(Sources: The Law on Negotiable Instruments by Hector De Leon & Commercial Law Review by Sundiang & Aquino)

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

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 WHAT IS A NEGOTIABLE INSTRUMENT?
It is a written contract for the payment of money
which is intended as a substitute for money and
passes from one person to another as money, in
such a manner as to give a holder in due course
the right to hold the instrument free from
defenses available to prior parties.
FUNCTION & IMPORTANCE OF
NEGOTIABLE INSTRUMENTS
a. They are used as a substitute for money;
b. They constitute the media of exchange
for most commercial transactions; and
c. Serves as a medium of credit
transaction.
CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
Negotiable instruments have two important
features:
a. Negotiability — it is the quality or
attribute of a bill or note whereby it may
pass from one person to another similar
to money, so as to give the holder in due
course the right to collect on the
instrument the sum payable for himself
free from any defect in the title of any of
the prior parties or defenses available to
them among themselves.
b. Accumulation of secondary contracts —
once an instrument is issued, additional
parties can become involved. Secondary
parties are picked up and carried along
with them as they are negotiated from
one person to another, or in the course
of negotiation of a negotiable
instrument, a series of juridical ties
between the parties thereto arise either
by law or by privity.
NEGOTIABLE INSTRUMENTS LAW
FORMS OF NEGOTIABLE INSTRUMENTS
a. Common forms:
a. Promissory notes — those in
which the issuer has promised
to pay. It is an unconditional
promise in writing made by one
person to another, signed by the
maker, engaging to pay on
demand or at a fixed
determinable future time a sum
certain in money to order or to
bearer.; and
b. Bills of exchange — those in
which the issuer has ordered a
third person to pay. It is an
unconditional order in writing
addressed by one person to
another, signed by the person
giving it, requiring the person to
whom it is addressed to pay on
demand or at a fixed
determinable future time a sum
certain in money to order or to
bearer.
b. Special types:
a. Certificates of deposit;
b. Bank notes;
c. Due bills;
d. Bonds;
e. Drafts;
f. Trade acceptances; and
g. Banker’s acceptances.
IN CASE OF DOUBT
Where the meaning is doubtful, the courts have
adopted the policy of resolving in favor of the
negotiability of the instrument.
This is so as to encourage the free circulation of
the negotiable papers because of the admittedly
indispensable function that they perform in
JUDGE E. BONGHANOY
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commercial business transactions in any given named therein is the owner of a
country and the world at large. designated number of shares of stock.
g. Warehouse receipt — it is a document of
INSTRUMENTS WITH LIMITED title likewise without an unconditional
NEGOTIABILITY promise or order to pay a sum certain in
money.
a. Letter of credit — it is a letter from a h. Pawn ticket — it is not a negotiable
merchant or bank or banker in one instrument under the Negotiable
place, addressed to another, in another Instruments Law.
place or country, requesting the
addressee to pay money or deliver goods
to a third party therein named, the
writer of the letter undertaking to
provide him the money for the goods or
to repay him.
b. Trust receipt — it is a document of
security pursuant to which a bank
acquires a “security interest” in the
goods under trust receipt. The
transaction involves a loan feature
represented by a letter of credit and a
security feature which is in the covering
trust receipt which secures an
indebtedness. (Lee v. CA, 375 SCRA 579,
2012.)
c. Treasury warrant — it is a government
warrant for the payment of money such
as that issued in favor of a public officer
or employee covering payment or
replenishment of cash advances for
official expenditures; it is payable out of
a specific fund or appropriation.
(Abubakar v. Auditor General, 81 Phil.
359.)
d. Postal money order — it is an order for
the payment of money to the payee
named therein drawn by one post office
upon another under authority of law. It
is subject to the restrictions and
limitations under postal laws and
regulations.
e. Bill of lading — it is without an
unconditional promise or order to pay a
sum certain in money.
f. Certificate of stock — it is a written
instrument signed by a proper officer of
a corporation stating that the person

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

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FORM OF NEGOTIABLE INSTRUMENTS
An instrument to be negotiable must conform to
the following requirements:
a. It must be in writing and signed by the
maker or drawer;
b. Must contain an unconditional promise
or order to pay a sum certain in money;
c. Must be payable on demand or at a fixed
or determinable future time;
d. Must be payable to bearer or order; and
e. Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable
certainty. (Sec. 1, NIL.)
(W-U-P-O-A)
FORMAL REQUIREMENTS OF
NEGOTIABILITY, IN GENERAL
Form & content:
A negotiable instrument is a contractual
obligation to pay money.
Matters to be considered:
In determining the negotiability of an
instrument, the following must be considered:
a. The whole of the document;
b. Only what appears on the face of the
instrument; and
c. The provisions of the Negotiable
Instruments Law, especially in Sec. 1.
FORMAL REQUISITES, EXPLAINED
The instrument must be in writing:
NEGOTIABLE INSTRUMENTS LAW
Writing includes not only that which has been
written on paper and with pen or pencil but also
that which is in print or has been typed.
There is no such thing as an oral negotiable
instrument. An oral promise can make it difficult
to determine the liability and create a danger to
fraud.
The instrument must be signed by the maker or
drawer:
General Rule: signature of the maker or drawer
is placed at the lower right hand corner of the
instrument, or may appear in any part thereof
whether at the top, middle, or bottom, or at the
margin.
His signature is prima facie evidence of his
intention to be bound as either maker or drawer.
However, if the signature is so placed upon the
instrument that is is not clear in what capacity
the person intended to sign, he is deemed an
indorser and not a maker or drawer.
PROBLEM:
Juan Cruz borrowed P1,000.00 from Pedro Santos as
evidenced by a promissory note executed by X as maker.
All other requisites of negotiability are present in the note
except that Juan Cruz did not affix his usual signature
thereon. As Juan was ailing that time, he was only able to
put “X” in the blank space meant for the signature of the
maker. Is the requisite that the instrument must be signed
by the maker complied with?
Yes. The letter “X” is sufficient to comply with the
requirement that the instrument must be signed by the
maker. It appears from the problem that such letter was
adopted by Juan Cruz with the intent to authenticate the
instrument. It is not necessary that the signature is the usual
signature of the maker.
The instrument must contain an unconditional
promise or order to pay:
A commercial paper or instrument involving the
payment of money must contain either a
promise to pay or an order to pay.
JUDGE E. BONGHANOY
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Promise or order to pay must be unconditional: PROBLEM:
An unqualified order or promise to pay is The instrument must be payable in a sum certain
unconditional within the meaning of NIL though in money:
coupled with: The promise or order must call for the payment
a. An indication of a particular fund our of of a sum certain in money.
which reimbursement is to be made or a
particular account to be debuted with Money — it is the medium of exchange
the amount, or authorized or adopted by a domestic or foreign
b. A statement of the transaction which government as part of its currency. It includes all
gives rise to the instrument. (Sec. 3, NIL.) legal tender, in which it is that currency which a
debtor can legally compel a creditor to accept in
It is conditional if: payment of a debt in money when tendered by
a. It is an order to promise to pay out of a the debtor in the right amount.
particular fund;
b. An instrument payable upon a If the obligor or the maker is given the option to
contingency. deliver something in lieu of money, the
instrument is not negotiable.
Particular Fund vs. Fund for Reimbursement
INDICATING FUND FOR If the holder is given the election to require
PARTICULAR FUND REIMBURSEMENT something to be done in lieu of payment of
There is only one act 1. The drawee pays money, the instrument is still negotiable.
— the drawee pays the payee from
directly from the his own funds The sum payable is a sum certain, although it is
particular fund afterwards. to be paid (Sec. 2, NIL.):
indicated. 2. The drawee pays a. With interest;
himself from the b. By stated installments;
particular fund i. The dates of each installment
indicated. must be fixed or at least
Particular fund Particular fund determinable and the amount to
indicated is the indicated is not the be paid for each installment
direct source of direct source of must be stated.
payment. payment. c. By stated installments with a provision
that, upon default in payment of any
installment or of interest, the whole
A treasury warrant was issued by Mr. BA in his capacity as
disbursing officer of the Food Administration, a shall become due;
government instrumentality. The warrant states that it is i. Acceleration dependent on
“payable for additional cash advances for the Food maker — negotiable.
Campaign in La Union” and the amount stated therein is ii. Acceleration at option of holder
“payable from the appropriation for Food
Administration.” The warrant is now in the hands of Mr.
— not negotiable.
BA who claims to be a holder in due course. Can BA be d. With exchange, whether at a fixed rate
considered a holder in due course? or at the current rate;
No, he cannot, because he is not even the holder i. If the instrument is an inland or
of the warrant. He cannot be a holder because the warrant
domestic bill, both drawn and
is not even negotiable. The promise to pay is conditional
because the sum is payable out of a particular fund. payable at the same place, there
(Benjamin Abubakar v. The Auditor General, 31 Phil. 359, can be no exchange so that a
July 31, 1948.)

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

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 stipulation for payment in
exchange may be disregarded.
e. With costs of collection of an attorney’s
fee, in case payment shall not be made
at maturity
The instrument must be payable at a fixed or
determinable future time or on demand:
An instrument is payable at a determinable
future time, which is expressed to be payable—
a. At a fixed period after date or sight;
b. On or before a fixed or determinable
future time specified therein;
c. On or at a fixed period after the
occurrence of a specified event which is
certain to happen, though the time of
happening be uncertain. (Sec. 4, NIL.)
Payable on demand:
The instrument should be paid the
moment it is presented for payment.
Payable at a determinable future time:
The instrument is payable at a
determinable future time if it is expressed to be
payable.
The instrument must be payable to order or to
bearer:
An instrument that is payable to a specified
person or entity is not negotiable because the
NIL requires that the instrument must be
payable to order or to bearer.
A certificate of time deposit is negotiable when
it is stated: “this is to certify that bearer has
deposited xxx, repayable to said depositor.”
However, where the said certificates were
delivered, but not indorsed as security, there is
no negotiation.
NEGOTIABLE INSTRUMENTS LAW
PROBLEM:
Determine if the following instrument is negotiable
“FOR VALUE RECEIVED, I/we jointly and severally promise
to pay to the ITM Corporation, the sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE
PESOS & 71/100 only (P1,093,789.71), Philippine
Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th
of the month thereafter until fully paid…”
The note is not negotiable because it is not
payable to order or to bearer. It is payable to a specified
person. (Consolidated Plywood Industries, Inc. v. IFC Leasing
& Acceptance Corp., 149 SCRA 448, April 30, 1987.)
The drawee must be named:
Where the instrument is addressed to a drawee,
he must be named or otherwise indicated with
reasonable certainty. The holder must know to
whom he should present it for acceptance
and/or for payment.
A bill may be addressed to more than one
drawee jointly; whether they are partners or not;
but not two or more drawees in the alternative
or in succession.
ACTS IN ADDITION TO PAYMENT OF
MONEY
General Rule: The instrument is non-negotiable
if it contains a promise or order to do any act in
addition to the payment of money.
Exceptions (under Sec. 5, NIL.):
a. Sale of collateral securities
b. Confession of judgment
c. Waiver of benefit granted by law
d. Election of holder to require some other
act.
JUDGE E. BONGHANOY
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PROBLEM:
The manager & treasurer of MORB Company executed and
delivered to PNB a P/N whereby the company promises to
pay to the order of PNB the amount of P61,000.00. The note
contains the following stipulations: “Without defalcation,
value received; and do hereby authorize any attorney in the
Philippines, in case this note be not paid at maturity, to
appear in the name and confess judgment for the above
sum with interest, cost of suit and attorney’s fees of 10% for
collection, a release of all errors and waiver of rights to
inquisition and appeal, and to the benefit of all laws
exempting property, real or personal, from levy or sale.”
MORB claims that the instrument is not negotiable because
the above stipulations are invalid. Is MORB correct?
The negotiability of the instrument is not affected
by the stipulations. Although MORB is correct in stating that
the stipulations are void, it is still negotiable if all other
requirements of Sec. 1 are present. They are in the nature of
stipulations authorizing confession of judgment which is
considered void for being against public policy in this
jurisdiction. However under Sec. 5, it provided that the
negotiable character of an instrument is not affected by a
provision which authorizes confession of judgment if the
instrument be not paid at maturity. (Phil. National Bank v.
Manila Oil Refining & By-Products, Co., 43 Phil. 444.)
OMISSIONS OF DATE
The validity and negotiable character of an
instrument are not affected by the fact that:
a. It is not dated;
b. Does not specify the value given, or that
any value has been given therefor;
c. Does not specify the place where it is
drawn or the place where it is payable;
d. Bears a seal;
e. Designates a particular kind of current
money in which payment is to be made.
(Sec. 6, NIL.)
General Rule: The date in a bill or note is not
necessary.
Exceptions:
a. Where said date is tied to the date of
issue;
b. Where interest is stipulated for the
purpose of determining when interest is
to run;
NEGOTIABLE INSTRUMENTS LAW
c. In case of P/N, the date of issue, and in
case of bill of exchange, the date of last
negotiation, for the purpose of
determining whether a party acted
within a reasonable time in making
presentment for payment.
PROBLEM:
Can a bill of exchange or a promissory note qualify as a
negotiable instrument if: (a) it a not dated; (b) or the day
and month, but not the year of its maturity, is given; (c) or
it is payable to “cash”; (d) or it names two alternative
drawees; (e) or it does not state the place where it is made
or payable?
(a) Yes. Sec. 6(a) provides that negotiability of an
instrument is not affected if it is not dated.
(b) No. Absence of the year of maturity affects the
negotiability. Time for payment is not
determinable.
(c) Yes. Sec. 9(d) provides that an instrument is
payable to bearer if the name of the payee
does not purport to be the name of any
person.
(d) No. Sec. 128 provides that a bill may not be
addressed to 2 or more drawees in the
alternative or succession.
(e) Negotiability of an instrument is not affected
if it does not state the place where it is made
or where it is payable.
OMISSION OF VALUE
It is usual to state in the instrument that it is
given for “value received” without specifying
what that value is. But it is not even necessary to
state that value has been received for the
instrument because consideration is presumed.
(Sec. 24, NIL)
OMISSION OF PLACE
An instrument does not specify the place of
payment is presumed to be payable at the place
of residence or business of the maker or drawer.
JUDGE E. BONGHANOY
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 e. One or more several payees; or
PRESENCE OF SEAL
f. The holder of an office for the time
The fact that the instrument bears a seal does no being. (Sec. 8, NIL)
destroy its negotiability. There is no difference in
legal effect between sealed and unsealed private PROBLEM:
writings.
Is a certificate of time deposit wherein it is stated: “This is
to certify that bearer has deposited xxx, repayable to said
PAYABLE ON DEMAND depositor” negotiable?
It is negotiable being payable to bearer. However,
An instrument is payable on demand— where the CTDs were delivered, but not indorsed as security,
a. Where it is expressed to be payable on there is no negotiation; at most the holder would be a holder
demand, or at sight, or on presentation; for value up to the extent of his lien under Sec. 27 of the NIL
or a pledgee under the Civil Code.
or
b. In which no time for payment is
expressed;
c. Where an instrument is issued, PAYABLE TO BEARER
accepted, or indorsed when overdue, it
The instrument is payable to bearer—
is, as regards the person so issuing,
a. When it is expressed to be so payable; or
accepting, or indorsing it, payable on
b. When it is payable to a person named
demand. (Sec. 7, NIL)
therein or bearer; or
c. When it is payable to the order of a
Par (a): an instrument is payable on demand not
fictitious or non-existing person, and
only as between the immediate parties but also
such fact was known to the person
as to subsequent parties.
making it so payable; or
Par (b): refers only to immediate parties since
d. When the name of the payee does not
between the immediate parties there is no
purport to be the name of any person; or
difference between a holder in due course and a
e. When the only or last indorsement is an
person not a holder in due course.
indorsement in blank. (Sec. 9, NIL)
An instrument payable on demand is due and
Bearer— person in possession of a bill or note
payable immediately after delivery.
which is payable to bearer or legally qualifies as
a bearer instrument.
(NOTE: “on demand” is ordinarily used for
promissory notes; “at sight” is ordinarily used for
When an instrument is payable to bearer,
bills of exchange)
payment to any person in possession thereof in
good faith and without notice that his title is
PAYABLE TO ORDER defective, at or after maturity, discharges the
instrument.
The instrument is payable to order where it is
Fictitious person— one who, though named as
drawn payable to the order of a specified person
payee in an instrument, has no right to it because
or to him or his order. It may be drawn payable
the maker or drawer so intended and it matters
to the order of:
not, whether the name of the payee used by him
a. A payee who is not maker, drawer, or
be that one living or dead, or one who never
drawee;
existed.
b. The drawer or maker; or
c. The drawee; or
d. Two or more payee jointly; or

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

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CRITERION OF NEGOTIABILITY
Clear intention of the parties — the substance of
the transaction rather than its form is one of the
criterion of negotiability;
Use of foreign language — it is still negotiable
even though it is written in a foreign language
Mere defect in language or grammatical error —
it does no render an instrument non-negotiable
PRESUMPTION AS TO DATE
If the instrument bears a date, it is presumed
that said date is the date when it was made by
the maker, drawn by the drawer, accepted by
the drawee, or indorsed by the payee or holder.
Generally, a date is not essential to make an
instrument negotiable.
DATE IN INSTRUMENT PAYABLE ON
DEMAND
Date of issue or last negotiation — it is required
under Sec. 71 that a promissory note must be
presented for payment within a reasonable time
after its issue and in case of a bill of exchange,
within a reasonable time after the last
negotiation. Otherwise, persons secondarily
liable may be released from their liability.
Importance of the date — date of issue of the
promissory note or the date of the last
negotiation of the bill of exchange is, therefore,
essential for the purpose of determining
whether a party has acted within a reasonable
time but not to make the instrument negotiable.
ANTE-DATED & POST-DATED
Ante-dated — contains a date earlier than the
true date of its issuance.
Post-dated — contains a date later than the true
date of its issuance.
NEGOTIABLE INSTRUMENTS LAW
Ante-dating or post-dating an instrument does
not render it invalid or non-negotiable by the
fact alone. It may be negotiated before or after
the date given as long as it is not negotiated after
its maturity. The person to whom the instrument
so date is delivered acquires the title thereto as
of the date of delivery.
If the ante-dating or post-dating is done for an
illegal or fraudulent purpose, the instrument is
rendered invalid.
WHEN DATE MAY BE INSERTED
Date may be inserted by the holder—
a. Where an instrument is payable at fixed
period after date but is issued undated;
and
b. Where an instrument is payable at a
fixed period after sight but the
acceptance is undated.
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. (Sec. 13, NIL)
INSERTION OF WRONG DATE
As to holder with knowledge — insertion of
wrong date in an undated instrument by one
having knowledge of the true date of issue or
acceptance will avoid the instrument as to him
but not as to a subsequent holder in due course
who may enforce the same notwithstanding the
improper date.
As to subsequent holder in due course —
insertion of wrong date constitutes a material
alteration; nevertheless, in the hands of a holder
in due course, the date inserted, even if wrong,
is to be regarded as the true date.
JUDGE E. BONGHANOY
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STEPS IN ISSUANCE OF NEGOTIABLE
INSTRUMENT
There are 2 steps involved in the issuance of
every negotiable instrument, namely:
a. The 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 the drawer to the payee
or holder with the intentions of giving
effect to it.
INCOMPLETE INSTRUMENT, DELIVERED
The holder or the person in possession has prima
facie authority to complete an incomplete
instrument by filling out the blanks therein.
Material particular — any particular
proper to be inserted in a negotiable
instrument to make it complete, and the
power to fill in the blanks extends to every
complete feature of the instrument.
(Linthlicum v. Bagby, 102 Atl. 997)
The authority to complete is not an authority
to alter. The holder has no authority to
change the amount after it has been filled
out, or to insert the words “or order” or “or
bearer” after the name of the payee.
A signature on a blank paper delivered in
order that may be converted into a
negotiable instrument operates as a prima
facie authority to fill it out as such for any
amount.
The instrument may be enforced only against
a party prior to completion if filled out strictly
in accordance with the authority given and
within a reasonable time.
The defense that the instrument had not
been filled out in accordance with the
authority given and within a reasonable time
NEGOTIABLE INSTRUMENTS LAW
is not available as against a holder in due
course.
PROBLEM:
Give the effect of an incomplete but delivered instrument:
Where the instrument is wanting in any material
particular the person in possession thereof, is prima
facie presumed authorized to complete it.
A signature on a blank paper delivered by the person
making the signature in order that it may be converted
into a negotiable instrument operates as prima facie
authority to fill it up as such for any amount.
In both cases, the instrument must be filled out in
accordance with the authority given and within
reasonable time in order that it may be enforced against
any person who became a party thereto prior to its
completion. Persons negotiating after its completion are
liable because of their warranties.
A holder in due course may enforce the instrument as if
it has been filled out strictly in accordance with the
authority given and within a reasonable time.
It is no defense in an action to enforce a negotiable
promissory note that it was signed in blank as Sec. 14 of
the NIL concedes prima facie authority of the person in
possession of negotiable instruments to fill in the blanks.
(Quirino Gonzales Logging Concessionaire, et al. V. CA,
G.R. No. 126568, April 30, 2003.)
INCOMPLETE INSTRUMENT,
UNDELIVERED
The fact that an incomplete instrument,
completed without authority, had not been
delivered, is a defense even against against a
holder in due course.
The invalidity, therefore, shall only be with
reference to the parties whose signature appear
on the instrument before and not after delivery.
Example:
Suppose M makes a note for P10,000 with the
name of the payee in blank and keeps it in his
drawer. P steals the note and inserts his name
as payee and then indorses the note to A, A to
B, B to C, and C to D, a holder in due course. Can
D enforce the note against M?
JUDGE E. BONGHANOY
Page 10 of 74
 No, the law is specific in that the instrument
is not a valid contract in the hands of any
holder. The phrase “any holder” includes a
holder in due course. As the signature of M
was placed thereon before delivery, he does
not assume any responsibility whatsoever.
In this case, a real defense exists. The
instrument may be considered a forgery
insofar as M is concerned since both the two
steps in the execution of a negotiable
instrument are not complied with. There is a
prima facie presumption of delivery which
M must rebut by proof to the contrary.
The negligence on the part of M may render
him liable to a holder in due course.
Further, the instrument can be enforced
against P, A, B, and C because, as indorsers,
they warrant that the instrument that the
instrument is genuine and in all respects
what it purports to be. As their signatures
appear on them instrument after delivery,
the instrument is valid as to them.
In the case of P, he is liable not merely
because he is an indorser but also because
he is the one responsible for the theft, and
the completion and negotiation of the
instrument.
PROBLEM:
Give the effect of an incomplete undelivered instrument:
Non-delivery of an incomplete instrument is a real
defense. (Sec. 15, NIL)
COMPLETE INSTRUMENT, UNDELIVERED
Every contract on negotiable instrument even if
it is completely written is incomplete and
revocable until its delivery for the purpose of
giving it effect.
Delivery— transfer of possession, actual
or constructive, from one person to
another.
NEGOTIABLE INSTRUMENTS LAW
Issue— the first delivery of the
instrument, complete in form, to a
person who takes it as holder
Holder— payee or indorsee of a bill or
note who is in possession of it, or the
bearer thereof
The delivery of the instrument is the final act
essential to its consummation as an
obligation. Delivery may be made either by
the maker or drawer himself or through a
duly authorized agent.
If a complete instrument is found in the
possession of an immediate party or a remote
party other than a holder in due course, there
is prima facie presumption of delivery but
subject to rebuttal.
An undelivered instrument is inoperative
because delivery is a prerequisite to liability.
If the instrument is no longer in the
possession of the person who signed it and it
is complete in its terms, “a valid and
intentional delivery him is presumed until the
contrary is proved.”
Immediate parties— those who are
immediate in the sense of having or
being held to know of the conditions
or limitations placed upon the
delivery of the instrument.
(Contemplates privity not proximity)
Remote parties— parties who are not
in direct contractual relation to each
other
If delivery was made or authorized, it may
be shown to have been conditional, or for
a special purpose only and not for the
purpose of transferring the property to
the instrument.
When delivery is made, it is presumed to
be made with the intention to transfer
ownership of the instrument to the payee.
If a complete instrument is in the hands of
the holder in due course, a valid delivery
JUDGE E. BONGHANOY
Page 11 of 74
 thereof by all parties prior to him is
conclusively presumed.
A presumption is said to be conclusive
when admission of evidence to the
contrary is not allowed.
PROBLEMS:
Give the effect of a complete but undelivered instrument:
Delivery is essential to the validity of any negotiable
instrument. As between immediate parties and those
who are similarly situated, delivery must be coupled
with the intention of transferring title to the
instrument.
If If the instrument is in the hands of a holder in due
course, valid delivery to him is conclusively
presumed.
T The defense of want of delivery of complete
instrument is only a personal defense..
Jose Reyes signed a blank check, and in his haste to
attend a party, left the check at the top of his executive
desk in his office. Later, Nazareno forced open the door
to Reyes’ office, and stole the blank check. Nazareno
immediately filled in the amount of P50,000 and a
fictitious name as payee on the said check. Nazareno
then indorsed the check in the payee’s name and
passed it to Rodan. Thereafter, Roldan indorsed the
check to Dantes.
(a) Can Dantes enforce the check against Jose
Reyes?
(b) If Dantes is a holder in due course will your
answer to (a) be the same?
(a) Dantes cannot enforce the instrument against
Jose Reyes. He can raise the defense that the
incomplete instrument was not delivered since
the check was only stolen and filled out by
Nazareno.
(b) Yes, provided that Dantes is a holder in due
course. If an incomplete instrument has not
been delivered, it will not, if completed and
negotiated without authority be a valid
contract against any holder, even a holder in
due course. (1985 Bar)
NEGOTIABLE INSTRUMENTS LAW
A signed a blank check and kept it inside the drawer of
his desk in his office. B, a janitor of the office, opened
the drawer, got the check and filled out the amount of
P100,000 with B’s name as payee. Thereafter, B
indorsed the check to C and C indorsed the check to D.
Should the drawee bank dishonor the check? Can D
hold A liable? Would your answer be the same if D was
a holder in due course? How about B and C, are they
liable to D?
No, D cannot hold A liable because the instrument is
incomplete and undelivered. Sec. 15, an incomplete
and undelivered instrument would not be a valid
instrument in the hands of any holder as against any
person whose signature was placed before delivery.
Yes, the answer would be the same even if D is a HIDC
because Sec. 15 says “ANY HOLDER.”
Yes, B & C are liable. B was the forger and an
indorser, and he warrants that the instrument.
RULES OF CONSTRUCTION IN CASE OF
AMBIGUITY OR OMISSION
Where the language of the instrument is
ambiguous or there are omissions therein,
the following rules apply:
a. If the sums expressed in words
and figures differ— the amount in
words must control
(NOTE: By current BSP Circulars,
when a check is defective because
amount in words and figures
differ, it is automatically returned
by the Phil. Clearing House for
technical deficiencies)
b. If words are ambiguous or
uncertain— words outweigh
figures.
c. If date is not specified for when
interest should run— the interest
runs from the date of the
instrument or if undated from the
date of its issue.
d. If the instrument is undated— it
shall be considered dated as of
the date of its issue
e. If the written and printed words
are in conflict— the written words
should prevail as against printed
words
JUDGE E. BONGHANOY
Page 12 of 74
 f. If the instrument is either a bill or
a note— the holder may either at
his election
g. If there is doubt in what capacity
the signatory has signed— he is
deemed to be an indorser.
h. If the instrument is signed by two
or more persons—liability may be
either solidary or joint.
] If the agent signs a note or bill in his own
LIABILITY OF PERSON SIGNING IN TRADE
OR ASSUMED NAME
General Rule: Only persons whose
signature appear on an instrument are
liable thereon.
Exceptions:
a. Where a person signs in a trade or
assumed name;
b. The principal is liable if a duly
authorized agent signs on his own
behalf;
c. In case of forgery, the forger is
liable even if his signature does
not appear on the instrument;
d. Where the acceptor makes his
acceptance of a bill on a separate
paper; and
e. Where a person makes a written
promise to accept a bill before it is
drawn.
SIGNATURE BY AN AUTHORIZED AGENT
The signature of any party may be made
by a duly authorized agent. No particular
form of appointment is necessary for this
purpose and the authority of the agent
may be established as in other cases of
agency. (Sec. 19, NIL)
LIABILITY OF PERSON SIGNING AS AGENT
In order that an agent who signs a
negotiable instrument may escape
NEGOTIABLE INSTRUMENTS LAW
personal liability, the following requisites
must concur:
a. He is duly authorized;
b. He adds words to his signature
indicating that he signs as an
agent, for or on behalf of a
principal, or in representative
capacity; and
c. He discloses his principal.
name and discloses no principal, he is
personally bound, and evidence to the
contrary may not be admitted to relieve
him from personal liability. (Phil. Nat’l
Bank v. Aruego, 102 SCRA 530)
The mere addition of descriptive words
without disclosing the principal will not
relieve the signer from personal liability.
On who signs an instrument in a
representative capacity but without
disclosing his principal will still be
personally liable.
SIGNATURE BY PROCURATION
Procuration— act by which a principal gives
power to another to act in his place as he could
himself. (Fink v. Scott, 143 S.E. 305.)
The term gives a warning to that the agent has
but a limited authority, so that is the duty of the
person dealing with him to inquire into the
extent of his authority.
EFFECT OF INDORSEMENT BY
INCAPACITATED PERSONS
Minors:
He is not bound by his indorsement, but he is not
incapacitated to transfer certain rights. It is also
not a personal defense which can be set up by
parties other than the minor; but it is a real
defense available to the minor. A minor may be
held bound by his signature in an instrument
where he is found guilty of actual fraud
JUDGE E. BONGHANOY
Page 13 of 74
committed by specifically stating that he is of age
when, in fact he is not.
Other incapacitated persons
Their incapacity is a real defense available even
against a holder in due course.
FORGERY
Forgery— the counterfeit-making or fraudulent
alteration of any writing, and may consist in the
signing of another’s name or the alteration of an
instrument in the name, amount, description of
the person with intent to defraud.
When a signature if forged or made without the
authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge, or to enforce payment against any
party, can be acquired through or under such
signature, unless the party against whom it is
sought to enforce such right is precluded from
setting up the forgery or want of authority.
In case forgery 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.
In case forgery of an instrument payable to
bearer, the party whose indorsement is forged is
liable to a holder in due course, but not to one
who is not a holder in due course.
Despite forgery of the signature, there may be
parties who shall be precluded from setting up
forgery or want of authority:
a. Those who warrants like the indorsers or
acceptors;
b. Those who ratified the forgery, express
or implied; and
c. Those who were negligent.
The general rule is that in case of forgery of the
indorsement of the payee of the check and the
NEGOTIABLE INSTRUMENTS LAW
drawee bank cannot debit the drawer’s account
and that loss shall be borne by the drawee bank.
PROBLEMS:
M, maker, prepared a P/N payable to the order of A,
but he did not sign the same and left it inside his
drawer. X, a thief, stole the instrument, forged M’s
signature and delivered the same to A. A indorsed the
instrument to B, B in turn indorsed it to C, then C to D,
the present holder.
(a) Against whom can D enforce payment?
(b) Will your answer be the same it were a bearer
instrument?
(a) D can enforce payment from X, A, B, & C but
not against M. Sec. 23, the forged signature of
M is wholly inoperative and no right to enforce
payment was acquired against M by virtue of
the forged signature.
However, the indorsers are liable because they
are parties after the forgery and are therefore
precluded from setting up such forgery against
the present holder. When they indorsed the
instrument, they warranted that the
instrument is genuine and in all respects what
it purports to be.
(b) The answer would be the same even if it were
a bearer instrument.
Fernando forged the name of Daniel, manager of a
trading company, as drawer of a check. BPI, the drawee
bank, did not detect the forgery and paid the amount.
May the bank charge the amount paid against the
account of the alleged drawer?
No. The drawee may not charge the account of the
trading company. A bank is charged with the
knowledge of the signature of its customer and it
should not honor any check bearing a forged
signature of the drawer. (1977 Bar)
Juan de la Cruz signs a P/N payable to Pedro or bearer,
and delivers it personally to Pedro. The latter somehow
misplaces the note and Carlos finds the note lying
around the corridor of the building. Carlos indorses P/N
to Juana, for value, by forging the signature of Pedro.
May Juana hold Juan liable on the note?
Yes. The P/N is payable to bearer hence title is
transferred thru negotiation by mere delivery of the
note. Juana may obtain title even if there is no
indorsement.
If the
JUDGE E. BONGHANOY
Page 14 of 74
Hernan issued a check payable to the order of Fernando
in the sum of P12,000, and drawn on X Bank. The check
was delivered to Matilde by Adriano for encashment.
At that time, the check had the indorsements of
Fernando and Rosa. When Matilde encashed it with X
Bank, she affixed her signature on the check. Upon
Matilde’s receipt of the cash proceeds of the check she
turned over the amount to Adriano. X Bank was
informed that the alleged indorsement of the payee
Fernando was a forgery, since the latter had died 2
years ago. X Bank having refunded the amount to
Hernan, sued Matilde, who refused to return the
money.
(a) Was X Bank correct in paying Hernan?
(b) Does X Bank have a cause of action against
Matilde?
(a) Yes. X Bank was correct in paying Hernan. The
forged signature of the payee is wholly
inoperative and no right to give discharge to
the instrument was acquired by X Bank thru the
forged signature. When X Bank paid Matilde, it
did not comply with the order of its client.
Hence, it is the bank’s duty to reimburse
Hernan.
(b) Yes. Matilde is a general indorser and as such
she warrants that she has good title to the
instrument. Having breached such warranty,
she is no responsible to the collecting bank.
Even if she encashed the check for Adriano as
an accommodation party, her liability as an
indorser remains.
PRESUMPTION OF CONSIDERATION
Consideration— the immediate, direct, or
essential reason which induces a party to enter
into a contract
It is not necessary that the consideration be
expressly stated in the instrument. Presumption
is that it has been issued for a valuable
consideration and tat every person whose
NEGOTIABLE INSTRUMENTS LAW
signature appears thereon has become a party
thereto for value.
WHAT CONSTITUTES VALUE
Value is any consideration sufficient to support a
simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such
whether the instrument is payable on demand or
at a future time.
A valuable consideration does not have to be
adequate; it is sufficient if it is a valuable one.
HOLDER FOR VALUE
Holder for value— one who has given a valuable
consideration for the instrument issued or
negotiated to him.
The holder is deemed as such not only as regards
the party to whom value has been given by him
but also in respect to all those who become
parties prior to the time when value was given.
A holder of a negotiable instrument is presumed
to be a holder for value until the contrary be
shown by any party who claims otherwise.
The holder is a holder for value only to the extent
that the consideration agreed upon has been
paid, delivered, or performed. Non-performance
of the obligation will give rise to partial or full
defense of failure of consideration as the case
may be.
One who has taken a negotiable instrument as
collateral security for a debt has a lien on the
instrument.
If the amount of the instrument is more than the
debt secured by such instrument, the pledgee is
a holder for value to the extent of his lien.
If the amount of the instrument is less than or
the same as the debt secured by such
JUDGE E. BONGHANOY
Page 15 of 74
instrument, the pledgee is a holder for value for After making payment to the holder, the
the full amount and may recover all. accommodation party may recover from the
accommodated party for reimbursement.
WANT OF CONSIDERATION
ACCOMMODATION
REGULAR PARTY
Absence of consideration— a total lack of any PARTY
valid consideration for the contract, Signs an instrument Signs the instrument for
inconsequence of which the alleged contract without receiving value value
must fail. therefor
Signs an instrument for Does not sign for the
Failure of consideration— failure or refusal of the purpose of lending purpose of lending his
one of the parties to do, perform or comply with his name to some other name
the consideration agreed upon. person
May always show by Cannot disclaim or limit
parol evidence that he is his personal liability as
LIABILITY OF ACCOMMODATION PARTY
only an accommodation appearing on the
Accommodation note or bill— one to which the party instrument by parol
accommodation party has put his name, without evidence
consideration, for the purpose of Cannot avail of the May avail of the defense
accommodating some other party who is to use defense of absence or of absence or failure of
it, and is expected to pay it. (Loan of one’s credit failure of consideration consideration against a
line) against a holder in due holder not in due course
course
Accommodation party— one who has signed the After paying the holder, Ay not sue any
instrument as maker, drawer, acceptor, or may sue for subsequent party for
indorser, without consideration, for the purpose reimbursement the reimbursement
of lending his name to another party. accommodated party,
although a subsequent
Accommodated party— one in whose favor a party
person, without consideration, signs an
instrument for the purpose of lending his credit
and enabling said party to raise money upon it.

The accommodation party is liable on the

instrument to a holder for value notwithstanding
such holder at the time of taking the instrument
knew him to be only an accommodation party.

The absence of consideration between the

accommodation party and the accommodated
party does not itself constitute a valid defense
against a holder for value even though he knew
of it when he became a holder. (Ang Tiong v.
Lorenzo Ting, 22 SCRA 713)

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 16 of 74
 subject to all defense available against
the latter.
b. Transferee does not become holder of
instrument.
c. When indorsement is subsequently
obtained, the transfer operates as a
negotiation only as of the time the
indorsement is actually made.

Assignment— the transfer of the title to an

instrument, with the assignee generally taking
METHODS OF TRANSFER OF A only such title or rights as his assignor has,
NEGOTIABLE INSTRUMENT subject to all defenses available against his
a. Issue — first delivery of the instrument assignor.
complete in form, to a person who takes
it as holder. An instrument’s legal life NEGOTIATION ASSIGNMENT
does not begin until it is issued by the Refers only to Refers generally to an
maker or drawer to the first holder; negotiable ordinary contract
b. Negotiation — operate to make the instruments
transferee of a negotiable instrument Transferee is a holder Transferee is an
the holder thereof. It ordinarily involves assignee
indorsement; A holder in due An assignee is subject
c. Assignment — involves a transfer of course is subject only to both real and
rights under a contract. to real defenses personal defenses
A holder in due An assignee merely
Negotiation — the transfer of a negotiable course may acquire a steps into the shoes
instrument from one person to another made in better title or greater of the assignor
such a manner as to constitute the transferee rights under the
the holder thereof. instrument than
those possessed by
METHODS OF NEGOTIATION the transferor or prior
party
If the instrument is payable to bearer, it is A general indorser An assignor does no
negotiated by mere delivery alone without warrant the solvency warrant the solvency
indorsement. of prior parties of prior parties unless
expressly stipulated
If the instrument is payable to order, it is or the insolvency is
negotiated by the indorsement of the holder known to him
completed by delivery. An indorser is not An assignor is liable
liable unless there be even without notice
Delivery if an order instrument without presentment and of dishonor
indorsement: notice of dishonor
a. Transfer operates as an ordinary Governed by the Governed by Articles
assignment and the assignee is merely Negotiable 1624 to 1635 of the
placed in the position of the assignor, Instruments Law Civil Code
the former acquiring the instrument

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 17 of 74
 1. One that
INDORSEMENT
specifies the
Indorsement— the writing of the name of the person to
payee on the instrument with the intent either whom the
to transfer title to the same, or to strengthen the instrument is to
security of the holder by assuming a contingent be paid; and
liability for its future payment, or both. 2. One that
specifies the
An indorsement is a mode of transfer and it person to
involves a new contract and an obligation on the whose order
part of the indorser— an implied guaranty that the instrument
the instrument will be duly paid according to the is to be payable.
terms thereof. b. Blank — no indorsee is specified
and it is done by affixing the
Necessity of Indorsement indorser’s signature
a. Indorsement is essential to the ii. As to the kind of title transferred
execution of an instrument payable to a. Restrictive
the order of the maker or drawer. i. When considered a
b. It is essential to the negotiation of an restrictive indorsement:
order instrument, not if a bearer 1. Prohibits the
instrument. further
c. It is not necessary to a mere assignment negotiation of
of a negotiable or non-negotiable the instrument;
instrument. or
2. Constitutes the
Form of Indorsement indorsee the
The NIL does not require an exclusive form by agent of the
which an indorsement may be accomplished. It indorser; or
only needs to be in writing. 3. Vest the title in
the indorsee in
Place of Indorsement trust for or to
a. On the instrument itself; or the use of some
b. On a separate piece of paper attached to other persons
the instrument (allonge) ii. Rights of restrictive
indorsee
General Rule: Indorsement must be of the entire 1. To receive
instrument. payment of the
instrument;
Exception: When there was previous partial 2. To bring any
payment. action thereon
that the
Kinds of Indorsement indorser could
i. As to the methods of negotiation bring;
a. Special — designates the 3. To transfer his
indorsee rights as such
i. Forms of special indorsee, where
indorsement: the form of the

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 18 of 74
 indorsement
authorizes him
to do so.
b. Non-restrictive
iii. As to scope of liability of indorser
a. Qualified — constitutes the
indorser a mere assignor of the
title to the instrument. It may be
made by adding to the
indorser’s signature the words
“without recourse”
b. Unqualified or General
iv. As to presence or absence of limitations
a. Conditional — party required to
pay the instrument may
disregard the condition and
make payment fo the indorsee
or his transferee whether the
condition has been fulfilled or
not.
b. Unconditional
v. Other kinds of indorsements
a. Joint
b. Successive
c. Irregular or Anomalous
d. Facultative
If the instrument is originally payable to order,
and it is negotiated by the payee by special
indorsement, the indorsement of the indorsee is
necessary to the further negotiation of the
instrument.
If the instrument is originally payable to bearer,
it may be negotiated by mere delivery even if the
original bearer indorsed it specially but the
special indorser is liable to only such holders as
make title through his indorsement.
Where an instrument is payable to the order of
two or more payees or indorsees who are not
partners, all must indorse unless the one
indorsing has authority to indorse for the others.
(Sec. 41, NIL)
Where an instrument is drawn or indorsed to a
person as “cashier” or other fiscal officer of a
NEGOTIABLE INSTRUMENTS LAW
bank or corporation, it is deemed prima facie to
be payable to the bank or corporation of which
he is such officer, and may be negotiated by
either the indorsement of the bank or
corporation or the indorsement of the officer.
(Sec. 42, NIL)
Where the name of a payee or indorsee is
wrongly designated or misspelled, he may
indorse the instrument as therein described
adding, if he thinks fit, his proper signature. (Sec.
43, NIL)
Where any person is under obligation to indorse
in a representative capacity, he may indorse in
such terms as to negative personal liability. (Sec.
44, NIL)
Except where an indorsement bears date after
the maturity of the instrument, every
negotiation is deemed prima facie to have been
effected before the instrument was overdue.
(Sec. 45, NIL)
Except where the contrary appears, every
indorsement is presumed prima facie to have
been made at the place where the instrument is
dated. (Sec. 46, NIL)
General Rule: An instrument negotiable in origin
is always negotiable.
Exceptions:
a. When the instrument has been
restrictively indorsed; or
b. When it has been discharged by
payment or otherwise.
Striking out of Indorsement
The holder may at any time strike out any
indorsement which is not necessary to his title.
The indorser whose indorsement is struck out,
and all indorsers subsequent to him, are thereby
relieved from liability on the instrument. (Sec.
48, NIL)
JUDGE E. BONGHANOY
Page 19 of 74
If the instrument is payable to bearer, it may be
negotiated by mere delivery without
indorsement. In case it is indorsed, it remains a
bearer instrument and may be further
negotiated by mere delivery. The holder may
strike out all intervening indorsements or any of
them for none of them is necessary to his title.
If the instrument is payable to order, it may be
negotiated only by the indorsement of the payee
completed by delivery.
a. When the indorsement is special, the
indorsement of the special indorsee is
necessary to the further negotiation of
the instrument. If the indorsement is in
blank, the instrument becomes payable
to bearer and may be negotiated by
mere delivery.
Where the holder of an instrument payable to
his order transfers it for value without indorsing
it, the transfer vests in the transferee such title
as the transferor had therein, and the transferee
acquires, in addition, the right to have the
indorsement of the transferor. But for the
purpose of determining whether the transferee
is a hold in due course, the negotiation takes
effect as of the time when the indorsement is
actually made. (Sec. 49, NIL)
Sec. 49 is applicable only to an instrument that
is payable to order.
i. The transaction operates as an equitable
assignment and the transferee acquires
the instrument for value without
indorsing it.
ii. He cannot negotiate it.
iii. If the transferor had legal title, the
transferee acquires such title and, in
addition, the right to have the
indorsement of the transferor.
Reacquirer — a holder who negotiates an
instrument and then subsequently reacquires it.
NEGOTIABLE INSTRUMENTS LAW
If a prior party reacquires an instrument before
maturity, he may negotiate the same further. But
after paying the holder, he may not claim
payment from any of the intervening parties.
Limits on renegotiation of instruments:
b. Where it is payable to the order of third
person, and has been paid by the
drawer;
c. Where it was made or accepted for
accommodation and has been paid by
the party accommodated; and
d. In other cases, where the instrument is
discharged when acquired by a prior
party.
HOLDER IN DUE COURSE
Classes of holders
a. Holders simply;
b. Holders for value; and
c. Holders in due course.
Ordinary holder (or mere holder) — a person who
qualifies as a holder but does not meet all the
conditions to qualify as a holder in due course.
In the hands of any holder other than a holder in
due course, a negotiable instrument is subject to
any and every defense or defect in the
instrument, whether real or personal, as it it
were non-negotiable.
Rights of a holder in general
a. He may sue on the instrument in his
name; and
b. He may receive payment and if the
payment is in due course, the instrument is
discharged.
JUDGE E. BONGHANOY
Page 20 of 74
What constitutes a holder in due course (HIDC)
(COV-N)
a. That it is complete and regular upon its
face;
b. That he became the holder of it before it
was overdue, and without notice that it
has been previously dishonored, if such
was the fact;
c. That he took it in good faith and for
value;
d. That at the time it was negotiated to
him, he had no notice of any infirmity in
the instrument or defect in the title of
the person negotiating it.
All four conditions must concur in order to
qualify a person as a holder in due course. If any
one of them is absent, the holder cannot be
considered a holder in due course.
There is a presumption that every holder is
generally a holder in due course; but he who
shall claim otherwise, shall have the burden of
proof.
A holder of a non-negotiable instrument cannot
attain the status of a holder in due course. He is
a mere assignee subject to defenses, acquiring
no better rights under the contract than those
possessed by the assignor.
A transferee who receives an instrument other
than by issue or negotiation cannot acquire the
status of a holder in due course regardless of the
other circumstances under which his acquisition
of the instrument took place.
Where the transferee receives notice of any
infirmity in the instrument or defect in the title
of the person negotiating the same before he
had paid te full amount agreed to be paid
therefor, he will be deemed a holder in due
course only to the extent of the amount therefor
paid by him. (Sec. 54, NIL)
Where an instrument has been taken but the
purchaser has not yet paid anything, and he
NEGOTIABLE INSTRUMENTS LAW
receives notice of infirmity in the instrument or
defect in the title of the holder, he is relieved
from the obligation to make payment.
Where the instrument has been transferred to
him in consideration of his promise to make
future payments to his transferor, he is under
no legal obligation to pay the balance of the
amount he has agreed to pay on discovering the
infirmity or defect.
The title of a person who negotiates an
instrument is defective in two ways:
a. In the acquisition
o He obtained the instrument or
any signature by fraud, duress,
or force and fear, or any
unlawful means, or for illegal
consideration.
b. In the negotiation
o He negotiated the instrument in
breach of faith, or under such
circumstances as amount to a
fraud.
In order to constitute notice of defect, the
transferee must have actual knowledge of the
infirmity or defect; or knowledge of such facts
(which don’t appear on the face of the
instrument) that his action in taking the
instrument amounts to bad faith. (Sec. 56, NIL)
Rights of a holder in due course
a. He may sue on the instrument in his own
name;
b. He may receive payment and if the
payment is in due course, the instrument
is discharged;
c. He holds the instrument free from any
defect of title of prior parties;
d. He holds the instrument free from
defenses available to prior parties
among themselves; and
e. He may enforce payment of the
instrument for the full amount thereof
against all parties liable thereon.
JUDGE E. BONGHANOY
Page 21 of 74
Personal defenses cannot be set up against a
holder in due course.
Real defenses attach to the instrument itself,
hence, they would be available against all
persons even as against a holder in due course.
A holder, who is not a holder in due course,
acquires the instrument subject to ALL
DEFENSES, whether real or personal, because he
is treated as a mere assignee of a non-negotiable
paper.
PROBLEMS:
A is indebted to B in the amount of P100,000.00. In order to
raise funds to pay for his obligation, A sold his old car to C
on Jan. 25, 2019. A agreed to deliver the car to C on Jan. 30,
2019. However, A convinced C to immediately issue a check
and to make the check payable to B. A informed C that the
check will be issued to B because of A’s outstanding
obligation. Hence, C issued a check to B to pay for the loan
of A payable on Jan. 30, 2019. The check was delivered to
B thru A. B and C were not aware at that time that the car
was sold, it was already destroyed by fire. A fraudulently
hid such fact in order to convince C to issue the check and
to convince B to accept the check. Can B, the payee of the
check, be considered a holder in due course?
Yes. There is a presumption that he is a holder in
due course because there is nothing stated in the
facts which shows otherwise. Moreover, all the
requisites of Sec. 52 of the NIL are present in the
case because it appears that B is a holder of the
instrument who has taken the instrument complete
and regular in its face, he took it before it was
overdue, it was not previously dishonored, he took
it in good faith and for value, and he had no notice
of any infirmity in the instrument or a defect of the
title of a prior party.
Defenses — grounds or reasons pleaded or
offered by the defendant in a case, showing why
NEGOTIABLE INSTRUMENTS LAW
Juan, intending to buy a car, saw an old friend, Pedro, who
is an agent to sell the car belonging to XYZ Clinic. After
negotiation, Juan decided to buy the said car. He drew upon
request of Pedro, a crossed check for P1,000.00, payable to
XYZ Clinic as evidence of good faith but which was merely
meant to be shown to XYZ Clinic by Pedro who received the
said check. The check would then be returned when Pedro
brings the car and its registration certificate for Juan’s
inspection. For failure of Pedro to bring the car and its
certificate of registration, and to return the check, Juan
issued a “stop payment order” to the drawee bank. In the
meantime, Pedro paid the check to XYZ Clinic for the
hospital bill of his wife and was given P132.00 as change.
May XYZ Clinic be considered a holder in due course, hence
entitled to recover?
XYZ Clinic may not be considered a holder in due course,
hence, not entitled to recover. Even though XYZ Clinic was
unaware of the circumstances with respect to the
delivery of the check to Pedro, there are circumstances
that should have put him on inquiry. It should have been
noted that Juan had no relation with it; that the amount
of the check did not correspond exactly with the
obligation of Pedro to the clinic; and that the check is a
crossed check, meaning that it should only be deposited
and may not be encashed should have put the clinic to
inquiry as to the possession of the check by Pedro, and
why he used it to pay his account.
Larry issued a negotiable P/N to Evelyn and authorized the
latter to fill out the amount in blank with his loan account
in the sum of P1,000.00. However, Evelyn inserted
P5,000.00 in violation of the instruction. She negotiated the
note to Julie who had knowledge of the infirmity. Julie in
turn negotiated said note to Devi for value and who had no
knowledge of the infirmity. Supposing Devi indorses the
note to Baby for value but who has knowledge of the
infirmity, can the latter enforce the note against Larry?
Yes. The problems indicates that Baby is not a holder in
due course. When she took the instrument, she had
knowledge of the breach of trust committed by Evelyn
against Larry. However, she has all the rights of a holder
in due course because she took the instrument from Devi,
who was a holder in due course. Although Baby is not a
holder in due course, she did not participate in the breach
of trust committed by Evelyn. Hence, Larry cannot set up
the defense that the instrument was completed in breach
of trust against Baby because such defense is a personal
defense. (1993 Bar)
DEFENSES
JUDGE E. BONGHANOY
Page 22 of 74
the plaintiff as a matter of law or fact, should not
be given the relief he seeks.
Kinds of Defenses
a. Real Defenses (Absolute or Universal) —
those assertable against all parties,
including holders in due course; they
attach to the instrument itself; and they
challenge the validity of the instrument
itself.
o It does not render the
instrument valueless, it is only
unenforceable against the party
entitled to set up the defense
but not against those to whom
such a defense is not available.
b. Personal Defenses (Limited or Equitable)
— those available to prior parties among
themselves but which are not good
against a holder in due course; includes
every defense available in actions under
ordinary contract law; and they
challenge the validity of the agreement
for which the instrument was issued.
o They are available only against
that person or subsequent
holder who stands in privity with
the party seeking to enforce it.
o They can be used only between
original parties or immediate
parties or against one who is not
a holder in due course.
REAL DEFENSES PERSONAL DEFENSES
Minority (available Failure or absence of
only to the minor) consideration
Forgery Illegal consideration
Non-delivery of Non-delivery of
incomplete complete instrument
instrument
Material alteration Conditional delivery
of complete
instrument
Ultra vires act of Fraud in inducement
corporation
Fraud in factum or in Filling out blanks not
esse contractus within authority
Illegality — if Duress or
declared void for any intimidation
purpose
Vicious force or Filling out blanks
violence beyond reasonable
time
Want of authority Transfer in breach of
faith
Prescription Mistake
Discharge in Insertion of wrong
insolvency date
Ante-dating or post-
dating for illegal or
fraudulent purpose
Kinds of Fraud
a. Fraud in the execution (fraud in factum)
— present when a person is induced to
sign an instrument not knowing its
character as a note or bill
o Exists in cases in where a person,
without negligence, has signed
an instrument which was a
negotiable instrument, but was
deceived as to the character of
the instrument and without
knowledge of it.
o This kind of fraud is a real
defense because there is no
contract.
o Example: When a person is
made to sign a document which
he believes is an application for
a credit card, but was in fact a
promissory note.
b. Fraud in inducement (simple fraud) —
the person who signs the instrument
intends to sign the same as a negotiable
instrument but was induced to do so
only through fraud.
o In this case, the consent was
vitiated by fraud

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 23 of 74
 o This kind of fraud is a personal
defense because it does not
prevent a contract.
PROBLEM:
A induced B by fraud to make a P/N payable on demand
to the order of A in the sum of P50,000,000.00.
(a) Can A file an action successfully against the
maker, B, for the amount of the note?
(b) Further, A transfers the note to C who pays
P50,000,000.00 therefor and acquires the
note under circumstances that make him a
holder in due course. Can C file an action
successfully against B for the amount of the
note?
(a) No. B may raise the defense of fraud in
inducement against A who is not a holder in
due course.
(b) Yes. Since C is presumed to be a holder in due
course.
PRIMARY AND SECONDARY LIABILITIES
Liability — obligation of a party to a negotiable
instrument to pay the same according to its
terms.
Primarily liable parties
a. Maker of a promissory note
o Engages to pay according to
the tenor of the instrument
o Admits the existence of the
payee and his capacity to
indorse
b. Acceptor of a bill of exchange
o Engages to pay according to
the tenor of his acceptance
o Admits the existence of the
drawer
o Admits the genuineness of his
signature and his capacity and
NEGOTIABLE INSTRUMENTS LAW
authority to draw the
instrument
o Admits the existence of the
payee and his capacity to
indorse
c. Certifier of a check
Secondarily liable parties
a. Drawer of a bill of exchange
o Admits the existence of payee
and his capacity to indorse
o Engages that the instrument
will be accepted or paid by the
party primarily liable
o Engages that if the instrument
is dishonored and proper
proceedings are brought, he
will pay to the party entitled to
be paid
b. Indorser of a note or a bill
PRIMARILY LIABLE SECONDARILY LIABLE
Unconditionally bound Conditionally bound
Absolutely required to Undertakes to pay the
pay the instrument instrument only after
upon maturity certain conditions have
been fulfilled
A person placing his signature upon an
instrument otherwise than as maker, drawer, or
acceptor is deemed to be an indorser, unless he
clearly indicates by appropriate words his
intention to be bound in some other capacity.
(Sec. 63, NIL)
General Indorser — a person who signs his name
on the back of an instrument
Irregular or Anomalous Indorsement — an
indorsement for some purpose other than to
transfer the instrument, or an indorsement by a
stranger to the instrument or by one not in the
actual or apparent chain of title, especially an
JUDGE E. BONGHANOY
Page 24 of 74
indorsement made prior to the delivery of the
instrument to the payee. Purpose is usually to
INDORSER DRAWER
add the signer’s credit to the instrument.
A party to either a note or Party only to a bill
An irregular or anomalous indorser is a person a bill
who: Does not make any Makes the admission
a. Not otherwise a party to an instrument, admission regarding the regarding the existence of
b. Places thereon his signature in blank, existence of the payee the payee and his then
c. Before delivery and his then capacity to capacity to indorse
indorse
Usually, an irregular or anomalous indorser is an Has warranties Makes no warranties
accommodation indorser.
WARRANTIES
IRREGULAR
Warranties of Qualified Indorser & Persons GENERAL INDORSER
INDORSER
negotiating by mere delivery Makes either a blank Always makes a blank
a. That the instrument is genuine and in all or special indorsement
respects what it purports to be; indorsement
b. That he has good title to it; Indorses the Indorses the
c. That all prior parties had capacity to instrument after its instrument before its
contract; delivery to the payee delivery to the payee
d. That he has no knowledge of any fact Liable only to parties Liable to the payee
which would impair the validity of the subsequent to him and subsequent
instrument or render it valueless parties unless he
The warranty of persons negotiating by mere signs for the
delivery extends to the immediate transferees accommodation of
only. the payee in which
case he is liable only
The liability of the one who negotiates by mere to all parties
delivery extends in favor only of his immediate subsequent to the
transferee. payee
The liability of the one who is a qualified indorser
extends to all subsequent holders who make title ENFORCEMENT OF LIABILITY
through his indorsement for a breach of any of Primarily liable parties
his warranties. a. Maker
o Liable the moment he makes the
Warranties of a General Indorser instrument
a. That the instrument is genuine and in all b. Drawee (Acceptor)
respects what it purports to be; o Liable the moment he accepts
b. That he has good title to it; the instrument
c. That all prior parties had capacity to
contract; Secondarily liable parties
d. That the instrument is, at the time of his a. Steps to Charge Secondary Parties in
indorsement, valid and subsisting. Promissory Note
The unqualified indorser also warrants that the
instrument will be honored.

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 25 of 74
 o Presentment for payment must
be made within the required
period to the maker
o Notice of dishonor should be
given, if P/N is dishonored by
non-payment by the maker.
b. Steps to Charge Secondary Parties in Bill
of Exchange
o Presentment for acceptance or
negotiation within a reasonable RULES ON PRESENTMENT FOR PAYMENT
time after it was acquired
o If dishonored by non- Presentment for payment — the presentation of
acceptance an instrument to the person primarily liable for
i. Notice of dishonor the purpose of demanding and receiving
should be given to the payment
indorsers and drawer
ii. If the bill is a foreign bill, When presentment for payment not necessary
there must be protest Presentment for payment is not necessary to
for dishonor by non- charge persons primarily liable. But it is
acceptance necessary to charge persons secondarily liable,
o If the bill is accepted except:
i. Presentment for a. As to drawer, where he has no right to
payment to the expect or require that the drawee or
acceptor should be acceptor will pay the instrument;
made b. As to indorser, where the instrument
1. If the bill is was made or accepted for his
dishonored accommodation and he has no reason to
upon expect that the instrument will be paid if
presentment presented;
for payment c. When dispensed with:
2. Notice of i. Where, after the exercise of
dishonor must reasonable diligence,
be given to presentment cannot be made
persons ii. Where the drawee is a fictitious
secondarily person
liable iii. By waiver of presentment,
ii. If the bill is a foreign bill, express or implied
protest for dishonor by d. Where the instrument has been
non-payment must be dishonored by non-acceptance.
made
c. Steps to Charge Acceptor for Honor and Requisites of Presentment for Payment
Referee in case of Need a. Must be made by the holder, or by some
o Protest for non-payment by the person authorized to receive payment
drawee on his behalf;
b. Must be made at a reasonable hour on a
business day on the proper date;
c. Must be at the proper place;

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 26 of 74
 d. Must be to the person primarily liable on
the instrument, or if he is absent or
inaccessible, to any person found at the
place where the presentment is made;
and
e. Person entitled to present the
instrument for payment must exhibit the
instrument to the person from whom
the payment is demanded and upon
payment must be delivered to the
person paying it.
Date of Presentment of Instrument
If the instrument is payable at a fixed or
determinable future time, presentment must be
made on the date it falls due without period of
grace; otherwise, drawer and indorsers are
discharged.
If the instrument is payable on demand:
o Within a reasonable time after issue of
not
o Presentment must be made to
the maker within a reasonable
time after its issue.
o Burden in on the holder of the
note.
o Within a reasonable time after last
negotiation of bill
o Presentment to the drawee or
acceptor must be made within a
reasonable time time after last
negotiation.
o Last negotiation = last transfer
for value
Place of Presentment
Presentment for payment is made at the proper
place:
a. Where the place for payment is specified
in the instrument and it is there
presented;
b. Where no place of payment is specified,
but the address of the person to make
payment is given in the instrument and
it is there presented;
c. Where no place of payment is specified
and no address is given and the
NEGOTIABLE INSTRUMENTS LAW
instrument is presented at the usual
place of business or residence of the
person to make payment;
d. In any other case if presented to the
person to make payment wherever he
can be found, or if presented at his last
known place of business or residence.
(Sec. 73, NIL)
The instrument must be exhibited to the person
from whom payment is demanded, and when it
is paid must be delivered up to the party paying
it. (Sec. 74, NIL)
Purpose of exhibition:
a. To determine the genuineness of the
instrument and the indorsements and
the right of the holder to receive
payment; and
b. To enable him, upon payment, to take
possession of it to guard against a
lawsuit by a subsequent holder.
If presentment is without exhibition, the
presentment is ineffectual as the debtor is
entitled to see the instrument and demand its
surrender upon payment.
Where the person primarily liable on the
instrument is dead, and no place of payment is
specified, presentment for payment must be
made to his personal representative, if such
there be, and if, with the exercise of reasonable
diligence, he can be found. (Sec. 76, NIL)
Where the persons primarily liable on the
instrument are liable as partners and no place of
payment is specified, presentment for payment
may be made to any one of them, even though
there has been a dissolution of the firm. (Sec. 77,
NIL)
Where the persons primarily liable on the
instrument are liable as partners and no place of
payment is specified, presentment for payment
may be made to any one of them, even though
there has been a dissolution of the firm. (Sec. 78,
NIL)
JUDGE E. BONGHANOY
Page 27 of 74

NOTICE OF DISHONOR
It is the bringing, either verbally or in writing, to
the knowledge of the drawer or indorse of an
instrument, the fact that a specified negotiable
instrument, upon proper proceedings taken, has
note been accepted or has not been laid and that
the party notified is expected to pay it. (Martin v.
Brown, 75 Ala. 442.)
WHEN IS AN INSTRUMENT CONSIDERED
DISHONORED
A negotiable instrument is considered to be
dishonored—
a. If it is not accepted when presented for
acceptance;
b. If it is not paid when presented for ,
notice of dishonor at maturity; or
c. If presentment is excused or waived and
the instrument is past due and unpaid.
OBJECT OF DISHONOR
The object of giving notice of dishonor is twofold:
a. To inform the parties secondarily liable
that the maker or acceptor has failed to
meet his engagement; and
b. To advise such parties that they will be
required to make payment.
EFFECT OF FAILURE TO GIVE NOTICE OF
DISHONOR
When an instrument is dishonored by non-
acceptance on presentment for acceptance or by
non-payment at its maturity, notice of such
dishonor must be given to the persons
secondarily liable; otherwise, any such person to
whom such notice is not given is discharged.
NEGOTIABLE INSTRUMENTS LAW
NOTICE OF DISHONOR NOT NECESSARY
General Rule: Notice of dishonor is not necessary
in cases of:
a. Waiver of notice;
b. Waiver of protest;
c. Where the notice of dishonor is
dispensed with when, after reasonable
diligence, it cannot be given to or does
not reach the parties sought to be
charged;
d. When the drawer and the drawee are
the same person;
e. When the drawee is a fictitious person or
a person not having capacity to contract;
f. When the drawer is the person to whom
the instrument is presented for
payment;
g. Where the drawer has no right to expect
or require that the drawee or acceptor
will honor the instrument;
h. Where the drawer has countermanded
payment;
i. When the indorser was aware of the fact
that at the time he indorsed the
instrument;
j. Where the instrument was made or
accepted for his accommodation;
k. Notice of non-payment where
acceptance is refused; and
l. Where an omission to give notice of
dishonor by non-acceptance does not
prejudice the rights of a holder in due
course subsequent to the omission.
Exception: Drawers and indorsers or their agents
are entitled to notice of dishonor.
BY WHOM SHOULD NOTICE OF
DISHONOR BE GIVEN
Notice of dishonor may be given by:
a. The holder;
b. Another in behalf of the holder (agent or
representative); and
JUDGE E. BONGHANOY
Page 28 of 74
 c. A party to the instrument who may be
compelled to pay it and who, upon
taking it up, would have a right to
reimbursement from the party. (Sec. 90,
NIL.)
(NOTE: notice by a mere stranger is ineffectual
unless he is acting as an agent of a party who is
entitled to give notice)
NOTICE GIVEN BY AN AGENT
The agent need not be authorized by the
principal to give the notice since any person can
be an agent of any party entitled to give notice.
The notice may be given in the name of the agent
or the party entitled to give notice. (Sec. 97, NIL.)
(NOTE: Under Sec. 91, NIL, the giving of notice by
the agent benefits the principal which is why
he/she does not need the principal’s
authorization.)
EFFECT OF NOTICE IN BEHALF OF HOLDER
Notice of dishonor given by or on behalf of the
holder inures to the benefit of:
a. All holders subsequent to the holder
who has given notice; and
b. All parties prior to the holder but
subsequent to the party to whom notice
has been given and against whom they
have a right of recourse.
EFFECT OF NOTICE GIVEN BY PARTY
ENTITLED THERETO
Notice of dishonor given by or on behalf of the
party entitled to give notice inures to the benefit
of:
a. The holder;
b. All parties subsequent to the party to
whom notice is given, including parties
subsequent to the holder who gave
notice. (Sec. 92, NIL.)
WHEN AND TO WHOM AGENT MAY GIVE
NOTICE
NEGOTIABLE INSTRUMENTS LAW
Agent, in case the instrument is dishonored in his
hands, may give notice either to:
a. Principal, or
b. Directly to the parties secondarily liable
thereon without notifying his principal.
When notice is to parties secondarily liable — he
must do so within the time fixed by Sections 102,
103, 104, and 107; otherwise, they are
discharged for lack of notice.
When notice is to the principal — he must notify
him within the same time referred to as if he
were a holder.
WHEN NOTICE IS SUFFICIENT
Notice is sufficient even if it is not signed and an
insufficient written notice may be supplemented
and validated by verbal communication. Mere
statement that the instrument is due and
payable is insufficient notice. (Kelleman v. Havas,
290 S.W. 700.)
Misdescription of the instrument does not vitiate
the notice unless the party to whom the notice is
given is in fact misled thereby. (Sec. 95, NIL.)
FORMS OF NOTICE
Notice of dishonor may be in writing or merely
oral. It may even be given by telephone provided
that it is clearly shown that the party notified was
really communicated with, that is, fully identified
as the party at the receiving end of the line.
(American National Bank v. Nat. Fertilizer Co.,
143 S.W. 597.)
EFFECT OF DEFECT IN NOTICE
a. Lack of signature or insufficiency — does
not invalidate the notice. (Sec. 95, NIL.)
Any insufficiency may be supplemented
and validated by oral communication.
JUDGE E. BONGHANOY
Page 29 of 74
 b. Misdescription of instrument — also
does not invalidate the notice, unless it
misleads the party to whom it is sent.
(Keng v. Husley, 85 No. 525.)
TO WHOM SHALL NOTICE BE GIVEN
The notice of dishonor may be given:
a. To the party himself; or
b. To his agent in that behalf.
(NOTE: Under Sec. 91, NIL, the agent giving the
notice need not be authorized by the principal,
but under Sec. 98, NIL, the agent has to be
authorized and competent to receive the notice
of dishonor because the receipt of the notice
creates liability.)
NOTICE WHERE PARTY IS DEAD
When the party sought to be charged is dead, the
notice must be given to his personal
representative provided that:
a. His death is known to the party giving
notice;
b. There is a personal representative; and
c. If with reasonable diligence the said
personal representative could be found.
(Sec. 98, NIL.)
NOTICE TO PARTNERS
Since each partner is an agent of the partnership,
the notice to the partners is deemed to be notice
to the partnership. If such partner who knew of
the notice and suppressed such fact
fraudulently, he becomes liable to the co-
partners, but the notice to him is still considered
as notice to the partnership. (Kensington Nat.
Bank v. Ware, 32 Pa. Super. Ct. 247.)
NOTICE TO PERSONS JOINTLY LIABLE
Notice to joint parties who are not partners must
be given to each of them unless one of them has
authority to receive such notice for the others.
(Sec. 100, NIL.)
NEGOTIABLE INSTRUMENTS LAW
NOTICE TO BANKRUPT
Where a party has been adjudged a bankrupt or
an insolvent, or has made an assignment for the
benefit of creditors, notice may be given either
to the party himself or to his trustee or assignee.
(Sec. 101, NIL.)
TIME WITHIN WHICH NOTICE MUST BE
Notice may be given as soon as the instrument is
GIVEN
dishonored and unless delay is excused as
provided for in the law, must be given within the
times fixed by the NIL. (Sec. 102, NIL.)
WHEN MUST NOTICE BE GIVEN
Where the parties reside in the same place — If
the person giving and the person to receive the
notice reside in the same place, the notice must
be given within the following periods:
a. At the place of business of the person to
receive the notice — must be given
before the close of the business hours
on the following day;
b. At his residence — must be given before
the usual hours of rest on the following
day;
c. Sent by mail — must be deposited in the
post office in time to reach him in usual
course on the following day. (Sec. 103,
NIL.)
Where the parties reside in different places — If
the person giving and the person to receive the
notice reside in different places, the notice must
be given within the following times:
a. Sent by mail — must be deposited in the
post office in time to go by mail the day
following the day of dishonor, or if there
be no mail at a convenient hour on that
day, by the next mail;
b. By means other than mail — must be
within the time that notice would have
been received in due course of mail, if it
has been deposited in the post office
within the time specified in the last
subdivision. (Sec. 104, NIL.)
JUDGE E. BONGHANOY
Page 30 of 74

WHEN SENDER DEEMED TO HAVE GIVEN
DUE NOTICE
Notice by mail is deemed to have been properly
made where:
a. Notice of dishonor is duly addressed;
and
b. Deposited in the post office. (Sec. 105,
NIL.)
(NOTE: So long as the sender has done everything
the law requires of him, notice would still be
considered on time even if it does not reach the
addressee due to miscarriage in the mails. It must
be properly addressed, stamped, and mailed.)
WHAT CONSTITUTES DEPOSIT IN THE
POST OFFICE
The notice may be deposited in:
a. The post office;
b. Any branch post office; or
c. Any letter box under the control of the
post office. (Sec. 106, NIL.)
TIME OF NOTICE TO SUBSEQUENT PARTY
The instrument is considered dishonored in the
hands of a party who receives a notice of
dishonor from the holder on the date he receives
such notice and not on the date the instrument
is dishonored in the hands of the holder. (Sec.
107, NIL.)
WHERE NOTICE MUST BE SENT
Where a party has added an address to his
signature, notice of dishonor must be sent to
that address; but if he has not given such
address, then the notice must be sent as follows:
a. Either to the post office nearest to his
place of residence or to the post office
where he is accustomed to receive his
letters; or
NEGOTIABLE INSTRUMENTS LAW
b. If he lives in one place, and has his place
of business in another, notice may be
sent to either place; or
c. If he is sojourning in another place,
notice may be sent to the place where he
is so sojourning. (Sec. 108, NIL.)
WAIVER OF NOTICE
Waiver — it is the intentional abandonment of a
known right; in relation to notice of dishonor, it
is the willingness on the part of the drawer or the
indorser concerned to be bound as such even
without due notice of dishonor.
Notice of dishonor may be waived either:
a. Before the time of giving notice; or
b. After the omission to give due notice.
(Sec. 109, NIL.)
The waiver may be:
a. Expressed — when made orally or in
writing as when “notice of dishonor
waived” appears above the signature of
an indorser.
b. Implied — when it can be inferred from
act or language, such usually happens
after there has been omission to give
notice.
The burden of proof is on the holder to show
waiver of notice and, being in derogation of a
statutory right, it must be proved by clear and
convincing evidence.
PERSONS AFFECTED BY WAIVER OF
NOTICE
If the waiver is embodied in the instrument itself
— it binds all parties to the instrument
If it is written above the signature of an indorser
— it only binds him.
WAIVER OF PROTEST
JUDGE E. BONGHANOY
Page 31 of 74
Protest — if notice is given by a notary public; it
is the formal instrument executed by the notary
public certifying that the legal steps necessary to
fix the liability of the drawee and the indorsers
have been taken.
Where protest is waived, presentment and
notice of dishonor are also deemed waived;
because “protest” means all steps accompanying
dishonor necessary to charge a party secondarily
liable. (Maury v. Winlock, 269 Pac. 811.)
WHEN NOTICE IS DISPENSED WITH
Notice of dishonor is dispensed with when, after
the exercise of reasonable diligence, it cannot be
given to or does not reach the parties sought to
be charged. (Sec. 112, NIL.)
Reasonable diligence depends on the
circumstances of each case since it implies an
active search. The holder should endeavour to
find the whereabouts of the party to be notified.
WHEN DELAY IN GIVING NOTICE IS
EXCUSED
Delay in giving notice of dishonor is excused
when the delay is caused by circumstances
beyond the control of the holder and not
imputable to his default, misconduct or
negligence. When the cause of delay ceases to
operate, notice must be given with reasonable
diligence. (Sec. 113, NIL.)
WHEN NOTICE TO DRAWER NOT
REQUIRED
Notice of dishonor is not required to be given to
the drawer in the following cases:
a. Drawer and drawee are the same
person;
b. Drawee is a fictitious person or one with
no capacity to contract;
c. Drawer is the person to whom the
instrument is presented for payment;
NEGOTIABLE INSTRUMENTS LAW
d. Drawer has no right to expect or require
that the drawee or acceptor will honor
the instrument — it has been held that
the drawer of the check is not entitled
to notice when he has no account with
the drawee bank or has no funds with
the drawee bank to meet it
e. Drawer has countermanded payment —
he orders the drawee not to pay
WHEN NOTICE TO INDORSER NOT
REQUIRED
Notice of dishonor is not required to be given to
an indorser in either of the cases:
a. When the drawee is a fictitious person or
a person not having capacity to contract,
and the indorser was aware of that fact
at the time he indorsed the instrument;
b. Where the indorser is the person to
whom the instrument is presented for
payment;
c. Where the instrument was made or
accepted for his accommodation. (Sec.
115, NIL.)
Failure to give due notice of dishonor to all other
secondary parties will relieve them of their
liability.
NOTICE OF NON-PAYMENT WHERE
ACCEPTANCE IS REFUSED
Where due notice of dishonor by non-
acceptance has been given, notice of a
subsequent dishonor by non-payment is not
necessary, unless in the meantime the
instrument has been accepted. (Sec. 116, NIL.)
When a bill is dishonored by non-acceptance, an
immediate right of recourse against all
secondary parties accrues to the holder and no
presentment for payment is necessary, since
dishonor of the instrument by non-payment is to
be expected.
However, if the instrument is accepted after it
has been dishonored by non-acceptance, it is
JUDGE E. BONGHANOY
Page 32 of 74
necessary for the holder or present the
instrument for payment upon maturity. In case
of non-payment, the holder must give the
corresponding notice of dishonor. Failure to do
so will discharge the secondary parties.
EFFECT OF OMISSION TO GIVE NOTICE OF
NON-ACCEPTANCE
The failure of the previous holder to give a notice
of dishonor by non-acceptance cannot prejudice
the holder in due course who may still present
the instrument to the drawee for acceptance and
notify the drawer and indorsers if acceptance is
refused.
d. Must be under the hand and seal of the
notary making the protest; and
e. Must specify the following:
a. Time and place of presentment;
b. Fact that presentment was
made and manner thereof;
c. Cause or reason for protest; and
d. Demand was made and the
answer give, if any, or that the
drawee or acceptor cannot be
found.

PROTEST: WHEN NEEDED?

Foreign bills of exchange — protest is necessary. DISCHARGE OF NEGOTIABLE
Other negotiable instruments — protest is INSTRUMENT
optional, except in cases of:
Discharge of an instrument — it is the release of
a. Protest for better security;
all parties, whether primary or secondary, from
b. Acceptance for honor; and
the obligation arising under the instrument
c. Payment for honor.
rendering it without force and effect and,
consequently, no longer negotiable.
Necessary if:
a. A foreign bill has been dishonored by METHODS FOR DISCHARGE OF
non-acceptance (Sec. 152, NIL); INSTRUMENT
b. A foreign bill which was not previously
A negotiable instrument is discharged:
presented for acceptance has been
a. By payment by or on behalf of the
dishonored by non-payment;
principal debtor — payment by a
c. A stranger to a bill will accept the stranger does not discharge the
instrument for honor (Sec. 161, NIL);
instrument
d. The bill will be presented for payment to b. By payment by the party
acceptor for honor or referee in case of
accommodated, where the instrument is
need (Sec. 167, NIL); and
made or accepted for accommodation
e. When the bill is dishonored by the
c. By the intentional cancellation by the
acceptor for honor (Sec. 170, NIL).
holder — may be done by writing the
word “cancelled” or “paid” on the face
Requisites of a valid protest:
of the instrument; presumption is that it
a. Must be made by a notary public or any
is intentional
respectable resident of the place where
d. By any other act which will discharge a
the bill is dishonored; simple contract for the payment of
b. Must be made in front of two witnesses;
money — the law on obligations and
c. Must be annexed to the bill or must
contracts will apply
contain a copy thereof;

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 33 of 74
 e. When the principal debtor becomes the
holder of the instrument at or after
maturity in his own right. (Sec. 119, NIL.)
The methods for discharge of a negotiable
instrument are exclusive.
WHEN PERSONS SECONDARILY LIABLE
ARE DISCHARGED
A person secondarily liable on the instrument is
discharged:
a. By any act which discharges the
instrument
b. By the intentional cancellation of his
signature by the holder — the right of a
holder to cancel the signature of an
indorser is subject to the limitation that
the indorsement is not necessary to the
holder’s title
c. By the discharge of a prior party —
applies only to discharge by the act of
the holder and not to discharges by
operation of law
d. By a valid tender of payment made by a
prior party;
e. By a release of the principal debtor,
unless the holder’s right of recourse
against the party secondarily liable is
expressly reserved; and
f. By any agreement binding upon the
holder to extend the time of payment, or
to postpone the holder’s right to enforce
the instrument, unless made with the
assent of the party secondarily liable, or
unless the right of recourse against such
party is expressly reserved. (Sec. 120,
NIL.)
RIGHT OF PARTY WHO DISCHARGES
INSTRUMENT
Payment at or after maturity by a party
secondarily liable does not discharge the
instrument. It only cancels his own liability and
that of parties subsequent to him.
NEGOTIABLE INSTRUMENTS LAW
RENUNCIATION BY HOLDER
The holder may expressly renounce his rights
against any party to the instrument before, at or
after its maturity. An absolute and unconditional
renunciation of his rights against the principal
debtor made at or after the maturity of the
instrument discharges the instrument. But a
renunciation does not affect the rights of a
holder in due course without notice. A
renunciation must be in writing, unless the
instrument is delivered up to the person
primarily liable thereon. (Sec. 122, NIL.)
EFFECT OF RENUNCIATION
If in favor of secondary party — may be made
before, at or after maturity of the instrument; it
shall only discharge such secondary party and all
parties subsequent to him but the instrument
itself remains in force.
If in favor of principal — may be effected at or
after maturity; it shall discharge the instrument
and all parties thereto, provided that the
renunciation is made absolutely and
unconditionally.
Renunciation does not affect the rights of a
holder in due course without notice.
CANCELLATION
A cancellation made unintentionally, or under a
mistake or without the authority of the holder, is
inoperative; but where an instrument or
signature thereon appears to have been
cancelled, the burden of proof lies on the party
who alleges that cancellation was made
unintentionally, or under a mistake or without
authority. (Sec. 123, NIL.)
JUDGE E. BONGHANOY
Page 34 of 74

MATERIAL ALTERATION
Material alteration — refers to any change in the
instrument which affects the liability of the
parties in any way, or changes the contract of the
parties in any respect.
International Corporate Bank v. CA
G.R. No. 129910, Sept. 5, 2006
Ministry of Education and Culture issued 15 checks
which were drawn against the respondent which
the petitioner accepted for deposit on various
dates. After 24 hours from submission of the checks
to the respondent for clearing, the petitioner paid
the value of the checks and allowed the
withdrawals of the deposits. However, the
respondent returned all the checks to the
petitioner without clearing them on the ground
that they were materially altered.
RTC: respondent cannot be faulted since they were
expected to use reasonable business practices and
should have verified the status of the checks.
CA: reversed the RTC ruling saying that the
petitioner could not have verified the status of the
checks. Later it amended its decision and affirmed
the RTC’s ruling.
Issue:
W/N the checks were materially altered
Held: NO.
As held by the SC in PNB v. CA, the alteration on the
serial number of a check is not material alteration.
“An alteration is said to be material if it alters the
effect if the instrument. It means an unauthorized
change in an instrument that purports to modify in
any respect the obligation of a party or an
unauthorised addition of words or numbers or other
change to an incomplete instrument relating to the
obligation of a party.”
EFFECT OF ALTERATION
If alteration was done by a party — effect of
material alteration by the holder is to discharge
the instrument and all prior parties thereto who
did not give their consent to such alteration.
Exceptions to the effect of material alteration:
NEGOTIABLE INSTRUMENTS LAW
It does not discharge the instrument as against:
a. A party who has made the alteration
b. A party who authorized or assented to
the alteration
c. Indorsers who indorsed subsequent to
the alteration
If alteration was done by a stranger — it is called
“spoliation”; has no effect on the instrument if
the original meaning can be ascertained.
A material alteration avoids the instrument in
the hands of a holder in due course as against
any prior party who has not assented to the
alteration; but if an altered instrument is
negotiated to a holder in due course, he may
enforce payment thereof according to its original
tenor regardless of whether the alteration was
innocent or fraudulent.
WHEN ALTERATION IS MATERIAL
Any alteration which changes:
a. The date;
b. The sum payable, either for principal or
interest;
c. The time or place of payment;
d. The number or the relations of the
parties;
e. The medium or currency in which
payment is to be made;
f. If it adds a place of payment where no
place of payment is specified;
g. Any other change or addition which
alters the effect of the instrument in any
respect. (Sec. 125, NIL.)
The alteration of the serial number of the check
does not alter the effect of the instrument, nor
does it modify in any respect the obligation of a
party thereto. It does not change the items
which are required to be stated under Sec. 1, NIL.
(PNB v. CA)
JUDGE E. BONGHANOY
Page 35 of 74
 from its last
negotiation

When a note is indorsed by the payee, it

becomes just like a bill.

After a bill of exchange has been accepted, it

becomes similar to that of a promissory note.

CLASSES OF BILLS OF EXCHANGE

a. Foreign bill of exchange — one that is
drawn in one state or country and
payable in another state or country;
BILL OF EXCHANGE AND PROMISSORY b. Inland bill of exchange — one that is
NOTE, DISTINGUISHED drawn and payable within the same
BILL OF EXCHANGE PROMISSORY NOTE state or country;
c. Draft — one that is payable on demand
Contains an Contains an or at sight, when the holder presents it
unconditional order unconditional for payment, or at a definite future time
addressed by one promise made by one or some future determinable time;
person to another person to another to
requiring the latter to pay it.
Citytrust Banking Corp. v. Court of Appeals
pay the instrument G.R. No. 92591, Apr. 30, 1991
3 parties are 2 parties are involved:
involved: drawer, maker and payee or Private respondent purchased a $40,000 bank draft from
petitioner bank payable to Thai International Airways and the
drawee, and payee bearer
corresponding bank in the US (drawee), Marine Midland. The
or bearer respondent then executed a stop payment order of the bank
The issuer (drawer) is The issuer (maker) is draft. Petitioner then credited back the money since there was
secondarily liable primarily liable non-payment, but months later, the respondent discovered that
Drawn payable to the Drawn payable to the the petitioner has re-debited the amount from the account.
drawer’s own order maker’s own order is Issue:
is complete without not complete until Who shall be liable for the amount
indorsement, if it has indorsed by him
been accepted by Held: Citytrust and Marine Midland were not in privity with each
other in a transaction involving payment through a bank draft. A
the drawee bank draft is a bill of exchange drawn by a bank upon its
Must be presented There is no need for correspondent bank issued at the solicitation of a stranger who
for acceptance in presentment for purchases and pays therefor. It is an order for payment of money.
certain cases and acceptance Citytrust was the drawer of the draft through which it ordered
Marine Midland, the drawee bank, to pay Thai Airways.The
drawee is not liable
drawee bank acting as payor bank is solely liable for acts not done
unless and until he in accordance with the instructions of the drawer bank or the
accepts the same purchaser of the draft. The drawee bank has the burden of proof
Payable on demand Payable on demand that it did not so violate. Meanwhile, the drawer, if sued by the
must be presented must be presented for purchaser of the draft, is liable for the act of debiting the
customer’s account despite an instruction to stop payment. The
for payment within a payment within a drawer has the duty to prove that he complied with the order to
reasonable time reasonable time from inform the drawee.
its issue

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 36 of 74
 d. Trade acceptance — a draft or bill of
exchange drawn by the seller on the
purchaser of goods and accepted by the
latter by signing it as drawee
LETTER OF CREDIT
Letters of credit are loan agreements made by a
bank (or another person) at the request a
customer that the bank (or issuer) will pay or
honor drafts drawn by the seller (creditor) on the
buyer (debtor) up to a stated amount on
compliance with the conditions specified in the
credit.
STATUS OF DRAWEE PRIOR TO
ACCEPTANCE OR PAYMENT
A drawee is a stranger to the bill drawn on him
unless and until he accepts the same. Before
acceptance, the bill is merely an order to the
drawee to pay. As far as the holder is concerned,
the drawee is not bound to accept even if the
drawer has sufficient funds in his hands.
The mere issuance of a bill does not operate as
an assignment of the funds in the hands of the
drawee. Hence, a holder in due course of a
dishonored bill has no cause of action against the
drawee but only against the drawer and
indorsers, if any. But the drawee who refuses to
accept may be made liable to the drawer.
BILL ADDRESSED TO SEVERAL DRAWEES
A bill may be addressed to two or more drawees
whether they are partners or not, but a bill
cannot be addressed to two or more drawees in
the alternative, nor two or more drawees in
succession.
WHEN BILL MAY BE TREATED AS NOTE
A holder may treat an instrument, at his option,
either as a bill of exchange or a promissory note,
when:
NEGOTIABLE INSTRUMENTS LAW
a. Drawer and drawee are the same
person;
b. Drawee is a fictitious person; and
c. Drawee has no capacity to contract.
(Sec. 130, NIL.)
REFEREE IN CASE OF NEED
It is the person named by the drawer or indorser
as the one to whom the holder may resort in case
of need, that is, in case the bill is dishonored by
none-acceptance or non-payment.
It is not obligatory upon the holder to apply to
the referee in case of dishonor. The referee is not
bound to pay the holder but he may be made
liable to the party who named him.
ACCEPTANCE
An acceptance of a bill is 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 and it
contemplates an engagement or promise to pay.
(Hunt v. Security State Bank, 179 Pac. 248.)
OBJECT AND EFFECT OF ACCEPTANCE
The drawee is not bound in any way, as a party
to a bill and the payee or other holder has no
recourse against him even if it is shown that he
has funds in his belonging to the drawer
sufficient to cover the bill, unless and until her
accepts.
JUDGE E. BONGHANOY
Page 37 of 74
By accepting the bill, the drawee admits
everything essential to its validity.
The drawer is the principal debtor until the bill
has been accepted. When the bill then is
accepted, it becomes a note.
FORMAL REQUISITES OF ACCEPTANCE
Actual acceptance, to be valid, must:
a. Be in writing;
b. Be signed by the drawee; and
c. Contain an express or implied promise to
pay money. (Sec. 132, NIL.)
HOW ACCEPTANCE IS MADE
Acceptance is made by writing across the face of
the bill the word “accepted” under which the
drawee signs his name with the date also
written.
WHERE ACCEPTANCE MAY BE MADE
Acceptance may be made on the bill itself or on
a separate instrument such as in a letter or in a
telegram. Acceptance on a separate paper may
either be an acceptance of an existing bill, or an
acceptance of a future or non-existing bill.
ACCEPTANCE BY SEPARATE INSTRUMENT
Where the acceptance is written on a paper
other than the bill itself, in order to bind the
acceptor:
a. The acceptance be shown to the person
to whom the instrument is negotiated;
and
b. Such person must take the bill for value
on the faith of such acceptance. (Sec.
134, NIL.)
PROMISE TO ACCEPT
An unconditional promise in writing to accept a
bill before it is drawn is deemed an actual
acceptance in favor of every person who, upon
NEGOTIABLE INSTRUMENTS LAW
the faith thereof, receives the bill for value. (Sec.
135, NIL.)
TIME ALLOWED DRAWEE TO ACCEPT
The drawee has 24 hours after presentment for
acceptance within which to act upon the bill.
However, should he decide to accept the bill the
acceptance shall be dated as of the day of
presentation or the date when he first saw the
bill.
CONSTRUCTIVE ACCEPTANCE
There is constructive acceptance:
a. Where the drawee to whom a bill is
delivered for acceptance destroys it; or
b. Where the drawee refuses, within 24
hours after delivery or within such
period as is given to him, to return the
bill accepted or non-accepted.
An accidental destruction would not constitute
acceptance. It must be willfully done.
WHEN ACCEPTANCE MAY BE MADE
Acceptance may be made before the bill has
been signed by the drawer or while otherwise
incomplete; even after it is overdue; and even
after it has been dishonored by non-acceptance
or non-payment.
KINDS OF ACCEPTANCE
As to liability:
a. General
b. Qualified
RIGHT OF HOLDER TO GENERAL
ACCEPTANCE
A holder has a right to require a general or
unqualified acceptance and if a qualified
acceptance has been made, he may refuse it and
treat the bill as dishonored by non-acceptance if
he does not obtain an unqualified acceptance.
JUDGE E. BONGHANOY
Page 38 of 74
The drawer and the indorsers engage that the bill
will be paid as drawn or indorsed by the, and the
effect of a qualified acceptance would be to
make a contract for hem without their consent.
WHEN PRESENTMENT FOR ACCEPTANCE
MUST BE MADE
Presentment for acceptance — it is the
production or exhibition of a bill of exchange to
the drawee for his acceptance or payment.
Presentment for acceptance must be made:
a. Where the bill is payable after sight, or in
any other case, where presentment for
acceptance is necessary in order to fix
the maturity of the instrument; or
b. Where the bill expressly stipulates that it
shall be presented for acceptance; or
c. Where the bill is drawn payable
elsewhere than at the residence or place
of business of the drawee. (Sec. 143,
NIL.)
WHEN FAILURE TO PRESENT RELEASES
DRAWER AND INDORSER
Presentment for acceptance is necessary:
a. To present the bill for acceptance, or
b. To negotiate it within a reasonable time
to charge the drawer and all indorsers.
The reason is that the drawer and indorsers have
a right in having the bills accepted immediately
in order to shorten the time of payment and thus
NEGOTIABLE INSTRUMENTS LAW
put a limit to the period of their liability and
likewise enable them to protect themselves by
other means before it is too late, if the bill is not
accepted and paid within the time originally
contemplated by them. (Mimrocks v. Woody, 2
S.E. 249.)
HOW PRESENTMENT FOR ACCEPTANCE
MADE
When proper — In order that presentment for
acceptance may be proper, it is necessary that it:
a. Must be by or on behalf of the holder;
b. At a reasonable hour;
c. On a business day;
d. Before the bill is overdue and within a
reasonable time; and
e. To the drawee or some person
authorized to accept or refuse
acceptance on his behalf.
Bill address to two or more drawees — Where a
bill is addressed to two or more drawees who are
not partners, presentment must be made to
them all unless one has authority to accept or
refuse acceptance for all, in which case
presentment may be made to him only. (Par. A,
Sec. 145, NIL.)
Drawee is dead — Where the drawee is dead,
presentment may be made to his personal
representative. (Par. B, Sec. 145, NIL.)
Where the drawee has been adjudged a
bankrupt or an insolvent or has made an
assignment for the benefit of creditors,
presentment may be made to him or to his
trustee or assignee. (Par. C, Sec. 145, NIL.)
ON WHAT DAYS PRESENTMENT MAY BE
MADE
A bill may be presented for acceptance on any
day on which negotiable instruments may be
presented for payment under the provisions of
Sec. 72 & 85. When Saturday is not otherwise a
holiday, presentment for acceptance may be
JUDGE E. BONGHANOY
Page 39 of 74
made before 12:00NN on that day. (Sec. 146,
NIL.)
The difference with Sec. 85 is that, there is a
distinction between instruments payable on
demand and instruments payable on a fixed or
determinable future time. Where the instrument
is not payable on demand and it falls due on a
Saturday, it must be presented for payment on
the next succeeding business day.Where
presentment is for acceptance only, it may be
made for all kinds of bills of exchange before
12:00NN on Saturday, provided that it is not a
holiday.
PRESENTMENT WHERE TIME IS
INSUFFICIENT
Where the holder of a bill drawn payable
elsewhere than at the place of business or
residence of the drawee has no time, with the
exercise of reasonable diligence, to present the
bill for acceptance before presenting it for
payment on the day that it falls due, the delay
caused by presenting the bill for acceptance
before presenting it for payment is excused and
does not discharge the drawers and indorsers.
(Sec. 147, NIL.)
A bill is dishonored by non-acceptance:
a. When it is duly presented for
acceptance, and such an acceptance as
is prescribed by this Act is refused or
cannot be obtained; or
b. When presentment for acceptance is
excused and the bill is not accepted.
(Sec. 149, NIL.)
DUTY OF HOLDER IN CASE OF NON-
ACCEPTANCE
If, within 24 hours after presentment, the bill is
not accepted, the person presenting it must treat
the bill as dishonored. The holder must take the
necessary proceedings against the drawer and
each indorser.
RIGHTS OF HOLDER WHERE BILL IS NOT
ACCEPTED
When a bill is dishonored by non-acceptance, the
holder, after giving notice of dishonor and
protesting when required, may immediately
proceed against the drawer and indorsers for the
value of the bill without waiting for the date of
maturity.

WHEN PRESENTMENT FOR ACCEPTANCE

EXCUSED
Presentment for acceptance is excused and a bill
may be treated as dishonored by non-
acceptance in either of the following cases:
a. Where the drawee is dead, or has
absconded, or is a fictitious person or a
person not having capacity to contract
by bill;
b. Where, after the exercise of reasonable
diligence, presentment cannot be made;
c. Where, although presentment has been REASONS FOR REQUIRING PROTEST IN
irregular, acceptance has been refused CASE OF FOREIGN BILLS
on some other ground. (Sec. 148, NIL.) Protest — it is the formal instrument executed by
a notary public or other competent person
WHEN DISHONORED BY NON- certifying that the facts necessary to the
ACCEPTANCE

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 40 of 74
dishonor of the instrument by non-acceptance
or non-payment have taken place.
Protest is required because:
a. It makes for uniformity in international
transactions because most countries
require it; and
b. It furnishes authentic and satisfactory
evidence of the dishonor to the drawer
who, from his residence abroad, would
experience difficulty in verifying the
matter and thus be compelled to rely on
the representation of the holder.
HOW PROTEST MADE
The protest must be annexed to the bill or must
contain a copy thereof, and must be under the
hand and seal of the notary making it, and must
specify:
a. Time and place of presentment;
b. The fact that presentment was made
and the manner thereof;
c. The cause or reason for protesting the
bill;
d. The demand made and the answer
given, if any, or the fact that the drawee
or acceptor could not be found. (Sec.
153, NIL.)
Without the authentication of the notary public,
the certificate of protest of a foreign bill is no
proof of the drawee’s refusal to accept or pay
the bill. (London & River Plate Bank v. Carr, 104
N.Y. Supp. 679.)
PURPOSE OF CERTIFICATE OF PROTEST
The purpose is to do away with the necessity of
proving the fact of presentment, demand, non-
payment, and notice of dishonor by witnesses in
court. The certificate of protest is merely prima
facie evidence and may be disproved by
competent evidence to the contrary.
BY WHOM PROTEST MADE
NEGOTIABLE INSTRUMENTS LAW
Protest may be made by:
a. A notary public; or
b. By any respectable resident of the place
where the bill is dishonored, in the
presence of two or more credible
witnesses. (Sec. 154, NIL.)
WHEN PROTEST TO BE MADE
When a bill is protested, such protest must be
made on the day of its dishonor, unless delay is
excused as herein provided. When a bill has been
duly noted, the protest may be subsequently
extended as of the date of the noting. (Sec. 155,
NIL.)
WHERE PROTEST TO BE MADE
General Rule: a bill must be protested at the
place where it has been dishonored.
Exception: a bill dishonored by non-acceptance
must be protested for non-payment at the place
where it is expressed payable if that place is the
place of business or residence of some person
other than the drawee.
PROTEST FOR NON-ACCEPTANCE & NON-
PAYMENT
A bill which has been protested for non-
acceptance may be subsequently protested for
non-payment. (Sec. 157, NIL.)
PROTEST FOR BETTER SECURITY BEFORE
MATURITY
Protest for better security — it is one made by
the holder of a bill after it has been accepted but
before it matures, against the drawer and
indorsers, where the acceptor has been
adjudged a bankrupt or an insolvent, or has
made an assignment for the benefit of creditors.
WHEN PROTEST DISPENSED WITH
Protest is dispensed with by any circumstances
which would dispense with notice of dishonor.
JUDGE E. BONGHANOY
Page 41 of 74
Delay in notice or protesting is excused when
delay is caused by circumstances beyond the
control of the holder and not imputable to his
default, misconduct, or negligence. When the
cause of delay ceases to operate, the bill must be
noted or protested with reasonable diligence.
(Sec. 159, NIL.)
PURPOSE OF ACCEPTANCE FOR HONOR
PROTEST WHERE BILL IS LOST Acceptance for honor — it is an undertaking by a
When a bill is lost or destroyed or is wrongly stranger to a bill after protest for the benefit of
detained from the person entitled to hold it, any party liable thereon, or for the honor of the
protest may be made on a copy or written person for whose account the bill is drawn which
particulars thereof. (Sec. 160, NIL.) acceptance inures also to the benefit of all
parties subsequent to the person for whose
honor it is accepted, and conditioned to pay the
bill when it becomes due if the original drawee
PROTEST VIS-À-VIS NOTICE OF does not pay it.
DISHONOR
PROTEST NOTICE OF The purpose is to preserve the credit of the
DISHONOR parties to the instrument or some party to it for
Required in case of Required in case of whose honor the acceptance is made, as the
dishonor of a foreign dishonor in any drawer, drawee, or indorser or somebody else.
bill negotiable
instrument other REQUISITES OF ACCEPTANCE FOR
than foreign bills HONOR
Always written May be oral or
Before an acceptance for honor may be made,
written
the following must concur:
Includes Limited only to such
a. The bill must have been protested for
presentment, notice notice
dishonor by non-acceptance or for
of dishonor, and all
better security;
the steps
b. The acceptor for honor must be a person
accompanying
not a party already liable thereon (a
dishonor
stranger to the bill);
Made either by Made by a party or
c. The bill must not be overdue at the time
notary public or by his agent
of the acceptance for honor; and
any respectable
d. The acceptance for honor must be with
resident in the
the consent of the holder of the
presence of
instrument.
witnesses
Made at the place Place of dishonor is
where the bill is not essential HOW ACCEPTANCE FOR HONOR IS MADE
dishonored
a. The acceptance for honor must be in
Made on the day of Giving of notice is
writing;
dishonor made within the
b. It must indicate that it is an acceptance
times prescribed
for honor;

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 42 of 74
 c. It must be signed by the acceptor for
honor;
d. It must contain an express or implied
promise to pay money; and
e. The accepted bill for honor must be
delivered to the holder.
WHEN ACCEPTANCE FOR HONOR
DEEMED FOR HONOR OF DRAWER
Where an acceptance for honor does not
expressly state for whose honor it is made, it is
deemed to be an acceptance for the honor of the
drawer. (Sec. 163, NIL.)
Presumption is because only the drawer will
become liable to the acceptor for honor, thus it
will discharge most of the parties to the bill.
RIGHT & LIABILITY OF ACCEPTOR FOR
HONOR
The acceptor for honor upon payment of the bill
is subrogated to the rights which the parties to
the bill subsequent to the party for whose honor
he has accepted may have as regards the latter
and all prior parties.
As the acceptor for honor takes the place of the
person for whose honor he accepts, he is liable
to the holder and all subsequent parties who
have a right of recourse against the person for
whose honor he accepts.
AGREEMENT OF ACCEPTOR FOR HONOR
Secondary liability — the undertaking of the
acceptor for honor is not an absolute
engagement to pay at all events, but only a
collateral and conditional engagement to pay, if
the drawee does not.
The acceptor for honor is liable secondarily. He
binds himself to pay according to the terms of his
acceptance, provided:
a. The bill shall have been duly presented
for payment;
NEGOTIABLE INSTRUMENTS LAW
b. It shall not have been paid by the
drawer;
c. It shall have been protested for non-
payment; and
d. Notice of dishonor is given to him for
honor.
Presentment for payment on maturity — the
holder is required to make presentment for
payment of the bill on maturity, notwithstanding
prior dishonor thereof by non-acceptance.
MATURITY OF BILL PAYABLE AFTER
SIGHT ACCEPTED FOR HONOR
Where a bill payable after sight is accepted for
honor, its maturity is calculated from the date of
the noting for non-acceptance and not from the
date of the acceptance for honor. (Sec. 166, NIL.)
PROTEST OF BILL ACCEPTED FOR HONOR
Where a dishonored bill has been accepted for
honor supra protest or contains a referee in case
of need, it must be protested for non-payment
before it is presented for payment to the
acceptor for honor or referee in case of need.
(Sec. 167, NIL.)
PRESENTMENT FOR PAYMENT TO
ACCEPTOR FOR HONOR
Presentment for payment to the acceptor for
honor must be made as follows:
a. If it is to be presented in the place where
the protest for non-payment was made,
it must be presented not later than the
day following its maturity;
b. If it is to be presented in some other
place than the place where it was
protested, then it must be forwarded
within the time specified in Sec. 104.
(Sec. 168, NIL.)
WHEN DELAY IN MAKING PRESENTMENT
IS EXCUSED
JUDGE E. BONGHANOY
Page 43 of 74
Provisions of Sec. 81 apply where there is delay
in making presentment to the acceptor for honor
or referee in case of need.

PROTEST FOR NON-PAYMENT BY

ACCEPTOR FOR HONOR
If the acceptor for honor does not pay the bill,
the holder must protest the bill for non-payment
by the acceptor for honor. WHO MAY MAKE PAYMENT FOR HONOR
Payment for honor — it is payment made by a
ACCEPTANCE FOR HONOR VIS-À-VIS person, whether a party to the bill or not, after it
ORDINARY ACCEPTANCE has been protested for non-payment, for the
benefit of any party liable thereon or for the
ACCEPTANCE FOR ORDINARY benefit of the person for whose account it was
HONOR ACCEPTANCE drawn.
There must be Protest is not
previous protest required Payment for honor may be made by a party to
Acceptor must be a Acceptor is the the bill or by a stranger. Thus, it may be made by
stranger to the bill drawee the drawee after he has refused to accept the
Consent of the Consent of the bill. It has been held that the drawer of the check
holder is required holder is not which has been dishonored and protested has a
required right to intervene and pay it to protest his honor.
Acceptor is
Acceptor is
secondarily liable primarily liable
PURPOSE & FUNCTION OF PAYMENT FOR
There may beThere can be no
HONOR
several acceptors acceptors in the
for honor foralternative or in Payment for honor may be availed of when the
different parties in succession holder, knowing that the bill has already been
the bill dishonored for non-payment, does not want to
Bill is not discharged Bill is discharged indorse the bill and thereby incur the liabilities of
upon payment by upon payment by an indorser.
the acceptor for the acceptor
REQUISITES OF VALID PAYMENT FOR
honor
HONOR
In order that payment for honor may operate as
such, the following requisites must be present:
a. The bill has been dishonored by non-
payment;
b. It has been protested for non-payment;
c. Payment supra protest is made by any
person, even a party thereto;
d. The payment is attested by a notarial act
of honor which must be appended to the
protest or form an extension of it; and

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 44 of 74
 e. The notarial act must be based on the The payer for honor is given the right to receive
declaration made by the payer for honor both the bill and the protest obviously to enable
or his agent of his intention to pay the him to enforce his rights against the parties who
bill for honor and for whose honor he are liable to him under Sec. 175.
pays.
PAYMENT FOR HONOR VIS-À-VIS
If the above formalities are not followed, the
ACCEPTANCE FOR HONOR
payment will operate as a mere voluntary
payment and the payer acquires no right to full PAYMENT FOR ACCEPTANCE FOR
reimbursement against the party for whose HONOR HONOR
honor he pay. Protest must be for Protest must be for
non-payment non-acceptance or
for better security
PREFERENCE OF PARTIES OFFERING TO
Bill is overdue Bill must not be
PAY FOR HONOR
overdue
In payment for honor, the person whose Consent of the Consent of the
payment will discharge the greatest number of holder is not holder is required
parties to the bill is given the preference. required nor can
the holder refuse
EFFECTS WHERE BILL IS PAID FOR HONOR Acceptor may be Acceptor should be
any party to the bill a stranger to the bill
The effects of a payment for honor are as or even a stranger
follows: Acceptor is Acceptor is
a. All parties subsequent to the party for secondarily liable primarily liable
whose honor it is paid are discharged; A notarial act of A notarial act of
and honor is necessary honor is not
b. The payer for honor is subrogated for, necessary
and succeeds to, both the rights and There can be only There may be
duties of the holder as regards the party one payer for honor several acceptors
whose honor he pays and all parties for honor
liable to the latter. If the payment is Effects of payment Effects or payment
made for the honor of all parties to the for honor are those for honor are those
bill, the payer for honor may have provided for in Sec. provided for in Sec.
recourse against all of them. 175 & 177 164 & 165

EFFECT OF HOLDER’S REFUSAL TO

RECEIVE PAYMENT
In payment for honor, the holder cannot refuse
the payment. If he refuses, he cannot recover
from the parties who would have been
discharged had he accepted the same. In
acceptance for honor, the holder’s consent is
necessary.

RIGHTS OF PAYER FOR HONOR

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 45 of 74

PURPOSE OF BILLS IN SET
Bill in a set – one that is composed of several
parts, each part being numbered and containing
a reference to the other parts, the whole of the
parts constituting but one bill.
Bills in set are usually availed of in cases where a
bill had to be sent to a distant place through
some conveyance. In each part is sent by
different means of conveyances, the chance that
at least one part of the set would reach its
destination would be greater.
The purpose then of drawing a bill in set to avoid
the difficulties which would arise in case of loss
or miscarriage on the way of the bill.
RIGHTS OF HOLDERS WHERE DIFFERENT
PARTS OF A SET ARE NEGOTIATED
Each part of a bill in set may be negotiated. But
the payee is not supposed to negotiate all of the
parts since the only reason for drawing the bill in
parts is to obtain greater assurance that at least
one part will reach the payee or its destination
safely. However, should the payee negotiate the
different parts to different persons, then he is
liable on each.
As between holders in due course, the owner of
the bill is the holder whose title first accrues, the
holder to whom a part is first negotiated. If the
drawee in good faith accepts or pays the part
first presented to him, he is protected and he
can rightfully refuse to accept or pay the bill
presented by the holder in due course who first
became the owner.
NEGOTIABLE INSTRUMENTS LAW
LIABILITY OF INDORSER OF DIFFERENT
PARTS OF A SET
The holder of a bill drawn in a set if liable to each
person to who he has indorsed a part of the bill;
and should the indorsees indorse their
respective parts of the bill, each would be liable
on the part he has himself indorsed, such part
being considered a separate bill by itself.
The drawee is not liable for more than one part
since his order is to accept or pay only one part.
LIABILITY OF ACCEPTOR OF DIFFERENT
PARTS OF A SET
The drawee is required to accept only one part
of a bill drawn in a set; and the acceptance may
be written on any part. But should the drawee
accept more than one part and they are
negotiated to holders in due course, he is liable
to every holder of the different parts as if such
parts were separate bills.
LIABILITY OF ACCEPTOR WHO PAYS PART
OF A SET
Any part of a bill in set may be negotiated. But
the payee is not supposed to negotiate all of the
parts since the only reason for drawing the bill in
parts is to obtain greater assurance that at least
one part will reach the payee or its destination
safely.
The drawee does not warrant every part of the
bill in a set that is indorsed but only the part
accepted by him. Upon paying the bill, the
acceptor should require surrender of the part
bearing his acceptance. Should he fail to do so,
he would still be liable to a holder in due course
of such part.
EFFECT OF DISCHARGING A PART OF A
SET
As far as the drawer is concerned, the entire bill
is discharged when any one part is discharged by
JUDGE E. BONGHANOY
Page 46 of 74
payment or otherwise because a bill in a set
constitutes only one bill.
NOTE PAYABLE TO MAKER’S ORDER
A promissory note payable to the maker’s own
order is not complete until indorsed by him. In
the absence of delivery, the maker is not liable to
any holder where his indorsement is forged.
SPECIAL TYPES OF PROMISSORY NOTES
Certificate of Deposit — it is a written
acknowledgment by a bank of the receipt of
money on deposit which the bank promises to
repay to the depositor, bearer, to some other
person, to the order of the depositor, or to him
or his order, at a later date or on demand.
It is negotiable only if it is drawn with all the
essential elements of a negotiable paper under
Sec. 1. It is most commonly a time deposit of
money with a bank.
NEGOTIABLE INSTRUMENTS LAW
Example:
First National Bank
Manila, Philippines
August 14, 2016
No…
P10,000
This certifies that Silverio S.L. Jose has deposited
in this bank Ten Thousand Pesos Payable on 30 days notice
to the order of himself on the return of this certificate
properly indorsed.
(Sgd.) Patricio N. Manguera
Cashier
This certificate is not subject to check.
Bond — it is an evidence of indebtedness issued
by a public or private corporation, promising to
pay a sum of money on a day certain in the
future.
2 types of bonds:
a. Registered bond — one that is payable
only to the person whose name appears
on the face of the certificate and in the
books of the company. It is non-
negotiable. It is transferable by the
registration of the transferee’s name in
the books of the company; and
b. Coupon bond — one to which are
attached coupons which entitle the
holder to interest when due. These
interest coupons may be detached and
negotiated.
Bank note — it is an instrument issued by a bank
for circulation as money payable to bearer or
demand.
Due bill — it is a promissory note which shows on
its face an acknowledgment by a person of his
indebtedness to another.
JUDGE E. BONGHANOY
Page 47 of 74
Example:
Manila, Philippines
August 14, 2016
P10,000
Due to Alicia L. Cinco Ten Thousand Pesos
payable to his order.
Miguel N. Manguerra, Jr.
Mortgage note — a security contract which
provides that the mortgage can be foreclosed if
the note is not paid when it is due.
2 kinds of mortgage:
a. Chattel mortgage note — it is secured by
personal property.
b. Real estate mortgage note — it is
secured by real property.
Title-retaining note — it is secured by a
conditional sales contract which ordinarily
provides that the title to the goods shall remain
in the payee’s name until the note is paid in full.
(Usually used to secure the purchase price of
goods)
Collateral note — it is used when the maker
pledges securities to the payee to secure the
payment of the amount of the note. The
securities are usually placed with the holder.
Judgment note — it is a note to which is added a
power of attorney enabling the payee to take
judgment against the maker without the
formality of a trial if the note is not paid on its
due date.
Installment note — it is a note payable in
specified or periodic installments at
predetermined times.
NEGOTIABLE INSTRUMENTS LAW
Perla Compania de Seguros, Inc. v. Court of Appeals, Heminio Lim and
Evelyn Lim
G.R. No. 96452, May 7, 1992
— and —
FCP Credit Corporation v. Court of Appeals, Herminio Lim and Evelyn
Lim
Private respondents spouses Herminio and Evelyn Lim executed a
promissory note in favor of Supercars, Inc. payable in monthly
installments according to the payment schedule indicated in the note, and
secured by a chattel mortgage over a brand new vehicle, which is
registered under the name of Herminio Lim and insured with Perla. On
the same date, Supercars, Inc. (with notice to spouses Lim) assigned to
FCP its rights, title and interest on the said P/N and chattel mortgage.
In 1982, the said vehicle was carnapped while parked. Evelyn, who was
driving the said car, immediately called up the Anti-Carnapping Unit of the
Philippine Constabulary to report the said incident and went to the
nearest police substation to make a police report regarding the incident.
Spouses requested from FCP for a suspension of payment on the monthly
amortization agreed upon due to the loss of the vehicle and since the
vehicle was carnapped, Perla, should be made to pay the remaining
balance of the promissory note and chattel mortgage contract.
Issue:
W/N the loss of the collateral exempted the debtor from his admitted
obligations under the P/N
Held: NO.
There is no casual connection between the possession of a valid driver’s
license and the loss of a vehicle. To rule otherwise would render car
insurance practically a sham since an insurance company can easily
escape liability by citing restrictions which are not applicable or germane
to the claim, thereby reducing indemnity to a shadow. chattel mortgage
constituted over the automobile is merely an accessory contract to the
promissory note. Being the principal contract, the promissory note is
unaffected by whatever befalls the subject matter of the accessory
contract. Therefore, the unpaid balance on the promissory note should
be paid, and not just the installments due and payable before the
automobile was carnapped.
WHAT IS A CHECK
A check is a bill of exchange drawn on a bank
payable on demand. It has also been defined as
a written order addressed to a bank or persons
carrying on the business of banking by a party
having money in their hands requesting them to
pay on presentment to a person named therein
or to his order, or to bearer, a named sum of
money.
JUDGE E. BONGHANOY
Page 48 of 74
 \
CHECK VIS-À-VIS ORDINARY BILL OF SPECIAL TYPES OF CHECKS
EXCHANGE
Memorandum check — it is like an ordinary
ORDINARY BILL OF check except that the word “memorandum”,
CHECK
EXCHANGE “mem”, or “memo” is written on the face of the
Always drawn on a May or may not be check, signifying that the drawer engages to pay
bank or banker drawn on a bank the bona fide holder absolutely, and not upon a
Always payable on Either payable on condition to pay upon presentment at maturity
demand demand or at a and if due notice of the presentment and non-
fixed determinable payment should be given.
future time
Supposed to be Need not be drawn Drawer may be sued the same as a maker upon
drawn against against a deposit a promissory note.
previous deposit of
funds Cashier’s check — it is one drawn by the cashier
Need not be Required to be of a bank upon itself, payable on demand to a
presented for presented for payee. It is deemed accepted by the act of
acceptance acceptance in issuance. It is really the bank’s own check and
certain cases may be treated as a promissory note with the
Ordinarily intended For circulation as an bank as the maker.
for immediate instrument of credit
payment If the check is drawn by a bank upon another
Death of the drawer Death of the drawer bank, it is a bank draft.
with the knowledge does not revoke the
of the bank revokes authority of the It is an accepted practice in the business sector
the authority of the drawee to pay that a cashier’s check is deemed as cash. (New
bank to pay Pacific Timber & Supply Inc. v. Seneris, 101 SCRA
Must be presented Must be presented 686.)
for payment within for payment within
a reasonable time a reasonable time Manager’s check — it is one drawn by the bank’s
after its issue after its last manager upon the bank itself. (Similar to that of
negotiation a cashier’s check)
Drawer of a check Drawer of an
not presented ordinary bill not Traveler’s check — it is one upon which the
within a reasonable presented within a holder’s signature must appear twice, one
time after its issue is reasonable time affixed by him at the time it is issued and the
discharged from after its last second or counter-signature, to be affixed by
liability to the negotiation is him in the presence of the payee before it is paid,
extent of the loss totally discharged otherwise, it is incomplete.
caused by the delay
When a check is When an ordinary The purpose is to provide the traveler a safe and
accepted or bill is accepted or convenient method by which to supply himself
certified, drawer certified, drawer with funds in almost all parts of the civilized
and indorsers are and indorsers world without the hazard of carrying the money
discharged from remain liable in on his person.
liability spite of acceptance

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 49 of 74
The bank (or company) issuing the instrument
has the right to refuse to pay it when it does not In actual practice, the check crossed generally is
bear the counter-signature agreed upon and the deposited with a bank by the holder where he
owner of the check also has the right to insist keeps an account and the bank takes charge of
that it shall not be paid when not counter-signed. the collection. If the check is crossed specially, he
(Samberg Express Co., 99 N.W. 879.) deposits it with the bank indicated between the
parallel lines.
Certified check — it is one which bears upon its
face an agreement by the drawee bank that the The purpose of crossing a check is to insure
check will be paid on presentation. It is similar to payment to the payee particularly when it is
a certificate of deposit. forwarded by mail or when it is entrusted to an
agent. Crossing a check does not destroy its
The purpose of certifying a check as regards the negotiability.
parties is to enable the holder to use it as money.
Examples:
Crossed-check — it is one which bears across its
face, two parallel lines drawn diagonally, usually (1) Check crossed specially
on the upper left side.
A 92-10230
Example:
Philippines, March 3, 2019
A 92-10230
Philippines, March 3, 2019 PAY TO THE
ORDER OF Cesareo C. de Leon P10,000/xx
PAY TO THE PESOS Ten thousand only
ORDER OF Cesareo C. de Leon P10,000/xx
PESOS Ten thousand only Ruben C.S. De Leon
The United Commercial Bank
Ruben C.S. De Leon
The United Commercial Bank (2) Check crossed generally

2 kinds of crossed-checks:
a. Crossed specially — the name of the A 92-10230
particular bank or company is written or Philippines, March 3, 2019
appears between the parallel lines in
which case the drawee bank must pay PAY TO THE
the check only upon presentment by ORDER OF Cesareo C. de Leon P10,000/xx
such bank or company. (Chan Wan v. Tan PESOS Ten thousand only
Kim and Chen So, 109 Phil. 706.)
b. Crossed generally — only the words “and Ruben C.S. De Leon
Co.” are written between the parallel The United Commercial Bank
lines or when nothing is written at all
between the said line; in such case,
drawee bank must pay the check
through the intervention of some bank
or banker.

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

Page 50 of 74
 STALE CHECK
It is one which has not been presented for
payment within a reasonable time after its issue.
It is valueless and should not be paid.
In banking practice, a stale check is usually one
which has been outstanding for more than 6
months. Banks will normally not pay such check
without consulting the depositor (or the
drawer).
The drawer is not discharged by the mere delay
in the presentation of the check for payment if
he does not suffer any loss from the delay.
WHEN DRAWER OF CHECK DISCHARGED
FROM LIABILITY
There are 3 requisites in order that the drawer
may be discharged from liability:
a. The check is not presented within a
reasonable time after its issue;
b. The drawer suffers loss; and
c. The loss suffered by the drawer is
attributable to the delay. (Sec. 186, NIL.)
DISCHARGE OF DRAWER AND INDORSER
IN CASE PRESENTMENT DELAYED
Drawer:
The only loss which would be sustained by the
drawer in case presentment was not made
within a reasonable time would be caused by the
insolvency of the bank subsequent to the
delivery and prior to the presentment of the
check.
But the drawer will be discharged from liability
only to the extent of the loss caused by the delay
in presentment and the burden of proving the
loss is on the drawer.
Indorser:
An indorser is wholly discharged irrespective of
any question of loss or injury by delay in
NEGOTIABLE INSTRUMENTS LAW
presentment unless presentment is excused or
dispensed with.
The reason for the difference between the
liability of the drawer and indorser is that in case
of dishonor, the drawer is not necessarily
prejudiced while an indorser is actually or by
legal presumption, prejudiced.
EFFECTS OF CERTIFICATION OF CHECKS
The following are the effects of certification:
a. It is equivalent to acceptance, making
the bank primarily liable on the check;
b. It discharges persons secondarily liable if
procured by the holder;
c. It operates as an assignment of the funds
of the drawer in the hands of the drawee
bank;
d. The payee or holder, for all intents and
purposes, becomes the depositor of the
drawee bank, with rights and duties of
one in such a situation; and
e. The drawer may not issue a stop
payment order on the certified check.
OBJECT OF CERTIFYING CHECKS
The certification of checks enables persons not
well acquainted with each other to close
promptly business transactions since the holder
knows that he can compel the drawee bank to
cash it.
The object of certifying a check as regards the
parties is to enable the holder to use it as money.
When the holder procures a check to be
certified, the check operates as an assignment to
him of the amount certified.
EFFECT WHERE HOLDER PROCURES
CERTIFICATION OF CHECK
If the holder procures the certification of a check,
the drawer and the indorsers are discharged, on
the theory that the drawer’s credit deposit with
the drawee is, to the extent of the check, taken
JUDGE E. BONGHANOY
Page 51 of 74
from his control and appropriated for the
payment of the check. (Lipten v. Columbia Trust
Co., 185 N.Y. Supp. 198.)
The certification has the same effect as if the
holder has drawn the money, redeposited it and
taken a certificate of deposit for it. The drawer is
discharged both on the check and the original
debt.
EFFECT WHERE CERTIFICATION
OBTAINED BY OTHERS
If the certification is obtained not by the holder
but by others, the secondary parties are not
discharged as when it is obtained by the drawer
even at the request of the payee or even though
the drawer is also the payee. The reason being,
the holder has not yet received the payment.
RIGHT BEFORE ACCEPTANCE OR
CERTIFICATION OF CHECK
A check drawn in the ordinary form, not
accepted or certified by the bank, does not of
itself, as between the drawer and the payee or
holder, constitute a transfer of any money of the
drawer to the credit of the holder.
Until payment is made by the drawee bank, its
issuance and circulation have no effect on the
funds of the drawer in the bank nor do they
discharge the debt in payment for which the
check was issued.
WHEN CHECK OPERATES AS
ASSIGNMENT OF DRAWER’S FUNDS
The moment the check is certified, the funds
cease to be under the control of the drawer.
Under banking laws and practice, by the
certification, the funds represented by the check
are transferred from the credit of the drawer to
that of the payee by holder and, for all intents
and purposes, the latter becomes the depositor
of the drawee bank with rights and duties of one
NEGOTIABLE INSTRUMENTS LAW
in such relation. (Gregorio Araneta, Inc. v. Paz
Tuazon de Paterno and Jose Vital, 91 Phil. 786.)
CASES WHEN BANK MAY REFUSE
PAYMENT
A bank may rightfully refuse to pay checks drawn
against it, if:
a. The bank is insolvent;
b. The drawer’s deposit is insufficient or he
has no account with the bank or said
account had been closed or garnished;
c. The drawer is insolvent and proper
notice is received by the bank;
d. The drawer dies and proper notice is
received by the bank;
e. The drawer has countermanded
payment;
f. The holder refuses to identify himself;
g. The bank has reason to believe that the
check is a forgery; or
h. The check is stale or post dated.
RELATION BETWEEN DEPOSITOR & BANK
Creditor & Debtor:
A deposit is constituted from the moment a
person receives a thing belonging to another
with the obligation of safely keeping it and
returning the same. (Art. 1962, New Civil Code.)
A bank deposit is a loan which creates the
relationship of debtor and creditor. (Gullas v.
Phil. National Bank, 62 Phil. 519.)
Principal & Agent:
Where checks are received by a bank merely for
collection and deposit, the relationship is one of
agency. Since the bank is to collect from the
drawees of the check of its depositor for sums
not in excess of the amount of his deposit.
First bank to receive a check for payment:
depositary bank.
JUDGE E. BONGHANOY
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The bank on which a check is drawn: payor bank. The payee or indorsee
Any bank except the payor bank that handles a of a bill or note, who is
HOLDER
check during some phase of the collection in possession of it, or
process: collecting bank. the bearer thereof
Any bank except the payor bank and the An indorsement
INDORSEMENT
depositary bank to which a check is transferred completed by delivery
in the course of the collection process:
INSTRUMENT Negotiable instrument
intermediate bank.
The first delivery of
the instrument,
ISSUE complete in form, to a
person who takes it as
a holder
Includes a body of
PERSON persons, whether
incorporated or not
Valuable
VALUE
consideration
WRITTEN Includes printed

DEFINITION OF TERMS IN SEC. 191, NIL PERSONS LIABLE ON INSTRUMENT

Primarily liable:
TERM MEANING a. Principal
An acceptance b. Surety (in reality, an accommodation co-
ACCEPTANCE completed by delivery maker)
or notification
Includes counterclaim Secondarily liable:
ACTION
and set-off o Accommodation guarantor
Includes any person or
association of persons Accommodation maker — is a person primarily
carrying on the liable even though he adds the word “surety” to
BANK his signature or the fact that he signed for
business of baking,
whether incorporated accommodation is known to the holder.
or not
The person in
REASONABLE TIME
possession of a bill or
BEARER In determining what is reasonable time or an
note which is payable
or bearer unreasonable time, regard is to be had to the
nature of the instrument, the usage of trade or
BILL Bill of exchange
business (if any) with respect to such
Transfer of instruments, and the facts of the particular case.
possession, actual or (Sec. 193, NIL.)
DELIVERY
constructive, from one
person to another
COMPUTATION OF TIME

NEGOTIABLE INSTRUMENTS LAW JUDGE E. BONGHANOY

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Where the day, or the last day for doing any act
herein required or permitted to be done falls on
a Sunday or on a holiday, the act may be done on
the next succeeding secular or business day.
(Sec. 194, NIL.)
APPLICATION OF ACT
The provisions of this Act (NIL) do not apply to
negotiable instruments made and delivered
prior to the taking effect thereof. (Sec. 195, NIL.)
CASES NOT COVERED BY THE ACT
Where the Negotiable Instruments Law is silent,
resort must be had to existing legislations, such
as:
a. The Civil Code;
b. The Code of Commerce;
c. Rules of Court; and
d. Others which may be applicable.
The law merchant cannot prevail against specific
prohibitions of the Negotiable Instruments Law.
REPEALS
Repeals by implications are not favored. In order
that a law may operate to repeal another law by
implications, the 2 laws must be so repugnant
that they cannot stand together or be
consistently reconciled. (U.S. v. Palacio, 33 Phil.
208.)
Documents of title — it is a symbol of the goods
covered by it, serving as evidence of transfer of
title and transfer of possession. It also serves as
evidence of the contract between the parties
who are bound by its terms.
COMMON FORMS OF DOCUMENTS OF
TITLE
NEGOTIABLE INSTRUMENTS LAW
Bill of lading — it is a contract or receipt for the
transport of goods and their delivery to the
person named therein, to his order, or to bearer.
3 parties are involved: consignee, shipper, and
the carrier.
Dock warrant — it is an instrument given by dock
owners to an importer of goods warehoused on
the dock recognizing the importer’s title to said
goods.
Warehouse receipt — it is a contract or receipt
for goods deposited with a warehouseman
containing the latter’s undertaking to hold and
deliver said goods to a specified person, to his
order, or to bearer.
LAWS GOVERNING DOCUMENTS OF
TITLE
They are as follows:
a. The Civil Code;
b. The Warehouse Receipts Law; and
c. Code of Commerce.
Art. 1507. A document of title in which it
is stated that the goods referred to
therein will be delivered to the bearer, or
to the order of any person named in such
document is a negotiable document of
title.
Classes of Documents of Title
o Negotiable documents of title — bailee
undertakes to deliver the goods to the
bearer or to the order of a specified
person
o Non-negotiable documents of title —
goods covered are deliverable to a
specified person
JUDGE E. BONGHANOY
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Art. 1508. A negotiable document of title
may be negotiated by delivery:
(1) Where by the terms of the document
the carrier, warehouseman or other
bailee issuing the same undertakes to
deliver the goods to the bearer; or
(2) Where by the terms of the document
the carrier, warehouseman or other
bailee issuing the same undertakes to
deliver the goods to the order of a
specified person, and such person or a
subsequent endorsee of the document
has indorsed it in blank or to the bearer.
Where by the terms of a negotiable
document of title the goods are
deliverable to bearer or where a
negotiable document of title has been
indorsed in blank or to bearer, any holder
may indorse the same to himself or to
any specified person, and in such case the
document shall thereafter be negotiated
only by the endorsement of such
endorsee.
Art. 1509. A negotiable document of title
may be negotiated by the endorsement
of the person to whose order the goods
are by the terms of the document
deliverable. Such endorsement may be in
blank, to bearer or to a specified person.
If indorsed to a specified person, it may
be again negotiated by the endorsement
of such person in blank, to bearer or to
another specified person. Subsequent
negotiations may be made in like
manner.
NEGOTIABLE INSTRUMENTS LAW
Art. 1510. If a document of title which
contains an undertaking by a carrier,
warehouseman or other bailee to deliver
the goods to bearer, to a specified person
or order of a specified person or which
contains words of like import, has placed
upon it the words "not negotiable,"
"non-negotiable" or the like, such
document may nevertheless be
negotiated by the holder and is a
negotiable document of title within the
meaning of this Title. But nothing in this
Title contained shall be construed as
limiting or defining the effect upon the
obligations of the carrier,
warehouseman, or other bailee issuing a
document of title or placing thereon the
words "not negotiable," "non-
negotiable," or the like.
Art. 1511. A document of title which is
not in such form that it can be negotiated
by delivery may be transferred by the
holder by delivery to a purchaser or
donee. A non-negotiable document
cannot be negotiated and the
endorsement of such a document gives
the transferee no additional right.
Art. 1512. A negotiable document of title
may be negotiated:
(1) By the owner therefor; or
(2) By any person to whom the
possession or custody of the document
has been entrusted by the owner, if, by
the terms of the document the bailee
issuing the document undertakes to
deliver the goods to the order of the
person to whom the possession or
custody of the document has been
entrusted, or if at the time of such
entrusting the document is in such form
that it may be negotiated by delivery
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 Art. 1513. A person to whom a negotiable
document of title has been duly
negotiated acquires thereby:
(1) Such title to the goods as the person
negotiating the document to him had or
had ability to convey to a purchaser in
good faith for value and also such title to
the goods as the person to whose order
the goods were to be delivered by the
terms of the document had or had ability
to convey to a purchaser in good faith for
value; and
(2) The direct obligation of the bailee
issuing the document to hold possession
of the goods for him according to the
terms of the document as fully as if such
bailee had contracted directly with him.
Rights of person to whom document has
been negotiated:
a. The title of the person negotiating the
document over the goods covered by
the document;
b. The title of the person to whose order by
the terms of the document the goods
were to be delivered over such goods;
and
c. The direct obligation of the bailee to
hold possession of the goods for him, as
if the bailee directly contracted with
him.
NEGOTIABLE INSTRUMENTS LAW
Art. 1514. A person to whom a document
of title has been transferred, but not
negotiated, acquires thereby, as against
the transferor, the title to the goods,
subject to the terms of any agreement
with the transferor.
If the document is non-negotiable, such
person also acquires the right to notify
the bailee who issued the document of
the transfer thereof, and thereby to
acquire the direct obligation of such
bailee to hold possession of the goods for
him according to the terms of the
document.
Prior to the notification to such bailee by
the transferor or transferee of a non-
negotiable document of title, the title of
the transferee to the goods and the right
to acquire the obligation of such bailee
may be defeated by the levy of an
attachment of execution upon the goods
by a creditor of the transferor, or by a
notification to such bailee by the
transferor or a subsequent purchaser
from the transfer of a subsequent sale of
the goods by the transferor.
Rights of person to whom document has
been transferred:
a. The title to the goods as against the
transferor;
b. The right to notify the bailee of the
transfer thereof; and
c. The right to acquire the obligation of
the bailee to hold the goods for him.
The right of the transferee is not absolute as
it is subject to the terms of any agreement
with the transferor.
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Art. 1515. Where a negotiable document
of title is transferred for value by
delivery, and the endorsement of the
transferor is essential for negotiation,
the transferee acquires a right against
the transferor to compel him to endorse
the document unless a contrary intention
appears. The negotiation shall take effect
as of the time when the endorsement is
actually made.
Art. 1516. A person who for value
negotiates or transfers a document of
title by endorsement or delivery,
including one who assigns for value a
claim secured by a document of title
unless a contrary intention appears,
warrants:
(1) That the document is genuine;
(2) That he has a legal right to negotiate
or transfer it;
(3) That he has knowledge of no fact
which would impair the validity or worth
of the document; and
(4) That he has a right to transfer the title
to the goods and that the goods are
merchantable or fit for a particular
purpose, whenever such warranties
would have been implied if the contract
of the parties had been to transfer
without a document of title the goods
represented thereby.
Art. 1517. The endorsement of a
document of title shall not make the
endorser liable for any failure on the part
of the bailee who issued the document or
previous endorsers thereof to fulfill their
respective obligations.
NEGOTIABLE INSTRUMENTS LAW
Art. 1518. The validity of the negotiation
of a negotiable document of title is not
impaired by the fact that the negotiation
was a breach of duty on the part of the
person making the negotiation, or by the
fact that the owner of the document was
deprived of the possession of the same
by loss, theft, fraud, accident, mistake,
duress, or conversion, if the person to
whom the document was negotiated or a
person to whom the document was
subsequently negotiated paid value
therefor in good faith without notice of
the breach of duty, or loss, theft, fraud,
accident, mistake, duress or conversion.
Art. 1519. If goods are delivered to a
bailee by the owner or by a person whose
act in conveying the title to them to a
purchaser in good faith for value would
bind the owner and a negotiable
document of title is issued for them they
cannot thereafter, while in possession of
such bailee, be attached by garnishment
or otherwise or be levied under an
execution unless the document be first
surrendered to the bailee or its
negotiation enjoined. The bailee shall in
no case be compelled to deliver up the
actual possession of the goods until the
document is surrendered to him or
impounded by the court.
Art. 1520. A creditor whose debtor is the
owner of a negotiable document of title
shall be entitled to such aid from courts
of appropriate jurisdiction by injunction
and otherwise in attaching such
document or in satisfying the claim by
means thereof as is allowed at law or in
equity in regard to property which
cannot readily be attached or levied
upon by ordinary legal process.
JUDGE E. BONGHANOY
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Art. 1532. The unpaid seller may exercise
his right of stoppage in transitu either by
obtaining actual possession of the goods
or by giving notice of his claim to the
carrier or other bailee in whose
possession the goods are. Such notice
may be given either to the person in
actual possession of the goods or to his
principal. In the latter case the notice, to
be effectual, must be given at such time
and under such circumstances that the
principal, by the exercise of reasonable
diligence, may prevent a delivery to the
buyer.
When notice of stoppage in transitu is
given by the seller to the carrier, or other
bailee in possession of the goods, he
must redeliver the goods to, or according
to the directions of, the seller. The
expenses of such delivery must be borne
by the seller. If, however, a negotiable
document of title representing the goods
has been issued by the carrier or other
bailee, he shall not obliged to deliver or
justified in delivering the goods to the
seller unless such document is first
surrendered for cancellation.
NEGOTIABLE INSTRUMENTS LAW
Art. 1535. Subject to the provisions of
this Title, the unpaid seller's right of lien
or stoppage in transitu is not affected by
any sale, or other disposition of the
goods which the buyer may have made,
unless the seller has assented thereto.
If, however, a negotiable document of
title has been issued for goods, no seller's
lien or right of stoppage in transitu shall
defeat the right of any purchaser for
value in good faith to whom such
document has been negotiated, whether
such negotiation be prior or subsequent
to the notification to the carrier, or other
bailee who issued such document, of the
seller's claim to a lien or right of stoppage
in transitu.
Art. 1749. A stipulation that the common
carrier's liability is limited to the value of
the goods appearing in the bill of lading,
unless the shipper or owner declares a
greater value, is binding.
JUDGE E. BONGHANOY
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 (Source: Commercial Law Review by Cesar Villanueva)

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