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LECTURE NOTES ON NEGOTIABLE INSTRUMENTS

Act No. 2031

APPLICABILITY OF THE LAW

It applies only to negotiable instruments that meet the requirements laid down in Section 1 of
the law. Otherwise, any case not provided for shall be governed by the provisions of existing legislation,
or in default thereof, by the rules of the law merchant (Under Section 196, the law merchant refers to
the custom of merchants or rules that have been developed under common law, consisting of primarily
of usages of trade previously proven in court or ratified by legal decisions. It is also known as the Custom
of Merchants). Thus, the Civil Code, the Bouncing Check Law and the Revised Penal Code provisions on
Estafa applies only to supply any deficiencies in cases not covered by the Act.

 In the case of GSIS vs. Court of Appeals, 170 SCRA 533, the Supreme Court on the issue as to
whether private respondents were accommodation parties under Section 29, it said that the
arguments were misplaced as the promissory note executed was not negotiable because it was
not payable to order or to bearer.

WHAT IS A NEGOTIABLE INSTRUMENT

It is a transferable instrument containing an unconditional promise or order to pay to a holder or

to the order of a holder upon issue, possession, demand or at a specified time.

COMMON KINDS OF NEGOTIABLE INSTRUMENTS

1. 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 or determinable future time, a sum
certain in money or to bearer.

The ORIGINAL parties to a promissory note are the maker (one who makes the promise and signs
the instrument), the payee (party to whom the promise is made or instrument is payable), and
SUBSEQUENTLY, the holder (as defined in Section 191 is the person to whom the instrument is delivered
to, he may be payee or any subsequent person holding the note (or bill) by delivery or by delivery and
endorsement.

2. Bill of Exchange under Section 126 is an unconditional order in writing addressed by one person
to another, signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable period of time a sum certain in money to order or bearer.

The ORIGINAL parties are the drawer (he draws up the bill and gives the order to pay money to
a third party) drawee (the party upon whom the bill is drawn. He is the person to whom the bill is
addressed and is ordered to pay. Under Section 62, he becomes an ACCEPTOR when he indicates a
willingness to accept responsibility for the payment of the bill), and the payee (the partying whose favor
the bill is drawn or is payable to) SUBSEQUENTLY, the holder (as defined in Section 191 is the person to
whom the instrument is delivered to, he may be payee or any subsequent person holding the note (or
bill) by delivery or by delivery and endorsement.

Note: that a check is not another kind of negotiable instrument, rather it is a form of a bill of exchange.

Table of Differences between Negotiable Instruments

PN
2 parties: maker and payee
Promise to pay
Maker is primarily liable
Secondarily liable: indorsers and persons
negotiating by mere delivery
Maker is liable primarily and NO conditions
precedent is required
BOE
3 parties: drawer, payee, drawee/acceptor
Order to pay
Drawee/acceptor is primarily liable
Secondary liable: drawer, indorsers and
persons negotiating by mere delivery
Drawer’s liability is secondary and attaches
ONLY upon compliance with conditions
precedent:
a) Presentment
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b) Dishonor
c) Proceedings (for dishonoring)

No need to present for acceptance Needs to be presented for acceptance in some

Life of a promissory note: issue, negotiation,
indorsements, presentment for payment,
dishonor by non-payment, notice of dishonor
and discharge
If payable on demand, it must be presented for
payment within a reasonable time after its
issuance
cases as required by law
Life of a bill of exchange: issue, negotiation,
indorsements, presentment for acceptance,
dishonor by non-acceptance, presentment by
payment, dishonor by non-payment, notice of
dishonor and discharge
If payable on demand, it must be presented for
payment within a reasonable time from it last
negotiation

BOE Check
Drawee may be any person Always drawn upon a bank
Payable on demand or at fixed or determinable Always payable on demand
future time
It is necessary that it be presented for Not necessary that it be presented for
acceptance acceptance (it is presented at once for
payment)
It is not necessary that drawer has money with Drawn on deposit
the drawee
Must be presented for payment within a Must be presented for payment within a
reasonable time after last negotiation reasonable time after its issue (6 mos.)

FUNCTIONS AND IMPORTANCE OF NEGOTIABLE INSTRUMENTS

1. While not legal tender (Article 1249, Civil Code and Section 52 of the New Central Bank Act, RA
7653 which provides that only notes and coins issued by it possess legal tender power, and as for coins
up to PHP 50.00 for denominations of 25 centavos and above and up to PHP 10.00 for denominations of
10 centavos and below), they are recognized substitutes for money as its negotiability allows it be
transferred from one hand to another, subject however to the financial ability of the parties to honor the
instrument.

1.1 Note though that in Fortunado vs. Court of Appeals, 196 SCRA 26, the delivery of checks is
sufficient in the exercise of the right of redemption. The right of redemption is a privilege and is not an
ordinary obligation. Hence Article 1249 does not apply.

2. They constitute, checks particularly, as the media of exchange for most commercial transactions.
The ability to purchase is thereby increased without need for actual money to be produced and
delivered.

3. They serve as a medium of credit transaction. They enable the transaction of business as the
party to whom they are delivered can treat the promises contained therein as cash.

3.1 Note also Section 60 of RA 7653 that states that checks representing demand deposits do not
have legal tender power and their acceptance in the payment of debts, both public and private, is at the
option of the creditor. Provided, however, that a check which has been cleared and credited to the
account of the creditor shall be equivalent to delivery to the creditor of cash.

TWO DISTINCTIVE FEATURES OF NEGOTIABLE INSTRUMENTS

1. Negotiability which allows instruments, negotiable in character to be transferred from one

person to another so as to constitute the transferee as a holder.

2. Accumulation of secondary contracts because the indorsers of the instrument become

secondarily liable not only to their immediate transferee but also to any holder, subject to valid defenses.
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There is thus greater security brought upon the instrument as whoever takes it has greater chances of
recovery as more people are liable on the instrument and consequently, raises its level of acceptability.

FORMAL REQUISITES OF NEGOTIABLE INSTRUMENTS

A negotiable instrument is primarily a contractual obligation to pay money, whose negotiability depends
on its form and content as dictated by Section 1 which provides for the formal requisites of a negotiable
instrument, thus:

1. It must be in writing and signed by maker or drawer;

2. It must contain an unconditional promise or order to pay a sum certain in money;

3. It must be payable on demand, or at a fixed or determinable future time;

4. It must be payable to order or to bearer; and

5. Where it is a bill of exchange, drawee must be named or otherwise indicated therein with
reasonable certainty.

The basic GUIDING PRINCIPLE as laid down in Section 10 is that the instrument need not follow the
language of the law, but the terms must be sufficient to clearly indicate an intention to conform to the
requirements of the law. Hence, the use of a foreign language or grammatical errors does not destroy
negotiability.

NOTE THOUGH the EXCEPTION FOUND IN SECTION 8 pertaining to an instrument payable to order,
where literal compliance with the law is necessary

Illustrations:

1. The following promissory note is not negotiable because it is neither payable to order or to
bearer:
“Received P10,000.00 payable after
World War II.”

SEE: Jimenez v. Bucoy 103 Phil. 40 (1958)

2. Conformity with all requirements of NIL makes an instrument a bill of exchange, even if
acceptance is not made since the latter is important only in determination of liabilities of parties. SEE:
Phil. Bank of Commerce v. Aruego 102 SCRA 530 (1981)

A. INSTRUMENT MUST BE IN WRITING

 Physical integrity of Whole Instrument – the negotiability of an instrument must be determined

only from the face of the document itself and not elsewhere. (Des Moines Savings Bank v.
Arthur, 163 La. 205, 143 NW 556)

 A commercial transaction may be verbal unless the law requires a written document for its
validity. Writing is required for negotiable instruments. Hence, there can be no verbal
promissory note nor a verbal bill of exchange.

In short, the requisites for the validity of a negotiable instrument are:

a. Consent
b. Consideration
c. subject matter
d. Form
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 As a general rule, bills, notes and other instruments of similar nature are not subject to be
varied or contradicted by parol or extrinsic evidence pursuant to the rule that “long experience
that written evidence is so much more certain and accurate than that which rests in fleeting
memory only, that it would be unsafe, when parties have expressed the terms of their contract
in writing, to admit weaker evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them BUT if
there is an allegation of fraud in the execution of promissory note, such as when the note having
a face value of – P50,000.00 was alleged to have been signed by the makers at only P5,000.00,
where parol contemporaneous agreement was the inducing and moving cause of the written
contract, it may be shown by parol evidence; but it must be established by clear and convincing
evidence, mere preponderance of evidence not even being adequate. (Inciong v. Court of
Appeals, 257 SCRA 578)

B. IT MUST BE SIGNED BY MAKER OR DRAWER

 Any inscription or even stamping will suffice provided that it is meant to function as the
signature of the party.

 Persons who write their names on the face of a note are makers and are liable as such, and their
solidary liability is made certain by the presence of the phrase “joint and several.” (Republic
Planters Bank v. CA, 216 SCRA 738)

C. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN

MONEY

 An unconditional promise or order to pay is required because the purpose of a negotiable

instrument is to take the place of money. Hence, if the instrument may or may not mature, no
one will have faith on negotiable instrument embodying it. Thus, the promise or order must be
ABSOLUTE.

 Any word equivalent to an order would suffice, and words of courtesy would not be inconsistent
with the order; however, a mere request or authorization would not be enough.

 The promise must be found in the instrument itself; the mere existence of a debt does not
amount to a promise. The use of the word “order” is deemed equivalent to promise.

 An acknowledgment of debt becomes a promise to pay by addition of words implying a promise

of payment, such as “payable on a given day,” “payable on demand,” “paid when called for,”
“I.O.U.” (Jimenez v. Bucoy, 103 Phil. 40 [1958]).

 Nature of Condition (Art. 1179, Civil Code) – A distinction must be made between a condition (a
future and uncertain event which may or may not happen) and a period (one that is certain to
happen though the time when it will happen is not known). An instrument embodying an
obligation that is subject to a condition is non-negotiable; whereas, that with an obligation
subject to a period is negotiable.

Illustrations:
1.

“Pay to A or order P500 if it rains on 28

June 2002.”
(Sgd.) “B”

“If it rains on 28 June 2002” is a condition, one which may or may not happen. The instrument is non-
negotiable. Under the last sentence of Sec. 4, if it indeed rains on 28 June 2002 and the condition is
thereby fulfilled, the instrument which was originally conditional and non-negotiable does not thereby
become negotiable by the fulfillment of the condition.
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“10 days after X dies, pay A or order P500.”

(Sgd.) “B”
When X will die is not certain, but X is sure to die. This is a period. The instrument is negotiable.

2. Under Sec. 39, a condition in the endorsement would not destroy negotiability of the
instrument. Thus:

“Pay A or order P500.”

(Sgd.) “B”

[At the back:]

“Pay to X if it rains on 28 June

2002.”
(Sgd.) “A”

B, upon presentment for payment, may pay immediately ignoring whether the condition is fulfilled.
Should B choose to pay immediately and the condition is not fulfilled, then the quasi-contract of solutio
indebiti arises. (Article 2154, Civil Code).

3. Under Section 3(a) an “indication of a particular account to be debited with the amount” does
not make the promise or order conditional. We have to distinguish between the use of the
words “fix” and “indicate.” If the instrument fixes the fund from where payment has to be made,
so that payment cannot be made from other funds, the instrument is not negotiable. But if the
instrument merely indicates the fund from where payment is to be made, so that the obligor will
still be liable even if the indicated fund is depleted, then the instrument is negotiable.

NOTE:
a. A check of itself does not operate as an assignment of any part of the funds to the credit of
the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts
or certifies the check. (Section 189)
b. A treasury warrant is not a negotiable instrument because it is to be paid from a particular
fund. (Abubakar v. Auditor General, 81 Phil. 359 [1948])
c. Indication of a particular fund out of which reimbursement is to be made.
d. A statement of the transaction which gives rise to the instrument under Section 3(b)
like:
“Pay to A or order P500 arising from our rice
deal.”
(Sgd.) “B”

SEE: Elizalde & Co., Inc. v. Biñan Trans. Co. (CA) 58 O.G. 5886 (1960)

Reference in a promissory note to some extrinsic agreement, in order to destroy its negotiability, must
be such as to indicate unmistakably that the paper is to be burdened with conditions of that agreement.
When the reference is a simple recital of the consideration for which the paper was given, or is a mere
mention of origin of the transaction, its negotiability is not affected.

D. TO PAY A SUM CERTAIN IN MONEY:

 The sum is certain when what is to be paid is a fixed amount of money or alternatively, if from
the face of the instrument it can be mathematically computed.
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Under Section 2, the sum is still certain even when it is

a. With interest stipulated THOUGH Usury Law now ineffective. (Liam Law v. Olympic Sawmill
Co., 129 SCRA 439 [1984]; CB Circular No. 905, s. 1982, 78 OG 7336).
b. By stated installments, though the installments must not only be stated, but the maturity of
each installment must be fixed or determinable.
c. By stated installments, with Acceleration Clause
d. With either fixed or current rate of exchange, or payable in foreign exchange (Uniform
Currency Law, R.A. 529, repealed by R.A. 8183).
e. With costs of collection or attorney’s fees, in cases where payment is not made at maturity
NOTE THOUGH that at maturity, the instrument is no longer fully negotiable since any
transferee acquiring it would not be a holder in due course under Sections 52 and 58.

 Section 2 illustrates instances where the sum payable is still a sum certain. This must be
correlated with Section 5 which provides that “an instrument which contains an order or
promise to do any act in addition to the payment of money is not negotiable.” Thus, in the
following illustration, the instrument is not negotiable, to wit:

“Pay A or order P500 or 5 sacks of rice.”

(Sgd.) “B”

However, under Sec. 5(d), the instrument is not rendered non-negotiable if it is the holder who is given
an election to require something to be done in lieu of payment of money. Thus, in the following
illustration, the instrument if negotiable because the obligation of the maker/acceptor to pay in a sum
certain, if the holder so chooses, is still absolute, to wit:

“Pay A or order P500 but the holder may demand

delivery of 5 sacks of rice.”
(Sgd.) “B”

Illustrations

As provided for under Sec. 2, the following are still negotiable instruments, to wit:
1.
“Pay to A or order P500 with interest at 12% per
annum.”

2.
“Pay to A or order P500 payable in monthly
installments of P100.”

3.
“Pay to A or order P500 in monthly installments of
P100 and failure to pay one installment will make
the entire fall due immediately.”

4.
“Pay to A or order P500 and in the event of
litigation, I agree to pay court costs and attorney’s
fees.”

5.
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“Pay A or order $500.”

The paragraph of Section 2 on foreign exchange is deemed to have been amended by Rep. Acts 529 and
4100. The instrument is valid but what is void is the obligation to pay in foreign currency. SEE: Arrieta v.
NARIC, 10 SCRA 79 [1964]).

While the agreement to pay in foreign exchange is declared null and void and of no effect, what the law
specifically prohibits is payment in currency other than legal tender; it does not defeat a creditor’s claim
for payment, but to be made in lawful Philippine legal tender. SEE: Ponce v. Court of Appeals 90 SCRA
533 (1979)

Where the parties stipulate payment in foreign currency, the rate of exchange is determined not at the
time of making of the instrument but at the time of payment, and not the rate at the time the obligation
was incurred. SEE: Kalalo v. Luz 34 SCRA 337 (1970)

E. IT MUST BE PAYABLE ON DEMAND, OR AT A FIXED OR DETERMINABLE FUTURE TIME

Under Section 7, an instrument is payable on demand

a. when expressed to be payable on demand, or at sight, or on presentation
b. when no time for payment is expressed

Special Rule: When an instrument is issued, accepted, or endorsed when overdue, it is, as regards
the person so issuing, accepting or indorsing it, payable on demand.

Illustrations on payable on demand:

(a) “On demand pay to A or order P500.”

(b) “At sight pay to A or order P500.” (This applies only to a bill of exchange.)
(c) “On presentation pay to A or order P500.” (This applies only to a bill of exchange.)
(d) “Pay to A or order.” (No date expressed.)
(e) “10 days after date (16 April 2002) pay to A or order P500.” (Provided, That this instrument is
issued, accepted or endorsed when overdue, as far as the person issuing, accepting or indorsing is
concerned, the instrument is payable on demand.)

A DETERMINABLE FUTURE TIME as provided by Section 4 is:

(a) At a fixed period after date or sight.

“10 days after date pay to A or order P500.”

(Sgd.) “B”

“10 days after sight pay to A or order P500.”

(Sgd.) “B”

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

On or before 9 July 2004 pay to A or order
P500.”
(Sgd.) “B”

(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.
10 days after X dies pay to A or order P500.”

(Sgd.) “B”
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The specification “before” a specified event, would render the instrument non-negotiable because the
date of maturity can be determined only after the note has become overdue.

A stipulation that the instrument shall be paid “when my means permit me to do so” although by law
would constitute a period would still render the instrument non-negotiable because the instrument is
not deemed payable at a “fixed or determinable future” since the term of the period would have to be
set by the courts under Articles 1180 and 1197, Civil Code.

(d) Instrument payable upon a contingency is not negotiable, and the happening of the event does
not cure the defect. (West Point Banking Co. v. Gaunt, 34 ALR 862).

F. IT MUST BE PAYABLE TO ORDER OR TO BEARER:

An instrument is payable to order under Section 8 when:

a. Drawn payable to the order of a specified person or to him or his order. The payee is not the
maker, drawer or drawee.

“Pay to A or order P500.”

(Sgd.) “B”
[A is neither maker, drawer or drawee.]

b. Drawn payable to the drawee as payee. Here being both the drawee and the payee, the drawee
can pay himself upon maturity from the funds belonging to the drawer in his possession: once
accepted is equivalent to a promissory note in favor of the drawer.

“Pay to C or order P500.”

(Sgd.) “B”

“To: C”

[B can demand C to pay himself because

B has money or credit with C.]

c. Maker as payee. Here the maker promises as follows “ I promise to pay to the order of myself,
10,000” : the instrument is not complete until the maker endorses under Section 184.

“Pay to B or order P500.”

(Sgd.) “B”

[Under Sec. 184, this instrument is not

complete until endorsed by maker.]

d. Drawer as payee: this authorizes the drawee to pay himself/drawer.

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[Check]

“Pay to B or order P500.”

(Sgd.) “B”

“To: PNB”

[This means that B has a deposit with

PNB and he wants to withdraw the
amount indicated.]

e. Two or more payees jointly, or one or more several payees.

“Pay to A and X or order P500.”

(Sgd.) “B”

[Since the conjunction “and” is used in

the above-illustrated instrument, then
the endorsements of both A and X are
necessary for the negotiation of the
instrument.]

“Pay to A or X or order P500.”

(Sgd.) “B”

[Since the conjunction “or” is used,

then the endorsement of either A or X
will be sufficient for the negotiation of
the instrument.]

(f) The holder of an office for the time being.

“Pay to City Treasurer of Baguio City

or order
P500.”

(Sgd.) “B”
In case the instrument is endorsed, then it will be like this:

City Treasurer of Baguio City

“By:__________

(g) When the instrument is payable to order, the payee must be named or otherwise indicated
therein with reasonable certainty. This requirement is imposed as if there is no payee, there is
NOBODY WHO COULD GIVE THE ORDER OR AUTHORITY TO COLLECT. THERE IS NO ONE WHO
CAN ENDORSE THE DOCUMENT AND CAN THUS BE SAID TO BE NOT NEGOTIABLE.

It would seem in Equitable Banking Corp. v. IAC, 161 SCRA 518 (1988), the contravention of this rule
(such as when the check is payable to “Equitable Banking Corporation order of A/C of Cavilled
Enterprises, Inc.”) would not render the instrument non-negotiable but would merely place the burden
of ambiguity to the person who caused it under Art. 1377 of the Civil Code.
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 Subject to the rules in Sections 13, 14 and 15 on incomplete instruments, leaving the payee
blank may make the instrument non-negotiable. This is because an instrument payable to order
may be negotiated only by endorsement and delivery.

There are only two ways to make an instrument payable to order, as provided under Sec. “8”

“Pay to A or order.”

(Sgd.) “B”

“Pay to the order of A.”

(Sgd.) “B”

Under Section 9, a negotiable instrument is payable to bearer:

(a) When it is expressed to be so payable to bearer:

“Pay to bearer P500.”

(Sgd.) “B”
(b) When it is payable to a person named therein or bearer:

“Pay to A or bearer P500.”

(Sgd.) “B”
(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:

“Pay to John Doe or order P500.”

(Sgd.) “B”

The clause “and such fact is known to the person making it so payable,” does not require that it should
be the maker himself who is chargeable with the notice. Otherwise, “the whole provisions would be
ineffective in practically every case where the purpose of the person drawing the check was fraudulent.”
(Mueller & Martin v. Liberty Ins. Bank, 219 S.W. 465, 187 Ky 44 [1920]).

(d) When the name of the payee does not purport to be name of any person.

“Pay to cash or order P500.”

(Sgd.) “B”

There is no need to use “order” or equivalent word to qualify the instrument. A check payable to the
order of “cash” is payable to bearer and the bank may pay it to the person presenting it for payment
without the drawer’s endorsement. (Ang Tek Lian v. CA, 87 Phil. 383 [1950]).

(e) When the only or last endorsement is an endorsement in blank.

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“Pay to A or order P500.”

(Sgd.) “B”

(And the only or last endorsement

at the back is a blank.)

 Bearer means the person in possession of a bill or a note which is payable to bearer. (Sec. 191).
A person who steals an instrument payable to bearer is a “bearer.” (Mass. Nat. Bank v. Marshall,
25 Pac. 214).

- Words equivalent to “bearer” are: “Assignee,” “holder” (Wilson County v. Third Nat. Bank of
Nashville, 103 US 770); “Possessor”; “on return of this certificate properly endorsed” (Felton v.
Commercial Nat. Bank, 177 NE 52);“Order of the bearer” (American National Bank v. Kerley, 220
Pac 116, 32 ALR 262).

- Words unaccepted as equivalent to “bearer”: “To X or his collector”; “To X or his agent”; “To
bearer B.” (Weaver v. Scott, 32 Iowa 22)

 A bearer instrument may be negotiated by mere delivery. When a bearer instrument is not
delivered for purposes of negotiation but physically delivered merely as security for another
obligation, there is no negotiation in the sense of transfer of legal title to the instrument and
would constitute the subsequent holder merely as a holder for value and not a holder in due
course. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security,
in the event of non-payment of the principal obligation, must be contractually provided for. SEE:
Caltex (Phils.) v. Court of Appeals 212 SCRA 448 (1992)

G. IN BILLS OF EXCHANGE, DRAWEE MUST BE NAMED OR OTHERWISE INDICATED THEREIN WITH

REASONABLE CERTAINTY

 The purpose of this requirement is to enable the payee or the holder to know upon whom he
has to call for acceptance or payment.

Note however, that under Section 14, the omission of drawee may be filled in later on.

WHAT PROVISIONS IN A NEGOTIABLE INSTRUMENT DO NOT AFFECT NEGOTIABILITY

The general rule under Section 5 is that an instrument is rendered non negotiable if it contains a promise
or order to do anything in addition to the payment of money as what transpires is that while the promise
or order to pay money, the other thing would have to be assigned BUT BY WAY OF EXCEPTION, the
following provisions do not affect negotiability

a. Authorizes the sale of collateral securities in case the instrument be not paid at maturity. The
additional act is to be done after the date of maturity of the instrument and when it is no longer
negotiable.

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

Confession of judgment clauses are void as being against public policy to give a person his day in
court; however, such nullity does not affect the negotiability of the instrument. SEE: National Bank v.
Manila Oil Refining Co., 43 Phil. 444 [1922].

Where an agreement stipulates for the confession of judgment prior to any actual litigation the
stipulate is void for being contrary to public policy. However, if the creditor sues, the debtor can go to
court and only then confess judgment. This is valid if done by the debtor himself. SEE: In Traders
Insurance v. Dy Eng Biok, 104 Phil. 806 (1958)
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c. Waives the benefit of any law intended for advantage or protection of obligor. Examples: Waiver
of Notice of Dishonor under Section 110, Waiver of Protest under Section111, Presentment for
Payment under Section 70

d. Gives holder an election to require something to be done in lieu of payment of money.

BUT nothing in Section 5 shall be validate a provision or stipulation that is otherwise illegal.

The TEST: The test of negotiability is whether or not the promise would give rise to a cause of action for
breach of contract if the additional act is not done. If it does, the instrument is rendered non-negotiable.

WHAT OMISSIONS IN A NEGOTIABLE INSTRUMENT DO NOT AFFECT VALIDITY AND NEGOTIABILITY

The following omissions do not affect the validity and negotiability of an instrument
1. Non-dating of instrument.

2. Non-specification of value given, or that any value has been given.

3. Non-specification of place where it is drawn or place where it is payable.

4. Bears a seal.

5. Designation of particular kind of currency in which payment is to be made.

Under Sec. 52, a requisite for a holder in due course is that instrument is “complete and regular” on its
face. Section 6 therefore provides for certain omissions that do not destroy completeness or regularity,
as other portions of the law supplement these omissions. Thus:

“Pay to A or order P500.”

(Sgd.) “B”:

This instrument has omissions: (a) no date; (b) no place of payment; and (c) no statement of value
received.

Note Date: This is supplied by Sec. 17(c) which states that where instrument is not dated, it will be
considered dated as of time it was issued.

No Place of Payment: This is supplied by Sec. 73 which provides: Where no place of payment is
specified, but the address of person to make the payment is given in the instrument and it is there
presented;

Where no place of payment is specified and no address is given and instrument is presented at usual
place of business or residence of person to make payment;

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.

No Statement of Value Received: Supplied by Sec. 24 which provides that “every negotiable instrument
is deemed prima facie to have been issued for a valuable consideration and every person whose
signature appears thereon to have become a party for value.”

WHAT ARE THE RULES OF CONSTRUCTION COVERING NEGOTIABLE INSTRUMENTS

Under Section 17, the following rules of construction are provided:

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1. The sum expressed in words takes precedence over the sum expressed in numbers; except
where the words are ambiguous or uncertain, then reference to the figures should be made.

2. Where interest is stipulated, without specification of the starting date, the interest runs from the
date of the instrument, and if undated, from the issue thereof.

3. An undated instrument is considered to be dated as of time it is issued.

4. Written provisions prevail over printed provisions of instrument.

5. Where the instrument is ambiguous as to whether it is a note or a bill, the holder may treat it as
either at his election.

6. When the capacity of signatory is not clear, he is to be deemed an endorser. The signature of the
maker is usually affixed at the lower right hand corner while that of the drawee is at the lower left hand
corner, the holder negotiates by signing at the back thereof. If a doubt arises, he is deemed an endorser
and assumes the least liability.

7. “I promise to pay” when signed by two or more persons is deemed to be jointly and severally
signed, i.e., solidary liability.

“I promise to pay A or order P500.”

(Sgd.) “B”
(Sgd.) “C”

 Liability of B and C is solidary.

(a) BAR QUESTION: What is the liability of B and C?

“Promise to pay A P500.00.”

(Sgd.) “B & C”

ANSWER: Joint because the above instrument is not a negotiable instrument, thus the general rule
under civil law of joint liability applied in the absence of stipulation that liability should be solidary.

(b) If the instrument reads:

“I/We promise to pay A or order P500.00.”

(Sgd.) “B & C”

Held: B and C are liable solidarily since “I” dominates. SEE: PNB v. Concepcion Mining, 5 SCRA 745 (1962)

STEPS IN THE ISSUANCE OF A NEGOTIABLE INSTRUMENT

The steps in the issuance of a negotiable instrument are:

1. The act of writing the instrument completely and in accordance with Section 1 of the NIL.

2. The delivery of the complete instrument by the maker or the drawer to the payee or holder with
the intention of giving effect to it
 14

FORM, INTERPRETATION AND ISSUANCE OF NEGOTIABLE INSTRUMENTS

A. PRESUMPTION AS TO DATE:

 Importance of Date of Instrument: Determining when instrument, endorsement or acceptance is

due (maturity); and Determining prescription of a cause of action.

 Date is not an essential element for negotiability.

 An undated instrument is considered to be dated as of the time it was issued under Section 17.

 Where an instrument or acceptance or endorsement thereon is dated, such date is deemed

prima facie to be the true date of the making, drawing, acceptance, or endorsement, as the case
may be under Section 11, to be read with Sections 53 and 71.

This is important especially in an instrument that is payable on demand (Section 71), in order to
determine whether holder is a holder in due course since one of the requisites of such is that he became
holder thereof before it was overdue. (See Section 53).

 The instrument is not invalid for the reason only that it is ante- dated or post-dated, provided
this is not done for illegal or fraudulent purpose. The person to whom instrument so dated is
delivered acquires the title thereto as of the date of delivery under Section 12.

Ante-dating is when the instrument contains a date earlier than the true date of issuance, while post-
dating is when the instrument contains a date later than the true date of issuance.

 WHEN HOLDER IS AUTHORIZED TO PUT A DATE ON THE INSTRUMENT- under Section 13, where
an instrument expressed to be payable at a fixed period after date is issued undated, or where
the acceptance of an instrument payable at a fixed period after sight is undated, any holder may
insert therein the true date of issue or acceptance, and the instrument shall be payable
accordingly.

Illustrations:

(a) When instrument is expressed to be payable at a fixed period after date, but it is issued undated:

“10 days after date pay A or order P500.”

(Sgd.) “B”
The holder of such an instrument is authorized to insert the correct date. But if the holder inserts the
wrong date, the maker shall be liable on wrong date as penalty for his neglect in leaving the instrument
undated.

(b) Where acceptance of instrument payable at a fixed period after sight is undated:

“10 days after sight, pay A or order P500.”

(Sgd.) “B”

“To: C”
“Accepted
(Sgd. “C”)
Holder is authorized to insert the proper date of acceptance. But if he inserts wrong date, acceptor shall
be liable on this wrong date as a penalty for his neglect in leaving his acceptance undated.

DOES NOT APPLY TO an instrument payable on demand, although undated, for its maturity is already
fixed NEITHER to an undated bill of exchange payable at a fixed period after sight (Example: 30 days after
sight) BUT if it is the acceptance that is undated, the insertion is necessary because the period is to be
counted from sight not date of issue.
 15

The RATIONALE for the rule is that if the true date is not allowed to be inserted, one will not know when
the instrument will be due.

ALSO, the insertion of the 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. The insertion
of wrong date avoids the instrument as to person making such insertion. (Bank of Houston v. Day, 145
Mo. Appl. 410, 122 SW 756). The reason being that the one who signs such instrument furnishes the
means of fraud and is thus estopped to deny liability thereon.

B. CONCEPT OF DELIVERY:

Before a discussion of Sections 14, 15, and 16, the concept of delivery must be understood
because the making, drawing, accepting, and indorsing of an instrument has for one of its
common elements THE DELIVERY OF THE INSTRUMENT FOR THE PURPOSE OF NEGOTIATION,
and the other is, VALUABLE CONSIDERATION.

LIKE SO:
Making – B prepares a promissory note, he assumed the liability of maker. When will B’s liability
as maker arise? B is not liable unless he receives valuable consideration and before B can be liable as
maker, he must sign the instrument and deliver it to A for negotiation. If the instrument is not delivered,
he is not liable.

Drawing – When is B liable as drawer? B must sign the instrument, receive valuable
consideration and deliver the instrument to A for the purpose of negotiation.

Acceptance – C, before he signs, is a mere drawee, and has no liability because his signature
does not appear on the instrument. He must sign in order to be liable, and his status is then changed
from a mere drawee to an acceptor. C is not liable as an acceptor unless he receives valuable
consideration, signs the instrument and delivers it to the holder for the purpose of negotiation.

Indorsement – The position of the indorser is – similar with that of a guarantor. A, as indorser,
must receive valuable consideration, sign and deliver the instrument, for the purpose of negotiation
before he can be made liable.

“Delivery” means transfer of possession of instrument by the maker or drawer, with

intent to transfer title to the payee and recognize him as holder thereof. Therefore, where checks
have not yet been delivered to payee, they do not belong to him and cannot be the subject of
garnishment by payee’s creditors. SEE: De la Victoria v. Burgos 62 SCAD 112, 245 SCRA 374
(1995)

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

“Issue” is the first delivery of the instrument complete in form, to a person who takes it
as a holder. (Sec. 191).

“Delivery” is the transfer of possession, actual or constructive, from one person to

another (Sec. 191), e.g., mailing the note with proper address, etc.

Where instrument is no longer in possession of a party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is proved under Section 16. However, in the
hands of holder in due course, a valid delivery thereof by all prior parties is conclusively presumed.

 As between immediate parties, and as regards a remote party other than a holder in due
course, the delivery, in order to be effectual, must be made either by or under the authority of
party making, drawing, accepting, or indorsing, as the case may be. In such cases, delivery may
be shown to have been conditional, or for a special purpose only, and not for purpose of
transfer.
 16

“Immediate parties” are those who are immediate in the sense of knowing or being held to know the
conditions or limitations placed upon delivery of instrument. (Liberty Trust Co. v. Tilton, 105 NE 605). It
means privity, no proximity. (Howard Nat. Bank v. Wilson, 120 Atl. 889).

5. For a holder in due course, a valid delivery thereof by all parties prior to him so as to make them
liable to him is conclusively presumed. (Sec. 16).

Illustrations:

“Pay to A or order P500.” [At the back]

(Sgd.) “B” (1) “Pay to X.”

(Sgd.) “A” (4)

“Pay to A or order P500.

“To C: “B” (2)

“Accepted

(Sgd.) “C” (3)

Under Sec. 14, an incomplete instrument is delivered but the amount thereof is left in blank.
Thus:
“Pay to A or order P_______.”

(Sgd.) “B”

If the above instrument has been delivered by B to A for the purpose of negotiation, then A or
any subsequent holder has the authority to insert any amount. On the other hand, should no such
delivery have taken place, such an authority to fill the blank does not exist. Nevertheless, if after the
amount is filled (whether with or without authorization), is negotiated to a holder in due course, it is
valid and effectual for all purposes in his hands, and he may enforce it as if it had been filed up strictly in
accordance with the authority given and within a reasonable time. Thus, Sec. 14 gives only a personal,
not real defense.

Under Sec. 15, if an incomplete instrument is not delivered (for the purpose of negotiation), it
will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder
(even in the hands of a holder in due course), as against any person whose signature was placed thereon
before delivery. Thus, Sec. 15 gives a real defense.

Section 16 provides that once instrument (which is complete) is in the hands of holder in due
course, delivery is conclusively presumed.

CATEGORIZING HOLDERS

HOLDER- under Section 191, he is the PAYEE or INDORSEE of a bill or note, who is in possession of it, or
the BEARER thereof. Under Section 51, the rights of a holder are to sue on the instrument in his name,
and receive payment, and if payment is in due course (Under Section 88 when made at or after maturity
of the instrument to the holder thereof in good faith and without notice that title is defective. NOTE the
TIME OF PAYMENT and that the maker or acceptor be in GOOD FAITH) discharges the instrument.
Example: Pledgee of an instrument.

HOLDER FOR VALUE- under Section 26, he is one who has given a valuable consideration for the
instrument issued or negotiated to him. He is such not only as regards the party to whom value has been
given but also in respect to all those who became parties prior to the time when value is given. Example:
If the maker issues a note to the payee without consideration, it is subsequently endorsed by the payee
to another without consideration, and is subsequently indorsed with consideration, the last endorsee is
 17

deemed to be a holder for value not only as to his indorser, but all other parties subsequent to the
indorsement.

EFFECT IS: If the holder for value is also a holder in due course, he may enforce payment on the
instrument against all parties. IF NOT, prior parties can set up the defense of absence of consideration.

HOLDER IN DUE COURSE- Under Section 52, he is one who has taken the instrument under the following
conditions:

a. That it is complete and regular on its face. Complete means that the instrument is not wanting in
any material particular, while Regular means that there is no visible or apparent alteration on the
face of the instrument

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. Before it is overdue means before maturity.

c. That he took it in good faith and for value. Good faith means that he has no knowledge of the
facts which render it dishonest for him to take the negotiable paper BUT the knowledge required
is not that necessary to show exact truth but such that tends to show that there was something
wrong with the transaction.

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. The title of the person negotiating it is defective
when he obtains (OR ACQUIRES) the instrument or any signature thereto by FRAUD, DURESS,
OR FORCE OR FEAR OR OTHER UNLAWFUL MEANS, OR FOR AN ILLEGAL CONSIDERATION- OR-
when he NEGOTIATES the instrument in BREACH OF FAITH (Example: negotiation after he has
been paid) or CIRCUMSTANCES AMOUNTING TO FRAUD (Example: negotiation with knowledge
that it will not be paid)

Under Section 53- A PERSON WHO IS THE HOLDER OF AN INSTRUMENT PAYABLE ON DEMAND WHO
NEGOTIATES IT AFTER AN UNREASONABLE LENGTH OF TIME IS NOT DEEMED A HOLDER IN DUE COURSE.
What is reasonable time is determined with regard to the nature of the instrument, usage of trade or the
business, and the facts of each particular case under Section 193.

Under Section 59, there is a prima facie presumption that every holder is a holder in due course BUT the
burden of proof shifts when it is shown that the title of the person negotiating the instrument is
defective BUT it does not apply to a party who became bound on the instrument prior to the acquisition
of defective title.

PARTIES MAY BE IMMEDIATE, REMOTE OR PRIOR

Parties are immediate when they are in direct contractual relationship with each other, they are remote
if they are not in direct contractual relation to each other, and they are prior parties if they became such
prior to a subsequent party.

AVAILABLE DEFENSES WHICH MAY BE INTERPOSED TO AN ACTION UPON A NEGOTIABLE INSTRUMENT

There are two basic kinds of defenses that may be interposed, they are:

REAL DEFENSES- they are those available against all parties, both immediate and remote, including
holders in due course. They are such because they attach to the instrument itself.
Examples of real defenses:

a. Incapacity as far as the incapacitated person is concerned (see Art. 1327, ibid.);
b. Illegality of contract when declared by law (see Art. 1409, ibid.); except where the maker or
drawer is himself a party to the illegality; thus, a note for a gambling debt (an illegal
consideration) is a mere personal defense (see Sec. 55);
c. Want of delivery of incomplete instrument (Sec. 15);
d. Forgery (Sec. 23);
e. Want of authority, apparent and real (ibid.);
f. Duress amounting to forgery as where one takes the hands of another and forces him to sign his
name (Espy v. Bank, 18 Wall. 604; First Nat. Bank v. Northwestern Bank, 28 N.E. 729);
g. Fraud in factum or fraud in esse contractus (Sec. 14);
 18

h. Fraudulent alteration b holder (Secs. 124, 1 st sentence; 125.);

i. Prescription (see Arts. 1140-1142, 1144-1147, Civil Code.);
j. Other infirmities appearing on the face of the instrument (Sec. 52.); and
k. Discharge at or after maturity. (Secs. 88, 118, 121, 122.)

PERSONAL DEFENSES - are those which grow out of the agreement or conduct of a particular person in
regard to the instrument which renders it inequitable for him, though holding the legal title, to enforce it
against the party sought to be made liable but which are not available against a holder in due course.
(see Sec. 55). They are called “personal defenses” because they are available only against that person or
subsequent holder who stands in privity with him. (Ogden, op.cit., p. 309). In other words, they can
used only between original parties or immediate parties or against one who is not a holder in due
course.

Examples of personal defenses:

a. Filling of wrong date (Sec. 13);

b. Filling up of blanks not in accordance with the authority given and within reasonable time (Sec.
28);
c. Want of delivery of complete instrument (Sec. 16);
d. Absence or failure of consideration (Sec. 28);
e. Simple fraud or fraud in inducement (Sec. 55);
f. Acquisition of instrument (not signature) by duress, or force and fear (ibid);
g. Acquisition of instrument by unlawful means (ibid);
h. Acquisition of instrument for an illegal consideration (ibid);
i. Negotiation of breach of faith (ibid);
j. Negotiation under circumstances that amounts to fraud (ibid);
k. Innocent alteration or spoliation. (see Secs. 124 [last sentence], 125). Spoliation is an alteration
made by a stranger to an instrument. If the original meaning can be ascertained, the holder in
due course may recover according to its original tenor;
l. Set-off between immediate parties (see Sec. 58);
m. Discharge by payment or renunciation or release before maturity (Secs. 50, 121, 122);
n. Discharge of party secondarily liable by discharge of prior party (Sec. 20[c]);
o. Usury – because the contract of loan itself is not void but only the agreed interest (see Sec. 7,
Usury Law; Art. 1413, Civil Code; and
p. Want of authority but agent has apparent authority. (see Art. 1869, ibid)

NEGOTIABLE INSTRUMENT THAT IS INCOMPLETE WHICH HAS BEEN DELIVERED

Section 14 applies to an incomplete instrument which has been delivered by the maker or drawer to the
payee or the holder, the rules related thereto are:

1. Where the instrument is lacking in any material particular, person in possession thereof
has prima facie authority to complete it by filling-up the blanks therein. A MATERIAL PARTICULAR is any
particular proper to be inserted in a negotiable instrument to make it complete, like blanks for date, due
date, name of the payee, amount, or rate of interest

2. The signature on a blank paper delivered by person making the signature in order that
paper may be converted into a negotiable instrument operates as prima facie authority to fill it up as
such for any amount. It MUST BE SHOWN that the purpose of delivery was to convert the said blank
paper into a negotiable instrument. If such purpose is absent, the person whose signature appears
thereon will not be liable, even to a holder in due course.

3. In order that any such instrument when completed may be enforced against any person
who became a party thereto prior to its completion, it must be:
a. filled-up strictly in accordance with the authority given; and
b. Within a reasonable time
- IN THIS CASE, ONE MUST DISTINGUSH BETWEEN ONE WHO IS NOT A HOLDER IN DUE COURSE
AND ONE WHO IS A HOLDER IN DUE COURSE.
 19

Note that if not a holder in due course, there can be enforcement only if both (a) and (b) are
present. If a holder in due course, the defense that it was filled contrary to the authorization is
not available. It is thus only a PERSONAL DEFENSE.

NOTE: In all the above cases, there is an intention to issue a negotiable instrument . But if a signature on
a paper is given only for autograph purposes and the same is converted into a negotiable instrument,
this will amount to forgery, constituting thus a valid defense even against a holder in due course.

Whether or not the instrument is filled up in accordance with the authority given, remember that
endorsers are liable on their warranties.

INCOMPLETE INSTRUMENT NOT DELIVERED

Section 15 applies to an instrument that is incomplete and undelivered.

1. Where an incomplete instrument has not been delivered, it will not, if completed and
negotiated, without authority, be a valid contract in the hands of any holder, as against any person
whose signature was placed thereon before delivery.

2. With regards parties whose signature appeared prior to delivery, the non-delivery of an
incomplete instrument is a valid defense, not only between the original parties but also against a holder
in due course. It is therefore a real defense, available even against a holder in due course.

3. With regards parties whose signature appeared after delivery, the instrument is valid and
enforceable.

Example:

A makes a note, with the name of the payee in blank. X steals the note and inserts his name as payee. He
then indorses it to Y, then Y to Z, who is a holder in due course. Z cannot enforce the note as it is not a
valid contract in the hands of any holder.

Considering that A’s signature was placed thereon before delivery, he does not assume any responsibility
whatsoever. Such is a REAL DEFENSE- ALTHOUGH A must rebut the prima facie presumption of delivery
by proof to the contrary.

X is liable as an indorser and as the party responsible for the theft, completion and negotiation of the
instrument.

Y is also liable as an indorser as his signature appears on the instrument after delivery.

4. The maker or drawer may however be estopped from claiming the above defense if there should
be negligence on his part.

5. It was ruled that while drawer of a check owed a duty to the bank on which the check was drawn
to guard against the escape of a check signed in blank which had been stolen, he owed no such duty to
the purchaser of the check and therefore, the drawer cannot be held liable to such purchaser provided
that the incomplete instrument was not yet delivered. (Linicks v. Nuttwig & Co., 140 App. Div. 265).

MECHANICALLY COMPLETE BUT UNDELIVERED (Sec. 16):

Section 16 applies to an instrument that is mechanically complete but is not delivered:

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

2. As between immediate parties, and as regards a remote party other than a holder in due course,
the delivery in order to be effectual, must be made either by or under the authority of the party making,
drawing, accepting or indorsing, as the case may be. (The term “immediate parties” refers to persons
who know or are presumed to know the conditions or limitations placed upon the delivery of the
instrument, excluding a holder in due course.)
 20

3. The delivery may be shown to have been conditional, or for a special purpose only, and not for
the purpose of transferring the property (title) in the instrument.

4. Where instrument is in the hands of holder in due course, a valid delivery thereof by all parties
prior to him so as to make them liable to him is conclusively presumed.

5. Where the instrument is no longer in possession of the party whose signature appears thereon,
a valid and intentional delivery by him is presumed until the contrary is proved.

NOTE: Delivery of an instrument need not be actual; it may be constructive. Thus, is has been held that
depositing a note by mail with intent to transmit it to payee in the usual way is a delivery in
contemplation of law.

Example:

Maker/Drawer makes/draws a note or a bill, payable to the order of the payee. It is complete in all
respects.

If there is no delivery, there is no contract. No liability is incurred, the payee does not acquire any right

If the note/bill is stolen by the payee, who endorses it to A, who in turn endorses it to B, who in turn
endorses it to C.

If C is aware of the theft, as against him and the payee, the maker/drawer may prove that there was no
delivery or that delivery was not authorized as they are immediate parties against whom a claim that
delivery to be effectual must be made either by or under the authority of the person making, drawing, or
indorsing as the case may be

If the note/bill was delivered or authorized, it may be shown to have been conditional, or for a special
purpose AND NOT for transferring title.

If the maker/drawer delivers to the payee, under a condition that it is for safekeeping only. The payee
cannot enforce the note. THIS DOES NOT APPLY TO ONE WHO IS NOT AN IMMEDIATE PARTY, like an
indorsee, who may now enforce the note/bill as against the maker/drawer. The same is true, if the
maker/drawer delivers the note/bill to an agent, who in turn does not inform the payee of the condition.

If the note/bill is in the hands of a holder in due course, the maker/drawer cannot prove the theft or
delivery under a condition, as there is a conclusive presumption of delivery. NOTE: THE PHRASE- until
delivery of the instrument for the purpose of giving effect thereto WOULD TEND TO EXCUSE THE
MAKER/DRAWER IF THERE WAS NO ACTUAL DELIVERY FOR ANY PURPOSE OF THE INSTRUMENT AND
ABSENT ANY FAULT OR NEGLIGENCE, EQUITY DICTATES THAT HE NOT BE HELD LIABLE.

As far as signatures, if the instrument is no longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery is presumed until the contrary is proven.

6. Where the debtor who drew two checks payable to his creditor but never delivered them, but
that a third-party was able to collect the proceeds of the checks by forging the endorsement of the
creditor-payee, the creditor did not gain standing against any person to recover on the checks since he
acquired no interest over them by reason of delivery. SEE: Development Bank of Rizal v. Sim Wei, 219
SCRA 736 (1993)

SIGNATURES AND FORGERY

The rules to determine liability as far as signatories and in cases of forgery are as follows:

1. The GENERAL RULE: Under Section 18, no person is liable upon an instrument whose
signature does not appear thereon.
 21

The EXCEPTIONS ARE:

a. Trade Name – One who signs using a trade or assumed name will be liable to the extent as if he
had signed in his own name under Section 18

b. Rules on Signature of Agent – Signature of any party may be made by a duly authorized agent.
No special form of agency is required under Section 19. The rule is if the instrument contains or a person
adds to his signature that he signs for or in behalf of a principal, or in a representative capacity, HE IS
NOT LIABLE IF HE WAS DULY AUTHORIZED BUT THE MERE ADDITION OF SUCH WORDS OR INDICATION
OF SUCH DOES NOT EXEMPT HIM FROM PERSONAL LIABILITY IF THE PRINCIPAL IS NOT DISCLOSED. Note:
That a signature by “procuration” (e.g., “Juan de la Cruz, per procuration: Pedro de la Cruz”) operates as
notice that the agent has but limited authority to sign, and principal is bound only in case agent in so
signing acted within the actual limits of his authority under Section 21.

“B” by “X” – Principal is disclosed. So long as agent X signed within the scope of his authority, he is not
personally liable on the instrument.

“by X” – Agent X signs for an undisclosed principal, the agent becomes personally liable but he can evade
his personal liability by disclosing his principal and so long as he signed within the scope of his authority.
If X does not disclose his principal, he is personally liable.

“B pp X” – Agent signs by procuration. This is notice to the whole world that the agent is signing with
very limited authority.

c. Under Section 134 – Acceptance of a bill of exchange on a separate piece of paper.

d. Under Section 135 – Unconditional promise in advance to accept a bill of exchange before it is
drawn; the promise must be in writing.

NOTE; Under Section 22, an indorsement or assignment of instrument by corporation or by infant passes
the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no
liability thereon.

The contract of endorsement of an infant is not void, and that his endorse has the right to enforce
payment from all parties prior to the infant endorser; the incapacity of the infant cannot be availed of by
prior parties. (Murray v. Thompson, LRA 1917B 1172, 188 SW 578). However, it does not destroy the
right of such an infant endorser to disaffirm under rules of infancy. (Ibid.)

In both instances, endorsements are voidable – valid until annulled – so that they pass good title.
Therefore, parties prior to minor or corporation cannot escape liability by setting up as defense the
incapacity of one of endorsers.

Before a discussion of the rules, it is best to classify the kinds of forgeries that can take place, they are:

1. IN A PROMISSORY NOTE: forgery of the maker’s signature and forgery of an indorsement.

2. IN A BILL OF EXCHANGE: forgery of the drawer’s signature, either with acceptance by the drawee
or without acceptance but is paid by the drawee and forgery of an indorsement in the bill

THE EFFECTS ARE:

1. The instrument is not declared totally void nor are the genuine signatures thereon rendered
inoperative. IT IS ONLY THE FORGED SIGNATURE THAT IS DECLARED INOPERATIVE. Hence: rights still exist
and may be enforced by virtue of the instrument as between parties whose signatures were not forged.

2. A forged instrument just prevents any subsequent party from acquiring any rights as against any
party whose name appears prior to the forgery. Rights will exist and may be enforced as between
subsequent parties BUT no one can acquire a right as against parties prior to the forgery, who also have
rights and may enforce them as against each other.

Example:
 22

M makes a note payable to the order of P. P indorses it to A. X Obtains possession of the note
fraudulently and indorses it to B, by forging A’s signature. B indorses to C. Thus, the indorsements are as
follows:

Pay to A

(Sgd.) P

Pay to B
(Sgd.) A (forged by X)

Pay to C
(Sgd.) B

a. C cannot enforce the instrument against M and P because C’s right against them are cut off by
the forged signature of A which is wholly inoperative. C could acquire rights against M or P to the
instrument only through the forged signature of A.

b. Neither can C enforce the note against A because A’s signature is wholly inoperative . A has no
privity with C. Under Section 23, C acquired no right to retain, discharge, or enforce payment of the note
under the forged signature of A.

c. But C may go against B whose signature is genuine and, therefore, operative. B is a general
indorser who wanted to C that the instrument is genuine and was valid and subsisting at the time of B’s
indorsement. (See Sec. 65 and 66.)

d. Of course, B or C has a right of recourse against X, the forger;

e. A can recover from M and P because his rights against them were not affected by the forgery.
The signatures of M and P are genuine and they are liable to A on their contract.

3. The rights of the parties in cases of forged indorsements are:

a. Where note payable to order. – The party whose indorsement is forged is not liable to any
holder even a holder in due course. The indorsement being forged, it is inoperative.

The other parties, including the maker, prior to the party whose signature is forged are not also liable to
any holder. The instrument being payable to order, it can be negotiated only by indorsement completed
by delivery. But since the indorsement is forged, it is inoperative and, therefore, it cannot operate to
transfer any right or title over the instrument.

Holder did not acquire any rights to retain the note, give discharge therefore, or enforce
payment as against party whose signature is forged and parties prior to him, including
maker.

Any transferee of forger merely acquires whatever rights he had against prior parties, hence, transferee
likewise acquires no rights against prior parties

b. Where note payable to bearer. – Where the note, mechanically complete, is originally 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. The other parties, including the maker, prior to the party whose signature
is forged, may also be held liable by one who is not a holder in due course.

The reason is that the instrument being originally payable to bearer, it can be negotiated by mere
delivery. (Section 30.). In other words, indorsement is not necessary to the title of the holder. Hence,
even if the indorsement is forged, the forgery may be disregarded. The forged indorsement does not
prevent the transfer of title since the holder may just strike out the forged indorsement. (Sec. 48). The
 23

only defense available is want of delivery but this defense can be raised only against a holder not in due
course. (Sec. 16).

c. Where bill payable to order. – Where the bill is payable to order, the party whose indorsement is
forged, is not liable to any holder even a holder in due course. The forged indorsement is wholly
inoperative.

Where the signature of the payee was forged, the collecting bank is liable to the payee and must bear
the loss because it is its legal duty to ascertain that the payee’s endorsement was genuine before cashing
the check.

If the drawee pays under a forged indorsement, the drawer is not liable on the bill and the drawee may
not debit the drawer’s account. If it does, it shall have to recredit the amount of the check to the
account of the drawer. A bank is bound to know the signature of its customers (drawers), and if it pays a
forged check it must be considered as making the payment out of its own funds and cannot ordinarily
charge the amount so paid to the account of the depositor (see Sec. 189).

Where, however, the checks are received merely for collection and deposit, the bank, as agent, cannot
be expected to know or ascertain the genuineness of al prior indorsements. (Jai-Alai Corp vs. Bank of P.I.,
66 SCRA 29 [1975].) But by stamping on checks accepted by it for deposit its guarantee that “all prior
endorsements and/or lack of endorsements guaranteed, a collecting/presenting bank thereby makes the
assurance that it has ascertained the genuineness of all prior indorsements. (Associated Bank vs. Court
of Appeals, supra.) So even if the indorsement on the check deposited by the collecting bank’s client is
forged, the collecting bank is bound by its warranties as an indorser and cannot set up the defense of
forgery as against the drawee-bank. (Associated Bank vs. Court of Appeals, supra.)

Apropos, the matter of forgery in indorsements, the collecting bank, or last indorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the
act of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the indorsements. (See Philippine
National Bank vs National City Bank, 63 Phil. 711 [1936]

Where the drawer of a check delivers it to an impostor mistakenly believing him to be the payee named
in the check, the indorsement of the check by the impostor is not a forgery, and the drawer is liable to a
bona fide holder or any subsequent indorser who may be compelled to pay it. (Burrows vs. Wester Union
Tel. Co., 86 Minn. 499, 90 N.W. 1111; see Sec. 61)

d. Where bill payable to bearer. – In case the bill is originally payable to bearer, the drawee may
debit the drawer’s account in spite of the forged indorsement. The reason is that the forged
indorsement is not necessary to the title of the holder. The drawee cannot recover from the holder.

e. The endorser is liable on the instrument although the signature of the payee is forged because
the endorser by his endorsement guaranteed that the instrument is genuine, therefore, impliedly, that
the instrument is valid, otherwise, there would be nothing for the endorser to guarantee. SEE: Republic
Bank v. Ebrada 65 SCRA 680 (1975)

5. The exceptions to the rule are:

a. Is when a party is precluded from setting up forgery as a defense under Section 23. The parties
precluded from setting up the defense of forgery are:

1. Those who by their acts, silence or negligence, are ESTOPPED from setting up the
defense of forgery.
2. Those who warrant or admit the genuineness of the signature in question (i.e.,
endorsers, persons negotiating by delivery, and acceptors of bills of exchange);

b. When forged signature is unnecessary to the title of the holder as when the endorsement is
forged on an instrument payable to bearer.

Facts: Two (2) of the Company’s Citibank checks were prepared made payable to the Commissioner of
Internal Revenue (CIR), which were both crossed checks. The checks were turned around by the
 24

Company’s confidential employees and were forged to facilitate deposit with PCI Bank in exchange for
PCI Bank manager’s checks, in collusion with an organized syndicate. PCI Bank now wants to hold
Company liable for the forged checks, the act of fraud being facilitated by its confidential employees.

Held: Although the employees of Company initiated the transactions attributable to an organized
syndicate, their actions were not the proximate cause of encashing the checks payable to the CIR. The
degree of Company’s negligence, if any, could not be characterized as the proximate cause of injury to
the parties. The Company’s Board of Directors did not confirm the request to recall forged Citibank
Checks No. SN-04867, and the instruction to replace the said checks with PCI Bank’s manager’s check
was not in the ordinary course of business which could have prompted PCI Bank to validate the same.
Given these circumstances, the mere fact that was committed by the drawer-payor’s confidential
employee, who by virtue of his position has unusual facilities for perpetrating the fraud and imposing the
forged paper upon the bank, does not entitle PCI Bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer. This rule likewise applied to checks
fraudulently negotiated or diverted by confidential employees who hold them in their possession. PCI
Bank v. Court of Appeals 350 SCRA 446 (2001)

6. Section 23 on forgery only covers forged signature, or signature made without the
authority of the person whose signature it purports to be. Forgeries that consist of other alterations are
covered by Sec. 124.

(c) Effects of Forgery under Sec. 23 of NIL

Associated Bank v. Court of Appeals

67 SCAD 487, 252 SCRA 620 (1996)

Checks having forged indorsements should be differentiated

from forged checks or checks bearing the forged signature of the drawer.
Under Sec. 23 of NIL, a forged signature, whether it be that of the
drawer or the payee, is wholly inoperative and no one can gain title to
the instrument through it. A person whose signature was forged was
never a party and never consented to the contract which allegedly gave
rise to such instrument. Section 23 does not avoid the instrument but
only the forged signature. Therefore, a forged indorsement does not
operate as the payee’s endorsement.

The exception to the general rule in Sec. 23 is where “a party

against whom it is sought to enforce a right is precluded from setting up
the forgery or want of authority.” Parties who warrant or admit the
genuineness of the signature in question and those, who by their acts,
silence or negligence are estopped from setting up the defense of
forgery, are precluded from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors of the genuineness
of the signature on the instrument.

In bearer instruments, signature of payee or holder is

unnecessary to pass the title to the instrument; hence, when the
indorsement is a forgery, only the person whose signature is forged can
raise the defense of forgery against a holder in due course.

PNB v. Court of Appeals

25 SCRA 693 (1968)

When in a check the signature of the drawer is forged, as

between the drawee and collecting bank, the drawee bank shall sustain
the loss, since the collecting bank does not guarantee the signature of
the drawer, and in fact the payment of the check by the drawee bank
 25

constitutes the proximate negligence since it was the primary duty of

the drawee bank to know the signature of its client-drawer.

Manila Lighter Transportation, Inc. v. CA

182 SCRA 251 (1990)

A collecting bank is not guilty of negligence over a forged

indorsement on checks for it has no way of ascertaining the authority of
the endorsement and when it caused the checks to pass through the
clearing house before allowing withdrawal of the proceeds thereof.

Republic Bank v. Court of Appeals

196 SCRA 100 (1991)

When drawee bank therefore fails to return a forged or altered

check to collecting bank within the 24-hour clearing period, collecting
bank is absolved from liability.

Associated Bank v. Court of Appeals

67 SCAD 487, 252 SCRA 620 (1996)

In cases involving a forged check, where drawer’s signature is

forged, drawer can recover from the drawee bank. No drawee bank has
a right to pay a forged check. If it does, it shall have to recredit the
amount of check to the account of drawer. The liability chain ends with
drawee bank whose responsibility it is to know the drawer’s signature
since the latter is its customer.

NOTE: It must be remembered that the foregoing rules are qualified by

the rules precluding the setting up of the defense of forgery by warranty,
as in the case of parties negotiating an instrument subsequent to
forgery, or by estoppel, as in the case of negligence. Parties negotiating
by endorsement and delivery, or by mere delivery subsequent to the
forgery are precluded from setting up the defense of forgery and may be
held liable under their warranties stated under Secs. 65 and 66.

(b) Forgery of Indorsement:

(1) Drawer’s account cannot be charged by drawee, and if

charged, drawer can recover from the drawee bank. (Galino v.
PNB, [CA] 51 OG 410).

(2) Drawer has no cause of action against collecting bank, since

the duty of collecting bank is only to payee. Also, drawer suffers
no damage since drawer can recover amount paid from drawee
bank, which has no right to charged drawer’s account.

(3) Even with sending of bank statement by drawee bank to

drawer, the latter is not estopped since it would be a case where
the drawer’s own signature was forged in one of its checks and
therefore the receipt of the statement would be an appraisal of
the forgery.

(4) Drawee bank can recover from the collecting bank. (Great
Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678
[1922]).

(5) Payee can recover from drawer as he still retained his claim
of debt against drawer.

(6) Payee can also recover from recipient of payment, such as

collecting bank.
 26

(7) Collecting bank is liable to payee. The possession of check on

forged or unauthorized indorsement is wrongful and when the
money had been collected on the check, the bank or other
person or corporation can be held as for moneys had or
received, and proceeds are held for the rightful owners of
payment and may be recovered by them.

(8) Payee cannot collect from drawee bank, unless the latter
shall accept or certify the check, without such specification or
acceptance there is no privity of contract between the drawee
bank and the payee.

(9) Collecting bank bears the loss but can recover from person to
whom it has paid check.

Gempesaw v. Court of Appeals

218 SCRA 682 (1993)

Although as a rule a drawee-bank which has paid a check on

which an indorsement has been forged cannot charge drawer’s account
for the amount of said check, an exception to such rule applies where
drawer was guilty of such negligence which causes the bank to honor
such a check, as when the drawer negligently or fails either to discover
or to report promptly the fact of such forgery to the drawee-bank.

(c) Delineating Liability for Forged Indorsements on Checks

Payable to Order:

Associated Bank v. Court of Appeals, 252 SCRA 620 (1996), laid

down the following rules delineating the consequences, rights and
liabilities of parties in case of forged indorsements on checks payable to
order, thus:

(1) When instrument is payable to order at the time of forgery,

the signature of its rightful holder is essential to transfer title to
the same instrument. When holder’s indorsement is forged, all
parties prior to the forgery may raise the real defense of forgery
against all parties subsequent thereto.

(2) An indorser of an order instrument warrant “that the

instrument is genuine and in all respects what it purports to be;
that he has a good title to it; that all prior parties had capacity to
contract; and that the instrument is at the time of his
endorsement valid and subsisting. He cannot interpose the
defense that signatures prior to him are forged.

(3) The collecting bank where a check is deposited and which

endorses the check upon presentment with drawee bank, is
such an indorser. So even if the indorsement on the check
deposited by the bank’s client is forged, collecting bank is bound
by its warranties as an indorser and cannot set up defense of
forgery as against drawee bank.

(4) The bank on which a check is drawn (drawee bank) is under

strict liability to pay the check to the order of the payee. The
drawer’s instructions are reflected on the face and by the terms
of the check. Payment under a forged endorsement is not to the
drawer’s order. When drawee bank pays a person other than the
payee, it does not comply with the terms of the check and
violates its duty to charge its customer’s (drawer) account only
for properly payable items. Since drawee bank did not pay a
 27

holder or other person entitled to receive payment, it had no

right to reimbursement from the drawer. The general rule then
is that the drawee bank may not debit the drawer’s accound and
is not entitled to indemnification from drawer. The risk of loss
must perforce fall on drawee bank.

(5) However, if drawee bank can prove a failure by

customer/drawer to exercise ordinary care that substantially
contributed to the making of forged signature, drawer is
precluded from asserting forgery.

(6) If at the same time drawee bank was also negligent to the
point of substantially contributing to the loss, then such loss
from the forgery can be apportioned between the negligent
drawer and the negligent bank.

(7) The chain of liability does not end with drawee bank. The
drawee bank may not debit the account of drawer but may
generally pass liability back through the collection chain to the
party who took from forger and, of course, to forger himself, if
available. In order words, drawee bank can seek reimbursement
or a return of the amount it paid from the presentor bank or
person.

(8) Theoretically, presentor bank or person can demand

reimbursement from the person who endorsed the check to it
and so on. The loss falls on the party who took the check from
the forger, or on the forger himself.

Since a forged indorsement is inoperative, the collecting bank had no right to be

paid by the drawee bank. The former must necessarily return the money paid by the
latter because it was paid wrongfully.

More importantly, by reason of the statutory warranty of a general indorser in

Sec. 66 of NIL, a collecting bank which indorses a check bearing a forged endorsement
and presents it to the drawee bank guarantees all prior indorsements, including the
forged indorsement. It warrants that the instrument is genuine, and that it is valid and
subsisting at the time of his indorsement. Because endorsement is a forgery, collecting
bank commits a breach of this warranty and will be accountable to drawee bank. This
liability scheme operates without regard to fault on the part of collecting/presenting
bank. Even if the latter bank was not negligent, it would still be liable to drawee band
because of its endorsement.

7. NEGLIGENCE DISCUSSED:

(a) The depositor’s negligence or conduct which would stop him must
be the proximate cause of the payment by depository upon forged
indorsement.

(b) A depositor (drawer) is generally under a duty to his depository

(drawee) to examine returned vouchers notify it within reasonable
time of any mistakes or inaccuracies in amounts of checks or
forgeries of depositor’s signature.

(c) Doctrine of Comparative Negligence – Constructive negligence of

the bank if overcome by the active negligence of paying banks in
not using the ordinary precautions which are used by banks,
namely, demanding identifications of person presenting the check,
etc.

(d) Basic Rule in Estoppel by Negligence – Where the loss, which must
be borne by one of the two parties alike innocent of forgery can be
 28

traced to the neglect or fault of either, it is reasonable that one

through whose name the fraud was committed must bear the loss,
even if he is innocent of the fraud.

(e) Indorsers warrant genuineness of prior indorsements. But drawee is

not entitled to the benefit of endorsement’s warranty because e is
held not to be a holder in due course. As to him, it is as if there is no
indorsement, but the instrument was payable to bearer, and the
ordinary rules apply depending upon the presence or absence of
negligence.

xxx
1. Where the signature on the instrument is affixed by one who does not claim to
act as an agent and who has no authority to bind the person whose signature he has
forged; and
2. Where the signature is affixed by one who purports to be an agent but has no
authority to bind the alleged principal.
In both cases, the signature is wholly inoperative and so no right can be acquired
through the forged signature. Payment made “through or under such forged signature”
is ineffectual and does not discharge the Instrument. A person whose signature was
forged as maker, drawer, payee or indorsee of a note or check was never a party or never
gave his consent to the contract which gave rise to the instrument. Since his signature
does not appear in the instrument, he cannot be held liable thereon by anyone.
(Gempesaw vs. Court of Appeals, 218 SCRA 682 [1993].) Forgery is, therefore, a real
defense even against a holder in due course. (see Sec. 58)

EFFECT OF A MATERIAL ALTERATION

Under Section 124, where a negotiable instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to
the alteration and subsequent indorsers.

But when an instrument has been materially altered and is in the hands of a holder in due course, not a
party to the alteration, he may enforce payment thereof according to its original tenor.

CONSEQUENTLY, the effects of an alteration of the instrument are:

(1) Alteration by a party. – The effect of a material alteration by the holder is to discharge the
instrument and all prior parties thereto who did not give their consent to such alteration. Since no
distinction is made, it does not matter whether it is favorable or unfavorable to the party making the
alteration.

The law however makes certain exceptions as to the effect of material alteration. It does not discharge
the instrument as against: (a) a party who has made the alteration, and (b) a party who authorized or
assented to the alteration, and (c) indorsers who indorsed subsequent to the alteration.

EXAMPLE:

M makes a promissory note for P3, 000.00 payable to P or order. P negotiates the note to A who,
with the consent of P, raises the amount to P8,000.00 and thereafter indorses it to B, B to C, and C to D,
under circumstances which make D not a holder in due course.

The note is discharged as against M; hence, D cannot enforce it as against M even for the original
tenor. A, however, would be liable to D for P8, 000.00 as he is the party who himself made the alteration
although D is not a holder in due course. Moreover, as indorser, A warrants that the instrument is
genuine and in all respects what it purports to be. (Secs. 65 and 66.)

P would also be liable to D for P8, 000.00 as he authorized the alteration

B and C are liable to D because they are subsequent indorsers.

 29

(2) Alteration by a stranger. – When the material alteration of the instrument is made by a stranger,
it is called spoliation.

(3) Right of holder in due course. – A material alteration avoids the instrument in the hands of one
who is not a holder in due course as against any prior party who has not assented to the alteration. 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. ( See Sec.
62.)

EXAMPLE:

In the example given, if D were a holder in due course, he could enforce the instrument against
M for P3, 000.00, its original tenor. (See Sec. 14.) Of course, D can recover from P, A, B, or C P8, 000.00
should M dishonor the instrument.

WHEN ALTERATION IS MATERIAL

Section 125 defines what will constitute a material alteration. It is any alteration which changes –
a. The date;
b. The sum payable, either for principal or interest;
c. The time or place of payment;
d. The number or the relations of the parties;
e. The medium or currency in which payment is to be made;
f. Or which adds a place of payment where no place of payment is specified, or any other change
or addition which alters the effect of the instrument in any respect, is a material alteration.

CONSIDERATION FOR THE ISSUANCE OF A NEGOTIABLE INSTRUMENT

1. Under Section 24, every negotiable instrument is deemed prima facie to have been issued for
valuable consideration, and every person whose signature appears thereon to have become a party
thereto for value.

2. Under Section 25, value is any consideration sufficient to support a simple contract. An
anteceded or pre-existing debt constitutes value; and is deemed such whether the instrument is payable
on demand or at a future time.

3. Under Section 27, where a holder has a lien on the instrument, arising from a contract or by
implication of law, he is deemed a holder for value to the extent of his lien. HE IS ONE WHO HAS TAKEN A
NEGOTIABLE INSTRUMENT AS COLLATERAL SECURITY FOR A DEBT

The effects are:

1. 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. He can collect the full value of the instrument, and apply
the same to the payment of the debt but he must deliver the surplus to the pledgor. (See Art. 2118, Civil
Code.)

Example:

M makes a promissory note for P1, 000.00 to the order of P who pledges it to A to secure the
payment of P’s debt of P800.00. The note is indorsed and delivered by P to A. (See Art. 2095, ibid.)

In this case, A is a holder for value to the extent of P800.00 which is also the extent of his lien.
On the maturity of the note, even if the debt of P800.00 is not yet due (see Art. 2118, ibid.), A may
recover the full amount of P1, 000.00, holding the surplus for P, the pledgor.

2. If, between the pledgor and the party liable on the instrument, there are existing defenses, then
the pledgee can collect on the instrument only to the extent of the amount of the debt.

Example:
 30

If M has defenses against P, indorser, such as absence or failure of consideration (Sec. 28), A can
collect only P800.00 on the note even if he is a holder in due course. As the note in the hands of M is
void, all that ought to be recovered by A is the amount due on the loan.

3. If the amount of the instrument is less than or the same as the debt secured by such instrument,
the pledge is a holder for value for the full amount and may, therefore, recover all.

Example:

Supposing that the amount of the instrument is P700.00 then A is a holder for value for the full
amount of P700.00 and is entitled to recover to that extent.

4. If the defenses of the party liable on the instrument are real defenses, then the pledgee can
recover nothing upon the instrument.

Example:

If the signature of M is a forgery, A can collect nothing from M because M’s signature is
inoperative. As against M, A acquired no right to enforce payment of the note. (Sec. 23.) Forgery is a real
defense. (See Sec. 57)

WHEN CONSTITUTES BEING A HOLDER FOR VALUE

Under Section 26, a HOLDER FOR VALUE is one who has given a valuable consideration for the
instrument issued or negotiated to him. He is such not only as regards the party to whom value has been
given but also in respect to all those who became parties prior to the time when value is given. Example:
If the maker issues a note to the payee without consideration, it is subsequently endorsed by the payee
to another without consideration, and is subsequently indorsed with consideration, the last endorsee is
deemed to be a holder for value not only as to his indorser, but all other parties subsequent to the
indorsement.

WHAT IS THE EFFECT OF WANT OF CONSIDERATION

The absence or failure of consideration is a matter of defense as against any person not a holder in due
course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained
and liquidated amount or otherwise.

Meaning of absence or want of consideration.

Absence of consideration means a total lack of any valid consideration for the contract, in consequence
of which the alleged contract must fall. (Klein v. Roteman, 6 Ohio App. 145.)

Example:

M makes a promissory note to P in payment for a parcel of land which does not exist.

As between the parties, there can be no recovery on the note a there is absence of
consideration. But if P indorses the note to A, a holder in due course, A can recover from M because
absence of consideration is only a personal defense not available against a holder in due course.

Meaning of failure of consideration.

Failure of consideration means the failure or refusal of one of the parties to do, perform or comply with
the consideration agreed upon. In other words, something was agreed upon as consideration but for
some cause, such agreed consideration failed to materialize.

WHO IS AN ACCOMODATION PARTY

 31

Section 29 provides that an accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name
to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew him to be only an accommodation party.

1. Accommodation bill or note is one to which the accommodation party has put his name, without
consideration, for the purpose of accommodating some other party who is to use it, and is expected to
pay it. (Brown Carriage Co. v. Dowd, 71 S.E. 721.) In other words, it is a loan of one’s credit. (Burr vs.
Beckler, 106 N.E. 206)

An accommodation paper creates no obligation upon delivery to the accommodated party and is
of no legal efficacy and creates no obligation until delivered or negotiated to a holder for value.

2. Accommodated party is one in whose favor a person, without receiving value therefor, signs an
instrument for the purpose of lending his credit and enabling said party to raise money upon it. (Sec . 29)
He impliedly agrees to take up the instrument at maturity and to indemnify the accommodation party
against the consequences of non-payment.

Liability of accommodation party to a holder.

1. Absence of consideration not a defense. – Section 29, by clear mandate makes the
accommodation party “liable on the instrument to a holder for value notwithstanding such holder at the
time of taking the instrument knew him (the signatory) to be only an accommodation party,” in whatever
capacity he signed the instrument, whether primarily or secondarily. This means that absence of
consideration between the accommodation party and the accommodated party does not of itself
constitute a valid defense against a holder for value even though he knew of it when he became a
holder. (See Ang Tiong vs. Lorenzo Ting, 22 SCRA 713 [1968]; Republic Bank vs. Ebrada, 65 SCRA 680
[1975]

2. Accommodation party in effect a surety. – In lending his name to an accommodated party, the
accommodation party is, in effect, a surety. (Philippine Bank of Commerce vs. Aruego, 102 SCRA 530
[1981]). However, unlike in a contract of suretyship, the liability of the accommodation party remains
not only primary but also unconditional to a holder for value such that even if the accommodated party
receives an extension of the period for payment without the consent of the accommodation party, the
latter is still liable for the whole obligation an such extension does not release him because as far as a
holder for value is concerned, he is a solidary co-debtor. (Prudencio vs. Court of Appeals, 103 SCRA 7
[1986]; see People vs. Maniego, 148 SCRA 30 [1987].)

It will then be noted that Section 29 is an exception to Section 28. But Section 29 should not be
construed as to allow a holder for value, not otherwise a holder in due course, to recover against an
accommodation party in the light of other sections (Secs. 16, 55, 58) of the Negotiable Instruments Law.
In other words, except the defense of absence of consideration between the accommodation party and
the accommodated party, the accommodation party is liable to a holder in due course.

Rights of accommodation party.

1. Right to revoke accommodation – since a signature for accommodation is gratuitous, it may be

revoked or rescinded by cancellation or by notice to those interested at any time before the instrument
ha been negotiated for value. But once the instrument has been negotiated for value, the
accommodation party is liable according to the face of his undertaking, the same as if he were financially
interested in the transaction.

2. Right to reimbursement from accommodated party – after making payment to the holder, the
accommodation party has a right to obtain reimbursement from the accommodated party. The relation
between them is, in effect, that of principal and surety, the accommodation party being the surety. (Phil.
National Bank vs. Maza and Macenas, 48 Phil. 207 [1915]; People vs. Maniego, 148 SCRA 31 [1987];
Caneda Jr. vs. Court of Appeals, 181 SCRA 762 [1990]. As between the accommodation party and the
accommodated party, the latter is expected to pay the instrument directly to the holder. The
accommodated party is the real debtor. Hence, the cause of action is not on the instrument but on an
implied contract of reimbursement.
 32

3. Right to contribution from other solidary accommodation maker – where the solidary
accommodation maker paid to the bank, the balance due on a promissory note, he may seek
contribution from the other solidary accommodation makers in the absence of a contrary agreement
between them, and subject to the conditions imposed by law. This right springs from an implied promise
between the accommodation makers to share equally the burden resulting from the execution of the
note. They are joint guarantors of the principal debtor. (Sadaya vs. Sevilla, supra; see Art. 2073, Civil
Code; Sec. 196.)

KINDS OF ACCOMODATION PARTIES

“An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or
indorser.” (Sec. 29)

Examples:

1. Accommodation maker – M, as accommodation party, issues a promissory note payable to P

who may then negotiate it to A.

2. Accommodation drawer – M, as accommodation party, signs a bill of exchange with P as payee,

and P may indorse the same to A.

3. Accommodation acceptor – M, as accommodation party, accepts a bill drawn on him by P in

favor of himself and P may indorse the same to A.

4. Accommodation indorser – M, as a accommodation party, simply signs as an indorser in blank,

the bill or note made by P in favor of A, before it is delivered to A. (see Sec. 63)

ACCOMMODATION PARTY AND REGULAR PARTY DISTINGUISHED

The following are the differences:

1. An accommodation party signs an instrument without receiving value therefor, while a regular
party signs the instrument for value (Sec. 24);
2. An accommodation party signs an instrument for the purpose of lending his name to some other
person (Sec. 29), while a regular party does not sign for that purpose;

3. An accommodation party may always show by parol evidence that he is only such, while a
regular party cannot disclaim or limit his personal liability as appearing on the instrument by parol
evidence (see Maulini vs. Serrano, 28 Phil. 640 [1914]; Velasco vs. Liuan & Co., 43 Phil. 195 [1922]);

4. An accommodation party cannot avail of the defense of absence or failure of consideration

against a holder not in due course, while a regular party may avail of said defense against a holder not in
due course; and

5. An accommodation party, after paying the holder, may sue for reimbursement the
accommodated party, although a subsequent party, while a regular party may not sue any subsequent
party for reimbursement. (Phil. National Bank vs. Maza & Macenas, 48 Phil. 207 [1925])

NEGOTIATION
CONCEPT OF NEGOTIATION

Under Section 30 an instrument is negotiated when it is transferred from one person to another in such
a manner as to constitute the transferee the holder of the instrument.

A “holder” means the payee or endorsee of a bill or note who is in possession of it or the bearer thereof.

MANNER OF TRANSFER OF INSTRUMENTS

1. By Assignment – Generally for non-negotiable instruments. In assignment, the assignee is

merely placed in the position of the assignors and acquires the instrument subject to all the defenses
that might have been set up against original payee.
 33

2. By Operation of Law – Such as by succession, by insolvency. Upon the death of a joint payee or
indorsee, in which case the general rule is that title vests at once in the surviving payee or indorsee.
3. By Negotiation

METHODS OF NEGOTIATION
Negotiable Instruments may be negotiated by:

1. By indorsement and delivery if payable to order

2. By delivery if payable to bearer

WHAT IS AN INDORSEMENT
It is the writing of the name of the indorser on the instrument with the intent to transfer title to the
same.

Indorsement is not only a mode of transfer, it is also a contract. Every indorser is a new drawer and the
terms are found on the face of the bill or note, with the additional obligation that if the instrument is
dishonored by non-payment or non-acceptance, and notice is given to the endorser, the latter will pay
for it.

WHERE IS SHOULD AN INDORSEMENT BE CONTAINED

1. Under Section 31, the indorsement must be written on the instrument itself or upon a paper
attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.

2. An indorsement is usually written at back of instrument and may be made any form (eg. print,
typewritten, rubber stamp) as long as meant to be an endorsement.

3. Under Section 32, the indorsement must be of the entire instrument. Otherwise, the
indorsement is not valid, but would only constitute a valid assignment binding between the parties. The
REASON is that the instrument must be delivered and there cannot be partial delivery of an instrument.

Also, when an indorsement purports to transfer the instrument to two or more indorsees severally
(instead of jointly), the same is not valid endorsement. The REASON is that the cause of action on the
instrument will be split or divided.

THE EXCEPTION is when an instrument has already been paid in part, it may be endorsed to the residue.

NOTE: That an indorsement which purports to transfer to the indorsee a part only of the amount payable
does not operate as a negotiation of the instrument; it operates merely as an assignment. SEE:
Montinola v. PNB, 88 Phil. 178 [1951]

KINDS OF INDORSEMENTS
1. SPECIAL INDORSEMENT – it qualifies the person to whom or to whose order the instrument is
payable, and the indorsement of such endorsee is necessary to the further negotiation of the instrument
(Section 34)

“Pay to X.”

(Sgd.) “A”

a. If X (the endorsee) wants to further negotiate the instrument, he must sign it at the back.

b. However, when the instrument is originally payable to bearer, it can further be negotiated by
mere delivery, even if the original bearer negotiated it by special endorsement but the person indorsing
specially shall be liable as endorser to only such holders as make title through his endorsement (Section
40).
 34

This rule does not apply to instruments originally payable to order, but because the only or last
indorsement is an indorsement in blank.

Section 40, when read with Section 9, shows that of the five (5) kinds of bearer instruments discussed
under Sec. 9, Section 40 applies only to the first four types, those that are payable to bearer on their
face. These four types of bearer instrument, even if endorsed specially, they retain their character as
bearer instrument and may still be negotiated by mere delivery; the special endorsement may be
ignored.

NOTE: Under Sec. 67, where an instrument payable to bearer is negotiated by indorsement and delivery,
the person signing (through his signature was not necessary for negotiation) is liable as a special
endorser.

2. BLANK INDORSEMENT – it specifies no endorsee, and the instrument so endorsed is payable to

bearer and may be negotiated by mere delivery. (Section 34)

a. The holder may convert a blank indorsement into a special indorsement by writing over the
signature of the endorser in blank any contract consistent with the character of the endorsement.

3. ABSOLUTE INDORSEMENT – one by which the endorser binds himself to pay, upon no other
condition than the failure of prior parties to do so and of due notice to him of such failure.

4. CONDITIONAL INDORSEMENT– the party required to pay the instrument may disregard the
condition and make payment to the endorsee or his transferee whether the condition has been fulfilled
or not. But any person to whom an instrument so endorsed is negotiated will hold the same, or the
proceeds thereof, subject to the rights of the person indorsing conditionally. (Section 39)

Illustration:

“Pay to X PHP500 if it rains on 28 June

2002.”
(Sgd.) “B”

X may present the instrument for payment before 28 June 2002, but B may tell X to: Wait for 28 June
2002 OR Pay X PHP500; but if it does not rain on 28 June 2002, X must return the money on the principle
of solution indebiti.

5. RESTRICTIVE INDORSEMENT – such indorsement either: (a)Prohibits further negotiation of

instrument (b)Constitutes endorsee the agent of endorser (c)Vest title in endorsee in trust for or to the
use of some other person. But mere absence or words implying power to negotiate does not make an
indorsement restrictive. (Section 36)

a. EFFECT OF RESTRICTIVE INDORSEMENT: It confers upon the endorsee the right –(a) To
receive payment of the instrument;(b)To bring any action thereon that the endorser could bring;(c)
To transfer his rights as such endorsee, where the form of the indorsement authorizes him to do
so. (Section 37)

But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
indorsement.

Illustrations:

(a) “Pay to X only”

(b) “Pay to X as agent”
(c) “Pay to X in trust”

Under letter (a), it completely destroys the negotiable character of the instrument and it may no longer
be negotiated.
 35

Under letter (b), the rights of X to negotiate is limited because the same must be within the scope of his
authority as agent.

Under letter (c), X may negotiate the instrument only within the scope of his authority as trustee.

b. Section 47 must be correlated with Sec. 36 (restrictive indorsement), Sec. 88 (payment) and Sec.
119 (discharge of an instrument)

Illustration:

“One year from date, pay to

A or order PHP500.”

“June 28, 2002 (Sgd.) “B”

General Rule: An instrument which is negotiable in origin continues to be negotiable until it has been:

(a) restrictively endorsed;

(b) paid at or after maturity.

When referring to “restrictive indorsement,” we refer only to the first kind: Pay to X only; because this is
the only type of restrictive indorsement that completely destroys the negotiability of the instrument.

When referring to payment, this must be understood to be payment made at or after maturity of the
negotiable instrument. Because if payment is made before maturity thereof, the person so paying can
still renegotiate or reissue the instrument. In other words, payment before maturity does not destroy
negotiability.

6. QUALIFIED INDORSEMENT constitutes endorser a mere assignor of the title to the instrument. It
may be made by adding to the endorser’s signature the words “without recourse” or “sans recourse” or
other terms of similar import. (Section 38)

a. “Without recourse” means without resort to a person who is secondarily liable after the default
of person who is primarily liable.

b. Qualified endorser has limited liability, i.e., he is liable if the instrument is dishonored by non-
acceptance or nonpayment due to:
- Forgery
- Lack of good title on the part of the endorser;
- Lack of capacity to endorse on the part of the prior parties;
- The fact that at the time of the endorsement, the instrument was valueless or not valid, and he
knew of that fact.

Illustration:

“Pay to X PHP500 without recourse.”

(Sgd.) “A”

The qualified endorser guarantees only the genuineness of the instrument but does not guarantee its
payment. He will be liable only if signature of the maker turns out to be a forgery. He will not be liable if
maker refuses to pay.

In case of qualified endorsement, the consideration is less than in general endorsement. For an
instrument of PHP500 for example, the qualified endorser may have paid only PHP200. If B’s (maker)
signature is forged, he will be liable for PHP200 only as he paid that much only to guarantee
genuineness. This is the difference between general and qualified endorsements.

When Warranties of Qualified Endorser Cannot Prevail:

 36

Bank of P.I. v. Court of Appeals

326 SCRA 641 (2000)
Facts: Depositor, by way of accommodation, allowed the deposit of a check in his savings
account after he had endorsed the same. He executed a blank withdrawal slip to allow the
accommodated party to withdraw the amount of the check deposited as soon as it has been cleared and
upon presentation of the passbook. The amount were withdrawn prior to the clearance of the check,
which turned out alter to be counterfeit. The bank seeks to recover from the depositor on the basis of
his endorsement of the check which the bank relied upon in servicing the withdrawal before there was
an actual clearance thereof.

Held: The bank cannot be allowed to recover against the depositor. While ordinarily, the
depositor could have been held liable on the basis of his warranties, since a person negotiating an
instrument by delivery or by qualified endorsement are:

a. that the instrument is genuine and in all respects what it purports to be;
b. That he has a good title to it; and
c. that all prior parties had capacity to contract.

Nevertheless, the circumstances of the case shows that the immediate cause for the loss was the
failure of the bank to exercise the extraordinary diligence required of banks when dealing with the
accounts of their depositors, especially in allowing withdrawal of the amount prior to the clearing of the
check and without the presentation of the passbook.

7. JOINT INDORSEMENT is where an instrument is payable to the order of two or more payees or
indorsees who are not partners, all must endorse, unless the one indorsing has authority to endorse for
the others. (Section 41)

a. This rule does not apply to indorsements payable to two or more payees severally (e.g., “Pay to
the order of A or B”), which under Section 8(c) may be negotiated by the endorsement of one payee.

Illustration:

[Indorsements at the back]

“Pay to X or Y.” “Pay to X P200 to Y P300.”

(Sgd.) “A” (Sgd.) “A”

Both of these indorsements are prohibited.

Compare this with Sec. 8: “Pay to A or X or order P500,” which may be indorsed by A alone or by X alone.
The instrument may be payable in the alternative but the endorsement to two or more persons is void.
If payable in the alternative on its face, the instrument is less confusing; but when the indorsement is
alternative there would be confusion.

b. Section 41 states “but who are not partners” but this clause should be ignored because it
contemplates the American Law on Partnership, where the partners are solidarily liable and hence only
one partner may be made liable to collect the whole amount so that only one needs to sign the
indorsement.

This is different from Philippine Law which provides that partners are jointly liable; hence, both must sign
the endorsement.

8. IRREGULAR INDORSEMENT is where a person, not otherwise a party to an instrument, places

thereon his signature in blank before delivery, he is liable as an endorser. (Section 64)

EFFECTS OF STRIKING OUT AN INDORSEMENT

 37

A holder may at any time strike out any endorsement which is not necessary to his title. The endorser
whose endorsement is truck out, and all endorsees subsequent to him, are thereby relieved from liability
on the instrument. (Section 48)

EFFECT OF A TRANSFER WITHOUT AN INDORSEMENT

Any transfer of an instrument without an indorsement shall have the following effects:

1. Transferee acquires only the rights of transferor, the defense available against the transferor will
also be available against the transferee.

2. Transferee has also the right to require the transferor to endorse the instrument.

3. The time for determining whether the transferee is a holder in due course is as of the time of
actual endorsement, not at the time of delivery. (Section 49)

OTHER INDORSEMENTS

1. Payable to Cashier – where the 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 the
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. (Section 42)

2. Misspelling – where the name of a payee or endorsee is wrongly designated or misspelled, he

may indorse the instrument as therein described adding, if he thinks fit, his proper signature. (Section
43)

3. Representative Capacity – where any person is under obligation to indorse in a representative

capacity, he may indorse in such terms as to negative personal liability (i.e., disclose his principal or sign
the principal’s name) (Section 44)

TIME, PLACE, CONTINUATION OF NEGOTIATION

Time of Indorsement – 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.
(Section 45). This presumption is rebuttable.

Place of Indorsement – except where the contrary appears, every indorsement is presumed prima facie
to have been made at the place where the instrument is dated. (Section 46)

Continuation of Negotiable Character – an instrument negotiable in origin, continues to be negotiable

until it has been restrictively endorsed or discharged by payment or otherwise. (Section 47)

When Prior Party May Negotiate – where an instrument is negotiated back to a prior party, such party
may reissue and further negotiate the same. But he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable. (Section 50)

RIGHTS OF A HOLDER

1. The rights of a SIMPLE HOLDER are:

a. He may sue thereon in his own name
b. payment to him in due course will discharge the instrument

2. The rights of a HOLDER IN DUE COURSE are:

a. He may sue on the instrument
b. to receive payment on the instrument and payment in due course will discharge the instrument
c. Under Section 57, he holds the instrument free from any defect in title of prior parties
d. he holds the instrument free from defenses available to prior parties among themselves
e. Enforce payment on the instrument to the full amount against all parties liable thereon.
 38

LIABILITIES OF THE MAKER

1. The liabilities of the MAKER are:

a. he will pay the note according to its tenor
b. the payee exists, and
c. the payee has capacity to endorse.
The maker is thus PRECLUDED from setting up the defenses that the payee is fictitious or that
payee was insane, a minor or a corporation acting ultra vires (Section 60).

2. The nature of the liability of the maker is primary and unconditional.

3. If there are joint makers, their liability is solidary.

LIABILITIES OF THE DRAWER

By signing his name on the bill as DRAWER, he ADMITS that

a. the payee exists
b. payee has capacity to endorse
c. drawee will accept or pay or both according to the tenor of the bill
d. in case of non-acceptance or non-payment, the drawer will pay (Section 61)

NOTE that the drawer’s obligation to pay is not absolute. The bill must be dishonored and the necessary
proceedings of dishonor must be duly taken.

He may insert an express stipulation negating or limiting his own liability.

The nature of the drawer’s liability is thus secondary in favor of

a. the holder, and
b. Any of the endorsers intervening between the holder and the drawer who is compelled to pay by
the holder.

LIABILITIES OF THE ACCEPTOR

1. The ACCEPTOR by accepting (Under Section 132 mean assent to the order of the drawer) the
instrument
a. Engages that he will pay it according to the tenor of his acceptance NOT the tenor of the
instrument BUT if the tenor of the acceptance is GENERAL, under Sections 139 and 140, the
tenor of the bill is the same as that of the acceptance.
b. Admits the existence of the drawer, genuineness of the signature of the drawer, capacity and
authority of the drawer to draw the instrument, and the existence and capacity to endorse of
the payee. CONSEQUENTLY, he is precluded from setting up the defenses that the drawer is non-
existent or fictitious, that drawer’s signature is a forgery, and want of consideration between him
and the drawer

2. In case of an alteration before acceptance, the prevailing view is that he is liable only up to the
original tenor of the bill prior to acceptance. The basis is Section 132.
3. The nature of the liability of the acceptor is primary.

LIABILITIES OF AN INDORSER

 An indorser is one who has placed his signature upon an instrument other than as the maker,
drawer or acceptor UNLESS he clearly indicates by appropriate words his intention to be bound
in some other capacity.

An IRREGULAR INDORSER (one who places his signature in blank before delivery) is liable as follows:
a. in an order instrument, he is liable to the payee and to all subsequent parties
b. in a bearer instrument, or payable to order of the maker or drawer, he is liable to all parties
subsequent to the maker or drawer
c. if he signs for accommodation of the payee, he is liable to all parties subsequent to the payee
(Section 64)

A QUALIFIED INDORSER (one who endorses without recourse), warrants that:

 39

a. That the instrument is genuine (does not guaranty payment).

b. That he had 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.

NOTE: These liabilities of a qualified endorser are the same as those of a person who negotiates an
instrument payable to bearer by delivery alone. But when the negotiation, is by delivery only, the
warranty extends in favor of no holder other than the immediate transferee.

Illustration:

“Payable to A or bearer P500.00”

(Sgd.) “B”

This is delivered physically to X, X delivers it to Y. X is liable to Y alone but X’s liability refers to the four
items above mentioned. He is not liable for payment because under Sec. 18, in as much as X’s signature
does not appear, he is not liable thereon.

A GENERAL INDORSER (one who endorses without qualification, warrants to all subsequent holders in
due course:
a. That the instrument is genuine and in all respects what it purports to be
b. That he has a good title to it
c. That all prior parties had capacity to contract
d. That the instrument is at the time of his endorsement valid and subsisting.

This warranty does not run in favor of holders who are parties of the illegal transaction. (Burke v.
Smith, 75 Atl. 114) (e) He engages that on due presentment, the instrument shall be accepted or
paid, or both, as he case may be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder,
or to any subsequent endorser who may be compelled to pay it.

 Where a person places his endorsement on an instrument negotiable by delivery he incurs all
liabilities of an endorser. (Sec. 67)

ORDER IN WHICH INDORSERS ARE LIABLE – as respect one another, indorsers are liable – prima facie in
the order in which they endorse; but evidence is admissible to show that as between or among
themselves they have agreed otherwise. Joint-payees or joint-endorsees who indorse are deemed to
endorse jointly and severally. (Sec. 68)

a. The foregoing rules does not apply to a holder in due course, to whom the indorsers are liable in
any order
b. Every indorser is liable to all endorsers subsequent to him, but not those indorsers prior to him.

Illustration:

“Pay to A or order P500.00” [Indorsements:]

_________________
(Sgd.) “B” “Pay to X.”

(Sgd.) “A” (1)

_________________
“Pay to Y.”
(Sgd.) “X” (2)
_________________
“Pay to Z.”
(Sgd. “Y” (3)
 40

Z as holder of the instrument may present payment.

If B refuses to pay, Z can ask Y to pay; Y can collect from others in the order in which they
endorse.
Under Sec. 84, where the instrument is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues to the holder. There is no need to follow the
order of endorsements.
When is the order of endorsement followed? When not?

1. Before dishonor: accessory, subsidiary

2. After dishonor: (a) principal
(b) solidary

1. Before dishonor, the obligation of an endorser is only accessory. Z, the holder, must seek
payment from B first. After dishonor by non-payment, Sec. 84 provides that an immediate right of
recourse to all parties secondarily liable thereon accrues to the holder But if B refuses to pay, he
dishonors the instrument.

2. . Hence, A, X and Y are now liable principally, Z, the holder, can choose to go after any or all of
them. After dishonor, the liability of A, X and Y becomes joint and several. Z, at his option, may sue any
or all of them. Sec. 68 provides that if Z goes after X alone and X pays the P500, it is the right of X to ask
A and Z to reimburse, and who is liable to one another in the order in which they are endorsed.

PROCEDURE TO MAKE PERSONS SECONDARILY LIABLE TO PAY

1. The parties primarily liable are the Maker – in a promissory note and the Acceptor – in a bill of
exchange.

2. The parties who are secondarily liable are the Drawer and an Indorser.

To make parties secondarily liable requires (a) presentment for payment to the Maker or the Acceptor
and (b) notice of dishonor. The absence of either will discharge persons secondarily liable.

PRESENTMENT FOR PAYMENT

It is defined as: (a) the production of a bill of exchange to the drawee for his acceptance, or to the
drawee or acceptor for payment; or (b) the production of a promissory note to the party liable for its
payment. (Windham Bank v. Norton, 22 Conn. 213, 56 Am. Dec. 297).

1. Presentment for payment is not necessary in order to charge the person primarily liable on the
instrument (The “person primarily liable” on the instrument is the person who by the terms of the
instrument is absolutely required to pay the same under Section 192). This pertains to the maker of a
promissory note and the acceptor of a bill of exchange.

2. But if instrument is, by its terms, payable at a special place and the person primarily liable is able
and willing to pay it there at maturity, such ability and willingness are equivalent to tender of payment
on his part. (Section 70). This pertains to a situation where the instrument is payable at a particular
institution or office, such as a bank and not when the instrument is payable in a certain locality.

3. Presentment for payment is necessary to charge the drawer and endorsers. (Section 70).
Without presentment, the persons secondarily liable are discharged.

3. For Promissory Notes: it is necessary that: Presentment for payment must be made to the
person primarily liable (Sec. 71);

 If the note is dishonored by nonpayment, notice of dishonor by nonpayment must be given to

the person secondarily liable (Sec. 80), unless excused.
 41

4. In All Other Cases: it is necessary that –

 Protest for nonpayment by drawee is necessary to charge an acceptor for honor (Sec. 167);

 Protest for nonpayment by the acceptor for honor is also required. (Sec. 170).

GENERAL PROCEDURES TO CHARGE PERSON SECONDARILY LIABLE:

1. In the three cases required by law, presentment for acceptance to the drawee or negotiation within a
reasonable time after acquisition is required (Secs. 143 and 144), unless excused. (Sec. 148). In all other
cases, there is no need for presentment for acceptance.

2. If bill is dishonored by non-acceptance: (a) notice of dishonor by non-acceptance must be given to

persons secondarily liable (Sec. 80) unless excused (Sec. 117); and (b) in case of foreign bills, protest for
dishonor by non-acceptance must be made, unless excused. (Secs. 117 and 159).

3. But if the bill is accepted, or if the bill is not required to be presented for acceptance, it must be
presented for payment to the persons primarily liable (Sec. 71), unless excused. (Sec. 82).

4. If the bill is dishonored by nonpayment then:

 A notice of dishonor by nonpayment must also be given to persons secondarily liable (Sec.
80), unless excused; and

 In case of foreign bill a protest for dishonor by nonpayment must be made (Sec. 152), unless
excused.

WHEN PRESENTMENT MUST BE MADE

1. Instrument on a Fixed or Determinable Future Time – Presentment must be made on the day it
falls due. Presentment before maturity is improper.

(a) Every negotiable instrument is payable at the time fixed therein without grace. (Sec. 85).

(b) When the day of maturity falls upon a Sunday or a holiday, the instrument is payable on the next
succeeding business day. (Sec. 85).

(c) When the day of maturity is on a Saturday, presentment for payment shall be made on the next
succeeding business day; except that demand instrument may, at the option of the holder, be presented
for payment before 12:00 o’clock noon on Saturday when that entire day is not a holiday. (Sec. 85).

(d) Where the instrument is payable at a fixed period after date, after sight, or after the happening of a
specified event, the time of payment is determined by excluding the day from which the time is to begin
to run, and by including the date of payment. (Sec. 86).

Illustration:

“18 June 2002”

Present this on 28
“10 days after date June 2002 for payment
Pay A or order P500.” because that is its due
date.
(Sgd.) “B”

GENERAL RULE: Presentment for payment must be made on due

date of instrument.

EXCEPTION: If the due date falls on a Saturday, present

instrument on Monday next.

REASON: Obligor is entitled to the full day to make

payment. But since Saturday is half day work
 42

and the banks would be closed in the afternoon,

and the following day is a Sunday, he should
have until Monday to pay. The law wants to give
the person primarily liable one whole day to
look for money.

EXCEPTION TO EXCEPTION: If the instrument is payable on demand, the

instrument can be presented on a Saturday. The
reason is that the holder could have presented
it on any day.

2. Instrument Payable on Demand:

(a) In case of note, it must be presented for payment within a reasonable time from issue;

(b) In case of a bill of exchange, it must be presented for payment within a reasonable time
from last negotiation.

 The last negotiation is the last transfer for value. Subsequent transfers between banks for
purposes of collection are not negotiations within this section.

WHAT CONSTITUTES SUFFICIENT PRESENTMENT (Sec. 72):

Presentment for payment, to be sufficient, must be made –

1. By the holder, or by some person authorized to receive payment on his behalf.

(a) Presentment for payment of a promissory note by a bank having it for collection is sufficient.
(Caine v. Foreman, 289 Pac. 929).

(b) 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). Demand over the telephone
therefore cannot constitute proper presentment.

First Acceptance v. Dimayuga

11 car 114 (1967)

The instrument must be exhibited in order that the maker or the acceptor may
be able to determine the genuineness of the instrument, the right of the holder to
receive payment, and so that he may immediately reclaim possession upon paying the
amount. Non-exhibition or surrender would not constitute due presentment to charge
drawer and endorsers.

(c) The maker’s right to exhibition of a note is waived when he does not demand to see the
note and he refuses payment on some other grounds. (Greensteen v. Kucharski, 140 Atl. 482;
Foster East Jordan Realty Co., 177 N.W. 987).

2. at a reasonable hour on a business day.

5. Where Notice Must Be Sent: Where a party has added an address to his signature, notice of
dishonor must be sent to that address; but if he has not given such address, then the notice
must be sent as follows:

(a) Either to the post office nearest to his place of residence or to the post office where he
is accustomed to receive his letters; or

(b) If he lives in one place, and has his place or 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.
 43

But where the notice is actually received by the party within the time specified by law, it
will be sufficient, though not sent in accordance with the requirement of this section. (Sec.
108).

TO WHOM NOTICE GIVEN: Notice of dishonor may be given either to the party himself or to his agent in
that behalf. (Sec. 97).

1. When notice is given to an agent, he must be duly authorized to receive notice of dishonor;
otherwise, the notice is not valid.

2. Notice to Party Dead: When a party is dead, and his death is known to the party giving notice,
notice must be given to personal representative, if there be one, and if with reasonable
diligence, he can be found. If there be no personal representative, notice may be sent to the last
residence or last place of business of deceased. (Sec. 98).

3. Notice to Partners: Where the parties to be notified are partners, notice to any one partner is
notice to the firm, even though there has been dissolution. (Sec. 99).

4. Notice of 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 notice for the others. (Sec. 100).

5. Notice of 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).

H & BC v. Peoples Bank

35 SCRA 140 (1970)

The period within which to clear checks at the clearing house of

the Central Bank was 24 hours (i.e., any forgery must be discovered and
reported within 24 hours). Hongkong and Shanghai Bank’s
representative whether the check was in fact genuine.

Shanghai Bank said yes. This had to be done within 24 hours.

Two months later, the forgery was discovered and Hongkong and
Shanghai Bank sought to recover, but this was denied by the court.
Because the period of clearing has been extended to 180 days, but once
any alteration is discovered, the same must be reported within 24 hours
after discovery.

TIME WITHIN WHICH NOTICE GIVEN:

1. Notice may not be given before the maturity of the instrument. Notice may be given on the date
of maturity, provided that instrument has been presented for payment and it has been
dishonored.

2. Where Parties Reside in Same Place: Where the person given and the person to receive notice
reside in the same place, notice must be given within the following periods:

(a) If given at the place of business of the person to receive notice, it must be given before the
close of business hours on the day following;

(b) If given by mail it must be deposited in the post office in time to reach him in usual course
on the day following. (Sec. 103).

 “Same place” refers to the corporate limits of a town or city where the presentment is
made or where the holder resides.

3. Where Parties Reside in Different Place: Where the person giving and the person to receive
notice reside in different place, the notice must be given within the following periods:
 44

(a) If sent by mail, it must be deposited in the post office in time to go by mail the day following
the day of the dishonor, or if there be no mail at a convenient hour or that day, by the next
mail thereafter;

(b) If given otherwise than through post office, then within the time that notice would have
been received in due course of mail, if it had been deposited in post office within the time
specified. (Sec. 104).

NOTE: These provisions are similar to Art. 54 of the Code of Commerce which provides:
“Contracts entered into through correspondence shall be perfected from the
time an answer is made accepting the propositions by which the latter may be
modified.”

4. Where a party receives notice of dishonor, he has, after the receipt of such notice, the same
time for giving notice to antecedent parties that the holder has after the dishonor. (Sec. 107).

WAIVER OF NOTICE:

1. Notice of dishonor may be waive, either before the time of giving notice has arrived or after the
omission to given due notice, and the waiver may be expressed or implied. (Sec. 109).

2. Whom Affected by Waiver: Where the waiver is embodied in the instrument itself, it is binding
upon all parties; but where it is written above the signature of an endorser, it binds him only.
Sec. 110).

3. Waiver of Protest: A waiver of protest, whether in the case of foreign bill of exchange or other
negotiable instrument, is deemed to be a waiver not only of a formal protest but also of
presentment and notice of dishonor. (Sec. 111).

4. When Notice is Dispensed With: Notice of dishonor is dispensed with when, after exercise or
reasonable diligence, it can not be given to or does not reach parties sought to be charged. (Sec.
112).

5. When Delay in Notice Allowed: 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).

6. When Notice Need Not Be Given to Drawer: Notice of dishonor is not required to be given to the
drawer in any of the following cases;

(a) Where the drawer and drawee are the same person;

(b) When the drawee is a fictitious person or a person not having capacity to contract;

(c) When the drawer is the person to whom the instrument is presented for payment;

(d) Where the drawer has not right to expect or require that the drawee or acceptor will honor
the instrument;

(e) Where the drawer has countermanded payment. (Sec. 114).

7. When Notice need not be given to Endorser: Notice of dishonor is not required to be given to an
endorser in either of the following cases:

(a) When the drawee is a fictitious person or does not have capacity to contract and the
endorser was aware of this at the time of endorsement;

(b) Where the endorser is the person to whom the instrument is presented for payment;

(c) Where the instrument was made or accepted for his accommodation. (Sec. 115).
 45

8. Where due notice of dishonor by non-acceptance has been given, notice of subsequent dishonor
by nonpayment is not necessary unless in the meantime instrument has been accepted. (Sec.
116).

9. Effect of Omission to Give Notice of Non-Acceptance: An omission to give notice of dishonor by

non-acceptance does not prejudice the rights of a holder in due course subsequent to the
omission. (Sec. 117).

PROTEST:

1. Where any negotiable instrument has been dishonored, it may be protested for non-acceptance
or nonpayment, as the case may be. (Sec. 118).

2. But protest is not required except in the case of foreign bills of exchange. (Sec. 118).

3. Distinctions between Inland Bill and Foreign Bill:

An inland bill of exchange is a bill which is or on its face, purports to be, both drawn and
payable within the Philippines. Any other bill is a foreign bill which is one which is, or on its face
purports to be drawn or payable outside the Philippines. (Sec. 129).

A foreign bill of exchange is one:

(a) Drawn in the Philippines but payable outside the Philippines.

(b) Payable in the Philippines but drawn outside the Philippines.

NOTE: Unless the contrary appears on the face of the bill of exchange, the holder may
treat it as an inland bill of exchange.

4. Under Sec. 118, verbal notice of dishonor is sufficient in case of promissory note and inland bill
of exchange. But with respect to a foreign bill of exchange, a protest is needed.

DISCHARGE OF NEGOTIABLE INSTRUMENTS

A. DEFINITION: It is the release of all parties, whether primary or secondary, from the obligation on
the instrument; discharge renders the instrument non-negotiable.

B. HOW NEGOTIABLE INSTRUMENTS DISCHARGED. (Sec. 119). A negotiable instrument is

discharged:

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

2. by payment in due course by the party accommodated, where the instrument is made or
accepted for accommodation;
3. by the intentional cancellation of the instrument by the holder thereof;
4. By any other act which will discharge a simple contract for the payment of money:
a. remission;
b. novation;
c. Confusion or merger.

As to the other modes: payment is already in (a) and (b); loss of a negotiable instrument
will not extinguish liability; compensation is not available so long as an obligation is evidenced by
a negotiable instrument.

PRESUMPTION: When the principal debtor becomes the holder of the instrument at or after
maturity in his own right. If a private document evidencing an obligation is in the
possession of the debtor, the presumption is that the debtor has paid such an
obligation.
 46

State Investment House v. CA

217 SCRA 32 (1993)

The fact that post-dated checks were issued merely as security is

not a ground for the discharge of the checks as against a holder in due
course.

The intentional cancellation contemplated under Sec. 119 on

NIL for the discharge of an instrument is the cancellation effected by
destroying the instrument either by tearing it up, burning it, or writing
the work “cancelled” on the instrument, and certainly requires the
element in the holder in intentionally canceling it. Cancellation cannot
be presumed by failure to recover the instrument.

The discharge of the instrument would necessarily carry with it

the discharge of the persons primarily liable thereon.

C. WHEN PERSONS SECONDARILY LIABLE ON INSTRUMENT ARE DISCHARGED (Sec. 120):

1. By any act which discharges the instrument.

2. By the intentional cancellation of his signature by the holder.

(a) No consideration is necessary to support a discharge by intentional cancellation of an

endorser’s signature by holder.

3. By discharge of a prior party.

(a) Discharge of a party by intentional cancellation of his signature also operates to discharge
parties subsequent to the party discharged.

(b) The rule only applies to discharge by the act of the holder and not to discharges by
operation of law, such as insolvency.

4. By a valid tender of payment made by a prior party.

5. By a release of the principal debtor, unless the holder’s right of recourse against the party
secondarily liable is expressly reserved.

6. By any agreement binding upon the holder to extend the time of payment or to postpone the
holder’s right to enforce the instrument.

EXCEPT:(a) When made with the consent of other party

secondarily liable;

(b) Unless the right of recourse against such party is expressly

reserved.

7. In the discharging of persons secondarily liable:

(a) The liability of a party secondarily liable is subsidiary.

(b) His liability is similar (but not exactly the same) to that of a guarantor.

(c) Endorsers are liable in the order in which they endorse.

D. PAYMENT BY PARTY SECONDARILY LIABLE: Where the instrument is paid by a party secondarily
liable thereon, the instrument is not discharged. However, the party so paying is remitted to his
 47

former rights as regards all prior parties, and he may strike out his own and all subsequent
endorsements, and again negotiate the instrument.

EXCEPT: (a) Where it is payable to the order of a third

person, and had been paid by the drawer; and

(b) Where it was made or accepted for accommodation and has

been paid by the party accommodated. (Sec. 121).

1. The party secondarily liable who pays will have the effect of discharging the party paying.

2. The party paying is remitted to his former rights against parties prior to him; if he was formerly a
holder in due course, even if at the time of payment he already had notice of the defects of title,
he can enforce his rights against any of the prior parties free from defenses.

E. RENUNCIATION BY HOLDER: Holder may expressly renounce his rights against any party to the
instrument before, at, or after its maturity. (Sec. 122).

1. An absolute and unconditional renunciation of his rights against the principal debtor made at or
after the maturity of the instrument discharges the instrument. (Sec. 122).

2. A renunciation does not affect the rights of a holder in due course without notice. (Sec. 122).

3. A renunciation must be in writing, except when the instrument is delivered up to the person
primarily liable thereon. (Sec. 122).

F. UNINTENTIONAL CANCELLATION: A cancellation made unintentionally, or under a mistake or

without the authority of the holder, is inoperative. (Sec. 123).

1. But where an instrument or any signature thereon appears to have been cancelled the burden of
proof lies on the party who alleges that the cancellation was made unintentionally, or under a
mistake or without authority. (Sec. 123).