COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
GENERAL CONCEPTS
Negotiable Instrument (NI)
A written contract or the payment o money
which complies with the requirements of Sec. 1
of the Negotiable Instruments Law (NIL), which
by its form and on its face, is intended as a
substitute or money and passes from hand to
hand as money, so as to give the holder in due
course (GC) the right to hold the instrument
free from personal defenses available to prior
parties (Reviewer on Commercial Law, Jose R.
Sundiang and Timoteo B. Aquino, 2006ed).
Requisites: (WU-POA)
1. Must be in Writing and signed by the
maker or drawer,
2. Must contain an Unconditional promise
o order to pay a sum certain in money;
3. Must be Payable on demand, or at fixed
or determinable future time;
4. Must be Payable on demand, or at a
fixed or determinable future time;
5. When the instrument is Adressed to a
drawee, he must be named or
otherwise indicated therein with
reasonable certainty (Sec. 1, NIL).
Functions:
1. It operates as a substitute of money.
2. It is a means of creating and
transferring credit.
3. It facilitates the sale of goods.
4. It increases the purchasing medium in
circulation. (Reviewer on Commercial
Law, Jose R. Sundiang and Timoteo B.
Auino, 2006ed)
5. It is a proof of transactions
Note: A NI although intended to be a substitute
for money, is NOT a legal tender; hence,
delivery of instrument does not operate as
payment.
However, a check that has been CLEARED AND
CREDITED to the account of the creditor shall be
equivalent to delivery to the creditor of cash
(Sec. 60, NCBA).
Governing Laws:
1. N.I.L. (ACT 2031) the provisions o the
NIL are not applicable if the instrument
involved are not negotiable.
2. Code of Commerce NI are governed
by the provisions o the CoC that were
not impliedly repealed by the NIL.
Note: The provisions on CROSSED CHECKS are
still in force because there is no provision in th
NIL that deals with crossed checks. (Chan Wan
v. Tan Kim, 109 Phil. 706 [1960])
3. New Civil Code applied suppletorily
Features of a NI
1. Negotiability
That attribute or property whereby a
bill or note or check may pass from
hand to hand similar to money, so as to
give the holder in due course the right
to hold the instrument and to collect
the sum payable for himself from
defenses.
2. Accumulation of Secondary Contracts,
Secondary contracts are picked up and
carried along with them as they are
negotiated from one person to another
or in the course of negotiation from one
person to another or in the course of
negotiation of a NI, a series o juridical
ties between the parties thereto arise
by law or by privity. (Reviewer on
Commercial Law, Jose R. Sundiang and
Timoteo B. Aquino, 2006ed).
Negotiable Non-Negotiable
Instruments Instruments
Applicable law
Only NI is Application of the
governed by the NIL is only by
NIL analogy
Transferability
Transferable by Transferable only
negotiation or by by assignment
assignment
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NEGOTIABLE INSTRUMENTS LAW

3. Check
Transferee A bill of exchange drawn on a bank
The transferee can be The transferee payable on demand (Sec. 185, NIL). It is
a HDC if all the remains to be an also the most common form of bill
requirements are assignee and can exchange.
complied with never be a HDC
Defenses Exchange Check
A holder in due course All defenses available To whom instrument drawn
takes the NI free from to prior parties may be May or may not Is always drawn
personal defenses raised against the last be drawn on the on a bank or
transferee bank banker
Nature of title Drawn on deposit
Requires clean title, Transferee acquires a Need NOT be Is drawn on
one that is free from derivative title only drawn on a deposit,
any infirmities in the deposit, hence it is otherwise, if it is
instrument and not necessary that not drawn on
defects of title of prior the drawer of a deposit there
transferors. bill of exchange would be fraud
Solvency o the debtor should have funds
Solvency of debtor is Solvency of the debtor in the hands of
in the sense is not guaranteed drawee
guaranteed by the under Art. 1628 of the When payable
indorsers because NCC unless expressly May be presented Need not to be
they engage that the stipulated (Notes and for acceptance presented for
instrument will be Cases I Banks, acceptance,
accepted, paid or both Negotiable however, if the
and that they will pay Instruments, and other holder requests
if the instrument is Commercial and the banker
dishonored Documents, Timoteo desires, he may
B. Aquino, 2006ed) accept
When presentment made
Kinds of Negotiable Instruments May be presented Must be
1. Promissory Note (PN) for payment presented for
An unconditional promise, in writing, within reasonable payment within a
made by one person to another, signed time after its last reasonable time
by the maker engaging to pay, on negotiation after its issue
demand or at a fixed or determinable Effect of acceptance/certification
future time, a sum certain I money to If accepted If certified
order or to bearer (Sec. 184 NIL) drawer/indorser drawer/indprsers
2. Bill of Exchange (BE) remains liable are discharged
An unconditional order, in writing Effect of drawer s death
addressed by one person to another, Death of drawer Death of the
signed by the person giving it, requiring of a BOE, with the drawer of a check
the person to whom it is addressed to knowledge of the with the
pay, on demand or at a fixed or bank, does not knowledge of the
determinable future time, a sum certain revoke the bank, revokes the
in money, to order or to bearer (Sec. authority of the authority of the
126, NIL)
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

drawee to pay banker to pay 3. Bond, which are in the nature of

promissory notes;
Instances when a BILL OF EXCHANGE 4. Drafts, which are bills of exchange
may be treated as a PROMISSORY NOTE drawn by one bank upon another;
at the election of the HOLDER (Sec. 17e 5. Debenture
and Sec. 130, NIL) (FLANS)
1. The drawer and the drawee are the Non-negotiable Instruments
same person; 1. Treasury Warrant being payable out
2. Drawee is a fictitious person; of a particular fund of the national
3. Drawee does not have the capacity treasury (Metrobank . CA, GR No. 8886,
to contact (Sec. 130) February 18, 1991).
4. Here the bill is drawn on a person 2. Postal money orders-
who is legally absent; and a. Under postal regulations, the
5. Where the bill is ambiguious (Sec. bureau o posts can refuse to
17e, NIL) pay on numerous ground, thus
Promissory Note Bill of Exchange the order is not unconditional;
Nature b. A money order can be indorsed
Unconditional Unconditional order only once;
Promise c. The post office is not run by the
Number of parties government for commercial profit, but
Involves 2 parties Involves 3 parties for public service. (Philippine Education
Liability of creator Co., Inc. v. Soriano, GR.L-22405, June 30,
Maker is primary Drawer is only 1971)
liable secondarily liable
Presentment 3. Letter of Credit being payable to a
Only one Generally two (2) specified person.
presentment: for presentments: 4. Trust Receipt- being payable to the
payment For acceptance and entrustor, conditioned upon the resale
of the goods.
for payment
Note: 2 presentments: 5. Negotiable Document of Title, Bill of
only in cases provided Lading and Warehouse Receipt being
in Section 143 payable in goods rather than money.
Right to limit liability
Partied to a Negotiable Instrument
Maker of note may Drawer may insert in
1. Promissory Note
NOT insert an the instrument a
a. Maker Party who executes
express stipulation express stipulation
the written promise to pay;
limiting or limiting or negativing
b. Payee- party in whose favor the
negativing his own his own liability to the
promissory note is made
liability to the holder (Sec. 61, NIL)
payable.
holder
2. Bill of Exchange
a. Drawer party who executes
Other Negotiable Instruments:
the written order to pay;
1. Certificate of deposit issued by banks,
b. Acceptor: a drawee who
payable to the depositor or his order, or
ACCEPTS the order to pay made
to bearer;
by the drawer
2. Trade acceptance;
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NEGOTIABLE INSTRUMENTS LAW
Note: It is only when a drawee
becomes an acceptor that he is
primarily liable.
Legal Basis: A bill of itself does not
operate as an assignment of unds in
the hands of the drawee available
for payment thereof, and the
drawee is not liable until and unless
he accepts the same. (Sec 127, NIL)
c. Payee party in whose favor
the bill is drawn or is payable
Other parties to a Negotiable Instrument
1. Indorser a person placing his
signature upon an instrument
otherwise than as maker, drawer, or
acceptor;
2. Indorsee, in the case of instrument
payable to order;
3. Persons negotiating by mere delivery;
4. Persons to whom the instrument is
negotiated by mere delivery, in case the
instrument is payable to bearer,
5. Acceptor- a drawee who accepts the
order to pay made by the drawer. It is
only when a drawee becomes an
acceptor that he is primarily liable.
(Reviewer on Commercial Law, Jose R.
Sundiang and Timoteo B. Aquino,
2006ed).
6. Accomodation Party- one who has
signed the instrument as maker,
drawer, acceptor or indorser, without
receiving value therefore, and for the
purpose of lending his name to some
other person. (Sec. 29, NIL)
7. Referee in case of need (Sec. 130) a
person who may be designated in the
instrument as the person who may be
resorted to be the parties in case of
dispute. (Reviewer on Commercial Law,
Jose R. Sundiang and Timoteo B.
Aquino, 2006ed.)
NEGOTIABILITY
The requisites of the negotiability are provided
for under Section 1 of the NIL. It is the most
important provision o the NIL because the law
does not apply if the instrument does not meet
the requisites of negotiability as provided
therein (Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents,
Timoteo B. Aquino, 2006ed.)
Factors that affect the determination of
negotiability of instruments: (WART)
1. Whole instrument;
2. What appears on the face of the
instrument
3. Requisites enumerated in Sec. 1 of the
NIL; and
4. Should contain words or terms o
negotiability such as order or
bearer (Gopenco, Commercial Law
Bar Reviewer. Cited in Aquino, p. 23)
Acceptance
The acceptance of a bill of exchange is not
important in the determination of its
negotiability. The nature o acceptance is
important only on the determination o the kind
of liabilities of the parties involved (PBCom v.
Aruego, GR Nos. L-25836-37, January 31, 1981)
The presence of an indorsement of the
instrument does not affect the negotiability of
the instrument. This rule is subject to the
provision that a promissory note that is payable
to the order of the maker himself is not yet
complete unless it is endorsed by the maker.
(Section 184, NIL) Moreover, an indorser, in
which case, subsequent transferees can no
longer be considered holders. (Section 36, NIL)
Rationale of formalities of negotiable
instrument
a. To become effective substitutes for money
b. To be desirable tools for credit transactions
c. For security of mercantile transactions
Ommissions & Provisions that do not affect
Negotiability
1. It is not dated;
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NEGOTIABLE INSTRUMENTS LAW

The unconditional nature of the promise or

Note: The date should be inserted order is NOT affected by: (FT)
when it is necessary to determine the 1. An indication of a particular FUND OUT OF
maturity date of the instrument WHICH REIMBURSEMENT is to be made, OR
a particular ACCOUNT TO BE DEBITED with
2. It does not specify the value given or the amount;
that any value has been given;
BUT an order or promise to PAY OUT OF A
Reason: Consideration is presumed. PARTICULAR FUND is conditional, as it
depends upon the sufficient of the fund
3. It does not specify the place where it is thus indicated (Sec. 3)
drawn or where is it payable;
4. It bears a seal; Test. Does the instrument carry the general
5. It designates a particular kind of current credit o the drawer or the maker, or only
money in which payment is to be made the credit of a particular fund? (Handbook
(Sec 6, NIL) of Commercial Law Sulpicio Guevara, 10th
edition)
Requisites of Negotiability
A. It must be in writing and signed by the Fund for Particular Fund for
maker or drawer Reimbursement Payment
Acts Involved
Signature: may be in one s handwriting, Drawee pays the There is only onle
printed, engraved, lithographed or payee from his own act- the drawee pays
photographed, so long as the signature is funds; afterwards, directly from the
adopted by the signer with the intent to the drawee pays particular fund
authenticate the writing (Notes and Cases himself from the indicated. Payment
on Banks, Negotiable Instruments and other particular fund is subject to the
Commercial Documents, Timoteo B. Aquino, indicated condition that the
2006ed.) fund is sufficient
Nature of Fund Indicated
Note: One who signs under a trade or Particular und Particular fund
assumed name shall be liable to the same indicated is NOT the indicated is the
extent as if he had signed in his own name. direct source of direct source of
payment but only payment
B. Unconditional Promise or Order to pay a the source of
sum certain in money reimbursement
Effect
Promise of Order to pay Conditional Unconditional
The word promise or order need not
appear in the instrument to satisfy the Note: Bills and checks by itself do not operate
requirements in Section 1. However, the as an assignment of any part of the funds to the
promise of order must be ABSOLUTE and credit of the drawer with the bank, and the
UNCONDITIONAL. bank is not liable to the holder unless and until
it accepts or certifies the check (Sec. 127 and
Mere authority and/or request to pay 189, NIL)
render the instrument non-negotiable
because it does not contain an order to pay. 2. A statement of the transaction which gives
rise to the instrument (Sec. 3). Where the
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
promise or order is subject to the terms and
conditions o the transaction stated, the
instrument is rendered non-negotiable. The
NI must be burdened with the terms and
conditions of that agreement to destroy its
negotiability (Commercial Law Review,
Cesar Villanueva, 2004ed)
Note: Reference to another transaction or
document must be descriptive rather than
restrictive.
Payable in sum certain in money
A sum is certain if the amount to be
unconditionally paid by the maker or the
drawee can be determined on the face of the
instrument and is not affected by the fact that
the exact amount is arrived at only after a
mathematical computation (Notes and Cases on
Banks, Negotiable Instruments and other
Commercial Documents, Aquino, 2006 ed).
The certainly is NOT affected although to be
paid: (ISA-Ex-Co)
1. With Interest;
2. By stated installements;
a. For the amount to be certain-
i. The amount of each installment is
indicated; AND
ii. The due date is fixed or at least
determinable
3. By stated installments with a statement
that upon default I payment of any
installment due or interest, the whole shall
become due (acceleration clause);
4. With exchange, whether at a fixed rate or at
a current rate; or
5. With cost of collection or attorney s fees, in
case payment shall not be made at
maturity.
Is a negotiable Instrument a legal tender?
Answer: No.
Legal Basis:
1. Section 60, R.A. 7653 of the New Central
Bank Act;
Sec. 60. Legal Character Checks
representing demand deposits do not have
legal tender power and their acceptance in
the payment of debts, both public ad
private, is at the option of the creditor:
provided, however that a check which has
been cleared and credited to the account of
the creditor shall be equivalent to a delivery
to the creditor of cash in an amount equal
to the amount credited to his account.
2. Article 1249, New Civil Code: (Impairment
Clause) The delivery of a note payable to
order or a bill of exchange or any other
mercantile document shall produce
payment only when they have been
encashed or through the fault of creditor,
the value is impaired.
3. The Supreme Court ruled that the creditor
cannot be compelled to accept a check in
payment of a debt. (Leticia Co vs. PNB, G.R.
No. L-51767. June 29, 1982).
Note: An instrument is still negotiable although
the amount to be paid is expressed in currency
that is not legal tender so long as it is expressed
in money (PNB v. Zulueta, GR No. L-7271,
August 30, 1957).
Under Section 1 of RA 8183, 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.
The parties may now, not only in the case
negotiable instrument, but any contract
involving payment o f a debt money, they can
made in a foreign currency, under R.A. 8183
which repealed the Uniform Currency Act or
R.A. 529.
What is a Legal Tender?
1. (Without referring to a particular country):
It is that kind of currency which the law
compels a creditor to receive in payment of
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

a debt, be it public, or private, provided it is

tendered in the right amount. Note: Confession of judgment clauses are VOID
2. Section 52, New Central Bank Act R.A. 7653 as being against public policy to give a person
his day in court; however such nullity does not
All notes and coins issued by the Bangko Sentral affect the negotiability of the instrument
shall be fully guaranteed by the Government of (National Bank v. Manila Oil Refining Co., GR L-
the Republic o the Philippines and shall be legal 18103, June 8, 1922).
tender in the Philippines o all debts, both public
and private: Provided, however, That, unless C. Payable on Demand or at Fixed on
otherwise fixed by the Monetary Board, coins Determinable Future Time
shall be legal tender in amounts not exceeding Payable on Demand Payable at a Fixed or
Fifty pesos (P50.00) or denominations of Determinable Future
Twenty-five centavos and above, and in Time
amounts not exceeding Twenty pesos (P20.00) a. Where expressed to a. At fixed perid
for denominations of Ten centavos or less. be payable on after date or sight;
demand, at sight or After sight means after
Checks representing demand deposits do not on presentation the drawee has seen the
have legal tender power and their acceptance in b. Where no period of instrument upon the
the payment o debts, both public and private, payment is stated; presentment for
as at the option of the creditor: Provided, c. Where issued or acceptance
however, That a check which has been cleared accepted, or b. On or before a
and credited to the account of the creditor shall indorsed after fixed or determinable
be equivalent to a delivery to the creditor of maturity (only as future time specified
cash in an amount equal to the amount credited between immediate therein; or
to his account. (Sec. 60 or RA 7653) parties) (Sec. 7, NIL) c. On or at a fixed
period after the
Note: An instrument is still negotiable although occurrence of a
the amount to be paid is expressed in currency specified event,
that is not legal tender so long as it is expressed which is certain to
in money (PNB v. Zulueta, GR No. L-7271, happen, though the
August 30, 1957). time of happening is
uncertain )Sec. 4 NIL)
General Rule: An instrument which contains an
order or promise to do any act in addition to Note: If the day and the month, but not the
the payment of money is not negotiable (Sec. 5, year of payment is given, it is not negotiable
NIL). due to its uncertainty (Pandect of Commercial
Law and Jurisprudence, Justice Jose Vitug,
Exceptions: 2006ed).
1. Authorizes the sale of collateral securities
on default; If the instrument states that the amount shall
2. Authorizes confessions of judgment on be paid in two equal installments, the second
default; being payable on a fixed date, the instrument
3. Waives the benefit of law intended to can be considered negotiable since the first
protect the debtor such as presentment installment would then be payable on demand
for payment, notice of dishonor and (Ibid).
protest; or
4. Allows the holder the option to require
something in lieu of money
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
D. Payable to Order of to Bearer
Payable to Order
The instrument is payable to order where it
is drawn payable to the order o a specified
person, or to him of his order (Sec. 8, NIL)
The instrument may be made payable to the
order of: (Ma-Dra-Wse, Dra-Wee, H-O-T)
1. A payee who is not the make,
2. A payee who is not the drawer
3. A payee who is not the drawee
Note: The payee must be named or otherwise
indicated therein with reasonable certainty, If
there is no payee, in an instrument that is
payable to order, no one could indorse the
instrument (Sec. 8a, NIL).
Subject to the rules in Secs. 13,14, and 15 on
incomplete instruments, leaving the payee
blank may make the instrument non-negotiable
because an instrument payable to order may be
negotiated ONLY by indorsement AND delivery.
4. The drawer or maker;
Note: If the maker is made the payee, the
instrument must be indorsed in order to
complete it (Sec. 184).
Where the instrument is payable to the order of
the drawer and it is accepeted by the drawee,
the instrument is equivalent to a promissory
nite made by the acceptor in favor of the
drawer (Commercial Laws of the Philippines,
Vol. 1, Aguedo Agbayani, 1992ed).
5. The drawee;
6. Two or more payees jointly;
7. One or some of several payees; or
8. The holder of an office for a time being
Payable to Bearer
The instrument is payable to bearer
(OPEN-F)
1. When it is expressed to be so payable; or
2. When it is payable to a person named
therein or to bearer;
3. 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;
Fictitious Payee Rule
Fictitious person is not limited to persons
having no real existence. An existing person
may be considered a fictitious payee, if the
person making it so payable does not intend
to pay the specified person.
Reason: There is no one to indorse it. And
hence, if the maker intended to give it
negotiability, it could only be on the theory
that it became payable to bearer.
4. When the name o the payee does not
purport to be the name of any person such
as pay to ash or pay to the order of money;
A check that is payable to the oder of cah is
payable to bearer (Ang Tek Lian v. CA, GR L-
2516, September 25, 1950).
5. When the only or last indorsement is an
indorsement in blank (Sec.9, NIL)
Note: An instrument originally payable to
bearer can be negotiated by mere delivery
even if it is indorsed especially. I IT IS
ORIGINALLY A BEARER INSTRUMENT, IT
WILL ALWAYS BE A BEARER INSTRUMENT
(Sec. 40, NIL).
As opposed to an original order instrument
becoming payable to bearer, if the same is
indorsed specially it can NO LONGER be
negotiated further by mere delivery, it has
to be indorsed.
Where the instrument is payable only to a
specified person or his agent, it is not
payable to order, thus non-negotiable.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

E. Identification of Drawee 4. Presentment for acceptance, in certain

It is applicable only to a bill of exchange. kinds of Bills of Exchange
5. Acceptance
However, omission of drawee may be filled 6. Dishonor by non-acceptance
later on (Sec. 14, NIL). 7. Presentment for payment
8. Dishonor by non-payment
A bill may be addressed to 2 pr more 9. Notice of dishonor
drawees jointly, whether they are partners 10. Protest
or not, but NOT to 2 or more drawees in the 11. Discharge (Commercial Laws of the
ALTERNATIVE or in SUCCESSION (Sec. 128, Philippines, Vol. 1, Agbayani, 1992ed)
NIL).
Bill of Exchange
INTERPRETATION OF NI (Sec. 17, NIL)
Issuance
1. Words prevail over figures.
2. Interest stipulated runs from the date of the
instrument or, if undated, from its issue. Negotiation
3. If undated the instrument deemed dated at
its issue.
4. Written words prevail over printed
Presentment or
provisions.
5. When there is doubt whether the acceptance
instrument is a bill or a note, the holder at
his election, may treat it as earlier as a bill
or as a note. Acceptance
6. When it is not clear in what capacity a
person signs he is deemed an indorser;
7. When two or more persons sign: We
Dishonor by non-
promise to pay, their liability is JOINT
acceptance
(each liable for his part) but if they sign I
promise to pay the liability is SOLIDAY
(each can be compelled to comply with the Presentment for payment
entire obligation.

It is ONLY when the instrument in question

is ambiguous, doubtful, or obscure, or when Dishonor by non-payment

there are omissions therein that the rules in

this section apply.
Notice of dishonor
TRANSFER AND NEGOTIATION

Incidents in the Life of NI

(PIN-PAD-PDNPD) Protest (for foreign bills)
1. Preparation and signing complete with all
the requisites provided for in Section 1 of
the NIL
2. Issue Discharge
3. Negotiation
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NEGOTIABLE INSTRUMENTS LAW

Promissory Note A person taking a negotiable instrument by

assignment in a separate piece of paper takes it
subject to the rules applying to assignment. And
Issuance where the holder of the bill payable to order
transferred it without indorsement, it operates
as an equitable assignment (Commercial Laws of
the Philippines, Vol.1, Aguedo Agbayani,
Negotiation 1992ed).

3. By operation of law
Presentment for payment
Dishonor by non-payment
Notice of dishonor
Discharge
Mode of Transfer
1. Negotiation
The transfer of the instrument from one
person to another so as to constitute the
transferee a holder thereof (Sec.30)
a. By indorsement completed by delivery
(in case of order instrument); OR
b. By mere delivery (in case of bearer
instrument)
Effect: makes the transferee the holder of the
instrument (Sec. 191)
2. Assignment
A method of transferring a negotiable or
non-negotiable instrument whereby the assignee
is merely placed in position o the assignor and
acquires the instrument subject to all defenses
that might have been set up against the original
payee.
The full title to a bill may pass without
assignment, indorsement, or delivery, i.e. by
operation of law (Ba-De-De)-
a. By the death if holder, where the title vests in
his personal representatives;
b. By the bankruptcy of the holder, where the
title vests in his assignee or trustee;
c. Upon the death of a joint payee or indorsee,
in which case the title vests in the surviving
payee or indorsee in general (Commercial Laws
of the Philippines, Vol. 1, Agbayani, 1992ed)
How Negotiation Takes Place
1. Issuance
It is the first delivery of the instrument,
complete in form, to a person who takes it as a
holder (Sec. 191).
Steps:
a. Mechanical act of writing the instrument
completely and in accordance with the
requirements of Sec. 1; and
b. The delivery of the complete instrument by
the maker or drawer to the payee or holder
with the intention of giving effect to it (The Law
on Negotiable Instruments with Documents of
Title, Hector de Leon, 2000 ed).
Definitions of Delivery:
a. The transfer of possessiopn with intent to
transfer title (Sec. 16, NIL).
b. The transfer of possession of the instrument
by the maker or drawer with the intention to
transfer title to the payee and recognize him as
holder thereof (De la Victoria v. Burgos, 245
SCRA 374 [1995])
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

2. Subsequent Negotiation Rights of transferee for Value:

An instrument is negotiated when it is a. Acquires only the rights of the transferor; and
transferred from one person to another in such b. Right to require the transferor to indorse the
a manner as to constitute the transferee the instrument
holder thereof.
a. If payable to bearer, a negotiable instrument However, transferees in this situation do not
may be negotiated by mere delivery. enjoy the presumption of ownership in favor of
b. If payable to order, a NI may be negotiated holders.
by indorsement completed by delivery.
Reason: Mere possession of a negotiable
In both cases, delivey must be intended to give instrument does not in itself conclusively
effect to the transfer of instrument. establish either the right of the possessor to
(Development Bank v. Sima Wei, GR No. 85419, receive payment to be discharged from liability
March 9, 1993). (BPI v. CA and Salazar, GR No. 136202, January
25, 2007).
Assignment Negotiation
Applicable Law For the purpose of determining whether the
Governed by the Civil Governed by the NIL trasferee is as holder in due course, the
Code (Sesbreno v. CA, GR negotiation takes effect as of the time when the
No. 89252, May 24, indorsement is made. (section 49, NIL)
1993)
Type of transaction 4. Indorsement; How Made
Pertains to contracts Pertains to NI The indorsement must be written on the
in general instrument itself or upon a paper attached
Nature of the transferee thereto (allonge). The signature of the indorser
The transferee is a The transferee is a without additional words is sufficient (Sec. 31,
mere assignee holder who may be a NIL).
holder in due course
Rights acquired Where the indorsement is written in an allonge,
Assignee steps into Holder in due course the same must be tacked or pasted on the
the shoes of the may acquire a better instrument so as to become part of it,
assignor and merely right than the right of otherwise, it cannot be considered an allonge,
acquires whatever the transferor indorsement may be made in any form, as long
rights the assignor as it is meant to be an indorsement.
may have
Availability of defenses Indorsement
Assignee takes the Holder in due course Nature: an indorsement is not only a mode of
transfer, it is also a contract.
instrument subject to takes it free from
the defenses obtaining personal defenses
among the original available among the Indorsement as a contract
parties parties Unless the indorsement is qualified (Sec. 65),
every indorsed is a new obligor and the terms
are found on the face of the bill or note, with
3. Incomplete negotiation of ORDER
the additional obligation that if the instrument
instrument (Sec. 48, NIL)
is dishonored by non-payment or non-
Contemplates a case where there is delivery
acceptance, and notice is given to the indorser,
and payment of value but NO indorsement.
the latter will pay for it (Commercial Law
Review, Cesar Villanueva, 2004ed)
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
But a qualified indorser is liable in case of
breach of warranties (Sec. 65, NIL).
Rules on Indorsement
1. Indorsement must be of the entire
instrument.
Except: Where instrument has been paid in
part, it may be indorsed as to the residue (Sec.
32, NIL).
2. Where a person is under obligation to
indorse in a representative capacity, he may
indorse in such terms as to negate personal
liability (Sec. 44, NIL).
a. He must ass words describing himself as
agent;
b. He must disclose his principal;
c. He must be duly authorized.
3. Where an instrument is drawn of indorsed to
a person as cashier or other fiscal officer of a
bank or coporation, it is deemed prima facie to
be payable to the bank or corporation of which
he s an officer, and may be negotiated by either
indorsement of the bank or corporation or
indorsement of the officer (Sec. 42, NIL).
4. Where the name of payee or indorsee is
wrongly misspelled, he may indorse the
instrument as therein described adding, if he
thinks fit, his proper signature (Sec. 43, NIL).
An indorsement which purports to transfer to
the indorsee a part only of the amount payable
does not operate as a negotiation of the
instrument; it operates merely as an
assignment (Montinola vs. ONB, GR No. L-2861,
February 26, 1951).
Exception: Where instrument has been paid in
part, it may be indorsed as to the residue (Sec.
32, NIL)
Note: An indorsement which purports to
transfer the instrument to two or more
indorsees severally does not operate as a
negotiation of the instrument (Sec. 32, NIL)
Kinds of Indorsement
1. Special - Specifies the person to whom or to
whose order, the instrument is to be payable
(Sec. 34, NIL)
2. Blank - Specifies no person to whom or to
whose order the instrument is to be payable.
Rules on Blank Indorsement:
a. If originally payable to order and negotiated
by SPECIAL INDORSEMENT, it can be further
negotiated by indorsement completed by
delivery.
b. If originally payable to order and negotiated
by BLANK INDORSEMENT, it can be negotiated
further by mere deliver.
Effects of Blank Indorsement:
to make the instrument payable to bearer and
(2) may be converted to special indorsement by
writing over the signature of indorser in blank
any contract consistent with character of
indorsement (Sec. 35, NIL).
c. If originally payable to bearer, it can be
further negotiated by mere delivery, EVEN IF
the original bearer negotiated it by special
indorsement.
3. Absolute - One by which the Indorser binds
himself to pay:
a. Upon no other condition than failure of prior
parties to do so, and
b. Upom due notice to him of such falure.
4. Conditional - Right of the indorsee is made to
depend on the happening of a contingent
event. Party required to pay may disregard the
conditions (Sec. 39, NIL)
Note: Conditional indorsement does NOT
render an instrument non-negotiable BUT if the
condition is on the face of the instrument, the
condition renders it non-negotiable as the
promise or order therein would not be
unconditional.
5. Restrictive - An indorsement is restrictive,
when it either:
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
a, Prohibits further negotiation of the
instrument; or
b. Constitutes the indorsee as the agent of the
indorser (e.g. indorsement for deposit); or
c. Vests the title in the indorsee in trust for or to
the use of some other persons.
Note: But mere absence of words implying
power to negotiate does not make an
indorsement restrictive (Sec. 36, NIL).
The omission of words of negotiability in the
indorsement does NOT affect the negotiability
of the instrument BUT such omission in the
body thereof will render the instrument non-
negotiable.
Effect of Restrictive Indorsement: (PAT)
Confers upon the indorsee the right to:
a. Receive payment of the instrument;
b. Bring any action thereon that the indorser
could bring;
c. Transfer his rights as such indorsee, where
the form of the indorsement authorizes him to
do so. (Sec. 37)
Note: An instrument negotiable in its origin
continues to be negotiable until it has been
restrictively indorsed or discharged by payment
or otherwise. (Sec. 47)
6. Qualified - Constitutes the indorser a mere
assignor of the title to the instrument (Sec. 38,
NIL).
It is made by addng to the indorsers signature
words like sans recourse without recourse.
indorser not holder, at the indorsers own risk,
other terms of similar import.
Hence, it has been hed that oral testimony is
not admissibnle to establish that an unqualified
indorsement in fact qualified (Velasco vs. Tan
Liuan & Co., GR No. 17230, March 17, 1922).
Without Recourse - means without resort to a
person secondarily liable after the default of the
person primarily liable.
Note: Qualified indorsement is usually resorted
to if the indorser wants to transfer his rights
over the instrument but does not want to
assume responsibilities under the secondary
contract.
Effects of Qualified Indorsement:
a. A qualified indorser has limited liability, i.e.
he is liable for breach of warranty if the
instrument is dishonored by non-acceptance or
non-payment due to:
i. Forgery - warranty as to genuineness;
ii. Lack of good title on the part of the prior
parties - warranty as to capacity to contract; or
iv. Fact that at the time of the endorsement,
the instrument was valueless or not valid, and
he knew of the fact - warranty as to ignorance
of certain facts.
b. A qualified indorsement does not impair the
negotiable character of the instrument (Sec. 38,
last sentence);
c. A qualified indorser is liable to all the parties
who derive their title through his indorsement
(Agbayani, 1992ed, See p. 334)
7. Joint - indorsement payable to the order of 2
or more persons (Sec. 41, NIL)
General Rule: Where the instrument payable to
two or more payees ALL must indorse in order
that the instrument may be validly negotiated.
Reason: To make it an indorsement of the
entire instrument because if only one indorses,
he passes only his part of the instrument.
Exceptions
a. Where the payees or indorsees indorsing has
the authority to indorse for the others, and
b. Where the payees or indorsees are partners
(Sec. 41, NIL)
8. Irregular - A person who, not otherwise a
party to an instrument, places thereon his
signature in blank before delivery (Sec. 64, NIL).
Liability of Irregular Indorser:
a. If the instrument is payable to the order of a
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
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 payabnle to bearer,
he is liable to all parties subsequent to the
maker or drawer.
c. If he signs for the accomodation of the payee,
he is liable to all parties subsequent to the
payee.
Presumption as to Time of Indorsement
General Rule: Negotiation is deemed prima
facie to have been effected before the
instrument is overdue.
Exception: If the indorsement bears a date, the
presumption would be that the date written is
the true date (Sec. 11, NIL).
Presumption as to Place of Indorsement
Except whre the contrary appears, every
indorsement is presumed to have been made at
the place where the instrument is dated (Sec.
46, NIL).
Renegotiaton of Prior Parties (Sec. 50, NIL)
Where an instrument is negotiated back to a
prior party, such party may reissue and further
negotiate the same. But he is not entitled to
enforce payment thereof against any
intervening party to whom he was personally
liable.
Reason: To avoid circuitousness of suits.
Limitations:
A prior party cannot renegotiate the
instrument:
1. Where it is payable to the order of a third
person, and has been paid by the drawer;
2. Where it was made or accepted for
acommodation and has been paid by the party
accommodated.
Striking Out Indorsement
The holder may at any time strike out any
indorsement which is not necessary to his title.
Effect: The indorser whose indorsement is
struck out, and all indorsers subsequent to him
are thereby relieved from liabnlity on the
instrument (Sec. 48, NIL)
Note: If the instrument is negotiated by special
indorsment, the hodler has no right to strike
out such indorsement nor can he convert the
special indorsement into a blank indorsement.
Continuation of Negotiable Character
General Rule
An instrument which is negotiable shall
continue to be such until it has been--
1. Restrictively indorsed:
This refers only to th efirst kind (Sec. 36[a] NIL)
because this is the only type if restrictive
indorsement that completely destroys the
negotiability of the instrument.
2. Discharged by payment or otherwise (Sec.
47, NIL)
This must be understood to be payment made
at of after maturity because if the payment be
made before maturity thereof, the person so
paying can still renegotiate or reissue the
instrument. Hence, payment before maturity
does not destroy negotiability.
HOLDERS
Holder
A payee or indorsee of a bill or note who is in
possession of it or the bearer thereof entitled to
receive the sum for which it calls (Sec. 191, par.
7)
Classes
1. Holders in Due Course - one who has taken
the instrument under the conditions of Sec. 52
and holds the instrument free from personal
defenses available to prior parties
2. Simple Holders or Holders Not in Due Course
- One who became a holder without any, some
or all of the requisites under Sec. 52. He holds
the instrument subject to the same defenses as
if it were non-negotiable. He may enforce the
instrument and receive payment therefore.
3. Holders For Value - Where value has at
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
anytime been given for the instrument, the
holder is deemed a holder for yale in respect to
all parties who become such prior to that time
(Sec. 26, NIL).
Importance of the Classification
Each class of holders has defenses which are
available to one class and which may not be
available to other classes (Laws on Negotiable
Instrument, Hector De Leon, 2004ed).
Note: If there are NO defenses, the distinction
between a HDC and one who is not a HDC is
IMMATERIAL (Notes and Cases on Banks,
Negotiable Instruments and other Commercial
Documents, Aquino, 2006ed).
Rights of Holders in General (Sec. 51, NIL)
1. May sue thereon in his own name;
Even if he be a holder only for collection or as
pledge of the instrument.
2. Payment to him in due course discharges the
instrumetn
Payment in due course is payment made:
a. At or after the maturity of the instrument;
b. To the holder thereof;
c. In good faith; and
d. Without notice that his title is defective.
Right to sue of Transferee of an unendorsed
instrument
A transferee of unendorsed instrument is
certainly not a holder as defined under Sec. 191
and can not be considered a holded in due
course. Nevertheless, if the transferor could sue
in his own name, then the transferee may also
do so under the principle in assignment that the
assignee steps into the shoes of the assignor
(Laws on Negotiabnle Instrument, Hector De
Leon, 2004ed).
Holder in Due Course (HDC)
A holder who has taken the instrument under
the following conditions: (COVI)
1. That the instrument is complete and regular
upon its face;
An instrument is incomplete when it its wanting
in any material particular proper to be inserted
in a negotiable nstrument (Sec. 14). BUT if the
omission is not an important particular, such
omission will not deprive the holder the right of
a holder in due course.
2. That he has become a holder of it before it
was overdue and without notice that it had
been previously dishonored, if such were the
case;
A holder who takes an overdue instrument is
put on inquiry although he is not actually aware
of any existing defense of a prior party. A
person taking an overdue instrument should
certainly question why the instrument is still in
circulation even if it is overdue (Notes and
Cases on Banks, Negotiable Instruments and
Other Commercial Documents, Timoteo Aquino
2006ed).
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.
Installment Instruments
A purchaser after maturity of the first
installment with notice that it was unpaid takes
the paper as overdue paper, Consequently, a
purchaser of an installment note after an
installment is overdue may be a holder in due
course as to the balance if he has NO notice of
the failure to pay the first installment.
Interest
Where by the terms of the instrument, the
principal was to become due upon the default
of the payment of interest, one who takes the
isntrument upon which the interest is overdue
is NOT a holder in due course.
Demand Instruments (Sec. 53, NIL)
Where an instrument payabnle on demand is
negotiated on an unreasonable length of time
after its issue, the hodler is NOT deemed a
holder in due course.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
In determining what is unreasonable length of
time regard must be given 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. 193, NIL)
3. That he has taken in good faith and for value
Although good faith on the part of the holder is
presumed, such presumption is destroyed if
the payee of the indorsee acquired possession
of the instrument under circumstances that
should have put him to inquiry as to the title of
the holder who negotiated the instrument. The
burden now is on the part of the holder to show
that notwithsatnding the suspicious
circumstances, it acquired the check in actual
good faith. (De Ocampo vs. Gatchalian, et al. GR
No. L-15126, November 30, 1961).
Good faith refers to the indorsee or transferee,
not to the indorser or transferor of the
instrument.
Consideration for the Issuance and Subsequent
Transfer
Every NI is deemed prima facie to have been
issued for a valuable consideration. Every
person whose signature appears thereon is
presumed to have become a party thereto for
value (Sec. 24, NIL).
Consideration is not relevant to the negotiablity
of an instrument but is significant on the
question of whether or not one is a holder in
due course.
Value
Any consideration sufficient to support a simpel
contract (Sec. 25, NIL).
It includes:
1. An antecedent or pre-existing debt;
2. Value previously given (Sec. 25, NIL);
3. Lien arising from contract or by operation of
law but the holder is deemed a holder for value
to the extent of his lien (Sec. 27, NIL).
4. That at the time of its negotiation to him, he
has had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it (Sec. 52, NIL)
Notice to holder ocvers only situations where
the holder had actual or chargeabnle
knowledge of the infirmity or defect or must
have acted in bad faith (Sec. 56, NIL).
Defects in the title results from the acquisition
of the negotiation of the instrument.
In the acquisition thereof, the title of a person
becomes defective when he obtains the
instrument or any signature thereto by (1)
fraud; (2) force, duress or fear; (3) other
unlawful means; (4) for an illegal consideration.
In the negotiation thereof, the title becomes
defective when he negotiates it in (5) breach of
faith; or under (6) such circumstances that
amount to fraud (Sec. 55, NIL).
Infirmities must include things that are wrong
with the instrument itself as distinguished from
those things that are lacking in the contracts on
the instruments. Such infirmities are to be
found in situations arising Sec. 13, 14, 15, 16, 21
and 23 of the NIL.
Effect of acquiring notice of infirmity before
payment of full amont of consideration:
Transferee will be deemed a holder in due
course only to the extent of the amount
therefor paide by him (Sec. 54, NIL)
Who is Deemed a Holder in Due Course
Every holder of a negotiable instrument is
deemed prima facie a holder in due course.
However, this presumption arises only in favor
of a person who is a holder as defined in Sec.
191 of the NIL.
BUT when it is shown that the title of any
person who has negotiated the instrument was
defective, the burden is on the hoder to prove
that he or some person under whom he claims
acquired the title as holder in due course (Sec.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
59, NIL)
The PAYEE may be a holder in due course
because Section 191 defines a holder as the
payee or indorsee of a bill or note who is in
possession of it or the bearer thereof. Such
payee may either have acquired the note from
another holder or he did not deal directly with
the maker thereof.
SOo if the payee satisfies the requirements of
Section 52, that payee can be a HDC (Cely Yang
v. Court of Appeals, GR No. 138074, August 15,
2003).
Rights of HDC (HERS)
1. May sue on the instrument in his own name;
Note: Even when he holds the instrument
merely in a representative capacity; such as a
holder for collection only of a pledgee of a note.
2. May receive payment if payment is on due
course the instrument is discharged;
3. Holds the instrument free from any defect of
the title of prior parties and free from personal
defenses availabnle to parties among
themselves;
4. May enforce payment of the instrument for
the full amount thereof against all parties liable
thereon (Secs. 51 and 57, NIL)
Exceptions:
a. When the holder is a holder for the value
only to the extent of his lien - HDC only to that
extent (Sec. 27, NIL)
b. When the holder acquired notice of any
infirmity in the instrument defect in the title of
the person negotiating the same before he has
paid the full amount agreed to be paid therefor
- HDC only to the extent of the amount paid
(Sec. 54, NIL);
c. In case of alteration as to amount - HDC may
enforce payment only according to its original
tenor (Sec. 124, NIL).
Holder not in Due Course
One who becaome a holder of an instrument
without any, some or all of the requisites under
Sec. 52, of the NIL.
General Rule: If a holder is not a holder in due
course, he is subject to the same defenses as if
it were non-negotiable. In other words, a holder
not in due course is subject to both real and
personal defenses available to parties primarily
or secondarily liable.
Exception (Shelter Rule): If he derives his title
through a holder in due course and if he is not a
party to any fraud or illegality affecting the
instrument, he has all the rights of such former
holder in respect of all parties prior to the
latter. (Sec. 58, NIL)
Exception to te Exception: The rule under Sec.
58, does not apply if the holder was a previous
holder NOT in due course who had
subsequently repurchase the instrument either
personally or through an agent.
Reason: a holder who is not a holder in due
course cannot improve his situation by
reqcquiring the instrument (Fossum v.
Fernandez GR No. L-20080 March 27, 1923).
Rights of a Holder NOT In Due Course: (HARS)
1. He may sue on the instrument in his own
name;
2. He may receive payment and if the payment
is in due course, the instrument is discharged;
3. He holds the instrument subject to the same
defenses as if it were non-negotiable.
Note: thus, prior parties can avail against him
any defense available among these prior parties
and prevent the said holder from collecting in
whole or in part the amount stated in the
instrument.
4. If he derives his title through a holder in due
course and if he is not a party to any fraud or
illegality affecting the instrument, he has all the
rights of such former holder in respect of all
parties prior to the latter. (Shelter Rule)
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

Failure to Make Inquiry who breached the

same may either be
General Rule: Failure to make inquiry after liable or barred from
notice of tha facts merely sufficient to cause a asserting a
person of ordinary prudence to make inquiry as particular defense
to an infirmity in the negotiable instrument and Requisites to enforce liability
defect in the holders title, is not evidence of Conditioned on Does not require
bad faith as to bar him from recovery. presentment and presentment and
notice of dishonor notice of dishonor
Reason: The law does not impose a duty on the When action must be brought
part of every holder to make inquiry before Action cannot be May be brought at any
acquiring the instrument. brought until maturity time; the breach may
of instrument even occur at the time
Exceptions: of transfer (Campos
1. Where a holders title is defective or and Lopez-Campos,
suspicious that would compel a reasonable man Negotiable
to investigate, it cannot be stated that the Instruments Law,
payee acquired the instrument without the 1994ed)
knowledge of said defect in the holders title and
for this reason the presumption that it is a A. Maker (Sec. 60)
holder in due course or that it acquired the 1. Engages to pay according to the tenor of the
instrument in good faith does not exist (De instrument
Ocampo v. Gatchalian, GR L-15126, November 2. Admits the existence of the payee and his
30, 1961). capacity to indorse.

2. Holder to whome cashers check is not Note: The liability of the maker is primary and
indorsed in due course and negotiated for value unconditional; therefore he cannot shift his
is not a holder in due course (Mesina v. IAC, GR liability to any person without the payees
No. 70145, November 13, 1986). consent.

Note: The holder may not be considered a
holder in due course because of the instrument
involved, as in the case where a person takes a
crossed check without making further inquiries.
The act of crossing a check serves as a warning
to the holder that the check has been issued for
a definite purpose (Bataan Cigar and Cigarette
Factory v. CA, GR No. 93048, March 3, 1994).
B. Acceptor (Sec. 62, NIL)
1. Engages to pay according to the tenor of his
acceptance
2. Admits the existence of the drawer, the
genuineness of his signature and his capacity
and authority to draw the instrument; and
3. Admits the existence of the pay and his
capacity to indorse.

PARTIES WHO ARE LIABLE Note: The warranty established by Sec. 62 is in

favor of holders of the instrument after
Liability Warranty acceptance and when the drawee bank cashes
Liability to pay or pays the check, the cycle of negotitaion is
Makes the parties Impose not direct terminated. It is illogical thereafter to speak of
liable to pay the sum obligation to pay in subsequent holders who can invoke the
certain in money the absence of breach warranty provided in Sec. 62 against the drawee
stated in the there. In case of (PNB v. National City Bank of New York, et. al.,
instrument breach, the person GR No. 43596, October 31, 1956).
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

1. Secondarily Liable liable; and the maker or

drawer.
Drawer General Irregular Engages If the If he signs for
(Sec.61) Indorser (Sec. Indorser that if the instrument is accommodatio
66) (Sec.64) instrument dishonored and n of the payee,
Admits the Warrants to all A person, not is necessary he is liable to
existence subse-quent otherwise a dishonored proceedings on all parties
of the HDC party to an and proper dishonor be duly subsequent to
payee and a. That the instrument, proceeding taken, he will the payee.
his instrum places his s are pay to the party
capacity to ent is signature brought, entitled to be
indorse; genuine thereon in he will pay paid.
and in blank before to the
all delivery. party
respect. If instrument entitled to
What it payable to the be paid.
purports order of a 3rd
to be; person, he is Note:
b. He has liable to the a. Drawer
good payee and there is a contractual relation between the
title to subsequent drawer and the drawee.
it; parties.
c. All prior A drawer may not unilaterally discharge himself
parties from liability on checks issued by him as
had security and not for value and negotiated to a
capacity holder in due course by the mere expediency of
to withdrawing his funds from the drawee bank
contract (State Investment House Inc. v. CA GR No.
; 101163, January 11, 1993).
d. The
instrum When the holder deposits his check with the
ent is, at collecting bank, the nature of relationship
the time created is one of agency that is the banks to
of collect from the drawee of the check the
endorse corresponding proceeds. Thus, the privity of
ment, contract is between the holder-depositor and
valid the collectiong bank. There is no privity of
and contract between the drawers and the
subsistin collecting bank.
g
Engages Engages that the If instrument The drawer is secondarily liable to (1) the
that the instrument will payable to holder or (2) to the indorser who is compelled
instrument be accepted or order of maker to pay. Sec. 61 allows the drawer to negative or
will be paid or both as or drawer or limit his liability by express stipulation.
accepted the case may be to bearer, he is
or paid by according to its liable to all b. General Indorser
the party tenor; and parties A general indorser is one who indorses the
primarily subsequent to instrument wothout any qualification. He is
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

secondarily liable to the holder or any title to it;

subsequent indorser who may be compelled to 3. All prior
pay the instrument on account of Sec. 66. parties had
capacity to
By indorsing the instrument, the indorser enters contract;
into a contract with certain fixed and definite 4. He has no
terms, which may not be varied or contradicted knowledge of
by parole evidence. any fact which
would impair
c. Irregular Indorser (Sec. 64, NIL) the validity of
Although the law does not state that all the instrument
irregular indorsers are accommodation parties, or render it
they are usually accommodation parties. valueless.
To whom warranties extend
To be considered as an irregular indorser: Liable to all parties Warranties extend to
1. A person must not be a party to the who derive their title immediate transferee
instrument; through his only
2. He must have signed the instrument in blank; endorsement
and
3. He must have signed before delivery. General Indorser Person Negotiating by
Where a person puts his signature after Mere Delivery or by
delivery, this section does not apply. It Qualified Indorsement
is section 17 (f) and Section 63 which Nature of Liability
apply. There is secondary No secondary liability;
liability and warranties liable only for breach
The party is called an irregular or an anomalous of warranty
indorser because he indorses in an unusual, Warranty as to ignorance of certain facts
singular or peculiar manner. His name appears Warrant that the Warrants that he has
where we would naturally expect another instrument is, at the no knowledge of any
name. time o his fact which would
indorsement, valid impair the validity of
Liability of irregular indorser and subsisting the instrument or
An irregular indorser is liable as a general regardless o whether render it valueless
indorser because he indorses without he is ignorant of that
qualification. fact or not
To whom warranties extend
2. Limited Liability (Sec. 65; Metropol Financing To subsequent holders Person Negotiating by
v. Sambok, GR L-39641, February 28, 1983) in due course; Mere delivery to
subsequent parties immediate transferee
Qualified Indorser Person Negotiating by deriving their title only
Delivery from holders in due
Warranties course and his Qualified indorser to
1. Instrument is Same warranties immediate transferee all parties who derive
genuine and in their title through his
all respects indersement
what it
purports to be; d. Agents
2. He has good An agent incurs all liabilities of a maker, drawer,
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
accpetor or indorser who acted through him,
unless he discloses the name of his principal
and the fact that he is acting only as an agent.
When person signing the instrument NOT
deemed an indorser:
a. The person who signed the instrument has
clearly indicated by appropriate words his
intention to be bound in some other capacity
(Sec. 63, NIL).
b. A person signs for the purpose of identifying
a person only and not for the purpose of
incurring any liability (American Bank v.
Macondray & Co., GR No. 1808, August 23,
1905).
c. A person only guarantees prior endorsements
(PNB v. CA, GR L-26001, October 29, 1968).
Conditions precedent to make endorser liable:
a. Presentment for payment or acceptance; and
b. If the instrument is dishonored, the proper
proceedings must be taken.
Order of Liability
There is no order of liability among the
ondorsers as against the holder. He is free to
choose to recover from any ondorser in case of
dishonor of the instrument (Notes and Cases on
Banks, Negotiable Instruments and other
Commercial Documents Aquino, 2006ed).
As respect one another, indorsers are liable
prima facie in the order in which they indorse
unless the contrary is proven (Sec. 68, NIL).
ACCOMMODATION
Accommodation
A legal arrangement under which a person
called the accommodation party, lends his
name and credit to another called the
accommodated party, without any
consideration.
Accommodation Party (AP)
Requisities:
1. He must be a party to the instrument, signing
as maker, drawer, acceptor, or indorser
2. He must not receive value therefor; and
3. He must sign for the purpose of lending his
name or credit (Sec. 29, NIL).
Note: Without receiving value therefor, means
without receiving value by virtue of the
instrument (Clark v. Sellner, GR 16477,
November 22, 1921).
Relation between accommodation party and
accommodated party
When the accommodation party makes
payment to the holder of the note, it has the
right to 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; the
accommodation party generally regarded as a
surety for the party accommodated. However,
the accommodation party cannot recover from
the accommodation party. as between them,
absence of consideration is a defense.
Liabiity of an Accommodation Party
Liable on the instrument to a holder for value
notwithstanding such holder, at the time of the
taking of the instrument, knew him to be only
an accommodation party. Hence, as regards, an
accommodation party, the 4th condition, i.e.
lack of notice of infirmity in the instrument or
defect in the title of the persons negotiating it,
has NO application (Stelco Marketing Corp. v.
Court of Appeals, GR No. 96160, June 17, 1992).
Note: The cooperation is not liable of it acts as
an accommodation part. This is because the
issue or indorsement of negotiable paper by a
corporation without consideration and for the
accommodation of another is ultra vires.
Hence, one who has taken the instrument with
knowledge of the accommodation nature
thereof cannot recover against a corporation
where it is only an accommodation party
(Crisologo- Jose v. CA, GR No. 80599 September
15, 1989).
Liability of an Accommodated Party
When the accommodation party makes
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

payment to the holder of the notes, they have consideration as a defense

the right to sue the accommodated party for Cannot avail of the Can avail of said
reimbursement since the relation between defense of absence or defense against a
them is in effect of a principal and sureties, the failure of person NOT a holder
accommodation parties being the sureties. consideration against in due course
a holder NOT in due
Specific Rights of Accommodation Party: course
1. Right to revoke accommodation; Right to sue
2. Right to reimbursement from an After paying the May not sue any
accommodated party after making the payment holder, may sue for subsequent party for
(Agro Conglomerates Inc. v. CA, GR No. 117660, reimbursement the reimbursement (Phil.
December 18, 2000). accommodated party National Bank v.
3. Right to contribution from other solidary Maza, GR No. L-24224,
accommodation parties, if any. November 3, 1925)

An accommodation party may demand LIABILITY TO THE INSTRUMENT

contribution from his co-accommodation party General Rule: A person whose signature does
without first directing his action against the not appear on the instrument is not liable. (Sec.
principal debtor PROVIDED. 18, NIL).
a. He made the payment by virtue of
judicial demand; or Exceptions (PITACA-DF)
b. The principal debtor is insolvent 1. Persons whose signature were forged but
(Sadaya v. Sevilla, GR No. L-17845, April 27, who are precluded from setting up the defense
1967). of forgery (Sec. 23, NIL);
2. Incapacitated persons who sign through their
Accommodation Party Regular Party legal guardians;
Purpose for signing 3. One who signs in a trade or assumed name
Signs instrument for Does not sign for that (Sec. 18, NIL);
the purpose of lending purpose in which the 4. One who signs through an agent or
his name or credit to accommodation party authorized representative (Sec. 19, NIL);
some other person did. 5. In case of constructive acceptance (Sec. 137,
(Sec. 29, NIL) NIL);
Value received 6. Indorsers who sign on a separate piece of
Signs instrument Signs instrument for paper (allonge)
without receiving value 7. Persons who negotiate by mere delivery.
value therefor They are liable for breach of warranty although
Availability of parole evidence they did not sign. (Sec. 65, NIL);
May always show by Can not disclaim or 8. Forgers of signature (Sec. 23, NIL).
people eveidence that limit his personal
he is only such a party liability as appearing DEFENSES
on the instrument by the right of the holder to enforce payment of a
parole evidence negotiable instrument may be defeated by the
(Maulini v. Serrano, defenses that may be raised by the person
GR No. L-8844, primarily or secondarily liable.
December 16, 1914;
Velasco v. Viluan 43 Real Defenses Personal Defenses
Phil 195) Nature
Availability of absence or failure of Those that attach to Those which are
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

the instrument itself available only against of instrument;

and are available a person not a holder Corporation; 6. Filling up
against all holders, in due course or a 11. Discharge blank beyond
whether in due course subsequent holder Insolvency reasonable
or not, but only by the who stands in privity 12. Fraud in time (Sec. 14);
parties entitled to with him (aka Factum or 7. Absence or
raise them. (aka equitable defences) Esse failure of
absolute defences) Contractus consideration
Status of contract Fraud whether
Void Voidable Execution; partial or tiatl
Availability against HDC 13. Execution of (Sec. 20)
Available against HDC Not available against instrument 8. Illegal
HDC 14. Marriage in consideration
Defenses the case of a (Sec. 55)
Key: Key: wife; 9. Filling up
Note: An instrument blank not
PAID-WIFI-MUD-FEM (CUBIC-RAIN-WIFI- subject to real defense within
MICU) cannot be enforced authority (Sec.
1. Prescription against the person to 14);
2. Material 1. Non-delivery whom thedefense is 10. Want of
Alteration of complete available but it can be authority of
(Sec. 124) instrument enforced against those agent where
3. Illegality if (Sec. 16); whom such defense is he has
declared void 2. Ultra vires not available such as apparent
for ay acts of under Sec. 23 authority;
purpose; corporations 11. Fraud in
4. Duress where the inducement;
amounting to corporation 12. Acquisition by
forgery; has the power force, duress
5. Want of to issue or fear (Sec.
authority of negotiable 55);
agent; paper but the 13. Intoxication
6. Non-delivery issuance was 14. Mistake
of incomplete not authorized 15. Insanity where
instrument for the there is no
(Sec. 15); particular notice of
7. Forgery (Sec. purpose which insanity on
23) it was issued; the part of the
8. Insanity where 3. Negotiation in one
the insane breach of faith contracting
person has a (Sec. 55); with the
guardian 4. Insertion of insane person
appointed by wrong date in 16. Negotiation
the court; an instrument under
9. Minority (Sec. 13); circumstances
(available only 5. Conditional that amount
to the minor); Delivery of to fraud (Sec.
10. Ultra Vires Act Complete 55)
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
17. Acquisition of
the
instrument by
unlawful
means (Sec.
55)
Effects of Certain Defenses
A. Minority
Negotiation by a minor passes title to the
instrument (sec. 22). Furthermore, under secs.
60, 61 and 62, the maker, drawer and acceptor,
by making, drawing and accepting the
instrument, admits the capacity of the payee to
indorse. But the minor is not liable and the
defense is personal to him. Thus, other parties
who are capacitated cannot invoke such
defense.
Note: However, the minor shall be liable under
the following exceptions: (1) the minor actively
misrepresents his age and it appears that he is
physically of such age (estoppel); (2) the minor
kept the fruits or benefits; and (3) the minor
spent the money in good faith (Art. 1427, NCC).
B. Fraud
1. Fraud in Factum (Real Defense)
In case of FRAUD IN FACTUM, the person who
signs the instrument lacks knowledge of the
character or essential terms of the instrument.
But the defense is not available if the party
involved had reasonable opportunity to obtain
such knowledge.
An essential element is that the maker or
indorser must have exercised ordinary diligence
andd in no manner contributed negligently to
the imposition.
2. Fraud in Inducement (Personal Defense)
The person who signs the instrument intends to
sign the same as a NI but was unduced by fraud.
C. Incomplete but Delivered NI (Sec. 14, NIL)
a. Prima Facie Authority to Complete the
Instrument -
Requisites:
i. Want of a material particular in the
instrument.
Note: Material particular includes the matters
stated in Sec. 125 of the NIL.
ii. Possession thereof by a person;
iii. That such person had authority to fill up the
bank:
(1) Strictly in accordance with the authority
given; and
(2) Within a reasonable time
b. Prima Facie Authority to Fill it Up For Any
Amount-
Requisites:
i. Signature on a blank paper
ii. Person signing in blank delivers it to another;
iii. Delivery was for the purpose if converting it
into a negotiable instrument.
If the holder of the instrument, after it was
filled up, is a holder in due course, the holedr
may enforce the instrument as if it has been
filled up strictly ina ccordance with the
authority given and within a reasonable time
(Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents,
Aquino, 2006 ed).
D. Incomplete and Undelivered NI (Sec. 15, NIL)
Two steps in the execution of a negotiable
instrument:
1. The act of writing the instrument completely
and in accordance with Sec. 1; and
2. The delivery of the instrument with the
intention of giving effect thereto.
Note: If completed and negotiated without
authority, not a valid contract against a person
who has signed before delivery of the contract
even in the hands of holders are liable. This is a
REAL defense which belongs to the drawer (or
parties, if any prior to the delivery of the
instrument to the payee) against any holder.
Reason: The law does not make any distinction
between holder in due course and one who is
not a holder in due course.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

E. Complete but Undelivered NI (Sec. 16)

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.
Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect
thereto.

Rules
As Regards Immediate Parties and Remote As Regards Holders in Due Course
Parties who are not HDC
Delivery must be coupled with the intention of Delivery is conclusive if he is in possession of a
transferring title to the instrument and made complete instrument so as to make all prior parties
either by or under the authority of the party to him liable
making, drawing, accepting or indorsing, as the
case may be.
It may be shown that: It cannot be shown that there was no delivery, or
that delivery was not authorized, or that it was
a. There was no delivery conditional, or delivery was for a special purpose
b. Delivery was not authorized; only.
c. Delivery was conditional; or
d. Delivery was for a special purpose only

Comparison of Sections 14, 15, and 16 of the Negotiable Instruments Law

Section 14 Sec. 15 Sec. 16
Delivery Delivered Undelivered Undelivered

Note: Delivery may be

conditional or for a special
purpose only and not for
the purpose of
transferring the property
in the instrument
Completeness Wanting in Blank paper Mechanically Mechanically complete
any with incomplete
material signature
particular
Authority of Prima facie Signature No authority to May negotiate if delivered
person in authority operates as complete and/or to him by or under the
possession to a prima negotiate instrument authority o the party
complete it facie making, indorsing,
by filling authority to drawing or accepting, as
up the fill it up as the case may be
blanks such for any
therein amount
When enforceable If filled up strictly in Not endorceable When delivery is made by
accordance with or under authority of the
authority given and within party making, indorsing,
a reasonable time drawing or accepting, as
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

the case may be

Kind of defense Personal Real Personal
Rights of Holder 1. If HDC, he can None in the hands of Can enforce the
enforce the any holder. However, instrument.
instrument as the invalidity of the
completed against instrument is only with
parties prior or reference to parties
subsequent to the whose signatures Note: Where the
completion appear on the instrument is in the hands
2. If not a HDC, he instrument after of a HDC, a valid delivery
can enforce the delivery, the instrument thereof by all parties prior
instrument as is valid. to him so as to make them
completed only liable to him is
against parties conclusively presume.
subsequent to the Where the instrument is
completion but no longer in the
not against those possession of a party
prior thereto. whose signature appears
thereon, a valid and
international delivery to
him is presumed until the
contrary is proved.

Effects of Want of Consideration (Sec. 28)

Type of transaction involved
F. Absence or Failure of Consideration (Sec. 28) Embraces transactions Implies that the giving
Personal defense to the prejudice of a party and where no of valuable
available against any person not holder in due consideration was consideartion was
course. intended to pass contemplated but that
it failed to pass.
Partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and Both are valid defenses against a person not a
liquidated amount or otherwise (Sec. 29). holder in due course. These defenses are
therefore ONLY personal or equitable.
Absence of Failure of
Consideration Consideration Partial failure of consideraton is merely a
Definition defense or liquidated amount or otherwise
It is the total lack of It is the neglect or (Sec. 28, NIL).
any valid failure of one of the
consideration parties to give, to do, Note: The drawee, by accepting unconditionally
to to perform the the bill, becomes liable to the holder, and
consideration agreed therefore cannot allege want of consideration
upon. between him and the drawer.

Reason: The holder is a stranger as regards the

transaction between the drawer and the
drawee, and if the holder has given value to the
drawer and has no knowledge of any equity
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
between the drawer and the drawee, he is in
the same situation as an indorsee in good faith
(Commercial Laws of the Philippines, Vol. 1,
Aguedo Agbayani, 1992ed).
Consideration founded on (1) love and affection
or (2) upon gratitude is good consideration but
does NOT constitute such valuable
consideration as is sufficient of itself to support
the obligation of a bill or a note.
G. Prescription
Refers to extinctive prescription and may be
raised even against a holder in due course.
Under the Civil Code, the prescriptive period of
an action based on a written contract is 10
years from accrual of cause of action.
In case of checks, the action of the depositor
against his drawee bank commerces to run from
the time he is given notice of payment
(Philippine Commercial International Bank v.
CA, GR No. 121413, January 29, 2001).
The failure of the payee to encash a check for
more than 10 years `undoubtedly resulted in
the impairment of the check through his
unreasonable and unexplained dealy.` (Myron
C. Papa v. A. U. Valencia et. al., GR No. 105188,
January 23, 1998).
Note: This is contrary to NAMARCO vs. F.U.N.D.
(GR No. L-22578, January 31, 1973). In this case,
the SC held that the delivery of promissory
notes payable to order, or bills of exchange or
drafts or other mercantille document shall
produce the effect of payment only when
realized, or when by the fault of the creditor,
the privileges inherent in their negotiable
character have been impaire. The clause of
Article 1249 is applicable ONLY to instruments
executed by THIRD PERSONS and delivered by
the debtor to the creditor, and does NOT apply
to instruments executed by the debtor himself
and delivered to the creditor.
H. Material Alteration
It refers to any alteration which changes the
date, sum payable, time or place of payment,
number or relation of the parties, or medium of
currency of payment, or adds a place of
payment where non is specified or which alters
the effect of the instrument in any respect (PNB
v. CA GR :-266001, October 29, 1968).
It is a `partial` real defense because the holder
in due course can enforce it according to its
original tenor.
In the case at bar, the check was altered so that
the amount was increased from P1,000.00 to
P91,000.00 and the date was changed from 24
November 1994 to 14 November 1994.
Apparently, since the entries altered were
among those enumerated under Section 1 and
125, namely, the sum of money payable and the
date of the check the instant controversy
therefore squarely falls within the purview of
material alteration. (Metrobank vs. Cabilizo G.R.
No. 15446 December 6, 2006).
An alteration is said to be material if it alters the
effect of the instrument. In other words, a
material alteration is one which changes the
items which are required to be stated under
Sec. 1 of the Negotiable Instruments Law (PNB
v. CA GR L-26001, October 29, 1968).
Note: The alteration mentioned herein is under
sec. 124 must be distinguished from sec. 23.
The intent to defraud distinguishes forgery from
innocent alterations and spoilation. Sec. 23
applies only to forged signatures or signatures
made without bthe authority of the person
whose signature it purports to be.
Consequently, if the forgery consists of
alteration in the amount, Sec. 124 appllies.
(Agbayani, pg. 198)
Changes in the following constitute material
alterations: (Sec. 125, NIL)
1. Date;
2. Sum payable, either for principal or interest
3. Time of place of payment;
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
4. Number or relations of the parties;
5. Medium or currency in which payment is to
be made;
6. That which adds a place of payment where
no place of payment is specified; and
7. Any other change or addiction which alters
the effect of the instrument n any respect.
A serial number is an item which is not an
essential requisite for negotiability under Sec. 1,
NIL, and which does not affect the rights of the
parties, hence its alteration is not material (PNB
v. CA, 256 SCRA 491 cited in; international
Corporate Bank v. CA & PNB, GR No. 129910,
September 5, 2006)
In his work, `Pandect of Commercial :aw and
Jurisprudence,` Justice Vitug opines that `an
innocent alteration (generally changes on items
other than those required to be stated under
Sec. 1, NIL) and spoilation (alterations done by a
stranger) will not avoid the instrument but the
holder may enforce it only according to its
original tenor.
Also, change of name of the payee is NOT
considered as a material alteration. This time,
however, it cant be enforced according to its
original tenor.
Effects:
a. Alteration by a party - Avoids the instrument
EXCEPT as against the party who (1) mad, (2)
authorized, or (3) assented to the alteration and
(4) subsequent indorsers. However, if an altered
instrument is negotiated to a holder in due
course, he may enforce payment thereof
according to its original tenor regardless of
whatever the alteration was innocent or
fraudulent.
Note: Since no distinction is made, it does not
matter whether it is favorable or unfavorable to
the party making the alteration. The intent of
the law is to preserve the intergrity of the
negotiable instruments.
b. Alteration by a stranger (spoilation) - the
effect is the same as where the alterationis
made by a party in which case a holder in due
course can recover on the original tenor of the
instrument (Sec. 124).
I. Ultra Vires Acts
A corporation may raise want of authority as a
real defense but the negotiation of the
corporation may pass title to the instrument.
Ultra vires act- one committed outside the
object for which a corporation is createdas
defined by the law of its organization and
therefore beyond the power conferred upon it
by law.
It is merely voidable which may be enforced by
performance.
J. Ante-dating or Past-dating
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
(Section 12, NIL)
However, ante-dating for the purpose of hiding
an illegal imposition of grossly excessive
interest may make the ante-dating a defense.
K. Insertion of a wrong date
If a wrong date is inserted, the holder in due
course has the right to regard the wrongfully
inserted date as the true date.
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.
(Section 13, NIL)
L. Forgery
Counterfeiting or fraudulent alteration of any
writing, which may consist of:
1. Signing of another`s name with intent to
defraud; or
2. Alteration of an instrument in the name,
amount, name of payee, etc. with intent to
defraud.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
Effects:
1. When a signature is forged or made without
the authority of the person, the signature (not
the instrument itself and the genuine
signatures) is wholly inoperative.
2. NO right to retain the instrument, or to give
discharge therefore, or to enforce payment
thereof against any party thereto, can be
acquired.
Exception: Unless the party against whom it is
sought to enforce such right is precluded from
setting up the forgery or want of authority (Sec.
23, NIL).
Persons precluded from setting up defense of
forgery
1. Persons who warrant or admit the
genuineness of the signature in question.
Warrantors of genuineness include:
a. Indorsers- The Supreme Court, in the case of
Republic Bank v. Ebrada (G.R. No. L-40796 July
31, 1975), applied Section 23 of the NIL which
states that the forged signature is not wholly
inoperative. In saying so, the SC further held
that it did not mean however, that nobody is
precluded, the indorsers can be held liable
because of their breach of warranty that the
instrument is genuine in all respect what it
purports to be.
b. Persons negotiating by mere deliver, and
c. Acceptors
2. Those who by their acts, silence, or
negligence,are estopped from setting up the
defense of forgery.
These include acts or omission that amounts to
ratification, express or implied.
BUT a person precluded from raising the
defense of forgery may still recover damages
under the Civil Code provisions on quasi-delicts.
If the instrument is payable to bearer, the
forgery of the indorsement is immaterial since it
is negotiable by mere delivery.
Note: A person whose signature is forged as
maker, drawer, payee or indorsee of a note or
check was never a party or did not ever consent
to the contract which gave rise to the
instrument. Since his signature does not appear
in the instrument, he cannot be held liable
thereon by anyone (Gempesaw v. CA, GR No.
92244, February 9, 1993).
In case of forery of an indorsemet of an
instrument payable to order, it is not only the
person whose signature was forged who would
not be liable but also the parties prior to such
person. Payment under a forged indorsement is
not the drawer`s order. (Sundiang Aquino
Reviewer, 2006ed).
The general rule is that in the case of forgery of
the indorsement of the payee of the check the
drawee bank cannot debit the drawer`s account
and that loss shal be borne by the drawee bank.
The dopositary or collecting bank is liable to the
drawee in case of forged indorsement because
it guarantees all prior indorsements. But, this is
subject to the qualification that the drawee
himself was not negligent or guilty of such
conduct as would estop him from asserting the
forged character of the indorsement as against
the drawer. (Ibid).
24 Hour Clearing Rule
When the drawer bank fails to return a forged
check or altered check to the collecting bank
within the 24-hour clearing period the collecting
bank is absolved from liability (Republic Bank vs.
CA GR No. 12725, April 22, 1991).
Cut-Off Rule
Parties PRIOR to the forged signature are cut-
off from the parties AFTER the forgery in the
sense that prior parties cannot be held liable
and can raise the defense of forgery. The holder
can only enforce the instrument against parties
who became such after the forgery.
Exception: When the prior parties are
precluded from setting up the defense of
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

forgery either because of their warranties, authorized signatory of the corporation

representation or negligence (Gempesaw v. CA,
Ibid).
Where a depositor is using its own personalized
checks, its failure to provide adequate security
measures to prevent forgeries of checks
constitutes gross negligence and bars it from
setting up the defense of forgery (MWSS v. CA,
GR No. L-62943, July 14, 1986).
BUT the mere fact that a check had been
removed and stolen in a checkbook without the
knowledge and consent of the owner cannot be
considered negligence. (PNB vs. Quimpo, GR
No. L-53194. March 14, 1988).
Illustration:
(Samsung Corp. and Supply Company vs. Far
East bank and Trust Company, G.R. No. 134712,
August 13, 2004)
3. BUT if there is a collecting bank, the
collecting bank bears the loss.
Reason: The Collecting Bank or last indorser
generally suffers the loss because it has the
duty to ascertain the genuineness of all prior
indorsements considering that the act of
presenting the check for payment to the
drawee is an assertion that the party making
the presentment has done its duty to ascertain
the genuineness of the indorsements (Banco De
Oro Savings and Mortgage Bank c. Equitable
Banking Corporation, 157 SCRA 188)

Rules on Forgery
C forged then indorsed to D 1. Promissory Notes
M ---- A ---- B ---- C ---- D ---- E ---- H

Order Instrument Bearer Instrument

Maker s signature forged
Maker is not liable Maker is not liable
1. A and B can raise the defense of forgery for because he never
being parties prior to the forgery as against C, became a party to
D, E, and H unless precluded from setting up the
the instrument
forgery.
2. H can enforce the instrument only against C,
Indorsers subsequent Indorsers may be made
the forger, D, E, and M, the maker unless
to forgery are liable liable to those persons
precluded from setting up the forgery.
because of their who obtain title
warranties through their
Note: The liability of maker is absolute if the
indorsements.
instrument involved is a payable to BEARER.
Party who made the Party who made the
forgery is liable. forgery is liable.
Test to determine who will bear the loss in
Payee s signature forged
cases of a forged check:
1. Was there a gross negligence on the part of Maker and payee not Maker is liable
the drawer? If yes, DRAWER (MWSS v. CA, GR liable
No. L-62943, July 14, 1986). Indorsers subsequent Indorsement is not
2. If there is none, it should be the drawee- to forgery are liable necessary to title and
bank. the maker engages to
pay holder
Reason: The drawee-bank should have known Party who made the Party who made the
that the signature was forged considering that forgery is liable forgery is liable
the signature appearing on the check was even Indorser s signature forged
compared with the specimen signature of the Maker, payee and Maker is liable.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

indorser whose Indorsement is not Payee s signature forged

signature was forged necessary to title and Drawer, drawee and Drawer is liable (his
is not liable the maker engages to payee not liable. Cut- indorsement is not
pay the holder. off rule applies necessary to pass title)
Indorsers subsequent Indorser whose
to orgery are liable signature was forger Drawee is liable (No
because of their not liable
privity between
warranties
Party who made the Party who made the drawer and payee
forgery is liable forgery is liable. because indorsement
of payee is not
2. Bills of Exchange necessary) (Ang Tek
Lian case, GR L-2516,
Order Instrument Bearer Instrument September 25, 1950)
Drawer s Signature forged
Drawer is not liable Drawer is not liable Payee is not liable
because he never Indorsers subsequent Collecting bank is liable
became a party to the to forgery are liable because of warranty.
instrument (such as collecting
Drawee is liable I it Drawee is liable if it bank)
paid (no recourse to paid. Drawee cannot
drawee because he recover from the But it may recover
admitted the collecting bank from the person who
forged the
genuineness of the because it is bound to
indorsement on the
drawer s signature. know the drawer s check and deposited or
signature since the encashed the same
latter is its depositor. (Jai-Alai Corp v. Bank
Drawee cannot of PI, GR No. L-29432,
recover from the August 6, 1975)
collecting bank Party who made the Party who made the
The drawee may forgery is liable. forgery is liable.
because there is no recover from the
privity between the Indorser s signature forged
drawer when the
collecting bank and Drawer, payee and Drawer is liable
latter s negligence is
the drawer. The latter indorser whose (indorsement not
the proximate cause o
does not give any signature was forged necessary to title)
the loss or contributed
warranty regarding not liable. (Cut off
thereto (Gempesaw v.
the signature of the rule does NOT apple)
CA, 218 SCRA 682).
drawer (Associated Drawee is liable if it Drawee is liable.
Bank v. CA, 208 SCRA paid.
465), Indorsers subsequent Indorser whose
Indorsers subsequent to forgery are liable signature was forged is
to forgery liable (such (such as collecting liable because
as collecting bank or bank) indorsement is not
last endorser) necessary to title.
Party who made the Party who made the Party who made the Party who made the
forgery is liable. forgery is liable. forgery is liable. forgery is liable.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
ENFORCEMENT OF LIABILITY
Primary Liability
AS TO THE MAKER, the unconditional promise
attaches the moment the maker makes the
instrument.
While AS TO THE ACCEPTOR, the acceptor`s
assent to the unconditional order attaches the
moment he accepts the instrument.
No further act os necessary in order for the
liability to accreu. What is necessary only is for
the holder to enforce such liability by
presenting it for payment.
Secondary Liability
1. Indorser; and
2. Drawer
Their liability cannot be immediately enforced.
There are necessary steps which should be
taken in order to charge these persons. Unless
the holder is excused from taking any of the
steps, the persons secondarily liable are
discharged.
Steps in Promissory Note
1. Presentment for payment to the maker
unless excused.
Wehen presentment for payment is excused:
a. After exercise of reasonable diligence, it
cannot be made;
b. Drawee is a fictitious person;
c. Express or implied waiver (Sec. 82, NIL).
2. If dishonored by non-payment, notice of
dishonor should be given to the persons
secondarily liable unless excused.
When notice of Dishonor is excused:
a. When notice is waived;
b. When dispensed with under Sec. 112;
c. As to drawer under Sec. 114
d. As to indorser, under Sec. 115
e. Where due notice of dishonor by non-
acceptance has been given;
f. As to the holder in due course without notice.
Steps in Bill of Exchange
1. Presentment for acceptance or negotiation
within a reasonable time after it is acquired
ONLY in the following instances:
a. Where the bill is payable after sight;
b. When it is necessary in order to fix the
maturity of the instrument;
c. Where the bill expressly stipulates that it shall
be presented for acceptance;
d. Where the bill is drawn payable elsewhere
than at the residence or place of business of the
drawee (Sec. 143, NIL).
Note: In all the above cases, the holder must
either present the bill for acceptance or
negotiate it within a reasonable time;
otherwise, the drawer and all indorsers are
discharged (Sec. 144, NIL).
2. If dishonored by non-acceptance:
a. Notice of dishonor given to drawer and
indorsers unless excused; or
b. Protest in case of a foreign bill unless
excused.
3. If bill is accepted:
a. Presentment for payment to the acceptor
unless excused under Sec. 82
b. If dishonored upon presentment for
payment:
i. Notice of dishonor to persons secondarily
liable; or
ii. Protest for dishonor by non-payment in case
of foreign bill
Steps in Order to Charge Persons Secondarily
Liable in Other cases:
1. Protest for non-payment by drawee in order
to charge an acceptor for honor (Sec. 165 and
167) or a referee in case of need (Sec. 167, NIL);
2. Protest for non-payment by the acceptor for
honor is also required (Sec. 17, NIL)
Presentment
The production of a BE to the drawee for his
acceptance, or to the drawee or acceptor for
payment or the production of a PN to the party
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
liable for the payment of the same (Sec. 70,
NIL).
A. Presentment for Payment Consists of:
1. Personal demand for payment at the proper
place; and
2. Readiness to exhibit the instrument, if
required, and
3. To receive payment and to surrender the
instrument if the debtor is willing to pay.
Note: Mere informal talk not accompanied by
presentment is not sufficient. Demand on
phone is also not sufficient unless maker waives
exhibition (implied or express) (Gilpin vs.
Savage, 201 NY 167, 94 N.E. 656).
Requisites:
1. Made by the holder or any person authorized
to receive payment on his behalf;
2. At a reasonable hour on a business day;
3. At a proper place;
4. To the person primarily liable, or if he is
absent or inaccessible, to any person found at
the place where the presentment is made (Sec.
72, NIL).
General Rule: Presentment for payment is NOT
necessary in order to charge the person
primarily liable but it is necessary in order to
charge the drawer and indorser, except as
otherwise provided.
When not Required:
1. In order to charge the drawer
Where he has no right to expect or require that
the drawee or acceptor will pay the instrument
(Sec. 79) such as in case of a check where
payment has been stopped.
2. In order to charge an indorser
When the instrument was made or accepted for
his accommodation and he has no reason to
expect that the instrument will be paid if
presented (Sec. 80, NIL)
Note: Only the drawer and the indorser
referred to in these sections are not discharged
but all other parties secondarily liable are
relieved of their liability.
When DELAY in making presentment or of
giving notice is excused:
1. When caused by circumstances beyond the
control of the holder; and
2. Not imputable to his default, misconduct, or
negligence (Sec. 81, NIL).
When should be made:
Instrument When Payable
PN payable on Within reasonable
demand time after its issue
BE payable on demand Within reasonable
time after its last
negotiation
Payable on a specified Or the date it falls due
date (Sec. 11, NIL).
Note: In determining what reasonable time is,
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. 193, NIL).
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 (Sec. 86, NIL).
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
Instruments falling due or becoming payable on
Saturday are to be presented for payment on
the next succeeding business day.
Exception: The instruments which is payable on
demand may, at the option of the holder, be
presented for payment before twelve o`clock
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
noon on a saturday when that entire day is not
a holiday (Sec. 85, NIL)
Proper Place of Presentment (Sec. 73, NIL).
1. Where a place of payment is specified in the
instrument, it to be presented there.
2. Where no place of payment is specified but
the address of the person to make payment is
given in the instrument, it is there presented.
3. Where no place of payment is specified and
no address is given, the instrument is presented
at the usual place of business or residence of
the person to make payment.
4. In any other case, presented is to be made to
the person to make payment wherever he can
be found, OR presented at his last known place
of business or residence
If the instrument is, by its terms,
payable at a special palce, and the
person primarily liable is able and
willing to pay it there at maturity, such
ability and willingness are equivalent to
a tender of payment upon his part (Sec.
70, NIL).
Exhibition: (Sec. 74, NIL)
Purpose:
1. To enable the debtor to determine the
genuineness of the instrument and the rught of
the holder to receive payment; and
2. To enable him to reclaim possession upon
payment.
When excused:
1. When debtor does not demand to see the
instrument but refuses payment on some other
grounds; and
2. When the instrument is lost or destroyed.
Even if the rule requires that the
instrument must be exhibited to
determine its genuineness, this is
rendered unnecessary not only by the
omission to contest it, but also by the
admission of the authenticity of the
note implicit from the averment that
substantial payments were made
thereon and by the express waiver of
demand, presentment, protests and
notice of protest and non-payment in
the note (Jose Ma. Ansaldo v. Court of
Appeals, GR No. 47696, August 29,
1989).
Special cases:
1. Instrument payable at a bank - Must be made
during banking hours, unless there are no funds
to meet it at any time during the day,
presentment at any hour before the bank is
closed on that day is sufficient (
Sec. 75, NIL).
2. Person liable is dead - May be made to his
personal representative, if there be one, and if
he can be found (Sec. 76, NIL)
3. Persons liable are partners - may be made to
any of the partners, even if their partnership
has been dissolved (Sec. 77, NIL).
4. Persons liable are joint debtors - must be
made to all of them (Sec. 78, NIL).
B. Presentment for Acceptance Requisites:
1. Must be made by or on behalf of the holder;
2. At a reasonable hour on a business day;
3. Before the bill is overdue; and
4. To the drawee or some person authorized to
accept or refuse to accept on his behalf.
General Rule: Presentment for acceptance is
NOT necessary in order to render any party to
the bill liable.
When required:
1. Where the bill is payabale after sight, or
when it is necessary in order to fix the maturity
of the instrument;
2. Where the bill expressly stipulates that it
shall be presented for acceptance;
3. Where the bill is drawn payable elsewhere
than at the residence or place of business of the
drawee (Sec. 143, NIL).
Must either present it for acceptance or
negotiate it within a reasonable time;
upon failure to do so, the drawer and all
indorsers are discharged.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
When excused:
1. Where the drawee is dead, or has absconded,
or is a fictitious person or a person not having
capacity to contract by bbill;
2. After exercise of reasonable diligence,
presentment cannot be made;
3. Although presentment has been irregular,
acceptance has been refused on some other
ground (Sec. 148, NIL)
Rules: (Sec. 145, NIL)
1. Where a bill is addressed to two or more
drawees whoa re not partners, presentment
must be made to the, all unless one has the
authority to accept or refuse acceptance for all,
in which case presentment may be made to him
only.
2. Where the drawee is dead, presentment may
be made to his personal representative.
3. Where the drawee has been adjudged
bankrupt or insolvent or has made an
assignment for the benefit of creditors,
presentment may be made to him or to his
trustee or assignee.
A bill may be presented for acceptance
on any day on which negotiable
instruments may be presented for
payment under the provisions of Secs.
72 and 75 of the NIL.
Acceptance
The signification by the drawee of his assent to
the order of the drawer.
It is the act by which the drawee manifests his
consent to comply with the request contained
in the bill of exchange directed to him.
Form:
1. Must be in writing;
2. Signed by the drawee;
3. Must not express that the drawee will
perform his promise by any other means than
the payment of money (Sec. 132, NIL).
The holder of the 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 (Sec. 133, NIL).
Kinds:
1. General - assents without qualification to the
order of thee drawer.
2. Qualfied - which in express terms varies the
effect of the bill as drawn.
a. conditional - makes payment by the acceptor
dependent on the fulfillment of a condition
therein stated.
b. Partial - an acceptance to pay part only of the
amount for which the bill is drawn.
c. Local - 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 (sec. 141, NIL).
Effect of Qualified Acceptance
The drawer and indorsers are DISCHARGED
unless (1) they have expressly or impliedly
authorized the holder to take qualified
acceptance or (2) sunsequently assented
thereto.
THUS, a sunsequent party when caused the
dishonor of the check through its qualified
indorsement cannot hold prior indorsers liable
on the instrument (Melva Theresa Gonzales vs.
Rizal Commercial Banking Corporation, GR No.
166294, November 29, 2006).
The holder has the right to require the drawee
to accept the bill without qualificaton if the
latter refused he can treat the bill as dishonored
by nin-acceptance (Sec. 142, NIL).
3. Implied/Constructive Acceptance (Sec. 137,
NIL)
If after 24 hours, the drawee fails to return the
instrument. He is also deemed to have accepted
the instrument when he destroys the same.
Acceptance int he sense used in NIL is
not required for checks for the same
are payable on demand.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
Payment is not acceptance because the
latter is a promise to perform an act
while the former is the actual
performance thereof (PNB vs. CA, GR
No. L-26001, October 29, 1968)
4. Extrinsic (Sec. 134, NIL) - acceptance may be
made on a paper other than the bill.
5. Virtual (Sec. 135, NIL) - contemplates the
situation where an acceptance is made on a bill
has not yet been drawn.
Dishonor
Where a bill is duly presented for acceptance
and is not accepted within the prescribed time:
1. The person presenting it must treat the bill as
dishonored by non-acceptance or he loses the
right of recourse against the drawer and
indorsers; and
2. Proper notice of dishonor should be given to
the drawer and indorsers
Dishonor by Non-Payment
1. Payment is refused or cannot be obtained
after due presentment for payment;
2. Presentment is excused and the instrument is
overdue and unpaid (Sec. 83, NIL).
Effect: There is an immediate right of recourse
by the holder against persons secondarily liable.
However, notice of dishonor is generally
required (Sec. 84, NIL).
Dishonor by non-acceptance
1. When it is duly presented for acceptance and
such an acceptance is refused or cannot be
obtained; or
2. When presentment for acceptance is
excused, and the bill is not accepted. (Sec. 149,
NIL).
Notice of dishonor
Notice given by holder or his agent to party or
parties secondarily liable that the instrument
was dishonored by non-acceptance by the
drawee of a bill or by non-payment by the
acceptor of a bill or by non-payment by the
maker of a note (Sec. 89, NIL).
Requisites:
1. Given by holder or his agent, or by any party
who may be compelled by the holder to pay
(Sec. 90, NIL)
2. Given to secondary party or his agent (Sec.
97, NIL);
3. Given within the periods provided by law
(Sec. 102, NIL); and
4. Given at the proper place (Secs. 103 and 104,
NIL)
How given:
Notice of dishonor may be:
1. Oral, or
2. In writing.
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 for acceptance, and that it has been
dishonored; and
3. A statement that the party giving notice
intends to look for the party addressed for
payment.
By whom given:
1. The holder;
2. Another, on behalf of the holder; or
3. Any party to the instrument who may be
compelled to pay it to the holder, and who
would have a right of reimbursement from the
party to whom notice is given (Sec. 90, NIL)
to whom given:
1. Non-acceptance (bill) - to persons secondarily
liable, namely the crawer and indorsers as the
case may be
2. Non-payment (both bill and note) - indorsers
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties are
discharged. Notice may be given to the party
himself or to his agent.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

When Given: As soon as the instrument is Where a party receives notice of

dishonored (Sec. 102) dishonor, he has after ther eceipt of
such notice, the same time for giving
When dispensed with: notice to antecedent parties that the
1. When party to be notified knows about the holder has after the dishonor (Sec. 107,
dishonor actually or constructively (Sec. 115, NIL).
NIL). Waiver of Notice of Dishonor
2. If waived (Sec. 109, NIL), and
3. When after due diligence, it cannot be given When made:
(Sec. 112, NIL). 1. Before the time of giving notice, or
2. After the omission to give due notice
to whose benefit does a notice of dishonor
inure: Waiver may be expressed or implied (Sec. 109,
1. When given by or on behalf of a holder: NIL).
a. All parties prior to the holder, who have a
right of recourse against the party to whom the As to who are affected by an express waiver
notice is given; and depends on where the waiver is written:
b. All holders subsequent to the holder giving 1. If it appears in the body or on the face of the
notice (Sec. 93. NIL) instrument, it binds all parties; but
2. If it is written above the signature of an
Effect of lack of notice of dishonor on NI which indorser, it binds him only (Sec. 110)
is payable in installments:
1. No acceleration clause - failure to give notice When Notice of Dishonor is not required to be
of dishonor on a previous installment does not given to --
discharge drawers and indorsers as to Drawer (Sec. 14) (Sa- Indorser (Sec. 115)
succeeding installments. Fic-Pec)
2. With acceleration clause - it depends upon Drawer and drawee Drawee is a fictitious
whether the clause is optional or automatic. are the same person or does not
a. Automatic - failure to give notice of dishonor have the capacity to
as to a previous installment will discharge the contract, and indorser
persons secondarily liable as to the succeeding was aware of that fact
installments. at the time he
b. Optional - if not exercised, the rule would be indorsed the
the same as where there is no acceleration instrument
clause. If it is exercised, the rule would be the Drawee is a fictitious Indorser is the person
same as where the installment contains an person or not having to whom the
automatic acceleration clause. (Commercial the capacity to instrument is
Laws of the Philippines, Vol. 1, Agbayani, contract presented for
1992ed). payment
Drawer is the person Instrument was made
Dishonor in the hands of an Agent: to whome the or accepted for his
Agent can do either of the following: instrument is accommodation (Sec.
1. Directly give notice to persons secondarily presented for 115)
liable thereon; or payment
2. Give notice to his principal. In such case, he The drawer has no
must give notice within the time allowed by law right to expect or
as if he were a holder (Sec. 94, NIL). require that the
drawee or acceptor
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

will honor the (Sec. 16, NIL).

instrument
Where the drawer has An omission to give notice of dishonor by non-
countermanded acceptance does NOT prejudice the rights of a
payment (Sec. 114) holder in due course subsequent to the
omission (Sec. 117, NIL).
Note: If an instrument is not accepted by the
drawee, there is no sense presenting it again for
pament and notice of dishonor must at once be
given. If there was acceptance presentment for
payment is still required and if payment is
refused there is a NEED for notice of dishonor

Enforcement of Liability
Presentment Notice of Dishonor
Payment Acceptance
Nature of Promissory Notes Sec. 143 Promissory Note
Instrument
Bills of Exchange Bill is payable after Bills of Exchange
sight or when it is
Checks necessary in order to fix Checks
the maturity of the
instrument
Bill is drawn payable
elsewhere than at the
residence or place of
business of the drawee
By Whom Holder/Agent Holder/Agent Secs. 90 & 91

Holder/Agent
By or on behalf
of any party who
might be
compelled to pay
it to the holder
and who have a
right of
reimbursement
rom the party to
whom the notice
is given
To Whom Secs. 76, 77, 78 Sec. 145 Secs. 89&97

Person Primarily Liable Drawee/Agent WITH Drawer/Indorser or any

AUTHORITY TO ACCEPT OR person secondarily liable
Maker/Drawee REJECT (because acceptance or his Agent.
If debtor is deadm
gives rise to a liability on the
to his personal
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

representative party of the drawee)

If liable as
partners, If there are two or Sec. 98-101
presentment may more drawee who
be made to any are not partners, If dead, to his
one of them presentment must personal
If joint debtors, be made to all of representative
presentment must them unless one has If partners,
be made to all of authority to accept notice to any one
them or refuse for all. partner is
Any person found If drawee is deadm sufficient
at the place of presentment must If jointly liable,
presentment be made to his notice must be
(Substituted personal given to each of
Presentment) representative. them unless one
I adjudged bankrupt has authority to
or insolvent or has receive notice for
made an the others.
assignment, If adjudged
presentment must bankrupt or
be made to him, his insolvent or an
trustee or assignee. assignment was
made, notice
must be gien to
him, his trustee
or assignee
How made Sec. 74 By producing the bill Either VERBALLY or in
(because the bill will be WRITING
By exhibiting the stamped ACCEPTED)
instrument Must describe the
instrument and the state
the fact of presentment
and the fact of dishonor
When Made Secs. 72 & 85 If payable on a If living in the
future determinable same area,
If instrument is time, it must be notice must be
payable on a presented before it given w/in 24
future is overdue or at hours from
determinable maturity dishonour
time, must be If payable on If living in
presented on DUE demand the bill different area,
DATE, except must be presented the dropping of
when it falls due w/in reasonable letter in a
on a Saturday, time from last mailbox is
Sunday or a begotiation sufficient
holiday, in which including Saturday compliance.
case, presentment up to 12 noon
must be made on
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

the NEXT
BUSINESS DAY
Sec. 85/194

If instrument is
payable on
demand, it must
be made w/in
REASONABLE TIME
note ATER ISSUE
BillFROM LAST
NEGOTIATION

Checks- 6
MONTHS after
issue including
Saturday up to 12
noon
Where made Sec. 73 NO REQUIREMENT because Address of party
it is immaterial. indicated/added
Place designated in his instrument
by the parties What is important is that the If none, at his
If none, at the bill was accepted. residence or
address of the office
maker/acceptor as If none, where he
stated in the is sojourning
instrument
If none, at his
residence or office
If none, any place
where he is found
How excused Secs. 79-82 Sec. 148 Secs. 112-114 (DRAWER)

When the drawer Drawee is deadm After the

has no right to absconded a exercise of due
expect or require fictitious person or a diligence, it
that the drawee or person not having cannot be given
acceptor will pay the capacity to to or does not
the instrument contract by bill reach the parties
Where the After the exercise of sought to be
instrument was due diligence, charged
made or accepted presentment cannot Delay is caused
for his be made by circumstances
accommodation Although beyond the
and he has no presentment was control of the
reason to expect irregular, acceptance holder and not
that the has been refused on imputable to his
instrument will be some other ground default,
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

paid if presented misconduct or

When the delay is negligence
caused by Drawer is a
circumstances fictitious person
beyond the control or a person not
of the holder and having the
not imputable to capacity to
his default, contract
misconduct or Drawer is the
negligence person to whom
Even after the the instrument is
exercise of due presented for
diligence, payment
presentment Drawer has no
cannot be made right to expect or
Drawee is a require that the
fictitious person drawee of
Waiver, express or acceptor will
implied honor the
instrument
Drawer has
countermanded
payment

Sec. 115 (INDORSER)

When the
drawee is a
fictitious person
or a person not
having the
capacity to
contract and the
indorser was
aware of that
fact at the time
he indorsed the
instrument
Indorser is the
person to whom
the instrument
was presented
for payment
When the
instrument was
made or
accepted or his
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

Foreign Bill of Exchange
One which is or on its face purports to be:
1. Drawn in the Philippines but payable outside
the Philippines; OR
2. Payable in the Philippines but drawn outside
the Philippines.
accommodation.
Note: Protest is necessary only in case of
foreign bills of exchange, which have been
dishonoured by non-acceptance or non-
payment
Effect of non-protest: the drawer and indorsers
are discharged (Sec. 118 NIL).

Inland Be Foreign Be Protest is absolutely required:

A bill which or on its One which is or on its 1. Upon dishonour by non-acceptance of
face purports to be face purports to be a foreign bill appearing on its face to be
both drawn and drawn or payable such (Sec. 152, NIL)
payable WITHIN the OUTSIDE the 2. Upon dishonour by non-payment of a
Philippines Philippines foreign bill appearing on its face to be
such, if not having been previously
dishonoured by non-acceptance;
Protest 3. Before a bill can be accepted for honor,
The formal instrument executed usually by a it must be protested for dishonour by
notary public certifying that the legal steps non-acceptance or protested for better
necessary to fix the liability of the drawee and security (Sec. 161, NIL).
the indorsers have been taken. 4. Before a bill can be presented for
payment to the acceptor for honor or
the referee in case of need, it must be
Requisites: protested by the holder for non-
1. Must be made by (a) notary public; or (b) any payment to any party liable thereon
respectable resident of the place where the bill (Sec. 167, NIL).
is dishonored, in the presence of 2 or more 5. Upon dishonour of the bill by the
credible witnesses (Sec. 154, NIL); acceptor for honor for non-payment by
2. Must be annexed to the bill, or must contain the acceptor for honor (Sec.170, NIL);
a 6. Before a bill can be paid for honor, it
copy thereof; must be protested by the holder for
3. Must be under the hand and seal of the non-payment by any party liable
notary making it; thereon (Sec 171, NIL).
4. Must specify - (a) The time and place of
presentment; (b) The fact that presentment was Notice of Dishonor Protest
made and the manner thereof; (c) The cause or
reason for protesting the bill; (d) The demand When required
and the answer given, if any or the fact that the
drawee or acceptor could not be found (Sec. Required inland bill Required in foreign bill
153, NIL)
Form
Purposes:
1. For uniformity in international May be oral or Always written
transactions; and written
2. To furnish an authentic and satisfactory
evidence of dishonour. By whom made
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

May be made by a Made by a notary 4. Bill must not be overdue;

party or agent public or a respectable 5. Must follow the formalities prescribed
resident in the in Sec. 162, to wit: (a) Must be in
writing; (b) Must indicate that it is an
presence of witness
acceptance for honor; (c) Signed by the
acceptor for honor; (d) Must contain an
Where made
express or implied promise to pay
Made in residence of Made in the place of money; (e) The accepted bill for honor
must be delivered to the holder.
parties dishonor
Payment for Honor
Payment made by a person, whether a party to
When Made: On the day of dishonour unless
the bill or not, after it has been protested for
delay is excused.
non-payment, for the benefit of any party liable
thereon or for the benefit of the person for
Where Made: At the place where it is
whose account it was drawn (Secs. 171-177,
dishonoured expect where the bill is payable at
NIL)
a place other than the residence of the drawee.
Requisites:
Protest for better security One made by the
1. The bill has been dishonoured by non-
holder of a bill after it has been accepted but
payment;
before it matures, against the drawer and
2. It has been protested for non-payment;
indorsers, where the acceptor has been
3. Payment supra protest (another term
adjudged a bankrupt or an insolvent, OR has
for payment for honor because prior
made an assignment for the benefit of the
protest for non-payment is required) is
creditors (Sec. 158, NIL).
made by any person, even by a party
thereto;
Purpose: To give the acceptor the opportunity
4. The payment is attested by a notarial
to perform an act that will ensure payment.
act of honor which must be appended
to the protest or form an extension of
Acceptance for Honor
it;
An undertaking by a stranger to a bill, after
5. The notarial act must be based on the
protest for the benefit of any party liable
declaration made by the payor for
thereon or for the honor of the person for
honor or his agent of his intention to
whose account the bill is drawn which
pay the bill for honor and for whose
acceptance inures also to the benefit of all
honor he pays.
parties subsequent to the person for whose
honor it is accepted, and conditioned to pay the
Note: If the above formalities are not complied
bill when it becomes due, the original drawee
with, payment will operate as a mere
does not pay it (Sec. 161-170, NIL).
VOLUNTARY PAYMENT and the payor will
acquire no right to full reimbursement against
Requisites:
the party for whose honor he pays.
1. The bill must have been protested for
dishonour by non-acceptance or for
In payment for honor, the payee cannot refuse
better security;
payment. If he refuses, he cannot recover from
2. The acceptor for honor must be a
the parties who would have been discharged
stranger to the bill;
had he accepted the same. In acceptance for
3. The holder must consent to the
honor, the holder s consent is necessary.
acceptance for honor;
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

Right of Payor for Honor acceptor

To receive both the bill and the protest to
enable him to enforce his rights against the
parties who are liable to him. Acceptance for honor Payment for Honor

Ordinary Acceptance Acceptance for Honor Bill

Necessity of protest Bill must be overdue Bill may be overdue

Previous protest is not Previous protest is Previous protest

required required
Previously protested Previously protested
Consent of holder for non-acceptance or for non-payment
for better security
Consent of holder is Consent of holder is
implied implied Consent of holder

Liability Consent of the holder Consent of the holder

is necessary is not necessary
Acceptor is primarily Acceptor is
liable secondarily liable Liability

By whom accepted Acceptor is secondarily Acceptor is primarily

liable liable
Drawee is accepto Acceptor must be
stranger to the bill By whom made

Number of acceptors Made by a stranger or Made by any person

party not liable on the whether a party for
No acceptors in the There may be several bill stranger to the bill
alternative or in acceptors for honor
succession for different parties in Notarial Act
the bill
Notarial act of honor Notarial act of honor
For whose benefit not necessary necessary

Benefits the holder Benefits parties Effects

and all prior parties subsequent to party
Effects (Secs. 164-165) Effect (Secs. 175-177)
for whose honor the
bill is accepted

Effect of payment

Instrument is Bill is not discharged

discharged upon upon payment by
payment by the acceptor for honor
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

bill had to be sent to a distant place through

Payment by person Payment for Honor some conveyance. If each part is sent by
different means of conveyances, the chance
Liable
that at least one part of the set would reach its
destination would be greater.
Necessity of protest

No need to protest for Need to protest for Rights of holders where parts are negotiated
separately:
non-payment or non- non-payment
1. If both are HDC, the holder whose title
acceptance first accures is considered the true
owner of the bill.
Party liable 2. But the person who accepts or pays in
due course shall not be prejudiced (Sec.
A party the maker or May be a stranger or
179).
the drawee-acceptor may be a party

In whose favor payment is made

Obligations of holder who indorses 2 or more
In favour of specific In favour of a
parts of the bill in set:
parties specified person and 1. The person shall be liable on every such
the law requires that part;
there is a statement 2. Every indorser subsequent to him is
of the person for liable on the part he has himself
whose honor payment indorsed, as if such parts were separate
bills (Sec. 180, NIL).
is made

Notarial Act DISCHARGE

Not Necessary Necessary Discharge of NI

A release of all parties, whether primary or
Payment in due course secondary, from the obligations arising
thereunder. It renders the instrument without
Discharges the Cannot be payment in force and effect and, consequently, it can no
instrument due course and longer be negotiated (The Law of Negotiable
Instruments with Documents of Title, Hector de
payment discharges
Leon, 2000ed).
only the parties after
the party in whose Instances:
favor payment for 1. By payment in due course by or on
honor is made behalf of the principal debtor;
2. Payment by accommodated party;
Bills in Set 3. Intentional cancellation by the holder;
One composed of several parts, each part being 4. By any act which will discharge a simple
numbered and containing a reference to the contract for the payment of money;
other parts, the whole of the parts constituting 5. When the principal debtor becomes the
but one bill. holder of the instrument at or after
maturity in his own right (Sec. 119).
Purpose: It is usually availed of in cases where a
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
A. Payment in Due Course Requisites:
1. Payment must be made at or after
maturity;
2. Payment must be made to the
holder;
3. Payment must be made in good
faith and without notice that the
holder s title is defective (Sec. 88
NIL)
By whom made:
1. By maker or acceptor; or (selected
accommodation party)
2. Surety, if a primary party; or
3. By an agent on behalf of the principal
B. Payment by Accommodated Party
Reason: He is the one ultimately liable
on the instrument.
C. Cancellation
It includes the act of tearing, erasing,
obliterating, or burning. It is not limited
to writing of the word cancelled, or
paid or drawing criss-cross lines
across the instrument. (Sec. 123, NIL). It
may be made by any other means by
which the intention to cancel the
instrument may be evident.
Intentional Cancellation Requisites:
1. Intentionally done;
2. By the holder thereof; and
3. By writing the word cancelled, or
paid on the face of the instrument; or
if the instrument is torn up, burned,
mutilated or destroyed.
Effect of unintentional cancellation, or under a
mistake or without the authority of holder:
The participation is inoperative but party who
alleges that cancellation was made
unintentionally, or under a mistake or without
authority has the burden of proof (sec. 123,
NIL).
D. By any other Act which Discharges the
Instrument
The Law on Obligations and Contracts
will apple. Article 1231 provides how
obligations are extinguished (by
payment, or performance, loss of thing
due, condonation or remission of debts,
confusion or merger of the rights of the
creditor and debtor, compensation,
novation, annulment, rescission,
fulfilment of resolutory condition and
prescription). However, although such
ways discharge the instrument as
between immediate parties, they will
not do so in the hands of a holder in
due course.
Note: The instrument must be surrendered to
the payor. If the instrument is not
surrendered, it may fall in the hand of a
holder in due course who may have the
right to enforce the instrument despite
the previous payment.
Discharge of Persons Secondarily Liable:
(DIVARA)
1. By any act which discharges the
instrument;
2. By the international cancellation of his
signature by the holder;
3. By the discharge of a prior party;
a. The release of the principal
debtor must be by the ac of the
holder and not by operation of
law.
4. By a valid tender or payment made by a
prior party
a. Tender of Payment means the
act by which one produces and
offers to a person holding a
claim against 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.
5. By the release of the principal debtor,
unless the holder s right of recourse
against the party secondarily liable is
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
expressly reserved;
6. By any agreement binding upon the
holder to extend the time of payment
or to postpone the hodler s right to
enforce the instrument (Sec. 120, NIL).
Instances when the agreement to extend the
time of payment does NOT discharge a party
secondarily liable:
1. Where the extension of time is
consented to by such party;
2. Where the holder expressly reserves his
right of recourse against such party.
Effects of Payment by Parties Secondarily
Liable:
1. Instrument is not discharged.
2. It only cancels his own liability and that
of the parties subsequent to him.
3. He may strike out his own and all
sunsequent indorsements and again
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 wasmade or
accepted for accommodation and has
been paid by the party accommodated
(Sec. 121, NIL)
E. Renunciation (Sec. 122, NIL)
The act of surrendering a right or claim
without recompense, but it can be
applied with equal propriety to the
relinquishing of a demand upon an
agreement supported by a
consideration (1 Agbayani 1992 ed).
It must be with written declaration to
that effect and if oral, must be
accompanied by surrender of the
instrument to the person primarily
liable thereon.
Requisites:
1. Absolute and unconditional;
2. Made in favour of the person
primarily liable; and
3. Made at or after maturity
Effects:
1. A renunciation in favour of a secondary
party may be made by the holder
before, at or after maturity of the
instrument. The effect is to discharge
only such secondary party and all
parties subsequent to him but the
instrument itself remain in force.
2. A renunciation in favour of the principal
debtor may be effected at or after
maturity. The effect is to discharge the
instrument and all parties thereto
provided the renunciation is made
unconditionally and absolutely.
In either case, renunciation does not
affect the rights of a holder in due
course without notice.
F. Principal debtor becomes the holder
An instrument is discharged when the
principal debtor becomes the holder of
the instrument at or after maturity date
in his own right.
In his own right constuted to
exclude a case where a maker acquires
the instrument in a purely
representative capacity. (Sigler vs.
Sigler, 98 Kans, 524, 158 p. 864 (1916),
citing Bank vs. Drayden, 91 Kan. 216,
137 Pac. 928)
The note is not discharged when the
maker acquires it as agent of another.
Nor it is discharged when the maker
becomes the holder, like as executor or
administrator. (ibid)
G. Surrender of the instrument
The instrument must be surrendered to
the pay or whenever discharge is by
payment by or in behalf of the principal
debtor, payment by the accommodated
party, by renunciation or by any other
ground that discharges simple contract.
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
CHECKS
A bill of exchange drawn on a bank
payable on demand (Sec. 185, NIL).
Checks are not mere contracts but:
1. A representation of funds on
deposit;
2. Representation of credit stated in
monetary value;
3. Substitute for cash; and
4. As payment for an obligation.
But 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. The bank is not liable to the
holder, unless and until it accepts or
certifies the check (Sec. 189, NIL).
Presentment for payment
A check must be presented for payment
within reasonable time after its issue or
the drawer will be discharged from
liability thereon to the extent of the loss
caused by the delay (Sec. 186, NIL).
Types of check
1. Cashier s Check
One drawn by the cashier of a bank,
in the name of the bank against the
bank itself payable to a third
person. It is primary obligation of
the issuing bank and accepted in
advance upon issuance (Tan v. CA
GR No. 108555, December 20,
1994)
2. Manager s Check
A check drawn by the manager of a
bank in the name of the bank itself
payable to a third person. It is
similar to the cashier s check as to
the effect and use.
Note: In issuing a manager s check,
the bank assumed the liabilities of
an acceptor under Section 62 of the
Negotiable Instruments Law
(Equitable PCI Bank v. Rowena Ong,
GR No. 156207, September 15,
2006).
3. Memorandum Check
A check given by a borrower to a
lender for the amount of a short
loan, with the understanding that it
is not to be presented at the bank,
but will be redeemed by the maker
himself when the loan falls due and
which understanding is evidenced
by writing the word
memorandum, memo or
mem on the check.
4. Certified Check
An agrrement whereby the bank
against whom a check is drawn
undertakes to pay it at any
futuretime when presented for
payment (Sec. 187, NIL)
5. Traveler s Check
It is one upon which the holder s
signature must appear twice; one to
be affixed by him at the time it is
issuedand the second, for counter-
signature, to be affixed by him in
the presence of the payee before it
is paid, otherwise, it is incomplete
(Commercial Law Review,
Villamnueva, 2004ed)
Certification of Checks
An agreement whereby the bank
against whom a check is drawn
undertakes to pay it at any future time
when presentment for payment.
Effects:
1. Equivalent to acceptance (Sec. 187,
NIL) and is the operative act that
makes banks liable.
2. Assignment of the funds of the
drawer in the hands of the drawee
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
(Sec.189, NIL);
3. If obtained by the holder discharges
the persons secondarily liable
thereon (Sec.188, NIL)
Where the holder of a check procures it
to be accepted or certified the drawer
and all indorsers are discharged from
liability thereon (Sec. 186, NIL).
Refusal of drawee bank to pay and certify
General Rule: If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under
Sections 185 and 189 of the Negotiable
Instrumental Law, sue the bank. The payee
should instead sue the drawer who might in
turn sue the bank.
Reason: No privity of contract exists between
the draw-bank and the payee (Sincere
Villanueva v. Marlyn Nite, GR No. 148211, July
25, 2006).
Exception: If the drawer himself ordered the
bank to pay and such drawer has a sufficient
fund therein
Collection of Checks
On the check s due date, a holder of a check
may either proceed directly to the drawee bank
and present the same for payment or he may
deposit it in his account with his bank known as
the depositary bank or collecting bank.
It is only after the check has been cleared and
collected from the drawee bank that final credit
is made in the payee-depositor s account.
Clearing of checks
When a check is sent to the clearinghouse, the
collecting bank acts as the agent of the
depositor. The collecting bank does not become
the owner of the amount covered by the check
as the same is only being collected from the
drawee bank for the principal, the depositor.
(Bank of the Philippine Island vs. Court of
Appeals G.R. No. 112392, February 29, 2000)
Crossed Check
A check which in addition to the usual contents
of an ordinary check contains also the name of
a certain banker or business entity through
whom it must be presented for payment.
Kinds:
1. Crossed Specially The name of a
particular bank or company is written or
appears between the parallel lines in
which case the drawee-bank must pay
the check only upon presentment by
such bank or company (Chan Wan vs.
Tan Kim GR No. L-15380, September 30,
1960) on penalty of being made to pay
again by the rightful owner should the
first payment prove to have been
erroneous.
2. Crossed Generally only the
wordsand Co. are written between
the parallel lines or when none at all is
written at all between said lines.
Effects:
1. It may not be encashed, but may only
be deposited with the bank (Associated
Bank. CA, GR No. 39802, May 7, 1992).
2. It may be negotiated only once to a
person who has an account with the
bank; and
3. It serves as a warning to the holder that
the check has been issued for a definite
purpose (Bataan Cigar v. CA,GR No.
93048, March 3, 1994).
The NIL is silent with respect to crossed checks,
although the Code of Commerce makes
reference to such instrument. Nonetheless, this
Court has taken judicial cognizance of the
practice that a check with 2means that it could
only be deposited and not converted into cash.
The effects of crossing a check thus, relates to
the mode of payment, meaning that the drawer
had intended the check for deposit only by the
rightful person, i.e., the payee named therein
(Cely Yang v. Court of Appeals, GR No. 138074,
August 15, 2003).
 COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW

case of not be called upon to surrender

Iron Clad Rule the check and the bank would be
Prohibits the countermanding of payment of without a voucher affording a certain
certified checks (Republic of the Philippines means of showing payment (Moran
v.PNB,GR No. 16106, December 1, 1961). v.CA, GR No. 105836, March 1994)

Note: The holder must be a holder in due course B. Estafa

so that the stop-payment order may not be It is done by postdating a check or issuing a
successfully invoked against him (Mesina v. IAC, check in payment of an obligation. (Article
GR No. 70145, November 13, 1986). 315, par. 2(d) of the RPC)

Crimes Involving Checks C. Batas Pambansa Blg. 22 (Bouncing

Checks Law)
A. Check Kiting
It is the wrongful practice of taking
advantage of the float, the time that
elapses between the deposit of the
check in one bank and its collection at
another.
Note: In anticipation of the dishonour
of the check that was deposited the
conspirators will replace the original
check with another worthless check
(Notes and Cases on Banks Negotiable
Instruments and other Commercial
Documents, Aquino, 2006ed).
a. By making or drawing and
issuing a check to apply on
account or for value knowing at
the time of issue that the check
is not sufficiently funded;
b. By having sufficient funds in or
credit with the drawee bank at
the time of issue but failing to
keep sufficient funds therein or
credit with said bank to cover
the full amount of the check
when presented to the drawee
bank within a period of 90 days.

Cases When Bank May Refuse Payment

1. The bank is insolvent;
2. The drawer s deposit is insufficient or
he has no account with the bank or said
account had been closed or garnished;
3. The drawer is insolvent and proper
notice is received by the bank;
4. The drawer dies and proper notice is
received by the bank;
5. The drawer has countermanded
payment;
6. The holder refuses to identify himself;
7. The bank has reason to believe that the
check is forgery.

A bank is under no obligation to make

partial payment on a check-up to the
amount of the drawer s funds as where
the check is drawn for an amount larger
than what the drawer has on deposit. In