GENERAL CONCEPTS particular account to be debited with the

amount
NEGOTIABLE INSTRUMENTS – A written contract for the NOTE: An order or promise to pay out of a particular fund is
payment of money which complies with the requirements of Sec 1 not unconditional
of the Negotiable Instruments Law (NIL), which by its form and on o The promise or order to pay to be unconditional must
its face, is intended to hand as money, so as to give the holder in be unqualified, absolute and obligatory; nor merely
due course (HDC) the right to hold the instrument free from aspirational
personal defenses and available to prior parties (Jose R. Sundiang o TEST: Does the instrument carry the general credit of
and Timoteo B. Aquino, Reviewer on Commercial Law, 2006 ed.). the drawer or the maker or only the credit of a particular
fund?
REQUISITES (Sec 1 NIL)
FUND FOR PARTICULAR
1. Must be in WRITING and signed by the maker or drawer
REIMBURSEMENT FUND FOR
– Signature is binding however written or printed as PAYMENT
long as it is intended to be the signature of the signer Acts involved Drawee pays the There is only one
or made with his authority payee from his own act: the drawee
o Assumed or Trade name – NO person is liable on the NI funds, afterwards pays directly
whose signature does not appear thereon unless the drawee pays from the
otherwise provided. But one who signs in a trade or himself from the particular fund
assumed name will be liable to the same extent as if he particular fund indicated.
signed his own name (Sec 18 NIL) indicated Payment is
o Signature by agent – The signature of any party ma be subject to the
made by a duly authorized agent. No particular form is condition that the
necessary fund is sufficient
o If the signature placed on the NI is not clear so what Nature of fund Particular fund Particular fund
capacity the person intended to sign, he is deemed as indicated indicated is NOT indicated is the
an indorser (Sec 17.f NIL) the direct source of direct source of
payment but only payment
2. Must contain an UNCONDITIONAL promise or order to the source of
pay a sum certain in money – There must be an express reimbursement
promise or order to pay a sum certain in money Effect Unconditional Conditional
o “Promise” need not be used; an equivalent expression Example Pay to the order of I promise to pay
is sufficient X P1,000 and X or order the
o Order is a command or imperative direction. A mere reimburse yourself sum of P1,000
request or authority to pay is not equivalent to an order. from the rentals of out of my salary
o There must be a clear demand upon the drawee to pay my house in XYZ corp

WHEN UNCONDITIONAL (Sec 3 NIL)
There is an unqualified or unconditional order or promise to
pay if there is:
a. An indication of a particular fund out of
which reimbursement is to be made, or a
NOTE: Bills and checks by itself do not operate as an
assignment of any part of the funds to the credit of the drawer
with the bank, and the bank is not liable to the holder unless
and until it accepts or certifies the check (Sec 127 and 189
NIL)

Page | 1

Account to be debited with the amount – The payment does
not depend upon the existence or adequacy or the particular
account to be debited. It is negotiable because the instrument
is to be paid first after the particular account indicated will be
debited (De Leon, The Law on Negotiable Instruments 2010
ed.)
b. A statement of the transaction which gives rise
to the NI – Where the promise or order is
subject to the terms and conditions of the
transaction stated, the instrument is rendered
non-negotiable. The NI must be burdened with
the terms and conditions of that agreement to
destroy its negotiability (Villanueva,
Commercial Law Review 2004 ed.)
NOTE: Reference to another transaction or
document must be descriptive rather than
restrictive.
SUM PAYABLE MUST CERTAIN (Sec 2) – A sum is certain if the
amount to be unconditionally paid by the maker or drawee can
be determined on the face of the instrument and is not
affected by the fact that the exact amount is arrived at only
after a mathematical computation
o NI is a device intended to take the place of money, it is
essential, then, that it represents a fixed amount of
money. The amount to be paid must be stated plainly
on the face of the instrument and must be determinable
from the face of the instrument itself without reference
to any outside source
Sum payable is certain even if (ISA-Ex-Co):
a. With INTEREST
b. By STATED installments
i. The amount of each installment is indicated;
AND
ii. The due date is fixed or at least
determinable
c. By stated installments with a provision that
upon default in payment of any installment
or of interest, the whole shall become due
(ACCELERATION clause)
d. With EXCHANGE, whether at a fixed rate or
at the current rate; or
e. With COSTS of collection or an attorney’s
fees, in case payment shall not be made at
maturity
PAYABLE IN MONEY – An instrument which contains an order
or promise to in addition to the payment of money is not
negotiable
o If the order or promise gives the holder an option to
require something to be done in lieu of payment, its
negotiability is not affected
o If the option to pay money or something in lieu thereof
is with the maker or the person primarily liable, the
instrument is not negotiable
CERTAINTY OF SUM PAYABLE
GENERAL RULE: An instrument which contains an order or
promise to do any act in addition to the payment of money is
not negotiable (Sec 5 NIL)
REASON: The instrument calls for an act other than payment
of money is not negotiable because a NI is intended as a
substitute for money
EXCEPTIONS:
(1) Authorizes the sale of collateral securities on
default
(2) Authorizes confession of judgment on default
NOTE: Confession of judgment clauses are VOID as
being against public policy because the PN bargains
away his day in court however such nullity does nto
affect the negotiability of the instrument (National Bank
v. Manila Oil Refining Co, G.R. no L-18103, June 8,
1922)
(3) Waives the benefit of law intended to protect the
debtor such as presentment for payment, notice
of dishonor and protest or;
(4) Allows the holder the option to require something
in lieu of money
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NOTE: An instrument is still negotiable although the amount to be
paid is expressed in currency that is not legal tender so long as it is
expressed in money (PNB v. Zulueta, G.R. no L-7271, August 30,
1957)
REASON: Under the Sec 1 of RA 8183, all monetary obligations shall
be settled in Philippine currency which is legal tender in the
Philippines. However, the parties may agree that the obligation shall
be settled in any other currency at the time of payment
 Sec 1(b) and 6(e) call for the payment of money but the law
does not require the payment should be made in legal tender
 The Uniform Currency Act (RA 529) has repealed RA 8183;
the parties may now—not only in the case of NI—but in any
contract involving payment of debt money, agree now that the
payment should be made in a foreign currency
IS A NEGOTIABLE INSTRUMENT A LEGAL TENDER? No.
a.) Sec 60 of the New Central Bank Act (RA 7653) provides
that: Checks are not legal tender. Checks representing
demand deposits do not have legal tender power and their
acceptance in the payment of debts, both public and private,
is at the option of the creditor; provided that a check which
has been cleared and credited to the account of the
creditor/s shall be equivalent to the creditor of cash in an
amount equal to the amount credited to his account
b.) Art 1249 NCC (impairment clause): The delivery of a note
payable to order or a bill of exchange or any other
mercantile document shall produce payment only when they
have been encashed or through the fault of the creditor, the
value is impaired
c.) The SC ruled that the creditor cannot be compelled to accept
a check in payment of a debt (Leticia Co v. PNB, G.R. no L-
51767, June 29, 1982). Acceptance of a check is not
tantamount to payment
WHAT IS LEGAL TENDER?
a.) It is that kind of currency which the law compels a creditor
to receive in payment of a debt, be it public or private,
provided it is tendered in the right amount
b.) Sec 52 New Central Bank Act: All notes and coins issued by
BSP shall be fully guaranteed by the Government of the
Philippines and shall be legal tender for all debts, both public
or private
NOTE: Checks representing demand deposits do not have legal
tender power and their acceptance in the payment of debts is at the
option of the creditor; provided that that a check which has been
cleared and credited to the account of the creditor/s shall be
equivalent to the creditor of cash in an amount equal to the amount
credited to his account (Sec 60 RA 7653)
3. Must be PAYABLE on demand, or at a fixed or
determinable future time – Purpose: To inform the holder
of the NI of the date when he may enforce payment thereof.
Before to maturity, he cannot compel the maker or acceptor
to pay unless there is a valid acceleration clause
WHEN PAYABLE ON DEMAND (Sec 7)
a. Where it is expressed to be payable on demand, at sight
or on presentation – NI is payable on demand not only
as between parties but also as to subsequent parties
 AT sight – the NI is payable as soon as it is seen
by the party primarily liable
b. Where no period of payment is stated – Refers only to
immediate parties since between immediate parties
there is no difference between HDC and a person not
HDC
c. Where issued, accepted or indorsed after maturity (only
as between immediate parties)
PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME – The
time must be certain so that the holder will know when he
may enforce the NI and the person liable, when he may be
required to pay (Sec 4 NIL)
WHAT CONSTITUTES DETERMINABLE FUTURE TIME (Sec 4)
a. At a fixed period after date or sight – After sight: after
the drawee has seen the NI upon presentment for
acceptance
b. On or before a fixed or determinable future time
specified therein; or
Page | 3
 c. Before the occurrence of a specified event which is
certain to happen, though the time of happening is
certain (Sec 4 NIL)
d. A NI payable on contingency is not negotiable even if
the contingent event does happen
NOTE: If the day and month, but not the year of payment is
given, it is not negotiable due to its uncertainty
o If the NI states that the amount shall be paid in 2 equal
installments, the 2nd being payable on a fixed date, the
NI can be considered negotiable since the 1 st
installment would then be payable on demand
o Presumption as to date: If NI is dated, such date is
prima facie presumed to be the true date of making,
drawing, acceptance or indorsement as the case may be
(Sec 11)
o If NI is not dated, it will be considered to be dated as of
the time it was issued (Sec 17 NIL)
EFFECT OF ACCELERATION CLAUSE – Acceleration clause
does not affect the negotiability of the NI (Sec 4.b NIL)
o If acceleration clause is at the option of the holder:
negotiability depends on the nature of the provision:
(a) If only upon happening of a specified event over
which he has no control = negotiable
(b) If option is unconditional = non-negotiable
(c) Acceleration clause to apply upon default =
negotiable
4. Must be payable to ORDER or to bearer – words of
negotiability: Payable to order or to bearer. This serves as an
expression of consent that the instrument may be transferred
o Need not expressly state payable to “order” or
“bearer” as long as intention to legal requirements
is sufficient (substantial compliance)
WHEN PAYABLE TO ORDER (Sec 8) – NI 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 made payable to the order
of:
a. A payee who is not the maker, drawee or drawer
NOTE: Payee must be named or indicated with
reasonable certainty. If there is no payee, in a NI
payable to order, no one could indorse the NI (Sec 8.a)
 Subject to the rules in Sec 13, 14 and 15 on
incomplete instruments, leaving the payee
blank may make the NI non-negotiable because
an instrument payable to order may be
negotiated only by indorsement AND delivery
b. The drawer or maker
NOTE: If maker is made the payee, the NI must be
indorsed to be complete (Sec 14 NIL)
 Where the NI is payable to the order of the
drawer and it is accepted by the drawee, the NI
is equivalent to a PN made by the acceptor in
favor of the drawer
c. The drawee
d. Two or more payees jointly
e. One or some of several payees
f. The holder of an office for the time being
PAYABLE TO BEARER (Sec 9 NIL) – Only NI under Subsections
A and B are bearer instruments on the face. Those under
Subsections C, D, and E are order instruments on the face:
(OPEN-F)
a. When it is EXPRESSED to be so payable
b. When it is payable to a PERSON named therein or
bearer
c. When it is payable to the order of a FICTITTIOUS
or non-existing person, and such fact was known
to the person making it so payable – Fictitious
person is not limited to persons having no real
existence. An existing person may be considered a
fictitious payee, if the person making it so payable does
not intend to pay the specified person
 REASON: There is no one to indorse it, hence if
the maker intended to give it negotiability, it
could only be on the theory that it became
payable to bearer
 A note payable to the estate of a person still
existing at the time of its execution is payable
to bearer since it is payable to a non-existing
person
Page | 4
  That the payee is a fictitious or non-existing
person must be known to the maker or drawer
otherwise it is an order instrument
d. When the name of the payee does NOT purport to be
the name of any person – e.g., pay to cash or pay to
sundries
 The payee named is one who does not exist and
has never existed. Since indorsement is
obviously impossible, the manifest intention of
the drawer is to make the instrument a bearer
paper negotiable by delivery
e. When the ONLY or last indorsement is an indorsement
in blank – It becomes payable to bearer even if it is
originally payable to a specified person
 NI originally payable to bearer can be
negotiated by mere delivery even if it is
indorsed specially. If it is originally a BEARER
instrument, it will ALWAYS be a bearer
instrument (Sec 40 NIL)
 As opposed to an original order instrument
becoming payable to bearer, if ht same is
indorsed specially, it can no longer be
negotiated further by mere delivery, it has to be
indorsed
 When the instrument is payable only to a
specified person or his agent, it is not payable
to order, thus non-negotiable
5. When the instrument is ADDRESSED to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty – It is applicable only to a bill of
exchange
o Omission of drawee may be filled later (Sec 14
NIL)
o A bill may be addressed to 2 or more drawees
jointly, whether they are partners or not in the
alternative or in succession (Sec 128 NIL) because
there would be no certainty as the person to
whom the bill should be presented for payment or
acceptance
APPLICABILITY
The provisions of NIL apply only to negotiable instruments. If the
instrument is negotiable, the instrument is not governed by the
provisions of NIL (Metropolitan Bank and Trust Co v. CA, 194 SCRA
169, 1991).
NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE
INSTRUMENTS DISTINGUISHED
NEGOTIABLE INSTRUMENTS NON-NEGOTIABLE
INSTRUMENTS
Only negotiable instruments are NIL does not apply
governed by NIL
Can be transferred by negotiation Can be transferred only
or by assignment by assignment
Transferee can become HDC if all Transferee can never
requirements under Sec 52 NIL are become HDC
complied with
If last transferee is HDC, prior All defenses available to
parties may not raise defenses prior parties may be raise
against HDC (except real defenses) against last transferee
GOVERNING LAWS
1. NEGOTIABLE INSTRUMENTS LAW (Act 2031)
2. CODE OF COMMERCE – Negotiable instruments are governed
by the provisions of the Code of Commerce that were not
impliedly repealed by NIL
NOTE: The provisions on CROSSED CHECKS are still in force
because there is no provision in NIL that deals with crossed
checks. (Chan Wan v. Tan Kim, 109 PHIL 706, 1960).
3. Law Merchant (Sec 196 NIL)
4. CIVIL CODE – applicable suppletorily
FUNCTIONS OF NEGOTIABLE INSTRUMENTS
1. It operates as a substitute of money
2. It is a means of creating and transferring credit
3. It facilitates sale of goods
4. It increases the purchasing medium in circulation (Sundiang,
Reviewer on Commercial Law)
5. It is a proof of transactions
Sec 52 of the New Central Bank Act (RA 7653) provides that only
notes and coins issued by the Banko Sentral ng Pilipinas are
Page | 5
considered legal tender, hence, negotiable instruments are NOT
legal tender. Delivery of instrument does not operate as payment.
Sec 69 of the same law expressly provides that checks are not legal
tender. Sec 60 states that checks representing demand deposits do
not have legal tender power and their acceptance in the payment of
debts, both public and private, is at the option of the creditor.
Provided, however, that a check which has been cleared and
credited to the account of the creditor shall be equivalent to delivery
to the creditor of cash in an amount equal to the amount credited
to his account (Sundiang, Reviewer on Commercial Law).
STAGES IN THE NEGOTIABLE INSTRUMENT
1. PREPARATION AND SIGNING complete with all the
requirements provided under Sec 1 NIL
2. ISSUANCE – First delivery of the instrument to the payee
(from maker to payee/bearer or from drawee 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 Bills of
Exchange – 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
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 said maker or
drawee/acceptor will pay
8. DISHONOR by nonpayment – Refusal to pay by the maker
or drawee/acceptor
9. NOTICE OF DISHONOR – Notice to the persons secondarily
liable that the maker or drawee/acceptor refused to pay or
accept the NI
10. PROTEST – applicable to foreign bills
11. DISCHARGE
FEATURES OF A NEGOTIABLE INSTRUMENT
1. NEGOTIABILITY –That attribute or property whereby a bill or
note or check may pass from hand to hand similar to money,
so as to give the holder in due course the right to hold the
instrument and collect the sum payable for himself free from
defenses
2. ACCUMULATION OF SECONDARY CONTRACTS – Secondary
contracts are picked up and carried along with them as they
are negotiated from one person to another, or in the course
of negotiation from one person to another, or in the course of
negotiation of NI, a series of juridical ties between the parties
thereto arise by law or by privity (Sundiang, Reviewer on
Commercial Law)
INTERPRETATION OF NEGOTIABLE INSTRUMENT
(Sec 17 NIL)
The rules in Sec 17 are applicable only when the instrument is
ambiguous or uncertain or when there are omissions therein. If the
terms are clear, the NI must be enforced as it reads.
 When the meaning is doubtful, the courts have adopted the
policy of resoling in favor of the negotiability of the
instrument.
1. Words prevail over figures
2. Interest stipulated runs from the date of the NI, or if undated,
from its issue
3. If undated, the instrument is deemed dated at its issue
4. Written words prevail over printed provisions
5. When there is doubt whether the NI is a bill or a note, the
holder, at his election, may treat it as either a bill or a note –
Where in a bill, the drawer and the drawee are the same
person or where the drawee is a fictitious person, or a person
not having capacity to contract, the holder may treat the NI
at his option,, either as a bill of exchange or promissory note
(Sec 130 NIL)
6. When it is not clear in what capacity a person signs, he is
deemed an indorser
7. When 2 or more persons sign “We promise to pay,” their
liability is JOINT (each liable for his part) but if they sign “I
promise to pay,” the liability is SOLIDARY (each can be
compelled to comply with the entire obligation
KINDS OF NEGOTIABLE INSTRUMENTS
A. PROMISSORY NOTE (PN) – An unconditional promise, in
writing, made by one person to another, signed by the maker
Page | 6
 engaging to pay, on demand or at a fixed or determinable future
time, a sum of certain money, ot order or to bearer (Sec 184 NOTE: Prior to the acceptance of the Bill of Exchange,
NIL) there is no party primarily liable in a bill of bill of
PARTIES: exchange. It is only when a drawee becomes an acceptor
a. Maker – Party who executes the written promise to pay that he is primarily liable.
b. Payee – Party in whose favor the promissory note is made
payable LEGAL BASIS: A bill itself does not operate as an
assignment of funds in the hands of the drawee available
EXAMPLE: for payment thereof, and the drawee is not liable until and
Payee unless he accepts the same (Sec 127 NIL)
July 15, 2012
Manila c. Payee – Party in whose favor the bill is drawn or payable
P10,000
EXAMPLE:
Fifteen (15) days after date, I promise to pay Mr. X or order the sum of Ten Payee
Thousand Pesos (P10,000) July 15, 2012
Sgd. Mr. Y Manila
P10,000

Maker Fifteen (15) days after date, pay Mr. X or order the sum of Ten Thousand
Pesos (P10,000).
Sgd. Mr. Y
B. BILL OF EXCHANGE (BEX) – An unconditional order, in
To: Mr. Z
writing, addressed by one person to another, signed by the President, XYZ Corp
person giving it, requiring the person to whom it is addressed Mendiola, Manila
to pay, on demand or at a fixed or determinable future time, a
sum certain in money, to order or to bearer (Sec 126 NIL) Drawee/Acceptor Drawer
PARTIES:
a. Drawer – Party who executes the written order to pay
NOTE: A bill of exchange requires in its inception three NOTE: The parties need not all be distinct persons. Thus, the drawer
parties: drawer, drawee and payee may draw on himself payable to his own order (De Leon, The Law
b. Drawee – The person to whom the bill is addressed and on Negotiable Instruments, 2010 ed.).
who is ordered to pay

The drawee is not really a party to the bill. He assumes
liability only when he accepts the bill usually by writing
the word “accepted and signing his name on the face
thereof” (Sec 132 and 133 NIL) in which case he ceases
to be drawee and becomes known as an ACCEPTOR
(Hector De Leon, The Law on Negotiable Instruments)
ACCEPTOR – A drawee who ACCEPTS the order to pay
made by the drawer
BILL OF EXCHANGE TREATED AS PROMISSORY NOTE
INSTANCES WHEN A BILL OF EXCHANGE MAY BE TREATED AS PN
AT THE ELECTION OF THE HOLDER (Sec 17e and Sec 130 NIL):
(FLACS)
1. Drawee is a FICTITIOUS person
2. Where the bill is drawn on a person who is LEGALLY absent
3. Where the bill is AMBIGUOUS (Sec 17e NIL)

Page | 7
 4. Drawee does not have the CAPACITY to contract (Sec 130 fixed or
NIL); and determinable
5. The drawer and drawee are the SAME person future time
PRESENTMENT Must be presented Need not be
PROMISSORY NOTE AND BILL OF EXCHANGE for acceptance presented for
DISTINGUISHED acceptance,
PROMISSORY NOTE BILL OF EXCHANGE however, if the
holder requests and
NATURE Unconditional Unconditional order
the bank desires,
promise
he may accept
NUMBER OF Involves 2 parties Involves 3 parties
DRAWN ON DEPOSIT Need NOT be Is drawn on
PARTIES
drawn on a deposit, otherwise
LIABLITY OF Maker is primarily Drawer is only
deposit, hence it there would be
CREATOR liable secondarily liable
is not necessary fraud
PRESENTMENT Only one Generally 2
that the drawer of
presentment for presentments:
a bill of exchange
payment a. Acceptance
should have funds
b. Payment
in the hands of
the drawee
NOTE: 2
WHEN May be presented Must be presented
presentments only
PRESENTMENT MADE for payment within a reasonable
in cases provided in
within reasonable time after its issue
Sec 143
time after last
RIGHT TO LIMIT Maker of the note Drawer may insert
negotiation
LIABILITY may NOT insert an in the instrument
EFFECT OF If accepted: If certified:
express stipulation an express
ACCEPTANCE OR drawer/indorser drawer/indorser are
limiting or negativing stipulation limiting
CERTIFICATION remains liable discharged
his own liability to or negativing his
EFFECT OF Death of a drawer Death of the
the holder own liability to the
DRAWER’S DEATH of BOE, with the drawer of the
holder (Sec 61 NIL)
knowledge of the check, with the
bank, does not knowledge of the
C. CHECK – A bill of exchange drawn on a bank payable on
revoke the bank, revokes the
demand (Sec 185 NIL). It is also the most common form of bill authority of the authority of the
of exchange drawee to pay banker to pay
 Except as otherwise provided, the provisions of NIL
applicable to a bill of exchange payable on demand D. CERTIFICATE OF DEPOSIT issued by banks, payable to the
apply to a check (Sec 185 NIL) depositor or his order, or to bearer – A form of promissory note
which is a written acknowledgment of a bank of its receipt of a
EXCHANGE AND CHECK DISTINGUISHED certain sum with a promise to repay the same
EXCHANGE CHECK  A written acknowledgment by a bank or banker of the
WHEN PAYABLE May be payable Always payable on receipt of a sum of money on deposit which the bank or
on demand or at a demand banker promises to pay to the depositor, to the order of the

Page | 8
 depositor, or to some other person or his order, whereby receiving value therefore, and for the purpose of lending his
the relation of debtor and creditor between the bank and name to some other person (Sec 29 NIL)
depositor is created 7. REFEREE IN CASE OF NEED (Sec 130 NIL) – A person who
may be designated in the instrument as the person who may
E. TRADE ACCEPTANCE – A bill of exchange payable to order and be resorted to by the parties in case of dispute (Sundiang,
at a certain maturity, drawn by a seller against the purchaser of Reviewer on Commercial Law)
goods as drawee, for a fixed sum of money, showing on its face
the acceptance of the purchaser of the goods and that it has NON-NEGOTIABLE INSTRUMENTS AND
arisen out of a purchase by goods by the acceptor
NEGOTIABLE INSTRUMENTS DISTINGUISHED
F. BONDS, which are in the nature of promissory notes – A NEGOTIABLE NON-NEGOTIABLE
certificate or evidence of a debt which the issuing company or INSTRUMENTS INSTRUMENTS
governmental body promises to pay the bondholders a specified APPLICABLE LAW Only NI is governed Application of NIL
amount of interest for a specified length of time, and to repay by NIL is only by analogy
the loan on the expiration date TRANSFERABILITY Transferable by Transferrable only
negotiation or by by assignment
G. DRAFTS –which are bills of exchange drawn by one bank upon assignment
another TRANSFEREE The transferee can The transferee
be a HDC if all the remains to be an
 In Bank drafts, the drawer and drawee are liable to the
requirements are assignee and can
purchaser of draft for not complying with his instructions
complied with never be a HDC
DEFENSES A holder in due All defenses
H. DEBENTURE – A promissory note or bond backed by the
course takes the NI available to prior
general credit of a corporation and usually not secured by a
free from personal parties may be
mortgage or lien on any specific property
defenses raised against the
last transferee
I. BANK NOTES – Promissory notes of the issuing bank which NATURE OF TITLE Requires clean title, Transferee acquires
are payable to bearer on demand one that is free a derivative title
from any infirmities only
OTHER PARTIES TO A NEGOTIABLE INSTRUMENT in the instrument
1. INDORSER – A person placing his signature upon an and defects of title
instrument, otherwise than as maker, drawer or acceptor of prior transferors
2. INDORSEE – in the case of instrument payable to order SOLVENCY OF THE Solvency of the Solvency of the
3. Persons negotiating by mere delivery DEBTOR debtor is in the debtor is not
4. Persons to whom the instrument is negotiated by mere sense guaranteed guaranteed under
delivery, in case the instrument is payable to bearer by the indorsers Art 1628 NCC
5. ACCEPTOR – A drawee who accepts the order to pay made because they unless expressly
by the drawer. It is only when a drawee becomes an acceptor engage that the stipulated (Timoteo
that he is primarily liable (Sundiang, Reviewer on Commercial instrument will be Aquino, Cases on
Law) accepted, paid or Banks, Negotiable
6. ACCOMODATION PARTY – One who has signed the both and that they Instruments and
instrument as maker, drawer, acceptor, or indorser, without will pay if the

Page | 9
 instrument is other Commercial
dishonored Documents)
1. TREASURY WARRANT – Being payable out of a particular
fund of the national treasury (Metrobank v. CA, G.R. no
88866, February 18, 1991)
2. POSTAL MONEY ORDERS –
REASONS:
a. Under postal regulations, the bureau of posts can refuse
to pay on numerous grounds, thus the order is not
unconditional
b. A money order can be indorsed only once
c. The post office is not run by the government for
commercial profit, but for public service (Phil Education Co
Inc v. Soriano, G.R. no L-22405, June 30, 1971)
3. LETTER OF CREDIT – Being payable to a specified person
4. TRUST RECEIPT – Being payable to the entrustor,
conditioned upon the resale of the goods
5. NEGOTIABLE DOCUMENT OF TITLE, BILL OF
LADING AND WAREHOUSE RECEIPT – Being payable
in goods rather than money
6. CERTIFICATE OF STOCKS – It is a written instrument
signed by proper officer of a corporation stating that the
person named therein is the owner of a designated number of
shares of stock. It is also without an unconditional promise or
order to pay sum certain in money (De Leon,l The Law on
Negotiable Instruments)
NEGOTIABILITY
NEGOTIABILITY – The requisites of negotiability are provided
for under Sec1 NIL. It is the most important provision of NIL because
the law does not apply if the instrument does not meet the requisites
of negotiability as provided therein (Aquino, Cases on Banks,
Negotiable Instruments and other Commercial Documents)
FACTORS THAT AFFECT THE DETERMINATION OF
NEGOTIABILITY OF INSTRUMENTS (WART)
1. The WHOLE of the instrument shall be considered
2. Only what APPEARS on the face of instrument shall be
considered
3. REQUISITES enumerated in Sec 1 NIL; and
4. Should contain words or TERMS of negotiability such as
“order” or “bearer” (Gopenco, Commercial Law Reviewer
citied in Aquino, p. 23)
RATIONALE OF FORMALITIES OF NEGOTIABLE INSTRUMENTS
1. To become effective substitutes for money
2. To be desirable tools for credit transactions
3. For security of mercantile transactions
PROVISIONS AND OMMISIONS THAT DO NOT
AFFECT NEGOTIABILITY
1. PROVISIONS which
a. Authorizes the sale of COLLATERAL SECURITIES in case
the instrument be not paid at maturity
b. Authorizes a CONFESSION of judgment if the
instrument be not paid at maturity
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 (Sec 5 NIL)
2. OMMISSIONS (Sec 6)
a. It is not dated – The date referred is the date of the
making or drawing of the NI. If the NI is not dated, it
will be considered to be dated as of the time it was
issued
 Sec 13 NIL contemplates a situation where the
date is necessary to fix the maturity date or to
make the maturity date determinable. The
reason is that unless the true date is inserted,
one will not know when the NI is due
b. It does not specify the value given or that any
value has been given – Consideration is presumed
(Sec 24 NIL)
c. It does not specify the place where it is drawn or
where it is payable – It should be noted that Sec 73
NIL already provides for the rules on the proper place of
Page | 10
 presentment where no place is specified. On the other o EFFECT: Makes the transferee the holder of the NI (Sec
hand, Sec 75 covers a situation where it is payable at a 191). The right to collect a sum certain in money is
bank transferred from one person to another
d. It bears a seal o BEARER – the person in possession of a bill or note
e. It designates a particular kind of current money in payable to bearer
which payment is to be made o HOLDER – payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof (Sec 191)
a. NI Payable to ORDER – Where the NI is payable to
3. ACCEPTANCE – The acceptance of a bill of exchange is not
order, there are 2 steps required for its negotiation
important in the determination of its negotiability. The nature
b. NI payable to BEARER – It is negotiated by mere
of acceptance is important only in the determination of the
delivery without indorsement
kind of liabilities of the parties involved (PBCom v. Aruego,
G.R. no L-25836-37, January 31, 1981)
2. ASSIGNMENT – A method of transferring a negotiable or
non-negotiable instrument whereby the assignee is merely
4. INDORSEMENT – The presence of indorsement of the NI does
placed in the position of the assignor and acquires the NI
not affect the negotiability of the NI. This rule is subject to the
subject to all defenses that may be set up against the original
provision that a PN that is payable to the order of the maker
payee
himself is not yet complete unless it is indorsed by the maker
o A person taking a NI by assignment in a separate piece
(Sec 184 NIL). Moreover, an indorsement may prevent further
of paper takes it subject to the rules on assignment. And
negotiation of the NI, in which case, subsequent transferees
where the holder of the bill payable to order transferred
can no longer be considered holders (Sec 36)
it without indorsement, it operates as an equitable
assignment
NOTE: If the instrument is not negotiable, it can still be
TRANSFER AND NEGOTIATION transferred but only through assignment

DELIVERY – Transfer of possession, whether actual or ASSIGNMENT AND NEGOTIATION DISTINGUISHED

constructive, from one person to another ASSIGNMENT NEGOTIATION
 Contract of NI is incomplete and revocable until delivery of NI Applicable law Civil Code NIL
for the purpose of giving effect thereto (Sec 16) Type of Pertains to contracts in Pertains to NI
 Without the initial delivery of the instrument to the payee, transaction general
there can be no liability on the NI (e.g. if delivered merely for Nature o f the The transferee is a The transferee is a
safekeeping = no liability) transferee mere assignee holder who may be
 ISSUANCE – First delivery of the NI complete in form to a HDC
person who takes it as a holder Availability of Assignee steps into the HDC takes it free from
defenses shoes of the assignor personal defenses
MODES OF TRANSFER and merely acquires available among
1. NEGOTIATION – NI is negotiated when it is transferred whatever rights the parties
from one person to another in such a manner as to constitute assignor may have
the transferee the holder thereof. If payable to bearer, it is As to The transferee can The transferee can
negotiated by mere delivery; if payable to order, it is possibility of never become HDC become HDC in proper
negotiated by indorsement of the holder completed by become HDC cases
delivery (Sec 30 NIL)

Page | 11
HOW NEGOTIATION TAKES PLACE
a. ISSUANCE – The first delivery of the NI, complete in
form, to a person who takes it as a holder (Sec 191). It
is the first transfer of NI to a payee
Steps:
(1) Mechanical act of writing the NI completely and
in accordance with the requirements under Sec
1 NIL
(2) The delivery of the complete instrument by the
maker or drawer to the payee or holder with the
intention of giving effect to it
b. SUBSEQUENT NEGOTIATION (Sec 30 NIL) – AN NI is
negotiated when it is transferred from one person to
another in such a manner as to constitute the transferee
the holder thereof
(1) If payable to bearer, NI may be negotiated by
mere delivery
(2) If payable to order, NI negotiated by
indorsement completed by delivery
 In both cases, delivery must be intended to give
effect to the transfer of NI (DBP v. Sima Wei,
G.R. no 85419, March 9, 1993)
c. INCOMPLETE NEGOTIATION OF ORDER
INSTRUMENT (Sec 49 NIL) – Contemplates a case
where there is delivery and payment of value but NO
indorsement
 Applicable only to NI payable to order
 Effect: The NI is in effect merely assigned to the
transferee. It is only at the time of indorsement
that the transferee acquires all the rights of the
holder
 For the purpose of determining whether the
transferee is HDC, the negotiation takes effect
as of the time when the indorsement is made.
Hence, before indorsement, the transferee is
not a holder (Sec 49 NIL)
RIGHTS OF TRANSFEREE FOR VALUE
a. Acquires only the rights of the transferor; and
b. Right to require the transferor to indorse the NI
NOTE: Transferees in this situation do not enjoy the
presumption of ownership in favor of holders
REASON: Mere possession of a NI does not in itself
conclusively establish either the right of the possessor
to receive payment, or of the right of one who has made
payment to be discharged from liability (BPI v. CA and
Salazar, G.R. no 136202, January 25, 2007)
EQUITABLE ASSIGNMENT – The transaction is an equitable
assignment and the transferee acquires the NI subject to the
defenses and equities available among prior parties. If the
transferor had legal title, the transferee acquires such title,
and the right to have the indorsement of the transferor and
also the right, as holder of the legal title, to maintain legal
action against the maker or acceptance or other party liable
to the transferor.
3. BY OPERATION OF LAW – The full title to a bill may pass
without assignment or indorsement or delivery, i.e. by
operation of law (De-Ba-De)
a. By the DEATH of the holder, where the title vests in his
personal representatives
b. By the BANKRUPTCY of the holder, where the title vests
in his assignee or trustee
c. Upon the DEATH of a joint payee or indorsee, in which
case the title vests in the surviving payee or indorsee in
general
4. INDORSEMENT – It is the writing of the name of the
indorser on the NI with the intent either to transfer the title to
the same, or to strengthen the security of the holder by
assuming a contingent liability for its future payment, or both
HOW INDORSEMENT IS MADE – The indorsement must be
written on the NI itself or upon a paper attached thereto
(allonge). The signature of the indorser without additional
words is sufficient (Sec 31 NIL).
o Allonge can only be used when there is no longer any
room on NI for further indorsements.
o Where the indorsement is written in an allonge, the
same must be tacked or pasted on the NI so as to
become part of it; otherwise, it cannot be considered an
allonge. Indorsement may made in any form, as long as
it is meant to be an indorsement.
Page | 12

NATURE: An indorsement is not only a mode of transfer, it is
also a contract.
INDORSEMENT AS A CONTRACT – Unless the indorsement
is qualified (sec 65), every indorser is a new obligor and the
terms are found on the face of the NI, with the additional
obligation that if the NI is dishonored by nonpayment or non-
acceptance, and notice is given to the indorser, the latter will
pay for it.
NOTE: A qualified indorser is liable in case of breach of
warranties (Sec 65).
RULES ON INDORSEMENT
1. Indorsement must be of the entire NI
EXCEPT: Where NI has been paid in part, it may be indorsed
as to the residue or balance (Sec 32)
o An indorsement which purports to transfer to the
indorsee a part only of the amount payable does not
operate as a negation of NI, it operates merely as an
assignment (Montinola v. PNB, G.R. no L-2861,
February 26, 1951)
o NOTE: An indorsement which purports to transfer the NI
to 2 or more indorsees severally does not operate as a
negotiation of NI (Sec 32)
o Sec 32 does not prohibit discounting, whereby the
indorsee pays the indorser les than the face amount of
the NI. The discount is given in consideration of the
period during which the purchaser has to way before he
can cash the NI with the maker or acceptor, which can
be done only at the maturity of NI
o If the indorsement of NI does not comply with Sec 32,
the transfer is a mere assignment which subjects the
holder to all defenses on the NI
EFFECT OF PARTIAL INDORSEMENT
a. It doesn't operate as an indorsement
b. It may constitute a valid assignment though b
inding between the parties
c. The person to whom the instrument is indorse
d would not be
considered an indorsee but merely an assignee
and would therefore
take the instrument subject to the defenses a
vailable between the original parties
2. Where a person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negate personal liability (Sec 44 NIL)
a. He must add words describing himself as agent
b. He must disclose his principal
c. He must be duly authorized in writing
3. Where NI is drawn or indorsed to a person as “cashier” or
other fiscal officer or corporation, it is deemed prima facie to
be payable to the bank or corporation of which he is an officer,
and may be negotiated by either indorsement of the bank or
corporation or indorsement of the officer
NOTE: The cashier or treasurer may prove that the NI were in
fact indorsed to them in their personal capacities and not to
the corporations. They can prove that they own the NI.
4. Where the name of a payee or indorsee is wrongly misspelled,
he may indorse the NI as therein described, adding, if he
thinks fit, his proper signature (Sec 43 NIL)
5. Joint indorsement – Where NI is payable to the order of 2 or
more payees or indorsees who are not partners, all must
indorse (Sec 11)
EXCEPTION:
a. Where the payee or indorsees are partners AND
b. Where the payee or indorsee indorsing has authority to
indorse for the others
CLASSIFICATION OF INDORSEMENT
A. As to METHODS of negotiation
1. SPECIAL – Specifies the person to whom or whose order,
the NI is to be payable, and the indorsement of such indorsee
is necessary to the further negotiation of the NI (Sec 34 NIL)
o If the NI is originally payable to order and it is
negotiated by the payee by special indorsement, the
indorsement of the indorsee is necessary to further
negotiation of the instrument (Sec 34)
o If the NI is originally payable to bearer, it may be
negotiated by mere delivery even if the original bearer
indorsed it specially (Sec 40 NIL)
o Example: Pay to X, signed M.
Page | 13

2. BLANK – Specifies no person to whom or to whose order the
NI is to be payable and may be negotiated by delivery (Sec
34)
o Example: An NI payable to the order of X, is indorsed
by the latter by merely affixing his signature without
specifying an indorsee
RULES ON BLANK INDORSEMENT
a. If NI is originally payable to order and negotiated by
special indorsement, it can be further negotiated by
indorsement completed by delivery
b. If originally payable to order and negotiated by blank
indorsement, it can be negotiated further by mere
delivery
c. If originally payable to bearer, it can be further
negotiated by mere delivery even if the original bearer
negotiated it by special indorsement
EFFECTS OF BLANK INDORSEMENT: (a) To make the NI
payable to bearer and (b) may be converted to special
indorsement by writing over the signature of indorser in blank
any contract consistent with character of indorsement (Sec 35
NIL)
B. As to presence or absence of LIMITATIONS
1. ABSOLUTE (UNCONDITIONAL) – One by which the
indorser binds himself to pay:
a. Upon no other condition than failure of prior parties to
do so; and
b. Upon due notice to him of such failure
2. CONDITIONAL – Right of the indorsee is made to depend
on the happening of a contingent event. Party required to pay
may disregard the conditions (Sec 39 NIL)
o Where an additional condition is annexed to the
indorser’s liability. Such condition must be express.
o If an indorsement is conditional, the party required to
pay the NI 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 the I so indorsed is negotiated will hold the same,
or the proceeds thereof, subject to the rights of the
person indorsing conditionally
o Example: Pay to X if he tops the 2013 bar exams
o NOTE: Conditional indorsement does NOT render an
instrument non-negotiable but if the condition is on the
face of the NI, the condition renders it non-negotiable
as the promise or order therein would not be
unconditional.
C. As to the kind of TITLE transferred
1. RESTRICTIVE – An indorsement is restrictive when it either
(Sec 36 NIL):
a. Prohibits further negotiation of the NI – E.g., Pay to
Y only, signed M
b. Constitutes the indorsee as the agent of the indorser
(e.g., indorsement for deposit) – Pay to X for
collection, signed M
c. Vests the title in the indorsee in trust for so to the
use of some other persons – Pay to Y in trust for A,
signed M
o Mere absence of words implying power to negotiate
does not make an indorsement restrictive (Sec 36
NIL)
o The omission of words of negotiability in the
indorsement does NOT affect the negotiability but
such omission in the body will render the NI non-
negotiable
o A restrictive indorsement destroys the negotiability of
the instrument and bars any further negotiation to
HDC
EFFECT OF RESTRICTIVE INDORSEMENT (PAT)
It confers upon the indorsee the right to:
a. Receive PAYMENT of the NI
b. Bring any ACTION thereon that the indorser could bring
c. TRANSFER his rights as such indorsee, where the from
of the indorsement authorizes him to do so (Sec 37 NIL)
NOTE: An instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or discharged
by payment or otherwise (Sec 47 NIL)
Page | 14
 o This refers only to the first kind (Sec 36.a NIL) because
this is the only type of restrictive indorsement that
completely destroys the negotiability of the instrument
D. As to scope of LIABILITY of indorser
1. QUALIFIED – Constitutes the indorser a mere assignor of
the title to the NI (Sec 38)
o By adding the words “without recourse” above his
signature, the indorser expressly rids himself of his
liability as indorser, i.e. the holder would have no
recourse to him should the maker fail to pay on the due
date
o A qualified indorser merely assumes the contract of
sale/assignment of NI and agrees merely to transfer
title
o It is made by adding to the indorser’s signature words
like “sans recourse,” “without recourse,” indorser not
holder,” “at the indorser’s own risk” or other terms of
similar import
o Oral testimony is not admissible to establish that an
unqualified NI is in fact qualified (Velasco v. Tan Liuan,
G.R. no 17239, March 17, 1922)
WITHOUT RECOURSE – Without resort to a person secondarily
liable after the default of the person primarily liable
NOTE: Qualified indorsement is usually resorted to if the
indorser wants to transfer his rights over the instrument but
does not want to assume responsibilities under the secondary
contract
EFFECTS OF QUALIFIED INDORSEMENT
a. A qualified indorser has limited liability, i.e. he is liable
for breach of warranty if the NI is dishonored by non-
acceptance or non-payment due to:
1) Forgery – Warranty as to genuineness
2) Lack of good title on the part of the indorser –
warranty as to good title
3) Lack of capacity to indorse on the part of the
prior parties – warranty as to capacity to
contract; or
4) Fact that at the time of the indorsement, the NI
was valueless or not value, and he knew of the
fact – warranty as to ignorance of certain facts
b. A qualified indorsement does not impair the negotiable
character of the instrument (Sec 38, last sentence)
c. A qualified indorser is liable to all the parties who derive
their title through his indorsement
2. GENERAL(UNQUALIFIED) – The indorser indorses the
instrument without any qualified and subject liabilities under
Sec 66 NIL
E. OTHER kinds of indorsement
1. JOINT – Indorsement payable to the order of 2 or more
persons (Sec 41 NIL)
GENERAL RULE: Where the instrument is payable to 2 or
more payees, ALL must indorse in order that the NI may be
validly negotiated
REASON: To make it an indorsement of the entire
instrument because if only one indorses, he passes only his
part of the instrument
EXCEPTION:
a. Where the payees or indorsees indorsing has the
authority to indorse for the others; and
b. Where the payees or indorsees are partners (Sec 41
NIL)
2. IRREGULAR – A person who, not otherwise a party to an
instrument, places thereon his signature in blank
before delivery (Sec 64 NIL)
LIABILITY OF IRREGULAR INDORSER (Sec 64)
a. If the NI is payable to the order of a third person
(payee), he is liable to the payee and to all subsequent
parties
b. If the NI 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
Page | 15
PRESUMPTION AS TO TIME OF INDORSEMENT
GENERAL RULE: Negotiation is deemed prima facie to have been
effected before the instrument is overdue
EXCEPTION: IF the indorsement bears a date after the maturity of
the instrument (Sec 45 NIL)
NOTE: IF the indorsement bears a date, the presumption would be
that the date written is the true date (Sec 11 NIL)
PRESUMPTION AS TO PLACE OF INDORSEMENT (Sec 46 NIL)
Except where the contrary appears, every indorsement is presumed
to have been made at the place where the NI is date.
RENEGOTIATION OF PRIOR PARTIES
 Sec 50 refers to a re-acquirer or holder who negotiates the NI
and then subsequently reacquires it.
 Where an NI is negotiated back to a prior party, such party
may reissue and further negotiate the same. But he is not
entitled to enforce payment thereof against any intervening
party to whom he was personally liable (Sec 50 NIL)
 REASON: To avoid circuitousness of suits
LIMITATIONS:
A prior party may cannot renegotiate the NI:
1. Where it is payable to order of a third person, and has been
paid by the drawer
2. Where it was made or accepted for accommodation and has
been paid by the party accommodated
STRIKING OUT (CANCELLATION) INDORSEMENT
(Sec 48 NIL)
The holder may at any time strike out or cancel the indorsement
which is not necessary to his title.
EFFECT: The indorser whose indorsement is stricken out, and all the
indorsers subsequent to him are relieved from liability on the NI
(Sec 48).
NOTE: If the NI is negotiated by special indorsement, the holder has
no right to strike out such indorsement nor can he convert the
special indorsement into a blank indorsement.
WHEN HOLDER MAY CANCEL INDORSEMENT
1. An indorsement payable to bearer on its face – By virtue of
Sec 48, the holder may strike out all intervening indorsements
or any of them since they are not necessary to his title
2. Instrument originally payable to order – Under Sec 9(e), NI
which is upon its face payable order becomes payable to
bearer when the only or last indorsement is in blank. Hence,
when a blank indorsement is followed by a special
indorsement and the holder cancels all indorsements
subsequent to the blank indorsement, the NI would become
payable to bearer s the last indorsement would be in blank.
The special indorsements are not necessary to the holder’s
title as he could have acquired the title to NI by mere delivery
NOTE: The indorser may NOT strike out the payee’s
indorsement since the NI is payable to order, it cannot be
validly negotiated without his indorsement
CONTINUATION OF NEGOTIABLE CHARACTER
(Sec 47 NIL)
GENERAL RULE: An instrument which is negotiable shall continue to
be such until it has been:
1. RESTRICTIVELY INDORSED – This refers only to the first kind
(Sec 36.a NIL) because this is the only type of restrictive
indorsement that completely destroys the negotiability of the
instrument
2. DISCHARGED BY PAYMENT OR OTHERWISE (Sec 47 NIL) –
This must be understood to be payment made at or after
maturity because if the payment was made before maturity,
the person so paying can still renegotiate or reissue the
instrument. Hence, payment before maturity does not destroy
negotiability
TRANSFER WITHOUT INDORSEMENT (Sec 49 NIL)
 Contemplates a case where there is delivery and payment of
value but NO indorsement (unendorsed)
 Applicable only to NI payable to order
 The holder acquires only the rights of his predecessor and the
right to have the NI indorsed by the transferor
 EFFECT: The instrument is in effect merely assigned to the
transferee. It is only at the time of indorsement that the
transferee acquires the rights of a holder
Page | 16
  For the purpose of determining whether the transferee is HDC,
the negotiation takes effect as of the time when the
indorsement is made. Hence, before the indorsement the
transferee is not a holder (Sec 49)
HOLDERS
HOLDER – A payee or indorsee of a bill or note who is in possession
of it or the bearer thereof entitled to receive the sum for which it
calls (Sec 191 NIL)
CLASSIFICATION OF HOLDERS
1. HOLDER IN DUE COURSE – One who has taken the
instrument under the conditions of Sec 52 NIL and holds the
NI free from personal defenses available to prior parties
2. SIMPLE HOLDER (HOLDER NOT IN DUE COURSE) –
One who became a holder without any, some or all of the
requisites under Sec 52. He holds the NI subject to the same
defenses as if it were non-negotiable. He may enforce the NI
and receive payment therefor
3. HOLDER FOR VALUE – Where value has at anytime been
given for the NI, the holder is deemed a holder for value in
respect to all parties who become such prior to that time (Sec
26 NIL)
o The mere fact that the present holder paid nothing for a
note or is not a holder for value does not preclude
recovery, but only lets in all defenses, if any, that might
be urged against the original payees
o Where the holder has a lien on the NI, arising from
either contract or by implication of law, he is deemed a
holder for value to the extent of his lien (sec 27 NIL)
 If the amount called for by the NI is less than
the principal debt secured by such NI, the
pledgee is a holder for value for the full amount
and may recover all
 If the debt secured by the NI is less than the
sum for which it was issued, the pledgee may
recover call but he becomes merely a trustee as
to the excess. This is in line with the general rule
against splitting of cause of action under Sec 32
PRESUMPTION OF VALUE: there is a prima facie presumption
that every NI is issued for valuable consideration and may be
rebutted by contrary proof
o Absence or failure of consideration is a defense against
a holder not in due course
o CONSIDERATION – Valuable consideration (Sec 191);
any consideration sufficient to support a simple contract
(Sec 25).
BANK CREDIT AS VALUE: When the holder of a check deposits
it with his bank (not drawee bank) and the bank credits it to
his account, is the bank a holder for value? The bank becomes
a holder for value only when the deposit withdraws the
amount of the deposited instrument. If such withdrawal takes
place before maturity and before the bank receives notice of
any defense on the NI, the bank is HDC against whom such
defense would be unavailable.
How determined: First In First Out (FIFO) – First money in is
presumed to be the first money paid out
IMPORTANCE OF THE CLASSIFICATION: Each class of holders has
defenses which are available to one class and which may not be
available to the other classes.
NOTE: If there are NO defenses, the distinction between HDC and
one who is not HDC is IMMATERIAL
RIGHTS OF HOLDERS IN GENERAL (Sec 51 NIL)
1. May SUE thereon in his own name – Even if he is a holder only
for collection or as pledge to the NI
2. Payment to him in due course discharges the NI – Payment in
due course is made:
a. At or after the maturity of the NI
b. To the holder thereof
c. In good faith; and
d. Without notice that his title is defective
RIGHT TO SUE OF TRANSFEREE OF AN UNINDORSED INSTRUMENT
A transferee of an unendorsed NI is certainly not an holder under
Sec 191 NIL and cannot be considered HDC. However, the
Page | 17
transferee may sue in his own name under the principle in
assignment that the assignee steps into the shoes of the assignor.
CAN A PAYEE BE A HDC? Yes.
If the payee satisfies the requirements of Sec 52, the payee can be
HDC (Cely Yang v. CA, G.R. no 138074, August 15, 2003).
REASON: Sec 191 defines a holder as the payee or indorsee of a bill
or note who is in possession of it or the bearer thereof. Such payee
may either have acquired the note from another holder or he did not
deal strictly with the maker thereof.
CAN A DRAWEE BE HDC? No.
While a payee may be a HDC, a drawee does not, by paying a bill,
become HDC.
REASON: A holder refers to one who has taken the NI as it passes
along in the course of negotiation towards the drawee and not the
drawee who, on the acceptance and payment of the NI, thereby
strips it of all negotiability and reduces it to a mere voucher or proof
of payment (National Bank of Commerce v. Seattle National Bank,
187 Pac 342).
HOLDER IN DUE COURSE
 All the 4 conditions under Sec 52 must concur in order to
qualify a person as HDC
 The holder of a non-negotiable instrument cannot attain the
status of HDC. The fact that the instrument is non-negotiable
is a sign of warning to a prospective purchaser and places him
on guard and on inquiry
 A holder not HDC has all the rights of the latter except that
the instrument is subject to the defenses as if it were non-
negotiable (Sec 58)
 Personal defenses cannot be set up against HDC but real
defenses which attach to the NI itself, would be available
against all persons even as against HDC
REQUISITES FOR HOLDER IN DUE COURSE (Sec
52 NIL)
1. That the instrument is COMPLETE and REGULAR upon
its face
a. Complete – An instrument is incomplete when it is
wanting in any material particular proper to be inserted
in a NI without which the same will not be complete (Sec
14). BUT if the omission is not a important particular,
such omission will not deprive the holder to be HDC
REASON: The taking of an incomplete instrument puts
the purchaser on inquiry as to why it is incomplete. If
he fails to do so, he takes the NI subject to all defenses
b. Regular on its face – TO render the NI irregular under
sec 52(a) NIL, the alteration must be visible or apparent
on its face. If not apparent, the matter is governed
solely by Sec 124 (on alteration) which renders the NI
void
2. That he has become a holder of it before it was
OVERDUE and WITHOUT notice that it had been
previously dishonored if such were the case
a. 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 person
taking an overdue NI should certainly question why the
NI is still in circulation even if it is overdue
 On the date of maturity, the NI is not overdue
and a holder who acquires the NI on that date
is HDC because the principal debtor has the
whole day to pay
WHEN IS THE DATE OF MATURITY?
a. The date of maturity is the time fixed therein
b. If NI is payable on demand, the date of maturity is
determined at the time of presentment (Sec 183 NIL).
The same applies if payable on sight
c. If NI is payable on the occurrence of a specified event
which is certain to happen, the date of maturity is fixed
by the happening of the event (Sec 4.c NIL)
EFFECT OF POSTDATING OR ANTEDATING – An instrument is
not only valid but also negotiable although it is antedated or
postdated. A holder thereof can be HDC and he is not put on
inquiry for the mere fact that it is antedated or postdated. A
postdated check is payable either:
a. Fixed or determinable future time specified therein; or
Page | 18
 b.
If no time is expressed, on demand or on after the date
of the NI
NOTE: If the postdating or antedating of NI is for an illegal or
fraudulent purpose, the NI is void.
INSTALLMENT INSTRUMENTS – A purchaser after maturity of
the first installment with notice that it was unpaid takes the
paper as overdue paper. Consequently, a purchaser of an
installment note after an installment is overdue may be HDC
as to the balance if he has NO notice of the failure to pay of
the first installment.
INTEREST – Where by the terms of the NI, the principal was
to become due upon the default of the payment of interest,
one who takes the NI upon which the interest is overdue is
not HDC.
NOTE: An overdue NI may still be negotiated but the holder
cannot be HDC.
b. Without notice of dishonor – An instrument may be
dishonored by:
(1) Non-acceptance (Sec 149 NIL)
(2) Nonpayment (Sec 83)
NOTE: While dishonor by nonpayment can only take place at
the time of maturity, dishonor by non-acceptance of bill may
occur even before the date of maturity
DEMAND INSTRUMENTS (Sec 53 NIL) – Where NI payable on
demand is negotiated on an unreasonable length of time after
its issue, the holder is not deemed HDC.
o In determining what is unreasonable length of time
regard must be given to the NATURE of the instrument,
the USAGE OF TRADE OR BUSINESS with respect to
such NI and the FACTS of the particular case (Sec 193
NIL)
NOTE: Dishonored NI may still be negotiated and the holder
WITHOUT notice can be HDC
3. That he has taken it in GOOD FAITH and for VALUE
a. Good faith – Although good faith on the part of the
holder is presumed, such presumption is destroyed if
the payee or the indorsee acquired possession of the NI
under circumstances that should have put him to inquiry
as to the title of the holder who negotiated the NI. The
burden is now on the part of the holder to show that
despite the suspicious circumstances, it acquired the
check in actual good faith (De Ocampo v. Gatchalian,
G.R. no L-15126, November 30, 1961)
Good faith – refers to the indorsee or transferee not the
indorser or transferor of the NI.
Bad faith – means that the indorsee or transferee must
have knowledge of facts which render it dishonest for
him to take a particular piece of negotiable paper.
Proof of bad faith: It is not necessary to show knowledge
of exact truth. It is sufficient that such knowledge tends
to show that there was something wrong with the
transaction.
b. Value – Any consideration to support a contract (Sec 25
NIL)
CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT
TRANSFER – Every NI is deemed prima facie to have been
issued for a valuable consideration. Every person whose
signature appears thereon is presumed to have become a
party thereto for value (Sec 24 NIL)
o Consideration is not relevant to the “negotiability”” of
an NI but it is significant on the question of whether or
not one is HDC
Value includes:
a. An antecedent or pre-existing debt
b. Value previously given (Sec 25)
c. Lien arising from contract or by operation of law but the
holder is deemed a holder for value to the extent of his
lien (Sec 27 NIL)
NOTE: It is not necessary that the consideration should be
adequate (Art 1355 NCC), but love and affection do not
constitute value within the meaning of the law.
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4. That at the time of its negotiation to him, he had NO
NOTICE of any infirmity in the instrument or in the title
of the person negotiating it
NOTICE OF DEFECT – The person to whom it is negotiated
must have had actual or chargeable knowledge of the infirmity
or defect, or knowledge of such facts that his action in taking
the NI amounted to bad faith (Sec 56 NIL)
How Proven: The question of good faith or bad faith is a
question of fact which must be determined in accordance with
the particular circumstances of the case (circumstantial
evidence)
EFFECT OF PURCHASE AT A DISCOUNT: The purchase of NI
at a discount, does not itself constitute bad faith because in
most cases, a purchaser at a discount is a influenced by the
financial condition of the issuer of the NI rather than by the
possibility it was obtained subject to a defense.
EFFECT OF NOTICE BEFORE FULL PAYMENT – If the transferee
receives notice of any defect or infirmity in the NI before
paying the full amount, he will be HDC only as to the extent
of the amount paid by him (Sec 54 NIL)
o This does not apply where the holder has given for the
NI a promise which he must perform, in which case he
would be in the same position as one who has paid
money or property at the time of the transfer.
CONSTRUCTIVE NOTICE NOT SUFFICIENT – There must
actual notice of the defect or infirmity in the NI. However,
notice to an agent is chargeable to the principal.
IIS MERE NEGLIGENCE TO MAKE INQUIRIES SUFFICIENT TO
CONSTITUTE NOTICE OF INFIRMITY OR DEFECT? No.
Under Sec 54 and 56 NIL, negligence in itself is not sufficient
to constitute notice since it is not equivalent to either actual
knowledge or bad faith
o If the holder had actual knowledge of suspicious
circumstances, coupled with the means of readily
informing himself of the facts and he willfully abstained
from making inquiries, his intentional ignorance may
amount to bad faith
EFFECTS OF NOTICE OF DEFECT
a. It destroys the status of the holder as HDC
b. The holder is open to all defenses and not merely those
relating to defect of which he had notice (Sec 58)
WHEN TITLE IS DEFECTIVE (Sec 55 NIL)
a. In the ACQUISITION thereof, the title of a person
becomes defective when he obtains the NI or any
signature thereto by: (1) fraud; (2) force, duress or
fear; (3) other unlawful mean; or (40 for an illegal
consideration
b. In the NEGOTIATION thereof, the title becomes
defective when he negotiates it in (5) breach of faith;
or (6) under circumstances that amount to fraud (Sec
55 NIL)
NOTE: BUT when it is shown that the title of any person who
has negotiated the NI was defective, the burden is on the
holder to prove that he or some other person under whom he
claims acquired the title as HDC (Sec 59 NIL).
INFIRMITIES – include things that are wrong with the NI itself
as distinguished from those things that are lacking in the
contracts on the NI. Such infirmities are to be found in
situations arising from:
a. Maturity date not listed on the NI (Sec 13)
b. Lack in material particulars (Sec 14)
c. Incomplete and undelivered NI (Sec 15)
d. Complete but undelivered NI (Sec 16)
e. Signature by procuration (Sec 21)
f. Forged signature (Sec 23)
WHAT IS THE EFFECT OF ACQUIRING NOTICE OF INFIRMITY
BEFORE PAYMENT OF FULL CONSIDERATION?
The transferee will be deemed HDC only to the extent of the
amount therefor paid by him (Sec 54)
RIGHTS OF HOLDER IN DUE COURSE (Sec 51 and
57 NIL)
1. May SUE on the instrument in his own name
2. May RECEIVE payment and if payment is in due course, the
instrument is discharged
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 3. HOLDS the instrument free from any defect of title of prior
parties and free from personal defenses available to parties
among themselves
4. May ENFORCE payment of the instrument for the full amount
thereof against all parties liable thereon
EXCEPTIONS:
a. When the holder is a holder for value only to the extent
of his lien – HDC only to that extent (Sec 27 NIL)
b. When the holder acquired notice of any infirmity in the
NI or defect in the title of the person negotiating the
same BEFORE he has paid the full amount agreed to be
paid therefor – HDC only to the extent of the amount
paid (Sec 54 NIL)
c. In case of alteration as to amount – HDC may enforce
payment only according to its original tenor (Sec 124
NIL)
WHO IS DEEMED A HOLDER IN DUE COURSE (Sec 59 NIL)
Every holder of a NI is deemed prima facie HDC. However, this
presumption arises only in favor of a peson who is a holder as
defined under Sec 181 NIL, i.e. a payee or indorsee who is in
possession of the instrument or bearer thereof
 When it is shown that the title of any person who has
negotiated the NI was defective, the burden is on the holder
to prove that he or some other person under whom he claims,
acquired the title as HDC
 EXCEPTION: The holder has no burden of proving that he has
HDC in favor of a party who became bound on the NI prior to
the acquisition of such defective title
WHO IS NOT DEEMED A HOLDER IN DUE COURSE (Sec 53
NIL)
Where an NI payable on demand is negotiated for an unreasonable
length of time after issue, he holder is not deemed HDC.
WHAT IS REASONABLE TIME?
As to what constitutes reasonable time, the law provides that:
“Regard is to be had to the nature of the instrument, usage of trade
or business (if any), with respect to such instruments and the facts
of the particular case. (Sec 193 NIL)
HOLDER NOT IN DUE COURSE
One who became the holder of NI without any, some or all of the
requisites for due course holding under Sec 52 NIL
GENERAL RULE: If a holder is not HDC, he is subject to the same
defenses as if it were non-negotiable. In other words, a holder not
in due course is subject to both personal and real defenses available
to parties primarily or secondarily liable.
EXCEPTION (SHELTER RULE): If a holder derives his title through
HDC and if he is not a party to any fraud or illegality affecting the
NI, he has all the rights of such former holder (HDC) in respect of
all parties prior to the latter (Sec 58 NIL)
REASON: Without this provision, the hands of the HDC would be tied
in disposing the instrument because he would still have to look for
a buyer who had notice of the defect.
NOTE: A payee whose title is defective title is defective cannot better
his title by selling the NI to HDC and buying it back again.
 The presumption refers only to the status of the present
holder and not to any previous holder. Thus if the present
holder’s rights depend on a previous holder’s status as HDC,
he would have to prove such fact and cannot rely on the
presumption because the latter is no longer the holder.
EXCEPTION TO THE EXCEPTION: The rule under Sec 58 does not
apply if the holder was previous holder not in due course who had
subsequently repurchased the instrument either personally or
through an agent.
REASON: A holder who is not HDC cannot improve his situation by
reacquiring the NI (Fossum v. Fernandez, G.R. no L-20080, March
27, 1923).
RIGHTS OF A HOLDER NOT 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
3. He HOLDS the instrument subject to the same defenses as if
it were non-negotiable
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 NOTE: This, prior parties can avail against him any defense Real defenses His rights can be His rights can be
available among these prior parties and prevent the said defeated by real defeated by real
holder from collecting in whole or in part the amount stated in defenses defenses
the NI. Personal His rights cannot be His rights can be
4. If he derives his title through HDC and if he is not party to any defenses defeated by personal defeated by personal
fraud or illegality affecting the NI, he has ALL the rights of defenses defenses
such former holder (HDC) in respect of all parties prior to the Rights He has the right to He has the right to
latter (SHELTER RULE) enforce payment, sue enforce payment, sue
in his own name, and in his own name, and
FAILURE TO MAKE INQUIRY negotiate the NI negotiate the NI
GENERAL RULE: Failure to make inquiry after notice of the facts
merely sufficient to cause a person of ordinary prudence to make
inquiry as to an infirmity in the NI and defect in the holder’s title, is
not evidence of bad faith to bar him from recovery. LIABILITY OF PARTIES
REASON: The law does not impose a duty on the part of every holder
to make inquiry before acquiring the NI.
LIABILITY AND WARRANTY DISTINGUISHED
LIABILITY WARRANTY
EXCEPTIONS:
1. Where the holder’s title is defective or suspicious that would Liability to pay Makes the parties Impose no direct
compel a reasonable man to investigate, it cannot be stated liable to pay the obligation to pay in
that the payee acquired the NI without the knowledge of said sum certain in the absence of
defect in the holder’s title and for this reason the presumption money stated in the breach thereof. In
is that it is HDC or that it acquired the instrument in good faith NI case of breach, the
does not exist (De Ocampo v. Gatchalian, G.R. no L-15126, person who
November 30, 1961). breached the same
2. Holder to whom cashier’s check is not indorsed in due course may either be liable
and negotiated for value is not HDC (Mesina v. IAC, G.R. no or barred from
70145, November 13, 1986) asserting a
NOTE: The holder may not be considered HDC because of the NI particular defense
involved, as in the case where a person takes a crossed check Requisites to Condition on Does not require
without making further inquiries. The act of crossing a check serves enforce liability presentment and presentment and
as a warning to the holder that the check has been issued for a notice of dishonor notice of dishonor
definite purpose (Bataan Cigar and Cigarette Factory v. CA, G.R. no When action must Action cannot be May be
93048, March 3, 1994) be brought brought until
maturity of the NI
HOLDER IN DUE COURSE AND HOLDER NOT IN
DUE COURSE DISTINGUISHED CLASSITIFICATION OF PARTIES ACCORDING TO
HOLDER IN DUE HOLDER NOT IN DUE LIABILITY
COURSE COURSE 1. PRIMARY PARTY – Unconditionally liable; the primary party
Compliance All the conditions One, some or all of is bound to pay the holder at the date of maturity, whether or
with the under Sec 52 NIL are the requisites under not the holder demands payment him (Sec 192 NIL)
requisites PRESENT Sec 52 are ABSENT

Page | 22
 o He is not relieve from liability even if NI should become (notice and/or
overdue due to holder’s failure to make a demand protest)
a. Maker of a promissory note
b. Acceptor of Bill of Exchange; and PRIMARILY LIABLE
c. Certifier of Bill of Exchange 1. MAKER (Sec 60 NIL)– applies only to promissory notes
a. Engages to pay according to the tenor of the NI
2. SECONDARY PARTY – Conditionally liable; the secondary
b. Admits the existence of the payee and his then
party is not bound to pay unless the following conditions have
capacity to indorse
been fulfilled: (a) due presentment or demand to the primary
o Due presentment for payment (Sec 70 NIL) and due
party for payment or acceptance; (b) its dishonor by the
notice of dishonored (Sec 89 NIL) are not necessary
party; and (c) taking of proceedings required by law after
for the purpose of charging the maker with liability. It
dishonor, i.e. notice of dishonor and in case of foreign Bills of
is necessary, however, fix the liability of the drawer or
Exchange, protest of the bill (Sec 70 NIL)
indorser
a. Drawer of a bill; and
o By executing a PN, the maker warrants that the payee
b. Indorsee of a note or bill
named in the NI is existing; therefore, he cannot
question the corporate existence of the payee
3. NOT LIABLE
o Maker also represents to the world that the payee has
a. Drawee until he accepts the NI in which case he
the capacity to indorse at the time of the making of
comes an acceptor
PN and thus represents that the payee can transfer a
good and valid title to the PN by indorsement
 Maker cannot raise the defense of minority;
PRIMARY LIABILITY AND SECONDARY LIABILITY insanity of payee or ultra-vires act of
DISTINGUISHED corporation
PRIMARY LIABLE SECONDARY LIABLE 2. ACCEPTOR (Sec 62 NIL) – drawee has no liability on the
Liability Who by the terms of the Who by the terms of the bill unless and until he accepts the same. Once he accepts, he
NI is absolutely required NI is not absolutely becomes primarily liable on the instrument because he
to pay the same (Sec 92 required to pay accepts to pay it according to the tenor of his acceptance,
NIL) subject to no condition whatsoever
Unconditionally bound to Conditionally bound to o Acceptance applies only to bills of exchange
pay pay o Object: to bind the drawee and to make him an actual
When to Absolutely required to Required to pay after and bound party to the instrument
pay pay upon maturity of NI conditions have been a. The drawee of a bill is not liable before acceptance.
fulfilled: Once he accepts, he becomes an acceptor and
1. Due presentment for become primarily bound on the NI subject to no
payment or condition whatsoever
acceptance of primary
party; Acceptor engages to pay according to the tenor of his
2. Dishonor by such acceptance:
party o The acceptor engages to pay according to the tenor of
3. Taking of the his acceptance, which is not the same as tenor of the
proceedings required bill itself because the acceptance may be qualified (Sec
by law after dishonor 139 NIL)

Page | 23
 o Like the maker of PN, neither presentment for payment
nor notice of dishonor is necessary to charge him with
liability, except were he is an acceptor
REQUISITES FOR VALID ACCEPTANCE (SEC 132)
a. It must be in writing
b. It must be signed by the drawee
c. It must not change the implied promise of the
acceptor to pay only in money
NOTE: There can be no valid oral or implied acceptance except
under Sec 137 (constructive acceptance)
o Acceptance is made by writing the word “accepted” or
by the drawee’s signature alone
STATUS OF DRAWEE PRIOR TO ACCEPTANCE OR
PAYMENT – The drawee is not liable on the bill of exchange
or check until he accepts it. Even HDC cannot sue drawer prior
to his acceptance
 REASON: Mere issuance of the bill does not render
the drawee liable because it does not operate as an
assignment of the funds in the hands of the drawee
 When the bill is accepted, the acceptor becomes
primarily liable under Sec 62
 Bank is not liable until it accepts or certifies the
check. Prior to certification, the drawer may issue a
stop payment order
NOTE: If the drawee bank refuses to accept the bill without
justifiable reason/s, the drawee may be liable to the drawer
for breach of contract or damages based on
CONSTRUCTIVE ACCEPTANCE – The drawee has 24 hrs
after presentment to determine whether to accept the bill or
not.
o 24 hr-period is counted from time of delivery
 If check is returned unaccepted within 24 hrs =
not dishonored since drawee still has the
remainder of the period to accept or dishonor
 If check is returned and fails to accept within the
remainder of the 24 hrs = dishonored
 If check is returned with statement of refusal =
dishonored
 If drawee destroys the check instead of
returning or accepting = deemed accepted (Sec
137) unless the destruction is accidental
 If the bill is delivered to the drawee who
destroys the same
 If the drawee does not return the bill, accepted
or non-accepted within 24 hrs (24-hr rule) or
such time allowed by holder
o Sec 137 NIL uses the word “refuses” which clearly
implies a demand for the return of the bill.
o Mere failure to return on time is not acceptance; Sec
150 provides if no acceptance is given within the
prescribed time, the bill is deemed dishonored
ACCEPTANCE ON A SEPARATE INSTRUMENT – An
acceptance is valid even if it is not written on the same
instrument, e.g. letter or telegram.
o Acceptance may be on an existing bill or a future bill:
(1) Extrinsic acceptance – acceptance on an existing
bill; acceptance may be conditional
(2) Virtual acceptance – acceptance on an future bill;
acceptance must be unconditional
o To be valid, such acceptance must identify the bill to
which the acceptance and must be clear and
unequivocal
o Sec 134 requires that the acceptance be shown and
purchaser take the take the bill for value on the faith of
such acceptance
 EFFECT: Subsequent holders acquire the rights
of the relying party from whom they take the
NI, applying Sec 58 and 49
KINDS OF ACCEPTANCE
(1) General acceptance – Sec 140 provides that an
acceptance to pay at a particular place is a general
acceptance UNLESS it expressly states that the bill is to
be paid there only and not elsewhere
(2) Conditional acceptance – If any of the following are
present:
Page | 24
 (a) Conditional i.e., which makes payment by the National City Bank of New York, G.R. no 43596, October 3,1
acceptor dependent on the fulfillment of a condition 1956)
(b) Partial i.e., acceptance only to the part of the anount
(c) Local i.e., acceptance to pay ONLY at a particular SECONDARILY LIABLE
place
(d) Qualified as to time DRAWER, GENERAL INDORSER AND IRREGULAR INDORSER
(e) Acceptance of some one or more of the drawees but
DISTINGUISHED
not all
DRAWER (Sec 61) GENERAL IRREGULAR
INDORSER (Sec 66) INDORSER (Sec 64)
TRADE ACCEPTANCE – Draft or bill of exchange with a definite
Admits the Warrants to all A person not, not
maturity, drawn by seller or buyer for the purchase of goods,
existence of the subsequent HDC: otherwise a party to
bearing across its face the acceptance of the buyer
payee and his a. That the an NI, places his
o Generally limited to domestic transactions
capacity to indorse instrument is signature thereon
GENUINE and in in blank before
BANKER’S ACCEPTANCE – Negotiable time draft or bill of
all respect what delivery
exchange drawn on and accepted by a commercial bank
it purports to be
o Generally used for international trade e.g., financial,
b. He has GOOD If the NI is payable
import-export transactions
TITLE to it to the order of a 3rd
o Used when buyer and seller are not known to each
c. ALL prior parties person, he is liable
other; acceptance substitutes the bank’s credit for the
had capacity to to the payee and
unknown firm
contract subsequent parties
o Effect: Accepting bank is unconditionally and irrevocably
d. The instrument
liable to pay holder at maturity. Drawer and indorsers
is, at the time of
are subsidiarily liable
indorsement,
VALID and
WARRANTIES OF THE ACCEPTOR (Sec 62 NIL) subsisting
a. Admits the existence of the drawer, the genuineness of
Engages that the Engages that the NI If the NI payable to
his signature, and his capacity and authority to draw the
instrument will be will be accepted or the order of maker
NI and;
accepted or paid by paid, or both, as in or drawer or to
b. Admits the existence of the payee and his then capacity
the party primarily the case may be, bearer, he is liable
to indorse
liable; and according to its to all parties
 The acceptor does NOT admit the genuineness
tenor; and subsequent to the
of the indorser’s signature because it is only the
maker or drawer
signature of the drawer that he warrants by
Engages that if the If the NI is If he signs for
virtue of the business relationship between the
instrument is dishonored and accommodation of
bank and the drawer.
dishonored and necessary the payee, he is
proper proceedings proceedings on liable to all parties
NOTE: The warranty established by Sec 62 is in favor of
are brought, he will dishonor be duly subsequent to the
holders of the NI after acceptance and when the drawee bank
pay to the party taken, he will pay payee
cashes or pays the check, the cycle of negotiation is
entitled to be paid to the party entitled
terminated. It is illogical thereafter to speak of subsequent
to be paid
holders who can invoke the warranty under Sec 62 (PNB v.

Page | 25
 2. GENERAL INDORSER (Sec 66) – Gen indorser makes 2
1. DRAWER (Sec 61) – The liability of drawer is conditional.
The drawer does not promise to pay the bill absolutely. He
makes no warranty but he engages to pay after the following
conditions are complied with:
a. The bill is PRESENTED for acceptance (Sec 143 NIL) or
for payment (Sec 70) as the case may be to the drawee
b. The bill is DISHONORED by non-acceptance or
nonpayment, as the case may be; and
c. The necessary PROCEEDINGS on dishonor are duly
taken:
(1) Notice of dishonor was given to the drawer
(2) In case of foreign bills, protest is made
o The drawer is secondarily liable to (1) holder; or (2)
any subsequent indorser who is compelled to pay (or
known as INTERVENING INDORSERS)
o Sec 61 allows the drawer to negative or limit his
liability by express stipulation
NOTE: There is a contractual relation between the drawer and
the drawee
o A drawer may not unilaterally discharge himself from
liability on the checks issued by him as security and not
for value and negotiated to HDC by the mere expediency
of withdrawing his funds from the drawee (State
Investment House Inc v. CA, G.R. no 101163, January
11, 1993)
o When the holder deposits his check with the collecting
bank, the nature of relationship created is one of
agency, i.e. the bank is to collect from the drawee of the
check the corresponding proceeds. Thus, the privity of
contract is between the holder-depositor and the
collecting bank. There is no privity of contract between
the drawer and the collecting bank
DRAWER AND MAKER DISTINGUISHED
DRAWER MAKER
Undertaking Issues the bill of Makes a promissory
exchange note
Liability Secondarily liable Primarily liable
Limitation of Can negative or limit Cannot limit his
liability his liability liability
contracts: contract of sale of NI and special contract of
indorsement
o Liable as assignor of credit AND also on his indorsement
o Under Sec 66 warranties of Gen indorser run to “all
subsequent HDCs” = indorse should not have
knowledge of breach of warranty at the time of
indorsement
o If NI payable to bearer is specially indorsed = indorser
becomes liable under Sec 66
 EXCEPT if holder chooses to strike out the
indorsement as not necessary to title
o When maker issues PN payable to his own order, it is
not complete until he indorses it = not the same as
indorsement to make him liable under Sec 66
 Such indorsement is merely a step in the
issuance of NI so that 1st transferee may
become a holder (effect 1st transferee becomes
payee)
 Liability of maker is still as MAKER
o When banks require holders of a check to sign at the
back = not same as indorsement but mere
acknowledgment of receipt of cash paid by drawee bank
o Bank stamps “all prior and/or lack of indorsement
guaranteed” – liable against forgery not because of Sec
66 but because fo express warranty
CONDITIONS PREDECENT TO INDORSER’S LIABILITY
a. Due presentment for payment or acceptance must
be made
b. If dishonored, the proceedings on dishonor be duly
taken
NOTE: Liability of an unqualified indorser is similar to that of
drawer
WARRANTIES:
a. NI is GENUINE and in all respects what it purports
to be
b. He has GOOD TITLE to it
c. ALL PRIOR parties had capacity to contract; and
Page | 26
 d. He has NO KNOWLEDGE of any fact that would
impair the validity of NI or render it valueless
e. NI at the time of the indorsement is VALID and
subsisting
 Unqualified indorser – guarantees that NI is
valid and subsisting whether or not he has no
knowledge of the fact
 Qualified indorser – warrants merely that he has
no knowledge of any fact that would invalidate
the NI
3. IRREGULAR INDORSER (Sec 64) – Although the law
does not sate that all irregular indorsers are accommodation
parties, they are usually accommodation parties.
TO BE CONSIDERED AN IRREGULAR INDORSER
a. A person must NOT be party to the NI
b. He must have signed the NI in BLANK
c. He must have signed BEFORE delivery
NOTE: The party is called an “irregular” or an “anomalous”
indorser because he indorses in an unusual, singular, or
peculiar manner. His name usually appears where we would
naturally expect another name
LIABLITY OF IRREGULAR INDORSER – An irregular indorser is
liable as a general indorser because he indorses without
qualification
o Sec 64 provides only for the parties to whom an
irregular indorser is liable
4. RESTRICTIVE INDORSER – Liability of restrictive
indorser depends on the kind of restrictive indorsement is
made
o If indorsement prohibits further negotiation = NI ceases
to be negotiable but restrictive indorser is liable to his
immediate indorsee as Gen indorser unless otherwise
indicated
o If by restrictive indorsement, indorsee is made an agent
of indorser = any subsequent indorsee who acquires
title from agent acquires only such title
o Restrictive indorsement for the benefit of 3rd party =
liable as Gen indorser unless otherwise indicated
5. AGENT OR BROKER (Sec 69) – When a broker or agent
negotiates an instrument without indorsement, he incurs all
liabilities under Sec 65 (general indorser) unless he discloses
the name of his principal and the fact that he is acting only as
agent (Sec 69)
o The principal whose name is undisclosed on the NI
cannot be liable because no person is liable on an
instrument unless his signature appears thereon (Sec
18 NIL).
 Where the agent signs his name but does not
disclose the name of the principal or that he is
acting only as an agent = no action against the
principal and the agent is personally liable to the
holder
 Agent signed his name band indicated he is
acting in a representative capacity but did not
disclose principal’s name = parol evidence
cannot be used to evade agent’s personal
liability
 Agent signed his name without indicating that
he acted as agent but disclosed the name of
principal = agent is presumptively liable but
parol evidence is admissible to show that he is
an agent of a third person
 Where agent disclosed on the NI that he is
acting in a representative capacity and the
name of his principal = parol evidence is
admissible to exonerate the agent from
personal liability
o Where the agent discloses the name of the principal and
expressly indicates that an agency exists between them
= principal is bound and agent is not personally liable
UNLESS he had not authority from the principal
o If agent signs by procuration, it serves as a notice that
the agent’s authority is limited
o If agent in signing by procuration exceeded his
authority = principal is not liable even to HDC
WHEN PERSON SIGNING THE INSTRUMENT NOT DEEMED AS
AN INDORSER
Page | 27
 a. The person who signed the NI has clearly indicated by Warranties 1. NI is genuine and in SAME
appropriate words his intention to be bound in some all respects what it
OTHER capacity (Sec 63 NIL) purports to be
b. A person signs for the purpose of indetifying a person 2. He has good title to
only and not for the purpose of incurring any liability it
(American Bank v. Macondray & Co, G.R. no 1808, 3. All prior parties had
August 23, 1905) capacity to contract
c. A person only guarantees prior indorsements (PNB v. 4. He had no
CA, G.R. no L-26001, October 29, 1968) knowledge of any
fact that would
LIMITED LIABILITY impair the validity
1. QUALIFIED INDORSER (Sec 65 NIL) – A qualified indorser is of NI or render it
not secondarily liable. His qualified indorsement transfers title valueless
without rendering him secondarily liable. However, he is liable To whom Liable to all parties who Warranties extend to
for his warranties to all subsequent holders: warranties derive their title from immediate transferee
a. That the instrument is genuine and in all respects what extend his indorsement only
it purports to be
b. That he has good title to it GENERAL INDORSER AND QUALIFIED INDORSER
c. That all prior parties had capacity to contract DISTINGUISHED
d. That he has no knowledge of any fact that would impair GENERAL INDORSER QUALIFIED
the validity of the NI or render it valueless INDORSER/NEGOTIATING
BY DELIVERY
NOTE: The difference with a general indorser is that a general Nature of There is secondary No secondary liability;
indorser warrants that the NI is valid and subsisting at the liability liability and liable only for breach of
time of his indorsement while a qualified indorser only warranties warranty
warrants that he has no knowledge of any fact which would Warranty as Warrants that the NI Warrants that he has no
impair the validity of the NI to ignorance is at the time of his knowledge of any fact
EFFECT: If the validity of the NI was already impaired at the of certain indorsement valid which would impair the
time of negotiation, the qualified indorser is not liable if he facts and subsisting validity of the NI or
had no knowledge of such fact. regardless whether render it valueless
he is ignorant of
2. PERSON NEGOTIATING BY DELIVERY – A person negotiating such fact
a NI by delivery is subject to the same warranties as a
To whom To subsequent HDC, Person negotiating by
qualified indorser under Sec 65. However, the warranty
warranties subsequent parties mere delivery: To
extends to the immediate transferee ONLY.
extend deriving their title immediate transferee
from HDC and his only
QUALIFIED INDORSER AND PERSON NEGOTIATING BY immediate transfree Qualified indorser: To all
DELIVERY DISTINGUISHED parties who derive their
QUALIFIED INDORSER PERSON NEGOTIATING title through his
BY DELIVERY indorsement

Page | 28
LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY
(Sec 67) – A person who incurs his indorsement on NI negotiable by
delivery, he incurs all the liabilities of an indorser
 This applies to bearer NI only
 Example: M issued a note to X payable to bearer. X may
negotiate the NI by mere delivery. Suppose X indorses the
note to A, Pay to A without recourse (qualified indorsement).A
may negotiate the note by delivery. A can hold X liable for
breach of warranty of a qualified indorser (Sec 65). But if the
indorsement is general, A may hold X liable for breach of
warranty of a general indorser
ORDER OF LIABILITY (Sec 68 NIL)
There is no order of liability among the indorsers as against the
holder. He is free to choose to recover from any indorser in case of
dishonor of the NI.
 With respect to one another, indorsers are liable prima facie
in the order in which they appear unless the contrary is proven
SIGNATURE BY TRADE NAME – Under Sec 18 NIL, a person
whose signature does not appear on the instrument is not liable
thereon unless expressly provided. But a person who signs in a trade
or assumed name will be liable as if he signed his own name
 This is not an exception to the rule which forbids action on a
NI against one whose name does not appear thereon but it is
an instance in which the defendant’s business name serves
the same purpose that would be served by the use of his given
name
ACCOMMODATION
ACCOMMODATION – A special arrangement which a person
called the accommodation party, lends his name and credit to
another called the accommodated party, without any consideration
ACCOMMODATION PARTY – An accommodation party is one
who has signed the NI as maker, drawer, acceptor or indorser,
without receiving value therefor, for the purpose of lending his name
to some other person. Such person is liable on the NI to the holder
for value, despite the latter’s knowledge of him as an
accommodation party (Sec 29)
 An accommodation party in lending his name to the
accommodated party, is in effect a surety for the latter
 Since the relationship between the accommodated and
accommodation party is one of principal and surety, should
the accommodation party pay to the holder, he has a right
to claim from the accommodated party
 LIABILITY: The accommodation party’s liability is primary or
secondary depending on whether he signed as maker,
drawer, acceptor or indorser
o If accommodation party signed as maker = primarily
liable
 Effect: There is absence of consideration and
holder cannot recover from accommodation
party
 If accommodation party signed as co-maker =
there is consideration although accommodation
party received no part of it but holder can
recover from him
o If accommodation party signed as drawer = secondarily
liable
o If accommodation party signed as acceptor = primarily
liable
o If accommodation signed as indorser = secondarily
liable
 An accommodation party, whether irregular or
otherwise, is liable as general indorser under
Sec 66 unless he indicates otherwise
o The liability of an accommodation party under Sec 29 is
limited only to HDC because in the hands of a non-HDC, a
NI is subject to the same defenses as if it were non-
negotiable
o Even if the holder knows the party to be an accommodation
party, it does not prevent him from becoming HDC and
recovering from accommodation party
o A corporation, unless expressly authorized by its charter,
has no authority to sign as accommodation party and cannot
be liable to holder for value
REQUISITES OF AN ACCOMODATION PARTY (Sec 29 NIL)
1. He must be a PARTY to the instrument, signing as a maker,
drawer, acceptor or indorser
2. He must NOT receive value therefor; and
Page | 29
 3. He must for the purpose of LENDING his name or credit When the accommodation party makes payment to the holder of the
notes, they have the right to sue the accommodated party for
NOTE: “Without receiving value therefor” means without receiving reimbursement since the relation between them is in effect of a
value by virtue of the NI (Clark v. Sellner, G.R. no 16477, November principal and surety, the accommodation party being the surety.
22, 1921)
LIABILITY AMONG PARTIES IN ACCOMMODATION
RELATION BETWEEN ACCOMMODATION PARTY AND A solidary accommodation party may seek reimbursement from the
ACCOMMODATED PARTY (PRINCIPAL AND SURETY) accommodated party or other accommodation parties, subject to
When the accommodation party makes payment to the holder of the the following rules:
note, it has the right to sue the accommodated party for 1. A solidary accommodation party such as an accommodation
reimbursement since the relation between them is in effect that of maker may demand from the principal debtor reimbursement
principal and surety, the accommodation party being the surety for for the amount that he paid to the payee
the accommodated party. However, the accommodated party 2. A solidary accommodation party who pays on the said PN may
cannot recover from the accommodation party. As between them, directly demand reimbursement from his co-accommodation
absence of consideration is a defense. maker without first directing his action against the principal
debtor provided that:
LIABILITY OF AN ACCOMMODATION PARTY a. He made the payment by virtue of a judicial demand; or
o The liability of an accommodation party is DIRECT and b. A principal debtor is insolvent
IMMEDIATE. It is a settled rule that a surety is bound equally
and absolutely with the principal and is deemed an SPECIFIC RIGHTS OF ACCOMMODATION PARTY
ORIGINAL PROMISOR and debtor from the beginning 1. Right to REVOKE accommodation
(Romeo Garcia v. Dionisio Llamas, G.R> no 154127, 2. Right to REIMBURSEMENT from an accommodated party after
December 8, 2003) making the payment (Agro Conglomerates Inc v. CA, G.R. no
o The accommodation party is liable on the NI to a holder for L-17845, April 27, 1967)
value despite that such holder, at the time of the taking of
the NI, knew him only to be an accommodation party. ACCOMODATION PARTY DISTINGUISHED
Hence, as regards an accommodation party, the 4th ACCOMMODATION REGULAR PARTY
condition, i.e. lack of notice of infirmity in the instrument or PARTY
defect in the title of the person negotiating it, has NO Purpose for Signs NI to lend his Purpose for signing is
application (Stelco Marketing Corp v. CA, G.R. no 96160, signing name or credit to not the same as
June 17, 1992) some other person accommodation party
(Sec 29)
NOTE: The corporation is not liable if it acts as an accommodation Value Signs NI without Signs NI for value
party. This is because the issue or indorsement of NI by a received receiving value
corporation without consideration and for the accommodation of therefor
another is ultra vires. Hence, one who has taken the NI with Availability May always show by Cannot disclaim or limit
knowledge of the accommodation nature thereof cannot recover of parole parole evidence that his personal liability as
against a corporation where it is only an accommodation party evidence he is only appearing on the NI by
(Crisologo-Jose v. CA, G.R. no 80599, September 15, 1989). accommodation party parole evidence
(Maulini v. Serrano,
LIABILITY OF ACCOMMODATED PARTY G.R. no L-8844,
December 16m 1914)

Page | 30
 Availability Cannot avail of the Can avail of said absence of one of the essential elements of a contract or
of absence defense of absence or defense against a where the admitted contract is void for all purposes for
or failure of failure of consideration holder not in due reasons of public policy
consideration against a holder NOT course o Available against all holders, even HDC
as defense in due course 2. PERSONAL DEFENSES (EQUITABLE DEFENSES) – Those
Right to sue After paying the May not sue any wherein a true contract appears, but for some reason, such as
holder, may sue for subsequent party for fraud, the defendant is excused from the obligation to perform
reimbursement from reimbursement (PNB v. o Can be raised only against non-HDC
the accommodated Maza, G.R. no L-24224,
party November 3, 1925) KINDS OF CLAIMS OF OWNERSHIP (EQUITIES)
1. Legal title – May recover even from HDC
2. Equitable title – May not recover from HDC, only from non-
HDC
LIABILITY ON THE INSTRUMENT
REAL AND PERSONAL DEFENSE DISTINGUISHED
GENERAL RULE: A person whose signature does not appear on the
REAL DEFENSES PERSONAL DEFENSES
NI is not liable (Sec 18 NIL)
NATURE
Those that attach to the NI Those which are available only
EXCEPTIONS (PITACA-DF)
itself and are available
against against a person not HDC or a
1. Persons whose signature were forged but who are PRECLUDED
all holders, whether or not subsequent holder who stands
from setting up the defense of forgery (Sec 23 NIL)
HDC, but only by parties in privity with him
2. INCAPACITATED persons who sign through their legal
entitled to raise them
guardians
3. One who signs in a TRADE or assumed name (Sec 18 NIL) STATUS OF CONTRACT
4. One who signs through an AGENT or authorized Void Voidable
representative (Sec 137 NIL) AVAILABILITY AGAINST HDC
5. In case of CONSTRUCTIVE acceptance (Sec 137) Available against HDC Not available against HDC
6. Indorsers who sign on a separate piece of paper (ALLONGE) DEFENSES
7. Persons who negotiate by mere DELIVERY. They are liable for Key: PAID-WIFI-MUD-FEM Key: CUBIC: RAIN-WIFI-MICU
breach of warranty although they did not sign (Sec 65 NIL) 1. PRESCRIPTION 1. Non-delivery of COMPLETE
8. FORGERS of signature (Sec 23 NIL) 2. Material ALTERATION (Sec instrument (Sec 16)
124) 2. ULTRA VIRES acts of
3. ILLEGALITY – If declared corporations where the
void for any purpose corporation has the power
DEFENSES AND EQUITIES
4. DURESS – amounting to to issue negotiable paper
forgery but the issuance was not
DEFENSES –The right of the holder to enforce payment of NI may 5. WANT of authority of authorized for the
be defeated by the defenses that may be raised by the person agent particular purpose for
primarily or secondarily liable 6. NON-DELIVERY of which it was issued
Incomplete Instrument 3. Negotiation in BREACH of
KINDS OF DEFENSES (Sec 15) faith (Sec 55)
1. REAL DEFENSES (ABSOLUTE DEFENSES) – Those which 7. FORGERY (Sec 23) 4. INSERTION of wrong date
attach to the instrument itself and generally disclose an in an instrument (Sec 13)

Page | 31
 8. INSANITY – Where the 5. CONDITIONAL delivery of o A cannot raise the defense of minority of B because: (1)
insane person has a complete instrument Sec 22 provides that indorsement of NI by a minor
guardian appointed by the 6. Filling up blank beyond passes the property therein; and (2) under Sec 60, the
court REASONABLE time (Sec maker warrants the capacity of the payee to indorse
9. MINORITY – available only 14) o If A is insolvent, D cannot sue B because as to B,
to the minor 7. ABSENCE or failure of minority is a real defense
10. ULTRA VIRES act of consideration whether o Is C liable to D? Yes, under Sec 66, a general indorser
corporation partial or total (Sec 28) warrants the capacity of all prior parties
11. DISCHARGE in insolvency 8. ILLEGAL consideration (Sec o Minority is a real defense available only to the minor and
12. Fraud in FACTUM or Esse 55) is not a personal defense which by availed of by the
Contractus – Fraud in 9. Filling up blank NOT within parties other than such minor
execution authority (Sec 14) NOTE: However, the minor shall be liable under the following
13. Execution of NI between 10. WANT of authority agent exceptions:
public ENEMIES where he has apparent a. The minor actively misrepresents his age and it
14. MARRIAGE in the case of a authority appears that he is physically of such age (Estoppel)
wife 11. Fraud in INDUCEMENT – A minor may be held bound by his signature in an
12. Acquisition by FORCE, instrument where he is guilty of actual fraud
NOTE: An Instrument subject duress or fear (Sec 55) committed by specifically stating that he is of age
to real defense cannot be 13. INTOXICATION when, in fact, he is not (Mercado v. Espiritu, 37 PHIL
enforced against the person to 14. MISTAKE 215)
whom the defense is available 15. INSANITY – Where there is b. The minor kept the fruits or benefits; or
but it can be enforced against no notice of insanity in the c. The minor spent the money in good faith (Art 1427
those whom such defense is part of the one contracting NCC)
not available such as under with the insane person
Sec 23 16. Negotiation under OTHER INCAPACITATED PERSONS – Insane, demented
CIRCUMSTANCES that persons and deaf-mute or those who have no capacity to give
amount to fraud (Sec 55) consent (Art 1327 NCC), their capacity is a real defense as far
17. Acquisition of the as such person is concerned. It is available against HDC
instrument by UNLAWFUL
means (Sec 55) B. FRAUD – Under Sec 55, fraud renders a party’s title defective
which is a personal defense and cannot be used against HDC
EFFECTS OF CERTAIN DEFENSES o Where the fraud is practice on the maker or signer of NI
A. MINORITY – Under Sec 22 NIL, If a minor indorses a NI, in which he is tricked into signing a paper which he does
although he cannot be held liable on his contract of not know to be a NI, he cannot be liable to any holder,
indorsement, the title to the instrument passes to his indorsee even HDC. This is called fraud in factum or fraud in the
o Real defense execution – real defense
o EFFECT: Subsequent holder, if HDC, can recover from o Where the signer knows the paper he is signing is NI but
the maker free from the defenses of minority and other is deceived as to its value or terms, the fraud is fraud in
personal defenses inducement – personal defense and not available
EXAMPLE: A makes a note payable to B (minor). B indorses against HDC
the note to C, who in turn, indorses it to D. Upon maturity, D
sues A (maker).

Page | 32
 o Where the signer does not know the nature of the paper
he is signing but he could have known using ordinary
care – personal defense
TYPES OF FRAUD
a. FRAUD IN FACTUM (REAL DEFENSE) – The person
who signs the instrument lacks knowledge of the
character or essential terms of the instrument. But the
defense is not available if the party had reasonable
opportunity to obtain such knowledge
o An essential element is that the maker or indorser
must have exercise ordinary diligence and in no
manner contributed negligently to the imposition
b. FRAUD IN INDUCEMENT (PERSONAL DEFENSE) –
The person who signs the same as NI but was induced
by fraud
C. INCOMPLETE BUT DELIVERED NI – This is only a
PERSONAL defense (See Sec 14 NIL)
Two kinds of writings:
1) Incomplete instruments – There is an intent to make
it NI
2) Blank paper or paper so far incomplete that it does
not constitute NI, but signed – To be considered
complete, it must be shown that:
 Delivery of instrument
 Delivery must have been for the purpose of
converting it to NI (There must be intent to
deliver otherwise maker is not liable even to
HDC)
o In order that 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
o Authority extends to the insertion of the date, place of
payment, the amount, the name of the payee and the
time of payment
 The insertion of a wrong date, by one having
knowledge of the true date of issue, will avoid the
instrument as to him, but an innocent party may
enforce the same despite the improper date
 First or subsequent holder may insert his name or
the name of the person to whom he negotiates the
NI but unless authorized, he cannot fill in a
predecessor’s name enlarge the predecessor’s
liability beyond the latter’s contract
 As to time, Sec 14 provides that in order to be
enforceable against a party prior to completion, it
must be filled in within a reasonable time, which is
reckoned from the date of issuance
1. PRIMA FACIE AUTHORITY TO COMPLETE THE INSTRUMENT
REQUISITES:
a. Want of a material particular in the instrument (Sec
125)
NOTE: Material particular includes matters stated in
Sec 125 NIL
b. Possession thereof by a person
c. That such person had authority to fill up the blank
(1) Strictly in accordance with the authority given;
(2) Within a reasonable time
(3)
2. PRIMA FACIE AUTHORITY TO FILL IT UP FOR ANY AMOUNT
REQUISITES
a. Signature on a blank paper
b. Person signing in blank delivers it to another
c. Delivery was for the purpose of converting it into NI
NOTE: IF the holder of the NI, after it was filled up, is HDC, the
holder may enforce the instrument as if it has been filled up strictly
in accordance with the authority given and within reasonable time.
D. INCOMPLETE AND UNDELIVERED NI (Sec 15 NIL) –
Under Sec 15, an instrument which is not only undelivered but
also incomplete, is a REAL defense, which not even HDC can
recover
o RATIO: There is no valid contract
o The conclusive presumption of delivery under Sec 16
does not apply
 If NI is complete, Sec 16 applies
o Test: If an instrument contains all the requisites for
making it negotiable, it should be considered complete
even if there may be blanks as to non-essentials
Page | 33
 o However, as against a drawee bank, the drawer is
estopped to rely on Sec 15 if his negligent custody of
the checks after partial execution, contributed to its loss
TWO STEPS IN THE EXECUTION OF NI
a. The act of writing the instrument completely and in
accordance with Sec 1; and
b. The delivery of the instrument with the intention of
giving effect thereto
NOTE: If completed and negotiated without authority, not a
valid contract against a person who has signed before delivery
of the contract even in the hands of HDC but subsequent
indorsers are liable. This is a real defense which belongs to
the drawer (or parties prior to the delivery of NI to the payee)
against any holder
REASON: The law does not make any distinction between HDC
and a holder not in due course.
Where an INCOMPLETE and UNDELIVERED instrument is in
the hands of HDC, there is a prima facie presumption of
delivery which the maker may rebut by proof of non-delivery
E. COMPLETE BUT UNDELIVERED NI (Sec 16 NIL) –
Non-delivery of a complete instrument is only a PERSONAL
defense (See Sec 16 NIL on Delivery)
o RATIO: Delivery is a prerequisite for liability; even if the
instrument is complete but if undelivered, there is no
contract
o However, if the NI is no longer in the possession of the
person who signed it, there is a disputable presumption
of delivery
IMMEDIATE PARTIES AND REMOTE PARTIES WHO ARE NOT HDC
Delivery must be coupled with the intention of transferring title to the
NI and made either by or under the authority of the party making,
drawing, accepting or indorsing, as the case may be
It may be shown that:
a. There was no delivery
b. Delivery was not authorized
c. Delivery was conditional; or
d. Delivery was for a special purpose only
 If holder is HDC, there is a conclusive presumption
of delivery
 This applies even if NI is payable to bearer
o Every contract on a NI is incomplete and revocable until
delivery of the instrument for the purpose of giving
effect thereto
F. DURESS – Duress is merely a personal defense which cannot
be used to defeat the rights of HDC
o However, where the duress is so serious as to result to
a lack of contractual intent, it can be used as a real
defense
o E.g., the signer acted not in accordance with his own
will, but in accordance with the will of another because
of his well-founded fear of an imminent and serious
injury
G. ILLEGALITY – available against HDC.
o Under Sec 55 NIL, illegal consideration is mere
personal defense, available only against non-HDC
o Although a NI may have been issued or negotiated for
an illegal consideration, only the parties involved in the
illegality and subsequent parties who are not HDC can
be adversely affected
o HDC can still recover
o HOWEVER, NI, if declared void for any/all purposes,
the defense of illegality becomes a real defense
HDC
Delivery is CONCLUSIVE if he is in possession of a complete
NI so as to make all prior parties to him liable
It CANNOT be shown that there was no delivery, or that
delivery was not authorized, or that it was conditional, or
delivery was for a special purpose only
Page | 34
 COMPARISON OF SEC 14, 15 AND 16 NIL
INCOMPLETE BUT DELIVERED (Sec 14) INCOMPLETE AND UNDELIVERED COMPLETE BUT UNDELIVERED
(Sec 15 ) (Sec 16)
Delivered Undelivered Undelivered
NOTE: Delivery may be conditional or for a
special purpose only and not for the purpose of
transferring title
COMPLETENESS
Wanting in a material Blank paper with Mechanically incomplete Mechanically complete
particular signature
AUTHORITY OF PERSON IN POSSESSION
Prima facie authority Signature operates as a No authority to complete and/or negotiate NI May negotiate if delivered to him by or under the
to complete it by filling prima facie authority to authority of the party making, indorsing, drawing
up the blanks therein fill it up as such for any or accepting as the case may be
amount
WHEN ENFORCEABLE
If filled up strictly in accordance with authority No enforceable When delivery is made by or under authority of
given and within a reasonable time the party making, indorsing, drawing or accepting,
as the case may be
KIND OF DEFENSE
Personal Real Personal
RIGHTS OF HOLDER
1. If HDC, he can enforce the NI as None in the hands of any holder. Can enforce the NI
completed against parties prior or However, the invalidity of NI is only with NOTE: Where the NI is in the hands of
subsequent to the completion reference to parties whose signature HDC, a valid thereof by all parties prior to
2. If not HDC, he can enforce the NI as appear on the NI after delivery, the NI is him so as to make them liable to him is
completed only against parties valid conclusively presumed. Where the NI is no
subsequent to the completion but not longer in possession of a party whose
against those prior thereto signature appears thereon, a valid and
intentional delivery to him is presumed until
the contrary is proved

o The failure of the payee to encash a check for more than

H. PRESCRIPTION – refers to the extinctive prescription and
may be raised even against HDC (real defense). Under NCC, the
prescriptive period of an action based on a written contract is
10 years from accrual of cause of action
o In case of checks, the action of the depositor against his
drawee bank commences to run from the time he is
given notice of payment (PCIB v. CA, G.R. no 121413,
January 29, 2001)
10 years undoubtedly results in the impairment of the
check through his unreasonable and unexplained delay
(Myron C. Papa v. Valencia, G.R. no 105188, January
23, 1998)
NOTE: This is contrary to the ruling in NAMARCO v. F.U.N.D.
(G.R. no L-22578, January 31, 1978). In this case, the SC held
that the delivery of promissory notes payable to order, or bills
of exchange or drafts or other mercantile document shall

Page | 35
 produce the effect of payment only when realized, or when by
the fault of the creditor, the privileges are inherent in their
negotiable character are impaired. The clause in Art 1249 is
applicable ONLY to instruments executed by THIRD PERSONS
and delivered by the debtor to the creditor and does NOT
apply to instruments executed by the debtor himself and
delivered to the creditor.
I. MATERIAL ALTERATION – Any alteration which changes
the date, sum payable, number or relation of the parties, time
or place of payment, or medium of currency, or adds a place of
payment where none is specified, or which alters the effect of
the NI in any respect (PNB v. CA, G.R. no L-26001, October 29,
1968)
o Since it changes the contract of the parties, a material
alteration avoids the instrument (Effect: No longer a NI)
and discharges all parties, unless they authorized or
consented to the alteration
o EXCEPT: As to subsequent indorser because by
indorsing the NI, he warrants that the instrument is in
all respects what it purports to be and that it was valid
and subsisting at the time of his indorsement (Sec 65-
66 NIL)
o It is a PARTIAL DEFENSE because HDC can enforce it
according to its original tenor
o Material Alteration is a PERSONAL defense when used to
deny liability according to the original tenor of the
instrument, but it is a REAL defense when relied on to
deny liability according to the altered terms
o Intent is immaterial in the alteration
NOTE: The alteration mentioned under Sec 124 must be
distinguished from Sec 23. The intent to defraud distinguishes
forgery from innocent alterations and spoliation. Sec 23
applies only to forged signatures or signatures made without
the authority of the person whose signature it purports to be.
Consequently, if the forgery consists of alteration in the
amount, Sec 124 applies.
WHAT CONSTITUTES MATERIAL ALTERATION (SEC
125)
(a) Date
(b) Sum payable or interest
(c) Time or place of payment
(d) Number or relations of parties
(e) Medium or currency of payment
(f) Any other change or addition which alters the effect of
NI
A serial number is an item which is not an essential requisite
of negotiability under Sec 1 NIL and which does not affect the
rights of the parties, hence its alteration is not material (PNB
v. CA, 2256 SCRA 491).
NOTE: Spoliation, material alteration by a stranger, does not
affect the NI, provided the original meaning can be
ascertained
o An innocent alteration---generally, changes on items
other than those required to be stated under Sec 1 NIL—
and spoliation will not avoid the NI, but the holder may
enforce it only according to the original tenor.
EFFECTS OF MATERIAL ALTERATION
a. Alteration by a PARTY – Avoids the NI except as against
the party who (1) made, (2) authorized, or (3) assented
to the alteration and (4) subsequent indorsers.
However, if an altered NI is negotiated to HDC, he may
enforce the payment according to its original tenor
regardless whether the alteration was innocent or
fraudulent.
NOTE: Since distinction is made, it does not matter
whether it is favorable or unfavorable to the party
making the alteration. The intent of the law is to
preserve the integrity of the NI
b. Alteration by a STRANGER (Spoliation) – The effect is
the same as where the is made by a party in which case
HDC can recover on the original tenor of the NI (Sec 124
NIL)
J. ULTRA VIRES ACTS – A corporation may raise want of
authority as a real defense but the negotiation of the corporation
may pass title to the NI (Sec 22 NIL).
o ULTRA VIRES ACT – One committed outside the
object for which a corporation is created as defined
Page | 36
 by the law of its organization and therefore beyond
the power conferred upon it by law
o It is merely voidable which may be enforced by
performance
K. INSERTION OF WRONG DATE – If a wrong date was
inserted, HDC has the right to regard the wrongfully inserted
date as the true date
o The insertion of a wrong date does not avoid the NI in
the hands of a subsequent HDC; but as to him, the date
so inserted is to be regarded as the true date (Sec 13
NIL)
L. CONSIDERATION – Sec 28 reiterates the rule laid down by
Sec 24 that every NI is deemed prima facie to have been issued
for a valuable consideration
o The defendant has the burden of proving that there was
no consideration for the NI
o Sec 28 provides that absence or failure of consideration
is a personal defense available only against non-HDC
 As to HDC, the presumption of consideration is
conclusive
o Absence of consideration = total lack of consideration
o Failure of consideration means that something was
agreed upon as consideration for a contract but for some
reason, the consideration did not materialize
o Partial failure of consideration means that part of the
consideration did not materialize
 In such case, the maker may raise set up as a
defense pro tanto (partial defense) against the
payee or holder not in due course, i.e. he is not
liable to the extent of the price of the
undelivered portion (Sec 29 NIL)
ABSENCE OF CONSIDERATION AND FAILURE OF
CONSIDERATON DISTINGUISHED
ABSENCE OF CONSIDERATION FAILURE OF CONSIDERATION
DEFINITION
It is the total lack of any valid It is the neglect or failure of one
consideration of the parties to give, to do, or
to perform the consideration
agreed upon
TYPE OF TRANSACTION INVOLVED
Embraces transactions where Implies the giving of valuable
no consideration was intended consideration was
to pass contemplated but that it failed
to pass
EFFECT OF WANT OF CONSIDERATON (Sec 28 NIL)
o Both are valid defenses against a person not a holder in
due course. These defenses are only personal or
equitable.
o Partial failure of consideration is merely a defense pro
tanto, whether the failure is an ascertained or liquidated
amount or otherwise (Sec 28 NIL)
NOTE: The drawee, by accepting unconditionally the bill,
becomes liable to the holder and therefore cannot allege want
of consideration between him and the drawer
REASON: The holder is a stranger in relation to the transaction
between the drawer and drawee, and if the hlder has given
value to the drawer and has no knowledge of any equity
between the drawer and drawee, he in the same situation as
an indorsee in good faith
Consideration founded on (1) love and affection or (2) upon
gratitude is good consideration but does NOT constitute such
valuable consideration as is sufficient of itself to support the
obligation of the bill or note.
M. FORGERY – Counterfeiting or fraudulent alteration of any
writing which may consist of:
1. Signing of another’s name with intent to
defraud; or
2. Alteration of an NI in the name, amount,
name of payee, etc. with intent to defraud
o Under Sec 23, forgery is a real defense. A person whose
signature to an instrument was forged was never a party
and never consented to the contract which gave rise to
such instrument; as such, he cannot be held liable
thereon by anyone, not even HDC
Page | 37
TWO situations contemplated under Sec 23:
a. Want of authority of agent – Where the signature on the
instrument is affixed by one who purports to be an agent
but who does not have the authority to bind the alleged
principal
b. Where the signature is affixed by one who does not
claim to act as an agent and who has no authority to
bind the apparent signer
EFFECTS:
a. When a signature is forged or made without the
authority of the person, the signature (not the
instrument itself and the genuine signatures) is
inoperative and no one can gain title to the instrument
through it
b. NO right to retain the instrument, or to give discharge
therefore, or to enforce payment thereof against any
party thereto, can be acquired
EXCEPTION: Where the party against whom it is sought to
enforce a right is precluded from setting up the forgery or
want of authority (Sec 23 NIL)
PERSONS PRECLUDED FROM SETTING UP DEFENSE OF
FORGERY
1. Person who WARRANT or admit the genuineness of the
signature in question
Warrantors of Genuineness include:
a. Indorsers – Indorsers can be held liable because of
their breach of warranty that the instrument is
genuine and in all respect what it purports to be
(Sec 66)
b. Persons negotiating by mere delivery; and
c. Acceptors
2. Those who by their acts, silence, or negligence are
ESTOPPED from setting up the defense of forgery –
These include acts or omission that amount to
ratification, express or implied
 But a person precluded from raising the defense
of forgery may still recover damages under NCC
on torts
ACCEPTANCE AND PAYMENT UNDER MISTAKE
 If the instrument is payable to bearer, the
forgery of the indorsement is immaterial since it
is negotiable by mere delivery
NOTE: A person whose signature is forged as maker,
drawer, payee or indorsee of a check or note was never
a party or did not give consent to the contract which
gave rise to the NI. Since his signature does not appear
in the NI, he cannot be held liable thereon by anyone
(Gempesaw v. CA, G.R. no 92244, February 9, 1993)
o In case of forgery of an indorsement of an instrument
payable to order, it is not only the person whose signature
was forged who would not be liable but also the parties prior
to such person. Payment under a forged instrument is not
the drawer’s order.
o The general rule is that, in the case of forgery of the
indorsement of the payee of the check the drawee bank
cannot debit the drawer’s account and the loss shall be
borne by the drawee bank. The depository or collecting bank
is liable to the drawee in case of a forged indorsement
because it guarantees all prior indorsements. But this is
subject to the qualification that the drawee himself was not
negligent or guilty of such conduct as would estop him from
asserting the forged character of the indorsement against
the drawer
o Where an instrument is originally payable to bearer, the
effects of a forged indorsement is different. The holder of
such instrument who did not know of the forgery can still
enforce it against the drawer or maker because he can
cancel the forged indorsement as not being necessary to his
title (Sec 48). REASON: Payable to bearer instruments are
negotiated by mere delivery
o Should there be an indorsement subsequent to the forged
one, the holder, should he be unable to recover from the
maker, may have a right against the subsequent indorser
on the latter’s warranty that the instrument is genuine and
valid at the time of his indorsement
NOTE: The burden of proving the genuineness of a signature
is on the person basing his claim thereon.
Page | 38
 1. Price v. Neal Doctrine – When the drawer’s signature is
forged on a bill or check and the drawee did not detect the
forgery thereon, the drawee cannot charge the amount
thereof to the drawer’s account
o RATIO: The drawee is bound the know the signature of
the drawer by reason of its business relations with the
drawer.
o Forgery as a defense is not available to the acceptor
under Sec 62 NIL
o Sec 62 covers bills paid without prior acceptance and
bills accepted since one who pays a bill necessarily
accepts it. (No distinction between acceptance and
payment)
2. Application of Price v. Neal Doctrine
a. Stop Payment Order – A stop payment order is one
issued by the drawer of a check countermanding his first
order to the drawee bank to pay the check i.e., the drawer
is ordering the drawee bank not to pay the check issued
by him.
 The drawee bank is bound to follow the stop order
provided it is received prior to its certification or
payment of the check
 RATIO: Payment was voluntary on the part of the
drawee bank which, because of the stop order, was
under no legal obligation to pay and its negligence
is paying precludes it from reclaiming the amount
from a bona fide holder
 EXCEPTION: Drawee bank may claim from drawer if
such payment discharged a legitimate debt of the
drawer
 If stop order comes after the bank has certified or
accepted the check, the bank is under legal duty to
pay the holder and will not be liable to the drawer
for doing so
 Certification and acceptance are akin to assignment
of credit i.e., funds are segregated to be given to
the payee
EFFECT OF NEGLIGENCE OF DEPOSITOR – The drawee bank is not
liable if the proximate cause of the wrongful payment is the
negligence of the drawer
o If the negligence of the depositor should delay the discovery
of the forgeries and this negligence is should deprive the
bank to recover from the forger, the depositor will have to
bear the burden of the loss and cannot demand a re-credit
from the bank
o RATIO: It is the duty of the depositor to carefully examine
the bank’s statement, his cancelled checks and check stubs
within a reasonable time, and to report any errors without
unreasonable delay
EFFECT OF PAYMENT UNDER FORGED INDORSEMENTS – A drawee
can recover the amount paid by him on a forged indorsement since
he makes no warranty as to the genuineness of any indorsement
o When the drawee learns about the forgery, the drawee has
the duty to notify the holder whom he has paid as soon as
possible. If he fails to act promptly, he may lose his right to
recover against the holder if his negligent delay operates to
the latter’s prejudice
o If the draw fails to recover from an insolvent holder, he
cannot recover from the drawer
o Payable to bearer instruments: The drawee bank may debit
the drawer’s account in spite of the forged indorsement
because such indorsement may be disregarded as being
unnecessary to the holder’s title EXCEPT: If drawee’s
negligence prejudices the holder
o Where both drawee and collecting banks are guilty of
negligence, the degree of negligence of each will be weighed
in considering the amount of loss each should bear
(contributory negligence)
NOTE: In such cases, the doctrine of contributory negligence is
applied. Art 2179 NCC provides: When the plaintiff’s own negligence
was the immediate and proximate cause of his injury, he cannot
recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendant’s
lack of due care, the plaintiff may recover damages but the courts
shall mitigate the damages to be awarded.
EFFECT OF NEGLIGENCE OF DRAWEE IN INFORMING RECIPIENT OF
FORGERY
If it shown that the drawee on learning of the forgery did not give
prompt notice of it and that damages resulted, recovery by the
Page | 39
drawee is barred. The drawee should be allowed to shift that loss to
the drawee only upon clear showing that the drawee’s delay in
notifying him of the forgery caused him damage. No such damage
has been shown by Clearfield. (Clearfield Trust Co v. United
States, 318 US, 363, 63 S. S. Ct. 573)
EFFECT OF NEGLIGENCE OF DRAWER IN CASE OF FORGED
INDORSEMENTS ON CHECKS – The drawer, as soon as he discovers
the forged indorsement, should promptly notify the drawee bank.
Otherwise, if the drawer’s negligent delay is the proximate cause of
any subsequent loss to the bank, the drawee bank may recover from
the drawer.
24-HOUR CLEARING RULE
When the drawee bank fails to return a forged check or altered check
to the collecting bank within the 24-hour releasing period, the
collecting bank is absolved from liability (Republic Bank v. CA, G.R.
no 42725, April 22, 1991)
CUT-OFF RULE
Parties PRIOR to the forged signature are cut-off from the parties
AFTER the forgery in the sense that prior parties cannot be held
liable and raise the defense of forgery. The holder can only enforce
the NI against parties who became such after the forgery.
EXCEPTION: When the prior parties are precluded from setting up
the defense of forgery either because of their warranties,
representation or negligence (Gempesaw v. CA)
NOTE: Where a depositor is using his own personalized checks, its
failure to provide adequate security measures to prevent forgeries
of checks constitutes gross negligence and bars it from setting up
the defense of forgery (MWSS v. CA, G.R. no L-62943, July 14,
1986)
o But the mere fact that a check had been removed and
stolen in a checkbook without the knowledge and consent of
the owner cannot be considered negligence (PNB v. Quimpo,
G.R. no L-53194, March 14, 1988)
ILLUSTRATION
C forged then indorsed to D
A ----- B ----- C ----- D ----- E ----- H
1. A and B can raise the defense of forgery for being parties prior
to the forgery as against C, D, E and H unless precluded from
setting up forgery
2. H can enforce the NI only against C (the forger), D, E and M
(maker) unless precluded from setting up the defense of
forgery
NOTE: The liability of the maker is absolute if the NI involved is
payable to bearer.
TEST TO DETERMINE WHO WILL BEAR THE LOSS IN CASE OF A
FORGED CHECK
1. Was there a gross negligence on the part of the drawer? If
yes, drawer is liable (MWSS v. CA)
2. If there is none, it should be the drawee bank
REASON: The drawee bank should have known that the
signature was forged considering that the signature
appearing on the check was even compared with the
specimen signature of the authorized signatory of the
corporation (Samsung Corp and Supply Co v. FEBTC, G.R. no
134712, August 13, 2004)
3. BUT if there is a collecting bank, the collecting bank bears
the loss
REASON: The collecting bank or last indorser generally
suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that the
act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has doen
its duty to ascertain the genuineness of the indorsements
(Banco de Oro Savings and Mortgage Bank v. Equitable
Banking Corp, 157 SCRA 186)
RULES ON FORGERY
PROMISSORY NOTES
ORDER INSTRUMENT BEARER INSTRUMENT
MAKER’S SIGNATURE FORGED
Maker is not liable because he Maker is not liable
never became a party to the
NI
Page | 40
Indorsers subsequent to Indorsers may be made liable the signature of the drawer contributed thereto
forgery are liable because of to persons who obtain title (Associated Bank v. CA, 208 (Gempesaw v. CA)
their warranties through their indorsements SCRA 465)
Party who made the forgery is Party who made the forgery is Indorsers subsequent to
liable liable forgery liable (such as
PAYEE’S SIGNATURE FORGED collecting bank or last
Maker and payee not liable Maker is liable indorser)
Indorsers subsequent to Indorsement is not necessary Party who made the forgery is Party who made the forgery is
forgery are liable to title and the maker engages liable liable
to pay the holder PAYEE’S SIGNATURE FORGED
Party who made the forgery is Party who made the forgery is Drawer, drawee and payee not Drawer is liable (his
liable liable liable (Cut-off rule applies) indorsement is not necessary
INDORSER’S SIGNATURE FORGED to pass title)
Maker, payee and indorser Maker is liable. Indorsement is Drawee is liable; no privity
whose signature was forged is not necessary to title and the between drawer and payee
not liable maker engages to pay the because indorsement of payee
holder is not necessary (Ang Tek Lian
Indorsers subsequent to Indorser whose signature was v. CA, G.R. no L-2516,
forgery are liable because of forged is not liable September 25, 1950)
their warranties Payee is not liable
Party who made the forgery is Party who made the forgery is Indorsers subsequent to Collecting bank is liable
liable liable forgery are liable (such as because of warranty.
collecting bank)
But it may recover from the
person who forged the
BILLS OF EXCHANGE
indorsement on the check and
ORDER INSTRUMENT BEARER INSTRUMENT
deposited or enchased the
DRAWER’S SIGNATURE FORGED
same (Jai-Alai Corp v. BPI,
Drawer is not liable because Drawer is not liable G.R. no L-29432, August 6,
he was never party to the NI 1975)
Drawee is liable if it paid (no Drawee is liable if it paid. Party who made the forgery is Party who made the forgery is
recourse to drawer—Price v. Drawee cannot recover from liable liable
Neal doctrine) because he the collecting bank because it
INDORSER’S SIGNATURE FORGED
admitted the genuineness of is bound to know the drawer’s
Drawer, payee and indorser Drawer is liable (indorsement
the drawer’s signature signature since the latter is its
whose signature was forged not necessary to title)
depositor.
are not liable (Cut-off rule
Drawee cannot recover from
does NOT apply)
the collecting bank because The drawee may recover from
Drawee is liable if it paid Drawee is liable
there is no privity between the the drawer when the latter’s
Indorsers subsequent to Indorser whose signature was
collecting bank and the negligence is the proximate
forgery are liable (such as forged is liable because
drawer. The latter does not cause of the loss or
collecting bank) indorsement is not necessary
give any warranty regarding
to title

Page | 41
 Party who made the forgery is Party who made the forgery is
liable liable
ENFORCEMENT OF LIABILITY
PRIMARY LIABILITY
1. As to MAKER – The unconditional promise attaches the
moment the maker makes the NI
2. As to the ACCEPTOR – The acceptor’s assent to the
unconditional order attaches the moment he accepts the NI
NOTE: No further act is necessary in order for their liability to
accrue. What is necessary only is for the holder to enforce such
liability by presenting it for payment
SECONDARY LIABILITY
1. Indorser
2. Drawer
Their liability cannot be immediately enforced. There are necessary
steps which should be taken in order to charge these persons.
Unless the holder is excused from taking any of the steps, the
persons secondarily liable are discharged.
STEPS IN PROMISSORY NOTE
1. Presentment for payment to the maker unless excused
WHEN PRESENTMENT FOR PAYMENT IS EXCUSED
a. After exercise of reasonable diligence, it cannot be made
b. Drawee is a fictitious person
c. Express or implied waiver (Sec 82 NIL)
 Effect: the holder may treat the NI as a bill or note
and hold the drawer liable as maker who is a
primary party not entitled to presentment
 Waiver of notice does not mean waiver of
presentment
 To bind indorser or drawer, his waiver must be with
knowledge of the facts which release him, so if he
pays not knowing there was no demand and no
notice, he can recover
2. If dishonored by nonpayment, notice of dishonor should
be given to the persons secondarily liable unless
excused
WHEN NOTICE OF DISHONOR IS EXCUSED:
a. When notice is waived
b. When dispensed with under Sec 112 NIL
c. As to drawer under Sec 114
d. As to indorser under Sec 115
e. When due notice of dishonor by non-acceptance has
been given
f. As to HDC without notice
STEPS IN BILL OF EXCHANGE
1. Presentment for acceptance or negotiation within
reasonable time after it is acquired ONLY in the
following instances:
a. Where the bill is payable after sight
b. When it is necessary in order to fix maturity of the NI
c. Where the bill expressly stipulates that it shall be
presented for acceptance
d. Where the bill is drawn payable elsewhere than at the
residence or place of business of drawee (Sec 143 NIL)
NOTE: In all above cases, the holder must either present the
bill for acceptance or negotiate it within a reasonable time;
otherwise, the drawer and all indorsers are discharged (Sec
144)
2. If dishonored by NON-ACCEPTANCE:
a. Notice of dishonor given to drawer and indorsers unless
excused; or
b. Protest in case of foreign bills unless excused
3. If bill is accepted:
a. Presentment for payment to the acceptor unless
excused under Sec 82 NIL
b. If dishonored upon presentment for payment:
(1) Notice of dishonor to persons secondarily liable; or
(2) Protest for dishonor by nonpayment in case of
foreign bills
STEPS IN ORDER TO CHARGE PERSONS SECONDARILY
LIABLE IN OTHER CASES

Page | 42
 1. Protest for payment by drawee in order to charge an acceptor
honor *Sec 165 and 167) or a referee in case of need (Sec
167 NIL)
2. Protest for nonpayment by the acceptor for honor is also
required (Sec 167)
PRESENTMENT – The 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 the
payment of the same (Sec 70 NIL)
PRESENTMENT FOR PAYMENT
PRESENTMENT FOR PAYMENT CONSISTS OF
1. Personal DEMAND for payment at the proper place
2. Readiness to EXHIBIT the NI if required; and
3. To RECEIVE payment and surrender the NI if the debtor is
willing to pay
NOTE: Mere informal talk not accompanied by presentment is not
sufficient. Demand on phone is also not sufficient unless maker
waives exhibition, whether implied or express (Gilpin v. Savage, 201
NY 167, 94 N.E. 656)
REQUISITES
1. MADE by the holder or any person authorized to receive
payment on his behalf
2. At a REASONABLE HOUR on a business day
3. At a proper PLACE
4. To the person primarily LIABLE, or if he is absent or
inaccessible, to any person found at the place, where the
presentment is made (Sec 72 NIL)
GENERAL RULE: Presentment for payment is NOT necessary in order
to charge the person primarily liable but is necessary in order to
charge the drawer and indorser, except as otherwise provided.
WHEN PRESENTMENT IS NOT REQURIED
1. In order to charge the DRAWER – Where he has no right to
expect or require the at the drawee or acceptor will pay the
NI (Sec 79) such as in case of a check where payment has
been stopped
2. In order to charge the INDORSER – When the NI was made or
accepted for his accommodation and he has no reason to
expect that the NI will be paid if presented (Sec 80 NIL)
NOTE: Only the drawer and indorser referred to in these sections
are not discharged but all other parties secondarily liable are
relieved of their liability
WHEN DELAY IN MAKING PRESENTMENT OR GIVING NOTICE
IS EXCUSED
1. When caused by circumstances beyond the control of the
holder; and
2. Not imputable to his default, misconduct, or negligence (Sec
81 NIL)
WHEN PRESENTMENT SHOULD BE MADE
INSTRUMENT WHEN PAYABLE
PN payable on demand Within reasonable time after
issue
Bill of Exchange payable on Within reasonable time after
demand its last negotiation
Payable on a specified date On the date it falls due (Sec
71 NIL)
NOTE: In determining what is reasonable time, regard is to be had
to the nature of the NI, the usage of trade or business with respect
to such NI and the facts of the particular case (Sec 193 NIL).
HOW COMPUTED
When the NI is payable at a fixed period after date, after sight or
after the happening of a specified event—the time of payment is
determined by excluding the day from which time is to begin to run
and by including the date of payment (Sec 86)
TIME OF MATURITY
Every NI is payable at the time fixed therein without grace.
WHEN MATURITY FALLS ON A SUNDAY OR HOLIDAY
NIs falling due or becoming payables on Saturday are to be
presented for payment on the next business day .

Page | 43
EXCEPTION: The NI which is payable on demand may, at the option
of the holder, be presented for payment before 12 noon on a
Saturday when that entire day is not a holiday (Sec 85 NIL)
TIME OF PRESENTMENT OF INSTRUMENT WITH FIXED
MATURITY
WHEN PRESENTED EFFECT
Made before maturity Not effective
If made after maturity Too late unless delay is
excusable
Effect: Secondary parties will
be discharged
Presentment on Sunday or NI will have to be presented
Holiday on the next business day (Sec
194 NIL)
PROPER PLACE OF PRESENTMENT (Sec 75 NIL)
1. Where a place of payment is specified in the NI, it shall be
presented there
2. Where no place of payment is specified but the address of the
person to make payment is given in the NI, it is there
presented
3. Where no place of payment is specified and no address is
given, the NI is presented at the usual place of business or
residence of the person to make payment
4. In any other case, presentment is to be made to the person
to make payment wherever he can be found OR presented at
his last known place of business or residence
o If the NI is, by its terms, payable at a special place, and
the person primarily liable is able and willing to pay it
there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part (Sec 70
NIL)
EXHIBITION (Sec 74 NIL)
PURPOSES:
1. To enable he debtor to determine the genuineness of the NI
and the right of the holder to receive payment; and
2. To enable him to reclaim possession upon payment
WHEN EXCUSED:
1. When debtor does not demand to see the NI but refuses
payment on some other grounds; and
2. When the NI is lost or destroyed
NOTE: Even if the rule requires that the NI must be exhibited to
determine its genuineness, this is rendered unnecessary not by the
omission of the authenticity of the note implicit from the averment
that substantial payments were made thereon and by express
waiver of demand, presentment, protests and notice of protest and
nonpayment in the note (Ansaldo v. CA, G.R. no 47696, August 29,
1989)
SPECIAL CASES
1. NI payable at a bank – must be made during banking hours,
unless there are no funds to meet it at any time during the
day, presentment at any hour before the bank is closed on
that day is sufficient (Sec 75 NIL)
2. Person liable is dead – may be made to his personal
representative, if there be one and if he can be found (Sec 76
NIL)
3. Persons liable are partners – may be made to any of the
partners, even if their partnership has been dissolved (Sec 77
NIL)
4. Persons liable are joint debtors – must be made to all of them
(Sec 78 NIL)
PRESENTMENT for ACCEPTANCE
REQUISITES
1. Must be made by or on behalf of the holder
2. At a reasonable hour on a business day
3. Before the bill is overdue; and
4. To the drawee or some other person authorized to accept or
refuse to accept on his behalf
GENERAL RULE: Presentment for acceptance is NOT necessary in
order to render any party to the bill liable.
WHEN REQUIRED
1. Where the bill is payable after sight, or when it is necessary
in order to fix the maturity of the NI
2. Where the bill expressly stipulates that it shall be presented
for acceptance
Page | 44
 3. Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee 9Sec 143 NIL)
NOTE: The holder must either present it for acceptance or negotiate
it within a reasonable time; upon failure to do so, the drawer and
all indorsers are discharged.
WHEN EXCUSED (Sec 148 NIL)
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. After exercise of due diligence, presentment cannot be made
3. Although presentment has been irregular, acceptance has
been refused on some other ground
RULES ON PRESENTMENT FOR ACCEPTANCE (Sec 145 NIL)
1. Where the bill is addressed to two or more drawees who are
not partners, presentment must be made to ALL of them
unless one has the authority to accept or refuse acceptance
for all, in which case presentment may be made to him only
2. Where the drawee is dead, presentment may be made to his
personal representative
3. Where the drawee has been adjudged bankrupt or insolvent
or has made an assignment for the benefit of creditors,
presentment may be made to him or to his trustee or assignee
NOTE: A bill may be presented for acceptance on any day on which
NI may be presented for payment under Sec 72 and 75 NIL.
ACCEPTANCE – The signification by the drawee of his assent to
the order of the drawer
o It is the act by which the drawee manifests his consent to
comply with the request contained in the bill of exchange
directed to him
FORM OF ACCEPTANCE (Sec 132 NIL)
1. Must be in WRITING
2. SIGNED by the drawee
3. Must not express that the drawee will perform his promise by
any other means than the PAYMENT OF MONEY
NOTE: The holder of the bill presenting the same for acceptance
may require that it be written on the bill and if such request is
refused, may treat the bill as dishonored (Sec 133 NIL)
KINDS OF ACCEPTANCE
1. GENERAL – Assents without qualification to the order of the
drawer
2. QUALIFIED – which in express terms varies the effect of the
bill as drawn
a. CONDITIONAL – Makes payment by the acceptor
dependent on the fulfillment of a condition therein
stated
b. PARTIAL –A acceptance to pay part only of the amount
for which the bill is drawn
c. LOCAL – An acceptance to pay at a particular place
d. Qualified as to TIME
e. The acceptance of one or some of the drawees but NOT
ALL (Sec 141 NIL)
EFFECT OF QUALIFIED ACCEPTANCE
The drawer and the indorsers are DISCHARGED unless:
a. They have expressly or impliedly AUTHORIZED the
holder to take qualified acceptance; or
b. Subsequently ASSENTED thereto
Thus, a subsequent party which caused the dishonor of the
check through its qualified indorsement cannot hold prior
parties liable on the NI (Gonzales v. RCBC, G.R. no 156294,
November 29, 2006)
The holder has the right to require the drawee to accept the
bill without qualification. If the latter refused, he can treat the
bill as dishonored by non-acceptance (Sec 142 NIL)
3. IMPLIED COSNTRUCTIVE ACCEPTANCE (Sec 137 NIL) – If
after 24 hours the drawee fails to return the NI, he is deemed
to have accepted the NI. This also applies if the drawee
destroyed the NI.
o Acceptance in the sense used in NIL is not required for
checks for the same are payable on DEMAND
o Payment is not acceptance because the latter is a
“promise to perform an act while the former is the actual
performance (PNB v. CA, G.R. no L-26001, October 29,
1968). But the effect is the same: discharge of the NI
4. EXTRINSIC (Sec 134 NIL) – Acceptance may be made on a
paper other than the bill
5. VIRTUAL (Sec 135 NIL) – Contemplates the situation where
an acceptance is made on a bill that has not yet been drawn
(acceptance in advance)
Page | 45

DISHONOR – Where a bill is duly presented for acceptance and is
NOT accepted within the prescribed time:
1. The person presenting it must treat the bill as dishonored by
acceptance otherwise he loses the right of recourse against
the drawer and indorsers; and
2. Proper notice of dishonor should be given to the drawer and
indorsers
DISHONOR BY NONPAYMENT (Sec 83 NIL)
1. Payment is refused or cannot be obtained after due
presentment for payment
2. Presentment is excused and the NI is overdue and unpaid
EFFECT: There is an immediate right of recourse by the holder
against persons secondarily liable. However, notice of dishonor is
generally required (Sec 84 NIL).
DISHONOR BY NON-ACCEPTANCE (Sec 149 NIL)
1. When it is duly presented for acceptance and such acceptance
is refused or cannot be obtained; or
2. When presentment for acceptance is excused, and the bill is
not accepted
EFFECT: Immediate right of recourse against the drawer and
indorsers accrues to the holder and no presentment for payment is
necessary (Sec 151 NIL)
NOTICE OF DISHONOR – Notice is given by holder or his agent
to party or parties secondarily liable that the NI was dishonored by
non-acceptance by the drawee of a bill or by nonpayment by the
acceptor of the bill or by nonpayment by the maker of the note (Sec
89 NIL)
NOTE: Only persons secondarily liable are given notice of dishonor.
A joint maker, an accommodation maker, or a surety need not be
given a notice of dishonor. But an irregular or accommodation
indorser is entitled as any indorser to notice of dishonor otherwise
he is discharged from liability.
REQUISITES FOR NOTICE OF DISHONOR
1. Given by the holder or his agent, or by ANY PARTY who may
be compelled by the holder to pay (Sec 90 NIL)
2. Given to a SECONDARY PARTY or his agent (Sec 97 NIL)
3. Given with the PERIODS provided by law (Sec 102); and
4. Given at the proper PLACE (Sec 103 and 104 NIL)
HOW GIVEN (Sec 96)
Notice of dishonor may be:
1. Oral; or
2. Written
NOTE: Notice of dishonor must be served personally or by mail.
CONTENTS OF NOTICE OF DISHONOR
1. Sufficient DESCRIPTION of the NI to identify it
2. A statement that it has been PRESENTED for payment or for
acceptance and that it has been dishonored; and
3. A statement that the party giving notice intends to look for
the party addressed for PAYMENT
BY WHOM GIVEN (Sec 90 NIL)
1. Holder
2. Another, on behalf of the holder; or
3. Any party to the NI who may be compelled to pay it to the
holder, and who would have a right of REIMBURSEMENT from
the party to whom notice was given (Sec 90 NIL)
TO WHOM GIVEN
1. Non-acceptance (Bill) – to persons secondarily liable, namely
the drawer and indorsers as the case may be
2. Nonpayment (both bill and note) – indorsers
NOTE: Notice must be given to persons secondarily liable. Otherwise
such parties are discharged. Notice may be given to the party
himself or to his agent
WHEN GIVEN: As soon as the NI is dishonored (Sec 102).
WHEN NOTICE IS DISPENSED WITH:
1. When party to be notified knows about the dishonor, actually
or constructively (Sec 115 NIL)
2. If waived (Sec 109 NIL); or
3. When after due diligence, it cannot be given (Sec 112 NIL)
NOTICE OF DISHONOR INURES TO THE BENEFIT OF
1. When given by or on behalf of a holder
a. All parties prior to the holder, who have a right of
recourse against the party to whom notice is given; and
Page | 46
 b.
All holders subsequent to the holder giving notice (Sec NOTE: Waiver may be express or implied (Sec 109 NIL)
92 NIL)
2. When given by or on behalf of a party entitled to give notice As to who are affected by an express waiver depends on where the
a. The holder; and waiver was written:
b. All parties subsequent to the party to whom notice is 1. If it appears in the body or in the face of the NI, it binds all
given (Sec 93 NIL) parties
2. If it is written above the signature of an indorser, it binds him
EFFECT OF LACK OF NOTICE OF DISHONOR ON INSTRUMENT only (Sec 110 NIL)
PAYABLE IN INSTALLMENT
1. NO acceleration clause – Failure to give notice of dishonor on WHEN NOTICE OF DISHONOR IS NOT REQUIRED TO BE GIVEN
a previous installment does not discharge drawers and DRAWER (Sec 114) INDORSER (Sec 115)
indorsers as to succeeding installments Drawee & drawee are the same Drawee is a fictitious person or
2. WITH acceleration clause – It depends upon whether the has no capacity to contract
clause is optional or automatic and if indorser was aware of
a. Automatic – Failure to give notice of dishonor as to a such fact at the time of
previous installment will discharge the person indorsement
secondarily liable as to the succeeding installments Drawee is a fictitious person or Indorser is the person to
b. Optional – If not exercised, the rule would be the same has no capacity to contract whom the NI is presented for
as where there is no acceleration clause. If it is payment
exercised, the rule would be the same as where the Drawer is the person to whom NI was made or accepted for
installment contains an automatic acceleration clause NI is presented for payment his accommodation (Sec 115)
Drawer has no right to expect
DISHONOR IN THE HANDS OF AN AGENT (Sec 94 NIL) or require that the drawee or
Agent can do either of the following: acceptor will honor NI
1. Directly give notice to persons secondarily liable; or Where NI has countermanded
2. Give notice to his principal. In such case, he must give notice payment
within the time allowed by law as if he were a holder NOTE: If an NI is not accepted by the drawee, there is no sense
NOTE: Where a party receives notice of dishonor, he has, after the presenting in again for payment, and notice of dishonor must at
receipt of notice, the same time for giving notice to antecedent once be given. If there was acceptance presentment for payment is
parties that the holder has after the dishonor (Sec 107 NIL) still required and if payment is refused, there is still a NEED for
notice of dishonor (Sec 115).
WAIVER OF NOTICE DISHONOR
WHEN MADE: An omission to give notice of dishonor by non-acceptance does NOT
1. Before the time of giving notice; or prejudice the rights of HDC subsequent to omission (Sec 117)
2. After the omission to give due notice
ENFORCEMENT OF LIABILITY

PRESENTMENT NOTICE OF DISHONOR

PAYMENT ACCEPTANCE
NATURE OF INSTRUMENT
Promissory notes Sec 143 Promissory notes

Page | 47
Bills of exchange
Checks
Holder/Agent
Sec 76, 77 & 78
Person primarily liable:
o Maker/drawee
o If debtor is dead, to his personal
representative
o If liable as partners, presentment
may be made to any one of them
o If joint debtors, presentment must
be made to all of them
o Any person found at the place of
presentment (Substituted
presentment)
Sec 74: exhibiting NI
Sec 72 & 85: If NI is payable on a future
determinable time, must be presented on
DUE DATE, except if it falls on a Sat, Sun or
holiday in which case it must be made the
next business day
Sec 85/194: If NI is payable on demand, it
must be made within reasonable time
a. Note – after issue
b. Bill – from last negotiation
o Bill is payable after sight or when it is
necessary in order to fix the maturity of
the NI
o Bill expressly stipulates
o Bill is drawn payable elsewhere than at
the residence or place of trade or
business of drawee
BY WHOM
Holder/agent
TO WHOM
Sec 145
Drawee/Agent WITH authority to accept or
reject (acceptance gives rise to liability on the
part the drawee)
o If there are 2 or more drawees who are
not partners, presentment must be
made to all of them unless one has the
authority to accept or refuse for all
o If debtor is dead, to his personal
representative
o If adjudged bankrupt or insolvent or has
made an assignment, presentment must
be made to him, his trustee or assignee
HOW MADE
By producing the bill (because the bill will
be stamped ACCEPTED
WHEN MADE
If payable on a future determinable time,
presentment must be before it is overdue or
at maturity
IF payable on demand, the bill must be
presented within a reasonable time from
last negotaiton (including Sat 12 noon)
Bills of exchange
Checks
Sec 90 & 91:
o Holder/agent
o By or on behalf of any party who might
be compelled to pay it to the holder and
who has a right of reimbursement from
the party to whom the notice is given
Sec 89 & 97: Drawer/Indorser or any person
secondarily liable or his agent
Sec 98-101
o If dead, to his personal representative
o If parties, notice to anyone of partners
o If jointly liable, notice to each one of them
unless one has authority to receive notice
for others
o If adjudged bankrupt or insolvent or an
assignment was made, notice must given
to him, his trustee or his assignee
Either VERBALLY or in WRITING.
Must describe the NI and state the fact of
presentment and fact of dishonor
If living in the same AREA, notice must be
given within 24 hrs from dishonor
If living in a DIFFERENT AREA, the dropping
of letter in a mailbox is sufficient compliance
Page | 48
 c. Check – 6 months after issue;
including Sat up to 12 noon
Sec 73
o Place designated by the parties
o If none, at the address of the
maker/acceptor as stated in the NI
o If none, at his residence or office
o If none, any place where he is found
Sec 79-82
o When drawer has no right to expect to
or require that drawee or acceptor will
pay NI
o Where the NI was made or accepted
for his accommodation and he has no
reason to expect that the NI will be
paid if presented
o When the delay is caused by
circumstances beyond the control of
the holder and not imputable to his
default, misconduct or negligence
o Even after the exercise of due
diligence, presentment cannot be
made
o Drawee is a fictitious person
o Waiver, express or implied
FOREIGN BILL OF EXCHANGE
One which is on its face or purports to be:
1. Drawn in the Philippines but payable outside the Philippines
2. Payable in the Philippines but drawn outside the Philippines
WHERE MADE
NO REQUIREMENT because it is immaterial.
What is more important is that the bill was
accepted
HOW EXCUSED
Sec 148
o Drawee is dead, absconded, a fictitious
person or a person with no capacity to
contract by bill
o After exercise of due diligence,
presentment cannot be made
o Although presentment was irregular,
acceptance has been refused on some
other ground
INLAND BILL OF EXCHANGE
EXCHANGE DISTINGUISHED
INLAND BILL OF EXCHANGE
o Address of party indicated/added in his
NI
o If none, at his residence or office
o If none, where is sojourning
Sec 112-114 (DRAWER)
o After the exercise of due diligence, it
cannot be given to does not reach the
parties sought to be charged
o Delay is caused by circumstances beyond
the control of the holder & not imputable
to his default, misconduct or negligence
o Drawer and drawee is the same person
o Drawee is a fictitious person or with no
capacity to contract
o Drawer is the person to whom NI was is
presented for payment
o Drawer has no right to expect or require
that drawee or acceptor will honor NI
o Drawer has countermanded payment
Sec 115 (INDORSER)
o When the drawee is a fictitious person or
a person with no capacity to contract and
the indorser was aware of such fact at
the time of indorsement
o Indorser is the person to whom NI was
presented for payment
o When NI was made or accepted for his
accommodation
AND FOREIGN BILL OF
FOREIGN BILL OF EXCHANGE
Page | 49
 A bill which is or on its face One which is or on its face 3. Before a bill can be accepted for honor, it must be protested
purports to be both drawn and purports to be draw or payable for dishonor by non-acceptance or protested fro better
payable WITHIN the Philippines OUTSIDE the Philippines security (Sec 161 NIL)
4. Before a bill can be presented for payment to the acceptor for
PROTEST – The formal instrument executed usually by a notary honor or the referee in case of need, it must be protested by
public certifying that the legal steps necessary to fix the liability of the holder for non-payment to any party liable thereon (Sec
the drawee and the indorsers have been taken 167)
5. Before a bill can be paid for honor, it must be protested by the
REQUISITES FOR PROTEST holder for nonpayment by any party liable thereon (Sec 171)
1. Must be MADE by a
a. Notary public; or NOTICE OF DISHONOR AND PROTEST DISTINGUISHED
b. Any respectable resident of the place where the bill is NOTICE OF DISHONOR PROTEST
dishonored, in the presence of 2 or more credible WHEN REQUIRED
witnesses (Sec 154 NIL) Required in inland bill Required in foreign bill
2. Must be ANNEXED to the bill or must contain a copy thereof FORM
(Sec 153) May be oral or written Always written
3. Must be under the hand and SEAL of the notary public making BY WHOM MADE
it May be made by the party or Made by a notary public or a
4. Must SPECIFY agent respectable resident in the
a. The time and place of presentment present of 2 or more witnesses
b. The fact that presentment was made and the manner WHERE MADE
thereof Made in the residence of Made in the place of dishonor
c. The cause or reason for protesting the bill parties
d. The demand and the answer given, if any or the fact
that the drawee or acceptor could not be found (Sec 153 WHEN MADE: On the day of dishonor unless delay is excused. When
NIL) a bill has been duly noted, the protest may be subsequently
extended as of the date of noting (Sec 155 NIL).
PURPOSES OF PROTEST
1. For uniformity in international transactions WHERE MADE: At the place where it is dishonored EXCEPT where
2. To furnish an authentic and satisfactory evidence of dishonor the bill is payable at a place other than the residence of the drawee,
NOTE: Protest is necessary only in case of foreign bills of exchange, it must be protested at the place where it is expressed to be payable
which have been dishonored by non-acceptance or nonpayment. (Sec 156 NIL)
EFFECT OF NON-PROTEST: The drawer and indorsers are discharged
(Sec 118 NIL). PROTEST FOR BETTER SECURITY
One made by the holder of a bill after it has been accepted but
PROTEST IS ABSOLUTELY REQUIRED before it matures against the drawer and indorsers, where the
1. Upon dishonor by non-acceptance of a foreign bill appearing acceptor has been adjudged bankrupt or insolvent, or made an
on its face to be such (Sec 152 NIL) assignment for the benefit of the creditors (Sec 158)
2. Upon dishonor by nonpayment of a foreign bill appearing on PURPOSE: To give acceptor the opportunity to perform an act that
its face to be such, if not having been previously dishonored will ensure payment
by non-acceptance (Sec 152)

Page | 50
ACCEPTANCE FOR HONOR
An undertaking by a stranger to a bill after protest for the benefit of
any party liable thereon or for the honor of the person for whose
account the bill is drawn such acceptance inures also to the benefit
of all parties subsequent to the person for whose honor it is
accepted, and conditioned to pay the bill when it becomes due if he
original drawee does not pay it (Sec 161-170 NIL)
REQUISITES (Sec 161-162 NIL)
1. The bill must have been protested for dishonor by non-
acceptance or for better security
2. The acceptor for honor must be stranger to the bill
3. The holder must consent to the acceptance for honor
4. Bill must not be overdue
5. Must follow the formalities prescribed in Sec 162:
a. Must be in writing
b. Must indicate it is an acceptance for honor
c. Signed by the acceptor for honor
d. Must contain an express or implied promise to pay
money
e. The accepted bill for honor must be delivered to the
holder
LIABILITY FOR ACCEPTANCE FOR HONOR
1. The acceptor for honor is liable to the holder and to all parties
to the bill subsequent to the party for whose honor he has
accepted (Sec 164 NIL)
2. By such acceptance, he engages that he will on due
presentment pay the bill according to the terms of his
acceptance, provided it shall not have been paid by the
drawee, and that it shall have been duly presented for
payment and protested for nonpayment and notice of dishonor
given to him (Sec 165)
ACCEPTANCE FOR HONOR FOR BILL PAYABLE AFTER SIGHT
Where a bill payable after sight is accepted for honor, its maturity
is calculated from the date of the noting for non-acceptance and not
from the date of the acceptance for honor (Sec 166 NIL)
PROTEST OF BILL ACCEPTED FOR HONOR
Where a dishonored bill has been accepted for honor before protest
or contains a referee in case of need, it must be protested for
nonpayment before it is presented for payment to the acceptor for
honor or referee in case of need (Sec 167)
PRESENTMENT FOR PAYMENT TO ACCEPTOR FOR HONOR; HOW
MADE
1. If it is to be presented in the place where the protest for
nonpayment was made, it must be presented not later than
the day following the maturity
2. If it is to be presented in some other place than the place
where protested, it must be forwarded within the time
specified in Sec 104
WHEN DELAY IS EXCUSED: Where there is delay in making
presentment to the acceptor for honor or referee in case of need,
Sec 81 applies: Where circumstances beyond the holder’s control
but not imputable to holder’s fault or negligence (Sec 169)
WHEN DISHONORED BY ACCEPTOR FOR HONOR: It must be
protested for nonpayment by him (Sec 170)
PAYMENT FOR HONOR
Payment made by a person, whether a party to the bill or not, after
it has been protested for nonpayment, for the benefit of any party
liable thereon or for the benefit of the person for whose account it
was drawn (Sec 171-177)
REQUISITES(Sec 171-172 NIL)
1. The bill has been dishonored by non-acceptance
2. It has been protested for nonpayment
3. Payment supra protest (another term for payment for honor
because prior protest for nonpayment is required) is made by
any person, even by a party thereto
4. The payment is attested by a notarial act of honor which must
be appended to the protest or form of an extension of it
5. The notarial act must be based on the declaration made by
the payor for honor or his agent of his intention to pay the bill
for honor and for whose honor he pays
NOTE: If the above formalities are not complied with, payment will
operate as VOLUNTARY PAYMENT and the payor will acquire no right
to full reimbursement against the party whose honor he pays. (Sec
172)
Page | 51
In payment for honor, the payee cannot refuse payment. If he Liability Acceptor is Acceptor is primarily
refuses, he cannot recover from the parties who would have been secondarily liable liable
discharged had he accepted the same. In acceptance for honor, the By whom Made by a stranger or Made by any person
holder’s consent is necessary made party not liable on the whether a party or
bill stranger to the bill
RIGHT OF PAYOR FOR HONOR Notarial act Notarial act of honor Notarial act of honor is
To receive both the bill and protest to enable him to enforce his is not necessary necessary
rights against parties who are liable to him. Effects Sec 164, 165 Sec 175, 177

ORDINARY ACCEPTANCE AND ACCEPTANCE FOR PAYMENT BY PERSON PRIMARILY LIABLE AND
HONOR DISTINGUISHED PAYMENT FOR HONOR DISTINGUISHED
ORDINARY ACCEPTANCE FOR PAYMENT BY PAYMENT FOR HONOR
ACCEPTANCE HONOR PERSON
Necessity of Previous protest is Previous protest IS PRIMARILY
protest NOT required required LIABLE
Consent of Implied Required Necessity of No need to Need to protest for
holder protest protest for nonpayment
Liability of Primary Secondary nonpayment or
acceptor non-acceptance
By whom Drawee is acceptor Acceptor must be Party liable A party to the NI: May be a stranger or may
accepted stranger to the bill maker or be a party
Number of No acceptor in the There may be several drawee-acceptor
acceptors alternative or in acceptors for honor for In whose In favor of In favor of a specified
succession different parties in the favor specific parties person and the law requires
bill payment is that there is a statement of
Effect of Instrument IS Bill is NOT discharged made the person for whose honor
payment discharged upon upon payment by payment is made
payment by the acceptor for honor Notarial act Not necessary Necessary
acceptor Payment in Discharges the NI Cannot be payment in due
due course course & payment
ACCEPTANCE FOR HONOR AND PAYMENT FOR HONOR discharges only the parties
DISTINGUISHED after the party in whose
ACCEPTANCE FOR PAYMENT FOR HONOR fabor the payment for
HONOR honor is made
Bill Bill must be overdue Bill may be overdue
Previous Previously protested Previously protested BILLS IN SET
protest for non-acceptance or for nonpayment One composed of several parts, each part being numbered and
for better security containing a reference to the other parts, the whole of the parts
Consent of Necessary Is not necessary constituting one bill (Sec 178 NIL)
holder

Page | 52
PURPOSE: It is usually availed of in cases where a bill had to be sent
to a distant place through some conveyance. If each part is sent by
different means of conveyance, the chance that at least one part of
the set would reach its destination would be greater.
RIGHTS OF HOLDERS WHERE PARTS ARE NEGOTIATED
SEPARATELY
1. If both are HDC, the holder whose title first accrues is
considered the true owner of the bill
2. But the person who accepts or pays in due course shall not be
prejudiced (Sec 178 NIL)
OBLIGATION OF HOLDER WHO INDORSES 2 OR MORE PARTS
OF BILL IN SET
1. The person shall be liable on every such part
2. Every indorser subsequent to him is liable on the part he has
himself indorsed, as if such parts were separate bills (Sec 180)
DISCHARGE
DISCHARGE OF INSTRUMENT –A release of all parties,
whether primary or secondary, from the obligations arising
thereunder. It renders the NI without force and effect, and
consequently, it can no longer be negotiated
INSTANCES
1. By payment in due course or on behalf of the principal debtor
2. Payment by accommodation party
3. Intentional cancellation by the holder
4. By any act which will discharge a simple contract for the
payment of money
5. When the principal debtor becomes the holder of the NI or
after maturity in his own right (Sec 119)
A. PAYMENT IN DUE COURSE
REQUISITES
a. Payment must be made at or after maturity
b. Payment must be made to the holder
c. Payment must be made in good faith and without notice
that the holder’s title is defective (Sec 88 NIL)
BY WHOM MADE
a. By maker or acceptor or (selected accommodated party)
b. Surety, if a primary party; or
c. By an agent on behalf of the principal
B. PAYMENT BY ACCOMODATED PARTY
REASON: He is the one ultimately liable on the NI
C. CANCELLATION – It includes any act of tearing, erasing,
obliterating, or burning. It is not limited to writing the word
“cancelled” or “paid,” or drawing crisscross lines across the NI
(Sec 123). It may be made by any other means by which the
intention to cancel the NI may be evident.
INTENTIONAL CANCELLATION REQUISITES
1. Intentionally done
2. By the holder thereof; and
3. By writing the word “cancelled” or “paid” on the face of
the NI or of the NI is torn up, burned, mutilated or
destroyed
EFFECT OF UNINTENTIONAL CANCELLATION
If the NI is unintentionally cancelled or cancelled by mistake
or without authority of the holder, the cancellation is
INOPERATIVE but party who alleges that cancellation was
made unintentionally, under mistake or without authority has
the burden of proof (Sec 123 NIL)
D. ANY OTHER ACT WHICH DISCHARGES THE
INSTRUMENT – The law on obligations and contracts will
apply. Art 1231 provides how obligations may be
extinguished:
1. Payment or performance of obligation
2. Loss of thing due
3. Condonation or remission of debt
4. Confusion or merger in the rights of the creditor and
debtor
5. Compensation
6. Novation
7. Annulment
8. Rescission
Page | 53
 9. Fulfillment of resolutory condition
10. Prescription
However, although such ways discharge the NI as between
immediate parties, they will not do so in the hands of HDC.
NOTE: The NI must be surrendered to the payor. If the NI is
not surrendered, it may fall in the hands of HDC who may
have the right to enforce the NI despite the previous payment
DISCHARGE OF PERSONS SECONDARILY LIABLE
1. By any ACT which discharges the NI
2. By the INTENTIONAL cancellation of his signature by the
holder
3. By the DISCHARGE of a prior party
NOTE: The release of the principal debtor must be by t
act of the holder and not by operation of law.
4. By a VALID tender or payment made by a prior party
Tender of payment means the act by which one
produces and offers to a person holding a claim
against 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
5. By the RELEASE of the principal debtor, unless the
holder’s right of recourse against the party secondarily
liable is expressly reserved
6. By any AGREEMENT binding upon the holder to extend
the time of payment or to postpone the holder’s right to
enforce the NI (Sec 120)
Instances when the agreement to extend the time of payment
does NOT discharge a party secondarily liable
1. Where the extension of time is consented to by such
party
2. Where the holder expressly reserves his right of
recourse against such party
EFFECTS OF PAYMENT BY PARTIES SECONDARILY
LIABLE
1. NI will not be discharged
2. It only cancels his own liability and that of the parties
subsequent to him
3. He may strike out his own and all subsequent
indorsements and again negotiate the NI 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 (Sec 121 NIL)
E. RENUNCIATION (Sec 122 NIL) – The act of
surrendering a right or claim without recompense, but it can
be applied with equal property to the relinquishing of a
demand upon an agreement supported by a consideration
o It must be with written declaration to that effect and if
oral, must be accompanied by surrender of the NI to the
person primarily liable thereon
REQUISITES
1. Absolute and unconditional
2. Made in favor of the person primarily liable; and
3. Made at or after maturity
EFFECTS
1. A renunciation in favor of a secondary party may be
made by the holder before, at or after maturity of the
NI. The effect is to discharge the only such secondary
party and all parties subsequent to him but the NI itself
must remain in force
2. A renunciation in favor of the principal debtor may be
effected at or after maturity. The effect is to discharge
the NI and all parties thereto provided the renunciation
is made unconditionally and absolutely
NOTE: In either case, renunciation does not affect the
HDC without notice.
F. PRINCIPAL DEBTOR BECOMES THE HOLDER – An
instrument is discharged when the principal debtor becomes
the holder of the instrument at or after maturity date in his
own right.
o In his own right – construed to exclude a case where a
maker acquires the NI in a purely representative
capacity (Sigler v. Sigler, 98 Kans. 524, 158 P. 864)
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 o The note is not discharged when the maker acquires it
as agent of another. Nor is it discharged when the maker
becomes the holder, like as executor or administrator
G. SURRENDER OF THE INSTRUMENT – The NI must be
surrendered to the payor whenever discharge is by payment
by or in behalf of the principal debtor, payment by the
accommodated party, by renunciation or by any other ground
that discharges simple contract
CHECKS
CHECK – An instrument which is in the form of a bill of exchange
but is always payable on demand and always drawn on a bank (Sec
185 NIL)
Elements:
(1) Contain an unconditional order
(2) For payment of money
(3) Amount of which is definite and certain
(4) May be transferred by indorsement or by delivery
depending if payable to bearer or to order
o Checks are not mere contracts but:
1. A representation of FUNDS on deposit
2. Representation of CREDIT stated in monetary value
3. SUBSTITUTE for cash; and
4. As PAYMENT for an obligation
o But a check itself does NOT operate as assignment of any part
of the funds to the credit of the drawer with the bank. The
bank is not liable to the holder UNLESS AND UNTIL it accepts
or certifies the check (Sec 189 NIL)
PRESENTMENT FOR PAYMENT
A check must be presented for payment within reasonable time
AFTER ITS ISSUE or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay (sec 186 NIL).
When a check is crossed, it is the duty of the collecting bank to
ascertain that check is only deposited to the payee’s account (Phil
Commercial Bank v. Phil Commercial and International Bank, G.R.
no 180257, February 23, 2011).
TYPES OF CHECKS
1. PERSONAL CHECK – Most common form of check
2. CASHIER’S CHECK – One drawn by the cashier of a bank, in
the name of the bank against the bank itself payable to a third
person. It is a primary obligation of the issuing bank and
accepted in advance upon issuance (Tan v. CA, G.R. no
108555, December 20, 1994)
3. MANAGER’S CHECK – A check drawn by the manager of a bank
in the name of the bank itself payable to a third person. It is
similar to the cashier’s check as to the effect and use
o Drawn by a bank itself and has the effect of acceptance.
It is more like a promissory note; as such bank is
primarily liable
4. MEMORANDUM CHECK – A check given by a borrower to a
lender for the amount of a short 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
o Check where the word “memorandum” or “memo” is
written across its face meaning that the drawer will pay
the holder absolutely, without need of presentment
5. CERTIFIED CHECK – An agreement whereby the bank against
whom a check is drawn undertakes to pay it any future time
when presented for payment (Sec 187 NIL)
6. TRAVELER’S CHECK – It is one upon which the holder’s
signature must appear twice: one to be affixed by him at the
time it is issued; and the second, for countersignature, to be
affixed by him in the presence of the payee before it is paid
otherwise it is incomplete
CERTIFICATION OF CHECKS
An agreement whereby the bank against whom a check is drawn,
undertakes to pay it at any future time when presented for payment
EFFECTS
1. Equivalent to acceptance (Sec 187 NIL) and is the operative
act that makes banks liable
2. Assignment of the funds of the drawer in the hands of the
drawee (Sec 189)
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 3. If obtained by the holder, discharges the persons secondarily
liable thereon (Sec 188)
NOTE: Where the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability
thereon (Sec 186)
REFUSAL OF DRAWEE BANK TO PAY AND CERTIFY
GENERAL RULE: If a bank refuses to pay a check (despite the
sufficiency of funds), the payee-holder cannot, as provided under
Sec 185 and 189 NIL sue the bank. The payee should instead sue
the drawer who might in turn sue the bank
REASON: No privity of contract exists between the drawee-bank and
payee (Sincere Villanueva v. Marlyn Nite, G.R. no 148211, July 25,
2006)
EXCEPTION: If the drawer himself ordered the bank to pay and such
drawer has sufficient funds therein
COLLECTION OF CHECKS
On the check’s due date, the holder of a check may either proceed
directly to the drawee bank and present the same for payment or
he may deposit it in his account with his bank known as the
depositary bank or collecting bank.
 It is only after the check has been cleared and collected from
the drawee bank that final credit is made in the payee-
depositor’s account
CLEARING OF CHECKS
When a check is sent to the clearinghouse the collecting bank acts
as the agent of the depositor. The collecting bank does not become
the owner of the amount covered by the check as the same is only
being collected from the drawee bank for the principal, the depositor
(BPI v. CA, G.R. no 112392, February 29, 2000)
CROSSED CHECK – A check which in addition to the usual
contents of an ordinary check contains also the name of a certain
banker or business entity through whom it must be presented for
payment
KINDS
1. CROSSED SPECIALLY – The name of a particular bank or
company is written or appears between the parallel lines in
which case the drawee-bank must pay the check only upon
presentment by such bank or company (Chan Wan v. Tan Kim,
G.R. no L-15380, September 39, 1960)
2. CROSSED GENERALLY – Only the words “and Co.” are written
between the parallel lines or when none at all is written
between said lines
Where the manager obtained and encashed manager’s checks that
were plainly crossed checks, the SC held the following effects:
1. It may not be encashed but may only be deposited with the
bank
2. It may be negotiated only once to a person who has an
account with the bank; and
3. It serves as a warning to the holder that the check has been
issued for a definite purpose and he must inquire if he received
the check pursuant to this purpose; otherwise he is not HDC
(Associated Bank v. CA, G.R. no 89802, May 7, 1992)
The NIL is silent with respect to crossed checks, although the Code
of Commerce makes reference to such instrument. Nonetheless, the
SC has taken judicial cognizance of the practice that a check with 2
parallel lines in the upper left hand corner means that it could only
be deposited and not converted into cash. The effects of crossing a
check thus relates to the mode of payment, meaning that the drawer
had intended the check for deposit only by the rightful person, i.e.
payee named therein (Cely Yang v. CA, G.R. no 138074, August 15,
2003)
IRON CLAD RULE
Prohibits the countermanding of payment of certified checks
(Republic v. PNB, G.R. no 16106, December 1, 1961)
NOTE: The holder must be HDC so that the stop payment order may
not be successfully invoked against him (Mesina v. IAC, G.R. no
70145, November 13, 1986)
CRIMES INVOLVING CHECKS
A. CHECK KITING – It is the practice of taking advantage of the
float, the time that elapses between the deposit of the check in
one back and its collection in another
NOTE: In anticipation of the dishonor of the check that was
deposited, the conspirators will release the original check with
another worthless check
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CASES WHEN BANK MAY REFUSE PAYMENT
1. The BANK is insolvent
2. The drawer’s deposit is INSUFFICIENT or he has no
account with the back or said account has been closed
or garnished
3. The DRAWER is insolvent and proper notice is received
by the bank
4. The drawer DIES and proper notice is received by the
bank
5. The drawer has COUNTERMANDED payment
6. The holder REFUSES to identify himself
7. The bank has reason to believe the check is FORGERY
NOTE: A bank is under no obligation to make partial
payment on a check up to the amount of the drawer’s
funds as where the check is drawn for an amount larger
than what the drawer has on deposit. In case of partial
payment, the check holder could not be called upon to
surrender the check and the bank would be without a
voucher affording a certain means of showing payment
(Moran v. CA, G.R. no 105836, march 1994)
B. ESTAFA – By express provision of BP22, prosecution of said
law is without prejudice to any liability under RPC, particularly
Art 315(d) – Deceit is necessary
Elements
1) Offender issued a postdated check or issued a check in
payment of an obligation
2) Such postdating or issuing a check was done when
offender had no funds in the bank or his funds deposited
therein were not sufficient to cover the amount of the
check
NOTE:
o Good faith is a defense in a charge of estafa by
postdating or issuing a check
o the drawer’s failure to cover the issued check within 3
days from notice of dishonor is prima facie evidence of
deceit
o If the check was issued in payment of pre-existing debt,
there is NO estafa
o Offender must be able to obtain something from the
offended party by means of the check he issues and
delivers (for value or consideration)
o If postdating a check issued as mere
guarantee/promissory note, there is NO estafa
C. BP 22 (BOUNCING CHECKS LAW) – If check is dishonored
of insufficient funds, the drawer may be held civilly liable
(under NIL) and criminally liable under BP 22.
o Purpose: To prevent increase in the number of worthless
checks issued by unscrupulous persons causing
prejudice to the banking system and to the flow of
business and trade
Acts punishable:
1) Making, drawing or issuing a check knowing at the
time of issue that the drawer has no sufficient
funds/credit with the drawee bank – knowledge of
insufficient funds is essential
2) Failure to keep sufficient funds to cover the check
for 90 days from date of check – drawing and
issuance of said check is prima facie evidence of
drawer’s knowledge of insufficient funds
 EXCEPT if Drawer pays holder the amount of the
check within 5 banking days after notice of
dishonor or makes arrangement for payment in
full by the drawee (same period)
 Payment within 5 banking days does not remove
criminal liability
o To dishonor check = write reason for dishonor in the
check and in the notice of dishonor (prima facie
evidence of issuance, due presentment and dishonor of
check)
o If check is presented after 90 days and dishonored = no
criminal liability
o Check is presented “on account or for value”
WHERE THE ACCUSED WAS ACQUITTED OF THE CRIMINAL
CHARGES UNDER BP 22, MAY HE STILL BE HELD CIVILLY LIABLE
FOR THE CHECKS HE ISSUED? Yes.
Since the court held that upon issuance of a check, in the absence
of evidence to the contrary, it is presumed that the same was issued
for valuable consideration. Under NIL, it is presumed that every
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party to an NI acquires the same for a consideration or for value. As
petitioner alleged that there was no consideration for the issuance
of the subject checks, it devolved upon him to present convincing
evidence to overthrow the presumption and prove that the checks
were in fact issued without valuable consideration (Cayanan v. North
Star International Travel, G.R. no 172954, October 5, 2011)

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