NEGOTIABLE INSTRUMENTS LAW

REVIEWER
ATTY. VILLANUEVA-CASTRO

SEC. 3. WHEN PROMISE IS UNCONDITIONAL. – AN UNQUALIFIED ORDER

OR PROMISE TO PAY IS UNCONDITIONAL WITHIN THE MEANING OF THIS ACT
THOUGH COUPLED WITH:
A) 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
B) A STATEMENT OF THE TRANSACTION WHICH GIVES RISE TO THE
INSTRUMENT. BUT AN ORDER OR PROMISE TO PAYOUT OF A PARTICULAR
FUND IS NOT UNCONDITIONAL.

- This means that the promise or order to pay is absolute and is not subject to uncertainty or contingency, which may
or may not happen, otherwise the instrument is not a negotiable instrument.
- An instrument may be considered non-negotiable if the word “non-negotiable” is stamped thereon or if it is payable
from a specific fund.
- The doctrine of estoppel may, however, convert a non-negotiable instrument into a negotiable one. Where a
collecting bank stamped its indorsement on a non-negotiable check, “all indorsements and/or lack of indorsements are
guaranteed,” before sending it for clearing thru the clearing house, as required by the rules of the clearing house, the
collecting bank is estopped to deny that the check is non-negotiable and is liable as a general indorser under the
provisions of the Negotiable Instruments Law, rendering the latter applicable thereto.
- Fund for Reimbursement
1) Drawee pays the payee from his own funds; afterwards, the drawee himself from the particular fund
indicated.
2) Particular fund indicated is NOT the direct source of payment, but only the source reimbursement.
- Particular Fund for Payment
1) There is only one act- the drawee pays directly from the particular fund indicated. Payment is subject to
the condition that the fund is sufficient.
2) Particular fund indicated is the direct source of payment.

SEC. 4. DETERMINABLE FUTURE TIME; WHAT CONSTITUTES. – AN INSTRUMENT

IS PAYABLE AT A DETERMINABLE FUTURE TIME WITHIN THE MEANING OF THIS ACT,
WHICH IS EXPRESSED TO BE PAYABLE:
A) AT A FIXED PERIOD AFTER DATE OR SIGHT; OR
B) ON OR BEFORE A FIXED OR DTERMINABLE FUTURE TIME SPECIFIED
THEREIN; OR
C) 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.
AN INSTRUMENT PAYABLE UPON A CONTINGENCY IS NOT NEGOTIABLE AND
THE HAPPENING OF THE EVENT DOES NOT CURE THE DEFECT.

SEC. 5. ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY. – AN

INSTRUMENT WHICH CONTAINS AN ORDER OR PROMISE TO DO ANY ACT IN
ADDITION TO THE PAYMENT OF MONEY IS NOT NEGOTIABLE. BUT THE NEGOTIABLE
CHARACTER OF AN INSTRUMENT OTHERWISE NEGOTIABLE IS NOT AFFECTED BY A
PROVISION WHICH:
A) AUTHORIZES THE SALE OF COLLATERAL SECURITIES IN CASE THE
INSTRUMENT BE NOT PAID AT MATURITY; OR
B) AUTHORIZES A CONFESSION OF JUDGMENT IF THE INSTRUMENT BE NOT
PAID AT MATURITY; OR
C) WAIVES THE BENEFIT OF ANY LAW INTENDED FOR THE ADVANTAGE OR
PROTECTION OF THE OBLIGOR; OR
D) GIVES THE HOLDER AN ELECTION TO REQUIRE SOMETHING TO BE
DONE IN LIEU OF PAYMENT OF MONEY.
BUT NOTHING IN THIS SECTION SHALL VALIDATE ANY PROVISION OR
STIPULATION OTHERWISE ILLEGAL.

- Acceleration and Extension clauses do not affect the negotiability of an instrument, while an insecurity
clause renders an instrument non-negotiable.

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 - An instrument which gives the maker the option to pay a sum certain in money or to perform a particular
act is not negotiable, as when it provides that the maker promises to pay either in money or in property.
However, an instrument which gives the holder thereof an election to require something to be done in
lieu of payment of money is negotiable. The distinction is based on the fact that if the option to pay a
sum certain in money or to perform a particular act is given to the maker, it is no longer an unconditional
promise or order to pay a sum certain in money and it destroys its negotiability; while if the option is
given to the holder, his election to require something to be done in lieu of payment of money is a waiver
by him of the latter and it does not destroy its negotiability.
- A note is sometimes secured by a collateral, and the usual provision of the collateral agreement is the
authorization to sell the collateral upon default of the note and to apply the proceeds thereof in payment
of the note. Such provision will not affect the negotiability of the instrument.
- Confession of judgment
o In our country, it has been held that a confession of judgment in the instrument against the maker is
usually against public policy but it does not render the instrument otherwise negotiable as non-
negotiable, as it does not prevent the party concerned to resist and defeat, on some valid grounds,
the action based on such instrument.
- Waiver of Rights
o A person may waive any matter which affects his property, and any alienable right or privilege of
which he is legally entitled, whether secured by contract, conferred by statute or guaranteed by the
constitution, provided such rights and privileges rest in the individual, are intended for his sole
benefit, do not infringe on the rights of others, and the waiver is not forbidden by law, and does not
contravene public policy or moral or public interest.

SEC. 6. OMISSIONS; SEALS; PARTICULAR MONEY. – THE VALIDITY AND

NEGOTIABE CHARACTER OF AN INSTRUMENT ARE NOT AFFECTED BY THE FACT
THAT:
A) IT IS NOT DATED; OR
B) DOES NOT SPECIFY THE VALUE GIVEN, OR THAT ANY VALUE HAS BEEN
GIVEN THEREFOR; OR
C) DOES NOT SPECIFY THE PLACE WHERE IT IS DRAWN OR THE PLACE
WHERE IT IS PAYABLE; OR
D) BEARS A SEAL; OR
E) DESIGNATES PARTICULAR KIND OF CURRENT MONEY IN WHICH
PAYMENT IS TO BE MADE.
BUT NOTHING IN THIS SECTION SHALL ALTER OR REPEAL ANY STATUTE
REQUIRING IN CERTAIN CASES THE NATURE OF THE CONSIDERATION TO BE STATED
IN THE INSTRUMENT.

- The reason for this provision is that under Sec 14 of the NIL, the person in possession of the incomplete
instrument has prima facie authority to complete it by filling up the blanks and that the issuance of the
instrument is presumed to be for valuable consideration. Seal is not necessary for the validity of an
instrument.
- The validity and negotiable character of an instrument are not affected by the fact that it designates a
foreign currency in which payment is made. The obligor is free to pay in the currency stipulated.
However, if he is sued to compel him to pay the specified currency, he may raise the defense that the
obligation itself to pay in foreign currency is void, but not the instrument itself as a contract, and he may
only be compelled to pay its equivalent in Philippine peso.

SEC. 7. WHEN PAYABLE ON DEMAND. – AN INSTRUMENT IS PAYABLE ON

DEMAND:
A) WHEN IT IS SO EXPRESSED TO BE PAYABLE ON DEMAND OR AT SIGHT,
OR ON PRESENTATION; OR
B) IN WHICH NO TIME FOR PAYMENT IS EXPRESSED
WHEN AN INSTRUMENT IS ISSUED, ACCEPTED, OR INDORSED WHEN OVERDUE,
IT IS, AS REGARDS THE PERSON SO ISSUING, ACCEPTING, OR INDORSING IT, PAYABLE
ON DEMAND.

- An instrument which is payable to bearer on demand after the lapse of 5 years from date thereof is not
payable on demand, as it does not meet the requirement of Sec 7 of the NIL.
- When a promissory note expresses no time for payment, it is deemed payable on demand. A promissory
note expressly payable on demand is immediately due and demandable.
- A check is always payable on demand, otherwise it is not a check as defined in Sec 185 of the Nil.
- “Issue” means first delivery, complete in form, to a person who takes it as a holder.
- When an instrument is accepted when overdue, the instrument is payable on demand insofar as the
acceptor is concerned. Ex: when an instrument payable 30 days from its date of july 1, 2004, is accepted
on aug 5, 2005. But, where the instrument due on july 1, 2004 is indorsed by the payee on july 15, 2004,
coupled by delivery, the instrument is payable on demand as regards the indorser.

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SEC. 8. WHEN PAYABLE TO ORDER. – THE INSTRUMENT IS PAYABLE TO ORDER
WHERE IT IS DRAWN PAYABLE TO THE ORDER OF A SPECIFIED PERSON OR TO HIM
OR HIS ORDER. IT MAY BE DRAWN PAYABLE TO THE ORDER OF:
A) A PAYEE WHO IS NOT MAKER, DRAWER, OR DRAWEE; OR
B) THE DRAWER OR MAKER; OR
C) TWO OR MORE PAYEES JOINTLY; OR
D) ONE OR SOME OF SEVERAL PAYEES; OR
E) THE HOLDER OF AN OFFICE FOR THE TIME BEING.
WHERE THE INSTRUMENT IS PAYABEL TO ORDER, THE PAYEE MUST BE
NAMED OR OTHERWISE INDICATED THEREIN WITH REASONABLE CERTAINTY.

- Sec 184 of the NIL provides that where a note is drawn to the maker’s own order, it is not complete until
indorsed by him.

SEC. 9. WHEN PAYABLE TO BEARER. – THE INSTRUMENT IS PAYABLE TO

BEARER:
A) WHEN IT IS EXPRESSED TO BE SO PAYABLE; OR
B) WHEN IT IS PAYABLE TO A PERSON NAMED THEREIN OR BEARER; OR
C) WHEN IT IS PAYABLE TO THE ORDER OF A FICTITIOUS OR NON-
EXISTING PERSON, AND SUCH FACT WAS KNOWN TO THE PERSON
MAKING IT SO PAYABLE; OR
D) WHEN THE NAME OF THE PAYEE DOES NOT PURPORT TO BE THE NAME
OF ANY PERSON; OR
E) WHEN THE ONLY OR LAST INDORSEMENT IS AN INDORSEMENT IN
BLANK.

- “Bearer” refers to whoever may be the bearer or holder at the time of the presentment for payment of the
instrument.
- A “bearer instrument” is one which is payable to bearer under Sec 9 of the NIL
- A check payable to the order of “cash” is a check payable to bearer and the bank may pay to the person
presenting it for payment without the drawer’s indorsement. However, as a precaution, banks usually
require that the person presenting it should present an identification and endorse it, so as to hold him
liable therefor in case of forgery or payment to an unauthorized person.
- “The need to resort to extrinsic evidence is what is sought to be avoided by the Nil and calls for the
application of the elementary rule that the interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity.”

SEC. 10. TERMS, WHEN SUFFICIENT. – THE INSTRUMENT NEED NOT FOLLOW THE
LANGUAGE OF THIS ACT, BUT ANY TERMS ARE SUFFICIENT WHICH CLEARLY
INDICATE AN INTENTION TO CONFORM THE REQUIREMENTS HEREOF.

- The language of the NIL is in the English language. But an instrument written in Filipino, or any other
language, otherwise negotiable, is not rendered non-negotiable by the fact that it is not written in
English.
- The words of negotiability are “to order” or “to bearer.” Any other words clearly indicating that the
instrument is payable to order of a specified person or to bearer is sufficient, so long as it is a direction to
pay or an undertaking to pay, absolutely and not contingently.
- A promise on the part of the obligor to pay as implied form his having executed a promissory note
acknowledging his indebtedness does not create a negotiable promissory note. It is merely an evidence
of indebtedness bec the promise is not absolute but is merely implied.
- An acknowledgement of debt in a note may become a promise by the addition of words by which a
promise of payment is implied, such as payable, payable on a given day, payable on demand, to be paid
when called for. However, there must be unconditional and absolute promise to pay to a specified persn
or order, over and above the mere acknowledgement of the debt that may be culled from the words used
in the instrument, in order that the instrument may be regarded as a negotiable promissory note.

SEC. 11 DATE, PRESUMPTION AS TO. – 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.

SEC. 12. ANTE-DATED AND POST-DATED. – THE INSTRUMENT IS NOT INVALID

FOR THE REASON ONLY THAT IT IS ANTE-DATED OR POST-DATED, PROVIDED THIS IS

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NOT DONE FOR AN ILLEGAL OR FRAUDULENT PRUPOSE. THE PERSON TO WHOM AN
INSTRUMENT SO DATED IS DELIVERED ACQUIRES THE TITLE THERETO AS OF THE
DATE OF DELIVERY.

- He who questions the date therein appearing has the burden of proof to show the correct date. However,
a check must be presented for payment within a reasonable time from the date appearing in the
instrument. By current banking practice, a check becomes stale after more than 6 months, which is
counted from date of issue appearing on the face of the instrument.
- Post-dating a check simply means that on the date indicated on its face, the check would be properly
funded, not that the check should be deemed as issued only then.

SEC. 13. WHEN DATE MAY BE INSERTED. – WHERE AN INSTRUMENT EXPRESSED

TO BE PAYABLE AT A FIXED PERIOD AFTER DATE IS ISSUED UNDATED, OR WHERE
THE ACCEPTANCE OF AN INSTRUMENT PAYABLE AT A FIXED PERIOD AFTER SIGHT IS
UNDATED, ANY HOLDER MAY INSERT THEREIN THE TRUE DATE OF ISSUE OR
ACCEPTANCE, AND THE INSTRUMENT SHALL BE PAYABLE ACCORDINGLY. THE
INSERTION OF A WRONG DATE DOES NOT AVOID THE INSTRUMENT IN THE HANDS OF
A SUBSEQUENT HOLDER IN DUE COURSE; BUT AS TO HIM, THE DATE SO INSERTED OS
TO BE REGARDED AS THE TRUE DATE.

- Sec 13 contemplates 2 situations, namely:

o 1) Where an instrument is expressed to be payable at a fixed period after date is issued
undated. In this situation, for instance, an instrument is payable 30 days from date of issue, but
there is no date of issue, in which case the holder may insert the true date of issue of the instrument
from which to count the 30 day period.
o 2) Where the acceptance of an instrument payable at a fixed period after sight is undated.
This situation refers to the fixed period to pay. i.e. 30 days from date of acceptance of the
instrument, but the acceptance is undated, in which case the holder may insert the true date of the
acceptance, from which to count the 30 day period. Acceptance is a promise to perform an act; it
signifies assent by the drawee to the order of the drawer to pay the amount stated. If the acceptance
is undated, the maturity may not be determined except by inserting the true date of acceptance, from
which to fix the maturity date.

SEC. 14. BLANKS; WHEN MAY BE FILLED. – WHERE THE INSTRUMENT IS

WANTING IN ANY MATERIAL PARTICULAR, THE PERSON IN POSSESSION THEREOF
HAS PRIMA FACIE AUTHORITY TO COMPLETE IT BY FILLING UP THE BLANKS
THEREIN. AND A SIGNATURE ON A BLANK PAPER DELIVERED BY THE PERSON
MAKING THE SIGNATURE IN ORDER THAT THE PAPER MAY BE CONVERTED INTO A
NEGOTIABLE INSTRUMENT OPERATES AS A PRIMA FACIE AUTHORITY TO FILL IT UP
AS SUCH FOR ANY AMOUNT. IN ORDER, HOWEVER, THAT ANY SUCH INSTRUMENT
WHEN COMPLETED MAY BE ENFORCED AGAINST ANY PERSON WHO BECAME PARTY
THERETO PRIOR TO ITS COMPLETION, IT MUST BE FILLED UP STRICTLY IN
ACCORDANCE WITH THE AUTHORITY GIVEN AND WITHIN REASONABLE TIME. BUT
IF ANY SUCH INSTRUMENT, AFTER COMPLETION, IS NEGOTIATED TO A HOLDER IN
DUE COURSE, IT IS VALID AND EFFECTUAL FOR ALL PURPOSES IN HIS HANDS, AND HE
MAY ENFORCE IT AS IF IT HAD BEEN FILLED UP STRICLTY IN ACCORDANCE WITH
THE AUTHORITY GIVEN AND WHITHIN A REASONABLE TIME.

- Sec 14 covers an incomplete instrument which has been delivered, which means that the instrument is
transferred to another who is prima facie authorized to complete the instrument.
- Pursuant to Sec 14, the holder of the instrument containing blank spaces has the assumed authority to fill
in the blanks.
- A party who became a party to the instrument prior to its completion is not liable thereto if the
instrument is not strictly filled up in accordance with the authority given by the maker or drawer to the
person authorized to fill it up and complete within a reasonable time. This implies that inquiry as to the
scope of authority of the person is proper, to determine whether he has exceeded his authority. What is a
reasonable time depends upon the nature of the instrument, the usage of trade or business with respect to
such instrument, and the facts of the particular case. However, if such instrument, after its 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 has been filled up strictly in accordance with authority given and within reasonable
time.

SEC. 15. INCOMPLETE INSTRUMENT NOT DELIVERED. – WHERE AN INCOMPLETE

INSTRUMENT HAS NOT BEEN DELIVERED, IT WILL NOT, IF COMPLETED AND
NEGOTIATED WITHOUT AUTHORITY BE A VALID CONTRACT IN THE HANDS OF ANY

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HOLDER, AS AGAINST ANY PERSON WHOSE SIGNATURE WAS PLACED THEREON
BEFORE DELIVERY.

SEC. 16 DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED. – EVERY CONTRACT ON A

NEGOTIABLE INSTRUMENT IS INCOMPLETE AND RECOVERABLE UNTIL DELIVERY OF THE
INSTRUMENT FOR THE PURPOSE OF GIVING EFFECT THERETO. AS BETWEEN IMMEDIATE
PARTIES AND AS REGARDS A REMOTE PARTY OTHER THAN A HOLDER IN DUE COURSE, THE
DELIVERY, IN ORDER TO BE EFFECTUAL MUST BE MADE EITHER BY OR UNDER THE
AUTHORITY OF THE PARTY MAKING, DRAWING, ACCEPTING OR INDORSING, AS THE CASE
MAY BE; AND, IN SUCH CASE, THE DELIVERY MAY BE SHOWN TO HAVE BEEN CONDITIONAL,
OR FOR A SPECIAL PURPOSE ONLY, AND NOT FOR THE PURPOSE OF TRANSFERRING OF THE
PROPERTY IN THE INSTRUMENT. BUT WHERE THE INSTRUMENT IS IN THE HANDS OF A
HOLDER IN DUE COURSE, A VALID DELIVERY THEREOF BY ALL PARTIES PRIOR TO HIM SO AS
TO MAKE THEM LIABLE TO HIM IS CONCLUSIVELY PRESUMED. AND WHERE THE
INSTRUMENT IS NO LONGER IN THE POSSESSION OF A PARTY WHOSE SIGNATURE APPREARS
THEREON, A VALID AND INTENTIONAL DELIVERY BY HIM IS PRESUMED UNTIL THE
CONTRARY IS PROVED.

- Delivery means the transfer of the possession of the instrument, actual or constructive, by the maker or
drawer with the intent to transfer title to the payee and recognize him as the holder thereof.
- Holder refers to the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.
- Delivery involves the making of a note or the drawing of a bill; the transfer of title therein by negotiation
by the maker or drawer either by giving the instrument to the holder or indorsee if the instrument is a
bearer instrument or by indorsement coupled by handing over the instrument if the instrument is an order
instrument.
- Necessity of delivery
o Where the person to whom the instrument is delivered received it not as a holder, as the word is
defined in Sec 191 of the NIL, there is no delivery. Thus, if the document is given to a messenger
of the payee, the messenger is not a holder thereof, as there is no intent to transfer title to him or as
he is not entitled to enforce it against the maker or drawer, until the messenger gives it to the payee
or except when the messenger is duly authorized by the payee by power of attorney to accept
delivery thereof.
o Delivery is the final act essential to the consummation of the obligation.
o The place of delivery is important in determining one of the venues where the information for
violation of BP 22 may be filed.

o Except where there has been a constructive delivery, physical delivery to the payee makes the
instrument complete and generally irrevocable. For instance, a salary check of a gov’t employee is
considered transferred only after the same is physically delivered to him. Before there is actual
delivery, the drawer or maker may recall or revoke the instrument and the payee acquires no right
thereto, which his creditor may proceed against. Before delivery of a gov’t check to the employee
in payment of his salary, the same did not belong to him and still has the character of a public fund.
Consequently, the said salary check cannot be garnished to satisfy judgment rendered against the
employee (De la Victorias v. Burgos).

- Under Sec 191 of the NIL, “issue” means the first delivery of the instrument complete in form to a
person who takes it as a holder. The place where the bill is written, signed or dated does not necessarily
fix or determine the place where it is executed.

- Until delivery, the contract is revocable. The delivery must be to a holder, who in possession of it, or the
bearer.

- In Development Bank of Rizal v. Sima Wei, the issue raised was whether a payee of checks intended as
payment of a loan obtained from the payee bank by the drawer, which were not delivered to the payee
bank but, for one reason or another, fell into a wrong person who forged the payee’s indorsement,
deposited them in his account and obtained the proceeds thereof, had a valid cause of action against the
drawer founded on said checks. The court ruled that the payee bank acquired no interest thereon nor any
cause of action founded on the check against the person who issued them nor against the persons who
encashed them bec the check had not been delivered to the payee bank, and the latter acquired no right or
interest to the negotiable instrument.

SEC. 17 CONSTRUCTION WHERE INSTRUMENT IS AMBIGUOUS. – WHERE THE

LANGUAGE OF THE INSTRUMENT IS AMBIGUOUS OR THERE ARE OMISSIONS THEREIN, THE FF
RULES OF CONSTRUCTION APPLY:

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 A) 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;

B) WHERE THE INSTRUMENT PROVEDS FOR THE PAYMENT OF INTERESTS,

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;

C) WHERE THE INSTRUMENT IS NOT DATED, IT WILL BE CONSIDERED TO BE

DATED AS OF THE TIME IT WAS ISSUED;

D) WHERE THERE IS A CONFLICT BETWEEN THE WRITTEN AND PRINTED

PROVISIONS OF THE INSTRUMENT, THE WRITTEN PROVISIONS PREVAIL;

E) 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;

F) WHERE A SIGNATURE IS SO PLACED UPON THE INSTRUMENT THAT IT IS NOT

CLEAR IN WHAT CAPACITY THE PERSON MAKING THE SAME INTEDED TO SIGN,
HE IS TO BE DEEMED AN INDORSER;

G) WHERE AN INSTRUMENT CONTAINING THE WORDS “I PROMISE TO PAY” IS

SIGNED BY TWO OR MORE PERSONS, THEY ARE DEEMED TO BE JOINTLY AND
SEVERALLY LIABLE THEREON.

- Illustrative cases:

o Caltex Inc. v. CA

SEC. 18 LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. – NO PERSON IS

LIABLE ON THE INSTRUMENT WHOSE SIGNATURE DOES NOT APPEAR THEREON, EXCEPT AS
HEREIN OTHERWISE EXPRESSLY PROVIDED. BUT ONE WHO SIGNS IN A TRADE OR ASSUMED
NAME WILL BE LIABEL TO THE SAME EXTENT AS IF HE HAD SIGNED HIS OWN NAME.

SEC. 19 SIGNATURE BY AGENT; AUTHORITY; HOW SHOWN. – THE SIGNATURE OF ANY

PARTY MAY BE MADE BY A DULY AUTHORIZED AGENT. NO PARTICULAR FORM OF
APPOINTMENT IS NECESSARY FOR THIS PURPOSE; AND THE AUTHORITY OF THE AGENT MAY
BE ESTABLISHED AS IN OTHER CASES OF AGENCY.

- Thus, it is not enough that the agent has been duly authorized, by a special power of attorney, to sign an
instrument, he has to comply with the requirement of Sec 20, otherwise he is personally liable on the
instrument.

SEC. 20 LIABILITY OF PERSON SIGNING AS AGENT, AND SO FORTH. – WHERE THE

INSTRUMENT CONTAINS OR A PERSON ADDS TO HIS SIGNATURE WORDS INDICATING THAT HE
SIGNS FOR OR ON BEHALF OF A PRINCIPAL OR IN A REPRESENTATIVE CAPACITY, HE IS NOT
LIABLE ON THE INSTRUMENT IF HE WAS DULY AUTHORIZED; BUT A MERE ADDITION OF
WORDS DESCRIBING HIM AS AN AGENT, OR AS FILLING A REPRESENTATIVE CHARACTER,
WITHOUT DISCLOSING HIS PRINCIPAL, DOES NOT EXEMPT HIM FROM PERSONAL LIABILITY.
- But if he signs it by his assumed name or as agent, he becomes a party to the instrument and becomes
liable thereto, except where he qualifies his signature thereon.
- Pursuant to Sec 20 of the NIL, a person signing an instrument, who claims he is signing as agent of the
drawer or indorser is not liable if:
o He is duly authorized,
o He describes himself as agent of the principal
o He discloses the name of the principal, in the instrument itself

SEC. 21 SIGNATURE BY PROCURATION. – A SIGNATURE BY “PROCURATION” OPERATES

AS NOTICE THAT THE AGENT HAS BUT A LIMITED AUTHORITY TO SIGN, AND THE PRINCIPAL
IS BOUND ONLY IN CASE THE AGENT IN SO SIGNING ACTED WITHIN THE ACTUAL LIMITS OF
HIS AUTHORITY.

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SEC. 22 EFFECT OF INDORSEMENT BY INFANT OR CORPORATION. – THE INDORSEMENT
OR ASSIGNMENT OF THE INSTRUMENT BY A CORPORATION OR BY AN INFANT PASSES THE
PROPERTY THEREIN, NOTWITHSTANDING THAT FROM WANT OF CAPACITY, THE
CORPORATION OR INFANT MAY INCUR NO LIABILITY THEREON.

- If the act is one which is lawful itself, and not otherwise prohibited, is reasonably tributary to the
promotion of those ends, in substantial and not in remote and financial senses, it may fairly be
considered within the charter powers and the corporation can lawfully undertake it. An ultra vires act
may be ratified expressly by the board of directors of the corporation, or impliedly by the receipt and
enjoyment of the benefits flowing from the act or contract. The doctrine of ultra vires may be invoked
for or against a corporation. If a corporation incurs no liability bec the act done is ultra vires, the
corporate officer or the directors assenting thereto, may be held liable personally therefor.
- An accommodation indorsement of a corporation by way of accommodating the accommodated party is
an ultra vires act.
- In Crsiologo-Jose v. CA, the SC ruled, “This is bec the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of another is ultra vires. Hence, one who
has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. If the form of he instrument or the nature of the
transaction is such as to charge the indorsee with knowledge that the issue or indorsement of the
instrument by the corporation is for the accommodation of another, he cannot recover against the
corporation thereon. By way of exception, an officer or agent of a corporation shall have the power to
execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third
person only if specifically authorized to do so. Corollarily, corporate officers, such a the president and
vice-president, have no power to execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or in relation to matters in which the
corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced
against the corporation, especially since it is not involved in any aspect of the corporate business or
operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be
personally liable therefor, as well as the consequences arising from their acts in connection therewith.
- Indorsement or assignment by infant
o The minority of a person is a mere restriction on capacity to act, and does not exempt the minor
from certain obligations which arise from his acts or from property relations. The contract executed
by a mere minor is voidable, capable of ratification by the parents or by him upon reaching the age
of majority.
o It has been held that Sec 22 does not preclude an infant’s disaffirmance of his contract; that the
defense of infancy may be asserted against a holder in due course, even though its effect is to render
the instrument voidable, but not void; but such infancy is not available as a defense to a prior party.
Where the contract is annulled on the ground that one of the contracting parties is a minor, the
incapacitated person is not obliged to make any restitution except insofar as he has been benefited
by the thing or price received by him. In other words, minority or lack of capacity to give consent is
a defense. It is not a question of form and interpretation of an instrument but of the liabilities of the
parties thereto.

SEC. 23 FORGED SIGNATURE; EFFECT OF. – WHEN A SIGNATURE IS FORGED OR MADE

WITHOUT THE AUTHORITY OF THE PERSON WHOSE SIGNATURE IT PRUPORTS TO BE, IT IS
WHOLLY INOPERATIVE, AND NO RIGHT TO RETAIN THE INSTRUMENT, OR TO GIVE A
DISCHARGE THEREFOR, OR TO ENFORCE PAYMENT THEREOF AGAINST ANY PARTY
THERETO, CAN BE ACQUIRED THROUGH OR UNDER SUCH SIGNATURE, UNLESS THE PARTY
AIGANST WHOM IT IS SOUGHT TO ENFORCE WUCH RIGHT IS PRECLUDED FROM SETTING UP
THE FORGERY OR WANT OF AUTHORITY.

- The general rule is that a forged signature in an instrument is wholly inoperative and no right to retain
the instrument or to give a discharge thereof, or to enforce payment thereof against any party thereto can
be acquired through or under such forged signature.
- The forged signature may be the signature of the drawer or maker, or that of the payee or indorser. A
person whose signature was forged was never a party and never consented to the contract which
allegedly gave rise to such instrument. Thus, a forged indorsement does not operate as the payee’s
indorsement.
- The fact that one signature of a party to the instryment has been forged does not render the whole
instrument null and void. Sec 23 does not avoid the instrument but only the forged signature. Sec 23
does not mean that the existence of forged signature in a negotiable instrument will render void all the
negotiations of the check with respect to the other parties whose signature are genuine.
- In other words, a forged signature may give rise to a valid right after a series of negotiations of the
instrument, in favor of the indorsee who acquired his rights from a lawful indorser whose right is
founded on a valid signature and who did not know of the forgery. The indorsee may even become a
holder in due course, if all the requisites thereof as prescribed in Sec 52 of the NIL are present.

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 - A person’s signature on an instrument amounts to a prima facie evidence that he issued it. By denying
that he issued the instrument, he puts in issue the genuineness and authenticity of the signature thereon
and it is he who has the burden of proof that his signature is a forgery.
- Where drawer’s signature is forged
o Where the maker’s or drawer’s signature is forged, the instrument itself is void, except when the
same is subsequently transferred to an indorser who is not aware of the forgery. If the signature of
the maker of a check is forged and the forger succeeded in encashing it in exchange for cash from
the drawee bank or by depositing it in his collecting bank and the drawee bank allowed payment, the
latter alone is liable for the loss, as the bank is bound to know the signature of its customer or
depositor; and it cannot charge the drawer of the amount thereof, as his signature is forged, except
where the drawer is grossly negligent as the proximate cause thereof. However, if a check in which
the signature of the drawer is forged is made payable to a person, who indorses it to another person
who receives it for value and without being aware of such forgery, the latter has the right to recover
on the check. In other words, while a forged signature is void and no title may arise therefrom,
other genuine signatures on the same check or instrument may become the source of a right of
action on the instrument on the part of the holder or indorsee.
o In PNB v. CA, the court ruled that it is the duty of the drawee bank to verify the genuineness of the
drawer’s ignature and not of the indorsement bec the drawer is its client. Its duty is to pay only
according to the terms of the check, and if it violates such duty, it cannot escape liability and should
bear part of the loss.
- Where payee’s indorsement is forged
o Problems arising from forged indorsements of checks may be broken into two types:
 Where forgery was accomplished by a person not associated with the drawer
 Where the indorsement was forged by an agent of the drawer. In this case, the negligence
or failure of the drawer to discover or to report promptly the fact of such forgery to the
drawee may result in the loss of his right against the drawee who has debited his account
under the forged indorsement.
- In DBP v. Sima Wei, the court ruled that the payee, whose indorsement was forged, had no cause of
action against the drawee bank bec the check had not been delivered to the payee and it therefore
acquired no interest thereon, as the payee lost nothing.
- Only those who derive title from such forged signature are precluded from enforcing the document, but
those who derive their title from persons whose signatures therein are genuine can enforce the
instrument against the latter. The forgeries in cases falling under the general rule (if signature is forged,
it is wholly inoperative) are either clearly established or admitted, in which case the person or bank
paying is precluded from recovery, except as against the forger.
- Exception to the general rule
o The exception may arise from estoppel, which precludes setting up forgery as a defense. Parties
who warrant or admit the genuineness of the signature and those who, by their acts, silence or
negligence are estopped from setting up the defense of forgery are precluded from this defense.
Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of the
signatures on the instruments, and as warrantors they are estopped to raise forgery as a defense.
o Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the
defense of forgery against a holder in due course. In order instruments, where the holder’s
indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto.
o A collecting bank, as last indorser by stamping the check with the words, “all prior and/or lack of
indorsements guaranteed” cannot raise the defense of forgery of prior indorsements and such bank is
an indorser and is this liable as indorser.
o The case of MWSS v. CA illustrates the exception. It appears that 23 MWSS checks were signed by
persons other than the authorized MWSS signatories. These checks were payable to several persons
and deposited with their depositary banks, and were paid and cleared by PNB as drawee bank. It
turned out later that the checks were forged and MWSS demanded from PNB the return of the
amounts in the checks. The court ruled that the negligence of MWSS was the proximate cause of the
loss, and it has to bear the loss.
- In Republic Bank v. Endrada, it was explained that in case the signature of the original payee was
forged, and thereafter it was successfully indorsed, with the last indorsee encashing the same with the
drawee bank, the check is valid with respect to other indorsers whose signatures are genuine; and drawee
bank has the right to recover against the last indorser.
- In Great Eastern Life Insurance Co v. Hongkong and Shanghai Bank, in which the check involved
was forged not by an agent or employee or the drawer, the drawer was not found to be negligent in the
handling of its business affairs and the theft of the check by a total stranger was not attributable to
negligence of the drawer; neither was the forging of the payee’s indorsement due to the drawer’s
negligence. Since the drawer was not negligent, the drawee was duty-bound to restore to the drawer’s
account the amount paid under the check with a forged payee’s indorsement bec the drawee did not pay
as ordered by the drawer.

SEC. 24 PRESUMPTION OF CONSUDERATION. – EVERY NEGOTIABLE INSTRUMENT IS

DEEMED PRIMA FACIE TO HAVE BEEN ISSUED FOR A VALUABLE CONSIDERATION; AND EVERY

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PERSON WHOSE SIGNATURE APPEARS THEREON TO HAVE BECOME A PARTY THERETO FOR
VALUE.

- A check which is regular on its face is deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon is deemed to have become a party
thereto for value. Thus, the mere introduction of the instrument sued on in evidence prima facie entitles
the plaintiff to recovery. Further, the rule is that a negotiable instrument is presumed to have been given
or indorsed for a valuable consideration unless otherwise contradicted and overcome by other competent
evidence.
- The party who has the burden of proof upon an issue may be aided in establishing his claim or defense
by the operation of a presumption, or, expressed differently, by the probative value which the law
attaches to a specific state of facts. A presumption may operate against his adversary who has not
introduced proof to rebut the presumption. The effect of a legal presumption upon a burden of proof is
to create the necessity of presenting evidence to meet the legal presumption or the prima facie evidence
case created thereby, and which if no proof to the contrary is presented and offered, will prevail. The
burden of proof remains where it is, but the presumption of the one who has that burden is relieved fro
the time being from introducing evidence in support of his averment, bec the presumption stands in the
place of evidence unless rebutted.
- Burden to overcome presumption
o The party who alleges lack of consideration has the burden of proof to overcome the presumption of
consideration. Only evidence of the clearest and most convincing kind will suffice for that purpose
of overcoming the presumption. A self-serving uncorroborated testimony is not sufficient.
o The presumption that a negotiable instrument is supported by a valuable consideration may also be
overcome by showing that the consideration is illegal or against the law or public policy, as when
the instrument is issued to influence a public official to do an illegal act or as payment of ransom of
a kidnapping.

SEC. 25 VALUE, WHAT CONSTITUTES. – VALUE IS ANY CONSIDERATION SUFFICIENT TO

SUPPORT A SIMPLE CONTRACT. AN ANTECEDENT OR PRE-EXISTING DEBT CONSTITUTES
VALUE; AND IS DEEMED SUCH WHETHER THE INSTRUMENT IS PAYABLE ON DEMAND OR AT A
FUTURE TIME.

- Valuable consideration refers to some right, interest, profit or benefit to the party who makes the
contract, or some forbearance, detriment, loss, responsibility on the other side. Any of these is a
valuable consideration which can support a negotiable instrument.
- A stipulation is consideration of P1 is just as effectual and valuable as a consideration as a larger sum
stipulated for or paid.
- Consideration must be legal

SEC. 26 WHAT CONSTITUTES HOLDER FOR VALUE. – WHERE VALUE HAS AT ANY TIME
BEEN GIVEN FOR THE INSTRUMENT, THE HOLDER IS DEEMED A HOLDER FOR VALUE IN
RESPECT TO ALL PARTIES WHO BECOME SUCH PRIOR TO THAT TIME.

- A holder for value is a holder who has taken the instrument:

o Complete and regular upon its face, and
o Before it became overdue and without notice of its previous dishonor, if such was the fact, and
o In good faith and for value.

SEC. 27 WHEN LIEN ON INSTRUMENT CONSTITUTES HOLDER FOR VALUE. – 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.

- In the case of Caltex v. CA, the court ruled that while the CTDs were negotiable instruments as they
contain the word of negotiation namely, “bearer,” Caltex could not recover from said CTDs bec the latter
was not a valid lien holder, the requirements thereof under Art 2095 and 2096 of the Civil Code not
having been satisfied. The delivery to Caltex of the bearer instruments was not for the purpose of
transferring title thereto to Caltex in payment of oil products but for the purpose of securing the payment
from Caltex; and Caltex can recover on the instruments only by complying with the requirements and
procedures for a pledge as provided by pertinent provisions of the Civil Code must be in a public
instrument.

SEC. 28 EFFECT OF WANT OF CONSIDERATION. – ABSENCE OR FAILURE OF

CONSIDERATION IS A MATTER OF DEFENSE AS AGAINST ANY PERSON NOT A HOLDER IN DUE
COURSE; AND PARTIAL FAILURE OF CONSIDERATION IS A DEFENSE PRO TANTO, WHETHER
THE FAILURE IS AN ASCERTAINED AND LIQUIDATED AMOUNT OR OTHERWISE.

- For instance, A owed B money and issued to him, as payee a check in payment thereof. B indorsed the
check to C as a gift and therefore the latter did not pay any consideration to B. For value, C indorsed it

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 to D who knew that C received the check as a gift from B. D then indorsed the check to E. D is a holder
for value with regard to A and C, but not as regard B who can set up the defense of failure of
consideration. Being a holder in due course, E can hold all other parties liable in the event the check is
dishonored.
- But supposing A purchased from B a brand new car and issued to B a check in payment thereof. For
value, B indorsed the check to C and the latter to D. The car turned out to old and defective; hence,
there was a failure of consideration, which A can assert as a defense if the checks are dishonored and is
sued on the check against B, C, D. While D is a holder for value, as regard B and C, D cannot even be
regarded as a holder in due course, even if D is not aware of the lack of consideration bec it is against
Sec 146 of RA 7394 which states: “In cases where the instrument will be sold at a discount to a bank,
financing company or other lender, the said transferee shall be subject to all claims and defenses which
the debtor could assert against the seller of the consumer products obtained herein or with the proceeds
thereof.”

SEC. 29 LIABILITY OF 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. SUCH A PERSON 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.

- In cases of accommodation indorsement, the indorser makes the indorsement for the accommodation of
the maker. Such an indorsement is generally for the purpose of better securing the payment of the note.
Where an indorsement is made as a favor to the indorsee who requests it, not to better secure the
payment but to relieve himself from a detestable situation, the indorsement is not an accommodation
indorsement, nor is there a consideration sufficient to sustain an action on the indorsement.
- In accommodation transactions recognized by the NIL, an accommodation party lends his credit to the
accommodated party by issuing or indorsing a check which is held by a payee or indorsee as a holder in
due course, who gave full value therefor to the accommodated party. The latter, in other words, receives
or realizes full value which the accommodated party then must repay the accommodating party, unless
the accommodating party intended to make donation to the accommodated party. But the
accommodating party is bound on the check to the holder due course who is necessarily a third party is
not the accommodated party. Having issued or indorsed the check, the accommodating party has
warranted to the holder in due course that he will pay the same according to its tenor.
- In lending his name to the accommodated party, the accommodation party is in effect a surety for the
latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He
receives no part of the consideration for the instrument but assumes liability to the other parties thereto
bec he wants to accommodate another.
- Accommodation pertains to an arrangement made as a favor to another, not upon a consideration
received. It differs from a guarantee in that a guarantee refers to a promise to answer the debt of another,
in case the latter fails to do so.
- Liability of accommodation party
o The law is that the accommodation party can claim no benefit as such, but he is still liable according
to the face of his undertaking, the same as if he were himself financially interested in the
transaction. To fasten liability upon an accommodation maker, it is not necessary that any
consideration should move to him.
o The accommodation party is liable to a holder for value as a contract was not for accommodation. It
is not a valid defense that the accommodation party did not receive any valuable consideration when
he executed the instrument. Nor is it correct to say that the holder for value is not a holder in due
course merely bec at the time he acquired the instrument, he knew that the indorser was only an
accommodation party.
o An accommodation maker is primarily and unconditionally liable on the promissory note to a holder
for value, regardless of whether he stands as surety or solidary co-debtor since such distinction
would be entirely immaterial ad inconsequential as far as a holder for value is concerned.
o From the standpoint of contract law, an accommodation party differs from the ordinary concept of a
debtor therein in the sense that he has not received any valuable consideration for the instrument he
signs. Nevertheless, he is liable to a holder for value as if the contract was not for the
accommodation, in whatever capacity such accommodation party signed the instrument, whether
primarily or secondarily. In lending his name to the accommodated party, the accommodation party
is in effect a surety for the latter.
- However, 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 surety.
- The fact that the accommodation party did not receive any value in the issuance of the instrument does
not mean that there is no consideration therefor. A third party advances the face value of the note to the
accommodated party at the time of the creation of the note, the consideration for the note as regards it is
the money advanced to the accommodated party. And it cannot be said that the note is lacking in
consideration as to the accommodating party just bec he himself received none of the money. It is
enough that value was given for the note at the time of its creation.

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 - Where an indorsement is made as a favor to the indorsee, who requests it, not the better to secure
payment, but to relieve himself from a distasteful situation, and where the only consideration for such
indorsement passes from the indorser to indorsee, the situation does not present one creating an
accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the
indorsement.
- Sec 29 of the NIL does not include nor apply to corporations which are accommodation parties. This is
bec the issue or indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who has taken the instrument with knowledge of
the accommodation nature thereof cannot recover against a corporation where it is only an
accommodation party.
- Where a bank extended a loan to a company, in connection with which an accommodation party co-
signed, along with the borrower, the promissory note promising to pay the loan and executing a real
estate mortgage on his property to secure payment of the loan, and the borrower in turn assigned its
receivables to the bank providing, in the deed of assignment, that the receivables would be applied in
payment of the loan, as consideration which moved the accommodation party to execute the promissory
note and the real estate mortgage, the accommodation party in a surety is liable jointly and severally to
the bank upon default in the payment of the loan. However, the extension of time to pay the receivables
granted by the bank as assignee thereof, without the knowledge and consent of the accommodation
party, releases the latter from his liability as accommodation maker and as mortgagor.
- An agreement to settle the prosecution of a crime is manifestly contrary to public policy and due
administration of justice and will not be enforced in a court of law.
- Liabilities between accommodation and accommodated parties
o The relation between the accommodation and accommodated parties is regarded as one of surety
whereby the accommodation party acts as surety for the party accommodated.
o Sec 29 makes the accommodation party, whether as maker, drawer, acceptor or indorser, liable on
the instrument to a holder for value. Hence the accommodation party is not liable to the
accommodated party, there being lackof consideration between them.
o In accepting the accommodation, the party accommodated upon a negotiable instrument impliedly
agrees to save the accommodation party harmless at maturity of the instrument and to indemnify the
latter against the consequence of non-payment. He has the right of indemnification or
reimbursement. The general rule is that the accommodation party who has paid the holder of the
instrument may recover the amount paid from the party accommodated. This rule applies to
accommodation maker, acceptor, drawer and indorser.
o Moreover, a person who answers for the obligation of another in a contract or bond for that purpose
without pecuniary gain and merely as a gesture of friendship or accommodation, is granted the
benefit of strictissimi juris. A surety who acts without motive of pecuniary gain should be protected
against unjust pecuniary impoverishment by imposing on the principal duties akin to those of a
fiduciary. He is protected by the rule of strictissimi juris.

NEGOTIABLE INSTRUMENTS LAW

CHAPTER ON NEGOTIATION

SEC. 30 WHAT CONSTITUTES 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. OF PAYABLE TO BEARER, IT IS NEGOTIATED BY
DELIVERY; IF PAYABLE TO ORDER, IT IS NEGOTIATED BY THE INDORSEMENT OF THE
HOLDER AND COMPLETE DELIVERY.

- This issuance of an instrument means the first delivery of the instrument complete in form to a person
who takes it as a holder. The delivery of the instrument is the final act essential to its consummation as
an obligation.
- Delivery – the transfer of the possession of the instrument, actual or constructive, by the maker or
drawer with the intent to transfer title to the payee or indorsee or to the bearer thereof and recognize him
as the holder thereof, entitled to enforce it.
- Delivery to an intermediate person is not delivery. Thus, a messenger or collector of the payee or
indorsee or bearer is not delivery, as it is not intended to transfer title to the messenger or collector until
the same is actually delivered to the payee or indorsee or bearer.
- If the instrument is payable to order, the instrument is negotiated by indorsement of the holder by
signing the instrument, usually at the back page thereof, with or without additional words, and completed
by delivery to the indorsee.
- Payment of the instrument is not delivery, but is a discharge of such instrument and its negotiability
ceases. The obligor or drawee paying the instrument, to whom it is handed, is not a holder and the
instrument becomes a voucher or evidence of payment.
- A delivery for a special purpose is a conditional delivery, which does not take effect until the special
purpose is accomplished. The condition may be a condition precedent or condition subsequent. In
condition precedent, the delivery is not effective until the condition occurs or is fulfilled, which means

11
 that there is no successful negotiation or transfer of the instrument. In a condition subsequent, the
delivery is in full force and effect, but its non-fulfillment avoids the instrument.
- The conditional delivery or a delivery for a special purpose applies only to “immediate parties” as
understood in Sec 16 of the NIL, or those who are in privity not merely in proximity and who know or
are being held to know the conditions and limitations placed upon the delivery. Holders in due course
are not considered “immediate parties.” The validity of the delivery by all parties prior to a holder in
due course as to make them liable is conclusively presumed.
- When delivery and endorsement of bearer instrument is required
o But if the delivery is for a purpose other than to transmit title to the instrument and to constitute the
transferee a holder, indorsement for such purpose is required, otherwise the transferee may only be
considered an assignee who holds the instrument subject to defenses available to prior parties.
o Thus, where a bearer certificate of time deposit was issued by a bank and the bearer thereof
delivered the same to a company to serve as security for his purchases, without informing the bank
at that time, a valid negotiation thereof for the true purpose – which is to serve as security – requires
both delivery and endorsement of the instrument and the execution of a public document of pledge,
to enable the company to recover on the certificate of time deposit in the event of failure to pay the
price of the purchases secured by the pledge. Delivery alone is not sufficient. Under the NIL, an
instrument is negotiated when it is transferred from one person to another in such a manner as to
constitute the transferee the holder thereof, and a holder may be the payee may be the payee of
endorsee of the bill or note, who is in possession of, or the bearer. In this case, there was no
negotiation in the sense of a transfer of the legal title of the certificate of deposit. Negotiation for
the purpose of using the certificate of time deposit as security by mere delivery is not sufficient
since the terms thereof and the subsequent disposition of such security, in the event of non-payment
of the principal obligation, must be contractually provided for in an agreement duly notarized. At
most, the company may be regarded as a holder for value by reason of its lien under Sec 27 of the
NIL. As such holder of collateral security, the company would be a pledge and the requirements
thereof, under Art 2095 and 2096 of the Civil Code, must be complied with, namely, that the
instrument must be indorsed and must appear in a public document so as to take effect against third
persons.

SEC. 31 INDORSEMENT; HOW MADE. – THE INDORSEMENT MUST BE WRITTEN ON THE

INSTRUMENT ITSELF OR UPON A PAPER ATTACHED THERETO. THE SIGNATURE OF THE
INDORSER, WITHOUT ADDITIONAL WORDS, IS A SUFFICIENT INDORSEMENT.

- Indorsement is a written transaction by which the holder of the instrument transfers to another his rights
and title to such instrument, by affixing his signature, usually at the back thereof or in its face with or
without additional words. The indorsement may also be made in a separate paper firmly attached to the
instrument, which is called allonge. An unattached paper or security document attached to the
instrument is not a valid indorsement. An allonge is usually used where the instrument is so cluttered
with previous indorsements that convenience or necessity requires additional space for further
indorsement.
- An indorsement means indorsement coupled by delivery in the case of order instruments or merely
delivery in the case of bearer instruments.
- An indorser may affix his signature with additional words, which may or may not limit his liability. An
indorsement with recourse means resort to a person who is secondarily liable after the default of the
person primarily liable. An indorsement with recourse, makes the indorsee a general indorsee or one
without qualification. Conversely, an indorsement without recourse limits the liability of the indorser
and precludes the payee from holding the latter liable.

SEC. 32 INDORSEMENT MUST BE OF THE ENTIRE INSTRUMENT. – THE INDORSEMENT

MUST BE AN INDORSEMENT OF THE ENTIRE INSTRUMENT. AN INDORSEMENT WHICH
PURPORTS TO TRANSFER TO THE INDORSEE A PART ONLY OF THE AMOUNT PAYABLE, OR
WHICH PRUPORTS TO TRANSFER THE INSTRUMENT TO TWO OR MORE INDORSEES
SEVERALLY, DOES NOT OPERATE AS A NEGOTIATION OF THE INSTRUMENT. BUT WHERE THE
INSTRUMENT HAS BEEN PAID IN PART, IT MAY BE INDORSED AS TO THE RESIDUE.

- An indorsement in part operates as a mere assignment of such part.

- An instrument payable to the order of two or more persons jointly or one of several payees is a valid
indorsement of the entire document. Thus, an indorsement making the instrument payable to Pedro,
Carlo and Antonio jointly or to one of them is a valid indorsement and transfers the title to them.

SEC. 33 KINDS OF INDORSEMENT. – AN INDORSEMENT MAY EITHER BE SPECIAL OR IN

BLANK; AND IT MAY ALSO BE RESTRICTIVE OR QUALIFIED OR CONDITIONAL.

SEC. 34 SPECIAL INDORMSENT; INDORSEMENT MADE IN BLANK. – A SPECIAL

INDORSEMENT SPECIFIES THE PERSON TO WHOM, OR TO WHOSE ORDER, THE INSTRUMENT IS
PAYABLE, AND THE INDORSEMENT OF SUCH INDORSEE IS NECESSARY TO THE FURTHER
NEGOTIATION OF THE INSTRUMENT. AN INDORSEMENT IN BLANK SPECIFIES NO INDORSEE,

12
AND AN INSTRUMENT SO INDORSED IS PAYABLE TO BEARER; AND MAY BE NEGOTIATED BY
DELIVERY.

SEC. 35 BLANK INDORSEMENT; HOW CHANGED TO SPECIAL INDORSEMENT. – THE

HOLDER MAY CONVERT A BLANK INDORSEMENT INTO A SPECIAL INDORSEMENT BY
WRITING OVER THE SIGNATURE OF THE INDORSER IN BLANK ANY CONTRACT CONSISTENT
WITH THE CHARACTER OF THE INDORSEMENT.

- A special indorsement or an indorsement in blank does not destroy the negotiability of the instrument.

SEC. 36 WHEN INDORSEMENT RESTRICTIVE. – AN INDORSEMENT IS RESTRICTIVE

WHICH EITHER:
A) PROHIBITS THE 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 SOME
OTHER PERSONS.
BUT THE MERE ABSENCE OF WORDS IMPLYING POWER TO NEGOTIATE DOES NOT
MAKE AN INDORSEMENT RESTRICTIVE.

- A restrictive indorsement prohibits the further negotiation of the instrument or constitutes the indorsee
the agent of the indorser, or vests the title in the indorsee in trust for or to be used by some other person.
Since an indorsee, in a restrictive indorsement, does not acquire title or ownership of the instrument and
since he assumes responsibilities pertaining to the kind and purpose of restrictive indorsement, it is
necessary that he indicates his conformity thereto, expressly or impliedly, in order that there be a binding
contract between the indorser and the indorsee, and to hold the latter liable for non-performance or for
conversion of the proceeds of the instrument for his own use and benefit.
- An indorsement which prohibits the further negotiation of the instrument is worded as to preclude the
indorsee from negotiating it, as “pay to Antonio only, or pay to Antonio and to no one else.” In such a
case, the negotiability of the instrument is destroyed and the instrument becomes non-negotiable.
- An indorsement which constitutes the indorsee the agent of the indorser, such as “pay to Carlo as my
agent for collection,” is restrictive. The indorsee is merely to collect the amount of the instrument and to
give the amount to the indorser.
- An indorser which vests the title in the indorsee in trust for or to the use of some other persons is
restrictive. An indorsement which states: “Pay to Pedro for Carla, for her educational use” is an
indorsement for the use of other person. “Pay to Carling in trust for me” in which case, Carling holds
the proceeds on the indorser’s behalf; or “Pay to Carlos in trust for the 12 year old Ronnette” is
restrictive and the indorsee holds the proceeds for the benefit of said minor.

SEC. 37 EFFECT OF RESTRTICTIVE INDORSEMENT; RIGHTS OF INDORSEE. – A

RESTRICTIVE INDORSEMENT CONFERS UPON THE INDORSEE THE RIGHT:
A) TO RECEIVE PAYMENT OF THE INSTRUMENT;
B) TO BRING ANY ACTION THEREON THAT THE INDORSER COULD BRING;
C) TO TRANSFER HIS RIGHTS AS SUCH INDORSEE, WHERE THE FORM OF THE
INDORSEMENT AUTHORIZES HIM TO DO SO.
BUT ALL SUBSEQUENT INDORSEE ACQUIRES ONLY THE TITLE OF THE FIRST INDORSEE
UNDER THE RESTRICTIVE INDORSEMENT.

- It has been held that a restrictive indorsement terminates the negotiability of the instruments or suspends
its negotiability so long as it remains in the instrument.
- The negotiability of a restrictive indorsement, which has been suspended, may be restored by the holder
striking out the restrictive indorsement, where it is unnecessary to his title, as where he is the payee,
where it follows a blank indorsement, or where it has been placed on the instrument by one with who he
deposited it for collection who returned it to him upon dishonor. A bank which has received a check for
deposit or a note for collection and has given value for the instrument may strike out the restrictive
indorsement and recover against the drawer or maker.
- The striking our of a restrictive indorsement by the restrictive indorser has the effect of restoring the
negotiability of an instrument.
- A restrictive indorsement confers upon the indorsee the right to receive payment of the instrument and to
issue receipt therefor, but he can dispose of the proceeds only to the person intended to be benefited and
for the purpose of the indorsement. The right to receive payment does not include the right to receive
less than the amount of the instrument, nor to discharge the instrument.
- A restrictive indorsement confers upon the indorsee the right to transfer his rights as such indorsee,
where the form of the indorsement authorizes him to do so. The general rule is that the indorsee in a
restrictive indorsement, cannot transfer his rights to another, except when the indorsement authorizes
him to do so, as when it provides that he has the right to appoint a substitute to act on his behalf and
exercise the rights conferred.

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SEC. 38 QUALIFIED INDORSEMENT. – A QUALIFIED INDORSEMENT CONSTITUTES THE
INDORSER A MERE ASSIGNOR OF THE TITLE TO THE INSTRUMENT. IT MAY BE MADE BY
ADDING TO THE INDORSER’S SIGNATURE THE WORDS “WITHOUT RECOURSE” OR ANY WORDS
OF SIMILAR IMPORT. SUCH AN INDORSEMENT DOES NOT IMPAIR THE NEGOTIABLE
CHARACTER OF THE INSTRUMENT.

- An indorsement without recourse constitutes the indorser a mere assignor of the title to the instrument
and “without recourse” simply means that the indorser is exempt from liability for payment of the
instrument in the event the instrument is dishonored at maturity, as opposed to “with recourse” which is
an equivalent to a general indorsement.
- By adding such words as “without recourse,” an indorsement relieves the indorser of the general
obligation to pay if the instrument is dishonored but not of the liability arising from warranties on the
instrument as provided by Sec 65 of the NIL.
- In other words, an indorser who desires to avoid liability on the instrument should make the indorsement
“without recourse” or use such words as will limit personal liability.
- “Recourse” means resort to a person who is secondarily liable after the default of the person who is
primarily liable.
- A holder of a “with recourse” instrument has the option to either sue under the NIL of under the Civil
Code.

SEC. 39 CONDITITONAL INDORSEMENT. – WHERE AN INDORSEMENT IS CONDITIONAL,

THE PARTY REQUIRED TO PAY THE INSTRUMENT MAY DISREGARD THE CONDITION AND
MAKE PAYMENT TO THE INDORSEE OR HIS TRANSFEREE WHETHER THE CONDITION HAS
BEEN FULFILLED OR NOT. BUT 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.

- A conditional indorsement should be distinguished from a conditional instrument. A conditional

instrument is non-negotiable as it is not an unconditional promise or order to pay a sum certain in
money. A conditional indorsement refers to one subject to a condition, written and signed by the
indorser on a negotiable instrument. It makes the indorsement subject to the fulfillment of a condition.
For example, indorser Carlos instructs: “pay to Pedro upon completion of my summer vacation house on
or before year 2006.” The indorsee holds the instrument subject to such condition. But indorsee may
present it for payment and the drawee may disregard the condition – completion of the house- and make
payment to the indorsee who then holds the proceeds subject to the right of the indorser.
- In other words, the drawee may pay the instrument, even before the fulfillment of the condition, but the
indorsee holds the proceeds, subject to the rights of the person indorsing conditionally, that is, the
indorsee becomes owner of the proceeds of the instrument upon completion of the house or the indorsee
has to return the money to the indorser when the house is not completed.

SEC. 40 INDORSEMENT OF INSTRUMENT PAYABLE TO BEARER. – WHERE AN

INSTRUMENT, PAYABLE TO BEARER, IS INDORSED SPECIFICALLY, IT MAY NEVERTHELESS BE
FURTHER NEGOTIATED BYDELIVERY; BUT THE PERSON INDORSING SPECIALLY IS LIABLE AS
INDORSER TO ONLY SUCH HOLDERS AS MAKE THE TITLE THROUGH HIS INDORSEMENT.

- The bearer of the instrument, Pedro, may indorse the instrument specially, namely: “Pay to Carling” and
the latter may further negotiate it by delivery, say, to Jose, without Carling indorsing it as an exception
to Sec 34. Jose may further negotiate it to Froilan and the latter to Albert. However, Pedro, who
indorsed it specially, is liable as indorser only to Carling, and not to Froilan and Albert bec only Carling
obtained title through his special indorsement.

SEC. 41 INDORSEMENT WHERE PAYABLE TO TWO OR MORE PERSONS. – WHERE AN

INSTRUMENT IS PAYABLE TO THE ORDER OF TWO OR MORE PAYEES OR INDORSEES WHO ARE
NOT PARTNERS, ALL MUST INDORSE UNLESS THE ONE INDORSING HAS AUTHORITY TO
INDORSE FOR THE OTHERS.

- An indorsement which states: “Pay to the order of Amado and Camina.” The two must indorse unless
one of them has written authority to indorse for the other. The one authorized to indorse has to indorse
twice, one for his own right as payee and in his capacity as authorized agent of the other. If they are
partners, the indorsement of one is sufficient for a partner is deemed authorized to indorse by the other
partner.

SEC. 42 EFFECT OF INSTRUMENT DRAWN OR INDORSED TO A PERSON AS 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

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TO THE BANK OR CORPORATION OF WHICH HE IS SUCH OFFICER, AND MAY BE NEGOTIATED
BY EITHER THE INDORSEMENT OF THE BANK OR CORPORATION OR THE INDORSEMENT OF
THE OFFICER.

SEC. 43 INDORSEMENT WHERE NAME IS MISSPELLED, AND SO FORTH. – 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. 44 INDORSEMENT IN REPRESENTATIVE CAPACITY. – WHERE ANY PERSON IS

UNDER OBLIGATION TO INDORSE IN A REPRESENTATIVE CAPACITY, HE MAY INDORSE SUCH
TERMS AS TO NEGATIVE PERSONAL LIABILITY.

- Sec 44 should be read in relation to Sec 20 which reads:

o “Sec. 20. Liability of person signing as agent and so forth. – Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he has duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability.”
- It has been held that the right of an agent to indorse commercial paper is a very responsible power and
will not be lightly inferred. A salesman with authority to collect money belonging to a corporation,
which can act only by agents, does so at his peril, and must abide by the consequences if the agent who
indorses the same is without authority. Where a salesman of a company receives checks payable to said
company, which he indorsed and deposited in his own personal account and the bank allowed said
deposits and withdrawals therefrom, the bank is liable therefor, unless it shows that the withdrawals
were received by the company, which thus suffered no less.
- To escape personal liability, the agent must comply with two requirements: he must have been duly
authorized to sign in a representing capacity, which should be in writing and clearly authorizing him to
sign or indorse the instrument as agent of principal, and he must disclose and write the name of his
principal in the instrument itself and signs his name for and in behalf of said principal. The two
requisites must concur, otherwise the agent will still be personally liable on the instrument.

SEC. 45 TIME OF INDORSEMENT; PRESUMPTION. – EXCEPT WHERE AN INDORSEMENT

BEARS DATE AFTER THE MATURITY OF THE INSTRUMENT, EVERY NEGOTIATION IS DEEMED
PRIMA FACIE TO HAVE BEEN EFFECTED BEFORE THE INSTRUMENT WAS OVERDUE.

- An indorsement is deemed prima facie to have been effected before the instrument was overdue, in
which case the person to whom it is indorsed may become a holder in due course under Sec 52 of the
NIL, as he took the instrument before it was overdue. The presumption is rebuttable and the burden of
proof to show the contrary lies with th person who denies that the holder is not a holder in due course.
The presumption is also rebuttable by the instrument itself where the indorsement was dated after
maturity.

SEC. 46 PLACE OF INDORSEMENT. – EXCEPT WHERE THE CONTRARY APPEARS, EVERY

INDORSEMENT IS PRESUMED PRIMA FACIE TO HAVE BEEN MADE AT THE PLACE WHERE THE
INSTRUMENT IS DATED.

- Sec 46 is a rule of conflicts of law. The presumption is that the place of indorsement is where the
instrument is dated, which governs the form and solemnity of the indorsement. If the law of the place
where the instrument is dated in a foreign country, say in NY, USA, is different from that of the
Philippines, the NY law governs the execution of the indorsement and not that of the Philippines unless,
executed before diplomatic or consular officials of the Phils.

SEC. 47 CONTINUATION OF NEGOTIABLE CHARACTER.- AN INSTRUMENT NEGOTIABLE

IN ITS ORIGIN CONTINUES TO BE NEGOTIABLE UNTIL IT HAS BEEN RESTRICTIVELY INDORSED
OR DISCHARGED BY PAYMENT OR OTHERWISE.

- The negotiability of an instrument also ceases when the instrument is discharged by payment or
otherwise.
SEC. 48 STRIKING OUT INDORSEMENT. – THE HOLDER MAY AT ANY TIME STRIKE OUT
ANY INDORSEMENT WHICH IS NOT NECESSARY TO HIS TITLE. THE INDORSER WHOSE
INDORSEMENT IS STRUCK OUT, AND ALL INDORSEMENT IS STRUCK OUT, AND ALL INDORSERS
SUBSEQUENT TO HIM, ARE THEREBY RELIEVED FROM LIABILITY ON THE INSTRUMENT.

- An instrument may be an order instrument or a bearer instrument. If an order instrument is indorsed by

holder A in blank to B, and the latter indorses it to C specially, and so on until it is indorsed to F, the

15
 latter may cancel the indorsements of C since the indorsement to B is in blank which is not necessary to
F’s title. The striking out of the indorsement of C cancels subsequent indorsements to C, D and E, who
are relieved from liability on the instrument.
- In both order and bearer instruments, the last indorsee or holder can claim that the blank indorsement
refers to him and that he derives his title from the indorsement in blank.
- The act of striking our benefits the indorsee whose indorsement has been stricken and all indorsers
subsequent to him, with no apparent benefit to the striking indorsee, for if the instrument is not paid or is
dishonored, the striking indorsee cannot hold liable those indorsees who have been relieved of liability
on the instrument.

SEC. 49 TRANSFER WITHOUT INDORSEMENT; EFFECT OF. – WHERE THE HOLDER OF AN

INSTRUMENT PAYABLE TO HIS ORDER TRANSFERS IT FOR VALUE WITHOUT INDORSING IT,
THE TRANSFER VESTS IN THE TRANSFEREE SUCH TITLE AS THE TRANSFEROR HAD THEREIN,
AND THE TRANSFEREE ACQUIRES IN ADDITION, THE RIGHT TO AVE THE INDORSEMENT OF
THE TRANSFEROR. BUT 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.

- The holder of an instrument payable to his order may transfer it for value in favor of another, without
indorsing it, and the transfer vests in the transferee the title of the transferor in the instrument. But the
transferee cannot be a holder in due course, unless he requires the transferor to indorse the instrument to
him and the indorsement takes effect as of the time when the indorsement is actually made. If before
such indorsement, the transferee learns of any defect in the title in the instrument, the transferee cannot
be a holder in due course, who holds the instrument subject to defenses available to prior parties.

SEC. 50 WHEN PRIOR PARTY MAY NEGOTIATE INSTRUMENT. – WHEN AN INSTRUMENT

IS NEGOTIATED BACK TO A PRIOR PARTY, SUCH PARTY MAY, SUBJECT TO THE PROVISIONS
OF THIS ACT, 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.

- A prior party may be a maker or drawer, a payee or indorsee. If the maker or drawer re-acquires the
instrument before maturity, he can reissue and renegotiate it, but he is not entitled to enforce payment
against any intervening party to whom he was personally liable. If the prior party reacquires the
instrument after it has been discharged, he can no longer re-issue and renegotiate it because the
discharge of the instrument extinguishes its negotiability.

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SEC. 51 RIGHT OF HOLDER TO SUE; PAYMENT. – THE HOLDER OF A NEGOTIABLE
INSTRUMENT MAY SUE THEREON IN HIS OWN NAME AND PAYMENT TO HIM IN DUE COURSE
DISCHARGES THE INSTRUMENT.

- A holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof.
- A holder for value is a holder who has given value for the instrument in respect to all parties who
become such prior to that time. He is a holder for value who meets the other requirements for a holder in
due course except that at the time it was negotiated to him, he had notice of infirmity in the instrument or
defect in the title of the person negotiating it. If he does not qualify as a holder in due course, then he
holds the instrument subject to the same defenses as if it were non-negotiable.
- Where a person received a check after it was already dishonored for having drawn against a “closed
account,” in payment of some goods, the person is not a holder in due course. Yet it does not follow that
he could not recover on the check.
- The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable. Thus, if the check had been issued in payment of shoes that were
not made and delivered, that fact is a good defense as against a holder who is not a holder in due course.

SEC. 52 WHAT CONSTITUTES A HOLDER IN DUE COURSE. – A HOLDER IN DUE COURSE IS

A HOLDER WHO HAS TAKEN THE INSTRUMENT UNDER THE FOLLOWING CONDITIONS:
A) THAT IT IS COMPLETE AND REGULAR UPON ITS FACE;
B) THAT HE BECAME THE HOLDER OF IT BEFORE IT WAS OVERDUE, AND
WITHOUT NOTICE THAT IT HAS BEEN PREVIOUSLY DISHONORED, IF SUCH WAS
THE FACT;
C) THAT HE TOOK IT IN GOOD FAITH AND FOR VALUE;
D) THAT 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.

- The very first requirement of due course is that the instrument must be a negotiable instrument as
defined in Sec 1 of the NIL.
- The second requirement is that the instrument must be complete and regular on its face, namely, it is
duly signed, dated, for a fixed amount payable, and bears no material alteration apparent on its face.
Any alteration, which changes the date, the sum payable, either for principal or interest, the time or place
of payment, the number of relations of the parties, the medium of currency in which the payment is to be
made, or which adds a place of payment where no place is specified or any other change or additions
which alters the effect of the instrument, is a material alteration. Any of these alterations must be
evident on the face of the instrument so that any holder who takes it is warned that the instrument has
been altered, which may avoid the instrument.
- The next requirement is that the holder became the holder thereof before it was overdue, and without
notice that it has been previously dishonored, is such was the fact. For instance, an instrument on its
face shows the word “dishonored.” This is a notice that the instrument has been previously dishonored
and its holder may not be considered a holder in due course.
- The next requirement is that the holder took the instrument in good faith and for value. Good faith is the
holder’s well-founded belief that the person from whom he received the instrument was the owner
thereof, with the right to transfer or convey it. It is the opposite of bad faith, which imports dishonest
purpose or fraud, prompted by some interested or sinister motive. For value means that the holder has
given consideration for the instrument.
- The last requirement is that at the time it was negotiated to him, the holder had no notice of infirmity in
the instrument or defect in the title of the person negotiating it. As a rule, infirmity refers to any
infirmities that vitiate the instrument itself, while defect in the title of the person negotiating it refers to
how he obtained the instrument or the signature thereto, as by fraud, duress, force or 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 fraud.
- The presence or absence of notice of infirmity or defect must be determined at the time the instrument
was negotiated to the holder. If at that time, he had notice of infirmity or defect, he may not be
considered a holder in due course. But if he acquired notice of the infirmity or defect after the
instrument has been negotiated to him, his status as holder in due course is not affected.
- The law defines a holder as the payee or indorsee of a bill or note who is in possession of it.
- In Prudencio v. CA, the issue was whether PNB, the payee, was a holder in due course, entitled to
recover on the promissory note. The petitioners contend that the payee was not a holder in due course
bec it was an “immediate party” and that it directly dealt with the transaction that led to the issuance of
the note, with PNB as payee, and the latter breached its obligations thereunder. The court ruled that as a
general rule, a payee may be considered a holder in due course, but such general rule does not apply to
PNB bec it was an immediate party, dealt directly with the transactions, and violated their terms. The
court thus absolved the petitioners of their ability on the promissory note.
- In Fossum v. Hernandes, the court enunciated the ff principles:
o An agent of a principal, which sold an equipment and drew a time draft for the purchase therof,
upon the buyer and payable to a bank, which the buyer accepted according to its terms, and which
draft was subsequently endorsed to the agent, cannot, when the equipment proved to be defective,

17
 be considered a holder in due course, nor can the principal be so considered bec he is an active
participant in the transaction.
o A party who acquires without considerations title to an instrument from one who is a holder in due
course thereof must prove that he is a holder in due course, as an independent matter and the
presumption that a holder is a holder in due course does not apply to him.
o An instrument which is unenforceable for lack of consideration ma become enforceable in the hands
of holder who acquires it for value and in good faith without notice of its defect.
o If the original payee of a note unenforceable for lack of consideration repurchases the instrument
after transferring it to a holder in due course, the paper again becomes subject to the same defenses
to which it could have been subject if the paper had never passed through the hands of a holder in
due course.
- The difference between a holder for value and a holder in due course is that a holder for value is one
who at the time it was negotiated to him, he had notice of infirmity in the instrument or defect in the title
of the person negotiating it.

SEC. 53 WHEN PERSON NOT DEEMED HOLDER IN DUE COURSE. – WHERE AN

INSTRUMENT PAYABLE ON DEMAND IS NEGOTIATED ON AN UNREASONABLE LENGTH OF
TIME AFTER ITS ISSUE, THE HOLDER IS NOT DEEMED A HOLDER IN DUE COURSE.

- What constitutes an unreasonable length of time depends upon the circumstances of each case, and the
determination of such question lies in the sound discretion of the court, which may not be disturbed in
the absence of grave or patent abuse.
- Except that in case of a bill of exchange, presentment for payment will be sufficient if made within a
reasonable period of time after indorsement.
- An unreasonable delay in presenting a check for payment means such delay as to make the check stale,
and a check becomes stale after 6 months from issue.

SEC. 54 NOTICE BEFORE FULL AMOUNT IS PAID. – 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 THEREFOR PAID BY HIM.

- This provision presupposes that payment by the transferee of the consideration is in installment and he
receives notice of an infirmity, i.e. lack of consideration, illegality of the note, in the instrument or defect
in the title of the person negotiating the same before he has paid the balance of what has been agreed to
pay. But he is deemed to be a holder in due course only to the extent of the amount paid by him. This
means that he holds the instrument free from such infirmity or defect with respect to what he had paid, as
he is deemed a holder in due course to such extent, and that if he seeks to enforce the instrument, his
right to recover the full amount thereof may be defeated, except as to the amount prior to his receipt of
the notice of such infirmity or defect.

SEC. 55 WHEN TITLE DEFECTIVE. – 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 and 59 should be construed together, as they complement each other. Sec 55 defines a defective
title of the person who negotiates an instrument, while Sec 59 provides that when it is shown that the
title of the person who negotiates the instrument is defective, the holder has the burden of proof to show
that he is a holder in due course or the person from whom he acquired title is a holder in due course. In
the first instance, the defendant against whom the complaint for recovery of the face value of the
instrument was filed by a holder in due course has to prove the latter acquired the instrument from one
who has a defective title. Having proved and shown the defective title of the negotiating person, the
defective title destroys the presumption that the holder is a holder in due course, and the burden now
shifts to the latter to show that he is a holder in due course or that the person from whom he acquired the
instrument is a holder in due course.
- It has been held that the misrepresentation constituting fraud must be established by full, clear, and
convincing evidence, and not merely preponderance of evidence. The deceit must be serious. The fraud
is serious when it is sufficient to impress, or to lean an ordinarily prudent person into serious error, that
which cannot deceive a prudent person, cannot be a ground for nullity. The circumstances of each case
should be considered, taking into account the personal conditions of the victim.
- Negotiation beyond authority
o The person negotiating the check must have gone beyond the authority given by his principal. If the
principal could prove that there was no negligence in the performance of his duties, he may set up
the personal defense to escape liability and recover from other parties, who, through their own
negligence, allowed the commission of the crime.

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SEC. 56 WHAT CONSTITUTES NOTICE OF DEFECT. – TO CONSTUTUTE NOTICE OF AN
INFIRMITY IN THE INSTRUMENT OR DEFECT IN THE TITLE OF THE PERSON NEGOTIATING
THE SAME, THE PERSON TO WHOM IT IS NEGOTIATED MUST HAVE HAD ACTUAL KNOWLEDGE
OF THE INFIRMITY OR DEFECT, OR KNOWLEDGE OF SUCH FACTS THAT HIS ACTION IN
TAKING THE INSTRUMENT AMOUNTED TO BAD FAITH.

- In Consolidated Plywood Industries, Inc. v. IFC Leasing and Acceptance Corp., the issue raised was
whether or not a bank or financing company whose favor a note to cover the purchase price of
commodity sold in installments, who directly participated in the transaction, was a holder in due course,
as to preclude the buyer, when sued on the note, to raise the defense that the goods sold turned out to be
defective as to constitute failure of consideration. The court held that the bank or financing company
was not a holder in due course.
- The court in Salas v. CA, held that the financing company was a holder in due course, that the seller was
barred from raising as a defense against it the fact that the vehicle sold was not actually what the vehicle
described in the deed, and that the buyer’s recourse was against the seller. However, the question as to
the immediate participation of the financing company in the transaction was to render the latter in bad
faith in acquiring the promissory note was not raised as an issue, so that the buyer was held liable under
the promissory note in favor of the financing company, notwithstanding the fact that there was failure of
consideration.
- The implication of the rulings in the two cases is that a financing company could be considered a holder
in due course, if it did not actively participate in the installment sale of goods.
- In the recent case of Great Asian Sales Center Corp. v. CA, the court ruled that policy considerations
militate against according finance companies the rights of a holder in due course, otherwise, consumers
who purchase appliances on installment, giving their promissory notes or checks to the seller, will have
no defenses against the finance company should the appliance later turn out to be defective. The court
made this ruling regardless of any direct participation of the financing company to the installment sales
transaction (as provided for in Art 146 of RA 7394, which was enacted after Great Asian). The
purchaser may thus issue a “stop-payment order” or countermand his checks, when serious defects in the
goods purchased occur which may entitle him to rescind the contract of sale and to sue for damages for
breach thereof.
- Crossing a check is notice of infirmity
o A corporation, which discounted a cross-check payable to a named payee, is not a holder in due
course bec it was aware that the cross-check is for deposit only to the account of the payee and is
not to be further negotiated. It this discounted the check with notice of infirmity in the instrument or
defect in the title of the person negotiating it. The crossing of a check with the words “payee’s
account only” is a warning that the check should be deposited only to the account of the payee and if
the check is negotiated instead of depositing to the account of the payee of the crossed check, the
duty devolved upon the holder to make inquiry as to the title of the drawer, failing which the holder
is in bad faith and cannot be a holder in due course.
- The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is
subject to defenses as if were non-negotiable.
- Post-dating a check
o Postdating a check is not, by itself, notice of infirmity in the instrument. There should be more than
mere posting that should require a reasonably cautious man to make inquiry or investigation.
o In State Investment House Inc. v. CA, the court held that an indorser of a postdated check
negotiated before the due date for value, without the latter having notice of any defect therein, is a
holder in due course, even if the drawer issued the check merely as security for a contemplated sale
of pieces of jewelry which failed. The court thus impled that the fact that a check is postdated is
not, by itself, a notice of infirmity in the check, as to prevent the indorsee from being a holder in due
course.
o Illustrative cases of notice of infirmity or of bad faith:
 Vicente de Ocampo Co. v. Gatchalian
- It was also ruled in Ocampo v. Gatchalian that physical delivery of the check by the drawer to her agent
is not negotiation in the legal sense, for delivery implies that the person who receives delivery holds the
check for a special purpose and not as a holder thereof. The agent was not authorized to negotiate the
check, and when he did, he violated the authority given him by the drawer.

SEC. 57 RIGHTS OF A HOLDER IN DUE COURSE. – A HOLDER IN DUE COURSE HOLDS THE
INSTRUMENT FREE FROM ANY DEFECT OF TITLE OF PRIOR PARTIES, AND FREE FROM
DEFENSES AVAILABLE TO PRIOR PARTIES AMONG THEMSELVES, AND MAY ENFORCE
PAYMENT OF THE INSTRUMENT FOR THE FULL AMOUNT THEREOF AGAINST ALL PARTIES
LIABLE THEREON.

- Sec 57 cannot be construed in isolation from the other provisions of the NIL.
- Sec 57 and 59 distinguish between defective title and defenses available to prior parties among
themselves. The distinction being that the former is available as a defense against a holder in due
course, but not personal defenses, whole both defective title and personal defenses are defenses which
can be asserted against a holder who is not a holder in due course. Hence, such defenses cannot be

19
 asserted against a holder in due course to defeat his claim on the instrument. These are so-called
personal defenses. Defenses may be thus classified into real defenses or those which can be asserted
against a holder in due course, and personal defenses which are not.
- It has been held that the personal defenses include the ff:
o Lack or failure of consideration
o Breach of contract
o Payment before paper overdue without taking up paper or having indorsement of payment made
thereon
o Set-off and counterclaim
o Fraud in inducement or consideration
o Duress, undue influence
o Illegality of transaction
o Defenses that, while not admitting issuance, are not allowable bec of conduct of defendant by which
he is estopped to setup defenses as against a holder in due course, such as:
 Lack of authority of an agent who has a general authority to issue such paper
 Lack of authority of a partner who has a general authority to issue such paper
 Lack of delivery of paper which defendant has executed in completed form.
- Real defenses:
o Defenses that deny all responsibility for the issuance of the instrument consisting of:
 That defendant’s signature is a forgery
 That the instrument sued on has been materially altered, and therefore is not paper for
which defendant is responsible
 That the instrument sued on was procured by trickery, i.e. defendant never meant to issue it
 That the paper was issued by one who purported to be as agent of the defendant but who in
fact had no authority to issue the paper
o Defenses that deny the capacity of the defendant to issue the instrument, such as minority and
insanity
o Defenses which, admitting the issuance of the paper, are based upon the theory that the law for
purposes of public policy makes the act utterly void.
- If a note, bill or check is issued in consideration of any of the above non-existent or void contracts, and
is thereafter negotiated to a holder complete and regular upon its face; the holder became a holder of it
before it was overdue, and without notice that it has been previously dishonored, if such was the fact; he
took it in good faith and for value; and at the time it was negotiated to him, he had no notice of infirmity
in the instrument or defect in the title of the person negotiating it, the fact that the instrument as a
contract is null and void under Art 1409 of the Civil Code is a good defense to prevent the holder from
recovery on the note, bill or check, by proving that the title of person who negotiated the instrument is
fatally defective under any of the provisions of the Civil Code.
- It has been held that a promissory note executed in favor of another as bribe money for the purpose of
influencing public officials in the performance of their duties is null and void, as against law and public
policy.
- Likewise, a check issued by the parents of a kidnap victim in favor of the kidnapper as ransom money
for the release of the victim is illegal consideration and is null and void.

SEC. 58 WHEN SUBJECT TO ORIGINAL DEFENSE. – IN THE HANDS OF ANY HOLDER

OTHER THAN A HOLDER IN DUE COURSE, A NEGOTIABLE INSTRUMENT IS SUBJECT TO THE
SAME DEFENSES AS IF IT WERE NON-NEGOTIABLE. BUT A HOLDER WHO DERIVES HIS TITLE
THROUGH A HOLDER IN DUE COURSE, 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 PARTIES PRIOR TO THE LATTER.

- A party who acquires title to an instrument from one who is a holder in due course thereof must prove
that he is a holder in due course, as an independent matter and the presumption that a holder is a holder
in due course does not apply to him.
- Party deriving title from holder in due course
o A person who is not a holder in due course, who derives title from a holder in due course, may
recover against the person primarily liable thereon, if he can show that the person through whom he
derives his title is a holder in due course, as an independent matter of fact and unaided by the
presumption that a holder is presumed to be a holder in due course, such presumption not being
applicable to such situation. It is also held that if the original payee of a note unenforceable for lack
of consideration repurchases the instrument after transferring it to a holder in due course, the paper
again becomes subject in the payee’s hands to the same defenses which it would have been subject
if the paper had never passed through the hands of a holder in due course. The same is true where
the instrument is retransferred to an agent of the payee.

SEC. 59 WHO IS DEEMED HOLDER IN DUE COURSE. – EVERY HOLDER IS DEEMED PRIMA
FACIE TO BE A HOLDER IN DUE COURSE; BUT 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

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TITLE AS HOLDER IN DUE COURSE. BUT THE LAST MENTIONED RULE DOES NOT APPLY IN
FAVOR OF A PARTY WHO BECAME BOUND ON THE INSTRUMENT PRIOR TO THE
ACQUISITIOON OF SUCH DEFECTIVE TITLE.

- Thus, where a bank acquired the negotiable note of another bank by a contract of merger of the two
banks, the bank that acquired the note was not a holder in due course bec the note was not indorsed to it
by the payee. Only a negotiation by indorsement could have operated as valid transfer to make the bank
a holder in due course.
- He who disputes that a holder is not a holder in due course has the burden of proof to show that one or
more of the requirements of Sec 52 are absent.
- The absence of, or failure to comply with, any of the conditions will render the holder not a holder in due
course.
- Illustrative cases of due course holder:
o State Investment House, Inc. v. CA
o Yang v. CA
o De Ocampo Co. v. Gatchalian
o Bataan Cigar v. CA

SEC. 60 LIABILITY OF MAKER. – THE MAKER OF A NEGOTIABLE INSTRUMENT, BY

MAKING IT, ENGAGES THAT HE WILL PAY IT ACCORDING TO ITS TENOR, AND ADMITS THE
EXISTENCE OF THE PAYEE AND HIS THEN CAPACITY TO INDORSE.

- The maker and acceptor are primarily liable, while the drawer and indorser are secondarily liable and
their liability is contingent upon certain steps taken, such as presentment for acceptance of payment, and
notice of dishonor upon them.
- Sec. 192 provides who are primarily and secondarily liable on the instrument. It provides, “The person
primarily liable on an instrument is the person who, by the terms of the instrument, is absolutely required
to pay the same. All other parties are secondarily liable.
- The primary liability stems from the terms of the instrument and is not dependent on any procedure that
may be taken to hold them as such. Persons secondarily liable are those whose liability on the
instrument requires application to other persons for acceptance or payment and compliance with certain
procedure. Those who are primarily liable are the makers of promissory notes and acceptors of bills and
checks. Those secondarily liable are the drawers of bills and checks, and indorsers of bills, checks and
notes.
- For instance, an accommodation party is a surety for the maker or for any other party who lends his
name and credit to the latter, without receiving any consideration. Since the NIL is silent on the
liabilities of a surety or a guarantor, the pertinent provisions of the Civil Code on the matter will govern.
- Liability of maker
o The note may be signed by two or more persons as makers, and the makers are jointly and severally
liable therefor.
o In the absence of ambiguity in the note, the person who signs as maker thereof cannot show by parol
evidence as against the payee for value that he intended to be bound otherwise or in a different
capacity. The maker is presumed to have signed the note with full awareness and knowledge of the
contents thereof, and in the absence of fraud, the instrument must be given its legal effect.
o By making the instrument, the maker not only aggress to pay it according to its tenor, but also
admits the existence of the payee and his capacity to indorse. In other words, the fact that the payee
is fictitious or is a minor or lacks the capacity to contract is waived and the maker is estopped by his
written representation to claim that the payee is non-existent or the corporate payee is a foreign
corporation not duly licensed to do business or is not duly licensed to do business or is not duly
registered. Or has no capacity to indorse, to defeat the action by an indorsee for value against him
on the instrument.
o Sec 22 of the NIL provides that the indorsement or assignment of the instrument by a corporation or
by an infant passes the property therein, notwithstanding that from want of capacity, the corporation
or infant may incur no liability to the indorsee of the minor or of the corporation even if its act is
regarded as ultra vires.

SEC. 61 LIABILITY OF DRAWER. – THE DRAWER BY DRAWING THE INSTRUMENT

ADMITS THE EXISTENCE OF THE PAYEE AND HIS THEN CAPACITY TO INDORSEE; AND
ENGAGES THAT, ON DUE PRESENTMENT, THE INSTRUMENT WILL BE ACCEPTED OR PAID, OR
BOTH, ACCORDING TO ITS TENOR, AND THAT IF IT BE DISHONORED AND THE NECESSARY
PROCEEDINGS ON DISHONOR BE DULY TAKEN, HE WILL PAY THE AMOUNT THEREOF TO THE
HOLDER OR TO ANY SUBSEQUENT INDORSER WHO MAY BE COMPELLED TO PAY IT. BUT THE
DRAWER MAY INSERT IN THE INSTRUMENT AN EXPRESS STIPULATION NEGATIVING OR
LIMITING HIS OWN LIABILITY TO THE HOLDER.

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 - A drawer and a maker differ from each other, except that both admit the existence of the payee and his
then capacity to indorse.
o (1) The drawer draws a bill of exchange, while the maker makes a promissory note.
o (2) The maker of a promissory note is primarily liable on the instrument, while a drawer is
secondarily liable and becomes primarily liable only when three conditions are complied with,
namely:
 Presentment of the bill for acceptance or payment
 Dishonor by non-payment or non-acceptance
 Notice of dishonor
o (3) A drawer may state in the instrument an express stipulation negativing or limiting his own
liability to the holder, by inserting the words “without recourse” or words of similar import.
o (4) The maker cannot unilaterally countermand a note, without rescinding the note, while a drawer
may do so under certain circumstances
- Stop payment or countermand
o As a rule, the drawer of a bill may issue a stop payment or countermand order to the drawee before
acceptance or payment. Where payment has been stopped, the drawer still remains liable on the
instrument unless he can show valid defense to prevent the payee from recovery.
o Where a stop payment or countermand is issued by the drawer before the acceptance or payment of
the instrument by the drawee, the drawee has the right to refuse or deny payment on the check, and
the payee has no cause of action against the drawee. However, if the notice of stop payment or
countermand is issued and received by the drawee after it has accepted the bill or after it has paid
the same, problems of liability will arise between the drawer and the drawee or between the payee,
the drawer and the drawee, and as who may ultimately be held liable as the reason or reasons for
stopping payment, the terms of the contract, express or implied, between the drawer and the drawee,
in light of the statutory or contractual obligations of each party.
o If the drawee banks pays a check to the payee, even after it has received a stop payment order from
the drawer or depositor, the bank cannot seek reimbursement from the drawer nor debit the latter’s
account with it, for by proceeding to pay notwithstanding receipt of the stop payment order, the
drawee violated its contract with the drawer, which is that of debtor and creditor. It gas been held
that the drawee bank, in such a situation, cannot recover on the check from the payee of the check.

SEC. 62 LIABILITY OF ACCEPTOR. – THE ACCEPTOR, BY ACCEPTING THE INSTRUMENT,

ENGAGES THAT HE WILL PAY IT ACCORDING TO THE TENOR OF HIS ACCEPTANCE AND
ADMITS:
A) THE EXISTENCE OF THE DRAWER, THE GENUINENESS OF HIS SIGNATURE, AND
HIS CAPACITY AND AUTHORITY TO DRAW THE INSTRUMENT; AND
B) THE EXISTENCE OF THE PAYEE AND HIS THEN CAPACITY TO INDORSE

- The acceptance makes the acceptor a party thereto and is thus primarily bound thereby. Until such
acceptance, the acceptor is not liable therefor.
- The drawee by acceptance becomes liable to the payee or his indorsee, and also to the drawer himself.
But the drawer and acceptor are the immediate parties to the consideration, and if the acceptance be
without consideration, the drawer cannot recover of the acceptor. The payee holds a different relation;
he is a stranger to the transaction between the drawer and the acceptor, and is, therefore, in a legal sense
a remote party. In a suit by him against the acceptor, the question as to the consideration between the
drawer and the acceptor cannot be inquired into. The payee or holder gives value to the drawer, and if
he is ignorant of the equities between the drawer and the acceptor, he is in the position of a bona fide
indorsee. Hence, it is no defense to a suit against the acceptor of a draft which has been discounted, and
upon which money has been advanced by the plaintiff, that the draft was accepted for the
accommodation of the drawer.
- If a drawee bank pays a forged check which was previously accepted or certified by the said bank, it
cannot recover from a holder who did not participate in the forgery and did not have actual notice
thereof.
- Presentment for payment is a demand for payment of the instrument, accompanied by the production of
the instrument, upon the drawee or upon the acceptor or the maker of a promissory, for payment thereof,
they being the parties primarily liable thereon.
- The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer, which,
in the case of checks, is the payment, on demand, of a given sum of money while actual payment of the
amount of the check implies not only an assent to said order of the drawer and a recognition of the
drawer’s obligation to pay the aforesaid sum, but also a compliance with such obligation.
- On the other hand, payment means the discharge of an obligation. In the absence of an agreement, either
express or implied, payment means the discharge of a debt or obligation in money and unless the parties
so agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as
medium of payment of his debt.
- The phrase “according to the tenor of his acceptance,” has been construed as referring to the instrument
as it was at the time it came into the hands of the acceptor for acceptance for he accepts no other
instrument than the one presented to him – the altered form – and it is alone he engages to pay. It makes
for the usefulness and currency of negotiable paper without seriously endangering accepted banking

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 practices, for banking institutions can readily protect themselves against liability on altered instruments
by qualifying their acceptance or certification.
- Sec 62 implies that the acceptor may accept the instrument, subject to a condition or qualification, to
protect him against liability on a forged instrument. He may accept the instrument with qualification.
Thus, he may write: “Accepted, provided that the instrument is genuine or all signatures therein are not
forged.” If he accepts it with such qualification, he can raise the defense of forgery by prior parties to
defeat recovery on the instrument against him. If he accepts it without qualification, it is a promise on
his part to pay according to the tenor of the instrument, as presented to him, in which case his
undertaking in unqualified and he is liable even if the instrument was altered or forged, at the time it was
presented for his acceptance, except as against the party who forges the signature as he cannot be
permitted to base his claim on his forged signature.
- The presumption is that the drawer has funds in the hands of the drawee or acceptor against which the
instrument, which the latter has accepted can be drawn. However, the fact that the drawer has no funds
in the hands of the drawee does not relieve the latter from liability on the accepted instrument, for he
could be an accommodation drawee for the benefit of the drawer. But if the drawer has no sufficient
funds in the hands of the drawee, payment by the latter entitles him to seek reimbursement from the
drawer for what he had paid on the accepted instrument.

SEC. 63 WHEN A PERSON DEEMED INDORSER. – A PERSON PLACING HIS SIGNATURE

UPON AN INSTRUMENT OTHERWISE THAN AS MAKER, DRAWER, OR ACCEPTOR, IS DEEMED TO
BE INDORSER UNLESS HE CLEARLY INDICATES BY APPROPRIATE WORDS HIS INTENTION TO
BE BOUND IN SOME OTHER CAPACITY.

SEC. 64 LIABILITY OF IRREGULAR INDORSER. – WHERE A PERSON, NOT OTHERWISE A

PARTY TO AN INSTRUMENT, PLACES THEREON HIS SIGNATURE IN BLANK BEFORE DELIVERY,
HE IS LIABLE AS INDORSER, IN ACCORDANCE WITH THE FF RULES:
A) IF THE INSTRUMENT IS PAYABLE TO THE ORDER OF A THIRD PERSON, HE IS
LIABLE TO THE PAYEE AND TO ALL SUBSEQUENT PARTIES.
B) IF THE 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.
C) IF HE SIGNS FOR THE ACCOMMODATION OF THE PAYEE, HE IS LIABLE TO ALL
PARTIES SUBSEQUENT TO THE PAYEE.

SEC. 65 WARRANTY WHERE NEGOTIATION BY DELIVERY AND SO FORTH. – EVERY

PERSON NEGOTIATING AN INSTRUMENT BY DELIVERY OR BY A QUALIFIED INDORSEMENT
WARRANTS:
A) THAT THE INSTRUMENT IS GENUINE AND IN ALL RESPECTS WHAT IT PURPORTS
TO BE;
B) THAT HE HAS A GOOD TITLE TO IT;
C) THAT ALL PRIOR PARTIES HAD CAPACITY TO CONTRACT;
D) THAT HE HAS NO KNOWLEDGE OF ANY FACT WHICH WOULD IMPAIR THE
VALIDITY OF THE INSTRUMENT OR RENDER IT VALUELESS.
BUT WHEN THE NEGOTIATION IS BY DELIVERY ONLY, THE WARRANTY EXTENDS IN
FAVOR OF NO HOLDER OTHER THAN THE IMMEDIATE TRANSFEREE.
THE PROVISIONS OF SUBDIVISION (C) OF THIS SECTION DO NOT APPLY TO A PERSON
NEGOTIATING PUBLIC OR CORPORATION SECURITIES OTHER THAN BILLS AND NOTES.

SEC. 66 LIABILITY OF GENERAL INDORSER. – EVERY INDORSER WHO INDORSES

WITHOUT QUALIFICATION, WARRANTS TO ALL SUBSEQUENT HOLDERS IN DUE COURSE:
A) THE MATTERS AND THINGS MENTIONED IN SUBDIVISIONS (A), (B), AND (C) OF
THE NEXT PRECEDING SECTION; AND
B) THAT THE INSTRUMENT IS, AT THE TIME OF HIS INDORSEMENT, VALID AND
SUBSISTING.
AND, IN ADDITION, HE ENGAGES THAT, ON DUE PRESENTMENT, IT SHALL BE
ACCEPTED OR PAID OR BOTH, AS THE CASE MAY BE, ACCORDING TO ITS TENOR, AND THAT IF
IT BE DISHONORED AND THE NECESSARY PROCEEDINGS ON DISHONOR BE DULY TAKEN, HE
WILL PAY THE AMOUNT THEREOF TO THE HOLDER, OR TO ANY SUBSEQUENT INDORSER WHO
MAY BE COMPELLED TO PAY IT.

- Every indorser is liable to the holder for breach of his obligation to the latter, and if the holder elects to
demand payment from him, he must pay his obligation and look to prior indorsers for repayment of the
amount due on the note.
- An accommodation indorser who endorses the instrument without qualification is also considered a
general indorser, liable on the instrument to a holder for value, notwithstanding that such holder at the
time of taking the instrument knew him to be only an accommodation party. The accommodation party
is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that

23
 the accommodation party did not receive any valuable consideration when he executed the instrument.
Nor is it correct to say that the holder for value is not a holder in due course merely bec at the time he
acquired the instrument he knew that the indorser was only an accommodation party.
- Effect of guaranteeing “all prior endorsements”
o A drawee bank, or the collecting bank, is required by the clearing house rules, of which it is a
member, to stamp checks presented to it for payment, the ff words: “all prior endorsements and/or
lack of endorsements guaranteed.” By making such endorsements, the collecting bank is considered
an endorser and is liable as such, and the check, even if non-negotiable, is considered negotiable by
the doctrine of estoppel.
o By stamping a check with the words “all prior endorsements and/or lack of endorsements
guaranteed,” the drawee bank made the assurance that it had ascertained the genuineness of all prior
endorsements, treated the check as negotiable, and assumed the warranty of the endorser. If the
endorsement happens to be forged, the drawee bank is liable on the check in favor of the payee or
person entitled thereto. The weight of authority is that the possession of a check on a forged or
unauthorized endorsement is wrongful and when the money is collected on the check, the bank can
be held for moneys had and received. The proceeds are held for the rightful owner of the payment
and may be recovered by him. The position of the bank taking the check on the forged or
unauthorized endorsements is the same as if it had taken the check and collected without
indorsements at all. The act of the bank amounts to conversion of the check. To simplify
proceedings, the payee of the illegally encashed check should be allowed to recover directly from
the bank responsible for such encashment regardless of whether or not the check was actually
delivered to the payee.

SEC. 67 LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY. – WHERE A

PERSON PLACES HIS INDORSEMENT ON AN INSTRUMENT NEGOTIABLE BY DELIVERY, HE
INCURS ALL THE LIABILITY OF AN INDORSER.

SEC. 68 ORDER IN WHICH INDORSERS ARE LIABLE. – AS RESPECT TO 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. 69 LIABILITY OF AN AGNT OR BROKER. – WHERE A BROKER OR OTHER AGENT

NEGOTIATES AN INSTRUMENT WITHOUT INDORSEMENT, HE INCURS ALL THE LIABILITIES
PRESCRUBED BY SEC 65 OF THIS ACT, UNLESS HE DISCLOSES THE NAME OF HIS PRINCIPAL
AND THE FACT THAT HE IS ACTING ONLY AS AGENT.

ENFORCEMENT OF LIABILITY

PRESENTMENT FOR PAYMENT

SEC. 70 EFFECT OF WANT OF DEMAND ON PRINCIPAL DEBTOR. – PRESENTMENT FOR PAYMENT

IS NOT NECESSARY IN ORDER TO CHARGE THE PERSON PRIMARILY LIABLE ON THE INSTRUMENT; BUT
IF THE INSTRUMENT IS, BY ITS TERMS, PAYABLE AT A SPECIAL PLACE, AND HE IS ABLE AND WILLING TO
PAY IT THERE AT MATURITY, SUCH LIABILITY AND WILLINGNESS ARE EQUIVALENT TO A TENDER OF
PAYMENT UPON HIS PART. BUT EXCEPT AS HEREIN OTHERWISE PROVIDED, PRESENTMENT FOR
PAYMENT IS NECESSARY IN ORDER TO CHARGE THE DRAWER AND INDORSER.

- Steps in a promissory note in order to charge the indorser are:

• Presentment for payment must be made within the required period to the maker
• Notice of dishonor should be given, if promissory note is dishonored by non-payment by the maker
- Steps in Bill of Exchange
• Presentment for acceptance – or negotiation within a reasonable time after it was acquired – should be made
only in the ff instances:
 Where the bill is payable after sight or in any other case, where presentment for acceptance is
necessary in order to fix the maturity date of the instrument
 Where the bill expressly stipulates that it shall be presented for acceptance
 Where the bull is drawn payable elsewhere than at the residence or place of business of the drawee
• If dishonored by non-acceptance:
 Notice of dishonor should be given to the indorsers and drawers
 If the bill is a foreign bill, there must be protest for dishonor by non-acceptance
• If the bill is accepted:
 Presentment for payment to the acceptor should be made
 If the bill is dishonored upon presentment for payment:
• Notice of dishonor must be given to person secondarily liable

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 • If the bill is a foreign bill, protest for dishonor by non-acceptance must be made
- Presentment for payment is the presentation of the instrument for payment of the face value thereof. It is a demand
for payment is excused or is not necessary, presentment for payment is mandatory. It is a demand for payment of
the instrument, accompanied by the production of the instrument, upon the drawee or upon the acceptor or the maker
of a promissory note, for payment thereof.
- Sec. 70 requires that as a rule, the presentation of the instrument for payment is necessary in order to charge the
drawer and indorsers, they being secondarily liable.
- If not presented for payment at a special place, the person primarily liable is still liable for the value of the
instrument, the only effect of non-presentment at the specified place is to relieve the maker from liability for costs
and attorney’s fees.

SEC. 71 PRESENTMENT WHERE INSTRUMENT IS NOT PAYABLE ON DEMAND AND WHERE

PAYABLE ON DEMAND. – WHERE THE INSTRUMENT IS NOT PAYABLE ON DEMAND, PRESENTMENT MUST
BE MADE ON THE DAY IT FALLS DUE. WHERE IT IS PAYABLE ON DEMAND, PRESENTMENT MUST BE
MADE WITHIN A REASONABLE TIME AFTER ITS ISSUE, EXCEPT THAT IN THE CASE OF A BILL OF
EXCHANGE, PRESENTMENT FOR PAYMENT WILL BE SUFFICIENT IF MADE WITHIN A REASONABLE TIME
AFTER THE LAST NEGOTIATION THEREOF.
- It has been held that the burden is on the holder to prove presentment within a reasonable time, and the defendant
indorser need not plead failure to make due presentment, although it is also held in a case that Sec 71 is in effect a
statute of limitations, and the burden was upon the indorser of a demand note to plead and prove that the
presentment was unreasonably delayed.

(Sec. 72) To constitute sufficient payment, the ff must be present:

• Presentment must be made by the holder or by some person authorized to receive payment on his behalf
• It must be made at a reasonable hour on a business day on the proper date
• Presentment must be at the proper place
• Presentment must be to the person primarily liable on the instrument, or if he is absent or inaccessible,
to any person found at the place where presentment is made
• The person entitled to present the instrument for payment must exhibit the instrument to the person
from whom the instrument is demanded and upon payment must be delivered to the person paying it
- If the instrument is payable on demand, presentment must be made within a reasonable time after its issue, except in
the case of a bill of exchange, presentment will be sufficient if made within a reasonable time after the last
negotiation thereof.
- Reasonable time:
• So much time as is necessary under the circumstances for a reasonably prudent and diligent man to do,
conveniently, what the contract or duty requires should be done, having a regard for the rights and possibility of
loss, if any to the other party.
• Regard is to be had as to the nature of the instrument, the usage of trade or business with respect to such
instruments, and the facts of the particular case.
• The test is whether the payee employed such diligence as a prudent man exercises in his own affairs.
- Where the instrument is payable at the bank, presentment for payment must be made during banking hours, unless
the person to make payment has no funds there to meet it at any time during the day, in w/c case presentment at any
hour before the bank is closed on that day is sufficient.
- Presentment must be made by the holder. It may also be presented by the person authorized by the holder to receive
payment on his behalf. The authorization must be in writing, otherwise, the payee may refuse payment, and must
have in him the instrument for exhibition and delivery to the party paying it.
- Where a check is crossed specially to a specified or named bank, it should be presented by the latter by depositing it
to his account, and not in any other person, otherwise, the presentment is not effective and the liability of the drawer
would not attach.

SEC. 73 PLACE OF PRESENTMENT. – PRESENTMENT FOR PAYMENT IS MADE AT THE PROPER

PLACE:
A. WHERE A PLACE OF PAYMENT IS SPECIFIED IN THE INSTRUMENT AND IT IS THERE
PRESENTED;
B. 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;
C. 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;
D. 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
- Place of payment – a house, bank, counting room, store or place of business, where the holder can present a note,
where the maker can deposit or provide funds to meet it, and where a legal offer to pay can be made.
- Designation of a town or city is not sufficient.

SEC. 74 INSTRUMENT MUST BE EXHIBITED. – THE INSTRUMENT MUST BE EXHIBITED TO THE

PERSON FROM WHOM PAYMENT IS DEMANDED, AND WHEN IT IS PAID, MUST BE DELIVERED UP TO THE
PARTY PAYING IT.
- If the instrument is not surrendered and cancelled, there is a danger that it may fall in the hands other persons who
might claim rights over the instrument.
- In Asaldo v. CA, the SC stated that even if the rule is that the instrument must be exhibited to determine its
genuineness, this is rendered unnecessary not only by the omission to contest it, but also by the admission of the
authenticity of the note implicit from the averment that substantial payment were made thereon and by the express
waiver of “demand, payments, protest and notice of protest and non-payment” in the note.

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 - In Far East Bank v. Queremit, the court declared that a bank that pays a certificate of time deposit without
requiring the surrender of the certificate does so at its own peril.
- The purpose of Sec 74 are:
• To give the maker or the party against whom payment is demanded to determine the genuineness of the
instrument or the indorsement thereon and, after payment,
• To have the paying party written evidence of payment and protection against further transfer of said instrument.
- However, these are rights of the paying party, which he may waive, such as by not asking the instrument to be
exhibited and delivered, or by failing to raise it as a defense or by admission of the authenticity of the instrument, or
by waiving demand, presentment, protest and notice of protest and non-payment. If he waives such right and the
person to whom payment is made turns out to be unauthorized or not entitled to payment, the drawee may be held
liable therefor.

SEC. 75 PRESENTMENT WHERE INSTRUMENT PAYABLE AT BANK. – WHERE THE INSTRUMENT IS

PAYABLE AT A BANK, PRESENTMENT FOR PAYMENT MUST BE MADE DURING BANKING HOURS, UNLESS
THE PERSON TO MAKE PAYMENT HAS NO FUNDS THERE TO MEET IT AT ANY TIME DURING THE DAY, IN
WHICH CASE PRESENTMENT AT ANY HOUR BEFORE THE BANK IS CLOSED ON THAT DAY IS SUFFICIENT.
- Usual banking hours is from 9 to 3, Monday to Friday. The exception is when the person to make payment has no
funds in the bank, in which case presentment may be at any hour before 3 pm, so as to give the drawer the
opportunity to deposit funds prior to such hour.

SEC. 76 PRESENTMENT WHERE PRINCIPAL DEBTOR IS DEAD. - WHERE THE PERSON PRIMARILY
LIABLE ON THE INSTRUMENT IS DEAD AND NO PLACE OF PAYMENT IS SPECIFIED, PRESENTMENT FOR
PAYMENT MUST BE MADE TO HIS PERSONAL REPRESENTATIVE, IF SUCH THERE BE, AND IF, WITH THE
EXERCISE OF REASONABLE DILIGENCE, HE CAN BE FOUND.
- If there is an estate proceeding, the personal representative is the administrator or administratrix. If none, the
personal representative is the heir or the heirs of the deceased.

SEC. 77 PRESENTMENT TO PERSONS LIABLE AS PARTNERS. – WHERE THE PERSONS PRIMARILY

LIABLE ON THE INSTRUMENT ARE LIABLE AS PARTNERS AND NO PLACE OF PAYMENT IS SPECIFIED,
PRESENTMENT FOR PAYMENT MAY BE MADE TO ANY ONE OF THEM, EVEN THOUGH THERE HAS BEEN A
DISSOLUTION OF THE FIRM.

SEC. 78 PRESENTMENT TO JOINT DEBTORS. – WHERE THERE ARE SEVERAL PERSONS, NOT
PARTNERS, PRIMARILY LIABLE ON THE INSTRUMENT AND NO PLACE OF PAYMENT IS SPECIFIED,
PRESENTMENT MUST BE MADE TO THEM ALL.

SEC. 79 WHEN PRESENTMENT NOT REQUIRED TO CHARGE THE DRAWER. – PRESENTMENT FOR
PAYMENT IS NOT REQUIRED IN ORDER TO CHARGE THE DRAWER WHERE HE HAS NO RIGHT TO EXPECT
OR REQUIRE THAT THE DRAWEE OR ACCEPTOR WILL PAY THE INSTRUMENT.
- Where the drawer has insufficient funds in the bank to pay the check or where he has closed his account therewith,
he has no right to expect or require that the drawee bank or acceptor will pay the instrument. In such case,
presentment by the holder is not required to charge the drawer and he can immediately hold the latter liable thereon.

SEC. 80 WHEN PRESENTMENT NOT REQUIRED TO CHARGE THE INDORSER. – PRESENTMENT 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. 81 WHEN DELAY IN MAKING PRESENTMENT IS EXCUSED. – DELAY IN MAKING

PRESENTMENT FOR PAYMENT IS EXCUSED WHEN THE DELAY IS CAUSED BY CIRCUMSTANCES BEYOND
THE CONTROL OF THE HOLDER AND NOT IMPUTABLE TO HIS DEFAULT, MISCONDUCT, OR NEGLIGENCE.
WHEN THE CAUSE OF THE DELAY CEASES TO OPERATE, PRESENTMENT MUST BE MADE WITH
REASONABLE DILIGENCE.

SEC. 82 WHEN PRESENTMENT FOR PAYMENT IS EXCUSED. – PRESENTMENT FOR PAYMENT IS

EXCUSED:
A. WHERE, AFTER THE EXERCISE OF REASONABLE DILIGENCE, PRESENTMENT, AS
REQUIRED BY THIS ACT, CANNOT BE MADE;
B. WHERE THE DRAWEE IS A FICTITIOUS PERSON;
C. BY WAIVER OF PRESENTMENT, EXPRESS OR IMPLIED.

- It has been held that non-presentment will not relieve the drawer from his liability but would only discharge him
from liability to the extent of the loss caused by the delay or non-presentment.
- In International Corporate Bank v. Sps Gueco, the court ruled: “Even assuming that presentment is needed, failure
to present for payment within a reasonable time will result to the discharge of the drawer only to the extent of the
loss caused by the delay. Failure to present on time, this, does not totally wipe out all liability. In fact, the legal
situation amounts to an acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses
have not alleged, much less shown that they or the bank which issued the manager’s check has suffered damage or
loss caused by the delay or non-presentment. Definitely, the original obligation to pay certainly has not been
erased.”

SEC. 83 WHEN INSTRUMENT DISHONOTED BY NON-PAYMENT. – THE INSTRUMENT IS

DISHONORED BY NON-PAYMENT WHEN:

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 A. IT IS DULY PRESENTED FOR PAYMENT AND PAYMENT IS REFUSED OR CANNOT
BE OBTAINED; OR
B. PRESENTMENT IS EXCUSED AND THE INSTRUMENT IS OVERDUE AND UNPAID.

SEC. 84 LIABILITY OF PERSON SECONDARILY LIABLE, WHEN INSTRUMENT DISHONORED. –

SUBJECT TO THE PROVISIONS OF THIS ACT, WHEN THE INSTRUMENT IS DISHONORED BY NON-PAYMENT,
AN IMMEDIATE RIGHT OF RECOURSE TO ALL PARTIES SECONDARILY LIABLE THEREON ACCRUES TO
THE HOLDER.

SEC. 85 TIME OF MATURITY. – EVERY NEGOTIABLE INSTRUMENT IS PAYABLE AT THE TIME

FIXED THEREIN WITHOUT GRACE. WHEN THE DAY OF MATURITY FALLS UPON SUNDAY OR A HOLIDAY,
THE INSTRUMENT IS PAYABLE ON THE NEXT SUCCEEDING BUSINESS DAY. INSTRUMENTS FALLING DUE
ON OR BECOMING PAYABLE ON SATURDAY ARE TO BE PRESENTED FOR PAYMENT ON THE NEXT
SUCCEEDING BUSINESS DAY EXCEPT THAT 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.

SEC. 86 TIME: HOW COMPUTED. – WHEN THE INSTRUMENT IS PAYABLE AT A FIXED PERIOD
AFTER DATE, AFTER SIGHT, OR AFTER THAT HAPPENDING 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.

SEC. 87 RULE WHERE INSTRUMENT IS PAYABLE AT BANK. – WHERE THE INSTRUMENT IS MADE
PAYABLE AT A BANK, IT IS EQUIVALENT TO AN ORDER TO THE BANK TO PAY THE SAME FOR THE
ACCOUNT OF THE PRINCIPAL DEBTOR THEREON.
- Similarly, Sec 187 of the NIL provides that a check of itself does not operate as assignment of any part of the funds
to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or
certifies the check.

SEC. 88 WHAT CONSTITUTES PAYMENT IN DUE COURSE. – PAYMENT IS MADE IN DUE COURSE
WHEN IT IS MADE AT OR AFTER THE MATURITY OF THE PAYMENT TO THE HOLDER THEREOF IN GOOD
FAITH AND WITHOUT NOTICE THAT HIS TITLE IS DEFECTIVE.
- If the holder or indorseee does not present the instrument for payment at all or does after an unreasonable period, the
indorser is discharged from liability, whether or not he is injured by the delay.
- Unless the holder can show that delay in making presentment for payment is excused or non-presentment for
payment is excused, the holder has no cause of action against the indorser bec he is relieved from liability thereon
for the unreasonable delay in the presentment from payment of the instrument. The unreasonable delay is similar to
exctinctive prescription of a cause of action which, if evident from the allegations of the complaint, may be raised
any time.
- It was held in Far East Realty Investment Inc. v. CA, “Likewise, presentment for payment is not required in order
to charge the drawer, and that notice of dishonor is not required to be given to the drawer where he has no right to
expect or require that the drawee or acceptor will pay or honor the instrument. Therefore, where presentment for
payment and notice of dishonor are not necessary as when funds are insufficient to meet a check, the drawer is
liable, whether such presentment and notice be totally omitted or merely delayed. However, in situation where the
presentment and notice is required to be made without unreasonable delay, the drawer is discharged pro tanto or
only to the degree of loss suffered by reason of delay. Since the discharge is the exception to the general rule, the
loss must be proven by the drawer. The drawer in the instant case has not presented in evidence any loss which he
may have suffered by reason of the delay.
- As a rule, delay in the presentation of a check for payment does not discharge the drawer, except to the extent of the
loss caused thereby. Thus, the rule is that although the drawer of a check is discharged only to the extent of loss
caused by unreasonable delay in presentment, so that the absence of loss does not discharge the drawer for any
length of delay, an indorser is wholly discharged thereby irrespective of any question of loss or injury or whether or
not loss is caused by the delay.
- The reason for the difference between the liability of the indorser and that of the drawer in case of dishonor is that
the drawer is not probably or necessarily prejudiced thereby, while an indorser is, actually or by legal presumption.
If the debt remains unpaid, the fact that the check had become stale bec it was not presented for payment within 6
months from issue does not relieve the drawer from payment of the debt; it merely destroys its negotiability but it
still remains an evidence of debt, and the debtor is still liable to pay the same to the creditor, except when such debt
has been extinguished by any of the modes of extinguishing an obligation under the NCC.

NOTICE OF DISHONOR

SEC. 89 TO WHOM NOTICE OF DISHONOR MUST BE GIVEN. – EXCEPT AS HEREIN OTHERWISE

PROVIDED, WHEN A NEGOTIABLE INSTRUMENT HAS BEEN DISHONORED BY NON-ACCEPTANCE OR NON-
PAYMENT, NOTICE OF DISHONOR MUST BE GIVEN TO THE DRAWER AND TO EACH INDORSER, AND ANY
DRAWER OR INDORSER TO WHOM SUCH NOTICE IS NOT GIVEN IS DISCHARGED.
- Accdg to Sec 83, the notice may be given or on behalf of the holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to
reimbursement from the party to whom notice is given.
- Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior
parties who have a right of recourse against the party to whom it is given. If the notice is given by the indorser who

27
 may be compelled to pay, such notice inures to the benefit of the holder and all the parties subsequent to the party to
whom notice is given.
- Thus, of M, the maker dishonors the instrument, D, the holder may notify C (the immediate transferee of D) since C
may be compelled to pay D. C in turn may notify person who may be secondarily liable to him, B, A, and the payee
P. B may notify A and P and A may notify P. If D gave notice of dishonor to P, A, B and C, the latter C need not
notify P, A and B again because notice by the holder inures to the benefit of all prior parties who have the right of
recourse against the party to whom it is given. On the other hand, if D notified C only, but C in turn, notified P, A,
and B, D can already hold P, A and B liable because notice by an indorser inures to the benefit of the holder.
Additionally, P need not notify A and B anew bec the notice given by C inures to the benefit of all parties
subsequent to the party to whom notice is given.
- Notice of dishonor means simply bringing to the knowledge of the drawer or indorser of the instrument, either
verbally or in writing, the fact that a specified instrument, upon proceedings taken, has not been accepted or has not
been paid, and that the party notified of the dishonor is expected to pay it.
- Under BP 22, the notice of dishonor must be in writing. Verbal notice here is not effective.
- In the case of assignment of check, the assignor is not released from liability for lack of notice of dishonor to him
bec his liability arises from breach of the assignment and not from the dishonor of the check.
- Sec 186 of the NIL provides that the drawer will be discharged from liability on the check to the extent of loss
caused by the delay in presenting it for payment within a reasonable time after its issue.
- It is different as to indorsers bec it has been held that unreasonable delay in giving notice of dishonor of a check will
discharge the indorser whether such delay causes loss to him or not.
- Thus, if sued, the drawer must not only prove unreasonable delay in giving notice of dishonor but also that the delay
caused him loss or damage, to be absolved from liability to the extent or loss. For indorsers, they must show only
that there was unreasonable delay in giving notice.
- The fact that a check has become stale does not mean that the drawer is discharged from liability thereon. It merely
means that its negotiability ceases. The stale check merely means drawer may not be held liable thereon, but the
same remains an evidence of indebtedness and if such debt has not been paid, the debtor may still be liable for
payment of such debt, unless in the meanwhile the cause of action based thereon has prescribed or the obligation
extinguished.
- In the ff instances, the notice of dishonor is not necessary to hold the drawer or indorser liable:
• When notice of dishonor is waived, either before the time of giving notice has arrived or after the omission to
give notice, and waiver may be express or implied.
• When after the exercise of due diligence, it cannot be given or does not reach the parties sought to be charged
• Where the drawer and drawee are the same person; the drawee is a fictitious person or a person not having
capacity to contract; when the drawer is the person to whom the instrument is presented; where the drawer has
no right to expect or require that the drawee will honor the instrument; when the drawer has countermanded
payment.
• Need not be given to indorser when the drawee is a fictitious person or a person not having the capacity to
contract and the indorser was aware of that fact at the time he indorsed the instrument; where the indorser is the
person to whom the instrument is presented for payment; where the instrument was made or accepted for his
accommodation
• Where due notice of dishonor by non-acceptance has been given, unless in the meantime, the instrument has
been accepted
• An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due
course subsequent to the omission.

SEC. 90 BY WHOM GIVEN. – THE NOTICE MAY BE GIVEN BY OR ON BEHALF OF THE HOLDER, OR
BY OR ON BEHALF OF ANY PARTY TO THE INSTRUMENT WHO MIGHT BE COMPELLED TO PAY IT TO THE
HOLDER, AND WHO, UPON TAKING IT UP, WOULD HAVE A RIGHT TO REIMBURSEMENT FROM THE PARTY
TO WHOM NOTICE IS GIVEN.

SEC. 91 NOTICE GIVEN BY AN AGENT. – NOTICE OF DISHONOR MAY BE GIVEN BY ANY AGENT
EITHER IN HIS OWN NAME OR IN THE NAME OF ANY PARTY ENTITLED TO GIVE NOTICE, WHETHER THAT
PARTY BE HIS PRINCIPAL OR NOT.
- Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to give
notice, whether that party be his principal or not. This means that a person may effectively give notice for another
even if he is not authorized to do so. On the other hand, if the agent is authorized, he may give such notice in his
own name as in the case of collecting banks.
- Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to give
notice, whether that party be his principal or not. This means that a person may effectively give notice for another
even if he is not authorized to do so. On the other hand, if the agent is authorized, he may give such notice in his
own name as in the case of collecting banks.

SEC. 92 EFFECT OF NOTICE ON BEHALF OF HOLDER. – WHERE NOTICE IS GIVEN BY OR ON

BEHALF OF THE HOLDER, IT INURES TO THE BENEFIT OF ALL SUBSEQUENT HOLDERS AND ALL PRIOR
PARTIES WHO HAVE A RIGHT OF RECOURSE AGAINST THE PARTY TO WHOM IT IS GIVEN.

SEC. 93 EFFECT WHERE NOTICE IS GIVEN BY PARTY ENTITLED THERETO. – WHERE NOTICE IS
GIVEN BY OR ON BEHALF OF A PARTY ENTITLED TO GIVE NOTICE, IT INURES TO THE BENEFIT OF THE
HOLDER AND ALL PARTIES SUBSEQUENT TO THE PARTY TO WHOM NOTICE IS GIVEN.

SEC. 94 WHEN AGENT MAY GIVE NOTICE. – WHERE THE INSTRUMENT HAS BEEN DISHONORED
IN THE HANDS OF AN AGENT, HE MAY EITHER HIMSELF GIVE NOTICE TO THE PARTIES LIABLE
THEREON, OR HE MAY GIVE NOTICE TO HIS PRINCIPAL. IF HE GIVES NOTICE TO HIS PRINCIPAL, HE
MUST DO SO WITHIN THE SAME TIME AS IF HE WERE THE HOLDER, AND THE PRINCIPAL, UPON THE
RECEIPT OF SUCH NOTICE, HAS HIMSELF THE SAME TIME FOR GIVING NOTICE AS IF THE AGENT HAD
BEEN AND INDEPENDENT HOLDER.

SEC. 95 WHEN NOTICE SUFFICIENT. – A WRITTEN NOTICE NEED NOT BE SIGNED AND AN
INSUFFICENT WRITTEN NOTICE MAY BE SUPPLEMENTED AND VALIDATED BY VERBAL

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COMMUNICATION. A MISDESCRIPTION OF THE INSTRUMENT DOES NOT VITIATE THE NOTICE UNLESS
THE PARTY TO WHOM THE NOTICE IS GIVEN IS IN FACT MISLED THEREBY.

SEC. 96 FORM OF NOTICE. – THE NOTICE MAY BE IN WRITING OR MERELY ORAL AND MAY BE
GIVEN IN ANY TERMS WHICH SUFFICIENTLY IDENTIFY THE INSTRUMENT, AND INDICATE THAT IT HAS
BEEN DISHONORED BY NON-ACCEPTANCE OR NON-PAYMENT. IT MAY IN ALL CASES BE GIVEN BY
DELIVERING IT PERSONALLY OR THROUGH THE MAILS.
- Whether verbal or in writing, the notice must state the ff:
• Sufficient description of the bill or note
• A statement that the instrument has been dishonored upon presentment for acceptance or for payment
• A statement that the instrument has been protested if protest is required
• An announcement of the intention to look to the party addressed for payment
- If the written notice lacks any of the aforementioned matters, the same may nevertheless be completed or validated
by verbal communication.
- If there is misdescription, the notice is still valid and effective except if a party was in fact misled. Thus, if the
notice states that amount to be paid but was misdescription thereof, the notice is still effective bec the instrument
itself states the sum certain in money that has to be paid.
- If the notice of dishonor is in writing, it can be delivered to the person to whom notice should be given, or it may
sent to him by mail.

SEC. 97 TO WHOM NOTICE MAY BE GIVEN. – NOTICE OF DISHONOR MAY BE GIVEN EITHER TO
THE PARTY HIMSELF OR TO HIS AGENT IN THAT BEHALF.
- While Sec 93 refers to the agent of parties who will give notice, Sec 97 refers to agents of persons who will receive
the notice.
- While Sec 93 allows agents to give notice even if they are not authorized, Sec 97 presupposes that the agent that will
receive the notice in behalf of his principal is authorized to receive such notice of dishonor.
- With respect to corporations, notice should be given to those who are duly authorized by the board to bind the
corporation. Normally, notice to the president of the corporation would bind the corporation.

SEC. 98 NOTICE WHERE THE PARTY IS DEAD. – WHEN ANY PARTY IS DEAD AND HIS DEATH IS
KNOWN TO THE PARTY GIVING NOTICE, THE NOTICE MUST BE GIVEN TO A PERSONAL
REPRESENTATIVE, IF THERE BE ONE, AND IF WITH REASONABLE DILIGENCE, HE CAN BE FOUND. IF
THERE BE NO PERSONAL REPRESENTATIVE, NOTICE MAY BE SENT TO THE LAST RESIDENCE OR LAST
PLACE OF BUSINESS OF THE DECEASED.
- Notice to a representative is not necessary when:
• There was in fact, no personal representative;
• The person to give notice is not aware of the death of the person who is supposed to receive notice;
• The personal representative cannot be found despite the exercise of reasonable diligence.

SEC. 99 NOTICE TO PARTNERS. – WHERE THE PARTIES TO BE NOTIFIED ARE PARTNERS, NOTICE
TO ANY ONE PARTNER IS NOTICE TO THE FIRM, EVEN THOUGH THERE HAS BEEN A DISSOLUTION.

SEC. 100 NOTICE TO PERSONS JOINTLY LIABLE. – NOTICE TO JOINT PERSONS WHO ARE NOT
PARTNERS MUST BE GIVEN TO EACH OF THEM UNLESS ONE OF THEM HAS AUTHORITY TO RECEIVE
SUCH NOTICE FOR THE OTHERS.

SEC. 101 NOTICE TO BANKRUPT. – WHERE A PARTY HAS BEEN ADJUDGED A BANKRUPT OR AN
INSOLVENT, OR HAS MADE AN ASSIGNMENT FOR THE BENEFIT OF CREDITORS, NOTICE MAY BE GIVEN
EITHER TO THE PARTY HIMSELF OR TO HIS TRUSTEE OR ASSIGNEE.

SEC. 102 TIME WITHIN WHICH NOTICE MUST BE GIVEN. – NOTICE MAY BE GIVEN AS SOON AS THE
INSTRUMENT IS DISHONORED AND, UNLESS DELAY IS EXCUSED AS HEREINAFTER PROVIDED, MUST BE
GIVEN WITHIN THE TIME FIXED BY THIS ACT.
THE MOMENT THE INSTRUMENT IS DISHONORED WHEN IT IS PRESENTED FOR
ACCEPTANCE OR THE MOMENT THE SAME IS DISHONORED FOR NON-PAYMENT, NOTICE OF DISHONOR
MUST BE GIVEN WITHIN THE TIME PROVIDED FOR IN SECTION 103 AND 104 OF THE NIL. IF NO NOTICE IS
GIVEN WITHIN THE SAME PERIOD TO THE DRAWER OR THE INDORSERS, THEY ARE DISCHARGED FROM
SECONDARY LIABILITY.
IT SHOULD BE NOTED HOWEVER, THAT THE LIABILITY OF THE DRAWER UNDER A
SEPARATE CONTRACT MAY REMAIN ALTHOUGH NO NOTICE OF DISHONOR IS GIVEN TO HIM. THE
ABSENCE OF NOTICE OF DISHONOR AFFECTS THE DRAWER’S SECONDARY LIABILITY BUT DOES NOT
AFFECT THE LIABILITY OF THE DRAWER UNDER A SEPARATE SOURCE OF OBLIGATION. THUS, IF THE
DRAWER ISSUED THE BILL OF EXCHANGE TO THE PAYEE IN PAYMENT OF THE OBLIGATION, THE BILL
WAS DISHONORED BY THE DRAWEE WHEN IT WAS PRESENTED FOR ACCEPTANCE AND NO NOTICE OF
DISHONOR WAS GIVEN TO THE DRAWER, THE DRAWER IS NO LONGER SECONDARILY LIABLE.
HOWEVER, THE DRAWER IS STILL LIABLE BASED ON THE BREACH OF CONTRACT OF SALE. THE
DRAWER, IN EFFECT, FAILED TO PAY THE PRICE AND IS THEREFORE STILL LIABLE TO PAY SUCH PRICE
DESPITE THE ABSENCE OF NOTICE OF DISHONOR.

SEC. 103 WHERE PARTIES RESIDE IN SAME PLACE. – WHERE THE PERSON GIVING AND THE
PERSON TO RECEIVE NOTICE RESIDES IN THE SAME PLACE, NOTICE MUST BE GIVEN WITHIN THE FF
TIMES:
A. IF GIVEN AT THE PLACE OF BUSINESS OF THE PERSON TO RECEIVE NOTICE, IT
MUST BE GIVEN BEFORE THE CLOSE OF BUSINESS HOURS ON TH DAY FOLLOWING.
B. IF GIVEN AT HIS RESIDENCE, IT MUST BE GIVEN BEFORE THE USUAL HOURS OF
REST ON THE DAY FOLLOWING.
C. IF SENT BY MAIL, IT MUST BE DEPOSITED IN THE POST OFFICE IN TIME TO
REACH HIM IN USUAL COURSE ON THE DAY FOLLOWING.
- When the law refers to persons residing in the same place under Sec 103, the law means the same town or city.

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 - Notice may either be personal or by mail.
- Usual hours of rest has been defined as any of the hours when the member of the household are attending their
ordinary affairs.
- Under Par C, notice is still considered timely given even if in fact the notice did not reach the person who is
supposed to receive notice of dishonor the day following. It might even be possible under present circumstances to
expect that the mail will reach the destination the ff day. It is therefore enough that the person who is supposed to
give notice must exert effort that it will reach the day following

SEC. 104 WHERE PARTIES RESIDE IN DIFFERENT PLACES. – WHERE THE PERSON GIVNG AND THE
PERSON TO RECEIVE NOTICE RESIDE IN DIFFERENT PLACES, THE NOTICE MUST BE GIVEN WITHIN THE
FF TIMES:
A. IF SENT BY MAIL, IT MUST BE DEPOSITED IN THE POST OFFICE IN TIME TO GO BY MAIL
THE DAY FOLLOWING THE DAY OF DISHONOR, OR IF THERE BE NO MAIL AT A
CONVENIENT HOUR ON LAST DAY, BY THE NEXT MAIL THEREAFTER.
B. IF GIVEN OTHERWISE THAN THROUGH THE POST OFFICE, THEN WITHIN THE TIME THAT
NOTICE WOULD HAVE BEEN RECEIVED IN DUE COURSE OF MAIL, IF IT HAD BEEN
DEPOSITED IN THE POST OFFIE WITHIN THE TIME SPECIFIED IN THE LAST SUBDIVISION.

SEC. 105 WHEN SENDER DEEMED TO HAVE GIVEN DUE NOTICE. – WHERE NOTICE OF DISHONOR
IS DULY ADDRESSED AND DEPOSITED IN THE POST OFFICE, THE SENDER IS DEEMED TO HAVE GIVEN
DUE NOTICE, NOTWITHSTANDING ANY MISCARRIAGE IN THE MAILS.

SEC. 106 DEPOSIT IN POST OFFICE; WHAT CONSTITUTES. – NOTICE IS DEEMED TO HAVE BEEN
DEPOSITED IN THE POST OFFICE WHEN DEPOSITED IN ANY BRANCH POST OFFICE OR IN ANY LETTER
BOX UNDER THE CONTROL OF THE POST-OFFICE DEPARTMENT.
IF THE NOTICE WAS DULY MAILED, MEANING DULY ADDRESSED AND DEPOSITED IN THE
POST OFFICE WITH SUFFICIENT STAMPS, THERE IS DEEMED TO BE NOTICE OF DISHONOR EVEN IF
THERE WAS MISCARRIAGE IN THE MAILS. THUS, IF THE NOTICE WAS MISDELIVERED TO ANOTHER
PERSON, THERE IS STILL DEEMED TO BE NOTICE OF DISHONOR SO LONG AS IT WAS PROPERLY MAILED
ON TIME.
THE NOTICE MAY BE MAILED UNDER SECTION 106 IN: A) THE POST OFFICE ITSELF, B)
BRANCH POST OFFICE, AND C) LETTER BOX UNDER THE CONTROL OF THE POST-OFFICE DEPARTMENT.
SEC. 107 NOTICE TO SUBSEQUENT PARTY; TIME OF. – WHERE A PARTY RECEIVES NOTICE OF
DISHONOR, HE HAS, AFTER THE RECEIPT OF SUCH NOTICE, THE SAME TIME FOR GIVING NOTICE TO
ANTECEDENT PARTIES THAT THE HOLDER HAS AFTER THE DISHONOR.
- An indorser who receives a notice of dishonor is entitled to give notice to persons from whom he can ask
reimbursement.
- If notice is received by an indorser, he can avail of the period provided for in Sec 103 and 104.
- Pursuant to the Rules of Court, the best evidence of the fact of notice sent is the certification to that effect by the
postmaster.

SEC. 108 WHERE NOTICE MUST BE SENT. – WHERE A PARTY HAS ADDED AN ADDRESS TO HIS
SIGNATURE, NOTICE OF DISHONOR MUST BE SENT TO THAT ADDRESS; BUT IF HE HAS NOT GIVEN SUCH
ADDRESS, THEN THE NOTICE MUST BE SENT AS FOLLOWS:
A. EITHER TO THE POST-OFFICE NEAREST TO HIS PLACE OF RESIDENCE OR TO THE POST-
OFFICE WHERE HE IS ACCUSTOMED TO RECEIVE HIS LETTERS; OR
B. IF HE LIVES IN ONE PLACE AND HAS HIS PLACE OF BUSINESS IN ANOTHER, NOTICE MAY
BE SENT TO EITHER PLACE; OR
C. IF HE IS SOJOURNING IN ANOTHER PLACE, NOTICE MAY BE SENT TO THE PLACE WHERE
HE IS SO SOJOURNING.
BUT WHERE THE NOTICE IS ACTUALLY RECEIVE BY THE PARTY WITHIN THE TIME SPECIFIED IN
THIS ACT, IT WILL BE SUFFICIENT, THOUGH NOT SENT IN ACCORDANCE WITH THE
REQUIREMENT OF THIS SECTION.
- The last paragraph of Sec 108 clearly manifests that strict compliance is not necessary. It is not absolutely necessary
that the notice is sent in the places mentioned in paragraphs a, b and c. It is enough that notice is actually received
on time or within the time prescribed under Sec 103 and 104 by the person who is supposed to receive notice even if
he received the same in a different place. Thus, if the indorser personally received a notice of dishonor the day
following the dishonor, the same is valid even if he received it while he was in a restaurant eating his lunch.
Needless to state, there must be proof of actual receipt of the notice of dishonor.

SEC. 109 WAIVER OF NOTICE. – NOTICE OF DISHONOR MAY BE WAIVED EITHER BEFORE THE
TIME OF GIVING NOTICE HAS ARRIVED OR AFTER THE OMMISSION TO GIVE DUE NOTICE, AND THE
WAIVER MAY BE EXPRESS OR IMPLIED.

SEC. 110 WHOM AFFECTED BY WAIVER. – WHERE THE WAIVER IS EMBODIED IN THE
INSTRUMENT ITSELF, IT IS BINDING UPON ALL PARTIES; BUT WHERE IT IS WRITTEN ABOVE THE
SIGNATURE OF AN INDORSER, IT BINDS HIM ONLY.
- Waiver means the person who is making the waiver renounces the benefit of the act or matter in his favor. Thus, the
rule on the giving of notice of dishonor is for the benefit of the drawer or the indorsers. If no notice is given, they
are discharged. The indorsers or the drawer the benefit of the notice of dishonor and they will still be liable as a
consequence despite the absence of such notice.
- Types of waiver:
• The waiver of notice of dishonor may be either express or implied
• Written waiver may either be written in the instrument itself or written above the signature of the indorser
• Waiver may either be before the time of giving of notice or after the failure to give notice.
- If the waiver is written on the instrument itself, it is binding on all parties
- If the waiver is written above the signature of the indorser, it binds only the such indorser and he is the only one who
is deemed to have made the waiver.

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SEC. 111 WAIVER OF PROTEST. – A WAIVER OF PROTEST, WHETHER IN THE CASE OF A FOREIGN
BILL OF EXCHANGE OR OTHER NEGOTIABLE INSTRUMENT, IS DEEMED TO BE A WAIVER NOT ONLY OF A
FORMAL PROTEST BUT ALSO OF PRESENTMENT AND NOTICE OF DISHONOR.
- A protest is a formal statement in writing made by a notary public at the instance of the holder declaring that the
instrument has been presented for payment or for acceptance but the same was dishonored.
- Protest is indispensable only in a foreign bill of exchange. However, this requirement may also be a subject to
waiver. Waiver of protest has the ff effects:
• Protest itself is waived
• Presentment for payment or acceptance is also deemed waived
• Notice of dishonor is also deemed waived.

SEC. 112 WHEN NOTICE IS DISPENSED WITH. – NOTICE OF DISHONOR IS DISPENSED WITH WHEN,
AFTER THE EXERCISE OF REASONABLE DILIGENCE, IT CANNOT BE GIVEN TO OR DOES NOT REACH THE
PARTIES SOUGHT TO BE CHARGED.

SEC. 113 DELAY IN GIVING NOTICE; HOW EXCUSED. – DELAY IN GIVING NOTICE OF DISHONOR IS
EXCUSED WHEN THE DELAY IS CAUSED BY CIRCUMSTANCES BEYOND THE CONTROL OF THE HOLDER
AND NOT IMPUTABLE TO HIS DEFAULT, MISCONDUCT, OR NEGLIGENCE. WHEN THE CAUSE OF DELAY
CEASES TO OPERATE, NOTICE MUST BE GIVEN WITH REASONABLE DILIGENCE.

SEC. 114 WHEN NOTICE NEED NOT BE GIVEN TO DRAWER. – NOTICE OF DISHONOR IS NOT QUITE
REQUIED TO BE GIVEN TO THE DRAWER IN EITHER OF THE FF CASES:
A. WHERE THE DRAWER AND DRAWEE ARE THE SAME PERSON;
B. WHEN THE DRAWEE IS A FICTITIOUS PERSON OR A PERSON NOT HAVING CAPACITY TO
CONTRACT;
C. WHEN THE DRAWER IS THE PERSON TO WHOM THE INSTRUMENT IS PRESENTED FOR
PAYMENT;
D. WHERE THE DRAWER HAS NO RIGHT TO EXPECT OR REQUIRE THAT THE DRAWEE OR
ACCEPTOR WILL HONOR THE INSTRUMENT
E. WHERE THE DRAWER HAS COUNTERMANDED PAYMENT.
- An example of Par D is a situation where the drawer closed his account with the drawee bank. Hence, the drawer
has no reason to expect that the drawee bank will honor the check that he issued.
- Countermand under Par E – stop payment order
- An indorsee may sue his immediate indorser even if the latter is already discharged on the instrument, based on their
contract. Thus, if the indorsement was made as consideration for the goods that the indorser purchased, his liability
to pay for the goods still remains.
- Failure to give notice of dishonor of assigned check
• An assigned check, not negotiated, has an effect similar to a sale. The assignor warrants both the credit itself
and the person of the debtor, if so stipulated, and if there be any breach of warranties, the assignor should be
held liable.
• The dishonor of an assigned check simply stresses its liability and the failure to give a notice of dishonor will
not discharge it from liability, the reason being that the cause of action stems from the breach of warranties in
the assignment and not from the dishonoring of the check.

SEC. 115 WHEN NOTICE NEED NOT BE GIVEN TO INDORSER. – NOTICE OF DISHONOR IS NOT
REQUIRED TO BE GIVEN TO AN INDORSER IN EITHER OF THE FF CASES:
A. WHEN THE DRAWEE IS A FICTITIOUS PERSON OR PERSON NOT HAVING CAPACITY TO
CONTRACT, AND THE INDORSER WAS AWARE OF THAT FACT AT THE TIME HE INDORSED
THE INSTRUMENT;
B. WHERE THE INDORSER IS THE PERSON TO WHOM THE INSTRUMENT IS PRESENTED FOR
PAYMENT;
C. WHERE THE INSTRUMENT WAS MADE OR ACCEPTED FOR HIS ACCOMMODATION.
- An indorser does not admit the existence of the drawee when he indorses the bill of exchange. However, he has
only himself to blame if he was aware that the drawee is not existing and he still indorsed the instrument. He may
not e aware that the drawee was fictitious at the time he took the instrument but he cannot expect that the instrument
will be honored in the hands of the subsequent holders if he was already aware of such fact at the time of his
indorsement.
- Example of Par B – if the indorser is the authorized agent of the drawee who dishonored the instrument, then notice
of dishonor need not be given to the drawer. This is possible for instance if the indorser is the bank teller who
dishonored the check in behalf of the drawee bank.

SEC. 116 NOTICE OF NON-PAYMENT WHERE ACCEPTANCE REFUSED. – WHERE DUE NOTICE OF
DISHONOR BY NON-ACCEPTANCE HAS BEEN GIVEN, NOTICE OF A SUBSEQUENT DISHONOR BY NON-
PAYMENT IS NOT NECESSARY UNLESS IN THE MEANTIME THE INSTRUMENT HAS BEEN ACCEPTED.
- Notice of dishonor by non-payment is no longer necessary if the bill of exchange was already dishonored by non-
acceptance and notice of such dishonor by non-acceptance was previously given.
- However, if the drawee initially refused to accept the instrument but later changed his mind and accepted the bill of
exchange, the holder or any other person who is supposed to give notice must give notice of the acceptor dishonored
the instrument and refused to accept the same.
SEC. 117 EFFECT OF OMISSION TO GIVE NOTICE OF NON-ACCEPTANCE. – AN OMISSION TO GIVE
NOTICE OF DISHONOR BY NON-ACCEPTANCE DOES NOT PREJUDICE THE RIGHTS OF A HOLDER IN DUE
COURSE SUBSEQUENT TO THE OMISSION.
- For example – DR issued a bill of exchange to P payable to the order of P and addressed to the drawee, DW. P
indorsed the instrument to A and A indorsed the instrument to B. On March 10, 2004, B presented the instrument
for acceptance to DW but DW refused to accept. B did not give any notice of dishonor. B thereafter, indorsed the
instrument to C, who in turn, indorsed the instrument to D. If the holder is still B, B can no longer enforce the
secondary liability of DR, P, and A bec of his failure to give notice. However, if D is a holder in due course who

31
 was not aware of the previous dishonor, he can still recover from and enforce the secondary liability of Dr, P and A.
As to D, a holder in due course, the persons secondarily liable are not discharged.

SEC. 118 WHEN PROTEST NEED NOT BE MADE; WHEN MUST BE MADE. – WHERE ANY NEGOTIABLE
INSTRUMENT HAS BEEN DISHONORED, IT MAY BE PROTESTED FOR NON-ACCEPTANCE OR NON-
PAYMENT, AS THE CASE MAY BE; BUT PROTEST IS NOT REQUIRED EXCEPT IN THE CASE OF FOREIGN
BILLS OF EXCHANGE.

DISCHARGE

SEC. 119 INSTRUMENT; HOW DISCHARGED. – A NEGOTIABLE INSTRUMENT IS DISCHARGED:

A. BY PAYMENT IN DUE COURSE BY OR ON BEHALF OF THE PRINCIPAL DEBTOR;
B. BY PAYMENT IN DUE COURSE BY THE PARTY ACCOMMODATED, WHERE THE
INSTRUMENT IS MADE OR ACCEPTED FOR HIS ACCOMMODATION;
C. BY THE INTENTIONAL CANCELLATION THEREOF BY THE HOLDER;
D. BY ANY OTHER ACT WHICH WILL DISCHARGE A SIMPLE CONTRACT FOR THE PAYMENT
OF MONEY;
E. WHEN THE PRINCIPAL DEBTOR BECOMES THE HOLDER OF THE INSTRUMENT AT OR
AFTER MATURITY IN HIS OWN RIGHT.
- Discharge means release from further liability, obligation, or from the binding effect of the negotiable instrument
- Under Art 1231, obligations are extinguished by:
• Payment or performance;
• Loss of the thing due
• Condonation
• Confusion or merger
• Compensation
• Novation
• Other causes such as annulment, rescission, fulfillment of a resolutory condition, and prescription, other means
provided for by law
- In the absence of an agreement, express or implied, payment means the discharge of the debt or obligation in money
and unless the parties so agree, a debtor has no right, except at his own peril, to substitute something in lieu of cash
as medium of payment. However, every negotiable instrument or check, whether manager’s check or ordinary
check, does not, by itself, operate as payment nor does it discharge an obligation.
- Under payment as provided by Sec 88 the ff must concur:
• It must be made by or in behalf of the principal debtor or the accommodated party if such was made or
accepted for his accommodation
• The payment must be made to the holder
• The payor must be in good faith and without notice that his title is defective
• Payment must be made at or after maturity date of the instrument
- Payment cannot be made by delivering another negotiable instrument
- By whom made:
• The principal debtor may not be the person indicated to be the person primarily liable in the instrument. An
accommodated party may be the principal debtor even if he signed merely as a secondary party.
- Payment by the secondary party who is not the accommodated party will not discharge the instrument
- Under Par C, the cancellation must be effected by destroying the instrument either by tearing it up, burning it, or
writing the word cancelled on the instrument. The act of destroying the instrument must also be made by the holder
of the instrument intentionally, which presupposes that the holder still has physical possession of the instrument,
otherwise, he cannot effect an intentional cancellation thereof. Thus, a debtor may not unilaterally discharge herself
from her liability as drawer by mere expediency of withdrawing funds from the drawee bank. He is still liable
therefor.
- Withdrawal of funds is not one of the grounds for extinguishment of a simple contract.
- Under Par E, the phrase “in his own right” has been construed to exclude a case where a maker acquires the
instrument in a purely representative capacity. However, the maker is discharged even if he acquired the instrument
through an agent who did not disclose his principal.

SEC. 120 WHEN PERSONS SECONDARILY LIABLE ON THE INSTRUMENT ARE DISCHARGED. – A
PERSON SECONDARILY LIABLE ON THE INSTRUMENT IS DISCHARGED:
A. BY ANY ACT WHICH DISCHARGES THE INSTRUMENT;
B. BY THE INTENTIONAL CANCELLATION OF HIS SIGNATURE BY THE HOLDER;
C. BY THE DISCHARGE OF A PRIOR PARTY;
D. BY A VALID TENDER OR PAYMENT MADE BY A PRIOR PARTY;
E. BY A RELEASE OF THE PRINCIPAL DEBTOR UNLESS THE HOLDER’S RIGHT OF RECOURSE
AGAINST THE PARTY SECONDARILY LIABLE IS EXPRESSLY RESERVED;
F. BY ANY AGREEMENT BINDING UPON THE HOLDER TO EXTEND THE 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.
- The majority view is that the grounds set forth in Par B to F applies only to parties who one the face of the
instrument itself are secondarily liable, and not to parties primarily liable thereon, even if they be only sureties or for
a co-maker or accommodation makers. In other words, a maker who is only an accommodation maker is not
discharged by any of the grounds provided for in Sec 120.
- In connection with Par B, Sec 48 provides that the holder may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby
relieved from liability on the instrument.
- Par C does not include discharge by operation of law such as: bankruptcy, insolvency, prescription, and failure to
give notice of dishonor.

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 - Under Par D, the tender of payment if refused, does not extinguish obligation unless completed or followed by
consignation of the sum due. The tender must be in cash and both tender and consignation must be unconditional.
Consignation must follow, supplement or complement the tender of payment, if discharge of the obligation is to be
obtained. The effect of a valid tender of payment, without consignation, is merely to exempt the debtor from
payment of interest and/or damages.
- Under Par E, it has been submitted that the reservation will not release the secondary parties only if they acceded to
the release of the principal debtor. If the release was done without their consent, they cannot be made liable bec the
drawer and the general indorsers engage to pay only if the instrument is dishonored. If there is no dishonor, they
cannot be made liable.
- Under Par F, an agreement to extend the time of payment varies the original undertaking of the secondary parties.
- Under Par F, it has been submitted that an accommodation party should be treated in such capacity has he has signed
the instrument and be discharged as such. If the accommodation party is a general indorser, his liability will be
treated as if he is an ordinary general indorser. Thus, an extension of time extended to the maker (who is the
accommodated party) should benefit the accommodation parties such that he is discharged from his liability
pursuant to Sec 120 Par F.
- Sec 142 provides, “The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified
acceptance, he may treat the bill as dishonored by non-acceptance. When a qualified acceptance is taken, the drawer
and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder
to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a
qualified acceptance, he must within a reasonable time, express his dissent to the holder or he will be deemed to
have assented thereto.”
- Sec 144 “Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to
be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails
to do so, the drawer and all the indorsers are discharged.”
- Sec 188 “Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are
discharged from liability thereon.”

SEC. 121 RIGHT OF PARTY WHO DISCHARGES INSTRUMENT. – WHERE THE INSTRUMENT IS PAID
BY A PARTY SECONDARILY LIABLE THEREON, IT IS NOT DISCHARGED; BUT THE PARTY SO PAYING IT IS
REMITTED TO HIS FORMER RIGHTS AS REGARDS ALL PRIOR PARTIES, AND HE MAY STRIKE OUT HIS
OWN AND ALL SUBSEQUENT INDORSEMENTS AND AGAIN NEGOTIATE THE INSTRUMENT, EXCEPT:
A. WHERE IT IS PAYABLE TO THE ORDER OF A THIRD PERSON AND HAS BEEN PAID BY THE
DRAWER; AND
B. WHERE IT WAS MADE OR ACCEPTED FOR ACCOMMODATION AND HAS BEEN PAID BY
THE PARTY ACCOMMODATED.
- The NCC recognizes a situation where a third person will pay for and in behalf of the principal debtor. It provides,
“Whoever pays for another may demand from the debtor what he has paid except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar at the payment has been beneficial to the
debtor.”
- The rule is that where a note is presented by a stranger, without a legal transfer, the presumption is that it was lost,
stolen, or otherwise improperly circulated.

SEC. 122 RENUNCIATION BY HOLDER. – THE HOLDER MAY EXPRESSLY RENOUNCE HIS RIGHTS
AGAINST ANY PARTY TO THE INSTRUMENT BEFORE, AT, OR AFTER ITS MATURITY. AN ABSOLUTE AND
UNCONDITIONAL RENUNCIATION OF HIS RIGHTS AGAINST THE PRINCIPAL DEBTOR MADE AT OR AFTER
THE MATURITY OF THE INSTRUMENT DISCHARGES THE INSTRUMENT. BUT A RENUNCIATION DOES NOT
AFFECT THE RIGHTS OF A HOLDER IN DUE COURSE WITHOUT NOTICE. A RENUNCIATION MUST BE IN
WRITING UNLESS THE INSTRUMENT IS DELIVERED UP TO THE PERSON PRIMARILY LIABLE THEREON.
- Requisites of valid renunciation:
A. The renunciation must be in writing, unless the instrument is delivered up to the person primarily liable
thereon, who is the maker or acceptor. This exception is reinforced by Art 1271 of the NCC, which
provides, “The delivery of a private document evidencing a credit, made voluntarily by the creditor to the
debtor, implies the renunciation of the action which the former had against the latter.”
B. The renunciation must be absolute and unconditional
C. The renunciation must be expressly made before, at or after its maturity.
- It has been submitted that Sec 122 must also conform to Art 1270 of the NCC which states that there must be an
acceptance by the debtor of the renunciation either expressly or impliedly before there can be a valid condonation.

SEC. 123 CANCELLATION; UNINTENTIONAL; BURDEN OF PROOF. – A CANCELLATION MADE

UNINTENTIONALLY OR UNDER A MISTAKE OR WITHOUT THE AUTHORITY OF THE HOLDER, IS
INOPERATIVE BUT WHERE AN INSTRUMENT OR ANY SIGNATURE THEREON APPEARS TO HAVE BEEN
CANCELLED, THE BURDEN OF PROOF LIES ON THE PARTY WHO ALLEGES THAT THE CANCELLATION
WAS MADE UNINTENTIONALLY OR UNDER A MISTAKE OR WITHOUT AUTHORITY.

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PRESENTMENT FOR ACCEPTANCE

SEC. 132 ACCEPTANCE; HOW MADE, BY AND SO FORTH. – THE ACCEPTANCE OF A BILL IS THE
SIGNIFICATION BY THE DRAWEE OF HIS ASSENT TO THE ORDER OF THE DRAWER. THE ACCEPTANCE
MUST BE IN WRITING AND SIGNED BY THE DRAWEE. IT MUST NOT EXPRESS THAT THE DRAWEE WILL
PERFORM HIS PROMISE BY ANY OTHER MEANS THAN THE PAYMENT OF MONEY.
- The law does not require any formal way of signifying acceptance of the drawer. Normally, acceptance is made by
placing a stamp “accepted” accompanied by the signature of the drawee or his authorized representative on the bill.
Nevertheless, mere signature of the drawee can be construed as a valid acceptance.
- It was observed, however, that mere admission by the drawee of the correctness of the amount stated in the
instrument is not an acceptance. It does not signify an assent to the order of the drawee. Thus, there is no
acceptance if the drawee merely stated: “I return the drawer’s order. Balance of his account is in the same as order.”

SEC. 133 HOLDER ENTITLED TO ACCEPTANCE ON FACE OF BILL. – THE HOLDER OF A BILL
PRESENTING THE SAME FOR ACCEPTANCE MAY REQUIRE THAT THE ACCEPTANCE BE WRITTEN ON THE
BILL, AND, IF SUCH REQUEST IS REFUSED, MAY TREAT THE BILL AS DISHONORED.

SEC. 134 ACCEPTANCE BY SEPARATE INSTRUMENT. – WHERE AN ACCEPTANCE IS WRITTEN ON A

PAPER OTHER THAN THE BILL ITSELF, IT DOES NOT BIND THE ACCEPTOR EXCEPT IN FAVOR OF A
PERSON TO WHOM IT IS SHOWN AND WHO, ON THE FAITH THEREOF, RECEIVES THE BILL FOR VALUE.
- Thus, acceptance can be made by sending a telegram to the holder. However, the acceptance stated in the telegram
will not bind the acceptor to the subsequent holder if the said holder is not aware thereof.

SEC. 135 PROMISE TO ACCEPT; WHEN EQUIVALENT TO ACCEPTANCE. – AN UNCONDITIONAL

PROMISE IN WRITING TO ACCEPT A BILL BEFORE IT IS DRAWN IS DEEMED AN ACTUAL ACCEPTANCE IN
FAVOR OF EVERY PERSON WHO, UPON THE FAITH THEREOF, RECEIVES THE BILL FOR VALUE.

SEC. 136 TIME ALLOWED DRAWEE TO ACCEPT. – THE DRAWEE IS ALLOWED 24 HOURS AFTER
PRESENTMENT IN WHICH TO DECIDE WHETHER OR NOT HE WILL ACCEPT THE BILL; THE ACCEPTANCE,
IF GIVEN, DATES AS OF THE DAY OF PRESENTATION.

SEC. 137 LIABILITY OF DRAWEE RETURNING OR DESTROYING BILL. – WHERE A DRAWEE TO

WHOM A BILL IS DELIVERED FOR ACCEPTANCE DESTROYS THE SAME, OR REFUSES WITHIN 24 HOURS
AFTER SUCH DELIVERY OR WITHIN SUCH OTHER PERIOD AS THE HOLDER MAY ALLOW, TO RETURN
THE BILL ACCEPTED OR NON-ACCEPTANCE TO THE HOLDER, HE WILL BE DEEMED TO HAVE ACCEPTED
THE SAME.
- The conflict is more apparent than real, and is based on the assumption that the drawee is entitled under Sec 136
makes no such provision. The bill is at all times the property of the holder, and he is entitled to have it when he
wants it, and Sec 137 so provides. If the holder should demand return before 24 hours, the drawee would be
required to comply on pain of being held as an acceptor, but return within 24 hours unaccepted would not be a
dishonor. The drawee could still accept by notification within 24 hours. See Sec 191. Here an extrinsic acceptance,
Sec 134, would play an important part. If the drawee after returning the bill still refused to act after the expiration of
the time allowed, the holder then would be required to treat the bill as dishonored or lose his rights against prior
parties.

SEC. 138 ACCEPTANCE OF AN INCOMPLETE BILL. – A BILL MAY BE ACCEPTED BEFORE IT HAS
BEEN SIGNED BY THE DRAWER, OR WHILE OTHERWISE INCOMPLETE, OR WHEN IT IS OVERDUE, OR
AFTER IT HAS BEEN DISHONORED BY A PREVIOUS REFUSAL TOACCEPT, OR BY NON-PAYMENT. BUT
WHEN A BILL PAYABLE AFTER SIGHT IS DISHONORED BY NON-ACCEPTANCE AND THE DRAWEE
SUBSEQUENTLY ACCEPTS IT, THE HOLDER, IN THE ABSENCE OF ANY DIFFERENT AGREEMENT, IS
ENTITLED TO HAVE THE BILL ACCEPTED AS OF THE DATE OF THE FIRST PRESENTMENT.
- It should be noted that the holder may refuse to take a qualified acceptance and if he does not obtain an unqualified
acceptance, be may treat the bill as dishonored by non-acceptance is taken, the drawer and indorsers are discharged
from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance,
or subsequently assents thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must,
within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto.
- It has been held that acceptance is presumed to be unqualified or absolute.
- It was explained that if the drawee intends to qualify his acceptance, he must do so distinctly and unmistakably or
else the acceptance will be taken as absolute.

SEC. 139 KINDS OF ACCEPTANCE. – AN ACCEPTANCE IS EITHER GENERAL OR QUALIFIED. A

GENERAL ACCEPTANCE ASSENTS WITHOUT QUALIFICATION TO THE ORDER OF THE DRAWER. A
QUALIFIED ACCEPTANCE IN EXPRESS TERMS VARIES THE EFFECT OF THE BILL AS DRAWN.

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SEC. 140 WHAT CONSTITUTES A GENERAL ACCEPTANCE. – AN ACCEPTANCE TO PAY AT A
PARTICULAR PLACE IS A GENERAL ACCEPTANCE UNLESS IT EXPRESSLY STATES THAT THE BILL IS TO
BE PAID THERE ONLY AND NOT ELSEWHERE.

SEC. 141 QUALIFIED ACCEPTANCE. – AN ACCEPTANCE IS QUALIFIED WHICH IS:

A. CONDITIONAL; THAT IS TO SAY, WHICH MAKES PAYMENT BY THE ACCEPTOR
DEPENDENT ON THE FULFILLMENT OF A CONDITION THEREIN STATED;
B. PARTIAL; THAT IS TO SAY, AN ACCEPTANCE TO PAY PART ONLY OF THE
AMOUNT FOR WHICH THE BILL IS DRAWN;
C. LOCAL; THAT IS TO SAY, AN ACCEPTANCE TO PAY ONLY AT A PARTICULAR
PLACE;
D. QUALIFIED AS TO TIME;
E. THE ACCEPTANCE OF SOME, ONE OR MORE OF THE DRAWEES BUT NOT OF ALL.

SEC. 142 RIGHTS OF PARTIES AS TO QUALIFIED ACCEPTANCE. – THE HOLDER MAY REFUSE TO
TAKE A QUALIFIED ACCEPTANCE AND IF HE DOES NOT OBTAIN AN UNQUALIFIED ACCEPTANCE, HE MAY
TREAT THE BILL AS DISHONORED BY NON-ACCEPTANCE. WHERE A QUALIFIED ACCEPTANCE IS TAKEN,
THE DRAWER AND INDORSERS ARE DISCHARGED FROM LIABILITY ON THE BILL UNLESS THEY HAVE
EXPRESSLY OR IMPLIEDLY AUTHORIZED THE HOLDER TO TAKE A QUALIFIED ACCEPTANCE, OR
SUBSEQUENTLY ASSENT THERETO. WHEN THE DRAWER OR AN INDORSER RECEIVES NOTICE OF A
QUALIFIED ACCEPTANCE, HE MUST, WITHIN A REASONABLE TIME, EXPRESS HIS DISSENT TO THE
HOLDER OR HE WILL BE DEEMED TO HAVE ASSENTED THERETO.

SEC. 143 WHEN PRESENTMENT FOR ACCEPTANCE MUST BE MADE. – PRESENTMENT FOR
ACCEPTANCE MUST BE MADE:
A. WHERE THE BILL IS PAYABLE AFTER SIGHT, OR IN ANY OTHER CASE, WHERE
PRESENTMENT FOR ACCEPTANCE IS NECESSARY IN ORDER TO FIX THE MATURITY OF
THE INSTRUMENT; OR
B. WHERE THE BILL EXPRESSLY STIPULATES THAT IT SHALL BE PRESENTED FOR
ACCEPTANCE; OR
C. WHERE THE BILL IS DRAWN PAYABLE ELSEWHERE THAN AT THE RESIDENCE OR PLACE
OF BUSINESS OF THE DRAWEE
IN NO OTHER CASE IS PRESENTMENT FOR ACCEPTANCE NECESSARY IN ORDER TO RENDER ANY
PARTY TO THE BILL LIABLE.
- It is not necessary to present a check for acceptance as it is not one of those that is required to be presented for
acceptance under Sec 143.

SEC. 145 PRESENTMENT; HOW MADE. – PRESENTMENT FOR ACCEPTANCE MUST BE MADE BY OR
ON BEHALF OF THE HOLDER AT A REASONABLE HOUR, ON A BUSINESS DAY AND BEFORE THE BILL IS
OVERDUE, TO THE DRAWER OR SOME PERSON AUTHORIZED TO ACCEPT OR REFUSE ACCEPTANCE ON
HIS BEHALF, AND
A. WHERE A BILL ADDRESSED TO TWO OR MORE DRAWEES WHO ARE NOT
PARTNERS, PRESENTMENT MUST BE MADE TO THEM ALL UNLESS ONE HAS THE
AUTHORITY TO ACCEPT OR REFUSE ACCEPTANCE FOR ALL, IN WHICH CASE
PRESENTMENT MAY BE MADE TO HIM ONLY;
B. WHERE THE DRAWEE IS DEAD, PRESENTMENT MAY BE MADE TO HIS PERSONAL
REPRESENTATIVE;
C. WHERE THE DRAWEE HAS BEEN ADJUDGED A BANKRUPT OR AN INSOLVENT OR
HAS MADE AN ASSIGNMENT FOR THE BENEFIT OF HIS CREDITORS, PRESENTMENT MAY
BE MADE TO HIM OR TO HIS TRUSTEE OR ASSIGNEE

SEC. 146 ON WHAT DAYS PRESENTMENT MAY BE MADE. – A BILL MAY BE PRESENTED FOR
ACCEPTANCE ON ANY DAY ON WHICH NEGOTIABLE INSTRUMENTS MAY BE PRESENTED FOR PAYMENT
UNDER THE PROVISIONS OF SECTIONS 72 AND 85 OF THIS ACT. WHEN SATURDAY IS NOT OTHERWISE A
HOLIDAY, PRESENTMENT FOR ACCEPTANCE MAY BE MADE BEFORE 12 O’CLOCK NOON ON THAT DAY.

SEC. 147 PRESENTMENT WHERE TIME IS INSUFFICIENT. – WHERE THE HOLDER OF A BILL DRAWN
PAYABLE ELSEWHERE THAN AT THE PLACE OF BUSINESS OR THE RESIDENCE OF THE DRAWEE HAS NO
TIME, WITH THE EXERCISE OF REASONABLE DILIGENCE, TO PRESENT THE BILL FOR ACCEPTANCE
BEFORE PRESENTING IT FOR PAYMENT ON THE DAY THAT IT FALLS DUE, THE DELAY CAUSED BY
PRESENTING THE BILL FOR ACCEPTANCE BEFORE PRESENTING IT FOR PAYMENT IS EXCUSED AND DOES
NOT DISCHARGE THE DRAWERS AND INDORSERS.

SEC. 148 WHERE PRESENTMENT IS EXCUSED. – PRESENTMENT FOR ACCEPTANCE IS EXCUSED

AND ABILL MAY BE TREATED AS DISHONORED BY NON-ACCEPTANCE IN EITHER OF THE FF CASES:
A. WHERE THE DRAWEE IS DEAD, OR HAS ABSCONDED, OR IS A FICTITIOUS PERSON
OR A PERSON NOT HAVING CAPACITY TO CONTRACT BY BILL
B. WHERE AFTER THE EXERCISE OF REASONABLE DILIGENCE, PRESENTMENT
CANNOT BE MADE
C. WHERE ALTHOUGH PRESENTMENT HAS BEEN REGULAR, ACCEPTANCE HAS
BEEN REFUSED ON SOME OTHER GROUND

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CHECKS

- Checks are bills of exchange payable on demand drawn on banks. It is of the essence of payable on demand bec the
contract between the banker and the customer is that the money is needed on demand.
- Art. 186 of the NIL provides, “A check must be presented for payment within a reasonable time after its issue
or the drawer will be discharged thereon to the extent of the loss caused by the delay.”
- Art. 189 of the NIL provides, “A check itself does not operate as an assignment of any part of the funds to the
creditor of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or
certifies a check.”
- Kinds of checks
• Ordinary, crossed, certifies, memorandum, manager’s or cashier’s
- Cashier’s and Manager’s checks
• A cashier’s check is a bill of exchange drawn by a bank upon itself, and is accepted by its issuance.
Essentially, the bank is both the drawer and the drawee of the cashier’s check.
• Not equivalent of a bank draft which is an open letter of request form to a to a third party who is the drawee.
• Cannot be payable to bearer so as not to be resorted for money-laundering purposes.
- Certified Checks
• Is one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will
be paid when duly presented for payment. It is analogous to a certificate of deposit of a certifying bank.
• Certification is different from Acceptance in that:
A. Certification at the instance of the holder discharges while there is no discharge in an ordinary
acceptance
B. In certification, the bank debits the drawer’s account at the time of certification and sets aside funds
out of the drawer’s control.
• Nevetheless, even if the drawer does not actually have any deposits in the drawee bank, the certification legally
obligates the latter to honor the certified check. However, it was held that a bank which has certified a check
through mistake or fraud can revoke its certification if the rights of third parties are not affected and the payee
has not changed his position in reliance of the certification.
• Certification consists in the signification buy the drawee of his assent to the order of the drawer, which must
not express that the drawee will perform his promise by any other means than the payment of money.
• When the holder of a check procures it to be certified or accepted, the drawer and the indorsers are discharged
from liability thereon. The theory for such release is that the holder, by requesting such certification instead of
payment, enters into a new contract with the bank, and one not within the contemplation of the drawer or a
prior indorser bec the drawer and indorsers expect that the check will be presented for payment, not for
certification.
• The purpose of procuring a check to be certified is to impart strength and credit to the paper by obtaining an
acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and
securing the engagement of the bank that the check will be paid upon presentation.
• When a check is certified, it ceases to possess the character, or to perform the functions of a check and
represents so much money on deposit, payable to the holder on demand. This means that the check becomes a
basis of credit.
• Ordinarily, the acceptance or certification of a check is performed and evidenced by some words or mark,
usually the words “good,” “certified,” or “accepted” are stamped or written upon the check by the banker or
bank.
- Crossed checks according to the Bill of Exchange Act of 1882
• Generally crossed check – where a check bears across its face an addition of
A. The words “and company” or any abbreviation thereof between two parallel transverse lines, either
with or without the words “not negotiable”; or
B. Two parallel transverse lines simply, either with or without the words “not negotiable”; that addition
constitutes a crossing and the check is crossed generally
• Specially crossed check – where a check bears across its face an addition of the name of a bank, either with or
without the words “not negotiable,” that addition constitutes a crossing, and the check is crossed specially and
to that bank.
• The specific effects of crossing a check:
A. The check may not be encashed but only deposited in the bank

36
 B. The check may be negotiated only once – to one who has an account with the bank
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.
• Crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser’s
title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross
negligence amounting to legal absence of good faith.
• Crossing of the check becomes a material part thereof such that its obliteration is unlawful.
- Memorandum and Traveler’s checks
• A memorandum check is in the form of an ordinary check, with the word “memorandum,” “mem,” or “memo”
written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely,
without any condition concerning its presentment. Such a check is an evidence of debt against the drawer, and
although it may not be intended to be presented, has the same effect as an ordinary check, and if passed to a
third person, will be valid in his hands like any other check.
• A traveler’s check us an instrument purchased from banks, express companies, or the like, in various
denominations, which can be used like cash upon second signature by the purchaser. It has the characteristics
of a cashier’s check of the issuer.
• BILLS OF EXCHANGE • CHECKS
• Not necessarily drawn on a deposit • Necessarily drawn on a deposit
• Death of a drawer with the knowledge of • Death of the drawer with the knowledge by
the bank does not revoke the authority of the bank revokes the authority of the bank
the bank to pay to pay
• May be presented for payment within a • Must be presented for payment within
reasonable time after its last negotiation if reasonable time after its issue
payable on demand
• The drawee may or may not be a bank • Drawee is always a bank
• Presentment for acceptance is necessary for • Presentment for acceptance is not necessary
certain types of bills of exchange
• May be payable on demand or at a fixed or • Always payable on demand
determinable future time
- Although the payee may not sue the drawee based on the check itself, the payee may sue based on tort under Article
19 of the Civil Code: abuse of right, so long as he can prove that:
• There is a legal right or duty which is exercised in bad faith and for the sole intent of prejudicing or injuring
another.
- A bank is under obligation to treat the accounts of its depositors with meticulous care whether such account consists
only of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance of
this obligation is demandable. While the bank’s negligence was not attended with malice and bad faith,
nevertheless, it caused serious anxiety, embarrassment and humiliation. The fact remains that the bank has
committed a serious error.
- Clearing
• When a check is sent through the clearinghouse, the collecting bank acts as the agent of the depositor. The
collecting bank does not become the owner of the amount covered by the check as the same is only being
collected from the drawee bank for the principal, the depositor
• A collecting bank is required to stamp on the check that it guarantees all prior indorsements or the lack thereof.
This means that the collecting bank is liable as a general indorser under Sec 66 of the Negotiable Instruments
Law
• However, in the absence of the stamp, the collecting bank is also deemed to have made such warranty in
sending the check for clearing.
• The collecting bank cannot set up the defense of material alteration for it warrants that the instrument is
genuine and in all respects what it purports to be.
- Duty of Care
• The banking industry is affected with public interest. As such, in dealing with its depositors, a bank should
exercise its functions not only with the diligence of a good father of a family but it should do so with the
highest degree of care.
- 24 hour rule – return of checks which contain forged signatures and other grounds stated in Sec 20 in the Rules of
the Philippine Clearing House Corp. Failure to comply with such rule will be deemed negligence on the part of the
drawee.
- 24 hour rule does not apply to checks bearing forged indorsements and materially altered checks. For this, the
period prescribed by law is within 10 yrs as provided by the Civil Code, and thus prescribes after 10 yrs from the
time the right of action accrues.
- Stopping payment
• If a bank pays a check after it has been notified to stop payment, it pays on its own responsibility and will not
be permitted to charge the account.
• Iron clad rule – no countermanding of cashier’s or manager’s checks.
• However, in the case of Mesina v. IAC, the court qualified the rule by stating that the holder must be a holder
in due course before the stop payment order may not be successfully invoked against him.
- Check Kiting – is the wrongful practice of taking advantage of the float, the time that elapses between the deposit of
the check in one bank and its collection at another. The depositary bank will honor the checks even if it has not yet
been cleared. In anticipation of the dishonor of the check that was deposited, the conspirators will replace the
original check with another worthless check. Check kiting has been described as 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. This is punishable under Art. 315 (1) (b) of the RPC

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DOCUMENTS OF TITLE

- Documents of title may be used as tools to ensure payment even prior to delivery. It performs such function bec
control over the goods is, in effect, retained through documents of title even if the seller has actually parted with
physical possession of the goods.
- Bill of Lading – a document that serves as evidence of receipt of goods for shipment issued by a common carrier
- Warehouse Receipt – a document of title which is issued by a warehouseman who is lawfully engaged in the
business of storing goods for profit
- Quedan – warehouse receipt that covers sugar
- Dock warrant – a warrant given by dock-owners to the owner of merchandise imported and warehoused on the dock,
upon the faith of the bills of lading, as recognition of his title to the goods.
- Functions of documents of title:
• It is an evidence of the receipt of goods
• Document where the agreement between parties are stipulated
• Operates as a transferable document of title
- Purpose – facilitate the exchange of goods.
- For documents of title to be negotiable, they must contain words of negotiability.
- If documents of title contain the required words of negotiability to make it a negotiable document of title under the
Civil Code, such document remains to be negotiable even if the words “not negotiable” or the like are placed
thereon.
- If there is a negotiable document of title payable to bearer and it subsequently is indorsed specially, its subsequent
negotiation must be by indorsement and delivery bec the special indorsement has the effect of converting the bearer
instrument into an order instrument.
- Incomplete negotiation
• The absence of the indorsement in a transfer of an order document of title does not, by itself invalidate the
transfer, however, it shall be deemed only an assignment of the rights of the transferor. Thus, subject to
defenses that may be raised by any party to the document.
• The transferee acquires a right to compel the transferor to indorse the document unless a contrary intention
appears. In such a case, negotiation shall take effect as the time when the indorsement is actually made.
- Negotiation of the document has the effect of manual delivery so as to constitute the transferee the owner of the
goods. There is a direct obligation of the bailee issuing the document to hold possession of the goods.
- Vendor’s lien
• Sec 49 of the Warehouse Receipts Law provides, “Where a negotiable receipt has been issued for goods, no
seller’s lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to
whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to
the warehouse man who issued such receipt of the seller’s claim to a lien or right of stoppage in transitu. Nor
shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller unless the
receipt is first surrendered for cancellation.”
- Pledge of Receipt
• Ownership of the goods is not transferred to the pledge of the receipt: “It is obvious that where the transaction
involved in the transfer of a warehouse receipt or quedan is not a sale but pledge or security, the transferee or
endorsee does not become the owner of the goods but that he may only have the property sold and then satisfy
the obligation from the proceeds of the sale.

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 • The right of a pledgee of a quedan or warehouse receipt for value cannot be defeated by the unpaid seller.
- Who may negotiate documents of title
• If one is not the real owner of the document, as in the case of the agent, he can only negotiate the document if
he is in custody or possession of the document and it is in such form that he is allowed under the law to do so.
On its face, the document must be capable of being negotiated by such persons. This may happen if there is
apparent authority to negotiate:
A. The goods are to be delivered to the order of the agent or
B. The document may be negotiated by mere delivery.
• Under Sec 47 of the WRL and Art 1518 of the Civil Code, even a person who is not legally entitled to negotiate
the instrument may transfer title to a bona fide purchaser for value and in good faith. Thus, even if the
negotiation was in breach of trust, the transferee will acquire rights over the instrument.
• While Art 1518 of the Civil Code specifically mentions loss, theft and accident, Sec 47 is silent on this matter.
The clear import of sec 47 of the WRL is not to vest ownership over the goods to a bona fide purchaser from a
thief or from a finder of a lost document while the Civil Code gives preference to the bona fide purchaser from
such persons.
- Warranties:
• Art 1517 of the Civil Code provides, “the indorsement of a document of title shall not make the endorser liable
for any failure on the part of the bailee who issued the document or previous endorsers thereof to fulfill their
respective obligations.
• Art. 1516 of the Civil Code provides, “A person who for value negotiates or transfers a document of title by
endorsement or delivery, including one who assigns for value a claim secured by a document of title unless a
contrary intention appears, warrants:
A. That the document is genuine
B. That he has legal right to negotiate or transfer it
C. That he has knowledge of no fact which would impair the validity or worth of the document of title
D. That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a
particular purpose, whenever such warranties would have been implied if the contract of the parties
had been to transfer without a document of title the goods represented thereby.
• Consequently, the transferor may be held liable if the document of title that he negotiated was fake or if he stole
the instrument or he negotiated with breach of faith.
• Sec 46 of the WRL provides that a mortgagee, pledge or holder for security of a receipt who, in good faith,
demands or receives payment of the debt for which such receipt is security, whether from a party to a draft
drawn for such debt or from any other person, shall not by doing so, be deemed to represent or to warrant the
genuineness of such receipt or the quantity or quality of the goods therein described.
- Non-negotiable receipts
• If the document is non-negotiable, an assignee acquires the right to notify the bailee who issued the document
of the transfer thereof, and thereby acquire the direct obligation of such bailee to hold possession of the goods
for him according to the terms of the document. Prior to the notification to such bailee, the title to the goods
and the right to acquire the obligation of such bailee may be defeated by the levy of an attachment of execution
upon the goods by a creditor or the transferor, or by a notification to such bailee by the transferor or a
subsequent purchaser from the transfer of a subsequent sale of the goods by the transferor.
- Delivery of goods
• The primary obligation of the bailee if he issued a document of title is to surrender the goods covered thereon
to a person entitled to their delivery under the terms of the said document. If he fails to deliver the goods
without valid or legal ground, he will be liable for conversion (punishable under Art 315 of the RPC).
Conversion will also result if there was misdelivery. He may also be liable for damages if the goods were lost
due to his negligence.
• The warehouseman is obligated to deliver what is owed to the ff persons:
A. The person lawfully entitled to the possession of the goods or his agent
B. A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for
the goods or who has written authority from the person so entitled either indorsed upon the receipt or
written upon another paper
C. A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him
or order, or to bearer, or which has been indorsed to him or in blank by the person to whom delivery
was promised by the terms of the receipt or by his mediate or immediate indorser.
• Sec 8 of the WRL provides that: A warehouseman, in the absence of some lawful excuse provided by this Act,
is bound to deliver the goods upon a demand made wither by the holder of a receipt for the goods or by the
depositor; if such demand is accompanied with:
A. An offer to satisfy the warehouseman’s lien
B. An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the
negotiation of the receipt; and
C. A readiness and willingness to sign when the good are delivered, an acknowledgment that they have
been delivered, if such signature is requested by the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the holder
or depositor so accompanied, the burden shall be upon the warehouseman to establish the existence of
lawful excuse for such refusal.
• The bailee has the obligations to cancel the document lest it will again re-enter the channels of trade and it may
then also fall in the hands of another purchaser for value who may have no notice of prior delivery of the
document.
• Loss or destruction of the receipt does not authorize the warehouseman to deliver the goods. The
warehouseman cannot determine for himself the fact of loss. It is only a court of competent jurisdiction that
can determine such factual question. If the warehouseman delivered the goods under the mistaken belief that
the document was lost is not relieved from liability if it was in fact not lost.
• Where a negotiable receipt has been lost or destroyed, a court may order the delivery of the goods upon
satisfactory proof of such loss or destruction and upon the giving of a bond with sufficient sureties to be
approved by the court to protect the warehouseman from any liability or expense, which he or any person
injured by such delivery may incur by reason of the original receipt outstanding. The court may also in its
discretion order the payment of the warehouseman’s reasonable costs and counsel fees.

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 • Even of the goods were released bec of the order of the court, the warehouseman is still not free from liability.
The law provides that the delivery of the goods under an order of the court shall not relieve the warehouseman
from liability to a person to whom the negotiable receipt has been or shall be negotiated for value without
notice of the proceedings or of the delivery of goods. The recourse of the warehouseman if it is made liable is
to enforce the bond required by the court or to run after the person who obtained the release of the goods.
- Adverse claim of the warehouseman
• The warehouseman cannot set up title in himself over the goods. Sec 16 of the WRL provides that no title or
right to the possession of the goods, on the part of the warehouseman, shall excuse the warehouseman from
liability for refusing to deliver the goods according to the terms of the receipt.
• However, there are 2 exceptions:
A. The warehouseman’s title or right is derived directly or indirectly from a transfer made by the
depositor at the time of or subsequent to the deposit for storage
B. The right is based on the warehouseman’s lien. Thus, the warehouseman can refuse to deliver the
goods to the purchaser if the goods were duly indorsed to the warehouseman as a purchaser of the
goods and the warehouseman’s indorsement was forged after the order document of title was stolen
from him.
- Defenses for non-delivery or mis-delivery
• Loss or destruction of the goods without fault of the bailee
• Failure to satisfy the bailee’s lien
• Failure to surrender the negotiable document of title
• Lack of willingness to sign acknowledgment
• Receipt by the bailee of a request by or on behalf of the person lawfully entitled to a right of property or
possession in the goods, not to make such delivery
• The bailee has information that the delivery about to be made was to one not lawfully entitled to the possession
of the goods
• Delivery to a claimant with a better right
• Attachment or levy of the goods by a creditor where the document of title is surrendered or its negotiation is
enjoined or the document impounded
• Where the document of title is attached by a creditor
- Warehouseman’s lien
• A warehouseman can refuse to deliver the goods if the holder does not offer to satisfy the warehouseman’s lien.
• It should be noted at the outset that the presence of a lien does not preclude the use of other remedies.
• The law provides that whether a warehouseman has or has not a lien upon the goods, he is entitled to all
remedies allowed by law for a creditor against a debtor for the collection from the depositor of all charges and
advances which the depositor has expressly or impliedly contracted with the warehouseman to pay.
• Sec 27 of the WRL provides, “Subject to the provisions of Sec 30, a warehouseman shall have a lien on goods
deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of the
goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing,
coopering and other charges and expenses in relation to such goods, also for all reasonable charges and
expenses for notice, and advertisements of sale, and for sale of the goods where default had been made in
satisfying the warehouseman’s lien.
• It is necessary that the charges that are present at the time of the issuance of the receipt must be so stated in the
receipt with the amounts thereof specified. If the existing charges are not stated, the warehouseman shall have
no lien thereon. He shall have a lien only for charges for storage of goods subsequent to the date of the receipt
unless the receipt expressly enumerated other charges for which a lien is claimed.
• Properties that are subject to the lien
A. All goods whenever deposited, belonging to the person who is liable as debtor for the claims in
regard to which the line is asserted
B. Against all goods belonging to others which have been deposited at any time by the person who is
liable as debtor for the claims in regard to which the lien is asserted if such person had been so
entrusted with the possession of goods that a pledge of the same by him at the time of the deposit to
one who took the goods in good faith for value would have been valid.
• How lien may be lost:
A. By surrendering possession of the goods
B. By refusing to deliver the goods when a demand is made with which he is bound to comply under the
provisions of the WRL
• However, a warehouseman having a lien valid against the person demanding the goods may refuse to deliver
the goods to him until the lien is satisfied
• Satisfaction of lien by sale (Sec 33 of the WRL)
• Sec 36 of the WRL provides, “After goods have been lawfully sold to satisfy a warehouseman’s lien, or have
been lawfully sold or disposed of because of their perishable or hazardous nature, the warehouseman shall not
thereafter be liable for failure to deliver the goods to the depositor or owner of the goods or to a holder of the
receipt given for the goods when they were deposited, even if such receipt be negotiable.
- Alteration
• Alteration is not by itself a ground for refusal to deliver the goods. The alteration of a receipt shall not excuse
the warehouseman who issued it from any liability if such alteration was:
A. Immaterial
B. Authorized
C. Made without fraudulent intent
• If the alteration was authorized, the warehouseman shall be liable according to the terms of the receipt as
altered. If the alteration was unauthorized but made without fraudulent intent, the warehouseman shall be
liable according to the terms of the receipt as they were before alteration.
• In the case of material and fraudulent alteration of a receipt, the warehouseman is not excused from liability to
deliver according to the terms of the receipt as originally issued, the goods for which it was issued but shall
excuse him from any other liability to the person who made the alteration. Any purchaser of the receipt for
value without notice of the alteration shall acquire the same rights against the warehouseman which such
purchaser would have acquired if the receipt had not been altered at the time of the purchase.

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 - Adverse claimant
• Sec 17, 18, 19 of the WRL
- Attachment or levy
• Sec 25, 26 of the WRL
- Duty of care
• Sec 21 of the WRL provides, “a warehouseman shall be liable for any loss or injury to the goods caused by his
failure to exercise such care in regard to them as reasonably careful owner similar goods would exercise, but he
shall not be liable, in the absence of an agreement to the contrary, for any loss or injury to the goods, which
could not have been avoided by the exercise of such care.
• Sec 20 of the WRL provides, “A warehouseman shall be liable to the holder of a receipt for damages caused by
the non-existence of the goods or by the failure of the goods to correspond with the description thereof in the
receipt at the time of its issue. If , however, the goods are described in a receipt merely by a statement of marks
or labels upon them or upon packages containing them or by a statement that the goods are said to be good of a
certain kind or that the packages containing the goods are said to contain goods of a certain kind or by words of
like purport, such statements, if true, shall not make liable the warehouseman issuing the receipt, although the
goods are not of the kind which the marks or labels upon them indicate or of the kind they were said to be by
the depositor.”
• Sec 22 of the WRL provides, “Except as provided in the ff section, a warehouseman shall keep the goods so far
separate from goods of other depositors and from other goods of the same depositor for which a separate
receipt has been issued, as to permit at all times the identification and redelivery of the goods deposited.
• Sec 23 of the WRL provides, “if authorized by agreement or by custom, a warehouseman may mingle fungible
goods with other goods of the same kind and grade. In such case, the various depositors of the mingled goods
shall own the entire mass in common and each depositor shall be entitled to such portion thereof as the amount
deposited by him bears to the whole.
• Sec. 24 of the WRL provides, “The warehouseman shall be severally liable to each depositor for the care and
redelivery of his share of such mass to the same extent and under the same circumstances as if the goods had
been kept separate.”

LETTERS OF CREDIT AND TRUST RECEIPTS

- A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will
honor drafts or other demands for payment upon compliance with the conditions specified in the credit.
- Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its
customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus
commitment fees agreed upon.
- Although letters of credit are normally used in trade of goods, it is also used as a security for other types of
obligations including those arising from loan agreements, contracts for the supply of services or construction of
buildings and infrastructures.
- A letter of credit is a financial devise developed by merchants as a convenient and relatively safe mode of dealing
with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods
before he is paid, and the buyer who wants to have control of the goods before paying. To break the impasse, the
buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter
of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what
documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the
shipment of the goods to the buyer.
- Governing law for letters of credit – Uniform Customs and Practice for Documentary Credits (UCP).
- Parties
• The buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of
the documents of title. Instead of going to the place of issuing bank to claim payment, the buyer may approach
another bank, termed the negotiating bank to have the draft discounted.
• The bank, issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper
documents of titles and to surrender the documents to the buyer upon reimbursement
• The seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment.
- Obligations of the issuing bank
• To make a payment to or to the order of a third party (the beneficiary) or is to accept and pay the bills of
exchange drawn by the beneficiary
• To authorize another bank to effect such payment, or to accept and pay such bills of exchange

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 • To authorize another bank to negotiate against stipulated document, provided that the terms and conditions of
the credit are complied with.
• Negotiation – the giving of value of draft and/or documents by the bank authorized to negotiate. Mere
examination of documents without giving of value does not constitute negotiation.
- Except when the letter of credit specifically stipulates otherwise, the obligation of the issuing bank is solidary with
the person requesting for its issuance.
- Examination of Tender Documents
• All instructions to issue, confirm, or advise a credit must state precisely the documents against which payment,
acceptance or negotiation is to be made.
• All documents stipulated must be examined
• Documents which appear on their face to be inconsistent with one another will be considered as not appearing
on their face to be in compliance with the terms and conditions of the credit.
• Documents not stipulated in the credit will not be examined
• The Issuing Bank, Confirming Bank, if any, or a Nominated Bank acting on their behalf shall each have a
reasonable time, not to exceed 7 banking days following the day of receipt of the documents to examine the
documents and to determine and to inform the party from which it received the documents accordingly.
• If a credit contains conditions without stating the documents to be presented in compliance therewith, banks
will deem such conditions as not stated and will disregard them.
- Payment
• Paying bank – the bank on which the drafts are to be drawn
- Seller-Beneficiary
• The instrument is addressed to him and is in his favor. It is the written contract of the bank which has created
the instrument. While the bank cannot compel the beneficiary to ship and avail himself of the benefits of the
instrument, the seller may recover from the bank the value of his shipment if made within the terms of the
instrument, even though he has not given the bank any direct consideration for the bank’s promises contained
in the instrument. By a stretch of imagination, and in order to support the instrument as a two-sided contract,
supported by mutually given considerations, the courts seem to hold that the commission paid or to be paid by
the seller to the bank is also the consideration flowing from the seller to the bank.
• When the seller avails of the letter of credit, his obligation is to deliver the tender document to the paying bank
whether the bank is the issuing bank or confirming bank. Strict compliance with the terms of the letter of credit
is necessary when the seller performs his obligations.
- Buyer-importer
• The buyer-importer is the person who applies for and for whose benefit the issuing bank issues the letter of
credit. Under the independent contract between the buyer and the issuing bank which is in the form of a credit
agreement, the buyer obligates himself to reimburse the issuing bank when the latter complies with the terms of
the letter.
- Notifying or Advising Bank
• A correspondent bank of the issuing bank. It assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit. The relationship between the issuing bank and the notifying
bank is similar to that of agency and not a guarantee.
• If the notifying bank cannot establish such apparent authenticity of the credit, it must inform without delay the
bank from which the instructions appear to have been received.
- Confirming Bank
• The confirming bank not only notifies the beneficiary but it also assumes the direct obligation to the seller. Its
liability is primary, it is as if the confirming bank issued the letter of credit.
- Negotiating Bank
• Is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent
upon the stage of the negotiation. Before negotiation, it has no liability with respect to the seller but after
negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. It may buy
or refuse to buy as it chooses.
- There are at least 3 independent and distinct contracts involved in a letter of credit:
• The contract of sale between the buyer and the seller
• The contract of the buyer with the issuing bank
• The letter of credit proper
- Independence principle
• It is important to emphasize that few things are more clearly settled in law than that the contracts involved in a
letter of credit arrangement are to be maintained in a state of perpetual separation.
• Thus, the contract of sale is independent from the letter of credit itself. The letter of credit is also independent
of the contract between the buyer and the issuing bank. Thus, violation of the contract of sale will not
necessarily affect the letter of credit obligation of the issuing bank to the seller so long as the tender documents
are delivered to the former. In other words, the letter of credit constitutes the complete agreement and is
independent of the contract of sale between the buyer and the seller, and is unaffected by any breach on the part
of the seller or the buyer or by any controversy which may arise between the buyer and the seller or by any
other transaction between the buyer and the seller.
• The letter of credit is also independent of any contract of carriage that may have been involved.
• The independence principle is what differentiates a letter of credit from any other accessory contract.
• A direct consequence of the independence principle is the rule that banks only deal with documents and not
with goods, services or obligations to which they relate. Banks that provide financing in international business
transactions do not deal with the property to be exported or shipped to the importer, but deal only with
documents.
• Payment, negotiation or acceptance against documents according with the terms and conditions of the credit by
a bank authorized to do so binds the buyer or the party giving the authorization to take up the documents and
reimburse the bank making payment, negotiation or acceptance. Thus, the applicant cannot recover on the
ground that the issuing bank paid the seller despite the alleged discrepancies in the shipment vis-à-vis the order
specifications. What is important is the delivery of tender documents that conforms with what the letters of
credit requires.

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 • If the letter of credit is drawable only after the settlement of any dispute on the main contract of sale, then there
would be no practical and beneficial use for letters of credit in commercial transactions.
- Kinds of letters of credit
• Confirmed LC – there is a confirmed LC whenever the beneficiary stipulates that the obligation of the opening
bank shall also be made the obligation of the bank to himself. When this occurs, we have what is known as a
confirmed commercial credit and the bank local to the beneficiary becomes the Confirming bank.
• Irrevocable LC – definite undertaking on the part of the issuing bank and constitutes the engagement of that
bank to the beneficiary and bona fide holders of drafts drawn and or documents presented thereunder, that the
provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all
the terms and conditions of the credit are complied with. It refers to the duration of the letter of credit. What it
simply means is that the issuing bank may not without the consent of the beneficiary (the seller) and the
applicant (the buyer) revoke his undertaking under the letter.
• Revolving LC – credit that provides for renewed credit to become available as soon as the opening bank has
advised that the negotiating or paying bank that the drafts are already drawn by the beneficiary have been
reimbursed to the opening bank by the buyer.
• Back-to-back LC – credit with identical documentary requirements and covering the same merchandise as
another letter of credit, except for a difference in the price of the merchandise as shown by the invoice and the
draft. The second letter of credit can be negotiated only after the first is negotiated.
• Standby LC – security arrangement for the performance of certain obligations. It can be drawn against only if
another business transaction is not performed. It may be issued in lieu of a performance bond.

TRUST RECEIPTS

- Under the TRL, the bank becomes the entrustor of the goods while the buyer-importer is the entrustee.
- The goods will in effect be released by the bank to the buyer by the delivery of the document of title/bill of lading
covering the goods. The buyer as entrustee is obligated to sell the goods and to apply the proceeds thereof to the
payment of the loan extended by the entruster bank. The buyer will only get the balance of the proceeds of the sale
after making such application.
- The entruster only retains security interest over the goods. Thus, the entrustee-buyer bears the loss of the goods
after delivery thereof. Nevertheless, the entrustee may be liable for estafa if he fails to turn over the proceeds of the
sale of the goods, documents or instruments covered by the trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods if they were not sold or disposed of in accordance
with the terms of the trust receipt.
- Remedies of the entruster
• The right of repossession and subsequent sale at public auction which are availed of by an entruster bank are
rights available upon default, and which are conferred by statute.
• The repossession by the bank of the goods by the entruster does not result in the full satisfaction of the
entrustee’s obligation.

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