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Negotiable Instruments Law

Atty. Rommel Mercado


Sec. 119. Instrument; how discharged. - A negotiable instrument Methods of Discharge of Secondary Parties
is discharged: 1. Any act which discharges the instrument:
- If any of those circumstances enumerated in Sec. 119 took place, the
(a) By payment in due course by or on behalf of the principal
instrument ceases to have force and effect and ALL parties are
debtor; discharged;
(b) By payment in due course by the party accommodated, where - The discharge of a party secondarily liable does not discharge the
the instrument is made or accepted for his accommodation; instrument itself
(c) By the intentional cancellation thereof by the holder; 2. Intentional cancellation of signature
(d) By any other act which will discharge a simple contract for the - Striking out the signature of a party secondarily liable means
payment of money; discharging such person from his liability as if he never became a party
thereto
(e) When the principal debtor becomes the holder of the
- The indorsement must not be necessary to the holder’s title
instrument at or after maturity in his own right. 3. Discharge of prior party by act of holder
Meaning and effect of Discharge of Instrument: a release of ALL parties - The discharge of a party as by intentional cancellation of his signature
from the obligations arising thereunder; renders the instrument ineffectual also operates as a discharge of parties subsequent to the party
and, consequently, it can no longer be negotiated discharged.
Concept of Discharge: refers to both the instrument and to the parties to - the discharge deprives a subsequent party of a right of recourse
it; the NIL provides for specified methods for the discharge of the instrument, against the party discharged by the holder
which necessarily includes the discharge of the persons primarily liable, and - includes prior indorsers and principal debtors
for the discharge of those secondarily liable - applies only to discharge by the act of the holder and not to discharges
by operation of law (ex. Bankruptcy, statute of limitations or failure to
Methods for discharge of Instrument:
give notice of dishonor)
- There is no express provision for the relies of those primarily liable 4. Valid tender of payment
because they are ABSOLUTELY bound to pay in the first instance and can - Tender of payment: one produces and offers a person holding a claims
only be relieved only by a discharge of the instrument itself; or demand against him the amount of money which he considers and
- The list of Sec. 199 is exclusive admits to eb due, in satisfaction of such claim or demand without any
1. Payment by principal debtor stipulation or condition
- When there are several person liable for an instrument, if it is - If accepted, it would discharge such party and all parties subsequent
satisfied by someone who primarily liable, there will be a complete to him
discharge - Refusal to accept tender only stops the running of interest and relieves
- The following requisites must concur: (a) It must be made by or on the party making tender from subsequent liability for costs and
behalf of the principal debtor; (b) at or after its maturity; (c) to the attorney’s fees in case of litigation
holder thereof; (d) in good faith and without notice that the holder’s 5. Release of principal debtor by act of holder
title is defective - The release of the principal debtor discharges the instrument and all
- Principal debtor is the person ultimately bound to pay the debt the secondary parties
2. Payment by accommodated party – the accommodated part is the - GR: If the principal debtor is released, subsequent parties lose their
real debtor; his payment is actually the payment by the principal right of recourse against him.
debtor, whether he appears as a party to the instrument or not - XPN: if the holder EXPRESSLY reserved his right of recourse against
3. Intentional cancellation of instrument by holder: the said subsequent parties, then NOBODY is discharged because it is
- The following must concur: (1) it is intention; (2) made by the an implied reservation by the subsequent parties of their right of
holder. recourse against the principal debtor
- It may be done thru writing the words cancelled or paid on the face - The release must be by the act of the holder and not by operation of
of the instrument, when the instrument is torn up, burned, law
mutilated, or destroyed. 6. Extension of time of payment
- Cancellation is presumed to be intentional - “Agreement binding on the holder” = agreement binding on the holder
4. Any act which discharges a contract: made with the principal debtor
- Generally, payment of money would suffice; - Must be supported by a valuable consideration and for a definite period
- The Art. 1232 of the Civil Code also provides a list; however, shall - Consistent with the rule that an extension granted to the debtor by the
only operate to discharge the instrument as between the creditor without the consent of the guarantor extinguishes the
immediate parties and not int hands of a holder in due course: guaranty.
 By payment or performance; - There is no discharge of parties secondarily in the following cases: (a)
 By the loss of the thing due; the extension is consented to by such party; (b) the holder expressly
 By the condonation or remission of the debts; reserves the right of recourse against such party
 By the confusion or merger of the rights of creditor and debtor;
 By compensation;
 By novation. Sec. 121. Right of party who discharges instrument. - Where the
- Other include the annulment, rescission, fulfillment of a resolutory
instrument is paid by a party secondarily liable thereon, it is not
condition, and prescription
5. Reacquisition by principal debtor in his own right discharged; but the party so paying it is remitted to his former
- The following must concur: (a) By the principal debtor; (b) in his rights as regard all prior parties, and he may strike out his own and
own right; (c) at or after date of maturity all subsequent indorsements and against negotiate the instrument,
- There is a merger of creditor and debtor except:
- In his own right does not mean in his representative capacity
(a) Where it is payable to the order of a third person and has been
paid by the drawer; and
Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is (b) Where it was made or accepted for accommodation and has
discharged: been paid by the party accommodated.
Effect of Reacquisition by prior party:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder; - Payment at or after maturity by a party secondarily liable does not
(c) By the discharge of a prior party; discharge the instrument but only cancels his own liability and that of
parties subsequent to him.
(d) By a valid tender or payment made by a prior party;
- For prior parties, the re-acquirer is remitted to his former position and
(e) By a release of the principal debtor unless the holder's right of may strike out his own and all subsequent indorsements, as they are not
recourse against the party secondarily liable is expressly necessary for his title
reserved;
Negotiation by Prior Party:
(f) By any agreement binding upon the holder to extend the time
of payment or to postpone the holder's right to enforce the - The first clause provides that the instrument is not discharged AND it
instrument unless made with the assent of the party may again be negotiated
- The exception only applies to the right to negotiate
secondarily liable or unless the right of recourse against such
- If it would apply to instruments that are not discharged, it would deny
party is expressly reserved. the drawer who pays a bill of the right to recover from the acceptor

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Negotiable Instruments Law
Atty. Rommel Mercado
Sec. 122. Renunciation by holder. - The holder may expressly payment within a reasonable payment within a reasonable
renounce his rights against any party to the instrument before, at, time from its last negotiation time from its issue
or after its maturity. An absolute and unconditional renunciation of When a promissory note is like a bill of exchange: If a note is indorsed
his rights against the principal debtor made at or after the maturity by the payee
of the instrument discharges the instrument. But a renunciation When bill of exchange is like a promissory note: if the bill of exchange
does not affect the rights of a holder in due course without notice. has been accepted;
A renunciation must be in writing unless the instrument is delivered
Other classes of bills of exchange: drafts, orders, and checks
up to the person primarily liable thereon.
1. Foreign bill of exchange – a bill drawn in one state and payable in another
Meaning of renunciation: state; if drawn and payable within the same state, it is called an inland
- the act of surrendering a right or claim with or without recompense; bill of exchange
- Generally, Sec. 122 only applies to renunciation by a unilateral act of the 2. Draft: it is called a demand or sight draft if a bill if exchange payable on
holder i.e. a release without consideration demand at sight, when the holder presents it for payment; If payable at
- Sec. 119(e) covers a case of oral renunciation supported by a a stated time after sight or a definite future time or some future
consideration; if there is no consideration, the renunciation is ineffective determinable time, it is called a time draft.
- If drawn by a bank against its branch or another bank, it is called a
How renunciation by holder is made:
bank draft;
- must be made by a written declaration - A draft drawn and payable in one country is a domestic draft. If drawn
- If oral, it should be accompanied by a surrender of the instrument to in one country and payable in another, it is an international draft
the person primarily liable thereon - Drawee-bank acting as a "payor" bank is solely liable for acts done not
- mere expression of an intention or desire to renounce is not enough. in accordance with the instructions of the drawer-bank or of the
- The renunciation must be EXPRESS purchaser of the draft.
Effect of Renunciation: - It has the burden of proving that it did not violate the instructions given
to it.
- If made in favor of a secondary party, it must be made by the holder,
- Drawer, if sued by purchaser, must debit the customer’s account
before, at, or after maturity of the instrument; it only discharges such
despite instruction of non-payment; must prove that that he informed
secondary party and all parties subsequent to him
the drawee
- If made in favor of the principal debtor, it must be made at or after
- Draft is always drawn on a bank; a check is drawn on bank AND
maturity; it discharges the instrument and all parties thereto, provided it
payable in demand;
is made ABSOLUTELY and UNCONDITIONALLY
- Bank draft is more acceptable as medium of payment because of the
- Renunciation is only a PERSONAL DEFENSE and does not affect the rights
bank’s superior credit and resources
of a holder in due course
3. Trade Acceptance: a draft or bill of exchange drawn by the seller on the
purchaser of goods and accepted by the latter by signing it as drawee.
Sec. 123. Cancellation; unintentional; burden of proof. - A - Has a definite maturity date and is ordinarily used in the purchase and
cancellation made unintentionally or under a mistake or without the sale of goods
- Seller is both the drawer and the payee
authority of the holder, is inoperative but where an instrument or
- To enable the seller to raise money on the paper even before the
any signature thereon appears to have been cancelled, the burden obligation of the purchaser is due or matures thru endorsement and
of proof lies on the party who alleges that the cancellation was made discount
unintentionally or under a mistake or without authority. - If the instrument is drawn against a bank instead of the purchaser, it
When cancellation inoperative: If made (1) unintentionally; (2) by is called banker's acceptance; the bank is lending its credit to the buyer
mistake or thru fraud; (3) without authority (not a loan) and is more acceptable as a credit instrument

Presumption: Cancellation is intentional; the holder has the burden to prove


its ineffectiveness Sec. 127. Bill not an assignment of funds in hands of drawee. - A
bill of itself does not operate as an assignment of the funds in the
Examples of Cancellation: (1) writing the words cancelled or paid; (2)
drawing crisscross lines across the instruments; (3) tearing, erasure,
hands of the drawee available for the payment thereof, and the
obliteration, or burning drawee is not liable on the bill unless and until he accepts the same.
Status of Drawee prior to acceptance or payment and after payment:
1. Drawee a mere stranger to the bill - he is a stranger to the bill drawn on
Sec. 126. Bill of exchange, defined. - A bill of exchange is an him unless and until he accepts the same; if he does, he becomes the
unconditional order in writing addressed by one person to another, principal debtor
signed by the person giving it, requiring the person to whom it is 2. Drawee not bound to accept
addressed to pay on demand or at a fixed or determinable future - Before acceptance, the bill is merely an order to the drawee to pay
time a sum certain in money to order or to bearer. - Drawee is not bound to accept; he shall only become liable if he accepts
the same
Bill of Exchange Promissory Note - It must be presented within reasonable time after their issuance or last
Unconditional order unconditional promise made negotiation, otherwise, the drawer is discharge from liability or to the
addressed by one person to by one person to another to extent of the loss cause by such delay
another requiring the latter to pay it 3. Drawee not liable to holder in due course
pay the instrument - mere issuance of a bill does not operate as an assignment of the funds
in the hands of the drawee
Three parties: drawer, Two parties: maker, payee or - HIDC has no cause of action against drawee, but only against drawer
drawee, and the payee or bearer and indorsers
bearer - The drawee who refuses to accept may be liable to drawer
Drawer, the one who issues Maker, the one who issues 4. Effect of payment
the instrument, is only the instrument, is primarily - no contractual relation created between a drawee-bank and the payee
secondarily liable liable - If dishonored, the payee cannot sue the drawee-bank but only the
drawer for lack of privity.
If drawn payable to the A note is complete if drawn
drawer's own order, it is payable to the maker's own
complete without order and is indorsed by him Sec. 128. Bill addressed to more than one drawee. - A bill may be
indorsement, provided, it has addressed to two or more drawees jointly, whether they are
been accepted by the drawee partners or not; but not to two or more drawees in the alternative
Must be presented for no need of presentment for or in succession.
acceptance in certain cases; acceptance Bills addressed to several drawees:
drawee shall not be liable
unless he accepts 1. If addressed to two or more drawee, it is allowed (ex. To A and B)
2. If addressed to two or more drawees in the alternative, it is not allowed
If payable on demand, it If payable on demand, it (ex. To A or B)
must be presented for must be presented for 3. If addressed to two or more drawees in succession, it is not allowed (ex.
To A, and in his absence, to B)
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Negotiable Instruments Law
Atty. Rommel Mercado
in the bill of exchange directed to him and it contemplates an
Sec. 129. Inland and foreign bills of exchange. - An inland bill of engagement or promise to pay.
exchange is a bill which is, or on its face purports to be, both drawn - No acceptance unless completed by delivery or notification
and payable within the Philippines. Any other bill is a foreign bill. - Only applies to bills of exchange
Unless the contrary appears on the face of the bill, the holder may - May be actual or constructive
treat it as an inland bill.
Object and effect of acceptance
- Classifies bill accdg to where they are drawn and paid
1. Until acceptance, drawee is not liable on the bill.
Inland bill- bill drawn and payable in the Philippines Payee/holder has no recourse against him. The object of
Foreign bill- not drawn and payable in the PH acceptance is to bind the drawee and make him an actual
Importance of the distinction: party liable to the instrument.
2. By acceptance, the drawee admits to everything essential
1. A foreign bill must be protested in case of dishonor to to its validity. Thus, want or failure of consideration cannot
charge the drawer and indorser under Sec 118 (notice of be shown in a suit by the payee against the acceptor.The
dishonor- when protest is needed) and Sec 158 (cases presumption is that every BOE is drawn due to some
when protest necessary). On the other hand, protest is not indebtedness from the drawee to the drawer, and that the
needed in an inland bill. acceptance is an appropriation of the funds of the drawer
2. To determine the applicable law that will govern the to the drawee. It is not unjust as it is the duty of the
validity, interpretation and effect of the bill drawee prior to acceptance, to know if he owes the drawer
A foreign bill may be treated as an inland bill unless the contrary something which is exclusively within his knowledge but
appears on its face. (i.e. the bill does not show that it was drawn in which the oayee would have no means of knowing.
another country) 3. The drawer is the principal debtor until the bill has been
accepted. Upon acceptance, the bill becomes a note. The
drawee assumes the liability of the maker and the drawer,
Sec. 130. When bill may be treated as promissory note. - Where that of the first indorser.
in a bill the drawer and drawee are the same person or where the
drawee is a fictitious person or a person not having capacity to The nature of acceptance is important only to determine the
contract, the holder may treat the instrument at his option either liabilities of the parties involved.
as a bill of exchange or as a promissory note.
Ex: Drawee and drawer are the same person in cases when a draft Formal requisites of acceptance:
drawn by a bank on its branch, or by a corporation on its treasurer
or by an agent on his principal by authority of the latter. 1. Must be in writing- because sound public policy requires
some substantial and tangible evidence of the contract and
Reasons: more reliable in its nature than the statement of
1. the drawer is practically ordering himself to pay. Treating recollection of witnesses. However, this does not apply to
the bill as a note would make the drawer the maker and constructive acceptance and a foreign bill unless their law
would make his liability primary. requires written acceptance.
2. Where the drawee is a fictitious person- nobody could 2. Signed by the drawee- the drawee is not liable if it is not
accept the bill signed by him. Signature is sufficient acceptance.
3. No capacity to contract- acceptance would not be valid 3. Express promise to pay money- acceptance must always
express a promise to pay money only.
In all these cases, the holder does not need to prove presentment 4. Delivered to the holder- acceptance is incomplete until the
for payment or have the acceptance of the drawee or give notice of acceptor has delivered the bill back to the holder. Before
dishonor to charge the drawer. Even if the holder treats the bill as delivery, the acceptor may revoke or cancel his
such, notice of dishonor is not required to make the drawer liable. acceptance.
Acceptance is made by writing across the face of the bill the word
Sec. 131. Referee in case of need. - The drawer of a bill and any “accepted” under which the drawee signs his name with the date.
indorser may insert thereon the name of a person to whom the
holder may resort in case of need; that is to say, in case the bill is Any equivalent word to constitute acceptance or the signature of
dishonored by non-acceptance or non-payment. Such person is the drawee without more is valid as acceptance. What is important
called a referee in case of need. It is in the option of the holder to is that an intention to accept may be inferred from the words used.
resort to the referee in case of need or not as he may see fit.
Referee- person named by the drawer or indorser as the one to Sec. 133. Holder entitled to acceptance on face of bill. - The holder
whom the holder may resort in case of need (dishonor by non- of a bill presenting the same for acceptance may require that the
acceptance or non-payment) acceptance be written on the bill, and, if such request is refused,
may treat the bill as dishonored.
- Not required that the holder apply to referee in case of
dishonor. On the other hand, referee is not bound to pay Acceptance may be on the bill itself or on a separate document such
the holder but he may be made liable to the party who as in a letter or telegram. Acceptance on a separate paper may be
named him on a present or future bill. But, in a constructive acceptance, there
is no actual written acceptance by the drawee.

X. ACCEPTANCE
Right of holder to acceptance on the bill- even if it is not
essential that the acceptance be on the bill itself, a holder may
Sec. 132. Acceptance; how made, by and so forth. - The compel the drawee to make the acceptance on the bill. If drawee
acceptance of a bill is the signification by the drawee of his assent refuses, the holder may consider the bill to be dishonored and go
to the order of the drawer. The acceptance must be in writing and after the parties who are secondarily liable on the instrument after
signed by the drawee. It must not express that the drawee will giving notice of dishonor. Although a bill payable at a fixed time
perform his promise by any other means than the payment of need not be presented for acceptance to charge the drawer or
money. indorser, it may be presented for acceptance at any time.
Acceptance of bill- the signification by the drawee of his assent
to the order of the drawer. Also defined as the act by which the Sec. 134. Acceptance by separate instrument. - Where an
drawee manifests his consent to comply with the request contained acceptance is written on a paper other than the bill itself, it does
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Negotiable Instruments Law
Atty. Rommel Mercado
not bind the acceptor except in favor of a person to whom it is
shown and who, on the faith thereof, receives the bill for value. Sec. 138. Acceptance of incomplete bill. - A bill may be accepted
Requisites for the acceptance to be binding when made on a before it has been signed by the drawer, or while otherwise
separate paper: incomplete, or when it is overdue, or after it has been dishonored
by a previous refusal to accept, or by non payment. But when a bill
1. The acceptance must be shown to the person to whom the payable after sight is dishonored by non-acceptance and the drawee
instrument is negotiated. subsequently accepts it, the holder, in the absence of any different
2. Such person must take the bill for value on the faith of agreement, is entitled to have the bill accepted as of the date of the
such acceptance first presentment.
For future/non existing bill: no need for exhibition, enough that the - Acceptance may be made even before the bill has been
holder knows of the acceptance and relies upon it, the acceptor signed by the drawer or otherwise incomplete, even after
must be held to his acceptance even if it was not actually shown to it is overdue and even after it has been dishonored by non-
the holder. acceptance or non-payment
Incomplete bill- though it is allowed, the person to whom it is
Acceptance by telegram: transferred cannot be a holder in due course
- The words must indicate a promise to pay and not merely Overdue bill has been dishonored- a bill does not lose its
informative negotiability by the fact that it is overdue or has been
- The word “good” if written on the instrument constitutes dishonored. A bill may still be accepted within 24 hours or after
acceptance but not if written on a separate instrument there has been refusal to pay. This section refers only to a bill
that has not been dishonored.

Sec. 135. Promise to accept; when equivalent to acceptance. -


An unconditional promise in writing to accept a bill before it is drawn
is deemed an actual acceptance in favor of every person who, upon
the faith thereof, receives the bill for value.
The promise to accept a future non-existing bill must be
unconditional and in writing. As to the issue on whether or not a
description of the bill is essential for the acceptance, a description
is preferred so that there can be no doubt on the application of the
acceptance.

Sec. 136. Time allowed drawee to accept. - The drawee is allowed


twenty-four hours after presentment in which to decide whether or
not he will accept the bill; the acceptance, if given, dates as of the
day of presentation.
- The law allows the drawee time to accept because upon
acceptance he becomes liable as an acceptor
- the drawee has 24 hours from presentment for acceptance
within which to act upon the bill. Upon his acceptance, the
date of acceptance will be the date that the instrument was
presented to him

Sec. 137. Liability of drawee returning or destroying bill. - Where


a drawee to whom a bill is delivered for acceptance destroys the
same, or refuses within twenty-four hours after such delivery or
within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have
accepted the same.

There is constructive acceptance when:


1. the drawee whom a bill is delivered for acceptance
destroys it
2. the drawee refuses to return the bill within 24 hours after
delivery or within such period as given to him whether it
be accepted or non-accepted
Effect of retention of bill:
1. Mere retention without refusal to return the bill- if for more
than 24 hours, it constitutes constructive acceptance
under Sec 137. This is because 24 hours is considered to
be sufficient time. The manifest purpose in requiring the
prompt return of the bill is for the protection of the holder.
It is immaterial to the drawer when the bill is returned as
he is protected by notice of dishonor. Demand and refusal
are not required to consider that the instrument is
accepted because the moment the instrument was
presented it is already a demand for its acceptance and if
the bill is retained by the drawee, it implies a demand for
its return if acceptance is declined.

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