I. GENERAL CONCEPTS 5.

Debenture
 All of these must comply with Sec. 1, NIL.
NEGOTIABLE INSTRUMENT (NI) Note: Letters of credit are not negotiable because they are
 A written contract for the payment of money which complies issued to a specified person.
with the requirements of Sec. 1 of the NIL, which by its form and
on its face, is intended as a substitute for money and passes Instances when a BE may be treated as a PN
from hand to hand as money, so as to give the holder in due a. The drawer and the drawee are the same person; or
course (HDC) the right to hold the instrument free from defenses b. Drawee is a fictitious person; or
available to prior parties. (Reviewer on Commercial Law, c. Drawee does not have the capacity to contract. (Sec.
Professors Sundiang and Aquino) 130)
 Functions: (Bar Review Materials in Commercial Law, Jorge d. Where the bill is drawn on a person who is legally
Miravite, 2002 ed.) absent;
1. To supplement the currency of the government. e. Where the bill is ambiguous (Sec. 17[e])
2. To substitute for money and increase the purchasing
medium. Parties to a NI
 Legal tender – That kind of money which the law 1. Promissory Note
compels a creditor to accept in payment of his debt when a. Maker – one who makes promise and signs the instrument
tendered by the debtor in the right amount. b. Payee – party to whom the promise is made or the instrument
Note: A NI although intended to be a substitute for money, is not is payable.
legal tender. However, a check that has been cleared and 2. Bill of Exchange
credited to the account of the creditor shall be equivalent to a. Drawer – one who gives the order to pay money to a
delivery to the creditor of cash. (Sec. 60, NCBA) third party
Features: (Reviewer on Commercial Law, Professors b. Drawee – person to whom the bill is addressed and who
Sundiang and Aquino) is ordered to pay. He becomes an acceptor when he
1. Negotiability – That attribute or property whereby a bill indicates his willingness to pay the bill
or note or check may pass from hand to hand similar to c. Payee – party in whose favor the bill is drawn or is
money, so as to give the holder in due course the right payable.
to hold the instrument and to collect the sum payable for
himself free from defenses. DISTINCTIONS
 The essence of negotiability which characterizes
a negotiable paper as a credit instrument lies in its PROMISSORY BILL OF EXCHANGE
freedom to circulate freely as a substitute for NOTE
money. (Firestone Tire vs. CA, 353 SCRA 601) Unconditional promise Unconditional order
2. Accumulation of Secondary Contracts – Secondary
contracts are picked up and carried along with NI as
Involves 2 parties Involves 3 parties
they are negotiated from one person to another; or in
the course of negotiation of negotiable instruments, a Maker is primarily liable Drawer is only secondarily
series of juridical ties between the parties thereto arise liable
either by law or by privity. Only one presentment: Two presentments: for
for payment acceptance and for
Applicability: payment
 General Rule: The provisions of the NIL are not applicable if
the instrument involved is not negotiable. NEGOTIABLE NON-NEGOTIABLE
 Exception: In the case of Borromeo vs. Amancio Sun, 317 INSTRUMENTS INSTRUMENTS
SCRA 176, the SC applied Section 14 of the NIL by analogy in a
Only NI are governed by Application of the NIL is only by
case involving a Deed of Assignment of shares which was signed
the NIL. analogy.
in blank to facilitate future assignment of the same shares. The
Transferable by Transferable only by
SC observed that the situation is similar to Section 14 where the
negotiation or by assignment
blanks in an instrument may be filled up by the holder, the signing
assignment.
in blank being with the assumed authority to do so.
 The NIL was enacted for the purpose of facilitating, not A transferee can be a A transferee remains to be an
hindering or hampering transactions in commercial paper. Thus, HDC if all the assignee and can never be a HDC
the statute should not be tampered with haphazardly or lightly. requirements are
Nor should it be brushed aside in order to meet the necessities in complied with
a single case. (Michael Osmeña vs. Citibank, G.R. No. 141278, A holder in due course All defenses available to prior
March 23, 2004 Callejo J.) takes the NI free from parties may be raised against the
personal defenses last transferee
Kinds of NI
1. PROMISSORY NOTE (PN)
 An unconditional promise in writing by one person to another
signed by the maker engaging to pay on demand or at a fixed or
determinable future time, a sum certain in money to order or to
bearer. (Sec. 184)
Requires clean title, Transferee acquires a
2. BILL OF EXCHANGE (BE) one that is free from derivative title only.
 An unconditional order in writing addressed by one person to any infirmities in the (Notes and Cases on
another, signed by the person giving it, requiring the person to instrument and Banks, Negotiable
whom it is addressed to pay on demand or at a fixed or defects of title of Instruments and other
determinable future time a sum certain in money to order or to prior transferors. Commercial
bearer. (Sec. 126) (Notes and Cases Documents, Timoteo
on Banks, B. Aquino)
Negotiable
CHECK - A bill of exchange drawn on a bank payable on Instruments and
demand. (Sec. 185). It is the most common form of bill of other Commercial
exchange. Documents,
Timoteo B. Aquino)
OTHER FORMS OF NI
1. Certificate of deposit issued by banks, payable to the
depositor or his order, or to bearer
2. Trade acceptance
3. Bonds, which are in the nature of promissory notes
4. Drafts, which are bills of exchange drawn by one bank upon
another
 Solvency of debtor is Solvency of debtor is not goods.
in the sense guaranteed under Art.
guaranteed by the 1628 of the NCC unless ASSIGNMENT NEGOTIATION
indorsers because expressly stipulated.
they engage that the (Notes and Cases on Pertains to contracts in Pertains to NI
instrument will be Banks, Negotiable general
accepted, paid or Instruments and other Holder takes the Holder in due course
both and that they will Commercial Documents, instrument subject to the takes it free from personal
pay if the instrument Timoteo B. Aquino) defenses obtaining defenses available among
is dishonored. (Notes among the original the parties
and Cases on Banks, parties
Negotiable
Governed by the Civil Governed by the NIL
Instruments and other
Commercial
Code
Documents, Timoteo
B. Aquino) II. NEGOTIABILITY
Form of NI: (Sec. 1) Key: WUPOA
1. Must be in Writing and signed by the maker or drawer;
NEGOTIABLE NEGOTIABLE 2. Must contain an Unconditional promise or order to pay
INSTRUMENT DOCUMENT OF TITLE a sum certain in money;
Subject is money Subject is goods 3. Must be Payable on demand, or at a fixed or
Is itself the property The document is a mere
determinable future time;
with value evidence of title – the things 4. Must be payable to Order or to bearer; and
of value being the goods 5. When the instrument is addressed to a drawee, he
mentioned in the document must be named or otherwise indicated therein with
reasonable certainty.
Has all the Does not have these
requisites of Sec. 1 requisites Determination of negotiability:
of NIL
a. Whole instrument
A holder of NI may Intermediate parties are not
b. What appears on the face of the instrument
run after the secondarily liable if the
secondary parties document is dishonored. c. Requisites enumerated in Sec.1 of the NIL
for payment if d. Should contain words or terms of negotiability.
dishonored by the (Gopenco, Commercial Law Bar Reviewer, cited in Aquino,
party primarily p. 23)
liable.
A holder, if a holder A holder can never acquire In determining the negotiability of an instrument, the
in due course, may rights to the document better instrument in its entirety and by what appears on its face
acquire rights over than his predecessors. must be considered. It must comply with the requirements
the instrument of Sec. 1 of the NIL. (Caltex Phils. v. CA, 212 SCRA 448)
better than his
predecessors.
 The acceptance of a bill of exchange is not important in
the determination of its negotiability. The nature of
acceptance is important only on the determination of the
BILLOF EXCHANGE CHECK kind of liabilities of the parties involved (PBCOM vs.
Not necessarily It is necessary that a Aruego, 102 SCRA 530)
drawn on a deposit. check be drawn on a bank
The drawee need not deposit. Otherwise, there
be a bank would be fraud. REQUISITES OF NEGOTIABILITY
a. It must be writing and signed by the maker or
Death of a drawer of a Death of the drawer of a drawer
BOE, with the check, with the knowledge Any kind of material that substitutes paper is sufficient.
knowledge of the bank, of the bank, revokes the With respect to the signature, it is enough that what the
does not revoke the authority of the banker to maker or drawer affixed shows his intent to authenticate
authority of the drawee pay. the writing. (Notes and Cases on Banks, Negotiable
to pay. Instruments and other Commercial Documents, Timoteo B.
May be presented for Must be presented for Aquino)
payment within payment within a
b. Unconditional Promise or Order to pay a sum
reasonable time after its reasonable time after
last negotiation. its issue. certain in money
Unconditional promise or order
May be payable on Always payable on  Where the promise or order is made to depend on a
demand or at a fixed or demand contingent event, it is conditional, and the instrument
determinable future time involved is non-negotiable. The happening of the event
does not cure the defect.
NEGOTIABLE NEGOTIABLE  The unconditional nature of the promise or order is not
INSTRUMENT WAREHOUSE affected by:
RECEIPT a) An indication of a particular fund out of which
If originally payable to If payable to bearer, it will reimbursement is to be made, or a particular account
bearer, it will always be converted into a to be debited with the amount; or
remain so payable receipt deliverable to b) A statement of the transaction which gives rise to the
regardless of manner of order, if indorsed instrument
indorsement. specially.  Where the promise or order is subject to the terms and
A holder in due course The indorsee, even if conditions of the transaction stated, the instrument is
may obtain title better holder in due course, rendered non-negotiable. The NI must be burdened with
than that of the one who obtains only such title as the terms and conditions of that agreement to destroy its
negotiated the instrument the person who caused negotiability. (Cesar Villanueva, Commercial Law Review,
to him. the deposit had over the 2004 ed.)
 But an order or promise to pay out of a particular fund is
NOT unconditional. (Sec. 3)

FUND FOR REIMBURSEMENT PARTICULAR FUND FOR PAYMENT

Drawee pays the payee from his There is only one act- the drawee pays directly
own funds; afterwards, the from the particular fund indicated. Payment is
drawee pays himself from the subject to the condition that the fund is
particular fund indicated. sufficient.
Particular fund indicated is NOT Particular fund indicated is the direct source of
the direct source of payment but payment.
only the source of
reimbursement.
extension clause a. He consents or
Postal money orders are not negotiable instruments. Some of b. Right of recourse is expressly
the restrictions imposed by postal laws and regulations are reserved. (Notes and Cases on B
inconsistent with the character of negotiable instruments. (Phil. Negotiable Instruments and other
Education Co. vs. Soriano, 39 SCRA 587) Commercial Documents, Timoteo
Aquino)
 Treasury warrants are non-negotiable because there is an
indication of the fund as the source of payment of the
disbursement. (Metrobank vs. CA, 194 SCRA 169)
c. Payable on Demand or at fixed or determinable
Payable in sum certain in money future time
 An instrument is still negotiable although the amount to be
paid is expressed in currency that is not legal tender so long as it
is expressed in money. (PNB vs. Zulueta, 101 Phil 1071, Sec.6 PAYABLE AT A FIXED O
(e)). PAYABLE ON DEMAND DETERMINABLE FUTURE
 The certainty is however not affected although to be paid:
a. With interest; or a. Where expressed to be a. At a fixed period after
b. By stated installments; or payable on demand, at sight;
c. By stated installments with an acceleration clause; sight or on presentation; b. On or before a fix
d. With exchange; or b. Where no period of determinable future time sp
e. With cost of collection or attorney’s fees. (Sec. 2) payment is stated; therein; or
c. Where issued, accepted, c. On or at a fixed period af
 The dates of each installment must be fixed or at least or indorsed after maturity occurrence of a specified
determinable and the amount to be paid for each installment. (only as between which is certain to happen,
 A sum is certain if the amount to be unconditionally paid by the immediate parties). (Sec. the time of happening is un
maker or drawee can be determined on the face of the instrument 7) (Sec. 4)
and is not affected by the fact that the exact amount is arrived at
only after a mathematical computation. (Notes and Cases on  If the day and the month, but not the year of payment is given,
Banks, Negotiable Instruments and other Commercial it is not negotiable due to its uncertainty. (Pandect of Commercial
Documents, Timoteo B. Aquino) Law and Jurisprudence, Justice Jose Vitug, 1997 ed.)

d. Payable to Order or to Bearer

ACCELERATION INSECURITY EXTENSION
CLAUSE CLAUSE CLAUSE Payable to Order
 The instrument is payable to order where it is drawn
A clause that Provisions in the Clauses in the face
payable to the order of a specified person, or to him or his
renders whole debt contract which of the instrument
order. (Sec. 8)
due and allows the holder that extend the
 The payee must be named or otherwise indicated therein
demandable upon to accelerate maturity dates;
with reasonable certainty.
failure of obligor to payment if he a. At the option of
 The instrument may be made payable to the order of:
comply with certain deems himself the holder;
a. A payee who is not the maker, drawer or drawee
conditions. insecure. b. Extension to a
b. The drawer or maker
further definite time
c. The drawee
at the option of the
d. 2 or more payees jointly
maker or acceptor
e. One or some of several payees
c. Automa –tically
f. The holder of an office for a time being
upon or after a
specified act or
event.
Payable to Bearer
Instrument is still Instrument is Instrument is still  The instrument is payable to bearer:
negotiable rendered non- negotiable (Notes a. When it is expressed to be so payable; or
negotiable and Cases on b. When it is payable to a person named therein or to
because the Banks, Negotiable bearer; or
holder’s whim and Instruments and c. When it is payable to the order of a fictitious or non-
caprice prevail other Commercial existing person, and such fact was known to the person
without the fault Documents, making it so payable; or
and control of the Timoteo B. Aquino) d. When the name of the payee does not purport to be the
maker name of any person; or
e. When the only or last indorsement is an indorsement in
blank. (Sec. 9)

EXTENSION CLAUSE EXTENSION UNDER SEC. 120(f)

Stated on the face of the
instrument
Parties are bound because
they took the instrument
knowing that there is an
Note: An instrument originally payable to bearer can be
negotiated by mere delivery even if it is indorsed especially. If it is
Agreement binding the holder;originally a BEARER instrument, it will always be a BEARER
a. To extend the time of payment or
instrument.
b. Postpone the holder’s rightAs
to opposed
enforce to an original order instrument becoming payable to
the instrument bearer, if the same is indorsed specially, it can NO LONGER be
negotiated further by mere delivery, it has to be indorsed.
Binds the person secondarily liable
(and therefore cannot be discharged
from liabilities if:
 A check that is payable to the order of cash is payable to b. Assignment – The transferee does not become a holder and
bearer. Reason: The name of the payee does not purport to be he merely steps into the shoes of the transferor. Any defense
the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383) available against the transferor is available against the
transferee. (Notes and Cases on Banks, Negotiable Instruments
FICTITIOUS PAYEE RULE and other Commercial Documents, Timoteo B. Aquino)
 It is not necessary that the person referred to in the instrument  Assignment may be effected whether the instrument is
is really non-existent or fictitious to make the instrument payable negotiable or non-negotiable. (Sesbreño vs. CA, 222 SCRA 466)
to bearer. The person to whose order the instrument is made
payable may in fact be existing but he is till fictitious or non- HOW NEGOTIATION TAKES PLACE
existent under Sec. 9(c) of the NIL if the person making it so a. Issuance – first delivery of the instrument complete in form to
payable does not intend to pay the specified persons. (Reviewer a person who takes it as a holder. (Sec. 191)
on Commercial Law, Professors Sundiang and Aquino)
Steps:
e. Identification of Drawee 1. Mechanical act of writing the instrument completely
 Applicable only to a bill of exchange and in accordance with the requirements of Section
 A bill may be addressed to 2 or more drawees jointly whether 1; and
they are partners or not but not to 2 or more drawees in the 2. The delivery of the complete instrument by the
alternative or in succession. (Sec. 128) maker or drawer to the payee or holder with the
intention of giving effect to it. (The Law on
OMISSIONS & ADDITONAL PROVISONS NOT Negotiable Instruments with Documents of Title,
PROVISIONS THAT DO AFFECTING NEGOTIABILITY Hector de Leon, 2000 ed.)
NOT AFFECT
NEGOTIABILITY
b. Subsequent Negotiation
a. It is not dated; GENERAL RULE: If some other act is1. If payable to bearer, a negotiable instrument may
b. It does not specify the required other than or in addition to be negotiated by mere delivery.
value given or that any 2. If payable to order, a NI may be negotiated by
payment of money, the instrument is not indorsement completed by delivery
value has been given; negotiable. (Sec. 5) Note: In both cases, delivery must be intended to give effect to
c. It does not specify the EXCEPTIONS: the transfer of instrument. (Development Bank vs. Sima Wei, 219
place where it is drawn a. Authorizes the sale of collateral
SCRA 736)
or where it is payable; securities on default; c. Incomplete negotiation of order instrument
d. It bears a seal; Where the holder of an instrument payable to his order
b. Authorizes confession of judgment
e. It designates a on default; transfers it for value without indorsing it, the transfer vests in the
particular kind of current c. Waives the benefit of law intended
transferee such title as the transferor had therein and he also
money in which to protect the debtor; or acquires the right to have the indorsement of the transferor. But
payment is to be made. d. Allows the creditor the option to purpose of determining whether the transferee is a holder
for the
(Sec. 6) require something in lieu of
in money.
due course, the negotiation takes effect as of the time when
the indorsement is made. (Sec. 49)
d. Indorsement
 Legal transaction effected by the affixing one's signature at
the:
III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. a. Back of the instrument or
17) b. Upon a paper (allonge) attached thereto with or without
additional words specifying the person to whom or to whose
a. Discrepancy between the amount in figures and that in words order the instrument is to be payable whereby one not only
– the words prevail, but if the words are ambiguous, reference transfers legal title to the paper transferred but likewise
will be made to the figures to fix the amount. enters into an implied guaranty that the instrument will be duly
b. Payment for interest is provided for – interest runs from the paid (Sec. 31)
date of the instrument, if undated, from issue thereof. GENERAL RULE: Indorsement must be of the entire
c. Instrument undated – consider date of issue. instrument.
d. Conflict between written and printed provisions – written EXCEPTION: Where instrument has been paid in part, it may
provisions prevail. be indorsed as to the residue. (Sec. 32)
e. When the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at his  Kinds of Indorsement:
election; A. SPECIAL – Specifies the person to whom or to whose order,
f. If one signs without indicating in what capacity he has the instrument is to be payable (Sec. 34)
affixed his signature, he is considered an indorser. B. BLANK – Specifies no indorsee:
g. If two or more persons sign “We promise to pay,” their 1. Instrument becomes payable to bearer and may be
liability is joint (each liable for his part) but if they sign “I promise negotiated by delivery (Sec. 34)
to pay,” the liability is solidary (each can be compelled to 2. May be converted to special indorsement by writing over
comply with the entire obligation). (Sec. 17) the signature of indorser in blank any contract consistent
with character of indorsement (Sec. 35)
IV. TRANSFER AND NEGOTIATION C. ABSOLUTE – One by which indorser binds himself to pay:
1. Upon no other condition than failure of prior parties to do
INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.) so;
a. Issue 2. Upon due notice to him of such failure.
b. Negotiation D. CONDITIONAL – Right of the indorsee is made to depend
c. Presentment for acceptance, in certain kinds of Bills of on the happening of a contingent event. Party required to pay
Exchange may disregard the conditions. (Sec. 39)
d. Acceptance E. RESTRICTIVE – An indorsement is restrictive, when it
h. Dishonor by non-acceptance either:
i. Presentment for payment a. Prohibits further negotiation of the instrument; or
j. Dishonor by non-payment b. Constitutes the indorsee the agent of the indorser; or
k. Notice of dishonor
l. Discharge c. Vests the title in the indorsee in trust for or to the use of
some other persons. But mere absence of words
MODES OF TRANSFER implying power to negotiate does not make an
a. Negotiation – the transfer of the instrument from one indorsement restrictive. (Sec. 36)
person to another so as to constitute the transferee as F. QUALIFIED – Constitutes the indorser a mere assignor of
holder thereof. (Sec.30)
the title to the instrument. (Sec. 38)
 It is made by adding to the indoser's signature words like
"sans recourse,” “without recourse", "indorser not holder", "at the
indorser's own risk", etc.
G. JOINT – Indorsement payable to 2 or more persons (Sec.
41)
H. IRREGULAR – A person who, not otherwise a party to an
instrument, places thereon his signature in blank before delivery
(Sec. 64)
 Other rules on indorsement;
1. Negotiation is deemed prima facie to have been effected
before the instrument is overdue except if the indorsement bears
a date after the maturity of the instrument. (Sec. 45)
2. Presumed to have been made at the place where the
instrument is dated except when the place is specified. (Sec. 46)
3. Where an instrument is payable to the order of 2 or more
payees who are not partners, all must indorse unless authority is
given to one. (Sec. 41)
4. Where a person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negative personal liability. (Sec. 44)
RENEGOTIATION TO PRIOR PARTIES (Sec. 50)
 Where an instrument is negotiated back to a prior party, such
party may reissue and further negotiate the same. But he is not
entitled to enforce payment thereof against any intervening party
to whom he was personally liable. Reason: To avoid
circuitousness of suits.
STRIKING OUT INDORSEMENT
 The holder may at any time strike out any indorsement which
is not necessary to his title. The indorser whose indorsement is
struck out, and all indorsers subsequent to him, are thereby
relieved from liability on the instrument. (Sec. 48)
CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT
TRANSFER
 Every NI is deemed prima facie to have been issued for a
valuable consideration. Every person whose signature appears
thereon is presumed to have become a party thereto for value.
(Sec. 24)
 What constitutes value:
a. An antecedent or pre-existing debt
b. Value previously given
c. Lien arising from contract or by operation of law. (Sec. 27)
V. HOLDERS
HOLDER
 A payee or endorsee of a bill or note who is in possession of it
or the bearer thereof. (Sec. 191)
RIGHTS OF HOLDERS IN GENERAL
(Sec. 51)
a . May sue thereon in his own name
b. Payment to him in due course discharges the instrument
 The only disadvantage of a holder who is not a holder
in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable. (Chan Wan vs. Tan Kim,
109 Phil. 706)
Holder In Due Course (HDC)
 A holder who has taken the instrument under the following
conditions: KEY: C O V I
1. Instrument is complete and regular upon its face;
2. Became a holder before it was overdue and without notice
that it had been previously dishonored;
3. For value and in good faith; and
4. At the time he took it, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
(Sec. 52)
 Rights of a HDC:
1. May sue on the instrument in his own name;
2. May receive payment and if payment is in due course, the
instrument is discharged;
3. Holds the instrument free from any defect of title of prior
parties and free from defenses available to parties among
themselves; and
4. May enforce payment of the instrument for the full amount
thereof against all parties liable thereon. (Secs. 51 and 57)
 Every holder of a negotiable instrument is deemed prima facie
a holder in due course. However, this presumption arises only in
favor of a person who is a holder as defined in Section 191 of the
NIL. The weight of authority sustains the view that a payee may
be a holder in due course. Hence, the presumption that he is a
prima facie holder in due course applies in his favor. (Cely Yang
vs. Court of Appeals, G.R. No. 138074, August 15, 2003)
Holder Not In Due Course
 One who became a holder of an instrument without any, some
or all of the requisites under Sec. 52 of the NIL.
 With respect to demand instruments, if it is negotiated an
unreasonable length of time after its issue, the holder is deemed
not a holder in due course. (Sec.53)
GENERAL RULE: Failure to make inquiry is not evidence of
bad faith.
EXCEPTIONS:
1. Where a holder’s title is defective or suspicious that would
compel a reasonable man to investigate, it cannot be stated that
the payee acquired the check without the knowledge of said
defect in the holder’s title and for this reason the presumption that
it is a holder in due course or that it acquired the instrument in
good faith does not exist. (De Ocampo vs. Gatchalian, 3 SCRA
596)
2. Holder to whom cashier’s check is not indorsed in due course
and negotiated for value is not a holder in due course. (Mesina v.
IAC)
 Rights of a holder not in due course:
1. It can enforce the instrument and sue under it in his own name.
2. Prior parties can avail against him any defense among these
prior parties and prevent the said holder from collecting in whole
or in part the amount stated in the instrument
Note: If there are no defenses, the distinction between a HDC
and one who is not a HDC is immaterial. (Notes and Cases on
Banks, Negotiable Instruments and other Commercial
Documents, Timoteo B. Aquino)
SHELTER RULE
 A holder who derives his title through a holder in due course,
and who is not himself a party to any fraud or illegality affecting
the instrument, has all the rights of such former holder in respect
of all prior parties to the latter. (Sec. 58)
ACCOMMODATION
 A legal arrangement under which a person called the
accommodation party, lends his name and credit to another
called the accommodated party, without any consideration.
Accommodation Party (AP)
 Requisites:
1. The accommodation party must sign as maker, drawer,
acceptor, or indorser;
2. He must not receive value therefor; and
3. The purpose is to lend his name or credit. (Sec. 29)
4.
Note: “without receiving value therefor,” means without receiving
value by virtue of the instrument. (Clark vs. Sellner, 42 Phil. 384)
 Effects: The person to whom the instrument thus executed is
subsequently negotiated has a right of recourse against the
accommodation party in spite of the former’s knowledge that no
consideration passed between the accommodation and
accommodated parties. (Sec. 29)

 Rights & Legal Position:

1. AP is generally regarded as a surety for the party
accommodated;
2. When AP makes payment to holder of the note, he has the
right to sue the accommodated party for reimbursement.
(Agro Conglomerates, Inc. vs. CA, 348 SCRA 450)

 Liability: Liable on the instrument to a holder for value

notwithstanding such holder at the time of the taking of the
instrument knew him to be only an accommodation party. Hence,
As regards, an AP, the 4th condition, i.e., lack of notice of infirmity
in the instrument or defect in the title of the persons negotiating it,
has no application. (Stelco Marketing Corp. vs. Court of Appeals,
210 SCRA 51)
2. Secondarily Liable (Sec. 61, 64 and 66, NIL)
 Rights of APs as against each other: May demand contribution
from his co-accommodation party without first directing his action DRAWER GENERAL IRREGULAR INDORSER
against the principal debtor provided: INDORSER
a. He made the payment by virtue of judicial demand; or
b. The principal debtor is insolvent.

 The relation between an accommodation party is, in effect, one A. Admits the A. Warrants all A person, not
of principal and surety – the accommodation party being the existence of the subsequent HDC otherwise a party to
surety. It is a settled rule that a surety is bound equally and payee and his - an instrument, places
absolutely with the principal and is deemed an original capacity to his signature thereon
indorse; a. That the in blank before
promissory and debtor from the beginning. The liability is instrument is
immediate and direct. (Romeo Garcia vs. Dionisio Llamas, G.R. delivery. (Sec. 64)
B. Engages that genuine and in
No. 154127, December 8, 2003) the instrument all respect what A. If instrument
will be it purports to be payable to the order
 Well-entrenched is the rule that the consideration necessary to accepted or of a 3rd person, he is
support a surety obligation need not pass directly to the surety, a paid by the b. He has good liable to the payee
consideration need not pass directly to the surety, a party primarily title to it; and subsequent
consideration moving to the principal alone being sufficient. liable; and parties.
c. All prior
(Spouses Eduardo Evangelista vs. Mercator Finance Corp, G.R.
C. Engages that parties had B. If instrument
No. 148864, August 21, 2003)
capacity to
if the payable to order of
instrument is contract maker or drawer or to
VII. PARTIES WHO ARE LIABLE dishonored and d. The bearer, he is liable to
proper instrument is, at all parties subsequent
PRIMARY AND proceedings are the time of to the maker or
SECONDARY WARRANTIES OF PARTIES brought, he will endorse-ment, drawer.
LIABILITY OF PARTIES pay to the party valid and
entitled to be C. If he signs for
Impose no direct obligation to subsisting. accommo-dation of
Makes the parties liable pay in the absence of breach paid.
B. Engages that the payee, he is liable
to pay the sum certain in thereof. In case of breach, the
the instrument to all parties
money stated in the person who breached the
will be accepted subsequent to the
instrument. same may either be liable or
or paid, or both, payee.
barred from asserting a
particular defense. as the case may
be, according to
Conditioned on Does not require presentment its tenor; and
presentment and notice and notice of dishonor.
of dishonor (Campos and (Campos and Lopez-Campos, C. If the
Lopez-Campos, Negotiable Instruments Law, instrument is
Negotiable Instruments 1994 ed.) dishonored and
Law, 1994 ed.) necessary
proceedings on
1. Primarily Liable (Sec. 60 and 62, NIL) dishonor be duly
taken, he will
pay to the party
MAKER ACCEPTOR OR DRAWEE
entitled to be
A. Engages to pay A. Engages to pay according
paid.
according to the tenor of to the tenor of his acceptance;
the instrument; and B. Admits the existence of the
B. Admits the existence drawer, the genuineness of his
of the payee and his signature and his capacity and
capacity to indorse. authority to draw the
instrument; and
C. Admits the existence of the 3. Limited Liability (Sec. 65; Metropol Financing v.
payee and his capacity to Sambok, 120 SCRA 864)
indorse.

 A bill of itself does not

operate as an assignment of
funds in the hands of the QUALIFIED INDORSER PERSON NEGOTIATING
drawee available for the BY DELIVERY
payment thereof and the
drawee is not liable unless and
until he accepts the same Every person negotiating A. Warranties same as
(Sec.127) instrument by delivery or by those of qualified
 a qualified endorsement indorsers; and 3. Duress amounting to total;
warrants that: forgery;
B. Warranties extend to 4. Fraud in factum or fraud 2. Want of delivery of
A. Instrument is genuine and immediate transferee only. in esse contractus; complete instrument;
in all respects what it 5. Minority (available to 3. Insertion of wrong date
purports to be; in an instrument;
the minor only);
6. Marriage in the case of a 4. Filling up of blank
B. He has good title to it; contrary to authority given
wife;
C. All prior parties had 7. Insanity where the or not within reasonable
capacity to contract; insane person has a guardian time;
appointed by the court; 5. Fraud in inducement;
D. He has no knowledge of 6. Acquisition of instrument
any fact which would impair 8. Ultra vires acts of a
corporation by force, duress, or fear;
the validity of the 7. Acquisition of the
instrument or render it 9. Want of authority of
agent; instrument by unlawful
valueless. means;
10. Execution of instrument
between public enemies; 8. Acquisition of the
instrument for an illegal
11. Illegality – if declared
void for any purpose consideration;
12. Forgery. 9. Negotiation in breach of
PERSON NEGOTIATING faith;
BY MERE DELIVERY OR 10. Negotiation under
GENERAL INDORSER
BY QUALIFIED circumstances that amount
INDORSEMENT to fraud;
11. Mistake;
12. Intoxication (according
No secondary liability; but is There is secondary to better authority);
liable for breach of warranty liability, and warranties 13. Ultra vires acts of
corporations where the
corporation has the power
to issue negotiable paper
Warrants that he has no Warrants that the but the issuance was not
knowledge of any fact which instrument is, at the time authorized for the
would impair the validity of of his indorsement, valid particular purpose for which
the instrument or render it and subsisting it was issued;
valueless 14. Want of authority of
agent where he has
apparent authority;
15. Insanity where there is
no notice of insanity on the
part of the one contracting
with the insane person; and
16. Illegality of contract
ORDER OF LIABILITY where the form or
consideration is illegal.
 There is no order of liability among the indorsers as against
the holder. He is free to choose to recover from any indorser in
case of dishonor of the instrument. (Notes and Cases on Banks,
EFFECTS OF CERTAIN DEFENSES
Negotiable Instruments and other Commercial Documents,
A. MINORITY
Timoteo B. Aquino)
 Negotiation by a minor passes title to the instrument. (Sec.22).
 As respect one another, indorsers are liable prima facie in the
But the minor is not liable and the defense is personal to him
order in which they indorse unless the contrary is proven
(Sec.68)
B. ULTRA VIRES ACTS
GENERAL RULE: One whose signature does not appear on  A real defense but the negotiation passes title to the
the instrument shall not be liable thereon. instrument. (Sec. 22)
Note: A corporation cannot act as an accommodation party.
EXCEPTIONS: The issuance or indorsement of negotiable instrument by a
1. The principal who signs through an agent is liable; corporation without consideration and for the accommodation of
2. The forger is liable; another is ultra vires. (Crisologo-Jose v. CA, 117 SCRA 594)
3. One who indorses in a separate instrument (allonge) or
where an acceptance is written on a separate paper is liable; C. INCOMPLETE AND UNDELIVERED NI (Sec. 15)
 If completed and negotiated without authority, not a valid
4. One who signs his assumed or trade name is liable; and contract against a person who has signed before delivery of the
5. A person negotiating by delivery (as in the case of a bearer contract even in the hands of HDC but subsequent indorsers are
instrument) is liable to his immediate indorsee. liable. This is a real defense.

VII. DEFENSES D. INCOMPLETE BUT DELIVERED NI (Sec. 14)

REAL DEFENSES
Those that attach to the
instrument itself and are
available against all holders,
whether in due course or
not, but only by the parties
entitled to raise them. (a.k.a
absolute defenses)
1. Material Alteration;
2. Want of delivery of
incomplete instrument;
1. Holder has prima facie authority to fill up the instrument.
2. The instrument must be filled up strictly in accordance with
PERSONAL DEFENSES the authority given and within reasonable time
3. HDC may enforce the instrument as if filled up according to
Those which are available no. 2.
only against a person not a
holder in due course or a
subsequent holder who
E. COMPLETE BUT UNDELIVERED NI (Sec. 16)
stands in privity with him.1. Between immediate parties and those who are similarly
(a.k.a. equitable defenses) situated, delivery must be coupled with the intention of
transferring title to the instrument.
2. As to HDC, it is conclusively presumed that there was valid
delivery; and
1. Absence or failure of
consideration, partial or
3. As against an immediate party and remote party who is not a
HDC, presumption of a valid and intentional delivery is
rebuttable.

F. FRAUD
FRAUD IN FACTUM OR
FRAUD IN
INDUCEMENT
The person who signs
the instrument intends to
sign the same as a NI
but was induced by fraud
FRAUD IN ESSES
CONTRACTUS OR FRAUD IN
EXECUTION
The person is induced to sign an
instrument not knowing its
character as a bill or note

G. ABSENCE OR FAILURE OF CONSIDERATION (Sec. 28)

 Personal defense to the prejudiced party and available against
any person not HDC.

H. PRESCRIPTION
 Refers to extinctive prescription and may be raised even
against a HDC. Under the Civil Code, the prescriptive period of
an action based on a written contract is 10 years from accrual of
cause of action.

I. MATERIAL ALTERATION
 Any change in the instrument which affects or changes the
liability of the parties in any way.
 Effects:
1. Alteration by a party – Avoids the instrument except as
against the party who made, authorized, or assented to the
alteration and subsequent indorsers.
 However, if an altered instrument is negotiated to a HDC, he
may enforce payment thereof according to its original tenor
regardless of whether the alteration was innocent or fraudulent.

Note: Since no distinction is made, it does not matter whether it

is favorable or unfavorable to the party making the alteration.
The intent of the law is to preserve the integrity of the negotiable
instruments.

2. Alteration by a stranger (spoliation)- the effect is the same as

where the alteration is made by a party which a HDC can
recover on the original tenor of the instrument. (Sec. 124)

 Changes in the following constitute material alterations:

a. Date;
b. Sum payable, either for principal or interest;
c. Time or place of payment;
d. Number or relations of the parties;
e. Medium or currency in which payment is to be made;
f. That which adds a place of payment where no place of
payment is specified; and
g. Any other change or addition which alters the effect of
the instrument in any respect. (Sec. 125)  A serial
number is an item which is not an essential requisite for
negotiability under Sec. 1, NIL, and which does not
affect the rights of the parties, hence its alteration is not
material. (PNB vs. CA, 256 SCRA 491)