Nego Reviewer Final

NEGOTIABLE INSTRUMENTS -
GENERAL PRINCIPLES
Law on Negotiable Instruments
Negotiable Instruments - General Principles

PURPOSE OF CODIFICATION
Chief purpose was to produce uniformity in the laws of the different states upon
this important subject, so that the citizens of each state might know the rules which
would be applied to their notes, checks, and other negotiable paper in every other state in
which the law was
enacted, since it is an absolute impossibility for the commercial purchaser
Second purpose was to preserve the law as nearly as possible as it then existed
COMMON FORMS OF NEGOTIABLE INSTRUMENTS

1. Promissory notes
2. Bills of exchange
3. Checks, which are also bills of exchange, but of a special kind
PROMISSORY NOTE, SECTION 184

“A negotiable promissory note, within the meaning of this act, is an unconditional
promise in writing by one person to another, signed by the maker
(1), engaging to pay on demand or at a fixed or determinable future time
(2), a sum certain in money
(3) to order or to bearer
(4). Where a note is drawn to the maker’s own order, it is not complete until indorsed by
them.”
Essentially a promise in writing to pay a sum certain in money
The promise is to pay on demand or on a fixed or determinable future time
General characteristics: amount; place where contract to pay is executed; due date;
absolute promise to pay something; payable to order/bearer; payee; maker of the note
BILL OF EXCHANGE, SECTION 126

• “A bill of exchange is an unconditional order in writing addressed by one person to
another signed by the person giving it
(1), requiring the person to whom it is addressed to pay on demand or at a fixed or

determinable future time
(2) a sum certain in money
(3) to order or to bearer”
• General characteristics: the order or command to pay; drawer/maker; drawee
CHECK
A bill of exchange drawn on a bank payable on demand
TO WHOM INSTRUMENTS MAY BE PAYABLE

1. Bearer
2. Order
3. To a specified person
WHEN IS IT PAYABLE TO BEARER?

1. When it is expressed to be so payable
2. When it is payable to a person named therein or bearer
WHEN IS IT PAYABLE TO ORDER?

1. When it is expressed to be payable to the order of a specified person
2. To a specified person or his order
WHEN IS IT PAYABLE TO A SPECIFIED PERSON?
When the instrument is payable to a specified person named in the
instrument and no other
PARTIES TO A PROMISSORY NOTE

1. Maker—the person who executes the written promise to pay
2. Payee, if the instrument is payable to order—the person in whose favor the
promissory note is made payable
3. Bearer, if the instrument is payable to bearer
PARTIES TO A BILL OF EXCHANGE

1. Drawer—the person who executes the written order to pay
2. Payee, if the instrument is payable to order—the person in whose favor a bill of
exchange is drawn payable
3. Bearer, if the instrument is payable to bearer
4. Acceptor—the drawee who signifies his assent to the order of the drawer. It is only
when he accepts the bill that he becomes a party thereto and liable thereon.
OTHER PARTIES TO NEGOTIATED INSTRUMENTS

1. Indorser and
2. Indorsee, in the case of instruments payable to order
3. Persons negotiating by mere delivery
4. Persons to whom the instrument is negotiated by delivery
INDORSER AND INDORSEE

When the negotiation is by indorsement completed by delivery, the parties added are
the indorser and indorsee
Indorser—the one who negotiates the instrument
Indorsee—the one to whom the instrument is negotiated by indorsement
WHERE INSTRUMENT IS PAYABLE TO BEARER
• Where the instrument is payable to bearer, it can be negotiated by mere delivery
without necessity of indorsement
HOLDER
The payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof
If the instrument is payable to order, he who is the payee or indorsee and who is in
possession thereof
If the instrument is payable to bearer, he who is in possession thereof
ISSUE
First delivery of the instrument, complete in form to a person who takes it as a
holder
DELIVERY
Consists principally of placing the transferee in possession of the instrument, but it
must be accompanied by the intent to transfer title
“every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto”
NEGOTIATION
• Transfer of an instrument from one person to another as to constitute the transferee the
holder of the instrument
• Mode of transferring an instrument
• Effect is to make the transferee the holder of the instrument
HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED

May be negotiated by mere delivery
HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED
Must be negotiated by indorsement completed by delivery
Indorsement is necessary to make the transferee the indorsee and delivery is
necessary to place the transferee in possession of the instrument
INDORSEMENT
Legal transaction, effected by the writing of one’s own name on the back of the
instrument or upon a paper attached thereto, with or without additional words specifying
the person to whom or to whose order the instrument is to be payable whereby one not
only transfers
one’s full legal title to the paper transferred but likewise enters into an implied guaranty that
the instrument will be duly paid
SPECIAL INDORSEMENT
Specifies the person to whom or to whose order the instrument is to be payable
BLANK INDORSEMENT
One that doesn’t specify the person to whom or to whose order the instrument is to
be payable
NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED.

1. Indorsement is merely the first step in the process of negotiating an instrument which is
payable to order
2. Where the instrument is payable to order, neither is delivery equivalent to negotiation

3. But where the instrument is payable to bearer, delivery is equivalent to negotiation
PRESENTMENT FOR ACCEPTANCE

Exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent
to the order or command of the drawer
ACCEPTANCE
Signification of the drawee of his assent to the order of the drawer
DISHONOR BY ACCEPTANCE
Where the bill is presented for acceptance, and acceptance is refused by the drawee, or
cannot be obtained, or where presentment for acceptance is excused, and the bill is not
accepted
PRESENTMENT FOR PAYMENT

Consists of exhibiting the instrument to the person primarily liable thereon and
demanding payment form him on the date of maturity
DISHONOR BY NON-PAYMENT
Where the instrument is presented for payment and payment is refused or cannot be
obtained, or where presentment for payment is excused and the instrument is overdue and
unpaid
NOTICE OF DISHONOR
When an instrument has been dishonored by non-payment or non-acceptance
DISCHARGE
• An instrument is discharged by payment in due course by or on behalf of the principal
debtor
PARTIES PRIMARILY AND SECONDARILY LIABLE

• Under the Negotiable Instruments Law, the person primarily liable on an instrument
is the person who by the terms of the instrument is absolutely required to pay the same
• All other parties are secondarily liable
IN BILLS OF EXCHANGE
• The acceptor is the one primarily liable
• He is absolutely required to pay the instrument as he engages that he will pay it according
to the tenor of his acceptance
SECONDARY LIABILITY OF DRAWER

• By the mere drawing of the instrument, the drawer assumes the liability stated in
Section 61
• The general tenor of the liability of the drawer is that he will pay the bill if the drawee
doesn’t accept or pay the bill.
• In other words, he is not absolutely required to pay the bill—if the drawee pays,
then he is not required to pay. It is only when the drawee doesn’t pay that he will be
required to pay.
SECONDARY LIABILITY OF INDORSER

He will pay the instrument if the person primarily liable will not pay.
SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY

By merely delivering an instrument payable to bearer, without saying anything more, the
person negotiating by mere delivery assumes the liability mentioned in Section 65.
Under said section, the general tenor of liability is similar to that of an indorser
IN PROMISSORY NOTES
The maker is primarily liable
Agreement of the maker is that he will pay the instrument according to the tenor
FUNCTION OF NEGOTIABLE INSTRUMENTS

1. Substitute for money
2. Increase the purchasing medium in circulation
PAYMENT BY NEGOTIABLE INSTRUMENTS
W/N the giving and taking of a promissory note or bill of exchange is prima facie absolute
payment as in the case of money or merely a prima facie conditional payment?
The delivery of the promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when, through the fault of the creditor, they have been impaired
PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS

1. Negotiability
2. Accumulation of secondary contracts as they are transferred from one person to another
NEGOTIABILITY
Attribute or property whereby a bill, note or check passes or may pass from hand to hand
similar to money, so as to give the holder in due course the right to hold the instrument and
collect the sums payable for himself free from defense.
PRIMARY PURPOSE OF NEGOTIABILITY

To allow bills and notes the effect which money, in the form of government bills or
notes, supplies in the commercial world
ACCUMULATION OF SECONDARY CONTRACTS

Most important characteristic of negotiable instruments is the accumulation of
secondary contracts which they pick up and carry with them as they are negotiated from one
person to another
Advantage: they improve as they pass from hand to hand, as more debtors are
added
BILL OF EXCHANGE, DEFINED

Bill of Exchange
Bill of exchange, defined.
A bill of exchange is an unconditional order in writing addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a sum certain in money to order or to bearer.
TYPES OF BILLS OF EXCHANGE
1. Draft
2. Trade acceptance
3. Banker’s acceptance
4. Treasury warrants
5. Money orders
6. Clean bills of exchange
7. Documentary bill of exchange
8. D/A bills of exchange
9. D/P bills of exchange
10. Time or usance bills
11. Bills in set
12. Inland bills
13. Foreign bills
DRAFT
> Common term for all bills of exchange and they are used synonymously
IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LIABLE TO PURCHASER OF DRAFT
FOR NOT COMPLYING WITH HIS INSTRUCTIONS
> The drawee bank acting as “payor” bank is solely liable for acts not done in accordance with
the instructions of the drawer bank or of the purchaser of the draft
> The drawee bank has the burden of proving that it didn’t violate
TRADE ACCEPTANCE
> A bill of exchange payable to order and at a certain maturity, drawn by a seller against the
purchaser of goods as drawee, for a fixed sum of money, showing on its face the acceptance of
the purchaser of goods and that it has arisen out of a purchase of goods by the acceptor
> A draft drawn by the seller on the purchaser of goods sold and accepted by such purchaser
> States upon its face that the obligation of the acceptor arises out of purchase of goods from
the drawer
> Arises from credit obligations arising from the sale of goods and must have a definite maturity
BANKER’S ACCEPTANCE
> Draft of which the acceptor is a bank or banker engaged generally in the business of granting
banker’s acceptance credit
> Similar to a trade acceptance
> Drawn against the bank instead of the buyer
TRUST RECEIPT
> The written or printed document signed by the entrustee in favor of the entruster containing
terms and conditions substantially complying with the provisions of this decree
> The legal title to the matter entrusted remains in the entruster but the entruster gives to the
trustee a form of title which is good and legal against everybody except the entruster
> Entrustee—the person having or taking possession of goods, documents or instruments
under a trust receipt transaction, and any successor in interest of such person for the purpose
or purposes specified in the trust receipt agreement
> Entruster—person holding title over the goods, documents, or instruments subject of a TRA
and any successor-in-interest of such person
PROMISSORY NOTE, DEFINED

Promissory Note, Defined

Sec. 184. Promissory note, defined.
A negotiable promissory note within the meaning of this Act is an unconditional promise in
writing made by one person to another, signed by the maker, engaging to pay on demand,
or at a fixed or determinable future time, a sum certain in money to order or to bearer.
Where a note is drawn to the maker's own order, it is not complete until indorsed by him.
SPECIAL TYPES OF PROMISSORY NOTES

1. Certificate of deposit
2. Bonds
3. Bank notes
4. Due bills
CERTIFICATE OF DEPOSIT
> Written acknowledgment by a bank of the receipt of money on deposit which the bank
promises to pay to the depositor, bearer, or to some other person or order
BONDS
> A promise, under seal to pay money
> More formal in character
> Runs for a longer period of time
> Issued under different legal circumstances
CLASSES OF BONDS
1. Mortgage bonds
2. Equipment bonds
3. Collateral trust bonds
4. Guaranteed bonds
5. Debentures
6. Income bonds
7. Convertible
8. Redeemable
9. Registered bonds
10. Coupon bonds
REQUISITES OF A NEGOTIABLE
INSTRUMENT
REQUISITES AS TO A NEGOTIABLE NOTE

1. It must be in writing and signed by the maker
2. It must contain an unconditional promise to pay a sum certain in money
3. It must be payable on demand, or at a fixed or determinable future time
4. It must be payable to order or to bearer
REQUISITES AS TO A NEGOTIABLE BILL

1. It must be in writing and signed by the maker
2. It must contain an unconditional order to pay a sum certain in money
3. It must be payable on demand, or at a fixed or determinable future time
4. It must be payable to order or to bearer
5. The drawee must be named or otherwise indicated therein with reasonable certainty
THE INSTRUMENT MUST BE IN WRITING

> There must be a writing of some kind, for if the instrument were not in writing, there
would be nothing to be negotiated or passed from hand to hand
THE INSTRUMENT MUST BE SIGNED BY THE MAKER OR DRAWER

> Full name must be written
> At least the surname should appear and generally, the signature usually is by writing
the signer’s name
> But, where the name is not signed, the holder must prove that what is written is intended
as a signature of the person sought to be charged
> Commonly, it is found in the lower part of the instrument. It could also be signed
anywhere as long as the maker or drawer acknowledges the signature to be his own.
IF A BILL, IT MUST CONTAIN AN ORDER TO PAY

• It is an instrument demanding right
• Any words which are equivalent to order or which show the drawer’s will that the money
should be paid, are sufficient to make the instrument a bill of exchange
AN INSTRUMENT WITH AN EFFECT OF MERE AUTHORITY TO PAY

> It is not negotiable because it is not an order to pay
> “I hereby authorize you to pay P1000 to Pedro Cruz”
EFFECT OF MERE REQUEST TO PAY

> The instrument is not negotiable as it is not an order to pay but a mere request to
pay
> “Please to let the bearer have P70 and place to my account and you will oblige”
EFFECT OF MERE WORDS OF CIVILITY

> The mere fact that it contains words of civility or courtesy doesn’t make it non-
negotiable
WHERE INSTRUMENT IS A NOTE, IT MUST CONTAIN A PROMISE TO

PAY
1. It is enough that words of equivalent meaning are used
2. The promise is implied from promissory words contained in the instrument
THE PROMISE OR ORDER TO PAY MUST BE UNCONDITIONAL
> It must not be subject to a condition
> It must be unconditional and absolute
SUM PAYABLE MUST BE DEFINITE AND CERTAIN

> The amount of money to be paid must be determinable by inspection and must be stated
plainly on the face of the instrument, and like the denomination of money, must be started in
the body of the instrument
SUM MUST BE PAYABLE IN MONEY ONLY

> Money is the one standard of value in actual business or more stable standard of value
> Legal tender—that kind of money which the law compels the creditor to accept in payment
of his debt when tendered by the debtor in the right amount
> But if authorized by law or consent of creditor, cash may be substituted by other
means, or may be check
> Instrument need not be payable in legal tender
INSTRUMENT MUST SPECIFY DENOMINATION

> Instruments should express the specific denomination of money when it is payable in the
money of a foreign country in order that the courts may be able to ascertain its equivalent
value; otherwise, it is non-negotiable
PAYABLE ON DEMAND OR ON A FIXED OR DETERMINABLE FUTURE

TIME
> On demand
> At a fixed or determinable future time
WHERE NO YEAR IS SPECIFIED

> Neither payable on demand or on a fixed or determinable future time
> Time of payment is not determinable as the year is not stated
THE INSTRUMENT MUST BE PAYABLE TO ORDER OR TO BEARER
> An instrument is not negotiable unless made payable to a person or his order or
bearer or unless words of the similar or equivalent import are used such as assigns or assignees
or holder
WHERE PAYABLE TO THE ORDER OF BEARER

> Also negotiable
> This was held to be payable to order
> The payee of such an instrument is the bearer and it can only be negotiated by his
indorsement
WHERE PAYABLE TO A CERTAIN PERSON

> Where the instrument is payable to a specified person, it’s not payable to order
> Payable to a certain person or his agent
> Where payable to “bearer B”
THE DRAWEE MUST BE NAMED

> Requirement that refers only to bills of exchange
> Drawee’s name may be omitted and be filled in under implied authority like any other
blank
> An acceptance may supply the omission of the designation
IMPORTANCE OF FORMALITIES
> Essential for the security of the mercantile transactions
> Distinguish the negotiable instrument from the ordinary non-transferrable written
contract
NECESSITY OF COMPLIANCE WITH PROVISIONS

> Where the instrument doesn’t conform with the requirements laid down in Section 1,
then it is not governed by NIL
DETERMINATION OF NEGOTIABILITY
> By the provisions of the NIL, particularly Section 1 thereof
> By considering the whole of the instrument
> By what appears on the face of the instrument and not elsewhere
WHAT CONSTITUTES CERTAINTY AS

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

(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in payment of any installment or
of interest, the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.
WITH INTEREST
> The fact that the sum payable is to be paid with interest doesn’t render the sum uncertain
> Amount can easily be computed
> When interest is stipulated but not specified, the legal interest shall be used
> Where there is no stipulation, the legal rate shall be paid when the debtor incurs delay
> Interest due shall earn legal interest from the time it is judicially demaned, although the
instrument may be silent upon this point
ESCALATION AND DEESCALATION CLAUSE—FORMER IS VALID IF
ACCOMPANIED BY THE LATTER
> Parties may stipulate that the rate of interest agreed upon be increased in the event that the
applicable maximum rate of interest is increased by law.
> Deescalation clause—stipulation in the agreement that the rate of interest agreed upon shall
be reduced if the maximum rate of interest is decreased by law.
BY STATED INSTALLMENTS
1. It must be stated
2. The maturity of each installment must be fixed or determinable—required in order to comply
with the requisite that the instrument, if not payable on demand, must be payable on a fixed or
eterminable future time
BY STATED INSTALLMENTS, WITH ACCELERATION CLAUSE
> Acceleration clause—“upon default in the payment of any installment, the whole sum payable
shall become due”
> It hastens the payment of the whole note
WITH EXCHANGE
> While the rate of exchange is not always the same and while it is technically true that the
resort must be had to extrinsic evidence to ascertain what it is, yet the current rate of exchange
between two places at a particular date is a matter of common commercial knowledge, or at
least easily ascertained by anyone so that the parties can always, without difficulty, ascertain
the exact amount necessary to discharge the paper
> Applies only to instruments drawn in one country and payable in another
EXCHANGE
> Difference in value of the same amount of money in different countries

> Current rate or fixed rate
WITH COSTS AND ATTORNEY’S FEES
> An instrument may thus stipulate that costs of collection and attorney’s fees shall be paid by
the debtor in addition to the principal in case the instrument shall not be paid in maturity
> Although the stipulation will make the sum after maturity uncertain, it will not affect the
certainty of the sum payable at maturity and therefore, will not affect the negotiability of the
instrument in which it is stipulated
What constitutes certainty as to sum

•
WHEN PROMISE IS UNCONDITIONAL

- NEGOTIABLE INSTRUMENTS
Sec. 3. When promise is unconditional. An unqualified order or promise to pay is

unconditional within the meaning of this Act though coupled with:
(a) An indication of a particular fund out of which reimbursement is to be made or a

particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional.
APPLICATION OF SECTION
Whether or not the indication of a particular fund or particular account, or the statement
of the transaction which gives rise to the instrument, would make the promise or order
conditional
INDICATION OF A PARTICULAR FUND

First case, the particular fund is not the direct source of the payment, only the source of
reimbursement
Unconditional—drawee pays the payee from his own funds and afterwards, the
drawee pays himself from the particular fund indicated
But an order or promise to pay out of a particular fund is not unconditional—

particular fund is the direct source of payment
Conditional—where the payment to the payee is directly from the funds indicated,
the payment is the subject to the condition that the funds indicated are sufficient
PARTICULAR ACCOUNT TO BE DEBITED

The instrument is to be paid first and afterwards, the particular account indicated will
be debited
The payment is not subject to the sufficiency or adequacy of the particular account
to be debited
STATEMENT OF TRANSACTION
Instruments are not issued without any transaction upon which they are based
Generally negotiable but a statement of transaction will render the instrument non-
negotiable where the promise or order to pay is made subject to the conditions and terms
of the transactions stated, then the instrument is rendered non-negotiable
AS PER CONTRACT NOTES
The appearance of words “as per contract” on the face of the instruments in any
position doesn’t affect the negotiability of the instrument
CHATTEL NOTES
A promissory note given for a chattel and stipulating that the title to the chattel shall
remain in the vendor-payee until the note is paid, is not conditional
REFERENCE TO MORTGAGES
Provisions in the mortgage doesn’t affect the negotiability of the instrument it secures
Where a note otherwise negotiable contains the words “this note is secured by a
mortgage” and the mortgage contains clauses promising to do many acts other than the
payment of money, it was held that the note is not rendered non-negotiable
WHEN REFERENCE TO A MORTGAGE RENDERS INSTRUMENT

NON-NEGOTIABLE
When there is uncertainty in amount or when such provisions become part of the note,
even though they aren’t in the note itself, the instrument is also rendered non-negotiable
WHAT CONSTITUTES
DETERMINABLE FUTURE TIME -
NEGOTIABLE INSTRUMENTS
Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a

determinable future time, within the meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein; or
(c) On or at a fixed period after the occurrence of a specified event, which is certain to
happen, though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the
event does not cure the defect.
“AFTER SIGHT”
After the drawee has seen the instrument upon presentment for acceptance
ACCELERATION NOTES
There are certain notes which contain acceleration provisions
Make it possible for the maker to pay the instrument at an earlier date or make it possible
for the holder to require payment of the instrument at an earlier date
EXAMPLES OR ILLUSTRATIONS OF ACCELERATION NOTES

1. That contain acceleration clauses on the maker’s default in payment of installments or of
interest, or on the happening of an extrinsic event
2. Or contain, in notes secured by collateral, a provision that the maker shall supply additional
collateral in case of depreciation in the value of the original deposit, with the holder’s right
to declare the note due immediately on failure to make good the depreciation
a. Non-negotiable—time for payment becomes uncertain and indefinite

b. It doesn’t render it non-negotiable—that from the standpoint of expediency as
encouraging circulation and of business custom on account of their common acceptance
by the commercial world, such clauses should be interpreted as not affecting negotiability
3. Or contain provisions for acceleration when holder deems himself insecure
a. It is rendered non-negotiable where it is payable at a fixed and future time, but with
an option on the part of the holder to declare it due and demandable before maturity
whenever he deems it insecure but to hold them non-negotiable is a spurious
construction of the Act
b. It is rendered non-negotiable when the whole condition is lodged to the holder—

middle ground is so long as the basis is dependent on factors not within the control of the
holder, then it would still be negotiable
WORD USED IS AFTER
The word used in the law is “after” and not before
ADDITIONAL PROVISIONS NOT

AFFECTING NEGOTIABILITY -
Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains

an order or promise to do any act in addition to the payment of money is not
negotiable. But the negotiable character of an instrument otherwise negotiable is not
affected by a provision which:
(a) authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or
(b) authorizes a confession of judgment if the instrument be not paid at maturity; or
(c) waives the benefit of any law intended for the advantage or protection of the obligor;
or
(d) gives the holder an election to require something to be done in lieu of payment of
money.
But nothing in this section shall validate any provision or stipulation otherwise
illegal.
GENERAL RULE AS TO THE ADDITIONAL ACT

The general rule is that an instrument must not contain an order or promise to do
any act in addition to the payment of money. Otherwise, the instrument wouldn’t be
negotiable.
FOUR EXCEPTIONS TO THE GENERAL RULE
1. SALE OF COLLATERAL SECURITIES if the instrument be not paid at maturity
2. Authorizes CONFESSION OF JUDGMENT if the instrument be not paid at maturity
3. WAIVER OF BENEFIT OF LAW for the protection and benefit of the obligor
4. Gives the HOLDER an election to require something to be done in lieu of payment of money
PROMISE TO FURNISH ADDITIONAL SECURITY

A promise of the maker to render additional collateral will render the note non-
negotiable, as that would be an additional act to the promise to pay money
However, they are to be distinguished from those instruments in which the holder may
demand collateral, and failure to furnish it accelerates the instrument which are clearly
negotiable, but merely accelerable on the non-performance of an optional act
SALE OF COLLATERAL SECURITIES

The law gives exceptions to the general rule that “an instrument which contains an order
or promise to do any act in addition to the payment of money is non-negotiable”
Sometimes, the obligation arising from the transaction which gives rise to the instrument is
secured by a mortgage or pledge
The additional act to be performed is to be executed after the date of maturity, when the
instrument ceases to be negotiable in the full commercial sense
Before date of maturity, however, the sale of collateral securities would render the
instrument non-negotiable
CONFESSION OF JUDGMENT
Must be after the date of maturity
Second exception to the rule
TWO CLASSES OF CONFESSION OF JUDGMENT

1. Cognovit actionem—a written confession of an action by the defendant,
subscribed but not sealed, and irrevocably authorizing any attorney of any court of record to
confess judgment and issue
execution usually for the sum named. It is given in order to save expense and differs
from a warrant of attorney, which is given to an expressly designated attorney before the
commencement of any action and is under seal.
2. Confession relicta verificatione—confession of judgment made after plea is pleaded
WARRANT OF ATTORNEY
Instrument in writing addressed to one or more attorneys named therein, authorizing
them, generally to appear in court, or in some specified court on behalf of the person
giving it, and to confess judgment in favor of some particular person named therein in
an action for debt
EFFECT OF CONFESSION OF JUDGMENT IN THE PHILIPPINES

In the Philippines, a confession of judgment is considered void as it is against public
policy--
1. Because they enlarge the field for fraud
2. Because under this treatment, the promissory bargains away his right to a day in court
3. Because the effect of the instrument is to strike down the right to appeal accorded
by statute
WAIVER OF BENEFIT
Waives the benefit of any law intended for the advantage and protection of the
obligor
Examples: presentment for payment, notice of dishonor, protest
ELECTION OF HOLDER TO REQUIRE SOME OTHER ACT

Fourth exception to the rule
Even if there is an additional act, the instrument still remains to be negotiable
provided that the right to choose between payment of money or the performance of the
additional act is in the hands of the holder
WHEN IS A NEGOTIABLE
INSTRUMENT PAYABLE ON
DEMAND?
Sec. 7. When payable on demand. - An instrument is payable on demand:
(a) When it is so expressed to be payable on demand, or at sight, or on

presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards

the person so issuing, accepting, or indorsing it, payable on demand.
EXPRESSED TO BE PAYABLE ON DEMAND

An instrument is payable on demand where it is expressed to be payable on demand,
on sight, or on presentation
It is payable on demand also when no date of payment is specified
It is payable on demand when the time of payment is left blank or unfilled
INSTRUMENT ON DEMAND ONLY AS BETWEEN THE PARTIES

That after the date of maturity, the instrument can no longer be negotiated as to
make the parties who acquire the instrument after the date of maturity holders in due
course because they become holders thereof with notice that it is already overdue, as
this can be determined from the face of the instrument itself
•
INSTRUMENT PAYABLE TO ORDER?
Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order. It may be drawn payable to the order
of:
(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.
WORDS OF NEGOTIABILITY
Among others, for an instrument to be negotiable, it should contain words of
negotiability
There are only 2 ways by which an instrument and the bill or note is to be paid to the
person designated in the instrument or to any person to whom he has indorsed or delivered the
same
Without the words “or order” or “to order of”, the instrument is payable only to
the person designated therein and therefore, is non-negotiable
MEANING OF THE PHRASE “TO ORDER”

Pay the payee or the person designated by the payee
NECESSITY OF NAMING THE PAYEE
The law requires that the payee must be named or otherwise indicated with reasonable
certainty
Must be a person in being, whether natural or legal, and ascertained at the time of issue
If there is no named payee, where the instrument is payable to order, no one could
indorse the instrument. Consequently, it is useless to consider it as negotiable.
WHERE THE BLANK FOR NAME OF PAYEE UNFILLED

Not payable to order because the payee is not named neither is he
designated with reasonable certainty
•
INSTRUMENT PAYABLE TO BEARER?
Sec. 9. When payable to bearer. - The instrument is payable to bearer:
(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact
was known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) When the only or last indorsement is an indorsement in blank.
PAYABLE TO THE ORDER OF A FICTITIOUS OR NON-EXISTENT PERSON

1. The payee named must be fictitious or non-existent
2. The one making the instrument so payable must know him to be fictitious or non-
existing
FICTITIOUS PERSON
Not limited to persons having no real existence
To be a person who has no right to the instrument because the drawer or maker of it so
intended, and therefore, it doesn’t matter whether the name of the payee used by the
drawer or drawee be that of the living or the dead, or one who never existed
EXISTING PAYEE INTENDED TO RECEIVE PROCEEDS; NOT PAYABLE

TO BEARER
A negotiable paper made payable to the name of an existing person known or
believed by the maker or drawer to be existing, with intent that he should receive it or its
proceeds, or that it be paid to him or upon his indorsement, IS NOT PAYABLE TO A
FICTITIOUS PAYEE OR TO BEARER, although as a matter of fact such person has no interest in
the paper and it was procured by fraud of a third person or of the maker’s or drawer’s
employee or agent whose knowledge or intent is not imputable to the principal or employer,
and cashed by the person having possession upon the forged instrument of the payee
NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, BUT BELIEVED

EXISTING OR WITH INTEREST, AND INTENDED TO RECEIVE
PROCEEDS; NOT PAYABLE TO BEARER
NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, KNOWN

OR BELIEVED NON-EXISTING NOT INTENDED TO RECEIVE
PROCEEDS; PAYABLE TO BEARER
PERSON TO WHOM THE FICTITIOUS OR NON-EXISTING

CHARACTER OF PAYEE MUST BE KNOWN
The drawer drawing a bill or the maker making a note is the person to whom the fictitious
or non-existing character of the payee must be known
Where the instrument is drawn or made by an agent or prepared by an employee with the
maker or drawer signing only, the question arises as to whose intent should control
WHERE AGENT HAS NO AUTHORITY TO EXECUTE INSTRUMENT
The knowledge of the principal or employer is controlling, and if he doesn’t have any
knowledge of the fictitious or non-existing character of the payee, the knowledge of the
employee or the agent will not avail to call into application as to fictitious payees and the
instrument will not be considered as payable to bearer
NAME OF PAYEE NOT NAME OF PERSON

Pay to cash
Pay to the order of money
Pay to the order of cash
WHERE PAYABLE TO THE ESTATE OF A DEAD PERSON

It has been held to be payable to bearer
The state is a juridical person in a limited way and thus it shouldn’t be payable to
bearer
NEGOTIABLE INSTRUMENTS; TERMS,

WHEN SUFFICIENT
Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act,
but any terms are sufficient which clearly indicate an intention to conform to the
requirements hereof.
Illustrative case:
JIMENEZ V. BUCOY
103 PHIL 40
FACTS:
In the intestate of the estate of spouses Young, Jimenez presents a promissory note signed by Pacita Young for
different amounts totaling P21,000. The administrator is willing to pay the promissory note on the premise that
the amount be adjusted. Claimant assails the adjustment and
hence, she instituted a case for collection of sum of money.
*Note: “6 months after the war”
HELD:
The administrator calls attention to the fact that the notes contained no express promise to pay for a certain
amount. This is without merit. An acknowledge may become a promise to pay by the addition of words by
which a promise of payment is naturally implied, such as “payable”,
“payable” on a given date, “payable on demand”, “paid…when called for”.
To constitute a good promissory note, no precise words of contract are necessary, provided they amount, in legal
effect, a promise to pay.
PRESUMPTION AS TO DATE IN
Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is
dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be.
APPLICATION OF SECTION 11
1. The instrument contains the date of issue—prima facie the true date of the making or drawing of the instrument
2. In an accepted bill of exchange, the acceptance is dated—prima facie the date of acceptance
3. An instrument is indorsed, and the indorsement is dated—prima facie date of indorsement
PRIMA FACIE
Evidence produces for the time being a certain result but that result may be repealed by contrary evidence
Apparent, as it first appears
ANTE-DATED AND POST-DATED;
WHEN DATE MAY BE INSERTED -
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or
post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so
dated is delivered acquires the title thereto as of the date of delivery.
Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after
date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is
undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder
in due course; but as to him, the date so inserted is to be regarded as the true date.
WHEN DATE NECESSARY

Under Section 6, the insertion of date is unnecessary
However, it may be necessary to determine the date of maturity
In the following cases, the date is also necessary:
o Where interest is stipulated, to determine when interest is to run, but not to make the instrument negotiable
o To determine where a party has acted within a reasonable time, but not make the instrument negotiable
EFFECT OF INSERTION OF WRONG DATE

Knowingly inserting the wrong date in an undated instrument will avoid it as to the party so inserting the wrong
date
It is implied that the instrument void as to the person who knowingly inserted the wrong date
Also, under Section 12, it is void for ante-dating an instrument for fraudulent purposes
To a holder in due course, the instrument is not void, after the instrument is indorsed to him. The insertion of
the wrong date doesn’t avoid the instrument in the hands of a holder in due course.
WHEN MAY BLANKS BE FILLED IN A

NEGOTIABLE INSTRUMENT?
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it by
filling up the blanks therein. And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill it up as such for any amount. In
order, however, that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But if any such
instrument, after completion, is negotiated to a holder in due course, it is valid and effectual
for all purposes in his hands, and he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a reasonable time.
SCOPE OF SECTION 14
> There are 2 steps in the execution of a negotiable instrument—
o The act of writing the instrument completely and in accordance with Section 1 of
the Negotiable Instruments Law
o The delivery of the instrument with the intention of giving effect to it
THE MATERIAL PARTICULAR REFERRED TO IN THIS PROVISION MAY

BE—
1. A particular the omission of which will render the instrument non-negotiable
2. A particular the omission of which will not render the instrument non-negotiable
FACTS FROM WHICH PRIMA FACIE AUTHORITY PRESUMED

1. Want of a material particular in the instrument
2. Possession thereof by a person, a third fact
3. That such person had authority to fill up the blank
THE LAW PRESUMES THE EXISTENCE OF AUTHORITY TO FILL THE

INSTRUMENT UP TO ANY AMOUNT FROM THE FOLLOWING FACTS
1. A signature on blank paper
2. That the person signing in blank delivers it in order that the paper may be converted into a
negotiable instrument
REQUISITES TO HOLD PRIOR PARTIES LIABLE

1. The blank must be filled strictly in accordance with the authority given
2. It must be filled up within a reasonable time
RIGHT OF HOLDER OF DUE COURSE WHERE BLANK WRONGFULLY

FILLED
> First view: One who is not a holder in due course cannot enforce the instrument if the same is
not filled up strictly in accordance with the authority given or within reasonable time
> Second view: the holder can enforce the instrument accordance with the authorized
tenor
> According to Agbayani, the better view is the first view is the better view to have.
The law provides that in order be one who is not a holder in due course may enforce
mechanically incomplete but delivered instrument, the two requisites must exist. The
implication is that one or both are not present, the instrument may not be enforced.
REASONABLE TIME
> Regard is had to the nature of the instrument, the usage of trade or business with respect to
such instrument and the facts of the particular case
> Term is very relative
PERSONAL DEFENSE
> Defense available only to holders who are not holders in due course
SUMMARY OF RULES WHEN INSTRUMENT IS INCOMPLETE BUT

DELIVERED
1. Where the holder is a holder in due course, he can enforce the instrument as
completed against parties prior or subsequent to the completion
2. Where the holder is not a holder in due course, he can enforce the instrument as
completed as against the parties subsequent to the completion but not against those prior
thereto
INCOMPLETE AND UNDELIVERED
NEGOTIABLE INSTRUMENT
Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument

has not been delivered, it will not, if completed and negotiated without authority, be a
valid contract in the hands of any holder, as against any person whose signature was
placed thereon before delivery.
APPLICATION OF PROVISION
Section applies to an incomplete and undelivered instrument
INSTRUMENT NOT VALID AGAINST PARTY BEFORE DELIVERY

Situation: A signs a blank check, which was subsequently stolen by B and fills up the
amount and a fictitious name as payee. He then indorses the same to C, C to D, D to E,
and E to F. Can F enforce the instrument against A?
The answer is NO, because against A, whose signature was placed on the check prior to
delivery, the instrument is not valid.
The answer would still be the same in case F was a holder in due course. Why?
The law doesn’t discriminate on what kind of holder.
However, the invalidity of the instrument is only with reference to parties whose
signature appears in the same prior to delivery. As to parties whose signature appears after
delivery, it may be valid.
IT IS A REAL DEFENSE
The possible defense of a party whose signature appears on an instrument prior to
delivery is that, as against him, the instrument is not valid for having been incomplete and
undelivered
Want of delivery of a mechanically incomplete instrument—defense that cannot only
be interposed against one who is not a holder in due course but also a holder in due course
DELIVERY IS NOT CONCLUSIVELY PRESUMED WHERE INSTRUMENT
IS INCOMPLETE
Section 15 and 16 read together
BUT DELIVERY PRESUMED PRIMA FACIE

But where an incomplete and undelivered instrument is in the hands of a holder in due
course, there is prima facie presumption of delivery which the maker may rebut by proof of
non-delivery
Where the custody of an incomplete instrument has been entrusted to another, who
wrongfully completes and negotiates it to a holder in due course, delivery to an agent or
custodian is a sufficient delivery to bind the drawer or maker.
•
OUTLINE OF RULES ON DELIVERY OF

Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual, must be made either by or
under the authority of the party making, drawing, accepting, or indorsing, as the case may be;
and, in such case, the delivery may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property in the instrument.
But where the instrument is in the hands of a holder in due course, a valid delivery
thereof by all parties prior to him so as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed until the contrary is proved.
SCOPE OF SECTION
Applies to an instrument mechanically complete but undelivered
UNDELIVERED INSTRUMENT IS INCOMPLETE
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto
DELIVERY AND ISSUE

As between immediate parties and as regards a remote party other than a holder in
due course, the delivery, in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing as the case may be
Issue—the first delivery of the instrument, complete in form, to a person who takes it
as a holder
OUTLINE OF RULES ON DELIVERY OF NEGOTIABLE INSTRUMENTS

1. Delivery is essential to the validity of any negotiable instrument
2. As between immediate parties, or those in like cases, delivery must have been with
the intention of passing title
3. An instrument signed by the drawer/maker but not completed by him and retained in his
own custody, is invalid as to him for want of delivery, even though stolen or negotiated to
a holder in due course
4. But when the instrument mentioned above is in the hands of a holder of due course, there
is prima facie presumption of delivery which the maker/drawer may rebut by proof of non-
delivery
5. Where the custody of the incomplete instrument has been entrusted to another, who
wrongfully completes and negotiates it to a holder in due course, delivery to an agent or
custodian is sufficient delivery to bind the drawer or maker
6. Where maker or drawer executes a complete instrument which is found in the
possession of another other than a holder in due course, there is a prima facie presumpton of
delivery—but subject to rebuttal
7. Where the instrument mentioned above is in the hands of a holder in due course, there is a
conclusive presumption of delivery
8. Delivery of the instrument may be made on a parol condition or for a special purpose not
inconsistent with its written terms, where the validity of the instrument is to arise out
of the performance of the condition or consummation of the purpose. But such
condition or specification or purpose doesn't affect the rights of a holder in due course.
Such conditions is a condition precedent, and is to be sharply distinguished from a condition
subsequent, the happening or non-happening of which is to defeat or qualify the
instrument. Such condition subsequent contradicts the written terms and may not be set up
by parol evidence.
RIGHT TO REVOKE
Before delivery, the maker or drawer can revoke, cancel, or tear up the instrument
LITERAL MEANING OF IMMEDIATE AND REMOTE PARTIES

The drawer and payee are immediate parties to one another
Maker and payee are immediate parties to one another
Indorser and indorsee are also immediate parties to one another
BROAD MEANING OF IMMEDIATE AND REMOTE PARTIES

Immediate parties are confined to “those who are immediate, in the sense of
knowing or being held to know the conditions or limitations placed upon the delivery of
the instrument—privity and not proximity
Criterion: Whether or not the party in question knows of the conditions or limitations
placed upon the delivery of the fact that the instrument was not delivered but stolen..
o If the party in question knows, he is an immediate party even if he is not physically remote
o If he doesn’t know, he is not an immediate party even if he is the next party immediately
PRESUMPTION OF VALID DELIVERY AS TO IMMEDIATE PARTY OR

REMOTE PARTY NOT HOLDER IN DUE COURSE
Where the instrument is no longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed until the contrary is proved
Presumption is however rebuttable
DELIVERY FOR SPECIAL PURPOSES

For safekeeping or for collection only
PRESUMPTION OF DELIVERY AS TO HOLDER IN DUE COURSE
Conclusively presumed
There is conclusive presumption where the contrary proof is barred
PERSONAL DEFENSE
The possible defense of a party sought to be charged is that the instrument wasn't
delivered, or if delivered, the delivery wasn't authorized or only on a condition or for a
special purpose
“Want of delivery of a mechanically complete instrument” defense
It can however be interposed against an immediate party and remote parties not
holders in due course inasmuch as the presumption of valid and intentional delivery is only
rebuttable as to immediate parties and to remote parties who are not holders in due course
Only personal defense
CONCLUSIVE PRESUMPTION NOT APPLICABLE TO INCOMPLETE INSTRUMENTS
DEFENSES UNDER THE SECOND SENTENCE OF SECTION 16

1. It wasn’t delivered either by or under the authority of the party making, delivering,
accepting or indorsing the instrument
2. It was for a conditional purpose
3. It was for a special purpose only
•
CONSTRUCTION WHERE
NEGOTIABLE INSTRUMENT IS
AMBIGUOUS
Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or
there are omissions therein, the following rules of construction apply:
(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain,
reference may be had to the figures to fix
the amount;
(b) Where the instrument provides for the payment of interest, without specifying the date from which interest
is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;
(d) Where there is a conflict between the written and printed provisions of the instrument, the written
provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it
as either at his election;
(f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the
same intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.
WHEN SECTION APPLICABLE

Rules stated in this section shall not be availed of if the terms of the instrument in question is clear and admit of no
doubt
Applicable only when the instrument in question is ambiguous, doubtful or obscure, or when there are
omissions therein that the
SIGNING A NEGOTIABLE
INSTRUMENT IN TRADE OR
ASSUMED NAME
Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the
instrument whose signature does not appear thereon, except as herein otherwise
expressly provided. But one who signs in a trade or assumed name will be liable to the
same extent as if he had signed in his own name.
GENERAL RULE AS TO LIABILITY OF PERSON WHOSE SIGNATURE IS NOT ON INSTRUMENT
A person whose signature doesn’t appear on the instrument is not liable
EXCEPTIONS TO THE GENERAL RULE

1. Where a duly authorized agent signs for a person, the person is liable
2. Where a person sought to be charged forges the signature of another person, the forger is
liable even if his signature doesn’t appear thereon
3. Where a person sought to be charged signs on a paper separate from the instrument
itself, as in an allonge, although the allonge may be considered a part of the instrument, or
where an acceptance is written on a paper other than the bill itself
4. Where the person uses an assumed name or trade name—one may become a party
to a negotiable instrument by any designation he desires
SIGNING AS AN AGENT IN A
Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be
established as in other cases of agency.
SIGNATURE THROUGH AGENT, FORM

The party may sign personally or through an agent
Agency may be written or oral
No particular form required by the law and the agency may be proved through oral or written evidence, unless
specific provisions of the law, such as the Statute of Frauds, requires otherwise
Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as
filling a representative character, without disclosing his principal, does not exempt him from personal liability.
REQUISITES FOR AGENT TO ESCAPE LIABILITY

1. Be duly authorized
2. Add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or a
representative capacity
3. Disclose his principal
SIGNATURE BY PROCURATION IN
Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as

notice that the agent has but a limited authority to sign, and the principal is bound only in
case the agent in so signing acted within the actual limits of his authority.
HOW SIGNATURE PER PROCURATION IS MADE

“Luis Martin Tan, Per Procuration: Ryan Teehankee” on which Luis Tan is the principal
while Ryan Teehankee is the agent
EFFECT OF SIGNATURE PER PROCURATION

Constitutes a warning that an agent has a limited authority
A person who takes the instrument so signed is bound at his peril to inquire into the
extent and nature of the agent’s authority, and this applies to every person
•
EFFECT OF INDORSEMENT BY
INFANT OR CORPORATION
INDORSEMENT OF MINOR OR CORPORATION

If a minor or corporation indorses an instrument, the indorsee acquires title to it and can
enforce it against the maker or acceptor or other parties prior to the minor
Such prior parties cannot escape liability by setting a defense the incapacity of the
indorser
Also applies to other incapacitated persons
Sec. 22. Effect of indorsement by infant or corporation. - The indorsement or

assignment of the instrument by a corporation or by an infant passes the property
therein, notwithstanding that from want of capacity, the corporation or infant may incur
no liability thereon.
•
FORGERY OF SIGNATURE IN
Sec. 23. Forged signature; effect of. - When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery
or want of authority.
FORGERY, DEFINED AND EXPLAINED

Counterfeit making or fraudulent alteration of any writing, and may consist in the
signing of another’s name, or the alteration of an instrument, in the name, amount,
description of the person and the like, with the intent to defraud
Section 23 only applies to forged signatures or signatures made without the authority
of the person whose signature purports it to be
FRAUD AMOUNTING TO FORGERY

Fraud in factum or fraud in esse contractus
There is no intention to issue an instrument
FRAUDULENT IMPERSONATION
• Suppose X represents himself as Juan Cruz when he is not to Y. Due to such
misrepresentation, he obtained from Y a note payable to the order of Juan Cruz. If Y intends
that the proceeds of the note will go to the real Juan Cruz and not X, but to whom Y issued the
note on the belief that X was Juan Cruz, would be a forgery.
DOUBLE INTENT IN FRAUDULENT IMPERSONATION

1. He intends to make the instrument payable to the person before him or to the person
writing at the other end of the line, in case the negotiation is by correspondence
2. He intends to make the instrument payable to the person whom he believes the
stranger to be
GENERAL RULE IN FRAUDULENT IMPERSONATION

• The first one is the controlling intent except where the name of the payee was
already known to the maker or drawer or was particularly identified in some manner
REASON FOR RULE: THEORY OF ACTUAL INTENT

• Throws the loss on the drawer
• In the absence of anything to show that the drawer had any doubt as to the identity of
the person to whom he delivered the paper as payee—the drawee, in paying the paper,
or the holder, in taking it upon the indorsement of the impostor in the name of which the
payee was described, carries out the intention that the drawer entertained at the time of
delivery of the paper to the impostor, although that intention was conceived in
consequence of the fraud of the impostor as
to his identity and ownership of the property which represented the consideration
ANOTHER REASON FOR THE RULE: THEORY OF ESTOPPEL

• As between two innocent persons, the one whose act was the cause of the loss should
bear the consequences
• It was the drawer’s duty to use diligence to ascertain the identity of the party with
whom he has dealt. Failing to make this discovery, he became the victim of the fraud. The
impostor having succeeded in this first and essential step in the practice of the fraud, the
next was comparatively an easy one.
RULE IS QUALIFIED WHERE IMPOSTOR REPRESENTS HIMSELF AS
AGENT OF PAYEE
• There is a distinction between cases where the paper is delivered to the impostor as
payee, in the belief that he is the person to whom the instrument it would be paid, and cases
where the paper is delivered to the impostor upon his representation, in the belief that he is
agent of the person named as payee
• The loss falls on the drawee or purchaser, as the case may be, rather than on the drawer
where the impostor upon whose indorsement the paper was purchased or paid, represented
himself to be the agent of
the payee and not the payee himself
ADMISSION OF GENUINENESS AND DUE EXECUTION

• When an action or defense is founded upon a written instrument such as a negotiable
instrument, copied in or attached to the corresponding pleading, the genuineness and due
execution of the instrument shall be deemed admitted unless specifically denied under
oath by the adverse party
• Consequently, the genuineness and due execution of the written instrument or
document copied in or attached to the opponent’s pleading as the basis of his claim or
defense, should be denied specifically under oath, otherwise they are deemed admitted.
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 relying upon it,
3. That any formal requisites required by law, such as swearing and acknowledgment,
or revenue stamp which it requires, are waived by him
DEFENSES CUT OFF BY ADMISSION OF GENUINENESS, ETC.

1. The defense that the signature is a forgery
2. That it was unauthorized, as in the case of an agent signing for his principal, or one
signing on behalf of a partnership or corporation or that in case of the latter, that the
corporation was not authorized under its charter to sign the instrument
3. That the party charged signed the instrument in some other capacity than that alleged in
the pleading setting it out
FAILURE TO IDENTIFY PROMISSORY NOTE WILL NOT NECESSARILY DEFEAT CLAIM
EFFECT OF FORGERY IN GENERAL

1. That the signature forged or made without authority is wholly inoperative
2. That no right to retain the instrument, or to give discharge thereof, or to enforce payment
thereof against any party thereto, can be acquired through or under such a signature forged or
made without authority
3. That nevertheless, as against a party precluded from setting up the forgery or want
of authority, the signature forged or made without authority is operative, and rights to
retain the instrument, to give discharge therefore, or to enforce payment thereof, can be
acquired through or under the signature forged or made without authority
EXTENT OF THE EFFECT OF THE FORGERY

1. Only the signature forged or made without authority is stated by the law to be
inoperative but neither the instrument itself is, nor the genuine signatures are, rendered
inoperative
2. The instrument can be enforced by holders to whose title over the instrument the
forged signature is not necessary, such as, the indorsement of an instrument which on its
face is payable to bearer
3. The instrument can be enforced against those who are precluded from setting up the
defense of forgery, even against those whose signatures have been forged
PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY

1. Those who warrant or admit to the genuineness of the signature in question—
indorsers, persons negotiating by delivery, and acceptors
2. Those who, by their acts, silence or negligence, are estopped from setting up the
defense of forgery
INDORSERS AS WARRANTORS
• Whether general or qualified
• Warrant that the instrument indorsed by them is genuine in all respects what it
purports it to be
PERSONS NEGOTIATING BY DELIVERY AS WARRANTORS

• Persons negotiating by mere delivery also warrant that the instrument negotiated by them
is genuine and in all respects what it purports to be
• They are consequently precluded from setting up the defense of forgery
ACCEPTORS AS WARRANTORS
• A drawee, by accepting the bill, admits the genuineness off the signature of the
drawer
PRECLUDED
• Includes those cases where they are estoppels against the party desiring to set up the
forgery
ESTOPPEL AS TO FORGERY OF INSTRUMENTS

• Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe that his or another’s signature in an instrument is
genuine, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted
to set up the forgery of such signature/s
• Estoppel may arise from a declaration, act or omission/negligence
UNREASONABLE DELAY
• Unreasonable delay, after his discovery of the forgery, on the part of one having the
opportunity and duty to speak, in disclosing the forgery upon commercial paper to the one who
ought to be apprised thereof, estops the former from thereafter asserting the forgery as against
the latter where the latter is prejudiced by such delay or failure
• Requisites:
o That the delay be unreasonable
o That the one who ought to be apprised of the forgery has been prejudiced
REASONABLY PROMPT NOTICE

• Depends upon the circumstances of the case, and the situation of the parties with
reference to the remedies against any party is a proper element to enter into the estimate
of the reasonableness of the notice
WHEN PREJUDICED AND WHEN NOT PREJUDICED

• A bank is prejudiced—at the time one discovered that his attorney forged his
indorsement to a draft in his favor, it had assets of the attorney in its possession to
protect itself but at the time it was notified of the forgery, it has parted with such assets
• It is not prejudiced by the delay where at no time after the discovery of the forgery did
the cashier have any property with which to indemnify the bank
ESTOPPEL BY NEGLIGENCE IN DELIVERY

• A drawer may be precluded from defense of forgery of the payee’s indorsement if
delivery by him to the payee is negligent
CASES OF FORGERY IN GENERAL

1. Forgery of promissory notes which may be further subdivided into—forgery of
indorsement in the note; forgery of the maker’s signature
2. Forgery of bills of exchange which may be further classified into—forgery of an
indorsement on the bill; forgery of the drawer’s signature, either with acceptance by the
drawee, or without such acceptance but the bill is paid by the drawee
RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN NOT PAYABLE

TO ORDER
Where the indorsement is forged and the note is payable to order, the party whose
indorsement is forged and parties prior to him including the maker cannot be held liable
by the holder, whether that holder is a holder in due course or not:
1. The reason is that, inasmuch as the indorsement is forged, it is inoperative. But
since the note is payable to order, it can be negotiated only by indorsement completed by
delivery, and therefore, the forged instrument is the only means one could acquire any rights to
it or its proceeds
2. The law further provides that no right to retain the note, give discharge thereof, or
enforce payment thereof, could be acquired through and under the forged signature.
Hence the holder didn’t acquire at least those rights as against the party whose
signature is forged and parties prior to him, including the maker
3. The forger usually obtains possession of the note by fraudulent or other unlawful
means and therefore, he has no right whatsoever in the note
RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN A NOTE

PAYABLE TO BEARER
• May be held liable by a holder in due course but not by the one who is not a holder in due
course
• Provided that the note was mechanically complete before the forgery
• Forged instrument is not necessary to the title of a holder since instruments payable
by bearer can be negotiated by mere delivery
RIGHTS OF PARTIES IN FORGERY OF MAKER’S SIGNATURE

• Where the maker’s signature is forged, he cannot be held liable by any holder, whether the
holder is in due course or not
• Purported maker is not a party to the instrument as his forged signature is
inoperative and no right to retain, enforce, or discharge the note, may be acquired against
him
DRAWEE CANNOT CHARGE ACCOUNT OF DRAWER

• In an action by the drawee against the drawer for the amount charged by the drawee
against the account of the drawer where the drawee paid a check on a forged
indorsement, the drawee has no defense against the drawer and the drawer may recover
from the drawee for an instrument paid on a forged indorsement
• Depository owes to the depositor an absolute and contractual duty to pay the check only
to the person to whom it is made payable or upon his genuine indorsement
DRAWER CANNOT RECOVER FROM THE COLLECTING BANK
• Drawer has no right to recover the amount paid from the collecting bank as the duty
of the collecting to exercise care in collection is due only to the payee, and as the drawer
suffers no loss since it can recover the amount paid from the drawee bank which has no right
to charge the drawer’s account
DRAWEE CAN RECOVER FROM COLLECTING BANK

• The drawee may recover from the recipient of payment, such as the collecting bank,
under a forged indorsement
• Rule allowing the payee to recover from the recipient of the payment under a forged
indorsement
PAYEE CAN RECOVER FROM RECEIPT OF PAYMENT

• According to the general rule, a bank or other corporation or an individual, who
has obtained possession of a check, upon an unauthorized or forged indorsement of the
payee’s signature and who collects the amount of the check from the drawee, is liable for
the proceeds thereof to the payee or other owner, notwithstanding that they have been
paid to the person whom the check was obtained
• The possession of the check on the forged indorsement is wrongful and when the money
had been collected on the check, the bank or other person or corporation, can be held as far as
moneys had and received and the proceeds are held for the rightful owners of the payment and
may be recovered by them
COLLECTING BANK BOUND TO SCRUTINIZE CHECKS DEPOSITED WITH IT TO DETERMINE

GENUINENESS AND REGULARITY
CONVERSION
• An unauthorized assumption and exercise of the right of ownership over goods or
personal chattels belonging to another, to the alteration of their condition or exclusion of the
owner’s right
AS AFFECTED BY QUESTION OF DELIVERY TO PAYEE
• The checks didn’t reach the hands of the payee. The bearing of such absence of delivery
is considered in some cases and held not to be material
• Where there is no delivery to the payee and no title vests upon him, he ought not to be
allowed to recover on the ground that he lost nothing because he never became owner of
the check and still retained his claim against the drawer
PAYEE CANNOT RECOVER FROM THE DRAWEE

• An action cannot be maintained by a payee of a check against the bank on which it
is drawn unless the check has been certified or accepted by the bank on which it is
drawn, without acceptance or certification, as provided by the statute, there is no privity of
contract between the drawee bank and the payee, or holder of the check
RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN BILL PAYABLE

TO BEARER
• Holder may recover if he is a holder in due course
RIGHTS OF PARTIES IN FORGERY OF DRAWER’S SIGNATURE

WHERE DRAWEE HASN’T ACCEPTED BILL BUT PAID IT
• In the case of the payment of a forged check even without former acceptance, the
drawee cannot recover from a holder in due course not chargeable with any act or
negligence or disregard of duty
• As between equally innocent parties, the drawee who pays money on a check the
signature to which is forged, cannot recover the money from the one who received it
BUT PAYMENT NOT EQUIVALENT TO ACCEPTANCE OR CERTIFICATION

• The payment of a forged check doesn’t include or imply its acceptance in the sense that
this word is used in Section 62 of NIL
• Basis of the general rule is not that the drawee is precluded from setting up forgery
because, by paying the check, it has accepted the check and therefore admitted the
genuineness of the drawer’s signature
• By paying the check the drawer is presumed negligent or deemed constructively
negligent
NEGLIGENCE IN FORGERY OF INDORSEMENTS IN BILL

• It presupposes that the drawer himself wasn’t negligent or guilty of such conduct as
would estop him from asserting the forged character of the indorsement as against the
depository and that if he was negligent or guilty of such conduct, the loss must fall on him
WHERE A DEPOSITOR IS USING ITS OWN PERSONALIZED CHECKS, ITS FAILURE TO

PROVIDE ADEQUATE SECURITY MEASURES TO PREVENT FORGERIES OF ITS CHECKS
CONSTITUTES GROSS NEGLIGENCE AND BARS IT FROM SETTING UP THE DEFENSE OF FORGERY
BUT FAILURE OF DEPOSITOR TO MAKE PROMPT RECONCILIATION OF THE MONTHLY BANK

STATEMENTS FURNISHED BY THE BANK CONSTITUTES NEGLIGENCE FOR WHICH THE BANK
CANNOT BE BLAMED IN CASE DEPOSITOR’S CASE ARE FORGED
BUT DRAWER NOT GENERALLY NEGLIGENT WHERE HIS CHECK IS STOLEN
PAYEE’S NEGLIGENCE IN FORGERY OF DRAWER’S SIGNATURE

• The payee in a check may be supposed to have knowledge of the circumstances
under which it is drawn and generally, of the person drawing it, and is in a better position
to judge the genuineness of the paper than are indorsees.
• And there is a tendency to place greater responsibility upon him and he is much more
likely to be required to return the proceeds of the paper than are the indorsees
INDORSER’S NEGLIGENCE
• After a draft or check has once been negotiated so that it is in circulation, there is
little opportunity for negligence on the part of those through whose hands it passes; but as
to them, in most cases, the rule will apply that, as between innocent parties, the loss must fall
on the drawee
DUTY OF PURCHASER OF CHECK OR BILL
• One who purchases a bill or check is bound to satisfy himself that the paper is genuine; and
that by indorsing or presenting it for payment or putting it in circulation before presentation,
he impliedly asserts that he has performed his duty and the drawee who has without
actual negligence on his part, paid the forged demand, may recover the money paid from
such negligent purchaser
PAPER FORWARDED FOR COLLECTION

• The fact that the paper wasn’t cashed and indorsed with unrestricted indorsement but
was taken for collection and forwarded for that purpose under an indrosement giving
notice of that fact, may place a greater burden upon the drawee than it would otherwise bear
FORGERY OF SIGNATURE IN INSTRUMENT IS FALSIFACTION OF PRIVATE DOCUMENT
FORGER NEED NOT IMITATE GENUINE SIGNATURE

• One who signs in the name of another without the latter’s authority, as drawer in a
check, and thereby makes it appear falsely that the alleged drawer of the check was a real
party thereto, when as a matter of fact he didn’t participate in the transaction, is guilty of
falsification
COMMERCIAL DOCUMENTS
• Documents or instruments which are used by businessmen or merchants to
promote or facilitate trade or credit transactions
CONSIDERATION IN NEGOTIABLE
INSTRUMENTS
CONSIDERATION
Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person whose signature appears thereon to have become a party
thereto for value.
PRESUMPTION OF CONSIDERATION IS DISPUTABLE
• One of the disputable presumptions laid down by our Rules of Court is that a negotiable instrument was given or
indorsed for a sufficient consideration
CONSIDERATION NEED NOT ALLEGED OR PROVED

• In an action based on a negotiable instrument, it is unnecessary to aver or prove consideration for it is
imported and presumed from the fact that it is a negotiable instrument
MERE INTRODUCTION OF INSTRUMENT SUFFICIENT

• The mere introduction of the instrument sued on in evidence, prima facie entitles the plaintiff of a recovery
and unless such prima facie case is overcome by evidence produced by the defendant the plaintiff is entitled to
recover
EFFECT OF LACK OF CONSIDERATION

• The same is without legal effect and the payment for the note is not demandable
VALUABLE CONSIDERATION IN
Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a
simple contract. An antecedent or pre-existing debt constitutes value; and is deemed
such whether the instrument is payable on demand or at a future time.
VALUABLE CONSIDERATION, IN GENERAL

• Consideration is the inducement—cause or impelling influence which induces a
contracting party to enter into the contract
• Valuable consideration may in general terms be said to consist either in some right,
interest, profit or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some
responsibility to act, or labor, or service given, suffered, or undertaken by the other side
MEANING OF A HOLDER FOR VALUE
- NEGOTIABLE INSTRUMENTS
Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the
holder is deemed a holder for value in respect to all parties who become such prior to
that time.
MEANING OF A HOLDER FOR VALUE

• One who gives valuable consideration for an instrument issued or negotiated to him is a
holder for value
• Not limited to one who is known to have given valuable consideration for the
instrument he holds—it refers to any holder of an instrument for which value has been given at
any time
WHEN LIEN ON INSTRUMENT

CONSTITUTES HOLDER FOR VALUE
Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument
arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien.
• Suppose that A makes a note in the sum of P1000 payable to the order of B. B owes C P600. C is said to have
a lien on the note to the extent of P600 only, and to that extent, he is a holder for value.
• Can C as indorsee collect the whole amount of P1000 from A, or only P600? It depends. If A maker, has defenses
against B indorser, such as absence of consideration, C, even if a holder in due course can collect only P600 from
A, the extent of his lien.
• Reason for the rule: C is actually a holder in due course for P600 only. He is a holder in due course for such as
he is a holder for value for only P600. For the balance of P400 he is not a holder for value, and since being a holder
for value is one of the requisites of a holder in due course, he cannot be a holder in due course as far as the P400
is concerned.
• If A has personal defenses, he cannot use such as far as the P600 is concerned.
• If A on the other hand has real defenses, C cannot collect anything.
• But if A maker doesn't have any defenses at all against B indorser, then C can collect the whole amount of
P1000 and hold the P400 for
the benefit of B.
LIABILITY OF ACCOMODATION
PARTY IN NEGOTIABLE
INSTRUMENTS
Sec. 29. Liability of accomodation party. - An accomodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at
the time of taking the instrument, knew him to be only an accomodation party.
ACCOMODATION PARTY: REQUISITES

• One who has signed the instrument as maker, drawer, indorser, acceptor, without receiving any value
therefore and for the purpose of lending his name to some other person
• Requisites:
1. He must be a party to the instrument, signing as maker, acceptor, indorser, or drawer
2. He must not receive any value therefore
3. He must sign for the purpose of lending his name or credit
RIGHTS AND LEGAL POSITION OF AN ACCOMODATION PARTY

• The accomodation party is generally regarded as a surety for the party accomodated
• When the accomodation parties make payment to the holder of the notes, they have the right to sue the
accomodated party for reimbursement since the relation between them is in effect that of a principal and
sureties, the accomodation parties being the sureties
ACCOMMODATED PARTY CANNOT RECOVER FROM

ACCOMMODATING PARTY
• Absence of consideration is a defense
• In fact as between them, the understanding is that the accomodated party either is to
1. To reimburse the amount which the accomodation party may be obliged to pay
2. To pay the instrument directly to the holder
LIABILITY OF THE ACCOMODATION PARTY
• The accomodation party is liable on the instrument to a holder in value, notwithstanding such holder at any
time of the taking of the instrument knew him to be only an accomodation party
• The accomodation party doesn't receive any valuable consideration for the instrument he signs but he is liable
to a holder for value as if the contract wasn't for accomodation
CORPORATIONS ARE NOT LIABLE AS ACCOMODATION PARTIES EVEN TO HOLDERS FOR VALUE
OFFICERS SIGNING FOR CORPORATION AS ACCOMODATION PARTY WITHOUT AUTHORITY TO DO SO FOR THEIR
INDIVIDUAL DEBTS OR TRANSACTIONS ARE PERSONALLY LIABLE THEREON
HOLDER MUST OTHERWISE BE A HOLDER IN DUE COURSE
ACCOMODATION PARTY MAY ACCOMODATE ONE WHO IS NOT A PARTY TO THE INSTRUMENT
ACCOMODATION PARTY CAN INTERPOSE DEFENSE OF WANT OF

CONSIDERATION AGAINST ONE NOT HOLDER IN DUE COURSE.
NEGOTIATION IN NEGOTIABLE
INSTRUMENTS
NEGOTIATION OF NEGOTIABLE INSTRUMENTS
Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is

transferred from one person to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder and completed by delivery.
METHOD OF TRANSFER
1. By assignment
2. By operation of law
3. By negotiation, which may be completed by indorsement completed by delivery or by mere
delivery
ASSIGNMENT
• Method of transferring a non-negotiable instrument whereby the assignee is merely
placed in the position of the assignor and acquires the instrument subject to all defenses
that might have been setup against the original payee
MODE OF ASSIGNMENT
• Differs in no respect from that of any other contract
• Although some sort of written instrument is customarily employed, it may be written
either on the instrument itself or on a separate piece of paper
EFFECT OF ASSIGNMENT OF A NON-NEGOTIABLE INSTRUMENT

• The effect of the assignment is that the party holding the right drops out of the contract
and another takes his place
• The assignee is substituted in place of the assignor
• The assignee and every subsequent person to whom the instrument comes by
assignment may be considered as the person who made the instrument in the first instance
and as having said and done everything in making the instrument which the original assignor
did or said.
• Each assignee takes his chance as to the exact position in which any party making an
assignment of it stands
• And as it is called in law, the assignee takes the contract subject to equities, that is,
to defenses to the contract which would avail in favor of the original party up to the time
the notice of the assignment is given to the person against whom the contract is sought
to be enforced
ASSIGNMENT OF A NEGOTIABLE INSTRUMENT

• A person taking a negotiable instrument by assignment in a separate piece of paper takes it
subject to the rules applying to assignment
• And where the holder of a bill payable to order transfers it without indorsement, it
operates an equitable assignment
TRANSFER BY OPERATION OF LAW
1. By the death of his holder where the title vests in his personal representative, or
2. By the bankruptcy of the holder, where title vests in his assignee or trustee
3. Upon the death of a joint payee or indorsee in which case the general rule is that the
title vests at once in the surviving payee or trustee
NEGOTIATION
• Transfer of the instrument from one person to another in such a manner as to
constitute the transferee the holder thereof
• May either be by indorsement completed by delivery or by mere delivery
IS DELIVERY TO PAYEE A NEGOTIATION?

• First view: no because negotiation refers to an existing negotiable instrument and
before delivery to the payee, the instrument is incomplete.
• Second or better view: under this section and section 191, an instrument is
negotiated when it is delivered to the payee or to an indorsee
INDORSEMENT OF NEGOTIABLE
INSTRUMENTS
Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument
itself or upon a paper attached thereto. The signature of the indorser, without additional
words, is a sufficient indorsement.
NATURE OF AN INDORSEMENT
• It is not only a mode of transfer
• It is also a contract
• Every indorser is a new drawer and the terms are found on the face of the bill or note
• The indorsement of the bill or not implies an undertaking from the indorser to the
person in whose favor it is made and to every other person to whom the bill or note may
afterwards be transferred, exactly similar to that which is implied by drawing a bill except
that, in the case of drawing a bill, the stipulations with respect to the drawer’s
responsibility and undertaking don't apply
• The general indorser in effect, states to every person who follows him—this
instrument will be paid by the maker, if a note, or accepted the drawee or paid by the
acceptor, if a bill. If it is dishonored by
non-payment or non-acceptance, and you give me notice thereof, I will pay it.
WHERE THE INDORSEMENT IS WRITTEN

• The indorsement may be written on the instrument itself or upon a paper attached
thereto
• Allonge: paper attached to the instrument
MAY ALLONGE BE USED WHERE THERE IS ROOM ON

INSTRUMENT FOR INDORSEMENT?
• It has been held that the use of an allonge is allowable only when there is a
physical impossibility of writing the indorsement on the instrument itself, and an
indorsement on a separate piece of paper where there is sufficient space on the instrument
for indorsement will be considered as a mere assignment and not a negotiation
HOW INDORSEMENT WRITTEN?

• Means must show that there is indorsement
Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an

indorsement of the entire instrument. An indorsement which purports to transfer to the
indorsee a part only of the amount payable, or which purports to transfer the
instrument to two or more indorsees severally, does not operate as a negotiation of the
instrument. But where the instrument has been paid in part, it may be indorsed as to the
residue.
INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT

• The general rule is that the instrument must be of the entire instrument
• Accordingly, an indorsement of a part of the instrument doesn't operate as a
negotiation thereof
EFFECT OF PARTIAL INDORSEMENT
• It doesn't operate as an indorsement
• It may constitute a valid assignment though binding between the parties
• The person to whom the instrument is indorsed would not be considered an
indorsee but merely an assignee and would therefore take the instrument subject to the
defenses available between the original parties
EXCEPTION
• But where the instrument has been paid in part, it may be indorsed as to the residue
TRANSFER TO TWO OR MORE INDORSEES SEVERALLY

• An indorsement which purports to transfer the instrument to two or more indorsees
severally, doesn't operate as a negotiation of the instrument
MONTINOLA V. PNB
88 PHIL 178
FACTS:
*Remember the case with the Japanese occupation and the mutilated
check.
HELD:
Where the indorsement of the check was only for a part of the amount payable, it is
not legally negotiated within the meaning of Section 32, which provides that the
indorsement must be an indorsement of the entire instrument. An indorsement which
purports to transfer to the indorsee a
part only of the amount payable doesn't operate as a negotiation of the instrument.
Montinola may therefore be not regarded as an indorsee. At most he may be regarded as a
mere assignee of the P30,000 sold to him.
In which case, as an assignee, he is subject to the defenses available to the drawer

Provincial Treasurer. Sec. 33. Kinds of indorsement. - An indorsement may be either
special or in blank; and it may also be either restrictive or qualified or conditional.
KINDS OF INDORSEMENT
1. Special
2. In blank
3. Absolute
4. Conditional
5. Restrictive
6. Qualified
7. Joint
8. Successive
9. Irregular
10. Facultative
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the
person to whom, or to whose order, the instrument is to be payable, and the indorsement of
such indorsee is necessary to the further negotiation of the instrument. An indorsement in
blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be
negotiated by delivery.
SPECIAL AND BLANK INDORSEMENT
HOW FURTHER NEGOTIATED

1. Where the instrument is originally payable to order and it is negotiated by the payee
by special indorsement, it can be further negotiated by the indorsee of the instrument
completed by delivery
2. Where the instrument is originally payable to order and it is negotiated by the payee
in blank indorsement, it can be further negotiated by the holder by mere delivery. The
reason is that the
effect of a blank indorsement is to make the instrument payable to bearer
3. Where the instrument is originally payable to bearer, it can be further negotiated by

mere delivery, even if the original bearer negotiated it by special indorsement
Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a
blank indorsement into a special indorsement by writing over the signature of the indorser in
blank any contract consistent with the character of the indorsement.
• Suppose that A makes a note with B as payee. It is indorsed as follows:
o (Indorsement in blank) (Sgd.) B.
• Delivery was then made to C. C may place above the signature of B, “Pay to C.” so as to
make the indorsement thus:
o Pay to C.
(Sgd.) B.
• This converts the blank indorsement to a special indorsement
LIMITATION UPON CONVERSION OF BLANK INDORSEMENT

• Holder must not write any contract not consistent with the indorsement, that is,
the contract so written must not change the contract of the blank indorser
• The following has been held to be inconsistent with the contract of blank
indorsement—“pay to X and Y”, “Demand and notice waived”, “I guaranty payment”, “Without
recourse”
Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.
PROHIBITION OF FURTHER NEGOTIATION

1. Pay to C only
2. Pay to C and no other person
INDORSEE AGENT OF THE INDORSER
• Known as the agency-type of indorsement
“Pay to C for collection”

(Sgd.) B
• Hence, any action the indorsee may file is subject to defenses available against the
indorser such as lack of consideration
• Thus, where the proof tends to show that the plaintiff holds the draft for collection only,
and that the acceptance of it by defendants was conditional, and that after such an
acceptance, the defendants refused to accept the goods evidenced by the draft, which
were returned to and accepted by the plaintiff, who agreed to release the defendants
from any liability, plaintiff thereafter cannot recover
INDORSEMENTS FOR DEPOSIT

• An indorsement for deposit constitutes the indorsee the agent of the indorser
• “Pay to C for deposit (Sgd.) B”—such an indorsement, like an indorsement for
collection, constitutes a relation of title in the depositor in the absence of any practice or
agreement to the contrary
• In any event, a restrictive indorsement of an instrument for collection or deposit, or to
the use of the indorser and for his benefit, in the absence of any other circumstances, will
not divest the indorser of his title thereto until the money is paid
• Indorsements for deposits are usually informal
VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER

1. Pay to X in trust for C
2. Pay to X for use of C
CAN THE MAKER SET UP AGAINST THE INDORSEE HIS DEFENSES

AGAINST THE RESTRICTIVE INDORSER?
There are two views to this question:
1. Sulbrason-Dickinson v. Hopkins: an indorsement to A for the benefit of B was held
restrictive under Section 47 of the NIL, making the indorsee and its successors subject to
the good defenses against the restrictive indorser
2. Some learned writers held this view to be unsound. Thus, it has been held that the
indorsee of a check indorsed in trust for a third person who is a holder in due course could
recover from the
drawer who had a defense of failure of consideration, for while the restrictive indorsement
creating a trust gives notice of this trust to subsequent purchasers, it did not give notice
of defenses obtaining between prior parties.
• TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a distinction between what
kind of restrictive indorsement was made. Was it a trust type or an agency type? If it was an
agency type, the indorsee just fills in the shoes of the restrictive indorser. And thus, he is
susceptible and open to the defenses that the maker can have against the indorser. It
is different if it is trust type because the indorsee does not step inside the shoes of the
indorser and thus, the maker can no longer set up against the indorsee his defenses
against the indorser.
PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS

• As a general rule, an indorsement of a negotiable bill which purports to pass the title to
the bill to the indorsee, imports a consideration and the burden of proving want of
consideration rests upon the party alleging it
• The restrictive indorsements which are held to negative the presumption of a
consideration are such as to indicate that they are intended to pass title but merely to
enable the indorsee to collect for the benefit of the indorser, such as indorsements “for
collection” or others showing that the indorser is entitled to the proceeds
• But an indorsement to one person for the use or benefit of another, affords no such
indication. The indorser parts with the whole title to the bill and the presumption is that he
done so for a consideration.
• The only effect of such an indorsement, by way of restriction, is to give notice of the
rights of the beneficiary named in the indorsement and protect him against
misappropriation
EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY

• The mere absence of words of negotiability doesn't make the indorsement restrictive
• While the omission of words in the indorsement doesn't affect negotiability of the
instrument, such omission in the body thereof will render the instrument non-negotiable
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement
confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement.
RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT

• A restrictive indorsement confers upon the indorsee the right to receive payment of
the instrument
RESTRICTIVE INDORSEE MAY BRING AN ACTION

• A restrictive indorsement confers upon the indorsee the right to bring any action thereon
that the indorser could bring
• In a restrictive indorsement “for deposit”, can the indorsee such as B in the illustration,
bring an action against the indorser, such as A? Yes if the indorser received value for said
indorsement
RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS

• It is stated in the interpretation of the clause in Section 47 declaring a paper negotiable in
its origin to continue negotiable until it has been restrictively indorsed, is that the words
“until it has been restrictively indorsed” don't contemplate every restrictive indorsement
but a restrictive indorsement that prohibits the further negotiation of the instrument
under subdivision 1 of Section 36
• Section 46 didn't mean to declare the effects of a restrictive indorsement but to
preserve as far as possible the negotiability of an instrument negotiable in its origin and that
the implication of Section
47 should not be taken as destroying negotiability of an instrument heretofore universally
accepted as negotiable
EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT

• That all forms of restrictive negotiability impose some degree of limitation on
negotiability
• That they don't all impose the same degree of limitation
• That the indorsement itself discloses the extent of the limitation in the particular case
LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION

• But all subsequent indorsees acquire only title of the first indorsee under the
restrictive indorsement
• Illustrations of this rule:
o In the indorsement, “pay to A for collection,” the rights of the subsequent indorsees are
subject to the restrictive indorsement—namely, he can collect only for being a
restrictive indorsee, he acquires only the title of the first indorsee whose right is merely to
collect
o Suppose the P1000 note is indorsed as “Pay to B for deposit only. (Sgd.) A” and that B
owes Y P1000, B cannot transfer the note to Y for said debt. Or suppose B transfers the note
to another person for P1000, B cannot use the P1000 for his own personal expenses. He must
safely keep the money for
the benefit of A.
o “Pay to A for account of B”—gives notice that the instrument cannot be negotiated by A
for his own debt or benefit
Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a

mere assignor of the title to the instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of similar import. Such an indorsement
does not impair the negotiable character of the instrument.
HOW QUALIFIED INDORSEMENT IS MADE

• By adding to the indorser’s signature the words “without recourse”, “Sans recours”,
“indorser not holden”, or “with intent to transfer title only and not to incur liability as
indorser”, “at indorsee’s own risk”
EFFECT OF QUALIFIED INDORSEMENT

• Constitutes the indorser a mere assignor of the title to the instrument
• One who indorses without recourse states that all parties to the paper are genuine; I am
the lawful owner of the paper and I have title to it and know of no reason why you could
not recover on it as a valid instrument, but on thing I don't guarantee; I don't
guarantee the financial responsibility on that paper but I do say that I hold the title the same as
any other personal property
QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY

• He is secondarily liable on his warranties as an indorser under Section 65, that is, the
qualified indorser is liable if the instrument is dishonored by non-acceptance or non-
payment due to:
1. Forgery
2. Lack of good title on the part of the indorser
3. Lack of capacity to indorse on the part of the prior parties
4. The fact that, at the time of the indorsement, the instrument was valueless or not valid and
he knew of that fact
A QUALIFIED INDORSEMENT DOESN'T IMPAIR THE NEGOTIABLE

CHARACTER OF THE INSTRUMENT
Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party

required to pay the instrument may disregardthe condition and make payment to the
indorsee or his transferee whether the condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally.
ABSOLUTE INDORSEMENT
• One by which the indorser binds himself to pay upon no other condition than the
failure of prior parties to do so and upon due notice to him of such failure
CONDITIONAL INDORSEMENT
• An indorsement subject to a contingent event, that is, an event that may or may not
happen, or a past event unknown to the parties
• Suppose a note for P1000 with A maker, and B payee. It is then indorsed as follows
“Pay to Y if he passes the bar examinations. (Sgd.) B”—this is a conditional indorsement as Y
may or may not pass the bar examination.
OBLIGATION OF CONDITIONAL INDORSEE

• Y indorsee holds the note or the proceeds thereof, if he is paid by A, subject to the rights of
B
• If A disregards the condition and pays Y without waiting for the condition to be
fulfilled, Y doesn't immediately acquire ownership of the sum
• Y must hold in trust while the condition is not fulfilled
• It is upon the fulfillment of the condition that such ownership over the proceeds of the
note is absolutely acquired by the conditional indorsee Y
A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT

NON-NEGOTIABLE
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to

bearer, is indorsed specially, it may nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as indorser to only such holders as make
title through his indorsement.
• Section applies only to instruments which are originally payable to bearer
• Cannot apply where the paper is originally made payable to order and indorsed in blank;
for by Section 9, a note or bill which is payable to order becomes payable only when the last
indorsement is in blank;
and hence, when a blank indorsement is followed by a special indorsement, the
instrument is not within the terms of Section 9.
NEGOTIATION OF INSTRUMENT PAYABLE TO BEARER BUT

SPECIALLY INDORSED
• Where an instrument payable to bearer is indorsed, it may nevertheless be
further negotiated by delivery
• An instrument which is originally payable to bearer is always payable to bearer
• Hence, even when it has been specially indorsed, it is still payable to bearer
EFFECT ON LIABILITY OF SPECIAL INDORSER

Pay P1000 to bearer
(Sgd.) A
*C is bearer and he delivered to D
*D specially indorsed it to E
*E specially indorsed it to F
*F delivered to G, bearer.
• Is D liable to G being the first who specially indorsed the instrument? No, because G
didn't take title through D’s indorsement but through delivery of D
• To whom D is liable? To E and F, because they acquired the title to the instrument through
the special indorsement of D. Had F merely indorsed the instrument to G, D would be
liable also to G for the same reason.
Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is
payable to the order of two or more payees or indorsees who are not partners, all must indorse
unless the one indorsing has authority to indorse for the others.
• Applies only to instruments payable to two or more payees jointly
HOW INDORSEMENT OF JOINT PAYEES MADE
• Where the instrument is payable to two or more payees, all payees must each
indorse in order to negotiate the instrument
• If only one indorses, he passes only his part of the instrument—such an indorsement
wouldn't operate as such because it would not be an indorsement of the whole instrument
• Exceptions to the rule:
1. Where the payee or person indorsing has authority to indorse for the others
2. Where the payee or indorsees are partners
Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an

instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or
corporation, it is
deemed prima facie to be payable to the bank or corporation of which he is such
officer, and may be negotiated by either the indorsement of the bank or corporation or the
indorsement of the
officer.
Pay P1000 to the order of cashier, Lyceum of the Philippines.
(Sgd.) A
• Presumption is that the note is payable to Lyceum, not to the cashier personally
• And the note may be indorsed by any duly authorized officer of Lyceum other than
the cashier
DISPUTABLE PRESUMPTION
Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a
payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as
therein described
adding, if he thinks fit, his proper signature.
• An instrument drawn or indorsed to “Juan Dytuco” whose real name is “Juan Dyjuco” may
be indorsed as follows:
o Pay to Y (Sgd.) Juan Dytuco Juan Dyjuco
o Or (Sgd.) Juan Dyjuco
Sec. 44. Indorsement in representative capacity. - Where any person is under obligation
to indorse in a representative capacity, he may indorse in such terms as to negative personal
liability.
HOW AGENT MUST INDORSE?

1. He must add words describing himself as agent
2. At the same time, disclose his principal
3. He must be duly authorized
Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date
after the maturity of the instrument, every negotiation is deemed prima facie to have been
effected before the instrument was overdue.
DISPUTABLE PRESUMPTION
IMPORTANCE OF THIS PROVISION

• This provision becomes importance when considered in connection with Section 52 (b)
• Under the provision, in order that one may become a holder in due course, the
instrument must be negotiated to him before it becomes overdue
• The indorsement without date establishes a prima facie presumption that the
instrument was indorsed before maturity and one who denies that the holder of such
instrument is a holder in due course has the burden of proof
Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every
indorsement is presumed prima facie to have been made at the place where the instrument
is dated.
IMPORTANCE OF PLACE OF INDORSEMENT

• The place of indorsement is sometimes material because an indorsement is
governed by the laws of the state where it is indorsed, although the instrument is drawn or
made in a different state
Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin

continues to be negotiable until it has been restrictively indorsed or discharged by payment or
otherwise.
WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE

1. Restrictive indorsement which further prohibits the further negotiation of an
instrument
2. By a discharge thereof by payment or otherwise
NEGOTIABILITY AFTER DATE OF MATURITY

• FIRST VIEW: negotiability ceases in the full commercial sense after maturity and
negotiability ceases by default of the maker in his payment
• SECOND VIEW: negotiability continues even after maturity
• RECONCILIATION OF THE TWO: the mercantile character of the instrument as a
negotiable paper and of the contracts of the several parties to it, continues after maturity
and until it is paid except: that an indorsee or a transferee after maturity takes the instrument
subject to defenses between original parties, because after maturity such subsequent
parties take the instrument after it becomes overdue and therefore, under paragraph b of
Section 52, they are not holders in due course
• After maturity, an instrument originally negotiable continues to be negotiable in the
sense that the contracts of the parties to it continue and are governed by the Negotiable
Instruments Law
• After maturity the instrument ceases to be negotiable in the sense that a transferee after
maturity is not a holder in due course and therefore not free from defenses obtaining between
prior parties
LEGAL POSITION OF HOLDER TAKING OVERDUE INSTRUMENT

• He is a holder with notice. He may or may not be a holder for value and his rights will be
regulated accordingly. He takes a bill which on the face of it, ought to have been paid.
• He is bound to make two inquiries—has what ought to have been done really have been
done? And if not, why not?
RIGHT OF HOLDER NOT IN DUE COURSE
• He can recover checks in his possession but the only disadvantage is that the negotiable
instrument is subject to the defenses as if it were non-negotiable
Indorsement of Negotiable Instruments
STRIKING OUT INDORSEMENT -

Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are
thereby relieved from liability on the instrument.
WHEN HOLDER MAY OR MAY NOT STRIKE OUT INDORSEMENT

• But where the instrument is transferred by special indorsement, the holder has no
right to strike out the name of the person mentioned in such indorsement and insert his own
name in place thereof; nor can he strike out such name and convert such special
indorsement into a blank indorsement
• The holder who acquires title subsequent to the succeeding special indorsement
must trace his title not only through the blank indorsement but through the special
indorsement as well
EFFECT OF STRIKING OUT

1. The indorser whose indorsement is struck out is relieved from his liability on the instrument
2. All subsequent indorsers are also relieved from their liability on the instrument
TRANSFER WITHOUT INDORSEMENT
OF NEGOTIABLE INSTRUMENTS
Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose
of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the
indorsement is actually made.
• Applies only to instruments payable to order
• Contemplates a case wherein delivery and payment of value but there was no indorsement
• One element lacking for the negotiation of the instrument
RIGHTS OF TRANSFEREES FOR VALUE

1. The transferee acquires only the rights of the transferor. This means that if a
defense is available against the transferor, that defense is also available against the
transferees
2. The transferee has also the right to require the transferor to indorse the instrument
BPI V. COURT OF APPEALS

GR 136202, JANUARY 25, 2007
FACTS:
Templonuevo demanded payment from petitioner of a sum of money representing the
aggregate value of three checks which were allegedly payable to him but which were
deposited with the petitioner to Salazar’s account, without his knowledge and corresponding
endorsement. Finding
merit in the demands of Templonuevo, the bank then froze the account of the engineering firm
as the account of Salazar was already closed or had insufficient funds. Failure of any
settlement between Templonuevo and Salazar, this prompted the bank to debit the account
of Salazar and give back the money to Templonuevo through cashier’s check. The account of
Salazar was also debited for whatever charges incurred for the issuance of the cashier’s check.
The trial court held in favor of Salazar.
ISSUE:
Does a collecting bank, over the objections of its depositor, have the authority to
withdraw unilaterally from such depositor’s account the amount it had previously paid upon
certain unendorsed order instruments deposited by the depositor to another account that she
later closed?
HELD:
In the present case, the records do not support the finding made by the CA and the trial court
that a prior arrangement existed between Salazar and Templonuevo regarding the transfer of
ownership of the checks. This fact is crucial as Salazar’s entitlement to the value of the
instruments is based on the assumption that she is a transferee within the contemplation of
Section 49 of the Negotiable Instruments Law.
Transferees in this situation do not enjoy the presumption of ownership in favor of holders
since they are neither payees nor indorsees of such instruments. The weight of authority
is that the mere possession of a negotiable instrument does not in itself conclusively
establish either the right of the possessor to receive payment, or of the right of one who has
made payment to be discharged from liability. Thus, something more than mere possession by
persons who are not payees or indorsers of the
instrument is necessary to authorize payment to them in the absence of any other facts
from which the authority to receive payment may be inferred.
Even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s
possession of the checks, it cannot be said that the presumption of ownership in
Templonuevo’s favor as the designated payee therein was sufficiently overcome. This is
consistent with the principle that if instruments payable to named payees or to their order
have not been indorsed in blank, only such payees or their indorsees can be holders and
entitled to receive payment in their own right.
The presumption that a negotiable instrument was given for a sufficient consideration
will not inure to the benefit of Salazar because the term “given” does not pertain merely
to a transfer of physical possession of the instrument. The phrase “given or indorsed” in the
context of a negotiable instrument refers to the manner in which such instrument may be
negotiated.
It is an exception to the general rule for a payee of an order instrument to transfer the
instrument without indorsement. Precisely because the situation is abnormal, it is but
fair to the maker and to prior holders to require possessors to prove without the aid of
an initial presumption in
their favor, that they came into possession by virtue of a legitimate transaction with the
last holder. Salazar failed to discharge this burden, and the return of the check proceeds
to Templonuevo was therefore warranted under the circumstances despite the fact that
Templonuevo may
not have clearly demonstrated that he never authorized Salazar to deposit the checks or to
encash the same. Noteworthy also is the fact that petitioner stamped on the back of the
checks the words: "All prior endorsements and/or lack of endorsements guaranteed,"
thereby making the assurance that it had ascertained the genuineness of all prior
endorsements. Having assumed the liability of a general indorser, petitioner’s liability
to the designated payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account
for the value of the checks it previously credited in her favor. However, the issue of whether
it acted judiciously is an entirely different matter. As businesses affected with public
interest, and because
of the nature of their functions, banks are under obligation to treat the accounts of
their depositors with meticulous care, always having in mind the fiduciary nature of their
relationship. In this regard, petitioner was clearly remiss in its duty to private
respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious
lack of indorsement thereon, petitioner permitted the encashment of these checks three times
on three separate occasions. This negates petitioner’s claim that it merely made a mistake
in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of
the CA that petitioner recognized Salazar’s claim of ownership of checks and acted deliberately
in paying the same, contrary to ordinary banking
policy and practice. It must be emphasized that the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it, for the purpose of determining their
genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself
out to the public as the expert on this field, and the law thus holds it to a high standard
of conduct. The taking and collection of a check without the proper indorsement
amount to a conversion of the check by the bank.
More importantly, however, solely upon the prompting of Templonuevo, and with full
knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited
the account held in the name of the sole proprietorship of Salazar without even serving due
notice upon her. This ran contrary to petitioner’s assurances to private respondent Salazar
that the account would remain untouched, pending the resolution of the controversy
between her and Templonuevo. For the above reasons, the Court finds no reason to disturb the
award of damages granted by the CA against petitioner. This whole incident would have
been avoided had petitioner adhered to the standard of diligence expected of one
engaged in the banking business. A depositor has the right to recover reasonable moral
damages even if the bank’s negligence may not have been attended with malice and bad
faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation
•
WHEN PRIOR PARTY MAY

NEGOTIATE INSTRUMENT
Sec. 50. When prior party may negotiate instrument. - Where an

instrument is negotiated back to a prior party, such party may,
subject to the provisions of this Act, reissue and further negotiable the
same. But he is not entitled to enforce payment thereof against any
intervening party to whom he was personally liable.
•
RIGHTS OF THE HOLDER OF

RIGHTS OF THE HOLDER
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may
to sue thereon in his own name; and payment to him in due course discharges the
instrument.
RIGHTS OF A HOLDER IN GENERAL

1. He may sue on the instrument in his own name
2. He may receive payment and if the payment is in due course, the instrument is discharged
RIGHT TO SUE
• Holder of a negotiable instrument may sue on his own name, even if
he be a holder only for collection or as a pledge of the instrument
RIGHT OF TRANSFEREE OF UNINDORSED INSTRUMENT

• Such possessor may sue in his own name if his transferor could have done so
• Under Section 49, a transfer for value, but without indorsement, of an instrument is
payable to order vests in the transferee such title as the transferor had therein.
EFFECT OF PAYMENT TO THE HOLDER

• The payment in due course to the holder of the instrument discharges the instrument
• It is in due course if it is made at or after the maturity of the
instrument; or to the holder thereof; in good faith and without notice
that his title is defective
•
HOLDER IN DUE COURSE -

Holder in Due Course - Negotiable Instruments
Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who
has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
PRESUMPTION HOLDER IN DUE COURSE

• Generally, every holder is prima facie a holder in due course
• Any one, therefore, who claims otherwise must prove that the holder in question acquired
the instrument with one or more of the conditions lacking
• Any holder proved to have taken an instrument with one of the conditions
enumerated lacking is not a holder in due course
ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE

• The holder of the instrument must have become the holder before the instrument has
become overude
• Illustrations—
o One who has purchased 2 promissory notes without the necessary indorsement on
the part of the holder after payment thereof had already been one year overdue and
without having made inquiries about the solvency of the makers cannot be considered as a
holder in due course
o One taking past due paper is chargeable with notice of all equities between the
original parties but nbt with equities between intermediate indorsers
o If the instrument is overdue, it is also a notice that it has been dishonored
WHEN INSTRUMENT IS OVERDUE

• When it after the date of maturity
• On the date of maturity, the instrument is not overdue and a holder who acquires
the instrument on that date is a holder in due course
• If the instrument is overdue, there might be something wrong with the instrument
AS TO ACCELERATED INSTRUMENTS
• When the instrument contains an acceleration clause, knowledge of the holder at
the time of acquisition thereof that one installment or interest, or both, as the case may
be, is unpaid, is notice that the instrument is overdue
AS TO INTEREST
• One who purchases in good faith an instrument upon which the interest is overdue is
• But where by the terms of the instrument, the principal was to become due upon default
of the payment of instrument, then one who takes the instrument upon which the
interest is overdue is not a holder in due course
WHAT IS AN ACQUISITION IN GOOD FAITH?

• Good faith refers to the indorsee or transferee and not to the seller of the paper
• Taking in good faith means that he doesn't have any knowledge of fact which would
render it dishonest for him to take a particular piece of negotiable paper
MEANING OF HOLDER IN GOOD FAITH

• Holder without knowledge or notice of equities of any sort which could be set up against a
prior holder of an instrument
EFFECT OF FAILURE TO MAKE INQUIRY
• Ordinarily, failure to inquire after notice merely sufficient to cause a person of
ordinary prudence to make inquiry as to an infirmity in a negotiable instrument and
defect in the holder’s title, is not evidence of purchaser’s bad faith so as to bar him from
recovery
• TEST OF HONESTY—whether or not his purpose is dishonest?
WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD FAITH?

• Failure to make inquiry when circumstances strongly indicate defect, renders the
holder not a holder in due course
ACQUISITION FOR VALUE

• Where the holder gave no valuable consideration for the transfer of the instrument to him,
he cannot be a holder in due course
• Discounting of a negotiable instrument is still considered to be taking for value
EFFECT OF INADEQUACY OF INSTRUMENT

• Generally, lesion or inadequacy of cause shall not invalidate a contract, unless there has
been fraud, mistake or undue influence
• It may be an evidence of fraud
• An amount paid for an instrument if a trifling sum should be a red flag and may by itself
establish notice
ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR OF INFIRMITY

• The following may be chargeable with notice—one taking an instrument which is
overdue; and one acquiring an instrument for a grossly inadequate consideration
GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY
DEFECTS OF TITLE
• All those situations which at common law were known as equitable defenses and
also to cover those equities of ownership where there was breach of faith in negotiation
• Examples?
o Acquisition of the instrument by fraud
o Acquisition of the instrument by force, duress or fear
o Acquisition of the instrument by unlawful means
o Acquisition of the instrument by for an illegal consideration
o Negotiation of the instrument in breach of faith
o Negotiation of the instrument under circumstances which amount to fraud
DEFENSES
• Include those common law defenses outside those covered in Section 55
• These include mistake, absence and failure of consideration covered in Section 28, minority
and other forms of incapacity, lack of authority of an agent
INFIRMITIES
• Things that are wrong with the instrument itself
• What are these?
o Wrong date inserted where the instrument is expressed to be payable at a fixed period
after sight is undated
o Filling up a blank instrument not strictly in accordance with the authority given or not
within authority given or not within the reasonable time, where it was delivered wanting in
a material alteration
o Filling up without authority an incomplete and undelivered instrument
o Lack of valid and intentional delivery
o Forgery
o Material alteration
MAY A PAYEE BE A HOLDER IN DUE COURSE?

• Yes, if he satisfies the requirements as set forth in Section 52
MAY A DRAWEE BE A HOLDER IN DUE COURSE?

• A holder refers to one who has taken the instrument as it passes along in the course of
negotiation towards the drawee and not the drawee, who, on the acceptance and payment of
the instrument, thereby strips the instrument of all negotiability and reduces it to a mere
voucher or proof of payment
Sec. 53. When person not deemed holder in due course. - Where an instrument payable on
demand is negotiated on an unreasonable length of time after its issue, the holder is not
deemed a holder in due course.
WHAT CONSTITUTES UNREASONABLE LENGTH OF TIME?

• Jurisprudence doesn't state an exact period, nonetheless, there is practically no
authorities hold that a reasonable time for negotiating a demand note could be extended
beyond a year
Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any
infirmity in the instrument or defect in the title of the person negotiating the same before he
has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course
only to the extent of the amount therefore paid by him.
Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective
within the meaning of this Act when he obtained the instrument, or any signature thereto,
by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.
DEFECTIVE TITLE IN GENERAL

• In the acquisition or negotiation thereof
Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument amounted to bad faith.
NOTICE OF DEFECT IN GENERAL

To constitute a notice of defect or infirmity, the holder must have actual knowledge
either:
1. Of the defect or infirmity
2. Or of facts that his action in taking the instrument amounts to bad faith
ACTUAL KNOWLEDGE
• Actual knowledge is required and not mere suspicion, surmise or fear
TAKING AMOUNTING TO BAD FAITH

• Bad faith consists in guilty knowledge, or willful ignorance, showing a vicious or evil mind
• While mere suspicion is not enough, where there is knowledge of suspicious
circumstances, coupled with means of verifying them, taking the instrument may amount to
bad faith
Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument
free from any defect of title of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the instrument for the full amount
thereof against all parties liable thereon.
RIGHTS OF A HOLDER IN DUE COURSE

1. He may sue on the instrument in his won name
3. He holds the instrument free from any defect of title of prior parties and free from
defenses available to prior parties among themselves
4. And he may enforce payment of the instrument for the full amount thereof against all
parties liable thereto
LEGAL AND EQUITABLE DEFENSES

• The holder in due course is free from equitable defenses only
AN ALTERATION MAY BE A REAL OR PERSONAL DEFENSE. WHY?

• An alteration irrespective of original tenor, it can be enforced—real
• Irrespective of difference between original and altered tenor, can collect only limited
amount—personal
EQUITABLE OR PERSONAL DEFENSES
• Those which grow out of the agreement or conduct of a particular person in regard
to the instrument which renders it inequitable for him, though holding legal title, to enforce
it against the defendant, but which are not available against bona fide purchasers for value
without notice
LEGAL OR REAL DEFENSE

• Attach to the instrument itself and can be set up against the whole world, including
• The right sought to be enforced has never existed or ceased to exist
• Defense against everybody
THE INSTRUMENT SUBJECT TO A REAL DEFENSE CAN STILL BE ENFORCED. IT

CANNOT BE ENFORCED WITH REGARD THE PERSON TO WHOM THE LEGAL DEFENSE IS
AVAILABLE.
BETWEEN WHOM DEFENSE CAN BE RAISED IN NOTES

• In general, the defense of want of consideration may only be raised between
immediate parties
• But this could be raised in the instance that the holder has notice of the want in
consideration
BETWEEN WHOM DEFENSE MAY BE RAISED IN BILLS

• The want or failure of consideration may be interposed in an action brought by the
payee against the drawer or by the indorsee against the payee indorsing, or by the drawer
against the acceptor, but not in an action between the payee and acceptor
• In the latter case, the defense is available only if there is no consideration received
by the defendant for his liability and plaintiff must have given no consideration for his title
WANT OF DELIVERY OF COMPLETE INSTRUMENT

• Where the instrument is mechanically complete and is not wanting in any material
particular, want of delivery is an equitable defense
• As against holders not in due course, it can be shown that no delivery was made, or that
the delivery was conditional or for a special purpose
• Where the instrument is stolen, the defense is also equitable
• But where the instrument is payable to order, it is a real defense—for the person would
have to commit forgery on the instrument
FRAUD IN INDUCEMENT IS A PERSONAL OR EQUITABLE DEFENSE

• Relates to the quantity, quality, value or character of the consideration of the instrument
FOR MISTAKE TO INVALIDATE CONSENT

• It should refer to the substance of the thing which is the object of the contract, or those
conditions which have principally moved one or both parties to enter into the contract
FRAUD IN FACTUM OR FRAUD IN ESSE CONTRACTUS IS A LEGAL

DEFENSE
• This fraud exists in those cases which a person without negligence has signed an
instrument which was in fact a negotiable instrument but was deceived as to the
character of the instrument and without knowledge of it
• Essential element is that the maker or indorser, as the case may be, must have exercised
ordinary diligence and in no manner contributed negligently to the imposition
MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR
WHERE THE CORPORATION IS ABSOLUTELY PROHIBITED FROM ISSUING ANY NEGOTIABLE

INSTRUMENT, THE PAPER CANNOT BE ENFORCED EVEN BY A HOLDER IN DUE COURSE
WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY STATUTE, THE

ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE
Sec. 58. When subject to original defense. - In the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it were
non-negotiable. But a holder who derives his title through a holder in due course, and
who is not himself a party to any fraud or illegality affecting the instrument, has all the
rights of such former holder in respect of all
parties prior to the latter.
RIGHTS OF A HOLDER NOT IN DUE COURSE

1. He may sue on his own name
3. He holds the instrument subject to the same defenses as if it were non-negotiable
4. But a holder not in due course who derives his title from a holder in due course and who
isn’t a party himself to any fraud or illegality affecting the instrument, has all the rights of
such former holder in respect of parties prior to the latter
THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS THE BURDEN OF PROOF
TO SHOW PREDECESSOR IS INDEED A HOLDER IN DUE COURSE
Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to
be a holder in due course; but when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to prove that he or
some person under whom he claims acquired the title as holder in due course. But the
last-mentioned rule does not apply in favor of a party who became bound on the instrument
prior to the acquisition of such defective title.
IN WHOSE FAVOR PRESUMPTION ARISES

• In order to be a holder, he must be in possession of the note or the bearer thereof
WHEN PRESUMPTION ACCRUES

• It is presumed that the holder acquired the note under all the circumstances
required under Section 52
• Before the presumption arises, he must prove that he is the holder of the instrument, that
is, that he is the indorsee in possession of the instrument, as it is payable to order
WHEN BURDEN IS SHIFTED

• When it is shown that the title of any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or some under whom he claims,
acquired the title as holder in due course
THE PRESUMPTION IS NOT APPLICABLE WHEN THE HOLDER’S TITLE WAS DEFECTIVE OR
SUSPICIOUS
LIABILITIES OF PARTIES IN
LIABILITIES OF PARTIES IN NEGOTIABLE INSTRUMENTS
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that
he will pay it according to its tenor, and admits the existence of the payee and his then capacity
to indorse.
MAKER PRIMARILY LIABLE

• Engagement of the maker is to pay absolutely for the note according to its tenor
• His liability is primarily and unconditional
• One who has signed an instrument as a maker is presumed to have acted with care
and to have signed the instrument with full knowledge of its contents, unless of course, if fraud
is proved
MAKER MUST PAY ACCORDING TO THE TERMS OF THE NOTE

• The maker bound himself to pay personally. He cannot shift the obligation without
the consent of the payee. He cannot allege that he spend the money on expenses which
should be charged to a trust administered by a creditor because it is not the payee’s
concern to know how the proceeds should be spent. That is the sole concern of the maker.
The payee’s interest is merely to see that the note is paid according to its term.
LIABILITY OF 2 OR MORE MAKERS

• When 2 or more makers sign jointly or severally, each of them is individually liable
for the payment of the full amount of their obligation even if one of them didn’t receive part of
the value given therefor, as he would be considered as an accommodation party
PAYEE’S EXISTENCE, ETC.
• The maker also admits of the existence of the payee and his then capacity to indrose
• He is precluded from setting up the following defenses:
o That the payee is a fictitious person because by making the note, he admits that the
payee exists
o That the payee was insane, a minor, or a corporation acting ultra vires because by
making the note, he admits the then capacity of the payee to indorse
Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the
existence of the payee and his then capacity to indorse; and engages that, on due
presentment, the instrument will be accepted or paid, or both, according to its tenor, and
that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder or to any subsequent indorser who may be
compelled to pay it. But the drawer may insert in the instrument an express
stipulation negativing or limiting his own liability to the holder.
DRAWER SECONDARILY LIABLE

• He engages merely that the bill will be accepted or paid or both, according to its
tenor, and that he will pay only when
1. It is dishonored
2. And the necessary proceedings of dishonor are duly taken
• The liability of the drawer is subject to the two conditions and attaches only upon their
fulfillment
• The drawer, by merely drawing the bill and signing his name in the bill as such drawer,
without more, impliedly engages to be so secondarily liable, as if he has incorporated the
provisions of Section 61 in the bill
• If the bill is not paid, accordingly, if a bill is not paid, the drawer becomes liable for
the payment of its value to the holder provided that notice of dishonor is given
TO WHOM DRAWER IS SECONDARILY LIABLE

1. The holder
2. Or if any of the indorsers intervening between the holder and the drawer is compelled to
pay by the holder, the drawer, will be liable to that indorser so compelled to pay
IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE?
• Yes
• It was held that until the bill has been accepted, the drawer is the principal debtor
and after acceptance, the drawee or acceptor is the principal debtor and the drawer
becomes secondarily liable
PAYEE’S EXISTENCE
• Like the maker, the drawer admits to the existence of the payee and his capacity to indorse
NEGATIVES HIS LIABILITY

• The law allows the drawer to negative or limit his liability by express stipulation
• By adding words such as “without recourse” or “I shall not be liable in case of non-payment
or non-acceptance”
Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that
he will pay it according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity
and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
ACCEPTOR PRIMARILY LIABLE

• Acceptor engages to pay absolutely according to the tenor of its acceptance
• His liability is not subject to any condition
• The acceptor is the drawee who accepts the bill
• His acceptance immediately places a legal liability on him for the payment of the bill
in favor of one who became a holder thereof after acceptance, and if he wants to escape
liability, it is up to him to show that he is a mere agent of the drawer, or allege and prove any
other defense which he has to the liability
EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR
• Where being unable to pay certain bills of exchange which the drawee has accepted, the
latter makes a mortgage in favor of the holder of said bills upon certain merchandise the
value of which is sought to be collected through said bills, in order to secure the payment
of said amount if the merchandise is sold and the integrity thereof while the sale is not
effected, the execution of said mortgage doesn’t constitute a Novation of the obligation
represented by said accepted bills unless it is expressly stated in the mortgage
ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE

• While the maker of a note engages to pay according to the tenor of the note, an acceptor
engages to pay according to the tenor of his acceptance, not of the bill he accepts
• Tenor of his acceptance may be different from the tenor of the bill, as the acceptor may
accept the bill with qualifications
• If his acceptance is general, the tenor of then bill is the same tenor as the tenor of his
acceptance
WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE

• Suppose the bill is originally for P1000. Before the drawee X accepts it, it is altered by the
payee B to P4000. Then X accepts it. How much is X liable to a holder in due course?
• According to one view, X is liable for P4000 and not P1000. The reason is that the
tenor of X’s acceptance is for P4000.
EFFECT OF SECTION 124

• Under the first view, what is the effect of Section 124 which provides that a holder in due
course can recover only the original tenor of the instrument?
• It seems that this refers to the original tenor of instrument taken from the standpoint of
the person primarily liable, in X’s standpoint. In other words, the original tenor of the
instrument is P4000, which is the tenor of X’s acceptance.
• If after his acceptance, a subsequent indorsee alters the bill to read P9000, then X
could be liable for P4000 only, the original tenor of his acceptance, even as to a holder of due
course.
ADMISSION OF DRAWER’S EXISTENCE, ETC.
• Drawer’s existence
• The genuineness of the drawer’s signature
• The capacity and authority of the drawer to draw the instrument
• He doesn’t admit the genuineness of the indorser’s signatures
EFFECT OF ACCEPTOR’S ADMISSIONS

1. Acceptor consequently precluded from setting up the defense that the drawer is non-
existent or fictitious because of his admission of the drawer’s existence
2. Neither can he claim the drawer’s signature is a forgery because he admits the genuineness
of the drawer’s signature
3. Neither can the drawee escape liability by alleging want of consideration between
him and the drawer as by accepting the bill, he admits the capacity and authority of the
drawer to draw
the bill
•
WHEN PERSON DEEMED INDORSER -

Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as
maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his
intention to be bound in some other capacity.
WHEN PERSON DEEMED INDORSER

• In the absence of any indication in what capacity a person whose signature is written on the instrument
intends to be bound, he shall be deemed as an indorser
INDICATION TO BE BOUND OTHERWISE THAN INDORSER

• Will not be deemed as an indorser if he indicates by appropriate words his intention to be bound in some other
capacity
• But anyone who assumes the responsibility of identifying the payee of a check is answerable to the bank cashing the
check if the bank pays its amount to such payee so identified
ADMISSIBILITY OF PAROL EVIDENCE
• The statutory command that the legal effect of a blank instrument cannot be changed by parol proof or by
evidence from other source
• The intent to be bound in some other capacity than as an indorser must be indicated in the indorsement or
on the face of the instrument and cannot be shown by parol
LIABILITY OF AN IRREGULAR
INDORSER IN NEGOTIABLE
INSTRUMENTS
Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon
his signature in blank before delivery, he is liable as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent
parties.
(b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable
to all parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.
IRREGULAR INDORSEMENT
• An irregular indorser is one who not otherwise a party to an instrument, places his signature thereon his
signature in blank before delivery
IRREGULAR INDORSEMENT
• Its an indorsement in an unusual, peculiar, or singular manner
• His name appears where he would naturally expect another name
BEFORE DELIVERY
• It means the initial delivery
• Provision doesn’t apply if the signature was placed after delivery
WARRANTY WHERE NEGOTIATION IS

BY DELIVERY
Warranty where negotiation is by delivery
Sec. 65. Warranty where negotiation by delivery and so forth. — Every person
negotiating an instrument by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other
than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating public
or corporation securities other than bills and notes.
1. A person negotiating by mere delivery
2. A person negotiating by qualified indorsement
LIABILITY OF PERSON NEGOTIATING BY DELIVERY
• A person negotiating by mere delivery becomes liable to the holder only when the
holder cannot obtain payment by reason of the fact that any of the warranties of the person
negotiating by delivery is or becomes false
•
LIABILITY OF GENERAL INDORSER -

Liability of general indorser - Negotiable Instruments

Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification,
warrants to all subsequent holders in due course: (holders in good faith)
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding
section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or

both, as the case may be, according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay it.
• Deals with the liability or warranties of one negotiating by general indorsement, as

distinguished from qualified indorsers or persons negotiating by mere delivery
• It has been held that this section includes an indorser for collection
LIABILITY OF GENERAL INDORSER

1. That the instrument is genuine and in all respects what it purports to be
2. That he has a good title to it
3. That all prior parties had capacity to contract
4. And that the instrument is, at the time of his indorsement, valid and subsisting
FOURTH WARRANTY OF GENERAL INDORSER AND QUALIFIED

INDORSER, DISTINGUISHED
• While the qualified indorser or person negotiating by delivery warrants that he is ignorant
of any fact that will render the instrument valueless or impair its validity, the general indorser
warrants that the instrument he is indorsing is valid and subsisting regardless of whether
he is ignorant of that fact or not
THE WARRANTIES OF A GENERAL INDORSER EXTEND TO THE

FOLLOWING
1. Holders in due course
2. Persons who derive their title from holders in due course
3. Immediate transferees even if they are not holders in due course
WARRANTIES DON’T EXTEND TO DRAWEE

• The indorser of a check doesn’t warrant the genuineness of the drawer’s signature to
the drawee who pays it since the drawee is not a holder in due course
• The warranties provided do not run in favor of the drawee in respect to the genuineness
of the drawer’s signature but only in favor of subsequent holders in due course
OTHER LIABILITY OF GENERAL INDORSER

• He engages that, on due presentment, it shall be accepted or paid, or both, as the case
may be, according to its tenor, and that if it be dishonored and the necessary proceedings
of dishonor be duly taken, he will pay the amount to the holder, or to any subsequent
indorser who may be compelled to pay it
GENERAL INDORSER IS SECONDARILY LIABLE

• Secondary liability not confined to the four warranties
• He is liable if for any reason, the person primarily liable cannot pay, as distinguished from
the limited secondary liability of the qualified indorser or of the person negotiating by mere
delivery
• The reason for dishonor need not be established. As long as there was dishonor, this is
sufficient.
LIABILITY OF ASSIGNOR
• The vendor in good faith shall be responsible for the existence and legality of the
credit at the time of the sale unless it should have been sold as doubtful but not for the
solvency of the debtor unless it has been so expressly stipulated or unless the insolvency
was prior to the sale and of common knowledge
•
LIABILITY OF INDORSER WHERE

PAPER NEGOTIABLE BY DELIVERY
Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on
an instrument negotiable by delivery, he incurs all the liability of an indorser.
CASE DIGESTS: SECTION 67
JAI ALAI V. BPI

66 SCRA 29
FACTS:
Checks were deposited by petitioner in its current account with the bank. These checks were from a certain Ramirez,
a consistent better in its games, who was a sales agent from Inter-Island Gas. Inter-Island later found out that
of the forgeries committed in the checks and thus, it informed all the parties concerned. Upon the demands on the
bank as the collecting bank, it debited the account of petitioner. Thereafter, petitioner tried to issue a check for
payment of shares of stock but such was dishonored for insufficient funds. It filed a complaint against the bank.
HELD:
Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner
as an indorser guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon
the petitioner’s warranty should not be held liable for the resulting loss.
Furthermore, the provision in the deposit slip on the right of reservation by the bank applies only when there is
actual receipt of current funds or solvent credits. But as earlier on indicated, the transfer on account of the checks
were ineffectual because it was made under the mistaken and valid assumption that the indorsements of the payee
thereon were genuine.
ORDER IN WHICH INDORSERS ARE

LIABLE
Order in which indorsers are liable
Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are
liable prima facie in the order in which they indorse; but evidence is admissible to show
that, as between or among themselves, they have agreed otherwise. Joint payees or
joint indorsees who indorse are deemed to indorse jointly and severally.
• Applies only with respect to an indorser as against another but not as against a holder in due course
• Every indorser is liable to all indorsers subsequent to him but not those prior to him whom he in turn makes
liable
JOINT AND SEVERAL LIABILITY OF JOINT PAYEES

• Joint payees or joint indorsees are deemed to indorse solidarily
EFFECT OF LACK OF NOTICE OF DISHONOR, ETC.

• One of the joint indorsers cannot escape liability because proper notice of dishonor wasn’t given to his joint indorser
•
LIABILITY OF AN AGENT OR BROKER
IN NEGOTIABLE INSTRUMENTS
Liability of an agent or broker in negotiable instruments
Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an
instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five
of this Act, unless he discloses the name of his principal and the fact that he is acting
only as agent.
• Instruments payable to bearer
• To escape personal liability as a party negotiating by delivery, the agent must disclose his principal and state
that he is acting only as an agent
PRESENTATION FOR PAYMENT OF

PRESENTATION FOR PAYMENT OF NEGOTIABLE

INSTRUMENTS
Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in
order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special
place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender
of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order
to charge the drawer and indorsers.
MEANING OF PRESENTMENT FOR PAYMENT
• Production of a bill of exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or
the production of the promissory note to the person liable for payment of the same
1. Personal demand for payment at the proper place
2. With the bill or note in readiness to exhibit it as required and to receive payment and surrender it if the debtor is
willing to pay
PRESENTMENT FOR PAYMENT NOT NECESSARY TO CHARGE

PERSONS PRIMARILY LIABLE
• It cannot be validly claimed that it is presentment of the bill which is the operative act that makes the acceptor
liable under his acceptance
PAYABLE AT A SPECIAL PLACE

• If the bill is payable at the PNB, is it necessary to make presentment for payment to X in order to charge him?
No, the rule is the same. The only effect is that if, X is able and willing to pay the bill at the PNB at maturity, it is
equivalent to a tender of payment on the part of drawee X.
PRESENTMENT NECESSARY TO CHARGE PERSONS SECONDARILY LIABLE
NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE IN BILLS

OF EXCHANGE
1. In the three steps required by law, presentment for acceptance to the drawee or
negotiation within reasonable time after acquisition unless excused
2. If the bill is dishonored by non-acceptance, notice of dishonor by non-acceptance must be
given to persons secondarily liable unless excused and in case of foreign bills, protest for
dishonor by non-acceptance must be made unless excused
3. But if the bill is accepted, or if the bill isn’t required to be presented for
acceptance, it must be presented for payment to the persons primarily liable unless
excused
4. If the bill is dishonored by non-payment, notice of dishonor by non-payment must be
also be given to person secondarily liable unless excused, and in case of foreign bills, protest for
dishonor by non-pay7ment must be made unless excused
NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE
• Presentment for payment must be made within the period required to the person primarily
liable unless excused
• If the note is dishonored by non-payment, notice of dishonor by non-payment must be
given to the person secondarily liable unless excused
PRESENTMENT WHERE
INSTRUMENT IS NOT PAYABLE ON
DEMAND AND PAYABLE ON
DEMAND
Presentment where instrument is not payable on demand

and payable on demand
Sec. 71. Presentment where instrument is not payable on demand and where payable on
demand. - Where the instrument is not payable on demand, presentment must be made
on the day it falls due. Where it is payable on demand, presentment must be made
within a reasonable time after its issue, except that in the case of a bill of exchange,
presentment for payment will be sufficient if made within a reasonable time after the last
negotiation thereof.
WHEN PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME

• The presentment must be made at the date of maturity
WHEN PAYABLE ON DEMAND IN CASE OF NOTES
• The time for presentment depends upon whether the instrument is a bill or a note
• If it is a note, it must be presented for payment within reasonable time for issue
• If it is a bill, it must be presented for payment within reasonable time from last negotiation
and not for issue, as in the case of notes
CASE DIGESTS: SECTION 71
FAR EAST REALTY INVESTMENT V. CA

166 SCRA 256
FACTS:
Private respondents approached petitioner and asked the latter to extend to them an
accommodation loan. They proposed to pay with interest. They even gave a check,
signed by Tat, drawn against Chinabank, and signed at the back by the private
respondents. They said that they will change the check with cash after one month and if
not, the check could be presented for payment and it would be paid. The loan was
actually extended but when the check was presented for payment, it was dishonored—
the account on which it is drawn has long been closed. The
trial courts held in favor of petitioner but this was reversed by the appellate court by ruling
that the check has passed through other hands before reaching the petitioner and the
said check wasn’t presented within reasonable time and after its issuance.
HELD:
Where the instrument is not payable on demand, presentment must be made on the day
it falls due. Where it is payable on demand, presentment must be made within a reasonable
time after issue, except that in case of a bill of exchange, presentment for payment is
sufficient if made within
reasonable time after the last negotiation thereof.
Notice may be given as soon as instrument has been dishonored and unless delay is
excused must be given within the time fixed by law.
In this case, presentment and notice of dishonor were not made within reasonable time.
September 1960—date when the check was drawn
March 1964—presented to drawee bank
April 1968—notice of dishonor
•
SUFFICIENT PRESENTMENT IN
Sufficient presentment in negotiable instruments
Sec. 72. What constitutes a sufficient presentment. - Presentment for payment, to be

sufficient, must be made:
(a) By the holder, or by some person authorized to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to

any person found at the place where the presentment is made.
APPLICATION THIS OF SECTION

• Establishes the requisites for a sufficient presentment for payment
WHO MAKES PRESENTMENT

• Presentment for payment must be made by the holder of the instrument or by
some person authorized to receive payment on his behalf
TIME FOR MAKING PRESENTMENT
• At a reasonable hour on a business day
CASE DIGEST
STATE INVESTMENT HOUSE V. IAC

175 SCRA 310
FACTS:
New Sikatuna requested for a loan from Spouses Chua. Latter issued post-dated crossed
checks in favor of former. Thereafter, Sikatuna sold checks to SIHI which upon deposit,
checks were dishonored. The trial court decided the case in favor of SIHI.
HELD:
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once—to one who has an account with a bank
3. The act of crossing the check serves the warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that
purpose, otherwise, he is not a holder in due course.
The checks in issue were crossed generally and issued payable to New Sikatuna Wood
which could only mean that the drawer has intended the same for deposit only by the
rightful person. Apparently, it was not the payee who presented the same for payment
and therefore, there was no proper presentment and the liability didn't attach to the drawer.
Thus, in the absence of due presentment, the drawer didn't become liable. Consequently,
no right of recourse is available to petitioner against the drawer of the subject checks
considering that the petitioner is the proper
party authorized to make presentment of the checks in question. Nonetheless, the holder
could still collect from New Sikatuna if the latter doesn't have a valid excuse from refusing
payment.
•
PLACE OF PRESENTMENT OF
Place Of Presentment Of Negotiable Instruments

Sec. 73. Place of presentment. - Presentment for payment is made at the proper place:
(a) Where a place of payment is specified in the instrument and it is there presented;
(b) Where no place of payment is specified but the address of the person to make payment is
given in the instrument and it is there presented;
(c) Where no place of payment is specified and no address is given and the instrument
is presented at the usual place of business or residence of the person to make payment;
(d) In any other case if presented to the person to make payment wherever he can be
found, or if presented at his last known place of business or residence. (ORDER OF
PREFERENCE)
EXHIBITION OF NEGOTIABLE
INSTRUMENTS FOR PAYMENT
Exhibition of Negotiable Instruments For Payment
Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person
from whom payment is demanded, and when it is paid, must be delivered up to the party
paying it.
NECESSITY OF EXHIBITION OF INSTRUMENT
• Presentment includes not only demand for payment but also the exhibition of the
instrument
• Purpose is to enable the debtor to determine the genuineness of the instrument and
the right of the holder to receive payment and to
enable him to retain possession upon payment
A DEMAND BY TELEPHONE IS INSUFFICIENT
WHEN EXHIBITION EXCUSED

1. When the debtor doesn’t demand to see the instrument but refuses payment on some
other grounds
2. When the instrument is lost or destroyed
CASE DIGESTS
ANSALDO V. CA, 177 SCRA 8

FACTS:
TFC issued promissory notes in favor of PCIB. At about the same time, TFC extended
loans to Ansaldo and Reyes. These loans were evidenced by promissory notes, each waiving
demand, presentment, protest, and notice of protest and non-payment. TFC then paid
part of its obligation with
PCIB. To pay for its outstanding balance, it endorsed the notes issued by Ansaldo and Reyes.
Claiming that the notes have matured without payment by Ansaldo and Reyes, the bank
instituted actions against them.
HELD:
The contention of Ansaldo that the instrument should have been first presented to him is
bereft of merit.
First, it couldn’t be first raised on appeal.
Second, it is a petty issue for if according to him, such an exhibition was needed to give him
opportunity to determine the genuineness of the instrument, this was rendered
unnecessary not only by his omission to contest it, but also by his admission of the
authenticity of the note implicit from his averment that he made substantial payments thereon
and second, he made a waiver of demand, presentment, etc.
PRESENTMENT TO PARTNERS, JOINT

DEBTORS, WHERE DEBTOR IS DEAD
Presentment to partners, joint debtors, where debtor is

dead
Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable
on the instrument is dead and no place of payment is specified, presentment for
payment must be made to his personal representative, if such there be, and if, with
the exercise of reasonable diligence, he can be found.
Sec. 77. Presentment to persons liable as partners. - Where the persons primarily liable
on the instrument are liable as partners and no place of payment is specified,
presentment for payment
may be made to any one of them, even though there has been a dissolution of the
firm.
Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners,
primarily liable on the instrument and no place of payment is specified, presentment must
be made to them
all.
SECTIONS 76 TO 78 NOT APPLICABLE WHERE PLACE SPECIFIED
• Applies only where there is no place specified
WHERE PERSON PRIMARILY LIABLE DEAD

• Presentment must be made to the executor or administrator if there is one and if he can be found
• The holder must use diligence to find the personal representative if there be one
• The person primarily liable is dead, there is a personal representative, and no place of payment indicated in the
instrument—if there is a place indicated, then presentment should be done there
WHERE PERSONS PRIMARILY LIABLE ARE PARTNERS THE PRESENMENT MUST BE MADE TO ANY ONE OF THEM
WHERE PERSONS PRIMARILY LIABLE ARE JOINT DEBTORS, PRESENTMENT MUST BE MADE TO ALL OF THEM
WHEN PRESENTMENT NOT

REQUIRED TO CHARGE THE DRAWER
/ INDORSER
When presentment not required to charge the drawer /

indorser
Sec. 79. When presentment not required to charge the drawer. - Presentment for
payment is not required in order to charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the instrument.
Sec. 80. When presentment not required to charge the indorser. - Presentment is not
required in order to charge an indorser where the instrument was made or accepted for his
accommodation and he has no reason to expect that the instrument will be paid if
presented.
APPLICATION OF SECTION 79 AND 80
• These provisions give exceptions to the general rule that if no presentment for
payment is made, the persons primarily liable are discharged
WHERE DRAWER NEED NOT BE GIVEN NOTICE

• Where A withdraws his funds from X, drawee bank, so that they are not sufficient to
pay the bill, he has no right to expect or require that the drawee or acceptor would pay the
instrument
• Accordingly, where F holder doesn’t make a presentment to X, A drawer would not

be discharged by such failure
PRESENTMENT IS NOT REQUIRED TO CHARGE THE DRAWER IN

THE FOLLOWING CASES
1. In case the check upon which payment has been stopped
2. Where the drawer’s balance is less than the amount of the check. The mere fact however
that the drawer has no funds with drawee at the time he draws, doesn’t render presentment
unnecessary if
he still has reasonable grounds to believe that the instrument will be paid, particularly when
provision has been made for payment of any bill drawn by the drawer on the drawee
3. Where the drawer of a bill containing the words “Pay from balance” had no money on
deposit with the drawee but expected to arrange with the broker to cover drafts
•
DELAY IN MAKING PRESENTMENT

OF NEGOTIABLE INSTRUMENTS
Delay in making presentment of negotiable instruments
Sec. 81. When delay in making presentment is excused. - Delay in making presentment for
payment is excused when the delay is caused by circumstances beyond the control of the
holder and not imputable to his default, misconduct, or negligence. When the cause of
delay ceases to operate, presentment must be made with reasonable diligence.
EXCUSES FOR DELAY

• Overwhelming calamity, malignant diseases, interruption of trade
negotiations by political circumstances, etc.
Sec. 82. When presentment for payment is excused. - Presentment for payment is excused:
(a) Where, after the exercise of reasonable diligence, presentment, as required by

this Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
• What is excused is failure to make presentment for payment and not mere delay
WAIVER MAY BE EXPRESS OR IMPLIED
IMPLIED WAIVER
• Implied waiver of presentment may be manifested by any language or conduct or any agreement between the
parties reasonably calculated to lead the holder to believe that presentment is waived or to mislead or prevent him
from treating the bill as he otherwise would
SUMMARY OF RULES AS TO PRESENTMENT FOR PAYMENT

1. Presentment for payment is not necessary to charge persons primarily liable
2. But it is necessary to charge a person secondarily liable except
a. As to drawer, under Section 79
b. As to indorser, under Section 80
c. When dispensed with under Section 82
d. When the instrument has been dishonored by non-acceptance
DISHONORED NEGOTIABLE
INSTRUMENTS
Dishonored Negotiable Instruments

Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by
non-payment when:
(a) It is duly presented for payment and payment is refused or cannot be obtained; or
(b) Presentment is excused and the instrument is overdue and unpaid.
WHEN PAYMENT REFUSED, ETC.

• The instrument must be duly presented for payment and payment is either refused or
cannot be obtained
WHEN PRESENTMENT IS EXCUSED

• Presentment for payment is excused
• Instrument is overdue
• It is unpaid
Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to
the provisions of this Act, when the instrument is dishonored by non-payment, an
immediate right of recourse to all parties secondarily liable thereon accrues to the
holder.
AFTER DISHONOR, INDORSERS, ETC. ARE PRIMARILY LIABLE
• As to holder, after an instrument is dishonored by non-payment , the persons secondarily

liable thereon ceases to be secondarily liable
• They become principal debtors and their liability becomes the same as that of the principal
obligors—provided a notice of dishonor has been given to them
• If no notice is given, they are discharged
• If they are charged by dishonor and notice, while it is true that they become principal
debtors as to the holder, yet as among themselves, persons secondarily liable are presumed
liable in the order that they
become parties to the instrument
CASE DIGEST:
PNB V. SEETO, 91 SCRA 757

FACTS:
Seeto called at a branch of bank and presented a check payable to cash or bearer, and drawn
by Kiao against PBC. After consultation with the employees, Seeto made a general and
qualified indorsement of the check. He was then paid the amount of the check by bank.
The check was consequently dishonored, a letter was sent to Seeto and was asked to
refund the money given to him. A second letter was sent to him and he averred that case
against him be deferred while he inquired about why the
check was dishonored. Thereafter, he refused to pay, alleging that the account against
the check was drawn had sufficient funds when the check was drawn and if the bank didn’t
delay in clearing the check, there would have been sufficient funds.
The appellate court reversed the lower court in its decision. It ruled that the bank was guilty of
unreasonably retaining and withholding the check, and that the delay in the presentment was
inexcusable, so that respondent thereby was discharged from liability.
HELD:
Section 84 is applicable, nonetheless, it should be read in correlation with Section 186, which
says that presentment should be within reasonable time.
TIME - NEGOTIABLE INSTRUMENTS

Time - Negotiable Instruments
Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein
without grace. When the day of maturity falls upon Sunday or a holiday, the instruments
falling due or becoming payable on Saturday are to be presented for payment on the next
succeeding business day except that instruments payable on demand may, at the option of
the holder, be presented for payment before twelve o'clock noon on Saturday when that
entire day is not a holiday.
Sec. 86. Time; how computed. - When the instrument is payable at a

fixed period after date, after sight, or after that happening of a
specified event, the time of payment is determined by excluding
the day from which the time is to begin to run, and by including the
date of payment.
PAYMENT IN DUE COURSE

Payment in due course
REQUISITES FOR PAYMENT IN DUE COURSE
1. Payment must be made at or after the date of maturity

2. Payment must be to the holder
3. Payment must be made by the debtor in good faith and without notice that his title is
defective
• If payment is made before maturity, it would constitute a negotiation back to the person
primarily liable and he can renegotiate it. Payment doesn’t discharge the instrument.
• Payment to indorsee who is not in possession of the instrument is not payment to a person
other than the holder is at the risk of the party so paying if the person wasn’t authorized by
the holder to receive payment. So also, the payment to the original payee after the
note had been transferred by him to a holder in due course doesn’t discharge the note
• Payment to a person by the debtor who knows that such person stole it, is not payment in
due course, as such payment is not in good faith. The maker of a note or the acceptor of a
bill must satisfy himself, when it is presented for payment, that the holder traces his
title through genuine indorsements, and if there is a forged indorsement, it is a nullity and no
right passes by it
PAYMENT MUST BE MADE TO POSSESSOR OF INSTRUMENT

• The party making payment must insist on the presentment of the paper by the party
demanding payment in order to make sure that it is at the time in his possession and not
outstanding in another
• A receipt taken is no protection
• If at the time he makes payment, it is outstanding and in the hands of a holder in due
course, he must pay it again
• Possession of notes by the maker is presumptive evidence
NOTICE OF DISHONOR IN
NOTICE OF DISHONOR in Negotiable Instruments

Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise
provided, when a negotiable instrument has been dishonored by non-acceptance or non-
payment, notice of dishonor must be given to the drawer and to each indorser, and any
drawer or indorser to whom such notice is not given is discharged.
MEANING OF NOTICE
• By notice of dishonor is meant bringing either verbally or by writing, to the knowledge of
the drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon
proper proceedings taken, has not been accepted or hasn’t been paid, and that the party
notified is expected to paid it
NECESSITY AND PURPOSE OF NOTICE
• When an instrument is dishonored by NON-ACCEPTANCE or NON-PAYMENT, notice
of such dishonor must be given to persons secondarily liable, as the case may be.
Otherwise, such parties are discharged
BURDEN OF PROOF
• It is upon the plaintiff who seeks to enforce the defendant’s liability upon a
negotiable instrument as indorser to establish said liability by proving that notice was given to
the defendant within the time and in the manner required by the law that the instrument
in question had been dishonored
• Where these facts are not proven, the plaintiff doesn’t sufficiently establish the
defendant’s liability
• Where there is no proof in record tending to show that the plaintiff gave any notice
whatsoever to the defendant that the instrument in question had been dishonored, said
plaintiff hasn’t established its cause of action
PERSONS PRIMARILY LIABLE NEED NOT BE NOTIFIED
DOES FAILURE TO GIVE NOTICE OF DISHONOR OF A PREVIOUS INSTALLMENT TO

PERSONS SECONDARILY LIABLE ALSO DISCHARGE THEM ON THE SUCCEEDING
INSTALLMNETS?
• It depends on whether the instrument contains an acceleration clause
RULE WHERE THERE IS NO ACCELERATION CLAUSE

• Where the instrument contains no acceleration clause, failure to give notice of
dishonor on previous installment doesn’t discharge drawers and indorsers as to the
succeeding installments, and therefore, the holder can file an action against them for
such succeeding installments, notice is given
• The reason is that each separate installment is equivalent to another note
RULE WHERE THERE IS AN ACCELERATION CLAUSE

• It depends whether the clause is optional or automatic
• If it is automatic, failure to give notice of dishonor as to a previous installment will
discharge the persons secondarily liable as to the succeeding installments
• If it is optional and it is not exercised, the rule would be the same as where there is no
acceleration clause
EXCEPTIONS TO REQUIREMENT OF NOTICE

• The law provides for exceptions on failure to give notice would discharge drawer or
indorsers
Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on
behalf of any party to the instrument who might be compelled to pay it to the holder, and
who, upon taking it up, would have a right to reimbursement from the party to whom the
notice is given.
NOTICE MAY BE GIVEN BY

1. The holder
2. Another in behalf of the holder
3. Any party to the instrument who may be compelled to pay it to the holder—against
any party whom he has a right of reimbursement should such party giving notice pay
the instrument
4. Another person in behalf of such party
Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his
own name or in the name of any party entitled to given notice, whether that party be his
principal or not.
NOTICE OF AGENT
• Notice may be given by the agent and it is not necessary that the agent be
authorized by the principal
• He may give the notice in his name or in the name of his principal
• A collecting bank may give notice, and where it has done so, no notice from the owner is
necessary
• And where the cashier of the drawee bank which had refused to pay a check gave the
check to a notary to protest, which was done, it was held that the possession of the check by
the cashier was evidence of his agency of the holder to present it for protest
Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the
holder, it inures to the benefit of all subsequent holders and all prior parties who have
a right of recourse against the party to whom it is given.
MEANING OF BENEFIT
• Benefit refers to the right to charge the person secondarily liable who received notice
• The party to whom this benefit inures can charge the party receiving notice of dishonor,
even if himself didn’t give the notice
INURES TO THE BENEFIT OF THE FOLLOWING

1. All parties prior to the holder, who have a right of recourse against the party to
whom the notice is given
2. All holders subsequent to the holder giving notice
Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is given
by or on behalf of a party entitled to give notice, it inures to the benefit of the holder
and all parties subsequent to the party to whom notice is given.
APPLICATION OF THIS SECTION

• Follows the same principle as the preceding section but this time, the person giving notice
is not the holder but a party to the instrument who might be compelled to pay it to the
holder, and who, upon taking t up, would have a right of reimbursement from the party
to whom notice is given
Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the
hands of an agent, he may either himself give notice to the parties liable thereon, or he
may give notice to his principal. If he gives notice to his principal, he must do so within
the same time as if he were the holder, and the principal, upon the receipt of such
notice, has himself the same time for giving notice as if the agent had been an independent
holder.
WHEN AGENT’S NOTICE MUST BE GIVEN
• When an instrument is dishonored in the hands of an agent, he can do either of the
following
o Directly give notice to the persons secondarily liable thereon
o Give notice to his principal
• If the agent decides to give notice to the principal, he must give notice within the time
allowed by law as if he were a holder
• The principal has also the same time to give notice to the persons secondarily liable
Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient
written notice may be supplemented and validated by verbal communication. A
misdescription of the instrument does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby.
Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any
terms which sufficiently identify the instrument, and indicate that it has been dishonored
by non-acceptance or non-payment. It may in all cases be given by delivering it personally
or through the mails.
FORM AND CONTENTS OF NOTICE

• It may be oral or in writing
• Whether oral or in writing, it must contain
1. SUFFICIENT DESCRIPTION OF THE INSTRUMENT TO IDENTIFY IT,
and
2. A STATEMENT THAT IT HAS BEEN PRESENTED FOR PAYMENT AND FOR ACCEPTANCE, AND
THAT IT HAS BEEN DISHONORED, and
3. A STATEMENT THAT THE PARTY GIVING NOTICE INTENDS TO LOOK FOR THE PARTY
ADDRESSED FOR PAYMENT
EFFECTS OF DEFECTS IN NOTICE

• If the notice is not signed, it will not invalidate it
• If the notice is written and doesn’t contain #2 and #3, it can be supplemented by
oral communication stating the things lacking
• If there is misdescription, it would only vitiate the notice if the person is misled thereby
NOTICE BY PHONE
• This could be done however it must be shown that the party to be notified was
really communicated with, that is, fully identified as to the party at the receiving end of the line
MANNER OF GIVING NOTICE

• May be given by personal delivery or by mail
Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party
himself or to his agent in that behalf.
NOTICE MAY BE GIVEN

1. To the party himself
2. To his agent in his behalf
• An accommodation indorser is entitled to notice
• An irregular indorser must also be given notice if he is to be charged
• And if notice is given to an agent, he must be duly authorized to receive the notice
of dishonor
AGENT DISTINGUISHED FROM PERSON PRESENT IN ABSENCE OF

PARTY
• Notice to agent must be distinguished from notice attempted to be given to party
himself where he is absent at his place of business or residence. In such a case, the notice may
be left with anyone found in charge therein
Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the
party giving notice, the notice must be given to a personal representative, if there be one,
and if with reasonable diligence, he can be found. If there be no personal representative,
notice may be sent to the last residence or last place of business of the deceased.
REQUISITES FOR NOTICE TO REPRESENTATIVE
1. Death is known to the party giving notice
2. There is a personal representative
3. If with reasonable diligence he could be found
WHEN NOTICE MAY BE SENT TO THE LAST RESIDENCE OR PLACE

OF BUSINESS
1. If his death is not known to the party giving notice
2. Or although his death is known to the party giving notice but there is no personal
representative
3. If there be one but he cannot be found with reasonable diligence
Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one
partner is notice to the firm, even though there has been a dissolution.
Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be
given to each of them unless one of them has authority to receive such notice for the others.
PROVISION WOULD APPLY ONLY TO JOINT DRAWERS
Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent,
or has made an assignment for the benefit of creditors, notice may be given either to the
party himself or to his trustee or assignee.
1. Where the party secondarily liable has been declared a bankrupt or an insolvent
2. Where he has made an assignment of his properties for the benefits of creditors
• In such cases, notice be given to the party himself or his trustee or assignee
Sec. 102. Time within which notice must be given. - Notice may be given as soon as the
instrument is dishonored and, unless delay is excused as hereinafter provided, must be
given within the time fixed by this Act.
MAY NOTICE OF DISHONOR BE GIVEN BEFORE THE DATE OF
MATURITY
• No, such notice would be insufficient because an instrument cannot be said to be
dishonored for non-payment unless presented and presentment must be made on the
date of maturity unless of course, presentment is excused
• But even in such cases, the instrument cannot be said to be dishonored by non-
payment unless it is overdue and unpaid
• Notice of dishonor can be given only after the instrument has been actually
dishonored, and notice given before the paper due is premature and insufficient,
regardless of the indorser’s knowledge that the maker was in default
MAY NOTICE OF DISHONOR BE GIVEN ON THE DATE OF MATURITY?

• Yes, provided that the instrument has been presented for payment and is has been
dishonored
• But if the instrument is payable at a bank, it is not dishonored if the maker deposits the
amount of the instrument before the close of banking hours. Hence, notice of dishonor
must be given after the close of banking hours on the date of maturity
PURPOSE OF PROMPT NOTICE

• To give the persons secondarily liable every opportunity to secure themselves such as
to enable the party to be charged to preserve and protect his rights against prior parties
Sec. 103. Where parties reside in same place. - Where the person giving and the person to
receive notice reside in the same place, notice must be given within the following times:
(a) If given at the place of business of the person to receive notice, it must be given
before the close of business hours on the day following.
(b) If given at his residence, it must be given before the usual hours of rest on the day
following.
(c) If sent by mail, it must be deposited in the post office in time to reach him in usual
course on the day following.
Sec. 104. Where parties reside in different places. - Where the person giving and the
person to receive notice reside in different places, the notice must be given within the
following times:
(a) If sent by mail, it must be deposited in the post office in time to go by mail the
day following the day of dishonor, or if there be no mail at a convenient hour on last day,
by the next mail thereafter.
(b) If given otherwise than through the post office, then within the time that notice would
have been received in due course of mail, if it had been deposited in the post office
within the time specified in the last subdivision. (TO REACH HIM IN USUAL COURSE THE DAY
FOLLOWING)
TIME FOR GIVING NOTICE IN GENERAL

• The law provides for a different period for giving notice of dishonor depending on
whether—the party giving notice and the party to receive notice reside in the same place;
or the party giving notice and the party to receive reside in different places
MEANING OF “THE SAME PLACE”

• Refers to the corporate limits of a town or city where the presentment is made or where
the holder resides
EFFECT OF NOTICE GIVEN OUT OF TIME

• Unless excused, notice given out of time would be considered not to have been given
• Hence, the party to receive notice would be discharged
Sec. 105. When sender deemed to have given due notice. - Where notice of dishonor is duly
addressed and deposited in the post office, the sender is deemed to have given due
notice, notwithstanding any miscarriage in the mails.

• A party giving notice is deemed to have given due notice where the notice of
dishonor is duly addressed and deposited in the post office, even when there is miscarriage of
mail
CONCLUSIVE PRESUMPTION
Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been
deposited in the post-office when deposited in any branch post office or in any letter box
under the control of the post-office department.
DEPOSIT IN LETTER BOX

• The letter box must be under the control of the post office department
• Otherwise, notice wouldn’t deemed to have been deposited in the post office
• Thus, a notice of protest properly addressed and left in a place in a notary’s office
where mail was usually collected by his postman was held not a mailing of the notice as
required by the statute
Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of
dishonor, he has, after the receipt of such notice, the same time for giving notice to
antecedent parties that the holder has after the dishonor.
Sec. 108. Where notice must be sent. - Where a party has added an address to his signature,
notice of dishonor must be sent to that address; but if he has not given such address, then
the notice must be sent as follows:
(a) Either to the post-office nearest to his place of residence or to the post-office where he
is accustomed to receive his letters; or
(b) If he lives in one place and has his place of business in another, notice may be
sent to either place; or
(c) If he is sojourning in another place, notice may be sent to the place where he is so
sojourning.
But where the notice is actually received by the party within the time specified in this
Act, it will be sufficient, though not sent in accordance with the requirement of this
section.
Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time
of giving notice has arrived or after the omission to give due notice, and the waiver may
be expressed or implied.
WHEN WAIVER MAY BE MADE

1. Before the time of giving notice, such as express waiver in the body of the instrument
or added to the signature of the party
2. After omission to give due notice
IMPLIED WAIVER
• Waiver may be implied from acts, declarations, or silence
Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument
itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it
binds him only.
WHOM AFFECTED BY WAIVER IN GENERAL

• The persons affected by waiver depends upon whether the waiver is in the instrument
itself or is written above the signature of the indorser
• If the waiver is embodied in the instrument itself, it is binding upon all parties
• If the waiver is written above the signature of an indorser, it binds him
only
Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of
exchange or other negotiable instrument, is deemed to be a waiver not only of a formal
protest but also of presentment and notice of dishonor.
WHERE PROTEST IS WAIVED, THE FOLLOWING ARE INCLUDED

AND ARE DEEMED WAIVED ALSO
1. Presentment
2. Notice of dishonor
• Where presentment for payment is waived, notice of dishonor is also waived
• But where notice of dishonor is waived, presentment for payment is not waived
Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when,
after the exercise of reasonable diligence, it cannot be given to or does not reach the
parties sought to be charged.
WHEN NOTICE EXCUSED

• When political disturbances interrupt and obstruct the ordinary negotiations of
trade, they constitute a sufficient excuse for want of presentment or notice, upon the same
principle that controls in cases of military operations or interdictions of commerce
• Prevalence of a malignant, contagious, infectious disease…
Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is
excused when the delay is caused by circumstances beyond the control of the holder and
not imputable to his default, misconduct, or negligence. When the cause of delay ceases to
operate, notice must be given with reasonable diligence.
Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required
to be given to the drawer in either of the following cases:
(a) Where the drawer and drawee are the same person;
(b) When the drawee is fictitious person or a person not having capacity to contract;
(c) When the drawer is the person to whom the instrument is presented for payment;
(d) Where the drawer has no right to expect or require that the drawee or acceptor will
honor the instrument;
(e) Where the drawer has countermanded payment.
Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required
to be given to an indorser in either of the following cases:
(a) When the drawee is a fictitious person or person not having capacity to contract, and
the indorser was aware of that fact at the time he indorsed the instrument;
(b) Where the indorser is the person to whom the instrument is
presented for payment;
(c) Where the instrument was made or accepted for his accommodation.
WHEN NOTICE RELATIVELY EXCUSED

1. Where he has knowledge of the dishonor by means other than through a formal
notice, as when he is both the drawee and drawer or when presentment is made to him
2. Where he has no reason to expect that the instrument will be honored, as when he
has countermanded payment or where the drawee is fictitious or without capacity to
contract
NO RIGHT TO EXPECT OR REQUIRE PAYMENT AS TO DRAWER

1. Where the drawer of the check has no account with the drawee bank
2. When the drawer of a check payable abroad has no funds with the drawee bank to meet it
3. When the knowledge that previous drafts on the same consignee had been dishonored.
• In the foregoing, the drawer has no right to receive notice of dishonor
DRAWER HAS COUNTERMANDED PAYMENT

• A drawer tells drawee B not to pay the bill. F holder need not give notice to A
drawer. An allegation that payment of a check had been countermanded is sufficiently set
out where the check was set forth with the indorsement across the face “Payment stopped”
DRAWEE FICTITIOUS, ETC. MUST BE MADE KNOWN AS TO INDORSERS

• The indorser must be aware of the fact that the drawee is fictitious or not having capacity
to contract. Otherwise, notice of dishonor must be given to such indorser to charge him.
But the fact that that the indorser knew the maker to be insolvent or that the
instrument was dishonored doesn’t dispense with the necessity of notice
Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of
dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-
payment is not necessary unless in the meantime the instrument has been accepted.
Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of
dishonor by non-acceptance does not prejudice the rights of a holder in due course
subsequent to the omission.
SUMMARY AS TO NOTICE OF DISHONOR

1. Like presentment for payment, notice of dishonor need not be given to persons
primarily liable in order to charge them
2. But aside from presentment for payment to persons primarily liable, notice of dishonor
to persons secondarily liable is necessary to charge the latter except—
a. When notice is waived
b. When dispensed with under Section 112
c. As to drawer, under Section 114
d. As to indorser, under Section 115
e. Where due notice of dishonor by non-acceptance has been given
f. As to a holder in due course without notice
Sec. 118. When protest need not be made; when must be made. - Where any negotiable
instrument has been dishonored, it may be protested for non-acceptance or non-payment, as
the case may be; but protest is not required except in the case of foreign bills of
exchange.
WHEN PROTEST NECESSARY

• Protest is necessary with regard foreign bills of exchange
• Mere fact of protest is not conclusive upon the dishonor of the instrument and
due notice to the indorser; other evidence is competent on these questions
• While protest is not required in cases of promissory notes and inland bills, it is usual to
protest these instruments also when dishonored since the notary’s certificate of protest
is the most convenient and certain mode of proving the facts
•
DISCHARGE OF NEGOTIABLE
INSTRUMENTS
DISCHARGE OF NEGOTIABLE INSTRUMENTS
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is
made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after
maturity in his own right.
PAYMENT BY PRINCIPAL DEBTOR

• In order to discharge the instrument, the payment must be a payment in due course, and
second, a payment made by the principal debtor
• If payment is made before the date of maturity, the instrument is not discharged as the
payment is not in due course
• Where payment is made by a party who is not a primary obligor or an accommodation
party, his payment only conceals his own liability and those who are obligated after him. All
prior parties primarily or secondarily liable on the bill, are liable to such a payer, and the payer
may cancel indorsements subsequent to his own and reissue the paper, and it will be valid
as against the prior parties
PAYMENT BY THIRD PERSONS
• If payment is made by a third person, the instrument is not discharged because payment is
not made by the person principally liable
• Not any one who desires may pay the instrument and then recover of the maker. He must
be a person who has in some way made himself liable for the payment of the instrument.
• Exception: where an instrument has been protested and someone voluntarily makes
payment supra protest or for honor. And if the instrument was to give money in
payment, the instrument is discharged.
SUMMARY OF DISCHARGE BY PAYMENT

1. Payment by a person ultimately liable, whatever his position in the paper, is a
discharge of the instrument
2. Payment by an accommodation party isn’t a discharge of the instrument,
whatever his position thereon and whether the indorsement be regular or anomalous
3. Payment by the drawer or indorser is not a discharge of the instrument
PRINCIPAL DEBTOR
• Person ultimately bound to pay the debt
PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER

1. When they actually have been cashed or
2. When, through the fault of the creditor, they have been impaired
• A creditor isn’t bound to accept a check in satisfaction of his demand because a check,
even if good when offered, doesn’t meet the requirements of legal tender
WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK

• It is the general rule that an object to a tender must, to be available to the creditor, be
made in good time and that the grounds for objection must be specified; and that an objection
to tender on one ground is a waiver of all other objections which could have been made at that
time
• It is ordinarily required of one to whom payment is offered in the form of a check, that he
makes his objection at the time of the offer of by check instead of an offer of payment in
money
• Reason for the rule—to afford the debtor the opportunity to secure the specific money
which the law prescribes shall be accepted in payment of debts
PAYMENT BY ACCOMMODATED PARTY

• The one ultimately liable on the accommodation instrument is the latter
• Hence, his payment in due course discharges the instrument as if payment was made
by the principal debtor under paragraph (a)
INTENTIONAL CANCELLATION
• The cancellation must be intentional and made by the holder
• There must be an intention to cancel a negotiable instrument by the holder thereof
as such intention is an essential element of discharge on a negotiable instrument and a
negotiable note in a torn condition is presumed cancelled by the holder thereof
WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE

DEBTOR DISCHARGE THE INSTRUMENT?
• No, according to the majority view
• Because while it isn’t omitted in Section 120, it is omitted in Section 119
• Shows the legislative intent to that an extension of time by the holder will not discharge
the instrument
PRINCIPAL DEBTOR ACQUIRES INSTRUMENT

• Reacquisition must be by the principal debtor and in his own right at or after the date of
maturity
• In his own right—not in a representative capacity
WHEN INSTRUMENT REACQUIRED BEFORE MATURITY

• A reacquisition by the principal debtor in his own right but before maturity will not
discharge the instrument
• It will merely be a negotiation back to the principal debtor
DISCHARGE BY OPERATION OF LAW

Sec. 120. When persons secondarily liable on the instrument are discharged. - A person
secondarily liable on the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's right of recourse against the
party secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to extend the time of payment or to
postpone the holder's right to enforce the instrument unless made with the assent of
the party secondarily liable or unless the right of recourse against such party is expressly
reserved.
EFFECT OF SECTION 120 IS A SURETYSHIP

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

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

1. Discharge by reason of bankruptcy
2. Discharge of a party not given due notice of dishonor
3. Discharge by the statute of limitations
VALID TENDER OF PAYMENT
• If D an indorser validly tenders payment and F unjustifiably refuses to do accept, D is
discharged
• Tender of payment: act by which one produces and offers to a person holding a
claim or demand against him the amount of money which he considers and admits to be
due, in satisfaction of
such claim or demand without any stipulation or condition
RELEASE MUST BE ACT OF HOLDER
RELEASE MUST BE FOR VALUE
EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR

• General rule is that he is not discharged by the holder’s release of the principal debtor
even if the release be made with knowledge or true relation of the parties and,
conversely, the release of the accommodation maker or acceptor doesn’t discharge the
principal debtor through the latter occupies the position of a party secondarily liable on the
instrument
EXTENSION OF TIME
• If the holder agrees to extend the time of payment, the indorsers are discharged
• However, where the extension of time is consented to by the party secondarily
liable, he is not discharged. Also, where the holder expressly reserves his right of recourse
against the party secondarily liable, the latter is not discharged.
REQUISITES OF AGREEMENT FOR EXTENSION OF TIME

1. It must be a binding contract, supported by valuable consideration and for a definite period
2. It must be made with the principal debtor and not with a third party
Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a
party secondarily liable thereon, it is not discharged; but the party so paying it is
remitted to his former rights as regard all prior parties, and he may strike out his own and all
subsequent indorsements and against negotiate the instrument, except:
(a) Where it is payable to the order of a third person and has been paid by the drawer; and
(b) Where it was made or accepted for accommodation and has been paid by the party
accommodated.
Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against
any party to the instrument before, at, or after its maturity. An absolute and unconditional
renunciation of his rights against the principal debtor made at or after the maturity of the
instrument discharges the instrument. But a renunciation does not affect the rights of a
holder in due course without notice. A renunciation must be in writing unless the
instrument is delivered up to the person primarily liable thereon.

1. Applies only to renunciation by the unilateral act of the holder without consideration and in
cases where the instrument is not delivered up to the person intended to be released
2. Renunciation—act of surrendering a right or claim without recompense but it can be
applied with equal propriety to the relinquishing of a demand upon an agreement
supported by a consideration
FORM OF RENUNCIATION
It must be in writing and must be express
TIME FOR MAKING RENUNCIATION

1. Before maturity
2. At maturity
3. After maturity
WHEN RENUNCIATION DISCHARGES INSTRUMENT

1. Renunciation discharges the instrument when it is absolute and unconditional
2. It is made in favor of the person primarily liable
3. It is made at or after maturity
Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made

unintentionally or under a mistake or without the authority of the holder, is inoperative but
where an instrument or any signature thereon appears to have been cancelled, the burden
of proof lies on the party who alleges that the cancellation was made unintentionally or under a
mistake or without authority.
MEANING OF CANCELLATION
Signifies not only the drawing of criss-cross lines but also tearing, obliterations,
erasures or burning
It may be made by any other means by which the intention to cancel the instrument may
be evident
WHEN CANCELLATION IS INOPERATIVE

1. When made unintentionally
2. When made under mistake

3. When made without the authority of the holder
BURDEN OF PROOF IS UPON THE PERSON WHO CLAIMS THAT THE CANCELLATION IS
INOPERATIVE
EFFECTS OF ALTERATION OF A
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a
party who has
himself made, authorized, or assented to the alteration and subsequent indorsers. But
when an instrument has been materially altered and is in the hands of a holder in due
course not a party to the alteration, he may enforce payment thereof according to its
original tenor.
RIGHTS OF ONE NOT HOLDER IN DUE COURSE
• Where an instrument has been materially altered, it is avoided in the hands of one who is
not a holder in due course as against a prior party who has not assented to the alteration
WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE

COURSE
1. A party who has made the material alteration
2. A party who has authorized the material alteration
3. A party who has assented to the material alteration

4. Any subsequent indorsers
RIGHTS OF HOLDER IN DUE COURSE

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

• When the alteration wasn't fraudulently done, the holder may recover the original
consideration
WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE RIGHT TO HAVE HIS
ACCOUNT DEBITED WITH CORRECT AMOUNT ONLY
BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND MUST NOTIFY THE
COLLECTING BANKS WITHIN 24 HOURS OF ALTERATION OF CHECKS
MATERIAL ALTERATION IN A
Sec. 125. What constitutes a material alteration. - Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect, is a material
alteration.
MATERIAL ALTERATION IN A
Sec. 125. What constitutes a material alteration. - Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;

(f) Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect, is a material
alteration.
BILL OF EXCHANGE, SECTION 126

• “A bill of exchange is an unconditional order in writing addressed by one person to
another signed by the person giving it
(1), requiring the person to whom it is addressed to pay on demand or at a fixed or

determinable future time
(2) a sum certain in money
(3) to order or to bearer”
• General characteristics: the order or command to pay; drawer/maker; drawee
Notes on Section 124
– there is no distinction between fraudulent and innocent alteration
80. Material Alteration – an alternation is said to be material if it alters the effect of the instrument.
Under Section 125 the following changes are considered material alterations:
1. dates
2. the sum payable
3. time and place of payment
4. number or relations of the parties
5. medium or currency for payment
6. adding a place of payment where no place is specified
7. any other which alters the affect of the instrument
81. Instances where a BOE may be treated as a PN:
8. where the drawer and the drawee are one and the same
9. where the drawee is a fictitious person
10. where the drawee has no capacity to contract (Sec. 130 NIL)
The holder has the option to treat it as a BOE or a PN
82. Acceptance 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. (Sec. 132 NIL)
Acceptance may be:

11. actual
12. constructive
13. general (Sec. 140)
14. qualified (Sec. 141)
Requisites of actual acceptance:
– in writing
– signed by the drawee
– must not express the drawee will perform his promise by any other means than payment of money
– communicated or delivered to the holder
15. A holder has the right:

16. require that acceptance be written on the bill and if refused, treat it as if dishonored (Sec. 133)
17. refuse to accept a qualified acceptance and may treat it as dishonored (Sec. 142)
18. Constructive Acceptance:
19. where the drawee to whom the bill has been delivered destroys it
20. the drawee refuses within 24 hrs after such delivery or within such time as is given, to return the bill accepted or not.
(Sec. 137 NIL)
– drawee becomes primarily liable as an acceptor.
– mere retention is equivalent to acceptance
21. When presentment for acceptance is necessary:

22. if necessary to fix the maturity of the bill
23. if it is expressly stipulated that it shall be presented for acceptance
24. if the bill is drawn payable elsewhere than the residence or place of business of the drawee (Sec. 143 NIL)
– Presentment is the production of a BOE to the drawee for his acceptance
– in on order case is presentment necessary to make parties liable.
90. Summary on presentment for acceptance of Bills of Exchange:
a. to make the drawee primarily liable and for the accrual of secondary liability (Sec. 144)
b. necessary to fix maturity date, where bill expressly stipulates presentment, bill payable other than
place of drawee (Sec. 143)
c. when presentment is excused: drawee is dead, hides, is fictitious, incapacitated person, after due
diligence presentment cannot be made, presentment is refused on another ground although presentment is
irregular (Sec. 148)
25. General rule: Protest is required only for foreign bills
Exception:
– inland bills and notes may also be protested if desired
Protest is required:
26. where the foreign bill is dishonored by non acceptance

27. where the foreign bill is dishonored by non-payment
28. where the bill has been accepted for honor, it must be protested for non-payment before it is presented for payment to
the acceptor for honor
29. where the bill contains a referee in case of need, it must be protested for non payment before presentment for payment
to the referee in case of need (Sec. 152)
– 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.
– it means all steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser
– required when the instrument is a foreign bill of exchange.
– it must be made on the same date of dishonor, by a notary/respectable citizen of the place in the
presence of 2 credible witnesses so recourse to secondary parties
30. Acceptance for Honor (Sec. 161 NIL)– an acceptance of a bill made by a stranger to it before maturirty, where the
drawee of the bill has:
31. refused to accept it
32. and the bill has been protested for non-acceptance
33. or where the bill has been protested for better security
Requisites for acceptance for honor:
– the bill must have been previously protested a) for non-acceptance b) or for better security
– the bill is not overdue at the time of the acceptance for honor
– the acceptor for honor must be a stranger to the bill
– the holder must give his consent
Notes on Acceptance for Honor
– Purpose: to save the credit of the parties to the instrument or some party to it as the drawer, drawee,
or indorser or somebody else.
– Acceptor for honor is liable to the holder and to all the parties to the bill subsequent to the party for
whose honor he has accepted (Sec. 164)
34. How acceptance for honor is made:

35. in writing and indicated that it is an acceptance for honor
36. signed by the person making the acceptance (Sec. 162 NIL)
37. Payment for Honor – payment made through a notarial act of honor of a party liable/stranger to the bill after bill has
been dishonored by non-payment by the acceptor and protested for non-payment by the holder
Requisites:
a. protest for non-payment
b. any person may pay supra protest
Form for payment of honor:
38. payment must be attested by notarial act appended to the protest, or form an extension to it.
39. notarial act of honor must be based on a declaration by the payer for honor
40. Bills in Set – bill of exchange drawn in several parts, each part of the set being numbered and containing a reference to
the other parts, the whole of the parts just constituting one bill (Sec 178 NIL)
Source:
Commercial Law Memory Aid
Negotiable Instruments Law
Ateneo Central Bar Operations 2001

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Tags: commecial law, commlaw, negotiable instruments law
Negotiable Instruments Law – Discharge

DEC 19
Posted by Magz
NEGOTIABLE INSTRUMENTS LAW

Memory Aid
Based on the Outline of the 1994 Edition of Campos & Campos

DISCHARGE
41. Of the Instrument

42. payment in due course by or on behalf of principal debtor
• Payment in due course:
43. made at or after maturity
44. to the holder thereof
45. in good faith and without notice that his title is defective
46. payment in due course by party accommodated where party is made/ accepted for accommodation
47. intentional cancellation by holder
• if unintentional or under mistake or without authority of holder, inoperative. Burden of proof on party which alleges it
was unintentional, etc.
48. any other act which discharges a simple contract
49. principal debtor becomes holder of instrument at or after maturity in his own right
50. renunciation of holder:
• holder may expressly renounce his rights vs. any party to the instrument, before or after its maturity
• absolute and unconditional renunciation of his rights vs. principal debtor made at or after maturity discharges the
instrument
• renunciation does not affect rights of HDC w/o notice.
• Renunciation must be in writing unless instrument delivered up to person primarily liable thereon
51. material alteration (sec. 124: material alteration w/o assent of all parties liable avoids instrument except as against party
to alteration and subsequent indorsers)
52. Of secondary parties

53. any act which discharges the instrument
54. intentional cancellation of signature by holder
55. discharge of prior party
56. valid tender of payment made by prior party
57. release of principal debtor, unless holder’s right of recourse vs. 2ndary party reserved
58. any agreement binding upon holder to extend time of payment, or to postpone holder’s right to enforce instrument,
unless made with assent of party secondarily liable, or unless right of recourse reserved.
59. Failure to make due presentment (sec. 70, 144)
60. failure to give notice of dishonor
61. certification of check at instance of holder
62. reacquisition by prior party
• where instrument negotiated back to a prior party, such party may reissue and further negotiate, but not entitled to
enforce payment vs. any intervening party to whom he was personally liable
• where instrument is paid by party secondarily liable, it’s not discharged, but
63. the party so paying it is remitted to his former rights as regard to all prior parties
64. and he may strike out his own and all subsequent indorsements, and again negotiate instrument, except
• where it’s payable to order of 3rd party and has been paid by drawer
• where it’s made/accepted for accommodation and has been paid by party accommodated.
Reference: University of the Philippines
BarOps ’99
Commercial Law – Val Feria, Mina Herrera, Gary Mallari & Rachel Ramos
Posted in Negotiable Instruments Law
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Tags: Negotiable Instruments Law - Discharge
Negotiable Instruments Law – Liabilities of Parties

DEC 19
Posted by Magz

Memory Aid

LIABILITIES OF PARTIES
65. PRIMARY PARTIES

• Person primarily liable: person who by the terms of the instrument is absolutely required to pay the same.
• Sec. 70 (effect of want of demand on principal debtor)
66. Liability of Maker

67. Promises to pay it according to its tenor
68. admits existence of payee and his then capacity to indorse
69. Status of drawee prior to acceptance or payment

• sec. 127 (bill not an assignment of funds in hands of drawee)
• sec. 189 (when check operates as assignment)
70. Liability of Acceptor

• Promises to pay inst according to its tenor
• Admits the following:
71. existence of drawer
72. genuineness of his signature
73. his capacity and authority to draw the instrument
74. existence of payee and his then capacity to endorse
• sec. 191, 132, 133, 138 — formal requisites of acceptance
• sec. 136, 137, 150 — constructive acceptance
• sec. 134, 135 — acceptance on a separate instrument
• Kinds of Acceptance:
75. general
76. qualified
a. conditional
b. partial
c. local
d. qualified as to time
e. not all drawees
* sec. 142 (rights of parties as to qualified acceptance)
• Certification: Principles
77. when check certified by bank on which it’s drawn, equivalent to acceptance
78. where holder of check procures it to be accepted/certified, drawer and all indorsers discharged from al liability
79. check not operate as assignment of any part of funds to credit of drawer with bank, and bank is not liable to holder,
unless and until it accepts or certifies check
80. certification obtained at request of drawer: secondary parties not released
81. bank which certifies liable as an acceptor
82. checks cannot be certified before payable
83. SECONDARY PARTIES

84. Liability of Drawer
85. Admits existence of payee and his then capacity to endorse
86. Engages that on due presentment instrument will be accepted, or paid, or both, according to its tenor and that
87. If it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder or to an subsequent indorser who may be compelled to pay it
• drawer may insert in the instrument an express stipulation negativing / limiting his own liability to holder
88. Liability of Indorsers:
• Qualified Indorser and one Negotiating by Delivery
89. Instrument genuine, in all respects what it purports to be
90. good title
91. all prior parties had capacity to contract
92. he had no knowledge of any fact w/c would impair validity of instrument or render it valueless
• in case of negotiation by delivery only, warranty only extends in favor of immediate transferee
• Liability of a General or Unqualified Indorser

93. instrument genuine, good title, capacity of prior parties
94. instrument is at time of indorsement valid and subsisting
95. on due presentment, it shall be accepted or paid, or both, according to tenor
96. if it be dishonored, and necessary proceedings on dishonor be duly taken, he will pay the amt. To holder, or to any
subsequent indorser who may be compelled to pay it
• Order of Liability among Indorsers

97. among themselves: liable prima facie in the order they indorse, but proof of another agreement admissible
98. but holder may sue any of the indorsers, regardless of order of indorsement
99. joint payees/indorsees deemed to indorse jointly and severally
100. Liability of Accomodation Party

• Definition: one who signed instrument as maker/drawer/acceptor/ indorser w/o receiving value thereof, for the
purpose of lending his name to some other person
• AP liable on the instrument to holder for value even if holder, at time of taking instrument, knew he was only an AP
• Liability of Irregular Indorser
o Where a person not otherwise a party to an instrument, places thereon his signature in blank before delivery, he’s liable
as an indorser, in accordance w/ these rules:
101. Instrument payable to order of 3rd person: liable to payee and to all subsequent parties
102. Instrument payable to the order of maker/drawer, or payable to bearer: liable to all parties subsequent to
maker/drawer
103. Signs for accommodation of payee, liable to all parties subsequent to payee
• Sadaya v Sevilla Rules:
104. a joint and several accommodation maker of a negotiable promissory note may demand from the principal
debtor reimbursement for the amt. That he paid to the payee
105. a joint and several accommodation maker who pays on the said promissory note may directly demand
reimbursement from his co-accommodation maker without first directing his action vs. the principal debtor provided:
a. he made the payment by virtue of a judicial demand
b. or the principal debtor is insolvent
106. Liability of an Agent
• Signature of any party may be made by duly authorized agent, establish as in ordinary agency
• Where instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a
principal, he is not liable on the instrument if he was duly authorized, but the mere addition of words describing him as
an agent without disclosing his principal, does not exempt from personal liability.
• Signature per procuration operates as notice that the agent has but a limited authority to sign, and the principal is bound
on ly in case the agent in so signing acted within the actual limits of his authority
• Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities in Sec. 65, unless he
discloses name of principal and fact that he’s only acting as agent
I. Presentment For Acceptance
When presentment for acceptance must be made
107. bill payable after sight, or in other cases where presentment for acceptance necessary to fix maturity
108. where bill expressly stipulates that it shall be presented for acceptance
109. where bill is drawn payable elsewhere than at residence / place of business of drawee
When failure to present releases drawer/indorser
Failure to present for acceptance of negotiate bill of exchange within reasonable time
Reasonable Time
Must consider
110. nature of instrument

111. usage of trade or business with respect to instrument
112. facts of each case
How and When Made Sec. 145, 146, 147
When Excused Sec. 148
Dishonor and Effects
• sec. 149 (when dishonored by non-acceptance)

• sec. 150 (duty of holder where bill not accepted)
• sec. 151 (rights of holder where bill not accepted)
• sec. 89 (to whom notice of dishonor must be given)
• sec. 117 (effect of omission to give notice of non-acceptance)
II. For Payment

Where necessary Sec. 70
Where not necessary Sec. 79, 80, 82, 151, 111
Date and time of presentment of instrument bearing fixed maturity Sec. 71, 85, 86, 194
Date of presentment
• Where instrument not payable on demand: presentment must be made on date it falls due
• Where payable on demand: presentment must be made within reasonable time after issue, except that in case of a bill of
exchange, presentment for payment will be sufficient if made within a reasonable time after last negotiation (but note:
though reasonable time from last negotiation, it may be unreasonable time from issuance thus holder may not be HDC
under sec. 71)
• Check must be presented for payment within reasonable time after its issue or drawer will be discharged from liability
thereon to extent of loss caused by delay
Delay excused Sec. 81
Manner Sec. 74, 72, 75
Place Sec. 73
To Whom Sec. 72, 76, 77, 78
Dishonor by nonpayment Sec. 83, 84
Notice of Dishonor
General rule: to drawer and to each indorser, and any drawer or indorser to whom such notice is not given is
discharged
Form, Contents, Time Sec. 95, 96, 102, 103, 104, 105, 106, 108, 113
By Whom Given
• By or on behalf of the holder or any party to the instrument who may be compelled to pay it to the holder, and who,
upon taking it up, would have a right to reimbursement from the party to whom the notice is given
• Notice of dishonor may be given by an agent either in his own name or in the name of any party entitled to give notice,
whether that party be his principal or not
o Where instrument has been dishonored in hands of agent, he may either himself give notice to the parties liable
thereon, or he may give notice to his principal (as if agent an independent holder)
In whose favor notice operates
113. when given by/on behalf of holder: insures to benefit of

a. all subsequent holders and
b. all prior parties who have a right of recourse vs. the party to whom it’s given
114. where notice given by/on behalf of a party entitled to give notice: insures for benefit of a. holder , and
b. all parties subsequent to party to whom notice given
Waiver Sec. 109, 110
Where not necessary to charge drawer
115. drawer/drawee same person

116. drawee fictitious, incapacitated
117. drawer is person to whom instrument is presented for payment
118. drawer has no right to expect/require that drawee/acceptor will honor instrument
119. drawer countermanded payment
Where not necessary to charge indorser
120. drawee fictitious, incapacitated, and indorser aware of the fact at time of indorsement
121. indorser is person to whom instrument presented for paymt
122. instrument made/accepted for his accommodation
Protest
Definition: testimony of some proper person that the regular legal steps to fix the liability of drawer and
indorsers have been taken
When necessary: sec. 152,
Form and contents: sec. 153
By whom made: sec. 154
Time and Place: sec. 155, 156
For better security: sec. 158
Excused: sec. 159

Waiver: sec. 111
Acceptance for Honor
Sec. 161, 131, 171
Bills in Set: 178-183
BarOps ’99
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Tags: Negotiable Instruments Law - Liabilities of Parties
Negotiable Instruments Law – Defenses and Equities

DEC 19
Posted by Magz

Memory Aid

DEFENSES AND EQUITIES
KINDS OF DEFENSES
123. real defense – attaches to instrument; on the principle that the right sought to be enforced never
existed/there was no contract at all
124. personal defense – growing out of agreement; renders it inequitable to be enforced vs. defendant
DEFENSES
125. INCAPACITY: real; indorsement/assign by corp/infant: passes property but corp/infant no liability
126. ILLEGALITY: personal, even if no K because void under CC 1409
127. FORGERY: real (lack of consent):
a. forged
b. made without authority of person whose signature it purports to be.
General Rule:
128. wholly inoperative

129. no right to retain instrument, or give discharge, or enforce payment vs. any party, can be acquired through or
under such signature (unless forged signature unnecessary to holder’s title)
Exception:
unless the party against whom it is sought to enforce such right is precluded from setting up forgery/want of
authority
precluded:
130. parties who make certain warranties, like a general indorser or acceptor
131. estopped/negligent parties
* note rules on Acceptance/Payment Under Mistake as applied to:
132. 1. overdraft
133. 2. stop payment order
134. 3. forged indorsements
135. MATERIAL ALTERATION

• Where NI materially altered w/o assent of all parties liable thereon, avoided, except as vs. a
136. party who has himself made, authorized or assented to alteration
137. and subsequent indorsers.
• But when an instrument has been materially altered and is in the hands of a HDC not a party to the alteration, HDC may
enforce payment thereof according to orig. tenor
• Material Alteration
138. change date
139. sum payable, either for principal or interest
140. time of payment
141. number/relations of parties
142. medium/currency of payment, adds place of payment where none specified, other change/addition altering
effect of instrument in any respect.
*material alteration a personal defense when used to deny liability according to org. tenor of instrument, but
real defense when relied on to deny liability according to altered terms.
143. FRAUD
144. fraud in execution: real defense (didn’t know it was NI)
145. fraud in inducement: personal defense (knows it’s NI but deceived as to value/terms)
146. DURESS
• Personal, unless so serious as to give rise to a real defense for lack of contractual intent
147. COMPLETE, UNDELIVERED INSTRUMENT
• Personal defense (sec. 16)
• If instrument not in poss. Of party who signed, delivery prima facie presumed
• If holder is HDC, delivery conclusively presumed
148. INCOMPLETE, UNDELIVERED INSTRUMENT
• Real defense (sec. 15)
• Instrument will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as
against any person whose signature was placed thereon before delivery
10. INCOMPLETE, DELIVERED
• Personal defense (sec. 14)

• 2 Kinds of Writings:
149. Where instrument is wanting in any material particular: person in possession has prima facie authority to
complete it by filing up blanks therein
150. Signature on blank paper delivered by person making the signature in order that the paper may be converted
into a NI: prima facie authority to fill up as such for any amount
• In order that any such instrument, when completed, ma be enforced vs. any person who became a party thereto prior to
its completion:
151. must be filled up strictly in accordance w/ authority given
152. within a reasonable time
• but if any such instrument after completion is negotiated to HDC, it’s valid for all purposes in his hands, he may enforce it
as if it had been filled up properly.
BarOps ’99
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Tags: Negotiable Instruments Law - Defenses and Equities
Negotiable Instruments Law – Holder in Due Course

DEC 19
Posted by Magz

Memory Aid
HOLDER IN DUE COURSE
HOLDER
Sec. 191
RIGHTS OF HOLDER
153. sue thereon in his own name

154. payment to him in due course discharges instrument
HOLDER IN DUE COURSE: REQUISITIES
155. complete and regular upon its face

• sec. 124 (effect of alteration)
• sec. 125 (what constitute material alterations)
156. holder became such before it was overdue, without notice of any previous dishonor
• sec. 53 (demand inst. nego after unreasonable length of time: not HDC)
• sec. 12 (effect antedating/postdating)
157. taken in good faith and for value
• sec. 24 (presumption of consideration)
• sec 25 (definition. of value)
• sec. 26 (definition. holder for value)
• sec. 27 (lien as value)
158. at time negotiated to him, he had no notice (sec. 56-def; 54-notice before full amt. paid) of —
a. infirmity in instrument
b. defect in title of person negotiating
i. instrument/signature obtained through fraud, etc., illegal consideration/means, or
ii. instrument negotiated in breach of faith, or fraudulent circumstances
RIGHTS OF HOLDER IN DUE COURSE:
159. holds instrument free of any defect of title of prior parties

160. free from defenses available to prior parties among themselves
161. may enforce payment of instrument for full amount, against all parties liable
* if in the hand of any holder (note definition of holder) other than a HDC, vulnerable to same defenses as if
non-negotiable
RIGHTS OF PURCHASER FROM HOLDER IN DUE COURSE:

General Rule: in the hands of any holder other than a HDC, NI is subject to same defenses as if it were non-
negotiable.
Exception: holder who derives title through HDC and who is not himself a party to any fraud or illegality has
all rights of such former holder in respect to all parties prior to the latter.
WHO DEEMED HDC
• prima facie presumption in favor of holder

• but when shown that title of any person who has negotiated instrument was defective (sec. 55—when title defective):
burden reversed (now with holder)
• but no reversal if party being made liable became bound prior to acquisition of defective title (i.e., where defense is not
his own)
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Negotiable Instruments Law – Transfer

DEC 19
Posted by Magz

Memory Aid

TRANSFER
DELIVERY
• NI incomplete and revocable until delivery for the purpose of giving effect thereto
• as between
162. immediate parties
163. a remote party other than holder in due course
delivery, to be effectual, must be made by or under the authority of the party

making/drawing/accepting/indorsing
• in such case delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of
transferring the property in the instrument.
PRESUMPTION OF DELIVERY
Where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is proved (*if in the hands of a HDC, presumption
conclusive)
NEGOTIATION
• When an instrument is transferred from one person to another as to constitute the transferee the holder thereof.
• If payable to BEARER, negotiated by delivery; if payable to ORDER, negotiated by indorsement of holder + delivery
INDORSEMENT
• Indorser generally enters into two contracts:

164. sale or assignment of instrument
165. to pay instrument in case of default of maker
• Sec. 31 (how indorsement made)
• Sec. 41 (where payable to two or more)
• Sec. 43 (indorsement where name misspelled)
• Sec. 48 (cancellation of indorsement)
• Sec. 45, 46 (presumptions)
• Indorsement must be of entire instrument. (can’t be indorsement of only part of amount payable, nor can it be to two or
more indorsees severally. But okay to indorse residue of partially paid instrument)
• Sec. 67 (liability of indorser where paper negotiable by delivery)
• Sec. 63 (when person deemed indorser)
KINDS OF INDORSEMENT
166. as to manner of future method of negotiation

167. special – specifies the person to whom/to whose order the instrument is to be payable; indorsement of such
indorsee is necessary to further negotiation.
168. Blank – specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated by delivery
• the holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in
blank any contract consistent with the character of the indorsement
169. as to kind of title transferred

170. restrictive
• prohibits further negotiation of instrument,
• constitutes indorsee as agent of indorser, or
• vests title in indorsee in trust for another
• rights of indorsee in restrictive ind.:
o receive payment of inst.
o Bring any action thereon that indorser could bring
o Transfer his rights as such indorsee, but all subsequent indorsees acquire only title of first indorsee under restrictive
indorsement
171. non-restrictive
172. as to kind of liability assumed by indorser

173. qualified-constitutes indorser as mere assignor of title (eg. “without recourse”)
174. unqualified
175. as to presence/absence of express limitations put by indorser upon primary obligor’s privileges of paying the
holder
176. conditional – additional condition annexed to indorser’s liability.
• Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make
payment to the indorsee or his transferee, whether condition has been fulfilled or not
• Any person to whom an instrument so indorsed is negotiated will hold the same/proceeds subject to rights of person
indorsing conditionally
177. unconditional
INDORSEMENT OF BEARER INST.
• Where an instrument payable to bearer is indorsed specially, it may nevertheless be further negotiated by delivery
• Person indorsing specially liable as indorser to only such holders as make title through his indorsement
UNINDORSED INSTRUMENTS
• Where holder of instrument payable to his order transfers it for value without indorsing, transfer vests in transferee
178. such title as transferor had therein
179. right of tranferee to have indorsement of transferor
• for purposes of determining HDC negotiation effective upon actual indorsement
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Tags: Negotiable Instruments Law - Transfer
Negotiable Instruments Law – Negotiability

DEC 19
Posted by Magz

Memory Aid

NEGOTIABILITY
REQUISITES
180. 1. in writing and signed by maker or drawer
• no person liable on the instrument whose signature does not appear thereon ( subject to exceptions)
• one who signs in a trade or assumed name liable to the same extent as if he had signed in his own name
• signature of any party may be made by a duly authorized agent, no particular form of appt. necessary
181. unconditional promise or order to pay

• unqualified order or promise to pay is unconditional though coupled with
182. an indication of a particular fund out of which reimbursement to be made, or a particular account to be debited
with amount, or
a. a statement of the transaction which gives rise to the instrument
• an order or promise to pay out of a particular fund is not unconditional
a sum certain in money
• even if stipulated to be paid—

183. with interest, or
184. by stated installments, or
185. by stated installments with a provision that upon default in payment of any installment/interest, the whole
shall become due, or
186. with exchange, whether at a fixed rate or at the current rate, or
187. with costs of collection or an attorney’s fee, in case payment not made at maturity
188. 3. payable on demand,
• when expressed to be payable on demand, or at sight, or on presentation;
• when no time for payment expressed, or
• where an instrument is issued, accepted or indorsed when overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand
or at a fixed or determinable future time
• when it’s expressed to be payable at a fixed period after date or sight, or

• on or before a fixed or determinable future time fixed therein, or
• on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of
happening be uncertain
• an instrument payable upon a contingency not negotiable, and happening of event doesn’t cure it
* relate to sec. 11 ( presumption as to date) and sec. 17 (construction where instrument ambiguous)
* note effect of acceleration provisions, p. 30 Campos
* note effect of provisions extending time of payment, p. 40 Campos
189. 4. payable to order

• where it is drawn payable to the order of a specified person or to him or his order. May be drawn payable to order of —
• when the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable
certainty
190. a payee not the maker/drawer/drawee, or
191. drawer or maker, or
192. drawee, or
193. two or more payees jointly, or
194. holder of an office for time being
or bearer,
• when expressed to be so payable

• when payable to person named therein or bearer
• when payable to order or fictitious/non-existent person, and such fact known to the person making it so payable, or
• when name of payee doesn’t purport to be the name of any person, or
• when the only/last indorsement is in blank
195. 5. where addressed to drawee: such drawee named/ indicated therein with reasonable certainty
• bill may be addressed to two or more drawees jointly, whether partners or not, but not to two or more drawees in the
alternative or in succession
• bill may be treated as a PN, at option of holder, where
196. drawer and drawee are same person
197. drawee is fictitious/incapacitated
EFFECT OF ADDITIONAL PROVISIONS
Gen. Rule: order/promise to do any act in addition to the payment of money renders instrument non-
negotiable.
Exception: negotiability not affected by provisions w/c
198. authorize sale of collateral security if instrument not paid at maturity

199. authorize confession of judgment…
200. waives benefit of any law intended for advantage/protection of obligor
201. give holder election to require something to be done in lieu of money
CONTINUATION OF NEGOTIABLE CHARACTER
Until
202. restrictively indorsed

203. discharged by payment or otherwise
BarOps ’99
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Tags: Negotiable Instruments Law - Negotiation
Negotiable Instruments Law – Definitions

DEC 19
Posted by Magz

Memory Aid

DEFINITIONS
• Written contract for the payment of money, by its form intended as substitute for money and intended to pass from
hand to hand to give the holder in due course the right to hold the same and collect the sum due
PROMISSORY NOTE
• unconditional promise in writing made by one person to another signed by the maker
• engaging to pay on demand, or at a fixed or determinable future time a sum certain in money to order or to bearer
• where a note is drawn to the maker’s own order, it is not complete until indorsed by him
BILL OF EXCHANGE
• unconditional order in writing addressed by one person to another signed by the person giving it
• requiring the person to whom it’s addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer
• check: bill of exchange drawn on a bank payable on demand. Kinds of checks:
204. personal check
205. manager’s/cashier’s check – drawn by a bank on itself. Issuance has the effect of acceptance
206. memorandum check – “memo” is written across its face, signifying that drawer will pay holder absolutely
without need of presentment
207. crossed check –
• effects:
208. check may not be encashed but only deposited in bank
209. may be negotiated only once, to one who has an acct. with a bank
210. warning to holder that check has been issued for a definite purpose so that he must inquire if he received check
pursuant to such purpose, otherwise not HDC
• kinds:
211. general (no word between lines, or “co” between lines)
212. special (name of bank appearing between parallel lines)
BEARER
Person in possession of a bill/note payable to bearer
HOLDER
Payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.
THE LIFE OF A NEGOTIABLE INSTRUMENT:
213. issue
214. negotiation
215. presentment for acceptance in certain bills
216. acceptance
217. dishonor by on acceptance
218. presentment for payment
219. dishonor by nonpayment
220. notice of dishonor
221. protest in certain cases
222. discharge

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NEGOTIABLE INSTRUMENTS -

Negotiable Instruments - General Principles

COMMON FORMS OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTE, SECTION 184

(1), engaging to pay on demand or at a fixed or determinable future time

(2), a sum certain in money

(3) to order or to bearer

BILL OF EXCHANGE, SECTION 126

(1), requiring the person to whom it is addressed to pay on demand or at a fixed or

(2) a sum certain in money

(3) to order or to bearer”

• General characteristics: the order or command to pay; drawer/maker; drawee

TO WHOM INSTRUMENTS MAY BE PAYABLE

WHEN IS IT PAYABLE TO BEARER?

WHEN IS IT PAYABLE TO ORDER?

PARTIES TO A PROMISSORY NOTE

PARTIES TO A BILL OF EXCHANGE

OTHER PARTIES TO NEGOTIATED INSTRUMENTS

INDORSER AND INDORSEE

HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED

NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED.

2. Where the instrument is payable to order, neither is delivery equivalent to negotiation

PRESENTMENT FOR ACCEPTANCE

PRESENTMENT FOR PAYMENT

PARTIES PRIMARILY AND SECONDARILY LIABLE

SECONDARY LIABILITY OF DRAWER

SECONDARY LIABILITY OF INDORSER

SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY

FUNCTION OF NEGOTIABLE INSTRUMENTS

PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS

PRIMARY PURPOSE OF NEGOTIABILITY

ACCUMULATION OF SECONDARY CONTRACTS

BILL OF EXCHANGE, DEFINED

A bill of exchange is an unconditional order in writing addressed by one person to another,

TYPES OF BILLS OF EXCHANGE

PROMISSORY NOTE, DEFINED

Promissory Note, Defined

SPECIAL TYPES OF PROMISSORY NOTES

REQUISITES AS TO A NEGOTIABLE NOTE

REQUISITES AS TO A NEGOTIABLE BILL

THE INSTRUMENT MUST BE IN WRITING

THE INSTRUMENT MUST BE SIGNED BY THE MAKER OR DRAWER

IF A BILL, IT MUST CONTAIN AN ORDER TO PAY

AN INSTRUMENT WITH AN EFFECT OF MERE AUTHORITY TO PAY

EFFECT OF MERE REQUEST TO PAY

EFFECT OF MERE WORDS OF CIVILITY

WHERE INSTRUMENT IS A NOTE, IT MUST CONTAIN A PROMISE TO

SUM PAYABLE MUST BE DEFINITE AND CERTAIN

SUM MUST BE PAYABLE IN MONEY ONLY

INSTRUMENT MUST SPECIFY DENOMINATION

PAYABLE ON DEMAND OR ON A FIXED OR DETERMINABLE FUTURE

WHERE NO YEAR IS SPECIFIED

WHERE PAYABLE TO THE ORDER OF BEARER

WHERE PAYABLE TO A CERTAIN PERSON

> Where payable to “bearer B”

THE DRAWEE MUST BE NAMED

NECESSITY OF COMPLIANCE WITH PROVISIONS

WHAT CONSTITUTES CERTAINTY AS

(a) with interest; or

BY STATED INSTALLMENTS, WITH ACCELERATION CLAUSE

> Difference in value of the same amount of money in different countries

WITH COSTS AND ATTORNEY’S FEES

What constitutes certainty as to sum