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GENERAL CONCEPTS particular account to be debited with the

NEGOTIABLE INSTRUMENTS – A written contract for the NOTE: An order or promise to pay out of a particular fund is
payment of money which complies with the requirements of Sec 1 not unconditional
of the Negotiable Instruments Law (NIL), which by its form and on o The promise or order to pay to be unconditional must
its face, is intended to hand as money, so as to give the holder in be unqualified, absolute and obligatory; nor merely
due course (HDC) the right to hold the instrument free from aspirational
personal defenses and available to prior parties (Jose R. Sundiang o TEST: Does the instrument carry the general credit of
and Timoteo B. Aquino, Reviewer on Commercial Law, 2006 ed.). the drawer or the maker or only the credit of a particular
1. Must be in WRITING and signed by the maker or drawer
– Signature is binding however written or printed as PAYMENT
long as it is intended to be the signature of the signer Acts involved Drawee pays the There is only one
or made with his authority payee from his own act: the drawee
o Assumed or Trade name – NO person is liable on the NI funds, afterwards pays directly
whose signature does not appear thereon unless the drawee pays from the
otherwise provided. But one who signs in a trade or himself from the particular fund
assumed name will be liable to the same extent as if he particular fund indicated.
signed his own name (Sec 18 NIL) indicated Payment is
o Signature by agent – The signature of any party ma be subject to the
made by a duly authorized agent. No particular form is condition that the
necessary fund is sufficient
o If the signature placed on the NI is not clear so what Nature of fund Particular fund Particular fund
capacity the person intended to sign, he is deemed as indicated indicated is NOT indicated is the
an indorser (Sec 17.f NIL) the direct source of direct source of
payment but only payment
2. Must contain an UNCONDITIONAL promise or order to the source of
pay a sum certain in money – There must be an express reimbursement
promise or order to pay a sum certain in money Effect Unconditional Conditional
o “Promise” need not be used; an equivalent expression Example Pay to the order of I promise to pay
is sufficient X P1,000 and X or order the
o Order is a command or imperative direction. A mere reimburse yourself sum of P1,000
request or authority to pay is not equivalent to an order. from the rentals of out of my salary
o There must be a clear demand upon the drawee to pay my house in XYZ corp

WHEN UNCONDITIONAL (Sec 3 NIL) NOTE: Bills and checks by itself do not operate as an
There is an unqualified or unconditional order or promise to assignment of any part of the funds to the credit of the drawer
pay if there is: with the bank, and the bank is not liable to the holder unless
a. An indication of a particular fund out of and until it accepts or certifies the check (Sec 127 and 189
which reimbursement is to be made, or a NIL)

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or of interest, the whole shall become due
Account to be debited with the amount – The payment does (ACCELERATION clause)
not depend upon the existence or adequacy or the particular d. With EXCHANGE, whether at a fixed rate or
account to be debited. It is negotiable because the instrument
at the current rate; or
is to be paid first after the particular account indicated will be
e. With COSTS of collection or an attorney’s
debited (De Leon, The Law on Negotiable Instruments 2010
ed.) fees, in case payment shall not be made at
b. A statement of the transaction which gives rise
to the NI – Where the promise or order is PAYABLE IN MONEY – An instrument which contains an order
subject to the terms and conditions of the or promise to in addition to the payment of money is not
transaction stated, the instrument is rendered negotiable
non-negotiable. The NI must be burdened with o If the order or promise gives the holder an option to
the terms and conditions of that agreement to require something to be done in lieu of payment, its
destroy its negotiability (Villanueva, negotiability is not affected
Commercial Law Review 2004 ed.) o If the option to pay money or something in lieu thereof
NOTE: Reference to another transaction or is with the maker or the person primarily liable, the
document must be descriptive rather than instrument is not negotiable
SUM PAYABLE MUST CERTAIN (Sec 2) – A sum is certain if the GENERAL RULE: An instrument which contains an order or
amount to be unconditionally paid by the maker or drawee can promise to do any act in addition to the payment of money is
be determined on the face of the instrument and is not not negotiable (Sec 5 NIL)
affected by the fact that the exact amount is arrived at only REASON: The instrument calls for an act other than payment
after a mathematical computation of money is not negotiable because a NI is intended as a
o NI is a device intended to take the place of money, it is substitute for money
essential, then, that it represents a fixed amount of
money. The amount to be paid must be stated plainly EXCEPTIONS:
on the face of the instrument and must be determinable (1) Authorizes the sale of collateral securities on
from the face of the instrument itself without reference default
to any outside source (2) Authorizes confession of judgment on default
NOTE: Confession of judgment clauses are VOID as
Sum payable is certain even if (ISA-Ex-Co): being against public policy because the PN bargains
a. With INTEREST away his day in court however such nullity does nto
b. By STATED installments affect the negotiability of the instrument (National Bank
i. The amount of each installment is indicated; v. Manila Oil Refining Co, G.R. no L-18103, June 8,
AND 1922)
ii. The due date is fixed or at least (3) Waives the benefit of law intended to protect the
determinable debtor such as presentment for payment, notice
c. By stated installments with a provision that of dishonor and protest or;
upon default in payment of any installment (4) Allows the holder the option to require something
in lieu of money

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NOTE: An instrument is still negotiable although the amount to be Philippines and shall be legal tender for all debts, both public
paid is expressed in currency that is not legal tender so long as it is or private
expressed in money (PNB v. Zulueta, G.R. no L-7271, August 30,
1957) NOTE: Checks representing demand deposits do not have legal
tender power and their acceptance in the payment of debts is at the
REASON: Under the Sec 1 of RA 8183, all monetary obligations shall option of the creditor; provided that that a check which has been
be settled in Philippine currency which is legal tender in the cleared and credited to the account of the creditor/s shall be
Philippines. However, the parties may agree that the obligation shall equivalent to the creditor of cash in an amount equal to the amount
be settled in any other currency at the time of payment credited to his account (Sec 60 RA 7653)
 Sec 1(b) and 6(e) call for the payment of money but the law
does not require the payment should be made in legal tender 3. Must be PAYABLE on demand, or at a fixed or
 The Uniform Currency Act (RA 529) has repealed RA 8183; determinable future time – Purpose: To inform the holder
the parties may now—not only in the case of NI—but in any of the NI of the date when he may enforce payment thereof.
contract involving payment of debt money, agree now that the Before to maturity, he cannot compel the maker or acceptor
payment should be made in a foreign currency to pay unless there is a valid acceleration clause


a.) Sec 60 of the New Central Bank Act (RA 7653) provides a. Where it is expressed to be payable on demand, at sight
that: Checks are not legal tender. Checks representing or on presentation – NI is payable on demand not only
demand deposits do not have legal tender power and their as between parties but also as to subsequent parties
acceptance in the payment of debts, both public and private,  AT sight – the NI is payable as soon as it is seen
is at the option of the creditor; provided that a check which by the party primarily liable
has been cleared and credited to the account of the b. Where no period of payment is stated – Refers only to
creditor/s shall be equivalent to the creditor of cash in an immediate parties since between immediate parties
amount equal to the amount credited to his account there is no difference between HDC and a person not
b.) Art 1249 NCC (impairment clause): The delivery of a note HDC
payable to order or a bill of exchange or any other c. Where issued, accepted or indorsed after maturity (only
mercantile document shall produce payment only when they as between immediate parties)
have been encashed or through the fault of the creditor, the
c.) The SC ruled that the creditor cannot be compelled to accept time must be certain so that the holder will know when he
a check in payment of a debt (Leticia Co v. PNB, G.R. no L- may enforce the NI and the person liable, when he may be
51767, June 29, 1982). Acceptance of a check is not required to pay (Sec 4 NIL)
tantamount to payment
WHAT IS LEGAL TENDER? a. At a fixed period after date or sight – After sight: after
a.) It is that kind of currency which the law compels a creditor the drawee has seen the NI upon presentment for
to receive in payment of a debt, be it public or private, acceptance
provided it is tendered in the right amount b. On or before a fixed or determinable future time
b.) Sec 52 New Central Bank Act: All notes and coins issued by specified therein; or
BSP shall be fully guaranteed by the Government of the

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c. Before the occurrence of a specified event which is NOTE: Payee must be named or indicated with
certain to happen, though the time of happening is reasonable certainty. If there is no payee, in a NI
certain (Sec 4 NIL) payable to order, no one could indorse the NI (Sec 8.a)
d. A NI payable on contingency is not negotiable even if  Subject to the rules in Sec 13, 14 and 15 on
the contingent event does happen incomplete instruments, leaving the payee
NOTE: If the day and month, but not the year of payment is blank may make the NI non-negotiable because
given, it is not negotiable due to its uncertainty an instrument payable to order may be
o If the NI states that the amount shall be paid in 2 equal negotiated only by indorsement AND delivery
installments, the 2nd being payable on a fixed date, the b. The drawer or maker
NI can be considered negotiable since the 1 st NOTE: If maker is made the payee, the NI must be
installment would then be payable on demand indorsed to be complete (Sec 14 NIL)
o Presumption as to date: If NI is dated, such date is  Where the NI is payable to the order of the
prima facie presumed to be the true date of making, drawer and it is accepted by the drawee, the NI
drawing, acceptance or indorsement as the case may be is equivalent to a PN made by the acceptor in
(Sec 11) favor of the drawer
o If NI is not dated, it will be considered to be dated as of c. The drawee
the time it was issued (Sec 17 NIL) d. Two or more payees jointly
e. One or some of several payees
EFFECT OF ACCELERATION CLAUSE – Acceleration clause f. The holder of an office for the time being
does not affect the negotiability of the NI (Sec 4.b NIL)
o If acceleration clause is at the option of the holder: PAYABLE TO BEARER (Sec 9 NIL) – Only NI under Subsections
negotiability depends on the nature of the provision: A and B are bearer instruments on the face. Those under
(a) If only upon happening of a specified event over Subsections C, D, and E are order instruments on the face:
which he has no control = negotiable (OPEN-F)
(b) If option is unconditional = non-negotiable a. When it is EXPRESSED to be so payable
(c) Acceleration clause to apply upon default = b. When it is payable to a PERSON named therein or
negotiable bearer
c. When it is payable to the order of a FICTITTIOUS
4. Must be payable to ORDER or to bearer – words of or non-existing person, and such fact was known
negotiability: Payable to order or to bearer. This serves as an
to the person making it so payable – Fictitious
expression of consent that the instrument may be transferred
person is not limited to persons having no real
o Need not expressly state payable to “order” or
existence. An existing person may be considered a
“bearer” as long as intention to legal requirements fictitious payee, if the person making it so payable does
is sufficient (substantial compliance) not intend to pay the specified person
 REASON: There is no one to indorse it, hence if
WHEN PAYABLE TO ORDER (Sec 8) – NI is payable to order the maker intended to give it negotiability, it
where it is drawn payable to the order of a specified person, could only be on the theory that it became
or to him or his order. It may be made payable to the order payable to bearer
of:  A note payable to the estate of a person still
a. A payee who is not the maker, drawee or drawer existing at the time of its execution is payable
to bearer since it is payable to a non-existing

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 That the payee is a fictitious or non-existing APPLICABILITY
person must be known to the maker or drawer The provisions of NIL apply only to negotiable instruments. If the
otherwise it is an order instrument instrument is negotiable, the instrument is not governed by the
d. When the name of the payee does NOT purport to be provisions of NIL (Metropolitan Bank and Trust Co v. CA, 194 SCRA
the name of any person – e.g., pay to cash or pay to 169, 1991).
 The payee named is one who does not exist and NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE
has never existed. Since indorsement is INSTRUMENTS DISTINGUISHED
obviously impossible, the manifest intention of NEGOTIABLE INSTRUMENTS NON-NEGOTIABLE
the drawer is to make the instrument a bearer INSTRUMENTS
paper negotiable by delivery Only negotiable instruments are NIL does not apply
e. When the ONLY or last indorsement is an indorsement governed by NIL
in blank – It becomes payable to bearer even if it is Can be transferred by negotiation Can be transferred only
originally payable to a specified person or by assignment by assignment
 NI originally payable to bearer can be Transferee can become HDC if all Transferee can never
negotiated by mere delivery even if it is requirements under Sec 52 NIL are become HDC
indorsed specially. If it is originally a BEARER complied with
instrument, it will ALWAYS be a bearer
If last transferee is HDC, prior All defenses available to
instrument (Sec 40 NIL)
parties may not raise defenses prior parties may be raise
 As opposed to an original order instrument
against HDC (except real defenses) against last transferee
becoming payable to bearer, if ht same is
indorsed specially, it can no longer be
negotiated further by mere delivery, it has to be
2. CODE OF COMMERCE – Negotiable instruments are governed
 When the instrument is payable only to a
by the provisions of the Code of Commerce that were not
specified person or his agent, it is not payable
impliedly repealed by NIL
to order, thus non-negotiable
NOTE: The provisions on CROSSED CHECKS are still in force
because there is no provision in NIL that deals with crossed
5. When the instrument is ADDRESSED to a drawee, he checks. (Chan Wan v. Tan Kim, 109 PHIL 706, 1960).
must be named or otherwise indicated therein with 3. Law Merchant (Sec 196 NIL)
reasonable certainty – It is applicable only to a bill of 4. CIVIL CODE – applicable suppletorily
o Omission of drawee may be filled later (Sec 14 FUNCTIONS OF NEGOTIABLE INSTRUMENTS
NIL) 1. It operates as a substitute of money
o A bill may be addressed to 2 or more drawees 2. It is a means of creating and transferring credit
jointly, whether they are partners or not in the 3. It facilitates sale of goods
4. It increases the purchasing medium in circulation (Sundiang,
alternative or in succession (Sec 128 NIL) because
Reviewer on Commercial Law)
there would be no certainty as the person to 5. It is a proof of transactions
whom the bill should be presented for payment or
acceptance Sec 52 of the New Central Bank Act (RA 7653) provides that only
notes and coins issued by the Banko Sentral ng Pilipinas are

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considered legal tender, hence, negotiable instruments are NOT instrument and collect the sum payable for himself free from
legal tender. Delivery of instrument does not operate as payment. defenses

Sec 69 of the same law expressly provides that checks are not legal 2. ACCUMULATION OF SECONDARY CONTRACTS – Secondary
tender. Sec 60 states that checks representing demand deposits do contracts are picked up and carried along with them as they
not have legal tender power and their acceptance in the payment of are negotiated from one person to another, or in the course
debts, both public and private, is at the option of the creditor. of negotiation from one person to another, or in the course of
Provided, however, that a check which has been cleared and negotiation of NI, a series of juridical ties between the parties
credited to the account of the creditor shall be equivalent to delivery thereto arise by law or by privity (Sundiang, Reviewer on
to the creditor of cash in an amount equal to the amount credited Commercial Law)
to his account (Sundiang, Reviewer on Commercial Law).
1. PREPARATION AND SIGNING complete with all the The rules in Sec 17 are applicable only when the instrument is
requirements provided under Sec 1 NIL ambiguous or uncertain or when there are omissions therein. If the
2. ISSUANCE – First delivery of the instrument to the payee terms are clear, the NI must be enforced as it reads.
(from maker to payee/bearer or from drawee to the  When the meaning is doubtful, the courts have adopted the
payee/bearer) policy of resoling in favor of the negotiability of the
3. NEGOTIATION – Transfer from one person to another so as instrument.
to constitute the transferee a holder 1. Words prevail over figures
4. PRESENTMENT for acceptance for certain kinds of Bills of 2. Interest stipulated runs from the date of the NI, or if undated,
Exchange – The bill of exchange shall be presented to the from its issue
drawee so that the latter will signify his agreement to the 3. If undated, the instrument is deemed dated at its issue
order of the drawer to pay 4. Written words prevail over printed provisions
5. ACCEPTANCE – Written assent of the drawee to the order 5. When there is doubt whether the NI is a bill or a note, the
6. DISHONOR by non-acceptance – Refusal to accept by the holder, at his election, may treat it as either a bill or a note –
drawee Where in a bill, the drawer and the drawee are the same
7. PRESENTMENT for payment – The instrument is shown to person or where the drawee is a fictitious person, or a person
the maker or drawee/acceptor so that the said maker or not having capacity to contract, the holder may treat the NI
drawee/acceptor will pay at his option,, either as a bill of exchange or promissory note
8. DISHONOR by nonpayment – Refusal to pay by the maker (Sec 130 NIL)
or drawee/acceptor 6. When it is not clear in what capacity a person signs, he is
9. NOTICE OF DISHONOR – Notice to the persons secondarily deemed an indorser
liable that the maker or drawee/acceptor refused to pay or 7. When 2 or more persons sign “We promise to pay,” their
accept the NI liability is JOINT (each liable for his part) but if they sign “I
10. PROTEST – applicable to foreign bills promise to pay,” the liability is SOLIDARY (each can be
11. DISCHARGE compelled to comply with the entire obligation


1. NEGOTIABILITY –That attribute or property whereby a bill or
note or check may pass from hand to hand similar to money, A. PROMISSORY NOTE (PN) – An unconditional promise, in
so as to give the holder in due course the right to hold the writing, made by one person to another, signed by the maker

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engaging to pay, on demand or at a fixed or determinable future
time, a sum of certain money, ot order or to bearer (Sec 184 NOTE: Prior to the acceptance of the Bill of Exchange,
NIL) there is no party primarily liable in a bill of bill of
PARTIES: exchange. It is only when a drawee becomes an acceptor
a. Maker – Party who executes the written promise to pay that he is primarily liable.
b. Payee – Party in whose favor the promissory note is made
payable LEGAL BASIS: A bill itself does not operate as an
assignment of funds in the hands of the drawee available
EXAMPLE: for payment thereof, and the drawee is not liable until and
Payee unless he accepts the same (Sec 127 NIL)
July 15, 2012
Manila c. Payee – Party in whose favor the bill is drawn or payable
Fifteen (15) days after date, I promise to pay Mr. X or order the sum of Ten Payee
Thousand Pesos (P10,000) July 15, 2012
Sgd. Mr. Y Manila

Maker Fifteen (15) days after date, pay Mr. X or order the sum of Ten Thousand
Pesos (P10,000).
Sgd. Mr. Y
B. BILL OF EXCHANGE (BEX) – An unconditional order, in
To: Mr. Z
writing, addressed by one person to another, signed by the President, XYZ Corp
person giving it, requiring the person to whom it is addressed Mendiola, Manila
to pay, on demand or at a fixed or determinable future time, a
sum certain in money, to order or to bearer (Sec 126 NIL) Drawee/Acceptor Drawer
a. Drawer – Party who executes the written order to pay
NOTE: A bill of exchange requires in its inception three NOTE: The parties need not all be distinct persons. Thus, the drawer
parties: drawer, drawee and payee may draw on himself payable to his own order (De Leon, The Law
b. Drawee – The person to whom the bill is addressed and on Negotiable Instruments, 2010 ed.).
who is ordered to pay

The drawee is not really a party to the bill. He assumes BILL OF EXCHANGE TREATED AS PROMISSORY NOTE
liability only when he accepts the bill usually by writing
the word “accepted and signing his name on the face INSTANCES WHEN A BILL OF EXCHANGE MAY BE TREATED AS PN
thereof” (Sec 132 and 133 NIL) in which case he ceases AT THE ELECTION OF THE HOLDER (Sec 17e and Sec 130 NIL):
to be drawee and becomes known as an ACCEPTOR (FLACS)
(Hector De Leon, The Law on Negotiable Instruments) 1. Drawee is a FICTITIOUS person
ACCEPTOR – A drawee who ACCEPTS the order to pay 2. Where the bill is drawn on a person who is LEGALLY absent
made by the drawer 3. Where the bill is AMBIGUOUS (Sec 17e NIL)

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4. Drawee does not have the CAPACITY to contract (Sec 130 fixed or
NIL); and determinable
5. The drawer and drawee are the SAME person future time
PRESENTMENT Must be presented Need not be
PROMISSORY NOTE AND BILL OF EXCHANGE for acceptance presented for
holder requests and
NATURE Unconditional Unconditional order
the bank desires,
he may accept
NUMBER OF Involves 2 parties Involves 3 parties
DRAWN ON DEPOSIT Need NOT be Is drawn on
drawn on a deposit, otherwise
LIABLITY OF Maker is primarily Drawer is only
deposit, hence it there would be
CREATOR liable secondarily liable
is not necessary fraud
PRESENTMENT Only one Generally 2
that the drawer of
presentment for presentments:
a bill of exchange
payment a. Acceptance
should have funds
b. Payment
in the hands of
the drawee
WHEN May be presented Must be presented
presentments only
PRESENTMENT MADE for payment within a reasonable
in cases provided in
within reasonable time after its issue
Sec 143
time after last
RIGHT TO LIMIT Maker of the note Drawer may insert
LIABILITY may NOT insert an in the instrument
EFFECT OF If accepted: If certified:
express stipulation an express
ACCEPTANCE OR drawer/indorser drawer/indorser are
limiting or negativing stipulation limiting
CERTIFICATION remains liable discharged
his own liability to or negativing his
EFFECT OF Death of a drawer Death of the
the holder own liability to the
DRAWER’S DEATH of BOE, with the drawer of the
holder (Sec 61 NIL)
knowledge of the check, with the
bank, does not knowledge of the
C. CHECK – A bill of exchange drawn on a bank payable on
revoke the bank, revokes the
demand (Sec 185 NIL). It is also the most common form of bill authority of the authority of the
of exchange drawee to pay banker to pay
 Except as otherwise provided, the provisions of NIL
applicable to a bill of exchange payable on demand D. CERTIFICATE OF DEPOSIT issued by banks, payable to the
apply to a check (Sec 185 NIL) depositor or his order, or to bearer – A form of promissory note
which is a written acknowledgment of a bank of its receipt of a
EXCHANGE AND CHECK DISTINGUISHED certain sum with a promise to repay the same
EXCHANGE CHECK  A written acknowledgment by a bank or banker of the
WHEN PAYABLE May be payable Always payable on receipt of a sum of money on deposit which the bank or
on demand or at a demand banker promises to pay to the depositor, to the order of the

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depositor, or to some other person or his order, whereby receiving value therefore, and for the purpose of lending his
the relation of debtor and creditor between the bank and name to some other person (Sec 29 NIL)
depositor is created 7. REFEREE IN CASE OF NEED (Sec 130 NIL) – A person who
may be designated in the instrument as the person who may
E. TRADE ACCEPTANCE – A bill of exchange payable to order and be resorted to by the parties in case of dispute (Sundiang,
at a certain maturity, drawn by a seller against the purchaser of Reviewer on Commercial Law)
goods as drawee, for a fixed sum of money, showing on its face
the acceptance of the purchaser of the goods and that it has NON-NEGOTIABLE INSTRUMENTS AND
arisen out of a purchase by goods by the acceptor
F. BONDS, which are in the nature of promissory notes – A NEGOTIABLE NON-NEGOTIABLE
certificate or evidence of a debt which the issuing company or INSTRUMENTS INSTRUMENTS
governmental body promises to pay the bondholders a specified APPLICABLE LAW Only NI is governed Application of NIL
amount of interest for a specified length of time, and to repay by NIL is only by analogy
the loan on the expiration date TRANSFERABILITY Transferable by Transferrable only
negotiation or by by assignment
G. DRAFTS –which are bills of exchange drawn by one bank upon assignment
another TRANSFEREE The transferee can The transferee
be a HDC if all the remains to be an
 In Bank drafts, the drawer and drawee are liable to the
requirements are assignee and can
purchaser of draft for not complying with his instructions
complied with never be a HDC
DEFENSES A holder in due All defenses
H. DEBENTURE – A promissory note or bond backed by the
course takes the NI available to prior
general credit of a corporation and usually not secured by a
free from personal parties may be
mortgage or lien on any specific property
defenses raised against the
last transferee
I. BANK NOTES – Promissory notes of the issuing bank which NATURE OF TITLE Requires clean title, Transferee acquires
are payable to bearer on demand one that is free a derivative title
from any infirmities only
1. INDORSER – A person placing his signature upon an and defects of title
instrument, otherwise than as maker, drawer or acceptor of prior transferors
2. INDORSEE – in the case of instrument payable to order SOLVENCY OF THE Solvency of the Solvency of the
3. Persons negotiating by mere delivery DEBTOR debtor is in the debtor is not
4. Persons to whom the instrument is negotiated by mere sense guaranteed guaranteed under
delivery, in case the instrument is payable to bearer by the indorsers Art 1628 NCC
5. ACCEPTOR – A drawee who accepts the order to pay made because they unless expressly
by the drawer. It is only when a drawee becomes an acceptor engage that the stipulated (Timoteo
that he is primarily liable (Sundiang, Reviewer on Commercial instrument will be Aquino, Cases on
Law) accepted, paid or Banks, Negotiable
6. ACCOMODATION PARTY – One who has signed the both and that they Instruments and
instrument as maker, drawer, acceptor, or indorser, without will pay if the

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instrument is other Commercial 1. The WHOLE of the instrument shall be considered
dishonored Documents) 2. Only what APPEARS on the face of instrument shall be
1. TREASURY WARRANT – Being payable out of a particular 3. REQUISITES enumerated in Sec 1 NIL; and
fund of the national treasury (Metrobank v. CA, G.R. no 4. Should contain words or TERMS of negotiability such as
88866, February 18, 1991) “order” or “bearer” (Gopenco, Commercial Law Reviewer
2. POSTAL MONEY ORDERS – citied in Aquino, p. 23)
a. Under postal regulations, the bureau of posts can refuse RATIONALE OF FORMALITIES OF NEGOTIABLE INSTRUMENTS
to pay on numerous grounds, thus the order is not 1. To become effective substitutes for money
unconditional 2. To be desirable tools for credit transactions
b. A money order can be indorsed only once 3. For security of mercantile transactions
c. The post office is not run by the government for
commercial profit, but for public service (Phil Education Co PROVISIONS AND OMMISIONS THAT DO NOT
Inc v. Soriano, G.R. no L-22405, June 30, 1971) AFFECT NEGOTIABILITY
3. LETTER OF CREDIT – Being payable to a specified person 1. PROVISIONS which
4. TRUST RECEIPT – Being payable to the entrustor, a. Authorizes the sale of COLLATERAL SECURITIES in case
conditioned upon the resale of the goods the instrument be not paid at maturity
5. NEGOTIABLE DOCUMENT OF TITLE, BILL OF b. Authorizes a CONFESSION of judgment if the
LADING AND WAREHOUSE RECEIPT – Being payable instrument be not paid at maturity
in goods rather than money c. WAIVES the benefit of any law intended for the
6. CERTIFICATE OF STOCKS – It is a written instrument advantage or protection of the obligor; or
signed by proper officer of a corporation stating that the d. Gives the holder an election to require something to be
person named therein is the owner of a designated number of done IN LIEU of payment of money (Sec 5 NIL)
shares of stock. It is also without an unconditional promise or
order to pay sum certain in money (De Leon,l The Law on 2. OMMISSIONS (Sec 6)
Negotiable Instruments) a. It is not dated – The date referred is the date of the
making or drawing of the NI. If the NI is not dated, it
will be considered to be dated as of the time it was
 Sec 13 NIL contemplates a situation where the
NEGOTIABILITY date is necessary to fix the maturity date or to
make the maturity date determinable. The
reason is that unless the true date is inserted,
NEGOTIABILITY – The requisites of negotiability are provided
one will not know when the NI is due
for under Sec1 NIL. It is the most important provision of NIL because
the law does not apply if the instrument does not meet the requisites
b. It does not specify the value given or that any
of negotiability as provided therein (Aquino, Cases on Banks, value has been given – Consideration is presumed
Negotiable Instruments and other Commercial Documents) (Sec 24 NIL)
c. It does not specify the place where it is drawn or
FACTORS THAT AFFECT THE DETERMINATION OF where it is payable – It should be noted that Sec 73
NEGOTIABILITY OF INSTRUMENTS (WART) NIL already provides for the rules on the proper place of

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presentment where no place is specified. On the other o EFFECT: Makes the transferee the holder of the NI (Sec
hand, Sec 75 covers a situation where it is payable at a 191). The right to collect a sum certain in money is
bank transferred from one person to another
d. It bears a seal o BEARER – the person in possession of a bill or note
e. It designates a particular kind of current money in payable to bearer
which payment is to be made o HOLDER – payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof (Sec 191)
a. NI Payable to ORDER – Where the NI is payable to
3. ACCEPTANCE – The acceptance of a bill of exchange is not
order, there are 2 steps required for its negotiation
important in the determination of its negotiability. The nature
b. NI payable to BEARER – It is negotiated by mere
of acceptance is important only in the determination of the
delivery without indorsement
kind of liabilities of the parties involved (PBCom v. Aruego,
G.R. no L-25836-37, January 31, 1981)
2. ASSIGNMENT – A method of transferring a negotiable or
non-negotiable instrument whereby the assignee is merely
4. INDORSEMENT – The presence of indorsement of the NI does
placed in the position of the assignor and acquires the NI
not affect the negotiability of the NI. This rule is subject to the
subject to all defenses that may be set up against the original
provision that a PN that is payable to the order of the maker
himself is not yet complete unless it is indorsed by the maker
o A person taking a NI by assignment in a separate piece
(Sec 184 NIL). Moreover, an indorsement may prevent further
of paper takes it subject to the rules on assignment. And
negotiation of the NI, in which case, subsequent transferees
where the holder of the bill payable to order transferred
can no longer be considered holders (Sec 36)
it without indorsement, it operates as an equitable
NOTE: If the instrument is not negotiable, it can still be
TRANSFER AND NEGOTIATION transferred but only through assignment

DELIVERY – Transfer of possession, whether actual or ASSIGNMENT AND NEGOTIATION DISTINGUISHED

constructive, from one person to another ASSIGNMENT NEGOTIATION
 Contract of NI is incomplete and revocable until delivery of NI Applicable law Civil Code NIL
for the purpose of giving effect thereto (Sec 16) Type of Pertains to contracts in Pertains to NI
 Without the initial delivery of the instrument to the payee, transaction general
there can be no liability on the NI (e.g. if delivered merely for Nature o f the The transferee is a The transferee is a
safekeeping = no liability) transferee mere assignee holder who may be
 ISSUANCE – First delivery of the NI complete in form to a HDC
person who takes it as a holder Availability of Assignee steps into the HDC takes it free from
defenses shoes of the assignor personal defenses
MODES OF TRANSFER and merely acquires available among
1. NEGOTIATION – NI is negotiated when it is transferred whatever rights the parties
from one person to another in such a manner as to constitute assignor may have
the transferee the holder thereof. If payable to bearer, it is As to The transferee can The transferee can
negotiated by mere delivery; if payable to order, it is possibility of never become HDC become HDC in proper
negotiated by indorsement of the holder completed by become HDC cases
delivery (Sec 30 NIL)

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HOW NEGOTIATION TAKES PLACE REASON: Mere possession of a NI does not in itself
a. ISSUANCE – The first delivery of the NI, complete in conclusively establish either the right of the possessor
form, to a person who takes it as a holder (Sec 191). It to receive payment, or of the right of one who has made
is the first transfer of NI to a payee payment to be discharged from liability (BPI v. CA and
Steps: Salazar, G.R. no 136202, January 25, 2007)
(1) Mechanical act of writing the NI completely and
in accordance with the requirements under Sec EQUITABLE ASSIGNMENT – The transaction is an equitable
1 NIL assignment and the transferee acquires the NI subject to the
(2) The delivery of the complete instrument by the defenses and equities available among prior parties. If the
maker or drawer to the payee or holder with the transferor had legal title, the transferee acquires such title,
intention of giving effect to it and the right to have the indorsement of the transferor and
b. SUBSEQUENT NEGOTIATION (Sec 30 NIL) – AN NI is also the right, as holder of the legal title, to maintain legal
negotiated when it is transferred from one person to action against the maker or acceptance or other party liable
another in such a manner as to constitute the transferee to the transferor.
the holder thereof
(1) If payable to bearer, NI may be negotiated by 3. BY OPERATION OF LAW – The full title to a bill may pass
mere delivery without assignment or indorsement or delivery, i.e. by
(2) If payable to order, NI negotiated by operation of law (De-Ba-De)
indorsement completed by delivery a. By the DEATH of the holder, where the title vests in his
 In both cases, delivery must be intended to give personal representatives
effect to the transfer of NI (DBP v. Sima Wei, b. By the BANKRUPTCY of the holder, where the title vests
G.R. no 85419, March 9, 1993) in his assignee or trustee
c. INCOMPLETE NEGOTIATION OF ORDER c. Upon the DEATH of a joint payee or indorsee, in which
INSTRUMENT (Sec 49 NIL) – Contemplates a case case the title vests in the surviving payee or indorsee in
where there is delivery and payment of value but NO general
 Applicable only to NI payable to order 4. INDORSEMENT – It is the writing of the name of the
 Effect: The NI is in effect merely assigned to the indorser on the NI with the intent either to transfer the title to
transferee. It is only at the time of indorsement the same, or to strengthen the security of the holder by
that the transferee acquires all the rights of the assuming a contingent liability for its future payment, or both
 For the purpose of determining whether the HOW INDORSEMENT IS MADE – The indorsement must be
transferee is HDC, the negotiation takes effect written on the NI itself or upon a paper attached thereto
as of the time when the indorsement is made. (allonge). The signature of the indorser without additional
Hence, before indorsement, the transferee is words is sufficient (Sec 31 NIL).
not a holder (Sec 49 NIL) o Allonge can only be used when there is no longer any
room on NI for further indorsements.
RIGHTS OF TRANSFEREE FOR VALUE o Where the indorsement is written in an allonge, the
a. Acquires only the rights of the transferor; and same must be tacked or pasted on the NI so as to
b. Right to require the transferor to indorse the NI become part of it; otherwise, it cannot be considered an
NOTE: Transferees in this situation do not enjoy the allonge. Indorsement may made in any form, as long as
presumption of ownership in favor of holders it is meant to be an indorsement.

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considered an indorsee but merely an assignee
NATURE: An indorsement is not only a mode of transfer, it is and would therefore
also a contract. take the instrument subject to the defenses a
vailable between the original parties
INDORSEMENT AS A CONTRACT – Unless the indorsement 2. Where a person is under obligation to indorse in a
is qualified (sec 65), every indorser is a new obligor and the representative capacity, he may indorse in such terms as to
terms are found on the face of the NI, with the additional negate personal liability (Sec 44 NIL)
obligation that if the NI is dishonored by nonpayment or non- a. He must add words describing himself as agent
acceptance, and notice is given to the indorser, the latter will b. He must disclose his principal
pay for it. c. He must be duly authorized in writing
3. Where NI is drawn or indorsed to a person as “cashier” or
NOTE: A qualified indorser is liable in case of breach of other fiscal officer or corporation, it is deemed prima facie to
warranties (Sec 65). be payable to the bank or corporation of which he is an officer,
and may be negotiated by either indorsement of the bank or
RULES ON INDORSEMENT corporation or indorsement of the officer
NOTE: The cashier or treasurer may prove that the NI were in
1. Indorsement must be of the entire NI
fact indorsed to them in their personal capacities and not to
EXCEPT: Where NI has been paid in part, it may be indorsed
the corporations. They can prove that they own the NI.
as to the residue or balance (Sec 32)
4. Where the name of a payee or indorsee is wrongly misspelled,
o An indorsement which purports to transfer to the
he may indorse the NI as therein described, adding, if he
indorsee a part only of the amount payable does not
thinks fit, his proper signature (Sec 43 NIL)
operate as a negation of NI, it operates merely as an
5. Joint indorsement – Where NI is payable to the order of 2 or
assignment (Montinola v. PNB, G.R. no L-2861,
more payees or indorsees who are not partners, all must
February 26, 1951)
indorse (Sec 11)
o NOTE: An indorsement which purports to transfer the NI
to 2 or more indorsees severally does not operate as a
a. Where the payee or indorsees are partners AND
negotiation of NI (Sec 32)
b. Where the payee or indorsee indorsing has authority to
o Sec 32 does not prohibit discounting, whereby the
indorse for the others
indorsee pays the indorser les than the face amount of
the NI. The discount is given in consideration of the
period during which the purchaser has to way before he CLASSIFICATION OF INDORSEMENT
can cash the NI with the maker or acceptor, which can A. As to METHODS of negotiation
be done only at the maturity of NI 1. SPECIAL – Specifies the person to whom or whose order,
o If the indorsement of NI does not comply with Sec 32, the NI is to be payable, and the indorsement of such indorsee
the transfer is a mere assignment which subjects the is necessary to the further negotiation of the NI (Sec 34 NIL)
holder to all defenses on the NI o If the NI is originally payable to order and it is
negotiated by the payee by special indorsement, the
EFFECT OF PARTIAL INDORSEMENT indorsement of the indorsee is necessary to further
a. It doesn't operate as an indorsement negotiation of the instrument (Sec 34)
b. It may constitute a valid assignment though b o If the NI is originally payable to bearer, it may be
inding between the parties negotiated by mere delivery even if the original bearer
c. The person to whom the instrument is indorse indorsed it specially (Sec 40 NIL)
d would not be o Example: Pay to X, signed M.

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or the proceeds thereof, subject to the rights of the
2. BLANK – Specifies no person to whom or to whose order the person indorsing conditionally
NI is to be payable and may be negotiated by delivery (Sec o Example: Pay to X if he tops the 2013 bar exams
34) o NOTE: Conditional indorsement does NOT render an
o Example: An NI payable to the order of X, is indorsed instrument non-negotiable but if the condition is on the
by the latter by merely affixing his signature without face of the NI, the condition renders it non-negotiable
specifying an indorsee as the promise or order therein would not be
a. If NI is originally payable to order and negotiated by C. As to the kind of TITLE transferred
special indorsement, it can be further negotiated by 1. RESTRICTIVE – An indorsement is restrictive when it either
indorsement completed by delivery (Sec 36 NIL):
b. If originally payable to order and negotiated by blank a. Prohibits further negotiation of the NI – E.g., Pay to
indorsement, it can be negotiated further by mere Y only, signed M
delivery b. Constitutes the indorsee as the agent of the indorser
c. If originally payable to bearer, it can be further (e.g., indorsement for deposit) – Pay to X for
negotiated by mere delivery even if the original bearer collection, signed M
negotiated it by special indorsement c. Vests the title in the indorsee in trust for so to the
use of some other persons – Pay to Y in trust for A,
payable to bearer and (b) may be converted to special o Mere absence of words implying power to negotiate
indorsement by writing over the signature of indorser in blank does not make an indorsement restrictive (Sec 36
any contract consistent with character of indorsement (Sec 35 NIL)
NIL) o The omission of words of negotiability in the
indorsement does NOT affect the negotiability but
B. As to presence or absence of LIMITATIONS such omission in the body will render the NI non-
1. ABSOLUTE (UNCONDITIONAL) – One by which the
o A restrictive indorsement destroys the negotiability of
indorser binds himself to pay:
the instrument and bars any further negotiation to
a. Upon no other condition than failure of prior parties to
do so; and
b. Upon due notice to him of such failure
2. CONDITIONAL – Right of the indorsee is made to depend EFFECT OF RESTRICTIVE INDORSEMENT (PAT)
on the happening of a contingent event. Party required to pay It confers upon the indorsee the right to:
may disregard the conditions (Sec 39 NIL) a. Receive PAYMENT of the NI
o Where an additional condition is annexed to the b. Bring any ACTION thereon that the indorser could bring
indorser’s liability. Such condition must be express. c. TRANSFER his rights as such indorsee, where the from
o If an indorsement is conditional, the party required to of the indorsement authorizes him to do so (Sec 37 NIL)
pay the NI may disregard the condition and make NOTE: An instrument negotiable in its origin continues to be
payment to the indorsee or his transferee whether the negotiable until it has been restrictively indorsed or discharged
condition has been fulfilled or not. But any person to by payment or otherwise (Sec 47 NIL)
whom the I so indorsed is negotiated will hold the same,

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o This refers only to the first kind (Sec 36.a NIL) because 4) Fact that at the time of the indorsement, the NI
this is the only type of restrictive indorsement that was valueless or not value, and he knew of the
completely destroys the negotiability of the instrument fact – warranty as to ignorance of certain facts
b. A qualified indorsement does not impair the negotiable
D. As to scope of LIABILITY of indorser character of the instrument (Sec 38, last sentence)
1. QUALIFIED – Constitutes the indorser a mere assignor of c. A qualified indorser is liable to all the parties who derive
the title to the NI (Sec 38) their title through his indorsement
o By adding the words “without recourse” above his
signature, the indorser expressly rids himself of his 2. GENERAL(UNQUALIFIED) – The indorser indorses the
liability as indorser, i.e. the holder would have no instrument without any qualified and subject liabilities under
recourse to him should the maker fail to pay on the due Sec 66 NIL
o A qualified indorser merely assumes the contract of E. OTHER kinds of indorsement
sale/assignment of NI and agrees merely to transfer 1. JOINT – Indorsement payable to the order of 2 or more
title persons (Sec 41 NIL)
o It is made by adding to the indorser’s signature words GENERAL RULE: Where the instrument is payable to 2 or
like “sans recourse,” “without recourse,” indorser not more payees, ALL must indorse in order that the NI may be
holder,” “at the indorser’s own risk” or other terms of validly negotiated
similar import REASON: To make it an indorsement of the entire
o Oral testimony is not admissible to establish that an instrument because if only one indorses, he passes only his
unqualified NI is in fact qualified (Velasco v. Tan Liuan, part of the instrument
G.R. no 17239, March 17, 1922)
WITHOUT RECOURSE – Without resort to a person secondarily a. Where the payees or indorsees indorsing has the
liable after the default of the person primarily liable authority to indorse for the others; and
b. Where the payees or indorsees are partners (Sec 41
NOTE: Qualified indorsement is usually resorted to if the NIL)
indorser wants to transfer his rights over the instrument but
does not want to assume responsibilities under the secondary 2. IRREGULAR – A person who, not otherwise a party to an
contract instrument, places thereon his signature in blank
before delivery (Sec 64 NIL)
a. A qualified indorser has limited liability, i.e. he is liable LIABILITY OF IRREGULAR INDORSER (Sec 64)
for breach of warranty if the NI is dishonored by non- a. If the NI is payable to the order of a third person
acceptance or non-payment due to: (payee), he is liable to the payee and to all subsequent
1) Forgery – Warranty as to genuineness parties
2) Lack of good title on the part of the indorser – b. If the NI is payable to the order of the maker or drawer,
warranty as to good title or is payable to bearer, he is liable to all parties
3) Lack of capacity to indorse on the part of the subsequent to the maker or drawer
prior parties – warranty as to capacity to c. If he signs for the accommodation of the payee, he is
contract; or liable to all parties subsequent to the payee

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GENERAL RULE: Negotiation is deemed prima facie to have been 1. An indorsement payable to bearer on its face – By virtue of
effected before the instrument is overdue Sec 48, the holder may strike out all intervening indorsements
EXCEPTION: IF the indorsement bears a date after the maturity of or any of them since they are not necessary to his title
the instrument (Sec 45 NIL) 2. Instrument originally payable to order – Under Sec 9(e), NI
which is upon its face payable order becomes payable to
NOTE: IF the indorsement bears a date, the presumption would be bearer when the only or last indorsement is in blank. Hence,
that the date written is the true date (Sec 11 NIL) when a blank indorsement is followed by a special
indorsement and the holder cancels all indorsements
PRESUMPTION AS TO PLACE OF INDORSEMENT (Sec 46 NIL) subsequent to the blank indorsement, the NI would become
Except where the contrary appears, every indorsement is presumed payable to bearer s the last indorsement would be in blank.
to have been made at the place where the NI is date. The special indorsements are not necessary to the holder’s
title as he could have acquired the title to NI by mere delivery
RENEGOTIATION OF PRIOR PARTIES NOTE: The indorser may NOT strike out the payee’s
 Sec 50 refers to a re-acquirer or holder who negotiates the NI indorsement since the NI is payable to order, it cannot be
and then subsequently reacquires it. validly negotiated without his indorsement
 Where an NI is negotiated back to a prior party, such party
may reissue and further negotiate the same. But he is not CONTINUATION OF NEGOTIABLE CHARACTER
entitled to enforce payment thereof against any intervening (Sec 47 NIL)
party to whom he was personally liable (Sec 50 NIL) GENERAL RULE: An instrument which is negotiable shall continue to
 REASON: To avoid circuitousness of suits be such until it has been:
1. RESTRICTIVELY INDORSED – This refers only to the first kind
LIMITATIONS: (Sec 36.a NIL) because this is the only type of restrictive
A prior party may cannot renegotiate the NI: indorsement that completely destroys the negotiability of the
1. Where it is payable to order of a third person, and has been instrument
paid by the drawer 2. DISCHARGED BY PAYMENT OR OTHERWISE (Sec 47 NIL) –
2. Where it was made or accepted for accommodation and has This must be understood to be payment made at or after
been paid by the party accommodated maturity because if the payment was made before maturity,
the person so paying can still renegotiate or reissue the
STRIKING OUT (CANCELLATION) INDORSEMENT instrument. Hence, payment before maturity does not destroy
(Sec 48 NIL) negotiability
The holder may at any time strike out or cancel the indorsement
which is not necessary to his title. TRANSFER WITHOUT INDORSEMENT (Sec 49 NIL)
EFFECT: The indorser whose indorsement is stricken out, and all the  Contemplates a case where there is delivery and payment of
indorsers subsequent to him are relieved from liability on the NI value but NO indorsement (unendorsed)
(Sec 48).  Applicable only to NI payable to order
 The holder acquires only the rights of his predecessor and the
NOTE: If the NI is negotiated by special indorsement, the holder has right to have the NI indorsed by the transferor
no right to strike out such indorsement nor can he convert the  EFFECT: The instrument is in effect merely assigned to the
special indorsement into a blank indorsement. transferee. It is only at the time of indorsement that the
transferee acquires the rights of a holder

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 For the purpose of determining whether the transferee is HDC,
the negotiation takes effect as of the time when the PRESUMPTION OF VALUE: there is a prima facie presumption
indorsement is made. Hence, before the indorsement the that every NI is issued for valuable consideration and may be
transferee is not a holder (Sec 49) rebutted by contrary proof
o Absence or failure of consideration is a defense against
a holder not in due course
o CONSIDERATION – Valuable consideration (Sec 191);
HOLDERS any consideration sufficient to support a simple contract
(Sec 25).
HOLDER – A 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 BANK CREDIT AS VALUE: When the holder of a check deposits
calls (Sec 191 NIL) it with his bank (not drawee bank) and the bank credits it to
his account, is the bank a holder for value? The bank becomes
CLASSIFICATION OF HOLDERS a holder for value only when the deposit withdraws the
1. HOLDER IN DUE COURSE – One who has taken the amount of the deposited instrument. If such withdrawal takes
instrument under the conditions of Sec 52 NIL and holds the place before maturity and before the bank receives notice of
NI free from personal defenses available to prior parties any defense on the NI, the bank is HDC against whom such
2. SIMPLE HOLDER (HOLDER NOT IN DUE COURSE) – defense would be unavailable.
One who became a holder without any, some or all of the How determined: First In First Out (FIFO) – First money in is
requisites under Sec 52. He holds the NI subject to the same presumed to be the first money paid out
defenses as if it were non-negotiable. He may enforce the NI
and receive payment therefor IMPORTANCE OF THE CLASSIFICATION: Each class of holders has
3. HOLDER FOR VALUE – Where value has at anytime been defenses which are available to one class and which may not be
given for the NI, the holder is deemed a holder for value in available to the other classes.
respect to all parties who become such prior to that time (Sec
26 NIL) NOTE: If there are NO defenses, the distinction between HDC and
o The mere fact that the present holder paid nothing for a one who is not HDC is IMMATERIAL
note or is not a holder for value does not preclude
recovery, but only lets in all defenses, if any, that might RIGHTS OF HOLDERS IN GENERAL (Sec 51 NIL)
be urged against the original payees 1. May SUE thereon in his own name – Even if he is a holder only
o Where the holder has a lien on the NI, arising from for collection or as pledge to the NI
either contract or by implication of law, he is deemed a 2. Payment to him in due course discharges the NI – Payment in
holder for value to the extent of his lien (sec 27 NIL) due course is made:
 If the amount called for by the NI is less than a. At or after the maturity of the NI
the principal debt secured by such NI, the b. To the holder thereof
pledgee is a holder for value for the full amount c. In good faith; and
and may recover all d. Without notice that his title is defective
 If the debt secured by the NI is less than the
sum for which it was issued, the pledgee may RIGHT TO SUE OF TRANSFEREE OF AN UNINDORSED INSTRUMENT
recover call but he becomes merely a trustee as A transferee of an unendorsed NI is certainly not an holder under
to the excess. This is in line with the general rule Sec 191 NIL and cannot be considered HDC. However, the
against splitting of cause of action under Sec 32

Page | 17
transferee may sue in his own name under the principle in a. Complete – An instrument is incomplete when it is
assignment that the assignee steps into the shoes of the assignor. wanting in any material particular proper to be inserted
in a NI without which the same will not be complete (Sec
CAN A PAYEE BE A HDC? Yes. 14). BUT if the omission is not a important particular,
If the payee satisfies the requirements of Sec 52, the payee can be such omission will not deprive the holder to be HDC
HDC (Cely Yang v. CA, G.R. no 138074, August 15, 2003). REASON: The taking of an incomplete instrument puts
REASON: Sec 191 defines a holder as the payee or indorsee of a bill the purchaser on inquiry as to why it is incomplete. If
or note who is in possession of it or the bearer thereof. Such payee he fails to do so, he takes the NI subject to all defenses
may either have acquired the note from another holder or he did not b. Regular on its face – TO render the NI irregular under
deal strictly with the maker thereof. sec 52(a) NIL, the alteration must be visible or apparent
on its face. If not apparent, the matter is governed
CAN A DRAWEE BE HDC? No. solely by Sec 124 (on alteration) which renders the NI
While a payee may be a HDC, a drawee does not, by paying a bill, void
become HDC.
REASON: A holder refers to one who has taken the NI as it passes 2. That he has become a holder of it before it was
along in the course of negotiation towards the drawee and not the OVERDUE and WITHOUT notice that it had been
drawee who, on the acceptance and payment of the NI, thereby previously dishonored if such were the case
strips it of all negotiability and reduces it to a mere voucher or proof a. Before overdue – A holder who takes an overdue
of payment (National Bank of Commerce v. Seattle National Bank, instrument is put on inquiry although he is not actually
187 Pac 342). aware of any existing defense of a prior party. A person
taking an overdue NI should certainly question why the
NI is still in circulation even if it is overdue
HOLDER IN DUE COURSE  On the date of maturity, the NI is not overdue
 All the 4 conditions under Sec 52 must concur in order to and a holder who acquires the NI on that date
qualify a person as HDC is HDC because the principal debtor has the
 The holder of a non-negotiable instrument cannot attain the whole day to pay
status of HDC. The fact that the instrument is non-negotiable
is a sign of warning to a prospective purchaser and places him WHEN IS THE DATE OF MATURITY?
on guard and on inquiry a. The date of maturity is the time fixed therein
 A holder not HDC has all the rights of the latter except that b. If NI is payable on demand, the date of maturity is
the instrument is subject to the defenses as if it were non- determined at the time of presentment (Sec 183 NIL).
negotiable (Sec 58) The same applies if payable on sight
 Personal defenses cannot be set up against HDC but real c. If NI is payable on the occurrence of a specified event
defenses which attach to the NI itself, would be available which is certain to happen, the date of maturity is fixed
against all persons even as against HDC by the happening of the event (Sec 4.c NIL)

52 NIL) not only valid but also negotiable although it is antedated or
postdated. A holder thereof can be HDC and he is not put on
1. That the instrument is COMPLETE and REGULAR upon
inquiry for the mere fact that it is antedated or postdated. A
its face
postdated check is payable either:
a. Fixed or determinable future time specified therein; or

Page | 18
If no time is expressed, on demand or on after the date the payee or the indorsee acquired possession of the NI
of the NI under circumstances that should have put him to inquiry
NOTE: If the postdating or antedating of NI is for an illegal or as to the title of the holder who negotiated the NI. The
fraudulent purpose, the NI is void. burden is now on the part of the holder to show that
despite the suspicious circumstances, it acquired the
INSTALLMENT INSTRUMENTS – A purchaser after maturity of check in actual good faith (De Ocampo v. Gatchalian,
the first installment with notice that it was unpaid takes the G.R. no L-15126, November 30, 1961)
paper as overdue paper. Consequently, a purchaser of an
installment note after an installment is overdue may be HDC Good faith – refers to the indorsee or transferee not the
as to the balance if he has NO notice of the failure to pay of indorser or transferor of the NI.
the first installment. Bad faith – means that the indorsee or transferee must
have knowledge of facts which render it dishonest for
INTEREST – Where by the terms of the NI, the principal was him to take a particular piece of negotiable paper.
to become due upon the default of the payment of interest,
one who takes the NI upon which the interest is overdue is Proof of bad faith: It is not necessary to show knowledge
not HDC. of exact truth. It is sufficient that such knowledge tends
to show that there was something wrong with the
NOTE: An overdue NI may still be negotiated but the holder transaction.
cannot be HDC.
b. Value – Any consideration to support a contract (Sec 25
b. Without notice of dishonor – An instrument may be NIL)
(1) Non-acceptance (Sec 149 NIL) TRANSFER – Every NI is deemed prima facie to have been
(2) Nonpayment (Sec 83) issued for a valuable consideration. Every person whose
NOTE: While dishonor by nonpayment can only take place at signature appears thereon is presumed to have become a
the time of maturity, dishonor by non-acceptance of bill may party thereto for value (Sec 24 NIL)
occur even before the date of maturity o Consideration is not relevant to the “negotiability”” of
an NI but it is significant on the question of whether or
DEMAND INSTRUMENTS (Sec 53 NIL) – Where NI payable on not one is HDC
demand is negotiated on an unreasonable length of time after
its issue, the holder is not deemed HDC. Value includes:
o In determining what is unreasonable length of time a. An antecedent or pre-existing debt
regard must be given to the NATURE of the instrument, b. Value previously given (Sec 25)
the USAGE OF TRADE OR BUSINESS with respect to c. Lien arising from contract or by operation of law but the
such NI and the FACTS of the particular case (Sec 193 holder is deemed a holder for value to the extent of his
NIL) lien (Sec 27 NIL)
NOTE: Dishonored NI may still be negotiated and the holder NOTE: It is not necessary that the consideration should be
WITHOUT notice can be HDC adequate (Art 1355 NCC), but love and affection do not
constitute value within the meaning of the law.
3. That he has taken it in GOOD FAITH and for VALUE
a. Good faith – Although good faith on the part of the
holder is presumed, such presumption is destroyed if

Page | 19
4. That at the time of its negotiation to him, he had NO EFFECTS OF NOTICE OF DEFECT
NOTICE of any infirmity in the instrument or in the title a. It destroys the status of the holder as HDC
of the person negotiating it b. The holder is open to all defenses and not merely those
NOTICE OF DEFECT – The person to whom it is negotiated relating to defect of which he had notice (Sec 58)
must have had actual or chargeable knowledge of the infirmity
or defect, or knowledge of such facts that his action in taking WHEN TITLE IS DEFECTIVE (Sec 55 NIL)
the NI amounted to bad faith (Sec 56 NIL) a. In the ACQUISITION thereof, the title of a person
How Proven: The question of good faith or bad faith is a becomes defective when he obtains the NI or any
question of fact which must be determined in accordance with signature thereto by: (1) fraud; (2) force, duress or
the particular circumstances of the case (circumstantial fear; (3) other unlawful mean; or (40 for an illegal
evidence) consideration
b. In the NEGOTIATION thereof, the title becomes
EFFECT OF PURCHASE AT A DISCOUNT: The purchase of NI defective when he negotiates it in (5) breach of faith;
at a discount, does not itself constitute bad faith because in or (6) under circumstances that amount to fraud (Sec
most cases, a purchaser at a discount is a influenced by the 55 NIL)
financial condition of the issuer of the NI rather than by the NOTE: BUT when it is shown that the title of any person who
possibility it was obtained subject to a defense. has negotiated the NI was defective, the burden is on the
holder to prove that he or some other person under whom he
EFFECT OF NOTICE BEFORE FULL PAYMENT – If the transferee claims acquired the title as HDC (Sec 59 NIL).
receives notice of any defect or infirmity in the NI before INFIRMITIES – include things that are wrong with the NI itself
paying the full amount, he will be HDC only as to the extent as distinguished from those things that are lacking in the
of the amount paid by him (Sec 54 NIL) contracts on the NI. Such infirmities are to be found in
o This does not apply where the holder has given for the situations arising from:
NI a promise which he must perform, in which case he a. Maturity date not listed on the NI (Sec 13)
would be in the same position as one who has paid b. Lack in material particulars (Sec 14)
money or property at the time of the transfer. c. Incomplete and undelivered NI (Sec 15)
d. Complete but undelivered NI (Sec 16)
CONSTRUCTIVE NOTICE NOT SUFFICIENT – There must e. Signature by procuration (Sec 21)
actual notice of the defect or infirmity in the NI. However, f. Forged signature (Sec 23)
notice to an agent is chargeable to the principal.
CONSTITUTE NOTICE OF INFIRMITY OR DEFECT? No. The transferee will be deemed HDC only to the extent of the
Under Sec 54 and 56 NIL, negligence in itself is not sufficient amount therefor paid by him (Sec 54)
to constitute notice since it is not equivalent to either actual
knowledge or bad faith RIGHTS OF HOLDER IN DUE COURSE (Sec 51 and
o If the holder had actual knowledge of suspicious 57 NIL)
circumstances, coupled with the means of readily 1. May SUE on the instrument in his own name
informing himself of the facts and he willfully abstained 2. May RECEIVE payment and if payment is in due course, the
from making inquiries, his intentional ignorance may instrument is discharged
amount to bad faith

Page | 20
3. HOLDS the instrument free from any defect of title of prior or business (if any), with respect to such instruments and the facts
parties and free from personal defenses available to parties of the particular case. (Sec 193 NIL)
among themselves
4. May ENFORCE payment of the instrument for the full amount HOLDER NOT IN DUE COURSE
thereof against all parties liable thereon One who became the holder of NI without any, some or all of the
requisites for due course holding under Sec 52 NIL
a. When the holder is a holder for value only to the extent GENERAL RULE: If a holder is not HDC, he is subject to the same
of his lien – HDC only to that extent (Sec 27 NIL) defenses as if it were non-negotiable. In other words, a holder not
b. When the holder acquired notice of any infirmity in the in due course is subject to both personal and real defenses available
NI or defect in the title of the person negotiating the to parties primarily or secondarily liable.
same BEFORE he has paid the full amount agreed to be
paid therefor – HDC only to the extent of the amount EXCEPTION (SHELTER RULE): If a holder derives his title through
paid (Sec 54 NIL) HDC and if he is not a party to any fraud or illegality affecting the
c. In case of alteration as to amount – HDC may enforce NI, he has all the rights of such former holder (HDC) in respect of
payment only according to its original tenor (Sec 124 all parties prior to the latter (Sec 58 NIL)
NIL) REASON: Without this provision, the hands of the HDC would be tied
in disposing the instrument because he would still have to look for
a buyer who had notice of the defect.
NOTE: A payee whose title is defective title is defective cannot better
WHO IS DEEMED A HOLDER IN DUE COURSE (Sec 59 NIL) his title by selling the NI to HDC and buying it back again.
Every holder of a NI is deemed prima facie HDC. However, this  The presumption refers only to the status of the present
presumption arises only in favor of a peson who is a holder as holder and not to any previous holder. Thus if the present
defined under Sec 181 NIL, i.e. a payee or indorsee who is in holder’s rights depend on a previous holder’s status as HDC,
possession of the instrument or bearer thereof he would have to prove such fact and cannot rely on the
 When it is shown that the title of any person who has presumption because the latter is no longer the holder.
negotiated the NI was defective, the burden is on the holder
to prove that he or some other person under whom he claims, EXCEPTION TO THE EXCEPTION: The rule under Sec 58 does not
acquired the title as HDC apply if the holder was previous holder not in due course who had
 EXCEPTION: The holder has no burden of proving that he has subsequently repurchased the instrument either personally or
HDC in favor of a party who became bound on the NI prior to through an agent.
the acquisition of such defective title REASON: A holder who is not HDC cannot improve his situation by
reacquiring the NI (Fossum v. Fernandez, G.R. no L-20080, March
Where an NI payable on demand is negotiated for an unreasonable RIGHTS OF A HOLDER NOT IN DUE COURSE
length of time after issue, he holder is not deemed HDC. 1. He may SUE on the instrument in his own name
2. He may RECEIVE payment and if the payment is in due course,
WHAT IS REASONABLE TIME? the instrument is discharged
As to what constitutes reasonable time, the law provides that: 3. He HOLDS the instrument subject to the same defenses as if
“Regard is to be had to the nature of the instrument, usage of trade it were non-negotiable

Page | 21
NOTE: This, prior parties can avail against him any defense Real defenses His rights can be His rights can be
available among these prior parties and prevent the said defeated by real defeated by real
holder from collecting in whole or in part the amount stated in defenses defenses
the NI. Personal His rights cannot be His rights can be
4. If he derives his title through HDC and if he is not party to any defenses defeated by personal defeated by personal
fraud or illegality affecting the NI, he has ALL the rights of defenses defenses
such former holder (HDC) in respect of all parties prior to the Rights He has the right to He has the right to
latter (SHELTER RULE) enforce payment, sue enforce payment, sue
in his own name, and in his own name, and
FAILURE TO MAKE INQUIRY negotiate the NI negotiate the NI
GENERAL RULE: Failure to make inquiry after notice of the facts
merely sufficient to cause a person of ordinary prudence to make
inquiry as to an infirmity in the NI and defect in the holder’s title, is
not evidence of bad faith to bar him from recovery. LIABILITY OF PARTIES
REASON: The law does not impose a duty on the part of every holder
to make inquiry before acquiring the NI.
1. Where the holder’s title is defective or suspicious that would Liability to pay Makes the parties Impose no direct
compel a reasonable man to investigate, it cannot be stated liable to pay the obligation to pay in
that the payee acquired the NI without the knowledge of said sum certain in the absence of
defect in the holder’s title and for this reason the presumption money stated in the breach thereof. In
is that it is HDC or that it acquired the instrument in good faith NI case of breach, the
does not exist (De Ocampo v. Gatchalian, G.R. no L-15126, person who
November 30, 1961). breached the same
2. Holder to whom cashier’s check is not indorsed in due course may either be liable
and negotiated for value is not HDC (Mesina v. IAC, G.R. no or barred from
70145, November 13, 1986) asserting a
NOTE: The holder may not be considered HDC because of the NI particular defense
involved, as in the case where a person takes a crossed check Requisites to Condition on Does not require
without making further inquiries. The act of crossing a check serves enforce liability presentment and presentment and
as a warning to the holder that the check has been issued for a notice of dishonor notice of dishonor
definite purpose (Bataan Cigar and Cigarette Factory v. CA, G.R. no When action must Action cannot be May be
93048, March 3, 1994) be brought brought until
maturity of the NI
COURSE COURSE 1. PRIMARY PARTY – Unconditionally liable; the primary party
Compliance All the conditions One, some or all of is bound to pay the holder at the date of maturity, whether or
with the under Sec 52 NIL are the requisites under not the holder demands payment him (Sec 192 NIL)
requisites PRESENT Sec 52 are ABSENT

Page | 22
o He is not relieve from liability even if NI should become (notice and/or
overdue due to holder’s failure to make a demand protest)
a. Maker of a promissory note
b. Acceptor of Bill of Exchange; and PRIMARILY LIABLE
c. Certifier of Bill of Exchange 1. MAKER (Sec 60 NIL)– applies only to promissory notes
a. Engages to pay according to the tenor of the NI
2. SECONDARY PARTY – Conditionally liable; the secondary
b. Admits the existence of the payee and his then
party is not bound to pay unless the following conditions have
capacity to indorse
been fulfilled: (a) due presentment or demand to the primary
o Due presentment for payment (Sec 70 NIL) and due
party for payment or acceptance; (b) its dishonor by the
notice of dishonored (Sec 89 NIL) are not necessary
party; and (c) taking of proceedings required by law after
for the purpose of charging the maker with liability. It
dishonor, i.e. notice of dishonor and in case of foreign Bills of
is necessary, however, fix the liability of the drawer or
Exchange, protest of the bill (Sec 70 NIL)
a. Drawer of a bill; and
o By executing a PN, the maker warrants that the payee
b. Indorsee of a note or bill
named in the NI is existing; therefore, he cannot
question the corporate existence of the payee
o Maker also represents to the world that the payee has
a. Drawee until he accepts the NI in which case he
the capacity to indorse at the time of the making of
comes an acceptor
PN and thus represents that the payee can transfer a
good and valid title to the PN by indorsement
 Maker cannot raise the defense of minority;
PRIMARY LIABILITY AND SECONDARY LIABILITY insanity of payee or ultra-vires act of
PRIMARY LIABLE SECONDARY LIABLE 2. ACCEPTOR (Sec 62 NIL) – drawee has no liability on the
Liability Who by the terms of the Who by the terms of the bill unless and until he accepts the same. Once he accepts, he
NI is absolutely required NI is not absolutely becomes primarily liable on the instrument because he
to pay the same (Sec 92 required to pay accepts to pay it according to the tenor of his acceptance,
NIL) subject to no condition whatsoever
Unconditionally bound to Conditionally bound to o Acceptance applies only to bills of exchange
pay pay o Object: to bind the drawee and to make him an actual
When to Absolutely required to Required to pay after and bound party to the instrument
pay pay upon maturity of NI conditions have been a. The drawee of a bill is not liable before acceptance.
fulfilled: Once he accepts, he becomes an acceptor and
1. Due presentment for become primarily bound on the NI subject to no
payment or condition whatsoever
acceptance of primary
party; Acceptor engages to pay according to the tenor of his
2. Dishonor by such acceptance:
party o The acceptor engages to pay according to the tenor of
3. Taking of the his acceptance, which is not the same as tenor of the
proceedings required bill itself because the acceptance may be qualified (Sec
by law after dishonor 139 NIL)

Page | 23
o Like the maker of PN, neither presentment for payment  If check is returned with statement of refusal =
nor notice of dishonor is necessary to charge him with dishonored
liability, except were he is an acceptor  If drawee destroys the check instead of
returning or accepting = deemed accepted (Sec
REQUISITES FOR VALID ACCEPTANCE (SEC 132) 137) unless the destruction is accidental
a. It must be in writing  If the bill is delivered to the drawee who
b. It must be signed by the drawee destroys the same
c. It must not change the implied promise of the  If the drawee does not return the bill, accepted
acceptor to pay only in money or non-accepted within 24 hrs (24-hr rule) or
such time allowed by holder
NOTE: There can be no valid oral or implied acceptance except o Sec 137 NIL uses the word “refuses” which clearly
under Sec 137 (constructive acceptance) implies a demand for the return of the bill.
o Acceptance is made by writing the word “accepted” or o Mere failure to return on time is not acceptance; Sec
by the drawee’s signature alone 150 provides if no acceptance is given within the
prescribed time, the bill is deemed dishonored
PAYMENT – The drawee is not liable on the bill of exchange ACCEPTANCE ON A SEPARATE INSTRUMENT – An
or check until he accepts it. Even HDC cannot sue drawer prior acceptance is valid even if it is not written on the same
to his acceptance instrument, e.g. letter or telegram.
 REASON: Mere issuance of the bill does not render o Acceptance may be on an existing bill or a future bill:
the drawee liable because it does not operate as an (1) Extrinsic acceptance – acceptance on an existing
assignment of the funds in the hands of the drawee bill; acceptance may be conditional
 When the bill is accepted, the acceptor becomes (2) Virtual acceptance – acceptance on an future bill;
primarily liable under Sec 62 acceptance must be unconditional
 Bank is not liable until it accepts or certifies the o To be valid, such acceptance must identify the bill to
check. Prior to certification, the drawer may issue a which the acceptance and must be clear and
stop payment order unequivocal
o Sec 134 requires that the acceptance be shown and
NOTE: If the drawee bank refuses to accept the bill without purchaser take the take the bill for value on the faith of
justifiable reason/s, the drawee may be liable to the drawer such acceptance
for breach of contract or damages based on  EFFECT: Subsequent holders acquire the rights
of the relying party from whom they take the
CONSTRUCTIVE ACCEPTANCE – The drawee has 24 hrs NI, applying Sec 58 and 49
after presentment to determine whether to accept the bill or
o 24 hr-period is counted from time of delivery (1) General acceptance – Sec 140 provides that an
 If check is returned unaccepted within 24 hrs = acceptance to pay at a particular place is a general
not dishonored since drawee still has the acceptance UNLESS it expressly states that the bill is to
remainder of the period to accept or dishonor be paid there only and not elsewhere
 If check is returned and fails to accept within the (2) Conditional acceptance – If any of the following are
remainder of the 24 hrs = dishonored present:

Page | 24
(a) Conditional i.e., which makes payment by the National City Bank of New York, G.R. no 43596, October 3,1
acceptor dependent on the fulfillment of a condition 1956)
(b) Partial i.e., acceptance only to the part of the anount
(c) Local i.e., acceptance to pay ONLY at a particular SECONDARILY LIABLE
(e) Acceptance of some one or more of the drawees but
not all
TRADE ACCEPTANCE – Draft or bill of exchange with a definite
Admits the Warrants to all A person not, not
maturity, drawn by seller or buyer for the purchase of goods,
existence of the subsequent HDC: otherwise a party to
bearing across its face the acceptance of the buyer
payee and his a. That the an NI, places his
o Generally limited to domestic transactions
capacity to indorse instrument is signature thereon
GENUINE and in in blank before
BANKER’S ACCEPTANCE – Negotiable time draft or bill of
all respect what delivery
exchange drawn on and accepted by a commercial bank
it purports to be
o Generally used for international trade e.g., financial,
b. He has GOOD If the NI is payable
import-export transactions
TITLE to it to the order of a 3rd
o Used when buyer and seller are not known to each
c. ALL prior parties person, he is liable
other; acceptance substitutes the bank’s credit for the
had capacity to to the payee and
unknown firm
contract subsequent parties
o Effect: Accepting bank is unconditionally and irrevocably
d. The instrument
liable to pay holder at maturity. Drawer and indorsers
is, at the time of
are subsidiarily liable
a. Admits the existence of the drawer, the genuineness of
Engages that the Engages that the NI If the NI payable to
his signature, and his capacity and authority to draw the
instrument will be will be accepted or the order of maker
NI and;
accepted or paid by paid, or both, as in or drawer or to
b. Admits the existence of the payee and his then capacity
the party primarily the case may be, bearer, he is liable
to indorse
liable; and according to its to all parties
 The acceptor does NOT admit the genuineness
tenor; and subsequent to the
of the indorser’s signature because it is only the
maker or drawer
signature of the drawer that he warrants by
Engages that if the If the NI is If he signs for
virtue of the business relationship between the
instrument is dishonored and accommodation of
bank and the drawer.
dishonored and necessary the payee, he is
proper proceedings proceedings on liable to all parties
NOTE: The warranty established by Sec 62 is in favor of
are brought, he will dishonor be duly subsequent to the
holders of the NI after acceptance and when the drawee bank
pay to the party taken, he will pay payee
cashes or pays the check, the cycle of negotiation is
entitled to be paid to the party entitled
terminated. It is illogical thereafter to speak of subsequent
to be paid
holders who can invoke the warranty under Sec 62 (PNB v.

Page | 25
2. GENERAL INDORSER (Sec 66) – Gen indorser makes 2
1. DRAWER (Sec 61) – The liability of drawer is conditional. contracts: contract of sale of NI and special contract of
The drawer does not promise to pay the bill absolutely. He indorsement
makes no warranty but he engages to pay after the following o Liable as assignor of credit AND also on his indorsement
conditions are complied with: o Under Sec 66 warranties of Gen indorser run to “all
a. The bill is PRESENTED for acceptance (Sec 143 NIL) or subsequent HDCs” = indorse should not have
for payment (Sec 70) as the case may be to the drawee knowledge of breach of warranty at the time of
b. The bill is DISHONORED by non-acceptance or indorsement
nonpayment, as the case may be; and o If NI payable to bearer is specially indorsed = indorser
c. The necessary PROCEEDINGS on dishonor are duly becomes liable under Sec 66
taken:  EXCEPT if holder chooses to strike out the
(1) Notice of dishonor was given to the drawer indorsement as not necessary to title
(2) In case of foreign bills, protest is made o When maker issues PN payable to his own order, it is
o The drawer is secondarily liable to (1) holder; or (2) not complete until he indorses it = not the same as
any subsequent indorser who is compelled to pay (or indorsement to make him liable under Sec 66
known as INTERVENING INDORSERS)  Such indorsement is merely a step in the
o Sec 61 allows the drawer to negative or limit his issuance of NI so that 1st transferee may
liability by express stipulation become a holder (effect 1st transferee becomes
NOTE: There is a contractual relation between the drawer and payee)
the drawee  Liability of maker is still as MAKER
o A drawer may not unilaterally discharge himself from o When banks require holders of a check to sign at the
liability on the checks issued by him as security and not back = not same as indorsement but mere
for value and negotiated to HDC by the mere expediency acknowledgment of receipt of cash paid by drawee bank
of withdrawing his funds from the drawee (State o Bank stamps “all prior and/or lack of indorsement
Investment House Inc v. CA, G.R. no 101163, January guaranteed” – liable against forgery not because of Sec
11, 1993) 66 but because fo express warranty
o When the holder deposits his check with the collecting
bank, the nature of relationship created is one of CONDITIONS PREDECENT TO INDORSER’S LIABILITY
agency, i.e. the bank is to collect from the drawee of the a. Due presentment for payment or acceptance must
check the corresponding proceeds. Thus, the privity of be made
contract is between the holder-depositor and the b. If dishonored, the proceedings on dishonor be duly
collecting bank. There is no privity of contract between taken
the drawer and the collecting bank
NOTE: Liability of an unqualified indorser is similar to that of
Undertaking Issues the bill of Makes a promissory WARRANTIES:
exchange note a. NI is GENUINE and in all respects what it purports
Liability Secondarily liable Primarily liable to be
Limitation of Can negative or limit Cannot limit his b. He has GOOD TITLE to it
liability his liability liability c. ALL PRIOR parties had capacity to contract; and

Page | 26
d. He has NO KNOWLEDGE of any fact that would
impair the validity of NI or render it valueless 5. AGENT OR BROKER (Sec 69) – When a broker or agent
e. NI at the time of the indorsement is VALID and negotiates an instrument without indorsement, he incurs all
subsisting liabilities under Sec 65 (general indorser) unless he discloses
 Unqualified indorser – guarantees that NI is the name of his principal and the fact that he is acting only as
valid and subsisting whether or not he has no agent (Sec 69)
knowledge of the fact o The principal whose name is undisclosed on the NI
 Qualified indorser – warrants merely that he has cannot be liable because no person is liable on an
no knowledge of any fact that would invalidate instrument unless his signature appears thereon (Sec
the NI 18 NIL).
 Where the agent signs his name but does not
3. IRREGULAR INDORSER (Sec 64) – Although the law disclose the name of the principal or that he is
does not sate that all irregular indorsers are accommodation acting only as an agent = no action against the
parties, they are usually accommodation parties. principal and the agent is personally liable to the
TO BE CONSIDERED AN IRREGULAR INDORSER  Agent signed his name band indicated he is
a. A person must NOT be party to the NI acting in a representative capacity but did not
b. He must have signed the NI in BLANK disclose principal’s name = parol evidence
c. He must have signed BEFORE delivery cannot be used to evade agent’s personal
NOTE: The party is called an “irregular” or an “anomalous” liability
indorser because he indorses in an unusual, singular, or  Agent signed his name without indicating that
peculiar manner. His name usually appears where we would he acted as agent but disclosed the name of
naturally expect another name principal = agent is presumptively liable but
parol evidence is admissible to show that he is
LIABLITY OF IRREGULAR INDORSER – An irregular indorser is an agent of a third person
liable as a general indorser because he indorses without  Where agent disclosed on the NI that he is
qualification acting in a representative capacity and the
o Sec 64 provides only for the parties to whom an name of his principal = parol evidence is
irregular indorser is liable admissible to exonerate the agent from
personal liability
4. RESTRICTIVE INDORSER – Liability of restrictive o Where the agent discloses the name of the principal and
indorser depends on the kind of restrictive indorsement is expressly indicates that an agency exists between them
made = principal is bound and agent is not personally liable
o If indorsement prohibits further negotiation = NI ceases UNLESS he had not authority from the principal
to be negotiable but restrictive indorser is liable to his o If agent signs by procuration, it serves as a notice that
immediate indorsee as Gen indorser unless otherwise the agent’s authority is limited
indicated o If agent in signing by procuration exceeded his
o If by restrictive indorsement, indorsee is made an agent authority = principal is not liable even to HDC
of indorser = any subsequent indorsee who acquires
title from agent acquires only such title WHEN PERSON SIGNING THE INSTRUMENT NOT DEEMED AS
o Restrictive indorsement for the benefit of 3rd party = AN INDORSER
liable as Gen indorser unless otherwise indicated

Page | 27
a. The person who signed the NI has clearly indicated by Warranties 1. NI is genuine and in SAME
appropriate words his intention to be bound in some all respects what it
OTHER capacity (Sec 63 NIL) purports to be
b. A person signs for the purpose of indetifying a person 2. He has good title to
only and not for the purpose of incurring any liability it
(American Bank v. Macondray & Co, G.R. no 1808, 3. All prior parties had
August 23, 1905) capacity to contract
c. A person only guarantees prior indorsements (PNB v. 4. He had no
CA, G.R. no L-26001, October 29, 1968) knowledge of any
fact that would
LIMITED LIABILITY impair the validity
1. QUALIFIED INDORSER (Sec 65 NIL) – A qualified indorser is of NI or render it
not secondarily liable. His qualified indorsement transfers title valueless
without rendering him secondarily liable. However, he is liable To whom Liable to all parties who Warranties extend to
for his warranties to all subsequent holders: warranties derive their title from immediate transferee
a. That the instrument is genuine and in all respects what extend his indorsement only
it purports to be
c. That all prior parties had capacity to contract DISTINGUISHED
d. That he has no knowledge of any fact that would impair GENERAL INDORSER QUALIFIED
the validity of the NI or render it valueless INDORSER/NEGOTIATING
NOTE: The difference with a general indorser is that a general Nature of There is secondary No secondary liability;
indorser warrants that the NI is valid and subsisting at the liability liability and liable only for breach of
time of his indorsement while a qualified indorser only warranties warranty
warrants that he has no knowledge of any fact which would Warranty as Warrants that the NI Warrants that he has no
impair the validity of the NI to ignorance is at the time of his knowledge of any fact
EFFECT: If the validity of the NI was already impaired at the of certain indorsement valid which would impair the
time of negotiation, the qualified indorser is not liable if he facts and subsisting validity of the NI or
had no knowledge of such fact. regardless whether render it valueless
he is ignorant of
2. PERSON NEGOTIATING BY DELIVERY – A person negotiating such fact
a NI by delivery is subject to the same warranties as a
To whom To subsequent HDC, Person negotiating by
qualified indorser under Sec 65. However, the warranty
warranties subsequent parties mere delivery: To
extends to the immediate transferee ONLY.
extend deriving their title immediate transferee
from HDC and his only
QUALIFIED INDORSER AND PERSON NEGOTIATING BY immediate transfree Qualified indorser: To all
DELIVERY DISTINGUISHED parties who derive their
BY DELIVERY indorsement

Page | 28
LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY  An accommodation party in lending his name to the
(Sec 67) – A person who incurs his indorsement on NI negotiable by accommodated party, is in effect a surety for the latter
delivery, he incurs all the liabilities of an indorser  Since the relationship between the accommodated and
 This applies to bearer NI only accommodation party is one of principal and surety, should
 Example: M issued a note to X payable to bearer. X may the accommodation party pay to the holder, he has a right
negotiate the NI by mere delivery. Suppose X indorses the to claim from the accommodated party
note to A, Pay to A without recourse (qualified indorsement).A  LIABILITY: The accommodation party’s liability is primary or
may negotiate the note by delivery. A can hold X liable for secondary depending on whether he signed as maker,
breach of warranty of a qualified indorser (Sec 65). But if the drawer, acceptor or indorser
indorsement is general, A may hold X liable for breach of o If accommodation party signed as maker = primarily
warranty of a general indorser liable
 Effect: There is absence of consideration and
ORDER OF LIABILITY (Sec 68 NIL) holder cannot recover from accommodation
There is no order of liability among the indorsers as against the party
holder. He is free to choose to recover from any indorser in case of  If accommodation party signed as co-maker =
dishonor of the NI. there is consideration although accommodation
 With respect to one another, indorsers are liable prima facie party received no part of it but holder can
in the order in which they appear unless the contrary is proven recover from him
o If accommodation party signed as drawer = secondarily
SIGNATURE BY TRADE NAME – Under Sec 18 NIL, a person liable
whose signature does not appear on the instrument is not liable o If accommodation party signed as acceptor = primarily
thereon unless expressly provided. But a person who signs in a trade liable
or assumed name will be liable as if he signed his own name o If accommodation signed as indorser = secondarily
 This is not an exception to the rule which forbids action on a liable
NI against one whose name does not appear thereon but it is  An accommodation party, whether irregular or
an instance in which the defendant’s business name serves otherwise, is liable as general indorser under
the same purpose that would be served by the use of his given Sec 66 unless he indicates otherwise
name o The liability of an accommodation party under Sec 29 is
limited only to HDC because in the hands of a non-HDC, a
NI is subject to the same defenses as if it were non-
ACCOMMODATION o Even if the holder knows the party to be an accommodation
party, it does not prevent him from becoming HDC and
ACCOMMODATION – A special arrangement which a person recovering from accommodation party
called the accommodation party, lends his name and credit to o A corporation, unless expressly authorized by its charter,
another called the accommodated party, without any consideration has no authority to sign as accommodation party and cannot
be liable to holder for value
ACCOMMODATION PARTY – An accommodation party is one
who has signed the NI as maker, drawer, acceptor or indorser, REQUISITES OF AN ACCOMODATION PARTY (Sec 29 NIL)
without receiving value therefor, for the purpose of lending his name 1. He must be a PARTY to the instrument, signing as a maker,
to some other person. Such person is liable on the NI to the holder drawer, acceptor or indorser
for value, despite the latter’s knowledge of him as an 2. He must NOT receive value therefor; and
accommodation party (Sec 29)

Page | 29
3. He must for the purpose of LENDING his name or credit When the accommodation party makes payment to the holder of the
notes, they have the right to sue the accommodated party for
NOTE: “Without receiving value therefor” means without receiving reimbursement since the relation between them is in effect of a
value by virtue of the NI (Clark v. Sellner, G.R. no 16477, November principal and surety, the accommodation party being the surety.
22, 1921)
RELATION BETWEEN ACCOMMODATION PARTY AND A solidary accommodation party may seek reimbursement from the
ACCOMMODATED PARTY (PRINCIPAL AND SURETY) accommodated party or other accommodation parties, subject to
When the accommodation party makes payment to the holder of the the following rules:
note, it has the right to sue the accommodated party for 1. A solidary accommodation party such as an accommodation
reimbursement since the relation between them is in effect that of maker may demand from the principal debtor reimbursement
principal and surety, the accommodation party being the surety for for the amount that he paid to the payee
the accommodated party. However, the accommodated party 2. A solidary accommodation party who pays on the said PN may
cannot recover from the accommodation party. As between them, directly demand reimbursement from his co-accommodation
absence of consideration is a defense. maker without first directing his action against the principal
debtor provided that:
LIABILITY OF AN ACCOMMODATION PARTY a. He made the payment by virtue of a judicial demand; or
o The liability of an accommodation party is DIRECT and b. A principal debtor is insolvent
IMMEDIATE. It is a settled rule that a surety is bound equally
and absolutely with the principal and is deemed an SPECIFIC RIGHTS OF ACCOMMODATION PARTY
ORIGINAL PROMISOR and debtor from the beginning 1. Right to REVOKE accommodation
(Romeo Garcia v. Dionisio Llamas, G.R> no 154127, 2. Right to REIMBURSEMENT from an accommodated party after
December 8, 2003) making the payment (Agro Conglomerates Inc v. CA, G.R. no
o The accommodation party is liable on the NI to a holder for L-17845, April 27, 1967)
value despite that such holder, at the time of the taking of
the NI, knew him only to be an accommodation party. ACCOMODATION PARTY DISTINGUISHED
Hence, as regards an accommodation party, the 4th ACCOMMODATION REGULAR PARTY
condition, i.e. lack of notice of infirmity in the instrument or PARTY
defect in the title of the person negotiating it, has NO Purpose for Signs NI to lend his Purpose for signing is
application (Stelco Marketing Corp v. CA, G.R. no 96160, signing name or credit to not the same as
June 17, 1992) some other person accommodation party
(Sec 29)
NOTE: The corporation is not liable if it acts as an accommodation Value Signs NI without Signs NI for value
party. This is because the issue or indorsement of NI by a received receiving value
corporation without consideration and for the accommodation of therefor
another is ultra vires. Hence, one who has taken the NI with Availability May always show by Cannot disclaim or limit
knowledge of the accommodation nature thereof cannot recover of parole parole evidence that his personal liability as
against a corporation where it is only an accommodation party evidence he is only appearing on the NI by
(Crisologo-Jose v. CA, G.R. no 80599, September 15, 1989). accommodation party parole evidence
(Maulini v. Serrano,
December 16m 1914)

Page | 30
Availability Cannot avail of the Can avail of said absence of one of the essential elements of a contract or
of absence defense of absence or defense against a where the admitted contract is void for all purposes for
or failure of failure of consideration holder not in due reasons of public policy
consideration against a holder NOT course o Available against all holders, even HDC
as defense in due course 2. PERSONAL DEFENSES (EQUITABLE DEFENSES) – Those
Right to sue After paying the May not sue any wherein a true contract appears, but for some reason, such as
holder, may sue for subsequent party for fraud, the defendant is excused from the obligation to perform
reimbursement from reimbursement (PNB v. o Can be raised only against non-HDC
the accommodated Maza, G.R. no L-24224,
1. Legal title – May recover even from HDC
2. Equitable title – May not recover from HDC, only from non-
GENERAL RULE: A person whose signature does not appear on the
NI is not liable (Sec 18 NIL)
Those that attach to the NI Those which are available only
itself and are available
against against a person not HDC or a
1. Persons whose signature were forged but who are PRECLUDED
all holders, whether or not subsequent holder who stands
from setting up the defense of forgery (Sec 23 NIL)
HDC, but only by parties in privity with him
2. INCAPACITATED persons who sign through their legal
entitled to raise them
3. One who signs in a TRADE or assumed name (Sec 18 NIL) STATUS OF CONTRACT
4. One who signs through an AGENT or authorized Void Voidable
representative (Sec 137 NIL) AVAILABILITY AGAINST HDC
5. In case of CONSTRUCTIVE acceptance (Sec 137) Available against HDC Not available against HDC
6. Indorsers who sign on a separate piece of paper (ALLONGE) DEFENSES
7. Persons who negotiate by mere DELIVERY. They are liable for Key: PAID-WIFI-MUD-FEM Key: CUBIC: RAIN-WIFI-MICU
breach of warranty although they did not sign (Sec 65 NIL) 1. PRESCRIPTION 1. Non-delivery of COMPLETE
8. FORGERS of signature (Sec 23 NIL) 2. Material ALTERATION (Sec instrument (Sec 16)
124) 2. ULTRA VIRES acts of
3. ILLEGALITY – If declared corporations where the
void for any purpose corporation has the power
4. DURESS – amounting to to issue negotiable paper
forgery but the issuance was not
DEFENSES –The right of the holder to enforce payment of NI may 5. WANT of authority of authorized for the
be defeated by the defenses that may be raised by the person agent particular purpose for
primarily or secondarily liable 6. NON-DELIVERY of which it was issued
Incomplete Instrument 3. Negotiation in BREACH of
KINDS OF DEFENSES (Sec 15) faith (Sec 55)
1. REAL DEFENSES (ABSOLUTE DEFENSES) – Those which 7. FORGERY (Sec 23) 4. INSERTION of wrong date
attach to the instrument itself and generally disclose an in an instrument (Sec 13)

Page | 31
8. INSANITY – Where the 5. CONDITIONAL delivery of o A cannot raise the defense of minority of B because: (1)
insane person has a complete instrument Sec 22 provides that indorsement of NI by a minor
guardian appointed by the 6. Filling up blank beyond passes the property therein; and (2) under Sec 60, the
court REASONABLE time (Sec maker warrants the capacity of the payee to indorse
9. MINORITY – available only 14) o If A is insolvent, D cannot sue B because as to B,
to the minor 7. ABSENCE or failure of minority is a real defense
10. ULTRA VIRES act of consideration whether o Is C liable to D? Yes, under Sec 66, a general indorser
corporation partial or total (Sec 28) warrants the capacity of all prior parties
11. DISCHARGE in insolvency 8. ILLEGAL consideration (Sec o Minority is a real defense available only to the minor and
12. Fraud in FACTUM or Esse 55) is not a personal defense which by availed of by the
Contractus – Fraud in 9. Filling up blank NOT within parties other than such minor
execution authority (Sec 14) NOTE: However, the minor shall be liable under the following
13. Execution of NI between 10. WANT of authority agent exceptions:
public ENEMIES where he has apparent a. The minor actively misrepresents his age and it
14. MARRIAGE in the case of a authority appears that he is physically of such age (Estoppel)
wife 11. Fraud in INDUCEMENT – A minor may be held bound by his signature in an
12. Acquisition by FORCE, instrument where he is guilty of actual fraud
NOTE: An Instrument subject duress or fear (Sec 55) committed by specifically stating that he is of age
to real defense cannot be 13. INTOXICATION when, in fact, he is not (Mercado v. Espiritu, 37 PHIL
enforced against the person to 14. MISTAKE 215)
whom the defense is available 15. INSANITY – Where there is b. The minor kept the fruits or benefits; or
but it can be enforced against no notice of insanity in the c. The minor spent the money in good faith (Art 1427
those whom such defense is part of the one contracting NCC)
not available such as under with the insane person
Sec 23 16. Negotiation under OTHER INCAPACITATED PERSONS – Insane, demented
CIRCUMSTANCES that persons and deaf-mute or those who have no capacity to give
amount to fraud (Sec 55) consent (Art 1327 NCC), their capacity is a real defense as far
17. Acquisition of the as such person is concerned. It is available against HDC
instrument by UNLAWFUL
means (Sec 55) B. FRAUD – Under Sec 55, fraud renders a party’s title defective
which is a personal defense and cannot be used against HDC
EFFECTS OF CERTAIN DEFENSES o Where the fraud is practice on the maker or signer of NI
A. MINORITY – Under Sec 22 NIL, If a minor indorses a NI, in which he is tricked into signing a paper which he does
although he cannot be held liable on his contract of not know to be a NI, he cannot be liable to any holder,
indorsement, the title to the instrument passes to his indorsee even HDC. This is called fraud in factum or fraud in the
o Real defense execution – real defense
o EFFECT: Subsequent holder, if HDC, can recover from o Where the signer knows the paper he is signing is NI but
the maker free from the defenses of minority and other is deceived as to its value or terms, the fraud is fraud in
personal defenses inducement – personal defense and not available
EXAMPLE: A makes a note payable to B (minor). B indorses against HDC
the note to C, who in turn, indorses it to D. Upon maturity, D
sues A (maker).

Page | 32
o Where the signer does not know the nature of the paper  First or subsequent holder may insert his name or
he is signing but he could have known using ordinary the name of the person to whom he negotiates the
care – personal defense NI but unless authorized, he cannot fill in a
predecessor’s name enlarge the predecessor’s
TYPES OF FRAUD liability beyond the latter’s contract
a. FRAUD IN FACTUM (REAL DEFENSE) – The person  As to time, Sec 14 provides that in order to be
who signs the instrument lacks knowledge of the enforceable against a party prior to completion, it
character or essential terms of the instrument. But the must be filled in within a reasonable time, which is
defense is not available if the party had reasonable reckoned from the date of issuance
opportunity to obtain such knowledge
o An essential element is that the maker or indorser 1. PRIMA FACIE AUTHORITY TO COMPLETE THE INSTRUMENT
must have exercise ordinary diligence and in no REQUISITES:
manner contributed negligently to the imposition a. Want of a material particular in the instrument (Sec
The person who signs the same as NI but was induced NOTE: Material particular includes matters stated in
by fraud Sec 125 NIL
b. Possession thereof by a person
C. INCOMPLETE BUT DELIVERED NI – This is only a c. That such person had authority to fill up the blank
PERSONAL defense (See Sec 14 NIL) (1) Strictly in accordance with the authority given;
Two kinds of writings: (2) Within a reasonable time
1) Incomplete instruments – There is an intent to make (3)
2) Blank paper or paper so far incomplete that it does REQUISITES
not constitute NI, but signed – To be considered a. Signature on a blank paper
complete, it must be shown that: b. Person signing in blank delivers it to another
 Delivery of instrument c. Delivery was for the purpose of converting it into NI
 Delivery must have been for the purpose of
converting it to NI (There must be intent to NOTE: IF the holder of the NI, after it was filled up, is HDC, the
deliver otherwise maker is not liable even to holder may enforce the instrument as if it has been filled up strictly
HDC) in accordance with the authority given and within reasonable time.
o In order that such instrument, when completed, may be
enforced against any person who became a party D. INCOMPLETE AND UNDELIVERED NI (Sec 15 NIL) –
thereto prior to its completion, it must be filled up Under Sec 15, an instrument which is not only undelivered but
strictly in accordance with the authority given also incomplete, is a REAL defense, which not even HDC can
o Authority extends to the insertion of the date, place of recover
payment, the amount, the name of the payee and the o RATIO: There is no valid contract
time of payment o The conclusive presumption of delivery under Sec 16
 The insertion of a wrong date, by one having does not apply
knowledge of the true date of issue, will avoid the  If NI is complete, Sec 16 applies
instrument as to him, but an innocent party may o Test: If an instrument contains all the requisites for
enforce the same despite the improper date making it negotiable, it should be considered complete
even if there may be blanks as to non-essentials

Page | 33
o However, as against a drawee bank, the drawer is  If holder is HDC, there is a conclusive presumption
estopped to rely on Sec 15 if his negligent custody of of delivery
the checks after partial execution, contributed to its loss  This applies even if NI is payable to bearer
o Every contract on a NI is incomplete and revocable until
TWO STEPS IN THE EXECUTION OF NI delivery of the instrument for the purpose of giving
a. The act of writing the instrument completely and in effect thereto
accordance with Sec 1; and
b. The delivery of the instrument with the intention of F. DURESS – Duress is merely a personal defense which cannot
giving effect thereto be used to defeat the rights of HDC
o However, where the duress is so serious as to result to
NOTE: If completed and negotiated without authority, not a a lack of contractual intent, it can be used as a real
valid contract against a person who has signed before delivery defense
of the contract even in the hands of HDC but subsequent o E.g., the signer acted not in accordance with his own
indorsers are liable. This is a real defense which belongs to will, but in accordance with the will of another because
the drawer (or parties prior to the delivery of NI to the payee) of his well-founded fear of an imminent and serious
against any holder injury
REASON: The law does not make any distinction between HDC
and a holder not in due course. G. ILLEGALITY – available against HDC.
o Under Sec 55 NIL, illegal consideration is mere
Where an INCOMPLETE and UNDELIVERED instrument is in personal defense, available only against non-HDC
the hands of HDC, there is a prima facie presumption of o Although a NI may have been issued or negotiated for
delivery which the maker may rebut by proof of non-delivery an illegal consideration, only the parties involved in the
illegality and subsequent parties who are not HDC can
E. COMPLETE BUT UNDELIVERED NI (Sec 16 NIL) – be adversely affected
Non-delivery of a complete instrument is only a PERSONAL o HDC can still recover
defense (See Sec 16 NIL on Delivery) o HOWEVER, NI, if declared void for any/all purposes,
o RATIO: Delivery is a prerequisite for liability; even if the the defense of illegality becomes a real defense
instrument is complete but if undelivered, there is no
o However, if the NI is no longer in the possession of the
person who signed it, there is a disputable presumption
of delivery
Delivery must be coupled with the intention of transferring title to the Delivery is CONCLUSIVE if he is in possession of a complete
NI and made either by or under the authority of the party making, NI so as to make all prior parties to him liable
drawing, accepting or indorsing, as the case may be
It may be shown that: It CANNOT be shown that there was no delivery, or that
a. There was no delivery delivery was not authorized, or that it was conditional, or
b. Delivery was not authorized delivery was for a special purpose only
c. Delivery was conditional; or
d. Delivery was for a special purpose only

Page | 34
(Sec 15 ) (Sec 16)
Delivered Undelivered Undelivered
NOTE: Delivery may be conditional or for a
special purpose only and not for the purpose of
transferring title
Wanting in a material Blank paper with Mechanically incomplete Mechanically complete
particular signature
Prima facie authority Signature operates as a No authority to complete and/or negotiate NI May negotiate if delivered to him by or under the
to complete it by filling prima facie authority to authority of the party making, indorsing, drawing
up the blanks therein fill it up as such for any or accepting as the case may be
If filled up strictly in accordance with authority No enforceable When delivery is made by or under authority of
given and within a reasonable time the party making, indorsing, drawing or accepting,
as the case may be
Personal Real Personal
1. If HDC, he can enforce the NI as None in the hands of any holder. Can enforce the NI
completed against parties prior or However, the invalidity of NI is only with NOTE: Where the NI is in the hands of
subsequent to the completion reference to parties whose signature HDC, a valid thereof by all parties prior to
2. If not HDC, he can enforce the NI as appear on the NI after delivery, the NI is him so as to make them liable to him is
completed only against parties valid conclusively presumed. Where the NI is no
subsequent to the completion but not longer in possession of a party whose
against those prior thereto signature appears thereon, a valid and
intentional delivery to him is presumed until
the contrary is proved

o The failure of the payee to encash a check for more than

10 years undoubtedly results in the impairment of the
H. PRESCRIPTION – refers to the extinctive prescription and check through his unreasonable and unexplained delay
may be raised even against HDC (real defense). Under NCC, the (Myron C. Papa v. Valencia, G.R. no 105188, January
prescriptive period of an action based on a written contract is 23, 1998)
10 years from accrual of cause of action
o In case of checks, the action of the depositor against his NOTE: This is contrary to the ruling in NAMARCO v. F.U.N.D.
drawee bank commences to run from the time he is (G.R. no L-22578, January 31, 1978). In this case, the SC held
given notice of payment (PCIB v. CA, G.R. no 121413, that the delivery of promissory notes payable to order, or bills
January 29, 2001) of exchange or drafts or other mercantile document shall

Page | 35
produce the effect of payment only when realized, or when by (c) Time or place of payment
the fault of the creditor, the privileges are inherent in their (d) Number or relations of parties
negotiable character are impaired. The clause in Art 1249 is (e) Medium or currency of payment
applicable ONLY to instruments executed by THIRD PERSONS (f) Any other change or addition which alters the effect of
and delivered by the debtor to the creditor and does NOT NI
apply to instruments executed by the debtor himself and
delivered to the creditor. A serial number is an item which is not an essential requisite
of negotiability under Sec 1 NIL and which does not affect the
I. MATERIAL ALTERATION – Any alteration which changes rights of the parties, hence its alteration is not material (PNB
the date, sum payable, number or relation of the parties, time v. CA, 2256 SCRA 491).
or place of payment, or medium of currency, or adds a place of
payment where none is specified, or which alters the effect of NOTE: Spoliation, material alteration by a stranger, does not
the NI in any respect (PNB v. CA, G.R. no L-26001, October 29, affect the NI, provided the original meaning can be
1968) ascertained
o Since it changes the contract of the parties, a material o An innocent alteration---generally, changes on items
alteration avoids the instrument (Effect: No longer a NI) other than those required to be stated under Sec 1 NIL—
and discharges all parties, unless they authorized or and spoliation will not avoid the NI, but the holder may
consented to the alteration enforce it only according to the original tenor.
o EXCEPT: As to subsequent indorser because by
indorsing the NI, he warrants that the instrument is in EFFECTS OF MATERIAL ALTERATION
all respects what it purports to be and that it was valid a. Alteration by a PARTY – Avoids the NI except as against
and subsisting at the time of his indorsement (Sec 65- the party who (1) made, (2) authorized, or (3) assented
66 NIL) to the alteration and (4) subsequent indorsers.
o It is a PARTIAL DEFENSE because HDC can enforce it However, if an altered NI is negotiated to HDC, he may
according to its original tenor enforce the payment according to its original tenor
o Material Alteration is a PERSONAL defense when used to regardless whether the alteration was innocent or
deny liability according to the original tenor of the fraudulent.
instrument, but it is a REAL defense when relied on to NOTE: Since distinction is made, it does not matter
deny liability according to the altered terms whether it is favorable or unfavorable to the party
o Intent is immaterial in the alteration making the alteration. The intent of the law is to
NOTE: The alteration mentioned under Sec 124 must be preserve the integrity of the NI
distinguished from Sec 23. The intent to defraud distinguishes b. Alteration by a STRANGER (Spoliation) – The effect is
forgery from innocent alterations and spoliation. Sec 23 the same as where the is made by a party in which case
applies only to forged signatures or signatures made without HDC can recover on the original tenor of the NI (Sec 124
the authority of the person whose signature it purports to be. NIL)
Consequently, if the forgery consists of alteration in the
amount, Sec 124 applies. J. ULTRA VIRES ACTS – A corporation may raise want of
authority as a real defense but the negotiation of the corporation
125) o ULTRA VIRES ACT – One committed outside the
(a) Date object for which a corporation is created as defined
(b) Sum payable or interest

Page | 36
by the law of its organization and therefore beyond to perform the consideration
the power conferred upon it by law agreed upon
o It is merely voidable which may be enforced by TYPE OF TRANSACTION INVOLVED
performance Embraces transactions where Implies the giving of valuable
no consideration was intended consideration was
K. INSERTION OF WRONG DATE – If a wrong date was to pass contemplated but that it failed
to pass
inserted, HDC has the right to regard the wrongfully inserted
date as the true date
o The insertion of a wrong date does not avoid the NI in EFFECT OF WANT OF CONSIDERATON (Sec 28 NIL)
the hands of a subsequent HDC; but as to him, the date o Both are valid defenses against a person not a holder in
so inserted is to be regarded as the true date (Sec 13 due course. These defenses are only personal or
NIL) equitable.
o Partial failure of consideration is merely a defense pro
tanto, whether the failure is an ascertained or liquidated
L. CONSIDERATION – Sec 28 reiterates the rule laid down by
amount or otherwise (Sec 28 NIL)
Sec 24 that every NI is deemed prima facie to have been issued
for a valuable consideration
NOTE: The drawee, by accepting unconditionally the bill,
o The defendant has the burden of proving that there was
becomes liable to the holder and therefore cannot allege want
no consideration for the NI
of consideration between him and the drawer
o Sec 28 provides that absence or failure of consideration
REASON: The holder is a stranger in relation to the transaction
is a personal defense available only against non-HDC
between the drawer and drawee, and if the hlder has given
 As to HDC, the presumption of consideration is
value to the drawer and has no knowledge of any equity
between the drawer and drawee, he in the same situation as
o Absence of consideration = total lack of consideration
an indorsee in good faith
o Failure of consideration means that something was
agreed upon as consideration for a contract but for some
Consideration founded on (1) love and affection or (2) upon
reason, the consideration did not materialize
gratitude is good consideration but does NOT constitute such
o Partial failure of consideration means that part of the
valuable consideration as is sufficient of itself to support the
consideration did not materialize
obligation of the bill or note.
 In such case, the maker may raise set up as a
defense pro tanto (partial defense) against the
payee or holder not in due course, i.e. he is not M. FORGERY – Counterfeiting or fraudulent alteration of any
liable to the extent of the price of the writing which may consist of:
undelivered portion (Sec 29 NIL) 1. Signing of another’s name with intent to
defraud; or
ABSENCE OF CONSIDERATION AND FAILURE OF 2. Alteration of an NI in the name, amount,
CONSIDERATON DISTINGUISHED name of payee, etc. with intent to defraud
ABSENCE OF CONSIDERATION FAILURE OF CONSIDERATION o Under Sec 23, forgery is a real defense. A person whose
DEFINITION signature to an instrument was forged was never a party
It is the total lack of any valid It is the neglect or failure of one and never consented to the contract which gave rise to
consideration of the parties to give, to do, or such instrument; as such, he cannot be held liable
thereon by anyone, not even HDC

Page | 37
TWO situations contemplated under Sec 23:  If the instrument is payable to bearer, the
a. Want of authority of agent – Where the signature on the forgery of the indorsement is immaterial since it
instrument is affixed by one who purports to be an agent is negotiable by mere delivery
but who does not have the authority to bind the alleged NOTE: A person whose signature is forged as maker,
principal drawer, payee or indorsee of a check or note was never
b. Where the signature is affixed by one who does not a party or did not give consent to the contract which
claim to act as an agent and who has no authority to gave rise to the NI. Since his signature does not appear
bind the apparent signer in the NI, he cannot be held liable thereon by anyone
(Gempesaw v. CA, G.R. no 92244, February 9, 1993)
a. When a signature is forged or made without the o In case of forgery of an indorsement of an instrument
authority of the person, the signature (not the payable to order, it is not only the person whose signature
instrument itself and the genuine signatures) is was forged who would not be liable but also the parties prior
inoperative and no one can gain title to the instrument to such person. Payment under a forged instrument is not
through it the drawer’s order.
b. NO right to retain the instrument, or to give discharge o The general rule is that, in the case of forgery of the
therefore, or to enforce payment thereof against any indorsement of the payee of the check the drawee bank
party thereto, can be acquired cannot debit the drawer’s account and the loss shall be
borne by the drawee bank. The depository or collecting bank
EXCEPTION: Where the party against whom it is sought to is liable to the drawee in case of a forged indorsement
enforce a right is precluded from setting up the forgery or because it guarantees all prior indorsements. But this is
want of authority (Sec 23 NIL) subject to the qualification that the drawee himself was not
PERSONS PRECLUDED FROM SETTING UP DEFENSE OF negligent or guilty of such conduct as would estop him from
FORGERY asserting the forged character of the indorsement against
1. Person who WARRANT or admit the genuineness of the the drawer
signature in question o Where an instrument is originally payable to bearer, the
Warrantors of Genuineness include: effects of a forged indorsement is different. The holder of
a. Indorsers – Indorsers can be held liable because of such instrument who did not know of the forgery can still
their breach of warranty that the instrument is enforce it against the drawer or maker because he can
genuine and in all respect what it purports to be cancel the forged indorsement as not being necessary to his
(Sec 66) title (Sec 48). REASON: Payable to bearer instruments are
b. Persons negotiating by mere delivery; and negotiated by mere delivery
c. Acceptors o Should there be an indorsement subsequent to the forged
2. Those who by their acts, silence, or negligence are one, the holder, should he be unable to recover from the
ESTOPPED from setting up the defense of forgery – maker, may have a right against the subsequent indorser
These include acts or omission that amount to on the latter’s warranty that the instrument is genuine and
ratification, express or implied valid at the time of his indorsement
 But a person precluded from raising the defense NOTE: The burden of proving the genuineness of a signature
of forgery may still recover damages under NCC is on the person basing his claim thereon.
on torts

Page | 38
1. Price v. Neal Doctrine – When the drawer’s signature is o If the negligence of the depositor should delay the discovery
forged on a bill or check and the drawee did not detect the of the forgeries and this negligence is should deprive the
forgery thereon, the drawee cannot charge the amount bank to recover from the forger, the depositor will have to
thereof to the drawer’s account bear the burden of the loss and cannot demand a re-credit
o RATIO: The drawee is bound the know the signature of from the bank
the drawer by reason of its business relations with the o RATIO: It is the duty of the depositor to carefully examine
drawer. the bank’s statement, his cancelled checks and check stubs
o Forgery as a defense is not available to the acceptor within a reasonable time, and to report any errors without
under Sec 62 NIL unreasonable delay
o Sec 62 covers bills paid without prior acceptance and
bills accepted since one who pays a bill necessarily EFFECT OF PAYMENT UNDER FORGED INDORSEMENTS – A drawee
accepts it. (No distinction between acceptance and can recover the amount paid by him on a forged indorsement since
payment) he makes no warranty as to the genuineness of any indorsement
2. Application of Price v. Neal Doctrine o When the drawee learns about the forgery, the drawee has
a. Stop Payment Order – A stop payment order is one the duty to notify the holder whom he has paid as soon as
issued by the drawer of a check countermanding his first possible. If he fails to act promptly, he may lose his right to
order to the drawee bank to pay the check i.e., the drawer recover against the holder if his negligent delay operates to
is ordering the drawee bank not to pay the check issued the latter’s prejudice
by him. o If the draw fails to recover from an insolvent holder, he
 The drawee bank is bound to follow the stop order cannot recover from the drawer
provided it is received prior to its certification or o Payable to bearer instruments: The drawee bank may debit
payment of the check the drawer’s account in spite of the forged indorsement
 RATIO: Payment was voluntary on the part of the because such indorsement may be disregarded as being
drawee bank which, because of the stop order, was unnecessary to the holder’s title EXCEPT: If drawee’s
under no legal obligation to pay and its negligence negligence prejudices the holder
is paying precludes it from reclaiming the amount o Where both drawee and collecting banks are guilty of
from a bona fide holder negligence, the degree of negligence of each will be weighed
 EXCEPTION: Drawee bank may claim from drawer if in considering the amount of loss each should bear
such payment discharged a legitimate debt of the (contributory negligence)
 If stop order comes after the bank has certified or NOTE: In such cases, the doctrine of contributory negligence is
accepted the check, the bank is under legal duty to applied. Art 2179 NCC provides: When the plaintiff’s own negligence
pay the holder and will not be liable to the drawer was the immediate and proximate cause of his injury, he cannot
for doing so recover damages. But if his negligence was only contributory, the
 Certification and acceptance are akin to assignment immediate and proximate cause of the injury being the defendant’s
of credit i.e., funds are segregated to be given to lack of due care, the plaintiff may recover damages but the courts
the payee shall mitigate the damages to be awarded.


liable if the proximate cause of the wrongful payment is the EFFECT OF NEGLIGENCE OF DRAWEE IN INFORMING RECIPIENT OF
negligence of the drawer FORGERY
If it shown that the drawee on learning of the forgery did not give
prompt notice of it and that damages resulted, recovery by the

Page | 39
drawee is barred. The drawee should be allowed to shift that loss to
the drawee only upon clear showing that the drawee’s delay in
notifying him of the forgery caused him damage. No such damage 1. A and B can raise the defense of forgery for being parties prior
has been shown by Clearfield. (Clearfield Trust Co v. United to the forgery as against C, D, E and H unless precluded from
States, 318 US, 363, 63 S. S. Ct. 573) setting up forgery
2. H can enforce the NI only against C (the forger), D, E and M
EFFECT OF NEGLIGENCE OF DRAWER IN CASE OF FORGED (maker) unless precluded from setting up the defense of
INDORSEMENTS ON CHECKS – The drawer, as soon as he discovers forgery
the forged indorsement, should promptly notify the drawee bank. NOTE: The liability of the maker is absolute if the NI involved is
Otherwise, if the drawer’s negligent delay is the proximate cause of payable to bearer.
any subsequent loss to the bank, the drawee bank may recover from
24-HOUR CLEARING RULE 1. Was there a gross negligence on the part of the drawer? If
When the drawee bank fails to return a forged check or altered check yes, drawer is liable (MWSS v. CA)
to the collecting bank within the 24-hour releasing period, the 2. If there is none, it should be the drawee bank
collecting bank is absolved from liability (Republic Bank v. CA, G.R. REASON: The drawee bank should have known that the
no 42725, April 22, 1991) signature was forged considering that the signature
appearing on the check was even compared with the
specimen signature of the authorized signatory of the
corporation (Samsung Corp and Supply Co v. FEBTC, G.R. no
Parties PRIOR to the forged signature are cut-off from the parties
134712, August 13, 2004)
AFTER the forgery in the sense that prior parties cannot be held
3. BUT if there is a collecting bank, the collecting bank bears
liable and raise the defense of forgery. The holder can only enforce
the loss
the NI against parties who became such after the forgery.
REASON: The collecting bank or last indorser generally
EXCEPTION: When the prior parties are precluded from setting up
suffers the loss because it has the duty to ascertain the
the defense of forgery either because of their warranties,
genuineness of all prior indorsements considering that the
representation or negligence (Gempesaw v. CA)
act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has doen
NOTE: Where a depositor is using his own personalized checks, its
its duty to ascertain the genuineness of the indorsements
failure to provide adequate security measures to prevent forgeries
(Banco de Oro Savings and Mortgage Bank v. Equitable
of checks constitutes gross negligence and bars it from setting up
Banking Corp, 157 SCRA 186)
the defense of forgery (MWSS v. CA, G.R. no L-62943, July 14,
o But the mere fact that a check had been removed and RULES ON FORGERY
stolen in a checkbook without the knowledge and consent of PROMISSORY NOTES
the owner cannot be considered negligence (PNB v. Quimpo, ORDER INSTRUMENT BEARER INSTRUMENT
G.R. no L-53194, March 14, 1988) MAKER’S SIGNATURE FORGED
Maker is not liable because he Maker is not liable
ILLUSTRATION never became a party to the
C forged then indorsed to D NI
A ----- B ----- C ----- D ----- E ----- H

Page | 40
Indorsers subsequent to Indorsers may be made liable the signature of the drawer contributed thereto
forgery are liable because of to persons who obtain title (Associated Bank v. CA, 208 (Gempesaw v. CA)
their warranties through their indorsements SCRA 465)
Party who made the forgery is Party who made the forgery is Indorsers subsequent to
liable liable forgery liable (such as
PAYEE’S SIGNATURE FORGED collecting bank or last
Maker and payee not liable Maker is liable indorser)
Indorsers subsequent to Indorsement is not necessary Party who made the forgery is Party who made the forgery is
forgery are liable to title and the maker engages liable liable
to pay the holder PAYEE’S SIGNATURE FORGED
Party who made the forgery is Party who made the forgery is Drawer, drawee and payee not Drawer is liable (his
liable liable liable (Cut-off rule applies) indorsement is not necessary
Maker, payee and indorser Maker is liable. Indorsement is Drawee is liable; no privity
whose signature was forged is not necessary to title and the between drawer and payee
not liable maker engages to pay the because indorsement of payee
holder is not necessary (Ang Tek Lian
Indorsers subsequent to Indorser whose signature was v. CA, G.R. no L-2516,
forgery are liable because of forged is not liable September 25, 1950)
their warranties Payee is not liable
Party who made the forgery is Party who made the forgery is Indorsers subsequent to Collecting bank is liable
liable liable forgery are liable (such as because of warranty.
collecting bank)
But it may recover from the
person who forged the
indorsement on the check and
deposited or enchased the
same (Jai-Alai Corp v. BPI,
Drawer is not liable because Drawer is not liable G.R. no L-29432, August 6,
he was never party to the NI 1975)
Drawee is liable if it paid (no Drawee is liable if it paid. Party who made the forgery is Party who made the forgery is
recourse to drawer—Price v. Drawee cannot recover from liable liable
Neal doctrine) because he the collecting bank because it
admitted the genuineness of is bound to know the drawer’s
Drawer, payee and indorser Drawer is liable (indorsement
the drawer’s signature signature since the latter is its
whose signature was forged not necessary to title)
are not liable (Cut-off rule
Drawee cannot recover from
does NOT apply)
the collecting bank because The drawee may recover from
Drawee is liable if it paid Drawee is liable
there is no privity between the the drawer when the latter’s
Indorsers subsequent to Indorser whose signature was
collecting bank and the negligence is the proximate
forgery are liable (such as forged is liable because
drawer. The latter does not cause of the loss or
collecting bank) indorsement is not necessary
give any warranty regarding
to title

Page | 41
Party who made the forgery is Party who made the forgery is 2. If dishonored by nonpayment, notice of dishonor should
liable liable be given to the persons secondarily liable unless
ENFORCEMENT OF LIABILITY a. When notice is waived
b. When dispensed with under Sec 112 NIL
PRIMARY LIABILITY c. As to drawer under Sec 114
d. As to indorser under Sec 115
1. As to MAKER – The unconditional promise attaches the
e. When due notice of dishonor by non-acceptance has
moment the maker makes the NI
been given
2. As to the ACCEPTOR – The acceptor’s assent to the
f. As to HDC without notice
unconditional order attaches the moment he accepts the NI
NOTE: No further act is necessary in order for their liability to
accrue. What is necessary only is for the holder to enforce such STEPS IN BILL OF EXCHANGE
liability by presenting it for payment 1. Presentment for acceptance or negotiation within
reasonable time after it is acquired ONLY in the
SECONDARY LIABILITY following instances:
1. Indorser a. Where the bill is payable after sight
2. Drawer b. When it is necessary in order to fix maturity of the NI
Their liability cannot be immediately enforced. There are necessary c. Where the bill expressly stipulates that it shall be
steps which should be taken in order to charge these persons. presented for acceptance
Unless the holder is excused from taking any of the steps, the d. Where the bill is drawn payable elsewhere than at the
persons secondarily liable are discharged. residence or place of business of drawee (Sec 143 NIL)
NOTE: In all above cases, the holder must either present the
STEPS IN PROMISSORY NOTE bill for acceptance or negotiate it within a reasonable time;
1. Presentment for payment to the maker unless excused otherwise, the drawer and all indorsers are discharged (Sec
a. After exercise of reasonable diligence, it cannot be made 2. If dishonored by NON-ACCEPTANCE:
b. Drawee is a fictitious person a. Notice of dishonor given to drawer and indorsers unless
c. Express or implied waiver (Sec 82 NIL) excused; or
 Effect: the holder may treat the NI as a bill or note b. Protest in case of foreign bills unless excused
and hold the drawer liable as maker who is a 3. If bill is accepted:
primary party not entitled to presentment a. Presentment for payment to the acceptor unless
 Waiver of notice does not mean waiver of excused under Sec 82 NIL
presentment b. If dishonored upon presentment for payment:
 To bind indorser or drawer, his waiver must be with (1) Notice of dishonor to persons secondarily liable; or
knowledge of the facts which release him, so if he (2) Protest for dishonor by nonpayment in case of
pays not knowing there was no demand and no foreign bills
notice, he can recover

Page | 42
1. Protest for payment by drawee in order to charge an acceptor 2. In order to charge the INDORSER – When the NI was made or
honor *Sec 165 and 167) or a referee in case of need (Sec accepted for his accommodation and he has no reason to
167 NIL) expect that the NI will be paid if presented (Sec 80 NIL)
2. Protest for nonpayment by the acceptor for honor is also NOTE: Only the drawer and indorser referred to in these sections
required (Sec 167) are not discharged but all other parties secondarily liable are
relieved of their liability
PRESENTMENT – The production of a bill of exchange to the
drawee for his acceptance, or to the drawee or acceptor for payment WHEN DELAY IN MAKING PRESENTMENT OR GIVING NOTICE
OR the production of a promissory note to the party liable for the IS EXCUSED
payment of the same (Sec 70 NIL) 1. When caused by circumstances beyond the control of the
holder; and
PRESENTMENT FOR PAYMENT 2. Not imputable to his default, misconduct, or negligence (Sec
1. Personal DEMAND for payment at the proper place
2. Readiness to EXHIBIT the NI if required; and WHEN PRESENTMENT SHOULD BE MADE
3. To RECEIVE payment and surrender the NI if the debtor is INSTRUMENT WHEN PAYABLE
willing to pay PN payable on demand Within reasonable time after
NOTE: Mere informal talk not accompanied by presentment is not issue
sufficient. Demand on phone is also not sufficient unless maker Bill of Exchange payable on Within reasonable time after
waives exhibition, whether implied or express (Gilpin v. Savage, 201 demand its last negotiation
NY 167, 94 N.E. 656) Payable on a specified date On the date it falls due (Sec
71 NIL)
1. MADE by the holder or any person authorized to receive NOTE: In determining what is reasonable time, regard is to be had
payment on his behalf to the nature of the NI, the usage of trade or business with respect
2. At a REASONABLE HOUR on a business day to such NI and the facts of the particular case (Sec 193 NIL).
3. At a proper PLACE
4. To the person primarily LIABLE, or if he is absent or
inaccessible, to any person found at the place, where the HOW COMPUTED
presentment is made (Sec 72 NIL) When the NI is payable at a fixed period after date, after sight or
after the happening of a specified event—the time of payment is
GENERAL RULE: Presentment for payment is NOT necessary in order determined by excluding the day from which time is to begin to run
to charge the person primarily liable but is necessary in order to and by including the date of payment (Sec 86)
charge the drawer and indorser, except as otherwise provided.
WHEN PRESENTMENT IS NOT REQURIED Every NI is payable at the time fixed therein without grace.
1. In order to charge the DRAWER – Where he has no right to
expect or require the at the drawee or acceptor will pay the WHEN MATURITY FALLS ON A SUNDAY OR HOLIDAY
NI (Sec 79) such as in case of a check where payment has NIs falling due or becoming payables on Saturday are to be
been stopped presented for payment on the next business day .

Page | 43
EXCEPTION: The NI which is payable on demand may, at the option 1. When debtor does not demand to see the NI but refuses
of the holder, be presented for payment before 12 noon on a payment on some other grounds; and
Saturday when that entire day is not a holiday (Sec 85 NIL) 2. When the NI is lost or destroyed
NOTE: Even if the rule requires that the NI must be exhibited to
TIME OF PRESENTMENT OF INSTRUMENT WITH FIXED determine its genuineness, this is rendered unnecessary not by the
MATURITY omission of the authenticity of the note implicit from the averment
WHEN PRESENTED EFFECT that substantial payments were made thereon and by express
Made before maturity Not effective waiver of demand, presentment, protests and notice of protest and
If made after maturity Too late unless delay is nonpayment in the note (Ansaldo v. CA, G.R. no 47696, August 29,
excusable 1989)
Effect: Secondary parties will
be discharged SPECIAL CASES
Presentment on Sunday or NI will have to be presented 1. NI payable at a bank – must be made during banking hours,
Holiday on the next business day (Sec unless there are no funds to meet it at any time during the
194 NIL) day, presentment at any hour before the bank is closed on
that day is sufficient (Sec 75 NIL)
2. Person liable is dead – may be made to his personal
representative, if there be one and if he can be found (Sec 76
1. Where a place of payment is specified in the NI, it shall be
presented there
3. Persons liable are partners – may be made to any of the
2. Where no place of payment is specified but the address of the
partners, even if their partnership has been dissolved (Sec 77
person to make payment is given in the NI, it is there
4. Persons liable are joint debtors – must be made to all of them
3. Where no place of payment is specified and no address is
(Sec 78 NIL)
given, the NI is presented at the usual place of business or
residence of the person to make payment
4. In any other case, presentment is to be made to the person PRESENTMENT for ACCEPTANCE
to make payment wherever he can be found OR presented at REQUISITES
his last known place of business or residence 1. Must be made by or on behalf of the holder
o If the NI is, by its terms, payable at a special place, and 2. At a reasonable hour on a business day
the person primarily liable is able and willing to pay it 3. Before the bill is overdue; and
there at maturity, such ability and willingness are 4. To the drawee or some other person authorized to accept or
equivalent to a tender of payment upon his part (Sec 70 refuse to accept on his behalf
GENERAL RULE: Presentment for acceptance is NOT necessary in
EXHIBITION (Sec 74 NIL) order to render any party to the bill liable.
1. To enable he debtor to determine the genuineness of the NI WHEN REQUIRED
and the right of the holder to receive payment; and 1. Where the bill is payable after sight, or when it is necessary
2. To enable him to reclaim possession upon payment in order to fix the maturity of the NI
2. Where the bill expressly stipulates that it shall be presented
WHEN EXCUSED: for acceptance

Page | 44
3. Where the bill is drawn payable elsewhere than at the 1. GENERAL – Assents without qualification to the order of the
residence or place of business of the drawee 9Sec 143 NIL) drawer
NOTE: The holder must either present it for acceptance or negotiate 2. QUALIFIED – which in express terms varies the effect of the
it within a reasonable time; upon failure to do so, the drawer and bill as drawn
all indorsers are discharged. a. CONDITIONAL – Makes payment by the acceptor
dependent on the fulfillment of a condition therein
WHEN EXCUSED (Sec 148 NIL) stated
1. Where the drawee is dead, or has absconded, or is a fictitious b. PARTIAL –A acceptance to pay part only of the amount
person or a person not having capacity to contract by bill for which the bill is drawn
2. After exercise of due diligence, presentment cannot be made c. LOCAL – An acceptance to pay at a particular place
3. Although presentment has been irregular, acceptance has d. Qualified as to TIME
been refused on some other ground e. The acceptance of one or some of the drawees but NOT
ALL (Sec 141 NIL)
1. Where the bill is addressed to two or more drawees who are EFFECT OF QUALIFIED ACCEPTANCE
not partners, presentment must be made to ALL of them The drawer and the indorsers are DISCHARGED unless:
unless one has the authority to accept or refuse acceptance a. They have expressly or impliedly AUTHORIZED the
for all, in which case presentment may be made to him only holder to take qualified acceptance; or
2. Where the drawee is dead, presentment may be made to his b. Subsequently ASSENTED thereto
personal representative Thus, a subsequent party which caused the dishonor of the
3. Where the drawee has been adjudged bankrupt or insolvent check through its qualified indorsement cannot hold prior
or has made an assignment for the benefit of creditors, parties liable on the NI (Gonzales v. RCBC, G.R. no 156294,
presentment may be made to him or to his trustee or assignee November 29, 2006)
NOTE: A bill may be presented for acceptance on any day on which
NI may be presented for payment under Sec 72 and 75 NIL. The holder has the right to require the drawee to accept the
bill without qualification. If the latter refused, he can treat the
ACCEPTANCE – The signification by the drawee of his assent to bill as dishonored by non-acceptance (Sec 142 NIL)
the order of the drawer 3. IMPLIED COSNTRUCTIVE ACCEPTANCE (Sec 137 NIL) – If
o It is the act by which the drawee manifests his consent to after 24 hours the drawee fails to return the NI, he is deemed
comply with the request contained in the bill of exchange to have accepted the NI. This also applies if the drawee
directed to him destroyed the NI.
o Acceptance in the sense used in NIL is not required for
FORM OF ACCEPTANCE (Sec 132 NIL) checks for the same are payable on DEMAND
1. Must be in WRITING o Payment is not acceptance because the latter is a
2. SIGNED by the drawee “promise to perform an act while the former is the actual
3. Must not express that the drawee will perform his promise by performance (PNB v. CA, G.R. no L-26001, October 29,
any other means than the PAYMENT OF MONEY 1968). But the effect is the same: discharge of the NI
NOTE: The holder of the bill presenting the same for acceptance 4. EXTRINSIC (Sec 134 NIL) – Acceptance may be made on a
may require that it be written on the bill and if such request is paper other than the bill
refused, may treat the bill as dishonored (Sec 133 NIL) 5. VIRTUAL (Sec 135 NIL) – Contemplates the situation where
an acceptance is made on a bill that has not yet been drawn
KINDS OF ACCEPTANCE (acceptance in advance)

Page | 45
4. Given at the proper PLACE (Sec 103 and 104 NIL)
DISHONOR – Where a bill is duly presented for acceptance and is
NOT accepted within the prescribed time: HOW GIVEN (Sec 96)
1. The person presenting it must treat the bill as dishonored by Notice of dishonor may be:
acceptance otherwise he loses the right of recourse against 1. Oral; or
the drawer and indorsers; and 2. Written
2. Proper notice of dishonor should be given to the drawer and NOTE: Notice of dishonor must be served personally or by mail.
DISHONOR BY NONPAYMENT (Sec 83 NIL) 1. Sufficient DESCRIPTION of the NI to identify it
1. Payment is refused or cannot be obtained after due 2. A statement that it has been PRESENTED for payment or for
presentment for payment acceptance and that it has been dishonored; and
2. Presentment is excused and the NI is overdue and unpaid 3. A statement that the party giving notice intends to look for
EFFECT: There is an immediate right of recourse by the holder the party addressed for PAYMENT
against persons secondarily liable. However, notice of dishonor is
generally required (Sec 84 NIL). BY WHOM GIVEN (Sec 90 NIL)
1. Holder
DISHONOR BY NON-ACCEPTANCE (Sec 149 NIL) 2. Another, on behalf of the holder; or
1. When it is duly presented for acceptance and such acceptance 3. Any party to the NI who may be compelled to pay it to the
is refused or cannot be obtained; or holder, and who would have a right of REIMBURSEMENT from
2. When presentment for acceptance is excused, and the bill is the party to whom notice was given (Sec 90 NIL)
not accepted
EFFECT: Immediate right of recourse against the drawer and TO WHOM GIVEN
indorsers accrues to the holder and no presentment for payment is 1. Non-acceptance (Bill) – to persons secondarily liable, namely
necessary (Sec 151 NIL) the drawer and indorsers as the case may be
2. Nonpayment (both bill and note) – indorsers
NOTICE OF DISHONOR – Notice is given by holder or his agent NOTE: Notice must be given to persons secondarily liable. Otherwise
to party or parties secondarily liable that the NI was dishonored by such parties are discharged. Notice may be given to the party
non-acceptance by the drawee of a bill or by nonpayment by the himself or to his agent
acceptor of the bill or by nonpayment by the maker of the note (Sec
89 NIL) WHEN GIVEN: As soon as the NI is dishonored (Sec 102).
NOTE: Only persons secondarily liable are given notice of dishonor.
A joint maker, an accommodation maker, or a surety need not be WHEN NOTICE IS DISPENSED WITH:
given a notice of dishonor. But an irregular or accommodation 1. When party to be notified knows about the dishonor, actually
indorser is entitled as any indorser to notice of dishonor otherwise or constructively (Sec 115 NIL)
he is discharged from liability. 2. If waived (Sec 109 NIL); or
3. When after due diligence, it cannot be given (Sec 112 NIL)
1. Given by the holder or his agent, or by ANY PARTY who may NOTICE OF DISHONOR INURES TO THE BENEFIT OF
be compelled by the holder to pay (Sec 90 NIL) 1. When given by or on behalf of a holder
2. Given to a SECONDARY PARTY or his agent (Sec 97 NIL) a. All parties prior to the holder, who have a right of
3. Given with the PERIODS provided by law (Sec 102); and recourse against the party to whom notice is given; and

Page | 46
All holders subsequent to the holder giving notice (Sec NOTE: Waiver may be express or implied (Sec 109 NIL)
92 NIL)
2. When given by or on behalf of a party entitled to give notice As to who are affected by an express waiver depends on where the
a. The holder; and waiver was written:
b. All parties subsequent to the party to whom notice is 1. If it appears in the body or in the face of the NI, it binds all
given (Sec 93 NIL) parties
2. If it is written above the signature of an indorser, it binds him
1. NO acceleration clause – Failure to give notice of dishonor on WHEN NOTICE OF DISHONOR IS NOT REQUIRED TO BE GIVEN
a previous installment does not discharge drawers and DRAWER (Sec 114) INDORSER (Sec 115)
indorsers as to succeeding installments Drawee & drawee are the same Drawee is a fictitious person or
2. WITH acceleration clause – It depends upon whether the has no capacity to contract
clause is optional or automatic and if indorser was aware of
a. Automatic – Failure to give notice of dishonor as to a such fact at the time of
previous installment will discharge the person indorsement
secondarily liable as to the succeeding installments Drawee is a fictitious person or Indorser is the person to
b. Optional – If not exercised, the rule would be the same has no capacity to contract whom the NI is presented for
as where there is no acceleration clause. If it is payment
exercised, the rule would be the same as where the Drawer is the person to whom NI was made or accepted for
installment contains an automatic acceleration clause NI is presented for payment his accommodation (Sec 115)
Drawer has no right to expect
DISHONOR IN THE HANDS OF AN AGENT (Sec 94 NIL) or require that the drawee or
Agent can do either of the following: acceptor will honor NI
1. Directly give notice to persons secondarily liable; or Where NI has countermanded
2. Give notice to his principal. In such case, he must give notice payment
within the time allowed by law as if he were a holder NOTE: If an NI is not accepted by the drawee, there is no sense
NOTE: Where a party receives notice of dishonor, he has, after the presenting in again for payment, and notice of dishonor must at
receipt of notice, the same time for giving notice to antecedent once be given. If there was acceptance presentment for payment is
parties that the holder has after the dishonor (Sec 107 NIL) still required and if payment is refused, there is still a NEED for
notice of dishonor (Sec 115).
WHEN MADE: An omission to give notice of dishonor by non-acceptance does NOT
1. Before the time of giving notice; or prejudice the rights of HDC subsequent to omission (Sec 117)
2. After the omission to give due notice


Promissory notes Sec 143 Promissory notes

Page | 47
Bills of exchange o Bill is payable after sight or when it is Bills of exchange
Checks necessary in order to fix the maturity of Checks
the NI
o Bill expressly stipulates
o Bill is drawn payable elsewhere than at
the residence or place of trade or
business of drawee
Holder/Agent Holder/agent Sec 90 & 91:
o Holder/agent
o By or on behalf of any party who might
be compelled to pay it to the holder and
who has a right of reimbursement from
the party to whom the notice is given
Sec 76, 77 & 78 Sec 145 Sec 89 & 97: Drawer/Indorser or any person
Person primarily liable: Drawee/Agent WITH authority to accept or secondarily liable or his agent
o Maker/drawee reject (acceptance gives rise to liability on the
o If debtor is dead, to his personal part the drawee) Sec 98-101
representative o If there are 2 or more drawees who are o If dead, to his personal representative
o If liable as partners, presentment not partners, presentment must be o If parties, notice to anyone of partners
may be made to any one of them made to all of them unless one has the o If jointly liable, notice to each one of them
o If joint debtors, presentment must authority to accept or refuse for all unless one has authority to receive notice
be made to all of them o If debtor is dead, to his personal for others
o Any person found at the place of representative o If adjudged bankrupt or insolvent or an
presentment (Substituted o If adjudged bankrupt or insolvent or has assignment was made, notice must given
presentment) made an assignment, presentment must to him, his trustee or his assignee
be made to him, his trustee or assignee
Sec 74: exhibiting NI By producing the bill (because the bill will Either VERBALLY or in WRITING.
be stamped ACCEPTED Must describe the NI and state the fact of
presentment and fact of dishonor
Sec 72 & 85: If NI is payable on a future If payable on a future determinable time, If living in the same AREA, notice must be
determinable time, must be presented on presentment must be before it is overdue or given within 24 hrs from dishonor
DUE DATE, except if it falls on a Sat, Sun or at maturity
holiday in which case it must be made the If living in a DIFFERENT AREA, the dropping
next business day IF payable on demand, the bill must be of letter in a mailbox is sufficient compliance
Sec 85/194: If NI is payable on demand, it presented within a reasonable time from
must be made within reasonable time last negotaiton (including Sat 12 noon)
a. Note – after issue
b. Bill – from last negotiation

Page | 48
c. Check – 6 months after issue;
including Sat up to 12 noon
Sec 73 NO REQUIREMENT because it is immaterial. o Address of party indicated/added in his
o Place designated by the parties What is more important is that the bill was NI
o If none, at the address of the accepted o If none, at his residence or office
maker/acceptor as stated in the NI o If none, where is sojourning
o If none, at his residence or office
o If none, any place where he is found

Sec 79-82 Sec 148 Sec 112-114 (DRAWER)
o When drawer has no right to expect to o Drawee is dead, absconded, a fictitious o After the exercise of due diligence, it
or require that drawee or acceptor will person or a person with no capacity to cannot be given to does not reach the
pay NI contract by bill parties sought to be charged
o Where the NI was made or accepted o After exercise of due diligence, o Delay is caused by circumstances beyond
for his accommodation and he has no presentment cannot be made the control of the holder & not imputable
reason to expect that the NI will be o Although presentment was irregular, to his default, misconduct or negligence
paid if presented acceptance has been refused on some o Drawer and drawee is the same person
o When the delay is caused by other ground o Drawee is a fictitious person or with no
circumstances beyond the control of capacity to contract
the holder and not imputable to his o Drawer is the person to whom NI was is
default, misconduct or negligence presented for payment
o Even after the exercise of due o Drawer has no right to expect or require
diligence, presentment cannot be that drawee or acceptor will honor NI
made o Drawer has countermanded payment
o Drawee is a fictitious person Sec 115 (INDORSER)
o Waiver, express or implied o When the drawee is a fictitious person or
a person with no capacity to contract and
the indorser was aware of such fact at
the time of indorsement
o Indorser is the person to whom NI was
presented for payment
o When NI was made or accepted for his


One which is on its face or purports to be: EXCHANGE DISTINGUISHED
1. Drawn in the Philippines but payable outside the Philippines INLAND BILL OF EXCHANGE FOREIGN BILL OF EXCHANGE
2. Payable in the Philippines but drawn outside the Philippines

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A bill which is or on its face One which is or on its face 3. Before a bill can be accepted for honor, it must be protested
purports to be both drawn and purports to be draw or payable for dishonor by non-acceptance or protested fro better
payable WITHIN the Philippines OUTSIDE the Philippines security (Sec 161 NIL)
4. Before a bill can be presented for payment to the acceptor for
PROTEST – The formal instrument executed usually by a notary honor or the referee in case of need, it must be protested by
public certifying that the legal steps necessary to fix the liability of the holder for non-payment to any party liable thereon (Sec
the drawee and the indorsers have been taken 167)
5. Before a bill can be paid for honor, it must be protested by the
REQUISITES FOR PROTEST holder for nonpayment by any party liable thereon (Sec 171)
1. Must be MADE by a
b. Any respectable resident of the place where the bill is NOTICE OF DISHONOR PROTEST
dishonored, in the presence of 2 or more credible WHEN REQUIRED
witnesses (Sec 154 NIL) Required in inland bill Required in foreign bill
2. Must be ANNEXED to the bill or must contain a copy thereof FORM
(Sec 153) May be oral or written Always written
3. Must be under the hand and SEAL of the notary public making BY WHOM MADE
it May be made by the party or Made by a notary public or a
4. Must SPECIFY agent respectable resident in the
a. The time and place of presentment present of 2 or more witnesses
b. The fact that presentment was made and the manner WHERE MADE
thereof Made in the residence of Made in the place of dishonor
c. The cause or reason for protesting the bill parties
d. The demand and the answer given, if any or the fact
that the drawee or acceptor could not be found (Sec 153 WHEN MADE: On the day of dishonor unless delay is excused. When
NIL) a bill has been duly noted, the protest may be subsequently
extended as of the date of noting (Sec 155 NIL).
1. For uniformity in international transactions WHERE MADE: At the place where it is dishonored EXCEPT where
2. To furnish an authentic and satisfactory evidence of dishonor the bill is payable at a place other than the residence of the drawee,
NOTE: Protest is necessary only in case of foreign bills of exchange, it must be protested at the place where it is expressed to be payable
which have been dishonored by non-acceptance or nonpayment. (Sec 156 NIL)
EFFECT OF NON-PROTEST: The drawer and indorsers are discharged
One made by the holder of a bill after it has been accepted but
PROTEST IS ABSOLUTELY REQUIRED before it matures against the drawer and indorsers, where the
1. Upon dishonor by non-acceptance of a foreign bill appearing acceptor has been adjudged bankrupt or insolvent, or made an
on its face to be such (Sec 152 NIL) assignment for the benefit of the creditors (Sec 158)
2. Upon dishonor by nonpayment of a foreign bill appearing on PURPOSE: To give acceptor the opportunity to perform an act that
its face to be such, if not having been previously dishonored will ensure payment
by non-acceptance (Sec 152)

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ACCEPTANCE FOR HONOR nonpayment before it is presented for payment to the acceptor for
An undertaking by a stranger to a bill after protest for the benefit of honor or referee in case of need (Sec 167)
any party liable thereon or for the honor of the person for whose
account the bill is drawn such acceptance inures also to the benefit PRESENTMENT FOR PAYMENT TO ACCEPTOR FOR HONOR; HOW
of all parties subsequent to the person for whose honor it is MADE
accepted, and conditioned to pay the bill when it becomes due if he 1. If it is to be presented in the place where the protest for
original drawee does not pay it (Sec 161-170 NIL) nonpayment was made, it must be presented not later than
the day following the maturity
REQUISITES (Sec 161-162 NIL) 2. If it is to be presented in some other place than the place
1. The bill must have been protested for dishonor by non- where protested, it must be forwarded within the time
acceptance or for better security specified in Sec 104
2. The acceptor for honor must be stranger to the bill
3. The holder must consent to the acceptance for honor WHEN DELAY IS EXCUSED: Where there is delay in making
4. Bill must not be overdue presentment to the acceptor for honor or referee in case of need,
5. Must follow the formalities prescribed in Sec 162: Sec 81 applies: Where circumstances beyond the holder’s control
a. Must be in writing but not imputable to holder’s fault or negligence (Sec 169)
b. Must indicate it is an acceptance for honor
c. Signed by the acceptor for honor WHEN DISHONORED BY ACCEPTOR FOR HONOR: It must be
d. Must contain an express or implied promise to pay protested for nonpayment by him (Sec 170)
e. The accepted bill for honor must be delivered to the PAYMENT FOR HONOR
holder Payment made by a person, whether a party to the bill or not, after
it has been protested for nonpayment, for the benefit of any party
LIABILITY FOR ACCEPTANCE FOR HONOR liable thereon or for the benefit of the person for whose account it
1. The acceptor for honor is liable to the holder and to all parties was drawn (Sec 171-177)
to the bill subsequent to the party for whose honor he has
accepted (Sec 164 NIL) REQUISITES(Sec 171-172 NIL)
2. By such acceptance, he engages that he will on due 1. The bill has been dishonored by non-acceptance
presentment pay the bill according to the terms of his 2. It has been protested for nonpayment
acceptance, provided it shall not have been paid by the 3. Payment supra protest (another term for payment for honor
drawee, and that it shall have been duly presented for because prior protest for nonpayment is required) is made by
payment and protested for nonpayment and notice of dishonor any person, even by a party thereto
given to him (Sec 165) 4. The payment is attested by a notarial act of honor which must
be appended to the protest or form of an extension of it
ACCEPTANCE FOR HONOR FOR BILL PAYABLE AFTER SIGHT 5. The notarial act must be based on the declaration made by
Where a bill payable after sight is accepted for honor, its maturity the payor for honor or his agent of his intention to pay the bill
is calculated from the date of the noting for non-acceptance and not for honor and for whose honor he pays
from the date of the acceptance for honor (Sec 166 NIL) NOTE: If the above formalities are not complied with, payment will
operate as VOLUNTARY PAYMENT and the payor will acquire no right
PROTEST OF BILL ACCEPTED FOR HONOR to full reimbursement against the party whose honor he pays. (Sec
Where a dishonored bill has been accepted for honor before protest 172)
or contains a referee in case of need, it must be protested for

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In payment for honor, the payee cannot refuse payment. If he Liability Acceptor is Acceptor is primarily
refuses, he cannot recover from the parties who would have been secondarily liable liable
discharged had he accepted the same. In acceptance for honor, the By whom Made by a stranger or Made by any person
holder’s consent is necessary made party not liable on the whether a party or
bill stranger to the bill
RIGHT OF PAYOR FOR HONOR Notarial act Notarial act of honor Notarial act of honor is
To receive both the bill and protest to enable him to enforce his is not necessary necessary
rights against parties who are liable to him. Effects Sec 164, 165 Sec 175, 177

Necessity of Previous protest is Previous protest IS PRIMARILY
protest NOT required required LIABLE
Consent of Implied Required Necessity of No need to Need to protest for
holder protest protest for nonpayment
Liability of Primary Secondary nonpayment or
acceptor non-acceptance
By whom Drawee is acceptor Acceptor must be Party liable A party to the NI: May be a stranger or may
accepted stranger to the bill maker or be a party
Number of No acceptor in the There may be several drawee-acceptor
acceptors alternative or in acceptors for honor for In whose In favor of In favor of a specified
succession different parties in the favor specific parties person and the law requires
bill payment is that there is a statement of
Effect of Instrument IS Bill is NOT discharged made the person for whose honor
payment discharged upon upon payment by payment is made
payment by the acceptor for honor Notarial act Not necessary Necessary
acceptor Payment in Discharges the NI Cannot be payment in due
due course course & payment
DISTINGUISHED after the party in whose
HONOR honor is made
Bill Bill must be overdue Bill may be overdue
Previous Previously protested Previously protested BILLS IN SET
protest for non-acceptance or for nonpayment One composed of several parts, each part being numbered and
for better security containing a reference to the other parts, the whole of the parts
Consent of Necessary Is not necessary constituting one bill (Sec 178 NIL)

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PURPOSE: It is usually availed of in cases where a bill had to be sent
to a distant place through some conveyance. If each part is sent by BY WHOM MADE
different means of conveyance, the chance that at least one part of a. By maker or acceptor or (selected accommodated party)
the set would reach its destination would be greater. b. Surety, if a primary party; or
c. By an agent on behalf of the principal
1. If both are HDC, the holder whose title first accrues is REASON: He is the one ultimately liable on the NI
considered the true owner of the bill
2. But the person who accepts or pays in due course shall not be C. CANCELLATION – It includes any act of tearing, erasing,
prejudiced (Sec 178 NIL) obliterating, or burning. It is not limited to writing the word
“cancelled” or “paid,” or drawing crisscross lines across the NI
OBLIGATION OF HOLDER WHO INDORSES 2 OR MORE PARTS (Sec 123). It may be made by any other means by which the
OF BILL IN SET intention to cancel the NI may be evident.
1. The person shall be liable on every such part
2. Every indorser subsequent to him is liable on the part he has INTENTIONAL CANCELLATION REQUISITES
himself indorsed, as if such parts were separate bills (Sec 180) 1. Intentionally done
2. By the holder thereof; and
3. By writing the word “cancelled” or “paid” on the face of
DISCHARGE the NI or of the NI is torn up, burned, mutilated or


whether primary or secondary, from the obligations arising If the NI is unintentionally cancelled or cancelled by mistake
thereunder. It renders the NI without force and effect, and or without authority of the holder, the cancellation is
consequently, it can no longer be negotiated INOPERATIVE but party who alleges that cancellation was
made unintentionally, under mistake or without authority has
INSTANCES the burden of proof (Sec 123 NIL)
1. By payment in due course or on behalf of the principal debtor
2. Payment by accommodation party D. ANY OTHER ACT WHICH DISCHARGES THE
3. Intentional cancellation by the holder INSTRUMENT – The law on obligations and contracts will
4. By any act which will discharge a simple contract for the apply. Art 1231 provides how obligations may be
payment of money extinguished:
5. When the principal debtor becomes the holder of the NI or 1. Payment or performance of obligation
after maturity in his own right (Sec 119) 2. Loss of thing due
3. Condonation or remission of debt
A. PAYMENT IN DUE COURSE 4. Confusion or merger in the rights of the creditor and
a. Payment must be made at or after maturity 5. Compensation
b. Payment must be made to the holder 6. Novation
c. Payment must be made in good faith and without notice 7. Annulment
that the holder’s title is defective (Sec 88 NIL) 8. Rescission

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9. Fulfillment of resolutory condition 3. He may strike out his own and all subsequent
10. Prescription indorsements and again negotiate the NI except
However, although such ways discharge the NI as between a. Where it is payable to the order of a third person
immediate parties, they will not do so in the hands of HDC. and has been paid by the drawer; and
b. Where it was made or accepted for
NOTE: The NI must be surrendered to the payor. If the NI is accommodation and has been paid by the party
not surrendered, it may fall in the hands of HDC who may accommodated (Sec 121 NIL)
have the right to enforce the NI despite the previous payment
E. RENUNCIATION (Sec 122 NIL) – The act of
DISCHARGE OF PERSONS SECONDARILY LIABLE surrendering a right or claim without recompense, but it can
1. By any ACT which discharges the NI be applied with equal property to the relinquishing of a
2. By the INTENTIONAL cancellation of his signature by the demand upon an agreement supported by a consideration
holder o It must be with written declaration to that effect and if
3. By the DISCHARGE of a prior party oral, must be accompanied by surrender of the NI to the
NOTE: The release of the principal debtor must be by t person primarily liable thereon
act of the holder and not by operation of law.
4. By a VALID tender or payment made by a prior party REQUISITES
Tender of payment means the act by which one 1. Absolute and unconditional
produces and offers to a person holding a claim 2. Made in favor of the person primarily liable; and
against or demand against him the amount of money 3. Made at or after maturity
which he considers and admits to be due, in
satisfaction of such claim or demand without any EFFECTS
stipulation or condition 1. A renunciation in favor of a secondary party may be
5. By the RELEASE of the principal debtor, unless the made by the holder before, at or after maturity of the
holder’s right of recourse against the party secondarily NI. The effect is to discharge the only such secondary
liable is expressly reserved party and all parties subsequent to him but the NI itself
6. By any AGREEMENT binding upon the holder to extend must remain in force
the time of payment or to postpone the holder’s right to 2. A renunciation in favor of the principal debtor may be
enforce the NI (Sec 120) effected at or after maturity. The effect is to discharge
the NI and all parties thereto provided the renunciation
Instances when the agreement to extend the time of payment is made unconditionally and absolutely
does NOT discharge a party secondarily liable NOTE: In either case, renunciation does not affect the
1. Where the extension of time is consented to by such HDC without notice.
2. Where the holder expressly reserves his right of F. PRINCIPAL DEBTOR BECOMES THE HOLDER – An
recourse against such party instrument is discharged when the principal debtor becomes
the holder of the instrument at or after maturity date in his
LIABLE o In his own right – construed to exclude a case where a
1. NI will not be discharged maker acquires the NI in a purely representative
2. It only cancels his own liability and that of the parties capacity (Sigler v. Sigler, 98 Kans. 524, 158 P. 864)
subsequent to him

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o The note is not discharged when the maker acquires it TYPES OF CHECKS
as agent of another. Nor is it discharged when the maker 1. PERSONAL CHECK – Most common form of check
becomes the holder, like as executor or administrator 2. CASHIER’S CHECK – One drawn by the cashier of a bank, in
the name of the bank against the bank itself payable to a third
G. SURRENDER OF THE INSTRUMENT – The NI must be person. It is a primary obligation of the issuing bank and
surrendered to the payor whenever discharge is by payment accepted in advance upon issuance (Tan v. CA, G.R. no
by or in behalf of the principal debtor, payment by the 108555, December 20, 1994)
accommodated party, by renunciation or by any other ground 3. MANAGER’S CHECK – A check drawn by the manager of a bank
that discharges simple contract in the name of the bank itself payable to a third person. It is
similar to the cashier’s check as to the effect and use
o Drawn by a bank itself and has the effect of acceptance.
CHECKS It is more like a promissory note; as such bank is
primarily liable
4. MEMORANDUM CHECK – A check given by a borrower to a
CHECK – An instrument which is in the form of a bill of exchange lender for the amount of a short loan, with the understanding
but is always payable on demand and always drawn on a bank (Sec that it is not to be presented at the bank, but will be redeemed
185 NIL) by the maker himself when the loan falls due and which
Elements: understanding is evidence by writing the word
(1) Contain an unconditional order “memorandum,” “memo” or “mem” on the check
(2) For payment of money o Check where the word “memorandum” or “memo” is
(3) Amount of which is definite and certain written across its face meaning that the drawer will pay
(4) May be transferred by indorsement or by delivery the holder absolutely, without need of presentment
depending if payable to bearer or to order 5. CERTIFIED CHECK – An agreement whereby the bank against
o Checks are not mere contracts but: whom a check is drawn undertakes to pay it any future time
1. A representation of FUNDS on deposit when presented for payment (Sec 187 NIL)
2. Representation of CREDIT stated in monetary value
3. SUBSTITUTE for cash; and 6. TRAVELER’S CHECK – It is one upon which the holder’s
4. As PAYMENT for an obligation signature must appear twice: one to be affixed by him at the
o But a check itself does NOT operate as assignment of any part time it is issued; and the second, for countersignature, to be
of the funds to the credit of the drawer with the bank. The affixed by him in the presence of the payee before it is paid
bank is not liable to the holder UNLESS AND UNTIL it accepts otherwise it is incomplete
or certifies the check (Sec 189 NIL)
A check must be presented for payment within reasonable time
An agreement whereby the bank against whom a check is drawn,
AFTER ITS ISSUE or the drawer will be discharged from liability
undertakes to pay it at any future time when presented for payment
thereon to the extent of the loss caused by the delay (sec 186 NIL).
When a check is crossed, it is the duty of the collecting bank to
1. Equivalent to acceptance (Sec 187 NIL) and is the operative
ascertain that check is only deposited to the payee’s account (Phil
act that makes banks liable
Commercial Bank v. Phil Commercial and International Bank, G.R.
2. Assignment of the funds of the drawer in the hands of the
no 180257, February 23, 2011).
drawee (Sec 189)

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3. If obtained by the holder, discharges the persons secondarily which case the drawee-bank must pay the check only upon
liable thereon (Sec 188) presentment by such bank or company (Chan Wan v. Tan Kim,
NOTE: Where the holder of a check procures it to be accepted or G.R. no L-15380, September 39, 1960)
certified, the drawer and all indorsers are discharged from liability 2. CROSSED GENERALLY – Only the words “and Co.” are written
thereon (Sec 186) between the parallel lines or when none at all is written
between said lines
GENERAL RULE: If a bank refuses to pay a check (despite the Where the manager obtained and encashed manager’s checks that
sufficiency of funds), the payee-holder cannot, as provided under were plainly crossed checks, the SC held the following effects:
Sec 185 and 189 NIL sue the bank. The payee should instead sue 1. It may not be encashed but may only be deposited with the
the drawer who might in turn sue the bank bank
REASON: No privity of contract exists between the drawee-bank and 2. It may be negotiated only once to a person who has an
payee (Sincere Villanueva v. Marlyn Nite, G.R. no 148211, July 25, account with the bank; and
2006) 3. It serves as a warning to the holder that the check has been
issued for a definite purpose and he must inquire if he received
EXCEPTION: If the drawer himself ordered the bank to pay and such the check pursuant to this purpose; otherwise he is not HDC
drawer has sufficient funds therein (Associated Bank v. CA, G.R. no 89802, May 7, 1992)

COLLECTION OF CHECKS The NIL is silent with respect to crossed checks, although the Code
On the check’s due date, the holder of a check may either proceed of Commerce makes reference to such instrument. Nonetheless, the
directly to the drawee bank and present the same for payment or SC has taken judicial cognizance of the practice that a check with 2
he may deposit it in his account with his bank known as the parallel lines in the upper left hand corner means that it could only
depositary bank or collecting bank. be deposited and not converted into cash. The effects of crossing a
 It is only after the check has been cleared and collected from check thus relates to the mode of payment, meaning that the drawer
the drawee bank that final credit is made in the payee- had intended the check for deposit only by the rightful person, i.e.
depositor’s account payee named therein (Cely Yang v. CA, G.R. no 138074, August 15,
When a check is sent to the clearinghouse the collecting bank acts IRON CLAD RULE
as the agent of the depositor. The collecting bank does not become Prohibits the countermanding of payment of certified checks
the owner of the amount covered by the check as the same is only (Republic v. PNB, G.R. no 16106, December 1, 1961)
being collected from the drawee bank for the principal, the depositor NOTE: The holder must be HDC so that the stop payment order may
(BPI v. CA, G.R. no 112392, February 29, 2000) not be successfully invoked against him (Mesina v. IAC, G.R. no
70145, November 13, 1986)
CROSSED CHECK – A check which in addition to the usual
contents of an ordinary check contains also the name of a certain CRIMES INVOLVING CHECKS
banker or business entity through whom it must be presented for A. CHECK KITING – It is the practice of taking advantage of the
payment float, the time that elapses between the deposit of the check in
one back and its collection in another
KINDS NOTE: In anticipation of the dishonor of the check that was
1. CROSSED SPECIALLY – The name of a particular bank or deposited, the conspirators will release the original check with
company is written or appears between the parallel lines in another worthless check

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o Offender must be able to obtain something from the
CASES WHEN BANK MAY REFUSE PAYMENT offended party by means of the check he issues and
1. The BANK is insolvent delivers (for value or consideration)
2. The drawer’s deposit is INSUFFICIENT or he has no o If postdating a check issued as mere
account with the back or said account has been closed guarantee/promissory note, there is NO estafa
or garnished
3. The DRAWER is insolvent and proper notice is received C. BP 22 (BOUNCING CHECKS LAW) – If check is dishonored
by the bank of insufficient funds, the drawer may be held civilly liable
4. The drawer DIES and proper notice is received by the (under NIL) and criminally liable under BP 22.
bank o Purpose: To prevent increase in the number of worthless
5. The drawer has COUNTERMANDED payment checks issued by unscrupulous persons causing
6. The holder REFUSES to identify himself prejudice to the banking system and to the flow of
7. The bank has reason to believe the check is FORGERY business and trade
NOTE: A bank is under no obligation to make partial Acts punishable:
payment on a check up to the amount of the drawer’s 1) Making, drawing or issuing a check knowing at the
funds as where the check is drawn for an amount larger time of issue that the drawer has no sufficient
than what the drawer has on deposit. In case of partial funds/credit with the drawee bank – knowledge of
payment, the check holder could not be called upon to insufficient funds is essential
surrender the check and the bank would be without a 2) Failure to keep sufficient funds to cover the check
voucher affording a certain means of showing payment for 90 days from date of check – drawing and
(Moran v. CA, G.R. no 105836, march 1994) issuance of said check is prima facie evidence of
drawer’s knowledge of insufficient funds
B. ESTAFA – By express provision of BP22, prosecution of said  EXCEPT if Drawer pays holder the amount of the
law is without prejudice to any liability under RPC, particularly check within 5 banking days after notice of
Art 315(d) – Deceit is necessary dishonor or makes arrangement for payment in
Elements full by the drawee (same period)
1) Offender issued a postdated check or issued a check in  Payment within 5 banking days does not remove
payment of an obligation criminal liability
2) Such postdating or issuing a check was done when o To dishonor check = write reason for dishonor in the
offender had no funds in the bank or his funds deposited check and in the notice of dishonor (prima facie
therein were not sufficient to cover the amount of the evidence of issuance, due presentment and dishonor of
check check)
o If check is presented after 90 days and dishonored = no
NOTE: criminal liability
o Good faith is a defense in a charge of estafa by o Check is presented “on account or for value”
postdating or issuing a check
o the drawer’s failure to cover the issued check within 3 WHERE THE ACCUSED WAS ACQUITTED OF THE CRIMINAL
days from notice of dishonor is prima facie evidence of CHARGES UNDER BP 22, MAY HE STILL BE HELD CIVILLY LIABLE
o If the check was issued in payment of pre-existing debt, Since the court held that upon issuance of a check, in the absence
there is NO estafa of evidence to the contrary, it is presumed that the same was issued
for valuable consideration. Under NIL, it is presumed that every

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party to an NI acquires the same for a consideration or for value. As
petitioner alleged that there was no consideration for the issuance
of the subject checks, it devolved upon him to present convincing
evidence to overthrow the presumption and prove that the checks
were in fact issued without valuable consideration (Cayanan v. North
Star International Travel, G.R. no 172954, October 5, 2011)

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