Negotiable Instruments Law - de Leon Book Atty. Busmente © Michelle Duguil 1

• Purpose: facilitating, not hindering or hampering transactions in commercial
paper
INTRODUCTION
FUNCTION AND IMPORTANCE OF NEGOTIABLE INSTRUMENTS (4)
1. SUBSITUTE FOR MONEY
• X constitute legal tender
HISTORICAL BACKGROUND
• X money
USE OF NEGOTIABLE DOCUMENTS BY MERCHANTS OF EUROPE • But there are used a sub for money, eliminating the risk of dealing in cash
• Merchants of Italy • Negotiability – one of the distinctive characteristics of NI which allows it to
pass freely form hand to hand in the commercial mark and to take place of
• Inconvenience and danger of transporting money itself
money in commercial transactions free from all personal defenses available
against the personal owner
ENGLISH BILLS OF EXCHANGE ACT
• NI is different from money because NI is valuable or worthless depending
• Litigations came under the jurisdiction of common law courts when the Law
upon the financial ability of the parties to them
Merchant was absorbed by the Kings Court under the direction of Lord
2. AS MEDIUM OF EXCHANGE FOR MOST COMMERCIAL TRANSACTIONS
Mansfield
• Increase the purchasing medium in circulation, doing away with the active
• English parliament began to enact special statutes
handling of money and the need to physically count bills and coins
• 1982 – English parliament passed the Bills of Exchange Act which codified
3. AS MEDIUM OF CREDIT TRANSACTIONS
the law of Negotiable Instruments (NI) as found in court decisions of
• Purpose of negotiability is to allow men of undoubted credit to carry on a
England
business enterprise upon their promissory notes, bills of exchange and
checks knowing that other businessmen will treat these promises as cash
US UNIFORM NEGOTIABLE INSTRUMENTS ACT
4. AS MEANS, IN THE CASE OF CHECK, OF MAKING IMMEDIATE PAYMENT
• National Conference of Commissions on Uniform State Laws drafter the
• Check – primarily used for immediate payment (i.e. sub for money)
Uniform NI Law for the US in 1986
• Ordinary bill of exchange and promissory note – intended for circulation of
• English Bills of Exchange Act of 1882
credits (i.e. primarily as credit transaction
US UNIFORM COMMERCIAL CODE • Use of checks automatically provides a receipt for payment and serves as
convenient records of financial transactions
• Uniform NI act has been replaced in part by Article 3 and in part by other
articles of the Uniform Commercial Code (UCC) • Example:
o Ryan sells good to Kath à Kath gives a check or promissory note
• Article 3 thereof makes clear that it covers only negotiable instruments and
payable until a future date
not other types of negotiable documents
o Since Ryan would have to wait until maturity date to collect à this
• Seeks to clarify and standardize the rules of commercial paper
is a form of extending credit to kath
rd
o Now, Ryan may wish to sell the instrument to a bank (or 3
ACT 2031
person) for immediate cash
• Enacted on Feb 3, 1911 o To induce the bank (indorsee) which would have to wait for the
• Took effect 90 days after publication on March 4, 1911 in the OG maturity before receiving payment, to but the instrument, Ryan
• Took effect on June 2, 1911 accepts a discount of 10% of the face amount
• Pattered with very slight modifications after the Uniform negotiable o In the example, the bank in effect pays less than the amount it will
instruments Act eventually collect as a way of charging Ryan interest in advance
• Facilitate transaction in commercial paper and to promote free flow of credit as compensation for its role in the transaction
CHARACTERISTICS OR FEATURES OF NEGOTIABLE INSTRUMENTS (2)

CODE OF COMMERCE 1. NEGOTIABILITY
• Prior to act 2031, it could be found in Book II of the Code of Commerce, • Quality or attribute of a bill or note whereby it may pass from hand to hand
from Article 443 to 556 similar to money, so as to give the holder in due course the right to hold the
• All these articles have been repealed instrument and collect the sum payable for himself free from any infirmity in
o E: Those on cross checked the instrument or defect in the title of any of the prior parties or defenses
available to them among themselves
APPLICATION AND PURPOSE OF NEGOTIABLE INSTRUMENTS LAW • NI is analogous to money à because on who finds its without knowledge of
• Act only applies to negotiable instruments or to those instruments which loss or theft, giving value for it, can hold it against the whole world, even the
meet the requirements laid down in Sect 1 of the law true owner
• Covers the entire subject of negotiable instruments and must be treated as • Rule that one can pass no better title to personal property than himself has
a complete body of law = x apply to NI
• Civil code – supply deficiency in cases not covered by the act • Must freely transfer the right of the creditor/oblige to payment to encourage
• Existing legislations and the rules of the law merchant – governs any case acceptability
not provided for by the act • Example:
NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 1
o Ryan sells and delivers goods to Kath à Kath refused to pay for DOUBT RESOLVED IN FAVOR OF NEGOTIABILITY
them as they are not as ordered • Purpose: encourage the free circulation of the negotiable papers because of
o In a suit y Ryan against Kath for the price, Kath can successfully the indispensible function they perform in mercantile business transactions
raise breach of contract by Kath as a defense in any given country and the world at large
o If Ryan assigns the account to Merv, Kath can interpose the same
defense against Merv notwithstanding that X did not know of any CONTRACTS AND NEGOTIABLE INSTRUMENTS COMPARED
despite between Kath and Ryan when Merv bought Kath’s 1. ASSIGNABILITY AND NEGOTIABILITY
account • BOE and PN in their various forms are written contracrs
o As assignee, Merv stands in the shoes of Ryan, his assignor • Fundamental rules governing contracts are applicable to the determination
of legal questions which may arise over such instruments
o Assume now that Kath had issued to Ryan a promissory note for • However, between ordinary contract and NI à difference is between
the price of the goods “assignability” and negotiability”
o If Ryan sues Kath on the note, the defense of breach of contract • Unlike other contract, NI is X in force until it is delivered
is available to Kath 2. NEGOTIABILITY OF VARIOUS TYPES OF COMMERCIAL PAPERS
o But if Ryan negotiates the note to Jolo who takes the note under • An instrument may possess, some but not all of the elements of negotiability
such circumstance as to make him a HDC à Kath can no longer or be negotiable in a limited sense rather than in true sense
interpose such defense against Y • True negotiability may be confined to commercial contracts which represent
• A bona fide holder, however, while free from personal defense available to and in a measure, pass as money, such as BOE and PN and their special
prior parties among themselves à is subject to REAL DEFENSES that forms
might have obtained between them 3. RULES OF LAW APPLICABLE
2. ACCUMULATION OF SECONDARY CONTRACTS • Holder, who has taken by negotiation, and not as an original party
• Most important feature of NI • GR: Non-nego instruments are governed by the rules of law applicable to
• NI are transferred from one person to another ordinary contracts
• Once an instrument is issues, additional parties can become involved o E: the NI is applicable to them by analogy or express provision
• True NI are governed by the NI law
THE THEORY OF NEGOTIABLE INSTRUMENTS
• Rests upon the proposition that they appear to belong to the person having COMMERCIAL PAPERS WITH LIMITED NEGOTIABILITY
them in possession and to no one else • Non-negotiable in a technical sense because they do not have the
• By sending a NI into the world, the marker is estopped from urging, as requisites that are essential under the NIL
against a bona fide holder who has received it from anyone in possession, a • Beyond the scope of the law, hence governed by other law
defect or title • Among such papers are the following:
• The holder, although without title à has capacity to give title because he is 1. Document of title
the apparent owner of the instrument • Receipt or order for the delivery of the goods
• Includes:
FORMS OF NEGOTIABLE INSTRUMENTS
o Bill of lading
1. COMMON FORMS
o Dock Warrant
1. Promissory notes
o Quedan
2. Bills of Exchange
o Warehouse receipt
3. Bank Check
2. Letter of credit
• 2 KINDS/TYPES OF INSTRUMENTS
• It is in favor of a specified person, not to order
1. Promissory notes (PN) – those which the issuer had promised to pay
rd • But drafts issued in connection with letters of credit are NI
2. Bills of exchange (BOE) – those in which the issuer has ordered a 3 person
3. Trust receipt
to pay
• Document of security pursuant to which a bank acquired a
• Checks – special for or kind of BOE; most familiar form of commercial paper
“security interest” in the goods under trust receipt
2. SPECIAL TYPES
• Bank extends a loan covered by a letter of credit with the trust
• Special types of PN
receipt as a security for the loan
• Certificate of deposit
4. Certificate of Stock
• Bank notes
• Muniment of title to a given share in the assets of a corporation
• Due Bills
• Also without an unconditional promise or order to pay a sum
• Bonds certain money
• Special types of BOE 5. Pawn ticket
• Drafts • X NI under the NIL nor a Negotiable Document of Title under Art
• Trade acceptance 1507 of the NCC
• Banker’s acceptances

FORMAL REQUIREMENTS EXPLAINED
Section 1. Form of negotiable instruments. - An instrument to be negotiable must • The requisites are essential for the security of commercial transaction
conform to the following requirements: • They enable one to tell at a glance w/n an instrument is N and accordingly,
(a) It must be in writing and signed by the maker or drawer; gauge the risks involved in taking it as security
1. IT MUST BE IN WRITING
(b) Must contain an unconditional promise or order to pay a sum certain in money; • Instrument must be in writing or in tangible form
• X only include that which is written on paper with a pen or pencil
(c) Must be payable on demand, or at a fixed or determinable future time; • Also that which is in print or has been typed
• May be made on leather, cloth or any other substitute for paper as long as it
(d) Must be payable to order or to bearer; and is MOVABLE in nature
• X oral NI
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
• N or NN is determined from the writing that is from the face of the
indicated therein with reasonable certainty.
instrument itself
• Duty of the court is not to determine what the parties secretly intended, but
COMMERCIAL PAPER DEFINED
what is the meaning of the words they have used
• COMMERCIAL PAPER – refers to written promises or obligations that arise
2. INSTRUMENT MUST BE SIGNED BY THE MAKER OR DRAWER
out of commercial transaction from the use of such instruments as PN and
• GR: Signature of the D or M must be placed at the lower right hand corner
BOE
of the instrument
• All such paper is either negotiable (N) or non-negotiable (NN)
o BUT it may also appear in any part thereof whether at the top,
middle or bottom or at the margin
FORMAL REQUIREMENTS OF NEGOTIABILITY IN GENERAL
• Signature is valid and binding as long as it appears that a person intended
1. FORM AND CONTENT
to make the instrument his own
• NI = contractual obligation to pay money
• Signature = prima facie evidence of his intention to be bound as either M or
• Whether it is N or NN depends on its form and content
D
• NI must conform to character described in Sect
• BUT if the signature is so placed upon the instrument that it is not clear in
2. MATTERS TO BE CONSIDERED
what capacity the person intended to sign = deemed an INDORSER
• In determining the N of the instrument, the ff must be considered:
• Signature of M or D is usually in longhand
1. Whole of the instrument
• Preferable that the full name or at least the surname should appear
2. Only what appears on the face of the instrument; and
3. The provisions of NI law especially sect 1 thereof which gives the • But initials or any mark will be sufficient
requirement of N • Use of pencil is undesirable since it is easy to tamper
3. NEGOTIABILITY DIFFERING FROM VALIDITY • What is important is that the signer has intended to adopt the signature on
• A valid instrument is not necessarily negotiable the instrument as his own and to obligate himself for payment
• Every NI is presumed to be a contract à but not every contract is a NI • Where the genuiness of the signature of the maker or drawer is denied à
the signature is nevertheless PRESUMED VALID à M or D must provide
NEGOTIABLE INSTRUMENT DEFINED evidence of signature’s invalidity
• Sec 1 = def of NI 3. MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY
• It is an instrument which possess all the elements of N provided in Sec 1 • See comments under Sec 3
4. MUST BE PAYABLE IN A SUM CERTAIN IN MONEY;
• X cover other types of nego documents involving the sale or transfer of
goods • Reason: money is the one standard of value in actual business
• With the requirement, NI acquire a uniform standard of value enabling them
APPLICABILITY OF FORMAL REQUIREMENTS to pass freely in lieu of money in the business world
• All kinds of NI are either promises or order to pay money, which meet the • Money = includes all legal tender
formal requirements set forth in the law • LEGAL TENDER – that sort of money in which a debt or obligation calling
• The requirements from a to d = necessary in order that a PN may be N for money, may be lawfully paid, if the contract does not specify the medium
• A to E = BOE to be N of payment
5. MUST BE PAYABLE ON DEMAND, OR AT A FIXED OR DETERMINABLE
• Under subsection A
FUTURE TIME;
o Maker = person issuing PN
o Drawer = person issuing BOE • Section 4 and 7
6. MUST BE PAYABLE TO ORDER OR TO BEARER; AND
• Under subsection B
o Unconditional promise = PN • Section 8 and 9
o Unconditional order = BOE 7. THE DRAWEE MUST BE NAMED
• Subsection c and d = both applicable to each of the 2 kinds of instruments • Applies only to bills and checks
• Subsection e = applicable only to BOE • Obviously, an order which is not addressed to any person cannot be a bill
• A bill is an order

• But the bill would be sufficient if the drawee is indicated therein with • Signature must appear on the face • May be specifically designated by
reasonable certainty though he is not named of the note for him to be liable name or by office or title (ex.
• Trade name may be used as in the case of the payee thereon treasurer of x corp)
• Reason for this element: to enable the payee or holder to know upon whom • After an instrument (PN or BOE) • May be unspecified (ex. bearer)
he is to call for acceptance or payment has been issued, additional parties • He may seek payment personally or
• A PN = has no drawee can become involved further negotiate the instrument à
• Like the drawee, the payee must be named with reasonable certainty hence the maker assumed liability to
pay the payee or the holder
NON-NEGOTIABLE INSTRUMENT DEFINED
• X negotiable Note: Holder – Every person to whom an instrument is delivered is a holder
• X meet the requirements laid down to qualify an instrument as negotiable • Such holder may be the payee of the subsequent person receiving the PN
one or an instrument which in its inception was N but has lost its quality of N or BOE by:
• Example: o Delivery OR
o Check payable to a specified person, as when it merely reads, o By delivery and indorsement
“Pay to Pedro Cruz”
o A NI ceases to be N if the indorsement prohibits dither negotiation SEE EXAMPLES PAGE 19
of the instrument 1. Payable to order – I promise to pay to the order of Alfredo Almeda
2. Payable to bearer
NATURE OF NON- NEGOTIABLE INSTRUMENT a. I promise to pay to the order of Alfredo Almeda OR BEARER
• A NN instrument = merely a simple contract in writing and is evidence of b. I promise to pay BEARER
such intangible rights as may have been created by the assent of the parties
• Covered by the general provisions of the NCC, not by the NIL August 30, 2013
• X negotiated, but may be assigned or transferred, absent an express
prohibition against assignment or transfer written on the face of the P10,000.00
instrument For value received, I promise to pay Alfredo M. Almeda or bearer
• Person who transfer or assign contractual or NN rights pass only the rights the sum of ten thousand (10,000.00) pesos, on or before September 30,
they had 2013 at his house at Pateros, Metro Manila.
MONEY DEFINED (sgd.) Arsenio F. Flores

• MONEY – means what is coined or stamped by public authority and has its
value fixed by public authority; cash
• It is a medium of exchange authorized or adopted by a government as part 1. P10,000 at the upper left hand corner
of its currency • Amount of the note
• X essential but convenient because the amt is in figures
MONEY NOT GOVERNED BY ACT 2. Manila
• Paper money = NI à but X governed by NIL • Place where the contract is executed
3. August, 20, 2013
PROMISSORY NOTE DEFINED • Date of execution
• NEGOTIABLE PROMISSORY NOTE DEFINED • GR: Place and date X essential for negotiability
o an unconditional promise in writing made by one person to o E: in certain cases when the date is necessary to determine when
another, à signed by the maker, à engaging to pay on demand, the:
or at a fixed or determinable future time, à a sum certain in § Note is due or the interest is to run when the payment
money to order or to bearer of interest has been stipulated OR
o In short, it is a promise to pay a sum of money § Whether the holder is barred by the statute of limitation
o Commonly referred to as “note” from enforcing the note
o It may be a DEMAND instrument, but it is normally a TIME 4. For the value received
instrument • Indicates the consideration given for the note which may be specified
• Since consideration is presumed, the words above may be omitted
ORIGINAL PARTIES TO A PROMISSORY NOTES • Other words that may be used:
• This class of NN is a promise paper, or 2 party paper o I agree to pay
• There are originally 2 parties in a PN o I will pay
o Good to Alfredo Ameda or order
MAKER PAYEE o Due to Alfredo Almeda or order
One who makes the promise and signs Party to whom the promise is made or o I acknowledge to be indebted to Alfredo Alemda or order
the instrument the instrument is payable

• But mere acknowledge of a debt without the use of the words “order” or payment of the bill 3. unspecified
“bearer” = x satisfy the requirement because it does not imply a promise to Ex. Drawee is a bank in
pay (Ex. Due to Alfredo Almeda P10,000) case of a check
• X “will agree to pay” Person na nag-uutos sa Person na nagbabayad sa Person na tumatanggap
4. On or before September 30, 2013 drawee na magbayad payee ng payment
• Indicate date of maturity or the time when the promise to be fulfilled
• Not all instruments are payable at a fixed time EXAMPLE:
• They may be payable:
o After date or December 30, 2013
o After the expiration of a certain period or
o Payable on demand P10,000.00
5. Alfredo Almeda Thirty days after date, pay to Alfredo M. Almeda or order the sum
• Payee of ten thousand (10,000.00) pesos. Value received and charge the same to
• Person to whom the promise is made or the instrument is payable the account of
• But the payee need not be specified if the promise is made to “bearer”
6. Ten Thousand Pesos (sgd.) Jovencio Cinco à drawer
• Indicate the amount which the maker binds himself to pay
7. At his house at Pateros, Manila To Domingo M. Lantican à drawee à if he agrees to sign = acceptor
• Place where the note is to be paid College, Los Banos
• X essential as it may be made payable at any other place agreed upon by Laguna
the parties
8. Signature “Arsenio F. Flores” The following general characteristics are not found in the PN:
• Maker of the note 1. “Pay to”
• One who promises to pay at the first instance • Indicate an unconditional order to pay instead of an unconditional promise
• A note may be signed by several persons either jointly, or jointly and to pay a PN
severally 2. “Jovencio Cinco”
• Drawer
BILL OF EXCHANGE DEFINED • One who signs the BOE
• An unconditional order in writing addressed by one person to another, • Corresponds to the maker in case of PN
signed by the person giving it, requiring the person to whom it is address to 3. “Domingo Lantican”
pay on demand or at a fixed determinable future time a sum certain in • Drawee
money to order or to bearer • The one to him the bill is addressed
• An order made by one person to another to pay money to a third person • In a PN, there is no drawee
• Check = if drawn on a bank and payable on demand; most common form • The Drawee is not really a party to the bill
• He assumes liability only when he accepts the bill by writing the words
ORIGINAL PARTIES TO A BILL OF EXCHANGE “accepted” and signing his name on the face thereof = acceptor
• Order paper or 3 party paper • By accepting, the acceptor becomes primarily liable like the major of the
• Drawer, drawee, payee note, the drawer becoming only a surety
• Parties need not all be distinct persons 4. “Charge the same to the account of”
• A deed will be valid where there is only 1 party to it, for one may draw on • The amount to be paid by the drawee is to be charged against the funds of
himself payable to his own own order à that is, the 2 parties to the bill can the drawer
be the same person (drawer-drawee or drawer-payee) • But these may be omitted
Drawer Drawee Payee IDEA AND PURPOSE OF BOE
Person who issues and Party upon whom bill is Party in whose favor the 1. DRAWER’S FUNDS IN HANDS OF DRAWEE
draws the order bill drawn bill is originally drwn or is • Drawer has funds in the hands of the drawee of which the drawer wishes to
payable avail himself
X pay directly, gives order Party to whom bill is Up to the time of • The office of the instrument is to collect for the drawer from the drawee
rd
to pay money to a 3 party address to and is ordered acceptance by the draw, money to which the former may be entitled
to pay the payee looks 2. LIABILITY OF DRAWEE FOR NON-PAYMENT
exclusively to the drawer • If the drawee refused to accept when he has funds for the purpose à he
Becomes an acceptor Payee may be: becomes liable to the drawer for the resulting DAMAGES and the harm
when he indicates his 1. specifically designated, done to his credit
willingness to accept or • Drawer X funds in the hands of the draweee à it is at least presumed that
responsibility for the 2. may be an office or title the drawer must have arrangement with the latter so that he will honor the
bill à drawee must look to the drawer for reimbursement and not to the CERTAINTY AS TO SUM PAYABLE
bona fide holder • The promise or order must call for the payment of sum certain in money
o In short, in order for the drawee to be liable to the drawer, there • Needed to assure clarity and certainty in determining the value of the
must be some kind of agreement obligating the drawee to honor instrument
the order of the drawer or an existing debtor-creditor relationship • Requirement is met if the holder can determine from the instrument itself the
between them amount he is entitled to receive at maturity
o That is, the drawee must owe the drawer a debt, in which case • If the instrument calls for an act other than the payment of money = X
the drawer simply order the drawee to pay the debt or a portion of negotiable
it to a third party 1. PAYMENT OF A FIXED AMOUNT OF MONEY
• Drawee-bank • Since NIs are subs for money, it is essential that it represents a fixed
o Insufficient funds of drawer = X liable amount to be paid wholly in money
o Sufficient funds = substantial damages without any proof of actual • Amount must be stated plainly on the face of the instrument or at least may
damages be ascertained upon its face by computation, independent of any extrinsic
evidence
(from memaid) PROMISSORY NOTE BILL OF EXCHANGE • If value is dependent on extrinsic evidence = X negotiable
NATURE Unconditional promise Unconditional order o Examples:
# OF PARTIES 2 parties 3 parties 1. To pay P1k or what may be due on my deposit
LIABILITY OF Maker is primarily liable Drawer is secondarily liable 2. To pay P1k and also all other sums which may be due to him
CREATOR 3. To pay 1k and the value of 4 days of labor
PRESENTMENT Only 1 presentment for May involve 2 presentments: 2. PERMISSIBLE CLAUSES OR STIPULATIONS
payment 1. For acceptance (in cases • Test: Whether the holder can determine by calculation or computation the
provided in Sec 143) amount payable when the instrument is due
2. Payment • The sum is not rendered uncertain by a clause in the instrument that:
RIGHT TO Maker of note may NOT insert Drawer MAY insert in the 1. It is to be paid with interest
LIMIT an express stipulation limiting instrument an express 2. By stated installment
LIABILITY his own liability to the holder stipulation limiting or negating 3. With exchange
his own liability to the holder 4. With costs of collection
DEFINITION an unconditional promise in An unconditional order in writing 5. With atty’s fees
writing made by one person to addressed by one person to
another, signed by the maker, another, signed by the person SUM TO BE PAID WITH INTEREST
engaging to pay on demand, giving it, requiring the person to 1. INTEREST AT FIXED RATE
or at a fixed or determinable whom it is address to pay on • A provision for the payment of interest is a mere INCIDENT
future time, a sum certain in demand or at a fixed • X render the instrument NN because it does not make uncertain the sum
money to order or to bearer determinable future time a sum payable
certain in money to order or to • Example:
bearer o I promise to pay Ryan or order P10k, w/ interest at 15% per
annum
2. INTEREST AT INCREASED OR REDUCED RATE
Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain • Increased rate if the note is not paid at maturity
within the meaning of this Act, although it is to be paid: • Reduced if payment is made at or before maturity
• For payment of interest on interest
(a) with interest; or
• = x destroy N
• Example:
(b) by stated installments; or
o I promise to pay Ryan or order P10k with interest at 18% per
annum from date until paid; 15% if paid when due.
(c) by stated installments, with a provision that, upon default in payment of any
o The increase rate of 3% is a penalty
installment or of interest, the whole shall become due; or
3. ACCRUAL/RATE OF INTEREST X SPECIFIED
• If the instrument provides for the payment of interest without stating the date
(d) with exchange, whether at a fixed rate or at the current rate; or
form which it is to run à it shall be computed from the date of the instrument
(e) with costs of collection or an attorney's fee, in case payment shall not be made at • If the instrument is not dated à from the issue thereof
maturity. • If there is a stipulation for the payment of interest but the rate is not
specified = legal rate of 12%
4. INTEREST USURIOUS
• Still negotiable because the contract remains valid as to the principal

SUM PAID BY STATES INSTALLMENTS • EXCHANGE – the charge for the expense of providing funds at the place
• X affect negotiability where the instrument is payable to cover such instrument which is issued at
• STATED INSTALLMENTS MEANING another place. It mat be at:
a) the interest of each installment o Fixed or
b) the due date of each installment must be fixed in the instrument o Current rate
• Example: 1. PAYMENT IN FOREIGN CURRENCY
o I promise to pay Kath or order the sum of 1k in 2 installments as • X impair negotiability because the current rate of exchange at any given
follows: P500, on or before Nov 1, 2013, and P500 on or before time may easily be ascertained by:
December 1, 2013. 1. Inquiry from the banks dealing on exchange or foreign currencies
o But a promise to pay P1k in “two installments” or “in installments” 2. Such rate is a matter of common commercial knowledge
= X fulfill requirements if law 2. PAYMENT WITH EXCHANGE RATE
1. WITH AN ACCELERATION CLAUSE • The provision on payment with exchange applies to instruments drawn in
• Sum is still certain although payable by stated installment with an one country and payable in another
acceleration clause (AC) (i.e. a promise that if any of the installments or • Exchange is applicable only to foreign bills
interest is not paid as agreed, the whole shall become due) • Example:
• Requires full payment of an instrument payable upon contingency since the o M promises to pay P or order $1K with exchange at 2/4%
tine of payment will surely come and the exact value of the instrument can o M promises to pay P order the sum of $1k with the exchange at
be ascertained the current rate (or going rate or market rate)
2. ACCELERATION DEPENDENT ON MAKER 3. EXCHANGE NOT APPLICABLE TO INLAND OR DOMESTIC BILL
• Maker can avoid the acceleration by paying the installments on the due date • If the instrument is both drawn and payable at the same place à there can
• Example: be no exchange so that a stipulation for payment in exchange may be
o I promise to pay Ryan or order P10k with an interest at 15% per disregarded
annum in four equal monthly installments beginning July 1, 2013. • Under RA 8183, every monetary obligation must be paid in Phil currency
Upon default in payment of any installment or interest, the whole o E: Parties may agree that the obligation or transaction shall be
sums shall be due and payable” settled in any other currency at the time of payment
• GR: The maker or payee cannot accelerate the note
o E: the maker fails to pay on installment SUM TO BE PAID WITH COSTS OF COLLECTION AND/OR ATTY’S FEES
• “Attorney’s fees AND all costs of collection” does not impair negotiability,
3. ACCELERATION AT OPTION OF HOLDER since the 2 phrases mean the same thing
• Non-negotiable 1. INCREASE IN AMOUNT DUE EFFECTIVE AFTER MATURITY
• X affect certainty of amount payable at maturity since the increase in the
EXTENSION CLAUSES amount due even if uncertain takes place after maturity when the instrument
• Opposite of acceleration clauses ceases to be N in the full commercial sense
• Appear in instruments with fixed future maturity date and provide that under 2. UNCERTAINTY OF SUM PAYABLE ONLY AFTER MATURITY
certain circumstances, the date shall be further extended • Anything which renders the sum payable uncertain AFTER the instrument
• An instrument is negotiable if by its terms, it is: has ceased to be a substitute for money, but which in no wise affected it
1. Payable at a definite time subject to extension at the option of the holder before such time, cannot impair its negotiability
2. Or to extension to a further definite time at the option of the maker or • Examples:
acceptor o M promises to pay P or bearer P100k on or before Dec 4, 2013
3. Or automatically upon or after a specified event wuth 12% atty’s fees and costs of collection if not paid at maturity”
1. IF THE RIGHT IS GIVEN TO THE HOLDER = ✓N
• Time of payment X need new fixed maturity o A provision “to pay all costs, charges, and expenses including
• X need to specify length of extension atty’s fee incurred by the payee in any legal proceedings for the
• Reason: holder is free to demand payment at the maturity date or any time collection of the debt” = XN à cannot be ascertained from the
after said date face of the instrument exactly how much money it represents
• In fact, the holder is free to postpone the time of payment even if no 3. LIABILITY FOR ATTY’S FEES (AF)
extension clause appears • Stipulation for AF may be reduced if the courts find it unconscionable or
2. IF THE RIGHT IS GIVEN TO THE OBLIGOR (DEBTOR) unreasonable
• ✓ need to specify interest of extention to keep the instrument negotiable • BUT atty’s fees which the debtor binds himself to pay in case of litigation =
• “For no longer than reasonable time” = NN because the definite time X considered interest under the Usury law because said law is X applicable
requirement is not met • If AF is unspecified = it shall be in a reasonable sum
SUM TO BE PAID WITH EXCHANGE

• 2(d) refers to instruments payable in foreign currency
• X destroy negotiability

Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is 4. LIABILITY OF DRAWER
unconditional within the meaning of this Act though coupled with: • Immaterial whether the drawee obeys the order to pay or not
• Negotiability of a bill depends upon the same terms of the order
(a) An indication of a particular fund out of which reimbursement is to be made // or a • Drawer has his liability under the law
particular account to be debited with the amount; or
WHEN PROMISE OR ORDER TO PAY UNCONDITIONAL
(b) A statement of the transaction which gives rise to the instrument. 1. INSTRUMENT PAYABLE ABSOLUTELY
• Enough that there is a promise or order
But an order or promise to pay out of a particular fund is not unconditional. • Note or bill must be payable absolutely
• GR: Must be unconditional – x subject to any condition or contingency
WHEN A PROMISSORY NOTE CONTAINS A PROMISE TO PAY o E: Implied conditions of:
• In order for a PN (or BOE) may be N à it must contain an 1. Presentment
UNCONDITIONAL PROMISE (OR ORDER) to pay 2. Protests
• A prospective holder would not be eager to accept an instrument unless its 3. Notice of dishonor as provided in law
payment can be reasonably expected under every circumstance 2. REASON FOR REQUISITE
1. IMPLIED PROMISE TO PAY • It enhances the ability of the instrument to circulate freely from one person
• X essential that the word “promise” should be used to another
• Any words equivalent to a promise or assumption of full responsibility for the • Instruments which are not paid until a condition has happened or fulfilled
payment of the note (like payable, to be paid, I agree to pay, I guaranty to would be of little practical value in business
pay, M obliges to pay, good for, due on demand”) on the face of an • Examples: X negotiable if with conditions:
instrument are sufficient to constitute a “promise to pay” o If X marries
2. BARE ACKNOWLEDGEMENT OF INDEBTEDNESS o If certain property is sold
• A bare admission or acknowledgment of indebtedness (like I.O.U., due o If after 2 years I am still living
1000, for value received, etc) alone = XN à X import an express promise to o Out of the rent which may be collected from my apartment
pay or show that the parties intend the debt to be paid = simple contract; XN
• An acknowledgement of debt à evidences an old obligation 3. TERMS NOT AFFECTING UNCONDITIONAL LAIBILITY
• Promissory note à imports a new obligation • Instrument remain N if the terms appearing thereon do not affect the
3. USE OF WORDS OF NEGOTIABILITY unconditional duty to pay
• The language used must be such that the written undertaking to pay may be • Examples
fairly deduced therefrom o Mere indication of a particular fund out of which reimbursement is
• Examples: due P or order, due P or bearer, due P or demand, or I.O.U. to be made or an indication of a particular account to be debited
P10k to be paid on June 1 à ✓N even if it contains no express promissory with the amount = X render a promise or order conditional à this
words has reference to BOE only since reimbursement and debiting
can only take place where payment by another has been made
WHEN BILL OF EXCHANGE CONTAINS ORDER TO PAY o Nor is the instrument made NN by a statement of the transaction
• There must be an unconditional order to pay by one party to another which gives rise thereto
1. WORDS EQUIVALENT TO AN ORDER TO PAY o Additional terms appearing in the instrument (ex. statement of the
• X necessary to use the words “order” purpose for which the instrument is issued or the collateral
• Any words which are equivalent to an order or which show the drawer’s will securing it, the consideration received in exchange for the
that the money should be paid instrument à do not make the promise or order unconditional if
• Ex. Let the bearer, W (drawee) will much oblige R (drawer) to Pay or order the duty to pay is unaffected by such terms
P
3. MERE REQUEST TO PAY INDICATION OF A PARTICULAR FUND OUT OF WHICH REIMBURSEMENT IS TO
• X mere request BE MADE
• Drawer does not merely ask or expect the drawee to pay • ✓ NEGOTIABLE
• He DEMANDS the drawee to make payment • An instrument which mentions a particular fund out of which reimbursement
• ORDER – command or imperative direction and therefore mere request is to be made is negotiable because the order to pay is not rendered
which asks for favor supplication or authority does not constitute order for it conditional
does not import a right to ask and duty to obey • The drawee is not limited to the money in his hands belonging to the drawer
• Example: “I request you to pay, I wish you to pay, I hope you will pay • In other words, the fund indicated is not the direct source of the payment but
• But mere polite use of “please” = x convert an order into a request (polite only the source of REIMBURSEMENT which is an act subsequent to
command) payment
• As long as the language used expresses the drawer’s will that money be • Example:
paid, the bill of exchange is good o Pay to the order of Ryan, P1k and reimburse yourself with the
rentals of my house”

o The drawee may pay the amount out of any fund à it is only the • Mere recital of consideration for which the instrument was issued or mere
reimbursement that is to come from the rentals reference to a separate agreement was issued or mere reference to a
INDICATION OF A PARITCULAR FUND OUT OF WHICH PAYMENT IS TO BE separate agreement out of which the instrument has arisen does not make it
MADE conditional
• X NEGOTIABLE • Such kind of reference has no adverse legal effect on negotiability of the
• X payable in any event because the amount to be paid is made to depend instrument
upon the adequacy or existence of the fund designated • Examples: Per contract, in accordance with the contract, per memorandum
• Fund specified is the direct source of payment and the measure of liability or agreement, the note secured by a mortgage
• Immaterial w/n the fund is in actual existence or is yet to be created à • If the addition of words in question makes the promise conditional à it is on
instrument remains NN even if the funds is to be found sufficient at maturity the party making such claim to show
o E: But an instrument is simply CHARGEABLE to a particular • Example:
account is ✓ negotiable o I promise to pay to the order of P P300k being the price of a car
• TEST OF N: W/N the instrument carries the general personal credit of the this day sold and delivered to me
maker or drawer à statement merely identifies the transaction which gives rise to the
o It it does not à the instrument is ✓N instrument
o If it carries only the credit of a particular fund = XN 2. TERMS AND CONDITIONS CONTAINED IN ANOTHER PAPER
• Examples: (XN) • X NEGOTIABLE
o I promise to pay P or order the sum of 10k out of my salary in the • If the promise or order is “subject to or governed by the terms and
government or out of the proceeds of the sale of shares of stocks conditions of our contract executed by us on _____,” = XN
o Pay to bearer the sum of 10k our of the dividends which I made • Because the obligation to pay is burdened with the terms and conditions of
receive from X corporation another contract, subjecting recovery on the instrument to defenses
o Pay to bearer the sum of 10k out of my money in your hand or out available under the contract
of my share in the profits • It will require an examination of said contract to determine the rights and
à in each of the above cases, the maker or drawee is limited to the obligations under the instrument
fund indixated and is not supposed to pay if the fund should prove • As said, the negotiability of the instrument must be determinable from what
insufficient à the note however is not made uncollectible à the right or appears on its face alone and not elsewhere
contract must be resolved under the ordinary contract of law (XN) • IN SHORT, to destroy N, the reference to a collateral contract must sow that
o The intention to limit payment to particular fund must be made plain the obligation to pay is burdened with the conditions of that contract
o If the language used in ambigious = courts usually decide in favor of N • RULE: The negotiability of a bill or not is X affected by a reference which is
simply:
INDICATION OF A PARTICULAR ACCOUNT TO BE DEBITED WITH THE 1. A recital of the consideration for which the paper was given
AMOUNT 2. A statement of the origin of the transaction
• ✓ NEGOTIABLE 3. A statement that it given in accordance with the terms of contract
• Because the promise/order is not also made conditional between the same parties
• Payment is not confined to that fund, but is made whether it should fail or
otherwise, and it is mentioned only for the purpose of informing the drawee, Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a
as to his means of reimbursement determinable future time, within the meaning of this Act, which is expressed to be
• The payment does not depend upon the existence of adequacy of the payable:
particular account to be debited
• Examples: (a) At a fixed period after date or sight; or
o I promise to pay to P or order the sum of 10k to be debited with
his current account with me (b) On or before a fixed or determinable future time specified therein; or
o Pay P or order the sum of 10k and charge the same to my
account or my share in the profits (c) On or at a fixed period after the occurrence of a specified event which is certain to
o Pay P or order 10k on account of my contract with you happen, though the time of happening be uncertain.
à in the cases, the instrument is payable absolutely and not out of a
particular fund à merely indicated a particular account out of which the An instrument payable upon a contingency is not negotiable, and the happening of the
holder or drawee is to reimburse himself à the instrument us paid first event does not cure the defect.
after which the particular account indicated will be debited
CERTAINTY OF TIME OF PAYMENT
STATEMENT OF TRANSACTION WHICH GIVES RISE TO INSTRUMENT 1. INSTRUMENT PAYABLE AT ALL EVENTS
1. MERE RECITAL OF CONSIDERATION FOR INSTRUMENT/ORIGIN OF • It is an essential requisite of a NI that it must be payable at all events
TRANSACTION • If payable upon a contingency = XN à because it does not appear on its
• Instruments are issued by reason of the transaction upon which they are face whether or not it will ever be paid
bad • Note containing provision that it may be renewed at maturity = X negotiable
à because their no unconditional promise to pay at maturity
2. WHEN TIME OF PAYMENT CERTAIN à The instrument is not rendered NN where the holder’s right to
• There must be a certainty as to the time of payment (i.e. the payment will be exercise the option depends upon the happening of a specified
certainly due and demandable one time or another, though it may be event or contingency over which he has no control
uncertain when the time will come • “I promise to pay P 10K on Nov 30, 2013 but if I fail to collect
• There is certainty as to time when the instrument is: from X on order before said date, this note shall be extended
1. Payable on demand to Jan 20, 2014” = ✓N
2. Or a fixed or determinable future time à A provision to the effect that the maker may extend payment
from due date does not affect its negotiability as such instrument
REASON FOR REQUIREMENT is the same on payable “on or before”
• In case of demand requirement à the holder may call for payment at any à The note would become due in any event, although the exact
time time could not be determined at the time of its execution
• Term or time instrument à payable only upon the arrival of the time for 5. PAYABLE ON OR BEFORE A DETERMINABLE FUTURE TIME
payment • “On or before the start of the next school semester, I promised to pay P
• The time must be certain so that the holder will know: or order 10K” = ✓N
1. When he may enforce the instrument à The determinable future time is “the next school semester”
2. The person liable à The maker may pay before the start of the semester if he shall choose so
3. When he may be required to be pay à DETERMINABLE FUTURE TIME – means a time that can be determine
4. Secondary parties – the draw, indorser or accommodation party – when with certainty after the execution of the instrument
his obligation will arise 6. PAYABLE ON THE OCCURRENCE OF A SPECIAL EVENT
• Section 4 – indicates when an instrument is payable at a determinable • “I promise to pay P or order the sum of 10k upon the death of his father”
future time = ✓N
• Section 7 – when it is payable on demand à Death of P’s father is certain to happen although the time of happening or
• Checks – payable on demand occurrence is not known or uncertain
• EXAMPLES: 7. PAYABLE AFTER THE OCCURRENCE OF A SPECIFIED EVENT
1. PAYABLE AT A FIXED TIME • “30 days after the death of his father, I promise to pay P or order the sum
• I promise to pay P or order the sum of 10k on Dec 10, 2013 of 10k” = ✓N
2. PAYABLE AT A FIXED PERIOD AFTER A DATE à But a bill or not payable several days BEFORE the occurrence of the
• 60 days after date, I promise to pay P or order the sum of 10k specified event = XN since the date of maturity of the instrument can only be
à count 60 days after issuance ascertained after it has become overdue and therefore the time for payment
à but an instrument payable “at the earliest possible time after is uncertain
à Moreover, the laws says, “on or at a fixed period AFTER” and not before
date” = XDT
3. PAYABLE AT A FIXED PERIOD AFTER SIGHT 8. PAYABLE UPON CONTINGENCY
• 60 days after sight, pay to the order of P the sum of 10k • “Pay to the order of P the sum of 10k upon reaching the age of majority”
à AFTER SIGHT – after the instrument is seen by the drawee – XN
upon presentment for acceptance or accepted by the drawee à The order is conditional
à Count 60 days from the date it is presented to the drawee à Payment is not certain because P may die before reaching the age of
4. PAYABLE ON OR BEFORE A FIXED TIME majority hence the bill will never mature
à Even if he reaches age of maturity, this will not cure the defect because
• “On or before December 10, 2013, I promise to pay to P or
the character of a NI does not depend on future events, but solely upon its
order P1k” =✓N
character when created
à Here, the maker has the option to pay on December 10, 2013
or before that date • I promise to pay P or order the sum of 10k if his father should die within 5
à legal right of P is clear and certain years” – XN
à he can demand payment only at the time fixed and not before à If there is no length of time within which the death may take place, the
à the maker has the mere option to pay in advance of the legal maturity is determinable at a future time
liability as he sees fit
à it is necessary that the years of maturity be stated PAYABLE “WHEN ABLE” ETC; WITHIN REASONABLE TIME
• “On demand or at the end of the year, I promise to pay P or • Under either view, such a promise is x negotiable
st
order P10k” = ✓N ?? • 1 view
à The payee is given unrestricted power to declare the note due o N is destroyed by the condition and by want of a fixed
at any time before maturity time for payment
nd
à It is a contingency over which the maker has no control • 2 view
à This uncontrollable option of the payee renders the notes NN o By the general principles that a promise to pay within a
because it renders the time payment uncertain reasonable time is no so certain as to render an
à It is believd that such an instrument should be considered as instrument negotiable
one payable on demand à the fixed maturity of the date is simply
disregarded
Sec. 5. Additional provisions not affecting negotiability. - An instrument which may appear unpaid thereon, together with costs of suit
contains an order or promise to do any act in addition to the payment of money is not and 12% atty’s fees, and thereupon waive all errors in
negotiable. // But the negotiable character of an instrument otherwise negotiable is not any such proceedings and waive my right to appeal”
affected by a provision which: • GR: Warrants of atty to confess judgment however are X authorized
nor contemplated by our law à void as against public policy because
(a) authorizes the sale of collateral securities in case the instrument be not paid at they enlarge fraud because the promissor’s day in court is bargained
maturity; or away
§ E: expressly authorized by the law
(b) authorizes a confession of judgment if the instrument be not paid at maturity; or • But the invalidity of the provision as to the confession of judgment does
not render the instrument non-negotiable. It remains valid as to the
(c) waives the benefit of any law intended for the advantage or protection of the amount.
obligor; or • Confession of judgment must be distinguished from cognavit
actiomen and relicta verificationem
(d) gives the holder an election to require something to be done in lieu of payment
of money. COGNAVIT ACTIOMEN RELICTA VERIFICATIONEM
“He has confessed action” “his pleading is abandoned”
But nothing in this section shall validate any provision or stipulation otherwise illegal. Written confession of action by the Confession of judgment by
defendant acknowledging his withdrawal of the defense
ACTS IN ADDITION TO PAYMENT OF MONEY indebtedness to the plaintiff after
• A negotiable instrument must be payable in “a sum certain in money” the action has been filed
1. GENERAL RULE VALID VALID
• GR: The instrument is XN is it contains a promise or order to do any act in Given AFTER the action is brought
addition to the payment of money to save expense
• Reason: while on could be indorsed the other would have to be assigned
• Example (XN) : c. WAIVER OF BENEFIT GRANTED BY LAW
o I promise to pay P order order 10k and (or) to deliver a horse • Example:
o “and to pay for taxes assessed upon the note or its mortgage o “Pay bearer 10k. Notice of dishonor waived.”
security” • Neither do the following destroy N:
o “and to keep free from encumbrance property on which the o Waiver of protest
value of collateral pledged for security of the instrument depends” o Presentment for payment
o “and a promise to insure the property pledged as security” o Demand
2. EXCEPTIONS (4): o Exemption from attachment or execution
a. SALE OF COLLATERAL SECURITIES
• Example:
• Example: o “3 month after date, I promise to pay to the other of P 10k
o “I promise to pay P order order the sum of 300k on Nov 25, waiving the benefit of the homestead and all other
2013 secured by a ring I delivered to him by way of statutory exemptions as to the debt evidenced by this
pledge and which he could sell if I fail to pay him at note”
maturity” o
o Here the additional act to be performed is after the date of d. ELECTION OF HOLDER TO REQUIRE SOME ACT
maturity when the instrument is no longer negotiable in full
• Example:
commercial sense
o I promise to pay P or order 15k or an airconditioner at the
o Until the date of maturity, the promise is to pay money only
option of the holder” = ✓N
o Note that the statement does not subject the promise or
o In this case, the holder has the choice
order to the terms and conditions of the pledge
o Instrument is therefore negotiable as it is as good as
b. CONFESSION OF JUDGMENT
instrument payable in money
• Enables the holder to obtain a judgment without the delay usually
• Similarly, the negotiability is not affected by a provision which gives
incident to a law suit, as it eliminates the necessity of trial
the PAYEE the right to repossess the property sold for which the
• It is a written statement signed by the defendant, setting forth the basis note was given should payment not be made on time = ✓N
of liability and authorizing the entry of judgment thereon
• If the option is with the PROMISSOR = XN à because the holder
• Example: cannot compel him to make payment in boney
o For the value received, I promise to pay P or order the sum o Example:
of 10k with interest at 15% per annum and I hereby § I promise to pay P order 12k or a brand new
authorize my atty-in-law to appear in court of record airconditioner” = XN
after the obligation becomes due and waive the issuing
• A recital in the instrument that the debtor will deliver on demand
and service of process and confess judgment against
additional securities to the satisfaction of a holder deeming himself
me in favor of the holder of the note for such amount as
insecure because of his opinion that the collateral has depreciate, X
impair negotiability = ✓N à such provision simply aids the holder to EFFECT OF OMISSION OF PLACE
secure payment, protects him fro risk of insolvency, steadies the value • It will be noted that Section 1 X require NI to specify the place it is made or
of the instrument, and makes it circulate more readily drawn or where it is payable
• HOWEVER, SECTION 73 specifies where presentment for payment should
Sec. 6. Omissions; seal; particular money. - The validity and negotiable character be made when the place of payment is not specified:
of an instrument are not affected by the fact that – 1. An instrument is presumed to have been made where it is dated
2. A note that does not specify the place of payment is presumed to be
(a) it is not dated; or payable at the place of residence of the maker
3. If the place of execution or payment is not stated, it is presumed to be at
(b) does not specify the value given, or that any value had been given therefor; or maker or drawer’s place of business or home
(c) does not specify the place where it is drawn or the place where it is payable; or EFFECT OF PRESENCE OF SEAL
• At common law, a seal instrument is XN and subject to the rules governing
(d) bears a seal; or contracts under seal
• UNDER OUR LAW, there is NO such distinction
(e) designates a particular kind of current money in which payment is to be made. • There is no difference in legal effect between sealed and unsealed private
writings
But nothing in this section shall alter or repeal any statute requiring in certain cases • It is ADVISABLE however to have a bill or note appear in a public
the nature of the consideration to be stated in the instrument. instrument à so that it will be included among the preferred credits with
respect to other property of the debtor
EFFECT OF OMMISSION OF A DATE
1. GR: DATE OF INSTRUMENT GENERALLY NOT NECESSARY EFFECT OF DESIGNATION OF PARTICULAR KIND OF CURRENT MONEY
• Omission will X make the instrument NN PAYABLE
• Instrument will be considered as dated as of the TIME IT WAS ISSUED • The law does NOT require that payment should be made in legal tender
• An instrument has no inception until delivery • Money = x necessarily limited to legal tender as defined by law
2. E: CASES WHERE DATE IS NECESSARY o Includes any particular kind of current money or foreign money
1. Where said date is tied to the date of issue which have a fixed value in relation to our money
• An undated note is “payable 40 days after date” o Currency, current funds, current coins, current bank notes = good
2. Where the interest is stipulated commercial paper and are really payable in money
• For the purpose of determining when the interest will run • The instrument is still ✓N although it is payable in foreign money which Is
3. Promissory note – date of issue; BOE – date of last negotiation thereof not current in the Philippines if the obligation may be discharged in pesos of
• For the purpose of determine whether the party acted within a equivalent amount
reasonable time in making presentment for payment • Example:
Note: instruments may be post dated or ante-dated o I promise to pay P or order the sum of 10k in Central Bank notes
3. DATE STATED NOT IN CALENDAR of 50 peso bills”
• If the date is stated, but there is no such date on the calendar, the law ill o It is valid although it designates a particular kind of money, in
deem the nearest date of the month the date intended which payment is to be made
• Note dated September 31 will be construed as to have been intended for
September 30
• The insertion of the wrong date will not avoid the instrument in the hands of Sec. 7. When payable on demand. - An instrument is payable on
an innocent party who may enforce the same nothwithstanding the improper demand:
date
(a) When it is so expressed to be payable on demand, or at sight, or on presentation;
EFFECT OF OMMISION OF VALUE or
• It is usual to state in the instrument that it is given for “value received”
without specifying what the value is (b) In which no time for payment is expressed.
• But it is not even necessary to state that value has been received for the
instrument because CONSIDERATION IS PRESUMED Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards
• E: the person so issuing, accepting, or indorsing it, payable on demand.
o This should not mean to alter or repeal any law which requires in
certain cases the nature of such consideration to be stated in the WHEN INSTRUMENT PAYABLE ON DEMAND
st nd
instrument (par 2) à NO SUCH LAW IN THE PHIL 1 paragraph 2 paragraph
• Example: an instrument is payable on demand not only to immediate parties since between
o Payable to bearer 10k” = ✓N although it does not specify the only as between the immediate parties immediate parties there is no difference
value given or that any value has been given therefor but also as to subsequent parties between holder in due course (HDC) and
a person X HDC
(a) A payee who is not maker, drawer, or drawee; or
• An instrument payable on demand is due and payable immediately after delivery (b) The drawer or maker; or
• It is a present debt due at once
• The word “on demand” in a note à do not make a demand a condition precedent (c) The drawee; or
to the right of action, but import that the debt is due and demandable, or at least,
the commencement of a suit therefor is a sufficient element (d) Two or more payees jointly; or
1. EXPRESSED TO BE PAYABLE ON DEMAND
• “I promise to pay to bearer on demand 10k” (e) One or some of several payees; or
• “I promise to pay P10k upon receipt by me of my share from the Estate of X
or upon demand” (f) The holder of an office for the time being.
à The promissory note is payable upon contingency or on demand because
P may rely on the wording “on demand” à X payable at a fixed or Where the instrument is payable to order, the payee must be named or otherwise
determinable future time indicated therein with reasonable certainty.
• Other words that may be used:
o At sight – the instrument is payable as soon as it seen by the STANDARDIZED WORDS OF NEGOTIABILITY
party primarily liable • The words:
o On presentation o “to the order of”
o On call o or order
o At any time called for o or bearer
o At such times as the payee may require o to bearer
o At the holder’s convenience = standardized words of negotiability of an instrument
• On demand – promissory notes • These words serve as an expression of consent that the instrument may be
• At sight – bills of exchange transferred to whoever the payee orders, allowing further negotiation of the
2. NO TIME FOR PAYMENT IS EXPRESSED insurment
• Example: • Consent = indispensiable since a maker or drawer assumed greater risks
o Pay to P or order P10k under a NI than a XNI
o Payable at the maker’s convenience • Any other words may be used indicating the intention of the maker or
o Payable… after date drawer to make the instrument freely transferrable to some person or
• Instrument payable on demand because it does not express the time for persons other than the one to whom it was originally issued
payment
• As between the maker and the payee, a demand note is payable as soon as WHEN INSTRUMENT PAYABLE TO ORDER
it is executed • An instrument is payable to order where it drawn payable:
• Parol evidence – is admissible to show a contemporaneous oral agreement 1. to the order of a specified person
fixing the time for payment 2. to him or his order
o E: instrument on demand cannot be contradicted by parol proof • An instrument payable to a specified person (ex. pay to Ryan) = X an order
• An instrument payable to bearer on demand “if presented for payment after indorsement = XN à promise or order is limited to one person
5 months from the date of issue” = x payable on demand since it expresses o Any subsequent purchase thereof will not enjoy the advantages of
a time for payment being a holder of NI, but will merely “step into the shoes of the
person designated in the instrument and will thus be open to all
• Trade acceptance which states a day and a month but omits the year of its
defense available against the latter (person designated)”
maturity = X payable on demand, X N
3. PAYABLE ON DEMAND AS REGARDS THE MAKER • It is X essential that the word “to the order of “or order” be used à the word
to “P and assigns” = equivalent words which will render the instrument
• Example:
negotiable
o Note date July 3, 2013 and payable “30 days after date” was
issued on August 4, 2013 (when it was already over due)
PERSONS TO WHOM ORDER INSTRUMENT MAY BE DRAWN
4. PAYABLE ON DEMAND AS REGARDS THE INDORSER
• SEE EXAMPLES PAGE 55
• Example:
o A bill payable on July 20, 2013 was accepted by the drawer July
EFFECT WHERE PAYEE NOT NAMED OR DESCRIBED
21, 2013
à the indorsement after maturity, in legal effect à created a new • If there is no payee, then there is nobody who could give the order or
instrument payable on demand authority to collect
• There would nobody who could indorse the instrument and therefore there
Sec. 8. When payable to order. - The instrument is payable to order where it is is no point considering it N
drawn payable to the order of a specified person or to him or his order. It may be • Thus, an instrument payable “to order” where there is no blank space for the
drawn payable to the order of: name of the payee = XN

• But it is sufficient if the payee, though not names, is described with 3. PAYABLE TO THE ORDER OF A FICTITUOUS PERSON
reasomable certainty (to the order of the admin of estate of p” • Example:
• Trade name of payee may be used o “Pay to John Doe or order 10k”
• Name is FICTITIOUS - if feigned or pretended
Sec. 9. When payable to bearer. - The instrument is payable to • “Person making it so payable” – refers to the maker or drawer rather than
bearer: the party actually executing the instrument
• It is essential that the payee is known to the maker or drawer to be fictitious
(a) When it is expressed to be so payable; or or non-existing person, otherwise, it would NOT be a bearer instrument but
an order instrument
(b) When it is payable to a person named therein or bearer; or • FICTITIOUS – one who, though named or specified as payee in an
instrument, à has NO right to it because the maker or drawer so intended
(c) When it is payable to the order of a fictitious or non-existing person, and such and it matters not, therefore, whether the name of the payee used by him be
fact was known to the person making it so payable; or that one living or dead, or one who never existed
• In a fictitious payee situation, the drawee-bank, in the absence of BF or
(d) When the name of the payee does not purport to be the name of any gross negligence à absolved from liability and the drawer of the check
person; or bears the loss
4. PAYABLE TO ORDER OF A NON-EXISTING PERSON
(e) When the only or last indorsement is an indorsement in blank. • Example:
o “Pay to the order of the King of the Pacific Ocean”
WHEN INSTRUMENT PAYABLE TO BEARER • Payee named is one who does not exist and has never existed
• BEARER – means the person in possession of a bill or note which is • Since the indorsement is impossible, the manifest intention of the drawer is
payable to bearer to make the instrument a bearer paper negotiable by delivery
• Instrument payable to bearer may be transferred by delivery w/o • An instrument payable to a person already dead = payable to bearer
indorsement and payment to any person in possession thereof in GF and 5. NAME OF PAYEE NOT A NAME OF A PERSON
without notice that his title is defective at or after maturity, discharges the • Example:
instrument o Pay to cash
• DELIVERY alone is enough to effect negotiation of the instrument o Pay to cash or order
• Whoever possesses is the bearer o Pay to money
• For added security, the holder may require indorsement of the instrument o Pay to sundries
• An instrument that fails to qualify as an order instrument is nonetheless o Pay to payroll
negotiable if payable to bearer o “To the order of P’s estate” = payable to bearer à BUT criticized
1. EXPRESSED TO BE PAYABLE TO BEARER because since an estate is always represented by a person
• Example: • X designate specific payee
o I promise to pay to bearer 10k” • In making an instrument payable to an impersonal payee à the maker or
o But if “bearer, P” = XN drawer intends the same to be payable to bearer
• The word “bearer need not be used if the bearer would be sufficiently meant • Indorsement of this instrument by the payee is impossible
and designated 6. ONLY INDORSEMENT IN BLANK
• Examples: Face
o Pay to holder
o Pay to P or holder Pay to P or order P10k
o Pay to P or any one to whom he may deliver it or to any one who
might hold the same by delivery (sgd) R
• Payable to the “ORDER of bearer” = payable to order à critique: such note To W
is either a bearer note or else a NN for want of sufficient description of the Manila
payee
2. PAYABLE TO PERSON NAMED THEREIN OR BEARER
• Example: Back
o Pay to P or bearer 10k
o Pay to P or holder 1k
(sgd) P
o Holder or order
o To the order of P or bearer
o Bearer or P = XN
• An instrument is an order instrument
o E: the bearer words are handwritten or typewritten

• The instrument is indorsed in blank by P by simply writing his name on the 1. CLEAR INTENTION OF THE PARTIES
back • The substance rather than the form is the criterion of negotiability
• The blank indorsement makes the instrument payable to bearer 2. USE OF FOREIGN LANGUAGE
• ✓N
7. LAST INDORSEMENT IN BLANK 3. MERE DEFECT IN LANGUAGE OR GRAMMATICAL ERROR
• X destroy negotiability
Pay to A • Example:
(sgd) P o The words “himself order” à may be construed as “himself or
Pay to B order”
(sgd) A
(sgd) B Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any
indorsement thereon is dated, such date is deemed prima facie to be the true date of
**A, B, C, etc refer to indorsee or indorser as the case may be the making, drawing, acceptance, or indorsement, as the case may be.
• The bill which is payable to the order of P, is indorsed especially by P to A à A 1. DATE OF INSTRUMENT, ACCEPTANCE OR ANY INDORSEMENT
further indorses it to B who merely signs his signature on the back without • If the instrument bears a date à it is presumed that said date is the date
indorsing the bill to a specified person and delivers it to C à the instrument when it was made or drawn
becomes payable to bearer à C may negotiate the bill by delivery since the last • Example:
indorsement is in blank o “accepted, Dec 20, 2014, (sgd) W
• But a blank indorsement cannot make a NN instrument à it is negotiable as a 2. EVIDENCE OF DIFFERENT DATE
bearer instrument payable to a specified person, otherwise the person who last • Burden of proof: he who claims that some other date is the true date has the
signed his name on the back of the instrument would able to change entirely the burden to establish such claim
contracts entered into between the parties and to make the character of the • Example:
instrument depend on the manner of the indorsement, and not upon the terms o Evidence is admissible that the maker of an instrument
expressed therein (?) inadvertently wrote 2013 instead of 2014 because at the
• INDORSEMENT – refers only to NI beginning of the new year, he had not yet been accustomed to
o **The act of result of writing your name on the back of a check writing the new date
• But a different date may be shown ONLY AS BET ORIG PARTIES, but X
against a HDC
(from memaid) INSTRUMENT PAYABLE TO ORDER PAYABLE TO BEARER
PAYEE The payee must be named or The payee need NOT be DATE OF INSTRUMENT PAYABLE AT A FIXED FUTURE DATE
indicated with reasonable certainty indicated à it is enough • GR: A date is not essential to make an instrument negotiable
that it is expressed • This is true of instruments which are payable at a fixed future date and
payable to bearer which do not stipulate for the payment of interest
NEGOTIATION It is negotiated by INDORSMENT DELIVERY • Example:
coupled with DELIVERY o I promise to pay P or bearer P10k on Oct 10, 2013
CONVERSION Instrument originally payable to order Instrument originally o Since the instrument is payable on Oct 10, 2013 or a fixed future
CAN be converted into a bearer payable to bearer date and it does not stipulate for the payment of interest à there
instrument thru a BLANK CANNOT be converted is no need to determine when the instrument was first issued
INDORSMENT into an order instrument. • E: In the following cases however, the date is necessary to determine
MATURITY (but not for negotiability) of the instrument:
A bearer instrument is 1. Where instrument is payable at a fixed period after date
always a bearer • Example:
instrument and can be o 30 days after date, I promise to pay P or order of 10k
negotiated by mere 2. Where instrument is payable at fixed period after sight or
delivery even if specially presentment
indorsed. • Example:
o Pay to P or order 10k 30 days after sight (or after
Sec. 10. Terms, when sufficient. - The instrument need not follow the language of presentment)
this Act, but any terms are sufficient which clearly indicate an intention to conform to
the requirements hereof. DATE OF INSTRUMENT PAYABLE ON DEMAND
• GR: An instrument payable on demand need not be date since it is
SUBSTANCE CRITERION OF NEGOTIABILITY demandable at any time
• It is advisable in most cases to conform to the forms prescribed by law to • E:
avoid uncertainty o Sect 71
• HOWEVER, it is not required to use the exact words of the law
§ PROMISSORY NOTE - must be presented for payment Sec. 13. When date may be inserted. - Where an instrument expressed to be
within reasonable time AFTER ITS ISSUE payable at a fixed period after date is issued undated, or where the acceptance of an
§ BILL OF EXCHANGE – within reasonable time after instrument payable at a fixed period after sight is undated, any holder may insert
the LAST NEGOTIATION THEREOF… otherwise therein the true date of issue or acceptance, and the instrument shall be payable
persons secondarily liable may be released from their accordingly. The insertion of a wrong date does not avoid the instrument in the hands
liability of a subsequent holder in due course; but as to him, the date so inserted is to be
o Hence, date of issue of PN and date of last negotiation of BOE is regarded as the true date.
essential for the purpose of determining whether a party has
acted within a reasonable time but not to make the instrument WHEN DATE MAY BE INSERTED
negotiable 1. TWO CASES
o Reasonable time – question of fact and each case is to be 1. Where an instrument is payable at fixed period AFTER DATE but is
considered ISSUED UNDATED
2. Where an instrument is payable at a fixed period AFTER SIGHT but the
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason ACCEPTEANCE IS UNDATED
only that it is ante-dated or post-dated, provided this is not done for an illegal or 2. DATE OF ISSUE OR ACCEPTANCE TO BE SPECIFIED
fraudulent purpose. The person to whom an instrument so dated is delivered acquires • Any holder may insert therein the true date of issue or acceptance and the
the title thereto as of the date of delivery. instrument shall be payable accordingly
• It is necessary that the date of issue or acceptance, as the case may be, be
MEANING OF ANTE-DATING AND POST-DATING specified so as to determine the date of maturity
1. ANTE-DATED • Unless the true date is inserted, one will not know when the instrument will
• Contains a date earlier than the true date of its issuance be due
• Example: 3. APPLICATION TO OTHER CASES
o July 15 – dated • X apply to an instrument payable on demand although undated à for its
o July 30 – issued maturity is already fixed, being due immediately
2. POST-DATED • X authorize the insertion of the date of issue in an undated bill of
• Contains a date later than the true date of its issuance exchange payable at a fixed period after sight (30 days after sight) à in
• Example: such case, date of issue is not necessary to fix the maturity of the bill (it is
o July 15 – issued however necessary to determine w/n the holder acted with reasonable
o July 30 - dated diligence
o E: if the acceptance is undated, the insertion of the true date is
EFFECT OF ANTE-DATING AND POST-DATING necessary because “30 days” is to be counted not from the date
• X render invalid or NN by that fact alone of issue but from the date of acceptance
o PROV: it is not done for an illegal or fraudulent purpose • Examples:
• It may be negotiated before or after the date given as long as it is not o I promise to pay P (no date) or order P10k thirty days after date
negotiation after its maturity Sgd. (M)
• If the ante-dating or post-dating is done for an illegal or fraudulent purpose § In this case, the date of maturity cannot be determined
à the instrument is rendered invalid unless we know the true date of issue of the note.
• Example: § The true date may be inserted not only by P but also by
o Done to conceal the charge of usurious interest à illegal ante- any holder after him.
dating o Pay to P or order P10k thirty days after sight (sgd.) R To W
o Issues a post-dated check in payment of an obligation because of § He bill is accepted by W who writes the words
insufficiency of funds without a bona fide intention to cover the “accepted” across the instrument but the acceptance
amount of check à illegal post-dating was made undated
§ E: If the payee however was informed that the check § Under Section 13, P or any holder may insert the true
was not covered by adequate funds, the drawer would date of acceptance
not be guilty of BF or estafa in issuing it because there § The date of acceptance must be the date when it was
was no deceit actually accepted by him
DATE WHEN INSTRUMENT TAKES EFECT

• In accordance with the mutual agreement to that effect EFFECT OF INSERTION OF WRONG DATE
• The person to whom the instrument is delivered acquired title or ownership • GR: Avoid the instrument as to him or any one claiming under him
over it, not as o the date it bears à BUT AS OF THE DATE IT IS o E: But not as to a subsequent HDC who may enforce the same
DELIVERED notwithstanding the improper date
• Reason: One who signs such an instrument furnishes the means of fraud
and is estopped to deny his liability thereon

• Example:
o Suppose the true date of the note in the preceding example is
May 20, 2013, and therefore the date of maturity is June 19, 2013
o If P dated it May 15, 2013 to hasten the day of maturity à the
note is avoided insofar as P is concerned because the instrument
was ante-date for a fraudulent purpose
o HOWEVER, if P, after inserting the wrong date indorses it to A
who acquires it in GF for value without notice and before maturity,
then, A as a holder in due course has the right to enforce
payment on June 14, 2013 and not on June 19, 2013m because
as to him, the date so inserted, May 15, 2013, will be regarded as
the true date

III. NEGOTIATION may not have legal right thereto
Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is If the instrument is negotiated to a HDC
transferred from one person to another in such manner as to constitute the à the latter may acquire a better title
transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if than the transferor
payable to order, it is negotiated by the indorsement of the holder and completed by Under section 74, the instrument must be DELIVERY – transfer of possession,
delivery. exhibited when presented for payment to actual or constructive, fropm one person
the person from whom payment is to another
MODES OF TRANSFER OF BILL OR NOTE, IN GENERAL demanded
1. TRANSFER – process by which property is delivered by one person to another
2. A BOE or PN may be transferred from one person to another in several different The party paying must judge the
ways, for different purposes and with different types of indorsement which result genuineness of the indorsements and of
or may result in the acquisition of different rights or interest and the incurrence of the right of the holder to receive payment
different liabilities Example:
3. The law does NOT prescribe an exclusive method of transferring NI à but only
the manner in which their independence of equities or defenses that might obtain Marc issues a note “payable to bearer” à
between original parties may be preserved stolen from Marc’s home by Thea who
delivered the note to Penny
3 MODES OF TRANSFERRING A NI
• ISSUE Thea’s acquisition of the notes = X
• First delivery of the instrument constitute delivery (no negotiation to
• Complete in form Thea because delivery must be
• To a person who takes it as a holder voluntary)
• It is the first transfer of an instrument to a payee
• A NI’s life does not begin until it is issued by the maker or drawer to the first However, deliver to Penny (who acted in
holder GF) = ✓ negotiation
• NEGOTIATION
• Ordinarily involves indorsement (in regard to other than bearer paper) While a thief (or finder) cannot acquire
• Negotiation and indorsement are often used interchangeably title to the instrument, by virtue of theft,
• Negotiation makes its possible for the transferee to acquire a better right to he can transfer title to a subsequent
innocent purchase
a NI that the transferor had
• Whether the holder is a HDC depends on the factors other than the fact of
PAYMENT OF INSTRUMENT BY DRAWEE NOT NEGOTIATION
negotiation
• ASSIGNMENT • The payment of a check (or bill) by the drawee bank = X negotiation = X
make the bank holder within Section 30
• Less usual method, which may or may not involve an indorsement in the
• Bank = X payee nor indorsee
sense of writing on the back of the instrument
o Check is extinguished and cannot be put in circulation as to bind
• There can be no negotiation of a non-nego instrument
the drawer or indorser
• Although it may be transferred by indorsement and delivery, the assignee
• The writing of the name of the holder on the back of the check before
acquired the instrument subject to the rules applicable to a NN paper
surrendering it for payment to the drawee-bank = X indorsement
o Such signature merely serves as a receipt for the money
MEANING OF NEGOTIATION
o Upon payment, the check becomes merely a voucher
1. The method by which an instrument is negotiated depends upon whether
o Payment effects a discharge of the instrument, not a transfer of
the instrument is payable to order or to bearer
title thereto
• Incidentally, a bank is under no obligation to make part payment on a check
PAYABLE TO ORDER PAYABLE TO BEARER
up to only the amount of the drawer’s fund, where the check is drawn for an
Two steps: Negotiated by mere delivery without
amount larger than what the drawer has deposit
1. Indorsement by the payee of indorsement
o Upon partial payment, the check holder could not be called upon
present holder
to surrender the check and the bank would be without voucher
2. Delivery to the next holder
affording a certain means of showing payment
An instrument payable to order is payable Section 191 (par 4) – defines BEARER - o Rule is based on commercial convenience
to the payee named therein or to the as the person in possession of a bill or
indorsee or the person ordered or note which is payable to a bearer MEANING OF ASSIGNMENT
authorized by the payee to collect à this
• ASSIGNMENT – merely means transfer of the title to the instrument, with
order or authority is made by means of Hence, any person in possession of a
the assignee, generally taking only such title as his assignor has, subject to
indorsement followed by delivery of the instrument payable to bearer is always
all defenses available to his assignor
instrument to the indorsee payable to bearer thereof, although he
ASSIGNMENT OF INSTRUMENT WHEN DISTINCTIONS NOT MATERIAL
• Assignment involves transfer of right under a contract • X material if there is no defense to the obligation and only the maker is
• The transfer of a NN instrument always constitutes an assignment sought to be held
• The words transfer is also used when referring to assignment • But whether the transfer of a bill or note is by negotiation or assignment à
• When negotiation takes place à the transferee becomes a holder the transfer may constitute a sale, exchange, pledge or gift
• Absent a prohibition against assignment or transfer written on the face of
the NN instrument à the same may be assigned or transferred PAYMENT BY MEANS OF INSTRUMENT MERELY CONDITIONAL
• Sesbreno vs CA • Whether the act involved is negotiation or assignment, payment by means
o Thus a PN marked “non-negotiable” but not at the time stamped of a PN, BOE and other NI is MERELY CONDITIONAL à i.e. subject to the
“non transferreable” or “non-assignable” = may be assigned or condition that they be CONVERTED TO CASH upon maturity
transferred • The rule is different in insurance
o Acceptance of a PN or check in payment of the premium by the
EFFECT OF DELIVERY OF ORDER INSTRUMENT WITHOUT INDORSEMENT insurer renders the policy immediately operative where the
• A transfer of NI is effected otherwise by negotiation when an order policy is silent as to the mode of payment, although one of its
instrument is delivered with instrument conditions is that “it shall not be valid or binding until the first
• In this case, the transfer operates as an ORDINARY ASSIGNMENT and the premium is paid.” à the acceptance, in effect, waives the
assignee is merely placed in the position of the assignor à the assignee provision
acquiring the instrument subject to all defenses, real and person, available
against the assignor CAN THERE BE NEGOTIATION TO A PAYEE?
ST
• Without the indorsement, the transferee would not be the holder of the • 1 SCHOOL OF THOUGHT
instrument o The delivery to the payee by the maker or drawer = X negotiation
• However, the assignee acquires the right to have the indorsement of the because delivery is part of the creation of the NI
assignor o Before the writing is delivered, there is no NI, no contract as yet
• When indorsement is subsequently obtained à the transfer operates as a o Negotiation, on the other hand, refers to an existing NI
ND
negotiation only as of the time the indorsement is actually made • 2 SCHOOL OF THOUGHT
• Example: o There can be ✓ negotiation
o Marc issued a PN in favor of Penny à it was agreed between o Under sect 30 and 191 (par 7) – an instrument is negotiated when
Marc and Ana, as part of a property settlement, that the note it is delivered to the payee or to an indorser or to the bearer
payable to Penny should be paid to Ana à the note was delivered thereof
to Ana but was not indorsed by Penny à Some time later, Penny o Hence, “negotiated” is not confined to transfer after delivery to the
died. à Ana sued Marc on the note payee because a holder may be a payee in possession of the
§ The lack of any indorsement by Penny = X preclude instrument
Anna’s right to enforce the note o There are American cases where courts have supported the
§ It merely prevents Ana from obtaining the status of second view
holder • Both arguments are logical and convincing. They may be RECONCILED:
§ But she can still seek to holder from Marc as an 1. FIRST DELIVERY OF INSTRUMENT TO PAYEE
assignee and owner of the note • The payee, as the first holder, acquires title to the instrument not
by negotiation but by ISSUE OR ISSUANCE
NEGOTIATION AND ASSIGNMENT DISTINGUISHED • If negotiation refers to an instrument already completely executed
• While a NI may be either negotiated or assigned or issued à then only the holders subsequent to the payee can
• A NNI can only be assigned or transferred, not negotiated acquire title by negotiation
st
• This should be the rule in case the 1 delivery of the instrument is
NEGOTIATION ASSIGNMENT made by the maker or drawer directly to the payee
Transfer of NI to a HOLDER 2. FIRST DELIVERY OF INSTRUMENT TO OTHER THAN PAYEE
Refers only to Negotiable instruments Ordinary contract • If the delivery is not so made, such delivery, as a qualification of
HDC is subject only to real defense Assignee is subject to both real and Section 191, par 10 (“issue”) à may constitute negotiation under
personal defenses Sect 30 in relation to Section 191, par 7 (“holder”)
HDC may acquire a better title or greater Assignee merely steps into the shoes of • Thus, where the delivery by the maker or drawer is made to a
rights under the instrument than those the assignor person other than the payee such as an agent of the maker or
possessed by a prior party drawer à the payee acquired title by negotiation
3. DELIVERY OF INSTRUMENT TO PAYEE BY LAST HOLDER
Indorser = X liable unless there be Assignor ✓ liable even without notice of
presentment and notice of dishonor dishonor • There may also be negotiation to the payee when the instrument
Governed by the NI law Governed by Art 1624 to 1645 (on is delivered back to him by the last holder
assignment of credits) of the NCC • In such case, the indorsement of the last holder is X necessary
because the payee is remitted to his former rights and all
intervening parties are discharged from liability
DELIVERY OF KINDS OF NEGOTIABLE INSTRUMENT Sec. 31. Indorsement; how made. - The indorsement must be written on the
1. KINDS instrument itself or upon a paper attached thereto. The signature of the indorser,
• Delivery is the transfer of possession, actual or constructive, from one without additional words, is a sufficient indorsement.
person to another
• Example of constructive delivery: MEANING AND NATURE OF INDORSEMENT
o Where A, without B’s knowledge, indorses an instrument to B and • INDORSEMENT – writing of the name of the payee on the instrument with
puts it into an envelope containing others papers of B intent either to transfer title to the same, or to strengthen the security of the
2. NECESSITY holder by assuming a contingent liability for its future payment, or both
• Delivery is an essential part of every negotiation • The payee by signing (indorsing) the instrument and delivering it to another
• INDORSEMENT – an indorsement completed by delivery person (in payment of debt payee owes him or for any other reason)
• An intent to be bound is necessary to the creation of an obligation becomes an INDORSER
• Delivery of the NI = operative fact that evidences the intention of the drawer • INDORSEE – person who receives the indorsed instrument à he can
or maker to become bound by it indorse the instrument to someone else and thus become an indorser as
3. PRESUMPTION well
• Delivery is presumed from possession • Indorsement alone without delivery conveys no title and creates no holder
• The maker or drawer may overcome this prima facie presumption by proof • Indorsement in accordance with Sect 191, par 8, means an indorsement
that the instrument was lost or stolen completed by delivery à it applies to both bills and notes
o E: Against a holder in due course • An indorsement is not only a mode of transfer
• It involves a new contract and an obligation on the part of the indorser – an
WHERE DELIVERY CONDITIONAL implied guaranty that the instrument will be duly paid according to the terms
The delivery may be conditional thereof
1. CONDITION PRECEDENT • By his indorsement, the indorser becomes a party to the instrument, and
• Parol evidence = ✓ admissible may be held liable for its payment even without receiving any consideration
• Parol evidence is admissible to show that (notwithstanding delivery) the therefor
instrument was to become operative as a contract only upon the • Each indorsement generates an additional contract between the indorser
HAPPENING OF A FUTURE, CONTINGENT EVENT à since this is a and all subsequent holder
condition precedent to the attaching of any obligation • An indorsement involves the certainty of 2 things:
• Example: 1. The identity of the indorser (as being the payee or true owner); and
o Marc delivers his PN to Penny stating orally that the note is not to 2. The genuineness of his signature
take effect until Penny delivers to Marc a deed to certain property • It is the duty of a person cashing or paying on an instrument to ascertain
à Penny fails to deliver the deed BOTH before paying
§ Evidence of the oral argument = ✓ admissible to show • But the acceptor does not admit the genuineness of the indorser’s signature
that the note which purports to be a contract is in fact
no contract at all INDORSEMENT AND ASSIGNEMENT DISTINGUISHED
2. CONDITION SUBSEQUENT
• Parol evidence = X admissible INDORSEMENT ASSIGNMENT
• Where an instrument is UNCONDITIONALLY delivered as an operative Broader, and sometimes includes the
contract à parol evidence is NOT admissible to show a parol condition (not former (indorsement)
expressed in the writing) attached to the obligation of the contract Negotiable instrument Non-negotiable, instrument in blank
• Example:
o Marc is sued by Penny on a PN given by Marc in part payment of NECESSITY OF INDORSEMENT
his tuition fee à Marc testifies that Penny promised orally that M 1. Indorsement is essential to the execution of an instrument payable to order
would be released on the note of Marc should decide to of the maker or drawer
discontinue his course and should so notify Penny before he has 2. Essential to the negotiation of an order instrument, not of a bearer
received more than 5 lessons à Marc did so decided and notified instrument
Penny in accordance with the oral agreement 3. X necessary to a mere assignment of a negotiable or NN instrument
§ Testimony of Marc = X admissible as it is in direct • Thus, one may acquire title to such instrument without
contradiction with the written contract (as to the indorsement
existence of validity of which there is no controversy) • But without indorsement of an order instrument, he cannot be a
§ Its admission would violate the parol evidence rule HDC thereof even though he is entitled to have the indorsement
made
4. Under proper circumstances, an ESTOPPEL may take the place of an
indorsement to uphold the transfer of a bill or note such as where the
indorsement is forged or unauthorized and the party against whom the
instrument is sought to be enforced is precluded from setting up the defense
of forgery or want of authority
• While an indorsement is usually written on the back, it may be written on the
face of the instrument
FORM OF INDORSEMENT • Place = X essential
• The law does NOT require an exclusive form why which an indorsement • The law looks to the intention of the parties rather than to the form as to
may be accomplished indorsement
• But it “must be written” or in writing 2. UPON A PAPER ATTACHED THERETO
• As “writing” includes “print” à the indorsement made by the rubber stamp or • ALLONGE - Where the indorsement is on a slip of paper physically
typewritten on the instrument complies with the assignment attached to the instrument so as to become part of it, the paper is known as
• The use of the word “assign” does not make a negotiation a mere allonge
assignment • When it is not clear in what capacity a person intended to sign à he shall be
o Example: deemed an indorser
§ I hereby assign all my rights and interests in the note
(sgd.) P USE OF ALLONGE FOR INDORSEMENT
§ Clearly, it cannot be said that P intends to limit the • The question as to whether an allonge can be used whether or not there is
rights of the person to whom he transfers the still room in the instrument has given rise to much conflict
instrument • Although the law makes no distinction, the BETTER VIEW - seems that it is
• BLANK INDORSEMENT - According to Sect 31, the signature of the immaterial whether there is still room or not
indorser, without additional words, is a sufficient indorsement o As one author said: “Why should such a space be material when
• Such indorsement is called a some indorsements are on an attached piece of paper?”
• SPECIAL INDORSEMENT - Where the name of the indorsee is specified. o In neither case does the leaving of blank space facilitate fraud,
The indorser, however, may add words which prohibit or limit the further since nobody would gain any advantage by inserting his name in
negotiation of the instrument the space and rendering himself liable to those who indorsed
• Case: below him upon the note or the allonge
o At the back of the PN payable to order issued by Marc, the
following notations appear: “For value received, I hereby guaranty Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an
the payment of the within note including interest and costs at indorsement of the entire instrument. An indorsement which purports to transfer to
maturity at any time thereafter demanded” (Sgd.) P. (payee) the indorsee a part only of the amount payable, / or which purports to transfer the
o Before maturity of the note à Alan became the bona fide instrument to two or more indorsees severally, / does not operate as a negotiation of
purchaser thereof, for value and without notice of any defense the instrument. But where the instrument has been paid in part, it may be indorsed as
thereto to the residue.
o Alan brought a suit to recover upon the note à Marc argued that
the guaranty provision on the back standing alone was not an INDORSEMENT MUST BE OF ENTIRE INSTRUMENT
indorsement and the note was not thereby negotiated but merely • GR: Indorsement must be an indorsement of the entire instrument
transferred or assigned subject to defenses existing in favor of the • Reason:
maker against the original payee o Instrument must be delivered to the indorsee and there cannot be
o Issue: partial delivery of one instrument
§ Did the guaranty followed by the signature of P amount o The object of the provision is to avoid multiplicity of suits
to an indorsement o A Bill or note divided into different parts divides the cause of
o Held: action
§ 2 conflicting lines of authority • Example:
1. Reasoning of authority which support the o An indorsement of a note for 5k which is “Pay to Alan” or “Pay to
position of Marc is that the indorsement is not Alan P5k” is good indorsement
in blank, but is filled up; that it expresses fully o But “Pay to Alan P4k” leaving the balance without indorsement =
the contract and can raise no implication of X valid negotiation of the instrument
another § Such indorsement renders the whole instrument non-
2. The majority of decisions hold that the negotiable
guaranty operates as an indorsement with § Alan would not be considered a holder but merely an
enlarged liability à but such guaranty is assignee in which case he would be subject to all
wholly inoperative until the note is transferred defenses available between the original parties
by the payee to a third party § Alan is not a holder because the law defines a holder
as “the payee or indorsee of a bill or note who is in
PLACE OF INDORSEMENT possession of it, or the bearer thereof
The indorsement may be written: § Alan is not a payee or bearer of the note
1. ON THE INSTRUMENT ITELSEF § Neither is he an indorsee à for being only a part
• Indorsement is derived from the latin word “INDORSA” indorsee, he is considered merely as an assignee
• It literally means, “writing on the back”
4. As to presence or absence of limitations
a) Conditional
INDORSEMENT TO MULTIPLE PAYEE OR INDORSEES b) Unconditional
1. JOINT PAYEES 5. The other kinds of indorsement are
• Similarly, an indorsement purporting to transfer the instrument to 2 or more a) Joint
persons severally does not operate as negotiation of the instrument for b) Successive
again the cause of action is split c) Irregular or anomalous
• However, the negotiated is valid where the indorsees are joint d) Facultative
• This is impliedly recognized by Section 41 • Note that once an instrument as issued satisfied all the requirements of
• The indorsements of all the indorsees are required for further negotiation of negotiability à no indorsement, even restrictive ones, can negate its
the instruments negotiable status
2. ALTERNATIVE PAYEES
• Instruments are sometimes payable to 2 or more alternative payee Sec. 34. Special indorsement; indorsement in blank. - A special indorsement
• In such case, the negotiation of the instrument may be made by the specifies the person to whom, or to whose order, the instrument is to be payable,
indorsement of either of the payees and the indorsement of such indorsee is necessary to the further negotiation of the
• Example: instrument. An indorsement in blank specifies no indorsee, and an instrument so
o Scenario 1: indorsed is payable to bearer, and may be negotiated by delivery.
§ An indorsement of the note for 5k as follows: “Pay to A
P4k, and pay to B, P1k” = X operate as negotiation of SPECIAL INDORSEMENT EXPLAINED
the note; neither A nor B can sure or further indorse • One where the name of the payee is specified
§ But “Pay to A and B” is valid negotiation • Also known as SPECIFIC INDORSEMENT OR INDORSEMENT IN FULL
§ The indorsements of both A and B are required to • Special and blank indorsements = Unqualified indorsement
negotiate the instrument 1. FORMS
o Scenario 2: • There are 2 forms of special indorsements:
§ “Pay to A or B”, either A or B may indorse the 1. One that specifies the person to whom the instrument is payable
instrument o Example:
o Scenario 3: § Pay to A
§ Marc issued an order not to Penny who indorses it to § In this first example, the indorsement, in legal effect, is
Alan à Subsequently, Alan makes the following “Pay to A or order”
indorsement: “Pay to B or C (Sgd.)” 2. One that specifies the person to whose order the instrument is top be
§ In this case, Alan must acknowledge the receipt or payable
payment of P4k o Example:
§ Pay to the order of A or
WHEN PARTIAL INDORSEMENT ALLOWED § Pay to A or order
• If part of the amount has already been paid à the unpaid balance may be • In either case, the indorsement must be followed by the signature of the
indorsed as this is expressly authorized by law indorser
• Example: • Unlike in the case of the instrument itself, it is not necessary to use the
st
o In the 1 example above, if the maker has paid P4k to Alan, the words of negotiability i.e. “or order” or “to the order of” à their omission
payee, the latter can indorse it to someone else as to the balance, does not affect the negotiability of an instrument which is negotiable on its
thus, “Pay to B P1k” face
o In this case, A must acknowledge receipt or payment of P4k 2. NEGOTIATION OF ORDER AND BEARER INSTRUMENTS
• If the instrument is ORIGINALLY PAYABLE TO ORDER and it is
Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; negotiated by the payee by special indorsement à the indorsement of the
and it may also be either restrictive or qualified or conditional. indorsee is necessary to the further negotiation of the instrument
• If the instrument is ORIGINALLY PAYABLE TO BEARER à it may
CLASSIFICATION OF INDORSEMENT nevertheless be further negotiated by mere delivery even if the original
1. As to methods of negotiation bearer indorsed it specially à but the special indorser is liable only to such
a) Special holders as make title through his indorsement
b) Blank • A special indorsement will turn a bearer paper into an order paper and the
2. As to the kinds of title transferred party specified will have to indorse the instrument before it can be
a) Restrictive negotiated further
b) Non-restrictive
3. As to scope of liability of indorser BLANK INDORSEMENT EXPLAINED
a) Qualified • BLANK INDORSEMENT – one which specifies no particular indorsee
b) Unqualified or general o Such indorsement generally consists only of the signature of the
payee or
• An instrument so indorsed is payable to bearer or whoever possesses it and Pay to Alan
may be negotiated by the indorser by delivery alone regardless of whether
the instrument is originally payable to bearer or not (sgd) Penny
• The use of bearer instruments involves greater risk through theft or loss (sgd) Alan
than the use of order paper
• A thief or finder could likewise negotiate the instrument by mere delivery
and if payment were made in GF à the real owner would not have the right
to recover from the maker or drawer • Bob, as the holder of the instrument with blank indorsement, may
• Example: protect himself against the possibility of loss of title through subsequent
o If Marc makes a note payable to the order of Penny and Penny negotiation, for example by a thief à by converting it into a special
wants to negotiate it to Alan à he simply writes his signature on indorsement
the back of the note and delivers the same to Alan o For example: By writing over the signature of Alan, the words
o In this case, although Penny is an indorser, Alan is not an “Pay to Bob,” thereby indorsing it to himself
indorsee but the bearer thereof à because he is in possession of o Thus the following will appear
a note (or bill) which is payable to bearer
• One of the most common methods of creating a bearer paper is to make a
check that already has imprinted “Pay to the order of” read: Pay to Alan
o Pay to the order of cash or
o Pay to the order of bearer (sgd) Penny
Pay to Bob
Sec. 35. Blank indorsement; how changed to special indorsement. - The holder
may convert a blank indorsement into a special indorsement by writing over the (sgd) Alan
signature of the indorser in blank any contract consistent with the character of the
indorsement.
CONVERSION OF BLANK INDORSEMENT TO SPECIAL INDORSEMENT

• Under Sect 9 (e) - an instrument is payable to order on its face à becomes • But Bob cannot, however, write over it any contract inconsistent with
payable to bearer only if the only or last indorsement is in blank the character of the indorsement à that is, it must not chance the
o The holder, however, may protect himself from liability by contract of the blank indorser
changing the blank indorsement to a special indorsement • Thus, adding:
• Under Sect 35 – an instrument made payable to bearer by an indorsement o “protest waived” or
in blank may be converted into an order instrument à by writing over the o “demand and notice waived” or
signature of the indorser in blank any contract not inconsistent with the o “without recourse”
character of the indorsement = constitute material alteration as it would vary the liability of Alan,
• But the bearer instruments always remains a bearer instrument negotiable the indorser
by mere delivery whether the last indorsement is a blank or a special one =and if made without the consent of Alan, the same would avoid
• Example: the indorsement
o 1: • Or the words “I guaranty payment” = effect of this would be to deprive
§ Suppose Marc makes a note payable to Penny or order Alan if the right of notice in case of dishonor
à the instrument is therefore, originally payable to
order Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:
§ If it is indorsed especially by Penny to Alan, then Alan a) Prohibits the further negotiation of the instrument; or
to Bob in blank à the instrument is converted into a b) Constitutes the indorsee the agent of the indorser; or
bearer instrument because the last indorsement is a c) Vests the title in the indorsee in trust for or to the use of some other
blank indorsement persons. 
§ But if the blank indorsement of Alan is followed by a But the mere absence of words implying power to negotiate does not make an
special indorsement by Bob to Cath à its further indorsement restrictive.
negotiation can be effected only by the indorsement of
Cath, the special indorsee RESTRICTIVE INDORSEMENT EXPLAINED
o 2: • The signature of the indorser without additional words = sufficient
§ In the above example, the indorsement by Penny to indorsement
Alan, and Alan to Bob may appear thus: • HOWEVER, appropriate words may be added which prohibit or limit the
further negotiation of an instrument
• RESTRICTIVE INDORSEMENT – is one so worded so that it either:
1. Prohibits entirely the further negotiation of an instrument or

2. Restricts its further negotiation to a particular person or for a particular • “Pay to A for deposit”
purpose or • A = X acquire title over the instrument
3. Modifies the rights of the holders or the liabilities of the indorser • The indorsement also prohibit the further negotiation of the
1. LIMITS THE RIGHTS OF INDORSEE instrument
• By means of a restrictive indorsement, an indorser notifies all • Where the holder of a check deposits it with a bank other than the
prospective holders that: drawee bank, negotiating the check with the indorsement “for
o The indorsee has only the authority to deal with the deposit” à views differ as to whether this type of indorsement is
instrument as thereby directed and restrictive or non restrictive
o That the indorsee has only a restrictive title thereto 3.
rd
Vests title in indorsee for the benefit of the or 3 party
• Thus, by such indorsement, an indorser can safeguard his interest by • Pay to A in trust for B
limiting the rights of the indorsee whenever he should find it necessary • Pay to A as trustee for P
to entrust negotiable paper to another • Pay to A as agent of P
2. DESTROYS THE NEGOTIABILITY OF INSTRUMENT • Pay to A for my use
• Such indorsement destroys the negotiability of the instrument and bars • Pay to A for the use of B
further negotiation to a holder in due course • The indorsements transfer the legal title to the instrument to A as
• A restrictive indorsee = X HDC in the strcit sense of that terms or in his trustee for B or P, the beneficial owner
own right • They give notice that the paper cannot be negotiated by A for his
• Defenses available against the indorser are not cut off by the transfer own debt or for his own benefit
of the instrument under such indorsement, in the absence of waiver or • But indorsement itself by the use of the words of negotiability, “or
estoppel order” indicates that A may still negotiate the instrument
• All subsequent indorsees acquire only the title of the first indorsee
under the restrictive indorsement EFFECT OF ABSENCE OF WORDS OF NEGOTIABILITY
3. THREE CLASSES •
nd
Under the 2 paragraph of Sect 36, mere absence of the words implying
• The law defines 3 classes of restrictive indorsement: power to negotiate = X make an instrument restrictive
1. Prohibits further negotiation • Thus, “Pay to A” is the same as “Pay to Order of A” or “Pay to A or order”
o “Pay to A only”
• In other words, the instrument, originally negotiable continues to be
o “Pay to A and to no other person:”
negotiable in spite of the absence of such words in an indorsement
§ Here, A is the only one authorized to receive payment
• But if in their place a restrictive word such as “only” is employed so as to
§ Note: Banking rules prohibit the drawee bank from
prevent further negotiation à the instrument is not only restrictively indorsed
having checks with more than one indorsement
but it also ceases to be negotiable
• E: cleared by some bank officials
§ The banking rules banning acceptance of checks for
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive
deposit or cash payment with more than 1 indorsement
indorsement confers upon the indorsee the right:
= X invalidate the instrument
a) to receive payment of the instrument; 
= X invalidate the negotiation or transfer of said check
b) to bring any action thereon that the indorser could bring;
= destroys negotiability of bills or checks by limiting
c) to transfer his rights as such indorsee, where the form of the indorsement
their negotiation by indorsement of only the payee
authorizes him to do so. 
• Under Sect 36 (9) – the only kind of indorsement which stops the But all subsequent indorsees acquire only the title of the first indorsee under the
further negotiation of an instrument is a restrictive indorsement restrictive indorsement.
which prohibits the further negotiation thereof
• In this kind of restrictive indorsement, the prohibition to transfer or RIGHT OF INDORSEE IN RESTRICTIVE INDORSEMENT
negotiate must be WRITTEN in EXPRESS WORDS at the back of • Under any form of restrictive indorsement, the indorsee may:
the instrument à so that any subsequent party may be 1. Receive payment on the instrument
forewarned that it ceases to be negotiable 2. Sue there on in his name and
• Although the holder of a check cannot compel a drawee bank to 3. Negotiate the instrument
honor it because there is no privity between them unless it o E: When it is prohibited in the indorsement
accepts the check à such bank may not legally refuse to honor a • However, the rights of the indorsees subsequent to the first indorsee, are
negotiable bill or check drawn against it with more than 1 subject to the terms of the restrictive indorsement
indorsement if there is nothing irregular with the bill or check and
• Example:
the drawer has sufficient funds à It will make itself liable for suit
o In the indorsement, “Pay to Alan for collection (Sgd.) Penny.”
for damages at the instance of the drawer for wrongful dishonor of
o Alan = merely an agent of Penny and any action he may file on
the bill or check (Gempesaw vs CA)
the instrument is therefore subject to defenses available against
2. Constitutes indorsee agent of indoser
Penny, his indorser
• “Pay to A for collection” o Similarly, is Alan negotiates the instrument, to Bob, a subsequent
• “Pay to A for collection and remittance” indorsee, à Bob “acquires only the title” of Alan, the first
• “Pay to A for collection only” indorsee, who right is merely to collect
o If Penny has already been paid à Alan and Bob cannot enforce EFFECT OF QUALIFIED INDORSEMENT
the instrument anymore 1. INDORSER, A MERE ASSIGNOR
• A special or blank indorsement indicates that the indorser, in addition to
Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser transferring little to the instrument, is guaranteeing its payment is the holder
a mere assignor of the title to the instrument. It may be made by adding to the is unable to obtain payment from the maker, acceptor or drawer at maturity
indorser's signature the words "without recourse" or any words of similar import. • Purpose of qualified indorsement without recourse: to transfer title
Such an indorsement does not impair the negotiable character of the instrument. without guaranteeing payment by the primary party
o In other words, it makes the indorser a mere assignor to the
QUALFIED INDORSEMENT EXPLAINED instrument
• QUALFIED INDORSEMENT – one which constitutes the indorser or mere 2. INDORSER’S LIABILITY LIMITED
assignor of the tile to the instrument • X mean however that the qualified indorser incurs no liability at all
1. WORDS USED CLEARLY EXPRESS INTENTION • The effect of the qualified indorsement à is merely to limit his liability
• An indorsement may be qualified by adding to the indorser’s signature the • He is secondarily liable for breach of his warranties as an indorser under
words: Sect 65
o “Without recourse” • Warranty liability is still present even if the indorsement is qualified
o “San recourse” o E: Unless such indorsement specifically excludes warranties
o “At indorsee’s own risk” • Thus, he is liable if the instrument is dishonored by non-acceptance or non-
o “Indorser not holder payment due to:
To either a blank or special indorsement 1. Forgery
• Thus: 2. Lack of good title to the instrument indorsed
o “Pay to the order of Alan without recourse on me (Sgd) Penny” 3. Lack of capacity to contract on the part of prior parties
o “Pay to A, indorser not holder (Sgd.) P” 4. The fact that the instrument was valueless or not valid at the time of
• RECOURSE – resort to a person who is secondarily liable after the default the indorsement which fact was known to him
of the person who is primarily liable • E: HOWEVER, the qualified indorser, is NOT liable to the indorsee if the
• An indorsement “without recourse” = X affect the negotiable quality of an instrument is dishonored for some other reason like the insolvency of the
instrument à shows only an unwillingness to be answerable for the person primarily liable
solvency of prior parties – a prudent precaution, particularly where the note 3. NEGOTIABILITY OF INSTRUMENT NOT AFFECTED
has a long time to run before it matures • It is a good precaution to indorse without recourse where the instrument has
2. WORDS USED DO NOT CLEARLY EXPRESS INTENTION a long period of maturity so that there is danger that the principal debtor
• There is conflict of opinion as to the whether the words, “I hereby transfer might become insolvent
and assign all my right, title and interest” and other similar words of • Note that the qualified indorsement, “does not impair the negotiable
assignment or transfer appearing above the signature of the indorser character of the instrument”
constitutes an indorsement without recourse • Example:
o MAJORITY o Marc makes a PN à payable to the order of Penny à who
§ By weight of authority, they have been held to indorses the same “without recourse” to Alan
constitute a negotiation and render the writer liable to o If Marc refused to pay because his signature has been forged à
an innocent holder as an indorser, and not as an Penny would be liable to Alan because, as a qualified indorser,
assignor Penny warrants among other things that the instrument is genuine
§ “It is not enough that words are used which simply o But if Marc cannot pay because of insolvency and such
express assignment… when an indorser intends to insolvency was not known to Penny at the time of negotiation à
qualify his indorsement instead of using the words Alan cannot make Penny pay
“without recourse” he attempts to avail of others of § The effect of Alan’s qualified indorsement is to exempt
similar import, those other words must be such as to Penny from paying the instrument in case of default of
clearly express the intention Marc
o OTHER COURTS § So, Alan, cannot recover the amount of the note from
§ An assignment of “right, title and interest” = qualified Penny
indorsement only on the ground that the words are of
similar import as “without recourse” Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party
§ Construing the terms, they limit the right acquired by required to pay the instrument may disregard the condition and make payment to
the transferee to those which the transferor had therein the indorsee or his transferee whether the condition has been fulfilled or not. But any
and thus constitute him as a mere assignor person to whom an instrument so indorsed is negotiated will hold the same, or the
proceeds thereof, subject to the rights of the person indorsing conditionally.

ABSOLUTE AND CONDITIONAL INDORSEMENT EXPLAINED Blank and conditional Payable upon completion of my house in Pateros,
Metro Manila (Sgd.) Alan
ABSOLUTE INDORSEMENT CONDITIONAL INDORSEMENT Special, unrestrictive, Pay to B (Sgd.) Alan
One by which the indorser binds himself Is one by which the indorser imposes unqualified
to pay, upon no other condition than the some other conditions to his liability or on And so on
failure of prior parties to do so and of due the indorsee’s right to collect the
notice to him of such failure proceeds of the instrument
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument,
• CONDITIONAL INDORSEMENT payable to bearer, is indorsed specially, it may nevertheless be further negotiated
o Has no effect on the further negotiation of the instrument by delivery; but the person indorsing specially is liable as indorser to only such
o The party required to pay, if he chooses, may make payment, holders as make title through his indorsement.
disregarding the condition without incurring any liability because he is
expressly authorized to do so under Section 39 EFFECT OF SPECIAL INDORSEMENT WHERE INSTRUMENT ORIGINALLY
o But the person who received payment will hold the proceeds subject to PAYABLE TO BEARER
the right of the conditional indorser • By virtue of the present section, an instrument payable to bearer = X
o A conditional indorsement = X prohibit the further negotiation of the converted into an instrument payable to order by being indorsed specially
instrument regardless of whether the condition has been fulfilled or not • Therefore, notwithstanding the provisions of Sect 34, the indorsee may
o It should be remembered that while a condition in the indorsement X further negotiate the instrument by mere delivery
destroy negotiability à a condition appearing on the face of instrument • In such case, the person indorsing is specially liable only to those holders
renders the instrument non-negotiable who can trade their title to the instrument by a series of unbroken
o Example: indorsements from such special indorser
§ Marc makes a note for P50k à payable to Penny or order • His liability shall be that of a GENERAL INDORSER as provided in Sect 66
who indorses as follows, “Pay to Alan on completion of the • The liability of a person who negotiated by delivery alone (which is exactly
construction of my house (Sgd.) Penny.” the same as one who indorses qualifiedly) = governed by Section 65
§ The condition imposed is binding in favor of Penny as • Example:
regards Alan and subsequent holders through Alan o Marc issued PN payable to Penny or bearer à and delivers it to
§ If Alan has not finished the construction of Penny’s house on Penny
the date of maturity à Marc may refuse to pay Alan on the o To negotiate the note Alan à Penny has only to deliver the same
ground that the condition has not been or has not yet been to Alan
fulfilled o With or without indorsement of Penny à Alan becomes the holder
§ Without the condition having been fulfilled à Marc may, if he of the instrument by its delivery because indorsement is not
wants to, disregard the condition and pay Alan necessary
§ This Marc may do because he is the principal debtor à Marc o If Penny indorses the instrument to Alan à Alan may
has the right to terminate his obligation upon maturity and nevertheless negotiate it by mere delivery to Bob
cannot be burdened with conditions which were not part of o However, Bob will have no right against Penny since he (Bob) did
his contract not obtain his title through the indorsement of Penny
§ However, in such case, Alan holds the proceeds in trust for o But Alan, as indorser and Marc, as maker, à will be liable to Bob
Penny and does not become and owner thereof until the • Example 2:
condition is fulfilled o Suppose Alan indorses the note to Bob à Bob negotiates the
§ If the condition is not complied with à Alan must turn over same to Cath by mere delivery
the P50k to P, the person indorsing conditionally o The following indorsement thus appears on the back:
DIFFERENT COMBINATIONS OF INDORSEMENTS
• All indorsements are either: Pay to Alan (Sgd.) Penny
o Special or blank
o Restrictive or non-restrictive Pay to Bob (Sgd.) Alan
o Etc
• Thus, different combinations are possible o
• Examples: o In this case, Penny is liable to Alan and also Bob as a general
indorser under Sect 66
Special and restrictive Pay to Alan only (Sgd) Penny o Alan is likewise liable to Bob
Special and qualified Pay to A without recourse (Sgd) Penny o Cath obtains her title through negotiation by delivery of the
Special and Conditional Pay to A if he marries before he reaches the age of instrument by Bob and not through the indorsements of Penny
25 (Sgd) Penny and Alan
o Hence, Penny and Alan are liable to Cath
Blank and restrictive For collection only (Sgd) Alan o But Bob would be liable to Cath under Section 65
3. INDORSEMENT TO A CO-PAYEE
APPLICATION OF SECTION 40 • A check payable to the order of 2 persons, when indorsed by only one of
1. ONLY INSTRUMENTS ORIGINALLY PAYABLE TO BEARER such payees, who had no authority to indorse for the others à was held no
• Section applies only instrument payable to bearer longer transferable as NI but only as a NEGOTIABLE CHOSE IN ACTION
• Therefore, X apply where the paper is originally made payable to order • But it has been held that the indorsement and delivery of the instrument by
and indorsed in blank because by Section 9, a note or bill which upon one of 2 joint payees to his co-payee may transfer full title to the latter
its face is payable to order, becomes payable to bearer only when the
last indorsement is followed by a special indorsement, the instrument is WHEN JOINT INDORSEMENT BY ALL PAYEES OR INDORSEES NOT REQUIRED
not within the terms of Section 9 • There are 2 exceptions to the rule requiring joint indorsement:
• Example: 1. Where the payees or indorsees are partners
o Thus, if a check drawn to the order of Penny à is indorsed 2. Where the payee or indorsee indorsing has authority to indorse for
in blank by the payee à and delivered to Alan à and Alan the others
indorses it to the order of Bob à it is no longer payable to • Example:
bearer for the reason that the last indorsement which by o Marc makes a note payable to the order of Penny and Alan
Section 9 is made the test, is a special indorsement o The indorsement of either Penny or Alan alone, or the
2. REASON indorsement of both of them, by one without authority from the
• The reason for making a distinction in this respect between instruments other = X constitute negotiation of the instrument because it would
originally drawn payable to bearer and instruments which have become so not be an indorsement of the entire instrument
payable because indorsed in blank is obvious § E: If Penny and Alan are partners, or the one indorsing
• In one case, the maker or drawer has expressly provided that the instrument has authority to indorse for the others, à the
shall be payable to bearer, and it cannot be made payable to order without indorsement will bind the other
modifying these terms o Similarly, if Marc makes a note payable to the order of Penny who
• But where, upon its face, it is payable to order, a transferee, taking a blank indorses “Pay to Alan and Penny” à both must indorse
indorsement does not, by indorsing it, specially, change its tenor originally § E: Unless Alan and Penny are partners or the one
drawn indorsing has authority to indorse for the others
• Section 41 = interpreted in light of our law on partnership à partnership has
Sec. 41. Indorsement where payable to two or more persons. - Where an a personality separate and distinct from the partners composing it
instrument is payable to the order of two or more payees or indorsees who are not o Hence, an indorsement of an instrument payable to Penny and
partners, all must indorse unless the one indorsing has authority to indorse for the Alan as partners doing business under a firm name à must be in
others. the name such firm and not in the name of Penny and Alan as
joint payees or indorsees
INDORSEMENT WHERE INSTRUMENT PAYABLE TO 2 OR MORE JOINT o Ofcourse, the partner indorsing must have authority, express or
PAYEES OR INDORSEES implied, to sign for the partnership
This section refers to a JOINT INDORSEMENT
1. 2 OR MORE PAYEES OR INDORSEES JOINTLY Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where
• Under Sect 8(d) - an instrument may be payable to the order of “2 or an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a
more payees jointly” bank or corporation, it is deemed prima facie to be payable to the bank or
• Under section 8(e) – an instrument may be payable to the order of corporation of which he is such officer, and may be negotiated by either the
“one or some several payees” indorsement of the bank or corporation or the indorsement of the officer.
• Section 41 = X apply to instruments payable to 2 or more payees
severally, such as “Pay to the order of P or A” à governed by Section INDORSEMENT WHERE INSTRUMENT DRAWN OR INDORSED TO A PERSON
8(e) and may be negotiated by any of such alternative payees AS CASHIER
irrespective of the share corresponding to each in the instrument • The cashier of a bank, president of a corporation, or any other
• Anyone of such parties in possession of the instrument is the holder administrative officer, as secretary or treasurer à may b:
2. INDORSEMENT BY ALL PAYEES OR INDORSEES o Expressly authorized to issue negotiable paper for the corporation
• If the instrument is payable to the order of 2 or more payees or or
indorsees à ALL MUST INDORSE in order for the transaction to o He may have such power from implication by reason of having
operate as a negotiation previously exercised the power
• If only 1 indorses à his indorsee would have no right of action for said • Example:
indorsement would be contrary to the provision of Sect 32 o In a case where Shannen was a cashier of a MBank à a
• The payment of an instrument over a missing indorsement is the certificate of deposit issued by MBank to the order of “Shannen
equivalent of payment on a forged instrument or an unauthorized Cashier” was indorsed “Shanner Cashier” and came to the
indorsement in itself in the case of joint payees. plaintiff (HDC) à it was held that the indorsement was that of the
• See Metropolitan Bank vs BA finance corporation case (Page 180) bank à and it was not competent for the bank to show that
Shannen acted on his own interest and in violation of his duty to
the bank
o Where a note was indorsed by Alan à parol evidence = X Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears
admissible to show that the bank was intended as indorsee even date after the maturity of the instrument, every negotiation is deemed prima facie to
though Alan was, in fact, cashier of said bank à In case Alan have been effected before the instrument was overdue.
delivers he note to the bank without indorsement à the bank may
sue upon it, but subject to defenses PRESUMPTION AS TO TIME OF INDORSEMENT
• An instrumemt drawn or indorsed to the order of the “cashier of the • Section is important because in order to constitute one a HDC à he must
university of the Philippines” = deemed prima facie payable to said have taken the instrument before it was overdue
university and may be negotiated by the university through the indorsement • If the indorsement bears a date à the presumption is that it is the true date
of any of its duly authorized officers à thus if the president is authorized by • If the indorsement is without a date à the presumption is that it was
the by-laws of the univ = he may indorse the instrument negotiated before maturity
• The word “corporation” in this section = X include cities and towns à so that • Burden of proof: The one who alleges that the indorsement was effected
no authority is conferred upon a town treasurer to impose upon his own after maturity
town the liability of an indorser • It has been held that the fact that an indorsement appears to be in a much
o So that an instrument payable to the “Treasurer of the Town in F” fresher ink than the face of a demand note = X sufficient to overcome the
= stands in the same footing as it is payable to the town, which is presumption that it was indorsed before it was overdue
the real payee and the treasurer may not indorse it for circulation • Example:
• The presumption established in this section may be disproved by sufficient o A note payable on Dec 10, 2013 bears the undated indorsement
evidence to the contrary of the payee
o It may be shown that the instrument really belongs to the cashier o Presumption: he indorsed the note on or before Dec 10, 2013,
personally as the real creditor of the maker or drawer that is before the note was overdue
o But presumption = rebuttable
Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name o It can be shown that the negotiation was actually made after Dec
of a payee or indorsee is wrongly designated or misspelled, he may indorse the 10, 2013
instrument as therein described adding, if he thinks fit, his proper signature.
Sec. 46. Place of indorsement; presumption. - Except where the contrary appears,
INDORSEMENT WHERE NAME MISSPELLED, ETC. every indorsement is presumed prima facie to have been made at the place where
• Where the name of the payee or indorsee is “Luz M. Villamayor” when the the instrument is dated.
name of the surname should spell “Villamor” à the instrument may be
indorsed as therein described thus: PRESUMPTION AS TO PLACE OF INDORSEMENT
a) (Sgd) Luz M. Villamayor; or by the same name but by adding his • In the absence of evidence to the contrary, an indorsement is presumed to
proper signature as follows: have been made at the place where the instrument is date
b) (Sgd) Luz M. Villamayor • Rebuttable presumption
(Sgd.) Luz M. VILLAMOR • The place of indorsement becomes important where the law in different
• The payee or indorsee may sign his name in the same way as it appears in countries varies
the instrument à but the signature in both names may be required by a • In such case, an indorsement is governed by the law of the state where it
person paying or giving value for the instrument is made although the instrument is executed in a different state
• A person may correct a spelling or error à only if the intention of the maker • Example:
or drawer was that the instrument should be payable to the person making o Suppose a note is dated as follows: “Manila, Dec 10, 2013”
the correction o If it is subsequently indorsed by the payee without indicating the
• Any variance between the name of the payee on the face of the instrument place of indorsement à the presumption is that it was made in
and the signature on the back thereof à should be ignored if the payee and Manila
the indorser are the same person o Whoever alleges otherwise has the burden of proof
Sec. 44. Indorsement in representative capacity. - Where any person is under Sec. 47. Continuation of negotiable character. - An instrument negotiable in its
obligation to indorse in a representative capacity, he may indorse in such terms as origin continues to be negotiable until it has been restrictively indorsed or
to negative personal liability. discharged by payment or otherwise.
INDORSEMENT IN REPRESENTATIVE CAPACITY CONTINUATION OF NEGOTIABLE CHARACTER OF ORIGINALLY NEGOTIABLE

• An instrument may be indorsed by a person either: INSTRUMENT
o Personally or 1. GENERAL RULE
o Through an agent • An instrument negotiable in its origin is always negotiable until paid
• The authority of the agent = X need to be in writing • This is true although the NI has been dishonored or is already overdue
• See comment under Sect 20 as to how such indorsement should be made à but any holder who acquires the instrument can no longer be a HDC
in accordance with Section 52 (b)
• An instrument indorsed after it became overdue = considered payable
on demand
2. EXCEPTIONS o Cath, the present holder, may strike out all
1. When the instrument has been RESTRICTIVELY INDORSED; or indorsements because they are not necessary to her
2. When it has been DISCHARGED by payment or otherwise title
• It should be remembered that not every restrictive indorsement prohibits further o The instrument, being originally bearer on its face à it
negotiation of the instrument remains a bearer instrument in spite of the special
• Therefore, the words “restrictively indorsed” in this section = construed to refer indorsement and therefore, may be negotiated by mere
only to such restrictive indorsement as prohibits further negotiation of the delivery
instrument o If Cath cancels Penny’s indorsement, then Penny,
• Payment is not the only way of discharging an instrument whose indorsement is struck, and Alan and Bob
• That is why the law includes the words, “otherwise” “indorsers subsequent to him” (P) à are released from
• A NI ceases to be negotiable when it us discharged by any of the different ways liability on the instrument
enumerated in Section 119 o Cath could only claim against Marc, the maker
o Alan and Bob are also discharged from liability because
CONVERSION FROM NON-NEGOTIABLE TO NEGOTIABLE INSTRUMENT they are deproved of their right of recourse against
• The GR: is that a paper which is NN in its inception à continues to be NN Penny
• An indorsement of such paper = X change its character and a blank o If Cath strikes out Bob’s indorsement then only Bob will
indorsement does not have the effect of making the paper a bearer be freed from liability
instrument, not only because of the change of contract which this would 2. AN INSTRUMENT ORIGINALLY PAYABLE TO ORDER (sec 8)
involve but also because the NIL provision as to the effect of a blank • May be negotiated only by the indorsement of the payee
indorsement has no application to a NNI completed by delivery
o E: However, the view has been taken that although an instrument • When the indorsement is SPECIAL à the indorsement of the
as originally made is not negotiable for lack of words of special indorsee is necessary to the further negotiation of the
negotiability à yet, if it is indorserd “to order” or “bearer” à it instrument
becomes AS BETWEEN THE INDORSER AND SUBSEQUENT • When the indorsement is in BLANK à the instrument becomes
HOLDERS, a NI and subject to the principles and usages of payable to bearer and may be negotiated by mere delivery
instruments of that character • Under Section 9 (e) – an instrument which upon its face is
payable to order, becomes payable to bearer when the only or
last indorsement is in blank
Sec. 48. Striking out indorsement. - The holder may at any time strike out any • Hence, when a blank instrument is followed by a special
indorsement which is not necessary to his title. The indorser whose indorsement is instrument and the holder strikes out all indorsements subsequent
struck out, and all indorsers subsequent to him, are thereby relieved from liability on to the blank indorsement à the instrument would become
the instrument. payable to bearer as the last indorsement would be in blank
• The special indorsements are not necessary to the holder’s title
WHEN HOLDER MAY STRIKE OUT INDORSEMENT as even without any subsequent indorsement he could have
1. AN INSTRUMENT PAYABLE TO BEARER ON ITS FACE (sec 9) acquired title to the instrument by mere delivery
• May be negotiated by mere delivery without indorsement • The indorser whose indorsement is cancelled and all indorsers
• In case it is indorsed à it remains a bearer instrument and may subsequent to him à are thereby discharged from their liability on
be further negotiated by mere delivery the instrument
• By virtue of Section 48, the holder make strike out all intervening • Since the instrument is payable to order à it cannot be validly
indorsements or any of them for none of them is necessary of his negotiated without his indorsement
title • Example:
• Example: o Suppose Marc issued a promissory note payable to the
o Suppose Marc makes a notes payable to the order of order of Penny. It is indorsed as follows
Penny or bearer
o The note is indorsed specially and in succession as (Blank indorsement)
follows:
(Sgd.) Penny
Pay to Alan
(Sgd.) Penny Pay to Bob
(Sgd) Alan
Pay to Bob
(Sgd) Alan Pay to Cath
(Sgd) Bob
Pay to Cath
(Sgd) Bob

o In this case, the indorsement of Alan and Bob = X o Thus, such an instrument may still be effectually transferred by
necessary to Cath’s title by virtue of the blank mere delivery
indorsement of Penny o However, before the instrument is actually indorsed by Penny,
o If their indorsements are cancelled à the note would Alan cannot be considered a “holder” since he does not come
become payable to bearer as the remaining within the definition of Sect 191, nor is he “bearer” as the
indorsement would be an indorsement in blank instrument is not payable to bearer
o Cath may “aver that the first blank indorser (Penny) o Alan is a mere assignee who holds the instrument subject to
refers immediately to him” equities
o If Alan’s indorsement is stricken out à Bob, is also o For instance, is there was an absence of consideration à Marc
relieved from liability being an indorser subsequent to could set up that fact as a defense against Alan although the
Alan latter had no knowledge of it at the time of the transfer
o But Penny’s indorsement is necessary to the title of • Before indorsement, transferees do NOT enjoy the presumption of
Cath since Penny cannot validly negotiate the note ownership in favor of holders since they are neither payees nor indorsees of
which is payable to order, to Cath by mere delivery such instruments à Something more than mere possession is necessary to
authorize payment to them in the absence of other facts from which the
Sec. 49. Transfer without indorsement; effect of. - Where the holder of an authority to receive payment may be inferred
instrument payable to his order transfers it for value without indorsing it, the transfer • Note that Sect 49 – speaks of transfer without indorsements of an
vests in the transferee such title as the transferor had therein, and the instrument “for value
transferee acquires in addition, the right to have the indorsement of the o If the transfer is gratuitous à the done-transferee has no right to
transferor. But for the purpose of determining whether the transferee is a holder in compel the donor-transferor to make the indorsement although,
due course, the negotiation takes effect as of the time when the indorsement is as a legal owner of the instrument, he has the right to sue thereon
actually made.
EFFECT OF INDORSEMENT AFTER TRANSFER
EFFECT OF TRANSFER WITHOUT INDORSEMENT • As already stated in the above example, Alan may require Penny to indorse
• This section is applicable only to an instrument payable to order the instrument and unless there is proof of an agreement to the contrary, he
• The indorsement of the payee is necessary to its negotiation has a right to an unqualified indorsement
• The special indorsee of an indorsement should likewise indorse it if he • The indorsement of Penny converts the transfer into a “negotiation” and
wants to negotiate it further makes Alan a “holder” – i.e. the indorsee of the instrument in possession of
• Where the holder of a bill payable to order transfers it for value without it
indorsing it, the transferee cannot negotiate the bill by indorsing it to another • But the time for determining whether Alan is a HDC is as of the time of
• Section 49 contemplates a situation where the payee of indorsee delivers actual indorsement
said instrument for value without, however, indorsing it • Hence, if by the time that Alan had already notice of the absence of
• The transaction operates as an EQUITABLE ASSIGNMENT and the consideration à he cannot be a HDC although he had no such notice at the
transferee acquires the instrument subject to defenses and equities time of delivery
available among prior parties à He cannot negotiate it • Reason: Is that negotiation is completed at the time of indorsement, not at
• If the transferor has legal title à the transferee acquires: the time of delivery
o Such title and, in addition,
o The right to have the indorsement of the transferor Sec. 50. When prior party may negotiate instrument. - Where an instrument is
o And also the right, as holder of the legal title, to maintain legal negotiated back to a prior party, such party may, subject to the provisions of this Act,
action against the maker or acceptor or other party liable to the reissue and further negotiable the same. But he is not entitled to enforce payment
transferor thereof against any intervening party to whom he was personally liable.
• Before the instrument is made, the transferee is NOT a holder of the
instrument notwithstanding section 59 RIGHT OF PRIOR PARTY TO NEGOTIATE
• Under Section 191, he is neither: • Section 50 – refers to a REACQUIRER or a holder who negotiates an
o A “holder” - because is not a payee or indorsee instrument and then subsequently reacquires it
o Nor a “bearer” – because the instrument is not payable to bearer • If a prior party reacquires an instrument before maturity à he may negotiate
• The negotiation takes effect as of the time the indorsement is actually made the same further
for the purpose of determining whether or not the transferee is a HDC • But after paying the holder à he may not claim payment from any
• Example: intervening parties
o Marc issued an instrument payable to Penny or order à Penny • The law, to avoid multiplicity of suits, denies an action to a party thus
delivers it to Alan for value without indorsing it situated
o The transfer = X constitute negotiation but it vests in Alan such • However, it was rule in a case, if the instrument had passed through his
title as Penny had an in addition, it gives Alan the right to have hands without indorsement, or it had been indorsement by him without
Penny’s indorsement and to recover from Marc who has, recourse, the reason would not exist, and there could be no objection,
however, the right to require proof from Alan that the transfer to founded on his prior holding or indorsement, to the maintenance of an
him was legitimate action by him against the parties liabile to the instrument
• Example:
o Marc makes a note payable to the order of Penny. It is indorsed
successively as follows:
Pay to Alan
(Sgd.) Penny
Pay to Bob
(Sgd) Alan
Pay to Cath
(Sgd) Bob
Pay to Dugs
(Sgd.) Cath
Pay to Bob
(Sgd.) Dugs
Pay to Ekta
(Sgd) Bob
o In the above example, Bob, a prior party, reacquires the note

o He may further negotiate the same to any subsequent holder
o For instance, he may indorse it to Ekta
o If several persons indorse in succession (SUCCESSIVE
INDORSEMENT) à they are liable to each other in the order they
indorse
o But in this case, Bob may not sue Cath or Dugs tow hom he was
personally liable for his reacquisition of the instrument
o If Bob can hold Cath and Dugs liable in his capacity as a
subsequent holder to them, then Cath and Dugs should also be
able to hold Bob, a prior indorser, liable to them à This would
result in multiplicity of actions
o Bob’s rights would, therefore, be limited to Marc, Penny and Alan
o But Cath and Dugs are not discharged from liability on the
instrument
o Ekta, the present holder, could have a right of recourse, not only
against Marc, Penny, Alan, and Bob, but also against Cath and
Dugs
o But if Bob strikes out his indorsement to Cath under Sect 48 à
and this Bob can do because his indorsement to Cath is X
necessary to his title à Cath and Dugs will be released from
liability
LIMITATIONS OF RENEGOTIATION
In the following cases, a prior party CANNOT further negotiate the instrument:
rd
1. Where it is payable to the order of a 3 person, and has been paid by the
drawer
2. Where it was made or accepted for accommodation and has been paid by
the party accommodated
3. In other cases, where the instrument is discharged when acquired by prior
party

Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any • Also, a blank for the place of payment for the amount of attorney’s fees
material particular, the person in possession thereof has a prima facie authority to where it supplies a manifest omission in accord with the character and
complete it by filling up the blanks therein. And a signature on a blank paper delivered object of the blank
by the person making the signature in order that the paper may be converted into a • The authority to complete is NOT an authority to alter
negotiable instrument operates as a prima facie authority to fill it up as such for any • The holder has no authority to change the amount after it has been filled in
amount. In order, however, that any such instrument when completed may be or to insert the word “or order” or “or bearer” after the name of the payee
enforced against any person who became a party thereto prior to its completion, it • GR: X presume authority
must be filled up strictly in accordance with the authority given and within a reasonable o E: the character of the instrument directly indicates it, to add at
time. But if any such instrument, after completion, is negotiated to a holder in due the end of the instrument the word, “with interest”
course, it is valid and effectual for all purposes in his hands, and he may enforce it as 2. AUTHORITY TO PUT ANY AMOUNT
if it had been filled up strictly in accordance with the authority given and within a • A signature on a blank paper delivered in order that it may be converted into
reasonable time. a NI = PRIMA FACIE AUTHORITY TO FILL IT UP AS SUCH FOR ANY
AMOUNT
STEPS IN ISSUANCE OF NEGOTIABLE INSTRUMENT • Example:
• 2 steps: o Suppose in the same example, M just delivered a blank paper
1. Mechanical act of writing containing his signature to P
o completely and in accordance with the requirements of Section 1 o In order that P may have authority to fill it up for any amount à it
2. Delivery of the complete instrument must be shown by him that the purpose of M was to convert the
o By the maker or the drawer said blank paper into a NI
o To the payee or holder o In the absence of such a showing à X prima facie authority of P
o With the intention of giving effect to it to fill it up for the amount
• Such instrument, complete and delivered, is negotiable and may be o Thus, if M signs his name on a piece of paper and delivers it to P
enforced accordingly for the PURPOSE OF IDENTIFYING OR COMPARING IT WITH
M’S SIGNATURE à M will not be liable even to a HDC after it is
APPLICATION OF SECTION 14, 15, and 16 converted into a NI
• Section 14 – applies only to incomplete instrument which has been 3. RIGHT AGAINST PARTY PRIOR TO COMPLETION
delivered by the maker or drawer to the payee or holder (I + D) • The instrument may be enforced only against a party prior to completion if
• Section 15 – incomplete instrument and undelivered (I – D) filled up strictly in accordance with the authority given and within a
• Section 16 – complete instrument but undelivered (C- D) reasonable time
• When considering Section 14, it is important to bear in mind the distinction • If an instrument is incomplete when delivered à the holder has prima facie
between the 2 classes of instrument: authority to fill up the blanks thereon
1. Those in which OBVIOUS BLANKETS are left at the time they are made • If a blank paper is delivered by the person making the signature à the
or indorsed, of such a character, as manifestly to indicate that the holder has prima facie authority to fill it up for any amount if the person
instruments are incomplete until such blanks shall be filled up making the signature intended to convert it into a NI
• Doctrine of implied authority: One who signs or indorses = • In either case, the PRESUMPTION - is that the blank was filled up in
liable as bona fide holders thereof accordance with the authority given and within reasonable time
2. Those which are APPARENTLY COMPLETE, containing blanks only • Burden to rebut the presumption of agency: the person who signed his
because the written matter does not fully occupy the entire paper as to name by:
preclude the insertion of additional words or figures, or both o Contrary proof of want of authority or
• Doctrine of negligence: Liability for the amount of the instrument o Proving that the authority granted was exceeded
which has been increased by filling up unoccupied spaces therein • Example:
placed o Suppose that in the first example, M authorized P to put in the
blank only 10k
o However, P inserts the sum of 2k and then indorses the note to A,
RULES WHERE INSTRUMENT INCOMPLETE BUT DELIVERED from A to B, and B to C, who is not a HDC
1. AUTHORITY TO FILL UP BLANKS o It is believed that C, not being a HDC = X collect anything on the
• The holder or the person in possession = has prima facie authority to note from M
complete an incomplete instrument by filling up the blanks therein o The implication of the law is that when one or both requisites are
• Material particular – any particular proper to be inserted in a negotiable absent, the XHDC cannot recover
instrument to make it complete; and the power to fill in blanks extend, o Such holder is to be treated the same way as a holder not in due
therefore, to every incomplete feature or the instrument course of a materially altered instrument
• Material = X synonymous with necessary 4. RIGHT OF HOLDER IN DUE COURSE
• Thus, blanks for date, due date, name of payee, amount or rate of interest • The defense that the instrument had not been filled up in accordance with
may be filled in the authority given and within reasonable time = X available as against a
• It has been held that even the blank for the name of the drawer may be filled HDC
in • Example:
o Let us assume that C = HDC remote party other than a holder in due course, the delivery, in order to be effectual,
o The defense that P exceeded his authority = X avail against C for must be made either by or under the authority of the party making, drawing, accepting,
in such case, the note “is valid and effective for all purpose in his or indorsing, as the case may be; and, in such case, the delivery may be shown to
hands and he may enforce it as if it has been filled up strictly in have been conditional, or for a special purpose only, and not for the purpose of
accordance with the authority given and within reasonable time transferring the property in the instrument. But where the instrument is in the hands of
• IN SHORT, SECTION 14 MERELY RAISES A PERSONAL DEFENSE a holder in due course, a valid delivery thereof by all parties prior to him so as to make
• The rule is founded upon the PRINCIPLE – where one of 2 persons must them liable to him is conclusively presumed. And where the instrument is no longer in
suffer by the BF of another, the loss must fall upon the one who first the possession of a party whose signature appears thereon, a valid and intentional
reposed confidence and made it possible for the loss to occur delivery by him is presumed until the contrary is proved.
Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument RULES WHERE INSTRUMENT MECHANICALLY COMPLETE
has not been delivered, it will not, if completed and negotiated without authority, be a 1. UNDELIVERED
valid contract in the hands of any holder, as against any person whose signature • Every contract on NI even it is completely written à is incomplete and
was placed thereon before delivery. revocable until its delivery for the purpose of giving it effect
• GR: A NI has no legal inception or existence until it has been delivered in
RULES WHERE INSTRUMENT INCOMPLETE AND UNDELIVERED (I – D) accordance with the purpose and intent of the parties à without initial
1. DEFENSE EVEN AGAINST HDC delivery, there can be no liability thereon à moreover, such delivery must
• The fact that an incomplete instrument, completed without authority, has not be intended to give effect to the instrument
been delivered = defense even against a HDC • In short, there must be delivery
• Example: • DELIVERY – transfer of possession, actual or constructive, from one person
o Suppose M makes a note for k with the name of the payee in to another with intent to transfer title thereto
blank and keeps it in his drawer • ISSUE – first delivery of the instrument, complete in form, to a person who
o P steals the note and inserts his name as payee à then indorses takes it as a holder
the note to A à A to B à B to C à C to D (holder in due course) • **Issue and delivery are used interchangeable
o Can D enforce the note against M? • HOLDER – the payee and indorsee of a bill or note who is in possession of
§ NO! it or the bearer thereof
§ Law specifically says that the instrument is not a valid • Example:
contract in the hands of any holder o M makes a note payable to the order of P and keeps it in his
§ Even against HDC drawer
§ As the signature of M was placed thereon before o In the absence of delivery, the instrument though complete in all
delivery à X assume any responsibility whatsoever its particulars à there is NO contract
§ Real defense exists o M does not assume any liability
§ May be considered FORGERY insofar as M is o P does not acquire any right against M who may revoke, cancel or
concerned à since both the 2 steps on the execution of tear it up with or without reason
a NI are X complied with 2. DELIVERED
§ However, there is prima facie presumption of delivery • The place where the instrument was written, signed or dated does NOT
à which M must rebut by proof to the contrary necessarily fix or determine the place where it was executed
§ Under certain circumstances, negligence by M may • What is of decisive importance is the delivery thereof
render him liable to a HDC • The delivery of the instrument is the final act essential to the consummation
2. DEFENSE AVAILABLE TO PARTIES PRIOR TO DELIVERY as an obligation
• The invalidity of the above instrument is only with reference to the parties • Delivery must be made by the:
whose signature appear on the instrument BEFORE and NOT AFTER o Maker or drawer himself or
DELIVERY o A duly authorized agent
• Example: • It has been held that mailing a NI with intent to transmit it to the payee
o In the same example, the instrument can be enforced against P, constitutes (constructive) delivery
A, B and C because as indorsers, they warrant that instrument is
• But a note drawn by testator and found among his effects after his death is
genuine and in all respect what it purports to be
not enforceable, no delivery being shown
o As their signature appear on the instrument after delivery à the
• Receipts of checks by the collector of the payee is not the issuance and
instrument is valid as to them
delivery to the payee in contemplation of law
o In the case of P = he is liable not merely because he is an
indorser but also because he is the one responsible for the theft, • The collector cannot take the checks as holder as defined above; neither
and the completion and negotiation of the instrument can he be deemed an agent where he appears to be a mere employee (i.e.
messenger) of the payee
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a 3. IN POSSESSION OF PARTY OTHER THAN A HDC
negotiable instrument is incomplete and revocable until delivery of the instrument for • Prima facie presumption of delivery: If a complete instrument is found in
the purpose of giving effect thereto. As between immediate parties and as regards a the possession of an immediate party or remote party other than a HDC
o E: Subject to rebuttal
• GR: An undelivered instrument is inoperative because delivery is a • This conclusive presumption exists as well when the instruments taken from
prerequisite to liability a thief as in any other case
rd
o E: However, if the instrument is no longer in the possession of the • General principle: When one of 2 persons must suffer by the acts of a 3 ,
person who signed it and it is complete in its terms, “a valid and he who has enabled such third person to occasion the loss must bear it
intentional delivery by him is presumed” • Example:
§ E to E: Until the contrary is proved o In the 2 preceding examples, if the note were negotiated to D,
• IMMEDIATE PARTIES – refers to those who are immediate in the sense of under the circumstances which make him a HDC à M cannot
having or being held to know the conditions or limitations placed upon the prove that the note was stolen by P or was delivered
delivery of the instrument. unconditionally or for a special purpose only à because one an
o In short, it contemplates privity not proximity instrument is in the hands of D, a valid and intentional delivery by
o A payee who is a HDC = X immediate party in the sense of M, a prior party to D, as to make him liable, is conclusively
Section 16 presumed
• REMOTE PARTIES – parties who are not in direct contractual relation to o The defense = personal defense; X real defense
each other • E: Defense X apply to an instrument which is incomplete
o E: But if they are chargeable, for example, with knowledge or • But in case there was no actual delivery to anyone for any purpose by the
notice of any infirmities in the instrument or defect in the title of maker of PN who was a victim of theft or robbery committed in his house
the person negotiating the same à they will be considered as and there was nothing to show any fault or negligence on his part à it would
immediate parties for purposes of Sect 16 be unreasonable to hold him liable even to an innocent holder for value
o Example: • A note in the hands of the maker, albeit complete, is in law, but a blank
§ Suppose in the preceding example, P steals the note piece of paper à its wrongful seizure cannot create against his will a valid
and indorses it to A à A to B à B to C à C to D contract where none existed before
§ D has knowledge that the note was stolen by P
§ In this case, P and = immediate parties Sec. 17. Construction where instrument is ambiguous. - Where the language of
§ D is also an immediate party, although he is physically the instrument is ambiguous or there are omissions therein, the following rules of
remote from M because he is not a HDC construction apply:
§ As against them, M may prove that no delivery was (a) Where the sum payable is expressed in words and also in figures and there is a
made or that it was not authorized discrepancy between the two, à the sum denoted by the words is the sum payable;
§ But D can recover from P, A, B and C as they are but if the words are ambiguous or uncertain, à reference may be had to the figures to
indorsers fix the amount;
§ But suppose M delivers the note to X, his agent, with (b) Where the instrument provides for the payment of interest, without specifying the
instruction to deliver it to P only for safekeeping à If X date from which interest is to run, à the interest runs from the date of the instrument,
does not tell P that the delivery is only for safekeeping and if the instrument is undated, from the issue thereof;
à P can enforce the instrument as he is not an (c) Where the instrument is not dated, à it will be considered to be dated as of the
immediate party within the meaning of Section 16 time it was issued;
4. DELIVERED CONDITIONALLY OR FOR A SPECIAL PURPOSE (d) Where there is a conflict between the written and printed provisions of the
• If delivery was made or authorized à it may be shown to have been instrument, à the written provisions prevail;
conditional, or for special purpose only, and not for the purpose of (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or
transferring the property (title) to the instrument note, à the holder may treat it as either at his election;
• Presumption when delivery is made: Presumed that it was made with the (f) Where a signature is so placed upon the instrument that it is not clear in what
intention to transfer ownership of the instrument to the payee capacity the person making the same intended to sign, à he is to be deemed an
o E: It may be shown between immediate parties that the delivery indorser;
was CONDITIONAL or for SPECIAL PURPOSE only (g) Where an instrument containing the word "I promise to pay" is signed by two or
more persons, à they are deemed to be jointly and severally liable thereon.
• Example:
o Suppose in the same example, M delivers the note to P on RULES OF CONSTRUCTION IN CASE OF AMBIGUITY OR OMISSION
condition that it will not be binding on him until a co-maker has • The rules in this section are applicable only when the instrument in question
been procured, or for safekeeping, or for collection only is ambiguous or uncertain or when there are omissions therein
o P cannot enforce the instrument against M because the latter can • If the terms are clear, the instrument must be enforced as it reads
set up the defense that the delivery was conditional or for a
special purpose only and not for the purpose of transferring title to STIPULATION CONSTRUCTION EXAMPLE REASON
the instrument 1. SUMS Sum expressed in A promissory note 1. Figures in the
5. IN THE HANDS OF A HDC EXPRESSED words control reading “One margin form no part of
• CONCLUSIVE PRESUMPTION: If a complete instrument is in the hands of IN WORDS hundred pesos” in the instrument and are
HDC à a valid delivery thereof by all parties is conclusively presumed AND IN its body and P1000 simply an abridgement
• A presumption is conclusive when it admits of no evidence to the contrary FIGURES in the margin = good of the amount payable
DIFFERENT only for P100.00 for convenience or
reference AND PRINTED provisions 81
2. It is easier to PROVISIONS prevail -Written word “only”
change the figures or IN CONFLICT prevail over the
to commit a mistake printed words “to the
on them than when order of” = XN
the amount is written 6. WHETHER • Holder may I promise to pay P or
in words THE treat EITHER order P10,000”
2. WORDS • Words If a check bears the - If the ambiguity is INSTRUMENT at his election Signed R
AMBIGUOUS outweighs figures “P365.00” between words and BILL OR To W (page 82)
OR figures and the amount numbers à the words NOTE IN
UNCERTAIN • However, written is three sixty control if they are clear DOUBT The instrument is
when the five pesos à the - If the words are ambiguous à
words are marginal figures ambiguous à the promise to pay
ambiguous or control figures control indicates that it is a
uncertain à -When the amount in PN à however it is
reference may words has been wholly addressed to W
be had to the omitted in the body of which indicates that
figure to the instrument à the it is a BOE à P may
determine the marginal figures may treat the instrument
true amount be referred to to either is a BOE or
supply the amount for PN
which it was given
3. DATE • Interest runs A PN payable “with Another illustration
WHEN from the date interest at 16% per is the BOE where
STIPULATED of the annum from…” à the drawer and
INTEREST TO instrument will earn interest drawee are one and
RUN NOT • If undated à from the date of the the same person
SPECIFIED from the date note or the date of 7. CAPACITY • Deemed to be A PN payable to the - Signature of maker
of issue its issue IN WHICH an indorser order of P is signed of a note or the drawer
PERSON by M as the maker = lower right hand
If no rate of interest SIGNED IN à if P writes his corner
is mentioned à DOUBT name across the - drawee’s name =
legal rate face of the note à P lower left hand
= deemed indorser - Holder – negotiates
- P cannot be an by signing at the back
acceptor because thereof
4. • Dated as of GR: PN is dated Oct - ISSUE– the first the instrument is not - Section 17 (f) applies
INSTRUMENT the date of its 15, 2013 à date is delivery of the a BOE only when there is
UNDATED issue prima facie the true instrument complete in doubt due to the
date of its issue form, to a person who AMBIGUOUS
E: proof may be takes it as a holder LOCATION of the
adduced as between - The date appearing signature à party who
the immediate in the instrument = signs is considered an
parties to show a prima facie the true indorser who assumes
different date date of its issuance, LEAST LIABILITY,
E to E: Holder in acceptance or and not as a maker or
due course indorsement drawer
- He is not altogether
If the PN has no exempted from liability
date but it was since he is presumed
delivered to the to have intended to
payee on Oct 15, assume a certain
2013 à the note will responsibility by
be considered dated signing the instrument
as of the same time - One who signed in
5. WRITTEN • Written See example page the place of the

maker’s name = X necessary for this purpose; and the authority of the agent may be established as in
indorser other cases of agency.
- This provision only
applies to cases of SIGNATURE BY AN AUTHORIZED AGENT
doubt arising out of • The maker or drawer may sign the instrument personally or by another duly
the location of the authorized by him
signature 1. AUTHORITY OF AGENT TO SIGN PRINCIPAL’S NAME
-Parol evidence = X • Authority may be shown to have been given ORALLY or in WRITING
admissible to show subject to the provisions of the Statute of Frauds
that he intended to be • Written power of attorney – purpose is not to define the authority of the
an indorser, not a agent, as between himself and the principal, but to evidence the authority of
maker the agent to third parties dealing with the agent
8. • Solidary - “I, we, or either of - Anyone of the signer 2. AUTHORITY OF AGENT TO INDORSE INSTRUMENT PAYABLE TO PRINCIPAL
INSTRUMENT liability us promise to pay” may be held liable for • The right of an agent to indorse commercial paper is a very responsible
SIGNED BY 2 - “I or we promise to the whole amount of power and will not be lightly inferred
OR MORE pay” signed by 2 or the instrument • A salesman with authority to collect money belonging to his principal = X
PERSONS more persons - Reason: Each of have the implied authority to indorse checks received in payment
with the creates a solidary them is deemed to 3. CORPORATIONS ACT ONLY BY AGENTS
words “I liability utter the words, “I • Any person who accepts for cash checks made payable to a corporation,
promise to -BUT “we promise to promise to pay” which can act only by agents à without making any inquiry as to the
pay” pay” signed by 2 authority of the individual to exchange checks belonging to said payee-
makers = joint corporations à DOES SO AT HIS OWN PERIL à and must abide by the
liability consequence if the supposed agent who indorses the same is without
authority
Sec. 18. Liability of person signing in trade or assumed name. - No person is 4. DRAWER AS AGENT OF DRAWEE
liable on the instrument whose signature does not appear thereon, except as herein • The fact that the drawer was a commission agent of the drawee in the
otherwise expressly provided. But one who signs in a trade or assumed name will be purchase of merchandise covered by the bill à does NOT necessarily make
liable to the same extent as if he had signed in his own name. him an agent of the drawee in the latter’s obligation arising from the drawing
of the bill by him
PERSONS LIABLE ON AN INSTRUMENT • GR: His (drawer’s) act in negotiating the bill constitutes a different contract
1. GENERAL RULE distinct from that made by his having purchase the merchandise on behalf
• Only persons whose signatures appear on an instrument are liable thereon of the drawee
2. EXCEPTIONS o E: Unless at the time of signing of the bill, he should have added
1. Where a person signed in a trade or assumed name to his signature some expression to indicate it
2. The principal is liable if a duly authorized agent signs on his own behalf
3. In case of forgery, the forger is liable even if his signature does not appear Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument
on the instrument contains or a person adds to his signature words indicating that he signs for or on
4. Where the acceptor makes his acceptance of a bill on a separate paper behalf of a principal or in a representative capacity, he is not liable on the instrument if
5. Where a person makes a written promise to accept a bill before it is he was duly authorized; but the mere addition of words describing him as an agent, or
drawn as filling a representative character, without disclosing his principal, does not exempt
3. SIGNING IN A TRADE OR ASSUMED NAME him from personal liability.
• One who signs in a trade or assumed name is liable as if he signed his own
name
• However, it is necessary that the party who signed be intended to be bound WHEN AGENT MAY ESCAPE PERSONAL LIABILITY
by his signature • In order that an agent who signs a NI may escape personal liability, the
• Examples: following are the REQUISITES:
o A PN signed in the business name by the proprietor of the 1. He is duly authorized
nd
business is governed by 2 par of Sec 18 à making the person 2. He adds words to his signature indicating that he signs as an agent – that
so signing liable to the same extent as if he has signed his name is, for or on behalf of the principal OR in a representative capacity; and
o In an action on a PN which was made payable to ABC company 3. He discloses his principal
which has no legal existence à the payee was held estopped • Examples
from alleging that it was made payable to a fictitious payee where o “agent”
the company was an assumed name used by the payee o “as agent of Jovencio Cinco”
o “For Jovencio Cinco”
Sec. 19. Signature by agent; authority; how shown. - The signature of any party o See examples page 87
may be made by a duly authorized agent. No particular form of appointment is
• If agent is being sued by the payee à agent may introduce evidence that he • X bind principal even if the agent may have acted within the general scope
signed only in representative capacity and that the payee knew this to be of the agency if he exceeded the actual limits of his authority
the case • Example:
o General Authority bestowed upon an agent to transact the
DISCLOSURE BY AGENT OF PRINCIPAL business of his principal = X imply an authority to accept or
• If the agent signs a note or bill in his own name and discloses no principal indorse bills so as to charge the principal
à he is PERSONALLY BOUND • The power to make or indorse negotiable paper = must be expressly
o Evidence to the contrary = X be admitted to relieve him from granted
personal liability 2. WHERE AN EGNT ACTED WITH ABUSE OF AUTHORITY GIVEN
• It is however X necessary to exempt the agent from liability that the • Where the agent has authority to do a particular act in question à his abuse
disclosure of the principal be in signature of such authority is NOT a defense against a bona fide holder
• See example page 88 • Example:
o Where by the resolution of the board of directors, Ryan (A), the
USE OF DESCRIPTIVE WORDS WITHOUT DISCLOSURE OF PRINCIPAL chairman of the corporation, is authorized to accept bills drawn by
1. SIGNER PERSONALLY LIABLE Merv (R) against the deposit of security and Ryan accepts a bill
• The mere addition of descriptive words without disclosing the principal = X drawn by Kath (P), signing “per pro” and without requiring the
relieve the signer from personal liability deposit of the security and the bill is negotiated to a bona fide
• One who signs in a representative capacity but without disclosing his holder
principal will be personally liable although he adds to his signature the § Held: The company ✓ liable
words: “agent” or “trustee” or “administrator” or “guardian” or “director” or
“treasurer” Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or
• Words added = mere description personae – describing the person who assignment of the instrument by a corporation or by an infant passes the property
rd
signed the instrument and do not of themselves make 3 persons therein, notwithstanding that from want of capacity, the corporation or infant may incur
chargeable with notice of any representative relation of the signer no liability thereon.
• GR: Agent personally liable if X disclose principal
2. EVIDENCE ADMISSIBLE TO PROVE CONTRACT ACTUALLY ENTERED INTO EFFECT OF INDORSEMENT BY INCAPACITATED PERSONS
• E: As between immediate parties, ✓ extrinsic evidence may be admitted to 1. MINORS
show the real character of the transaction • X void
• Agent is entitled to give evidence to prove the contract actually entered into • X used as defense by prior parties
• ✓ recover and disaffirm by minors
Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates • A minor = x bound by his indorsement for lack of capacity
as notice that the agent has but a limited authority to sign, and the principal is bound • But he is NOT incapacitated to transfer certain rights
only in case the agent in so signing acted within the actual limits of his authority. • Section 22 merely provides that the indorsement of an infant is NOT
void
MEANING OF PROCURATION • His incapacity is not a defense in favor of prior parties
• PROCURATION - The act by which the principal gives the power to another • X take away the infant’s right to disaffirm his indorsement and recover
to act in his place as he could himself the instrument even against an innocent indorsee or subsequent holder
• Ordinarily understood in the same sense as agency or proxy for the one for value
who signs is merely acting as an agent for another • Minorty is NOT even a personal defense which may be set up by
• Frequently used in England parties other than the minor à but it is a REAL DEFENSE AVAIL TO
• Example: THE MINOR
o Jovencio F. Cinco • Hence, he may also disaffirm and recover the instrument from a HDC
Per Procuration: Domingo M. Navarro
o Instead of per procuration, it may also be expressed thus: • Examples:

§ Per Pro • Situation 1:
§ Per Proc o Mark issues a negotiable promissory note payable to the
§ P.P. order of Baby Noey (minor)
§ PP. o Baby Noey indorses the instrument to Merv
o Marc = liable to Merv à because the indorsement passes
EFFECT OF SIGNATURE BY PROCURATION the title to Merv
• It gives warning that the agent has but LIMITED AUTHORITY o But if Marc cannot pay and Merv sues Baby Noey à Baby
• It is the duty of the person dealing with him to inquire into the extent of his Noey may raise the defense of minority to escape liability
authority o Baby Noey may even disaffirm his indorsement and recover
1. WHERE AN AGENT EXCEEDED HIS AUTHORITY the instrument from Merv
• X bind principal • Situation 2:
o In the same example, after Baby Noey indorses the note to 1. PRESENCE OF ALL CONDITIONS
Merv à Merv negotiates the same to Ryan • All 4 conditions must concur to qualify a person as HDC
o Now Baby Noey seeks to disaffirm his indorsement and • If any one of them is absent, holder = X HDC
recover the note from Ryan • Presumption: Every holder is generally deemed prima facie HDC
o If Ryan qualifies as a HDC Of the note à Baby Noey cannot • One cannot be a HDC unless he is a holder
set aside the negotiation • HOLDER – law refers to the payee or indorsee of a bill or note, who is in
o Baby Noey can rescind his indorsement before the possession of it, or the bearer thereof
instrument is negotiated to a party who qualifies as a holder 2. STATUS AS MERE ASSIGNEE
in due course • The holder of a NNI (such as a simple contract) = X HDC
o (See page 92) • Mere assignee is subject to defenses
• Exception: • The fact that the instrument is NN is a sign of warning to prospective
o A minor, however, may be held bound by his signature in an purchaser and places him on his guard and on inquiry
instrument where he is guilty of actual fraud committed
• A part indorsee of an instrument is considered merely an assignee
specifically by stating that he is of age, when in fact, he is not
• A transferee who receives an instrument other than by issue or negotiation
(Estoppel?)
= X acquire the status of a HDC regardless of the other circumstances
2. OTHER INCAPACITATED PERSONS
under which the acquisition of the instrument took place
• Sect 22 applies to other incapacitated persons as well
3. PRESUMPTION
• Other persons who have no capacity to give consent:
• Prima facie presumption that the holder of a NI = HDC
o Insane
• Burden of proving otherwise lies in the person who disputes the
o Demented
presumption
o Deaf-mutes who do not know how to write
4. RIGHTS OF A HOLDER IN DUE COURSE/NOT A HDC
• As far as the incapacitated person is concerned à his incapacity is a real
defense that is available even against a HDC
HDC X HDC
• He is not even bound to restore anything that he has received by virtue of
On the other hand, a HDC is afforded Law does not provide that a holder who is
his contract
most favored status under the law a HDC may not in any case recover on
o E: To the extent to which he has been benefitted thereby
the instrument
EFFECT OF INDORSEMENT BY A CORPORATION
He takes the instrument free of many The only disadvantage of a holder who is
• Section 22 applies to cases where the corporation has committed ultra vires
defenses that exist between original XHDC à is that the instrument is subject
acts or acts beyond its powers
parties to defenses as if it were NN
• A corporation is not liable on notes in a suit thereon by an indorsee, where
the corporation is without capacity to make the contract in fulfillment of
Thus, it is possible for a HDC to acquire
which they were executed
greater rights under a NI than those
• One who deals with the officers or agents of a corporation is bound to know
possessed by a payee/holder
their powers and extent of their authority
• If the act or obligation under the law is merely voidable at the election of the
Example:
debtor and not entirely null and void à the defense is cut off
• Marc buys a machine from Penny for 50k under an installment contract
• After delivery, Penny assigns his rights under the contract (to collect the
Sec. 52. What constitutes a holder in due course. - A holder in due course is a
holder who has taken the instrument under the following conditions: price) to Alan
(a) That it is complete and regular upon its face; • The machine turns out to be defective
(b) That he became the holder of it before it was overdue, and without notice that it • Marc can successfully assert this fact as defense against Penny had there
has been previously dishonored, if such was the fact; been no assignment
(c) That he took it in good faith and for value; • The same would be true if Marc had simply given a NN notes
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the • The rights acquired by Allen are possessed by Penny, no more, no less
instrument or defect in the title of the person negotiating it. • On the other hand, if Marc had given Penny a negotiable note (or check) in
payment of the machine and Allen acquired the note under circumstances
WHAT CONSTITUTES A HOLDER IN DUE COURSE that qualified him as HDC, then Allen would be entitled to recover the full
• HDC –is a holder who took the instrument under the conditions enumerated amount of the note given by Marc despite the fact that Penny had violated
in Section 52 his contract with Marc
• He takes the instrument free of most defenses or adverse claims to it by • Similarly, a mere assignee like an ordinary holder can enforce the
other parties instrument against the primary party if the latter has no defense available to
• Used as the equivalent for the old expression “bona fide holder” or “bona him
fide holder for value without notice
• Only negotiation can operate as a valid transfer to make the transferee a
HDC
PAYEE AS HDC • Therefore, the rule is that when mere inspection of an instrument shows that
• Is the payee entitled to the same protection under Sect 52 as any other it has been altered à a purchaser is not a HDC because such instrument is
bona fide holder for value? not regular on its face
• There is a marked conflict of opinion: • Example:
1. CONTRARY VIEW o The following are complete and regular or are not complete and
• Those who hold the negative view contend that under subsection 4 of Sect regular upon its face:
52 = the HDC must have acquired the instrument through negotiation and 1. An instrument payable “on or before… after date” = X complete; X
an instrument is issued and not negotiated to a payee regular
• Hence, X 2. A bill dated “August 1, 1919” and payable “December 1” but not
2. AFFIRMATIVE VIEW naming the year of maturity = = X complete; X regular
• But “there can be no doubt that a proper interpretation of the act as a whole 3. So is an instrument blank as to payee or acceptor or drawee
leads to the conclusion that a payee MAY BE A HDC under any of the 4. There mere absence of the required revenue stamps from a NI =
circumstances in which he meets the requirements of Sect 52 X make it incomplete
• A holder in due course is a payee or indorsee who is in possession 5. Although a printed name of a payee was stricken out and another
• ✓ SUSTAINED VIEW BY WEIGHT OF AUTHORITY payee’s name inserted in writing but the same is a common
• Example: practice by the holder bank = X complete; X regular on its face
o W delivered to H, a check made payable to Penny (a creditor of 6. An instrument having the figures on the upper right hand corner
W) with the instruction to pay her debt with it and a blank space for the amount in words = ✓ Complete and
o H handed the check to Penny as payment upon debt of HIS OWN regular on its face à since the court can ascertain, within the 4
to Penny who accepted it as such in GF corners of the instrument and excluding nothing there appearing,
o It was held that Penny = ✓HDC there terms and conditions of the obligation
o Penny qualified as HDC if she gave the value for the check, took 7. The omission of the pronoun “we” or “I” in the space left therefor
it before it was overdue, and without notice of the lack of authority on the printed note “---- I promise to pay” = X make instrument
of H incomplete since the meaning of the note can be gathered upon
o Here, Penny (Payee), has not directly dealt with W (the drawer of its face
the check). She is not an immediate party to the check
HOLDER BEFORE INSTRUMENT IS OVERDUE
DRAWEE AS HDC 1. WHEN INSTRUMENT OVERDUE
• While a payee may be a HDC, a drawee, does not, by paying a bill, become • An instrument is overdue after the date of maturity
a HDC under this section • Date of maturity = fixed time therein
• HOLDER – refers to one who has taken the instrument as it passes along in • If payable on demand = the date of maturity is determined by the date of
the course of negotiation towards the drawee à and not the drawee, who presentment
on the acceptance and payment of instrument, thereby strips it of all o Presentment must be made within a reasonable time after its
negotiability and reduces it to a mere voucher or proof of payment issue, if it is a PN or
o After the last negotiation therefore, if it is a BOE
INSTRUMENT COMPLETE AND REGULAR UPON ITS FACE o After the lapse of such reasonable time, the instrument is deemed
1. WANTING ANY MATERIAL PARTICULAR overdue
• An instrument is INCOMPLETE when it is wanting in any material particular • If the instrument is with a fixed maturity designated by a calendar date (ex.
or particular proper to be inserted in a NI without which the same will not be June 10) à it is overdue at the beginning of the day after the fixed date
complete (June 11)
• The taking of an incomplete instrument puts the purchaser on inquiry as to • If it is payable on the occurrence of a specified event which is certain to
why it is incomplete à If he fails to do so, he takes the instrument subject to happen à the date of maturity is fixed by the happening of the event and
all defenses and equities becomes overdue after said date
o E: But if the omission is NOT an important particular, such 2. OVERDUE INSTRUMENT PUTS ALL PERSONS ON NOTICE
omission will not deprive the holder of the right of a HDC • A NI in circulation past its maturity date carries strong indication that it has
• If the omission or “incompleteness” has no effect on the clear meaning of been dishonored
the instrument à The same would not necessarily make the instrument • The question instantly arises: Why is it in circulation when it should have
incomplete been presented for payment to the person primarily liable?
2. ALTERATION APPARENT ON THE FACE OF THE INSTRUMENT • An overdue paper puts all persons on notice that it may not have been paid
• The instrument must also be regular upon its face because of a valid defense to such payment
• The most common type of irregularity is an alteration in the instrument • But one taking an instrument on the date of maturity takes before maturity
• To render the instrument IRREGULAR under Sect 52 (a), alteration, because the principal debtor has the whole day to pay à Hence it cannot be
tampering or erasure must be visible or apparent on the face of the considered as notice that the instrument has been dishonored
instrument à for if it is not apparent à the matter is governed sole by Sect 3. OVERDUE INSTRUMENT STILL NEGOTIABLE
124 which renders the instrument VOID • An overdue instrument is still negotiable à and although (in the hands of
one who is neither, nor makes title through, a HDC) it is subject to
DEFENSES existing at the time of transfer à it is certainly NOT “subject to installments, for he would have notice that the
the same defenses as if it were NN instrument was previously dishonored
• Thus, payment by Maker to Payee of past due note after its negotiation by P § See page 204 b to d
to A after maturity à is no defense to an action by A, since M made the
instrument negotiable and cannot rightly assume that it has not been HOLDER WITHOUT NOTICE OF DISHONOR
transferred à the result would of course be different where the not is NN 1. WAYS AND TIME OF DISHONOR
chose in action or had the payment been made after maturity but prior to • Instrument may be dishonored either by:
transfer by P o Non-acceptance (149) or
o Non-payment (83)
WHERE INSTRUMENT IN PART OVERDUE AND IN PART NOT
• Suppose the transferee of an installment note acquires it after one or more Dishonor by non-acceptance Dishonor by non-payment
but less than all the installments are due on its face, can he be a HDC refers only to bill of exchange
where the past due installment have not in fact been paid? May occure even before date of maturity can only take place at the time of maturity
1. WHERE INSTALLMENT DUE BEFORE TRANSFER
• An installment note as to installments due before the transfer, and a • Example:
transferee thereof = X HDC as to such installment, w/n he had notice of o Suppose Randy draws a bill of 1k payable to the order of Penny
the non-payment addressed to Weng as the drawer
2. WHERE TRANSFEREE WITHOUT NOTICE OF NON-PAYMENT o The bill is payable on November 30, 2010
• If the transferee had no notice of the non-payment à he is a HDC as to o Penny presents the bill for acceptance on Nov 10, 2010, but
installments to mature in the future Weng refuses to accept
• In the absence of an acceleration clause, the fact that the maturity date of o In this connection, it should be noted that when a bills is
one or more installments have passed cannot make the instrument overdue dishonored by non-acceptance à all the drawer has to do is to
as to installments payable in the future inform the holder that he does not accept the bill
• Circulation of a NI after the due date of installment expect the last = X serve o Hence the fact of dishonor may not appear on the face of bill
as notice that the installment had not been paid à for the instrument was o But if Penny negotiates the bill to Allan who knows that the bill
designed to circulate until the maturity date of the last installment has been previously dishonored by non-acceptance à Allan = X
o A transferee may assume that the ordinary course of business HDC
has been followed and the installments due have been paid
• It is different where the principal obligation is overdue. 2. NEGOTIATION AFTER MATURITY OR DISHONOR
o An installment note, however has several maturities, and if the • An overdue or dishonored instrument may still be negotiated by
maturity of each installment is regarded as the maturity of the indorsement or by delivery to the same extent as before maturity
instrument à then the instrument would be overdue after the • But in the case of the former à holder = cannot be HDC
st
maturity of the 1 installment • While in the latter à holder without notice can be HDC
• The possession by the payee or holder of an installment notes with 1 or • A party who acquired unpaid checks deposited with a bank for collection,
more installment overdue = X signify dishonor after they were returned to the bank as the drawer has no funds, some of
o The holder would necessarily retain it for collection of the balance them stamped “account closed” = XHDC under the circumstances, since, he
of installment knew upon taking them up, that the checks had already been dishonored
• Even if it is assumed that the non-payment of an installment is tantamount 3. NON-PAYMENT OF INTEREST DUE
to dishonor of the whole instrument à the holder ha no notice of dishonor • The great weight of authority holds that the mere fact that interest due is
unless he has notice of non-payment unpaid, the principal not being due, à does not render the note dishonored
3. WHERE TRANSFEREE WITH NOTICE OF NON-PAYMENT
• May a purchaser be considered a HDC as to future installments where HOLDER IN GF
he took the note with notice or knowledge that one or more installment 1. MEANING OF GOOD FAITH
were not paid when due? • GOOD FAITH – refers to the GF of the indorsee or transferee and not to the
o Purchase = X HDC seller of the paper
o The majority opinion, however, did not explain what provision of • “Honesty in fact in the transaction concerned”
NI law its conclusion was based • Each situation must be examines separately to determine GF
o Dissenting opinion: • A holder must take in GF, but if he does not take in BF à his GF is
§ Non-payment of installment note = X constitute sufficiently shown
dishonor of the entire note à if the ruling were 2. PROOF OF GOOD FAITH
otherwise, even if future installments were • GF is a broad term that cannot be precisely defined
subsequently paid, the whole note would be regarded • Its existence or absence is to be determined by consideration of the facts
as “previously dishonored” and consequently, and circumstances of the particular
knowledge of a transferee that one installment was paid
• It is generally agreed, however, that the term implies not only honesty of
late would preclude his being a HDC as to future
intention but the absence of suspicious circumstances, or if such

circumstances exist, then such inquiry will satisfy a prudent man of the o E: However, where the discount is unusually large or grossly
validity of the transaction unreasonable this fact, together with other facts, may be material
3. MEANING OF BAD FAITH on the question of GF
• Under Sect 56, it means that the person to whom an instrument is • Love and affection = X constitute value within the meaning of the law
negotiated must have actual knowledge of the infirmity or defect or 2. TAKING OF INSTRUMENT FOR VALUE
knowledge of such facts which render it dishonest for him to take a • The taking for value is essential to the status of a HDC, that is, to the right to
particular negotiable paper enforce an instrument free from certain defenses; à and a HDFV, as such,
4. PROOF OF BAD FAITH may enforce the liability of an accommodation party notwithstanding that at
• It must be proved that the holder either had: the time of taking the instrument he knew him to be only an accommodation
o Actual knowledge of a defect in the instrument or party
o Ignored facts that would show the defect • Also, the time when and the extent to which value is given is material on the
• To show knowledge of such facts that the taking would amount to BF à its question of status as a HDC
is X necessary to show knowledge of the exact truth 3. THREE METHODS OF GIVING VALUE FOR AN INSTRUMENT
• It is sufficient if the facts within the knowledge tend to show that there was • Under the US uniform commercial code, a holder takes the instrument for
something wrong with the transaction value –
5. EQUITABLE DOCTRINE OF CLEAN HANDS 1. To the extent that the agreed consideration has been performed or that
• Principle is closely analogous to the equitable doctrine of clean hands he acquires a security interest in or a lien on the instrument otherwise
• Thus, where a holder took an instrument payable to a corporation from an than by legal process; OR
officer thereof for a private debt of the officer à it was held that the holder = 2. When he takes the instrument in payment of or as security for an
X HDC since he knows from the face of the instrument that the officer is not antecedent claim against any person whether or not the claim is due
the owner of the instrument OR
rd
• In any case, test of GF or BF is subjective 3. When he gives a NI for it or makes an irrevocable commitment to a 3
person
EFFECTS OF CROSSING A CHECK • Note that each method involves ACTUAL PERFORMANCE BY THE
• Crossing a check relates to the mode of making payment, the drawer HOLDER, not just a commitment or promise to do something in the future
nd
intending the check to be deposited only by the rightful person – i.e. the • 2 method is valid even if the claim is not due yet
rd
payee named therein • Under the 3 method, the holder gives a NI in exchange for the one
rd
• In order to preserve the credit worthiness of checks, jurisprudence has received or make an irrevocable document to a 3 person (X transferor) as
pronounced that crossing of a check should have the following effects: the basis for the transfer
1. The check may NOT be encashed but only DEPOSITED in the bank
2. The check may be negotiated only ONCE – to one who has an account HOLDER WITHOUT NOTICE OF INFIRMITY IN INSTRUMENT OR DEFECT OF
with the bank; and TITLE
3. The act of crossing the check serves as a WARNING to the holder that 1. NOTICE AT TIME OF NEGOTIATION
the check has been issued for a definite purpose so that he must • The status of a HDC can be predicated only on a negotiation, since one of
inquire if he has received the check pursuant to that purpose; the requirements or conditions of a HDC status is that at the time the
otherwise, he is X HDC instrument “was negotiated to him he had no notice of any infirmity in the
• A holder, therefore, cannot claim it acted in GF when it accepted and instrument or defect in the title of the person negotiating it”
discounted post dated crossed checks from the payee, when it was all too • However, under Sect 59, every holder is deemed a PRIMA FACIE HDC
aware that the subject checks were cross and bore restrictions that they 2. LACK OF BAD FAITH
were for deposit to payee’s account only à hence, could not be further • Under Section 56, in order to constitute NOTICE – the holder must have:
negotiated to it o Had actual or chargeable knowledge of the infirmity or defect or
• The law does not absolutely bar a holder who is not a HDC from recovering o Must have acted in bad faith
on the checks à the holder may recover from the party who • The absence of knowledge and lack of bad is the essential basis that
indorsed/enchased the checks “if the latter has no valid excuse for refusing renders a holder a HDC
payment” • Notice that is the instrument has been dishonored, any defense against the
• See case page 207 instrument after the instrument has been acquired does not prevent a holder
from qualifying as a HDC
HOLDER FOR VALUE • Example:
1. ADEQUACY OF CONSIDERATION o If Penny steals from Marc (maker), a note payable to bearer à
• VALUE - Any consideration sufficient to support a simple contract is value and negotiates it to Allan who has notice of the theft à Allan = X
• X necessary that the consideration be adequate HDC
• Thus, the purchase of an instrument at discount = X necessarily prevent one o However, if Allan acquires the note before he has notice of the
from being a bona fide holder especially if the financial condition of the theft à A = ✓HDC assuming the other conditions are present
issuer of the instrument is not well known 3. BAD FAITH OF AGENT

• Knowledge of an agent acting within the scope of his authority = Liability of the one who negotiates by The qualified indorser is liable to all
constructive knowledge of the principal and will render the principal not a mere delivery extends in favor only of his subsequent holder who make it through
HDC immediate transferee his indorsement for a breach of any of his
warranties
Sec. 65. Warranty where negotiation by delivery and so forth. — Every person
negotiating an instrument by delivery or by a qualified indorsement warrants: Example 1:
(a) That the instrument is genuine and in all respects what it purports to be; • Marc makes a PN payable to bearer à and delivers the same to Penny à
(b) That he has a good title to it;  who negotiates it to Allen either by delivery or by qualified indorsement
(c) That all prior parties had capacity to contract; • If the note is dishonored in the hands of Allen due to the insolvency of
(d) That he has no knowledge of any fact which would impair the validity of the Marc à Allen cannot recover from Penny because Penny does not
instrument or render it valueless. warrant Marc’s solvency
• However, Penny is ✓ liable:
But when the negotiation is by delivery only, the warranty extends in favor a) if the instrument is FORGED à for she warrants that the: “instrument
of no holder other than the immediate transferee. is genuine” or
b) If Penny had stolen the note from Marc à for he warrants that “he has
The provisions of subdivision (c) of this section do not apply to a person good title to it” or
negotiating public or corporation securities other than bills and notes. c) If Marc is a minor à for he warrants that all prior parties had capacity
to contract
NEGOTIATION BY DELIVERY/QUALIFIED INDORSEMENT d) If Penny knew that the instrument was invalid for want or failure of
• Every indorser makes certain warranties or guarantees about the instrument consideration or that Marc was insolvent but concealed that fact from
he is negotiation (Sect 65, 66) Allen for he warrants that à “he has no knowledge of any fact which
• WARRANTY LIABILITY = UNCONDITIONAL i.e. it is not conditioned upon would impair the validity of the instrument or render it useless
proper presentment and dishonor of the instrument and the giving of notice • Suppose the note is negotiated by Penny to Allen, and Allen to Bino, all by
of dishonor delivery, is Penny liable to Bino for violation of any of the four warranties?
• NEGOTIATION “BY DELIVERY” under Section 65 – means that the o NO!
indorsement is not necessary because it is an instrument payable to o Because the warranties of Penny extend only to Allen, his
BEARER immediate transferee
o The words DELIVERY therefore, refers to a holder who o Allen, of course, is liable to B, his immediate transferee
negotiates the instrument in the same condition in which he
received it, making no indorsement at all Example 2:
o So a blank indorser of an instrument = X negotiate it “by delivery” • Randy issued 10 checks (2 of 3 crossed checks are bearer checks and one,
within this section as his liability would be governed by Sect 66 uncrossed bearer check) à payable to Penny, Inc. à Xena, a sales agent
• A a qualified indorsement - is made by adding to the indorser’s signature of Penny, Inc. indorsed all the check to Allen Corporation which deposited
the words “without recourse” or any words of similar import the same in its current account with Bank of PI à after temporarily crediting
the amount thereof to Allen corp’s account à Bank of PI debited the amount
WARRANTY LIABILITY OF ONE NEGOTIATING BY DELIVERY AND OF against the account of Allen Corp, upon being informed by Penny Inc that
QUALIFIED INDORSER the indorsement by X were forgeries
1. The liability of a person negotiating a bearer instrument by mere delivery = o Under Section 65, the warranty of Randy with respect to the
same as the person who negotiates it by qualified indorsement bearer checks, extends only to the bank of PI (Jai Alai Corp
• Both do not assume to pay the instrument in the event of its case)
dishonor
o E: unless the dishonor is based on any of the 4 implied LIABILITY OF COLLECTING/ISSUING BANK
warranties enumerated in Sect 65 1. GUARANTEES EVEN IF PREVIOUS INDORSEMENT IS FORGED
• They are in fact, merely assigning a credit • The warranty “that the instrument is genuine and it all respect what it
2. Their liabilities differ however, with respect to the person in whose favor the purports to be” à covers all the defects in the instrument affecting the
warranty extends validity thereof, including forged indorsement
• While the liability of the one who negotiates by mere delivery • Thus, the last indorser will be liable for the amount indicated in the NI even
extends in favor only of his immediate transferee, the qualified if a previous indorsement was forged
indorser is liable to all subsequent holder who make it through his • It has been held in a line of cases that “a collecting bank which indorses a
indorsement for a breach of any of his warranties check bearing a forged indorsement and presents it to the drawee bank
In short… guarantees all prior indorsements, including the forged indorsement itself,
and ultimately it should be LIABLE therefore”
NEGOTIATING BY DELIVERY QUALIFIED INDORSER o E: When the issuance of the check itself was attended with
The liability of a person negotiating a bearer instrument by mere delivery = same as negligence
the person who negotiates it by qualified indorsement • Thus, while a collecting bank is generally held liable, the issuing bank is just
as liable or more than the collecting bank where the subject check was
negligently issued (eg to a stanger on instruction by telephone of supposed
depositor, without written authorization)
o Where both banks are negligent à SC allocated the loss between
them considering their comparative or relative negligence and the
demands of substantial justice
o In one case, proportionate sharing – 50 -50
o In another, 60-40
2. ASSUMES WARRANTY OF AN INDORSER
• A collecting bank where a check is deposited which indorses the check
upon presentment with the drawee bank = indorser
• This is because in indorsing a check to the drawee bank, a collecting bank,
stamps at the back of the check with the phrase “all prior/or lack of
indorsement guaranteed” and for all intents and purposes, treats the check
as NI à hence assumes all the warranties of an indorser
• Without the warranty, the drawee bank would not pay the value of the check
• As collecting bank or last indorser à The bank generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
indorsements considering that the act of presenting the check for payment
to the drawee bank is an assertion that the party making the presentment
has done its duty to ascertain the genuineness of prior indorsements
SALE OF PUBLIC OR CORPORATE SECURITIES

• Brokers and other person “negotiating public or corporation securities, other
than bills and notes” = X warranty the capacity of prior parties
• Example:
o Under the leg authority, the city of Manila issued bonds à BDO
buys some of these bonds and sells them to Penny (an investor)
à SC subsequently decided that the law authorizing the issue of
the bonds and the bonds (on some ground or another) are VOID
o In this case, BDO is not liable to Penny for breach of implied
warranty à BDO did not impliedly warranty that the City of Manila
had the capacity to issue the bonds in question

Sec. 23. Forged signature; effect of. - When a signature is forged or made CASES OF FORGERY IN GENERAL
without the authority of the person whose signature it purports to be, it is wholly The case of forgery may be divided as follows:
inoperative, and no right to retain the instrument, or to give a discharge therefor, 1. FORGERY OF A PROMISSORY NOTE, which may subdivided into:
or to enforce payment thereof against any party thereto, can be acquired through a. Forgery of an INDORSEMENT on the note; and
or under such signature, unless the party against whom it is sought to enforce b. Forgery of the MAKER’S SIGNATURE
such right is precluded from setting up the forgery or want of authority. 2. FORGERY OF BILLS OF EXCHANGE, which may be subdivided into:
FORGERY EXPLAINED a. Forgery of an INDORSEMENT on the bill; and
• FORGERY – the counterfeit-making or fraudulent alteration of a writing, b. Forgery of the DRAWER’S SIGNATURE; either
and may consist in the signing of another’s name or the alteration of an 1. With acceptance by the drawee; or
instrument in the name, amount, description of the person and the link, 2. Without such acceptance but the bill is paid by the drawee
with intent thereby to defraud
• Intent to defraud distinguishes forgery from innocent alteration and EXTENT OF THE EFFECT OF FORGERY
spoliation • Section 23 does not purport to declare the instrument totally void nor
the genuine signature thereon inoperative
APPLICATION OF SECTION 23 • It is only the forged or unauthorized signature that is declared to be
1. TWO CASES inoperative
• First part – general rule • In other words, rights may still exist and be enforced by virtue of such
• Second part – exception instrument as to those whose signature thereto are found to be genuine
• It applies only in 2 cases: • A forged instrument prevents any subsequent party from acquiring any
a. Where the signature on the instrument is affixed by the one who right as against any party whose name appears prior to the forgery
does NOT claim to act as an agent and who has NO authority to o E: However, the law makes an exception to these rules where
bind the person whose signature he has forged the party is precluded from setting forgery as a defense
b. Where the signature is affixed by one who purports to be an agent • Example:
but has NO authority to bind the alleged principal o Marc makes a note payable to the other of Penny à Penny
2. EFFECT OF FORGED SIGNATURE indorses it to Alan. à Xander obtains possession of the note
• In BOTH cases à the signature is WHOLLY INOPERATIVE fraudulently and indorses it to Bob by forging Alan’s signature
• No right can be acquired through the forged signature à Bob indorses it to Cathy, thus the indorsement is as
• Ineffectual and X discharge the instrument follows:
• A persons whose signature was forged as maker, drawer, payee or o (See page 95)
indorsee of a note or check = never a party or never gave his consent o Effects:
to the contract which gave rise to the instrument § Cathy = cannot enforce the instrument against Marc
• Since his signature X appear in the instrument à he cannot be held and Penny because Cathy’s rights against them are
liable thereon cut of by the forged signature of Allan which is
• Forgery = REAL AND ABSOLUTE DEFENSE even against a HDC wholly inoperative
3. PROOF OF FORGERY • Cathy could acquire the rights against
• Proved with clear and convincing evidence Marc or Penny to the instrument through
• Burden of proof: Lies on the party alleging the forgery à X presumed the forged signature of Allan
§ Neither can Cathy enforce the notes against Allan
• Mere variance of signatures = X conclusive proof that the same was
because Allan’s signature is wholly inoperative
forged
• Allan has no privity with Cathy
• Examples:
o P makes a promissory note payable to his own order, forging • Under Sect 23, Cathy acquired no right to
M’s signature as the maker à retain, discharge or enforce payment of the
§ Signature = inoperative; note under the forged signature of Allan
§ M = X liable even to innocent purchaser for value § BUT Cathy may go against BOB whose signature is
o X issues a promissory notes payable to the order of P. X genuine and therefore, operative
signs M’s name indicating that he signs on behalf of M. • Bob is a general indorses who warranted
However, X has NO AUTHORITY TO BIND M à to Cathy that the instrument is genuine and
§ Signature = inoperative was valid and subsisting at the time of
§ M is X liable to any holder Bob’s indorsement
§ Of course Bob and Caty have a right of recourse
against XANDER, the forger

§ ALAN can recover from Marc and Penny because o He was precluded from holding the bank for
his rights against them were not affected by the paying forged checks after the time he should
forgery have given them notice
• The signature of Marc and Penny are • Example of estoppel arising from SILENCE:
genuine and they are liable to Allan on • Mara, whose name was forged by Xander, her husband, upon
their contract notes also signed by him and given for a loan to him à Mara
failed to inform Alan (the payee), of the forgery for many
2 EXCEPTIONS TO THE GENERAL RULE months after Mara discovered it à thus preventing Alan from
1. If the party against whom it is sought to enforce such right is PRECLUDED taking steps to protect himself against loss
from setting up the forgery or want from authority o Mara = was estopped by her silence from setting
2. Where the forged signature is NOT NECESSARY to the holder’s title in up forgery
which case the forgery may be disregarded o He who is silent when conscience requires him to
speak shall be debarred from speaking when
conscience requires him to be silent
PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY • Example:
• PRECLUDED – synonymous with estopped and does not include ratification • Marc (maker) and Penny (payee). Xander indorses the note to
or adoption in their strict primary meaning but only when they involve some Alan by forging Penny’s signature. à Alan indorses the note
of the elements of estoppel to Bob à Bob to Cathy à Cathy to Dugs (present holder).
• DIVIDED INTO 2 GENERAL CLASSES o Dugs can enforce the note against Alan, Bob and
1. Those who by their acts, silence or negligence are estopped from setting Cathy who are indorses subsequent to the forgery
up the defense of forgery à
2. Those who warrant or admit the genuineness of the signatures in o As indorsers, they warrant that the instrument is
question, namely: genuine and in all respects what it purports to be
1. Indorsers • Example:
2. Acceptors • Penny makes a BOE payable to his own order by forging
3. Persons negotiating by delivery Ryan’s signature thereto as a drawer à The bill was
• RIGHT TO RECOVER DAMAGES addressed to Weng as drawee à on the presentation for
• A party precluded from raising the defense of forgery by such reason of acceptance, Weng accept the bill à Penny then indorses the
negligence = may still recover damages under the NCC provisions on bill to Alan à Alan to Bob à Bob to Cathy à Cathy to Dugs
quasi-delicts (the present holder)
• Example of estoppel arising from gross negligence: o In this case, Weng cannot refuse to pay Digs on
• Ryan is authorized to draw on World Bank for any amount not the ground that the signature of Ryan was a
exceeding 5k à Penny makes a BOE payable to his own forgery because by accepting the bill, he admits of
order for 6k by forging Ryan’s signature à Penny indorsed the genuineness of the drawer’s signature
the bill to Alan (HDC), who presented it for payment à After o Of course, Weng will not be liable to Penny
the bill had been cleared through World Bank’s clearing office, (forger) and he can recover from him the money
World Bank paid the bill. Can World Bank recover the paid to Dugs
amount paid to Alan? o Neither is Weng liable to Dugs if Dugs has the
o NO! World bank is guilty of gross negligence knowledge of the forgery or was guilty of
considering the irregularity that was apparent on negligence at the time he acquire the bill in not
the face of the bill making inquiries which if made might have
o World bank is precluded from setting yp the revealed the fact of forgery
question of forgery
• Example of estoppel arising from DECLARATION: (See illustrative cases from page 99 to 114!!!!)
o Penny makes a PN payable to his own order, forging the
signature of Marc thereto as maker RIGHT OF DRAWEE TO RECOVER PAYMENT MADE WHERE DRAWER’S
o When Penny attempts to indorse the note to Alan, Alan asks SIGNATURE WAS FORGED
Marc if his signature is genuine and Marc says, “It is alright” • Has the drawee of a BOE the right to recover a payment, which he has
o = Marc is estopped from setting up that his signature made to a HDC of a bill on which the signature of the drawer was
is a forgery forged?
• Example of estoppel arising from NEGLIGENCE: o NO!
• Where the drawer negligently failed to examine the checks o Doctrine of Price vs. Neal
returned to him
o As between equally innocent persons, the drawee who pays RIGHT OF DRAWEE TO RECOVER PAYMENT WHERE PAYEE’S OR
the money on a check or draft, the signature on which was INDORSER’S SIGNATURE WAS FORGED
forged à cannot recover the money from the one who 1. FROM THE ENCASHER OR LAST INDORSER
received • Drawee = ✓ recover
o Acceptance prior to payment is not a prerequisite to the rule; • It is not supposed to be the duty of the drawee bank of a check to
o And the rule applies alike where payment is received without ascertain whether the signature of the payee or indorsers are genuine
prior acceptance and where it is paid after acceptance or not
1. RULE FOUNDED ON ESTOPPEL AND ON PRINCIPLE OF NATURAL • This is because the indorser is supposed to warrant to the drawee that
JUSTICE the signatures of the payee and previous indorsers are genuine à
• Grounds given include: warranty not extending only to HDC
o estoppel, • One who purchases a check or draft is bound to satisfy himself that the
o actual or presumed negligence of the drawer of not detecting paper is genuine and that by indorsing it or presenting it for payment or
the forgery putting it into circulation before presentation à he impliedly asserts that
o Principle of natural justice as between 2 persons, one of he has performed his duty and the drawee who has paid the forged
whom must suffer, the legal title shall prevail check, without actual negligence of his part, may recover the money
• Rule is based upon the obligation of the drawee to know the signature from such negligent purchasers
of the drawer and the presumption is that he does • In such case, the RECOVERY IS PERMITTED à because although
• Drawee (bank) has the best means of knowing or learning whether the drawee was in a way negligent in failing to detect the forgery, yet, if
signature of the drawer is genuine the encasher of the check had performed his duty, the forgery would, in
• Inequality of footing of the drawee and the holder furnishes the all probability, have been detected and the fraud defeated
justification for the rule placing the onus on the drawee • Reason for the rule:
2. RULE FOUNDED ON GROUND OF PUBLIC POLICY o No businessman would accept a check in exchange for
• The rule is one of policy maintaining confidence in the security of money or goods unless he is satisfied that the check is
negotiable paper by making the time and place of acceptance or genuine
payment the time and place for the final settlement, as between the o If he is deceived, he has suffered the loss of his cash or
drawer and the holder, of the genuineness of the drawer’s signature goods by his own mistake
3. RESPONSIBILITY OF DRAWEE BANK o His own credulity or recklessness, misplaced confidence was
• Fundamental rule in banking that when a bank receives money to be the sole cause of the loss
checked out by the depositor à it is to be paid only as the depositor 2. FROM THE DRAWER OR DEPOSITOR
shall order • Drawee = X recover
• If it pays out the money otherwise than according to such order à it is • A drawee bank who has a paid a check on which an indorsement has
liable to the depositor for the amount so paid been forged à cannot debit or charge the drawer’s account for the
• If it pays money out on a forged signature, the depositor being free from amount of said check and à is not entitled to indemnification from
blame or negligence à it must bear the loss the drawer
o E: But where the payee was not the client of the respondent • Risk of loss à fall on the drawee bank
bank (i.e. X maintain an account in said bank) and the bank o E: Where the drawer is guilty of such negligence which
had no way of ascertaining the authenticity of the payee’s causes the bank to honor such check or checks
indorsements on all checks which were deposited in the • If a check is stolen from the payee à it is obvious that the drawer
accounts of the defendants in said bank à bank cannot be cannot possibly discover the forged indorsement by mere examination
held negligent where, in accordance with banking practice, it of the cancelled check
caused the checks to pass through the clearing house before • This accounts for the rule that although a depositor owes a duty to his
it allowed their proceeds to be drawn by the defendants drawee bank to examine his cancelled checks for forgery of his own
4. ALLOCATION OF LOSS BETWEEN DRAWEE BANK AND COLLECTING signature à he has no similar duty as to forged indorsements
BANK • A different situation arises where the indorsement was forged by an
• In case where both the drawee bank and the representing collecting employee or agent of the drawer or done with the active
bank were guilty of negligence resulting the establishment of forged participation of the drawer
checks à the SC allocated the loss and the cost of arbitration o Most of the cases involving forgery by an agent or employee
proceedings on a 60-40 ratio considering the comparative negligence deal with the payee’s indorsement à the drawer and payee
of the 2 banks oftentimes have long standing business relations à the
continued occurrence of business transaction of the same
(See cases page 116 to 122!!!!!) nature provides the opportunity for the agent/employee to
commit the fraud after developing familiarity with the
signatures of the parties
o The negligence of the depositor which will prevent recovery of 2. WHERE NOTE PAYABLE TO BEARER
an unauthorized payment is based on failure of the depositor • ✓ liable only to HDC
to act as a prudent business man under the circumstances • Where the note mechanically complete, is originally payable to bearer,
• Example: the party whose indorsement is forged à is liable to a HDC, but not
o Drawer relied implicitly upon the honestly and loyalty of her to one is not a HDC
bookkeeper à X verify the accuracy of the amounts of the • The other parties including the maker, prior to the party whose
checks she signed à X carefully examine the same nor the signature is forged à may also be held liable only by one who is not a
check stubs returned à she could have easily detected the HDC (✓ liable only to HDC)
discrepancies between the checks and the documents serving • Reason: the instrument being originally payable to bearer à it can be
as bases fo the checks à It was not until 2 year until she negotiated by mere delivery à indorsement is X necessary to the title
discovered the forgeries, at which time she notified the bank of the holder
§ Depositor may not sit idly by, after knowledge has • Hence, even if the indorsement is forged, the forgery may be
come to her that he funds seem to be disappearing disregarded
§ If she fails to take such steps, the facts may • The forged indorsement does not prevent the transfer of title since the
establish her negligence and in that event, she holder may just strike out the forged indorsement
would be ESTOPPED FROM RECOVERING FROM • Only defense available: Want of delivery but this defense can only be
THE BANK raised against a holder NOT in due course
• If the drawee bank is also negligent to the point of substantially • Example:
contributing to the loss à such loss from forgery can be o Suppose in the preceding example, the note is payable to
APPORTIONED BETWEEN THE DRAWER AND THE DRAWEE bearer on its face and it is delivered by Marc to Penny à
Penny indorsed it to Alan à the note is found by Xander
RIGHTS OF PARTIES IN CASES OF FORGED INDORSEMENTS (forger) and is indorsed by him to Bob by forging Alan’s
1. WHERE NOTE PAYABLE TO ORDER signature à Bob indorses the note to Cathy who delivers
• X liable to ANY holder without indorsement the note to Dugs (HDC)
• Where the note is payable to order, the party whose indorsement is § The indorsement of Penny, Alan, and Bob = X
forged is not liable to any holder even a HDC necessary to vest ownership in the note to Dugs
• The indorsement being forged = inoperative § Being originally payable to bearer à merely delivery
• The other parties including the maker, prior to the party whose is sufficient
signature is forged = X liable to any holder § For the same reason, Marc (maker) and Penny
• The instrument being payable to order, it can negotiated only by (party prior to Alan, whose signature was forged) à
indorsement completed by delivery liable to Dugs
• But since the indorsement is forged, it is inoperative and therefore, it § Dugs may just strike out the forged indorsement of
cannot operate to transfer any right or title over the instrument Alan
• Example: § Of course, Dugs can enforce the note against Bob
o Marc makes a notes payable to Penny or order à Penny and Cathy who are liable under their warranties as
indorses the note to Alan à Xander (forger) indorses the note indorsers
to Bob forging Alan’s signature thereto 3. WHERE BILL PAYABLE TO ORDER
§ Alan, whose indorsement is forged à X liable to Bob • X liable to ANY holder
(whether Bob is HDC or not) à instrument is wholly • Where the bill is payable to order, the party whose indorsement is
inoperative forged = X liable to any holder even a HDC
§ Marc and Penny, parties prior to Alan, whose • Forged instrument = wholly inoperative
signature is forged à X liable to Bob • Where the signature of the payee was forged, the collecting bank à is
• The indorsement of the note by Alan liable to the payee and must bear the loss because it is its legal duty to
together with the delivery of the same, is ascertain that the payee’s endorsement was genuine before cashing
the only means through which B could the check
acquire any right against Marc and Penny • GR: A bank or corporation who has obtained possession of a check
under the instrument upon an unauthorized or forged indorsement of the payee’s signature
• Consequently, no rights can be enforced and who collects the amount from the drawee à is liable for the
by virtue of such instrument proceeds thereof to the payee or other owner, notwithstanding that the
amount has been paid to the person from the check was obtain (Bank
✓ liable to payee or owner)

• Theory of the rule: The possession of a check on a forged or • The drawee-bank must be free of any negligence in failing to discover
unauthorized indorsement is wrongful, and when the money is collected the alteration or forgery in order that it may claim reimbursement from
on the check à the bank can be held liable for the amount had and the collecting bank
received à The proceeds are held for the rightful owner of the payment • It has the duty to promptly inform the presentor of the forgery upon
and may be recovered by him discovery à otherwise, it forfeits its right to reimbursement if the delay
• Westmont bank case (page 127) deprives the drawee-bank of the opportunity to go after the forger
o The payee ought to be allowed to recover directly from the • It is therefore prudent on the part of the bank to seek the opinion of an
collecting bank, regardless of whether the check was expert to determine the genuineness of the signatures on checks or
delivered to the payee or note encashment slips in case inconspicuous divergences are noted on the
o Petitioner could not escape liability for its negligent act questioned signatures which could not be easily detected by untrained
• If the drawee pays under a forged indorsement à the drawer is NOT eyes
liable on the bill and the drawee may NOT debit the drawer’s account • Where the drawer of the check delivers it to an impostor mistakenly
à If it does, it shall have to recredit the amount of the check to the believing him to be the payee named in the check à the indorsement of
account of the drawer the check by the impostor is not a forgery, and the drawer is liable to a
• A bank is bound to know the signature of its customers (drawers) and if bona fide holder or any subsequent indorser who may be compelled to
it pays a forged check à it must be considered as making the payment pay it
out of its own funds à and cannot ordinarily charge the amount so paid • See example page 130
to the account of the depositor whose name was forged
• While the drawee- bank may not debit the account of the drawer à it 4. WHERE BILL PAYABLE TO BEARER
may generally pass liability back through the collection chain to the • In case the bill is originally payable to bearer à the drawee may debit
party who took from the forger and, of course, the forger himself the drawer’s account in spite of the forged signature
o E: Where hoever, the checks are received merely for • The reason is that the forged indorsement is not necessary to the title to
collection and deposit, the bank, as agent, à cannot be the holder
expected to know or ascertain the genuineness of all prior • The drawee cannot recover from the holder
indorsement • Example:
§ E to E: But by stamping on checks accepted by it for o Supposing that the check drawn by the insurance company is
deposit its guarantee that “all prior endorsement originally a bearer one à H&S bank may charge the amount
and/or lack of endorsement guaranteed,” à a thereof to the account of the insurance company
collecting/presenting bank thereby makes the o In this case, the drawee (H&S bank) would not be able to
assurance that it has ascertained the genuineness recover from the holder (P&N bank) of the bearer since the
of all prior indorsements forged indorsement of Penny by Xander (forger) = X prevent
• So, even if the indorsement on the check deposited by the collecting the transfer of title
bank’s client is forged à the collecting bank is bound by its warranties o The remedy of the drawer insurance company is against
as an indorser and cannot set up the defense of forgery as against the Xander (forger)
drawee bank o Of course, Penny (Payee) is not bound not having received
o The principle of ESTOPPEL prevents the collecting bank from the amount of the check and not have been indorsed the
denying liability same
o The drawee of a check can recover from the holder the o It must be remembered that all the foregoing are qualified in
money paid to him on a forged indorsement those cases where there is estoppel against the party desiring
• The collecting bank or last indorser generally suffers the loss à to set up the defense of forgery
because it has the duty to ascertain the genuineness of all prior
indorsements SUMMARY: RIGHTS OF PARTIES IN CASES OF FORGED INDORSEMENTS
• A collecting bank has privity with its depositors and it is in a better
position to detect forgery Liability to holder of Indorsement Maker, prior to the
• If the drawee-bank discovers that the signature of the payee was forged party whose party whose
after it has cleared the check and paid the amount of the check to the indorsement is forged signature is forged
holder thereof à it can recover the amount paid from the collecting WHERE X liable to ANY holder Inoperative X liable to ANY
bank as it has no right to be paid, without prejudice to the collecting NOTE holder
bank proceeding against the forger PAYABLE
• Even if the collecting bank was not negligent à it would still be liable to TO ORDER
the drawee-bank because of its indorsement
WHERE ✓ liable only to HDC Indorsement is ✓ liable only to
NOTE X necessary to HDC
PAYABLE the title of the
TO BEARER holder
WHERE X liable to ANY holder Forged Collecting bank à

BILL instrument = is liable to the
PAYABLE wholly payee and must
TO ORDER inoperative bear the loss
because it is its
legal duty to
ascertain that the
payee’s
endorsement was
genuine before
cashing the check
WHERE Drawee may debit the Forged

BILL drawer’s account in indorsement is
PAYABLE spite of the forged not necessary
TO BEARER signature to the title to
the holder
Drawee cannot recover
from the holder

II. CONSIDERATION Sec. 25. Value, what constitutes. — Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt constitutes value; and
Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed is deemed such whether the instrument is payable on demand or at a future time.
prima facie to have been issued for a valuable consideration; and every person
whose signature appears thereon to have become a party thereto for value. VALUABLE CONSIDERATION IN GENERAL
1. VALUE – valuable consideration
MEANING OF CONSIDERATION IN GENERAL 2. VALUABLE CONSIDERATION –
• CONSIDERATION • In general terms be said to consist either in some right, interest,
o An inducement to a contract, that is, the cause, price or impelling profit or benefit accruing to the party who makes the contract, or
influence which induces a contracting party to enter into the some forbearance, determinant, loss, responsibility, act, labor or
contract service, on the other side
o It is the essential or proximate purpose a party has in view at the • And if none of these exists, it will furnish sufficient consideration
time of entering into the contract to sustain the making or indorsing of a PN in favor of the payee or
• IT IS DIFFERENT FROM MOTIVE – which is the personal or private the holder
reasons of a party in entering into the contract • It is no defense to an action on PN for the maker to say that there
was no consideration which was beneficial to him personally. à It
PRESUMPTION OF CONSIDERATION is sufficient if the consideration was a benefit conferred upon a
• Like all other contract, a NI must have a cause or consideration third person or a detriment suffered by the promisee, at the
1. NEED NOT BE EXPRESSLY STATED instance of the promissor à it is enough that the oblige forgoes
• X necessary that the consideration be expressly stated in the instrument some right or privilege or suffers some detriment
• Presumption is that it has been issued for: • But a check issued to a person who was not authorized to collect
o A valuable consideration and and receive the same is without valuable consideration and is
o That every person whose signature appears thereon has become also considered issued for non-existing account
a party thereto for value 3. CONSIDERATION –
Whether the words “value received” appear in it or not • Means any prestation sufficient to support any contract in favor of
2. NEED NOT BE ALLEGED OR PROVED the party to an instrument, such as the maker or indorser, and it
• Consideration being presumed, it need not be alleged and proved may consist in giving, doing or not doing
• Presumption = prima facie only • Consideration founded on mere love, affection or gratitude = X
• May be rebutted by evidence to the contrary sufficient to sustain an action on a note or bill
• The evidence must be convincing to overthrow the presumption o Example:
• It is not overcome by a mere denial of receipt of the consideration § When an instrument is made or accepted by
• Once such doubt is cast, the burden of proof shifts to the payee to prove the a parent in favor of a child à the same
consideration by a preponderance of evidence cannot be enforced as between original
• Example: parties
o Marc issued in favor of Penny a PN which recites: • In an exchange of notes or bills à each note or bill is good
§ “30 days after date, I promise to pay Penny or order the consideration for the other
amount of 1k (Sgd) Marc”
o On the back of the note, the following indorsement appears: ADEQUACY OF CONSIDERATION
§ “Pay to A (Sgd) P.” • A valuable consideration = X need to be adequate
o Although the PN does not mention the consideration à the law • Sufficient if it is a valuable one
presumed that Marc must have received a consideration for the • Example:
note and that the same is lawful o Where Penny sells and deliver to Marc a piano worth 9k à and
o If Marc claims otherwise, then, he has the burden to rebut the Marc issues to P a PN for 10k à there is valuable consideration
presumption for the note, which is the piano
o Similarly, it is presumed that Penny, as an indorser, received o In an action on the note, Marc cannot allege as defense that the
some valuable consideration for the note value of the piano is not adequate for the amount of the note
o If Penny claims otherwise, she must prove his allegation o The law presumes that Marc is capable of managing his affairs
• See case page 134 and the mere inadequacy of the consideration = X sufficient
o X consideration ground for relief
o Penny failed to show that she had accepted the offer § E: there is fraud, mistake or undue influence
o X given value

ANTECEDENT OR PRE-EXISTING DEBT o If Bob is a HDC à he may enforce payment for the full amount of the
• An antecedent or pre-existing debt is a valuable consideration note against, Marc, Penny and Allan
1. DEBT OF A THIRD PERSON o If Bob is X HDC à Marc can set up the defense of absence of
rd
• The debt that may be that of a 3 person and the discharge of such debt = consideration
is a valuable consideration for a NI, whether such instrument is payable on 2. Now, suppose in the same example, Bob negotiates the note to Cathy by
demand or at a future time way of gift
• It must be shown that the holder has given up the pre-existing debt or the § Cathy = HFV (Sect 26) as against Marc, Penny and Allan
right to sue because they became parties prior to the time when the
2. SECURITY FOR PRE-EXISTING DEBT value was given on the note by Bob
• The transfer of a NI not only as a security for new purchases and advances, 3. Penny is the payee of a check drawn by Randy against BDO à She
made upon the transfer thereof but also as security for antecedent debts deposits the check with China Bank (Penny’s bank), which credits the
has become very common in the commercial world amout thereof to his account. Is China Bank a HFV under Sect 25 and 26?
• Such transaction contributes largely to the benefit and convenience of both § NO!
debtors and creditors § China Bank has parted with nothing and crediting the
• The creditor is thereby enabled to realize or to secure his debt, and thus amount involves a mere bookkeeping entry = X constitute
may safely give a prolonged credit, or forbear from taking any legal steps to giving of value
enforce his rights § Therefore, BDO is not entitled to recover from Randy
• The debtor has also the advantage of making his Nego paper of equivalent assuming that Randy has a personal defense against Cathy
value to cash § However, if Penny, after depositing the check, withdrew from
• Where the rule otherwise, that negotiable papers cannot be applied in his account such an extent that the particular credited item
payment of, or as security for pre-existing debts, without letting in all the was exhausted, BDO = HFV
defenses between original and antecedent parties à the value and
circulation of such securities must be essentially diminished, and the debtor RULE WHERE FUNDS REPRESENTED BY CHECK HAVE BEEN WITDHRAWN
driven to the embarrassment of making a sale thereof, often at a ruinous • If the sum had been subsequently checked out à then the value would have
discount to some third person and then by circuity to apply the proceeds to been passed
the payment of his debts • But how shall on determine whether or not the funds represented by a particular
• Examples: check have been withdrawn where there has been a continuous flow of deposits
1. Marc owes 1k payable today à Marc fails to pay in cash à He issues and drawings by the depositor?
a check for that amount to Penny who accepts the check à Here, the o FIRST RULE - Under the rule, “the first money in is the first money
CONSIDERATION FOR THE CHECK = PRE-EXISTING DEBT OF M out”
2. If Xander is the debtor and he fails to pay Penny the amount of 1k à o The first debits are to be charged against the first credits
the check issued by Marc in favor of Penny for the benefit of Xander • A DIFFERENT RULE
rests on sufficient consideration i.e. The pre-existing debt of Xander o States that as long as the balance of the depositor of P is equal to or
exceeds the amount of the check paid à the said balance cannot be
Sec. 26. What constitutes holder for value. - Where value has at any time been considered withdrawn, and therefore, W bank, at this staege is not a
given for the instrument, the holder is deemed a holder for value in respect to all HFV
parties who become such prior to that time. • SECOND IS THE BETTER RULE
o Under or law, bank deposits are governed by the provisions on simple
WHAT CONSTITUTES A HOLDER FOR VALUE (HFV) loan
• HOLDER FOR VALUE – one who has given a valuable consideration for the o As creditor, the depositor does not expect to receive the identical
instrument issued or negotiated to him money in return but an equivalent sum
1. The holder is deemed as such not only as regards the party to whom value o His money becomes the money of the bank and is mingled with other
has been given by him à but also in respect to all those who became money, the entire amount forming a single fund from which all deposits
parties prior to the time when value was given are paid
2. A holder of a NI is presumed to be a holder for value until the contrary is
shown Sec. 27. When lien on instrument constitutes holder for value. — Where the
o A holder who has not given value for an instrument obviously will suffer holder has a lien on the instrument arising either from contract or by implication
no loss by being unable to recover from the primary party in the event of law, he is deemed a holder for value to the extent of his lien.
that the latter has a personal defense assertable by him
EXAMPLES: WHERE A HOLDER HAS LIEN ON INSTRUMENT
1. Marc issues a note to Penny (payee) without consideration à Penny, also • One who has taken a NI as a collateral security for a debt = has a lien on
without consideration, à indorses it to Allan, who with value à indorses it to the instrument
Bob • As such holder of a collateral security à he would be a pledgee but the
o Under Section 26, Bob = HFV not only as regard Allan, but also as requirements therefore and the effects thereof not being provided for by the
regards Marc and Penny NI law à shall be governed by the provisions of the Civil Code on pledge of
incorporeal rights
1.
If the amount of the instrument is MORE than the debt secured by such • In other words, something was agreed upon as consideration, but for some
instrument à the pledgee is a HFV to the extent of his lien cause, such agreed consideration failed to materialize
• He can collect the full value of the instrument, and apply the same • EXAMPLES:
to the payment of the debt à BUT he must deliver the surplus to 1. In the example given, if there is really a land owned by Penny which
the pledgor was sold, but Penny failed to deliver it to Marc because she sold it
2. If the amount of the instrument is LESS THAN OR THE SAME the debt again to Xander who in GF registered the sale à there is failure of
secured by such instrument à the pledgee is a HFV for the full amount consideration so that Penny cannot recover from Marc
and may therefore, recover all • If only 2/3 portion of the land was delivered à there would
3. If between the pledger and the party liable on the instrument, there are be a partial failure of consideration which would bar recovery
existing defenses, à then the pledgee can collect on the instrument only only pro tanto
to the extent of the amount of the debt à o Hence, Penny could recover only 2/3 of the note
a. If the defenses of the party liable on the instrument are real as Marc is not liable to the extent of 1/3 which is
defenses à then the pledgee can recover nothing upon the the price of the undelivered portion
instrument 2. Randy issued a check in the name of Penny under an agreement that
EXAMPLES: the amount of the check was to be given to Xander in payment of
1. Marc makes a PN for 1k to the order of Penny à who pledges it to Allan to textiles and that profits to be derived from the investment was to be
secure the payment of Penny’s debt of P800 à the note is indorsed and divided equally between Randy and Penny. à Penny indorsed and
delivered by penny to Allan cashed the check and turned over the proceeds to Xander à Xander
• In this case, Allan is a HFV to the extent of P800 à which is also however, failed to deliver the textiles to Randy à The account was
the extent of his lien carried in Randy’s books as Penny’s indebtedness and notice thereof
• On the maturity of the note, even if the debt of P800 is not yet due was given to him every year for his confirmation
à Allan may recover the full amount of 1k, holding the surplus for • In view of this, the claim of Penny that he signed the check
Penny, the pledgor only as a witness and that the long period of time that
2. If Marc has a defense against Penny (indorser) à such as absence or elapsed before the suit was filed created a presumption
failure of consideration à Allan can only collect P800 on the even if he is a against his liability was held untenable
HDC • Hence, Randy could recovery from Penny the face value of
• As the note in the hands of Marc is void à all that ought to be the check
recovered by Allan is the amount due on the loan
3. Supposing the amount of the instrument is P700 à then Allan is a HFV for Sec. 29. Liability of accommodation party. - An accommodation party is one who
the full amount of P700 and is entitled to recover to that extent has signed the instrument as maker, drawer, acceptor, or indorser, without
4. If the signature of Marc is a forgery à Allan can collect nothing from Marc receiving value therefor, and for the purpose of lending his name to some other
because Marc’s signature if inoperative person. Such a person is liable on the instrument to a holder for value,
• As against Marc, Allan acquired no right to enforce payment of notwithstanding such holder, at the time of taking the instrument, knew him to be only
the note an accommodation party.
• FORGERY = real defense
DEFINITION OF TERMS
Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a 1. ACCOMMODATION NOTE OR BILL
matter of defense as against any person not a holder in due course; and partial • Is one to which the accommodation party has put his name, without
failure of consideration is a defense pro tanto, whether the failure is an consideration, for the purpose of accommodating some other party
ascertained and liquidated amount or otherwise. who is to use it, and is expected to pay it
• In other words, IT IS A LOAN OF ONE’S CREDIT
MEANING OF ABSENCE OR WANT OF CONSIDERATION • An accommodation paper = creates NO obligation upon delivery to the
• ABSENCE OF CONSIDERATION – total lack of any valid consideration for accommodated party and is of no legal efficacy and creates no
the contract, in consequence of which the alleged contract must fail obligation until delivered or negotiated to a HFV
• Example: 2. ACCOMMODATION PARTY
o Marc makes a PN to Penny in payment for a parcel of land which • One who has signed the instrument as
does not exist a. Maker, drawer, acceptor, or indorser
o As between the parties à there can be no recovery on the note b. Without receiving value for the signature and
as there is ABSENCE OF CONSIDERATION c. For the purpose of lending his name to some other person
o BUT if Penny indorses the note to Allan (HDC) à Allan may • He usually expect that not he, but the accommodated party, will provide
recover from Marc because absence of consideration is only a payment of the bill or note when it falls due
PERSONAL DEFENSE not available against a HDC • He actually lends his credit to the party to whom the accommodation is
made
MEANING OF FAILURE OF CONSIDERATION • He is classified according to the accommodated party’s status
• FAILURE OF CONSIDERATION – the failure or refusal of one of the parties • If the accommodated party is a maker, for example, he is liable on the
to do, perform or comply with the consideration agreed upon instrument subsequent to parties as if he were the maker
• In lending his name to the accommodated party, the accommodation party the facts show that the accommodation involved was for their personal
is, in effect, a SURETY for the former account, undertaking or purpose and the credit was aware thereof
3. ACCOMMODATED PARTY 3. ACCOMMODATION PARTY, IN EFFECT, A SURETY
• One in whose favor a person, without receiving value therefor, signs an • In lending his name to an accommodated party à the accommodation party
instrument for the purpose of lending his credit and enabling said party to is, in effect, a SURETY à the accommodated party being the principal
raise money upon it • As surety, the accommodation party is bound equally and absolutely with
• He impliedly agrees to take up the instrument at maturity and to indemnify the principal
the accommodation party against the consequences of non-payment o However, unlike in a contract of suretyship, the liability of the
• Example: accommodation party remains not only PRIMARY but also
o Penny is in immediate need of 30k but she cannot find anybody to UNCONDITIONAL to a HFV such that even if the accommodated
lend him the sum he needs à no one trusts him because he has party receives an extension of the period for payment without the
no credit. à He goes to Marc, a rich relative, who is willing to consent of the accommodation party à the accommodation party
ACCOMMODATE HIM by letting her borrow on Marc’s credit. à is still liable for the whole obligation and such extension does not
So Marc signs a PN payable to Penny, receiving no consideration release him because as far as the holder for value is concerned,
therefore. à Penny indorses the note to PNB (bank) which he is a SOLIDARY CO-DEBTOR
discounts the note because of Marc’s credit • It will then be noted that SECTION 29 IS AN EXCEPTION TO SECTION 28
o In this case, the PN = accommodation note o But Section 29 should not be construed as to allow a HFV, not
o Penny = Accommodated party otherwise a HDC, to recover against an accommodation party in
§ Penny cannot enforce the note against Marc should the light of other section of the NIL
Penny pay PNB because gave no consideration to o In other words:
Marc and he was merely accommodated by Marc § GR: The accommodation party is liable to a HDC
o Marc may simply sign the PN payable to PNB to accommodate • E: Except the defense of absence of
Penny in order that Penny can borrow from PNB consideration between the accommodation
party and the accommodated party = X liable
PAROL EVIDENCE TO PROVE ACCOMMODATION 4. RIGHT OF ACCOMMODATION PARTY TO NOTICE OF DEFAULT OR
• The problem with an accommodation paper is that it is impossible to tell DELINQUENCY OF THE ACCOMMODATED PARTY
from an inspection of the instrument whether the signature was placed on • While not exonerating his solidary liability, an accommodation party has a
the instrument for accommodation or otherwise right to be properly appraised of the default or delinquency of the
• The accommodation party is permitted to show by parol evidence which accommodated party precisely because of solidary liability
party he accommodated • A bank is guilty of negligence in not properly informing an accommodation
o If this were not so, an accommodated party could enforce party who is a co-signatory of PN about the default and exact outstanding
payment of the instrument against the accommodation party period interests unpaid preventing him to act properly only the delinquency,
• In the absence of concrete evidence showing when one issued the subject for which reasonable damages may be recovered for the humiliation and
check and in what capacity à it CANNOT be assumed that he intended to embarrassment he suffered by the dishonor of his check
lend his name as an accommodation party • Example:
• Hence, X PRESUMPTION OF ACCOMMODATION PARTY (dugs note?) o In the preceding example, the fact that Marc did not receive any
consideration for the note = would NOT be a defense in an action
LIABILITY OF ACCOMMODATION PARTY TO A HOLDER brought against him by PNB
1. ABSENCE OF CONSIDERATION NOT A DEFENSE o This would still be true even if PNB knew that Marc’s signature
• Section 29, by clear mandate makes the accommodation party “LIABLE on was made for Penny’s accommodation
the instrument to a HFV notwithstanding such holder at the time of making o If Marc were not to be held liable, then the accommodation would
the instrument knew him (the signatory) to be only an accommodation not serve any purpose
party”, in whatever capacity he signed the instrument, whether primarily or o Suppose after signing the PN, Marc keeps it in his safe but Penny
secondarily steal it à Penny then indorses the note to PNB which knows that
• This means that the absence of consideration between the Penny has stolen the note
accommodation party and the accommodated party = X itself § In this case, PNB = X HDC because he knows of the
constitute a valid defense against HFV even though he knew of it when lack of delivery
he became a holder § Under Section 16 and 58, Marc is NOT liable
2. RULE NOT APPLICABLE TO CORPORATIONS • See case page 147
• Section 29 = X include not apply to corporations which are accommodation 5. WHERE INSTRUMENT VITIATED BY AN ILLEGALITY OF CAUSE
parties • A HFV under Section 29 may be a payee
• Because the issue or indorsement of a NP by a corp without consideration • There can be NO recovery by a payee against an accommodation party on
and for the accommodation of another is ULTRA VIRES an instrument vitiated by an illegality of cause
• The fact that for lack of capacity of the corporation is not bound by an • Example:
accommodation paper = X thereby absolve, but should render o Thus, where the principal debtor bought a TV set and as security,
PERSONALLY LIABLE THE SIGNATORIES of the said instrument where executed a CM over it, did not pay for it and even sold the set
without the witten consent of the seller mortgagee who • The last word “THEREFOR” – refers to the instrument itself and not to the
accordingly filed an estafa case against the buyer-mortgagor à use of the name by way of accommodation
and to settle EJ the criminal case, the mortgagor and another • As stated by the SC, the expression “WITHOUT RECEIVING VALUE
accommodation party executed in favor of the mortgagee the PN THEREFOR” MEANS – that no value has been received for the NI and
à there can be no recovery against the accommodation NOT “without receiving payment for lending his name”
party as the PN is vitiated by ILLEGALITY OF CAUSE – o Example:
promise not to prosecute the estafa case, if the PN is executed § Thus, if in the same example, Marc is given 1k in
o But the mortgagor has an obligation to the mortgagee consideration of lending his name but not for the PN he
independently of the PN because for him to escape from the signs = Marc does NOT lose his status as an
payment of a just obligation will result in UNJUST ENRICHMENT accommodation party
at the expense of another
6. LIABILITY OF SOLIDARY ACCOMMODATION MAKERS KINDS OF ACCOMMODATION PARTY
• In a case where 3 accommodation makers executed a PN “jointly and • An accommodation party is one who has signed the instrument as a maker,
severally” in favor of a bank à it has been held that any one of the solidary drawer, acceptor or indorser
accommodation makers may be held liable when the principal debtor who • EXAMPLES:
received from the bank the full value of the note failed to pay the same
ACCOMMODATION MAKER Marc, as accommodation party, issues a
RIGHTS OF ACCOMMODATION PARTY PN payable to Penny who may then
1. RIGHT TO REVOKE ACCOMMODATION negotiate to Allan
• Since a signature for accommodation is GRATUITOUS à it may be revoked ACCOMMODATION DRAWER Marc, as accommodation party, signs a
or rescinded by cancellation or by notice to those interested at any time BOE with Penny as payee, and payee
before the instrument has been negotiated for value indorse the same to Allan
• But once the instrument has been negotiated for value à the ACCOMMODATION ACCEPTOR Marc, as accommodation party, accepts
accommodation party is liable according to the face of his undertaking, the a bill drawn on him by Penny in favor of
same as if he were financially interested in the transaction himself and Penny may indorse the same
• So… (Dugs) to Allan
o GR: Before the instrument has been negotiated for value = ACCOMMODATION INDORSER Marc, as accommodation party, simply
revocable accommodation signs as an indorser in blank, the bill or
§ E: After instrument has been negotiated for value = X note made by Penny in favor of Allan,
revocable, ✓ liable before it is delivered to Allan
2. RIGHT TO REIMBURSEMENT FROM ACCOMMODATED PARTY
• After making payment to the holder à the accommodation party has the ACCOMODATION PARTY AND REGULAR PARTY DISTINGUISHED
right to obtain reimbursement from the accommodated party
• The relation between them, is in effect, that of PRINCIPAL AND SURETY The following are the differences
o Accommodation party = surety ACCOMMODATION PARTY REGULAR PARTY
• As between the accommodation party and the accommodated party à the For Value Signs an instrument WITHOUT Regular party signs the
accommodated party is expected to pay the instrument directly to the real RECEIVING VALUE instrument FOR VALUE
debtor THEREFOR
o Hence, the cause of action is not on the instrument but on an Purpose Signs an instrument for the X sign for that purpose
implied contract of reimbursement purpose of lending his name
3. RIGHT TO CONTRIBUTION FROM OTHER SOLIDARY ACCOMMODATION to some other person
MAKER Parol Evidence May always show parol CANNOT disclaim or limit
• Where the solidary accommodation maker paid to the bank the balance due evidence that he is only such his personal liability as
on a PN à he may seek contribution from the other solidary appearing on the instrument
accommodation makers in the absence of contrary agreement between by parol evidence
them, and subject to conditions imposed by law Defense of CANNOT avail of the defense May avail of said defense
• This right springs from an implied promise between the accommodation absence or failure of absence or failure of against a Holder NOT in
makers to share equally the burden resulting from the execution of the note of consideration consideration due course
• They are joint guarantors of the principal debtor Right to After paying the holder, may Regular party may NOT sue
reimbursement sue for reimbursement the any subsequent party for
MEANING OF “WITHOUT RECEIVING VALUE THEREFORE” accommodated party, although reimbursement
• One of the requisites in order that a person may be considered an a subsequent party
accommodation party
• HOWEVER, this does not mean that one cannot be an accommodation
party merely because he ahs received some consideration for the use of his
name
IV. RIGHTS OF THE HOLDER • Under Sect 58 and 59, a holder who is not himself a HDC but derives his
title from a HDC is given the rights of such prior holder
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument
may to sue thereon in his own name; and payment to him in due course discharges RIGHT OF TRANSFEREE OF UNINDORSED INSTRUMENT TO SUE
the instrument. • The authorities are not uniform as to the question of whether the transferee
of an unendorsed instrument may sue in his own name
MEANING OF HOLDER • A transferee of unindorsed instrument is certainly not a “holder” as defined
• HOLDER – the payee or indorsee of a bill or note who is in possession of it, by Section 191 à therefore, X HDC
or the bearer thereof entitled to receive the sum for which it calls • Nevertheless, it is believed that he may do so
• PAYEE – refers to the person to whom the instrument was originally issued • If the transfer vests in the transferee such title as the transferor had and if
by the maker or drawer the transferor had legal title, this must pass by the transfer although subject
• INDORSEE – refers to the person to whom the instrument was negotiated to defenses
by indorsement and/or delivery
• Thus, the term HOLDERS includes not only persons possessing but also Sec. 52. What constitutes a holder in due course. - A holder in due course is a
payees and indorsees possessing ORDER instruments holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
CLASSES OF HOLDERS (b) That he became the holder of it before it was overdue, and without notice that it
• In ascending order of rights, the classes are: has been previously dishonored, if such was the fact;
1. Holders simply (Sec 51) (c) That he took it in good faith and for value;
2. Holders for value (Sec 26) (d) That at the time it was negotiated to him, he had no notice of any infirmity in the
3. HDC (Sect 52, 57) instrument or defect in the title of the person negotiating it.
• ORDINARY HOLDER OR MERE HOLDER (or assignee or transferee) - A
person who qualifies as a holder but does not meet all the conditions to Sec. 53. When person not deemed holder in due course. - Where an instrument
qualify as a HDC payable on demand is negotiated on an unreasonable length of time after its
• The holder of a NI is not necessarily the owner thereof issue, the holder is not deemed a holder in due course.
o Example:
§ A thief who steals a bearer paper is a holder but is not HOLDER IN DUE COURSE IN INSTRUMENT PAYABLE ON DEMAND
the owner although he can legally transfer (negotiate) • One of the requisites of due course holding is that holder of the instrument
the same to another who then becomes the new holder became such “before it was overdue” à applies to an instrument payable at
a fixed or determinable future time
RIGHTS OF A HOLDER IN GENERAL (2) • With respect to instruments payable on demand, Sect 53 governs whether
1. TO SUE the purchase is one of an overdue instrument
• A holder may sue on the instrument in his name • If the negotiation of a demand instrument is made outside the reasonable
• A holder may be a holder only for collection may sue in his own name time after its issue à the holder CANNOT be deemed a HDC
• Also, the indorsee (pledgee) of a note, as a collateral security, may sue as • For the fact that the instrument has been in circulation for such a length of
he is a “holder” within this section time gives rise to a strong indication that it has already been DISHONORED
• A person who is neither the payee nor a holder of a bad check has neither • Reasonable time depends upon the facts of the particular case
the personality to sue nor a COA against the drawer • “regard is to be had to the NATURE of the instrument, the USAGE OF
• Where a NI has been in circulation and there is no defense between the TRADE OR BUSINESS (if any) with respect to such instruments, and the
antecedent parties, a purchaser of such instrument as collateral security is FACTS of the particular case
entitled to recover thereon against the maker, the whole amount regardless
of what he may have paid therefor Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of
2. TO RECEIVE PAYMENT any infirmity in the instrument or defect in the title of the person negotiating the
• He may receive payment and if the payment is in due course, the instrument same before he has paid the full amount agreed to be paid therefor, he will be
is discharged deemed a holder in due course only to the extent of the amount therefore paid
• PAYMENT IN DUE COURSE - is payment made: by him.
o (a) at or after the maturity of the instrument
o (b) to the holder thereof EFFECT OF NOTICE BEFORE FULL PAYMENT
o (c) in GF and without notice that his title is defective 1. NO AMOUNT HAS YET BEEN PAID
• PAYMENT must be made at or after maturity in order to discharge the • Where an instrument has been taken but the purchaser has not yet
instrument for if the instrument is paid after maturity, the prior party who paid anything and he receives notice of infirmity of the instrument or
reacquires the same, may reissue and further negotiate it under Sec 50 defect in the title of the holder à he is RELIEVED FROM THE
• In the hands of any holder other than a HDC, a NI is subject to the same OBLIGATION TO MAKE PAYMENT
defenses, whether real or personal, as if it were NN • If he does so, he is not entitled to the same protection as a HDC
• However, it does not mean that an instrument in the hands of such holder is • PAID – is not limited to the payment of monet, but includes the
NN performance in any other manner of an obligation
2. AN AMOUNT HAD BEEN PAID o In such case, he is in the same position and entitled to the same
• Where the instrument has been transferred to him in consideration of his protection as one who has paid for the instrument in money or
promise to make future payments to his transferor à he is under NO property at the time of the transfer
LEGAL OBLIGATION TO PAY THE BALANCE OF THE AMOUNT AS HE • See illustrative case page 212
HAD AGREED TO PAY ON DISCOVERING THE INFIRMITY OR DEFECT
• If he does, he can be considered a HDC but only to the extent of the amount Sec. 55. When title defective. - The title of a person who negotiates an instrument is
theretofore paid to him defective within the meaning of this Act when he obtained the instrument, or any
• Example 1: signature thereto, by fraud, duress, or force and fear, or other unlawful means, or
o A PN for 20k signed by Marc (maker), and payable to bearer, is for an illegal consideration, or when he negotiates it in breach of faith, or under
delivered to Penny in payment of goods sold such circumstances as amount to a fraud.
o The goods were NOT delivered by Marc to Penny and therefore,
there was failure of consideration DEFECTIVE TITLE IN GENERAL
o Penny indorsed the note to Alan upon the terms of payment of 1. DEFECTS OF TITLE
12k and the balance in a month • Cover all those situations which are known as personal or equitable
o Before Alan could pay the balance of 8k, he received notice of the defenses
defect in the title of Penny • Also cover those equities of ownership where there is a breach of faith in
§ Under these circumstances, Alan is a HDC to the extent negotiation
of 12k – the amount paid by him before he learned of 2. INFIRMITIES
P’s defective title but not as to 8k balance, although he • Must include things that are wrong with the instrument itself as
pays it later on distinguished from those things that are lacking in the contracts on the
• Example 2: instruments
o A note for 10k was obtained by Penny (payee), by means of • Such infirmities are found in the situations arising Under Sec 13, 14, 15, 16
FRAUD was negotiated by Penny for 9k to Alan, a bona fide (usually defects of title), 21, 23, 124, and 125
purchaser without notice, upon terms of payment of 5k cash and
4k in a month WHEN TITLE OF A PERSON DEFECTIVE
o Within the month, Alan notified Marc (maker) of the equity of fraud • The title of a person who negotiates an instrument is defective under Sec 55 in 2
as against Penny. How much should Alan recover from M? ways
§ Under Sect 54, only 5k, thereby depriving Alan of the 1. IN THE ACQUISITION
benefit of the bargain § When he obtained the instrument or any signature thereto
o Suppose Alan had paid the whole consideration of 9k before by:
receiving notice • FRAUD,
§ In this case, Alan, under Sec 57, can recover 10k, the • DURESS, OR
full amount of the note from Marc, thus receiving the • FORCE AND FEAR or
benefit of the bargain • other UNLAWFUL MEANS or for an ILLEGAL
CONSIDERATION
APPLICABILITY OF SECT 54 2. IN THE NEGOTIATION
• Sec 54 is intended to define the situation in which the holder must protect • When he negotiates the instrument in
himself by refusing to make further payments o BREACH OF FAITH or
• It is APPLICABLE ONLY where the obligation incurred by the holder of a o UNDER SUCH CIRCUMSTANCE AS TO
bill or note is such that upon discovering the infirmity in the instrument, AMOUNT TO FRAUD
he is relieved from all further legal obligation to make further o DURESS OR FORCE AND FEAR include all acts
payments which overcome the signer’s will
o Example:
§ Where the note has been transferred to him in GOOD FAITH OF TAKER AND NEGOTIATOR
consideration of his promise to make future payments • The object of Sect 55 in connection with 56 – is to prevent one from
to his transferor become a HDC who takes an instrument with notice that his transferor is not
§ In that case if it should turn out that, by reason of fraud acting honestly
on the part of the transferor, the maker of the note had • It is the same object as it is found in the GF in section 52 (c) but viewed
a defense thereto, the transferee would be under no from somewhat different angle
obligation to pay the balance of the amount that he
• Said clause has regard to the attitude of the taker of the instrument
had agreed to pay the transferor
• While section 55 emphasizes the HONESTY of the negotiator as brought to
• It DOES NOT APPLY where the holder has given for the paper his promise
the notice of the taker
which he must perform, as, for instance, when he has incurred liability to a
• The object of the whole is, however, a single one – to require a thoroughly
third person
HONEST AND FAIR transaction to constitute one a HDC

• Examples: 2. KNOWLEDGE AMOUNTING TO BAD FAITH
1. FRAUD • There is a difference between actual suspicion of the holder and if the
• Brokers employed to but stock represented that they bought the holder had actual knowledge of suspicious circumstances, coupled
stock and received a check therefore, but HAD NOT IN FACT with the means of readily informing himself of the facts and he willfully
BOUGHT IT abstained from making inquiries, his intentional ignorance may amount
• It was held that their title to the check was defective because to BF
they obtained it by means of fraud • It is NOT necessary that the buyer of the instrument had notice or
2. DURESS OR FORCE AND FEAR knowledge of the exact fraud or the particulars thereof, committed by
• Where Alan, by the use of VIOLENCE AND INTIMIDATION, the assignor, since all that is required is “knowledge of such facts that
forced Penny to indorse a PN in favor of Alan his action in taking the instrument amounted to BF”
3. OTHER UNLAWFUL MEANS • Examples:
• Where the instrument has been stolen o A purchaser who takes the instrument after being told that
• It has been held that a person who acquires an instrument by the maker intends to resist payment or that the transferor
indorsement of a part thereof gets title by unlawful means since had no legal right to transfer (though honestly believing that
the transfer is in contravention of the law the law would sustain the transfer) = X HDC
4. ILLEGAL CONSIDERATION o While INADEQUACY OF PRICE is not itself sufficient to
• A note given to stifle a criminal prosecution is invalid show BF, the inadequacy may be so GROSS as to justify the
• Or in consideration of the payee killing a person finding of BF as where the one paid P50 for a note of P500,
5. NEGOTIATION IN BREACH OF FAITH the solvency and credit of the maker being well-known
• Where the payee of a note negotiated it after receiving payment o Where a NI signed by a person known to be insolvent is sold
from the maker at a very large discount, such circumstance alone is
• Where the payee transfers the instrument in breach of an sufficient to require the purchaser to make inquiry as to the
agreement genuineness thereof and and if he fails to make such inquiry
à HE CANNOT BE DEEMED A BONA FIDE PURCHASER.
• Where a note is given in payment of goods to be delivered and
In any case, the fact that the instrument was purchased at a
the note is negotiated without delivery of the goods
discount may, taken together with other circumstances, rebut
• Where a note held merely as collateral or security is negotiated
the presumption that the holder is one in due course
6. CIRCUMSTANCES AMOUNTING TO FRAUD
o But the indorsee of a note payable to order of Penny or Alan
• Where the payee of a note negotiated it after being told that the and indorsed by Alan only, who takes it in GF and for value
maker intends to resist payment or that the transferor had no legal and without notice of any infirmity in the instrument or defect
right to transfer in the title = ✓HDC
3. EFFECT OF NOTICE OF DEFECT
See illustrative cases page 215 to 223 – PCIB vs CA
• Knowledge or chargeable notice of any defect, at the time of taking of an
instrument, which destroys the status of a holder as HDC, opens all
Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in
defenses otherwise cut off against him and not merely that relating to
the instrument or defect in the title of the person negotiating the same, the person to
the defect of which he had notice
whom it is negotiated must have had actual knowledge of the infirmity or defect, or
• Thus, a holder with knowledge of failure of consideration is subject to the
knowledge of such facts that his action in taking the instrument amounted to bad faith.
defense that a note was obtained by fraud
WHAT CONSTITUTES NOTICE OF INFIRMITY OR DEFECT • This does not, however, modify the rule that one holding from a HDC may
have all the rights of the latter
• In order to constitute NOTICE – the transferee must have actual knowledge
of the infirmity or defect; or knowledge of such facts (which do not appear • Notice to the agent is ordinarily deemed notice to the principal and
on the face of the instrument) that his action in taking the instrument • Notice to a partner is notice to the partnership
amounts to bad faith • See illustrative case page 225
• ACTUAL KNOWLEDGE – is usually shown by the instrument itself 4. DOCTRINE OF CONSTRUCTIVE NOTICE NOT APPLICABLE
1. MERE NEGLIGENCE TO MAKE INQUIRIES NOT SUFFICIENT • The doctrine has never been applies to commercial paper
• Negligence itself is not sufficient to constitute notice since it is not the • TRUE TEST – as to negotiable paper is that of GOOD OR BAD FAITH
equivalent of either actual knowledge or BF • Thus, a notice of lis pendens affecting land is applicable only to a person
• The question of BF or GF is mostly a question of fact who is dealing with the land itself, and a purchaser of a NI secured by a
• Notice is to be determined by the SIMPLE TEST OF HONESTY AND mortgage on the land is not dealing in land, and constructive record of
GOOD FAITH and not by speculative issue as to indorsee’s negligence notice of an infirmity in the instrument does not amount to BF
• Mere suspicious circumstance may not be enough
FACTS THAT ARE NOT NOTICE
• Thus, consulting an attorney before taking a note does NOT show BF
• Under the US Uniform Commercial Code, knowledge of the following facts,
• Nor does the fact that the payee indorsee “without recourse” constitute
standing alone, is NOT notice of defense or claim even if the holder has
a badge of guilty knowledge
knowledge of the fact:
1. The instrument is antedated or postdated
2. It was issued or negotiated in return for an executory promise or REAL DEFENSES AVAILABLE AGAINST HOLDER IN DUE COURSE
accompanied by a separate agreement, • The defenses referred to in Sect 57 that cannot be set up against a HDC
o E: Unless the purchaser has notice that a defense or claim has are the so-called “personal defenses” or equities, as distinguished from
arisen from the terms thereof absolute or real defenses
3. Any party has signed for an accommodation party • They are cut off by negotiation of the instrument to a HDC
4. An incomplete instrument has been completed • This rule which permits a HD to take an instrument free of all personal
o E: Unless the purchaser has notice of any improper completion defenses is a necessity if commercial papers are to circulate freely and
5. Any person negotiating the instrument is or was a fiduciary prospective purchasers are to accept them routinely and willingly
6. There has been default in payment of interest on the instrument or in • Real defenses, which attach to the instrument itself, would be available
payment of any other instrument except one of the same series against all persons even as against a HDC
• In addition, the filing or recording of a document à does NOT itself • In the case of immediate parties, all defenses are available
constitute notice to a person who would otherwise qualify as a HDC • A holder not a HDC acquires the instrument subject to all defenses, whether
• To be effective, notice must be received at such time and in such manner as personal or real, because he is treated as a mere assignee of a non-
to give the holder a reasonable opportunity to act on the information negotiable paper
• Notice must be received before the holder receives the instrument,
otherwise, later notice is irrelevant Sec. 58. When subject to original defense. - In the hands of any holder other than
a holder in due course, a negotiable instrument is subject to the same defenses as
Sec. 57. Rights of holder in due course. - A holder in due course holds the if it were non-negotiable. But a holder who derives his title through a holder in
instrument free from any defect of title of prior parties, and free from defenses due course, and who is not himself a party to any fraud or illegality affecting the
available to prior parties among themselves, and may enforce payment of the instrument, has all the rights of such former holder in respect of all parties prior
instrument for the full amount thereof against all parties liable thereon. to the latter.
RIGHTS OF A HDC DEFENSES IN GENERAL

• The following are the rights of a HDC: • DEFENSES – are grounds or reasons pleaded or offered by the defendant
1. He may SUE on the instrument in his own name in a case, showing why the plaintiff, as a matter of law or fact, should not be
2. He may RECEIVE PAYMENT and if the payment is in due course, the given the relief he seeks
instrument is DISCHARGED • There are 2 KINDS OF DEFENSES which may be interposed to an action
3. He holds the instrument FREE FROM ANY DEFECT OF TITLE of prior upon a NI
parties 1. REAL, ABSOLUTE OR UNIVERSAL DEFENSES
4. He holds the instrument FREE FROM DEFENSES AVAILABLE TO 2. PERSONAL, LIMITED OR EQUITABLE DEFENSES
PRIOR PARTIES among themselves • Some defenses are either real or personal depending on the factual
5. He may ENFORCE PAYMENT of the instrument for the FULL amount situations out of which arise the particular defense
thereof against all parties liable thereon
REAL DEFENSES
IMPORTANCE AND FOUNDATION OF DUE COURSE HOLDING • REAL DEFENSES – are those that are available against all parties both
1. Section 57 – shows the commercial importance of due course holding immediate and remote, including HDC or holders through the latter
• A HDC acquires a right better than any of his predecessors because he • In other words, there are cases when a HDC is not legally entitled to
takes the instrument free of most defenses available to prior parties among payment from the primary party
themselves • REAL – because they attach to the rest, that is, the instrument itself
• Thus, the fact that the instrument has been stolen, or negotiated in breach regardless of the merits or demerits of the holder or the conduct or
of faith or has not been delivered is no defense against a HDC agreement of the parties to it
• A HDC may enforce the full amount of the instrument without regard to the o They challenge the validity of the instrument itself
amount he paid for it o It cannot be enforced by the holder because there is no contract
2. The doctrine protects a HDC is founded on the broadest principles of PUBLIC to enforce
POLICY, with regard to utility, free circulation, and credit or negotiable paper in • This does not imply however that the instrument is valueless and can never
the commercial world be enforced
• Indeed, the convenience and necessities of commerce requires NI which • It is only enforceable against the party entitled to set up the defense (eg
can pass almost as freely In the commercial world as legal tender, and maker’s defense that he was infant when he executed and delivered the
demand, consequently, the protection of those holding them in due course instrument sued on or that the signature thereon was a forgery) but not
• This protection is sometimes explained as ESTOPPEL against those to whom such a defense is not available such as, in the case
• In other words, ONE PUTTING NP ON THE MAKER IS ESTOPPED FROM of forgery, persons precluded from setting it up
CONTESTING THE CONSEQUENES AND INCIDENTS OF HIS ACTS • Generally, the case of the real or absolute defense is presented where the
• Legal maxim – where loss has happened which must fall on one of 2 contract is void (not merely voidable) because of the absence of one or
innocent persons, it shall be borne by him who is the occasion of the loss more of the essential elements of a contract or where the contract itself is
• The one who made the wrong possible is estopped by his neglect declared void by law

• Usually, a real defenses applies only to the person who has made or drawn 14. Discharge of party secondarily liable by discharge of prior party
the instrument 15. Usury – because the contract of loan itself is not void but only agreed
• Examples of real defenses: interest
1. Incapacity as far as the incapacitated person is concerned 16. Want of authority of the agent who has apparent authority, but if the
2. Illegality of contract when declared by law principal can show that the agent had no express, implied, or apparent
• E: Where the maker or drawer is himself a party to the authority to sign, the defense is real
illegality; thus, a note for a gambling debt (an illegal
consideration) is a mere personal defense IMMEDIATE, REMOTE AND PRIOR PARTIES EXPLAINED
3. Want of delivery of incomplete instrument 1. IMMEDIATE PARTIES
4. Forgery o Assume that Marc makes and delivers his PN to Penny (payee) and
5. Want of authority, apparent and real that Penny indorses to Allan à Allan to Bob
6. Duress amounting to forgery as where one takes the hands of another o Marc and Penny are immediate parties because they are in direct
and forced him to gunpoint to sign his name. contractual relation to each other
• There are varying degrees of duress under the law. o Where, however, Marc makes and delivers to Xander, an intermediary,
• If for example, a person signs his name under a vague threat his (Marc’s) PN payable to the order of Penny, and Xander delivers the
or through fear of economic retaliation, the defense is only note to Penny (payee) for value, Marc and Penny are NOT immediate
personal in nature. The duress must be so overwhelming parties
that the victim is entirely deprived of his will o Immediacy signifies privity and not mere proximity
7. Fraud in factum or fraud in esse contractus 2. REMOTE PARTIES
8. Fraudulent alteration by holder o A remote party is one who takes title to an instrument by negotiation
9. Prescription from either the original payee or any subsequent holder
10. Other infirmities appearing on the face of the instrument o In the preceding illustration, Marc and Bob are remote parties – that is,
11. Discharge at or after maturity parties who are not in direct contractual relation to each other
o Other pairs of remote parties are:
PERSONAL DEFENSES § Marc and Alan
• PERSONAL DEFENSES – are those which grow out of the agreement or § Penny and Bob
conduct of a particular person in regard to the instrument which renders it 3. PRIOR PARTIES
inequitable for him, though holding the legal title, to enforce it against the party • In the example given in (1) above, Marc, Penny, and Alan are prior parties
sought to be made liable but which are not available against a HDC with respect to Bob
• They include every defense assertable in action under ordinary contract law • A HDC is free from personal “defenses available to prior parties among
1. They are called “personal defenses” because they are available only against themselves”
that person or subsequent holder who stands in privity with him. In other • As between the immediate parties, no distinction need be made between
words, they can be used only between original parties or immediate parties real and personal defenses
or against one who is not a HDC • So as between Marc and Penny, or Penny and Alan, or Alan and Bob
2. Note that while a real defense questions the legal validity of the instrument above, we might say that all defenses are real
itself, a personal defense affects only the validity of the agreement for which • But when the instrument has passed to a remote party like Alan in relation
the instrument was issued. The validity of the instrument is recognized. It is to Marc, the latter, a prior party, can only set up real defense
the underlying agreement that is in question. • However, if Alan is not HDC, the instrument is subject to all defenses
• EXAMPLES OF PERSONAL DEFENSES: • In such a case, Alan is a mere assignee and the general rules on contract
1. Filing of wrong date would apply
2. Filling up of blanks not in accordance with the authority given and within
reasonable time DEFENSES AVAILABLE AGAINST A HOLDER NOT A HOLDER IN DUE COURSE
3. Want of delivery of complete instrument • A mere assignee or one who is not a HDC takes the instrument subject to all
4. Absence or failure of consideration valid claims of any party which would be available in an action on an ordinary
5. Simple fraud or fraud in inducement contract
6. Acquisition of instrument (not signature) by duress or force and fear • “Same defenses” – as used in Section 58, does not limit the defenses, since the
7. Acquisition of instrument by unlawful means section is not exclusive and does not prevent pleading other defenses of an
8. Acquisition of instrument for an illegal consideration entirely different character not dealt with or covered in such section but
9. Negotiation of breach of faith specifically permitted by any other statute
10. Negotiation under circumstances that amounts to fraud • Unless he has the rights of HDC, any person takes the instrument subject to all
11. Innocent alteration or spoliation. valid claims or defenses of any party which would be available in an action on a
o SPOILATION – is an alteration made by a stranger to an instrument. If simple contract
the original meaning can be ascertained, the HDC may recover
according to its original tenor
12. Set-off between immediate parties
13. Discharge by payment or renunciation or release before maturity
DEFENSES SUBJECT TO ESTOPPEL 4. He has all the rights of the HDC from whom he derives his title in respect of
• Through estoppel, an admission or representation is rendered conclusive all parties prior to such holder, provided he is not himself a party to any
upon the person making it, and it cannot be denied or disproved as against fraud or illegality affecting the instrument
the person relying thereof
• Real and personal defenses are subject to estoppel since the rules and RIGHT OF HOLDER NOT IN DUE COURSE TO RECEIVE PAYMENT
principles governing estoppel generally are applied to commercial • It does not follow as a legal proposition that simply because one is not a
instruments HDC he cannot recover on the instrument
• In fact, practically all the defenses such as forgery or illegality may be • The law does not provide that a HNDC may not, in any case, recover on the
precluded by estoppel instrument
• If Bob, for instance, purchases from Alan an overdue nego PN signed by
FRAUD IN FACTUM AND FRAUD IN INDUCEMENT DISTINGUISHED Marc à Bob is not a HDC but he may recover from Marc or Alan, if Marc or
• There are 2 kinds of fraud relating to NI Alan has no valid excuse for refusing payment
• The only disadvantage of a holder who is not a HDC is that the NI is subject
FRAUD IN FACTUM OR FRAUD IN THE FRAUD IN INDUCEMENT to defenses as if it were NN
EXECUTION • Where a (crossed) check were issued by the drawer without consideration,
- It exists in those cases in which a - It is that which relates to the in breach of faith, no right of recourse is available to a holder in BF against
person, without negligence, has QUALITY, QUANTITY, VALUE OR the drawer
signed an instrument, which was in CHARACTER of the consideration
fact a NI, but was deceived as to the of the instrument RIGHTS OF PURCHASER FROM HDC
character of the NI and without - In this case, the signer is led by • Whether a holder takes NI free of equities and defenses that might obtain
knowledge of it, deception to execute what he knows between the original parties depends upon the further fact of his status as a
- Example: as where a note was is negotiable instrument and, HDC or as take through such holder
signed by one under the belief that therefore, necessarily signed with 1. RIGHTS OF A MERE TRANSFEREE
he was signing as a witness to a knowledge that the instrument • If a person is not a HDC, his rights are those of a transferee of a NN
deed or where the signature as would probably pass into the hands instrument so that he is not free from personal defenses
procured by fraudulent use of of an innocent purchaser 2. RIGHTS OF TRANSFEREE FROM A HDC
carbon paper - Here, the deceit is not in the • Section 58 provides the exception: A holder who derives his title from a
character of the instrument but its HDC has all the rights of the latter even though he himself is a mere
amount or its terms transferee or does not satisfy the requirements of a HDC
- It implies that the signer knew what • 2 REQUISITES:
he was signing but he was induced 1. That he derives his title through a HDC
by fraud to sign 2. That he was no himself a party to any fraud or illegality affecting the
- Example: Where a person is instrument
induced to sign a note for the price 3. RIGHTS OF REACQUIRER WITH A DEFECTIVE TITLE, FROM A HDC
of worthless stock which was • But a payee or indorsee whose title is defective cannot better it by selling
fraudulently represented by the the instrument to a HDC and buying it again
payee as to its value • A holder not in due course should not be permitted to wash an instrument
Real defense because there is no Personal defense because it does not clean by passing it into the hands of a HDC and then repurchase it à he is
contract prevent a contract remitted to his former position
-It implies that the person did not know • Similarly, a HDC who negotiates the instrument to a holder other than one in
that he was signing Mere carelessness or negligence, in the due course and then reacquires it, will hold the instrument as a HDC
absence of any fraud, is neither a real nor EXAMPLES
E: But where the signer by the exercise personal defense • Marc is induced through simple fraud committed by Penny to issue a PN in
of reasonable diligence could have favor of Penny. Here, Penny is a party to the fraud. à Penny indorsed the
discovered the nature of the instrument, note to Allan. Allan HAS NOTICE of the fraud but did not take part in it. à
the fraud cannot be a real defense, as By Allan, the note is indorsed to Bob, a HDC, Bob in turn, indorses the note
where a person, who can read signed a to Cyrus who knows how the note was obtained but without being a party to
note but failed to read it the fraud
o In this case, even Cyrus is NOT A HDC à he has all the rights of
RIGHTS OF HOLDER NOT IN DUE COURSE such holder in respect of Marc, Penny and Allan having derived
A holder not in due course has the following rights: his title from Bob (HDC) and the defenses of fraud cannot be set
1. He may sue on the instrument in his own name up against him. In effect, Cyrus is a HDC relative to Marc,
2. He may receive payment and if the payment is in due course, the instrument Penny and Alan
is discharged o If instead of indorsing the note to Cyrus, Bob indorses it to Penny
3. He is entitled to the instrument but holds it subject to the same defenses as (payee), Penny cannot recover on the instrument because he
if it were non-negotiable
is a party to the fraud. Penny is remitted to her original position presumption of due course holding does not accrue in favor of
when she first acquired the note from Marc David as far as Penny is concerned once Penny shows that the
o If the note is indorsed by Cyrus to David, who has also notice of title of Alan was defective
the defect but was not a party to the fraud à David cannot 3. Let us know suppose that the fraud was committed by Bob against Alan.
recover from Marc because David did not acquire his title • In this case, the situation of Alan is the same as that of Marc in
from a HDC the first example,
o Assuming that Cyrus is a HDC and Alan reacquired from him the • And Penny, the same as that of Marc in the second example
note, Alan is not given the former’s rights although he was
not a party to the fraud. Alan is remitted to his original position
which he occupied when he first acquired the note from Penny.
The act of Alan in negotiation the note to a HDC in order to cut off
Marc’s defense upon his (Alan’s) reacquisition of the instrument
may be considered FRAUD under Sec 55
o If Bob who takes the note from Alan as a HDC and negotiates it to
Cath who is NOT a HDC, reacquires it from Cath, Bob will hold
the note as a HDC. He is remitted to his former position.
Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima
facie to be a holder in due course; // E: but when it is shown that the title of any
person who has negotiated the instrument was defective, the burden is on the
holder to prove that he or some person under whom he claims acquired the title as
holder in due course.// E to E: But the last-mentioned rule does not apply in favor of a
party who became bound on the instrument prior to the acquisition of such
defective title.
WHEN A HOLDER PRESUMED A HDC

• Every holder is deemed a prima facie HDC arises only in favor of a person
who is a HDC defined in Sect 191 – payee or indorsee who is in possession
of the instrument, or bearer thereof
• There is no presumption that a person through whose hands an instrument
has passed was a HDC
1. PROOF OF BEING A HOLDER
• Once the person through whose hands an instrument has passed shows
that he is a holder à the presumption accrues in his favor
• He does not have to prove that he acquired the instrument under all the
circumstances required under Sec 52
2. BURDEN OF PROOF ON HOLDER WHERE INDORSER’S TITLE DEFECTIVE
• When it is shown that the title of any person who has negotiated the
instrument was defective, as when the instrument is not payable to him or
bearer à then the burden of proof shifts to the holder who must show that
he is a HDC although he is not himself a HDC
• A person who acquires title from a prior HDC is referred to as HOLDER
THROUGH A HOLDER IN DUE COURSE
Examples:
1. Penny obtained the note from Marc through (simple) fraud and negotiates it
to Alan à Alan to Bob à Bob to Cyrus à Cyrus to David (present holder)
• Presumption: David is a HDC
• But once Marc proves the fraud committed by Penny, the burden
is shifted to David to prove that he is actually a HDC or that
Cyrus, from whom he acquired title, is a HDC
2. Suppose the fraud was committed by Alan against Penny, the presumption
that David is HDC is not destroyed because Marc became bound on the
instrument before the acquisition of the defective title by Alan
• Note that Penny is similarly situated as Marc in the first example
• As Penny became bound on the instrument contemporaneous
(not prior to) with the acquisition of Alan’s defective title, the
VI. LIABILITIES OF PARTIES • He engages to pay the note according to its term subject to no condition
whatsoever
• Due presentment for payment and due notice of dishonor = X necessary for
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, the purpose of charging the maker with liability, which is necessary,
engages that he will pay it according to its tenor, and admits the existence of the however to fix the liability of any drawer or indorser
payee and his then capacity to indorse. • He promises to pay not only to the PAYEE but to ANY SUBSEQUENT
HOLDER who is legally entitled to the instrument at its maturity even if the
CLASSIFICATION OF PARTIES ACCORDING TO LIABILITY holder does not demand payment at that time
• LIABILITY – refers to the obligation of a party to negotiate the instrument to • He remains fully liable despite the fact that the instrument is presented for
pay the same according to its terms payment late until prescription has run
• The parties to a NI may be classified according to their liability as follows: • Moreover, he admits the existence of the payee and his THEN capacity (at
1. PRIMARILY LIABLE the time of signing of the note) to indorse
a. The maker of a PN • The rule operate to prevent the maker from escaping liability by showing the
b. The acceptor of a BOE and non-existence and incapacity of the payee
c. The certifier of a check • The payee must exist because there is no negotiable instrument until it is
2. SECONDARILY (CONDITIONALLY) LIABLE delivered to him
a. The drawer of a bill; and • The payee must have the capacity to contract because the note is intended
b. The indorser of a note or a bill to be negotiated and not to be retained with the payee
3. NOT LIABLE 2. PRESUMPTION ARISING FROM SIGNATURE
a. The drawee until he accepts the instrument in which case he • A person placing his name on the face of a note is PRIMA FACIE A MAKER
becomes an acceptor and liable as such
• A person becomes a party to an instrument by signing his name thereon • He is presumed to have acted with care and to have signed the instrument
• GR: No person is liable on an instrument in question with full knowledge of its content
o E: Unless his signature appears thereon Example:
• Marc issued a PN for Penny for 500 payable on demand à Penny indorses
PRIMARY PARTY AND SECONDARY PARTY DISTINGUISHED the note to Alan
• Upon being sued by Alan, Marc cannot say that the agreement between him
PRIMARY PARTY SECONDARY PARTY and Penny was to pay only P300
The person primarily liable on the All other parties are secondarily liable • Neither can he alleged that Penny is a non-existent nor fictitious person
instrument is the person who by the
• He is also precluded from setting up such defenses as minority, insanity,
terms of the instrument is absolutely
ultra vires act of a corporation
required to pay the same (Sec 192)
Unconditionally bound – person primarily Conditionally bound – secondary party Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the
liable is absolutely required to pay the undertakes to pay the instrument only
existence of the payee and his then capacity to indorse; and engages that, on due
instrument upon its maturity after certain conditions have been presentment, the instrument will be accepted or paid, or both, according to its
fulfilled, to wit: tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly
1. Due presentment for payment
taken, he will pay the amount thereof to the holder or to any subsequent
or acceptance to primary party; indorser who may be compelled to pay it. // E: But the drawer may insert in the
2. Dishonor by such party instrument an express stipulation negativing or limiting his own liability to the
3. Taking of proceedings required
holder.
by law after dishonor
Liability to an instrument ends when the LIABILITY OF DRAWER
primary party pays the full amount of the
• Just as the maker of a note, the drawer, by merely signing the name on the
instrument to the proper party bill as drawer, admits the existence of the payee and his THEN capacity to
Face only potential secondary liability on indorse the instrument at the time it was executed
the instrument 1. LIABILITY CONDITIONAL
Liable in the reverse order in which they • HOWEVER, the drawer does NOT promise to pay the bill absolutely
signed the instrument
• He makes NO WARRANTIES, but he engages to pay after certain
conditions are complied with. To wit:
LIABILITY OF THE MAKER 1. A bill is PRESENTED FOR ACCEPTANCE OR FOR PAYMENT, as
• The term “MAKER” here applies only to PN the case may be, to the drawee
• It includes an accommodation party and a surety who signs as a maker 2. The bill is DISHONORED by non-acceptance or non-payment, as the
1. LIABILITY UNCONDITIONAL case may be and
• Maker = primarily liable as he is the one to whom the holder will look first for 3. The necessary PROCEEDINGS OF DISHONOR are duly taken. Such
payment and the one who is expected to pay proceedings are:

1. Notice of dishonor is given to the drawer subject to certain
exceptions Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument,
2. In case of foreign bills, protest is made followed by a notice of engages that he will pay it according to the tenor of his acceptance and admits:
protest a) The existence of the drawer, the genuineness of his signature, and
2. LIABILITY AS A GENERAL INDORSER his capacity and authority to draw the instrument; and
• The drawer, therefore, is only SECONDARILY LIABLE to the holder or to b) The existence of the payee and his then capacity to indorse.
any subsequent indorser, who may be compelled to pay it
• His liabilities are CONDITIONAL in the same manner as the liabilities of a LIABILITY OF ACCEPTOR
GENERAL INDORSER 1. LIABILITY OF DRAWEE BEFORE ACCEPTANCE
• The phrase to “any subsequent holder” • Drawee of a bill is NOT LIABLE thereon before acceptance
o refers to any of the indorsers between the drawer and the holder • He is not obligated to the payee or any holder to accept the bill
o also called INTERVENING INDOSERS o E: although he may be liable to the drawer for breach of
• Note that the drawer may, by express stipulation, inserted in the instrument, contract if he refuses without valid reason to accept the bill
NEGATIVE OR LIMIT HIS OWN LIABILITY TO THE HOLDER • GR: A refusal by the drawee to accept a bill constitutes DISHONOR of
3. LIABILITY OF A DRAWER OF A CHECK the instrument which triggers the liability of secondary parties – drawer
• The drawer may NOT UNILATERALLY DISCHARGE HIMSELF FROM and indorser
LIABILITY on checks issued by him merely as security and not for value to a o E: Those indorsing qualifiedly, that is without guaranteeing
payee who negotiated the same without his knowledge and consent to a payment
HDC, by the mere expediency of withdrawing his funds from the drawee • Unless the drawee accepts, he owed no duty to either the payee or any
bank other holder
o By issuing a check, the drawer impliedly represents that the funds • His obligation is to the drawer to pay in accordance with the latter’s
or credit are available for its payment in the drawee bank orders
o The drawer can still be made liable under a separate contract 2. LIABILITY OF DRAWEE AFTER ACCEPTANCE
distinct from the instrument • Once the drawee accepts, he BECOMES AN ACCEPTOR
o Thus, the liability of the drawer under the letter of undertaking is • He is virtually in the same position as the MAKER of the note
primary and independent from that under the sight drafts, which • The same result takes place when a drawee bank certifies a check drawn
subsist even if they are dishonored for non-acceptance or non- on the bank
payment • The acceptor is PRIMARILY BOUND on the instrument for by his
• There is a slight difference between the liability of a drawer of a check and acceptance, he engages to pay it according to the terms of his acceptance,
that of a drawer of other BOE subject to no conditional whatsoever
• Example: • IN OTHER WORDS, HIS ACCEPTANCE IS A PROMISE TO PAY
o Suppose Ryan, as drawer, draws a bill on Weng, as drawee • The bank (drawee) on which a check is drawn, is under strict liability based
payable to the order of Penny à The bill is indorsed successively on the contract between the bank and its customer (drawer), to pay the
by Penny to Alan, by Allan to Bob and by Bob to Cath (present check only to the payee’s order
holder) o Drawer’s instructions are reflected on the face and by the terms of
o In this case, RYAN is liable only to Cath if Weng dishonors the bill the check
by non-acceptance or non-payment and the necessary o Otherwise, the bank violates the duty to charge the drawer’s
proceedings of dishonor are taken account only for properly payable items and shall be liable for the
o After such proceedings are taken, the indorsers Penny, Alan and amount charged to the drawer’s account
Bob - would also be liable to Cath 3. RETRACTION OF ACCEPTANCE
o And if say Bob, pays Cath,Bob may recover from Ryan, Penny or • The BOE itself implies a representation by the drawer that the drawee is
Allan already in receipt of the funds to pay, and the acceptance (admission of the
o Penny Allan and bob are the intervening indorsers truth of that representation) makes the drawee PRIMARILY LIABLE
o Ryan as the indorser is permitted by law to negative or limit his • The drawee who has accepted CANNOT RETRACT HIS ADMISSION as
own liability to the holder against HFC, since he has thereby obtained a suspension of the holder’s
o Thus, Ryan may insert in the bill the words, “I shall not be bound remedies against the drawer and an extension of credit
in case the instrument is dishonored” or “without recourse” 4. PAYMENT OF CHECK DESPITE STOP-PAYMENT ORDER
• If a drawee-bank accepts or pays a check despite stop payment order from
DRAWER VS MAKER the drawer, through oversight or otherwise, IT CANNOT REFUSE TO PAY
THE HOLDER OR RECOVER WHAT HAS BEEN PAID
DRAWER MAKER • NEITHER MAY IT DEBUT the drawer’s account
Issued BOE PN o E: The acceptance nor payment was made PRIOR to the receipt
Secondarily liable Primarily liable of the order
Can negative or limit his liability X 5. SIMILARITY TO LIABILITY OF MAKER AND DRAWER

• The acceptor has the same liability as the maker of a PN and the drawer of • Weng is liable only for 3k (original tenor of the bill)
a bill with respect to the EXISTENCE OF THE PAYEE AND HIS CAPACITY • More logical view
TO INDORSE • Sec 62 should be read in relation to the definition of
• Like the maker, neither presentment nor notice of dishonor is necessary to acceptance in Sect 132
charge him with liability • “Assent to the order of the drawer” in Sec 132 means
o E: Where he is an ACCEPTOR FOR HONOR “assent to pay according to the order of the drawer” and
not according to what appears to be the order of the drawer
LIABILITY DEPENDS ON TENOR OF ACCEPTANCE • How can the acceptor assent to the alteration when he has
• GR: No one but the drawee may accept; a stranger or volunteer is NOT no knowledge of the alteration
bound by acceptance • Sect 124 (par 2), a HDC may enforce payment of a
o E: When a bill is accepted for honor supra protest materially altered instrument NOT according to its altered
1. While the maker of a note or the drawer of a bill engages to pay according tenor but according to its original tenor
to the tenor of the instrument, // the acceptor engages to pay according to
the TENOR OF HIS ACCEPTANCE, which is not the same as the tenor of WARRANTIES OF THE ACCEPTOR
the bill itself because the acceptance may be qualified • The acceptor, by signing a bill as such, warrants:
o Of course, if his acceptance is GENERAL OR ABSOLUTE – then 1. The existence of the payee and
he is liable to pay according to the tenor of his acceptance which 2. His THEN capacity to indorse
incidentally is also the tenor of the bill itself 3. Admits the existence of the drawer
2. The nature of acceptance - is important only in the DETERMINATION OF 4. The genuineness of his signature and
THE KIDNS OF LIABILITIES OF THE PARTIES INVOLVED, but NOT in the 5. His capacity and authority to draw the bill
determination of whether a commercial paper is a BOE or not 1. DEFENSES PRECLUDED
o As long as a commercial paper conforms with the definition of a • Acceptor is precluded from asserting as defense that:
BOE, the paper is considered a BOE o The drawer is fictitious or non-existent or
Example: o The drawer’s signature is a forgery or
• If Ryan draws on Weng a bill for P500 payable 30 days after sight à Weng, o That he has no funds in his hands belonging to the drawer with
not being a party to the bill may REFUSE TO ACCEPT the same which to pay the bill or
• If Weng accepts, she becomes primarily liable o That the drawer has overdrawn his account or
o BUT her liability depends on the kind of acceptance that she o That the drawer has no capacity to contract or has no authority to
makes draw a bill
o Thus, if Weng accepts the bill for P200 à she is liable only for • By accepting unconditionally a bill, the drawee becomes liable to a holder
200 = The tenor of his acceptance and not P500, the tenor of the and he cannot allege want or failure of consideration between him and the
bill drawer
o If she accepts the bills but payable “90 days after sight” à she is • The holder is a stranger as regards the transaction between the drawer and
bound to pay the bill as accepted the drawee
o If she merely signs the bill as acceptor à then she is bound to 2. MATTERS NOT ADMITTED
pay unconditionally the bill according to its tenor which is the • The acceptor does NOT admit the GENUINESS OF THE INDORSER’S
same as the tenor of his acceptance SIGNATURE à because it is only the signature of the drawer that he
warrants, although the purported indorsement was on the bill at the time it
EFFECT OF ACCEPTANCE OF AN ALTERED BILL was accepted
• Q: Suppose a bill is altered without authority by the payee before • An acceptor is only held to a knowledge of the signature of the drawer
acceptance and is subsequently accepted by the acceptor as altered, is the • By accepting a bill, he only admits the genuineness of such signature and
acceptor liable to an innocent holder according to the original tenor of the cannot be charged with knowledge of the want of genuineness of any other
bill or according to its altered tenor? In other words, is the altered tenor of part of the instrument or of the title of the holder
the bill, the tenor of acceptance? For instance, if a bill originally for 3k is
altered by Penny (the payee) to P8k and is accepted by Weng (the PAYMENT WITHOUT ACCEPTANCE
acceptor) for 8k, how much is Weng liable to Alan (HDC) – 3k or 8k? 1. DISTINCTION BETWEEN PAYMENT AND ACCEPTANCE
• A: TWO VIEWS • As a rule, payment by the drawee may not be considered as equivalent of
1. TENOR OF ACCEPTANCE acceptance
• W is liable to pay 8k as it is the tenor of his acceptance
• Since an acceptor by Sec 62 engages to pay the bill PAYMENT ACCEPTANCE
according to the tenor of its acceptance, he must pay to the Actual performance of an act The promise to perform an act
innocent payee or subsequent holder the amount called for
The acceptance of a bill is the
by the bill at the time he accepted, even though larger than
signification by the drawee of his assent
the original amount order by the drawer
to the order of the drawer
2. ORIGINAL TENOR
X required for checks because payable
• ✓ Better view
on demand
Discharge of the indebtedness Obligation to pay • Unlike an indorser, a guarantor is only SUBSIDIARILY LIABLE after the
Implies not only the drawee’s assent to assets of the principal debtor have been exhausted
the roder of the drawer but also an 2. LIABILITY AS SURETY
admission of his corresponding obligation • Signature + ‘as surety”
to pay the instrument and his clear • PRIMARY AND ABSOLUTELY LIABLE with the principal debtor without
compliance with that obligation benefit of exhaustion of the properties of the latter and without also the
necessity of presentment or notice of dishonor
2. PAYMENT AMOUNTS TO MORE THAN ACCEPTANCE 3. SIGNATURE MADE FOR IDENTIFICATION ONLY
• Payment of the amount of a bill check by the drawee implied not only • Liable as a guarantor not indorser
acceptance but also compliance with the drawee’s obligation 4. ENGAGEMENT OF GUARANTOR
• The rule, holding that such payment has all the efficacy of acceptance, is • Under the UCC, a gurantor may sign an instrument either:
founded upon the PRINCIPLES THAT THE GREATER INCLUDES THE 1. PAYMENT GUARANTEED or
LESS 2. COLLECTION GUARANTEED
• The payment of a check includes its acceptance • PAYMENT GUARANTEED – The signer engages that if the instrument is
• It has been held that acceptance by the drawee may be implied not paid when due, he will pay it according to its tenor even if the party
• See case page 252 – IMPT! entitled to payment HAS NOT ATTEMPTED TO COLLECT from the party
liable for it
Sec. 63. When a person deemed indorser. - A person placing his signature upon • COLLECTION GUARANTEED – the signer engages that if the instrument
an instrument otherwise than as maker, drawer, or acceptor, is deemed to be is not paid when due he will pay it according to its tenor but only AFTER the
indorser // E: unless he clearly indicates by appropriate words his intention to be party entitled to payment HAS TRIED TO COLLECT from the party liable for
bound in some other capacity. it and has been unable to do so and it is apparent that it is USELESS to
proceed against him
WHEN A PERSON DEEMED AN INDORSER
• A person signing his name on the back of an instrument is, nothing else LIABILITY OF AGENT OF BANK FOR COLLECTION
appearing, a GENERAL INDORSER and LIABLE AS SUCH • As a mere agent for collection, a bank is NOT BOUND TO KNOW THE
• Being an indorser, he CHARGEABLE ONLY AFTER PRESENTMENT AND GENUINENESS OF PRIOR INDORSEMENTS (Jai Alai case)
NOTICE OF DISHONOR • See page 255
1. PAROL EVIDENCE INADMISSIBLE • GR: A collecting bank is generally not liable on a forged instrument (Jai
• The law absolutely fixes the status of indorser Alai)
• It does not merely raise a presumption that he is such o E: However, a collecting bank is liable for being the last
• So one who signs as an indorser CANNOT SHOW BY PAROL EVIDENCE indorser and for having a warranty stamp, “all prior
HIS INTENTION TO BE BOUND IN SOME OTHER CAPACITY, à as for indorsement or lack of indorsement guaranteed” (BDO)
example: He signed merely as an agent for the purpose only of identifying a § E to E: Collecting bank is NOT liable despite having
person on the instrument a warranty stamp for drawee bank’s failure to return
• The law requires that he indicates by APPROPRIATE WORDS his the forged check within 24 hours (Republic Bank
INTENTION to be bound in SOME OTHER CAPACITY on the and MetroBank case)
INSTRUMENT ITSELF
2. REASON FOR THE RULE Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to
• Commercial necessity an instrument, places thereon his signature in blank before delivery, he is liable as
• The full and free circulation of negotiable papers which take the place of indorser, in accordance with the following rules:
money is a matter of great acceptance a) If the instrument is payable to the order of a third person, he is
• To require each assignee to inquire into and investigate before accepting liable to the payee and to all subsequent parties.
them would destroy the commercial value and seriously impede business b) If the instrument is payable to the order of the maker or drawer, or
transactions is payable to bearer, he is liable to all parties subsequent to the
maker or drawer.
WHEN A PERSON LIABLE AS GUARANTOR OR SURETY c) If he signs for the accommodation of the payee, he is liable to all
1. LIABILITY AS GUARANTOR parties subsequent to the payee.
• A person who writes, in addition to his signature on the back of an
instrument, “I HEREBY GUARANTEE PAYMENT OF THIS INSTRUMENT” IRREGULAR OR ANOMALOUS INDORSEMENT EXPLAINED
or “PAYMENT GUARANTEED” or equivalent, indicates his intention to be • The term usually denotes:
bound as guarantor o An indorsement for some purpose other than to transfer the
• In which case, he is NOT discharged from liability merely because of the instrument, or
lack of due presentment or due notice of dishonor o An indorsement by a stranger to the instrument or
• He WAIVES the need for presentment, protest or notice of dishonor

o By one not in actual or apparent chain of title, especially an o If the note were payable to bearer, Xander would also be
indorsement made prior to the delivery of the instrument to the liable to all parties subsequent to Marc
payee 3. IRREGULAR INDORSER SIGNING FOR ACCOMMODATION OF PAYEE
• The purpose of the indorsement not for transfer is usually to add the • Suppose in the first illustration Penny wants to discount the note with
signer’s credit to the instrument American Bank, but the bank is not willing to rely on the financial ability of
Marc and penny alone
WHEN A PERSON AN IRREGULAR OR ANOMALOUS INDORSER • Penny then secures Xander to accommodate him
1. An irregular or anomalous indorser is a person who: • Xander without receiving any valuable consideration therefore but only for
a) Not otherwise a party to an instrument – that the irregular indorser is the purpose of lending his name and credit to P, indorses the note in blank
not a maker, drawer, acceptor or regular indorser thereon o Xander is liable to all parties subsequent to Penny (the payee)
b) Places thereon his signature in blank o Penny, is in effect, the first indorser
c) Before delivery o X = second indorser
2. Sec 64 deals only with the liability of an irregular indorser to the payee and
subsequent parties WARRANTIES OF IRREGULAR INDORSER
• The rights and liabilities of several irregular indorsers as among themselves • It must be noted that Sec 64 provides only for the parties to whom an
– governed by Sec 68 irregular indorser is liable
• Sec 64 has no application to a case where the signature was placed on the • His warranties are the same as those of a general indorser under Sec 66
instrument AFTER delivery to the payee inasmuch as his indorsement is in blank which in itself, is an indorsement
3. The irregular or anomalous indorser indorses the instrument in an UNUSUAL, without qualification
SINGULAR OR PECULIAR MANNER
• His name appears where we would naturally expect another name Sec. 65. Warranty where negotiation by delivery and so forth. — Every person
• Example: fi an instrument is made payable to the order P as the payee, negotiating an instrument by delivery or by a qualified indorsement warrants:
Penny’s name shoyl appear on the back of the instrument as the first (a) That the instrument is genuine and in all respects what it purports to be;
indorser but instead we find the name of Xander à in such case, Xander = (b) That he has a good title to it; 
irregular or anomalous indorser (c) That all prior parties had capacity to contract;
4. Usually an irregular or anomalous indorser is an accommodation indorser (d) That he has no knowledge of any fact which would impair the validity of the
• He is not necessarily so where he participates in the consideration for the instrument or render it valueless.
instrument
But when the negotiation is by delivery only, the warranty extends in favor
RULES AS TO LIABILITY OF IRREGULAR OR ANOMALOUS INDORSER of no holder other than the immediate transferee.
• Sect 64 sets out rules for 3 classes of cases regarding the liability of an
irregular or anomalous indorser The provisions of subdivision (c) of this section do not apply to a person
• EXAMPLES: negotiating public or corporation securities other than bills and notes.
1. INSTRUMENT PAYABLE TO THE ORDER OF A THIRD PERSON
• Marc makes a note payable to Penny or order à Penny, however, NEGOTIATION BY DELIVERY/QUALIFIED INDORSEMENT
does not have faith in the financial ability of Marc and is willing to take • Every indorser makes certain warranties or guarantees about the instrument
the note only if Xander’s financial ability “is back of it” he is negotiation (Sect 65, 66)
• Marc then secures Xander’s indorsement in blank before the note is • WARRANTY LIABILITY = UNCONDITIONAL i.e. it is not conditioned upon
delivered to Penny à Penny negotiates the note to Alan for some proper presentment and dishonor of the instrument and the giving of notice
obligation à When Alan takes the instrument, Xander’s name appears of dishonor
as the first indorser followed by Penny’s name • NEGOTIATION “BY DELIVERY” under Section 65 – means that the
o Xander is liable to Penny (payee) and Alan (subsequent indorsement is not necessary because it is an instrument payable to
party BEARER
o But NOT to Marc o The words DELIVERY therefore, refers to a holder who
2. INSTRUMENT PAYABLE TO THE ORDER OF MAKER OR DRAWER OR negotiates the instrument in the same condition in which he
TO BEARER received it, making no indorsement at all
• Suppose the note is payable to the order of Marc (which means that o So a blank indorser of an instrument = X negotiate it “by delivery”
the maker and the payee are the same person) à Marc cannot within this section as his liability would be governed by Sect 66
circulate the instrument without Xander’s indorsement thereon • A a qualified indorsement - is made by adding to the indorser’s signature
• Xander then signs his name and Marc indorses and delivers the the words “without recourse” or any words of similar import
instrument to Alan
o Xander is liable to Alan (party subsequent to Marc, the WARRANTY LIABILITY OF ONE NEGOTIATING BY DELIVERY AND OF
maker) and to subsequent parties but NOT to Marc QUALIFIED INDORSER
o But Marc is liable to Xander a) The liability of a person negotiating a bearer instrument by mere delivery =
o The liability of Marc is that of a first indorser same as the person who negotiates it by qualified indorsement
o X is that of a second indorser
• Both do not assume to pay the instrument in the event of its o Under Section 65, the warranty of Randy with respect to the
dishonor bearer checks, extends only to the bank of PI (Jai Alai Corp
o E: unless the dishonor is based on any of the 4 implied case)
warranties enumerated in Sect 65
• They are in fact, merely assigning a credit LIABILITY OF COLLECTING/ISSUING BANK
b) Their liabilities differ however, with respect to the person in whose favor the 3. GUARANTEES EVEN IF PREVIOUS INDORSEMENT IS FORGED
warranty extends • The warranty “that the instrument is genuine and it all respect what it
• While the liability of the one who negotiates by mere delivery purports to be” à covers all the defects in the instrument affecting the
extends in favor only of his immediate transferee, the qualified validity thereof, including forged indorsement
indorser is liable to all subsequent holder who make it through his • Thus, the last indorser will be liable for the amount indicated in the NI even
indorsement for a breach of any of his warranties if a previous indorsement was forged
In short… • It has been held in a line of cases that “a collecting bank which indorses a
check bearing a forged indorsement and presents it to the drawee bank
NEGOTIATING BY DELIVERY QUALIFIED INDORSER guarantees all prior indorsements, including the forged indorsement itself,
The liability of a person negotiating a bearer instrument by mere delivery = same as and ultimately it should be LIABLE therefore”
the person who negotiates it by qualified indorsement o E: When the issuance of the check itself was attended with
negligence
Liability of the one who negotiates by The qualified indorser is liable to all • Thus, while a collecting bank is generally held liable, the issuing bank is just
mere delivery extends in favor only of his subsequent holder who make it through as liable or more than the collecting bank where the subject check was
immediate transferee his indorsement for a breach of any of his negligently issued (eg to a stanger on instruction by telephone of supposed
warranties depositor, without written authorization)
o Where both banks are negligent à SC allocated the loss between
Example 1: them considering their comparative or relative negligence and the
• Marc makes a PN payable to bearer à and delivers the same to Penny à demands of substantial justice
who negotiates it to Allen either by delivery or by qualified indorsement o In one case, proportionate sharing – 50 -50
• If the note is dishonored in the hands of Allen due to the insolvency of o In another, 60-40
Marc à Allen cannot recover from Penny because Penny does not 4. ASSUMES WARRANTY OF AN INDORSER
warrant Marc’s solvency • A collecting bank where a check is deposited which indorses the check
• However, Penny is ✓ liable: upon presentment with the drawee bank = indorser
e) if the instrument is FORGED à for she warrants that the: “instrument • This is because in indorsing a check to the drawee bank, a collecting bank,
is genuine” or stamps at the back of the check with the phrase “all prior/or lack of
f) If Penny had stolen the note from Marc à for he warrants that “he has indorsement guaranteed” and for all intents and purposes, treats the check
good title to it” or as NI à hence assumes all the warranties of an indorser
g) If Marc is a minor à for he warrants that all prior parties had capacity • Without the warranty, the drawee bank would not pay the value of the check
to contract • As collecting bank or last indorser à The bank generally suffers the loss
h) If Penny knew that the instrument was invalid for want or failure of because it has the duty to ascertain the genuineness of all prior
consideration or that Marc was insolvent but concealed that fact from indorsements considering that the act of presenting the check for payment
Allen for he warrants that à “he has no knowledge of any fact which to the drawee bank is an assertion that the party making the presentment
would impair the validity of the instrument or render it useless has done its duty to ascertain the genuineness of prior indorsements
• Suppose the note is negotiated by Penny to Allen, and Allen to Bino, all by
delivery, is Penny liable to Bino for violation of any of the four warranties? SALE OF PUBLIC OR CORPORATE SECURITIES
o NO! • Brokers and other person “negotiating public or corporation securities, other
o Because the warranties of Penny extend only to Allen, his than bills and notes” = X warranty the capacity of prior parties
immediate transferee • Example:
o Allen, of course, is liable to B, his immediate transferee o Under the leg authority, the city of Manila issued bonds à BDO
buys some of these bonds and sells them to Penny (an investor)
Example 2: à SC subsequently decided that the law authorizing the issue of
• Randy issued 10 checks (2 of 3 crossed checks are bearer checks and one, the bonds and the bonds (on some ground or another) are VOID
uncrossed bearer check) à payable to Penny, Inc. à Xena, a sales agent o In this case, BDO is not liable to Penny for breach of implied
of Penny, Inc. indorsed all the check to Allen Corporation which deposited warranty à BDO did not impliedly warranty that the City of Manila
the same in its current account with Bank of PI à after temporarily crediting had the capacity to issue the bonds in question
the amount thereof to Allen corp’s account à Bank of PI debited the amount
against the account of Allen Corp, upon being informed by Penny Inc that
the indorsement by X were forgeries

Sec. 66. Liability of general indorser. - Every indorser who indorses without When a person makes an unqualified
qualification, warrants to all subsequent holders in due course: indorsement of an instrument, the law
a) The matters and things mentioned in subdivisions (a), (b), and (c) of the specifies and defines his liability and
next preceding section; and parol testimony is not admissible to
b) That the instrument is, at the time of his indorsement, valid and explain or defeat such liability
subsisting; 
• After an instrument is dishonored by non-payment, indorsers cease to be
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or merely secondarily liable à the become PRINCIPAL DEBTORS whose
both, as the case may be, according to its tenor, and that if it be dishonored and the liability becomes identical to that of the original obligor
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to • The holder need not even proceed against the maker or drawer before
the holder, or to any subsequent indorser who may be compelled to pay it. suing the indorsers
• The maker or drawer is NOT an indispensable party in an action against
WARRANTY LIABILITY OF GENERAL OR UNQUALIFIED INDORSER indorsers
• The drawer and general indorser guarantee payment of the instrument, 4. WARRANTY THAT PRIOR INDORSEMENTS GENUINE
provided certain steps are taken to charge them with liability • By stamping on a (crossed) check accepted by it for deposit its guarantee
1. SIMILARLY TO THAT OF A QUALIFIED INDORSER AND PERSON that all “prior indorsement and/or lack thereof guaranteed” à a collecting
NEGOTIATING BY DELIVERY bank makes the assurance that it has ascertained the genuineness of all
• Sec 66 incorporates subsection a b c of Sec 65 prior indorsements à assumed the warranty of an indorser
• In so far as the first 3 warranties in sec 65 are concerned à the liability of a • In case the indorsement is forged or unauthorized à the bank, in paying the
general indorser is similar to the liability of a qualified indorser and a person check, becomes liable to the payee for the value thereof (Associated Bank
negotiating by delivery case)
• It must be emphasized that the law is NOT applicable NN like treasury 5. WARANTY AVAILABLE ONLY TO A HDC
warranties à He cannot interpose the defense that the signature prior to • The warranties of a general indorser as provided in 66 are based upon
him are forged transfer of title and are available only to a HDC
2. WARRANTY THAT THE INSTRUMENT IS VALID AND SUBSISTING • They do not attach to the indorsement for deposit and collection made by
th
• As regards the 4 warranty however, the similarity ends the payee/holder of a bill or check
• In case of erroneous payment by the drawee bank à the drawee bank has
UNQUALIFIED INDORSER QUALIFIED INDORSER no legal right to debit the amount of the payee for any amount it refunded to
Guarantees that the instrument is valid Warrants merely that he has no the drawee-bank
and subsisting, w/n he has no knowledge knowledge of such facts which would • Under sec 36, a RESTRICTIVE INDORSEMENT (eg one only for the
of the fact invalidate the instrument or render it purpose of collection_ - does NOT in any way transfer the title of the
useless instrument to the collecting bank
If the instrument indorsed turns out to be But the qualified indorser is not liable • The collecting bank cannot invoke the warranty of the payee/ depositor who
invalid, the unqualified indorser is liable unless he was aware of the cause of the indorsed the instrument for collection
th
because of the 4 warranty invalidity 6. WARRANTY OF COLLECTING BANK AS INDORSER
• A collecting bank where a check is deposited and which indorses the check
upon presentment with the drawee bank à is an INDORSER and assumes
the warranty of an indorser under Sec 61
• A subsequent party which cause a defect in the instrument cannot have any • In check transactions, the collecting bank or as last indorser generally siffers
recourse against any of the prior indorsers in GF the loss because it has the duty to ascertain the genuiness of all prior
• Thus, a bank which caused the dishonor of a check upon presentment to indorsement considering that the act of presenting the check for payment to
the drawee bank, through the qualified indorsement of its employee, where the drawee is an assertion that the party making the presentment has done
full payment by the drawee-bank would have taken place where it not for the its duty to ascertain the genuineness of the indorsement when a bank
“irregular indorsement” cannot hold prior indorsers liable on the instrument stamps a check with the phrase, “all prior indorsement and/or lack of
for its dishonor indorsement guaranteed” à it treast the check as NI and assume the
warranty of an indorser
3. WARRANTY THAT THE INSTRUMENT WILL BE HONORED • Without such warranty, the drawee would not make payment on the check
• • As indorser, he cannot deny liability for damages in case the warranty has
UNQUALIFIED INDORSER QUALIFIED INDORSER proven to be false or inaccurate (BDO case)
The unqualified indorser also warrants
that the instrument will be honored RIGHTS OF HOLDER NOT IN DUE COURSE TO ENFORCE WARRANTIES OF
GENERAL INDORSER
So he is liable in case the instrument will But a qualified indorser is not liable • Although Sec 66 states that warranties of unqualified indorsers run “to all
not be paid because of the insolvency of unless he has knowledge of such subsequent HDC” à it should NOT be construed literally in the sense that
any prior party insolvency holders X in DC cannot enforce the warranties

• The warranties of Sec 65 run to any person to whom the instrument is X make any admission regarding the Drawer makes such admission
negotiated and there is no reason why the same result should not be existence of the payee and his capacity
obtained under 66 then to indorse
• To hold otherwise, the transferee of a qualified indorser would have greater Indorser has warranties Drawer makes no warranties, but he
rights than the transferee of a general indorser engages to pay after certain conditions
are complied with
CONDITIONS PRECEDENT TO MAKE INDORSER LIABLE Liabilities of the drawer are conditional in
• The unqualified indorser, in addition to his warranties, engages to pay the the same manner as those of the general
instrument if it is dishonored indorser
• In order to enforce his liability in this respect, the following CONDITIONS
must be complied with: GENERAL INDORSER VS IRREGULAR INDORSER
1. Due presentment for payment or acceptance, as the case may be,
must be made GENERAL INDORSER IRREGULAR INDORSER
2. If the instrument is dishonored (by non-presentment or non- Makes either a blank or special Always makes a blank indorsement
acceptance), the necessary proceedings on dishonor be duly taken indorsement
• These conditions must be met in order that a secondary party may be held Indorses the instrument AFTER its Indorses BEFORE its delivery by the
liable on his promissory liability as distinguished from his warranty delivery to the payee payee
liability Liable only to parties subsequent to him Liable to the payee and subsequent
o E: if waived parties
• An indorsement is presumed unqualified E: Unless he signs for the
• To be qualified, it must contain specific words qualifying liability accommodation of the payee in which
case he is liable only to all parties
INDORSER’S LIABILITY AS WARRANTOR DISTINCT FROM HIS LIABILITY TO subsequent to to the payee
PAY
• Even the unqualified indorser who does not guarantee payment of the Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a
instrument may nevertheless incur liability for breach of one or more of the person places his indorsement on an instrument negotiable by delivery, he incurs all
implied warranties the liability of an indorser.
• These warranties are imposed in view of the fact that the indorser is actually
a seller of property LIABILITY OF INDORSER OF BEARER INSTRUMENT
• And although a general indorser’s obligation to pay the instrument may 1. NEGOTIATION BY DELIVERY
never become absolute because of non-presentment or omission to give • An instrument payable to bearer is negotiable by delivery and the transferor
due notice of dishonor à he may be held liable if there has been breach of is liable to the immediate transferee (65)
any implied warranty • It is therefore, not necessary for the holder to indorse the instrument if the
• His liability as warrantor is distinct from his liability to pay the instrument purpose is just to negotiate the same
• As warrantor, his liability is UNCONDITIONAL 2. NEGOTIATION BY INDORSEMENT
o No steps (due presentment, due notice of dishonor, protest, infra) • Nothing however to prevent the holder from indorsing the instrument is he
are necessary to fix an indorser’s liability for breach of warranty wants to
o Example: • In such case, his liability will be governed by sec 65 or by 66 depending
§ Ryan delivers to Penny a check for 3k. à Penny upon whether the indorsement is qualified or unqualified
increases the amount to 8k and indorses the check to o If he indorses SPECIALLY – he is liable only to holder who make
Alan à Alan to bob title through his indorsement
§ The forgery was not known to Alan and Bob o If he indorses WITHOUT QUALIFICATION – he incurs the liability
§ Bob took the check for value and satisfied the of a general indorser
requirements of a HDC
• In this case, Bob can recover judgment Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers
against Ryan (drawer) in the amount of 3k are liable prima facie in the order in which they indorse; but evidence is admissible
and judgment against Alan in the amount of to show that, as between or among themselves, they have agreed otherwise. Joint
5k for breach of warranty of genuineness payees or joint indorsees who indorse are deemed to indorse jointly and severally.
• Note that A is liable notwithstanding the fact
that he had no knowledge of the forgery ORDER OF LIABILITY AMONG INDORSERS
1. AMONG THEMSELVES
INDORSER AND DRAWER DISTINGUISHED • This section governs the liability of indorsers only as among
themselves
INDORSER DRAWER • Disputable presumption – that every indorser is liable to all indorsers
Both are secondarily liable on the instrument subsequent to him
Party to either a note or bill Bill only
• This prima facie order of liability may be rebutted because it may be
shown by PAROL EVIDENCE either written or oral that “as between or Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates
among themselves, the agree otherwise” an instrument without indorsement, he incurs all the liabilities prescribed by
• Thus, an irregular indorser (64) will not be liable to the accommodated Section 65 of this Act, // E: unless he discloses the name of his principal and the
party although from the order in which he indorsed, the latter appears fact that he is acting only as agent.
subsequent to the former
2. TO THE HOLDER LIABILITY OF AN AGENT OR BROKER
• The holder of an instrument which has been dishonored is not bound by the 1. PERSONAL LIABILITY
above section • This section refers to instruments which are payable to bearer and are
• As to him, indorsers are liable in any order and none of them can interpose therefore negotiable by delivery
as a defense against him an agreement among themselves that they are not o The agent or broker who negotiates by mere delivery incurs
liable in the order of indorsements the liabilities prescribed under Sec 65
• The rule must be qualified in the case of a qualified indorser and an indorser o If he negotiates the instrument by
of a bearer instrument, title to which the immediate holder took by delivery § Qualified indorsement, his warranties are also
alone those stated in sec 65 and
• Example: § If by general indorsement, those stated in sec 66
o An instrument payable to the order of Penny bears the following 2. EXEMPTION FROM LIABILITY
indorsement on the back thereof: P, A, B, and C • To escape from personal liability, he must:
o The present holder is D 1. Disclose his principal and
§ D may recover payment from any of said indorsers 2. The fact that he is acting only as agent (sec 20)
st
since Sec 68 (1 sentence) governs only the liability of • Parol evidence = X admissible to relive a broker or agent whose
the indorsers among themselves but not their liability to indorsement brings him within sec 69
the holder à So, if D sues A, A cannot allege that he
and B have agreed that B should first be liable VI. PRESENTATION FOR PAYMENT
§ If A is made to pay BY D, A can go against P, a prior
indorser, but NOT against B and C (subsequent Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment
indorsers) to whom he is liable is not necessary in order to charge the person primarily liable on the instrument; but if
§ However, if after paying D, A can prove that their the instrument is, by its terms, payable at a special place, and he is able and willing to
agreement is that B should be liable first, A can enforce pay it there at maturity, such ability and willingness are equivalent to a tender of
reimbursement from the others payment upon his part. But except as herein otherwise provided, presentment for
payment is necessary in order to charge the drawer and indorsers.
LIABILITY OF JOINT PAYEES OR JOINT INDORSEES WHO INDORSE
1. SOLIDARY LIABILITY MEANING OF PRESENTMENT FOR PAYMENT
• Under Sec 68, “joint payee or joint indorsees who indorse are deemed to • PRESENTMENT FOR PAYMENT – presentment of an instrument (i.e.
indorse jointly” and severally promissory note or accepted bill) to the person primarily liable for the
• Their liability is SOLIDARY so that none of them can escape liability just purpose of demanding and receiving payment
because proper notice of dishonor was not given to the other
• PAROL EVIDENCE is admissible that they signed as guarantors only PRESENTMENT FOR PAYMENT TO PERSON PRIMARILY LIABLE NOT
• But one who pays may demand reimbursement from the others NECESSARY
2. JOINT LIABILITY 1. LIABILITY ABSOLUTE ON DATE FOR PAYMENT
• Under Sec 184, a note mad payable to the order of the maker is NOT • Presentment and demand for payment are NOT necessary in order to
complete until indorsed by him charge the person primarily liable, that is, the maker or the acceptor
• The same is trye of a bill payable to the drawer’s order since his liability is ABSOLUTE
• In light of Sec 184, the last sentence of Sec 68 does not apply to an • In order words, the holder can sue the maker or acceptor, although no
instrument containing the words “we promise to pay” and made payable to demand has been made on him, as soon as the date for payment has
the order of the makers themselves because in such case their liability is passed without the instrument being paid
JOINT and not solidary 2. WHERE INSTRUMENT PAYABLE AT A SPECIAL PLACE
• This is true whether the instrument is payable on time or on demand and
SUCCESSIVE NEGOTIATIONS CONTEMPLATED even if the instrument is payable at a special place (e.g. at a bank or at an
• Sec 68 does not determine the order of liability of joint indorsers among office or at a residence but not at unspecified place like the city of manila)
themselves • However, in this case, the ability and willingness on the part of the primary
• Thus, in a note with an indorsement beginning “ I, or we, hereby guarantee” party to pay there at maturity are equivalent to a tender or offer of payment
signed in succession by P,A,B,C, and D à C has no right of indemnification on his part so that is the instrument is not paid and is overdue, he cannot be
by P,A and B, the preceding indorsers, under Sec 68 considerd in delay and therefore, not being at fault, he is not liable for costs
and interests subsequently accruing although he is not relieved from making
• In fixing the order of liability, Sec 68 contemplates successive negotiation
payment of the amount due
and successive indorsements
3. WHERE PRESENTMENT REQUIRED BY TERMS OF INSTRUMENT E: Except that in the case of a bill of exchange, presentment for payment will be
• Neither is the presentment for payment necessary to charge the maker or sufficient if made within a reasonable time after the last negotiation thereof.
the acceptor even if it is required according to the terms of the instrument
• Worse, the failure to make the presentment would not put him in default DATE OF PRESENTMENT OF INSTRUMENT
notwithstanding that the instrument is overdue and unpaid • The date of presentment depends on whether the instrument is:
• Example: o Payable at a fixed or determinable future time or
o Marc issued to penny an interest-bearing PN in the amount of 10k o On demand
payable to X bank à Marc has deposit at maturity and at all time 1. IF THE INSTRUMENT IS PAYABLE AT A FIXED OR DETERMINABLE
thereafter a sum sufficient to pay the note of presented FUTURE TIME
o Penny’s failure to present the note at maturity does NOT release • Presentment must be made on the DATE IT FALLS DUE without period of
Marc from liability for the principal sum of P10k and interest upon grace
maturity (even though X bank fails) but Marc is NOT liable for • Otherwise, the drawer and indorsers will be DISCHARGED from liability
interest after maturity • Presentment made BEFORE maturity = X effective
o If Penny sues Marc on the note, Marc (not penny) will be entitled • And a notice to makers BEFORE maturity reminding them of the date when
to court costs the note would fall due = X proper presentment
o There must be evidence not only of the ability but also of 2. IF THE INSTRUMENT IS PAYABLE ON DEMAND
willingness on the part of Marc to pay the note at the bank named • The law makes a distinction as to presentment for payment between
at maturity promissory notes and ordinary BOE
4. RULE APPLICABLE TO NOTES PAYABLE ON DEMAND
• The rule on presentment for payment is NOT necessary to charge the PROMISSORY NOTE BILL OF EXCHANGE
person primarily liable is applicable to notes payable on demand and suit Presentment must be made within Presentent for payment to the drawee or
thereon may be maintained though no demand was made reasonable time after its issue or acceptor must be made within a
5. RISK ASSUMED BY HOLDER IN CASE PRESENTMENT NOT MADE delivery reasonable time after last negotiation
• But neglect to present a check does not affect the debt for which it was thereof
given Explanation: Explanation:
• Practically, the only risk assumed by the holder of a check in case As to what constitutes reasonable time is • The time from the issuance up
presentment was not made within reasonable time, so far as the right a question of fact to the last negotiation is not
against the drawer are concerned, is the INSOLVENCY of the drawee considered
Examples: • Sec 71, the liability of the
PRESENTMENT FOR PAYMENT TO PERSONS SECONDARILY LIABLE • Demand made after 60 days = drawer and indorser of a bill
NECESSARY unreasonable could continue for an indefinite
1. PRESENTMENT FIRST TO PRIMARY PARTY REQUIRED • Delay of 7 months = not time limited only be the statute
• The persons secondarily liable (drawer and indorsers) stand on a different unreasonable of limitations so long as each
footing negotiation takes place
• Since they undertake to pay only if the instrument is dishonored, it is promptly after each indorser
obvious that a demand for payment must first be made upon the person acquires title
primarily liable (although the only purpose of such demand is to charge the • Last negotiation – last
indorsers with liability) transfer of value
• The demand is effected by presenting the instrument to him for payment Burden is on the holder of a note, when Example:
• A dishonor by the primary party occurs when proper presentment is made seeking to hold an indorser, to prove due • Check dated September 13,
and acceptance and/or payment is refused and timely presentment 1960 drawn by one of the
2. EFFECT WHERE PRESENTMENT NOT MADE respondents signed at the back
• In the even of non-acceptance or non-payment, notice of dishonor must be by the others was prssented by
given to the drawer and each indorser, otherwise, the party to whom notice the petitioner only on Marc 5,
is not given will be released from liability (89) 1964 to the drawee-bank which
• Dishonor of the instrument activates the secondary liability of the drawer dishonored it on the same date
and indorsers and made notice formal
• If the instrument is not presented to the person primarily liable, the drawer dishonor to the petitioner
and the indorsers are discharged from their secondary liability through a letter date April 27,
o E: Unless such presentment is excused or dispensed with 1964
• It was held under these
Sec. 71. Presentment where instrument is not payable on demand and where circumstances that petitioner
payable on demand. - Where the instrument is not payable on demand, undoubtedly failed to exercise
presentment must be made on the day it falls due. // Where it is payable on prudence and diligence on
demand, presentment must be made within a reasonable time after its issue, // what he ought to do as
required by law
o If the holder after the exercise of reasonable diligence cannot find
Sec. 72. What constitutes a sufficient presentment. - Presentment for payment, to the person to make payment on the day and at the place of
be sufficient, must be made: payment, he has done all that is required of him
(a) By the holder, or by some person authorized to receive payment on his behalf;
(b) At a reasonable hour on a business day; 
(c) At a proper place as herein defined;  Sec. 73. Place of presentment. - Presentment for payment is made at the proper
(d) To the person primarily liable on the instrument, or if he is absent or place:
inaccessible, to any person found at the place where the presentment is made.  (a) Where a place of payment is specified in the instrument and it is there presented;
(b) Where no place of payment is specified but the address of the person to make
REQUISITES FOR A SUFFICIENT PRESENTMENT FOR PAYMENT payment is given in the instrument and it is there presented;
• If the presentment for payment does not comply with any of the requisites (c) Where no place of payment is specified and no address is given and the
provided in this section, the EFFECT - is the same AS IF NO instrument is presented at the usual place of business or residence of the person to
PRESENTMENT IS MADE AND CONSEQUENTLY, THE PERSONS make payment;
SECONDARILY LIABLE ARE DISCHARGED (d) In any other case if presented to the person to make payment wherever he can
1. BY WHOM be found, or if presented at his last known place of business or residence.
• The holder (as owner of the instrument) has the right to make presentment
• Any person authorized by him PLACE OF PRESENTMENT
o Authorization need not be in writing 1. ORDER OF ENUMERATION
o Example: A presentment for payment of PN by a bank having it • In order from subsection a to d
for collection is sufficient • If presentment is not made in the proper order, sect 72 (c) will apply
• By crossing a check, the drawer intends the same for deposit only by the 2. WHERE PLACE SPECIFIED
rightful person (i.e. the payee named therein) • Presentment of a note payable at a specified place where the payee
o There is no proper presentment when the check is presented for resides, at a different place which was the domicile and place of business of
payment not by the payee but by his transferee the maker, is not sufficient to charge indorsers
• In the absence of proper presentment, NO RIGHT OF RECOURSE IS • Example: Where a note is payable at a designated branch of a trust
AVAILABLE AGAINST THE DRAWER company, presentment at the principal office or at any other branch = X
• It is believed that a transferee of an unendorsed instrument is included in sufficient
the term “holder” as used in Sec 72 (a) • A specified place of payment must indicate a DEFINITE ADDRESS
2. WHEN • If only the name of the town or city is stated then subsection b applies and
• REASONABLE HOUR ON A BUSINESS DAY – means during business in default of the same subsection x
hours • The usual residence = the usual ordinary and habitual residence
• What constitute business hours depends upon the general customs of the 3. CLEARING HOUSE
place of the particular transaction • Presentment can be made at a place specified in the instrument or through
o If payable at a BANK – presentment should be made during a CLEARINGHOUSE - an association of banks and financial institutions
BANKING HOURS where adjustment and payment of daily balances between banks are made
o If presented at the PLACE OF BUSINESS – during usual (i.e. it clears items among them)
business hours in that place
o If presented at the RESIDENCE OF THE PERSON LIABLE TO Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the
PAY – it must be made between the usual hours of rising and person from whom payment is demanded, and when it is paid, must be delivered
retiring up to the party paying it.
3. WHERE
• The proper place of presentment is discussed in the next section MODE OF PRESENTMENT FOR PAYMENT
4. TO WHOM • PRESENTMENT – refers to the act of the holder of a negotiable instrument
• Presentment for payment must be made to the PRIMARY PARTY of exhibiting a note to the maker and demanding payment, or showing a bill
o Maker in case of PN to the drawee and requesting its acceptance or payment
o Acceptor in case of an accepted bill • A valid presentment for payment consists of something more than a mere
• If the BOE or check is payable on demand, the presentment must be made demand
to the drawee although he is not liable on the bill • It requires personal or face to face demand at the proper place, exhibiting
• If the person primarily liable is ABSENT OR INACCESSIBLE – then the instrument to the maker or acceptor from whom payment is demanded
presentment must be made to ANY PERSON OF SUFFICIENT
DISCRETION AT THE PROPER PLACE OF PRESENTMENT EXHIBITION OF THE INSTRUMENT
o Thus, where a note is payable at a certain store, presentment for 1. PURPOSE OF EXHIBITION
payment at such store to a person connected therewith is • The purpose is to enable the debtor:
sufficient and no personal demand on the maker is necessary 1. to determine the genuineness of the instrument and the
indorsements and the rights of the holder to receive payment;
and
2. To enable him, upon payment, to take possession of it to guard • Reason: even if presentment was made during banking hours, the
against a lawsuit by a subsequent holder instrument could not have been paid just the same
• In the case of the acceptor who pays a bill, he has the right to have it 3. BEFORE CLOSING OF BANKING HOURS
delivered to him for use as a voucher in settlement of accounts with the • The person to make payment has until the close of banking hours of the
drawer bank where the instrument is made payable in which to pay
2. PRESENTMENT WITHOUT EXHIBITION • If before the close of such hours he deposits funds to the banks there
• If the instrument is not exhibited, the presentment would be ineffectual as enough to pay the instrument à a demand earlier in the day is premature
the debtor is entitled to see the instrument and demand its surrender upon • Hence, if the instrument is not considered dishonored dishonored through
payment payment has been refused earlier in the day
• Demand by telephone is not sufficient because exhibition of the instrument 4. AFTER DATE OF MATURITY
is not possible • Unlike the indorser, the maker of a note is not discharged in any way by the
3. INFORMAL DEMAND WITHOUT PRESENTMENT fact that the note is presented for payment after maturity date unless
• An informal demand for payment of a demand note, not accompanied by a prescription has run
presentment of it and not intended as a formal presentment and demand, is • He has the duty to pay even if the holder does not demand at that time
not sufficient to put the note in dishonor as to charge an indorser • Where however, the note is payable at a specified bank and the bank
• Such informal demand, however, may have an important bearing on the became insolvent after maturity date but before presentment for payment –
question of whether the note was actually presented for payment within a with the result that the maker is “deprived of funds” during the delay – the
reasonable time maker “may discharge his liability by written assignment to the holder of his
4. WAIVER OF MAKER’S RIGHT TO EXHIBITION rights… the payor bank in respect to such funds” and the maker is thereby
• But the instrument need not actually be exhibited discharge of further liability to the holder
o E: such exhibition is demanded • If the bank does not pay, the loss falls on the holder because of the late
• Thus, the maker’s right to an exhibition of a note is waived when he does presentment
not demand to see the note and he refuses payment on some other grounds
Sec. 75. Presentment where instrument payable at bank. - Where the instrument is
payable at a bank, presentment for payment must be made during banking
hours, // E: unless the person to make payment has no funds there to meet it at any
time during the day, in which case presentment at any hour before the bank is closed
on that day is sufficient.
PRESENTMENT WHERE INSTRUMENT PAYABLE AT A BANK

• Where an instrument is payable at a bank, it equivalent to an order to the
bank to make payment, for the account of the principal debtor
• Example: The banking hours in MM are from 9 am to 3 pm. At least 6 hours
on all working days from M-F
• Banks or any of their branches or offices may open for business on non-
working days (Sat, Su, holidays) for at least 3 hours a day, but they shall
report to the BSP the additional days during which they or their branches or
offices shall transact business
• The BSP must be notified of banking operations on additional days so that it
can manage banks cash balances as well as make provisions for additional
cash requirements that may arise during the weekends
1. DURING BANKING HOURS
• If the instrument is payable at a bank and the person to make payment has
funds in the bank to meet it on the date of maturity à presentment must be
made during banking hours
• Presentment made outside banking hours = X sufficient inasmuch as banks
do not make payment outside of banking hours
• Persons secondarily liable will be discharged
• But in the absence of evidence to the contrary, the instrument will be
presumed to have been presented during banking hours
2. ANY TIME DURING THE DAY
• If the person to make payment has no funds in the bank to meet the
payment any time during the day à presentment at any hour before the
bank is closed is sufficient to hold persons secondarily liable

Sec. 76. Presentment where principal debtor is dead. - Where the person primarily • Thus, presentment is not required to charge the drawer where he has no
liable on the instrument is dead and no place of payment is specified, presentment for funds with the drawee
payment must be made to his personal representative, if such there be, and if, with o E:
the exercise of reasonable diligence, he can be found. § Unless arrangement has been made for payment of the
bill or
PRESENTMENT WHERE PRINCIPAL DEBTOR IS DEAD § Where the drawer of a check has stopped payment
• This section and 77 and 78 – applicable only if no place of payment if thereof or
specified § Where the drawer of a check has withdrawn funds form
• If there is a place specified in the instrument, presentment should be made the drawee bank leaving nothing with which to pay the
at such place check
• If the principal debtor is dead à presentment may be made to his • Neither is presentment required where the drawer and the drawee is
EXECUTOR OR ADMINISTRATOR if there be one and can be found considered a maker under Sect 70, he is liable without presentment
• But presentment may be DISPENSED with if with exercise of due diligence,
no personal representative can be found Sec. 80. When presentment not required to charge the indorser. - Presentment is
• HOWEVER, the holder is not excused from giving notice of dishonor to the not required in order to charge an indorser where the instrument was made or
indorser, if he wishes to hold the latter liable on the instrument accepted for his accommodation and he has no reason to expect that the
instrument will be paid if presented.
Sec. 77. Presentment to persons liable as partners. - Where the persons primarily
liable on the instrument are liable as partners and no place of payment is specified, WHEN PRESENTMENT NOT REQUIRED TO CHARGE INDORSER
presentment for payment may be made to any one of them, even though there has • This section refers only to an indorser for whose accommodation an
been a dissolution of the firm. instrument is MADE OR ACCEPTED
• As far as all other parties secondarily liable are concerned, presentment is
PRESENTMENT TO PERSONS LIABLE AS PARTNERS still necessary to charge them
• Each partner is an agent of the partnership or his co-partners and is • Reason: The accommodated payee-indorser is the real debtor and not the
presumed to have authority to act for the others maker or acceptor. Hence, he is not discharged even if no presentment for
• Hence, presentment may be made to any one of them or to the agent of one payment is made to the maker or acceptor whom in substance, is a surety
of them for the debt
• A DISHONOR BY ONE IS A DISHONOR BY ALL • It is not necessary under this section that a loan for which notes are given
• The same rule applies even though there has been dissolution of the should be made for the sole accommodation of an indorser
partnership • It is enough if it only partly for his benefit
• Thus, if a partner dies before maturity of a partnership note, a demand on
the surviving partner will be sufficient Sec. 81. When delay in making presentment is excused. - Delay in making
presentment for payment is excused when the delay is caused by circumstances
Sec. 78. Presentment to joint debtors. - Where there are several persons, not beyond the control of the holder and not imputable to his default, misconduct,
partners, primarily liable on the instrument and no place of payment is specified, or negligence. When the cause of delay ceases to operate, presentment must be
presentment must be made to them all. made with reasonable diligence.
PRESENTMENT TO ALL JOINT DEBTORS WHEN DELAY IN MAKING PRESENTMENT EXCUSED

• If the parties primarily liable are NOT partners, their liability is only JOINT • Under this section, only the delay in MAKING OF PRESENTMENT IS
• In a joint obligation, there are as many debts as there are debtors, each EXCUSED and NOT the making of the presentment itself
debt being considered distinct and separate from each other • Under Sect 79 and 80, like in 82, presentment for payment itself is excused
• Hence, presentment must be made to all of them to hold the drawer and • Circumstances beyond the control of the holder are – events which could
indorsers on their secondary liability not be foreseen or which though foreseen are inevitable
• Reason: see page 282 o Example: Extreme weather conditions
• As soon as the cause which operated to prevent the making of presentment
Sec. 79. When presentment not required to charge the drawer. - Presentment for is removed, presentment must be made with reasonable diligence
payment is not required in order to charge the drawer where he has no right to
expect or require that the drawee or acceptor will pay the instrument. Sec. 82. When presentment for payment is excused. - Presentment for payment
is excused:
WHEN PRESENTMENT NOT REQUIRED TO CHARGE DRAWER (a) Where, after the exercise of reasonable diligence, presentment, as required by
• This section refers only to the DRAWER this Act, cannot be made;
• All other parties secondarily liable will be discharged (b) Where the drawee is a fictitious person;
o E: Unless presentment for payment is made to faster their liability (c) By waiver of presentment, express or implied. 
• Sect 79 is an instance where a party secondarily liable is NOT discharged in
spite of lack of presentment

WHEN PRESENTEMMT MAY BE DISPENSED WITH • Thus, there is already dishonor where on presentment, the maker promises
• The facts excusing presentment or failure to give notice of dishonor or to pay 5 days later
waiver thereof must be especially pleaded 2. NON-PAYMENT WITHOUT PRESENTATION
• Proof thereof is not otherwise admissible • Under subsection b, it is necessary that:
1. WHERE REASONABLE DILIGENCE HAS BEEN EXERCISED 1. A presentment is excused (79,80,82)
• Reasonable diligence – implied active search 2. The instrument is overdue (85,86,94)
• If practicable, the holder should make inquires of the payee when neither 3. It is unpaid
the maker nor his residence could be found • Thus, is presentment is waived, the instrument is deemed dishonored if it is
• But the fact that the bank was closed by the government dispenses with overdue and unpaid even if the holder did not make presentment
presentment • The provision makes it clear that although presentment may be excused,
• Likewise, presentment is dispensed with when the proper place of the indorser is still entitled to notice of dishonor of the instrument by its
presentment cannot be determined because Sect 73 is not applicable being overdue and unpaid
• But insolvency of the maker even if known to the indorser, will not excuse • But where there has been no presentment for payment and presentment is
presentment for payment not excused, the instrument is not dishonored although it is already overdue
2. WHERE DRAWEE IS FICTITIOUS and unpaid
• If the drawee is fictitious, there is no one to whom presentment is to be
made, therefore, it is dispensed with Sec. 84. Liability of person secondarily liable, when instrument dishonored. -
3. WHERE THERE IS A WAIVER Subject to the provisions of this Act, when the instrument is dishonored by non-
• The waiver may be BEFORE OR AFTER MATURITY payment, an immediate right of recourse to all parties secondarily liable thereon
• May be EXPRESS OR IMPLIED accrues to the holder.
• “PRESENTMENT WAIVED” or “WAIVING DEMAND AND PROTEST” –
written before the signature of the drawer or indorser, is an EXPRESS EFFECT OF DISHONOR BY NON-PAYMENT
WAIVER • As to the holder, after an instrument is dishonored by non-payment, the
• IMPLIED WAIVER of presentment may be manifested by an act or conduct persons secondarily liable become the principal debtors and he need not
of a party calculated to lead the holder to believe that presentment is made proceed against the person primarily liable before suing them
or to mislead or prevent him from treating the instrument as he otherwise • Subject to the provisions of this Act – means that the immediate right of
would like, for instance, where the drawer promised from time to time to pay recourse against secondary parties will accrue only after the giving of due
the bill, making no objection on the ground that the bill had not been notice of dishonor to them
presented to the drawee o The application of Section 84 to an indorser fo a check
• Waiver of presentment of a note by the maker = X operated as a waiver by dishonored by non-payment is subject to the condition imposed
the indorser by Sect 186 to the effect that the check must be presented for
payment within a reasonable time after its issue
SUMMARY OF RULES AS TO PRESENTMENT FOR PAYMENT • Right of recourse to all parties secondarily liable – means the right of
1. Presentment for payment is NOT necessary to charge persons primarily the holder to enforce the liabilities said parties as defined in Sect 61, 65 and
liable but is necessary to change persons secondarily liable 66
2. In the following cases, presentment for payment is NOT necessary to o This right is IMMEDIATE because the holder may immediately
charge persons secondarily liable: bring suit against the secondary parties and the latter cannot
a) as to the drawer (sect 79) interpose the defense that the suit should have been brough first
b) indorser (80) against the maker or acceptor
c) when presentment is dispensed with under section 82 • To hold a secondary party liable, the holder must prove at least 3
d) when the bill has been dishonored by non-acceptance (151) things:
1. Presentment was properly made
Sec. 83. When instrument dishonored by non-payment. - The instrument is 2. The primary party dishonored the instrument
dishonored by non-payment when: 3. Notice of dishonor was properly given to the secondary party
(a) It is duly presented for payment and payment is refused or cannot be
obtained; or Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed
(b) Presentment is excused and the instrument is overdue and unpaid. therein without grace. When the day of maturity falls upon Sunday or a holiday, the
instruments falling due or becoming payable on Saturday are to be presented for
WHEN INSTRUMENT DISHONORED BY NON-PAYMENT payment on the next succeeding business day // except that instruments payable on
1. NON-PAYMENT UPON DUE PRESENTMENT demand may, at the option of the holder, be presented for payment before twelve
• Under subsection (a) there are 2 requisites: o'clock noon on Saturday when that entire day is not a holiday.
1. that the instrument is duly PRESENTED for payment to the party
primarily liable thereon TIME OF MATURITY OF THE INSTRUMENT
2. That payment is either refused or cannot be obtained • As the law expressly says that the instrument is payable at the time fixed
• In other words, an instrument is dishonored by non-payment as long as it is therein without grace, it is not permitted to show a custom or usage fixing a
not paid although the primary party may be willing to pay.
date of maturity different from that clearly indicated on the face of the o If leap year = feb 29
instrument • If an instrument is payable 10 days after Oct 11
• If the grace is provided in the instrument, the instrument is payable on the o Maturity date = October 21
last date of grace o The last of the 10 days is October 21
1. ON A SUNDAY OR HOLIDAY • It must be remembered that the party primarily liable has all the last day to
• Presentment for payment cannot be made on a Sunday or a holiday make payment
• If date of maturity falls on Sunday or holiday, it will have to be presented on • Hence, an action brought on the date of maturity is premature
the NEXT SUCCEEDING BUSINESS DAY
2. ON A SATURDAY Sec. 87. Rule where instrument payable at bank. - Where the instrument is made
• If the instrument falls due on a Saturday and it is a time instrument, it should payable at a bank, it is equivalent to an order to the bank to pay the same for the
be presente don the next succeeding business day (Monday or the next account of the principal debtor thereon.
succeeding business day if Monday is holiday)
• The rule is intended for the benefit of the debtor RULE WHERE INSTRUMENT PAYABLE AT A BANK
• Since the business hours on Sat are only up to noontime, the law intends • An instrument made payable at a bank is equivalent to an order to pay
not to deprive the debtor of half a day within which to look for money addressed to the bank
3. ON DEMAND • The bank may charge the amount of the instrument out of the deposit of the
• If the instrument which falls due on a Saturday is payable on demand, it maker or drawer without necessity of getting additional authority from the
may be presented for payment for 12 noon on Saturday or Monday at the latter
option of the holder • The instrument itself is sufficient authority
• Reason: The instrument being payable on demand, the presumption is that • But a bill of itself does not operate as assignment of funds in the hands of
the party primarily liable has the money ready at any time for payment the drawee bank available for payment thereof and the bank is Not liable
• Example: unless and until it accepts the same
o See page 289 • Sect 87 applies only hwere the instrument is payable to a particular named
bank, “PNB”
INSTRUMENTS FALLING DUE OR BECOMING PAYABLE ON SATURDAY • So that the fact that a note made payable at “any bank in manila” sent by
• An instrument “falls due” on Saturday, if it is payable on Saturday; “it the maker for collection to a bank in manila in which he has a deposit when
becomes payable on Saturday” when it falls due on another day like Friday the note matured = does not authorize that bank to pay the note from such
which happens to be a holiday and; therefore, the instrument shall instead deposit
be payable on Saturday which is the next day
• In either case, presentment should also be made, not on Saturday but on Sec. 88. What constitutes payment in due course. - Payment is made in due
the next succeeding business day course when it is made at or after the maturity of the payment to the holder
• Example: thereof in good faith and without notice that his title is defective.
o In the example given, if Oct 5 2013 is Saturday, the instrument
falls due on Saturday REQUISITES FOR PAYMENT IN DUE COURSE
o If Oct 5, 2013 is a Saturday which is a holiday, the instrument • Payment in due course - is payment in the usual course of business
becomes payable on Saturday • To affect discharge of an instrument, payment should be in MONEY since in
o In either case, it should be presented for payment on the next a NI, the promise or order is to pay a sum certain in money
succeeding business day in the same manner as if Oct 5, 2013 is • The party bound to make payment had no right to do so in any other
a Sunday or a holiday medium in the absence of agreement to that effect
• To constitute payment in DC, the following REQUIREMENTS MUST
Sec. 86. Time; how computed. - When the instrument is payable at a fixed period PRESENT:
after date, after sight, or after that happening of a specified event, the time of payment 1. PAYMENT MUST BE MADE AT OR AFTER DATE OF MATURITY
is determined by excluding the day from which the time is to begin to run, and by • Payment made before maturity does Not discharge the instrument
including the date of payment. anymore than if it were merely discounted
• It would constitute a negotiation back to the primary party
COMPUTATION OF TIME OF MATURITY • If the instrument is renegotiate to a HDC, the latter may recover
• In determining the proper date of presentment, we count from the day on the instrument
following the date from which the time is to run (even if the said date is a 2. PAYMENT MUST BE MADE TO THE HOLDER
holiday) and include the last day of the period • So the maker of a note is not charged when he pays the payee
• Hence, in an instrument dated Sept 5, 2013 and payable 4 months after the who is no longer the holder because he has already transferred
date the note to a holder in due course unless it is shown that he was
o Due date = Dec 5, 2013 authorized by the holder to receive payment
• Instrument dated Nov 8, 2013 and payable after 12 months, • In such case, the remedy of the maker is against the one who
o Due date = Nov 8, 2014 and not nov 9 received the payment
• But on dated Jan 31 and payable 1 month after date
o Due date = Feb 28
3. PAYMENT MUST BE MADE IN GF AND WITHOUT NOTICE THAT THE EFFECT OF FAILURE TO GIVE NOTICE OF DISHONOR
HOLDER’S TITLE IS DEFECTIVE • When an instrument is dishonored by non-acceptance on presentment for
• The maker of a note or the acceptor of a bill must satisfy himself, acceptance (bill) or by non-payment at its maturity (both bill and note),
when the instrument is presented to him for payment, that the notice of such dishonor must be given to the person secondarily liable,
holder traces his title through genuine indorsements for if there is namely:
a forged instrument, it is a nullity and no right passes by it and o Drawer – if it be a bill
payment by him does not operate as a discharge of the o Each indorser – if bill or note
instrument • Any such person to whom such notice is not given is discharged
• The phrase in “good faith” refers to the maker or acceptor and not • However, although the indorser to whom notice is not given is discharged,
to the holder he is still liable for breach of warranties pertaining to the instrument
• Example:
o Marc issues a note payable to P or order à the note BURDEN ON HOLDER TO PROVE NOTICE GIVEN
indorsed in blank and delivered by P to A from whom it • The holder is NOT required to notify all the indorsers, although the laws
was obtained through fraud by B who presented it to M says, “each indorser”
on maturity for payment • He may select to hold only one or some of the indorsers and any party “to
o If M had no notice of the fraud, payment by him whom such notice is not given discharged”
discharges the note • The burden of proving due notice or that the notice was waives or excused
o This would not be so if the payment was made before is on the HOLDER
maturity or M had notice of the fraud when he made the • It is incumbent upon the plaintiff who seeks to enforce the defendant’s
payment liability upon a NI to establish such liability by proving that notice eas given
to the defendant within the time and in the manner required by law, that the
VII. NOTICE OF DISHONOR instrument in question had been dishonored
• The loss of a note does NOT excuse compliance with Sect 89
Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise • SEE ILLUSTRATIVE CASE PAGE 295
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 ENTITLED TO NOTICE OF DISHONOR
indorser, and any drawer or indorser to whom such notice is not given is • Notice is essential
discharged.
• Mere knowledge by the indorser of nonpayment is NOT sufficient
1. ANY KIND OF INDORSER
WHEN INSTRUMENT CONSIDERED TO BE DISHONORED
• “Each indorser” and “Any indorser” include any kind of indorser
An instrument is considered to be dishonored:
1. If it is not accepted when presented for acceptance; or • Hence, an accommodation indorser is entitled to notice and also an irregular
2. If it is not paid when presented for payment at maturity indorser
3. If presentment is excused or waived and the instrument is past due and unpaid • The holder of a check is entitled to unqualified notice of dishonor by the
drawee before he is required, in order to hold an indorser liable, to notify
MEANING OF NOTICE OF DISHONOR him that payment has been refused
• NOTICE OF DISHONOR – is bringing either verbally or in writing, to the 2. LIABILITY OF QUALIFIED INDORSER AND INDORSER NEGOTIATING BY
knowledge of the drawer or indorser of an instrument, the fact that a DELIVERY
specified NI, upon proper proceedings taken, has not been accepted or has • It would seem that lack of notice of dishonor has no effect on a qualified
not been paid and that the party notified expected to pay it indorser and a person negotiating an instrument by delivery inasmuch as
• It is called a PROTEST - if such notice is given by a notary public such indorsers do not undertake to pay the instrument in the event of its
dishonor
OBJECT OF NOTICE OF DISHONOR • But as already pointed out, they are still liable on the warranties (65)
• The object of giving notice of dishonor is 2 fold:
1. To INFORM the parties secondarily liable that the maker or WHEN NOTICE OF DISHONOR NOT NECESSARY
acceptor, as the case may be, has failed to meet his engagement • GR enunciated in 89, is not applicable in the cases mentioned under
2. To ADVISE such party that they will be required to make o E: 109, 111, 112, 114, 115, 116, 117
payment • Only the drawer and indorsers or their agents are entitled to notice of
• The purpose of giving prompt notice of dishonor is to enable the party, dishonor
whom the holder wishes to charge, to preserve and enforce his rights • The maker and acceptor do not have to be notified because they are the
against prior parties very ones who dishonored the instrument
• The notice preserves the right of the holder to recover on the instrument and • Thus, a joint maker, therefore, is NOT entitled to notice of dishonor
enforce the liability of the drawer or indorser thereon • Even an accommodation maker is NOT entitled to notice
• An assignor of a check under 1628 of the NCC = liable to the assignee in
case of dishonor of the check notwithstanding the absence of notice of
dishonor to the assignor

• SEE ILLUSTRATIVE CASE PAGE 297 Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent
either in his own name or in the name of any party entitled to given notice, whether
Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, that party be his principal or not.
or by or on behalf of any party to the instrument who might be compelled to pay
it to the holder, and who, upon taking it up, would have a right to reimbursement AUTHORITY TO GIVE NOTICE NOT NECESSARY
from the party to whom the notice is given. • The agent need not be authorized by the principal to give the notice
• Under this section, any person can be an agent of any party entitled to give
BY WHOM NOTICE OF DISHONOR GIVEN notice
• Under this section, the notice may be given: • The notice may be given in the name of the agent or the party entitled to
1. By the holder give notice
2. Another in behalf of the holder
3. By a party to the instrument who may be compelled to pay it to the holder Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf
and who, upon taking it up, would have right of reimbursement from the of the holder, it inures to the benefit of all subsequent holders and all prior parties who
party to whom the notice is given have a right of recourse against the party to whom it is given.
4. Another person in behalf of such party
• So, notice by a mere stranger (one who is no longer liable on, and has no EFFECT OF NOTICE GIVEN BY HOLDER
interest in the instrument) is not ineffectual • Notice of dishonor given by or on behald of the holder inures to the benefit
o E: Unless he is acting as agent of a party who is entitled to give of:
notice of dishonor 1. All holder subsequent to the holder who has given notice
• It has been held that the drawee who refuses to accept is not a party or 2. All parties prior to the holder but subsequent to the party to whom
charegeable on the bill, and notice from him of non-acceptance is no degree notice has been given and against whom they have right of recourse
better than from any other stranger • In other words, a party can charge a prior party who has received notice of
• One wrongfully in possession of the instrument cannot given notice without dishonor although he himself has not given said prior party any notice
authority from the holder • Reason: a party entitled to notice of dishonor need not be notified only once
• The object of requiring the notice to come from the holder is to enable him • Example:
as the person chiefly interested, to fix or waive the liabilities of the persons o M makes a note payable to P or order
secondarily liable o The following are the indorsers of the note in the order of
• Examples: indorsements:
o M makes a note payable to the order of P. The note is indorsed P
successively by P to A, by A to B, by B to C, and by C to D, the A
present holder B
o Suppose the note is dishonored in the hands of D C
1. D or his agent may give notice of dishonor to PABC, D – holder
the parties secondarily liable E – subsequent holder
2. If D notifies only C à the latter, who thereby can be • The above note is dishonored in the hands of D, who notified PABC
compelled by D to pay, may, in turn, notify PAB • The notice given by D to P operated to the benefit of ABC, parties
3. B may give notice to A and P whom he can hold subsequent to P and E, a subsequent holder, although they
liable. Likewise, A may give notice to P. But A cannot themselves have not notified P
give notice to B because A is the one liable to B who • The notice to A à inures to the benefit of BC and E
is a subsequent party and therefore, A has no right of • The notice to B à to the benefit of C and E
reimbursement from B. For the same reason, P • And the notice to C à to the benefit of E
would have no right to notify A • Therefore, should B, for example, pay C, B may go against P or A on
4. If D gives notice only to B, the effect is to discharge the basis of the notice given to P or A although B has not himself given
C due to lack of notice since B would have no right to notice of dishonor
notify C • But the notice to A does not operate in favor of P because P has no
5. If B, after having been given notice by D, does not right of recourse against A
choose to notify P and A, then the latter would also
• It is A who can hold P liable
be discharged from the instrument
6. Upon his discharge, C becomes a total stranger and
as such he is not entitled to given notice unless he is
acting as an agent of a party who can give proper
notice of dishonor

Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is • Under Sect 103, if XPA reside in the same place, the notice must be given
given by or on behalf of a party entitled to give notice, it inures to the benefit of the to X within the next following day. So, if the instrument is dishonored on
holder and all parties subsequent to the party to whom notice is given. October 10, X must give notice to PAB not later than Oct 11
• If X gives notice to C instead, such notice must be given also not later than
EFFECT OF NOTICE GIVEN BY PARTY ENTITLED THERETO October 11. C has, in turn, until the next day October 11 to give notice to
• Notice of dishonor given by or on behalf of the party entitled to give notice PAB or until October 12
(Sec 90) inures to the benefit of:
1. The holder and Sec. 95. When notice sufficient. - A written notice need not be signed and an
2. All parties subsequent to the party to whom notice is given including insufficient written notice may be supplemented and validated by verbal
parties subsequent to the holder who gave notice communication. A misdescription of the instrument does not vitiate the notice unless
• Example: the party to whom the notice is given is in fact misled thereby.
o In the preceding example, if D notifies C, then PAB are discharge
from their liability for lack o notice Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be
o The notice to C à makes him a “party entitled to give notice” as given in any terms which sufficiently identify the instrument, and indicate that it has
he might be compelled to pay it (the instrument) to the holder, and been dishonored by non- acceptance or non-payment. It may in all cases be given by
who, upon taking it up, would have a right to reimbursement from delivering it personally or through the mails.
the party to whom notice is given
o If C, however, within the time fixed by law, gives due notice to FORM OF NOTICE
PAB, such notice insured to the benefit of D, the holder and also 1. Notice of dishonor may be in WRITING or merely ORAL
of E as he is also a party “subsequent to the party to whom notice • Notice may this be given thru telephone provided that it be clearly
is given” shown that the party notified was really communicated with, that is fully
o C’s notice to P inures to the benefit of ABDE, parties subsequent identified as the party at the receiving end of the line
to P, although they themselves did not give notice to P • Notice may also be sent thru telegraph
o For the same reason, C’s notice to A inures to the benefit of BDE, 2. A notice which contains a copy of the instrument and declares that payment has
etc been demanded and refused, is sufficient
o Thus, A is not discharged by failure of D to given him notice if A is • But a mere statement that the instrument is due and payable is
notified properly by a person entitled to give notice like C insufficient notice
Sec. 94. When agent may give notice. - Where the instrument has been dishonored CONTENTS OF NOTICE
in the hands of an agent, he may either himself give notice to the parties liable Whether written or oral, the notice must set forth:
thereon, or he may give notice to his principal. If he gives notice to his principal, he 1. The identity of the instrument;
must do so within the same time as if he were the holder, and the principal, upon the 2. The fact that it has been dishonored by non-acceptance or non-payment
receipt of such notice, has himself the same time for giving notice as if the agent had and
been an independent holder. 3. A statement that the party giving notice intends to look to the party
addressed for payment
WHEN AND TO WHOM AGENT MAY GIVE NOTICE
• Under this section, the agent, in case the instrument is dishonored in his HOW NOTICE GIVEN
hands, may give notice either to his principal or directly to the parties Notice of dishonor may be given:
secondarily liable thereon without notifying his principal 1. By personal delivery or
1. NOTICE TO PARTIES SECONDARILY LIABLE 2. By mail
• If the agent gives notice directly to the parties secondarily liable, he must do ** the word “may” the last sentence of 96 has been construed as MUST
so within the time fixed by Sec 102, 103, 104, and 107; otherwise, they are
discharged for lack of notice DEFECT IN NOTICE
o E: Unless, the principal himself notifies them within the same time 1. LACK OF SIGNATURE OR INSUFFICIENCY
2. NOTICE TO PRINCIPAL • The fact that a written notice is not signed or insufficient would not
• If he chooses to give notice to his principal, he must notify the latter within invalidate it
the same time referred to as if he were a holder • Thus, failure to state in the notice of dishonor the date of the making
• The principal, upon receiving such notice, has also the same time for giving and maturity of a note, and the name of the payee = X invalidate the
notice to the parties secondarily liable as if the instrument was dishonored notice
on the day he received the notice • Any such insufficiency may be supplemented and validated by oral
Example: communication
• A note indorsed by PAB is dishonored in the hands of X, agent of C (present 2. MISDESCRIPTION OF INSTRUMENT
holder) • Neither does misdescription of the instrument such as to the amount or the
• X may give notice either to PAB directly or to C, his principal and let the date or the name of the parties or the date of maturity or other defect = X
latter notify PAB vitiate the notice
o E: Unless it misleads the party to whom it is sent
• The purpose of the notice is to appraise the party entitled thereto of the WHEN NOTICE TO PERSONAL REPRESENTATIVE NOTE REQUIRED
dishonor of the instrument In the following cases, there is NO duty to give notice to the personal representative:
• So that when he is, in fact, not misled by the misdescription, the notice is 1. If the death is NOT known t the party giving the notice
sufficient 2. Although the fact of death is known, the decedent has NO personal
3. LACK OF STATEMENT OF RECOURSE TO INDORSER representative or
• A notice of dishonor need not state that the sender looks to the indorser for 3. If there be one but with reasonable diligence, cannot be found
payment, where it may be inferred that the indorsee looks to the indorser, In any of the above situations, “notice may be sent to the last residence or last place
and no other inference could reasonably be drawn from the notice of business of the deceased
Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to
the party himself or to his agent in that behalf. any one partner is notice to the firm, even though there has been a dissolution.
PERSON TO BE GIVEN NOTICE NOTICE TO PARTNERS

• The notice of dishonor may be given to: • Each partner is an agent in a partnership
o the party himself or • Hence, notice to one partner is notice to the partnership
o to his agent in that behalf • This could still be true although notice was fraudulently suppressed by the
1. AGENT AUTHORIZED TO RECEIVE NOTICE partners receiving it
• The agent to whom notice is given must be authorized to receive notice for • But the fraudulent partner is liable to his co-partners
the drawer or indorser concerned and not merely an agent for a specified • Sect 99 has no application to individual undertakings of a partner
purpose
• Thus, notice to an agent having authority merely to sell, collect and remit is Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not
NOT sufficient partners must be given to each of them // E: unless one of them has authority to
• Also, an oral notice by telephone to a clerk of an indorsing corp especially receive such notice for the others.
when it does not appear that the clerk had communicated it to the
management = ineffective NOTICE TO JOINT PARTIES
2. REASON FOR REQUIRING AUTHORITY FROM THE PRINCIPAL • Where persons not partners indorse, each is entitled to notice and upon
failure to give such notice, neither could be charged, because as to them,
Sect 91 Sect 97 each must have separate notice
The agent giving the notice of An agent to be competent to • Under Sect 68, joint payees or joint indorsees who indorse an instrument
dishonor need not be receive notice of dishonor are deemed to indorse jointly and severally. Their liability is solidary, not
authorized by the principal must be authorized joint; so that if one of them is notified, that one is not discharged by reason
Reason The giving of notice benefits the The receipt of notice creates of failure to give notice to the other joint indorsees
principal liability • Section 100, therefore, does NOT refer to the “joint payees or indorsees”
mentioned in 68
Sec. 98. Notice where party is dead. - When any party is dead and his death is • Since joint accommodation indorsers are neither payees nor indorsees, they
known to the party giving notice, the notice must be given to a personal are not solidarily liable under Sect 68 and they may be governed by Sect
representative, if there be one, and if with reasonable diligence, he can be found. If 100
there be no personal representative, notice may be sent to the last residence or last • Hence notice must be given to each of the joint accommodation indorsers
place of business of the deceased. o E: Unless:
1. They are partners
NOTICE WHERE PARTY IS DEAD 2. One of them has authority to receive such notice from
• When the party sought to be charged is dead, the notice must be given to the others
his personal representative provided that:
1. His death is known to the party giving notice Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an
2. There is personal representative and insolvent, or has made an assignment for the benefit of creditors, notice may be
3. If with reasonable diligence the said personal representative could be given either to the party himself or to his trustee or assignee.
found
• Accordinly, where the holder knows that the party concerned is dead, he NOTICE TO BANKRUPT
must use reasonable diligence to find out whether there is a personal • This section contemplated 2 situations:
representative of such decedent or not 1. The party secondarily liable has been declared a bankrupt or an
• It has been held that an executor named in the will, but not yet apprived by insolvent and
the court, is the “personal representative” within the rule 2. The party secondarily liable has made an assignment of his properties
• A notice sent to the “estate of” a deceased indorser at his last residence for the benefit of creditors
was also held sufficient • In either case, notice may be given to the party himself or to his trustee or
• Where there are several personal representatives, notice to one of them is assignee
good
• From the moment that notice of dishonor is duly served, the liability of the • The specific words of Sect 103 cannot be modified by the definition of a
secondary party is fixed reasonable time in sect 193 which has no application to this section but
• However, it is necessary for the holder to file his claims in the insolvency applies to cases like that described in Sect 144 and perhaps, others
proceedings and to prove the giving of due notice of dishonor before he can 1. AT THE PLACE OF BUSINESS
enforce his rights against said party • Notice given after the close of business hours on the day following the
dishonor would be late
Sec. 102. Time within which notice must be given. - Notice may be given as soon • Example: Thus, where the holder of a demand note presented it to the
th nd
as the instrument is dishonored and, unless delay is excused as hereinafter provided, maker on the 17 of the month and was told to return on the 22 for
nd
must be given within the time fixed by this Act. payment but on the 2 the maker had absconded, the notice given on the
nd
22 to the indorser was held not within the time limit, the dishonor having
th
TIME WITHIN WHICH NOTICE MUST BE GIVEN occurred on the 17
• The times fixed for giving notice are provided for in Sections 103, 104 and • Example 2: So also, if the holder’s agent called at the indorser’s place of
107 business to give notice of dishonor of the note, but he was absent from the
• The time for giving notice are those specified in Sect 103 – if the party city and after calling again in 4 or 5 days, he saw the indorser and gave him
giving notice and the party to be notified reside in the same place, that is the notice, it was held that the notice was not given on time as it could have
they reside within the corporate limits of the same town or city been given by mail
• Sect 104 – if they reside in difference places • Where the time for giving notice falls on a Sunday or a holiday, the act may
• Delay in giving notice of dishonor within the period specified will discharge be done on the next succeeding business day
the persons secondarily liable 2. AT THE RESIDENCE
o E: Unless such delay is excused in accordance with Sect 119 • It has been held that notice is sufficient is given during any of the hours
1. Each party into whose hands a dishonored bill may pass, is allowed 1 entire day when the members of the household are attending to their ordinary affairs
for the purpose of giving notice • In case the party to be notified has a place of business in one place and a
• A different rule would subject every party to the inconvenience of giving an resident in another place, the holder has the option to send the notice to
account of all of his other engagement in order to prove that he could not either place
reasonably be expected to send the notice on the same day of dishonor 3. BY MAIL
• Thus, the rule excludes all discussion as to the particular occupations of the • If the notice of dishonor is mailed on time, that is deposited at the mailbox
party on the day “in time to reach him in usual course on the day following” the dishonor à it
2. Notice of dishonor can be given only after the instrument has been actually is immaterial that through miscarriage in the mails or for any cause not
dishonored by non-acceptance or non-payment imputable to the sender, the notice does not reach the addressee the day
• Thus, notice of dishonor before maturity of the instrument even on the following the dishonor
ground that the maker has indicated his intention not to pay the same is • Thus, it has been held that a notice placed in a mail on the day of the
premature and ineffective protest but not postmarked until the next day at noon, is mailed in time and
3. An instrument cannot be dishonored by non-payment until after the maturity it will be presumed, in the absence of any contrary evidence, that the notice
• After dishonor, notice may be given earlier than is required by law reached its destination on the day following before the close of business
• The purpose of the early notice is, in addition to holding the parties hours
secondarily liable on the instrument, to afford the latter an opportunity to
discharge it, thereby avoiding court action Sec. 104. Where parties reside in different places. - Where the person giving and
the person to receive notice reside in different places, the notice must be given
Sec. 103. Where parties reside in same place. - Where the person giving and the within the following times:
person to receive notice reside in the same place, notice must be given within the (a) If sent by mail, it must be deposited in the post office in time to go by mail the day
following times: following the day of dishonor, or if there be no mail at a convenient hour on last day,
(a) If given at the place of business of the person to receive notice, it must be given by the next mail thereafter.
before the close of business hours on the day following. (b) If given otherwise than through the post office, then within the time that notice
(b) If given at his residence, it must be given before the usual hours of rest on the would have been received in due course of mail, if it had been deposited in the post
day following. office within the time specified in the last subdivision.
(c) If sent by mail, it must be deposited in the post office in time to reach him in
usual course on the day following.  NOTICE WHERE THE PARTIES RESIDE IN DIFFERENT PLACES
1. Under the foregoing section, the notice may be given by mail or otherwise than
NOTICE WHERE PARTIES RESIDE IN SAME PLACE by mail
• Section 203 provides for 2 means of giving notice of dishonor: • “Go by mail” – means an actual departure in the course of mail from
1. Personally and the post office in which the notice was deposited, in case there is a
2. By mail mail from that post office to the destination of the notice at a
• The place – where the notice may be given is either: convenient hour on the required day
o Place of business or • Convenient – in subsection a, has reference to the sender
o The residence of the party to receive the notice o It has been held that when the departure time for the mail the
At the option of the party giving the notice day after dishonor is between 9 and 11 am, it is convenient
o If the notice was given otherwise than by mail, it must be Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been
received within the time that it would have been received in deposited in the post-office when deposited in any branch post office or in any letter
due course of mail box under the control of the post- office department.
2. The burden is upon the holder to prove that the notice was mailed within the
time prescribed WHEN NOTICE DEEMED TO HAVE BEEN DEPOSITED
• It is not enough merely to show that the notice was deposited in the • Section 106 defines the act of depositing in the post office
post office on the day following the dishonor • The notice may be desposited in:
• It is also necessary to show that the notice was deposited in time to go 1. The post office
by mail the day following the day of dishonor 2. Any branch post office or
Examples: 3. Any letter box under the control of the post office
1. BY MAIL • So deposit in a mail box is equivalent to deposit in the post office
• H, holder, resides in Manila and R, drawer (or indorser) resides in • But a notice properly addressed and left in a place in the notary’s office
Olongapo where mail was usually collected by the postman, was held not mailing of
• The instrument is dishonored on Oct 10, 2013 the notice as required by law
• If the notice is given by mail, it need not reach R on Oct 11, 2013 • Neither is a deposit of a notice of dishonor of a NP in a private letter box of
but it must be deposited in the mails not later than Oct 11, 2013, a private office a deposit required by Sect 106
so as to go by mail on Oct 11, 2013, the day following the day of • However, delivery to a mail carrier while making his rounds has been held a
dishonor deposit within the meaning of this section
• If there is no mail on oct 11, 2013 or if there is but leaves at an
inconvenient hour, say 4 am in the mornibg and the next mail is 5 Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of
pm on oct 12, 2013, the notice must be deposited in time for it to dishonor, he has, after the receipt of such notice, the same time for giving notice to
go by the 5 am mail on Oct 12, 2013 antecedent parties that the holder has after the dishonor.
2. OTHERWISE THAN BY MAIL
• If H fails to deposit the written notice in the mails on time, the same TIME OF NOTICE TO SUBSEQUENT PARTY
may still be given in some other way as by personal messenger • A party who receives notice of dishonor is entitled to give notice of dishonor
• What is important is that R should receive the notice not later than the to prior parties within the same period of time that the holder has after the
time he would have received it had it been mailed dishonor as if he were the holder
• Suppose that the notice would have been received by R on Oct 14, • In other words, under section 107, the instrument is considered dishonored
2013 had it been mailed to him under par (a) of Section 104 in the hands of a party who receives a notice of dishonor from the holder on
• If notice is given by personal messenger after October 14, 2013, the the date he receives such notice and not on the date of the instrument is
notice is inoperative and R is discharged dishonored in the hands of the holder
• Example:
Sec. 105. When sender deemed to have given due notice. - Where notice of o PABC are indorsers and D is the holder. All of them reside in the
dishonor is duly addressed and deposited in the post office, the sender is deemed same place
to have given due notice, notwithstanding any miscarriage in the mails. o If the instrument is dishonored on October 10, D may notify any of
or all of the indorsers prior to him
WHEN SENDER DEEMED TO HAVE GIVEN DUE NOTICE o D must give notice not later than the next day, October 11
• Notice by mail is deemed to have been properly made where: o Assuming D notifies only C on October 11 à C upon receipt of
1. The notice of dishonor is duly addressed and the notice of dishonor from D, may in turn, notify any or all of the
2. Deposited in the post office antecedent parties not later than October 12
• As long as the sender has done everything which the law requires him to o However, if D immediately notifies C on October 10, C must give
do, the notice would still be considered on time although it does not reach notice to antecedent parties not later than October 11
the addressee due to miscarriage in the mails o C cannot take an extra day to notify PA and/or B
• The notice must be properly addressed, stamped, and mailed o If they reside in different place, the notice must be given within the
• The notice is not “duly addressed” when it is addressed at an address time provided for in Sect 104
different from that given on the instrument and was not received by him or
where it is addressed to the indorser without any address Sec. 108. Where notice must be sent. - Where a party has added an address to his
• The BURDEN OF PROOF rests upon the PLAINTIFF to show compliance signature, notice of dishonor must be sent to that address; but if he has not given such
with the statutory provisions in order to hold the indorser (or drawer) as the address, then the notice must be sent as follows:
liability of the indorser depends entirely upon compliance as to notice (a) Either to the post-office nearest to his place of residence or to the post-office
where he is accustomed to receive his letters; or
(b) If he lives in one place and has his place of business in another, notice may be
sent to either place; or
(c) If he is sojourning in another place, notice may be sent to
the place where he is so sojourning. 

But where the notice is actually received by the party within the time specified in this • With reference to notice of dishonor, waiver is the willingness on the part of
Act, it will be sufficient, though not sent in accordance with the requirement of this the drawer or the indorser concerned to be bound as such even without due
section. notice of dishonor
• It may be made before the time of giving notice or after omission to give due
PLACE WHERE NOTICE MUST BE GIVEN notice
• Where a party has added an address to his name, the notice must be sent
to that address and it will be sufficient even though the address is an FORM OF WAIVER
incorrect one • BURDEN OF PROOF – is on the HOLDER to show waiver of notice and
• But if no address is indicated, then the notice must be sent to the placed being in derogation of a statutory right, it must be proved by clear and
stated in subsection a, b and c convincing evidence
• RESIDENCE • EXPRESS WAIVER – when it is made orally or in writing as when “notice of
o In subsection a, is not used in the strict sense as necessarily dishonor waived” appears above the signature of an indorser
implying permanent, exclusive or actual abode in the place, but it • IMPLIED WAIVER – inferred from act or language
may be satisfied by a temporary or parties or even constructive o Usually takes place after there has been omission to give notice
residence o Example:
o The statute is mandatory § Payment of interest by an indorser after he learns of
o Thus, where the indorser has not added his address to his default of the maker
signature, the notice MUST be sent to: § Admission of liability after dishonor
§ the post office nearest to his place of residence or § Promise to pay the note if the maker does not pay
§ where he is accustomed to receive his letters § Suggesting a plan of settlement
o In such cases, the burden is on the holder to discover the “place
of residence” and to send the notice to the nearest post office Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the
o This appears to be the measure of diligence required by law instrument itself, it is binding upon all parties; but, where it is written above the
• PLACE OF BUSINESS signature of an indorser, it binds him only.
o In subsection b, does not comprehend every place where a
person may transact any business PERSONS AFFECTED BY WAIVER
o It refers to the place, where he carries on business as merchant, • As to who are affected by an express waiver depends on where the waiver
tradesman, professional man or other similar trade or calling is written
o Where the resident and the place of business are in the same 1. If the waiver is embodied in the instrument itself, that is it appears in
place à notice must be sent to the residence the body or on the face of the instrument à it binds ALL PARTIES
o Notice to an indorser who has added no address, addressed to a 2. If it is written above the signature of an indorser à it binds HIM ONLY
house where he does not reside or do business or receive letters
= X good even though he owns the house and his sons do EXAMPLE:
business there Suppose the instrument reads as follows:
• SOJOURNING
o In subsection c, is something more than mere traveling I promise to pay or order 10k on or before November 30, 2013
o It applies to a temporary as differentiated from a permanent waiving presentment for payment and notice of dishonor
residence
o Si that when an indorser vacationing in Baguio has not given his (Sgd.) M
address notice to him may be sent to Baguio
RECEIPT, NOT MANNER, OF NOTICE ESSENTIAL

• What is important is that the party to be notified actually receives the notice The following indorsement appear on the back:
on time wherever the notice is given
• The law is not so much concerned with the address of the party to be To A
misdirected, if it is in fact received, it is sufficient compliance with the law (Sgd) P
• The mere manner in which the notice is sent wholly immaterial To B
• But the burden of proof of actual receipt of notice is on the party who gives (Sgd) A
notice To C
(Sgd) B
Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time
of giving notice has arrived or after the omission to give due notice, and the waiver
may be expressed or implied.
WAIVER OF NOTICE OF DISHONOR

• WAIVER – is the intentional abandonment of a known right
• The waiver in the above example binds not only the maker M, but the • Where personal service is relied upon, the evidence must show diligent
indorsers P,A,B since it appears in the body of the instrument itself efforts to make personals ervice upon the indorser either at his place of
• It is therefore not necessary for C to give notice to PAB and to charge them business or if he has no place of business, at his residence and if he be
because the waiver is a part of the contract not only of the maker M, but absent, it is not necessary to call a second time and the notice may be left
also of the indorsers PA and B as well with any of one found in charge or no one there, then the giving of notice is
• It would be different if the waiver had been written above the signature of A deemed waived
only à in that case, only A would be bound by the waiver. C must give • The last clause of this section is but a reinstatement of the rule in Section
notice to P and B; otherwise, they would be discharged 105
• There is a conflict of opinion as to whether the waiver may be deemed
embodied in the instrument and binding upon all indorsers when it is printed Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor
or written on the back of the instrument above the indorsements. It is is excused when the delay is caused by circumstances beyond the control of the
believed that the question is one of construction. holder and not imputable to his default, misconduct, or negligence. When the
cause of delay ceases to operate, notice must be given with reasonable diligence.
Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill
of exchange or other negotiable instrument, is deemed to be a waiver not only of a WHEN DELAY IN GIVING NOTICE EXCUSED
formal protest but also of presentment and notice of dishonor. • The rule in this section is similar to that in Sect 81 excusing delay in making
presentment
EFFECT OF WAIVER OF PROTEST • Section 112 dispenses with the duty to give notice but this section excuses
• PROTEST – is the formal instrument executed usually by a notary public MERELY THE DELAY IN GIVING IT
certifying that the legal steps necessary to fix the liability of the drawee and • It has been held that delay in giving notice of dishonor caused by the
the indorsers have taken necessity of making inquiries as to the address of the party to be notified is
• Strictly speaking, the term “protest” applies only to foreign bills but the excusable where the holder was ignorant of the address
custom to treat inland bills and notes in the same manner has become so • But the delay will not be excused in the case where the holder’s agent
nearly universal, that in common usage, the term means THE TAKING OF called at the defendant’s place to give him notice of dishonor, but he was
SUCH STEPS AS ARE REQUIRED TO CHARGE THE INDORSER absent from the city, since notice by mail was practicable
• Where the protest is waived the following are deemed waived:
1. Presentment and Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not
2. Notice of dishonor required to be given to the drawer in either of the following cases:
- This is so because “protest” means all the steps accompanying dishonor (a) Where the drawer and drawee are the same person;
necessary to charge a party secondarily liable (b) When the drawee is fictitious person or a person not having capacity to
- But a waiver of notice of protest waives notice only and is not a waiver of contract;
presentment (c) When the drawer is the person to whom the instrument is presented for payment;
• Where the presentment for payment is waived, notice of dishonor is also (d) Where the drawer has no right to expect or require that the drawee or acceptor
waived will honor the instrument;
o E: But waiver of the latter does not include the waiver of the (e) Where the drawer has countermanded payment.
former
• When an indorser waives presentment and notice of dishonor, he thereby WHEN NOTICE TO DRAWER NOT REQUIRED
enlarges his liability and his indorsement is known as FACULTATIVE 1. HOLDER HAS OPTION TO TREAT BILL AS PROMISSORY NOTE
INDORSEMENT • There is no necessity of giving the notice of dishonor under
subsections a and b since in these 2 cases the holder is given the
Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with option under Sect 130 to treat the bill as a PN
when, after the exercise of reasonable diligence, it cannot be given to or does not • The drawer will be regarded as a maker and a primary party
reach the parties sought to be charged. • Furthermore, since the drawer is the same person who dishonoured
the instrument, he already knows of the dishonor and obviously notice
WHEN NOTICE IS DISPENSED WITH to him is superfluous
• Reasonable diligence is a relative term. • It has been held that a bill drawn by an agent on his principal (drawee)
• It depends upon the circumstances of each case with authority of the latter is equivalent to bill drawn by the principal on
• It implies ACTIVE SEARCH himself
• Where the facts are undisputed, it is a question of law whether sufficient 2. DRAWER HAS KNOWLEDGE OF DISHONOR
diligence has been shown • Under subsection c, the reason for not requiring notice is that the drawer
• The holder should endeavor to find out the whereabouts of the party to be has knowledge of the dishonor since he is the one who dishonored the
notified instrument
• There is due diligence when the holder inquired for the payee and mailed • The presentment itself constitutes notice of dishonor of the instrument
the notice to the address given, then the later he learned of the indorser’s • Thus, where the bill is payable at the office of the drawer and it is there
address and mailed a second set of notices presented for payment at maturity but the drawee is not there and the

presentment is made to the drawer who refuses payment à the holder need non-payment is not necessary unless in the meantime the instrument has been
not give notice to the drawer as the latter already knows of the dishonor accepted.
3. DRAWER KNEW BILL WOULD BE DISHONORED
• Under subsection d, It has been held that the drawer of the check is NOT EFFECT WHERE NOTICE OF NON-ACCEPTANCE ALREADY GIVEN
entitled to notice of dishonor when he: • When a bill is dishonored by non-acceptance, an immediate right of
o has no account with the drawee-bank recourse against all secondary parties accrues to the holder and no
o or has no funds with the drawee bank to meet it presentment for payment is necessary since dishonor of the instrument by
o and this is especially true when there is no existing contractual nonpayment is to be expected
relation between the drawer and the drawee binding the drawee • If nevertheless the holder presents the bill for payment on maturity and it is
to accept or pay dishonored, he need not notify again the secondary parties
• But the simple fact that the drawer has no funds with the drawee does not • However, if the instrument is accepted after it has been dishonored by non-
always operate to excuse the holder to give notice to the drawer acceptance, it is necessary for the holder to present the instrument for
• The drawee may have agreed to advance the amount for the drawer who payment upon maturity
has a reason, and therefore, to “expect” the drawee to accept or pay • In case of non-payment, the holder must give the corresponding notice of
• But the fact of drawing without funds, in the absence of other proof to dishonor
explain it is, fraud • Failure to do so will discharge the secondary parties
• The drawer of a check issued to another merely as a security (for jewelry to • Example:
be sold on commission) is liable to the HDC à he cannot simply withdraw
his funds from the drawee-bank to excuse himself from liability after the
check has been negotiated without his knowledge to a HDC and there is no
need to serve him notice of dishonor
4. DRAWER COUNTERMANDED PAYMENT
• REASON for sec e: the drawer knows that the instrument will be dishonored
• When the drawer countermands payment, he orders the drawee not to pay
• The order is referred to as STOP PAYMENT ORDER
• It is useful when a check is lost or when the drawee does not receive the
value he expected when he issued the check
• Only the drawer has the right to stop payment
• A drawer may not stop payment on a certified check
Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not
required to be given to an indorser in either of the following cases:
(a) When the drawee is a fictitious person or person not having capacity to
contract, and the indorser was aware of that fact at the time he indorsed the Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to
instrument; give notice of dishonor by non-acceptance does not prejudice the rights of a holder in
(b) Where the indorser is the person to whom the instrument is presented for due course subsequent to the omission.
payment;
(c) Where the instrument was made or accepted for his accommodation.  EFFECT OF OMISSION TO GIVE NOTICE OF NON-ACCEPTANCE
• In case of dishonor by non-payment, no holder subsequent thereto can be a
WHEN NOTICE TO INDORSER NOT REQUIRED HDC because the maturity of the instrument appears on the face thereof,
• This section applies only to the indorser concerned and therefore, the holder knows of such dishonor from the fact that the
• Failure to give due notice of dishonor to all other secondary parties will instrument is overdue
relieve them of their liability • But any holder may present an instrument for acceptance before maturity
• Subsection (a) is similar to subsection (b) of Section 114 and in order to dishonor it, all that the drwee has to do is to refuse to accept
• THE ONLY DIFFERENCE IS THE EXCEPTION THAT THE INDORSER it without having to write anything on the instrument
MUST BE AWARE OF THE FACT THEREIN STATED • Under section 117, the failure of the previous holder to give a notice of
• If he is aware of such fact, he has no reason to expect or require the dishonor by non-acceptance cannot prejudice a HDC who may still present
instrument to be accepted or paid the instrument to the drawee for acceptance and notify the drawer and
• But the knowledge by the indorser that the maker is insolvent or that the indorsers if acceptance is refused
instrument had been dishonored = X dispense with notice • Example:
• Under subsection c, the indorser (accommodated party) is in fact the
principal debtor and therefor, he is entitled to notice
Sec. 116. Notice of non-payment where acceptance refused. - Where due notice
of dishonor by non-acceptance has been given, notice of a subsequent dishonor by

Sec. 118. When protest need not be made; when must be made. - Where any
negotiable instrument has been dishonored, it may be protested for non-acceptance or
non-payment, as the case may be; but protest is not required except in the case of
foreign bills of exchange.
WHEN PROTEST REQUIRED AND NOT REQUIRED

1. FOREIGN BILLS OF EXCHANGE
• Protest is necessary only in the case of foreign bills of exchange which have
been dishonored by non-acceptance or non-payment, as the case may be
• If it is not so protested, the drawer and indorsers are discharged
2. OTHER NEGOTIABLE INSTRUMENTS
• Protest for other NI (inland BOE, checks and PN) is OPTIONAL
o E: in cases provided in Sect 158, 161 and 171
• Formal protest of a PN by a notary public is NOT essential to hold an
indorser
• What is essential is presentment and demand at the time and place
provided for in the instrument, followed by notice to the indorser of such
presentment, demand and non-payment
• It is, however, advantageous to protest these instruments also when
dishonored since the holder obtains a most convenient record evidencing
the fact of dishonor
SUMMARY OF RULES AS TO NOTICE OF DISHONOR

1. Like presentment for payment, notice of dishonor is NOT necessary to
charge persons primarily liable but is necessary to charge persons
secondarily liable; and
2. In the following cases, notice of dishonor is not necessary to charge
persons secondarily liable:
1. When NOTICE is WAIVED under 109
2. When PROTEST is WAIVED under 111
3. When NOTICE is DISPENSED WITH under sect 112
4. As to the DRAWER under 114
5. As to the INDORSER under 115
6. Where DUE NOTICE OF DISHONOR BY NON-ACCEPTANCE has
been given under 116
7. As to a HDC, without notice of dishonor by non-acceptance,
subsequent to the omission to give notice under Sect 117

VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS INTENTIONAL CANCELLATION OF INSTRUMENT BY HOLDER
• To effect discharge of the instrument, the cancellation must:
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged: 1. Be intentionally done
(a) By payment in due course by or on behalf of the principal debtor; 2. By the holder thereof
(b) By payment in due course by the party accommodated, where the instrument is • Cancellation may be done writing the word “cancelled” or “paid” on the face
made or accepted for his accommodation; of the instrument
(c) By the intentional cancellation thereof by the holder; • There is also cancellation when the instrument is torn up, burned mutilated
(d) By any other act which will discharge a simple contract for the payment of money; or destroyed
(e) When the principal debtor becomes the holder of the instrument at or after maturity • To be effective, the cancellation must be done INTENTIONALLY
in his own right. • Presumption: cancellation is intentional
MEANING AND EFFECT OF DISCHARGE OF INSTRUMENT ANY ACT WHICH DISCHARGES A CONTRACT
• DISCHARGE OF AN INSTRUMENT – a release of all parties, whether • As to other acts of discharging contracts in general for the payment of
primary or secondary, from obligations arising thereunder money, the law on oblicon and other existing legislations apply
• It renders the instrument without force and effect and consequently, it can • Art 1231 of the NCC:
no longer be negotiated o Payment or performance
o Loss of the thing due
CONCEPT OF DISCHARGE o Condonation or remission
• DISCHARGE – used in reference to both the instrument itself and to the o Confusion or merger of the rights of the creditor and debtor
parties to it o Compensation
• Includes discharge of the person or persons primarily liable on it and a o Novation
person secondarily liable on the instrument o Annulment
o Rescission
METHODS OF DISCHARGE OF AN INSTRUMENT o Fulfillment of resolutory condition
• NIL contains no express provision for release of a party primarily liable o Prescription
• Can be relieved only by a discharge of the instrument itself • While the various cases of discharging a simple contract such as payment,
• Methods of discharge of a NIL in 119 are exclusive condonation, etc will operate to discharge the instrument as between the
immediate parties, they will not in the hands of a HDC
PAYMENT BY PRINCIPAL DEBTOR
• Payment or satisfaction of the instrument by the primary party is the most REACQUISITION BY PRINCIPAL DEBTOR IN HIS OWN RIGHT
common type of discharge • In order that there will be discharge under SUBSECTION E, the
• It discharges all liability on the instrument reacquisition must be:
• GR: When an instrument upon which several are liable, some primarily and 1. by the principal debtor
some secondarily, if it is satisfied by him who is primarily liable, a complete 2. in his own right
discharge results. It no longer has legal existence 3. at or after date of maturity
• In order that payment may produce the effect of discharging the instrument • When the principal debtor becomes the holder of the instrument in his own
under SUBSECTION A, right, the instrument is discharged because of the merger in his person of
1. It must be made by or on behalf of the principal debtor the characters of creditor and debtor
2. At or after its maturity • “IN HIS OWN RIGHT” – means not in a representative capacity
3. To the holder thereof o X as agent of another
4. In GF and without notice that the holder’s title is defective (Sec 88) o X as pledge from the holder
• Payment made in BF to a thief or to a person holding through a thief = X o X as administrator of the intestate estate of the holder
operate as discharge of the instrument • “AT OR AFTER MATURITY”
• Neither will payment operate as a discharge if the payor makes the payment o Otherwise, no discharge will be effected because the debtor, on
that violates a restrictive indorsement reacquiring the instrument, can renegotiate the same under Sect
• PRINCIPAL DEBTOR – person ultimately liable to pay the debt and not 50
necessarily to the person primarily liable on the instrument Sec. 120. When persons secondarily liable on the instrument are discharged. - A
• Holder is not bound to accept payment by check or other NI because it does person secondarily liable on the instrument is discharged:
not meet requirements of legal tender (a) By any act which discharges the instrument; 
(b) By the intentional cancellation of his signature by the holder;
PAYMENT BY ACCOMMODATED PARTY (c) By the discharge of a prior party; 
• As between the accommodation party and the accommodated party, the (d) By a valid tender or payment made by a prior party;
ACCOMMODATED PARTY IS THE REAL DEBTOR (e) By a release of the principal debtor unless the holder's right of recourse against the
• Hence, payment by the accommodated party is actually payment by the party secondarily liable is expressly reserved;
principal debtor and this is true whether he appears as a party to the (f) By any agreement binding upon the holder to extend the time of payment or to
instrument or not postpone the holder's right to enforce the instrument unless made with the assent of
the party secondarily liable or unless the right of recourse against such party is • It is but just therefore that the holder’s refusal without any justifiable reason
expressly reserved. to accept a valid tender of payment made by a prior party should discharge
the subsequent parties
METHODS OF DISCHARGE OF SECONDARY PARTIES • The refusal to accept the tender = X operate to discharge the debt but the
• Section 120 only applies to parties secondarily liable on the instrument tender stops running of interest and relieves the party making the tender
• X parties secondarily liable within this section from subsequent liability for costs and AFs in case of litigation
o A maker even though he be a surety for a co-maker • While the party lending tendering payment is discharged to a limited extent,
o An accommodation co-maker any other parties on the instrument are totally discharged if, to collect on the
o Accommodate acceptor instrument, they could theoretically have sued the party who made the
• Discharge may be tender of payment
o Partial – 5. RELEASE OF THE PRINCIPAL DEBTOR BY ACT OF THE HOLDER
§ Tender of payment • The release of the principal debtor discharges the instrument, and therefore,
§ Cancellation of secondary party’s signature of all the secondary parties are also discharged
indorsement • Moreover, with the release of the principal debtor, subsequent parties lose
§ Reacquisition of instrument their right of recourse against him
o Total • Such, however, would not be the case if the holder reserved his right of
§ Involves all the parties recourse against the said subsequent parties, for then the effect of the
§ Payment or satisfaction of the instrument reservation by the holder of his right is the implied reservation by the
§ Cancellation of the instrument itself subsequent parties of their right of recourse against the principal debtor
1. ANY ACT WHICH DISCHARGES THE INSTRUMENT • This reservation of the right of recourse must be EXPRESS
• If the instrument is discharged under Sect 119, it ceases to have force and • Hence, it cannot be implied form the acts and conduct
effect • As under SUBSECTION C, the release of the principal debtor must be by
• Hence, all parties, whether primarily or secondarily liable, will also be the act of the holder and not by operation of law like a judgment for the
discharged maker in an unsuccessful suit by the indorsee against him
• But a discharge of a secondary party does not effect a discharge of the • Example:
instrument itsel o Suppose Marc is the maker of the instrument payable to the order
2. INTENTIONAL CANCELLATION OF SIGNATURE of Penny who indorsed it to Allan à Allan to Bob à Bob to Cath
• If the holder intentionally strikes out the signature of a person secondarily (present holder)
liable, the effect is to discharge him from liability on the instrument as if he o If Cath releases Marc (maker), Penny, Alan and Bob, the persons
has never been a party to the same secondarily liable, are likewise discharged
• No consideration is necessary to support the discharge o But if Cath, in releasing Marc, expressly reserved his right against
• However, the right of the holder to cancel the signature of the indorser is the parties secondarily liable à then they are not discharged
subject to the limitation that the indorsement is not necessary to the holder’s o By such reservation, it is understood that the right of recourse of
title Penny, Allan and Bob against Marc are also reserved
• A holder may discharge a secondary party either by striking out a portion of 6. EXTENSION OF TIME OF PAYMENT
the instrument, such as one or more signature or the entire instrument itself • The phrase “AGREEMENT BINDING TO HOLDER” – means an agreement
3. DISCHARGE OF PRIOR PARTY BY ACT OF HOLDER binding on the holder made with the principal debtor
rd
• The discharge of a party as by intentional cancellation of his signature also • Hence, an agreement by the holder with a 3 party to extend the time of
operates as a discharge of the parties subsequent to the party discharged payment = X discharge indorsers
• Reason: the discharge deprives a subsequent party of a right of recourse • To be binding, the agreement must be supported by a valuable
against the party discharged by the holder consideration and for a definite period
• PRIOR PARTY = X limited to prior indorsers but includes as well principal • SUBSECTION F = is consistent with the rule that an extension granted to
debtors within its meaning the debtor by the creditor without consent of the guarantor extinguishes the
• Subsection c applies only to discharge by the act of the holder and not to guaranty
discharge by operation of law • But the mere failure on the part of the holder to demand payment does not
• X include a discharge: of itself constitute an extension of time referred to herein
o by bankruptcy • The agreement to extend time of payment does not discharge a party
o by statute of limitations secondarily liable:
o for failure of holder to give him notice of dishonor 1. Where the extension of time is consented to by such party
4. VALID TENDER OF PAYMENT 2. Where the holder expressly reserves his right of recourse against such
• TENDER OF PAYMENT – the act by which one produces and offers to a party
person holding a claim or demand against him the amount of money which
he considers and admits to be due, in satisfaction of such claims or demand Sec. 121. Right of party who discharges instrument. - Where the instrument is paid
without any stipulation or condition by a party secondarily liable thereon, it is not discharged; but the party so paying it is
• May be made by a prior party, if accepted, would result in the discharge of remitted to his former rights as regard all prior parties, and he may strike out his own
said party and necessarily of all parties subsequent to him and all subsequent indorsements and against negotiate the instrument, except:
(a) Where it is payable to the order of a third person and has been paid by the drawer; affect the rights of a holder in due course without notice. A renunciation must be in
and writing // unless the instrument is delivered up to the person primarily liable thereon.
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.  MEANING OF RENUNCIATION
• RENUNCIATION – describes the act of surrendering a right or claim with or
EFFECT OF REACQUISTION BY PRIOR PARTY without recompense
• Payment at or after maturity by a party secondarily liable = X discharge the • While there are decisions to the contrary, it has been held that Sect 11,
instrument à It only cancels his own liability and that of the parties when read together with 119 and 120 à applies only to renunciation by a
subsequent to him UNILATERAL ACT OF THE HOLDER (i.e. release without consideration)
• With respect to prior parties, primary or secondary, the reacquirer is • On the other hand, Sect 120 (e) would cover the case of an oral
remitted to his former position and consequently he may strike out his own renunciation supported by a consideration; so an oral release without
and all subsequent indorsements as they are not necessary to his title consideration is INEFFECTIVE
• If the party so paying was formerly a HDC à he may recovery from prior
parties as such a holder even though at that time he already had notice of HOW RENUNCIATION BY HOLDER MADE
defenses • Sect 122 – deals with express renunciation of a debt evidence by a NI
• The renunciation must be made by a written declaration to that effect
NEGOTIATION BY PRIOR PARTY • If oral, it should be accompanied by a surrender of the instrument to the
• First clause contains the provisions: person primarily liable thereon
1. That the instrument is not discharged • The mere expression of an intention or desire to renounce is NOT enough
2. That it may again be negotiated • Thus, where the holder of demand note being in articulo mortis instructed
• Do the exceptions in subsections a and b apply to the rule that the his nurse to write a memorandum to the effect that the note should be
instrument is not discharged or to the right to further negotiate the destroyed as soon as it could be found à it was held that there was no
instrument? renunciation under the law
o Exception is intended only to apply to the right to negotiate • Sect 122 does NOT apply to or prevent a discharge by oral novation under
o Moreover, the exception may operate harshly, if it is made to which the obligation of the other persons is accepted in lieu of the maker of
apply to the rule that the instrument is not discharged because it the instrument
would deny the drawer who pays a bill of the right to recover from
the acceptor EFFECT OF RENUNCIATION
o Thus, where the drawer of a certified check which he has drawn • A renunciation by the holder of his right against any party to the instrument
payable to the US government for taxes was reacquired to take also acts as a discharge
up the check because of failure of the drawee-bank, the check is • A renunciation in favor of a secondary party may be made by the holder
not discharged and the drawer is subrograted to the right of the before, at or after maturity of the instrument
payee and can recover in full o The effect of the renunciation: is to discharge only such
• Example: secondary party and all parties subsequent to him to him but the
o Ryan is the drawer of a bill addressed to Weng (drawee) and instrument itself remains in force
payable to the order of Penny • A renunciation in favor of the principal debtor may be made at or after
o The bill is accepted by weng and indorsed to Penny, Alan, Bob, maturity
and Cyrus in succession o The effect of the renunciation: is to discharge the instrument
o If Alan pays the bills, it is not discharged but it discharges him and and all parties thereto, provided the renunciation is made
Bob, and Cyrus to whom he is personally liable absolutely and unconditionally
o But he “is remitted to his former rights as regard all prior parties” • In either case, said renunciation does not affect the right of a HDC without
Ryan and Penny and he may strike out his indorsement to Bob as notice
well as the indorsement of Cyrus and renegotiate the instrument
• If the renunciation is made before maturity of the instrument, it runs the risk
o Of course, Alan’s right to sue Ryan and Penny and to renegotiate
of being negotiated later so as to gain new life in the hands of a HDC since
may be exercised without cancelling intervening indorsements
renunciation is only a personal defense
o If the bill is paid by Ryan, the case would come under subsection
• Example:
a and so Ryan cannot further renegotiate the bill
o David is the holder of an instrument made by Marc and indorsed
o If Penny is an accommodated party and Penny pays à neither
in succession by Penny, Allan, Bob and Cyrus
can he renegotiate the bill as his case would fall under subsection
o If David renounces his rights against Bob à then Bob and Cath
b
are discharged
o If David makes the renunciation in favor of Marc à the instrument
Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights
is discharged as well as the parties
against any party to the instrument before, at, or after its maturity. An absolute and
o Now, if David, after he has made the renunciation, negotiates the
unconditional renunciation of his rights against the principal debtor made at or after
instrument to Eric (HDC) without notice à Eric cans still enforce
the maturity of the instrument discharges the instrument. // But a renunciation does not
the instrument because under the law, “a renunciation does not
affect the rights of a HDC without notice
2. a party who authorized or assented to the alteration
Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made 3. indorsers who indorsed subsequent to the alteration
unintentionally or under a mistake or without the authority of the holder, is inoperative • When an alteration is apparent, the party claiming under the instrument has
// but where an instrument or any signature thereon appears to have been cancelled, the burden of explain the alterations or that he had no part therein or that he
the burden of proof lies on the party who alleges that the cancellation was made was a HDC
unintentionally or under a mistake or without authority. • But where the alteration is not apparent on the face by the use of ordinary
care in inspecting the instrument, the burden is on the party alleging it
MANNER OF CANELLATION • When the drawee bank pays a materially altered check, it has no right to
• CANCELLATION – of an instrument is the act by which the intention to claim reimbursement from the drawer, much less, the right to deduct the
cancel the instrument may be evidence. erroneous payment if made from the drawer’s account since it did not pay
• It is not limited to the writing of the word “cancelled” or “paid” or the drawing according to the original tenor of the instrument
of crisscross lines across the instrument • Example:
• It includes any other means such as tearing, erasure, obliteration, or burning o Marc makes PN for 3k payable to Penny or order
o Penny negotiates the note to Alan, who with the consent of
WHEN CANCELLATION INOPERATIVE Penny, raises the amount to 8k and thereafter indorses it to Bob,
• If the cancellation is made: Bob to Cyrus à Cyrus to David (XHDC)
1. Unintentionally or o The note is discharged as against Marc; hence David cannot
2. By mistake or through fraud or enforce it against Marc even for the original tenor
3. Without authority o Alan, however, would be liable to David for 8k as he is the party
= INOPERATIVE who himself made the alteration although David is not a HDC
• PRESUMPTION: Cancellation is intentional o Moreover, as indorser, Alan warrants that the instrument is
o E: Burden of proof is on holder claiming its ineffectiveness to genuine and in all respects what it purports to be
overcome the presumption by contrary proof o Penny would also be liable to David for 8k as he authorized or
assented to the alteration
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is o Likewise, Bob and Cyrus would be liable to David for 8k as they
materially altered without the assent of all parties liable thereon, it is avoided, // are subsequent indorsers
except as against a party who has himself made, authorized, or assented to the 2. ALTERATION BY A STRANGER
alteration and subsequent indorsers. • When the material alteration of the instrument is made by a stranger, it is
But when an instrument has been materially altered and is in the hands of a called SPOILATION
holder in due course not a party to the alteration, he may enforce payment thereof • In England, spoliation has the same effect as alteration
according to its original tenor. • In American courts, spoilation has no effect upon the instrument is the
original meaning can be ascertained
MEANING OF MATERIAL ALTERATION 3. RIGHTS OF HDC
• MATERIAL ALTERATION – any change in the instrument which affects or • A material alteration AVOIDS the instrument in the hands of one who is
changes the liability of the parties in any way as specified in Sect 125 or NOT a HDC as against any prior party who has not assented to the
changes the contract of the parties in any respect alteration
• Sect 124 has reference to PHYSICAL ALTERATIONS of the instrument • But if an altered instrument is negotiated to a HDC à he may enforce
• So an extension of time given by the holder of a note to the principal maker payment thereof according to its original tenor regardless of whether the
without the consent of a surety co-maker = X alteration alteration was innocent or fraudulent
• Example:
EFFECT OF ALTERATION OF INSTRUMENT o In the example given if David were a HDC, he could enforce the
• A discharge can also take place because of material alterations instrument against Marc for 3k (its original tenor)
1. ALTERATION BY A PARTY o Of course, David can recover from Penny, Alan, Bob or Cyrus 8k
• Effect: discharge the instrument and all prior parties thereto who did not should Marc dishonor the instrument
give their consent to such alteration
• Since no distinction is made, it does not matter whether it is favorable or REASON FOR RULE IN RELATION TO MATERIAL ALTERATION
unfavorable to the party making the alteration or to the interest of the prior • Public policy
parties or whether it is innocently or fraudulently made since material • To maintain the integrity surrounding commercial relations, no party to be
alteration includes innocent changes without regard to the motive of the benefitted should be permitted under any guise to alter the written
party making it obligations of another without his authority or assent
• So that where the instrument has been altered, although innocently, it is • To do otherwise would open the door to the perpetration of all kinds of fraud
discharged but the innocent party can sue upon the original debt for which it to the prejudice of the party or parties to be bound who have no control
has been given whatever over the possession of such instruments which are passed from
• EXCEPTIONS AS TO THE EFFECT OF MATERIAL ALTERATION – it does hand to hand and therefore, cannot prevent any person in possession
not discharge the instrument as against: thereof from making changes therewith in disregard of honest and good
1. a party who has made the alteration conscience
• No man should be permitted to take the chance of gain by the commission • Change of the place of payment from a town to a particular bank = material
of fraud, without running the risk of loss in case of detection since the maker is deprived of the advantages under Sect 70 of an
instrument payable at a special place and possibly subject him to the
Sec. 125. What constitutes a material alteration. - Any alteration which changes: disadvantages of an instrument payable at a bank
(a) The date;  • The addition of the name of the city after that of the bank designated as the
(b) The sum payable, either for principal or interest;  place of payment = material
(c) The time or place of payment:  • Change of the name of bank at which an instrument is payable after
(d) The number or the relations of the parties;  execution, from X bank to Y bank = X material alteration where X bank is
(e) The medium or currency in which payment is to be made; known to have gone out of existence and has become Y bank since even
(f) Or which adds a place of payment where no place of payment is specified, or any without the alteration, the instrument would be payable to Y bank
other change or addition which alters the effect of the instrument in any respect, is a 5. NUMBER OR RELATIONS OF THE PARTIES
material alteration. • ✓ MATERIAL ALTERATIONS
o The addition of a co-maker
WHEN ALTERATION MATERIAL o the addition of the word “surety after the name of the co-maker”
• Under Sect 125, a change in any of the matters mentioned or any other o The word “trustee” after the name of the payee
change which alters the effects of the instrument in any respect constitutes o The erasure of the payee’s name and the insertion of the name of
material alteration another person or just leaving a space blank
• Any other alteration immaterial = X discharge the instrument not affect the o The erasure of the words “agent of P” in a check payable to “X,
liability of parties to instrument prior to the alteration agent of P” leaving X’s name
• Alteration of serial numbers on a check = X material alteration à an item o Erasure of the word “or”
which is not essential requisite for negotiability and therefore the drawee- o And the insertion of the words “Agent, Phil National Bank” after
bank is not justified to refuse the check in question (INTERNATIONAL the check was transferred by the payee, which converts the Bank
CORP BANK VS CA) from a mere drawee to drawer and therefore changes its liability
• Adding the words implied by law or making marginal figures = X material (MONTINOLA CASE)
alteration 6. MEDIUM OR CURRENCY OF PAYMENT
1. DATE • Any change in the medium or currency in which payment is to be made =
• A change in the date of the instrument whether it hastens or postpones the material alteration
time of payment = material o Insertion of the words “current funds”
• Change in the date from which interest is to run = material o Or the words “in gold coins”
• Change in the date of indorsement = X material where the date is not o When the note is payable in pesos, Philippine currency, is
necessary to fix the maturity of the instrument changed by making it appear as payable in American Dollars
o E: Unless the issue is whether the instrument was made before or 7. OTHER ALTERATIONS
after maturity • ✓ MATERIAL ALTERATIONS
• Filing of date blanks = X material; X alteration o Under the last par, the substitution of the words “or bearer” for “or
2. SUM PAYABLE order”
• Any change in the amount of the principal or interest whether increasing or o Writing the words “protest waived” above a blank indorsement
reducing it = material alteration o Erasure of the words “without recourse” above the signature of an
• Addition of the words “with interest” with or without fixed rates = material indorser
• Alteration of the marginal figures of the instrumemt = X material when the o A change in the pronoun “I” to “We” in a PN since it changes the
sum is stated in words in the body remains unchanged obli from solidary to a joint one
• Insertion by the payee of the words “with interest” after execution with
authority of the maker = X material
• Insertion of the legal rate of instrument where the instrument has a provision
“interest at – percent” = X material since the legal import is not thereby
changed
3. TIME OF PAYMENT
• A change in the maturity of the instrument whether the time of payment is
thereby curtailed or extended = material
• Change in the marginal notation of the date of maturity of an instrument in
order to correct an obvious mistake = X material alteration
• Change of a marginal note “Due 2-29-19” to March 1 material when the year
1919 was not a leap year
4. PLACE OF PAYMENT
• Any alteration which changes the place of payment or inserts a place of
payment where none is specified = material


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• Purpose: facilitating, not hindering or hampering transactions in commercial

CHARACTERISTICS OR FEATURES OF NEGOTIABLE INSTRUMENTS (2)

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 2

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 3

MONEY DEFINED (sgd.) Arsenio F. Flores

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 6

SUM TO BE PAID WITH EXCHANGE

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 8

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 13

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 14

DATE WHEN INSTRUMENT TAKES EFECT

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 17

CONVERSION OF BLANK INDORSEMENT TO SPECIAL INDORSEMENT

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 25

INDORSEMENT IN REPRESENTATIVE CAPACITY CONTINUATION OF NEGOTIABLE CHARACTER OF ORIGINALLY NEGOTIABLE

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 29

o In the above example, Bob, a prior party, reacquires the note

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 31

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 35

o Instead of per procuration, it may also be expressed thus: • Examples:

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 40

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 41

SALE OF PUBLIC OR CORPORATE SECURITIES

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 43

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 44

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 47

WHERE X liable to ANY holder Forged Collecting bank à

WHERE Drawee may debit the Forged

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 50

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 56

RIGHTS OF A HDC DEFENSES IN GENERAL

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 58

WHEN A HOLDER PRESUMED A HDC

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 63

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 65

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 67

NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 68

PRESENTMENT WHERE INSTRUMENT PAYABLE AT A BANK

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PRESENTMENT TO ALL JOINT DEBTORS WHEN DELAY IN MAKING PRESENTMENT EXCUSED

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 77

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PERSON TO BE GIVEN NOTICE NOTICE TO PARTNERS

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RECEIPT, NOT MANNER, OF NOTICE ESSENTIAL

WAIVER OF NOTICE OF DISHONOR

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 85

WHEN PROTEST REQUIRED AND NOT REQUIRED

SUMMARY OF RULES AS TO NOTICE OF DISHONOR

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NEGOTIABLE INSTRUMENTS LAW – DE LEON BOOK ATTY. BUSMENTE © Michelle Duguil 91

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