GENERAL CONCEPTS a.

An indication of a particular fund out of

which reimbursement is to be made, or a
NEGOTIABLE INSTRUMENTS – A written contract for the particular account to be debited with the
payment of money which complies with the requirements of Sec 1 amount
of the Negotiable Instruments Law (NIL), which by its form and on NOTE: An order or promise to pay out of a particular fund is
its face, is intended to hand as money, so as to give the holder in not unconditional
due course (HDC) the right to hold the instrument free from o The promise or order to pay to be unconditional must
personal defenses and available to prior parties (Jose R. Sundiang be unqualified, absolute and obligatory; nor merely
and Timoteo B. Aquino, Reviewer on Commercial Law, 2006 ed.). aspirational
o TEST: Does the instrument carry the general credit of
REQUISITES (Sec 1 NIL) the drawer or the maker or only the credit of a
1. Must be in WRITING and signed by the maker or particular fund?
drawer – Signature is binding however written or
FUND FOR PARTICULAR
printed as long as it is intended to be the signature of
REIMBURSEMENT FUND FOR
the signer or made with his authority PAYMENT
o Assumed or Trade name – NO person is liable on the
Acts involved Drawee pays the There is only one
NI whose signature does not appear thereon unless
payee from his own act: the drawee
otherwise provided. But one who signs in a trade or
funds, afterwards pays directly from
assumed name will be liable to the same extent as if
the drawee pays the particular fund
he signed his own name (Sec 18 NIL)
himself from the indicated.
o Signature by agent – The signature of any party ma be
particular fund Payment is
made by a duly authorized agent. No particular form is
indicated subject to the
necessary
condition that the
o If the signature placed on the NI is not clear so what
fund is sufficient
capacity the person intended to sign, he is deemed as
Nature of fund Particular fund Particular fund
an indorser (Sec 17.f NIL)
indicated indicated is NOT indicated is the
the direct source of direct source of
2. Must contain an UNCONDITIONAL promise or order to payment but only payment
pay a sum certain in money – There must be an the source of
express promise or order to pay a sum certain in reimbursement
money Effect Unconditional Conditional
o “Promise” need not be used; an equivalent expression Example Pay to the order of I promise to pay X
is sufficient X P1,000 and or order the sum
o Order is a command or imperative direction. A mere reimburse yourself of P1,000 out of
request or authority to pay is not equivalent to an from the rentals of my salary in XYZ
order. my house corp
o There must be a clear demand upon the drawee to pay
NOTE: Bills and checks by itself do not operate as an
WHEN UNCONDITIONAL (Sec 3 NIL) assignment of any part of the funds to the credit of the
There is an unqualified or unconditional order or promise to drawer with the bank, and the bank is not liable to the
pay if there is:

Page | 1
holder unless and until it accepts or certifies the check (Sec
127 and 189 NIL)
Account to be debited with the amount – The payment does
not depend upon the existence or adequacy or the particular
account to be debited. It is negotiable because the
instrument is to be paid first after the particular account
indicated will be debited (De Leon, The Law on Negotiable
Instruments 2010 ed.)
b. A statement of the transaction which gives rise
to the NI – Where the promise or order is
subject to the terms and conditions of the
transaction stated, the instrument is rendered
non-negotiable. The NI must be burdened with
the terms and conditions of that agreement to
destroy its negotiability (Villanueva,
Commercial Law Review 2004 ed.)
NOTE: Reference to another transaction or
document must be descriptive rather than
restrictive.
SUM PAYABLE MUST CERTAIN (Sec 2) – A sum is certain if
the amount to be unconditionally paid by the maker or
drawee can be determined on the face of the instrument and
is not affected by the fact that the exact amount is arrived at
only after a mathematical computation
o NI is a device intended to take the place of money, it is
essential, then, that it represents a fixed amount of
money. The amount to be paid must be stated plainly
on the face of the instrument and must be
determinable from the face of the instrument itself
without reference to any outside source
Sum payable is certain even if (ISA-Ex-Co):
a. With INTEREST
b. By STATED installments
i. The amount of each installment is
indicated; AND
ii. The due date is fixed or at least
determinable
c. By stated installments with a provision
that upon default in payment of any
installment or of interest, the whole shall
become due (ACCELERATION clause)
d. With EXCHANGE, whether at a fixed rate
or at the current rate; or
e. With COSTS of collection or an attorney’s
fees, in case payment shall not be made
at maturity
PAYABLE IN MONEY – An instrument which contains an order
or promise to in addition to the payment of money is not
negotiable
o If the order or promise gives the holder an option to
require something to be done in lieu of payment, its
negotiability is not affected
o If the option to pay money or something in lieu thereof
is with the maker or the person primarily liable, the
instrument is not negotiable
CERTAINTY OF SUM PAYABLE
GENERAL RULE: An instrument which contains an order or
promise to do any act in addition to the payment of money is
not negotiable (Sec 5 NIL)
REASON: The instrument calls for an act other than payment
of money is not negotiable because a NI is intended as a
substitute for money
EXCEPTIONS:
(1) Authorizes the sale of collateral securities on
default
(2) Authorizes confession of judgment on default
NOTE: Confession of judgment clauses are VOID as
being against public policy because the PN bargains
away his day in court however such nullity does nto
affect the negotiability of the instrument (National
Bank v. Manila Oil Refining Co, G.R. no L-18103, June
8, 1922)
(3) Waives the benefit of law intended to protect the
debtor such as presentment for payment, notice
of dishonor and protest or;
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 (4) Allows the holder the option to require something
in lieu of money
NOTE: An instrument is still negotiable although the amount to be
paid is expressed in currency that is not legal tender so long as it
is expressed in money (PNB v. Zulueta, G.R. no L-7271, August
30, 1957)
REASON: Under the Sec 1 of RA 8183, all monetary obligations
shall be settled in Philippine currency which is legal tender in the
Philippines. However, the parties may agree that the obligation
shall be settled in any other currency at the time of payment
 Sec 1(b) and 6(e) call for the payment of money but the law
does not require the payment should be made in legal tender
 The Uniform Currency Act (RA 529) has repealed RA 8183;
the parties may now—not only in the case of NI—but in any
contract involving payment of debt money, agree now that
the payment should be made in a foreign currency
IS A NEGOTIABLE INSTRUMENT A LEGAL TENDER? No.
a.) Sec 60 of the New Central Bank Act (RA 7653) provides
that: Checks are not legal tender. 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 that a
check which has been cleared and credited to the account
of the creditor/s shall be equivalent to the creditor of cash
in an amount equal to the amount credited to his account
b.) Art 1249 NCC (impairment clause): The delivery of a note
payable to order or a bill of exchange or any other
mercantile document shall produce payment only when
they have been encashed or through the fault of the
creditor, the value is impaired
c.) The SC ruled that the creditor cannot be compelled to
accept a check in payment of a debt (Leticia Co v. PNB,
G.R. no L-51767, June 29, 1982). Acceptance of a check is
not tantamount to payment
WHAT IS LEGAL TENDER?
a.) It is that kind of currency which the law compels a creditor
to receive in payment of a debt, be it public or private,
provided it is tendered in the right amount
b.) Sec 52 New Central Bank Act: All notes and coins issued
by BSP shall be fully guaranteed by the Government of the
Philippines and shall be legal tender for all debts, both
public or private
NOTE: Checks representing demand deposits do not have legal
tender power and their acceptance in the payment of debts is at
the option of the creditor; provided that that a check which has
been cleared and credited to the account of the creditor/s shall be
equivalent to the creditor of cash in an amount equal to the
amount credited to his account (Sec 60 RA 7653)
3. Must be PAYABLE on demand, or at a fixed or
determinable future time – Purpose: To inform the holder
of the NI of the date when he may enforce payment thereof.
Before to maturity, he cannot compel the maker or acceptor
to pay unless there is a valid acceleration clause
WHEN PAYABLE ON DEMAND (Sec 7)
a. Where it is expressed to be payable on demand, at
sight or on presentation – NI is payable on demand not
only as between parties but also as to subsequent
parties
 AT sight – the NI is payable as soon as it is
seen by the party primarily liable
b. Where no period of payment is stated – Refers only to
immediate parties since between immediate parties
there is no difference between HDC and a person not
HDC
c. Where issued, accepted or indorsed after maturity
(only as between immediate parties)
PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME –
The time must be certain so that the holder will know when
he may enforce the NI and the person liable, when he may
be required to pay (Sec 4 NIL)
WHAT CONSTITUTES DETERMINABLE FUTURE TIME (Sec 4)
a. At a fixed period after date or sight – After sight: after
the drawee has seen the NI upon presentment for
acceptance
Page | 3
 b. On or before a fixed or determinable future time
specified therein; or
c. Before the occurrence of a specified event which is
certain to happen, though the time of happening is
certain (Sec 4 NIL)
d. A NI payable on contingency is not negotiable even if
the contingent event does happen
NOTE: If the day and month, but not the year of payment is
given, it is not negotiable due to its uncertainty
o If the NI states that the amount shall be paid in 2
equal installments, the 2nd being payable on a fixed
date, the NI can be considered negotiable since the 1 st
installment would then be payable on demand
o Presumption as to date: If NI is dated, such date is
prima facie presumed to be the true date of making,
drawing, acceptance or indorsement as the case may
be (Sec 11)
o If NI is not dated, it will be considered to be dated as
of the time it was issued (Sec 17 NIL)
EFFECT OF ACCELERATION CLAUSE – Acceleration clause
does not affect the negotiability of the NI (Sec 4.b NIL)
o If acceleration clause is at the option of the holder:
negotiability depends on the nature of the provision:
(a) If only upon happening of a specified event
over which he has no control = negotiable
(b) If option is unconditional = non-negotiable
(c) Acceleration clause to apply upon default =
negotiable
4. Must be payable to ORDER or to bearer – words of
negotiability: Payable to order or to bearer. This serves as
an expression of consent that the instrument may be
transferred
o Need not expressly state payable to “order” or
“bearer” as long as intention to legal
requirements is sufficient (substantial
compliance)
WHEN PAYABLE TO ORDER (Sec 8) – NI is payable to
order where it is drawn payable to the order of a specified
person, or to him or his order. It may be made payable to
the order of:
a. A payee who is not the maker, drawee or drawer
NOTE: Payee must be named or indicated with
reasonable certainty. If there is no payee, in a NI
payable to order, no one could indorse the NI (Sec 8.a)
 Subject to the rules in Sec 13, 14 and 15 on
incomplete instruments, leaving the payee
blank may make the NI non-negotiable
because an instrument payable to order may
be negotiated only by indorsement AND
delivery
b. The drawer or maker
NOTE: If maker is made the payee, the NI must be
indorsed to be complete (Sec 14 NIL)
 Where the NI is payable to the order of the
drawer and it is accepted by the drawee, the
NI is equivalent to a PN made by the acceptor
in favor of the drawer
c. The drawee
d. Two or more payees jointly
e. One or some of several payees
f. The holder of an office for the time being
PAYABLE TO BEARER (Sec 9 NIL) – Only NI under
Subsections A and B are bearer instruments on the face.
Those under Subsections C, D, and E are order instruments
on the face: (OPEN-F)
a. When it is EXPRESSED to be so payable
b. When it is payable to a PERSON named therein or
bearer
c. When it is payable to the order of a FICTITTIOUS
or non-existing person, and such fact was known
to the person making it so payable – Fictitious
person is not limited to persons having no real
existence. An existing person may be considered a
fictitious payee, if the person making it so payable
does not intend to pay the specified person
 REASON: There is no one to indorse it, hence if
the maker intended to give it negotiability, it
could only be on the theory that it became
payable to bearer
Page | 4
  A note payable to the estate of a person still
existing at the time of its execution is payable
to bearer since it is payable to a non-existing
person
 That the payee is a fictitious or non-existing
person must be known to the maker or drawer
otherwise it is an order instrument
d. When the name of the payee does NOT purport to be
the name of any person – e.g., pay to cash or pay to
sundries
 The payee named is one who does not exist
and has never existed. Since indorsement is
obviously impossible, the manifest intention of
the drawer is to make the instrument a bearer
paper negotiable by delivery
e. When the ONLY or last indorsement is an indorsement
in blank – It becomes payable to bearer even if it is
originally payable to a specified person
 NI originally payable to bearer can be
negotiated by mere delivery even if it is
indorsed specially. If it is originally a BEARER
instrument, it will ALWAYS be a bearer
instrument (Sec 40 NIL)
 As opposed to an original order instrument
becoming payable to bearer, if ht same is
indorsed specially, it can no longer be
negotiated further by mere delivery, it has to
be indorsed
 When the instrument is payable only to a
specified person or his agent, it is not payable
to order, thus non-negotiable
5. When the instrument is ADDRESSED to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty – It is applicable only to a bill of
exchange
o Omission of drawee may be filled later (Sec 14
NIL)
o A bill may be addressed to 2 or more drawees
jointly, whether they are partners or not in the
alternative or in succession (Sec 128 NIL)
because there would be no certainty as the
person to whom the bill should be presented for
payment or acceptance
APPLICABILITY
The provisions of NIL apply only to negotiable instruments. If the
instrument is negotiable, the instrument is not governed by the
provisions of NIL (Metropolitan Bank and Trust Co v. CA, 194 SCRA
169, 1991).
NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE
INSTRUMENTS DISTINGUISHED
NEGOTIABLE INSTRUMENTS NON-NEGOTIABLE
INSTRUMENTS
Only negotiable instruments are NIL does not apply
governed by NIL
Can be transferred by negotiation or Can be transferred only
by assignment by assignment
Transferee can become HDC if all Transferee can never
requirements under Sec 52 NIL are become HDC
complied with
If last transferee is HDC, prior All defenses available to
parties may not raise defenses prior parties may be raise
against HDC (except real defenses) against last transferee
GOVERNING LAWS
1. NEGOTIABLE INSTRUMENTS LAW (Act 2031)
2. CODE OF COMMERCE – Negotiable instruments are governed
by the provisions of the Code of Commerce that were not
impliedly repealed by NIL
NOTE: The provisions on CROSSED CHECKS are still in force
because there is no provision in NIL that deals with crossed
checks. (Chan Wan v. Tan Kim, 109 PHIL 706, 1960).
3. Law Merchant (Sec 196 NIL)
4. CIVIL CODE – applicable suppletorily
FUNCTIONS OF NEGOTIABLE INSTRUMENTS
1. It operates as a substitute of money
2. It is a means of creating and transferring credit
3. It facilitates sale of goods
Page | 5
 4. It increases the purchasing medium in circulation (Sundiang,
Reviewer on Commercial Law)
5. It is a proof of transactions
Sec 52 of the New Central Bank Act (RA 7653) provides that only
notes and coins issued by the Banko Sentral ng Pilipinas are
considered legal tender, hence, negotiable instruments are NOT
legal tender. Delivery of instrument does not operate as payment.
Sec 69 of the same law expressly provides that checks are not
legal tender. Sec 60 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 in an amount equal to
the amount credited to his account (Sundiang, Reviewer on
Commercial Law).
STAGES IN THE NEGOTIABLE INSTRUMENT
1. PREPARATION AND SIGNING complete with all the
requirements provided under Sec 1 NIL
2. ISSUANCE – First delivery of the instrument to the payee
(from maker to payee/bearer or from drawee to the
payee/bearer)
3. NEGOTIATION – Transfer from one person to another so as
to constitute the transferee a holder
4. PRESENTMENT for acceptance for certain kinds of Bills of
Exchange – The bill of exchange shall be presented to the
drawee so that the latter will signify his agreement to the
order of the drawer to pay
5. ACCEPTANCE – Written assent of the drawee to the order
6. DISHONOR by non-acceptance – Refusal to accept by the
drawee
7. PRESENTMENT for payment – The instrument is shown to
the maker or drawee/acceptor so that the said maker or
drawee/acceptor will pay
8. DISHONOR by nonpayment – Refusal to pay by the maker
or drawee/acceptor
9. NOTICE OF DISHONOR – Notice to the persons secondarily
liable that the maker or drawee/acceptor refused to pay or
accept the NI
10. PROTEST – applicable to foreign bills
11. DISCHARGE
FEATURES OF A NEGOTIABLE INSTRUMENT
1. NEGOTIABILITY –That attribute or property whereby a bill or
note or check may pass from hand to hand similar to money,
so as to give the holder in due course the right to hold the
instrument and collect the sum payable for himself free from
defenses
2. ACCUMULATION OF SECONDARY CONTRACTS – Secondary
contracts are picked up and carried along with them as they
are negotiated from one person to another, or in the course
of negotiation from one person to another, or in the course
of negotiation of NI, a series of juridical ties between the
parties thereto arise by law or by privity (Sundiang,
Reviewer on Commercial Law)
INTERPRETATION OF NEGOTIABLE INSTRUMENT
(Sec 17 NIL)
The rules in Sec 17 are applicable only when the instrument is
ambiguous or uncertain or when there are omissions therein. If the
terms are clear, the NI must be enforced as it reads.
 When the meaning is doubtful, the courts have adopted the
policy of resoling in favor of the negotiability of the
instrument.
1. Words prevail over figures
2. Interest stipulated runs from the date of the NI, or if
undated, from its issue
3. If undated, the instrument is deemed dated at its issue
4. Written words prevail over printed provisions
5. When there is doubt whether the NI is a bill or a note, the
holder, at his election, may treat it as either a bill or a note –
Where in a bill, the drawer and the drawee are the same
person or where the drawee is a fictitious person, or a
person not having capacity to contract, the holder may treat
the NI at his option,, either as a bill of exchange or
promissory note (Sec 130 NIL)
6. When it is not clear in what capacity a person signs, he is
deemed an indorser
Page | 6
 7. When 2 or more persons sign “We promise to pay,” their The drawee is not really a party to the bill. He assumes
liability is JOINT (each liable for his part) but if they sign “I liability only when he accepts the bill usually by writing
promise to pay,” the liability is SOLIDARY (each can be the word “accepted and signing his name on the face
compelled to comply with the entire obligation thereof” (Sec 132 and 133 NIL) in which case he ceases
to be drawee and becomes known as an ACCEPTOR
KINDS OF NEGOTIABLE INSTRUMENTS (Hector De Leon, The Law on Negotiable Instruments)
ACCEPTOR – A drawee who ACCEPTS the order to pay
A. PROMISSORY NOTE (PN) – An unconditional promise, in
made by the drawer
writing, made by one person to another, signed by the maker
engaging to pay, on demand or at a fixed or determinable
NOTE: Prior to the acceptance of the Bill of Exchange,
future time, a sum of certain money, ot order or to bearer (Sec
there is no party primarily liable in a bill of bill of
184 NIL)
exchange. It is only when a drawee becomes an acceptor
PARTIES:
that he is primarily liable.
a. Maker – Party who executes the written promise to pay
b. Payee – Party in whose favor the promissory note is
LEGAL BASIS: A bill itself does not operate as an
made payable
assignment of funds in the hands of the drawee available
for payment thereof, and the drawee is not liable until
EXAMPLE: and unless he accepts the same (Sec 127 NIL)
Payee
July 15, 2012 c. Payee – Party in whose favor the bill is drawn or payable
Manila
P10,000
EXAMPLE:
Payee
Fifteen (15) days after date, I promise to pay Mr. X or order the sum of Ten
July 15, 2012
Thousand Pesos (P10,000)
Manila
Sgd. Mr. Y
P10,000

Fifteen (15) days after date, pay Mr. X or order the sum of Ten Thousand
Maker
Pesos (P10,000).
Sgd. Mr. Y
B. BILL OF EXCHANGE (BEX) – An unconditional order, in To: Mr. Z
writing, addressed by one person to another, signed by the President, XYZ Corp
person giving it, requiring the person to whom it is addressed Mendiola, Manila
to pay, on demand or at a fixed or determinable future time, a
sum certain in money, to order or to bearer (Sec 126 NIL) Drawee/Acceptor Drawer
PARTIES:
a. Drawer – Party who executes the written order to pay NOTE: The parties need not all be distinct persons. Thus, the
NOTE: A bill of exchange requires in its inception three drawer may draw on himself payable to his own order (De Leon,
parties: drawer, drawee and payee The Law on Negotiable Instruments, 2010 ed.).
b. Drawee – The person to whom the bill is addressed and
who is ordered to pay

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BILL OF EXCHANGE TREATED AS PROMISSORY NOTE  Except as otherwise provided, the provisions of NIL
applicable to a bill of exchange payable on demand
INSTANCES WHEN A BILL OF EXCHANGE MAY BE TREATED AS PN apply to a check (Sec 185 NIL)
AT THE ELECTION OF THE HOLDER (Sec 17e and Sec 130 NIL):
(FLACS) EXCHANGE AND CHECK DISTINGUISHED
1. Drawee is a FICTITIOUS person EXCHANGE CHECK
2. Where the bill is drawn on a person who is LEGALLY absent
WHEN PAYABLE May be payable on Always payable on
3. Where the bill is AMBIGUOUS (Sec 17e NIL)
demand or at a demand
4. Drawee does not have the CAPACITY to contract (Sec 130
fixed or
NIL); and
determinable
5. The drawer and drawee are the SAME person
future time
PRESENTMENT Must be presented Need not be
PROMISSORY NOTE AND BILL OF EXCHANGE for acceptance presented for
DISTINGUISHED acceptance,
PROMISSORY NOTE BILL OF EXCHANGE however, if the
NATURE Unconditional promise Unconditional order holder requests and
NUMBER OF Involves 2 parties Involves 3 parties the bank desires, he
PARTIES may accept
LIABLITY OF Maker is primarily Drawer is only DRAWN ON DEPOSIT Need NOT be Is drawn on deposit,
CREATOR liable secondarily liable drawn on a otherwise there
PRESENTMENT Only one presentment Generally 2 deposit, hence it is would be fraud
for payment presentments: not necessary that
a. Acceptance the drawer of a bill
b. Payment of exchange
should have funds
NOTE: 2 in the hands of the
presentments only drawee
in cases provided in WHEN PRESENTMENT May be presented Must be presented
Sec 143 MADE for payment within within a reasonable
RIGHT TO LIMIT Maker of the note may Drawer may insert reasonable time time after its issue
LIABILITY NOT insert an express in the instrument an after last
stipulation limiting or express stipulation negotiation
negativing his own limiting or EFFECT OF If accepted: If certified:
liability to the holder negativing his own ACCEPTANCE OR drawer/indorser drawer/indorser are
liability to the holder CERTIFICATION remains liable discharged
(Sec 61 NIL) EFFECT OF DRAWER’S Death of a drawer Death of the drawer
DEATH of BOE, with the of the check, with
C. CHECK – A bill of exchange drawn on a bank payable on knowledge of the the knowledge of
demand (Sec 185 NIL). It is also the most common form of bill bank, does not the bank, revokes
of exchange revoke the the authority of the
authority of the banker to pay

Page | 8
 drawee to pay 2. INDORSEE – in the case of instrument payable to order
3. Persons negotiating by mere delivery
D. CERTIFICATE OF DEPOSIT issued by banks, payable to 4. Persons to whom the instrument is negotiated by mere
the depositor or his order, or to bearer – A form of promissory delivery, in case the instrument is payable to bearer
note which is a written acknowledgment of a bank of its receipt 5. ACCEPTOR – A drawee who accepts the order to pay made
of a certain sum with a promise to repay the same by the drawer. It is only when a drawee becomes an
 A written acknowledgment by a bank or banker of the acceptor that he is primarily liable (Sundiang, Reviewer on
receipt of a sum of money on deposit which the bank or Commercial Law)
banker promises to pay to the depositor, to the order of 6. ACCOMODATION PARTY – One who has signed the
the depositor, or to some other person or his order, instrument as maker, drawer, acceptor, or indorser, without
whereby the relation of debtor and creditor between the receiving value therefore, and for the purpose of lending his
bank and depositor is created name to some other person (Sec 29 NIL)
7. REFEREE IN CASE OF NEED (Sec 130 NIL) – A person who
E. TRADE ACCEPTANCE – A bill of exchange payable to order may be designated in the instrument as the person who may
and at a certain maturity, drawn by a seller against the be resorted to by the parties in case of dispute (Sundiang,
purchaser of goods as drawee, for a fixed sum of money, Reviewer on Commercial Law)
showing on its face the acceptance of the purchaser of the
goods and that it has arisen out of a purchase by goods by the NON-NEGOTIABLE INSTRUMENTS AND
acceptor NEGOTIABLE INSTRUMENTS DISTINGUISHED
NEGOTIABLE NON-NEGOTIABLE
F. BONDS, which are in the nature of promissory notes – A INSTRUMENTS INSTRUMENTS
certificate or evidence of a debt which the issuing company or APPLICABLE LAW Only NI is governed Application of NIL is
governmental body promises to pay the bondholders a by NIL only by analogy
specified amount of interest for a specified length of time, and TRANSFERABILITY Transferable by Transferrable only
to repay the loan on the expiration date negotiation or by by assignment
assignment
G. DRAFTS –which are bills of exchange drawn by one bank TRANSFEREE The transferee can The transferee
upon another be a HDC if all the remains to be an
 In Bank drafts, the drawer and drawee are liable to the requirements are assignee and can
purchaser of draft for not complying with his instructions complied with never be a HDC
DEFENSES A holder in due All defenses
H. DEBENTURE – A promissory note or bond backed by the course takes the NI available to prior
general credit of a corporation and usually not secured by a free from personal parties may be
mortgage or lien on any specific property defenses raised against the
last transferee
I. BANK NOTES – Promissory notes of the issuing bank which NATURE OF TITLE Requires clean title, Transferee acquires
are payable to bearer on demand one that is free from a derivative title
any infirmities in the only
OTHER PARTIES TO A NEGOTIABLE INSTRUMENT instrument and
1. INDORSER – A person placing his signature upon an defects of title of
instrument, otherwise than as maker, drawer or acceptor prior transferors

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SOLVENCY OF THE Solvency of the Solvency of the NEGOTIABILITY
DEBTOR debtor is in the debtor is not
sense guaranteed by guaranteed under NEGOTIABILITY – The requisites of negotiability are provided
the indorsers Art 1628 NCC unless for under Sec1 NIL. It is the most important provision of NIL
because they expressly stipulated because the law does not apply if the instrument does not meet
engage that the (Timoteo Aquino, the requisites of negotiability as provided therein (Aquino, Cases
instrument will be Cases on Banks, on Banks, Negotiable Instruments and other Commercial
accepted, paid or Negotiable Documents)
both and that they Instruments and
will pay if the other Commercial
FACTORS THAT AFFECT THE DETERMINATION OF
instrument is Documents)
dishonored NEGOTIABILITY OF INSTRUMENTS (WART)
1. The WHOLE of the instrument shall be considered
2. Only what APPEARS on the face of instrument shall be
1. TREASURY WARRANT – Being payable out of a
considered
particular fund of the national treasury (Metrobank v. CA,
3. REQUISITES enumerated in Sec 1 NIL; and
G.R. no 88866, February 18, 1991)
4. Should contain words or TERMS of negotiability such as
2. POSTAL MONEY ORDERS – “order” or “bearer” (Gopenco, Commercial Law Reviewer
REASONS: citied in Aquino, p. 23)
a. Under postal regulations, the bureau of posts can refuse
to pay on numerous grounds, thus the order is not RATIONALE OF FORMALITIES OF NEGOTIABLE INSTRUMENTS
unconditional 1. To become effective substitutes for money
b. A money order can be indorsed only once 2. To be desirable tools for credit transactions
c. The post office is not run by the government for 3. For security of mercantile transactions
commercial profit, but for public service (Phil Education
Co Inc v. Soriano, G.R. no L-22405, June 30, 1971)
PROVISIONS AND OMMISIONS THAT DO NOT
3. LETTER OF CREDIT – Being payable to a specified person
4. TRUST RECEIPT – Being payable to the entrustor,
AFFECT NEGOTIABILITY
conditioned upon the resale of the goods 1. PROVISIONS which
5. NEGOTIABLE DOCUMENT OF TITLE, BILL OF a. Authorizes the sale of COLLATERAL SECURITIES in
case the instrument be not paid at maturity
LADING AND WAREHOUSE RECEIPT – Being payable
b. Authorizes a CONFESSION of judgment if the
in goods rather than money
instrument be not paid at maturity
6. CERTIFICATE OF STOCKS – It is a written instrument c. WAIVES the benefit of any law intended for the
signed by proper officer of a corporation stating that the advantage or protection of the obligor; or
person named therein is the owner of a designated number d. Gives the holder an election to require something to be
of shares of stock. It is also without an unconditional done IN LIEU of payment of money (Sec 5 NIL)
promise or order to pay sum certain in money (De Leon,l The
Law on Negotiable Instruments)
2. OMMISSIONS (Sec 6)
a. It is not dated – The date referred is the date of the
making or drawing of the NI. If the NI is not dated, it
will be considered to be dated as of the time it was
issued

Page | 10
  Sec 13 NIL contemplates a situation where the
date is necessary to fix the maturity date or to
make the maturity date determinable. The
reason is that unless the true date is inserted,
one will not know when the NI is due
b. It does not specify the value given or that any
value has been given – Consideration is presumed
(Sec 24 NIL)
c. It does not specify the place where it is drawn or
where it is payable – It should be noted that Sec 73
NIL already provides for the rules on the proper place
of presentment where no place is specified. On the
other hand, Sec 75 covers a situation where it is
payable at a bank
d. It bears a seal
e. It designates a particular kind of current money
in which payment is to be made
3. ACCEPTANCE – The acceptance of a bill of exchange is not
important in the determination of its negotiability. The
nature of acceptance is important only in the determination
of the kind of liabilities of the parties involved (PBCom v.
Aruego, G.R. no L-25836-37, January 31, 1981)
4. INDORSEMENT – The presence of indorsement of the NI
does not affect the negotiability of the NI. This rule is subject
to the provision that a PN that is payable to the order of the
maker himself is not yet complete unless it is indorsed by
the maker (Sec 184 NIL). Moreover, an indorsement may
prevent further negotiation of the NI, in which case,
subsequent transferees can no longer be considered holders
(Sec 36)
TRANSFER AND NEGOTIATION
DELIVERY – Transfer of possession, whether actual or
constructive, from one person to another
 Contract of NI is incomplete and revocable until delivery of
NI for the purpose of giving effect thereto (Sec 16)
 Without the initial delivery of the instrument to the payee,
there can be no liability on the NI (e.g. if delivered merely
for safekeeping = no liability)
 ISSUANCE – First delivery of the NI complete in form to a
person who takes it as a holder
MODES OF TRANSFER
1. NEGOTIATION – NI is negotiated when it is transferred
from one person to another in such a manner as to
constitute the transferee the holder thereof. If payable to
bearer, it is negotiated by mere delivery; if payable to order,
it is negotiated by indorsement of the holder completed by
delivery (Sec 30 NIL)
o EFFECT: Makes the transferee the holder of the NI
(Sec 191). The right to collect a sum certain in money
is transferred from one person to another
o BEARER – the person in possession of a bill or note
payable to bearer
o HOLDER – payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof (Sec 191)
a. NI Payable to ORDER – Where the NI is payable to
order, there are 2 steps required for its negotiation
b. NI payable to BEARER – It is negotiated by mere
delivery without indorsement
2. ASSIGNMENT – A method of transferring a negotiable or
non-negotiable instrument whereby the assignee is merely
placed in the position of the assignor and acquires the NI
subject to all defenses that may be set up against the
original payee
o A person taking a NI by assignment in a separate piece
of paper takes it subject to the rules on assignment.
And where the holder of the bill payable to order
transferred it without indorsement, it operates as an
equitable assignment
NOTE: If the instrument is not negotiable, it can still
be transferred but only through assignment
ASSIGNMENT AND NEGOTIATION DISTINGUISHED
ASSIGNMENT NEGOTIATION
Applicable law Civil Code NIL
Type of Pertains to contracts in Pertains to NI
Page | 11
transaction general indorsement that the transferee acquires all
Nature o f the The transferee is a The transferee is a the rights of the holder
transferee mere assignee holder who may be  For the purpose of determining whether the
HDC transferee is HDC, the negotiation takes effect
Availability of Assignee steps into the HDC takes it free from as of the time when the indorsement is made.
defenses shoes of the assignor personal defenses Hence, before indorsement, the transferee is
and merely acquires available among not a holder (Sec 49 NIL)
whatever rights the parties
assignor may have RIGHTS OF TRANSFEREE FOR VALUE
As to The transferee can The transferee can a. Acquires only the rights of the transferor; and
possibility of never become HDC become HDC in proper b. Right to require the transferor to indorse the NI
become HDC cases NOTE: Transferees in this situation do not enjoy the
presumption of ownership in favor of holders
HOW NEGOTIATION TAKES PLACE REASON: Mere possession of a NI does not in itself
a. ISSUANCE – The first delivery of the NI, complete in conclusively establish either the right of the possessor
form, to a person who takes it as a holder (Sec 191). to receive payment, or of the right of one who has
It is the first transfer of NI to a payee made payment to be discharged from liability (BPI v.
Steps: CA and Salazar, G.R. no 136202, January 25, 2007)
(1) Mechanical act of writing the NI completely
and in accordance with the requirements under EQUITABLE ASSIGNMENT – The transaction is an equitable
Sec 1 NIL assignment and the transferee acquires the NI subject to the
(2) The delivery of the complete instrument by the defenses and equities available among prior parties. If the
maker or drawer to the payee or holder with transferor had legal title, the transferee acquires such title,
the intention of giving effect to it and the right to have the indorsement of the transferor and
b. SUBSEQUENT NEGOTIATION (Sec 30 NIL) – AN NI also the right, as holder of the legal title, to maintain legal
is negotiated when it is transferred from one person to action against the maker or acceptance or other party liable
another in such a manner as to constitute the to the transferor.
transferee the holder thereof
(1) If payable to bearer, NI may be negotiated by 3. BY OPERATION OF LAW – The full title to a bill may
mere delivery pass without assignment or indorsement or delivery, i.e. by
(2) If payable to order, NI negotiated by operation of law (De-Ba-De)
indorsement completed by delivery a. By the DEATH of the holder, where the title vests in his
 In both cases, delivery must be intended to personal representatives
give effect to the transfer of NI (DBP v. Sima b. By the BANKRUPTCY of the holder, where the title
Wei, G.R. no 85419, March 9, 1993) vests in his assignee or trustee
c. INCOMPLETE NEGOTIATION OF ORDER c. Upon the DEATH of a joint payee or indorsee, in which
INSTRUMENT (Sec 49 NIL) – Contemplates a case case the title vests in the surviving payee or indorsee
where there is delivery and payment of value but NO in general
indorsement
 Applicable only to NI payable to order 4. INDORSEMENT – It is the writing of the name of the
 Effect: The NI is in effect merely assigned to indorser on the NI with the intent either to transfer the title
the transferee. It is only at the time of to the same, or to strengthen the security of the holder by

Page | 12
 assuming a contingent liability for its future payment, or
both
HOW INDORSEMENT IS MADE – The indorsement must
be written on the NI itself or upon a paper attached thereto
(allonge). The signature of the indorser without additional
words is sufficient (Sec 31 NIL).
o Allonge can only be used when there is no longer any
room on NI for further indorsements.
o Where the indorsement is written in an allonge, the
same must be tacked or pasted on the NI so as to
become part of it; otherwise, it cannot be considered
an allonge. Indorsement may made in any form, as
long as it is meant to be an indorsement.
NATURE: An indorsement is not only a mode of transfer, it is
also a contract.
INDORSEMENT AS A CONTRACT – Unless the
indorsement is qualified (sec 65), every indorser is a new
obligor and the terms are found on the face of the NI, with
the additional obligation that if the NI is dishonored by
nonpayment or non-acceptance, and notice is given to the
indorser, the latter will pay for it.
NOTE: A qualified indorser is liable in case of breach of
warranties (Sec 65).
RULES ON INDORSEMENT
1. Indorsement must be of the entire NI
EXCEPT: Where NI has been paid in part, it may be indorsed
as to the residue or balance (Sec 32)
o An indorsement which purports to transfer to the
indorsee a part only of the amount payable does not
operate as a negation of NI, it operates merely as an
assignment (Montinola v. PNB, G.R. no L-2861,
February 26, 1951)
o NOTE: An indorsement which purports to transfer the
NI to 2 or more indorsees severally does not operate
as a negotiation of NI (Sec 32)
o Sec 32 does not prohibit discounting, whereby the
indorsee pays the indorser les than the face amount of
the NI. The discount is given in consideration of the
period during which the purchaser has to way before
he can cash the NI with the maker or acceptor, which
can be done only at the maturity of NI
o If the indorsement of NI does not comply with Sec 32,
the transfer is a mere assignment which subjects the
holder to all defenses on the NI
EFFECT OF PARTIAL INDORSEMENT
a. It doesn't operate as an indorsement
b. It may constitute a valid assignment though
binding between the parties
c. The person to whom the instrument is
indorsed would not be considered an indorsee
but merely an assignee and would therefore
take the instrument subject to the defenses
available between the original parties
2. Where a person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negate personal liability (Sec 44 NIL)
a. He must add words describing himself as agent
b. He must disclose his principal
c. He must be duly authorized in writing
3. Where NI is drawn or indorsed to a person as “cashier” or
other fiscal officer or corporation, it is deemed prima facie to
be payable to the bank or corporation of which he is an
officer, and may be negotiated by either indorsement of the
bank or corporation or indorsement of the officer
NOTE: The cashier or treasurer may prove that the NI were
in fact indorsed to them in their personal capacities and not
to the corporations. They can prove that they own the NI.
4. Where the name of a payee or indorsee is wrongly
misspelled, he may indorse the NI as therein described,
adding, if he thinks fit, his proper signature (Sec 43 NIL)
5. Joint indorsement – Where NI is payable to the order of 2 or
more payees or indorsees who are not partners, all must
indorse (Sec 11)
EXCEPTION:
a. Where the payee or indorsees are partners AND
b. Where the payee or indorsee indorsing has authority to
indorse for the others
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CLASSIFICATION OF INDORSEMENT
A. As to METHODS of negotiation
1. SPECIAL – Specifies the person to whom or whose order,
the NI is to be payable, and the indorsement of such
indorsee is necessary to the further negotiation of the NI
(Sec 34 NIL)
o If the NI is originally payable to order and it is
negotiated by the payee by special indorsement, the
indorsement of the indorsee is necessary to further
negotiation of the instrument (Sec 34)
o If the NI is originally payable to bearer, it may be
negotiated by mere delivery even if the original bearer
indorsed it specially (Sec 40 NIL)
o Example: Pay to X, signed M.
2. BLANK – Specifies no person to whom or to whose order
the NI is to be payable and may be negotiated by delivery
(Sec 34)
o Example: An NI payable to the order of X, is indorsed
by the latter by merely affixing his signature without
specifying an indorsee
RULES ON BLANK INDORSEMENT
a. If NI is originally payable to order and negotiated by
special indorsement, it can be further negotiated by
indorsement completed by delivery
b. If originally payable to order and negotiated by blank
indorsement, it can be negotiated further by mere
delivery
c. If originally payable to bearer, it can be further
negotiated by mere delivery even if the original bearer
negotiated it by special indorsement
EFFECTS OF BLANK INDORSEMENT: (a) To make the NI
payable to bearer and (b) may be converted to special
indorsement by writing over the signature of indorser in
blank any contract consistent with character of indorsement
(Sec 35 NIL)
B. As to presence or absence of LIMITATIONS
1. ABSOLUTE (UNCONDITIONAL) – One by which the
indorser binds himself to pay:
a. Upon no other condition than failure of prior parties to
do so; and
b. Upon due notice to him of such failure
2. CONDITIONAL – Right of the indorsee is made to depend
on the happening of a contingent event. Party required to
pay may disregard the conditions (Sec 39 NIL)
o Where an additional condition is annexed to the
indorser’s liability. Such condition must be express.
o If an indorsement is conditional, the party required to
pay the NI may disregard the condition and make
payment to the indorsee or his transferee whether the
condition has been fulfilled or not. But any person to
whom the I so indorsed is negotiated will hold the
same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally
o Example: Pay to X if he tops the 2013 bar exams
o NOTE: Conditional indorsement does NOT render an
instrument non-negotiable but if the condition is on the
face of the NI, the condition renders it non-negotiable
as the promise or order therein would not be
unconditional.
C. As to the kind of TITLE transferred
1. RESTRICTIVE – An indorsement is restrictive when it
either (Sec 36 NIL):
a. Prohibits further negotiation of the NI – E.g., Pay
to Y only, signed M
b. Constitutes the indorsee as the agent of the
indorser (e.g., indorsement for deposit) – Pay to X
for collection, signed M
c. Vests the title in the indorsee in trust for so to the
use of some other persons – Pay to Y in trust for A,
signed M
o Mere absence of words implying power to negotiate
does not make an indorsement restrictive (Sec 36
NIL)
o The omission of words of negotiability in the
indorsement does NOT affect the negotiability but
such omission in the body will render the NI non-
negotiable
Page | 14
 o A restrictive indorsement destroys the negotiability
of the instrument and bars any further negotiation to
HDC
EFFECT OF RESTRICTIVE INDORSEMENT (PAT)
It confers upon the indorsee the right to:
a. Receive PAYMENT of the NI
b. Bring any ACTION thereon that the indorser could
bring
c. TRANSFER his rights as such indorsee, where the from
of the indorsement authorizes him to do so (Sec 37
NIL)
NOTE: An instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or discharged
by payment or otherwise (Sec 47 NIL)
o This refers only to the first kind (Sec 36.a NIL)
because this is the only type of restrictive indorsement
that completely destroys the negotiability of the
instrument
D. As to scope of LIABILITY of indorser
1. QUALIFIED – Constitutes the indorser a mere assignor of
the title to the NI (Sec 38)
o By adding the words “without recourse” above his
signature, the indorser expressly rids himself of his
liability as indorser, i.e. the holder would have no
recourse to him should the maker fail to pay on the
due date
o A qualified indorser merely assumes the contract of
sale/assignment of NI and agrees merely to transfer
title
o It is made by adding to the indorser’s signature words
like “sans recourse,” “without recourse,” indorser not
holder,” “at the indorser’s own risk” or other terms of
similar import
o Oral testimony is not admissible to establish that an
unqualified NI is in fact qualified (Velasco v. Tan Liuan,
G.R. no 17239, March 17, 1922)
WITHOUT RECOURSE – Without resort to a person
secondarily liable after the default of the person primarily
liable
NOTE: Qualified indorsement is usually resorted to if the
indorser wants to transfer his rights over the instrument but
does not want to assume responsibilities under the
secondary contract
EFFECTS OF QUALIFIED INDORSEMENT
a. A qualified indorser has limited liability, i.e. he is liable
for breach of warranty if the NI is dishonored by non-
acceptance or non-payment due to:
1) Forgery – Warranty as to genuineness
2) Lack of good title on the part of the indorser –
warranty as to good title
3) Lack of capacity to indorse on the part of the
prior parties – warranty as to capacity to
contract; or
4) Fact that at the time of the indorsement, the
NI was valueless or not value, and he knew of
the fact – warranty as to ignorance of certain
facts
b. A qualified indorsement does not impair the negotiable
character of the instrument (Sec 38, last sentence)
c. A qualified indorser is liable to all the parties who
derive their title through his indorsement
2. GENERAL(UNQUALIFIED) – The indorser indorses the
instrument without any qualified and subject liabilities under
Sec 66 NIL
E. OTHER kinds of indorsement
1. JOINT – Indorsement payable to the order of 2 or more
persons (Sec 41 NIL)
GENERAL RULE: Where the instrument is payable to 2 or
more payees, ALL must indorse in order that the NI may
be validly negotiated
REASON: To make it an indorsement of the entire
instrument because if only one indorses, he passes only
his part of the instrument
EXCEPTION:
a. Where the payees or indorsees indorsing has the
authority to indorse for the others; and
Page | 15
 b. Where the payees or indorsees are partners (Sec
41 NIL)
2. IRREGULAR – A person who, not otherwise a party to
an instrument, places thereon his signature in blank
before delivery (Sec 64 NIL)
LIABILITY OF IRREGULAR INDORSER (Sec 64)
a. If the NI is payable to the order of a third person
(payee), he is liable to the payee and to all subsequent
parties
b. If the NI is payable to the order of the maker or
drawer, or is payable to bearer, he is liable to all
parties subsequent to the maker or drawer
c. If he signs for the accommodation of the payee, he is
liable to all parties subsequent to the payee
PRESUMPTION AS TO TIME OF INDORSEMENT
GENERAL RULE: Negotiation is deemed prima facie to have been
effected before the instrument is overdue
EXCEPTION: IF the indorsement bears a date after the maturity of
the instrument (Sec 45 NIL)
NOTE: IF the indorsement bears a date, the presumption would be
that the date written is the true date (Sec 11 NIL)
PRESUMPTION AS TO PLACE OF INDORSEMENT (Sec 46
NIL)
Except where the contrary appears, every indorsement is
presumed to have been made at the place where the NI is date.
RENEGOTIATION OF PRIOR PARTIES
 Sec 50 refers to a re-acquirer or holder who negotiates the
NI and then subsequently reacquires it.
 Where an NI 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 (Sec 50 NIL)
 REASON: To avoid circuitousness of suits
LIMITATIONS:
A prior party may cannot renegotiate the NI:
1. Where it is payable to order of a third person, and has been
paid by the drawer
2. Where it was made or accepted for accommodation and has
been paid by the party accommodated
STRIKING OUT (CANCELLATION) INDORSEMENT
(Sec 48 NIL)
The holder may at any time strike out or cancel the indorsement
which is not necessary to his title.
EFFECT: The indorser whose indorsement is stricken out, and all
the indorsers subsequent to him are relieved from liability on the
NI (Sec 48).
NOTE: If the NI is negotiated by special indorsement, the holder
has no right to strike out such indorsement nor can he convert the
special indorsement into a blank indorsement.
WHEN HOLDER MAY CANCEL INDORSEMENT
1. An indorsement payable to bearer on its face – By virtue of
Sec 48, the holder may strike out all intervening
indorsements or any of them since they are not necessary to
his title
2. Instrument originally payable to order – Under Sec 9(e), NI
which is upon its face payable order becomes payable to
bearer when the only or last indorsement is in blank. Hence,
when a blank indorsement is followed by a special
indorsement and the holder cancels all indorsements
subsequent to the blank indorsement, the NI would become
payable to bearer s the last indorsement would be in blank.
The special indorsements are not necessary to the holder’s
title as he could have acquired the title to NI by mere
delivery
NOTE: The indorser may NOT strike out the payee’s
indorsement since the NI is payable to order, it cannot be
validly negotiated without his indorsement
CONTINUATION OF NEGOTIABLE CHARACTER
(Sec 47 NIL)
GENERAL RULE: An instrument which is negotiable shall continue
to be such until it has been:
Page | 16
 1. RESTRICTIVELY INDORSED – This refers only to the first
kind (Sec 36.a NIL) because this is the only type of
restrictive indorsement that completely destroys the
negotiability of the instrument
2. DISCHARGED BY PAYMENT OR OTHERWISE (Sec 47 NIL) –
This must be understood to be payment made at or after
maturity because if the payment was made before maturity,
the person so paying can still renegotiate or reissue the
instrument. Hence, payment before maturity does not
destroy negotiability
TRANSFER WITHOUT INDORSEMENT (Sec 49 NIL)
 Contemplates a case where there is delivery and payment of
value but NO indorsement (unendorsed)
 Applicable only to NI payable to order
 The holder acquires only the rights of his predecessor and
the right to have the NI indorsed by the transferor
 EFFECT: The instrument is in effect merely assigned to the
transferee. It is only at the time of indorsement that the
transferee acquires the rights of a holder
 For the purpose of determining whether the transferee is
HDC, the negotiation takes effect as of the time when the
indorsement is made. Hence, before the indorsement the
transferee is not a holder (Sec 49)
HOLDERS
HOLDER – A payee or indorsee of a bill or note who is in
possession of it or the bearer thereof entitled to receive the sum
for which it calls (Sec 191 NIL)
CLASSIFICATION OF HOLDERS
1. HOLDER IN DUE COURSE – One who has taken the
instrument under the conditions of Sec 52 NIL and holds the
NI free from personal defenses available to prior parties
2. SIMPLE HOLDER (HOLDER NOT IN DUE COURSE)
– One who became a holder without any, some or all of the
requisites under Sec 52. He holds the NI subject to the same
defenses as if it were non-negotiable. He may enforce the NI
and receive payment therefor
3. HOLDER FOR VALUE – Where value has at anytime been
given for the NI, the holder is deemed a holder for value in
respect to all parties who become such prior to that time
(Sec 26 NIL)
o The mere fact that the present holder paid nothing for
a note or is not a holder for value does not preclude
recovery, but only lets in all defenses, if any, that
might be urged against the original payees
o Where the holder has a lien on the NI, arising from
either contract or by implication of law, he is deemed a
holder for value to the extent of his lien (sec 27 NIL)
 If the amount called for by the NI is less than
the principal debt secured by such NI, the
pledgee is a holder for value for the full
amount and may recover all
 If the debt secured by the NI is less than the
sum for which it was issued, the pledgee may
recover call but he becomes merely a trustee
as to the excess. This is in line with the general
rule against splitting of cause of action under
Sec 32
PRESUMPTION OF VALUE: there is a prima facie presumption
that every NI is issued for valuable consideration and may
be rebutted by contrary proof
o Absence or failure of consideration is a defense against
a holder not in due course
o CONSIDERATION – Valuable consideration (Sec 191);
any consideration sufficient to support a simple
contract (Sec 25).
BANK CREDIT AS VALUE: When the holder of a check
deposits it with his bank (not drawee bank) and the bank
credits it to his account, is the bank a holder for value? The
bank becomes a holder for value only when the deposit
withdraws the amount of the deposited instrument. If such
withdrawal takes place before maturity and before the bank
receives notice of any defense on the NI, the bank is HDC
against whom such defense would be unavailable.
How determined: First In First Out (FIFO) – First money in is
presumed to be the first money paid out
Page | 17
IMPORTANCE OF THE CLASSIFICATION: Each class of holders has
defenses which are available to one class and which may not be
available to the other classes.
NOTE: If there are NO defenses, the distinction between HDC and
one who is not HDC is IMMATERIAL
RIGHTS OF HOLDERS IN GENERAL (Sec 51 NIL)
1. May SUE thereon in his own name – Even if he is a holder
only for collection or as pledge to the NI
2. Payment to him in due course discharges the NI – Payment
in due course is made:
a. At or after the maturity of the NI
b. To the holder thereof
c. In good faith; and
d. Without notice that his title is defective
RIGHT TO SUE OF TRANSFEREE OF AN UNINDORSED INSTRUMENT
A transferee of an unendorsed NI is certainly not an holder under
Sec 191 NIL and cannot be considered HDC. However, the
transferee may sue in his own name under the principle in
assignment that the assignee steps into the shoes of the assignor.
CAN A PAYEE BE A HDC? Yes.
If the payee satisfies the requirements of Sec 52, the payee can be
HDC (Cely Yang v. CA, G.R. no 138074, August 15, 2003).
REASON: Sec 191 defines a holder as the payee or indorsee of a
bill or note who is in possession of it or the bearer thereof. Such
payee may either have acquired the note from another holder or
he did not deal strictly with the maker thereof.
CAN A DRAWEE BE HDC? No.
While a payee may be a HDC, a drawee does not, by paying a bill,
become HDC.
REASON: A holder refers to one who has taken the NI as it passes
along in the course of negotiation towards the drawee and not the
drawee who, on the acceptance and payment of the NI, thereby
strips it of all negotiability and reduces it to a mere voucher or
proof of payment (National Bank of Commerce v. Seattle National
Bank, 187 Pac 342).
HOLDER IN DUE COURSE
 All the 4 conditions under Sec 52 must concur in order to
qualify a person as HDC
 The holder of a non-negotiable instrument cannot attain the
status of HDC. The fact that the instrument is non-negotiable
is a sign of warning to a prospective purchaser and places
him on guard and on inquiry
 A holder not HDC has all the rights of the latter except that
the instrument is subject to the defenses as if it were non-
negotiable (Sec 58)
 Personal defenses cannot be set up against HDC but real
defenses which attach to the NI itself, would be available
against all persons even as against HDC
REQUISITES FOR HOLDER IN DUE COURSE (Sec
52 NIL)
1. That the instrument is COMPLETE and REGULAR upon
its face
a. Complete – An instrument is incomplete when it is
wanting in any material particular proper to be
inserted in a NI without which the same will not be
complete (Sec 14). BUT if the omission is not a
important particular, such omission will not deprive the
holder to be HDC
REASON: The taking of an incomplete instrument puts
the purchaser on inquiry as to why it is incomplete. If
he fails to do so, he takes the NI subject to all
defenses
b. Regular on its face – TO render the NI irregular under
sec 52(a) NIL, the alteration must be visible or
apparent on its face. If not apparent, the matter is
governed solely by Sec 124 (on alteration) which
renders the NI void
2. That he has become a holder of it before it was
OVERDUE and WITHOUT notice that it had been
previously dishonored if such were the case
a. Before overdue – A holder who takes an overdue
instrument is put on inquiry although he is not actually
aware of any existing defense of a prior party. A
Page | 18
 person taking an overdue NI should certainly question
why the NI is still in circulation even if it is overdue
 On the date of maturity, the NI is not overdue
and a holder who acquires the NI on that date
is HDC because the principal debtor has the
whole day to pay
WHEN IS THE DATE OF MATURITY?
a. The date of maturity is the time fixed therein
b. If NI is payable on demand, the date of maturity is
determined at the time of presentment (Sec 183 NIL).
The same applies if payable on sight
c. If NI is payable on the occurrence of a specified event
which is certain to happen, the date of maturity is
fixed by the happening of the event (Sec 4.c NIL)
EFFECT OF POSTDATING OR ANTEDATING – An instrument
is not only valid but also negotiable although it is antedated
or postdated. A holder thereof can be HDC and he is not put
on inquiry for the mere fact that it is antedated or postdated.
A postdated check is payable either:
a. Fixed or determinable future time specified therein; or
b. If no time is expressed, on demand or on after the
date of the NI
NOTE: If the postdating or antedating of NI is for an illegal
or fraudulent purpose, the NI is void.
INSTALLMENT INSTRUMENTS – A purchaser after maturity of
the first installment with notice that it was unpaid takes the
paper as overdue paper. Consequently, a purchaser of an
installment note after an installment is overdue may be HDC
as to the balance if he has NO notice of the failure to pay of
the first installment.
INTEREST – Where by the terms of the NI, the principal was
to become due upon the default of the payment of interest,
one who takes the NI upon which the interest is overdue is
not HDC.
NOTE: An overdue NI may still be negotiated but the holder
cannot be HDC.
b. Without notice of dishonor – An instrument may be
dishonored by:
(1) Non-acceptance (Sec 149 NIL)
(2) Nonpayment (Sec 83)
NOTE: While dishonor by nonpayment can only take place at
the time of maturity, dishonor by non-acceptance of bill may
occur even before the date of maturity
DEMAND INSTRUMENTS (Sec 53 NIL) – Where NI payable on
demand is negotiated on an unreasonable length of time
after its issue, the holder is not deemed HDC.
o In determining what is unreasonable length of time
regard must be given to the NATURE of the
instrument, the USAGE OF TRADE OR BUSINESS with
respect to such NI and the FACTS of the particular case
(Sec 193 NIL)
NOTE: Dishonored NI may still be negotiated and the holder
WITHOUT notice can be HDC
3. That he has taken it in GOOD FAITH and for VALUE
a. Good faith – Although good faith on the part of the
holder is presumed, such presumption is destroyed if
the payee or the indorsee acquired possession of the
NI under circumstances that should have put him to
inquiry as to the title of the holder who negotiated the
NI. The burden is now on the part of the holder to
show that despite the suspicious circumstances, it
acquired the check in actual good faith (De Ocampo v.
Gatchalian, G.R. no L-15126, November 30, 1961)
Good faith – refers to the indorsee or transferee not
the indorser or transferor of the NI.
Bad faith – means that the indorsee or transferee must
have knowledge of facts which render it dishonest for
him to take a particular piece of negotiable paper.
Proof of bad faith: It is not necessary to show
knowledge of exact truth. It is sufficient that such
knowledge tends to show that there was something
wrong with the transaction.
Page | 19
 b. Value – Any consideration to support a contract (Sec
25 NIL)
CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT
TRANSFER – Every NI is deemed prima facie to have been
issued for a valuable consideration. Every person whose
signature appears thereon is presumed to have become a
party thereto for value (Sec 24 NIL)
o Consideration is not relevant to the “negotiability”” of
an NI but it is significant on the question of whether or
not one is HDC
Value includes:
a. An antecedent or pre-existing debt
b. Value previously given (Sec 25)
c. Lien arising from contract or by operation of law but
the holder is deemed a holder for value to the extent
of his lien (Sec 27 NIL)
NOTE: It is not necessary that the consideration should be
adequate (Art 1355 NCC), but love and affection do not
constitute value within the meaning of the law.
4. That at the time of its negotiation to him, he had NO
NOTICE of any infirmity in the instrument or in the title
of the person negotiating it
NOTICE OF DEFECT – The person to whom it is negotiated
must have had actual or chargeable knowledge of the
infirmity or defect, or knowledge of such facts that his action
in taking the NI amounted to bad faith (Sec 56 NIL)
How Proven: The question of good faith or bad faith is a
question of fact which must be determined in accordance
with the particular circumstances of the case (circumstantial
evidence)
EFFECT OF PURCHASE AT A DISCOUNT: The purchase of NI
at a discount, does not itself constitute bad faith because in
most cases, a purchaser at a discount is a influenced by the
financial condition of the issuer of the NI rather than by the
possibility it was obtained subject to a defense.
EFFECT OF NOTICE BEFORE FULL PAYMENT – If the
transferee receives notice of any defect or infirmity in the NI
before paying the full amount, he will be HDC only as to the
extent of the amount paid by him (Sec 54 NIL)
o This does not apply where the holder has given for the
NI a promise which he must perform, in which case he
would be in the same position as one who has paid
money or property at the time of the transfer.
CONSTRUCTIVE NOTICE NOT SUFFICIENT – There must
actual notice of the defect or infirmity in the NI. However,
notice to an agent is chargeable to the principal.
IIS MERE NEGLIGENCE TO MAKE INQUIRIES SUFFICIENT TO
CONSTITUTE NOTICE OF INFIRMITY OR DEFECT? No.
Under Sec 54 and 56 NIL, negligence in itself is not sufficient
to constitute notice since it is not equivalent to either actual
knowledge or bad faith
o If the holder had actual knowledge of suspicious
circumstances, coupled with the means of readily
informing himself of the facts and he willfully abstained
from making inquiries, his intentional ignorance may
amount to bad faith
EFFECTS OF NOTICE OF DEFECT
a. It destroys the status of the holder as HDC
b. The holder is open to all defenses and not merely
those relating to defect of which he had notice (Sec
58)
WHEN TITLE IS DEFECTIVE (Sec 55 NIL)
a. In the ACQUISITION thereof, the title of a person
becomes defective when he obtains the NI or any
signature thereto by: (1) fraud; (2) force, duress or
fear; (3) other unlawful mean; or (40 for an illegal
consideration
b. In the NEGOTIATION thereof, the title becomes
defective when he negotiates it in (5) breach of faith;
or (6) under circumstances that amount to fraud (Sec
55 NIL)
NOTE: BUT when it is shown that the title of any person who
has negotiated the NI was defective, the burden is on the
holder to prove that he or some other person under whom
he claims acquired the title as HDC (Sec 59 NIL).
Page | 20
 INFIRMITIES – include things that are wrong with the NI
itself as distinguished from those tings that are lacking in the
contracts on the NI. Such infirmities are to be found in
situations arising from:
a. Maturity date not listed on the NI (Sec 13)
b. Lack in material particulars (Sec 14)
c. Incomplete and undelivered NI (Sec 15)
d. Complete but undelivered NI (Sec 16)
e. Signature by procuration (Sec 21)
f. Forged signature (Sec 23)
WHAT IS THE EFFECT OF ACQUIRING NOTICE OF INFIRMITY
BEFORE PAYMENT OF FULL CONSIDERATION?
The transferee will be deemed HDC only to the extent of the
amount therefor paid by him (Sec 54)
RIGHTS OF HOLDER IN DUE COURSE (Sec 51 and
57 NIL)
1. May SUE on the instrument in his own name
2. May RECEIVE payment and if payment is in due course, the
instrument is discharged
3. HOLDS the instrument free from any defect of title of prior
parties and free from personal defenses available to parties
among themselves
4. May ENFORCE payment of the instrument for the full amount
thereof against all parties liable thereon
EXCEPTIONS:
a. When the holder is a holder for value only to the
extent of his lien – HDC only to that extent (Sec 27
NIL)
b. When the holder acquired notice of any infirmity in the
NI or defect in the title of the person negotiating the
same BEFORE he has paid the full amount agreed to be
paid therefor – HDC only to the extent of the amount
paid (Sec 54 NIL)
c. In case of alteration as to amount – HDC may enforce
payment only according to its original tenor (Sec 124
NIL)
WHO IS DEEMED A HOLDER IN DUE COURSE (Sec 59 NIL)
Every holder of a NI is deemed prima facie HDC. However, this
presumption arises only in favor of a peson who is a holder as
defined under Sec 181 NIL, i.e. a payee or indorsee who is in
possession of the instrument or bearer thereof
 When it is shown that the title of any person who has
negotiated the NI was defective, the burden is on the holder
to prove that he or some other person under whom he
claims, acquired the title as HDC
 EXCEPTION: The holder has no burden of proving that he
has HDC in favor of a party who became bound on the NI
prior to the acquisition of such defective title
WHO IS NOT DEEMED A HOLDER IN DUE COURSE (Sec 53
NIL)
Where an NI payable on demand is negotiated for an unreasonable
length of time after issue, he holder is not deemed HDC.
WHAT IS REASONABLE TIME?
As to what constitutes reasonable time, the law provides that:
“Regard is to be had to the nature of the instrument, usage of
trade or business (if any), with respect to such instruments and
the facts of the particular case. (Sec 193 NIL)
HOLDER NOT IN DUE COURSE
One who became the holder of NI without any, some or all of the
requisites for due course holding under Sec 52 NIL
GENERAL RULE: If a holder is not HDC, he is subject to the same
defenses as if it were non-negotiable. In other words, a holder not
in due course is subject to both personal and real defenses
available to parties primarily or secondarily liable.
EXCEPTION (SHELTER RULE): If a holder derives his title through
HDC and if he is not a party to any fraud or illegality affecting the
NI, he has all the rights of such former holder (HDC) in respect of
all parties prior to the latter (Sec 58 NIL)
REASON: Without this provision, the hands of the HDC would be
tied in disposing the instrument because he would still have to look
for a buyer who had notice of the defect.
NOTE: A payee whose title is defective title is defective cannot
better his title by selling the NI to HDC and buying it back again.
Page | 21
  The presumption refers only to the status of the present presumption is that it is HDC or that it acquired the
holder and not to any previous holder. Thus if the present instrument in good faith does not exist (De Ocampo v.
holder’s rights depend on a previous holder’s status as HDC, Gatchalian, G.R. no L-15126, November 30, 1961).
he would have to prove such fact and cannot rely on the 2. Holder to whom cashier’s check is not indorsed in due course
presumption because the latter is no longer the holder. and negotiated for value is not HDC (Mesina v. IAC, G.R. no
70145, November 13, 1986)
EXCEPTION TO THE EXCEPTION: The rule under Sec 58 does not NOTE: The holder may not be considered HDC because of the NI
apply if the holder was previous holder not in due course who had involved, as in the case where a person takes a crossed check
subsequently repurchased the instrument either personally or without making further inquiries. The act of crossing a check
through an agent. serves as a warning to the holder that the check has been issued
REASON: A holder who is not HDC cannot improve his situation by for a definite purpose (Bataan Cigar and Cigarette Factory v. CA,
reacquiring the NI (Fossum v. Fernandez, G.R. no L-20080, March G.R. no 93048, March 3, 1994)
27, 1923).
HOLDER IN DUE COURSE AND HOLDER NOT IN
RIGHTS OF A HOLDER NOT IN DUE COURSE DUE COURSE DISTINGUISHED
1. He may SUE on the instrument in his own name HOLDER IN DUE HOLDER NOT IN DUE
2. He may RECEIVE payment and if the payment is in due COURSE COURSE
course, the instrument is discharged Compliance All the conditions under One, some or all of the
3. He HOLDS the instrument subject to the same defenses as if with the Sec 52 NIL are requisites under Sec 52
it were non-negotiable requisites PRESENT are ABSENT
NOTE: This, prior parties can avail against him any defense Real defenses His rights can be His rights can be
available among these prior parties and prevent the said defeated by real defeated by real
holder from collecting in whole or in part the amount stated defenses defenses
in the NI. Personal His rights cannot be His rights can be
4. If he derives his title through HDC and if he is not party to defenses defeated by personal defeated by personal
any fraud or illegality affecting the NI, he has ALL the rights defenses defenses
of such former holder (HDC) in respect of all parties prior to
Rights He has the right to He has the right to
the latter (SHELTER RULE)
enforce payment, sue in enforce payment, sue
his own name, and in his own name, and
FAILURE TO MAKE INQUIRY negotiate the NI negotiate the NI
GENERAL RULE: Failure to make inquiry after notice of the facts
merely sufficient to cause a person of ordinary prudence to make
inquiry as to an infirmity in the NI and defect in the holder’s title,
is not evidence of bad faith to bar him from recovery.
REASON: The law does not impose a duty on the part of every LIABILITY OF PARTIES
holder to make inquiry before acquiring the NI.
LIABILITY AND WARRANTY DISTINGUISHED
EXCEPTIONS: LIABILITY WARRANTY
1. Where the holder’s title is defective or suspicious that would Liability to pay Makes the parties Impose no direct
compel a reasonable man to investigate, it cannot be stated liable to pay the obligation to pay in
that the payee acquired the NI without the knowledge of said sum certain in the absence of
defect in the holder’s title and for this reason the money stated in the breach thereof. In

Page | 22
 NI case of breach, the PRIMARY LIABILITY AND SECONDARY LIABILITY
person who DISTINGUISHED
breached the same PRIMARY LIABLE SECONDARY LIABLE
may either be liable Liability Who by the terms of the Who by the terms of the NI
or barred from NI is absolutely required is not absolutely required
asserting a to pay the same (Sec 92 to pay
particular defense NIL)
Requisites to Condition on Does not require Unconditionally bound to Conditionally bound to pay
enforce liability presentment and presentment and pay
notice of dishonor notice of dishonor When to Absolutely required to pay Required to pay after
When action must Action cannot be May be pay upon maturity of NI conditions have been
be brought brought until fulfilled:
maturity of the NI 1. Due presentment for
payment or acceptance
CLASSITIFICATION OF PARTIES ACCORDING TO of primary party;
LIABILITY 2. Dishonor by such party
1. PRIMARY PARTY – Unconditionally liable; the primary 3. Taking of the
party is bound to pay the holder at the date of maturity, proceedings required
whether or not the holder demands payment him (Sec 192 by law after dishonor
NIL) (notice and/or protest)
o He is not relieve from liability even if NI should
become overdue due to holder’s failure to make a PRIMARILY LIABLE
demand 1. MAKER (Sec 60 NIL)– applies only to promissory notes
a. Maker of a promissory note a. Engages to pay according to the tenor of the NI
b. Acceptor of Bill of Exchange; and b. Admits the existence of the payee and his then
c. Certifier of Bill of Exchange capacity to indorse
o Due presentment for payment (Sec 70 NIL) and due
2. SECONDARY PARTY – Conditionally liable; the secondary notice of dishonored (Sec 89 NIL) are not necessary
party is not bound to pay unless the following conditions for the purpose of charging the maker with liability.
have been fulfilled: (a) due presentment or demand to the It is necessary, however, fix the liability of the
primary party for payment or acceptance; (b) its dishonor by drawer or indorser
the party; and (c) taking of proceedings required by law o By executing a PN, the maker warrants that the
after dishonor, i.e. notice of dishonor and in case of foreign payee named in the NI is existing; therefore, he
Bills of Exchange, protest of the bill (Sec 70 NIL) cannot question the corporate existence of the payee
a. Drawer of a bill; and o Maker also represents to the world that the payee
b. Indorsee of a note or bill has the capacity to indorse at the time of the making
of PN and thus represents that the payee can
3. NOT LIABLE transfer a good and valid title to the PN by
a. Drawee until he accepts the NI in which case he indorsement
comes an acceptor  Maker cannot raise the defense of minority;
insanity of payee or ultra-vires act of
corporation

Page | 23
2. ACCEPTOR (Sec 62 NIL) – drawee has no liability on
the bill unless and until he accepts the same. Once he
accepts, he becomes primarily liable on the instrument
because he accepts to pay it according to the tenor of his
acceptance, subject to no condition whatsoever
o Acceptance applies only to bills of exchange
o Object: to bind the drawee and to make him an actual
and bound party to the instrument
a. The drawee of a bill is not liable before acceptance.
Once he accepts, he becomes an acceptor and
become primarily bound on the NI subject to no
condition whatsoever
Acceptor engages to pay according to the tenor of his
acceptance:
o The acceptor engages to pay according to the tenor of
his acceptance, which is not the same as tenor of the
bill itself because the acceptance may be qualified (Sec
139 NIL)
o Like the maker of PN, neither presentment for
payment nor notice of dishonor is necessary to charge
him with liability, except were he is an acceptor
REQUISITES FOR VALID ACCEPTANCE (SEC 132)
a. It must be in writing
b. It must be signed by the drawee
c. It must not change the implied promise of the
acceptor to pay only in money
NOTE: There can be no valid oral or implied acceptance
except under Sec 137 (constructive acceptance)
o Acceptance is made by writing the word “accepted” or
by the drawee’s signature alone
STATUS OF DRAWEE PRIOR TO ACCEPTANCE OR
PAYMENT – The drawee is not liable on the bill of exchange
or check until he accepts it. Even HDC cannot sue drawer
prior to his acceptance
 REASON: Mere issuance of the bill does not render
the drawee liable because it does not operate as
an assignment of the funds in the hands of the
drawee
 When the bill is accepted, the acceptor becomes
primarily liable under Sec 62
 Bank is not liable until it accepts or certifies the
check. Prior to certification, the drawer may issue
a stop payment order
NOTE: If the drawee bank refuses to accept the bill without
justifiable reason/s, the drawee may be liable to the drawer
for breach of contract or damages based on
CONSTRUCTIVE ACCEPTANCE – The drawee has 24 hrs
after presentment to determine whether to accept the bill or
not.
o 24 hr-period is counted from time of delivery
 If check is returned unaccepted within 24 hrs
= not dishonored since drawee still has the
remainder of the period to accept or dishonor
 If check is returned and fails to accept within
the remainder of the 24 hrs = dishonored
 If check is returned with statement of refusal =
dishonored
 If drawee destroys the check instead of
returning or accepting = deemed accepted
(Sec 137) unless the destruction is accidental
 If the bill is delivered to the drawee who
destroys the same
 If the drawee does not return the bill, accepted
or non-accepted within 24 hrs (24-hr rule) or
such time allowed by holder
o Sec 137 NIL uses the word “refuses” which clearly
implies a demand for the return of the bill.
o Mere failure to return on time is not acceptance; Sec
150 provides if no acceptance is given within the
prescribed time, the bill is deemed dishonored
ACCEPTANCE ON A SEPARATE INSTRUMENT – An
acceptance is valid even if it is not written on the same
instrument, e.g. letter or telegram.
o Acceptance may be on an existing bill or a future bill:
(1) Extrinsic acceptance – acceptance on an existing
bill; acceptance may be conditional
Page | 24
 (2) Virtual acceptance – acceptance on an future bill; o Effect: Accepting bank is unconditionally and
acceptance must be unconditional irrevocably liable to pay holder at maturity. Drawer
o To be valid, such acceptance must identify the bill to and indorsers are subsidiarily liable
which the acceptance and must be clear and
unequivocal WARRANTIES OF THE ACCEPTOR (Sec 62 NIL)
o Sec 134 requires that the acceptance be shown and a. Admits the existence of the drawer, the genuineness of
purchaser take the take the bill for value on the faith his signature, and his capacity and authority to draw
of such acceptance the NI and;
 EFFECT: Subsequent holders acquire the rights b. Admits the existence of the payee and his then
of the relying party from whom they take the capacity to indorse
NI, applying Sec 58 and 49  The acceptor does NOT admit the genuineness
of the indorser’s signature because it is only
KINDS OF ACCEPTANCE the signature of the drawer that he warrants
(1) General acceptance – Sec 140 provides that an by virtue of the business relationship between
acceptance to pay at a particular place is a general the bank and the drawer.
acceptance UNLESS it expressly states that the bill is to
be paid there only and not elsewhere NOTE: The warranty established by Sec 62 is in favor of
(2) Conditional acceptance – If any of the following are holders of the NI after acceptance and when the drawee
present: bank cashes or pays the check, the cycle of negotiation is
(a) Conditional i.e., which makes payment by the terminated. It is illogical thereafter to speak of subsequent
acceptor dependent on the fulfillment of a condition holders who can invoke the warranty under Sec 62 (PNB v.
(b) Partial i.e., acceptance only to the part of the anount National City Bank of New York, G.R. no 43596, October 3,1
(c) Local i.e., acceptance to pay ONLY at a particular 1956)
place
(d) Qualified as to time SECONDARILY LIABLE
(e) Acceptance of some one or more of the drawees but
not all DRAWER, GENERAL INDORSER AND IRREGULAR INDORSER
DISTINGUISHED
TRADE ACCEPTANCE – Draft or bill of exchange with a
DRAWER (Sec 61) GENERAL INDORSER IRREGULAR
definite maturity, drawn by seller or buyer for the purchase
(Sec 66) INDORSER (Sec 64)
of goods, bearing across its face the acceptance of the buyer
Admits the existence Warrants to all A person not, not
o Generally limited to domestic transactions
of the payee and his subsequent HDC: otherwise a party to
capacity to indorse a. That the an NI, places his
BANKER’S ACCEPTANCE – Negotiable time draft or bill of
instrument is signature thereon in
exchange drawn on and accepted by a commercial bank
GENUINE and in blank before
o Generally used for international trade e.g., financial,
all respect what delivery
import-export transactions
it purports to be
o Used when buyer and seller are not known to each
b. He has GOOD If the NI is payable
other; acceptance substitutes the bank’s credit for the
TITLE to it to the order of a 3rd
unknown firm
c. ALL prior parties person, he is liable
had capacity to to the payee and
contract subsequent parties

Page | 25
 d. The instrument o A drawer may not unilaterally discharge himself from
is, at the time of liability on the checks issued by him as security and
indorsement, not for value and negotiated to HDC by the mere
VALID and expediency of withdrawing his funds from the drawee
subsisting (State Investment House Inc v. CA, G.R. no 101163,
Engages that the Engages that the NI If the NI payable to January 11, 1993)
instrument will be will be accepted or the order of maker o When the holder deposits his check with the collecting
accepted or paid by paid, or both, as in or drawer or to bank, the nature of relationship created is one of
the party primarily the case may be, bearer, he is liable agency, i.e. the bank is to collect from the drawee of
liable; and according to its to all parties the check the corresponding proceeds. Thus, the
tenor; and subsequent to the privity of contract is between the holder-depositor and
maker or drawer the collecting bank. There is no privity of contract
Engages that if the If the NI is If he signs for between the drawer and the collecting bank
instrument is dishonored and accommodation of
dishonored and necessary the payee, he is DRAWER AND MAKER DISTINGUISHED
proper proceedings proceedings on liable to all parties DRAWER MAKER
are brought, he will dishonor be duly subsequent to the Undertaking Issues the bill of Makes a promissory
pay to the party taken, he will pay to payee exchange note
entitled to be paid the party entitled to Liability Secondarily liable Primarily liable
be paid Limitation of Can negative or limit his Cannot limit his liability
liability liability

1. DRAWER (Sec 61) – The liability of drawer is conditional.
The drawer does not promise to pay the bill absolutely. He
makes no warranty but he engages to pay after the following
conditions are complied with:
a. The bill is PRESENTED for acceptance (Sec 143 NIL) or
for payment (Sec 70) as the case may be to the
drawee
b. The bill is DISHONORED by non-acceptance or
nonpayment, as the case may be; and
c. The necessary PROCEEDINGS on dishonor are duly
taken:
(1) Notice of dishonor was given to the drawer
(2) In case of foreign bills, protest is made
o The drawer is secondarily liable to (1) holder; or (2)
any subsequent indorser who is compelled to pay (or
known as INTERVENING INDORSERS)
o Sec 61 allows the drawer to negative or limit his
liability by express stipulation
NOTE: There is a contractual relation between the drawer
and the drawee
2. GENERAL INDORSER (Sec 66) – Gen indorser makes
2 contracts: contract of sale of NI and special contract of
indorsement
o Liable as assignor of credit AND also on his
indorsement
o Under Sec 66 warranties of Gen indorser run to “all
subsequent HDCs” = indorse should not have
knowledge of breach of warranty at the time of
indorsement
o If NI payable to bearer is specially indorsed = indorser
becomes liable under Sec 66
 EXCEPT if holder chooses to strike out the
indorsement as not necessary to title
o When maker issues PN payable to his own order, it is
not complete until he indorses it = not the same as
indorsement to make him liable under Sec 66
 Such indorsement is merely a step in the
issuance of NI so that 1st transferee may
become a holder (effect 1st transferee becomes
payee)

Page | 26
  Liability of maker is still as MAKER
o When banks require holders of a check to sign at the
back = not same as indorsement but mere
acknowledgment of receipt of cash paid by drawee
bank
o Bank stamps “all prior and/or lack of indorsement
guaranteed” – liable against forgery not because of
Sec 66 but because fo express warranty
CONDITIONS PREDECENT TO INDORSER’S LIABILITY
a. Due presentment for payment or acceptance must
be made
b. If dishonored, the proceedings on dishonor be duly
taken
NOTE: Liability of an unqualified indorser is similar to that of
drawer
WARRANTIES:
a. NI is GENUINE and in all respects what it purports
to be
b. He has GOOD TITLE to it
c. ALL PRIOR parties had capacity to contract; and
d. He has NO KNOWLEDGE of any fact that would
impair the validity of NI or render it valueless
e. NI at the time of the indorsement is VALID and
subsisting
 Unqualified indorser – guarantees that NI is
valid and subsisting whether or not he has no
knowledge of the fact
 Qualified indorser – warrants merely that he
has no knowledge of any fact that would
invalidate the NI
3. IRREGULAR INDORSER (Sec 64) – Although the law
does not sate that all irregular indorsers are accommodation
parties, they are usually accommodation parties.
TO BE CONSIDERED AN IRREGULAR INDORSER
a. A person must NOT be party to the NI
b. He must have signed the NI in BLANK
c. He must have signed BEFORE delivery
NOTE: The party is called an “irregular” or an “anomalous”
indorser because he indorses in an unusual, singular, or
peculiar manner. His name usually appears where we would
naturally expect another name
LIABLITY OF IRREGULAR INDORSER – An irregular indorser
is liable as a general indorser because he indorses without
qualification
o Sec 64 provides only for the parties to whom an
irregular indorser is liable
4. RESTRICTIVE INDORSER – Liability of restrictive
indorser depends on the kind of restrictive indorsement is
made
o If indorsement prohibits further negotiation = NI
ceases to be negotiable but restrictive indorser is liable
to his immediate indorsee as Gen indorser unless
otherwise indicated
o If by restrictive indorsement, indorsee is made an
agent of indorser = any subsequent indorsee who
acquires title from agent acquires only such title
o Restrictive indorsement for the benefit of 3rd party =
liable as Gen indorser unless otherwise indicated
5. AGENT OR BROKER (Sec 69) – When a broker or
agent negotiates an instrument without indorsement, he
incurs all liabilities under Sec 65 (general indorser) unless he
discloses the name of his principal and the fact that he is
acting only as agent (Sec 69)
o The principal whose name is undisclosed on the NI
cannot be liable because no person is liable on an
instrument unless his signature appears thereon (Sec
18 NIL).
 Where the agent signs his name but does not
disclose the name of the principal or that he is
acting only as an agent = no action against the
principal and the agent is personally liable to
the holder
 Agent signed his name band indicated he is
acting in a representative capacity but did not
disclose principal’s name = parol evidence
Page | 27
 cannot be used to evade agent’s personal d. That he has no knowledge of any fact that would
liability impair the validity of the NI or render it valueless
 Agent signed his name without indicating that
he acted as agent but disclosed the name of NOTE: The difference with a general indorser is that a
principal = agent is presumptively liable but general indorser warrants that the NI is valid and subsisting
parol evidence is admissible to show that he is at the time of his indorsement while a qualified indorser only
an agent of a third person warrants that he has no knowledge of any fact which would
 Where agent disclosed on the NI that he is impair the validity of the NI
acting in a representative capacity and the EFFECT: If the validity of the NI was already impaired at the
name of his principal = parol evidence is time of negotiation, the qualified indorser is not liable if he
admissible to exonerate the agent from had no knowledge of such fact.
personal liability
o Where the agent discloses the name of the principal 2. PERSON NEGOTIATING BY DELIVERY – A person negotiating
and expressly indicates that an agency exists between a NI by delivery is subject to the same warranties as a
them = principal is bound and agent is not personally qualified indorser under Sec 65. However, the warranty
liable UNLESS he had not authority from the principal extends to the immediate transferee ONLY.
o If agent signs by procuration, it serves as a notice that
the agent’s authority is limited QUALIFIED INDORSER AND PERSON NEGOTIATING
o If agent in signing by procuration exceeded his BY DELIVERY DISTINGUISHED
authority = principal is not liable even to HDC QUALIFIED INDORSER PERSON NEGOTIATING
BY DELIVERY
WHEN PERSON SIGNING THE INSTRUMENT NOT DEEMED AS Warranties 1. NI is genuine and in SAME
AN INDORSER all respects what it
a. The person who signed the NI has clearly indicated by purports to be
appropriate words his intention to be bound in some 2. He has good title to
OTHER capacity (Sec 63 NIL) it
b. A person signs for the purpose of indetifying a person 3. All prior parties had
only and not for the purpose of incurring any liability capacity to contract
(American Bank v. Macondray & Co, G.R. no 1808, 4. He had no knowledge
August 23, 1905) of any fact that
c. A person only guarantees prior indorsements (PNB v. would impair the
CA, G.R. no L-26001, October 29, 1968) validity of NI or
render it valueless
LIMITED LIABILITY To whom Liable to all parties who Warranties extend to
1. QUALIFIED INDORSER (Sec 65 NIL) – A qualified indorser is warranties derive their title from his immediate transferee
not secondarily liable. His qualified indorsement transfers extend indorsement only
title without rendering him secondarily liable. However, he is
liable for his warranties to all subsequent holders: GENERAL INDORSER AND QUALIFIED INDORSER
a. That the instrument is genuine and in all respects what
DISTINGUISHED
it purports to be
GENERAL INDORSER QUALIFIED
b. That he has good title to it
INDORSER/NEGOTIATING
c. That all prior parties had capacity to contract
BY DELIVERY

Page | 28
Nature of There is secondary No secondary liability; trade or assumed name will be liable as if he signed his own name
liability liability and warranties liable only for breach of  This is not an exception to the rule which forbids action on a
warranty NI against one whose name does not appear thereon but it is
Warranty as Warrants that the NI is Warrants that he has no an instance in which the defendant’s business name serves
to ignorance at the time of his knowledge of any fact the same purpose that would be served by the use of his
of certain indorsement valid and which would impair the given name
facts subsisting regardless validity of the NI or
whether he is ignorant render it valueless
of such fact ACCOMMODATION
To whom To subsequent HDC, Person negotiating by
warranties subsequent parties mere delivery: To ACCOMMODATION – A special arrangement which a person
extend deriving their title immediate transferee called the accommodation party, lends his name and credit to
from HDC and his only another called the accommodated party, without any consideration
immediate transfree Qualified indorser: To all
parties who derive their ACCOMMODATION PARTY – An accommodation party is one
title through his
who has signed the NI as maker, drawer, acceptor or indorser,
indorsement
without receiving value therefor, for the purpose of lending his
name to some other person. Such person is liable on the NI to the
holder for value, despite the latter’s knowledge of him as an
LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY accommodation party (Sec 29)
(Sec 67) – A person who incurs his indorsement on NI negotiable  An accommodation party in lending his name to the
by delivery, he incurs all the liabilities of an indorser accommodated party, is in effect a surety for the latter
 This applies to bearer NI only  Since the relationship between the accommodated and
 Example: M issued a note to X payable to bearer. X may accommodation party is one of principal and surety, should
negotiate the NI by mere delivery. Suppose X indorses the the accommodation party pay to the holder, he has a right
note to A, Pay to A without recourse (qualified to claim from the accommodated party
indorsement).A may negotiate the note by delivery. A can  LIABILITY: The accommodation party’s liability is primary
hold X liable for breach of warranty of a qualified indorser or secondary depending on whether he signed as maker,
(Sec 65). But if the indorsement is general, A may hold X drawer, acceptor or indorser
liable for breach of warranty of a general indorser o If accommodation party signed as maker = primarily
liable
ORDER OF LIABILITY (Sec 68 NIL)  Effect: There is absence of consideration and
There is no order of liability among the indorsers as against the holder cannot recover from accommodation
holder. He is free to choose to recover from any indorser in case of party
dishonor of the NI.  If accommodation party signed as co-maker =
 With respect to one another, indorsers are liable prima facie there is consideration although accommodation
in the order in which they appear unless the contrary is party received no part of it but holder can
proven recover from him
o If accommodation party signed as drawer =
SIGNATURE BY TRADE NAME – Under Sec 18 NIL, a person secondarily liable
whose signature does not appear on the instrument is not liable o If accommodation party signed as acceptor = primarily
thereon unless expressly provided. But a person who signs in a liable

Page | 29
 o If accommodation signed as indorser = secondarily
liable
 An accommodation party, whether irregular or
otherwise, is liable as general indorser under
Sec 66 unless he indicates otherwise
o The liability of an accommodation party under Sec 29 is
limited only to HDC because in the hands of a non-HDC, a
NI is subject to the same defenses as if it were non-
negotiable
o Even if the holder knows the party to be an
accommodation party, it does not prevent him from
becoming HDC and recovering from accommodation party
o A corporation, unless expressly authorized by its charter,
has no authority to sign as accommodation party and
cannot be liable to holder for value
REQUISITES OF AN ACCOMODATION PARTY (Sec 29 NIL)
1. He must be a PARTY to the instrument, signing as a maker,
drawer, acceptor or indorser
2. He must NOT receive value therefor; and
3. He must for the purpose of LENDING his name or credit
NOTE: “Without receiving value therefor” means without receiving
value by virtue of the NI (Clark v. Sellner, G.R. no 16477,
November 22, 1921)
RELATION BETWEEN ACCOMMODATION PARTY AND
ACCOMMODATED PARTY (PRINCIPAL AND SURETY)
When the accommodation party makes payment to the holder of
the note, it has the right to sue the accommodated party for
reimbursement since the relation between them is in effect that of
principal and surety, the accommodation party being the surety for
the accommodated party. However, the accommodated party
cannot recover from the accommodation party. As between them,
absence of consideration is a defense.
LIABILITY OF AN ACCOMMODATION PARTY
o The liability of an accommodation party is DIRECT and
IMMEDIATE. It is a settled rule that a surety is bound
equally and absolutely with the principal and is deemed an
ORIGINAL PROMISOR and debtor from the beginning
(Romeo Garcia v. Dionisio Llamas, G.R> no 154127,
December 8, 2003)
o The accommodation party is liable on the NI to a holder for
value despite that such holder, at the time of the taking of
the NI, knew him only to be an accommodation party.
Hence, as regards an accommodation party, the 4th
condition, i.e. lack of notice of infirmity in the instrument
or defect in the title of the person negotiating it, has NO
application (Stelco Marketing Corp v. CA, G.R. no 96160,
June 17, 1992)
NOTE: The corporation is not liable if it acts as an accommodation
party. This is because the issue or indorsement of NI by a
corporation without consideration and for the accommodation of
another is ultra vires. Hence, one who has taken the NI with
knowledge of the accommodation nature thereof cannot recover
against a corporation where it is only an accommodation party
(Crisologo-Jose v. CA, G.R. no 80599, September 15, 1989).
LIABILITY OF ACCOMMODATED PARTY
When the accommodation party makes payment to the holder of
the notes, they have the right to sue the accommodated party for
reimbursement since the relation between them is in effect of a
principal and surety, the accommodation party being the surety.
LIABILITY AMONG PARTIES IN ACCOMMODATION
A solidary accommodation party may seek reimbursement from
the accommodated party or other accommodation parties, subject
to the following rules:
1. A solidary accommodation party such as an accommodation
maker may demand from the principal debtor
reimbursement for the amount that he paid to the payee
2. A solidary accommodation party who pays on the said PN
may directly demand reimbursement from his co-
accommodation maker without first directing his action
against the principal debtor provided that:
a. He made the payment by virtue of a judicial demand;
or
b. A principal debtor is insolvent
SPECIFIC RIGHTS OF ACCOMMODATION PARTY
1. Right to REVOKE accommodation
Page | 30
 2. Right to REIMBURSEMENT from an accommodated party 2. INCAPACITATED persons who sign through their legal
after making the payment (Agro Conglomerates Inc v. CA, guardians
G.R. no L-17845, April 27, 1967) 3. One who signs in a TRADE or assumed name (Sec 18 NIL)
4. One who signs through an AGENT or authorized
ACCOMODATION PARTY DISTINGUISHED representative (Sec 137 NIL)
ACCOMMODATION REGULAR PARTY 5. In case of CONSTRUCTIVE acceptance (Sec 137)
PARTY 6. Indorsers who sign on a separate piece of paper (ALLONGE)
Purpose for Signs NI to lend his Purpose for signing is not 7. Persons who negotiate by mere DELIVERY. They are liable
signing name or credit to some the same as for breach of warranty although they did not sign (Sec 65
other person (Sec 29) accommodation party NIL)
Value Signs NI without Signs NI for value 8. FORGERS of signature (Sec 23 NIL)
received receiving value therefor
Availability May always show by Cannot disclaim or limit
of parole parole evidence that he his personal liability as DEFENSES AND EQUITIES
evidence is only accommodation appearing on the NI by
party parole evidence (Maulini DEFENSES –The right of the holder to enforce payment of NI
v. Serrano, G.R. no L- may be defeated by the defenses that may be raised by the person
8844, December 16m primarily or secondarily liable
1914)
Availability Cannot avail of the Can avail of said defense KINDS OF DEFENSES
of absence defense of absence or against a holder not in 1. REAL DEFENSES (ABSOLUTE DEFENSES) – Those which
or failure of failure of consideration due course attach to the instrument itself and generally disclose an
consideration against a holder NOT in absence of one of the essential elements of a contract or
as defense due course where the admitted contract is void for all purposes for
Right to sue After paying the holder, May not sue any reasons of public policy
may sue for subsequent party for o Available against all holders, even HDC
reimbursement from reimbursement (PNB v. 2. PERSONAL DEFENSES (EQUITABLE DEFENSES) – Those
the accommodated Maza, G.R. no L-24224, wherein a true contract appears, but for some reason, such
party November 3, 1925) as fraud, the defendant is excused from the obligation to
perform
o Can be raised only against non-HDC
LIABILITY ON THE INSTRUMENT
KINDS OF CLAIMS OF OWNERSHIP (EQUITIES)
1. Legal title – May recover even from HDC
GENERAL RULE: A person whose signature does not appear on the
2. Equitable title – May not recover from HDC, only from non-
NI is not liable (Sec 18 NIL)
HDC
EXCEPTIONS (PITACA-DF)
1. Persons whose signature were forged but who are REAL AND PERSONAL DEFENSE DISTINGUISHED
PRECLUDED from setting up the defense of forgery (Sec 23 REAL DEFENSES PERSONAL DEFENSES
NIL) NATURE
Those that attach to the NI Those which are available only

Page | 31
itself and are available against against a person not HDC or a defense is available but it can 14. MISTAKE
all holders, whether or not HDC, subsequent holder who stands be enforced against those 15. INSANITY – Where there is
but only by parties entitled to in privity with him whom such defense is not no notice of insanity in the
raise them available such as under Sec 23 part of the one contracting
STATUS OF CONTRACT with the insane person
Void Voidable 16. Negotiation under
AVAILABILITY AGAINST HDC CIRCUMSTANCES that
Available against HDC Not available against HDC amount to fraud (Sec 55)
DEFENSES 17. Acquisition of the
Key: PAID-WIFI-MUD-FEM Key: CUBIC: RAIN-WIFI-MICU instrument by UNLAWFUL
1. PRESCRIPTION 1. Non-delivery of COMPLETE means (Sec 55)
2. Material ALTERATION (Sec instrument (Sec 16)
124) 2. ULTRA VIRES acts of EFFECTS OF CERTAIN DEFENSES
3. ILLEGALITY – If declared corporations where the A. MINORITY – Under Sec 22 NIL, If a minor indorses a NI,
void for any purpose corporation has the power although he cannot be held liable on his contract of
4. DURESS – amounting to to issue negotiable paper indorsement, the title to the instrument passes to his indorsee
forgery but the issuance was not o Real defense
5. WANT of authority of agent authorized for the particular o EFFECT: Subsequent holder, if HDC, can recover from
6. NON-DELIVERY of purpose for which it was the maker free from the defenses of minority and
Incomplete Instrument (Sec issued other personal defenses
15) 3. Negotiation in BREACH of EXAMPLE: A makes a note payable to B (minor). B indorses
7. FORGERY (Sec 23) faith (Sec 55) the note to C, who in turn, indorses it to D. Upon maturity, D
8. INSANITY – Where the 4. INSERTION of wrong date in sues A (maker).
insane person has a an instrument (Sec 13) o A cannot raise the defense of minority of B because:
guardian appointed by the 5. CONDITIONAL delivery of (1) Sec 22 provides that indorsement of NI by a minor
court complete instrument passes the property therein; and (2) under Sec 60, the
9. MINORITY – available only 6. Filling up blank beyond maker warrants the capacity of the payee to indorse
to the minor REASONABLE time (Sec 14) o If A is insolvent, D cannot sue B because as to B,
10. ULTRA VIRES act of 7. ABSENCE or failure of minority is a real defense
corporation consideration whether o Is C liable to D? Yes, under Sec 66, a general indorser
11. DISCHARGE in insolvency partial or total (Sec 28) warrants the capacity of all prior parties
12. Fraud in FACTUM or Esse 8. ILLEGAL consideration (Sec o Minority is a real defense available only to the minor
Contractus – Fraud in 55) and is not a personal defense which by availed of by
execution 9. Filling up blank NOT within the parties other than such minor
13. Execution of NI between authority (Sec 14) NOTE: However, the minor shall be liable under the following
public ENEMIES 10. WANT of authority agent exceptions:
14. MARRIAGE in the case of a where he has apparent a. The minor actively misrepresents his age and it
wife authority appears that he is physically of such age
11. Fraud in INDUCEMENT (Estoppel) – A minor may be held bound by his
NOTE: An Instrument subject to 12. Acquisition by FORCE, signature in an instrument where he is guilty of
real defense cannot be enforced duress or fear (Sec 55) actual fraud committed by specifically stating that
against the person to whom the 13. INTOXICATION

Page | 32
 he is of age when, in fact, he is not (Mercado v.
Espiritu, 37 PHIL 215)
b. The minor kept the fruits or benefits; or
c. The minor spent the money in good faith (Art 1427
NCC)
OTHER INCAPACITATED PERSONS – Insane, demented
persons and deaf-mute or those who have no capacity to
give consent (Art 1327 NCC), their capacity is a real defense
as far as such person is concerned. It is available against
HDC
B. FRAUD – Under Sec 55, fraud renders a party’s title defective
which is a personal defense and cannot be used against HDC
o Where the fraud is practice on the maker or signer of
NI in which he is tricked into signing a paper which he
does not know to be a NI, he cannot be liable to any
holder, even HDC. This is called fraud in factum or
fraud in the execution – real defense
o Where the signer knows the paper he is signing is NI
but is deceived as to its value or terms, the fraud is
fraud in inducement – personal defense and not
available against HDC
o Where the signer does not know the nature of the
paper he is signing but he could have known using
ordinary care – personal defense
TYPES OF FRAUD
a. FRAUD IN FACTUM (REAL DEFENSE) – The person
who signs the instrument lacks knowledge of the
character or essential terms of the instrument. But the
defense is not available if the party had reasonable
opportunity to obtain such knowledge
o An essential element is that the maker or indorser
must have exercise ordinary diligence and in no
manner contributed negligently to the imposition
b. FRAUD IN INDUCEMENT (PERSONAL DEFENSE) –
The person who signs the same as NI but was induced
by fraud
C. INCOMPLETE BUT DELIVERED NI – This is only a
PERSONAL defense (See Sec 14 NIL)
Two kinds of writings:
1) Incomplete instruments – There is an intent to
make it NI
2) Blank paper or paper so far incomplete that it does
not constitute NI, but signed – To be considered
complete, it must be shown that:
 Delivery of instrument
 Delivery must have been for the purpose of
converting it to NI (There must be intent to
deliver otherwise maker is not liable even to
HDC)
o In order that such instrument, when completed, may
be enforced against any person who became a party
thereto prior to its completion, it must be filled up
strictly in accordance with the authority given
o Authority extends to the insertion of the date, place of
payment, the amount, the name of the payee and the
time of payment
 The insertion of a wrong date, by one having
knowledge of the true date of issue, will avoid the
instrument as to him, but an innocent party may
enforce the same despite the improper date
 First or subsequent holder may insert his name or
the name of the person to whom he negotiates the
NI but unless authorized, he cannot fill in a
predecessor’s name enlarge the predecessor’s
liability beyond the latter’s contract
 As to time, Sec 14 provides that in order to be
enforceable against a party prior to completion, it
must be filled in within a reasonable time, which is
reckoned from the date of issuance
1. PRIMA FACIE AUTHORITY TO COMPLETE THE INSTRUMENT
REQUISITES:
a. Want of a material particular in the instrument (Sec
125)
NOTE: Material particular includes matters stated in
Sec 125 NIL
b. Possession thereof by a person
c. That such person had authority to fill up the blank
(1) Strictly in accordance with the authority given;
(2) Within a reasonable time
Page | 33
 (3)
2. PRIMA FACIE AUTHORITY TO FILL IT UP FOR ANY AMOUNT
REQUISITES
a. Signature on a blank paper
b. Person signing in blank delivers it to another
c. Delivery was for the purpose of converting it into NI
NOTE: IF the holder of the NI, after it was filled up, is HDC, the
holder may enforce the instrument as if it has been filled up
strictly in accordance with the authority given and within
reasonable time.
D. INCOMPLETE AND UNDELIVERED NI (Sec 15 NIL) –
Under Sec 15, an instrument which is not only undelivered but
also incomplete, is a REAL defense, which not even HDC can
recover
o RATIO: There is no valid contract
o The conclusive presumption of delivery under Sec 16
does not apply
 If NI is complete, Sec 16 applies
o Test: If an instrument contains all the requisites for
making it negotiable, it should be considered complete
even if there may be blanks as to non-essentials
o However, as against a drawee bank, the drawer is
estopped to rely on Sec 15 if his negligent custody of
the checks after partial execution, contributed to its
loss
TWO STEPS IN THE EXECUTION OF NI
a. The act of writing the instrument completely and in
accordance with Sec 1; and
b. The delivery of the instrument with the intention of
giving effect thereto
NOTE: If completed and negotiated without authority, not a
valid contract against a person who has signed before
delivery of the contract even in the hands of HDC but
subsequent indorsers are liable. This is a real defense which
belongs to the drawer (or parties prior to the delivery of NI
to the payee) against any holder
REASON: The law does not make any distinction between
HDC and a holder not in due course.
Where an INCOMPLETE and UNDELIVERED instrument is in
the hands of HDC, there is a prima facie presumption of
delivery which the maker may rebut by proof of non-delivery
E. COMPLETE BUT UNDELIVERED NI (Sec 16 NIL) –
Non-delivery of a complete instrument is only a PERSONAL
defense (See Sec 16 NIL on Delivery)
o RATIO: Delivery is a prerequisite for liability; even if
the instrument is complete but if undelivered, there is
no contract
o However, if the NI is no longer in the possession of the
person who signed it, there is a disputable
presumption of delivery
 If holder is HDC, there is a conclusive presumption
of delivery
 This applies even if NI is payable to bearer
o Every contract on a NI is incomplete and revocable
until delivery of the instrument for the purpose of
giving effect thereto
F. DURESS – Duress is merely a personal defense which cannot
be used to defeat the rights of HDC
o However, where the duress is so serious as to result to
a lack of contractual intent, it can be used as a real
defense
o E.g., the signer acted not in accordance with his own
will, but in accordance with the will of another because
of his well-founded fear of an imminent and serious
injury
G. ILLEGALITY – available against HDC.
o Under Sec 55 NIL, illegal consideration is mere
personal defense, available only against non-HDC
o Although a NI may have been issued or negotiated for
an illegal consideration, only the parties involved in the
illegality and subsequent parties who are not HDC can
be adversely affected
o HDC can still recover
o HOWEVER, NI, if declared void for any/all purposes,
the defense of illegality becomes a real defense
Page | 34
 IMMEDIATE PARTIES AND REMOTE PARTIES WHO ARE NOT HDC
Delivery must be coupled with the intention of transferring title to the
NI and made either by or under the authority of the party making,
drawing, accepting or indorsing, as the case may be
It may be shown that:
a. There was no delivery
b. Delivery was not authorized
c. Delivery was conditional; or
d. Delivery was for a special purpose only
HDC
Delivery is CONCLUSIVE if he is in possession of a complete
NI so as to make all prior parties to him liable
It CANNOT be shown that there was no delivery, or that
delivery was not authorized, or that it was conditional, or
delivery was for a special purpose only

COMPARISON OF SEC 14, 15 AND 16 NIL

INCOMPLETE BUT DELIVERED (Sec 14) INCOMPLETE AND UNDELIVERED COMPLETE BUT UNDELIVERED
(Sec 15 ) (Sec 16)
Delivered Undelivered Undelivered
NOTE: Delivery may be conditional or for a
special purpose only and not for the purpose of
transferring title
COMPLETENESS
Wanting in a material Blank paper with Mechanically incomplete Mechanically complete
particular signature
AUTHORITY OF PERSON IN POSSESSION
Prima facie authority Signature operates as a No authority to complete and/or negotiate NI May negotiate if delivered to him by or under the
to complete it by filling prima facie authority to authority of the party making, indorsing, drawing
up the blanks therein fill it up as such for any or accepting as the case may be
amount
WHEN ENFORCEABLE
If filled up strictly in accordance with authority No enforceable When delivery is made by or under authority of
given and within a reasonable time the party making, indorsing, drawing or accepting,
as the case may be
KIND OF DEFENSE
Personal Real Personal
RIGHTS OF HOLDER
1. If HDC, he can enforce the NI as None in the hands of any holder. Can enforce the NI
completed against parties prior or However, the invalidity of NI is only with NOTE: Where the NI is in the hands of
subsequent to the completion reference to parties whose signature HDC, a valid thereof by all parties prior to
2. If not HDC, he can enforce the NI as appear on the NI after delivery, the NI is him so as to make them liable to him is
completed only against parties valid conclusively presumed. Where the NI is no
subsequent to the completion but not longer in possession of a party whose
against those prior thereto signature appears thereon, a valid and
intentional delivery to him is presumed until
the contrary is proved

Page | 35
H. PRESCRIPTION – refers to the extinctive prescription and
may be raised even against HDC (real defense). Under NCC,
the prescriptive period of an action based on a written contract
is 10 years from accrual of cause of action
o In case of checks, the action of the depositor against
his drawee bank commences to run from the time he is
given notice of payment (PCIB v. CA, G.R. no 121413,
January 29, 2001)
o The failure of the payee to encash a check for more
than 10 years undoubtedly results in the impairment of
the check through his unreasonable and unexplained
delay (Myron C. Papa v. Valencia, G.R. no 105188,
January 23, 1998)
NOTE: This is contrary to the ruling in NAMARCO v. F.U.N.D.
(G.R. no L-22578, January 31, 1978). In this case, the SC
held that the delivery of promissory notes payable to order,
or bills of exchange or drafts or other mercantile document
shall produce the effect of payment only when realized, or
when by the fault of the creditor, the privileges are inherent
in their negotiable character are impaired. The clause in Art
1249 is applicable ONLY to instruments executed by THIRD
PERSONS and delivered by the debtor to the creditor and
does NOT apply to instruments executed by the debtor
himself and delivered to the creditor.
I. MATERIAL ALTERATION – Any alteration which changes
the date, sum payable, number or relation of the parties, time
or place of payment, or medium of currency, or adds a place of
payment where none is specified, or which alters the effect of
the NI in any respect (PNB v. CA, G.R. no L-26001, October
29, 1968)
o Since it changes the contract of the parties, a material
alteration avoids the instrument (Effect: No longer a
NI) and discharges all parties, unless they authorized
or consented to the alteration
o EXCEPT: As to subsequent indorser because by
indorsing the NI, he warrants that the instrument is in
all respects what it purports to be and that it was valid
and subsisting at the time of his indorsement (Sec 65-
66 NIL)
o It is a PARTIAL DEFENSE because HDC can enforce it
according to its original tenor
o Material Alteration is a PERSONAL defense when used
to deny liability according to the original tenor of the
instrument, but it is a REAL defense when relied on to
deny liability according to the altered terms
o Intent is immaterial in the alteration
NOTE: The alteration mentioned under Sec 124 must be
distinguished from Sec 23. The intent to defraud
distinguishes forgery from innocent alterations and
spoliation. Sec 23 applies only to forged signatures or
signatures made without the authority of the person whose
signature it purports to be. Consequently, if the forgery
consists of alteration in the amount, Sec 124 applies.
WHAT CONSTITUTES MATERIAL ALTERATION (SEC
125)
(a) Date
(b) Sum payable or interest
(c) Time or place of payment
(d) Number or relations of parties
(e) Medium or currency of payment
(f) Any other change or addition which alters the effect of
NI
A serial number is an item which is not an essential requisite
of negotiability under Sec 1 NIL and which does not affect
the rights of the parties, hence its alteration is not material
(PNB v. CA, 2256 SCRA 491).
NOTE: Spoliation, material alteration by a stranger, does not
affect the NI, provided the original meaning can be
ascertained
o An innocent alteration---generally, changes on items
other than those required to be stated under Sec 1
NIL—and spoliation will not avoid the NI, but the
holder may enforce it only according to the original
tenor.
EFFECTS OF MATERIAL ALTERATION
a. Alteration by a PARTY – Avoids the NI except as
against the party who (1) made, (2) authorized, or (3)
Page | 36
 assented to the alteration and (4) subsequent
indorsers. However, if an altered NI is negotiated to
HDC, he may enforce the payment according to its
original tenor regardless whether the alteration was
innocent or fraudulent.
NOTE: Since distinction is made, it does not matter
whether it is favorable or unfavorable to the party
making the alteration. The intent of the law is to
preserve the integrity of the NI
b. Alteration by a STRANGER (Spoliation) – The effect is
the same as where the is made by a party in which
case HDC can recover on the original tenor of the NI
(Sec 124 NIL)
J. ULTRA VIRES ACTS – A corporation may raise want of
authority as a real defense but the negotiation of the
corporation may pass title to the NI (Sec 22 NIL).
o ULTRA VIRES ACT – One committed outside the
object for which a corporation is created as
defined by the law of its organization and
therefore beyond the power conferred upon it by
law
o It is merely voidable which may be enforced by
performance
K. INSERTION OF WRONG DATE – If a wrong date was
inserted, HDC has the right to regard the wrongfully inserted
date as the true date
o The insertion of a wrong date does not avoid the NI in
the hands of a subsequent HDC; but as to him, the
date so inserted is to be regarded as the true date
(Sec 13 NIL)
L. CONSIDERATION – Sec 28 reiterates the rule laid down by
Sec 24 that every NI is deemed prima facie to have been
issued for a valuable consideration
o The defendant has the burden of proving that there
was no consideration for the NI
o Sec 28 provides that absence or failure of
consideration is a personal defense available only
against non-HDC
 As to HDC, the presumption of consideration is
conclusive
o Absence of consideration = total lack of consideration
o Failure of consideration means that something was
agreed upon as consideration for a contract but for
some reason, the consideration did not materialize
o Partial failure of consideration means that part of the
consideration did not materialize
 In such case, the maker may raise set up as a
defense pro tanto (partial defense) against the
payee or holder not in due course, i.e. he is
not liable to the extent of the price of the
undelivered portion (Sec 29 NIL)
ABSENCE OF CONSIDERATION AND FAILURE OF
CONSIDERATON DISTINGUISHED
ABSENCE OF CONSIDERATION FAILURE OF CONSIDERATION
DEFINITION
It is the total lack of any valid It is the neglect or failure of one
consideration of the parties to give, to do, or
to perform the consideration
agreed upon
TYPE OF TRANSACTION INVOLVED
Embraces transactions where no Implies the giving of valuable
consideration was intended to consideration was contemplated
pass but that it failed to pass
EFFECT OF WANT OF CONSIDERATON (Sec 28 NIL)
o Both are valid defenses against a person not a holder
in due course. These defenses are only personal or
equitable.
o Partial failure of consideration is merely a defense pro
tanto, whether the failure is an ascertained or
liquidated amount or otherwise (Sec 28 NIL)
NOTE: The drawee, by accepting unconditionally the bill,
becomes liable to the holder and therefore cannot allege
want of consideration between him and the drawer
REASON: The holder is a stranger in relation to the
transaction between the drawer and drawee, and if the hlder
has given value to the drawer and has no knowledge of any
Page | 37
 equity between the drawer and drawee, he in the same PERSONS PRECLUDED FROM SETTING UP DEFENSE OF
situation as an indorsee in good faith FORGERY
1. Person who WARRANT or admit the genuineness of the
Consideration founded on (1) love and affection or (2) upon signature in question
gratitude is good consideration but does NOT constitute such Warrantors of Genuineness include:
valuable consideration as is sufficient of itself to support the a. Indorsers – Indorsers can be held liable because of
obligation of the bill or note. their breach of warranty that the instrument is
genuine and in all respect what it purports to be
M. FORGERY – Counterfeiting or fraudulent alteration of any (Sec 66)
writing which may consist of: b. Persons negotiating by mere delivery; and
1. Signing of another’s name with intent to c. Acceptors
defraud; or 2. Those who by their acts, silence, or negligence are
ESTOPPED from setting up the defense of forgery –
2. Alteration of an NI in the name, amount,
These include acts or omission that amount to
name of payee, etc. with intent to defraud
ratification, express or implied
o Under Sec 23, forgery is a real defense. A person
 But a person precluded from raising the
whose signature to an instrument was forged was
defense of forgery may still recover damages
never a party and never consented to the contract
under NCC on torts
which gave rise to such instrument; as such, he cannot
 If the instrument is payable to bearer, the
be held liable thereon by anyone, not even HDC
forgery of the indorsement is immaterial since
it is negotiable by mere delivery
TWO situations contemplated under Sec 23:
NOTE: A person whose signature is forged as maker,
a. Want of authority of agent – Where the signature on
drawer, payee or indorsee of a check or note was
the instrument is affixed by one who purports to be an
never a party or did not give consent to the contract
agent but who does not have the authority to bind the
which gave rise to the NI. Since his signature does not
alleged principal
appear in the NI, he cannot be held liable thereon by
b. Where the signature is affixed by one who does not
anyone (Gempesaw v. CA, G.R. no 92244, February 9,
claim to act as an agent and who has no authority to
1993)
bind the apparent signer
o In case of forgery of an indorsement of an instrument
EFFECTS:
payable to order, it is not only the person whose signature
a. When a signature is forged or made without the
was forged who would not be liable but also the parties
authority of the person, the signature (not the
prior to such person. Payment under a forged instrument
instrument itself and the genuine signatures) is
is not the drawer’s order.
inoperative and no one can gain title to the instrument
o The general rule is that, in the case of forgery of the
through it
indorsement of the payee of the check the drawee bank
b. NO right to retain the instrument, or to give discharge
cannot debit the drawer’s account and the loss shall be
therefore, or to enforce payment thereof against any
borne by the drawee bank. The depository or collecting
party thereto, can be acquired
bank is liable to the drawee in case of a forged
indorsement because it guarantees all prior indorsements.
EXCEPTION: Where the party against whom it is sought to
But this is subject to the qualification that the drawee
enforce a right is precluded from setting up the forgery or
himself was not negligent or guilty of such conduct as
want of authority (Sec 23 NIL)

Page | 38
 would estop him from asserting the forged character of the
indorsement against the drawer
o Where an instrument is originally payable to bearer, the
effects of a forged indorsement is different. The holder of
such instrument who did not know of the forgery can still
enforce it against the drawer or maker because he can
cancel the forged indorsement as not being necessary to
his title (Sec 48). REASON: Payable to bearer instruments
are negotiated by mere delivery
o Should there be an indorsement subsequent to the forged
one, the holder, should he be unable to recover from the
maker, may have a right against the subsequent indorser
on the latter’s warranty that the instrument is genuine and
valid at the time of his indorsement
NOTE: The burden of proving the genuineness of a
signature is on the person basing his claim thereon.
ACCEPTANCE AND PAYMENT UNDER MISTAKE
1. Price v. Neal Doctrine – When the drawer’s signature is
forged on a bill or check and the drawee did not detect the
forgery thereon, the drawee cannot charge the amount
thereof to the drawer’s account
o RATIO: The drawee is bound the know the signature of
the drawer by reason of its business relations with the
drawer.
o Forgery as a defense is not available to the acceptor
under Sec 62 NIL
o Sec 62 covers bills paid without prior acceptance and
bills accepted since one who pays a bill necessarily
accepts it. (No distinction between acceptance and
payment)
2. Application of Price v. Neal Doctrine
a. Stop Payment Order – A stop payment order is one
issued by the drawer of a check countermanding his first
order to the drawee bank to pay the check i.e., the
drawer is ordering the drawee bank not to pay the check
issued by him.
 The drawee bank is bound to follow the stop order
provided it is received prior to its certification or
payment of the check
 RATIO: Payment was voluntary on the part of the
drawee bank which, because of the stop order, was
under no legal obligation to pay and its negligence
is paying precludes it from reclaiming the amount
from a bona fide holder
 EXCEPTION: Drawee bank may claim from drawer
if such payment discharged a legitimate debt of
the drawer
 If stop order comes after the bank has certified or
accepted the check, the bank is under legal duty to
pay the holder and will not be liable to the drawer
for doing so
 Certification and acceptance are akin to
assignment of credit i.e., funds are segregated to
be given to the payee
EFFECT OF NEGLIGENCE OF DEPOSITOR – The drawee bank is not
liable if the proximate cause of the wrongful payment is the
negligence of the drawer
o If the negligence of the depositor should delay the
discovery of the forgeries and this negligence is should
deprive the bank to recover from the forger, the depositor
will have to bear the burden of the loss and cannot
demand a re-credit from the bank
o RATIO: It is the duty of the depositor to carefully examine
the bank’s statement, his cancelled checks and check stubs
within a reasonable time, and to report any errors without
unreasonable delay
EFFECT OF PAYMENT UNDER FORGED INDORSEMENTS – A drawee
can recover the amount paid by him on a forged indorsement
since he makes no warranty as to the genuineness of any
indorsement
o When the drawee learns about the forgery, the drawee has
the duty to notify the holder whom he has paid as soon as
possible. If he fails to act promptly, he may lose his right
to recover against the holder if his negligent delay
operates to the latter’s prejudice
o If the draw fails to recover from an insolvent holder, he
cannot recover from the drawer
o Payable to bearer instruments: The drawee bank may
debit the drawer’s account in spite of the forged
indorsement because such indorsement may be
Page | 39
 disregarded as being unnecessary to the holder’s title
EXCEPT: If drawee’s negligence prejudices the holder
o Where both drawee and collecting banks are guilty of
negligence, the degree of negligence of each will be
weighed in considering the amount of loss each should
bear (contributory negligence)
NOTE: In such cases, the doctrine of contributory negligence is
applied. Art 2179 NCC provides: When the plaintiff’s own
negligence was the immediate and proximate cause of his injury,
he cannot recover damages. But if his negligence was only
contributory, the immediate and proximate cause of the injury
being the defendant’s lack of due care, the plaintiff may recover
damages but the courts shall mitigate the damages to be awarded.
EFFECT OF NEGLIGENCE OF DRAWEE IN INFORMING RECIPIENT
OF FORGERY
If it shown that the drawee on learning of the forgery did not give
prompt notice of it and that damages resulted, recovery by the
drawee is barred. The drawee should be allowed to shift that loss
to the drawee only upon clear showing that the drawee’s delay in
notifying him of the forgery caused him damage. No such damage
has been shown by Clearfield. (Clearfield Trust Co v. United
States, 318 US, 363, 63 S. S. Ct. 573)
EFFECT OF NEGLIGENCE OF DRAWER IN CASE OF FORGED
INDORSEMENTS ON CHECKS – The drawer, as soon as he
discovers the forged indorsement, should promptly notify the
drawee bank. Otherwise, if the drawer’s negligent delay is the
proximate cause of any subsequent loss to the bank, the drawee
bank may recover from the drawer.
24-HOUR CLEARING RULE
When the drawee bank fails to return a forged check or altered
check to the collecting bank within the 24-hour releasing period,
the collecting bank is absolved from liability (Republic Bank v. CA,
G.R. no 42725, April 22, 1991)
CUT-OFF RULE
Parties PRIOR to the forged signature are cut-off from the parties
AFTER the forgery in the sense that prior parties cannot be held
liable and raise the defense of forgery. The holder can only enforce
the NI against parties who became such after the forgery.
EXCEPTION: When the prior parties are precluded from setting up
the defense of forgery either because of their warranties,
representation or negligence (Gempesaw v. CA)
NOTE: Where a depositor is using his own personalized checks, its
failure to provide adequate security measures to prevent forgeries
of checks constitutes gross negligence and bars it from setting up
the defense of forgery (MWSS v. CA, G.R. no L-62943, July 14,
1986)
o But the mere fact that a check had been removed and
stolen in a checkbook without the knowledge and consent
of the owner cannot be considered negligence (PNB v.
Quimpo, G.R. no L-53194, March 14, 1988)
ILLUSTRATION
C forged then indorsed to D
A ----- B ----- C ----- D ----- E ----- H
1. A and B can raise the defense of forgery for being parties
prior to the forgery as against C, D, E and H unless
precluded from setting up forgery
2. H can enforce the NI only against C (the forger), D, E and M
(maker) unless precluded from setting up the defense of
forgery
NOTE: The liability of the maker is absolute if the NI involved is
payable to bearer.
TEST TO DETERMINE WHO WILL BEAR THE LOSS IN CASE OF A
FORGED CHECK
1. Was there a gross negligence on the part of the drawer? If
yes, drawer is liable (MWSS v. CA)
2. If there is none, it should be the drawee bank
REASON: The drawee bank should have known that the
signature was forged considering that the signature
appearing on the check was even compared with the
specimen signature of the authorized signatory of the
corporation (Samsung Corp and Supply Co v. FEBTC, G.R.
no 134712, August 13, 2004)
Page | 40
 3. BUT if there is a collecting bank, the collecting bank bears BILLS OF EXCHANGE
the loss ORDER INSTRUMENT BEARER INSTRUMENT
REASON: The collecting bank or last indorser generally DRAWER’S SIGNATURE FORGED
suffers the loss because it has the duty to ascertain the Drawer is not liable because he Drawer is not liable
genuineness of all prior indorsements considering that the was never party to the NI
act of presenting the check for payment to the drawee is an Drawee is liable if it paid (no Drawee is liable if it paid.
assertion that the party making the presentment has doen recourse to drawer—Price v. Drawee cannot recover from the
its duty to ascertain the genuineness of the indorsements Neal doctrine) because he collecting bank because it is
(Banco de Oro Savings and Mortgage Bank v. Equitable admitted the genuineness of the bound to know the drawer’s
Banking Corp, 157 SCRA 186) drawer’s signature signature since the latter is its
depositor.
RULES ON FORGERY Drawee cannot recover from the
PROMISSORY NOTES collecting bank because there is The drawee may recover from
ORDER INSTRUMENT BEARER INSTRUMENT no privity between the the drawer when the latter’s
MAKER’S SIGNATURE FORGED collecting bank and the drawer. negligence is the proximate
Maker is not liable because he Maker is not liable The latter does not give any cause of the loss or contributed
never became a party to the NI warranty regarding the thereto (Gempesaw v. CA)
Indorsers subsequent to forgery Indorsers may be made liable to signature of the drawer
are liable because of their persons who obtain title (Associated Bank v. CA, 208
warranties through their indorsements SCRA 465)
Party who made the forgery is Party who made the forgery is Indorsers subsequent to forgery
liable liable liable (such as collecting bank
PAYEE’S SIGNATURE FORGED or last indorser)
Maker and payee not liable Maker is liable Party who made the forgery is Party who made the forgery is
Indorsers subsequent to forgery Indorsement is not necessary to liable liable
are liable title and the maker engages to PAYEE’S SIGNATURE FORGED
pay the holder Drawer, drawee and payee not Drawer is liable (his
Party who made the forgery is Party who made the forgery is liable (Cut-off rule applies) indorsement is not necessary to
liable liable pass title)
INDORSER’S SIGNATURE FORGED Drawee is liable; no privity
Maker, payee and indorser Maker is liable. Indorsement is between drawer and payee
whose signature was forged is not necessary to title and the because indorsement of payee
not liable maker engages to pay the is not necessary (Ang Tek Lian
holder v. CA, G.R. no L-2516,
Indorsers subsequent to forgery Indorser whose signature was September 25, 1950)
are liable because of their forged is not liable Payee is not liable
warranties Indorsers subsequent to forgery Collecting bank is liable
Party who made the forgery is Party who made the forgery is are liable (such as collecting because of warranty.
liable liable bank)
But it may recover from the
person who forged the
indorsement on the check and

Page | 41
 deposited or enchased the same a. After exercise of reasonable diligence, it cannot be
(Jai-Alai Corp v. BPI, G.R. no L- made
29432, August 6, 1975) b. Drawee is a fictitious person
Party who made the forgery is Party who made the forgery is c. Express or implied waiver (Sec 82 NIL)
liable liable  Effect: the holder may treat the NI as a bill or note
INDORSER’S SIGNATURE FORGED and hold the drawer liable as maker who is a
Drawer, payee and indorser Drawer is liable (indorsement primary party not entitled to presentment
whose signature was forged are not necessary to title)  Waiver of notice does not mean waiver of
not liable (Cut-off rule does presentment
NOT apply)  To bind indorser or drawer, his waiver must be
Drawee is liable if it paid Drawee is liable with knowledge of the facts which release him, so
Indorsers subsequent to forgery Indorser whose signature was if he pays not knowing there was no demand and
are liable (such as collecting forged is liable because no notice, he can recover
bank) indorsement is not necessary to
title 2. If dishonored by nonpayment, notice of dishonor
Party who made the forgery is Party who made the forgery is should be given to the persons secondarily liable
liable liable unless excused
WHEN NOTICE OF DISHONOR IS EXCUSED:
a. When notice is waived
b. When dispensed with under Sec 112 NIL
ENFORCEMENT OF LIABILITY c. As to drawer under Sec 114
d. As to indorser under Sec 115
PRIMARY LIABILITY e. When due notice of dishonor by non-acceptance has
1. As to MAKER – The unconditional promise attaches the been given
moment the maker makes the NI f. As to HDC without notice
2. As to the ACCEPTOR – The acceptor’s assent to the
unconditional order attaches the moment he accepts the NI
STEPS IN BILL OF EXCHANGE
NOTE: No further act is necessary in order for their liability to
accrue. What is necessary only is for the holder to enforce such 1. Presentment for acceptance or negotiation within
liability by presenting it for payment reasonable time after it is acquired ONLY in the
following instances:
SECONDARY LIABILITY a. Where the bill is payable after sight
1. Indorser b. When it is necessary in order to fix maturity of the NI
2. Drawer c. Where the bill expressly stipulates that it shall be
Their liability cannot be immediately enforced. There are necessary presented for acceptance
steps which should be taken in order to charge these persons. d. Where the bill is drawn payable elsewhere than at the
Unless the holder is excused from taking any of the steps, the residence or place of business of drawee (Sec 143 NIL)
persons secondarily liable are discharged. NOTE: In all above cases, the holder must either present the
bill for acceptance or negotiate it within a reasonable time;
otherwise, the drawer and all indorsers are discharged (Sec
STEPS IN PROMISSORY NOTE 144)
1. Presentment for payment to the maker unless excused 2. If dishonored by NON-ACCEPTANCE:
WHEN PRESENTMENT FOR PAYMENT IS EXCUSED

Page | 42
 a. Notice of dishonor given to drawer and indorsers 4. To the person primarily LIABLE, or if he is absent or
unless excused; or inaccessible, to any person found at the place, where the
b. Protest in case of foreign bills unless excused presentment is made (Sec 72 NIL)
3. If bill is accepted:
a. Presentment for payment to the acceptor unless GENERAL RULE: Presentment for payment is NOT necessary in
excused under Sec 82 NIL order to charge the person primarily liable but is necessary in
b. If dishonored upon presentment for payment: order to charge the drawer and indorser, except as otherwise
(1) Notice of dishonor to persons secondarily liable; or provided.
(2) Protest for dishonor by nonpayment in case of
foreign bills WHEN PRESENTMENT IS NOT REQURIED
1. In order to charge the DRAWER – Where he has no right to
STEPS IN ORDER TO CHARGE PERSONS SECONDARILY expect or require the at the drawee or acceptor will pay the
LIABLE IN OTHER CASES NI (Sec 79) such as in case of a check where payment has
1. Protest for payment by drawee in order to charge an been stopped
acceptor honor *Sec 165 and 167) or a referee in case of 2. In order to charge the INDORSER – When the NI was made
need (Sec 167 NIL) or accepted for his accommodation and he has no reason to
2. Protest for nonpayment by the acceptor for honor is also expect that the NI will be paid if presented (Sec 80 NIL)
required (Sec 167) NOTE: Only the drawer and indorser referred to in these sections
are not discharged but all other parties secondarily liable are
PRESENTMENT – The production of a bill of exchange to the relieved of their liability
drawee for his acceptance, or to the drawee or acceptor for
payment OR the production of a promissory note to the party liable WHEN DELAY IN MAKING PRESENTMENT OR GIVING
for the payment of the same (Sec 70 NIL) NOTICE IS EXCUSED
1. When caused by circumstances beyond the control of the
PRESENTMENT FOR PAYMENT holder; and
2. Not imputable to his default, misconduct, or negligence (Sec
PRESENTMENT FOR PAYMENT CONSISTS OF
81 NIL)
1. Personal DEMAND for payment at the proper place
2. Readiness to EXHIBIT the NI if required; and
3. To RECEIVE payment and surrender the NI if the debtor is WHEN PRESENTMENT SHOULD BE MADE
willing to pay INSTRUMENT WHEN PAYABLE
NOTE: Mere informal talk not accompanied by presentment is not PN payable on demand Within reasonable time after
sufficient. Demand on phone is also not sufficient unless maker issue
waives exhibition, whether implied or express (Gilpin v. Savage, Bill of Exchange payable on Within reasonable time after its
201 NY 167, 94 N.E. 656) demand last negotiation
Payable on a specified date On the date it falls due (Sec 71
REQUISITES NIL)
1. MADE by the holder or any person authorized to receive
payment on his behalf NOTE: In determining what is reasonable time, regard is to be had
2. At a REASONABLE HOUR on a business day to the nature of the NI, the usage of trade or business with respect
3. At a proper PLACE to such NI and the facts of the particular case (Sec 193 NIL).

Page | 43
HOW COMPUTED
When the NI 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 time is to begin to
run and by including the date of payment (Sec 86)
TIME OF MATURITY
Every NI is payable at the time fixed therein without grace.
WHEN MATURITY FALLS ON A SUNDAY OR HOLIDAY
NIs falling due or becoming payables on Saturday are to be
presented for payment on the next business day .
EXCEPTION: The NI which is payable on demand may, at the
option of the holder, be presented for payment before 12 noon on
a Saturday when that entire day is not a holiday (Sec 85 NIL)
TIME OF PRESENTMENT OF INSTRUMENT WITH FIXED
MATURITY
WHEN PRESENTED EFFECT
Made before maturity Not effective
If made after maturity Too late unless delay is
excusable
Effect: Secondary parties will be
discharged
Presentment on Sunday or NI will have to be presented on
Holiday the next business day (Sec 194
NIL)
PROPER PLACE OF PRESENTMENT (Sec 75 NIL)
1. Where a place of payment is specified in the NI, it shall be
presented there
2. Where no place of payment is specified but the address of
the person to make payment is given in the NI, it is there
presented
3. Where no place of payment is specified and no address is
given, the NI is presented at the usual place of business or
residence of the person to make payment
4. In any other case, presentment is to be made to the person
to make payment wherever he can be found OR presented at
his last known place of business or residence
o If the NI 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 a tender of payment upon his part
(Sec 70 NIL)
EXHIBITION (Sec 74 NIL)
PURPOSES:
1. To enable he debtor to determine the genuineness of the NI
and the right of the holder to receive payment; and
2. To enable him to reclaim possession upon payment
WHEN EXCUSED:
1. When debtor does not demand to see the NI but refuses
payment on some other grounds; and
2. When the NI is lost or destroyed
NOTE: Even if the rule requires that the NI must be exhibited to
determine its genuineness, this is rendered unnecessary not by the
omission of the authenticity of the note implicit from the averment
that substantial payments were made thereon and by express
waiver of demand, presentment, protests and notice of protest and
nonpayment in the note (Ansaldo v. CA, G.R. no 47696, August
29, 1989)
SPECIAL CASES
1. NI payable at a bank – must be made during banking hours,
unless there are no funds to meet it at any time during the
day, presentment at any hour before the bank is closed on
that day is sufficient (Sec 75 NIL)
2. Person liable is dead – may be made to his personal
representative, if there be one and if he can be found (Sec
76 NIL)
3. Persons liable are partners – may be made to any of the
partners, even if their partnership has been dissolved (Sec
77 NIL)
4. Persons liable are joint debtors – must be made to all of
them (Sec 78 NIL)
PRESENTMENT for ACCEPTANCE
REQUISITES
1. Must be made by or on behalf of the holder
2. At a reasonable hour on a business day
Page | 44
 3. Before the bill is overdue; and
4. To the drawee or some other person authorized to accept or
refuse to accept on his behalf
GENERAL RULE: Presentment for acceptance is NOT necessary in
order to render any party to the bill liable.
WHEN REQUIRED
1. Where the bill is payable after sight, or when it is necessary
in order to fix the maturity of the NI
2. Where the bill expressly stipulates that it shall be presented
for acceptance
3. Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee 9Sec 143 NIL)
NOTE: The holder must either present it for acceptance or
negotiate it within a reasonable time; upon failure to do so, the
drawer and all indorsers are discharged.
WHEN EXCUSED (Sec 148 NIL)
1. Where the drawee is dead, or has absconded, or is a
fictitious person or a person not having capacity to contract
by bill
2. After exercise of due diligence, presentment cannot be made
3. Although presentment has been irregular, acceptance has
been refused on some other ground
RULES ON PRESENTMENT FOR ACCEPTANCE (Sec 145 NIL)
1. Where the bill is addressed to two or more drawees who are
not partners, presentment must be made to ALL of them
unless one has the authority to accept or refuse acceptance
for all, in which case presentment may be made to him only
2. Where the drawee is dead, presentment may be made to his
personal representative
3. Where the drawee has been adjudged bankrupt or insolvent
or has made an assignment for the benefit of creditors,
presentment may be made to him or to his trustee or
assignee
NOTE: A bill may be presented for acceptance on any day on which
NI may be presented for payment under Sec 72 and 75 NIL.
ACCEPTANCE – The signification by the drawee of his assent to
the order of the drawer
o It is the act by which the drawee manifests his consent to
comply with the request contained in the bill of exchange
directed to him
FORM OF ACCEPTANCE (Sec 132 NIL)
1. Must be in WRITING
2. SIGNED by the drawee
3. Must not express that the drawee will perform his promise
by any other means than the PAYMENT OF MONEY
NOTE: The holder of the bill presenting the same for acceptance
may require that it be written on the bill and if such request is
refused, may treat the bill as dishonored (Sec 133 NIL)
KINDS OF ACCEPTANCE
1. GENERAL – Assents without qualification to the order of the
drawer
2. QUALIFIED – which in express terms varies the effect of the
bill as drawn
a. CONDITIONAL – Makes payment by the acceptor
dependent on the fulfillment of a condition therein
stated
b. PARTIAL –A acceptance to pay part only of the amount
for which the bill is drawn
c. LOCAL – An acceptance to pay at a particular place
d. Qualified as to TIME
e. The acceptance of one or some of the drawees but
NOT ALL (Sec 141 NIL)
EFFECT OF QUALIFIED ACCEPTANCE
The drawer and the indorsers are DISCHARGED unless:
a. They have expressly or impliedly AUTHORIZED the
holder to take qualified acceptance; or
b. Subsequently ASSENTED thereto
Thus, a subsequent party which caused the dishonor of the
check through its qualified indorsement cannot hold prior
parties liable on the NI (Gonzales v. RCBC, G.R. no 156294,
November 29, 2006)
The holder has the right to require the drawee to accept the
bill without qualification. If the latter refused, he can treat
the bill as dishonored by non-acceptance (Sec 142 NIL)
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 3. IMPLIED COSNTRUCTIVE ACCEPTANCE (Sec 137 NIL) – If
after 24 hours the drawee fails to return the NI, he is
deemed to have accepted the NI. This also applies if the
drawee destroyed the NI.
o Acceptance in the sense used in NIL is not required for
checks for the same are payable on DEMAND
o Payment is not acceptance because the latter is a
“promise to perform an act while the former is the
actual performance (PNB v. CA, G.R. no L-26001,
October 29, 1968). But the effect is the same:
discharge of the NI
4. EXTRINSIC (Sec 134 NIL) – Acceptance may be made on a
paper other than the bill
5. VIRTUAL (Sec 135 NIL) – Contemplates the situation where
an acceptance is made on a bill that has not yet been drawn
(acceptance in advance)
DISHONOR – Where a bill is duly presented for acceptance and
is NOT accepted within the prescribed time:
1. The person presenting it must treat the bill as dishonored by
acceptance otherwise he loses the right of recourse against
the drawer and indorsers; and
2. Proper notice of dishonor should be given to the drawer and
indorsers
DISHONOR BY NONPAYMENT (Sec 83 NIL)
1. Payment is refused or cannot be obtained after due
presentment for payment
2. Presentment is excused and the NI is overdue and unpaid
EFFECT: There is an immediate right of recourse by the holder
against persons secondarily liable. However, notice of dishonor is
generally required (Sec 84 NIL).
DISHONOR BY NON-ACCEPTANCE (Sec 149 NIL)
1. When it is duly presented for acceptance and such
acceptance is refused or cannot be obtained; or
2. When presentment for acceptance is excused, and the bill is
not accepted
EFFECT: Immediate right of recourse against the drawer and
indorsers accrues to the holder and no presentment for payment is
necessary (Sec 151 NIL)
NOTICE OF DISHONOR – Notice is given by holder or his
agent to party or parties secondarily liable that the NI was
dishonored by non-acceptance by the drawee of a bill or by
nonpayment by the acceptor of the bill or by nonpayment by the
maker of the note (Sec 89 NIL)
NOTE: Only persons secondarily liable are given notice of dishonor.
A joint maker, an accommodation maker, or a surety need not be
given a notice of dishonor. But an irregular or accommodation
indorser is entitled as any indorser to notice of dishonor otherwise
he is discharged from liability.
REQUISITES FOR NOTICE OF DISHONOR
1. Given by the holder or his agent, or by ANY PARTY who may
be compelled by the holder to pay (Sec 90 NIL)
2. Given to a SECONDARY PARTY or his agent (Sec 97 NIL)
3. Given with the PERIODS provided by law (Sec 102); and
4. Given at the proper PLACE (Sec 103 and 104 NIL)
HOW GIVEN (Sec 96)
Notice of dishonor may be:
1. Oral; or
2. Written
NOTE: Notice of dishonor must be served personally or by mail.
CONTENTS OF NOTICE OF DISHONOR
1. Sufficient DESCRIPTION of the NI to identify it
2. A statement that it has been PRESENTED for payment or for
acceptance and that it has been dishonored; and
3. A statement that the party giving notice intends to look for
the party addressed for PAYMENT
BY WHOM GIVEN (Sec 90 NIL)
1. Holder
2. Another, on behalf of the holder; or
3. Any party to the NI who may be compelled to pay it to the
holder, and who would have a right of REIMBURSEMENT
from the party to whom notice was given (Sec 90 NIL)
TO WHOM GIVEN
1. Non-acceptance (Bill) – to persons secondarily liable, namely
the drawer and indorsers as the case may be
2. Nonpayment (both bill and note) – indorsers
Page | 46
NOTE: Notice must be given to persons secondarily liable.
Otherwise such parties are discharged. Notice may be given to the
party himself or to his agent
WHEN GIVEN: As soon as the NI is dishonored (Sec 102).
2. Give notice to his principal. In such case, he must give notice
within the time allowed by law as if he were a holder
NOTE: Where a party receives notice of dishonor, he has, after the
receipt of notice, the same time for giving notice to antecedent
parties that the holder has after the dishonor (Sec 107 NIL)

WHEN NOTICE IS DISPENSED WITH: WAIVER OF NOTICE DISHONOR

1. When party to be notified knows about the dishonor, WHEN MADE:
actually or constructively (Sec 115 NIL) 1. Before the time of giving notice; or
2. If waived (Sec 109 NIL); or 2. After the omission to give due notice
3. When after due diligence, it cannot be given (Sec 112 NIL) NOTE: Waiver may be express or implied (Sec 109 NIL)

NOTICE OF DISHONOR INURES TO THE BENEFIT OF As to who are affected by an express waiver depends on where the
1. When given by or on behalf of a holder waiver was written:
a. All parties prior to the holder, who have a right of 1. If it appears in the body or in the face of the NI, it binds all
recourse against the party to whom notice is given; parties
and 2. If it is written above the signature of an indorser, it binds
b. All holders subsequent to the holder giving notice (Sec him only (Sec 110 NIL)
92 NIL)
2. When given by or on behalf of a party entitled to give notice WHEN NOTICE OF DISHONOR IS NOT REQUIRED TO BE GIVEN
a. The holder; and DRAWER (Sec 114) INDORSER (Sec 115)
b. All parties subsequent to the party to whom notice is Drawee & drawee are the same Drawee is a fictitious person or
given (Sec 93 NIL) has no capacity to contract and
if indorser was aware of such
EFFECT OF LACK OF NOTICE OF DISHONOR ON fact at the time of indorsement
INSTRUMENT PAYABLE IN INSTALLMENT Drawee is a fictitious person or Indorser is the person to whom
1. NO acceleration clause – Failure to give notice of dishonor on has no capacity to contract the NI is presented for payment
a previous installment does not discharge drawers and Drawer is the person to whom NI NI was made or accepted for his
indorsers as to succeeding installments is presented for payment accommodation (Sec 115)
2. WITH acceleration clause – It depends upon whether the Drawer has no right to expect or
clause is optional or automatic require that the drawee or
a. Automatic – Failure to give notice of dishonor as to a acceptor will honor NI
previous installment will discharge the person Where NI has countermanded
secondarily liable as to the succeeding installments payment
b. Optional – If not exercised, the rule would be the same NOTE: If an NI is not accepted by the drawee, there is no sense
as where there is no acceleration clause. If it is presenting in again for payment, and notice of dishonor must at
exercised, the rule would be the same as where the once be given. If there was acceptance presentment for payment
installment contains an automatic acceleration clause is still required and if payment is refused, there is still a NEED for
notice of dishonor (Sec 115).
DISHONOR IN THE HANDS OF AN AGENT (Sec 94 NIL)
Agent can do either of the following: An omission to give notice of dishonor by non-acceptance does
1. Directly give notice to persons secondarily liable; or NOT prejudice the rights of HDC subsequent to omission (Sec 117)

Page | 47
 ENFORCEMENT OF LIABILITY

PRESENTMENT NOTICE OF DISHONOR

PAYMENT ACCEPTANCE
NATURE OF INSTRUMENT
Promissory notes Sec 143 Promissory notes
Bills of exchange o Bill is payable after sight or when it is Bills of exchange
Checks necessary in order to fix the maturity of Checks
the NI
o Bill expressly stipulates
o Bill is drawn payable elsewhere than at
the residence or place of trade or business
of drawee
BY WHOM
Holder/Agent Holder/agent Sec 90 & 91:
o Holder/agent
o By or on behalf of any party who might be
compelled to pay it to the holder and who
has a right of reimbursement from the
party to whom the notice is given
TO WHOM
Sec 76, 77 & 78 Sec 145 Sec 89 & 97: Drawer/Indorser or any person
Person primarily liable: Drawee/Agent WITH authority to accept or secondarily liable or his agent
o Maker/drawee reject (acceptance gives rise to liability on the
o If debtor is dead, to his personal part the drawee) Sec 98-101
representative o If there are 2 or more drawees who are o If dead, to his personal representative
o If liable as partners, presentment not partners, presentment must be made o If parties, notice to anyone of partners
may be made to any one of them to all of them unless one has the o If jointly liable, notice to each one of them
o If joint debtors, presentment must be authority to accept or refuse for all unless one has authority to receive notice
made to all of them o If debtor is dead, to his personal for others
o Any person found at the place of representative o If adjudged bankrupt or insolvent or an
presentment (Substituted o If adjudged bankrupt or insolvent or has assignment was made, notice must given
presentment) made an assignment, presentment must to him, his trustee or his assignee
be made to him, his trustee or assignee
HOW MADE
Sec 74: exhibiting NI By producing the bill (because the bill will be Either VERBALLY or in WRITING.
stamped ACCEPTED Must describe the NI and state the fact of
presentment and fact of dishonor
WHEN MADE
Sec 72 & 85: If NI is payable on a future If payable on a future determinable time, If living in the same AREA, notice must be
determinable time, must be presented on presentment must be before it is overdue or given within 24 hrs from dishonor

Page | 48
DUE DATE, except if it falls on a Sat, Sun or
holiday in which case it must be made the
next business day
Sec 85/194: If NI is payable on demand, it
must be made within reasonable time
a. Note – after issue
b. Bill – from last negotiation
c. Check – 6 months after issue;
including Sat up to 12 noon
Sec 73
o Place designated by the parties
o If none, at the address of the
maker/acceptor as stated in the NI
o If none, at his residence or office
o If none, any place where he is found
Sec 79-82
o When drawer has no right to expect to
or require that drawee or acceptor will
pay NI
o Where the NI was made or accepted for
his accommodation and he has no
reason to expect that the NI will be paid
if presented
o When the delay is caused by
circumstances beyond the control of the
holder and not imputable to his default,
misconduct or negligence
o Even after the exercise of due diligence,
presentment cannot be made
o Drawee is a fictitious person
o Waiver, express or implied
at maturity
IF payable on demand, the bill must be
presented within a reasonable time from
last negotaiton (including Sat 12 noon)
WHERE MADE
NO REQUIREMENT because it is immaterial.
What is more important is that the bill was
accepted
HOW EXCUSED
Sec 148
o Drawee is dead, absconded, a fictitious
person or a person with no capacity to
contract by bill
o After exercise of due diligence,
presentment cannot be made
o Although presentment was irregular,
acceptance has been refused on some
other ground
If living in a DIFFERENT AREA, the dropping of
letter in a mailbox is sufficient compliance
o Address of party indicated/added in his
NI
o If none, at his residence or office
o If none, where is sojourning
Sec 112-114 (DRAWER)
o After the exercise of due diligence, it
cannot be given to does not reach the
parties sought to be charged
o Delay is caused by circumstances beyond
the control of the holder & not imputable
to his default, misconduct or negligence
o Drawer and drawee is the same person
o Drawee is a fictitious person or with no
capacity to contract
o Drawer is the person to whom NI was is
presented for payment
o Drawer has no right to expect or require
that drawee or acceptor will honor NI
o Drawer has countermanded payment
Sec 115 (INDORSER)
o When the drawee is a fictitious person or
a person with no capacity to contract and
the indorser was aware of such fact at the
time of indorsement
o Indorser is the person to whom NI was
presented for payment
o When NI was made or accepted for his
accommodation
Page | 49
FOREIGN BILL OF EXCHANGE EFFECT OF NON-PROTEST: The drawer and indorsers are
One which is on its face or purports to be: discharged (Sec 118 NIL).
1. Drawn in the Philippines but payable outside the Philippines
2. Payable in the Philippines but drawn outside the Philippines PROTEST IS ABSOLUTELY REQUIRED
1. Upon dishonor by non-acceptance of a foreign bill appearing
INLAND BILL OF EXCHANGE AND FOREIGN BILL OF on its face to be such (Sec 152 NIL)
EXCHANGE DISTINGUISHED 2. Upon dishonor by nonpayment of a foreign bill appearing on
INLAND BILL OF EXCHANGE FOREIGN BILL OF EXCHANGE its face to be such, if not having been previously dishonored
by non-acceptance (Sec 152)
A bill which is or on its face One which is or on its face
3. Before a bill can be accepted for honor, it must be protested
purports to be both drawn and purports to be draw or payable
for dishonor by non-acceptance or protested fro better
payable WITHIN the Philippines OUTSIDE the Philippines
security (Sec 161 NIL)
4. Before a bill can be presented for payment to the acceptor
PROTEST – The formal instrument executed usually by a notary for honor or the referee in case of need, it must be protested
public certifying that the legal steps necessary to fix the liability of
by the holder for non-payment to any party liable thereon
the drawee and the indorsers have been taken
(Sec 167)
5. Before a bill can be paid for honor, it must be protested by
REQUISITES FOR PROTEST the holder for nonpayment by any party liable thereon (Sec
1. Must be MADE by a 171)
a. Notary public; or
b. Any respectable resident of the place where the bill is NOTICE OF DISHONOR AND PROTEST DISTINGUISHED
dishonored, in the presence of 2 or more credible NOTICE OF DISHONOR PROTEST
witnesses (Sec 154 NIL) WHEN REQUIRED
2. Must be ANNEXED to the bill or must contain a copy thereof
Required in inland bill Required in foreign bill
(Sec 153)
FORM
3. Must be under the hand and SEAL of the notary public
May be oral or written Always written
making it
BY WHOM MADE
4. Must SPECIFY
a. The time and place of presentment May be made by the party or Made by a notary public or a
b. The fact that presentment was made and the manner agent respectable resident in the
thereof present of 2 or more witnesses
c. The cause or reason for protesting the bill WHERE MADE
d. The demand and the answer given, if any or the fact Made in the residence of parties Made in the place of dishonor
that the drawee or acceptor could not be found (Sec
153 NIL) WHEN MADE: On the day of dishonor unless delay is excused.
When a bill has been duly noted, the protest may be subsequently
PURPOSES OF PROTEST extended as of the date of noting (Sec 155 NIL).
1. For uniformity in international transactions
2. To furnish an authentic and satisfactory evidence of dishonor WHERE MADE: At the place where it is dishonored EXCEPT where
NOTE: Protest is necessary only in case of foreign bills of the bill is payable at a place other than the residence of the
exchange, which have been dishonored by non-acceptance or drawee, it must be protested at the place where it is expressed to
nonpayment. be payable (Sec 156 NIL)

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PROTEST FOR BETTER SECURITY
One made by the holder of a bill after it has been accepted but
before it matures against the drawer and indorsers, where the
acceptor has been adjudged bankrupt or insolvent, or made an
assignment for the benefit of the creditors (Sec 158)
PURPOSE: To give acceptor the opportunity to perform an act that
will ensure payment
ACCEPTANCE FOR HONOR
An undertaking by a stranger to a bill after protest for the benefit
of any party liable thereon or for the honor of the person for
whose account the bill is drawn such acceptance inures also to the
benefit of all parties subsequent to the person for whose honor it is
accepted, and conditioned to pay the bill when it becomes due if
he original drawee does not pay it (Sec 161-170 NIL)
REQUISITES (Sec 161-162 NIL)
1. The bill must have been protested for dishonor by non-
acceptance or for better security
2. The acceptor for honor must be stranger to the bill
3. The holder must consent to the acceptance for honor
4. Bill must not be overdue
5. Must follow the formalities prescribed in Sec 162:
a. Must be in writing
b. Must indicate it is an acceptance for honor
c. Signed by the acceptor for honor
d. Must contain an express or implied promise to pay
money
e. The accepted bill for honor must be delivered to the
holder
LIABILITY FOR ACCEPTANCE FOR HONOR
1. The acceptor for honor is liable to the holder and to all
parties to the bill subsequent to the party for whose honor
he has accepted (Sec 164 NIL)
2. By such acceptance, he engages that he will on due
presentment pay the bill according to the terms of his
acceptance, provided it shall not have been paid by the
drawee, and that it shall have been duly presented for
payment and protested for nonpayment and notice of
dishonor given to him (Sec 165)
ACCEPTANCE FOR HONOR FOR BILL PAYABLE AFTER SIGHT
Where a bill payable after sight is accepted for honor, its maturity
is calculated from the date of the noting for non-acceptance and
not from the date of the acceptance for honor (Sec 166 NIL)
PROTEST OF BILL ACCEPTED FOR HONOR
Where a dishonored bill has been accepted for honor before
protest or contains a referee in case of need, it must be protested
for nonpayment before it is presented for payment to the acceptor
for honor or referee in case of need (Sec 167)
PRESENTMENT FOR PAYMENT TO ACCEPTOR FOR HONOR; HOW
MADE
1. If it is to be presented in the place where the protest for
nonpayment was made, it must be presented not later than
the day following the maturity
2. If it is to be presented in some other place than the place
where protested, it must be forwarded within the time
specified in Sec 104
WHEN DELAY IS EXCUSED: Where there is delay in making
presentment to the acceptor for honor or referee in case of need,
Sec 81 applies: Where circumstances beyond the holder’s control
but not imputable to holder’s fault or negligence (Sec 169)
WHEN DISHONORED BY ACCEPTOR FOR HONOR: It must be
protested for nonpayment by him (Sec 170)
PAYMENT FOR HONOR
Payment made by a person, whether a party to the bill or not,
after it has been protested for nonpayment, for the benefit of any
party liable thereon or for the benefit of the person for whose
account it was drawn (Sec 171-177)
REQUISITES(Sec 171-172 NIL)
1. The bill has been dishonored by non-acceptance
2. It has been protested for nonpayment
3. Payment supra protest (another term for payment for honor
because prior protest for nonpayment is required) is made
by any person, even by a party thereto
Page | 51
 4. The payment is attested by a notarial act of honor which ACCEPTANCE FOR HONOR AND PAYMENT FOR HONOR
must be appended to the protest or form of an extension of DISTINGUISHED
it ACCEPTANCE FOR PAYMENT FOR HONOR
5. The notarial act must be based on the declaration made by HONOR
the payor for honor or his agent of his intention to pay the Bill Bill must be overdue Bill may be overdue
bill for honor and for whose honor he pays Previous Previously protested Previously protested for
NOTE: If the above formalities are not complied with, payment will protest for non-acceptance or nonpayment
operate as VOLUNTARY PAYMENT and the payor will acquire no for better security
right to full reimbursement against the party whose honor he pays. Consent of Necessary Is not necessary
(Sec 172) holder
Liability Acceptor is secondarily Acceptor is primarily
In payment for honor, the payee cannot refuse payment. If he
liable liable
refuses, he cannot recover from the parties who would have been
By whom Made by a stranger or Made by any person
discharged had he accepted the same. In acceptance for honor,
made party not liable on the whether a party or
the holder’s consent is necessary
bill stranger to the bill
Notarial act Notarial act of honor is Notarial act of honor is
RIGHT OF PAYOR FOR HONOR
not necessary necessary
To receive both the bill and protest to enable him to enforce his
Effects Sec 164, 165 Sec 175, 177
rights against parties who are liable to him.
PAYMENT BY PERSON PRIMARILY LIABLE AND
ORDINARY ACCEPTANCE AND ACCEPTANCE FOR
PAYMENT FOR HONOR DISTINGUISHED
HONOR DISTINGUISHED
PAYMENT BY PAYMENT FOR HONOR
ORDINARY ACCEPTANCE FOR
PERSON
ACCEPTANCE HONOR
PRIMARILY
Necessity of Previous protest is NOT Previous protest IS
LIABLE
protest required required
Necessity of No need to Need to protest for
Consent of Implied Required
protest protest for nonpayment
holder
nonpayment or
Liability of Primary Secondary
non-acceptance
acceptor
Party liable A party to the NI: May be a stranger or may be
By whom Drawee is acceptor Acceptor must be
maker or drawee- a party
accepted stranger to the bill
acceptor
Number of No acceptor in the There may be several
In whose In favor of In favor of a specified person
acceptors alternative or in acceptors for honor for
favor payment specific parties and the law requires that
succession different parties in the
is made there is a statement of the
bill
person for whose honor
Effect of Instrument IS Bill is NOT discharged payment is made
payment discharged upon upon payment by
Notarial act Not necessary Necessary
payment by the acceptor for honor
Payment in Discharges the NI Cannot be payment in due
acceptor
due course course & payment discharges
only the parties after the

Page | 52
 party in whose fabor the
payment for honor is made
BILLS IN SET
One composed of several parts, each part being numbered and
containing a reference to the other parts, the whole of the parts
constituting one bill (Sec 178 NIL)
PURPOSE: It is usually availed of in cases where a bill had to be
sent to a distant place through some conveyance. If each part is
sent by different means of conveyance, the chance that at least
one part of the set would reach its destination would be greater.
RIGHTS OF HOLDERS WHERE PARTS ARE NEGOTIATED
SEPARATELY
1. If both are HDC, the holder whose title first accrues is
considered the true owner of the bill
2. But the person who accepts or pays in due course shall not
be prejudiced (Sec 178 NIL)
OBLIGATION OF HOLDER WHO INDORSES 2 OR MORE
PARTS OF BILL IN SET
1. The person shall be liable on every such part
2. Every indorser subsequent to him is liable on the part he has
himself indorsed, as if such parts were separate bills (Sec
180)
DISCHARGE
DISCHARGE OF INSTRUMENT –A release of all parties,
whether primary or secondary, from the obligations arising
thereunder. It renders the NI without force and effect, and
consequently, it can no longer be negotiated
INSTANCES
1. By payment in due course or on behalf of the principal
debtor
2. Payment by accommodation party
3. Intentional cancellation by the holder
4. By any act which will discharge a simple contract for the
payment of money
5. When the principal debtor becomes the holder of the NI or
after maturity in his own right (Sec 119)
A. PAYMENT IN DUE COURSE
REQUISITES
a. Payment must be made at or after maturity
b. Payment must be made to the holder
c. Payment must be made in good faith and without
notice that the holder’s title is defective (Sec 88 NIL)
BY WHOM MADE
a. By maker or acceptor or (selected accommodated
party)
b. Surety, if a primary party; or
c. By an agent on behalf of the principal
B. PAYMENT BY ACCOMODATED PARTY
REASON: He is the one ultimately liable on the NI
C. CANCELLATION – It includes any act of tearing, erasing,
obliterating, or burning. It is not limited to writing the word
“cancelled” or “paid,” or drawing crisscross lines across the
NI (Sec 123). It may be made by any other means by which
the intention to cancel the NI may be evident.
INTENTIONAL CANCELLATION REQUISITES
1. Intentionally done
2. By the holder thereof; and
3. By writing the word “cancelled” or “paid” on the face of
the NI or of the NI is torn up, burned, mutilated or
destroyed
EFFECT OF UNINTENTIONAL CANCELLATION
If the NI is unintentionally cancelled or cancelled by mistake
or without authority of the holder, the cancellation is
INOPERATIVE but party who alleges that cancellation was
made unintentionally, under mistake or without authority
has the burden of proof (Sec 123 NIL)
Page | 53
D. ANY OTHER ACT WHICH DISCHARGES THE
INSTRUMENT – The law on obligations and contracts will
apply. Art 1231 provides how obligations may be
extinguished:
1. Payment or performance of obligation
2. Loss of thing due
3. Condonation or remission of debt
4. Confusion or merger in the rights of the creditor and
debtor
5. Compensation
6. Novation
7. Annulment
8. Rescission
9. Fulfillment of resolutory condition
10. Prescription
However, although such ways discharge the NI as between
immediate parties, they will not do so in the hands of HDC.
NOTE: The NI must be surrendered to the payor. If the NI is
not surrendered, it may fall in the hands of HDC who may
have the right to enforce the NI despite the previous
payment
DISCHARGE OF PERSONS SECONDARILY LIABLE
1. By any ACT which discharges the NI
2. By the INTENTIONAL cancellation of his signature by
the holder
3. By the DISCHARGE of a prior party
NOTE: The release of the principal debtor must be by t
act of the holder and not by operation of law.
4. By a VALID tender or payment made by a prior party
Tender of payment means the act by which one
produces and offers to a person holding a claim
against or demand against him the amount of money
which he considers and admits to be due, in
satisfaction of such claim or demand without any
stipulation or condition
5. By the RELEASE of the principal debtor, unless the
holder’s right of recourse against the party secondarily
liable is 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 NI (Sec 120)
Instances when the agreement to extend the time of
payment does NOT discharge a party secondarily liable
1. Where the extension of time is consented to by such
party
2. Where the holder expressly reserves his right of
recourse against such party
EFFECTS OF PAYMENT BY PARTIES SECONDARILY
LIABLE
1. NI will not be discharged
2. It only cancels his own liability and that of the parties
subsequent to him
3. He may strike out his own and all subsequent
indorsements and again negotiate the NI except
a. Where it is payable to the order of a third
person and has been paid by the drawer; and
b. Where it was made or accepted for
accommodation and has been paid by the
party accommodated (Sec 121 NIL)
E. RENUNCIATION (Sec 122 NIL) – The act of
surrendering a right or claim without recompense, but it can
be applied with equal property to the relinquishing of a
demand upon an agreement supported by a consideration
o It must be with written declaration to that effect and if
oral, must be accompanied by surrender of the NI to
the person primarily liable thereon
REQUISITES
1. Absolute and unconditional
2. Made in favor of the person primarily liable; and
3. Made at or after maturity
EFFECTS
1. A renunciation in favor of a secondary party may be
made by the holder before, at or after maturity of the
NI. The effect is to discharge the only such secondary
Page | 54
 party and all parties subsequent to him but the NI
itself must remain in force
2. A renunciation in favor of the principal debtor may be
effected at or after maturity. The effect is to discharge
the NI and all parties thereto provided the renunciation
is made unconditionally and absolutely
NOTE: In either case, renunciation does not affect the
HDC without notice.
F. PRINCIPAL DEBTOR BECOMES THE HOLDER – An
instrument is discharged when the principal debtor becomes
the holder of the instrument at or after maturity date in his
own right.
o In his own right – construed to exclude a case where a
maker acquires the NI in a purely representative
capacity (Sigler v. Sigler, 98 Kans. 524, 158 P. 864)
o The note is not discharged when the maker acquires it
as agent of another. Nor is it discharged when the
maker becomes the holder, like as executor or
administrator
G. SURRENDER OF THE INSTRUMENT – The NI must be
surrendered to the payor whenever discharge is by payment
by or in behalf of the principal debtor, payment by the
accommodated party, by renunciation or by any other
ground that discharges simple contract
CHECKS
CHECK – An instrument which is in the form of a bill of exchange
but is always payable on demand and always drawn on a bank
(Sec 185 NIL)
Elements:
(1) Contain an unconditional order
(2) For payment of money
(3) Amount of which is definite and certain
(4) May be transferred by indorsement or by delivery
depending if payable to bearer or to order
o Checks are not mere contracts but:
1. A representation of FUNDS on deposit
2. Representation of CREDIT stated in monetary value
3. SUBSTITUTE for cash; and
4. As PAYMENT for an obligation
o But a check itself does NOT operate as assignment of any
part of the funds to the credit of the drawer with the bank.
The bank is not liable to the holder UNLESS AND UNTIL it
accepts or certifies the check (Sec 189 NIL)
PRESENTMENT FOR PAYMENT
A check must be presented for payment within reasonable time
AFTER ITS ISSUE or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay (sec 186
NIL).
When a check is crossed, it is the duty of the collecting bank to
ascertain that check is only deposited to the payee’s account (Phil
Commercial Bank v. Phil Commercial and International Bank, G.R.
no 180257, February 23, 2011).
TYPES OF CHECKS
1. PERSONAL CHECK – Most common form of check
2. CASHIER’S CHECK – One drawn by the cashier of a bank, in
the name of the bank against the bank itself payable to a
third person. It is a primary obligation of the issuing bank
and accepted in advance upon issuance (Tan v. CA, G.R. no
108555, December 20, 1994)
3. MANAGER’S CHECK – A check drawn by the manager of a
bank in the name of the bank itself payable to a third
person. It is similar to the cashier’s check as to the effect
and use
o Drawn by a bank itself and has the effect of
acceptance. It is more like a promissory note; as such
bank is primarily liable
4. MEMORANDUM CHECK – A check given by a borrower to a
lender for the amount of a short loan, with the
understanding that it is not to be presented at the bank, but
will be redeemed by the maker himself when the loan falls
due and which understanding is evidence by writing the word
“memorandum,” “memo” or “mem” on the check
o Check where the word “memorandum” or “memo” is
written across its face meaning that the drawer will
pay the holder absolutely, without need of
presentment
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 5. CERTIFIED CHECK – An agreement whereby the bank
against whom a check is drawn undertakes to pay it any
future time when presented for payment (Sec 187 NIL)
6. TRAVELER’S CHECK – It is one upon which the holder’s
signature must appear twice: one to be affixed by him at the
time it is issued; and the second, for countersignature, to be
affixed by him in the presence of the payee before it is paid
otherwise it is incomplete
CERTIFICATION OF CHECKS
An agreement whereby the bank against whom a check is drawn,
undertakes to pay it at any future time when presented for
payment
EFFECTS
1. Equivalent to acceptance (Sec 187 NIL) and is the operative
act that makes banks liable
2. Assignment of the funds of the drawer in the hands of the
drawee (Sec 189)
3. If obtained by the holder, discharges the persons secondarily
liable thereon (Sec 188)
NOTE: Where the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability
thereon (Sec 186)
REFUSAL OF DRAWEE BANK TO PAY AND CERTIFY
GENERAL RULE: If a bank refuses to pay a check (despite the
sufficiency of funds), the payee-holder cannot, as provided under
Sec 185 and 189 NIL sue the bank. The payee should instead sue
the drawer who might in turn sue the bank
REASON: No privity of contract exists between the drawee-bank
and payee (Sincere Villanueva v. Marlyn Nite, G.R. no 148211, July
25, 2006)
EXCEPTION: If the drawer himself ordered the bank to pay and
such drawer has sufficient funds therein
COLLECTION OF CHECKS
On the check’s due date, the holder of a check may either proceed
directly to the drawee bank and present the same for payment or
he may deposit it in his account with his bank known as the
depositary bank or collecting bank.
 It is only after the check has been cleared and collected
from the drawee bank that final credit is made in the
payee-depositor’s account
CLEARING OF CHECKS
When a check is sent to the clearinghouse the collecting bank acts
as the agent of the depositor. The collecting bank does not become
the owner of the amount covered by the check as the same is only
being collected from the drawee bank for the principal, the
depositor (BPI v. CA, G.R. no 112392, February 29, 2000)
CROSSED CHECK – A check which in addition to the usual
contents of an ordinary check contains also the name of a certain
banker or business entity through whom it must be presented for
payment
KINDS
1. CROSSED SPECIALLY – The name of a particular bank or
company is written or appears between the parallel lines in
which case the drawee-bank must pay the check only upon
presentment by such bank or company (Chan Wan v. Tan
Kim, G.R. no L-15380, September 39, 1960)
2. CROSSED GENERALLY – Only the words “and Co.” are
written between the parallel lines or when none at all is
written between said lines
Where the manager obtained and encashed manager’s checks that
were plainly crossed checks, the SC held the following effects:
1. It may not be encashed but may only be deposited with the
bank
2. It may be negotiated only once to a person who has an
account with the bank; and
3. It serves as a warning to the holder that the check has been
issued for a definite purpose and he must inquire if he
received the check pursuant to this purpose; otherwise he is
not HDC (Associated Bank v. CA, G.R. no 89802, May 7,
1992)
The NIL is silent with respect to crossed checks, although the Code
of Commerce makes reference to such instrument. Nonetheless,
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the SC has taken judicial cognizance of the practice that a check
with 2 parallel lines in the upper left hand corner means that it
could only be deposited and not converted into cash. The effects of
crossing a check thus relates to the mode of payment, meaning
that the drawer had intended the check for deposit only by the
rightful person, i.e. payee named therein (Cely Yang v. CA, G.R.
no 138074, August 15, 2003)
IRON CLAD RULE
Prohibits the countermanding of payment of certified checks
(Republic v. PNB, G.R. no 16106, December 1, 1961)
NOTE: The holder must be HDC so that the stop payment order
may not be successfully invoked against him (Mesina v. IAC, G.R.
no 70145, November 13, 1986)
CRIMES INVOLVING CHECKS
A. CHECK KITING – It is the practice of taking advantage of the
float, the time that elapses between the deposit of the check in
one back and its collection in another
NOTE: In anticipation of the dishonor of the check that was
deposited, the conspirators will release the original check with
another worthless check
CASES WHEN BANK MAY REFUSE PAYMENT
1. The BANK is insolvent
2. The drawer’s deposit is INSUFFICIENT or he has no
account with the back or said account has been closed
or garnished
3. The DRAWER is insolvent and proper notice is received
by the bank
4. The drawer DIES and proper notice is received by the
bank
5. The drawer has COUNTERMANDED payment
6. The holder REFUSES to identify himself
7. The bank has reason to believe the check is FORGERY
NOTE: A bank is under no obligation to make partial
payment on a check up to the amount of the drawer’s
funds as where the check is drawn for an amount
larger than what the drawer has on deposit. In case of
partial payment, the check holder could not be called
upon to surrender the check and the bank would be
without a voucher affording a certain means of
showing payment (Moran v. CA, G.R. no 105836,
march 1994)
B. ESTAFA – By express provision of BP22, prosecution of said
law is without prejudice to any liability under RPC,
particularly Art 315(d) – Deceit is necessary
Elements
1) Offender issued a postdated check or issued a check in
payment of an obligation
2) Such postdating or issuing a check was done when
offender had no funds in the bank or his funds
deposited therein were not sufficient to cover the
amount of the check
NOTE:
o Good faith is a defense in a charge of estafa by
postdating or issuing a check
o the drawer’s failure to cover the issued check within 3
days from notice of dishonor is prima facie evidence of
deceit
o If the check was issued in payment of pre-existing
debt, there is NO estafa
o Offender must be able to obtain something from the
offended party by means of the check he issues and
delivers (for value or consideration)
o If postdating a check issued as mere
guarantee/promissory note, there is NO estafa
C. BP 22 (BOUNCING CHECKS LAW) – If check is dishonored
of insufficient funds, the drawer may be held civilly liable
(under NIL) and criminally liable under BP 22.
o Purpose: To prevent increase in the number of
worthless checks issued by unscrupulous persons
causing prejudice to the banking system and to the
flow of business and trade
Acts punishable:
1) Making, drawing or issuing a check knowing at the
time of issue that the drawer has no sufficient
funds/credit with the drawee bank – knowledge of
insufficient funds is essential
2) Failure to keep sufficient funds to cover the check
for 90 days from date of check – drawing and
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 issuance of said check is prima facie evidence of
drawer’s knowledge of insufficient funds
 EXCEPT if Drawer pays holder the amount of
the check within 5 banking days after notice of
dishonor or makes arrangement for payment in
full by the drawee (same period)
 Payment within 5 banking days does not
remove criminal liability
o To dishonor check = write reason for dishonor in the
check and in the notice of dishonor (prima facie
evidence of issuance, due presentment and dishonor of
check)
o If check is presented after 90 days and dishonored =
no criminal liability
o Check is presented “on account or for value”

WHERE THE ACCUSED WAS ACQUITTED OF THE CRIMINAL

CHARGES UNDER BP 22, MAY HE STILL BE HELD CIVILLY LIABLE
FOR THE CHECKS HE ISSUED? Yes.
Since the court held that upon issuance of a check, in the absence
of evidence to the contrary, it is presumed that the same was
issued for valuable consideration. Under NIL, it is presumed that
every party to an NI acquires the same for a consideration or for
value. As petitioner alleged that there was no consideration for the
issuance of the subject checks, it devolved upon him to present
convincing evidence to overthrow the presumption and prove that
the checks were in fact issued without valuable consideration
(Cayanan v. North Star International Travel, G.R. no 172954,
October 5, 2011)

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