Negotiable Instruments Atty. Sebastian Esguerra

NEGOTIABLE INSTRUMENTS LAW
PROFESSOR SEBASTIAN
A REVIEWER BY
LEX SOCIETAS
VERITAS. VNITAS. VIRTVS.
NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN
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which the law was enacted, since it was impossible for the commercial purchaser
in any state to know all the details affecting the negotiability of paper governed by
the laws of all the other states.
INTRODUCTION
ORIGIN
2) To preserve the law as nearly as possible as it then existed.

Agbayani: The Negotiable Instrument Law is a creature of the law merchant,
from which it was imported into England and crystallized in the English common
law. It was codified in that country in 1882 by what is known as the Bills of
Exchange Act.
Sebatian: Rules in Negotiable Instruments Law are universally the same. Thus,
it enables trade with other people anywhere he goes or transacts.
CONCEPT OF NEGOTIABILITY
In the United States there was, prior to the drafting of the Negotiable Instrument
Law, a codification of the law in some states but there was nothing looking
towards a codification for all the states of the Union. The earliest codification for
an individual state is found in the California Code of 1372.
At a conference of commissioners from nineteen states held in 1895, a resolution
was adopted requesting the committee on commercial laws to procure a draft bill
relating to commercial paper based on the Bill of Exchange Act. In 1896, the
draft, as amended, was adopted by the conference and recommended for general
enactment by the state Legislatures.
Campos: The use of negotiable instruments originated from the merchants and
traders of the Middle Ages, more specifically among the Florentine and Venetian
merchants along the Adriatic Sea. The bill of exchange was devised to facilitate
the contract of cambium and to avoid the risks of transporting money.
Sebastian: The Negotiable Instrument Law is a compilation of commercial
practice developed in Europe. It was necessary for traders to come up with a
substitute medium of exchange because trade was flourishing. There was hardly
enough government coins to sustain the production of mint. In those days, bank
notes (or paper bills) were non-existent. Due to scarcity of coins, promissory
notes and bills of exchange came about.
This compilation of rules have evolved from ancient trading practices. In 1882,
UK enacted the Bill of Exchange Act. On or about that time, the US also codified a
verbatim reproduction of the Uniform Negotiable Instrument Law.
The Americans brought the Negotiable Instrument Law to the Philippines which
we copied verbatim. It has not been amended since 1911.
Sebastian: An instrument is negotiable when it transfers from one hand to

another. It is not just a mere transfer but a deliberate and with intention to give
or transfer. Where there is proper negotiation, the person who holds it as a
consequence of delivery is called a holder. Therefore, negotiation is the transfer
of a negotiable instrument for the purpose of making the transferee the holder of
the negotiable instrument.
Non-Negotiable Instrument
to specified person
transfer by assignment
Transferee is assignee. Assignee is
similar to a subrogee. Therefore,
assignee only acquires the totality of
the right of the transferor.
Negotiable Instrument
to order or bearer
transfer by negotiation
Transferee is holder. Unlike an
assignee, a holder is in due course is
free from all personal defenses
available among the parties. Thus,
one of the big advantages of a holder
is that he can get rights better or
superior to those rights of his
immediate transferor.
Assignability
more comprehensive term and
pertains to contracts in general
subject to the defenses obtaining
among the original parties
it is necessary to allege and prove
consideration to maintain an action
on a common law instrument
Negotiability
pertains only to a special class of
contracts negotiable instruments
takes it free from personal defenses
available among the parties
consideration is presumed and need
not be alleged and proved
PURPOSE
Agbayani:
1) To produce uniformity in the laws of the different states upon this important
subject, so that the citizens of each state might know the rules which would be
applied on their notes, checks and other negotiable paper in every other state in
assignor in good faith does not

warrant the solvency of the debtor
LEX SOCIETAS
Indorser is not liable on his

indorsement
unless
there
be
presentation for payment at maturity
and prompt notice of dishonor in case
of dishonor
A general indorser is secondarily
liable for any cause for which the
1
unless it has been expressly stipulated

or unless the insolvency was prior to
the assignment and of common
knowledge
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party primarily liable on a negotiable

instrument does not or cannot pay.
He warrants the solvency of the
person primarily liable. The qualified
indorser and the person negotiating
by mere delivery have limited
secondary liability.
There are two contracts in a negotiable instrument. First there is the issuance of a
negotiable instrument and the second is the underlying transaction. The
underlying transaction is the reason for the issuance of the negotiable
instrument. However, in transferring the negotiable instrument, you only look at
the issuance of the negotiable instrument and there is no need to consider the
underlying transaction.
APPLICATION OF THE LAW
Ang Tiong v. Ting Having arisen from a bank check which indisputably a
negotiable instrument, the present case is, therefore, in so far as the indorsee is
concerned vis--vis the indorser, governed by the Negotiable Instrument law (see
Secs. 1 and 185). Article 2071 of the new Civil Code is hereby completely
irrelevant and can have no application whatsoever.
Agbayani: An instrument which does not comply with the requirement of the
Negotiable Instrument Law is a simple contract in writing and is merely an
evidence of such intangible rights as may have been created by the assent of the
parties. If, however, it conforms to the requirements of the Negotiable
Instruments Law, the instrument is itself the contract and not just a mere
evidence of rights. It is a mercantile specialty.
Campos: The Negotiable Instruments law applies only to negotiable
instruments, to those instruments which conform with the requisites laid down
by section one of the law. Should any of said requisites be absent the instrument
would not be negotiable and would therefore not governed by the Negotiable
Instruments Law but by general law on contracts.
Sebastian: For the Negotiable Instrument Law to apply, the instrument must
comply with the requisites under Section 1. Otherwise, the Civil Code shall apply.
TYPES OF NEGOTIABLE INSTRUMENTS
Agbayani: The Negotiable Instruments Law deals with three kinds of
negotiable instruments, namely: (1) promissory notes, (2) bills of exchange, and
(3) checks, which are also bills of exchange, but of a special kind.
Campos: The Negotiable Instruments Law divides negotiable instruments into

two main groups: the promissory note and the bill of exchange. The first
evidences a promise to pay money, while the bill of exchange is an order made by
one person to another to pay money to a third person. The most commonly used
for of bill of exchange is the check, wherein the one who issued it order his bank
to pay the person named on the check. A check is always payable on demand.
Promissory Note A negotiable promissory note is an unconditional promise
in writing made by one person to another, signed by the maker, engaging to pay
on demand or at a fixe or determinable future time, a sum certain in money to
order or to bearer. (Sec. 184)
Agbayani: A promissory note is essentially a promise in writing to pay on
demand or at a fixed or determinable future time a sum certain in money.
Non-Negotiable
I promise to pay X P 100.00 on
September 1, 2012.
(sgd.)
Maker
In this note the person paid is
specified.
Negotiable
I promise to pay X, or order P 100.00
on September 1, 2012.
(sgd.)
Maker
This note can pass from hand to hand;
and was intended to circulate. This
note can be negotiated by X prior to
due date. X may indorse this note by
writing Pay to Y or order. (sgd.) X.
Campos: There are usually two parties to a promissory note: the promissor,
called the maker; and the payee, the person to whom the promise to pay is made.
Bills of Exchange A bill of exchange is an unconditional order in writing
addressed by one person to another signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or determinable
future time a sum certain in money to order or to bearer. (Sec. 126)
Agbayani: A bill of exchange is essentially an order or a command in writing
addressed to someone requiring him to pay a sum certain in money. (Agbayani)
Campos: The person who gives the order to pay in a bill of exchange is referred
to as the drawer; the addressee of the order is the drawee, and the person to
whom the payment to be made is the payee.
Sebastian: A bill of exchange is similar to a promissory note with one
difference, it is an order to pay. The function of a bill of exchange is that it is a
substitute for money. It allows making payment without even touching the actual
money.
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Checks A check is a bill of exchange drawn on a bank payable on demand.

(Sec. 185)
Sebastian: A check is only one of the many types of bills of exchange. Rules
governing bills of exchange are slightly modified when we talk of checks.
Another type of bill of exchange is a draft which is exactly like a check; however,
it need not be directed to a bank. It is an order to pay given to a person which is
not necessarily a bank. Therefore, a check is a special draft which is directed to a
bank.
Sec. 190. Short title. - This Act shall be known as the Negotiable
Instruments Law.
Sec. 191. Definition and meaning of terms. - In this Act, unless the
contract otherwise requires:
"Acceptance" means an acceptance completed by delivery or
notification;
"Action" includes counterclaim and set-off;
DISTINCTIONS AMONG VARIOUS TYPES OF INSTRUMENTS

Bill of Exchange
an order or command to pay
an order not because it is payable to
order but because, by its terms, it
orders or commands the drawee to pay
money to a payee or bearer
Promissory Note
a promise to pay
a promissory note does not become a
bill by reason that it is payable to order
Bill of Exchange
may not be drawn against a bank
may be payable on demand or at a
fixed or determinable future time
must be presented for acceptance
Checks
always drawn upon a bank or banker
always payable on demand
need not drawn on a deposit

death of a drawer of an ordinary bill of
exchange does not revoke the authority
of the banker to pay
may be presented for payment within a
reasonable time after its last
negotiation
GENERAL PROVISIONS
"Bank" includes any person or association of persons carrying on

the business of banking, whether incorporated or not;
"Bearer" means the person in possession of a bill or note which is
payable to bearer;
"Bill" means bill of exchange, and "note" means negotiable
promissory note;
not needed to be presented for

acceptance
drawn on a deposit
death of a drawer of a check, with
knowledge by the banks, revokes the
authority of the banker to pay
must be presented for payment within
a reasonable time after its issue
"Delivery" means transfer of possession, actual or constructive,

from one person to another;
"Holder" means the payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof;
"Indorsement" means an indorsement completed by delivery;
"Instrument" means negotiable instrument;
"Issue" means the first delivery of the instrument, complete in
form, to a person who takes it as a holder;
CONCEPT OF REAL AND PERSONAL DEFENSES
"Person" includes a body of persons, whether incorporated or not;
Sebastian: A real defense is one raised against all persons, including holders in
due course. While a personal defense is one that can be raised except against a
holder in due course.
"Value" means valuable consideration;

"Written" includes printed, and "writing" includes print.
Sec. 192. Persons primarily liable on instrument. - The person
"primarily" liable on an instrument is the person who, by the terms
of the instrument, is absolutely required to pay the same. All other
parties are "secondarily" liable.
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Sec. 193. Reasonable time, what constitutes. - In determining what is

a "reasonable time" regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such
instruments, and the facts of the particular case.
Sec. 194. Time, how computed; when last day falls on holiday. Where the day, or the last day for doing any act herein required or
permitted to be done falls on a Sunday or on a holiday, the act may be
done on the next succeeding secular or business day.
Sec. 195. Application of Act. - The provisions of this Act do not apply
to negotiable instruments made and delivered prior to the taking
effect hereof.
Sec. 196. Cases not provided for in Act. - Any case not provided for in
this Act shall be governed by the provisions of existing legislation or
in default thereof, by the rules of the law merchant.
Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent
with this Act are hereby repealed.
Sec. 198. Time when Act takes effect. - This Act shall take effect ninety
days after its publication in the Official Gazette of the Philippine
Islands shall have been completed.
FORMS OF NEGOTIABLE INSTRUMENTS

Sec. 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.
Promissory
Note
1) it must be in
writing and
signed by the
maker
2) it
must
contain
an
unconditional
promise
to
pay a sum
certain
in
money
3) it must be
payable
on
demand, or at
a fixed or
determinable
future time
4) it must be
payable
to
order or to
bearer
Bill of Exchange
1)
2)
3)
4)
5)
it must be in writing and signed by the drawer

it must contain an unconditional order to pay a sum
certain in money
it must be payable on demand, or at a fixed or
determinable future time
it must be payable to order or bearer
the drawee must be named or otherwise indicated
with reasonable certainty
Agbayani: The name of the person on whom a bill is

drawn should appear on its face. Otherwise the
instrument would not be negotiable. But under Section 14,
the drawees name may be omitted and be filled in under
implied authority like any other blank. And, an acceptance
may supply the omission of a designation.
Sebastain: If the instrument is addressed to a drawee,
he must be named or otherwise indicated with reasonable
certaintly. This suggests that there are two types of
negotiable instruments. This requirement is only applied
in bills of exchange where there is a drawee.
The authority to pay is different from a direct instruction
to pay. Therefore, I authorize (drawee) to pay is a nonnegotiable instrument.
LEX SOCIETAS
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Agbayani: The formalities required are essential for the security of mercantile
transactions. They distinguish the negotiable instrument from the ordinary nontransferrable written contract.
The negotiability of an instrument is to be determined: (1) by Section 1; (2) by
considering the whole of the instrument; and (3) by what appears on the face of
the instrument and not elsewhere. In other words, to determine whether an
instrument is negotiable or not, only the instrument itself, and no other, must be
examined and compared with the requirements of Section 1. If it appears on the
instrument that it lacks one of the requirements, it is not negotiable. The
requirement lacking cannot be supplied by using a separate instrument in which
that requirement which is lacking appears.
must prove that what is written is intended as a signature of the person sought to
be charged.
The name may be printed, typewritten, stamped, engraved, photographed or
lithographed. But in such case, it must be shown to have been adopted and used
by the party as his signature.
MUST BE IN WRITING
Campos: The signature is binding whether it is in ones handwriting, or printed,

engraved, lithographed or photographed, so long as it is intended or adopted as
the signature of the signer or made with his authority. It will be valid and binding
so long as the intention to make the instrument the makers or drawers is shown.
The maker of a note or the drawer of a bill must sign the instrument and his
signature is usually written at the lower right hand corner thereof. The drawees
name is usually written on the lower left hand corner, although in checks the
banks name sometimes appears across the top. The payee and the successive
indorsees negotiate the instrument by signing on the back. As long as the parties
to the bill or note comply with these long established and recognized customs, it
would be clear in what capacity the parties signed. However, once a party to an
instrument deviates from the commercial usage with respect to the place of
signature, and it is not clear from the instrument in what capacity he signs,
ambiguity arises. The law solves this by considering such a person as an indorser,
and not as a maker or drawer.
Agbayani: In order to be negotiable, there must be a writing of some kind, for,

if the instrument were not in writing, there would be nothing to be negotiated
from hand to hand.
Sebastian: Identification of the maker or drawer is not an element of

negotiability. Thus, only the customary signature, at least, of the maker or drawer
is necessary.
Campos: In writing includes print and it includes not only what is written
with pen or pencil, but also what has been typed.
Garcia v Lacuesta (90 Phil 489) Where a cross appearing in a document is

not the usual signature of a person, that cross cannot be considered as a valid
signature.
Campos: The fact that an instrument does not meet the foregoing requisites will
not affect its validity, the only consequence being that it will be governed not by
the Negotiable Instruments Law but by the general law on contracts.
Sebastian: In civil law, form is not an essential ingredient for the validity of a
contract. However, in a negotiable instrument, which is also a contract, form is
an essential ingredient for its negotiability.
Sebastian: If the instrument is not in writing, there would be nothing to be

negotiated or passed from hand to hand. Delivery is necessary; no delivery, no
issuance. Therefore, the medium of the negotiable instrument should be
transferrable from hand to hand. Thus, it is only logical that the negotiable
instrument is in writing in such a way that it can be transferrable from hand to
hand.
The reason for this requisite is not limited to the presentation of an instrument
that can be passed from hand to hand. The drawer/maker would also want
evidence of the note or the bill or evidence of an indorsement.
SIGNATURE
Agbayani: The full name may be written. At least, the surname should appear
and, generally, the signature usually is by writing the signers name. But it may
consist of initials or even numbers. But, where the name is not signed, the holder
Sebastian: An electronic signature is equivalent to the functional signature,

subject to the precautions set by law.
Legal Recognition of Electronic Documents. Electronic documents shall have
the legal effect, validity or enforceability as any other document or legal writing,
and (a) Where the law requires a document to be in writing, that requirement is
met by an electronic document if the said electronic document
maintains its integrity and reliability and can be authenticated so as to
be usable for subsequent reference, in that (i) The electronic document has remained complete and unaltered,
apart from the addition of any endorsement and any
authorized change, or any change which arises in the normal
course of communication, storage and display; and
(ii) The electronic document is reliable in the light of the purpose for
LEX SOCIETAS
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which it was generated and in the light of all the relevant

circumstances.
(b) Paragraph (a) applies whether the requirement therein is in the form of an
obligation or whether the law simply provides consequences for the
document not being presented or retained in its original form.
(c) Where the law requires that a document be presented or retained in its
original form, that requirement is met by an electronic document if (i) There exists a reliable assurance as to the integrity of the
document from the time when it was first generated in its final
form; and
(ii) That document is capable of being displayed to the person to
whom it is to be presented: Provided, That no provision of this
Act shall apply to vary any and all requirements of existing laws
on formalities required in the execution of documents for their
validity.
For evidentiary purposes, an electronic document shall be the functional
equivalent of a written document under existing laws.
This Act does not modify any statutory rule relating to the admissibility of
electronic data messages or electronic documents, except the rules relating to
authentication and best evidence. (Sec. 7, Electronic Commerce Act of 2000)
Legal Recognition of Electronic Signatures. - An electronic signature on the
electronic document shall be equivalent to the signature of a person on a written
document if that signature is proved by showing that a prescribed procedure, not
alterable by the parties interested in the electronic document, existed under
which (a) A method is used to identify the party sought to be bound and toindicate
said partys access to the electronic document necessary for his consent
or approval through the electronic signature;
(b) Said method is reliable and appropriate for the purpose for which the
electronic document was generated or communicated, in the light of all
the circumstances, including any relevant agreement;
(c) It is necessary for the party sought to be bound, in order to proceed further
with the transaction, to have executed or provided the electronic
signature; and
(d) The other party is authorized and enabled to verify the electronic signature
and to make the decision to proceed with the transaction authenticated
by the same. (Sec. 8, Electronic Commerce Act of 2000)
Presumption Relating to Electronic Signatures. - In any proceedings involving
an electronic signature, it shall be presumed that (a) The electronic signature is the signature of the person to whom it
correlates; and
(b) The electronic signature was affixed by that person with the intention of
signing or approving the electronic document unless the person relying

on the electronically signed electronic document knows or has notice of
defects in or unreliability of the signature or reliance on the electronic
signature is not reasonable under the circumstances. (Sec. 9, Electronic
Commerce Act of 2000)
Agbayani: The signature of the maker or drawer is usually written at the
bottom right hand corner. The location of the signature is not material. What is
important is that it appears therefrom that the person intended to make it his
own.
PROMISE TO PAY AND ORDER TO PAY
Agbayani:
Promise to Pay
The promise to pay must be on the instrument
itself, although it is not necessary to use the word
promise. It is enough (1) that the words of
equivalent meaning are used, or (2) that the
promise is implied from promissory words
contained in the instrument. But a promise to pay
cannot be implied from the mere existence of a
debt.
Instead of promise, the words agree, will pay,
shall pay, good, due and the like may be used.
A mere admission that the debt is due is not
sufficient because such admission it only evidences
the existence of a debt.
In addition to the acknowledgement of
indebtedness, there must be other words
expressing the intention to pay or from which may
be implied such as an intention to pay.
Order to Pay
A bill is an instrument
demanding a right. It is,
however, not necessary
that the word order be
used. Any words which
are equivalent to an
order or which show the
drawers will that the
money should be paid,
are sufficient to make the
instrument a bill of
exchange.
A mere authorization to
pay or request to pay is
not negotiable because it
gives a discretion to the
drawee to pay or not to
pay.
The words order and bearer are usually referred

to as words of negotiability. However, they may also
be used to imply a promise.
Campos: The instrument must contain a promise or an order to pay. Mere
acknowledgement of a debt does not constitute a promise. There should be an
express promise on the face of the instrument to pay the money. However, the
LEX SOCIETAS
DLSU LAW
word promise is not absolutely necessary. Any expression equivalent to a

promise is sufficient.
money if the holder so wishes. Thus, an instrument is not negotiable if payable in

personal property like merchandise, or shares of stock, or even gold.
In a bill of exchange, words which are equivalent to an order are sufficient. A

mere request or authority to pay does not constitute an order. The instrument is
by its nature demanding a right.
If a contract contains a stipulation that payment is to be made in a currency other

than Philippine currency, such stipulation will be ineffective and the obligation
can be discharged only in legal tender. But the negotiability of such instrument
will not be affected by such stipulation.
Sebastian: A promise to pay is a written commitment of the maker to pay a sum

of money to the payee or payees order. It constitutes an obligation. On the other
hand, order to pay is a directive to pay/settle an obligation but, in fact, it instructs
another person to make the payment. The bill makes an order for the settlement
of an obligation. In this case, the drawee of the bill is the debtor to the drawer.
Under the Civil Code, creditors are not required to accept payments from third
parties. Under the Negotiable Instruments Law, creditors may be required.
An instrument which contains an order or promise to do an act in addition to the

payment of money is not negotiable. This rule helps to retain simplicity of form
which is absolutely necessary to the free use of negotiable instrument in the place
of money. But if the order or promise gives the holder an election to require
something to be done in lieu of money, an instrument otherwise negotiable would
not be affected thereby.
CONCEPT OF A SUM CERTAIN IN MONEY
Sebastian: a sum certain is a definite amount. It must definite because

negotiable instruments are substitutes for money. Thus, it must be for a specified
amount of money.
Agbayani: The amount of money to be paid must be determinable by

inspection and must be stated plainly on the phase of the instrument, and, like
the denomination of money, must be stated in the body of the instrument.
One cannot draw a negotiable instrument that is not payable in money.

A negotiable instrument must be equal to money, not a commodity.
A note or bill, if it is to be negotiable, cannot be made payable in goods, wares, or

merchandise, or in property, or in labor or services. So also, an instrument is not
negotiable if it is made payable in bonds, corporate stock, state paper, scrip,
checks, foreign bills.
The real reason for the requirement that negotiable instruments must be payable
in money is obviously is that money is the one standard of value in actual
business. All other commodities may rise and fall in value but in theory, at least,
money always remain measures this rise and fall and remains the same.
Campos: The amount payable must be certain. An instrument cannot function
properly as a substitute for money unless the amount for which it stands for is
specified and definite. An agreement to pay interest does not however render the
sum uncertain. The exact amount thereof can be computed without looking
beyond the instrument.
The sum is certain although it is payable in installments as long as the latter are
stated (1) the amount of each installment and (2) due date of each
installment. Neither will an acceleration provision based on default render the
sum uncertain.
In order to be negotiable, an instrument must be payable in money. Since
negotiable instruments are intended to be substitutes for money, to properly
perform such function they must necessarily be capable of being transformed into
However, where an instrument entitles holder to demand something else in lieu

of money, negotiable character is not affected because it remains to be payable in
money. In this case, the conversion should not have been made by the obligor.
Once conversion is made, the instrument ceases to be negotiable.
Sec. 2. What constitutes certainty as to sum. - The sum payable is a
sum certain within the meaning of this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall
become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment
shall not be made at maturity.
Payment of Interest and the Usury Law (Act 2655)
Agbayani: The addition of interest does not make the sum uncertain because,
by mere mathematical computation, the amount to be paid on the maturity is
ascertainable.
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Sebastian: Payment of interest does not make the sum uncertain because it can
be calculated arithmetically.
In Negotiable Instruments Law, what matters in the value of money, not the
certainty of amount. Thus, fluctuation of the exchange rate does not make the
sum represented uncertain.
Default Interest
Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
(Art. 2212, Civil Code)
Agbayani: When interest is stipulated but not specified, the interest shall be the
legal rate, which is 12% for loans and forbearance of money. Where interest is not
stipulated, the legal interest will be paid when the debtor incurs delay.
Sebastian: If no interest is specified in the instrument, civil law will apply.
Unlike the Civil Code, in Negotiable Instruments Law, you can write an
instrument ordering to pay a sum in foreign currency. Enforcement of such
currency should also be paid in foreign currency. If the drawer cannot produce
the foreign currency, the instrument is considered to be dishonored/defaulted.
But if the currency is not available, it can be converted to legal tender.
After the Uniform Currency Law, all foreign currency obligations are
automatically converted to legal tender. But this was repealed by RA 8183.
Therefore, undertaking to pay an obligation in foreign currency, you can be made
to pay in foreign currency with only a single defense available stipulation to pay
in a currency that is not locally available.
Currency of Payment
With Exchange
Agbayani: A bill or note may be made payable in denominations of foreign
money, currency or coins. However, the instrument should express the specific
denomination of money when it is payable in the money of a foreign country in
order that the courts may be able to ascertain its equivalent value; otherwise, it is
not negotiable.
Foreign Currency Uniform Currency Act
All monetary obligations shall be settled in the Philippine
currency which is legal tender in the Philippines. However, the
parties may agree that the obligation or transaction shall be
settled in any other currency at the time of payment. (R. A. 8183)
Legal Tender
The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then
in the currency which is legal tender in the Philippines. (Art. 1249,
Civil Code)
Sebastian: Payment under the Negotiable Instruments Law can be in any legal
currency, unlike in the Civil Code where monetary obligations may only be settled
by paying in legal tender.
A negotiable instrument can be denominated in any currency, although the
fulfillment of the instrument can be frustrated. Nonetheless, the lack of source of
currency is not a ground for the negotiable instrument to lose its negotiability.
Agbayani: The sum payable is a sum certain even if it is to be paid with

exchange, whether at a fixed rate or at the current rate because the rate of
exchange between two places at a particular date is a matter of common
commercial knowledge, or at least easily ascertained by any one so that the
parties can always, without difficulty, ascertain the exact amount necessary to
discharge the paper. Exchange is the difference in value of the same amount of
money in different countries. The exchange may be at the current rate or at a
fixed rate. The provision on payment with exchange naturally applies only to
instruments drawn in one country and payable in another. Where an instrument
is drawn and payable in the same country, there can be no exchange, so a
provision for payment of exchange may be disregarded.
Sebastian: A promise to pay in one currency but the medium of payment is
another does not make the amount payable uncertain because, at any point, you
can determine how much you will pay simply by computing for it.
Effect of Installment Payments
Agbayani: The sum payable is a sum certain within the meaning of this act,
although it is to be paid by stated installments. Consequently, an instrument
containing such a stipulation would not thereby render non-negotiable. But the
installments: (1) must be stated and (2) the maturity of each installment must be
fixed or determinable. This last qualification is required in order to comply with
the requisite that the instrument, if not payable on demand, must be payable at a
fixed or determinable future time.
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An acceleration clause is a provision that upon default in payment of any

installment or of interest, the whole shall become due. An instrument containing
an acceleration clause would not render it non-negotiable.
But in the absence of stipulation, attorneys fees and expenses other than judicial
costs, cannot be recovered, subject to the exceptions provided in the law.
Legal Tender
Sebastian: Payment in installments does not destroy negotiability of the

instrument because certainty is not destroyed. However, when writing an
installment note, the installment schedule should clearly be stated. When the
installment is to paid and how much the installment should be specified.
Installments do not need to be equal. It can be in various amounts per
installments. What is important is that there is no doubt on the due date and
amount due on each installment and the total amount due at the end.
Heffron: When the installment payments should start should also be specified.
Effect of Payment of Unliquidated Amounts
The delivery of promissory notes payable to order, or bills of

exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault
of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall
be held in the abeyance. (Art. 1249, Civil Code)
Agbayani: Legal tender is that kind of money which the law compels a creditor
to accept in payment of his debt when tendered by the debtor in the right
amount.
A check, whether a managers check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor. The obligation is not extinguished and
remains suspended until payment by commercial document is actually realized.
Payment of Attorneys Fees

Agbayani: An instrument may stipulate that cost of collection and/or attorneys
fees shall be paid by the debtor in addition to the principal in case the instrument
shall not be paid at maturity. The legality of such a stipulation is expressly
recognized in Section 2, and impliedly in the New Civil Code. Such a stipulation is
not void as usurious, even when added to a contract for the payment of the
highest rate of interest permissible. It may, of course, be made to conceal usury.
But that is a matter of proof to be determined in each case. The purpose of a
stipulation in the note for reasonable attorneys fee is to safeguard the lender
against future loss or damage by being compelled to retain counsel to institute
judicial proceedings to collect his debt.
Although such stipulation will make the sum payable after maturity uncertain, it
will not affect the certainty of the sum payable at maturity and, therefore will not
affect negotiability of the instrument in which it is stipulated.
After the date of maturity, the instrument will no longer be negotiable, in the
sense that any transferee acquiring it would not be a holder in due course, as he
would acquire the instrument after it is overdue. Since the tranferee would not be
a holder in due course, he would hold the instrument subject to defenses, as if it
were non-negotiable. Consequently, even if the amount to be paid after the date
of maturity becomes uncertain by the payment of attorneys fees and costs of
collection, the negotiability will not be impaired as the uncertainty occurs after
maturity.
In the absence of an agreement, either express or implied, payment means the

discharge of a debt or obligation in money and unless parties so agree, a debtor
has no right, except at his own peril, to substitute something in lieu of cash as
medium of payment of his debt.
Even treasury certificates are not legal tender except for those payment of taxes
and public debts.
The validity and negotiable character of an instrument are not affected by the fact
that it designates a particular kind of current money in which payment is to be
made. But where the instrument is made payable in the paper or currency of a
particular bank, specifically and absolutely, and without reference to the currency
or value of the paper, it is held not to be for the payment of money and is not
negotiable.
UNCONDITIONALITY OF PROMISE OR ORDER TO PAY
Agbayani: It is not enough that there be a promise or an order. The promise or
order must also be unconditional or absolute. This means that it must not be
subject to a condition. A condition is (1) a future event that may or may not
happen, or (2) a past event which is unknown to the parties. It is distinguished
from an even that is certain to happen, even though the time of its happening is
not known. Thus, an instrument subject to an event that is certain to happen is
negotiable.
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Campos: As a rule, unless the reference to the fund clearly indicates an

instrument that such fund alone should be the source of payment, courts usually
decide in favor of negotiability. Neither does the recital of the transaction for
which the instrument was issued make the promise or order conditional. The
latter is not expressly qualified by such transaction. Information is merely given
that the instrument was issued in connection with the transaction.
The fact that the condition appearing on the instrument has been fulfilled will not
convert it into a negotiable one.
Sebastian: An instrument is a substitute for money and must, therefore,
operate like money.
A condition is a future or uncertain event, or a past event unknown to the parties
which could either give rise to an obligation or it could terminate/resolve an
obligation.
The promise/order to pay can never be conditional be cause if there is a
condition, the instrument may or may not become a substitute for money. Thus,
it is no longer negotiable. If a promise to pay is unconditional, it means that there
are no ifs or buts. A note is an outright and direct promise to pay.
Sec. 3. When promise is unconditional. - An unqualified order or
promise to pay is unconditional within the meaning of this Act though
coupled with:
(a) An indication of a particular fund out of which reimbursement
is to be made or a particular account to be debited with the
amount; or
(b) A statement of the transaction which gives rise to the
instrument.
But an order or promise to pay out of a particular fund is not
unconditional.
Source of Funding or Reimbursement
Agbayani: An unqualified order or promise to pay is unconditional though
coupled with an indication of a particular fund out of which reimbursement is to
be made. But an order or promise to pay out of a particular fund is conditional. In
the first case, the particular fund indicated is not the direct source of payment. It
is only the source of reimbursement. In the second case, the particular fund
indicated is the direct source of payment.
Fund for
Reimbursement
Fund for Payment
There are two cases: (1) the drawee

pays the payee from his own funds;
afterwards (2) the drawee pays
himself from the particular fund
indicated.
There is only one act, namely, (1) the

drawee pays directly from the
particular fund indicated.
Where the payment to the payee is directly from the funds indicated, the payment
is subject to the condition that the funds indicated are sufficient. But the funds
indicated may or may not by sufficient. In other words, when a particular fund is
indicated out of which the payment is to be directly made, the order would be
conditional. On the other hand, where the fund is merely for purpose of
subsequent reimbursement, the order or promise is not subject to the sufficiency
of the funds. The order or promise is upon the general credit of the drawee or
maker. It may, however, be argued that, if the drawer has no money in the hands
of the drawee out of which reimbursement could be made, the drawee may refuse
to accept or pay the bill. This is true. But whether a bill of exchange is negotiable
or not does not depend upon the drawees willingness and ability to pay. It
depends upon the tenor of the terms of the order. If the bill absolutely requires
the drawee to pay, then the order in the bill is unconditional.
Sebastian: Reimbursement does not affect negotiability because it has nothing
to do with the note. Reimbursement here refers to whoever pays the holder of the
instrument (i.e. in a bill the drawer instructs the drawee to pay the payee). By
simply identifying the source of reimbursement, the instrument is still negotiable
because the existence of the source of reimbursement is not conditional. The
instrument is still negotiable but the lack of funds will mean that the drawee will
refuse payment.
But if the instrument stipulates a specific account as source of payment, this will
be non-negotiable because the instrument becomes conditional, i.e. the existence
of the account or its sufficiency is the condition. Meaning, the instrument will
only be paid if the account exists or if it is sufficiently funded.
Van Tassel v. McGrail
Agbayani: After making a note which was negotiable in form, the parties signed
the following written agreement on the same paper: It is herein provided and
agreed that the above note is to be paid from the proceeds obtained from the sale
of lots in the town of Vanors, and that one-forth of the proceeds of al sales of the
lots are to be applied to the payment of said note and interest and until the same
is paid. The promise to pay is unconditional.
Sebastian: The US Court said that the promise to pay is unconditional because
the provision was not considered to be part of the note which had a separate
signature.
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Keck v. Yakima Savings

Agbayani: A country bond payable out of Yakima County Road Refunding
Bond Fund and secured to be paid by taxes and assessments, etc., was held
negotiable because it was not restricted to the road fund.
Sebastian: Theoretically, the security, e.g. taxes, will never run out of money.
However, to be safe, the instrument in this case is non-negotiable because the
instrument specified the source of payment.
Particular Account to be Debited
Agbayani: An instrument containing an indication of a particular account to be
debited with the account is not rendered non-negotiable because the instrument
is to be paid first and, afterwards, the particular account indicated will be
debited.
Sebastian: Even if reimbursement of the payment is to be debited from a
particular account, negotiability is not impaired because debiting is merely the
source of payment.
Sebastian: To be negotiable, there must be a definite day on which one will be

able to collect on an instrument. A determinable future time is expressed under
(a), (b) and (c).
Ideally, a negotiable instrument should be payable on a fixed date but it may be
payable at a determinable future time. The test whether it is payable at a
determinable future time is when the time to pay is ascertainable without the
need to negotiable further with the maker as to the date.
Sec. 4. Determinable future time; what constitutes. - An instrument
is payable at a determinable future time, within the meaning of this
Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified
therein; or
(c) On or at a fixed period after the occurrence of a specified event
which is certain to happen, though the time of happening be
uncertain.
An instrument payable upon a contingency is not negotiable, and the
happening of the event does not cure the defect.
Statement of Underlying Transaction

Agbayani: As a rule, instruments are not issued without any transaction upon
which they are based. However, the mere fact that a transaction gives rise to the
instrument is stated in the instrument will not make the promise or order
conditional. But where the promise or order is made subject to the terms and
conditions of the transaction stated, then, the instrument is rendered nonnegotiable. To destroy negotiability of the instrument, the reference to the
collateral contract must show that the obligation to pay is burdened with the
condition of the contract.
Sebastian: A note that tells the maker is a debtor and the payee is a creditor
does or that the maker makes a promise to pay based on a loan agreement does
not destroy its negotiability.
Payable After Date or After Sight

Agbayani: After sight means after the drawee has seen the instrument upon
presentation for acceptance. If the instrument is a promissory note, the date of
maturity is determined by counting the period from the date of its issuance.
Sebastian: After sight refers to a bill of exchange. Presentment is necessary
because it is essential to check if the signature of the maker/drawer is authentic
and the drawee has every right to scertain wether or not the order to pay is
genuine. From the time the drawee sees the instrument, he can either accept the
instrument or reject it. By accepting it, the order of the maker was accepted and
becomes the party liable on the bill of exchange. The drawee is not a party to the
transaction until the instrument is accepted.
CONCEPT OF FUTURE OR DETERMINABLE FUTURE TIME

Agbayani: An instrument, to be negotiable, must be payable either (1) on
demand or (2) at a fixed or determinable future time. If it is not either, the
instrument is not negotiable.
Campos: The requirement as to certainty of time of payment is for the purpose
of informing the holder of the instrument of the date when he may enforce the
payment thereof. Before such time, he cannot compel the maker of the note or
the acceptor of the bill to pay, unless there is a valid acceleration provision.
A usance draft is an instrument payable at a fixed period after sight. This is used
in banks.
A bank or drawee is not liable to an instrument until it accepts it. A bank may
dishonor an instrument for insufficient funds but it may still honor it, resulting in
an overdraft facility.
On or Before a Specific Date
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Sebastian: The phrase on or before gives the person liable a chance to pay on
any other day before the due date. Payment date is still certain because it merely
stipulates the debtor has the option to make a pre-payment at any time before the
absolute due date.
Rehabilitation Finance Corporation v. CA At the outset, it should be
noted that the makers of the promissory note quoted above promised to pay the
obligation evidenced thereby on or before October 31, 1951. Although the full
amount of said obligation was not demandable prior to October 31, 1951, in view
of the provision of the note relative to the payment in ten (10) annual
installments, it is clear, therefore, that the makers or debtors were entitled to
make a complete settlement of the obligation at any time before said date.
Fixed Period After the Occurrence of a Specified Event
Sebastian: The phrase on or after means it cannot be on or before. The event
described herein is that it will certainly happen but you just dont know when (i.e.
death).
Extension of Due Date
Sebastian: By simply not making a demand for the presentment of the
negotiable instrument, the instrument is no longer negotiable in its full
commercial sense because the holder can no longer be a holder in due course
since there is already a default (i.e. the note is already past due).
State Bank of Halstad v. Bilstad The notes in suit provided for an
extension of time for one year on the condition therein named. The time at which
they eventually become due was therefore fixed and certain. The only uncertainty
as to the time or fact of payment was whether they should be paid at a particular
time in one year, or at the date named in the next year.
Section 3060-a4 expressly says that a note that is payable at a determinable
future time, or that is payable on or before a fixed period after the occurrence of a
specified event, which is certain to happen, is negotiable. These provisions clearly
provide for flexibility in fixing the time of payment, provided only that there shall
certainly come a time when the note is, by its terms, due. In other words, they
recognize the right of the parties to an instrument to contract for their mutual
benefit, and say in effect that, if the contract is made certainly to be performed at
some definite time in the future, its negotiability is not destroyed. A determinable
future time as used in the second, can mean nothing else than a time that can be
certainly determined after the execution of the note. The contingency will render
a note non-negotiable under the last clause of the section clearly means an even
which may or may not happen. A contingency is, in law, an uncertain future
event, and, as a contingency may never happen, a note payable only upon the
happening thereof may never come due.
Security Bank of Sioux City v. Gunderson The promissory note in suit

contains the following language:
The makers, indorsers, guarantors of this note, and the sureties hereon severally
waive presentment for payment, protest and notice of dishonor, and consent that
the time of its payment may be extended without notice, all defenses on the
ground of any extension of time of payment being hereby expressly waived.
In First National Bank of Pomeroy v. Buttery, the Court held that this phrase
does not express an agreement to extend time, but leaves the matter of extension
optional with the holder, and not obligatory upon him, and the note of its face
fixes the time when it becomes due. The obvious purpose of the provision taken
as a whole was merely to relieve the holder of the paper from the burdens made
necessary by the rigid requirements of the mercantile law in order to secure the
continued liability of the indorsers and sureties upon the paper. Therefore what
was meant by the stipulation as to the extension of time was simply that in case
the holder and the maker should agree upon an extension, the sureties and
indorsers should not be discharged. The holder and maker of any note may at
anytime agree upon an extension; therefore the fact that they have that right does
not affect the negotiability of the paper.
Sebastian: Time extension does not destroy negotiability provided that it is at
the option of the holder/creditor. What destroys negotiability is the option of
extension being given to the debtor because the certainty of the date is made
uncertain.
Effect of Acceleration Clause and Material Adverse Change Clause
(MAC)
Agbayani: There are certain notes containing acceleration provisions. These
provisions (1) make it possible for the maker to pay the instrument at an earlier
date or (2) make it possible the holder to require payment of the instrument at an
earlier date.
An illustration of the first class is the so-called payable on or before a certain
date note. Illustrations of the latter class are those instruments that:
1) contain acceleration clauses on the makers default in payment of
installments or of interest, or on the happening of an extrinsic event;
2) contain, in notes secured by collateral, a provision that the maker shall
supply additional collateral in case of depreciation in the value of the
original deposit, with the holders right to declare the note due
immediately on failure to make good the depreciation; or
3) contain provisions for acceleration where holder deems himself
insecure.
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missed. It is used to deter a default. Once there is default, one loses the benefit of
the term.
The first is covered by Section 2(b).

There is a conflict of authority with regards to the second. The better view of the
two maintain that the stipulation in question does not render the instrument
containing it non-negotiable because from the standpoint of expediency as
encouraging circulation and of business custom on account of their common
acceptance by the commercial world, such clauses should be interpreted as not
affecting negotiability.
There is also a conflict of authority with regards the third. The better view of the
two maintain that these cases holding an instrument payable at a fixed time but
accelerable at the option of the payee or holder still negotiable because such
instruments are certainly payable on or before a fixed time specified therein.
Campos: Where the option to accelerate the maturity of the instrument is on the
maker, the negotiability of the instrument is not affected, whether such option is
absolute or conditional. But where the acceleration is at the option of the holder,
whether such acceleration provision renders the instrument non-negotiable
depends on the nature of the provision.
If the option can be exercised by the holder only upon the happening of a
specified event or act over which he has no control, then the negotiable character
of the instrument is not affected.
Where the holders right to exercise the option is unconditional, the time of
payment is rendered uncertain and the instrument would not be negotiable.
However, where the option given to the holder to accelerate the maturity of an
installment note upon failure of the maker to pay any installment when due does
not affect the negotiability of the instrument.
Acceleration of the maturity of the instrument by operation of law does not affect
its negotiability.
Sebastian: Every time we use an acceleration clause, it refers to an obligation
that is suspended by a term. The obligation is not immediately to be performed,
but at some future time. Its function is to accelerate/advance the performance of
obligation prior to the stipulated due date. In many cases, it is used when the
obligation is to be performed in installments. It is used to accelerate installments
payable when there is default in payment of one of the installments.
The theory behind an acceleration clause is this: when a payment obligation is
staggered on a monthly/ installment basis, default of one installment is indicative
of inability to continue with further payments on a timely basis. If one
installment is missed, there is a probability that the other installments will be
However, default is not the only source of accelerating the obligation. It is also
possible that the note is current but the acceleration clause is triggered by a
collateral default. A note secured by a mortgage, it does not lose negotiability
because the collateral arrangement is a separate undertaking from the obligation
under the note. The function of the mortgage is to strengthen the enforceability of
the note. Where there is a breach of the collateral arrangement, there will be a
breach of the note. But negotiability is not destroyed by acceleration of the
collateral. In effect, one will be required to pay the obligation immediately and
lose the benefit of the term.
It is not unusual to find a negotiable instrument with an acceleration clause that
is triggered by a mere feeling of insecurity on the part of the creditor. When
somebody lends money, his concern is to recover what he lent. Recourse against
the collateral is secondary, but gives a higher level of comfort that you can still
recover in case of default. The longer the period of the payment, the greater is the
risk taken by the creditor.
If at any time there is a material adverse change in the nature of the undertaking,
a creditor has right to accelerate. This is known as Material Adverse Change
Clause (MAC). When the change in circumstance is adverse, creditor is entitled to
call in the obligation. If a negotiable instrument carries an acceleration clause
where the ground is a MAC, its negotiability is not impaired because, with or
without the MAC clause, there is still a due date of the instrument. It merely gives
the holder to make a pre-emptive strike to collect the value of the note before
things go sour.
In summary, an acceleration clause, a collateral default or an insecurty of the
holder will not affect negotiability.
For instance a note is payable at a future time and the maker dies today. The
holder may file a claim against the estate of the deceased regardless of the due
date on the note. The rule is that an acceleration by operation of law also does not
affect negotiability.
PAYABLE TO ORDER OR TO BEARER
Agbayani: An instrument is not negotiable unless made payable to a person or
his order or to bearer or unless words of similar or equivalent import are used
such as assigns or assignees, or holder. Where the instrument is payable
only to a specified person, it is not payable to order.
Campos: The instrument in order to be considered negotiable must contain the
so called words of negotiability must be payable to order or bearer. These
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words serve as an expression of consent that the instrument may be transferred.

This consent is indispensable since the maker assumes greater risks under a
negotiable instrument than under a non-negotiable one. Under Sec. 10 however,
the instrument need not follow the language of the law, but any term which
clearly indicates an intention to conform to the legal requirements is sufficient.
Sebastian: In a negotiable instrument, there must be no obligation other than

the payment of money. When it is conjunctive, and the other is not in the nature
of payment of a sum of money, the negotiability is impaired.
Negotiability of Secured Instruments
Sebastian: order or bearer are critical words that define negotiability. These
words connote that the instrument is transferrable from one person to another.
Order means payable to payee or who payee identifies. Bearer means payable to
whoever has possession of the instrument. If the person is specified without these
words, the instrument is non-negotiable but not necessarily void.
PROVISIONS NOT AFFECTING NEGOTIABILITY
Sec. 5. Additional provisions not affecting negotiability. - An
instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable. But the negotiable
character of an instrument otherwise negotiable is not affected by a
provision which:
(a) authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
(b) xxx
(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.
Agbayani: The general rule is that an instrument must not contain an order or
promise to do ay act in addition to the payment of money. Otherwise, the
instrument would be rendered non-negotiable, for then the instrument would be
payable not in money only but in money and the additional act promised or
ordered to be performed.
Test of Negotiability
Agbayani: The test of negotiability is whether or not the promise would give
rise to a cause of action for breach of contract if the additional act is not done. If
it does, the instrument is rendered non-negotiable.
Sebastian: If he breach if the additional act results to a cause of action for
breach of contract, the instrument is no longer negotiable.
Effect of Conjunctive Obligations
Agbayani: A promise of the maker to furnish additional collateral will render

the note non-negotiable, as that would be an additional act to the promise to pay
money. However, they are to be distinguished from those instruments in which
the holder may demand collateral and, failure to furnish it accelerates the
instrument which are clearly negotiable, being merely accelerable on the nonperformance of an optional act.
The negotiable character of an instrument otherwise negotiable is not affected by
a provision which authorizes the sale of collateral securities in case the
instrument is not paid be paid at maturity because the additional act to be
performed is to be executed after the date of maturity, when the instrument
ceases to be negotiable in the full commercial sense. Before the date of maturity,
no additional act is to be performed except the payment of the money. Hence,
before and until the date of maturity, the promise to pay is to pay money only.
Otherwise, the instrument would be non-negotiable.
Campos: The negotiable character of an instrument otherwise negotiable is not
affected by a provision which authorizes the sale of collateral securities in case
the instrument be not paid at maturity. Thus, not only may the instrument state
that the note is secured by the pledged or mortgaged property, but also that the
collateral may be sold for discharging the instrument itself. An authorization
however, which empowers the holder to sell the collateral before the maturity of
the note renders it non-negotiable because it gives the holder an option to
accelerate the maturity of the instrument, thus rendering the time of payment
uncertain.
Sebastian: Consider this: I promise to pay X or order P1,000,000 subject to
the terms and conditions of the mortgage. Under this note, the payment is
subject to the terms of the mortgage; hence, non-negotiable. When you introduce
a collateral default in a negotiable instrument, bear in mind that the payment
obligation in the negotiable instrument must never be subject to the conditions of
the mortgage. The moment there is union between the negotiable instrument and
the mortgage, negotiability is impaired.
On the other hand, an isntrument will still be negotiable if it merely says that is
secured by a mortgage or holder has a right to accelerate in case colateral default.
The sale of collateral securities in case the instrument is not paid at maturity
enhances the enforcement of the instrument. This is a separate undertaking and
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has nothing to do with the enforcement of the instrument. Thus, foreclosure of a

security has nothing to do with negotiability.
When the note is secured by a collateral, the payment obligation under the note
should not be based on the collateral, otherwise negotiability is destroyed.
Confession of Judgment
Sebastian: Confession of judgment has 2 forms:
1) cognotiv actionem a stipulation whereby defendant authorizes plaintiff or
his counsel to confess judgment for the sum being claimed by the plaintiff. In
this case, the decision is rendered by the court immediately because the
debtor is empowered to confess to a judgment on his behalf.
2) relicta verificatione after a plea of not guilty is made, one withdraws it and
judgment is immediately promulgated.
Confession of judgments are void under Philippine Law.
PNB v Manila Oil Refining and By-Products Co. Inc. (43 Phil 444)
Section 5(b) of the Negotiable Instrument Law providing that the negotiable
character of an instrument otherwise negotiable is not affected by a provision
which authorizes a confession of judgment if the instrument cannot be paid at
maturity, cannot be taken to sanction judgments by confession because it is a
portion of a uniform law which merely provides that, in jurisdictions were
judgment notes are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the Negotiable
Instruments Law concludes with these words: But nothing in this section shall
validate any provision or stipulation otherwise illegal.
The judgment note was held to be void as against public policy, because they
enlarge the field of fraud, because under these instruments the promissory
bargains away his right to a day in court, and because of the effect of the
instrument is to strike down the right of appeal accorded by statute.
Benefits intended for the advantage or protection of the obligor are the rights to
(1) presentment for payment, (2) notice of dishonor, and (3) protest. All of these
may be waived.
Acts Exercisable at Option of the Holder
Agbayani The last exception to the general rule is that the negotiable character
of an instrument otherwise negotiable is not affected by a provision which gives
the holder an election to require something to be done in lieu of payment of
money. Under this, even if there is an additional act, the instrument still remains
to be negotiable provided that the right to choose between payment of money or
the performance of the additional act is in the hands of the holder. But if the
choice to pay money or to do the additional act is in the hands of the debtor, the
instrument is rendered non-negotiable.
Sebastian: If the option is given to the holder, the instrument is still negotiable.
Thus, a holder can demand novation provided that option was given to him. It
must be remembered that the holder must make sure that the other act that will
substitute payment of money is not illegal.
OMISSION IN A NEGOTIABLE INSTRUMENT
Sec. 6. Omissions; 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 had been
given therefor; or
(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.
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.
The Court was of the opinion that warrants of attorney to confess judgment are
not authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments
against makes should not be recognized in this jurisdiction by implication and
should only be considered as valid when given express legislative sanction.
Sebastian: If something is not included in Section 1, their omission will not

affect the negotiability of the instrument.
Waiver of Debtors Rights
Effect of Omission of Date
Agbayani: Another exception is that the negotiable character of an instrument

otherwise negotiable is not affected by a provision which waives the benefits of
any law intended for the advantage or protection of the obligor.
Agbayani: Even where the instrument is not dated, still the instrument is not
rendered non-negotiable. There are, however, cases where the date is necessary
to fix the date of maturity.
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Campos: The validity and negotiable character of an instrument are not affected
by the fact that it is not dated. A date in a bill or note is not essential to make it
negotiable. If it is not dated, and the date is necessary to fix the maturity of the
instrument, the law fills in the gap and considers the date of issue as the date of
the instrument, and allows any holder to insert the true date.
Sebastian: Even if the date is not an element of negotiability, this does not
mean that the date is irrelevant. Regardless, whether or not the instrument is
negotiable, one may still determine the due date. Relate this provision with
Section 13 where the date is necessary to fix the date of maturity. Thus, if the
instrument is negotiable, the remedy to the missing date of issuance is under
Section 13. The holder has the authority to insert a date in the instrument but the
date must be the true date of issue, which means that such date was on which the
instrument was delivered to him by the drawer or maker.
If the holder was a holder in due course, the written date is conclusively
presumed to be the date of issue on the instrument. Thus, as to a holder in due
course, the false date will be conclusively be a correct date. However, if the
instrument was transferred to another person past the due date of the
instrument, the holder may not be considered a holder in due course.
If the holder is not a holder in due course, the drawee may interpose personal
defenses. If he is, the drawee cannot use personal defenses.
If the instrument is non-negotiable, the Civil Code provision will apply, where in
the court will fix the date of issuance under Article 1197 of the Civil Code.
Effect of Omission of Value
Agbayani: Usually, all that is stated in the instrument is that it is being issued
for value received, without specifying what the value is. Nevertheless, even
where the value given is not specified, still the instrument is not rendered nonnegotiable. As a matter of fact, it is not even necessary to state that value has been
received because consideration is presumed.
Under paragraph (b), the law authorizes that the value given need not be
specified. However, under the last paragraph of this section, where a statute
requires that a particular contract specify the value given, the value given under
such contract must be specified. There seems, however, to be no statute of this
kind in the Philippines.
Sebastian: Looking at Section 24, there is a presumption that for every issuance
of an instrument, value was given. This presumption persists until proven
otherwise. Consideration in Civil Law likewise applies: the cause need not be
stated in the contract. It is presumed to exist unless otherwise shown.
Effect of Omission of Place

Campos: The purpose of specifying a certain place of payment is to fix the place
at which the holder must present the instrument for payment. It is an important,
though not essential, feature of the instrument. If no place is mentioned, the law
again fills in the gap by providing that presentment should be made at the
address of the person who is to pay, if such address is stated; if not, at the place of
business or residence of the person to make payment.
Sebastian: Place of issuance is important to know so that one will know where
to file a criminal case. It is also important to know so that one does not have to
look for the person who issued the check. However, even assuming there is no
place of payment written, Section 73, whichpertains to presentment, says that
you can present at the (1) address of the person who is to make payment if such is
indicated; or (2) if there is no address, make presentment at the usual place of
business or residence; or (3) make presentment wherever you can find him or last
known address.
Where Instrument Bears a Seal
Agbayani: At common law, a sealed instrument is rendered non-negotiable and
becomes subject to the rule governing contracts under seal. Under the Negotiable
Instrument Law, however, that is no longer true. Hence, even if the instrument is
sealed, the fact alone will not make non-negotiable.
Sebastian: Whether or not an instrument is sealed will not affect its
negotiability because a seal is irrelevant in our jurisdiction since we do not have
any law on seals.
Particular Kind of Current Money
Agbayani: As already stated under Section 1, even if the money in which the
instrument is to be payable is not legal tender, provided that it is current money
or foreign money which has a fixed value in relation to the money of the country
in which the instrument is payable, still the negotiability of the instrument is not
affected, as the instrument would still be considered payable in money.
INSTRUMENTS PAYABLE ON DEMAND
Sec. 7. When payable on demand. - An instrument is payable on
demand:
(a) When it is so expressed to be payable on demand, or at sight, or
on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue,
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it is, as regards the person so issuing, accepting, or indorsing it,

payable on demand.
Agbayani: Instead of on demand the words on sight or on presentation
may be used. The words at sight, however, are not ordinarily used in
promissory notes.
When a promissory note expresses no time for payment, it is deemed payable
on demand.
Where a blank for time for payment is unfilled, the instrument has been held to
be payable on demand. However, it may properly be considered an incomplete
instrument and may fall under the provisions of Sections 14, 15 or 16, depending
upon how the instrument is delivered. Moreover, a note payable on ______
was held payable on demand.
It must be remembered that after the date of maturity, the instrument can no
longer be negotiated as to make the parties who acquire the instrument after the
date of maturity holders in due course because they become holders thereof with
notice that it is already overdue, as this can be determined from the face of the
instrument itself. The last paragraph of Section 7 means that the instrument is
payable on demand only as between the immediate parties.
Sebastian: An instrument payable on demand is payable at any time on
demand of the payee or holder. In a bill of exchange, before the drawee can be
liable, he must accept it. If he does not accept the instrument, that instrument is
dishonored by non-acceptance. At that particular time, drawer will become liable
to the payee or holder. The drawers liability is secondary and he can only be ran
after if the drawee dishonored the instrument.
If the drawee accepts, the payee or holder must make a demand before he is paid.
When the payee or holder demands for payment, it is essential that he brings the
instruments. If he fails to, the drawee may dishonor his demand. The moment the
payee or holder brings the instrument to the drawee, the latter must inspect the
instrument and check if it is genuine. Then he should pay.
A negotiable instrument is a substitute for money and the due date need not be
expressed.
INSTRUMENTS PAYABLE TO ORDER
Sec. 8. When payable to order. - The instrument is payable to order
where it is drawn payable to the order of a specified person or to him
or his order. It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or

(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named
or otherwise indicated therein with reasonable certainty.
Agbayani: Among others, the instrument in order to be considered negotiable
must contain so-called words of negotiability. Under this section, there are only
two ways by which an instrument may be made payable to order. There must
always be a specified person named in the instrument and the bill or note is to be
paid to the person designated in the instrument or to any person 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.
Campos: There must always be a specified person named in the instrument. It
means the bill or note is to be paid to the person designated in the instrument or
to any person to whom he has indorsed or delivered the same. Without the words
to order or to the order of the instrument is payable only to the person
designated therein and is therefore non-negotiable.
Sebastian: When an instrument is payable to order, the promise to pay is
towards the payee or at his instruction. This indicates that the ultimate payee of
the instrument need not be the payee because he can transfer his rights to
another person. This indicates the negotiability of the instrument and if this is
missing, the instrument cannot be negotiable. As far as the maker is concerned,
he issues an instrument that is intended to pass from hand to hand.
Designation of Payee
Agbayani: Under the last paragraph of this section, the law requires that the
payee must be named or otherwise indicated with reasonable certainty. The
payee of an instrument payable to order must be a person in being, natural or
legal, and ascertained at the time of issue. If there is no payee, where the
instrument is payable to order, no one could indorse the instrument.
Consequently, it is useless to consider it negotiable.
Where blank for name of payee is unfilled, the instrument is not payable to order
because the payee is not named, neither is he designated with reasonable
certainty. However, it may be considered by Sections 14, 15 and 16, depending
upon how it is delivered.
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Campos: In Sec. 8(f), the payee is certain. Such an instrument is capable of 3

interpretations: (3) xxx The payee may be the person who happens to be
secretary at any particular moment thereby making the instrument a floating
promise. The third view is the most acceptable because the payee is certain and
easily determinable and such interpretation is most probably what the lawmaker
had in mind in using the words for the time being.
The name of the payee being misspelled or wrongly designated does not affect the
negotiability of the instrument. Under Sec. 43, it is provided that where the
name of the payee is wrongly designated or misspelled, he may indorse the
instrument as therein described, adding, if he thinks fit, his proper signature.
Sebastian: An instrument wherein the maker/drawer and the payee are one in
same person is not void under the Negotiable Instruments Law. If the instrument
is a note, that person is ultimately liable for the note and, as an indorser, also
warrants that if he cannot pay, he will pay as an indorser. If the instrument is a
bill, the person is in effect telling the drawee to pay him. Until the drawee
accepts, the drawee is not liable for the instrument. Assuming there is
acceptance, if the drawee cannot pay, the drawer, who is the payee and indorerser
at the same time, will be liable primarily and secondarily. Thus, in both instances,
there are 2 liabilities created one as maker and one as indorser.
When the instrument is made payable to the holder for the time being, the person
who can indorse such instrument is the incumbent person occupying the office at
a particular time.
If the name of the payee was wrongly spelled, one must write the misspelled
name and there after indorse it to the correctly spelled name.
INSTRUMENTS PAYABLE TO BEARER
Sec. 9. When payable to bearer. - The instrument is payable to
bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it so
payable; or
(d) When the name of the payee does not purport to be the name of
any person; or
(e) When the only or last indorsement is an indorsement in blank.
Sebastian: When an instrument is payable to bearer, it is payable to who is in
physical possession. Who is in physical possession of the instrument can indorse,
present for payment and collect the proceeds of the instrument.
Bearer instruments need not to be indorsed because it is negotiated by mere

delivery. Thus, forgery of an indorsement cannot be raised as a defense by the
maker or drawer.
When the last indorsement is an indorsement in blank, the instrument becomes
bearer instrument.
Concept of a Fictitious Person
Agbayani: The words fictitious person are not limited to persons having no
real existence. An existing person may be considered a fictitious payee,
depending upon the intention of the one making or drawing the instrument. The
words fictitious person mean to be a person who has no right to the instrument
because the drawer or maker of it so intended, and, therefore, it does not matter
whether the name of the payee used by the drawer or maker be that of one living
or dead, or one who never existed. The name is fictitious when it is feigned or
pretended and a non-existent person is one who does not exist in the sense that
he was not intended to be the payee by the drawer.
Campos: That the payee is a fictitious or non-existing person must be known to
the maker or drawer. The theory is that since the payee is not capable of
indorsing and since the maker or drawer knew of this fact, he must have intended
the instrument to be transferred by mere delivery.
If the maker or drawer is not aware that the person he named as payee is
fictitious or non-existent, then the instrument is not a bearer instrument but an
order one. Obviously, there is no one who can indorse it, so in effect it cannot be
validly negotiated.
Sebastian: The concept of a fictitious person is not limited to a fictional person
or a person who does not exist at all. A person who actually exists can be
construed as a fictitious person depending on the intention of the maker or
drawer. A fictitious person can include one who actually exists but has no right to
the instrument simply because the drawer or maker did not intend that person
did not intend for that person to have a right to that instrument. Thus, the true
test of fictitious person arises not from the existence of the individual, but it will
depend on the intention of the drawer or maker. When a transaction arose from a
feigned transaction, the intention of the issuer controls.
A check payable to a deceased person is not necessarily a check issued to a
fictitious person. If the maker/drawer believes that the payee is alive, the payee is
not considered fictitious. Clearly, drawer intended that the payee will have a right
to the instrument. As a consequence, not issued to a fictitious person, it is not
payable to bearer.
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If the instrument is made payable to the estate of a deceased person, it is an

instrument payable to order.
2) in an accepted bill of exchange and the acceptance is dated the date placed
is deemed prima facie the true date of acceptance
3) in an indorsed instrument and the indorsement is dated the date placed is
deemed prima facie the true date of indorsement
Limjoco v. Intestate Estate of Fragante Within the philosophy of the

present legal system and within the framework of the Constitution, the estate of
Pedro O. Fragante should be considered an artificial or juridical person for the
purposes of the settlement and distribution of his estate, which of course, include
the exercise during the juridical administration thereof of those rights and the
fulfillment of those obligations of his which survived after his death.
Sebastian: The date on the instrument is presumed to be the true and correct
date. However, this is a disputable presumption and any person who has an
interest in that instrument is free to dispute such presumption. But as to a holder
in due course, this presumption is conclusive.
Agbayani: The estate of a deceased person is a juridical person in a limited way.
Ante-dating and Post-dating of Instrument
Nazareno v. Court of Appeals The estate of a deceased person is a juridical

entity that has a personality of its own.
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for
the reason only that it is ante-dated or post-dated, provided this is not
done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the
date of delivery.
Sebastian: I do not like how this statement was phrased by the Supreme Court.
EXACT WORDS OF LAW NEED NOT BE USED
Sec. 10. Terms, when sufficient. - The instrument need not follow the
language of this Act, but any terms are sufficient which clearly
indicate an intention to conform to the requirements hereof.
Agbayani: It is advisable to use the words of the law in order to avoid
uncertainty and doubt. However, it is not necessary to use the exact words of law.
Indeed, an instrument may be valid and negotiable though written in a foreign
language.
Sebastian: Although the law does not require that a negotiable instrument be in
a document written in the language known to the drawer or maker, an
instrument needs to be in a language known to the drawer or maker because all
contracts require an intelligent consent. Therefore, signing a note written in a
foreign language not known to the drawer or maker may be a personal defense.
DATE OF A NEGOTIABLE INSTRUMENT
Relevance
Sec. 11. Date, presumption as to. - Where the instrument or an
acceptance or any indorsement thereon is dated, such date is deemed
prima facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be.
Agbayani: This legal provision applies to three cases:
1) the instrument contains the date of issue the date placed is deemed prima
facie the true date of the making or drawing of the instrument
Agbayani: An instrument is ante-dated when the date written thereon is earlier

than the true date of its issuance or delivery. An instrument is post-dated when
the date written thereon is later than the true date if its issuance or delivery. An
ante-dated or post-dated instrument is not rendered invalid or non-negotiable by
that fact alone. It may be negotiated before or after the date given as long as it is
not negotiated after its maturity.
The only limitation is that the ante-dating or post-dating is not done for illegal
and fraudulent means, such as, evading the Usury Law.
The person to whom the instrument is delivered acquires title or ownership over
it, not as of the date written on the instrument, but as to the date of actual
delivery.
Triphonoff v. Sweeney It makes no difference whether a check be postdated
or antedated, it is still payable according to its express terms. The drawing of a
postdated check is an everyday occurrence in the commercial world, and the
uniform understanding of the parties is that, when a check is postdated, it is
payable on the day it purports to be drawn, even though it be negotiated
beforehand. The contention of the defendants is that the instrument was not a
check, for the reason that it was not payable on demand and that the same was
not negotiable. We incline to the belief that the instrument was a check, payable
on demand on or after April 15, 1911. This conclusion is in harmony with cases
wherein it is held that a postdated instrument of this nature is a check, and not a
bill of exchange, which would authorize the holder to present the same for
acceptance prior to the time when it would be payable.
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Sebastian: Ante/postdating a check does not affect negotiability unless its

objective is unlawful.
Insertion of Date
Sec. 13. When date may be inserted. - Where an instrument
expressed to be payable at a fixed period after date is issued undated,
or where the acceptance of an instrument payable at a fixed period
after sight is undated, any holder may insert therein the true date of
issue or acceptance, and the instrument shall be payable accordingly.
The insertion of a wrong date does not avoid the instrument in the
hands of a subsequent holder in due course; but as to him, the date so
inserted is to be regarded as the true date.
Agbayani: Under Section 6, the date is not necessary for the negotiability of the
instrument. However, the date may be necessary to determine the date of
maturity.
Sebastian: The date of the instrument is not essential for negotiability. The two
instances when date is critical is when the instrument is payable after a fixed date
or payable after sight. If there is no date, one will never know when the due date
is.
Filling in the missing element of date is delegated to the holder.
Take note that this section only refers to a missing date. It does not refer to any
other element of a negotiable instrument. The date here pertains to the due date
of the instrument.
In the case of the dishonesty committed by the author of the dishonesty, the
instrument is avoided as to him. If the instrument is avoided as to the author of
the dishonesty, he can recover from the maker because only the negotiability of
the instrument is avoided but not the whole instrument. The instrument may
then be enforced as a debt instrument under the Civil Code.
As to a holder in due course, the date appearing on the instrument is conclusively
the date of issuance.
COMPLETION AND DELIVERY OF INSTRUMENTS

Agbayani: There are two steps in the execution of a negotiable instrument,
namely: (1) the act of writing the instrument completely and in accordance with
Section 1, and (2) the delivery of the instrument with the intention of giving effect
to it.
Campos: Delivery of the instrument means transfer of possession, actual or
constructive, from one person to another. It may thus be accomplished by
manual transfer of possession or by any other act manifesting intent to transfer of
possession. Without the initial delivery of the instrument from the maker to the
payee, there can be no liability on said instrument. Moreover, such delivery must
be intended to give effect to the instrument. Thus, if the maker gives the
instrument to another for mere safekeeping, there is no delivery within the
meaning of the above provision. However, once the instrument is no longer in the
possession of the person who has signed it, a valid delivery by him is presumed,
until the contrary is proved, and as to the holder in due course, the presumption
is conclusive, provided the instrument is complete.
The first delivery of the instrument complete in form, to a person who takes it as
a holder, is called the issue or issuance of the instrument.
Sebastian: there are two steps necessary to make a negotiable instrument. The
first step is to write the instrument. Having written the instrument and complied
with Section 1, the negotiable instrument is not yet complete. The second step is
delivery. This is the more important step in giving life to the negotiable
instrument. There are two types of delivery. It is called issuance when the
delivery is from the author to the first transferor. Upon delivery, the instrument
comes to life. Is called deliveries when the delivery is from the payee to the first
endorser.
INCOMPLETE BUT DELIVERED INSTRUMENTS
Sec. 14. Blanks; when may be filled. - Where the instrument is
wanting in any material particular, the person in possession thereof
has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up
as such for any amount. In order, however, that any such instrument
when completed may be enforced against any person who became a
party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But
if any such instrument, after completion, is negotiated to a holder in
due course, it is valid and effectual for all purposes in his hands, and
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he may enforce it as if it had been filled up strictly in accordance with

the authority given and within a reasonable time.
Agbayani: Bills and notes are sometimes executed in blank and delivered to
another to fill in and negotiate either for his own benefit or that of the maker.
Such instruments are, therefore, incomplete but delivered.
Campos: This provision merely raises a personal defense. It covers two kinds of
writings: (1) incomplete instruments, and (2) a blank paper or a paper so far
incomplete that it does not constitute an instrument within the meaning of the
definition of this term, but signed. The first kind involves a writing which
although containing blanks, is so far completed that it is an instrument, i.e.,
where the writing recites enough of the formalities to make evident the intention
to make the writing operate as negotiable instrument. In such case, any person
in possession thereof has a prima facie authority to complete it by filling up the
blanks therein. This contemplates a delivered instrument, and not an
undelivered instrument which is covered by Section 15.
The second kind of writing is one which is so far incomplete that it is not an
instrument. in this case, two conditions must be present before the presumption
of authority to complete may arise: (1) delivery of the instrument, and (2) the
delivery must have been for the purpose of converting it into a negotiable
instrument. Thus if the paper or writing is delivered without such intention, its
subsequent conversion into a negotiable instrument will not render the person
signing liable to anybody, not even a holder in due course. The presence of such
intention must be proven by the possessor of the instrument.
As to a signed blank paper, the law provides that there is prima facie authority to
fill it up for any amount. It is believed that it includes authority to fill in other
blanks, specially to all missing requirements necessary to make it a negotiable
instrument, since otherwise it would not be such an instrument. Whether it is an
incomplete instrument or a mere signed blank paper therefore, the authority
extends to the insertion of the date, place of payment, the amount, the name of
the payee, and the time of payment. While Sec. 14 is broad enough to include the
matter of filling in blanks for the time of payment, Sec. 13 deals with more
particularity on some aspects of this right.
The insertion of a wrong date, by one having knowledge of the true date of issue,
will avoid the instrument as to him, but the innocent party may enforce the same
notwithstanding the improper date. The authority to fill in the blanks or to
complete the instrument is limited as to time. According to Sec. 14, in order to be
enforceable against a party prior to completion, it must be filled in within a
reasonable time. Such reasonable time must be reckoned from the time of the
issuance of the instrument and not from the time of each successive negotiation,
because the interest involved is that of the issuer. In determining what is
reasonable time, Section 193 provides that regard is to be had to the nature of
the instrument, the usage of trade or business (if any) with respect to such
instruments, and the facts of the particular case. However, it should be noted
that whether unreasonable time has elapsed or not would be immaterial, if the
used had expressly fixed the time within which completion may be made.
Sebastian: The missing element here must be a material particular. Either one
of the missing material particulars may be corrected by Section 14. An instrument
that is non-negotiable at inception may become negotiable because of Section 14.
However, the correction of the missing date cannot be corrected by Section 14,
but may be corrected by Section 13.
Authority to Complete the Instrument
Agbayani: The material particular referred to here may be: (1) a particular
omission of which will render the instrument non-negotiable (e.g. name of the
payee or the name of the drawer); or (2) a particular omission of which will not
render the instrument non-negotiable (e.g. date, rate of interest, place of
payment).
The law presumes from two facts: (1) want of a material particular in the
instrument, and (2) possession thereof by a person, a third fact (3) that such
person had authority to fill up the blank.
It will be noted that the law does not seem to require the delivery of the
instrument with intent to have it converted into a negotiable paper. The law
merely requires that it be in the possession of a person other than the drawer or
maker, and from such possession, together with the fact that the instrument is
wanting in a material particular, the law presumes agency to fill up the blanks.
The law thus presumes the existence of the authority to fill the instrument up to
any amount from the following two facts: (1) a signature on a blank paper and (2)
that the person signing in blank delivers it in order that the paper may be
converted into a negotiable instrument. Mere possession by a person is not
enough.
Sebastian: The holder is presumably given the authority to fill the missing
element. What is presumed is given that the instrument is incomplete, the maker
or drawer made a delivery. Consequently, the person to who it is delivered is
presumed given the authority to fill it up.
Rights of a Holder in Due Course
Agbayani: Under this section, the defense of parties prior to completion is that
it is not filled up within a reasonable time. However, such defense is available
only against holders who are not holders in due course. The defense is not
available against a holder in due course because under the law, in the hands of
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such a holder, the complete but delivered instrument is valid and effective for all
purposes in his hands, and he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a reasonable time. The defense
is, therefore, a personal or equitable defense.
Sebastian: A holder in due course can enforce the instrument against parties
prior to completion regardless of the validity of the elements filled up by the prior
holders. Thus, this is a personal defense.
Agbayani: An incomplete instrument is not valid against the party before its
delivery. The non-delivery of an incomplete instrument is a valid defense, not
only between the original parties but also against a holder in due course. The law
does not make any distinction between a holder in due course and who is not
because the law used the phrase any holder which includes a holder in due
course. The defense of want of delivery of a mechanically incomplete
instrument is, thus, a real defense.
However, the invalidity of the instrument is only with reference to the parties
whose signatures appear on the instrument prior to delivery. As to parties whose
signatures appear on the instrument after delivery, the instrument may be valid.
Instruments Delivered in Blank

Agbayani: One who is not a holder in due course cannot enforce the instrument
against a party prior to the completion of the instrument if the instrument is not
filled up strictly in accordance with the authority given and within reasonable
time. The law provides that in order that one who is not a holder in due course
may enforce mechanically incomplete but delivered instrument, the two
requisites must exist. The implication is that when one or both of the requisites
are absent, the instrument may not be enforced.
Although an instrument was completed not in accordance with the authority
given, the parties negotiating after completion are liable on the completed
instrument because they are estopped or precluded from claiming that the note
was not filled up strictly in accordance with the authority given.
In determining what is a reasonable time or an unreasonable time, regard is
had to the nature of the instrument, the usage of trade or business (if any) with
respect to such instrument and the facts of the particular case. In other words,
the term is very relative.
Sebastian: Another incomplete instrument in this section is a blank piece of
paper that is signed. It may be filled up in accordance with the instructions and
within a reasonable time. After which, the instrument may be enforced againt
prior parties; otherwise, the instrument cannot be enforced.
The requirements for a blank sheet to become a negotiable instrument is that (1)
the maker must sign a blank sheet of paper, (2) with intent to convert to a
negotiable instrument, and (3) must deliver the sheet.
INCOMPLETE AND UNDELIVERED INSTRUMENTS
Sec. 15. Incomplete instrument not delivered. - Where an incomplete
instrument has not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in the hands of any
holder, as against any person whose signature was placed thereon
before delivery.
Under Section 16, the delivery is conclusively presumed where an instrument is

in the hands of the holder in due course. The provision of Section 16 that a valid
delivery is in the hands of a holder in due course must be read in connection with
Section 15, and Section 16 does not apply in the case of an incomplete instrument
completed and negotiated without authority. Section 16 applies to a mechanically
completed instrument not delivered, while Section 15 applies to a mechanically
incomplete instrument not delivered.
But where an incomplete and undelivered instrument is in the hands of a holder
in due course, there is a prima facie presumption of delivery which the maker
may rebut by proof of non-delivery. This presumption must, however, be
distinguished from the presumption where an undelivered mechanically
complete instrument is in the hands of a holder in due course, in which the
presumption of valid delivery is note merely prima facie but conclusive.
Furthermore, where the custody of the incomplete instrument has been entrusted
to another, who wrongfully completes and negotiates it to a holder in due course,
delivery to the agent or custodian is a sufficient delivery to bin the drawer or
maker.
Campos: This contemplates an instrument which is not only undelivered but
also incomplete. In this case, a real defense exists and not even a holder in due
course can recover on the instrument, for the law is specific that it is not a valid
contract in the hands of any holder. The conclusive presumption of delivery
under Sec. 16 cannot apply, although possession of an incomplete instrument
raises prima facie presumption of delivery.
If an instrument contains all the requisites for making it a negotiable one, it
should be considered as complete though it in fact may have blanks as to nonessentials, so as to give rise to a conclusive presumption of delivery in favor of a
Sebastian: This is a real defense.
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As a rule, one cannot enforce the instrument whose signature appeared before
delivery. But if the incompleteness is cured by the authority given by the maker to
an agent, Section 15 will not be applicable.
Also, there are cases where Section 15 is not applied where the doctrine of
estoppel is involved.
Pavilis v Farmers Union Livestock Commission The check in
controversy was an incomplete instrument when stolen and cannot be enforced
in the absence of conduct on the part of the drawer creating an estoppel.
While there can be no question that the provisions of the Negotiable Instruments
Law do not prevent an inquiry into the question of the negligent custody of an
incomplete instrument, and, that, if as a result of negligence such instrument
comes into the hands of a holder in due course, the latter may recover, yet we
cannot say under the facts and circumstances of the instant case that defendant
was negligent. The loss did not result from completion and negotiation of the
check by one entrusted with its possession, and we are not concerned with a
breach of duty as between a depositor and drawee. It does not appear that that
the defendant company had reason to mistrust its employee and anticipate the
wrongful taking by him of a check signed in blank, the subsequent completion
and negotiation. The drawer owes the duty to use due care in the execution of
checks, but it does not follow as a legal conclusion that signers of checks in blank
assume the risk of liability in all cases where such instruments are wrongfully
taken, completed and negotiated. To hold that a person is negligent in having in
his possession a check signed in blank would require something more than the
exercise of ordinary care.
Weiner v Pennsylvania Co. In the instant case the plaintiff signed the
check in blank, thus putting it in the power of an unauthorized person to fill it in
and present it for payment. The depositors act made the loss possible and caused
it, and enabled the thief to commit the fraud. The depositor-plaintiffs acts in this
respect are a bar and an estoppel in her suit against the drawee bank, thus
preventing any recovery on her part. To hold otherwise would require the bank to
communicate with the drawer as each check was presented, in order to find out if
delivery was intended. This is too much to be expected; and to place the burden
of loss or its chance on the depository if it does not interview the maker, is
neither fair nor compatible with public interest.
Campos: How does this case compare with Pavilis case? The court in effect
holds that mere signing of a check in blank is negligence which will make the
drawer liable to the drawee bank in case it is successfully encashed without
having been validly delivered. Is this holding inconsistent with the last sentence
in the Pavilis case?
Linick v A.J. Nutting & Co. The delivery of a promissory note by the maker
is necessary to a valid inception of the contract. The possession of such a note by
the payee or indorsee is prima facie evidence of delivery, but if it appears that the
note has never been actually delivered, and that without any confidence, or
negligence, or fault of the maker, but by force of fraud, it was put in circulation,
there can be no recovery upon it, even when in the hands of an innocent holder.
COMPLETE BUT UNDELIVERED
INSTRUMENTS
Sec. 16. Delivery; when effectual; when presumed. - Every contract on
a negotiable instrument is incomplete and revocable until delivery of
the instrument for the purpose of giving effect thereto. As between
immediate parties and as regards a remote party other than a holder
in due course, the delivery, in order to be effectual, must be made
either by or under the authority of the party making, drawing,
accepting, or indorsing, as the case may be; and, in such case, the
delivery may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property in
the instrument. But where the instrument is in the hands of a holder
in due course, a valid delivery thereof by all parties prior to him so as
to make them liable to him is conclusively presumed. And where the
instrument is no longer in the possession of a party whose signature
appears thereon, a valid and intentional delivery by him is presumed
until the contrary is proved.
Agbayani: The law provides that every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of
giving effect thereto. And no rights, properly speaking, arise in respect to an
instrument until it is delivered.
Issue is the first delivery of the instrument, complete in form, to a person who
takes it as a holder. Delivery and issuance are used interchangeably. Delivery and
issuance may be made either by the maker or drawer himself or through a duly
authorized agent, and may be made either to the payee himself or to his duly
authorized agent.
Before delivery, the maker or drawer can revoke, cancel or tear up the
instrument. The payee named in the instrument acquires no right until the
instrument is delivered to him.
The term immediate parties is confined to those who are immediate, in the sense
of knowing or being held to know the conditions or limitations placed upon the
delivery of the instrument. It means privity, not proximity. In other words, the
criterion is whether or not the party in question knows of the conditions or
limitations placed upon the delivery or the fact that the instrument was not
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delivered but stolen. If the party in question knows, he is an immediate party

even if he is physically remote. On the other hand, if he does not know, he is not
an immediate party even if he is the next party physically.
due course, it is a personal defense. What is conclusive is only the delivery. It

does not preclude the maker from interposing any other defenses.
This provision is subject to the application of estoppel.
Under the law where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved. However, as against an immediate party
who is not a holder in due course, the presumption will exist in his favor only
until the contrary is proven. In other words, the presumption is rebuttable as
against an immediate party or a remote party who is not a holder in due course
and, as against him, it may proved that:
1) no delivery was made;
2) if the delivery was made, it was not authorized;
3) if the delivery was made or authorized, the delivery was conditional or for a
special purpose and not for the purpose of transferring the property in the
instrument.
Campos: Non-delivery of a complete instrument is only a personal defense.
Delivery of an instrument is a prerequisite for liability. If the instrument is
complete in all its particulars, but is not delivered, there is no contract. However,
if the instrument is no longer in the possession of a party who has signed it, a
delivery is presumed until the contrary is proved. If the holder is a holder in due
course, the instrument is not merely prima facie deemed delivered, but this fact is
conclusively presumed. Thus, if a complete instrument is stolen from the maker
or drawer, and negotiated to a holder in due course, such maker or drawer cannot
set up a defense of non-delivery because it is a personal defense available only
between immediate parties and as regards remote parties who are not holders in
due course.
Sebastian: Delivery is the transfer of possession, actual or constructive, from
one person to another. For delivery to be effectual, must be done by making or
endorsing under the authority of the person making, endorsing, drawing or
accepting. When a person delivers an instrument, the delivery can be conditional,
unconditional or for a specific purpose only.
As a general rule, when the instrument is no longer in the possession of the party
who signed, there is a prima facie presumption that the party who signed it
intentionally delivered it. In respect to a holder in due course, there is already a
conclusive presumption of delivery. However, for immediate and remote parties,
to be effectual, delivery must be made by the drawer, maker, acceptor or
endorser, or under their authority. Immediate parties are those parties who has
knowledge of the circumstances surrounding the delivery of the instrument. They
are remote when they have no knowledge and there is no privity of contract. The
presumption may be raised against remote parties because of the guaranties
made under Section 65 and 66. In so far as this provision protects the holder in
Delivery Subject to Conditions

Agbayani: The following is an example of a conditional delivery: A makes a
complete note in favor of B, with the understanding that it is not to become
binding on A until it is also signed by C. If B files an action on the note without
any additional proof, the presumption is that it was delivered validly and
intentionally. But as B knows of the condition placed upon the delivery, he is an
immediate party. Consequently, the presumption is rebuttable, and A can show
that the delivery was conditional and if the condition is not fulfilled, he cannot be
held liable by B.
It is to be noted that what is conditional here is the delivery, not the promise or
order to pay. Otherwise, the instrument is rendered non-negotiable.
Delivery for Special Purposes
Agbayani: The following is an example of delivery for a special purpose: A
delivers a complete note payable to bearer signed by him to B for (1) safekeeping
or (2) for collection only. B cannot enforce the note against A, as A can prove that
the note was delivered only for a special purpose.
Presumption of Delivery as to Holder In Due Course
Agbayani: Where the instrument is in the hands of a holder in due course, a
valid delivery thereof by all parties to him is conclusively presumed. A
presumption is said to be conclusive when contrary proof is barred.
It must be remembered that the bills or notes dealt with in this section are
mechanically complete. As already stated, under Section 15, an incomplete and
undelivered instrument is not valid even in the hands of a holder in due course as
against a party prior to delivery.
In Re Martens Estate Every contract on a negotiable instrument for the
purpose of giving effect thereto. This was the common law rule.
Obviously, the note here sued upon could not be made the basis of a valid claim
against the estate unless there was a legal delivery of same, during the lifetime of
the decedent. Our decisions, relative to the analogous situations, are reviewed in
the recent case of Orris v. Whipple, where in we state: All there is to show
delivery in the case is that the deed was prepared and executed by Miss Aken;
that she told others that she wanted the plaintiffs to have the property and that
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she prepared papers for providing. She put the deeds in her safety deposit box
and retained the key. We do not think these admitted facts show a legal delivery
of the deed in question.
The position taken by this court in the Orris case is controlling here.
SUMMARY OF
INSTRUMENTS
RULES
ON
DELIVERY
OF
NEGOTIABLE
Sebastian: Delivery of a negotiable instrument is necessary. Between

immediate parties, delivery must be made with intention to pass title. Where the
intention is for some other things, then it is not the delivery contemplated by law.
incomplete but delivered
HIDC
NOT HIDC
Holder can enforce the Holder
can
enforce
instrument as completed instrument as completed
against parties prior or only
against
parties
subsequent to completion.
subsequent
to
the
completion but not against
those prior thereto.
incomplete and undelivered
Holder can enforce instrument as contemplated only
against parties subsequent to the delivery but not against
those prior thereto.
Possession gives rise to a Possession does not give
prima facie presumption of rise to any presumption of
delivery which the maker or delivery.
drawer may rebut by proof
of non-delivery.
complete but undelivered
Possession gives rise to a Possession gives rise to a
conclusive presumption of prima facie presumption of
delivery.
delivery which the maker or
drawer may rebut by proof
of non-delivery.
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RULES OF CONSTRUCTION
LIABILITY OF PERSONS SIGNING AN INSTRUMENT
Sec. 17. Construction where instrument is ambiguous. - Where the

language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
(a) Where the sum payable is expressed in words and also in
figures and there is a discrepancy between the two, the sum
denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures
to fix the amount;
(b) Where the instrument provides for the payment of interest,
without specifying the date from which interest is to run, the
interest runs from the date of the instrument, and if the
instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be
dated as of the time it was issued;
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at
his election;
(f) Where a signature is so placed upon the instrument that it is not
clear in what capacity the person making the same intended to
sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I promise to pay" is
signed by two or more persons, they are deemed to be jointly
and severally liable thereon.
Agbayani: The rules stated in this section shall not be availed of if the terms of
the instrument in question are clear and admit of no doubt. It is only when the
instrument in question is ambiguous, doubtful or obscure, or when there are
omissions therein that the rules stated in the section apply.
Continental Illinois Bank v. Clement The Negotiable Instruments Law
provides that where an instrument containing words I promise to pay is signed
by two or more persons, they are deemed to be jointly and severally liable
thereon.
If an instrument worded in a singular is executed by several, the obligation is a
joint and several one.
SIGNING UNDER A TRADE OR ASSUMED NAME

Sec. 18. Liability of person signing in trade or assumed name. - No
person is liable on the instrument whose signature does not appear
thereon, except as herein otherwise expressly provided. But one who
signs in a trade or assumed name will be liable to the same extent as if
he had signed in his own name.
Agbayani: The rule stated here is that a person whose signature does not
appear on the instrument is not liable Thus, a drawee who has accepted the bill of
exchange is not liable on the instrument. Thus, also, one whose name does not
appear on the note cannot be held liable thereon even though the payee knew at
the time of making the note that the obligation was that of a person other than
the maker. So also, where a note was signed by one individual, a person
associated with him in a joint oil enterprise for the benefit of which money was
borrowed, was not liable on the note since undisclosed principal may not be held
liable on negotiable paper executed by the agent in his own name.
The following are the exceptions to the general rule:
1) where a duly authorized agent signs for a person, that person is liable.
2) Where a person sought to be charged forges the signature of another person,
the forger is liable even if his signature does not appear thereon.
3) Where a person sought to be charged signs on a paper separate from the
instrument itself, as an allonge, although the allonge may be considered as
part of the instrument; or where an acceptance is written on a paper other
than the bill itself, under Section 134 and 135.
Sebastian: As a rule, if there is no signature, there can be no liability. Another
exception is where the person uses an assumed name or trade name one may
become a party to a negotiable instrument by any designation he desires.
SIGNING AS AN AGENT
Sec. 19. Signature by agent; authority; how shown. - The signature of
any party may be made by a duly authorized agent. No particular form
of appointment is necessary for this purpose; and the authority of the
agent may be established as in other cases of agency.
Agbayani: As already stated, the party may sign personally or through an agent.
The agency may be oral or written. There is no particular form required by the
law and the agency may be proved by oral or written evidence, unless specific
provisions of the general law, such as, the statute of frauds, require otherwise.
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Sebastian: If the agent had authority to issue the instrument, the intention of
the agent is the intention of the principal. If the agent did not have authority, he
cannot bind the principal and his transaction will become unenforceable unless
the principal ratifies it.
signed by the agent, it is possible that the agent may or may not have the
obligation to disclose his principal.
Insular Drug v. PNB (58 Phil 684) The right of an agent to indorse
commercial paper is a very responsible power and will not be lightly inferred. A
salesman without authority to collect money belonging to his principal does not
have implied authority to indorse the checks received in payment. Any person
taking checks made payable to a corporation which can act only by agents, does
so at his peril and must abide by the consequences if the agent who indorses the
same is without authority.
Sec. 21. Signature by procuration; effect of. - A signature by

"procuration" operates as notice that the agent has but a limited
authority to sign, and the principal is bound only in case the agent in
so signing acted within the actual limits of his authority.
When a bank accepts the indorsements on checks made out to a drug company of
a salesman of the drug company and the indorsements of the salemans wife and
clerk, and credits the checks to the personal account of the salesman and his wife,
permitting them to make withdrawals, the bank makes itself responsible to the
drug company for the amounts represented by the checks, unless it is pleaded
and proved that after the money was withdrawn from the bank, it passed to the
drug company which thus suffered no loss.
Sec. 20. Liability of person signing as agent, and so forth. - Where
the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an
agent, or as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
Agbayani: In order to escape personal liability on the instrument, an agent
must:
1) be duly authorized;
2) adds words to his signature indicating that he signs as an agent, that is, for
or on behalf of a principal, or in a representative capacity; and
3) disclose his principal.
Officers of the government and other public corporations are not held to the same
rule of agency by which, in exceeding their authority, they bind themselves;
everyone having dealings with a public officer is supposed to know the legal
limitations of his agency so that when the public officer, in innocent mistake of
law, makes an unauthorized contract in the name of the public corporation,
neither he nor the corporation is bound.
Sebastian: Under this section an agent is under the obligation to disclose the
identity of his principal. Therefore, depending on the nature of the instrument
SIGNATURE BY PROCURATION
Agbayani: A signature per procuration constitutes a warning that the agent has
but a limited authority, and, therefore, a person who takes the instrument is
bound at his peril to inquire into the extent and nature of the agents authority,
and this applies to every person.
INDORSEMENT BY
INFANT OR CORPORATION
Sec. 22. Effect of indorsement by infant or corporation. - The
indorsement or assignment of the instrument by a corporation or by
an infant passes the property therein, notwithstanding that from
want of capacity, the corporation or infant may incur no liability
thereon.
Agbayani: Ordinarily, a minor cannot give consent to contracts and a contract
entered to him is voidable. In the case of corporations, [directors and officers]
cannot perform acts beyond the scope of their authority. Such acts would be ultra
vires acts. Nevertheless, if a minor or a corporation indorses an instrument, the
indorsee acquires title to it and can enforce it against the maker or acceptor or
other parties prior to the minor. Such prior parties cannot escape liability by
setting up a defense the incapacity of the indorser.
This section is also applicable to indorsements by lunatics, imbeciles, and other
incapacitated persons.
Sebastian: An indorsement by corporations or minors pass property regardless
of lack of capacity but there will be no liability incurred. They may give
ownership, but no liability.
Murray v. Thompson In stipulating that the indorsement of the instrument
by an infant passes property therein, it was meant to provide that the contract
of indorsement is not void, and that his indorsee has the right to enforce payment
from all parties prior to the infant indorser. Incapacity of the minor cannot be
availed of by prior parties.
The purchaser and indorsee of a not is not a bona fide holder as against an infant
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indorser, and that the latter may disaffirm and recover the note from the
possession of the former, who takes with constructive notice of the incapacity.
FORGERY
Sec. 23. Forged signature; effect of. - When a signature is forged or
made without the authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument,
or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
Agbayani: By forgery is meant the counterfeit making or fraudulent alteration
of any writing. It may consist in the signing of anothers name, or the alteration of
an instrument in the name, amount, description of the person and the like, with
intent to defraud. The intent to defraud distinguishes forgery from innocent
alterations and spoliation. Section 23 applies only to forged signatures or
signatures made without the authority of the person whose signature purports to
be. Consequently, if the forgery consists of alteration in the amount, Section 23
does not apply. Such alterations are covered by Section 124.
It is not necessary that the forger attempt to imitate or simulate the signature
being forged.
Campos: Forgery is a real defense. A person whose signature to an instrument
was forged was never a party and never consented to the contract which allegedly
gave rise to such instrument. Since his signature does not appear on the
instrument, he cannot be held liable thereon by anyone, not even by a holder in
due course.
Section 23 deals with two sets of situations:
1) Where the signature on the instrument is affixed by one who purports to be
an agent, but who does not have the authority to bind the alleged principal;
and
2) Where the signature is affixed by one who does not claim to act as an agent
and who has no authority to bind the apparent signer.
The signature in both cases is wholly inoperative and no one can gain title to
the instrument through it.
Sebastian: Forgery is the affixing of the counterfeit signature of maker, drawer,
indorser, or drawee; or a material alteration of an instrument, particularly to the
amount or name of the payee. In some cases, alteration of date can be a forgery as
when making it appear that the instrument is not yet past due. Material alteration
are those alterations made to material elements or those that are important to an
instrument.
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DLSU LAW
Fraudulent alteration is merely one of the two forms of forgery. Although,

generally, what is usually forged is the signature. The maker/drawer, drawee and
indorser are the only people who can sign in the negotiable instrument. Any other
persons signature that is forged is irrelevant.
Where a signature is affixed on a blank paper w/o intent to create an instrument,

and something is written to make it appear that the signatory is a drawer, maker,
indorser, or payee, there is fraud in factum.
FRAUD IN INDUCEMENT
The two general types of forgeries are the (1) counterfeiting of signature, and (2)
material alteration under Section 124. Material alteration is a form of forgery.
The counterfeiting of the signature may be done (1) by an authorized agent of the
person whose signature is forged, or (2) by a person who is a total stranger. If it is
done by an authorized agent, it must be determined if the agent acted within or
outside the scope of his authority. When an agent affixes the signature of the
person to an instrument without being empowered to do so, then there is forgery
by an agent. This is a functional equivalent of unenforceable contract in Civil
Law. If it is not done by an agent, the person does not even represent himself to
be the agent of the person whose signature is forged. Thus, such person cannot
claim any authority to affix any signature.
Agbayani: Fraud in inducement does not amount to forgery and is only a

personal defense. The following is an illustration of fraud in inducement: A sells
to B what he represents to be as a diamond ring, which in fact is only glass. B
issues to A a check. The check is not a forgery. The fraud here is in inducing B to
issue the check. Here, there is an intention of B to issue an instrument.
FRAUD IN CIVIL LAW
There is fraud when, through insidious words or machinations of one
of the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to. (Art. 1338, Civil
Code)
Forgery can be invoked even if the signature is authentic.

DURESS AMOUNTING TO FORGERY
FRAUD IN FACTUM
Agbayani: Fraud in factum or fraud in esse contractus amounts to forgery and
is a real defense. The following is an illustration of fraud in factum: B obtains the
signature of A by telling A that it is only for autograph instrument. The fraud here
amounts to fraud. Here, there is no intention to issue an instrument.
Sebastian: There is fraud in factum if there was no intention to issue an
instrument. Although the signature is mechanically genuine, there is want of
intent. Fraud in factum, however, will never apply to a check because when you
sign a check, you know for what purpose is that signature.
Fraud in factum is a real defense. However, one cannot raise this defense if he is
charged with negligence. Thus, an essential element is that the person whose
signature appears on the instrument should have exercised ordinary diligence
and did not contribute to the imposition of the forgery. The test is whether or not
the signature is procured in such manner as to be voluntary by the maker. If it is,
then there is liability. The person raising the defense must present competent
proof that the signature affixed was without negligence on his part.
An indorsee is not obliged to ask the genuineness of the note because his
protection is the warranty of an indorser. The indorser can also claim under this.
He is not primarily laible but will still be covered under the warranties under
Section 66.
Agbayani: Ordinarily, duress is merely a personal defense. But where it

amounts to forgery, it is a real defense, as where A takes Bs hand and forces him
to sign his name.
Sebastian: There must be violence or intimidation that results in the affixing of
a genuine signature to an instrument. While the signature was genuine, it was
surrounded by circumstances with violence or intimidation. In this case, there
was want of intention to execute an instrument or to indorse.
FRAUDULENT IMPERSONATION
Agbayani: Suppose that X represents himself to be Juan Cruz, when in fact he
is not. By this misrepresentation, X obtains from Y a note payable to the order of
Juan Cruz. Then X indorses the note, signing Juan Cruz. This is forgery
depending upon whom Y intended to pay. If Y intended that proceeds of the note
will go to X, the person dealing with him, named at that time Juan Cruz, then Xs
signature of the name Juan Cruz is not a forgery. But if Y intended that the
proceeds of the note will go to the real Juan Cruz and not X, but to whom Y
issued the note on the belief that X was Juan Cruz, then Xs signature of Juan
Cruz would be a forgery.
Sebastian: In fraudulent impersonation, there is no intention to issue the
instrument to the person to who it was given to. Thus, what is controlling is that
one though the person in front of him is the person entitled to the instrument.
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The person raising this defense must demonstrate that he is not guilty of
negligence or that it was not his negligence that allowed the commission of the
forgery.
Sebastian: Fraudulent inducement is not a form of forgery and is merely a

personal defense.
Theory of Double Intent
Procedural Requirement in Proving Forgery
Agbayani: In these fraudulent impersonation cases, the maker or drawer of the

instrument may be said to have a double intent. First, he intends to make the
instrument payable to the person before him or to the person writing at the other
end of the line, in case the negotiation is by correspondence. Second, he intends
to make the instrument payable to the person who he believes the stranger to be.
To use the illustration, Y here may be said to have a double intent. First, he
intends to make the instrument payable to X, the person before him. And,
second, he intends to make the instrument payable to Juan Cruz who he believes
X, the stranger, to be.
Sebastian: The person raising the defense of forgery must deny the document
under oath. If he forgets to deny it under oath, the genuineness of the instrument
is conclusively admitted.
The first is the controlling intent except where the name of the payee was already
known to the maker or drawer, or was more particularly identified, by some
designation, description or title, in which case the second becomes the
controlling intent. Consequently, in the illustration, it would ordinarily be held
that X is the indented payee, and therefore, Xs signature of Juan Cruz would
ordinarily not constitute a forgery but the signature of an assumed name.
The theory commonly invoked in throwing the loss on the drawer is that the
drawee, in paying the paper, or the holder, in taking it upon the indorsement of
the impostor in the name of which the payee was described, carries out the
intention that the drawer entertained at the time of the delivery of the paper to
the impostor, although that intention was conceived in consequence of fraud of
the impostor as to his identity and ownership of the property which represented
the consideration. (Theory of Actual Intent)
Another theory invoked is the maxim that as between two innocent persons, the
one whose act was the cause of the loss should bear the consequences. (Theory of
Estoppel)
There is a distinction between cases where the paper is delivered to the impostor
as payee and cases where the paper is delivered to the impostor upon his
representation, in the belief that he is agent of the person named as payee,
although the latter is a fictitious person, or at least a person who has no
connection with the transaction. In the absence of negligence on the drawers
part, as between the drawer and drawee or between the drawer and a holder in
due course, the loss falls on the drawee or the purchaser, as the case may be,
ratherthan on the drawer, where the impostor represented himself to be the
agent of the payee, and not the payee himself. The doctrine of actual intent does
not apply because the drawer did not regard the individual to whom he delivered
the check as the payee but merely as the agent of the payee.
EFFECTS OF FORGERY
Agbayani: Section 23 lays down three fundamental rules as to the effect of a
forged signature:
1) that the signature forged or made without authority is wholly inoperative;
2) that no right (1) to retain the instrument, (2) to give discharge therefore or (3)
to enforce payment thereof against any party thereto, can be acquired through
or under such signature forged or made without authority; and
3) that, nevertheless, as against a party precluded from setting up the forgery or
want of authority, the signature forged or made without authority:
a) the signature forged or made without authority is operative, and
b) rights can be acquired trough or under the signature forged or made
without authority.
Sebastian: When there is forgery, the signature becomes wholly inoperative
and there can be no right to retain, no right to discharge the instrument or right
to enforce payment, except if the party is precluded from interposing the defense
of forgery.
The person whose signature is forged, incurs no liability under that instrument
because the signature is wholly inoperative. A negotiable instrument is a contract
between 2 or more people. It is axiomatic that one does not become a party
unless consent is given to a contract; thus, no rights or liabilities are incurred. If
the signature is completely inoperative, then the intended beneficiary of the
instrument does not acquire anything under the counterfeit signature.
There must be an unbroken chain of legitimate transactions and any forgery
breaks the legitimate transactions. When the signature is wholly inoperative,
anybody whose signature appears prior to the forgery cannot be held liable by the
last person who holds the instrument.
A holder in due course can then enforce payment under breach of warranties
under Section 66 against the indorsers after the forgery. His action is one for
specific performance. A holder in due courses action against the forger is not
limited to Section 66.
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EXTENT OF EFFECTS OF FORGERY

Agbayani: It must be noted, however, that:
1) Only the signature forged or made without authority is stated by law to be
inoperative but neither the instrument itself is, nor the genuine signatures
are, rendered inoperative.
2) The instrument can be enforced by holders to whose title over the instrument
the forged signature is not necessary, such as, an indorsement of an
instrument which on its face is payable to bearer.
3) The instrument can be enforced against those who are precluded from setting
up the defense of forgery, even against those whose signatures are forged.
Sebastian:
1) Only the forged signature or made without authority is wholly inoperative
and the other signatures are vaild.
2) The insturment can be enforced by the holder whose title to the instrument
does not require the forged signature. Meaning, the holder can enforce the
instrument against a person whose signature is not neessary for the
instrument. Remember that to a holder in due course, a valid delivery to all
prior parties is conclusively presumed.
Forgery of an irrelevant signature is not a defense, while forgery of a relevant
signature is a real defense.
3)
While a forged signature is wholly inoperative, the person against whom it is

sought to be enforced must not be precluded from claiming forgery, such as,
(1) the forgery was committed thru their negligence or (2) they delayed in
notifying the forgery to the parties involved.
Sebastian: By merely affixing your signature, one becomes a general indorser

and warrants that the instrument is genuine in all respect what it purports to be
under Section 66.
Persons Negotiating by Delivery
Agbayani: Persons negotiating by mere delivery also warrant the instrument
negotiated by them is genuine in all respects what it purports to be.
Sebastian: Unlike an indorser, the warranties made are under Section 65 or
warranties made by a qualified indorser. These warranties are given by persons
negotiating the instrument by mere delivery (i.e. bearer instruments).
Acceptors
Agbayani: Under Section 62, a drawee, by accepting the bill, admits the
genuineness of the signature of the drawer.
Campos: An acceptor is precluded from claiming that the drawers signature is
forged because under Sec. 62, he warrants its genuineness.
A bank is bound to know the signatures of its customers; and if it pays a forged
check, it must be considered as making the payment out of its own funds, and
cannot ordinarily charge the amount so paid to the account of the depositor
whose name was forged.
Sebastian: By way of Section 62, an acceptor admits the genuineness of the
signature.
PARTIES BARRED FROM SETTING UP THE DEFENSE OF FORGERY

Sebastian: Persons who are precluded from setting up the defense of forgery
are (1) those who warrant or admit the instruments genuineness and (2) those
who are barred on account of silence, acts or negligence.
Representations and warranties enhance the acceptability of the instrument. By

making them, the instrument becomes more like money and more acceptable.
Warranties need not to be stated in the instrument.
Persons in Estoppel
The common rule to all is that he who made the loss happen should bear the risk
and loss.
Agbayani: Indorsers, whether qualified or general, warrant that the instrument

indorsed by them is genuine in all respects what it purports to be.
Agbayani: The rule of estoppel as stated in the New Rules of Court, applied to
forgery in negotiable instruments may be stated thus: Whenever a party has, by
his own declaration, act, or omission, intentionally and deliberately led another
to believe that his or anothers signature in an instrument is genuine, and to act
upon such belief, he cannot, in any litigation arising out of such declaration, act,
or omission, be permitted to set up the forgery of such signature or signatures.
Campos: A general indorser subsequent to the forgery warrants among other

things that the instrument is genuine, and that it is valid and subsisting at the
time of his indorsement.
Unreasonable delay, after his discovery of the forgery, uon the part of one having
the opportunity and duty to speak, in disclosing the forgery upon commercial
paper to the one who ought to be apprised thereof, estops the former from
Indorsers
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thereafter asserting the forgery as against the latter where the latter is prejudiced
by such delay or failure. The requisites are (1) that the delay be unreasonable and
(2) that the one who ought to be apprised of the forgery must have been
prejudiced.
Agbayani: Where the indorsement is forged and the note is payable to order,
the party whose indorsement is forged and parties prior to him including the
maker cannot be held liable by the holder, whether that holder is a holder in due
course or not.
Sebastian: Estoppel may arise from declaration, act or omission. Because of

these, you are precluded from using forgery as a defense.
Sebastian: Normally, the holder must first collect from his immediate indorser
and the latter must first collect from his immediate indorser and so on and so
forth until it reaches the forger. However, because of the forgery, the law allows a
shortcut where the holder can go after forger. His cause of action would be
enforcement of warranites under Section 66 or a criminal action for falsification
of commercial document. In fact, the holder can file an action to all parties after
the forgery in one suit.
The basis of the rule of estoppel is that one cannot lead another to believe that his
or anothers signature in an instrument is genuine, and to act upon such belief, he
cannot deny in any litigation arising out of such declaration. Not every
declaration puts a person in estoppel. It must be meant to be relied upon for the
person to make the declaration to be estoppable. In this case, the declaration
was suppose to make the instrument more acceptable and negotiable.
Estoppel may also apply when there is unreasonable delay on the part of the
person who suffered the loss due to forgery and failed to report that the
instrument was forged. It is the responsibility of the person who incurred the loss
due to forgery to report it within reasonable time because had the forgery been
reported as early as possible, the transfer of the instrument could have been
prevented.
Persons Guilty of Negligence in Delivery
Agbayani: The omission may consist in negligence in the delivery of the
instrument. Thus, a drawer may be precluded from a defense of forgery of the
payees indorsement if delivery by him to the payee is negligent.
Sebastian: Negligence in delivery may also result to estoppel.
FORGERY OF NOTES
Agbayani: Forgery of promissory notes may be further subdivided into forgery
of an indorsement in the note and forgery the makers signature.
Forged Indorsement of Note Payable to Bearer

Agbayani: In case the note is originally payable to bearer, the party whose
indorsement is forged and parties prior to him including the maker, may be held
liable by a holder in due course provided that the note was mechanically
complete before the forgery.
Sebastian: A bearer instruments need not be signed because they only need to
be delivery to be negotiated. Warranties under Section 65 will apply. By mere
delivery a holder is already a holder in due course even if there was no
indorsement. Thus, the holder can enforce the note against the maker because an
indorsement is irrelevant in a bearer instrument.
However, when the check is stolen the holder cannot make a claim against the
maker because the instrument was not properly discharged. But theft is only a
personal defense and cannot be used against a holder in due course. Instead, the
holder can go after forger civilly for recovery of sum of money and/or criminally
for theft or qualified theft.
FORGERY OF BILLS OF EXCHANGE
Forged Indorsement of a Bill Payable to Order
Forgery of Makers Signature

Agbayani: Where the makers signature is forged, he cannot be held liable by
any holder, whether the holder is in due course or not. The reason is that the
purported maker is not a party to the instrument as his forged signature is
inoperative and no right to retain, enforce or discharge the note, may be acquired
against him.
Forged Indorsement of Note Payable to Order
Agbayani: Where the indorsement is forged and the bill is payable to order, in
the absence of preclusion from setting up forgery by warranty as in the case of
indorserers or by estoppel as in the case of negligence, the following are the rights
and liabilities of the parties:
drawers account cannot be debited
Agbayani: In an action by the drawee against the drawer for the amount
charged by the drawee against the account of the drawer where the drawee
paid a check on a forged indorsement, the drawee has no defense against the
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drawer, and the drawer may recover from the drawee for an instrument paid
on a forged instrument.
This is on the theory that the drawer owes the drawee an absolute and
contractual duty to pay the check only to the person to whom it is made
payable or upon his genuine indorsement. And the depository cannot relieve
himself of this duty by an amount or degree of care he may have exercised to
determine the indorsement is the genuine indorsement of the payee. In such
cases, the drawer authorizes and directs the drawee to pay only to the payee
or to the order of payee. It does not authorize or direct the drawee to pay the
check to any other person. The drawee bank has no legal right to pay the
money of the drawer on deposit with it to anyone except the drawer or its
order.
payee can recover from drawer

Agbayani: Payee can still recover from the drawer on the basis of his claim
of debt upon which the check in the first place had been issued.
Sebastian: Since the payee did not receive the proceeds of the check because
of the forged indorsement, his claim against the drawee subsists and he can
recover from the latter. It must be remembered that when payment is made
by way of a negotiable instrument, the debt is not extinguished until the
instrument is encashed except if the instrument lost its value on account of
the creditors fault.
payee can recover from recipient of payment
Sebastian: Drawee has an obligation to pay payee or order only. There is

breach of contract if drawee does not. In this case, drawee cannot even raise
the defense that he exercised extraordinary diligence because the cause of
action of the drawer against the drawee is breach of contract, not negligence.
drawer cannot recover from collecting bank
Agbayani: The drawer has no right to recover the amount paid from the
collecting bank because the duty of the collecting bank to exercise care in
collection is due only to the payee and the drawer suffers no damage since it
can recover the amount paid from the drawee bank.
Sebastian: The drawer cannot recover from the collecting bank because
there is no privity of contract between them.
drawee can recover from collecting bank
Agbayani: The drawee may recover from the recipient of the payment, such
as the collecting bank, under a forged indorsement. The reason for this is the
same as for the rule allowing the payee to recover from the recipient of the
payment under a forged indorsement.
Agbayani: According to the general rule, a bank or other corporation or an

individual, who has obtained possession of a check, upon an unauthorized or
forged indorsement of the payees signature and who collects the amount of
the check from the drawee, is liable for the proceeds thereof to the payee or
other owner, notwithstanding that they have been paid to the person whom
the check was obtained.
collecting bank is liable to payee
Agbayani: The possession of the check on the forged or unauthorized
indorsement is wrongful, and when the money had been collected on the
check, the bank or other person or corporation, can be held as for the moneys
had and received, and the proceeds are held for the rightful owners of the
payment and may be recovered by them. The position of the bank or other
corporation or person taking the check on the forged or unauthorized
indorsement is the same as if he had taken the check and collected the money
without indorsement at all, and the act of the bank amounts to conversion of
the check.
Payment to depositor of forged signature of the payee, or the drawee bank on
the same forged signature gave rise to an obligation to return the amounts
received.
Sebastian: The drawee can recover from the collecting bank if the latter was
the forgers bank because the collecting bank is the agent of the forger. Since
the drawee can also run after the forger, he can also run after the collecting
bank because the legal standing of the agent cannot stand higher that that of
the principal. However, if the collecting banks principal was a holder in due
course, the drawee cannot collect from collecting bank because the former is
already a party after the forgery.
Sebastian: The collecting bank is liabile to the payee because when the
collecting bank collected the instrument, it had no authority to do so. Its
authority to collect the check is based on the validity of the instrument.
On this same ground, the payee can also recover from the forger. Since theft
of the check is a criminal offence, the thief is required to make restitution.
Agbayani: The general rule is that an action cannot be maintained by a

payee of the check against the drawee bank it is drawn unless the check has
payee cannot recover from drawee
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been certified or accepted by the drawee bank. Without acceptance or

certification, there is no privity of contract between the drawee bank and the
payee, or holder of the check. Neither is there an assignment pro tanto of the
funds where the check is not drawn on a particular fund, or does not show on
its face that it is an assignment of a particular fund.
The only defense of the drawer, if ever, is that the instrument was not delivered.
However, this defense is only a personal defense; thus, not available against a
holder in due course. A holder in due course can claim against the drawee
because delivery is conclusively presumed.
Forged Signature of Drawer with Acceptance
Sebastian: Payee cannot recover from the drawee because there is no privity
of contract. But there can be one created if the drawee bank certified the
check. By certification the drawee undertakes to pay the check but does not
accept it, the bank debits from drawers account and the drawer becomes
liable to pay the bank. Through certification, the check becomes a promissory
note of the drawee because it makes an undertaking to pay the instrument.
Campos: No exception lies in the case of the drawees acceptance or payment of
a genuine bill where only an indorsement has been forged. The drawee can
recover the amount paid out by him since he makes no warranty as to the
genuineness of any indorsement. However, when he learns about the forgery, he
should notify the holder to whom he paid as promptly as possible. Should he do
so his right of recovery will not be affected by his subsequent knowledge of the
forgery. But should he fail to act promptly, he may lose his right to recover
against the holder if his negligent delay operates to the latters prejudice.
Where the negligence of the drawee bank is the proximate cause of a collecting
banks payment of a check with a forged indorsement, the former may be held
liable to the latter bank.
The real and underlying reasons why negligence of the drawer constitutes no
defense to the collecting bank are that there is no privity between the drawer and
the collecting bank and the drawer owes to that bank no duty of vigilance.
While the drawer generally owes no duty of diligence to the collecting bank, the
law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with if for the purpose of determining their genuineness and regularity.
The collecting bank, being primarily engaged in banking holds itself out to the
public as the expert and the law holds it to a high standard of conduct.
Forged Indorsement of Bill Payable to Bearer
Agbayani: The rules are the same as in forged indorsements of promissory
notes.
Sebastian: In this case, if the drawee pays a forged bearer instruent, he is not
liable for breach of contract with drawer because the instruction was pay to
bearer. If drawee dishonors, a holder in due course can sue drawer, the
forger/indorser under warranties in Section 65 and the drawee bank.
Agbayani: The drawee cannot set up the defense of forgery because when he
accepted the bill, he admitted the genuineness of the signature of the drawer, and
therefore, he cannot be thereafter be heard to say that the signature is a forgery.
Consequently, he stands to bear the loss and his remedy is against the forger.
The purported drawer is not liable as his signature is inoperative and, therefore,
he is not a party to the bill. No right to retain the bill, give discharge therefor or
enforce payment thereon may be acquired against him by any holder. Further
more, since his signature is inoperative, his signature does not really appear on
the bill, and, therefore, he is not liable thereon.
Campos: Where the drawers signature is forged on a bill or check, the drawee
who pays it without having detected the forgery cannot charge the amount
thereof to the drawers account. The forged signature is wholly inoperative and
does not give the drawee the right to discharge it.
We do not think that he who accepts a forged signature of a payee deserves that
preferred treatment. It is his neglect or error in accepting the forgers signature
which occasions the loss. He should be allowed to shift that loss to the drawee
only on a clear showing that the drawees delay in notifying him of the forgery
caused him damage.
Sebastian: By acceptance, drawee becomes liable to pay. Until the drawee
accepts, the liability is determined under Section 66. Once drawee accepts, a
holder can collect from him since an acceptor cannot raise the defense of forgery
being a party after the forgery. A holder can also claim from the forger.
Forgery of the drawers signature is not a defense available to the drawee bank.
Likewise, the drawee bank cannot run after parties subsequent to the forgery.
Instead, the drawee bank may run after the forger.
Forged Signature of Drawer without Acceptance
Agbayani: As between equally innocent persons, the drawee, who pays money
on a check or draft the signature to which is forged, cannot recover from the one
who received it.
The drawee so paying is considered as being constructively negligent. This rule is
absolutely necessary to the circulation of drafts and checks and is based upon the
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presumed negligence of the drawee in failing to meet its obligation to know the
signature of its correspondent. Conditions would be intolerable if the retiring of
commercial paper, through its payment by the drawee, did not close the
transaction but it was possible at an indefinite time in the future to reopen the
matter and recover the money, if the paper proved to have been forged. No one
would dare handle it, and it would pass out of use regardless of its convenience or
necessity as a part of the life of business. There is nothing inequitable in such
rule. If the paper comes to the opportunity of ascertaining its character,
pronounces it valid and pays it, it is not only a question of payment under
mistake but payment in neglect of duty which the commercial law places upon
him, and the result of his negligence must rest upon him.
The basis of the general rule is not that the drawee is precluded from setting up
forgery because, by paying the check, it has accepted the check and therefore
admitted the genuineness of the drawers signature. The basis is that by paying
the check, the drawee is presumed negligent or deemed constructively negligent.
Campos: The drawee who had paid an accepted bill as well as a non-accepted
bill, each of which bore the forged signature of the drawer, could not recover the
money paid out on either bill. The drawee is bound to know the signature of the
drawer and must therefore bear the loss in case it turns out to be forged.
Acceptance and payment are essentially different things, for the former is a
promise to perform an act, whereas the latter is the actual performance thereof.
The acceptance of a bill is the signification by the drawee of his assent to the
order of the drawer. Actual payment of the amount of a check implies not only an
assent to said order of the drawer and recognition of the drawees obligation to
pay the aforementioned sum, but also, a compliance with such obligation.
When one or two innocent persons must suffer by the wrongful act of a third
person, the loss must be borne by the one whose negligence was the proximate
cause of the loss or who put it into the power of the third person to perpetrate the
wrong.
The rule creating an exception to the doctrine of payment under mistake, has
been extended by the courts to cover the drawee of a bill who honors an
overdraft. An overdraft occurs when a check is issued for an amount more than
what the drawer has in deposit with the drawee bank.
The test which determines whether a recover may be had is whether the
defendant in equity and good conscience is entitled to retain the money to which
the plaintiff asserts claim. It is also a general rule that the failure of the payor to
exercise ordinary care to avoid mistake will not as a matter of law defeat his
recovery.
If the stop order comes after the bank has certified or accepted the check, the
bank is under legal duty to pay the holder and will not be liable to the drawer for
doing so.
Sebastian: Drawee here is a party after the forgery. Drawee does not have a
liability to pay but he paid.
PNB v. Quimpo The prime duty of a bank is to ascertain the genuineness of
the signature of the drawer or the depositor on the check being encashed. It is
expected to use reasonable prudence in accepting and cashing a check presented
to it. Obviously, petitioner was negligent in encashing said forged check without
carefully examining the signature which shows marked variation from the
genuine signature of private respondent.
Agbayani: Where the drawee bank encashed a check in which the drawers
signature is forged which shows marked variations from the genuine signature of
the supposed drawer, said bank is negligent, and should return to the drawer
what it has debited the latters account.
Sebastian: In this case, we should focus on which party should the effect of
negligence fall.
National Bank v National City Bank
Agbayani: If the drawee accepts the paper after seeing it and then permits it to
go into circulation as genuine, on all the principles of estoppel, he ought to be
prevented from setting up forgery to defeat liability to one who has taken the
paper on the faith of the acceptance or certification.
In the case of the payment of a forged check even without former acceptance, the
drawee cannot recover from a holder in due course not chargeable with any act or
negligence or disregard of duty.
But the payment of a forged check does not include or imply its acceptance in the
sense that this word is used in Section 62. Payment is the final act which
extinguishes a bill. Acceptance is a promise to pay in the future and continues the
life of the bill.
Campos: The responsibility of the drawee who pays a forged check, for the
genuineness of the drawers signature, is absolute only in favor of one who has
not, by his own fault or negligence, contributed to the success of the fraud or to
mislead the drawee.
Sebastian: In this case, the negligence of the drawer was the proximate cause of
the forgery, and thus, he is estopped from raising forgery as a defense.
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San Carlos Milling v BPI

Payees Negligence in Forgery of Drawers Signature
Agbayani: A bank is bound to know the signature of its customers; and if it
pays a forged check, it must be considered as making the payment out of its own
funds and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged.
Qualifications to the Foregoing Rules
Agbayani: It must be remembered that the foregoing rules are qualified by the
rules precluding the setting up the defense of forgery by warranty or by estoppel.
Campos: The bank is freed from liability only if the proximate cause of its
wrongful payment is the negligence of the drawer, but not otherwise.
Agbayani: The payee in a check or draft may be supposed to have knowledge of

the circumstances under which it is drawn and, generally, of the person drawing
it, and is in a better situation to judge the genuineness of the paper than are
indorsees. And there is a tendency to place a greater responsibility upon him and
he is much more likely to be required to return the proceeds of paper than are the
indorsees. Without a doubt, the same necessities of business which require the
drawee to know the signature of the drawer, and prevent his recovering money
paid to an innocent holder of the paper, require one who first negotiatest the
paper to take some precautions to learn whether or not it is genuine, and if he,
through indifference, or worse, assists the forger in committing the fraud, he
should not be permitted to retain the proceeds of the draft from the drawee
whose sole fault was that he did not discover the forgery before he paid the draft.
Liability of Party Negotiating After Forgery

Agbayani: Parties negotiating by indorsement and delivery, or by mere delivery
subsequent to the forgery, are precluded from setting up the defense of forgery
and may be held liable under their warranties or liabilities stated in Sections 65
or 66.
Negligence of Drawer in Forgery of Indorsement Other than a Check
Agbayani: The negligence of drawers in making possible forged indorsements
by their swindling clerks, and not discovering or reporting them promptly, barred
recovery from the drawee bank by the drawers, as where there is negligence in
delivery. Likewise, unreasonable delay in giving notice will bar recovery by the
drawer from the drawee bank.
Negligence of Drawer in Forgery of Indorsement of a Check
Agbayani: But with a few possible exceptions the courts are generally agreed
that the depositors duty does not extend to the examination and verification of
the genuineness of the indorsements on the checks, or to the discovery of
forgeries therein because a depositor is not required and may not be expected to
know the signatures of the payee and of the various indorsers. Therefore, even if
the cancelled checks were examined by him, the examination would not disclose
forgery; that duty of verifying the genuiness of the indorsements rests on the
depository cashing the check, and the depositor may rely upon its proper
performance of this duty at least in the absence of evidence that he was familiar
with the signature of the payee.
Campos: If due to the drawers negligence, the forgery is not discovered until it
is too late for the bank to recover from the holder or the forger, then the drawee
may properly charge the amount against the drawers account.
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SUMMARY OF RIGHTS AND LIABILITIES IN RELATION TO FORGERY

FORGERY OF PROMISSORY NOTES
Forgery of Makers Signature
Rule
Reason
Exception
Caveat
The maker is not liable to any holder.

The maker, whose signature is forged,
is not a party to the transaction.
He may be made liable if the doctrine
of estoppel finds application.
If the note is negotiated nevertheless
by subsequent endorsement and
delivery, the endorsers may be held
liable on their statutory warranties.
FORGERY OF BILLS OF EXCHANGE

Forgery of Payees Signature
Forgery of Drawers Signature
Drawer vs. Drawee
Bill Accepted
Rule
Reason
Drawee Bank suffers the loss and must

reimburse the account of Drawer.
Drawer instructed Drawee Bank to pay
Payee and no one else. If Payee is not
paid, Drawee Bank did not obey the
instruction.
Drawee vs. Collecting Bank
Rule
Drawee/Acceptor must
pay the check.
Drawer is not liable for

the value of the check.
Reason
By accepting the check,
an acceptor undertakes
to pay the instrument in
accordance with the
tenor of his acceptance.
A forged signature is
totally inoperative.
Forgery of Indorsers Signature

Rule
Note Payable to Order
Rule
Reason
Endorser whose signature is forged

and all prior parties, including the
maker are not liable to any holder.
The signature of the endorser and the
delivery of the note are necessary to
transfer title to the note. Since an
endorsers signature is forged, the
transfer of title to a subsequent
endorsee is inoperative.
Reason
Drawee Bank may recover from

Collecting Bank because Collecting
Bank had no authority to pay the
proceeds of the check to Forger.
Collecting Bank has the legal duty to
ascertain that the payees endorsement
is genuine.
Drawer vs. Collecting Bank

Rule
Reasons
Drawer has no cause of action against

Collecting Bank.
There is no privity of contract between
drawer and collecting bank. The duly to
observe due care is owed by the
collecting bank to the payee.
Payee vs. Drawer

Rule
Reason
Payee may recover from Drawer.

The claim of Payee against Drawer
remains unpaid.
LEX SOCIETAS
Bill Not Accepted

Rule
Drawee Bank cannot
recover the proceeds of
the check from Holder if
he is a holder in due
course.
Endorser is liable to
Holder, if Drawee Bank
dishonored the check
Reason
Drawee Bank should
have detected the forgery
of Drawers signature
because Drawer is its
client.
An endorser is liable
under his warranties in
Section 66.
Drawer generally enjoys

protection
against
forgery. However, he
must not be guilty of
negligence;
i.e.,
the
forgery must not have
been caused by his own
negligence. Also, he must
discover the forgery
within
a
reasonable
period of time.
A forged signature is
wholly inoperative.
37
Note Payable to Bearer

Rule
Reason
Exception
Qualificati
on
Endorser whose endorsement is

forged and all prior parties including
the maker ARE LIABLE TO A
HOLDER IN DUE COURSE, provided
the note is mechanically complete
before the forgery.
The endorsement is not necessary to
transfer title.
The only defense
available to resist the claim is want of
delivery of a mechanically complete
instrument under Section 16.
Section 16 is a defense available only
against a holder who is not a holder in
due course, because a valid and
intentional delivery of the note is
presumed by law as regards a holder
in due course.
If the note is incomplete, Section 14
would apply, in which case the
possessor of the note must complete
the instrument strictly in accordance
with the authority given and within a
reasonable time. But if upon
completion the note is negotiated to a
holder in due course, the note is valid
and effectual for all purposes in his
hands and he may enforce the note as
if it was strictly filled up in accordance
with the authority given, and within a
reasonable period of time.
If the note is incomplete and
undelivered, then Section 15 will apply
and it will not be valid in the hands of
any holder unless completed and
negotiated with authority.
DLSU LAW
Payee vs. Recipient of Payment

Rule
Reason
Payee may recover from Forger.

Forger is not entitled to the proceeds of
the check. At best, Forger holds the
proceeds of the check in trust for Payee.
(f) Payee vs. Collecting Bank

Rule
Reason
Payee may recover from the Collecting

Bank.
Collecting Banks collection of the
proceeds of the check is unlawful, and
Collecting Bank therefore holds the
funds in trust for the payee. A forged
endorsement is totally inoperative.
Collecting Banks collection of the
proceeds of the check amounts to a
conversion i.e., the unauthorized
assumption and exercise of rights of
ownership over goods and chattels
belonging to another.
Payee vs. Drawee

Rule
Reason
Payee has no cause of action against

Drawee Bank unless the check has been
certified or accepted by the latter.
There is no privity of contract between
the payee and the drawee.
Collecting Bank vs. Forger

Rule
Reason
C (Collecting Bank) has a cause

of action against Y (forger) for
the recovery of the proceeds of
the check.
C was prejudiced by the
withdrawal of funds by Y, which
amount must be reimbursed by C
to either the Payee or the
Drawee.
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its original tenor, provided that he

was not a party to the alteration.
ALTERATION
Sec. 124. Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the
hands of a holder in due course not a party to the alteration, he may
enforce payment thereof according to its original tenor.
Sec. 125. What constitutes a material alteration. - Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the
effect of the instrument in any respect, is a material
alteration.
DEFINITION
Campos: A material alteration changes the contract of the parties.
Sebastian: Material alteration is any change in the details of the instrument
that results in a change in the effect of such instrument.
Both forgery and alteration are changes made to an instrument.
FORGERY
The kinds of forgery are (1)
mechanical falsification, (2) fraud in
factum, (3) duress amounting to
forgery
and
(4)
fraudulent
impersonation.
As to effect, the forged signature
becomes wholly inoperative.
ALTERATION
The forms of alteration are defined
under Section 125. The enumeration
therein is exclusive.
If the signature is altered, it is no
longer alteration.
The instrument does not becomes
wholly inoperative.
A holder in due course may still
enforce the instrument according to
Forgery is a real defense and parties

prior to the forgery cannot be held
liable.
The instrument is avoided except

against the party who has himself
made, authorized or assented to the
alteration and subsequent indorsers.
Material alteration is a personal
defense to deny the liability according
to the original tenor of the
instrument. It is a real defense when
relied to deny liability according to
the altered terms.
The instrument may only be enforced
up to the original tenor of the
instrument.
WHAT CONSTITUTES MATERIAL ALTERATION

Agbayani: An alteration is said to be material if it alters the effect of the
instrument.
Campos: Section 125 specifies and defines what constitutes a material
alteration. Any other alteration not mentioned under Sec. 125 would be nonmaterial and would not affect the liability of any prior party on the instrument.
Thus, the addition of words implied the by law, or changing marginal figures to
make them conform to the sum expressed in words, is not a material alteration
because it does not change the legal effect of the instrument.
Changing the payees name is obviously a material alteration. It may consist in
erasing the original payees name and writing the name of another. Where the
instrument is payable to joint payees, the alteration may consist in erasing the
word and between the names of two payees, and by replacing it with or,
making the instrument payable to alternative payees. But where the erasure is
made before the issuance by the maker or drawer, there being no other signatures
at such time, there is no material alteration. The instrument has nolegal existence
prior to such issuance. If the payees name is altered after the issunace, no
purchaser, though innocent, can derive title as regards the payee and prior
parties.
The addition of a name, either as a primary party or as second party, is a material
alteration. Spoilation or a material alteration by a stranger, id not avoid the
instrument under common law. Section 124 does not distinguish, but the cases
that have been arisen under the Negotiable Instruments Law have continued to
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DLSU LAW
apply the common law rule the spoliation does not affect the instrument,
provided the original meaning can be ascertained.
Sebastian: Material alterations are changes in the contractual relationship of
the parties. Thus, one who altered the note making it a bearer instrument, even if
the instrument was already made a bearer instrument by a blank indorsement, is
guilty of materially altering the instrument because the original contractual
relations of the original parties are changed as to the warranties made.
EFFECTS OF MATERIAL ALTERATION
Agabayani: Where a negotiable instrument is materially altered, it is avoided
in the hands of one who is not a holder in due course as against any prior party
who has not assented to the alteration. However, the law makes certain
exceptions. The instrument is not avoided as against:
1) a party who has made the alteration;
2) a party who authorizes or assented to the alteration; and
3) subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a
holder in due course not a party to the alteration, he may enforce payment
thereof according to its original tenor.
A holder in due course can enforce the instrument according to its original tenor
regardless of whether the alteration was innocent or fraudulent because the law
does not make any distinction.
Campos: A material alteration avoids the instrument and discharges all parties,
unless they authorized or consented to the alteration. A subsequent indorser is
excepted from this rule because by the indorsement he warrants, among other
things, that the instrument is in all what it purports to be and that it was valid
and subsisting at the time of his indorsement. On the other hand, a holder in due
course may enforce the altered instrument according to its original tenor. This
presupposes that the alteration is not apparent on the face of the instrument,
otherwise it would be irregular and no holder thereof could be a holder in due
course. Where the alteration is of the amount, the holder in due course may
recover the original sum. The drawee bank can likewise charge the drawers
account with the original amount. If the holder is not one in due course, he
cannot recover anything and the drawee bank cannot charge any part of the
amount against the drawers account. Where the interest rate is altered, the
holder in due course can recover the principal sum with the original rate of
interest. Where the date of payment is changed, the original date of maturity
controls in determining whether or not a holder is a holder in due course.
Material alteration is therefore a personal defense when used to deny liability

according to the original tenor of the instrument. It is a real defense when relied
on to deny liability according to altered terms.
Since Section 124 made no distinction, the instrument will be avoided whether
the material alteration was made with or without fraudulent intent, and whether
it proves beneficial or prejudicial to the interests of prior parties.
General rule denies the drawee banks right to charge against the drawers
account the amount of an altered check. However, the drawers negligence, before
or after alteration, may estop him from setting up such alteration as against an
innocent drawee bank who has paid the check. Thus, where the drawer of a check
who in filling it out negligently leaves spaces, making it possible for another to
alter the amount by inserting words and figures therein, the drawer cannot
complain should the bank pay and charge the amount as altered against his
account. It was his negligence which proximately caused its payment. However,
there is a conflict of opinion as to whether such estoppel can apply in favor of a
holder in due course. Some courts refuse to apply such estoppel against the
drawer in favor of a holder in due course, who, in spite of the drawers negligence
is allowed to recover only the original amount. The basis given for the difference
lies in the fact that since a bank has the duty of honoring checks drawn against it
by its depositors, the drawer owes a corresponding duty to his bank to fill in his
checks carefully. On the other hand, one to whom a check is negotiated is under
not duty to take it. The drawer therefore owes him no duty of diligence. The
Uniform Commercial Code rejects this view and provides that the drawer is liable
to a holder in due course for the terms as altered.
Where the negligence of the drawer consists in failing to discover alterations
previously made, the rule is similar to that applicable to a forged check. Thus, in a
series of alterations of several checks, if the drawer could have discovered the
alterations by a comparison between his cancelled checks and his check stubs, or
by a diligent observation of his record, and could thus have prevented the drawee
bank from subsequently cashing other altered checks, the latter can charge the
subsequent checks against the negligent drawers account.
Suppose a drawee bank has cashed a check on which the amount has been
altered, can it recover back from the recipient-holder in due course the difference
between the original and altered amount? Similarly, if the drawee bank has paid a
check on which the payees name was changed, can it recover back the money it
paid? The prevailing view, which was the common law rule, allows recovery by
the drawee bank on the ground that the amount paid is under mistake and under
Section 124, a holder in due course can recover only according to the original
amount and not the altered tenor of the instrument. The opposite view however
asserts that under Section 62, the acceptor engages to pay according to the tenor
of his acceptance and is therefore estopped from recovering.
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The arguments set forth by the majority view find strong support in the legal
provisions. Acceptance is defined by Sec. 132 as the signification of the drawee of
his assent to the order of the drawer. Sec. 62 should be related to this definition.
Assent to the order of the drawer means assent to the actual not the apparent
order of the drawer. In like manner, Section 139 in defining general and qualified
acceptance provides: A general acceptance assents without qualification to the
order of the drawer. A qualified acceptance in express terms varies the effect of
the bill as drawn. In both these provisions, acceptance is definitely associated
with the order of the drawer and not with what appears to be the drawers order
after the alteration. The words according to the tenor of his acceptance should
thus be construed to mean the kind of acceptance whether qualified, or general.
Furthermore, Section 124 avoids the instrument except as against a party who
has himself made, authorized or assented to the alteration and subsequent
indorsers. An acceptor has not assented to the alteration because assent can
only mean assent with knowledge of the facts. Neither is he a subsequent
indorser. The final and perhaps strongest legal argument is that Sec. 124
expressly provides that a holder in due course can recover only according to the
original tenor of the instrument. There is however one important and desirable
effect of the minority view cannot be ignored denying recovery to the drawee
bank would tend to give stability to checks. Furthermore, as between the holder
and the drawee bank, it seems that the latter is in a better financial position to
shoulder the loss, since it can and probably should insure itself against such
eventualities.
It will be recalled that the rule in forgery of the drawers signature is that the
drawee bank cannot recover from the holder in whose favor it cashed such check.
The basis of this rule is that a s between the holder and the drawee bank, the
latter is in much better position to know the signature of the drawee since the
latter is its customer. It is for this reason that Section 62 incorporates the
acceptors warranty of the genuineness of the drawers signature. In the case of
the altered check however, there can be no similar basis for holding the drawee
bank responsible for non-apparent alterations. Although it is bound to know the
drawers signature, it would be unfair to burden it with knowledge of the drawers
handwriting. And many times checks are not filled in by hand but by typewriter
or in print. Payment by the drawee bank of the altered check would therefore
indeed be a mistake, and should be effective only to the extent of the original and
not the altered tenor of the instrument.
Our Supreme Court has in effect come to the same conclusion as the minority
view but on an entirely different basis. The drawee bank was denied recovery
based on a Central Bank Circular regulating clearing of checks and limiting the
period within which a drawee bank may return a spurious check. No mention of
Section 62 or of Section 124 or of any provision of the Negotiable Instruments
Law was made. The Circular has since been amended.
A drawee bank is bound to know the signature of its depositors, so when it honors
checks on which the drawer-depositors signature is forged, it has no excuse for
later trying to recover from the collecting bank. And even in the case where the
forgery is so skillfully done that the drawee could not have detected it, still the
drawee would be estopped from recovering because under Sec. 62 the drawee
bank by accepting or paying a check admits the genuineness of the drawers
signature. As earlier stated, the justification for this rule is that payment on a
check must at some time or another become final. Any other rule would affect the
stability of commercial transactions.
Alteration of the payees name or of any other material terms of the check is an
entirely different matter. If the altreation is not apparent on the face of the check,
the drawee banks would not disvoer the alteration until it is informed by the
drawer after the latter has received the cancelled check. Then, because of Section
124, it would have to recredit the drawer with the amount of the check. When it
receives an altered check through the clearing house, the check looks regular on
its face. There would be absolutely nothing to warn it about the defect, and thus
all it would do and should be expected to do is to check the sufficiency of the
drawers funds and the genuineness of his signature. It would be highly
impractical to require the bank to check with each drawer the correctness of the
terms of the check he has issued, even in the cases where his signature is
admittedly genuine and his deposit is sufficient to cover the check. Yet this is in
effect the burden which the HSBC case places on drawee banks. But would it be
possible for them to do this with all checks drawn daily against them within the
short period allowed by the clearing house rule referred to in the case?
An acceptor of a bill of exchange, by acceptance, only admits the genuineness of
the signature of the drawer, and does not admit the genuineness of the
indorsements, whether of the drawee of the same bill, or of any other person
whose name appears upon it, or any other part of the bill, is sustained by an
unbroken current of authority.
When the bill is presented for acceptance, the acceptor looks to the handwriting
of the drawer with which he is presumed to be acquainted, and he affirms its
genuineness by giving credit to the bill, by his acceptance in favor of the legal
holder thereof.
The drawee bank which has paid an altered check to a collecting bank bears the
loss only if it is itself negligent in failing to return the check promptly after
discovery. Recovery of the the difference between the original and the altered
amount from a holder in due course may be made.
Sebastian: Parties prior to alterations cannot be made liable on the altered
instrument. The instrument cannot be voided because Section 124 says that it is
not avoided against subsequent holders. Meaning, there can be subsequent
parties after the alteration that had nothing to do with the alteration.
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When you change the contractual relationship of the parties, the instrument is
avoided as to parties prior to the alteration and thereby released from liability.
But as to parties subsequent, they already saw the alteration and thus it cannot be
avoided as to them.
Banco Atlantico v Auditor General Payment of checks by foreign bank to
payee without previously clearing said checks by foreign bank to payee without
previously clearing said checks with the drawee bank is contrary to normal and
ordinary banking practice especially where drawee bank is a foreign bank and the
amounts involved are large and bars recovery.
When a drawer of a bill or the maker of a note has himself, by careless execution
of the instrument, left room for any alteration to be made, either by insertion or
erasure, without defacing it or exciting the suspicion of a careful man, and the
opportunity which he has afforded has been embraced, and the instrument filled
up with a larger amount of different terms than those which it bore at the time he
signed it, he will be liable upon it as altered to any bona fide holder without
notice. In the hands of such holder a negotiable instrument may be enforced if a
sum in excess of that authorized by the maker is inserted in a bank left for the
amount of the instrument.
Sebastian: Since Foutch was negligent, he should bear the loss.
Agbayani: Paying bank must clear check with drawee bank before paying.
Saving Bank of Richmond v National Bank of Goldsboro
Banco Atlantico was not a holder in due course as defined in Section 52 because it
was obvious that it had knowledge of the infirmity or defect of the check.
Campos: The liability against the drawer of the draft as forged exists only for the
original amount thereof. The language of the statute and its obvious purpose and
intent are too manifest to leave room for cavil or doubt as to its meaning, and we
should so take it, if left alone to our judgment thereof.
Sebastian: This case boils down to the doctrine of estoppel by negligence. It was
the negligence of Banco Atlantico (collecting bank) that gave rise to the loss. Its
negligence were manifested by paying cash to a check which was not cleared by
the drawee bank. The collecting bank was not a holder in due course becase it was
obvious that it had knowledge of the infirmity or defect of the check. Had the
collecting bank been a holder in due course, it would have been able to at least
recover the original amount of the check.
Since Banco Atlantico was not a holder in due course, it may not even enforce
payment according to the instruments original tenor.
Foutch v Alexandria Bank We call attention to a distinction of essential
importance recognized generally between bank checks and negotiable
instruments of the note and bill class. This distinction is strongly emphasized
because one who purchases a note is under no manner of compulsion and acts
purely at his option or election, under which circumstances it is not inappropriate
to apply, by analogy, the caveat emptor rule; whereas the Bank is under a direct
and peculiar delicate obligation, which requires prompt discharge, usually with
little opportunity for investigation, to pay the check of its depositor, upon
presentation, or subject itself to the risk of damages. Furthermore, the depositor,
on the other hand, owes to his bank the duty to exercise care in drawing his
checks in order to avoid possible loss.
Campos: That duty is so to fill up his check as that when it leaves his hands as a
signed document, it shall be properly and fully filled up so that tampering with its
contents or filling in a sum different from what the customer meant it to cover
shall be prevented.
Recovery could only be had against the defendant for the original face value of
the draft; that where a negotiable note was delivered in completed form, the
possibility that it might be raised or altered by the willful fraud or forgery of
another was too remote to afford the basis of an action either in tort or in
contract; that suit as upon a contract should not be maintained upon the note in
its forged and altered state, because it was not the contract of the maker of the
instrument; and that in such case, the issuing of the note could in no sense be
considered the proximate cause of the loss.
Sebastian: In this case, the maker was not held liable because the check was
delivered complete in all its part. The Court said that it was the duty of the bank
to verify the check. This case was covered by the law of the State of California
which says that the holder in due course may only enforce an instrument only up
to the original tenor of the instrument.
Critten v Chemical National Bank
Campos: The relation existing between a bank and a depositor being that of
debtor and creditor, the bank can justify a payment on the depositors account
only upon the actual direction of the depositor. The question of negligence cannot
arise unless the depositor has in drawing his check left blanks unfilled, or by
some affirmative act of negligence has facilitated the commission of a fraud by
those into whose hands the check may come.
The rule is settled that the depositor owes his bank the duty of a reasonable
verification of the returned checks. It would prevent the successful commission of
continuous frauds by exposing the first forgeries.
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Sebastian: This case modifies the whole theory of negligence. The liability for
the damages are directly attributable to the negligence that caused it.
Marine National Bank v National City Bank An acceptor of a bill of
exchange by acceptance only admits to the genuineness of the signatures of the
drawer, and does not admit the genuineness of the indorsements, whether of the
drawee of the same bill, or of any other person whose name appears upon it, or
any other part of the bill. The reason for this is when the bill is presented for
acceptance the acceptor looks to the handwriting of the drawer with which he is
presumed to be acquainted, and he affirms its genuineness by giving credit to the
bill, by his acceptance in favor of the legal holder thereof. But the acceptor cannot
be presumed to have such knowledge of the other facts upon which the rights of
the holder may depend.
As to the liability of the collecting bank on its clearing house endorsement, such
an indorsement must be read together with the 24-hour regulations on clearing
House Operations of the Central Bank. Once that 24-hour period is over, the
liability on such an indorsement has ceased.
Agbayani: Banks are bound by 24-hour clearing house rule, and must notify
collecting banks within 24 hours of alteration of checks.
Republic v CA The 24-hour clearing house rule is a valid rule applicable to
commercial banks. When an indorsement is forged, the collecting bank or last
indorser, as a general rule, bears the loss. But the unqualified indorsement of the
collecting bank on the check should be read together with the 24-hour regulation
on clearing house operation. Thus, when the drawee bank fails to return a forged
or altered check to the collecting bank within 24-hour clearing period, the
collecting bank is absolved from liability.
24-HOUR CLEARING RULE

Campos: Under Section 1 of the Circular, the clearing is conducted at 4:00 pm
every business day. Therefore, defective items must be returned by the drawee
bank not later than 4:00 pm the next business day after the questioned check was
presented for clearance. But as to altered checks and checks with forged
indorsements, an exception is made. As to these, the drawee bank can still return
them even after 4:00 pm of the next day provided it does so within 24 hours from
its discovery of the alteration or forged indorsement, but in no case may return be
made beyond the usual prescriptive period prescribed by law, which would be 10
years since the relationship between drawee bank and collecting bank would
normally be evidenced by some written document. Thus, if the drawer discovers
the alteration or forged indorsement say, one year after the checks clearing, he
should notify and return the defective check to the collecting bank not later than
4pm of the next business day after it receives notice of the defect. Otherwise, the
collecting bank will not be liable to return the amount to the drawee bank.
Agbayani: When drawee bank fails to return a forged or altered check to the
collecting bank within the 24-hour clearing period, collecting bank is absolved for
liability.
Campos: It is true that when an indorsement is forged, the collecting bank or
last indorser, as a general rule, bears the loss. But the unqualified indorsement of
the collecting bank on the check should be read together with the 24-hour
regulation on clearing house operation. Thus, when the drawee bank fails to
return a forged or altered check to the collecting bank within the 24-hour clearing
period, the collecting bank is absolved from liability.
Unless an alteration is attributable to the fault or negligence of the drawer
himself, such as when he leaves spaces on the check which would allow the
fraudulent insertion of additional numerals in the amount appearing thereon, the
remedy of the drawee bank that negligently clears a forged and/or altered check
for payment is against the party responsible for the forgery or alteration.
Sebastian: Regardless of forgery/alteration or lack thereof, under banking laws,

when a check is deposited and the drawee bank does not act within 24 hours, the
drawee bank is considered to have conclusively honored the check. This is
irreversible.
Metropolitan Bank v HSBC In this case, the check was not returned to the
collecting bank in accordance with the 24-hour clearing house period, but was
cleared by the drawee bank. Failure of the drawee bank, therefore, to call the
attention of the collecting bank to the alteration of the check in question until
after the lapse of nine days, negates whatever right it might have against the
collecting bank. Its remedy is not against the collecting bank, but against the
party responsible for the alteration.
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CONSIDERATION OF NEGOTIABLE INSTRUMENTS

Sebastian: Consideration in the Civil Code is the same in Negotiable
Instruments Law. And every contract must be supported by a valuable
consideration.
PRESUMPTION OF CONSIDERATION AND HOW REBUTTED
Sec. 24. Presumption of consideration. - Every negotiable instrument
is deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon to
have become a party thereto for value.
Agbayani: The presumption is disputable in the sense that the said
presumption is satisfactory if not contradicted. Thus, in an action based upon an
instrument, it is unnecessary to aver or prove consideration, for consideration is
imported and presumed from the fact that it is a negotiable instrument. Mere
introduction of the instrument sued on in evidence prima facie entitles the
plaintiff of a recovery and unless it is overcome by evidence produced by the
defendant the plaintiff is entitled to recover. This means that the person claiming
the that a payee or an indorsee did not give valuable consideration for an
instrument must prove that there really was no valuable consideration given.
Sebastian: The existence of consideration is only a prima facie presumption.
The burden of proof is on the challenger that there was no valuable
consideration. This is usually the person who is being held liable under the
instrument.
Persons whose signature is on the instrument are the (1) maker/drawer, who is
presumed to have received value, (2) drawee, who accepted the instrument
because maker/drawer received value, and (3) indorser, who also accepted the
instrument for the same reason as the drawee.
In onerous contracts the cause is understood to be, for each

contracting party, the prestation or promise of a thing or service by
the other; in remuneratory ones, the service or benefit which is
remunerated; and in contracts of pure beneficence, the mere
liberality of the benefactor. (Art. 1350, Civil Code)
Agabayani: Consideration means inducement to a contract that is, the cause,
motive, price or impelling influence which induces a contracting party to enter
into a contract. Valuable consideration means an obligation to give, to do or not
to do, in favor of the party who makes the contract, such as the maker or
indorser.
Sebastian: In Negotiable Instruments Law, consideration is defined in Section.
25. Consideration should be sufficient to support the contract. It should be
valuable and has monetary equivalent. One can deny liability under a check if it
was issued without valuable consideration.
Liberality as a general rule cannot support a civil contract because consideration
is measurable in money.
Those that are purely emotional cannot support a simple contract. If the
instrument was given as a gift, the instrument was not validly issued because
there was no consideration.
But if the gift check was issued by a bank, it is considered as a managers check. If
the gift check is not a personal check but one issued by the bank, it is unlikely to
be dishonored because the check was drawn by the bank against itself. This gift
check, when delivered, while there may not be any value that you paid for them,
the party who is obligated under the gift check is the issuing bank itself.
Therefore, can the issuing bank cannot raise the defense of want of consideration
when it is encahsed becaudr it received full value for the amount of the check
when it was issued.
The issuance, negotiation and acceptance of a negotiable instrument is not an

exception to the law that there must be consideration. In writing and issuing a
negotiable instrument, consideration is presumed.
Consideration for an instrument can be insufficient because Inadequacy does not

create a defect of the contract. Lesion is not a ground to set it aside except in
Article 1361 of the Civil Code. Other than that, inadequacy of consideration does
not create a defect in the contract.
WHAT CONSTITUTES VALUE
HOLDER FOR VALUE
Sec. 25. Value, what constitutes. - Value is any consideration

sufficient to support a simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time.
Sec. 26. What constitutes holder for value. - Where value has at any
time been given for the instrument, the holder is deemed a holder for
value in respect to all parties who become such prior to that time.
Agbayani: One who gives valuable consideration for an instrument issued or
negotiated to him is a holder for value. But the term is not limited to the one who
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is known to have given valuable consideration for the instrument he holds. It

refers also to any holder of an instrument for which value has been given at any
time.
holder in due course; and partial failure of consideration is a defense

pro tanto, whether the failure is an ascertained and liquidated
amount or otherwise.
Sebastian: When a holder deposits and indorses a check, the bank did not
become holder for value because when it received the check, it did not have to pay
for the check. However, in the Philippines, this is wrong. Because of Article 1980
of the Civil Code, when a depositor deposit money in the bank, he is lending the
bank. The bank is the borrower and the depositor is the lender. This is why all
deposits are mutuum. If the bank and depositer is related within the context of
borrower and lender, the bank who receives deposit becomes owner of the
money. In exchange, the bank promises that upon demand, it will pay the amount
of your deposit. Thus, there is consideration when you deposit the check (i.e. the
promise of the bank to pay you back). While checks are negotiable instrument,
the relationship between depositor and bank, it is governed by Article 1980 of
Civil Code.
Agbayani:
When instrument is received and value was given for it, the holder is holder for
value. Once a holder pay for consideration for an instrument, he is a for value for
all parties.
Campos: This provision reiterates the rule laid down by Section 24 that every
instrument is deemed prima facie to have been issued for a valuable
consideration. It is also consistent with the provision that the validity and
negotiable character of an instrument is not affected by the fact that it does not
specify that any value has been given therefor. Under these rules, the defendant
has the burden of proving that there was no consideration for the instrument.
Lien Holder
Sec. 27. When lien on instrument constitutes holder for value. Where the holder has a lien on the instrument arising either from
contract or by implication of law, he is deemed a holder for value to
the extent of his lien.
Agbayani: The reason for this seems to be that the holder who has a lien on the
instrument is a holder in due course only up to the extent of his lien. Thus, a
holder who has a lien on the instrument can only up to the extent of his lien if
there are personal defenses (i.e. lack of consideration) against him but he cannot
collect at all if there are real defenses available against him. However, he can still
collect the whole amount of the instrument if there are no defenses at all.
Sebastian: Person who has a lien is considered to be a holder for value to the
extent of his lien over the instrument. This is important because the
consideration for the negotiation of the note does not have to be paid
simultaneously with the delivery of the note. The person who has a lien is only a
holder for value up to the extent of his lien because he was never meant to be the
owner of the instrument.
WANT OF CONSIDERATION VS FAILURE OF CONSIDERATION
Sec. 28. Effect of want of consideration. - Absence or failure of
consideration is a matter of defense as against any person not a
Lack of Consideration
total lack of any valid consideration
embraces transactions where no
consideration was intended to pass
remedy is to annul the instrument
Failure of Consideration
neglect or failure of one of the parties
to give, to do or to perform the
consideration agreed upon
implies that the giving of valuable
consideration was contemplated but
that it failed to pass
Remedies are (1) rescission of the
instrument as to value that was failed
to receive or (2) specific performance
Absence of consideration means total lack of consideration. For example, A

makes a promissory note payable to B as a gift; there is absence of consideration.
As between A and B, there can be no recovery on the note. But if B negotiates it to
C, a holder in due course, C can recover against A, because As defense of absence
of consideration is personal.
Failure of consideration means that something was agreed upon as consideration
for a contract but for some reason the consideration did not materialize. For
example, A enters into a contract to sell certain merchandise to B. In
consideration of this merchandise, B makes a promissory note payable to A as
advance payment thereof. A fails to deliver the merchandise. There is a failure of
consideration, so that A cannot recover from B. If B negotiates the note to C, who
knew that A failed to deliver, neither can C recover from A. If C were ignorant of
such defense and is a holder in due course, C can recover from A.
Partial failure of consideration means simply that part of the consideration did
not materialize. In the example above, if A delivered part of the merchandise and
failed to deliver the rest, there is a partial failure of consideration which may be
set up as a defense pro tanto by B against A or a holder not in due course (i.e. B is
not liable to the extent of the price of the undelivered portion).
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Sebastian: In lack of consideration, there is no considration at all. While in

failure of consideration, there was meant to be a consideration but it was never
fulfilled. In the latter, there was intent to consummate a contract and there was
an instrument issued for the fulfillment of the contract.
However, failure of consideration was not necessary to proive since the holder
cannot renegotiate the note.
Osorio v Montenegro vda. de Papa
NATURE OF DEFENSE
Agbayani: When it is shown that a promissory note is executed without just,

real or legal consideration, and that it was executed so that the supposed
creditor may help the supposed debtor protect the latters properties in the event
of an expected litigation to be commenced by a third person against said debtor,
the same is without any effect and the payment of said note is not demandable.
Agbayani: Whether total or partial, can be interposed as a defense only against

persons not holders in due course but not against holders in due course.
Therefore, Want or failure of consideration are only personal defenses.
Sebastian: In this case, it was proven that there was no valuable consideration
other than to protect the person from the claims of other persons. Thus, the
instrument was void for lack of vlauable consideration.
Elgin National Bank v Goecke Plaintiffs in error, as accommodation
parties and indorsers of the notes in question, indorsed the same for purpose of
lending their names and credit to the brewing company. They are therefore liable
to the defendant in error on the notes, although the defendant in error at the time
of taking the instrument knew plaintiffs in error to be accommodation parties, if
the defendant in error is a holder for value, as the notes were indorsed to it before
maturity and without notice of their restricted use and purpose.
An indorsee of a negotiable note who has taken it, before its maturity, as
collateral security for a pre-existing debt and without any express agreement, is
deemed a holder for a valuable consideration, and that he holds it free from latent
defenses on the part of the maker.
Dougherty v Salt The note was the voluntary and unenforceable promise of
an executory gift.
Sebastian: There was no consideration in this case because the check was
meant to be a gift. Even if the note said that it was issued for valuable
consideration, this was merely a disputable presumption. This case is a clear case
of want of consideration.
William Barco & Sons v Forbes One who gives a note in renewal of
another note, with knowledge at the time of partial failure of the consideration
for the original note, or of false representations by the payee, waives such defense
and cannot set it up to defeat or to reduce the discovery on the renewal note.
Sebastian: In this case, the note was issued for the purchase of fertilizers. Also,
there was no actual finding of failure of consideration and this was only assumed.
There was only failure of consideration in this case.
Campos: Section 28 goes farther for it in effect provides that absence or failure
of consideration is a personal defense available only against holders not in due
course. In the hands of a holder in due course therefore, the presumption of
consideration is conclusive. The acceptability of negotiable instrument would be
greatly restricted if prospective purchasers were burdened with the need of
determining whether such instruments are supported by consideration.
LIABILITY OF AN ACCOMMODATION PARTY
Sec. 29. Liability of accommodation party. - An accommodation
party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be only an
accommodation party.
Agbayani: The following are the requisites for an accommodation party: (1) he
must be a party to the instrument; (2) he must not receive value therefor; and (3)
he must sign for the purpose of lending his name or credit.
It should be noted that the phrase without value thereof means without
receiving value by virtue of the instrument and not without receiving payment for
lending his name. An accommodation note showing on the face in express terms
that it has been issued for no consideration would be of little or not use to the
payee, and for that reason, practically all accommodation notes are so drawn as
to either express or imply a valuable consideration prima facie.
Sebastian: An accommodation party does not lend his name but lends his
credit because he exposes himself to liability so the accommodated party can get
credit.
Maulini v Serrano An accommodation party is one who has signed an
instrument as maker, drawer, acceptor or indorser without receiving value
therefor and for the purpose of lending his name to some other person. The
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accommodation to which reference is made in [Section 29] is not one to the

person who takes the note but one to the maker or indorser of the note. In cases
of accommodation indorsement, the indorser makes the indorsement for the
accommodation of the maker. Such an indorsement is generally for the purpose
of better securing the payment of the note that is, he lends his name to the
maker, not to the holder. An accommodation note is one to which the
accommodation party has put his name, without consideration, for the purpose of
accommodating some other party who is to use it and is expected to pay it. The
credit given to the accommodation party is sufficient consideration to bind the
accommodation maker. Where, however, an indorsement is made as a favor to
the indorsee, who requests it, not the better to secure payment, but to relieve
himself from a distasteful situation, and where the only consideration for such
indorsement passes from the indorser to the indorsee, the situation does not
present one creating an accommodation indorsement, nor one where there is a
consideration sufficient to sustain an action on the indorsement.
Sebastian: The broker was not an accommodating party because he never lent
his credit line to the borrower so that the latter can borrow money from the
lender.
Ang Tiong v Ting An accommodation party liable to a holder for value as if
the contract was not for accomodation. It is not a valid defense that the
accommodation party did not receive any valuable consideration when he
executed the instrument. Nor is it is not correct to say that the holder for value is
not a holder in due course merely because at the time he acquired the instrument,
he knew that the indorser was only an accommodation party.
Sebastian: An accommodation party is not liable as a surety. He may look like
one but he cannot invoke the protection of the surety under the Civil Code.
RIGHTS OF ACCOMMODATION PARTIES AMONGST THEMSELVES
Agbayani: (1) The accommodation party is generally regarded as a surety for
the party accommodated.
(2) When the accommodation parties make payment to the holder of the notes,
they have the right to sue the accommodated party fore reimbursement since the
relation between them is in effect that of principal and sureties, the
accommodation parties being the sureties.
The accommodated party cannot recover from the accommodation party. As
between them, the understanding is that he accommodation party either is (1) to
reimburse the amount which the accommodation party may be obliged to pay, or
(2) to pay the instrument directly to the holder. The real debtor is the
accommodated party. As between the accommodated party and accommodation
party, the latter is secondary liable.
Sebastian: For accommodation makers, each of them is the maker and each of
them made a warranty. Each accommodation maker is individually liable for the
instrument. The accommodation party who paid for the whole instrument cannot
seek reimbursement from the other accommodation parties.
Reimbursement rights of accommodating parties are not governed by the
Negotiable Instruments Law because the instrument has already been discharged
and, therefore, Article 2073 of the Civil Code comes in.
When there are two or more guarantors of the same debtor and for
the same debt, the one among them who has paid may demand of each
of the others the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne
by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent. (Art. 2073, Civil Code)
In case an accommodating party cannot recover reimbursement from his coaccomodating parties, he can still recover from the accommodated party because
he is the principal debtor.
Sadaya v Sevilla (1) A joint and several accommodation maker of a
negotiable promissory note may demand from the principal debtor
reimbursement for the amount that he paid to the payee; and (2) a joint and
several accommodation maker who pays on the said promissory note may
directly demand reimbursement from his co-accomodation maker without first
directing his action against the principal debtor provides that (a) he made the
payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.
APPLICATION OF HOLDER FOR VALUE
Agbayani: In instruments which are not accommodation papers, the effect of
this notice of want of consideration is to render the holder for value not a holder
in due course because he has notice of a defense of prior parties, namely, want of
consideration, which is a defense under Section 28. However, because of the
provisions of Section 29, an accommodation party cannot interpose the defense
of want of consideration between him and the accommodated party against a
holder for value even if the holder for value has notice of the fact that he is an
accommodation party and therefore, has notice that he did not receive any
consideration for the instrument which he signed.
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Sebastian: Holder for value must be a holder in due course other than for the
fact that he knew the accommodation party signed the instrument without
receiving value therefor. But other than that, a holder for value must meet the
elements under Section 52.
Acua v Veloso and Javier Where one of the signers of a joint and several
promissory note affixes his signature thereto for the accommodation of a comaker and a third person advances the face value of the note to the
accommodated party at the time of the creation of the note, the consideration for
the note, as regards both makers, is the money so advanced to the accommodated
party; and it cannot be said that the note is lacking consideration as to the
accommodating party because he himself received none of the money It is
enough that value was given for the note at the time of its creation.
NEGOTIATION
WHAT CONSTITUTES NEGOTIATION
Sec. 30. What constitutes negotiation. - An instrument is negotiated
when it is transferred from one person to another in such manner as
to constitute the transferee the holder thereof. If payable to bearer, it
is negotiated by delivery; if payable to order, it is negotiated by the
indorsement of the holder and completed by delivery.
Agbayani: There are three methods of transfer, namely: (1) by assignment, (2)
by operation of law, (3) by negotiation, which may either be by indorsement
completed by delivery or by mere delivery.
Campos: A negotiation is the transfer of a negotiable instrument made in such
manner that the transferee becomes a holder and thus possibly a holder in due
course capable of acquiring a better title to the instrument than that of his
transferor.
Transfer is a broader term than negotiation. If an instrument is transferred
without negotiation, the transfer is a mere assignment which constitutes the
transferee as a mere assignee, not a holder, subject to all defenses existing among
prior parties. Transfer thus includes both an ordinary assignment and a
negotiation.
A negotiation may be for value as in a sale, or by way of a gift. In either case, there
will be a valid transfer. However, the rights acquired by the transferee in each
case may be different.
Sebastian: A transfer equivalent to negotiation is when it makes a transferee a
holder of the instrument. A holder is a payee or indorsee of a bill or not who is in
possession of it, or the bearer thereof. The initial issuance of the instrument
constitutes negotiation pursuant to Sections 30 and 191.
Under the Negotiable Instruments Law, the mode of transfer is by negotiation
which has two forms: (1) if it is a bearer instrument, by mere delivery; and (2) if it
is an order instrument, its is by indorsement then delivery.
DIFFERENCE FROM ASSIGNMENT
Agbayani: Assignment is the method of transferring a non-negotiable
instrument whereby the assignee is merely placed in the position of the assignor
and acquires the instrument subject to all defenses that might have been set up
against the original payee.
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The effect of assignment is that the party holding the right drops out of the
contract and another takes his place. The assignee and every subsequent person
to whom the instrument comes by assignment is substituted in the place of the
assignor. Hence, if the original assignor said or did something which under the
ordinary law of such contract would prevent him from enforcing the contract or
asserting his right against the other party to the original contract, the assignee,
although he knows nothing of the original transaction, may be deemed to have
said and done the same things. And further, if any subsequent assignee from
whom, as an assignor, the holder in turn derives the contract, has done anything
to prevent its enforcement against the original party, the said holder cannot
enforce it against the original party.
A person taking a negotiable instrument by assignment in a separate piece of
paper takes it subject to the rules applying to assignment. And where the holder
of a bill payable to order transfers it without indorsement, it operates as an
equitable assignment.
TRANSFERS BY OPERATION OF LAW
Agbayani: The fill title to an instrument may pass without either assignment,
indorsement, or delivery, that is, by operation of law, (1) by death of the holder,
where the title vests in his personal representative, or (2) by bankruptcy of the
holder, where title vests in his assignee or trustee, or (3) upon the death of a joint
payee or indorsee, in which case the general rule is that the title vests at once in
the surviving payee or indorsee.
INITIAL DELIVERY OF INSTRUMENT
Agbayani: Under Section 3o and 191, an instrument is negotiated when it is
delivered to the payee or to an indorsee. Negotiation is not confined to transfer
after delivery to the payee. A holder is a payee or an indorsee who is in possession
of an instrument payable to order. Consequently, when an instrument payable to
order is delivered to the payee thereof, the payee becomes a holder or he becomes
thereby a payee in possession of the instrument. In short, the delivery to him of
the instrument constitutes him the holder thereof. And since negotiation is
defined being such transfer of an instrument as to constitute the transferee the
holder thereof, such a delivery to the payee is negotiation.
and to every other person to whom the instrument may afterwards be

transferred, exactly similar to that which is implied by drawing a bill except that,
in the case of drawing a bill, the stipulations with respect to the drawers
responsibility and undertaking do not apply. Thus, the general indorser, in effect,
states to every person who follows him: This instrument will be paid by the
maker, if a note, or accepted by the drawee or paid by the acceptor, if a bill. If it is
dishonored by non-payment or non-acceptance and you give me notice thereof, I
will pay it. This, in effect, is the contract of the general indorser.
Campos: When the payee of an instrument transfers it to another by signing at
the back thereof he is said to have negotiated or indorsed the same and thereby
becomes an indorser. The person to whom he negotiates it is the indorsee, who,
by such negotiation becomes the holder of the instrument.
As to the nature of their liability, the parties to a negotiable instrument are either
primarily or secondarily liable. The primary party is the one who is absolutely
and unconditionally required to pay the instrument when it falls due. The maker
is the person primarily liable on a promissory note. In a bill of exchange, there is
no person primarily liable to pay until and unless the drawee accepts the order of
the drawer to pay. Before he accepts such drawee is not liable on the instrument
and he cannot be compelled by the holder to accept or pay it. But if and when the
drawee accepts, he becomes an acceptor who is absolutely bound to pay on the
date specified on the bill.
The drawer of a bill of exchange and the indorsers of either a bill or note are the
parties secondarily liable thereon, and they can be held responsible should the
primary parties fail to pay. Their liability is conditioned on 2 factors: (1) that a
demand or presentment be duly made on the primary party and (2) should the
said party dishonor such instrument, that a notice of such dishonor be given to
the secondary party sought to be charged.
An indorser by indorsing the bill or note impliedly enters into 2 contracts: (1) he
is selling or transferring the instrument to his indorsee, thus assuming liabilities
similar to that of a seller or transferor of personal property; and (2) he warrants
that he will pay the instrument when the two conditions for his liability
mentioned above have been fulfilled. The holder can therefore hold any indorser
liable should the maker or acceptor fail to pay, provided these two conditions are
complied.
INDORSEMENT
Agbayani: An indorsement is not only a mode of transfer. It is also a contract.
Every indorser is a new drawer and the terms are found on the face of the
instrument. There is an added obligation upon the instrument aside from what
appears upon the face of the instrument. The indorsement of an instrument
implies an undertaking from the indorser to the person in whose favor it is made
An instrument payable to order requires for its negotiation, first, an indorsement

by the payee or present holder, and second, its delivery to the transferee or
indorsee, who now becomes the holder. An indorsement consists of the signature
of the indorser usually on the back of the instrument. An indorsement has double
significance:
1) It constitutes a transfer or sale of the instrument to the indorsee or
transferee
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It signifies the agreement of the indorser to answer for the amount

represented by the instrument in case of default of the maker or the party
primarily liable.
Sebastian: Negotiation at the back of the instrument is only true in the case of a
check. In promissory notes, indorsement does not necessarily have to be at the
back for they can be made below the note.
An instrument payable to bearer can be negotiated by mere delivery. It is a

common practice, however, to indorse a bearer instrument whenever it is
transferred. It does not impair the negotiation but serves as an additional
security to the transferee, since he can hold the indorser liable as such. One who
negotiates by mere delivery, although he assumes the liabilities of a seller or
transferor of the note or bill, does not warrant that he will pay in case the primary
party fails to pay.
Generally, an indorsement is a signature. The first indorsement of an instrument

is by the payee. When you put something else in addition to the signature, it can
qualify the nature of the indorsement.
2)
A transfer of a negotiable instrument is effected otherwise than by negotiation

when an order instrument is delivered by the payee or special indorsee without
his indorsement or where the indorsement is not made properly as required by
law.
HOW MADE
Sec. 31. Indorsement; how made. - The indorsement must be written
on the instrument itself or upon a paper attached thereto. The
signature of the indorser, without additional words, is a sufficient
indorsement.
Agbayani: If written on the indorsement itself, the indorsement is usually
written on the back of back thereof. But the indorsement may be written on the
face of the instrument. Where the inorsement is written on a paper attached to
the instrument, such paper is called an allonge. But the allonge must be tacked
or pasted on the instrument so as to become a part of it, and where the separate
paper is only temporarily attached, as when clipped or pinned, it cannot be
considered an allonge.
ALLONGE
Agbayani: The use of an allonge is allowable only when there is a physical
impossibility of writing the indorsement on the instrument itself, and an
indorsement on a separate piece of paper where there is sufficient space on the
instrument for indorsements will be considered as mere assignment, not a
negotiation.
Campos: An allonge can be validly used only when there is no longer any room
on the instrument for further indorsements, otherwise the transfer will not be
sufficient to constitute the transferee a holder. He will thus be subject to defenses
such as failure of consideration. A contrary rule would open the door to fraud.
Sebastian: If the instrument no longer has space for indorsements, signatures
may be placed on an allonge. An allonge is a paper attached to a document for
receiving indorsements too numerous to be written on the bill itself. It only
relates to an instrument payable to order because indorsements are not needed in
bearer instruments. Its purpose is to provide more space for indorsements. Thus,
it must be attached permanently to the instrument. It is important to attach the
allonge to the instrument in order to determine the order of in which the
instrument was indorsed. This helps determine the order of liability of the
indorsers. It is important to know the order from who the instrument came from
because each indorsement made by a general indorser carries the warranty of
solvency of all prior parties.
Campos: If an instrument is payable to the order of A and B, either as payees or

indorsees, both must indorse in order for the transaction to operate as a
negotiation. A and B will then be jointly and severally liable and an action will lie
against any of them individually. If one of them should pay, the other is prima
facie liable to contribute his share to the paying indorser. If only one indorses, his
indorsee can have no right of action on the instrument because this would be
violating the rule against splitting of actions.
An allonge is permanently attached to the instrument when, once there is

detachment, it would be evident.
If one of several joint payees or joint indorsees indorses his own name and
without authority from his co-obligee, indorses the latters name and delivers the
instrument to a purchaser, such transaction does not constitute a negotiation of
the instrument. But it has been held that one of two joint payees, by indorsement
and delivery of the instrument to his co-payee, may transfer full title to the latter.
Clark v Thompson A written transfer of a note, made on a separate paper to

which it was pinned, there being room on the back of the note itself of the
transfer, was an assignment merely, not a commercial indorsement. Whether the
note was pinned not, we are constrained to treat its transfer as a common-law
assignment merely, and to hold that respondent was not a holder in due course.
If there was supposed to be an allonge and the instrument was presented by the
holder without it, the maker has the right to dishonor payment because there was
lack of proof of the holder that he was the lawful holder of the instrument.
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Sebastian: Subrogation happens when a creditor is substituted through

novation.
INDORSEMENT FOR THE FULL INSTRUMENT
Sec. 32. Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the entire instrument. An
indorsement which purports to transfer to the indorsee a part only of
the amount payable, or which purports to transfer the instrument to
two or more indorsees severally, does not operate as a negotiation of
the instrument. But where the instrument has been paid in part, it
may be indorsed as to the residue.
Agbayani: An indorsement of a part of the instrument does not operate as
negotiation. But it may constitute a valid assignment binding between the parties.
The person to whom the instrument is indorsed would not be considered an
indorsee but merely an assignee and would therefore take the instrument subject
to the defenses available between the original parties.
Campos: The purpose of this provision is to protect the obligors from more than
one action on the instrument. The maker and all the prior parties, in assuming
liability, took the risk of only one cause of action against them.
Sebastian: The indorsement of must be an indorsement of the entire

instrument. An indorsement which purports to transfer to the instrument to two
or more indorsees severally does not operate as a negotiation of the instruments.
The law states that the indorsement does not operate as a negotiation and
suggests that it is entirely inoperative.
Off-setting cannot take place under the Negotiable Instruments Law but and
could only be done outside of it.
KINDS OF INDORSEMENT
Sec. 33. Kinds of indorsement. - An indorsement may be either special
or in blank; and it may also be either restrictive or qualified or
conditional.
Campos: Indorsements containing such additional words are classified into
special, restrictive, qualified, and conditional. Where only the signature of the
indorser appears, it is called a blank indorsement.
The provision does not cover a situation where part of the amount of the
instrument has been paid, in which case, it may be negotiated for the balance.
Thus, in a note payable by installments, where some installments have been paid,
the instrument may still be negotiated for the remaining unpaid installments.
The basis of classification of indorsements are:

1) Special and blank future method of negotiation, whether by indorsement
and delivery or by delivery alone
2) Restrictive and non-restrictive the kind of title transferred
3) Qualified and unqualified the scope of the liability assumed by the indorser
4) Conditional and unconditional presence or absence of express limitations
put by the indorser upon the primary obligors privileges of paying the holder
Neither does the provision prohibit a transaction where the indorsee pays the
indorser less than the face amount of the instrument, title transferring to the
indorsee. This is what is called a discount of the instrument. The discount is
given in consideration of the period during which the purchaser has to wait
before he can cash the instrument with the maker or acceptor, which can be done
only at the maturity of the instrument.
Sec. 34. Special indorsement; indorsement in blank. - A special

indorsement specifies the person to whom, or to whose order, the
instrument is to be payable, and the indorsement of such indorsee is
necessary to the further negotiation of the instrument. An
indorsement in blank specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be negotiated by delivery.
When an indorsement does not comply with Sec. 32, the transfer is not
necessarily void. It remains valid, not as a negotiation, but as a mere assignment
which subjects the holder to all defenses on the instrument.
Agbayani: Where the instrument is originally payable to order and it is

negotiated by the special indorsement, it can be further negotiated by the
indorsee by indorsement completed by delivery.
Sebastian: An instrument must be indorsed in full in order to determine the

holder of the instrument.
Where the instrument is originally payable to order and it is negotiated by the

payee by blank indorsement, it can be further negotiated by the holder by mere
delivery. The reason is that the effect of a blank indorsement is to make the
instrument payable to bearer.
Blake v Weiden When there has been a purported indorsement of the whole
instrument, in separate parts to two or more trasferees, the purported indorsees
take legal title to their several shares and may sue together, or any one or more
may sue provided all the other indorsees are brought in as parties.
Where the instrument is originally payable to bearer it can be further negotiated

by mere delivery, even if the original bearer negotiated it by special indorsement.
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Campos: There are two forms of special indorsement: Pay X or Pay X or

order followed by the signature of the indorser. An indorsement need not
contain the words of negotiability as long as these appear on the face of the
instrument. In either case of special indorsement, the indorsement of the special
indorsee is necessary for the further negotiation of the instrument.
A person who negotiates by mere delivery is liable only to his immediate
transferee. A special indorser however is liable to subsequent holders, unless the
instrument is an originally bearer instrument, in which case he is liable only to
those who take title through his indorsement.
An indorsement in blank specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
Sebastian: An indorsement is special when the name of the indorsee is written
in the indorsement.
Sec. 35. Blank indorsement; how changed to special indorsement. The holder may convert a blank indorsement into a special
indorsement by writing over the signature of the indorser in blank
any contract consistent with the character of the indorsement.
Agbayani: The holder must not write any contract not consistent with the
indorsement, that is, the contract so written must not change the contract of the
blank indorser. The following have been held to be contracts inconsistent with
the character of the indorsement:
1) Pay to X and Y.
2) Demand and notice waived.
3) I guaranty payment. This will make the indroser a garantor and deprive him
thereby of his right to demand notice.
Campos: A blank indorsement may be converted into a special indorsement by
writing over the signature of the indorser in blank any contract consistent with
the character of the indorsement.
Sebastian: When there is a blank indorsement, the instrument becomes a

bearer instrument. The holder may then treat the instrument as a bearer
instrument.
RESTRICTIVE INDORSEMENT
Sec. 36. When indorsement restrictive. - An indorsement is restrictive
which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some
other persons.
But the mere absence of words implying power to negotiate does not
make an indorsement restrictive.
Agbayani: While the omission of words of negotiability in the indorsement
does not affect the negotiability of the instrument, such omission in the body will
render the instrument non-negotiable.
Campos: A restrictive indorsement either restricts the right of the indorsee to
further negotiate the instrument or reserves beneficial interest therein in the
indorser or in a third person. In the latter case, although the instrument may be
further negotiated, all subsequent indorsees take subject to the rights of the
restrictive indorser or the third person, as the case may be.
Sebastian: A restrictive indorsement limits the title of the indorsee. It implies
that there is a limitation on what the indorsee can do.
Indorsement that Kill Negotiability
Sebastian: An indorser would want to kill negotiability so (1) that he would not
be liable to a holder in due course later on and (2) that he may have a personal
defense.
Indorsement as agent for
An instrument payable to order on its face may be converted into a bearer

instrument by means of a blank indorsement, and may later be reconverted into
an order instrument by a subsequent special indorsement, the last indorsement
always controlling the means of further negotiation. On the other hand, an
instrument payable to bearer on its face always remains a bearer instrument. An
indorsement of a bearer instrument does not convert it to an instrument payable
to order.
Agbayani: Under this restrictive indorsement, the indorsee does not acquire
title over the instrument as against the indorser. He merely becomes the agent of
the indorser. Hence, any action the indorsee may file is subject to defenses
available against the indorser, such as lack of consideration.
An indorsement for deposit constitutes the indorsee the agent of the indorser.
Sebastian: An indorsee makes a restrictive indorsement to an agent or a trustee
because he is dealing with an agent or trustee and not the principal or
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beneficiary. This protects himself because the restrictive indorsement acts as a

constructive notice to subsequent indorsees that his immediate indorsee is acting
as a mere agent or trustee.
While the indorsee is entitled to enforce the instrument, the person is not the
beneficial owner of the proceeds. Indorsee will be paid the amount but, upon
receipt of payment, it is for the account of someone else. The person for whom
the collection or enforcement being made is the one protected in this nature of
the instrument since each indorsee will be charged with the fidelity of an agent or
trustee.
(c) to transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
Agbayani: The indorsement passes the legal title over the note to the indorsee
so as to enable him to demand and receive payment of the value of the
instrument. This is true under any of the forms of restrictive indorsement.
In a restrictive indorsement for deposit, the indorsee can bring an action
against the indorser if the indorser received value for said indorsement.
Granado v Riverdale
Agbayani: The notation for deposit is a restrictive indrosement and indicates
that the indorsee bank is an agent for collection and not the payee. Indorsement
for a check by the payee for deposit does not thereby render it negotiable but
prohibits further negotiation for any purpose except for collection for deposit in
the payees account in the bank selected by the payee. By adding the notation,
title to the check remained in the name of the firm.
Indorsement in trust for
Sulbrason-Dickenson Co. v Hopkins
Agbayani: An indorsement to A for the benefit of B was held restrictive making
the indorsee or his successors subject to good defenses against the restrictive
indorser.
Atlantic v Comm. Lumber Co.
Agbayani: The indorsee of a check indorsed in trust for a third person who is a
holder in due course could recover from the drawer who had a defense of failure
of consideration for while the restrictive indorsement creating a trust gives notice
of this trust to subsequent purchasers, it did not give notice of defenses obtaining
between prior parties.
White v National Bank
Leonardi v Chase National Bank
EFFECTS OF RESTRICTIVE INDORSEMENT
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A
restrictive indorsement confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
The words until it has been restrictively indorsed in Section 47 do not

contemplate every restrictive indorsement but a restrictive indorsement that
prohibits the further negotiation of the instrument under Section 36(a).
Where the indorsement is Pay to C only, the instrument becomes nonnegotiable. But an indorsement for collection does not destroy transferability and
it can be reindorsed so that the indorsee can sue in his own name. Neither does
an indorsement for deposit only destroy the transferability of the instrument,
but the restrictive indorsee cannot transfer the instrument for his own debt or for
his own benefit.
QUALIFIED INDORSEMENT
Sec. 38. Qualified indorsement. - A qualified indorsement constitutes
the indorser a mere assignor of the title to the instrument. It may be
made by adding to the indorser's signature the words "without
recourse" or any words of similar import. Such an indorsement does
not impair the negotiable character of the instrument.
Effects of Qualified Indorsement
Agbayani: A qualified indorsement constitutes the indorser as a mere assignor
of the title to the instrument. Without recourse means without resort to a person
who is secondarily liable after the default of the person who is primarily liable. In
effect, any one who indorses without recourse states that all parties to the paper
are genuine; I am the lawful holder of that paper, and I have title to it and know
of no reason why you could not recover on it as a valid instrument; but I do not
guarantee the financial responsibility of the parties on that paper but I do say
that I hold title to it just the same as any other personal property.
Liability of Qualified Indorser
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Agbayani: The qualified indorser is not entirely free from secondary liability.
He is secondarily liable on his warranties as an indorser under Section 65. He is
liable if the instrument is dishonored by non-acceptance or non-payment due to
(1) forgery, (2) lack of good title on the part of the indorser, (3) lack of capacity to
indorse on the part of the prior parties, or (4) the fact, at the time of the
indorsement, that the instrument was valueless or not valid and knew of that fact.
Campos: An indorser by his indorsement impliedly enters into two contracts:
(1) a contract of sale or assignment of the instrument and (2) a contract to pay the
instrument if the maker is unable to pay on maturity. By adding the words
without recourse above his signature, he expressly rids himself of the second
contract.
A qualified indorser therefore merely assumes the first contract and agrees
merely to transfer legal title to the instrument. This is what the law means when
it says that he is a mere assignor of the title of the instrument. The transfer
would still be negotiation and the transferee would still be a holder capable of
acquiring a title free from defenses of prior parties. The only effect of the
qualified indorsement is to relieve the qualified indorser of his liability to pay the
instrument should the maker be unable to pay at maturity.
In the absence of clear and unmistakable language qualifying liability, an
indorser will be liable on both his contracts. His liability cannot be limited by
implication.
Sebastian: Unlike a general indorser, the qualified indorser does not warrant
the solvency of the maker/drawer. An indorser indorses qualifiedly if he is not
sure if he can guarantee the payment of the liability or the solvency of the
maker/drawer. The value of indorsements is merely supportive of the liability of
the person primarily liable. If the person primary liable has the ability to pay,
then the responsibility of the indorsers are not as significant as they should be.
By making a qualified indorsement, one makes an off balance sheet transaction.
Fay v Witte
whom an instrument so indorsed is negotiated will hold the same, or

the proceeds thereof, subject to the rights of the person indorsing
conditionally.
Agbayani: A conditional indorsement is an indorsement subject to the
happening of a contingent event, that is, an event that may or may not happen, or
a past event unknown to the parties.
A conditional indorsement does not render an instrument non-negotiable. But if
the condition is on the face of the instrument, the condition renders it nonnengotiable as the promise or order therein would not be unconditional.
Campos: An indorser is liable to pay the instrument in two conditions: (1) that
due demand or presentment be made on the party primarily liable on the date of
imaturity, and (2) that should the latter fail to pay on such presentment, a notice
of dishonor be promptly sent to the indorser. An indorsement without any other
condition upon which liability is based is referred to as an unconditional or
absolute indorsement. A conditional indorsement is one where an additional
condition is annexed to the indorsers liability. An indorsement does not affect
the negotiability of the instrument because the original promise or order remains
unconditional. But all holders subsequent to the conditional indorsement take
subject to the condition.
Sebastian: A conditional indorsement implies that there is a condition where, if
not fulfilled, the indorsement would not be complete. In other words, the
indorsement becomes condition if the transfer is subject to the fulfillment of a
condition.
If the indorsement is conditional, the person obliged may ignore the condition
and pay it; or dishonor the instrument and wait until the condition is fulfilled.
The option of paying or not paying pertains to the maker/drawee. There is
nothing stopping the holder from presenting the instrument to the maker/
drawee.
Refusal to pay of the maker/ drawer will not constitute dishonor if the condition
has not yet been fulfilled. But as far as the maker is concerned he can choose to
ignore the conditions because he is not a party to the conditions. The law gives
the maker the choice to pay the instrument regardless if the condition was not
fulfilled.
Copeland v Burke
Hutson v Rankin
CONDITIONAL INDORSEMENT
Sec. 39. Conditional indorsement. - Where an indorsement is
conditional, the party required to pay the instrument may disregard
the condition and make payment to the indorsee or his transferee
whether the condition has been fulfilled or not. But any person to
The other option is to look at the indorsement and hold the payment of the
instrument until the fulfilment of the condition. Holder may not be entitled
because the indorsment is conditional. But once the condition is fufilled, the
maker/drawee should pay.
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If the condition is resolutory, the maker/drawee has no choice but to pay the
instrument on due date.
indorsement prior to him but the special indorsments made will still have
warranties under Section 66.
But if after due date, the resolutory condition was breached, can we say that the
person who was paid was merely holding the proceeds of the note in trust for the
previous indorser who indorsed with condition? This is questionable. When the
maker pays, the instrument is discharged and it ceases to exist. Once it ceased to
exist, the effect is that Negotiable Instruments Law no longer applies. Then we
enter to the agreement between indorser indorsee which is attached to the
agreement which no longer exists as a negotiable instrument. The instrument
now becomes a simple contract. At the time of maturity, resolutory condition was
not breached. As far as maker, he has to pay. The only time he can refuse is if
there was breach at the time of presentment.
We already know that if breach happened after the payment of the instrument, it
is no longer a negotiable instrument. But the fact remains that there was an
agreement between the indorser and indorsee where the payment was based on a
resolutory condition. In their case, there was breach of contract and the remedy is
specific performance or rescission.
Assuming that the instrument was originally an order instrument which had a
blank indorsement, the holder may still cancel the prior special indorsements
because the blank indorsement already made it a bearer instrument.
Agbayani is wrong because there can be no trust since there was no trustor and
trustee, and no beneficiary. He failed to show the fluidity of transition from
Negotiable Instrumetns Law to contract laws.
If only one payee indorses, he passes only his part of the instrument. Such an
indorsement would not operate as such because it would not be an indorsement
of the entire instrument. But the following are exceptions to the rule requiring
joint indorsement:
1) where the payee or indorsee indorsing has authority to indorse for the
others, and
2) where the payees or indorsees are partners.
INDORSEMENT OF BEARER INSTRUMENT

Sec. 40. Indorsement of instrument payable to bearer. - Where an
instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as make
title through his indorsement.
Agbayani: Section 40 applies only to instruments which are originally payable
to bearer. It does not apply to instruments originally payable to order, even when
they become payable to bearer because the only or last indorsement is in blank.
An instrument which is originally payable to bear is always payable to bearer.
Hence, even when specially indorsed, it can be negotiated by mere delivery.
A special indorser of an originally payable to bearer instrument is not liable to a
holder who became a holder through delivery because delivery was sufficient to
transfer title. However, a special indorser is liable to special indorsee/s because
they acquire their title over the instrument through the special indorsement as
they can trace their title through a series of unbroken indorsements.
Sebastian: Special indorsements do not convert the original bearer instrument
to an order instrument. The holder in due course can cancel the special
INDORSEMENT TO TWO OR MORE PERSONS

Sec. 41. Indorsement where payable to two or more persons. - Where
an instrument is payable to the order of two or more payees or
indorsees who are not partners, all must indorse unless the one
indorsing has authority to indorse for the others.
Agbayani: Section 41 applies only to instruments payable to two or more
payees jointly. It does not apply to instruments to two or more payees severally
because these fall under Section 8(c) and such instrument so payable may be
negotiated by the indorsement of one payee.
Campos: Where the instrument is payable or indorsed to A and B, they are joint
payees and an indorsement by either A or B only will not constitute a valid
negotiation so as to free the instrument from defenses, unless the one indorsing
is authorized by the other.
INDORSEMENT TO A CORPORATE OFFICIAL
Sec. 42. Effect of instrument drawn or indorsed to a person as
cashier. - Where an instrument is drawn or indorsed to a person as
"cashier" or other fiscal officer of a bank or corporation, it is deemed
prima facie to be payable to the bank or corporation of which he is
such officer, and may be negotiated by either the indorsement of the
bank or corporation or the indorsement of the officer.
Sebastian: By indicating the limited capacity of the indorser, he does not
become a general indorser that warrants under Section 66.
Johnson v Buffalo Bank
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DLSU LAW
Agbayani: Where S was the cashier of the C bank, a certificate of deposit issued
by the C bank to the order of S, Cashier was indorsed S, Cashier, and came to
the plaintiff, a holder in due course, it was held that the indorsement was that of
the bank, and that it was competent for the bank to show that S acted in his own
interest and in violation of his duty to the bank.
MISSPELLED NAME OF INDORSEE
Sec. 43. Indorsement where name is misspelled, and so forth. Where the name of a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
Campos: The indorsement should be made by the holder in the manner he was
designated, otherwise the signature will prima facie not be a valid indorsement of
the instrument.
INDORSEMENT BY A REPRESENTATIVE
Sec. 44. Indorsement in representative capacity. - Where any person
is under obligation to indorse in a representative capacity, he may
indorse in such terms as to negative personal liability.
Agbayani: A representative must indorse in the same manner as an agent of the
maker, drawer or acceptor should in order to escape personal liability under
Section 20. In short, (1) he must add words describing himself as an agent; and
(2) at the same time disclose his principal. Of course, (3) he must be duly
authorized.
It has been held that an agent may indorse by merely signing the name of the
principal.
Campos: An instrument may be indorsed either personally or through an agent.
And the authority of the agent need not be in writing. In so signing, an agent
should make it plain that he is merely signing in behalf of the principal, otherwise
he may be held personally liable. The most common form of indorsement by an
agent is Pedro Reyes by Jose Santos, agent.
be just like payment. Where the holder deposits the check with a bank other than
the drawee, he would in effect be negotiating the check to such bank, since he
would have to indorse the check before the bank will accept it for deposit.
Whatever kind of indorsement is made by the holder, the bank in fact is only a
collecting agent. As a rule, the indorsement made by the depositor of a check
would be in blank, just his signature without any other words. The instrument
will therefore not show any restriction to the collecting banks title and to all
appearances, title has transferred to it.
TIME AND PLACE OF INDORSEMENT
Sec. 45. Time of indorsement; presumption. - Except where an
indorsement bears date after the maturity of the instrument, every
negotiation is deemed prima facie to have been effected before the
instrument was overdue.
Agbayani: If the indorsement bears a date, the presumption in this section
would not arise. The presumption would be that stated in Section 11, namely, that
the date written is the true date.
This provision becomes important in connection with Section 52(b). In order that
one may be a holder in due course, the instrument must be negotiated to him
before it becomes overdue. The indorsement without date establishes a prima
facie presumption that the instrument was negotiated before maturity, and one
who denies that the holder of such instrument is a holder in due course has the
burden of proof.
The fact that an indorsement appears to be in fresher ink than the face of a
demand note is not sufficient to overcome the presumption that it was indorsed
before it was overdue.
Sec. 46. Place of indorsement; presumption. - Except where the
contrary appears, every indorsement is presumed prima facie to have
been made at the place where the instrument is dated.
Sebastian: This provision has no sense in the Philippines because there is only
one Negotiable Instruments Law here.
INDORSEMENT TO OR BY COLLECTING BANK

CONTINUATION OF NEGOTIABILITY
Campos: A holder of a check may either cash it with the drawee bank, or may
deposit it to his credit either in the drawee bank or in another bank. Should he
cash it directly with the drawee bank, then payment to him by the latter would
discharge the instrument and terminate all rights and liabilities of the parties
thereto. Should he deposit it in the drawee bank without immediately cashing it,
such bank will credit the amount of the check to his account and the effect would
Sec. 47. Continuation of negotiable character. - An instrument

negotiable in its origin continues to be negotiable until it has been
restrictively indorsed or discharged by payment or otherwise.
Agbayani: The mercantile character (1) of the instrument as a negotiable paper
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and (2) of the contracts of several parties to it, continues after its maturity and
until it is paid except (3) that an indorsee or a tranferee after maturity takes the
instrument subject to the defenses between original parties, because after
maturity such subsequent parties take the instrument after it becomes overdue,
and therefore, they are not holders in due course. In short, after maturity, an
instrument originally negotiable continues to be negotiable in the sense that the
contracts of the parties to it continue and are governed by the Negotiable
Instruments Law. However, the instrument ceases to be negotiable in the sense
that a transferee after maturity is not a holder in due course, and, therefore, is
not free from defenses obtaining between prior parties. Transfer to such
transferees would be equivalent to a mere assignment and subject to defenses.
The position of a holder who takes a bill when over due is that he is a holder with
notice. He may or may not be a holder for value and his rights will be regulated
accordingly. He is a holder with notice because he takes a bill which, on the face
of it, ought to have been paid. He is therefore bound to make two inquiries:
1) Has the bill been discharged? If not, why not?
2) Was the title of the person who held it at maturity defective?
If the title to the instrument was complete, it is immaterial that for some
collateral reason he could not have enforced the bill against some or one more of
the parties liable thereon.
It does not follow that simply because one is not a holder in due course he cannot
recover on the checks in his possession. The Negotiable Instruments Law does
not provide that the holder who is not a holder in due course, may not, in any
case, recover on the instrument. The only disadvantage is that the instrument is
subject to defenses as if it were non-negotiable.
Campos: A negotiable instrument, although overdue, retains its negotiability
unless it has been paid or restrictively indorsed so as to prohibit further
negotiation. Other forms of restrictive indorsements do not destroy negotiability,
for Section 37 recognizes the right of the restrictive indorsee to further negotiate
the instrument.
The fact that the instrument is overdue does not affect the right of the holder to
further negotiate it if he wishes to, but merely prejudices the status of subsequent
holders as they cannot be considered holders in due course.
Although indorsements after maturity are good to transfer title, they prevent a
holder from becoming a holder in due course, thus subjecting him to defenses, if
any. The presumption that every negotiation was effected before the instrument
was overdue is therefore significant, since indorsements are usually not dated.
The law of the place of dating will govern any controversy should there be conflict
of laws.
STRIKING OUT OF INDORSEMENT

Sec. 48. Striking out indorsement. - The holder may at any time strike
out any indorsement which is not necessary to his title. The indorser
whose indorsement is struck out, and all indorsers subsequent to
him, are thereby relieved from liability on the instrument.
Agbayani: Where an instrument is transferred by a special indorsement, the
holder has no right to strike out the name of the person mentioned in such
indorsement and insert his own name in place; nor can he strike out such name
and convert such special indorsement into a blank indorsement. The holder who
acquires title subsequent to the succeeding special indorsement must trace his
title not only through the blank indorsement but through the special indorsement
as well.
An indorsement is not necessary when mere delivery is sufficient to vest
ownership in the indorsee.
The following are effects of striking out:
1) indorser whose indorsement is struck out is relieved from liability on the
instrument; and
2) all subsequent indorsers are also relieved from their liability on the
instrument.
Campos: If the instrument is payable to bearer on its face, then whether or not
there are indorsements on the back of the instrument would be immaterial to the
title of the bearer, who is presumptively the owner and holder by his mere
possession of such instrument. None of the indorsements would be necessary to
his title since mere delivery would have been sufficient to transfer title from one
holder to another. The holder, thus have a right to cancel any or all indorsements.
Where the instrument is payable to order on its face, the situation is different. If
all the indorsements appearing on the back of the instrument are special, then all
of them would be necessary to the holders title.
TRANSFERS WITHOUT INDORSEMENT
Sec. 49. Transfer without indorsement; effect of. - Where the holder
of an instrument payable to his order transfers it for value without
indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the
right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the
negotiation takes effect as of the time when the indorsement is
actually made.
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Agbayani: Section 49 applies only to instruments payable to order. This

contemplates a case where there is delivery and payment of value but no
indorsement. There is, therefore, one element lacking for the negotiation of the
instrument, namely, indorsement by the payee or indorsee. This operates as an
equitable assignment.
subject to the provisions of this Act, reissue and further negotiable

the same. But he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable.
The following are the rights of the transferee for value:

1) the transferee acquires only the rights of the transferor. This means that if a
defense is available against the transferor, that defense is also available
against the transferee.
2) The transferee has also the right to require the transferor to indorse the
instrument.
The time for determining whether the transferee is a holder in due course is as of
the time of actual indorsement, not at the time of the delivery. The reason is that
negotiation is completed at the time of indorsement, not at the time of delivery.
Campos: If his predecessor had legal title, the transferee of an unindorsed
instrument acquires such, subject however to hte defenses and equities available
among prior parties.
It is the exception rather than the rule for a payee of an order instrument or a
special indorsee to transfer the instrument without indorsement, and therefore
since the situation is abnormal, it is only fair to the maker and to prior holders to
require the possessor to prove without the aid of an initial presumption in his
favor, that he came into possession by virtue of a legitimate transaction with the
last holder.
But the transferee of an unindorsed instrument may become a holder by
obtaining the indorsement of his transferor. It is only at this time that the
instrument can be considered as having been negotiated. As to what kind of
indorsement such transferee is entitled to, the majority view is that, unless there
is proof of an agreement to the contrary, he has a right to an unqualified and not
merely a qualified indorsement.
There can be no apparent reason therefore why an unindorsed instrument should
not also be the subject of gift, passing title to the donee. However, such a donee,
although he has a right to sue on an instrument as a legal owner thereof, does not
have the right to compel the indorsement of his donor. This is the only difference
in the effect which Section 49 should have on a gratuitous transfer as contrasted
with the transfer for value.
NEGOTIATED BACK TO PRIOR PARTY
Sec. 50. When prior party may negotiate instrument. - Where an
instrument is negotiated back to a prior party, such party may,
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without notice that it has been previously dishonored, if such

was the fact;
RIGHTS OF A HOLDER
IN GENERAL
(c) That he took it in good faith and for value;
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable

instrument may to sue thereon in his own name; and payment to him
in due course discharges the instrument.
(d) That at the time it was negotiated to him, he had no notice of

any infirmity in the instrument or defect in the title of the
person negotiating it.
Agbayani: A holder in due course may (1) sue on the instrument in his own
name; and (2) receive payment and if the payment is in due course, the
instrument is discharged.
A possessor of an unendorsed instrument payable to order may sue in his own
name if the transferor could have done so. Under Section 49, a transfer for value,
but without indorsement, of an instrument which is payable to order vests in the
transferee such title as the transferor had therein.
Negotiable Instruments Law

holder in due course
Acquires the instrument free of all
personal defenses.
May acquire even superior to that of
the immediate transferor.
Civil Code
holder in good faith and for value
Acquires nothing but the rights and
obligations of the transferor.
May only acquire everything that the
transferor has.
ELEMENTS
The payment in due course to the holder of an instrument discharges the

instrument. Payment in due course is payment made (1) at or after the maturity
of the instrument (2) to the holder thereof (3) in good faith and (4) without notice
that his title is defective.
Agbayani: Any holder proved to have taken an instrument with one of the
conditions enumerated in this section lacking is not a holder in due course.
Sebastian: To sue in his own name means to enforce a negotiable instrument.

This presupposes that there was a dishonor or a default payment. A holder here
refers to the payee or indorsee of the instrument in possession thereof.
Sebastian: If the instrument can be paid without controversy, then the

instrument is complete and regular upon its face.
A pledgee of an instrument is a holder who may sue because when you pledge an
instrument, it must be indorsed to the pledgee. In a contract of pledge, you
cannot constitute a pledge without delivering to the pledgee the thing that is
pledged. Thus, pledgee must be in possession of the instrument, making the
pledgee a holder as far as the Negotiable Instruments Law is concerned.
However, a pledgee has limited rights. He has no right to demand payment when
instrument is due. His right is to have a lien on the instrument when it becomes
due. When a pledgee receives payment, it is by way of the lien constituted by the
pledge.
HOLDER IN DUE COURSE
Sec. 52. What constitutes a holder in due course. - A holder in due
course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
Complete and Regular Upon its Face
A forgery that is not apparent is not considered against a holder in due course.
When the forgery was invisible to the naked eye, the holder may be considered as
a holder in due course.
Receipt Before Instrument is Overdue
Agbayani: One taking a past due paper is chargeable with notice of all equities
between the original parties, but not with equities between intermediate
indorsers. Moreover, if the instrument is overdue, it is also a notice that it has
been dishonored.
An instrument is overdue after the date of maturity. On the date of maturity, the
instrument is not overdue, and a holder who acquires the instrument on that date
is a holder in due course because the principal debtor has the whole day to pay.
When the instrument contains an acceleration clause, knowledge of the holder at
the time of acquisition thereof that one installment or interest, or both is unpaid,
is notice that the instrument is overdue.
(b) That he became the holder of it before it was overdue, and

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Where, by the terms of the instrument, the principal was to become due upon
default of the payment of the interest, one who takes the instrument upon which
the interest is overdue is not a holder in due course.
Campos: A holder in order to be a holder in due course must become a holder of
the instrument before it is overdue and without notice that it has been previously
dishonored if such was the fact. The fact that the instrument is overdue is a
strong indication that it was dishonored and the law puts the potential holder on
inquiry as to whether it was dishonored and the reason therefor.
Sebastian: An instrument past due is technically a default instrument.
As far as a check is concerned, due date is any date from date of issue. Also, a
reasonable time for demanding payment of a check is 180 days from issue. A
check presented for payment after such time can be dishonored by the drawee
bank for being stale.
Absence of knowledge of a defense, when the instrument was taken, is

essential element in the matter of good faith.
Campos: One of the important requisites of due course holding is that the
holder must have taken the instrument in good faith and that at the time it
was negotiated to him, he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it. Note that due course holding is
not affect by the holders acquisition of knowledge after he has taken the
instrument.
Sebastian: There is good faith when the holder has no knowledge of fact
which renders it dishonest for him to take the instrument. As a rule, you do
not need to make an inquiry on the title of the indorser. Knowledge here
means actual knowledge of facts which render the instrument to be
dishonoest. Suspicion or speculation is not enough.
Failure to Make Inquiry
In the case of a time draft presented for acceptance, it can be dishonored twice,
presentment prior to due date or on due date.
Montinola v PNB Montinola cannot be considered a holder in due course
because Section 52 defines a holder in due course as a holder who has taken the
instrument under certain conditions, one of which is that he became a holder
before it was overdue. When he received the check, it was long overdue.
Agbayani: One who took the check two and a half years after it became payable
is not a holder in due course. By then, the check was stale.
Agbayani: Ordinarily, failure to inquire after notice of facts merely

sufficient to cause a person of ordinary prudence to make inquiry as to an
infirmity in a negotiable instrument and defect in holders title, is not
evidence of purchasers bad faith so as to bar him from recovery. The test for
determining whether a holder acquires an instrument in good faith is not
whether he was negligent, such as in failing to make inquiries, but whether
his purpose was dishonest. Even gross negligence in purchasing a negotiable
instrument from a holder whose title was defective does not establish bad
faith. In short, the test is subjective test of honesty, not an objective test of
due care.
Without Notice of Prior Dishonor

Sebastian: There are 3 ways of dishonoring an instrument.
Holder in Good Faith
Agbayani: Good faith refers to the indorsee or transferee, not to the
seller of the paper. Even if the seller is in bad faith, the transferee may still be
a holder in due course. Taking in good faith means that if the holder does not
take in bad faith, his good faith is sufficiently shown, and bad faith, under
Section 56, means that he must have knowledge of facts which render it
dishonest for him to have a particular piece of negotiable paper. Knowledge,
not surmise, suspicion, or fear, is necessary; not knowledge of the exact truth
but of some truth that would prevent action by those commercially honest
men for whom the law is made.
However, it has been held that failure to make inquiry, when circumstances
strongly indicate defect, renders the holder not a holder in due course. A
willful failure of one purchasing a note, with actual knowledge of suspicious
circumstances, to make inquiries, may amount to bad faith. And suspicious
facts and circumstances and grossly inadequate price may properly be
considered in determining whether a purchaser acquired notes in bad faith.
Vicente R. de Ocampo & Co. v Anita Gatchalian The stipulation of
facts expressly states that plaintiff was not aware of the circumstances under
which the check was delivered to Manuel Gonzales, but we agree with the
defendants that the circumstances indicated by them in their briefs, such as
the fact:
1) that appellants had no obligation or liability to the Ocampo Clinic;
2) that the amount of the check did not correspond exactly with the
obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and
Holder in good faith means a holder without knowledge or notice of equities

of any sort which could be set up against a prior holder of the instrument.
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3)
that the check had two parallel lines in the upper left hand corner, which
practice means that the check could only be deposited but may not be
converted into cash.
All these circumstances should have put the plaintiff to inquiry as to the why
and wherefore of the possession of the check by Manuel Gonzales, and why
he used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was
or the nature of his possession. Having failed in this respect, we must declare
that plaintiff was guilty of gross neglect in not finding out the nature of the
title and possession of Manuel Gonzales, amounting to legal absence of good
faith, and it may not be considered as a holder of the check in good faith.
The rule that a possessor of the instrument is prima facie a holder in due
course does not apply because there was a defect in the title of Manuel
Gonzales and the instrument is not payable to him or to bearer.
Under the circumstances of this case, instead of the presumption that the
payee was a holder in good faith, he fact is that it acquired possession of the
instrument under circumstances that should have put it to inquiry as to the
title of the holder who negotiated the check to it. The burden was, therefore,
placed upon it to show that notwithstanding the suspicious circumstances, it
acquired the check in actual good faith.
Sebastian: This case is an exception to the no inquiry rule. In this case, the
instrument was a crossed check and that generally indicates restrictions on
negotiability. However, it does not destroy negotiability but it means that it
may only be negotiated once, which is to payees account only and can only
be encashed.
Value need not be full and a holder will be one for value even if he gave less than
the face value of the instrument, provided that intention of the transferor is to
transfer the full amount represented by the instrument.
The bank becomes a holder for value only when the depositor withdraws the
amount of the deposited instrument. And where such withdrawal takes place
before maturity and before the bank receives notice of any defense on the
instrument, the bank is a holder in due course against whom such defense would
be unavailable.
The mere fact that the present holder paid for nothing for a note or is not a holder
for value does not preclude recovery, but only lets in all defenses, if any, that
might be urged against the original payee.
If a negotiable instrument is given as collateral for a debt, the holder has a lien on
the instrument. If the amount called for by the instrument is less than the
principal debt secured by such instrument, the pledgee is a holder for value for
the full amount and may therefore recover all. If the debt secured by the
instrument is less than the sum for which the instrument is issued, and there are
no existing defenses, the pledgee can still recover all, but the excess over the debt
he holds in trust for whomsoever is entitled to it.
Whether or not the words for value received appear in an instrument is
immaterial. In their absence, the presumption fills in the gap. On the other hand,
their presence will not preclude evidence to show lack of consideration. The
presumption is prima facie and may be rebutted by proof to the contrary.
DEFECTS OF TITLE
ACQUISITION FOR VALUE

Agbayani: Where the holder gave no valuable consideration for the transfer of
the instrument to him, he cannot be a holder in due course. But the fact that a
note is purchased at a discount does not of itself raise an inference that the
purchaser is buying a tainted instrument.
While inadequacy of consideration is not of itself a sufficient ground for either
legal or equitable relief, yet it may be shown as evidence of fraud.
An amount paid for an instrument, if a trifling sum, may itself establish notice.
Campos: A negotiable instrument may be given as a gift to the indorsee or
transferee. In such cases whatever defenses can be set up against the transferor
can also be set up against the transferee. But where the holder gave valuable
consideration for the note and the other requisites of Section 52 are present, he
will be free from such defenses.
Agbayani: The Negotiable Instruments Law, in defining things that may be

wrong with an instrument uses three terms, namely (1) defenses, (2) infirmities,
and defect of title. Defect of title are defined by Section 55 to cover all those
situation which at common law were known as equitable defenes, and also to
cover those equities of ownership where there was breach of faith in negotiation.
The defective title of a person over an instrument may result from the following:
1) acquisition of the instrument by fraud;
2) acquisition of the instrument by force, duress or fear;
3) acquisition of the instrument by unlawful means;
4) acquisition of the instrument for an illegal consideration;
5) negotiation of the instrument in breach of faith; and
6) negotiation of the instrument under circumstances that amount to fraud.
One acquiring an instrument with knowledge of any of the foregoing defects of
title of the person negotiating is not a holder in due course.
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DEFENSES
NOTICE OF INFIRMITY OR DEFECT OF TITLE
Agbayani: Defenses include common law defenses outside those covered in

Section 55. They include:
1) mistake;
2) absence and failure of consideration;
3) minority and other forms of incapacity to contract;
4) lack of authority of an agent; and
5) others.
Sec. 54. Notice before full amount is paid. - Where the transferee
receives notice of any infirmity in the instrument or defect in the title
of the person negotiating the same before he has paid the full amount
agreed to be paid therefor, he will be deemed a holder in due course
only to the extent of the amount therefore paid by him.
One acquiring an instrument with knowledge of any of the foregoing defenses is

not a holder in due course.
INFIRMITIES OF AN INSTRUMENT
Agbayani: Infirmities include things that are wrong with the instrument itself
as distinguished from those that are lacking in contracts on the instrument. Such
infirmities are to be found in situations arising under:
1) wrong date inserted where the instrument is expressed to be payable at a
fixed period after sight is undated;
2) filling up a blank instrument not strictly in accordance with the authority
given or not within reasonable time, where it was delivered wanting in a
material particular;
3) filling up and negotiating without authority an incomplete and undelivered
instrument;
4) lack of valid and intentional delivery of a mechanically complete instrument;
5) agent signing per procuration beyond the scope of his authority;
6) forgery; and
7) material alteration.
Accordingly, notice by the holder of an instrument of any of the foregoing, at the
time of negotiation of the instrument to him, would render him not a holder in
due course.
WHAT CONSTITUTES DEFECTIVE TITLE

Sec. 55. When title defective. - The title of a person who negotiates an
instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud, duress,
or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith, or under
such circumstances as amount to a fraud.
Agbayani: Title of a person in an instrument becomes defective either in the
acquisition or in the negotiation.
Sebastian: Those things enumerated are the first things that can go wrong on
the instrument.
WHAT CONSTITUTES NOTICE OF DEFECT
Sec. 56. What constitutes notice of defect. - To constitutes notice of an
infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must have
had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounted to bad faith.
Agbayani: To constitute notice of defect or infirmity, the transferee must have
actual knowledge, either (1) of the defect or infirmity, or (2) of such facts that his
action in taking the instruments amounts to bad faith.
HOLDER NOT IN DUE COURSE

Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable
length of time after its issue, the holder is not deemed a holder in due
course.
Agbayani: The section applies to instruments which are payable on demand.
Practically no authority hold that a reasonable time for negotiating a demand
note could be extended beyond a year.
Actual knowledge of facts is necessary to constitute bad faith. Nevertheless,

knowledge and bad faith may be established by circumstantial evidence. Section
56 does not wholly eliminate the duty of inquiry. The circumstantial evidence
may be so strong and decisive that to ignore it would not only be negligence but
an act of bad faith.
Knowledge is required, not mere suspicion, surmise or fear. But knowledge of the
exact truth is not necessary. Knowledge of some truth as would prevent the
taking of the instrument by commercially honest men is enough. Knowledge of
agent is knowledge by principal.
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Where there is knowledge of suspicious circumstances, coupled with means of

verifying them, taking the instrument may amount to bad faith.
Campos: Under Section 56, in order to constitute notice, the holder must have
actual and not merely constructive knowledge of the defect, or he must have
acted in bad faith. Gross negligence in itself would not constitute notice since it is
not the equivalent of bad faith nor of actual knowledge. Anything short of either
actual knowledge or bad faith therefore, will not constitute notice.
Sebastian: What constitutes notice of defect does not depend on diligence but
on actual knowledge as modified by De Ocampo v. Gachalian.
RIGHTS OF A HOLDER IN DUE COURSE
Sec. 57. Rights of holder in due course. - A holder in due course holds
the instrument free from any defect of title of prior parties, and free
from defenses available to prior parties among themselves, and may
enforce payment of the instrument for the full amount thereof against
all parties liable thereon.
Agbayani: A holder in due course:
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 prior parties among themselves; and
4) may enforce payment of the instrument for the full amount thereof against all
parties liable thereon.
Campos: A holder in due course can acquire a better title than his predecessors
because he takes the instrument free from any defect of title of prior parties. He is
furthermore free from defenses available to prior parties among themselves.
Sebastian: Additional rights of a holder in due course are that (1) he holds the
instrument free from defenct and defenses and (2) he may enforce payment
against all prior parties. A holder in due course is only immune to personal
defenses but will yield to real defenses.
Sec. 58. When subject to original defense. - In the hands of any holder
other than a holder in due course, a negotiable instrument is subject
to the same defenses as if it were non-negotiable. But a holder who
derives his title through a holder in due course, and who is not
himself a party to any fraud or illegality affecting the instrument, has
all the rights of such former holder in respect of all parties prior to
the latter.
Agbayani: A holder not in due course:

1) may sue on the instrument in his own name;
2) may receive payment and if the payment is in due course, the instrument is
discharged;
3) holds the instrument subject to the same defenses as if it were nonnegotiable;
4) but a holder not in due course who derives his title through a holder in due
course and who is not himself a party o any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect to the parties
prior to the latter.
The general rule that equitable defenses can be interposed against a person not a
holder in due course has this exception, that a person 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 a such former holder in
respect to all parties prior to the latter. In other words, though he is not himself a
holder in due course, equitable defenses cannot be interposed against him by
parties prior to the holder in due course from whom he derived his title. But of
course, real defenses can be interposed against him. It will be noted that there are
two requisites, namely
1) that he derived his title from a holder in due course, and
2) that he was not himself a party a party to any fraud or illegality affecting the
instrument.
In order that a holder who derives his title from a holder in due course may
recover on the instrument, it is incumbent upon him to show that the person
through whom he derives his title was a holder in due course; and this must be
proven as an independent matter of fact.
Campos: The fact that a holder is not in due course will in no way affect the
negotiability of the instrument. It only affects such holders rights, and does not
necessarily prevent subsequent holders from acquiring the status of due course
holders.
Sebastian: If there is an intervening holder in due course, the subseqent
holders also become holders in due course. If an instrument is in the possession
is one who is not a holder in due course, but derives his title from a holder in due
course, the former is called a holder in due course by osmosis. In an indorsement,
you acquire everything that belongs to the superior provided that such holder is
not involved in the defect of the instrument. Ifyou are claiming title under a
holder in due course, you are under a legal duty to prove that the prior holder is a
Fossum v Fernandez Hermanos If a person not a holder in due course
reacquires from a holder in due course, the instrument becomes subject to the
same defenses to which it would have been subject as if the paper had never
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passed through the hands of a holder in due course. The same is true where the
instrument is retransferred to the agent of a person not a holder in due course.
REAL AND PERSONAL DEFENSES
Agbayani: The defenses referred to in Section 57, from which the holder in due
course is free, are equitable (personal) defenses only, not legal (real) defenses,
which latter class of defenses can be set up against a holder in due course.
Personal defenses are those which grow out of the agreement or conduct of a
particular person in regard to the instrument which renders it inequitable for
him, though holding legal title, to enforce it against the defendant, but which are
not available against bona fide purchases for value without notice. They can be
set up against persons not holders in due course but not against holders in due
course. They are called personal defenses because they are available only against
that person or a subsequent holder who stands in privity with him.
In real defenses, the right sought to be enforced has never existed or ceased to
exist. It is a defense against everybody. The case of the real defense is presented
where (1) the contract was void, not voidable only, as to the defendant in its
inception, as where:
1) his signature was forged or unauthorized;
2) he was legally incapable of making the contract;
3) his signature was secured by misrepresentation of the kind of paper he was
signing;
4) the contract was void under an invalidating statute;
or (2) the contract has lost its vitality by the occurrence of a subsequent event by:
1) material alteration without defendants consent;
2) lapse of time or
3) discharge by payment in due course;
4) bankcruptcy proceedings or otherwise.
An instrument subject to real defense cannot be enforced against the person to
whom the legal defense is available but it can be enforced against those to whom
such a defense is not available.
Where the action is against joint makers, a defense belong personally to one of
them will not be available to the other co-makers; but where the defense of the
defendant goes to the merits of the case defeating plaintiffs right to recover, it is
available to the benefit of the other defendant. The last statement seems to mean
defenses which are derived from the nature of the obligation.
instrument
3) insertion of wrong date when
necessary
4) filling up of a blank contrary to
authority given or not within
reasonable time
5) fraud in inducement
6) acquisition of instrument by force,
duress, fear, fraud, mistake,
intoxication, unlawful means or
for an illegal consideration
7) negotiation in breach of faith or
under circumstances amounting
to fraud
8) ultra vires acts of corporations
9) want of authority of agent where
he has apparent authority
10) insanity where there is no notice
of insanity on the part of the one
contracting with insane person
11) form or consideration is illegal
3)
4)
5)
6)
7)
8)
9)
10)
11)
instrument
duress amounting to forgery
fraud in factum or fraud in esse
contractus
minority
marriage in case of a wife
insanity where the insane person
has a guardian appointed by court
ultra vires act of corporation
where there is an absolute
prohibition
want of authority of agent
execution between public enemies
illegality of contract
Campos: It should be kept in mind that the question of whether a holder is a

holder in due course or not is significant only when there is an existing defense
between prior parties.
Sebastian: Alteration is neither a real or personal defense. It is better to say
neither than to say it is both. Niether means it can be real or personal, or
something totally different.
The defesne of minority can only be used by the minor and other indorsers may
not claim minority of the indorser. But if there was misrepresentation of the
minors age, the minor will be held liable.
Between the parties to the underlying transaction, illegality of the underlying
transaction is a real defense. But as to remote parties, the instrument is valid. A
holder unaware of the nature of the note may be a holder in due course.
If the illegality of the instrument is by virtue of a statutory provision, it is a real
defense. Otherwise, it is only a personal defense.
PRESUMPTION IN FAVOR OF HOLDER IN DUE COURSE
1)
2)
Personal Defenses
absence or failure of consideration
want of delivery of complete
Real Defenses
1) forgery
2) want of delivery of incomplete
Sec. 59. Who is deemed holder in due course. - Every holder is

deemed prima facie to be a holder in due course; but when it is shown
that the title of any person who has negotiated the instrument was
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defective, the burden is on the holder to prove that he or some person

under whom he claims acquired the title as holder in due course. But
the last-mentioned rule does not apply in favor of a party who became
bound on the instrument prior to the acquisition of such defective
title.
Agbayani: The presumption expressed in this section arises only in favor of a
person who is a payee or indorsee who is in possession of the draft or the bearer
thereof. Under this definition, in order to be a holder, one must be in possession
of the note or the bearer thereof. However, when the instrument is not payable to
the holder thereof or to bearer, there is said to be a defect in the title of the holder
and the rule that possessor of the instrument is prima facie a holder in due
course does not apply. Furthermore, the presumption does not apply in favor of a
person who is no longer in possession of the instrument.
Before the presumption arises, he must prove that he is the holder of the
instrument, that is, that he is the indorsee in possession of the instrument, as it is
payable to order.
But when it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he or some
under whom he claims, acquired the title as holder in due course.
Asia Banking Corporation v Ten Sen Guan y Sobrinos The reason for
this salutary rule given by the courts in innumerable decision is that the guilty
maker or holder of an instrument vitiated by fraud or illegality will naturally seek
to put it in the hands of some other person in order to cut off the defense to which
the instrument is subject, and a presumption arises against the bona fides of the
transfer. The law therefore requires the holder of such paper to manifest the most
complete can do and show exactly the circumstances under which the paper was
acquired.
But the shifting of the burden of proof to the holder where it is shown that there
is a defect in the title of any person who negotiated it does not apply in favor of a
party who became bound on the instrument prior to the acquisition of such
defective title.
LIABILITIES OF PARTIES
Campos: From the point of view of liability, parties to a negotiable instrument
are classified into: (1) primary party, and (2) secondary party. The parties
primarily liable are (1) the maker of a promissory note and (2) the acceptor of a
bill. The drawee is not a party liable on the instrument until and unless he
accepts; in such case he becomes an acceptor, and is primarily liable on the bill.
The parties secondarily liable are: (1) the indorser of both a note and a bill, and
(2) the drawer of a bill.
The main difference between a primary party and a secondary party is that the
former is unconditionally liable when the latter is conditionally liable. Being
unconditionally liable, the primary party is duty bound to pay the holder at the
date of maturity, whether or not the holder demands payment from him, and he
is not relieved from liability even if the instrument should become overdue due to
the failure of the holder to make such demand. On the other hand, a party
secondarily liable is not bound to pay unless the following conditions have been
fulfilled: due presentment or demand to the primary party for payment or
acceptance, its dishonor by such party, and the taking of proceedings required by
law after dishonor i.e., notice of dishonor to the secondary party and, in cases
of foreign bills of exchange, protest of the bill.
Sebastian: Parties who are primarily laible on an instrument are the maker and
the acceptor. It must be noted that a drawee is not even liable on the instrument.
Parties who are secondarily liable on an instrument are the drawer and indorsers.
LIABILITY OF MAKER
Sec. 60. Liability of maker. - The maker of a negotiable instrument,
by making it, engages that he will pay it according to its tenor, and
admits the existence of the payee and his then capacity to indorse.
Agbayani: The engagement of the maker is to pay absolutely the note according
to its tenor. The makers liability is primarily and unconditional. And one who
has signed a maker is presumed to have acted with care and to have signed the
document in question with full knowledge of its contents unless, of course, fraud
is proved.
Maker must pay according to terms of the note.
Aside from engaging to pay the instrument according to its tenor, the maker also
admits the existence of the payee and his then capacity to indorse. Thus, without
expressly stating it in the note, the maker, by merely signing his name in a note as
such, without more, represents to the world that the payee is an existing person
with the then capacity to indorse. The maker consequently is precluded from
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setting up the following defenses: (1) that the payee is a fictitious person because,
by making the note, he admits that the payee exists; and (2) that the payee was
insane, a minor, or a corporation acting ultra vires because, by making the note,
he admits the then capacity of the payee to indorse.
Sebastian: This case explains what liability one incurs if he signs an

instrument. In this case, the maker was held liable because when he signed as a
maker, he became a person primarily liable who undertook to make payment
according to its tenor.
Campos: Under Section 60, a maker is undoubtedly a party primarily liable as

defined in Section 192, for he engages to pay the note according to its tenor,
subject to no condition whatever.
Araneta v Perez Under Section 60 of the Negotiable Instruments Law, the

maker of a promissory note cannot escape liability by alleging that he spent the
money for the medical treatment of his daughter, the beneficiary of the trustee
who is the payee of the note, since it is not the payees concern to know how said
proceeds should be spent, inasmuch as that is the sole concern of the maker, and
the payees interest is merely to see that the note be paid according to its terms.
The term maker applies only to the promissory note. By executing a note, a maker
warrants that the payee as named in the instrument is existing. He cannot
therefore deny his liability on the ground that no such payee in fact exists. Thus,
he cannot be heard to question, for example, the corporate existence of the payee.
Sebastian: The maker is liable to pay according to its tenor because the maker
wrote it, that is why he will pay the instrument according to its tenor. He is the
primary obligor and it is incumbent upon him to honor his commitment.
When the instrument after it has been issued by the maker is materially altered,
the commitment to pay according to its tenor will not apply to the note because it
is no longer the tenor of his obligation.
A maker must admit the existence of a payee and his capacity to indorse so he
cannot deny his liability on the ground that no such payee in fact exists. A
negotiable instrument is substitute for money andsomething acceptable to
strangers to the underlying transaction of the instrument. Therefore, each step of
the way, the person negotiating is making representation with respect to prior
transactions. On each step, someone assures the holder that the instrument is
good. By the last holder, he will have every protection available from the
indorsers to the maker. In effect, the maker is saying that I pass the instrument
to the payee and he can pass it to you; and when he passes it to you, I am willing
to pay.
PNB v Maza and Macenas The accommodation party can claim no benefit
as such, but he is liable according to the face of his undertaking, the same as if he
were himself financially interested in the transaction. To fasten liability upon
him, it is not necessary that any consideration should move to him.
After making payment to the holder, the accommodation party may sue the
accommodated party for reimbursement, since the relation between them is in
effect that of principal and surety, the accommodation party being the surety.
TanTua Sia v Yu Biao Sontua There being no evidence of fraud, and the
appellant having admitted the genuineness of his signature on the promissory
note in question, the same must be given its legal effects.
Sebastian: There was no off set because the parties to the note and the parties
to the trust were different. The responsibility of the trustee was between the
trustor and the beneficiary. A civil liability cannot be off set from a liability that
arose from a breach of trust.
Republic v vda. de Yulo A perusal of the promissory notes attached to the
complaint shows that the appellee signed some of them merely as an agent of one
of his co-defendant. The complaint itself alleges that on several occasions the
latter, for herself and through other defendants, including appellee, obtained
several loans from the former Bank of Taiwan. That it was solely said defendant,
who owed the loans, is further corroborated by the allegation that the chattel
mortage to secure them was signed by her and was constituted on her exclusive
property. Upon these facts, it is held that the complaint, as against appellee, was
correctly dismissed for lack of sufficient cause of action.
Parot v Gemora When a promissory note is signed by two or more persons,
promising to pay the amount of the sad note juntos o separadamente, such
comakers are individually liable for the payment of the full amount of the
obligation of such contract.
Clark v Sellner The fact that a joint and several note has been signed by one
or various makers thereof for the accommodation by one or more of his or their
comakers, does not render him or them an accommodation maker or makers
with respect to the creditor who, upon the receipt of the note, pays the full value
thereof. In such a case the payment by the creditor of the value of the note upon
the latter passing into his hands, renders all the signers of the note liable thereon;
and is of no importance that one or more of the signers has or have not received
absolutely any part of the consideration.
Mere delay on the part of the creditor, after maturity of the note, in enforcing the
guaranty given to secure the payment of said note, does not affect the liability of
the maker, and the latter is not released by the fact that by the lapse of time the
guaranty has becomes worthless.
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Sebastian: In this case, the principle of laches did not apply. What is
controlling is the liability of the maker, accommodation or otherwise, who
undertakes to pay the instrument.
LIABILITY OF A DRAWER
Sec. 61. Liability of drawer. - The drawer by drawing the instrument
admits the existence of the payee and his then capacity to indorse;
and engages that, on due presentment, the instrument will be
accepted or paid, or both, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder or to any subsequent
indorser who may be compelled to pay it. But the drawer may insert
in the instrument an express stipulation negativing or limiting his
own liability to the holder.
Sebastian: The drawer warrants the existence of the payee and his capacity to
indorse.
There is no warranty on the existence of the drawee because the drawee is not yet
a party to the instrument. The presumption is that every bill of exchange is drawn
on account of some indebtedness from the drawee to the drawer, and that the
acceptance is an appropriation of the funds of the latter in the hands of the
former.
Drawer may be held liable on the basis of his liability based on his contractual
obligation and his statutory undertaking as the drawer of the instrument.
only when: (1) it is dishonored; (2) and the necessary proceedings of dishonor are
duly taken. The liability of the drawer is therefore, subject to these two conditions
and attaches only upon their fulfillment. Thus, without expressly stating it in the
bill, the drawer, by merely drawing the bill and signing his name in the bill as
such drawer, without more, impliedly engages to be so secondarily liable, as if he
has incorporated the provisions of Section 61 in the bill. Accordingly, if a bill is
not paid, the drawer becomes liable for the payment of its value to the holder
provided that notice of dishonor is given. In the absence of due presentment, the
drawer is not liable. And a person in whose favor a bank sells a telegraphic
exchange on a foreign bank may, in case payment is refused by the bank of
destination, maintain an action against the bank selling the exchange, without
regard to whether such payee was an immediate party to the purchase of the
exchange or not.
Liability for Unaccepted Bill
Agbayani: Is drawer of unaccepted bill primarily liable? It has been held that
until the bill ahs been accepted, the drawer is the primary debtor and after
acceptance, the drawee of acceptor is the principal debtor and the drawer
becomes secondarily liable. His liability is the as that of a first indorser. It may be
pointed out, however, that under Section 61, whether the bill is accepted or not,
the drawer is not absolutely required to pay. Therefore, strictly speaking, under
Section 192, which defines a person primarily liable as one who by the terms of
the instrument is absolutely required to pay the same, the drawer is not
primarily liable thereon even if the bill is unaccepted.
Ability to Deflect Liability
Kauffman v PNB A person whose favor a bank sells telegraphic exchange on

a foreign country may, in case payment is refused by the bank of destination,
maintain an action against the bank selling the exchange, without regard to
whether such payee was an immediate party to the purchase of the exchange or
not.
Agbayani: The law allows the drawer to negative or limit his liability by express
stipulation, as by adding to his order to pay the words: (1) without recourse, (2)
I shall not be liable in case of non-payment or non-acceptance.
Sebastian: The instrument in this case was not negotiable; in fact, there was no
written instrument at all.
PNB v Court of Appeals (1982) Drawer of checks should pay their value to
the bank who paid for them in case said checks were lost and thus were not
debited against the drawers current account is consistent with the doctrine of
preventive unjust enrichment.
To Whom Drawer is Liable

Agbayani: The secondary liability of the drawer is in favor of: (1) the holder, or
(2) if any of the indorsers intervening between the holder and the drawer is
compelled to pay by the holder, the drawer will be liable to that indorser so
compelled to pay.
Reimbursement Obligation of Drawer
Sebastian: The checks in this case were never dishonored because they were
never presented. However, to argue that the check was never dishonored would
result in unjust enrichment.
STATUS OF DRAWEE PRIOR TO ACCEPTANCE
The drawer does not engage to pay the bill absolutely. He engages merely that the
bill will be accepted or paid or both, according to its tenor and that he will pay
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Campos: The drawee is the person on whom a bill of exchange or check is

drawn and who is ordered to pay it. He is not liable on the instrument until he
accepts it, and even a holder in due course cannot sue him on the instrument
before his acceptance. The mere issuance of the bill does not make the drawee
liable thereon because it does not operate as an assignment of the funds of the
drawee. Once the bill is accepted, the acceptor becomes primarily liable on the
instrument under Sec. 62. The presumption is that every bill of exchange is
drawn on account of some indebtedness from the drawee to the drawer, and that
the acceptance is an appropriation of the funds of the latter in the hands of the
former.
A bill of exchange presupposes a debtor-creditor relationship between the drawer
and the drawee. Thus, although a drawee is not liable to the holder until and
unless he accepts, the drawee who refuses to accept may, under some
circumstances, be made liable to the drawer for breach of contract or for damages
based on tort. If the drawee, for a certain consideration, had previously promised
the drawer that he would honor the latters bill, unjustified refusal to accept will
be a breach of the promise. Thus, if a bank refuses without just reason to honor a
check of one of its depositors although the latter has sufficient funds with it to
cover the check, the drawer may recover from the bank damages for any injury
suffered by him, including that to his credit or reputation.
LIABILITY OF AN ACCEPTOR
Sec. 62. Liability of acceptor. - The acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his
acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
Agbayani: The acceptor, by his acceptance, admits: (1) the drawers existence,
(2) the genuineness of the drawers signature; and (3) the capacity and authority
of the drawer to draw the instrument. But he does not admit the genuineness of
the indorsers signature. Thus, without adding any word to his acceptance, the
acceptor, by signing the bill as such, represents that the drawer exists, that his
signature is genuine and that he has the capacity and authority to draw the bill.
Effect of acceptors admissions:
(1) The acceptor is consequently precluded from setting up the defense that the
drawer is non-existent or fictitious because of his admission of the drawers
existence;
(2) Neither can he claim that the drawers signature is a forgery because he
admits the genuineness of the drawers signature.
(3) Neither can the drawee escape liability by alleging want of consideration
between him and the drawer as, by accepting the bill, he admits the capacity and
authority of the drawer to draw the bill. For the same reason, the better rule
seems to be that the acceptor is liable on the bill even if the drawer has
overdrawn his account.
Campos: Negotiable instruments are payable either immediately or at some
future time. If a bill of exchange is payable immediately, it will be presented to
the drawee for payment; on the other hand, if payable at some future time, the
bill of exchange may be presented to the drawee for acceptance before its due
date. A drawee has no liability on the bill until and unless he accepts the same.
Once he accepts, he becomes primarily liable on the instrument, for then he
engages to pay it according to the tenor of his acceptance, subject to no condition
whatever. He cannot refuse to pay a holder in due course on the ground of forgery
of the drawers signature since he admits its genuineness. Neither can he refuse
to pay a holder in due course on the ground of absence of consideration or other
personal defense exiting between the acceptor and the drawer.
Sebastian: An acceptor will pay the instrument according to the tenor of his
acceptance, not according to the tenor of the instrument. Acceptor may choose to
accept the instrument on terms that are different from what was written on the
instrument. When you agree to pay, you are bound to the instrument.
There a warranty with regards to the drawer because when the acceptor accepts,
he cannot question the existence, capacity, and authority of the drawer, and the
genuineness of the signature of the drawer. If there is no warranty, the
acceptance will have no point, because he can still deny payment to the payee.
Warranty of the payees existence is necessary because it was only upon
acceptance that the acceptor became a party. After acceptance, acceptor is
directly and primarily liable to the payee although initially there was no liability.
Acceptor Primarily Liable
Agbayani: The acceptor engages to pay absolutely according to the tenor of his
acceptance. His liability is not subject to any condition. Thus, without expressly
stating it on the bill, the acceptor, by merely signing the bill as such, engages to
pay unconditionally the bill according to the tenor of is acceptance. It is to be
noted, however, that as already stated, the acceptor is a drawee who accepts the
bill. Before acceptance, the drawee is not liable on the bill. The drawee by
acceptance becomes liable to the payee or his indorsee, and also to the drawer
himself. His acceptance immediately places a legal liability on him for the
payment of the bill in favor of one who became a holder thereof after acceptance
and if he wants to escape liability, it is up to him to show that he is a mere agent
of the drawer, or allege and prove any other defense which he has to the liability.
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The prevailing view is that the same rule found in Section 62 applies in the case
of a drawee who pays a bill without having previously accepted it.
days after sight. He engages to pay the bill 60 days after sight, which is tenor of
his acceptance, not 30 days after sight, the tenor of the bill. Suppose that the
bill is for 1,000 and the acceptor accepts it for 600, he would be liable only for
600, the tenor of his acceptance, not 1000, the tenor of the bill.
Sebastian: By acceptance, acceptor warrants that he is primarily liable.

PNB v Picornell The drawee, by accepting unconditionally the bill, becomes
liable to the holder, and cannot allege want of consideration between him and the
drawer. The holder is a stranger as regards the transaction between the drawer
and the drawee, and if he has given value to the drawer and has no knowledge of
any equity between the drawer and drawee, he is in the same situation as an
indorsee in good faith. Hence in an action brought by the holder against the
acceptor it is no defense that the merchandise sent by the drawer and which
constituted the consideration for the drawing of the bill, is of inferior quality than
was ordered by the drawee to such a degree that is not worth the value of the bill.
Sebastian: An acceptor, upon acceptance, detaches himself from the underlying
transaction. He assumes liability under the instrument and independent from the
underlying trasaction of the instrument. Thus, defects in the underlying
transaction does not affect the acceptor.
Effect of Mortgage
Asia Banking Corporation v Lacson Company, Inc. Where being
unable to pay certain bills of exchange which the drawee has accepted, the latter
makes a mortgage in favor of the holder of said bills upon certain merchandise
the value of which is sought to be collected through said bills, in order to secure
the payment of said amount if the merchandise is sold and the integrity thereof
while the sale is not effected, the execution of said mortgage does not constitute
any novation of the obligation represented by said accepted bills, unless it is so
expressly stated in said mortgage.
Sebastian: Even if an instrument is secured by a mortgage, the mortgage will
not operate to novate the liability of an acceptor. Subsequent constitution of the
mortgage does not novate the liability of an acceptor.
Payment According to Tenor of Acceptance
Agbayani: Acceptor to pay according to tenor of his acceptance. It is to be
noted that while the maker of a note engages to pay according to the tenor of the
note, an acceptor engages to pay according to the tenor of his acceptance, not of
the bill he accepts. This is an important distinction for the tenor of the acceptors
acceptance may be different from the tenor of the bill, as the acceptor may accept
the bill with qualifications. But, of course, if his acceptance is general, the tenor of
the bill is the same tenor as the tenor of his acceptance. Thus, suppose that the
bill is payable 30 days after sight and the drawee accepts it but payable 60
Sebastian: If nagbago ung tenor nung instrument, the holder may consider
the instrument dishonored.
Alteration Before Acceptance
Agbayani: Suppose the bill is originally for 1,000. Before the drawee X
accepts it, it is altered by the payee B to 4,000. Then X accepts it. How much is
X liable to a holder in due course? Before the adoption of the Negotiable
Instruments Law, at common law, an acceptor was liable according to the tenor
of the bill. Since the adoption of the Negotiable Instruments Law, a diversity of
opinion has arisen as to the effect of Section 62.
According to one view, X is liable for 4,000 not 1,000. The reason is that the
tenor of Xs acceptance is for 4,000. since an acceptor, by Section 62 engages
to pay the bill according to the tenor of his acceptance, he must pay to the
innocent payee or subsequent holder the amount called for by the time he
accepted, even though larger than the original amount ordered by the drawer.
Moreover, he would be a party who has himself assented tot the alteration.
A learned writer takes the opposite view and he is supported by some decisions.
He suggests that the Illinois view overlooks other pertinent sections of the
Negotiable Instruments Law and that Section 62 should be paraphrased to state
the liability of the acceptor depends upon the terms of his acceptance, that is,
whether it is a general acceptance, or a qualified acceptance or an acceptance for
honor. He suggests that all three of these acceptance contracts are within the
purview of the provision of Section 62 that the acceptor, by accepting the
instrument, engages that he will pay it not according to the tenor of the bill since
this would deny him the right to qualify the acceptance or to accept for honor but
according to the tenor of his acceptance.
Under the first view, what is the effect of Section 124 which provides that a holder
in due course can recover only the original tenor of the instrument? It seems that
this refers to the original tenor of the instrument taken from the standpoint of the
person principally liable, in the first illustration, from Xs standpoint. In other
words, the original tenor of the instrument is 4,000, which is the tenor of Xs
acceptance. If after his acceptance, a subsequent indorsee alter the bill to read
9,000, then X could be liable only for 4,000, the original tenor of his
acceptance, even as to a holder in due course.
LIABILITY OF AN INDORSER
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Agbayani: In the absence of any indication in what capacity a person whose

signature is written on the instrument intends to be bound, he shall be deemed
an indorser. But one making a note payable to his own order does not, by
indorsement thereof, assume liability as indorser.
Sec. 64. Liability of irregular indorser. - Where a person, not

otherwise a party to an instrument, places thereon his signature in
blank before delivery, he is liable as indorser, in accordance with the
following rules:
(a) If the instrument is payable to the order of a third person, he is
liable to the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or
drawer, or is payable to bearer, he is liable to all parties
subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all
parties subsequent to the payee.
And one who signs otherwise than as maker, drawer, or acceptor, will not be
deemed an indorser if he indicates by appropriate words his intention to be
bound in some other capacity. Accordingly, an indorser upon a promissory note
or bill of exchange who indorses for the purpose of incurring any liability as to
the payment of such promissory note or bill of exchange, incurs no liability. This
indorsement or guaranty, however, must clearly indicate that it is for the purpose
of identification only.
Agbayani: Where a person puts his signature on the instrument after delivery,
this section does not apply. It is Section 17 (f) and Section 63 which apply. This
section applies where the signature in blank is placed on the instrument before
delivery. And this section deals only with the liability of the irregular indorser to
the payee but does not fix the rights of various irregular indorsers as between
themselves which shall be governed by Section 68, under which evidence is
admissible as to the order in which they are to be liable.
But anyone who assumes the responsibility of identifying the payee of a check is
answerable to the bank cashing the check if the bank pays its amount to such
payee so identified. But where a party signed his name on the back of the check
below the clause for identification of payees signature and payment
guaranteed, stamped immediately after a signature appearing thereon as last
indorsee, and thereafter the agents of the bank encashed the check in favor of the
drawee and not in favor of the person so identified, such agents are guilty of
negligence, and the bank is liable to the drawer for the amount of check.
Definition of Irregular Indorser
Who is Deemed an Indorser

Sec. 63. When a person deemed indorser. - A person placing his
signature upon an instrument otherwise than as maker, drawer, or
acceptor, is deemed to be indorser unless he clearly indicates by
appropriate words his intention to be bound in some other capacity.
Sebastian: Under this section, the person placing his signature upon an
instrument who does not signify how is to be bound is deemed an
accommodation indorser and liable under Section 66. An accommodation
indorser does not receive any consideration but signs it nonetheless.
A deemed indorser indorses after the instrument is delivered, while an irregular
indorser indorses before delivery.
American Bank v Macondray & Co. An indorser upon a promissory note
or bill of exchange who indorses for the purpose of indentifying the person only
and not for the purpose of incurring any liability as to the payment of such
promissory note or bill of exchange incurs no liability. This indorsement or
guaranty, however, must clearly indicate that it is for the purpose of
identification only.
CONCEPT OF AN IRREGULAR INDORSER
Agbayani: Based on the first sentence of Section 64, an irregular or anomalous

indorser is a person who, not otherwise a party to an instrument, places thereon
his signature in blank before delivery. In order, therefore, that a person may be
considered an irregular indorse, the following three requisites must be present:
(1) he must not otherwise be a party to the instrument, that is, he must not be a
maker, drawer, acceptor or regular indorsee thereon; (2) he must sign the
instrument in blank; and (3) he must sign before delivery.
Such a party so signing is called an irregular or anomalous indorser because he
indorses in an unusual, singular or peculiar manner. His name appears where we
would naturally expect another name. thus, where an instrument is payable to B
or order, Bs name should appear on the back of the instrument as the first
indorser, but instead, we find the name of say Y as the first indorser. In such a
case, Y is an irregular indorser.
Sebastian: An irregular indorser signs the instrument even before issuance.
Like a deemed indorser, an irregular indorser is also an accommodation indorser.
He accommodates the maker/drawer. An accommodation party can never claim
lack of consideration. Since an accommodation party does not have any liability
to the payee or the subsequent parties, Section 64 makes the accommodation
party liable because subsequent parties relied in good faith on the signature of
the accommodation party.
Thus, subsequent parties may look to the
accommodation party for payment.
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cannot obtain payment form the person primarily liable by reason of the fact that
any of the warranties of the person negotiating by delivery is or becomes false.
Meaning of Before Delivery

Agbayani: Does this mean the initial delivery or every delivery from one party
to another in the curse of the negotiation of the instrument? In dealing with
irregular indorsers, Ogden uses the word initial to modify delivery. On the
other hand, under a case delivery seems to include not only the original delivery
to the payee but also every delivery from the party accommodated to a
subsequent party.
LIABILITY OF PERSON NEGOTIATING BY DELIVERY
Sec. 65. Warranty where negotiation by delivery and so forth.
Every person negotiating an instrument by delivery or by a qualified
indorsement warrants:
(a) That the instrument is genuine and in all respects what it
purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in
favor of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a
person negotiating public or corporation securities other than bills
and notes.
Agbayani: This section treats of the warranties or liabilities of: (1) a person
negotiating by mere delivery, and (2) a person negotiating by qualified
indorsement. It is, of course, to be understood that one negotiating by qualified
indorsement completes the process with delivery. The first refers to the
instrument payable to bearer, either originally or when the only or last
indorsement is in blank. But one indorsing in blank is not referred to here, as he
negotiations by indorsement (although blank) completed by delivery, not by
delivery only. The second refers to instrument payable to order. Thus, suppose
that A makes note payable to B or order. Then B negotiates it by a qualified
indorsement to C. the liabilities incurred by B by so negotiating the note are also
stated in this section.
Suppose that A makes a note payable to bearer and delivers the same to B. then B
negotiates the note to C by mere delivery. What is the liability of B in so
negotiating? By merely delivering the instrument to C, without saying more, B
warrants all the matters and things mentioned in paragraphs (a), (b), (c), and (d)
of Section 65 and his liability is limited only to these warranties. Thus, a person
negotiating by mere delivery becomes liable to the holder only when the holder
Suppose that he instrument is altered or the makers signature is forged, for

which reason the holder cannot collect from the maker. The party negotiating by
mere delivery is liable to the holder because he warrants that the instrument is
genuine and in all respects what it purports to be.
Suppose that the maker is a minor, a lunatic or other cases of incompetency, a
married woman, or a corporation acting ultra vires, for which reason the holder
cannot collect from the maker. The party negotiating by delivery is liable to the
holder because he warrants that prior parties have capacity to contract.
But under the last paragraph, a party negotiating public or corporation securities
other than bills and notes, do not warrant the capacity of prior parties to
contract.
Suppose that the maker was insolvent at the time of the negotiation of the
instrument. This fact renders the instrument valueless, and for this reason, the
holder cannot collect on the instrument against the insolvent maker. (1) If the
party negotiating by delivery knew that the maker was insolvent, and he
concealed that fact, he would be liable because he warrants that he is ignorant of
any fact that would render the instrument valueless, and it turns out that he
knew. But if the party negotiating did not know of the makers insolvency, he
would not be liable. (2) The party negotiating by delivery would also be liable, if
he knew but concealed that the instrument is not valid for want of consideration
because he warrants that he does not know of any fact which would impair the
validity of the instrument. But if he did not know that fact, he would not be liable,
as he does not warrant that the instrument is valid.
The four warranties expressed in this section are not exclusive but may be
extended by analogy to like situations. So that, when as indorser, without
recourse of a note secured by a lien, released the lien after he had indorsed it to
the holder, said indorser is liable for breach of warranty. The Negotiable
Instruments Law, Section 65, does not state the only warranties and under said
section, by analogy, the person negotiating by delivery or indorsing qualifiedly
warrants also that he will do no act to prevent the indorsee from collecting the
note.
The qualified indorser has the same warranties as those of a person negotiating
by mere delivery. The only difference is that, while the person negotiating by
mere delivery is liable only to his immediate transferee, the person negotiating by
qualified indorsement is liable to all parties who derive their title though his
indorsement.
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DLSU LAW
It is clear form the foregoing that a qualified indorser or a person negotiating by

mere delivery are secondarily liable, and that their secondary liability is limited,
namely, to their warranties. In other words, they are secondarily liable only when
the person primarily liable cannot pay because of a violation of any of the four
warranties but they will not be liable if the person primarily liable cannot pay for
any other reason than the violation of the four warranties.
Campos: A qualified indorsement is made by adding the words without
recourse or words of similar import, to the indorsers signature, and constitutes
the indorser a mere assignor of the title of the instrument.
Negotiation by delivery presupposes that no indorsement is necessary because
the instrument is payable to bearer and therefore refers to the holder who passes
the instrument in the same condition in which he received it, making no
indorsement at all. Even if he did not sign the instrument, he would be liable
under Section 65.
A qualified indorser and one who negotiates by mere delivery, do not undertake
to pay the instrument in the event of its dishonor. The purpose of the negotiator
in these two cases is to pass title to the instrument without incurring liability for
its payment. Like an assignor, he gives no assurance that the parties primarily
liable will or can pay the instrument. He is in fact merely assigning the credit and
is not a party secondarily liable.
As a general rule, therefore, the warranties in Section 65(a) could cover most real
defenses as would fall within the meaning of genuine and in all respects what
it purports to be. The qualified indorser cannot plead any of these defenses
because they are covered by the warranties implied from his sale of the negotiable
instrument.
Sebastian: A person liable under Section 65 does not guarantee of solvency of
the person primarily liable for the payment of the instrument. Thus, if the reason
for non-payment of instrument is not about the solvency of the person primarily
liable, the indorser may still be held liable.
LIABILITY OF RESTRICTIVE INDORSER
Campos: The liability of a restrictive indorser would depend on what kind of
restrictive indorsement he made. If it prohibits the further negotiation of the
instrument, the instrument ceases to be negotiable. Nevertheless, the restrictive
indorser is liable to his immediate indorsee as an unqualified indorser, unless he
otherwise indicates. However, any subsequent transferee cannot acquire the
rights of a holder because the instrument has become non-negotiable, and his
rights, if any, will be merely that of an ordinary assignee.
LIABILITY OF GENERAL INDORSER
Sec. 66. Liability of general indorser. - Every indorser who indorses

without qualification, warrants to all subsequent holders in due
course:
(a) The matters and things mentioned in subdivisions (a), (b), and
(c) of the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and
subsisting;
And, in addition, he engages that, on due presentment, it shall be
accepted or paid, or both, as the case may be, according to its tenor,
and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder,
or to any subsequent indorser who may be compelled to pay it.
Agbayani: This section deals with the liability or warranties of one negotiating
by general indorsement, as distinguished from qualified indorsers or persons
negotiating by mere delivery. It has been held that this section includes an
indorser for collection. This holding seems correct where the indorser for
collection receives value from the bank so that he can be considered a seller.
Under such circumstances, the restrictive nature of the indorsement should not
negative the usual warranties of a seller of an instrument, for, on correct
principles, it merely adds the promise that on presentation, it will be honored,
and is an obligation to protect subsequent holders for value from loss in he
manner as if there was no trust.
In addition to his four (4) warranties, a general indorser, by merely signing his
name as such on an instrument and without expressly stating it on the
instrument, engages that, on due presentment, it shall be accepted or paid, or
both, as the case may be, according to its tenor, and that if it be dishonored and
the necessary proceedings of dishonor be duly taken, he will pay the amount to
the holder, or to any subsequent indorser who may be compelled to pay it. This
is similar to the secondary liability of the drawer.
The general indorser is secondarily liable. Under the last paragraph, his
secondary liability is not limited only to the four warranties. He is liable if, for
any reason, the person primarily liable cannot pay, as distinguished from the
limited secondary liability of the qualified indorser or of the person negotiating
by mere delivery under Section 65. This is to say that he is secondarily liable if the
instrument is dishonored. And, in a Philippine case, it has been held that the law
does not require that the reason for the dishonor be established. It is sufficient
that there was dishonor. Moreover, being a holder in due course does not defeat
the liability of an indorser and his warranties as set forth in Sections 65 and 66.
Where the person primarily liable is insolvent, the general indorser is liable, even
if he neither knew nor concealed that fact because he engages to pay if the person
LEX SOCIETAS
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DLSU LAW
primarily liable cannot pay. Accordingly, where a person makes an unqualified

indorsement of a promissory note, the Negotiable Instruments Law specifies and
defines his liability and parol testimony is not admissible to explain or defeat
such liability.
Summary of distinctions between liabilities of persons negotiating:
(1) As to the party negotiating by delivery, his warranties extend only to the
immediate transferee, while as to the qualified indorser and the general indorser,
they extend to parties subsequent to them. As between a qualified indorser and a
general indorser, the warranties of the first extend to all subsequent parties who
acquire title through his indorsement regardless of whether they are holders in
due course or not, while as to the second, his warranties extend only to
subsequent holders in due course, subsequent parties deriving their title from
holders in due course and his immediate transferee.
(2) Under Section 65, the party negotiating by delivery or by qualified
indorsement warrants not only that he is ignorant of any fact which would impair
the validity of the instrument or render it valueless, while under Section 66, the
general indorser warrants that the instrument is valid and subsisting.
(3) Under Section 65, the party negotiating by delivery or qualified indorsement
does not engage to pay the instrument if it is dishonored by non-acceptance or
non-payment except when such dishonor arises from his four warranties. in other
words, his secondary liability is limited. Under Section 66, the general indorser
engages to pay the holder or any intervening party who may be compelled by the
holder to pay if the instrument is dishonored either by non-acceptance or nonpayment, whether such dishonor arises from the warranties or from other causes
such as insolvency. In other words, his secondary liability is not limited to the
four warranties.
It will be seen that, ordinarily, like the qualified indorser or person negotiating by
delivery, but not like the general indorser, an assignor is not responsible for the
insolvency of the principal debtor and will not be liable to the assignee if for that
reason the assignee can not collect from the principal debtor. On the other hand,
unlike the qualified indorser and person negotiating by delivery, but like the
general indorser, the assignor warrants the existence and legality of the credit
assigned and will therefore, be liable to the assignee in case the assignee can not
collect from the principal debtor where the credit assigned is illegal or nonexistent. As in the case of general indorser, this liability of the assignor exists
whether or not he knows of the illegality or non-existence of the credits he
assigned.
contract of indorsement. As a vendor, his liability is similar to that of the

qualified indorser and the transferor by delivery. His liability on the special
contract of indorsement is similar to that of the drawer and is expressed in the
second paragraph of Section 66 he engages that the instrument upon
presentment, will be paid or accepted, or both, and if dishonored he engages to
pay the holder, if proper proceedings on dishonor are duly taken. In this lies the
fundamental difference between a qualified and a general indorser. The latter is a
party secondarily liable.
Section 66(b) imposes liability on the general indorser, if the instrument is not
valid and subsisting at the time of his indorsement, whether or not he was
ignorant of the cause thereof.
Under Section 65, the warranties of one who negotiates by delivery extends in
favor of no holder other than the immediate transferee. Under this section the
liability of the qualified indorser, by implication, runs to all subsequent holders
whether holders in due course or not.
In Section 66 however, the warranties of an unqualified indorser run to all
subsequent holders in due course. The implication being that they do not run in
favor of holders not in due course. It has been suggested that this phrase be
interpreted to mean merely that the indorsee should not have had knowledge of
the breach of warranty at the time the instrument is indorsed to him.
To validly negotiate an instrument payable to bearer on its face, it need not be
indorsed. There is nothing however to prevent the holder from so doing if he
wishes. If he does, his liability will no longer be governed by Section 65, but by
Section 66, but his liability runs only in favor of those holders who make title
through his indorsement, if this is special. He may be relieved from liability
however, if the holder chooses to exercise his right to strike out the indorsement,
which is actually not necessary to holders title.
Sebastian:
Section 65
There is no mention of the validity of
the instrument but only a warranty
that he has no knowledge of any fact
that would impair the instruments
validty or render it valuless.
Warranty is only for the immediate
transferee.
Campos: The general indorser makes two contracts: an assignment or sale of

the instrument, and a special contract of indorsement. Unlike the qualified
indorser, he is liable not only as a vendor or assignor of a credit, but also on his
LEX SOCIETAS
Section 66
There is a categorical statement that
the instrument is valid and subsisting.
Warranty is for all persons deriving

title from the general indorser.
Indorser has knowledge of the origin
of the instrument.
Privity of relationship is established.
73
DLSU LAW
Sebastian:
Limitation of Application of the 4th Warranty
Agbayani: The fourth warranty of the general indorser is different from that of
a qualified indorser or person negotiating by delivery. While the qualified
indorser or person negotiating by delivery warrants that he is ignorant of any fact
that will render the instrument valueless or impair its validity, the general
indorser warrants that the instrument he is indorsing is valid and subsisting
regardless of whether he is ignorant of that fact or not. But the fourth warranty of
a general indorser does not run in favor of holders who are parties to the illegal
transaction.
General
indorser
Extends to
all subsequent
parties.
4th Warranty
Warrants that the

instrument is
valid and
subsisting.
pay the holder or
any intervening
party if the
instrument is
dishonored either
by nonacceptance or
non-payment.
Beneficiaries of the Warranties

Agbayani: The law extends the warranties only to subsequent holders in due
course. But a person negotiating by delivery is liable only to his immediate
transferee, while a qualified indorser is liable to all parties who can trace their
title to his indorsement, whether such parties are holders in due course or not.
However, an opinion is expressed that there seems to be no reason why the
warranties of a general indorser should not run in favor of any person to whom
the instrument Is negotiated as in Section 65. The law does not use the word
only. Thus, it is silent as to the rights of a holder not in due course. Accordingly,
the warranties of a general indorser extend to the following: (1) Subsequent
holders in due course; (2) Persons who derive their title from holders in due
course; (3) Immediate transferees, even if they are not holders in due course.
Otherwise, the transferee of a qualified indorser would have greater rights than
the transferee of a general indorser.
The indorser of a check does not warrant the genuineness of the drawers
signature to the drawee who pays it since the drawee is not a holder in due course
under section 52 not a holder under Section 191. The warranties provided for in
Sections 65 and 66 do not run in favor of the drawee in respect to the
genuineness of the drawers signature but only in favor of subsequent holders in
due course, inasmuch as the drawee is not such holder nor is the presentation for
payment to him a negotiation.
PNB v Court of Appeals (1968) With respect to the warranty on the back of
the check, the PCIB guaranteed only all prior indorsements, not the
authenticity of the signatures of the officers of the GSIS who signed on its behalf,
because the GSIS is not an indorser of the check, but its drawer. Said warranty is
irrelevant, therefore, to the PNBs alleged right to recover from PCIB. It could not
have been availed of by a subsequent indorsee or a holder in due course
subsequent to the PCIB, but, the PNB is neither. Upon payment by the PNB, as
drawee, the check ceased to be a negotiable instrument, and became a mere
voucher of proof of payment.
Engages to
Qualified
indorser
Person
Negotaties by
Delivery
immediate
transferee.
all subsequent
parties who
acquire title
through his
indorsement.
Warrants that he has no knowledge of
any fact that would impair the
instruments validty or render it
valuless.
Doesnt engage to pay the instrument if
it is dishonored by non-acceptance
except when such dishonor arises from
the found from his four warranties.
LIABILITY OF INDORSER OF A BEARER INSTRUMENT

Sec. 67. Liability of indorser where paper negotiable by delivery.
Where a person places his indorsement on an instrument negotiable
by delivery, he incurs all the liability of an indorser.
Sebastian: Signing a bearer instrument makes the indorser liable under Section
66.
ORDER IN WHICH INDORSERS ARE LIABLE
Sec. 68. Order in which indorsers are liable. - As respect one another,
indorsers are liable prima facie in the order in which they indorse;
but evidence is admissible to show that, as between or among
themselves, they have agreed otherwise. Joint payees or joint
indorsees who indorse are deemed to indorse jointly and severally.
Agbayani: This rule applies only with respect to an indorser as against another
but not as against a holder in due course. Under this rule, every indorser is liable
to all indorsers subsequent to him but not those prior to him whom he in turn
makes liable. This section contemplates successive negotiations of the instrument
LEX SOCIETAS
74
DLSU LAW
and successive indorsements. It does not determine the order of liability of joint
indorsers among themselves.
To avoid liability, two things must be disclosed, namely: (1) identify ones self as
an agent and (2) identify his principal.
The rule that indorsers are liable in the order they indorse is only as between or
among themselves but not a against the holder. As to the holder, they are liable in
any order.
One of the joint indorsers cannot escape liability because proper notice of
dishonor was not given to his join indorser. Consequently, when the holder
expressly releases the first indorser, the second indorser will be discharged.
However, if one of the joint indorsers pays the instrument, the second joint
indorser is prima facie liable to contribute and the burden of proof to show
release from such liability is upon the second indorser. Under the New Civil Code,
in joint and several obligations, he who made the payment may claim from his
co-debtors only the share which corresponds to each, with interest for the
payment already made.
Campos: Among themselves, indorsers are liable prima facie in the order they
indorse. Section 68 does not bind the holder, and he may sue any of the
indorsers, regardless of the order of their indorsement.
Sebastian: Even if the law provides that an injured party can go against any of
the indorsers, the action must still comply with the Rules of Court and sue all of
them as indispensable parties.
LIABILITY OF AGENT OR BROKER
Sec. 69. Liability of an agent or broker. - Where a broker or other
agent negotiates an instrument without indorsement, he incurs all the
liabilities prescribed by Section Sixty-five of this Act, unless he
discloses the name of his principal and the fact that he is acting only
as agent.
Agbayani: This section seems to refer to instruments which are payable to
bearer. The liability and warranties of the agent are those stated in Section 65. To
escape personal liability as a party negotiating by delivery, the agent must (1)
disclose his principal; and (2) state that he is acting only as an agent. But parol
evidence is not admissible to relieve an agent whose indorsement brings him
within this section.
Sebastian: This section is referring to a bearer instrument. To escape personal
liability as a party, as a party negotiating by delivery, the agent must disclose his
principal and state that he is acting only as an agent. As agent of the principal,
there are no warranties. Rather it is actually the agents principal that gives
warranty.
LEX SOCIETAS
75
DLSU LAW
SUMMARY OF WARRANTIES, UNDERTAKINGS, DEFENSES BARRED AND BENEFICIARIES

MAKER
Section
Warranties
- Defenses
Barred
payee's
existence
payee's
capacity
to
indorse
60
payee is a
fictitious
person or
non-existent
person
payee is a
minor or an
insane
person or
otherwise
incapacitated
in case of a
corporate
payee, the
transaction
is ultra vires
DRAWER
payee's
existence
payee's
capacity
to
indorse
ACCEPTOR
61
payee is a
fictitious
person or
non-existent
person
62
drawer is a
fictitious or
non-existent
person
forgery of
drawers
genuine
drawers
signature
signature
drawers
drawer is a
capacity
minor or an
insane person
or otherwise
incapacitated
in the case of
a corporate
payee, the
transaction is
ultra vires
drawers
drawer lacks
authority
of authority
to draw
to draw
the
instrument
instrument (e.g. want of
consideration
or amount
drawn is in
excess of
drawers
funds)
payees
payee is a
existence
fictitious
person or
non-existent
person
drawers
existence
payee is a
minor or an
insane
person or
otherwise
incapacitated
in the case of
a corporate
payee, the
transaction is
ultra vires
payees
capacity to
endorse
payee is a
minor or an
insane person
or otherwise
incapacitated
LEX SOCIETAS
QUALIFIED INDORSER
65
GENERAL (IRREGULAR)
INDORSER
66 (64)
instrument is
forgery and
genuine and
material
in all respects
alteration
what it
purports to be
instrument is
genuine and
in all respects
what it
purports to be
forgery and
material
alteration
he has good
title to the
instrument
he has no title
to the
instrument
because he
stole it or he
procured it
through fraud
he has good
title to the
instrument
he has no title
to the
instrument
because he
stole it or he
procured it
through fraud
all prior
parties have
capacity to
contract
a prior party
is a minor or
an insane
person or
otherwise
incapacitated
all prior
parties have
capacity to
contract
a prior party is
a minor or an
insane person
or otherwise
incapacitated
no knowledge
of fact that
would impair
the validity of
the
in the case of
a corporate
prior party,
the
transaction is
ultra vires
if the
insolvency of
the maker at
the time of
negotiation is
the
instrument is,
at the time of
his
endorsement
in the case of a
corporate
prior party,
the
transaction is
ultra vires
illegality of the
note because
of illegal
consideration
76
DLSU LAW
in the case of
a corporate
payee, the
transaction is
ultra vires
Beneficiaries
of
Warranties
Undertakings
Unconditional and
principal obligation to
pay according to tenor of
instrument.
If bill is dishonored and

proceedings for dishonor
taken, he will pay the bill
to holder or endorser who
may be compelled to pay
it; obligation to pay is
secondary and
conditional.
Pay the bill according to the

tenor of his acceptance;
obligation is principal.
LEX SOCIETAS
instrument or
would render
it valueless
known to the
is valid and
subsisting
endorser, he
would be
liable for a
breach of this
warranty
Warranties extend to all holders
by delivery
qualified
in due course as well as to the
indorsement
transferee of a holder in due
Warranties
Warranties
course. The secondary
extend to
extend to all
obligation to pay is not limited
immediate
subsequent
to a dishonor resulting from a
transferee
parties
breach of the warranties.
only.
deriving title
through the
qualified
endorsement,
whether or
not such
subsequent
party is a
holder in due
course. No
undertaking
to pay the
instrument
except if
dishonor
results in a
breach of any
of the 4
warranties.
If instrument is dishonored, and proceedings for dishonor are
taken, he will pay holder or any endorser who pays it; obligation is
secondary.
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DLSU LAW
PRESENTMENT FOR PAYMENT

Sebastian: A promissory note is presented once while, as a rule, a bill of
exchange is presented twice. Checks and a bill that stipulates that presentment is
waived may be presented once.
The equivalent of presentment in Civil Law is demand. The rule is no
presentment, no payment, unless waived or excused.
DEMAND ON THE PRINCIPAL DEBTOR
Sec. 70. Effect of want of demand on principal debtor. - Presentment
for payment is not necessary in order to charge the person primarily
liable on the instrument; but if the instrument is, by its terms, payable
at a special place, and he is able and willing to pay it there at maturity,
such ability and willingness are equivalent to a tender of payment
upon his part. But except as herein otherwise provided, presentment
for payment is necessary in order to charge the drawer and indorsers.
Definition of Presentment
Agbayani: Presentment is meant the production of a bill of exchange to the
drawee for his acceptance, or to the drawee or acceptor for payment or the
production of a promissory note to the party liable for payment of the same. It
consists of a (1) personal demand for payment at the proper place (2) with the bill
or note in readiness to exhibit it if required, and to receive payment and
surrender it if the debtor is willing to pay.
Campos: Presentment for payment is the presentation of the instrument to the
person primarily liable for the purpose of demanding and obtaining payment
thereof.
Sebastian: Presentment is the physical brining of the instrument to the person
primarily liable and making presentment on due date of the instrument. When
there is presentment for payment, and payment is not made, the instrument is
dishonored by non-payment. With the dishonor of the instrument by nonpayment, the party holding the instrument must make a notice of dishonor.
In presentment for payment, the negotiable instrument is brought to verify the
authenticity, to check if it is due and to avoid double presentment. Then there
will be a demand for payment of the instrument.
Sebastian: There are two types of presentment. If it is for payment, its

functional equivalent is demand for payment. If it is for acceptance, it is only
necessary in cases of bills of exchange which are payable at sight or within a
certain number of days after sight. When holder presents the draft, he wants the
drawee to accept so that he will become liable. If the drawee dishonors, the
holder can go back to the drawer and hold him liable under Section 61.
In time bill or usance bill, upon acceptance, the drawee indicates that he is willing
to pay the instrument according to its tenor. The holder You does not get paid
until the lapse of the specific time/date indicated in the instrument. Acceptor is
ultimately obligated to pay but may make use the period of time to pay; during
such time, he may use the instrument.
Demand for Payment
Agbayani: Presentment for payment is not necessary in order to charge the
person primarily liable. This rule applies to instruments payable on demand.
It cannot be validly claimed that it is the presentment for payment of the bill to
the acceptor which is the operative act that makes the acceptor liable under his
acceptance. Before he accepts, the drawee is a stranger to the bill but from the
moment he accepts, he becomes bound as a party primarily liable on the
instrument. He is bound according to the tenor of his acceptance and he cannot
show, as against the payee, that the drawer modifying the terms of the
acceptance.
If the bill is payable at a special place it is not necessary to make presentment for
payment to the person primarily liable. The only effect is that if, the person
primarily liable is able and willing to pay the bill at the special place at maturity,
it is equivalent to a tender of payment to him, and the holder loses his right to
recover interest due subsequent to maturity and cost of collection but can still
hold the former liable.
Campos: Presentment for payment need not be made to charge the primary
party. The maker and acceptor are obliged to pay the instrument although no
demand has been made on them on its due date and they remain liable even
when it is already overdue.
Sebastian: It is not the presentment that creates the liability for persons
primarily liable because the liability is already there but the
presentment/demand will make it due and payable (demandable).
If there is no demand, then there is no default arising from delay.
Nature of Presentment
Demand on Persons Secondarily Liable
LEX SOCIETAS
78
DLSU LAW
Agbayani: Presentment for payment to the person primarily liable is necessary

to charge persons secondarily liable. Otherwise, they are discharged except as
otherwise provided for.
Section 71 read in connection with the last sentence of Section 70 simply means
that the instrument must be presented for payment on the date and period
therein mentioned to charge the persons secondarily liable. And the instrument
must be presented on the date of maturity, (1) if it is payable on a fixed date, (2)
within a reasonable time after issue, if it is a promissory note, (3) or within a
reasonable time after last negotiation, if it is a bill of exchange. Otherwise, the
drawer and indorsers are discharged from liability.
Sections 79 and 80 give two exceptions to the general rule that if no presentment
for payment is made, the person secondarily liable are discharged. However, the
exceptions herein stated are relative. Only the drawer or indorser referred to in
these sections are relived of their liability.
PROCEDURE TO HOLD PERSONS SECONDARILY LIABLE ON A BILL
OF EXCHANGE
Agbayani: If one of the steps is not taken, the persons secondarily liable are
discharged and only the person primarily liable is left to answer for the payment
of the instrument:
1) In the three cases required by law, presentment for acceptance to the drawee
or negotiation within a reasonable time after acquisition unless excused. In
other cases aside from the three, there is no need for presentment for
acceptance.
2) If the bill is dishonored by non-acceptance:
1) notice of dishonor by non-acceptance must be given to persons
secondarily liable unless excused and
2) in case of foreign bills, protest for dishonor by non-acceptance must be
made unless excused.
3) But if the bill if accepted, or if the bill not required to be presented for
acceptance, it must be presented for payment to the person primarily liable
unless excused.
4) If the bill is dishonored by non-payment:
a) notice of dishonor by non-acceptance must be given to persons
secondarily liable unless excused and
b) in case of foreign bills, protest for dishonor by non-acceptance must be
made unless excused.
Sebastian: Present (for acceptance) instrument to drawee. Presentment is
necessary when (Section 143): (1) bill is payable at sight or necessary to fix
maturity; (2) bill specifically stipulates; and (3) bill is drawn payable at a certain
place. Other than these cases, presentment for acceptance is not necessary.
Presentment is excused in Section 148.

If the drawee dishonors, holder must serve of dishonor telling the drawer that the
instrument was declined, thus holding drawer liable to his warranties. Secondary
liable persons are only required to pay upon notice that the person primarily
liable had dishonored or declined to pay the instrument. As a rule, notice of
dishonor must be given to all persons secondarily liable. Person not given notice
is discharged and released from liability. After giving notice, holder must give the
dishonored instrument to the person secondarily liable and demand for payment
under Section 61 or 65.
PROCEDURE TO HOLD PERSONS SECONDARILY LIABLE ON A
NOTE
Agbayani:
1) Presentment for payment must be made within the period required to the
person primarily liable unless excused; and
2) If the note is dishonored by non-payment, notice of dishonor by non-payment
must be given to the person secondarily liable unless excused.
PRESENTMENT OF INSTRUMENTS PAYABLE/NOT PAYABLE ON
DEMAND
Sec. 71. Presentment where instrument is not payable on demand
and where payable on demand. - Where the instrument is not
payable on demand, presentment must be made on the day it falls
due. Where it is payable on demand, presentment must be made
within a reasonable time after its issue, except that in the case of a bill
of exchange, presentment for payment will be sufficient if made
within a reasonable time after the last negotiation thereof.
Agbayani: Where the instrument is payable on demand, the time for
presentment depends upon whether the instrument is a bill or a note.
Last negotiation means the last transfer for value, and subsequent transfers
between banks for purposes of collections are not negotiations within this
section. Consequently, the requirement of reasonable time for a bill begins to run
form the last taking for value.
Campos: Different rules apply to demand notes and to demand bills of
exchange. As regards demand notes the time at which the reasonable time begins
to run is the date of issue of the note and not the date on which the individual
indorser signed, so that the liability of all indorsers of a demand note expires at
the same time.
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While a demand note must be presented for payment within a reasonable time
after issue, a demand bill of exchange should be presented within a reasonable
time after the last negotiation thereof. The time within which a check should be
presented for payment is governed by Section 186.
effective. Thus, a notice to the makers before maturity, reminding them of the
date when the note would fall due, is not a proper presentment. If made after
maturity, it is too late and unless delay is excused by law, the secondary parties
will be discharged.
Under Section 71, the liability of the drawer and indorsers of a demand bill can be
preserved indefinitely, provided presentment is made within a reasonable time
from the last negotiation. However, under Section 53, where an instrument
payable on demand is negotiated an unreasonable length of time after its issue,
the holder is not a holder in due course. Thus, although reasonable time may not
have elapsed between the last negotiation and the presentment for payment of a
demand bill, and the secondary parties thus remain liable, the holder who takes
the instrument after the laps of a reasonable time from its issue, will be subject to
personal defenses.
WHAT CONSTITUTES REASONABLE TIME
A check is intended for immediate use. Hence, a special rule with respect to
presentment for payment applies to checks. Unlike in ordinary bills of exchange,
the transfer of a check to successive holders, where it is drawn and delivered in
the place where the drawee bank is located, does not extend the time for
presentment.
However, the drawer is discharged by delay in presentment only to the extent of
any loss caused by such delay. If no such loss is shown by the drawer, he remains
liable despite the unreasonable delay. The most frequent cause of loss to the
drawer which could have been prevented by a prompt presentment is the
subsequent insolvency of the drawee bank at a time when the drawer had
sufficient funds on deposit to pay the check.
What constitutes reasonable time is determined by Sec. 193. It is well settled that
when the drawer, drawee and payee al reside or are located in the same city,
presentment of a check should be made on the business day next succeeding that
on which it was issued. In order that the holder may charge the drawer,
presentment to the drawee bank should be made within a reasonable time, the
check remains effective as an order of the drawer to the drawee bank to pay the
holder and if the bank does pay, it can debit the amount against the drawers
account.
PRESENTMENT OF INSTRUMENT PAYABLE AT A FIXED OR
DETERMINABLE FUTURE TIME
Agbayani: Where the instrument is payable at a fixed or determinable future
time, the presentment must be made on the date of maturity. A presentment
before maturity is not proper.
Campos: If an instrument has a fixed date of maturity, presentment must be
made on the day the instrument falls due. If made before maturity, it is not
Agbayani: The term reasonable time is relative or based on accepted

commercial practice.
Sebastian: Reasonable time for a check is from 6 month from issuance.
SUFFICIENCY OF PRESENTMENT
Sec. 72. What constitutes a sufficient presentment. - Presentment for
payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized to receive payment
on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is
absent or inaccessible, to any person found at the place where
the presentment is made.
Agbayani: If the presentment does not comply with any of these requisites, it is
not sufficient. The effect is the same as if no presentment is made, namely, the
persons secondarily liable are discharged.
Presentment for payment cannot be made on a Sunday or holiday.
Presentment for payment is to be made to the maker, if a note, or to the acceptor,
if a bill, and not to the person secondarily liable.
PLACE OF PRESENTMENT
Sec. 73. Place of presentment. - Presentment for payment is made at
the proper place:
(a) Where a place of payment is specified in the instrument and it is
there presented;
(b) Where no place of payment is specified but the address of the
person to make payment is given in the instrument and it is
there presented;
(c) Where no place of payment is specified and no address is given
and the instrument is presented at the usual place of business
or residence of the person to make payment;
(d) In any other case if presented to the person to make payment
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Agbayani: Sections 76 to 78 are inapplicable if there is a place specified. Thus,

presentment should be made at the place specified.
Agabayani: Presentment for payment may be made to the executor or

administrator if there be one, and if he can be found. The holder must use
diligence to find the personal representative, if there be one. Although the
indorser himself be the personal representative, presentment has been held
necessary.
PRESENTMENT OF INSTRUMENT
PRESENTMENT TO PARTNERS
Sec. 74. Instrument must be exhibited. - The instrument must be

exhibited to the person from whom payment is demanded, and when
it is paid, must be delivered up to the party paying it.
Sec. 77. Presentment to persons liable as partners. - Where the

persons primarily liable on the instrument are liable as partners and
no place of payment is specified, presentment for payment may be
made to any one of them, even though there has been a dissolution of
the firm.
wherever he can be found, or if presented at his last known

place of business or residence.
Purpose of Presentment
Agbayani: Presentment includes not only demand for payment but also the
exhibition of the instrument. The purpose of exhibition is to enable the debtor:
1) to determine the genuiness of the instrument and the right of the holder to
receive payment; and
2) to enable him to reclaim possession upon payment.
Agbayani: In case of death of one of the makers who are partners, presentment
shall not be made to his personal representative but to the surviving partner.
PRESENTMENT TO JOINT DEBTORS
Sec. 78. Presentment to joint debtors. - Where there are several
persons, not partners, primarily liable on the instrument and no
place of payment is specified, presentment must be made to them all.
Exception to Rule Requiring Exhibition of Instrument

Agbayani: Actual exhibition is not necessary in the following cases:
a) When he debtor does not demand to see the instrument but refuses payment
on some other grounds; and
b) When the instrument is lost or destroyed.
Agabayani: But if the persons primarily liable are not partners, presentment
must be made to all of them. Of course, if one of them is duly authorized by the
others for the purpose, presentment to him would be sufficient.
PRESENTMENT OF INSTRUMENT PAYABLE AT BANK
PRESENTMENT TO DRAWER NOT REQUIRED
Sec. 75. Presentment where instrument payable at bank. - Where the

instrument is payable at a bank, presentment for payment must be
made during banking hours, unless the person to make payment has
no funds there to meet it at any time during the day, in which case
presentment at any hour before the bank is closed on that day is
sufficient.
Sec. 79. When presentment not required to charge the drawer. Presentment for payment is not required in order to charge the
drawer where he has no right to expect or require that the drawee or
acceptor will pay the instrument.
Agabayani: Under this section, only the other parties secondarily liable are
discharged. The drawer would not be discharged from his liability.
Sebastian: Relate this provision with Section 87.

PRESENTMENT WHERE PRINCIPAL DEBTOR IS DEAD
Sec. 76. Presentment where principal debtor is dead. - Where the
person primarily liable on the instrument is dead and no place of
payment is specified, presentment for payment must be made to his
personal representative, if such there be, and if, with the exercise of
reasonable diligence, he can be found.
Campos: This section gives an instance where the drawer will not be discharged
in spite of lack of presentment to the primary party. The absence of a right in the
drawer to require and of a right to expect the drawee or acceptor to pay is not
identical in meaning. A right to require payment means that there is a preexisting contract between the drawer and drawee which makes it a duty on the
part of the drawee or acceptor to pay. A drawer may have the right to expect that
the drawee will pay when, although there is no contractual duty then owed by the
drawee to the drawer to pay, a course of dealing between the drawer and drawee
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justifies the reasonable expectation on the part of the drawer that the drawee will
pay.
Where the drawer has no funds with the drawee, or where his bank balance is less
than the amount of his check, or if he stopped payment thereof, the drawer would
have no right to require or expect payment and presentment is therefore not
necessary to charge him. Similarly, where the drawee and the drawer are the
same person, presentment is not required because under Section 130, the holder
may treat such instrument as a note. The drawer-drawee thus becomes a maker, a
primary party who is liable even without presentment.
Where the drawee is insolvent at the time a check is issued, and the drawer
knows of it, presentment and notice are not required to charge him because he
would not have the right to expect payment.
PRESENTMENT TO INDORSER NOT REQUIRED
Sec. 80. When presentment not required to charge the indorser. Presentment is not required in order to charge an indorser where the
instrument was made or accepted for his accommodation and he has
no reason to expect that the instrument will be paid if presented.
Agbayani: Under this section, only the other parties secondarily liable are
discharged. Hence, the accommodation payee-indorser, being the person
primarily liable, is not discharged even if no presentment for payment is made
because he did not give value for it; thus, he has no reason to expect that the note
will be paid upon presentment.
Campos: This section refers only to an indorser. In the usual case the indorser is
entitled to presentment to the primary party because the latter is normally the
principal debtor. In the situation covered by the above provision, however, the
principal debtor is the indorser and thus has no right to demand payment from
the accommodation maker or acceptor.
To excuse presentment, two conditions must concur (1) The instrtment was made
or accepted for the indorsers accommodation; and (2) he has no reason to expect
its payment. Thus, where the instrument was not made or accepted for his
accommodation, knowledge on the part of an indorser that the primary party is
insolvent at the date of maturity does not free the holder from his duty to present,
though he would have no reason to expect its payment.
DELAY IN PRESENTMENT EXCUSED
Sec. 81. When delay in making presentment is excused. - Delay in
making presentment for payment is excused when the delay is caused
by circumstances beyond the control of the holder and not imputable
to his default, misconduct, or negligence. When the cause of delay

ceases to operate, presentment must be made with reasonable
diligence.
Agbayani: What is excused here is not the making of presentment but only the
delay in making presentment. After the cause of delay ceases, presentment must
be made within reasonable time. Excusable circumstances are those events which
could not be foreseen, or which though foreseen, are inevitable.
PRESENTMENT FOR PAYMENT EXCUSED
Sec. 82. When presentment for payment is excused. - Presentment for
payment is excused:
(a) Where, after the exercise of reasonable diligence, presentment,
as required by this Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Agbayani: Under this section, what is excused is the failure to make
presentment for payment.
Reasonable diligence implies active search. In other words, the holder must take
all steps likely to discover the whereabouts of the party to whom presentment is
to be made.
Presentment is not required where the drawee is a fictitious person because there
is no one to whom presentment is to be made.
Implied waiver of presentment may be manifested by any language or conduct or
agreement between the parties reasonably calculated to lead the holder to believe
that presentment is waived or to mislead to prevent him from treating the bill as
he otherwise would.
Campos: The fact that the drawee bank was closed by the government dispenses
with presentment. But insolvency of the party upon whom presentment should be
made does not. Where the drawee of a bill is a fictitious person, then no
presentment can possibly be made and no secondary party can insist on it as a
condition to his liability. Furthermore, in such a case, the holder may treat the
instrument as a bill or a note and hold the drawer liable as a maker who as a
primary party is not entitled to presentment.
Circumstances under which waiver of presentment may be implied are varied. It
may be implied from any conduct or act of the drawer which misleads or prevents
the holder from treating the bill as he otherwise would. Thus, if the drawer
promises from time to time to pay the bill, or makes part payment knowing that
the bill has not been presented to the drawee, presentment is deemed waived.
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Likewise, consent given by an indorser to the holder before maturity that the time
of payment may be extended to the maker constitutes a waiver.
To bind the indorser or drawer, his waiver must be with knowledge of the facts
which release him, so that if he pays in ignorance of the fact that demand was not
made and notice not give, he can recover back the money so paid. However,
ignorance as to their legal effect will not relieve him from liability in the absence
of fraud.
payable on Saturday are to be presented for payment on the next

succeeding business day except that instruments payable on demand
may, at the option of the holder, be presented for payment before
twelve o'clock noon on Saturday when that entire day is not a holiday.
Campos: Presentment for payment cannot be made on a Sunday or legal
holiday, and if the note matures on such a day, since the maker cannot be
compelled to pay sooner than he promised, the note or bill will have to be
presented on the next business day.
WHEN INSTRUMENT IS DISHONORED BY NON-PAYMENT

COMPUTATION OF TIME
Sec. 83. When instrument dishonored by non-payment. - The
instrument is dishonored by non-payment when:
(a) It is [1] duly presented for payment and [2] payment is refused
or cannot be obtained; or
(b) Presentment is [1] excused and the instrument is [2] overdue
and [3] unpaid.
LIABILITY OF PERSONS SECONDARILY LIABLE ON DISHONORED
INSTRUMENT
Sec. 84. Liability of person secondarily liable, when instrument
dishonored. - Subject to the provisions of this Act, when the
instrument is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues to the
holder.
Agbayani: As to the holder, after an instrument is dishonored by non-payment,
the persons secondarily liable thereon ceases to be secondarily liable. They
become principal debtors and their liability becomes the same as that of the
original debtor, provided that notice of dishonor is given to them. If no notice of
dishonor is given to them, they are discharged. In other words, notice of dishonor
must be given to them first, after which the holder can bring an action against
any one of them, without necessity of first bringing an action against the person
primarily liable. But where persons secondarily liable are charged by dishonor
and notice, while it is true that they become principal debtors as to the holder, yet
among themselves, persons secondarily liable are presumed liable in the order
they become parties to the instrument.
Sebastian: What about the rule on non-joinder of an indispensable party?
Sec. 86. Time; how computed. - When the instrument is payable at a

fixed period after date, after sight, or after that happening of a
specified event, the time of payment is determined by excluding the
day from which the time is to begin to run, and by including the date
of payment.
Campos: In determining the proper date for presentment, the date from which
the time is to run is excluded and the date of payment included. Section 86, in
providing that a specified event may be used as a point of time from which the
period is to run, means any kind of event which under Section 4 will not destroy
negotiability.
INSTRUMENTS PAYABLE AT BANK
Sec. 87. Rule where instrument payable at bank. - Where the
instrument is made payable at a bank, it is equivalent to an order to
the bank to pay the same for the account of the principal debtor
thereon.
Agbayani: This section applies where the instrument is payable at a particular
named bank. This is equivalent to an order to pay addressed to the bank by the
maker. The bank may charge the amount of the note from the account of the
maker without further authority from the latter.
The maker is not discharged if the holder fails to make a presentment for
payment at the bank because the maker is primarily liable.
Sebastian: Under this section, the payor must know that there was in fact a
theft. Otherwise, he will still be required to pay.
RULE ON INSTRUMENT MATURING ON SATURDAY OR SUNDAY

PAYMENT IN DUE COURSE
Sec. 85. Time of maturity. - Every negotiable instrument is payable at
the time fixed therein without grace. When the day of maturity falls
upon Sunday or a holiday, the instruments falling due or becoming
Sec. 88. What constitutes payment in due course. - Payment is made

in due course when it is [1] made at or after the maturity of the
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payment [2] to the holder thereof [3] in good faith and without notice
that his title is defective.
Agbayani: If the payment is made before maturity, it would constitute a
negotiation back to the person primarily liable and he can re-negotiate it. The
payment does not discharge the instrument.
Payment to the indrosee who is not in possession of the instrument is not
payment in due course, as he is not a holder. The party paying must insist on the
presentment of the instrument by the party demanding payment in order to make
sure that it is at the time in his possession and not outstanding in another. The
possession of notes by the maker is presumptive evidence that the notes are paid
but the payees possession of the instrument raises the presumption that they are
not paid.
The maker of the note or the acceptor of a bill must satisfy himself, when it is
presented for payment, that the holder traces his title through genuine
indorsements, and if there is a forged instrument, it is a nullity and no right
passes by it.
When payment of an instrument is made by giving another instrument, as a
general rule, such payment will not be considered absolute until the paper given
in payment has been itself paid except where the parties expressly or impliedly
agree that the claim shall be discharged by such payment. A new instrument
given in renewal of an old one retained by the payee constitutes but a suspension
of the old one until the new one is paid. The taking of a renewal note is not a
payment of the original.
A bank to which a note is sent for collection is the agent of the owner. It is
immaterial that the maker requested the holder to send the note to this bank for
collection.
Where a check is presented by the payee or holder to the bank on which it is
drawn, and received as a deposit and credited to his account, this amounts, in the
absence of fraud, to a payment of the checks, just as if currency had been paid
over the counter and immediately redeposited.
Campos: Payment in order to discharge the instrument must be in due course.
In order to be in due course, it must be made to the holder, whether he is the
beneficial owner or merely a non-beneficial owner under a restrictive
indorsement. Payment to one of several payees or indorsees in the alternative
discharges the instrument but payment to one of several joint payees or joint
indorsers, is not a discharge unless the party receiving payment had authority
from the others to receive payment on their behalf.
Payment to a prior holder will not discharge the instrument unless he is

authorized by the present holder either expressly, impliedly or by estoppel, to
receive payment in his behalf.
Payment must be made to the holder at or after maturity in order to operate as a
discharge of the instrument. If paid before maturity and the instrument is
negotiated to a holder in due course, the latter may recover on the instrument.
If the payor at the time he pays knows that the holders title is defective, payment
by him even at or after maturity, will not be payment in due course under Section
88 and therefore, will not operate as a discharge of the instrument. He can still be
made liable thereon by the true owner of the instrument. However, if the payor
did not know or did not have notice of the defective title, his payment will operate
to discharge the instrument. Thus, if the instrument is payable to bearer and was
stolen from the payee, the maker or acceptor, who pays without knowledge of
such loss, pays in due course. The original holder from whom it was stolen cannot
subsequently claim payment against the maker or acceptor on the ground that he
is the real owner of the instrument. As far as the maker or acceptor is concerned,
the instrument was discharged upon his payment. The remedy of the original
holder is against the thief.
On the other hand, if the party demanding payment is a holder in due course and
the defect in the instrument or in the title thereto does not give rise to a real
defense, the maker or acceptor is liable to pay, and if he does pay, it is still
payment in due course, although the latter may have known of the infirmity. Any
party prejudiced by such payment will have a remedy against the guilty party.
The maker or acceptor must satisfy himself, when the instrument is presented to
him for payment, that the holder traces his title through genuine indorsements; if
there is a forged indorsement, no right can pass by it, and payment by him will
not effect a discharge of the instrument.
If the holder presents a check over the counter of the drawee bank, it is clear that
the check is paid or discharged as soon as the holder receives the cash. But a
holder may prefer to deposit the amount in his own account in the drawee bank.
In such a case, in the absence of any other agreement between the parties, if the
bank credits the amount of the check to the depositors account, it is equivalent to
paying the money to the depositor, and receiving the cash again for deposit. The
check will then be deemed discharged. Likewise, where the drawee bank charges
the check to the account of the drawer, it shows its intention to honor the check
and it will be deemed paid whether or not a credit entry has been made to the
holder. However, entry of a credit by the clearing house does not constitute
payment and the drawee bank still has the right to reject the check when it
reaches it from the clearing house.
SUMMARY OF RULES ON PRESENTMENT FOR PAYMENT
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Agbayani: Presentment for payment is not necessary to charge persons

primarily liable. But it is necessary to charge persons secondarily liable, except:
a) as to the drawer, under Section 79;
b) as to the indorser, under Section 80;
c) when dispensed with under Section 82; and
d) when the instrument has been dishonored by non-acceptance.
Sebastian: Presentment for payment is necessary so that persons secondarily
liable can be made liable. It is made by (1) exhibiting instrument and (2)
demanding payment. If paid, must be surrendered to person liable to enable
person to check genuineness and to retrieve upon payment.
NOTICE OF DISHONOR
TO WHOM GIVEN
Sec. 89. To whom notice of dishonor must be given. - Except as herein
otherwise provided, when a negotiable instrument has been
dishonored by non-acceptance or non-payment, notice of dishonor
must be given to the drawer and to each indorser, and any drawer or
indorser to whom such notice is not given is discharged.
Sebastian: Parties not notified are discharged from their liability. Assuming
that all indorsers were notified, the following are the effects: (1) Notice to an
antecedent party benefits subsequent parties and (2) service of notice of dishonor
makes all indorser co-obligors.
Parties secondarily liable who receives notice becomes an unconditional debtor to
the party serving such notice. This will not apply to a drawer sans recourse
because a drawer may limit or negate liability under Section 61.
MEANING OF NOTICE
Agbayani: By notice of dishonor is meant bringing whether verbally or by
writing, to the knowledge of a drawer or indorser of an instrument, the fact that a
specified negotiable instrument, upon proper proceeding taken, has not been
accepted or has not been paid, and that the party notified is expected to pay it.
When an instrument is dishonored by (1) non-acceptance of a bill or (2) nonpayment of a bill or note, notice of such dishonor must be given to persons
secondarily liable, namely, the drawer and indorsers. Otherwise, such parties are
discharged.
Persons primarily liable need not be given notice of dishonor in order to charge
them because they are the very ones who dishonor the instrument. Thus, a joint
maker and an accommodation maker is not entitled to notice.
Campos: Notice of dishonor is bringing either verbally or in writing, to the
knowledge of the drawer or the indorser of the instrument, the fact that a
specified negotiable instrument, upon proper proceedings taken, has not been
accepted, or has not been paid, and that the party notified is expected to pay it.
The purpose is to notify the drawer and/or the indorsers that the holder is
enforcing his right against them under their contract to pay should the
instrument not be paid or accepted at maturity. Without this notice, no secondary
party may be held liable, except in the cases where the law provides otherwise.
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Under Section 66, the indorser engages to pay only if the instrument is
dishonored and the necessary proceedings on dishonor are duly taken.
Necessary proceedings on dishonor means notice of dishonor and in case of
foreign bills of exchange, an additional requirement of protest. Hence, his
liability is conditional, among other things, on notice of dishonor and if such
notice is not given, he is discharged.
c) as to drawer, under Section 114;

d) as to indorser, under Section 115;
e) where due notice of dishonor by non-acceptance has been given (Section 116);
and
f) as to a holder in due course without notice (Section 117).
BY WHOM GIVEN
Sebastian: Notice of dishonor is notice given to persons secondarily liable,

bringing to their attention the fact that the instrument was presented to person
primarily liable, and that person declined to make payment. It is required
because when you seek to recover from persons secondarily liable, you must first
tell them that the person primarily liable had defaulted. Thus, you are calling
upon them to pay pursuant to the warranties they made under Sections 66, 65,
and 62.
BURDEN OF PROOF
Asia Banking Corporation v Juan Javier If, after a negotiable
instrument is dishonored for non-acceptance or non-payment, the indorser is not
notified of the fact in the time and manner prescribed by law, said indorser is
released from all liability upon the document.
Under the law on procedure, it will be incumbent upon the plaintiff who seeks to
enforce the defendants liability upon a negotiable instrument as indorser to
establish liability by proving that notice was given to the defendant within the
time and in the manner required by the law that the instrument in question has
been dishonored. Where these facts are not proven, the plaintiff does not
sufficiently establish the defendants liability. Where there is no proof in the
record tending to show that plaintiff gave any notice whatsoever to the defendant
that the instrument in question has been dishonored, said plaintiff has not
established its cause of action.
Sec. 90. By whom given. - The notice may be given by or on behalf of

the holder, or by or on behalf of any party to the instrument who
might be compelled to pay it to the holder, and who, upon taking it up,
would have a right to reimbursement from the party to whom the
notice is given.
Agbayani: Notice of dishonor may be given by:
1) the holder;
2) another in behalf of the holder;
3) any party to the instrument who may be compelled to pay the holder.
However, such a party cannot give notice of dishonor to everybody. He can
only give notice to another party against whom he has a right of
reimbursement should such party giving notice pay the instrument; and
4) another person in behalf of such party.
Campos: A holder, whether he is the owner of the instrument or not, may give
notice of dishonor. Thus, a restrictive indorsee who is a trustee for the benefit of
another, or an indorsee for collection, can give a binding notice. It may also be
given by one duly authorized by the holder to collect though he himself is not a
holder. This group would include notaries and attorneys. A prior indorser may
give notice to parties prior to him because he is a party who might be compelled
to pay the instrument to the holder and upon so paying would have a right of
reimbursement from the party notified.
Campos: To charge the indorser, the complaint must allege and prove
presentment to the maker and notice of dishonor, or that the same are dispensed
with under Sections 82 and 109, respectively, or is not required under Section
118. And the burden of proving due notice or that notice was waived or excused is
on the holder. The indorsers knowledge that the maker was in default on a note
does not dispense with notice of dishonor, and failure to notify the indorser
discharges his obligation.
Sebastian: The person who will give notice is the holder or any person in behalf
of the holder. In case of service of notice, the agent does not need to have
authority to serve notice of dishonor.
EXCEPTIONS TO THE RULES REQUIRING NOTICE
NOTICE BY AGENT
Agbayani: Notice of dishonor to persons secondarily liable is necessary to

charge them except:
a) when notice is waived (Section 109);
b) when dispensed with under Section 112;
Sec. 91. Notice given by agent. - Notice of dishonor may be given by

any agent either in his own name or in the name of any party entitled
to given notice, whether that party be his principal or not.
Notice given by the maker is not binding unless he has been authorized, either
expressly or impliedly, to give such notice. Thus, the showing to the indorser by
the maker of a telegram demanding payment of the maker is not sufficient notice.
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Agbayani: Notice of dishonor may be given by an agent and it is not necessary

that the agent be authorized by the principal.
Sec. 94. When agent may give notice. - Where the instrument has
been dishonored in the hands of an agent, he may either himself give
notice to the parties liable thereon, or he may give notice to his
principal. If he gives notice to his principal, he must do so within the
same time as if he were the holder, and the principal, upon the receipt
of such notice, has himself the same time for giving notice as if the
agent had been an independent holder.
Agbayani: If the agent chooses to give notice to his principal, he must give
notice within the time allowed by law as if he were a holder. The principal has
also the same time to give notice to the parties secondarily liable.
Campos: A typical example of an agent under the above section is the bank with
whom a check has been deposited by the holder for collection. Assuming the
check is dishonored by the drawee bank, the collecting bank should notify either
the drawer directly or his principal (the holder) of such dishonor within the time
specified by Sections 103 and 104. Should he decide to notify the holder, the
latter has the same time to notify the secondary parties, as if the collecting bank
were an independent holder.
Sebastian: In the case of the agent of the indorser, receipt of the notice creates
a liability. In the case of an agent giving notice, you are not creating liability,
rather you are seeking to enforce a right.
party to whom notice is given.

Agbayani: The principle involved here is the same as under Section 92. The
notice, however, is given, not by the holder but by a party entitled to give notice
under Section 90, namely, by a party to the instrument who might be compelled
to pay it to the holder, and who, upon taking it up, would have a right of
reimbursement from the party to whom notice is given.
SUFFICIENCY OF NOTICE
Sec. 95. When notice sufficient. - A written notice need not be signed
and an insufficient written notice may be supplemented and validated
by verbal communication. A misdescription of the instrument does
not vitiate the notice unless the party to whom the notice is given is in
fact misled thereby.
Campos: The notice must (1) identify the instrument and (2) make known the
fact that it has been dishonored either by non-acceptance or non-payment. A
mere recital in a notice that the instrument was not paid would be sufficient to
constitute a statement that it was dishonored. To constitute compliance with the
rule, it must be accompanied by language will inform the party addressed that the
instrument had been duly presented.
Sebastian: An insufficient notice makes the notice defective. But whatever
insufficiency it has, it may be cured.
FORM OF NOTICE
Notice by agent is governed by 2 provisions. Under Section 94, the instrument

that was dishonored is in the possession of the agent. He must serve notice of
dishonor to the indorsers and to the holder himself.
NOTICE OF NOTICE
Sec. 92. Effect of notice on behalf of holder. - Where notice is given by
or on behalf of the holder, it inures to the benefit of all subsequent
holders and all prior parties who have a right of recourse against the
party to whom it is given.
Agbayani: The benefit referred to here is the right to charge the person
secondarily liable who received the notice. In other words, the party to whom this
benefit inures can charge the party receiving the notice of dishonor, even he
himself did not give the notice.
Sec. 93. Effect where notice is given by party entitled thereto. Where notice is given by or on behalf of a party entitled to give notice,
it inures to the benefit of the holder and all parties subsequent to the
Sec. 96. Form of notice. - The notice may be in writing or merely oral
and may be given in any terms which sufficiently identify the
instrument, and indicate that it has been dishonored by nonacceptance or non-payment. It may in all cases be given by delivering
it personally or through the mails.
Agbayani: Whether written or oral, the notice must contain the following:
1) sufficient description of the instrument to identify it;
2) a statement that it has been presented for payment or acceptance, and that it
has been dishonored; and
3) a statement that the party giving notice intends to look for the party
addressed for payment.
The word may in the last sentence is held to mean that a choice is allowed for
the service of notice. In a personal service, the evidence must show either actual
personal service, or an ordinarily intelligent, diligent effort to make personal
service upon the indorser.
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Campos: Notice may be given orally or in writing. Notice may thus be given by
telephone provided it be clearly shown that the party to be notified is fully
identified as the party at the receiving end of the line. Notice may also be sent by
telegraph. And notice by service of process against the indorsers has been held
sufficient where process was served within the time prescribed by law.
Sebastian: A notice does not have to be in writing. It may be verbally made.
What is necessary is to give details of the dishonored instrument, describe in a
manner sufficient to inform persons secondairly liable which instrument was in
fact dishonored. The notice must state that it was presented for payment and the
fact that payment was refused. It must contain that you are holding the person
secondarily liable for the value of the instrument.
TO WHOM NOTICE IS GIVEN
Sebastian: Notice of dishonor is given to parties secondarily liable. Parties
primarily liable are not entitled to notice. Persons primarily liablen include an
accommodation maker, joint makers, or joint acceptors.
In a case of installment note that is defaulted, service of notice depends on the
circumstances. Installment notes w/o acceleration clauses are deemed to be
separate notes with respect to each installment. Thus, service of notice of
dishonor is only for the amount defaulted. You can run after indorser only up to
the amount default because the entire balance is not yet due. But for Installment
notes with an acceleration clause, default in one installment results to the entire
balance becomes due. A single notice of dishonor to persons secondarily liable for
the entire amount, upon default of one payment.
Sec. 97. To whom notice may be given. - Notice of dishonor may be
given either to the party himself or to his agent in that behalf.
Agbayani: Accordingly, an accommodation indorser is entitled to notice. An
irregular indorser must also be given notice if he is to be charged. And if notice is
given to an agent, he must be duly authorized to receive notice of dishonor. If he
is not, the notice is not valid.
Notice to agent must be distinguished from notice attempted to be given to the
party himself where he is absent at his place of business or residence. In the
latter, the notice may be left with anyone found in charge therein.
liable. If you serve notice not to the person himself, but to a person who is
supposedly an agent of the person secondarily liable, you must ascertain that the
agent is properly authorized. If he is not authorized to receive notice of dishonor,
then service is fatally defective and secondarily liable parties are discharged. This
only applies if the holder/server of notice know that he is dealing with an agent.
Otherwise, service is required to ascertain if the agent is authorized to receive
notice. Receipt of notice of dishonor must be within the power of the agent. This
suggests that the power of attorney of the agent must state he has the power to
receive notice. But Article 1878 of the Civil Code does not include receipt of notice
of dishonor as one of the instances where a special power of attorney is required.
To ascertain that the agent is authorized to receive notice of dishonor, you must
ask for a power of attorney. If there was no power of attoney, a special power of
attorney is necessary because when an agent receives notice of dishonor, by
merely receiving the notice, the contingent liability of the indorser becomes a real
liability. Therefore, receipt creates an obligation on the part of the indorser to
make good his warranty under Section 66, which is not within the scope of a
general power of attorney.
When you know you are dealing with an agent, you must establish his authority.
But when you are trying to serve the person itself, and he is unavailable, you dont
need to establish the agency if you will leave the notice to any person available. If
there were diligent efforts to serve notice, there was no agent or anyone else in
charge, it is deemed that the notice of dishonor is waived.
Sec. 98. Notice where party is dead. - When any party is dead and his
death is known to the party giving notice, the notice must be given to a
personal representative, if there be one, and if with reasonable
diligence, he can be found. If there be no personal representative,
notice may be sent to the last residence or last place of business of the
deceased.
Agbayani: When the person to be given notice of dishonor is dead, notice must
be given to his personal representative, provided that:
1) his death is known to the party giving notice;
2) there is a personal representative; and
3) if with reasonable diligence he could be found.
Campos: Not every agent of the party sought to be charged would be a proper
agent within this section, because it is clear therefrom that an agent to be
competent to receive notice of dishonor must be an agent in that behalf.
But although the party is dead, (1) if his death is not known to the party giving
notice, (2) or although his death is known to the party giving notice but there is
no persona representative, or (3) if there be one but he cannot be found with
reasonable diligence, then notice may be sent to the last residence or last place of
business of the deceased.
Sebastian: Section 97 says that service does not need to be directly to the
parties secondarily liable. It may be served on the agent of the party secondarily
Campos: If the partys death is known to the holder, he is put on inquiry to find
out whether there is a personal representative or not. If he neglects to make
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inquiry and the personal representative could have been found with reasonable
diligence, notice to the last resident or place of business of the deceased would be
ineffective to charge the estate. On the other hand, if the fact of death is not
known to the holder, although he could have discovered such fact with the
exercise of reasonable diligence, Section 98 does not impose on him the duty to
notify the personal representative.
Sebastian: Section 98 implies that the contingent liability of the secondarily
liable persons is not extinguished by their death. Thus, the holder must serve
notice to his personal representative, if there is one and can be found with
reasonable diligence. An administrator or executor is not considered as the
personal representative of the deceased becaise an administrator or executor
represents the court, the creditors, and the heirs, not the estate.
Sec. 99. Notice to partners. - Where the parties to be notified are
partners, notice to any one partner is notice to the firm, even though
there has been a dissolution.
Agbayani: The reason for this rule is that each partner is an agent of the
partnership of which he is a member. Accordingly, notice to one is notice to the
others.
Sebastian: In Section 68, joint payees and joint indorsees are deemed to have
indorsed jointly and severally. Thus, this rule will not apply to joint payees and
joint indorsees because notice to one is notice to all.
Sec. 101. Notice to bankrupt. - Where a party has been [1] adjudged a
bankrupt or an insolvent, or has [2] made an assignment for the
benefit of creditors, notice may be given either to the party himself or
to his trustee or assignee.
WHEN NOTICE IS GIVEN
Sec. 102. Time within which notice must be given. - Notice may be
given as soon as the instrument is dishonored and, unless delay is
excused as hereinafter provided, must be given within the time fixed
by this Act.
But where the notice is actually received by the party within the time
specified in this Act, it will be sufficient, though not sent in
accordance with the requirement of this section.
Agbayani: The time for giving notice is fixed in Sections 103, 104 and 107.
Campos: Notice to one partner is notice to firm although it was fraudulently

suppressed by the partner who received it.
Sec. 100. Notice to persons jointly liable. - Notice to joint persons
who are not partners must be given to each of them unless one of
them has authority to receive such notice for the others.
Agbayani: The provisions of this section do not apply to joint payees or joint
indorsees who indorse as such joint indorsers to whom notice of dishonor has
been given are not discharged by reason of failure to give notice to the other joint
indorsers. Accordingly, this section applies to joint parties other than joint payees
and joint indorsees who indorse, such as, to drawers who sign a bill jointly, or to
joint accommodation indorsers who are not solidarily liable under Section 68 as t
hey are neither payees nor indorsee.
Campos: This section should be interpreted with Section 68 under which joint
payees or joint indorsees are deemed to indorse jointly and severally. Thus, a
notice to only one of them is sufficient to charge the notified indorser and the
failure to notify the others, although it will discharge the latter, will not discharge
the former. But where the joint parties are not jointly and severally liable, such as
joint drawers, Sec. 100 applies and notice to each of them is necessary to charge
any of them, unless the one notified was given authority to receive for the others.
Thus, if only one of such joint parties is notified, all of them are discharged. Their
liability under Section 100 is conditioned upon notice to each of them.
Notice of dishonor may not be given before the date of maturity because an
instrument cannot be said to be dishonored for non-payment unless presented,
and presentment must be made on the date of maturity, unless, of course,
presentment is excused. But even in such cases, the instrument cannot be said to
be dishonored by non-payment unless it is overdue and unpaid. Notice of
dishonor can be given only after the instrument has been actually dishonored,
and notice given before the paper becomes due is premature and insufficient,
regardless of the indorsers knowledge that the maker was in default.
Notice of dishonor may be given on the date of maturity, provided that the
instrument has been presented for payment and it has been dishonored. But if
the instrument is payable at a bank, it is not dishonored if the maker deposits the
amount of the instrument before the close of banking hours. Hence, notice of
dishonor must be given after the close of banking hours on the date of maturity.
The purpose of giving prompt notice is to give the persons secondarily liable
every opportunity to secure themselves such as, to enable the party to be charged
to preserve and protect his rights against prior parties.
Campos: The earliest time at which a notice of dishonor may be sent is
immediately after dishonor, and a notice of dishonor by non-payment before
maturity of the instrument is premature and ineffective. The latest time at which
a notice of dishonor may be given depends in part on whether the party to give
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notice and the party to be notified are in the same place or in different places. At
any rate, if a notice is not given within the time fixed by Sections 103 and 104, the
notice is inoperative and the secondary party so notified is discharged.
Where the time for giving or sending notice falls on a Sunday or a holiday, the act
may be done on the next succeeding business day under Section 194. However,
should a notice be given on a Sunday or holiday, it is sufficient.
Sebastian: Notice must be served within 24 hours unless there is excusable
delay. The holder serves notice to secondarily liable persons when the person
primarily laible refuses to pay. Their contingent liability will be converted to an
actual liability. Immediate notice must be served. Requiring them to pay means
they will ask reimbursement from the person primarily liable. The sooner the
holder holds them liable, the sooner they can make a claim against the person
primarily liable. Thus, notice of dishonor is served to protect the holder and in
turn, those secondarily liable, may be able to preserve their claim against the
person primarily liable.
WHERE NOTICE IS GIVEN
Sec. 103. Where parties reside in same place. - Where the person
giving and the person to receive notice reside in the same place,
notice must be given within the following times:
(a) If given at the place of business of the person to receive notice, it
must be given before the close of business hours on the day
following.
(b) If given at his residence, it must be given before the usual hours
of rest on the day following.
(c) If sent by mail, it must be deposited in the post office in time to
reach him in usual course on the day following.
Sec. 104. Where parties reside in different places. - Where the person
giving and the person to receive notice reside in different places, the
notice must be given within the following times:
(a) If sent by mail, it must be deposited in the post office in time to
go by mail the day following the day of dishonor, or if there be
no mail at a convenient hour on last day, by the next mail
thereafter.
(b) If given otherwise than through the post office, then within the
time that notice would have been received in due course of
mail, if it had been deposited in the post office within the time
specified in the last subdivision.
Agbayani: The law provides a different period for giving notice of dishonor
depending upon whether (1) the party giving notice and the party to receive
notice resides in the same place, or (2) the party giving notice and the party to
receive notice resides in different places.

The same place refers to the corporate limits of a town or city where the
presentment is made or where the holder resides.
Unless excused, notice given out of time would be considered not to have been
given. Hence, the party to receive notice would be discharged.
Sec. 108. Where notice must be sent. - Where a party has added an
address to his signature, notice of dishonor must be sent to that
address; but if he has not given such address, then the notice must be
sent as follows:
(a) Either to the post-office nearest to his place of residence or to
the post-office where he is accustomed to receive his letters;
or
(b) If he lives in one place and has his place of business in another,
notice may be sent to either place; or
(c) If he is sojourning in another place, notice may be sent to the
place where he is so sojourning.
Campos: The sending of a notice to an address designated by the indorser will
be sufficient even though the address is an incorrect one. Where notice is sent to
an address other than the one designated, the notice may be binding upon proof
by the sender of its actual receipt. In this case, mailing will not give rise to the
presumption of receipt, rebuttable or conclusive. The burden of proof of actual
receipt of the notice will rest upon the party who gave it.
WHEN NOTICE IS DEEMED GIVEN
Sec. 105. When sender deemed to have given due notice. - Where
notice of dishonor is duly addressed and deposited in the post office,
the sender is deemed to have given due notice, notwithstanding any
miscarriage in the mails.
Campos: Notice of dishonor is duly addressed under Section 105 when a letter
or post card has been written by the sender and properly stamped, containing the
information required by Section 96, and which notice bears the name of the party
to whom notice is to be sent and the designation of the proper place. Thus, where
the president of the corporation and the corporation were both indorsers, a
mailed notice of non-payment addressed to the corporation, attention to the
president, was held not to be duly addressed to the individual indorser so as to
give rise to the presumption of due notice.
Sec. 106. Deposit in post office; what constitutes. - Notice is deemed
to have been deposited in the post-office when deposited in any
branch post office or in any letter box under the control of the post-
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office department.
Agbayani: The notice must be properly addressed, stamped and mailed.
Otherwise, the notice, even though mailed, is not proper. It has been held that
when the notice by letter is duly stamped, addressed and mailed, the sender is
deemed to have given due notice which is presumed to be received by the
addressee, notwithstanding any miscarriage in the mails, and the addressees
(indorsers) evidence that he had not receive the notice will be excluded. But
where copy of the protest is sent by mail in good season addressed to the drawer,
the presumption is now conclusive that the latter received it, not having been
rebutted, or at least, contradicted. It would see, therefore, that the presumption is
conclusive if not rebutted, or at least, contradicted.
Sebastian: Waiver is the abandonment/relinquishment of an existing right.

Thus, a person waiving must have the right to notice of dishonor. Consequently,
only parties secondarily liable may waive notice of dishonor.
A waiver is valid when (1) you own the right you are waiving, (2) the right exists
(not expected or inchoate), (3) it is deliberate and (2) it did not result from vice of
consent.
A waiver is embodied in the note itself. It is binding upon all parties. If you place
the waiver outside the instrument, it cannot bind the other parties secondarily
liable.
Time of Making a Waiver of Notice
The letter box must be under the control of the post-office department.
Otherwise, notice would not deemed to have been deposited in the post-office.
NOTICE TO ANTECEDENT PARTIES
Sec. 107. Notice to subsequent party; time of. - Where a party receives
notice of dishonor, he has, after the receipt of such notice, the same
time for giving notice to antecedent parties that the holder has after
the dishonor.
Campos: Waiver may be made before or after maturity of the instrument.

Sebastian: Waiver of notice of dishonor may be waived before due date or after
it has been committed. In other words, waiver may be done at any time prior to
payment.
Types of Waiver of Notice
Campos: Waiver may either be express or implied.
WAIVER OF NOTICE
PERSONS AFFECTED BY WAIVER OF NOTICE
Sec. 109. Waiver of notice. - Notice of dishonor may be waived either
before the time of giving notice has arrived or after the omission to
give due notice, and the waiver may be expressed or implied.
Sec. 110. Whom affected by waiver. - Where the waiver is embodied

in the instrument itself, it is binding upon all parties; but, where it is
written above the signature of an indorser, it binds him only.
What Constitutes Waiver of Notice

Agbayani: Waiver is the intentional abandonment of a right. It may be
expressed or implied.
Campos: A letter from the indorser to the holder after dishonor, admitting
liability, is a waiver of lack of notice. Similarly, when a note is dishonored and no
notice is given to indorsers, but the indorsers procure the holder to consent to an
extension of time of payment and accept a renewal note, there is a waiver of
notice on the original note.
The burden of proof is on the holder to show waiver of notice, and it will not be
inferred from doubtful acts of language of the indorser, but must be proved by
clear and unequivocal evidence.
Agbayani: The persons affected by waiver depends upon whether the waiver is
in the instrument itself or is written above the signature of an indorser. If the
waiver is embodied in the instrument itself, it is binding upon all parties. If the
waiver is written above the signature of the indorser, it binds him only.
A printed waiver on the back of the instrument above the indorsements is a
waiver embodied in the instrument itself. The effect is to make all the subsequent
indorsers unconditionally liable and, in this sense, unconditional debtors. But
such a waiver does not make the indorsers liable as co-makers since their
obligation to pay is still a contingent liability. Accordingly, all indorsers
appearing below it are bound and the holder need not give them notice to hold
them liable.
WAIVER OF PROTEST
Sec. 111. Waiver of protest. - A waiver of protest, whether in the case
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of a foreign bill of exchange or other negotiable instrument, is

deemed to be a waiver not only of a formal protest but also of
presentment and notice of dishonor.
Agbayani: Where protest is waived, presentment and notice of dishonor are
deemed waived also. But where notice of dishonor is wavied, presentment is not
waived.
DISPENSING NOTICE OF DISHONOR
Sec. 112. When notice is dispensed with. - Notice of dishonor is
dispensed with when, after the exercise of reasonable diligence, it
cannot be given to or does not reach the parties sought to be charged.
Campos: Reasonable diligence depends upon the circumstances of the case.
Thus, where the holder examined a telephone directory for the address of the
defendant and, failing to find it, mailed the notice to a co-indorser whose address
he knew, but failed to inquire of the co-indorser, it was held that reasonable
diligence had not been exercised. Similarly, where notice is sent to a town where
the indorser had never lived, and which was not received, it is ineffective.
On the other hand, in a case where the holder inquired of the payee and mailed
the notices to the address given by such payee, then later he learned of the
indorsers address and mailed a second set of notices, it was held that reasonable
diligence had been exercised.
capacity to contract;
(c) When the drawer is the person to whom the instrument is
presented for payment;
(d) Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument;
(e) Where the drawer has countermanded payment.
Sec. 115. When notice need not be given to indorser. Notice of
dishonor is not required to be given to an indorser in either of the
following cases:
(a) When the drawee is a fictitious person or person not having
capacity to contract, and the indorser was aware of that fact at
the time he indorsed the instrument;
(b) Where the indorser is the person to whom the instrument is
presented for payment;
(c) Where the instrument was made or accepted for his
accommodation.
Agbayani: As to a particular person secondarily liable on an instrument, such
as the drawer or an indorser, notice of dishonor to him is not necessary:
1) where he has knowledge of the dishonor by means other than through a
formal notice, as when he is both the drawee and drawer or when
presentment is made him; and
2) where the drawee is fictitious or without capacity to contract.
These sections apply only to the drawer or indorser concerned. Failure to give
due notice to the other parties secondarily liable will discharge them.
DELAY IN GIVING NOTICE OF DISHONOR

Sec. 113. Delay in giving notice; how excused. - Delay in giving notice
of dishonor is excused when the delay is caused by circumstances
beyond the control of the holder and not imputable to his default,
misconduct, or negligence. When the cause of delay ceases to operate,
notice must be given with reasonable diligence.
Sebastian: If the basis is beyond control of the person serving the notice of
dishonor, not due to negligence or misconduct, delayed service is excused. If
there is excuse for delay, there must be service as soon as the cause of the delay is
gone.
DISPENSING NOTICE OF DISHONOR
Sec. 114. When notice need not be given to drawer. - Notice of
dishonor is not required to be given to the drawer in either of the
following cases:
(a) Where the drawer and drawee are the same person;
(b) When the drawee is fictitious person or a person not having
Campos: The reason for not requiring notice under paragraphs (a) and (b) is
that in each of these cases, the holder is given the option under Section 130 of
treating the instrument as a promissory note, thus considering the drawer a
maker and a primary party.
The reason for non-requirement of notice under paragraph (c) is because such
demand for payment, of itself, constitutes notice of dishonor of the bill. The case
referred to must be one where presentment has been made upon the drawee who
dishonors the bill, or a case where for some reasons presentment is not required
or is dispensed with, and the holder demands payment from the drawer within
such time that he should give notice of dishonor to the drawer.
Under paragraph (d), where there is no antecedent contractual relation between
the drawer and drawee under which the drawee is bound to accept or pay, notice
of dishonor is not required because the drawee has no right to require that the
drawee accept or pay. Thus, where the drawer of a check has no account or no
sufficient funds with the drawee bank, he is not entitled to notice of dishonor.
However, the absence of contractual relation between the drawer and drawee will
not always operate to free the holder from the duty to give notice to the drawer,
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who may have a reason to expect that despite such absence, the drawee may
accept or pay.
Notice of dishonor is not required where the drawer has countermanded payment
because it is his own act which causes the dishonor of the instrument.
countermanding payment is the same as a stop order and means ordering the
drawee bank not to pay the check issued by the drawer.
DISCHARGE OF NEGOTIABLE INSTRUMENTS

Campos: The discharge of the instrument effects the extinguishment of the
obligations arising thereunder. It relives all parties. Whether primary or
secondary, from further liability on the instrument.
Functional equivalent in civil law is the extinguishment of the contract.
NOTICE OF NON-PAYMENT
Sec. 116. Notice of non-payment where acceptance refused. - Where
due notice of dishonor by non-acceptance has been given, notice of a
subsequent dishonor by non-payment is not necessary unless in the
meantime the instrument has been accepted.
Campos: A dishonor by non-acceptance confers upon the holder an immediate
right against all secondary parties. If the holder then gives due notice of dishonor,
he may enforce his rights against them by an action. If he fails to give notice of
dishonor by non-acceptance, his rights against secondary parties are lost and
such rights will not be revived by a subsequent presentment for payment.
OMISSION OF NOTICE OF NON-ACCEPTANCE
Sec. 117. Effect of omission to give notice of non-acceptance. - An
omission to give notice of dishonor by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the
omission.
Sebastian: In a negotiable instrument, the only obligation meant to be

discharged is that for payment for a sum of money. Performance of the obligation
in the instrument is the payment of the sum of money by the person primarily
liable to the holder of the instrument and the discharge of the monetary
obligation to the person liable discharges the instrument.
HOW INSTRUMENTS ARE DISCHARGED
Sec. 119. Instrument; how discharged. - A negotiable instrument is
discharged:
(a) By payment in due course by or on behalf of the principal
debtor;
(b) By payment in due course by the party accommodated, where
the instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the
payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
Sebastian: This section is not an exception to give notice.

By Principal Debtor
DISPENSING PROTEST OF FOREIGN BILLS
Sec. 118. When protest need not be made; when must be made. Where any negotiable instrument has been dishonored, it may be
protested for non-acceptance or non-payment, as the case may be; but
protest is not required except in the case of foreign bills of exchange.
Agbayani: Protest is necessary for foreign bills of exchange, while protest for
other negotiable instruments is optional.
Agbayani: In order to discharge the instrument, the payment must be (1) a

payment in due course; (2) a payment made by the principal debtor.
If payment is made before the date of maturity, the instrument is not discharged
as the payment is not in due course. It will merely constitute a negotiation back to
the principal debtor who can renegotiate the instrument.
Where the payment is made by a party who is not the primary obligor or an
accommodation party, his payment only conceals his own liability and those
obligated after him. All prior parties primarily liable or secondarily liable to the
bill, are liable to such payer, and the payer may cancel indorsements subsequent
to his own and re-issue the paper, and it will be valid against the prior parties.
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The term principal debtor refers to the person ultimately bound to pay the debt.
This is true whether he is a party to the instrument or not, or whether he appears
to be liable primarily or secondarily in the instrument.
Campos: Payment is the most usual way of discharging a bill or note. Since a
negotiable instrument must contain an unconditional promise or order to pay a
sum certain in money, payment should be in money in order to effect its
discharge. If the parties agree to discharge the instrument by a renewal note, it
would be discharged not by payment strictly speaking, but by novation or by
agreement, which modes are expressly recognized under Section 119 (d).
Payment must be made by or on behalf of the principal debtor, otherwise it would
constitute a purchase or negotiation, and the instrument would remain
outstanding. Principal debtor would include the maker and the acceptor.
Although the drawee is not a party until he accepts and payment by him is
literally not a discharge under Section 119, he fulfills the representation made by
the drawer and by the indorsers and therefore payment by him will also discharge
the instrument.
Sebastian: As a rule, there must be payment in due course by on or behalf of a
principal debtor. It may also be made by a accommodation party.
In civil law, a creditor is not compelled to accept a third party payment. But in
Negotiable Instruments Law, it is possible. If a holder refuses to accept payment
from a person who could be made to pay, that person and all subsequent parties
are discharged. A third party payment can be made by a total stranger (i.e.
payment for honor).
Performance of the obligation has to be plain and simply the payment of money.
As a rule, a negotiable isntrument is discharged by payment. However, not all
payments discharges an instrument. There are people who can make payment
that will not discharge the instrument.
Not all types of payment will discharge the instrument. It must be payment in
due course. Under Section 88 payment must be made at or after maturity. If not
at or after maturity, it will be considered a negotiation of the instrument. This is
because the instrument can still be renegotiated. When the person primarily
liable on the instrument pays it before due date, it is not payment in due course,
but it can still still extinguished because of confusion or merger of the rights of
the debtor and creditor.
Payment must be made to the holder, otherwise, the instrument is not
discharged.
By Third Person
The creditor is not bound to accept payment or performance by a
third person who has no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the will
of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor. (Art. 1236, Civil Code)
Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate
him in his rights, such as those arising from a mortgage, guaranty, or
penalty. (Art. 1237, Civil Code)
Agabayani: If payment is made by a third person, the instrument is not
discharged because payment is not made by the person principally liable. When
one who is not a party to a negotiable paper pays his money for it and takes up
the paper, the presumption is that he has bought it and not paid it off. It must be
understood that not any one who desires may pay the instrument and then
recover of the maker. He must be a person who has in some way made himself
liable for the payment of the instrument. There is however one exception to this,
and that is where an instrument has been protested and some one voluntarily
makes payment supra protest or for honor. And if the intention was to give the
money in payment, the instrument is discharged. Under the New Civil Code, a
third person can make payment for an obligor.
Sebastian: When the instrument is paid by a third party, not a party to the
instrument or a virtual stranger, the instrument cannot be presumed to have
been paid.When a person makes a payment and he is not the party obligated to
pay, there is a presumption that the instrument was negotiated to him. This
presumption can be overturned when there is expressed that the payment is to
discharge the instrument.
By Accommodated Party
Agbayani: As between the accommodation party and the accommodated party,
the latter is the one ultimately liable on the accommodation instrument. Hence,
his payment in due course discharges the instrument as if payment was made by
the principal debtor.
Payment must be made in good faith and without notice of the defect of the title
of the holder.
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Campos: Payment by the accommodated party if the instrument is made or

accepted for his accommodation is actually payment by the principal debtor,
whether or not he appears to be a party to the instrument.
Cancellation by Holder
Agbayani: The cancellation must be intentional and made by the holder.
Cancellation may be done by tearing the instrument, burning it or writing across
it the word cancelled.
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor. (Art. 1279, Civil Code)
Extension of Time of Payment
There must be an intention to cancel the negotiable instrument by the holder

thereof as such intention is an essential element of discharge on a negotiable
instrument and a negotiable note in a torn condition is presumed cancelled by
the holder thereof. Thus, the instrument is not discharged where the cancellation
is made under a mistaken belief that it has been fully paid when as a matter of
fact there is a failure of such payment, or where cancellation is induced by fraud.
Sebastian: What is important here is that cancellation must be intentional.
Only the holder can do this. In this case, the presumption is that he does not
intend to recover from the party primarily liable on the instrument. This
presupposes that the holder gave consent to the cancellation. It is not enough to
say that the cancellation was intentional. It is equally important to say that
cancellation was not only intentional, but it must be a cancellation that is free
from any vice of consent. When you cancel an instrument, the presumption is
that it is intentional. To enforce the instrument, you must prove that the
cancellation was unintentional.
Agbayani: An extension of time granted by the holder to the debtor will not
discharge the instrument because this ground is not omitted in Section 120 and it
is omitted in Section 119.
Sebastian: Extension of time without consent of parties secondarily liable will
discharge them. This makes the obligation of the parties secondarily liable more
onerous. In altering the tenor of the instrument, there must be consent of the
person primarily liable and all parties secondarily liable.
Principal Debtor Acquires Instrument
Agbayani: In order to discharge an instrument under paragraph (e),
reacquisition mmust be (1) by the principal debtor, (2) in his own right, and (3) at
or after the date of maturity.
In his own right means not in a representative capacity.
By Acts that Discharge a Money Debt

Agbayani: Novation would discharge the instrument.
However, it has been opined that paragraph (d) of Section 119 is meaningless and
inoperative in light of the other provisions of Section 119, and that consequently
the provision has not altered the unwritten rule as to discharge of negotiable
instruments, either as between the parties or with respect to holders in due
course.
By Merger or Legal Compensation
The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person. (Art. 1275, Civil
Code)
In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;
Reacquisition by the principal debtor in his own right but before maturity will not
discharge the instrument. It will merely constitute a negotiation back to the
principal debtor who, under authority of Section 50, may renegotiate the
instrument.
Discharge by Operation of Law
Agbayani: An instrument may be discharged by operation of law. If a judgment
is obtained on a bill or a note, the bill or note is thereby extinguished and merged
in the judgment. But the judgment alone, without actual satisfaction, is not
extinguishment as between the plaintiff and other parties not jointly liable with
the original defendant, whether those parties be prior or subsequent to the
defendant.
A discharge in bankruptcy, unless otherwise provided by statute, releases a
bankrupt from all his provable debts, and therefore will discharge the bankrupt
on all bills accepted, or notes made by him but will not discharge the other
parties.
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A discharge (1) of a party not given due notice of dishonor or (2) by the Statute of
Limitation is a discharge by operation of law.
Sebastian: Discharge of the person by operation of law does not discharge the
instrument. When a person primarily liable is excused by the law from payment
of the instrument, there is a discharge by operation of law. Take note, the
instrument is not yet discharged.; only the person. Persons secondarily liable will
remain liable as indorsers. Thus, when the party primarily liable is discharged by
operation of law, the instrument is not discharged because parties secondarily
liable are still required to pay.
In execution of judgment, the instrument is not discharged because it is not the
instrument that you are paying; it is the judgment of the court that is being
executed.
DISCHARGE OF PERSONS SECONDARILY LIABLE
Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is
discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's right of
recourse against the party secondarily liable is expressly
reserved;
(f) By any agreement binding upon the holder to extend the time of
payment or to postpone the holder's right to enforce the
instrument unless made with the assent of the party
secondarily liable or unless the right of recourse against such
party is expressly reserved.
Agbayani: The intentional cancellation of a prior party also discharges the

subsequent parties thereto because if the latter were not discharged, and he is
made to pay be the holder, he would not be able to enforce his right of recourse
against the prior party who has been discharged by the holder.
By Valid Tender of Payment
Agbayani: Tender of payments means the act by which one produces and offers
to a person holding a claim or demand against him the amount of money which
he considers and admits to be due, in satisfaction of such claim or demand
without any stipulation or condition. But where an instrument is payable at a
bank and the indorser waived protest, the fact that the maker had money on
deposit in the bank at maturity was held not sufficient tender under Section 70
and 87 to discharge an indorser. Notice of that fact must be brought to the holder.
Sebastian: When a party secondarily liable offers to pay the holder and the
latter declines payment, that party as well as all subsequent parties are
considered discharged because it is not fair that if the holder fails to collect from
the person he wanted, the holder goes back to the persons secondarily liable who
already offered to pay the instrument. Subsequent parties must also be
discharged because if the holder comes after them, they will eventually go after
the original secondarily liable person.
If an indorser goes to the place of payment and he is able and willing to discharge
the instrument, and the holder refuses to take it from him, there is a valid tender
of offer which was declined. Under the principles of the Negotiable Instruments
Law, mere presence is equivalent to a tender of payment.
There is no discharge if the bank failed to inform the holder that there were
insufficient funds for the bank to pay the instrument.
In civil law, if the creditor is in mora accipienti, he suffers the following:
1) If obligation is for delivery of a particular thing, the responsibility of the debtor
is diminished to responsibility arising from fraud and gross negligence.
By Discharge of Instrument
Agbayani: Any of the acts that will discharge an instrument under Section 119
will discharge the parties secondarily liable thereon, such as, by payment in due
course by the maker. This discharges the indorsers of the note.
2) If the thing is lost, the creditor bears the loss.
By Intentional Cancellation
3) If the thing is declined by the creditor requires expenses for preservation, the
expenses is bourn by the creditor.
Agbayani: No consideration is necessary to support a discharge by intentional

cancellation of an indorsers signature by the holder.
The creditor will cease to have title to the instrument for refusing to accept a valid
tender of payment.
By the Discharge of Prior Party
By Release of Principal Debtor

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Agbayani: If the holder releases the principal debtor, the persons secondarily
liable are also discharged as (1) this discharges the instrument and (2) deprives
them of their right of recourse against the principal debtor. But if on releasing the
principal debtor, the holder reserves his right of recourse against the parties
secondarily liable, they are not discharged. The reason is that the effect of such
reservation is the implied reservation of their right of recourse against the
principal debtor. In other words, while the holder cannot hold the person
principally liable, he can hold the parties secondarily liable, but they in turn can
hold the principal debtor should any of them be made to pay the holder. This
reservation of the right of recourse cannot be implied from acts and conduct but
must be express.
The release must be a voluntary act of the holder, not by operation of law.
Agbayani: The first effect is that the instrument is not discharged but it
discharges the party paying.
The second effect is that the party paying is remitted to his former rights against
parties prior to him. If he was formerly a holder in due course, even if at the time
of payment he already had notice of defects of title, he can enforce his rights
against any of the parties prior to him free from defenses, as he is remitted to his
former rights. But it is a well-known rule of law that if the original payee of a
note, unenforceable for lack of consideration, repurchases the instrument after
transferring it to a holder in due course, the paper again becomes subject in the
payees hands to the same defenses to which it would have been subject if the
paper never passed through the hands of a holder in due course. This is also true
where the instrument is retransferred to an agent of the payee.
The third effect is that the party paying can strike out his indorsement and
subsequent indorsements.
If the release is not for value, it is not a discharge of secondary parties.

As to an accommodation maker or acceptor, the general rule is that he is not
discharged by the holders release of the principal debtor even if the release be
made with knowledge of the true relation of the parties and, conversely, the
release of an accommodation maker or acceptor does not discharge the principal
debtor though the latter occupies the position of a party secondarily liable on
the instrument.
By Extension of Time
Agbayani: If the holder agrees to extend the time of payment, the indorsers are
discharged. The following, however, are exceptions:
1) where the extension of time is consented to by the party secondarily liable,
he is not discharged, and
2) where the holder reserves his right of recourse against the party secondarily
liable,
the latter is not discharged.
PAYMENT BY PERSON SECONDARILY LIABLE
Sec. 121. Right of party who discharges instrument. - Where the
instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former rights
as regard all prior parties, and he may strike out his own and all
subsequent indorsements and against negotiate the instrument,
except:
(a) Where it is payable to the order of a third person and has been
paid by the drawer; and
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.
The fourth effect is that the party paying can renegotiate the instrument.
Where there is a slight ambiguity in this section on this point, the exceptions
would seem to apply only to the right to negotiate but not to the rule that the
instrument is not discharged. Accordingly, where a drawer of a certified check
was required to take up the check because of the failure of the drawee bank, the
instrument is not discharged and he is subrogated to the rights of the payee. In
the following cases, the party secondarily liable who pays cannot negotiate the
instrument:
1) If the drawer pays as the bill is payable to the order of a payee, he can no
longer negotiate the instrument.
2) If the payee is an accommodated party and pays, he cannot negotiate the bill
because he is the ultimate person to pay it and he does not have a right of
recourse against either the drawee or drawer.
Campos: Payment by an indorser at maturity, not on behalf of the principal
debtor but in discharge of his own liability, does not discharge the instrument but
constitutes the indorsee a holder of the instrument, which remains a continuing
obligation against the primary party. Neither does payment by drawer discharge
the instrument.
Sebastian: If payment is made by parties secondarily liable, the instrument is
not discharged. The party who paid may still run after the persons primarily
liable. Basically, the right of enforcement merely goes up until it reaches the
person primarily liable. Party who pays the instrument, even if technically not a
holder in due course, is restored to his status from the time he originally held the
instrument.
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RENUNCIATION BY HOLDER
Sec. 122. Renunciation by holder. - The holder may expressly
renounce his rights against any party to the instrument before, at, or
after its maturity. An absolute and unconditional renunciation of his
rights against the principal debtor made at or after the maturity of the
instrument discharges the instrument. But a renunciation does not
affect the rights of a holder in due course without notice. A
renunciation must be in writing unless the instrument is delivered up
to the person primarily liable thereon.
Agbayani: This section, considered in connection with Sections 119 and 120,
applies only to renunciation by a unilateral act of the holder without
consideration and in cases where the instrument is not delivered up to the person
intended to be realeased. Section 119(e) would cover the case of an oral release
with consideration.
Sebastian: Renunciation is, in effect, a debt condonation.
cancellation made unintentionally or under a mistake or without the

authority of the holder, is inoperative but where an instrument or any
signature thereon appears to have been cancelled, the burden of proof
lies on the party who alleges that the cancellation was made
unintentionally or under a mistake or without authority.
Agbayani: Cancellation signifies not only the drawing of criss-cross lines but
also tearing, obliterations, erasures, or burning. It may be made by any other by
means by which the intention to cancel the instrument may be evident.
Cancellation is inoperative (1) when made unintentionally, (2) when made under
a mistake, or (3) when made without authority of the holder.
Where an instrument or signature thereon appears to have been cancelled, the
party claiming that the cancellation is inoperative must prove his allegations.
Thus, where it appeared that the date and the signature of the maker of the note
where destroyed by burning, the presumption was that the burning was
intentional and done for the purpose of cancelling the instrument, and the
burden was on the holder to prove the contrary.
Definition of Renunciation
Agbayani: Renunciation is the act of surrendering a right or claim without
recompense but can be applied with equal propriety to the relinquishing of a
demand upon an agreement supported by a consideration. Therefore, this term
includes the release of a claim by virtue of an accord and satisfaction as well as a
gratuitous waiver of liability.
Sebastian: The requisites for cancellation are basically the same as those of
renunciation.
Form of Renunciation
Agbayani: The renunciation must be express and in writing. However, if the
instrument is delivered to the person primarily liable, the renunciation may be
oral. This section does not apply to, or prevent discharge by, oral novation under
which the obligation of other persons is accepted in lieu of that of the maker of a
note. Similarly, it does not prevent an oral gift of an indebtedness by the payee to
the makers coupled with an intentional destruction of the notes.
Requisites of Renunciation
Agbayani: Renunciation discharges the instrument when it is:
1) absolute and unconditional;
2) it is made in favor of the person primarily liable; and
3) it is made at or after maturity.
EFFECT OF UNINTENTIONAL CANCELLATION
Sec.
123.
Cancellation;
unintentional;
burden
of
proof.
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in a transaction where goods are bought from a wholesaler and the latter, instead
of taking the buyers promissory note, executes a time bill on the buyer, who
writes Acceptance across the bills face and signs it. Its use is generally limited
to domestic transactions.
BILLS OF EXCHANGE
DEFINITION OF BILL OF EXCHANGE
Sec. 126. Bill of exchange, defined. - A bill of exchange is an
unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time
a sum certain in money to order or to bearer.
Sebastian: Once a bill is signed and accepted by the drawee, the draft becomes
an acceptance.
TYPES OF BILLS OF EXCHANGE
Drafts
Agbayani: A common term for all bills of exchange and they used
synonymously.
Bankers Acceptance
Agbayani: A draft or bill of exchange of which the acceptor is a bank or banker
engaged generally in the business of granting bankers acceptance credit. A
bankers acceptance is similar to a trade acceptance, the fundamental difference
being that the bankers acceptance is drawn against a bank instead of the buyer.
Campos: A bankers acceptance is a negotiable time draft or bill of exchange
drawn on and accepted by a commercial bank. It is more versatile and more
popular than the trade acceptance as it is used not only in domestic transactions
but even more so in international trade for financial, import and export
transactions. Unlike the trade acceptance, which is accepted by the buyer, a
bankers acceptance, which is accepted by the bank. Like the trade acceptance, it
differs from other bills in that it specifies the transaction which gave rise to it.
Trust Receipts
In bank drafts, drawer and drawee bank are liable to purchaser of draft for not
complying with his instructions.
Treasury Warrant
Trade Acceptance
Money Orders
Agbayani: (1) A bill of exchange payable to order and at a certain maturity,

drawn by a seller against the purchaser of goods as drawee, for a fixed sum of
money, showing on its face the acceptance of the purchaser of goods and that it
has arisen out of a purchase of goods by the acceptor; (2) A draft or bill of
exchange drawn by the seller on the purchaser of goods sold and accepted by
such purchaser.
Agbayani: A species of draft drawn by the post office upon another for an
amount money deposited at the first office by the person purchasing the money
order and payable at the second office to a payee named in the order. They are of
limited negotiability because they may only be indorsed once.
Trade Acceptance
states upon its face that the obligation
of the acceptor arises out of purchase
of goods from the drawer
confined to credit obligations arising
from the sale of goods
must have a definite maturity
Agbayani: Clean bill of exchange: is one to which are not attached documents
of title to be delivered to the person against whom the bill is drawn when he
either accepts or pays the bill.
Bill of Exchange
does not state upon its face that the
obligation of the acceptor arises out of
purchase of goods from the drawer
cover various kinds of transactions
may be payable on demand, at sight,
or at the end of a stated time
Campos: A trade acceptance is a draft or bill of exchange with a definite

maturity, drawn by a seller on a buyer for the purchase price of goods, bearing
across its face the acceptance of the buyer. It is usually payable to order. It is used
Clean and Documentary Bill of Exchange
Documentary bill of exchange is one to which are attached documents of title to

be delivered and surrendered to the drawee when he accepts or pays the bill.
D/P and D/A Bills of Exchange
Agbayani: Documents against payment bill (D/P Bill) is a sight or time bill to
which are attached to documents to be delivered and surrendered to the drawee
when he has paid the corresponding bill.
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Documents against acceptance bill (D/A Bill) is a time bill to which are attached
to documents to be delivered and surrendered to the drawee when he accepts the
bill.
Time or Usance Bills
Agbayani: Sight bills are bills which are payable upon presentation or at sight
or on demand. Time or usance bills are bills which are payable at a fixed future
time or at a determinable future time.
INLAND AND FOREIGN BILLS

Sec. 129. Inland and foreign bills of exchange. - An inland bill of
exchange is a bill which is, or on its face purports to be, both drawn
and payable within the Philippines. Any other bill is a foreign bill.
Unless the contrary appears on the face of the bill, the holder may
treat it as an inland bill.
Distinction
Bills in Set
Agbayani:
Inland and Foreign Bills
LIABILITY OF DRAWEE
Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill
of itself does not operate as an assignment of the funds in the hands of
the drawee available for the payment thereof, and the drawee is not
liable on the bill unless and until he accepts the same.
Agbayani: Where the drawee has not accepted the bill drawn against him, the
holder cannot enforce it against him, even if the drawer has sufficient funds in
the hands of the drawee to pay for the bill. Thus, an unaccepted draft cashed by a
bank at the drawers request is not an assignment of the drawers funds in the
hands of the drawee. And a holder in due course of a dishonored bill has no cause
of action against the drawee either at law or in equity as an assignee of the
drawers contractual rights underlying the bill.
Sebastian: A bill does not operate as an assignment of funds in the hands of the
drawee. Instead there is an agreement of the drawee to make payment for the
drawer either because the drawer has money with the drawee or the drawee
agrees to lend the drawer money. This does not mean there is earmarking of
funds. When a bill of exchange is accepted, even if the drawer has funds with the
drawee, there is no preference of one bill over another.
BILLS DRAWN ON MULTIPLE DRAWEES
Sec. 128. Bill addressed to more than one drawee. - A bill may be
addressed to two or more drawees jointly, whether they are partners
or not; but not to two or more drawees in the alternative or in
succession.
Sebastian: The liability of two or more acceptors is joint and solidary. If there
are 2 or more acceptors, they cannot end up pointing to each other kung sinong
magbabayad and demand on one or either is a demand for the whole amount.
Inland Bill
a bill which is, on its face purports to
be, both drawn and payable within
the Philippines
not required to be protested
Foreign Bill
a bill which is, on its face purports to
be, both drawn and payable outside
the Philippines
required to be protested
A bill is foreign if, on its face, it purports (1) to be drawn in the but payable
outside thereof; or (2) to be payable in the Philippines but drawn outside thereof.
Conflict Rule
BILL TREATED AS A NOTE
Sec. 130. When bill may be treated as promissory note. [1] Where
in a bill the drawer and drawee are the same person or [2] where the
drawee is a fictitious person or [3] a person not having capacity to
contract, the holder may treat the instrument at his option either as a
bill of exchange or as a promissory note.
Agbayani: In all these cases, notice of dishonor need not be given to the drawer
to charge him. Treating the bill as a note would constitute the drawer, the maker.
Thus, the drawer would then be a party primarily liable on the instrument to
whom notice of dishonor need not be given. Futhermore, the holder need not
prove presentment for payment or present the bill to the drawee for acceptance.
Sec. 130
Drawer and drawee is the same person treated as a promissory note
If the drawer and drawee is the same person

o Drawer instructs himself to pay the payee
Same if the drawee is fictitious
Same if the drawee is incapacitated
Enforcement of the instrument as BOE or PN depends on the holder.
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REFEREE
ACCEPTANCE
Sec. 131. Referee in case of need. - The drawer of a bill and any
indorser may insert thereon the name of a person to whom the holder
may resort in case of need; that is to say, in case the bill is dishonored
by non-acceptance or non-payment. Such person is called a referee in
case of need. It is in the option of the holder to resort to the referee in
case of need or not as he may see fit.
Agbayani: If the referee pays, he may recover the amount from the drawer or
indorser who has named him as referee in case of need.
Sebastian: If the instrument is not paid and indorser is being made to pay and
he cannot perform his liability, the holder has the option to go to the person in
case of need.Such person is not obligated to pay because he did not affix his
signature on the instrument. But if the referee in case of need makes good on the
obligation of the indorser, the referee is substituted to the rights of the indorser
and may go after the other indorsers or the maker.
DEFINITION
Sec. 132. Acceptance; how made, by and so forth. - The acceptance of
a bill is the signification by the drawee of his assent to the order of the
drawer. The acceptance must be in writing and signed by the drawee.
It must not express that the drawee will perform his promise by any
other means than the payment of money.
Agbayani: Acceptance is the signification of the drawee of his assent to the
order of the drawer. It is an act by which a drawee assents to the request of the
drawer to pay it.
Acceptance
a promise to perform an act
Payment
actual performance thereof
Campos: Acceptance only applies to bills of exchange and its object is to bind
the drawee and make him an actual and bound party to the instrument.
Sebastian: Acceptance is not required for all bills of exchange. It is only
required only if it is a time draft. In the case of a draft payable on demand, no
need to go to a drawee to accept. You merely go to the drawee for payment. It is
the same when the bill is a sight draft. The moment it is presented to you, the
obligation to pay arises.
KINDS OF ACCEPTANCE
Actual
Sebastian: A simple signature will not constitute acceptance because the law
provides that signature without indication in what capacity is deemed to be an
indorser.
Constructive
Sec. 137. Liability of drawee returning or destroying bill. - Where a
drawee to whom a bill is delivered for acceptance destroys the same,
or refuses within twenty-four hours after such delivery or within such
other period as the holder may allow, to return the bill accepted or
non-accepted to the holder, he will be deemed to have accepted the
same.
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Agbayani: There is constructive acceptance (1) where the drawee to whom the
bill is delivered for acceptance destroys it; or (2) where the drawee refuses, within
24 hours after such delivery, or within such time as is given him, to return the bill
accepted or not accepted. In any of theses cases, the drawee will be deemed to
have accepted the bill even if there is no actual written acceptance by him.
Accordingly, the drawee will be primarily liable as an acceptor.
The drawee is not entitled to keep the bill while he makes up his mind. The bill is
at all times the property of the holder and he is entitled to have it when he wants
it. If the holder should demand its return before twenty-four hours, the drawee
would be required to comply on pain of being held as an acceptor; but return
within twenty-four hours unaccepted would not be a dishonor. The drawee could
still accept by notification within twenty-four hours. Here, an extrinsic
acceptance would play an important part. If the drawee, after returning the bill,
still refused to act after the expiration of the time allowed, the holder then would
be required to treat the bill as dishonored or lose his right against prior parties.
Mere failure to return the bill within twenty-four hours is acceptance. Thus, the
presentation for acceptance is a demand for acceptance which, if the bill is
retained by the drawee, implies a demand for its return if acceptance is declined.
Further, under Section 185 a check was subject to the same rules and that failure
to return within twenty-four hours a check sent to a drawee bank for payment
was an acceptance upon which the holder could recover against the bank,
although the delay was due to the neglect of a third person.
Sec. 139. Kinds of acceptance. - An acceptance is either general or

qualified. A general acceptance assents without qualification to the
order of the drawer. A qualified acceptance in express terms varies
the effect of the bill as drawn.
Sec. 140. What constitutes a general acceptance. - An acceptance to
pay at a particular place is a general acceptance unless it expressly
states that the bill is to be paid there only and not elsewhere.
Agbayani: A general acceptance is one that assents without qualification to the
order of the drawer.
The mere fact that the acceptance is to pay at a particular place does not make the
acceptance qualified but to say that to pay only at a particular place makes the
acceptance qualified.
Campos: Section 140 provides that a general acceptance is an acceptance to pay
at a particular place, unless it expressly states that the bill is to be paid there only
and not elsewhere.
Sebastian: In general acceptance, the drawee agrees to the order of the drawer
without any other qualification.
Qualified
Sections 136 and 137 expressly cover only presentment for acceptance and
presentment for payment is not covered. But it does not necessarily follow that
because the law is silent as to be presented for payment that the result should be
different from the case of presentment for acceptance. The consideration
involved in both cases are the same.
Campos: The drawee has 24 hours after presentment within which to make up
his mind whether to accept the bill or not. The 24-hour period is counted from
delivery and not from demand for the return of the bill. Should he return it
unaccepted within 24 hours, the bill is not necessarily dishonored because he can
still accept it until the expiration of the 24th hour. Should he return it before the
24-hour period, and fails to accept within such period or within such other period
as the holder may allow, the holder must treat the bill as dishonored or else he
will lose his right against prior parties. If the drawee returns it with a statement
of refusal to accept, then even if the 24 hour period has not lapsed, the bill should
then be considered dishonored.
Sebastian: There is constructive acceptance when upon presentment, the
drawee destroys the bill or failed to act on presentment after 24 hours.
Sec. 141. Qualified acceptance. - An acceptance is qualified which is:

(a) Conditional; that is to say, which makes payment by the
acceptor dependent on the fulfillment of a condition therein
stated;
(b) Partial; that is to say, an acceptance to pay part only of the
amount for which the bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a particular
place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but not of
all.
Agbayani: A qualified acceptance is one which in express terms varies the effect
of the bills as drawn.
Campos: Under Section 141, the following are qualified acceptance:
1) Conditional The condition does not qualify the order to pay but only the
acceptance. Thus, the instrument is still negotiable and does not violate
Section 1(b).
General
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2) Partial A partial acceptance does not affect the negotiability of the

instrument, unlike a partial indorsement which under Section 32 does not
operate as a negotiation of the instrument.
3) Local Acceptance is qualified as to place of payment.
4) As to Time
5) As to Drawee If the bill is addressed to more than one drawee and only one
of them should accept, it is treated as qualifiedly accepted.
performed other than payment of money. And lastly, it must communicated and
delivered to the holder. Until there is delivery, the drawee/acceptor has every
right to revoke the acceptance. Such peron has the time until delivery before the
acceptance becomes permanent. Take note that if the drawee/acceptor asks for
time to decide whether or not he will accept the instrument, he cannot hold the
instrument. He must return the instrument to the holder and say when to come
back for the decision.
A holder need not take a qualified acceptance but instead may insist on a general
or unqualified acceptance, and upon his failure to obtain the latter, may treat the
bill as dishonored. However, if he agrees to a qualified acceptance, he should give
notice thereof to the drawer and indorsers, otherwise the latter will be discharged
from liability. If notified and they do not express their dissent within a reasonable
time, they remain liable on the instrument.
FORM OF ACCEPTANCE
Although the acceptance of a bill may be conditional, an acceptance of a future

bill must be unconditional, otherwise it will not be considered an acceptance.
Thus, a collateral writing stating that the defendant is authorizing A to make
sight drafts if necessary for commissions due from time to time as they accrue, is
not an acceptance under Section 135, because the agreement is conditional.
ACCEPTANCE OF CHECKS
Agbayani: In general, acceptance is not required for checks because they are
payable on demand. Payment of a check does not include or imply its acceptance
in the sense that this word is used in Section 62. In the words of the law, the
acceptance of a bill the signification by the drawee of his assent to the order of the
drawer, which, in the case of a check, is the payment on demand of the sum of
money. Upon the other hand, actual payment of the amount of a check implies
not only an assent to said order of the drawer and recognition of the drawees
obligation to pay the aforementioned sum, but also a compliance with such
obligation.
Sebastian: If the acceptance seeks to change the agreement between the payee
and the drawer, the acceptance is qualified. A holder may treat the bill as
dishonored and must give notice of dishonor to all parties secondarily liable. For
a foreign bill, the additional process of protest must be complied. However, A
qualified acceptance does not always result to a dishonored bill.
Agbayani: Without the signature of the drawee, he would not be bound,

pursuant to the principle enunciated in Section 18.
REQUISITES OF ACTUAL ACCEPTANCE
DELIVERY OF ACCEPTANCE
Agbayani: Actual acceptance must be (1) in writing, and (signed by the drawee.
In addition, (3) it must not express that the drawee will perform his promise by
another means than the payment of money and (4) it must be communicated or
delivered to the holder.
Agbayani: The acceptance is incomplete until delivery or notification. And the

acceptor or drawee who has not communicated his acceptance or transmitted the
accepted bill to the holder, may revoke an acceptance before delivery and cancel
the written acceptance.
The acceptance cannot be made orally because sound public policy requires some
substantial and tangible evidence of contract, and more reliable in its nature than
the statement or recollection of witnesses. An oral acceptance is not binding on
the drawee.
EFFECTS OF ACCEPTANCE
Campos: Under Section 132, the requisites for a valid acceptance are: (1) it must
be in writing; (2) it must be signed by the drawee, and (3) it must not change the
implied promise of the acceptor to pay only in money.
Sebastian: An acceptance must be in writing to avoid relying on the recollection
of the parties with regard to their liabiity on the insturment. It must be signed by
the drawee to manifest his consent. It must not express that the obligation will be
SIGNATURE OF DRAWEE
Agbayani: Upon acceptance, the drawee becomes liable on the bill. The bill
becomes in effect a note, the acceptor standing in the place of the maker, and the
drawer, in the place of the first indorser. But should the drawee refuse to accept,
the payee or other holder has no recourse against him but only against the drawer
and indorsers, if any.
Campos: Acceptance, if given, will retroact to the date of presentation. Thus, if a
bill is payable 10 days after sight, and it is presented at 10:00 am on June 1, the
drawee has up to 10:00 am June 2 to accept the bill. If he accepts the bill on June
2, the date of maturity will fall on June 11 and not on June 12.
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ACCEPTANCE OF BILL ON ITS FACE

Sec. 133. Holder entitled to acceptance on face of bill. - The holder of
a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused, may
treat the bill as dishonored.
Campos: An acceptance in order to be binding need not be written on the

instrument itself, but may be written on a separate instrument as in a letter or by
a telegram. An acceptance on a separate paper may be either an acceptance of an
existing bill or an acceptance of a future bill. The first is sometimes referred to as
an extrinsic acceptance and the second is a virtual acceptance. To be
operative, it must identify the bill to which the acceptance refers, and must be
clear and unequivocal.
Agbayani: The holder has a right to require that the acceptance must be written
on the bill itself. If the drawee refuses, the holder may treat the bill as
dishonored, and he must, therefore, give notice of dishonor. Otherwise, persons
secondarily liable are discharged. This section is not confined to sight bills but is
applicable to all bills of exchange.
Sebastian: When an acceptance is made on a separate instrument, it is deemed

to be an acceptance only with respect to people who saw and relied on the
acceptance.
How acceptance made
Generally written on the instrument itself.

o To avoid creating doubt on the acceptance
Acceptance by means of telegram

o According to agbayani, this will do.
o AMS: this creates a lot of risk. The law gives the holder the
right to demand that the acceptance be made on the
instrument, otherwise, he may consider the instrument
dishonored.
Sec. 135. Promise to accept; when equivalent to acceptance. - An

unconditional promise in writing to accept a bill before it is drawn is
deemed an actual acceptance in favor of every person who, upon the
faith thereof, receives the bill for value.
ACCEPTANCE BY SEPARATE INSTRUMENT

Sec. 134. Acceptance by separate instrument. - Where an acceptance
is written on a paper other than the bill itself, it does not bind the
acceptor except in favor of a person to whom it is shown and who, on
the faith thereof, receives the bill for value.
Agbayani: Acceptance may be made (1) on the bill itself, or (2) on a separate
paper. If it is made on a separate paper (a) it may be accepted as to existing bill or
(b) it may be an acceptance as to a non-existing bill. If the bill is non-existent, the
acceptance on a separate paper must comply with the following requirements:
1) that the contemplated drawee shall describe the bill to be drawn, and
promise to accept it;
2) that the bill shall be drawn within a reasonable time after such promise is
written; and
3) that the holder shall take the bill upon the credit of the promise.
If the acceptance is on a separate paper, it binds only those to whom it was shown
and who, on faith thereof, receive the bill for value.
PROMISE TO ACCEPT
Agbayani: The variance in wording between Sections 134 and 135 should,
however, be noted. Section 134 provides that an extrinsic acceptance must be in
writing and is good only to persons to whom it is shown; while Section 135
provides that a promise to accept is good to any person who upon faith thereof
receives the bill for value. Accordingly, under Section 135, it does not seem
necessary that the separate acceptance be shown. It is enough that the bill is
received on faith of the separate acceptance.
Sebastian: This section contemplates that the bill is accepted even before it
could be written. The acceptance here is binding on all persons who relied on the
acceptance even if they have not seen the instrument. For there to be an
acceptance, the following must concur:
1)
the acceptance must refer to a bill yet to be drawn;
2) the acceptance is in writing and describes the bill to be accepted;
3) there is a promise to accept the bill
4) the bill is executed within a reasonable period of time because advance
acceptance is worthless without the bill being made; and
5) the holder takes the bill on the faith of the forward acceptance.
TIME TO ACCEPT (24-HOUR RULE)
Sec. 136. Time allowed drawee to accept. - 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.
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Agbayani: The time allowed begins from the time of delivery and not after
demand for a return of the bill and the time for returning the bill to the holder
does not begin to run from the demand for its return but from the date of
delivery.
A drawee bank is not entitled to 24 hours to decide whether to pay a check or not
because a check is presented for payment, not acceptance. But of course, if the
check is presented for certification, this ruling will not apply, as certification is
equivalent to acceptance.
Sebastian: As a rule, a drawee has 25 hours to accept or not. However, the
drawer is not prohibited from giving the drawee a longer period of time to decide.
When the drawee accepts at a later date, the belated acceptance retroacts to the
date of presentment. Without this, failure of the drawee to accept within 24 hours
is deemed an acceptance.
As a rule, acceptance should be done at the due date. However, nothing prevents
an instrument from being discharged by payment. Thus, a drawee can accept the
bill at any time prior to the instrument being discharged by payment.
Sec. 142. Rights of parties as to qualified acceptance. - The holder

may refuse to take a qualified acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as dishonored by nonacceptance. Where a qualified acceptance is taken, the drawer and
indorsers are discharged from liability on the bill unless they have
expressly or impliedly authorized the holder to take a qualified
acceptance, or subsequently assent thereto. When the drawer or an
indorser receives notice of a qualified acceptance, he must, within a
reasonable time, express his dissent to the holder or he will be
deemed to have assented thereto.
Agbayani: The holder has a right to require the drawee to accept the bill
without qualification. If the drawee refuses, the holder can treat the bill as
dishonored by non-acceptance. Accordingly, the holder must give notice of
dishonor.
Where the holder takes a qualified acceptance, the drawer and indorsers are
discharged because the drawer and the indorsers warrant that the bill would be
paid as drawn, or as indorsed by them, and a qualified acceptance would vary
their contract without their consent.
ACCEPTANCE OF INCOMPLETE BILL

Sec. 138. Acceptance of incomplete bill. - A bill may be accepted
before it has been signed by the drawer, or while otherwise
incomplete, or when it is overdue, or after it has been dishonored by a
previous refusal to accept, or by non payment. But when a bill payable
after sight is dishonored by non-acceptance and the drawee
subsequently accepts it, the holder, in the absence of any different
agreement, is entitled to have the bill accepted as of the date of the
first presentment.
But if the drawer and the indorsers expressly or impliedly give their consent to
the qualified acceptance, they are not discharged. And a drawer or an indorser
will be considered to have consented if, after receiving notice of qualified
acceptance, he does not express his dissent thereto within a reasonable time.
Agbayani: Acceptance may be made (1) before the bill has been signed by the
drawer; (2) even when the bill is otherwise incomplete; (3) even when the bill is
over due; or (4) even after it has been dishonored by non-acceptance or by nonpayment.
Campos: Although a bill is usually accepted a reasonable time after execution,
Section 138 allows acceptance to be made while it is incomplete. This section
does not mean that one to whom the bill is transferred while incomplete may
become a holder in due course. Under the same section, a bill may be accepted
even after it is overdue or dishonored, since an instrument does not lose its
negotiability by the mere fact that its maturity date has passed or that the drawee
has refused to accept or pay it.
RIGHTS OF PARTIES AS TO QUALIFIED ACCEPTANCE
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Campos: Checks are not meant to be presented for acceptance or certification

and if so presented and certification refused, they will not be deemed dishonored.
The same rule applies to bills payable on demand.
PRESENTMENT FOR ACCEPTANCE

PRESENTMENT DEFINED
Agbayani: It is the production of a bill of exchange to the drawee for his
acceptance.
Presentment for acceptance is not necessary to render any party liable except in
the three cases enumerated in Section 143. In those three cases, to charge persons
secondarily liable, it is necessary (1) to make presentment for acceptance or (2) to
negotiate the bill within reasonable time.
So, even when no presentment for acceptance is made, if the bill is negotiated
within a reasonable time, the persons secondarily liable thereon are not
discharged.
Of course, there is nothing wrong in making a presentment for acceptance in the
other cases. Indeed, it is a usual course to present such bills for acceptance. And if
the bill is dishonored by non-acceptance, the holder may treat the bill as if it had
required acceptance.
Campos: Presentment for acceptance refers to bills of exchange only. It means
the production or exhibition of the bill of exchange to the drawee for the purpose
of obtaining his acceptance or his assent to the order of the drawer.
Sebastan: When you present a bill for acceptance, it means the physical
production of the bill where you produce and show it to the person whom you are
requesting to accept. Therefore, presentment for acceptance is always to the
drawee of the bill.
WHEN PRESENTMENT IS REQUIRED
Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence
or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to
render any party to the bill liable.
Sebastian: As a rule, presentment for acceptance is not necessary in order to

make a person liable on the instrument. This is different in contract laws where
demand is necessary to make a person liable to pay and there are specific
instances where demand is waived.
WHEN PRESENTMENT IS EXCUSED
Sec. 148. Where presentment is excused. - Presentment for
acceptance is excused and a bill may be treated as dishonored by nonacceptance in either of the following cases:
(a) Where the drawee is dead, or has absconded, or is a fictitious
person or a person not having capacity to contract by bill.
(b) Where, after the exercise of reasonable diligence, presentment
can not be made.
(c) Where, although presentment has been irregular, acceptance
has been refused on some other ground.
Agbayani: Where presentment cannot be made notwithstanding the exercise of
reasonable diligence, presentment is excused.
An irregular presentment in which acceptance is refused on some other ground is
where presentment is made on a Sunday, and therefore, it is irregular but the
acceptance is refused on the ground that the drawer has no funds in the hands of
the drawee.
Campos: A delay of the mails is sufficient excuse for omission to immediately
present a bill for acceptance, and a presentment immediately after its reception is
in time to charge the indorsers.
When a bill is presented after business hours or on a holiday, and the drawee
refuses to accept because the drawer has no funds with him, although the
presentment may have been irregular, the bill may be treated as dishonored
under Section 148(c).
Sebastian: If the drawee absconded there is no more need for presentment.
Presentment is also not needed if the drawee is a fictitious person.
Presentment is also excused when it cannot be made even with reasonable
diligence.
RELEASE OF DRAWER AND INDORSER
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Sec. 144. When failure to present releases drawer and indorser. Except as herein otherwise provided, the holder of a bill which is
required by the next preceding section to be presented for acceptance
must either present it for acceptance or negotiate it within a
reasonable time. If he fails to do so, the drawer and all indorsers are
discharged.
Sec. 147. Presentment where time is insufficient. - Where the holder
of a bill drawn payable elsewhere than at the place of business or the
residence of the drawee has no time, with the exercise of reasonable
diligence, to present the bill for acceptance before presenting it for
payment on the day that it falls due, the delay caused by presenting
the bill for acceptance before presenting it for payment is excused and
does not discharge the drawers and indorsers.
Sebastian: If presentment is required it must be done within reasonable time to
protect persons secondarily liable. By delaying, you are prolonging agony of the
drawer. By presenting on time, you will know whether or not the drawee will
accept. Thus, the sooner that you know he declines, the earlier you can prepare
claim against parties from whom you are entitled to reimbursement.
PRESENTMENT HOW MADE
Sec. 145. Presentment; how made. - Presentment for acceptance must
be made by or on behalf of the holder at a reasonable hour, on a
business day and before the bill is overdue, to the drawee or some
person authorized to accept or refuse acceptance on his behalf; and
(a) Where a bill is addressed to two or more drawees who are not
partners, presentment must be made to them all unless one
has authority to accept or refuse acceptance for all, in which
case presentment may be made to him only;
(b) Where the drawee is dead, presentment may be made to his
personal representative;
(c) Where the drawee has been adjudged a bankrupt or an insolvent
or has made an assignment for the benefit of creditors,
presentment may be made to him or to his trustee or assignee.
Agbayani: Presentment for acceptance must be made: (1) before the bill is
overdue, and (2) within reasonable time after acquisition thereof.
Generally, presentment must be made to the drawee or some person authorized
to accept or refuse acceptance on his behalf. Where there are two or more
drawees, presentment must be made to both of them unless (1) one is duly
authorized to accept or refused acceptance, or (2) they are partners, subject to the
limitations set forth in our partnership law. Under Section 141(e), acceptance by
one drawee where there are two or more is a qualified acceptance.
Paragraph (b) of Section 145 seems to be merely permissive since, by Section
148(a), presentment is excused where the drawee is dead.
As to paragraph (c), since there is no section which excuses presentment in case
the drawee has been adjudged bankrupt or an insolvent or has made an
assignment for the benefit of the creditors, the word may in said paragraph
indicates merely a permission to adopt either one of the two alternative methods
of presentment statednot permission to omit it altogether.
Campos: Unlike the presentment for payment, the law does not prescribe the
place where presentment for acceptance should be made. It would seem therefore
that as long as such presentment is made to the proper person/s in accordance
with Sec. 145, it would not matter where it takes place.
Where the drawee is dead, presentment for acceptance to his personal
representative is merely permissive, since Section 148(a) excuses presentment.
REASONABLENESS OF TIME OF PRESENTMENT
N.O. Behn Meyer & Co. v HSBC In this case, the instrument was presented
for acceptance more than a month. It was held that there was unreasonable delay
which discharges parties secondarily liable.
ACCEPTANCE OF JOINT DRAWEES
Sebastian: If there are 2 or more drawees, presentment must be made to all of
them. This is the rule when drawees are not partners. If they are partners,
presentment to one is good enough.
RULE IF DRAWEE IS DEAD
Agbayani: Where the drawee is dead, presentment for acceptance is not
necessary. Hence, it seems that under Section 145(b), the presentment mentioned
there to be made to the personal representative of the deceased drawee is merely
optional. Presentment is excused in this case an in case the drawee has
absconded, or is fictitious or a person not having capacity to contract because it
would then be futile.
Sebastian: Presentment for acceptance to a deceased drawee is not mandatory.
Presentment to personal representative cannot be construed as a mandatory
requirement of law.
Presentment for Acceptance
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Presentment for Payment

107
presentment to representative is
optional
the liabilities of parties secondarily
liable are preserved
DLSU LAW
presentment to representative is
madatory
failure to do so would discharge parties
secondarily liable
that he wants no liability, it is equally clear that he is not willing to pay. Thus,
once the instrument is declined for non-acceptance, there is no need to present
the instrument to the drawee for payment.
DUTY OF HOLDER OF A DISHONORED BILL
RULE IF DRAWEE IS INSOLVENT

DAYS PRESENTMENT CAN BE MADE
Sec. 146. On what days presentment may be made. - A bill may be
presented for acceptance on any day on which negotiable instruments
may be presented for payment under the provisions of Sections
seventy-two and eighty-five of this Act. When Saturday is not
otherwise a holiday, presentment for acceptance may be made before
twelve o'clock noon on that day.
Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly
presented for acceptance and is not accepted within the prescribed
time, the person presenting it must treat the bill as dishonored by
nonacceptance or he loses the right of recourse against the drawer
and indorsers.
Agbayani: Where the bill is dishonored by non-acceptance, the holder must
give notice of dishonor and protest, when required. Otherwise, the drawer and
the indorsers will be discharged.
Agbayani: The only difference between Section 72 and 85 is that under Section
146, there is no distinction between instruments payable at a fixed or
determinable future time and instruments payable on demand. Where
presentment is for acceptance, it may be made for all kinds of bills before 12 noon
on Saturday provided that day is not a holiday.
Notice of Dishonor
Sebastian: There is no difference between bill payable on demand and bill

payable on future determinable time. Presentment must be done within
reasonable time. Otherwise, parties secondarily laible will be discharged.
However, tardiness or delay in presentment can be excused if you did not have
sufficient time to do it.
Sec. 151. Rights of holder where bill not accepted. - When a bill is
dishonored by nonacceptance, an immediate right of recourse against
the drawer and indorsers accrues to the holder and no presentment
for payment is necessary.
DISHONOR BY NON-ACCEPTANCE
Sec. 149. When dishonored by nonacceptance. - A bill is dishonored
by non-acceptance:
(a) When it is duly presented for acceptance and such an
acceptance as is prescribed by this Act is refused or can not be
obtained; or
(b) When presentment for acceptance is excused and the bill is not
accepted.
Protest
RIGHT OF RECOURSE
Agbayani: When a bill is dishonored by non-acceptance, there is no necessity of

making a presentment of the bill for payment. But, of course, if after the previous
non-acceptance, the bill is subsequently accepted, presentment for payment is
necessary. And when the bill has been accepted for honor, to charge the acceptor
for honor, presentment for payment is also necessary.
The holder, after giving notice of dishonor, and protesting when required, can
immediately file an action against the parties secondarily liable on the bill. This is
true even when the bill is payable at a fixed or determinable future time and the
date of maturity has not yet arrived. The holder need not wait for that day to
arrive.
Campos: When a bill is dishonored by non-acceptance there is no need to

present the instrument again for payment, and the holder acquires an
immediate right of recourse against the persons secondarily liable, provided of
course he gives them the notice of dishonor as prescribed by Section 89.
Sebastian: When an instrument is dishonored by non-acceptance, it is clear
that the drawee is not willing to be liable for it. If the drawee has made it clear
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Agbayani: Protest is required only for foreign bill, but not for inland bills or
notes. However, they may also be protested if desired. Omission of protest, where
protest is required, will discharge the drawer and the indorsers.
PROTEST
PROTEST DEFINED
Agbayani: By protest is meant a formal statement in writing made by a notary
under his seal of office at the request of the holder of a bill or note, in which it is
declared that the same was on a certain day presented for payment (or
acceptance as the case may be), and such payment (or acceptance) was refused,
whereupon the notary protests against all parties to such instrument and declares
that they will be held responsible for all loss or damage arising from its
dishonor. In its popular sense, it means all the steps or acts accompanying the
dishonor of a bill or note necessary to charge an indorser.
Campos: Protest is the testimony of some proper person, usually a notary and
usually in the form of an affidavit, that the regular legal steps to fix the liability of
drawer and indorsers have been taken. This is done on the day of dishonor.
Sebastian: Protest is actually a notarial act; a written certificate signed by the
notary public which was meant to be a statement which is made at the request of
the holder of an instrument. The protests states that a bill was presented for
payment or acceptance, that it was refused. The notary protests against all
parties, and the holder reserves the right to hold all parties liable.
In protest, the holder goes to notary public, shows him that the bill of exchange
was due, it was presented on that same day, and it was dishonored. Then the
notary will write a certificate of protest which states that presentment was made
and it was declined, and that all parties secondarily liable are put on notice.
This is mandatory for foreign bills because protest ensures that there was
compliance with foreign laws applicable. For inland bills, protest is optional.
Thus, part of due diligence is to determine whether the bill was inland or foreign
to determine if protest is needed.
NECESSITY OF PROTEST
Sec. 152. In what cases protest necessary. - Where a foreign bill
appearing on its face to be such is dishonored by nonacceptance, it
must be duly protested for nonacceptance, by nonacceptance is
dishonored and where such a bill which has not previously been
dishonored by nonpayment, it must be duly protested for
nonpayment. If it is not so protested, the drawer and indorsers are
discharged. Where a bill does not appear on its face to be a foreign
bill, protest thereof in case of dishonor is unnecessary.
Protest is required: (1) where the foreign bill is dishonored by non-acceptance;

(2) where the foreign bill is dishonored by non-payment it not having been
previously dishonored by non-acceptance; (3) where the bill has been accepted
for honor, it must be protested for non-payment before it is presented for
payment to the acceptor for honor; (4) where the bill contains a referee in case of
need, it must be protested for non-payment before it is presented for payment to
the referee in case of need.
Protest is required: (1) for uniformity in international transactions because most
countries require it and (2) in order to furnish authentic and satisfactory
evidence of the dishonor to the drawer who, from his residence abroad, may
experience difficulty in verifying the matter and may be forced to rely on the
representations of the holder.
Sebastian: Protest is necessary when (1) the foreign bill is dishonored by nonacceptance or by non-payment, or was accepted for honor but was not paid; (2)
or there is a referee in case of need.
Sec. 157. Protest both for non-acceptance and non-payment. - A bill
which has been protested for non-acceptance may be subsequently
protested for non-payment.
Agbayani: Where a bill has already been protested for non-acceptance, protest
for non-payment is merely optional. Under Section 151, after the bill has been
dishonored by non-acceptance, presentment for payment is not necessary.
Campos: In addition to due presentment, dishonor and due notice of dishonor,
formal protest of dishonored foreign bills is a condition precedent to the holders
right of recovery from secondary parties. In the absence of such protest, the
secondary parties will be discharged. The necessity of protest is confined to
foreign bills of exchange which under Section 185 include foreign checks. It is not
necessary in foreign promissory notes because in the case of a note, the maker is
unconditionally liable, while in an unaccepted bill no party is liable unless there
has been due notice of dishonor.
HOW MADE
Sec. 153. Protest; how made. - The protest must be annexed to the bill
or must contain a copy thereof, and must be under the hand and seal
of the notary making it and must specify:
(a) The time and place of presentment;
(b) The fact that presentment was made and the manner thereof;
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(c) The cause or reason for protesting the bill;

(d) The demand made and the answer given, if any, or the fact that
the drawee or acceptor could not be found.
Agbayani: Where the instrument is presented for payment and payment is
refused, the instrument may be taken by a notary public to the party and the
party may state that he refuses to pay it; the notary makes a statement to that
effect and attaches his seal that it has been dishonored, and that he has protested
it for non-payment. The notary keeps this or he may send his sworn statement,
one copy to one person and one to the other. This is the protest. It is not the
notice of protest. The protest is a solemn declaration made by the notary public
that the paper has been dishonored.
Agbayani: After the notary protests the instrument, he sends notice to all the
parties on the instrument. He can do this in several ways. He might send it to the
person who sent the paper in for collection. Then the notary public would send
his notice of protest for the other parties on the instrument, to the last person on
the instrument, to the last person on the instrument, and he would say Notices
enclosed herewith to be sent to the other parties.
If the holder has sent notice to all the parties he is entitled to come in and recover
because he has performed his contract. He has sent notice to all the parties on the
instrument that he intends to recover against them.
BY WHOM MADE
Campos: In the above provision, protest means the certificate of the notary or
other person attesting to the acts constituting protest.
The certificate of protest is the same as a deposition. It is admissible as evidence
of the facts set forth in its terms and its production does away with the necessity
of proving these facts by witnesses in court. The main purpose therefore is to
furnish to the holder legal testimony of presentment, demand and notice of
dishonor, to be used in actions against the drawer and indorsers. However, it is
merely prima facie evidence and all facts stated therein may be disproved by
competent evidence showing the statements to be false.
Sec. 154. Protest, by whom made. - Protest may be made by:

(a) A notary public; or
(b) By any respectable resident of the place where the bill is
dishonored, in the presence of two or more credible
witnesses.
Campos: In making a formal protest, the notary public acts in a different
capacity from that in which he acts when making acknowledgment. In the latter
case, the notary attests to the fact that the affiant made a statement under oath.
He is not concerned with the truth or falsity of the statement.
Evidence of Protest
Agbayani: When suit is brought on the paper, it is absolutely necessary that
proof be shown. So when one comes to prove his case as the holder of an
instrument, he must prove that there has been a protest of the instrument that it
has been presented for payment or acceptance to the person liable and that it has
been refused. That is part of his case. And at the trial, this statement of the
protest by the notary is part of his case. It is the same as a deposition It can go in
as evidence anywhere and will prove the case, just as the same as a deposition.
The certificate is generally accepted as evidence of the facts set forth in its terms,
and its production obviates the necessity of proof of these facts by witness in
open court. The main purpose of the protest, therefore, is to furnish to the holder
legal testimony of presentment, demand, and notice of dishonor, to be used in an
action against the drawer and indorsers.
And the notarys certificate of protest is only evidence of those facts which are
stated therein which it is the duty of the notary to note in making presentment
and demand for payment. Collateral facts noted by the certificate must be proved
by other evidence.
Notice of Protest
Where the person making the protest is not a notary, it must be made in the
presence of two witnesses.
WHEN MADE
Sec. 155. Protest; when to be made. - When a bill is protested, such
protest must be made on the day of its dishonor unless delay is
excused as herein provided. When a bill has been duly noted, the
protest may be subsequently extended as of the date of the noting.
Agbayani: By the term duly noted is meant that the notary public jots down a
note on the bill, or a paper attached thereto, or in his registry book, consisting of
his initials or signature and those matters required to be stated in Section 153.
The noting must be made on the day of dishonor but it may be extended into a
formal protest afterwards. The protest may even be made at the trial. Thus,
suppose that a bill is dishonored on April 26, 1950. The protest need not be made
on April 26, 1950. But it must at least be noted. After that is done, the formal
protest may be made on May 10, 1950.
Campos: The protest must be made on the day of dishonor. The notation is for
the purpose of requiring the commitment of the facts to writing while they are
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fresh in the mind of the notary. He does not have to make the formal certificate of
protest on the same day the instrument is protested by him, if he makes a
notation on the bill to show that the instrument was dishonored and on what
date.
When the acceptor is declared bankrupt, he probably would not be able to pay for
the bill. The protest for better security is to give notice to the drawer and the
indorsers of this fact in order to enable them to make the necessary arrangements
so that they will not be held liable thereon and prevent loss of re-exchange.
Sebastian: If protest is delayed, it is possible that it will be excused if it can be

premised on circumstances beyond the control of the holder. Thus, protest does
not amount to actual dishonor.
Campos: Nothing in the section indicates that failure to protest for better
security would deprive the holder of any rights; neither does it indicate that the
holder acquires any additional rights. The purpose of the section must therefore
be merely to inform the drawer of the failure of the acceptor to enable the former
to arrange for the payment of the bill at maturity, as for example, for its
acceptance for honor.
WHERE MADE
Sec. 156. Protest; where made. - A bill must be protested at the place
where it is dishonored, except that when a bill drawn payable at the
place of business or residence of some person other than the drawee
has been dishonored by nonacceptance, it must be protested for nonpayment at the place where it is expressed to be payable, and no
further presentment for payment to, or demand on, the drawee is
necessary.
Agbayani: Generally, the protest must be made at the place where the
instrument is dishonored. The exception is where the bill is payable at a place
other than the residence of the drawee.
Sebastian: Protest is made in the place where the bill was dishonored. But if the
bill is payable at the place which is not the place or residence of the drawee, then
make the protest at the place where it is payable.
PROTEST FOR BETTER SECURITY
Sec. 158. Protest before maturity where acceptor insolvent. - Where
the acceptor has been adjudged a bankrupt or an insolvent or has
made an assignment for the benefit of creditors before the bill
matures, the holder may cause the bill to be protested for better
security against the drawer and indorsers.
Sebastian: If acceptor is declared insolvent without having the instrument

presented to him, the holder can immediately protest the bill based on the
insolvency of the acceptor. Protest will be given to persons secondarily liable.
This is called protest for better security.
WHEN PROTEST IS DISPENSED
Sec. 159. When protest dispensed with. - Protest is dispensed with by
any circumstances which would dispense with notice of dishonor.
Delay in noting or protesting is excused when delay is caused by
circumstances beyond the control of the holder and not imputable to
his default, misconduct, or negligence. When the cause of delay
ceases to operate, the bill must be noted or protested with reasonable
diligence.
Campos: The excuses for delay in making protest and the circumstances which
dispense with it are the same as those in notice of dishonor. It is also believed
that Section 159 incorporates not only Section 122 but also, by implication,
Sections 114 and 115 which set forth the circumstances when notice is not
necessary to charge the drawer and indorser.
LOST OR DESTROYED BILLS
Agbayani: One made by the holder against the drawer and indorsers where the
acceptor has been adjudged a bankrupt or an insolvent or has made an
assignment for the benefit of creditors before the bill matures. Such a protest is
not necessary to charge the drawer and the indorsers. It is optional on the part of
the holder.
Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or
destroyed or is wrongly detained from the person entitled to hold it,
protest may be made on a copy or written particulars thereof.
Agbayani: Loss or destruction of the bill does not excuse the making of protest.
A protest for better security must be made: (1) after acceptance; (2) but before the
date of maturity; (3) when the acceptor has been adjudged bankrupt or insolvent
or has made an assignment for the benefit of creditors.
Campos: This provision is in consonance with the general principle that the loss
of an instrument does not affect the rights and liabilities of parties thereto, and
the contents of the instrument may be proven as in other cases of lost documents.
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Sebastian: The burden of evidence is on the part of holder to prove existence of

the instrument and the right to collect based on the instrument.
ACCEPTANCE FOR HONOR

Campos: Acceptance for honor is proper only after a bill has been protested for
dishonor by non-acceptance or for better security. It is made to save the credit of
some party or parties to an instrument. If the name of a referee in case of need is
inserted in the bill, the holder may resort to him in case of dishonor, and his
acceptance would be an acceptance for honor.
The general effect of an acceptance for honor is to make the acceptor liable on the
bill to the holder and all parties subsequent to the party for whose honor he
accepted. However, his liability is not absolute but merely conditioned on the
drawees failure to pay upon presentment at maturity, after which a protest must
be made and a notice of dishonor be given to the acceptor for honor.
Another effect of an acceptance for honor is that the holders rights against
secondary parties are postponed until the following conditions take place:
1) Presentment for payment to the drawee
2) Dishonor by such drawee
3) Dishonor to the acceptor for honor and secondary parties
4) Protest
5) Presentment to the acceptor for honor
6) Dishonor by him
7) Notice of dishonor to the secondary parties
The acceptor for honor, should he suffer damages due to his acceptance, has a
right of recourse against the party for whose honor he accepted and all parties
against whom the latter would have recourse.
Sebastian: Acceptance for honor is made to save the credit of a particular party
on a particular instrument. The risk of non-payment is greatly diminished
because a new party comes in who is presenting to pay the instrument.
ACCEPTANCE FOR HONOR DEFINED
Sec. 161. When bill may be accepted for honor. - When a bill of
exchange has been protested for dishonor by non-acceptance or
protested for better security and is not overdue, any person not being
a party already liable thereon may, with the consent of the holder,
intervene and accept the bill supra protest for the honor of any party
liable thereon or for the honor of the person for whose account the
bill is drawn. The acceptance for honor may be for part only of the
sum for which the bill is drawn; and where there has been an
acceptance for honor for one party, there may be a further acceptance
by a different person for the honor of another party.
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Agbayani: An acceptance of a bill made by a stranger to it before maturity,

where the drawee of the bill has refused to accept it, and the bill has been
protested for non-acceptance, or where the bill has been protested for better
security. Such an acceptance is also called acceptance supra protest. This is a
peculiar kind of acceptance. It most frequently happens when the original drawee
refuses to accept the bill, in which case a stranger may accept the bill for the
honor of some one of the parties thereto, which acceptance will insure the benefit
of all the parties subsequent to him for whose honor it was accepted.
An acceptance for honor is done to save the credit of the parties to the
instrument or some party to it, as the drawer, drawee, or indorser, or somebody
else. Someone desires to save the credit of another on the bill and he does so by
writing accepted on the bill. The court holds that consideration is presumed
and the presumption is that he does have funds or money of the party for whose
honor he accepts.
Agbayani: It is essential that the acceptor for honor appear before a notary
public and declare that he accepts the protested bill in honor of the drawer or
indorser, as the case may be, and that he will pay it at the appointed time. An
acceptance for honor then, is properly made by the acceptor appearing before a
notary public and declaring his intention to accept for the honor of some one or
more of the parties and subscribing to some such expression of his intention as
accepted for the honor of A
Sebastian: An acceptance for honor is made by executing a written instrument
saying that the acceptor is accepting for honor and for the benefit of a party to the
instrument. Failure to to identify in whose honor, the acceptance is deemed for
the honor of the drawer. It must be signed. Lastly, it must declare that the protest
bill is accepted.
Payment by the acceptor for honor does not discharge the instrument. Until the
drawer reimburses the acceptor for honor, the instrument still subsists. Unless
the acceptor for honor discharges the instrument himself.
Requisites
Agbayani: The following are the four requisites established by law in order that
an acceptance for honor may be validly made:
1) The bill must have been previously protested (a) for non-acceptance or (b) for
better security.
2) The bill is not overdue at the time of the acceptance for honor.
3) The acceptor for honor must be a stranger to the bill. If he is a party, his
acceptance for honor would not give any additional security to the holder, as
such a party is already liable thereon.
4) The holder must give his consent.
There can even be several acceptors for honor for one person.
Requisites
Agbayani: Like an ordinary acceptance, acceptance for honor must be:
1) In writing and indicate that it is an acceptance for honor and
2) Signed by the person making the acceptance.
FOR WHOSE BENEFIT
Sebastian: Acceptane for honor is made only if the instrument has been
dishonored by non-acceptance. If the instrument is a foreign bill, dishonor by the
drawee must have been protested. It must be made before the bill becomes
overdue. If it is already overdue, payment for honor is the only way to save the
credit of the drawee.
For there to be accepatance for honor, the acceptor for honor must be a total
stranger to the instrument. Meaning he must have no liability on the instrument.
An acceptor for honor is a new party that is being made liable on the instrument.
Sec. 163. When deemed to be an acceptance for honor of the drawer. Where an acceptance for honor does not expressly state for whose
honor it is made, it is deemed to be an acceptance for the honor of the
drawer.
Sebastian: Acceptance for honor is made for the the person it was made and all
subsequent parties.
LIABILITY OF ACCEPTOR
Valuable consideration is presumed Otherwise, the transaction will be considered

a donation.
HOW MADE
Sec. 162. Acceptance for honor; how made. - An acceptance for honor
supra protest must be in writing and indicate that it is an acceptance
for honor and must be signed by the acceptor for honor.
Sec. 164. Liability of the acceptor for honor. - The acceptor for honor
is liable to the holder and to all parties to the bill subsequent to the
party for whose honor he has accepted.
Acceptor does not have to accept FULL responsibility.
At the end of the day, the acceptor is not the one with the utang.
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WARRANTIES OF ACCEPTOR FOR HONOR
or referee.
Sec. 165. Agreement of acceptor for honor. - The acceptor for honor,
by such acceptance, engages that he will, on due presentment, pay the
bill according to the terms of his acceptance provided it shall not have
been paid by the drawee and provided also that is shall have been duly
presented for payment and protested for non-payment and notice of
dishonor given to him.
PRESENTMENT FOR PAYMENT HOW MADE
Agbayani: The liability of an acceptor for honor is secondary, not primary or

absolute. He agrees to pay if: (1) presentment for payment has been made; (2) the
drawee does not pay; (3) the bill is protested for non-payment; and (4) notice of
dishonor is given to him.
Sebastian:
Section 165
According to the tenor of his
acceptance, provided:
1) it shall not have been paid by the
drawee
2) it shall have been duly presented for
payment and protested for nonpayment
3) Notice of dishonor given to him.
Sec. 168. Presentment for payment to acceptor for honor, how made.
- Presentment for payment to the acceptor for honor must be made as
follows:
(a) If it is to be presented in the place where the protest for nonpayment was made, it must be presented not later than the
day following its maturity.
(b) If it is to be presented in some other place than the place where
it was protested, then it must be forwarded within the time
specified in Section one hundred and four.
Sebastian: Presentment must be made the day following the maturity date. It
must be noted that presentment to acceptor for honor is presentment for
payment.
Section 60
According to the tenor of his
acceptance.
DELAY IN PRESENTMENT
Sec. 169. When delay in making presentment is excused. - The
provisions of Section eighty-one apply where there is delay in making
presentment to the acceptor for honor or referee in case of need.
DISHONOR OF THE BILL
PROTEST REQUIRED
Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is
dishonored by the acceptor for honor, it must be protested for nonpayment by him.
Sec. 166. Maturity of bill payable after sight; accepted for honor. Where a bill payable after sight is accepted for honor, its maturity is
calculated from the date of the noting for non-acceptance and not
from the date of the acceptance for honor.
Agbayani: The holder must protest for non-payment by the acceptor for honor
in order to fix the liabilities of the indorsers.
Sebastian: Noting here means in preparation of protest. This section

presupposes that the bill is foreign.
Sec. 167. Protest of bill accepted for honor, and so forth. - Where a
dishonored bill has been accepted for honor supra protest or contains
a referee in case of need, it must be protested for non-payment before
it is presented for payment to the acceptor for honor or referee in
case of need.
Sebastian: Try to collect first before going after acceptor for honor. Also,
protest for non-payment must first be made before going after acceptor for honor
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Sebastian: For there to be payment for honor, there must be intent to discharge
the insturmement and it is made at maturity. Also, it must identify the party for
whose account you are making payment.
PAYMENT FOR HONOR

Agbayani: Instead of simple negotiation to the person desiring to pay, payment
for honor may be availed of when the holder does not want to indorse the bill and
thereby incur the liabilities of an indorser or of one negotiating by mere delivery.
Campos: Under Sections 171 to 177, only a bill which has been protested can be
paid for honor and in order not to operate as a mere voluntary payment, it has to
be made before a notary after a declaration by the payor of his intention to pay
for honor and for whose honor he pays.
Reasonable period of time to notify person for whose honor you are paying.
Otherwise, payment will only be considered a voluntary payment thus giving the
payor right to be reimbursed.
PROCEDURE FOR PAYMENT FOR HONOR
Sec. 172. Payment for honor; how made. - The payment for honor
supra protest, in order to operate as such and not as a mere voluntary
payment, must be attested by a notarial act of honor which may be
appended to the protest or form an extension to it.
A payment for honor is not confined to an acceptor for honor but may be made by
anyone as long as the requisites are complied with. The effect of a payment for
honor is to discharge all parties subsequent to the party for whose honor it was
paid. Therefore, the holder who refuses such payment loses his right of recourse
against any party who would have been discharged by such payment. The payor
for honor is subrogated to all the rights and duties of the holder as regards the
party for whose honor he pays and all parties liable to the latter.
Sec. 173. Declaration before payment for honor. - The notarial act of
honor must be founded on a declaration made by the payer for honor
or by his agent in that behalf declaring his intention to pay the bill for
honor and for whose honor he pays.
The purpose therefore of a payment for honor is to free some party to the bill
from the obligation to make immediate payment on maturity. The holder gets
satisfaction, but the party for whom payment is made is not discharged and
remains liable to the payor for honor.
Sec. 174. Preference of parties offering to pay for honor. - Where two
or more persons offer to pay a bill for the honor of different parties,
the person whose payment will discharge most parties to the bill is to
be given the preference.
Sebastian: Payment for honor will only make payment only when the party
being protected is summoned to pay the instrument.
Sec. 175. Effect on subsequent parties where bill is paid for honor. Where a bill has been paid for honor, all parties subsequent to the
party for whose honor it is paid are discharged but the payer for
honor is subrogated for, and succeeds to, both the rights and duties of
the holder as regards the party for whose honor he pays and all
parties liable to the latter.
REQUISITES
Sec. 171. Who may make payment for honor. - Where a bill has been
protested for non-payment, any person may intervene and pay it
supra protest for the honor of any person liable thereon or for the
honor of the person for whose account it was drawn.
Agbayani: The following are the requisites established by law in order that a
payment for honor may validly be made: (1) the bill has been protested for nonpayment; and (2) any person, even a party thereto may pay supra protest. This is
distinguished from acceptance for honor in which the acceptor must be a stranger
to the bill.
(1) The payment must be attested by notarial act appended to the protest, or form
an extension to it; and (2) the notarial act must be based on a declaration by the
payer for honor.
Agbayani: The following is the procedure in making payment for honor:

1) The payer or his agent goes to a notary public and declares his intention
to pay the bill and for whose honor he pays.
2) The notary then records the declaration in the protest or in a separate
paper attached to it.
3) The payor then notifies the person for whose honor he pays within
reasonable time
If these formalities are not followed, the payment will operate as a mere
voluntary payment and the payor acquires only the rights stated in Articles 1236
to 1237 of the NCC and not those stated in Section 175.
Sebastian: Before payment for honor the bill must have been protested (if
inland bill, notice of dishonor is enough).
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HOLDER REFUSES PAYMENT
BILLS IN SET
Sec. 176. Where holder refuses to receive payment supra protest. Where the holder of a bill refuses to receive payment supra protest,
he loses his right of recourse against any party who would have been
discharged by such payment.
Sebastian: If the payee refused to be paid, all parties who would have benefited
from the payment will be discharged. As compared to the rule under the Civil
Code, refusal of the creditor to accept payment will not discharge all parties
liable.
RIGHTS OF PAYOR FOR HONOR
Sec. 177. Rights of payer for honor. - The payer for honor, on paying
to the holder the amount of the bill and the notarial expenses
incidental to its dishonor, is entitled to receive both the bill itself and
the protest.
Campos: The reason for drawing bills in a set was to obviate the difficulties
which would arise in case of miscarriage of the bill, since the means of
communication and transportation then were irregular and not very dependable.
It was thought that if drawn in set and each part sent by different means, chances
that one of the set would reach the payee or its destination would be greater. The
use of such bills in sets must have diminished since because of the facility and
regularity of our modern means of communication.
All rules applicable to bills of exchange generally are applicable to bills issued in
sets. But there are special rules rendered necessary because of the nature of bills
so issued. Problems arise at a point where a party transfers two or more parts of
the same bill to different persons.
DEFINITION
Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a
set, each part of the set being numbered and containing a reference to
the other parts, the whole of the parts constitutes one bill.
Agbayani: (1) He acquires the rights of the holder under Section 175, and in
addition, (2) the payer for honor has also the right to receive both the bill and the
protest. This is to enable him to enforce his rights against those who are liable to
him under Section 175.
Agbayani: One composed of various part, each part being numbered, and
containing a reference to the other parts, all of which parts constitute but one bill.
Sebastian: When someone makes payment for honor, that person is entitled to
reimbursement.
Bills in set are for the purpose of increasing the probability of the bill reaching its
destination. For this reason, each part is sent by different conveyances.
RIGHTS OF HOLDER
Sec. 179. Right of holders where different parts are negotiated. Where two or more parts of a set are negotiated to different holders
in due course, the holder whose title first accrues is, as between such
holders, the true owner of the bill. But nothing in this section affects
the right of a person who, in due course, accepts or pays the parts first
presented to him.
LIABILITY OF HOLDER WHO INDORSES TO DIFFERENT PERSONS
Sec. 180. Liability of holder who indorses two or more parts of a set
to different persons. - Where the holder of a set indorses two or more
parts to different persons he is liable on every such part, and every
indorser subsequent to him is liable on the part he has himself
indorsed, as if such parts were separate bills.
ACCEPTANCE OF BILLS IN SET
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Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be

written on any part and it must be written on one part only. If the
drawee accepts more than one part and such accepted parts
negotiated to different holders in due course, he is liable on every
such part as if it were a separate bill.
PAYMENT BY ACCEPTOR
Sec. 182. Payment by acceptor of bills drawn in sets. - When the
acceptor of a bill drawn in a set pays it without requiring the part
bearing his acceptance to be delivered up to him, and the part at
maturity is outstanding in the hands of a holder in due course, he is
liable to the holder thereon.
PROMISSORY NOTES AND CHECKS

PROMISSORY NOTE DEFINED
Sec. 184. Promissory note, defined. - A negotiable promissory note
within the meaning of this Act is an unconditional promise in writing
made by one person to another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where a note is drawn to the maker's
own order, it is not complete until indorsed by him.
Sebastian: Section 184 is nothing but a definition.
DISCHARGE OF BILL
You can make a promissory note payable to yourself. If the note was a nonnegotiable instrument, it would be a complete nullity because you cannot have a
contract with one party.
Sec. 183. Effect of discharging one of a set. - Except as herein

otherwise provided, where any one part of a bill drawn in a set is
discharged by payment or otherwise, the whole bill is discharged.
TYPES OF PROMISSORY NOTES
Agbayani: Subject to the exceptions in Sections 180, 181, and 182, if one part is
discharged, the whole bill is discharged. The reason is that the bill constitutes
only one bill.
Agbayani: The following are special types of promissory notes: (1) certificate of
deposit; (2) bonds (3) bank notes; and (4) due bills.
A promise, under seal, to pay money. But since all bonds of a single issue are
grouped together under a supplemental agreement known as trust indenture or
bond indenture, bonds may be defined as a series of instruments representing
units of indebtedness regarded as parts of one entire debt. The bond certifies that
the issuing company is indebted to the bondholder for the amount specified on
the face of the bond, and contains an agreement of the company to pay the sum at
a specified time in the future, and meanwhile, to pay a specified interest on the
principal amount at regular intervals, generally six months apart. Bonds are
negotiable if they conform with the Negotiable Instruments Law, particularly
Section 1 thereof.
Bonds are evidences of indebtedness of the issuer and are usually sold to raise
capital. They are really elaborate promissory notes. The following are distinctions
between an ordinary promissory note and a bond: (1) a bond is more formal in
character than the ordinary promissory note; (2) a bond runs for a longer period
of time than an ordinary promissory note; and (3) a bond is issued under
different legal circumstances.
There are various method of classifying bonds. The most important seems to be
according to the security of the bond, as it is in this that bonds differ
fundamentally among themselves. Based on the bond security, some of the
important classes of bonds are: (1) mortgage bonds; (2) equipment bonds; (3)
collateral trust bonds; (4) guaranteed bonds; (5) debentures; (6) income bonds.
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In addition, it may be stated that like shares, bonds may also be (7) convertible;
(8) redeemable; (9) registered bonds, and (10) coupon bonds.
Mortgage bond Those that are secured by a mortgage constituted on corporate
physical property. The property is conveyed to a trustee for the benefit of the
bondholders in case the interest or principal is defaulted.
Equipment bond Those that are secured by a mortgage or pledge of corporate
movable equipment, such as, in the case of railroads, their rolling stock. This is a
form of special lien bonds employed for the most part by railroads in order to
obtain money at low rates by pledging their movable equipment.
Collateral trust bonds Those that are not secured by lien on physical property of
the corporation but by a lien on securities deposited with a trustee as collateral.
Such securities may consist of shares or bonds issued by the subsidiaries of the
corporation issuing the collateral trust bonds. It may also consist of bonds of
small operating company which the issuing holding corporation controls. Finally,
it may consist of shares or binds of any corporation issuing the collateral trust
bond.
Guaranteed bonds One that is secured by the guaranty of a corporation other
than the one issuing it. It implies therefore, a double obligation, that of the
issuing corporation and that of the guaranteeing corporation.
income return, and are convertible at the owners request and under clearly
specified conditions into some less secure, more speculative form of security,
carrying a possibility of an increased income return. Accordingly, bonds are made
convertible into preferred and common stocks, secured bonds into debenture
bonds and stocks, preferred stocks into common stocks.
Redeemable bonds Those that give the privilege to the issuing corporation to
pay off the bonds even before the date of maturity. Without a provision for
redemption, the debtor corporation would have no right to pay off the bonds and
get rid of the restrictions of the mortgage or indenture before the bonds fell due.
Registered bonds Those which are issued to a specified person named therein
and the fact of issuance to him is registered in the books of the issuing
corporation. They are payable only to the person whose name is thus registered
and transferred only on presentation at the obligors office with a written
assignment duly executed by the registered owner. They are therefore generally
not negotiable.
Coupon bonds Those to which are attached a sheet of dated, numbered and
similarly printed coupons which the bondholder may cut off when due or
thereafter. Such coupons may be served and deposited in a bank, negotiated
before the maturity of the interest they represent, and transferred just like any
commercial paper. They are negotiable promissory notes if they conform to the
requirements of the Negotiable Instruments Law.
Debentures Those that are not secured by any specific mortgage, lien or pledge
on specific corporate property but by general credit of the corporation and
restrictive agreement. They are usually issued under a trust indenture and for a
shorter term than mortgage bonds. The disadvantage of debenture bonds is that
they rest on the general credit of the corporation rather than on the security of
specific corporate assets. Frequently they are protected by negative pledge
clauses which are agreements against new mortgages on the corporate assets or
those of subsidiary companies which do not equally secure the debenture.
A due bill is an instrument whereby one person acknowledges his indebtedness to

another.
Income bonds One the principal of which may or may not be secured by a
mortgage but the interest is payable only out of the net profit. The interest is
payable only out of net profit. The interest on income bonds which is payable out
of earnings only, may be cumulative or non-cumulative. It is thus seen that the
position of the holder of an income bond resembles that of the holder of preferred
shares, and that income bonds are the weakest of all obligations resting on
general credit.
It is a device of clearing house associations to save inconvenience and labor

incident to the setting of balances between the members of the association. The
certificates of due bills are issued, instead of the actual payment of money, by one
member of the association to another. They are not merely certificates of deposit
creating a contract of bailment but are as negotiable as checks payable to bearer,
or as promissory notes payable to order or bearer. Another term used is clearing
house certificate.
Convertible bonds One which confers on the holder the option of exchanging it
for a more speculative class of security, such as, for preferred shares or common
shares. The convertible bond and the convertible share are classed together as
convertible securities. Generally speaking, convertible securities are issued in a
more secure and less speculative form, a form of security with a fixed or limited
CHECK DEFINED
Bank notes are the promissory notes of the issuing bank payable to bearer on
demand and intended to circulate as money. They are regarded as cash ansd pass
from hand to hand without any evidence of title in the holder than that which
arises from possession. However, they are not money.
Sec. 185. Check, defined. - A check is a bill of exchange drawn on a

bank payable on demand. Except as herein otherwise provided, the
provisions of this Act applicable to a bill of exchange payable on
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demand apply to a check.

Agbayani: Subject to the exceptions in Sections 180, 181, and 182, if one part is
discharged, the whole bill is discharged. The reason is that the bill constitutes
only one bill.
Unlike a promissory note, a check is note a mere undertaking to pay an amount
of money. It is an order addressed to a bank and partakes of a representation that
the drawer has funds on deposit against which the check is drawn, sufficient to
ensure payment upon its presentation to the bank. There is therefore an element
of certainty or assurance that the instrument will be paid upon presentation. For
this reason, checks have become widely accepted as a medium of payment in
trade and commerce. Although not legal tender, checks have come to be
perceived as convenient substitutes for currency in commercial and financial
transactions. The basis or foundation of such perception is confidence. If such
confidence is shaken, the usefulness of checks as currency substitutes would be
greatly diminished or may become nil. Any practice therefore tending to destroy
that confidence should be deterred, for the proliferation of worthless checks can
only create havoc in trade circles and the banking community.
Campos: A check is an instrument which is in the form and nature of a bill of
exchange, but unlike an ordinary bill it is always payable on demand and always
drawn on a bank. If it is not drawn on a bank or is not payable on demand, it is
not a check. A depositor places money in his bank under an agreement that it
may be withdrawn anytime by his order. The order is evidenced by the check
which he draws and by which he expresses his desire to appropriate s much of his
money in the bank to the payee named therein. If negotiable in form, then a
check is a negotiable instrument subject to the same rules as the latter.
TYPES OF CHECKS
The following are special types of checks: (1) cashiers check; (2) managers
check; (3) memorandum checks; (4) certified checks; (5) crossed checks.
Republic v PNB A cashiers or managers check is a primary obligation of the
bank which issues it and constitutes its written promise to pay upon demand.
CROSS CHECKS AND ITS IMPLICATIONS
Sec. 186. Within what time a check must be presented. - A check must
be presented for payment within a reasonable time after its issue or
the drawer will be discharged from liability thereon to the extent of
the loss caused by the delay.
Agbayani: A check must be presented within a reasonable time after its issue.
The whole theory and use of a check points to its immediate payability. A
depositor places money with his bank or banker, where it is subject at any time to
his order; and by his check or order, he desires to appropriate so much of it to
another person, and the bank or banker, in consideration of its temporary use of
the money, agrees to pay it in whole, or in parcels, to the depositors order when
demanded. But he does not agree to contract to pay at a future day by acceptance
and the depositor cannot require it. Although under Section 185, a check is a bill
of exchange payable on demand, it is intended for immediate use and not to
circulate as promissory note. Therefore, the transfer of a check to successive
holders, where it is drawn and delivered in the place where the drawee bank is
located, does not extend the time for presentment. If the check is delivered on
one day and is not presented before the close of banking hours the next business
day, the drawer is discharged to the extent of any loss suffered from the failure to
present.
Test for reasonable time: Did the payee employ such diligence as a prudent man
exercises in his own affair?
Check Section 81 of the Negotiable Instruments Law provides that delay in
making presentment for payment is excused when the delay is caused by
circumstances beyond the control of the holder, and not imputable to his default,
misconduct, or negligence.
PRESENTMENT FOR PAYMENT
Delay in Presentment
Agbayani: A stale check is not presented for payment within a reasonable time
after its issue.
Under the law, when a check is not presented for payment within a reasonable
time after its issue, the drawer is discharged but only to the extent of the loss
caused by the delay. Hence, if no loss or injury is shown, the drawer is not
discharged. The only injury which would be sustained by the drawer in case of
presentment was not made within a reasonable time would be caused by the
failure of the bank subsequent to the delivery and prior to the presentement of
the check.
If a bank or banker still remains in good credit and is able to pay the check, the
drawer will still remain liable to pay the same, notwithstanding many months
may have elapsed since the date of the check and before the presentment for
payment and notice of dishonor. So, if the drawer, at the date of the check or at
the time of the presentment of it for payment, had no funds in the bank or
bankers hands, or if, after drawing the check and before its presentment for
payment and dishonor, he had withdrawn his funds, the drawer would remain
liable to pay the check, notwithstanding the lapse of time.
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Of course, where the check is dishonored by non-payment and the drawer is not
given notice of dishonor, the drawer is totally discharged from liability on the
instrument. But the drawer may be held liable by the payee on the basis of the
original consideration between him and said payee.
The maturity of the check for purpose of presentment for payment and of
dishonor in order to bind parties to it, is not identical with the maturity which
will charge subsequent holders with notice of defect of title or infirmities in the
instrument. In applying the rule, the courts are disposed to be governed rather by
the circumstances under which the plaintiff received the check than by the
precise age of the instrumentthat is good or bad faith exercised the prime
consideration. The result is that the plaintiff has been treated as a holder in due
course of checks transferred several months after issue.
Delay in the presentment of a check for payment will discharged the indorsers
thereon, whether or not he is injured by the delay as the law presume that he is
prejudiced. The bases of this statement are Section 84 and 186 of the Negotiable
Instruments Law. It was further held that Section 143 and 144 of the Negotiable
Instruments Law are not applicable to checks because these provisions have to do
with the presentment for acceptance of ordinary bills of exchange.
CERTIFICATION OF CHECKS
Sec. 187. Certification of check; effect of. - Where a check is certified
by the bank on which it is drawn, the certification is equivalent to an
acceptance.
Agbayani: A certification is an agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future time when presented for
payment. But a bank is not obligated to the depositor to certify checks. And the
drawee is not liable to the holder for refusal of the bank to certify checks. The
refusal of a bank does not dispense with the requirement of presentment for
payment since a check is of right presentable only for payment at the bank on
which it is drawn.
No particular form is required but it must be in writing. A telegram sent by a
bank that it would pay a certain check has been held to be a certification.
Stamping of the word certified, or good with the date of certification and the
signature of the officer of the bank authorized to certify checks, has been held as
sufficient certification. But the letters O.K. with the initials of the cashier of the
bank do not constitute a sufficient certification under modern banking practice.
Certification (1) is equivalent to acceptance and is the operative act that makes
the drawee bank liable. Furthermore, (2) it operates as an assignment of the
funds of the drawer in the hands of the drawee bank, and (3) if obtained by the
holder, it discharges persons secondarily liable.
Certification is equivalent to acceptance in that the drawee bank is bound on the
instrument upon certification. And it is immaterial to such liability in favor of a
holder in due course whether the drawer had funds or not in the bank or the
drawer was indebted to the bank for more than the amount of the check. Thus, a
certifying bank has all the liabilities stated in Section 62.
By the law merchant, the certificate of the bank of a check is equivalent to
acceptance. It implies that the check is drawn upon sufficient funds in the hands
of the drawee, that they have been set apart for its satisfaction, and that they shall
be so applied whenever the check is presented for payment. It is an
understanding that the check is good then, and shall continue good, and this
agreement is binding on the bank as its notes on circulation, a certificate of
deposit payable to the order of the depositor, or any other obligation it can
assume. The object of certifying a check, as regards both parties, is to enable the
holder to use it as money. The transferee takes it with same readiness and sense
of security that he would take the notes of the bank. It is advisable to perform its
important function until, in the course of business, it goes back to the bank for
redemption and is extinguished by payment. It cannot be doubted that the
certifying bank intended these consequences and it is liable accordingly. To hold
otherwise would render these important securities only a snare and a delusion. A
bank incurs no greater risk in certifying a check and in giving a certificate of
deposit. In well-regulated banks, the practice is at once to charge the check to the
account of the drawer, to credit it in a certified check account, and, when the
check is paid, to debit that account with the amount. Nothing can be simpler or
safer than this process.
The bank virtually says, that check is good, we have the money of the drawer here
ready to pay it. We will pay it now if you will receive it. The holder says No, I will
not take the money; you may certify the check and retain the money for me until
this check is presented.
The certification of a check is a means in constant and extensive use in the
business of banking and its effects and consequences are regulated by the law
merchant. Checks drawn upon banks or bankers, thus marked and certified, enter
largely into the commercial and financial transactions of the country; they pass
from hand to hand, in the payment of debts, the purchase of property, and in the
transfer of balances form one house and one bank to another. In the great
commercial center, they make up no inconsiderable portion of the circulation and
thus performed as useful, valuable, and an almost indispensible office.
To impart strength and credit to the paper by obtaining an acknowledgement
from the certifying bank that the drawer has funds therein sufficient to cover the
check and securing the engagement of the bank that the check will be paid upon
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presentation. A certified check has a distinctive character as a species of

commercial paper and performs important functions in banking and commercial
business. When a check is certified, it ceases to possess the character, or to
perform the functions, of a check, and represents so much money on deposit,
payable to the holder on demand. The check becomes a basis of creditan easy
mode of passing money from hand to hand and answers the purposes of money.
The drawer of a check contracts that it will be paid on presentment but not that it
will be certified. This is the theory on which the law discharging the drawer and
indorsers upon certification is based. Accordingly, certification differs from
acceptance in that the refusal of the drawee bank to certify does not amount of a
dishonor of the check. There is therefore no necessity of notice of dishonor by
non-acceptance or non-certification, and it is still necessary to make presentment
for payment which is not necessary in the case of a non-acceptance.
Acceptance and paymentare entirely different. If the drawee accepts the paper
after seeing it, and then permits it to go into circulation as genuine, on all the
principles of estoppel, he ought to be prevented from setting up forgery to defeat
liability to one who has taken the paper on the faith of the acceptance, or
certification. On the other hand, mere payment of the paper at the termination of
its course does not act as an estoppel. Payment is the final act which extinguish a
bill. Acceptance is a promise to pay in the future and continues the life of the bill.
Payment of a check do not amount to an acceptance so as to make the bank liable
to the payee.
Panlilio v David The letters O.K. with the initials of the cashier of a bank
written upon the face of a check drawn on that bank is not under modern banking
practice. Certifications of check are not made in such manner.
Where the certification is not obtained by the holder but by others such as the
drawer and indorsers, they are not discharged. Thus, in the following cases, the
drawers and indorsers are not discharged:
1) Where the certification is obtained by the drawer, even when the drawer
procures the certification at the instance of the payee
2) Where the certification is obtained by a person who is neither holder nor
drawer.
LIABILITY OF DRAWEE BANK
Sec. 189. When check operates as an assignment. - 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.
Agbayani: When the holder procures the check to be certified the check
operates as assignment of a part of the funds to the credit of the drawer bank.
As stated, by the certification of a check, the funds represented by the check are
transferred from the credit of the drawer to that of the payee or holder, and for all
intents and purposes, the payee or holder becomes the depositor of the drawee
bank with rights of one is such relation. But where the certification states the
check is to be void if not presented in 90 days from the date of acceptance, the
transfer of the corresponding funds from the credit of the depositor to that of the
payee is co-extensive with the life of the check, which in this case is 90 days. If
the check is not presented for payment within the period, it becomes invalid and
the funds are automatically restored to the credit of the drawer though not as a
current deposit but as a special deposit.
OBJECTIVE AND EFFECTS OF CERTIFICATION

Sec. 188. Effect where the holder of check procures it to be certified. Where the holder of a check procures it to be accepted or certified,
the drawer and all indorsers are discharged from liability thereon.
Agbayani: When the certification is obtained by the holder, the drawer and the
indorsers are discharged. The certification has the same effect as if the holder had
drawn the money re-deposited it and taken a certificate of deposit for it. Only the
indorsers at the time of the certification are discharged. Indorsers subsequent to
the certification are not discharged. In the Philippines, the practice is to certify
only at the request of the drawer.
The reason for the rule that a certification obtained by the holder discharges the
drawer and indorsers is that the moment the check is certified the funds cease to
be under the control of the original depositors and the pass under the control of
the person who procures the certification of the check drawn in his favor
A check of itself is not an assignment of the funds of the drawer in the bank. A
check drawn upon the bank in the usual form, not accepted or certified by its
cashier to be good, does not constitute a transfer of any money to the credit of the
holder.
Before acceptance or certification, the bank is not liable and the holder has no
right to sue the drawee bank on the check. Without acceptance or certification, as
provided by the statute, there is no privity of contract between the drawee bank
and the payee, or holder of the check.
The contract between a banker and a depositor is that of deposit. It is a separate
contract from that stated in the check that may be drawn by the depositor
agaisnat the depository bank. In this connection, it has been held that the relation
existing between a depositor and a bank is that of a creditor and debtor. The
implied contract between them being that the bank shall discharge the
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indebtedness by honoring such checks as the latter may draw upon it and cannot
debit the depositors account with payment not made by his order or direction.
By virtue of the contract of deposit between a banker and its depositor, the
banker agrees to pay checks drawn by the depositor provided that the said
depositor has money in the hands of the bank. And as to a depositor who has
funds sufficient to meet payment of a check drawn by him in favor of a 3rd party,
it has been held that he has a right of action against the bank for its refusal to pay
such check in the absence of notice to him that the bank has applied the funds
deposited in extinguishment of past due claims held against him. And the
depositor may maintain an action against the bank not only for a breach of
contract but also for a tort.
The drawee is not liable on a check as until accepted or certified by him, he is not
a party to instrument. However, on the basis of the contractual relation between
him as a drawee (depository) and the drawer (depositor), the drawee is obligated
to pay the persons designated by the drawer to be paid by the drawee.
Accordingly, if the drawee dishonors the check issued by the drawer, without
justifiable cause, the drawee is liable to the drawer for damages.
But where a drawer issues a check that is dishonored by the drawee bank upon a
mistake but rectifies it within 4 hours and the payee was paid in full, the drawer
is not entitled to moral damages. Temperate and moderate damages are proper
not for indemnification of loss suffered but for the vindication or recognition of a
right violated or invaded.
But a bank is under no obligation to make part payment to the amount of the
funds on deposit, on a check drawn by the depositor for an amount in excess of
such funds, nor has the payee of such a check any right to the actual balance on
deposit to the credit of the drawer. All of the checks presented to a bank for
payment in a bundle through a clearing house must be paid, or none, and, if
funds to pay all are insufficient, the payer bank may not select checks for
payment, thus permitting preference.
Where the drawee bank refuses to certify, or accept, or pay a check:
1) The holder has no action against it as a check is of itself not an assignment of
the funds of the drawer in the hands of the drawee bank, and the drawee bank
is not liable on the check until it has accepted or certified it.
2) Neither has the holder a right of action against the drawer where the drawee
bank refuses to accept or certify the check but he has a right of action against
the drawer where the drawee bank refuses to pay.
3) And while the holder has no right of action against the drawee bank which
refuses to pay, accept or certify a check, the drawer has a right of action
against the drawee bank so refusing. Such right of action, however, is not
based on the check drawn but on the original contract of deposit between
them.
Where a drawer of a check has prepared his check so negligently that it can be
easily altered without giving the instrument a suspicious appearance and
alterations are afterwards made, he can blame no one but himself and in such
case he cannot hold the bank liable for the consequences of his own negligence in
that respect; but negligence of the depositor in drawing a check will not excuse
the paying bank unless it is misled by such negligent act, and, if the drawer of a
check is first in fault and if his negligence contributes directly to its wrongful and
fraudulent appropriation, he is not entitled to recover.
When a depositors passbook has been written up and returned to him with
cancelled checks which have been charged to his account, it is his duty to examine
such checks which have been charged to his account, it is his duty to examine
such checks within a reasonable time, and if they disclose forgeries and
alterations, to report them to the bank, and failing in which he cannot, if his
failure results in detriment to the bank, dispute the correctness of payments
thereafter made by it on similar checks. This rule, however, assumes that the
bank itself has not been guilty of negligence in making the payment for when, by
the exercise of proper care, it could have discovered the alteration or forgery, it
must bear the loss notwithstanding that the depositor failed in his duty to
examine the accounts.
As a check of itself does not operate as an assignment of the funds to the credit of
the drawer, the latter may countermand payment before its acceptance or
certification. The order to stop payment must be communicated to the bank
before the check to which it refers has been paid; and in the absence of a rule of
the bank that stop orders must be in writing, a verbal notice is sufficient.
Gregorio Araneta, Inc. v Tuason de Paterno Under banking laws and
practice, by certification the funds represented by check were transferred from
the credit of the maker to that of the payee or holder, and, for all intents and
purposes, the latter became the depositor of the drawee bank with rights and
duties of one in such relation; the transfer of the corresponding funds from the
credit of the depositor to that of the payee had to be co-extensive with the life of
the checks, which in this case was 90 days. If the checks were not presented for
payment within that period, they became invalid and the funds were
automatically restored to the credit of the drawer though not as a current deposit
but as special deposit. Where the checks were never collected and the amount
against which they were drawn was not used or claimed, and since the account
was opened during the Japanese occupation and in Japanese currency, the
checks became obsolete as the account subject thereto is considered null and
void in accordance with Executive Order No. 49 of the President of the
Philippines.
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Negotiable Instruments Atty. Sebastian Esguerra

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Negotiable Instruments Atty. Sebastian Esguerra

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NEGOTIABLE INSTRUMENTS LAW

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

2) To preserve the law as nearly as possible as it then existed.

Sebastian: An instrument is negotiable when it transfers from one hand to

assignor in good faith does not

Indorser is not liable on his

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

unless it has been expressly stipulated

party primarily liable on a negotiable

Campos: The Negotiable Instruments Law divides negotiable instruments into

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

Checks A check is a bill of exchange drawn on a bank payable on demand.

DISTINCTIONS AMONG VARIOUS TYPES OF INSTRUMENTS

need not drawn on a deposit

"Bank" includes any person or association of persons carrying on

not needed to be presented for

"Delivery" means transfer of possession, actual or constructive,

CONCEPT OF REAL AND PERSONAL DEFENSES

"Person" includes a body of persons, whether incorporated or not;

"Value" means valuable consideration;

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

Sec. 193. Reasonable time, what constitutes. - In determining what is

FORMS OF NEGOTIABLE INSTRUMENTS

it must be in writing and signed by the drawer

Agbayani: The name of the person on whom a bill is

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

Campos: The signature is binding whether it is in ones handwriting, or printed,

Agbayani: In order to be negotiable, there must be a writing of some kind, for,

Sebastian: Identification of the maker or drawer is not an element of

Garcia v Lacuesta (90 Phil 489) Where a cross appearing in a document is

Sebastian: If the instrument is not in writing, there would be nothing to be

Sebastian: An electronic signature is equivalent to the functional signature,

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

which it was generated and in the light of all the relevant

signing or approving the electronic document unless the person relying

The words order and bearer are usually referred

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

word promise is not absolutely necessary. Any expression equivalent to a

money if the holder so wishes. Thus, an instrument is not negotiable if payable in

In a bill of exchange, words which are equivalent to an order are sufficient. A

If a contract contains a stipulation that payment is to be made in a currency other

Sebastian: A promise to pay is a written commitment of the maker to pay a sum

An instrument which contains an order or promise to do an act in addition to the

CONCEPT OF A SUM CERTAIN IN MONEY

Sebastian: a sum certain is a definite amount. It must definite because

Agbayani: The amount of money to be paid must be determinable by

One cannot draw a negotiable instrument that is not payable in money.

A note or bill, if it is to be negotiable, cannot be made payable in goods, wares, or

However, where an instrument entitles holder to demand something else in lieu

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

Agbayani: The sum payable is a sum certain even if it is to be paid with

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

An acceleration clause is a provision that upon default in payment of any

Sebastian: Payment in installments does not destroy negotiability of the

The delivery of promissory notes payable to order, or bills of

Payment of Attorneys Fees

In the absence of an agreement, either express or implied, payment means the

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

Campos: As a rule, unless the reference to the fund clearly indicates an

Fund for Payment

There are two cases: (1) the drawee

There is only one act, namely, (1) the

NEGOTIABLE INSTRUMENTS LAW REVIEWER SEBASTIAN

Keck v. Yakima Savings