NEGOTIABLE INSTRUMENTS Reviewer—ATTY.

BUSMENTE SBCA 2017-2018

What is a Negotiable Instrument?
A negotiable instrument is a written and signed instrument by the maker or drawer that
contains an unconditional promise or order to pay a sum certain in money made payable
on demand, or at a fixed or determinable future time, to be payable to order or to bearer,
and where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
It is an instrument which possesses all the elements of negotiability provided in Sec. 1 of
Act No. 2031, or otherwise known as the Negotiable Instruments Law.
Without referring to a particular country, it is that kind of currency which the law compels
a creditor to receive in payment of a debt, be it public or private, provided it is tendered in
the right amount.
All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be the legal tender in the
Philippines for all debts, both public and private.
A negotiable instrument is not a legal tender.
What are the two (2) characteristics or features of negotiable instruments?

Sec. 1. Form of Negotiable instruments.—An instrument to be negotiable must conform to the
following requirements:
a) It must be in writing and signed by the maker or drawer;
b) Must contain an unconditional promise or order to pay a sum certain in money;
c) Must be payable on demand, or at a fixed or determinable future time;
d) Must be payable to order or to bearer; and
e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
What is a Commercial Paper?
In its broadest sense, commercial paper refers to written promises or obligations that arise
out of commercial transactions from the use of such instruments as promissory notes and
bills of exchange.
All such paper is either negotiable or non-negotiable. It is negotiable if it satisfies certain
formal requirements, by giving it special characteristics not possessed by other types of
contracts.
Purpose of negotiable instruments?
The NIL was enacted for the purpose of facilitating, not hindering or hampering
transactions in commercial paper.
1) Negotiability—the quality or attribute of the instrument whereby it may pass from
hand to hand similar to money, so as to give the holder in due course the right to hold
the instrument and collect the sum payable for himself free from any infirmity in the
instrument or defect in the title of any of the prior parties, or defenses available to
them among themselves.
2) Accumulation of Secondary Contracts—this is the most important feature of
negotiable instruments as they are transferred from one person to another. Once an
instrument is issued, additional parties can become involved.
The more debts that are added, the more advantageous it will be to the holder in due
course as he can proceed not only against the maker but also against all transferors.
What are the matters to be considered in determining negotiability?
In determining the negotiability of an instrument, the following must be considered:
a) The whole of the instrument; (form)
b) Only what appears on the face of the instrument; (content) and
c) The provisions of the NIL especially Sec. 1 thereof which gives the requirements
of negotiability.
What is a Promissory Note?

What are the functions of negotiable instruments? A negotiable promissory note is an unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable
1) It operates as a substitute for money; future time, a sum certain in money to another or his order or to bearer. Where a note is
2) It is a medium of exchange; drawn to the maker’s own order, it is not complete until indorsed by him. (Sec. 184)
3) It is a credit instrument that increases credit circulation; Briefly stated, it is a written promise to pay a definite sum of money to another at a definite
4) It increases the purchasing power in circulation; and time. For brevity, a promissory note is usually called a “note.”
5) It is a proof of transaction.
EXAMPLE:
Define Money
1) Payable to order:
Money commonly means cash or government bills, notes and coins, which are means to 11 September 2017
buy goods or services or to pay indebtedness; they are a medium of exchange and legal Manila
P10,000.00
tender.
For value received, I promise to pay to the order of P the sum of Ten Thousand (P10,000.00) Pesos on or
Define Legal Tender before October 31, 2017 at his house at Hillsborough, Alabang.

(Sgd.) M

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2) Payable to bearer:
2) Payable to bearer: 11 September 2017
Manila
11 September 2017
P10,000.00
Manila
For value received, pay P or bearer the sum of Ten Thousand (P10,000.00) Pesos on or before October 31,
P10,000.00 2017 and charge the same to my account.
(Sgd.) Drawer
For value received, I promise to pay P or bearer the sum of Ten Thousand (P10,000.00) Pesos on or before To Drawee
October 31, 2017 at his house at Hillsborough, Alabang. Better Living, Bicutan

(Sgd.) M

Promissory Note and Bill of Exchange distinguished

What is a Bill of Exchange? Who are the three (3) parties to such an instrument?
A negotiable bill of exchange is an unconditional order in writing addressed by one person PROMISSORY NOTE BILL OF EXCHANGE
to another, signed by the person giving it, requiring the person to whom it is addressed to Sec. 184 Sec. 126
pay on demand or at a fixed or determinable future time a sum certain in money to order
or to bearer. (Sec. 126) It contains an unconditional promise to pay; Contains an unconditional order to pay;
There are two (2) parties on its face; There are three (3) parties on its face;
Briefly stated, it is a written order made by one person to another to pay money to a third The person who signs it is the maker; The person who signs it is the drawer;
person or his order or to bearer. For brevity, a bill of exchange is usually called a “bill.” Maker is primarily liable; Drawer is secondary liable;
The fundamental idea and purpose of a bill is that the drawer has funds in the hands of the The drawee-acceptor is primarily liable;
drawee of which the drawer wishes to avail himself. There is only one presentment for payment; There are two (2) presentments:
a) For acceptance; and
If drawn on a blank AND payable on demand, the order bill is, by definition, called a check b) For payment.
(Sec. 185). The check is the most common form of order paper.
Sec. 2. Certainty as to sum; what constitutes.—The sum payable is a sum certain within the meaning
A bill requires in its inception at least three (3) parties—the drawer, the drawee and the
of this Act, although it is to be paid—
payee—to fill the legal roles involved. a) With interest; or
b) By stated installments; or
1) Drawer—person who issues and draws the order bill. He gives the order to pay c) By stated installments, with a provision that upon default in payment of any installment or
money to a third party. He does not pay directly. of interest the whole shall become due; or
d) With exchange, whether at a fixed rate or at the current rate; or
2) Drawee—the party upon whom the bill is drawn. He is the person to whom the
e) With costs of collection or an attorney’s fee, in case payment shall not be made at maturity.
bill is addressed and who is ordered to pay. He becomes an acceptor when he
indicates a willingness to accept responsibility for the payment of the bill (Sec. The “sum certain” requirement is met if the holder can determine from the instrument
62). The acceptor has the same legal liability as the maker of a note. The drawee itself the amount he is entitled to receive at maturity.
is a bank in the case of a check.
The basic test is whether the holder can determine by calculation or computation from the
3) Payee—the party in whose favor the bill is originally drawn or is payable. Up to
terms of the instrument the amount payable when the instrument is due.
the time of acceptance by the drawee, the payee looks exclusively to the drawer.
Again, the payee, as in a promissory note, may be specifically designated, or may If the instrument calls for an act other than the payment of money, it is not negotiable
be an office or title, or unspecified. because a negotiable instrument is intended as a substitute for money.
Drawer  Drawee  Payee Interest at a fixed rate
EXAMPLE:
1) Payable to order:
EXAMPLE:
11 September 2017
Manila
P10,000.00 “I promise to pay P or order P10,000, with interest at 15% per annum.”
For value received, pay P or order the sum of Ten Thousand (P10,000.00) Pesos on or before October 31,
2017 and charge the same to my account.
(Sgd.) Drawer The entire sum is still certain because the principal sum of P10,000 is certain and the
To Drawee
Better Living, Bicutan
amount of interest due at any given time can easily be computed.

But if the promise merely states “to pay P10,000 with interest that may accrue,” the
instrument would be non-negotiable as it is lacking in a “sum certain” on its face.
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What is the effect if the accrual/rate of interest is not specified?
If the instrument provides for the payment of interest without statin the date from which
interest is to run, it shall be computed from the date of the instrument, and if the instrument
is not dated, from the issue thereof (Sec. 17[b]). If there is a stipulation for the payment of
interest but the rate is not specified, it shall be the legal rate of 12% (Art. 2209, Civil Code).
Stated installments
The interest and due date of each installment must be fixed in the instrument. The
instrument must state the principal amount then the division of such as well as the number
of installments and the maturity date for each.
Stated installments with an acceleration clause
The sum is still certain although payable by stated installments with an acceleration clause,
i.e., a promise that if any installment or interest is not paid as agreed, the whole shall
become due. Such a clause requires full payment of an instrument immediately upon
default on any installment.
Where the acceleration is dependent on the maker, then it is negotiable as the maker can
avoid the acceleration by paying the installments on the due date. In such a case, the payee
or holder cannot accelerate the note unless the maker fails to pay an installment.
However, if the acceleration is at the option of the holder, then it is non-negotiable.
Stated installment with an extension clause
Extension clauses are opposites of acceleration clauses. They appear in instruments with a
fixed future maturity date and provide that under certain circumstances, the date shall be
further extended. To be negotiable, the extension must be definite.
A provision for the payment of a sum in a foreign currency does not impair negotiability
because the current rate of exchange at any given time may easily be ascertained by inquiry
from the banks dealing on exchange or foreign currencies and such rate is a matter of
common commercial knowledge.
Exchange is applicable only to foreign bills. (see Sec. 129)
Sum to be paid with exchange
Refers to instruments that are payable in foreign currency. The exchange is the charge for
the expense of providing funds at the place where the instrument is payable to cover such
instrument which is issued at another place. It may be at a fixed rate or at the current rate.
Sec. 3. When promise is unconditional.—An unqualified order or promise to pay is unconditional
within the meaning of this Act, though coupled with—
a) An indication of a particular fund out of which reimbursement is to be made, or a particular
account to be debited with the amount; or
b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.
An instrument which mentions a particular fund out of which reimbursement is to be made
is negotiable because the order to pay is not rendered conditional. The drawee is not
limited to the money in his hands belonging to the drawer.
In other words, the fund indicated is not the direct source of payment, but only the source
of reimbursement which is an act subsequent to the payment. The drawee may pay the
amount out of any fund. It is only the reimbursement that is to come from the rentals. The
instrument is to be paid first after which the particular account indicated will be debited.
EXAMPLE:
1) Pay to the order of P P10,000 and reimburse yourself from the rentals of
my house.
2) I promise to P or order the sum of P10,000 to be debited with his current
account with me.
3) Pay P or order the sum of P10,000 and charge the same to my share of the
profits.
On the other hand, an instrument payable out of a particular fund is non-negotiable as it is
not payable “in any event” because the amount to be paid is made to depend upon the
adequacy or existence of the fund designated.
The test of negotiability in every case is said to be whether or not the instrument carries
the general personal credit of the maker or drawer. If it does, the instrument is negotiable;
if it carries only the credit of a particular fund, the instrument is non-negotiable.
The intention to limit payment to a particular fund must be made plain. If the language used
is ambiguous or obscure, courts usually decide in favor of negotiability.
Sec. 4. Determinable future time; what constitutes.—An instrument is payable at a determinable
future time, within the meaning of this Act, which is expressed to be payable—
a) At a fixed period after date or sight; or
b) On or before a fixed or determinable future time specified therein; or
c) On or at a fixed period after the occurrence of a specified event, which is certain to happen,
though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not
cure the defect.
It is an essential requisite of a negotiable instrument that it must be payable at all events.
Hence, an instrument which is only payable upon a contingency is not negotiable because
it does not appear on its face whether or not it will ever be paid. A note containing a
provision that it may be renewed a maturity is non-negotiable because there is no
unconditional promise to pay at maturity.
The last paragraph of Sec. 4 refers to a condition or an event which may or may not happen.
In order that an instrument may be negotiable, there must be certainty as to the time of
payment, i.e., the payment will certainly become due and demandable one time or another,
though it may be uncertain when that time will come. And there is certainty as to the time
when the instrument is payable on demand, or at a fixed or determinable future time (Sec.
1[c]).
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The time must be certain so that the holder will know when he may enforce the instrument;
when the statute of limitations will arise; the person liable, when he may be required to
pay; or the secondary parties—the drawer, indorser, or accommodation party—when his
obligation will arise.
Provide examples of each paragraph in Sec. 4
1) Payable at a fixed time
“I promise to pay P or order the sum of P10,000 on September 11, 2018.”
Here, the future date specified is a fixed time
2) Payable at a fixed period after date
“On or before sixty (60) days after date, I promise to pay P or order the sum of
P10,0000.”
The date of maturity may be determined beforehand by counting sixty (60) days from the
date of its issuance.
3) Payable at a fixed period after sight
“Sixty (60) days after sight, pay to the order of P the sum of P10,000.”
After sight means after the instrument is seen by the drawee upon presentment for
acceptance (see Sec. 143[a]), or accepted by the drawee. Here, the date of maturity may be
determined beforehand by counting sixty (60) days from the date it is presented to the
drawee.
4) Payable on or before a fixed time
“On or before September 11, 2018, I promise to pay P or order P10,000.”
Here, the maker has the option to pay on September 11, 2018 or before the date. The legal
right of P, the payee, is clear and certain. He can demand payment only at the time fixed
and not before. The maker has the mere option pay in advance of the legal liability if he
sees fit.
It is necessary that the year of maturity be stated, otherwise, the time of payment of the
instrument, although payable at a certain time, is not determinable.
“On demand or at the end of the year, I promise to pay P or order P10,000.”
Here, the payee is given unrestricted power to declare the note due at any time before
maturity. It is a contingency over which the maker has no control. The note is non-
negotiable because it renders the time of payment uncertain.
5) Payable on or before a determinable future time
“On or before the start of the next school semester, I promised to pay P or order
P10,000.”
The determinable future time specified is “the next school semester.” The maker may pay
before the start of the semester if he shall so choose. The phrase “determinable future time”
refers to a definite time upon or after the occurrence of an event which is certain to happen.
It means a time that can be determined with certainty after the execution of the instrument.
6) Payable on the occurrence of a specified event
“I promise to pay P or order the sum of P10,000 upon the death of his father.”
The instrument is negotiable because the specified event, the death of the father of P, is
absolutely certain to happen although the time of happening or occurrence is unknown or
uncertain (see Art. 1193, Civil Code).
7) Payable after the occurrence of a specified event
“Thirty (30) days after the death of his father, I promise to pay P or order the
sum of P10,000.”
But a bill or note payable several days before the occurrence of the specified even it non-
negotiable, since the date of maturity of the instrument can only be ascertained after it has
become overdue and, therefore, the time of payment is uncertain. Moreover, the law
provides “on or at a fixed period after” and not “before.”
8) Payable upon a contingency
“Pay to the order of P the sum of P10,000 upon his reaching the age of majority.”
Non-negotiable because the order is conditional. The payment is uncertain. P may die
before reaching the age of majority in which case the bill will never mature. It makes no
difference that P reaches such age because the happening of the contingent event does not
cure the defect (Sec. 4, par. 2) for the character of a negotiable instrument does not depend
upon future events, but solely upon its character when created.
A contingency is, in law, an uncertain future event which may or may not happen.
“I promise to pay P or order the sum of P10,000 if his father should die within
five (5) years.”
Here, the instrument is likewise non-negotiable as happening of the event within the
specified time period is a contingency, and therefore, the happening of which is uncertain.
Note that if there is no length of time within which the death may take place, the maturity
is a determinable future time.
Sec. 5. Additional provisions not affecting negotiability.—An instrument which contains an order
or promise to do any act in addition to the payment of money is not negotiable. But the negotiable
character of an instrument otherwise negotiable is not affected by a provision which—
a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity;
or
b) Authorizes a confession of judgment if the instrument be not paid at maturity; or
c) Waives the benefit of any law intended for the advantage or protection of the obligor; or
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d) Gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.
The general rule is that the instrument is non-negotiable if it contains a promise or order
to do any act in addition to the payment of money.
The law, however, gives exceptions (Sec. 5[a-d]) to the general rule.
1) Sale of collateral securities
“I promise to pay P or order the sum of P10,000 on September 11, 2018 secured
by a ring I delivered to him by way of pledge and which he could sell should I fail
to pay him at maturity.”
Here, the additional act is to be performed after the date of maturity when the instrument
is no longer negotiable in the full commercial sense. Until the date of maturity, the promise
is to pay money only. A statement that an instrument is secured by a collateral, in fact, adds
to the marketability of the instrument in commerce as a substitute for money or as a credit
instrument.
2) Confession of judgment
“For value received, I promise to pay P or order the sum of P10,000 with interest
at 15% per annum and I hereby authorize my attorney-at-law to appear in any
court of record after the obligation becomes due and waive the issuing and
service of process and confess a judgment against me in favor of the holder of
the note for such amount as may appear to be unpaid thereon, together with
costs of suit and 12% attorney’s fees, and thereupon to waive all errors in any
such proceedings and waive all rights of appeal.”
3) Waiver of benefit granted by law
“Pay bearer P10,000. Notice of dishonor waived.” (see Sec. 110)
Neither does waiver of protest (Sec. 111), presentment for payment (Sec. 70), or demand
(ibid), or exemption from attachment or execution, destroy the negotiability of an
instrument.
4) Election of holder to require some other act
“I promise to pay P or order P10,000 or an air conditioner at the option of the
holder.”
Here, the holder has the choice. The instrument is, therefore, negotiable as it is as good as
an instrument payable in money.
If the option is with the promissor, the instrument is non-negotiable because the holder
cannot compel him to make payment in money.
What is a Confession of judgement? Is it allowed in PH?
A confession of judgment is an acknowledgement by the debtor of his debt to another is
justly due. It enables the holder to obtain a judgment without the delay usually incident to
a lawsuit, as it cuts off all defenses, eliminates the necessity of a trial, and right of appeal. It
is a written statement signed by the defendant, setting forth the basis of liability and
authorizing the entry of judgment thereon.
It is not authorized, nor contemplated by our laws. Unless expressly authorized by statute,
they are void as against public policy because they enlarge the field for fraud, because
under these instruments, the promissor bargains away his right to a day in court, and
because the effect of the instrument is to strike down the right of appeal.
However, the invalidity of the provision as to the confession of judgment does not render
the instrument non-negotiable. It remains valid as to the amount.
What does cognavit actionem mean?
Literally means “he has confessed action.” It is a written confession of action by the
defendant acknowledging his indebtedness to the plaintiff after the action has been filed.
It is valid. It is given after the action is brought to save expenses.
What does relicta verificationem mean?
Literally means “his pleading being abandoned.” It is a confession of judgment by
withdrawal of the defense.
Sec. 6. Omissions; seal; particular money.—The validity and negotiable character of an instrument
are not affected by the fact that:
a) It is not dated; or
b) Does not specify the value given, or that any value had been given therefor; or
c) Does not specify the place where it is drawn or the place where it is payable; or
d) Bears a seal; or
e) Designates a particular kind of current money in which payment is to be made.
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the
consideration to be stated in the instrument.
Are the Place and Date essential in a negotiable instrument? What is the effect if no date is
inserted?
No. The omission of the date and place will not affect the negotiability of the instrument. In
such case, the instrument will be considered to be dated as of the time it was issued and
presumed to be paid at the maker’s or drawer’s place of business or his home.
EXAMPLE:
“I promise to pay P or order P10,000 30 days after date.”
Here, the date of issue is necessary to determine the date from which to start counting 30
days. Nevertheless, the instrument is negotiable although it is not dated. The holder may
insert the true date (Sec. 13). The insertion of a wrong date, however, will not avoid the
instrument in the hands of an innocent third party who may enforce the same
notwithstanding the improper date (Sec. 14).
However, there are cases where the date is necessary to determine the date of maturity as:
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a) Where instrument is payable at a fixed period after date or after
sight/presentment (e.g., an undated note is “payable 30 days after date); or
b) Where interest is stipulated for the purpose of determining when the interest is
to run (Sec. 17[c]); or
c) For the purpose of determining whether a party acted within a reasonable time
in making presentment for payment. (See Secs. 70, 71, 144)
What is the effect of an insertion of a wrong date?
The insertion of a wrong date in an undated instrument by one having knowledge of the
true date of issue or acceptance will avoid the instrument as to him or any one claiming
under him but not as to a subsequent holder in due course who may enforce the same
notwithstanding the improper date.
In the hands of a holder in due course, the date inserted, even if wrong, is to be regarded as
the true date. (Sec. 13)
The insertion of a wrong date constitutes a material alteration. (Sec. 125[a])
What is the effect of omission of place?
Sec.1 does not require a negotiable instrument to specify the place where it is made or
drawn or where it is payable.
However, Sec. 73 specifies where presentment for payment should be made when the place
of payment is not specified.
1) An instrument is presumed to have been made where it is dated;
2) A note that does not specify the place of payment is presumed to be payable at the
place of residence of the maker;
3) If the place of execution or payment is not stated, it is presumed to be the maker’s or
drawer’s place of business or his home.
4)
Sec. 7. When Payable on demand.—An instrument is payable on demand:
a) When it is so expressed to be payable on demand, or at sight, or on presentation; or
b) In which no tome for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so
issuing, accepting, or indorsing it, payable on demand.
Sec. 8. When payable to order.—The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. It may be drawn payable to the order of:
a) A payee who is not maker, drawer, or drawee; or
b) The drawer or maker; or
c) The drawee; or
d) Two or more payees jointly; or
e) One or some of several payees; or
f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein
with reasonable certainty,
Sec. 9.When payable to bearer.—The instrument is payable to bearer:
a) When I is expressed to be so payable; or
b) When it is payable to a person named therein or bearer; or
c) When it is payable to the order of a fictitious or non-existing person, and such fact was
known to the person making it so payable; or
d) When the name of the payee does not purport to be the name of any person; or
e) When the only or last indorsement is an indorsement in blank.
Sec. 10. Terms, when sufficient.—The instrument need not follow the language of this Act, but any
terms are sufficient which clearly indicate an intention to conform to the requirements hereof.
Sec. 11. Date, presumption as to.—Where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be.
Sec. 12. Ante-dated and post-dated.—The instrument is not invalid for the reason only that it is ante-
dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to
whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.
What is Ante-Dating?
An instrument is ante-dated when it contains a date earlier than the true date of its
issuance.
Thus, if the instrument was issued on July 30, 2016, but bears a date of July 15, 2016, it is
ante-dated.
What is Post-Dating?
An instrument is post-dated when it contains a date later than the true date of its issuance.
It is just the opposite of an ante-dated instrument.
Thus, if the instrument was issued on July 15, 2016, but bears a date of July 30, 2016, it is
post-dated.
Sec. 13. When date may be inserted.—Where an instrument expressed to be payable at a fixed
period after date is issued undated, or where the acceptance of an instrument payable at a fixed period
after sight is undated, any holder may insert therein the true date of issue of acceptance, and the
instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument
in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded
as the true date.
Sec. 14. Blanks; when may be filled.—Where the instrument is wanting in any material particular,
the person in possession thereof has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person making the signature in order that
the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it
up as such for any amount. In order, however, that any such instrument when completed may be
enforced against any person who became a party thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and within a reasonable time. But if any such
instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.
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Applies only to an incomplete instrument which has been delivered by the maker or the
drawer to the payee or holder.
Distinction between the two (2) classes of instruments:
1) Those in which obvious blanks are left at the time they are made or indorsed, of
such character as manifestly to indicate that the instruments are incomplete
until such blanks shall be filled up; and
2) Those which are apparently complete, containing blanks only because the
written matter does not so fully occupy the entire paper as to preclude the
insertion of additional words or figures, or both.
With respect to the first class, one who signs or indorses is liable to bona fide holders
thereof on the doctrine of implied authority, while with respect to the second class, the
liability for the amount of the instrument which has been increased by filling up
unoccupied spaces therein is placed upon the doctrine of negligence.
Rules where instrument incomplete but delivered
1) Authority to fill up the blanks
The holder or the person in possession has prima facie authority to complete an
incomplete instrument by filling up the blanks therein.
The law speaks of material particular.
e.g., blanks for date, due date, name of payee, even the name of the drawer,
amount, or rate of interest may be filled in.
The authority to complete is not an authority to alter. So the holder has no
authority to change the amount after it has been filled in or to insert the words
“or order” or “or bearer” after the name of the payee.
2) Authority to put any amount
A signature on a blank paper delivered in order that it may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for
any amount.
2 requisites to fill up amount:
i. Filled up strictly in accordance with the authority given; and
ii. Within a reasonable time.
EXAMPLE:
M delivered a blank paper containing his signature to P.
In order that P may have authority to fill it up for any amount, it must be shown
by him that the purpose of M was to convert the said blank paper into a
negotiable instrument. In the absence of such a showing, there cannot arise a
prima facie authority on the part of P to fill it up for any amount.
Thus, if M signs his name on a piece of paper and delivers it to P for the purpose
of identifying or comparing it with M’s other signatures, M will not be liable even
to a holder in due course after it is converted into a negotiable instrument.
3) Right against party prior to completion
The instrument may be enforced only against a party prior to completion if filled
up strictly in accordance with the authority given and within a reasonable time.
If an instrument is incomplete when delivered, the holder has prima facie
authority to fill up the blanks thereon.
If a blank paper is delivered by the person making the signature, the holder has
prima facie authority to fill it up for any amount if the person making the
signature intended to convert it into a negotiable instrument.
In either case, the presumption is that the blank was filled up in accordance with
the authority given and within a reasonable time.
4) Right of holder in due course
The defense that the instrument had not been filled up in accordance with the
authority given and within a reasonable time is a person defense. It is not
available as against a holder in due course.
Section 14 only raises a personal defense. The rule is founded upon the principle
that where one of two (2) persons must suffer by the bad faith of another, the
loss must fall upon the one who first reposed confidence and made it possible
for the loss to occur.
Sec. 15. Incomplete instrument not delivered.—Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands
of any holder, as against any person whose signature was placed thereon before delivery.
Applies only to an incomplete instrument and undelivered.
The fact that an incomplete instrument, completed without authority, has not been
delivered, is a defense even against a holder in due course.
EXAMPLE:
Suppose M makes a note for P10,000 with the name of the payee in blank and
keeps it in his drawer. P steals the note and inserts his name as payee and then
indorses the note to A, A to B, B to C, and C to D, a holder in due course. Can D
enforce the note against M?
No, because the law is specific that the instrument is not a valid contract in the hands of
any holder. And the phrase “any holder” includes a holder in due course. As the signature
of M was placed thereon before delivery, he does not assume any responsibility
whatsoever.
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In this case, a real defense exists. The instrument may be considered a forgery insofar as M
is concerned since both the two steps in the execution of a negotiable instrument are not
complied with. There is, however, a prima facie presumption of delivery, which M must
rebut by proof to the contrary.
Under certain circumstances, negligence on the part of M may render him liable to a holder
in due course.
The invalidity of the above instrument is only with reference to the parties whose
signatures appear on the instrument before and not after delivery.
EXAMPLE:
In the same example, the instrument can be enforced against P, A, B, and C
because, as indorsers, they warrant that the instrument is genuine and in all
respects what it purports to be, etc. As their signatures appear on the instrument
after delivery, the instrument is valid as to them.
In the case of P, he is liable not merely because he is an indorser but also because
he is the one responsible for the theft, and the completion and negotiation of the
instrument.
Sec. 16. Delivery; when effectual; when presumed.—Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As
between immediate parties and as regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to
have been conditional, or for a special purpose only, and not for the purpose of transferring the
property in the instrument. But where the instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a party whose signature appears thereon,
a valid and intentional delivery by him is presumed until the contrary is proved.
Applies only to a complete instrument but undelivered.
Every contract on a negotiable instrument, even if it is completely written, is incomplete
and revocable until its delivery for the purpose of giving it effect.
As a general rule, a negotiable instrument like any other written contract, has no legal
inception or existence, as such, until it has been delivered in accordance with the purpose
and intent of the parties. Without the initial delivery of the instrument, there can be no
liability thereon.
Delivery must be intended to give effect to the instrument.
An undelivered instrument is inoperative because delivery is a prerequisite to liability.
However, if the instrument is no longer in the possession of the person who signed it and
it is complete in its terms, “a valid and intentional delivery by him is presumed until the
contrary is proved.”
If a complete instrument is in the hands of a holder in due course, a valid delivery thereof
by all parties prior to him is conclusively presumed. In short, this is equivalent to saying
that in such case, delivery is not necessary.
When one of two (2) persons must suffer by the acts of a third, he who has enabled such
third person to occasion the loss must bear it.
EXAMPLE:
M makes a note payable to the order of P and keeps it in his drawer.
In the absence of delivery, the instrument though complete in all its particulars, there is no
contract. M does not assume any liability. P does no acquire any right against M who may
revoke, cancel or tear it up with or without any reason.
Sec. 17. Construction where instrument is ambiguous.—Where the language of the instrument is
ambiguous or there are omissions therein, the following rules of construction apply:
a) Where the sum payable is expressed in words and also in figures and there is a discrepancy
between the two, the sum denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures to fix the amount;
b) Where the instrument provides for the payment of interest, without specifying the date
from which interest is to run, the interest runs from the date of the instrument, and if the
instrument is undated, from the issue thereof;
c) Where the instrument is not dated, it will be considered to be dated as of the time it was
issued;
d) Where there is a conflict between the written and printed provisions of the instrument, the
written provisions prevail;
e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
f) Where a signature is so placed upon the instrument that it is not clear in what capacity the
person making the same intended to sign, he is to be deemed an indorser;
g) Where an instrument containing the word “I promise to pay” is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.
Sec. 18. Liability of person signing in trade or assumed name.—No person is liable on the
instrument whose signature does not appear thereon, except as herein otherwise expressly provided.
But one who signs in a trade or assured name will be liable to the same extent as if he had signed in
his own name.
Sec. 19. Signature by agent; authority; how shown.—The signature of any party may be made by a
duly authorized agent. No particular form of appointment is necessary for this purpose; and the
authority of the agent may be established as in other cases of agency.
Sec. 20. Liability of person signing as agent, and so forth.—Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability.
When may an agent escape personal liability?
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In order that an agent who signs a negotiable instrument may escape personal liability, the
following are the requisites:
1) He is duly authorized;
2) He must act within the scope of his authority;
3) He adds words to his signature indicating that he signs as an agent, that is, for or
on behalf of a principal, or in a representative capacity; and
4) He discloses his principal.
Sec. 21. Signature by procuration; effect of.—A signature by “procuration” operates as notice that
the agent has but a limited authority to sign, and the principal is bound only in case the agent in so
signing acted within the actual limits of his authority.
Define Procuration
The act by which a principal gives power to another to act in his place as he could himself.
It is ordinarily understood in the same sense as agency or proxy for the one who signs in
merely acting as agent for another.
The term has a special and technical meaning. It gives a warning that the agent has but a
limited authority, so that it is the duty of the person dealing with him to inquire into the
extent of his authority.
EXAMPLE:
A signature by procuration may be made as follows:
Richard Deleon
Per Procuration: Miguel Deleon
Instead of “per procuration,” it may also be expressed as: “per pro.,” “per proc.,” “P.P.,” or
“PP.”
Sec. 22. Effect of indorsement by infant or corporation.—The indorsement or assignment of the
instrument by a corporation or by an infant passes the property therein, notwithstanding that from
want of capacity, the corporation or infant may incur no liability thereon.
A promissory note was issued by the maker made payable to the order of P, an infant or
corporation. Thereafter it was negotiated to X, an innocent purchaser for value. X presented it
for payment to M. Can M raise as a defense against X the incapacity of P?
No. It is only P who raise such defense against X. Although incapacity it is a real defense, it
is personal to P. The reason behind this is because the maker of a negotiable instrument,
by making it, engages that he will pay it according to its tenor, and admits the existence of
the payee and his then capacity to indorse (Sec. 60). By such admission, M cannot raise as
a defense the incapacity of P to indorse.
What are the steps in the issuance of a negotiable instrument?
There are always two (2) steps involved in the issuance of every negotiable instrument,
namely:
1) The mechanical act of writing the instrument completely and in accordance with
the requirements of Sec. 1; and
2) The delivery of the complete instrument by the maker or the drawer to the payee
or holder with the intention of giving effect to it.
Such instrument, complete and delivered, is negotiable and may be enforced accordingly.
What are the three (3) methods of transferring instruments?
1) Issue—it is the first delivery of the instrument, complete in form, to a person who takes it
as holder (Sec. 191); it is the first transfer of an instrument to a payee. A negotiable
instrument’s legal life does not begin until it is issued by the maker or drawer to the first
holder.
2) Negotiation—the transfer of a negotiable instrument from one person to another made in
such a manner as to constitute that transferee the holder thereof. Negotiation makes
possible for the transferee to acquire a better right to a negotiable instrument that the
transferor had. Whether the holder is a holder in due course depends upon factors other
than the fact of negotiation (See Sec. 52).
3) Assignment—a transfer of the title to the instrument, with the assignee generally taking
only such title as his assignor has, subject to all defenses against his assignor. The assignee
acquires no better title or right than the assignor. Assignee merely steps into the shoes of
the assignor. Whatever defenses that were available to the assignor are also available to
the assignee.
Sec. 30. What constitutes negotiation.—An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof. If payable to
bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the
holder and completed by delivery.
Define Negotiation
An instrument is negotiated when it is transferred from one person to another in such
manner as to constitute the transferee the holder thereof. (Sec. 30)
To determine the “manner” required for negotiation, one must examine the form of the
instrument.
If payable to order, the instrument is negotiated by indorsement and completed by delivery
(actual or constructive).
If payable to bearer, the instrument is negotiated by delivery alone.
Define Assignment
An assignment of a bill or note merely means a transfer of the title to the instrument, with
the assignee generally taking only such title as his assignor has, subject to all defenses
available against his assignor.
The assignee acquires no better title or right than the assignor. Assignee merely steps into
the shoes of the assignor. Whatever defenses that were available to the assignor are also
available to the assignee.
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What are the rights of the assignee when the order instrument is merely delivered but not
indorsed? An indorsement:
a) Must be written on the instrument itself; or
1) Assignee steps into the shoes of the assignor; and b) Upon a paper attached thereto (allonge).
2) The transferee acquires the right to have the indorsement of the transferor.
The signature of the indorser, without additional words, is a sufficient indorsement. (Sec.
What can you compel the transferor so that you can be a holder, rather than an assignee? 31)

The assignee can compel the transferor to have the instrument indorsed so that your status What is the effect/function of an indorsement?
will be elevated from assignee to holder. If you are merely an assignee, you are not a holder
in due course. It serves as a conveyance from the indorser to the indorsee.

Negotiation and Assignment distinguished What is the contract created between the indorser and indorsee by virtue of an indorsement?

NEGOTIATION
Refers only to negotiable instruments;
The transferee is a holder;
A holder in due course is subject only to real
defenses;
A holder in due course may acquire a better
title or greater rights under the instrument
than those possessed by the transferor or a
prior party;
A general indorser warrants the solvency of
prior parties;
An indorser is not liable UNLESS there be
presentment and notice of dishonor;
ASSIGNMENT
Refers generally to an ordinary contract;
The transferee is an assignee;
An assignee is subject to both real and personal
defenses;
Generally, an assignee merely steps into the
shoes of the assignor;
An assignor does not warrant the solvency of
prior parties UNLESS expressly stipulated or
the insolvency is known to him;
An assignor is liable even without notice of
dishonor; and
An implied contract of guarantee if primary party does not pay, the indorser or transferor
can be held liable. Indorsee may run after indorser. (This is the main difference between a
Document of Title and a Negotiable Instrument)
What is the Two-Fold Purpose of Indorsement?
1) The transfer of the instrument from one person to another (conveyance); and
2) The implied guarantee that the instrument will be paid in accordance with its terms
(implied guarantee).
Sec. 32. Indorsement must be of entire instrument.—The indorsement must be an indorsement of
the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the
amount payable, or which purports to transfer the instrument to two or more indorsees severally,
does not operate as a negotiation of the instrument. But where the instrument has been paid in part,
it may be indorsed as to the residue.
Must the indorsement be of the entire instrument?
Yes, as provided by Sec. 32.

Negotiation is governed by the NIL; Assignment is governed by Arts. 1624-1635 If part of the amount has already been paid, the unpaid balance may be indorsed as this is
expressly authorized by law.
(on assignment of credits) of the NCC.
EXAMPLE:
If M has paid P4,000 of a note for P5,000 to P, the latter can indorse it to someone
else as to the balance, thus: “Pay to B P1,000.” In this case, P must acknowledge
Sec. 31. Indorsement; how made.—The indorsement must be written on the instrument itself or
receipt or payment of P4,000.
upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient
indorsement.
What if there is only one (1) payee and the amount of the note is P5,000, but the indorsement
is only for P4,000? Can this be done?
Define Indorsement
No. The instrument must be indorsed in its entirety. No partial indorsement can be done
It is the writing of the name of the payee on the instrument with the intent either:
unless the excess of P1,000 has already been paid.
a) to transfer the title to the same; or
b) to strengthen the security of the holder by assuming a contingent liability for its
What are the reasons behind Sec. 32 (indorsement must be of the entire instrument)?
future payment; or
c) both.
To avoid a (a) multiplicity of suits and the be in accordance with the (2) physical necessity
of transfer as you cannot split the instrument into two.
How do you make an indorsement?
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Sec. 33. Kinds of indorsement.—An indorsement may be either special or in blank; and it may also
be either restrictive or qualified or conditional.
What are the kinds of indorsements?
1) SPECIAL INDORSEMENT—specifies the person to whom, or to whose order, the
instrument is to be payable, and the indorsement of such indorsee is necessary to the
further negotiation of the instrument. (Sec. 34)
2) BLANK INDORSEMENT—specifies no indorsee, and an instrument so indorsed is payable
to bearer, and may be negotiated by delivery. (Sec. 34)
3) RESTRICTIVE—an indorsement is restrictive which either:
a) Prohibits the further negotiation of the instrument; (e.g., Pay to A
only) or
b) Constitutes the indorsee the agent of the indorser; (e.g., Pay to A for
collection and remittance) or
c) Vests the title in the indorsee in trust for or to the use of some other
persons. (e.g., Pay to A as trustee for P)
But the mere absence of words implying power to negotiate does not
make an indorsement restrictive. (Sec. 36)
4) QUALIFIED—a qualified indorsement constitutes the indorser a mere assignor of the title
to the instrument. It may be made by adding to the indorser’s signature the words “without
recourse” or any words of similar import. Such an indorsement does not impair the
negotiable character of the instrument. (Sec. 38)
5) CONDITIONAL—where an indorsement is conditional, the party required to pay the
instrument may disregard the condition and make payment to the indorsee or his
transferee whether the condition has been fulfilled or not. But any person to whom an
instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject
to the rights of the person indorsing conditionally. (Sec. 39)
Sec. 34. Special indorsement; indorsement in blank.—A special indorsement specifies the person
to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is
necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee,
and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.
Sec. 35. Blank indorsement; how changed to special indorsement.—The holder may convert a
blank indorsement into a special indorsement by writing over the signature of the indorser in blank
any contract consistent with the character of the indorsement.
Can a blank indorsement be converted into a special indorsement?
Yes, as provided by Sec. 35.
EXAMPLE:
M issues a note to P. P indorses it in blank to B. B may convert it into a special
indorsement by writing his name above the signature of P, provided that the
contract will be consistent with the character of the indorsement.
Sec. 36. When indorsement restrictive.—An indorsement is restrictive which either:
a) Prohibits the further negotiation of the instrument; or
b) Constitutes the indorsee the agent of the indorser; or
c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.
Sec. 37. Effect of restrictive indorsement; rights of indorsee.—A restrictive indorsement confers
upon the indorsee the right:
a) To receive payment of the instrument;
b) To bring any action thereon that the indorser could bring;
c) To transfer his rights as such indorsee, where the form of the indorsement authorizes him
to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
indorsement.
Sec. 38. Qualified indorsement.—A qualified indorsement constitutes the indorser a mere assignor
of the title to the instrument. It may be made by adding to the indorser’s signature the words “without
recourse” or any words of similar import. Such an indorsement does not impair the negotiable
character of the instrument.
Sec. 39. Conditional indorsement.—Where an indorsement is conditional, the party required to pay
the instrument may disregard the condition and make payment to the indorsee or his transferee
whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing
conditionally.
Sec. 40. Indorsement of instrument payable to bearer.—Where an instrument payable to bearer, is
indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders as make title through his indorsement.
In such a case, the person indorsing specially is liable only to those holders who can trace
their title to the instrument by a series of unbroken indorsements from such special
indorser. His liability shall be that of a general indorser as provided in Sec. 66.
EXAMPLE:
M issues a promissory note payable to P or bearer and delivers it to P. To
negotiate the note to A, P has only to deliver the same to A. With or without the
indorsement of P, A becomes the holder of the instrument by its delivery
because indorsement is not necessary. (Sec. 30)
If P indorses the instrument to A, the latter may nevertheless negotiate it by
mere delivery to B. However, B will have no right against P since he (B) did not
obtain his title through the indorsement of P. But A, as indorser and M, as maker,
will be liable to B.
Suppose A also indorses the note to B who negotiates the same to C by mere
delivery. The following indorsements thus appear on the back:
Pay to A. (Sgd.) P RMD 11
Pay to B. (Sgd.) A
 NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

1) An instrument payable to bearer on its face (Sec. 9) may be negotiated by mere delivery
without indorsement (Sec. 30). In case it is indorsed, it remains a bearer instrument and
may be further negotiated by mere delivery (Sec. 40). By virtue of Sec. 48, the holder may
strike out all intervening indorsements or any of them for none of them is necessary to the
acquisition of his title.

EXAMPLE:
In this case, P is liable to A and also to B as a general indorser under Sec. 66. A is
likewise liable to B. Suppose M makes a note payable to P or bearer. The note is indorsed specially
and in succession as follows:
C obtains his title through negotiation by delivery of the instrument by B and not
through the indorsements of P and A. Hence, P and A are not liable to C. But B
would be liable to C under Sec. 65. Pay to A
(Sgd.) P
Pay to B
Sec. 41. Indorsement where payable to two or more persons.—Where an instrument is payable to (Sgd.) A
the order of two or more payees or indorsees who are not partners, all must indorse unless the one Pay to C
(Sgd.) B
indorsing has authority to indorse for the others.

When joint indorsement by all payees or indorsees not required

C, the present holder, may strike out all indorsements because they are not
There are two (2) exceptions to the rule requiring joint indorsements: necessary to his title. The instrument being originally payable to bearer on its
1) Where the payees or indorsees are partners; and face, it remains a bearer instrument in spite of the special indorsements and,
2) Where the payee or indorsee indorsing has authority to indorse for the others. therefore, may be negotiated by mere delivery.

Sec. 42. Effect of instrument drawn or indorsed to a person as cashier.—Where an instrument is
drawn or indorsed to a person as “cashier” or other fiscal officer of a bank or corporation, it is deemed
prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated
by either the indorsement of the bank or corporation or the indorsement of the officer.
Sec. 43. Indorsement where name is misspelled, and so forth.—Where the name of a payee or
indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
If C cancels P’s indorsement, then P, whose indorsement is struck out, and A and
B “indorsers subsequent to him” (P), are released from liability on the
instrument. C could claim only against M, the maker. A and B are also discharged
from liability because they are deprived of their right of recourse against P. (see
Sec. 120[c])
If C strikes out B’s indorsement, then only B will be freed from liability. (see Sec.
40)

Sec. 44. Indorsement in representative capacity.—Where any person is under obligation to indorse 2) An instrument originally payable to order (Sec. 8) may be negotiated only by the
in a representative capacity, he may indorse in such terms as to negative personal liability. indorsement of the payee completed by delivery (Sec. 30).

Sec. 45. Time of indorsement; presumption.—Except where an indorsement bears date after the
maturity of the instrument, every negotiation is deemed prima facie to have been effected before the
instrument was overdue.
Sec. 46. Place of indorsement; presumption.—Except where the contrary appears, every
indorsement is presumed prima facie to have been made at the place where the instrument is dated.
The indorser may not strike out the payee’s indorsement. Since the instrument is payable
to order, it cannot be validly negotiated without his indorsement.
EXAMPLE:
Suppose M issues a promissory note payable to the order of P. it is indorsed as
follows:

Sec. 47. Continuation of negotiable character.—An instrument negotiable in its origin continues to
be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. (BLANK INDORSEMENT)
(Sgd.) P
Pay to B
(Sgd.) A
Sec. 48. Striking out indorsement.—The holder may at any time strike out any indorsement which Pay to C
is not necessary to this title. The indorser whose indorsement is struck out, and all indorsers (Sgd.) B
subsequent to him, are thereby relieved from liability on the instrument.

When holder may strike out indorsement

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In this case, the indorsement of A and B are not necessary to C’s title by virtue of
the blank indorsement of P. If their indorsements are cancelled, the note would
become payable to bearer as the remaining indorsement would be an
indorsement in blank. C may aver that the first blank indorser (P) refers
immediately to him.
If A’s indorsement is stricken out, B is also relieved from liability being an
indorser subsequent to A. But P’s indorsement is necessary to the title of C since
P cannot validly negotiate the note, which is payable to order, to C by mere
delivery.
Sec. 49. Transfer without indorsement; effect of.—Where the holder of an instrument payable to
his order transfers it for value without indorsing it, the transfer vests in the transferee such title as
the transferor had therein, and the transferee acquires in addition, the right to have the indorsement
of the transferor. But for the purpose of determining whether the transferee is a holder in due course,
the negotiation takes effect as of the time when the indorsement is actually made.
Sec. 50. When prior party may negotiate instrument.—Where an instrument is negotiated back to
a prior party, such party may, subject to the provisions of this Act, re-issue and further negotiate the
same. But he is not entitled to enforce payment thereof against any intervening party to whom he was
personally liable.
EXAMPLE:
M makes a note payable to the order of P. it is indorsed successively as follows:
Pay to A
(Sgd.) P
Pay to B
(Sgd.) A
Pay to C
(Sgd.) B
Pay to D
(Sgd.) C
Pay to B
Pay to E
(Sgd.) D
(Sgd.) B
In the above example, B, a prior party, reacquires the note. He may further
negotiate the same to any subsequent holder.
For instance, he may indorse it to E. If several persons indorse in succession
(successive indorsements) they are liable to each other in the order that they
indorse (Sec. 68). But in this case, B may not sue C and D to whom he was
personally liable before his reacquisition of the instrument. If B can hold C and
D liable in his capacity as a subsequent holder to them, then C and D should also
be able to hold B, a prior indorser, liable to them. This would result in a
multiplicity of actions. B’s rights would, therefore, be limited to M, P, and A. But
C and D are not discharged from liability on the instrument; only discharged
from liability to B.
E, the present holder, could have a right of recourse not only against M, P, A, and
B, but also against C and D. But if B strikes out his indorsements to C under Sec.
48, and this B can do because his indorsement to C is not necessary to his title, C
and D will be totally released from liability.
Who is a reacquirer?
A holder who negotiates an instrument and then subsequently reacquires it.
What are the limitation on renegotiation?
In the following cases, a prior party cannot further negotiate the instrument:
1) Where it is payable to the order of a third person, and has been paid by the
drawer;
2) Where it was made or accepted for accommodation, and has been paid by the
party accommodated; and
3) In other cases, where the instrument is discharged when acquired by a prior
party.
Sec. 51. Right of holder to sue; payment.—The holder of a negotiable instrument may sue thereon
in his own name; and payment to him in due course discharges the instrument.
Meaning of holder
“Holder” means the payee or indorsee of a bill or note who is in possession of it, or the
bearer thereof entitled to receive the sum for which it calls.
The payee refers to the person to whom the instrument was originally issued by the maker
or drawer, while the indorsee, to the person to whom the instrument was negotiated by
indorsement and/or delivery. Thus, the term “holders” includes not only persons
possessing bearer instruments, but also payees and indorsees possessing order
instruments.
Sec. 52. What constitutes a holder in due course.—A holder in due course is a holder who has taken
the instrument under the following conditions: (C-O-G-I)
a) That it is complete and regular upon its face;
b) That he became the holder of it before it was overdue, and without notice that it
has been previously dishonored, if such was the fact;
c) The he took it in good faith and for value;
d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
What are the kinds of defenses that are available against holders in due course?
Only real defenses.
What are the kinds of defenses that are available against holders not in due course?
Both real and personal defenses.
What are the warranties where negotiation by delivery or by a qualified indorsement? (Sec.
65)
Every person negotiating an instrument by delivery or by a qualified indorsement
warrants:
a) That the instrument is genuine and in all respects what it purports to be;
b) That he has a good title to it;
c) That all prior parties had capacity to contract;
d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
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But when the negotiation is by delivery only, the warranty extends in favor of no holder
other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating public
or corporation securities other than bills and notes.
What are the liabilities of a General Indorser? (Sec. 66)
Every indorser who indorses without qualification, warrants to all subsequent holders in
due course:
a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and
b) That the instrument is, at the time of his indorsement, valid and subsisting.
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both,
as the case may be, according to its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it.
Sec. 23. Forged signature; effect of.—When a signature is forged or made without the authority of
the person whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority.
What is wholly inoperative? Is it the signature? Entire instrument?
It is the forged signature or indorsement that is made without the authority of the person
whose signature it purports to be. The other subsisting negotiations contained in the
instrument is left valid and binding provided that the signatures or the indorsements are
genuine.
Doctrine of Republic v. Ebrada case?
The existence of a forged signature in the check will not render void all the other negotiations of
the check with respect to the other parties whose signatures are genuine. It is only the
negotiation predicated on the forged indorsement or the drawer’s signature that should be
declared inoperative.
When signature is forged, is it totally void? How would you treat the instrument itself?
It is only the forged or unauthorized signature that is declared inoperative. The rights may still
exist and be enforced by virtue of such instrument as to those whose signatures are found to be
genuine because their signatures, as indorsers warrants that the instrument is genuine and in
all respects what it purports to be. (Sec. 66) (See Ebrada case)
What are the warranties of an indorser?
An indorser warrants that the instrument is genuine and in all respects what it purports to be.
He is in effect stating that all signatures contained therein are not forged.
General rule regarding forged signature?
The signature is wholly inoperative and so no right can be acquired through the forged signature.
Payment made through or under such signature is ineffectual and does not discharge the
instrument.
A person whose signature was forged as M, D, P, or indorsee of a note or bill never gave his
consent to the contract which gave rise to the instrument. Since his signature does not appear in
the instrument, he cannot be liable thereon by anyone. It is a real or absolute defense even
against a holder in due course.
Exception?
Persons precluded from setting up the defense of forgery.
Who are the persons precluded from setting up the defense of want of authority or forgery?
Illustrate.
a) Those who by their acts, silence, negligence are estopped from setting up the defense of
forgery; and
b) Those who warrant or admit the genuineness of the signatures in question, namely:
i. The indorsers;
ii. The acceptors; and
iii. Persons negotiating by delivery
What is the Cut-Off Rule?
Parties PRIOR to the forged signature are cut-off from the parties AFTER the forgery in the sense
that prior parties cannot be held liable and can raise the defense of forgery. The holder can only
enforce the instrument against parties who became such AFTER the forgery.
The exception to this rule is when the prior parties are precluded from setting up the defense of
forgery either because of their warranties, representation or negligence.
Assuming M makes a Promissory Note to P or his order. But A forges the signature of P payable
to himself. A to B; B to C; C to D. Can D collect from M? From whom may he claim?
D cannot collect from M. Forgery is a real defense that M may invoke against any person
even holders in due course.
D may collect from A the forger, as well as from B and C, who are the indorsers and parties
subsequent to the forgery.
Assuming that Ilusorio was able to prove the forgery, would your answer still be the same
given the facts of the case? (Ilusorio v. CA)
No. Ilusorio is precluded from setting up the defense of forgery by reason of his negligence
of entrusting to his secretary his credit cards and checkbook, and for failing to properly
examine his monthly bank statements. The proximate cause of his loss was due to his own
negligence. Ilusorio had sufficient opportunity to prevent or detect any misappropriation
by his secretary had he only reviewed the bank statements.
What does no right to retain the instrument mean?
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The holder who acquired the instrument on the basis of the forgery has no right or title
over such instrument.
What does “to give discharge therefor” mean?
The release of all parties, whether primary or secondary, from the obligations arising
thereunder.
What is the general rule regarding collecting banks?
The collecting bank is not liable because they are only collecting.
The exception to this rule is where the collecting bank warrants the instrument.
What is a Collecting Bank?
It is the bank of the holder or payee of the instrument. Generally, it acts as a mere collector,
except when it warrants the indorsements/signatures contained in an instrument.
What is a Drawee Bank?
The bank of the drawer of the instrument.
Difference between Collecting Bank and Drawee Bank.
As a general rule, the collecting bank is not liable on a forged check. (Jai-Alai case)
Exception is when they put a stamp indicating all prior or lack of indorsements guaranteed,
meaning that they are estopped for warranting the indorsements on the check.
Whereas for drawees, the general rule is that the drawee who has paid upon a forged
signature is held to bear the loss because he has been negligent in failing to recognize that
the signature is not that of his client.
The only exception to this rule is when negligence can be traced back to the drawer whose
signature was forged.
What is the 24-Hour Clearing Rule?
The drawee bank receiving the check for clearing from the Central Bank Clearing House
must return the check to the collecting bank within the 24-hour period if the check is
defective for any reason. Otherwise, the drawee bank forever loses the right to claim
against the collecting bank if the check is not returned at the next clearing day or within 24
hours.
Recap of Cases
General Rule—collecting bank is not liable (Jai-Alai v. BPI)
Exception—collecting bank is liable for having a warranty stamp (BDO v. Equitable Bank)
Exception to the exception—collecting bank is not liable despite having a warranty stamp
for failure of the drawee bank to return the forged check within 24 hours, in accordance
with the 24-hour Clearing House Rules and Regulations (Metrobank v. FNCB)
Rules on Forgery
i. In all cases, the forger is liable;
ii. Instruments payable to bearer
The liability of the maker is absolute if the instrument involved is payable to bearer.
The forgery of the indorsement is immaterial since it is negotiated by mere delivery.
iii. Instruments payable to order
In case of forgery of an indorsement of an instrument payable to order, it is not only
the person whose signature was forged who would not be liable BUT also the parties
prior to such person. Payment under a forged indorsement is not the drawer’s order.
Sec. 24. Presumption of consideration.—Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration and every person whose signature appears thereon to have
become a party thereto for value.
What are the presumptions provided by Sec. 24?
1) Every negotiable instrument is DEEMED PRIMA FACIE to have been issued for a VALUABLE
CONSIDERATION; and (consideration is presumed)
2) Every person whose signature appears thereon to have become a PARTY THERETO FOR
VALUE. (holder for value is presumed)
What kind of presumption is provided by Sec. 24?
A prima facie presumption.
What does Prima Facie mean?
It means a disputable presumption; one that may be rebutted or disproved by contrary
evidence. The person assailing the presumption has the burden of disproving it.
It is the opposite of conclusive presumption.
Define Consideration
An inducement to a contract, that is, the cause, price or impelling influence which induces
a contracting party to enter into the contract. It is the essential or more proximate purpose
a party has in view at the time of entering into the contract. It is different from MOTIVE
which is the personal or private reasons of a party in entering into a contract.
Simply defined, consideration means any prestation sufficient to support any contract in
favor of the party to an instrument, such as the maker or indorser, and it may consist in
giving, doing, or not doing.
It need not be personally beneficial to the maker/drawer as it is sufficient if the
consideration was a benefit conferred upon a third person or a detriment suffered by the
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promisee, at the instance of the promissor. It is enough that the obligee foregoes some right
or privilege, or suffers some detriment.
Further, a valuable consideration need not be adequate. It is sufficient if it is a valuable one.
The mere inadequacy of the consideration is not a sufficient ground for relief unless there
is fraud, mistake or undue influence. (Art. 1355, NCC)
Sec. 25. Value; what constitutes.-- Value is any consideration sufficient to support a simple contract.
An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time.
What constitutes Value?
Any consideration sufficient to support a simple contract.
An antecedent or pre-existing debt constitutes value, and is deemed such whether the
instrument is payable on demand or at a future time. (Sec. 25)
Value and Consideration distinguished
VALUE CONSIDERATION
(or cause)
Any consideration sufficient to support a The immediate, direct, or essential reason
simple contract. which induces a party to enter into a contract.
Illustrate Pre-Existing or Antecedent Debt
M owes P P1,000 payable today. M fails to pay in cash. He issues a check for that amount to
P who accepts the check. Here, the consideration for the check is the pre-existing debt of
M.
If X is the debtor and he fails to pay P the amount of P1,000, the check issued by M in favor
of P for the benefit of X rests on a sufficient consideration, i.e., the pre-existing debt of X.
Does Love and Affection constitute consideration?
No. If such were considered as a valuable consideration, it would be insufficient to support
any contract and it would be impossible to be enforced as between the original parties.
Sec. 26. What constitutes holder for value.—Where value has at any time been given for the
instrument, the holder is deemed a holder for value in respect to all parties who become such prior
to that time.
Who is a holder for value?
A party for value or holder for value is one who has given a valuable consideration for the
instrument issued or negotiated to him. The holder is deemed as such not only as regards
the party to whom value has been given by him but also in respect to all those who became
parties prior to the time when value was given. (Sec. 26)
A holder of a negotiable instrument is presumed to be a holder for value until the contrary
is shown.
A holder for value must give consideration for the instrument. If he doesn’t give anything,
then he is not a holder for value.
The holder is a holder for value only to the extent that the consideration agreed upon has
been paid, delivered or performed. Non-performance of the obligation will give rise to
partial or full defense of failure of consideration.
Illustrate “…holder is deemed a holder for value in respect to all parties who become such prior
to that time.” (Sec. 26)
M issues a note to P without consideration. P, also without consideration, indorses it to A
who, with value, indorses it to B. B is deemed a holder for value not only as regards to A
but also to M and P.
Sec. 27. When lien on instrument constitutes holder for value.—Where the holder has a lien on the
instrument arising either from contract or by implication of law, he is deemed a holder for value to
the extent of his lien.
What does forbearance mean?
The action of refraining from exercising a legal right, especially enforcing the payment of a
debt.
What does lien mean?
A right to keep possession of property belonging to another person until a debt owed by
that person is discharged.
A lien is an encumbrance on one person’s property to secure a debt the property owner
owes to another person.
“…lien on the instrument constitutes holder for value…” (Sec. 27)—what does this phrase mean?
Where the holder has a lien on the instrument arising either from contract or by
implication of law, he is deemed a holder for value to the extent of his lien.
When do you consider a person having a lien?
One who has taken a negotiable instrument as collateral security for a debt has a lien on
the instrument.
If the amount of the instrument is more than the debt secured by such instrument, the
pledgee is a holder for value to the extent of his lien. He can collect the full value of the
instrument, and apply the same to the payment of the debt but he must deliver the surplus
to the pledger.
If the amount of the instrument is less than or the same as the debt secured by such
instrument, the pledgee is a holder for value for the full amount and may, therefore, recover
all.
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If between the pledger and the party liable on the instrument, there are existing defenses,
then the pledgee can collect on the instrument only to the extent of the amount of the debt.
If the defenses of the party liable on the instrument are real defenses, then the pledgee can
recover nothing upon the instrument.
EXAMPLE:
P owes A P600. M makes a note worth P1,000 payable to the order of P. A is said
to have a lien on the note to the extent of P600 only, and it is to that extent that
he is a holder for value. The excess of P400 shall be returned to P.
What does collateral security mean?
An instrument or property that is used to secure a payment with a condition attached that
in the event that you cannot pay, such instrument or property shall be applied.
Sec. 28. Effect of want of consideration.—Absence or failure of consideration is a matter of defense
as against any person not a holder in due course; and partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and liquidated amount or otherwise.
Absence of Consideration
A total lack of any valid consideration for the contract, in consequence of which the alleged
contract must fall.
EXAMPLE:
M makes a promissory note to P in payment for a parcel of land which does not
exist.
As between the parties, there can be no recovery on the note as there is absence
of consideration.
But if P indorses the note to A (a holder in due course), A can recover from M
because absence of consideration is only a personal defense not available
against a holder in due course.
Failure of Consideration
The failure or refusal of one of the parties to do, perform, or comply with the consideration
agreed upon.
In other words, something was agreed upon as a consideration, but for some cause, such
agreed consideration failed to materialize.
EXAMPLE:
M makes a promissory note to P in payment for a parcel of land, but P failed to
deliver it to M because he sold it again to X who in good faith registered the sale,
there is a failure of consideration so that P cannot recover from M.
If only a 2/3 portion of the land was delivered, there would be a Partial Failure
of Consideration which would bar recovery only pro tanto. Hence, P could
recover only 2/3 of the note as M is not liable to the extent of 1/3 which is the
price of the undelivered portion.
What is the effect of Partial Consideration?
The payee can only recover a proportional amount of the negotiable instrument, not the
whole amount.
When can you interpose the defense of lack of consideration?
Absence of failure of consideration is a matter of defense against any person not a holder
in due course.
Lack of consideration is a personal defense, as opposed to a real defense. Therefore, it
cannot be interposed against a holder in due course.
What is the status when…
1) ABSENT = VOID
2) FAILURE = VALID, but subject to remedy or rescission
3) PARTIAL FAILURE OF CONSIDERATION = defense pro tanto (to a certain extent)
Sec. 29. Liability of accommodation party.—An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party.
Accommodation Party
One who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person.
Such a person is liable to a holder for value, notwithstanding such holder at the time of
taking the instrument knew him to be only an accommodation party. (Sec. 29)
He usually expects that not he, but the accommodated party, will provide payment of the
bill or note when it falls due. He actually lends his credit to the party to whom the
accommodation is made.
He is classified according to the accommodated party’s status. If the accommodated party
is a maker, for example, he is liable on the instrument to subsequent parties as if he were
the maker. In lending his name to the accommodated party, the accommodation party is,
in effect, a surety for the former.
REQUISITES:
1) He must be a party to the instrument, signing as maker, drawer, acceptor, or
indorser;
2) He must not receive any value for the instrument; and
3) He must sign for the purpose of lending his name or credit.
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EXAMPLE: He impliedly agrees to take up the instrument at maturity and to indemnify the
accommodation party against the consequences of non-payment.
1) Accommodation maker—M, as accommodation party, issues a promissory note
payable to P who may then negotiate it to A. What is the relationship between accommodation and accommodated party?

2) Accommodation drawer—M, as accommodation party, signs a bill of exchange The relation between them is that of principal debtor and surety, with the accommodation
with P as payee, and P may indorse the same to A. party lending his name, being the surety of the accommodated party.

3) Accommodation acceptor—M, as accommodation party, accepts a bill drawn on Accommodation Note or Bill
him by P in favor of himself and P may indorse the same to A.
One to which the accommodation party has put his name, without consideration, for the
4) Accommodation indorser—M, as accommodation party, simply signs as an purpose of accommodating some other party who is to use it, and is expected to pay it. In
indorser in blank, the bill or note made by P in favor of A, before it is delivered other words, it is a loan of one’s credit.
to A. (Sec. 63)
“Without receiving value therefor”—what does this phrase mean? (Sec. 29)
What are the rights of an accommodation party?
This phrase only means that no value has been received for the negotiable instrument and
1) Right to revoke the accommodation; not “without receiving payment for lending his name.” The accommodation party may
2) Right to reimbursement from an accommodated party after making the receive some consideration for the use of his name. The last word “therefore” refers to the
payment; and instrument itself and not to the use of the name by way of accommodation.
3) Right to contribution from other solidary accommodation parties, if any.
Thus, if for example, M is given P1,000 in consideration of lending his name but not for the
Liability of the accommodation party promissory note he signs, M does not lose his status as an accommodation party.

Accommodation party is liable to any holder for value despite that the holder had known
him to be only an accommodation party.

In other words, the holder for value can run after the accommodation party even if the
holder knew that the accommodation party made the negotiable instrument without
consideration.

The accommodated party must reimburse the accommodation party if the latter is held
liable by the holder for value.

Rules on Solidary Accommodation Parties

A solidary accommodation party may seek reimbursement from the accommodated party
or other accommodation parties subject to the following rules:
1) A joint and several accommodation party such as an accommodation maker may
demand from the principal debtor reimbursement for the amount that he paid
to the payee; and
2) A joint and several accommodation maker who pays on the said promissory note
may directly demand reimbursement from his co-accommodation maker
without first directing his action against the principal debtor provided that:
a. He made the payment by virtue of a judicial demand; or
b. The principal debtor is insolvent.
Accommodated Party

One in whose favor a person, without receiving value therefor, signs an instrument for the
purpose of lending his credit and enabling said party to raise money upon it.

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