Negotiable Instruments Law Case Doctrines

Negotiable Instruments Law Case Doctrines
Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque
NEGOTIABLE INSTRUMENTS LAW

(ACT NO. 2031)
PRELIMINARY CONSIDERATIONS AND
GENERAL PRINCIPLES
Negotiable Instruments - written contracts for the payment of money; by its
form, intended as a 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.
History of the Negotiable Instruments Law
Cases:
Philippine National bank v. Zulueta, G.R. No. L-7271, August 30, 1957
Held: Our Negotiable Instruments Law, practically copied the American Uniform
Negotiable Instruments Law, which in turn was based largely on the Bills of
Exchange Act of England of 1882.
Applicability of the Negotiable Instruments Law
Cases:
Metropolitan Bank & Trust Company v. Court of Appeals, et.al, G.R. No. L88866, July 31, 1962 (5 SCRA 745, 747)
The provisions of the Negotiable Instruments Law are not applicable if the
instrument involved is not negotiabe.
Kauffman v. Philippine National Bank, G.R. No. 16454, September 21, 1921
Before the Negotiable Instruments Law can come into operation there must be a
document in existence of the character described in section 1 of that Law; and no
rights properly speaking arise in respect to said instrument until it is delivered.
Characteristics of Negotiable Instruments:
a. Negotiability - right of transferee to hold the instrument and collect the
sum due
b. Accumulation of secondary contracts - instrument is negotiated from
person to person

Functions of Negotiable Instruments
a. They are substitute for money;
b. They serve as credit instruments.
*Negotiable Instruments are not mere contracts but are substitutes for money.
Difference between
Instruments:
Negotiable
Instruments
Negotiable Instruments
from
Non-Negotiable
Non-negotiable Instruments
Contains all the requisites of Sec. 1 of Does not contain all the requisites of
the NIL
Sec. 1 of the NIL
Transferred by negotiation
Transferred by assignment
Holder in due course may have better Transferee acquires rights only of his
rights than transferor
transferor
Prior parties warrant payment
Transferee has right of
against intermediate parties
Prior parties merely warrant legality of

title
recourse Transferee has no right of recourse
Promissory Note - unconditional promise to pay in writing made by one person

to anther, signed by the maker, engaging to pay on demand or a fixed
determinable future time a sum certain in money to order or bearer. When the
note is drawn to makers own order, it is not complete until indorse by him. (Sec.
184 NIL)
Parties:
a. Maker
b. Payee
Cases:
Consolidated Plywood, Inc., et.al. v. IFC Leasing and Acceptance
Corporation [G.R. No. 72593. April 30, 1987.]
Facts: The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One
Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest there after at the rate of
2

twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
Thousand Eighty One Pesos & 71/100 (P249,081.71) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand
Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos
(P5,000.00) for expenses of litigation. The petitioners likewise prayed for such
other and further relief as would be just under the premises.
Trial Court rendered the decision:
"WHEREFORE, judgment is hereby rendered:
1. Ordering defendants to pay jointly and severally in their official
and personal capacities the principal sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED NINETY
EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of
ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED
EIGHTEEN PESOS & 86/100 (P151,618.86) as of August 15,
1979 and accruing interest thereafter at the rate of 12% per
annum;
"2) Ordering defendants to pay jointly and severally attorney's
fees equivalent to ten percent (10%) of the principal and to pay
the costs of the suit.
"Defendants' counterclaim is disallowed."
Petitioners filed a Motion for Reconsideration but it was denied. Thus, they
appealed to the Intermediate Appellate Court.
The following errors were assigned:
THAT THE LOWER COURT ERRED IN FINDING THAT THE
SELLER ATLANTIC GULF AND PACIFIC COMPANY OF
MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS
CLAIM OF WARRANTY.
THAT THE LOWER COURT ERRED IN FINDING THAT
PLAINTIFF-APPELLEE IS A HOLDER IN DUE COURSE OF
THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS
HOLDER THEREOF IN DUE COURSE.
The Appellate Court affirmed the decision of the lower court in toto; hence, this
petition.
3

The grounds of the petition were:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY
NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER
THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER
NOR TO BEARER.
II.
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE:
AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NONNEGOTIABLE INSTRUMENT AND THE TRANSFER OF
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT
ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST
THE
SELLER-ASSIGNOR,
INDUSTRIAL
PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE
PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A)THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;
B)IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM
THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY
THE
SELLER-ASSIGNOR
IN
FAVOR
OF
THE
RESPONDENT DOES NOT CHANGE THE NATURE OF
THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR
USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN
AFFIXED THEREON OR CANCELLED.

Issue: Whether or not the promissory note in question is a negotiable instrument
so as to bar completely all the available defenses of the petitioner against the
respondent-assignee.
Held: No, the Promissory note in question is not a negotiable instrument.
Paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer," it cannot be denied that
the promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiable must contain the so called
'words of negotiability' i.e., must be payable to 'order' or 'bearer'. These words
serve as an expression of consent that the instrument may be transferred. This
consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one . . ..
Section 8 of the Negotiable Instrument Law provides:
"When instrument is 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 . . .
"These are the only two ways by which an instrument may be made
payable to order. There must always be a specified person named
in the instrument. It means that the bill or note is to be paid to the
person designated in the instrument or to any person to whom he
has indorsed and delivered the same. Without the words 'or order'
or 'to the order of,' the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument, but will merely 'step into
the shoes' of the person designated in the instrument and will thus
be open to all defenses available against the latter."
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor,
Industrial Products Marketing.
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 is

addressed to pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer. (Sec. 126 NIL)
Parties:
a. Drawer
b. Payee
c. Draweree/ acceptor
Check - bill of exchange drawn on a bank and payable on demand. (Sec. 185
NIL)
Difference between Promissory Note and Bill of Exchange
Promissory Note
Bill of Exchange
Unconditional promise
Involves 2 parties
Maker primarily liable
Only 1 presentment - for payment
Unconditional order
Involves 3 parties
Drawer only secondarily liable
Generally 2 presentments - for acceptance
and for payment
Distinctions between a Check and Bill of Exchange

CHECK
- always drawn upon a bank or banker
BOE
- may or may not be drawn against a
bank
- always payable on demand
- may be payable on demand or at a
fixed or determinable future time
- not necessary that it be presented for - necessary that it be presented for
acceptance
acceptance
- drawn on a deposit
- not drawn on a deposit
- the death of a drawer of a check, with - the death of the drawer of the
knowledge by the banks, revokes the ordinary bill of exchange does not
authority of the banker pay
- must be presented for payment within - may be presented for payment within
a reasonable time after its issue (6 a reasonable time after its last
months)
negotiation.
Distinctions between a Promissory Note and Check
PN
- there are two (2) parties, the maker
and the payee
- may be drawn against any person,
not necessarily a bank
CHECK
- there are three (3) parties, the drawer,
the drawee bank and the payee
- always drawn against a bank

- may be payable on demand or at a -always payable on demand
fixed or determinable future time
- a promise to pay
- an order to pay
Other Forms of Negotiable Instruments:
a.
b.
c.
d.
e.
Certificates of deposits
Trade acceptances
Bonds in the nature of promissory notes
Drafts which are bills of exchange drawn by 1 bank to another
Letters of credit
Trust Receipt - a security transaction intended to aid in the financing of

importers and retailers who do not have sufficient funds to finance their
transaction and acquire credit except to use as collateral the merchandise
imported
Section 1. Form of Negotiable Instruments. an instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
Requisites of a Negotiable Note (PN): (SUDO)
It must:
a. be in writing signed by the drawer
b. contains an unconditional promise or order to pay a sum certain in money
c. be payable on demand or at a fixed determinable future time
d. be payable to order or to bearer (Sec. 1 NIL)
Case Doctrines:
Pacifica Jimenez vs. Dr. Jose Bucoy, G.R. No. L-10221, February 28, 1958
Facts: In this intestate of Luther Young and Pacita Young who died in 1954 and
1952 respectively, Pacifica Jimenez presented for payment four promissory
notes signed by Pacita for different amounts totalling twenty-one thousand pesos
(P21,000).

Acknowledging receipt by Pacita during the Japanese occupation, in the currency
then prevailing, the administrator manifested willingness to pay provided
adjustment of the sums be made in line with the Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance
with the notes. Applying doctrines of this Court on the matter, the Hon. Primitivo
L. Gonzales, Judge, held that the notes should be paid in the currency prevailing
after the war, and that consequently plaintiff was entitled to recover P21,000 plus
attorneys fees for the sum of P2,000.
Issue: When is an acknowledgement of debt becomes a promise to pay?
Held: An acknowledgment of a debt becomes a promise to pay by the addition of
words implying a promise of payment, such as, "payable," "payable on a given
day," "payable on demand".
"To constitute a good promissory note, no precise words of contract are
necessary, provided they amount, in legal effect, to a promise to pay. In other
words, if over and above the mere acknowledgment of the debt there may be
collected from the words used a promise to pay it, the instrument may be
regarded as a promissory note.
Juanita Salas vs. Honorable Court of Appeals and Filinvest Finance and
Leasing Corporation, G.R. No. 76788, January 22, 1990
Facts: Records disclose that on February 6, 1980, Juanita Salas (hereinafter
referred to as petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory
note. This note was subsequently endorsed to Filinvest Finance & Leasing
Corporation (hereinafter referred to as private respondent), which financed the
purchase.
Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to
a discrepancy in the engine and chassis numbers of the vehicle delivered to her
and those indicated in the sales invoice, certificate of registration and deed of
chattel mortgage, which fact she discovered when the vehicle figured in an
accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No. 5915 for
a sum of money against petitioner before the Regional Trial Court of San
Fernando, Pampanga.
Ruling of the Trial Court: The counterclaim of the defendant is dismissed with
costs against defendant. Hence, the case was elevated to the Court of Appeals.

The Appellate Court ruled: "WHEREFORE, considering the foregoing, the
appealed decision is hereby modified ordering the defendant to pay the plaintiff
the sum of P54,908.30 at 14% per annum from October 2, 1980 until full
payment. The decision is AFFIRMED in all other respects. With costs to
defendant."
Petitioners Motion for Reconsideration was denied; hence, this case.
Held: The questioned promissory note shows that it is a negotiable instrument,
having complied with the requisites under the law as follows: [a] it is in writing
and signed by the maker Juanita Salas; [b] it contains an unconditional promise
to pay the amount of P58,138.20; [c] it is payable at a fixed or determinable
future time which is "P1,614.95 monthly for 36 months due and payable on the
21st day of each month starting March 21, 1980 thru and inclusive of Feb. 21,
1983;" [d] it is payable to Violago Motor Sales Corporation, or order and as such,
[e] the drawee is named or indicated with certainty.
Requisites of a Negotiable Bill (BOE): (SUDOC)
It must:
a. Be in writing signed by the drawer
b. Contains an unconditional promise or order to pay a sum certain in money
c. Be payable on demand or at a fixed determinable future time
d. Be payable to order or to bearer
e. The drawee must be named or otherwise indicated with reasonable
certainty (Sec. 1 NIL)
Case Doctrines:
Caltex Philippines, Inc. v. Court of Appeals, et.al, G.R. No. 97753, August
10, 1992
On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument
itself. In the construction of a bill or note, the intention of the parties is to control,
if it can be legally ascertained. While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be added
to it or substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words they have used.
What the parties meant must be determined by what they said.
*The factors that affect the determination of negotiability of instruments are:

1) The whole of the instrument shall be considered;
2) Only what appears on the face of the instrument shall be considered;
3) The provisions of the NIL, especially Section 1 thereof, shall be applied.
Philippine Bank of Commerce v. Jose Aruego, 102 SCRA 530 [January 31,
1981])
Facts: Respondent Aruego signed drafts as drawee-acceptor but later claimed
that he was not liable under the drafts. One of the arguments that he raised was
that the drafts signed by him were not really bills of exchange but mere pieces of
evidence of indebtedness because payments were made before acceptance.
Issue: Was his contention correct?
Held: No. The court ruled that, Where an inspection of the drafts accepted by
the defendant shows that nowhere has he disclosed that he was signing as a
representative of the Philippine Education Foundation Company, and he merely
signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO", he is
personally liable for the drafts accepted by him and he may not interpose as a
defense that he signed the drafts merely as an agent of the Philippines Education
Foundation Company of which he is president.
As to the nature of the acceptance, the Supreme Court further held, As long as a
commercial paper conforms with the definition of a bill of exchange, that paper is
considered a bill of exchange. The nature of acceptance is important only in
determination of whether a commercial paper is a bill of exchange or not. Thus,
in the case at bar, defendant's contentions that the drafts signed by him were not
really bills of exchange but mere pieces of evidence of indebtedness because
payments were made before acceptance, is not meritorious.
Section 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 attorneys fee, in case payment shall
not be made at maturity
The common feature of the provisions specified in Section 2 is the fact that the
principal amount to be paid by the maker or drawee is unaffected. There is an
absolute obligation to pay a sum certain in money although certain amounts may
be added, as in the case where interest or attorneys fees will be paid. Indeed,
10

the promise to do an act or to pay another item in addition to the payment of
money that will render the note not negotiable must be a promise that conflicts
with some or one of the essential characteristics of a negotiable instrument
(Finley v. Smith, 165 Ky. 445, 177 S.W. 262 [1915]).
Section 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.
Section 3 of the NIL deals with the requirement, under Section 1(b) of the NIL,
that the promise or order stated in the instrument must be unconditional.
Furthermore, Section 3 further provides that a statement of the transaction that
gave rise to the obligation covered by the note or the bill does not destroy the
negotiability of the instrument. However, reference to another transaction or
document must be descriptive rather than restrictive.
In other words, the instrument must only give information that it was issued in
connection with a particular transaction or document. It must not make the order
or promise dependent on or burdened by the other transaction.
If the instrument is restricted by terms and conditions of another transaction,
contract or agreement, by incorporating the agreement or a portion thereof as
part of the other, the said instrument is non-negotiable. Consequently, a note
that is subject to the provisions of another contract or document is not
negotiable. A note is also negotiable under the same principle if the amount is
payable as set forth in that certain agreement dated March 12, 2004
(Salomonsky v. Kelly, 349 S.E. 2d 358 [1986]).
Moreover, the negotiability of the instrument is affected if what is specified is the
account or fund out of which payment is to be made. Hence, if the instrument
states, Pay to the order of Juan de la Cruz P10,000.00 out of my account with
you, it is not negotiable because the instrument is conditional. The obligation to
pay is subject to the condition that the funds in the account are sufficient. The
order to pay is not absolute because no payment will be made if the amount in
the account is less than P10,000.00.
Cases:
Metropolitan Bank & Trust Company v. Court of Appeals
G.R. No. 88866, February 18, 1991
11

194 SCRA 169
Facts: Person A deposited Treasury Warrants in Golden Savings (respondent).
Golden Savings deposited the Treasury Warrants in Metrobank and the warrants
were sent for clearing. Golden Savings made repeated inquiries if the warrants
had been cleared. Exasperated, Metrobank allowed Golden Savings to withdraw
from the warrants proceeds before clearance. Afterwards, Person A withdrew
the cleared warrants proceeds. It turns out however the warrants had been
dishonored and Metrobank demanded a refund from Golden Savings. Golden
Savings refused.
Issue: Are the Treasury Warrants negotiable instruments?
Held: No. The warrant have stamped on their face the word non-negotiable and
is payable from a particular fund, namely Fund 501. The promise to pay is
conditional on the availability of funds in Fund 501. The Treasury Warrants arent
negotiable instruments and the Negotiable Instruments Law doesnt apply to it.
Abubakar vs Auditor General
G.R. No. L-1405, July 31, 1948, 31 Phil. 359
Facts: The Auditor General refused to authorize payment of a Treasury warrant
which was issued in favor of a 3rd person but is now in Abubakars hands.
Issue: Is the Treasury warrant a negotiable instrument?
Held: No. The Treasury warrant isnt a negotiable instrument. The Treasury
warrants indicate on its face payable from the appropriation for food
administration meaning there is a particular fund out of which payment must be
made. The Treasury warrant isnt an unconditional promise to pay.
Philippine Education Company, Inc. v. Mauricio A. Soriano, et.al
G.R. No. L-22405, June 30, 1971; 39 SCRA 587
Issue: Is a postal money order negotiable?
Held: No, a postal money order is not negotiable. It does not contain an
unconditional promise or order to pay required in Section 1(b) of the NIL.
Regulations and restrictions are imposed on postal money orders, which are
inconsistent with the character of negotiable instruments.
Section 4. Determinable future time; what constitutes. An instrument is
payable at a determinable future time, within the meaning of this Act, which
expressed to be payable:
(a) At a fixed period after date or sight; or
12

(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.
ACCELERATION
CLAUSE
INSECURITY
CLAUSE
EXTENSION
CLAUSE
A clause that renders

whole debt due and
demandable upon
failure of obligor to
comply with certain
conditions.
Provisions in the
contract which allows
the holder to
accelerate payment if
he deems himself
insecure.
Clauses in the face of

the instrument that
extend the maturity
dates;
a. At the option of the
holder;
b. Extension to a
further definite time at
the option of the
maker or acceptor
c. Automa tically
upon or after a
specified act or event.
Instrument is still
negotiable
Instrument is
rendered nonnegotiable because
the holders whim
and caprice prevail
without the fault and
control of the maker
Instrument is still
negotiable (Notes and
Cases on Banks,
Negotiable
Instruments and other
Commercial
Documents, Timoteo
B. Aquino)
EXTENSION CLAUSE
EXTENSION UNDER SEC. 120(f)
Stated on the face of the

instrument
Agreement binding the holder;

a. To extend the time of payment or
b. Postpone the holders right to
enforce the instrument
13

Parties are bound because
they took the instrument
knowing that there is an
extension clause
Binds the person secondarily

liable (and therefore cannot be
discharged from liabilities if:
a. He consents or
b. Right of recourse is expressly
reserved. (Notes and Cases on
Banks, Negotiable Instruments and
other Commercial Documents,
Timoteo B. Aquino)
PAYABLE ON DEMAND
PAYABLE AT A FIXED OR
DETERMINABLE FUTURE TIME
a. Where expressed to be
payable on demand, at
sight or on presentation;
b. Where no period of
payment is stated;
c.
Where
issued,
accepted, or indorsed after
maturity (only as between
immediate parties). (Sec.
7)
a. At a fixed period after date or

sight;
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 is uncertain.
(Sec. 4)
Section 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.
14

A statement of the transaction that gave rise to the obligation does not make the
instrument non-negotiable. In the same manner, a statement in the instrument
that the same is secured by a collateral does not make the promise or order
conditional.
Apparently, Section 5(a) even declares that the instrument is still negotiable even
if it authorizes the sale of collateral securities in case of default.
Thus, an instrument is still negotiable even if it states that it is secured by a
chattel mortgage which can be foreclosed pursuant to pertinent law if the maker
defaults in payment of his obligation.
ADDITONAL PROVISONS NOT AFFECTING NEGOTIABILITY
GENERAL RULE: If some other act is required other than or in

addition to payment of money, the instrument is not negotiable.
(Sec. 5)
EXCEPTIONS:
a. Authorizes the sale of collateral securities on default;
b. Authorizes confession of judgment on default;
c. Waives the benefit of law intended to protect the debtor; or
d. Allows the creditor the option to require something in lieu of
money.
Notes on Section 5:
1. Limitation on the provision: it cannot require something illegal.
2. There are two kinds of judgments by confession:
a. cognovit actionem
b. relicta verificatione
c. Confessions of judgment in the Philippines are void as against
public policy.
d. If the choice lies with the debtor, the instrument is rendered nonnegotiable.
SECTION 6.Omission; Seal; Particular Money. The validity and
negotiable character of an instrument are not affected by the fact that
a) It is not dated; or
b) Does not specify the value given, or that any value has been
given therefor; or
15

c) Does not specify the place where it is drawn or the place
where it is payable; or
d) Bears a seal; or
e) Designates a particular kind of current money in which
payment is to be made.
f) But nothing in this section shall alter or repeal any statute requiring
in certain cases the nature of the consideration to be stated in the
instrument.
OMISSIONS & PROVISIONS THAT DO NOT AFFECT
NEGOTIABILITY
a. It is not dated;
b. It does not specify the value given or that any value has been
given;
c. It does not specify the place where it is drawn or where it is
payable;
d. It bears a seal;
e. It designates a particular kind of current money in which payment is
to be made. (Sec. 6)
Section 5 versus Section 6

OMISSIONS &
PROVISIONS THAT DO
NOT AFFECT
NEGOTIABILITY
ADDITONAL PROVISONS NOT

AFFECTING NEGOTIABILITY
16

(a) It is not dated;

(b) It does not specify
the value given or
that any
(c) value has been

given;
(d) It does not specify
the place where it is
drawn or where it is
payable;
(e) It bears a seal;
(f) It designates a
particular kind of
current money in
which payment is to
be made. (Sec. 6)
GENERAL RULE: If some other act is

required other than or in addition to
payment of money, the instrument is not
negotiable. (Sec. 5)
EXCEPTIONS:
e. Authorizes the sale of collateral
securities on default;
f. Authorizes confession of judgment on
default;
g. Waives the benefit of law intended to
protect the debtor; or
h. Allows the creditor the option to
require something in lieu of money.
Sec. 7 An instrument is payable on demand

(a)
(b)
Where it is expressed to be payable on demand, or at sight, or on

presentation; or
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.
Section 8. When payable to order. The instrument is payable to order
where it is drawn payable to the order of a specific 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) Two or more payees jointly; or
(d) One or some of several payees; or
(e) 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.
17

There are two (2) views regarding the nature of instruments that it is payable to
the order of bearer.
1. Prof. Simplicio Guevarra believed that the same is a bearer instrument. He
explains that an order instrument is one that is payable to the order of a
specified persons or payable to a specified person or his order. The
view is that there must always be a specified person named in the
instrument and the instrument must always be paid to the person
designated in the instrument or to any person to whom he has indorsed
and delivered the same (Salas vs. CA, et.al, G.R. No. 76788, January
22, 1980).
2. The other view is that the instrument that is payable to the order of
bearer is an order instrument. Writers citing the ruling in American
National Bank vs. Joe Kerley often support this view. However, reliance
thereon without fully explaining the rationale behind the ruling may tend to
mislead those who do not know the background thereof. The ruling
thereon tat the instrument involved therein is considered an order
instrument was made because the intent of the makers to make it an
order instrument was apparent on the face of the instrument. The court
did not foreclose the possibility that although the instrument is payable to
the order of bearer, it may still be considered a bearer instrument
whenever the same intent is apparent on the face of the instrument.
3. The instrument involved in the above mentioned case was considered an
order instrument because the intent of the maker to make it so was
apparent.
4. Section 8 of the Negotiable Instruments Law must be read in conjunction
with Section 30 thereof which provides that 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. Clearly, an
instrument payable to order has two requisites namely: (a) it must first be
indorsed by the holder; (b) it must be delivered.
Case Doctrines:
Ang Tek Lian v. Court of Appeals
G.R. No. L-2516, September 25, 1950, 87 Phil. 383
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the
order of "cash" is a check payable to bearer, and the bank may pay it to the
person presenting it for payment without the drawer's indorsement.
18

A check payable to the order of cash is a bearer instrument. Bacal vs. National
City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. Da
Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts
Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App.,
1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga.
App., 465; 87 S. E., 713.
"Where a check is made payable to the order of 'cash', the word cash 'does not
purport to be the name of any person', and hence the instrument is payable to
bearer. The drawee bank need not obtain any indorsement of the check, but may
pay it to the person presenting it without any indorsement. . . ." (Zollmann, Banks
and Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it
has the right to demand identification and/or assurance against possible
complications, for instance, (a) forgery of drawer's signature, (b) loss of the
check by the rightful owner, (c) raising of the amount payable, etc. The bank may
therefore require, for its protection, that the indorsement of the drawer or of
some other person known to it be obtained. But where the Bank is satisfied of
the identity and/or the economic standing of the bearer who tenders the check for
collection, it will pay the instrument without further question; and it would incur no
liability to the drawer in thus acting.
Payable to Bearer
Section 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 to 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.
Note: An instrument originally payable to bearer can be negotiated by mere
delivery even if it is indorsed especially. If it is originally a BEARER instrument, it
will always be a BEARER instrument.
As opposed to an original order instrument becoming payable to bearer, if the
same is indorsed specially, it can NO LONGER be negotiated further by mere
delivery, it has to be indorsed.
A check that is payable to the order of cash is payable to bearer. Reason: The
name of the payee does not purport to be the name of any person. (Ang Tek Lian
vs. CA, 87 Phil. 383)
19

III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17)
a. Discrepancy between the amount in figures and that in words the words
prevail, but if the words are ambiguous, reference will be made to the figures to
fix the amount.
b. Payment for interest is provided for interest runs from the date of the
instrument, if undated, from issue thereof.
c. Instrument undated consider date of issue.
d. Conflict between written and printed provisions written provisions prevail.
i. When 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;
j. If one signs without indicating in what capacity he has affixed his signature, he
is considered an indorser.
k. If two or more persons sign We promise to pay, their liability is joint (each
liable for his part) but if they sign I promise to pay, the liability is solidary (each
can be compelled to comply with the entire obligation). (Sec. 17)
IV. TRANSFER AND NEGOTIATION
INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.)
a. Issue
b. Negotiation
c. Presentment for acceptance, in certain kinds of Bills of Exchange
d. Acceptance
l. Dishonor by non-acceptance
m.Presentment for payment
n. Dishonor by non-payment
o. Notice of dishonor
p. Discharge
MODES OF TRANSFER
a. Negotiation the transfer of the instrument from one person to another so
as to constitute the transferee as holder thereof. (Sec.30)
b. Assignment The transferee does not become a holder and he merely
steps into the shoes of the transferor. Any defense available against the
transferor is available against the transferee. (Notes and Cases on Banks,
Negotiable Instruments and other Commercial Documents, Timoteo B.
Aquino)
? Assignment may be effected whether the instrument is negotiable or nonnegotiable. (Sesbreo vs. CA, 222 SCRA 466)
HOW NEGOTIATION TAKES PLACE
20

a. Issuance first delivery of the instrument complete in form to a person who
takes it as a holder. (Sec. 191)
FSteps:
1. Mechanical act of writing the instrument completely and in accordance
with the requirements of Section 1; and
2. The delivery of the complete instrument by the maker or drawer to the
payee or holder with the intention of giving effect to it. (The Law on
Negotiable Instruments with Documents of Title, Hector de Leon, 2000
ed.)
c. Subsequent Negotiation
1. If payable to bearer, a negotiable instrument may be negotiated by
mere delivery.
2. If payable to order, a NI may be negotiated by indorsement completed
by delivery
Note: In both cases, delivery must be intended to give effect to the transfer of
instrument. (Development Bank vs. Sima Wei, 219 SCRA 736)
d. Incomplete negotiation of order instrument
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 he also acquires 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
made. (Sec. 49)
e. Indorsement
Legal transaction effected by the affixing one's signature at the:
a. Back of the instrument or
b. Upon a paper (allonge) 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 legal title to the
paper
transferred but likewise enters into an implied guaranty that the instrument
will be duly paid (Sec. 31)
GENERAL RULE: Indorsement must be of the entire instrument.

EXCEPTION: Where instrument has been paid in part, it may be indorsed as to
the residue. (Sec. 32)
F Kinds of Indorsement:
21

A. SPECIAL Specifies the person to whom or to whose order, the
instrument is to be payable (Sec. 34)
B. BLANK Specifies no indorsee:
1. Instrument becomes payable to bearer and may be negotiated by delivery
(Sec. 34)
2. May be converted to special indorsement by writing over the signature of
indorser in blank any contract consistent with character of indorsement
(Sec. 35)
C. ABSOLUTE One by which indorser binds himself to pay:
1. Upon no other condition than failure of prior parties to do so;
2. Upon due notice to him of such failure.
D. CONDITIONAL Right of the indorsee is made to depend on the
happening of a contingent event. Party required to pay may disregard the
conditions. (Sec. 39)
E. RESTRICTIVE An indorsement is restrictive, when it either:
a. Prohibits 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 mere absence of words implying power to negotiate does not
make an indorsement restrictive. (Sec. 36)
F. QUALIFIED Constitutes the indorser a mere assignor of the title to the
instrument. (Sec. 38)
a. It is made by adding to the indoser's signature words like "sans
recourse, without recourse", "indorser not holder", "at the
indorser's own risk", etc.
G. JOINT Indorsement payable to 2 or more persons (Sec. 41)
H. IRREGULAR A person who, not otherwise a party to an instrument,
places thereon his signature in blank before delivery (Sec. 64)
Other rules on indorsement;
1. Negotiation is deemed prima facie to have been effected before the
instrument is overdue except if the indorsement bears a date after the
maturity of the instrument. (Sec. 45)
22

2. Presumed to have been made at the place where the instrument is dated
except when the place is specified. (Sec. 46)
3. Where an instrument is payable to the order of 2 or more payees who are
not partners, all must indorse unless authority is given to one. (Sec. 41)
4. Where a person is under obligation to indorse in a representative capacity,
he may indorse in such terms as to negative personal liability. (Sec. 44)
RENEGOTIATION TO PRIOR PARTIES (Sec. 50)
Where an instrument is negotiated back to a prior party, such party may reissue
and further negotiate the same. But he is not entitled to enforce payment thereof
against any intervening party to whom he was personally liable. Reason: To
avoid circuitousness of suits.
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. (Sec. 48)
CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT TRANSFER
Every NI is deemed prima facie to have been issued for a valuable consideration.
Every person whose signature appears thereon is presumed to have become a
party thereto for value. (Sec. 24)
What constitutes value:
a. An antecedent or pre-existing debt
b. Value previously given
c. Lien arising from contract or by operation of law. (Sec. 27)
HOLDERS
HOLDER - A payee or endorsee of a bill or note who is in possession of it
or the bearer thereof. (Sec. 191)
RIGHTS OF HOLDERS IN GENERAL (Section 51 of the NIL)
Section 51. Right of holder to sue payment. The holder of a negotiable
instrument may sue thereon in his own name; and payment to him in due
course discharges the instrument.
a. May sue thereon in his own name
23

b. Payment to him in due course discharges the instrument
c. The only disadvantage of a holder who is not a holder in due course is that
the negotiable instrument is subject to defenses as if it were nonnegotiable. (Chan Wan vs. Tan Kim, 109 Phil. 706)
Case:
Atrium Management Corporation v. Court of Appeals, et.al
G.R. No. 109491 (2001)
Issue: Whether Atrium was not a holder in due course and for value.
Held: No. In the instant case, the checks were crossed checks and specifically
indorsed for deposit to payee's account only. From the beginning, Atrium was
aware of the fact that the checks were all for deposit only to payee's account,
meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in
due course.
Furthermore, the Court said: However, it does not follow as a legal proposition
that simply because petitioner Atrium was not a holder in due course for having
taken the instruments in question with notice that the same was for deposit only
to the account of payee E.T. Henry that it was altogether precluded from
recovering on the instrument. The Negotiable Instruments Law does not provide
that a holder not in due course can not recover on the instrument.
Lastly, Court ruled, The disadvantage of Atrium in not being a holder in due
course is that the negotiable instrument is subject to defenses as if it were nonnegotiable. One such defense is absence or failure of consideration.
Holder In Due Course (HDC)
A holder who has taken the instrument under the following conditions:
KEY: C O V I
Section 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) Instrument is complete and regular upon its face;

(b) Became a holder before it was overdue and without notice that it had
been previously dishonored;
(c) For value and in good faith; and
(d) At the time he took it, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
24

Notes:
1. It is indispensable that a person who claims to be a holder in due course
must be a holder. If he is not a holder, he can never be a holder in due
course. Hence, a possessor of a check payable to the order of a different
person is not a holder in due course if the said payee did not endorse it to
him. The holding suffers from the infirmity of not having been properly
negotiated (Mesina, et.al. vs. The Hon. Court of Appeals, et.al, G.R.
No. L-70145; November 13, 1986).
Case:
Mesina et.al. vs. IAC
G.R. No. 70145; November 13, 1986
Facts: Jose Go purchased from Associated Bank a cashier's check for
P800,000.00. Unfortunately, he left said check on the top of the desk of the bank
manager when he left the bank. The bank manager entrusted the check for
safekeeping to a bank official, a certain Albert Uy. While Uy went to the men's
room, the check was stolen by his visitor in the person of Alexander Lim. Upon
discovering that the check was lost, Jose Go accomplished a "STOP
PAYMENT" order. Two days later, Associated Bank received the lost check for
clearing from Prudential Bank. After dishonoring the same check twice,
Associated Bank received summons and copy of a complaint for damages of
Marcelo Mesina who was in possession of the lost check and is demanding
payment. Petitioner claims that a cashier's check cannot be countermanded in
the hands of a holder in due course.
ISSUE: Whether or not petitioner can collect on the stolen check on the ground
that he is a holder in due course.
RULING: No. Petitioner failed to substantiate his claim that he is a holder in due
course and for consideration or value as shown by the established facts of the
case. Admittedly, petitioner became the holder of the cashier's check as
endorsed by Alexander Lim who stole the check. He refused to say how and why
it was passed to him. He had therefore notice of the defect of his title over the
check from the start. The holder of a cashier's check who is not a holder in due
course cannot enforce such check against the issuing bank which dishonors the
same.
2. An instrument is not complete and regular on its face if it contains material
alteration. A holder cannot be a holder in due course if he took the
instrument at the time when the amount to be paid appears to have been
altered by increasing the same.
25

3. A holder who takes an overdue instrument is put on inquiry although he is
not actually aware of any existing defense of a prior party. A person taking
an overdue instrument should certainly question why the instrument is still
in circulation even if it is overdue.
4. Notice of any infirmity in the instrument or defect in the title of a prior party
will destroy due course holding. To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the
person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in takin
the instrument amounted to bad faith (Section 56 of the NIL).
Infirmity in the instrument means any irregularity in the instrument. Thus, notice
of an alteration, which is apparent, is notice of an infirmity in the instrument.
Notice of forgery in the maker or the drawers signature is also notice of infirmity
in the instrument.
5. Insofar as good faith is concerned, the Supreme Court ruled that although
good faith on the part of the holder is presumed, such presumption is
destroyed if the payee or indorsee acquired possession of the instrument
under circumstnces that should have put it to inquiry as to the title of the
holder who negotiates the instrument (Vicente R. De Ocampo & Co. v.
Anita Gatchalian, et.al., G.R. No. L-15126, November 30, 1961 (3 SCRA
596).
Rights of a Holder in Due Course
Rights of a HDC (Section 51 in conjunction with Section 57 of the NIL)
1. May sue on the instrument in his own name;
2. May receive payment and if payment is in due course, the instrument is
discharged;
3. Holds the instrument free from any defect of title of prior parties and free from
defenses available to parties among themselves; and
4. May enforce payment of the instrument for the full amount thereof against all
parties liable thereon. (Secs. 51 and 57)
Every holder of a negotiable instrument is deemed prima facie a holder in due
course. However, this presumption arises only in favor of a person who is a
holder as defined in Section 191 of the NIL. The weight of authority sustains the
view that a payee may be a holder in due course. Hence, the presumption that
he is a prima facie holder in due course applies in his favor. (Cely Yang vs.
Court of Appeals, G.R. No. 138074, August 15, 2003)
26

Holder Not In Due Course
F One who became a holder of an instrument without any, some or all of the
requisites under Sec. 52 of the NIL.
F With respect to demand instruments, if it is negotiated an unreasonable
length of time after its issue, the holder is deemed not a holder in due course.
(Sec.53)
GENERAL RULE: Failure to make inquiry is not evidence of bad faith.

EXCEPTIONS:
1. Where a holders title is defective or suspicious that would compel a
reasonable man to investigate, it cannot be stated that the payee acquired
the check without the knowledge of said defect in the holders title and for
this reason the presumption that it is a holder in due course or that it
acquired the instrument in good faith does not exist. (De Ocampo vs.
Gatchalian, 3 SCRA 596)
2. Holder to whom cashiers check is not indorsed in due course and
negotiated for value is not a holder in due course. (Mesina v. IAC)
Rights of a holder not in due course:
1. It can enforce the instrument and sue under it in his own name.
2. Prior parties can avail against him any defense among these prior parties
and prevent the said holder from collecting in whole or in part the amount
stated in the instrument
3. Note: If there are no defenses, the distinction between a HDC and one
who is not a HDC is immaterial. (Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents, Timoteo B. Aquino)
SHELTER RULE
F 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 prior parties to the latter. (Sec. 58)
ACCOMMODATION
F A legal arrangement under which a person called the accommodation party,
lends his name and credit to another called the accommodated party, without
any consideration.
27

Accommodation Party (AP)
F Requisites:
1. The accommodation party must sign as maker, drawer, acceptor, or indorser;
2. He must not receive value therefor; and
3. The purpose is to lend his name or credit. (Sec. 29)
Note: without receiving value therefor, means without receiving value by virtue
of the instrument. (Clark vs. Sellner, 42 Phil. 384)
F Effects: The person to whom the instrument thus executed is subsequently
negotiated has a right of recourse against the accommodation party in spite of
the formers knowledge that no consideration passed between the
accommodation and accommodated parties. (Sec. 29)
F Rights & Legal Position:
1. AP is generally regarded as a surety for the party accommodated;
2. When AP makes payment to holder of the note, he has the right to sue the
accommodated party for reimbursement. (Agro Conglomerates, Inc. vs. CA,
348 SCRA 450)
F Liability: Liable on the instrument to a holder for value notwithstanding such
holder at the time of the taking of the instrument knew him to be only an
accommodation party. Hence, As regards, an AP, the 4th condition, i.e., lack of
notice of infirmity in the instrument or defect in the title of the persons negotiating
it, has no application. (Stelco Marketing Corp. vs. Court of Appeals, 210
SCRA 51)
F Rights of APs as against each other: May demand contribution from his coaccommodation party without first directing his action against the principal debtor
provided:
a. He made the payment by virtue of judicial demand; or
b. The principal debtor is insolvent.
? The relation between an accommodation party is, in effect, one of principal
and surety the accommodation party being the surety. It is a settled rule that a
surety is bound equally and absolutely with the principal and is deemed an
original promissory and debtor from the beginning. The liability is immediate and
direct. (Romeo Garcia vs. Dionisio Llamas, G.R. No. 154127, December 8,
2003)
? Well-entrenched is the rule that the consideration necessary to support a
surety obligation need not pass directly to the surety, a consideration need not
pass directly to the surety, a consideration moving to the principal alone being
28

sufficient. (Spouses Eduardo Evangelista vs. Mercator Finance Corp, G.R.
No. 148864, August 21, 2003)
VII. PARTIES WHO ARE LIABLE
PRIMARY AND SECONDARY
LIABILITY OF PARTIES
Makes the parties liable to pay
the sum certain in money
stated in the instrument.
Conditioned on presentment
and notice of dishonor
(Campos and Lopez-Campos,
Negotiable Instruments Law,
1994 ed.)
WARRANTIES OF PARTIES
Impose no direct obligation to pay in
the absence of breach thereof. In
case of breach, the person who
breached the same may either be
liable or barred from asserting a
particular defense.
Does not require presentment and
notice of dishonor. (Campos and
Lopez-Campos, Negotiable
Instruments Law, 1994 ed.)
1. Primarily Liable (Sec. 60 and 62, NIL)

MAKER
ACCEPTOR OR DRAWEE
A. Engages to pay according to

the tenor of the instrument; and
B. Admits the existence of the
payee and his capacity to
indorse.
A. Engages to pay according to the

tenor of his acceptance;
B. Admits the existence of the drawer,
the genuineness of his signature and
his capacity and authority to draw the
instrument; and
C. Admits the existence of the payee
and his capacity to indorse.
? A bill of itself does not operate as
an assignment of funds in the hands
of the drawee available for the
payment thereof and the drawee is not
liable unless and until he accepts the
same (Sec.127)
29

2. Secondarily Liable (Sec. 61, 64 and 66, NIL)
DRAWER
A. Admits the
existence of the
payee and his
capacity to indorse;
GENERAL
INDORSER
A. Warrants all
subsequent HDC a. That the
instrument is
genuine and in all
respect what it
purports to be
B. Engages that
the instrument will
be accepted or
paid by the party
b. He has good title
primarily liable; and to it;
C. Engages that if
c. All prior parties
the instrument is
had capacity to
dishonored and
contract
proper proceedings
are brought, he will d. The instrument is,
at the time of
pay to the party
entitled to be paid. endorse-ment, valid
and subsisting.
B. Engages that the
instrument will be
accepted or paid, or
both, as the case
may be, according
to its tenor; and
C. If the instrument
is dishonored and
necessary
proceedings on
dishonor be duly
taken, he will pay to
the party entitled to
be paid.
30
IRREGULAR INDORSER
A person, not otherwise a

party to an instrument,
places his signature
thereon in blank before
delivery. (Sec. 64)
A. If instrument payable to
the order of a 3rd person,
he is liable to the payee
and subsequent parties.
B. If instrument payable to
order of maker or drawer
or to bearer, he is liable to
all parties subsequent to
the maker or drawer.
C. If he signs for
accommo-dation of the
payee, he is liable to all
parties subsequent to the
payee.

3. Limited Liability (Sec. 65; Metropol Financing v. Sambok, 120 SCRA
864)
QUALIFIED INDORSER
PERSON NEGOTIATING BY
DELIVERY
Every person negotiating instrument A. Warranties same as those of

by delivery or by a qualified qualified indorsers; and
endorsement warrants that:
B.
Warranties
extend
to
A. Instrument is genuine and in all immediate transferee only.
respects what it purports to be;
B. He has good title to it;
C. All prior parties had capacity to
contract;
D. He has no knowledge of any fact
which would impair the validity of
the instrument or render it
valueless.
PERSON NEGOTIATING BY
MERE DELIVERY OR BY
QUALIFIED INDORSEMENT
GENERAL INDORSER
No secondary liability; but is liable There is secondary liability, and

for breach of warranty
warranties
Warrants that he has no knowledge Warrants that the instrument is,
of any fact which would impair the at the time of his indorsement,
validity of the instrument or render it valid and subsisting
valueless
ORDER OF LIABILITY
F There is no order of liability among the indorsers as against the holder. He is
free to choose to recover from any indorser in case of dishonor of the instrument.
31

(Notes and Cases on Banks, Negotiable Instruments and other Commercial
Documents, Timoteo B. Aquino)
F As respect one another, indorsers are liable prima facie in the order in which
they indorse unless the contrary is proven (Sec.68)
GENERAL RULE: One whose signature does not appear on the instrument
shall not be liable thereon.
EXCEPTIONS:
1. The principal who signs through an agent is liable;
2. The forger is liable;
3. One who indorses in a separate instrument (allonge) or where an
acceptance is written on a separate paper is liable;
4. One who signs his assumed or trade name is liable; and
5. A person negotiating by delivery (as in the case of a bearer instrument) is
liable to his immediate indorsee.
Sources:
Banking Laws and Negotiable Instruments Laws by Timoteo Aquino
Other reviewers posted on the internet
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Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque