Law on Negotiable

Instruments
To be submitted to: Ms. Bernadette De Ocampo

Jhanelle Marquez
BS Accountancy -IV
 NEGOTIABLE INSTRUMENTS

Written contract for the payment of

money, by its form intended as
substitute for money and intended to
pass from hand to hand to give the
HDC the right to hold the same and
collect the sum due

NEGOTIABLE NON-NEGOTIABLE
Contains all the Does not contain all
requisites of Sec. 1 the requisites of Sec.1
of the NIL of the NIL
Transferred by
negotiation Transferred by
HDC may have
LIFE OF NEGOTIABLE INSTRUMENT assignment
better rights than Transferee acquires
transferor  issue rights only of his
transferor
Prior parties  negotiation Prior parties merely
warrant payment
 presentment for warrant legality of
Transferee has acceptance in certain bills title
 acceptance Transferee has no
right of recourse
right of recourse
against  dishonor by or
intermediate acceptance
parties  presentment for payment
 dishonor by nonpayment
 notice of dishonor
 protest in certain cases
 discharge
 KINDS OF NEGOTIABLE INSTRUMENTS

Promissory Note
Bill of Exchange

-a promise to pay money -an order made by one person to another

-unconditional promise in writing made by one
person to another signed by the maker
engaging to pay on demand, or at a fixed or
determinable future time a sum certain in
money to order or to bearer
-where a note is drawn to the maker’s own
order, not complete until indorsed by him (Sec.
184, NIL).
to pay money to a third person.
-unconditional order in writing addressed by
one person to another signed by the person
giving it requiring the person to whom it is
addressed to pay on demand or at a fixed
or determinable future time a sum certain in
money to order or to bearer (Sec. 126, NIL).
-Check: bill of exchange drawn on a bank
payable on demand.

PARTIES:
 Drawer - person who
gives the order to
PARTIES: pay.
 MAKER  Drawee - addressee
 PAYEE- person to of the order.
whom the promise to  Payee - person to
pay is made whom the payment is
to be made.

•Indorser - the payee of an instrument who

transfers it to another by signing it at the
back thereof
•Indorsee - person to whom the
indorser negotiates the instrument, who,
by such negotiation, becomes the holder
of the instrument.
 REQUISITES OF NEGOTIABILITY

1.1. Must be in Writing and Signed by the Maker

No person liable on the instrument whose signature
does not appear thereon.
One who signs in a trade or assumed name liable to
same extent as if he had signed in his own name. (Sec.
18, NIL)
Signature of party may be made by duly authorized
agent; no particular form of appointment necessary.
(Sec. 19, NIL)
"In writing" - includes print; written or typed
Signature, binding so long it is intended or adopted as
the signature of the signer or made with his authority.

1.2. Must contain an Unconditional Order or Promise to

Pay

“ORDER OR PROMISE TO PAY”

PROMISSORY NOTE:
-PROMISE TO PAY: should be express on the
face of the instrument
Word "promise" is not absolutely
necessary. Any expression equivalent to a
promise is sufficient.
-Mere acknowledgment of a debt insufficient
BILLS OF EXCHANGE:
Order - command or imperative direction; the
instrument, by its nature, demanding a right.
Words which are equivalent to an order are
sufficient.
-A mere request or authority to pay does not
constitute an order.
-Although the mere use of polite words like
"please" does not of itself deprive the instrument
of its characteristics as an order, its language
must clearly indicate a demand upon the drawee
to pay.

“UNCONDITIONAL”
The promise or order to pay, to be unconditional,
must be unqualified.
Sec. 3, NIL: “An unqualified order or promise to pay
is unconditional…though coupled with:
“An indication of a particular fund out of which
reimbursement is to be made, or a particular
account to be debited with the amount
UNCONDITIONAL: Mere indication of
the particular fund out of which
reimbursement is to be made, or an
 indication of a particular account to be
debited with the amount
1.3. Sum Payable must be Certain
Sec. 2, NIL: The sum payable is a sum certain, even if:
With interest;
-By stated installments;
-By stated installments with acceleration
clause;
-With exchange, whether at a fixed rate or at
the current rate; or
With costs of collection or attorney's fee.
-A sum is certain if from the face of the instrument it
can be mathematically computed.
-A stipulation to pay a higher rate of interest if the note
is not paid or a lower rate if it is paid on or before
maturity does not render the instrument non-
negotiable.

1.4. Must be Payable in Money

-Capable of being transformed into money.

-NON NEGOTIABLE: an instrument which contains an order or

promise to do an act in addition to the payment of money

-BUT If the order or promise gives the holder an election to

require something to be done in lieu of payment of money, an
instrument otherwise negotiable would not be affected thereby.
(Sec. 5, NIL)

-But if the option is with the maker or person primarily liable,

instrument is NOT negotiable.

-Kind of current money does not affect negotiability. Since the

value of the note can by a simple mathematical computation be
expressed in the value of the lawful money of the latter country
(Incitti v Ferrante, 1933, US Jur)

-Obligations in foreign currency may be discharged in Philippine

currency based on

1.5. Time of Payment must be Certain

Purpose: Informing the holder of the instrument of
the date when he may enforce payment thereof.

An instrument may be payable:

on demand (Sec. 7. NIL)
1.) Expressed to be payable on demand, or at
sight, or on presentation;
2.) No time for payment is expressed;
3.) Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.

Demand instruments: Holder may call for

payment any time; maker has an option to pay at
any time, and the refusal of the holder to accept
payment will terminate the running of interest, if
any, but the obligation to pay the note remains.

at a fixed time
o Only on the stipulated date, and not before, may
the holder demand its payment.
o Should he fail to demand payment, the
instrument becomes overdue but remains valid
and negotiable. It is merely converted to a
demand instrument.

at a determinable future time

o Determinable future time, if expressed

to be payable (Sec. 4, NIL):

1.) At a fixed period after date of sight;

2.) On or before a fixed or determinable future
time specified therein;

3.) On or at a fixed period after the occurrence

of a specified event which is certain to
happen, though the time of happening be
uncertain.

If payable upon a contingency, both negotiable,

and the happening of the event does not cure
the defect.

Effect of acceleration provisions

If option (absolute or conditional) to accelerate
maturity is on the maker, still NEGOTIABLE.
Maker may pay earlier than the date fixed
but this option, if exercised, would be a
payment in advance of a legal liability to
pay. It is still payable on the date fixed, and
holder has no right to enforce payment
against the
maker before such date.
If option to accelerate is on the holder:
-If option can be exercised only after the happening of a
specified event/act over which he has no control
(conditional), still NEGOTIABLE.

If option is unconditional, time of

payment is rendered uncertain, NOT negotiable.

Other instances where instrument still

NEGOTIABLE:

When option given to the holder to accelerate the maturity of an

installment note upon failure of the maker to pay any
installment when due.

Acceleration, automatic upon default.

Acceleration by operation of law.

Provisions extending time of payment

General rule: Negotiability not affected. Effect is similar with

that of an acceleration clause at the option of the maker.

Negotiability not affected, even if the holder is given the option

to extend time of payment by mere inaction or indulgence for
an indefinite time depending on his will, because with or without
this provision, the holder may always choose to be indulgent.

Exception: Where a note with a fixed maturity provides that the

maker has the option to extend time of payment until the
happening of contingency, instrument NOT negotiable. The
time for payment may never come at all.

1.6. Must be Payable to Order or to Bearer/ Must contain

Words of Negotiability

words of negotiability - serve as an expression of consent

that the instrument may be transferred.

o But the instrument need not follow the language of the law;
any term which clearly indicates an intention to conform
with the legal requirements is sufficient.

1.7. Parties must be designated with Certainty

Maker and drawer
Sign the instrument at the lower right-hand corner.
Payee
When negotiating, sign at the back; same with
indorsers.
Drawee
Name usually at the lower left-hand corner, or
across the top.
If instrument addressed to drawee, he must be
named or indicated with
reasonable certainty.
-If it is not clear in what capacity the person signed, said person
is considered an indorser

PROVISIONS NOT AFFECTING NEGOTIABILITY

 Authorizes sale of collateral securities;

 Authorizes confession of judgment if
instrument not paid at maturity;
 Waives the benefit of any law intended for the
advantage or protection of the obligor; or
 Gives holder election to require something to
be done in lieu of payment of money. (if in
addition to money – not NI)
o Negotiability affected, when
instrument contains a promise or
order to do any act in addition to
the payment of money.
 Non-dating of the instrument
 Non-specification of value given, or that any
value had been given
 Non-specification of place where it is drawn
or place where it is payable
 Bears a seal
 Designation of particular kind of currency in
which payment is to be made
 TRANSFER

Negotiation Delivery and Issuance Indorsement

When an instrument is Delivery means transfer of possession of The indorsement must be

transferred from one instrument by the maker or drawer, with
person to another as to intent to transfer title to the payee and
constitute the recognize him as holder thereof.
transferee the holder (de la Victoria v. Burgos)
thereof.
If payable to BEARER, NI incomplete and revocable until delivery
negotiated by delivery; for the purpose of giving effect thereto
if payable to ORDER, as between (Sec. 16, NIL):
negotiated by
immediate parties
indorsement of holder
a remote party other than holder in due
+ delivery
course
(Sec.30, NIL)
delivery, to be effectual, must be made by
or under the authority of the party making
/ drawing / accepting/indorsing
delivery may be shown to have been
conditional, or for a special purpose only,
and not for the purpose of transferring the
property in the instrument
PRESUMPTION OF DELIVERY
Where the instrument is no longer in the
possession of a party whose signature
appears thereon, a valid and intentional
delivery by him is presumed until the
contrary is proved
written on the instrument
itself or on a paper attached
thereto (allonge). The
signature of the indorser,
without additional words, is
sufficient indorsement.
(Sec.31, NIL)
Indorser generally enters
into two contracts (Implied
contracts by Indorser):
sale or transfer of instrument
to pay instrument in case of
default of maker
Indorsement must be of
entire instrument (can’t be
indorsement of only part of
amount payable, nor can it
be to two or more indorsees
severally. But okay to
indorse residue of partially
paid instrument)
(Sec. 32, NIL)

if it is in the hands of a HDC, the

presumption is conclusive

PRESUMPTION AS TO DATE
Date is not an essential element of
negotiability
An undated instrument is considered to
be dated as of the time it was issued.

as to manner of
future method of
negotiation
(Sec. 35, NIL):
special – specifies the
person to whom/to whose
order the instrument is to
be payable; indorsement
of such indorsee is
necessary to further
negotiation.
A special indorser is liable
to all subsequent holders,
unless the instrument is an
originally bearer
instrument, in which case
he is liable only to those
who take title through his
indorsement (Sec 40, NIL)
blank – specifies no
indorsee, instrument so
indorsed is payable to
bearer, and may be
negotiated by delivery
a person who negotiates
by mere delivery is liable
only to his immediate
transferee. the holder may
convert a blank
indorsement into a special
indorsement by writing
over the signature of the
indorser in blank any
contract consistent with
the character of the
indorsement. An order
instrument may be
converted into a bearer
instrument by means of a
blank indorsement.
But a bearer instrument
remains as such whether it
has been indorsed
specially or in blank. It is
the liability of the indorser
which is affected.
KINDS OF INDORSEMENT
as to kind of title as to kind of as to
transferred: liability assumed presence/absence
by indorser: of express
restrictive – limitations put by
such indorsement either: qualified indorser upon
prohibits further constitutes indorser as primary obligor’s
negotiation of mere assignor of title privileges of
instrument, (eg. “without recourse”)
in this kind of restrictive (Sec. 38, NIL). paying the holder:
indorsement, the But this does not
prohibition to transfer or mean that the
negotiate must be transferee only has the conditional – additional
written in express rights of an condition annexed to
words at the back of assignee.Transfer indorser’s liability.
the instrument, so that remains a negotiation (Sec. 39, NIL)
any subsequent party and transferee can still
may be forewarned that be a holder capable of Where an indorsement is
ceases to be negotiable. acquiring a title free from
conditional, a party required
However, the restrictive defenses of prior to pay the instrument may
indorsee acquires the parties.It relieves the disregard the condition, and
right to receive payment qualified indorser of his make payment to the
liability to pay the
and bring any action indorsee or his transferee,
instrument should the
thereon as any indorser, whether condition has been
but he can no longer maker be unable to pay
fulfilled or not.
transfer his rights as at maturity.
such indorsee where the Any person to whom
form of the indorsement unqualified an instrument so
does not authorize him indorsed is negotiated
to do so. (Gempesaw v will hold the
CA 1993) same/proceeds
subject to rights of
person indorsing
conditionally
unconditional
other classifications:
Absolute – One by which the
indorser binds himself to pay, upon no
other condition than the failure of prior
parties to do so, and of due notice to
him of such failure
Joint - Where instrument payable to
the order of two or more payees or
indorsees not partners, all must
indorse, unless the one indorsing has
authority to endorse for the others
(Sec. 41, NIL)
Irregular - Where a person, not
otherwise a party to the instrument,
places thereon his signature in blank
before delivery, he is liable as
indorser.
 HOLDER IN DUE
COURSE

Definition: Payee or indorsee of a bill or note who

is in possession of it, or the bearer thereof.
RIGHTS OF HOLDER (Sec. 51, NIL)
1. sue thereon in his own name
2. payment to him in due course discharges
instrument

REQUISITES TO BECOME
HOLDER IN DUE COURSE
That it is complete and regular upon
its face
COMPLETE
o An instrument is complete if it
contains all the requisites for
making it a negotiable one, even
if it may have blanks as to non-
essentials.
o It is incomplete when it is wanting
in any material particular or
particular proper to be inserted
in a NI without w/c the same will
not be complete.

Material Particulars
o What are material
particulars? A change in the
ff. is considered a material
alteration (Sec. 125, NIL):
i. The date; The sum
payable, either for principal
or interest;
The time or place of
payment;
The number or the relations
of the parties;
The medium or currency in
which payment is to be
made;
Or which adds a place of
payment where no place of
payment is specified,
Rights of HDC of instrument that has
been materially altered
o enforce payment thereof according
to its original tenor IF not a
party to the alteration. (Sec.
124, NIL)
That he became the holder of it before
it was overdue and without notice
that it had been previously
dishonored, if such was the fact
“OVERDUE”
The ff. cannot be HDCs: (Sec.
53, NIL)

A holder who became such

after the date of maturity of
the
instrument (instrument is
overdue);
In case of demand
instruments, a holder who
negotiates it after an
unreasonable length of time
after its issue
Instruments with fixed maturity
but subject to acceleration:
ultimate date of maturity is the
date of maturity for the purpose
 of determining whether a
purchaser is a HDC
Undated instruments: Prima
facie presumption that it was
negotiated before it was overdue
(Sec 45)
NOTE: An overdue instrument is
still negotiable, but it is subject
to the defense existing at the
time of the transfer.

DISHONOR
Non-acceptance
Occurs when drawee refuses
to accept the order of the
drawer as stated in the bill
Applicable only to bills of
exchange
May occur before the date of
maturity of the bill
Non-payment
Occurs when the party
primarily liable fails to pay at
the date of maturity
Date of Maturity
“payable after sight”—
date of presentment
Payable on the
occurrence of a specified
event—date is fixed by
happening of event
An instrument is not invalid for the
reason only that it is ANTE-DATED
OR POST-DATED provided not done
for an illegal or fraudulent purpose.
The person to whom an instrument
so dated is delivered acquires the
title thereto as of the date of
delivery. (Sec.12, NIL)
That he took it in good faith AND
for value:
HOLDER FOR VALUE - (a) Where
value has at any time been
given for the instrument, the
holder is deemed a HFV in
respect to all parties who
become such prior to that time
(Sec.26, NIL) and (b) Where
the holder has a lien on the
instrument, he is deemed a
HFV to the extent of his lien
(Sec.27, NIL).
PRESUMPTION – Every NI
is deemed prima facie
issued for valuable
consideration; and every
person whose signature
appears thereon to have
 become a party thereto for
value (Sec. 24, NIL)
In actions based upon a
negotiable instrument,
it is unnecessary to
aver or prove
consideration, for
consideration is
imported and presumed
from the fact that it is a
negotiable instrument.
The presumption exists
whether the words
"value received" appear
on the instrument or
not (Ong v People,
2000)

That at time it was negotiated to

him, he had no notice of :
any infirmity in instrument
o any defect in title of
person negotiating;
title DEFECTIVE when (Sec. 55, NIL):
a. instrument / signature
obtained by fraud, duress,
force or fear or other
unlawful means OR for an
illegal consideration; or
instrument is negotiated in
breach of faith, or
fraudulent circumstances

NOTICE of infirmity or defect –

actual knowledge of the
infirmity or defect OR
knowledge of such facts
that his action in taking the
instrument amounted to
bad faith (Sec.56, NIL)
Notice to an AGENT is
chargeable against the
principal.
INSUFFICIENT NOTICE
CONSTRUCTIVE
NOTICE (ex. notice of
defenses disclosed by
public records, doctrine
of lis pendens) is
insufficient to charge a
purchaser of a NI with
notice.
Just as a
purchaser of a
negotiable
instrument is
not put on
inquiry, neither
 is he charged
 with notice of
defenses or
equities
disclosed by
public records,
nor is he
affected by the
doctrine of lis
pendens.
However, notice
to an agent is
chargeable
against the
 principal.
Notice of an
ACCOMODATION
PARTY is not notice of
a defect.
Thus, an
accomodation
party (one who
has signed the
instrument as
 maker,
drawer,acceptoror
endorser,
without
receiveing
value therefor,
and for the
purpose of
lending his
name to some
other person) is
liable on
the instrument,
notwithstanding
the fact that
the holder knew
him to be an
accomodation
party.
 DEFENSES
REAL DEFENSE
attaches to instrument
on the principle that
there was no contract at
all; available against ALL
holders including holders
in due course. They are
those which attach to the
instrument itself and
generally, disclose an
absence of one of the
essential elements of a
contract.
Incapacity: REAL defense but available
only to the incapacitated party (ex. minor
or corporation); the indorsement or
assignment of the instrument by a corp. or
by an infant passes the property therein,
notwithstanding that from want of capacity,
the corp. or infant may incur no liability
thereon.
(Sec.22, NIL)
Incomplete, Undelivered Instrument
Instrument will not, if completed and
negotiated without authority, be a
valid contract in the hands of ANY
holder, as against any person whose
signature was placed thereon before
delivery. (Sec. 15, NIL)
Who may be estopped from raising
the real defense under Sec 15? A
drawee bank whose negligent custody
of the checks, after partial execution,
contributed to its escape
PERSONAL
DEFENSE
grows out of the
agreement or conduct of
a particular person in
regard to the instrument
which renders it
inequitable FOR HIM,
though holding the legal
title, to enforce it against
the party sought to be
made liable; not
available against a
HDC.can be raised only
against holders not on
due course. Here, the
true contract appears ,
but for some reason ,
the defendant is
excused from the
obligation to perform.
Complete, Undelivered Instrument
a. CONCLUSIVE presumption of a valid delivery
– where the instrument is in the hands of a
HDC
b. PRIMA FACIE presumption of a valid delivery
– where the instrument is no longer in the
possession of a party whose sig appears thereon
(Sec. 16, NIL)
Incomplete, Delivered (sec.14)
This is a personal defense only because provision
states that if any instrument so completed is
negotiated to a holder in due course, it is
valid and effectual for all purposes
2 Kinds of Writings:
Where instrument is wanting in
any material particular: person in
possession has prima facie authority to
complete it by filing up blanks therein
Signature on blank paper delivered by
person making the signature IN ORDER
that the paper may be CONVERTED into a
NI  operates as prima facie authority to
fill up as such for any amount
 Sometimes REAL, Sometimes
PERSONAL Lack of Consideration(Sec. 28)
ABSENCE or failure of consideration is a matter of
4.1. Forgery (Sec. 23): made without defense as against any person not a HDC.
PARTIAL FAILURE of consideration is a defense
authority of person whose signature it purports
to be pro tanto whether the failure is an ascertained
and liquidated amount or otherwise .

1. In general, a REAL defense: …
Effect
a. signature is wholly inoperative
b. no right to retain instrument, or
give discharge, or enforce payment
against any party thereto, can be
acquired through or under such
signature (unless forged signature
unnecessary to holder’s title)
c. No subsequent party can acquire
the right against any party thereto
(prior to the forgery) to:
i. Retain the instrument
ii. Give a discharge there for
iii. Enforce payment thereof
2. PERSONAL if the party against whom it
is sought to enforce such right is
PRECLUDED from setting
forgery/want of authority;
Material Alteration (Sec.124)
As a DEFENSE:
PERSONAL defense when used to deny liability
according to the tenor of the instrument
Illegality
1. In general, a PERSONAL defense even
if
CC1409 provides that a contract with an
illegal cause is void.
2. REAL when the law expressly provides
for illegality as a real defense (Statutory
declaration of illegality
Duress
1. In general, PERSONAL defense.
2. REAL if duress so serious as to give
rise to a real defense for lack of
contractual intent
3. CAMPOS: There may be cases where
the duress employed is so serious that
it will give rise to a real defense
because of the lack of contractual
intent . Although the signer may know
what he is signing, there may be
wanting the intent or willingness to be
bound. Then it becomes a real defense.

REAL defense when relied on to deny liability

according to the altered terms.

What constitutes material alteration?

Statutory: Review Sec.125, NIL
change date
sum payable, either for principal or interest
time or place of payment
number/relations of parties
medium/currency of payment,
adds place of payment where none
specified,other change/addition altering effect of
instrument in any respect
Fraud

REAL DEFENSE
fraud in execution / fraud in factum: did not know
that paper was a NI when it was signed
not liable to ANY holder
PERSONAL DEFENSE
Fraud in inducement: knows it is NI but deceived as
to value/terms
Available as a defense against non-HDC
Fraud in factum accompanied by NEGLIGENCE of
maker or signer
Where the signor does not know the nature of the
instrument he signs, but where, by the exercise of
ordinary care, he could have discovered it.
 LIABILITY OF PARTIES

IN GENERAL
Parties primarily liable:
person who by the terms of the instrument is
absolutely required to pay the same.
Maker of promissory note
Acceptor of bill of exchange
unconditionally liable; duty bound to pay the
holder at date of maturity, WON holder
demands payment from him, and he is
not relieved from liability even if the
instrument should become overdue due
to failure of holder to make such
demand.

Parties secondarily liable:

SECONDARY PARTIES:
Indorsers, both note and bill
Drawer of bill
Conditionally liable; not bound to pay unless
the following has been fulfilled
Due presentment or demand from
primary party for payment or
acceptance;
Dishonor by such party; and
Taking of proceedings required by
law after dishonor.
 PRIMARY PARTIES
PAYMENT: Presentment and Tender
Presentment for payment not
necessary to charge primary party
if the instrument is, by its terms, payable
at a special place, and he is able and
willing to pay it there at maturity,
such ability and willingness are
equivalent to a tender of payment
upon his part. (Sec. 70, NIL)
Liability of MAKER
Promises to pay it according to its tenor
Admits existence of payee and his
then capacity to indorse.
Therefore, PRECLUDED from
setting up the following defenses:
the payee is a fictitious person
the payee was insane, a
minor, or a corporation acting
ultra vires
DRAWEE and ACCEPTOR
1. Drawee
a. A person on whom a bill of
exchange or check is drawn
and who is ordered to pay it
b. Liability of DRAWEE to:
Holder
Not liable on the
instrument until he
accepts it and even a
holder in due course
cannot sue him on the
instrument before his
acceptance
A bill/check of itself
does not operate as an
assignment of the funds
in the hands of the
drawee/bank (Sec 189,
NIL), and the
drawee/bank is NOT
LIABLE on the bill unless
and UNTIL he/it ACCEPTS
(or certifies) the same.
(Sec. 127, NIL)
SECONDARY PARTIES
Liability of DRAWER
Sec. 61, NIL
Admits existence of payee and his
then capacity to endorse
b. Engages that on due presentment
instrument will be accepted, or paid, or both,
according to its tenor
That if it be dishonored + necessary
proceedings on dishonor duly taken, will pay the
amount thereof to the holder or to a subsequent
indorser who may be compelled to pay it
Limiting Liability: drawer may insert in the
instrument an express stipulation negativing /
limiting his own liability to holder
Liability of INDORSERS:
Indorser
Sec. 63, NIL: A person placing his signature
upon an instrument other than as
maker, drawer, or acceptor unless he
indicates by appropriate words his
intention to be bound in some other
capacity
SAPIERA vs CA (1999). It is
undisputed that the four (4) checks
issued by de Guzman were signed
by petitioner at the back without
any indication as to how she should
be bound thereby and, therefore,
she is deemed to be an indorser
thereof.
Sec. 67, NIL: A person, who places his
signature on an instrument negotiable by
delivery, incurs all the liabilities of an
indorser.
Sec 64, NIL: Irregular Indorser
When a person not otherwise a
party to an instrument, places
thereon his signature in blank
before delivery, he is liable as an
indorser, in accordance w/ these
rules:
WARRANTIES:
Every person negotiating an instrument by
delivery or by a qualified indorsement warrants:
(Sec. 65, NIL)
Instrument genuine, in all respects what it
purports to be
He has good title to it
All prior parties had capacity to contract
He has no knowledge of any fact w/c would
impair validity of instrument or render it valueless
in case of negotiation by delivery only,
warranty only extends in favor of immediate
transferee
Acceptance
IN GENERAL:
Definition:
"Acceptance" means an acceptance
completed by delivery or notification
(Sec. 19, NIL)
The signification by the drawee of his
assent to the order of the drawer (Sec
132, NIL)
REQUISITES for a valid acceptance (Sec
132, NIL)
It must be in writing and signed by
the drawee;
Thus there is no valid or
implied acceptance except as
provided by Sec. 137 relating
to constructive acceptance
It must not express that the drawee
will perform his promise by any other
means than the payment of money.
does not change the implied
promise of acceptor to pay only in
money
MANNER of acceptance
Campos: Usually made by writing
the word “accepted” and signing
immediately below
BUT, drawee’s signature alone
is sufficient (Campos citing
Lawless v. Temple)
Sec 133, NIL: The holder of a bill
presenting the same for acceptance
may require that the acceptance be
written on the bill and if such
request is denied, may treat the bill
as dishonored
Effect: holder may go against
the party’s secondarily liable—
the drawer and the indorsers
Acceptance of an INCOMPLETE bill
KINDS OF ACCEPTANCE: An acceptance is either
(1) general or (2) qualified.
GENERAL - assents without qualification to the
order of the drawer. (Sec.139, NIL); Includes acceptance
to pay at a particular place; unless expressly states that
bill is to be paid there only and not elsewhere. (Sec. 140,
NIL)
QUALIFIED - in express terms varies the effect of
the bill as drawn. (Sec. 139, NIL)
Conditional; payment by the acceptor
dependent on the fulfillment of a condition therein
stated;
Partial; to pay part only of the amount for which
the bill is drawn;
Local; to pay only at a particular place;
Qualified as to time;
The acceptance of some, one or more of the
drawees but not of all. (Sec. 141, NIL)
General or Unqualified
Indorser: Every person who indorses
without qualification, warrants to all
subsequent HDCs: (Sec. 66, NIL)
instrument genuine, good
title, capacity of prior parties
instrument is at time of
indorsement valid and subsisting
eon due presentment, it shall be
accepted or paid, or both, according
to tenor
if it is dishonored, and necessary
proceedings on dishonor be duly
taken, he will pay the amt. To holder,
or to any subsequent indorser who
may be compelled to pay it
Accommodation Party
Accommodation Party: one who signed
instrument as maker/drawer/acceptor/ indorser
w/o receiving value thereof, for the
purpose of lending his name to some
other person
Liability : Liable on the instrument to
HFV even if holder knew he was only
an AP
Liability of an AGENT
AGENCY:
Signature of any party may be made by
duly authorized agent, established as in ordinary
agency
Signature per procuration operates as
notice that the agent has limited authority to sign,
and the principal is bound only in case the agent
in so signing acted within the actual limits of his
authority
LIABILITY
GEN RULE: Where person adds to his
signature words indicating that he signs on behalf
of a principal, not liable if he was duly authorized
WHEN LIABLE:
mere addition of words describing him as
an agent without disclosing his principal
Where a broker or agent negotiates an
instrument without indorsement, he incurs all
liabilities in Sec. 65, unless he discloses name of
principal and fact that he’s only acting as agent.
(Sec. 69, NIL)
 PRESENTMENT

Definition:
the production of a BE to the drawee for
his ACCEPTANCE, or to the drawer or
acceptor for PAYMENT; or
the production of a PN to the party liable
for payment

PRESENTMENT FOR PRESENTMENT FOR

PAYMENT ACCEPTANCE

IN GENERAL Presentment for Acceptance

NECESSARY in order to charge When necessary (Sec. 143, NIL)
the drawer and indorsers(Sec.
bill payable after sight, or in other
70, NIL)
cases where presentment for
NOT necessary acceptance necessary to fix maturity
where bill expressly stipulates that it
to charge the person primarily
shall be presented for acceptance
liable on the instrument (Sec.
where bill is drawn payable elsewhere
70, NIL) than at residence / place of business of
to charge the drawer where he drawee
has no right to expect or require In no other case is presentment for
that the drawee or acceptor will acceptance necessary in order to
pay the instrument. (Sec. 79, render any party to the bill liable.
NIL)
to charge an indorser where Effect of non-presentment [w/in reasonable
the instrument was made or time] (Sec. 144, NIL) - discharges the
accepted for his accommodation drawer and all indorsers.
and he has no reason to expect Reasonable Time: considerations
that the instrument will be paid
if presented. (Sec. 80, NIL) nature of instrument
usage of trade or business with
Excused:
respect to instrument
Where, after the exercise of facts of each case
reasonable diligence, How made (Sec. 145, NIL)
presentment cannot be BY or ON BEHALF of the holder
made; AT a reasonable hour,
Where the drawee is a -ON a business day and before the bill is overdue,
fictitious person; -TO the drawee or some person authorized to
By waiver of presentment, accept or refuse acceptance on his behalf; and bill
express or implied. addressed to drawees not partners, MUST be made
when a bill is dishonored by to them all unless one has authority to accept or
nonacceptance – immediate refuse acceptance for all;
right to recourse accrues to -drawee is dead, MAY be made to his personal
holder (Sec. 151, NIL) representative;
-drawee has been adjudged a bankrupt or an
in case of waiver of protest, insolvent or has made an assignment for the
whether in the case of a foreign benefit of creditors, MAY be made:
bill of exchange or other NI – to him or
deemed to be a waiver not only of to his trustee or assignee.
a formal protest but also of
presentment and notice of
dishonor. (Sec. 111, NIL)
 NOTICE OF DISHONOR

Definition
To bring either verbally or by writing, to the knowledge of the drawer or indorser of an
instrument, the fact that a specified NI, upon proper proceedings taken, has not been
accepted or has not been paid, and that the party notified is expected to pay it
General rule: MUST be given to drawer and to each indorser, and any drawer or indorser
to whom such notice is not given is discharged

When necessary
Sec 89, NIL Except as herein provided, when a negotiable instrument has been
dishonored by non-acceptance or non-payment, notice of dishonor must be given to
the drawer and to each indorser…
Parties entitled to notice:
Drawer
Indorser
Accomodation Indorsers
Joint maker excluded if not an indorser
Acceleration Clause
If clause is optional on holder:
The bringing of an action against the maker and indorsers constitutes a valid
exercise of option and a valid notice of dishonor
Clause is automatic:
Notice of dishonor must be givem
at once
Not sufficient to give it upon commencement of action

Form and Contents (Sec 96)

Form of Notice:
may either be in writing, or oral
Campos: must be in a language that will inform the addressed party that the
instrument has been duly presented
Contents – must contain any terms which sufficiently
a.identify the instrument, and
b. indicate that it has been dishonored by non-acceptance or non-payment;
3.Mode of delivery
a. Personal service
i. There must be actual personal
service, or
An ordinary intelligent and diligent effort to make personal service
Through the mails
Campos: Through the telephone
Party to be notified must be fully identified as the party at the
receiving end of the line
4. The ff. notice still sufficient: (Sec. 95, NIL)
a. a written notice, not signed
b. insufficient written notice, supplemented and validated by verbal communication
c. instrument suffering from misdescription UNLESS the party to whom the notice is given
is in fact misled thereby.
Time and Place
Notice may be given as soon as the instrument is dishonored and within the time
fixed by NIL, unless delay excused (Sec. 102, NIL)
NOTICE to SUBSEQUENT PARTY: Each party who receives a notice is given the same
period of time within which to notify prior indorsers that the last holder had. (Sec. 107)
 If given at the place of business of the person to receive notice - before the close of business hours on the
day following
If given at his residence - before the usual hours of rest on the day following
If sent by mail - deposited in the post office in time to reach him in usual course on the day following.
b. Where parties reside in different places (Sec. 104, NIL).:
i. If sent by mail - deposited in the post office in time to go by mail the day following the day of dishonor, or if
there be no mail at a convenient hour on last day, by the next mail thereafter
Convenient hour: depends on the usual hours of opening of business houses and the post-office
If given otherwise - within the time that notice would have been received in due course of mail, if it had been
deposited in the post office within the time specified above

Delay (Sec. 113, NIL)

Excused: when the delay is caused by circumstances beyond the control of the holder and not imputable to his
default, misconduct, or negligence
But, when the cause of delay ceases to operate, notice must be given with reasonable diligence.

Sender deemed to have given due notice (Sec. 105, NIL)

Where notice of dishonor is duly addressed and deposited in the post office,
“deposit in post office” — when deposited in any branch post office or in any letter box under the control of
the post-office department. (Sec. 106, NIL)
notwithstanding any miscarriage in the mails

Place where notice must be sent (Sec. 108, NIL)

to the address, if any, added by the party to his signature; if address not given:
to the post-office nearest to his place of residence or where he is accustomed to receive his letters; or
If he lives in one place and has his place of business in another, to either place; or
If he is sojourning in another place, to the place where he is so sojourning.
Notice sent to place not in accord with NIL, still SUFFICIENT

By Whom Given
Sec. 90, NIL
By or on behalf of the holder or
any party to the instrument who may be compelled to pay it to the holder, and who, upon taking it up,
would have a right to reimbursement from the party to whom the notice is given
Agent
Notice of dishonor may be given by an agent either in his own name or in the name of any party entitled
to give notice, whether that party be his principal or not (Sec. 91, NIL)
Where instrument has been dishonored in hands of agent, he may either himself give notice to the parties
liable thereon, or he may give notice to his principal (within the same time as if agent were holder) (Sec.
94, NIL)
To whom notice MAY be given
If given by an agent
to his principal, in case of an instrument dishonored in the hands of an agent (Sec. 94, NIL), or
to the parties liable thereon
ex: collecting bank
IN GENERAL (Sec. 97)
Party himself
Or his agent in that behalf
If party is dead and death known to the party giving notice (Sec. 98, NIL)
MUST be given to a personal representative, if there be one, and if with reasonable diligence, he can be
found;
If no personal representative – MAY be sent to the last residence or last place of business of the deceased.
To partners : to any one partner, even though there has been a dissolution. (Sec. 99, NIL)
To joint parties(Sec. 100, NIL)
to each of the party
unless one of them has authority to receive such notice for the others.
 PROTEST

Definition: testimony of some proper person that the regular legal steps to fix the liability of drawer and indorsers
have been taken
When necessary:
In case of a FOREIGN BILL appearing on its face to be such;
protest for non-acceptance if dishonored by nonacceptance &
protest for nonpayment if not previously dishonored by nonpayment.
Effect of failure to protest: the drawer and indorsers are discharged. (Sec. 152, NIL)
Form
annexed to the bill or must contain a copy thereof, and
must be under the hand and seal of the notary making it;
Contents
The time and place of presentment;
The fact that presentment was made and the manner thereof;
The cause or reason for protesting the bill;
The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found.
(Sec. 153, NIL).
By whom
A notary public; or
any respectable resident of the place where the bill is dishonored, in the presence of two or more credible
witnesses. (Sec. 154, NIL)
Time
on the day of its dishonor unless delay is excused;
when duly noted, the protest may be subsequently extended as of the date of the noting. (Sec. 155, NIL);
Place
at the place where it is dishonored,
EXCEPT bill drawn payable at the place of business or residence of person other than the drawee has been
dishonored by nonacceptance,
it must be protested for non-payment at the place where it is expressed to be payable, and
no further presentment for payment to, or demand on, the drawee is necessary. (Sec. 156, NIL)

DISCHARGE

Definition: The release of all parties, whether primary or secondary, from the obligation on the instrument; renders
the instrument non-negotiable.

How discharged: (Sec 119)10

By Payment in due course
Sec. 88: Payment is made in due course when it is made:
at or after the maturity of the payment
o if payment is made before maturity and the note is
negotiated to a HDC, the latter may recover on the instrument.
to the holder thereof
o payment to one of several payees or indorsees in the alternative discharges the instrument,
o but payment to one of several joint payees or joint indorsers is not a discharge. The party
receiving payment must have
been authorized by others to receive payment.
in good faith and without notice that his title is defective
b. By whom made:
payment in due course by or on
behalf of principal debtor
payment in due course by party accommodated where party is made/ accepted for accommodation
When check deemed paid by drawee bank
Once the holder receives the cash
If the bank credits the amt of the check to the depositor’s account
Where the drawee bank charges the check to the account, indicating intention to honor the check
intentional cancellation by holder
if unintentional or under mistake or
without authority of holder, inoperative;
where instrument or signature appears to have been cancelled, burden of proof on party which alleges it
was unintentional, etc. (Sec. 123, NIL)
any other act which discharges a simple contract for payment of money