NEGOTIABLE INSTRUMENT

A written contract for the payment of money which complies with the requirements of Sec. 1 of the
Negotiable Instrumen ts Law, which by its form and on its face, is intended as a substitute for
money and passes from hand to hand as money, so as to give the holder in due course the right to
hold the instrument free from personal defenses available to prior parties.

Requisites of Negotiability
1. Must be in writing and signed by the maker or drawer;
2. Must contain an unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or to bearer; and
5. Where the instrument is addressed to the drawee it must be named or otherwise indicated
therein with reasonable certainty.(Sec. 1, NIL)

Functions of a Negotiable Instrument

1. Operates as a substitute for money;
2. A means of creating and transferring credit:
a. Check – for immediate payment
b. Ordinary bill of exchange and promissory note – for circulation of credits
3. Facilitates the sale of goods;
4. Increases the purchasing medium in circulation.

• The Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or
hampering transactions in commercial paper. Thus, the said statute should not be tampered
with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a
single case. (Osmena v. Citibank, G.R. No. 141278, Mar. 23, 2004)

Legal tender – that sort of money in which a debt, or other obligation calling for money, may be
lawfully paid, if the contract does not specify the medium of payment

▪ A negotiable instrument is not a legal tender. Only notes and coins issued by the Bangko
Sentral ng Pilipinas and fully guaranteed by the Government are considered legal tender.
(Sec. 52, New Central Bank Act)
▪ Coins in denomination of P1, P5, and P10 shall be legal tender in amounts not exceeding
P1,000. (BSP Circular No. 375 Series of 2006)
▪ Coins in denomination of 0.01c, 0.05c, 0.10c, and 0.25c shall be legal tender in amounts not
exceeding P100. (BSP Circular No. 537, Series of 2006)
▪ Checks representing demand deposits are not legal tender, but their acceptance as payment
of debts is at the option of the creditor. However, where the check has been cleared and
credited to the account of the creditor, it is equivalent to delivery of cash. (Sec. 60, New
Central Bank Act)

Two Important Features of a Negotiable Instrument

1. Negotiability
▪ It is that attribute whereby a bill or note or check may pass from hand to hand similar to
money, so as to give the holder in due course the right to hold the instrument and to collect
the sum payable for himself free from defenses.

• The essence of negotiability which characterizes a negotiable paper as a credit instrument

lies in its freedom to circulate freely as a substitute for money. (Firestone Tire v. CA, 353
SCRA 601)

2. Accumulation of Secondary Contracts

Secondary contracts are picked up and carried along with them as they are negotiated from
one person to another, or in the course of the negotiation of negotiable instruments, a series of
juridical ties between the parties thereto that arise either by law or by privity.

1
 NEGOTIABLE INSTRUMENTS NEGOTIABLE DOCUMENTS OF
TITLE
The subject is money. The subject is goods.
Is itself the property with value. The document is a mere evidence of
title – the thing of value being the
goods mentioned in the documents.
Must comply all the requisites of Sec. 1 of Does not have these requisites of Sec.
NIL. 1, NIL.
Holder of a negotiable instrument may Intermediate parties are not
run after the secondary parties for secondarily liable if the document is
payment if dishonored by the party dishonored.
primarily liable.
A holder, if holder in due course, may A holder can never acquire rights to
acquire rights over the instrument better the document better than his
than his predecessor. predecessors.
Governed by the Negotiable Instruments Governed by the Civil Code (Law on
Law. Sales).

NEGOTIABLE INSTRUMENTS NON-NEGOTIABLE INSTRUMENTS

Must contain all requisites of Sec. 1 of
the NIL.
Transferable by negotiation or
assignment.
Holder in due course can have rights
better than his transferor since he takes
the instrument free from personal
defenses.
Prior parties warrant payment
(Secondary Liability).
A transferee can be a holder in due
course if all the set forth under Sec. 52
(NIL) are complied with.
Requires clean title, one that is free from
any infirmities in the instrument and
defects of title of prior transferors.
Solvency of debtor is in the sense
guaranteed by the indorsers because
they engage that the instrument will be
accepted, paid or both and that they will
pay if the instrument is dishonored.
Does not contain all requisites of Sec.
1 of the NIL.
Transferable only by assignment, not
negotiation.
A transferee acquires no better rights
than his transferor since he merely
steps into the shoes of the latter.
Prior parties do not warrant payment
but merely the legality of his title.
A transferee remains as an assignee
and can never be a holder in due
course.
Transferee acquires a derivative title
only.
Solvency of the debtor is not
guaranteed unless expressly
stipulated.

CLASSES OF NEGOTIABLE INSTRUMENTS

1. Promissory Note – Unconditional promise in writing made by one person to another signed by
maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in
money to order or to bearer (Sec. 184, NIL).

• The buyer of a car who executed a promissory note to pay for the car and mortgaged the
car is liable for payment of the promissory note even if the car was stolen, because the
mortgage is merely an accessory contract (Perla Compania de Seguros, Inc. v. Court of
Appeals, 208 SCRA 487).
2. Bill of Exchange - An unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a sum certain in money to order or to bearer (Sec. 126,
NIL).

When the Bill of Exchange may be treated as a Promissory Note:

a. The drawer and the drawee are the same person; (Sec. 130)
b. The drawee is a fictitious person; (Ibid.)
c. The drawee has no capacity to contract; (Ibid.)
d. The instrument is so ambiguous that there is doubt whether it is a bill or a note. (Sec. 17
par. c)
▪ Holder has the option whether to treat it as a bill of exchange or a promissory note
e. The bill is drawn on a person who is legally absent.

PROMISSORY NOTE BILL OF EXCHANGE

Unconditional promise. Unconditional order.
Involves 2 parties. Involves 3 parties.
Maker is primarily liable. Drawer is only secondarily liable.
Only one presentment: for payment. Two presentments: for acceptance and
for payment, except in cases under
Sec. 143 of the NIL.
Maker may not insert an express Drawer may insert an express
stipulation limiting his own liability to the stipulation limiting his own liability to
holder. the holder.

3. Check - A bill of exchange drawn on a bank payable on demand (Sec. 185, NIL).

• The payee of crossed checks issued with notation “for payee’s account only” can sue a
collecting bank which allowed an unauthorized third person to deposit the checks in his
own account and to withdraw its proceeds, because the proceeds belonged to the payee,
and the bank paid the checks although the third person had no title to the checks
(Associated Bank v. Court of Appeals, 208 SCRA 465).
• A debtor remains liable on his loan even if the check he issued to pay for it became stale but
only if such debtor did not suffer any prejudice (International Corporate Bank v. Gueco, 351
SCRA 510).
• While it is true that the delivery of a check produces the effect of payment only when it is
cashed, pursuant to Article 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check
implies an undertaking of due diligence in presenting it for payment, and if he from whom it
is received sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given. (Papa v. Valencia, GR 105188,
January 23, 1998)

BILL OF EXCHANGE CHECK

Not necessarily drawn on a deposit. The Necessary that a check be drawn on a
drawee need not be a bank. bank deposit. Otherwise, there would
be fraud.
Death of a drawer of a Bill of Exchange, Death of the drawer of a check, with
with the knowledge of the bank, does not knowledge of the bank, revokes the
revoke the authority of the drawee to authority of the banker to pay.
pay.
May be presented for payment w/in a Must be presented for payment w/in a
reasonable time after its last negotiation. “reasonable time” (Sec. 193, NIL) after
its issue.
May be payable on demand or at a fixed Always payable on demand.
or determinable future time.
Must be presented for acceptance. Need not be presented for acceptance
unless the holder requests and the
bank desires.
Drawer and indorser remains liable even Drawer and indorser are discharged
when accepted. when certified.

Idea and purpose of bill of exchange

▪ Drawer has funds in the hands of the drawee.
▪ If drawee refuses to accept when he has funds for the purpose, he becomes liable to drawer for
damages and harm done to his credit.
▪ If drawer has no funds in the hands of the drawee, it is presumed that drawer must have made
arrangements with drawer so that he will honor the bill; drawee must look to drawer for
reimbursement.

Other Negotiable Instruments:

1. Bank drafts;
2. Bonds in the nature of promissory notes;
3. Certificate of deposit issued by banks, payable to depositor or his order, or to bearer;
4. Debenture; and
5. Trade acceptance.

Bank Draft is a bill of exchange, involving an order for payment of money, drawn by a bank upon
its correspondent bank, issued at the solicitation of a stranger who purchases and pays therefor
(Citytrust Banking Corp. v. Court of Appeals, 196 SCRA 560 ).

• Demand Draft is very different from a cashier’s or manager’s check. The former is an order
upon a third party purporting to be drawn upon a deposit of funds. The latter is a primary
obligation of the bank, which issues it and continues its written promise to pay on demand
(Republic v. Phil. National Bank, 3 SCRA 581).

CLASSES OF NON-NEGOTIABLE INSTRUMENTS

1. Treasury Warrant is not a negotiable instrument because it is payable out of a particular fund
(Metropolitan Bank & Trust Co. v. Court of Appeals, 194 SCRA 169).
2. Postal Money Order is not a negotiable instrument, because the operation of money order
system is not a commercial transaction but a governmental function for the public benefit; a
money order may be endorsed only once, and payment may be refused on a variety of
grounds (Philippine Education Co. Inc. v. Soriano, 39 SCRA 587).
3. Letters of Credit is not a negotiable instrument because it is not payable to order or bearer,
they are issued to a specified person.
4. Warehouse Receipts, Negotiable Document of Title, Bill of Lading are not negotiable
instruments, because their subject matter are things or goods, and not a sum certain in money
as required by Sec.1 of the NIL.

• Since a certificate of indebtedness which is not payable to order or bearer but is payable to
a specific person is not negotiable, the assignee takes it subject to the defect in the title of
the assignor (Traders Royal Bank v. Court of Appeals, 269 SCRA 15).

5. Trust Receipt is not negotiable because it is conditioned upon the resale of the goods.
6. Certificate of stock – muniment of title to a given share in the assets of a corporation; no
unconditional promise or order to pay a sum certain in money.
7. Credit card – evidence of indebtedness but not a promise to pay.

Parties to a Negotiable Instrument

1. Promissory Note:
a. Maker – one who makes the promise and signs the instrument.
b. Payee – party to whom the promise is made or the instrument is payable.
2. Bill of Exchange:
a. Drawer – gives the order to pay money to a third party.
b. Drawee - the person to whom the bill is addressed and who is required to pay.
▪ Acceptor – when drawee indicates a willingness to accept responsibility for the payment
of the bill by signing on the instrument
c. Payee – one in whose favor the bill is drawn or is payable.

NEGOTIABILITY

Factors that Affect the Determination of Negotiability of Instruments:

a. Whole instrument;
b. What appears on the face of the instrument (Caltex Phils. v.CA, 212 SCRA 448);
c. Requisites enumerated in Sec.1 of the NIL; and
d. Should contain words or terms of negotiability.

REQUISITES OF NEGOTIABILITY
1. In writing and signed by the maker or drawer.
a. Must be in writing – Sec. 191 of the NIL provides that the word “written” includes print.
b. Signed by the maker or drawer – may be in any form as long as they are adopted as the
signature of the signer.

IMPORTANT: the maker or drawer used what he affixed as his own signature for
authentication.
2. Must contain an unconditional promise or order to pay a sum certain in money.

▪ Promise or order must be ABSOLUTE

Promise or Order to Pay. The promise/order in a PN is the undertaking made by the maker to
pay a sum certain in money to the payee or the holder. The word “promise” or “order” need not
appear in the instruments to satisfy the requirement of Sec. 1 (b) of NIL.

Unconditional nature of the promise or order is not affected by:

1. An indication of a particular fund out of which reimbursement is to be made, or a particular
account to be debited with the amount; or
2. A statement of the transaction which gives rise to the instrument (Sec. 3, NIL)

N.B. Where the promise or order is subject to the terms and conditions of the transaction
stated, the instrument is rendered non-negotiable. (Commercial Law Review, Villanueva,
2004)

Conditional
1. An order or promise to pay out of a particular fund;
2. An instrument payable upon a contingency (the happening of the event does not cure the
defect).

PARTICULAR FUND FOR FUND FOR REIMBURSEMENT

PAYMENT
One act: the drawee pays directly Two acts:
from the particular fund indicated. 1. Drawee pays the payee from his own
Payment is subject to the condition funds; afterwards,
that the fund is sufficient. 2. The drawee pays himself from the
particular fund indicated.
Particular fund indicated is the direct Particular fund indicated is NOT the
source of payment. direct source of payment but only the
source of reimbursement.
Indication in the instrument makes Indication in the instrument does not
the promise or order conditional. affect the unconditional nature of the
promise or order.
3. Payable in Sum Certain in Money

• A sum is certain if the amount to be unconditionally paid by the maker of drawee can be
determined on the face of the instrument and is not affected by the fact that the exact amount
is arrived at only after a mathematical computation (Notes and Cases on Banks, Negotiable
Instruments and Other Commercial Documents, Aquino, 2006)

Sum is certain, even if:

1. With interest; or
▪ The amount is certain if:
a. The amount if each installment is indicated, and
b. The due date is fixed or determinable.
2. By stated installments; or
3. By stated installments with an acceleration clause;
4. With exchange; or
▪ Pursuant to RA 8183 (Foreign Currency Act), parties may agree that the obligation or
transaction shall be settled in any other currency at the time of payment. (Sec. 1,
Foreign Currency Act)
5. With cost of collection or attorney’s fees (Sec. 2. NIL).
▪ Uncertainty in amount occurs only after maturity, when it ceases to be substitute for
money.

Payable in Money
General Rule: If some other act is required other than payment of money, the instrument is not
negotiable (Sec. 5, NIL)
Exception: Gives option to creditor or holder to choose another in lieu of money.

Stated installments – the dates of each installment must be fixed or at least determinable and
the amount to be paid for each installment must be stated.

4. Payable on Demand or At a Fixed or Determinable Future Time

When Payable on Demand

1. Expressed to be payable on demand, at sight or on presentation;
2. No period of payment is stated;
3. Issued, accepted, or indorsed after maturity (only as between immediate parties). (Sec. 7,
NIL)

Demand Instrument – one wherein the holder may call for payment at anytime; or where the
maker has an option to pay at anytime, and the refusal of the holder to accept the payment will
terminate the running of interest, but the obligation to pay the note remains.

Fixed Time – holder may demand payment only on the stipulated date and not before. If he fails
to demand payment, the instrument becomes overdue but remains valid and negotiable. It is
converted into a demand instrument.

Determinable Future Time

1. At a fixed period after date or sight;
▪ After sight – after the drawee has seen the instrument upon presentment for acceptance
2. On or before a fixed or determinable future time specified therein; or
3. On or at a fixed period after the occurrence of a specified event, which is certain to happen,
though the time of happening be uncertain. (Sec. 4, NIL)

N. B. If the instrument states that the amount shall be paid in two equal installments, the
second being payable on a fixed date, the instrument can be considered negotiable since the
first installment would then be payable on demand.
 ACCELERATION INSECURITY CLAUSE EXTENSION CLAUSE
CLAUSE
A clause that renders Provisions in the contract Clauses in the face of the
the whole debt due and which allows the holder to instrument that extend the
demandable upon failure accelerate payment if he maturity dates:
of the obligor to comply deems himself insecure. a. At the option of the
with certain conditions. holder;
b. Extension to a further
definite time at the
option of the maker or
acceptor;
c. Automatically upon or
after a specified act or
event.
Does not affect the Non-negotiable; because Does not affect the
negotiable character of the holder’s whim and negotiable character of the
the instrument. caprice prevail without instrument.
the fault and control of the
maker.

Acceleration Clauses – the negotiability of the instrument is not affected even if it is to be paid
but stated installments, with a provision that, upon default in payment of any installment or of
interest, the whole shall become due (Sec. 2, NIL).

Insecurity Clauses - Provisions in the contract which allow the holder to accelerate payment “if
he deems himself insecure”. The instrument is rendered non-negotiable.

Extension Clauses - An instrument is payable at a definite time if:

1. By its terms it is payable at a definite time subject to extension to a further definite time at
the option of the maker or acceptor; or
2. Automatically upon or after a specified act or event.

5. Payable to Order or Bearer

Payable to Order (Sec. 8, NIL)

The instrument is payable to order where it is drawn payable to the order of a specified person
or to him or to his order.

The instrument may be payable to the order of:

1. A payee who is not maker, drawer, or drawee;
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees jointly; or
5. One or some several payees; or
6. The holder of an office for the time being.

N.B. Where the instrument is payable to the order of the drawer and it is accepted by the
drawee, the instrument is equivalent to a promissory note made by the acceptor in favor of
the drawer. (Commercial Laws of the Philippines, Vol. 1, Agbayani, 1992)

• A check payable to order of a bank for the account of a third party deposited the check in
its account with the payee and then withdrew the money; the drawer cannot recover from
the payee. (Equitable Banking Corporation v. IAC, 161 SCRA 513).
• Without the words, “to order” or “to the order of,” the instrument is payable only to the
person designated therein and is therefore not negotiable. (Consolidated Plywood
Industries v. IFC Leasing and Acceptance Corp., G.R. No. 72593, Apr. 30, 1987)

When Payable To Bearer:

1. Expressed to be so payable; or
2. Payable to a person named therein or to bearer; or
3. Payable to the order of a fictitious or non-existing person, and such fact was known to the
person making it so payable; or

Fictitious Payee Rule

It is not necessary that the person referred to in the instrument is really non-existent or fictitious
to make the instrument payable to bearer. The person to whose order the instrument is made
payable may in fact be existing but he is still fictitious or non-existent under Sec. 9 (c) of the
NIL if the person making it so payable does not intend to pay the specified persons (Sundiang
and Aquino, Reviewer on Commercial Law 2004 ed. page96)

4. Name of the payee does not purport to be the name of any person; or

▪ Where a check is made payable to the order of 'cash', the word cash 'does not purport to be
the name of any person', and hence the instrument is payable to bearer. The drawee bank
need not obtain any indorsement of the check, but may pay it to the person presenting it
without any indorsement.

5. The only or last indorsement is an indorsement in blank. (Sec. 9, NIL)

Note: Sec. 9(e) of the NIL pertains to instruments which are originally payable to order. If only
or the last indorsement is in blank, then it becomes a bearer instrument and may be
negotiated by mere delivery.

Sec. 40 of the NIL establishes the rule that a bearer instrument is always a bearer instrument.
However, the said section applies only to instruments originally payable to bearer. Hence,
when an original order instrument is indorsed in blank, it thus becomes a bearer instrument,
and if followed by a special indorsement, then it can NO LONGER be negotiated further by
mere delivery.

Bearer Instrument Always A Bearer Instrument. Where an instrument, payable to bearer, is

indorsed specially, it may nevertheless be further negotiated by delivery; but any person
indorsing specially is liable as indorser to only such holders as make title through his
indorsement (Sec. 40, NIL).

OMISSIONS & PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY

a. The validity and negotiable character of an instrument are not affected by the fact that (Sec. 6,
NIL):
1. It is not dated (date of issuance); or
2. Does not specify the value given, or that any value had been given thereof; or
3. Does not specify the place where it is drawn or the place where it is payable; or
4. Bears a seal; or
5. Designates a particular kind of current money in which payment is to be made;
6. Addressed to more than one drawee jointly.

• The nature of acceptance is important only in the determination of the kind of liabilities of
the parties involved, but not in the determination of whether a commercial paper is a bill
of exchange or not. (PBCom v. Aruego, G.R. No. L-25836, Jan. 31, 1981)

b. When date may be inserted by the holder – when the date is necessary in order to determine the
maturity date of the instrument. (Sec. 13, NIL)

▪ Under Sec. 11 of the NIL, “where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true date of the making,
drawing, acceptance, or indorsement, as the case may be.”

c. Additional provision. An instrument is still negotiable even if the following are present (Sec. 5,
NIL):
1. Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or
 2. Authorizes a confession of judgment if the instrument be not paid at maturity; or
3. Waives the benefit of any law intended for the advantage or protection of the obligor; or
4. Gives the holder an election to require something to be done in lieu of payment of money.

• Provisions in notes authorizing attorneys to appear and confess judgments against makers
should not be recognized in this jurisdiction by implication and should only be considered
as valid when given express legislative sanction. (PNB v. Manila Oil Refining, G.R. No. L-
18103, June 8, 1922)

RULES ON CONSTRUCTION IN CASE OF AMBIGUITY (Sec. 17, NIL.)

(1) Where the sum payable is expressed in words and also in figures and there is a discrepancy
between the two, the sum denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures to fix the amount;
(2) Where the instrument provides for the payment of interest, without specifying the date from
which interest is to run, the interest runs from the date of the instrument, and if the instrument
is undated, from the issue thereof;
(3) Where the instrument is not dated, it will be considered to be dated as of the time it was
issued;
(4) Where there is a conflict between the written and printed provisions of the instrument, the
written provisions prevail;
(5) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder
may treat it as either at his election;

▪ When the Bill of Exchange may be treated as a Promissory Note:

a. The drawer and the drawee are the same person; (Sec. 130)
b. The drawee is a fictitious person; (Ibid.)
c. The drawee has no capacity to contract; (Ibid.)

(6) Where a signature is so placed upon the instrument that it is not clear in what capacity the
person making the same intended to sign, he is to be deemed an indorser;
(7) Where an instrument containing the word "I promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable thereon.

TRANSFER AND NEGOTIATION:

Incidents in the Life of a Negotiable Instrument

1. Issue;
2. Negotiation;
3. Presentment for acceptance, in certain bills of exchange;
4. Acceptance;
5. Dishonor by non-acceptance;
6. Presentment for payment;
7. Dishonor by non-payment;
8. Notice of dishonor;
9. Discharge (Commercial Laws of the Philippines, Agbayani, 1992).

▪ If the instrument is negotiable, transfer thereof can be effected either through:

a. Negotiation;
b. Assignment; or
c. Operation of law.

▪ If the instrument is merely assigned, the transferee does not become a holder and he merely
steps into the shoes of the transferor (Salas v. CA, 181 SCRA 296). This is in consonance
with Sec. 49 of the NIL. Any defense available against the transferor is available against the
transferee.

Issuance – “issue” is the first delivery of the instrument complete in form to a person who takes
it as a holder (Sec. 191, NIL).
 Delivery - the transfer of the possession of the instrument by the maker or the drawer with
intent to transfer title to the payee and recognize him as the holder thereof. (De La Victoria v.
Burgos, GR 111190, 27 June 1995)

Negotiation - an instrument is negotiated when it is transferred from one person to another in such
manner as to constitute the transferee the holder thereof.
a. If payable to bearer, it is negotiated by delivery.
b. If payable to order, it is negotiated by the indorsement of the holder completed by delivery.

• The mere delivery to the pledgee of negotiable certificate of time deposit does not constitute
negotiation and does not make the pledgee the holder of the certificate. Under Article 2095
of the Civil Code, the certificate must be indorsed and to bind third person, the pledge must
appear in public instrument (Caltex Philippines Inc. v. Court of Appeals, 212 SCRA 448,
461, August 10, 1992).
• Where the holder has a lien on the instrument arising either from contract or by implication of
law, he is deemed a holder for value to the extent of his lien. (Sec. 27, NIL)

Assignment – transfer of the title to the instrument, with the assignee generally taking only such
title as his assignor has, subject to all defenses available against his assignor. The assignee
acquires the instrument subject to the rules applicable to non-negotiable paper.

NEGOTIATION
Governed by the NIL.
Pertains to negotiable instruments.
The transferee is a holder who may be a
holder in due course.
Holder in due course may acquire a better
right than a transferor.
Holder in due course takes the instrument
free from personal defenses available
among the parties.
Indorser is not liable unless there be
presentment and notice of dishonor
ASSIGNMENT
Governed by the Civil Code. (Sesbreno
v. CA, GR. No. 89252, May 24, 1993)
Pertains to contracts in general.
The transferee is a mere assignee.
Assignee merely steps into the shoes of
the assignor and acquires whatever
rights the assignor may have.
Assignee takes the instrument subject to
the defenses obtaining among the
original parties.
Assignor liable even without notice of
dishonour

Operation of Law:
1. Death of holder – title vests in his personal representative
2. Bankruptcy of the holder – title vests in his assignee or tristee
3. Death of the joint payee or indorsee – title vests in the surviving payee or indorsee in general.
(Commercial Laws of the Philippines, Agbayani, 1992)

How Negotiation Takes Place

1. Issuance - first delivery, complete in form, to a person who takes it as a holder.

Steps:
a. Mechanical act of writing completely and in accordance with the requirements
b. Delivery of the complete instrument by drawer or maker to the payee or holder with the
intention of giving effect to it

2. Negotiation

INCOMPLETE NEGOTIATION OF AN ORDER INSTRUMENT – where the holder of an

instrument, payable to his order, transfers it for value without indorsing it (Sec. 49, NIL).

Rights of a Transferee for Value:

1. Acquires only the rights of the transferor; and
2. Right to have the indorsement of the transferor.

For the purpose of determining whether the transferee is a holder in due course, the negotiation
takes effect as of the time when the indorsement is actually made (Sec. 49, NIL).

• Mere possession of a negotiable instrument does not in itself conclusively establish either the
right of the possessor to receive payment, or of the right of one who has made payment to be
discharged from liability. (BPI v. CA and Salazar, GR No. 136202, January 25, 2007)

INDORSEMENT – The writing of the name of the indorser on the instrument with intent either to
transfer the title to the same, or to strengthen the security of the holder by assuming a contingent
liability for its future payment, or both.

Indorser – the payee who transfers the instrument to another by signing at the back thereof.

Indorsee – person to whom the indorser negotiates the instrument, who becomes the holder of the
instrument.

Where Indorsement May be Placed:

a. At the back of the instrument or the instrument itself; or
b. On a separate piece of paper attached to the instrument called allonge (Sec 31, NIL)

N. B. Unless the indorsement is qualified, every indorser is a new obligor and the terms are found
on the face of the bill or note, with the additional obligation that if the instrument is dishonored by
non-payment or non-acceptance, and notice is given to the indorser, the latter will pay for it.
(Commercial Law Review, Villanueva, 2004)

N. B. Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse
the instrument as therein described adding, if he thinks fit, his proper signature. (Sec. 43, NIL)

General Rule: Indorsement must be of the entire instrument.

Exception: Indorsement as to the residue in case the instrument has been paid in part. (Sec. 32,
NIL)

N. B. An indorsement which purports to transfer to the indorsee a part only of the amount payable,
or which purports to transfer the instrument to two or more indorsees severally, does not operate
as a negotiation of the instrument. (Sec. 32, NIL)

KINDS OF INDORSEMENT:
1. Special - specifies the person to whom or to whose order the instrument is to be payable. The
indorsement of such indorsee is necessary to the further negotiation of the instrument (Sec.
34, NIL).

2. Blank - specifies no indorsee.

Rules on Blank Indorsement:
a. If originally payable to order, and negotiated by special indorsement, indorsement is
necessary for further negotiation.
b. If originally payable to order, and negotiated by blank indorsement, it can be further
negotiated by mere delivery. Blank indorsement converts an order instrument into a bearer
instrument.
c. If originally payable to bearer, even if the original bearer indorses it specially, it may still be
further negotiated by mere delivery.

Effects of Blank Indorsement:

a. May be negotiated by delivery; or
b. May be converted to special indorsement by writing over the signature of indorser in blank
any contract consistent with character of indorsement (Sections 34 and 35, NIL).

3. Conditional - indorsement subject to the happening of a contingent event (Sec. 39, NIL).
 Effects:
1. The maker may disregard the condition and make payment to the indorsee or his transferee
whether the condition has been fulfilled or not.
2. Any person to whom an instrument so indorsed is negotiated will hold the same, or the
proceeds thereof, subject to the rights of the person indorsing conditionally. (Sec. 39, NIL)

4. Restrictive – an indorsement is restrictive when it either:

a. Prohibits further negotiation of the instrument; or
b. Constitutes the indorsee the agent of the indorser; or
c. Vests the title in the indorsee in trust for or to the use of other persons (Section 36, NIL).

▪ Mere absence of words to negotiate does not make an indorsement restrictive. (Sec. 36,
last par.) But such omission in the body thereof will render the instrument non-negotiable.
▪ Exception to the rule on the continuation of negotiable character of an instrument
negotiable in its origin. (Sec. 47, NIL)

Rights of the Restrictive Indorsee

a. To receive Payment of the instrument;
b. To bring an Action thereon that the indorser could bring;
c. To Transfer his rights as such indorsee, where the form of the indorsement authorizes him
to do so. In case of transfer, all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement. (Sec. 37, NIL)

N B Restrictive indorsement destroys the negotiability of the instrument and bars further
negotiation to a holder in due course.

5. Qualified – constitutes the indorser as a mere assignor of the title to the instrument. It is made
by adding to the indorser’s signature words like "sans recourse", "without recourse", "indorser
not holder", “at the indorser's own risk", etc. (Sec. 38, NIL)

▪ Qualified indorsers are subject to the warranties provided under Sec. 65 of the NIL.
• Oral testimony is NOT admissible to establish that an unqualified indorsement is in fact
qualified. (Velasco v. Tan Liuan, GR. 17230, March 17, 1922)

Without Recourse – means without resort to a person who is secondarily liable after the default
of the person who is primarily liable. It shows the unwillingness to be answerable for the
solvency of prior parties.

Effects of Qualified Indorsement:

1. Qualified indorser has limited liability; he is liable for breach of warranty in case of dishonor
due to:
a. Forgery;
b. Lack of good title;
c. Lack of capacity to contract on that part of prior parties; or
d. The fact that the instrument was valueless at the time of indorsement, which fact was
known to him.
2. The negotiability of instrument not affected.
3. A qualified indorser is liable to all the parties who derive their title through the indorsement.
(Commercial Laws of the Philippines, Agbayani, 1992)

6. Absolute - one by which indorser binds himself to pay, either:

1. Upon no other condition than failure of prior parties to do so; or
2. Upon due notice to him of such failure.

7. Joint - indorsement payable to 2 or more persons (Sec. 41, NIL).

General Rule: Where the instrument is payable to two or more payees, all must indorse in
order that the instrument may be validly negotiated. Otherwise, an indorsement by one party
alone passes only his part of the instrument.
 Exceptions:
a. Where the payees or indorsees indorsing has the authority to indorse for the others; and
b. Where the payees or indorsees are partners.

8. Irregular – Where a person, not otherwise a party to an instrument, places thereon his signature
in blank before delivery, he is liable as indorser. (Sec.64, NIL)

Liability of Irregular Indorser:

1. Instrument payable to the order of a third person, indorser is liable to the payee and all
subsequent parties.
2. If instrument is payable to the order of the maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the maker or drawer.
3. If he signs for accommodation of the payee he is liable to all parties subsequent to the
payee.

Note: That an indorser of an instrument payable to bearer, whether specially indorsed or not,
shall be liable only to such holders who acquire the instrument through a Series of Continous
and Uninterrupted Indorsement of Any Kind.

Requisites before Secondary Liability Attaches:

1. Presentment for payment in notes and presentment for acceptance and/or payment in bills of
exchange;
2. Dishonor by non-payment in notes and dishonor by non-acceptance and/or non-payment in
bills of exchange; and
3. Notice of dishonor to secondary parties.

Presumptions on Indorsement

a. As to time of indorsement

General Rule: Negotiation is deemed prima facie to have been effected before the instrument
is overdue.
Exception: If the indorsement bears a date after the maturity of the instrument (Sec. 45)

Note: If the indorsement bears a date, the presumption would be that the date written is the
true date (Sec. 11, NIL)

b. As to place of indorsement – Every indorsement is presumed to have been made at the place
where the instrument is dated.

Indorsement by an Agent
Where a person is under obligation to indorse in a representative capacity he may indorse in such
terms as to negate personal liability by:
a. Adding words describing himself as agent;
b. Disclosing his principal;
c. Showing that he is duly authorized.

Indorsement to a “Cashier”
Where an instrument is drawn or indorsed to a person as “cashier” or other fiscal officer of a bank
or corporation it is deemed prima facie to be payable to the bank or corporation of which he is an
officer, and may be negotiated by either indorsement of the bank or corporation or indorsement of
the officer (Sec. 42, NIL)

Re-Negotiation to Prior Parties

Where an instrument is negotiated back to a prior party, such party may reissue and further
negotiate the same. But he is not entitled to enforce payment thereof against any intervening party
to whom he was personally liable.
Effects of Renegotiation
1. He may reissue or further negotiate the instrument prior to maturity.
2. Intervening parties are discharged.

Limitations on Renegotiation – a prior party cannot renegotiate the instrument:

1. Where it is payable to order of third person, and has been paid by drawer
2. Where it is made or accepted for accommodation, and paid by the party accommodated.

Striking Out Indorsement

The holder may at anytime strike out any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all indorsers subsequent to him, is thereby relieved
from liability on the instrument. (Sec. 48, NIL)

Continuation of Negotiable Character

An instrument negotiable in its origin continues to be negotiable until:
1. An indorsement prohibits the further negotiation of the instrument; or
2. It has been discharged by payment made at or after maturity or otherwise.

HOLDERS AND ACCOMODATION PARTIES

HOLDERS
The payee or indorsee of a bill or note who is in possession of it or the bearer thereof. In other
words, the payee or indorsee is the holder of an order instrument while the payee or the bearer is
the holder of bearer instrument. (Sec. 191, NIL).

Classes of Holders:
1. Holder (Sec. 51);
2. Holder for Value (Sec. 26, NIL); or
3. Holder in Due Course (Secs. 52 and 57, NIL)

Importance of the Classification – each class of holders has defenses which are available to one
class and which may not be available to other classes. (Laws on Negotiable Instruments, De
Leon)

Rights of Holders in General: (Sec. 51, NIL)

1. Right to sue in his own name
2. Payment to him in due course discharges the instrument.

Payment in due course (Sec. 88, NIL)

a. When made at or after the maturity of the payment;
b. Payment made to the holder thereof;
c. In good faith; and
d. No notice of defective title.

N B A transferee of unendorsed instrument is certainly not a holder as defined in Sec. 91 and

cannot be considered a holder in due course. Nevertheless, if the transferor could sue in his
own name, then the transferee may also do so under the principle in assignment that the
assignee steps into the shoes of the assignor. (Laws on Negotiable Instruments, De Leon)

• The only disadvantage of a holder NOT in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable. (Chan Wan v. Tan Kim, GR No. L-15327,
September 30, 1960)

HOLDER IN DUE COURSE

A holder who has taken the instrument under the following conditions (Sec. 52, NIL):
1. The instrument is Complete and regular upon its face;
▪ Incomplete when it is wanting in any material particular or particular to be inserted in a NI
(Sec. 14).
 ▪ To be irregular, there is visible or apparent alteration, tampering or erasure on the face of
the instrument.
2. He became the holder of it before it was Overdue and that he had no notice that it has been
previously dishonored, if such was the fact;
▪ An instrument is overdue after the date of maturity.

Rule in case of installment instruments

▪ Where installments due BEFORE transfer – not a HIDC as to such installments whether or
not he had notice of the non-payment.
▪ Where transferee w/o notice of non-payment – HIDC as to installments to mature in the
future.
▪ Where transferee w/ notice of non-payment – not a holder in due course.

Interest – Where by the terms of the instrument, the principal was to become due upon the
default of the payment of interest, one who takes the instrument upon which the interest is
overdue is not a holder in due course.

Rule in case of demand instruments

a. Date of maturity is determined by the date of presentment
b. Overdue if w/in a reasonable time after issue, the instrument is still negotiated (Sec. 53,
NIL)
c. In determining what is a “reasonable time” regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such instruments, and the facts
of the particular case. (Sec. 193, NIL)

3. He took it For value and in good faith;

Good Faith - honesty in intention and absence of suspicious circumstances

N B Presumption of good faith is destroyed if the payee or the indorsee acquired possession of
the instrument under circumstances that should have put him to inquiry as to the title of the
holder who negotiated the instrument. Good faith refers to the indorsee or transferee, not to the
indorser or transferor.

Value - any consideration sufficient to support a simple contract (Sec. 25, NIL).

Value includes:
1. Pre-existing debt;
2. Value previously given; or
3. Lien arising from contract or by operation of law.
▪ Holder is deemed a holder for value to the extent of his lien. (Sec. 27, NIL)

Presumption of consideration – Every negotiable instrument is deemed prima facie to have

been issued for a valuable consideration; and every person whose signature appears thereon
to have become a party thereto for value. (Sec. 24, NIL)

Consideration – an inducement to a contract, that is, the cause, price or impelling influence
which induces a contracting party to enter into the contract; essential or more proximate
purpose a party has in view at the time of entering into the contract

N B Consideration is not relevant to the negotiability of an instrument but is significant on the

question of whether or not one is a holder in due course.

4. At the time it was negotiated to him, he had no notice of any Infirmity in the instrument or
defect in the title of the person negotiating it.

To constitute notice:
Person to whom instrument was negotiated must have had actual knowledge of the infirmity or
defect or must have had acted in bad faith (Sec. 56, NIL)
 Defects in the acquisition
a. Fraud
b. Force, duress or fear
c. Other unlawful means
d. Illegal consideration (Sec. 55, NIL)

Defects in the negotiation

a. Breach of faith
b. Fraud (Sec. 55, NIL)

Infirmities - contents that are wrong with the instrument itself as distinguished from those which
are lacking in the contracts on the instruments

Effect of notice before full amount is paid:

Transferee will be deemed a holder in due course only to the extent of the amount therefore
paid by him. (Sec. 54, NIL)

Who is Deemed a Holder in Due Course

General Rule: Every holder as defined in Sec. 191 of the Negotiable Instruments Law is presumed
to be holder in due course.

Exception: When the title of any person who has negotiated the instrument was defective, the
burden is on the holder to prove that he or some person under whom he claims acquired the title
as a holder in due course. (Sec. 59, NIL)

Exception to the Exception: It does not apply to parties prior to the defect; the holder is still to be
considered holder in due course.

Rights of Holder In Due Course:

1. Sue on the instrument in his own name. (Sec. 51, NIL)
2. Receive payment on the instrument and payment in due course discharges the instrument.
(Ibid.)
3. Hold the instrument:
a. Free from any defect of title of prior parties (Sec. 57, NIL)
b. Free from defenses available to prior parties among themselves (Ibid.)
- Free from PERSONAL defenses
4. May enforce payment on the instrument to the full amount against all parties liable thereon

Exceptions:
a. When the holder is a holder for value only to the extent of his lien (Sec. 27, NIL)
b. When the holder acquired notice of any infirmity in the instrument or defect in the title of
the person negotiating the same before he has paid the full amount agreed to be paid
(holder in due course only to the extent of the amount paid) (Sec. 54, NIL)
c. In case of alteration as to amount – holder in due course may enforce payment only
according to its original tenor (Sec. 124, NIL)

HOLDER NOT IN DUE COURSE

Is one who became a holder of the instrument without any, some or all of the aforementioned
requisites of Sec. 52, NIL.

General Rule: Failure to make inquiry as to the nature of one’s title is not evidence of bad faith.
Exceptions:
1. Where a holder’s title is defective or suspicious, it cannot be stated that the payee acquired the
check without the knowledge of said defect in the holder’s title and because of this the
presumption that it is a holder in due course or that it acquired the instrument in good faith
does not exist. (De Ocampo and Co. v. Gatchalian, 3 SCRA 596).
2. Holder to whom a cashier’s check is not indorsed in due course and negotiated for value is not
a holder is due course.
(Mesina v. IAC, 145 SCRA 497)

Rights of a Holder Not In Due Course:

1. He may sue in his own name.
2. He may receive payment, and if the payment is in due course, the instrument is discharged.
3. He holds the instrument subject to the same defenses as if it were non-negotiable.
4. If he derives his title from a HIDC, and he is not a party to any fraud or illegality affecting the
instrument, he has all the rights of such former holder in respect of all prior parties. (Shelter
Rule)

Presumption of Due Course Holding

Every holder is deemed prima facie to be a holder in due course. (Sec. 59, NIL)

When it is shown that the title of any person who has negotiated the instrument was defective, the
burden is on the holder to prove that he or some person under whom he claims acquired the title
as holder in due course. (Ibid.)
▪ The rule does not apply in favor of a party who became bound on the instrument prior to the
acquisition of such defective title (Ibid.)

General Rule: A holder not in due course is subject to personal and real defenses. (Sec. 51 and
57, NIL)

Exception:
Shelter Rule – A holder who derives his title from a HIDC, and who is not himself a party to any
fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all
prior parties. (Sec. 58, NIL)

Exception to the Exception:

The shelter rule does not apply if the holder was previously a holder not in due course who had
subsequently repurchased the instrument either personally or through an agent.

• A collecting bank which allowed its depositor to withdraw the proceeds of a check although the
check had not been cleared and was told by the depositor not to present the check until a later
date although the check was already due, is not a holder in due course and cannot recover
from the drawer in case a check is dishonored. (Banco Atlantico v. Auditor General, 81 SCRA
335)
• Where the accommodation makers of a promissory note signed by a contractor signed
because the proceeds of the construction were assigned to the payee but the payee released
the proceeds to pay for labor and materials, the payee is not a holder in due course and
cannot hold them liable, because the payee is in bad faith. (Prudencio v. Court of Appeals,
143 SCRA 7)
• A cigarette manufacturer which issued crossed checks to pay for the purchase of tobacco to a
supplier who failed to deliver the tobacco and who indorsed the checks to an investment
house cannot be held liable by the investment house for stopping the payment of the checks,
where the investment house failed to make inquiries, since the crossing serves as a warning
that the checks were issued for a particular purpose, the investment house is not a holder in
due course. (Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, 230 SCRA 647).
• A drawer who issued postdated checks to another in consideration of the undertaking of the
latter to rediscount the checks and to use the proceeds to redeem pieces of jewelry that had
been pawned and to share with the drawer the profits from the jewelry transaction is liable to
the parties to whom the checks were discounted even if the party to whom she issued the
checks did not comply with her obligation, where the party to whom the checks were
discounted is a holder in due course (Escante v. Court of Appeals, 224 SCRA 19).

HOLDER FOR VALUE

Where value has at anytime been given for the instrument, the holder is deemed a holder for value
in respect to all parties who become such prior to that time. (Sec. 26, NIL)
Value – a consideration sufficient to support a simple contract. These include antecedent debts
and lien on the instrument. (Sec. 25, NIL)

▪ The holder is a holder for value only to the extent that the consideration agreed upon has been
paid, delivered or performed. Non-performance of the obligation will give rise to partial or full
defense of failure of consideration as the case may be.
▪ Where the transferee receives notice of any infirmity in the instrument or defect in the title of
the person negotiating the same before he has paid the full amount agreed to be paid therefor,
he will be deemed a holder in due course only to the extent of the amount paid therefor by
him.

• As regards an accommodation party, the fourth condition, i.e. lack of notice of any infirmity in
the instrument or defect in title of the persons negotiating it, has no application (Stelco
Manufacturing Corp. v. CA, 210 SCRA 51).

ACCOMMODATION PARTY
An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor and for the purpose of lending his name to some other
person. An accommodation party is liable to holder for value, notwithstanding such holder, at the
time of taking the instrument, knew him to be only an accommodation party. The fourth condition
(d) in Section 52, NIL (Lack of notice in the infirmity of the instrument or defect in the title of the
person negotiating it), has no application. (Sec. 29, NIL)

Requisites:
a. Accommodation party must sign as maker, drawer, acceptor or indorser;
b. He must not receive value therefor: and
c. The purpose is to lend his name or credit.

• “Without receiving value therefor” means without receiving value by virtue of the instrument.
(Clark v. Sellner, 42 Phil. 384)

Rights of Accommodation Party

1. Right of recovery against Accommodated Party.

• When the accommodation party makes payment to the holder of the note, he has the right
to sue the accommodated party for reimbursement since the relation between them is in
effect that of principal and sureties (Sadaya v. Sevilla, 19 SCRA 924, 927).
2. Right to Demand Contribution from an Accommodation Co-Maker.
• Should there be more than one accommodation party who signs an instrument to lend their
name to an accommodated party, each of them is jointly and severally liable to the creditor.
Thus, where the principal debtor fails to pay what is due on the instrument, either one of
the solidary accommodation makers may be held liable for what was due. However, if one
of the accommodation party pays the obligation of the accommodated party in favor of the
creditor, said accommodation party can demand contribution from his solidary co-maker
subject to conditions required by the Civil Code, i.e., he may demand of each of the others
the share which is proportionally owing from him (Sadaya v. Sevilla, 19 SCRA 924, 927).
3. Right to Interpose Lack of Consideration against Accommodated Party.
• An absence or failure of consideration is a matter of defense as against any person not a
holder in due course (Sec. 28, NIL). In this regard, since an accommodation party signs
the instrument as maker, drawer, acceptor or indorser for the purpose of lending his name
only without receiving any value therefor, such lack of consideration can be interposed as
a defense against the party accommodated. Appropriately, it has been held that the
defense of want of consideration is available against the party accommodated (Prudential
Bank & Trust Co. v. Ramesh Trading Co., C.A. 32908-R, 12 SCRA (1964)).
4. Right to revoke the accommodation at anytime before the instrument is negotiated for value.

Obligations of Accommodation Party

A. Liability to a Holder for Value

• An accommodation party is liable on the instrument to a holder for value, notwithstanding

such holder, at the time of taking the instrument, knew him to be only an accommodation
party becomes the holder thereof must have acquired it for value in due course. In this
regard, the Supreme Court has declared that the accommodation party is liable to a holder
for value as if the contract was not for accommodation and it is not a valid defense that the
accommodation party did not receive any valuable consideration when he executed the
instrument (Ang Tiong v. Ting, 22 SCRA 713, 716).

B. Liability to an Accommodation Co-Maker

• In the event that there is more than one accommodation party to an instrument and one of
them was required to honor the instrument upon maturity, the paying accommodation co-
maker has the right to seek contribution against the other accommodation co-maker (Sadaya
v. Sevilla, 19 SCRA 924). SC cited Article 18 of the Civil Code, such that, in matters not
covered by the special laws, "their deficiency shall be supplied by the provisions of this
Code". Nothing extant in the NIL would define the right of one accommodation maker to seek
reimbursement from another. Same situation arises if an accommodation co-maker made
payment by virtue of a judicial demand or where the principal debtor who is the party
accommodated has become insolvent (Sadaya v. Sevilla, 19 SCRA 924).

Liability of Accommodated Party – the accommodated party impliedly agrees to take up the
instrument at maturity and to indemnify the accommodation party against the consequences of
non-payment.

Effects of Accommodation
The person, to whom an instrument thus executed is subsequently negotiated, has a right of
recourse against the accommodation party in spite of the former’s knowledge that no
consideration passed between the accommodation and accommodated parties.

• A corporation cannot act as an accommodation party. The issue or endorsement of negotiable

instrument by a corporation without consideration and for the accommodation of another is
ultra vires. (Crisologo v. CA, 117 SCRA 594)
• A corporate officer who signed a promissory note jointly and severally with the corporation is
primarily liable as co-maker. (Republic Planters Bank v. Court of Appeals, 216 SCRA 738)
• A party who signed a promissory note as accommodation maker in favor of the payees, who
then indorsed it to a financing company, cannot raise the defense that he did not receive any
value, but he is entitled to reimbursement from the party accommodated. (Caneda v. Court of
Appeals, 181 SCRA 762)
• A married couple who signed a promissory note in favor of a bank to enable the sister of the
husband to borrow from the bank are accommodation parties and are liable for the payment of
the loan. (Town Savings and Loan Bank v. Court of Appeals, 223 SCRA 459)
Where a party indorsed several checks as accommodation endorser and the checks were
dishonored for lack of funds, she is liable to the holder for the payment of the checks. (People
v. Maniego, 148 SCRA 30)

REGULAR PARTY ACCOMMODATION PARTY

Does not sign the instrument for the
purpose of lending his name or credit.
Presumed to have become a party to the
instrument for value.
Can avail of the defense of
absence/failure of consideration against
one, not a holder in due course.
Cannot limit his liability appearing on the
instrument by parole evidence.
May not sue any subsequent party for
Signs the instrument for the purpose of
lending his name or credit.
Signed the instrument without receiving
value therefore.
Cannot avail of the defense of absence or
failure of consideration.
May show by parole evidence that he is
merely an accommodation party.
May sue the accommodated party for
reimbursement. reimbursement.

DEFENSES

KINDS OF DEFENSES
A. Real Defense - those that attach to the instrument and are available against all holders,
whether in due course or not, but only by the party or parties entitled to raise them.
B. Personal Defense or Equitable Defenses - available only against the holder not in due course
who stands in privity with the party who is entitled to set it up or those who are not or do not
have the rights of a holder in due course.

Real vs. Personal Defenses

REAL DEFENSES PERSONAL DEFENSES
The contract is void. The contract is voidable.
Available against a holder in due course Not available against a holder in due
course
1. Minority (available only to the minor). 1. Failure or absence of consideration
Sec. 22, NIL) (Sec. 28, NIL).
2. Forgery (Sec.23, NIL) 2. Illegal consideration (Sec. 55, NIL)
3. Non-delivery of incomplete Instrument 3. Non-delivery of complete
(Sec. 15, NIL). instrument.(Sec.16, NIL)
4. Material Alteration. (Sec. 124, NIL) 4. Conditional delivery of complete
5. Ultra vires act of Corporation. (Sec. instrument.
22, NIL) 5. Fraud in inducement.
6. Fraud in factum or Esse contractus. 6. Filling up blank not in authority. (Sec.
7. Illegality – if declared void for any 14, NIL)
purpose. 7. Duress or intimidation. (Sec. 55, NIL)
8. Vicious force or violence. 8. Filling up blank beyond reasonable
9. Want of authority. time. (Sec.145, NIL)
10. Prescription 9. Transfer in breach of faith(Sec. 55,
11. Discharge in insolvency. NIL).
12. Insanity where the insane has a legal 10. Mistake
guardian 11. Insertion of wrong date (Sec. 13, NIL)
13. Execution of instrument between 12. Ante-dating or post-dating for illegal
public enemies or fraudulent purpose. (Sec. 12, NIL)
14. Marriage, in the case of the wife 13. Ultra vires acts of corporations which
has power to issue negotiable paper
but the issuance was not authorized for
the particular purpose
14. Filling up the blank beyond
reasonable time (Sec. 14)
15. Want of authority of agent when he
has apparent authority
16. Intoxication
17. Insanity where there is no notice of
insanity to the one contracting with the
insane
18. Negotiation under circumstances
amounting to fraud (Sec. 55, NIL)
19. Acquisition of instrument by unlawful
means (Sec. 55, NIL)

A. Effects of Incomplete but Delivered Negotiable Instrument:

1. Holder has prima facie authority to fill up the instrument;

Requisites:
 a. Want of material particular in the instrument;
b. Possession;
c. Authority to fill up the blank
1) Strictly in accordance with the authority, and
2) Within a reasonable time.

Requisites of authority to fill up the amount:

i. Signature on a blank paper;
ii. Delivery by the person signing;
iii. For the purpose of converting it into a negotiable instrument.

N B If the holder of the instrument, after it was filled up, is a holder in due course, the holder
may enforce the instrument as if it has been filled up strictly in accordance with the
authority given and within a reasonable time. (Notes and Cases on Banks, Negotiable
Instruments and Other Commercial Documents, Aquino, 2006)

2. Completion within reasonable time and according to authority given; and

3. Holder in due course can enforce such despite deficiency. (Sec. 14, NIL)

B. Effects of Incomplete and Undelivered Negotiable Instrument

If completed and delivered without authority, not a valid contract against a person who has
signed before delivery of the contract even in the hands of holder in due course but
subsequent indorsers are liable. (Sec. 15, NIL)

• Where the debtor who drew two checks payable to his creditor never delivered the checks
to his creditor and a third party was able to collect the proceeds of the checks by forging
the endorsement of the creditor as payee, the creditor has no cause of action against
anyone on the basis of the checks, since the payee acquires no interest in the checks until
delivery to him (Development Bank of Rizal v. Sima Wei, 219 SCRA 736).

C. Effects of Complete but Undelivered Negotiable Instrument

1. Between immediate parties and remote parties not holders in due course, there is a prima
facie presumption of delivery but subject to rebuttal;
2. As to a holder in due course, all prior deliveries are conclusively presumed valid; and
3. If instrument is not in the hands of drawer/maker, valid and intentional delivery is presumed.
(Sec. 16, NIL)

General Rule: The delivery of promissory notes, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been paid (par. 2, Art. 1249,
Civil Code).

Exceptions:
1. When through the fault of the creditor the legality of the promissory notes, bills of exchange, or
other mercantile documents have been Impaired (par. 2, Art. 1249, Civil Code);
2. When the creditor is in Estoppel or he had previously promised he would accept a check;
3. When the check Lost its value because of the fault of the creditor (Art. 1249, 2nd par.), as when
he had unreasonably delayed in presenting the check for payment (Phil. Nat. Bank v. Seeto, L-
4388, Aug, 13, 1952), or when, in the case of a foreign bill of exchange, the creditor neglected
to make a protest (Quiros v. Guinlay, 5 Phil. 675); and
4. “A check which has been Cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in an amount equal to the amount credited to his
account” (Sec. 60 The New Central Bank Act, RA 7653).

• Where the checks issued in payment of the salary of an assistant city fiscal has not yet
been delivered to him, they cannot be garnished for the funds they represent are still
public funds, since every contract on a negotiable instrument is incomplete until its
delivery for the purpose of giving effect to it (De La Victoria v. Burgos, 245 SCRA 374)
SECTIONS 14, 15 AND 16 COMPARE
 SECTION 14 SECTION 15 SECTION 16
Completeness a. Wanting in any Incomplete Complete
material particular.
b. b. Blank paper with
signature.
Delivery Delivered Undelivered Undelivered
Note: Delivery
may be made for a
conditional or for
special purpose of
transferring the
property in the
instrument.
Authority Of a. Prima facie No authority to May negotiate if
Person In authority to complete and/or delivered to him
Possession complete it by negotiate by or under the
filling up the blanks instrument. authority of the
therein. party making,
b. Signature operate indorsing, drawing
as a prima facie or accepting, as
authority to fill up it the case may be.
up as such for any
amount.
Kind Of Defenses Personal Real Personal
When Enforceable If filled up strictly in Not enforceable. When delivery is
accordance with made by or under
authority given and authority of the
within a reasonable party making,
time. indorsing drawing
or accepting, as
the case may be.
Rights Of Holder If holder in due None in the hands Can enforce the
course, he can of the holder, instrument.
enforce the However, the Note: Where the
instrument as invalidity of the instrument is in
completed against above instrument the hands of a
parties prior or is only with holder in due
subsequent to the reference to course, a valid
completion. parties whose delivery thereof by
signatures appear all parties prior to
If not a holder in due on the instrument him so as to make
course, he can prior to delivery them liable to him
enforce the because as to is conclusively
instrument as parties whose presumed. Where
completed only signature appear the instrument is
against parties on the instrument no longer in the
subsequent to the after delivery, the possession of a
completion but not instrument is valid. party whose
against those prior. (CUT-OFF RULE) signature appears
thereon, a valid
and intentional
delivery to him is
presumed until the
contrary is proved.
D. Effect of Absence or Failure of Consideration, Or Illicit Consideration
▪ Personal defense to the prejudiced party and available against any person not a holder in
due course. (Sec. 28, NIL)

• Since a check which was dishonored for lack of funds is presumed to have been issued for
a valuable consideration, the drawer should be ordered to pay its value if he failed to rebut
the presumption (Villaluz v. Court of Appeals, 278 SCRA 540; Ong v. People, 346 SCRA
117).

• Since a negotiable Instrument is presumed to have been issued for a valuable

consideration, the mere presentation of a dishonored check in evidence by the holder
entitles it to recover from the drawer even if it did not established the accountability of the
drawer (Travel-On v. Court of Appeals, 210 SCRA 351).

FORGERY
Counterfeit making or fraudulent alteration of any writing, which may consist of:
1. Signing of another name with intent to defraud; or
2. Alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.
arellano law

Effects of Forgery:
General Rule: When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative.
Effects:
1. No right to retain the instrument

2. No right to give discharge therefor

3. No right to enforce payment thereof against any party thereto

Exception: unless the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority (Sec. 23, NIL)

Rules in Relation to Forgery:

1. Only the forged signature is wholly inoperative not the instrument itself, and not the genuine
signature;
2. In case of forgery of an indorsement of an instrument payable to order, it is not only the person
whose signature was forged who would not be liable but also the parties prior to such person.
Payment under a forged indorsement is not to the drawer’s order;
3. Persons Precluded from Setting up Forgery:
 a. Those who warrant or admit the genuineness of the signature in question, such as
acceptors (Sec. 62), indorsers (Sec. 66) and those who negotiated by delivery (Sec. 65);
and
b. Those who, by their acts, silence, or negligence, are estopped from setting up the defense
of forgery.

General Rule: In case of forgery of the indorsement of the payee of the check the drawee bank
cannot debit the drawer’s account and that loss shall be borne by the drawee bank. The
depositary or collecting bank is liable to the drawee in case of forged indorsement.

Exception: If the drawee is negligent or guilty of such conduct as would estop him from asserting
the forged character of an indorsement as against the drawer.

• A drawee bank which pays a check which was stolen by a classmate and a friend of the
drawer, who then forged the signature of the drawer should return the amount to the account
of the drawer, because it is guilty of negligence in paying the check and the drawer cannot be
considered negligent (Philippine National Bank v. Quimpo, 159 SCRA 582).
• A drawee bank which paid a check on which the signature of the drawer had been forged
cannot recover the payment from the collecting bank, because payment implies acceptance
and an acceptor admits the genuineness of the signature of the drawer (Philippine National
Bank v. Court of Appeals, 25 SCRA 693).
• A drawer who discovered the loss of its checkbook and did not notify the bank of the loss
should bear the loss caused by the subsequent payment of the checks in which the signature
of the drawer had been forged (Security Bank and Trust Corporation v. Triumph Lumber and
Construction Corporation, 301 SCRA 537).
• The general rule is that, in case of forgery of the indorsement of the payee of the check, the
drawee bank cannot debit the drawer’s account and that loss shall be borne by the drawee
bank. The depositary or collecting bank is liable to the drawee in case of forged instrument
because it guarantees all prior indorsement (Trader’s Royal Bank v. RPN G.R. No. 138510,
Oct. 10, 2002).

Cut-Off Rule
Parties PRIOR to the forged signature are cut-off from the parties AFTER the forgery in the sense
that prior parties cannot be held liable and can raise the defense of forgery. The holder can only
enforce the instrument against parties who became such after the forgery.
▪ The rule applies only if it is an ORDER instrument. If it is a BEARER instrument, then it applies
only to the party whose signature was forged.

UNDATED INSTRUMENT
Rules of the NIL:
1. The insertion of a wrong date will not avoid the instrument in the hands of a subsequent holder
in due course; but as to him, the date so inserted is to be regarded as the true date. (Sec. 13,
NIL)
2. If an incomplete instrument, after completion, is negotiated to a holder in due course, it is valid
and effectual for all purposes in his hands and he may enforce it as if it had been filled up
strictly in accordance with the authority given within reasonable time. (Sec. 14, NIL)

MATERIAL ALTERATION
Any change in the instrument that affects or changes the liability of the parties in any way.

Effects of Alteration:
1. Alteration by a party - Discharge the instrument and all prior parties thereto who did not give
their consent to such alteration. (Sec. 124)

Exceptions:
1. The party who made the alteration
 2. One who authorized or assented to the alteration
3. Indorsers subsequent to the alteration

2. Alteration by a stranger (Spoliation) - Avoids the instrument in the hands of one who is not a
holder in due course as against any prior party who has not assented to the alteration.

▪ However, if an altered instrument is negotiated to a Holder in due course, he may enforce

payment thereof according to its original tenor regardless of whether the alteration was
innocent or fraudulent.
▪ “It is a partial real defense.”

• Where the amount of the check was altered by increasing it but the drawee bank failed to
return it to the collecting bank within twenty-four hours, the collecting bank is absolved from
liability for the drawee bank should detect the alteration (Republic Bank v. Court of Appeals).

24-Hour Clearing Rule:

• When the drawee bank fails to return a forged check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from liability. (Republic Bank v. Court of
Appeals, 66 SCRA 100)

• The alteration of the serial number of a check is not material and does not entitle the drawee
bank which paid it to recover the payment (Philippine National Bank v. Court of Appeals, 256
SCRA 491).

Changes that Constitutes Material Alterations:

1. Date;
2. Sum payable, either for principal or interest;
3. Time or place of payment;
4. Number or relations of the parties;
5. Medium or currency in which payment is to be made;
6. That which adds a place of payment where no place of payment is specified; and
7. Any other change or addition which alters the effect of the instrument in any respect.

FRAUD
1. “Fraud In Execution” (fraud in factum or fraud in esse contractus) – present when a person
induced to sign an instrument not knowing its character as a note or a bill. The person who
signs the instrument does not know that he is signing a negotiable instrument.
2. “Fraud In Inducement” – the person who signs the instrument intends to sign the same as a
negotiable instrument but was induced to do so only through fraud. His consent to issue a
negotiable instrument was vitiated by fraud;

▪ Fraud In Factum is a real defense while Fraud In Inducement is a personal defense.

MINORITY OR INCAPACITY OR WANT OF AUTHORITY

Minority or Incapacity
Minority or incapacity may be invoked by the minor or incapacitated as a real defense.
However, other parties who are capacitated cannot invoke such defense. The defense is personal
to the minor or incapacitated only. Transfer of title by the minor is, however, effective negotiation.

General Rule: A minor incurs no liability.

Exceptions:
1. Misrepresentation as to age
2. Minor kept the fruits or benefits
3. Minor spent money in good faith (Art. 1427, NCC)

Ultra-vires Acts:
 The fact that the indorsement or issuance of an instrument is an ultra vires act of a corporation
is a real defense. However, such negotiation passes title to the instrument (Sec. 22)

• The issue or indorsement of negotiable paper by a corporation without consideration and for
the accommodation of another is ultra vires. (Crisologo v. CA, GR 80599, 15 September
1989)

▪ The fact that indorsement or issuance of an instrument is an ultra vires act of a corporation is a
real defense.

DEFECTIVE TITLE
The title of a person who negotiates an instrument is defective within the meaning of this Act
when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or
under such circumstances as amount to a fraud. (Sec. 55, NIL)

PRESCRIPTION
Real defense that may be raised against a holder in due course. The prescriptive period for the
filing of a claim based on negotiable instruments is 10 years from the time the cause of action
accrued.

PARTIES WHO ARE LIABLE

LIABILITY
Makes the parties liable to pay the sum
certain in money stated in the instrument
Conditioned on presentment and notice
of dishonor
Action cannot be brought until the
maturity of the instrument.
Liability vs. Warranty
WARRANTY
Impose no direct obligation to pay in the
absence of breach. In case of breach, the
person who breached the same may either
be liable or barred from asserting a
particular defense.
Does not require presentment and notice of
dishonor
Action may be brought at anytime.

Parties Primarily Liable

a. Maker
1. Engages to pay according to the tenor of the instrument; and
2. Admits the existence of the payee and his capacity to indorse. (Sec. 60, NIL)

N B The liability of the maker is primary and unconditional, and he cannot shift his liability to any
person without the payee’s consent.

b. Acceptor
1. Engages to pay according to the tenor of his acceptance;
2. Admits the existence of the drawer, the genuineness of his signature and his capacity and
authority to draw the instrument; and
3. Admits the existence of the payee and his capacity to indorse. (Sec. 62, NIL)

▪ Drawee is not primarily liable unless and until he accepts the instrument. (Sec. 127, NIL)

Parties Secondarily Liable

a. Drawer
1. Admits the existence of the payee and his capacity to indorse;
2. Engages that the instrument will be accepted or paid by the party primarily liable; and
3. Engages that if the instrument is dishonored and proper proceedings are duly taken, he will
pay to the party entitled to be paid. (Sec. 61, NIL)
 N B When the holder deposits his check with the collecting bank, an agency is created where
the bank becomes an agent to collect from the drawee. There is not privity of contract between
the drawer and the collecting bank.

Drawer is secondarily liable to:

1. Holder
2. Indorser compelled to pay

N B A drawer may insert a stipulation negating his liability.

Requisites before a drawer becomes liable:

a. Presentment for acceptance or payment, as the case may be
b. Dishonor
c. Proceedings duly taken
i. Notice of dishonor given the drawer subject to certain exceptions
ii. In foreign bills, protest is made followed by a notice

b. General indorser – endorses the instrument without qualification.

1. Warrants all subsequent holder in due course that:
a. The instrument is genuine and in all respects what it purports to be;
b. He has good title to it;
c. All prior parties had capacity to contract;
d. The instrument is, at the time of endorsement, valid and subsisting.
2. Engages that the instrument will be accepted or paid, or both, as the case may be,
according to its tenor.
3. If the instrument be dishonored and necessary proceedings of dishonor be duly taken, he
will pay the party entitled to be paid. (Sec.66, NIL)

General indorser is secondarily liable to:

1. Holder
2. Indorser compelled to pay

c. Irregular Indorser – a person, not otherwise a party to an instrument, places his signature
thereon in blank before delivery. They are usually accommodation parties.
1. If the instrument is payable to the order of a third person, he is liable to the payee and
subsequent parties.
2. If instrument payable to order of maker or drawer or to bearer, he is liable to all parties
subsequent to the maker or drawer
3. If he signs for accommodation of the payee, he is liable to all parties subsequent to the
payee. (Sec. 64, NIL)

Irregular indorser
1. Not a party to the instrument
2. Places his signature in blank
3. Before delivery

N B An irregular indorser is liable as a general indorser.

Liability of indorser of an instrument negotiable by delivery:

He incurs all the liability of an indorser. (Sec. 67. NIL)

Liability of an agent or broker:

When he negotiates the instrument without indorsement, he incurs all the liabilities prescribed by
Sec. 65, unless he discloses the name of his principal and the fact that he is acting. (Sec. 69, NIL)
Limited Liability
a. Qualified Indorser – every person negotiating an instrument by delivery or by a qualified
endorsement warrants that:
1. The instrument is genuine and in all respects what it purports to be;
2. He has a good title to it:
 3. All prior parties had capacity to contract;
4. He has no knowledge of any fact which would impair the validity of the instrument or render
it valueless. (Sec.65, NIL)

N B A qualified indorser is liable to all parties who derive their title through his indorsement.

b. Persons Negotiating By Delivery

1. Same warranties as those of qualified indorsers; and,
2. Warranties extend to immediate transferee only. (Sec. 65, NIL)

General Rule: one whose signature does not appear on the instrument shall not be liable
thereon. (Sec. 18, NIL)

Exceptions:
1. Principal who signs through an agent;
2. Forger of the instrument;
3. Person negotiating by delivery (bearer instrument) is liable to the immediate indorsee;
4. One who sign his assumed or tradename;
5. One who endorses in a separate instrument (allonge) or where an acceptance is written on
a separate paper;
6. Persons whose signatures were forged but are precluded from setting up the defense of
forgery. (Sec. 23, NIL);
7. Incapacitated persons who sign through their legal guardians;
8. In case of constructive acceptance provided in Sec. 137.

GENERAL INDORSER PERSON NEGOTIATING BY DELIVERY

With secondary liabilities and
warranties
Warrants that the instrument is, at the
time of his indorsement, valid and
subsisting regardless of whether he is
ignorant of that fact or not
Warranties extend to subsequent
holders in due course, subsequent
parties deriving their title from holder
in due course, and immediate
transferee
OR BY QUALIFIED INDORSEMENT
No secondary liability; liable for breach of
warranties
Warrants that he has no knowledge of
any fact which would impair the validity of
the instrument of render it valueless
For persons negotiating by mere delivery,
warranties extend only to immediate
transferee
For qualified indorsers, warranties extend
to all parties who derive their title from his
indorsement.

When person signing the instrument is not deemed an indorser:

1. When he clearly indicates by appropriate words his intention to be bound in some other
capacity. (Sec. 63, NIL)
2. When the indorsement was for identification of the person only, and not for the purpose of
incurring any liability. (American Bank v. Macondray and Co., G.R. No. 1808, Aug. 23, 1905)
3. When he only guarantees prior indorsements. (PNB v. CA, G.R. No. L-26001, Oct. 29, 1968)

Conditions precedent to hold general indorser liable in case of non-payment (not in case of breach
of warranty)
1. Due presentment for payment or acceptance
2. Necessary proceedings when dishonoured

Order of liability:
As respect one another, indorsers are liable prima facie in the order in which they indorse; but
evidence is admissible to show that, as between or among themselves, they have agreed
otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and
severally. (Sec. 68, NIL)
ENFORCEMENT OF LIABILITY

LIABILITY ARISES:
1. Primary Liability
a. The maker is liable the moment he makes the instrument. (Sec. 60, NIL)
b. Drawee becomes liable the moment he accept the instrument. (Sec. 62, NIL) provides that
“the acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance.”

2. Secondary Liability
a. Steps to Charge Secondary Parties in Promissory Note.
1. Presentment for payment must be made within the required period to the maker (Sec.
70, NIL); and
2. Notice of Dishonor should be given, if promissory note is dishonored by non-payment by
the maker (Sec. 89, NIL).
b. Steps to Charge Secondary Parties in Bill of Exchange.
1. Presentment for acceptance or negotiation within a reasonable time after it was
acquired – should be made only in the instances required in Section 143, NIL.
2. If dishonored by non-acceptance:
a. Notice of Dishonor should be given to the indorsers and drawer (Sec. 89, NIL).
b. If the bill is a foreign bill, there must be protest for dishonor by non-acceptance (Sec.
159, NIL)
3. If the bill is accepted:
a. Presentment for payment to the acceptor should be made.
b. If the bill is dishonored upon presentment for payment.
▪ Notice of dishonor must be given to person secondarily liable; or
▪ If the bill is a foreign bill, protest for dishonor by non-acceptance must be made.
c. Steps to Charge Acceptor for Honor and Referee in case of Need.
1. Protest for non-payment by the drawee. (Sec. 165, NIL)

PRESENTMENT, ACCEPTANCE, DISHONOR, PROTEST

PRESENTMENT FOR PAYMENT

It is not necessary to charge the person primarily liable, but necessary to charge the drawer and
indorsers. (Sec. 70, NIL)

Presentment for Payment Consists of:

1. Personal demand for payment at the proper place; and
2. Readiness to exhibit the instrument if required, and to receive payment and to surrender the
instrument if the debtor is willing to pay.

When Presentment Should Be Made (Sec. 71, NIL)

1. When promissory note is payable on demand: within reasonable time after its issue.
2. If the bill of exchange is payable on demand: within reasonable time after its last negotiation.
3. Instrument payable on a specified date: on the date it falls due.

“Reasonable time”
In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the
usage of trade or business with respect to such instruments, and the facts of the particular case.
(Sec. 193, NIL)

What Constitutes Sufficient Presentment (Sec. 72, NIL)

1. Made by the holder or any person authorized to receive payment on his behalf;
2. At a reasonable hour on a business day;
3. At a proper place;
4. To the person primarily liable or if he is absent or inaccessible, to any person found at the
place where the presentment is made.

When presentment not necessary:

1. In cases where the drawer has no right to expect or require that the drawee or acceptor will
pay the instrument. (Sec. 79, NIL)
2. It is not required in order to charge an indorser where the instrument was made or accepted
for his accommodation and he has no reason to expect that the instrument will be paid if
presented. (Sec. 80, NIL)
3. When instrument has been dishonored by non-acceptance

When Presentment for Payment is Excused (Sec. 82, NIL)

1. After exercise of reasonable diligence, it cannot be made;
2. Drawee is a fictitious person;
3. Express or implied waiver.

Rule in determining maturity date:

Every negotiable instrument is payable at the time fixed therein without grace. (Sec. 85, NIL)

When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming
payable on Saturday are to be presented for payment on the next succeeding business day.

Except: Instruments payable on demand may, at the option of the holder, be presented for
payment before twelve o'clock noon on Saturday when that entire day is not a holiday.

Rule in computing time: (Sec. 86, NIL)

When the instrument is payable at a fixed period after date, after sight, or after that happening of a
specified event, the time of payment is determined by excluding the day from which the time is to
begin to run, and by including the date of payment.

Requisites of Payment in Due Course: (Sec. 88, NIL)

1. Made at or after maturity;
2. Made to the holder;
3. Made in good faith and without notice that the holder’s title is defective.

Place of Presentment: (Sec. 73, NIL)

Presentment for payment is made at the proper place:
1. Where a place of payment is specified in the instrument and it is there presented;
2. Where no place of payment is specified but the address of the person to make payment is
given in the instrument and it is there presented;
3. Where no place of payment is specified and no address is given and the instrument is
presented at the usual place of business or residence of the person to make payment;
4. In any other case if presented to the person to make payment wherever he can be found, or if
presented at his last known place of business or residence.

Rule if payable at a special place

When instrument is payable at a special place and the person is able and willing to pay it there at
maturity, then such ability and willingness is tender of payment on his part. (Sec. 70, NIL)

PRESENTMENT FOR ACCEPTANCE

It is the production or exhibition of a bill of exchange to the drawee for his acceptance or payment.

When Presentment for Acceptance is Required (Sec. 143, NIL)

1. Bill is payable after sight, or when necessary to fix the maturity of the instrument;
2. It is expressly stipulates in the bill; and
3. Bill is drawn payable elsewhere than at the residence or place of business of the drawee.
 • A bank, which opened a letter of credit to finance an importation and paid the sight drafts
drawn by the seller, is entitled to reimbursement from the importer even if the importer had
not previously accepted the drafts, since the draft need not be accepted because they are
payable at sight. (Prudential Bank v. Intermediate Appellate Court, 216 SCRA 257)

How Presentment is made: (Sec. 145, NIL)

1. Where a bill is addressed to two or more drawees who are not partners, presentment must be
made to them all unless one has authority to accept or refuse acceptance for all, in which case
presentment may be made to him only;
2. Where the drawee is dead, presentment may be made to his personal representative;
3. Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment
for the benefit of creditors, presentment may be made to him or to his trustee or assignee.

When Presentment is excused: (Sec. 148, NIL)

1. Where the drawee is dead, or has absconded, or is a fictitious person; or
2. After exercise of reasonable diligence, presentment cannot be made; or
3. Acceptance has been refused

Where Bill Dishonored by Non-Acceptance: (Sec. 149, NIL)

1. When it is duly presented for acceptance and such is refused or cannot be obtained; or
2. When presentment for acceptance is excused, and the bill is not accepted.

▪ If bill is duly presented for acceptance and it is not accepted within the prescribed time, the
person presenting it must treat the bill as dishonored by non-acceptance or he loses the right
of recourse against the drawer and indorsers.
▪ When a bill is dishonored by non- acceptance, an immediate right of recourse against the
drawers and indorsers accrues to the holder and no presentment for payment is necessary.
▪ There is implied acceptance if after 24 hours, the drawee fails to return the instrument.
▪ When he destroys the same or when instrument is deemed accepted.

ACCEPTANCE
The signification by the drawee of his assent to the order of the drawer. (Sec. 132, NIL)

Requisites of Acceptance: (Sec. 132, NIL)

1. The acceptance must be in writing;
2. The written acceptance must be signed by the drawee; and,
3. The drawee must assent to the promise to pay a sum certain in money and not by any other
means.

Ways of Accepting:
1. By writing the acceptance on the bill itself (Sec. 133, NIL)
▪ Holder has the right to require that acceptance be made on the bill itself
▪ If drawee refuses, holder may treat it as dishonored
2. By acceptance on a separate paper (Sec. 134, NIL)
▪ Acceptance of an existing bill
▪ Must be shown to the person to whom the instrument is negotiated
▪ Such person must take the bill for value on the faith of such acceptance
3. By promise to accept (Sec. 135)
▪ Acceptance of a future non-existing bill
▪ Must be unconditional
▪ Must be in writing
▪ Deemed an actual acceptance in favor of every person who, upon faith thereof, receives
the bill for value
4. By constructive acceptance (Sec. 137, NIL)
▪ By operation of law
▪ 2 ways:
a. Drawee to who the bill is delivered destroys it
b. Where the drawee refuses, w/in 24 hrs. after delivery of the instrument, or w/in such
period given to him, to return the bill
 ▪ Based on the principle of estoppels

Proof of Acceptance
The written acceptance may be in the instrument itself or in a separate instrument.

Kinds of Acceptance
1. General - assents without qualification to the order of the drawer.
2. Qualified - which in express terms varies the effect of the bills as drawn.
a. Conditional – which makes payment by the acceptor dependent on the fulfillment of a
condition therein stated;
b. Partial – an acceptance to pay part only of the amount for which the bill is drawn;
c. Local – an acceptance to pay only at a particular place;
d. Qualified as to time;
e. Acceptance of some, one or more of the drawees but not of all.

Rights of parties as to qualified acceptance: (Sec. 142, NIL)

1. Holder may refuse to take a qualified acceptance
2. If no unqualified acceptance, holder may treat the bill as dishonored by non-acceptance
3. Effect of taking a qualified acceptance:
▪ Discharges the drawer and indorsers from liability UNLESS there was express or implied
authority in favor of holder to take a qualified acceptance, or subsequently assents
thereto.
▪ Implied assent – if the drawer or indorser, after receiving notice of qualified acceptance,
does not express is dissent w/in a reasonable time to the holder

NOTICE OF DISHONOR
Notice given by holder or his agent to party or parties secondarily liable that instrument was
dishonored by non-acceptance by drawee of a bill, or by non-payment by acceptor of a bill or by
non-payment by maker of a note. (Sec. 89, NIL).

Requisites of Notice of Dishonor:

1. Given by holder or his agent, or by an party who may be compelled by the holder to pay;
2. Given to secondary party or his agent;
3. Given within the periods provided by law; and
4. Given at the proper place.

When Notice of Dishonor is Dispensed With:

1. When party to be notified knows about the dishonor, actually or constructively;
2. If waived; and
3. When after due diligence, it cannot be given.

How Given:
1. In writing or verbally; or
2. By bringing to the knowledge of the person liable the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been paid, and that the party
notified is expected to pay it.

To Whom Given:
1. Non-acceptance (bill) – to persons secondarily liable, namely, the drawer and indorsers as the
case may be.
2. Non-payment (both bill and note) – indorsers.

• The holder of two checks which where dishonored because the drawer withdrew her funds
from the bank can hold the drawer liable even if no notice of dishonor was given to the
drawer, since the drawer had no right to expect that the drawee bank would honor the
checks (State Investment House, Inc. v. Court of Appeals, 217 SCRA 32).

Where Instruments Payable in Installments:

1. No acceleration clause – failure to give notice of dishonor on a previous installment does not
discharge drawers and indorsers as to succeeding installments.
2. With acceleration clause – failure to give notice as to previous installment will discharge the
persons secondarily liable as to the succeeding installments.

By Whom Given:
1. The holder;
2. Another on behalf of the holder; or
3. Any party to the instrument who may be compelled to pay it to the holder, and who would have
a right to reimbursement from the party to whom the notice is given.

Notice of Dishonor Given by or on Behalf of a Holder Inures to the Benefit of:

1. All parties prior to the holder, who have a right of recourse against the party to whom the
notice is given; and
2. All holders subsequent to the holder giving notice.

Notice of Dishonor Given by or on Behalf of a Party Entitled to Give Notice Inures to the Benefit of:
1. The holder; and
2. All parties subsequent to the party to whom notice is given.

Where an instrument is dishonored in the hands of an agent, he can do either of the following:
1. Directly give notice to persons secondarily liable thereon; or
2. Give notice to his principal. In such case, he must give notice within the time allowed by law
as if he were a holder.

NOTICE OF DISHONOR PROTEST

Required in in-land bill.
May be oral or written.
Made by a party or agent.
Made in the residence of the parties.
Required in foreign bill.
Always written.
Made by a notary public or a respectable
resident in the presence of witnesses.
Made in place of dishonor.

PROTEST
A formal instrument executed usually by a notary public certifying that the legal steps
necessary to fix the liability of the drawee and the indorsers have been taken.

▪ Where protest is waived, presentment and notice of dishonor are also deemed waived. But
where the notice of dishonor is waived, presentment is not waived.
▪ Notice is dispensed with when, after the exercise of reasonable diligence, it cannot be given
or does not reach the parties sought to be charged.

Notice of dishonor is not required to be given to the DRAWER in any of the ff. cases: (Sec. 114,
NIL)
1. Drawer and drawee are the same;
2. Drawee is a fictitious person or not having the capacity to contract;
3. Drawer is the person to whom the instrument is presented for payment;
4. The drawer has no right to expect or require that the drawee or acceptor will honor the
instrument;
5. Where the drawer has countermanded payment.

Notice of dishonor is not required to be given to an INDORSER in either of the following cases:
(Sec. 115, NIL)
1. Drawee is a fictitious person or does not have the capacity to contract, and indorser was
aware of that fact at the time he indorsed the instrument;
2. Indorser is the person to whom the instrument is presented for payment;
3. Instrument was made or accepted for his accommodation.

Who May Make Protest:

1. Notary public; or
2. Any respectable resident of the place where the bill is dishonored, in the presence of 2 or
more credible witnesses.

Protest for Better Security

One made by the holder of a bill after it has been accepted but before it matures, against the
drawer and indorsers, where the acceptor has been adjudged a bankrupt or an insolvent, or has
made an assignment for the benefit of the creditors.

ACCEPTANCE FOR HONOR

An undertaking by a stranger to a bill, after protest, for the benefit of any party liable thereon or for
the honor of the person for whose account the bill is drawn which acceptance inures also to the
benefit of all parties subsequent to the persons for whose honor it is accepted, and conditioned to
pay the bill when it becomes due if the original drawee does not pay it. (Secs. 161-170, NIL)

Requisites of Acceptance for Honor:

1. Bill must have been protested for dishonor by non-acceptance or for better security;
2. Acceptor for honor must be a stranger and not a party already liable on the instrument;
3. Bill must not be overdue;
4. Acceptance for honor must be with the consent of the holder of the instrument.

Formal Requisites:
1. In writing;
2. Indicate that it is an acceptance for honor;
3. Signed by the acceptor for honor;
4. Contain an express or implied promise to pay money;
5. Accepted bill for honor must be delivered to the holder.

PAYMENT FOR HONOR

Payment made by a person, whether a party to the bill or not, after it has been protested for non-
payment, for the benefit of any party liable thereon or for the benefit of the person for whose
account it was drawn. (Sec.171-177, NIL)

Requisites of Payment for Honor:

1. Bill has been dishonored by non-payment;
2. It has been Protested for non-payment;
3. Payment supra protest is made by any person, even by a party thereto;
4. Attested by a notarial act of honor which must be appended to the protest;
5. Notarial act based on the declaration made by the payee for honor or his agent of his intention
to pay the bill for honor and for whose honor he pays.

Effect of Non- compliance with the formalities: Payment will operate as a mere voluntary payment
and the payor will acquire no right to full reimbursement against the other party for whose honor
he pays.

BILLS IN SET
Composed of several parts, each part being numbered and containing a reference to the other
parts, the whole of the parts constituting but one bill. (Secs. 178-183, NIL)

Obligations of Holder Who Indorses 2 or More Parts of the Bill in Set:

1. The person shall be liable on every such part; and
2. Every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts
were separate bills.

Liability of Acceptor:
1. The acceptor is bound to accept only one part of a bill. If different parts of a bill are negotiated
separately and both are holders in due course, the holder whose title first accrues is
considered the true owner of the bill.
2. If he accepts more than one part, he is liable to all the holders of the parts he accepted.
DISCHARGE OF NEGOTIABLE INSTRUMENTS

Discharge of Negotiable Instrument

It means a release of all parties, whether primary or secondary, from the obligations arising there
under. It renders the instrument without force and effect and, consequently, it can no longer be
negotiated. (Sec. 119, NIL)

When a Negotiable Instrument is Discharged: (Sec. 119, NIL)

1. By payment in due course by or on behalf of the principal debtor;
2. Intentional cancellation by the holder;
3. Payment by accommodated party;
4. By any act which will discharge a simple contract for the payment of money;
5. When the principal debtor becomes the holder of the instrument at or after maturity in his own
right.

Requisites of Payment in Due Course

1. Payment must be made at or after maturity.
2. Payment must be made to the holder.
3. Payment must be made in good faith and without notice that the holder’s title is defective.
(Sec. 88, NIL)

When Person Secondarily Liable is Discharged:

1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
4. By a valid tender of payment made by a prior party;
5. By a release of the principal debtor unless the holder’s right of recourse against the party
secondarily liable is expressly reserve;
6. By any agreement binding upon the holder to extend time of payment or to postpone the
holder’s right to enforce the instrument unless made with the assent of the party secondarily
liable or unless the right of recourse against such party is expressly reserved. (Sect. 120, NIL)

RENUNCIATION
The act of surrendering a right or claim without recompense, but it can be applied with equal
propriety to the relinquishing of a demand upon an agreement supported by a consideration. (Sec.
122, NIL)
▪ It must be with written declaration to that effect and if oral, must be accompanied by surrender
of the instrument to the person primarily liable thereon.

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. The effect is to discharge only such secondary party 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. The effect
is to discharge the instrument and all parties thereto provided the renunciation is made
unconditionally and absolutely. (Section 122, NIL).
Note: In either case, renunciation does not affect the rights of a holder in due course without
notice.

Cancellation of an Instrument:
1. Tearing
2. Obliteration
3. Burning
4. Erasure

Note: It is not limited to writing of the word ”cancelled”, or “paid”, or drawing of criss-cross lines
across the instrument (Section 123, NIL).
Unintentional Cancellation
Cancellation made unintentionally, or under a mistake or without the authority of the holder, is
inoperative.

CHECKS

CHECKS - A bill of exchange drawn on a bank and payable on demand. It must be presented for
payment within a reasonable time after its issue or the drawer will be discharged from liability
thereon to the extent of the delay. (Sec. 185, NIL)

▪ Must be presented within reasonable time (Sec. 186, NIL)

Types:
1. Cashier’s Check – one drawn by the cashier of a bank, in the name of the bank against the
bank itself payable to a third person or order.
2. Manager’s Check – drawn by a manager of a bank in the name of the bank against the bank
itself payable to a third person.
3. Memorandum Check - ordinary check with word “memo” written across its face, signifying that
the drawer engages to pay the bona fide holder absolutely without any condition concerning
its presentment.
4. Traveler’s Check – instruments purchased from banks, express companies, or the like, in
various denominations, which can be used like cash upon secondary signature by the
purchaser. It has the characteristics of a cashier’s check of the issuer. It requires the
signature of the purchaser at the time he buys it and also at the time he uses it – that is when
he obtains the check from the bank and also at the time he delivers the same to the
establishment that will be paid thereby
5. Certified Check – a certification is an agreement whereby the bank against whom a check is
drawn undertakes to pay it at any future time when presented for payment.
Effects of Certification
a. Equivalent to acceptance and is the operative act that makes the bank liable. (Sec. 187,
NIL)
b. If obtained by the holder, discharges the persons secondarily liable thereon. (Sec. 188,
NIL)
c. Assignment of the funds of the drawer in the hands of the drawee. (Sec. 189, NIL)
6. Crossed Check – a check is crossed especially when the name of a particular bank or a
company is written between the parallel lines drawn.

EFFECTS OF CROSSING THE CHECK

a. The check may not be encashed but only deposited in the bank;
b. The check may be negotiated only once, to a person who has an account with the bank; and
c. The act of crossing serves as a warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose.
(Bataan Cigars v. CA , 230 SCRA 643)

“Iron Clad Rule”- Prohibits the countermanding of payment of certified checks (Republic v. PNB,
December 30, 1961)

• The holder must be a holder in due course before the stop payment order may not be
successfully invoked against him (Mesina v. IAC, 146 SCRA 497, 505)

• A holder who receives a crossed check without inquiring into the purpose for which it was
issued cannot be a holder in due course. (De Ocampo v. Gatchalian, 3 SCRA 596)

Check Kiting (“Kiting” or “Kiting Operation”) is a procedure whereby checks written on accounts in
separate banks are used to generate short-term purchasing power through the use of the bank’s
credit.
• It is an insidious technique whereby, through a shrewd manipulation on current account checks
from different banks, a person is able to receive money from one bank through the normal
banking operation of the other banks, even as he has no funds available to back used by him in
the operations (People v. Palanca, 223742-CR, Sept. 22, 1981)

Cases when bank may refuse payment:

1. Insolvency of bank
2. Insufficiency of drawer’s deposit or he has no account with the bank or said account had been
closed or garnished
3. Insolvency of drawer and proper notice was received by the bank
4. Countermanded payment by the drawer
5. Holder refuses to identify himself
6. Bank has reason to believe that the check is a forgery
7. Stale or post-dated check
8. Death of drawer with proper notice to the bank.