the part of the one contracting
with the insane person
VI. DEFENSES 16. Illegality of contract where the form or
consideration is illegal
1. Real/Absolute Defenses - those that attach to
the instrument itself and are available against " Defenses available to solidary debtor (Art.
all holders, whether in due course or not. 1222, NCC):
Examples: a. Those derived from the nature of the
1. Alteration obligation
2. Non-delivery of incomplete instrument b. Those that are personal to him
3. Duress amounting to forgery (when c. Those that personally belong to the others
signature is acquired by duress) (partial defense)
4. Fraud in factum or fraud in esse
contractus " Effects of Defenses:
5. Minority
6. Marriage in the case of a wife 1. Minority if a real defense, but personal to the
7. Insanity where the insane person has a minor
guardian appointed by the court (Ogden)
8. Ultra vires acts of a corporation, where the 2. Incomplete but delivered instrument (Sec. 14;
corporation is absolutely prohibited by its 1997, 2004 Bar Exams)
charter or statute from issuing any • Situations contemplated:
commercial paper under any a. Where the instrument is wanting in
circumstances (Foreign case) any material particular, the person in
9. Want of authority of agent possession thereof has a prima facie
10. Execution of instrument between public authority to complete it by filling up the
enemies (Ogden) blanks therein. Material particular:
11. Illegality of contract where it is the contract those that can or cannot affect
or instrument itself which is expressly negotiability
made illegal by statute b. A signature on a blank paper
12. Forgery delivered by the person making the
13. Prescription signature in order that the paper may
14. Discharge in insolvency be converted into a NI operates as a
prima facie authority to fill it up as
2. Personal/Equitable Defenses – those which such for any amount
are available only against a person not a • To hold parties prior to completion liable
holder in due course or a subsequent holder by a HNIDC: NI must be filled up strictly in
who stands in privity with him. accordance with the authority given AND
Examples: within a reasonable time
1. Absence or failure of consideration • If requisites not met, can HNIDC enforce
2. Want of delivery of complete instrument the NI against a party prior to completion?
3. Insertion of wrong date in an instrument, b. No (better view)
where it is payable at a fixed period after c. Yes, according to authorized tenor
date and it is issued undated or where it is • if any such instrument, after completion, is
payable at a fixed period after sight and negotiated to a HIDC, it is valid and
the acceptance is undated effectual for all purposes in his hands, and
4. Filling up of blank contrary to authority he may enforce it as if it had been filled up
given or not within reasonable time, where strictly in accordance with the authority
the instrument is delivered given and within a reasonable time
5. Fraud in inducement
6. Acquisition of instrument by force, duress, 3. Incomplete and undelivered instrument (Sec.
or fear 15)
7. Acquisition of the instrument by unlawful • it will not, if completed and negotiated
means without authority, be a valid contract in the
8. Acquisition of the instrument for an illegal hands of ANY holder, as against any
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 12 of 19

person whose signature was placed • Exceptions:

thereon BEFORE delivery. 1. against a party who has himself made,
• However, subsequent indorsers are liable. authorized, or assented to the
• In the hands of a HIDC, there is prima alteration
facie presumption of delivery 2. subsequent indorsers
3. holder in due course not a party to the
4. Complete and undelivered instrument (Sec. alteration - he may enforce payment
16) according to its original tenor
• as between immediate parties and as • Changes constituting material alteration:
regards a remote party other than a holder a. date;
in due course, the delivery must be b. sum payable, either for principal or
authorized in order to be effectual interest;
• “Immediate” means privity, not proximity c. time or place of payment
• As against a HNIDC, it may be proved d. number or relations of the parties;
that: e. medium or currency in which payment
a. No delivery was made is to be made;
b. Delivery was not authorized f. that which adds a place of payment
c. Delivery was conditional or for a where no place of payment is
special purpose specified; and
g. any other change or addition which
Rules on delivery of NI (Sec. 15 & 16) alters the effect of the instrument in
1. Delivery is essential to the validity of any NI any respect.
2. Delivery must have been with the intention of Note: a material alteration is one that
passing title alters the effect of the instrument; one
3. An incomplete and undelivered NI is invalid as which changes the items required to be
to any party before delivery in the hands of stated under Sec. 1, NIL.
ANY holder, even a HIDC
4. NI mentioned in #3, there is prima facie • Spoliation – alteration made by a stranger
presumption of delivery (if HIDC) to the instrument. Sec. 124 is the
5. Delivery to the agent is sufficient (if HIDC) American doctrine of spoliation.
6. There is a prima facie presumption of delivery
of a complete NI (if HNIDC) • The general rule denies the drawee bank’s
7. There is conclusive presumption of delivery of right to charge against the drawer’s
a complete instrument (if HIDC) account the amount of an altered check.
8. Delivery of the NI may be made on a parol However, the latter’s negligence, before or
condition or for a special purpose (only against after the alteration, may estop him from
a HNIDC) setting such alteration as against an
innocent drawee bank who has paid the
5. Prescription check.
• Under the NCC, 10 years from accrual of
the cause of action Note: Alteration is only a partial real
• In the case of checks, the action of the defense because a holder in due course
depositor against his drawee bank can still enforce it according to its original
commences to run from the time he is tenor.
given notice of payment (PCIB v. CA, 350
SCRA 446 [2001]) 7. Forgery (1995, 2006, 2010 Bar Exams)
• In Papa v. Valencia, 284 SCRA 643
(1998), the SC said that the failure of the • Effects:
payee to encash the check for more than 1. signature is wholly inoperative
10 years ”undoubtedly resulted in the 2. no right to retain the instrument, or to
impairment of the check through his give a discharge therefor, or to
unreasonable and unexplained delay.” enforce payment thereof against any
This is contrary to NAMARCO v. F.U.N.D., party thereto, can be acquired through
49 SCRA 238 (1973) where it was held or under such signature
that the rule that delivery of a mercantile 3. Some parties are precluded from
document shall produce the effect of setting up the defense of forgery
payment when impaired by the creditor’s
fault has no application to a check issued • Extent of Effects:
by the debtor himself. There will be no 1. Only the forged signature is
prejudice to the drawer-debtor because he inoperative, not the NI, not the
is supposed to maintain his funds in his genuine ones
account. Nonetheless, it is submitted that 2. The NI can be enforced by holders
the SC could have arrived at the same whose title does not depend on the
conclusion reached in the Papa Case if it forged signature (bearer instruments)
relied on prescription. 3. Can be enforced against those who
are precluded from setting up the
6. Alteration (1995, 1996, 1999 Bar Exams) forgery, like:
• The instrument is avoided
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 13 of 19

a. Those who by their acts, silence, - Drawee bank that paid is liable. It
or negligence, are estopped from cannot go after the collecting bank.
setting up the defense of forgery Recourse is against the forger
b. Those who warrant or admit the
genuineness of the signature in • Double Intent in Fraudulent
question. These include acts or Impersonation
omissions that amount to 1. Maker or drawer intends to make the
ratification, express or implied instrument payable to the person
(indorser, acceptor, person before him
negotiating by mere delivery. 2. He intends to make the instrument
Note: Persons precluded from setting up payable to the person whom he
the defense of forgery may still recover believes the stranger to be.
damages under the NCC provisions on Note: The 1st is not forgery, but signature
quasi-delicts. of an assumed name.

• Cut-Off Rule • Loss is thrown upon the issuer:

General Rule: Parties prior to the forged 1. Theory of actual intent
signature are cut-off from the parties after 2. Theory of estoppel/negligence
the forgery in the sense that prior parties
cannot be held liable and can raise the
defense of forgery. The holder can only VII. PRESENTMENT FOR PAYMENT
enforce the instrument against parties who
became such after the forgery. Presentment for payment – the presentation of
Exception: When the prior parties are an instrument to the person primarily liable for the
precluded from setting up the defense of purpose of demanding and receiving payment.
General Rules:
• Forgery of Indorsement • presentment for payment is not necessary to
charge persons primarily liable
A. PN payable to order • presentment for payment is necessary to
- The party whose signature was charge persons secondarily liable; otherwise,
forged and parties prior to him are they are discharged.
not liable
B. PN or Bill payable to bearer a. drawer - where he has no right to expect or
- Only the person whose signature require that the drawee or acceptor will pay
was forged can raise forgery the instrument (sec. 79)
- To HIDC: Liable. Indorsement is b. indorser - where the instrument was made or
not necessary to pass title accepted for his accommodation and he has
- To HNIDC: Not liable. Defense is no reason to expect that the instrument will be
want of delivery of a mechanically paid if presented.
complete instrument (the c. when dispensed:
instrument must be complete - where, after the exercise of reasonable
before the forgery) diligence, presentment as required cannot
be made;
C. Bill Payable to order - where the drawee is a fictitious person;
- Drawee cannot charge the - by waiver of presentment, express or
account of the drawer implied. (sec. 82)
- Drawer cannot recover from the d. when the instrument has been dishonored by
collecting bank non-acceptance (sec. 151)
- Drawee can recover from the
collecting bank (BUT if it is the Sufficiency of presentment
drawer’s signature which was It must be:
forged, drawee cannot recover 1. made by the holder or any person authorized
from the collecting bank) to receive payment on his behalf;
- Payee can recover from the 2. at a reasonable hour on a business day;
drawer 3. at a proper place;
- Payee can recover from recipient 4. to the person primarily liable or if he is absent
of payment or inaccessible, to any person found at the
- Payee cannot recover from the place where the presentment is made.
- Collecting bank bear’s the risk of How made:
loss, but can recover from the 1. personal demand for payment at the proper
person to whom it is paid place; and
2. readiness to exhibit the instrument if required,
• Forgery of Drawer’s Signature and to receive payment and to surrender the
instrument if the debtor is willing to pay.

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 14 of 19

• Purpose of exhibition: To enable the c. Where no place of payment is specified and

debtor to: no address is given and the instrument is
1. determine the genuineness of the presented at the usual place of business or
instrument and the right of the holder residence of the person to make payment;
to receive payment; and d. In any other case if presented to the person to
2. to enable him to reclaim possession make payment wherever he can be found, or if
upon payment. presented at his last known place of business
or residence.
• When exhibition excused:
1. when debtor does not demand to see When delay in presentment excused – delay is
the instrument but refuses payment on caused by circumstances beyond the control of
some other grounds, and the holder and not imputable to his default,
2. when the instrument is lost or misconduct, or negligence. When the cause of
destroyed. delay ceases to operate, presentment must be
made with reasonable diligence.
When made:
• where the instrument is payable at a fixed or Principal debtor is dead (Sec. 76)
determinable future time, presentment must • Must be made to his Executor or administrator
be made on the day it falls due if there be one and can be found. Otherwise
• where it is payable on demand: presentment is excused
a. promissory note: presentment must be
made within a reasonable time after its Persons liable as partners (Sec. 77)
ISSUE • To any one of them, even if there’s dissolution
b. bill of exchange: presentment for payment • Mutual agency principle
will be sufficient if made within a
reasonable time after the LAST Joint Debtor (Sec 78)
NEGOTIATION thereof • To all of them. They are not partners
• a check must be presented for payment within • Except: when one is authorized
a reasonable time after its issue or the drawer
will be discharged from liability thereon to the Note: Sec. 76-78 do not apply if there is a place
extent of the loss caused by the delay (but specified.
indorsers are discharged W/N they suffered

Time of maturity: Presentment for acceptance – the production or

• every negotiable instrument is payable at the exhibition of a bill of exchange to the drawee for
time fixed therein without grace his acceptance
• when the day of maturity falls upon a Sunday
or a holiday, the instruments are to be General Rule: presentment for acceptance is not
presented for payment on the next succeeding necessary to render any party to the bill liable.
business day
• when the day of maturity falls upon a Exception: presentment for acceptance must be
Saturday: made:
! Instrument is payable at a fixed or a. Where the bill is payable after sight, or where
determinable future time (time instrument) presentment for acceptance is necessary in
- presented for payment is on the next order to fix the maturity of the instrument; or
succeeding business day b. Where the bill expressly stipulates that it shall
! instrument is payable on demand - at the be presented for acceptance; or
option of the holder, be presented for c. Where the bill is drawn payable elsewhere,
payment: than at the residence or place of business of
a. before 12:00 noon on Saturday when the drawee. (Sec. 143)
that entire day is not a holiday or Note: in all the above cases, the holder must
b. the next succeeding business day. either present the bill for acceptance or negotiate it
How computed: within a reasonable time; otherwise, the drawer
! excluding the day from which the time is to and all indorsers are discharged.
begin to run, and by including the date of
payment How made:
! applies to instruments which are payable 1. made by or on behalf of the holder;
at a fixed period after date, after sight, or 2. at a reasonable hour;
after that happening of a specified event. 3. on a business day;
4. before the bill is overdue and within
Proper place for presentment (In order): reasonable time;
a. Where a place of payment is specified in the 5. to the drawee or some person authorized to
instrument and it is there presented; accept or refuse acceptance on his behalf.
b. Where no place of payment is specified but
the address of the person to make payment is If addressed to 2 or more drawees:
given in the instrument and it is there - Must be made to all of them, except:
presented; a. They are partners
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 15 of 19

b. One is authorized be written on the bill, and if such request is

refused, may treat the bill as dishonored.
Where drawee is dead • where an acceptance is written on a paper
- to his personal representative other than the bill itself, it does not bind the
- merely permissive (under Sec. 148, acceptor except in favor of a person to whom
presentment is excused) it is shown and who, on the faith thereof,
receives the bill for value.
Drawee adjudged insolvent:
- To him, or to his trustee or assignee Period for drawee to accept - 24 hours after
presentment in which to decide whether or not he
Days presentment may be made. If date of will accept the bill; if acceptance is given, it dates
presentment is: as of the day of presentation (Sec. 136).
a. Sunday or a holiday – must be made on the
next succeeding business day Constructive/Implied acceptance
b. Saturday – before 12:00 noon on Saturday 1. If the drawee destroys the instrument
provided that it is not a holiday. 2. Where the drawee refuses to return the bill
(In Sec 146, presentment on a Saturday is not accepted or non-accepted to the holder within
limited to demand NI, unlike in Sec. 85) 24 hours after delivery, or within such other
period as the holder may allow (Sec. 137)
When delay for presentment excused: - Drawee must return NI if holder demands
- A bill is drawn payable elsewhere than at the even within 24 hours.
place of business or the residence of the drawee,
and holder has no time, with the exercise of Reconcile Sec 136, 137 and 150
reasonable diligence, to present the bill for
acceptance before presenting it for payment on Kinds:
the day that it falls due. 1. General - assents without qualification to the
Effect: does not discharge the drawers and order of the drawer.
indorsers. 2. Qualified - which in express terms varies the
effect of the bill as drawn.
Where presentment is excused: a. Conditional - makes payment by the
a. Where the drawee is dead, or has absconded, acceptor dependent on the fulfillment of
or is a fictitious person or a person not having a condition therein stated.
capacity to contract by bill b. Partial - an acceptance to pay part only of
b. Where presentment can not be made after the the amount for which the bill is drawn.
exercise of reasonable diligence c. Local - an acceptance to pay only at a
c. Where, although presentment has been particular place
irregular, acceptance has been refused on d. Qualified as to time
some other ground. e. The acceptance of some one or more of
Note: bill may be treated as dishonored by non- the drawees but not of all.
acceptance. 3. Constructive

Duty of holder where bill not accepted. - where Rights of parties as to qualified acceptance.
a bill is duly presented for acceptance and is not • Holder: he may refuse to take a qualified
accepted within the prescribed time (24 hours – acceptance and if he does not obtain an
Sec. 136), the person presenting it must treat the unqualified acceptance, he may treat the bill
bill as dishonored by non-acceptance or he loses as dishonored by non-acceptance.
the right of recourse against the drawer and • Drawer or indorser: when he receives notice
indorsers (Sec. 150). of a qualified acceptance, he must, within a
reasonable time, express his dissent to the
Right of holder where bill not accepted holder or he will be deemed to have assented
- an immediate right of recourse against the thereto (implied assent).
drawer and indorsers accrues to the holder
and no presentment for payment is necessary Effect of taking a qualified acceptance: the
- No need to wait for maturity date drawer and indorsers are discharged from liability
on the bill unless they have expressly or impliedly
IX. ACCEPTANCE authorized the holder to take a qualified
acceptance, or subsequently assent thereto.
Acceptance: the signification by the drawee of his
assent to the order of the drawer. Other rules on acceptance:
• a bill may be accepted before it has been
How made : signed by the drawer, or while otherwise
1. must be in writing incomplete, or when it is overdue, or after it
2. signed by the drawee has been dishonored by a previous refusal to
3. must not express that the drawee will perform accept, or by non payment
his promise by any other means than the • when a bill payable after sight is dishonored
payment of money. by non-acceptance and the drawee
• the holder of the bill presenting the same for subsequently accepts it, the holder, in the
acceptance may require that the acceptance absence of any different agreement, is entitled
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 16 of 19

to have the bill accepted as of the date of the " Effect of failure to give notice: parties
first presentment secondarily liable are discharged
• an unconditional promise in writing to accept a " Not necessary for qualified indorser or person
bill before it is drawn is deemed an actual who negotiated the NI by delivery.
acceptance in favor of every person who,
upon the faith thereof, receives the bill for " Requisites:
value 1. Given by holder (or his agent), or by any
• where a check is certified by the bank on party who may be compelled by the holder
which it is drawn, the certification is equivalent to pay (or his agent);
to an acceptance 2. Given to secondary party or his agent;
3. Given within the periods provided by law;
Acceptance for Honor - an undertaking by a 4. Given at the proper place.
stranger to a bill after protest for the benefit of any
party liable thereon or for the honor of the person " When notice of dishonor dispensed with:
for whose account the bill is drawn which 1. when party to be notified knows about the
acceptance inures also to the benefit of all parties dishonor, actually or constructively;
subsequent to the person for whose honor it is 2. if waived; and
accepted, and conditioned to pay the bill when it 3. when after due diligence, it cannot be
becomes due if the original drawee does not pay given.
! Requisites: " Notice of dishonor given by or on behalf of a
1. the bill must have been protested for holder inures to the benefit of:
dishonor by non-acceptance or for better a. all parties prior to the holder, who have a
security; right of recourse against the party to
2. the acceptor for honor must be a stranger whom the notice is given; and
and not a party already liable on the b. all holders subsequent to the holder giving
instrument; notice.
3. bill must not be overdue;
4. acceptance for honor must be with the " Notice of dishonor given by or on behalf of a
consent of the holder of the instrument. party entitled to give notice inures to the
! Formalities: benefit of:
1. must be in writing; a. the holder; and
2. must indicate that it is an acceptance for b. all parties subsequent to the party to
honor; whom notice is given.
3. signed by the acceptor for honor;
4. must contain an express or implied " Where an instrument is dishonored in the
promise to pay money; hands of an agent, he can do either of the ff.:
5. the accepted bill for honor must be a. directly give notice to persons secondarily
delivered to the holder. liable thereon; or
b. give notice to his principal.
! When the acceptance for honor does not
expressly state for whose honor it is made, it " A party giving notice is deemed to have given
is deemed to be an acceptance for the honor due notice where:
of the drawer. a. the notice of dishonor is duly addressed,
! Acceptor for honor is liable to the holder & all and
parties subsequent to the party for whose b. deposited in the post-office, even when
honor the acceptor has accepted. there is miscarriage of mail.
! Liability: SECONDARY. He agrees to pay if:
a. Presentment for payment is made " Where a party receives notice of dishonor, he
b. Drawee does not pay has, after the receipt of such notice, the same
c. Bill is protested for non-payment time for giving notice to antecedent parties
d. Notice of dishonor is given to him that the holder has after the dishonor.
! The maturity date of a bill payable after sight is
calculated from the date of the noting for non- " Notice may be waived either before the time of
acceptance and not from the date of the giving notice, or after the omission to give due
acceptance for honor notice. Waiver may be expressed or implied.
! When the bill is dishonored by the acceptor for
honor, it must be protested for non-payment " As to who are affected by an express waiver
by him (to fix the liabilities of indorsers) depends on where the waiver is written:
a. if it appears in the body or on the face of
X. NOTICE OF DISHONOR AND PROTEST the instrument, it binds all parties; but
b. if it is written above the signature of an
Notice of Dishonor - bringing, either verbally or indorser, it binds him only.
in writing, to the knowledge of the drawer and
indorser the fact that a NI, upon proper " Notice of dishonor is not required to be given
proceedings taken, has not been accepted or paid to the drawer in any of the ff. cases:
and the party notified is expected to pay it. 1. drawer and drawee are the same;

While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 17 of 19

2. drawee is a fictitious person or not having the same was presented for payment or
the capacity to contract; acceptance and that it was refused, whereupon
3. drawer is the person to whom the the notary protests against all parties to the
instrument is presented for payment; instrument & declares that they shall be held
4. the drawer has no right to expect or responsible for all loss or damage arising from its
require that the drawee or acceptor will dishonor.
honor the instrument;
5. where the drawer has countermanded " Effect of waiver: where protest is waived,
payment. presentment and notice of dishonor are also
deemed waived. But where the notice of
" Notice of dishonor is not required to be given dishonor is waived, presentment is not waived.
to an indorser in the ff. cases:
1. drawee is a fictitious person or does not " Applicability: protest is necessary only in case
have the capacity to contract, and indorser of foreign bills of exchange which have been
was aware of that fact at the time he dishonored by non-acceptance or non-
indorsed the instrument; payment, as the case may be. If it is not so
2. indorser is the person to whom the protested, the drawer and indorsers are
instrument is presented for payment; discharged.
3. instrument was made or accepted for his
accommodation. " Foreign Bill of Exchange:
1. Drawn in the Philippines but payable
" In Sec. 73 (place of presentment for payment), outside the Philippines.
there is a particular order to follow. In Sec. 108 2. Payable in the Philippines but drawn
(where notice of dishonor must be sent) there outside the Philippines.
is no particular order. What is important is that (On the face of the instrument)
notice is actually received on time.
" When protest necessary in inland bills:
" If an instrument is not accepted by the 1. In case of protest for better security
drawee, there is no sense presenting it again (protest is actually optional; Sec. 158)
for payment, and notice of dishonor must at 2. A bill that is supposed to be accepted for
once be given. If there was acceptance, honor should first be protested for
presentment for payment is still required and if dishonor by non-acceptance or protested
payment is refused, there is a need for notice for better security (Sec. 161)
of dishonor. 3. Where a dishonored bill has been
accepted for honor supra protest or
" An omission to give notice of dishonor by non- contains a referee in case of need, it must
acceptance does not prejudice the rights of a be protested for non-payment before it is
holder in due course subsequent to the presented for payment to the acceptor for
omission. honor or referee in case of need (Sec.
Dishonor by Non-Payment 4. When the bill is dishonored by the
acceptor for honor, it must be protested for
When instrument dishonored by non-payment: non-payment by him.
a. it is duly presented for payment and payment 5. In case of payment for honor, prior protest
is refused or cannot be obtained; or for non-payment is required (Sec. 171)
b. presentment is excused and the instrument is
overdue and unpaid. " Protest may be made by::
1. a notary public; or
Effect of dishonor: an immediate right of recourse 2. any respectable resident of the place
to all parties secondarily liable thereon accrues to where the bill is dishonored, in the
the holder. presence of 2 or more credible witnesses.

Dishonor by Non-Acceptance Protest for better security is one made by the

holder of a bill after it has been accepted but
Instances: before it matures, against the drawer and
a. When it is duly presented for acceptance and indorsers, where the acceptor has been adjudged
such an acceptance is refused or can not be a bankrupt or an insolvent, or has made an
obtained; or assignment for the benefit of the creditors. (But
b. When presentment for acceptance is excused protest is optional).
and the bill is not accepted (sec. 149)
Effect: an immediate right of recourse against the
drawer and indorsers accrues to the holder and no Discharge of instrument - a release of all parties,
presentment for payment is necessary. whether primary or secondary, from the
obligations arising thereunder. It renders the
Protest – a formal statement in writing made by a instrument without force and effect and,
notary under his seal of office at the request of the consequently, it can no longer be negotiated.
holder of a bill or note, in which it is declared that
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 18 of 19

1. By payment in due course by or on behalf of " Cancellation of an instrument includes tearing,
the principal debtor; erasure, obliteration, or burning. It is not
2. Payment by accommodated party, where the limited to writing of the word ‘cancelled”, or
instrument is made or accepted for his “paid”, or drawing of criss-cross lines across
accommodation; the instrument.
3. Intentional cancellation by the holder;
4. By any act which will discharge a simple Payment for Honor - payment made by a person,
contract for the payment of money; whether a party to the bill or not, after it has been
5. When the principal debtor becomes the holder protested for non-payment, for the benefit of any
of the instrument at or after maturity in his own party liable thereon or for the benefit of the person
right. for whose account it was drawn.
" Requisites:
By any act which would discharge a simple 1. the bill has been dishonored by non-payment;
contract: 2. it has been protested for non-payment;
1. Payment or performance; 3. payment supra protest (another term for
2. Loss of the thing due; payment for honor because prior protest for
3. Condonation or remission; non-payment is required) is made by any
4. Confusion or Merger; person, even by a party thereto;
5. Compensation; 4. the payment is attested by a notarial act of
6. Novation; honor which must be appended to the protest
7. Annulment or Rescission; or form an extension of it;
8. Fulfillment of a resolutory condition; 5. the notarial act must be based on the
9. Prescription. declaration made by the payor for honor or his
agent of his intention to pay the bill for honor
When persons secondarily liable on the and for whose honor he pays.
instrument are discharged:
1. By any act which discharges the instrument; Note: If the above formalities are not complied
2. By the intentional cancellation of his signature with, payment will operate as a mere voluntary
by the holder; payment and the payor will acquire no right to full
3. By the discharge of a prior party; reimbursement against the party for whose honor
4. By a valid tender of payment made by a prior he pays.
5. By the release of the principal debtor, unless " In payment for honor, the holder cannot refuse
the holder’s right of recourse against the party payment. If he refuses, he cannot recover
secondarily liable is expressly reserved; from the parties who would have been
6. By any agreement binding upon the holder to discharged had he accepted the same. In
extend the time of payment or to postpone the acceptance for honor, the holder’s consent is
holder’s right to enforce the instrument. necessary.

" In the following cases, the agreement to " The payor for honor is given the right to
extend the time of payment does not receive both the bill and the protest obviously
discharge a party secondarily liable: to enable him to enforce his rights against the
a. where the extension of time is consented parties who are liable to him.
to by such party;
b. where the holder expressly reserves his —oOo—
right of recourse against such party.

" Payment at or after maturity by a party

secondarily liable does not discharge the
instrument. It only cancels his own liability
and that of the parties subsequent to him.

Effects of Renunciation:
1. A renunciation in favor of a secondary party
may be made by the holder before, at or after
maturity of the instrument. Effect: only such
secondary party is discharged and all parties
subsequent to him but the instrument itself
remains in force.
2. A renunciation in favor of the principal debtor
may be effected at or after maturity. Effect: the
instrument is discharged and all parties
thereto provided the renunciation is made
unconditionally and absolutely.

Note: In either case, renunciation does not affect

the rights of a holder in due course without notice.
While we cannot control events and people, we can definitely control and change our
reactions and attitudes toward them. It is for this reason that we can say we are co-
creators with God in creating the future we want and the persons we want to be.

Page 19 of 19