NEGOTIABLE INSTRUMENTS LAW
as they are written although the amount of the said
charge is not stated.
When Warehouseman fees and charges cease to
accrue
The warehouseman fees and charges cease to
accrue from the date of rejection by the
warehouseman to heed the lawful demand by the
endorsee of the quedan for the release of the goods
(PNB v. Sayo, Jr., Supra)
NEGOTIABLE INSTRUMENTS LAW
Negotiable Instrument
It is a written contract for the payment of money
which is intended as a substitute for money and
passes from one person to another as money, in
such a manner as to give a holder in due course the
right to hold the instrument free from defenses
available to prior parties (Sundiang Sr. & Aquino,
2011).
Laws governing Negotiable Instruments
1. NIL - For instruments which meet the requisites
of negotiability.
2. New Civil Code (NCC) – Applies suppletorily in
cases of assignment and demand for payment of
an NIL.
3. Code of Commerce (CC) – Applies suppletorily to
NIL in cases of crossed checks.
Characteristics or features of a negotiable
instrument
1. Negotiability – The note may pass from hand to
hand similar to money so as to give the holder
in due course (HIDC) the right to hold the
instrument and collect the sum payable for
himself free from any infirmity in the
instrument or defect in the title of any of the
prior parties or defenses available to them
among themselves.
2. Accumulation of secondary contracts– A
characteristic of a negotiable instrument where
additional parties become involved as they are
transferred from one person to another. Once
an instrument is issued, additional parties can
become involved (De Leon, 2010).
Incidents in the life of a negotiable instrument
1. Issue – first delivery of the instrument to the
payee;
25
2. Negotiation – transfer from one person to
another so as to constitute the transferee a
holder;
3. Presentment for acceptance (in certain kinds of
Bills of Exchange) (NIL., Sec. 143)
4. Acceptance – written assent of the drawee to
the order;
5. Dishonor by non-acceptance – refusal to accept
by the drawee;
6. Presentment for payment – the instrument is
shown to the maker or drawee/ acceptor for
him to pay;
7. Dishonor by non-payment – refusal to pay by
the maker or drawee/ acceptor
8. Notice of dishonor – notice to the persons
secondarily liable that the maker or the
drawee/ acceptor refused to pay or to accept
instrument;
9. Protest
10. Discharge
Negotiable Instruments are not legal tender
Negotiable instruments are neither money nor legal
tender; they are mere substitutes for money (NCBA,
Sec. 60).
GR: The delivery of a negotiable instrument does
not by itself produce the effect of payment (Roman
Catholic Bishop of Malolos vs. Intermediate Appellate
Court, G.R. No. 72110, November 16, 1990).
XPNs: Negotiable instruments shall produce the
effect of payment when:
1. When they have been cashed, or when through
the fault of the creditor they have been
impaired (NCC, Art. 1249).
2. If a check representing demand deposit has
been cleared and credited to the account of the
creditor, such shall be equivalent to delivery to
the creditor of cash (NCBA, Sec. 60).
Q: Negotiable instruments are used as
substitutes for money, which means - (2012 Bar)
A: When negotiated, negotiable instruments can be
used to pay indebtedness.
FORMS AND INTERPRETATIONS
Rules governing the use of phrases in the
Negotiable Instruments
1. As to promissory note
a. The word “promise” need not be used. Any
expression equivalent to a promise is
sufficient.
b. Mere acknowledgment of a debt is not a
promissory note.
 MERCANTILE LAW
c. Language used must indicate a written Manner of Can be Can be
undertaking to pay. Transfer transferred by transferred only
negotiation or by assignment.
2. As to bill of exchange by assignment.
a. It must contain an order for payment as
distinguished from a mere request. Status of The transferee The transferee
b. The order is not invalidated because it Transferee can be a holder can never be a
contains words of civility. Thus, insertion of in due course holder in due
polite words like “please” does not alter the if all the course but
character of the instrument; as long as the requirements remains to be
language expresses the drawer’s will that of Section 52 an assignee.
the money be paid. of the NIL are
complied with.
Rules of construction in case of ambiguities in a
Negotiable Instrument Defenses All defenses
Available available to
1. Words prevail over figures. prior parties
2. If date from which interest is to run is may be raised
unspecified, interest runs from the date of the against the last
instrument; if undated, from the issue thereof. transferee.
3. If undated, instrument is considered dated as of (Sundiang Sr. &
the time it was issued. Aquino, 2014).
4. Written provisions prevail over printed.
5. If there is doubt whether it is a bill or note, the
holder may treat it as either at his election. Requisites of Negotiability
6. When not clear in what capacity it was signed,
deemed signed as an indorser. An instrument to be negotiable must conform to the
7. When two or more persons signed a negotiable following requirements: (WU-POA)
instrument stating "I promise to pay,"in case of
liability, they shall be deemed to be jointly and 1. It must be in Writing and signed by the maker or
severally liable (NIL, Sec. 17). drawer;
2. Must contain an Unconditional promise or order
REQUISITES OF NEGOTIABILITY to pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
Factors to determine the negotiability (FRI) determinable future time;
4. Must be payable to Order or to bearer; and
1. Words that appear on the Face of negotiable 5. Where the instrument is Addressed to a drawee,
instrument he must be named or otherwise indicated therein
2. Requirements enumerated in Section 1 of NIL with reasonable certainty (NIL, Sec.1).
3. Intention of the parties by considering the
whole of the instrument. NOTE: The requirements stated in Sec. 1 must
appear on the face of the instrument otherwise the
Negotiable Instrument vs. Non-negotiable instrument would not be negotiable.
Instrument
A NI need not follow the exact language of NIL, as
NON- long as the terms are sufficient which clearly
NEGOTIABLE indicate an intention to conform to the
BASIS NEGOTIABLE
INSTRUMENT requirements of the law (NIL, Sec. 10).
INSTRUMENT
Governing NIL. The Civil Code
Law or pertinent The instrument must be in writing
special laws
It must be reduced in writing or in tangible form.
should apply
The negotiability or non-negotiability of an
(GSIS v. CA,
instrument is determined from the writing on the
G.R. No. L-
face of the instrument itself (De Leon, 2010).
40824, February
23, 1989). The instrument must be signed by the maker or
drawer

It is placed at the lower right hand corner of the

26
 NEGOTIABLE INSTRUMENTS LAW
instrument. Nonetheless, it may appear in any part
of the instrument whether at the top, middle or
bottom or at the margin (De Leon, 2010).
However, where a signature is so placed upon the
instrument that it is not clear in what capacity the
person making the same intended to sign, he is to be
deemed an indorser (NIL, Sec. 17 [f]).
NOTE: The signature is valid and binding as long as
it appears that a person intended to make the
instrument his own. The signature is prima facie
evidence of a person’s intention to be bound as
either maker or drawer.
Unconditional promise or order to pay
An unqualified order or promise to pay is
unconditional though coupled with:
1. An indication of particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount; or
2. A statement of the transaction which gave rise
to the instrument. But an order or promise to
pay out of a particular fund is conditional (NIL,
Sec 3).
The word “promise” or “order” need not appear in
the instrument to satisfy the requirements of
Section 1(b) of the NIL (Sundiang Sr. & Aquino,
2014). The promise or order to pay must not be
subject to any condition or contingency. An
instrument payable upon a contingency is not
negotiable even if the condition thereon has been
fulfilled.
Certainty as to sum
The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
(ISDEA)
1. With Interest; or
2. By Stated installments; or
3. By stated installments, with a provision upon
Default in payment of any installment or of
interest, the whole shall become due (
acceleration clause);
4. With Exchange, whether at a fixed rate or at the
current rate; or
5. With cost of collection or an Attorney’s fees, in
case payment shall not be made at maturity
(NIL, Sec. 2).
A sum is certain within the contemplation of Section
1(b) of the NIL if the amount that is to be
unconditionally paid by the maker or drawee can be
determined on the face of the instrument even if it
27
requires mathematical computation (Sundiang Sr. &
Aquino, 2014).
Payment with interest
Interest at fixed rate or at increased or reduced rate
will not destroy negotiability because the presence
of such interest does not make uncertain the sum
payable. In the absence of a date as to which interest
is to run, it shall be from the date of instrument, or
in the absence thereof, at the date of issue. In the
absence of interest rate, it shall be the legal rate.
Payment by installment
Payment by installment is certain if the dates of each
installment are fixed and the amount to be paid for
each installment is stated (NIL, Sec. 2; Sundiang Sr. &
Aquino, 2009).
Q: Discuss the negotiability or non-negotiability:
Manila, June 3, 1993
P10,000.00
For value received, I promise to pay Sergio Dee
or order the sum of P10,000.00 in five (5)
installments, with the first installment payable
on October 5, 1993 and the other installments
on or before the fifth day of the succeeding
month or thereafter.
(Sgd.) Lito Villa (1993 Bar)
A: The instrument is negotiable because it complied
with the requirements provided by section 1 of the
NIL. The fact that it is payable in installments does
not make the instrument non-negotiable as long as
the dates of each installment is fixed or at least
determinable and the amount to be paid for each
installment is stated (NIL, Sec. 2[b]).
Payment with an acceleration clause
Acceleration clause is a provision, that upon default
in payment of any installment or interest, the whole
shall become due (NIL, Sec.2[c]).
1. Negotiable – If the option to accelerate the
maturity is on the maker, whether such option
is absolute or conditional.
2. Negotiable – Where acceleration is at the option
of the holder and can only be exercised upon the
happening of the specified event.
3. Not negotiable – Where the holder’s right to
accelerate is unconditional, the time of payment
is rendered uncertain.
Extension Clause
 MERCANTILE LAW
Extension Clauses are provisions extending the time
of payment.
GR: An extension clause does not affect the
negotiability of the instrument.
XPN: Where a note with a fixed maturity provides
that the maker has the option to extend time of
payment until the happening of a contingency, the
date is uncertain and the instrument is non-
negotiable. The time for payment may never come
at all.
NOTE: If the right is given to the holder, the time of
payment need not contain a new fixed maturity date
or the length of extension does not have to be
specified. The reason is that the holder is free to
demand payment at maturity date or any time after
said date. On the other hand, if the obligor is the one
given the right to extend payment, the interest of the
extension must be specified to keep the instrument
negotiable, for of the right to extend is without limit,
it cannot be determined with absolute certainty
when the holder will have the absolute right to be
paid. Thus, where the maker of the note is given the
right to extend the time of payment “for no longer
than a reasonable time” after maturity date, the note
is non-negotiable because the definite time
requirement is not met (De Leon, 2010)
Sum to be paid with exchange
The exchange is the charge for the expense of
providing funds at the place where the instrument
is payable to cover such instrument which is issued
at another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills (De
Leon, 2010).
Inland Bill of Exchange vs. Foreign Bill of
Exchange
An inland bill of exchange is one which is, or on its
face purports to be, both drawn and payable within
the Philippines. Any other bill is a foreign bill.
Unless the contrary appears on the face of the bill,
the holder may treat it as an inland bill (NIL, Sec.
109).
Sum to be paid with costs of collection and/or
attorney’s fees
It does not affect the certainty of the amount
payable at maturity since the increase in the amount
due, even if uncertain, takes place after maturity
when the instrument ceases to be negotiable in the
full commercial sense (De Leon, 2010).
28
Payable in Philippine Peso
The “money” referred into may be our legal tender
or foreign currency. 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 v Zulueta, G.R. No., L-7271,
August 30, 1957).
NOTE: An agreement to pay in foreign currency is
valid (RA 8183).
Effect if a bill or note is payable other than in
money
GR: The note or bill must be payable in money. If
payable in goods, wares, or merchandise, or in
property, the same is not negotiable.
XPNs: Negotiability is not affected if the note
contains an additional provision which: (SECo Law)
1. Authorizes the sale of collateral Securities in
case the instrument be not paid at maturity; or
2. Gives the holder an Election to require
something to be done in lieu of payment of
money; or
3. Authorizes a Confession of judgment if the
instrument be not paid at maturity; or
4. Waives the benefit of any Law intended for the
advantage or protection of the obligor (NIL, Sec.
5).
Payable on demand or at a fixed or determinable
future time
1. Payable on demand – The holder may call for
payment any time, likewise, the maker may also
pay any time and the refusal of the holder to
accept payment shall stop the running of
interest should there be any, but obligation to
pay the note subsist.
An instrument is payable on demand:
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed
(NIL, Sec 7).
c. Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand (ibid).
2. At a fixed time – A term or time instrument is
payable only upon the arrival of the time for
payment.
3. At a determinable future time-An instrument is
payable at a determinable future time which is
expressed to be payable:
 NEGOTIABLE INSTRUMENTS LAW
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future
time specified therein; or
c. On or at a fixed period after the occurrence
of a specified event which is certain to
happen, though the time of happening be
uncertain (NIL, Sec. 4).
Indication of particular fund for reimbursement
vs. Indication of particular fund for payment
was known to the person making it so payable;
(e.g. Pay to John Doe or order)
4. When the name of the Payee does not purport
to be the name of any person; (Pay to cash)
5. When the only or the Last indorsement is an
indorsement in blank (NIL, Sec 9).
Illustration:
Back of NI (indorsement)

FUND FOR FUND FOR PAYMENT Pay to A Sgd. P

REIMBURSEMENT
Pay to B Sgd. A
The drawee pays the There is only one act -
payee from his own the drawee pays Sgd. B
funds. directly from the
The drawee pays particular fund A promissory note which does not have the words
himself from the indicated. "or order" or "or bearer" will render the promissory
particular fund note non-negotiable, and therefore the note can still
indicated. be assigned and the maker made liable. (2012 Bar)
Particular fund Particular fund
indicated is not the indicated is the direct Q:
direct source of source of payment. A. MP bought a used cell phone from JR. JR
payment. preferred cash but MP is a friend so JR accepted
Instrument is Instrument is non- MR‘s promissory note for P10,000. JR thought of
negotiable. negotiable. The fund converting the note into cash by endorsing it to
specified is the direct his brother KR. The promissory note is a piece of
source of payment; paper with the following hand-printed notation:
therefore, it is subject ― MP WILL PAY JR TEN THOUSAND PESOS IN
to the availability of PAYMENT FOR HIS CELLPHONE 1 WEEK FROM
fund, hence conditional. TODAY. Below this notation MP‘s signature with
(Sundiang Sr. & Aquino, ―8/1/00 next to it, indicating the date of the
2014). promissory note. When JR presented MP‘s note
to KR, the latter said it was not a negotiable
instrument under the law and so could not be a
Payable to order valid substitute for cash. JR took the opposite
view, insisting on the note‘s negotiability. You
The instrument is payable to order where it is are asked to referee. Which of the opposing
drawn payable to the order of a specified person or views is correct?
to him or to his order. It may be drawn payable to
the order of: B. TH is an indorsee of a promissory note that
simply states: ― PAY TO JUAN TAN OR ORDER
1. A Payee who is not a maker, drawer, or drawee;
400 PESOS. The note has no date, no place of
2. The Drawer or maker; or payment and no consideration mentioned. It
3. The Drawee; or
was signed by MK and written under his
4. Two or more payees Jointly; or
letterhead specifying the address, which
5. One or some of Several payees; or happens to be his residence. TH accepted the
6. The Holder of an office for the time being (Sec.
promissory note as payment for services
8, NIL).
rendered to SH, who in turn received the note
from Juan Tan as payment for a prepaid cell
Payable to bearer (ENaF PaLa) phone card worth 450 pesos. The payee
acknowledged having received the note on
1. When it is Expressed to be so payable; (e.g. I
August 1, 2000. A Bar reviewee had told TH, who
promise to pay to bearer P10,000.00) happens to be your friend, that TH is not a
2. When it is payable to a person Named therein
holder in due course under Article 52 of the
or bearer; (e.g. Pay to P or bearer P10,000.00)
Negotiable Instruments Law (Act 2031) and
3. When it is payable to the order of a Fictitious therefore does not enjoy the rights and
person or non-existing person, and such fact
protection under the statute. TH asks for our

29
 MERCANTILE LAW
advice specifically in connection with the note
being undated and not mentioning a place of
payment and any consideration. What would
your advice be? (2000 Bar)
A:
a. The view of KR is correct. The note is payable to
a specific person hence it is not negotiable. The
law provides that for an instrument to be
negotiable, it must comply with the
requirements of section 1 of the NIL pertaining
to the part that a note must be payable to order
or bearer. In the given case, there were no
words of negotiability and it is silent as to
whether it is payable to order or bearer. Hence,
the instrument is non-negotiable.
b. The place and date are not essential to the
negotiability of the instrument except in certain
cases when [a] the date is necessary say to
determine when the note is due; or [b] the
interest is to run when the payment of interest
has been stipulated or whether the holder is
barred by the statute of limitations from
enforcing the note. The fact that there is no
mention of consideration is not essential
because it is presumed.
Difference between having a check payable to a
fictitious payee and payable to a specified payee
If a check is payable to a specified payee, it is an
order instrument, which requires indorsement
from the payee or holder before it may be validly
negotiated; but it may nevertheless be considered
as a bearer instrument if it is payable to the order of
a fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus,
checks issued to “Prinsipe Abante” or “Si Malakas at
si Maganda,” who are well-known characters in
Philippine mythology, are bearer instruments
because the named payees are fictitious and non-
existent (De Leon, 2010).
Fictitious-Payee rule
The fictitious-payee rule contemplates that the
payee is fictitious or not intended to be true
recipient of the proceeds. The check is considered a
bearer instrument negotiable by delivery alone. The
underlying theory is that the maker of the check
knew that the fictitious payee cannot indorse the
instrument so that he must have intended for it to
be negotiated by mere delivery. (PNB v. Rodriguez,
G.R. No. 170325, September 26, 2008)
GR: In case of controversy, the drawer is liable and
the drawee bank is absolved from liability.
XPN: When there is commercial bad faith,
30
whereby the drawee bank acts dishonestly and is a
party to the fraudulent scheme. The check is
deemed payable to order, and consequently, the
drawee bank bears the loss (Ibid).
When drawee must be named with reasonable
certainty
1. In a bill of exchange, the drawee must be named
or otherwise designated with reasonable
certainty (NIL, Sec. 1).
2. A bill may be addressed to two or more drawees
jointly, but not to two or more drawees in the
alternative or in succession (NIL, Sec. 127). Eg.
An instrument may be addressed “to A and B”
but not “to A or B”.
3. An instrument payable “to the order of the
bearer” has been held to be an instrument
payable to “order” (10 C.J.S. 575-576).
Q: Indicate and explain whether the promissory
note is negotiable or non-negotiable.
a. I promise to pay A or bearer Php100,000.00
from my inheritance which I will get after
the death of my father.
b. I promise to pay A or bearer Php100,000
plus the interest rate of ninety (90) – day
treasury bills.
c. I promise to pay A or bearer the sum of
Php100,000 if A passes the 2012 bar exams.
d. I promise to pay A or bearer the sum of
Php100.000 on or before December 30,
2012.
e. I promise to pay A or bearer the sum of
Php100,000. (2012 Bar)
A:
a. NON-NEGOTIABLE. It is based on a
contingency and not an unconditional promise
or order to pay sum certain in money. (NIL, Sec.
1 [b])
b. NEGOTIABLE. The instrument is negotiable
despite the inclusion of interest since the sum
to be paid with said interest is still certain. (NIL,
Sec. 2 [a])
c. NON-NEGOTIABLE. The instrument is not an
unconditional promise or order to pay a sum
certain in money since payment depends upon
the happening of an event. (NIL, Sec. 1 (b])
d. NEGOTIABLE. There is certainty in payment
since it is payable on or before a fixed or
determinable future time specified. (NIL, Sec.
4(b])
e. NEGOTIABLE. It is a bearer instrument that is
payable upon demand. (NIL, Sec. 7 [b] and Sec. 9
[b]).
Q: Antonio issued the following instrument:
 NEGOTIABLE INSTRUMENTS LAW
August 10, 2013
Makati City
P100,000.00
Sixty days after date, I promise to pay Bobby or
his designated representative the sum of ONE
HUNDRED THOUSAND PESOS (P100,000.00)
from my BPI Acct. No. 1234 if, by this due date,
the sun still sets in the west to usher in the
evening and rises in the east the following
morning to welcome the day.
(Sgd.) Antonio Reyes
Explain each requirement of negotiability
present or absent in the instrument. (2013 Bar)
A: The instrument contains a promise to pay and
was signed by the maker, Antonio Reyes (NIL, Sec.
1[a]).
The promise to pay is unconditional insofar as the
reference to the setting of the sun in the west in the
evening and its rising in the east in the morning are
concerned. These are certain to happen (NIL, Sec.
4[c). The promise to pay is conditional, because the
money will be taken from a particular fund, the BPI
Account No. 1234. The instrument contains a
promise to pay a sum certain in money, P100,000.00
. The money is payable at a determinable future
time, sixty days after August 10, 2013. The
instrument is not payable to order or to bearer
Provisions that do not affect the negotiability of
an instrument
1. Omission of date
2. Non-specification of value given or that any
value had been given
3. Non-specification of place where it is drawn or
payable
4. Bears a seal
5. Designation of particular kind of currency in
which payment is to be made. (Sec. 6, NIL.)
Q: Which of the following stipulations or
features of a promissory note (PN) affect or do
not affect its negotiability, assuming that the PN
is otherwise negotiable? Indicate your answer
by writing the paragraph number of the
stipulation or feature of the PN as shown below
and your corresponding answer, either
―Affected or ―Not affected. Explain.
a. The date of the PN is ―February 30, 2002.
b. The PN bears interest payable on the last
day of each calendar quarter at a rate equal
to five percent (5%) above the then
31
prevailing 91-day Treasury Bill rate as
published at the beginning of such calendar
quarter.
c. The PN gives the maker the option to make
payment either in money or in quantity of
palay or equivalent value.
d. The PN gives the holder the option either to
require payment in money or to require the
maker to serve as the bodyguard or escort of
the holder for 30 days. (2002 Bar)
A:
a. NOT AFFECTED. Date is not one of the
requirements for negotiability therefore it is
not essential except when the date is necessary
to determine when the note is due
b. NOT AFFECTED. An instrument payable with
interest determinable at a fixed time is
negotiable. The law provides under section 2a
of the NIL, a sum is still considered as certain
although it is to be paid within interest. It does
not make the promise unconditional
c. AFFECTED. An option given to the maker
makes the promise conditional
d. NOT AFFECTED. An option given to the holder
does not make the promise conditional
Q: B borrowed Php1 million from L and offered
to him his BMW car worth Php 1 Million as
collateral. B then executed a promissory note
that reads: “I, B, promise to pay L or bearer the
amount of Php1 Million and to keep my BMW car
(loan collateral) free from any other
encumbrance. Signed, B.” Is this note
negotiable? (2011 Bar)
A: NO, since it contains a promise to do an act in
addition to the payment of money.
NOTE: What will not affect the negotiability of the
instrument is an additional provision which gives an
election to require something to be done in lieu of
payment of money.
Q: A writes a promissory note in favor of his
creditor, B. It says: “Subject to my option, I
promise to pay B Php1 Million or his order or
give Php1 Million worth of cement or to
authorize him to sell my house worth Php1
Million. Signed, A.” Is the note negotiable? (2011
Bar)
A: NO, because the exercise of the option to pay lies
with A, the maker and debtor.
NOTE: In order not to affect the negotiability of the
instrument, the option must be with the
holder/creditor.
 MERCANTILE LAW

Q: Distinguish a negotiable document from a negotiable instrument (2005 Bar)

BASIS NEGOTIABLE INSTRUMENT NEGOTIABLE DOCUMENT

A written contract which is intended as Held to be non-negotiable in the technical
Substitute for
a substitute for money like promissory sense because they do not have the
money
notes and bill of exchange. requisites under the NIL.
It has various forms such as but not limited
It may either be a bill of exchange or a
Forms to bill of lading, stock certificates,
promissory note.
warehouse receipts and pawn tickets.
The subject matter is a sum certain in
Subject Matter Actually stands for the goods it covers.
money.
Capability of Capable of accumulating secondary Not capable of accumulating secondary
Accumulating contracts resulting from indorsements contracts resulting from indorsements at
Secondary Contracts at the back thereof. the back thereof.

KINDS OF NEGOTIABLE INSTRUMENTS A bill of exchange itself does not operate as an

Kinds of negotiable instruments
1. Promissory notes (PN) – An unconditional
promise in writing made by one person to
another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable future
time, a sum certain in money to order or to
bearer (NIL, Sec. 184).
assignment of the funds in the hands of the drawee
available for the payment thereof, and the drawee is
not liable on the bill unless and until he accepts the
same (NIL, Sec. 127).
A bill of exchange may be addressed to two or more
drawees jointly, whether partners or not; but not to
two or more drawees in the alternative or in
succession (NIL, Sec. 128).

2. Bill of exchange (BOE) – An unconditional order
in writing addressed by one person to another
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer (NIL, Sec. 126).
3. Check – A bill of exchange drawn on a bank
payable on demand (NIL, Sec. 185).
Promissory note vs. Bill of exchange
When a bill of exchange may be treated as
promissory note (2015 Bar)
1. Where in a bill the drawer and the drawee are
the same person (NIL, Sec. 130)
2. The drawee is a fictitious person (NIL, Sec. 130)
3. The drawee does not have the capacity to
contract (NIL, Sec. 130)
4. When the instrument is so ambiguous that
there is doubt whether it is a bill or a note, the
holder may treat it either at his election (NIL,
Sec. 17[e])

PROMISSORY BILL OF Q: State and explain whether the following are

BASIS NOTE EXCHANGE negotiable instruments under the Negotiable
Undertaking Promise to pay Order to pay Instruments Law:
3 parties (upon
As to number of a. Postal Money Order
2 parties acceptance of the
original parties b. A certificate of time deposit which states
drawee)
Drawer is “This is to certify that bearer has deposited
As to liability of Maker is in this bank the sum of FOUR THOUSAND
secondarily
parties primarily liable PESOS (P4,000) only, repayable to the
liable
2 presentments depositor 200 days after date.”
Only 1 c. Letters of Credit
As to number of (for acceptance
presentment d. Warehouse Receipts
presentments and for payment)
(for payment) is e. Treasury warrants payable from a specific
needed are generally
needed fund
needed

32
 NEGOTIABLE INSTRUMENTS LAW
f. Certificate of Indebtedness under Sec. 1 of the NIL. It is merely considered
g. Electronic messages as a negotiable document that does not result in
the accumulation of contracts.
e. A treasury warrant require appropriations
A:
from the national government which means
a. Postal money order is not a negotiable
that the particular fund may or may not exists
instrument because, as held in Phil. Education
which renders it conditional, thereby non-
Co. vs Soriano, there are many restrictions
negotiable.
which make them incompatible with concepts
f. Not negotiable. A certificate of indebtedness
of negotiable instruments, thereby making the
merely acknowledges to pay a sum of money to
order conditional, in contrast to Sec. 1 of the
a specified persons or entity. Since a certificate
NIL. Furthermore, such is governed by postal
of indebtedness which is not payable to order
rules and regulation and it may only be
or bearer but is payable to a specific person is
negotiated once.
not negotiable, the assignee takes it subject to
b. The certificate of time deposit is a negotiable
the defect in the title of the assignor. Thus,
instrument because it is an acknowledgement
when the person who signed the deed of
in writing by the bank of the amount of deposit
assignment was not authorized by the board of
with a promise to repay the same to the
directors, the assignor had no title to convey to
depositor or bearer thereof at a specific time
the assignee (Traders Royal Bank vs. Court of
(Caltex (Philippines), Inc. vs. Court of Appeals
Appeals, Filriters Guaranty Assurance
and Security Bank and Trust Company, G.R. No.
Corporation and Central Bank of the
97753, August 10, 1992).
Philippines, G.R. No. 93397, March 3, 1997).
c. A letter of credit is not negotiable because it is
g. The electronic messages are not signed by the
generally conditional and has limited
investor-clients as supposed drawers of a bill
negotiability - it is issued in favor of a specific
of exchange; they do not contain an
person. But the Supreme Court held in Lee vs.
unconditional order to pay a sum certain in
Court of Appeals, that the drafts issued in
money as the payment is supposed to come
connection with the letters of credit are
from a specific fund or account of the investor-
negotiable instruments.
clients; and, they are not payable to order or
d. A warehouse receipt is not a negotiable
bearer but to a specifically designated third
instrument because the obligation of a
party. Thus, the electronic messages are not
warehouseman is not to pay but to deliver the
bills of exchange (Hongkong & Shanghai
goods under the warehouse receipt which fails
Banking Corporation v. CIR, G.R. Nos. 166018 &
to comply with the requirements set forth
167728, 04 June 2014).

Parties to a negotiable instrument and their liabilities

BASIS PARTIES FUNCTION LIABILITY

One who makes the promise and signs Primarily liable; cannot limit his
Maker
the instrument. liability.
PN
The party to whom payment is
Payee
originally payable.
Secondarily liable, except when
The person who issues and draws drawee refused to accept; can limit
Drawer
the bill. his liability by putting “without
recourse.”
The party upon whom the bill is
BOE Drawee Not liable until he becomes acceptor.
drawn.
The party to whom payment is The party to whom payment is
Payee
originally payable. originally payable.
The acceptor is the drawee who
Acceptor Primarily liable.
accepts the bill.

Referee in case of need BOE is dishonored by non-acceptance or non-

payment. It is the option of the holder to refer to the
Referee in case of need is the person named by the referee in case of need or not as he may see fit (NIL,
drawer or indorser in the Negotiable Instrument as Sec. 131).
the one to whom the holder may resort in case the

33
 MERCANTILE LAW
Acceptance of the bill of exchange by the drawee
is not an important requisite for the
instrument’s negotiability
The acceptance of a BOE is not important in the
determination of its negotiability. The nature of
acceptance is important only in the determination
of the kind of liabilities of the parties involved
(Philippine Bank of Commerce v. Aruego, G.R. Nos. L-
25836-37, Jan. 31, 1981).
COMPLETION AND DELIVERY
Steps in the issuance of a negotiable instrument
1. The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of
NIL.
2. Delivery - The transfer of possession, actual or
constructive, from one person to another (NIL,
Sec. 191), with the intent to transfer title to
payee and recognize him as holder thereof.
Q: Jun was about to leave for a business trip. As
his usual practice, he signed several blank
checks. He instructed Ruth, his secretary, to fill
them as payment for his obligations. Ruth filled
one check with her name as payee, placed
P30,000.00 thereon, endorsed and delivered it
to Marie. She accepted the check in good faith as
payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did and
apologized to Jun. Immediately he directed the
drawee bank to dishonor the check. When
Marie encashed the check it was dishonored.
a. Is Jun liable to Marie?
b. Supposing the check was stolen while in
Ruth's possession and a thief filled the blank
check, endorsed and delivered it to Marie in
payment for the goods he purchased from
her, is Jun liable to Marie if the check is
dishonored? (2006 Bar)
A:
a. YES. When a delivered instrument is wanting in
any material particular (NIL, Sec. 14), the
person in possession thereof has prima facie
authority to complete it by filling up the blanks.
But if it was not filled up strictly in accordance
with the authority given, it cannot be enforced
against any person who became party thereto
prior to its completion. However, if it is
negotiated to a holder in due course, then it is
valid and effective for all purpose in his hands
because the defense of not filling it up in
accordance with the authority given is only a
personal defense that cannot be raised against
a holder in due course. Based on the foregoing,
34
Jun is liable to Marie, being a holder in due
course, for the incomplete instrument which he
delivered to Ruth.
b. NO. The check is an incomplete instrument not
delivered in contemplation of law. An
incomplete instrument not delivered is not a
valid contract in the hands of any holder as
against any person whose signature was placed
thereon before delivery. As such, Jun is not
liable to Marie since he does not assume any
responsibility whatsoever upon the said check
(NIL, Sec. 15)
Various situations involving negotiable
instruments
1. Incomplete instrument
a. Delivered
i. With forgery and alteration
ii. Without forgery and alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration
2. Complete instrument
a. Delivered
i. With forgery and alteration
ii. Without forgery and alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration
NOTE: If an instrument is complete and delivered
without forgery and alteration, all parties are
bound.
INSERTION OF DATE
GR: The date is not essential to the negotiability of
the instrument (not one of the requirements under
Sec. 1).
XPNs: Date is important to determine maturity:
1. Where the instrument is payable within a
specified period after date, or after sight.
2. When the instrument is payable on demand,
date is necessary to determine whether the
instrument was presented within a reasonable
time from issue, or from the last negotiation.
3. When the instrument is an interest-bearing one,
to determine when the interest starts to run.
Insertion of a wrong date
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in
due course, but as to a HIDC, the date so inserted is
to be regarded as the true date (ibid.).
 NEGOTIABLE INSTRUMENTS LAW
With respect to the person who inserted the wrong
date, however, the instrument is avoided (Bank of
Houston v. Day, 145 Mo. Appl. 410, 122 SW 756).
Ante-dating or post-dating an instrument
If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided
it is not done for illegal or fraudulent purpose (NIL,
Sec. 12).
Q: Can a bill of exchange or a promissory note
qualify as a negotiable instrument if:
a. it is not dated;
b. or the day and the month, but not the year of
its maturity, is given; or
c. it is payable to ―cash
d. it names two alternative drawees (1997
Bar)
A:
a. YES. Date is not an essential requirement for
the negotiability of an instrument as provided
for in section 1 of the NIL.
b. NO. Since the year is not determined, the time
for payment is not determinable.
c. YES. When the name of the payee does not
purport to be the name of any person, the law
provides in section 9d of the NIL that the maker
or drawer intends the same to be payable to
bearer, hence the instrument qualifies as a
negotiable instrument.
d. NO. When the bill is addressed to two or more
payees in the alternative, the law provides in
section 128 of the NIL that it is conditional and
therefore non-negotiable.
Holder may insert the date in an instrument in
the following instances
1. Where an instrument expressed to be payable
at a fixed period after date is issued undated; or
2. Where the acceptance of an instrument payable
at a fixed period after sight is undated (NIL, Sec.
13).
COMPLETION OF BLANKS
Meaning of a material particular
It is any particular proper to be inserted in a
negotiable instrument to make it complete.
INCOMPLETE BUT DELIVERED INSTRUMENTS
(NIL, SEC. 14)
Prima facie authority to fill up the blanks
35
A signature on a blank paper delivered by the
person making the signature in order that the paper
may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as
such for any amount. In order, however, that any
such instrument when completed may be enforced
against any person who became a party thereto
prior to its completion, it must be filled up strictly in
accordance with the authority given and within a
reasonable time (NIL, Sec. 14).
NOTE: While under the law, the one in possession
had a prima facie authority to complete the check,
such prima facie authority does not extend to its
use (i.e., subsequent transfer or negotiation) once
the check is completed (Patrimonio v. Gutierrez,
G.R. No. 187769, June 4, 2014).
Q: To secure certain advances from the bank, X
and Y executed several promissory notes. When
the obligation became due, X and Y failed to pay
the same despite repeated demands. To evade
their liability, they claimed that they signed the
promissory notes in blank and they had not
received the value of said notes. Is their defense
tenable?
A: NO. It is no defense that the promissory notes
were signed in blank as Section 14 of the Negotiable
Instruments Law concedes the prima facie authority
of the person in possession of negotiable
instruments to fill in the blanks (Quirino Gonzales
Logging Concessionaire vs. Court of Appeals, G.R. No.
126568, April 30, 2003).
Effect if a completed instrument was negotiated
to a holder in due course
After completion, the completed instrument which
was subsequently negotiated to an HIDC, is valid
and effectual for all purposes in his hands, and he
may enforce it as if it had been filled up strictly in
accordance with the authority given and within a
reasonable time (ibid).
NOTE: Hence, the defense that the blanks were
filled up beyond the authority given and/ or beyond
the reasonable time, is not available as against a
HIDC. This defense is merely a personal one.
Enforcement of an incomplete but delivered
instrument
In order that any such instrument when completed
may be enforced against any person who became a
party thereto prior to its completion, it must be
filled up strictly in accordance with the authority
given and within reasonable time.
 MERCANTILE LAW
If such instrument, after completion, is negotiated to
a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the
authority given and within reasonable time (Ibid).
Non-delivery of complete instrument is a personal
defense.
Q: Lorenzo signed several blank checks
instructing Nicky, his secretary, to fill them as
payment for his obligations. Nicky filled one
check with her name as payee, placed
P30,000.00 thereon, endorsed and delivered it
to Evelyn as payment for goods the latter
delivered to the former. When Lorenzo found
out about the transaction, he directed the
drawee bank to dishonor the check. When
Evelyn encashed the check, it was dishonored. Is
Lorenzo liable to Evelyn? (2006 Bar)
A: YES. This covers the delivery of an incomplete
instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was
prima facie authority on the part of Nicky to fill-up
any of the material particulars thereof. Having done
so, and when it is first completed before it is
negotiated to an HIDC like Evelyn, it is valid for all
purposes, and she may enforce it within a
reasonable time, as if it had been filled up strictly in
accordance with the authority given.
Q: AX, a businessman, was preparing for a
business trip abroad. As he usually did in the
past, he signed several checks in blank and
entrusted them to his secretary with instruction
to safeguard them and fill them out only when
required to pay accounts during his absence. OB,
his secretary, filled out one of the checks by
placing her name as the payee. She filled out the
amount, endorsed and delivered the check to
KC, who accepted it in good faith for payment of
gems that KC sold to OB. Later, OB told AX of
what she did with regrets. AX timely directed the
bank to dishonor the check. Could AX be held
liable to KC? Answer and reason briefly. (2004
Bar)
A: YES. AX could be held liable to KC. This is a case
of an incomplete check, which has been delivered.
Under Section 14 of the NIL, KC, as a holder in due
course, can enforce payment of the check as if it had
been filled up strictly in accordance with the
authority given by AX to OB and within a reasonable
time.
INCOMPLETE AND UNDELIVERED
INSTRUMENTS
(NIL, SEC. 15)
36
Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands
of any holder, as against any person whose
signature was placed thereon before delivery (NIL,
Sec. 15).
Non-delivery of an incomplete instrument is a real
defense which may be set up even against a holder
in due course.
Enforcement of the instrument against the party
whose signature was placed after delivery
The instrument can be validly enforced against the
party whose signature was placed after delivery like
an indorser because the indorser warrants the
instrument to be genuine and in all respect what it
purports to be.
Q:
A. PN makes a promissory note for P5,000.00,
but leaves the name of the payee in blank
because he wanted to verify its correct
spelling first. He mindlessly left the note on
top of his desk at the end of the workday.
When he returned the following morning,
the note was missing. It turned up later
when X presented it to PN for payment.
Before X, T who turned out to have filched
the note from PN’s office, had endorsed the
note after inserting his own name in the
blank space as the payee. PN dishonored the
note, contending that he did not authorize
its completion and delivery. But X said he
had no participation in, or knowledge about
the pilferage and alteration of the note and
therefore he enjoys the rights of a holder in
due course under the Negotiable
Instruments Law. Who is correct and why?
B. Can the payee in a promissory note be a
“holder in due course” within the meaning of
the Negotiable Instruments Law (Act 2031)?
Explain your answer (2000 Bar)
A:
A. Since the negotiable instrument is still
incomplete and has not yet been delivered, PN
is correct in dishonoring the said instrument.
Sec. 15 of Act 2031 provides that where an
incomplete instrument has not been delivered,
it will not, if completed and negotiated without
authority, be a valid contract in the hands of any
holder, as against any person whose signature
was placed thereon before delivery. Thus,
under this section, it is a real defense that can
even be interposed against a holder in due
course.
 NEGOTIABLE INSTRUMENTS LAW
B. A payee in a promissory note cannot be a
“holder in due course” within the meaning of
the Negotiable Instrument Law, because a
payee is an immediate party in relation to the
maker. The payee is subject to whatever
defenses, real or personal, available to the
maker of the promissory note.
COMPLETE BUT UNDELIVERED
INSTRUMENTS
(SEC. 16)
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL,
Sec. 16). Delivery is essential to the validity of any
negotiable instrument (Sundiang Sr. & Aquino,
2009).
Where a debtor who drew two checks payable to his
creditor never delivered the checks to his creditor
and a third party was able to collect the proceeds of
the checks by forging the endorsement of the
creditor as payee, the creditor has no cause of action
against anyone on the basis of the checks, since the
payee acquires no interest in the check until its
delivery to him (Development Bank of Rizal v. Sim
Wei, G.R. No. 85419, March 9, 1993).
However, in another case, the payee’s was forged to
make it appear that he had made an indorsement in
favor of the forger. Such signature should be
deemed as inoperative and ineffectual. The
collecting bank, grossly erred in making payment by
virtue of said forged signature. The payee should
therefore be allowed to recover from the collecting
bank even if the check was not delivered to the
payee (Westmont Bank v. Ong, G.R 132560, January
30, 2002).
NOTE: The defense of want of delivery of a complete
instrument is only a personal defense which means
that it is only available against a holder NOT in due
course.
Issuance of an instrument
The instrument is deemed issued upon the first
delivery of the instrument, complete in form, to a
person who takes it as holder (NIL, Sec. 191).
Conditional delivery or delivery for a special
purpose
The delivery is made conditional or for a special
purpose if it was made not for the purpose of
transferring the property (title) to the instrument.
In such case, if the instrument lands in the hands of
an HIDC (one who does not know of the conditional
37
delivery or of its special purpose), the instrument is
treated as if there is no condition if such delivery
was made to a holder not in due course, prior
parties are not bound by the instrument (NIL, Sec.
16).
NOTE: The law contemplates that the condition is
orally or verbally conveyed to the holder upon
delivery, because of the rule that the negotiability is
determined only upon the face of the instrument.
Presumption as to delivery
If the instrument is in the possession of an HIDC,
valid delivery is conclusively presumed.
If the instrument is in the possession of a party
other than an HIDC, possession of such party
constitutes only prima facie presumption of
delivery.
Immediate Parties
Immediate parties are persons having knowledge of
the conditions or limitations placed upon the
delivery of an instrument. It means privity, and not
proximity.
A payee who is a holder in due course is not an
immediate party in the sense of Section 16. (Liberty
Trust Co. v. Tilton, 105 N.E. 05.)
Remote Parties
Persons without knowledge as to the conditions or
limitations placed upon the delivery of an
instrument, even if he is the next party physically or
parties who are not in direct contractual relation to
each other, but if they are chargeable, for example,
with knowledge or notice of any infirmities in the
instrument or defect in the title of the person
negotiating the same, they will be considered as
immediate parties for purposes of Section16.
SIGNATURE
Validity of signature in a negotiable instrument
A party may use his full name, surname, initials or
even any mark in signing a negotiable instrument to
indicate his intention to bind himself.
A signature may be made in any manner as long as
the person signing has the intention to be bound.
Persons liable on an instrument
GR: Only persons whose signatures appear on an
instrument are liable thereon (NIL, Sec. 18).
 MERCANTILE LAW
XPNs: Notwithstanding the absence of their
signatures in their own names, the following
persons are deemed liable: (TraP FAP)
1. Person who signs in Trade or assumed name
(NIL, Sec. 18) – Party who signed must have
intended to be bound by his signature.
2. Principal who signs through a duly authorized
agent and such agent discloses the name of his
principal and adding words to show he is
merely signing in a representative capacity
(NIL, Sec. 19, 20).
3. Forger (NIL, Sec. 23)
4. Acceptor, who makes his acceptance of a bill on
a separate paper (NIL, Sec. 134)
5. Person, who makes a written Promise to accept
the bill before it is drawn (NIL, Sec. 135)
Where a signature is so placed upon the instrument
that it is not clear in what capacity the person
signed, he is deemed to be an indorser (NIL, Sec.
17[f]), not a maker or drawer.
Q: Juan borrowed P10,000.00 from Joe as
evidenced by a promissory note. All other
requisites of negotiability are present except
that Juan did not affix his usual signature
thereon as he was ailing at that time and was
only able to put “X” in the blank space meant for
the signature of the maker. Is the requisite that
the instrument must be signed by the maker
complied with?
A: YES. The letter “X” is sufficient to comply with the
requirement. It appears from the problem that such
letter was adopted by Juan with the intent to
authenticate the instrument. It is not necessary that
the signature is the usual signature of the maker.
SIGNING IN TRADE NAME
As a general rule, only persons whose signatures
appear on an instrument are liable thereon. But one
who signs in a trade or assumed name is liable as if
he signed his own name (NIL, Sec. 18). It is
necessary, however, that the party who signed
intended to be bound by his signature.
SIGNATURE OF AGENT
Requisites for an agent to be exempt from
liability
1. He is duly Authorized
2. He adds Words to his signature indicating that
he signs as an agent/representative and
3. He Discloses the name of his principal (NIL, Sec.
20).
38
Legal effects of an agent’s signature
The agent’s signature, provided that the above
requisites are complied with, will bind his principal
and he will be exempt from personal liability.
Procuration
It is the act by which a principal gives power to
another to act in his place as he could himself (Fink
v. Scott, 143 S.E. 305).
It operates as notice or a warning that the agent has
but a limited authority to sign and the principal is
bound only in case the agent in so signing acted
within the actual limits of his authority (NIL, Sec.
21).
INDORSEMENT OF A MINOR OR A
CORPORATION
Indorsement made by an infant or a corporation
1. Minor – A contract entered into by a minor is
voidable, at the option of the minor. It is a real
defense that can be invoked only by the minor.
While a minor is not bound by his indorsement
for lack of capacity, he is however not
incapacitated to transfer his rights.
Where a minor committed actual fraud by
specifically stating that he is of legal age, a
minor can be bound by his signature in an
instrument (PNB v. CA, G.R. No. L-34404, June 25,
1980).
2. Incapacitated person – An incapacitated person
may also use as a real defense his incapacity to
enter into a contract. Contract entered into by
the incapacitated are voidable. Incapacitated
persons include: a) insane or demented persons
and b) deaf and blind who does not know how
to write.
3. Corporation- Issuance or indorsement of an
instrument by a corporation acting beyond its
powers (ultra vires) is a real defense.
Q: A executed a promissory note in favor of M
which reads:
I promise to pay P (16 years old) or order
P10,000.
Sgd. M
P indorsed it to A.
 NEGOTIABLE INSTRUMENTS LAW
a. May A collect from M notwithstanding that P,
the indorser is a minor?
b. In case that A cannot collect from M, can he
collect from P?
A:
a. YES. A can collect from M. Notwithstanding the
fact that A is a minor, the indorsement of P (the
minor) passes title to A (the holder. M cannot
invoke the defense of minority because such
defense would only be available to P.
b. NO. A cannot collect from P, as he has a real
defense of minority on his part.
FORGERY
It is the counterfeit making or fraudulent alteration
of any writing. It happens when a signature is
affixed by one who does not claim to act as an agent
and who has no authority to bind the person whose
signature he has forged (NIL, Sec. 23).
Burden of proof in proving forgery
Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery (Chiang Yia
Min v. CA, G.R. No. 137932, Mar. 28, 2001).
Illustration
Pay to P or order P10,000 30 days after sight.
(Sgd)D, (forged by P)
To X
P presented the instrument for acceptance. X
accepted the instrument without detecting the
forgery. P then indorses the bill to A, A to B, B to C,
the present holder. In this case, if after 30 days the
holder presented the instrument to X for payment
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of
the drawer’s signature (NIL, Sec. 62)
A payee may sue the collecting bank for the
amount of the checks it paid under a forged
indorsement even when the instrument has not
been delivered to the payee
The collecting bank is liable to the payee and must
bear the loss because it is its legal duty to ascertain
that the payee’s indorsement (signature), its
customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
since the payee merely used one action to reach, by
desirable shortcut, the person who ought in any
event to be ultimately liable as among the innocent
39
persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings
(Westmont Bank v. Ong, supra).
Effects of forgery
GR: It does not avoid the instrument but only the
forged signature. The signature is wholly
inoperative. In other words, rights may still exist
and be enforced by virtue of such instrument as to
those signatures thereto are found to be genuine.
XPNs:
1. If the party against whom it is sought to enforce
such right is precluded from setting up forgery
or want of authority (NIL, Sec. 23).
2. Where the forged signature is not necessary to
the holder’s title, in which case, the forgery may
be disregarded (NIL, Sec. 48)
.
Persons precluded from setting up the defense
of forgery (2010 Bar)
1. Those who admit orwarrant the genuineness of
the signature such as indorsers, persons
negotiating by delivery and acceptor; (NIL, Sec
56).
2. Those who by their acts, silence, or negligence,
are estopped from claiming forgery;
3. A holder of a bearer instrument who
subsequently negotiates such instrument with a
prior forged indorsement (forged indorsement
is not necessary to his title it being a bearer
instrument).
Cut-off Principle
In order instruments, parties prior to forgery are
relieved or cut-off of liability. They cannot be held
liable by any holder, including a holder in due
course.
Liabilities of the parties to a negotiable
instrument where an indorsement is forged
Illustration
a. If the instrument is payable to order and the
indorsement of one of the indorsers is forged, C can
enforce the note against X and B but not against M,
 MERCANTILE LAW
P or A, because were it not for the forgery of X the
instrument will not reach the possession of C.
b. If the instrument is payable to bearer, the
indorsement of X is not necessary to vest title to C
because negotiation on bearer instrument requires
only delivery.
Legal consequences when a bank honors a
forged check
1. When drawer's signature is forged
GR: Drawee bank is liable because the bank is
bound to know the signature of its customers
and if it pays a forged check, it must be
considered as making the payment out of its
own funds and cannot ordinarily charge the
amount so paid to the account of the depositor
whose name was forged. It is also in a superior
position to detect the forgery because it has a
specimen of the signature of the maker. Lastly,
by accepting the instrument, it becomes an
acceptor who admits the genuineness of the
drawer’s signature (Pre-Week Reviewer in
Commercial Law, Dimaampao and Escalante).
XPN: When the drawer is guilty of negligence,
he should bear the loss. He is precluded from
setting up forgery because the proximate cause
of the loss is his own negligence (Ibid).
2. When the payee’s signature is forged
GR: Drawee bank is liable because it owes to the
drawer-depositor an absolute and contractual
duty to pay the check only to the person to
whom it is made payable. Drawee bank, in such
case, should credit back and restore to drawer’s
account the value of the check wrongfully
encashed (Ibid).
XPN: When the drawer is guilty of negligence,
he should bear the loss. He is precluded from
setting up forgery because the proximate cause
of the loss is his own negligence (Ibid).
3. When the indorser’s signature is forged
GR: Drawee bank bears the loss as it is under
strict liability to pay the check to the order of
the payee. Payment under forged indorsement
is not to the drawer’s order. Ensuingly, if the
drawee bank pays a check bearing forged
signature of indorser, it does so at its own peril.
However, the drawee bank may pass the
liability to the collecting bank who cannot
interpose the defense of forgery. The collecting
40
bank is an indorser who warrants that the
instrument is genuine and in all respect what it
purports to be (NIL, Sec. 16). The collecting
bank had no right to be paid by the drawee bank
since the forged indorsement is inoperative.
The collecting bank my ultimately recover from
the forger (Pre-Week Reviewer in Commercial
Law, Dimaampao and Escalante).
XPN: When the drawee bank is guilty of
negligence, he must bear the loss (Ibid).
Q: X Corporation opened an account with Y Bank
with its President and Secretary/Treasurer as
signatories. While they are abroad, several
checks bearing their signatures were presented
to and approved by the bank. The amount of
these checks were then debited against the
account of corporation. Upon noticing the
deductions in their account, they requested the
bank to credit back the same amount, claiming
that the deductions were unauthorized and
fraudulently made. The bank refused to restore
the amount. Who should bear the loss?
A: As between a bank and its depositor, where the
bank’s negligence is the proximate cause of the loss
and the depositor is guilty of contributory
negligence, the greater proportion of the loss shall
be borne by the bank. The bank was negligent
because it did not properly verify the genuineness
of the signatures in the applications for manager’s
checks while the depositor was negligent because it
clothed its accountant/bookkeeper with apparent
authority to transact business with the Bank and it
did not examine its monthly statement of account
and report the discrepancy to the Bank (Philippine
National Bank vs. FF Cruz and Company, G.R. No.
173259, July 25, 2011).
Q: X fraudulently obtained possession of the
check and forged P’s signature and then
indorsed and deposited the check with XYZ bank
which honored the check and placed the amount
thereof to his credit. Thereafter, XYZ Bank
indorsed the check to the drawee bank-ABC
bank which paid it and charged the account of
the drawer.
Illustrate the liability of a drawer and a drawee-
bank in an 1) instrument payable to order and
in an 2) instrument payable to bearer in case of
a forgery on payee’s signature.
Pay to P or order P10,000.
(Sgd)D
To: ABC Bank
 NEGOTIABLE INSTRUMENTS LAW
bank liable for the amounts withdrawn by the
A: secretary?
1. If the instrument is payable to order:
A: NO, he is precluded from setting up the forgery
a. The drawee bank is liable to the drawer for due to his own negligence in entrusting to his
the amount of the check and his account secretary his credit cards and check book including
cannot be charged because the the verification of his statements of account
indorsement of the payee is a forgery. (Ilusorio v. CA, G.R. No. 139130, November 27, 2002).
Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the Q: The drawer’s signature was forged. There is,
drawer for its payment. however, a provision in the monthly bank
b. XYZ Bank is however, liable to the drawee statement that if the drawer’s signature was
bank because of his warranty as an forged, the drawer should report it within 10
indorser. (NIL, Sec. 66) days from receipt of the statement to the
c. D, the drawer, is not liable on the check drawee. The drawer, however, failed to do so.
because its order is to pay P or his order What will be its effect insofar as the drawer’s
and not to any other person. right is concerned?

A: The failure of the drawer to report the forgery

2. If the instrument is payable to bearer:
within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude
a. ABC Bank, the drawee-bank, may charge
the drawer from questioning the mistake of the
the amount thereof to the account of the
drawee bank despite the provision (BPI v. CASA
drawer because the forged indorsement
Montessori Internationale, supra).
did not prevent the transfer of title. The
remedy of the drawer is against the forger.
Q: If forgery was committed by an employee of
b. Drawer has no cause of action against
the drawer whose signature was forged, does
collecting bank, since the duty of collecting
the relationship amount to estoppel such that
bank is only to the payee (Manila Lighter
the drawer is precluded in recovering from the
Transportation, Inc. v. CA, G.R. No. L-50373
drawee bank?
February 15, 1990). The drawee-bank can
recover from the collecting bank because
A: The bare fact that the forgery was committed by
even if the indorsement on the check
an employee of the party whose signature was
deposited by the bank's client is forged,
forged can not necessarily imply that such party’s
collecting bank is bound by its warranties
negligence was the cause of the forgery in the
as an indorser and cannot set up defense of
absence of some circumstances raising estoppel
forgery as against drawee bank (Associated
against the drawer (Samsung Construction Co. v. Far
Bank v. CA, supra).
East Bank and Trust Company, G.R. No. 129015,
August 13, 2004).
Q: P sold to M 10 grams of shabu worth
Php5,000.00. As he had no money at the time of
CONSIDERATION
the sale, M wrote a promissory note promising
to pay P or his order Php5,000.00. P then
Consideration
indorsed the note to X (who did not know about
the shabu), and X to Y. Unable to collect from P,
It is an inducement to a contract that is the cause,
Y then sued X on the note. X set up the defense of
price or impelling influence, which induces a party
illegality of consideration. Is he correct? (2011
to enter into a contract.
Bar)
NOTE: Every negotiable instrument is deemed
A: NO, since X, a general indorser, warrants that the
prima facie to have been issued for a valuable
note is valid and subsisting.
consideration (NIL, Sec. 24).
Q: X entrusted his check books, credit cards,
A check constitutes an evidence of indebtedness and
passbooks, bank statements and cancelled
is a veritable proof of an obligation. Thus, based on
checks to his secretary. He also introduced the
Sec. 24 of the NIL, checks complete and delivered to
secretary to the bank for purposes of
a person by another are sufficient by themselves to
reconciliation of his accounts. Subsequently, X’s
prove the existence of the loan obligation obtained
secretary forged his signature on the checks and
by the latter from the former. (Ting Ting Pua v.
was able to withdraw his money. Is the drawee

41
 MERCANTILE LAW
Spouses Tiong and Caroline Teng, G.R. No. 198660,
October 23, 2013, in Divina, 2014)
Q: Lorenzo drew a bill of exchange in the amount
of P100,000.00 payable to Barbara or order,
with his wife, Diana, as drawee. At the time the
bill was drawn, Diana was unaware that Barbara
is Lorenzo’s paramour. Barbara then negotiated
the bill to her sister, Elena, who paid for it for
value, and who did not know who Lorenzo was.
On due date, Elena presented the bill to Diana
for payment, but the latter promptly dishonored
the instrument because, by then, Diana had
already learned of her husband’s dalliance. Does
the illicit cause or consideration adversely affect
the negotiability of the bill? Explain. (2009 Bar)
A: NO, the bill of exchange is negotiable
notwithstanding the illegality of consideration,
provided all the requisites under Sec. 1 of NIL are
complied with. The fact that Barbara, the payee, was
the paramour of Lorenzo does not militate against
negotiability. The requisites of negotiability are not
concerned with the validity of consideration.
Validity is an issue distinct and separate from the
question of negotiability. The negotiability of the bill
of exchange is determined by ascertaining whether
the requisites of Sec. 1 of NIL appear on the face of
the instrument (Dimaampao and Escalante, 2014).
Q: R issued a check for P1M which he used to pay
S for killing his political enemy. Can the check be
considered a negotiable instrument? (2007 Bar)
A: YES. The check can be considered as a negotiable
instrument since it complied with the requirements
of negotiability under Sec. 1 of the Negotiable
Instruments Law. The unlawful consideration for
the issuance of the check is of no moment and will
not affect the negotiability of the check as it merely
constitutes a defect of title under Sec. 55 of the NIL.
Q: Virginia, the General Manager of North Star,
in accommodation and upon the instruction of
its client, Engr. Cayanan, sent the amount of
US$60,000 to View Sea Ventures Ltd., in Nigeria
from her personal account in Citibank Makati.
Virginia again sent US$40,000 to View Sea
Ventures by telegraphic transfer, with
US$15,000 coming from Engr. Cayanan. To cover
payment of the foregoing obligations, Engr.
Cayanan issued five checks to North Star. When
presented for payment, two of the checks were
dishonored for insufficiency of funds while the
other three checks were dishonored because of
a stop payment order from Engr. Cayanan. North
Star demanded payment, but Engr. Cayanan
failed to settle his obligations. Hence, North Star
instituted a criminal case, charging Engr.
42
Cayanan with violation of the Bouncing Checks
Law. Engr. Cayanan insists that the US$85,000
sent to View Sea Ventures was not sent for the
account of North Star but for the account of
Virginia as her investment. Engr. Cayanan
claims that North Star did not give any valuable
consideration for the checks since the
US$85,000 was taken from the personal dollar
account of Virginia and not the corporate funds
of North Star.
A: Upon issuance of a negotiable check, in the
absence of evidence to the contrary, it is presumed
that the same was issued for valuable consideration
which may consist either in some right, interest,
profit or benefit accruing to the party who makes
the contract, or some forbearance, detriment, loss
or some responsibility, to act, or labor, or service
given, suffered or undertaken by the other side.
Under the Negotiable Instruments Law, it is
presumed that every party to an instrument
acquires the same for a consideration or for value.
As Engr. Cayanan alleged that there was no
consideration for the issuance of the subject checks,
it devolved upon him to present convincing
evidence to overthrow the presumption and prove
that the checks were in fact issued without valuable
consideration. Engr. Cayanan, however, has not
presented any credible evidence to rebut the
presumption, as well as North Star’s assertion, that
the checks were issued as payment for the
US$85,000 Engr. Cayanan owed to the corporation
and not to the manager who facilitate the fund
transfer. (Engr. Cayanan v. North Star International
Travel Inc., G.R. No. 172954, October 5, 2011).
Holder for value
A holder for value is one who has given a valuable
consideration for the instrument. A holder for value
is deemed as such not only as regards the party to
whom the value has been given to by him but also in
respect to all those who became parties prior to the
time when value was given.
NOTE: Where the holder has a lien on the
instrument arising either from contract or by
implication of law, he is deemed a holder for value
to the extent of his lien (NIL, Sec. 27).
Value
It is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt
constitutes value and is deemed such whether the
instrument is payable on demand or at a future time
(NIL, Sec. 25).
 NEGOTIABLE INSTRUMENTS LAW
Want or absence of consideration vs. Failure of
consideration (1996, 2007 Bar)
WANT OR ABSENCE FAILURE OF
OF CONSIDERATION CONSIDERATION
Total lack of any valid Failure or refusal of one
consideration for the of the parties to do,
contract perform or comply with
the consideration agreed
upon
Effect of want of consideration
It becomes a matter of defense as against any person
not a holder in due course, thus, a personal defense
(NIL, Sec. 28).
Partial failure of consideration
Partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and
liquidated amount or otherwise (ibid.).
Inadequacy of consideration
GR: Inadequacy of consideration does not invalidate
the instrument.
XPN: There has been fraud, mistake or undue
influence (NCC, Art. 1355).
NOTE: However, knowledge of inadequacy of
consideration would render the holder not HIDC
liable (NIL, Sec. 53).
Q: X borrowed money from Y in the amount
of Php 1Million and as payment, issued a check.
Y then indorsed the check to his sister Z for no
consideration. When Z deposited the check to
her account, the check was dishonored for
insufficiency of funds. Is Z a holder in due
course? Explain your answer (2012 Bar)
A: NO, Z is not an HIDC. Under Sec. 52 (c), NIL, it is
expressly provided that the instrument must be
acquired in good faith and for value to consider him
a HIDC.
ACCOMMODATION PARTY
Accommodation party
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the
purpose of lending his name to some other person
(NIL, Sec. 29).
Requisites to be an accommodation party
43
1. Accommodation party must sign as maker,
drawer, acceptor or indorser;
2. No value is received by the accommodation
party from the accommodated party; and
3. The purpose is to lend the name.
NOTE: It does not mean, however, that one cannot
be an accommodation party merely because he has
received some consideration for the use of his name.
The phrase “without receiving value therefor” only
means that no value has been received “for the
instrument” and not “for lending his name.”
Q: Susan Kawada borrowed P500,000 from XYZ
Bank which required her, together with Rose
Reyes who did not receive any amount from the
bank, to execute a promissory note payable to
the bank, or its order on stated maturities. The
note was executed as so agreed. What kind of
liability was incurred by Rose, that of an
accommodation party or that of a solidary
debtor? Explain. (2003 Bar)
A: Rose incurs the liability of an accommodation
party since she executed the promissory without
receiving value therefor and for the purpose of
lending his name to Susan Kawada, the
accommodated party. Nonetheless, as an
accommodation maker, Rose is primarily and
unconditionally liable on the promissory note to a
holder for value, regardless of whether she stands
as a surety or solidary co-debtor since such
distinction would be entirely immaterial and
inconsequential as far as a holder for value is
concerned.
Q: Juan Sy purchased from “A” Appliance Center
one generator set on installment with chattel
mortgage in favor of the vendor. After getting
hold of the generator set, Juan Sy immediately
sold it without consent of the vendor. Juan Sy
was criminally charged with estafa. To settle the
case extra judicially, Juan Sy paid the sum of
P20,000 and for the balance of P5,000.00 he
executed a promissory note for said amount
with Ben Lopez as an accommodation party.
Juan Sy failed to pay the balance.
a. What is the liability of Ben Lopez as an
accommodation party? Explain.
b. What is the liability of Juan Sy? (2003 Bar)
A:
a. Section 29 of the Negotiable Instruments Law
provides that an accommodation party is liable
on the instrument to a holder for value,
notwithstanding that such holder at the time of
taking the instrument knew him to be only an
accommodation party. As an accommodation
 MERCANTILE LAW
party, Ben Lopez is primarily and
unconditionally liable on the promissory note
to a holder for value as if the contract was not
for accommodation.
b. Under Section 14 of the NIL, Juan Sy is primarily
liable to the extent of P5,000 in the hands of a
holder in due course. However, if Ben Lopez
paid the note, Juan Sy has the obligation to
reimburse the former to the extent of the
amount paid.
Q: Dagul has a business arrangement with
Facundo. The latter would lend money to
another, through Dagul, whose name would
appear in the promissory note as the lender.
Dagul would then immediately indorse the note
to Facundo. Is Dagul an accommodation party?
Explain. (2005 Bar)
A: NO. An accommodation note is one to which the
accommodation party has put his name, without
consideration, for the purpose of accommodating
some other party who is to use it and is expected to
pay it. The accommodation is not one to the person
who takes the note — that is, the payee or indorsee,
but one to the maker or indorser of the note. In this
case, the indorser, Dagul, in making the
indorsement to the lender, Facundo, was merely
acting as agent for the latter or, as a mere vehicle for
the transference of the naked title from the
borrower or maker of the note and was not acting
as an accommodation party.
said credit line through the issuance of check.
Gonzales issued a check in favor of Rene Unson,
drawn against the credit line. However, upon
presentment for payment by Unson of said
check, it was dishonored by PCIB due to the
termination by PCIB of the credit line under
COHLA for the unpaid periodic interest dues
from the loans of Gonzales and the spouses
Panlilio. Gonzales, through counsel, wrote PCIB
insisting that the check he issued had been fully
funded, and demanded the return of the
proceeds of his FCD as well as damages for the
unjust dishonor of the check. Was it proper for
PCIB to dishonor the check issued by Gonzales
against the credit line under the COHLA?
A: NO. While a maker who signed a promissory note
for the benefit of his co-maker (who received the
loan proceeds) is considered as an accommodation
party, he is, nevertheless, entitled to a written notice
on the default and the outstanding obligation of the
party accommodated. There being no such written
notice, the Bank is grossly negligent in terminating
the credit line of the accommodation party for the
unpaid interest dues from the loans of the party
accommodated and in dishonoring a check drawn
against such credit line (Eusebio Gonzales v.
Philippine Commercial and International Bank, Edna
Ocampo, and Roberto Noceda, G.R. No. 180257,
February 23, 2011).
Extent of liability of an accommodation party

Accommodation party vs. Regular party 1. Right to revoke accommodation – before the
instrument has been negotiated for value.
ACCOMMODATION 2. Right to reimbursement from the accommodated
REGULAR PARTY
PARTY party – the accommodated party is the real
Signs an instrument debtor. Hence, the cause of action is not on the
Signs the instrument for instrument but on an implied contract of
without receiving value
value (NIL, Sec. 24) reimbursement.
therefor (NIL, Sec. 29)
Purpose of signing is to 3. Right to contribution from other solidary
lend his name to another Not for that purpose accommodation maker (Sadaya v. Sevilla, G.R.
person (NIL, Sec. 29) No. L-17845, April 27, 1967).
May always show, by Cannot disclaim
parol evidence, that he is personal liability by Accommodation party cannot raise the defense
only such parol evidence of absence or want of consideration
Cannot avail of the
defense of An accommodation party who lends his name to
May avail of such enable the accommodated party to obtain credit or
absence/failure of
defense raise money is liable on the instrument to a holder
consideration against a
holder not in due course for value even if he receives no part of the
May sue reimbursement consideration. He assumes the obligation to the
after paying the other party and binds himself to pay the note on its
May not sue due date. By signing the note, the accommodation
holder/subsequent
party party thus became liable for the debt even if he had
no direct personal interest in the obligation or did
Q: PCIB granted a credit line to Gonzales through not receive any benefit therefrom (Dela Rama v.
the execution of the COHLA. Gonzales drew from Admiral United Savings Bank, G.R. No. 154740, April
16, 2008).

44
 NEGOTIABLE INSTRUMENTS LAW
Holder for value may recover from an
accommodation party notwithstanding his
knowledge that the accommodation party is
only signing as such
This is so because an accommodation party is liable
on the instrument to a holder for value,
notwithstanding that such holder at the time of
taking the instrument knew him to be only an
accommodation party. The accommodation party is
liable to a holder for value as if the contract was not
for accommodation. It is not a valid defense that the
accommodation party did not receive any valuable
consideration when he executed the instrument.
Nor is it correct to say that the holder for value is not
a holder in due course merely because at the time he
acquired the instrument, he knew that the indorser
was only an accommodation party (Ang Tiong v.
Ting, G.R. No. L-26767, February 22, 1968).
Q: To accommodate Carmen, maker of a
promissory note, Jorge signed as indorser
thereon, and the instrument was negotiated to
Raffy, a holder for value. At the time Raffy took
the instrument, he knew Jorge to be an
accommodation party only. When the
promissory note was not paid, and Raffy
discovered that Carmen had no funds, he sued
Jorge. Jorge pleads in defense the fact that he
had endorsed the instrument without receiving
value therefor, and the further fact that Raffy
knew that at the time he took the instrument
Jorge had not received any value or
consideration of any kind for his indorsement.
Is Jorge liable? Discuss. (1990, 1996 Bar)
A: YES, Jorge is liable. By the clear mandate of
section 29 of the Negotiable Instruments Law, an
accommodation party is "liable on the instrument to
a holder for value, notwithstanding that such holder
at the time of taking the instrument knew him to be
only an accommodation party." It is not a valid
defense that the accommodation party did not
receive any valuable consideration when he
executed the instrument (Ang Tiong vs Ting, supra).
Q: For the purpose of lending his name without
receiving value therefor, Pedro makes a note for
P20,000 payable to the order of X, who in turn
negotiates it to Y, the latter knowing that Pedro
is not a party for value.
a. May Y recover from Pedro if the latter
interposes the absence of consideration?
b. Supposing under the same facts, Pedro pays
the said Php20,000.00 may he recover the
same amount from X? (1998 Bar)
A:
45
a. YES, Y may recover from Pedro. Section 29 of
the NIL provides that a person who has signed
the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and
for the purpose of lending his name to some
other person is liable on the instrument to a
holder for value, notwithstanding the fact that
such holder at the time of taking the instrument
knew him to be only an accommodation party.
Pedro, being an accommodation maker of a
note, may thus be held primarily and
unconditionally liable therefor.
b. YES, Pedro may recover from X. When the
accommodation party makes payment to the
holder of the note, he has the right to sue the
accommodated party for reimbursement, since
the relation between them is in effect that of
principal and surety, the accommodation party
being the surety. Thus, after paying the holder,
Pedro may seek reimbursement from X, the
accommodated party.
Q: As a rule under the NIL, a subsequent party
may hold a prior party liable but not vice-versa.
Give 2 instances where a prior party may hold a
subsequent party liable. (2008 Bar)
A: A party may hold a subsequent party liable in the
following instances: (1) in case of an accommodated
party; and (2) in case of an acceptor for honor. An
accommodation party may hold the party
accommodated liable to him, even if the party
accommodated is a subsequent party. The relation
between them is that of principal and surety. For the
same reason, an acceptor for honor may hold the
party for whose honor he accepted a bill of exchange
liable to him. A payer for honor is subrogated to the
rights of the holder as regards the party for whose
honor he paid and all parties liable to the latter.
Accommodation made by a corporation
The issue or indorsement of a negotiable paper by a
corporation without consideration and for the
accommodation of another is ultra vires. Hence, one
who has taken the instrument with knowledge of
the accommodation nature thereof cannot recover
against a corporation where it is only an
accommodation party (Crisologo-Jose v. CA, G.R. No.
80599, September 15, 1989).
Q: On June 1, 1990, A obtained a loan of
₱100,000 from B, payable not later than
December 20, 1990. B required A to issue him a
check for that amount to be dated December 20,
1990. Since he does not have any checking
account, A, with the knowledge of B, requested
his friend, C, President of Saad Banking
Corporation (Saad) to accommodate him. C
 MERCANTILE LAW
agreed, he signed a check for the aforesaid 2. Negotiation
amount dated December 20, 1990, drawn 3. Assignment – transfer of the title to the
against Saad’s account with the ABC Commercial instrument, with the assignee generally taking
Banking Co. The By-laws of Saad requires that only such title as his assignor has, subject to all
checks issued by it must be signed by the defenses available against the assignor.
President and the Treasurer or the Vice-
President. Since the Treasurer was absent, C DISTINGUISHED FROM ASSIGNMENT
requested the Vice-President to co-sign the
check, which the latter reluctantly did. The NEGOTIATION ASSIGNMENT
check was delivered to B. The check was Non-negotiable
dishonoured upon presentment on due date for instrument may be
insufficiency of funds. Only a negotiable
assigned absent any
instrument may be
prohibition against
a. Is Saad liable on the check as an negotiated.
assignment written on
accommodation party?
its face.
b. If it is not, who then, under the above facts,
is/are liable? (1991 Bar) The transferee can
The transferee, if he is
have no better right
A: a HIDC may acquire
than his transferor; he
a. NO, Saad is not liable as an accommodation better rights than his
merely steps into the
party. This is because the issue or indorsement transferor.
shoes of the assignor.
of negotiable paper by a corporation without
consideration and for the accommodation of The holder can hold
another is ultra vires. Hence, one who has taken The transferee has no
the drawer and the
the instrument with knowledge of the right of recourse for
indorsers liable if the
accommodation nature thereof cannot recover payment against
party primarily liable
against a corporation where it is only an immediate parties.
does not pay.
accommodation party. While it may be legally
possible for a corporation whose business is to
provide financial accommodations in the MODES OF NEGOTIATION
ordinary course of business, such as one given
by a financing company, to be an Modes of negotiation
accommodation party, this situation, however,
is not the case at bar. 1. If payable to bearer- it is negotiated by mere
b. Considering that both the President and the delivery
Vice-President were signatories to the 2. If payable to order- it is negotiated by the
accommodation, they themselves can be indorsement of the holder completed by
subject to the liabilities of accommodation delivery (NIL, Sec. 30).
parties to the instrument in their personal
capacity (Crisologo-Jose v. CA, G.R. No. 80499, Q: Ligaray charged Wagas with estafa, alleging
September 15, 1989). that Wagas placed an order of 200 bags of rice
over the telephone with a post-dated check
NEGOTIATION payable to cash as payment. The seller Ligaray
delivered the rice to Cañada, brother-in-law of
Negotiation Wagas. In turn Ligaray received a post-dated
check issued by Wagas, which was later on
Negotiation is the transfer of an instrument from dishonored due to insufficiency of funds.
one person to another so as to constitute the
transferee the holder thereof (NIL, Sec. 30). During trial, Wagas averred that he issued the
check to Cañada, and that it was the latter who
NOTE: A holder is the payee or indorsee of a bill or had transacted with Ligaray. While admitting
note, who is in possession of it, or the bearer thereof that he signed a letter acknowledging his debt to
(NIL, Sec. 191). Ligaray, Wagas insisted that he signed the same
just to accommodate the please of his sister and
Methods of transferring an instrument her husband Cañada.

1. Issuance – first delivery of the instrument Is Wagas guilty of estafa?

complete in form to a person who takes it as a
holder.

46
 NEGOTIABLE INSTRUMENTS LAW
A: NO. In order to constitute estafa under Article
315, paragraph 2(d) of the RPC, as amended, the act
of postdating or issuing a check in payment of an
obligation must be the efficient cause of the
defraudation. This means that the offender must be
able to obtain money or property from the offended
party by reason of the issuance of the check,
whether dated or postdated. In other words, the
Prosecution must show that the person to whom the
check was delivered would not have parted with his
money or property were it not for the issuance of
the check by the offender.
Under the NIL (Sec. 9 and Sec. 30), a check made
payable to cash is payable to the bearer and could
be negotiated by mere delivery without the need of
indorsement.
This rendered it highly probable that Wagas had
issued the check not to Ligaray, but to somebody
else like Cañada, his brother-in-law, who then
negotiated it to Ligaray. Relevantly, Ligaray
confirmed that he did not himself see or meet Wagas
at the time of the transaction and thereafter, and
expressly stated that the person who signed for and
received the stocks of rice was Cañada.
It bears stressing that the accused, to be guilty of
estafa as charged, must have used the check in order
to defraud the complainant. What the law punishes
is the fraud or deceit, not the mere issuance of the
worthless check. Wagas could not be held guilty of
estafa simply because he had issued the check used
to defraud Ligaray. The proof of guilt must still
clearly show that it had been Wagas as the drawer
who had defrauded Ligaray by means of the check
(People v. Gilbert Wagas, G.R. No. 157943, September
4, 2013).
Delivery of negotiable instrument
Delivery means transfer of possession, actual or
constructive, from one person or another (NIL, Sec.
191).
NOTE: Where the instrument is no longer in the
possession of the party whose signature appears
thereon, there is a prima facie presumption of a
valid and intentional delivery by him (NIL, Sec. 16).
Bearer instrument is negotiated by indorsement
and delivery
A bearer instrument, even when indorsed specially,
may nevertheless be further negotiated by delivery,
but the person indorsing specially is liable as
indorser to only such holders who acquired title
through his indorsement (NIL, Sec. 40). This spawns
47
the rule that A BEARER INSTRUMENT IS ALWAYS A
BEARER INSTRUMENT.
Q: A makes a promissory note payable to bearer
and delivers the same to B. B, however, endorses
it to C in this manner:
"Payable to C. Signed: B."
Later, C, without indorsing the promissory note,
transfers and delivers the same to D. The note is
subsequently dishonored by A. May D proceed
against A for the note? (1998 Bar)
A: YES. D may collect from A. The note made by A is
a bearer instrument. Where an instrument, payable
to bearer, is indorsed, it may nevertheless be further
negotiated by delivery. Despite the special
indorsement made by B, the note remained a bearer
instrument and can be negotiated by mere delivery.
When C delivered and transferred the note to D, the
latter became a holder thereof. As such, D can
proceed against A.
Q: X executed a promissory note with a face
value of Php50,000.00, payable to the order of Y.
Y indorsed the note to Z, to whom Y owed
Php30,000.00. If X has no defense at all against
Y, for how much may Z collect from X? (2011
Bar)
A: Php 50,000.00, but with the obligation to hold
Php20,000.00 for Y's benefit.
Assignment of a negotiable instrument
The transferee does not become a holder and he
merely steps into the shoes of the transferor. Any
defense available against the transferor is available
against the transferee (Salas v. CA, G.R. No. 76788,
January 22, 1990).
Delivery of an order instrument without
indorsement
If an order instrument is not indorsed, the
negotiation is incomplete and the instrument is in
effect merely assigned. The transferee acquires the
right to have the indorsement of the transferor. It is
only at the time of indorsement that negotiation
takes effect and the transferee acquires the rights of
a holder (NIL, Sec. 49).
Negotiation by a prior party
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
 MERCANTILE LAW
was personally liable (NIL, Sec. 50). However, he
may strike out the intervening indorsements
because they are not necessary for his title and he is
liable to them because of his initial indorsement
(NIL, Sec. 48).
e.g. “A” payee indorsed the instrument to B, then B
indorsed it to C, C to D, then D to B. B can further
negotiate the instrument. He may also strike out the
indorsement of C and D (Sundiang Sr. & Aquino,
2014).
Limitations on re-negotiation
In the following cases, a prior party cannot further
negotiate the instrument:
1. Where it is payable to the order of a third
person, and it has been paid by the drawer (NIL,
Sec. 121[a]).
2. Where it was made or accepted for
accommodation and has been paid by the party
accommodated (NIL, Sec. 121[b]).
3. In other cases, where the instrument is
discharged when acquired by a prior party (NIL,
Sec. 119[e]).
KINDS OF INDORSEMENT
Indorsement
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the
same.
GR: Indorsement must be of the entire instrument
(NIL, Sec. 32).
XPN: When the instrument has been paid in part.
Indorsement to two or more indorsees severally
does NOT operate as a negotiation of the
instrument.
Indorsement should be placed:
1. On the instrument itself; or
2. On a separate piece of paper attached to the
instrument called “allonge” (NIL, Sec. 31)
Kinds of indorsement
1. Special (NIL, Sec. 34) – Specifies the person to
whom or to whose order the instrument is to be
payable. It is also known as specific
indorsement, or indorsement in full.
An instrument payable to bearer indorsed
specially may nevertheless be negotiated by
48
delivery (once a bearer always a bearer) (NIL,
Sec. 40).
2. Blank (NIL, Sec. 34) –Specifies no indorsee.
a. Instrument is payable to bearer and may
be negotiated by delivery;
b. May be converted to special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of indorsement (NIL,
Sec. 35).
3. Restrictive (NIL, Sec. 36)–When the instrument:
a. Prohibits further negotiation of the
instrument (it destroys the negotiability of
the instrument);
b. Constitutes the indorsee the agent of the
indorser;
c. Vests the title in the indorsee in trust for
or to the use of some persons.
But mere absence of words implying power to
negotiate does not make an instrument
restrictive.
4. Qualified (NIL, Sec. 38) – Constitutes the
indorser a mere assignor of the title to the
instrument made by adding to the indorser’s
signature words like, without recourse, sans
recourse or at the indorsee’s own risk (this
serves as an ordinary equitable assignment).
5. Absolute – The indorser binds himself to pay:
a. Upon no other condition than failure of
prior parties to do so;
b. Upon due notice to him of such failure
6. Conditional (NIL, Sec. 39)–Right of the indorsee
is made to depend on the happening of a
contingent event. The party required to pay
may disregard the conditions.
NOTE: The condition refers to the indorsement
not on the instrument itself.
7. Joint (NIL, Sec. 41) – Indorsement made payable
to 2 or more persons who are not partners.
All of them must indorse unless the one
indorsing has authority to indorse for the
others.
8. Irregular (NIL, Sec. 64) – A person who, not
otherwise a party to an instrument, places
thereon his signature in blank before delivery.
9. Facultative –Indorser waives presentment and
notice of dishonor, enlarging his liability and his
indorsement.
 NEGOTIABLE INSTRUMENTS LAW
10. Successive – Indorsement to two persons or
more in succession.
Any of them can indorse to effect negotiation of
the instrument.
Restrictive Indorsement
Indorsee has the following rights in a restrictive
indorsement:
1. To receive payment of the instrument;
2. To bring any action thereon that the indorser
could bring; and
3. To transfer his rights as such indorsee, where
the form of the indorsement authorizes him to
do so (NIL, Sec. 37,).
All subsequent indorsees acquire only the title of
the 1st indorsee under the restrictive indorsement
(NIL, Sec. 37).
An instrument negotiable in origin is always
negotiable until paid, which is still true even if the
NI was dishonored or is already overdue, unless the
instrument has been restrictively indorsed or when
discharged by payment or otherwise (NIL, Sec. 47)
Qualified indorsement
A qualified indorsement does NOT destroy the
negotiability of the instrument. It only means that
the qualified indorser is NOT liable when the maker
is insolvent. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or
non-payment due to:
1. Forgery;
2. Lack of good title on the part of the indorser;
3. Lack of capacity to indorse on the part of the
prior parties; or
4. The fact that at the time of the indorsement, the
instrument was valueless or not valid at the
time of the indorsement which fact was known
to him.
Instances when the indorsement is considered
only as equitable assignment
1. Indorsement of only a part of the amount of the
instrument (NIL, Sec. 32)
2. In cases of qualified indorsement (NIL, Sec. 38)
3. Transfer of an instrument payable to order by
mere delivery (NIL, Sec. 49).
Joint indorsement
49
GR: All must indorse in order for the transaction to
operate as a negotiation (NIL, Sec. 41).
XPN: Only one of them may indorse in case the:
1. Payees or indorsees are partners; and
2. Payee or indorsee indorsing has authority to
indorse for the others.
Indorsing an instrument as cashier or other
officers of a corporation
The negotiable instrument is deemed prima facie
payable to the corporation of which said person is
such an officer. It may be negotiated further by
either indorsement of the corporation or
indorsement of the officer (NIL, Sec. 42).
Date of indorsement
GR: Every negotiation is deemed prima facie to have
been effected before the instrument was overdue.
XPN: Except where an indorsement bears date after
the maturity of the instrument (NIL, Sec. 45).
Striking out of an indorsement
The holder may, at any time, strike out any
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out, and all
indorsers subsequent to him are relieved from
liability on the instrument (NIL, Sec. 48).
RIGHTS OF A HOLDER
Holder
The payee or indorsee of a bill or note who is in
possession of it or the bearer thereof (NIL, Sec. 191).
In general, a holder has the right to sue and to
receive payment (NIL, Sec. 51).
Classes of holders
1. Holders in general (Simple Holders) (NIL, Sec.
51).
2. Holders for value (NIL, Sec. 26).
3. Holders in due course (NIL, Secs. 52, 57).
HOLDER IN DUE COURSE (HIDC)
To be considered as a HIDC, the requisites under
Sec. 52 of the NIL must be complied with: (COFI)
1. That is Complete and regular upon its face;
 MERCANTILE LAW
2. Became the holder before it was Overdue, and
without notice that it has been previously
dishonored, if such was the fact;
3. Took it in good Faith and for value;
4. At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or
defect in the title of the person negotiating it.
(NIL, Sec. 52)
An instrument is complete when it is not wanting in
any material particular and regular when there is no
alteration apparent on the face of the instrument.
If the instrument is payable on demand, the date of
maturity is determined by the date of presentment,
which must be made within a reasonable time after
its issue, if it is a note, or after the last negotiation
thereof, if it is a bill of exchange (NIL, Secs. 71 and
143[a])
Where the transferee receives notice of any
infirmity in the instrument or defect in the title of
the person negotiating the same before he had paid
the full amount agreed to be paid, he will be deemed
a holder in due course only to the extent of the
amount paid by him (NIL, Sec. 54).
Q: R issued a check for P1M which he used to pay
S for killing his political enemy.
a. Does S have a cause of action against R in
case of dishonor by the drawee bank?
b. If S negotiated the check to T, who accepted
it in good faith and for value, may R be held
secondarily liable by T? (2007 Bar)
A:
a. NO. S does not have a cause of action against R
in case of dishonor by the drawee bank. S is not
a holder in due course, thus, R can raise the
defense that the check was issued for an illegal
consideration.
b. YES. R may be held liable by T since T is a holder
in due course of the instrument. The unlawful
consideration of the check is only a personal
defense that cannot be interposed to a holder in
due course who receives the check free from the
defect of title of S.
Q: Larry issued a negotiable promissory note to
Evelyn and authorized the latter to fill up the
amount in blank with his loan account in the
sum of P1,000. However, Evelyn inserted P5,000
in violation of the instruction. She negotiated
the note to Julie who had no knowledge of the
infirmity. Julie in turn negotiated said note to
Devi for value and who had no knowledge of the
infirmity.
50
a. Can Devi enforce the note against Larry and
if she can, for how much? Explain.
b. Supposing Devi endorses the note to Baby
for value but who has knowledge of the
infirmity, can the latter enforce the note
against Larry? (1993 Bar)
A:
a. Devi can enforce the note against Larry since
she is a holder in due course. Since the
document delivered to Evelyn is in blank and
she was authorized to fill up the amount in the
promissory note, Devi can enforce against Larry
the amount of P5,000.00 as this case falls
squarely under Sec 14 of the Negotiable
Instruments Law. As against a holder in due
course, the instrument is always valid and
enforceable to the full extent. The defense of
filing-up contrary to authorization is a mere
personal or equitable defense (Villanueva,
2009).
b. Baby cannot enforce the note against Larry
since she is not a holder in due course because
Larry could interpose the real and personal
defenses to defeat the claim of Baby. However,
because of the shelter principle in Negotiable
Instruments Law, Baby could be elevated to a
status of a holder in due course since a person
not holder in due course steps in the shoes of
the prior party. Therefore, Baby could enforce
the note against Larry the same way as Devi
could enforce it.
Q: X borrowed money from Y in the amount of
Php 1 Million and as payment, issued a check. Y
then indorsed the check to his sister Z for no
consideration. When Z deposited the check to
her account, the check was dishonored for
insufficiency of funds. Is Z a holder in due
course? Explain your answer. (2012 Bar)
A: NO. A holder in due course is a holder who has
taken the instrument under the following
conditions: (a)That it is complete and regular upon
its face; (b) That he became the holder of it before it
was overdue, and without notice that it had been
previously dishonored, if such was the fact; (c) That
he took it in good faith and for value; (d) That at the
time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of
the person negotiating it. All of the four conditions
must concur in order for a holder to qualify as a
holder in due course. In the case at hand, Z did not
acquire the instrument for value. As such she cannot
be considered as a holder in due course.
A holder is presumed to be an HIDC (1993, 2007
Bar)
 NEGOTIABLE INSTRUMENTS LAW
GR: Every holder is deemed prima facie to be an
HIDC.
XPN: When it is shown that the title of any person
who has negotiated the instrument was defective.
But this is only as regards a party who became such
after the acquisition of the defective title (NIL,
Sec.59).
Payment in due course
In order for payment to constitute payment in due
course, it must be made:
1. At or after the maturity of the instrument
2. To the holder thereof, in good faith and without
notice that his title is defective (NIL, Sec. 88).
Shelter principle or Holder in Due Course by
Subrogration
Under the "shelter principle," the HIDC, by
negotiating the instrument, to a party not an HIDC,
transfers all his rights as such holder to the latter
and acquires the right to enforce the instrument as
if he was an HIDC. The principle applies to a
"sheltered" holder who is not a party to any fraud or
illegality impairing the validity of the instrument.
2. Non-payment
That he took it in good faith and for value
Good faith is the holder’s well founded or honest
belief that the person from whom he received the
instrument was the owner thereof, with the right to
transfer it (Duran v IAC, G.R. No. L-64159, September
10, 1985).
Value may be some right, interest, profit or benefit
to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc. to
the other (BPI v. Roxas, G.R. No. 157833, October 15,
2007).
At the time it was negotiated to him, he had no
notice of any infirmity in the instrument or
defect in the title of the person negotiating it
The person to whom it is negotiated must have had
actual knowledge of such facts or knowledge of
other facts that his action in taking the instrument
amounted to bad faith (NIL, Sec. 56).
Presence or absence of defect or infirmity must be
determined at the time the instrument was
negotiated to the holder.

Specifically, a holder is entitled to the following Infirmity vs. Defect

rights: (1998, 2007, 2009 Bar)
INFIRMITY DEFECT
1. Hold the instrument free from defenses Refers to those that Refers to how he
available to parties among themselves; vitiate the instrument obtained the
2. Hold the instrument free from any defect of title itself instrument or the
of prior parties; signature thereto, as
3. Receive payment; by fraud, duress, or
4. Enforce payment of the instrument for the full force and fear, or other
amount thereof against all parties liable; and unlawful means, or for
5. Sue an illegal
consideration or when
That he became the holder before it was he negotiates it in
overdue breach of faith, or
under any other
An overdue instrument is still negotiable although it circumstances as
is subject to defenses existing at the time of transfer. amount to a fraud.
A negotiable instrument in circulation past its (NIL, Sec. 55)
maturity date carries strong indication that it has
been dishonored. An overdue instrument puts all Instances when the title of a transferor is
person on notice that it might not have been paid defective
because of a valid defense to such payment (De Leon,
2010). 1. In its acquisition – When he obtained the
instrument, or any signature thereto, by fraud,
Without notice that it has been previously duress, or force and fear, or other unlawful
dishonored, if such was the fact means, or for an illegal consideration.
2. In the negotiation – When he negotiates it in
An instrument may be dishonored either by: breach of faith, or under such circumstances as
amount to a fraud (NIL, Sec. 55).
1. Non-acceptance (refers to a bill of exchange) or

51
 MERCANTILE LAW
Q: A drawer issued a check for the payment of a
car, which check was delivered to the agent of
the owner of the car for safekeeping. The check
was then used by the agent to pay the medical
bills of his wife in a clinic. The projected
purchase did not materialize. Is the clinic
considered a holder in due course?
A: NO, the rule that a possessor of the instrument is
prima facie a HIDC does not apply to the clinic
because it cannot be said to have acquired the
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the
instrument was not payable “to the agent or to
bearer;” also the drawer had no account with the
clinic, the agent did not show or tell the payee why
he had the check in his possession and why he was
using it for the payment of his own account.
As the holder’s title was defective or suspicious, it
cannot be stated that the payee acquired the check
without knowledge of said defect in holder’s title,
the presumption that the clinic is a HIDC does not
exist (De Ocampo & Co. v. Gatchalian, G.R. No. L-
15126, November 30, 1961).
Possession of a negotiable instrument after
presentment and dishonor
It does not make the possessor a holder for value
within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or
indorsers (STELCO Marketing Corp. vs. CA, G.R. No.
96160, June 17, 1992).
Q: Is a corporation to which four crossed checks
were indorsed by the payee corporation a
holder in due course and hence entitled to
recover the amount of the checks when the same
had been dishonored for the reason of “payment
stopped”?
A: NO. The checks were crossed checks and
specifically indorsed for deposit to payee’s account
only. From the beginning, the corporation was
aware of the fact that the checks were all for deposit
only to payee’s account. Clearly then, it could not be
considered an HIDC (Atrium Management Corp. v.
CA, G.R. No. 109491, February 28, 2001).
Payee as holder in due course
There can be no doubt that a proper interpretation
of Negotiable Instruments Law as a whole leads to
the conclusion that a payee may be a holder in due
course under the circumstances in which he meets
the requirements of Sec. 52 (De Ocampo v.
Gatchalian, supra).
52
Drawee as holder in due course
A drawee does not become a HIDC by simply paying
a bill. A holder refers to one who has taken the
instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance
and payment, strips the instrument of negotiability
and reduces it to a mere voucher or proof of
payment.
Person is deemed not a holder in due course
1. A holder who acquires the instrument after its
date of maturity.
2. Where an instrument payable on demand is
negotiated for an unreasonable length of time
after its issue (NIL, Sec. 53).
NOTE: A note payable on demand is due when
payment is demanded. A check becomes
overdue when it is not presented for payment
within a reasonable time, usually 6 months
from date the thereof, afterwards, it becomes a
stale check.
3. Where the instrument contains an acceleration
clause, knowledge of the holder at the time of
acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
overdue.
Rights of a holder who is not a holder in due
course
The rights of a holder not an HIDC are similar to an
assignee. The other rights are:
1. He may receive payment and if the payment is
in due course, the instrument is discharged;
2. He is entitled to the instrument but holds it
subject to the same defenses as if it were non-
negotiable;
3. He may sue on the instrument in his own name
(NIL, Sec. 51).
DEFENSES AGAINST THE HOLDER
Defenses against the holder
The defenses available against the holder are
classified as follows:
1. Real or Absolute Defenses – those that are
attached to the instrument itself and are
available against all parties, both immediate
and remote, including holders in due course.
2. Personal or Equitable Defenses –defenses which
are only available against a holder not in due
course. Those which grow out of the agreement
 NEGOTIABLE INSTRUMENTS LAW
or conduct of a particular person which renders
it inequitable for him, though holding the legal
Real defenses available against a holder vs. Personal defenses
REAL DEFENSES
(IM In Ultra. AFForD PODIF)
1. Incomplete and undelivered instrument
2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are
concerned
4. Ultra –vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration
7. Forgery
8. Duress amounting to Forgery
9. Prescription
10. Other infirmities appearing on the face of the
instrument
11. Discharge in insolvency
12. Illegal Contract
13. Fraud in Factum or Esse Contractus
NOTE: Fraud in factum exists in those cases in which
a person, without negligence, has signed an
instrument, but was deceived as to the character of
the instrument and without knowledge of it, as where
a note was signed by one under the belief that he was
signing as a witness to a deed. This kind of fraud is a
real defense because there is no contract, since the
person did not know what he was signing (De Leon,
2010).
Q: Eva issued to Imelda a check in the amount of
P50,000 post-dated Sept. 30, 1995, as security
for a diamond ring to be sold on commission. On
Sept. 15, 1995, Imelda negotiated the check to
MT investment which paid the amount of
P40,000 to her.
Eva failed to sell the ring, so she returned it to
Imelda on Sept. 19, 1995. Unable to retrieve her
check, Eva withdrew her funds from the drawee
bank. Thus, when MT Investment presented the
check for payment, the drawee bank dishonored
it. Later on, when MT Investment sued her, Eva
raised the defense of absence of consideration,
the check having been issued merely as security
for the ring that she could not sell. Does Eva have
a valid defense? Explain. (1996 Bar)
A: NO, Eva does not have a valid defense. First, MT
Investment is a holder in due course and, as such,
holds the post-dated check free from any defect of
title of prior parties and from defenses available to
53
title, to enforce it against the party sought to be
made liable.
PERSONAL DEFENSES
(InnocentS2 ADD FUn In Fraud)
1. Innocent alteration or spoliation
2. Discharge of party Secondarily liable by discharge
of prior party.
3. Set-off between immediate parties
4. Filling up of blanks not in accordance with the
Authority given
5. Acquisition of instrument by Duress or force and
fear; unlawful means or for an illegal consideration
6. Discharge by payment or renunciation or release
before maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
NOTE: Fraud in inducement relates to the quality,
quantity, value or character of the consideration of
the instrument. Here, deceit is not in the character of
the instrument but in its amount or terms. This exists
when a person is induced to sign a note for the price
of a worthless stock which was fraudulently
represented by the payee as to its value. Such type of
fraud is only a personal defense because it does not
prevent a contract (De Leon, 2010).
prior parties among themselves. Eva can invoke the
defense of absence of consideration against MT only
if the latter was a privy to the purpose for which the
checks were issued and, therefore, not a holder in
due course. Second, it is not a ground for the
discharge of the post-dated check as against a
holder in due course that it was issued merely as
security. The only grounds for the discharge of a
negotiable instrument is enumerated in the
Negotiable Instruments Law and none of those
grounds are available to Eva. The latter may not
unilaterally discharge herself from her liability by
mere expediency of withdrawing her funds from the
drawee bank.
Q: X makes a promissory note for P10,000
payable to A, a minor, to help him buy school
books. A endorses the note to B for value, who in
turn endorses the note to C. C knows A is a
minor. If C sues X on the note, can X set up the
defenses of minority and lack of consideration?
(1998 Bar)
 MERCANTILE LAW
A: X cannot set-up the defense of minority to defeat 1. Drawer of a bill; and
the claim of C since only A, the minor could invoke 2. Indorser of a note or a bill
minority as a defense. X cannot set up the defense
against C. Lack of consideration is a personal Negotiable instrument should be presented for
defense which is only available between immediate payment to the party primarily liable (NIL, Sec.
parties who are not holders in due course. C’s 72[d]):
knowledge that A is a minor does not prevent C from
being a holder of due course. C took the promissory PRIMARILY LIABLE SECONDARILY LIABLE
from a holder for value B. Unconditionally
Conditionally bound
bound
Q: A bill of exchange has T for its drawee, U as Undertakes to pay only
drawer, and F as holder. When F went to T for after the ff. conditions
presentment, F learned that T is only 15 years have been fulfilled:
old. F wants to recover from U but the latter 1. Due presentment for
insists that a notice of dishonor must first be Absolutely required payment or acceptance
made, the instrument being a bill of exchange. Is to pay the to primary party (NIL,
he correct? (2011 Bar) instrument upon Sec. 143);
maturity 2. Dishonor by such
A: NO, since F can treat U as maker due to the party (NIL, Sec.70);
minority of T, the drawee. 3. Taking of
proceedings required
Q: Brad was in desperate need of money to pay by law (NIL, Sec.152)
his debt to Pete, a loan shark. Pete threatened to
take Brad’s life if he failed to pay. Brad and Pete The drawee is not liable for payment of a bill of
went to see Señorita Isobel, Brad’s rich cousin, exchange
and asked her if she could sign a promissory
note in his favor in the amount of P10,000.00 to The mere issuance of a bill of exchange does not
pay Pete. Fearing that Pete would kill Brad, operate as an assignment of the funds in the hands
Señorita Isobel acceded to the request. She of a drawee. The drawee must accept the
affixed her signature on a piece of paper with the instrument (thus, becomes an acceptor) in order
assurance of Brad that he will just fill it up later. that he may be primarily liable for the payment of a
Brad then filled up the blank paper, making a bill of exchange.
promissory note for the amount of P100,000.00.
He then indorsed and delivered the same to Pete MAKER
who accepted the note as payment of the debt.
Maker
What defense or defenses can Señorita Isobel set
up against Pete? Explain. (2005 Bar) The maker of a negotiable instrument, by making
such instrument:
A: Señorita Isobel may set up the defenses of:
a. Incomplete but delivered instrument. The 1. Engages that he will pay it according to its
authority she gave Brad was to fill up the note tenor, and
for P10,000.00 only and not P100,000.00. This 2. Admits the existence of the payee and his then
is a personal defense that may be raised against capacity to indorse (NIL, Sec. 60; 1995, 2001
Pete who is clearly not a holder in due course. Bar).
b. Force and intimidation. Señorita Isobel was
forced and intimidated into writing and issuing The maker is liable the moment he makes the NI. His
the note as she was threatened that Pete would liability is primary and unconditional.
kill Brad, her cousin if the debt is not paid.
Q: A issued a promissory note payable to B or
LIABILITIES OF PARTIES bearer. A delivered the note to B. B indorsed the
note to C. C placed the note in his drawer, which
Parties primarily liable was stolen by the janitor X. X indorsed the note
to D by forging C's signature. D indorsed the note
1. Maker – of a promissory note; to E who in turn delivered the note to F, a holder
2. Acceptor – of a bill of exchange; and in due course, without indorsement. Discuss the
3. Certifier of a check individual liabilities to F of A, B and C. (2001,
1997 Bar)
Parties secondarily liable

54
 NEGOTIABLE INSTRUMENTS LAW
A: A is primarily and unconditionally liable to F as
the maker of the promissory note. Section 60
provides that, by making the instrument, the maker
obliges himself to pay according to the tenor of the
instrument. He is liable to both payee and
subsequent holder in due course. Despite the
presence of the special indorsements on the note,
these do not detract from the fact that a bearer
instrument, like the promissory note in question, is
always negotiable by mere delivery, until it is
indorsed restrictively “For Deposit Only.”
B as a general indorser is secondarily liable to F. By
placing his signature on the bearer instrument, he
warrants that the instrument is genuine and in all
respects what it purports to be; that he has good
title to it; that all prior parties had capacity to
contract; that he has no knowledge of any fact which
would impair the validity of the instrument or
render it valueless; that at the time of indorsement,
the instrument is valid and subsisting; and that on
due presentment, it shall be accepted or paid, or
both, according to its tenor, and that if it be
dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser
who may be compelled to pay.
C, however, cannot be held liable because the
signature purporting to be his is a product of
forgery. C can raise the defense of forgery since it his
signature that was forged.
Q: On the right bottom margin of a PN appeared
the signature of the corporation’s president and
treasurer above their printed names with the
phrase “and in his personal capacity.” The
corporation failed to pay its obligation. Are the
officers liable?
A: YES, persons who sign their names on the face of
promissory notes are makers and liable as such. As
the promissory notes are stereotype ones issued by
the bank in printed form with blank spaces filled up
as per agreed terms of the loan, following customary
procedures, leaving the debtors to do nothing but
read the terms and conditions therein and to sign as
makers or co-makers. The officers are co-makers
and as such, they cannot escape liability arising
therefrom (Republic Planters Bank v. CA, G.R. No.
93073, December 21, 1992).
Q: Richard Clinton makes a promissory note
payable to bearer and delivers the same to
Aurora Page. Aurora Page, however, endorses it
to X in this manner: "Payable to X. Signed:
Aurora Page."
55
Later, X, without endorsing the promissory note,
transfers and delivers the same to Napoleon.
The note is subsequently dishonored by Richard
Clinton. May Napoleon proceed against Richard
Clinton for the note? (1998 Bar)
A: YES, Richard Clinton is liable for the promissory
note. Under Section 60 of the NIL, the maker of a
negotiable instrument, by making the same, engages
that he will pay according to its tenor, and admits
the existence of the payee and his then capacity to
indorse. The liability of the maker is primary which
means he is absolutely and unconditionally
required to pay. He engages to pay the instrument
according to its terms without any condition. He is
not only liable to the payee but also to the
subsequent holder in due course. Since the
instrument is a bearer instrument (which nature
was not changed even if it was specially indorsed by
Aurora), Napoleon became a legal holder thereof by
mere delivery from X to him. Thus, as a legal holder
of the promissory note, he is entitled to proceed
against the maker thereof, Richard Clinton.
DRAWER
Drawer
The drawer, by drawing the instrument:
1. Admits the existence of the payee and his then
capacity to indorse; and
2. Engages that on due presentment the
instrument will be accepted or dishonored; and
3. That if the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who
may be compelled to pay it (Sec. 61, NIL; 1991
Bar).
The drawer is secondarily liable to the holder or to
any subsequent indorser who may be compelled to
pay. But the drawer may insert in the NI an express
stipulation negating or limiting his own liability to
the holder (NIL, Sec. 61).
Q: A delivers a bearer instrument to B. B then
specially indorses it to C and C later indorses it
in blank to D. E steals the instrument from D and,
forging the instrument of D, succeeds in
"negotiating" it to F who acquires the
instrument in good faith and for value.
a. If for any reason, the drawee bank refuses to
honor the check, can F enforce the
instrument against the drawer?
b. In case of the dishonor of the check by both
the drawee and the drawer, can F hold any
of B, C and D liable secondarily on the
instrument? (1997 Bar)
 MERCANTILE LAW
A:
a. YES, F can proceed against the drawer, A, in
case of dishonor by the drawee bank. Section 61
of the NIL provides that by drawing the
instrument, the drawer engages that the
instrument will be accepted or paid or both
according to its tenor. Not only is the drawer
obliged to pay the amount of the instrument to
the holder, but he shall likewise be liable to the
subsequent indorser who was compelled to pay
it. The forged signature is unnecessary to
presume the juridical relation between or
among the parties prior to the forgery and the
parties after the forgery. Moreover, the only
party who can raise the defense of forgery
against a holder in due course is the person
whose signature is forged.
b. Only B and C can be held liable by F. According
to Section 67, when a person puts his signature
on a bearer instrument as a form of
indorsement, he becomes subject to all
liabilities of an indorser. D cannot be held liable
as an indorser because his signature is forged
by E--hence, there was no consent from D. The
forged signature is deemed inoperative and no
right can arise out of it. However, the effect of
being inoperative affects only the signature
which is the product of forgery. It will not deem
to affect other signatures subscribed with
knowledge and voluntariness. Therefore, B and
C are liable as indorsers.
Q: D draws a bill of exchange that states: “One
month from date, pay to B or his order
Php100,000.00. Signed, D.” The drawee named
in the bill is E. B negotiated the bill to M, M to N,
N to O, and O to P. Due to non-acceptance and
after proceedings for dishonor were made, P
asked O to pay, which O did. From whom may O
recover? (2011 Bar)
A: D, being the drawer.
ACCEPTOR
Acceptor
The acceptor, by accepting the instrument:
1. Engages that he will pay the NI according to the
tenor of his acceptance; and
2. Admits the existence of the drawer, the
genuineness of his signature and his capacity
and authority to draw the instrument;
3. Admits the existence of the payee and his then
capacity to indorse (NIL, Sec. 62, 1992; 1998
Bar).
56
Party who can accept the bill of exchange
GR: Only the drawee may accept. A stranger or
volunteer is not bound by acceptance.
XPN: In case of a bill which is accepted for honor
supra protest (NIL, Sec. 161).
NOTE: Honor supra protest or acceptance for honor
is an undertaking by a stranger to a bill after protest
for the benefit of any party liable thereon or for the
honor of the person for whose account the bill is
drawn which acceptance inures also to the benefit
of all parties subsequent to the person for whose
honor it is accepted, and conditioned to pay the bill
when it becomes due if the original drawee does not
pay it. (De Leon, 2010)
NOTE: Drawee does not become liable until he
accepts the instrument in which case he becomes an
acceptor. An acceptor engages to pay according to
the tenor of his acceptance, which may not be the
same as the tenor of the bill itself because the
acceptance may be qualified.
Difference between the liability of an acceptor
or drawee-acceptor and a maker
While both are primarily liable, the acceptor
engages to pay the negotiable instrument according
to the tenor of his acceptance. On the other hand, the
maker engages to pay the negotiable instrument
according to the tenor of the bill itself.
Q: X draws a check against his current account
with Bonifacio Bank in favor of B. Although X
does not have sufficient funds, the bank honors
the check when it is presented for payment.
Apparently, X has conspired with the bank's
bookkeeper so that his ledger card would show
that he still has sufficient funds.The bank files an
action for recovery of the amount paid to B
because the check presented has no sufficient
funds. Decide the case (1998 Bar).
A: The bank cannot recover the amount paid to B for
the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became
primarily and directly liable to the payee/holder B.
The recourse of the bank should be against X and its
bookkeeper who conspired to make X's ledger show
that he has sufficient funds.
INDORSER
Indorser
 NEGOTIABLE INSTRUMENTS LAW
A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to
be an indorser, unless he clearly indicates by
appropriate words his intention to be bound in
some other capacity (NIL, Sec. 63).
Order of liability among the indorsers
1. Among themselves – Liable prima facie in the
order in which they indorse (NIL, Sec. 68)
2. To the holder – In any order

NOTE: A person who places his indorsement on a Every indorser is liable prima facie to all indorsers
bearer instrument incurs all liabilities of an subsequent to him, but not those indorsers prior to
indorser (NIL, Sec. 67). him (NIL, Sec. 68)

General indorser vs. Irregular indorser (2005 Liability of an agent or broker who negotiates an
Bar) instrument without indorsement

GENERAL INDORSER IRREGULAR He incurs all the liabilities prescribed to a general

INDORSER indorser unless he discloses the name of his
Makes either a blank or Always makes a principal and the fact that he is acting only as an
special indorsement blank indorsement agent (NIL, Sec. 69)
Indorses the Indorses before its
instrument after its delivery to the payee NOTE: Parol evidence is NOT admissible to relieve
delivery to the payee an agent or broker whose endorsement brings him
Liable only to parties Liable to the payee within the above liability.
subsequent to him and subsequent
parties unless he Q: Can a collecting bank debit the account of the
signs for the depositor when the checks indorsed to it (bank)
accommodation of were forged?
the payee in which
case he is liable only A: YES, because the depositor of a check as indorser
to all parties warrants that it is genuine and in all respects what
subsequent to the it purports to be. Thus, when the checks deposited
payee had forged indorsements and the collecting bank, as
a consequence of such forgery, was made to pay the
(NIL, Secs. 64, 66; De Leon, supra) drawee bank, the collecting bank can debit the
account of the depositor for his breach of warranty
NOTE: The holder or subsequent indorser who tries (Jai-Alai Corporation of The Philippines v. BPI, G.R.
to claim under the instrument which had been No. L-29432, August 6, 1975).
dishonored for "irregular indorsement" must not be
the irregular indorser himself who gave cause for Q: Phebean, the drawer issued a check to James.
the dishonor. (Gonzales v. Rizal Commercial Banking James, subsequently indorsed it to Trude. When
Corporation, G.R. No. 156294, Novembber 29, 2006) Trude is about to encash the check, the drawee
Union Bank refused to encash it due to
Qualified indorser insufficiency of funds. Trude sued James for
payment of money. James alleged that the suit
A qualified indorser is a person who indorses should be dismissed because Phebean is an
without recourse (NIL, Sec. 65). indispensable party. Does James’ argument hold
water?
Drawer vs. Indorser
A: NO, there is no privity between the drawer and
DRAWER INDORSER the holder. The drawer is merely secondarily liable.
Party only to a bill Party either a bill or As indorser, the buyer warranted that upon due
note presentment, the checks were to be accepted or
Makes admission as to No such admission paid, or both, according to their tenor, and that in
the existence of the case they were dishonored, she would pay the
payee and his capacity corresponding amount. After an instrument is
to indorse dishonored by non-payment, indorsers cease to be
Makes no warranties, Has warranties merely secondarily liable; they become principal
but engages to pay debtors whose liability becomes identical to that of
after certain the original obligor (Tuazon v. Heirs of Bartolome
conditions are Ramos, G.R. No. 156262, July 14, 2005).
complied with

57
 MERCANTILE LAW
Q: X is the holder of an instrument payable to
him (X) or his order, with Y as maker. X then
indorsed it as follows: “Subject to no recourse,
pay to Z. Signed, X.” When Z went to collect from
Y, it turned out that Y's signature was forged. Z
Warranties and liabilities of parties who are secondarily liable
ABSOLUTE LIABILITY
Drawer of a BOE
Warrants:
a. The existence of payee and his then capacity to
indorse;
b. That the instrument will be accepted or paid
upon due presentment by the party primarily
liable according to its tenor; and
c. That if dishonored, he will pay the party
entitled to be paid. (NIL, Sec. 61.)
General indorser
a. Warrants that:
i. Instrument is genuine
ii. He had good title to it
iii. All prior parties had capacity to contract
iv. Instrument, at the time of indorse- ment, was
valid and subsisting;
b. On due presentment, it shall be accepted or paid,
or both according to its tenor
c. If the instrument is dishonored and the ne-
cessary proceedings on dishonor be duly taken,
he will pay the holder. (NIL, Sec. 66.)
Irregular indorser
a. In an order instrument, liable to the payee and all
subsequent parties
b. If bearer instrument or payable to order of maker
or drawer, liable to all parties subsequent to the
maker or drawer
c. If he signs for accommodation of the payee, liable
to all parties subsequent to payee. (NIL, Sec. 64.)
WARRANTIES
The following are the warranties a person provides
in negotiating an instrument:
1. That the instrument is genuine and in all
respects what it purports to be;
2. That he has good title to it;
3. That all prior parties had capacity to contract;
4. That he has no knowledge of any fact which
would impair the validity of the instrument or
render it useless.
NOTE: Indorser’s liability as warrantor is distinct
from his liability to pay the instrument. Even a
58
now sues X for collection. Will it prosper? (2011
Bar)
A: YES, because X, as a qualified indorser, warrants
that the note is genuine.
LIMITED LIABILITY
Qualified Indorser
Warrants that the:
a. Instrument is genuine;
b. He has good title to it;
c. Capacity to contract of all prior parties; and;
d. No knowledge of any fact which would impair
the validity of the instrument. (NIL, Sec.65)
NOTE: He is liable to all parties who derive their title
through his indorsement.
Person negotiating by delivery
Same warranties as a qualified indorser. But unlike a
qualified indorser, a person negotiating by mere
delivery is liable only to his immediate transferee.
(NIL, par. 2, Sec. 65)
NOTE: Person negotiating by mere delivery and a
qualified indorser’s secondary liability is limited,
namely, to their warranties
qualified indorser may incur liability for breach of
implied warranties. As warrantor, his liability is
unconditional.
Q: Distinguish an irregular indorser from a
general indorser (2005 Bar)
A: Irregular Indorser is not a party to the instrument
but he places his signature in blank before delivery.
He is not a party but he becomes one because of his
signature in the instrument. Because his signature
he is considered an indorser and he is liable to the
parties in the instrument.
 NEGOTIABLE INSTRUMENTS LAW
A General Indorser warrants that the instrument is
genuine, that he has a good title to it, that all prior
parties had capacity to contract; that the instrument
at the time of the indorsement is valid and
subsisting; and that on due presentment, the
instrument will be accepted or paid or both
accepted and paid according to its tenor, and that if
it is dishonored, he will pay if the necessary
proceedings for dishonor are made.
PRESENTMENT FOR PAYMENT
It is the presentation of an instrument to the person
primarily liable for the purpose of demanding and
receiving payment.
Manner of presentment
GR: Instrument must be exhibited to the person
from whom payment is demanded; when paid, it
must be delivered to the person paying it (NIL, Sec.
74).
XPNs: When exhibition is excused:
1. Debtor does not demand to see the instrument
and refuses payment on some other grounds; or
2. Instrument is lost or destroyed.
The bank remains liable to the holder if it paid the
certificate of deposit payable to bearer without
requiring its surrender (Far East Bank & Trust
Company v. Querimit, G.R. No. 148582, January 16,
2002).
Payee cannot claim payment for a promissory note
which was stolen and as such is not in his
possession. To make presentment for payment, it is
necessary to exhibit the instrument, which he
cannot do because he is not in possession thereof.
Q: AB issued a promissory note for P1,000
payable to CD or his order on September 15,
2002. CD indorsed the note in blank and
delivered the same to EF. GH stole the note from
EF and on September 14, 2002 presented it to AB
for payment. When asked by AB, GH said CD gave
him the note in payment for two cavans of rice.
AB therefore paid GH P1,000 on the same date.
On September 15, 2002, EF discovered that the
note of AB was not in his possession and he went
to AB. It was then that EF found out that AB had
already made payment on the note.
a. Can EF still claim payment from AB? Why?
b. As a sequel to the same facts narrated above,
EF, out of pity for AB who had already paid
P1,000 to GH, decided to forgive AB and
instead go after CD who indorsed the note in
59
blank to him. Is CD still liable to EF by virtue
of the indorsement in blank? Why? (2002
Bar)
A:
a. Since the instrument became a bearer
instrument, EF could no longer claim payment
from AB. EF is not a holder of the promissory
note. To make the presentment for payment, it
is necessary to exhibit the instrument, which EF
cannot do because he is not in possession
thereof.
b. NO, because CD negotiated the instrument by
delivery.
NECESSITY OF PRESENTMENT FOR
PAYMENT
Presentment for payment is not necessary in order
to charge the person primarily liable on the
instrument. It is only necessary to charge persons
secondarily liable—drawer and indorsers (NIL, Sec.
70).
1. As to drawer, where he has no right to expect or
require that the drawee or acceptor will pay the
instrument (Sec. 79, NIL).
2. As to indorser where the instrument was made
or accepted for his accommodation and he has
no reason to expect that the instrument will be
paid if presented (NIL, Sec. 80).
3. When dispensed with under Sec. 82, NIL such
as:
a. Where, after the exercise of reasonable
diligence, presentment cannot be made;
b. Where the drawee is a fictitious person;
c. By waiver of presentment, express or
implied.
Requisites for a sufficient presentment for
payment (1994, 2002 Bar)
Presentment for payment, to be sufficient, must be
made:
1. By the holder, or his agent authorized to receive
payment on his behalf;
2. At a reasonable hour on a business day;
3. At a proper place;
4. To the person primarily liable, or if he is absent
or inaccessible, to any person found at the place
where the presentment is made (NIL, Sec. 72).
If the instrument is, by its terms, payable at a special
place, and the person primarily liable is able and
willing to pay it there at maturity, such ability and
willingness are equivalent to a tender of payment
upon his part (Sec. 70, NIL).
Time for presentment for payment
 MERCANTILE LAW
INSTRUMENT TIME FOR PRESENTMENT Only the delay in presentment is excused and not
GR: On the day it falls due (NIL, the presentment itself. Hence, as soon as the cause
Sec. 85) of delay ceases to operate, presentment must be
made with reasonable diligence (ibid.).
XPN: If the due date falls on a
Payable at a Saturday, presentment must be Q: Is the bank liable to the payee for depositing
fixed or made on the next Monday. and encashing the crossed checks to an
determinable unauthorized person?
future time NOTE: If presentment for
payment is made before A: YES, the effects of crossing a check relate to the
maturity, it will not result to a mode of its presentment for payment. Under Sec. 72
discharge of the instrument (NIL, of the NIL, presentment for payment, to be
Sec. 50). sufficient, must be made by the holder or by some
Promissory person authorized to receive on his behalf. The
Within a reasonable time after its checks here had been crossed and issued “for
note payable
issue. payee’s account only.” This only signifies that the
on demand
Within a reasonable time after drawer had intended the same for deposit only by
the last negotiation thereof (NIL, the person indicated (Associated Bank v. CA, G.R. No.
Sec. 71). 89802, May 7, 1992).

NOTE: “Last negotiation” means
the last transfer for value.
Subsequent transfers between
Bill of
banks for purposes of collection
exchange
are not negotiations within Sec.
payable on
71.
demand
“Reasonable time” means not
more than 6 months from the
date of issue. Beyond said period,
the check becomes stale and
valueless and thus, should not be
paid.
Order of preference with regard to the place of
presentment
1. Specified place in the instrument
2. Address of the person to make the payment if
given in the instrument
3. Usual place of business or residence of the
person to make the payment
4. Wherever he can be found; or
5. At his last known place of business or residence
(NIL, Sec. 73).
Instrument is payable at a bank

NOTE: Every NI is payable at the time fixed therein When the instrument is payable at bank,
without grace. presentment must be made during banking hours,
unless the person to make payment has no funds
Rules on presentment for payment when there to meet it at any time during the day, in which
maturity date is fixed case presentment at any hour before the bank is
closed on that day is sufficient (NIL, Sec. 75).
TIME OF MATURITY WHEN TO PRESENT
OF INSTRUMENT FOR PAYMENT Requisites of payment in due course
On a Sunday or holiday On the next succeeding
business day Payment is made in due course when (MHG):
On a Saturday On the next succeeding
business day 1. It is made at or after the date of Maturity;
If instrument which Before 12:00 noon on 2. To the Holder thereof;
falls due on a Saturday Saturday, or on 3. In Good faith and without notice that holder’s
is payable on demand Monday, at the option of title is defective (NIL, Sec. 88).
the holder
The term “in good faith” refers to the maker or
Delay in making presentment is excused acceptor and not to the holder.

PARTIES TO WHOM PRESENTMENT FOR

1. When caused by circumstances beyond the
control of the holder; and PAYMENT SHOULD BE MADE
2. Not imputable to his default, misconduct, or
GR: Presentment for payment must be made to the:
negligence (NIL, Sec. 81).
1. The maker in case of a promissory note, or

60
 NEGOTIABLE INSTRUMENTS LAW
2. The acceptor in case of an accepted bill. If the
bill of exchange or check is payable on demand,
the presentment must be made to the drawee
although he is not automatically liable on the
bill.
XPNs: Where the person/s primarily liable is/are:
1. Dead – presentment for payment must be made
to his personal representative (NIL, Sec. 76).
2. Liable as partners and no place of payment
specified – presentment for payment may be
made to any of them though there has been
dissolution of the firm (NIL, Sec. 77).
3. Several persons, not partners, and no place of
payment is specified – presentment for payment
must be made to all of them (NIL, Sec. 78).
4. If the person primarily liable is absent or
inaccessible, then presentment for payment
must be made to any person of sufficient
discretion at the proper place of presentment
(NIL, Sec. 72[d]).
DISPENSATION WITH PRESENTMENT FOR
PAYMENT
GR: Drawer and the indorsers are discharged from
their secondary liability when presentment is not
made.
XPNs:
1. Presentment for payment is not required to
charge drawer and indorser when:
a. Drawer- when he has no right to expect or
require that the drawee or acceptor will
pay the instrument (NIL, Sec. 79).
b. Indorser – When the NI was made or
accepted for his accommodation and he has
no reason to expect that the instrument will
be paid if presented (NIL, Sec. 80).
2. When presentment for payment is dispensed
with under Sec. 82, NIL
3. When the BOE has been dishonored by non-
acceptance, since no Presentment for Payment
for is necessary (NIL, Sec. 151).
Q: Gemma drew a check on September 13, 2010.
The holder presented the check to the drawee
bank only on March 5, 2012. The bank
dishonored the check on the same date. After
dishonor by the drawee bank, the holder gave a
formal notice of dishonor.
a. What is meant by reasonable time as applied
to presentment?
b. Is Gemma still liable to the holder?
A:
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a. Reasonable time is relative. Regard is to be had
to the facts of each case, usage of business and
trade, and the nature of the instrument. With
respect to checks, current banking practice
dictates that the check becomes stale if it is not
presented for payment within 6 months from
issuance.
b. NO. Gemma is discharged from secondary
liability under the check because presentment
and notice of dishonor were made after an
unreasonable length of time. The check was
already stale at the time of presentment.
DISHONOR BY NON-PAYMENT
Subject to the provisions of the law, when the
instrument is dishonored by non-payment, an
immediate right of recourse to all parties
secondarily liable thereon accrues to the holder
(NIL, Sec. 84).
Instances when an instrument is dishonored by
non-payment
NON-PAYMENT UPON NON-PAYMENT
DUE PRESENTATION W/OUT
PRESENTATION
The instrument is duly Presentment is excused
presented for payment and the instrument is
to party primarily overdue and unpaid
liable and it is either
refused or cannot be
obtained
(NIL, Sec. 83).
NOTICE OF DISHONOR
It is a notice given by the holder to the parties
secondarily liable, drawer and each indorser, that
the instrument was dishonored by non-payment or
non-acceptance by the drawee/maker.
Persons primarily liable need not be given notice of
dishonor because they are the ones who dishonored
the instrument.
Purposes for requiring notice of dishonor
1. To inform parties secondarily liable that the
maker or acceptor has failed to meet his
engagement; and
2. To advise them that they are required to make
payment.
Q: Notice of dishonor is not required to be made
in all cases. One instance where such notice is
not necessary is when the indorser is the one to
whom the instrument is supposed to be
 MERCANTILE LAW
presented for payment. The rationale here is
that the indorser (2011 Bar)
A: Already knows of the dishonor and it makes no
sense to notify him of it.
Time and place of giving the notice of dishonor
1. GR: As soon as instrument was dishonored
(NIL, Sec. 10.)–Party is allowed one entire day
for the purpose of giving notice.
XPN: Delay is excused (NIL, Sec. 113,).
NOTE: An instrument cannot be dishonored by
non-payment until after the maturity.
2. Parties reside in the same place
a. Place of business – Before close of business
hours on the day following
b. Residence – Before the usual hours of rest
on the day following
c. By mail – Deposited in the post office in
time to reach him in the usual course on the
day following (NIL, Sec. 103)
3. Parties reside in different places
a. By mail – Deposited in the post office in
time to go by mail (actual departure in the
course of mail from the post office in which
the notice was deposited) the day following
the day of dishonor.
b. If no mail – At a convenient hour (of the
sender) on that day, by the next mail
thereafter
c. Other than by post office (e.g. personal
messenger) – Within the time that notice
would have been received in due course of
mail, if it has been deposited in the post
office within the time specified in (a) (NIL,
Sec. 104).
4. Time of notice to antecedent parties – Same
time for giving notice that the holder has after
the dishonor (NIL, Sec. 107).
NOTE: Actual receipt of the party within the time
specified by law is sufficient though not sent in the
places specified above (NIL, Sec. 108).
Instances when a negotiable instrument is
considered dishonored
For BOE:
1. If not accepted when presented for acceptance;
or
2. If presentment for acceptance is excused and
the bill is not accepted (NIL, Sec. 149).
For PN,
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1. Not paid (that is, payment is refused or not
obtained) when presented for payment at
maturity; or
2. Where presentment is excused or waived and
the instrument is overdue and unpaid (NIL, Sec.
83).
Liability of a person secondarily liable when the
instrument is dishonored
After the necessary proceedings for dishonor had
been duly taken, an immediate right of recourse to
all parties secondarily liable thereon accrues to the
holder (NIL, Sec. 84).
PARTIES TO BE NOTIFIED
Parties to whom notice must be given
Notice of dishonor should be given to:
1. The drawer; or
2. Indorser; or
3. His agent (NIL, Sec. 97)
4. Where party is dead – to a personal
representative or sent to the last residence or
last place of business of the deceased (NIL, Sec.
98)
5. When the parties to be notified are partners –
notice to any one partner though there has been
a dissolution (NIL, Sec. 99)
6. Notice to joint parties who are not partners
must be given to each of them (NIL, Sec. 100)
7. Where a party has been adjudged a bankrupt –
to the party himself or to his trustee or assignee
(NIL, Sec. 101)
In case the instrument was dishonored in the hands
of the agent, notice of dishonor should be given:
1. To the parties secondarily liable – Within the
time fixed by Secs. 102-104, and 107, otherwise,
they are discharged.
2. To his principal – The principal must give notice
to parties secondarily liable as if his agent were
an independent holder (NIL, Sec. 94).
A party who receives notice of dishonor is entitled
to give notice of such dishonor to prior parties
within the same period of time that the holder has
after the dishonor, as if he were the said holder (NIL,
Sec. 107).
PARTIES WHO MAY GIVE NOTICE OF DISHONOR
The parties who may give notice of dishonor are
1. Holder;
2. Another in behalf of the holder
3. Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
 NEGOTIABLE INSTRUMENTS LAW
would have a right to reimbursement from the
party to whom notice is given (NIL, Sec. 90).
EFFECTS OF NOTICE OF DISHONOR
Notice of dishonor, if given by or on behalf of the
holder, inures to the benefit of:
1. All holders subsequent to the holder who has
given notice; and
2. All parties prior to the holder but subsequent to
the party to whom notice has been given and
against whom they may have a right of recourse
(NIL, Sec. 92)
Notice of dishonor if given by party entitled thereto,
inures to the benefit of:
1. The holder; and
2. All parties subsequent to the party to whom
notice is given (NIL, Sec. 93).
FORM OF NOTICE
Form and contents of a notice of dishonor
1. Oral; or
2. In writing;
3. It may be given by personal delivery, or by mail
(NIL, Sec. 96)
4. Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for
payment or for acceptance and that it has
been dishonored (If protest is necessary,
notice must also contain a statement that it
has been protested); and
c. Statement that the party giving the notice
intends to look for the party addressed for
payment.
NOTE: A written notice need not be signed, and an
insufficient notice may be supplemented or
validated by verbal communication. A
misdescription of the instrument does not vitiate
the notice unless the party to whom the notice is
given is in fact misled thereby (NIL, Sec. 95).
WAIVER
It is the willingness on the part of the drawer or
indorser to be bound as such even without due
notice of dishonor.
Waiver of notice maybe given:
1. Before the time of giving notice has arrived; or
2. After the omission to give due notice (NIL, Sec.
109).
Ways to give a waiver of notice
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1. Express; or
2. Implied (e.g. Payment by an indorser after he
learns of the default of the maker; admission of
liability after dishonor) (NIL, Sec. 109).
Parties affected by the waiver of notice
1. All parties (if embodied on the face of the
instrument); or
2. Particular indorser (if written above the
signature of such indorser) (NIL, Sec. 110).
Waiver of protest
It is the waiver of the formal instrument executed
usually by a notary public certifying that the legal
steps necessary to fix the liability of the drawee and
the indorsers have been taken. Thus, it is deemed to
be a waiver not only of a formal protest but also of
presentment and notice of dishonor (NIL, Sec. 111).
DISPENSATION WITH NOTICE
Instances when notice of dishonor is not
necessary
1. Waiver of notice (NIL, Sec. 109)
2. Waiver of protest (NIL, Sec. 111)
3. When notice is dispensed with when after
exercise of reasonable diligence, notice cannot
be given or does not reach the parties sought to
be charged (NIL, Sec. 112)
4. Drawer in cases under Sec. 114, NIL.
5. Indorser in cases under Sec. 115, NIL.; and
6. Where due notice of dishonor by non-
acceptance has been given (notice of dishonor
by non-payment not necessary). (NIL, Sec. 116.)
Instances when a notice of dishonor to the
drawer may be dispensed with
1. When drawer and drawee is the same person
2. Drawee is fictitious or does not have the
capacity to contract
3. Drawer is the person to whom the instrument is
presented for payment (he is the one who
dishonored the instrument)
4. Drawer has no right to expect or require that
the drawee or acceptor will honor the
instrument.
5. Drawer has countermanded the payment (e.g.
stop payment order) (NIL, Sec. 114.)
NOTE: The holder of two checks which were
dishonored because the drawer withdrew her funds
from the bank can hold the drawer liable even if no
notice of dishonor was given to the drawer, since
the drawer had no right to expect that the drawee
 MERCANTILE LAW
bank would honor the checks. (State Investment
House, Inc. vs. Court of Appeals, G.R. No. 101163,
January 11, 1993)
Q: P authorized A to sign a negotiable
instrument in his (P’s) name. It reads: “Pay to B
or order the sum of Php1 million. Signed, A (for
and in behalf of P).” The instrument shows that
it was drawn on P. B then indorsed to C, C to D,
and D to E. E then treated it as a bill of exchange.
Is presentment for acceptance necessary in this
case? (2011 Bar)
A: NO, since the drawer and drawee are the same
person.
Q: Juben issued to Y two post-dated checks as
security for pieces of jewelry to be sold. Y
negotiated the check to S. When Juben failed to
sell the jewelry, he withdrew all his funds from
the drawee bank. After dishonor, Juben
contends that the holder failed to give him a
notice of dishonor. Is notice of dishonor
necessary?
A: NO, Juben was responsible for the dishonor of his
checks, hence, there was no need to serve him notice
of dishonor (State Investment House, Inc. v. CA,
supra.).
Instances when it is not necessary to give a
notice of dishonor to the indorser
1. Drawee is fictitious or has no capacity to
contract, and indorser was aware of these facts
at the time he indorsed the instrument;
2. Indorser is person to whom the instrument is
presented for payment; or
3. Instrument was made or accepted for his
accommodation (NIL, Sec. 115).
EFFECT OF FAILURE TO GIVE NOTICE
Effect of the omission of a previous holder to
give notice of dishonor by non-acceptance
It does not prejudice the rights of a holder in due
course subsequent to the omission to present the
instrument to the drawee for acceptance and notify
the drawer and indorsers if acceptance is refused
(NIL, Sec. 117).
Effect of failure to give notice of dishonor
GR: Any person to whom such notice is not given is
discharged, but he will still be liable for breach of
warranties pertaining to the instrument.
XPNs:
64
1. Waiver (NIL, Sec. 109)
2. Notice is dispensed with (NIL, Sec. 112)
3. Notice not necessary to drawer (NIL, Sec. 114)
4. Notice not necessary to indorser (NIL, Sec. 115)
NOTE: Holder is not required to notify all indorsers,
he may select to hold only one or more indorsers.
Indorsers who are discharged from liability by
reason that no notice of dishonor was given to them
is still liable for breach of warranties as to the NI.
Effect of lack of notice of dishonor on the
instrument which is payable in installments
1. No acceleration clause – Failure to give notice of
dishonor on a previous installment does not
discharge drawers and indorsers as to
succeeding installments.
2. With acceleration clause – It depends upon
whether the clause is automatic or optional.
a. Automatic – failure to give notice of
dishonor as to a previous installment will
discharge the persons secondarily liable as
to the succeeding installments;
b. Optional – if not exercised, the rule would
be the same as if there is no acceleration
clause. If exercised, the rule would be the
same as if the installment contains an
automatic acceleration clause (Town
Savings Bank v. CA, G.R. No. 106011, June 17,
1993).
DISCHARGE OF NEGOTIABLE INSTRUMENT
It is the release of all parties, whether primary or
secondary, from the obligations arising thereunder.
It renders the instrument without force and effect,
and consequently, it can no longer be negotiated.
Methods for discharge of instrument
1. Payment by principal debtor:
a. By or on behalf of principal debtor
b. At or after its maturity
c. To the holder thereof
d. In good faith and without notice that the
holder’s title is defective
2. Payment by accommodated party
3. Intentional cancellation of instrument by the
holder (by expressly stating it in the instrument
or when the instrument is torn up, burned or
destroyed)
4. Any act which discharges a simple contract for
the payment of money under Art. 1231 of the
NCC specifically remission, novation, and
merger.
NOTE: Loss of the negotiable instrument will not
extinguish liability; compensation is not available so
 NEGOTIABLE INSTRUMENTS LAW
long as an obligation is evidenced by a negotiable
instrument (Villanueva, 2009).
5. Reacquisition by principal debtor in his own
right. Reacquisition must be:
a. By the principal debtor
b. In his own right
c. At or after date of maturity (instrument is
discharged; if made before, it may be
renegotiated) (NIL, Sec. 119).
Q: Salazar with Calleja and Kallos procured from
J. Y. Bros. 300 cavans of rice. As payment, Salazar
negotiated and indorsed to J.Y. Bros. Prudential
Bank Check issued by Timario with the
assurance that the check is good as cash. On that
assurance, J.Y. Bros. parted with 300 cavans of
rice to Salazar. However, upon presentment, the
check was dishonored due to "closed account."
Calleja, Kallos and Salazar delivered to J.Y. Bros.
a replacement cross Solid Bank Check again
issued which bounced due to insufficient funds.
Despite demands, Salazar failed to settle the
amount due. J.Y. Bros., charged Salazar and
Timario with the estafa.
Salazar contends that the issuance of the Solid
Bank check and the acceptance thereof by J.Y.
Bros, in replacement of the dishonored
Prudential Bank check, amounted to novation
that discharged the latter check; that
respondent's acceptance of the Solid Bank
check, notwithstanding its eventual dishonor by
the drawee bank, had the effect of erasing
whatever criminal responsibility, under Article
315 of the RPC, the drawer or indorser of the
Prudential Bank check would have incurred in
the issuance thereof; and that a check is a
contract which is susceptible to a novation just
like any other contract. Is Salazar correct?
A: NO. While Section 119 of the NIL in relation to
Article 1231 of the Civil Code provides that one of
the modes of discharging a negotiable instrument is
by any other act which will discharge a simple
contract for the payment of money, such as
novation, the acceptance by the holder of another
check which replaced the dishonored bank check
did not result to novation.
There are only two ways which indicate the
presence of novation and thereby produce the effect
of extinguishing an obligation by another which
substitutes the same. First, novation must be
explicitly stated and declared in unequivocal terms
as novation is never presumed. Secondly, the old
and the new obligations must be incompatible on
every point.
65
In this case, J.Y. Bros.’s acceptance of the Solid Bank
check, which replaced the dishonored Prudential
Bank check, did not result to novation as there was
no express agreement to establish that Salazar was
already discharged from his liability. Neither was
there any incompatibility, since both checks were
given to terminate a single obligation arising from
the same transaction (Anamer Salazar v. J.Y.
Brothers Marketing Corporation, G.R. No. 171998,
October 20, 2010, in Divina 2014).
DISCHARGE OF SECONDARY PARTIES
Methods of discharge of secondary parties (ACS
TReE)
1. Any Act which discharges the instrument;
2. Intentional Cancellation of his signature by the
holder
3. Discharge of prior party which may be made
when signature is Stricken out
4. Valid Tender of payment by a prior party;
5. Release of the principal debtor, unless holder
expressly reserves his right of recourse against
the said subsequent parties
6. Extension of time of payment, unless:
a. Extension is consented to by such party
b. Holder expressly reserves his right of
recourse against such party (NIL, Sec. 120)
Q: The rule is that the intentional cancellation of
a person secondarily liable results in the
discharge of the latter. With respect to an
indorser, the holder's right to cancel his
signature is: (2011 Bar)
A: Limited to the case where the indorsement is not
necessary to his title.
Effects of payment by persons secondarily liable
1. Instrument is not discharged
2. It only cancels his own liability and that of the
parties subsequent to him
3. GR: Instrument may be renegotiated
XPNs:
a. Where it is payable to the order of a third
person, and has been paid by the drawer;
and
b. Where it is paid by the accommodated
party.
NOTE: (a) and (b) has the same effect as payment
by the party primarily liable.
4. Person paying is remitted to his former rights
(as regards prior parties) and he may strike out
 MERCANTILE LAW
his own and all subsequent indorsements (NIL,
Sec. 121).
RIGHTS OF THE PARTY WHO DISCHARGED THE
INSTRUMENT
GR: The party so discharging the instrument is
remitted to his former rights as regards all prior
parties, and he may strike out his own and all
subsequent indorsements, and again negotiate the
instrument.
XPNs:
1. Where it is payable to the order of a third
person, and has been paid by the drawee; and
2. It was made or accepted for accommodation,
and has been paid by the party accommodated.
RENUNCIATION BY THE HOLDER
Renunciation
It is the act of surrendering a claim or right with or
without recompense (a PERSONAL defense).
Manner of making renunciation by the holder
1. Must be written
2. If oral, the instrument must be surrendered to
the person primarily liable (NIL, Sec. 122).
Effects of renunciation
1. Made in favor of principal debtor made at or
after the maturity (made absolutely and
unconditionally) of the instrument – discharges
the instrument (NIL, Sec. 122).
2. Made in favor of a secondary party may be made
by the holder before, at or after maturity –
discharges only the secondary parties and all
subsequent to him (NIL, Sec. 122).
3. Renunciation does not affect the rights of a
holder in due course without notice (NIL, Sec.
120).
Rule regarding the cancellation of an
instrument
It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the
authority of the holder. But where an instrument or
any signature appears to have been cancelled, the
burden of proof lies on the party alleging that the
cancellation was made unintentionally, or under a
mistake or without authority (NIL, Sec. 123).
MATERIAL ALTERATION
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CONCEPT
Material alteration
It is any change in the instrument which affects or
changes the liability of the parties in any way. It
means an unauthorized change in an instrument
that purports to modify in any respect the obligation
of a party or an unauthorized addition of words or
numbers or other change to an incomplete
instrument relating to the obligation of a party.
Instances that constitute material alteration
Any alteration which changes:
1. Date
2. Sum payable, either for principal or interest
3. The time or place of payment
4. Number or the relations of the parties
5. Currency in which payment is to be made
6. Adds a place of payment where no place is
specified
7. Any other change or addition which alters the
effect of the instrument (NIL, Sec. 125.)
The change in the date of indorsement is not material
where the date is not necessary to fix the maturity
of the instrument.
There is no material alteration when the serial
number of a check had been altered. The alteration
of the serial number of a check did not change the
relations between the parties nor the effect of the
instrument. Hence, the alteration on the serial
number of a check is not a material alteration
(International Corporate Bank v. CA, G.R. No. 141968,
February 12, 2001).
Spoliation
It refers to material alteration of an instrument
done by a stranger. It has the same effect as
alteration.
EFFECT OF MATERIAL ALTERATION
Material alteration of a negotiable instrument,
without the assent of all parties liable thereon, has
the following effects:
1. Avoids the instrument except against:
a. A party who has made the alteration;
b. A party who authorized or assented to the
alteration; or
c. The indorsers who indorsed subsequent to
the alteration (because of their
warranties).
2. If negotiated to an HIDC, he may enforce the
payment thereof according to its original tenor
 NEGOTIABLE INSTRUMENTS LAW
against the person not a party to the alteration.
He may also enforce payment thereof against
the party responsible for the alteration for the
altered amount.
3. If negotiated to a holder not an HIDC, he cannot
enforce payment against the person not a party
prior to the alteration. He may, however
enforce payment according to the altered tenor
from the person who caused the alteration and
from the indorsers (NIL, Sec. 12).
A drawee who accepts a materially altered check
cannot recover from the holder and the drawer
(2011 Bar).
A material alteration of an instrument without the
assent of all parties liable thereon results in its
avoidance, except against a party who has made,
authorized or assented to the alteration and
subsequent indorser. (2011 Bar)
ACCEPTANCE
DEFINITION
Acceptance of a bill
It is a signification by the drawee of his assent to the
order of the drawer (NIL, Sec. 132).
Requisites for acceptance
1. In writing, except constructive acceptance and
to a foreign bill payable in another state (unless
the other state requires for written
acceptance);
2. Signed by the drawee (without it, he is not
liable);
3. Must express a promise to pay money (not
goods);
4. Delivered to the holder (before delivery or
notification, acceptor may revoke or cancel his
acceptance).
Upon acceptance, the bill, in effect becomes a note.
The drawee who thereby becomes an acceptor
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser.
Q: A bill of exchange states on its face: “One (1)
month after sight, pay to the order of Mr. R the
amount of Php50,000.00, chargeable to the
account of Mr. S. Signed, Mr. T.” Mr. S, the
drawee, accepted the bill upon presentment by
writing on it the words “I shall pay
Php30,000.00 three (3) months after sight.” May
he accept under such terms, which varies the
command in the bill of exchange? (2011 Bar)
67
A: YES, since a drawee is allowed to effect a
qualified acceptance in which case he shall be liable
according to the tenor of his acceptance.
Q: X, drawee of a bill of exchange, wrote the
words: “Accepted, with promise to make
payment within two days. Signed, X.” The
drawer questioned the acceptance as invalid. Is
the acceptance valid?
A: YES, because the acceptance is in reality a clear
assent to the order of the drawer to pay. Qualified
acceptance as to time is allowed (NIL, Sec. 141 [d]).
MANNER
Manner of making an acceptance
Acceptance may be made
1. On the bill itself,
2. On a separate paper; and if on a separate paper
a. It may be acceptance as to an existing bill;
or
b. It may be acceptance as to a non-existing
bill.
If the bill is non-existent, the acceptance on a
separate paper must comply with following
requirements:
1. The contemplated drawee shall describe the bill
to be drawn and promise to accept it;
2. Bill shall be drawn within a reasonable time
after such promise is written; and
3. The holder shall take the bill upon the credit of
the promise.
Kinds of acceptance
1. General Acceptance -It assents without
qualification to the order of the drawer (NIL,
Sec. 139).
2. Qualified Acceptance - An acceptance which in
express terms varies the effect of the bill as
drawn (ibid.).
NOTE: A holder may refuse to accept a qualified
acceptance and if he does not obtain an unqualified
acceptance, he may treat the bill as dishonored by
non-acceptance (NIL, Sec. 142).
Kinds of qualified acceptance
1. Conditional – makes payment by the acceptor
dependent on the fulfillment of a condition
therein stated.
2. Partial – an acceptance to pay part only of the
amount for which the bill is drawn.
 MERCANTILE LAW
3. Local – an acceptance to pay only at a particular
place.
4. Qualified as to time– a bill is accepted to be paid
on or after a specified date.
5. As to drawee - acceptance of some one or more
of the drawees but not of all (NIL, Sec. 141).
Other kinds of acceptance
1. Constructive/implied (NIL, Sec. 137).
a. Drawee to whom the bill is delivered for
acceptance destroys it; or
b. Drawee refuses, within 24 hours after such
delivery, or within such time as is given
him, to return the bill accepted or non-
accepted
2. Extrinsic– the acceptance is written on a paper
other than the bill itself. To be binding upon the
acceptor:
a. Acceptance must be shown to the person to
whom the instrument is negotiated; and
b. Such person must take the bill for value on
the faith of such acceptance (NIL, Sec. 134).
3. Virtual
a. Unconditional promise in writing to accept
a bill
b. Promise made before it is drawn
c. Any person who, upon faith thereof,
receives the bill for value (NIL, Sec. 135).
TIME FOR ACCEPTANCE
The drawer has 24 hours after presentment to
decide whether or not he will accept the bill. The
acceptance, if given, dates as of the day of
presentation (NIL, Sec. 136).
Drawee bank is not entitled to 24 hours to decide
whether or not to pay a check since a check is
presented for payment, not acceptance.
RULES GOVERNING ACCEPTANCE
Effect of accepting an instrument with a
qualified acceptance
GR: When the holder takes a qualified acceptance
the drawer and indorsers are discharged from
liability on the bill.
The holder may refuse to take a qualified acceptance
and if he does not obtain an unqualified acceptance,
he may treat the bill as dishonored by non-
acceptance (Sundiang Sr. & Aquino, 2014).
XPNs:
68
1. When they have expressly or impliedly
authorized the holder to take a qualified
acceptance; or
2. Subsequently assent thereto;
3. Implied assent (when they did not express their
dissent to the holder within a reasonable time
when they received a notice of qualified
acceptance) (NIL, Sec. 142).
When the drawer or indorser receives notice of a
qualified acceptance, he must, within a reasonable
time, express his dissent to the holder or he will be
deemed to have assented thereto (Sundiang Sr. &
Aquino, 2014).
Acceptance of an incomplete bill
Acceptance may be made before the bill has been
signed by the drawer or while otherwise
incomplete, or after it is overdue, or even after it has
been dishonored by non-acceptance or non-
payment (NIL, Sec. 138).
Effect of the certification by the drawee bank
Certification implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they
have been set apart for its satisfaction and that they
shall be so applied whenever the check is presented
for payment. Where a check is certified by the bank
on which it is drawn, the certification is equivalent
to acceptance (NIL, Secs. 187, 189; New Pacific
Timber v. Seneris, G.R. No. L-41764, December. 19,
1980).
PRESENTMENT FOR ACCEPTANCE
Presentment for acceptance
It is the production or exhibition of a bill of exchange
to the drawee for his acceptance or payment (also
includes presentment for payment).
GR: Acceptance is not necessary to render any party
to the bill liable (NIL, Sec. 143, par. 2).
XPNs:
1. Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the
instrument;
2. When bill expressly stipulates that it shall be
presented for acceptance; or
3. Where the bill is drawn payable elsewhere than
at the residence or place of business of the
drawee (NIL, Sec. 143, par. 1).
The holder must either present it for acceptance or
negotiate it within a reasonable time, otherwise, the
 NEGOTIABLE INSTRUMENTS LAW
drawer and all indorsers are discharged (NIL, Sec. 1. Where the drawee is dead, or has absconded, or
144). is a fictitious person not having capacity to
contract by bill;
TIME/PLACE/MANNER OF ACCEPTANCE 2. Where, after exercise of reasonable diligence,
presentment cannot be made; or
Proper presentment for acceptance 3. Where, although presentment has been
irregular, acceptance has been refused on some
It must be made: other ground (NIL, Sec. 148).

1. By or on behalf of the holder DISHONOR BY NON-ACCEPTANCE

2. At a reasonable hour on a business day
3. Before the bill is overdue; and Instances when a bill is dishonored by non-
4. To the drawee or some person authorized to acceptance
accept or refuse to accept on his behalf (NIL, Sec.
145). 1. When it is duly presented for acceptance and
such an acceptance is refused or cannot be
WHEN PRESENTMENT MUST BE obtained; or
MADE TO 2. When presentment for acceptance is excused,
Bill addressed to 2 All of them unless one has and the bill is not accepted (NIL, Sec. 149).
or more drawees authority to accept or
who are not refuse acceptance for all, in It is not sufficient that presentment for acceptance
partners which case presentment is excused, it is also necessary that the bill remains
may be made to him only not accepted.
(NIL, Sec. 145, [a]).
Duty of the holder where bill is not accepted
Drawee is dead Drawee's personal
representative (NIL, Sec. If within 24 hours after due presentment, the bill is
145, [b]). not accepted, the person presenting it must treat the
bill as dishonored by non-acceptance otherwise he
NOTE: Presentment is will lose the right of recourse against the drawer
merely permissive since it is and indorsers (NIL, Sec. 150).
excused by (NIL, Sec.148
[a]). Rules when a bill is dishonored by non-
acceptance
Drawee is adjudged To drawee or his trustee/
a bankrupt or assignee (NIL, Sec 145, [c]). 1. Right of recourse against all secondary party
insolvent or has accrues to the holder.
made an 2. No presentment for payment is necessary since
assignment for the dishonor of the instrument by non-payment is
benefit of creditors to be expected.
3. If the instrument is accepted after it has been
PRESENTMENT FOR ACCEPTANCE dishonored by non-acceptance, presentment
for payment is necessary upon maturity.
Failure to make such presentment will discharge the 4. In case of non-payment, holder must give the
drawer from liability or to the extent of the loss corresponding notice of dishonor; otherwise,
caused by the delay (NIL, Sec. 186; Republic of the secondary parties are discharged.
Philippines vs. PNB, G.R. No. L-16106, December 30,
1961). Rights of a holder when bill is not accepted

However, delay in presentment may be excused When a bill is dishonored by non-acceptance, an

where the holder of a bill drawn payable elsewhere
than at the place of business or the residence of the
drawee has no time with the exercise of reasonable
diligence, to present the bill for acceptance before
presenting it for payment on the day that it falls due
(NIL, Sec. 147).
Instances when presentment is excused
immediate right of recourse against the drawer and
indorsers accrues to the holder, and no presentment
for payment is necessary (NIL, Sec. 151).
Acceptance for honor
It is an undertaking by a stranger to a bill after
protest for the benefit of any party liable thereon or

69
 MERCANTILE LAW
for the honor of the person for whose account the
bill is drawn which acceptance inures to the benefit
of all parties subsequent to the person for whose
honor it is accepted, and conditioned to pay the bill
when it becomes due if the original drawee does not
pay it (NIL, Sec. 161).
Requisites of acceptance for honor (WIS)
1. Must be in Writing
2. Must Indicate that it is an acceptance for honor;
3. Must be Signed by the acceptor for honor (NIL,
Sec. 162)
PROMISSORY NOTE
Promissory note
An unconditional promise in writing made by one
person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or to bearer
(NIL, Sec. 184).
Special types of promissory notes
1. Certificate of deposit – a written
acknowledgment by a bank of the receipt of
money on deposit on which the bank promises
to pay to the depositor or to him or his order or
to some other person or to him or his order, or
to a specified person or bearer, on demand or
on a fixed date, often with interest.
2. Bonds – an evidence of indebtedness issued by
a public or private corporation which
constitutes a promise, under seal, to pay money.
It runs for a longer period of time than a PN.
3. Registered Bond – one payable only to the
person whose name appears on the face of the
certificate.
4. Coupon Bond – one to which are attached
coupons which entitle the holder to interest
when due.
5. Bank Note – instrument issued by a bank for
circulation as money payable to bearer on
demand.
6. Due Bill - PN which shows on its face that one
person acknowledges his indebtedness to
another. The word “due” is commonly used.
7. Mortgage Note – an instrument secured by
either a real (REM) or personal property
(Chattel).
8. Title-Retaining Note – an instrument used to
secure the purchase price of goods. It ordinarily
provides that title to the goods shall remain in
payee’s name until the note is paid in full.
9. Collateral Note – it is used when the maker
pledges securities to the payee to secure the
payment of the amount of the note.
70
10. Judgment Note – this is a note to which a power
of attorney is added enabling the payee to take
judgment against the maker without the
formality of a trial if the note is not paid on its
due date (De Leon, supra).
Q: Prudential Bank received from the CIR a Final
Assessment Notice and a Demand Letter for
deficiency Documentary Stamp Tax for the
taxable year 1995 on its Repurchase Agreement
with the BSP, Purchase of Treasury Bills from
the BSP, and on its SAP product. Prudential Bank
protested the assessment on the ground that the
documents subject matter of the assessment are
not subject to DST. It contends that its SAP is not
subject to DST because it is not included in the
list of documents under Section 180 of the old
NIRC, as amended. Prudential Bank insists that
unlike a time deposit, its SAP is evidenced by a
passbook and not by a deposit certificate. In
addition, its SAP is payable on demand and not
on a fixed determinable future. To support its
position, petitioner relies on the legislative
intent of the law prior to Republic Act (RA) No.
9243 and the historical background of the
taxability of certificates of deposit.
Prudential Bank further contends that even
assuming that its SAP is subject to DST, the CTA
En Banc nonetheless erred in denying
Prudential Bank’s withdrawal of its petition
considering that it has paid under the IVAP,
which it claims is 100% of the basic tax of the
original assessment BIR. Prudential Bank insists
that the payment it made should be deemed
substantial compliance considering the refusal
of the CIR to issue the letter of termination and
authority to cancel assessment. Is Prudential
Bank’s contention tenable?
A: NO. A certificate of deposit is defined as a written
acknowledgment by a bank or banker of the receipt
of a sum of money on deposit which the bank or
banker promises to pay to the depositor, to the
order of the depositor, or to some other person or
his order, whereby the relation of debtor and
creditor between the bank and the depositor is
created. A document to be considered a certificate
of deposit need not be in a specific form. Thus, a
passbook issued by a bank qualifies as a certificate
of deposit drawing interest because it is considered
a written acknowledgement by a bank that it has
accepted a deposit of a sum of money from a
depositor. Thus, it is subject to documentary stamp
tax (Prudential Bank v. Commissioner of Internal
Revenue, G.R. No. 180390, July 27, 2011, in Divina,
2014).
 NEGOTIABLE INSTRUMENTS LAW
Instances when a bill of exchange may be treated P35,147.59. He issued a post-dated PCIB check
as a promissory note (2015 Bar) in favor of SLI in the amount of P34,588.72. After
clearing, the amount of the check was
1. The drawer and the drawee are the same immediately debited by EPCIB from Tan’s
person; account thereby leaving him with a balance of
2. The drawee is a fictitious person; only P558.87. He thereafter issued three (3)
3. The drawee has no capacity to contract; checks payable to ASELCO, ANECO, and the other
4. The instrument is so ambiguous that there is payable in cash. When the latter were presented
doubt whether it is a bill or a note (Sundiang Sr. for payment, the three (3) checks were
& Aquino, 2014, citing NIL, Secs. 17[e] and 130). dishonored for being drawn against insufficient
funds. As a result, the electric power supply for
CHECK the two mini-sawmills owned and operated by
Tan, was cut off and it was restored only after
DEFINITION sometime. After trial, the RTC ruled in favor of
EPCIB and dismissed the complaint. On appeal
It is a bill of exchange drawn on a bank and payable the CA reversed the decision of the RTC. Is EPCIB
on demand (NIL, Sec. 185). liable due to its premature debiting of the post-
dated check, thereby affecting Tan’s business
A check must be presented for payment within a operations?
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the A: YES. The premature debiting of the postdated
loss caused by the delay. check by the bank which resulted to insufficiency of
funds that brought about the dishonor of two checks
Essential characteristics of checks causing the electric supply to be cut-off and affected
business operations indicates the negligence of the
1. They are drawn on a bank; and bank. For its failure to exercise extra-ordinary
2. Payable instantly on demand. diligence, it should be made liable in the case
(Equitable PCI Bank v. Arcelito B. Tan, G.R. No.
Q: Tan maintained a current and savings 165339, August 23, 2010, in Divina, 2014).
account with PCIB, now EPCIB, with a balance of

Check vs. Bill of Exchange

BASIS CHECKS BOE

Drawee Always drawn on a bank or banker May or may not be drawn on a bank and
against a previous deposit of funds need not be drawn against a deposit
Payability Always payable on demand Either payable on demand or at a fixed or
determinable future time (NIL, Sec.4)
Function Ordinarily intended for immediate Intended for circulation as instrument of
payment credit
Presentment for Must be presented for payment within a Must be presented for payment within a
Payment reasonable time after its issue(NIL, reasonable time after its last negotiation
Sec.186) (NIL, Sec. 171)
Discharge of When a check is accepted or certified, the They remain liable despiteacceptance
Liability drawer & indorsers are discharged from (NIL, Sec. 84)
liability thereon (NIL, Sec. 188)
Effect of the Death Death of the drawer of a check with the Death of the drawer of an ordinary bill
of the Drawer knowledge of the bank revokes the does not revoke the authority of the
authority of the bank to pay. drawee to pay.
Presentment Need not be presented for acceptance Must be presented for acceptance in
for Acceptance (NIL, Sec. 185) certain cases (NIL, Sec. 143)

71
 MERCANTILE LAW
Q: A check was dishonored due to material
alteration. The creditor then filed an action
against drawee bank for the amount. Will the
action prosper?
A: NO. If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections
185 and 189 of the NIL, sue the bank. The payee
should instead sue the drawer who might in turn
sue the bank. This is so because no privity of
contract exists between the drawee-bank and the
payee (Villanueva v. Nite, G.R. No. 148211, July 25,
2006).
NOTE: A check of itself does not operate as an
assignment of any part of the funds to the credit of
the drawer with the bank, and the bank is not liable
to the holder, unless and until it accepts or certifies
the check (NIL, Sec. 189).
Stopping payment
The drawer has the right to order the drawee to stop
payment of a check and this right flows from the rule
that the issuance of a check by itself is not an
assignment of funds by the drawee. If a bank pays a
check after it has been notified to stop payment, it
pays in its own responsibility and will not be
permitted to charge the account. The drawer may
countermand payment if he has a valid defense
against the holder of the check. Thus,
countermanding of a check is proper where the
payee failed to deliver the goods that he was
supposed to deliver (Sundiang Sr. & Aquino, 2014,
citing Bataan Cigar and Cigarette Factory v. CA, GR.
No. 93048, March 3, 1994).
Effect of erasure or alteration on checks
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective January
4, 2016, the following shall no longer be eligible or
acceptable for clearing:
a. Any check that shows or indicates on its face
erasure or alteration regardless of any
signature or initials that appear to indicate
authorization of the alteration or erasure; or
b. Does not indicate the date, payee, amount
payable in figures, amount payable in words, or
signature of the drawer
KINDS
Special types of checks
72
1. Cashier’s Check – a BOE drawn by the bank upon
itself and is accepted at its issuance. It is usually
signed by the cashier of the bank.
2. Manager’s Check – a BOE drawn by the bank
upon itself and is accepted at its issuance and
signed by a manager on behalf of a bank.
A manager’s check is as good as cash. It is a
check drawn by the bank against itself. It is
deemed pre-accepted by the bank from the
moment of issuance. The check becomes the
primary obligation of the bank which issues it
and constitutes its written promise to pay. By
issuing it, the bank in effect commits its total
resources, integrity and honor behind the check
(Metrobank and Trust Company vs Chiok, GR No.
172652, November 26, 2014). (2015 Bar)
3. Certified Check – Drawn by a depositor upon
funds to his credit in a bank which an officer of
a bank certifies will be paid on presentation.
4. Crossed Check – Done by writing 2 parallel lines
on the left top portion of the check. The
marking signifies that the bank should pay only
with the intervention of the company only.
5. Memorandum Check – A check with
“Memorandum” written on its face. The writing
signifies that the drawer engages to pay the
bona fide holder absolutely, without any
condition concerning its presentment.
6. Traveler’s Checks – Instruments purchased from
banks or express companies which can be used
like cash upon the second signature by the
purchaser (De Leon, supra).
Crossed check
A crossed check is a check with two (2) parallel
lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that
payment must be made to the right party; otherwise
the bank has no authority to use the drawer's funds
deposited with the bank.
The purpose is to insure payment to the payee. It
can only be deposited but may not be converted into
cash by the drawer. Crossing a check does not
destroy its negotiability but the check may be
negotiated only once – to one who has an account
with the bank (De Ocampo v. Gatchalian, G.R. No. L-
15126, November 30, 1961).
The effects of crossing a check are:
1. That the check may not be encashed but only
deposited in the bank;
2. That the check may be negotiated only once- to
one who has an account with a bank;
3. That the act of crossing the check serves as a
warning to the holder that the check has been
 NEGOTIABLE INSTRUMENTS LAW
issued for definite purpose so that he must
inquire if he has received the check pursuant to
the purpose. Otherwise, he is not an HIDC (State
Investment House v. IAC, G.R. No. 72764, July 13,
1989).
Q: Po Press issued in favor of Jose a postdated
crossed check, in payment of newsprint which
Jose promised to deliver. Jose sold and
negotiated the check to Excel Inc. at a discount.
Excel did not ask Jose the purpose of crossing
the check. Since Jose failed to deliver the
newsprint, Po ordered the drawee bank to stop
payment on the check. Efforts of Excel to collect
from Po failed. Excel wants to know from you as
counsel:
a. Whether as second indorser and holder of
the crossed check, is it a holder in due
course?
b. Whether Po’s defense of lack of
consideration as against Jose is also
available as against Excel? (1994, 1995,
2005 Bar)
A:
a. Excel Inc. is not a holder in due course. The act
of crossing the check imposes upon the holder
thereof the duty to ascertain the indorser’s, title
to the check or the nature of his possession or
the purpose for which it was issued. Excel is
guilty of gross negligence amounting to legal
absence of good faith for its failure to inquire
from Jose the purpose for which the three
checks were crossed despite the warning of the
crossing, hence, it is not deemed a holder in due
course.
b. YES, the defense of lack of consideration as
against Jose is also available as against Excel.
For not being a holder in due course, Excel is
subject to personal defenses as if the check
were non-negotiable, such as lack of
consideration between Po Press and Jose. In
this case, Jose’s failure to deliver the newsprint
resulted in the absence of consideration for the
issuance of the check. Consequently, Po Press
cannot be made liable to pay the face value of
the check.
Q: PCIB filed an action against Balmaceda, it
alleging that between 1991 and 1993, by taking
advantage of his position as branch manager, he
fraudulently obtained and encashed 31
Managers checks in the P10,782,150.00. PCIB
moved to be allowed to file an amended
complaint to implead Rolando Ramos as one of
the recipients of a portion of the proceeds from
Balmacedas alleged fraud. Since Balmaceda did
not file an Answer, he was declared in default.
73
On the other hand, Ramos filed an Answer
denying any knowledge of Balmacedas scheme.
The RTC issued a decision in favor of PCIB. On
appeal, the CA dismissed the complaint against
Ramos. According to the CA, the mere fact that
Balmaceda made Ramos the payee in some of
the Managers checks does not suffice to prove
that Ramos was complicit in Balmacedas
fraudulent scheme. Is PCIB itself at fault as
employer?
A: YES. While its manager forged the signature of
the authorized signatories of clients in the
application for manager’s checks and forged the
signatures of the payees thereof, the drawee bank
also failed to exercise the highest degree of diligence
required of banks in the case at bar. It allowed its
manager to encash the manager’s checks that were
plainly crossed checks. A crossed check is one
where two parallel lines are drawn across its face or
across its corner. Based on jurisprudence, the
crossing of a check has the following effects: (a) the
check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only once —
to the one who has an account with the bank; and
(c) the act of crossing the check serves as a warning
to the holder that the check has been issued for a
definite purpose and he must inquire if he received
the check pursuant to this purpose; otherwise, he is
not a holder in due course. In other words, the
crossing of a check is a warning that the check
should be deposited only in the account of the
payee. When a check is crossed, it is the duty of the
collecting bank to ascertain that the check is only
deposited to the payee’s account. In complete
disregard of this duty, PCIB’s systems allowed
Balmaceda to encash 26 manager’s checks which
were all crossed checks, or checks payable to the
“payee’s account only.” (PCIB v. Balmaceda and
Ramos, G.R. No. 158143 September 21, 2011, in
DIvina, 2014).
Crossed check with notation “Account Payee
Only”
A crossed check with the notation account payee
only can only be deposited in the named payees
account. It is gross negligence for a bank to ignore
this rule solely on the basis of a third partys’ oral
representations of having a good title thereto.
The fact that a person, other than the named payee
of the crossed check, was presenting it for deposit
should have put the bank on guard. It should have
verified if the payee authorized the holder to
present the same in its behalf or indorsed it to him.
The bank’s reliance on the holder’s assurance that
he had good title to the three checks constitutes
gross negligence even though the holder was
 MERCANTILE LAW
related to the majority stockholder of the payee.
While the check was not delivered to the payee, the
suite may still prosper because the payee did not
assert a right based on the undelivered check but on
quasi-delict (Equitable Banking Corporation v.
Special Steel Products, G.R. No. 175350, June 13, 2012,
in Divina, 2014).
Q: Distinguish clearly crossed checks from
cancelled checks (2004 Bar)
A: A crossed check is one with two parallel lines
drawn diagonally on the left portion of the check. On
the other hand, a cancelled check is one marked or
stamped "paid" and/or "cancelled" by or on behalf
of a drawee bank to indicate payment thereof.
Q: On Oct 12, 1993, Chelsea Straights, a
corporation engaged in the manufacture of
cigarettes, ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two crossed
checks postdated 15 Mar 94 and 15 Apr 94 in full
payment therefor. On 19 Jan 94 Moises sold to
Dragon Investment House at a discount the two
checks drawn by Chelsea in his favor. Moises
failed to deliver the bales of tobacco as agreed
despite Chelsea’s demand. Consequently, on 1
Mar 94 Chelsea issued a “stop payment” order
on the 2 checks issued to Moises. Dragon,
claiming to be a holder in due course, filed a
complaint for collection against Chelsea for the
value of the checks. Rule on the complaint of
Dragon. Give your legal basis. (1995 Bar)
A: The complaint should be dismissed. The act of
crossing the check imposes upon the holder thereof
the duty to ascertain the indorser’s, in this case
Moises’ title to the check or the nature of his
possession. Failing in this respect, Dragon cannot be
deemed a holder in due course and as such, Moises
is subject to personal defenses as if the check were
non-negotiable, such as lack of consideration
between Chelsea and Moises for Moises’ failure to
deliver the bales of tobacco. There being no
consideration for the issuance of the check, Chelsea
cannot thus be made liable to pay the face value of
the check and this constitutes a defense not only
against Moises but even against Dragon who is not a
holder in due course.
Q: On March 1, 1996, Pentium Company ordered
a computer from CD Bytes, and issued a crossed
check in the amount of P30,000 post-dated Mar
31, 1996. Upon receipt of the check, CD Bytes
discounted the check with Fund House. On April
1, 1996, Pentium stopped payment of the check
for failure of CD Bytes to deliver the computer.
Thus, when Fund House deposited the check, the
drawee bank dishonored it. If Fund House files
74
a complaint against Pentium and CD Bytes for
the payment of the dishonored check, will the
complaint prosper? Explain (1996 Bar)
A: The case will prosper as against the CD Bytes, the
immediate indorser but not as against Pentium
Company. The effect of crossing a check relates to
the mode of its presentment for payment which
must be made by the holder, or by some person
authorized to receive payment on his behalf. Thus,
in the absence of due presentment, as in this case
where the check was not presented by the payee
(CD Bytes) or the proper party authorized to make
presentment of the checks, the drawer (Pentium
Company) cannot be held liable. However, Fund
House may recover from the immediate indorser, if
the latter has no valid excuse for refusing payment.
Stale check
A check which has not been presented for payment
within a reasonable time after its issue. It is
valueless and thus, should not be paid. A check
becomes stale 6 months from date of issue.
Memorandum check
A memorandum check is an evidence of debt against
the drawer and although may not be intended to be
presented, has the same effect as an ordinary check
and if passed on to a third person, will be valid in his
hands like any other check (People v. Nitafan, G.R.
No. 75954, October 22, 1992).
When drawer of check discharged from liability
1. The check is not presented within a reasonable
time after its issue;
2. The drawer suffers loss; and
3. The loss suffered by the drawer is attributable
to the delay (De Leon, 2010).
PRESENTMENT FOR PAYMENT
TIME
A check must be presented for payment within a
reasonable time after its issue (NIL, Sec. 186).
EFFECTS OF DELAY
Effects of delay
1. The drawer will be discharged from liability
thereon to the extent of the loss caused by the
delay. (ibid.)
2. The indorser shall be discharged from liability
(PNB vs. Seeto, G.R. No. L-4388, August 13, 1952).
 INSURANCE CODE
Q: X and Y are disputing over a property. To
settle the dispute, they entered into a
compromise agreement by which they agreed to
have the property in dispute be sold. X bought
the property and delivered a manager’s check to
Y. Y refused to accept the same, hence it was
consigned with the court. Y later accepted the
check and three years after acceptance, he filed
an action alleging that the check payment did
not amount to legal tender and that he never
even encashed the check. Is the contention of Y
tenable?
A: NO. It is true that a check is not a legal tender and
while delivery of a check produces the effect of
payment only when it is encashed, the rule is
otherwise if the debtor (X) was prejudiced by the
creditor’s (Y) unreasonable delay in presentment.
Acceptance of a check implies an undertaking of due
diligence in presenting it for payment. If no such
presentment was made, the drawer cannot be held
liable irrespective of loss or injury sustained by the
payee. Payment will be deemed effected and the
obligation for which the check was given as
conditional payment will be discharged (Pio
Barretto Realty Development Corp. vs. Court of
Appeals, G.R. No. 132362, June 28, 2001).
Q: To ensure payment and as a business
practice, SMC required Puzon to issue postdated
checks equivalent to the value of the products
purchased on credit before the same were
released to him. Said checks were returned to
Puzon when the transactions covered by these
checks were paid or settled in full. Puzon
purchased products on credit and issued to SMC,
two (2) BPI checks to cover the said transaction.
During on of his visits to the SMC Paranaque
Sales Office, he allegedly requested to see BPI
Check No. 17657. However, when he got hold of
BPI Check No. 27903 which was attached to a
bond paper together with BPI Check No. 17657,
he allegedly immediately left the office with his
accountant, bringing the checks with them. SMC
sent a letter to Puzon, demanding the return of
the said checks. Puzon ignored the demand
hence SMC filed a complaint against him for
theft. The investigating prosecutor
recommended the dismissal of the case for lack
of evidence. On appeal, the CA agreed with the
prosecutor. Were the prosecutor and the DOJ
correct in finding no probable cause for theft?
A: Yes. If the subject check was given by Puzon to
SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title
to or ownership of the check was transferred upon
delivery. However, if the check was not given as
payment, there being no intent to give effect to the
75
instrument, then ownership of the check was not
transferred to SMC.
The evidence of SMC failed to establish that the
check was given in payment of the obligation of
Puzon. There was no provisional receipt or official
receipt issued for the amount of the check. What
was issued was a receipt for the document, a
POSTDATED CHECK SLIP.
Furthermore, SMC’s demand letter sent to Puzon
states: “As per company policies on receivables, all
issuances are to be covered by post-dated checks.
However, you have deviated from this policy by
forcibly taking away the check you have issued to us
to cover the December issuance. Notably, the term
payment was not used instead the terms covered
and cover were used” (San Miguel Corporation v.
Bartolome Puzon, Jr., G.R. No. 167567, September 22,
2011).
INSURANCE CODE
Laws governing contracts of insurance in the
Philippines
1. R.A. 10607
2. New Civil Code
3. Special Laws
CONCEPT OF INSURANCE
Contract of insurance
It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event. (IC, Sec. 2[a])
A contract of insurance, to be binding from the date
of application, must have been a completed contract
(Perez vs. CA, GR No. 112329, January 28, 2000).
Thus, it must have all the essential elements of a
valid contract as enumerated in Art. 1318 of the New
Civil Code:
1. Subject matter in which the insured has an
insurable interest;
2. Consideration, which is the premium paid by
the insured, for the insurer’s promise to
indemnify the former upon the happening of
the event or peril insured against;
3. Meeting of minds of the parties.
“Doing an insurance business” or “transacting
an insurance business” (ISRA)