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Negotiable Instruments Law (Aquino and Agbayani Notes) 1

Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y.


2010-2011)

CHAPTER 1: GENERAL CONSIDERATIONS


WHAT IS A 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 the holder in due course the right to
hold the instrument free from defenses available to prior parties. The instrument must comply with
Section 1 of the negotiable Instruments Law.
Governing Law: Act 2031 Negotiable Instruments Law

Impliedly repealed the Code of Commerce except on provisions that are not inconsistent with the
NIL (e.g. rule on crossed checks)

APPLICABILITY OF THE NIL

The provisions of the NIL are only applicable if the instrument involved is negotiable. Otherwise,
the NIL can only be applied by analogy.

FUNCTIONS OF NEGOTIABLE INSTRUMENTS: (SEC-PF)


1.
2.
3.
4.
5.

Substitute for Money


Medium of Exchange
Credit instrument which increases credit circulation
Increases the purchasing power in circulation
Proof of transactions

Notes on Legal Tender:


Definition: offered payment that, by law, cannot be refused in settlement of a debt, and have the debt
remain in force.
Negotiable instruments are not legal tender. Only notes and coins issued by the BSP are considered legal
tender.
Checks are declared by law not to be legal tender and creditors cannot be compelled to accept checks in
payment of obligations
Exceptions:
1.
2.

The obligation is deemed paid if the check has been cleared and credited to his account.
Impairment due to the fault of the creditor.

MAIN FEATURES OF NEGOTIABLE INSTRUMENTS:


A. Negotiability
Allows negotiable instruments to be transferred from one person to another so as to constitute the
transferor a holder (a holder in due course).
Such feature gives the negotiable instrument freedom as substitute for money.
B. Accumulation of Secondary Contracts
-

When negotiable instruments are transferred through negotiation, secondary contracts are
accumulated because the indorsers become secondarily liable not only to their immediate
transferees but also to any holder. It thus provides for greater security in dealing with such
instruments.

KINDS OF NEGOTIABLE INSTRUMENTS

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Bill of Exchange: 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.

Commonly termed a draft. It is used to designate bills of exchange that are used in trade of
goods.

May be an inland bill or a foreign bill.


1. Inland Bill: drawn and payable in the Philippines.
2. Foreign Bill either drawn or payable abroad.
Checks: a bill of exchange drawn on a bank and payable on demand.
ORDINARY BILL OF EXCHANGE
Not drawn on deposit. It is not necessary that the
drawer of a BOE should have funds in the hands of
the drawee.
Death of the drawer of a BOE with the knowledge of
the bank, does not revoke the authority of the
banker to pay.
May be presented for payment within a reasonable
time after its last negotiation.

CHECK
It is necessary that a check is drawn on a deposit.
Otherwise, there would be fraud.
Death of
knowledge
the banker
Must be
reasonable

the drawer of a check, with the


by the bank, revokes the authority of
to pay.
presented for payment within a
time after its issue.

Promissory Notes: A negotiable promissory note is an unconditional promise in writing made by one
person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future
time, a sum certain in money to order or to bearer. Where a note is drawn to the makers own order, it is
not complete until it is indorsed by him.
Dean Sundiang: when the situation contemplated in the last sentence occurs, the person who signs
assumes to personalities both as a maker and as an indorser. In what capacity is he then liable? In such
case, he becomes liable as a maker. The requirement of having to indorse does not deviate his very
capacity as the maker of the instrument. Furthermore, the maker has a more onerous liability compared
to that of an indorser.
Bills treated as Notes (Sec. 130)
1. When the drawer and the drawee are the same person.
2. The drawee is a fictitious person.
3. The drawee has no capacity to contract.
Bills vs. Notes
PROMISSORY NOTE
Contains an unconditional
promise.
There are 2 parties on its
face
The person who signs it is
the MAKER.
The person who signs it is
PRIMARILY LIABLE
The
person
primarily
liable is the maker
There
is
only
one
presentment:
for
payment.

BILL OF EXCHANGE
Contains an unconditional
order.
There are 3 parties on its
face.
The person who signs it is
the DRAWER
The person who signs it is
SECONDARILY LIABLE
The person primarily liable
is the DRAWEE-ACCEPTOR
There
are
2
presentments:
1. For acceptance
2. For payment

PARTIES TO NEGOTIABLE INSTRUMENTS

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Parties to a Promissory Note
1.
2.

Maker: Person who promises to pay according to the tenor of the note.
Payee: Person who is to receive payment from the maker.

Parties to a bill of exchange


1.
2.

Drawer: Person who draws the bill and orders the drawee to pay a sum certain in money.
Drawee: the one being commanded to pay the bill. NOTE HOWEVER, the drawee only becomes
party to the transaction upon acceptance of the BOE. Otherwise, he is not liable at all.

Other Parties to a Negotiable Instrument:


1.
2.
3.

Indorser: Persons who transfer the instrument through indorsement and completed by delivery.
Holder: Payee or indorsee of a bill or note who is in possession of it or the bearer thereof.
Bearer: person in possession of bill or note which is payable to bearer.

NEGOTIABLE INSTRUMENTS VS. NON-NEGOTIABLE INSTRUMENTS: DISTINCTIONS AND NOTES


Only negotiable instruments are governed by the NIL. The application of NIL to non-negotiable
instruments is only by analogy.
Negotiable instruments can be transferred by negotiation or assignment. Non-negotiable instruments can
only be transferred through assignment.
The transferee of a non-negotiable instrument can never be a holder in due course; only an assignee. All
defenses available may be raised against the last transferee.
INCIDENTS OR STAGES IN THE LIFE OF A NEGOTIABLE INSTRUMENT

1. Preparation and signing complete with all the requisites provided for in Section 1 of NIL.
2. Issuance: first delivery of the instrument to the payee (from maker to payee/bearer or from
drawer to the payee/bearer).

3. Negotiation: transfer from one person to another so as to constitute the transferee a holder.
4. Presentment for acceptance for certain kinds of BOE the bill of exchange shall be presented
to the drawee so that the latter will signify his agreement to the order of the drawer to pay.

5. Acceptance: written assent of the drawee to the order (act which makes the drawee a party to
the instrument, thus making him primarily liable - Sundiang).

6. Dishonor by non-acceptance: refusal to accept by the drawee.


7. Presentment for payment: the instrument is shown to the maker or drawee/acceptor so that
the maker or drawee/acceptor will pay.

8. Dishonor by non-payment: refusal to pay by the maker or drawee/acceptor


9. Notice of Dishonor: notice to the persons secondarily liable that the maker or the
drawee/acceptor refused to pay or to accept the instrument.
10. Protest.
11. Discharge.

CHAPTER 2: Negotiability
Requisites of Negotiability (Section 1, NIL)
Keyword: WUPOA

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1.
2.
3.
4.
5.

It must be in writing and signed by the maker/drawer;


It must contain an unconditional promise or order to pay a sum certain in money;
It must be payable on demand, or at a fixed or determinable future time;
It must be payable to order or bearer;
Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

HOW NEGOTIABILITY IS DETERMINED:


1.
2.
3.

The whole instrument shall be considered;


Only what appears on the face in the instrument shall be considered;
The provisions of NIL, especially Section 1 thereof shall be applied.

Acceptance
Acceptance of an instrument is not important in the determination of its negotiability. The nature of
acceptance is important only in the determination of the liabilities of the parties involved.
Indorsement
The negotiability of an instrument is not affected by the indorsement placed therein.
EFFECT OF ESTOPPEL

REQUISITE OF NEGOTIABILITY
Requisite #1: IN WRITING AND SIGNED BY THE MAKER OR THE DRAWER

It must be in writing. It may be printed, in ink or in pencil, and it may be written in any material
that substitutes paper like cloth, leather, or parchment.
Signed: marked by any means as long as they are adopted as the signature of the signer.

Requisite #2: IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN
MONEY
Unconditional Payment/Order
The promise in a promissory note is the undertaking made by the maker to pay a sum certain in money to
the payee or the holder. The order in a bill is a command made by the drawer addressed to the drawee
ordering the latter to pay the payee or the holder a sum certain in money.

The word promise or order need not appear to satisfy the requirements of Section 1(b) of NIL.
The promise or order must be unconditional. An unqualified order or promise to pay is
unconditional within the meaning of NIL although it is coupled with (Sec. 3, NIL):
1. An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount.
2. A statement of the transaction which gives rise to the instrument.
Conditional (therefore not negotiable):
1. An order or promise to pay out of a particular fund in this case, payment shall be subject
to the availability or sufficiency of funds.
2. An instrument payable upon a contingency.

Indication of a Particular Fund for Payment vs. Fund for Reimbursement


Fund For

Fund for Payment

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Reimbursement
The drawee pays the
payee
from
his
own
funds; afterwards, the
drawee pays himself from
the
particular
fund
indicated
Particular fund indicated is
not the direct source of
payment.

There is only one act: the


drawee pays directly from
the
particular
fund
indicated.
Particular fund indicated is
the
direct
source
of
payment.

A Sum Certain in Money

Money need not be legal tender. 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.
If the obligor like the maker is given the option to deliver something in lieu of money, then the
instrument is not negotiable.
If the instrument gives the holder an election to require something to be done in lieu of payment
in money, the instrument is still negotiable.
A SUM CERTAIN: If the amount that is to be unconditionally paid by the maker or drawee can be
determined from the face of the instrument even if it requires mathematical computation.
Section 2: A sum is certain although it is to be paid
a) with interest; or
b) by stated installments; or
c) by stated installments, with a provision that upon default in payment of any installment or
of interest, the whole obligation shall become due; or
d) with exchange, whether at a fixed rate or at a current rate; or
e) with costs of collection or an attorneys fee, in payment shall not be made upon maturity.
Stated Installments: the dates of each installment must be fixed or at least determinable and the
amount to be paid for each installment must be stated.

Requisite #3: PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME


Aquino: an instrument is not negotiable if the maturity date of an instrument is not certain.
Payable on Demand
When an instrument is payable on demand, the persons liable may be required to pay at ANYTIME before
the holder may so request.
When Payable on Demand (Section 7):
1. When it is expressed so to be payable on demand, or at sight, or on presentation;
2. In which no time for payment is expressed.
Sundiang (On at sight): what if the drawee is blind? It should not be taken literally.
Payable at a determinable future
Section
1.
2.
3.

4: An instrument is payable at a determinable future time if it is expressed to be payable


At a fixed period after date or sight;
On or before a fixed or determinable future time specified therein;
On or at a fixed period after the occurrence of a specified event which is certain to happen, though
the time of the happening be uncertain

Clauses that affect maturity of the instrument


1.

Acceleration clauses:

The negotiability of the instrument is not affected even if it is to be paid by stated


installments, with a provision that upon the default in payment of any installment or of
interest, the whole shall become due.

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Authorities seem quite uniform in holding that if the acceleration clause is dependent upon
some act or default of the maker, the rule against uncertainty of maturity is not violated.
2. Insecurity Clauses:
Provisions in the contract which allow the holder to accelerate payment if he deems himself insecure.
The instrument rendered is not negotiable.

The instrument is not negotiable because it is dependent upon the holders whims and
caprice without the fault of the maker. (Query: can such instruments be considered
instruments payable on demand, thus, not affecting the negotiability of the instrument?)
Extenion Clauses

An instrument is payable at a definite time if by its terms it is payable at a definite time


subject to extension at the option of the holder, or to extension to a further definite time
at the option of the maker or acceptor or automatically upon or after a specified act or
event.

3.

Requisite #4: PAYABLE TO ORDER TO BEARER


Notes
An instrument that is payable to a specified person or entity is not negotiable because the NIL requires
that the instrument must be payable to order or to bearer.
The rule has always been that the instrument in order to be considered negotiable must contain the so
called words of negotiability i.e. it must be payable to order or to bearer. These words serve as an
expression of consent that the instrument may be transferred by negotiation.
Bearer Instruments
Where the instrument is a bearer instrument, the person in possession can demand payment from the
person who are liable thereon.
Section
a)
b)
c)

9: An instrument is payable to bearer


When it is expressed to be so payable; or
When it is payable to a person named therein or bearer; or
When it is payable to the order of a fictitious or non-existing person, and such fact was known to
the person making it so payable; or
d) When the name of the payee does not purport to be the name of any person
e) When the only last indorsement is an indorsement in blank.

Fictitious Payee Rule:


An instrument is a bearer instrument if it is payable to the order of a fictitious or non-existing person and
such fact is known t the person making it so payable.
In a fictitious payee situation, the drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of
the check will bear the loss.
The burden of proving that the instrument is payable to a fictitious payee rests on the person making such
allegation.
Exception to Fictitious Payee Rule: A showing of commercial bad faith on the part of the drawee-bank, or
any transferee of the check for that matter, will work to strip it of this defense. There is a commercial bad
faith applicable when the transferee acts dishonestly where it has actual knowledge of the facts and
circumstances that amount to bad faith, thus itself becoming a participant to the fraudulent scheme.

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Order Instruments
Section 8. The instrument is payable to order where it is drawn payable to the order of a specified person
or to him or his order. It may be drawn payable to the order of:
a) A payee who is not maker, drawer, or drawee; or
b) The drawer or maker; or
c) The drawee; or
d) Two or more payees jointly; or
e) One or some of several payees; or
f) The holder of an office for the time being.
Requisite #5: IDENTIFICATION OF THE DRAWEE
Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty. The holder must know to whom he should present it for acceptance and/or for
payment, otherwise, the purpose of negotiable instrument as a tool in commercial dealings will be greatly
hampered.
A bill may be addressed to more than one drawee jointly, whether they are partners or not; but not to two
or more drawees in the alternative or in succession, (Sec. 128).
OMISSIONS AND PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY
Section 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are
not affected by the fact that:
it is not dated; or
a)
b)
c)
d)

does not specify the value given, or that any value had been given therefor; or
does not specify the place where it is drawn or the place where it is payable; or
bears a seal; or
designates a particular kind of current money in which payment is to be made.

The instrument is still negotiable if it is not dated. It should be noted, however, that there are cases where
the date of the instrument is necessary and in the absence thereof can be inserted in the instrument.
Section 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period
after date is issued undated, or where the acceptance of an instrument payable at a fixed period after
sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument
shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.
Other additional provisions that do not affect the negotiability of an instrument:
Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or
promise to do any act in addition to the payment of money is not negotiable. But the negotiable character
of an instrument otherwise negotiable is not affected by a provision which:
a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or
b) authorizes a confession of judgment if the instrument be not paid at maturity; or
c) waives the benefit of any law intended for the advantage or protection of the obligor; or
d) gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.

RELATED PROVISIONS: (AGBAYANI COMMENTARY)


Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following
requirements:

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(a) It must be in writing and signed by the maker or drawer;

There must be a writing of some kind for if the instrument were not in writing there would nothing to be
negotiated or to pass from hand to hand.
It may be in ink, print or pencil on a parchment, cloth leather or any substitute of paper.
It must be signed by the maker or drawer; full name may be indicated but the surname is enough
It may also consist of initials and numbers.
Where the name is not signed the holder must prove that what is written is intended as a signatureof the
person sought to be charged.
Signature may be printed, typewritten, stamped, engraved, photographed or lithographed; but in every case
there must be a showing that the party have adopted and used such signature.
Where signature found: location of signature is not material what is important is that it appears therefrom
that the person intended to make it his own.

(b) Must contain an unconditional promise or order to pay a sum certain in money;

Bill of exchange
A bill must contain an order to pay, a bill is an instrument demanding a right.
The word order may not necessarily be used, any words equivalent may suffice to make an instrument a bill of
exchange.
Mere authorization to pay is not a negotiable instrument.
A mere request to pay is not a negotiable instrument.
Promissory note

The promise to pay must be in the instrument itself although it is not necessary to use the word promise.
It is enough that (1) words of equivalent meaning are used or (2) the promise is implied from promissory
words contained in the instrument.
Note: the promise to pay cannot be implied from the existence of a debt.
Words equivalent to promise: agree, will pay, shall pay and the like.
Unconditional promise or order to pay

Promise or order must not be subject to any condition.


Art. 1179 a condition is a 1) a future event that may or may not happen 2) a past event unknown to the
parties.
Sum payable must be definite and certain

Amount of money to be paid must be determinable by inspection and must be stated plainly in the face of the
instrument.
Like the denomination of money it must be stated in the body of the instrument.
All that is required is that the principal should be certain.
Sum payable must be in money only. Bonds, stocks, state paper, scrip, checks, foreign bills are not negotiable.
Reason why NI should be in money: money is the one standard of value in actual business. All other
commodities may rise and fall in value but in theory, at least, money measures this rise and fall and remains
the same.

(c) Must be payable on demand, or at a fixed or determinable future time;


(d) Must be payable to order or to bearer; and

the words order or bearer are usually referred as words of negotiability.


An instrument is not negotiable unless made payable to a person or his order or to bearer unless words of
similar import is used such as assigns, assignees or holder.

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.

This requierement refers only to a bill of exchang.


Under section 14 drawees name may be omitted and be filled in under implied authority like any other blank.
And an acceptance may supply the omission of a designation.

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Notes

The formalities required by the NI are essential for the security of mercantile transactions. They distinguish the
negotiable from non-negotiable.
Where the instrument does not comply with the requirement of section 1 of the negotiable instruments law,
the provision of the NIL will not govern.
How negotiability determined: 1) NIL sec 1 2) considering the whole of the instrument 3) what appears on the
face of the instrument and not elsewhere.
The requirement lacking may not be supplied by using a separate instrument containing that requirement
which is lacking.

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this
Act, although it is to be paid:
(a) with interest; or

The fact that the sum payable is to be paid with interest does not render the sum uncertain.
The sum is certain when the principal sum is certain.
Where interest is stipulated but not specified the rate is determined to be the legal rate.
Interest shall earn interest from the time it is judicially demanded.

(b) by stated installments; or

A NI with stated instalment does not readily render it non-negotiable.


Instalments must conform to the ff : 1) must be stated 2) maturity of each instalment must be fixed and
determinable.
The sum payable is a sum certain within the meaning of this act although it is to be paid by instalments, with
the provision that upon default in payment of instalment or of interest the whole shall be due.
The sum payable is a sum certain within the meaning of this act, although it is to be paid with exchange
whether at a fixed rate or at a current rate.
Exchange between two places at a particular date is a matter of common commercial knowledge, or at least
easily ascertained by any one so that the parties can always without difficulty ascertain the exact amount
necessary to discharge the paper.
Gregorio araneta INC. v. PNB: held: although the plaintiffs application provides for payment at maturity of the
draft this refers merely to the time when the plaintiff was bound to pay , and not to the rate of exchange at
which the draft should be paid by the plaintiff swince the latters obligation is determined by the rate of
exchange von the date the drafts was drawn and presented or negotiated which was not later than Aug. 31
1949xxxx. Plaintiff-appellant invokes an alleged banking practice, custom or practice whereby drafts should be
paid at the rate existing on the date of its maturity. Even assuming the existence of this practice, the same is
clearly immaterial for they have an express contract between the parties defining their rights andobligation.

(c) by stated installments, with a provision that, upon default in payment of any installment or of interest,
the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.
Note: after the date of maturity the instrument will no longer be negotiable in the full commercial sense that is in the
sense that any transferee acquiring it would acquire the instrument after it is overdue. The transferee will not be
considered a holder in due course and hold the instrument subject to the defences as if it was non-negotiable.
Atty. Fee must be reasonable. The written amount shall govern unless the court founds it unreasonable and
unconscionable.
Atty. Fees non recoverable subject to some exceptions provided by law.
Sec. 3.When promise is unconditional. - An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with:

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(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to
be debited with the amount; or

The problem which is sought to be solved by this section is whether or not the indication of a particular fund
or particular account or the statement of the transactions which gives rise to the instrument would make
promise or order conditional.
An order or promise to pay out of a particular fund is not unconditional but if the order or promise is coupled
only by a source where reimbursement in case of non-payment it is still unconditional.
Where the payment is out from the funds indicated, the payment is subject to the condition that the funds
indicated is sufficient.

(b) A statement of the transaction which gives rise to the instrument.

Instruments are not issuede without any transactions which they are based.
Where the promise or order is made subject to the terms and conditions of the transaction stated the
instrument is rendered non-negotiable.

But an order or promise to pay out of a particular fund is not unconditional.


Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future
time, within the meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or

An instrument is payable at a determinable future time within the meaning of this act, which is expressed to
be payable at a fixed period after date or after sight.
After sight means after the drawee has seen the instrument upon presentment for acceptance.

(b) On or before a fixed or determinable future time specified therein; or

Acceleration clause: these provisions make it possible for the maker to pay the instrument at an earlier
date or make it possible for the holder to require payment of the instrument at an earlier date.
Kinds: 1) that which contain acceleration clauses on the makers default in payment of instalments or of
interest or on the happening of the extrinsic event; 2) or contain in notes secured by collateral a provision
that the maker shall supply additional collateral in case of depreciation in the value of the original deposits
with the holders right to declare the note due immediately on failure to make good the depreciation or 3)
contain provisions for acceleration where holder deems himself insecure.
Conflicting opinion as to the second: 1) those who maintained that such stipulation renders the
instrument non-negotiable argue that the time for payment becomes uncertain and indefinite. If the maker
fails when demanded to furnish additional security to the satisfaction of the holder, the note matures at once.
If the holder is not satisfied with the additional security the note matures at once and thus the time at which
it may mature would depend upon the time at which the holder declared himself dissatisfied with the security
delivered by the maker. 2) Those who maintain that the stipulation in question does not render the
instrument non-negotiable. This view is from the standpoint of expediency as encouraging circulation and of
business custom on account of their common acceptance by the commercial world such clauses should be
interpreted as not affecting negotiability.
Conflict of opinion as to third: 1) it has been held that a note is rendered non-negotiable where it
is payable at a fixed future time, but with an option on the part of the holder to declare it due and
payable before maturity whenever he deems it insecure; 2) it is submitted that these cases in
holding an instrument payable at a fixed time but accelerable at the option of the payee or holder
non-negotiable are directly contrary to the plain meaning of this section.

(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.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure
the defect.

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Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise
to do any act in addition to the payment of money is not negotiable. But the negotiable character of an
instrument otherwise negotiable is not affected by a provision which:
(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or

a promise of the maker to furnishadditional collateral will render the note non-negotiable, as that would be
an additional act to promise to pay money.

(b) authorizes a confession of judgment if the instrument be not paid at maturity; or

Classes of confession of judgement: cognovits actionem- a written confession of an action by a defendant,


subscribed, but not sealed and irrevocably authorizing any attorney of any court of record to confess
judgement and issue execution usually for sum named
Confession relicta verification- confession of judgement after plea has been entered.
Warrant of attorney an instrument in writing addressed to one or more attorneys named therein,
authorizing them generally to appear in court or in some specified court on behalf of the person giving it, and
to confess judgement in favor of some particular person therein named in action debt.
Confession of judgement before maturity- a note which contain a provision authorizoing confession of
judgement at any time thereafter, whether due or not is not negotiable.
Note: confession of judgement is void in the Philippines because: 1) enlarge the field of fraud; 2) under this
instrument the promissor bargains away hi right to a day in court; 3) effect is to strike down the right of
appeal.

(c) waives the benefit of any law intended for the advantage or protection of the obligor; or
(d) gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.
Sec. 6.Omissions; seal; particular money. - The validity and negotiable character of an instrument are not
affected by the fact that:
(a) it is not dated; or

gen rule: omission of date does not render the instrument non-negotiable
exp: when date is necessary to fix date of maturity

(b) does not specify the value given, or that any value had been given therefor; or

gen rule: no value specified does not affect NI; Reason: value is presumed

(c) does not specify the place where it is drawn or the place where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in which payment is to be made.
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the
consideration to be stated in the instrument.
Sec. 7.When payable on demand. - 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.
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.

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Sec. 8.When payable to order. - The instrument is payable to order where it is drawn payable to the order
of a specified person or to him or his order. It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein with
reasonable certainty.

Note: payable to order means that a person promises to pay to the order of a specific person or to the duly
authorized agent of that person.
There is a necessity of paying the payee: reason: if there is no payee where the instrument is to be
payable to his order no one could indorse the instrument. Consequently, it is useless to consider it
negotiable.

Sec. 9.When payable to bearer. - The instrument is payable to


bearer:
(a) When it is expressed to be so payable; or

ex. Pay to bearer P1

(b) When it is payable to a person named therein or bearer; or

Ex. Pay to hanselmorana or bearer

(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the
person making it so payable; or

When it is payable to the order of a fictitious person or non-existing person it is payable to bearer if such fact
was known to the person making it so payable.
Elements: 1) the payee named must be fictitious or non existing; 2) it must be known to the person making
it so payable.
The name is fictitious when it is feigned or pretended and a non-existing person one who does not exist in the
sense that he was not intended to be the payee by the drawer
Note: if the agent has no authority to execute the instrument himself the knowledge of the principal is
controlling. If principal has no knowledge the instrument will not apply as to the principal.
AngTekLian v. CA: Held: under the NIL a check drawn payable to cash is payable to bearer and the bank
masy pay to the person presenting it for payment.

(d) When the name of the payee does not purport to be the name of any
person; or
(e) When the only or last indorsement is an indorsement in blank.
Sec. 10.Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms
are sufficient which clearly indicate an intention to conform to the requirements hereof.
Sec. 11.Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is
dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be.

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This provision applies to three cases: 1)the instrument contains the date of the issue; 2)
acceptance is dated; 3) indorsement is dated

Sec. 12.Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated
or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the date of delivery.

Limitation on ante dating or post-dating: when it is done for fraudulent and illegal purposes.

Sec. 13.When date may be inserted. - Where an instrument expressed to be payable at a fixed period after
date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is
undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.

Date is not necessary for the negotiability of the instrument. However date may be necessary to determine
the date of maturity but not for negotiability.
o
Date is important to determine when interest is to run
o
Date is necessary to determine whether a party has acted within reasonable time.
Effects of inserting a wrong date: knowingly inserting the wrong date in an undated instrument will avoid the
instrument as to the party inserting the wrong date.

Insertion of the wrong date does not avoid the instrument in the hands of a holder in due course

CHAPTER 3: Interpretation of Instruments


EFFECTS OF BEING AN ADOPTED STATUTE
1.
2.
3.

Interpretation of Courts of the United States of the provisions of NIL can be applied in this
jurisdiction.
If there is no provision of the NIL or the Code of Commerce, the provisions of the the Negotiable
Instruments Law (U.S.) or the Bill of Exchange Act of 1882 can be applied.
Opinions and comments of authorities or legal writers on the provisions of the Uniform Negotiable
Instruments Law or the BEA 1882 may also be applied in this jurisdiction.

EFFECT OF IMPLIED REPEALS ON THE CODE OF COMMERCE


The NIL impliedly repealed the provisions of the code of commerce on promissory notes and bills but there
are provisions in the Code of Commerce involving Negotiable Instruments e.g. crossed checks.
RULES THAT APPLY IN CASES OF AMBIGUITY
Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is
ambiguous or there are omissions therein, the following rules of construction apply:
a) Where the sum payable is expressed in words and also in figures and there is a discrepancy
between the two, the sum denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures to fix the amount;
b) Where the instrument provides for the payment of interest, without specifying the date from which
interest is to run, the interest runs from the date of the instrument, and if the instrument is
undated, from the issue thereof;
c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;
d) Where there is a conflict between the written and printed provisions of the instrument, the written
provisions prevail;
e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder
may treat it as either at his election;
f) 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;
g) Where an instrument containing the word "I promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable thereon.

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OTHER RULES
In case of ambiguity, the ambiguity shall be construed against the party who caused the vagueness.
RELATED PROVISIONS: (AGBAYANI COMMENTARY)
SECTION 17:
When section applicable.
- it shall not be availed of if the terms of the instrument in question are clear and admit of no doubt.
- only when the instrument in question is ambiguous, doubtful or obscure, or when there are omissions therein that the
rules stated in this section apply.
Sum payable expressed in words and figures.
- sum payable in words must prevail.
- Reasons: (1) the figures in the margin do not form part of the instrument and are simply for convenience or
reference; and (2) it is easier to change the figures or to commit a mistake in regards to them than when the sum is
written out in words.
When words ambiguous.
- when the words are ambiguous or uncertain, reference may be had to the figures to fix the amount.
Payment of interest.
- applies when interest is stipulated but the date when interest begins to be paid is not specified.
- will earn interest from the date of the note or the date of its issue, at the legal rate.
Instrument not dated.
- if the instrument is date, will be presumed to be its true date.
- the presumption is prima facie, or rebuttable between the parties.
- proof may be adduced to show a different fate as to the true date of the issue, acceptance, or endorsement.
- if the instrument is not dated, the date of its issue will considered its date.
- it was held that an undated acceptance of an undated bill of exchange is payable on demand and will be considered to
be dated as of the time it is executed.
Conflict between written and printed provision.
- the handwritten words will prevail.
- written words are deemed to express the true intention of the maker because they are written by himself and printed
forms are printed without any particular contract in view.
Instrument in ambiguous.
- there is a drawee and acceptor.
- the payee or the holder may treat it wither as a bill or note.
Capacity of party signing not clear.
- deemed to be an endorser.
Two or more persons signing.
- "I promise to pay to C or order P1,000 (Sgd.) A and B" - A and B are deemed to be jointly and severally liable, not
merely jointly liable. The holder of the instrument can collect the whole amount of the instrument from either one of
them.

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- inclusion of the other co-signer in the complaint as co-defendant is unnecessary.
- "We promise" - joint liability

CHAPTER 4: Transfer and Negotiation


MODES OF TRANSFER
1.
2.

Negotiation: The Transfer of the instrument from one person to another as to constitute the
transferee a holder thereof.
Assignment: The transferee is an assignee who merely steps into the shoes of the transferor.

Applicable
Law
Type
of
transaction
Nature
of
transferee
Possibility to
become
a
holder in due
course
Rights
acquired

Availability of
personal
defenses

NEGOTIATION
Negotiable
Instruments Law
Negotiable
Instruments only
Holder
course
YES

in

due

The
transferee
holder
may
acquire
rights
more than that of
the transferor if
he is a holder in
due course
The
transfereeholder may be
free
from
personal defenses
if he is a holder in
due course

ASSIGNMENT
Civil Code
Contracts
in
general or other
assignable rights.
Mere assignee
NEVER

Transferee
merely steps in
to the shoes of
the transferor

Transferee
is
always subject to
personal
defenses.

HOW NEGOTIATION TAKES PLACE


A. ISSUANCE
Issuance is the first delivery of the instrument complete in form to a person who takes it as a holder (Sec.
191).
Issue: the delivery is the final act essential to the consummation of the instrument as an obligation.
B.

SUBSEQUENT NEGOTIATION

Section 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof.
a) If payable to bearer, it is negotiated by delivery;
b) if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.
Indorsement of Bearer Instrument

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Section 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is
indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders as make title through his indorsement.
C. INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT
Two Rules under Section 49:
1.
2.

Where the holder of the instrument payable to his order transfers is for value without indorsing it,
the transfer vests in the transferee such title as transferor had therein, and the transferee acquires
in addition, the right to have the indorsement of the transferor.
For the purpose of determining whether the transferee is a holder in due course, the negotiation
takes effect as of the time the indorsement is actually made.

The transaction is an equitable assignment and the transferee acquires the instrument subject to the
defenses and equities available among prior parties.
In addition, the presumption of sufficiency of consideration and title that is enjoyed by the holders will not
be enjoyed by the transferee contemplated under Sec. 49.
D. INDORSEMENT
Section 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon
a paper attached thereto. The signature of the indorser, without additional words, is a sufficient
indorsement.
Where indorsement should be placed:
1.
2.

On the instrument itself;


On a separate piece of paper attached to the instrument called allonge.

Other rules on indorsement:


Indorsement must be of the entire instrument except when there was a previous partial payment (Sec.
32).

Sec 32 further disallows negotiation of two or more indorsees severally.

Kinds of Indorsement
1.
2.

Blank Indorsement: no indorsee is specified and it is done by affixing the indorsers signature.
Special Indorsement: Designates the indorsee. (e.g. pay to x)

Note: the holder may convert a blank indorsement into a special indorsement by writing over the
signature of the indorser in blank any contract consistent with the character of the indorsement (Sec.
35).
3.
4.
5.

Qualified Indorsement: constitutes the indorser a mere assignor of the title to the instrument. It
may be made by adding to the indorsers signature the words without recourse. Such an
indorsement does not impair the negotiable character of the instrument.
Conditional Indorsement (Sec. 39): the party required to pay the instrument may disregard the
condition and make payment to the indorsee or his transferee whether the condition has been
fulfilled or not.
Restrictive indorsement (Sec. 36): An indorsement is restrictive which either:
a. Prohibits the further negotiation of the instrument; or
b. Constitutes the indorsee the agent of the indorser; or
c. Vests the title in the indorsee in trust for or to the use of some other persons.

Rights of a Restrictive indorsee (Sec. 37):

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1.
2.
3.

To receive payment of the instrument;


To bring any action thereon that the indorser could bring;
To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do
so. In case of transfer, all subsequent indorsees acquire only the title of the firs indorsee under the
restrictive indorsement.

Negotiation by Prior Party


Where an instrument is negotiated back to a prior party, such party may reissue and further renegotiate
the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was
personally liable (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 (Sec. 48).
Consideration for issuance and subsequent transfer
Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and
every person whose signature appears thereon to have become a party thereto for value (Section 24).
Therefore it is up to the party who alleges that there was absence of consideration to prove such fact. The
presumption will operate if there was negotiation. Consideration is not presumed if there was transfer
without indorsement (BPI vs. CA, G.R. No. 136202, January 25, 2007).
However, Section 28 provides that absence or failure of consideration is a matter of defense as against
any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether
the failure is an ascertained and liquidated amount or otherwise.
RULES ON WHAT CONSTITUTES VALUABLE CONSIDERATION FOR PURPOSES OF ISSUANCE AND
NEGOTIATION OF NEGOTIABLE INSTRUMENTS:
Section 25. Value, what constitutes. Value 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.
Section 26. What constitutes holder for value. - Where value has at any time been given for the
instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that
time.
Section 27. When lien on instrument constitutes holder for value. 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.
What Constitutes Value:
The simple contract referred to Section 25 refers to onerous contracts.
Art 1350 Civil Code: In onerous contracts the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit
which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor.
Ty vs. People (439 SCRA 220): Valuable consideration consists in either rights, 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 party. It is enough that the oblige
foregoes some right or privilege or suffers some detriment.

There is valuable consideration if the parties resort to what is known as discounting. IN


discounting, the instrument is negotiated to another because the transferee will pay the amount of
the instrument. However, the transferee charges or deducts a certain percentage from the
principal as its compensation.
Love and affection do not constitute valuable consideration.
A lien is also valuable consideration (please see Sec. 27).

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Effect if value was previously given
An exceptional case where a transferee who did not give valuable consideration for the instrument may
nevertheless be considered a holder for value is contemplated under Sec. 26 of the NIL.

RELATED PROVISIONS: (AGBAYANI COMMENTARY)


Section 24.
Presumption of Consideration is Disputable.
- negotiable instrument was given or endorsed for a sufficient consideration.
- it is disputable in the sense that the said presumption is satisfactory if not contradicted.
Consideration need not be alleged or proved.
- it is unnecessary to aver or prove consideration, for consideration is imported and presumed from the fact that it is a
negotiable instrument.
- any allegation which sets forth the existence of valuable consideration for the transfer of an instrument by
endorsement is sufficient, notwithstanding the failure to allege specifically the amount and nature of the consideration
which was in fact paid to the endorser.
Mere introduction of instrument is sufficient.
- prima facie entitles the plaintiff of a recovery and unless such prima facie case is overcome by evidence produced by
the defendant the plaintiff is entitled to recover.
- the person claiming that a payee or an indorsee did not give valuable consideration given.
Effect of lack of consideration.
- the instrument is without effect and the payment of said note is not demandable.
Section 25.
Valuable consideration in general.
- consideration: inducement to a contract that is, the cause, motive, price or impelling influence which induces a
contracting party to enter into a contract.
- 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.
- an obligation to give, to do or not to do, in favor of the party who make the contract, such as the maker or indorser.
Pre-existing debt, Third person's pre-existing debt, Bank credits, Exchange of negotiable papers
- sufficient consideration.
Consideration as to surety or guarantor.
- it is unnecessary to prove consideration between the surety and the creditor.
Love or affection.
- is good consideration, but does not constitute such valuable consideration as is sufficient itself to support the
obligation of a bill or note, as between the parties.
Section 26.
Meaning of holder for value.
- one who gives valuable consideration for an instrument issued or negotiated.
- not limited to one who is known to have given valuable consideration for the instrument he holds.
- any holder of an instrument for which value has been given at any time
Section 27.
Application of Section 27.
- if maker has defenses against endorser, such as absence of consideration, even a holder in due course can collect
from maker only the extent of the lien.
Reason for the rule.
- holder in due course is only a holder in due course for that amount only.
Where defenses are real, non-existent.
- if the defenses are real, holder in due course can collect nothing because maker can interpose those defense against
the holder in due course as to the whole amount of the instrument.
Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise.

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Sec. 29. Liability of 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. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party.
Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another
in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the holder and completed by delivery.
Method of Transfer. 3 methods of transfer: (1) by assignment; (2) by operation of law; (3) by negotiation, which may
either be by indorsement completed by delivery or by mere delivery.
Assignment. It is the method of transferring a non-negotiable instrument whereby the assignee is merely placed in
the position of the assignor and acquires the instrument subject to all defences that might have been set up against the
original payee.
Mode of assignment. Although some sort of written assignment is customarily employed, it may be written either on
the instrument itself or on a separate piece of paper.
Effect of assignment of non-negotiable instruments. The party holding the right drops out of the contract and
another takes his place. The assignee is substituted in place of the assignor. The assignee and every subsequent person
to whom the instrument comes by assignment may be considered as the person who made the instrument in the first
instance and as having said and done everything in making the instrument which the original assignor said or did. The
assignee takes the contract subject to equities, that is, to defenses to the contract which would avail in favor of the
original party up to the time the notice of the assignment is given to the person against whom the contract is sought to
be enforced.
Assignment of negotiable instruments. A person taking a negotiable instrument by assignment in a separate paper
takes it subject to the rules applying to assignment. And where the hold of a bill payable to order transfers it without
indorsement, it operates as an equitable assignment.
Transfer by operation of law. The full title to a bill or note may pass without either assignment, indorsement, or
delivery, that is, by operation of law: (1) by the death of the holder, where the title vests in his personal representative,
or (2) by the bankruptcy of the holder, where the title vests in his assignee or trustee, or (3) upon the death of a joint
payee or indorsee, in which case the general is that the title vests at once in the surviving payee or indorsee.
Negotiation. Usually, where the instrument is payable to order, it is negotiated by the indorsement of the holder
completed by deliver, and where it is payable to bearer, by mere delivery.
Is delivery to payee negotiation? The first view is that the issuance or delivery to the payee is not negotiation
because negotiation refers to an existing negotiable instrument and, before delivery to the payee, the instrument is
incomplete. The second view is that under this section and Section 191, an instrument is negotiated when it is
delivered to the payee or to an indorsee; negotiation is not confined to transfer after delivery to the payee. This seems
to be the better view, as delivery to the payee of the instrument constitutes him the holder thereof.
Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper
attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.
Nature of indorsement. An indorsement is not only a mode of transfer, it is also a contract. The indorsement of a bill
or note implies an undertaking from the indorser to the person in whose favor it is made and to every other person to
whom the bill or note may afterwards be transferred, exactly similar to that which is implied by drawing a bill except
that, in the case of drawing a bill, the stipulation with respect to the drawers responsibility and undertaking do not
apply.
Where indorsement written. The indorsement may be written (1) on the instrument itself, or (2) upon a paper
attached thereto, which is called an allonge. But the allonge must be tacked or pasted on the instrument so as to
become a part of it, and where the separate paper is only temporary attached, and where the separate paper is only
temporarily attached, it cannot be considered as allonge.
How indorsement is written. Indorsement does not prove itself. It must be shown that the means was intended as
an indorsement.
Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which

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purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the
instrument. But where the instrument has been paid in part, it may be indorsed as to the residue.

Indorsement must be of the entire instrument. Accordingly, an indorsement of a part of the instrument does not
operate as negotiation thereof.
Effect of partial indorsement when unauthorized. It does not operate as an indorsement, but it may constitute a
valid assignment binding between the parties. The person to whom the instrument is indorsed would not be considered
an indorsee but merely as assignee and would therefore take the instrument subject to the defenses available between
the original parties.
Exception. But where the instrument has been paid in part, it may be indorsed as to the residue.
Transfer of two or more indorsees severally. An indorsement which purports to transfer the instrument to two or
more indorsees severally does not operate as a negotiation of the instrument.
Sec. 33 Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive
or qualified or conditional.
Kinds of indorsement. (1) special, (2) in blank, (3) absolute, (4) conditional, (5) restrictive, (6) qualified, (7) joint,
(8) successive, (9) irregular, (10) facultative.
Sec. 34 Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose
order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of
the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and
may be negotiated by delivery.
How further negotiated.
(1) Where the instrument is originally payable to order and it is negotiated by the payee by special indorsement, it can
be further negotiated by the indorsee by indorsement completed by delivery;
(2) Where the instrument is originally payable to order and it is negotiated by the payee by blank indorsement, it can
be further negotiated by the holder by mere delivery;
(3) Where the instrument is originally payable to bearer, it can be further negotiated by mere delivery, even if the
original bearer negotiated it by special indorsement.
Sec. 35 Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a
special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of
the indorsement.
Limitation upon conversion of blank indorsement. The holder must not write any contract not consistent with the
indorsement, that is, the contract so written must not change the contract of the blank indorser.
Sec. 36 When indorsement restrictive. - An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement restrictive.
Indorsee agent of the indorser. This is known as the agency type of restrictive indorsement.
Effect of omission of words of negotiability. Under the law, mere absence of words implying power to negotiate
does not make an indorsement restrictive. But while the omission of words of negotiability in the indorsement does not
affect the negotiability of the instrument, such omission in the body thereof will render the instrument non-negotiable.
Sec. 37 Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the
right:

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(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement.

Restrictive indorsee may receive payment.


Restrictive indorsee may bring any action.
Restrictive indorsee may transfer his rights.

Sec. 38 Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar
import. Such an indorsement does not impair the negotiable character of the instrument.
How qualified indorsement is made. A qualified indorsement is made by adding to the indorsers signature the
words without recourse, sans recours, indorser not holden, with intent to transfer title only, and not to incur
liability as indorser, or at the indorsees own risk.
Effect of qualified indorsement. It constitutes the indorser a mere assignor of the title to the instrument. Without
recourse means without resort to a person who is secondarily liable after the default of the person who is primarily
liable.
Qualified indorser has limited secondary liability. He is secondarily liable on his warranties as an indorser under
Section 65, that is, the qualified indorser is liable if the instrument is dishonoured 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; (4) the fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew
of that fact.
Effect of qualified indorsement on negotiability. A qualified indorsement does NOT impair the negotiable character
of the instrument.
Sec. 39 Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or
not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally.
Absolute indorsement. One by which the indorser binds himself to pay, upon no other condition than the failure of
prior parties to do so and upon due notice to him of such failure.
Conditional indorsement. An indorsement subject to the happening of a contingent event, that is, an event that may
or may not happen, or a past event unknown to the parties.
Right to disregard conditions / Obligations of conditional indorsee. The maker MAY disregard the condition and
pay the indorsee even if the condition has not been fulfilled. Such payment will discharge him from liability on the
instrument. However, the indorsee does not immediately acquire ownership over the sum. The indorsee must hold it in
trust while the condition is not fulfilled. It is only upon the fulfilment of the condition that such ownership over the
proceeds of the note is absolutely acquired by the conditional indorsee.
Effect of conditional indorsement on negotiability. A conditional indorsement does not render an instrument nonnegotiable. But if the condition is on the face of the instrument, making the order or promise to pay conditional, the
condition renders it non-negotiable as the promise or order therein would not be unconditional.
Sec. 40 Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it
may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.
Application. This section applies only to instruments which are originally payable to bearer. It does NOT apply to
instruments originally payable to order, even when they become payable to bearer because the only or last indorsement
is in blank.
Negotiation of instrument payable to bearer but specially indorsed. An instrument which is originally payable to
bearer is always payable to bearer. Hence, even when specially indorsed, it can be negotiated by mere delivery.

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Sec. 41 Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or
more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for
the others.
Application. This section applies only to instruments payable to two or more payees jointly (and). It does NOT apply to
instruments payable to two or more payees severally/solidary (or).
How indorsement of joint payees made. Where the instrument is payable to two or more payees, all payees must
each indorse in order to negotiate the instrument. If only one indorses, he passes only his part of the instrument. Such
an indorsement would not operate as such because it would not be an indorsement of the entire instrument.
EXCEPTIONS: (1) where the payee or indorsee indorsing has authority to indorse for the others, and (2) where the
payees or indorsees are partners.
Sec. 42 Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a
person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or
corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or
the indorsement of the officer.
Presumption is disputable. Proof may be adduced to show that the bill is payable to the cashier personally as real
creditor to the maker.
However, as to public corporations, a town treasurer has no authority to indorse the said instrument since corporation
in this section does not include cities and towns.
Sec. 43 Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly
designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper
signature.
Sec. 44 Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative
capacity, he may indorse in such terms as to negative personal liability.
How agent must indorse. He must indorse in the same manner as an agent of the maker, drawer or acceptor should
in order to escape personal liability as required under Section 20. He must (1) add the words describing himself as an
agent; (2) disclose his principal; and (3) must be duly authorized.
Sec. 45 Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the
instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue.
Importance. In order that one may be a holder in due course, the instrument must be negotiated to him before it
becomes overdue. The indorsement without date establishes prima facie presumption that the instrument was
negotiated before maturity.
Sec. 46 Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed
prima facie to have been made at the place where the instrument is dated.
Importance. The place of indorsement sometimes is material because an indorsement is governed by the laws of the
place where it is indorsed, although the instrument is drawn or made in a different place.
Sec. 47 Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it
has been restrictively indorsed or discharged by payment or otherwise.
When negotiable instrument rendered non-negotiable. Under this section, an instrument originally negotiable can
be rendered negotiable only by: (1) restrictive indorsement; or (2) by a discharge thereof by payment or otherwise.
Right of holder not in due course. The only disadvantage of a holder who is not a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable.
Sec. 48 Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to
his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from
liability on the instrument.
When holder may or may not strike out indorsement. A holder may strike out any indorsement which is not
necessary to his title. But where an instrument is transferred by a special indorsement, the holder has no right to strike
out the name of the person mentioned in such indorsement and insert his own name in place thereof. The holder who
acquires title subsequent to the succeeding special indorsement must trace his title not only through the blank
indorsement but through the special indorsement as well.

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Effects of striking out. (1) The indorser whose indorsement is struck out is relieved from his liability on the
instrument, and (2) all subsequent indorsers are also relieved from their liability on the instrument.
Sec. 49 Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it
for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the
transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining
whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is
actually made.
Application. This section applies only to instruments payable to order. This contemplates a case where there is delivery
and payment of value but no indorsement. This operates as an equitable assignment.
Rights of transferee for value.
(1) The transferee acquires only the rights of the transferor.
(2) The transferee has also the right to require the transferor to indorse the instrument.
When transferee becomes holder in due course. The time for determining whether the transferee is a holder in
due course is as of the time of actual indorsement, not at the time of the delivery.
Sec. 50 When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such
party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to
enforce payment thereof against any intervening party to whom he was personally liable.

CHAPTER 5: Holders
Definition: A holder means the payee or indorsee of a bill or note who is in possession of it or the bearer
thereof.
1. Holder of an order instrument: PAYEE or INDORSEE;
2. Holder of a bearer instrument: BEARER
RIGHTS OF HOLDERS IN GENERAL
Sec 51: Every holder of a negotiable instrument may sue thereon in his own name; and payment to him in
due course discharges the instrument.
It is not necessary that the holder is a holder in due course before he can enforce payment especially if
there are no defenses available to the parties.
The only disadvantage of a holder not in due course is that the instrument is subject to defenses as if it
were non-negotiable.
REQUISITES OF A HOLDER IN DUE COURSE (SEC 52):
A holder is a holder in due course if he has taken the instrument under the following conditions:
1. That it is complete and regular upon its face;
2. That he became the holder of it before it was overdue and without notice that it has been
previously dishonoured, if such was the fact;
3. That he took it in good faith and for value;
4. 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.
Holder
It is actually the first requirement under Section 52 to be a holder. If a possessor of a negotiable
instrument is not a holder, he can never be a holder in due course.
Complete and Regular

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An instrument is complete and regular upon its face if it contains no material or substantial alteration. If
the alteration is not apparent, the firs requirement is still present because the instrument is still complete
and regular upon its face.
Taking before Overdue
A holder who takes an overdue instrument is put on inquiry although he is not actually aware of any
existing defense of a prior party.
A. Installment Instruments
With respect to instruments that are payable in installment, it is a general proposition under the Uniform
Negotiable Instruments Law in the United States and Common Law that the transferee of an
installment not a holder in due course as to any part of the note when the transfer has been
made after the maturity of one or more though less than all of the installment.
B. Overdue Interest Payments
The mere fact that interest on a note was overdue does not, in the absence of a stipulation making the
principal due upon failure to pay interest, affect an indorsee with notice of dishonour or put him on inquiry.
But it is a material circumstance bearing on the question whether the indorsee acquired the note in good
faith and without notice of defects of title.
C. Demand Instruments
Sec. 53: Where an instrument payable on demand is negotiated on an unreasonable length of time after
its issue, the holder is not deemed a holder in due course.
Unreasonable: regard has to be had in the nature of the instrument, the usage of trade or business (if
any) with respect to such instruments, and the facts of the particular case (Sec. 193).
Notice of Infirmity and Defect
Effect of Notice: destroy the due course holding of the instrument
Sec. 53: To constitute notice of an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad
faith.
Infirmity: any irregularity in the instrument.
Defective Title: when the party obtained the instrument, or any signature thereto by fraud, duress, or
force and fear, or other unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith, or under such circumstances as to amount to a fraud. (Sec. 57)
Good Faith
Ocampo vs. Gatchalian: Although good faith on the part of the holder is presumed, such presumption is
destroyed if the payee or indorsee acquired possession of the instrument under circumstances that should
have put it to inquiry as to the title of the holder who negotiated the instrument.
Crossed Checks: as to crossed checks, a person who takes a crossed check without making further
inquiries is not a holder in due course. The act of crossing a check serves as a warning to the holder that
the check has been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose. (Rule does not apply if the payee deposited the check).
Holder for Value
Value is a consideration sufficient to support a simple contract.

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A holder is a holder for value if the instrument was indorsed to him by his immediate transferor to pay for
a loan that was extended to the latter.
The concept of value under the NIL is different from the concept of cause or consideration under the Civil
Code. With respect to holders, the holder is a holder for value only to the extent that the consideration
agreed upon has been paid, delivered, or performed.
Sec. 54: Where the transferee receives notice of any infirmity in the instrument or defect in the title of the
person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent of the amount paid therefor by him.
Accommodation Parties
A holder for value under Sec. 29 of the NIL is one who must meet all the requirements of the holder in
due course under Sec. 52 of the same law except notice of want of consideration. Lack of notice of any
infirmity in the instrument or defect in title of the person negotiating it has no application.
However, the inapplicability of the fourth requisite is limited to notice of absence of consideration, that is,
notice of the fact that the party is a mere accommodation party who did not receive any consideration on
the instrument.
Presumptions
The prima facie presumption is that every holder is a holder in due course and it is up to the person who is
resisting the claim to prove that the holder is not a holder in due course. (Please see Sec. 59)
The presumption does not operate if a demand instrument is negotiated for an unreasonable length of
time.
A holder cannot likewise be presumed a holder in due course if there is no proof whatsoever how the
person who is claiming the rights of a holder in due course, acquired the instrument. The conclusion is
further reinforced if the same person cannot explain how he acquired the instrument and there is no
showing that he acquired it before it was dishonoured.
Payee as a Holder in Due Course
It is possible for a payee to be a holder in due course under any circumstance in which he meets the
requirements of Sec. 52 of the NIL. The word holder in Sec. 52 may be replaced by the definition in Sec.
191.
RIGHTS OF A HOLDER IN DUE COURSE
1.

2.
3.

A holder in due course holds the instrument free from any defect of title of prior parties, and free
from defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon.
a. A holder in due course is free from personal defenses.
b. A holder in due course is no free from real defenses
A holder no in due course is subject to personal and real defenses.
the law does not impose on a holder the obligation to inquire into the infirmity in the instrument or
defect of the title of the person negotiating it to him. However, failure to make inquiry, when
circumstances indicate defect, renders the holder not a holder in due course. Gross negligence
may amount to legal absence of good faith (De Ocampo vs. Gatchalian, 3 SCRA 596).

SHELTER RULE
General Rule: if a holder is not a holder in due course, he is subject to the same defenses as if it were
non-negotiable.
Exception: a holder who is not a holder in due course but he derived from his title from a holder in due
course.

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Sec. 58: x x x But a holder who derives his title through a holder in due course, and who is not himself a
party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect
of all parties prior to the latter.
The rule is not applicable:
1.
2.

If he was a previous holder not in due course who repurchased the instrument either personally or
through an agent.
Reacquisition of the instrument.

Rights of Holder in Bills in Set


Bill in set: one bill that is drawn in set.
Sec. 178: where a bill is drawn in a set, each part of the set being numbered and containing a reference
to the other parts, the whole of the parts constitutes one bill.
A problem arises if different parts of the set are negotiated to separate persons who are holders in due
course.
Rights available:
Sec. 179: Where two or more parts of a set are negotiated to different holders in due course, the holder
whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section
affects the right of a person who, in due course, accepts or pays the parts first presented to him.
Sec. 180: Where the holder of a set indorses two or more parts to different persons, he is liable on every
such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such
parts were separate bills.
Sec. 181: The acceptance may be written on any part and it must be written on one part only. If the
drawee accepts more than one part of such accepted parts negotiated to different holders in due course,
he is liable on every such part as if it was a separate bill.
CONSUMER TRANSACTIONS
Background
Protection must be granted to consumers who transact with negotiable instruments to sellers who in turn,
transact such instruments to finance companies who are deemed holders in due course. Thus, when
consumers find defect in the products they buy, they cannot refuse payment of such instruments primarily
due to the fact that such finance companies are holders in due course.
Protection under Philippine Jurisprudence
Consolidated Plywood Industries vs. IFC Leasing and Acceptance Corporation 1: finance companies are
better able to bear the risk of the dealers insolvency than the buyer. They are also in a better position to
protect their interests against unscrupulous and insolvent dealers.
Juanita Salas vs. CA2: finance companies are still holders in due course.
(Thus, the Supreme Court appears to be inconsistent in their rulings regarding these transactions.)
Protection under Consumer Act

1
2

RI 149 SCRA 448.


181 SCRA 296

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Art. 146 of RA 7394 effectively abolished the distinction between a holder in due course and one who is
not with respect to transfer to banks and financing companies of instruments that cover consumer credit
sales.
RIGHTS OF A HOLDER IN BILLS IN SET
Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set
being numbered and containing a reference to the other parts, the whole of the parts
constitutes one bill.
Bill in set, defined.

One composed of various parts, each part being numbered, and containing a reference to other
parts, all of which parts constitute but one bill.
Purpose.

To increase the probability of the bill reaching its destination.

Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a
set are negotiated to different holders in due course, the holder whose title first accrues is, as
between such holders, the true owner of the bill. But nothing in this section affects the right of
a person who, in due course, accepts or pays the parts first presented to him.
Suppose B, payee, wants to raise P4,000. In violation of his rights, he negotiates the first part
of the bill to C and the second part to D, both of whom are holders in due course.
Who is the true owner of the bill?
If B negotiates to C on January 3, 1950 and to D on January 5, 1950, C is the true owner, as Cs title
accrues first.
BUT, if D succeeds in presenting his part of the bill for acceptance or payment, and X, the drawee, accepts
or pays the second part in due course, X is protected and X can refuse to accept Cs part of the bill.
Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. Where the holder of a set indorses two or more parts to different persons he is liable on every
such part, and every indorser subsequent to him is liable on the part he has himself indorsed,
as if such parts were separate bills.
Liability of holder who indorses two or more parts. (Continuation of illustration under note
1178)

B is liable on both parts as if there are two bills, on the first to C and on the second to D. In other
words, as a result of his negotiation of the two parts, B is liable for a total of P4,000. But A, the drawer, or
X, the drawee, is liable only on one part or for P2,000 unless the drawee accepts both parts.

Suppose that C and D respectively negotiate the parts they have to E, the first part, and f, the
second part. C is liable to E for the part he indorsed to E and D is liable to F for the part he indorsed to F.
Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be
written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to
different holders in due course, he is liable on every such part as if it were a separate bill.
Drawee must accept only one part.

If he accepts both parts, and they are negotiated to holders in due course, he is liable on evey such
part as if it were a separate bill, that is for a total of P4,000. But he can ask reimbursement from A,
drawer only on one part, that is, P2,000, because the order of the drawer to him is to pay only one part,

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not both parts.
Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a
set pays it without requiring the part bearing his acceptance to be delivered up to him, and the
part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder
thereon.
Illustration.
Suppose that X accepts only the first part. Then, he pays the second part without requiring the
first part to be surrendered to him. On the date of maturity, X would still be liable to the holder of the first
part on which appears his acceptance.
Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any
one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is
discharged.
Effect of discharge of one part.

Subject to the exceptions in Sections 180, 181, and 182, if one part is discharged, the whole bill is
discharged.
Reason: The bill constitutes only one bill.
Example: Suppose that X, acceptor, pays the first part of which he accepted. The second and third parts
are also discharged.

RELATED PROVISIONS: (AGBAYANI COMMENTARY)


Sec. 51 Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name;
and payment to him in due course discharges the instrument.
Rights of the holder in general.
(1) He may sue on the instrument in his own name, even if he be a holder only for collection, or as a pledge of the
instrument.
(2) He may receive payment and if the payment is in due course, the instrument is discharged.
Effect of payment to the holder. The payment in due course to the holder of an instrument discharges the
instrument.
Sec. 52 What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument
under the following conditions:
(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 has 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.
Where instruments held complete and regular.
(1) Where the omission is immaterial
(2) Where there is alteration in the instrument but the court, upon inspection, found that the alteration was not
apparent
(3) Although a printed name of a payee was stricken out, and another payees name inserted in writing, but the
same is a common practice by the holder bank.
When instrument is overdue. An instrument is overdue after the date of maturity.
As to acceleration clause When the instrument contains an acceleration clause, knowledge of the holder at the time of
acquisition thereof of that one instalment or interest is unpaid, is notice that the instrument is overdue.

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As to interest One who purchases in good faith an instrument upon which the interest is overdue is a holder in due
course.
Acquisition in good faith. Good faith refers to the indorsee or transferee, not to the seller of the paper. He must NOT
have knowledge or notice of equities of any sort which could be set up against a prior holder of the instrument.
The test for determining whether a holder acquires an instrument in good faith is not whether he was negligent, but
whether his purpose was dishonest. Even gross negligence does not establish bad faith.
A subjective test of honesty, not an objective test of due care.
Acquisition for value. Where the holder gave no valuable consideration for the transfer of the instrument to him, he
cannot be a holder in due course.
Article 1335 of the Civil Code: except in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence. But while inadequacy of consideration is not of itself
a sufficient ground for either legal or equitable relief, yet it may be shown as evidence of fraud.
Defects of title. Defects are those defined by Section 55 to cover all those known as equitable defenses. Defenses
include those which are not covered by Section 55 such as mistake, absence and failure of consideration, minority and
other forms of incapacity, lack of authority, etc. Infirmities must include things that are wrong with the instrument itself.
May the drawee be a holder in due course? The holder refers to one who has taken the instrument as it passes
along in the course of negotiation towards the drawee and not the drawee, who, on the acceptance an payment of the
instrument, thereby strips it of all negotiability and reduces it to a mere voucher or proof of payment.
May a pledgee be a holder in due course? The pledgee for value in good faith of a complete unmatured note,
without notice of equities, is a holder in due course.
Sec. 53 When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not deemed a holder in due course.
Application. This section applies to instruments which are payable on demand.
Sec. 54 Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or
defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he
will be deemed a holder in due course only to the extent of the amount therefore paid by him.
Sec. 55 When title defective. - The title of a person who negotiates an instrument is defective within the meaning of
this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other
unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances
as amount to a fraud.
Defective title in general. The title of a person in an instrument becomes defective either: (1) in the acquisition, or
(2) in the negotiation thereof.
In acquisition, the title becomes defective when he obtains the instrument or any signature thereto by: (1) fraud, (2)
duress or force and fear, (3) other unlawful means, or (4) for an illegal consideration.
In negotiation, the title of a person becomes defective when he negotiates it: (1) with breach of faith, or (2) under such
circumstances amounting to fraud.
Sec. 56 What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title
of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.
Notice of defect of title in general. To constitute notice of defect or infirmity, the transferee must have actual
knowledge, either: (1) of the defect or infirmity, or (2) of such facts that his action in taking the instrument amounts to
bad faith.
Sec. 57 Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon.
Rights of a holder in due course.
(1) He may sue on the instrument in his own name;
(2) He may receive payment, and if the payment is in due course, the instrument is discharged;

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(3) He holds the instrument free from any defect of title of prior parties and free from defenses available to prior
parties among themselves; and
(4) He may enforce payment of the instrument for the full amount thereof against all parties liable thereon.

Section 58. When subject to original defences. In the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defences as if it were non-negotiable. But a holder
who derives his title through a holder in due course, and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to
the latter.
Rights of holder not in due course
1. He may sue on the instrument in his own name; (2) He may receive payment, and if payment is in due course, the
instrument is discharged. (3) He holds the instrument subject to the same defences as if it were non-negotiable; (4)
But a holder not in due course who derives his title through a holder in due course and who is not a party to any fraud
or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.
Holder acquiring from holder in due course
Requisites:
1. That he derived his title from a holder in due course; and (2) that he was not himself a party to any fraud or illegality
affecting the instrument

A purchaser from a holder in due course is entitled to recover against prior parties even though he has notice
of the defences, or notice of maturity of a negotiable certificate of deposit, or with knowledge of the equities
In order that a holder who derives his title form a holder in due course may recover on the instrument, it is
incumbent upon him to show that the person through whom he derives his title was a holder in due course
As to one not a holder in due course reacquiring from holder in due course. If the original payee of a
note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder in due
course, the paper again becomes subject in the payees hands to the same defences to which it would have
been subject as if the paper had never passed through the hands of a holder in due course. The same is true
where the instrument is retransferred to an agent of the payee.

Section 59. Who is deemed holder in due course. Every holder is deemed prima facie to be a holder in due
course; but when it is shown that the title of any person who has negotiated the instrument was defective,
the burden is on the holder to prove that he or some person under whom he claims acquired the title as
holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on
the instrument prior to the acquisition of such defective title.
In whose favor presumption arises. The presumption expressed in this section arises only in favor of a person who
is a holder in the sense defined in Section 191, that is, a payee or indorsee who is in possession of the draft, or the
bearer thereof. In order to be a holder, one must be in possession of the note or the bearer thereof. However, when the
instrument is not payable to the holder thereof or to bearer, there is said to be a defect in the title of the holder and the
rule that a possessor of the instrument is prima facie a holder in due course does not apply.
Presumption not applicable when the holders title was defective or suspicious. As holders title was defective
or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holders title,
and for this reason, the presumption that he is a holder in due course or that it acquired the instrument in good faith
does not exist.

Reason for the rule. The guilty maker or holder of an instrument vitiated by fraud or illegality will naturally
seek to put it in the hands of some other person in order to cut off the defense to which the instrument is
subject, and a presumption arise against the bona fide of the transfer

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CHAPTER 6: Parties who are Liable


NATURE OF LIABILITY
Primary and Secondary Liability
The holder is the person or entity who is given the right to demand the performance of the obligation
reflected in the negotiable instrument, that is, the obligation to pay a sum certain in money.
The passive subject (obligor/debtor) against whom the holder can enforce the right represented in the
instrument are the persons who are primarily liable and the persons secondarily liable.
1. Primarily liable: the person, who, by the terms of the instrument, is absolutely required to pay the
same.
2. Secondarily liable: if he engages that, on due presentment, the instrument shall be accepted or
paid, or both as the case may be, according to its tenor, and that if it be dishonoured and the
necessary proceedings on dishonour are duly taken, he will pay the amount thereof to the holder,
or to any subsequent indorser who may be compelled to pay it. In other words, the person
secondarily liable promises to pay if the person primarily liable refuses or fails to pay.
Liability vs. Warranty
Liability: the primary or secondary liability of the parties makes them liable to pay the sum certain in
money stated in the instrument.
Warranty: affirmations of fact on the part of the parties that impose no direct obligation to pay in the
absence of breach thereof.
An action on the indorsers special contract of indorsement is conditioned on presentment, and notice of
dishonour; his liability for breach of warranty is not so conditioned. Furthermore, the action on the special
contract cannot be brought until the maturity of the instrument while the action for breach of warranty,
occurring as it does at the time of the transfer, may be brought at any time.
Who is Liable for What?
Primary Liabilities
MAKER
1. Engages to pay according to the tenor of the instrument;
2. Admits the existence of the payee and his capacity to indorse.
ACCEPTOR (Sec. 62 as to the warranties)
1. Engages to pay according to the tenor of his acceptance;
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 capacity to indorse.
(N.B.: The acceptor does not become liable until he accepts the bill or unless he certifies the
check.)
Secondary Liability
DRAWER
1. Admits the existence of payee and his capacity to indorse;
2. Engages that the instrument will be accepted or paid by the party primarily liable;

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3.

Engages that if the instrument is dishonoured ad proper proceedings are brought, he will pay to
the party entitled to be paid.

Payment without Acceptance


Instruments that are payable on demand: acceptance is an unnecessary step. This is especially true in the
case of checks.
Question: Whether or not the drawee bank that pays the value of the check but does not accept the same
is still liable for the warranties of an acceptor under Sec. 62?
PNB vs. National City Bank of New York: the drawee does not warrant if it does not accept the checks. The
warranty is in favor of the holders of the instrument after acceptance and when the drawee bank cashes
or pays the check, the cycle of negotiation is terminated and it is illogical therafter to speak of subsequent
holders who can invoke the warranty provided in Sec. 62 against the drawee.
PNB vs. CA: Acceptance and payment are, within the purview of the law, essentially different things, for
the former is a promise to perform the act, while the latter is the actual performance thereof. The actual
payment of the amount of check implies not only an assent to said order of the drawer and recognition of
the drawers obligation to pay the aforementioned sum, but also, a compliance with such obligation. Thus,
the warranties of an acceptor under Sec. 62 of the NIL apply to the drawee who paid without prior
acceptance.
FEBTC vs. Gold Palace Jewellery Company: Payment of the negotiable instrument includes acceptance.
Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay.
Consequently, under this view, Sec. 62 applies to the drawee that paid without accepting the check.
WARRANTIES OF INDORSERS
General Indorser
Sec. 66: Every indorser who endorses without qualification, warrants to all subsequent holders in due
course:
1. That the instrument is genuine and in all respects what it purports to be;
2. That he has a good title to it;
3. That all prior parties had capacity to contract;
4. That the instrument is, at the time of the indorsement, valid and subsisting.
The general indorser also engages that on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor; and if it be dishonored and the necessary proceedings on dishonour
be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
Qualified Indorser
Sec. 65: Every person negotiating an instrument by delivery or by a qualified indorsement warrants:
1. That the instrument is genuine and in all respects what it purports to be;
2. That he has a good title to it;
3. That he has no knowledge of any fact which would impair the validity of the instrument or render
it valueless.
Note: the warranty of persons negotiating by mere delivery extends to the immediate transferee only.
Rule on the Liabilities of Agents
General Note: am maker, drawer, acceptor, or indorser may act through an agent. However, an agent
incurs all the liabilities as such maker, drawer, acceptor, or indorser unless he discloses the name of his
principal and the fact that he is acting only as an agent.
Liabilities of Agents:

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Sec. 18: No person is liable on the instrument whose signature does not appear thereon, except as
otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same
extent as if he had signed in his own name.
Sec. 19: the signature of any party may be made by a duly authorized agent. No particular form of
appointment is necessary for his purpose; and the authority of the agent may be established as in other
cases of agency.
Sec. 20: Where the instrument contains or a person adds to his signature words indicating that he signs
for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an agent, or as filling a representative
character, without disclosing his principal, does not exempt him from personal liability.
Sec. 21: A signature by procuration operates as notice 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.
A Person who should sign the instrument
General Note: a person must sign the instrument before he can be made liable under the same
instrument. This is consistent with Sec. 18 of NIL which provides that no person is liable on the
instrument whose signature does not appear thereon. Necessarily, the party must sign in his own name.
Exceptions: the following person who did not sign on their own names are still liable:
1. One who signs in a trade or assumed name (Sec. 18);
2. One who signs through an agent or an authorized representative (Sec. 19);
3. Incapacitated persons who sign through their legal guardian;
4. Forgers of signatures (Sec. 23);
5. Persons whose signatures were forged but who are precluded from setting up the defense of
forgery (Sec. 23);
6. In case of constructive acceptance (Sec. 137);
Sec. 137: Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within
24 hours after such delivery, or within such other period as the hodler may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have accepted the same.
7.
8.

Indorsers who sign on a separate piece of paper known as an allonge;


Persons who negotiate by mere delivery. They are liable for breach of warranty although they did
not sign.

Tradename or Assumed Name


If a person uses a trade name or an assumed name and he signs using such, he is liable as if he signed
using his real name.
AGENT
When a person signs through his authorized agent, the effect is that the same as the situation where he
personally signed the instrument. If the agent signs in the manner prescribed by the NIL, the agent is not
personally liable and the only person who is liable is the principal. However, two things must be present:
1. He must indicate that he is signing as a mere agent; and
2. He must indicate the name of the principal.
Per Procuration
A signature by procuration operates as notice 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.
LIABILITIES OF ACCOMODATION PARTIES

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Sec 29: an accommodation party is one who signed the instrument as maker, drawer, acceptor, or
indorser, without receiving the value therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the
time of taking the instrument, knew him to be only an accommodation party.
Requisites under Sec 29:
1.
2.
3.

He must be a party to the instrument, signing as a maker, drawer, acceptor, or indorser;


He must not receive value therefor; and
He must sign for the purpose of lending his name or credit to some other person.

The accommodation party lends his name to the accommodated party. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto. It is not a valid defense that the
accommodation party did not receive any valuable consideration when he executed the instrument.
Surety of Accommodated Party
By lending his name, the accommodation party, is in effect, a surety of the accommodated party.
Thus, if he is an accommodation indorser, he is secondarily liable as an accommodation indorser and he
cannot make the holder recover directly from the accommodated party. His only recourse is to seek
reimbursement from the accommodated party.
Irregular Indorser
Although the law does not state that all irregular indorsers are accommodation parties, they are usually
accommodation parties.
Definition of an Irregular Indorser:

A person, not otherwise a party to an instrument, who placed thereon his signature in blank
before delivery.
Prof. Ogden: the irregular or anomalous indorser is one who indorses the instrument in an
unusual, singular or peculiar manner; it is irregular and an anomaly in the law.

Liabilities of an irregular indorser:


1.
2.
3.

If the instrument is payable to the order of a third person, he is liable to the payee and to all
subsequent parties.
If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the payee.
If he signs for accommodation of the payee, is liable to all parties subsequent to the payee.

Liability among themselves


A solidary accommodation party may seek reimbursement from the accommodated party or other
accommodation parties subject to the following rules:
1.
2.

A joint and several accommodation party such as an accommodation maker may demand from the
principal debtor reimbursement for the amount that he had paid to the payee;
A joint and several accommodation maker who pays on the said promissory note may directly
demand reimbursement from his co-accommodation maker without first directing his action
against the principal debtor provided that:
a. He made payment by virtue of a judicial demand, or
b. A principal debtor is insolvent.

Liabilities of Corporations
The rule on the liability of an accommodation party under Sec. 29 of the NIL does not apply to
corporations.

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A corporation cannot act as an accommodation party. The issue or indorsement of a negotiable paper by a
corporation without consideration and for the accommodation of another is ultra vires.
By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a
negotiable paper in the name of the corporation for the accommodation of a third person only if
specifically authorized to do so.
If a corporation is not liable, the holder may turn to its officers for relief. Personal liability of the officers
and directors may attach in the following instances:
1. He assents:
a. To a patently unlawful act of the corporation, or
b. For bad faith or gross negligence in directing its affairs, or
c. For conflict of interest, resulting in damages to the corporation, its stockholders or other
persons
2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made by a specific provision of law, to personally answer for his corporate action.

RELATED PROVISIONS: (AGBAYANI COMMENTARY)


Section 60. Liability of maker. The maker of a negotiable instrument, by making it, engages that he will
pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.
Maker primarily liable. The engagement of the maker is to pay absolutely the note according to its tenor. The
makers liability is primary and unconditional. And one who has signed as maker is presumed to have acted with care
and to have signed the document in question with full knowledge of its contents unless, of course, fraud is proved

Liability of two or more makers. When two or more makers sign jointly and severally, each of them is
individually liable for the payment of the full amount of their obligation even if one of them did not receive part
of the value given therefor, a he would be considered an accommodation party.

Payees existence etc. Aside from engaging to pay the instrument according to its tenor, the maker also
admits the existence of the payee and his then capacity to indorse. The maker consequently is precluded from
setting up the following defences: (1) that the payee is a fictitious person because, by making the note, he
admits that the payee exists; and (2) that the payee as insane, a minor, or a corporation acting ultra vires
because, by making the note, he admits the then capacity of the payee to indorse.

Section 61. Liability of drawer. The drawer by drawing the instrument admits the existence of the payee
and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or
paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonour be duly taken. He will pay the amount thereof to the holder or to any subsequent indorser who
may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing
or limiting his own liability to the holder
Drawer secondarily liable. The drawer does not engage to pay the bill absolutely. He engages merely that the bill will
be accepted or paid or both, according to its tenor, and that he will pay only when: (1) it is dishonored; and (2) the
necessary proceedings of dishonour are duly taken.

In the absence of due presentment, the drawer is not liable

To whom drawer secondary liable. The secondary liability of the drawer is in favor of: (1) the holder, or (2) if any of
the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer will be liable
to that indorser so compelled to pay

The law allows the drawer to negative or limit his liability by express stipulation.

Section 62. Liability of Acceptor. The acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of
his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee
and his then capacity to indorse

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Acceptor primarily liable. The acceptor engages to pay absolutely according to the tenor of his acceptance. His
liability is not subject to any condition.

Before acceptance, the drawee is not liable on the bill.


The execution of mortgage does not constitute any novation of the obligation represented by said accepted
bills unless it is so expressly stated in said mortgage.
It is to be noted that while the maker of a note engages to pay according to the tenor of the note, an acceptor
engages to pay according to the tenor of his acceptance, not of the bill he accepts. This is an important
distinction, for the tenor of the acceptors acceptance may be different from the tenor of the bill, as the
acceptor may accept the bill with qualifications

Where original tenor is altered before acceptance. Suppose the bill is originally for P1000. Before the drawee X
accepts it, it is altered by the payee to P4000. Then X accepts it. How much X is liable to a holder in due course?

View that altered tenor is tenor of acceptance. According to one view, X is laible for P4000. The reason is
that the of Xs acceptance is for p4000. Moreover, he would be a party who has himself assented to the
alteration.

View that original tenor is tenor of acceptance. Section 62 should be paraphrased to state that the
liability of the acceptor depends upon the terms of his acceptance, that is, whether it is a general or a qualified
acceptance or an acceptance for honor. An author suggests that all three of these acceptance contracts are
within the purview of Section 62 that the acceptor, by accepting the instrument, engages that he will pay it not
according to the tenor of the bill since this would deny him the right to qualify the acceptance or to accept for
honor but according to the tenor of his accecptance.

Effect of Section 124. It seems that this refer to the original tenor of the instrument taken from the
standpoint of the person principally liable.

Admission of drawers existence, etc. The acceptor, by his acceptance, admits: (1) the drawers existence, (2) the
genuineness of the drawers signature; and (3) the capacity and authority of the drawer to draw the instrument. But he
does not admit the genuine of the indorsers. He also admits the existence of the payee and his then capacity to
indorse.

Effect of acceptors admissions. (1) precluded from setting up the defense that the drawer is non-existent
or fictitious because of his admission of the drawers existence; (2) Neither can he claim that the drawers
signature is a forgery since he admits its genuineness; (3) Neither can the drawee escape liability by alleging
want of consideration between him and the drawer.

Section 63. When person deemed indorser. A person placing his signature upon an instrument otherwise
than as a maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate
words his intention to be bound in some other capacity.
When person deemed indorser. In the absence of any indication in what capacity a person whose signature is
written on the instrument intends to be bound, he shall be deemed an indorser. But one making a note payable to his
own order does not, by indorsement thereof, assume liability as indorser
Indication to be bound otherwise. And one who signs otherwise than as maker, drawer, or acceptor, will not be
deemed an indorser if he indicates by appropriate words his intention to be bound in some other capacity.
Admissibility of parol evidence. Secition 63 is a statutory command that the legal effect of a blank indorsement
cannot be changed by parol proof or by evidence from other source. So that, under this section, one who indorses in
blank cannot show by parol that he signed merely as agent for a prior party and was not individually liable. He is an
indorser. Also the intent to be bound in some other capacity than as an indorser must be indicated in the indorsement
or on the face of the instrument and cannot be shown by parol.
Section 64. Liablitiy of irregular indorser. Where a person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following
rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and all
subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to
bearer, he is liable to all parties subsequent to the maker or drawer. (c) if he signs for the accommodation
of the payee, he is liable to all parties subsequent to the payee.

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Irregular indorser. In order that a person may be considered an irregular indorser, the following requisites must be
present: (1) he must not otherwise be a party to the instrument, that is, he must not be a maker, drawer, acceptor, or
regular indorsee thereon; (2) he must sign the instrument in blank; and (3) he must sign before delivery.
Reason for use of term. Such a party so signing is called an irregular or anomalous indorser because he indorses in
an unsual, singular or peculiar manner.
Meaning of before delivery. Delivery seems to include not only the original delivery to the payee but also every
delivery from the party accommodated to a subsequent party.
Application of Section 64. Where a person puts his signature after delivery, this section does not apply. It is Section
17(f) and Section 63 which will apply. This section deals only with the liability of the irregular indorser to the payee but
does not fix the rights if various irregular indorsers as between themselves.
Section 65. Warranty where negotiation by delivery and so forth. Every person negotiating an instrument
by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects
what it purports to be; (b) That he has good title to it; (c) that all prior parties had capacity to contract; (d)
That he has no knowledge of any fact which would impair the validity of the instrument or render it
valueless.
But when negotiation is by delivery only, the warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating public or
corporation securities other than bills and notes.
Application of Section 65. This section treats of the warranties of: (1) a person negotiating by mere delivery, and (2)
a person negotiating by qualified indorsement. The first refers to instrument payable to bearer, either originally or when
the only or last indorsement is in blank. But one indorsing in blank is not referred to here, as he negotiates by
indorsement completed by delivery, not only by delivery. The second refers to instrument payable to order.

A person negotiating by mere delivery becomes liable to the holder only when the holder cannot obtain
payment from the person primarily liable by reason of the fact that any of the warranties of the person
negotiating by delivery is or becomes false.\

Warranty as to genuineness. The party negotiating by mere delivery is liable to the holder when the latter cannot
collect from the maker because the instrument is altered or the makers signature is forged.
Warranty as to good title. The party negotiating by delivery is also liable to the holder if his title is defective as he
acquired the instrument by means of fraud for which reason the holder cannot collect from the maker or acceptor.
Warranty as to capacity to contract. The party negotiating by delivery is also liable to the holder if the maker is a
minor or an incompent.
Warranty as to ignorance of certain facts. Suppose that the maker was insolvent at the time of the negotiation of
the instrument. The fact renders the instrument valueless, and for this reason, the holder cannot collect on the
instrument against the insolvent maker. (1) If the party negotiating by delivery knew that the maker was insolvent,,
and he concealed that fact, he would be liable because he warrants that he is ignorant of any fact that would render the
instrument valueless, and it turns out that he knew it. (2) the party negotiating by delivery would also be liable, if he
knew but concealed that the instrument is not valid for want of consideration.
To whom warranties extend. In favor of no holder other than the immediate transferee.
Warranties not exclusive. The four warranties expressed in this section are not exclusive but may be extended by
analogy to like situations
Liability of Qualified Indorser. The only difference is that while the person negotiating by mere delivery is liable only
to his immediate transferee, the person negotiating by qualified indorsement is liable to all parties who derive their title
through hi indorsement.

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Nature of Liability. A qualified indorser or a person negotiating by mere delivery are secondarily liable, and that their
secondary liability is limited, namely, to their warranties. In other words, they are secondarily liable only when the
person primarily liable cannot pay because of a violation of any of the four warranties but they will not be liable if the
person primarily liable cannot pay for any other reason than the violation of the four warranties.
Section 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to
all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b), and
(c) of the next preceding section; and (b) that the instrument is, at the time of his indorsement, valid and
subsisting;
And in addition he engages that, on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonour be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who
may be compelled to pay it.
Application of Section 66. This section deals with the liability or warranties of one negotiating by general
indorsement. It has been held that this section includes an indorser for collection.
Liability of general indorser. It will be noted that the first three warranties of a general indorser are the same as
those of qualified indorser or of a person negotiating by mere delivery. The fourth warranty of a general indorser is that
the instrument is, at the time of his indorsement, valid and subsisting.
Fourth warranty of general indorser and qualified indorser, distinguished. While the qualified indorser or
person negotiating by mere delivery warrants that he is ignorant of any fact that will render the instrument valueless or
impair its validity, the general indorser warrants that the instrument he is indorsing is valid and subsisting regardless of
whether he is ignorant of that fact or not. But the fourth warranty of a general indorser does not run in favor of holders
who are parties to the illegal transaction.
To whom warranties extend. (1) subsequent holders in due course. (2) Persons who derive their title from holders in
due course. (3) Immediate transferees, even if they are not holders in due course. Otherwise, the transferee of a
qualified indorser would have greater rights than the transferee of a general indorser
Warranties do not extend to drawee. The indorser of a check does not warrant the genuineness of the drawers
signature to the drawee who pays it since the drawer is not a holder in due course under section 52 nor a holder under
section 191.
Other liability of the general indorser. Same as the secondary liability of a drawer. This is to say that the general
indorser is liable if the instrument is dishonored. And it has been held that the law does not require that the reason for
the dishonour be established.
When parol evidence admissible as to extrinsic agreement of indorsers. It has, however, been held that any
prior or contemporaneous conversation in connection with a note or its indorsement may be proven by parol evidence,
and that an extrinsic agreement between indorsers and indorsee which cannot be embodied in the instrument without
impairing its credit is provable by parol provided that such extrinsic agreement should not vary, alter or destroy the
obligations attached by law to the indorsement.
Liability of indorser and assignor compared. Like the qualified indorser and a person negotiating by delivery, but
not like the general indorser., an assignor is not responsible for the insolvency of the principal debtor. On the other
hand, unlike a qualified indorser and a person negotiating by delivery, but like the general indorser, the assignor
warrants the existence and legality of the credit assigned and will, therefore, be liable to the assignee in case the
assignee cannot collect from the principal debtor where the credit assigned is illegal or non-existent.
Section 67. Liability of indorser where paper negotiable by delivery. where a person places his
indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser
Section 68. Orders in which indorsers are liable. As respects one another, indorsers are liable prima facie
in the order in which they indorse; but evidence is admissible to show that, as between or among
themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to
indorse jointly and severally.

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Application of Section 68. This rule applies only with respect to an indorser or as against another but not as against
a holder in due course. Under this rule, every indorser is liable to all indorsers subsequent to him but not those prior to
him whom he in turn makes liable.
Liability as against holder. The rule that indorsers are liable in the order they indorse is only as between or among
themselves but not as against the holder. As to the holder they are liable in any order.
Joint and several liability of joint payees. Joint payees or joint indorsees are deemed to indorse jointly and
severally.
Effect of lack of notice of dishonour etc. One of the joint indorsers cannot escape liability because proper notice of
dishonour was not given to his joint indorser. Consequently, when the holder expressly releases the first indorser, the
second indorser will be discharged.
Section 69. liability of an agent or broker. Where a broker or other agent negotiates an instrument without
indorsement, he incurs all the liabilities prescribed by Section 65 of this act, unless he discloses the name
of his principal and the fact that he is acting only as agent.
Application. This section seems to refer to instruments which are payable to bearer. The liability and warranties of the
agent are those stated in Section 65.

CHAPTER 7: Defenses
REAL DEFENSES VS. PERSONAL DEFENSES:
1.
2.

Real defenses: those wherein the facts disclose an absence of one or more of the essential
elements of a contract, or where the admitted contract is vitiated for all purposes for reasons of
public policy.
Personal defenses: those wherein the facts present a true contract but where, for various reasons,
such as fraud, duress, mistake, prior breach of contract by the holder, discharge before maturity,
and the like, the defendant is excused from his obligation to perform.

Types of Real and Personal Defenses


REAL DEFENSES
Minority (available only to
the minor).

PERSONAL DEFENSES
Failure or Absence of
Consideration

Forgery

Illegal consideration

Non-delivery of complete
instrument

Non-delivery of complete
instrument

Material Alteration

Conditional delivery
complete instrument

Ultra
Vires
Corporation

act

of

of

Fraud in inducement

Fraud in Factum or Esse


Contractus

Filling up blank not within


authority

Illegality if declared void


for any purpose

Duress or Intimidation

Vicious force or violence

Filling up blank beyond


reasonable time

Want of authority

Transfer in breach of faith

Prescription

Mistake

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Discharge in Insolvency

Insertion of wrong date


Ante-dating or post dating
for illegal or fraudulent
purpose.

MINORITY AND OTHER CAUSES OF INCAPACITY


Sec. 22: the indorsement or assignment of the instrument b corporation or by an infant passes the
property therein, notwithstanding that from want of capacity, the corporation or infant may incur no
liability thereon.
Minority
Negotiation by a minor passes title to the instrument. The minor himself is not liable and the defense is
available only to the minor himself.
Ultra Vires Acts
Definition: an ultra vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon it by law.
Ultra Vires vs. Illegal Act
1.
2.

An ultra vires act is merely voidable which may be enforced by performance, ratification, or
estoppels
An illegal act is void and cannot be validated.

NON-DELIVERY AND CONDITIONAL DELIVERY


Non Delivery of Incomplete Instrument
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And
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. But if any 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 a reasonable
time.
Sec. 15. Incomplete instrument not delivered. - 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.
Note: In section 14 of the NIL, there is prima facie authority to fill up the incomplete instrument because
there was delivery. In Section 15, no such authority is presumed because there was no delivery.
Undelivered and Delivered Complete Instruments
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect
thereto. As between immediate parties and as regards a remote party other than a holder in due course,
the delivery, in order to be effectual, must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to
have been conditional, or for a special purpose only, and not for the purpose of transferring the property in
the instrument. But where the instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make them liable to him is conclusively

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presumed. And where the instrument is no longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed until the contrary is proved.
Outline of the Rules under Sec. 16
1.
2.
3.
4.
5.
6.
7.

A negotiable instrument must be delivered. If the instrument has not been delivered, the contract
concerning the instrument is incomplete and revocable. Thus, there must be delivery whenever
the instrument is issued or negotiated.
Delivery must be either by or under the authority of the party making, drawing, accepting, or
indorsing the instrument.
If the instrument is no longer in the hands of the maker or the drawer, he is presumed to have
already delivered the instrument to another (payee) for the purpose of issuing the same
As between immediate parties and remote parties who are not holders in due course, the delivery
of a complete instrument may be established to be conditional or for a special purpose and not for
the purpose of transferring title.
As between immediate parties and remote parties who are not holders in due course, it may be
established that there was no delivery at all of the complete instrument.
As to holders in due course, it cannot be established that there was no delivery. Delivery is
conclusive as to the holder in due course if he is in possession of a complete instrument.
As to holders in due course, it cannot be established that the delivery was conditional or for a
special purpose. As to him, delivery is conclusively presumed to be unconditional and for the
purpose of transferring title without any reservation or condition.

Other Notes
1.

2.

3.

4.

5.

Delivery means transfer of possession of the negotiable instrument by one person to another with
the intention to transfer title to the instrument. This is involved in the issuance of the instrument,
negotiation of the instrument and in other forms of transfer.

Transferee acquires no right if the instrument was not delivered to him.

Without delivery, transfer is incomplete.


The delivery of the negotiable instrument for purposes of issuance or negotiation position of the
parties in the chain of negotiation may be made personally by the person who is supposed to
transfer like the maker, drawer, or indorser or to his authorized agent/representative. (as to
agents/representatives, they must be authorized.)
If the instrument is no longer in the hands of the maker or the drawer, he is presumed to have
already delivered the instrument to another (payee) for the purpose of issuing the same. If the
instrument is no longer in the hands of the indorser, he is presumed to he is presumed to have
delivered the same for purposes of transferring title.
Immediate parties do not refer to the position of the parties in the chain of negotiation but
immediate refers to persons who are familiar with the circumstances regarding the transfer. With
respect to the holder, the most important thing to consider is whether or not the holder who is
trying to collect based on the instrument is a holder in due course or not.
The fact that the party is an immediate party or a remote party is important under Sec. 16 in
order to determine if it can be established as against them if the delivery was conditional or for a
special purpose.

FILLING UP BLANKS BEYOND AUTHORITY


(See Sec. 14) applies to an incomplete but delivered instrument. The defense available to parties
primarily liable against the holders is classified as a personal defense which is available against the holder
who is not a holder in due course.
Outline of Rules under Sec. 14:
1.
2.

A person in possession of an instrument that is wanting in a material particular has prima facie
authority to complete it by filling up the blanks therein strictly in accordance with the authority
given and within reasonable time.
If a person delivers a blank paper to another person containing his signature for the purpose of
converting it into a negotiable instrument, the person to whom the instrument is delivered has
prima facie authority to fill it up for any amount.

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3.

If the holder of the instrument, after it was filled up, is a holder in due course, the holder may
enforce the instrument as if it has been filled up strictly in accordance with the authority given and
within a reasonable time.

MATERIAL PARTICULAR
Example: an instrument that does not state the amount to be paid is not a complete instrument and a
material particular is missing.
Not limited to the matters mentioned as requisites under Sec. 1 of the NIL. It may include any detail that
affects the tenor of the instrument or the rights of the parties. It also includes matters mentioned in Sec.
125.
Sec. 125: any alteration which changes:
a. The date;
b. The sum payable, either for principal or interest;
c. The time or place of payment;
d. The number or the relations of the parties;
e. The medium or currency in which payment is to be made;
f. Or which adds a place of payment where no place of payment is specified, or any other change or
addition which alters the effect of the instrument in any respect, is a material alteration.
Prima Facie Authority
1.

Incomplete Instrument

If the maker or drawer delivers an instrument to the payee although it is wanting in


material particular, the payee is deemed to have prima facie authority to fill it up.

The moment the instrument is completed, the presumption is that the instrument was
completed with prior authority from the maker or the drawer and that the person who
completed the instrument did not exceed in his authority.

Sec. 14 also presumes that the instrument was completed in accordance with the authority
that it was given.
2. Signed bank piece of paper
If a person delivers a blank piece of paper containing his signature to another person for the purpose of
converting it into a negotiable instrument the person

3.

to whom the instrument is delivered has prima facie authority to fill it up with any amount.
Requisites for presumption to operate:
i. There must be delivery of a paper to another person;
ii. The paper that was delivered was a blank paper containing the signature of the
person who will deliver;
iii. The delivery was for the purpose of converting the paper into a negotiable
instrument.
Holder in Due Course

If the holder is an HDC, then the last sentence of Sec. 14 still applies even if what was
delivered was a blank piece of paper signed by the person delivering the same but without
authority to convert it into a negotiable instrument.

Fraud
Fraud in Inducement vs. Fraud in execution
FRAUD IN
INDUCEMENT
The person who signs the
instrument intends to sign
the same as a negotiable
instrument
but
was
induced to do so only
through fraud

FRAUD IN EXECUTION
When a person is induced
to sign an instrument not
knowing its character as a
note or a bill.

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Consent
fraud

is

vitiated

by

Only a personal defense

The person who signs the


instrument does not know
that he is signing a
negotiable instrument.
A real defense.

Notes
If fraud is committed in the performance of a collateral obligation, the nature of fraud is similar to fraud in
inducement and the defense is likewise a personal defense.
In the defense of fraud in factum, the person who signs the instrument lacks the knowledge of the
character or essential terms of the instrument. The defense is not available if the party involved had
reasonable opportunity to obtain such knowledge.
Factors to be considered in determining presence of reasonable opportunity:
1.
2.
3.
4.
5.
6.

Age and sex of the obligor;


Intelligence, education, and business experience;
Ability to read and understand the language used;
The representations made to him and his reason to rely on them or to have confidence in the
person making them;
him, or any other information;
The apparent necessity or lack of it, for acting without delay.

MATERIAL ALTERATION
Alteration must be material before it can be considered a defense. Otherwise, it is not a defense at all.
However, a material alteration is only a partial real defense because the holder in due course can enforce
it according to its original tenor.
(See Secs. 124 and 125 for application of rules on application)
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment thereof according to its original tenor.
Concept of Alteration
PNB vs. CA (256 SCRA 491): An alteration is said to be material if it alters the effect of the instrument. It
means an unauthorized change in an instrument that purports to modify in any respect the obligation of
any party or an unauthorized addition of words or numbers or other change to an incomplete instrument
relating to the obligation of a party. In other words, a material alteration is one which changes the items
which are required to be stated in Sec. 1 of the Negotiable Instruments Law. (according to Justice Vitug,
an innocent alteration and spoliation will not avoid the instrument, but the holder may enforce it only
according to its original tenor. In addition, there is no alteration if only serial numbers were altered.
Other Notes:
An alteration that totally prevents recovery constitutes a material alteration it cannot be enforced by the
holder in due course according to its original tenor.
Alteration of the amount payable is material alteration.
If the negotiable instrument involved is a check, and the same was deposited by the holder in a collecting
bank, the collecting bank will suffer the loss in case of material alteration because the warranties of the
collecting bank are that of a general indorser.

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Effect of alteration on payee who is a holder in due course: the collecting bank cannot debit the
account of a payee who is a holder in due course if the collecting bank returned the amount of the altered
check to the drawee bank. It is the drawee bank that should bear the loss and if the collecting bank
reimbursed the drawee bank the amount of the altered check, the collecting bank would only be
considered as acting on its own and should be responsible for its own action.
Reasons by the Supreme Court:3
7.

Presence or absence of any third person who might read or explain the instrument to

1.

The payment of a check by the drawee includes its acceptance contemplated under Sec. 62. Actual
payment is greater than acceptance. Payee is thus protected in Sec. 62.
By paying the collecting bank, the drawee, recognized and complied with its obligation to pay in
accordance with the tenor of his acceptance. In other words, the drawee is liable on its payment of
the check according to the tenor of the check at the time of payment, which was raised the
amount.
The payee of the altered check may be a holder in due course. A payee who is a holder in due
course, who relied on the drawee banks clearance and payment of the draft and not being
negligent, the payee is amply protected by Sec. 62.
It further reasserts the usefulness, stability and currency of negotiable paper without seriously
endangering accepted banking practices.
The preferential treatment given to the paying bank by common law jurisdictions cannot be
applied in this jurisdiction, absent any similar provision in our law.
If the collecting bank cannot be considered to have acted as the representative of the drawee
bank when it debited respondents account, because the drawee bank had no right to recover what
it had paid.
The collecting bank cannot invoke the warranty of the payee/depositor who indorsed the
instrument for collection to shift the burden it brought upon itself. This is precisely because the
said indorsement is only for purposes of collection which, under Section 36, is a restrictive
indorsement.

2.

3.
4.
5.
6.
7.

Another view with respect to extent of recovery of holder in due course: It is worth noting that
there is a view to the effect that even if the payee in the said case is a holder in due course who is entitled
to protection, the protection should be in accordance with Sec. 124 of the Negotiable Instruments Law.
Opposite view regarding liability of payee and collecting bank: it also should be pointed out that
the obligation to return the amount of the altered check is an obligation that is fixed by jurisprudence and
statutory provisions. It is not a mere voluntary act but is one dictated by law and jurisprudence. Hence,
the view is that as between the drawee-bank and the collecting bank, it is the collecting bank that shall be
responsible for the loss in case of alteration.
There is also jurisprudence to the effect that the collecting banks right of recourse is against the
depositor-payee; that the payee will shoulder the loss because he has the same warranties of a general
indorser when he signs the check for deposit. (TimAq agrees with this view)
Ante-dating or Post-dating
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is antedated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the date of delivery.
In other words: If the post-dating or the ante-dating is for an illegal or fraudulent purpose, a personal
defense is available against the holder.
INSERTION OF A WRONG DATE

FEBTC vs. Gold Palace Jewellery Company, G.R. No. 168274, August 20, 2008.

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Insertion of a wrong date may be a personal defense. If a wrong date is inserted, the holder in due course
has the right to regard the wrongfully inserted date as the true date.
Sec. 13: Where an instrument expressed to be payable at a fixed period after date is issued undated, or
where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may
insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due
course; but as to him, the date so inserted is to be regarded as the true date.
ABSENCE OR FAILURE OF CONSIDERATION
Absence or failure of consideration is a matter of defense as against any person not
course. Partial failure of consideration is a defense pro tanto, whether the failure is
liquidated amount or otherwise. Hence, the personal defense of failure of consideration
seller who received the negotiable instrument because of his promise to deliver goods,
with such promise.

a holder in due
ascertained and
is present if the
failed to comply

DURESS AND INTIMIDATION


To constitute duress, there must be an actual or threatened exercise or power possessed by the party
benefited thereby, for the purpose of obtaining the note (or bill), such as to deprive the maker of that
quality of mind essential to the making of a contract.
Degree of duress is relative depending on the circumstances of the parties and of the situation. Threats to
a feeble and old person might be duress to one while it may not be so to another.
Available even though there may be some consideration to support the instrument. The fact that the
defendant did not act as a reasonable man would in resisting the coercion exercised upon him will not
likewise prevent him from setting up the defense of duress.
Duress is a real defense or if it is vicious or if it is what is referred to as duress amounting to forgery.
(ex. A person who exerts force is practically writing the note itself by holding the hands of another.)
Illegality
General Rule: illegality of the transaction that gave rise to a particular transaction is only a personal
defense.
Exception: When the law which declares the transaction illegal likewise declares that the negotiable
instrument or document issued in connection thereto is void against any party.
PRESCRIPTION
Extinctive prescription is considered a real defense that may be raised even against a holder in due
course.
Prescriptive Period: 10 years from the time the cause of action accrued.
With respect to checks, the action of the depositor against his drawee bank commences to run from the
time he is given notice of payment.
FORGERY AND WANT OF AUTHORITY
General Rules
Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or
to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.

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Cut-Off Rule: Section 23 does not avoid the instrument and only the forged signature is rendered
inoperative. According to the cut-off rule, the parties prior to the forged signature are cut-off from the
parties after the forgery in the same sense that prior parties cannot be held liable and can raise the
defense of forgery. The only instance when prior parties are liable is if they are precluded from setting up
the defense of forgery either because of their warranties, representations or their negligence.
Gampesaw vs. CA (218 SCRA 682): A party whose signature to an instrument was forged was never a
party and never gave his consent to the contract which gave rise to the instrument. If a persons signature
is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise
to pay. Or where a persons signature as a drawer of the check is forged, the drawee bank cannot charge
the amount thereof against the drawers account because he never gave the bank the order to pay.
Persons Precluded from Setting up Forgery
1.
2.

Parties who warrant or admit the genuineness of the signature in question; and
Those who by their acts, silence, or negligence are stopped from setting up the defense of forgery.
These include acts or omission that amount to ratification, express or implied.

Warranty

Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of certain
signatures on the instrument. They are precluded from setting up the defense of forgery in certain cases.
(ex. Sec. 62 NIL)

Negligence

A drawer who can otherwise recover from the drawee may be barred from doing so because of its
negligence or may have to suffer reduction of the amount. Included therein is ones failure to comply with
the rules or agreement or on the return of checks.
However, negligence cannot be imputed to the drawer by the mere fact that the person responsible for the
forgery is his employee or even an independent auditor.
Estoppel
Example: if
the drawer
opportunity

and Ratification
the drawer was already informed that a check bearing his forged signature is being encashed,
will be deemed to have ratified the forgery if he failed to act on such information despite
to do so.

Forgery in Notes

Makers Signature

Where the makers signature is forged, the maker is not liable to all subsequent parties whether the
instrument is an order instrument or a bearer instrument. (See Sec. 23)
However, indorsers after the forgery are still secondarily liable to the holder. These indorsers warrant that
the instrument is genuine and in all respect what it purports to be. Hence, they can no longer claim that
the instrument is not genuine.

Indorsers Signature

On Order Instruments: Where the indorsement of the payee is forged in a note payable to order, the
instrument cannot be enforced against the payee and the maker. The payees forged signature is wholly
inoperative and no right to enforce payment can be obtained against any party prior to the forgery. The
indorsers after the forgery are liable because they warrant that they have good title to the instrument.
On Bearer Instruments: In bearer instruments, the signature of the payee or holder is unnecessary to
pass title to the instrument. Hence, the maker may still be liable to a holder in due course even if an
indorsement was forged after the issuance of the note. The rule is consistent with Sec. 60 which provides

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that the undertaking of the maker is to pay the instrument according to its tenor. The tenor of the
instrument is that he engages to pay any bearer of the instrument.
Forgery in Bills of Exchange

Drawers Signature

Where the drawers signature is forged, the drawer is not liable whether or not the instrument is payable
to bearer or payable order. There is no right to enforce payment against the drawer under the forged
signature. This is true even if the instrument is a bearer instrument because the drawer was never a party
to the instrument he did not promise to pay anybody. In addition, the drawers account cannot be
debited if his signature in a check was forged.
Drawee-Acceptors Warranties: drawee bank cannot recover the amount because by accepting the
instrument, he warrants all those mentioned in Sec. 63.
Negligence of Drawee: It can be further explained that the liability of the drawee in case the drawers
signature was forged can also be traced to the drawees negligence.
Indorsers Signature
On Order Instruments: Where the instrument of the payee in a bill of exchange was forged after
delivery of the instrument by the drawer to the said payee, the subsequent holder cannot enforce
payment thereof against the drawee, the drawer, or the payee. Parties prior to the forgery can raise the
defense of forgery. Parties after the forgery are cut-off from the parties prior to the forgery. Hence,
indorsers after the forgery may still be secondarily liable to the holder but indorsers prior to the said
forgery are not liable. If the instrument involved is a check, the drawee cannot charge the account of the
drawer if the payees or any indorsers signature is forged. The drawee, in turn has the right of recourse
against the collecting bank.
Other notes:
1.
2.
3.
4.

The payee can claim against the collecting bank.


The drawer cannot opt to recover from the collecting bank. There is no privity of contract between
the drawer and the collecting bank.
The last indorser will be liable for the amount indicated in the negotiable instrument even if a
previous indorsment was forged.
When the collecting bank is made liable, the collecting bank may recover from its depositor who
had not given value for the money paid to him has no right to retain the money he received.

On Bearer Instruments: the same rule that is applicable to forged indorsement in a bearer promissory
note applies to forged indorsement in a bearer bill of exchange. The holder of a bearer instrument can still
recover from the drawer if a special indorsement was forged because the forged signature is unnecessary
for his title.

CHAPTER 8 ENFORCEMENT OF LIABILITY


STEPS TO CHARGE THE PARTIES LIABLE
Persons primarily liable persons who are absolutely required to pay the instrument (Sec.191)

Promissory note - maker

The liability of persons primarily liable automatically attaches the moment they make or accept the
instrument as the case may be.
effect: no further act is necessary in order that liability may accrue

Bill of exchange - acceptor

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how liability is enforced: by presenting the instrument for payment
Persons secondarily liable those who promise to pay if the person primarily liable refuses or fails to
pay; those who engage that, on due presentment, the instrument shall be accepted or paid, or both, as
the case may be, 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 it.

Drawer
Indorsers
The liability of persons secondarily liable cannot be enforced immediately. There are necessary steps
to be taken. If the said steps are not complied with, they are discharged from the instrument or their
obligation is extinguished.

Steps in Enforcing Liability on promissory note: (indorser)


1.
2.

Presentment for payment must be made within the required period to the maker
Notice of dishonor should be given

Steps in Enforcing Liability on bill of exchange: (drawer and indorser)


1.
2.
3.

Presentment for acceptance


If dishonored by non-acceptance:
a. Notice of dishonor should be given to the indorsers and drawers
b. If the bill is a foreign bill, there must be protest for dishonor by non-acceptance
If the bill is accepted:
a. Presentment for payment to the acceptor should be made
b. If the bill is dishonored upon presentment for payment
i. Notice of dishonor must be given to person secondarily liable
ii. If the bill is a foreign bill, protest for dishonor by non-acceptance must be made

PRESENTMENT FOR PAYMENT (Secs. 70-88)


Presentment production of a bill of exchange to the drawee for his acceptance or to the drawee or
acceptor for payment or the production of a promissory note to the party liable for payment of the same
Presentment for payment consists of:
a.
b.

Personal demand for payment at the proper place


To exhibit the bill or note is required and to receive payment and surrender it if the debtor is willing to
pay

Requisites:
Who: by the holder, or by some person authorized to receive payment on his behalf
When: at a reasonable hour on a business day
Where: at a proper place as herein defined
To Whom: to the person primarily liable on the instrument, of if he is absent or inaccessible, to any
person found at the place where the presentment is made
Effect if the 4 requisites are not complied with:
as if no presentment for payment was done

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persons secondarily liable are discharged1. Who makes presentment for payment
a.
b.

Holder
Some person authorized to receive payment on his behalf (examples: (1) collecting bank; (2)
agent; (3) heirs; (4) successors-in-interest)

2. When presentment is made


a. Date of presentment

Instrument NOT payable on demand on the day it falls due or on the maturity date fixed

Instrument payable on demand


Promissory note within a reasonable time after its issue
Bill of exchange within a reasonable time after last negotiation
reasonable time so much time as is necessary under the circumstances for a reasonable prudent and
diligent man to do conveniently what the contract or duty requires should be done, having a regard for the
rights and possibility of loss, if any, to the other party
last negotiation last transfer for value
Note: Subsequent transfers between banks for purposes of collection are not negotiations contemplated
herein
stale check one which has not been presented for payment within a reasonable time after its issue
(after 180 days or 6 months); valueless

Instrument payable at a bank must be presented during banking hours


Exception: person to make payment has no funds there to meet it at any time during the day; said
person may present at any hour before the bank is closed
b.

Time of presentment

How is the time computed


excluding the day from which the time is to begin to run and by including the date of
payment

Instrument is payable at a fixed time payable at the time fixed therein without grace
Day of maturity of instrument falls on a Sunday or a holiday payable on Monday or
succeeding business day

Day of maturity falls on a Saturday or instrument becomes payable on a Saturday


i. Instrument payable at a fixed or determinate future time next succeeding business day
ii. Instrument is payable on demand Saturday, before 12noon or Monday at the option of the
holder
Note: On the day of payment, the party liable is entitled to the whole of that day within which to make
payment
Summary
When Presentment for Payment is Made
Date
Instrument
not
payable on
demand

On the day instrument


falls due

Time
At the time
fixed
without
grace
If day of
maturity
falls on a

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Sunday or
a holiday
payable on
Monday or
succeeding
business
day
If day of
maturity
falls on a
Saturday
or
instrument
becomes
payable on
a Saturday
next
succeeding
business
day
Instrument
payable on
demand

Promissory
note

Within a
reasonable
time after
its last
issue

Bill of
exchange

Within a
reasonable
time after
last
negotiation

Day of
maturity
falls on a
Saturday or
instrument
becomes
payable on
a Saturday

Saturday,
before
12nn or
Monday at
the option
of the
holder

3. Where presentment is made


Place of presentment: (Sec. 73)
a.
b.

Where a place of payment is specified in the instrument, and it is thee presented


Where no place of payment is specified but the address of the person to make payment is given in
the instrument and it is there presented
c. Where no place of payment is specified and no address is given, and the instrument is presented
at the usual place of business or residence of the person to make payment
d. In any other case if presented to the person to make payment wherever he can be found, or if
presented at his last known place of business or residence
Payable at a special place (Sec.70)
if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it
there at maturity, such ability and willingness are equivalent to a tender of payment

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maker/acceptor is still liable to pay
presentment for payment for person primarily liable is NOT necessary
effect: if holder will not present the instrument at the special place, he loses his right to the
payment of interest
place of payment a house, bank, counting room, store or place of business, where the holder can
present a note, where the maker can deposit or provide funds to meet it, and where a legal offer to pay
can be made
4. To whom presentment for payment is made:
a. To the person primarily liable on the instrument or if he is absent or inaccessible to any person
found at the place where presentment is made
b. Person primarily liable is dead and no place of payment is specified: personal representative, if
such there be and if with the exercise of due diligence, he can be found
c. Persons primarily liable are partners and no place of payment is specified, presentment may be
made to any one of them
d. There are several persons primarily liable and are not partners and no place of payment is
specified, presentment must be made to them all
Notes:

Letters b-d are not applicable if place is specified. In such case, presentment must be made to any
person found in the specified place.

Although the indorser himself be the personal representative of the deceased person primarily liable,
presentment for payment is still necessary.
Exhibition of the instrument (Sec.74)
The instrument must be exhibited to the person from whom payment is demanded, and when it is
paid, must be delivered up to the party paying it.
Purpose:
a. To determine the genuineness of the instrument and the right of the holder to receive payment
b. To enable him to reclaim possession upon payment
When excused:
a. When the debtor does not demand to see the instrument but refuses payment on some other
grounds
b. When the instrument is lost or destroyed
When unnecessary:
a. Omission to contest it
b. Admission of the authenticity of the note implicit from the averment that substantial payments
were made thereon
c. Express waiver of demand, presentment, protest, and notice of protest and non-payment in
the note
Note: Demand by telephone is NOT sufficient because exhibition of the instrument is NOT possible.
When delay of presentment for payment is excused: (Art. 81)
When delay is caused by circumstances beyond the control of the holder and not imputable to his
default, misconduct or negligence.
Note: When the cause of delay ceases to operate, presentment must be made with reasonable
diligence.
Dishonor by non-payment of instrument:
-

1.
2.

It is duly presented for payment and payment is refused or cannot be obtained


Presentment is excused and the instrument is overdue and unpaid

Effect of dishonor by non-payment: An immediate right of recourse to all parties secondarily liable
thereon accrues to the holder (necessary condition: notice of dishonor was given to them)

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Summary of Rules as to presentment for Payment


General Rules:
1. Presentment for payment is NOT necessary to charge persons primarily liable.
2. Presentment for payment is necessary in order to charge the drawer and indorsers (Sec.70)
Exceptions:
a.

When drawer need not be given notice (Sec.79)


where drawer has NO right to expect or require that the drawee or acceptor will pay the instrument
examples:

b.

c.

d.

Drawer ordered stop payment of a check

Drawers balance is less than the amount of the check


When indorser need not be given notice (Sec.80)
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
When presentment for payment is excused (Sec.82)

Where after the exercise of reasonable diligence, presentment cannot be made

Where drawee is a fictitious person

By waiver of presentment, express or implied


When the instrument has been dishonored by non-acceptance (Sec.151)

NOTICE OF DISHONOR
bringing either verbally or by writing to the knowledge of the drawer or indorser of an instrument, the
fact that a specified negotiable instrument upon proper proceedings taken, has not been accepted or has
not been paid, and that the party notified is expected to pay it.
purpose: to charge persons secondarily liable
burden of proof: holder must prove notice was given to drawer or indorser as the case may be
Form of Notice (Secs. 95&96)
may be verbal or in writing
contents:
a.
b.
c.
d.
Notes:

Sufficient description of the bill or note


Statement that the instrument has been dishonored upon presentment for acceptance for
payment
Statement that the instrument has been protested if protest is required
An announcement of the intention to look to the party addressed for payment

If the written notice lacks any of the aforementioned matters that should be stipulated in the contents,
the person given notice may orally state that there was dishonor to complete or validate the notice of
dishonor.
If there is misdescription, the notice is still valid and effective except if a party was in fact misled.
For purposes of BP 22, notice of dishonor must be in writing; verbal notice is not enough.

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If notice of dishonor is in writing, it can be delivered personally to the person to whom notice should
be given or it may be sent to him by mail. (Sec.96)

1. Who gives notice of dishonor


a. Principal
b. Agent, either in his own name or in the name of any party entitled to give notice, whether that
party be his principal or not.
2. When is notice of dishonor given
Rule: Notice may be given AS SOON AS the instrument is dishonored
Where parties
(person giving and
person to receive
notice) reside in
same place
(Sec.103)

Where parties
reside in different
places

If given at the place


of business of the
person to receive
notice, it must be
given before the
close of business
hours on the day
following

Within the time that


notice would have
been received in
due course of mail,
if it had been
deposited in the
post office within
the time specified in
the last subdivision.

If given at his
residence, it must
be given before the
usual hours of rest4
on the day
following.
If sent by mail, it
must be deposited
in the post office in
time to reach him in
usual course on the
day following

If sent by mail, it
must be deposited
in the post office in
time to go by mail
the day following
the day of dishonor
or if there be no
mail at a convenient
hour on last day, by
the next mail
thereafter

3. Where notice of dishonor is given


Rules: (Sec.108)
a.
b.
4

Where a party has added an address to his signature, notice of dishonor must be sent to that
address
If no address, either to the post office nearest to his place of residence or to the post-office where
he is accustomed to receive his letters

Usual hours of rest any of the hours when the member of the household are attending their ordinary affairs

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c.
d.

4. To
a.
b.
c.

If he lives in one place and has his place of business in another, notice may be sent to either place
If he is sojourning in another place, notice may be sent to the place where he is so sojourning

whom notice of dishonor is given


The indorsers or drawers themselves; or
Agent of the indorsers or drawer
With respect to corporations, notice should be given to those who are duly authorized by the board
to bind the corporation.

Special circumstances:
a.

Where party (drawer/indorser) is dead


Rule: Notice should be given to the partys personal representative
Requisites:

b.

- Person who should give notice knows that the person to receive notice is dead
- Person who is supposed to receive notice has a personal representative
- Personal representative could be found after the exercise of reasonable diligence
Notice to partners
Rule: Notice to one partner will bind the partnership

c. Notice to persons jointly liable


Rule: Notice should be given to each of them unless one has authority to receive such notice for the
others
d. Notice to bankrupt
Rule: Notice may be given either to the party himself or to his trustee or assignee
Waiver of Notice of Dishonor
Waiver means the person who is making the waiver renounces the benefit of the act or matter in his
favor
When done: either before the time of giving notice has arrived or after the omission to give due notice
(Sec.109)
To whom binding: Where the waiver is embodied in the instrument itself, it is binding upon all parties, but
where it is written above the signature of an indorser, it binds him only. (Sec.110)
Summary of Rules as to notice of dishonor:
General Rules:
1. Notice of dishonor need NOT be given to persons primarily liable
2. Notice of dishonor is necessary to charge drawers or indorsers
Exceptions:
a.

When notice is waived


Sec. 109: Notice of dishonor may be waived either before the time of giving notice has arrived or after
the omission to give due notice and the waiver may be express or implied.

b.

When dispensed with


Sec.112: Notice of dishonor is dispensed with when after the exercise of reasonable diligence, it
cannot be given to or does not reach the parties sought to be charged.

c.

When notice need not be given to drawer

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Sec. 114: Notice of dishonor is NOT required to be given to the drawer in either of the following cases:

d.

Where the drawer and drawee are the same person


When the drawee is a fictitious person or a person not having capacity contract
When the drawer is the person to whom the instrument for payment is made
Where the drawer has no right to expect or require that the drawee or acceptor will honor the
instrument

Where the drawer has countermanded payment


When notice need not be given to indorser
Sec.115: Notice of dishonor is NOT required to be given to an indorser in either of the following cases:

e.

f.

When the drawee is a fictitious person or person not having capacity to contract and the indorser
was aware of that fact at the time he indorsed the instrument

Where the indorser is the person to whom the instrument is presented for payment

Where the instrument was made or accepted for his accommodation


Where due notice of dishonor by non-acceptance has been given
Sec. 116: Where due notice of dishonor by non-acceptance has been given, notice of a subsequent
dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted.
As to a holder in due course without notice
Sec. 117: An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a
holder in due course subsequent to the omission.

PRESENTMENT FOR ACCEPTANCE


production of a bill of exchange to the drawee for his acceptance
General Rule: Presentment for acceptance is NOT necessary in order to render any party to the bill liable.
Exceptions: (Sec.143)
1.
2.
3.

Where the bill is payable after sight or in any other case where presentment for acceptance is
necessary in order to fix maturity of the instrument
Where the bill expressly stipulates that it shall be presented for acceptance
Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In the above 3 circumstances where presentment for acceptance is necessary, the following are the
requisites to charge persons secondarily liable:
1.
2.

Make presentment for acceptance


Negotiate the bill within a reasonable time

Presentment for acceptance, how made


1. Who makes presentment for acceptance
a. Holder
b. Any person in his behalf
2. When presentment for acceptance is made
a. At a reasonable hour on a business day; and
b. Before the bill is overdue

Days presentment may be made:

Payable at a fixed date on the day of maturity


Day of maturity is Sunday next succeeding business day

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Day of maturity is Saturday or payable at Saturday before 12nn provided it is not holiday

3. Where presentment for acceptance is made


4. To whom presentment for acceptance is made
a. Drawee or some person authorized to accept or refuse in his behalf
b. 2 or more drawees, not partners all of them unless one has authority to accept or refuse for all
c. Drawee is dead personal representative
d. Drawee is bankrupt, insolvent or made an assignment for the benefit of his creditors drawee
himself or his trustee or assignee

Where presentment for acceptance is excused: (Sec.148)


1. Where the drawee is dead, or has absconded or is a fictitious person or a person not having
capacity to contract by bill
2. Where after the exercise of reasonable diligence, presentment cannot be made
3. Where although presentment has been irregular, acceptance has been refused on some other
ground (example: presentment is made on a Sunday but acceptance is refused on the ground that
drawer has no funds in the hands of the drawee)

Dishonor by non-acceptance (Sec.149)


1. When it is duly presented for acceptance and such an acceptance is refused or cannot be obtained
2. When presentment for acceptance is excused and bill is not accepted
Notes:

If bill is dishonored by non-acceptance, holder must give: (1) notice of dishonor by non-acceptance;
and (2) protest (in case of foreign bill). Otherwise, drawers and indorsers are discharged. (Sec.150)
If bill is dishonored by non-acceptance, no presentment for payment is necessary to hold drawers and
indorsers liable. (Sec. 151) But if after previous non-acceptance, bill is subsequently accepted,
presentment for payment is necessary.
If bill is accepted for honor, presentment for payment is necessary to charge acceptor for honor.

ACCEPTANCE
signification by the drawee of his assent to the order of the drawer (Sec.132)
Kinds of acceptance:
1. Actual acceptance
Requisites:
a.
b.
c.

In writing
Signed by the drawee
Must not express that drawee will perform his promise by any other means than the payment of
money
d. Must be communicated or delivered to holder
Notes:

An oral acceptance is not binding on the drawee.


Acceptance by telegram has been held sufficient.
Acceptance is not required for checks for they are payable on demand.
Without signature of drawee, he would not be bound.
Acceptance must be expressed to be payable in money only.
Acceptance is incomplete until delivery or notification.
The acceptor or drawee who has not communicated his acceptance or transmitted the accepted bill
to the holder, may revoke an acceptance before delivery and cancel the written acceptance.
Is payment equivalent to acceptance? NO.

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acceptance a promise to perform an act
payment actual performance
Where acceptance may be written
a. On the bill itself
b. On a separate paper
i. Acceptance as to an existing bill
ii. Acceptance as to a non-existing bill
requisites:

The contemplated drawee shall describe the bill to be drawn and promise to accept it
Bill shall be drawn within a reasonable time after such promise is written
Holder shall take the bill upon the credit of the promise

2. Constructive acceptance (Sec.137)


a. Where the drawee to whom the bill is delivered destroys it
b. Where the drawee refuses, within 24 hours
c. After such delivery, or within such time as is given him, to return the bill accepted or not accepted
Notes:

The bill is at all times the property of the holder and he is entitled to have it when he wants it.
Mere failure to return the bill within 24 hours is an acceptance.
When acceptance may be made:
a. Before the bill has been signed by the drawer
b. Even when the bill is otherwise incomplete
c.
Even when the bill is overdue
d. Even after it has been dishonored by non-acceptance or non-payment
3. General acceptance
one that assents without qualification to the order of the drawer (Sec.139)
acceptance to pay at a particular place
4. Qualified acceptance (Sec.141)
a. Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a
condition stated therein
Example: Accepted, if Y marries Z. Sgd. X

b.

Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn
Example: Bill is for P1000. Accepted for P500 only.

c.

Local; that is to say, an acceptance to pay only at a particular place


Example: Accepted. Payable at PNB only.

d.

Qualified as to time
Example: Bill is payable 30 days after sight. Accepted, payable 60 days after sight.

e.

Acceptance of some, one or more of the drawees but not all


Example: The drawees of a bill are X and Y and it is accepted only by X.

Effect of taking a qualified acceptance


drawer and indorsers are discharged
Why? Drawers and indorsers warrant tht the bill would be paid as drawn, or as indorsed by them, and
a qualified acceptance would vary their contract without their consent.

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Exception: If the drawers and indorsers expressly or impliedly gave their consent to the qualified
acceptance.
PROTEST
a formal statement in writing made by a notary under his seal of office at the request of a holder of a
bill or note, in which it is addressed that the same was on a certain day presented for payment (or
acceptance), and such payment (or acceptance) was refused, whereupon the notary protests against all
parties to such instrument and declares that they will be held responsible for all loss or damage arising
from its dishonor.
all the steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser.
necessary only for foreign bills.
Foreign bill a bill of exchange that is not drawn and/or payable in the Philippines
When protest is required:
1.
2.
3.

Where the foreign bill is dishonored by non-acceptance


Where the foreign bill is dishonored by non-payment
Where the bill has been accepted for honor, it must be protested for non-payment before it is
presented for payment to the acceptor for honor
4. Where the bill contains a referee in case of need, it must be protested for non-payment before it is
protested for payment to the referee in case of need
5. When the bill is dishonored by acceptor for honor
Protest in case of inland bills
Protest is NOT necessary in inland bills. But, it is not prohibited and is discretionary on the part of
the holder.
Advantage of protest in inland bills: The certificate of the notary public is generally made prima
facie evidence of the facts relating to presentment, demand, non-payment, and notice of dishonor,
which are set forth in the certificate.
Main purpose of protest: to furnish to the holder legal testimony of presentment, demand, and notice
of dishonor to be used in an action against the drawer and indorsers.
Reasons for requiring protest:
1. For uniformity in international transactions because most countries require it
2. In order to furnish authentic and satisfactory evidence of the dishonor to the drawer, who from his
residence abroad, may experience difficulty in verifying the matter and may be forced to rely on
the representation of the holder.
Procedure for protest
1. How protest is made
Sec. 153. The protest must be annexed to the bill or must contain a copy thereof, and must be under
the hand and seal of the notary making it and must specify:
a.
b.
c.
d.

The time and place of presentment


The fact that presentment was made and the manner thereof
The cause or reason for protesting the bill
The demand made and the answer given, if any, or the fact that the drawee or acceptor could not
be found
2. Who makes protest
Sec. 154: Protest may be made by:
a.
b.

Notary public; or
Any respectable resident of the place where the bill is dishonored in the presence of two or more
credible witnesses
3. When protest is made

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Sec. 155: When a bill is protested, such protest must be made on the day of its dishonor unless delay
is excused as herein provided. When a bill has been duly noted, the protest may be subsequently
extended as of the date of the noting.
duly noted notary public jots down a note on the bill, or a paper attached thereto, or in his registry
book, consisting of his initials or signature and those matters required to be stated in Sec.153. the
noting must be made on the day of dishonor but it may be extended into a formal protest afterwards.
4. Where protest is made
Sec. 156:
General Rule: A bill must be protested at the place where it is dishonored
Exception: except that when a bill drawn payable at the place of business or residence of some person
other than the drawee has been dishonored by non-acceptance, it must be protested for non-payment
at the place where it is expressed to be payable, and no further presentment for payment to ro
demand on the drawee is necessary.
Note: Where a bill has already been protested for non-acceptance, protest for non-payment is merely
optional.

Protest for better security


one made by the holder against the drawer and indorsers where the acceptor has been adjudged a
bankrupt or insolvent or has made an assignment for the benefit of creditors before the bill matures.
merely optional on the part of the holder
when made:
a.
b.
c.

After acceptance
Before the date of maturity
When the acceptor has been adjudged bankrupt or insolvent or has made an assignment for the
benefit of creditors
purpose: to inform drawer and indorsers of the fact that acceptor is insolvent and may not pay the
bill, and to enable them to make necessary arrangements so that they will not be held liable thereon
and prevent loss of re-exchange.

CHAPTER 9 DISCHARGE OF NEGOTIABLE INSTRUMENTS


CONCEPT
Discharge release from further liability, obligation or from the binding effect of the negotiable
instrument
As to paper: puts an end to it as a contractual obligation
As to the parties: Operates as a release of some or all of them from further obligation and liability under
the instrument.
INSTRUMENT, HOW DISCHARGED.
Sec. 119: A negotiable instrument is discharged:
1.

By payment in due course by or on behalf of the principal debtor

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payment in due course5
requisites:
a. Must be made by or on behalf of the principal debtor/accommodated party
b. Payment must be made to the holder
c. Payor must be in good faith and without notice that holders title is defective
d. Payment is made at or after the maturity date of the instrument
principal debtor person ultimately bound to pay the debt

Payment by a third person


General Rule: Instrument is NOT discharged.
Exception: Payment for honor.
Note: If a person paid the holder with the intention of acquiring title over the instrument, payor is
NOT a third person.

2.

By payment in due course by the party accommodated where the instrument is made or accepted for
his accommodation
As between the accommodation party and the accommodated party, the latter is the one ultimately
liable, hence a principal debtor.

3.

By the intentional cancellation by the holder thereof


how made:
a.
b.
c.

Tearing the instrument


Burning the instrument
Writing across the instrument the word cancelled
If cancellation is unintentional, made under a mistake, or without the authority of holder,
cancellation is inoperative (instrument is NOT discharged).
cancellation signifies not only the drawing of criss-cross lines but also tearing, obliterations,
erasures or burning.
Burden of proof: lies on the party who alleges that the cancellation was made unintentionally, under
a mistake, or without authority.
4.

5.

By any other act which will discharge a simple contract for the payment of money
Art. 1231: Extinguishment of obligations
a. Payment
b. Loss of the thing due
c. Condonation or remission of the debt
d. Confusion or merger of rights
e. Compensation
f. Novation
g. Annulment/rescission
h. Fulfillment of resolutory condition
i. Prescription
When the principal debtor becomes the holder of the instrument at or after maturity in his own right
requisites:
a. Reacquisition must be made by principal debtor
b. In his own right
c. At or after the date of maturity
in his own right not in a representative capacity (e.g. maker is agent or maker is holder as
executor or administrator)

Sec.88:

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When instrument is reacquired before maturity
Instrument is NOT discharged
Merely constitutes a negotiation back to principal debtor who may in turn renegotiate the
instrument (Sec.50)
Persons secondarily liable on the instrument, how discharged
Sec. 120: A person secondarily liable on the instrument is discharged:

a.
b.
c.
d.
e.
f.

By any act which discharges the instrument


By the intentional cancellation of his signature by the holder
By the discharge of a prior party
By a valid tender of payment made by a prior party
By a release of the principal debtor unless the holders right of recourse against the party
secondarily liable is expressly reserved
By any agreement binding upon the holder to extend the time of payment or to postpone the
holders right to enforce the instrument unless made with the assent of the party secondarily liable
or unless the right of recourse against such party is expressly reserved.

Notes:

No consideration is necessary to support a discharge by intentional cancellation of an indorsers


signature by the holder.
Discharge of prior party discharges party subsequent thereto.
reason: subsequent parties cannot exercise their right of recourse against discharged prior party.
application: discharge of prior party must arise from the acts of holder; it does NOT cover discharge
by operation of law like discharge by reason of bankruptcy, discharge of party not given due notice of
dishonor, discharge by statute of limitations.
valid tender of payment act by which one produces and offers to a person holding a claim or
demand against him the amount of money which he considers and admits to be due in satisfaction of
such claim or demand without any stipulation or condition.
release of principal debtor
General Rule: Discharges the instrument and parties secondarily liable are deprives of their right of
recourse
Exception: When the holders right of recourse against party secondarily liable is expressly reserved.

Reason: the effect of such reservation is the implied reservation of their right of recourse against
person primarily liable
Note: The release must be a voluntary act of holder, not by operation of law and is for value.

As to effect of release to accommodation maker/acceptor:


Rule: He is NOT discharged by the release of the principal debtor
Extension of time
General Rule: Persons secondarily liable are discharged
reason: an agreement to extend time of payment varies the original undertaking of the parties
secondarily liable. Assurance of drawer and indorsers is payment according to the tenor of the
instruments.
Exceptions:
1.

extension is consented to the by the party secondarily liable

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2. where holder expressly reserves his right of recourse against person secondarily liable
Requisites:

1. it must be a binding contract, supported by valuable consideration and for a definite period
2. must be made with the principal debtor not with a third party
Effects of payment by indorser (Sec.121)
1. Instrument is NOT discharged but indorser who paid is discharged
2. Indorser is remitted to his former rights against parties prior to him
3. Indorser can strike out his indorement and all subsequent indorsements
rationale: indorsement of paying party subsequent indorsements are NOT necessary for his
title
4. indorser can renegotiate the instrument
exceptions:
a.
b.

where it is payable to the order of a 3rd person and has been paid by the drawer
when it is made or accepted for accommodation and has been paid by the party
accommodated
Renunciation by holder (Sec.122)
renunciation act of surrendering a right or claim without recompense but it can be applied with
equal propriety to the relinquishing of a demand upon an agreement supported by consideration.
Form:
1. Must be express
2. In writing
Time of making renunciation by holder:
1. Before maturity
2. At maturity
3. After maturity
When it discharges instrument:
1.
2.

When it is absolute and unconditional


When it is made in favor of the person primarily liable
3.
When it is made at or after maturity

CHAPTER 10 CHECKS
Check a bill of exchange payable on demand drawn on a bank (Sec.185)
essence: payable on demand (because the contract between the banker and the customer is that the
money is needed on demand)
KINDS OF CHECKS:
1. Cashiers check
one drawn by the cashier of a bank in the name of the bank against the bank itself payable to a
third person or order
Demand draft does not operate as an assignment of funds in the hands of the drawee who is not
liable on the instrument until he accepts it.
Cashiers check is a primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand
a bill of exchange drawn by a bank on itself and accepted in advance by the act of its issuance

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Nature and use: By its very nature, a cashiers check is the banks order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind the check. A cashiers check by
its peculiar character and general use in the commercial world is regarded substantially to be as
good as the money which it represents (Tan vs. CA)
2. Managers check
a check drawn by the manager of a bank in the name of the bank against the bank itself payable to
a third person

similar to cashiers check as to effect and use


3. Memorandum check
a check on which is written the word memorandum, memo, and mem signifying that the
drawer engages to pay the bona fide holder absolutely and not upon a condition to pay upon
presentment and non-payment
a check given by a borrower to a lender for the amount of a shot loan with the understanding that it
is not to be presented at the bank but will be redeemed by the maker himself when the loan falls due
and which understanding is evidence by writing the word memorandum, memo or mem on the
check
given by the drawer to the payee more in the nature of a memorandum of indebtedness than as
payment
drawer may be sued the same as upon a promissory note
4. Travelers check
instrument purchased from banks, express companies, or the like, in various denominations which
can be used like cash upon second signature by the purchaser
has the characteristics of a cashiers check of the issuer
requires the signature of the purchaser at the time he buys it and also at the time he uses it
5. Certified check
one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank
certifies will be paid when duly presented for payment
Certification almost similar to acceptance
discharges at the instance of the holder
an agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future
time when presented for payment
bank debits the drawers account at the time of certification and sets aside funds out of the
drawers control
effect: same as though the money had been paid by the bank to the holder and redeposited by him
in his own credit (payee/holder becomes the depositor of the bank)
Notes:

Bank is not obligated to the depositor to certify checks.


Drawee is not liable to the holder for the refusal of the bank to certify a check
The refusal of a bank does not dispense with the requirement of presentment for payment since a
check is of right presentable only for payment at the bank on which it is drawn

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certification is equivalent to acceptance


drawee bank is bound on the instrument upon certification
drawee bank incurs liabilities under Sec. 62 (liability of acceptor)
RELATED PROVISIONS: (AGBAYANI COMMENTARY)
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made or accepted for his
accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.
PAYMENT BY PRINCIPAL DEBTOR

In order to discharge the instrument, the payment must be a payment in due course, and second, a payment
made by the principal debtor

If payment is made before the date of maturity, the instrument is not discharged as the payment is not in
due course

Where payment is made by a party who is not a primary obligor or an accommodation party, his
payment only conceals his own liability and those who are obligated after him. All prior parties primarily or
secondarily liable on the bill, are liable to such a payer, and the payer may cancel indorsements subsequent to his
own and reissue the paper, and it will be valid as against the prior parties
PAYMENT BY THIRD PERSONS

If payment is made by a third person, the instrument is not discharged because payment is not made by the
person principally liable

Not any one who desires may pay the instrument and then recover of the maker. He must be a person who has in
some way made himself liable for the payment of the instrument.

Exception: where an instrument has been protested and someone voluntarily makes payment supra
protest or for honor. And if the instrument was to give money in payment, the instrument is
discharged.
SUMMARY OF DISCHARGE BY PAYMENT
1. Payment by a person ultimately liable, whatever his position in the paper, is a discharge of the instrument
2. Payment by an accommodation party isnt a discharge of the instrument, whatever his position
thereon and whether the indorsement be regular or anomalous
3. Payment by the drawer or indorser is not a discharge of the instrument
**PRINCIPAL DEBTOR

Person ultimately bound to pay the debt


PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER
1. When they actually have been cashed or
2. When, through the fault of the creditor, they have been impaired

A creditor isnt bound to accept a check in satisfaction of his demand because a check, even if good when
offered, doesnt meet the requirements of legal tender
WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK

It is the general rule that an object to a tender must, to be available to the creditor, be made in good time and
that the grounds for objection must be specified; and that an objection to tender on one ground is a waiver of all other
objections which could have been made at that time

It is ordinarily required of one to whom payment is offered in the form of a check, that he makes his objection at
the time of the offer of by check instead of an offer of payment in money

Payment by check has become so generally recognized as acceptable in business transactions that it has been held
that omission to make objection to a check as tender payment is regarded as a waiver of the right to demand payment

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in money

Reason for the ruleto afford the debtor the opportunity to secure the specific money which the law prescribes
shall be accepted in payment of debts
PAYMENT BY ACCOMMODATED PARTY

The one ultimately liable on the accommodation instrument is the latter

Hence, his payment in due course discharges the instrument as if payment was made by the principal
debtor under paragraph (a).
INTENTIONAL CANCELLATION

The cancellation must be intentional and made by the holder

There must be an intention to cancel a negotiable instrument by the holder thereof as such intention is
an essential element of discharge on a negotiable instrument and a negotiable note in a torn condition is presumed
cancelled by the holder thereof
WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE DEBTOR DISCHARGE THE INSTRUMENT?

No, according to the majority view

Because while it isnt omitted in Section 120, it is omitted in Section 119

Shows the legislative intent to that an extension of time by the holder will not discharge the instrument
PRINCIPAL DEBTOR ACQUIRES INSTRUMENT

Reacquisition must be by the principal debtor and in his own right at or after the date of maturity

In his own rightnot in a representative capacity


WHEN INSTRUMENT REACQUIRED BEFORE MATURITY

A reacquisition by the principal debtor in his own right but before maturity will not discharge the
instrument

It will merely be a negotiation back to the principal debtor


DISCHAGE BY OPERATION OF LAW

If a judgment is obtained on a bill or note, the bill or note is thereby extinguished and merged in the judgment.

But the judgment alone, without actual satisfaction, is not extinguishment as between plaintiff and other parties
not jointly liable with the original defendant, whether those parties be prior or subsequent to the defendant

A discharge in bankruptcy, unless otherwise provided by statute, releases a bankrupt from all his provable debts,
and therefore will discharge the bankrupt on all bills accepted, or notes made by him but will not discharge the other
parties
Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on
the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is
expressly reserved;
(f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to
enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse
against such party is expressly reserved.
EFFECT OF SECTION 120 IS A SURETYSHIP

Generally the courts regard this provision as exclusive, as a complete codification of the law of discharge of
secondary parties by the six methods therein set forth
ACTS THAT DISCHARGE INSTRUMENT

Any of the acts that will discharge an instrument under Section 119 will discharge a party secondarily
liable thereon, such as payment in due course by the maker. This will discharge the indorsers in the note.
DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED

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1.
2.
3.

Discharge by reason of bankruptcy


Discharge of a party not given due notice of dishonor
Discharge by the statute of limitations

VALID TENDER OF PAYMENT

If D an indorser validly tenders payment and F unjustifiably refuses to do accept, D is discharged

Tender of payment: act by which one produces and offers to a person holding a claim or demand
against him the amount of money which he considers and admits to be due, in satisfaction of such claim or demand
without any stipulation or condition
**RELEASE MUST BE ACT OF HOLDER
**RELEASE MUST BE FOR VALUE
EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR

General rule is that he is not discharged by the holders release of the principal debtor even if the release be
made with knowledge of the true relation of the parties and, conversely, the release of the
accommodation maker or acceptor does not discharge the principal debtor through the latter occupies the position
of a party secondarily liable on the instrument
EXTENSION OF TIME

If the holder agrees to extend the time of payment, the indorsers are discharged

Exceptions- (1) where the extension of time is consented to by the party secondarily liable, he is not
discharged;
(2) where the holder expressly reserves his right of recourse against the party secondarily liable, the latter is not
discharged.
REQUISITES OF AGREEMENT FOR EXTENSION OF TIME
1. It must be a binding contract, supported by valuable consideration and for a definite period
2. It must be made with the principal debtor and not with a third par
Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable
thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and
he may strike out his own and all subsequent indorsements and against negotiate the instrument, except:
(a) Where it is payable to the order of a third person and has been paid by the drawer; and
(b) Where it was made or accepted for accommodation and has been paid by the party accommodated.

EXCEPTION TO THE RIGHT TO RENEGOTIATE

Where a drawer of a certified check was required to take up the check because of the failure of the drawee bank,
the instrument is not discharged and he is subrogated to the rights of the payee.

Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the
instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the
principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the
instrument is delivered up to the person primarily liable thereon.
APPLICATION OF SECTION 122
1. Applies only to renunciation by the unilateral act of the holder without consideration and in cases where the
instrument is not delivered up to the person intended to be released
2. Renunciationact of surrendering a right or claim without recompense but it can be applied with equal
propriety to the relinquishing of a demand upon an agreement supported by a consideration
FORM OF RENUNCIATION
It must be in writing and must be express
However, if the instrument is delivered to the person primarily liable, the renunciation may be ORAL.

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TIME FOR MAKING RENUNCIATION
1. Before maturity
2. At maturity
3. After maturity

WHEN RENUNCIATION DISCHARGES INSTRUMENT


1. When it is absolute and unconditional
2. When it is made in favor of the person primarily liable
3. Made at or after maturity

Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a
mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon
appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was
made unintentionally or under a mistake or without authority.

MEANING OF CANCELLATION
Signifies not only the drawing of criss-cross lines but also tearing, obliterations, erasures or burning
It may be made by any other means by which the intention to cancel the instrument may be evident

WHEN CANCELLATION IS INOPERATIVE


1. When made unintentionally
2. When made under mistake
3. When made without the authority of the holder
**BURDEN OF PROOF IS UPON THE PERSON WHO CLAIMS THAT THE CANCELLATION IS INOPERATIVE

Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its original tenor.

RIGHTS OF ONE NOT HOLDER IN DUE COURSE

Where an instrument has been materially altered, it is avoided in the hands of one who is not a holder in due
course as against a prior party who has not assented to the alteration
WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE COURSE
1. A party who has made the material alteration
2. A party who has authorized the material alteration
3. A party who has assented to the material alteration
4. Any subsequent indorsers
RIGHTS OF HOLDER IN DUE COURSE NOT A PARTY TO THE ALTERATION

He may enforce the instrument in its original tenor

He could recover the altered tenor to any party who has made, authorized or assented the alteration,
or any subsequent indorser of the instrument
**NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT ALTERATION
RIGHT TO COLLECT ORIGINAL CONSIDERATION

When the alteration wasn't fraudulently done, the holder may recover the original consideration
**WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE RIGHT TO HAVE HIS ACCOUNT DEBITED WITH
CORRECT AMOUNT ONLY

As between the bank and its depositors, the payment of forged or altered checks by it is made at its peril and
cannot be charged against the depositors account UNLESS some negligent act or misconduct of his has contributed to
induce such payment, the bank itself being free from negligence.

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**BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND MUST NOTIFY THE COLLECTING BANKS
WITHIN 24 HOURS OF ALTERATION OF CHECKS

Sec. 125. What constitutes a material alteration. - Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any other change or addition
which alters the effect of the instrument in any respect, is a material alteration.

WHEN ALTERATION IS MATERIAL

If it alters the effect of the instrument

Examples of MATERIAL ALTERATION: (1) substituting the words or bearer for order; (2) writing protest
waived above blank indorsements; (3) a change in the date from which interest is to run; (4) adding the words with
interest with or without a fixed rate; (5)an alteration in the maturity of a note, whether the time for payment is
thereby curtailed or extended; (6) An instrument is payable to PNB, the plaintiff added the word Marion; (7) striking
out the name of the payee and substituting that of the person who actually discounted the note

Examples of IMMATERIAL ALTERATION: (1 )changing I promise to pay to we promise to pay where there are
two makers; (2) adding the word annual after the interest clause; (3) adding the date of maturity as a marginal
notation; (4)filling in the date of actual delivery where the makers of a note gave it with the date in blank, july.; (5)
where there is a blank for the place of payment, filling in the blank with the place desired

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CHAPTER 12 LETTERS OF CREDIT AND TRUST


RECEIPTS
LETTER OF CREDIT
Commerce branch of human activity the purpose of which is to bring products to the
consumer by means of exchanges or operations which tend to supply and extend them to him,
habitually, with intent to gain, at the proper time and place, and in good quality and quantity.
Commercial transactions those entered into by merchants to pursue activities as
merchants
Merchants one whose business is buying and selling goods for profit; a person or entity
that holds itself out as having expertise peculiar to the goods in which it deals, and is
therefore held by the law to a higher standard than a consumer or other non-merchant is held
Who are merchants? (Art.1, Code of Commerce)
1.
2.

Those who having capacity to engage in commerce, habitually devote themselves to it


Commercial or industrial companies which may be created in accordance with existing
legislation
Essential requisites of a merchant:
Filipino individual
1. Legal capacity to engage in commerce
2. Habitually engages himself therein

A single act of a party or person may be considered a habitual act.


3. Must be at least 18 years old (RA 6809)
4. Must have free disposition of his property
Filipino association
1. Commercial or industrial company
2. Created in accordance with existing legislations
3. With legal capacity to engage in commerce
4. Habitually engaged therein
Rule on Minors

General Rule: Minors may not engage in commerce


Exceptions:
1.
2.

When the minor continues the business of his parents or predecessors through a guardian
Investment in stocks of a corporation

A minor at least 7 years old may open a bank savings account or time deposit and
withdraw the same without assistance of his parent or guardian (PD 734)
Persons disqualified in engaging in commercial transactions
A. Absolutely Disqualified
1. Persons suffering the penalty of civil interdiction
2. Persons declared as bankrupt
3. Persons disqualified by special laws or provisions
B. Relatively Disqualified
1. Justices of the SC, judges, and officials of the department of public prosecutors in
actual service
2. Administrative, economic or military heads of districts, provinces or posts

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3.
4.
5.
6.
7.
8.
9.

Employees engaged in the collection and administration of public funds of the State,
appointed by the government
Stock or brokers of any class
Those who by virtue of laws or special provisions, may engage in commerce in a
determinate territory
Members of Congress
President, Vice-President, members of Cabinet and their deputies or assistants
Members of Constitutional Commission
President, Vice-President, members of the Cabinet, Congress, Supreme Court and the
Constitutional Commission, Ombudsman with respect to any loan, guaranty or other
form of financial accommodation for any business purpose by any government-owned
or controlled bank to them

Commercial contract an agreement between two or more merchants or nonmerchants binding themselves to give or to do something in commercial transactions
Macariola v. Asuncion: Art. 14 of the Code of Commerce (a Spanish law) providing for
the relative disqualification of judges is political in nature as it regulates the relationship
between the government and certain public officers and employees like justices and
judges. Upon the transfer of sovereignty from Spain to US and later on US to Philippines,
said provision must be deemed abrogated because where there is change of sovereignty,
political laws of the former sovereign, whether compatible or not with those of the new
sovereign are automatically abrogated. There being no explicit re-enactment by the new
sovereign, disqualification should be considered to have since lost its legal and binding
force on judges. Hence, the Court ruled in the said case that there was no violation of the
said rule when Asuncion associated himself with a company as a stockholder while being
concurrently a CFI judge.
Jose Berin v. Judge Felixberto Barte:
The Court ruled that Barte committed an impropriety in acting as a broker in the sale of a
real estate. This is so since while Sec. 14 of the Code of Commerce had already been
abrogated as ruled in Macariola v. Asuncion, the Code of Judicial Conduct which took effect
on October 20, 1989, refrained judges from entering into financial and business dealings
that tend to reflect adversity o the courts impartiality.
Letter of Credit
-

a letter issued by one merchant to another for purpose of attending to a commercial


transaction (Art. 567, Code of Commerce)6
Modern concepts:

an engagement by a bank or other person made at the request of a customer that the
issuer will honor drafts or other demands for payment upon compliance with th
conditions specified in the credit (Prudential Bank v. IAC; Bank of Commerce v.
Serrano)
one wherein the bank merely substitutes its own promise to pay for the promise to
pay of one of its customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment fees mutually agreed
upon

Not favored by Dean Sundiang

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one issued by a bank in order to aid a person who may not have a capital for the
importation of goods and merchandise7
a request by one bank (addressed usually to another bank) to advance money or
credit to a third person, upon fulfillment of certain conditions, usually by the latter on
the promise of the issuer bank to repay the same; issuer in turn look for the person
applying for the same for satisfaction

Conditions of a letter of credit: (Art. 568, Code of Commerce)


1.
2.

to be issued in favor of a definite person and not to order


to be limited to a fixed and specified amount or to one or more undetermined
amounts, but within a maximum the limits of which has to be stated exactly

When does the letter of credit become void (Art. 572, Code of Commerce)
if the bearer of a letter of credit does not make use of it within the period agreed upon
with the drawer

If there is no period stipulated,


within six months counted from the date in any point in the Philippines
within 12 months outside the Philippines
Basic parties to a letter of credit
1.

Buyer procures the letter of credit and obliges himself to reimburse the issuing bank
upon receipt of the documents of title
2. Bank (issuing/opening) undertakes to pay the seller upon receipt of the draft and proper
documents of title and to surrender the documents to buyer upon reimbursement
3. Seller (payee/beneficiary) who in compliance with the contract of sale ships the goods to
the buyer and delivers the documents of title and draft to the issuing bank to recover
payment
Other parties:

Paying bank bank on which the drafts are to be drawn


Confirming bank notifies the beneficiary, assumes the direct obligation to the seller; has
primary liability
Notifying bank correspondent bank of the issuing bank, assumes no liability except to
notify and/or transmit to the beneficiary the existence of a letter of credit, check
authenticity of credit8
Negotiating bank correspondent bank which buys or discounts a draft under the letter of
credit; liability is dependent upon the stage of negotiation
Before negotiation no liability to seller
After negotiation has contractual relationship with seller
Three contracts in a letter of credit
1.
2.

7
8

Contract between buyer and seller


- governed by the contract of sale executed by them
Contract between issuing bank and buyer
- governed by the terms of application and agreement for the issuance of letter of
credit

Definition of Dean
Relationship between notifiying bank and issuing bank: agency

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3. Contract between issuing bank and seller
Governed by the terms of the letter of credit itself
Independence Principle
a bank, in determining compliance with the terms of a letter of credit is required to
examine only the shipping documents presented by the seller and is precluded from
determining whether the main contract is actually accomplished or not
assures the seller of prompt payment independent of any breach of the main sales
contract
the contract of sale between buyer and seller is independent from the letter of credit
itself; the issuing bank need only to determine the tender documents presented by seller
and has the obligation to pay upon compliance with the terms of the letter of credit
works to the benefit of both issuing bank and beneficiary/seller
Rule of strict compliance
the documents tendered by the seller or beneficiary must strictly conform to the terms
of the letter of credit, i.e. they must include all documents required by the letter of credit
Fraud exception:
exists when the beneficiary for the purpose of drawing on the credit, fraudulently
presents to the confirming bank documents that contain expressly or by implication
material representations of fact that to his knowledge are untrue
effect: court may issue injunction to bar payment by the issuing bank
requirements of injunction:
a.
b.
c.

There is clear proof of fraud


Fraud constitutes fraudulent abuse of the independent purpose of the letter of credit
and not only fraud under the main agreement
Irreparable injury might follow if injunction is not granted or recovery of damages
would seriously be damaged

Kinds of Letter of Credit


1.

6.

Confirmed letter of credit whenever beneficiary stipulates that the obligation of the
opening bank shall also be made the obligation of a bank to himself
2. Unconfirmed letter of credit obligation only of the issuing bank
3. Irrevocable letter of credit obligates the issuing bank to honor drafts drawn in
compliance with the credit and can neither be cancelled nor modified without the
consent of all parties including in particular the beneficiary/exporter
4. Revocable letter of credit can be cancelled at anytime before payment; intended to
serve as a means of arranging payment but not as a guarantee of payment
5. Revolving letter of credit valid for several transactions over a given period of time
such as a week or month
Non-revolving letter of credit one that is valid for one transaction only

TRUST RECEIPTS LAW

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Trust Receipts Law (PD 115)
-

Bank becomes entruster of the goods while the buyer-importer is the entrustee. The
goods will in effect be released by the bank to the buyer by the delivery of the
documents of title or bill of lading covering the goods. Buyer as entruster is obligated
to sell the goods and to apply the proceeds thereof to the payment of the loan
extended by the entruster-bank, buyer will only get the balance of the proceeds of the
sale after making such application.

Purposes: (Section 2)
1.
2.
3.

To encourage and promote the use of trust receipts as an additional and convenient
aid to commerce and trade
To regulate trust receipt transactions in order to assure the protection of rights and the
enforcement of the obligations of the parties involved therein
To declare the misuse and/or misappropriation of goods or the proceeds realized from
the sale of goods, documents or instruments released under trust receipts as a
criminal offense punishable under Art.315 of the RPC

Trust receipt transaction


transaction between an entruster and entrustee whereby the entruster, who owns or
holds absolute title or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latters
execution and delivery to the entruster of a trust receipt wherein the entrustee binds
himself to hold the specified goods, documents, or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the amount owing to the
entruster or the goods, documents, or instruments themselves if they are unsold and not
otherwise disposed of.
Parties to a trust receipt transaction: (Sec.3, PD 115)
1.
2.

Entrustee person having or taking possession of goods, documents, instruments


under a trust receipt transaction and any successor-in-interest of such person
Entruster person holding title over the goods, documents, or instruments subject of
a trust receipt transaction and any successor-in-interest of such person

Rights of the entruster: (Sec.7)


1.
2.
3.

To receive the proceeds of the sale of the goods, documents or instruments released under
a trust receipt to the entrustee to the extent of the amount owing to the entruster
To the return of the said goods, documents or instruments in case they could not be sold
To cancel the trust in case the entrustee defaults, take possession of the goods,
documents or instruments and sell the same at public or private sale

Obligations of the entrustee (Sec.9)


1.
2.

To hold the goods, documents or instruments in trust for the entruster and to dispose
of them strictly in accordance with the terms of the trust receipt
To receive the proceeds of the sale of the goods, documents or instruments in trust
for the entruster and to turn over the same to the entruster to the extent of the
amount owing to the entruster

Negotiable Instruments Law (Aquino and Agbayani Notes) 74


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5.
6.

To insure the goods for their total value against loss from fire, theft, pilferage or other
casualties
To keep the goods, documents or instruments or the proceeds thereof whether in
money or whatever form, separate and capable of identification as property of the
entruster
To return the goods, documents, or instruments to the entruster in case they could
not be sold or upon demand of the entruster
To observe all other terms and conditions of the trust receipt