NEGOTIABLE INSTRUMENTS LAW

 SUBSTITUTE WORDS SUFFIECIENT TO CONSTITUTE A PROMISE TO PAY

1. This is to certify that I have to pay

2. Pedro obliges himself to pay
3. Paid when called for
4. I guaranty to pay
5. Good for
6. Holden for
7. To pay or cause to be paid
8. I agree to pay
9. I shall pay
10. Due to P or order P5, 000 payable on demand

 Promise to pay:

NOT merely an acknowledgment of debt

An acknowledgement of debt becomes a promise to pay by addition implying a

promise of payment, such as “payable”, “payable on a given day”, “payable on
demand”, “paid when called for”, “I.O.U.”

Due to Juan P10, 000

(sgd) Arthur

Note: NOT NEGOTIABLE. It is nothing but an acknowledgment of a debt. It is

merely an evidence of debt not a promissory note.

I do acknowledge myself to be indebted to Peter or order in the sum of

P10, 000, to be paid on demand.
(sgd) Darwin

Note: NEGOTIABLE. There are words expressing the intention to pay or from
which may be implied such intention to pay. The words “to be paid” imply a
promise to pay.

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 Due Peter or order P10, 000 payable on demand.
(sgd) Jose

Note: NEGOTIABLE. It contains a promise to pay because the words “payable on

demand” necessarily imply a promise to pay.

SUBSTITUTE WORDS TO CONNOTE “ORDER”

1. Credit a named person or order

2. Let the bearer have
3. The drawee will much oblige the drawer by paying to a named person

**A mere REQUEST will not suffice. An ORDER is a demand, a command, and
imperative direction.

I hereby authorize you to pay P1, 000 on our account, to the order of
Pedro.

(sgd) Dario

To Wally

Note: NOT NEGOTIABLE. It is not an order to pay. It is a mere authorization to

pay. By its terms, the bill gives discretion to the drawee to pay or not to pay.

Please let the bearer have P10, 000 and place to my account and you will
oblige.

(sgd) Roger

To Darwin
2067 XXX Bldg., Ayala Ave.

Note: NOT NEGOTIABLE. It does not contain an order to pay. It is nothing but a
request to pay.

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 Doris will oblige Dennis by paying Petra or order P1, 000.00 on her
account.

(sgd) Dennis

To: Doris

Note: NEGOTIABLE. The mere fact that it contains words of civility or courtesy
does not make it non-negotiable. In spite of the words of courtesy of civility, the
bill still contains an order to pay. The words “by paying” are held sufficient to
import an order to pay.

UNCONDITIONAL

It is absolute, not subject to conditions, contingents, reservations.

A CONDITION is every future and uncertain event which an obligation or

provision is made to depend (Art. 1179, CC)

IF subject to a condition, the instrument is NOT negotiable and the

happening of the condition will not cure the defect.

Pay to P or order P5, 000.00 if he passes the CPA Board Examination this
year.

 PROMISE OR ORDER MUST BE UNCONDITIONAL

Pay to Edgar or bearer P10, 000.00 if he marries Edgarda

(sgd) Marta

Note: NOT NEGOTIABLE. It is conditional; it is subject to the condition that Edgar

marries Edgarda, which is future and uncertain to happen.

I promise to pay Popoy or order P10, 000.00, ten (10) days after the death
of Solomon.

(sgd) Miguel
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Note: NEGOTIABLE. The death of Solomon is certain and therefore there is no
condition but a mere suspensive period.

I promise to pay Portia or bearer P10, 000.00 ten (10) days after Juan
passes the 2016 CPA Board Examinations.
(sgd) Roland

Note: NOT NEGOTIABLE. It is conditional. Although the payment is a fixed period

after a specified event – the passing of the 2016 CPA Examinations – such event is
not certain to happen.

Suppose Juan passes the 2016 CPA Board Exam, will it make the note
negotiable?

Note: NO, the happening of the condition will not cure the defect. (Sec. 4)

General Rule: The promise or order should depend on a contingent event. If it is

conditional, it is non-negotiable.

Exceptions:
a.Indications of particular fund from which the acceptor disburses himself
after payment.
b.Statement of the transactions which gives rise to the instrument (Sec. 3)

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

Statement of a particular fund or transaction giving rise to the instrument (Sec.

3)

The particular fund indicated should not be the direct source of payment
else it becomes unconditional and therefore non-negotiable. The fund should only
be the source of reimbursement.

A statement of the transaction does not destroy the negotiability of the

instrument.

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 Exception: Where the promise to pay or order is made subject to the terms
and conditions of the transaction stated.

Pay to Pandora or order P10, 000.00 and reimburse yourself out of my

money in your hands.

(sgd) Maricel

Note: NEGOTIABLE. The indication of the particular fund – my money in your

hands – is merely a source of reimbursement and not a fund for direct payment.
(Sec. 3)

Pay to the order of Pedro P10, 000.00 out of the rentals of my car.

(sgd) Deo)

Note: NOT NEGOTIABLE. The particular fund – the rentals of my car – is the source
of direct payment, and is considered conditional because the particular fund may
or may not be enough.

Pay Pamela or order P10, 000.00 an account of a contract between you

and the Torre de Manila Construction, Inc.

(sgd) Mario

Note: NEGOTIABLE. The instrument will be paid first and afterwards, the
particular fund – the account of a contract with Torre de Manila, Inc. – will be
debited.

I promise to pay Patricio or order P10, 000.00 in payment of a ring bought

from him the other day.

(sgd) Matias)

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Note: NEGOTIABLE. The statement of the transaction – the payment of a sale of a
ring sold the other day – which gave rise to the instrument does not destroy the
unqualified promise of Matias to pay Patricio.

OBLIGATION WITH A PERIOD

Period/Term – consists in a space or length of time upon the arrival of

which, the demandability or the extinguishment of an obligation determined; it
may be definite (exact date or time is known) or indefinite (arrival of date is
unknown but sure to come).
- Future + Certain event

GENERAL CLASSIFICATIONS:
a.EX DIE / SUSPENSIVE PERIOD – from a day certain give rise to the
obligation; suspensive effect.

b.IN DIEM / RESOLUTORY PERIOD – arrival of a term certain terminated the

obligation; resolutory effect.

Term – length of time sure to come

Condition – fact or event uncertain to come

Period/Term

A future and certain event upon the arrival of which, the obligation subject
to it either arises or is extinguished.

INDICATIONS OF A TERM OR PERIOD:

When the debtor binds himself to pay -- :when his means permit to do so
: little by little
: as soon as possible
: from time to time
: as soon as I have the money
: in partial payment
: when in the position to pay

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 Basis Period/Term Condition

1.TIME Always refers to FUTURE Can refer to past events

unknown to the parties

2.FULFILLMENT Sure to happen at an exact date May or may not happen

Or indefinite time but sure to come

3.INFLUENCE Merely fixes the time for the May cause the arising
Demandability or performance or cessation of the obligation
of obligation

Statement of a particular fund or transaction giving rise to the instrument (Sec.

3)

The particular fund indicated should not be the direct source of payment,
else it becomes conditional and therefore non-negotiable. The fund should only
be the source of REIMBURSEMENT or from which you will debit the payment.

A statement of the transaction does not destroy the negotiability of the

instrument.

Exception: Where the promise to pay or order is made subject to the terms
and conditions of the transaction stated.

I promise to pay Patricia or order P10, 000.00 subject to the stipulations in

the Deed of Sale executed by us.

Note: NOT NEGOTIABLE. The payment is conditioned on the Deed of Sale. It will
likewise require the determination of a separate instrument – the Deed of Sale –
in determining the negotiability of the instrument in violation of the fundamental
rule that the negotiability must be determined only from the document itself and
not elsewhere.

A statement of the transaction does not destroy the negotiability of the

instrument.

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 Exception: Where the promise to pay or order is made subject to the terms
and conditions of the transaction stated.

SUM CERTAIN IN MONEY

I promise to pay Pedro or order US$10, 000.00.

(sgd) Marites

Note: NEGOTIABLE. Although payable in foreign currency, the amount has a fixed
value and can by simple mathematical calculation be expressed in the value of our
peso.

I promise to pay Patricia or order P10, 000.00 thirty (30) days from this
date, at 6% interest.

(sgd) Marty

Note: NEGOTIABLE. The addition of the interest does not make the sum
uncertain. The sum due can be computed.

I promise to pay Perla or order P10, 000.00 together with all the sums that
may be due in November 30, 2016.
(sgd) Melody

Note: NOT NEGOTIABLE. The sum is not certain. It includes all sums by November
30, 2016 which is not stated and unknown until last date.

I promise to pay Phoebe or order P10, 000.00 in gold ring.

(sgd) Mark

Note: NOT NEGOTIABLE. The instrument is not payable in money as required by

law.

Money need not be “legal tender”

An instrument is still negotiable although the amount to be paid is

expressed in currency that is not legal tender so long as it is expressed in money.
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 Example: Payable in Yen.

Under Rep. Act. No. 8183, the agreement to pay in foreign current is valid.

Sum is certain even if it is to be paid with:

a.Interest
b.In stated installments
c.In installment with acceleration clause
d.With exchange
e.Costs of collection or attorney’s fees

Payment with interest

October 15, 2016

I promise to pay Patricia or order P10, 000.00 with interest at P10% on

January 15, 201.

(sgd) Maria

November 24,
2016

I promise to pay Pedro or order P10, 000.00 after six months with 12%
interest per month.

(sgd) Melvin

Sum is still certain even with:

a.Stated interest
b.Increased/Reduced interest rate
c.Accrual/interest not specified
d.Usurious interest
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 if the interest is stipulated but not specified, the rate is determined to be
the legal rate (6% per annum).

Where the instrument provides for the payment of interest, without specifying
the date from which interest is to run, the interest runs from the date of the
instrument, and if the instrument is undated, from the issue thereof. (Sec. 17e)

Payment in Stated Installments (Sec. 2 par. B)

To be negotiable, the amount paid in installments must be specified or

could be made certain.

June 1, 2016
I promise to pay P or order P10, 000.00 in two installments, as follows:

Jan. 1, 2017 --- P8, 000.00

Feb. 1, 2017 --- P2, 000.00

(sgd) M

Note: NEGOTIABLE. The sum certain and the installments are stated.

Jan. 1, 2017

I promise to pay P or order P10, 000.00 in two equal installments

beginning Feb. 14, 2017.

(sgd) M

Note. NEGOTIABLE. The sum payable is considered stated because there is a

beginning date for payment of the first installment.

1.I promise to pay P or order P10, 000.00 in two equal installments.

(sgd) M

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 2.I promise to pay P or order P10, 000.00 in two equal monthly
installments.

(sgd) M

Note: Both are NOT NEGOTIABLE. The maturity of each installment is not known.

Stated Installment

Means that the number of installments, the maturity of each installment

and the amount of each installment are specified. The time of payment of
installments must be at least be determinable.

The amount to be paid in installments must be specified or could be made

certain.

Requisites of stated installments:

1.Dates of each installment must be fixed or at least determinable, and

2.Amount to be paid for each installment must be stated.

Example: The instrument is not negotiable if payable if “payable in 5

installments in the amount of P10, 000.00 per installment” without stating the
dates of each installment.

PAYMENT WITH EXCHANGE

October 15, 2016

Pay P or order P10, 000.00 with exchange at the current rate.

(sgd) M

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Exchange

The difference in value of the same amount of money between the

different countries.

The rate of exchange may either be a fixed rate which is stated in the
instrument or at a current rate which is the prevailing rate of exchange at a given
date and place.

An instrument to be paid with exchange refers only to a foreign bill.

PAYMENT with ATTORNEY’s FEES AND COST OF COLLECTION

March 15, 2016

I promise to pay P or order P10, 000.00 on Feb. 14, 2017. Upon failure, I
agree to pay collection and attorney’s fees.
(sgd) M

With cost of collection & attorney’s fees (in case payment is not made at
maturity)

Even if the sum payable is uncertain, such uncertainty occurs after maturity
when the instrument is no longer negotiable in its full commercial sense.

All that the law requires for the instrument to be negotiable is for the sum
at maturity to be certain.

If some other act is required other than the payment of money, it is non-
negotiable.

Pay Pepe or order P10, 000.00 AND deliver a car.

(sgd) Melay

To: William

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Note: NOT NEGOTIABLE. While the part pertaining to payment of a sum of money
could be negotiated, the part relating to the performance of other act would have
to be assigned.

General Rule: If some other act is required other than the payment of money, it
is non-negotiable.

Exceptions:
a.Sale of collateral securities
b.Confession of judgment
c.Waives benefit of law
d.Gives option to the holder to require something to be done in lieu money
(Sec. 5)

Sale of collateral securities

I promise to pay Perla or order P10, 000.00 on October 25, 2016. If not
paid at maturity. Permal may sell the ring I pledged to her and apply the
proceeds to the value of this note.

Note: NEGOTIABLE. The performance of an additional act – the selling of the ring
that was pledged – will not render the note non-negotiable.

The additional act shall be performed after the date of the maturity of the note,
when it is no longer negotiable in the full commercial sense. Before the date of
maturity, no additional act is to be performed except the payment of money.

Confession of Judgment

I promise to pay P or bearer P10, 000.00 on January 17, 2017. If not paid
at maturity, I authorize any lawyer to appear before any court and confess
judgment for the amount of this note plus interests, costs and attorney’s fees.

I promise to pay Pedro or order on January 5, 2017. If not paid on the said
date, I admit liability.

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Kinds of confession of judgment

a.Cognovit actionem: a written confession of an action by a defendant,

subscribed, but not sealed, and irrevocably authorizing any attorney of any court
of record to confess judgment and issue execution usually for a sum named. The
purpose is to save expenses of litigation.

b.Relicta verification: a confession of judgment made after plea is pleaded,

accompanied by a withdrawal of the plea.

Waiver of benefits

I promise to pay Pablo or order P10, 000.00. Notice of dishonored waived.

(sgd) Mario

Other benefits that may be waived:

a.”The right to presentment for payment.”
b.”The right to protest.”
c.”The time for payment maybe extended without notice.”

Gives option to the holder to require something to be done in lieu of money

Pay Pedro or order P10, 000.00 or ten (10) sacks of rice at my option.
(sgd) Mario

Note: NOT NEGOTIABLE. If the option to perform an additional act belongs to the
maker, the instrument is not negotiable. The holder cannot demand the payment
of money or the delivery of the ten sacks of rice.

IF the instrument is SILENT as to whose option the performance of an additional

act, it is presumed to belong to the maker.

Designates the kind of current money in which payment is to be made

Q: Mark issues a promissory note payable to the order of Pedro payable

in twenty-peso- bills of the BSP. Is the note negotiable?

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 A:YES. The validity and negotiable character of an instrument are not
affected by the fact that it designates a particular kind of current money in
which payment is to be made. (Sec. 6)

Acceleration Clause

A stipulation that the default in the payment of any date of the installments
or interest will make the whole sum payable even before the maturity

An agreement to pay at a definite date and an additional promise to pay at

an earlier date on the occurrence of a specified event.

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PRACTICAL EXERCISES

Q: I hereby authorize on my account, to the order of Pedro Cruz.

(sgd) Jose Reyes

To: Walter

A: It is NOT NEGOTIABLE because it is not an order to pay. It is a mere

authorization to pay. By its terms, the bill gives a discretion to the drawee to pay
or not to pay.

Q: Please let the bearer have P10, 000.00 and place to my account and you
will oblige.

(sgd) Ernesto Cruz

To: Mario Reyes

A: It is NOT NEGOTIABLE because it does not contain an order to pay. It is

nothing but a mere request to pay.

Q: Due to X or order P10, 000.00

(sgd) Y

Is this a negotiable promissory note?

A: NO. It is nothing but a mere acknowledgment of a debt. It only evidences

the existence of a debt.

Q: I do acknowledge myself to be indebted to X order the sum of P10, 000.00,

to be paid on demand.

(sgd) M

Is this a negotiable promissory note?

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A: YES. There are words expressing the intention to pay or from which may be
implied such an intention to pay. The words “to be paid” imply a promise to pay.

Q: I promise to pay B or order P10, 000.00 together with all sums that may be
due him on June 30, 2016.

(sgd) A

A: NOT NEGOTIABLE. The sum is not certain. The amount of P10, 000.00 is not
the only principal amount due. It includes all sums which may be due to B on June
30, 2014. How much those sums are not stated and are unknown until June 30,
2016.

Q: I promise to pay X or order P10, 000.00 on or before June 30.

(sgd) Y

A: NOT NEGOTIABLE. The time of payment is not determinable as the year is

not stated. Neither is it payable on demand as it is to be paid at a certain time,
June 30. Hence, the note is not negotiable.

Q: Pay to B or his assigns P10, 000.00

(sgd) A

To: D

A: NEGOTIABLE. The instrument is negotiable because it is payable to order,

although instead of the word “order,” the words “assigns” is used. The reason is
that the word “assigns” is equivalent to the word “order.”

Q: I promise to pay to the order of bearer P10, 000.00.

(sgd) A

A: NEGOTIABLE. An instrument payable to the “order of bearer” is an order

instrument.
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Q: Pay to B or order P10, 000.00 and reimburse out of my money in your
hands.

(sgd) M

A: NEGOTIABLE. A promise or order to pay is unconditional although couple

with an indication of a particular fund out of which reimbursement is to be made
or a particular account to be debited with the amount (Sec. 3). The instrument,
therefore, is negotiable because the order to pay is not rendered conditional. The
fund is for reimbursement and not a fund for direct payment.

Q: I promise to pay B or order P10, 000.00 in payment for a car I bought from
him the other day.

(sgd) A

A: NEGOTIABLE. The statement of the transaction which gives rise to the

instrument does not destroy the unqualified promise of A to pay B. instruments
are not ordinarily issued without any transaction upon which they are based.

Q: MP will pay R P10, 000.00 in payment for his cellphone one week from June
01, 2015.

(sgd) MP

A: NOT NEGOTIABLE. It is not negotiable as it is not payable to order or to

bearer but to a specified person, MP.

Q: I promise to Pedro or order the sum of P10, 000.00.

(sgd) Juan

A: NEGOTIBALE. All the requirements of Section 1 of the NIL are present. It is

signed by Juan the maker; there is an unconditional promise to pay; it is payable
on demand, since no date of maturity appears; and it is payable to order.

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Q: I promise to pay Pablo or order P10, 000.00 in two equal monthly
installments.

(sgd) Mario

A: NOT NEGOTIABLE. The payment of the installment is not known. It cannot

be determined when to start paying and how much is to be paid per installment.

Q: (no date)
I promise to pay Pablo or bearer P10, 000.00 30 days after date.

(sgd) Mario

A: NEGOTIABLE. The omission of the date will not affect the negotiability of
the instrument. The date is still certain. In the absence of the date, the date of
issue is deemed as the date of the instrument.

Q: Pay to the order of Jose Rizal, national hero, P10, 000.00.

(sgd) Romeo

To: Wally

A: NEGOTIABLE. The instrument is payable to bearer. It is payable to the order

of a fictitious payee.

Q: I promise to pay Pepe P10, 000.00 with interest at 10% per annum.

(sgd) Manuel

A: NEGOTIABLE. The negotiability of the instrument is not affected by the fact

of existence of payment of interest.

Q: I promise to pay Gabriela P10, 000.00 three years after the unconditional
demolition of China of the structures set up in Spratly’s Island.

(sgd) Mario
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A: NOT NEGOTIABLE. The note is conditional because its enforceability is
subjected to the happening of a contingency: the unconditional demolition of the
Chinese structures in Spratly’s Island; and the note is not payable to bearer or
order but to a specified person, Gabriela.

Q: X executed a promissory note in favor of Y or order agreeing to pay P10,

000.00 plus interests but without specifying the rate. Is this negotiable? Can Y
collect interest on the note? Why or why not?

A: NEGOTIABLE. Y can collect interest on the note at the legal rate of 6% per
annum.

Q: R issued a check for P1.0 Million which he issued to pay S for killing his
political enemy. Can the check be considered a negotiable instrument?

A: NEGOTIABLE. The check can be considered a negotiable instrument. In

ascertaining the character of the instrument the primordial and only
consideration is its compliance with Section 1 of the NIL. The presumption is that
the instrument is negotiable and the illegality of consideration does not hinder
the negotiability thereof. The requisites of negotiability do not delve into the
validity of consideration. Validity is an issue distinct and separate from the
question of negotiability.

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 For Reimbursement vs. Fund for payment

a.(1) The drawee pays the payee
from his own fund,
afterwards (2) the drawee pays
pays himself from the particular
fund indicated
a.There is only one act –
drawee pays directly from
the particular fund
indicated
Conditional because fund
may or may not exist, and
may or may not be sufficient

b.Particular fund indicated is b.Particular fund inidacted is

not the direct source of payment the direct source of payment

Statement of transaction giving rise to the instrument (Sec. 3)

A statement of the transaction does not destroy the negotiability of the

instrument.

Exception: Where the promise to pay or order is made subject to the terms
and conditions of the transaction stated.

REFERENCE TO TRANSACTION

Reference to another transaction or document must be descriptive rather

than restrictive. In other words, the instrument must only give information that it
was issued in connection with a particular transaction or document. It must not
make the order or promise dependent on or burdened by the other transaction.

Thus, an instrument that states it was executed “as per contract”, “by
virtue of” or “pursuant to” a specified contract is still negotiable because there is
merely a statement of the transaction that gave rise to the obligation embodied
in the instrument. Consistently, reference to a Chattel Mortgage does not make
an instrument non-negotiable.

If the instrument is restricted by the terms and conditions of another

transaction, contract or agreement, by incorporating the agreement or a portion
thereof as part of the other, the said instrument is non-negotiable. Consequently,
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a note that is “subject to” the provisions of another contract or documents is not
negotiable.

The negotiability of the instrument is destroyed the moment the holder is

required to go beyond the instrument by requiring him to check the terms and
conditions of another contract even if these terms and conditions are in fact not
conditional.

I promise to pay Patricia or order P10, 000.00 subject to the stipulations in the
Deed of Sale executed by us.

(sgd) Maria

PAYABLR ON DEMAND OR AT A FIXED PERIOD OR DETERMINABLE FUTURE TIME

Payable on Demand (Time Instruments) (Sec. 7)

a.It is expressed to be so payable on demand

(Pay X or bearer P10, 000.00 on demand)
at sight (At sight pay to the order of Pam P10, 000)
on presentation (I promise to pay P or order P10, 000 on
presentation)

b.No period ofpayment is stipulated

(Pay X or order P10, 000)

c.Issued, accepted, or endorsed after maturity

3 Types of Future Time

a.Fixed
b.Determinable
-Time in the future which takes some computation
c.Occurrence of a specified event which is certain to happen but the time of
happening is uncertain
ex. Death

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Payable at fixed period/time

I promise to pay Pedro or order P10, 000 on 31 July 2017

The holder may demand the payment of the instrument only on said date
and not before. Should he fail to demand payment, the instrument becomes
overdue but remains valid and negotiable. It is merely converted into a demand
instrument.

Determinable Future Time (Sec. 4)

a.There is a fixed period after sight/date

b.On or before a specified date/fixed determinable future time
c.On or at a fixed dater after the occurrence of an event certain to happen
though the exact date is not certain

At fixed period after date

15 July 2017

I promise to pay Portia or order P10, 000.00 ten (10) days after date.

Note: The note is payable on 25 July 2017 by simple mathematical computation. Is

the instrument is undated from the issue thereof (Sec. 17e).

At fined period after sight

This usually applies to a BE. “AFTER SIGHT” means after the drawee, to
whom the BE is addressed, shall have seen the BE when is it presented to him by
the holder for acceptance. “Sight” does not apply to a PN as it is not presented for
acceptance.

25 July 2017

Pay to Petra or order P10, 000.00 ten (10) after sight.

(sgd) Rona
To: Willy
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 If Petra presents the instrument for acceptance on July 31, 2017, its
maturity is 10 August 2017.

On or before a fixed time/period

I promise to pay Pilar or order P10, 000.00 ten (10) on or before

November 15, 2017.

(sgd) Mencio

Note: The instrument is due and will become payable on November 15, 2017;
although Mencio, the maker, has the option to pay before such date.

I promise to pay Pamela or order P10, 000.00 on or before October 25.

(sgd) Matthew

Note: NOT NEGOTIABLE. The time of payment is not determinable as the year is
not stated. Neither is it payable on demand as it is to be paid at a certain time,
October 25.

On or before a determinable future time

I promise to pay Patricia or order P10, 000.00 on or before the next school
semester

On the occurrence of a specified time

I promise to pay Paula or order P10, 000.00 ON the death of her father.

At a fixed period after the occurrence of a specified event

I promise to pay Pancho or order P10, 000.00 five (5) days AFTER the
death of his father.

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Ten (10) days before the death of Solomon, I promise to pay bearer P10,
000.00.

(sgd) Mario

Note: NOT NEGOTIABLE. The time of payment is uncertain. The word used is
“before” and the date of maturity of the instrument can be determined only after
the note has become due.

On or at a fixed date after the occurrence of an event certain to happen though
the exact date is not certain

I promise to pay Popoy or order Ten (10) days before the death of
P10, 000.00 ten (10) days after Solomon, I promise to pay bearer
The death of Solomon P10, 000.00

NEGOTIABLE. The death of Solomon NOT NEGOTIABLE. The time of

Is certain, and therefore there is no payment is uncertain. The word used
condition but a mere suspensive is “before” and the date of maturity
period. of the instrument can be determined
only after the note has become due.

Extension Clauses

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

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

Example: An instrument is still negotiable if it is payable “two (2) years from

date subject to extension for another one (1) year at the option of the maker.”

Payment upon a contingency – NOT CERTAIN

-Upon reaching the age of majority

-If his father should die within 5 days
-If his father dies of AIDS
25
 a.”Pay when ably”…..
b.”Pay within a reasonable time”….. – NOT CERTAIN

Is an instrument having all the requisites of Section 1 of the NIL and containing
a statement: “It is agreed that if my harvest will yield less than 100 sacks of rice,
this note shall be extended for one year” negotiable?

Note: NOT NEGOTIABLE. Where a note with a fixed maturity provides that the
maker has the option to extend payment until the happening of a contingency,
the instrument would be non-negotiable under the second paragraph of Section
4. The time for payment may never come.

Payable to Order (Sec. 8)

It must be payable to the ORDER OF A SPECIFIED PERSON (Pay to the order

of Pedro).

It is payable to HIM OR HIS ORDER, meaning payable to a SPECIFIED

PERSON OR HIS ORDER (Pay to Pedro or order)

The SPECIFIED PERSON may be:

the drawee (Pay to the order of yourself)

or the maker (Pay to the order of myself/myself or order)
or the holder of an office for the time being (Pay to the order of the
Chairman of PCGG)

An instrument payable to the “order of bearer” is an ORDER INSTRUMENT.

Pay to Petrus or his assigns P10, 000.00

(sgd) Mark

Note: NEGOTIABLE. The word “assigns” is a valid substitute.

I promise to pay to the order of the Secretary of XXX Association the sum of
P10, 000.00.” Is this negotiable?

26
Note: YES. The Secretary of XXX Association is the holder og an office for time
being, hence payable to order.

PAYABLE TO BEARER

a.When expressed to be so payable

b.When payable to a person named therein or bearer (Pay to Pedro or
bearer)
c.When payable to the order of a fictitious person or non-existing person
and such fact was known to the person making it so payable (Pay to the order of
Malakas)
d.When the name of payee does not purport to be the name of a person
(Pay to Cash)
e.When the last indorsement is an indorsement in blank

I promise to pay bearer Juan P10, 000.00

(sgd) Mario

Note: NOT NEGOTIABLE. It is not a bearer instrument. The word “bearer” is

merely descriptive of Juan, or it is nothing but a modifier of Juan. The instrument
is payable to a specified person named Juan, who is a bearer.

Must a check payable to the order of cash be still indorsed by the person
presenting id for payment?

Note: NO. The check is payable to bearer and need not be indorsed. (Ang Tek Lian
vs. CA)

FICTITIOUS PAYEE RULE (PNB vs. Rodriguez)

It is not limited to persons having no real existence. An existing person may

be considered a fictitious payee, depending upon the intention of the one making
or drawing the instrument.

An actual, existing, and living payee may also be fictitious if the maker of
the check did not intent for the payee to in fact receive the proceeds of the check.
Thus, a check made expressly payable to a non-fictitious and existing person is not
27
necessarily an order instrument. If the payee is not the intended recipient of the
proceeds of the check, the payee is considered a fictitious payee and the check is
a bearer instrument.

Hence, a check stating “Pay to the order of Pres. Rody Duterte P10,
000.00,” is a bearer instrument if President Duterte is not the intended recipient.

THE COMMERCIAL BAD FAITH RULE

However, there is a commercial bad faith exception to the fictitious-payee

rule. A showing of commercial bad faith on the part of the drawee bank, or nay
transferee of the check for that matter, will work to strip it of this defense. The
exception will cause it to bear the loss.

Commercial bad faith is present if the transferee of the check acts

dishonestly, and is a party to the fraudulent scheme.

The checks are bearer instruments.

When the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument; they maybe negotiated
by mere delivery. A fictitious person cannot be expected to indorse the check.

The fictitious-payee rule extends its protection even to non-bank

transferees of the checks.

THE DRAWEE MUST BE NAMED OR OTHERWISE INDICATED THEREIN WITH

REASONABLE CERTAINTY

Applies to BE.

To enable the payee or subsequent holder to know upon whom he shall

present the instrument for acceptance of for payment.

Two or more drawees may be named JOINTLY, but not in the alternative.

28
 If named in the alternative or in succession, the instrument is non-
negotiable, because the holder has no right to proceed against the drawer and
the other parties secondarily liable until the bill is dishonored by all drawees.

Thus, a BE addressed to “Walter AND Williard” is negotiable, but not one

addressed to “Walter OR William” or “Walter OR in the absence, William.”

Problem: Can a bill of exchange or a promissory note quality as a negotiable

instrument if:

It is not dated?

A:YES. Sec. 6 (a) provides that the negotiability of an instrument is not affected if
it is not dated. The date of issuance is not a requisite of negotiability prescribed
by Sec. 1 of NIL.

They day and the month, but not the year of its maturity, is give?

A:NO. Absence of the year of maturity affects the negotiability. The evident intent
is to make the instrument payable on a fixed date but the year was omitted.
Hence, the time for payment is not determinable in this case.

Problem: Can a bill of exchange or a promissory note quality as a negotiable

instrument if:

It is payable to “cash”?

A:YES. Under Sec. 9 (d) of the NIL, an instrument is payable to bearer if the name
of the payee does not purport to be the name of any person. The name of the
payee (cash) is an inanimate object, hence, it is a bearer instrument.

It names two alternative drawees?

A:NO. Sec 128 of the NIL provides that a bill may not be addressed to two or
more drawees in the alternative or in succession. Otherwise, there is no certainty
as to the person to whom the instrument may be presented for payment.

29
Can a bill of exchange or a promissory note quality as a negotiable instrument if:

It does not state the place where it is made or payable?

A: The negotiability of an instrument is not affected if does not state the place
where it is made or where it is payable. All that is required under the NIL is
compliance with Sec. 1 thereof.

Date of the instrument

Omission of the date will not affect negotiability (Sec. 6).

If not dated, it will be considered to be dated as of the time it was issued

(Sec. 17c).

If delivered, holder has prima facie authority to fill up the blanks (Sec. 14).

Where the instrument or an acceptance is dated, such date is presumed to

be the true date of the making, drawing, acceptance or indorsement, as the case
maybe (Sec. 11).

Ante-dating or post dating an instrument will not render the instrument

invalid or non-negotiable by that fact alone, PROVIDED it is not done for an illegal
or fraudulent purpose. Otherwise, it is invalid (Sec. 12).

The person to whom the instrument so dated is delivered acquires title ot

ownership over it, not as the date it bears, but as of the date it is delivered.

When date may be inserted (Sec. 13)

a.An instrument expressed to be payable at a fixed period after date is

issued undated.
b.Where acceptance of an instrument payable at a fixed period after sight
is undated.

30
Effects:
-Any holder may insert the true date of issuance or acceptance.
-The insertion of a wrong date does not avoid the instrument in the hands
of a subsequent holder in due course.
-As to the holder in due course, the date inserted (even if it be the wrong
date) is regarded as the true date.

31
PROVISIONS, STIPULATIONS, OMISSIONS, AND OTHER MATTER
NOT AFFECTING NEGOTIABILITY

When the sum payable is (Sec. 2):

a.With interest
b.In installements
c.In installments with acceleration clause
d.With exchange
e.With costs of collection or attorney’s fees if not paid at maturity

Statement of a particular fund or transaction giving rise to the instrument (Sec.

3)

The particular fund indicated should not be the direct source of payment,
else it becomes unconditional and therefore non-negotiable. The fund should only
be the source of reimbursement.

A statement of the transaction does not destroy the negotiability of the

instrument
Exception: Where the promise to pay or order is made subject to the
terms and conditions of the transaction stated.

When the instrument authorizes (Sec. 5)

a.Sale of collateral securities if not paid at maturity

b.Confession of judgment if not paid at maturity
c.Waiver of benefits of law
d.Gives option to the holder to require something to be done in lieu of
money

OMISSIONS THAT WILL NOT AFFECT THE NEGOTIABILITY OF AN INSTRUMENT

a.It is not dated

b.Does not specify the value given or that any had been given
c.Does not specify the place where it is drawn or payable
32
 d.Bears a seal
e.Designates the kind of current money in which payment is to be made

PRESUMPTION AS TO DATE. Where the instrument or an acceptance or any

indorsement thereon is date, such date is deemed prima facie to be the true date
of the making, drawing, acceptance, or indorsement, as the case may be (Sec. 11).

INSTRUMENT NEED NOT FOLLOW THE FORM OR EXACT WORDS OR LANGUAGE

OF THE LAW (Sec. 10)

It will suffice to substantially conform to the forms prescribed, not required

to use the exact words of the law.

May be written in a foreign language.

Defect in language does not destroy negotiability.

Grammatical errors or errors in spelling should no militate against the

negotiability of the instrument.

Construction where the instrument is ambiguous (Sec. 17)

 Sec. 130: A bill of exchange may be treated as a promissory note at the option
of the holder

a.Where the drawer and the drawee are on and the same person
b.Where the drawee is a fictitious person
c.Where the drawee is a person not having capacity to contract

Where the instrument is so ambiguous that there is doubt whether it is a

bill or a note, the holder may treat it either at his election (Sec. 17e).

ISSUE: The first delivery of the instrument, complete in form to a person who
takes it as a holder (Sec. 191).

DELIVERY: The transfer of possession, actual or constructive, from one person to

another with intent to transfer title (Sec. 191).
33
NEGOTIATION: The transfer of an instrument from person to another as to
constitute the transferee the holder of the instrument. If the instrument, is
payable to bearer, it may be negotiated by mere delivery although the law does
not prohibit negotiation by indorsement completed by delivery.

If the instrument is payable to order, it must be negotiated by indorsement

completed by delivery (Sec. 30).

SIGNATURE

A person whose signature appears on the instrument is liable thereon. So

that a person whose signature does not appear on the instrument is not liable
thereon.

Effect of instruments signed by two or more persons

Where the instrument containing the words “I promise to pay” is signed by

two or more persons, they are deemed to be jointly and severally liable
(SOLIDARY) thereon (Sec. 17g).

An instrument which begins with “I”, “Either of us” promise to pay, when
signed by two or more persons, make them solidarily liable. The fact that the
singular pronoun is used indicates that the promise is individual as to each other;
meaning that each of the co-signers is deemed to have made an independent
singular promise to pay the notes in full. (Republic Planters Bank vs. CA)

Exception – instances where a person whose signature does not appear on the
instrument but is still liable:

a.The principal is liable if an agent signs in his behalf (Sec. 19)

b.In case of forgery, the forger is liable even if his signature does not appear
on the instrument
c.In case the person sough to be charged on the instrument signs on an
allonge (Sec. 134 & 135)
d.Where a person uses an assumed name or trade name (Sec. 18)

34
Exception – instances where a person’s signature appears on the instrument
and yet is NOT liable:

a.In case of an undelivered and incomplete instrument (Sec. 16)

b.In case of indorsement or assignment by a minor or incapacitated person,
the latter shall not incur any liability on the instrument although such
indorsement or assignment passes title over the instrument (Sec. 22)
c.In case of a signature of an authorized agent (Sec. 18)

 PRIMARY LIABILITY vs. SECONDARY LIABILITY

-The preeminent and -Subsidiary and conditional

unconditional undertaking liability to pay the instrument
or liability to pay the instrument

-The party to whom the -The party who face liability

instrument must first be only on certain conditions
presented for payment

HOLDER

A “holder” is the PAYEE or INDORSEE of a bill or note and who is in

possession of it, or the BEARER thereof.

A “BEARER” is the person in possession of a bill or note.

May a drawee be a HOLDER?

NO. Sec. 191 defines a “holder” as a payee or indorsee and a drawee is not
a payee or indorsee.

35
PRACTICAL EXERCIES

M makes a PN payable to the order of P and delivers it to P. Is P a holder?

YES, he is the payee and in possession of the PN.

M makes a PN payable to the order of P and delivers it to X. Is X a holder?

NO, although he is in possession of the PN, he is not the payee.

R draws a BE payable to the order of P. P indorsed it to A. Is A a holder?

YES, he is the last indorsee and in possession of the BE.

M makes a PN payable to P or bearer. X is in possession of the PN. Is X a

holder? YES, he is in possession of a bearer instrument.

In preceding section, suppose X stole the note, is X a holder? YES, a person

in possession of a bearer instrument is the holder.

PARTIES/SIGNATORIES and their RIGHTS & LIABILITIES

MAKER (Sec. 60)

-A maker is primarily liable.

-Effects of making the instrument, the maker:

a.Engages to pay according to tenor of instrument

b.Admits existence of payee and his capacity to indorse

-A maker’s liability is primary and unconditional

-One who has signed as such is presumed to have acted with care and to
have signed with full knowledge of its contents, unless fraud is proved.
-The payee’s interest is only to see to it that the note is paid according to its
terms
-The makers is precluded from setting up the defense of a) the payee is
fictional, b)that the payee was insane, a minor or a corporation acting ultra vires

36
To pay instrument according to its tenor

M makes PN to the order of P for P10, 000.00 with a private understanding

that M will be liable only for the discounted amount of P9, 000.00. Thereafter P
indorsed the PN to H. How much may H collect from M, P10, 000.00 or P9,
000.00?

M ------------> P -------------> H

Answer: P10, 000 because that is the tenor of the instrument.

Existence of Payee

M makes PN to the order of P, a FICTITIOUS PERSON. The PN was indorsed

by P to A, A to B, and B to H. H presents the PN to M for payment but M refuses
to pay because P is a fictitious person. Is the defense tenable?

M ------------- > P------------- > A ------------ > B -------------- > H

(Fictitious person)

Answer: NO, because by making the PN, M admitted the existence of P, the
payee.

Capacity of the Payee

M makes PN to the order of P, a MINOR. P indorsed the PN to A, A to B, and

B to H. H presents the PN to M for payment but M refuses to pay because he did
not know that P is a minor. Is the defense tenable?

M ------------ > P ------------ > A ------------ > B -------------> -------------- > H

(Minor)

Answer: NO, because by making the PN, M admitted the capacity of P, the
payee, to indorse (Sec. 60). Also, P, although a minor, passed title to the
instrument (Sec. 22).

37
Payee’s Interest

The payee’s interest is only to see to it that the note is paid according to its
terms.

DRAWER

-A drawer is secondarily liable

-Effects of drawing the instrument, the drawer:
a.Admits the existence of the payee
b.The capacity of such payee to indorse
c.Engages that on due presentment, the instrument will be accepted
or paid or both according to its tenor
-If the instrument is dishonored, and the necessary proceedings on
dishonor duly taken:
a.The drawer will pay the amount theoref to the holder
b.Will pay to any subsequent indorser who may be compelled to pay
it
-A drawer may insert an express stipulation to negative or limit his liability

DRAWER/ACCEPTOR (Sec. 62)

-An acceptor is primarily liable

-By accepting the instrument, an acceptor:
a.Engages that he will pay according to the tenor of his acceptance
b.Admits the existence of the drawer, the genuineness of his
signature and his capacity and authority to draw the instrument
c.The existence of the payee and his then capacity to indorse

THE EXISTENCE OF THE DRAWER

He cannot refuse to pay the BE by alleging that the drawer is a fictitious

person or non-existing person.

38
THE GENUINENESS OF THE DRAWER’s SIGNATURE

The acceptor is supposed to be familiar with the drawer’s signature, so that

it is incumbent upon him before accepting the BE to determine the genuineness
of the drawer’s signature. He cannot refuse to pay by setting up the defense that
the drawer’s signature was forged.

THE CAPACITY OF THE DRAWER TO DRAW THE INSTRUMENT

He cannot escape liability by alleging that the drawer gave no consideration

or has overdrawn his account or has no account with him or that the drawer is
incapable of giving consent.

ACCEPTOR MAY VARY THE TERMS OF THE INSTRUMENT SO THAT HE CAN

BECOME LIABLE ONLY ACCORDING TO HIS OWN TERMS. HOWEVER, HE IS
ABSOLUTELY LIABLE ACCORDING TO THE TENOR OF HIS ACCEPTANCE

Rica is the drawer of a BE payable to order of Portia for P10, 000.00 that is
due on 31 July 2017. Wally is the drawee.

Wally can vary its terms by accepting as follows:

a.Accepted for P5, 000.00. he become liable only for P5, 000.00 not
P10, 000.00, the tenor of his acceptance.

b.Accepted, 10 days after sight. Thus, if presented for a acceptance

on 31 July 2017, its maturity is 10 August 2017.

c.Accepted. Payable upon delivery of a car. Wally will be liable only

upon compliance with the condition, the delivery of a car.

ACCOMMODATION PARTY (Sec. 28)

An accommodation party is one who signs the instrument as maker,

drawer, acceptor, or indorser without receiving value therefor and for the
purpose of lending his name to some other person.

39
Effects: An accommodation party is liable to the holder for value notwithstanding
that such holder knew that of the accommodation.

-The accommodated party cannot recover from the accommodation party

-Want of consideration cannot be interposed by the accommodation party
-The relation between an accommodation party and the accommodated
party is one of principal and surety
-The liability of the accommodation party is primary, unconditional,
immediate, and direct

May a creditor be accommodated by an accommodation party?

NO. In the case of Maulini vs. Serrano, Mulan cannot hold Maui liable for
lack of consideration. Maui was not an accommodation indorser who could be
made liable even if he did not receive value for the note. In cases of
accommodation indorsement, the indorser makes the indorsement for the
accommodation of the maker. Such indorsement is generally for the purpose of
better securing the payment of the note – that is, he lends his name to the maker,
not the holder.

In other words, the accommodation must be made in favor of the debtor

and not in favor of the creditor. In this case, Maui lent his name to the creditor,
Mulan and therefore, the former was not an accommodation party. Not being an
accommodation party, Maui can raise the defense of lack of consideration.

THE CHECK CERTIFIER (Secs. 187-189)

-A check certifier is primarily liable

Concept: An agreement whereby the bank certifying the check assumes liability
for its payment. It assures the payee or any subsequent holder that the check is
genuine and that the bank will honor it when presented for payment. A bank,
however, is under no obligation to certify a check even if the drawer has sufficient
funds. Upon certification, the bank usually charges the account of the drawer for
the amount certified and shifts the money to a special account to the bank.

40
Effects:
a.It is equivalent to acceptance (Sec. 187)
b.If procured by the holder, the drawer and all indorsers are discharged
(Sec. 188)
c.It operated as an assignment of the funds of drawer to the drawee bank
(Sec. 189)

THE AGENT (Sec. 20)

General rule: An agent is not liable on the instrument if he were duly

authorized to sign for or on behalf of a principal

Requisites:
a.He must be duly authorized
b.He must add words to his signature indicating that he signs as an agent
c.He must disclose his principal

-If an agent does not disclose his principal, the agent is personally liable on
the instrument

Signing as Agent

Liable personally
-Paulo **Alfredo
By Alonso President, XXX Corp
Agent

-Alonso **Alfonso
As agent of Paulo Agent/President

-Alonso **Alfonso
For Paulo Agent of PAULO

41
Signature PER PROCURATION (Sec. 21)

It operates as a notice that the agent has but a limited authority to sign.

Effects:
a.The principal is only bound if the agent acted within the limits of the
authority given
b.The person who takes the instrument is bound to inquire into the extent
and nature of the authority given

Example:

(sgd) PATRCIK
Per procuration : ALJUN

(sgd) PATRICK
Per Proc: ALJUN

(sgd) PATRICK
P.P. ALJUN

Signature in a TRADE OR ASSUMED NAME (Sec. 18)

One who signs a trade or assumed name will be liable to the same extent as
if he had signed in his own name.

Thus, if Mario signs a promissory note with “Mario Designs,” his trade
name, Mario will be liable on the instrument to the same extent as if he signed his
own name.

Indorsement by INFANT (MINOR) OR CORPORATION (Sec. 22)

General rule: Infants (minors) and corporations incur no liability by their

indorsement or assignment of a instrument.

Effects:
a.No liability attached to the infant or the corporation
42
 b.The instrument is still valid and the indorsee acquires title
c.The indorsement of the infant (minor) or the corporation passes the title

M makes PN to the orde of O

M --------- > P -------- > A --------- > B -------- > C -------- > D -------- > H
(Minor)

From M & P?
-H, whether a HDC or not, collect from M & P who cannot raise the
defense of minority because A’s indorsement passes title to the instrument

From B, C & D?
-H, a HDC or not, can collect from B, C & D because of their warranty
as indorsers: “that all prior parties had the capacity to contract” (Sec. 65 & 66)

From A?
-H, even if a HDC, cannot collect from A because A’s minority is a real
defense.

INDORSEMENT

From the Latin term “in dorsa” meaning writing on the black.

The act of signing one’s name on a negotiable instrument payable to order

indicating the intent to transfer ownership of the instrument to another. It
creates a contract between the indorser and his transferee. The law does not
require that indorsement be made on a particular side of the instrument, but they
are usually written at the back for purposes of convenience.

If an indorsement is payable to bearer, an indorsement is not required for

this negotiation but the transferee may demand that it be indorsed for purposed
of security and the identification of the transferor of the instrument.

Where to indorse?

1.On the instrument itself

43
 As a matter of practice, an indorsement is written at the dorsal
portion/back of the instrument. However, it may be written or made on the face
of the instrument itself.

2.On a separate paper: allonge

On a separate paper, called allonge, which must be attached thereto to

make such paper an integral part of the instrument.

Kinds of Indorsements

1.Special (Sec. 34)

2.Blank (Sec. 35)
3.Restrictive (Sec. 36)
4.Qualified (Sec. 38)
5.Conditional (Sec. 39)

Facultative Indorsement: this is an indorsement in which the indorser

enlarges his liability by writing over his signature a waiver of the usual demand.

Special Indorsement

Specifies the person to whom or to whose order the instrument is to be

payable. The indorsement of the indorsee is necessary for the further negotiation
of the instrument.

Pay to Antonio
(sgd) Pablo

Blank Indorsement

Specifies no indorsee. If the instrument is an order instrument, it becomes

a bearer instrument (if the last indorsement is in blank) and may be negotiated by
mere delivery.

(no indorsee)
(sgd) Pedro
44
Restrictive Indorsement

KINDS:

1.Prohibits the further negotiation of the instrument

Pay to Ariel only.

(sgd) Patricio

2.Constitutes the indorsee as agent of the indorser (agency type)

Pay to Arthur for collection only.

(sgd) Peter

3.Vests title in the indorsee in trust for or to the use of some other person (trust
type)

Pay to Ali in trust for Bobby Pay to Amy for the use of Mario
(sgd) Pablo (sgd) Popoy

Pay to Ara for my personal use

(sgd) Padre

Effect of Restrictive Indorsement

-Destroys negotiability of the instrument

-Specifies the purpose of the indorsement or the use to be made of the
instrument

It limits/restrains the NI to such purpose or use.

Qualified Indorsement

Constitutes the indorser as a mere assignor of the title to the instrument. It

does not impair the negotiable character of the instrument.

45
 It may be made by adding the words “without recourse”/”sans recourse” or
words of similar import such as “indorser not holden”; “at the indorsee’s risk”

Pay to the order of Albert without recourse.

(sgd) Placido

Conditional Indorsement

An insdorsement subject to the happening of a condition.

The party required to pay may disregard the condition and pay the indorsee
whether the condition will be fulfilled or not. But any person to whom the
instrument so indorsed is negotiated will hold the same, subject to the rights of
the person indorsing conditionally.

Example: Manuel issues a PN payable to Pablo or order for P10, 000. Pablo
indorses the PN as follows:

Pay to the order of Abet if he wins the marathon next month.

(sgd) Pablo

-Manuel may pay Abet only if he wins the marathon

-Manuel, may pay Abet and disregard the condition. Here, Abet, holds the
proceeds subject to the rights of Pablo. If Abet wins the marathon, he acquires
the proceeds absolutely. If not, Abet must return the amount to Pablo.

Who must indorse?

1.TWO OR MORE PAYEES JOINTLY

Pay to the order of A and B P10, 000.

(sgd) M

-A and B must indorse unless one of them is authorized or they are

partners. (Sec. 41)

46
2.TWO OR MORE PAYEES SEVERALLY

Pay to the order of A or B P10, 000.

(sgd) M

-A or B may indorse.

3.TWO OR MORE INDORSEES

Pay to X and Y P10, 000.00

(sgd) I

-X and Y must indorse.

Pay to X or Y P10, 000.

(sgd) I

-Either X or Y may indorse.

Pay to X P8, 000 and B P2, 000.

-NOT A VALID INDORSEMENT (Sec. 32)

Who must indorse an instrument payable to a “cashier” or other fiscal officer of

a bank or corporation?

The instrument may be negotiated by either:

1.The indorsement of the officer; or

2.Through any other authorized officer of the bank or corporation. (Sec. 42)

Indorsement where name is misspelled

1.The payee or indorsee may indorse the instrument as therein described

2.He may also add to the misspelled name his proper or correct signature

Pay to the order of Manulo (whose correct name is MANOLO)

47
 Manolo may indorse as follows:

(sgd) Manulo
OR
(sgd) Manulo (sgd) Manolo

Indorsement of instrument payable to bearer (Sec. 40)

1.Even if specially indorse, it may be further negotiated by mere delivery

2.A person specially indorsing is liable as indorser only to such holders as to make
the title through his indorsement

M ------------------ > P or bearer -------------------- > A -------------------- > H

(P specially indorsed to A) (delivery)

-H cannot hold P liable; H did not acquire title through the indorsement of P

ORDER INSTRUMENT IS CONVERTED INTO A BEARER INSTRUMENT IF THE LAST

INDORSEMENT IS A BLANK INDORSEMENT (Sec. 9e)

M ---------------- > P --------------- > A ---------------- > B -------------- > H -------------- > X
Pay to A Pay to B (Blank indorsement) Pay to X
(sgd) P (sgd) A (sgd) B (sgd) H

The order instrument that was converted into a bearer instrument because
of the blank indorsement may be specially indorsed; it RE-ACQUIRES its status as
an order instrument.

STRIKING OUT OF INDORSEMENT (Sec. 48)

M --------- > P ---------- > A ----------- > B --------- > C ---------- > D --------- > E -------- > H
Pay to A Pay to B (Blank) Pay to D Pay to E Pay to H
(sgd) P (sgd) A (sgd) B (sgd) C (sgd) D (sgd) E

Order Instrument

The holder may strike out any indorsement IMMEDIATELY FOLLOWING a

blank indorsement in case of a blank and special indorsement.
48
 If there are only SPECIAL INDORDEMENT, the holder may NOT strike out
any indorsement since he must trace his title through all the indorsement.

INDORSERS

1.General Indorser
2.Qualified Indorser
(a qualified indorser is one who indorses without recourse or sans
recourse)

Irregular/Anomalous Indorser

A person not otherwise a party to an instrument places his signature in

blank before delivery is liable as an indorser

A person who signs for the purpose of identifying a person only and not for
the purpose of incurring any liability as to the payment of a promissory note or
bill of exchange and clearly indicating that it is for the purpose of identification
only, is not an indorser. (American Bank vs. Macondray)

One who only guarantees prior indorsements does not become an indorser.
(PNB vs. CA)

Warranties of an Indorser

1.The instrument is GENUINE and IN ALL RESPECTS WHAT IT PURPORTD TO BE

(Secs. 65-66)

2.The instrument is GENUINE, VALID and SUBSISTING (G-V-S)

3.He has good title to the instrument

4.All prior parties had the capacity to contract

Warranties where negotiating by delivery or qualified indorsement: (Sec. 65)

1.The instrument is genuine and in all respect what it purports to be

49
(instrument not a forgery/materially altered/inc. & undelivered)

2.The indorser has good title to it

(Title is not defective; not obtained by fraud, duress, force, fear, or unlawful
means, for illegal consideration – Sec. 55)

3.All prior parties had the capacity to contract (not a minor, insane…)

4. Indorser has no knowledge of any fact that would impair the validity or the
value of the instrument (insolvency, absence of consideration, illegality of the
instrument

Limitations of warranties

-If by delivery: extends only to immediate transferee

-Warranty of capacity to contract does not apply to persons negotiating public or
corporate securities

When title to the instrument is defective (Sec. 55)

1.If he obtained the instrument, or any signature thereto:

a.By fraud, as when agent-broker employed to buy stock and received a

check therefor, but had not bought a stock.
b.By duress, force and fear, as when the maker signed a note under threat
of killing of a member of his family.
c.For an illegal consideration, such as, when a note is issued to stifle a
criminal prosecution.

2.When the holder negotiates it in breach of trust or circumstances amouting to

fraud.

a.When the payee negotiates a note which is already paid.

b.When a payee negotiates a note which was given as a security.
c.When a payee negotiates a note after he fails to deliver the valuable
consideration he agreed to give in return for the note.

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What constitutes notice of defect? (Sec. 56)

a.ACTUAL knowledge of the infirmity or defect, or

b.Knowledge of such facts that his action in taking the instrument amounted to
bad faith
e.g. holder who was given a taken value for an instrument negotiated to
him

NEGLIGENCE is not sufficient to constitute notice since it is not equivalent to

either actual knowledge or bad faith

CONSTRUCTIVE notice NOT APPLICABLE to commercial paper.

Warranties of a General Indorser (Sec. 66)

1.The instrument is genuine and in all respect what it purports to be

2.That he has good title to it
3.All prior parties had the capacity to contract
4.That the instrument at the time of his indorsement was valid and subsisting

In addition:
-Engages that the instrument will be accepted or paid or both according to its
tenor on due presentment
-Engages to pay the amount thereof if it be dishonored and the necessary
proceedings on dishonor are taken

GENERAL INDORSER WARRANTS THE SOLVENCY OF THE MAKER.

GENERAL INDORSER

1.Warrants the solvency of a prior party

2.The indorser warrants that the instrument is valid and subsisting regardless of
whether he is ignorant of that fact or not

3.Warranties extend in favor or a) a HDC; b)persons who derive their title from
HDC; c) immediate transferees even if not HDC
51
4.The indorser does not warrant the genuineness of the drawer’s signature

5.General indorser is only secondarily liable

Delivery/Qualified Indorder vs. General Indorder

1.The instrument is genuine and in 1.The instrument is genuine and in all

all respect what it purports to be respect what it purports to be

2.The indorser has good title to it 2.That he has good title to it

3.All prior parties had the capacity 3.All prior parties had the capacity
to contract to contract

4.Indorser has no knowledge of any 4.That the instrument at the time of

fact that would impair the validity his indorsement was valid and
or the value of the instrument subsisting

MEANING OF ADMISSION OF GENUINENESS AND DUE EXECUTION

1.That he signed it or that it was signed by another for him and with his authority
2.That at the time it was signed, it was in words and figures exactly as set out in
the pleading of the party replying upon it
3.That any formal requisites required by law, such as swearing, are complied with;
and
4.Acknowledgment, or revenue stamp which it requires, are waived by him

Instrument is genuine and in all respect what it purports to be

M ----------- > P or order ----------- > A ------------- > B -------------- > H

G.I. Q.I. G.I.

M dishonors as note is a forgery/materially altered.

-P, A and B cannot raise the defense of forgery/material alteration

notwithstanding good faith or lack of knowledge of forgery or material alteration.
52
He has good title/that title is not defective

M ----------- > P or order ----------- > A ------------- > B -------------- > H

G.I. Q.I. G.I.

M dishonors as note was obtained by fraud.

-P, A and B cannot raise the defense of defective title; they warrant good title.

All prior parties had the capacity to contract

Cannot raise the defense that a prior party is a minor, insane or deaf-mute
who does not know how to write, or a corporation is performing an ultra vires act.

M ----------- > P or order ----------- > A ------------- > B ----------- > C------------ > H
(Minor) Q.I. G.I. Q.I. G.I.

M dishonors note due to minority.

-P, A, C, and C cannot raise defense of minority; they warrant that all prior parties
had the capacity to contract.

for QUALIFIED INDORSER for GENERAL INDORSER

He has no knowledge of any fact that the instrument is valid and

would impair the validity of the subsisting
instrument or render it valueless

Q.I. is not liable is has knowledge of: -warrants the solvency of the
1.Insolvency of a person primary liable; maker
2.The absence or want of consideration, or
3.The illegality of instrument. But Q.I. will be
Liable if he has knowledge of such facts.

53
 M ----------- > P or order ----------- > A ------------- > B -------------- > H
(Insolvent) G.I. Q.I. G.I.

M is insolvent, and P, A & B has NO knowledge of insolvency.

-A is not liable; he has no knowledge of the insolvency

-P and B are liable. They warrant that the instrument is valid and subsisting.

M ----------- > P or order ----------- > A ------------- > B -------------- > H

(Insolvent) Q.I. deliver deliver
w/ knowledge w/ knowledge not aware

P – liabel to H; he violated warranty, he has knowledge of any fact that would

impair the validity of the instrument or render it valueless

A – not liable to H. Warranty extends only to immediate transferee (A to B)

B – not liable to H; he did not know of the solvency

M makes a promissory note that states: “I, M, promise to pay P5, 000.00 to B or
bearer. Signed, M.” M negotiated the note by delivery to B, B to N, and N to O. B
had known that M was bankrupt when M issued the note. Who would be liable to
O?

-N is liable to O, since N as an indorser extends warranty only to immediate

transferee.

P sold to M 10 grams of shabu worth P5 000. As he has no money at the time of

the sale, M wrote a promissory note promising to pay P or his order P5, 000. P
then indorsed the note to X (who did not know about the shabu), and X to Y.
Unable to collect from P, Y then sued X on the note. X set up the defense of
illegality of consideration. Is he correct?

-Y can collect from X. As a general indorser, it does not matter whether he has
knowledge or none; he warrants that the instrument is valid and subsisting. P is
also liable to Y, since he has knowledge of the illegality of transaction.

54
A note purporting to be signed by X and Y was indorsed by B, payee, without
recourse. It turned out that Y’s signature was forged. Is the payee-indorser, B
liable?

A makes a note payable to B or order in payment of a shabu. B, indorses it to C,

who does not know that the consideration is illegal, indorses it to D.

Can D enfore the against C? May C set up the defense that the note is void as it is
issued for an illegal consideration.

-NO. C, as a general indorser, warrants that the instrument is valid and subsisting
even if he did not know of the illegality of the consideration.

55
HOLDER
A holder is the payee or indorsee of the bill or note and who is in the
possession of it, or the bearer thereof.

A bearer is the person in possession of a bill or note which is payable to

bearer.

 Requisites of a Holder in Due Course (HDC) (Sec. 52)

a.Receives the instrument complete and regular on its face

b.Became a holder before it was overdue and had no notice that it had
been previously dishonored if such was the fact
c.Takes the instrument for value and in good faith
d.At time he took the instrument, no notice of infirmity in instrument or
defect in the title of the person negotiating it

Rights of a HDC

a.He holds the instrument free from any defect of prior parties, and free
from defenses available to prior parties among themselves
b.He may enforce payment of the instrument’s full amount against all
parties liable on it (Sec. 57)

A personal defense cannot defeat the rights of a HDC, it may only defeat the
rights of a holder who is not HDC

A real defense can defeat the rights of ALL HOLDERS, whether a HDC or not HDC

Every holder is presumed to be a HDC

a.The person who questions such has the burden of proof to prove
otherwise
b.If one of the requisites are lacking, the holder is not HDC
c.An instrument is considered complete and regular on its face if the
omission is immaterial and the alteration on the instrument was not apparent on
its face
d.An instrument is overdue after the date of maturity
56
 e.On the date of maturity, the instrument is not overdue and the holder is a
HDC
f.Acquisition of the transferee or indorsee must be in good faith
g.Good faith means lack of knowledge or notice of defect or infirmity

NOT a holder in due course

a.A transferee of a NI who purchased it after maturity from one who is not
an innocent holder
b.A holder receiving an instrument 2 years after it became overdue
(Montinola vs. PNB)
c.A pledge of a note after maturity, or a transferee receiving if after
maturity
d.One who knows upon taking the instrument that it has already been
dishonored (Chan Wan vs. Tan Kim(
e.When an instrument payable on demand is negotiated after an
unreasonable length of time after its issue, the holder is not deemed a holder in
due course (Sec. 53)

Immediate Parties

This refers to those who are immediate in the sense of having or being held
to know of the conditions or limitations placed upon the delivery of the
instrument. In other words, it contemplates privity not proximity (Sec. 58)

Remote Parties

They are parties who are not in direct contractual relation to each other.
But if they are chargeable, for example, with knowledge or notice of any
infirmities in the instrument or defect in the title of the person negotiating the
same, they will be considered as immediate parties for purposes of Sec. 16.

The Shelter Rule (Sec. 58)

A holder who is not in due course but derives his title through a holder in
due course, and who is no himself a party to any fraud or illegality affecting the

57
instrument, has all the rights of such former holder in respect of all parties prior
to the latter.

Ex: P induced M by fraud to issue a PN payable to the order of P. P indorsed the

note to A, a HDC. Then A indorsed it to H who is aware of the issuance of the PN
by means of fraud. Although Hs is not a holder in due course, H may collect from
M because he acquired the right of A, a HDC, and H was not a party to the fraud
employed by P.

If however, H was the person who directed P to induce M, H is a

party to the illegality and will not acquire the rights of A as a HDC.

Personal (or equitable) defenses:

a.Insertion of a wrong date

b.Want or lack of authority to complete an instrument
c.Want or lack of delivery of a complete instrument, or that the delivery of
the instrument was conditional or for a special purpose only
d.Absence or failure of consideration
e.Acquisition of the instrument or a signature thereon by fraud, duress,
force and fear, or other unlawful means, or for an illegal consideration
f.Negotiation of the instrument in breach of faith or under such
circumstance as will amount to amount
g.Fraud in inducement (e.g. M was made to issue a check to P as payment
for a ring which P represents as a diamond ring which in reality is only made of
glass)
h.Discharge by payment or renunciation or release before maturity
i.Illegality of contract (refers to the manner of its execution or because of
unlawful consideration)

Real (or legal or absolute) defenses:

a.Want of delivery of an incomplete instrument

b.Minority or other form of incapacity
c.Forgery

58
 d.Fraud in factum (fraud in fact) or in esse contractus (fraud in the essence
of the contracts (e.g. B obtains the signature of M for autograph purposes but B
converts the same into a negotiable instrument)
e.Discharge at or after maturity
f.Illegality of contract (the instrument or contract itself must be expressly
declared illegal by statute)
g.Duress amounting to forgery (e.g. a person takes the hand of another and
forces the latter to sing his name)
h.Material alteration (to the extent of the material alteration)

Fraud in Factum/Fraud in Esse Contractus

-Real defense

Ex: B obtains the signature of M for autograph purposes but B converts the same
into a negotiable instrument.

-a form of FORGERY

Fraud in Inducement

-Personal Defense

Ex: M was made to issue a check to P as payment for a ring which P represents as
a diamond ring which in reality is only made of glass

When title to the instrument is defective

a.If he obtained the instrument, or any signature thereto:

-By fraud, as when an agent-broker employed to buy stock and
received a check therefor, but had not bought a stock
-By duress, force and fear, as when the maker signed a note under
threat of killing of a member of his family
-For an illegal consideration, such as, when a notice is issued to stifle
a criminal prosecution

59
 b.When the holder negotiates it in breach of trust or circumstances
amounting to fraud:
-When the payee negotiates a note which is already paid
-When a payee negotiates a note which was given as a security
-When a payee negotiates a note after he fails to deliver the valuable
consideration he agreed to give in return for the note

Obtained instrument or signature by FRAUD

R draws a check payable to the order of P as payment of a ring which P says

to be a diamond ring. In reality, the ring is made of glass. P’s title is defective; he
obtained the ring through fraud.

Bong obtained the signature of Digong on a blank sheet of paper. Bong

wrote a promissory note over the signature of Digong.

Obtained instrument or signature by DURESS or FORCE or FEAR

M executed a PN payable to the order of P because P threatened to kill M.

P’s title is defective; it was obtained through fear.

A issued a check payable to cash in favor of B for 1 million. C obtained the

check from B by pulling a gun on the latter. C’s title is defective; it was obtained
by force.

Obtained instrument or signature by UNLAWFUL MEANS

The check in favor of P was stolen by T. T’s title is defective; it was obtained
by unlawful means.

Obtained instrument or signature by UNLAWFUL CONSIDERATION

R draws a check in favor of P so that P will not testify in a criminal case that
was filed against R. P’s title is defective because the consideration is unlawful.

A issued a check payable to the order of B for 1 million so that B will

consent to be the mistress of A.
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Negotiation is breach of faith

An indorser’s title is defective if he negotiates a PN that was given to him as

a mere security or if he negotiates an instrument which was already paid.

A issued a check payable to cash in favor of B for 1 million. B negotiated the

check to C “for collection.” C deposited the check to his account.

Negotiation under circumstances as amount to fraud

The payee’s title is defective when he still negotiates a PN to another

despite having obtained knowledge that the maker has no intention to honor it.

What constitutes notice of defect? (Sec. 56)

a.ACTUAL knowledge of the infirmity or defect, or

b.Knowledge of such facts that his action is taking the instrument
amounted to bad faith
e.g. holder who was given a token value for an instrument negotiated
to him

-NEGLIGANCE is NOT sufficient to constitute notice since it is not equivalent to

either actual knowledge or bad faith

-CONSTRUCTIVE notice NOT APPLICABLE to commercial paper

Modes of Transferring Negotiable Instruments

a.Transfer by Assignment
b.Transfer by Operation of Law
c.Transfer by Indorsement
d.Transfer by Delivery

Transfer by Indorsement

The legal title to the NI made payable to order can regularly be transferred
only by indorsement. The transferee of an instrument made payable to order
61
without indorsement is the equitable owner, and takes it subject to all the
equities vested in prior parties.

Transfer by Delivery

Title to a negotiable instrument may be transferred by merely delivery

when the instrument is payable to bearer. Sec. 30, NIL provides: “If payable to
bearer, it is negotiated by delivery.” Thus, one holding an indorsement in blank
may transfer it without writing upon the instrument, and in this way he escapes
some liability which he would otherwise have. He is only liable to the party who
receives it from him, and as his name does not appear on the instrument, he has
not added any credit to it.

Concept of Negotiation

The transfer of the instrument from one person to another so as to

constitute the transferee as the holder thereof. The said holder, may, in proper
cases, be a holder in due course who is free from personal defenses of prior
parties. Such feature of NI is central to its function as a substitute for money. The
essence of negotiability which characterizes a negotiable paper as a credit
instrument lies in its freedom to circulate freely as a substitute for money.

Issuance to the payee is negotiation because the transfer constitutes the

payee as the holder of the instrument. The payee may even be a holder in due
course if he has acquired the note from another holder or he has not directly
dealt with the maker thereof.

Negotiation

The transfer of the instrument from one person to another so as to

constitute the transferee as the holder thereof. It means to transfer title or
ownership to the holder.

-Negotiation is the subsequent transfer by the payee to a third party, by the

latter to the fourth, and so on.
-Issue means the first delivery of the instrument, complete in form, to a
person who takes it as a holder (Sec. 191). Issue constitutes the execution of the
62
original contract, while negotiation constitutes the execution of as many
secondary contracts, as there are negotiations.
-Strictly speaking, an instrument is not negotiated until it leaves the hands
of the payee, or person to whom it is issued.

Negotiation means the act by which a BE or PN is put into circulation by being

passed by one of the original parties to another person.

Ex: If A gives B a check on C bank, and B presents the check at the counter of C
bank, no negotiation is necessary or had. He simply demands and received
payment. But is B goes to D store and buys a bill of goods and tenders the
indorsed check in payment, he negotiates the check.

Promissory Note

P10,000 Quezon City, Philippines

01 December 2016

For value received, I promise to pay PEDRO or order the amount of

Philippine Pesos: Ten Thousand (P10,000.00) on 04 January 2017.

(sgd) Maria

Is an overdue instrument still negotiable?

The character of a bill or note as a NI continues even after its maturity until
it is paid (Bernstein vs. Pacific States). An indorsement after maturity does not
change the character of the original contract as to its negotiability, however, the
holder after maturity takes the instrument subject to defenses and equities
between prior parties (Capwell vs. Machon) because he is not a holder in due
course as he took the instrument after it is overdue. (Sec. 52b)

4 Important Principles on Negotiablity and Negotiation

a.An instrument, which is negotiable at its inception, continues to be

negotiable, until it is: restrictively indorsed under Sec. 36 or discharged

63
 b.An instrument may be temporarily lose its quality or character of
negotiability when it is indorsed to transfer a portion of the amount of the
instrument, transfer to solidary indorsees. The law says such does not operate as
a negotiation; it operates as a transfer by assignment. It is indorsed qualifiedly.
The indorsee is a mere assignee. An order instrument is transferred for value by
its holder w/o an indorsement
c.An instrument, which is an order instrument at its inception, is converted
into a bearer instrument, when only its last indorsement is in blanl
d.An instrument, which is a bearer instrument at its inception, does not
lose its character of a bearer instrument, even it is indorsed specially.

Concept of Delivery

Delivery is the final act essential to the consummation of the instrument as

an obligation. Without delivery, the instrument cannot be deemed to have been
issued. Delivery is defined as the transfer of possession of the instrument by the
maker or drawer with the intention to transfer title to the payee and recognize
him as holder thereof. Delivery means more than handing over to another; it
imports such transfer of the instrument to another as to enable the latter to hold
it for himself.

TWO STEPS in the issuance of every negotiable instrument

a.The mechanical act of writing the instrument completely in accordance

with Sec. 1; and
b.The delivery of the instrument by the maker or drawer to the payee or
holder with the intention of giving effect to it

Rules of delivery of NI

a.Delivery is essential to the validity of any NI

b.As between immediate parties or those in like cases, delivery methods
must be with intention of passing title
c.An instrument signed but not completed by the drawer or maker and
retained by him is invalid as to him for want of delivery even in the hands of a
HDC

64
 d.But there is prima facie presumption of delivery of an instrument signed
but not completed by the drawer or maker and retained by him if it is in the
hands of a HDC. This may be rebutted by proof of non-delivery.
e.An instrument entrusted to another who wrongfully completes it and
negotiates it to a holder in due course, delivery to the agent or custodian is
sufficient delivery to bind the maker or drawer.
f.If an instrument is completed and is found in the possession of another,
there is prima facie evidence of delivery and if it be a HDC, there is conclusive
presumption of delivery.
g.Delivery may be conditional or for a special purpose but such do not
affect the rights of a HDC.

Need for Delivery

Delivery under Sec. 16 (as well as Sec. 15) means transfer of possession of
the NI by one person to another with the intention to transfer title to the
instrument.

As a general rule, a NI, like any other written contract, has no legal
inception or existence, as such, until it has been delivered in accordance with the
purpose and intent of the parties. Without the initial delivery of the instrument,
there can be no liability thereon. Moreover, such delivery must be intended to
give effect to the instrument.

Illustration: M makes a note payable to the order of P and keeps it in his

drawer. In the absence of delivery, the instrument though complete in all its
particulars, there is no contract. M does not assume any liability. P does not
acquire any right against M who may revoke, cancel or tear it up with or without
any reason.

INCOMPLETE BUT DELIVERED (personal defense) (Sec. 14)

a.Where an instrument is wanting in any material particular:

-Holder has prima facie authority to fill up the blanks therein
-It must be filled up strictly in accordance with the authority given
and within reasonable time

65
 -If negotiated to a HDC, it is valid and effectual for all purpose as
though it was filled up strictly in accordance with the authority given and within
reasonable time

b.Where only a signature on a blank paper was delivered:

-It was delivered by the person making it in order that it may be
converted into a NI
-The holder has prima facie authority to fill it up as such for any
amount

Material Alteration – an alteration is said to be material if it alters the effects of

the instrument

Under Sec. 125 the following changes are considered material alterations:

a.Dates
b.The sum payable
c.Time and place of payment
d.Number or relations of the parties
e.Medium or currency for payment
f.Adding a place of payment where no place is specified
g.Any other which alters the effect of the instrument

If the instrument is wanting in material particular, mere possession of the

instrument is enough to presume prima facie authority to fill it up

Material particular may be an omission which will render the instrument

non-negotiable (e.g. name of payee), an omission which will not render the
instrument non-negotiable (e.g. date)

In the case of the signature in blank, delivery with intent to convert it into
a NI is required. Mere possession is not enough.

Warrant Liability

A warranty is an affirmation, express (by the declarant) or implied (by law),

of the existence of specified facts.
66
 A promise that a proposition of fact is true. An assurance by one party to
agreement of existence of fact upon which other party may rely. It is intended
precisely to relieve promise of any duty to ascertain facts for himself, and
amounts to promise to indemnify promise for any loss if the fact warranted
proves untrue.

M delivered a blank PN to P whom he authorized to place the amount of

P10,000. P, however, wrote P15,000 then indorsed it to A, then A to B, B to C, and
C to H. What are the rights and obligations of the parties?

For 10,000 P filled up 15,000

M ---------->P -------- > A --------- > B ---------- > C ---------- > H

ANS: If H is a HDC, he can collect 15,000 from M, P, A, B and C.

M is liable for 15,000 because in the hands of a HDC, the instrument is “valid and
effective for all purposes in his hands, and he may enforce if as if it had been filled
up strictly in accordance with the authority given.”

P can be made liable because he is a guilty party and because of his warranty
(GVS)

A, B and C are liable as indorsers (GVS)

If H is NOT a HDC, M is not liable because in the hands of a HDC “want of

authority to complete the instrument” is a personal defense.

H, even is not a HDC can enforce payment of the instrument in the amount of
15,000 against A, B and C because of their indorsement (GVS)

M purchased goods from the store of P. since the goods considered of many
items and it would take some time for P to compute the total amount due, M
issued to P a promissory note which was blank as to amount and payable to the
order of P. Before he left P’s store with the goods, M instructed P to place the
amount due on the blank as soon as the computation was completed. Although
the goods purchased amounted only to 20,000, P place the amount of 120,000 on
the blank without M’s knowledge. P then indorsed the note to A, A to B, and B to
67
H, holder. A and B were not aware of the wrongful completion of the note. May H
collect from the following?

M issued a blank PN: to fill up 20,000

P filled up 120,000 A & B were not aware of the wrongful completion

M ------------->P -------------- > A --------------- > B --------------- > H

ANS:
From M? – On the assumption that H is a HDC, the whole amount of 120,000.
Want or lack of authority to complete an instrument is mere personal defense. If
H is not a HDC, he cannot collect.

From A and B? – The whole amount of 120,000 because their warranty as

indorsers. The instrument is genuine and in all respects what it purports to be,
that the instrument is at the time of their indorsement is valid and subsisting.

Will your answer be the same (in A and B) if A and B are aware of the wrongful
completion? – It does not matter. They are still liable because of their warranties
as indorsers.

From P? – The whole amount of 120,000 for the reason that P is the guilty party
and is also liable on his warranty as an indorser.

INCOMPLETE AND UNDELIVERED (real defense) (Sec. 15)

General Rule: Where an incomplete instrument has not been delivered, it

will not, if completed and negotiated without authority, be a valid contract in the
hands of any holder against any person who signed before delivery.

-It is a real defense. It can be interposed against a holder in due course

-Delivery is not conclusively presumed where the instrument is incomplete
-Defense of the maker is to prove non-delivery of the incomplete
instrument

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R signs a blank check and keeps it in his safe. P stole the check, made himself
the payee and places the amount of 50,000. Afterwards, P indorsed it to A, then A
to B, B to C, and C to H. Can H enforce the check against R? Against P, A, B and C?

Signed blank check P stole check

M -------------->P ------------ > A ------------- > B ------------- > C ------------- > H

Against R – NO. It does not matter whether H is a HDC or not HDC. Want of
delivery of an incomplete instrument is a defense even against a HDC (a real
defense).

Against P – YES, for being the guilty party and as an indorser (GVS)

Against A, B & C – YES, they are liable because of their warranties as indorsers
(GVS)

V signed a blank check which he left in the desk in his office. P later stole the
same, who filled the amount of 30,000 and a fictitious name as payee. P then
indorsed the check in the payee’s name and passed the check to A, thereafter, A
indorsed to B; then B to C, and C to D.

Can D enforce the check against V, P, A, B and C? Reason.

ANS. D can enforce the instrument against P, A, B and C except V, who can raise
the defense against any holder that the instrument is incomplete and
undelivered.

P is liable as he is the guilty party and because of his warranties as an indorser.

A, B and C are liable due to their warranties as indorsers.

COMPLETE BUT UNDELIVERED (personal defense) (Sec. 16) or

DELIVERED CONDITIONALLY OR FOR A SPECIAL PURPOSE

General Rule: Every contract on a negotiable instrument is incompleted and

revocable until delivery for the purpose of giving effect thereto.

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 a.If between immediate parties and remote parties not holder in due
course, to be effectual there must be authorized delivery by the party making,
drawing, accepting or indorsing. Delivery may be shown to be conditional of for a
special purpose only.
b.If the holder is a holder in due course, all prior deliveries are conclusively
presumed valid.
c.If instrument not in hands of drawer/maker, valid and intentional delivery
is presumed until the contrary is proven.

M executed a PN payable to the order of P for 10,000 then placed it inside his
drawer. P stole the PN and indorsed it to A, A to B, B to C, and C to H. What are
the rights and liabilities of the parties?

P stole check
M -------------->P ------------ > A ------------- > B ------------- > C ------------- > H

ANS:
If H is a HDC, he can enforce the PN against M, P, A, B and C.
As to a HDC, “a valid delivery of the instrument by all parties prior to him is
CONCLUSIVELY PRESUMED.” In addition, P, A, B and C are liable because of their
warranties as indorsers (GVS).

If H is not a HDC, H cannot enforce the PN against M. the defense of “want of

delivery of a complete instrument” is a personal defense.
H can enforce the PN against P, A, B, and C because of their warranties as
indorsers.

DELIVERED CONDITIONALLY OR FOR A SPECIAL PURPOSE

M issued a PN complete in form and in substance in favor of P. It was

agreed that the PN shall become binding on M only if M shall have secured the
approval of his loan from the bank.

Without M’s authority, P indorsed the PN to A, then A to B, B to C, and C to

H.

70
 What if M issued the PN to P for safekeeping. But P indorsed it to A, A to B,
B to C, and C to H.

ANS:
If H is not HDC, he cannot enforce the PN against M. The non-fulfillment of the
condition or that the PN was delivered only for sakekeeping, is a valid defense.

If H is HDC, he can enforce the PN against M. As to a HDC, “a valid delivery of the

instrument by all parties prior to him is CONCLUSIVELY PRESUMED.”

H, whether HDC or not, can enforce the PN against P, A, B and C because of their
warranty as indorsers.

M executed a promissory note for 10,000 payable to the order of P and placed it
in his drawer. Without M’s knowledge, P took the note and indorsed it to A, who
in turn, indorsed the note to H, a holder in due course. May H collect from M?

10,000 P stole note

M ------------- > P or order -------------- > A --------------- > H

ANS: Yes, because M is not allowed to prove that the note was taken from him by
without his consent. The instrument is complete but undelivered which is merely
a personal defense that is unavailable against a HDC. Besides, in the hands of
HDC like H, the delivery in conclusively presumed.

FORGERY (Sec. 23)

Applies ONLY to forged signatures or signatures made without authority,

and to no other case. It does not apply to altered amounts or other matters that
alter the effect of the instrument, in which case, Section 124 on material
alteration will govern.

Fraud Amounting to Forgery

If the blank paper with signature is delivered for autograph purposes but
the person to whom it is delivered converts it into a negotiable instrument, the
same amounts to a forgery which is a defense even against a holder in due
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course. This is known as FRAUD IN FACTUM or FRAUD IN ESSE CONTRACTUS. It is
a real defense.

Fraud in inducement (a personal defense)

When A sells to B what he represents to the latter as a diamond ring which

is in fact made of glass only. B issues a check of a promissory note. Is there forger?
Is a holder in due course of such instrument protected?

ANS: There is fraud but it does amount to forgery. The fraud is a fraud in
inducement. There being an intention to issue a negotiable instrument, a holder
in due course is protected.

Fraud in Factum/Fraud in Esse Contractus

-Real defense

Ex: B obtains the signature of M for autograph purposes but B converts the same
into a negotiable instrument.

-a form of FORGERY

Fraud in Inducement

-Personal Defense

Ex: M was made to issue a check to P as payment for a ring which P represents as
a diamond ring which in reality is only made of glass

Effects of Forgery

a.Only the signature forged or made without authority is stated by law to

be inoperative but neither the instrument itself is, nor the genuine signatures are,
rendered inoperative.
b.The instrument can be enforced by holders to whose titles over the
instrument the forged signature is not necessary, such as, a forged indorsement
of a bearer instrument.
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 c.The instrument can be enforced against those who are precluded from
setting up defense of forgery, even against those whose signature are forged.

Parties precluded

a.Indorsers (qualified or general): they warrant that the instrument

indorsed is genuine, valid and subsisting and in all respects what is purports to be
(Secs. 65 & 66).
b.Person negotiating by mere delivery: he warrants that the instrument is
genuine and in all respects what it purports to be. The warranty extends only to
the immediate transferee.
c.Accepter: by accepting the bill, he admits the genuineness of the
signature of the drawer.
d.Those who are stopped. Like in case of silence or negligence or failure to
repudiate the forgery within a reasonable time.

*Doctrine of comparative negliegence.

MAKER’s signature was forged in a PN payable to ORDER

M -------------->P ------------ > A ------------- > B ------------- > C ------------- > H

-H cannot hold M liable. M’s signature is inoperative

-H can hold P criminally liable for the forgery and as an indorser
-H can hold A, B & C liable because of their indorsements

MAKER’s signature was forged in a PN payable to BEARER

M -------------->P ------------ > A ------------- > B ------------- > C ------------- > H

-H cannot hold M liable. M’s signature is inoperative

-H can hold P criminally liable for the forgery
-H can hold C liable; C is liable to the immediate transferee
A is liable to B, not to C.
B is liable to C, not to H.

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INDORDER’s signature was forged in a PN payable to ORDER

A’s signature was forged by F

M -------------->P ------------ > A ------------- > B ------------- > C ------------- > H

-H cannot hold M, P and A liable. Instrument is wholly inoperative as to them

-H can hold F criminally liable for the forgery
-H can hold B & C liable because of their indorsements

INDORDER’s signature was forged in a PN payable to BEARER

A’s signature was forged by F

M -------------->P ------------ > A ------------- > B ------------- > C ------------- > H

-H can collect from M, P and A if H is a HDC. The forged indorsement is not

necessary for negotiation.
-H cannot collect from M, P and A if H is NOT a HDC, not because of forgery but
for want of delivery of a complete instrument.
-H can hold F criminally liable for the forgery
-H can hold B and C due to their indorsements

A, maker, executed a PN payable to the order of B, payee. B lost the note. X
found it, signed the name of B and negotiated the instrument to C, C to D, D to E,
holder. Is A, X, B, C or D liable to E?

X found note;forged B’s indorsement

A -------- >order of B -------- > C ---------- > D ---------- > E

-D, C and X (forger) are liable. They are precluded from raising forgery as a
defense. As general indorsers, they warrant that the instrument is genuine and in
all respect what it purports to be and that the instrument is valid and subsisting. X
is deemed to have signed in an assumed name and, therefore, has the same
warranties as a general indorser.

-B is NOT liable. He neither signed the instrument not authorized X to sign for
him.

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-A is NOT liable. The forged signature of B is wholly inoperative and did not validly
transfer title over the instrument to C. Insofar as A is concerned, what C acquired
are only the rights of a forger which was transferred to D and then to E. E then
has no right to enforce the instrument against A.

A, makes a note, complete in form and in substance, in favor of B or bearer. X

steals it and indorses it to C by signing the name of B. Can C hold A and B liable?
Why?
X steals it; forged B’s indorsement
A ------------ > B or bearer ------------- > C

-If C is a HDC, YES. If not a HDC, NO. The party whose indorsement is forged and
parties prior to him including the maker may be held liable by a HDC but not by
one who is not a HDC. The forged indorsement is not necessary to the title of the
holder since instruments payable to bearer can be negotiated by mere delivery.

D, debtor of C, wrote a promissory note payable to the order of C. C’s brother,
M, misrepresenting himself as C’s agent, obtained the note from D, then
negotiated it to N after forging C’s signature. N indorsed it to E, who indorsed it to
F, a holder in due course. May F recover from E?

M fraudulently acquired note; forged C’s signature HDC

D ----------- > order of C ------------- > N ------------- > E ------------- > F

-Yes, since only the forged signature is inoperative and E is bound as indorser.

M makes a 10,000 note payable to the order of O who indorsers it to A. F

obtains possession of the note fraudulently, forges A’s signature, alters the
amount to 70,000 and indorses it to B who in turn indorses to C.

Can C enforce the note against M? If so how much can C collect from M?

Can C enforce the note against B? If yes, how much can he collect from B?

F forged A’s signature’ alters to 70,000

M ----------- > order of O ---------- > A ----------- > B ------------- > C

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-NO, M is not liable. The note is wholly inoperative as to him. In an order
instrument, the person whose signature was forged and all prior parties are not
liable. The instrument as to them is inoperative.

-YES. Because of the warranties of B as an indorser: GVS. C can collect 70,000.

Due to his debt to C, D wrote a promissory note which is payable to the order of
C. C’s brother, M, misrepresenting himself as agent of C, obtained the note from
D. M then negotiated the note to N after forging the signature of C. May N
enforce the note against D?

M, by misrepresentation, obtained PN from D

And forged C’s signature
D ------------------- > order of C ------------------------ > N

-No, since the signature of C was forged. A person whose signature was forged,
and all prior parties are not liable on the instrument. D is a prior party.

X (forger) executed a PN by signing the name of Y as maker, making himself (X)

as payee of the instrument. Then X (forger-payee) negotiates the note to A; but
before accepting the note, A asks Y if everything is in order with the note to which
Y says: “Yes, that’s OK.”

Can Y raise the defense of forgery?

-NO. Y is precluded from putting up the defense of forgery because by his

declaration, he is stopped from denying the validity of the instrument.

A sells to B what he represents to the latter as a diamond ring which, in fact is

only glass. B issues to A a check.

Is there forgery? Is A a holder in due course.

-NONE. There is fraud but it does amount to forgery. The fraud is a fraud in
inducement. There being an intention to issue a negotiable instrument, a holder
in due course is protected. A is not a holder in due course; he is in fact the guilty
party.
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X (forger) executed a BE by signing the name of Y as drawer, making himself (X)
as payee of the instrument and addressed the BE to Z as drawee. Then X (forger-
payee) negotiates the BE to Z for acceptance. Z accepts and signs the bill as
acceptor. Can Z later refuse to pay the BE by putting up the defense of forgery of
the signature of the drawer?

Pay to X or order.
Y (drawer) (forged by X)
To: Z (accepted)
(drawee)

-NO. Z is precluded from putting up the defense of forgery. As acceptor, Z

warrants the genuineness of the signature of the drawer.

Fe forged the name of Dan, manager of a trading Company, as the drawer of a
check drawn against ChinaBank. ChinaBank did not detect the forgery and paid
the amount. May ChinaBank charge the amount against the account of Dan?

DAN: drawer
(Fe forged Dan’s signature)
CHINABANK
Drawee

-No. The signature of Dan was forged and the check is inoperative as to him.
Chinabnk as to him. Chinabank cannot charge the account of Dan.

“A bank is bound to know the signature of its customers; if it pays a forged

check, it must be considered as making the payment out of its funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose name
was forged.” (San Carlos Milling vs. Bank of PI & Chinabank)

A (drawer) signed a check payable to B (payee), drawn against RCBC Bank

(drawee bank). C fraudulently obtained said check and forged the signature of B
and indorsed it himself (C, forger). Then C personally signs the check and deposits
the check to his account at PCIBnk, which in turn indorsed the check to RCBC
Bank, which paid the amount and consequently charged the account of A, drawer.
What are the rights and liabilities of the parties in this case?
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 C, forged B’s signature; indorsed it himself then deposit to PCIBank
Check: B, payee -------------------------- > C ------------------------------- > PCIBank
A (drawer)

RCBC Bank (drawee) < -----------------------------------------------------------------

(paid check) indorsed

-RCBC Bank can NOT charge the account of A, drawer. As depositary bank, RCBC
has the contractual obligation to A as depositor to pay only the person designated
by the drawer as payee or his order and no other.

PCIBank as collecting bank, is liable as indorser to RCBC Bank. PCIBank shall

bear the loss. Its only remedy is to go against the forger.

A, drawer, cannot go against PCIBank because there is no privity of contract

between them.

Where a check is drawn payable to the order of one person and is presented to
a bank by another and purports upon its face to have duly endorsed by the payee
of the check, it is the duty of the bank to know that the check was duly endorsed
by the original payee, and where the bank pays the amount of the check to a third
person, who has forged the signature of the payee, the loss falls upon the bank
who cashed the check, and its only remedy is against the person to whom it paid
the money. (Great Eastern vs. RCBC)

The 24-hour clearing house rule

The 24-hour clearing house rule is a valid rule applicable to commercial

banks. It is true that when an endorsement is forged, the collecting bank or last
endorser, as a general rule, bears the loss. But the unqualified endorsement of
the collecting bank on the check should be read together with the 24-hour
regulation on clearing house operation. Thus, when the drawee bank fails to
return a forged or altered check to the collecting bank within the 24-hour clearing
period, the collecting bank is absolved from liability (Republic vs. CA).

The alteration of the serial number of a check is an immaterial or innocent one.

(PNB vs. CA)
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 Immaterial alteration and spoliation do not avoid instrument but holder
may enforce it only according to its original tenor.

Is there immaterial alteration when the serial number of a check had been
altered?

NONE. An alteration is said to be material if it alters the effect of the

instrument. It means an unauthorized change in an instrument that purports to
modify in any respect the obligation of a party or an unauthorized addition of
words or numbers or other change to an incomplete instrument relating to the
obligation of a party. The alteration of the serial number of a check did not
change the relations between the parties nor the effect of the instrument. Hence,
the alteration on the serial number of a check is not a material alteration.

Example: Material Alteration

M makes a promissory note for P300 payable to P or order. P indorses the

note to A. A alters the amount to P500 then indorses it to B who indorses it to C
and C to H. May H recover from M? if so, how much?

P300
M ------- > P -------- > A ---------- > B ----------- > C ---------- > H

-If H is a holder in due course and is not a party to the alteration, H may recover
the original tenor which is P300.

-If not a HDC, he recovers nothing.

Material Alteration

P300 P500
M ------- > P ------------ > A ---------- > B ----------- > C ---------- > H

-H can recover nothing from M if he is not a HDC

-H, if a HDC, may recover the original tenor which is P300

79
Manuel makes a promissory note for 3,000 payable to the order of Pedro. Pedro
negotiates the note to Anton who with the consent of Pedro raises the amount to
30,000 and thereafter indorses it to Boy, Boy to Cris, and Cris to Doy.

Can Doy collect from M? How much?

P3,000 Anton with Pedro’s consent, altered amount to P30,000

M --------- > Pedro or order ---------- > Anton -------- > Boy ------- > Cris ----- > Doy

ANS: If Doy is a HDC and since he is not a party to the alteration, Doy may recover
the original tenor which is P3,000.

If not a HDC, he recovers nothing.

FAILURE OF CONSIDERATION (personal defense)

M makes a note of P500 payable to the order of P in consideration for

certain date. P negotiates the note to A, to B, to C, and then to H, a holder in due
course. On due date, H presented the note to M for payment who refused to pay
because P did not deliver the goods in consideration for which the note was
issued. May H recover?

M -------------->P ------------ > A ------------- > B ------------- > C ------------- > H

ANS: H may recover. Lack of consideration is a personal defense and cannot

defeat the rights of a HDC

Eva issued to Imelda a check in the amount of 50,000 postdated September 30,
2012, as a security for a diamond ring to be sold on commission. On September
15, 2012, Imelda negotiated the check to MT Investment which paid the amout of
40,000 to her.

Eva failed to sell the ring, so she returned it to Imelda on September 19,
2012. Unable to retrieve her check, Eva withdrew her funds from the drawee
bank. Thus, when MT Investment presented the check for payment, the drawee
bank dishonored it. Later on, when MT investment sued her, Eva raised the

80
defense of absence of consideration, the check having been issued merely as
security for the ring that she could not sell.

Does Eva have a valid defense?

ANS: NO. Absence of a consideration is a personal defense and is not available

against MT Investment which is a holder in due course. Likewise, the fact that the
check was issued merely as security is not a ground to discharge the check as
against MT Investment, a holder in due course. The check can only be discharged
under the grounds in Section 119.

M issued a promissory note to the order of P for P10,000 for a ring which P said
was made of pure gold but which is only gold plated. Subsequently, P indorsed
the note to H. On due date, how much, if any, may H collect from M?

ANS: If H is a holder in due course, he may collect the whole amount of P10,000
from M. but if H is not a HDC, he may collect nothing because M can raise the
defense of want or absence of consideration (Sec. 28).

PARTIAL FAILURE OF CONSIDERATION is a defense pro tanto

Pro tanto: only “for so much”

Millet issued a PN payable to the order of Pedro to P10,000 for goods

purchased from the latter. Pedro, however, delivered goods worth P7,000 only.
Later, Pedro indorsed the note to Abe, Abe to Bob, Bob to Carl, and Carl to Holly.
At maturity, how much can Holly collect from Millet?

ANS: If Holly is a HDC, she can collect the whole 10,000. If Holly is not a HDC, she
can only collect P7,000 from Millet who can raise the defense of partial
consideration amounting to P3,000. Millet is raising the defense pro tanto.

M issued a promisoory note payable to the order of P for P10,000 for

merchandise he purchased from the latter. P, however, was able to deliver
merchandise worth P7,000. Later, P indorsed the note to H. At maturity, how
much may H (NOT a holder in due course) collect from M?

81
Presentment for payment (Sec. 70)

Production of BE to the drawee for his acceptance or to a drawee or

acceptor for payment. Also, presentment of a PN to the party liable for payment
of the same.

Consists of: a)a personal demand for payment at a proper place; b) the bill
or note must be ready to be exhibited if required and surrendered upon payment

Parties primarily liable – persons by the terms of the instrument are

absolutely required to pay the same. e.g. maker and acceptors. The can be sued
directly.

If payable at the special place, and the person liable is willing to pay there
at maturity, such willingness and ability is equivalent to tender of payment.

Presenment is necessary to charge persons secondarily liable otherwise

they are discharged

Acts needed to charge persons secondarily liable: a)presentment for

payment/acceptance; b) dishonor by non-acceptance/non-payment; c)notice of
dishonor to secondary parties

Presentment for payment

Necessary to charge, i.e. fix liability of, drawer and indorsers (Sec. 70)

Persons who should make the presentment:

a.the holder; or
b.a person authorized to receive payment on holder’s behalf

Time when presentment should be made

a.It must be done within a reasonable time after its issue if instrument is
payable on demand
-In case of a BE, presentment may be done within a reasonable time
after the last negotiation
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 -In case of an instrument payable at a bank, presentment must be
made during banking hours
b.It should be done on the day it falls due, if instrument is other than the
demand instrument
c.It must be done at a reasonable hour on a business day

Delay in presentment, when excused

Delay in giving notice is excused when delay is caused by circumstances

beyond holder’s control and not imputable to his fault, misconduct or negligence.
When cause of delay ends, presentment must be made within a reasonable
diligence.

Ex: When notice of dishonor cannot be given because the place of the maker is
isolated by landslides, the delay in giving notice of dishonor is excused. However,
when the place of the maker becomes accessible, presentment for payment must
be made to him with reasonable diligence. Here, only the delay in making
presentment is excused, but not the presentment for payment which is still
required.

Person to whom presentment should be made (Sec. 72d)

a.The person primarily liable (maker or the acceptor)

-If he has died: a) at a specified place of payment, or b) to his
personal representative, if no place is specified
-If primary parties are liable as partners: a) at a specified place of
payment, or b) to anyone of them, if no place is specified
-If primary parties are jointly liable: a) at a specified place of
payment, or b) to all of them, if no place is specified
b.Any person found at the place where presentment is made, if maker or
acceptor is absent or inaccessible

To whom should presentment be made where the principal debtor is dead

To his personal representative if:

a.NO place of presentment is specified; and

83
 b.A representative was designated who can be found with the exercise of
reasonable diligence

If a place for presentment is specified, the holder is NOT required to

present it to the maker’s personal representative but may be made to any person
found at the place specified.

Presentment for payment excused IF:

a.After due diligence, presentment cannot be made

b.Presentment is waived
c.The drawee is a fictitious person

A made a note payable to B or order on a specified date. B indorsed the note to

C. Upon maturity of the instrument, C filed an action against A and B. Both A and
B raised the defense that no demand for payment was made on the maker. Is the
defense proper?

ANS: The defense of A, the maker is not proper because being primarily liable on
the instrument, presentment for payment is not necessary to hold him liable.

The defense of B, the indorser is proper because being only secondarily

liable on the instrument, presentment for payment to the maker is necessary to
hold the indorser liable.

Legal Tender Power

All notes and coins issued by the BSP shall be fully guaranteed by the
Government of the RP and shall be legal tender in the Philippines for all debts,
both public and private.

A PN provides that presentment for payment be made at the residence of the

maker at No. 123 Medical St., Quezon City. On the day of maturity, the holder
went to the residence of the maker to make a presentment for payment but the
maker was abroad at that time and so, presentment was made to the wife of the
maker. Is such presentment valid?

84
ANS: Yes. The presentment is valid. While presentment for payment must be
made to the person primarily liable on the instrument, however, if he is absent or
inaccessible, presentment could be made to any person found at the place where
presentment is made.

Dishonor by non-payment

There is dishonor by non-payment when:

a.Payment is refused or cannot be obtained, despite due presentment, or

b.Instrument is overdue, and presentment is excused

*The immediate right of recourse to all parties secondarily liable accrues to

holder, when instrument is dishonored by non-payment.

Notice of Dishonor

Given by the holder to the parties secondarily liable, drawer and each
indorser, that the instrument was dishonored by non-acceptance or non-payment
by the drawee/maker

General rule: Any drawer or indorser to whom such notice is not given is
discharged.

Mere knowledge of the non-payment/dishonor is insufficient.

a.May be written or oral
b.Written notice need not be signed or may be supplemented by verbal
communication
c.May be by personal delivery or by mail

Waiver of notice of dishonor

Waiver, whether express or implied, of notice may be done before the time
of giving notice has arrived or after omission to give due notice. If waiver is in the
instrument, it binds all parties, but if it is written above an indorser’s signature, it
binds only him.

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ACCEPTANCE

It is the signification by the drawee of his assent to the order of the drawer.
It is an act by which a person on whom the BOE is drawn assents to the request of
the drawer to pay it.

-Drawee becomes primarily liable as an acceptor

-Mere retention is equivalent to acceptance

Acceptance may be:

a.Actual
b.Constructive
c.General
d.Qualified

Necessity of Notice of Dishonor

a.As against party primarily liable

-NO NEED because he is the person who dishonored the instrument
b.As against parties secondarily liable
-a MUST to make them liable
-note exceptions in Secs. 112 – 117

Presentment for Acceptance (applied to BE only)

It is the demonstration of the bill to the drawer to secure his consent to pay
it. Presentment is either necessary or optional.

Presentment is necessary when the bill:

a.is payable after sight, or where it is necessary to fix maturity date
b.expressly stipulates that presentment is necessary; or
c.is drawn payable elsewhere than drawee’s residence or place of business

*Failure to make necessary presentment discharges drawer and indorsers.

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Even if a BE is not required for presentment, it is better to present it for
acceptance for additional security. When dishonored, holder has an immediate
recourse against parties secondarily liable.

Requisites for valid acceptance

a.It must be in writing and signed by drawee.

-Holder may require that the acceptance be written on the bill itself. If his
request is refused, holder may treat the bill as dishonored
-If acceptance is on an allonge (paper other than the bill itself), it does not
bind acceptor except in favor of a person to whom it is shown and who on faith
receives bill for value

b.It must not express that drawee will perform his promise by any other means
than payment of money

c.It must be given within the period allowed by holder or if none is give, within 24
hours from presentment

Rules on presentment for acceptance

a.Drawer’s destruction of bill, when it is presented to him for acceptance is

acceptance
b.Drawee’s refusal to return bill, accepted or not, to holder within period allowed
by holder is acceptance
c.An unconditional written promise to accept before a bill is drawn is deemed
actual acceptance in favor of every person who, upon faith thereof, received the
bill for value
d.Certification of a check by the drawee bank is equivalent to acceptance
e.Acceptance may either be general or qualified

Actual Acceptance

-in writing
-signed by drawee
-must not express the drawee will perform his promise by any other means
than payment of money
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 -communicated or delivered to the holder
-there must be delivery or notification of the acceptance

*Acceptance is usually made by writing the word “Accepted”, “Good”, “Certified”,

“Honored,” or any word/s of similar import on the face of the bill, followed by the
signature of the drawee. However, any of these words is not required as the
signature of the drawee is sufficient.

Constructive Acceptance

a.Where the drawee to whom the bill has been delivered destroys it
b.The drawee refuses within 24 hours after such delivery or within such time as if
given, to return the bill accepted

General Acceptance

a.Assents without qualification to the order of the drawer

b.The drawee engages to pay according to the tenor of the BE
c.An acceptance to pay at a particular place if a general acceptance. However, if
the acceptance is to be paid at a particular place and no other, it is a qualified
acceptance.

Ex: Accepted, payable at PNB, Escolta, Manila is a general acceptance.

Accepted, payable at PNB, Escolta ONLY, is a qualified acceptance.

Qualified Acceptance

Varies the effect of the BE as drawn.

KINDS:
a.Conditional: makes the payment dependent on a condition (Accepted. To be
paid if payee passes the CPA Licensure Exams)

b.Partial: Acceptor agrees to pay only part of the amount draw. (Accepted only for
P60,000 of BE for P100,000)

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c.Local: Acceptance to be paid only at a particular place. (Accepted. Payable at
PNB, Escoltaonly)

d.Qualified as to time: Acceptance varies the time. (Accepted. Payable 60 days

after date of a BE 10 days after date)

e.Acceptance by one or more but all of the drawees. (a BE against A, B and C was
accepted by A only)

Rights of parties to a qualified acceptance

a.The holder may refuse to take a qualified acceptance. If he does not obtain one,
he may treat the BE as dishonored by non-acceptance.

b.Where a qualified acceptance is taken, the drawer and indorsers are discharged
from liability, EXCEPT:

-They have expressly or impliedly authorized the holder to tale a qualified

acceptance; or
-When they subsequently assent thereto. (Where the drawer or an indorser
receives a notice of qualified acceptance, he must, within reasonable time,
express his dissent to the holder, or he will be deemed to have assented thereto.)

Dishonor by non-acceptance

It is the failure of holder to get the drawee’s consent. It may also occur in
either of two ways:

a.Holder, who has required that acceptance be written on bill itself and
whore request is refused, may treat bill as dishonored.
b.Holder who refuses to take qualified acceptance and does not obtain it,
may treat bill as dishonored by non-acceptance

When presentment for acceptance is excuses

a.Where drawee is either:

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 -Dead (in presentment for payment, it is presented to personal
representative or at a specified place)
-Absconded
-A fictitious person
-Incapacitated to contract a BE (e.g. drawee is a minor)

b.Where after exercise of reasonable diligence, presentment for acceptance

cannot be made

c.Where, although presentment is irregular, acceptance is refused on some other

ground (ex: drawer has insufficient funds)

Duty of holder where BE is not accepted

Holder must treat BE as dishonored by non-acceptance. Accordingly:

a.Notice of dishonor must be given to drawer and each indorser

b.If BE is a foreign BE, the same must be protested

Holder has an immediate right of recourse against drawer and indorsers

and no more need for presentment for payment.

Referee in case of need

A person named by the drawer or any indorser in a bill to whom

presentment may be made in case the instrument is dishonored by non-
acceptance or non-payment. The holder may or may not resort to such person, at
his option.

Pay to P or order P10,000

R
To:W
(dishonored)

-Apply to X in case of need

*If X pays, he may recover from R or the indorsers

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Notice of Dishonor

It must be given to drawer and each indorser when instrument is

dishonored by non-acceptance or non-payment. Drawer or any indorser to whom
notice is not given is discharged.

Notice of dishonor is dispensed with when after exercise of reasonable

diligence, it cannot be given to or does not reach the parties sought to be
charged.

Notice to drawer need not be given under certaincases

Notice of dishonor is not required if the drawer has no right to expect or

require the bank to honor the check, or if the drawer has countermanded
payment. All the checks were dishonored for any of the following reasons:
“account closed”, “account under garnishment”, “insufficiency of funds”, or
“payment stopped”. In the first three instances, the drawers had no right to
expect or require the bank to honor the checks, and in the last instance, the
drawers had countermanded payment. (Great Asian Sales Center Corp. vs. CA)

Delay in giving notice of dishonor

Delay in giving notice of dishonor is excused when delay is caused by

circumstances beyond the holder’s control and not imputable to his default,
misconduct or negligence. When cause abates, notice must be given forthwith.

Ex: When notice of dishonor cannot be given because the place of the party to be
notified is isolated by landslides, the delay in giving notice of dishonor is excused.
However, when the place of the party becomes accessible, notice of dishonor
must be given with reasonable diligence. Here, only the delay of notice of
dishonor is excused, but not the giving of notice of dishonor.

Waiver of notice of dishonor

Waiver, whether express or implied, of notice may be done before the time
of giving notice has arrived or after omission to give due notice if waiver is in the

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instrument, it binds all parties, but if it is written above an indorser’s signature, it
binds only him.

Protest

Formal statement in writing made by a notary under his seal of office at the
request of the holder, in which it is declare that the some was presented for
payment or acceptance (as the case may be) and such was refused.

General rule: Protest is required only for foreign bill.

Exceptions: Inland bills and notes may also be protested if desired.

INLAND BILL: on its face is both drawn and payable in the Philippines. Any other
bill is a foreign bill.

Inland Bill or Foreign Bill

An inland bill is a bill which is, or on its face purports to be, both drawn and
payable within the Philippines. Any other bill is a foreign bill.

Unless the contrary appears on the face of the bill, the holder may treat is
as an inland bill. It is important to determine if the bill is a foreign bill or an inland
bill because there are provisions of the NIL which apply only to foreign bills. For
instance, a foreign bill must be protested in case of dishonor while an inland bill
need not be protested.

Causes of Discharge of the Instrument

a.Payment in due course by the debtor

b.Payment by accommodated party
c.Intentional cancellation by holder of instrument
d.Any other act discharging a simple monetary obligation
e.Debtor becomes holder of the instrument at/after maturity in his own right

Discharge of the instrument discharges all the parties thereto

-Payment must be in due course, and by the principal debtor or on his behalf
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-If payment is not made by the principal debtor, payment only cancels the liability
of the payor and those obligated after him bust does not discharge the
instrument
-payment by an accommodation party does not discharge the instrument

Requisites for payment in due course

a.Made at or after the maturity of the instrument

(Payment before maturity is not payment in due course and will not
discharge the instrument)
b.To the holder
c.In good faith
d.Without notice of any defect in the holder’s title

*Payment must be made to the possessor of the instrument

*Possession of the note by the make is presumptive evidence that it has been
paid

INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT

a.Issue (Sec. 191)

b.Negotiation (Sec. 30)
c.Presentment for acceptance (BE – Sec.143)
d.Acceptance (Sec. 132)
e.Dishonor by Non-Acceptance (Sec. 149)
f.Presentment for Payment (Sec.. 70)
g.Dishonor by Non-Payment (Sec.83)
h.Notice of Dishonor (Sec. 89)
i.Protest (Foreign Bill – Sec. 152)
j.Discharge (Sec. 119)

These are notes from Atty. Larry Ignacio’s power point presentation during
recitation. I do not own the contents of these notes. For educational purposes
only.

CABAÑGON, MFD.
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