REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Negotiable Instruments Law also known as Act No. 2031

1. Functions of Negotiable Instruments

a. They are substitutes for money.

b. They increase the purchasing medium in circulation.
c. They increase credit transactions.

2. Attributes of Negotiable Instruments

a. Accumulation of Secondary Contracts is an attribute of a negotiable instrument which means

that as the instrument is passed from one person to another, secondary contracts are entered
into thereby increasing the chances of the holder to collect the amount payable on the
instrument.

b. Negotiability is an attribute of a negotiable instrument which allows it to be passed from one

hand to another similar to money, so as to give the holder in due course the right to hold the
instrument and collect the sum payable, for himself free from personal defenses available to
prior parties.

3. Difference between Assignment of Credit by Assignor and Negotiation of Negotiable

Instruments by a General Indorser

a. Assignment is applicable to non-negotiable promissory note while negotiation is applicable to

negotiable promissory note.
b. The transferee in assignment is called an assignee while the transferee in negotiation is
called a holder.
c. The transferor in assignment is called an assignor while the transferor in negotiation is called
a general indorser if there is indorsement.
d. The assignee in assignment is subject to personal defenses available to prior parties while the
holder in due course in negotiation holds the instrument free from personal defenses available
to prior parties.
e. The assignor does not warrant the solvency of maker unless expressly stated while the general
indorser guarantees the solvency of maker as long as notice of dishonor will be given to him.

4. Kinds of Negotiable Instruments

a. Negotiable Promissory Note is an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand, or at a fixed time or at a
determinable future time, a sum certain in money to order or to bearer.

i. Requisites of Negotiable Promissory Note

1. It must be in writing and signed by the maker.

2. It must contain an unconditional promise to pay a sum certain in money.
3. It must be payable on demand, or at a fixed time or at a determinable future time.
4. It must be payable to order or bearer.

ii. Parties in a Negotiable Promissory Note

1. Maker - He drew the promissory note and therefore primarily liable up to the
extent of the tenor of the promissory note.
2. Payee - He is the person to whom the instrument is originally payable.
3. Indorser - He signs and delivers the instruments to the subsequent holder after
its issuance by the maker and therefore secondarily liable for the nonpayment of
the promissory note. He negotiates the instrument by indorsement coupled with
delivery.
4. Person negotiating the instrument by mere delivery - He negotiates the
instrument by mere delivery and therefore not secondarily liable for the
nonpayment of the promissory note unless there is violation of his warranties.
5. Holder is the payee or indorsee of an order negotiable instrument, who is in
possession of it or the bearer of a bearer negotiable instrument.

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 b. Negotiable Bill of Exchange is an unconditional order in writing addressed by one person
(drawer) to another (drawee) signed by the person giving it (drawer), requiring the person
(drawee) to whom it is addressed to pay on demand or at a fixed time or at a determinable
future time a sum certain in money to order or to bearer.

i. Requisites of Negotiable Bill of Exchange

1. It must be in writing and signed by the drawer.

2. It must contain an unconditional order to pay a sum certain in money.
3. It must be payable on demand, or at a fixed time or at a determinable future time.
4. It must be payable to order or bearer.
5. Since it is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

ii. Parties in a Negotiable Bill of Exchange

1. Acceptor - He assented to the order of the drawer and therefore primarily liable
to the bill of exchange up to the extent of his acceptance.
2. Drawer - He drew the bill of exchange and commanded the drawee and
therefore secondarily liable for the nonacceptance or nonpayment of the bill of
exchange.
3. Payee - He is the person to whom the instrument is originally payable.
4. Indorser - He signs and delivers the instruments to the subsequent holder after
its issuance by the drawer and therefore secondarily liable for the nonacceptance
or nonpayment of the bill of exchange. He negotiates the instrument by
indorsement coupled with delivery.
5. Person negotiating the instrument by mere delivery - He negotiates the
instrument by mere delivery and therefore not secondarily liable for the
nonacceptance or nonpayment of the bill of exchange unless there is violation of
his warranties.
6. Holder is the payee or indorsee of an order negotiable instrument, who is in
possession of it or the bearer of a bearer negotiable instrument.
7. Referee in case of need is a person whose name is inserted by a drawer of a
bill or any indorser to whom the holder may resort in case of need; that is to say,
in case the bill is dishonored by non-acceptance or non-payment. He becomes a
party only upon his acceptance.
8. Acceptor for honor is a person who accepted the bill of exchange instrument to
save the credit of the parties to the instrument or some party to it as the drawer,
drawee, or indorser or somebody else by intervening the protested bill of
exchange and accepting it with the consent of the holder.
c. Negotiable Check is a special type bill of exchange drawn on a bank payable on demand.

5. Indicate whether the following instruments is negotiable or non-negotiable

a. I promise to pay B or bearer the sum of P1,000. Sgd M.

b. Mr. O will oblige A by paying P or order P1,000 on his account. To A. Sgd O.
c. I swear to pay to the order of P P1,000. Sgd. M
d. Due B P1,000. Sgd. M
e. Due B or order on demand P1,000. Sgd. M
f. Pay to P or bearer P1,000 if he becomes a CPA. To Z. Sgd. M
g. I promise to pay to P or order P1,000 five days after the death of Jay Cruz. Sgd.M.
h. I promise to pay X or order P5,000 (10) days from this date January 1, 2031, at 10% interest
p.a. Sgd. M.
i. I promise to pay to P or order P10,000 together with all sums that may be due to him on
December 31,2020. Sgd M.
j. I promise to pay to P or order P1,000 in candies. Sgd. M.
k. I promise to pay to P or his order Australian $1,000 on December 31, 2050 exchange rate. Sgd.
M
l. I promise to pay P or order P1,000 on or before October 4. Sgd M.
m. Pay to P or his assigns P1,000. To A. Sgd. M.
n. I promise to pay to the order of bearer P1,000. Sgd. M.
o. I promise to pay to P or his agent or his collector, the sum of P10,000. Sgd. M.
p. Payable to possessor P10,000 on demand. Sgd M.
q. I promise to pay to bearer Kim P1,000. Sgd M.
r. I promise to pay to Andrea P1,000. Sgd. A.

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 6. Instances when the sum is certain

a. The sum payable is sum certain for negotiable instruments although it is to be paid
under the following instances
i. With interest
1. Pay to C or order P1,000 with 6% interest p.a. until paid
ii. By stated installments
1. I promise to pay to B or bearer P4,000 in four equal monthly installments
beginning January 1,2001.
2. I promise to pay to the order of B the sum of P100 in two installments as follows:
(1) P45 on Feb. 1, 1985 and (2) P55 on June 1, 1985.
iii. By stated installments with escalation clause
iv. With exchange, whether at a fixed rate or at a current rate.
1. Pay to B or order USA $1,000 on the December 31, 2016 exchange rate.
v. With costs of collections or an attorney’s fee
1. Pay to C or order P100,000 with collection costs and attorney’s fee if not paid at
maturity.

7. Instances when the promise remains to be unconditional making the instrument negotiable

i. An indication of a particular fund out of which reimbursement is to be made.

1. Pay to P or order P100,000 and reimburse yourself out of my money on your
hands.

ii. An indication of a particular account to be debited with the amount.

1. Pay to P or bearer P10,000 and debit the amount to my receivable.

iii. A statement of the transaction which gives rise to the instrument.

1. Pay to P or order P5,000 on account of contract of sale between you and SM Co.

8. Instance when the instrument is non-negotiable because of conditional promise

i. An order or promise to pay out of a particular fund.

1. Pay to B or order P1,000 out of my salary in the company.

9. Instances when the instrument is payable on a determinable future time

a. At a fixed period after date or sight.

i. 20 days after sight, pay to the order of Ann P15,000.

b. On or before a fixed or determinable future time specified therein.

i. On or before December 1,2051, I promise to pay P or order P2,000.

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.

i. On the death of Art Santos, I promise to pay B or order P1,000.

10. Instances when the instrument is non-negotiable because not payable at a determinable future
time
a. 5 days before the death of Alice, I promise to pay P or bearer P10,000.
b. I promise to pay P or bearer P12,000 10 days after L passes the bar examination.
c. I promise to pay P or order P15,000 when my means permit me to do so.

11. Instances when a negotiable instrument is payable on demand

a. Where it is expressed to be payable on demand, or at sight or on presentation.

i. I promise to pay P1,000 to the order of P on demand.

b. Where no time for payment is expressed.

i. I promise to pay to the order of P P1,000.

c. Where an instrument is issued, accepted, or indorsed when overdue, as regards to the person
issuing, accepting or indorsing it.
i. Dated January 5, 2018. I promise to pay to the order of P P1,000.

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 12. Instance when payable on a fixed time

a. On December 5, 2050, I promise to pay B or order P1,000.

13. Provisions that do not affect negotiability of an instrument

a. Authorization of sale of collateral securities in case the instrument be not paid at maturity.
i. I promise to pay to B or order P4,000 on October 1, 2014, provided, however, that if this
note is not paid at maturity date, the ring pledged may be sold at public auction.

b. Authorization of confession of judgment if the instrument be not paid at maturity.

c. Waiver of the benefit the law intended for the advantage or protection of the obligor.
i. Six months after December 1, 2043, I promise to pay to P or order P3,000 waiving the
right to appeal and all of valuation appraisement.

d. Giving the holder an election to require something to be done in lieu of payment of money.
i. I promise to pay B or order P1,000 or 10 dogs at the option of holder.

14. Instances that affect negotiability of an instrument

a. I promise to pay to bearer P12,000 and to deliver him two pencils.

b. I promise to pay P or order P1,000 or three cellphones.

15. Instances that do not affect the negotiable character of an instrument

a. It is not dated.
b. It does not specify the value given, or than any value had been given therefore.
c. It does not specify the place where it is drawn or the place where it is payable.
d. It bears a seal.
e. It designated a particular kind of current money in which payment is to be made.

16. Instances when an instrument is payable to order

a. When it is payable to the order of a specified person or

b. When it is payable to a specified person or his order
c. The instrument is payable to order where it is drawn payable to the order of a specified person
or to him or his order. It may be drawn payable to the order any of the following payees
1. A payee, who is not maker, drawer, or drawee
2. The drawer
3. The maker
4. The drawee
5. Two or more payees jointly
6. One or some of several payees
7. The holder of an office for the time being

17. Examples of Order Instruments

a. I promise to pay to the order of A P10,000.

b. Pay to the order of ourselves P100.00. To B.
c. I promise to pay to the order of myself P1,000.
d. Pay to yourself or order P1,000. To Y.
e. I promise to pay to A and B or order P1,000.
f. I promise to pay to the order of A or B P1,000.
g. I promise to pay to the order of cashier of DLSU P1,000.

18. Instances when the instrument is payable to bearer

a. When it is expressed to be so payable to bearer.

b. When it is payable to a person named therein or bearer.
c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to
the person making it so payable.
d. When the name of the payee does not purport to be the name of any person.
e. When the only or last indorsement is an indorsement in blank.

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 19. Examples of Bearer Instrument

a. Pay to bearer P10,000.

b. Pay to P or bearer P15,000.
c. Pay to the order of Batman P1,000. (The issuer knew that the Batman is a fictitious person.)
d. Pay to cash. Pay to the order of money. Pay to the order of cash.
e. Pay to X or order P1,000. To Y. Sgd G. Indorsement. Sgd Y.

Distinctions between Order Instrument and Bearer Instrument

Order Instrument Bearer Instrument
Holder Payee/Indorsee + Possessor Possessor or Bearer of
of Instrument Instrument
Modes of Negotiation Indorsement + Delivery Mere Delivery or Indorsement
+ Delivery
Conversion It can be converted to bearer In can never be converted to
instrument by blank order instrument because an
indorsement and reverted to originally bearer instrument is
order instrument by special always a bearer instrument.
indorsement.
Forgery Real defense to parties prior Not a real defense but merely
to forgery a personal defense known as
want of delivery

20. Rules of constructions of ambiguity or omissions in negotiable instrument

a. Where the sum payable is expressed in words and also in figures and there is a discrepancy
between the two, the sum denoted by the words is the sum payable, but if the words are
ambiguous or uncertain, reference may be had to the figures to fix the amount.
b. Where the instrument provides for the payment of interest, without specifying the date from
which interest is to run, the interest runs from the date of the instrument, and if the instrument is
undated, from the issue thereof.
c. Where the instrument is not dated, it will be considered to be dated as of the time it was issued.
d. Where there is a conflict between the handwritten and printed provisions of the instrument, the
handwritten provisions prevail.
e. Where the instrument is so ambiguous that there is doubt whether it is a bill of exchange or
promissory note, the holder may treat it as either bill of exchange or promissory note at his
election.
f. Where a signature is so placed upon the instrument that it is not clear in what capacity the
person making the same intended to sign, he is deemed to be an indorser.
g. Where an instrument containing the words “I promise to pay” is signed by two or more persons,
they are deemed to be solidarly liable thereon while where an instrument containing the words
“We promise to pay” is signed by two or more persons, they are deemed to be jointly liable.

21. Requisites for an agent signing in behalf of the principal to escape liability on the instrument

a. The agent must be duly authorized.

b. The agent must add words to his signature indicating that he signs as an agent, that is, for or on
behalf of a principal, or in representative capacity.
c. The agent must disclose his principal and need not be in the signature.

22. Incidents in the life of negotiable instrument particularly negotiable bill of exchange

a. Issuance or Issue is the first delivery of the instrument complete in form to a person who takes
it as a holder.

b. Delivery refers to the transfer of possession with intent to transfer title or it consists principally
by placing the transferee in possession of the instrument but it must be accompanied by an
intent to transfer title.

c. Negotiation is the transfer of an instrument from one person to another as to constitute the
transferee the holder of the instrument.

i. Bearer instrument is negotiated by (1) mere delivery or (2) indorsement coupled with
delivery.

ii. Order Instrument is negotiated by indorsement completed by delivery.

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 1. Principles of Indorsement
a. The indorsement must be written on the instrument itself or upon a paper
attached thereto.
b. The signature of the indorser, without additional words, is a sufficient
indorsement.
c. The indorsement must be an indorsement of the entire instrument.
d. When the instrument has been paid in part, it may be indorsed as to the
residue.
e. The indorsement or assignment of the instrument by a corporation or by
an infant passes the property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no liability thereon.
f. An indorsement which purports to transfer to the indorsee a part only of
the amount payable, or which purports to transfer the instrument to two or
more indorsees severally is not a valid negotiation of the instrument.
g. Where an instrument does not bear date after the maturity of the
instrument, every negotiation is deemed prima facie to have been
effected before the instrument was overdue.
h. 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.
i. Where any person is under obligation to indorse in a representative
capacity, he may indorse in such terms by indicating that he is merely an
agent and disclosing his principal to negate personal liability.
j. In the absence of contrary evidence, every negotiation is deemed prima
facie to have been effected at the place where the instrument is dated.
k. In case an instrument payable to order is merely delivered without
indorsement and the transferor indicates the indorsement at a date later
than the date of delivery, the indorsement takes effect for the purpose of
determining whether the transferee is a holder in due course at the time
the indorsement was actually made.
l. Where an instrument is payable to the order of two or more payees or
indorsees who are not partners, all of two or more payees or indorsees
must indorse unless the one indorsing has the authority to indorse for
others.
m. Where an instrument is payable to the order of two or more payees or
indorsees who are partners, anyone of the payees may indorse because
the there is presumption of mutual agency among the payees.
n. Where an instrument is drawn or indorsed to a person as "cashier" or
other fiscal officer of a bank or corporation, it is deemed prima facie to be
payable to the bank or corporation of which he is such officer, it may be
negotiated by the indorsement of the bank or corporation or it may be
negotiated by the indorsement of such officer of the bank or corporation.

2. Instances of invalid indorsement if the amount is P500

a. Pay to P P200. Sgd Indorser
b. Pay to P P100 and Pay to R P400. Sgd Indorser
c. Pay to A or B P500. Sgd Indorser

3. Instances of valid indorsement if the amount is P500

a. Pay to A and B P500. Sgd Indorser
b. Assuming P200 has already been paid, Pay to A P300. Sgd Indorser

4. Kinds of indorsement
a. Special indorsement is an indorsement which specifies the person to
whom, or to whose order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the further negotiaition of
the instrument. If the instrument is originally an order instrument, it will
revert an instrument converted to bearer by blank indorsement to its
original character of being order instrument.
b. Blank indorsement is an indorsement which specifies no indorsee and
an instrument so indorsed becomes bearer instrument and may be
negotiated by delivery.
c. Restrictive indorsement is an indorsement which either prohibits the
further negotiation of the instrument, or constitutes the indorsee the agent
of the indorser or vests the title in the indorsee in trust for or to the use of
some other person. But the mere absence of words implying power to
negotiate does not make an indorsement this kind of indorsement.

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 d. General indorsement is the ordinary type of indorsement without any
qualification whereby making the indorser secondarily liable to the
instrument by guaranteeing the solvency of the person primarily liable
provided notice of dishonor is given to the indorser.
e. Qualified indorsement is an indorsement that constitutes the indorser a
mere assignor of the title to the instrument and may be made by adding to
the indorer’s signature the words “without recourse” or any words of
similar import and such indorsement does not impair the negotiable
character of the instrument.
f. Absolute indorsement is an indorsement by which the indorser binds
himself to pay, upon no other condition that the failure of parties to do so
and of due notice to him of such failure.
g. Conditional indorsement an indorsement which is subject to the
happening of a condition but the party required to pay the instrument may
disregard the condition. But any person to whom an instrument so
indorsed is negotiated will hold the same, or the proceeds thereof, subject
to the rights of the person indorsing conditionally. It does not affect the
negotiability of the instrment.
h. Facultative indorsement is an indorsement which waives the benefit
provided by law to the indorsers.
i. Irregular indorsement is an indorsement wherein the name of the
indorsee is misspelled.
Note: Any indorsement which is not qualified is considered general indorsement.

5. Examples of Indorsements

a. Pay to A. Sgd. B
b. Sgd. B
c. Pay to C only. Sgd. B or Pay to C and no other person. Sgd. B
d. Pay to C for collection. Sgd. B or Pay to C for deposit. Sgd. B
e. Pay to X in trust for C. Sgd. B
f. Pay to X for the use of C. Sgd. B
g. Pay to C, at indorsee’s risk. Sgd. B or Sans recourse, Pay to C. Sgd. B or
Without recourse, Pay to C. Sgd. B
h. Pay to X if he passed the board exam. Sgd. B
i. Pay to X, notice of dishonor waived. Sgd. B

6. Effects of striking out or cancelling an indorsement by the Holder

I. The indorser whose indorsement is struck out is relieved from his liability on the
instrument.
II. All subsequent indorsers are likewise relieved from their liability on the
instrument.

7. Indorsements that may be cancelled by the Holder

a. Order instrument with continuous special indorsements and no
blank indorsement - None
b. Order instrument with special indorsements and blank
indorsements - Only the indorsement immediately after each black
indorsement
c. Bearer instrument with numerous indorsements - Any indorsement.

d. Presentment for Acceptance consists of exhibiting the bill to the drawee, and demanding that
he accepts it, that is, signify his assent to the order or command of the drawer.

i. Rules for the proper presentment of a bill of exchange for acceptance

1. Presentment for acceptance must be made by or on behalf of the holder at a

reasonable hour, on a business day and before the bill is overdue, to the drawee
or some person authorized to accept or refuse acceptance on his behalf.
2. 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.
3. Where the drawee is dead, presentment may be made to his personal
representative.
4. 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.

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 ii. Instances when presentment for acceptance of a negotiable bill of exchange must
be made

1. 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.
2. Where the bill expressly stipulates that it shall be presented for acceptance.
3. Where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee.

iii. Effect if the holder of a bill of exchange who is required by the preceding number
to present the bill for acceptance fails to do so or fails to negotiate it within a
reasonable time.
1. The drawers and all indorsers are discharged.

iv. Instances when presentment for acceptance is excused and a bill may be treated
as dishonored despite the absence of presentment for acceptance
1. Where the drawee is dead, or has absconded, or is a fictitious person or a
person not having capacity to contract by bill.
2. Where, after the exercise of reasonable diligence, presentment cannot be made.
3. Where, although presentment has been irregular, acceptance has been refused
on some other ground.

v. Instances when a negotiable bill of exchange is dishonored by non-acceptance

1. When it is duly presented for acceptance and such an acceptance as is

prescribed by this Act is refused or cannot be obtained.
2. When presentment for acceptance is excused and the bill is not accepted.

vi. Principles of Dishonor by Non-Acceptance

1. Where a bill is duly presented for acceptance and is not accepted within the
prescribed time, the person presenting it must treat the bill as dishonored by
nonacceptance or he loses the right of recourse against the drawer and
indorsers.
2. When a bill is dishonored by nonacceptance, an immediate right of recourse
against the drawer and indorsers accrues to the holder and no presentment for
payment is necessary

e. Acceptance is the signification by the drawee of his assent to the order of the drawer.

i. Requisites of valid acceptance by drawee

1. It must be in writing.
2. It must be signed by the drawee.
3. It must not express that the drawee will perform his promise by any other means
than the payment of money.

ii. Principles of Acceptance

1. The holder of a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused, may treat the
bill as dishonored.
2. Where an acceptance is written on a paper other than the bill itself, it does not
bind the acceptor except in favor of a person to whom it is shown and who, on
the faith thereof, receives the bill for value.
3. An unconditional promise in writing to accept a bill before it is drawn is deemed
an actual acceptance in favor of every person who, upon the faith thereof,
receives the bill for value.

iii. Period allowed by law for the drawee to accept the bill

1. The drawee is allowed 24 hours after presentment in which to decide whether or

not he will accept the bill.
2. If acceptance is given by the drawee, the date of acceptance is the date of the
presentation of the bill.

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 iv. Instances when the drawee deemed or presumed to have accepted the bill
presented to him by holder
1. Where a drawee to whom a bill is delivered for acceptance destroys the bill.
2. Where a drawee to whom a bill is delivered for acceptance refuses within twenty-
four hours after such delivery or within such other period as the holder may allow,
to return the bill accepted or non-accepted to the holder.

v. Kinds of Acceptance by Acceptor

1. General acceptance An acceptance to pay at a particular place is only

considered general acceptance unless it expressly states that the bill is to be
paid there only and not elsewhere.

2. Qualified acceptance
a. Conditional; that is to say, which makes payment by the acceptor
dependent on the fulfillment of a condition therein stated.
b. Partial; that is to say, an acceptance to pay part only of the amount for
which the bill is drawn.
c. Local; that is to say, an acceptance to pay only at a particular place.
d. Qualified as to time.
e. The acceptance of some, one or more of the drawees but not of all.

3. Principles of Acceptance

a. The holder may refuse to take a qualified acceptance and if he does not
obtain an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance.
b. Where a qualified acceptance is taken, the drawer and indorsers are
discharged from liability on the bill unless they have expressly or impliedly
authorized the holder to take a qualified acceptance, or subsequently
assent thereto.
c. When the drawer or an indorser receives notice of a qualified acceptance,
he must, within a reasonable time, express his dissent to the holder or he
will be deemed to have assented thereto.
d. The qualified acceptance by the drawee of the instrument will not make
the instrument non-negotiable.
e. A bill may be accepted before it has been signed by the drawer, or while
otherwise incomplete, or when it is overdue, or after it has been
dishonored by a previous refusal to accept, or by non payment. But when
a bill payable after sight is dishonored by non-acceptance and the drawee
subsequently accepts it, he is entitled to acceptance as of the date of first
presentment for acceptance.

4. Acceptance for Honor - It refers to the action made by a stranger or third

person to the instrument to save the credit of the parties to the instrument or
some party to it as the drawer, drawee, or indorser or somebody else by
intervening the protested bill of exchange and accepting it with the consent of the
holder.

a. Essential elements of valid acceptance for honor

i. The drawee has refused to accept the bill.

ii. The bill has been duly protested for non-acceptance or has been
duly protested for better security.
iii. The acceptor for honor must be a third party or stranger to the bill.
iv. The holder must give consent.

b. Formalities of valid acceptance for honor

i. An acceptance for honor supra protest must be in writing.

ii. It must indicate that it is an acceptance for honor.
iii. It must be signed by the acceptor for honor.
iv. The acceptance for honor may be the whole sum or amount
stated in the bill or lower than the amount stated in the bill.

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 c. Presumption to whom the dishonored bill is accepted to

i. Where an acceptance for honor does not expressly state for

whose honor it is made, the law presumes that it is made for the
honor of the drawer.

d. Extent of Liability of Acceptor for Honor

i. The acceptor for honor is liable to the holder and to all parties to
the bill subsequent to the party for whose honor he has accepted.

e. Nature of Liability of Acceptor for Honor

i. The acceptor for honor, by such acceptance, engages that he will,

on due presentment, pay the bill according to the terms of his
acceptance provided it shall not have been paid by the drawee
and provided also that is shall have been duly presented for
payment and protested for non-payment and notice of dishonor
given to him.

f. Dishonor by Non-Acceptance occurs when the bill is presented for acceptance, and
acceptance is refused by the drawee, or cannot be obtained, or when present for acceptance is
excused, and the bill is not accepted.

g. Presentment for Payment consists of exhibiting the instrument to the person primarily liable
thereon and demanding payment from him on the date of maturity.

i. As a general rule, presentment for payment is necessary to charge persons secondarily

liable such as drawer and general indorsers. Instances when drawers and general
indorsers are liable even without presentment for payment

1. When the drawer has no right to expect or require the drawee or acceptor will
pay the instrument.
2. Where the instrument was made or accepted for his accommodation and he has
no reason to expect that the instrument will be paid if presented.
3. When presentment is dispensed with.
4. When a bill is dishonored by non-acceptance.

ii. Instances when presentment for payment is dispensed with

1. When it cannot be made after the exercise of reasonable diligence.

2. When the drawee is a fictitious person.
3. When presentment is waived, express or implied.

iii. Rules on when presentment for payment shall be made

1. Presentment for payment must be made on the date fixed without grace period
unless delay in presentment for payment is excused when it is caused by
circumstances beyond the control of the holder and not imputable to his default
or negligence.
2. The time of presentment shall be on a reasonable hour on a business day and if
payable at a bank, it must be made during the banking hours.
3. A check must be presented for payment within a reasonable time after its issue.
4. If the promissory is payable on demand, presentment for payment must be made
within a reasonable time after issuance.
5. If the bill of exchange is payable on demand, presentment for payment must be
made within a reasonable time after its last negotiation.
6. If the instrument is not payable on demand or it is payable at a fixed or
determinable future time, presentment for payment must be made on the day it
falls due.

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 iv. Rules on place of presentment for payment

1. If a place of payment is specified in the instrument, the presentment shall be

made there.
2. If no place is stipulated, but the address of the person primarily liable is given,
the presentment shall be made there.
3. In the absence of a and b, presentment shall be made on the usual place or
residence of the person making it.
4. 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.

v. Persons to whom presentment for payment shall be made

1. To person primarily liable.

2. To any person found at the place where presentment is made if the person
primarily liable is absent or inaccessible.
3. If the person primarily liable is dead, to his personal representative if there is one
and if he can be found with reasonable diligence.
4. If a principal debtors are partners, to any one of them if no place of payment is
specified.
5. If principal debtors are joint, to all of them if no place of payment is specified.

h. Dishonor by Non-Payment occurs when the instrument is presented for payment, and
payment is refused or cannot be obtained, or where presentment for payment is excused and
the instrument is overdue and unpaid.

i. Notice of Dishonor by or Non-acceptance by Drawee or Nonpayment by Maker or

Acceptor must be given to the drawer and to general indorser in order to charge these persons
who are secondarily liable to the instrument.

i. Instances when notice of dishonor by nonpayment is waived

1. When the notice of dishonor is waived.

2. When notice of dishonor is dispensed with, when after the exercise of reasonable
diligence, it cannot be given or does not reach the parties sought to be charged.
3. When notice of dishonor by non-acceptance was previously given unless the
instrument has been subsequently accepted.

ii. Instances when notice of dishonor is not necessary to charge a drawer

1. When the drawer and drawee are the same person.

2. When the drawee is a fictitious person or a person not having capacity to
contract.
3. When the drawer is the person to whom the instrument is presented for payment.
4. Where the drawer has no right to expect or require that the drawee or acceptor
will honor the instrument.
5. Where the drawer has countermanded payment.

iii. Instances when notice of dishonor is not necessary to charge a general indorser

1. When the drawee is a fictitious person or a person not having a capacity to

contract and the indorser was aware of that fact at the time he indorsed the
instrument.
2. Where the indorser is the person to whom the instrument is presented for
payment.
3. Where the instrument was made or accepted for his accommodation meaning
the indorser is the party accommodated by maker or acceptor.

iv. Rules on Giving of Notice of Dishonor

1. Where notice is given by or on behalf of the holder, it inures to the benefit of all
subsequent holders and all prior parties who have a right of recourse against the
party to whom notice is given.
2. Where notice is given by or on behalf of a party entitled to give notice, it inures to
the benefit of the holder and all parties subsequent to the party to whom notice is
given.
3. Only prior parties may give notice of dishonor to subsequent parties but not the
other way around.

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 j. Protest - It is a formal written statement made by a notary public at the request of a holder of a
bill of exchange stating that he has demanded acceptance or payment of the bill and that it has
been refused, with the reasons, if any, given by the drawee or acceptor for the dishonour,
whereupon, the notary public protests against all parties to such instrument and declares that
they will be held responsible for all loss or damage arising from the dishonor of the bill.

i. Instances when protest of negotiable bill of exchange is mandatory

1. When a foreign bill is dishonored by non-acceptance or a foreign bill previously

accepted is dishonored by non-payment.
2. Where an inland bill has been accepted for honor.
3. Where an inland bill contains a referee in case of need.
4. Where an inland bill is dishonored by the acceptor for honor

ii. Who shall make the protest of negotiable bill of exchange

1. Notary public; or
2. By any respectable resident of the place where the bill is dishonored

iii. Number of witnesses present in protesting a negotiable bill of exchange

1. Two or more credible witnesses

iv. Place of protesting the negotiable bill of exchange

1. At the place where the bill is dishonored

k. Discharge refers to the extinguishment of negotiable instrument. It happens upon payment in

due course by or on behalf of the principal debtor. It also occurs because of other modes
provided by law for extinguishment of negotiable instrument.

i. Modes of discharging a negotiable instrument

1. By payment in due course by or on behalf of the principal debtor

a. Requisites of payment in due course

i. Payment must be made at or after maturity date.

ii. Payment must be made to the holder.
iii. Payment must be made by the debtor in good faith.
iv. Payment must be made without notice of the holder’s defective
title.

b. Payment for honor - refers to the payment made by a third person or

stranger to a bill of exchange protested for non-payment for the honor of
any person liable thereon or for the honor of the person for whose
account it was drawn.

i. Formal requisites provided by law for payment for honor

supra protest, in order to operate as such and result to legal
subrogation and not as a mere voluntary payment by a third
person

1. It must be attested by a notarial act of honor which may be

appended to the protest or form an extension to it.
2. The notarial act of honor must be founded on a declaration
made by the payer for honor or by his agent in that behalf
declaring his intention to pay the bill for honor and for
whose honor he pays.

ii. Preferred payor for honor of a dishonored bill

1. The person whose payment will discharge most parties to

the bill.

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 iii. Effects of payment for honor by third person

1. All parties subsequent to the party for whose honor it is

paid are discharged.
2. The payer for honor is subrogated for, and succeeds to,
both the rights and duties of the holder as regards the
party for whose honor he pays and all parties liable to the
latter.
3. The party for whose honor the payer pays and all prior
parties to the former are liable to the payer for honor.

2. By payment in due course by the party accommodated by maker or acceptor,

where the instrument was made or accepted for his accommodation

3. By the intentional cancellation, destroying, burning, or tearing of the instrument

by the holde

4. By NO-CO-ME-RE-PA-LO-PRE-RE-FUL-AN

5. When the principal debtor becomes the holder of the instrument at or after
maturity in his own right or by merger or confusion

ii. Modes of discharging party secondarily liable

1. By any act which discharges the instrument

2. By the intentional cancellation of the signature by the holder
3. By the discharge of prior party
4. By a valid tender of payment of a prior party
5. By release of a principal debtor, unless the holder’s right of recourse against the
parties secondarily liable is reserved
6. By any agreement binding upon the holder to extend the time of payment

iii. Effects of payment by a party secondarily liable

1. The party paying is remitted to his former rights as regards to all prior parties.
a. The party paying may strike out his own indorsement and all subsequent
indorsements.
b. The party paying may renegotiate the instrument except where it is
payable to the order of a third person and has been paid by the drawer or
where it was made or accepted for accommodation and has been paid by
the party accommodated.

23. Types of Holder

a. Holder of an order instrument is the payee or indorsee of a bill or note, who is in possession
of it.
b. Holder of a bearer instrument is the bearer or possessor thereof.
c. Holder for value is holder who has given value for an instrument issued or negotiated to him.
d. Holder in due course is a holder against whom personal defenses will not be available but
against whom real defenses will lie.
e. Holder not in due course is a holder against whom both personal and real defenses can be
used.

24. Requisites of a holder in due course (COGI)

a. He holds an instrument that is Complete and regular upon its face.

b. He becomes the holder of the instrument before it is Overdue, and without notice that it had
been previously dishonored if such was the fact.
c. He takes the instrument in Good faith and for value.
d. At the time the instrument is negotiated to him, he has no notice of Infirmity in the instrument or
defect in the title of the person of the person negotiating it.

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 25. Types of Defenses that may be set-up against a holder of a negotiable instrument

a. Personal or equitable defense is a type of defense of a party in a negotiable instrument which

cannot be set up against a holder in due course but available against a holder not in due
course. It grows out of the agreement or conduct of a particular person in regard to the
instrument which renders it inequitable for him, though holding legal title, to enforce it against
the defendant, but which are not available against a holder in due course.

b. Real, legal or absolute defense is a type of defense of a party in a negotiable instrument

which can be set up against any holder. It is a defense that attaches to the instrument itself and
can be set up against the whole world.

Personal or Equitable Defenses Real, Legal or Absolute Defenses

Absence or failure of consideration, partial or total Want/Absence of delivery of incomplete instrument
(Incomplete and Undelivered instrument)
Want/Absence of delivery of complete instrument Duress amounting to forgery
(Complete but undelivered instrument)
Filling of wrong date of an instrument where it is Fraud in factum or fraud in esse contractus
payable at a fixed period after date and it is issued
undated or where it is payable at a fixed period after
sight and the acceptance up of blank
Filling up of blank, contrary to authority given or not Minority
within reasonable time where the instrument is
delivered (Delivered but incomplete instrument)
Fraud in inducement Fraun in factum or fraud in esse contractus
Acquisition of instrument by force, duress or fear Insanity
Acquisition of instrument by unlawful means Ultra vires act of corporation, where the corporation is
absolutely prohibited by its charter or statute from
issuing any commercial paper under any
circumstances.
Acquisition of the instrument for an illegal Want of authority of agent, apparent or real
consideration
Negotiation in breach of faith Execution of instrument between public enemies
Negotiation under circumstances that amount to fraud Illegality of contract where it is the contract of
instrument itself which is expressly made illegal by
statute
Mistake Forgery but only for order instrument
Intoxication
Ultra vires acts of corporations where the corporation
has the power to issue negotiable paper but the
issuance was not authorized for the particular
purpose for which it is issued
Want of authority of agent where he has apparent
authority
Illegality of contract where form or consideration is
illegal
Insanity where there is no notice of insanity on the
part of the one contracting with the insane person

Material Alteration (May be enforced by Holder in Due Course according to original tenor) (Quasi-real
Quasi-personal)
It is a personal defense as to the original amount but it is a real defense as to the excess of the original
amount.

26. Rights of a holder in due course

a. To sue on the instrument in his own name.

b. To receive payment of the instrument, and if the payment is in due course, the instrument is
discharged.
c. To hold the instrument free from any defect of title of prior parties and free from defenses
available to the parties among themselves or free from personal defenses.
d. To enforce payment of the instrument for the full amount thereof against all parties liable
thereon.

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 27. Rights of a holder not in due course

a. To sue on the instrument in his own name.

b. To receive payment of the instrument, and if the payment is in due course, the instrument is
discharged.
c. To hold the instrument but is subject to the same defenses as if were non-negotiable meaning
subject to both real and personal defenses.
d. To have all the rights of a holder in due course, if he derives his title from such holder and he
himself is not party to any fraud or illegality affecting the instrument

28. Liability of a maker in a negotiable promissory note

a. He engages that he will pay it according to its tenor.

29. Warranties of a maker in a negotiable promissory note by making the instrument

a. He admits the existence of the payee.

b. He admits the capacity of the payee to indorse.

30. Liability of Acceptor by accepting the order by the drawer in a negotiable bill of exchange

a. He engages that he will pay it according to the tenor of his acceptance.

31. Warranties of Acceptor by accepting the instrument

a. He admits the existence of the payee.

b. He admits the capacity of the payee to indorse.
c. He admits the genuineness of the drawer’s signature.
d. He admits the capacity and authority of the drawer to draw the instrument.

32. Liability of the Drawer by drawing the instrument

a. He engages that on due presentment, the instrument will be accepted or paid or both, according
to its tenor, and that if it be dishonored and the proceedings of dishonor be duly taken, he will
pay the amount thereof to the holder or to any subsequent indorser who may be compelled to
pay it.

33. Warranties of Drawer by drawing the instrument

a. He admits the existence of the payee.

b. He admits the capacity of the payee to indorse.
c. He admits the existence of the drawee.
d. He admits the capacity of the drawee.

34. Liability of the General Indorser by generally indorsing the instrument

a. He engages that on due presentment, the instrument will be accepted or paid or both, according
to its tenor, and that if it be dishonored and the proceedings of dishonor be duly taken, he will
pay the amount thereof to the holder or to any subsequent indorser who may be compelled to
pay it.

35. Warranties of a General Indorser by generally indorsing the instrument

a. That the instrument is genuine and in all respects what it purports to be.
b. That he has good title to it.
c. That all prior parties had capacity to contract.
d. That the instrument, is at the time of his indorsement, is valid and subsisting.

36. A qualified indorser is not secondarily liable to the instrument because he does not guarantee the
solvency of the person primarily liable. Warranties of a Qualified Indorser by qualifiedly indorsing
the instrument although his warranties extend only to those parties who can trace their title
from such qualified indorsement

a. That the instrument is genuine and in all respects what it purports to be.
b. That he has good title to it.
c. That all prior parties had capacity to contract.
d. That he has no knowledge of any fact which would impair the validity of the instrument or render
it valueless.

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 37. A person negotiating the instrument by mere delivery is not secondarily liable to the instrument
because he does not guarantee the solvency of the person primarily liable. The following are the
warranties of a Person negotiating the instrument by delivery but his warranties extend in favor
of no holder other than the immediate transferee
a. That the instrument is genuine and in all respects what it purports to be.
b. That he has good title to it.
c. That all prior parties had capacity to contract.
d. That he has no knowledge of any fact which would impair the validity of the instrument or render
it valueless.

38. Examples of material alterations

a. Alteration of date or sum payable, either principal or for interest

b. Alteration of the time or place of payment
c. Alteration of the number or relations of the parties
d. Alteration of the medium or currency of payment
e. Alteration which adds a place of payment where no place of payment is specified
f. Any other change or addition which alters the effect of the instrument

39. Effects of material alteration

a. In the hands of a holder not in due course, the instrument is avoided as against the party prior to
alteration.
b. Any holder, whether in due course or not, may enforce payment of new amount to a party who
has himself made, authorized or assented to the alteration and subsequent indorsers.
c. The instrument is not avoided in hands of holder in due course as against the party prior to
alteration as to the original amount but it will be avoided as to the excess.

40. Bills in Set

a. Where a bill is drawn in a set, each part of the set being numbered and containing a reference
to the other parts, the whole of the parts constitutes one bill.
b. Where two or more parts of bills in set are negotiated to different holders in due course, the true
owner of the bills in set is presumed to be the holder whose title first accrues.
c. Where two or more parts of bills in set are negotiated to different holders in due course, the
payment or acceptance of the parts by drawee-acceptor first presented by the untrue owner of
the bills in set will not prejudice the drawee-acceptor.
d. Where the holder of a set indorses two or more parts to different persons he is liable on every
such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as
if such parts were separate bills.
e. The acceptance may be written on any part and it must be written on one part only.
f. If the drawee accepts more than one part and such accepted parts negotiated to different
holders in due course, he is liable on every such part as if it were a separate bill.
g. When the acceptor of a bill drawn in a set pays it without requiring the part bearing his
acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a
holder in due course, he is liable to the holder thereon.
h. Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged
by payment or otherwise, the whole instrument is discharged and not that part only.

41. Where the instrument is so ambiguous that there is doubt on whether it is a bill or a note, the holder
may treat it as either at his option. The following are the instances when a bill of exchange may be
treated as a promissory note by the holder

a. Where the drawer and drawee are the same person.

b. Where the drawee is a fictitious person.
c. Where the drawee is a person not having a capacity to contract.

42. Principles concerning Check

a. A check of itself does not operate as an assignment of the funds of the drawer in the hands of
the bank and the bank is not liable until he accepts or certifies the check.
b. A check must be presented for payment within a reasonable time (6 months) after its issue
otherwise the drawer will be discharged from liability thereon to the extent of loss caused by the
delay.
c. A check not presented within a reasonable time (6 months) after issue is stale check.

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 43. Effects of a certification of check by the bank on which it is drawn

a. It is equivalent to acceptance.
b. If procured by the holder, the drawer and all general indorsers are discharged.
c. It operates as an assignment of the funds of the drawer in the hands of the drawee bank.

44. Purposes of crossing of check

a. To have the check deposited only to the account of the payee.

b. To have the check paid only with the intervention of a particular banker when its name is placed
between the parallel lines crossing the check.
c. To obtain assurance that the check will be paid only to the rightful person.

45. Kinds of Checks

a. Memo check is a check which, across its face, is written the word memorandum or memo and it
is regarded as a contract whereby the drawer engages to pay the bona fide holder absolutely
and not upon a condition to pay upon presentment and non-payment.
b. Cashier's check is a check drawn by the cashier of a bank in the name of the bank and against
the bank itself payable to a third person or order.
c. Manager's check is a check drawn by the manager of a bank in the name of the bank and
against the bank itself payable to a third person.
d. Traveler's check is a check used by traveler to supply him with funds in lieu of cash.
e. Certified check is a check which bears the word certified on its face signifying that the check is
recognized and accepted by the bank as a valid appropriation of the amount specified thereon.
f. Crossed check is a check which bears two parallel lines usually drawn diagonally on the upper
left portion of its face.
g. Stale check is a check not presented for payment within reasonable time from its issue or
within 6 months from its maturity date.
h. Postdated check is a check wherein the date stated in the check is later than the actual date of
issuance of check.
i. Antedated check is a check wherein the date stated in the check is earlier than the actual date
of issuance of check.

Distinctions between check and bill of exchange

Check Bill of Exchange
Always drawn against a bank or banker May or may not be drawn against a bank or banker
Generally payable on demand except post-dated May be payable on demand or at fixed time or at a
check determinable future time
Presentment for acceptance is not required Presentment for acceptance is required
Drawer must have funds in the hands of the drawee to Drawer need not have funds with the drawee
avoid criminal prosecution for violation of BP 22
If payable on demand, must be presented for payment If payable on demand, must be presented for payment
within a reasonable time (6 months) after issue within a reasonable time after the last negotiation
Death of the drawer of the check revokes the bank’s Death of the drawer of ordinary bill of exchange does
authority to pay not revoke the drawee’s authority to pay
-END-

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