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Definition One who signs in a trade or assumed name will be liable to

the same extent as if he had signed in his own name (Sec.
18).
Written contract for the payment of money, by its form and
on its face, intended as substitute for money and intended Signature of any party may be made by duly authorized
to pass from hand to hand to give the holder in due course agent; no particular form of appointment necessary (Sec. 19)
(HDC) the right to hold the same and collect the sum due.
"In writing" - includes print; written or typed. Section 191 of
Instruments are negotiable when they conform to all the the NIL provides that the word “’written’ includes printed,
requirements prescribed by the NIL (Act 2031, 03 February and ‘writing’ includes print.”
1911).
Reason: Since an instrument is a document, there must be
Although considered as medium for payment of obligations, something in written form that can be transferred from
negotiable instruments are not legal tender (Sec. 60, New person to person. (Abad)
Central Bank Act, R.A. 7653).
Signature is binding and may be in one’s handwriting,
Q: Can the delivery of a negotiable instrument discharge an printed, engraved, lithographed or photographed so long as
obligation? it is intended or adopted as the signature of the signer or
A: Settled is the rule that payment must be made in legal made with his authority.
tender. A check is not legal tender and, therefore, cannot
constitute a valid tender of payment. Since a negotiable It may appear on any part of the instrument. However, if the
instrument is only a substitute for money and not money, signature is so placed upon the instrument that it is not
the delivery of such an instrument does not, by itself, clear in what capacity the person intended to sign, he is
operate as payment. Mere delivery of checks does not deemed an indorser. (Sec. 17[f])
discharge the obligation under a judgment. The obligation
is not extinguished and remains suspended until the CONTAINING AN UNCONDITIONAL PROMISE TO PAY
payment by commercial document is actually realized. (BPI OR ORDER TO PAY
vs. Royeca, 2008, Nachura) An unqualified order or promise to pay is unconditional,
though coupled with:
Notes: (1) An indication of a particular fund out of which
(1) Negotiable instruments shall produce the effect of reimbursement is to be made, or a particular account to
payment only when they have been encashed or when be debited with the amount; or
through the fault of the creditor they have been (2) A statement of the transaction which gives rise to the
impaired. (Art. 1249, Civil Code) instrument.
(2) BUT a CHECK which has been cleared and credited to
the account of the creditor shall be equivalent to a But an order or promise to pay out of a particular fund is not
delivery to the creditor of cash. unconditional (Sec. 3).

Unconditional
The promise or order to pay, to be unconditional, must be

Forms and Interpretation unqualified.

Must not be dependent upon a contingent event that is not

REQUISITES OF NEGOTIABILITY certain to happen. (Abad)
An instrument to be negotiable must conform to the
following requirements: Fact that the condition appearing on the instrument has
(1) It must be in writing and signed by the maker or drawer; been fulfilled will not convert it into a negotiable one (see
(2) Must contain an unconditional promise or order to pay a Sec. 4)
sum certain in money;
(3) Must be payable on demand, or at a fixed or A negotiable instrument is conditional when reference to
determinable future time; the fund clearly indicates an intention that such fund alone
(4) Must be payable to order or to bearer; and should be the source of payment. (Metropolitan Bank vs. CA,
(5) Where the instrument is addressed to a drawee, he must 1991)
be named or otherwise indicated therein with
reasonable certainty (Sec. 1). Fund Indicating a Particular Fund
for Reimbursement (non-negotiable)
Section 184 (defining a promissory note) and Section 126
(defining a bill of exchange) contain the same requisites in (1) The drawee pays the There is only one act —the
Section 1. payee from his own funds drawee pays directly from
afterwards. the particular fund indicated.
IN WRITING AND SIGNED BY THE MAKER OR DRAWER (2) The drawee pays himself
No person is liable on the instrument whose signature does from the particular fund
not appear thereon. indicated.

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Particular fund indicated is Particular fund indicated is Negotiable: If the option to require something to be done in
not the direct source of the direct source of payment. lieu of payment of money is with the holder
payment. (Sundiang and Aquino)
PAYABLE ON DEMAND OR AT FIXED OR DETERMINABLE TIME

Order or promise to pay Purpose: to inform the holder of the instrument of the date
As to promissory note: Promise to pay should be express on when he may enforce payment thereof.
the face of the instrument
On demand: An instrument is payable on demand:
The word "promise" is not absolutely necessary. Any (1) Where it is expressed to be payable on demand, or at
expression equivalent to a promise is sufficient. sight, or on presentation; or
(2) In which no time for payment is expressed.
Mere acknowledgment of a debt is insufficient
Where an instrument is issued, accepted, or indorsed when
As to bill of exchange: Order – command made by the overdue, it is, as regards the person so issuing, accepting, or
drawer addressed to the drawee ordering the latter to pay indorsing it, payable on demand (Sec. 7).
the payee or the holder a sum certain in money; the
instrument is, by its nature, demanding a right. Note: Holder may call for payment any time; maker has an
option to pay at any time, and the refusal of the holder to
Words which are equivalent to an order are sufficient. accept payment will terminate the running of interest, if
any, but the obligation to pay the note remains.
A mere request or authority to pay does not constitute an
order. Although the mere use of polite words like "please" At a fixed time: Only on the stipulated date, and not before,
does not of itself deprive the instrument of its may the holder demand its payment.
characteristics as an order, its language must clearly
indicate a demand upon the drawee to pay. Should he fail to demand payment, the instrument
becomes overdue but remains valid and negotiable. It is
Sum payable must be certain merely converted to a demand instrument with respect to
The sum payable is a sum certain, although it is to be paid: the person who issued, accepted, or indorsed it when
(1) with interest; or overdue. (Sec. 7)
(2) by stated installments; or
(3) by stated installments, with a provision that, upon At a determinable future time: An instrument is payable at a
default in payment of any installment or of interest, the determinable future time, which is expressed to be payable:
whole shall become due; or (1) At a fixed period after date or sight; or
(4) with exchange, whether at a fixed rate or at the current (2) On or before a fixed or determinable future time
rate; or specified therein; or
(5) with costs of collection or an attorney's fee, in case (3) On or at a fixed period after the occurrence of a specified
payment shall not be made at maturity (Sec. 2). event which is certain to happen, though the time of
happening be uncertain.
Note: A sum is certain if from the face of the instrument it
can be determined even if it requires mathematical An instrument payable upon a contingency is not
computation. (Sundiang and Aquino) negotiable, and the happening of the event does not cure
the defect (Sec. 4).
Payable in money
Capable of being transformed into money, since negotiable Note: Requires that the maturity of the instrument can be
instruments are intended to be substitutes for money absolutely determined with certainty. (Abad)

“Money” as used in the law is not necessarily limited to Examples: At a fixed period after date or sight, e.g., “30 days
“legal tender” as defined by law but includes any particular after date.”
kind of current money. (see, Sec. 6(e) and PNB v. Zulueta)
On or before a fixed or determinable future time specified
An agreement to pay in foreign currency is valid. (RA 8183) therein, e.g., “payable on or before December 1, 2000”

Non-negotiable: An instrument which contains an order or On or at a fixed period after the occurrence of a specified
promise to do an act in addition to the payment of money event which is certain to happen, though the time of
(with the exception of certain acts enumerated in Sec. 5) happening be uncertain, e.g., “payable within 60 days after
the death of Jose”
Payable in personal property like merchandise, shares of
stock or gold. Effect of acceleration provisions: If option (absolute or
conditional) to accelerate maturity is on the maker, still
Maker or the person primarily liable has the option to NEGOTIABLE.
require something to be done in lieu of payment of money.
(Campos)

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If option to accelerate is on the holder and can be exercised Fictitious payee rule: It is not necessary that the person
only after the happening of a specified event/act over which referred to in the instrument is really non-existent or
he has no control (conditional), still NEGOTIABLE fictitious to make the instrument payable to bearer. The
person to whose order the instrument is made payable may
Note: If option is absolute, non-negotiable. in fact be existing but he is still fictitious or non-existent
under Sec. 9(c) of the NIL if the person making it so payable
Insecurity Clauses: Provisions in the contract which allow the does not intend to pay the specified persons.
holder to accelerate payment “if he deems himself
insecure.” The instrument is rendered non-negotiable. A check drawn payable to the order of cash is a check
(Sundiang and Aquino) payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawer's indorsement.
Provisions extending time of payment: (Ang Tek Lian vs. CA, 1950)
General rule: Negotiability not affected. Effect is similar with
that of an acceleration clause at the option of the maker. Payable to order: The instrument is payable to order where it
is drawn payable to the order of a specified person or to him
Exception: Where a note with a fixed maturity provides that or his order. It may be drawn payable to the order of:
the maker has the option to extend time of payment until (1) A payee who is not maker, drawer, or drawee; or
the happening of contingency, the instrument is NOT (2) The drawer or maker; or
negotiable. The time for payment may never come at all. (3) The drawee; or
(4) Two or more payees jointly; or
PAYABLE TO ORDER OR TO BEARER (ASKED IN 1998) (5) One or some of several payees; or
Must contain words of negotiability: For example: (6) The holder of an office for the time being.
(1) “Pay to the order of Juan Cruz”, or “I promise to pay to
the order of Juan Cruz” Where the instrument is payable to order, the payee must
(2) “Pay to Juan Cruz or order”, or “I promise to pay Juan be named or otherwise indicated therein with reasonable
Cruz or order” certainty (Sec. 8).

Note: Need not follow the language of the law, but any term Notes: Without the words "to order" or "to the order of" the
which clearly indicates an intention to conform to the legal instrument is payable only to the person designated therein
requirements is sufficient. and is therefore non-negotiable. (Consolidated Plywood
Industries vs. IFC Leasing, 1987)
Negotiability determined from the face of the instrument: The
negotiability or non-negotiability of an instrument is For order instruments - negotiation requires delivery and
determined from the face of the instrument itself. Where indorsement of the transferor. (Sec. 30)
words "or bearer" printed on a check are cancelled by the
drawer, instrument becomes not negotiable. (Caltex vs. CA, Where the maker is the payee:
1992) (1) In effect making himself liable to himself. Thus, the
instrument produces no legal effect.
Payable to bearer: The instrument is payable to bearer: (2) Will produce legal effects only once the payee-maker
(1) When it is expressed to be so payable; or indorses the instrument to another person because such
(2) When it is payable to a person named therein or bearer; indorsement will then give rise to rights and obligations.
or (Abad)
(3) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the person IF BILL OF EXCHANGE, DRAWEE MUST BE NAMED OR DESIGNATED
making it so payable; or WITH REASONABLE CERTAINTY
(4) When the name of the payee does not purport to be the (1) Applies only to bill of exchange
name of any person; or (2) A bill may be addressed to 2 or more drawees jointly
(5) When the only or last indorsement is an indorsement in whether they are partners or not, but not to 2 or more
blank (Sec. 9). drawees in the alternative or in succession (Sec. 128).

Examples: Examples:
(1) Expressed to be so payable - "I promise to pay the (1) “To Juan Cruz and Jose Reyes” – negotiable
bearer the sum" (2) “To Juan Cruz or Jose Reyes” – not negotiable; no
(2) Payable to a person named therein or bearer -"Pay to A certainty as to drawee
or bearer"
(3) Payable to the order of a fictitious person or non- Determination of negotiability: In determining the
existing person, and such fact was known to the person negotiability of an instrument, the instrument in its entirety
making it so payable - “Pay to John Doe or order" and by what appears on its face must be considered. It must
(4) Name of payee does not purport to be the name of any comply with the requirements of Sec. 1 of the Negotiable
person – "Pay to cash"; "Pay to sundries." Instruments Law. (Caltex Phils. v. CA, 1992)
(5) Only or last indorsement is an indorsement in blank.
The acceptance of a bill of exchange is not important in the
Note: May be negotiated by mere delivery determination of its negotiability. The nature of acceptance

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is important only on the determination of the kind of KINDS OF BILLS OF EXCHANGE

liabilities of the parties involved. (PBCOM vs. Aruego, 1993) (1) Draft – used synonymously with bill of exchange
although it normally refers to a bill of exchange used in
Omissions and Provisions Additional Provisions documentary exchange like letters of credit
That Do Not Affect That Do Not Affect transactions.
Negotiability Negotiability (2) Inland and foreign bill – an Inland bill is a bill which is, or
on its face purports to be, both drawn and payable
(1) Non-dating of the (1) Authorizes the sale of within the Philippines. Any other bill is a foreign bill.
instrument collateral securities on (3) Time draft – draft that is payable at a fixed date.
(2) Non-specification of default; (4) Sight or demand draft – payable when the holder
value given, or that any (2) Authorizes confession of presents it for payment.
value had been given judgment on default; (5) Trade acceptance – used in contracts of sale where the
(3) Non-specification of (3) Waives the benefit of law seller as drawer orders the buyer (as drawee) to pay a
place where it is drawn or intended to protect the sum certain to the same seller (payee).
place where it is payable debtor; or (6) Banker’s acceptance – a time draft across the face which
(4) Bears a seal (4) Allows the creditor the the drawee has written the word accepted. (Sundiang
(5) Designation of particular option to require and Aquino)
kind of currency in which something in lieu of (7) Check - A bill of exchange drawn on a bank payable on
payment is to be made. money. (Sec. 5) demand (Sec. 185). It is the most common form of bill of
(Sec. 6) exchange.
Note: Negotiability is
affected when instrument Instances when a bill of exchange may be treated as a
contains a promise or order promissory note:
to do any act in addition to (1) The drawer and the drawee are the same person;
the payment of money. (2) Drawee is a fictitious person;
(3) Drawee does NOT have the capacity to contract (Sec.
130)
(4) Where the bill is drawn on a person who is legally
Kinds of Negotiable absent;
(5) Where the instrument is so ambiguous that there is
Instruments doubt whether it is a bill or note, the holder may treat it
as either at his election (Sec. 17[e])

PROMISSORY NOTE (Sec. 184) Promissory Note Bill of Exchange

(1) An unconditional promise in writing
(2) Made by one person to another Unconditional promise Unconditional order
(3) Signed by the maker
Involves 2 parties Involves 3 parties
(4) Engaging to pay on demand, or at a fixed or
determinable future time Maker is primarily liable Drawer is only secondarily
(5) A sum certain in money to order or to bearer liable
(6) Where a note is drawn to the maker's own order, it is not Only one presentment: for Two presentments: for
complete until indorsed by him. payment acceptance and for payment
KINDS OF PROMISSORY NOTES
(1) Certificate of deposit – a form of promissory note which Bill of Exchange Check
is a written acknowledgment of a bank of its receipt of a
Not necessarily drawn on It is necessary that a check
certain sum with a promise to repay the same.
a deposit. The drawee need be drawn on a bank deposit.
(2) Bonds – a certificate or evidence of a debt on which the
not be a bank Otherwise, there would be
issuing company or governmental body promises to pay
fraud.
the bondholders a specified amount of interest for a
specified length of time, and to repay the loan on the Death of a drawer of a BOE, Death of the drawer of a
expiration date. with the knowledge of the check, with the knowledge of
(3) Debenture – a promissory note or bond backed by the bank, does not revoke the the bank, revokes the
general credit of a corporation and usually not secured authority of the drawee to authority of the banker to
by a mortgage or lien on any specific property. pay. pay.
(Sundiang and Aquino)
May be presented for Must be presented for
payment within reasonable payment within a reasonable
BILL OF EXCHANGE (Sec. 126)
time after its last negotiation. time after its issue.
(1) An unconditional order in writing
(2) Addressed by one person to another May be payable on demand Always payable on demand
(3) Signed by the person giving it or at a fixed or determinable
(4) Requiring the person to whom it is addressed to pay on future time
demand or at a fixed or determinable future time
(5) A sum certain in money to order or to bearer
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Completion and Delivery COMPLETE AND UNDELIVERED INSTRUMENTS

(Sec. 16)
Every contract on a negotiable instrument is incomplete
Two steps involved in the execution of negotiable instruments and revocable until delivery of the instrument for the
(1) Writing of the instrument completely in accordance with purpose of giving effect thereto.
the requisites of negotiability under Sec. 1.
(2) Delivery of the instrument by the maker or the drawer to Between immediate parties and as regards a remote party
the payee in order to give legal effect thereto. (Abad) other than a holder in due course, the delivery, in order to be
effectual, must be made either by or under the authority of
INSERTION OF DATE (Sec. 13) the party making, drawing, accepting, or indorsing.
Any holder may insert the true date of issue or acceptance
of an instrument where: When the instrument is in the hands of HDC, a valid delivery
(1) The instrument is expressed to be payable at a fixed thereof by all parties prior to him so as to make them liable
period after date is issued undated; or to him is conclusively presumed.
(2) The acceptance of an instrument payable at a fixed
period after sight is undated. INCOMPLETE AND DELIVERED INSTRUMENTS (Sec. 14)
(1) Holder has prima facie authority to fill up the
The insertion of a wrong date does not avoid the instrument instrument.
in the hands of a subsequent holder in due course; but as to (2) The instrument must be filled up strictly in accordance
him, the date so inserted is to be regarded as the true date. with the authority given and within reasonable time
(3) HDC may enforce the instrument as if filled up
The instrument is not invalid for the reason only that it is according to (2) above.
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. 12).
Signature
COMPLETION OF BLANKS (Sec. 14)
Where the instrument is wanting in any material particular, General rule: One whose signature does not appear on the
the person in possession thereof has a prima facie authority instrument shall not be liable thereon.
to complete it by filling up the blanks therein.
Exceptions:
A signature on a blank paper delivered by the person (1) The principal who signs through an agent
making the signature in order that the paper may be (2) The forger
converted into a negotiable instrument operates as a prima (3) One who indorses in a separate instrument (allonge) OR
facie authority to fill it up as such for any amount. where an acceptance is written on a separate paper
(4) One who signs his assumed or trade name
For such instrument to be enforceable against any person (5) A person negotiating by delivery (as in the case of a
who became a party thereto prior to its completion, it must bearer instrument) is liable to his immediate indorsee.
be filled up strictly in accordance with the authority given
and within a reasonable time. SIGNING IN TRADE NAME
One who signs in a trade or assumed name will be liable to
When subsequently negotiated to a holder in due course the same extent as if he had signed in his own name (Sec.
(HDC), there is a presumption that such instrument is filled 18)
up strictly in accordance with the authority given and within
reasonable time. SIGNATURE OF AGENT
Signature of any party may be made by duly authorized
INCOMPLETE AND UNDELIVERED INSTRUMENTS agent, established as in ordinary agency.
(Sec. 15)
Where an incomplete instrument has not been delivered, it SIGNATURE PER PROCURATION
will not be a valid contract in the hands of any holder, as Operates as notice that the agent has limited authority to
against any person whose signature was placed thereon sign, and the principal is bound only in case the agent in so
before delivery if completed and negotiated without signing acted within the actual limits of his authority (Sec.
authority. Non-delivery of an incomplete instrument is a 21)
real defense.
LIABILITY
Note: A drawee bank whose negligent custody of the General rule: Where a person adds to his signature words
checks, after partial execution, contributed to its escape, is indicating that he signs on behalf of a principal, then he is
stopped from raising the real defense under Sec. 15. not liable if he was duly authorized.

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Exceptions: General rule: When a signature is forged or made without

(1) Mere addition of words describing him as an agent the authority of the person, only the forged signature (not
without disclosing his principal (Sec. 20) the instrument itself and the other genuine signatures) is
(2) Where a broker or agent negotiates an instrument wholly inoperative
without indorsement, he incurs all liabilities in Sec. 65,
unless he discloses name of principal and the fact that Effects:
he is only acting as an agent. (Sec. 69) (1) No right to retain the instrument
(2) No right to give a discharge therefor
INDORSEMENT BY MINOR OR CORPORATION (3) No right to enforce payment thereof against any party
The indorsement or assignment of the instrument by a thereto can be acquired through or under such
corporation or by an infant (minor) passes the property signature
therein, notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon (Sec. 22). Exception: The party against whom it is sought to be
enforced is precluded from setting up the forgery or want of
REAL defense but available only to the incapacitated party authority as a defense (Sec. 23).
(i.e. the minor or the corporation).
PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY
FORGERY (1) Those who warrant or admit the genuineness of the
Counterfeit making or fraudulent alteration of any writing, signature in question. This includes indorsers, persons
which may consist of: negotiating by delivery and acceptors.
(1) Signing of another’s name with intent to defraud; or (2) Those who, by their acts, silence, or negligence, are
(2) Alteration of an instrument in the name, amount, name estopped from setting up the defense of forgery.
of payee, etc. with intent to defraud.

RULES ON FORGERY

Promissory note
Order Instrument Bearer Instrument
Maker’s signature forged (1) Maker is not liable because he never (1) Maker is not liable.
became a party to the instrument. (2) Indorsers may be made liable to those
(2) Indorsers subsequent to forgery are persons who obtain title through their
liable because of their warranties. indorsements.
(3) Party who made the forgery is liable. (3) Party who made the forgery is liable.
Payee’s signature forged (1) Maker and payee are not liable. (1) Maker is liable. (REASON: Indorsement is
(2) Indorsers subsequent to forgery are not necessary to title and the maker
liable. engages to pay holder)
(3) Party who made the forgery is liable. (2) Party who made the forgery is liable
Indorser’s signature forged (1) Maker, payee, indorser whose (1) Maker is liable.
signature/s was/were forged, and all (2) Indorser whose signature was forged is not
indorsers preceding the forgery are not liable to one who is not a HDC provided the
liable. instrument is mechanically complete before
(2) Indorsers subsequent to forgery are the forgery.
liable. (3) Party who made the forgery is liable.
(3) Party who made the forgery is liable.

Bill of exchange
Order Instrument Bearer Instrument
Drawer’s signature forged (1) Drawer is not liable because he was (1) Drawer is not liable.
never a party to the instrument. (2) Drawee is liable if it paid. Drawee cannot
(2) Drawee is liable if it paid (no recourse to recover from the collecting bank.
drawer) because he admitted the (3) Party who made the forgery is liable.
genuineness of the drawer’s signature.
Drawee cannot recover from the
collecting bank because there is no
privity between the collecting bank and
the drawer. The collecting bank does
not give any warranty re: the drawer’s
signature. (Associated Bank vs. CA)
(3) Indorsers subsequent to forgery liable

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(such as collecting bank or last

endorser)
(4) Party who made the forgery is liable
Payee’s signature forged (1) Drawer and payee are not liable (1) Drawer and drawee are liable.
(2) Drawee is liable if it paid, but it may (2) Payee is not liable.
pass liability back through the (3) Collecting bank is liable because of
collection chain warranty.
(3) Indorsers subsequent to forgery are (4) Party who made the forgery is liable.
liable (such as collecting bank)
(4) Party who made the forgery is liable
Indorser’s signature forged (1) Drawer, payee, indorser whose (1) Drawer is liable.
signature/s was/were forged and all (2) Drawee is liable.
indorsers preceding the forgery are not (3) Indorser whose signature was forged is
liable. liable because indorsement is not
(2) Drawee is liable if it paid. necessary to title.
(3) Indorsers subsequent to forgery are (4) Party who made the forgery is liable.
liable. (such as collecting bank)
(4) Party who made the forgery is liable.

ACCEPTANCE AND PAYMENT UNDER MISTAKE later complain should bank refuse to recredit his
(1) When the drawee accepts or pays a forged instrument account.
A bank is bound to know the signatures of its depositors.
If a bank pays a forged check it must be considered as WHEN DRAWEE MAY RECOVER FROM DRAWER
making the payment out of its own funds and cannot (1) Where the instrument is originally a bearer instrument,
charge the account of the depositor whose signature because the indorsement can be disregarded as being
was forged. (PNB vs. Quimpo, 1988) unnecessary to the holder’s title
(2) Indorsement forged by an employee or agent of the
A bank is liable, irrespective of its good faith, in paying a drawer
forged check. (Samsung vs. Far East Bank, 2004) (3) If due to the drawer’s negligence/delay, the forgery is
not discovered until it is too late for the bank to recover
(2) Extensions of Price vs. Neal doctrine from the holder or the forger
Doctrine: As between equally innocent persons, the
drawee who pays money on a check or draft the WHEN DRAWEE MAY NOT RECOVER FROM HOLDER
signature on which was forged CANNOT recover the (1) Where the instrument is originally a bearer instrument,
money from the one who received it. The drawee is because the indorsement can be disregarded as being
bound to know the signature of its depositor. unnecessary to the holder’s title
(2) If drawee fails to act promptly , if he delays in informing
Notes: The bar to recovery is extended to overdrafts and the holder whom he paid
stop payment orders.
(a) Overdraft occurs when a check is issued for an amount BETWEEN DRAWEE BANK AND COLLECTING BANK
more than what the drawer has in deposit with the Collecting bank is only liable for forged indorsements and
drawee bank. Rule: The drawee who pays the holder of not forgeries of the drawer or maker’s signature (PNB v CA,
the bill cannot recover from the holder what he paid 1968).
under mistake
(b) Stop Payment Order is one issued by the drawer of a The collecting bank or last indorser generally suffers the
check countermanding his first order to the drawee bank loss because it has the duty to ascertain the genuineness of
to pay the check. Rule: The drawee bank is bound to all prior indorsements considering that the act of presenting
follow the order, provided it is received prior to its the check for payment to the drawee is an assertion that the
certification or payment of the check. party making the presentment had done its duty to
ascertain the genuineness of the indorsements (BPI v CA,
(3) Effects of Negligence of Depositor 1992).
If such negligence was the proximate cause of the loss,
the drawee-bank is NOT liable In presenting the checks for clearing, the collecting agent
made an express guarantee on the validity of “all the prior
It is the duty of the depositor/drawer to carefully endorsements.”
examine bank’s statements, cancelled checks, his check
stubs, and other pertinent records within a reasonable The drawee bank is not similarly situated as the collecting
time and to report any errors without unreasonable bank because the former makes no warranty as to the
delay. genuineness of any indorsement. The drawee bank’s duty is
but to verify the genuineness of the drawer’s signature and
If a drawer/depositor’s negligence and delay should not of the indorsement because only the drawer is its client.
cause a bank to honor a forged check, drawer cannot

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Notes: However, where the negligence of the drawee bank is Liable on the instrument to a holder for value
the proximate cause of the collecting bank’s payment of a notwithstanding such holder at the time of the taking of the
check with a forged indorsement, the drawee bank may be instrument knew him to be only an accommodation party.
th
held liable to the collecting bank. Hence, as regards an AP, the 4 condition, i.e., lack of
notice of infirmity in the instrument or defect in the title of
When both are guilty of negligence, the degree of negligence the persons negotiating it, has no application. (Stelco
of each will be weighed in considering the amount of loss Marketing Corp. vs. CA,1992)
which each should bear (BPI v CA, 1992)
ACCOMMODATION PARTY AS SURETY
Accommodation Party (AP) is generally regarded as a surety
for the party accommodated

Consideration When the AP makes payment to holder of the note, he has

the right to sue the accommodated party for
Consideration: Some right, interest, benefit, or advantage reimbursement. (Agro Conglomerates, Inc. v. CA)
conferred upon a promisor, to which he is otherwise not
lawfully entitled, or any detriment, prejudice, loss or Note: A corporation cannot act as an accommodation party.
disadvantage suffered or undertaken by the promise other The issue or endorsement of negotiable instruments by a
than to such as he is at the time of consent bound to suffer. corporation without consideration and for the
(Gabriel v. Monte de Piedad) accommodation of another is ultra vires (Crisologo v. CA)

Value: Any consideration sufficient to support a simple

contract.

An antecedent or pre-existing debt constitutes value; and is Negotiation

deemed such whether the instrument is payable on demand
or at a future time. (Sec. 25) NEGOTIATION DISTINGUISHED FROM ASSIGNMENT
Negotiation Assignment
Who is a Holder for Value (HFV)?
(1) A holder of an instrument for which value has been The transfer of the The transferee does not
given at any given time but only with respect to all instrument from one person become a holder and he
parties who have become parties to the instrument prior to another so as to constitute merely steps into the shoes
to the time at which value has been given. (Sec. 26) the transferee as holder of the transferor. Any
(2) A holder who as a lien on the instrument but only to the thereof (Sec.30). defense available against the
extent of his lien. (Sec. 27) transferor is available
against the transferee.
Burden of proof - presumption of consideration: Every
negotiable instrument is deemed prima facie to have been MODES OF NEGOTIATION
issued for a valuable consideration; and every person whose
signature appears thereon to have become a party thereto BY DELIVERY – IF PAYABLE TO BEARER (SEC. 30)
for value (Sec. 24). Delivery means transfer of possession of instrument by the
maker or drawer, with intent to transfer title to the payee
Effect of want of consideration: Absence or failure of and recognize him as holder thereof.
consideration is a matter of defense as against any person
not a holder in due course, hence, a personal defense. Issuance is the first delivery of the instrument complete in
form to a person who takes it as a holder (Sec. 191).

Requisites
Accommodation Party (1) Mechanical act of writing the instrument completely
and in accordance with the requirements of Section 1;
and
An accommodation party is one who has signed the (2) The delivery of the complete instrument by the maker or
instrument as maker, drawer, acceptor, or indorser, without drawer to the payee or holder with the intention of
receiving value therefor, and for the purpose of lending his giving effect to it.
name to some other person (Sec. 29).
Presumption of delivery
LIABILITY (1) Where the instrument is no longer in the possession of a
The person to whom the instrument thus executed is party whose signature appears thereon, a valid and
subsequently negotiated has a right of recourse against the intentional delivery by him is presumed until the
accommodation party in spite of the former’s knowledge contrary is proved (Sec. 16)
that no consideration passed between the accommodation (2) If it is in the hands of a HDC, the presumption is
and accommodated parties (Sec. 29). conclusive (Sec. 16)

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Presumption as to date Rights of Restrictive Indorsee:

(1) Date is not an essential element of negotiability (a) Receive payment
(2) An undated instrument is considered to be dated as of (b) Bring any action thereon that the indorser could bring.
the time it was issued (c) Transfer his rights as such indorsee, but all subsequent
indorsees acquire only the title of first indorsee under
BY INDORSEMENT COMPLETED BY DELIVERY – IF PAYABLE TO restrictive indorsement. (Sec 37)
ORDER (SEC. 30)
(2) Non-restrictive
Indorsement
(1) Where placed – The indorsement must be written (Sec. As to kind of liability assumed by indorser
31): (1) Qualified
(a) On the instrument itself, or (a) Constitutes indorser as mere assignor of title
(b) On a separate piece of paper attached to the instrument (b) Made by adding the words “without recourse” (Sec. 38).
called “allonge” (c) But this does not mean that the transferee only has the
rights of an assignee; transfer remains a negotiation and
(2) Signature of the indorser, without additional words, is a transferee can still be a holder capable of acquiring a
sufficient indorsement (Sec. 31) title free from defenses of prior parties.
(d) Effects:
(3) Must be of the ENTIRE instrument (i) Relieves the qualified indorser of his liability to pay the
(a) CANNOT indorse a part only of the amount payable; instrument should the maker be unable to pay
BUT if the instrument has been paid in part, then the (ii) The qualified indorser does not guarantee the solvency
instrument may be indorsed as to the residue (Sec. 32) of the maker, but merely his legal title to the instrument
(b) CANNOT transfer the instrument to two or more (iii) The instrument may still be further negotiated; no effect
indorsees severally (Sec. 32) on its negotiability
(c) If not an indorsement of the entire instrument, the
transfer remains valid, but as a mere assignment which (2) Non-qualified
subjects the holder to all defenses on the instrument
(Campos) As to presence/absence of express limitations
(1) Conditional
Kinds of indorsement (a) Additional condition annexed to indorser’s liability; such
condition must be expressed
As to manner of future method of negotiation (b) Where an indorsement is conditional, a party required to
(1) Special pay the instrument may disregard the condition, and
(a) Specifies the person to whom/to whose order the make payment to the indorsee or his transferee, whether
instrument is to be payable; indorsement of such condition has been fulfilled or not.
indorsee is necessary to further negotiation. (c) But any person to whom an instrument so indorsed is
(b) A special indorser is liable to all subsequent holders, negotiated, will hold the same, or the proceeds thereof,
unless the instrument is an originally bearer instrument, subject to the rights of the person indorsing
in which case he is liable only to those who take title conditionally. (Sec. 39)
through his indorsement (Sec 40).
(c) An instrument, payable to bearer, and indorsed (2) Unconditional
specially, may nevertheless be further negotiated by
delivery. (Sec 40) Other kinds of indorsement
(1) Absolute – One by which the indorser binds himself to
Originally bearer instrument always remains a bearer pay, upon no other condition than the failure of prior
instrument (Sundiang and Aquino) parties to do so, and of due notice to him of such failure
(2) Joint – Where instrument payable to the order of two or
(2) Blank more payees or indorsees not partners, all must indorse,
(a) Specifies no indorsee, instrument so indorsed is payable unless the one indorsing has authority to endorse for the
to bearer, and may be negotiated by delivery others (Sec. 41)
(b) The holder may convert a blank indorsement into a (3) Irregular – Where a person, not otherwise a party to the
special indorsement by writing over the signature of the instrument, places thereon his signature in blank before
indorser in blank any contract consistent with the delivery, he is liable as indorser
character of the indorsement. (Sec 35)
(c) An order instrument may be converted into a bearer
instrument by means of a blank indorsement, and may
be later reconverted into an order instrument by a
subsequent special indorsement Rights of the Holder
As to title transferred A holder is a payee or indorsee of a bill or note who is in
(1) Restrictive – Such indorsement either: possession of it, or the bearer thereof (Sec. 191). He has the
(a) Prohibits further negotiation of instrument following rights (Sec. 51):
(b) Constitutes indorsee as agent of indorser (1) To sue on the instrument in his own name
(c) Vests title in indorsee in trust for another (Sec 36)
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Unindorsed intruments: Sec. 49. Transfer without (d) That at the time it was negotiated to him, he had no
indorsement; effect of. Where the holder of an instrument notice of any infirmity in the instrument or defect in the
payable to his order transfers it for value without indorsing title of the person negotiating it. (Sec. 52)
it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in That the instrument is complete and regular upon its face
addition, the right to have the indorsement of the (1) It is incomplete when it is wanting in any material
transferor. But for the purpose of determining whether the particular or particular proper to be inserted in a
transferee is a holder in due course, the negotiation takes negotiable instrument without which the same will not be
effect as of the time when the indorsement is actually complete.
made.
Material particulars: A change in the following is considered
Note: This section applies only to an instrument payable to a material alteration (Sec. 125):
the order of the transferor. This cannot apply to bearer (a) Date
instruments. (b) Sum payable, either for principal or interest
(c) Time or place of payment
Cancellation of indorsement: Sec. 48. Striking out (d) Number or relations of the parties
indorsement. The holder may at any time strike out any (e) Medium or currency in which payment is to be made
indorsement which is not necessary to his title. The indorser (f) Or which adds a place of payment where no place of
whose indorsement is struck out, and all indorsers payment is specified
subsequent to him, are thereby relieved from liability on the (g) Or any other change or addition which alters the effect
instrument. of the instrument in any respect

Indorsement by agent: Sec. 20. Liability of person signing as (2) That he became the holder of it before it was overdue and
agent, and so forth. Where the instrument contains or a without notice that it had been previously dishonored, if
person adds to his signature words indicating that he signs such was the fact
for or on behalf of a principal or in a representative capacity,
he is not liable on the instrument if he was duly authorized; “Overdue” – The following cannot be HDCs:
but the mere addition of words describing him as an agent, (a) A holder who became such after the date of maturity of
or as filling a representative character, without disclosing the instrument (instrument is overdue);
his principal, does not exempt him from personal liability. (b) In case of demand instruments: a holder who negotiates
it after an unreasonable length of time after its issue
(2) Payment in due course to the holder discharges (Sec. 53)
instrument (c) Instruments with fixed maturity but subject to
acceleration: ultimate date of maturity is the date of
HOLDER IN DUE COURSE (HDC) maturity for the purpose of determining whether a
purchaser is a HDC
WHO ARE HDCS (d) Undated instruments: Prima facie presumption that it
(1) HDC under Sec. 52 was negotiated before it was overdue (Sec. 45)
(2) HDC under Sec. 58: A holder who derives title to the
instrument through a HDC has all the rights of the latter Notes:
even though he himself satisfies none of the (1) An overdue instrument is still negotiable, but it is
requirements of due course holding subject to the defense existing at the time of the
(3) HDC under Sec. 59 (presumption): Every holder is transfer.
deemed prima facie to be a holder in due course (2) As to what constitutes a reasonable time, regard is to be
had to the nature of the instrument, the usage of trade
Sec. 191 defines holder as the payee or indorsee of a bill or or business with respect to such instrument, and the
note, who is in possession of it, or the bearer thereof. The facts of the particular case. (Sec. 193)
word “holder” in the first clause of Sec. 52 and in the (3) An instrument is not invalid for the reason only that it is
second subsection thereof may be replaced by the definition ANTE-DATED OR POSTDATED provided not done for
in Sec. 191 so as to read a holder in due course as a payee or an illegal or fraudulent purpose. The person to whom an
an indorsee in possession, etc. (De Ocampo v. Gatchalian, instrument so dated is delivered acquires the title
1961) thereto as of the date of delivery (Sec. 12).

REQUISITES OF A HOLDER IN DUE COURSE That he took it in good faith AND for value
What constitutes a holder in due course. A holder in due “Value”
course is a holder who has taken the instrument under the (1) Any consideration sufficient to support a simple
following conditions: contract.
(a) That it is complete and regular upon its face; (2) An antecedent or pre-existing debt constitutes value,
(b) That he became the holder of it before it was overdue, whether the instrument is payable on demand or at a
and without notice that it has been previously future time (Sec. 25)
dishonored, if such was the fact;
(c) That he took it in good faith and for value;

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“Holder for value” (2) instrument is negotiated in breach of faith, or fraudulent

(1) Where value has at any time been given for the circumstances
instrument, the holder is deemed a HFV in respect to all
parties who become such prior to that time (Sec. 26); NOTICE of infirmity or defect – actual knowledge of the
and infirmity or defect OR knowledge of such facts that his
(2) Where the holder has a lien on the instrument, he is action in taking the instrument amounted to bad faith
deemed a HFV to the extent of his lien (Sec .27). (Sec.56)
(3) The holder is a holder for value only to the extent that
the consideration agreed upon has been paid, delivered, RIGHT of a transferee who receives NOTICE of any infirmity
or performed. (Sundiang and Aquino) or defect BEFORE he has PAID THE FULL amount for the
instrument. He will be deemed a HDC only to the extent of
Presumption: Every negotiable instrument is deemed prima the amount therefore paid by him (Sec.54)
facie issued for valuable consideration; and every person
whose signature appears thereon is deemed to have RIGHTS OF A HOLDER IN DUE COURSE
become a party thereto for value (Sec. 24). (1) To sue on the instrument in his own name (Sec. 51)
(2) To receive payment on the instrument (Sec. 51)
Such presumption cannot be overcome by the petitioner’s (3) Holds instrument free of any defect of title of prior
bare denial of receipt of the consideration. (Bayani vs. parties (Sec. 57)
People, 2004) (4) Free from defenses available to prior parties among
themselves (Sec. 57)
“Good faith” (5) May enforce payment of instrument for full amount,
Holder must have taken the instrument in good faith and against all parties liable (Sec. 57)
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 DEFENSES AGAINST THE HOLDER
person negotiating it.
PRESUMPTION IN FAVOR OF DUE COURSE HOLDING
“Actual knowledge” Every holder is deemed prima facie to be a holder in due
What constitutes notice of defect. To constitute notice of an course (Sec. 59).
infirmity in the instrument or defect in the title of the person (1) BURDEN SHIFTS when it is shown that the title of any
negotiating the same, the person to whom it is negotiated person who has negotiated the instrument was
must have had actual knowledge of the infirmity or defect, or defective. Holder MUST then PROVE that he or some
knowledge of such facts that his action in taking the person under whom he claims acquired the title as a
instrument amounted to bad faith. (Sec. 56) holder in due course.
(2) But the last mentioned rule does not apply in favor of a
That at the time it was negotiated to him he had no notice party who became bound on the instrument prior to the
of any infirmity in the instrument or defect in the title of the acquisition of such defective title. (Sec. 59)
person negotiating it
“Suspicious circumstances” HOLDER NOT IN DUE COURSE
BAD FAITH - does not require actual knowledge of the exact (1) One who became a holder of an instrument without any,
fraud that was practiced; knowledge that there was some or all of the requisites under Sec. 52
something wrong about the assignor’s acquisition of title is (2) With respect to demand instruments, if it is negotiated an
sufficient unreasonable length of time after its issue, the holder is
deemed not a holder in due course. (Sec. 53)
A check with 2 parallel lines in the upper left hand corner (3) Rights of a holder not in due course (Sec. 51):
means that it could only be deposited and may not be (a) To sue on the instrument under in his own name
converted to cash. Consequently, such circumstance should (b) To enforce the instrument
put the payee on inquiry and upon him devolves the duty to
ascertain the holders’ title to the check or the nature of his The only disadvantage of a holder who is not a holder in due
possession. Failing in this respect, the payee is declared guilty course is that the negotiable instrument is subject to
of gross negligence amounting to legal absence of good defenses as if it were non-negotiable. [Chan Wan vs. Tan
faith and as such the consensus of authority is to the effect Kim (1960)]
that the holder of the check is not a holder in good faith.
(State Investment House vs. IAC, 1989)

“Defective title”
Title is NOT defective when at the time it was negotiated to Liabilities of Parties
him, he had NO notice of:
(1) any infirmity in instrument Primary liability: The unconditional promise attaches the
(2) any defect in title of person negotiating moment the maker makes the instrument while the
acceptor’s assent to the unconditional order attaches the
Title is DEFECTIVE when (Sec. 55): moment he accepts the instrument. No further act is
(1) instrument/signature obtained by fraud, duress, force or necessary in order for the liability to accrue. Presentment for
fear or other unlawful means OR for an illegal payment is all that is necessary.
consideration; or
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PARTIES PRIMARILY LIABLE (Sec. 60 and 62) General or unqualified indorser (Sec. 66)
Persons who by the terms of the instrument are absolutely Engages that he will pay the amount of the instrument to
required to pay the same the holder or to any subsequent indorser who may be
compelled to pay the same if the instrument be dishonored
MAKER (SEC. 60) upon due presentment and proceedings on dishonor be
Promises to pay according to the tenor of the instrument taken.
(promissory note)
Who is a General or Unqualified Indorser? Every person who
ACCEPTOR (SEC. 62) indorses WITHOUT qualification (Sec. 66)
Upon acceptance of the bill of exchange, engages to pay
the bill according to the tenor of the acceptance. A person placing his signature upon an instrument other
than as a maker, drawer, or acceptor unless he indicates by
Unconditionally liable; he is duty-bound to pay the holder at appropriate words his intention to be bound in some other
date of maturity, WON holder demands payment from him, capacity (Sec. 63).
and he is not relieved from liability even if the instrument
should become overdue due to failure of holder to make A person, who places his signature on an instrument
such demand. negotiable by delivery, incurs all the liabilities of an indorser
(Sec. 67).
Note: Until he accepts the bill of exchange, the drawee
assumes no liability to pay the instrument. Note: A qualified indorser does not assume the liability to
pay the instrument since he is merely an assignor of the title
PARTIES SECONDARILY LIABLE to the instrument. However, he becomes liable once he
Secondary liability: A party secondarily liable is not bound to breaches a warranty.
pay unless the following have been fulfilled:
(1) Due presentment or demand to the primary party Who is a qualified indorser? One who is constituted as a
(2) Dishonor by such party mere assignor of the title to the instrument by adding to his
(3) Notice of dishonor to secondary party, and, in cases of signature the words "without recourse" or any words of
foreign bills of exchange, protest of the bill similar import.

DRAWER (SEC. 61) Irregular Indorser

(1) Engages that the instrument will be accepted or paid, or When a person not otherwise a party to an instrument,
both, according to its tenor on due presentment; places thereon his signature in blank before delivery, he is
(2) Engages that he will pay the amount of the instrument liable as an indorser, in accordance with these rules:
to the holder or to any subsequent indorser who may be (1) Instrument payable to order of 3rd person: liable to
compelled to pay the same if the instrument be payee and to all subsequent parties
dishonored upon due presentment and proceedings on (2) Instrument payable to the order of maker/drawer, or
dishonor be taken, payable to bearer: liable to all parties subsequent to
maker/drawer
Limiting liability: Drawer may insert in the instrument an (3) Signs for accommodation of payee: liable to all parties
express stipulation negativing/limiting his own liability to subsequent to payee (Sec. 64)
the holder.
Order of Liability among Indorsers (Sec. 68)
INDORSERS (1) Among themselves: liable prima facie in the order they
The following indorsers assume the liability to pay the indorse, but proof of another agreement admissible
instrument: (2) As to the Holder: Holder may sue any of the indorsers,
(1) General or Unqualified Indorser; and regardless of order of indorsement
(2) Irregular Indorser (3) Joint payees/indorsees deemed to indorse solidarily

WARRANTIES
General/ Qualified Person Negotiating
Maker Acceptor Drawer
Unqualified Indorser Indorser by Delivery
(1) Existence of the (1) Existence of the (1) Existence of the (1) Genuineness of (1) Genuineness of (1) Genuineness of
payee; payee; payee; the instrument the instrument the instrument
(2) His then (2) His then (2) His then in all respects in all respects in all respects
capacity to capacity to capacity to that it purports that it purports that it purports
indorse indorse; indorse to be; to be; to be;
(3) Existence of the (2) His good title to (2) His good title to (2) His good title to
drawer; the instrument; the instrument; the instrument;
(4) Genuineness of (3) All prior parties’ (3) All prior parties’ (3) Prior parties’
the drawer’s capacity to capacity to capacity to
signature; contract; contract; contract;

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(5) Drawer’s (4) The instrument (4) No knowledge (4) No knowledge

capacity and is valid and of any fact of any fact which
authority to subsisting at which would would impair
draw the the time of his impair the the validity of
instrument; indorsement. validity of the the instrument
instrument or or render it
render it valueless.
valueless.
Note: No. 3 does not Note: Warranty
apply to person extends only to
negotiating public immediate
or corporation transferee
securities other than
bills and notes

Presentment for Payment PARTIES TO WHOM PRESENTMENT FOR PAYMENT

SHOULD BE MADE
General rule: Presentment for payment must be made to the
Presentment means: person primarily liable on the instrument or if he is absent
(1) The production of a Bill of Exchange to the drawer or or inaccessible, to any person found at the place where the
acceptor for payment; or presentment is made.
(2) The production of a Promissory Note to the party liable
for payment. Exceptions: Where the person primarily liable is/are:
(1) Dead – presentment for payment must be made to his
Date and time of presentment: personal representative
(1) Bearing fixed maturity/not payable on demand – on the (2) Partners – presentment for payment may be made to
day it falls due if day of maturity falls on Sunday or a any one of them, even though there has been a
holiday, the instruments falling due or becoming dissolution of the firm
payable on Saturday are to be presented for payment on (3) Several persons, not partners (joint debtors) –
the next succeeding business day (Sec. 85) presentment for payment must be made to them all
(2) Payable on demand – within a reasonable time after its
issue, iv at the option of the holder, may be presented DISPENSATION WITH PRESENTMENT FOR PAYMENT
for payment before twelve o'clock noon on Saturday When Excused:
when that entire day is not a holiday (Sec. 85) (1) Where, after the exercise of reasonable diligence,
(3) Demand bill of exchange – within a reasonable time presentment cannot be made;
after the last negotiation. (Sec. 71) (2) Where the drawee is a fictitious person;
(3) By waiver of presentment, express or implied. (Sec. 82)
Note: Although presentment was made within a reasonable
time from last negotiation, it may have been made within an DISHONOR BY NON-PAYMENT
unreasonable time from issuance. Thus holder may still not The instrument is dishonored by non-payment when:
be a holder in due course under Sec. 71. (1) It is duly presented for payment and payment is refused
or cannot be obtained; or
NECESSITY OF PRESENTMENT FOR PAYMENT (2) Presentment is excused and the instrument is overdue
When necessary: In order to charge the drawer and indorsers and unpaid (Sec. 83).
(Sec. 70)
In case of waiver of protest, whether in the case of a foreign
When NOT necessary: bill of exchange or other NI – deemed to be a waiver not
(1) To charge the person primarily liable on the instrument only of a formal protest but also of presentment and notice
(Sec. 70) of dishonor (Sec. 111)
(2) To charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the
instrument. (Sec. 79)
(3) To charge an indorser where the instrument was made
or accepted for his accommodation and he has no Notice of Dishonor
reason to expect that the instrument will be paid if
presented. (Sec. 80) Notice given by holder or his agent to party or parties
(4) When the bill of exchange has previously been secondarily liable that the instrument was dishonored by:
dishonored by non-acceptance and has not been (1) Non-acceptance by the drawee of a bill; or
subsequently accepted (2) Non-payment by the acceptor of a bill; or

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(3) Non-payment by the maker of a note (Sec. 89) Who should give (Sec. 90):
(1) Holder
Requisites: (2) Agent or representative of holder.
(1) Given by holder or his agent, or by any party who may be (3) Any party who may be compelled to pay like indorsers.
compelled by the holder to pay (Sec. 90) (4) Agent of any party who may be compelled.
(2) Given to secondary party or his agent (Sec. 97)
(3) Given within the periods provided by law (Sec. 102) EFFECT OF NOTICE
(4) Given at the proper place (Secs. 103 and 104) Notice of dishonor is required to charge parties secondarily
liable.
PARTIES TO BE NOTIFIED
(1) Non-acceptance (bill) – to persons secondarily liable, Upon valid notice of dishonor, immediate right of recourse
namely, the drawer and indorsers as the case may be against the indorser arises. It is as if the indorser becomes
(2) Non-payment (both bill and note) – to indorsers primarily liable in the sense that the holder need not claim
payment from the person primarily liable (Sundiang and
Note: Notice must be given to persons secondarily liable. Aquino).
Otherwise, such parties are discharged. Notice may be given
to the party himself or to his agent. FORM OF NOTICE (Sec. 96)
The notice may be:
When given (1) In writing; or
Notice may be given as soon as the instrument is (2) Merely oral
dishonored (Sec. 102)
The notice may be given in any terms which:
When not necessary to give to drawer (1) Sufficiently identify the instrument; and
Notice of dishonor is not required to be given to the drawer (2) Indicate that it has been dishonored by non-acceptance
in any of the following cases: or non-payment
(1) Drawer and drawee are the same;
(2) Drawee is a fictitious person or not having the capacity It may in all cases be given by delivering it personally or
to contract; through the mails
(3) Drawer is the person to whom the instrument is
presented for payment; WAIVER
(4) The drawer has no right to expect or require that the Notice of dishonor may be waived either before the time of
drawee or acceptor swill honor the instrument; giving notice has arrived or after the omission to give due
(5) Where the drawer has countermanded payment (Sec. notice, and the waiver may be expressed or implied. (Sec. 109)
114)
Where the waiver is embodied in the instrument itself, it is
When not necessary to give to Indorser binding upon all parties; but, where it is written above the
Notice of dishonor is not required to be given to an indorser signature of an indorser, it binds him only. (Sec. 110)
in the following cases:
(1) Drawee is a fictitious person or does not have the DISPENSATION WITH NOTICE
capacity to contract, and indorser was aware of that fact (1) When party to be notified knows about the dishonor,
at the time he indorsed the instrument; actually or constructively (Secs. 114-117)
(2) Indorser is the person to whom the instrument is (2) If waived (Sec. 109)
presented for payment; (3) When after due diligence, it cannot be given (Sec. 112).
(3) Instrument was made or accepted for his
accommodation. (Sec. 115) EFFECT OF FAILURE TO GIVE NOTICE
Failure to give notice to parties secondarily liable discharges
Who will benefit such parties
If given by or on behalf of the holder (Sec. 92):
(1) All subsequent holders An omission to give notice of dishonor by non-acceptance
(2) All prior parties (as to holder) who have a right of does not prejudice the rights of a holder in due course
recourse against the party to whom it is given. subsequent to the omission (Sec. 117)

If given by the indorser (Sec. 93):

(1) Holder
(2) All parties subsequent to the party to whom notice is
given. Discharge of
PARTIES WHO MAY GIVE NOTICE OF DISHONOR Negotiable Instrument
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 Discharge: The release of all parties, whether primary or
compelled to pay it to the holder, and who, upon taking it secondary, from the obligation on the instrument. It renders
up, would have a right to reimbursement from the party to the instrument without force and effect and, consequently,
whom the notice is given. (Sec. 90) non-negotiable (De Leon)

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DISCHARGE OF NEGOTIABLE INSTRUMENT DISCHARGE OF PARTIES SECONDARILY LIABLE

A negotiable instrument is discharged:
(1) By payment in due course by or on behalf of the GROUNDS UNDER SEC. 120
principal debtor; A person secondarily liable on the instrument is discharged:
(2) By payment in due course by the party accommodated, (1) By any act which discharges the instrument;
where the instrument is made or accepted for his (2) By the intentional cancellation of his signature by the
accommodation; holder;
(3) By the intentional cancellation thereof by the holder; (3) By the discharge of a prior party;
(4) By any other act which will discharge a simple contract (4) By a valid tender or payment made by a prior party;
for the payment of money; (5) By a release of the principal debtor unless the holder's
(5) When the principal debtor becomes the holder of the right of recourse against the party secondarily liable is
instrument at or after maturity in his own right. (Sec. 119) expressly reserved;
(6) By any agreement binding upon the holder to extend
BY PAYMENT IN DUE COURSE (ASKED IN 2000) the time of payment or to postpone the holder's right to
Payment is made in due course when it is made at or after enforce the instrument unless made with the assent of
the maturity of the payment to the holder thereof in good the party secondarily liable or unless the right of
faith and without notice that his title is defective. (Sec. 88) recourse against such party is expressly reserved. (Sec.
120)
Requisites:
(1) Payment must be made at or after maturity. OTHER GROUNDS
(2) Payment must be made to the holder. (1) Failure to make due presentment (Secs. 70, 144)
(3) Payment must be made in good faith and without notice (2) Failure to give notice of dishonor
that holder’s title is defective. (3) Certification of check at instance of holder
(4) Reacquisition by prior party
If payment is made before maturity and the note is (5) Where instrument negotiated back to a prior party, such
negotiated to a HDC, the latter may recover on the party may reissue and further negotiate, but not entitled
instrument. to enforce payment against any intervening party to
whom he was personally liable
Payment to one of several payees or indorsees in the (6) Where instrument is paid by party secondarily liable, it is
alternative discharges the instrument, but payment to one not discharged, but
of several joint payees or joint indorsers is not a discharge. (a) the party so paying it is remitted to his former rights as
The party receiving payment must have been authorized by regard to all prior parties
others to receive payment. (b) and he may strike out his own and all subsequent
indorsements, and again negotiate instrument, except:
rd
By whom made: where it is payable to order of 3 party and has been
(1) payment in due course by or on behalf of principal paid by drawer or where it’s made/accepted for
debtor accommodation and has been paid by party
(2) payment in due course by party accommodated where accommodated
party is made/ accepted for accommodation (7) by taking a qualified acceptance

BY INTENTIONAL CANCELLATION RIGHT OF PARTY WHO DISCHARGED INSTRUMENT

A cancellation made unintentionally or under a mistake or Where the instrument is paid by a party secondarily liable
without the authority of the holder, is inoperative. thereon, it is not discharged; but the party so paying it is
remitted to his former rights as regards to all prior parties,
But where an instrument or any signature thereon appears and he may strike out his own and all subsequent
to have been cancelled, the burden of proof lies on the party indorsements, and again negotiate the instrument, except:
who alleges that the cancellation was made unintentionally (1) Where it is payable to the order of a third person, and
or under a mistake or without authority. (Sec. 123) has been paid by the drawer;
(2) Where it was made or accepted for accommodation, and
BY OTHER ACTS THAT DISCHARGE A SIMPLE CONTRACT has been paid by the party accommodated. (Sec. 121)
FOR PAYMENT OF MONEY
Any other act which discharges a simple contract for RENUNCIATION BY HOLDER (Sec. 122)
payment of money (Art. 1231 of the Civil Code), ex. issuance The holder may expressly renounce his rights against any
of a renewal note (novation). party to the instrument before, at, or after its maturity. An
absolute and unconditional renunciation of his rights
BY REACQUISITION OF PRINCIPAL DEBTOR IN HIS OWN RIGHT against the principal debtor made at or after the maturity of
Principal debtor becomes holder of instrument at or after the instrument discharges the instrument.
maturity in his own right
Renunciation must be in writing unless the instrument is
BY MATERIAL ALTERATION delivered up to the person primarily liable thereon
Material alteration without assent of all parties liable avoids
instrument except as against party to alteration and Renunciation does not affect the rights of an HDC without
subsequent indorsers (Sec. 124) notice

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Material Alteration (a) Conditional – makes payment by the acceptor

dependent on the fulfillment of a condition therein
stated
CONCEPT (b) Partial – an acceptance to pay part only of the amount
Any change in the instrument which affects or changes the for which the bill is drawn.
liability of the parties in any way. (c) Local – an acceptance to pay only at a particular place.
(d) Qualified as to time
Any alteration which changes the date, sum payable, time (e) The acceptance of some one or more of the drawees but
or place of payment, number of relation of the parties, or not of all. (Sec. 141)
medium of currency of payment where none is specified or
which alters the effect of the instrument in any respect (PNB Proof of acceptance (Sundiang and Aquino): The written
v. CA, GR No. L-26001, Oct. 21, 1968) acceptance may be in the instrument itself or in a separate
instrument. However, under Sec. 133, “the holder of a bill
An alteration is said to be material if it alters the effect of presenting the same for acceptance may require the
the instrument. In other words, a material alteration is one acceptance be written on the bill, and, if such request is
which changes the items which are required to be stated refused, may treat the bill as dishonored”
under Sec. 1 of the NIL (ibid.)
Effects: When an acceptance is written on a paper than the
Changes in the following constitute material alterations (Sec. bill itself, it does not bind the acceptor except in favor of a
125): person to whom it is shown and who, on the faith thereof,
(1) Date receives the bill for value.
(2) Sum payable, either for principal or interest
(3) Time or place of payment MANNER
(4) Number or relations of the parties
(5) Medium or currency in which payment is to be made EXPRESS ACCEPTANCE
(6) That which adds a place of payment where no place of Must be in writing and signed by the drawee and must not
payment is specified express that the drawee will perform his promise by any
(7) Any other change or addition which alters the effect of other means than the payment of money. (Sec. 132) If
the instrument in any respect. request for a written acceptance is refused, the holder may
treat the bill as dishonored (Sec. 133)
EFFECT OF MATERIAL ALTERATION
(1) Alteration by a party – Avoids the instrument except as IMPLIED ACCEPTANCE
against the party who made, authorized, or assented to (1) If the drawee refuses to return the instrument within 24
the alteration and subsequent indorsers. However, if an hours after it was delivered for acceptance.
altered instrument is negotiated to a HDC, he may (2) If the drawee destroys the same.
enforce payment thereof according to its original tenor (3) If the drawee makes an unconditional promise in writing
regardless of whether the alteration was innocent or before the instrument is drawn, with respect to every
fraudulent. person who, upon the faith thereof, receives the bill for
(2) Alteration by a stranger (spoliation) the effect is the value.
same as where the alteration was made by a party
wherein a HDC can recover on the original tenor of the TIME FOR ACCEPTANCE (Sec. 136)
instrument (Sec. 124). The drawee is allowed twenty-four hours after presentment
in which to decide whether or not he will accept the bill.

The acceptance, if given, dates as of the day of presentation.

Acceptance RULES GOVERNING ACCEPTANCE

Q: What is the implication of payment without acceptance
DEFINITION by a drawee?
The signification by the drawee of his assent to the order of A: Act No. 2031, or the Negotiable Instruments Law (NIL),
the drawer (Sec. 132) explicitly provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the
Requisites (Sec. 132): tenor of his acceptance. This provision applies with equal
(1) Must be in writing force in case the drawee pays a bill without having previously
(2) Signed by the drawee accepted it. His actual payment of the amount in the check
(3) Must not express that the drawee will perform his implies not only his assent to the order of the drawer and a
promise by any other means than the payment of money recognition of his corresponding obligation to pay the
aforementioned sum, but also, his clear compliance with
Kinds of Acceptance: that obligation. Actual payment by the drawee is greater
(1) General – assents without qualification to the order of than his acceptance, which is merely a promise in writing to
the drawer pay. The payment of a check includes its acceptance. (FEBTC
(2) Qualified – which in express terms varies the effect of vs. Gold Palace Jewellery Co,, Nachura, 2008)
the bill as drawn:

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Right to unqualified acceptance: The holder may refuse to TIME/PLACE/MANNER OF PRESENTMENT

take a qualified acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as dishonored WHEN MADE
by non-acceptance. A bill may be presented for acceptance on any day on which
negotiable instruments may be presented for payment
Where a qualified acceptance is taken, the drawers and under the provisions of Sections 72 and 85 of this Act. When
indorsers are discharged from liability on the bill unless they Saturday is not otherwise a holiday, presentment for
have expressly or impliedly authorized the holder to take a acceptance may be made before twelve o'clock noon on
qualified acceptance, or subsequently assent thereto. that day. (Sec. 146)

When the drawer or indorser receives notice of a qualified What constitutes sufficient presentment? Presentment for
acceptance, he must, within a reasonable time, express his payment, to be sufficient, must be made:
dissent to the holder or he will be deemed to have assented (1) By the holder, or by some person authorized to receive
thereto. payment on his behalf;
(2) At a reasonable hour on a business day;
However, acceptance is presumed to be unqualified or (3) At the proper place as herein defined (see Sec. 73);
absolute. (Sundiang and Aquino) (4) 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. (Sec. 72)

Presentment for Acceptance Time of maturity: Every negotiable instrument is payable at

the time fixed therein without grace. When they day of
maturity falls upon Sunday, or a holiday, the instrument is
Requisites: payable on the next succeeding business day. Instruments
(1) By the holder, or by some person authorized to receive falling due or becoming payable on Saturday are to be
payment on his behalf; presented for payment on the next succeeding business day,
(2) At a reasonable hour on a business day; except that instrument payable on demand may, at the
(3) At a proper place as herein defined; option of the holder be presented for payment before twelve
(4) To the person primarily liable on the instrument, or if he o’clock noon on Saturday when that entire day is not a
is absent or inaccessible, to any person found at the holiday. (Sec. 85)
place where the presentment is made.
HOW MADE (SEC. 145)
General rule: Presentment for acceptance is not necessary in (1) By or on behalf of the holder
order to render any party to the bill liable. (Sec. 143, last (2) At a reasonable hour
par.) (3) On a business day
(4) Before the bill is overdue
When presentment for acceptance necessary: Presentment (5) To the drawee or his agent
for acceptance must be made:
(1) Where the bill is payable after sight, or in any other case, Where a bill is addressed to 2 or more drawees who are not
where presentment for acceptance is necessary in order partners – presentment must be made to them all XPT. One
to fix the maturity of the instrument; or has authority to accept/refuse for all
(2) Where the bill expressly stipulates that it shall be
presented for acceptance; or Where the drawee is dead – presentment may be made to
(3) Where the bill is drawn payable elsewhere than at the his personal representative
residence or place of business of the drawee.(Sec. 143)
Where the drawee has been adjudged a bankrupt or insolvent
Note: It is not necessary to present a check for acceptance or has made an assignment for the benefit of creditors –
because it is not one of those required under Sec. 143. presentment may be made to him or to his trustee or
assignee.
When presentment for acceptance excused: Presentment for
acceptance is excused and a bill may be treated as EFFECT OF FAILURE TO MAKE PRESENTMENT
dishonored by non-acceptance in either of the following (Sec. 144)
cases: Failure to make presentment discharges the drawer and all
(1) Where the drawee is dead, or has absconded, or is a indorsers (Sec. 144).
fictitious person or a person not having capacity to
contract by bill. DISHONOR BY NON-ACCEPTANCE
(2) Where, after the exercise of reasonable diligence, When dishonored by non-acceptance: A bill is dishonored by
presentment cannot be made. non-acceptance:
(3) Where, although presentment has been irregular, (1) When it is duly presented for acceptance and such an
acceptance has been refused on some other ground. (Sec. acceptance as is prescribed by this Act is refused or
148) cannot be obtained; or

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(2) When presentment for acceptance is excused and the bill loan falls due and which understanding is evidenced by
is not accepted. (Sec. 149) writing the word “memorandum”, “memo” or “mem” on
Duty of holder: Where a bill is duly presented for acceptance the check.
and is not accepted within the prescribed time, the person
presenting it must treat the bill as dishonored by non- (4) Certified Check – An agreement whereby the bank
acceptance or he loses the right of recourse against the against whom a check is drawn undertakes to pay it at
drawer and indorsers. (Sec. 150) any future time when presented for payment (Sec. 187)
(a) Certification is equivalent to acceptance. (Sec. 187)
Effect: When a bill is dishonored by non-acceptance, an (b) Where the holder of a check procures it to be accepted
immediate right of recourse against the drawer and indorsers or certified, the drawer and all indorsers are discharged
accrues to the holder and no presentment for payment is from liability. (Sec. 188)
necessary. (Sec. 151) (c) A check of itself does not operate as an assignment of
any part of the funds to the credit of the drawer with the
bank, and the bank is not liable to the holder unless and
until it accepts or certifies the check. (Sec. 189)

Promissory Notes (5) Crossed Check – The NIL is silent with respect to crossed
checks, although the Code of Commerce makes
A promissory note is: reference to such instruments.
(1) An unconditional promise in writing
(2) Made by one person to another Article 541 of the Code of Commerce states: “The maker or
(3) Signed by the maker any legal holder of a check shall be entitled to indicate
(4) Engaging to pay on demand, or at a fixed or therein that it be paid to a certain banker or institution,
determinable future time which he shall do by writing across the face the name of
(5) A sum certain in money to order or to bearer said banker or institution, or only the words ‛and company.”
(6) Where a note is drawn to the maker's own order, it is not
complete until indorsed by him. (Sec. 184) Under usual practice, crossing a check is done by placing
two parallel lines diagonally on the left top portion of the
There are originally 2 parties in a promissory note: check (State Investment House vs. IAC, 1989).
(1) Maker – party who executes the written promise to pay.
(2) Payee – party in whose favor the promissory note is Types: Special and General
made payable. The crossing may be special wherein between the two
parallel lines is written the name of a bank or a business
institution, in which case the drawee should pay only with
the intervention of that bank or company, or crossing may
Checks be general wherein between two parallel diagonal lines are
written the words "and Co." or none at all as in the case at
bar, in which case the drawee should not encash the same
DEFINITION but merely accept the same for deposit (supra).
A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the Effects:
provisions of this Act applicable to a bill of exchange (1) The check may not be encashed; it may only be
payable on demand apply to a check. (Sec. 185) deposited with the bank;
(2) The check may be negotiated only once to a person who
KINDS has an account with the bank; and
(1) Cashier’s Check – One drawn by the cashier of a bank, in (3) It serves as a warning to a holder that the check has
the name of the bank against the bank itself payable to been issued for a definite purpose. (Bataan Cigar vs. CA,
a third person. It is a primary obligation of the issuing 1994)
bank and accepted in advance upon issuance (Tan vs.
CA 1994). PRESENTMENT FOR PAYMENT
A check of itself does not operate as an assignment of any
(2) Manager’s Check – A check drawn by the manager of a part of the funds to the credit of the drawer with the bank.
bank in the name of the bank itself payable to a third The bank is not liable to the holder, unless and until it
person. It is similar to the cashier’s check as to the effect accepts or certifies the check. (Sec. 189)
and use.
TIME
In issuing a manager’s check, the bank assumed the When to present? A check must be presented for payment
liabilities of the acceptor under Sec. 62, NIL (Equitable within reasonable time after its issue.
PCI Bank v. Ong (2006)
EFFECT OF DELAY
(3) Memorandum Check – A check given by a borrower to a The drawer will be discharged from liability thereon to the
lender for the amount of a short loan, with the extent of the loss caused by the delay. (Sec. 186)
understanding that it is not to be presented at the bank,
but will be redeemed by the maker himself when the
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Certification of checks: An agreement whereby the bank

against whom a check is drawn, undertakes to pay it at any
future time when presented for payment

Effects:
(1) Equivalent to acceptance (Sec. 187) and is the operative
act that makes banks liable
(2) Assignment of the funds of the drawer in the hands of
the drawee (Sec. 189)
(3) If obtained by the holder, discharges the persons
secondarily liable thereon (Sec. 188)

Refusal of drawee bank to certify: The holder has no action

against the bank but he has a right of action against the
drawer. The drawer in turn has right of action against the
bank based on the original contact of deposit between
them.

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