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negotiable Instruments law

(Act 2031)

BarOps Head I PY Caunan

Acads Head I Beth Liceralde

Subject Head I
Faculty Adviser I
Chapter I. INTRODUCTION lightly. Nor should it be brushed aside in order to
meet the necessities in a single case.

1. The Negotiable Instrument 3. Life of a Negotiable Instrument

 Written contract for the payment of money, by 1. issue

its form intended as substitute for money and 2. negotiation
intended to pass from hand to hand to give the 3. presentment for acceptance in certain bills
HDC the right to hold the same and collect the 4. acceptance
sum due. 5. dishonor by or acceptance
 Instruments are negotiable when they conform 6. presentment for payment
to all the requirements prescribed by the NIL 7. dishonor by nonpayment
(Act 2031, 03 February 1911). 8. notice of dishonor
 Although considered as medium for payment of 9. protest in certain cases
obligations, negotiable instruments are not legal 10. discharge
tender (Sec. 60, New Central Bank Act, R.A.
7653); 4. Kinds of Negotiable Instruments
 Negotiable instruments shall produce the effect
of payment only when they have been encashed
or when through the fault of the creditor they 4.1. Promissory note - a promise to pay money
have been impaired. (Art. 1249, CC) BUT a  unconditional promise in writing made by one
CHECK which has been cleared and credited to person to another signed by the maker
the account of the creditor shall be equivalent to  engaging to pay on demand, or at a fixed or
a delivery to the creditor of cash. determinable future time a sum certain in
money to order or to bearer
 where a note is drawn to the maker’s own
Negotiable Non-negotiable order, not complete until indorsed by him
(Sec. 184, NIL).
Contains all the Does not contain all
requisites of Sec. 1 of the requisites of Sec.
4.2. Bill of exchange - an order made by one person
the NIL 1 of the NIL
to another to pay money to a third person.
Transferred by Transferred by  unconditional order in writing addressed by
negotiation assignment one person to another signed by the person
giving it
HDC may have better Transferee acquires  requiring the person to whom it is addressed
rights than transferor rights only of his to pay on demand or at a fixed or
transferor determinable future time a sum certain in
money to order or to bearer (Sec. 126, NIL).
Prior parties warrant Prior parties merely  Check: bill of exchange drawn on a bank
payment warrant legality of payable on demand.

Transferee has right of Transferee has no Promissory Note Bill of Exchange

recourse against right of recourse
intermediate parties Unconditional Unconditional order

2. Negotiable Instruments Law Involves 2 parties Involves 3 parties

Maker primarily Drawer only secondarily liable

o The NIL applies only to instruments which liable
conform with the requisites laid down by Sec1
of the law. Should any of said requisites be Only 1 presentment Generally 2 presentments -
absent, the instrument would not be negotiable - for payment for acceptance and for
and would therefore not be governed by the NIL payment
but by the general law on contracts.
o TIP: It is advised that one memorizes the two
most important provisions of the NIL : Sec. 1 5. Parties
(Forms of negotiable instruments) and Sec. 52
(What constitutes a holder in due course) 5.1. As regards promissory note:
1. Promissor/maker
MICHAEL A. OSMEÑA v. CITIBANK (2004) 2. Payee - person to whom the promise to pay
is made.
The Negotiable Instruments Law was enacted for the
purpose of facilitating, not hindering or hampering 5.2. As regards bill of exchange:
transactions in commercial paper. Thus, the said 1. Drawer - person who gives the order to pay.
statute should not be tampered with haphazardly or 2. Drawee - addressee of the order.
3. Payee - person to whom the payment is to
be made.

 Indorser - the payee of an instrument who

transfers it to another by signing it at the back
 Indorsee - person to whom the indorser
negotiates the instrument, who, by such
negotiation, becomes the holder of the
Chapter II. NEGOTIABILITY a) UNCONDITIONAL: Mere recital of the
transaction or consideration for which
the instrument was issued
1 Requisites of Negotiability1 b) However, the fact that the condition
appearing on the instrument has been
fulfilled will not convert it into a
1.1. Must be in Writing and Signed by the
negotiable one.
iii. But an order or promise to pay out of a
1. No person liable on the instrument whose
particular fund is not unconditional
signature does not appear thereon.
a) CONDITIONAL: when reference to the
2. One who signs in a trade or assumed name
fund clearly indicates an intention that
liable to same extent as if he had signed in his
such fund alone should be the source of
own name. (Sec. 18, NIL)
3. Signature of party may be made by duly
authorized agent; no particular form of
Metropolitan Bank v. CA (1991)
appointment necessary. (Sec. 19, NIL)
The treasury warrants in question are not NIs. They
4. "In writing" - includes print; written or typed
are payable from a particular fund, to wit, Fund 501.
5. Signature, binding so long it is intended or
The indication of Fund 501 as the source of the
adopted as the signature of the signer or made
payment to be made on the treasury warrants makes
with his authority.
the order or promise to pay "not unconditional" and
the warrants themselves non-negotiable.
1.2. Must contain an Unconditional Order or
Promise to Pay
1.3. Sum Payable must be Certain
1. Sec. 2, NIL: The sum payable is a sum certain,
even if:
a. With interest;
i. PROMISE TO PAY: should be express on
b. By stated installments;
the face of the instrument
c. By stated installments with acceleration clause;
ii. Word "promise" is not absolutely
d. With exchange, whether at a fixed rate or at
necessary. Any expression equivalent to a
the current rate; or
promise is sufficient.
e. With costs of collection or attorney's fee.
iii. Mere acknowledgment of a debt
2. A sum is certain if from the face of the instrument
it can be mathematically computed.
3. A stipulation to pay a higher rate of interest if the
i. Order - command or imperative direction;
note is not paid or a lower rate if it is paid on or
the instrument, by its nature, demanding
before maturity does not render the instrument
a right.
ii. Words which are equivalent to an order
are sufficient.
1.4. Must be Payable in Money
iii. A mere request or authority to pay
1. Capable of being transformed into money.
does not constitute an order.
2. NON NEGOTIABLE: an instrument which contains
iv. Although the mere use of polite words like
an order or promise to do an act in addition to
"please" does not of itself deprive the
the payment of money
instrument of its characteristics as an
3. BUT If the order or promise gives the holder an
order, its language must clearly indicate a
election to require something to be done in lieu of
demand upon the drawee to pay.
payment of money, an instrument otherwise
negotiable would not be affected thereby. (Sec. 5,
a. The promise or order to pay, to be
unconditional, must be unqualified.
 But if the option is with the maker or person
b. Sec. 3, NIL: “An unqualified order or promise
primarily liable, instrument is NOT negotiable.
to pay is unconditional…though coupled with:
4. Kind of current money does not affect
i. “An indication of a particular fund out of
negotiability. Since the value of the note can by a
which reimbursement is to be made, or a
simple mathematical computation be expressed in
particular account to be debited with the
the value of the lawful money of the latter country
(Incitti v Ferrante, 1933, US Jur)
a) UNCONDITIONAL: Mere indication of
5. Obligations in foreign currency may be discharged
the particular fund out of which
in Philippine currency based on the prevailing rate
reimbursement is to be made, or an
at the time of payment, pursuant to RA 8183 (Asia
indication of a particular account to be
World Recruitment v NLRC, 1999).
debited with the amount
ii. “A statement of the transaction which
1.5. Time of Payment must be Certain
gives rise to the instrument.
 Purpose: Informing the holder of the
instrument of the date when he may enforce
payment thereof.
Suggested Mnemonics: UP MaSCoT’S PaWN: Unconditional
order and Promise, payable in Money, Signed by maker,
 An instrument may be payable:
Certainty as to Time, Sum and Parties, in Writing, include
words of Negotiability. 1. on demand (Sec. 7. NIL)
a. Expressed to be payable on demand, or at  Acceleration by operation of law.
sight, or on presentation;
b. No time for payment is expressed; 5. Provisions extending time of payment
c. Where an instrument is issued, accepted, or o General rule: Negotiability not affected.
indorsed when overdue, it is, as regards the Effect is similar with that of an
person so issuing, accepting, or indorsing it, acceleration clause at the option of the
payable on demand. maker.
 Negotiability not affected, even if the
Demand instruments: Holder may call for holder is given the option to extend
payment any time; maker has an option to time of payment by mere inaction
pay at any time, and the refusal of the holder or indulgence for an indefinite time
to accept payment will terminate the running depending on his will, because with
of interest, if any, but the obligation to pay or without this provision, the holder
the note remains. may always choose to be indulgent.
o Exception: Where a note with a fixed
2. at a fixed time maturity provides that the maker has the
a. Only on the stipulated date, and not before, option to extend time of payment until
may the holder demand its payment. the happening of contingency,
b. Should he fail to demand payment, the instrument NOT negotiable. The time
instrument becomes overdue but remains for payment may never come at all.
valid and negotiable. It is merely converted
to a demand instrument. 1.6. Must be Payable to Order or to Bearer/ Must
contain Words of Negotiability
3. at a determinable future time
a. Determinable future time, if expressed to be  words of negotiability - serve as an
payable (Sec. 4, NIL): expression of consent that the instrument
i. At a fixed period after date of sight; may be transferred.
ii. On or before a fixed or determinable o But the instrument need not follow the
future time specified therein; language of the law; any term which
iii. On or at a fixed period after the clearly indicates an intention to
occurrence of a specified event which is conform with the legal requirements is
certain to happen, though the time of sufficient.
happening be uncertain.
b. If payable upon a contingency, both Salas v CA (1990)
negotiable, and the happening of the event Among others, the instrument in order to be
does not cure the defect. considered negotiable must contain the so-called
"words of negotiability — i.e., must be payable to
4. Effect of acceleration provisions "order" or "bearer"". Under Section 8 of the
o If option (absolute or conditional) to Negotiable Instruments Law, there are only two ways
accelerate maturity is on the maker, by which an instrument may be made payable to
still NEGOTIABLE. order. There must always be a specified person
 Maker may pay earlier than the named in the instrument and the bill or note is to be
date fixed but this option, if paid to the person designated in the instrument or to
exercised, would be a payment in any person to whom he has indorsed and delivered
advance of a legal liability to pay. the same.
It is still payable on the date fixed,
and holder has no right to Caltex v. CA (1992)
enforce payment against the The negotiability or non-negotiability of an instrument
maker before such date. is determined from the face of the instrument itself.
o If option to accelerate is on the holder: The duty of the court in such case is to ascertain, not
 If option can be exercised only after what the parties may have secretly intended but what
the happening of a specified is the meaning of the words they have used.
event/act over which he has no
control (conditional), still Traders Royal Bank v. CA (1997)
NEGOTIABLE. The language of negotiability which characterize a
 If option is unconditional, time of negotiable paper as a credit instrument is its freedom
payment is rendered uncertain, to circulate as a substitute for money. Hence,
NOT negotiable. freedom of negotiability is the touchtone relating to
o Other instances where instrument still the protection of holders in due course, and the
NEGOTIABLE: freedom of negotiability is the foundation for the
 When option given to the holder to protection which the law throws around a holder in
accelerate the maturity of an due course.
installment note upon failure of the
maker to pay any installment when  Postal money order, not negotiable, because
due. it does not contain words of negotiability.
 Acceleration, automatic upon
 Where words "or bearer" printed on a check 2 Provisions Not Affecting Negotiability,
are cancelled by the drawer, instrument not
(Sec. 5)2
 Bearer instrument may be negotiated by
mere delivery. 1. Authorizes sale of collateral securities;
 When instrument is payable to bearer (Sec. 9, 2. Authorizes confession of judgment if instrument
NIL): not paid at maturity;
a. Expressed to be so payable - ex: "I 3. Waives the benefit of any law intended for the
promise to pay the bearer the sum…." advantage or protection of the obligor; or
b. Payable to a person named therein or 4. Gives holder election to require something to be
bearer – ex. "Pay to A or bearer." done in lieu of payment of money. (if in addition to
c. Payable to the order of a fictitious person or money – not NI)
non-existing person, and such fact was  Negotiability affected, when instrument
known to the person making it so payable - contains a promise or order to do any act in
ex: "Pay to John Doe or order." addition to the payment of money.
d. Name of payee does not purport to be the
name of any person - ex: "Pay to cash;" PNB v. Manila Oil Refining (1922)
"Pay to sundries." In this case, the note contains a provision that in case
e. Only or last indorsement is an indorsement that it would not be paid at maturity, the "maker
in blank. authorizes any attorney to appear and confess
judgment thereon."
Ang Tek Lian v. CA (1950) The Court ruled that said judgment note is illegal and
A check drawn payable to the order of cash is a inoperative as such is against public policy. It noted
check payable to bearer, and the bank may pay it to that it is in derogation of the constitutional safeguards
the person presenting it for payment without the (a day in court). Such judgment note can only be
drawer's indorsement. valid if given express legislative sanction.
A check payable to bearer is authority for payment
to the holder. Where the check is in the ordinary In common law, two kinds of judgment by confession:
form and is payable to bearer, so that no  Judgment by cognovit actionem
indorsement is required, a bank, to which it is  Confession relicta verificatione
presented for payment, need not have the holder
identified, and is not negligent in failing to do so. 3. Omissions Not Affecting Negotiability
(Sec. 6)
 Order Instrument, negotiation requires
delivery and indorsement of the transferor.
1. Non-dating of the instrument
» When instrument is payable to order:
2. Non-specification of value given, or that any value
Drawn payable to the order of a specified
had been given
person or to him or his order (Sec. 8, NIL).
3. Non-specification of place where it is drawn or
» Without the words "to order" or "to the
place where it is payable
order of," the instrument is payable only to
4. Bears a seal
the person designated therein and is
5. Designation of particular kind of currency in which
therefore non-negotiable. (Campos, as cited
payment is to be made
in Consolidated Plywood Industries v IFC
Leasing, 1987)
4. Rules of Construction (Sec.17)
1.7. Parties must be designated with Certainty
a. Maker and drawer 1. Sum expressed in words takes precedence over
 Sign the instrument at the lower sum in numbers; BUT where words are so
right-hand corner. ambiguous or uncertain, reference to the figures
b. Payee should be made
 When negotiating, sign at the back; 2. Where interest is stipulated, without specification
same with indorsers. of the starting date, the interest runs from the
a. Drawee date of the instrument, and if undated, from the
 Name usually at the lower left-hand issue thereof
corner, or across the top. 3. An undated instrument is considered dated as of
 If instrument addressed to drawee, time issued.
he must be named or indicated with 4. Written provisions prevail over printed provisions
reasonable certainty. 5. Where the instrument is ambiguous as to whether
 If it is not clear in what capacity the person it is a note or a bill, the holder may treat it as
signed, said person is considered an either at his election
indorser 6. When the capacity of signatory is not clear, he is
to be deemed an indorser

Suggested Mnemonic: WEJy S: Waives, gives holder Election,
confession of Judgment, Sale of Securities
7. “I promise to pay” when signed by two or more
persons is deemed to be jointly and severally
Chapter III. TRANSFER A NI may, instead of being negotiated, ALSO be
assigned or transferred. A non-NI may not be
negotiated; but it may be assigned or transferred,
1. Delivery and Issuance absent an express prohibition against assignment or
transfer written in the face of the instrument.
A. Delivery means transfer of possession of
instrument by the maker or drawer, with intent 3. Indorsement
to transfer title to the payee and recognize him
as holder thereof. (de la Victoria v. Burgos)  The indorsement must be written on the
B. NI incomplete and revocable until delivery for instrument itself or on a paper attached thereto
the purpose of giving effect thereto as (allonge). The signature of the indorser, without
between (Sec. 16, NIL): additional words, is sufficient indorsement.
1. immediate parties (Sec.31, NIL)
2. a remote party other than holder in due  Indorser generally enters into two contracts
course (Implied contracts by Indorser):
C. delivery, to be effectual, must be made by or 1. sale or transfer of instrument
under the authority of the party making / 2. to pay instrument in case of default of maker
drawing / accepting/indorsing
 Indorsement must be of entire instrument (can’t
D. delivery may be shown to have been
be indorsement of only part of amount payable,
conditional, or for a special purpose only, and
nor can it be to two or more indorsees severally.
not for the purpose of transferring the property
But okay to indorse residue of partially paid
in the instrument
instrument) (Sec. 32, NIL)
1. Where the instrument is no longer in the
3.1. Kinds of Indorsements (Sec. 33)
possession of a party whose signature
appears thereon, a valid and intentional
1. as to manner of future method of
delivery by him is presumed until the
negotiation(Sec. 35, NIL):
contrary is proved
2. if it is in the hands of a HDC, the
a. special – specifies the person to whom/to
presumption is conclusive
whose order the instrument is to be payable;
3. Camposes: Should an undelivered
indorsement of such indorsee is necessary to
instrument come into the hands of a holder
further negotiation.
in due course, the maker is liable to him
 A special indorser is liable to all
regardless of any proof of the lack of valid
subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable only
1. Date is not an essential element of
to those who take title through his
indorsement (Sec 40, NIL)
2. An undated instrument is considered to be
b. blank – specifies no indorsee, instrument so
dated as of the time it was issued
indorsed is payable to bearer, and may be
negotiated by delivery
GEMPESAW v CA (1993)  a person who negotiates by mere
delivery is liable only to his immediate
Every contract on a negotiable instrument is transferee.
incomplete and revocable until delivery of the  the holder may convert a blank
instrument to the payee for the purpose of giving indorsement into a special indorsement
effect thereto. The first delivery of the instrument, by writing over the signature of the
complete in form, to the payee who takes it as a indorser in blank any contract consistent
holder, is called issuance of the instrument. Without with the character of the indorsement
the initial delivery of the instrument from the drawer  An order instrument may be converted into a
of the check to the payee, there can be no valid and bearer instrument by means of a blank
binding contract and no liability on the instrument. indorsement.
 But a bearer instrument remains as such
2. Negotiation whether it has been indorsed specially or in
blank. It is the liability of the indorser which
is affected.
 When an instrument is transferred from one
person to another as to constitute the
transferee the holder thereof. 2. as to kind of title transferred:
 If payable to BEARER, negotiated by delivery; if
payable to ORDER, negotiated by indorsement a. restrictive – such indorsement either:
of holder + delivery (Sec.30, NIL) 1) prohibits further negotiation of
SESBREÑO v. CA (1993) o In this kind of restrictive indorsement,
the prohibition to transfer or negotiate
must be written in express words 5. other classifications:
at the back of the instrument, so
that any subsequent party may be a. Absolute – One by which the indorser binds
forewarned that ceases to be himself to pay, upon no other condition than
negotiable. However, the restrictive the failure of prior parties to do so, and of
indorsee acquires the right to receive due notice to him of such failure
payment and bring any action b. Joint - Where instrument payable to the order
thereon as any indorser, but he can of two or more payees or indorsees not
no longer transfer his rights as such partners, all must indorse, unless the one
indorsee where the form of the indorsing has authority to endorse for the
indorsement does not authorize him others (Sec. 41, NIL)
to do so. (Gempesaw v CA 1993) c. Irregular - Where a person, not otherwise a
party to the instrument, places thereon his
2) constitutes indorsee as agent of signature in blank before delivery, he is liable
indorser, or as indorser
3) vests title in indorsee in trust for
o rights of indorsee in restrictive 3.2. Other Rules on Indorsement
a) receive payment of inst. 1. Indorsement by Collecting Bank - holder
b) Bring any action thereon deposits check with a bank other than the
that indorser could bring drawee, would in effect be negotiating the check
c) Transfer his rights as such to such bank, since he would have to indorse the
indorsee, but all check before the bank will accept it for deposit.
subsequent indorsees In most cases, the bank is acting as a mere
acquire only title of first collecting agent.
indorsee under restrictive
indorsement 2. Negotiation by Joint or Alternative Payees or
b. non-restrictive Indorsees - all must indorse, unless the one
indorsing has authority to endorse for the others
3. as to kind of liability assumed by indorser
a. qualified 3. Unindorsed instruments – Sec 49, NIL Where
 constitutes indorser as mere assignor of holder of instrument transfers for value without
title (eg. “without recourse”) (Sec. 38, indorsing, transfer vests in transferee:
 But this does not mean that the a. such title as transferor had therein, subject to
transferee only has the rights of an defenses and equities available to prior
assignee. Transfer remains a parties
negotiation and transferee can still be a o ex: transferee can sue the transferor,
holder capable of acquiring a title free though he does not thereby automatically
from defenses of prior parties. become a HDC (Furbee v. Furbee,
 It relieves the qualified indorser of his 1936)
liability to pay the instrument should b. right to have indorsement of transferor, after
the maker be unable to pay at maturity. which, he becomes a holder or possibly a
b. unqualified HDC
o For purposes of determining whether or
not the transferee becomes a HDC after
4. as to presence/absence of express limitations securing the transferor’s indorsement,
put by indorser upon primary obligor’s privileges note that Sec. 52 must be met at the
of paying the holder: time of the negotiation, i.e., when
indorsement is actually made.
a. conditional – additional condition annexed
to indorser’s liability. (Sec. 39, NIL) BPI vs CA (2007)

o Where an indorsement is conditional, a The transaction [in Sec. 49, NIL] is an equitable
party required to pay the instrument assignment and the transferee acquires the
may disregard the condition, and make instrument subject to defenses and equities available
payment to the indorsee or his among prior parties. Thus, if the transferor had legal
transferee, whether condition has been title, the transferee acquires such title and, in
fulfilled or not addition, the right to have the indorsement of the
o Any person to whom an instrument so transferor and also the right, as holder of the legal
indorsed is negotiated will hold the title, to maintain legal action against the maker or
same/proceeds subject to rights of acceptor or other party liable to the transferor. The
person indorsing conditionally underlying premise of this provision, however, is that
a valid transfer of ownership of the negotiable
b. unconditional instrument in question has taken place.
Transferees in this situation do not enjoy the
presumption of ownership in favor of holders since
they are neither payees nor indorsees of such
instruments… Thus, something more than mere
possession by persons who are not payees or
indorsers of the instrument is necessary to authorize
payment to them in the absence of any other facts
from which the authority to receive payment may be

4. Cancellation of Indorsements - Holder may

strike out indorsements not necessary to his
title. The endorser whose endorsement was
struck out, and all endorsers subsequent to him,
are relieved from liability on the instrument
(Sec. 48, NIL)

5. Indorsement by Agent - agent should make it

plain that he is signing in behalf of a principal
otherwise he may be made personally liable
(Sec 20, NIL)

o The Negotiable Instruments Law provides

that where any person is under obligation to
indorse in a representative capacity, he
may indorse in such terms as to negative
personal liability. An agent, when so
signing, should indicate that he is merely
signing in behalf of the principal and must
disclose the name of his principal; otherwise
he shall be held personally liable.
(FRANCISCO v CA, 1990)

6. Presumption as to Indorsement
o Time (Sec.45, NIL) - Every negotiation
deemed prima facie effected before
instrument was overdue, except where
indorsement bears date after maturity of
the instrument.
o Place (Sec.46, NIL) - Every indorsement is
presumed prima facie made at place where
instrument is dated
o Where instrument drawn or indorsed to
person as cashier (Sec.42, NIL) - deemed
prima facie to be payable to the bank or
corporation of which he is such officer; may
be negotiated by either the indorsement (1)
of the bank or corporation or (2) of the

7. Continuation of Negotiable Character - An

NI, although overdue, retains its negotiability
unless it has been paid or restrictively indorsed
to prevent further negotiation (Sec. 47, NIL)

8. Indorsement of bearer inst.

o Where an instrument payable to bearer is
indorsed specially, it may nevertheless be
further negotiated by delivery
o Person indorsing specially liable as indorser
to only such holders as make title through
his indorsement
Chapter IV. HOLDER IN DUE i.
The date;
The sum payable, either for principal
COURSE or interest;
iii. The time or place of payment;
iv. The number or the relations of the
1. Holder (Sec. 191) parties;
v. The medium or currency in which
payment is to be made;
 Definition: Payee or indorsee of a bill or
vi. Or which adds a place of payment
note who is in possession of it, or the
where no place of payment is
bearer thereof.
1.sue thereon in his own name
2.payment to him in due course discharges 3. Rights of HDC of instrument that has been
instrument materially altered
o enforce payment thereof according to its
2. Three Kinds of DUE COURSE Holding original tenor IF not a party to the
alteration. (Sec. 124, NIL)
a. HDC under Sec 52
b. HDC under Sec 58 : A holder who derives 3.2. That he became the holder of it before it
title to the instrument through a HDC has was overdue and without notice that it had been
all the rights of the latter even though he previously dishonored, if such was the fact
himself satisfies none of the requirements 1. “OVERDUE”
of due course holding (Campos & Campos) a. The ff. cannot be HDCs: (Sec. 53, NIL)
c. HDC under Sec 59 (presumption): every i. A holder who became such after the
holder is deemed prima facie to be a holder date of maturity of the instrument
in due course (instrument is overdue);
ii. In case of demand instruments, a
holder who negotiates it after an
3. Requisites to become a holder in due unreasonable length of time after its
course (Sec.52)3 issue
b. Instruments with fixed maturity but
SALAS v. CA (1990) subject to acceleration: ultimate date of
maturity is the date of maturity for the
The indorsee was a HDC, having taken the purpose of determining whether a
instrument under the following conditions: (1) it is purchaser is a HDC
complete and regular upon its face; (2) it became c. Undated instruments: Prima facie
the holder thereof before it was overdue; (3) it took presumption that it was negotiated
the same in good faith and for value; and (4) when before it was overdue (Sec 45)
it was negotiated to the indorsee, the latter had no d. NOTE: An overdue instrument is still
notice of any infirmity in the instrument or defect in negotiable, but it is subject to the
the title of the previous indorser. defense existing at the time of the
HDC is one who has taken the instrument under the
following conditions: 2. DISHONOR
a. Non-acceptance
3.1. That it is complete and regular upon its i. Occurs when drawee refuses to
face accept the order of the drawer as
1. COMPLETE stated in the bill
o An instrument is complete if it contains ii. Applicable only to bills of exchange
all the requisites for making it a iii. May occur before the date of
negotiable one, even if it may have maturity of the bill
blanks as to non-essentials. b. Non-payment
o It is incomplete when it is wanting in i. Occurs when the party primarily
any material particular or particular liable fails to pay at the date of
proper to be inserted in a NI without maturity
w/c the same will not be complete. ii. Date of Maturity
1) “payable after sight”—date of
2. Material Particulars presentment
o What are material particulars? A change 2) Payable on the occurrence of a
in the ff. is considered a material specified event—date is fixed by
alteration (Sec. 125, NIL): happening of event
3. An instrument is not invalid for the reason
only that it is ANTE-DATED OR POST-DATED
suggested mnemonics: GROIN: Good faith and value,
complete and Regular, not Overdue, no notice of Infirmity at
provided not done for an illegal or fraudulent
time of Negotiation; or GROCI: Good faith and value, Regular, purpose. The person to whom an instrument
not Overdue, Complete, no Infirmity,
so dated is delivered acquires the title The general rule as to the application
thereto as of the date of delivery. (Sec.12, of payments, there being no special
NIL) facts to interfere, is that the first
payments apply to the oldest debts.
3.3. That he took it in good faith AND for value: The first debits are to be charged
1. HOLDER FOR VALUE - (a) Where value against the first credits. It follows
has at any time been given for the therefore, upon the facts as found,
instrument, the holder is deemed a HFV in that the bank was a bona fide HFV
respect to all parties who become such prior without notice, and, in accordance
to that time (Sec.26, NIL) and (b) Where with the stipulation, judgment should
the holder has a lien on the instrument, he be entered for the plaintiff upon the
is deemed a HFV to the extent of his lien note. Judgment reversed.
(Sec.27, NIL). ii. Bank credit as value - When the
a. PRESUMPTION – Every NI is deemed holder of a check deposits it with his
prima facie issued for valuable bank (assuming it is not the drawee
consideration; and every person whose bank) and the bank credits it to his
signature appears thereon to have account, is the bank at this stage a
become a party thereto for value (Sec. HFV?
24, NIL) o Majority View  first money in
i. In actions based upon a negotiable is presumed to be the first
instrument, it is unnecessary to money paid out
aver or prove consideration, for o Minority View  as long as the
consideration is imported and balance in the depositor’s
presumed from the fact that it is a account equals or exceeds the
negotiable instrument. The amount of the instrument
presumption exists whether the deposited, the latter cannot be
words "value received" appear on considered as withdrawn for the
the instrument or not (Ong v purpose of treating the bank as a
People, 2000) HFV.
ii. BAYANI VS. PEOPLE (2004) o (So far, there has been no
1) Under Section 28 of the decision by the SC on this issue.)
Negotiable Instruments Law
(NIL), absence or failure of
consideration is a matter of 2. GOOD FAITH
defense only as against any a. Holder must have taken the instrument in
person not a holder in due good faith and that at the time it was
course. negotiated to him he had no notice of any
2) Moreover, Section 24 of the infirmity in the instrument or defect in
NIL provides the presumption the title of the person negotiating it.
of consideration. Such b. NOT a Holder in GOOD FAITH
presumption cannot be i. Holder acted in bad faith
overcome by the petitioner’s ii. Holder had NOTICE OF DEFECT
bare denial of receipt of the 1) ACTUAL KNOWLEDGE
[consideration].  SEC 56. WHAT
3) Only evidence of the clearest CONSTITUTES NOTICE
and most convincing kind will OF DEFECT—To
suffice for that purpose. constitute notice of an
(Travel-On Inc v CA, 1992) infirmity in the
instrument or defect in
b. VALUE - any consideration sufficient to the title of the person
support a simple contract. An negotiating the same,
antecedent or pre-existing debt the person to whom it is
constitutes value, whether the negotiated must have
instrument is payable on demand or at had actual knowledge of
a future time. (Sec.25, NIL) the infirmity or defect,
or knowledge of such
i. MERCHANTS’ NATIONAL BANK facts that his action in
OF ST. PAUL v. STA. MARIA taking the instrument
SUGAR CO. (1914) amounted to bad faith.
The mere discounting of the note  It is therefore sufficient
and placing the amount of said that the buyer of a note
discount to the credit of the HFV had notice or knowledge
would not then have constituted a that the note was in
transfer for value. But if the sum some way tainted with
had subsequently been checked fraud. It is not necessary
out, then value would have passed. that he should know the
particulars of the fraud.
a. BAD FAITH - does not A check with 2 parallel lines in the upper left hand
require actual corner means that it could only be deposited and may
knowledge of the exact not be converted to cash. Consequently, such
fraud that was circumstance should put the payee on inquiry and
practiced; knowledge upon him devolves the duty to ascertain the holders’
that there was title to the check or the nature of his possession.
something wrong Failing in this respect, the payee is declared guilty of
about the assignor’s gross negligence amounting to legal absence of good
acquisition of title is faith and as such the consensus of authority is to the
sufficient. effect that the holder of the check is not a holder in
b. The burden is upon the good faith.
defendant to show that
notwithstanding the YANG v. CA (2003)
CIRCUMSTANCES, it … in accepting the cross checks and paying cash for
acquired the check in them, despite the warning of the crossing, the
actual good faith. (De subsequent holder could not be considered in good
Ocampo & Co. v. faith and thus, not a holder in due course.
o Purchase of an
instrument at a iii. FINANCING COMPANY
DISCOUNT does not, 1) Consolidated Plywood v. IFC:
of itself, constitute bad A FINANCING COMPANY
faith. However, if the that is the indorsee of a note
instrument is issued by a buyer payable to
pruchased at a heavy the seller of goods is NOT a
discount, this fact holder in good faith as to
together with other the buyer. In case the goods
facts, may be taken sold turn out to be defective,
into account in it cannot recover the
deciding the issue of purchase price of the goods
purchase in good faith. from the buyer.
(Ham v. Meritt) 2) In installment sales, the
buyer usually issues a note
VICENTE R. DE OCAMPO & CO. v. GATCHALIAN, payable to the seller to cover
ET. AL. (1961) the purchase price.
3) Many times, pursuant to a
In order to show that the defendant had knowledge previous arrangement with
of such facts that his action in taking the instrument the seller, a finance
amounted to bad faith, it is not necessary to prove company pays the full price
that the defendant knew the exact fraud that was of the property sold and the
practiced upon the plaintiff by the defendant’s note is indorsed to it by the
assignor, it being sufficient to show that the seller, subrogating it to the
defendant had notice that there was right to collect the price from
something wrong about the assignor’s the buyer.
acquisition of title, although he did not have 4) RULE  In such cases, the
notice of the particular wrong that was committed. tendency of the courts is to
…The fact is that it acquired possession of the protect the buyer against the
instrument under circumstances that should have finance company in the
put it to inquiry as to the title of the holder who event that the goods sold
negotiated the check to it. The burden was, turn out to be defective. The
therefore, placed upon it to show that finance company will be
notwithstanding the suspicious circumstances, it subject to the defense of
acquired the check in actual good faith. failure of consideration and
One line of cases had adopted the test of the cannot recover the purchase
reasonably prudent man and the other that of actual price from the buyer. NOTE:
good faith. It would seem that it was the intent of Consolidated Plywood v. IFC
the Negotiable Instruments Act to harmonize this  rule applied; Salas v. CA
disagreement by adopting the latter test.  rule not applied
Negligence on the part of the plaintiff, or suspicious
circumstances sufficient to put a prudent man on
inquiry, will not of themselves prevent a recovery, 3.4. That at time it was negotiated to him, he
but are to be considered merely as evidence bearing had no notice of :
on the question of bad faith. o any infirmity in instrument
o any defect in title of person subsequent holder of the rights of a HDC. If
negotiating; he fulfills all the requisites in Sec. 52 then he
1. title DEFECTIVE when (Sec. 55, NIL): is immune from all the personal defense.
a. instrument / signature obtained by C. A restrictive indorsement which prohibits
fraud, duress, force or fear or other further negotiation will not prevent the
unlawful means OR for an illegal indorsee from being a HDC. BUT, if he
consideration; or further indorses the instrument, then the
b. instrument is negotiated in breach of subsequent indorsee will not be a due course
faith, or fraudulent circumstances holder.

2. NOTICE of infirmity or defect – 5. Who is Deemed HDC (burden of proof)

a. actual knowledge of the infirmity or
defect OR knowledge of such facts that
his action in taking the instrument
amounted to bad faith (Sec.56, NIL) A. General Rule: Prima facie presumption in
b. Notice to an AGENT is chargeable favor of holder
against the principal. B. Exception: Burden is reversed (burden on
c. INSUFFICIENT NOTICE holder to prove that he or some person under
i. CONSTRUCTIVE NOTICE (ex. whom he claims acquired title as HDC) when
notice of defenses disclosed by it is shown that the title of any person who
public records, doctrine of lis has negotiated instrument was defective
pendens) is insufficient to charge a C. Exception to exception: There will be no
purchaser of a NI with notice. reversal if the party being made liable
 Just as a purchaser of a became bound prior to the acquisition of such
negotiable instrument is defective title (i.e., where defense is not his
not put on inquiry, neither own) – presumption in favor of holder
is he charged with notice of
defenses or equities 6. Rights of Holder in Due Course
disclosed by public records,
nor is he affected by the 6.1. Under the NIL4
doctrine of lis pendens. 1. to sue on the instrument in his own
However, notice to an name (Sec. 51, NIL)
agent is chargeable against 2. to receive payment on the instrument –
the principal. discharges the instrument (Sec. 51,
ii. Notice of an ACCOMODATION NIL)
PARTY is not notice of a defect. 3. holds instrument free of any defect of
 Thus, an accomodation title of prior parties (Sec. 57, NIL)
party (one who has signed 4. free from defenses available to prior
the instrument as maker, parties among themselves (Sec.57, NIL)
drawer, acceptor or 5. may enforce payment of instrument for
endorser, without full amount, against all parties liable
receiveing value therefor, (Sec.57, NIL)
and for the purpose of
lending his name to some 6.2. JUR: BPI v. ALFRED BERWIN & CO. Only
other person) is liable on a HDC may enforce payment on the PN. In
the instrument, CAB, it is not clear whether A (the payee) is still
notwithstanding the fact the HDC since D (the maker) believed that A may
that the holder knew him have negotiated it. Thus, to compel D to pay
to be an accomodation would expose him to pay a second time to the
party. HDC (in case A was no longer one).
d. RIGHT of a transferee who receives
NOTICE of any infirmity or defect 6.3. DISADVANTAGE of being a NON HDC:
BEFORE he has PAID THE FULL o The Negotiable Instruments Law does not
amount for the instrument provide that a holder not in due course
i. He will be deemed a HDC only to can not recover on the instrument. The
the extent of the amount therefore disadvantage of … not being a holder in
paid by him (Sec.54, NIL) due course is that the negotiable
instrument is subject to defenses as if it
4. Effect of Qualified, Conditional and were non-negotiable. One such defense is
Restrictive Indorsements absence or failure of consideration.
(Atrium Mgt v de Leon, 2001)
A. The status of a holder as a HDC is not
affected by his taking under a qualified
B. A conditional indorsement does not 4
Suggested Mnemonics: REFS: Receive and Enforce payment,
deprive the conditional indorsee or Free from any defect of title and defenses, Sue
7. Rights of Purchaser from Holder in Due
Course (Sec.58)

7.1. General Rule: In the hands of any holder

other than a HDC, NI is subject to same
defenses as if it were non-negotiable.

7.2. Exception: A holder who derives title

through a HDC and who is NOT himself A PARTY
TO ANY FRAUD or illegality has all rights of such
former holder in respect to all parties prior to
the latter EVEN though he himself does not
satisfy Sec.52

8. Presumption in Favor of Due Course


A. Every holder is deemed prima facie to be a

holder in due course;
1. BURDEN SHIFTS when it is shown that
the title of any person who has
negotiated the instrument was
defective. Holder MUST PROVE that he
or some person under whom he claims
acquired the title as a holder in due
2. But the last mentioned rule does not
apply in favor of a party who became
bound on the instrument prior to the
acquisition of such defective title.
(Sec.59., NIL)
B. However, this presumption arises only in
favor of a person who is a holder as defined
in Section 191 of the Negotiable
Instruments Law, meaning a “payee or
indorsee of a bill or note, who is in
possession of it, or the bearer thereof.”
(Yang v CA, 2003)
Chapter V. DEFENSES & EQUITIES 3.2. Incomplete, Delivered (sec.14)

1. This is a personal defense only because

1. Defenses in General provision states that if any instrument so
completed is negotiated to a holder in
due course, it is valid and effectual for
1.1. REAL defense – attaches to instrument on
all purposes
the principle that there was no contract at all;
2. 2 Kinds of Writings:
available against ALL holders including holders
i. Where instrument is wanting in any
in due course. They are those which attach to
material particular: person in
the instrument itself and generally, disclose an
possession has prima facie authority
absence of one of the essential elements of a
to complete it by filing up blanks
1.2. PERSONAL defense – grows out of the
ii. Signature on blank paper
agreement or conduct of a particular person in
delivered by person making the
regard to the instrument which renders it
signature IN ORDER that the paper
inequitable FOR HIM, though holding the legal
may be CONVERTED into a NI 
title, to enforce it against the party sought to be
operates as prima facie authority to
made liable; not available against a HDC.can be
fill up as such for any amount
raised only against holders not on due course.
3. The authority to fill up is limited by the
Here, the true contract appears , but for some
reason , the defendant is excused from the
a. When completed, it may be enforced
obligation to perform.
upon the parties thereto only if it was
1.3. Equities or Claims of Ownership are of
filled strictly in accordance with the
2 Kinds
authority given
1. Legal – one who has legal title to the
b. The filling up must be within a
instrument may recover possession
reasonable time
thereof even from holder in due course
2. Equitable – may only recover from a
NOTE: If the signature on a paper is
holder not in due course
given only for autograph purposes and
the same is converted into a NI, this
2. Real Defenses will amount to forgery, constituting
thus a valid defense even against a
2.1. Incapacity: REAL defense but available HDC
only to the incapacitated party (ex. minor or
corporation); the indorsement or assignment of 4. This provision contemplates delivered
the instrument by a corp. or by an infant passes instruments, so the person in possesion
the property therein, notwithstanding that from cannot be a thief or a finder but a person
want of capacity, the corp. or infant may incur in lawful possession- one to whom the
no liability thereon. (Sec.22, NIL) instrument has been delivered.
5. In order that any such instrument, when
completed, may be enforced against any
2.2. Incomplete, Undelivered Instrument person who became a party thereto prior
1. Instrument will not, if completed and to its completion:
negotiated without authority, be a valid a. must be filled up strictly in
contract in the hands of ANY holder, as accordance w/ AUTHORITY given
against any person whose signature b. within a REASONABLE TIME – in
was placed thereon before delivery. determining what is reasonable time,
(Sec. 15, NIL) regard is to be had to the (1) nature
2. Who may be estopped from raising the of the instrument, (2) usage of trade
real defense under Sec 15? A drawee or business (if any) with respect to
bank whose negligent custody of the such instruments, and 3) the facts of
checks, after partial execution, the particular case
contributed to its escape 6. BUT if negotiated to HDC, may enforce it
as if it had been filled up properly
7. What details may be filled up?
3. Personal Defenses
a. Amount, as to a signed blank paper
b. Date (Sec 13 “… The insertion of a
3.1. Complete, Undelivered Instrument wrong date does not void the
a. CONCLUSIVE presumption of a valid instrument in the hands of a
delivery – where the instrument is in the subsequent holder in due course…”)
hands of a HDC c. Place of payment
b. PRIMA FACIE presumption of a valid d. Name of payee
delivery – where the instrument is no longer
in the possession of a party whose sig 3.3. Lack of Consideration(Sec. 28)
appears thereon (Sec. 16, NIL)
1. ABSENCE or failure of consideration is a iii. Enforce payment thereof
matter of defense as against any person not
a HDC. 2. PERSONAL if the party against whom it is
2. PARTIAL FAILURE of consideration is a sought to enforce such right is
defense pro tanto whether the failure is an PRECLUDED from setting up forgery/want
ascertained and liquidated amount or of authority;
otherwise .
a. Who are PRECLUDED?
3.4. Illegality i. parties who make certain
1. In general, a PERSONAL defense even if warranties, like a general
CC1409 provides that a contract with an indorser or acceptor after forgery
illegal cause is void. (Sec. 62, NIL)
2. REAL when the law expressly provides for ii. estopped / negligent parties
illegality as a real defense (Statutory iii. parties who ratify (BUT there are
declaration of illegality conflicting views whether
“precluded” includes ratification)
b. One view holds that a forged
Maker cannot be relieved from the obligation of signature cannot be ratified because
paying the holder the amount of the note alleged ratification involves the relation of
to have been executed for an unlawful agency and a forger does not assume
consideration. (Illegality is personal, so defense to act for another.
only against a holder not in due course)
The holder paid the value of the note to its former 3. ACCEPTANCE AND PAYMENT of a forged
holder. He did so without being aware of the fact instrument
that the note had an unlawful origin. He accepted When there is acceptance and payment
note in good faith, believing the note was valid of a forged instrument, the rights and
and absolutely good. The maker even assured the liabilities of the parties depend on
holder before the purchase that the note was good whether the forgery pertains to the
and that he would pay it at a discount . drawer/maker’s signature or merely
of an indorsement.
3.5. Duress a. Drawer/Maker’s signature
1. In general, PERSONAL defense. i. PRICE v NEAL, The drawee who
2. REAL if duress so serious as to give had paid an accepted bill as well
rise to a real defense for lack of as a non-accepted bill, each of
contractual intent which was forged, could NOT
3. CAMPOS: There may be cases where recover the money paid out on
the duress employed is so serious that the bill. The neglect was on the
it will give rise to a real defense part of the drawee.
because of the lack of contractual intent
. Although the signer may know what PNB v QUIMPO (1988)
he is signing, there may be wanting the
intent or willingness to be bound. Then A bank is bound to know the signatures of its
it becomes a real defense. depositors. If bank pays a forged check it must be
considered as making the payment out of its own
4. Sometimes Real, Sometimes Personal funds and cannot charge the account of the
depositor whose signature was forged.
4.1. Forgery (Sec. 23): made without SAMSUNG CONSTRUCTION CO., INC. VS. FAR
authority of person whose signature it purports EAST BANK AND TRUST CO. AND CA (2004)
to be
Consequently, if a bank pays a forged check, it
1. In general, a REAL defense: … must be considered as paying out of its funds and
Effect cannot charge the amount so paid to the account of
the depositor. A bank is liable, irrespective of its
a. signature is wholly inoperative good faith, in paying a forged check.
b. no right to retain instrument, or
give discharge, or enforce payment ii. Extensions Of The Price v Neal
against any party thereto, can be Doctrine: The bar to recovery
acquired through or under such (Price v Neal doctrine) is
signature (unless forged signature extended to overdrafts and stop
unnecessary to holder’s title) payment orders
c. No subsequent party can acquire
the right against any party thereto 1) Overdraft occurs when a
(prior to the forgery) to: check is issued for an
i. Retain the instrument amount more than what the
ii. Give a discharge there for drawer has in deposit with
the drawee bank. RULE: authority.” In the instant case, it is the exception
The drawee who pays the that applies. Petitioner is precluded from setting up
holder of the bill cannot the forgery, assuming there is forgery, due to his
recover from the holder own negligence in entrusting to his secretary his
what he paid under credit cards and checkbook including the verification
mistake of his statements of account.
2) Stop Payment Order is
one issued by the drawer SAMSUNG CONSTRUCTION CO., INC. VS. FAR
of a check countermanding EAST BANK AND TRUST CO. AND CA (2004)
his first order to the
drawee bank to pay the The general rule remains that the drawee who has
check. RULE: The drawee paid upon the forged signature bears the loss.
bank is bound to follow the The exception to this rule arises only when
order, provided it is negligence can be traced on the part of the drawer
received prior to its whose signature was forged, and the need arises to
certification or payment of weigh the comparative negligence between the
the check drawer and the drawee to determine who should
3) SOME EXCEPTIONS: bear the burden of loss.
o If the payment to holder is Still, even if the bank performed with utmost
a legitimate debt of the diligence, the drawer whose signature was forged
drawer which the holder in may still recover from the bank as long as he or she
due course could have is not precluded from setting up the defense of
recovered from the drawer forgery. After all, Section 23 of the Negotiable
anyway. Instruments Law plainly states that no right to
o If the stop order comes enforce the payment of a check can arise out of a
after the bank has certified forged signature. Since the drawer, Samsung
or accepted the check, the Construction, is not precluded by negligence from
bank is under the legal setting up the forgery, the general rule should
duty to pay the holder and apply.
will not be liable to the
drawer for doing so. b. Indorsement:
i. When it is the signature of the
iii. Effect Of Negligence Of indorser that is forged, the
Depositor - If proximate cause drawee and drawer CAN recover
of loss, the bank (drawee) is vs holder
not liable 1) The drawee can recover the
amount paid by him in cases
1) It is the duty of the where only an indorsement
depositor/drawer to has been forged . This is
carefully examine bank’s because drawee makes no
statements, cancelled warranty as to the
checks, his check stubs, genuineness of any
and other pertinent records indorsement.
within a reasonable time 2) Generally, the drawee may
and to report any errors only recover from the holder.
without unreasonable Should he fail to do so(for
delay. instance due to insolvency)
2) If a drawer/depositor’s he cannot recoup his loss by
negligence and delay charging it to the drawer’s
should cause a bank to account
honor a forged check, 3) Although a depositor/drawer
drawer cannot later owes a duty to his drawee
complain should bank bank to examine his
refuse to recredit his cancelled checks, he has no
account. similar duty as to forged
ILUSORIO vs CA (2002) 4) The drawer, as soon as he
comes to know of the a
True, it is a rule that when a signature is forged or forged indorsement should
made without the authority of the person whose promptly notify the drawee
signature it purports to be, the check is wholly bank
However, the rule does provide for an exception, REPUBLIC v EBRADA
namely: “unless the party against whom it is
sought to enforce such right is precluded Drawee can recover. It is not supposed to be the
from setting up the forgery or want of duty of the drawee to ascertain whether the
signatures of the payee or indorsers are genuine indorsements considering
or not. that the act of presenting the
check for payment to the
ii. When drawee may recover drawee is an assertion that
from DRAWER the party making the
presentment had done its
1) Where the instrument is duty to ascertain the
originally a bearer genuineness of the
instrument, because the indorsements. (BPI v CA,
indorsement can be 1992)
disregarded as being 3) In presenting the checks for
unnecessary to the holder’s clearing the collecting agent,
title made an express guarantee
2) Indorsement forged by an on the validity of “all the
employee or agent of the prior endorsements”. ( BDO
drawer v Equitable bank)
3) If due to the drawer’s 4) The drawee bank is not
negligence/delay, the similarly situated as the
forgery is not discovered collecting bank because the
until it is too late for the former makes no warranty
bank to recover from the as to the genuineness of any
holder or the forger indorsement. The drawee
bank’s duty is but to verify
GEMPESAW v CA, PBC the genuineness of the
drawer’s signature and not
While there is no duty resting on the drawer to look of the indorsement because
for forged indorsements on his cancelled checks, a the drawer is its client.
depositor is under a duty to set up an 5) Where the negligence of the
accounting system and business procedure as drawee bank is the
are reasonably calculated to prevent or render proximate cause of the
the forgery of indorsements difficult, collecting bank’s payment of
particularly by the depositor’s own employees. a check with a forged
As a rule the drawee bank who has paid the check indorsement, the drawee
with forged indorsement, cannot charge the bank may be held liable to
drawer’s account for the amount of the said check. the collecting bank .
An exception to this rule is where the drawer is 6) When both are guilty of
guilty of such negligence which causes the bank to negligence, the degree of
honor the check. negligence of each will be
weighed in considering the
iii. When drawee may not amount of loss which each
recover from holder should bear. (refer to BPI v
CA, 1992)
1) Where the instrument is
originally a bearer GREAT EASTERN LIFE v HONGKONG &
instrument , because the SHANGHAI BANK (1922)
indorsement can be
disregarded as being “Where a check is drawn payable to the order of one
unnecessary to the holder’s person and is presented to a bank by another and
title purports upon its face to have been duly indorsed by
2) If drawee fails to act the payee of the check , it is the duty of the bank to
promptly , if he delays in know that the check was duly indorsed by the original
informing the holder whom payee and where the bank pays the amount of the
he paid check to a 3rd person , who has forged the signature
of the payee , the loss falls upon the bank who cashed
iv. Between Drawee Bank and the check , and its remedy is against the person to
Collecting Bank whom it paid the money.”
1) Collecting bank only liable
for forged indorsements BPI v CA (1992)
and not forgeries of the
drawer or maker’s Section 23 of the NIL has 2 parts. The first part states
signature. (PNB v CA, the general rule that a forged signature is wholly
1968) inoperative and payment made through or under such
2) The collecting bank or last signature is ineffectual. The second part admits of
indorser generally suffers exception. In this jurisdiction, the negligence of the
the loss because it has the party invoking the forgery is an exception to the
duty to ascertain the general rule.
genuineness of all prior
Both drawee and collecting bank were vii. other change/addition altering
negligent in the selection and supervision of their effect of
employees resulting in the encashment of the viii. instrument in any respect
checks by the impostor. Both banks were not able to
overcome the presumption of negligence in the b. Jurispridence
selection and supervision of their employees i. An alteration is said to be
Considering the comparative negligence of the material if it changes the effect
parties, the demands of substantive justice are of the instrument. It means that
satisfied by allocating the loss and the costs on a an unauthorized change in an
60-40 ratio. instrument that purports to
modify in any respect the
ASSOCIATED BANK v CA (1996) obligation of a party or an
unauthorized addition of words
By reason of the statutory warranty of a general or numbers or other change to
indorser in Section 66 of the Negotiable Instruments an incomplete instrument
Law, a collecting bank which indorses a check relating to the obligation of a
bearing a forged indorsement and presents it to the party. (PNB v CA, 1996)
drawee bank guarantees all prior indorsements, ii. A material alteration is one which
including the forged indorsement. It warrants that changes the items which are
the instrument is genuine, and that it is valid and required to be stated under
subsisting at the time of his indorsement. Because Section 1 of the Negotiable
the indorsement is a forgery, the collecting bank Instruments Law. (Metrobank v
commits a breach of this warranty and will be Cabilzo, 2006)
accountable to the drawee bank. This liability
scheme operates without regard to fault on the part 3. IMMATERIAL ALTERATION
of the collecting/presenting bank. Even if the latter a. Campos: Any other alteration would
bank was not negligent, it would still be liable to the be non-material and would not affect
drawee bank because of its indorsement. the liability of any prior party . Note
that #7 is a catch-all provision such
PCIB v. CA (2001) that sec 125 may still have broad
… A bank which cashes a check drawn upon another b. Alterations of the serial numbers do
bank, without requiring proof as to the identity of not constitute material alterations on
persons presenting it, or making inquiries with the checks... [It] is not an essential
regard to them, cannot hold the proceeds against requisite for negotiability under
the drawee when the proceeds of the checks were Section 1 of the Negotiable
afterwards diverted to the hands of a third party. In Instruments Law. The
such cases the drawee bank has a right to believe aforementioned alteration did not
that the cashing bank (or the collecting bank) had, change the relations between the
by the usual proper investigation, satisfied itself of parties. The name of the drawer and
the authenticity of the negotiation of the checks. the drawee were not altered. The
Thus, one who encashed a check which had been intended payee was the same. The
forged or diverted and in turn received payment sum of money due to the payee
thereon from the drawee, is guilty of negligence remained the same. (PNB v CA,
which proximately contributed to the success of the 1996; Int’l Corporate Bank v CA,
fraud practiced on the drawee bank. 2006)
c. EFFECT: an innocent alteration
(generally, changes on items other
4.2. Material Alteration (Sec.124) than those required to be stated
1. As a DEFENSE: under Sec. 1, N. I. L.) and spoliation
a. PERSONAL defense when used to (alterations done by a stranger) will
deny liability according to the tenor not avoid the instrument, but the
of the instrument holder may enforce it only according
b. REAL defense when relied on to to its original tenor. (PNB v CA, citing
deny liability according to the J. Vitug)
altered terms.
2. What constitutes material alteration? 4. EFFECT OF MATERIAL ALTERATION
a. Statutory: Review Sec.125, NIL
i. change date a. General Rule: Where NI materially
ii. sum payable, either for altered w/o the assent of all parties
principal or interest liable thereon it is AVOIDED, except
iii. time or place of payment as against:
iv. number/relations of parties i. party who has himself made,
v. medium/currency of payment, authorized or assented to
vi. adds place of payment where alteration
none specified, ii. subsequent indorser because by
indorsement he warrants that
the instrument is in all respects indorsement he warrants that
what it purports to be and that the instrument is in all
it was valid and subsisting at respects what it purports to be
the time of his indorsement and that it was valid and
(Secs. 65 and 66, NIL) subsisting at the time of his
b. As to a HOLDER in DUE COURSE indorsement (Sec 65 and 66)
i. When an instrument that has b. RECOVERY after acceptance or
been materially altered is in the payment by the drawee bank
hands of a HDC not a party to i. FROM HOLDER
the alteration, HDC may 1) Prevailing view - Yes, bec. of
enforce payment thereof (1) payment under mistake,
according to orig. tenor (2) Sec. 124 and (3) Sec.62
ii. Alteration must NOT be in relation to Sec. 132
apparent on the face of the 2) Minority view – No, bec. of
instrument for the holder then (1) estoppel, (2) stability of
would not be a holder in due transactions and (3) bank is
course in a better position to
iii. Where the interest rate is shoulder the loss.
altered , the holder in due 3) SC:
course can recover the a. adopted the minority
principal sum with the original view but on a
rate of interest different basis—the
c. When alteration is of the amount or Central Bank
the interest rate is altered, the Circular regulating
holder can recover the ORIGINAL clearing of checks
AMOUNT/interest rate. and limiting the
period within which
a drawee bank may
5. DRAWER’S NEGLIGENCE return a spurious
a. The general rule is that the drawee check
cannot charge against the drawer’s b. but if holder is guilty
account the amount of an altered of negligence which
check. proximately
b. BUT, the drawer’s negligence, contributed to the
before or after the alteration, may erroneous payment
estop him from setting up by drawee, holder
alteration as a defense. liable (PCIB v CA,
c. However, the drawer is not bound 2001)
to so prepare the check that
nobody else can successfully MONTINOLA v PNB (1951)
tamper with it (ex. a drawer cannot
be expected to foresee that his The insertion of the words “Agent Philippine
clerk will use acid to alter his National Bank” converted the bank from a mere
checks, Critten v. Chemical Natl drawee to a drawer and therefore changes its
Bank) liability, constitutes material alteration of the
d. Where the negligence of the drawer instrument without consent of the parties liable
consists in failing to discover thereon and so discharges the instrument. Drawee
alterations previously made which bank is not liable.
he could have discovered by a
comparison of the cancelled checks HONGKONG & SHANGHAI BANK v PEOPLES
and check stubs or by diligent BANK (1970)5
observation of his records and
could thus have prevented the The failure of the drawee bank to call the attention
drawee bank from subsequently of the collecting bank as to such alteration until
cashing other altered checks , the after the lapse of 27 days would negate whatever
drawee can charge the subsequent right it might have had. The remedy of the drawee
check against the negligent bank is against the party responsible for the forgery
drawer’s account. or alteration.


a. Where the interest rate is altered, The collecting bank is protected by the24-hour
the HDC can recover the principal clearing house rule from the liability to refund the
sum with the original rate of amount paid by the drawee bank. [Note: A much
i. EXCEPT: A subsequent 5
Affirmed the minority view that drawee cannot recover
indorser, because by the
recent Circular changed the point of reckoning for himself, the remedy of the drawee
the return of the altered check from within 24 bank that negligently clears a forged
hours from the clearing to within 24 hours from and/or altered check for payment is
the discovery of the alteration] against the party responsible for the
forgery or alteration, otherwise, it
ASSOCIATED BANK v CA (1996) bears the loss. (BPI v Buenaventura,
The rule mandates that the checks be returned 2005)
within twenty-four hours after discovery of the
forgery but in no event beyond the period fixed by 4.3. Fraud
law for filing a legal action. The rationale of the
rule is to give the collecting bank (which indorsed 1. REAL DEFENSE
the check) adequate opportunity to proceed a. fraud in execution / fraud in
against the forger. If prompt notice is not given, factum: did not know that paper was
the collecting bankmaybe prejudiced and lose the a NI when it was signed
opportunity to go after its depositor. b. not liable to ANY holder
a. Fraud in inducement: knows it is NI
ii. FROM DRAWER: drawee has no but deceived as to value/terms
right to seek reimbursement i. Available as a defense against
from drawer for its erroneous non-HDC
payment b. Fraud in factum accompanied by
NEGLIGENCE of maker or signer
METROBANK v CABILZO (2006) i. Where the signor does not know
the nature of the instrument he
In addition, the bank on which the check is drawn, signs, but where, by the exercise
known as the drawee bank, is under strict liability to of ordinary care, he could have
pay to the order of the payee in accordance with the discovered it.
drawer’s instructions as reflected on the face and by ii. Three factors are typically used
the terms of the check. Payment made under in determining the existence of
materially altered instrument is not payment done in negligence:
accordance with the instruction of the drawer. 1) legal character of the
When the drawee bank pays a materially altered instrument which the signer
check, it violates the terms of the check, as well as thinks he is signing
its duty to charge its client’s account only for bona 2) the physical condition of the
fide disbursements he had made. Since the drawee signer and his ability to read
bank, in the instant case, did not pay according to 3) whether the signer had the
the original tenor of the instrument, as directed by opportunity at the time of
the drawer, then it has no right to claim signing, to ascertain the
reimbursement from the drawer, much less, the legal nature of the paper he
right to deduct the erroneous payment it made from is executing
the drawer’s account which it was expected to treat
with utmost fidelity.


…It [the bank] should be able to detect alterations,

erasures, superimpositions or intercalations thereon,
for these instruments are prepared, printed and
issued by itself, it has control of the drawer's
account, and it is supposed to be familiar with the
drawer's signature. It should possess
appropriate detecting devices for uncovering
forgeries and/or alterations on these
There is nothing inequitable in such a rule for if in
the regular course of business the check comes to
the drawee bank which, having the opportunity to
ascertain its character, pronounces it to be valid and
pays it, as in this case, it is not only a question of
payment under mistake, but payment in neglect of
duty which the commercial law places upon it, and
the result of its negligence must rest upon it.

c. REMEDY: Unless a forgery or

alteration is attributable to the fault
or negligence of the drawer
Chapter VI. LIABILITY OF PARTIES drawee/bank (Sec 189, NIL),
and the drawee/bank is NOT
LIABLE on the bill unless and
1. In General UNTIL he/it ACCEPTS (or
certifies) the same. (Sec. 127,
1.1. Parties primarily liable:
3. Drawer
1. person who by the terms of the instrument
1) Payment despite Stop Payment
is absolutely required to pay the same.
a. Maker of promissory note
a) Before payment or
b. Acceptor of bill of exchange
certification by the bank, the
2. unconditionally liable; duty bound to pay
drawer may countermand
the holder at date of maturity, WON holder
the order, and payment
demands payment from him, and he is not
thereafter to the payee by
relieved from liability even if the instrument
the bank is wrongful.
should become overdue due to failure of
b) Since a check is not an
holder to make such demand.
assignment of the drawer’s
fund, the bank is liable for
1.2. Parties secondarily liable:
paying it in disregard of the
a. Indorsers, both note and bill
c) Moreover, drawee can no
b. Drawer of bill
longer recover what it
2. Conditionally liable; not bound to pay unless
voluntarily paid to the holder
the following has been fulfilled
of the uncertified and
a. Due presentment or demand from
unaccepted instrument.
primary party for payment or acceptance;
2) Refusal to Accept
b. Dishonor by such party; and
a) Under some circumstances,
c. Taking of proceedings required by law
the drawee who refuses to
after dishonor.
accept may be made liable for
breach of contract or for
2. Primary Parties damages based on a tort either
to the drawer (refer to Araneta
2.1. PAYMENT: Presentment and Tender v. Bank of America) or to the
1. Presentment for payment not necessary holder (refer to HSBC v. Catalan)
to charge primary party
2. if the instrument is, by its terms, payable at ARANETA V. BANK OF AMERICA(1971)
a special place, and he is able and willing to
pay it there at maturity, such ability and This was an action by a depositor against a bank for
willingness are equivalent to a tender of damages resulting from the wrongful dishonor of the
payment upon his part. (Sec. 70, NIL) depositor's checks. HELD: Araneta's claim for
temperate damages is legally justified because of the
2.2. Liability of MAKER adverse reflection on the financial credit of a
1. Promises to pay it according to its tenor businessman, a prized and valuable asset, w/c
2. Admits existence of payee and his then constitutes material loss.
capacity to indorse.
a. Therefore, PRECLUDED from setting up HSBC VS. CATALAN (2004)
the following defenses:
i. the payee is a fictitious person HSBC is not being sued on the value of the check
ii. the payee was insane, a minor, or a itself but for how it acted in relation to Catalan’s claim
corporation acting ultra vires for payment despite the repeated directives of the
drawer Thomson to recognize the check the latter
2.3. DRAWEE and ACCEPTOR issued.
1. Drawee Her allegations in the complaint that the gross
a. A person on whom a bill of inaction of HSBC on Thomson’s instructions, as well
exchange or check is drawn and as its evident failure to inform Catalan of the reason
who is ordered to pay it for its continued inaction and non-payment of the
b. Liability of DRAWEE to: checks, smack of insouciance on its part, are
2. Holder sufficient statements of clear abuse of right for which
1) Not liable on the instrument it may be held liable under Article 19 of the Civil Code
until he accepts it and even a for any damages she incurred resulting therefrom.
holder in due course cannot HSBANK’s actions, or lack thereof, prevented Catalan
sue him on the instrument from seeking further redress with Thomson for the
before his acceptance recovery of her claim while the latter was alive.
2) A bill/check of itself does not
operate as an assignment of 3. Acceptor: Liability
the funds in the hands of the a. (Sec.62, NIL) Drawee is not liable
unless he accepts the bill and in doing so,
he engages to pay the bill according to iii. Acceptance of an INCOMPLETE bill
the tenor of his acceptance, and admits (Sec 138, NIL)
the following: 1) A bill may be accepted:
i. existence of drawer a) before it has been signed by
ii. genuineness of his signature the drawer, or
iii. his capacity and authority to draw b) while otherwise incomplete,
the instrument or
iv. existence of payee and his then c) when it is overdue, or
capacity to endorse d) after it has been dishonored
b. Meaning of "according to the tenor by a previous refusal to
of his acceptance" accept, or by non payment
i. Majority and prevailing view: 2) But when a bill payable after
Where alteration consists in raising sight is dishonored by non-
the amount payable, acceptor liable acceptance and drawee
to HDC only as to its original subsequently accepts it, the
amount; if the alteration of payee's holder, in the absence of diff
name, paying banks cannot charge agreement, is entitled to have
drawer's account with the amount bill accepted as of date of the 1st
of the check because its duty is to presentment.
pay only “according to the order of a) Sec. 138, NIL allows
the drawer.” acceptance to be made
ii. Common law rule: Acceptor of while the bill is
altered check not liable to innocent incomplete.
holder except for the original b) The bill may be accepted
amount even after it is overdue or
dishonored, since an
2.4. Acceptance instrument DOES NOT LOSE
1. IN GENERAL: mere fact that its maturity
a. Definition: date has passed or the
i. "Acceptance" means an acceptance drawee’s refusal to accept or
completed by delivery or notification pay it.
(Sec. 19, NIL) d. PERIOD within which to accept
ii. The signification by the drawee of his i. The drawee is allowed 24 hours after
assent to the order of the drawer (Sec presentment to decide WON he will
132, NIL) accept the bill; the acceptance, if
b. REQUISITES for a valid acceptance given, dates as of the day of
(Sec 132, NIL) presentation. (Sec. 136, NIL)
i. It must be in writing and signed by ii. Effect of non-acceptance within the
the drawee; prescribed period
1) Thus there is no valid or 1) Where bill is duly presented and
implied acceptance except as is not accepted within prescribed
provided by Sec. 137 relating time, the person presenting it
to constructive acceptance must treat the bill as dishonored
ii. It must not express that the drawee by non-acceptance or he loses
will perform his promise by any other right of recourse against the
means than the payment of money. drawer and indorsers. (Sec. 150,
iii. does not change the implied NIL)
promise of acceptor to pay only in
money 2. CONSTRUCTIVE ACCEPTANCE: occurs in the
c. MANNER of acceptance following circumstances
i. Campos: Usually made by writing a. SEC 137, NIL: Where the drawee
the word “accepted” and signing i. destroys the bill, or
immediately below ii. refuses within 24hrs or such other
1) BUT, drawee’s signature alone period as the holder may allow, to return
is sufficient (Campos citing the bill accepted or non-accepted to the
Lawless v. Temple) holder
ii. Sec 133, NIL: The holder of a bill b. Under the clearing house rules, the drawee
presenting the same for acceptance bank’s failure to return within the prescribed
may require that the acceptance be time will be deemed payment or acceptance
written on the bill and if such of the check.
request is denied, may treat the bill c. If there is not demand for the return of the
as dishonored bill and the drawee keeps it until after the
1) Effect: holder may go against expiration of said period without expressly
the party’s secondarily liable— accepting or refusing it; two views:
the drawer and the indorsers i. Constitutes constructive notice
ii. Constitutes dishonor because have authorized the holder to
Sec.137, NIL uses the word "refuses" take a qualified acceptance, or
d. Acceptance, if given, will retroact to date subsequently assent thereto.
of presentation. 3) When the drawer or an indorser
receives notice of a qualified
SUMCAD v. PROVINCE OF SAMAR (1956) acceptance, he must, within a
reasonable time, express his
There was implied acceptance in view of the dissent to the holder or he will
circumstances of the case (furnishing of be deemed to have assented
photostatic copies, presentment for thereto. (Sec. 142, NIL)
certification) by voluntary assuming the c. TRADE - a draft or bill of exchange with
obligation of holding so much deposit as would a definite maturity, drawn by a seller on
be sufficient to cover the amount of the check. a buyer for the purchase price of goods,
bearing across its face the acceptance of
3. ACCEPTANCE ON A SEPARATE the buyer; always states upon its face
INSTRUMENT the transaction from which it arose.
e. Extrinsic acceptance - acceptance is d. BANKER'S acceptance - a negotiable
written on a paper other than the bill time draft or bill of exchange drawn on
itself; doesn’t bind the acceptor except and accepted by a commercial bank.
in favor of a person to whom it is shown
and who, on the faith thereof, receives 2.5. CHECKS : acceptance and certification
the bill for value. (Sec. 134, NIL); 1. Definition: A check is an instrument in the form
acceptance of an existing bill and nature of a BE, but an unlike an ordinary bill,
f. Virtual acceptance - unconditional always payable on demand and always drawn on
promise in writing to accept a bill a bank.
before it is drawn; deemed an actual 2. Kinds:
acceptance in favor of every person a. Cashier's or manager's - drawn by a
who, upon the faith thereof, receives bank on itself and its issuance has the effect
the bill for value. (Sec. 135, NIL); of acceptance; since the drawer and drawee
acceptance of future bill are the same, the holder may treat it is either
g. In both cases, the acceptance must a BE or PN.
clearly and unequivocally identify b. Memorandum check - where the word
the bill to which the acceptance refers. "memorandum" or "memo" is written across
its face, signifying that the drawer will pay
4. KINDS OF ACCEPTANCE: An the holder absolutely, without need of
acceptance is either (1) general or (2) presentment.
qualified. c. Traveler's check - upon which the
a. GENERAL - assents without holder's signature must appear twice -- first
qualification to the order of the drawer. when it is issued, and again when it is
(Sec.139, NIL); Includes acceptance cashed.
to pay at a particular place; unless d. Crossed – when the name of a particular
expressly states that bill is to be paid banker or a company is written between the
there only and not elsewhere. (Sec. parallel lines drawn.
140, NIL)
b. QUALIFIED - in express terms varies STATE INVESTMENT HOUSE V. IAC
the effect of the bill as drawn. (Sec.
139, NIL) Crossed check should put the payee on inquiry to
i. Conditional; payment by the ascertain the holders’ title to the check or the nature
acceptor dependent on the of his possession. Failing this, the payee is declared
fulfillment of a condition therein guilty of gross negligence to the effect that the holder
stated; of the check is not a holder in good faith. Effects of a
ii. Partial; to pay part only of the crossed check:
amount for which the bill is drawn; (a) the check may not be encashed but only
iii. Local; to pay only at a particular deposited in the bank;
place; (b) the check may be negotiated only once – to
iv. Qualified as to time; one who has an account with the bank; and
v. The acceptance of some, one or (c) the act serves as a warning to the holder that
more of the drawees but not of all. the check has been issued for a definite
(Sec. 141, NIL) purpose so that he must inquire if he has
1) The holder may refuse to take received the check pursuant to that purpose,
a qualified acceptance; may otherwise, he is not a HDC.
treat the bill as dishonored by
2) Where a qualified acceptance is CA
taken, the drawer and
indorsers are discharged from The negotiability of a check is not affected by its
liability on the bill unless they being crossed, whether specially or generally. It may
legally be negotiated as long as the one who containing checks drawn against the bank he
encashes the check with the drawee bank is another represents for examination and clearance.
bank, or if it is especially crossed, by the bank
mentioned between the parallel lines. 4. Certification
RP v. PNB (1961) i. an agreement by which a bank
promises to pay the check at any
Demand drafts have not been presented either for time it is presented for payment
acceptance or for payment, thus the bank never had ii. When check certified by bank on
any chance of accepting or rejecting them; as such, which it is drawn, equivalent to
these cannot be subject of escheat. acceptance
Cashier's check is the substantial equivalent of a b. Requisites for a Valid Certification
certified check and is thus subject to escheat. i. Must be in writing
Telegraphic transfers are likewise subject to ii. Made on the check or another
escheat because upon making payment complete instrument
the transaction insofar as he is concerned, though iii. Check must be payable
insofar as the remitting bank is concerned, the 1) Checks cannot be certified before
contract is executory until the credit is established. payable
c. Liability
PAL V. CA (1990) i. Bank which certifies
1) Becomes liable as an acceptor
A check, whether a manager's check or ordinary 2) REFUSAL to certify a check doesn’t
check, and an offer of a check in payment of a debt constitute dishonor; the holder at
is not a valid tender of payment and may be that stage cannot exercise his right
refused receipt by the obligee or creditor. of recourse against the drawer and
The issuance of the check to a person authorized to the indorsers
receive it operates to release the judgment debtor ii. If procurement by:
from any further obligations on the judgment. 1)Holder
a) The bank becomes the
(2001) b) The drawer and all indorsers
discharged from all liability
A manager’s check is one drawn by the bank’s (versus ordinary bill of
manager upon the bank itself. It is similar to a exchange – not discharged)
cashier’s check both as to effect and use. A 2) Drawer
cashier’s check is a check of the bank’s cashier on a) secondary parties not
his own or another check. In effect, it is a bill of released
exchange drawn by the cashier of a bank upon the
bank itself, and accepted in advance by the act of ROMAN CATHOLIC BISHOP V. IAC (1990)
its issuance. It is really the bank’s own check and
may be treated as a promissory note with the bank A certified personal check is not legal tender nor is it
as a maker. The check becomes the primary the currency stipulated, and therefore cannot
obligation of the bank which issues it and constitute valid tender of payment.
constitutes its written promise to pay upon
demand. The mere issuance of it is considered NEW PACIFIC TIMBER v. SENERIS (1980)
an acceptance thereof. If treated as promissory (as cited in EPCIB v. Ong, Sept. 2006)
note, the drawer would be the maker and in which
case the holder need not prove presentment for [S]ince the said check had been certified by the
payment or present the bill to the drawee for drawee bank, by the certification, the funds
acceptance represented by the check are transferred from the
credit of the maker to that of the payee or holder, and
EPCIB v ONG (2006) for all intents and purposes, the latter becomes the
depositor of the drawee bank, with rights and duties
A manager’s check is an order of the bank to pay, of one in such situation. Where a check is certified by
drawn upon itself, committing in effect its total the bank on which it is drawn, the certification is
resources, integrity and honor behind its issuance. equivalent to acceptance. Said certification “implies
By its peculiar character and general use in that the check is drawn upon sufficient funds in the
commerce, a manager’s check is regarded hands of the drawee, that they have been set apart
substantially to be as good as the money it for its satisfaction, and that they shall be so applied
represents. whenever the check is presented for payment. It is
an understanding that the check is good then, and
shall continue good, and this agreement is as binding
3. Clearing on the bank as its notes circulation, a certificate of
a. Clearing - check collection process deposit payable to the order of depositor, or any other
b. Clearing house - where representatives obligation it can assume. The object of certifying a
of different banks meet every afternoon of check, as regards both parties, is to enable the
every business day to receive the envelopes holder to use it as money.” When the holder
procures the check to be certified, “the check considering that the act of presenting the check for
operates as an assignment of a part of the payment to the drawee is an assertion that the party
funds to the creditors.” Hence, the exception to making the presentment has done its duty to
the rule enunciated under Section 636 of the Central ascertain the genuineness of the endorsements." The
Bank Act to the effect “that a check which has been rule finds more meaning in this case where the check
cleared and credited to the account of the creditor involved is drawn on a foreign bank and therefore
shall be equivalent to a delivery to the creditor in collection is more difficult than when the drawee bank
cash in an amount equal to the amount credited to is a local one even though the check in question is a
his account” shall apply in this case x x x. manager’s check

3. Secondary Parties
5. Surrender of Check
a. The surrender of the check by the
holder to the drawee bank upon its 3.1. Liability of DRAWER
payment is not negotiation. By 1. Sec. 61, NIL
paying the check, the drawee bank a. Admits existence of payee and his then
extinguishes it as a negotiable capacity to endorse
instrument and converts it into a mere b. Engages that on due presentment
voucher. instrument will be accepted, or paid, or
b. Distinction between surrender of check both, according to its tenor
upon payment thereof and negotiation c. That if it be dishonored + necessary
i. The delivery of the check by the proceedings on dishonor duly taken, will
holder to the drawee bank upon its pay the amount thereof to the holder or
payment is not negotiation. By to a subsequent indorser who may be
paying the check, the drawee bank compelled to pay it
extinguishes it as a negotiable 2. Limiting Liability: drawer may insert in the
instrument and converts it into a instrument an express stipulation negativing /
mere voucher. limiting his own liability to holder
ii. In the case of a deposit of a check
by the holder thereof in a bank PNB v. PICORNELL (1922)
other than the drawee bank, the
signature at the back of the check Picornell obtained money from PNB Cebu to purchase
would constitute an indorsement, tobacco to be shipped to Manila. Picornell then drew
unless otherwise indicated. The a bill of exchange drawn against his principal,
holder in negotiating the check to Hyndman, Tavera & Ventura (HTV), in favor of PNB or
the depositary bank, which in turn his order. Upon presentation of the bill, HTV accepted
will collect on the check from the it. However, HTV subsequently refused to pay the bill
drawee bank, through the because some of the tobacco shipped were damaged.
clearinghouse. HELD:
A. Liability of Acceptor (HTV)
BPI vs CA (2000)  PNB is a holder in due course and the partial
want of consideration does not exist with
In depositing the check in his name, private respect to the bank who paid full value for
respondent did not become the outright owner of the bill of exchange.
the amount stated therein. He was merely  The want of consideration between the
designating petitioner as the collecting bank. This is acceptor and drawer does not affect the
in consonance with the rule that a negotiable rights of the payee who is a remote party.
instrument, such as a check, whether a manager’s The payee or holder gives value to the
check or ordinary check, is not legal tender. drawer, and if he is ignorant of the equities
As such, after receiving the deposit, under its own between the drawer and acceptor, his is in
rules, petitioner shall credit the amount in private the position of a bona fide indorsee.
respondent’s account or infuse value thereon only B. Liability of Drawer (Picornell)
after the drawee bank shall have paid the amount of  As drawer of the bill, he warranted that it
the check or the check has been cleared for deposit. would be accepted upon proper presentment
Again, this is in accordance with ordinary banking & paid in due course. As it was not paid, he
practices and with this Court’s pronouncement that became liable to the payment of its value to
"the collecting bank or last endorser generally PNB.
suffers the loss because it has the duty to ascertain  The fact that Picornell was an agent of HTV in
the genuineness of all prior endorsements the purchase of the tobacco does not
necessarily make him an agent of HTV in
drawing the bill of exchange. These are 2
6 different contracts. He cannot claim
“SEC. 63. Legal character . – Checks representing deposit
money do not have legal tender power and their acceptance in exemption from liability by invoking the
the payment of debts, both public and private, is at the option existence of agency.
of the creditor: Provided, however, that a check which has  Drawer received notice of protest in
been cleared and credited to the account of the creditor fulfillment of the condition set by law for his
shall be equivalent to a delivery to the creditor of cash in
liability to arise.
an amount equal to the amount credited to his account.
 Drawer's liability is only secondary as the a. Sec. 63, NIL: A person placing his
liability of the acceptor is primary. signature upon an instrument other than as a
maker, drawer, or acceptor unless he
BANCO ATLANTICO v AUDITOR GENERAL indicates by appropriate words his intention
(1978) to be bound in some other capacity
i SAPIERA vs CA (1999). It is
B fraudulently altered checks payable to her drawn undisputed that the four (4) checks
by the Embassy by increasing the amounts. B issued by de Guzman were signed by
negotiated these checks by indorsement to BA w/c petitioner at the back without any
paid the full amount of the checks without first indication as to how she should be
clearing with the drawee bank, contrary to normal bound thereby and, therefore, she is
banking practice. HELD: Drawer (embassy) not deemed to be an indorser thereof.
liable. BA is guilty of negligence in giving B special b. Sec. 67, NIL: A person, who places his
treatment as a privileged client, in disregard of signature on an instrument negotiable by
elementary principles of prudence that should delivery, incurs all the liabilities of an
attend banking transactions. Hence, it should suffer indorser.
the loss. BA could not have been a HDC. c. Sec 64, NIL: Irregular Indorser
i When a person not otherwise a party
NOTE: The Camposes note that the drawer to an instrument, places thereon his
was not held liable because the decision was signature in blank before delivery, he
based on §23 on forgery instead of §124 on is liable as an indorser, in accordance
material alteration. If BA had been a HDC, w/ these rules:
the Embassy could have been held liable for 1) Instrument payable to order of
the original amount of the checks 3rd person: liable to payee and to
all subsequent parties
3. CRIMINAL LIABILITY FOR BOUNCING 2) Instrument payable to the order
CHECK of maker/drawer, or payable to
a. Under BP 22 bearer: liable to all parties
subsequent to maker/drawer
PEOPLE v NITAFAN(1992) 3) Signs for accommodation of
payee, liable to all parties
Lim issued a memorandum check which was subsequent to payee
subsequently dishonored for insufficiency of funds. 2. WARRANTIES:
A memorandum check has the same effect as an a. Every person negotiating an instrument by
ordinary check and within the ambit of BP 22. What delivery or by a qualified indorsement
the law punishes is the issuance itself of a bouncing warrants: (Sec. 65, NIL)
check & not the purpose for which it was issued nor ii Instrument genuine, in all respects
the terms & conditions relating to its issuance. what it purports to be
iii He has good title to it
b. Estafa under the RPC iv All prior parties had capacity to
PACHECO v CA (1999) v He has no knowledge of any fact w/c
would impair validity of instrument or
The essential elements in order to sustain a render it valueless
conviction under the above paragraph are: vi in case of negotiation by delivery
1. that the offender postdated or issued a check in only, warranty only extends in favor
payment of an obligation contracted at the time the of immediate transferee
check was issued; b. General or Unqualified Indorser: Every
2. that such postdating or issuing a check was done person who indorses without qualification,
when the offender had no funds in the bank, or his warrants to all subsequent HDCs: (Sec. 66,
funds deposited therein were not sufficient to cover NIL)
the amount of the check; i. instrument genuine, good title, capacity
3. deceit or damage to the payee thereof. of prior parties
ii. instrument is at time of indorsement
PEOPLE v REYES (2005) valid and subsisting
iii. eon due presentment, it shall be
There is no estafa through bouncing checks when it accepted or paid, or both, according to
is shown that private complainant knew that the tenor
drawer did not have sufficient funds in the bank at iv. if it is dishonored, and necessary
the time the check was issued to him. Such proceedings on dishonor be duly taken,
knowledge negates the element of deceit and he will pay the amt. To holder, or to any
constitutes a defense in estafa through bouncing subsequent indorser who may be
checks. compelled to pay it
3. Order of Liability among Indorsers (Sec. 68,
3.2. Liability of INDORSERS:
1. Indorser
a. among themselves: liable prima facie in ensue from their having consented to stamp their
the order they indorse, but proof of another signatures on the promissory note. The following are
agreement admissible the rules on reimbursement:
b. but holder may sue any of the indorsers, 1. A solidary accommodation maker of a note may
regardless of order of indorsement demand from the principal debtor reimbursement
c. joint payees/indorsees deemed to indorse for the amount he paid to the payee; and
jointly and severally 2. A solidary accommodation maker who pays on
the note may directly demand reimbursement
TUAZON v RAMOS (2005) from his co-accommodation maker without first
directing his action against the principal debtor
After an instrument is dishonored by nonpayment, provided that :
indorsers cease to be merely secondarily liable; they (a) he made the payment by virtue of a
become principal debtors whose liability becomes judicial demand or
identical to that of the original obligor. The holder (b) the principal debtor is insolvent.
of a negotiable instrument need not even proceed
against the maker before suing the indorser. TRAVEL-ON, INC. v. CA

Travel-On was entitled to the benefit of the statutory

3.3. Accomodation Party presumption that it was a HDC, that the checks were
1. Accomodation Party: one who signed supported by valuable consideration. The only
instrument as maker/drawer/acceptor/ indorser evidence private respondent offered was his own
w/o receiving value thereof, for the purpose of testimony that he had issued the checks to Travel-On
lending his name to some other person as payee to "accommodate" its General Manager; this
2. Liability : Liable on the instrument to HFV claim was in fact a claim that the checks were merely
even if holder knew he was only an AP simulated, that private respondent did not intend to
bind himself thereon. Only evidence of the clearest
MAULINI v. SERRANO (1914) and most convincing kind will suffice for that purpose.
In accommodation indorsement, the indorser makes
the indorsement for the accommodation of the CRISOLOGO-JOSE v. CA.
maker. Such an indorsement is generally for the
purpose of better securing the payment of the note, Section 29 of the NIL does not apply to corporations
i.e. he lends his name to the maker not to the which are accommodation parties because the issue
holder. An accommodation note is one which the or indorsement of negotiable paper by a corporation
accommodation party has put his name, without without consideration is ultra vires. Hence, one who
consideration, for the purpose of accommodation has taken the instrument with knowledge of the
some other party who is to use it and is expected to accommodation cannot recover against a corporation
pay it. - accommodation party EXCEPT if the officer or agent
Note: Campos disagrees with this ruling, referring of the corp. was specifically authorized to execute or
to the case of Goodman v Gaul where an indorse the paper for the accommodation of a third
accommodation indorsement may be made for the person.
accommodation of the payee or holder. Corporate officers, such as the president and vice-
president, have no power to execute for mere
accommodation a NI of the corporation for their
ANG TIONG v. TING (1968) individual debts or transactions in which the
corporation has no legitimate concern. It is the
It is not a valid defense that the accommodation signatories thereof that shall be personally liable
party did not receive any valuable consideration therefor.
when he executed the instrument. Nor is it correct
to say that the holder for value is not a holder in AGRO CONGLOMERATES v CA (2000)
due course merely because at the time he acquired
the instrument, he knew that the indorser was only An accommodation party is a person who has signed
an accommodation party. the instrument as maker, acceptor, or indorser,
The fact that the accommodation party stands only without receiving value therefor, and for the purpose
as a surety in relation to the maker is a matter of of lending his name to some other person and is liable
concern exclusively between accommodation on the instrument to a holder for value,
indorser & accommodated party. It is immaterial to notwithstanding such holder at the time of taking the
the claim of a holder for value. The liability of the instrument knew (the signatory) to be an
accommodation party remains primary & accommodation party. He has the right, after paying
unconditional. the holder, to obtain reimbursement from the party
accommodated, since the relation between them
SADAYA v. SEVILLA (1967) has in effect become one of principal and surety,
the accommodation party being the surety.
The solidary accommodation maker who made
payment has the right of contribution from his co- 3.4. Liability of an AGENT
accommodation maker. This right springs from an 1. AGENCY:
implied promise between the accommodation
makers to share equally the burdens that may
a. Signature of any party may be made by
duly authorized agent, established as in 4.2. Presentment for Acceptance
ordinary agency 1. When necessary (Sec. 143, NIL)
b. Signature per procuration operates as a. bill payable after sight, or in other cases
notice that the agent has limited authority where presentment for acceptance
to sign, and the principal is bound only in necessary to fix maturity
case the agent in so signing acted within b. where bill expressly stipulates that it
the actual limits of his authority shall be presented for acceptance
2. LIABILITY c. where bill is drawn payable elsewhere
a. GEN RULE: Where person adds to his than at residence / place of business of
signature words indicating that he signs on drawee
behalf of a principal, not liable if he was d. In no other case is presentment for
duly authorized acceptance necessary in order to render
b. WHEN LIABLE: any party to the bill liable.
i. mere addition of words describing him
as an agent without disclosing his 2. Effect of non-presentment [w/in reasonable
principal time] (Sec. 144, NIL) - discharges the drawer
ii. Where a broker or agent negotiates and all indorsers.
an instrument without indorsement, he a. Reasonable Time: considerations
incurs all liabilities in Sec. 65, unless he i nature of instrument
discloses name of principal and fact that ii usage of trade or business with
he’s only acting as agent. (Sec. 69, respect to instrument
NIL) iii facts of each case
3. How made (Sec. 145, NIL)
INSULAR DRUG v. PNB a. BY or ON BEHALF of the holder
b. AT a reasonable hour,
The right of an agent to indorse commercial paper c. ON a business day and before the bill is
will not be lightly inferred. A salesman with overdue,
authority to collect money does not have the implied d. TO the drawee or some person
authority to indorse checks received in payment. authorized to accept or refuse acceptance
Any person taking checks made payable to a on his behalf; and
corporation does so at his peril & must abide by the i bill addressed to drawees not
consequences if the agent who indorses the same is partners, MUST be made to them all
without authority. unless one has authority to accept or
refuse acceptance for all;
ii drawee is dead, MAY be made to his
PBC v ARUEGO (1981) personal representative;
iii drawee has been adjudged a
Aruego obtained a credit accommodation from PBC. bankrupt or an insolvent or has made
For every printing of the publication, the printer an assignment for the benefit of
collected the cost of printing by drawing a draft creditors, MAY be made:
against PBC, which will later be sent to Aruego for 1) to him or
acceptance. PBC seeks recovery on these drafts. 2) to his trustee or assignee.
Aruego invokes the defense that he signed the
document in his capacity as President of the Phil. 4. When made (Sec. 146, NIL) on any day on
Education Foundation & only as an accommodation which NIs may be presented for payment
party. under:
HELD: Aruego is personally liable because nowhere a. Sec. 72, NIL – at a reasonable hour on a
in the draft did he disclose that he was signing as a business day
representative of the Phil Education Foundation. i Instruments falling due or becoming
Neither did he disclose his principal. payable on Saturday - next
As an accommodation party, Aruego is liable on the succeeding business day
instrument to a holder for value, notwithstanding ii EXCEPT instruments payable on
such holder, at the time of the taking of the demand [at the option of the holder]
instrument knew him to be only an accommodation – before twelve o'clock noon on
party. Aruego signed as a drawee/acceptor. As Saturday WHEN that entire day is not
drawee, he is primarily liable for the drafts. a holiday.
b. Sec. 85, NIL –
4. Presentment i at the time fixed therein without
c. Where the holder has no time, with the
4.1. Definition: exercise of reasonable diligence, to
1. the production of a BE to the drawee for his present the bill for acceptance before
ACCEPTANCE, or to the drawer or acceptor presenting it for payment, delay is
for PAYMENT; or excused and doesn’t discharge the
2. the production of a PN to the party liable for drawers and indorsers. (Sec. 147, NIL)
5. When Excused (Sec. 148, NIL) Bill may 2) Where the drawee is a fictitious
be treated as dishonored by non- person;
acceptance: 3) By waiver of presentment,
a. Where the drawee is (1) dead, (2) express or implied.
absconded, (3) fictitious, (4) does not v. when a bill is dishonored by
have capacity to contract by bill. nonacceptance – immediate right to
b. Where, after the exercise of reasonable recourse accrues to holder (Sec. 151,
diligence, presentment can not be NIL)
made. vi. in case of waiver of protest, whether
c. Where, although presentment has been in the case of a foreign bill of exchange
irregular, acceptance has been refused or other NI – deemed to be a waiver not
on some other ground. only of a formal protest but also of
presentment and notice of dishonor.
6. Dishonor and Effects (Sec. 111, NIL)
a. Dishonor by nonacceptance:
i When duly presented for 2. Date and time of presentment
acceptance – acceptance is refused a. bearing fixed maturity / not payable
or can not be obtained; or on demand – on the day it falls due
ii When presentment for acceptance iii if day of maturity falls on Sunday or
is excused – bill is not accepted. a holiday, the instruments falling due
(Sec. 149, NIL) or becoming payable on Saturday are
b. NON ACCEPTANCE of the bill to be presented for payment on the
i Duty of holder: must treat the bill next succeeding business day
as dishonored by nonacceptance or (Sec.85, NIL)
he loses the right of recourse b. payable on demand – within a
against the drawer and indorsers. reasonable time after its issue,
(Sec. 150, NIL) iv at the option of the holder, may be
ii Right of holder: immediate right presented for payment before twelve
of recourse against the drawer and o'clock noon on Saturday when that
indorsers and no presentment for entire day is not a holiday (Sec. 85,
payment is necessary. (Sec. 151, NIL)
NIL) c. demand bill of exchange – within a
c. NOTICE OF DISHONOR reasonable time after the last negotiation.
i Recipient- (Sec.89, NIL) Except (Sec. 71, NIL) (NOTE: though reasonable
as herein otherwise provided, time from last negotiation, it may be
1) to the drawer and unreasonable time from issuance thus holder
2) to each indorser, may not be HDC under sec. 71)
ii Effect of omission to give notice d. Check - must be presented for payment
of non-acceptance within reasonable time after its issue or
1) any drawer or indorser to drawer will be discharged from liability
whom such notice is not given thereon to extent of loss caused by delay
is discharged i.How time computed. — When payable
2) does not prejudice the rights of at a (1) fixed period after date, (2) after
a HDC subsequent to the sight, or (3) after that happening of a
omission. (Sec. 117, NIL) specified event, exclude day from which
the time is to begin to run, include date
4.3. Presentment for Payment of payment. (Sec. 86, NIL)
1. IN GENERAL ii.Where the day, or the last day for
a. NECESSARY in order to charge the payment falls on a Sunday or on a
drawer and indorsers(Sec. 70, NIL) holiday – may be done on the next
b. NOT necessary succeeding secular or business day.
i. to charge the person primarily liable (Sec. 194, NIL)
on the instrument (Sec. 70, NIL)
ii. to charge the drawer where he has PNB v. SEETO (1952)
no right to expect or require that the
drawee or acceptor will pay the On 13 March, Seeto indorsed to PNB-Surigao a bearer
instrument. (Sec. 79, NIL) check dated 10 March drawn against PBC-Cebu. PNB-
iii. to charge an indorser where the Surigao mailed the check to its Cebu branch on 20
instrument was made or accepted for March & was presented to the drawee bank on 09
his accommodation and he has no April. The check was dishonored for insufficient funds
reason to expect that the instrument because the delay in presentment cause the
will be paid if presented. (Sec. 80, exhaustion of the drawer's funds. Indorser Seeto
NIL) asked that the suit be deferred while he made
iv. Excused: inquiries. He assured PNB that he would refund the
1) Where, after the exercise of value in case of dishonor.
reasonable diligence,
presentment cannot be made;
HELD: The indorser is discharged from liability by Tan Kim drew specially crossed checks payable to
reason of the delay in the presentment for payment, bearer. Chan Wan presented the checks for payment
under §84. to the drawee bank but they were dishonored due to
Drawer had enough funds when he issued the check insufficient funds. Chan Wan seeks recovery on these
because his subsequent checks drawn against the checks.
same bank had been encashed. HELD: Checks crossed specially to China Banking
The assurances of refund by the indorser are the should have been presented for payment by that
ordinary obligation of an indorser which are bank, not by Chan Wan. Inasmuch as Chan Wan
discharged by the unreasonable delay in presented them for payment himself, there was no
presentation of the check. proper presentment & the liability did not attach to
NOTE: Camposes note that the discharge of the the drawer.
indorser should have been based on §§ 66 & 71 on But there was due presentment as clearance
presentment as a condition to the indorser's liability endorsements by China Bank can be found at the
& presentment for payment of a demand bill made back of the checks. However, some of the checks
within a reasonable time from its last negotiation. were stamped account closed.
As Chan Wan failed to indicate how the checks
PAPA v A.U. VALENCIA (1998) reached his hands, the court held him not to be a
holder in due course who can still recover on the
Granting that petitioner had never encashed the checks but subject to personal defenses, such as lack
check, his failure to do so for more than ten (10) of consideration.
years undoubtedly resulted in the impairment of the NOTE: Camposes note that despite the addition of
check through his unreasonable and unexplained the words "non-negotiable" on the specially crossed
delay. checks, the Court considered the checks as negotiable
While it is true that the delivery of a check produces instruments. A check on its face normally has all the
the effect of payment only when it is cashed, the requisites of negotiability, and the addition of the
rule is otherwise if the debtor is prejudiced by the above words should not change its character as a
creditor’s unreasonable delay in presentment. The negotiable instrument.
acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he ASSOCIATED BANK v. CA & REYES (1992)
from whom it is received sustains loss by want of
such diligence, it will be held to operate as actual Different department stores issued crossed checks
payment of the debt or obligation for which it was bearing "for payee's account only" payable to
given. Melissa's RTW. Sayson, acting without authority,
It has, likewise, been held that if no presentment is deposited & encashed the checks with Associated
made at all, the drawer cannot be held liable Bank.
irrespective of loss or injury unless presentment is HELD: Citing State Invt House v IAC, the effects of
otherwise excused. This is in harmony with Article crossing a check are:
1249 of the Civil Code under which payment by way 1. check may not be encashed but only
of check or other negotiable instrument is deposited in the bank;
conditioned on its being cashed, except when 2. check may be negotiated only one -- to one
through the fault of the creditor, the instrument is who has an account with a bank; and
impaired. The payee of a check would be a creditor 3. the act of crossing the check serves as a
under this provision and if its non-payment is warning to the holder that the check has
caused by his negligence, payment will be deemed been issued for a definite purpose so that he
effected and the obligation for which the check was must inquire if he has received the check
given as conditional payment will be discharged. pursuant to that purpose.
The effects of crossing a check relate to the mode of
3. Where DELAY excused - when the delay is presentment for payment.
caused by circumstances beyond the control of The law imposes a duty of diligence on the collecting
the holder and not imputable to his default, bank to scrutinize checks deposited with it, for the
misconduct, or negligence; when the cause of purpose of determining their genuineness &
delay ceases to operate, presentment must be regularity.
made with reasonable diligence (Sec. 81,NIL)

4. Manner of Presentment ii. TIME: reasonable hour on a business

a. The instrument must be exhibited; when 1) where instrument payable at
paid, must be delivered up to the party bank. — must be made during
paying it. (Sec. 74, NIL) banking hours, UNLESS the
b. What constitutes a sufficient person to make payment has no
presentment. (Sec. 72, NIL) funds there to meet it at any
i.BY WHOM: the holder, or by some time during the day, in which
person authorized to receive payment case presentment at any hour
on his behalf; before the bank is closed on that
day is sufficient (Sec. 75, NIL)
CHAN WAN v. TAN KIM(1960) iii. PLACE: proper place as herein
defined: (Sec. 73, NIL)
1) place of payment specified – at 5. Notice of Dishonor
place of payment;
2) no place of payment specified
but address of the person to 5.1.Definition
make payment is given in the 1. To bring either verbally or by writing, to the
instrument – at the address knowledge of the drawer or indorser of an
given; instrument, the fact that a specified NI, upon
3) no place of payment and no proper proceedings taken, has not been
address is given – at the usual accepted or has not been paid, and that the
place of business or residence party notified is expected to pay it
of the person to make 2. General rule: MUST be given to drawer and
payment; to each indorser, and any drawer or indorser
1) in any other case – to whom such notice is not given is
wherever person to make discharged
payment can be (1) found,
or if presented (2) at his 5.2. When necessary
last known place of 1. Sec 89, NIL Except as herein provided, when
business or residence a negotiable instrument has been
2) where principal debtor is dishonored by non-acceptance or non-
dead and no place of payment, notice of dishonor must be given to the
payment is specified – to drawer and to each indorser…
his personal 2. Parties entitled to notice:
representative, IF any AND a. Drawer
IF he can be found with the b. Indorser
exercise of reasonable c. Accomodation Indorsers
diligence (Sec. 76, NIL) i Joint maker excluded if not an
3) where persons primarily indorser
liable are partners and no 3. Acceleration Clause
place of payment is a. If clause is optional on holder:
specified, presentment for i The bringing of an action against the
- to any one of them, even maker and indorsers constitutes a
though there has been a valid exercise of option and a valid
dissolution of the firm. notice of dishonor
(Sec. 77, NIL) b. Clause is automatic:
4) joint debtors and no i Notice of dishonor must be givem at
place of payment is once
specified - to them all ii Not sufficient to give it upon
(Sec. 78, NIL) commencement of action
iv. TO WHOM: (1) person primarily
liable on the instrument, or if he is GULLAS v. PNB (1935)
absent or inaccessible, (2) to any
person found at the place where A notice of dishonor is necessary to charge an
the presentment is made. indorser & that the right of action against him does
not accrue until the notice is given.
As a general rule, a bank has a right of set off of the
5. Dishonor by Nonpayment deposits in its hands for the payment of any
a. Sec 83, NIL The instrument when: indebtedness to it on the part of a depositor.
i. duly presented for payment and However, prior to the mailing of notice of dishonor &
payment refused or cannot be without awaiting any action by Gullas, the bank made
obtained; or use of the money standing in his account to make
ii. presentment is excused and the good for the treasury warrant. Gullas was merely an
instrument is overdue and unpaid. indorser & notice should actually have been given to
b. Effect:: [subject to NIL provs] an him in order that he might protect his interests.
immediate right of recourse to all parties
secondarily liable accrues to the holder. 5.3. Form and Contents (Sec 96)
(Sec. 84, NIL) 1. Form of Notice:
i. Dishonor is a condition precedent to a. may either be in writing, or oral
the enforcement of the liability of b. Campos: must be in a language that will
secondary parties. inform the addressed party that the
ii. This is conditioned upon the giving of instrument has been duly presented
due notice of dishonor 2. Contents – must contain any terms which
iii. An indorser whose liability has sufficiently
become fixed by demand and notice is, a.identify the instrument, and
as to holder, a principal debtor. b. indicate that it has been dishonored by
non-acceptance or non-payment;
3.Mode of delivery
a. Personal service
i. There must be actual personal a. Where notice of dishonor is duly addressed
service, or and deposited in the post office,
ii. An ordinary intelligent and diligent i. “deposit in post office” — when
effort to make personal service deposited in any branch post office or in
b. Through the mails any letter box under the control of the
c. Campos: Through the telephone post-office department. (Sec. 106, NIL)
i Party to be notified must be fully b. notwithstanding any miscarriage in the
identified as the party at the mails
receiving end of the line
4.The ff. notice still sufficient: (Sec. 95, NIL) 4. Place where notice must be sent (Sec. 108,
a. a written notice, not signed NIL)
b. insufficient written notice, supplemented a. to the address, if any, added by the party
and validated by verbal communication to his signature; if address not given:
c. instrument suffering from misdescription i to the post-office nearest to his place
UNLESS the party to whom the notice is of residence or where he is
given is in fact misled thereby. accustomed to receive his letters; or
ii If he lives in one place and has his
5.4.Time and Place place of business in another, to
1. Notice may be given as soon as the either place; or
instrument is dishonored and within the time iii If he is sojourning in another place,
fixed by NIL, unless delay excused (Sec. 102, to the place where he is so
NIL) sojourning.
2. NOTICE to SUBSEQUENT PARTY: Each party b. Notice sent to place not in accord with
who receives a notice is given the same period NIL, still SUFFICIENT
of time within which to notify prior indorsers i Where the notice is actually received
that the last holder had. (Sec. 107) by the party within the time specified
3. TIME FIXED BY THE NIL: in this Act,
a. Where parties reside in same place (Sec.
103, NIL): Must be given w/in the ff. 5.5. By Whom Given
times: 1. Sec. 90, NIL
ii If given at the place of business of a. By or on behalf of the holder or
the person to receive notice - b. any party to the instrument who may be
before the close of business hours compelled to pay it to the holder, and who,
on the day following upon taking it up, would have a right to
iii If given at his residence - before reimbursement from the party to whom the
the usual hours of rest on the day notice is given
following 2. Agent
iv If sent by mail - deposited in the a. Notice of dishonor may be given by an
post office in time to reach him in agent either in his own name or in the name
usual course on the day following. of any party entitled to give notice, whether
b. Where parties reside in different places that party be his principal or not (Sec. 91,
(Sec. 104, NIL).: NIL)
i. If sent by mail - deposited in the post b. Where instrument has been dishonored in
office in time to go by mail the day hands of agent, he may either himself give
following the day of dishonor, or if there notice to the parties liable thereon, or he
be no mail at a convenient hour on last may give notice to his principal (within the
day, by the next mail thereafter same time as if agent were holder) (Sec. 94,
ii. Convenient hour: depends on the NIL)
usual hours of opening of business
houses and the post-office 5.6. To whom notice MAY be given
iii. If given otherwise - within the time 1. If given by an agent
that notice would have been received in a. to his principal, in case of an instrument
due course of mail, if it had been dishonored in the hands of an agent
deposited in the post office within the (Sec. 94, NIL), or
time specified above b. to the parties liable thereon
c. ex: collecting bank
c. Delay (Sec. 113, NIL) 2. IN GENERAL (Sec. 97)
i. Excused: when the delay is caused by a. Party himself
circumstances beyond the control of the b. Or his agent in that behalf
holder and not imputable to his default, 3. If party is dead and death known to the party
misconduct, or negligence giving notice (Sec. 98, NIL)
ii. But, when the cause of delay ceases a. MUST be given to a personal
to operate, notice must be given with representative, if there be one, and if
reasonable diligence. with reasonable diligence, he can be
4. Sender deemed to have given due notice
(Sec. 105, NIL)
b. If no personal representative – MAY be b. drawee fictitious, incapacitated
sent to the last residence or last place c. drawer is person to whom instrument is
of business of the deceased. presented for payment
4. To partners : to any one partner, even d. drawer has no right to expect/require that
though there has been a dissolution. (Sec. drawee/acceptor will honor instrument
99, NIL) e. drawer countermanded payment
5. To joint parties(Sec. 100, NIL)
a. to each of the party STATE INVESTMENT HOUSE v CA (1993)
b. unless one of them has authority to
receive such notice for the others. Moulic issued 2 checks to Victoriano as security for
6. to bankrupt (Sec. 101, NIL) pieces of jewelry to be sold on commission.
a. to the party himself or Victoriano negotiated these checks to State
b. to his trustee or assignee Investment. As Moulic failed to sell the jewelry, she
returned them to Victoriano. However, she failed to
5.7. In whose favor notice operates retrieve her checks. Moulic withdrew her funds from
1. when given by/on behalf of holder: inures to the drawee bank. Upon presentment, the checks
benefit of (Sec. 92, NIL) were dishonored.
a. all subsequent holders and HELD: State Investment is a holder in due course &
b. all prior parties who have a right of is not subject to the personal defense of lack of
recourse vs. the party to whom it’s given consideration.
2. where notice given by/on behalf of a party There is no need to serve the drawer a notice of
entitled to give notice: inures for benefit (Sec. dishonor because she was responsible for the
93, NIL) dishonor of her checks. After withdrawing her
a. holder funds, she could not have expected her checks to be
b. all parties subsequent to party to whom honored.
notice given
2. Where not necessary to charge indorser
5.8. When rule requiring notice not applied (Sec. 115, NIL)
1. In general a. drawee fictitious, incapacitated, and
a. Sec 112: notice of dishonor is dispensed indorser aware of the fact at time of
with when after the exercise of reasonable indorsement
diligence, it cannot be given to or does not b. indorser is person to whom instrument
reach the parties sought to be charged presented for payment
b. Reasonable diligence depends upon the c. instrument made/accepted for his
circumstance of the case accommodation
2. When notice of non-acceptance is already
given 6. Protest
a. Sec 116: Where due notice of dishonor
by non-acceptance has been given, notice
of a subsequent debtor by non-payment is A. Definition: testimony of some proper person that
not necessary, unless in the meantime the the regular legal steps to fix the liability of drawer
instrument has been accepted and indorsers have been taken
b. Ratio for the rule: dishonor by non- B. When necessary:
1. In case of a FOREIGN BILL appearing on its
acceptance confers upon the holder an
immediate right against all secondary face to be such;
2. protest for non-acceptance if dishonored by
3. Waiver nonacceptance &
3. protest for nonpayment if not previously
a. Waiver of notice may be made either:
i before the time of giving notice has dishonored by nonpayment.
4. Effect of failure to protest: the drawer and
arrived or
ii after the omission to give due indorsers are discharged. (Sec. 152, NIL)
notice; may be expressed or C. Form
1. annexed to the bill or must contain a copy
implied. (Sec. 109, NIL)
b. Parties affected by waiver thereof, and
2. must be under the hand and seal of the
i. Dependent upon where the waiver is
written notary making it;
ii. Where the waiver is embodied in the D. Contents
1. The time and place of presentment;
instrument itself - binding upon all
2. The fact that presentment was made and the
iii. where written above the signature of manner thereof;
3. The cause or reason for protesting the bill;
an indorser - binds him only. (Sec.
4. The demand made and the answer given, if
110, NIL)
any, or the fact that the drawee or acceptor
5.9. When Notice Not Necessary could not be found. (Sec. 153, NIL).
1.When not necessary to charge drawer E. By whom
1. A notary public; or
(Sec. 114, NIL)
a. drawer/drawee same person
2. any respectable resident of the place where 2. When bill may be accepted for honor. —
the bill is dishonored, in the presence of two When a BE has been (1) protested for
or more credible witnesses. (Sec. 154, dishonor by non-acceptance or protested for
NIL) better security and (2) is not overdue  any
F. Time person not being a party already liable may,
1. on the day of its dishonor unless delay is with the CONSENT of the holder, intervene
excused; and accept the bill supra protest for the honor
2. when duly noted, the protest may be of any party liable thereon or for the honor of
subsequently extended as of the date of the the person for whose account the bill is
noting. (Sec. 155, NIL); drawn.
G. Place 3. The acceptance for honor may be for part
1. at the place where it is dishonored, only of the sum for which the bill is drawn;
2. EXCEPT bill drawn payable at the place of 4. where there has been an acceptance for
business or residence of person other than honor for one party, there may be a further
the drawee has been dishonored by acceptance by a different person for the
nonacceptance, honor of another party. (Sec. 161, NIL)
a. it must be protested for non-payment 5. Referee in case of need — person whose
at the place where it is expressed to be name is inserted by the drawer of a bill and
payable, and any indorser to whom the holder may resort
b. no further presentment for payment to, in case bill is dishonored by non-acceptance
or demand on, the drawee is necessary. or non-payment; option of the holder to
(Sec. 156, NIL) resort to the referee (Sec. 131, NIL)
H. Protest for better security against the drawer B. PAYMENT FOR HONOR - any person may
and indorsers — where the acceptor has been intervene and pay bill protested for non-payment
adjudged a bankrupt or an insolvent or has supra protest (Sec. 171, NIL)
made an assignment for the benefit of creditors
before the bill matures (Sec. 158, NIL) 6.3 INSTRUMENTS PAYABLE AT BANK
I. Delay excused
1. Requisites: Sec 87: Where the instrument is made payable at a
a. when caused by circumstances beyond bank, it is equivalent to an order to the bank ton pay
the control of the holder, and the same for the account of the principal debtor
b. not imputable to his default, therein
misconduct, or negligence.
2. When the cause of delay ceases to operate, BINGHAMPTON PHARMACY v FIRST NATIONAL
the bill must be noted or protested with BANK (1915)
reasonable diligence.; There is a distinction between the drawer of a check &
J. When protest dispensed with - by any the maker of a note payable at a bank:
circumstances which would dispense with notice Note payable at Check
of dishonor. (Sec. 159, NIL) bank
K. Waiver of protest: deemed to be a waiver not maker of a note is drawer of a check is
only of a formal protest but also of presentment primarily liable on only liable after
and notice of dishonor. (Sec. 111, NIL) the instrument dishonor
Law excuses requires
presentment of presentment within
TAN LEONCO v GO INQUI(1907) the instrument a reasonable time at
the peril of
In exchange for the abaca from Tan Leonco's discharging the
plantations, Go Inqui drew a bill of exchange drawer
against Lim Uyco. Upon presentment of the obligation of the Breach of the duty
draft, it was refused payment due to a stop maker of a note is of the holder of a
order from the drawer. The bill was not not a conditional check to present for
protested. promise to pay payment at the
HELD: The action is not brought upon the bill only at a special place where it is
of exchange which was used only as evidence place, but is a payable at a
of the indebtedness. Under these conditions, promise to pay reasonable time
protest & notice of nonpayment are generally, even discharges the
unnecessary in order to render the drawer though a place of drawer from liability
liable. payment to the extent he is
damaged by the
NOTE: The ruling of the Court on protest is breach.
merely obiter dictum.
8. Bills in Set
7. Acceptance or Payment for Honor
A. composed of various parts being numbered,
A. Acceptance and containing a reference to the other parts,
1. Practice of accepting for honor is obsolete all of which parts constitute one bill of lading
B. Bills in set constitute one bill. (Sec. 178,
C. Right of HDCs where different parts are
negotiated. — the holder whose title first
accrues is the true owner of the bill. But
nothing in this section affects the right of a
person who, in due course, accepts or pays
the parts first presented to him. (Sec.
179., NIL)
D. Liability of holder who indorses two or
more parts of a set to different persons. —
liable on every such part, and every
indorser subsequent to him is liable on the
part he has himself indorsed, as if such
parts were separate bills. (Sec. 180, NIL)
E. Acceptance - may be written on any part
and it must be written on one part only. If
the drawee accepts more than one part and
such accepted parts negotiated to different
holders in due course, he is liable on every
such part as if it were a separate bill. (Sec.
181, NIL)
F. Payment - When the acceptor of a bill
drawn in a set pays it without requiring the
part bearing his acceptance to be delivered
up to him, and the part at maturity is
outstanding in the hands of a holder in due
course, he is liable to the holder thereon.
(Sec. 182, NIL)
G. Effect of discharging one of a set. —
Except as herein otherwise provided, the
whole bill is discharged. (Sec. 183, NIL)
Chapter VII. DISCHARGE 4. principal debtor becomes holder
instrument at or after maturity in his own

1. Definition: Discharge 5. renunciation of holder: (Sec. 122, NIL)
a. holder may expressly renounce his rights
vs. any party to the instrument, before or
The release of all parties, whether primary or
after its maturity
secondary, from the obligation on the instrument;
b. absolute and unconditional renunciation
renders the instrument non-negotiable
of his rights against PRINCIPAL DEBTOR
made at or after maturity discharges the
2. Discharge of the INSTRUMENT instrument
c. renunciation does not affect rights of
2.1. How discharged: (Sec 119)7 HDC w/o notice.
1. By Payment in due course d. Renunciation must be in writing unless
a. Sec. 88: Payment is made in due instrument delivered up to person
course when it is made: primarily liable thereon
i at or after the maturity of the material alteration – review Sec.
payment 125, NIL: what constitutes material
o if payment is made before alteration (Sec. 124, NIL: material
maturity and the note is alteration w/o assent of all parties
negotiated to a HDC, the latter liable avoids instrument except as
may recover on the instrument. against party to alteration and
ii to the holder thereof subsequent indorsers)
o payment to one of several
payees or indorsees in the 3. OF SECONDARY PARTIES (Sec. 120,
alternative discharges the NIL)8
o but payment to one of several
A. by discharge of instrument
joint payees or joint indorsers
B. intentional cancellation of signature by holder
is not a discharge. The party
C. discharge of prior party
receiving payment must have
D. valid tender of payment by prior party
been authorized by others to
E. release of principal debtor, unless holder’s right of
receive payment.
recourse vs. 2ndary party reserved
iii in good faith and without notice
F. any agreement binding upon holder to extend
that his title is defective
time of payment, or to postpone holder’s right to
b. By whom made:
enforce instrument, UNLESS
i payment in due course by or on
1. made with assent of party secondarily liable,
behalf of principal debtor
ii payment in due course by party
2. right of recourse reserved.
accommodated where party is
G. Failure to make due presentment (Secs. 70, 144,
made/ accepted for accommodation
c. When check deemed paid by drawee
H. failure to give notice of dishonor
I. certification of check at instance of holder
i Once the holder receives the cash
J. reacquisition by prior party
ii If the bank credits the amt of the
1. where instrument negotiated back to a prior
check to the depositor’s account
party, such party may reissue and further
iii Where the drawee bank charges
negotiate, but not entitled to enforce
the check to the account, indicating
payment vs. any intervening party to whom
intention to honor the check
he was personally liable
2. intentional cancellation by holder
2. where instrument is paid by party secondarily
a. if unintentional or under mistake or
liable, it’s not discharged, but
without authority of holder, inoperative;
a. the party so paying it is remitted to his
b. where instrument or signature appears
former rights as regard to all prior parties
to have been cancelled, burden of proof
b. and he may strike out his own and all
on party which alleges it was
subsequent indorsements, and again
unintentional, etc. (Sec. 123, NIL)
negotiate instrument, except
3. any other act which discharges a simple
i where it’s payable to order of 3rd
contract for payment of money
party and has been paid by drawer
a. ex. issuance of a renewal note—
b. Refer to Art 1231 of the Civil Code

Suggested Mnemonics: CuPID CRRAFFT: intentional
Cancellation, Prior Party and Instrument Discharge, Certification,
Suggested Mnemonics: PICk ROAD: Payment in due course, Release, Reacquisition, any Agreement, Failure to make due
Intentional Cancellation, Renunciation, any Other Act, Debtor presentment, Failure to give notice of dishonor, valid Tender of
becomes holder. payment.
ii where it’s made/accepted for
accommodation and has been paid
by party accommodated
Chapter VIII. OTHER FORMS OF 3.2. Draft a form of BE generally used to facilitate
the transactions between persons physically remote
COMMERCIAL PAPER from each other.
3.3. Letters of Credit
1. one person requests some other person to
1. In General advance money or give credit to a third
person, and promises that he will repay the
1.1. Commercial papers – same to the person making the advancement,
1. also Negotiable instruments; or accept bills drawn upon himself for the like
2. merely special forms of either PNs or BEs; amount.
3. also governed by the NIL 2. must be issued in favor of a definite person,
and not to order.
1.2. Quasi-negotiable includes commercial paper 3. under our law, a letter of credit cannot be a
which though not governed by the NIL, have certain negotiable instrument because (a) it may not
attributes of negotiability. contain the words of negotiability; (b) may be
issued for an undetermined amount. See Art
568 Code of Commerce.
2. Bonds and Debentures 4. “INDEPENDENCE PRINCIPLE”: Credits, by
their nature, are separate transactions from
2.1. Bonds the sales or other contract(s) on which they
may be based and banks are in no way
1. evidences of indebtedness, in the nature of concerned with or bound by such contract(s),
a PNs even if any reference whatsoever to such
2. usually accompanied by a mortgage of the contract(s) is included in the credit.
property of the issuer Consequently, the undertaking of a bank to
3. issued by the government (municipal & pay, accept and pay draft(s) or negotiate
other public corporations) & private and/or fulfill any other obligation under the
corporations; credit is not subject to claims or defenses by
a. though not to mature for a long time, the applicant resulting from his relationships
assure some regular income to with the issuing bank or the beneficiary. A
bondholders in the form of interest*, beneficiary can in no case avail himself of the
usually payable annually contractual relationships existing between the
b. bonds and interest coupons (evidences banks or between the applicant and the
interest obligations)* issuing bank.
 may be negotiable in form, a. Thus, the engagement of the issuing
therefore governed by NIL (Sec bank is to pay the seller or beneficiary of
65); the credit once the draft and the required
 both are actually promissory documents are presented to it. This
notes principle assures the seller or the
c. they run for long periods of time, and beneficiary of prompt payment
are often sold to the public in general independent of any breach of the main
d. funds generated by such bonds are contract and precludes the issuing bank
used to finance corporate projects and from determining whether the main
public works; contract is actually accomplished or not.
e. there is no warranty on the part of such Under this principle, banks assume no
indorser or negotiator that prior parties liability or responsibility for the form,
had capacity to contract. The qualified sufficiency, accuracy, genuineness,
indorser & negotiator by delivery of a falsification or legal effect of any
bond do not warrant therefore that the documents, or for the general and/or
corporation which issued the bonds has particular conditions stipulated in the
any judicial capacity to act. A general documents or superimposed thereon, nor
indorser thereof however would be do they assume any liability or
liable for such want of capacity. responsibility for the description,
quantity, weight, quality, condition,
2.2. Debentures packing, delivery, value or existence of
1. similar to bonds except that they are the goods represented by any
usually for a shorter tem and may or may documents, or for the good faith or acts
not be accompanied by a mortgage. and/or omissions, solvency, performance
2. they are often issued on the general credit or standing of the consignor, the carriers,
of the issuer corporation or the insurers of the goods, or any other
person whomsoever.
3. Drafts and Letters of Credit b. The independent nature of the letter of
credit may be: (a) independence in toto
where the credit is independent from the
3.1. Drafts and Letters of Credit - The draft and justification aspect and is a separate
the letter of credit are generally used together to
obligation from the underlying agreement
effect payment in international transactions.
like for instance a typical standby; or (b)
independence may be only as to the The company and its officers cannot shift the burden
justification aspect like in a commercial of loss to the bank because of the terms of their
letter of credit or repayment standby, Commercial Letter of Credit Agreement with the bank
which is identical with the same provides that latter shall not be responsible for the
obligations under the underlying any difference in character or condition of the
agreement. In both cases the property. Furthermore, the bank was able to prove
payment may be enjoined if in the light the existence of a custom in international banking and
of the purpose of the credit the financing circles negating any duty of the bank to
payment of the credit would constitute verify whether what has been described in letters of
fraudulent abuse of the credit. credits or drafts or shipping documents actually
(Transfield vs. Luzon Hydro) tallies with what was loaded aboard ship. Banks, in
5. Pertinent Code of Commerce provisions: providing financing in international business
a. Art 567. Letters of credit - issued by transactions do not deal with the property to be
one merchant to another for the exported or shipped to the importer, but deal only
purpose of attending to a commercial with documents.
b. Art 568. The essential conditions of LEE v CA (2002)
letter of credit shall be:
i issued in favor of a definite person, Modern letters of credit are usually not made between
and not to order. natural persons. They involve bank to bank
ii limited to a fixed and specified transactions. Historically, the letter of credit was
amount, or to one or more developed to facilitate the sale of goods between,
undetermined amount, but all distant and unfamiliar buyers and sellers. It was an
within a maximum the limit of arrangement under which a bank, whose credit was
which has to be stated exactly. acceptable to the seller, would at the instance of the
Note: Those which do not have any of buyer agree to pay drafts drawn on it by the seller,
these last circumstances shall be provided that certain documents are presented such
considered as mere letters of as bills of lading accompanied the corresponding
recommendation. drafts. Expansion in the use of letters of credit was a
c. Art 569. The drawer of a letter of natural development in commercial banking. Parties
credit shall be liable to the person on to a commercial letter of credit include:
whom it was issued, for the amount (a) the buyer or the importer,
paid by virtue thereof, within the (b) the seller, also referred to as beneficiary,
maximum fixed therein. (c) the opening bank which is usually the
Letters of credit may not be protested buyer’s bank which actually issues the letter
even if not be paid; bearer cannot of credit,
acquire any right of action by reason of (d) the notifying bank which is the
non-payment against the person who correspondent bank of the opening bank
issued it. through which it advises the beneficiary of
The person paying has right to demand the letter of credit,
the proof of the identity of the person in (e) negotiating bank which is usually any
whose favor the letter of credit was bank in the city of the beneficiary. The
issued. services of the notifying bank must always be
d. Art 570. The drawer of a letter of utilized if the letter of credit is to be advised
credit may annul it, informing the to the beneficiary through cable,
bearer and the person to whom it is (f) the paying bank which buys or discounts
addressed the drafts contemplated by the letter of
e. Art 571. The bearer of a letter or credit credit, if such draft is to be drawn on the
shall pay the amount received to the opening bank or on another designated bank
drawer without delay. Should he not do not in the city of the beneficiary. As a rule,
so, an action involving execution may whenever the facilities of the opening bank
be brought to recover it, with legal are used, the beneficiary is supposed to
interest and the current exchange in present his drafts to the notifying bank for
the place where it is repaid. negotiation and
f. Art 572. If the bearer of a letter of (g) the confirming bank which, upon the
credit does not make use thereof within request of the beneficiary, confirms the letter
the (1) period agreed upon with the of credit issued by the opening bank.
drawer, or in default of a period fixed,
(2) within 6 months, counted from its TRANSFIELD VS. LUZON HYDRO (2004)
date, in any point in the Philippines,
and within 12 months anywhere outside Can the beneficiary invoke the independence
thereof, it shall be void in fact and in principle? Yes.
law. To say that the independence principle may only be
invoked by the issuing banks would render nugatory
the purpose for which the letters of credit are used in
BPI v. DE RENY FABRIC (1970) commercial transactions. As it is, the independence
doctrine works to the benefit of both the issuing limitations imposed by the principles governing
bank and the beneficiary. estoppel.

4. Certificate of Stock CAPCO v. MACASAET (1990)

Certificates of stocks are considered as quasi-

A. or share certificate is the customary and negotiable instruments. When the owner or
convenient evidence of the holder’s interest in shareholder signs the printed form of sale or
the corporation which issues it. assignment at the back of every stock certificates
B. not a NI, but is included in the term “securities” without filling in the blanks provided for the name of
bec does not contain any promise or order to the transferee as well as for the name of the
pay money; attorney-in-fact, the said owner or shareholder, in
C. described as Quasi-Negotiable bec oftentimes, effect, confers on another all the indicia of ownership
by application of the principles of estoppel, and of the said stock certificates.
to effectuate the ends of justice and the
intention of the parties, the courts decree a
better title to the transferee than actually 5. Negotiable Documents of Title
existed in his transferor, and is the same as
would be reached if the certificate were 5.1. In General
negotiable. 1. as distinguished from negotiable instruments,
D. When the shareholder signs the back of refer to goods and not to money; the sale of
certificates of stock without filling in the blanks goods covered is effected by the transfer of
(for the name of the transferee and attorney-in- said document
fact) and the certificate is delivered to another, 2. not governed by the NIL but by the Civil
the latter appears to be the owner thereof. A Code.
bona fide purchaser of value without notice, will 3. includes any bill of lading, dock warrant,
be protected in his acquisition, although such “quedan”, or warehouse receipt or order for
third person has diverted the certificate from the delivery of goods, or any other document
the purpose for which he was entrusted used in the ordinary course of business in the
therewith. (Principle of Estoppel) sale or transfer of goods, as proof of the
E. The same rule is applicable if the certificate is in possession or control of the goods, or
bearer form. authorizing or purporting to authorize the
F. The rule is applicable where the certificate is possessor of the document to transfer or
lost or stolen while signed in blank. Even a receive, either by indorsement or by delivery,
purchaser in good faith cannot acquire title as goods represented by such document.
against the true owner. (?) 4. Documents of title negotiable when goods
G. At common law, stock certificates are given the represented thereby are deliverable to a
attributes of negotiability only where the owner specified person , to order or to bearer.
thereof has entrusted the wrongdoer with the 5. valuable in commerce because it facilitates
possession of such certificate and clothed him the sale and delivery of goods.
with apparent ownership thereof.
5.2. Kinds
SANTAMARIA v HONGKONG & SHANGHAI 1. Warehouse receipts an agreement by a
BANK (1951) warehouseman to store goods and deliver
them to a named person or his order or to
Plaintiff, in failing to take the necessary precaution bearer.
upon delivering the certificate of stock to her broker, 2. Bill of Lading a similar contract by a carrier
was chargeable with negligence in the transaction to ship goods and deliver them to the person
which resulted to her own prejudice, and as such, named therein or his order or to bearer;
she is estopped from asserting title to it as against negotiable bill of lading is useful not only as
the defendant bank. evidence of the receipt of the goods by the
A certificate of stock, indorsed in blank, is deemed carrier but as evidencing title to goods
quasi-negotiable, and as such the transferee thereof covered by it. It also facilitates the purchase
is justified in believing that it belongs to the holder of goods by one person from another who is
and transferor. physically remote and probably unknown to
DE LOS SANTOS, McGRATH (1955) a. “straight” bill where the goods are to be
delivered to a specified person, it is not
Although a stock certificate is sometimes regarded negotiable and is called a “straight” bill.
as quasi-negotiable, in the sense that it may be Otherwise, it is referred to as an “order”
transferred by endorsement, coupled with delivery it bill.
is well settled that the instrument is non-negotiable,
because the holder thereof takes it without 3. Certificate of Deposita receipt of a bank for
prejudice to such rights or defense as the registered certain sum of money received upon deposit;
owner or credit may have under the law, except in generally framed in such FORM as to
so far as such rights or defenses are subject tot eh constitute a promissory note, payable to the
depositor, or to the depositor or order, or to owner thereof or had no authority
bearer. from such owner to deposit the
a. it is taken when depositor does not goods, then the holder of the
need his money for some extended negotiable document, even if the
period of time and wants it to earn negotiation to him was valid, cannot
interest; more of an investment paper acquire title to the goods.
than a commercial paper because it is ii On the other hand, even if the
not attendant to a commercial original bailor or depositor was the
transaction the way a check or a owner or had authority from the
promissory note is. owner, if the negotiation to the
b. it is negotiable if it meets all the present holder’s transferor was not
requirements of Sec 1 NIL valid, such holder, even if in good
faith and for value, does not acquire
5.3. Negotiation - same as those used in NIs; to any right to the goods.
order=delivery + indorsement, to bearer = delivery iii In both cases, the holder’s remedy if
1. The means of negotiating a document of title any, is against his transferor and/or
are the same as those used in negotiable the guilty party.
instruments. b. The person to whom the document has
2. If by the terms of the document, the goods been negotiated acquires the obligation
are deliverable to the order of a specified of the bailee to make delivery to him,
person, then it should be indorsed by such as if they had contracted directly with
person, either specially or in blank. each other.
3. If the goods are deliverable to bearer, or the i By issuing a negotiable document of
document has been indorsed in blank, then title, such bailee had given in
negotiation may be by mere delivery. advance his consent to hold the
goods for any person to whom such
5.4. Rights of a Holder document is negotiated.
1. When free from personal defense ii If document non-negotiable, notice of
a. Under Art 1518 Civil Code, a holder of any transfer should be given to the
a negotiable document of title in good bailee otherwise bailee or any other
faith, for value and without notice is person other than the transferor not
placed on the same level as a HDC of a bound
negotiable instrument – i.e., personal iii Thus, the transferee’s rights may be
defenses enumerated in said article are defeated by a levy of attachment on
not available against him. Personal the goods or by a notification to the
defenses include: negotiation was a bailee of a sale of the goods to
breach of duty on the part of the person another purchaser.
making the negotiation, owner of the iv A sale of the goods without the
document was deprived of the document will not prejudice a
possession of the same by loss, theft, subsequent purchaser who takes the
fraud, accident, mistake, duress or document in good faith and for
conversion. value.
b. Note Art 1518’s conflict with Art 1512. v The bailee’s delivery to the legal
(see p 915) holder of the document would relieve
2. What title acquired (NOTE: see Arts 1513, him of any further responsibility for
1514 and 1519 Civil Code) the goods.
a. A person to whom a negotiable
document of title has been duly 5.5. Liability of Indorser
negotiated acquires the title of the 1. The indorsement of a negotiable document of
person NEGOTIATING it as well as the title carries with it certain implied warranties by
title of the ORIGINAL BAILOR or the indorser.
depositor of the goods. 2. As to the document, his warranty covers its
ex. if the original bailor had no genuineness, his legal right to negotiate it and his
authority from such owner to deposit lack of knowledge of any fact which would impair
the goods, then the holder of the its validity.
negotiable document, even if the 3. As to the goods, he warrants that he has the
negotiation to him was valid, cannot right to transfer title thereto and that they are
acquire title to the goods; AND even if merchantable.
the original bailor had authority, if the 4. However, unlike the indorser of a NI who is
negotiation to the present holder’s liable if the primary party fails to pay, the
transferor was not valid, such holder, indorser of a negotiable document of title is not
even if in good faith and for value, does liable for the failure of the bailee to fulfill his
not acquire any right to the goods.  obligation to deliver the goods.
the holder’s remedy if any, is against
his transferor and/or the guilty party. ROMAN v ASIA BANKING CORP. (1922)
i Thus, if the original bailor or
depositor of the goods was not the
A warehouse receipt must be interpreted
according to its evident intent and it is obvious
that the deposit evidenced by the receipt in this
case was intended to be made subject to the
order of the depositor and therefore negotiable.
The indorsement in blank of the receipt with its
delivery which took place on the date of the
issuance of the receipt demonstrate the intent to
make the receipt negotiable. Furthermore, the
receipt was not marked “non-negotiable.”


If the owner of the goods permits another to have

the possession or custody of negotiable
warehouse receipts running to the order of the
latter, or to bearer, it is a representation of title
upon which bona fide purchasers for value are
entitled to reply, despite breaches of trust or
violations of agreement on the part of the
apparent owner.