Quick Look Negotiable Instruments Law .D

Commercial Law
Quick Look (Second Reading)
III. Negotiable instruments Law

Forms and Negotiable It is a written contract for payment of money, intended to substitute money.
Interpretation Instrument It passes from one person to another in such a manner as to give an HDC the right to hold the instrument free from defenses available to prioer parties.
The instrument must comply with Sec 1 in order to be considered negotiable
Notes:
1. Negotiable instruments have no legal tender power.
a. When money is of legal tender, the law compels the creditor to accept it as payment of his debt when debtor tenders the right amount.
b. There is an element of compulsion.
2. Only notes and coins issued by BSP are considered legal tender.
3. Checks are not legal tender because creditor has an option not to accept it. However, once it has been cleared and credited to the account of
creditor, it shall be equivalent to delivery of cash in an amount equal to the amount credited to his account.
Requisites of Requisites are:

Negotiability 1. It must be in writing and signed by the maker or drawer.
2. It must contain an unconditional promise or order to pay a sum certain in money.
3. It must be payable on demand, or at a fixed or determinable future time.
4. It must be payable to order or to bearer.
5. When the instrument is addressed to the drawee, he must be named or otherwise indicated with reasonable certainty. This requisite applies
only to BE.
It must be in writing Even if maker or drawer only writes “X” as his signature, the instrument is still negotiable as long as there was an intent to
and signed by authenticate the instrument. It is not necessary that the signature be the usual signature of the maker.
maker or drawer
It must contain an Unconditional 1. Words “Promise” or “order” do not need to appear in the instrument. An acknowledgement
unconditional promise may become a promise by addition of words by which a promise of payment can be naturally
promise or order to implied.
pay a sum certain in a. “Payable”, “payable on a given day”, “payable on demand”, “paid when called for”.
money. 2. The law requires the promise or order to be unconditional because no one will accept it if the
transferee does not know the certainty of the event that will happen. Uncertainty will defeat
the very purpose of the instrument which is to be a substitute for money.
3. It is still considered negotiable even if it is coupled with:
a. An indication of particular fund where reimbursement is to be taken; or a particular
account where amount is to be debited.
b. A statement of transaction which gives rise to the instrument.
4. Particular fund or particular account where reimbursement is to be taken is negotiable because
it is not the direct source of payment.
5. If it is an order or promise to pay out of a particular fund, it is conditional, and therefore non-
negotiable, because the payment depends on the sufficiency of the particular fund.
a. “As soon as his means permit him to do so” is not negotiable because the promise is
conditional. Under Civil Code, this is considered as an obligation with a period.
6. An option to deliver something in lieu or in replacement of money is not negotiable. However,
if the instrument allows the holder to choose delivery of something in lieu of money, instrument
is negotiable.
7. In alternative obligations, option must be left in the hands of the creditor in order for the
instrument to be negotiable. If left in the hands of the debtor, it is non-negotiable.
Sum certain 1. A sum is considered certain even though it is to be paid:

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 1
in money a. With interest
b. By stated installments
c. By stated installments, with provision that upon default of any installment or interest,
the entire sum shall become due.
d. With exchange, whether at a fixed rate or at the current rate.
e. With costs of collection or an attorney’s fees, in case payment shall not be made at
maturity.
2. There is a need to pay interest for consumption of money owned by a person but he was not
able to use.
3. Dates of installments must be fixed, or at least determinable and amount to be paid for each
installment must be stated. There must also be a maturity date.
4. Money does not need to be legal tender, as long as it is expressed in money. It may be an
amount expressed in another currency. An agreement to pay in foreign currency is valid.
a. Sum is certain if the amount can be determined on the face of the instrument, even
if it requires mathematical computation.
b. There must be a prevailing rate of conversion or fixed rate that is well known.
Exchange rate does not affect the negotiability of the instrument because the sum
remains to be certain.
5. There is payment of attorney’s fees when obligor defaults and oblige is forced to engage the
services of a lawyer.
Payable on demand Payable on When it is expressed to be payable:

or at a fixed or demand 1. On demand, or at sight, or on presentation.
determinable future 2. No time for payment is expressed.
time 3. If an instrument is issued, accepted or indorsed beyond the maturity date or when it is
overdue, it is payable on demand as to the person who issued, accepted or indorsed it.
Payable at a When it is expressed to be payable:
determinable 1. At a fixed period after date or sight
future time 2. On or before a fixed or determinable future time specified
3. On or at a fixed period after occurrence of a specified event which is certain to happen, though
the time of happening is uncertain.
4. If the instrument is payable upon a contingency, which is possible but not certain, it is not
negotiable and the happening of the contingency does not cure the defect.
Notes:
1. Payment “if he deems himself insecure” renders the instrument non-negotiable (Insecurity
Clauses).
2. An instrument payable at a definite time but subject to extension at the option of the holder,
or to extension t a further time at the option of the maker, acceptor, or automatically upon a
specific act or event is negotiable.
3. Death is an example of something certain even though the time of happening is uncertain.
Payable to order or 1. These are words of negotiability.
to bearer 2. If a certificate of deposit states that, “it is to certify that the bearer has deposited, repayable to said depositor”, it is
negotiated being a bearer instrument. However, if these are delivered but not endorsed as a security, there is no
negotiation. At the most, the holder would be a holder for value up to the extent of his lien or a pledgee under the
Civil Code.
Payable to 1. Expressed to be payable to bearer

bearer 2. Payable to a “person named or bearer”
3. Payable to the “order of a fictitious or non-existing person” and such fact was known to the
person making it so payable (maker or drawer)
4. Name of the payee does not purport to be the name of any person
5. Only or last indorsement is an indorsement in blank
Notes:
1. Once a bearer, always a bearer. This principle applies only when an instrument is originally
issued as a bearer instrument.
2. It does not need an indorsement to be validly negotiated. It is negotiated by mere deliver.
Payable to 1. Payable to the order of a specified person or his order.
order 2. Payable to the order of a specified person.
a. The payee (specified person) may be:
i. A payee who is not a maker, drawer or drawee
ii. Drawer or maker
iii. Drawee
iv. Two or more payees jointly
v. One or some of several payees
vi. Holder of an office for a time being
b. Payee must be named or otherwise indicated with reasonable certainty
Notes:
1. The payee may be a juridical person, if he is not the maker, drawer or drawee. He must be
ascertained at the time of issue.
2. It can be negotiated further though indorsement. It requires an indorsement from the payee or
holder before it may be validly negotiated.
3. It is not necessary to name the person holding “the office for the time being” because it is
payable to the office itself, and not to the person holding it.
4. When there are two or more drawees (compare to two or more “payees” jointly), the bill is
valid. However, it must not be addressed to two or more drawees in alternative or succession.
Fictitious Definition When a payee is fictitious or not intended to be the true recipient of the proceeds, the
Payee Rule instrument is a bearer instrument.
1. This principle applies when the instrument is payable to a fictitious person.
2. This defense is used by the drawee-bank or transferee to deny direct liability
to the payee.
3. They must show that the maker/drawer did not intend for the named payees
to be part of the transaction (involving checks). T
4. he requisite condition of the fictitious-payee situation is that the drawer
intended that the payee would not have any interest in the transaction.
Rationale 1. A fictitious person or a non-existing person cannot endorse.
2. One cannot expect a fictitious payee to negotiate (the check) by placing his
indorsement on it. Since the maker/drawer knew of this limitation, he must
have intended for the instrument to be negotiated by mere delivery. In such
case, he shall bear the loss.
Application 1. Even if there is a person named and existing to be payable in the order
instrument, it is a bearer instrument if the drawer or maker did not intend to
pay him.
2. An actual, existing and living payee may be fictitious if the maker (of the
check) did not intent for the payee to in fact receive the proceeds of the
check. This occur when the maker places a name for convenience or to cover
up an illegality.
Effect Once the payee is considered a fictitious payee and the (check) instrument, a bearer
instrument, the drawee bank is absolved from liability and the drawer bears the loss.
Effects are:
1. Drawee-bank is absolved from liability and drawer bears the loss.
2. Instrument can be negotiated by delivery.
Exceptions 1. There is a commercial bad faith on the party of the drawee-bank or any
transferee of the check. This will strip the defense of Fictitious Payee Rule.
The drawee-bank or transferee will bear the loss.
2. There is commercial bad faith if the transferee acts dishonestly and is a party
to the fraudulent scheme.
Omissions that do There is nothing in this Sec that shall alter or repeal any statute requiring that nature of consideration must be stated in the
not affect instrument, in certain cases.
negotiability No date 1. If it has no date, it becomes payable on demand.
2. A date is necessary and may be inserted by the holder when there is a need to determine
the maturity date of the instrument:
a. When the instrument (expressed to be payable at a fixed period after the date
of issuance) is undated.
b. When acceptance (of an instrument payable at a fixed period after sight) is
undated.
3. Sec 11 states that if the instrument, acceptance or indorsement is date, such date is
deemed prima facie to be the true date of making, drawing, acceptance or indorsement
as the case may be.
4. If the instrument is dated, it is presumed to be the true date. However, this presumption is
prima facie between immediate parties but not against the HDC.
No specific value All instruments have a presumption of consideration.
given or that any Sec 24 states that every negotiable instrument is deemed prima facie to have been issued for a
value had been valuable consideration; and every person whose signature appears to have become a party for value.
given
No specific place Since it is a written contract for payment of money, Civil Code applies suppletorily. It states that,
where it is drawn or “laws of the place where the contract was entered into shall govern”.
place where it is
payable
Bears seal (proves This is for authentication purposes.
ownership)
Designates a It would be still be considered payable in money.
particular kind or Foreign currency is convertible to Philippine money, which is legal tender, provided that it is current
current money money or foreign money has a fixed value compared money of the country in which the instrument is
payable.
Additions that do 1. There is nothing in this Sec that shall validate an illegal provision or stipulation.
not affect 2. GR: An instrument which contains an order or promise to do any act in addition to payment of money is not
negotiability negotiable.
3. : Sale of collateral securities and confession of judgment
Sale of collateral securities in 1. Sale of Collateral Securities contemplate that securities are to be added to the
case the instrument cannot be obligation to pay.
paid upon maturity 2. This addition act of sale must only be executed after date of maturity.
3. Authority to sell the collateral securities does not include the authority to buy
it or appropriate it for himself. Otherwise, it will be pactum commissorium.
Confession of judgment in case The confession itself is void due to public policy but the instrument is still negotiable. In
the instrument cannot be paid effect, the provision is considered not existing.
upon maturity
Waiver of benefits of any law Benefits that can be waived:
intended for protection of 1. Presentment for payment
obligor 2. Notice of dishonor
3. Protect
This waiver of benefits are merely to prevent discharge of secondary parties by extensions
of time. It does not alter the specified date of maturity.
Election of holder to require If it is the obligor or debtor (maker or drawer) who has the option to choose what can be
something to be done in lieu of done, it is not negotiable because the instrument becomes conditional. Holder cannot
payment of money demand delivery of money even if he wants to.
Interpretation of 1. Requisites under Sec 1 must appear upon its face.
negotiable 2. However, lack or doubt of requisites does not render the instrument automatically non-negotiable because Sec 17
instruments might still apply.
3. Sec 17 only applies when there is an ambiguity or doubt on the negotiable instrument, thus need an interpretation.
Sum payable is expressed in words and figures Sum denoted in words shall be the sum payable.
but there is a discrepancy between the two. If words are ambiguous or uncertain, figures may be referred to to fixed
the amount.
Instrument provides for payment of interest Interest runs from the date of the instrument.
without specifying the date from which interest If the instrument is undated, from its issuance.
is to run
Instrument is not dated Date it was issued
An undated acceptance of an undated BE is payable on demand, and will
be considered dated as of the time it was executed.
Conflict between written and printed provisions Written provisions will prevail
of the instrument
There is doubt whether it is a bill or a note Holder may treat it as either at his election
Signature was placed that it is not clear in which He is deemed to be an indorser.
capacity the person making it intended to sign
It contains the word “I promise to pay” but said They are deemed jointly and severally liable (solidary).
by two or more persons Holder can collect the whole amount of the instrument in either one of
them. Inclusion of other co-signer as co-defendant is not necessary.
But if the note says “we promise”, instead of “I promise”, the obligation is
only joint (not solidary)
Kinds of Negotiable Promissory notes Bills of Exchange

Instruments Definition It is an unconditional promise in writing made by one person It is an unconditional order in writing addressed by one person to
to another, signed by the maker, engaging to pay on demand another, signed by the person giving it, requiring the person to whom
or at a fixed or determinable future time, a sum certain in it is addressed to pay on demand or at a fixed or determinable future
money to order or to bearer. time, a sum certain in money to order or to bearer.
Engagement It is a personal engagement of the maker. It is an order directing another party to pay the instrument.
Commitment It is an unconditional promise. It is an unconditional order.
Parties It involves two parties: maker and holder. It involves three: drawer, drawee and holder.
Liability The maker is primarily liable. The drawer is secondarily liable, if the acceptor is unable to pay.
Presentment Only one: presentment for payment. Two: Presentment for acceptance of BE and presentment for payment.
Kinds 1. Certificate of deposit: a written acknowledgement  Draft: used in LOC (revert to LOC discussion.
of the bank when it receives a certain sum, with a  Time draft: draft payable at a fixed date.
promise to repay it.  Demand draft: draft payable when holder presents it for
2. Bonds: certificate of debt where the issuing payment.
company promises to pay the bond holders an
amount of interest for a specified length of time,  Trade acceptance: where seller orders the buyer to pay a
as well as an amount of loan upon expiration date. sum to the same seller (used in Contracts of Sale).
3. Debenture: promised supported by the general
credit of the corporation and usually not secured BE Check
by a mortgage or lien on any specified party. Time for Payable on demand, Payable on demand.
payment or at a fixed, or
determinable future
time.
Deposit It is not drawn on It is necessary that
deposit. check is drawn on
deposit. Otherwise,
there would be fraud.
Death of It does not revoke the It revokes the authority
drawer authority of the bank of the bank to pay.
to pay.
Presentment It may be presented It must be presented
for payment within reasonable within a reasonable
time after last time after its issue.
negotiation.
Notes:
1. BE can be treated as PN in the following instances:
a. Drawer and drawee are the same person.
b. Drawee is a fictitious person.
c. Drawee has no capacity to contract.
d. Instrument is so ambiguous that there is doubt whether it is a bill or a note, and the holder chooses it to be a note.
2. Non-negotiable instruments:
a. Treasury Warrant—it is payable out of a particular fund of the national treasury.
i. “Payable from appropriation for food administration” is actually an order for payment out of particular fund and is not
unconditional.
b. Certificate of stock—these are written evidence of shares but not the share itself. It does not represent credit. It only shows ownership
of stocks. It is non-negotiable because it does not contain an unconditional promise or order to pay a sum certain in money.
i. No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and
expenses (in case of delinquent shares) has been paid.
c. Postal Money Orders—under postal regulations, Bureau of Posts can refuse to pay on numerous grounds. Thus, the order is not
unconditional.
i. They have limited negotiability as they may be indorsed only once.
ii. Postal rules and regulations may be inconsistent with NIL.
iii. Government is not engaging in commercial transactions but only governmental power for public benefit in establishing and
operating postal money order system.
d. Pawn tickets – it does not represent money but pawned articles.
e. LOC—it is payable to a specified person only.
f. Trust Receipt—it is an evidence of ownership of goods, not money.
g. Negotiable Document of Title, Bill of Lading and Warehouse Receipt—it is payable in goods and not in money.
Completion and Completion
Delivery Insertion of Date Insertion of 1. This may be a personal defense.
wrong date 2. However, it does not apply to an HDC.
a. If a wrong date is inserted, HDC has the right to regard the wrongfully inserted date as the true date.
b. It does not avoid the instruments. But as to him, the date so inserted is regarded as the true date.
Ante-dating or The instrument is not invalid just because it is ante-dated or post-dated, as long as this was not done for an illegal or fraudulent
post dating purpose.
1. Once the instrument is delivered, he is deemed to have acquired the title of the instrument as of the date of actual delivery,
not of the date written on instrument.
2. Ante-dating or post-dating invalidates the instrument when it is done for an illegal or fraudulent purpose.
Presumption of If the indorsement bears date after maturity of the instrument, every negotiation is deemed to have been effected before the
time of instrument was overdue.
indorsement 1. The presumption is, he indorsed the note on or before the date of maturity (before the note became overdue).
2. The holder has the burden of proof to show that the indorsement was made after maturity.
3. This does not apply when the indorsement bears a date (before maturity). Instead, Sec 11 will apply.
a. “Where the instrument, acceptance or idnorsement is dated, such date is prima facie to be the true date of the
making, drawing, acceptance or indorsement as the case may be.
4. This is important because in order for the holder to be HDC, the instrument must be negotiated to him before it becomes
due.
5. Indorsement without a date shows a prima facie presumption that the instrument was negotiated before maturity.
Date in relation Every indorsement is presumed to have been made at the place where the instrument is dated.
to place of Place is material because indorsement should be governed by the laws of state where it is indorsed.
indorsement
Completion of Rules in the completion of blanks:

Blanks (Sec 14) 1. If the instrument is missing any material particular, the one possessing the instrument has prima face authority to complete the instrument by
filing up the blanks.
a. Material Particular—any important detail that affects the tenor of the instrument or the parties’ rights. It is not limited to the requisites
under Sec 1.
2. Signature on a blank paper delivered, by a person making the signature so that the paper may be converted into a negotiable instrument,
operates as prima facie authority to fill it up as such for any amount.
a. However, in order to enforce the instrument, when completed, against any person who is a party before its completion, the blanks must
be filled up strictly in accordance with authority given and within reasonable time.
3. After completion, if such instrument is negotiated to an HDC, it is valid and effectual for all purposes on his hands. He may enforce it as if it had
been strictly in accordance with authority given and within reasonable time.
Notes:
1. This is a personal defense.
2. A holder may go after the indorsers in case it is an order instrument or to the immediate transferor in case it is a bearer instrument.
a. Subsequent holders cannot put up the defense of GF.
3. One who takes a negotiable instrument, knowing that it contained blanks when it was delivered, does not have the obligation to inquire the
extent of agent’s authority. He may recover even if authority has exceeded. This is true even when blanks were filled up in the transferee’s presence
by the transferee himself or by agent’s authority.
Delivery
Concept of It means that party delivering it did so for giving effect to it, otherwise it cannot be considered delivery. The person to whom the instrument is delivered gets
delivery the title to the instrument completely and irrevocably.
Incomplete and Non-delivery of an incomplete instrument is a real defense.

Undelivered If completed and negotiated without authority, it will not be a valid contract in the hands of any holder as against any person whose signature was placed before
Instruments delivery.
Complete but Rules in complete but undelivered instruments:
Undelivered 1. Every contract on a negotiable instrument is incomplete and revocable until delivery for the purpose of giving effect.
Instruments 2. Between immediate parties, and remote parties other than an HDC, delivery must be made either by or under the authority of the person making,
drawing, accepting or indorsing.
a. Delivery may be shown to have been condition or for a special purpose only, and no for the purpose of transferring the property in the
instrument.
3. If the instrument is in the hands of HDC, there is a conclusive presumption hat a valid delivery by all parties prior the HDC have been made in order
to make them liable to him.
4. If the instrument is no longer with the party who signed it (or whose signature appears on it), there is a presumption that he made a valid and
intentional delivery, unless contrary is proved.
Notes:
1. It is only a personal defense.
2. Principle: the one who makes infirmity possible shall bear the loss.
3. Recourse: Go after the indorsers or the immediate transferee for breach of warranty (that they had good title to the instrument)
4. As against persons not HDC, it can be shown that no delivery was made or delivery is condition or for a special purpose as a defense to deny the
holder’s claim.
5. If the instrument was stolen, defense of want of delivery can be used. However, if the stolen instrument is payable to order and thief had to forge
the payee or indorsee’s signature to negotiate it, defense to be used should be forgery (a real defense) instead of lack of delivery.
Incomplete but Person in possession has prima facie authority to complete it by filing up the blanks.
delivered Signature on a blank paper delivered by the person making the signature to turn the instrument into a negotiable instrument operates as a prima facie authority
instrument to fill it up for any amount.
In order to enforce it against any person who became a party before the instrument was completed, the instrument must:
1. Be filled up strictly in accordance with authority given
2. Within reasonable time
Notes:
1. Persons negotiating it after its completion are liable because of their warranties.
2. HDC may enforce the instrument as if it had been filled up strictly in accordance with authority given and within reasonable time. Hence, it is not a
defense in an action to enforce PN that it was signed in blank because the person possession it has prima facie authority to fill up the blanks.
Complete but If the instrument is in the hands of an HDC, it is conclusively presumed that there has been a valid delivery be all parties before him, in order for HDC to make
undelivered them liable.
If the instrument is no longer in the possession of a party who signed it, there is a (disputable) presumption that he has validly and intentional delivered it, until
contrary is proved.
Notes: this is only a personal defense.
Signature Signing in
Trade Name
Signature of Signature by agent It may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose and the authority of
Agent the agent may be established as in other cases of agency.
Want of authority of Where agent is without authority, it is a real defense. Principal will not be bound beyond authority given to agent.
agent in certain cases
Liability of agent Agent is not liable on the instrument if the following requisites are present:
1. He was duly authorized.
2. He signed the instrument.
3. He added his signature words indicating that he signs for or on behalf of a principal or in a representative capacity
4. He disclosed his principal
Indorsement as a If a person is under an obligation to indorse in a representative capacity, he may indorse it to negate personal liability.
representative
Notes:
1. This must be related to Sec 20 (liability of person signing as agent).
a. If the instrument contains words, or a person adds words to his signature, indicating that he signed in behalf of
a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized.
b. However, mere addition of words describing him as agent, without disclosing his principal, does not exempt him
from personal liability.
2. Agent must:
a. Add words describing himself as agent
b. Disclose his principal
c. Must be duly authorized.
3. An agent may indorse by merely signing the name of the principal.
Liability of agent or If the broker or another agent negotiates an instrument without indorsement, he incurs all liabilities under Sec 65, unless he
broker who negotiates discloses the name of his principal and the fact that he is only an agent.
without indorsement
Notes:
1. This applies only to bearer instruments.
2. Warranties are either qualified indorser or of a person who negotiates the instrument by mere delivery.
3. Parole evidence is not admissible to relieve the agent.
4. “All prior parties had capacity to act” does not apply to person negotiating public or corporation securities, other than
bills and notes.
In relation to notice of Notice may be given by agent, either in his own name or in name of any party entitled to give notice, whether that party be his
dishonor principal or not.
Notes:
1. It is not necessary that agent be authorized by principal.
2. A collecting bank may give notice and if it does, notice from owner is not necessary.
3. Where cashier of drawee bank, which had refused to pay a check, gave the check to a notary to protest, it was held that
cashier’s possession of the check was evidence of his agency of the holder to present it for protest.
Notes:
1. Authority to collect money belonging to his principal does not include indorsement of instruments received in payment. But right to indorse will not be
lightly inferred.
2. Persons taking checks made payable to corporation, which can act only be agents, does at his peril and must abide by consequences if the agent
indorsing it does not have authority.
3. Factors that would negate personal liability of corporate officers who signed an instrument for a loan the corporation obtained:
a. Name and address of corporation appeared on the space provided for maker/borrower.
b. Officers had only 1 set of signatures on the instrument, when there should have been two if they intended to be bound solidarily—the first as
representatives of corporation and second in their individual capacities.
c. They did not sign under spaces provided for co-maker and neither their addresses reflected there.
d. At the back of instrument, they signed above the words “authorized representative”.
Indorsement Indorsement or assignment by a corporation or an infant passes property even if corporation or infant may not incur liability on it because of want of capacity.
by Minor or
Corporation Notes on Minority:
1. Negotiation passes title to the indorsee but it does not make the minor liable. Minor is not liable but the defense of minority is personal to him. Thus,
other parties who are capacitated cannot invoke such defense. However, the minor shall be liable if he actively misrepresents his age and it appears that
he is of such age.
2. If a minor issued an instrument as maker or drawer, holder cannot go after him because the minor can raise his being a minor as a defense. It is a real
defense because of his lack of capacity.
a. The holder’s recourse is to go after the indorsers.
b. This defense also applies to insanity. Only the minor and the insane can raise the defense.
3. If a maker issues an instrument in favor of a minor, the maker cannot use the payee’s minority as a defense because as a maker, he admits to the
existence of the payee and his capacity to indorse.
a. This applies to MDAI because they all warranted not only the existence of the payee but also his capacity to indorse.
4. Minor’s contract is voidable but he may ratify it.
5. Defense of minority is not total. If the minor has kept the whole valuable consideration, he cannot interpose minority as defense. If he kept only part
of the consideration, his defense applies only to the extent of benefit received by the minor.
Notes on Ultra Vires Acts:

1. Where a corporation is absolutely prohibited from issuing any commercial paper, the paper cannot be enforced even by an HDC. However, indorser
cannot set up the defense that execution of the bill or note by a corporation was ultra vires.
2. There must be a BOD approval on purchase of property or whenever required in order to have a valid negotiation. The corporation is not liable unless
estopped.
Forgery Definition When a signature is forged or made without authority of a person whose signature it purports to be, it is:
1. Wholly inoperative
2. No right can be acquired through or under such signature to:
a. Retain the instrument
b. Give a discharge to it
c. Enforce payment against any party
: Party against whom it is sought to enforce is precluded from setting up forgery or want of authority.
Note: Forgery under Sec 23 only pertains to the signature. If forgery consists of amount, it is covered by Material Alteration under Sec
124.
Persons precluded 1. Persons who warrant or admit the genuineness of signature in question.
from setting up a. Indorsers
the defense of b. Persons negotiating by mere delivery
forgery c. Acceptors
2. Those who by their acts, silence, or negligence are estopped from setting up the defense of forgery.
a. This include acts or omissions that amount to express or implied ratification.
Note: A person precluded from raising the defense of forgery may still recovery damages under Quasi-Delicts.
24-Hour Clearing When the drawee bank fails to return a forged check or altered check to the collecting bank within the 24-hour clearing period, the
Rule collecting bank is absolved from liability.
Cut-Off Rule Parties prior to the forged signature are cut-off from the parties after the forgery in the sense that they cannot be held liable. Parties
prior can raise the defense of forgery.
The holder can only enforce the instrument against parties who became such after the forgery. None of the subsequent parties can
acquire rights against prior parties, only amongst themselves.
Exceptions to Cut- This does not apply to prior parties who have guaranteed warranties, made representations and committed negligence.
Off Rule
Rules on Forgery of PN:

Order instrument Bearer instrument
Maker’s Maker  Not a party to the instrument Maker  Not a party to the instrument
signature Payee  He is considered an indorser if he Payee  He is considered an indorser if he negotiated it.
was forged negotiated it. Indorsers  Indorsers are liable to those who obtained title
Indorsers  Because of their warranties. through their indorsements.
Forger  Party who made the forgery is liable. Forger  Party who made the forgery is liable.
Payee’s Maker  Cut-Off Rule applies. Maker  Indorsement is not necessary to title and the
signature Payee  He can use defense of forgery. maker engages to pay the holder
forged Indorsers  Because of their warranties. Payee  He can use defense of forgery.
Forger  Party who made the forgery is liable. Indorsers  Indorsers are liable to those who obtained title
through their indorsements.
Forger  Party who made the forgery is liable.
Indorser’s Maker  Cut-Off Rule applies. Maker  Indorsement is not necessary to title and the
signature Payee  Payee  maker engages to pay the holder
forged Indorsers  He can use defense of forgery. Indorsers  He can use defense of forgery.
Subsequent  Because of their warranties. Subsequent  Indorsers are liable to those who obtained title
indorsers indorsers through their indorsements.
Signature of payee or holder is unnecessary to pass title of the instrument.

Indorsement is inoperative. There is no transfer of any rights to Hence, where indorsement is forged, only the person whose signature was
holder. forged can raise defense of forgery.
Cut-Off Rule applies because indorsement is necessary for Cut-Off Rule does not apply.
transfer of title.
Rules on Forgery of BE:

Order instrument Bearer instrument
Drawer’s Drawer  Not a party to the instrument Drawer  Not a party to the instrument
signature Drawee , if it GR: He admitted the genuineness of the Drawee , if it GR: He admitted the genuineness of the
paid drawer’s signature by accepting the paid drawer’s signature by accepting the
instrument. instrument.
: Drawer has committed negligence and : Drawer has committed negligence
such was the proximate cause of the and such was the proximate cause of
forgery. the forgery.
: Mere fact that depositor leaves his : Mere fact that depositor leaves his
checkbook lying around does not checkbook lying around does not
constitute negligence if reported the constitute negligence if reported the
forgery immediately upon discovery forgery immediately upon discovery
Payee  He is considered an indorser if he Payee  He is considered an indorser if he
negotiated it. negotiated it.
Indorsers  Because of their warranties. Indorsers  Indorsers may be made liable to those
Collecting  There is no privity between collecting who obtained title through their
bank bank and drawer. He cannot warranty the indorsements.
signature of the drawer. Collecting  There is no privity between collecting
Forger  Party who made the forgery is liable. bank bank and drawer. He cannot warranty
the signature of the drawer.
Note: GR: Drawee Bank is liable for the loss.
: There was fault or negligence on part of drawer, which was the proximate cause.
Drawee cannot charge the account of drawer and it cannot recover from collecting bank. It charged, drawer can recover the amount back.
Drawee bank should have known the signature of its own drawer-customer. Once, drawee accepts it, he can go after the last holder.
Payee’s Drawer  Cut of Rule applies Drawer  His indorsement is not necessary to
signature Drawee  pass title
forged Payee  He may use the defense of forgery. Drawee  No privity between drawer and payee
Indorsers  Because of their warranties. beause indorsement of payee is not
Collecting  It is considered an indorser of the payee’s necessary
bank forged signature. Payee  He may use the defense of forgery.
Forger  Party who made the forgery is liable. Indorsers  Indorsers may be made liable to those
who obtained title through their
indorsements.
Collecting  It is considered an indorser of the
bank payee’s forged signature.
Note: Depositary or collecting bank becomes liable because it guarantees all prior indorsements.
However, if if it was not established that checks containing forged indorsements passed through the collecting bank. only the drawee may be
held liable. In one case, drawee encashed the checks (one was crossed) presented by unknown persons although the checks were payable to
BIR. Hence, drawee was negligent in encashing checks.
Indorser’s Drawer  GR: Cut of Rule applies Drawer  Their indorsements is not necessary to pass
signature Drawee  : Drawee, if it paid. Drawee  title
forged Payee  Payee 
Indorser  He may use the defense of forgery Indorser  He may use the defense of forgery
Subsequent  Because of their warranties. Subsequent  Indorsers are liable to those who obtained
indorsers indorsers title through their indorsements.
Collecting  It is considered an indorser of the payee’s Collecting  It is considered an indorser of the payee’s
bank forged signature. bank forged signature.
Indorsement is inoperative. There is no transfer of any rights to Signature of payee or holder is unnecessary to pass title of the
holder. instrument. Hence, where indorsement is forged, only the person
Cut-Off Rule applies because indorsement is necessary for transfer of whose signature was forged can raise defense of forgery.
title. Cut-Off Rule does not apply.
Notes:
1. Only forged signature is wholly inoperative and not the instrument itself, not the genuine signatures.
2. Parties precluded from raising defense of forgery:
a. Persons negotiating by delivery
b. Prior parties or indorsers
3. Cut-Off Rule does not apply when it is the maker or drawer’s signature that was forged. Thus, it generally applies when payee’s or indorser’s signature
was forged.
4. If the drawee-bank’s negligence is the proximate cause of loss and the depositor-drawer is guilty of contributory negligence, the greater proportion of
loss shall be born by the bank.
a. In one case, the bank was negligent because it did not verify he genuineness of signatures in the applications for manager’s checks, while
depositor was negligent because it clothed its accountant with apparent authority and did not examine his monthly statement of account and
reported it to the bank. The Court allocated damages on a 60-40 ratio.
5. Bank may not invoke GF. It is required to exercise the highest degree of diligence. If it pays a forged check, it must be considered paying it out of its
own funds.
M prepared a PN payable to order of A, but he did not sign it. D can enforce payment to ABC and forger X. M was never considered to be a party to
X stole the instrument, forged M’s signature and delivered it to A. the instrument. Meanwhile, ABC are liable as indorsers when they warranted that the
A  B  C  Holder. instrument was genuine and in all respects what it purports to be.
Against whom can holder enforce the payment? Would your Forger X will be deemed as the principal debtor because his wrongdoing prevented
answer be the same if it was a bearer instrument? recover from M. In effect, he is the maker.
If the instrument is a bearer instrument, the answer would be the same. Indorsers are
still secondarily liable because persons who indorse bearer instruments are liable to
subsequent parties who acquired title through their indorsement.
A signs a PN payable to B or bearer. He delivers it personally to B. YES, the instrument is a bearer instrument. Thus, indorsement of A as maker is not
B misplaced the note and C finds it. C indorses it to D for value by necessary to transfer title. It is transferred through mere delivery. However, A may
forging B’s signature. May D hold A liable? validly invoke personal defense of non-delivery of complete instrument if D is not an
HDC.
F forged the signature of D as drawer of the check. BPI did not NO. He shall bear the loss because he should not have honored the check bore a forged
detect the forgery and paid the amount. May BPI charge it to D’s signature of a drawer.
account?
D issued a check payable to order of P, and drawn on X Bank. YES. Forged signature of payee is wholly inoperative. When X Bank paid A, it did not
The check was delivered to A by B for encashment. It had the comply with the order of their client, Drawer-D. Hence, it is the duty of the bank to
indorsements of P and C. reimburse him.
When A encashed the check with X Bank, she affixed her signature
on the check. When she received the proceeds, she gave them to B. X Bank as a personal action against A. A is a general indorser as she warranted that she
has good title to the instrument. Having breached the warranty, she is not responsible
X Bank was informed that the indorsement of P was forged to the collecting bank. Even if she encashed the check for B, as an accommodation party,
because P died 2 years ago. Thus, X refunded the amount to D and her liability as an indorser remains. In fact, she is liable even if she was only an agent of
sued A. Was X Bank correct in repaying D? B as it does not appear that she disclosed the fact that the check was delivered to her
for encashment only.
Consideration Presumption (Sec 24) Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears to have
become a party for value.
1. There is nothing in this Sec that shall alter or repeal any statute requiring that nature of consideration must be stated in the instrument, in
certain cases (omissions that do not affect negotiability).
2. The party who claims that there was no consideration has the burden to prove it.
What constitutes Valuable consideration may be any of the following:
consideration under 1. Lien arising from contract or by operation of law (holder is deemed a holder for value only to the extent of his lien).
NIL 2. Antecedent of pre-existing debt
3. Value, given at any time for the instrument (holder is deemed a holder for value only to all parties before the giving).
Consideration is not relevant in determining negotiability. But it is relevant in determining if the holder is an HDC.
Effect of want of Absence or failure of consideration is a matter of defense against any person not HDC.
consideration (Sec 28) Partial failure of consideration is a defense pro tanto (proportionate)whether the failure is ascertained and liquidated amount or otherwise.
Who can raise the 1. Drawer against the payee’s action.
defense in a BE 2. Payee indorsing against indorsee
3. Acceptor against drawer
Note:
1. Acceptor cannot raise this defense against the payee’s action. The defense is available only if the defendant did not receive any consideration
for his liability and plaintiff must have not given any consideration for his title.
2. In general, want of consideration can be raised only between immediate parties. However, this may be raised against a holder who takes the
instrument with notice of want ro failure of consideration.
Absence of There is a total lack of any valid consideration.
consideration Effects:
1. Drawee becomes liable to holder and cannot allege want of consideration between the drawer and drawee.
2. Holder is not privy to the agreement between drawer and drawee. If he has given value to drawer, and has no knowledge of agreement
between drawer and drawee, he is an indorser in GF.
Examples:
1. A issues B 1000 in payment of forged certificates of stock (valueless, hence no consideration).
2. Note given for future illicit cohabitation
3. Note by husband to wife, upon promise of wife to withdraw all opposition to proceedings for divorce.
4. Note for agreement to stifle or hinder a public prosecution for a felony.
Failure of Neglect or failure to give, do or perform the consideration agreed upon.

consideration Effects:
If there is only partial failure of consideration, a holder not HDC can only only claim for the value he paid (defense applies to the amount lacking). But if
HDC, he can collect the entire amount of the instrument.
Examples:
1. Stocks were not forged but person fails to delivery it.
2. Consideration for bill or note for use of an invention but which patent is not obtained or invention is non-patentable.
a. However, there is no failure of consideration if the use of the invention or its sales provides unprofitable.
3. A thinks he owns a piece of property because there is execution of a judgment against him, relating to the property, has not been taken. A then
conveys the property for B’s note. In the meantime, property is taken on execution.
Inadequacy of Lesion or inadequacy of cause shall not invalidate a contract, unless there has ben fraud, mistake or undue influence.
consideration (Sec 52) While it is not, in itself, a sufficient ground for relief, it may be shown as evidence of constructive fraud (Art 1355).
Illicit consideration It is a persona defense.

: if a statute declares the instrument void for any purpose
In relation to No specific value given or All instruments have a presumption of consideration.
“omission of that any value had been Sec 24 states that every negotiable instrument is deemed prima facie to have been issued for a valuable consideration;
conditions which does given and every person whose signature appears to have become a party for value.
not affect validity of
the instrument”
In relation to “At the time of its 1. There is a notice of infirmity if in the acquisition of instrument, the holder obtains the signature for an
requisites of a HDC negotiation to him, he had illegal consideration.
no notice of any infirmity in 2. Requirement of lack of notice of infirmities or defects do not apply to an accommodation party. However,
the instrument or defect in this is limited only to notice of absence of consideration.
the title of person a. Thus, he cannot raise the defense that did not receive any consideration for the instrument.
negotiating it.” b. If the holder has notice of other infirmities, personal defenses can be raised against him
In relation to holder For value 1. Value—consideration sufficient to support a simply contract. This includes antecedent debts and lien on the instrument.
for value 2. A holder is for value only to the extent of the consideration agreed upon, that has been paid, delivered or performed.
a. Non-performance of the obligation will give rise to partial or full defense of failure of consideration.
3. If transferee acquires notice of infirmity or defect before payment of full amount of consideration, he is only HDC to the
extent of amount he paid.
EX: Holder took the instrument with the promise to pay 200,000. He only paid 100,000. He is an HDC only upto 100,000 if he received a
notice of infirmity before he could fully pay the entire amount.
In relation to minority Defense of minority is not total. If the minor has kept the whole valuable consideration, he cannot interpose minority as defense. If he kept only part of
the consideration, his defense applies only to the extent of benefit received by the minor.
In relation to General indorser Qualified indorser
warranties of a Fourth warranty Instrument is valid and subsisting at the time of his indorsement. He had no knowledge of any fact that would impair the
general and qualified validity of the instrument or render it valueless.
indorser Difference He warrants the instrument, regardless of whether he is ignorant of He is ignorant of the fact that will render the instrument
the fact or not. valueless or impair its validity.
: This does not run in favor of a holder who are parties to an illegal A qualified indorser can set up the defense that he did
transaction. not know of the consideration’s illegality because there
Note: Exception speaks of an illegal transaction and not an illegal is no violation of his warranties.
consideration. A general indorser cannot set up the defense that
the consideration is illegal, even if he did not know of the illegality
(RESEARCH MORE)
There is no presumption of consideration in restrictive indorsements.

This is because they are not intended to pass title but merely allow the indorsee to collect proceeds for the benefit of the indorser.
Only effect of restrictive indorsement is to give notice of rights of beneficiary named in the indorsement and protect the beneficiary from misappropriation.
Accommodation Accommodation It is a legal arrangement under which a person lends his name to another without any consideration.
Party (Sec 29) Accommodation party lends his credit/name, by issuing or indorsing an instrument.
HDC will go after the accommodation party to pay the credit indicated in the instrument and the accommodation party will pay it.
Once the accommodation party pays it, the accommodated party shall reimburse him, unless the accommodation party intends it as a donation.
Accommodation party He is one who has signed the instrument as MDAI, without receiving value and for the purpose of lending his name to some other person.
“Without receiving value therefor” means without receiving value by virtue of the instrument.
Requisites of 1. He must be a party to the instrument, signing as MDAI.
accommodation party 2. He must not receive value for his receiving and lending of his name.
3. He must sign for the purpose of lending his name or credit to some other person.
Liability of an He is liable to the instrument to a holder for value, even if the holder knew him only to be an accommodation party at the time he took the
accommodation party instrument.
The 4th condition of Sec 52 (lack of notice of infirmity in the instrument or defect in the title of persons negotiating it has no application”. Sec 29 preserves
the right of records of a “holder for value” against the accommodation party.
Rights of 1. Demand from the accommodated party reimbursement of the amount he paid to the holder.
accommodation party 2. Demand contribution from his co-accommodation parties (maker) without first directing his action against the principal debtor as long as:
a. He made payment because there was a judicial demand.
b. Principal debtor (accommodated party) is insolvent
Liability of the He shall reimburse the accommodation party when the latter makes payment to the holder of the notes.
accommodated party Accommodation party has the right to be reimbursed since the relation between them is that of a principal and surety, the accommodation party being
the surety.
Presentment not If instrument was made or accepted for his accommodation, and he has no reason to expect that the instrument will be paid if presented.
required in order to Note: Only the drawer and indorser are not discharged, but all other parties secondarily liable are relieved of their liability.
charge indorser
Accommodated payee-indorser is not discharged even if no presentment is made because in effect an accommodated party is the prseon primarily
liable.
Dagul has a business arrangement with Facundo. Facundo would lend money to another, YES. In the case at bar, Dagul is a person who signs as a maker without receiving any
through Dagul, whose name would appear in the PN as the lender. consideration. He signs merely for the purpose of lending the credit of his name.
As an accommodation party, he cannot set up lack of consideration against any holder,
Dagul would then immediately indorse the note to Facundo. Is Dagul an accommodation even as to one who is not an HDC.
party?
Notes:
1. A corporation cannot act as an accommodation party.
a. Issuance or indorsement of a negotiable instrument by a corporation without consideration and for accommodation of another is ultra vires.
2. If the accommodated party was allowed to extend payment, without the accommodation party’s consent, the accommodation party is still liable primarily and
unconditionally. The extension does not release him because as far as the holder for value is concerned, he is a solidary co-debtor of the accommodated party.
3. When a married couple signed a PN in favor of a bank to allow the sister of the husband to obtain a loan, they are considered accommodation parties who are liable for the
loan’s payment.
4. Even if the accommodation party received value, it will not negate the character of the note as accommodation paper because all accommodation instruments imply that a
valuable consideration was received.
5. Sec 28 (Want of consideration) is different from Sec 29 (Accommodation Party):
Sec 28 (Want of consideration) Sec 29 (Accommodation Party)
Instrument These are not accommodation papers. Accommodation papers
Defense Valid defense to a holder not in due course. Cannot be a defense against a holder for value or HDC.
Notice of absence of consideration makes the holder for value, not an Even if holder has a notice that he is only an accommodation party, he
HDC because he has notice of infirmity of the instrument. cannot raise want of consideration against the holder because he
consented to lending his name.
Negotiation It is the transfer of the instrument in such a manner that the transferee becomes the holder.
1. Holder is the payee or indorsee of a bill or note who is in possession of it, or the bearer himself.
2. When passed by operation of law, full title to a bill may pass without assignment, indorsement or delivery:
a. Transfers by operation of law:
i. Death of holder, title passes to personal representatives
ii. Bankruptcy of holder where title vests in his assignee or trustee
iii. Death of joint payee or indorsee (GR: Title vests at once in the surviving payee or indorser)
Extent of An instrument that is negotiable in its origin continues to be negotiable until:
Negotiability 1. It has been restrictively indorsed
2. DIscharged by payment or otherwise
Notes:
1. Restrictive indorsement makes the instrument non-negotiable only if it is the first type (it prevents negotiation of the instrument).
2. Forms of restrictive indorsement:
a. Prohibits further negotiation
b. Constitutes the indorsee as the agent f the indorser
c. Vests title in the indorsee in trust for or to the use of some other persons
3. Issuance is the first delivery of the instrument complete in form to a person who takes it as a holder.
a. Issuance to the payee is negotiation because the transfer constitutes the payee as the holder. Payee may even be an HDC if he acquires the
note from another HDC, or he has not directly dealt with the maker.
b. Negotiation is not only the transfer after delivery to the payee. When an instrument payable to order is delivered to the payee, the payee
becomes a holder. Thus, the delivery by itself make shim a holder. Since negotiation is defined as transfer of instrument to constitute the
transferee as the holder, delivery to payee is negotiation.
4. Delivery is the transfer of possession by the maker or drawer with the intention to transfer title to the payee and recognize him as holder.
Distinguished Negotiation Assignment
from
Assignment Type of Negotiable instruments Contracts in general or assignable rights
transaction
Nature of Holder may be an HDC Mere assignee
transferee
Rights acquired Transferee-holder may acquire more rights Transferee cannot acquire more rights than the transferor because he only steps into
than the transferor if he is an HDC. the shoes of the transferor.
He only acquires whatever rights the assignor may have before he transferred the
instrument to the assignment.
If a subsequent assignee prevents enforcement of the instrument, he cannot enforce
it against the original party.
Availability of Transferee-holder may be free from personal Transferee is always subject to personal defenses.
personal defenses defenses if he is a HDC.
Notes: A negotiable instrument becomes the subject to an assignment when a holder of a bill payable to order transfers it without indorsement. It becomes an
equitable assignment to the subsequent transferee-holder.
Modes of Instances 1. Issuance: first delivery of the instrument, complete in form, to a person who takes it as a holder
Negotiation 2. Subsequent negotiation: an instrument is transferred from one person to another in such a manner as to constitute the transferee
the holder
3. Indorsement
Modes 1. Payable to bearer—delivery
2. Payable to order—indorsement + delivery
Bearer instrument Order instrument
Mode Delivery Indorsement and delivery
Rationale Indorsement is not necessary in a bearer instrument If the instrument is originally issued as an order
because transferor does not transfer the order to pay, but instrument, it does not always require indorsement:
rather the amount prescribed in the instrument. Special indorsement Indorsement in blank
Engagement in this case is to pay the amount of the Indorsement and Delivery alone is
instrument to the holder or to subsequent holders. delivery are necessary enough
Notes:
1. Original payee cannot avoid or dismiss indorsement. He must make an indorsement or he must honor it.
a. Through indorsement, original payee orders the maker to pay the transferee.
2. If an order instrument was negotiation without indorsement, Sec 49 applies:
a. “Where a holder of an order instrument transfers it for value without indorsing it, transfer vests in the transferee:
i. Title as the transferor had.
ii. In addition, right to have the transferor’s indorsement.
iii. For the purposes of determining whether transferee is an HDC, negotiation takes effect at the time the
indorsement is actually made”.
b. The transaction becomes an equitable assignment.
i. Transferee acquires that the transferor’s legal title
ii. Right to be indorsed
iii. Right to maintain legal action against the maker, acceptor or other parties liable to the transfer
c. Transferees do not enjoy presumption of ownership in favor of holders because they are neither payees nor indorsees.
i. Mere possession does not conclusively establish either right to receive payment, nor toe right of be discharged
from liability of one who has made payment.
ii. Thus, there must be something more than mere possession to authorize payment to them, in the absence of
other facts from which the authority to receive payment may be inferred. There must be an indorsement.
3. If an instrument is originally a bearer instrument, subsequently indorsed, and later on indorsed again but in blank, it can still be
negotiated by delivery because “once a bearer, always a bearer”. The holder has a right to enforce the instrument against the
maker/drawer.
Kinds of Indorsement It is a legal transaction effected by writing of one’s name at the back of the instrument or upon a paper attached with or without
Indorsements additional words specifying the person whom or to whose order the instrument is to be payable. One not only transfers legal title to the
paper transferred but enters into an implied guaranty that the instrument will by duly paid.
How made 1. It must be written on the instrument itself or upon the paper attached to it.
2. Signature of the indorser is sufficient enough.
Entire Indorsement must be an indorsement of the entire instrument.
indorsement If instrument has been paid in part, it may be indorsed as to the residue.
Indorsement in If a person is under an obligation to indorse in a representative capacity, he may indorse it to negate personal liability.
a 1. This must be related to Sec 20 (liability of person signing as agent).
representative a. If the instrument contains words, or a person adds words to his signature, indicating that he signed in behalf of a
capacity principal or in a representative capacity, he is not liable on the instrument if he was duly authorized.
b. However, mere addition of words describing him as agent, without disclosing his principal, does not exempt him
from personal liability.
2. Agent must:
a. Add words describing himself as agent
b. Disclose his principal
c. Must be duly authorized.
3. An agent may indorse by merely signing the name of the principal.
Presumption of If the indorsement bears date after maturity of the instrument, every negotiation is deemed to have been effected before the
time of instrument was overdue.
indorsement 1. The presumption is, he indorsed the note on or before the date of maturity (before the note became overdue).
2. The holder has the burden of proof to show that the indorsement was made after maturity.
3. This does not apply when the indorsement bears a date (before maturity). Instead, Sec 11 will apply.
a. “Where the instrument, acceptance or idnorsement is dated, such date is prima facie to be the true date of the
making, drawing, acceptance or indorsement as the case may be.
4. This is important because in order for the holder to be HDC, the instrument must be negotiated to him before it becomes
due.
5. Indorsement without a date shows a prima facie presumption that the instrument was negotiated before maturity.
Place of Every indorsement is presumed to have been made at the place where the instrument is dated.
indorsement Place is material because indorsement should be governed by the laws of state where it is indorsed.
Kinds of Indorsements
Conditional Right of the indorsee depends on the happening of a contingent event. Party required to pay may disregard the conditions.
indorsement
Notes:
1. In this case, the drawee or maker (person required to pay) may disregard the condition and pay the indorsee or his
transferee whether the condition is fulfilled or not.
2. However, any person to whom the instrument is negotiated must hold it, or its proceeds, subject to the rights of the person
indorsing it conditionally.
3. The very indorsement is suspended. The right of the indorsee depends on the happening of the event.
Restrictive Prohibits further negotiation Indorser has both beneficial and legal title
indorsement Constitutes the indorsee as agent of Indorser has legal title while the beneficial title remains with principal. Relationship
the indorser (e.g. indorsement for existing here is a principal-agent relationship.
deposit)
Vests the title in the indorsee int rust Beneficial title belongs to other persons whereas the legal title remains with the
for or to the use of some other persons beneficiary.
Relationship existing here is a trustee-trustor relationship.
Notes:
1. It does not follow that if the instrument is restrictively indorsed, liability is qualified.
2. It confers upon the indorsee the right to:
a. Receive payment of the instrument
b. Bring any action thereon that the indorser could bring
c. Transfers his rights as such indorsee, where the form of indorsement authorizes him to do so.
3. Indorsements for Deposit does not divest the indorser of his title until the money is paid. These are usually informal.
a. “For Deposit” does not render the instrument negotiable but prohibits further negotiation for any purpose, except
collection for deposit in the payee’s account in bank selected by payee.
4. Indorser cannot raise his personal defenses against a restrictive indorsee.
a. Even if restrictive indorsement served a notice of trust to subsequent purchasers, this did not give a notice of
defenses between prior parties (RESEARCH FURTHER)
5. There is no presumption of consideration in restrictive indorsements.
a. This is because they are not intended to pass title but merely allow the indorsee to collect proceeds for the benefit of
the indorser.
b. Only effect of restrictive indorsement is to give notice of rights of beneficiary named in the indorsement and protect
the beneficiary from misappropriation.
Absolute Indorser binds himself to pay:
indorsement 1. Upon no other condition than failure of prior parties to do so
2. Upon due notice to him of such failure
Blank Specifies no indorsee, and the instrument so indorsed is payable to bearer, and may be negotiation by mere delivery.
Effect of transfer of an instrument payable to order without indorsement:

1. Transferee acquires title as the transferor had before the transfer
2. He acquires right to have the transferor’s indorsement.
3. The instrument is merely assigned, not negotiated.
Notes:
A holder may convert a blank indorsement into a special indorsement by writing any contract consistent with the character of the
instrument, over the signature of the indorser in blank.
EX: Pay to C, signed B.
Irregular Definition A person who, not otherwise a party to an instrument places his signature in blank before delivery
Requisites 1. He must not be a party to the instrument.
2. He must sign the instrument in blank.
3. He must sign before initial delivery (not every delivery) or issuance.
a. When a person puts his name on the instrument, after delivery, he is not an irregular
indorser but an ordinary indorser. If it is not clear on what capacity the signature is for, the
person singing is presumed to be an indorser.
Rationale He indorses in an unusual, singular or peculiar manner when someone should be the one signing.
Liability to the Instrument is payable to order of 3rd He is liable to the payee and to parties after the payee.
payee persons
Payable to order of maker or drawer He is liable to parties after the maker/drawer.
Payable to bearer He is liable to parties after the maker/drawer.
Instrument is for accommodation party of He is liable to parties after the payee.
payee
An irregular indorser is liable as a general indorser because he indorses without qualification. However, as
between themselves, the irregular indorser is prima facie in the order they indorse.
Liability to Provisions under Sec 64 on irregular indorsers only deals with the liability of the irregular indorser to the payee,
other indorsers but not to his liability with other indorsers. Hence, the rules under Sec 68 (Order of Liability applies).
1. Joint indorsers may file an action for payment for other indorsers who negotiated the instrument prior
to them, unless there is a contrary agreement.
2. As between the joint indorsers/payees, a holder a file an action for the whole amount between/among
them (solidary debtors). In return, a joint indorser who paid can only claim the share pertaining to him
with interest (Art 1217).
3. If all indorsers/payees are joint and several, only #2 applies.
Special Specifies the person to whom or to whose order the instrument is to be payable. Once the person is specified, his indorsement (as
indorsee) is necessary to further negotiate the instrument.
Notes:
1. Indorsement may or may not have words specifying the person to whom or to whose order the instrument is to be payable.
a. If it specifies the person, it is a special indorsement.
b. If it does not specify the person, it is not a special indorsement but a sufficient indorsement nonetheless.
c. If it does not specify the person and was merely delivered, it is a blank indorsement and may be negotiated by
delivery.
2. If there are no words indicating that there is power to negotiate, it does not make the indorsement automatically
restrictive.
a. Note that words of negotiability referred here is in the indorsement and not in the instrument itself. The instrument
itself is still considered negotiable.
b. If the absence of words of negotiability are not in the indorsement but in the body of the instrument itself, the
instrument is non-negotiable.
Qualified Indorser is mere assignor of title of instrument.
1. It is made by adding to the words like, “sans recourse”, “without recourse”, “indorser not holder”, “at the indorser’s own risk”
and other terms of similar import.
2. “Without Recourse” means without resort to the person secondarily liable (drawer) after the default of the person primarily
liable (acceptor).
The instrument is still negotiable. It is just the indorsement (primarily between the indorser and indorsee) that is qualified. Thus, if the
indorsee subsequently indorses it and erases the qualifying words, it is returns to being a general indorsement.
Joint Indorsement If these payees or indorsers are not parties, all of them must indorse (in case they subsequently want to)
when EXCEPTIONS:
instrument is 1. One of payees or indorsees has authority to indorse for others
payable to two 2. Payees or indorsees are partners
or more
persons Notes:
1. This applies to instruments payable to two or more payees jointly.
2. This does not apply to instruments payable to two or more payees severally.
3. The reason why all of them must indorse is because if only one indorses, it would not be an
indorsement of the entire instrument.
Liability to 1. Joint indorsers may file an action for payment for other indorsers who negotiated the instrument
other indorsers prior to them, unless there is a contrary agreement.
(for Joint 2. As between the joint indorsers/payees, a holder a file an action for the whole amount
Indorsers) between/among them (solidary debtors). In return, a joint indorser who paid can only claim the
share pertaining to him with interest (Art 1217).
Transfer by Full title to a bill may pass without assignment, indorsement or delivery when one of the joint payee or indorsee
operation of dies. Title vests at once in the surviving payee or indorser.
law
Rights of the Holder He is a payee or indorsee who is in possession of the instrument, or the bearer entitled to receive the sum for which it calls.
Holder
Notes:
1. A payee can be called a holder if the instrument is in his possession, due to the presumption that there was a valid delivery.
2. A payee, who is not involved in the crossed check can still be considered an HDC because the word “holder” in Sec 52 may be replaced by the
definition under Sec 191.
3. Rights of a holder in genera (whether HDC or not):
a. Sue in his won name
b. Receive payment and if the payment is in due course, instrument is discharged.
i. There is payment in due course if it is done at or after maturity of the instrument, to the holder of the instrument in good faith
and without notice that his title is defective.
Classes of HDC One who has taken the instrument under the conditions of Sec 52, and holds the instrument free from personal defenses available to
holder prior parties.
Simple holder One who became a holder without any, some or all the requisites under Sec 52. He holds the instrument subject to the same defenses
or holder not in meant for a non-negotiable instrument.
due course
Holder for value If value has been given for the instrument, at any time, the holder is deemed for value in respect to all parties who become such prior to
that time.
Holder in Due He is a holder who has taken the instrument under the following conditions:
Course Instrument is complete and Complete Regular
regular upon its face. Definition All necessary details that define the There must be no visible alterations or changes upon
necessary rights and all requisites of Sec the face of the instrument.
1 are present.
Notes:
1. An instrument is incomplete when it is missing any material particular required to be inserted in a
negotiable instrument.
2. Alterations referred are those obvious to the naked eye.
He has become a holder of it Instruments Holder is not an HDC if he takes it after it was overdue.
before it was overdue, and payable at a A holder who takes an overdue instrument is put on inquiry, even if he was not actually aware of
without notice that it had been fixed or any existing defense of any prior party. If he takes an overdue instrument, he should ask why the
previously dishonored if such determinable instrument is still in circulation even if it is overdue.
were the fact. future time
Demand Holder is not an HDC if the instrument is negotiated for an unreasonable time after its issue.
instruments 1. For demand instruments, a person is deemed not to be an HDC when:
a. Instrument is payable on demand and it was negotiated on an unreasonsable
length of time after its issue.
2. Reasonable Test is applied. There must be reference to usage of trade or business with
respect to such instruments.
3. “Unreasonable Length of Time”—it was held that a demand instrument should not be
extended for more than a year.
4. This only applies to instruments payable in demand.
5. This applies to checks, because checks are demand instruments.
Installment 1. If the instrument has an acceleration clause, notice that one installment or interest
instruments unpaid is notice that instrument is overdue.
2. One who purchases an overdue instrument in GF is an HDC.
3. If by the terms of the instrument, the principal becomes due upon default of payment
of instrument, one who purchases instrument where its interest is overdue is not HDC.
He has taken it in GF and for Good faith 1. Presumption of GF is destroyed if the payee or indorsee acquired possession of the
value. instrument under circumstances that should have put him to inquiry as to the title of
the holder who negotiated the instrument.
2. GF is required from indorsee or transferee but not from the indorser or transferor of
the instrument.
For value 4. Value—consideration sufficient to support a simply contract. This includes
antecedent debts and lien on the instrument.
5. A holder is for value only to the extent of the consideration agreed upon, that has
been paid, delivered or performed.
a. Non-performance of the obligation will give rise to partial or full defense of
failure of consideration.
6. If transferee acquires notice of infirmity or defect before payment of full amount of
consideration, he is only HDC to the extent of amount he paid.
a. EX: Holder took the instrument with the promise to pay 200,000. He only
paid 100,000. He is an HDC only upto 100,000 if he received a notice of
infirmity before he could fully pay the entire amount.
At the time of its negotiation to Infirmity in the instrument Defect in the title of the person
him, he had no notice of any Definition This are things that are wrong with the instrument itself. 1. It results from acquisition or
infirmity in the instrument or Infirmities in the instrument are different from the negotiation of instrument.
defect in the title of person infirmities of the contract itself. 2. There is a defect in the title
negotiating it. when there is an error in
Complete and regular No notice of infirmity the indorsement and/or in
(first requirement) (fourth requirement) delivery.
This refers to infirmities This pertains to
visible to the naked eye. infirmities not visible to
the naked eye.
EX: Instrument contains all necessary details except for the

amount, A instructed B to fill the amount but only upto
50,000 only. B inserted 80,000 and negotiated it.
When it It may arise under: In acquisition (holder obtains the
arises 1. Wrong date inserted when instrument is instrument or signature by):
expressed to be so payable at a fixed period 1. Fraud
after sight is undated (Sec 13) 2. Duress
2. Filing up blank not strictly in accordance with 3. Force and fear
authority given or not within reasonable time, 4. Other unlawful means
where it was delivered wanting a material 5. For an illegal consideration
particular (Sec 14)
3. Filing up and negotiating without authority an In negotiation (holder negotiates it
incomplete and undelivered instrument (Sec 15) with:
4. Lack of valid and intentional delivery of 1. When he negotiates it in
complete instrument (Sec 16) breach of faith
5. Agent signing beyond authority (Sec 21) 2. Under circumstances
6. Forgery (Sec 23) amounting to fraud
7. Material alteration (Sec 124)
Notes on Notice:
1. To constitute “notice”, person to whom the instrument is negotiated must have actual or chargeable
knowledge of the infirmity of instrument or defect of title, or knowledge of facts that his action in taken
the instrument would amount to bad faith.
a. Sec 56 abolishes the Doctrine of Constructive Notice. Actual notice is necessary to constitute BF.
b. Knowledge of agent is knowledge by principal.
2. It is not necessary to prove that defendant knew the exact fraud. It is sufficient that he had notice that
there was something wrong about the assignor’s acquisition of title, even though he did not have notice of
any particular wrong committed.
3. Requirement of lack of notice of infirmities or defects do not apply to an accommodation party. However,
this is limited only to notice of absence of consideration.
a. Thus, he cannot raise the defense that did not receive any consideration for the instrument.
b. If the holder has notice of other infirmities, personal defenses can be raised against him.
Notes:
1. Requisites of Sec 52 boil down to GF and innocence of holder. This is equivalent to an innocent purchaser in GF in Civil Code.
2. If the instrument is a crossed check, holder must inquiry about possible infirmities or defects. He is obligated to inquiry regarding circumstances
involving the issuance of the check, Failure on his part will prevent him from becoming HDC because such failure or refusal amounts to BF.
a. Crossed check is usually for deposit only.
3. A holder who fails to inquire about infirmities and defects may still be HDC if the law does not impose an obligation to inquire.
a. : Circumstances indicate a defect—he is not an HDC based on gross negligence, which amounts to legal absence of GF.
4. Determination of due course holding is material only when there is a personal defense.
Presumption of HDC Every holder is deemed prima facie to be HDC.

1. One who claims otherwise, has onus probandi to prove that one or more conditions required to constitute HDC are
lacking.
2. Onus probandi does not apply in favor of a party who became bound on the instrument before acquisition of the defective
title.
a. When instrument is not a bearer instrument, presumption does not apply.
b. It does not apply to whose who no longer possess the instrument. This is because he is no longer a holder, as
he no longer posses the instrument. You have to be a holder to enjoy the presumption of a holder (in due
course).
Rights of HDC 1. Rights of holders in general:
a. He may sue in his own name.
b. He may receive payment and if payment is in due course, instrument is discharged.
2. He is free from any defect of title prior parties and from defenses available to prior parties among themselves (personal
defenses).
a. He is free from personal defenses.
b. He is not free from real defenses.
3. He may enforce payment for full amount against all parties who are liable for it.
Shelter Rule A holder who derives his title through an HDC, and who is not himself a party to any fraud or illegality affecting the instrument, has
all rights of the former holder in respect to all parties before him
: Shelter Rule does not apply if he was a previous holder not in due course, who repurchased the instrument either personally or
through an agent. He cannot improve his situation by reacquiring the instrument.
A holder not in due course is subject to personal and real defenses. However, if he derived his title from an HDC, he is only subject to
real defenses to al prior parties (as HDC), except to the person who negotiated the instrument to him.
Defenses Right of holder to enforce payment may be defeated by defenses that may be raised by the person primarily (maker or drawee) or secondarily liable (drawer
Against the or indorsers).
Holder Real defenses Personal defenses
Nature Absolute defenses—those that attach to the instrument itself, and are Equitable defenses—those available only against a person not
available against all holders, whether in due course or not, but only by in HDC, or a subsequent holder who stands in privity with him.
the person entitled to raise them.
Status of Void Voidable
contract
Availability Available Not available
against HDC
Defenses 1. Prescription 1. Non-delivery of complete instrument (Sec 16)
2. Material alteration (Sec 124) 2. Ultra vires acts of corporation where the corporation
3. Illegality—if declared void for any purpose has the power to issue the negotiable instrument but
4. Duress amounting to forgery the issuance was not authorized for the purpose for
5. Want of authority of agent which it should be issued.
6. Insanity where instane person has a guardian appointed by 3. Want of authority of agent where he has apparent
court authority
7. Fraud in Factum or Essece Contractus, or Fraud in 4. Insanity where there is no notice of insanity on party
Execution of the one contracting with insane person
8. Non-delivery of incomplete instrument (Sec 15) 5. Fraud in inducement
9. Minority (available only to the minor) 6. Insertion of wrong date in an instrument (Sec 13)
10. Ultra vires acts of corporation 7. Conditional delivery of complete instrument
11. Discharge in insolvency 8. Filing up the blanks beyond reasonable time (Sec 14)
12. Forgery (Sec 23) 9. Filing up the blanks not within authority (Sec 14)
13. Execution of instrument between public enemies 10. Absence or failure of consideration, partial or total
14. Marriage in the case of wife (Sec 28)
11. Illegal consideration (Sec 55)
12. Acquisition by force, duress or fear (Sec 55)
13. Negotiation in breach of faith (Sec 55)
14. Negotiation under circumstance amount to fraud
(Sec 55)
15. Acquisition of instrument by unlawful means (Sec 55)
16. Intoxication
17. Mistake
An instrument subject to real defenses cannot be enforced against

the person to whom the defenses is available.
It can be enforced against those whom such defense is not available
such as under Sec 23.
Real Defenses
Illegality of Real defense Personal defense
contract in If the contract or instrument is expressly made illegal by statute If the law declares the manner of execution or
certain cases This does not refer to manner of execution or consideration but legality of contract itself. consideration illegal, but not the contract
Negotiation by It passes title to the instrument.
a Minor Minor is not liable but the defense of minority is personal to him. Thus, other parties who are capacitated cannot invoke such defense.
However, the minor shall be liable if he actively misrepresents his age and it appears that he is of such age.
Material It is partial real defense because HDC can enforce it according to its original tenor.
Alteration An alteration is material if it alters the effect of the instrument. It changes the items required to be stated under Sec 1.
Prescription This refers to extinctive prescription. Under the Civil Code, prescription period of an action based on a written contract is 10 years from accrual of cause of action
(Art 1144).
In the case of checks, action of depositor against his drawee bank commences from the time he is given the notice of payment.
Payee’s acceptance of check implies an undertaking of due diligence in presenting it for payment.
Fraud in Factum When a person is induced to sign an instrument not knowing its character as a note or a bill.
A person who signs the instrument must lack knowledge of the character or essential terms of the instrument. The defense is not available if the party involved
had reasonable opportunity to obtain such knowledge. The essential element is that the maker or indorser must have exercised ordinary diligence and did not
contribute negligently to the imposition.
Notes:
1. NIL has no provision as to fraud in factum. However, maker may be estopped by negligence to deny knowledge of the character which he has signed.
If he is not negligent, he is not liable. In some cases, use of signature was applied as forgery under Sec 23.
2. TEST: Whether or not the signature was procured voluntarily. If the act of signing was not voluntary, without assent of the signer, he is not liable.
3. Instrument in this case never existed.
Fraud in execution Fraud in inducement Fraud in factum

Definition When a person induced to sign an instrument not He intends it to be a negotiable He signs the instrument but he lacks
knowing the character as a note or bill. instrument but he was only induced for knowledge of character or essential terms
He signed a paper for something else, not an fraudulent reasons. of the instrument.
negotiable instrument. His consent to issue was vitiated by fraud.
Kind of Real Personal Real, but this defense is not available if the
defense party involved had every reasonable
opportunity to obtain such knowledge.
A induced B by fraud to make an PN on demand to order of A in the sum of No, B may raise the defense of fraud of inducement against A who is not
5M. HDC. This is true in a case where A was the one who fraudulently induced B
Can A file an action successfully against Maker-B for the amount? to issue the note.
If A transfers the note to C, who pays 5M and acquires the note under
circumstances to make C an HDC, can C file an action successfully against B Yes, C can file an action against B. C is presumed to be HDC, Hence, he is free
as well? from personal defenses such as fraud in inducement in the absence of
contrary proof.
Incomplete and When the instrument is incomplete and undelivered, any holder will not be able to use it as a valid contract against any person who signed the instrument
undelivered before delivery, if the instrument was completed and negotiated without authority.
1. This makes it a real defense. This defense belongs to the drawer.
2. It is not a valid contract against a person who has signed before delivery, even in the hands of an HDC. However, subsequent indorsers are liable.
3. Invalidity of instrument only refers to parties whose signatures appear on instrument prior delivery.
4. If parties signed it after delivery, the instrument is valid. Thus, where a person steals a blank check, fills it up and indorses it, holder may enforce it
against him and to parties who indorsed it after him.
a. The instrument is valid as to the thief who indorsed it because he was responsible for the negotiation, theft and filling up. As an indorser, he
warrants that the instrument is what it purports to be. This also applies to subsequent indorsers after him.
A signed a blank check and left the check at the top of his desk. B stole the D cannot enforce the check because A can raise the defense of an incomplete
blank check, filled the amount and a fictitious name as payee. He then and undelivered instrument. The instrument was incomplete because it did
indorsed the check in the payee’s name and passed it to C. C indorsed it to not have any amount, and it was not delivered because it was stolen by B.
D.
My answer would be the same even if D is an HDC. If an incomplete and
Can D enforce the check? If he is an HDC, will your answer be the same? undelivered instrument was complete and negotiated without authority, it
shall not be a valid contract against any holder, even to an HDC.
Insolvency Person primarily liable is bankrupt or insolvent One negotiating is bankrupt or insolvent
It is not a defense. Holder may file a claim with assignee or trustee appointed If negotiation was made 30 days before petition for bankruptcy, negotiation
by court. is void and no title has been transferred.
It may be a defense depending upon time of indorsement.
Personal Defenses
Fraud in When a person who signs the instrument intends to sign it as a negotiable instrument but was induced to do so only through fraud.
inducement
Incomplete but Person in possession has prima facie authority to complete it by filing up the blanks.
delivered Signature on a blank paper delivered by the person making the signature to turn the instrument into a negotiable instrument operates as a prima facie authority
instrument to fill it up for any amount.
In order to enforce it against any person who became a party before the instrument was completed, the instrument must:
1. Be filled up strictly in accordance with authority given
2. Within reasonable time
Complete but If the instrument is in the hands of an HDC, it is conclusively presumed that there has been a valid delivery be all parties before him, in order for HDC to make
undelivered them liable.
If the instrument is no longer in the possession of a party who signed it, there is a (disputable) presumption that he has validly and intentional delivered it, until
contrary is proved.
Absence or It is a defense against any person not an HDC.
failure of Partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.
consideration
AB issued 2 postdated checks to CV, only as security of jewelry to be sold. Each NO. There is a presumption that SIH is an HDC. SIH is free from
check has a face value of 50,000. personal defenses.
CV negotiated the check to SIH Inc., without AB’s knowledge. AB returned the
jewelries to CV and tried to retrieve the checks. Having failed to do so, AB withdrew
her funds from drawee bank and the checks were dishonored. She interposed lack
of consideration as a defense against SIH Inc. However, she did not present proof
that SIH is not an HDC. Will the defense prosper?
BE was issued because of love and affection for payee. Can drawer be secondarily No, payee cannot holder the drawer liable because love and
liable for it to payee or to an HDC? affection is not a valuable consideration. However, this is only a valid
defense between the drawer and the payee, not to the HDC.
Pedro issued a note to Juan, a government employee to facilitate the early release No. Illegality of consideration is only a personal defense. Since Pablo
of government approval of application he filed. Juan negotiated the instrument to is HDC, illegality of consideration cannot be invoked.
Pablo, HDC.
When Pablo presented the instrument to Pedro for payment, Pedro claims that the
consideration was illicit. Is his refusal justified?
Liabilities of Primary Primary liability Secondary liability

Parties and Application He is absolutely liable. He is conditionally liable. He shall only pay if the instrument was dishonored and necessary proceedings on
secondary dishonor were taken.
liabilities When does Maker Acceptor General indorser Drawer
liability Unconditional The Their liability cannot be immediately enforced. There are necessary steps needed to charge these
attach promise moment he persons.
attaches the accepts the
moment the instrument. Steps to charge them liable:
maker makes PN BE
the 1. Presentment for 1. Presentment for acceptance or negotiation within a reasonable time
instrument payment must be after it was acquired (only in instances provided for in Sec 143).
made to the 2. If dishonored by non-acceptance:
maker within the a. Notice of dishonor should be given to indorsers and
required period. drawer.
2. Notice of dishonor b. Protest for dishonor is required if BE is a foreign bill.
should be given to 3. If bill is accepted:
those secondarily a. Presentment for payment to the acceptor should be
liable, if the PN is made.
dishonored b. If bill is dishonored upon presentment for payment, notice
because of the of dishonor must be given to persons secondarily liable.
maker’s non- c. If bill is a foreign bill, protest for dishonor by non-payment
payment. must be made.
PN and BE PN BE
Who is primarily liable Maker Acceptor
Due presentment and dishonor proceedings are not needed.
Who are secondarily liable General indorser General indorser and drawer
Due presentment and dishonor proceedings are needed.
Maker Maker Drawer Acceptor (and drawee who pays without accepting
Drawer the instrument)
Acceptor Liability Primary and unconditional. Secondary Primary
He cannot shift his liability to any person He may insert an express stipulation It is only upon acceptance of the bill or certification
without the payee’s consent. negativing or limiting his own liability to of the check that the drawee becomes primarily
the holder liable. He becomes liable to the holder by his
unconditional acceptance.
Obligations 1. Engages to pay the tenor of 1. Engages that instrument will 1. Engages to pay according to tenor of his
instrument. be accepted or paid by the acceptance.
2. Admits existence of payee and party primarily liable. 2. Admits existence of drawer, genuineness of
his capacity to indorse. 2. Engages that if the instrument his signature and his capacity and authority
is dishonored and proper to draw the instrument.
dishonor proceedings brought, 3. Admits the existence of the payee and his
he will pay the payee. capacity to indorse.
3. Admits the existence of payee
and his capacity to indorse.
Notes 1. He is presumed to have signed the 1. Due presentment is not only presentment
document with full knowledge of but presentment in accordance with law.
the contents, unless fraud is 2. If he wants to escape liability, he must show
proved. that:
2. He cannot shift the obligation to a. He is only an agent of the drawer
another without consent of the b. Prove any other defense which
payee. he has
3. When there are two or more 3. If the acceptor executes a mortgage because
makers who signed the instrument he cannot pay the BE, execution of the
jointly and severally, each of them mortgage does not constitute any novation
is individually liable for payment of of obligation represented by the accepted
the full amount, even if one of negotiable instrument.
them did not receive part of the 4. Acceptor pays according to the tenor of his
value given as he would be acceptance and not the original tenor.
considered an accommodation
party.
4. “Joint and several” must be
expressly stipulated.
Indorser General Indorser Qualified indorser Negotiator of a bearer instrument
Definition All other indorsers who have not 1. “Without Recourse” means without resort to For bearer instrument:
denied any secondary liability or the person secondarily liable (drawer) in case 1. It can be negotiated by mere
had no qualifications. the person primarily liable defaults delivery.
(acceptor). 2. It can be indorsed (and completed by
a. He added words like, “sans delivery), in which case, person
recourse”, “without recourse”, incurs all liabilities of an indorser.
“indorser not holder”, “at the
indorser’s own risk” and other
terms of similar import.
2. Conditional indorsement
a. Right of the indorsee depends on
the happening of a contingent
event. Party required to pay may
disregard the conditions.
Warranties A general indorser warrants to A qualified indorser or a person who negotiates an Negotiates it Indorses and delivers a
all subsequent HDC: instrument by mere delivery warrants: by mere bearer instrument
1. Instrument is what he 1. Instrument is what he purports to be. delivery
purports to be. 2. He has good title to it. Same as of a Warranties of general
2. He has good title to it. 3. All prior parties had capacity to contract qualified indorser applies, if he
3. All prior parties had 4. He had no knowledge of any fact that would indorser indorses it generally.
capacity to contract impair the validity of the instrument or under Sec 65.
4. Instrument is valid and render it valueless. Warranties of qualified
subsisting at the time of indorser if he is a qualified
his indorsement. indorser (thus, provision
under person who
negotiated by mere
delivery does not apply).
Liability to Their second liability is not Their secondary liability is limited to the four Negotiates by mere Indorses
payees limited to the four warranties. warranties. delivery
He becomes liable if the They only become liable when non-acceptance or non- Under Sec 65, Provisions under
instrument is dishonored either payment was due to a violation of any of their provision for general indorser
by non-acceptance or non- warranties. “negotiation for mere and qualified
payment regardless of the delivery applies”— indorser applies.
dishonor was because of the If the instrument was
violation of warranties or of negotiated only by Provision under
other causes such as insolvency. delivery, the warranty person who
extends only to the negotiated by
immediate transferee. mere delivery does
not apply.
Liabilities to payees/indorsees:
General 1. Secondary liability (like of a drawer’s):
indorser a. He will pay the holder (or any subsequent indorser compelled to pay the amount) if the instrument is dishonored.
i. By merely signing his name, he “engages that on due presentment, it shall be accepted, paid or both according
to its tenor and it is dishonored, and necessary proceedings of dishonor taken, he shall pay the amount to the
holder or to any subsequent indorser who may be complied to pay it”. There is no need to expressly state it in
the instrument.
b. He will pay for the acceptor or maker (persons primarily liable) in case they are insolvent, even if he knows or was
concealed that fact.
i. This is because he engages to pay if the person primarily liable cannot pay.
2. This also applies to an indorser for collection.
3. He enters the contract with fixed and definite terms, which may not be varied or contradicted by parol evidence.
a. Conversely, any prior conversation in connection with a note or its indorsement may be proved by parol evidence.
b. If there is an extrinsic agreement between indorsers and indorsee, which cannot be embodied in the instrument without
impairing its credit, it is still provable by parol evidence as long as the extrinsic agreement does not alter or destroy the
obligations attached by law to the indorsement.
c. Court held that an indorser’s oral assurance that he would refund the check if the drawer has no funds is simply ordinary
obligation of an indorser. This obligation is discharged if there is an unreasonable delay in the presentation of the check
for payment, because indorser it was not expressly made.
i. Thus, in order to hold an indorser to be liable in this case, he must express that the he would refund the
amount of the check even if there is a delay in its presentation—and not rely on an ordinary obligation of
refund.
ii. An ordinary obligation of refund assumes that the payee does not delay presentation of a check.
Qualified 1. Indorser is mere assignor of title of instrument.

indorser 2. Even if the indorser denies secondary liability, the instrument is still negotiable. It is just the indorsement (primarily between the
indorser and indorsee) that is qualified. Thus, if the indorsee subsequently indorses it and erases the qualifying words, it is returns to
being a general indorsement.
Persons who 1. If the instrument was negotiated only by delivery, the warranty extends only to the immediate transferee.
negotiated by 2. Difference of person negotiating by mere delivery and a qualified indorser:
mere delivery Person negotiating by mere delivery Qualified indorser (and person who indorsed a
bearer instrument)
Applicable Bearer instrument Order instrument, indorsed and delivered
instrument Note: It does not apply order instrument with an indorsement in
blank, because even if he negotiates it through a blank indorsement,
it is completed by delivery and not negotiated “by mere delivery”.
Liability He is liable only to the immediately transferee. He is liable to all parties who derived their title
through his indorsement.
3. Applicable to both person negotiating by mere delivery and qualified indorser:

a. They are not liable when the instrument is dishonored due to non-acceptance or non-payment per se.
i. They only become liable when non-acceptance or non-payment was due to a violation of any of their
warranties.
ii. Their secondary liability is limited to the four warranties.
b. “All prior parties had capacity to contract” do not apply to an indorser negotiating public or corporate securities, except
for bills or notes.
Transfer of an If a bearer instrument is indorsed specially, it may nevertheless be further negotiated by delivery; but person indorsing specially is liable as
indorsement indorser to only such holders as make title through his indorsement.
of a bearer 1. This section applies only to instruments which are originally payable to bearer.
instrument 2. Indorser of a bearer instrument can still be held liable even if a bearer instrument does not require indorsement. He shall be liable in
case of breach of warranty under Sec 67.
3. Generally speaking, if a maker or drawer expressly provides that the instrument is a bearer instrument, it cannot be changed into an
order instrument without modifying the terms. However, indorsement allows it to be changed without changing the tenor or terms of
the original instrument.
Liabilities among indorsers:

Order of With respect to one another (fellow indorsers) Joint payees or joint indorsers
liability of Order 1. They are liable prima facie in the order they indorse. Jointly and severally (solidary).
indorsers 2. Evidence showing that they have agreed otherwise, amongst themselves,
is admissible.
Notes:
1. This applies only amongst indorsers, but not against an HDC.
a. This contemplates successive negotiations and indorsements, except for joint and several liabilitiy.
b. Every indorser is liable to all indorsers after him but not those who indorsed before him.
i. EX: A  B  C  D  Holder
1. Holder asks for payment from C.
2. C may file an action against A and B but he cannot compel D.
3. This is because:
a. A is liable to BCD.
b. B is liable to CD.
c. C is liable to D.
4. Conversely:
a. D can ask payment from ABC.
b. C can ask payment from AB.
c. B can ask payment from A.
2. A holder can file an action against any of the indorser, regardless of the order they indorsed.
3. A holder can file an action for the whole amount in any of the indorsers if they indorsed jointly and severally (solidary debtors).
4. In return, an indorser who paid the holder may only claim the share which corresponds to each with interest for the payment
already made (Art 1217).
Notice of Several persons referred to here are joint payees, joint indorsees.
dishonor to It must be made to all of them, unless one has authority to receive notice.
several persons 1. This applies only with respect to an indorser against another indorser but not against an HDC.
not partners 2. This contemplates successive negotiations and successive indorsements.
3. Every indorser is liable to all indorsers after him but not to those before him.
4. It does not determine order of liability of joint indorsers amongst themselves.
Striking out an A holder may, at any time, strike out an indorsement not necessary to his title. If the indorsement is struck out, indorser who signed it and
indorsement all indorsers after (subsequent) to him are relieved from liability.
1. This should be related to Sec 40.
a. “Indorsements of bearer instruments—if a bearer instrument is indorsed specifically, it may still be further negotiated by
delivery. However, the person who specially indorsed it shall be liable to holders who had title through his indorsement”.
2. If the instrument was transferred by a special indorsement, holder cannot:
a. Strike out the name of the person mentioned and insert his own name.
b. Strike out the name and covert the special indorsement into a blank indorsement
3. Holder who acquires his title after a succeeding special indorsement must trace his title not only through the blank indorsement
but through the special indorsement as well (RESEARCH MORE)
4. Effect of striking out:
a. Indorser who signed the indorsement is relieved from liability.
b. All subsequent indorsed in line with the indorsement struck out shall also be relieved
Negotiation of a If the instrument is negotiated back to a prior party, such party may reissue and further negotiate the instrument. However, is no longer
prior party entitled to enforce payment against any intervening party (parties in the middle) to whom he was personally liable.
He may strike out the intervening indorsements because they are no longer necessary for his title.
Other forms of liabilities:

Irregular Definition A person who, not otherwise a party to an instrument places his signature in blank before delivery
indorser Liability to the Instrument is payable to order of 3rd persons He is liable to the payee and to parties after the payee.
payee Payable to order of maker or drawer He is liable to parties after the maker/drawer.
Payable to bearer He is liable to parties after the maker/drawer.
Instrument is for accommodation party of payee He is liable to parties after the payee.
An irregular indorser is liable as a general indorser because he indorses without qualification. However, as between
themselves, the irregular indorser is prima facie in the order they indorse.
Liability to Provisions under Sec 64 on irregular indorsers only deals with the liability of the irregular indorser to the payee, but not to
other indorsers his liability with other indorsers. Hence, the rules under Sec 68 (Order of Liability applies).
4. Joint indorsers may file an action for payment for other indorsers who negotiated the instrument prior to them,
unless there is a contrary agreement.
5. As between the joint indorsers/payees, a holder a file an action for the whole amount between/among them
(solidary debtors). In return, a joint indorser who paid can only claim the share pertaining to him with interest (Art
1217).
Notes on Warranties:
1. Difference of fourth warranty with qualified indorser:
General indorser Qualified indorser
Fourth Instrument is valid and subsisting at the time of his indorsement. He had no knowledge of any fact that would impair the
warranty validity of the instrument or render it valueless.
Difference He warrants the instrument, regardless of whether he is ignorant of the fact or He is ignorant of the fact that will render the instrument
not. valueless or impair its validity.
: This does not run in favor of a holder who are parties to an illegal transaction. A qualified indorser can set up the defense that he did not
Note: Exception speaks of an illegal transaction and not an illegal consideration. know of the consideration’s illegality because there is no
A general indorser cannot set up the defense that the consideration is illegal, violation of his warranties.
even if he did not know of the illegality (RESEARCH MORE)
2. Difference of liability and warranty:

Liability Warranty
Definition It is the obligation to perform a It is the undertaking that he had title to the instrument, and such title is valid and subsisting at the
particular act. time of his negotiation. It is an affirmation, assertion or admission that certain things are true.
Liability It is material to determine if the person It is immaterial to know the type of liability.
is primarily or secondarily liable.
3. All parties have warranties.

4. Engagement to pay is not common to all parties.
5. Drawee cannot be forced to be held liable as long as he does not accept the instrument. He cannot be compelled to accept the negotiable instrument. If
refusal amounted to a tortious act, he may be heled liable but not based on the contract.
a. The remedy of the holder is against the drawer, provided that notice of dishonor is given to him on the basis of the transaction that gave rise to
the issuance of the check.
b. Once the bank certifies the check, the bank becomes liable because certification is equivalent to acceptance. If procured by the holder, the
drawer and all indorsers are discharged from liability.
c. : The holder may sue the drawee if there was dishonor despite instrument of drawer to pay (under Art 19).
6. After an instrument is dishonored by non-payment, indorsers are no longer secondarily liable. They become principal debtors identical to the original
obligor. Holder does not need to proceed against the drawer first before going against the indorser.
7. Warranties extend to:
a. Subsequent HDC
b. Persons who derive their title from HDC
c. Immediate transferees, even if they are not HDC. Otherwise, a transferee of a qualified indorser would have greater rights than a transferee of
general indorser.
8. Warranties do not extend to a drawee because a drawee is not n HDC (Sec 52) nor a holder (Sec 191) as he is not a holder nor is the presentation for
payment a form of negotiation.
A issued a PN payable to B or bearer. A is liable to F.

A delivered it to B. As a maker, he is directly or primarily liable to F. Despite special indorsements on the note, these do not detract from the
B  C (placed the note in his drawer, fact that a bearer instrument, like the PN in question, will always be negotiable by delivery until it is indorsed
which was stolen by X) restrictively—for deposit only.
X (forged C’s signature)  D  E  F
(HDC) B, as a general indorser, is liable to F secondarily, and warrants that the instrument is genuine and in all respects what it
purports to be; that he has good title to it; that all prior parties had capacity to contract; that he has no knowledge of any
fact that would impair the validity of the instrument or render it valueless; that at the time of the indorsement, the
instrument is valid and subsisting; and that on due presentment, it shall be accepted or paid or both according to its
tenor and that it it is dishonored and necessary dishonor proceedings were duly taken, he shall pay the amount to the
holder, or to any subsequently indorser who may be compelled to pay.
C is not liable to F since the latter cannot trace his title to the former.
Signature of C in the supposed indorsement to D was forced by X. C can raise the defense of forgery since it was his
signature that was forced.
Alternative Answer: As a general indorser, B is secondarily liable to F.

C is liable to F since it is due to the negligence of C in placing the note in his drawer that X was sable to steal it and forge
his signature.
As between C and F who are both innocent parties, it is C whose negligence is the proximate cause of the loss. Hence, C
should suffer the loss.
Presentment for Enforcement of General steps in enforcing liability:

Payment liability 1. Presentment
a. For acceptance
b. For payment
2. Dishonor
3. Acceptance
PN BE
Persons Maker—the moment he Drawee—the moment he accepts the instrument (acceptor).
primarily liable makes the instrument.
Secondarily 1. Presentment 1. “Presentment for acceptance or negotiation within reasonable time after it was required”
liable for payment should be made only in instances under Sec 143.
must be made a. Bill is payable after sight, or in any other case, where presentment for
within the acceptance is necessary to fix the maturity of the instrument.
required period b. Bill expressly stipulates that it shall be presented for acceptance.
to the maker. c. Bill is drawn payable elsewhere than at the residence or place of business of
2. Notice of drawee.
dishonor 2. In any other case, presentment for acceptance is not needed.
should be 3. If dishonored by non-acceptance:
given, if PN is a. Notice of dishonor must be given to person secondarily liable (Drawer, General
dishonored by Indorser)
non-payment b. If bill is a foreign bill, there must be a protest for dishonor by non-acceptance.
of the maker. 4. If bill was accepted:
a. Presentment for payment to acceptor
i. Notice of dishonor must be given to person secondarily liable (Drawer,
General Indorser)
ii. If foreign bill, protest for dishonor by non-payment must be made.
Note: It is not necessary to present a check for acceptance because it is not one of those required
under Sec 143.
Concept of It is the production of BE to the drawee for his acceptance or to the drawee/acceptor for payment.
Presentment It is the production of PN to the Maker.
Notes:
Presentment to acceptor is the operative act to make him liable.
Before acceptance, drawee is a stranger to the bill. Upon acceptance, he becomes primarily liable. He is bound according to the tenor of his acceptance and
cannot show that there was a subsequent agreement between him and drawer modifying the terms of acceptance.
What constitutes It is made:

presentment for PN BE
payment (Sec 70) Manner Production of PN Production of BE
To whom presented To party liable for payment of the same. To drawee for his acceptance
To the drawee or acceptor for payment
It consists of:
1. Personal demand for payment at the proper place
2. Readiness to exhibit the instrument if required
3. Receipt of payment and surrender of instrument if debtor is willing to pay
Notes:
1. Informal talk without presentment or intention as a formal presentment or demand is not sufficient to put the note in dishonor.
a. Demand over the phone is not sufficient unless the maker, waives his right to ask for the exhibition of the note.
b. Demand by telephone is not sufficient because exhibition is not possible.
2. Actual exhibition of the instrument is excused when:
a. Debtor does not demand to see instrument but refuses to pay on some other grounds.
b. When instrument is lost or destroyed.
Necessity of Presentment for payment is not necessary to charge persons primarily liable but necessary to charge the drawer and indorser, except as otherwise provided.
Presentment for
Payment Requisites:
1. It must be made by the holder or an authorized person to receive payment.
2. It must be made at a reasonable hour on a business day or proper date
3. Must be at a proper place
4. Must be to persons primarily liable on the instrument. If he is absent or inaccessible, to any person found at the place where presentment is made.
5. Person entitled to present the instrument for payment must exhibit the instrument to the person from whom the payment is demanded, and upon
payment must be delivered to the person paying it.
a. If not surrendered and cancelled, there is a danger that it may fall in the hands of other persons who might clai rights over the instrument
It must be made by the holder or an

authorized person to receive payment.
It must be made at a reasonable hour 1. Read Sec 71 to Sec 70, “but, except otherwise provided, presentment for payment is necessary to
on a business day or proper date charge the drawer and indorsers”. This means that the instrument must be presented for payment
on the date and period mentioned to charge the persons secondarily liable, such as drawers and
indorsers.
a. Instrument must be presented on (otherwise, drawer and indorsers are discharged from
liability):
i. Date of maturity if payable on a fixed date, or within reasonable time after
issue if it is a PN.
ii. Within reasonable time from last negotiation if it is a BE.
iii. When instrument is not payable on demand, presentment must be made on
the day it falls due.
iv. When instrument is payable on demand, it must be made within reasonable
time after its issue.
2. “Last negotiation” means last transfer for value.
3. Subsequent transfers between banks for purposes of collection are not negotiations under this
section.
4. Requirement for reasonable time begins to run from last taking for value.
5. Time of Maturity of Instrument:
a. Every negotiable instrument is payable at fixed time, without grace.
i. If it falls on a Sunday or holiday, instruments falling due or becoming payable
on Saturday are presented on the next succeeding day.
ii. : Instruments payable on demand may be presented before 12PM on
Saturday when the entire day is not a holiday, at the option of the holder.
Must be at a proper place “Any other place” means when a holder meets a maker or acceptor while waiting in an area, presentment may
be properly made there.
Must be to persons primarily liable on 1. If bill is payable to PNB, there is no need to present the bill to the drawer.
the instrument. If he is absent or a. The only effect is that if X is able and willing to pay the bill at PNB at maturity, it is
inaccessible, to any person found at the equivalent to a tender of payment of X.
place where presentment is made. b. Holder loses his right to recover interests after maturity and costs of collection, but he can
still hold X liable for the amount of the instrument.
2. Rule that presentment is not necessary to charge the persons primarily liable applies also to
instruments payable on demand.
Person entitled to present the If not surrendered and cancelled, there is a danger that it may fall in the hands of other persons who might clai
instrument for payment must exhibit rights over the instrument
the instrument to the person from
whom the payment is demanded, and
upon payment must be delivered to the
person paying it.
Illustrative cases on reasonable time:
A drew a check on Sept 13 1990. Concept on what is reasonable time is relative. It has been defined as “time necessary for a reasonable, prudent
Holder presented the check to the and diligent man to do what the contract or duty require should be done, having regard for rights and possibility of
drawee bank only on Feb 5 1994. The loss to the other party”.
bank dishonored the check on the
same date. However, with respect to checks, SC took cognizance of current banking practice that a check becomes stale
after more than 6 months or 180 days.
After dishonor, holder gave a formal
notice to A dated April 27 1994. A is no longer liable because she is already discharged from secondary liability under the check. Presentment and
notice of dishonor was made after 3 years. However, A may still be liable to the holder if the holder is her
What is meant by “unreasonable contracting party.
time” as applied to presentment?
Is A liable to the holder? Failure to present the instrument on time does not totally wipe out all liability based on contracts. Although she
may not be liable on the check, she may be liable on their contract.
Check was presented to the drawee NO. According to banking practice, reasonable period to present a check is 6 months. After it, check becomes
bank 120 days from date. Is the stale and drawer is discharged from liability to the extent of loss caused by the delay.
drawer discharged?
Thus, presentment of check 120 days (4 months) after is issue was still within its allowable period.
Illustrative cases on place of payment:

PN is holder of a note originally issued by RP to XL as payee. XL indorsed YES, as far as the value of the note is concerned but not with respect to the
the note to PN for goods. The note mentions the place of payment on the interest due subsequent to the maturity of the note and the costs of
specified maturity date as office of the corporate secretary of PX Bank collection.
during banking hours. On maturity date, RP was at the office ready to pay
the note but PN did not show up. RP was ready and willing to pay the note at the specified place of payment
on specified maturity date, but PN did not show up. PN lost his right to
PN later sued XL for the face value of the note, interest and costs. Will the recover the interest and costs of collection.
suit prosper?
Notice of Dishonor of Dishonor by non-payment Dishonor by non-acceptance

Dishonor instrument When Payment is 1. Instrument must be duly presented for payment 1. Instrument is duly presented
dishonor refused or 2. Payment is either refused or cannot be obtained. for acceptance and
occurs cannot be acceptance is refused or
obtained cannot be obtained.
Presentment is 1. Presentment for payment is excused. 2. Presentment is excused and
excused, and 2. Instrument overdue bill is not accepted.
instrument is 3. Instrument is unpaid.
overdue and
unpaid Note: If presentment is not excused, bill is not dishonored by the mere fact
that the bill is overdue and unpaid
Concept of It is a notice given by holder or his agent to the drawee and to each indorser indicating that the instrument was dishonored by:
Notice of 1. Non-acceptance by the drawee
Dishonor 2. Non-payment of acceptor
3. Non-payment of maker
Note:
1. Revert to Enforcement of Liability
2. Drawer is not an indispensable party to a suit against indorsers in case of dishonor of instrument by non-payment.
a. After dishonor by non-payment, indorsers cease to be merely secondarily liable. They become principal debtors whose liability is identical
to the original obligor. Holder does not even need to proceed against the maker before suing the indorser. Hence, drawer is not an
indispensable party in an action against the indorser of checks.
3. Discharge of drawer from liability due to lack of protest does not discharge him from his own letter of undertaking as additional security for the bill of
exchange.
a. He can still be liable under the letter of undertaking even if discharged due to failure to protest the non-acceptance of the bill.
b. Letter of undertaking is a contract separate from the BE.
c. Liability of the drawer under the letter of undertaking is direct and primary, and subsist even if the bill was dishonored.
4. If the bill had a failure to contest the non-acceptance, drawer will be discharged from its liability.
a. A sight draft made payable outside the Philippines is a foreign bill of exchange. When a foreign bill of exchange is dishonored, protest is
necessary to hold the drawer and indorsers liable. Verily, the failure to protest the non-acceptance of sight draft resulted in the discharge of
drawer from liability.
Requisites 1. Given by holder or his agent, or by any party who may be compelled by the holder to pay.
2. Given to parties secondarily liable or their agents
3. Given within periods provided by law
4. Given at a proper place
Parties to be In case of non- Persons secondarily liable, namely the drawer and indorsers are the case may be.
Notified acceptance (bills only)
In case of non-payment Indorsers
(both on bill and note)
When is notice given As soon as the instrument is dishonored, and unless delay is excused, it must be within time fixed by law.
When is delay excused Delay is excused:
1. When caused by circumstances beyond the control of the holder.
2. Not imputable to his default, misconduct or negligence.
Notes:
1. Notice must be given to persons secondarily liable. Otherwise, they shall be discharged.
2. Notice may be given to the party himself or his representative.
Parties who Notice of dishonor may be given by the following:
may Give 1. Holder
Notice and 2. Any other person, on behalf of the holder
Dishonor 3. Any party to the instrument who may be compelled to pay it to the holder, and who would have a right of reimbursement from the aprty to whom notice
is given.
4. Any party who may be compelled.
Effect of Given of notice has the following effects:

Notice When given by or on It is beneficial to:
behalf of a holder 1. All parties who became parties before the holder because they now have a right of recourse against the party to whom
the notice of dishonor is given.
2. All holders after the holder who gave notice.
When given by or on It is beneficial to:
behalf of a party entitled 1. The holder.
to give notice 2. All parties after the party who gave notice
General effect Immediate right of recourse against indorser arises. It is as if indorser becomes primarily liable in the sense that the holder does
not need to claim payment from the person primarily liable.
Note:
1. Any drawer or indorser to whom such notice is not given is discharged.
2. If notice is given by the indorser, who may be compelled to pay, such inures to the benefit of the holder and all parties subsequent to party to whom
notice is given.
M issued a note to P, payable to P as payee or his order. NO, because notice of Holder inures to the benefit of all parties prior who
P indorsed it to A. A   C  Holder have the right of recourse against the party to whom it is given.
If M dishonors the note, Holder may notify C since C may be compelled to
pay. On the other hand, if Holder only notified C but C, in return, notified PAB,
C may notify any person who may be secondarily liable to him (PAB). Holder can already hold PAB liable because notice by an indorser (C in this
B may notify AP and A may only notify P. case) inures to the benefit of the holder.
If holder gave notice of dishonor to PABC, does C need to notify PAB again?
P need not be notified by AB anew because notice given to C inures to the
benefit of all parties subsequent to the party to whom notice is given (P having
notified by C).
Defects of Misdescriptions or failure to state:

notice 1. If notice is not signed, lack of signature does not invalidate it.
2. It it does not contain the stated that the instrument was presented and dishonored, the insufficiency can be supplemented by oral communication.
3. Failure to state date of making and maturity, and name of payee also does not invalidate it.
4. Notice which contains a copy of note and declares that payment has been made and refuse is sufficient.
5. Misdescription of instrument as to date, amount, names, does not vitiate the notice if the person is not misled. But if he is misled, notice is vitiated
(like when notice and envelop were addressed to another party)
6. Notice by phone is allowed because notice can be give orally.
a. However, it must be shown that party to be notified was really communicated with, fully identified as party at the receiving end of the line.
Notes on delivery of Notice of Defect to Person or his Representative:

1. Notice may be given to the party himself or his representative.
2. Accommodation indorser is entitled to notice. Irregular indorser must also be given notice if he is to be charged.
3. There is personal delivery when there is actual or diligent effort upon the indorser to deliver at his place of business/residence (if no place of
business).
a. If the indorser is absence, there is no need to call the second time and notice may be left with anyone in charge. If no one is there, giving
notice is deemed to be waived.
b. But leaving the notice at the window of the cashier was held to be insufficient where no one was shown to be present.
4. If the notice is attempted to be given to the party himself, notice may be left with clerk or person in charge at a party’s place of business or residence.
a. Proof what such person was not the party’s agent is not relevant because notice was left at the right place. Hence, leaving notice with private
secretary at his public office is sufficient.
5. If notice left at residence, leaving it with wife or any other person in his premises is sufficient.
Summary of 1. Like presentment, notice of dishonor does not need to be given to persons primarily liable.
Rules 2. Aside presentment, notice of dishonor to persons secondarily liable is necessary.
a. EXCEPTIONS:
i. Notice is waived (Sec 109)
ii. When dispensed with (Sec 112)
iii. As to drawer (Sec 114)
iv. As to indorser (Sec 115)
v. Where due notice of dishonor by non-acceptance has been given )Sec 116)
vi. As to HDC without notice (Sec 117)
Comparative Presentment for payment Presentment for acceptance
table of Concept It is the production of BE to the drawee for his acceptance or to the Acceptance of a bill is the signification by the drawee of his assent to the order of
presentment for drawee/acceptor for payment. the drawer.
payment and It is the production of PN to the Maker.
presentment
acceptance Notes:
Presentment to acceptor is the operative act to make him liable.
Before acceptance, drawee is a stranger to the bill. Upon acceptance, he
becomes primarily liable. He is bound according to the tenor of his
acceptance and cannot show that there was a subsequent agreement
between him and drawer modifying the terms of acceptance.
Time of Instrument must be presented on (otherwise, drawer and indorsers are On any day on which the negotiable instruments may be presented for payment
presentment discharged from liability): under Sec 72 and 85.
1. Date of maturity if payable on a fixed date, or within reasonable
time after issue if it is a PN. Notes:
2. Within reasonable time from last negotiation if it is a BE. 1. When Saturday is not a holiday, presentment for acceptance may be
3. When instrument is not payable on demand, presentment must made before 12PM. On that day.
be made on the day it falls due. 2. If the bill is payable elsewhere than at the place of business or residence
4. When instrument is payable on demand, it must be made of drawee and holder has no time to present the bill (even with exercise
within reasonable time after its issue. of reasonable diligence) before presenting it for payment on the day it
falls due, the delay of acceptance is excused and does not discharge the
Sec 85 (Time of Maturity)—Every negotiable instrument is payable at fixed drawers and indorsers.
time, without grace.
If it falls on a Sunday or holiday, instruments falling due or becoming Drawee is allowed 24 hours after presentment in which to decide whether or not he
payable on Saturday are presented on the next succeeding day. will accept the bill.
: Instruments payable on demand may be presented before 12PM on If he accepts, acceptance dates as of the day of presentation.
Saturday when the entire day is not a holiday, at the option of the holder
Comparative Presentment for payment Presentment for acceptance (it applies only to bills) Notice of dishonor
table of Concept It is the production of BE to the drawee Presentation for acceptance is the presentation of the bill to the It is a notice given by holder or his agent to the
presentment for for his acceptance or to the drawee for his approval to the order of the drawer. drawee and to each indorser indicating that the
payment, drawee/acceptor for payment. Acceptance of a bill is the signification by the drawee of that instrument was dishonored by:
acceptance and It is the production of PN to the Maker. assent. 1. Non-acceptance by the drawee
notice of 2. Non-payment of acceptor
dishonor 3. Non-payment of maker
Form of Production of instrument (to maker or Presentment of Presentation of the bill in order for the Notice that the instrument has been dishonored by
notice acceptor for payment), with a personal acceptance drawee to assent his withdrawal to the non-acceptance or payment.
demand for payment, readiness to order o the drawer.
exhibit the instrument if required and Actual Signification by drawee of its approval
receipt of payment and surrender of acceptance (by to the order of the drawer.
instrument. the drawee) GR: Placing a stamp “accepted”
accompanied with signature of drawee
or his authorized representative on the
bill.
: Mere signature of drawee can be
construed as valid acceptance. It must
be:
1. 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
Proof of Proof of acceptance may be the

acceptance instrument itself or in a separate
instrument.
However, Sec 133 states that “holder
presenting the bill for acceptance may
require that acceptance by written on
the bill and if refused, may treat it as
dishonored”.
Requisites 1. It must be made by the holder Presentment of 1. By or on behalf of holder at a Formal 1. It may be oral or in
or an authorized person to acceptance reasonable hour, on a requisites writing
receive payment. business day 2. It may be given in any
2. It must be made at a 2. Before the bill is overdue, terms which
reasonable hour on a business 3. To the drawee or some sufficiently identify
day or proper date person authorized to accept the instrument
3. Must be at a proper place or refuse acceptance on his 3. It must indicate that it
4. Must be to persons primarily behalf. has been dishonored
liable on the instrument. If he by non-acceptance or
is absent or inaccessible, to Actual 1. It must in writing non-payment.
any person found at the place acceptance (by 2. It must be signed by the 4. In all cases, it must be
where presentment is made. the drawee) drawee. delivered personally
5. Person entitled to present the 3. It must not express that the or through mails.
instrument for payment must drawee will perform his
exhibit the instrument to the promise by any other means Substantial 1. Given by holder or his
person from whom the other than payment of requisites agent, or by any party
payment is demanded, and money. who may be
upon payment must be 4. Drawee must assent to the compelled by the
delivered to the person paying promise to pay a sum certain holder to pay.
it. If not surrendered and in money and not by any 2. Given to parties
cancelled, there is a danger other means secondarily liable or
that it may fall in the hands of their agents
other persons who might claim 3. Given within periods
rights over the instrument provided by law
4. Given at a proper
place
Parties who 1. Holder 1. Holder Notice of dishonor may be given by the following:
may give it 2. Authorized person to receive 2. Any other person, on behalf of the holder 1. Holder
payment. 2. Any other person, on behalf of the holder
3. Any party to the instrument who may be
compelled to pay it to the holder, and
who would have a right of reimbursement
from the party to whom notice is given.
4. Notice may be given by agent, either in his
own name or in name of any party
entitled to give notice, whether that party
be his principal or not.
Notes: Where cashier of drawee bank, which had

refused to pay a check, gave the check to a notary to
protest, it was held that cahshier’s possession of the
check was evidence of his agency of the holder to
present it for protest.
Parties to Instrument must be exhibited to the Presentment must be made by holder or on his behalf to the In case of non- Persons secondarily liable,
Whom it person from whom payment is drawee or some person authorized to accept or refuse. acceptance (bills namely the drawer and
should given demanded. only) indorsers are the case may
or made (this When it is paid, it must be delivered up Drawee or authorized persion shall then: be.
refers to to the party paying it. 1. Place a stamp “accepted” with his signature
general 2. Only sign as long as acceptance is: In case of non- Indorsers
parties; see a. In writing payment (both on
specific b. Signed by drawee bill and note)
parties on c. Must not express that drawee will When is notice As soon as the instrument
presentment perform his promise by other means, given is dishonored, and unless
of payment rather than payment of money. delay is excused, it must
and be within time fixed by
acceptance) law.
Notice to Presentment for payment Presentment for acceptance Notice of dishonor

particular Presentment where It must be made during banking hours
parties instrument is payable at If person to make payment has no funds there to
Bank meet it ay any time during the day, at any hour
before the bank is closed on that day is sufficient.
Party is dead and no Party dead should be the principal debtor. Party dead should be the drawee. Party deed should be the party
place of payment is There must be no place of payment is specified. Personal representative secondarily liable and his death is
specified To his personal representative, if there is and if he known to the party giving notice
can be found through reasonable diligence. Personal representative.
If no personal representative, last
residence or place of business.
Presentment/Notice to There must be no place of payment is specified. Notice to one party is notice to the
persons liable as It may be made to any of them, even though firm even though there has been
partners there is a dissolution of the firm. dissolution.
Presentment/Notice to Several persons referred to here are joint Several persons referred to here are Several persons referred to here are
several persons not debtors. drawees. joint payees, joint indorsees.
partners There must be no place of payment is specified. It must be made to all of them, unless It must be made to all of them, unless
It must be made to all of them. one has authority to accept or refuse. one has authority to receive notice.
Party has been adjudged Bankrupt party referred to is the Bankrupt party referred to is the
as bankrupt or an drawee. party secondarily liable.
insolvent has made an It may be made to him or to his It may be made to him or his trustee
assignment for benefit trustee or asignee or assignee.
of creditors
Notes on Parties to Whom Presentment for Payment should be Made (Sec 74-78):
Parties to Whom Instrument must be exhibited to the person from whom payment is demanded.
Presentment for When it is paid, it must be delivered up to the party paying it.
Payment should
be Made (Sec 74- Notes
78) Presentment where 1. If the instrument is payable at Bank, presentment must be made between banking hours on
instrument is payable at ordinary banking days.
Bank 2. Otherwise, presentment would not be sufficient and persons secondarily liable are
discharged.
a. But if person to make payment has until close of banking hours to pay it, and he
deposits the funds there before close of such hours, a demand done earlier that
day is premature.
3. Rules where instrument is payable at a bank applies only if the instrument is payable at a
particularly named bank.
4. If there is failure to make presentment, person primarily liable is not discharged.
Where principal debtor In a case where one indorser is the personal representative, presentment was held to still be
is dead and no place of necessary.
payment is specified
Presentment to persons In case of death of one party, presentment shall not be made to his personal representative but to the
liable as partners and no surviving partner.
place of payment is
specified
Presentment to joint 1. Informal demand on one of joint makers is not a basis for charging indorsers.
debtors and no place of 2. If one is duly authorized for the purpose, presentment to him would be sufficient.
payment is specified
Note: Rules on “death of principal debtor, persons liable as partners and joint debtors” do not apply where place is specified.
Notes on Parties to Whom Presentment for Acceptance should be Made:

1. Drawee is allowed 24 hours after presentment in which to decide whether or not he will accept the bill. If he accepts, acceptance dates as of the day
of presentation.
2. Effects of acceptance: when an acceptance is written on a paper other than the bill, it does not bind the acceptor except in favor of a person to whom
it is shown and who receives the bill for value.
3. It is deemed accepted when:
a. Bill was delivered to the drawee and the latter destroys it.
b. Bill was delivered to drawee but drawee refuses within 24 hours or within such other period as the holder may allow the return of the bill
(accepted or not).
Notes on Parties to Whom Notice of Dishonor should be Made:

When party is dead and Party deed should be the party secondarily liable and his death is known to the party giving notice.
no place of payment is Note: Notice mailed in due course to indorser in care of executor in his address with postage prepaid, after information that
specified indorser was dead, was held to be proper notice even though the address of execution named in will is incorrect.
Notice to persons liable 1. This does not apply to joint payees or indorsees who indorser under Sec 68. Joint payees to whom notice has been given
as partners are not discharged by failure to give notice to other joint payees.
2. This applies to joint parties, who are not joint payees/indorsees namely:
a. Joint drawers who signed the bill jointly.
b. Joint accommodation indorsers who are not jointly and severally liable under Sec 68, because they are neither
payees/indorsees nor indorsers.
Notice of Dishonor to 1. This applies only with respect to an indorser against another indorser but not against an HDC.
several persons not a. Sec 68 contemplates, “Every indorser is liable to all indorsers after him but not to those before him”.
partners 2. This contemplates successive negotiations and successive indorsements.
3. It does not determine order of liability of joint indorsers amongst themselves.
4. Payees are deemed to have indorsed jointly and several. Thus, the holder can make any one of them pay the whole
amount.
5. One of the joint indorsers cannot escape liability because notice of dishonor was not given to his joint indorser.
6. When holder expressly releases first indorser, second indorser will be discharged. However, if one of joint indorsers pays
the instrument, second joint indorser is prima facie liable to contribute and he has burden to show release from such
liability.
Party has been adjudged Bankrupt party referred to is the party secondarily liable.
as bankrupt or an 1. It may be made to him or his trustee or assignee.
insolvent has made an 2. Contemplated situations:
assignment for benefit a. Party secondarily liable has been declared bankrupt or insolvent.
of creditors b. He has made an assignment of his properties for the benefit of others.
When it may 1. When after exercise of 1. When after exercise of reasonable diligence, When after exercise of reasonable diligence, it
be dispensed reasonable diligence, presentment cannot be made. cannot be given or does not reach the parties sought
with presentment cannot be 2. Drawee is dead, has absconded, or is a fictitious person to be charged.
made. or a person not having capacity to contract by bill
2. Drawee is a fictitious person 3. Presentment for acceptance can be dispensed with
Express or implied waiver of when acceptance has been refused on some other
presentment ground even if the presentation has been irregular.
Not required If drawer has no right to expect or Notice of dishonor not required to be given to the
to charge the require that the drawee or acceptor will drawer in the following cases:
drawer pay the instrument, such in the case of 1. Drawee and drawer are the same persion
checks where payment has been 2. Drawee is a fictitious person or person not
stopped. having the capacity to contract
3. Drawer is the person to whom
instrumentis presented for payment
4. Drawer has no right to expect or require
that the drawee or acceptor will honor the
instrument
5. Drawer has countermanded the payment
Where the drawer’s bank account was already close

even before issuance of check, he had no right to
expect or require the drawee bank to honor the
check. By virtue of Sec 114, petitioner is not entitled
to be given a notice of dishonor.
Not required If instrument was made or accepted for Notice of dishonor not required to be given to the
in order to his accommodation, and he has no indorser in the following cases:
charge reason to expect that the instrument 1. Drawee is a fictitious person or person not
indorser will be paid if presented. having the capacity to contract
Note: Only the drawer and indorser 2. Indorser is the person to whom
are not discharged, but all other instrument is presented for payment
parties secondarily liable are relieved 3. Instrument was made or accepted for his
of their liability. accommodation
Delay in Delay is excused: No provision for delay. However, it is deemed accepted when: Delay is excused:
making 1. When caused by 1. Bill was delivered to the drawee and the latter 1. When caused by circumstances beyond
presentment circumstances beyond the destroys it. the control of the holder.
or of giving control of the holder. 2. Bill was delivered to drawee but drawee refuses 2. Not imputable to his default, misconduct
notice 2. Not imputable to his default, within 24 hours or within such other period as the or negligence.
excused misconduct or negligence. holder may allow the return of the bill (accepted or
not).
When cause for delay cases to operate,
presentment must be made with Drawee is allowed 24 hours after presentment in which to
reasonable diligence. decide whether or not he will accept the bill.
Effect of Dishonor by Non-Payment (Sec 83-84) When Failure to Present Releases Drawer and Indorser (Sec Failure to Notice must be given to persons
Failure to It is dishonored by non-payment when: 144) give notice secondarily liable, namely drawer
Give Notice 1. It is duly presented for Holder of a bill (which is required to be presented for and indorser (in case of a bill) or
payment and payment is acceptance) must either present it or negotiate it within indorsers (in case of a note).
refused or cannot be reasonable time. If not, drawer and all indorsers are discharged. Otherwise, they shall be discharged.
obtained. : Except otherwise provided
2. Presentment is excused and This does not apply to drawers and
instrument is overdue and indorsers under Sec 115 and 115
unpaid. where notice can be relatively
excused (SEE NOTES ON “WHEN
Note: subject to NIL, when instrument RELATIVELY EXCUSED” BELOW)
is dishonored by non-payment, Effect of An omission to give notice of
immediate right of recourse to all omission dishonor by non-acceptance does
parties secondarily liable accrues to relating to not prejudice the rights of an HDC
the holder. an HDC who became a party after the
omission.
Notice of Where due notice of dishonor by

non- non-acceptance was given, notice
payment if of another dishonor by non-
acceptance payment is not necessary, unless in
was refused the meantime, the instrument has
been accepted.
Dishonor by Subject to NIL, when instrument is An immediate right of recourse against drawer and indorsers
non-payment dishonored by non-payment, accrues to the holder and no presentment for payment is
or non- immediate right of recourse to all necessary.
acceptance parties secondarily liable accrues to the
holder.
Notes on when Presentation/Notice is Dispensed with, Excused or Waivered:

Where Presentment 1. Cases where presentment is not required to charge the drawer:
for Payment is a. Payment for check has been stopped
dispensed with (Sec b. Drawer’s balance is less than the amount of the check. However, mere fact that drawer has no funds in the drawee’s hands at the
80-82) time he draws, does not render presentment unnecessary if holder still has grounds to believe that the instrument will be paid,
particular when provision has been made for payment of any bill drawn.
c. Bill contained “pay from balance” but drawer had no money deposit, although expected to arrange with broker to cover drafts.
2. Accommodated payee-indorser is not discharged even if no presentment is made because in effect an accommodated party is the person
primarily liable.
a. If notes were made for accommodation of payee, but the payee died before maturity, presentment to his administrator is not
necessary.
3. Delay vs. Failure to make presentment for payment
Delay Failure to make presentment
Grounds for 1. When caused by circumstances beyond 1. When after exercise of reasonable diligence, presentment cannot be
excuse the control of the holder. made.
2. Not imputable to his default, 2. Drawee is a fictitious person
misconduct or negligence. 3. Express or implied waiver of presentment
Application What is excused is delay. What is excused is failure to make presentment.

Notes “Excusable circumstances”—those events which “Reasonable diligence” implies active search.
could not be foreseen, or inevitable even if “Implied waiver” may be manifested by language or conduct or any agreement to
foreseen. make the holder believe that presentment is waived, or to prevent him from treating
the bill as he otherwise would.
Where Presentment Drawee is allowed 24 hours after presentment in which to decide whether or not he will accept the bill.
for Acceptance is Connect this with dispensation of presentment of acceptance on the grounds of “Presentment for acceptance can be dispensed with when acceptance has
excused (Sec 148) been refused on some other ground even if the presentation has been irregular”.
Notice of Dishonor When notice is relatively Notice against persons secondarily liable becomes necessary when:
is not required excused 1. He has knowledge of dishonor by other means than a formal notice (such as when he is both drawee and drawer,
or presentment is made to him).
2. He has no reason to expect that the instrument will be honored (as when he countermanded, or where drawee is
fictitious or without capacity to contract).
Sec 114 and 115 only apply to drawer and indorser. Failure to give due notice to other secondarily liable parties will discharge
them.
As to drawer (Sec 114) 1. When drawer has no right to require or expect payment, he has no right to notice of dishonor. It applies in the
following cases:
a. Drawer of check has no account with drawee bank
b. Drawer of check payable has no funds to meet with the drawee bank
c. When knowledge that previous drafts in the same consignee had been dishonored.
2. Where the drawer’s bank account was already close even before issuance of check, he had no right to expect or
require the drawee bank to honor the check. By virtue of Sec 114, petitioner is not entitled to be given a notice of
dishonor.
As to indorser (Sec 115) If the waiver is embodied in an instrument, it is binding upon all parties.
If waiver is written above the signature of the indorser, it only binds him.
Waiver of Notice of Waiver of notice It must be given before the notice has arrived or after omission to give notice.
Dishonor It may be expressed or implied.
Who is affected If the waiver is embodied in an instrument, it is binding upon all parties.
If waiver is written above the signature of the indorser, it only binds him.
Waiver of protest in It is deemed to be a waiver not only of formal protest but also of presentment and notice of dishonor.
foreign instruments Only foreign BE need to be protested in case of dishonor to charge the drawer and indorsers:
1. Drawn inside Philippines payable outside.
2. Both drawn and payable outside of Philippines
Discharge of Discharge of What constitutes It is the release of all parties, whether primary or secondary, from their obligations. It renders the instrument without force and
Negotiable Negotiable discharge effect and it can no longer be negotiated.
Instrument Instrument When discharged 1. Payment in due course by or on behalf of principal debtor
(Sec 119) 2. Payment by accommodated party
3. Intentional cancellation by holder
4. Any act which will discharge a simple contract for payment of money
5. Principal debtor becomes holder of instrument at or after maturity in his own right
Note on grounds of discharge:

Payment in due What constitutes 1. When it is made at or after maturity of payment to holder.
course payment in due 2. Holder in GF and without notice that his title is defective
course
Requisites 1. It must be made at or after date of maturity.
2. Made by holder
3. Made by debtor in GF and without notice that holder’s title is defective
Notes:
1. Debtor referred to in this case is the person primarily liable.
a. Maker
b. Acceptor
2. If payment is before maturity, payment does not discharge the instrument. Instead, negotiation
is reverted back to the person primarily liable and he can re-negotiate it.
3. If payment is made by an indorsee, it does not discharge the instrument if he does not possess it.
He is not a holder and he is not authorized to receive payment.
4. If debtor who knows that the person stole it, payment is not in GF.
5. Debtor must satisfy himself that the holder traces his title through genuine indorsements. If it is
a forged instrument, no right passes through it.
Payment must be Debtor must insist on presentment of paper by party demanding payment in order to make sure that it is, at
made to possessor the time, in his possession and not outstanding another.
of instrument If the instrument is outstanding and held by HDC at the time he makes payment, debtor will be liable to pay
again. But payee’s possession raises presumption that they are not paid.
Medium of payment 1. Currency stipulated
2. If not possible to delivery currency, legal tender
a. If payment is not through legal tender, payment will not be absolute until the paper
given for payment has been itself paid.
b. : parties agreed that paper shall produce effect of payment of claim.
3. In case of extraordinary inflation or deflation of currency stipulated, value of currency at the
time the obligation as established, unless there is contrary stipulation.
Notes:
1. Delivery of instrument shall produce effect of payment only when they have been cashed, or
impaired through fault of creditor. In the meantime, action derived from original obligation shall
be suspended.
2. Payment through banks is valid as banks are deemed to be agents of the owner.
3. Crediting of account constitutes payment.
a. If the check presented by holder to the bank it was drawn, and received it as deposit
to be credited to his account, it is as if there was payment over the counter in the
absence of fraud.
Payment by the Principal debtor is the person ultimately liable to pay the debt, whether he is a party to the instrument or not, or whether he is
principal holder primarily or secondarily liable.
Note:
1. After dishonor by non-payment, indorsers cease to be merely secondarily liable. They become principal debtors whose
liability is identical to the original obligor.
2. Holder does not even need to proceed against the maker before suing the indorser. Hence, drawer is not an indispensable
party in an action against the indorser of checks.
Payment by This apply between the accommodation party and the accommodated party. The accommodated party is liable on the instrument.
accommodated Hence, instrument is discharged once he pays because he is deemed to be a principal debtor.
party
Payment by a third This does not discharge the instrument, because payment is not made by a person principally liable.
person or stranger GR: Not everyone who desires, may pay and recover from the Maker. He must be a person who has made himself liable for payment.
: Where instrument has been protested (thus a foreign bill) and someone volunteers to pay for it for honor.
If the intention was to give money for payment, the instrument is discharged.
Intentional Requisites 1. It must be intentional
cancellation by 2. Made by the holder
holder 3. By tearing, burning or writing “cancelled”
When cancellation is 1. Unintentional
inoperative 2. Under mistake
3. Without authority
Any act which will Extinguishment of Obligations (Art 1231):

discharge a simple 1. Payment or performance
contract for 2. Loss of thing due
payment of money 3. Condonation or remission of debt
4. Confusion or merger of rights of creditors and debtor
5. Compensastion
6. Novation
Other causes:
1. Annulment
2. Rescission
3. Fulfillment of resolutory condition
4. Prescription
Notes:
1. A novation would discharge the instrument under the ground of “any act which will discharge a simple contract or
payment for money”.
a. Novation must produce the effect of extinguishing an obligation by another which substitute the same:
i. Novation must be explicitly stated and declared in unequivocal terms. Novation is never presumed.
ii. Old and new obligations must be incompatible on every point.
b. Acceptance of holder of another check which replaced the dishonored one does not result to novation. There is
no incompatibility because both checks were given precisely to terminate a single obligation arising from the
same transaction.
2. Extension of time granted by holder to debtor will not discharge the instrument.
Principal debtor Requisites 1. Reacquisition must be made by the principal debtor.
becomes holder of 2. In his own right
instrument at or 3. At or after date of maturity
after maturity in his At or after date of Instrument will not be discharged. It merely constitutes a negotiation back to principal debtor who may
own right maturity renegotiate the instrument.
Discharge by operation Judgment is obtained on the instrument Bankruptcy
of law Bill is extinguished and merged in judgment. It releases a bankrupt from all his provable
But judgment alone does not extinguish debts. This is personal to him only. It does not
agreement between plaintiff and other parties discharge other parties.
not jointly liable with original defendant,
whether parties be prior or after him.
Discharge of Grounds 1. Release of debtor unless the holder’s right of recourse against he party secondarily liable is expressly reserved.
Parties 2. Any act which discharges the instrument
Secondarily 3. Intentional cancellation of his signature by holder
Liable 4. Discharge of prior party
(Sec 120) 5. Agreement binding upon holder to extend the time of payment or to postpone the holder’s right to enforce the instrument
6. Valid tender of payment made by a prior party
Status of instrument Where the party secondarily liable pays for the instrument, the instrument is not discharged.
Right of party Party secondarily liable who was discharged from the instrument Exceptions
secondarily liable Parties Drawer and indorsers 1. The instrument is payable to
who was discharged involved order of a third person and has
from the instrument been paid by the drawer.
2. It was made or accepted for
accommodation and has been
paid by the party accommodated.
Rights He is remitted to his former rights as regard all prior parties. He may Rights of discharged party with secondary
strike out his own indorsement, and all subsequent indorsers and liability do not apply.
against negotiate the instrument.
Effects 1. Instrument is not discharged but it discharges the party Unlike in the general rule, drawer or party
paying (drawer or party accommodated). accommodated cannot renegotiate or reuse
2. Party paying shall be remitted to his former rights against the instrument when the instrument is not
parties before him. discharged. He is only subrogated to rights
a. If the party paying was formerly an HDC, he can of payee.
enforce his rights free from defenses because he 1. Where drawer was required to
his remitted to his former rights as an HDC even if pay the certified check because
he had notice of defects of title at the time of his of drawee bank’s failure,
payment. instrument is not discharged and
b. But if original payee of an note that lacked he is subrogated to the rights of
consideration repurchases the instrument after it the payee. Party secondarily
was transferred to an HDC, payee would be liable who pays cannot
remitted to the same (personal) defenses he had renegotiate the instrument.
as if the paper never passed through an HDC. 2. If payee is an accommodated
i. This still applies when the instrument is party and pays, he cannot
retransferred to an agent of the payee. negotiate the bill as he is the
3. Paying party can strike out his indorsements and untilate party. He does nto have a
subsequently indorsements after him. right of recourse against drawee
or drawer.
Notes on Grounds:
Release of debtor Release of principal debtor must be by act of holder and not by operation of law.
Any act which discharges Sec 119.
the instrument
Discharge of prior party Discharge by operation of law is not included. Discharge must be done by the holder.
Thus, not applicable:
1. Discharge by bankruptcy
2. Party not given due notice of dishonor
3. Statute of Limitations
Agreement binding upon Rule GR: If holder agrees to extend time for payment in favor of the principal debtor, all other indorsers and
holder to extend the time parties secondarily liable are discharged.
of payment EXCEPTIONS:
1. Made with approval of party secondarily liable
2. Right of recourse against such party is expressly reserved
Requisites 1. It must be a biding contract
2. Supported by valuable consideration
3. For definite period
4. Made with principal debtor, not a third party.
Valid tender of payment 1. Where an instrument is payable to a bank and indorser waived protest, fact that maker had money on deposit in the
by a prior party bank at maturity is not a sufficient tender to discharge the indorser.
2. Release must be a voluntary act of the holder, not by operation of law. Thus, if release is not for value, instrument is
not discharged.
3. Release of accommodation maker or acceptor does not discharge the principal debtor though the principal debtor
occupies the position of a party secondarily liable. There is no “release” contemplated by law even if it was made with
knowledge of true relation of parties.
Renunciation What constitutes It is the act of surrendering a right of claim without recompense, but it can be applied with equal propriety to the relinquishing of a
by Holder renunciation demand upon an agreement supported by consideration.
How made It must be with written declaration to that effect.
If oral, it must be accompanied with surrender of instrument to the person primarily liable.
Requisites 1. Absolute and unconditional
2. Made in favor of person primarily liable
3. Made at or after maturity
4. In writing
When made and Renunciation in favor of a secondary party Renunciation in favor of principal debtor
what is the effect When made The holder may make it before, at, or after maturity At or after maturity
of the instrument.
Effect It only discharges the secondary party, and all parties It will discharge the instrument, and all parties to it,
after him, but the instrument itself remains in force. provided the renunciation is made unconditionally and
absolutely.
In either case, renunciation does not affect the rights of HDC without notice.
Material Concept (Sec Any alteration which changes:
Alteration 125) 1. Date
2. Sum payable, either for principal or interest
3. Time or place of payment
4. Number or relations of parties
5. Medium or currency in which payment is t be made
6. Which adds a place of payment where no place of payment is specified
7. Any other change or addition which alters the effect of the instrument in any respect
Notes:
1. It is an unauthorized change in an instrument that purports to modify the obligation of a party or an unauthorized addition of words or numbers, or
other change to an incomplete instrument relating to the obligation of a party.
2. An alteration is material if it alters the effect of the instrument. It changes the items required to be stated under Sec 1.
3. Serial number is not a material particular of a check.
a. Its alteration does not constitute material alteration. It is not material to the negotiability of the instrument.
4. A change of date is a material alteration.
a. Take note also of the fact tat such alteration was not countersigned by the drawer to make a valid correction of date as a standard
procedure of the bank.
Payee admitted that there was alteration but it denied that it was done NO. While PN is an evidence of indebtedness, it is not the only evidence
without maker’s consent. He said it was part of company practice to rubber because existence of the obligation can be proven by other documentary
stamp an old PN which has been renewed to make it appear that there is a evidence such as a memorandum signed by parties.
new obligation. The maker did not rebut it. Will the alteration of PN
effectively, relieve the maker of liability? A check that was issued to secure in replacement of and for the same
purpose as PN can be presented to establish existence of the indebtedness.
Effect of Alteration by a GR: Where a negotiable instrument is materially altered without the assent of all parties liable on it, it is avoided.
Material party EXCEPTIONS:
Alteration (Sec Tenor of the alteration Tenor of the original instrument
124) Party who made, authorized or assented to the alteration, as well as If holder is HDC and not a party to the alteration, he may
subsequent indorsers are bound by the alteration, against a party enforce the payment according to its original tenor,
who is not an HDC. regardless of whether the alteration was innocent or
fraudulent.
It is partial real defense because HDC can enforce it according to its original tenor.
Alteration by a It has the same effect as if the alteration was made by a party.
stranger In which case, HDC can recover the original tenor.
(spoliation)
Notes:
1. Items involving material alteration or bearing forged indorsements may be return even beyond 24 hours as long as it is return within the
prescriptive period (10 years) because a check or indorsement is a written contract.
a. Item does not need to be return through the clearing house but by direct presentation to the presenting bank.
2. If a drawee bank pays a materially altered check, he cannot claim reimbursement from the drawer because it violates the instructions of the
drawer. It does not have a right to reimbursement or right to deduct the erroneous payment.
a. : When the drawer made or authorized the alteration, or when he failed to exercise reasonable diligence.
Drawer issued a check against drawee bank and made payable to XYZ Marketing or YES. Generally, drawee-bank is not liable under the check because it
order. The check was deposited with payee’s account at ABC Bank (collecting bank). has no privity of contract between XYZ Marketing (payee) and ABC
Bank (collecting bank). However, if drawee-bank’s action is an abuse
ABC Bank sent the check for clearing to drawee bank. of right which caused damage not only to Drawer but also to Payee,
Drawee refused to honor the check. It contended that payee (XYZ Marketing) cannot payee has a cause of action under quasi-delict.
sue it because there was no privity between them. Is it correct?
Acceptance Definition Acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.
Kinds of acceptance Conditional Partial Local Qualified Accepted by some, one or more drawees
but not all
Which makes payment by Acceptance to pay party Acceptance to pay only at As to time
acceptor dependent on only of the amount for a particular place
fulfillment of condition which the bill was drawn.
stated.
Rules Governing Rules on Acceptance:

Acceptance Acceptance by a When an acceptance is written on a paper other than the bill itself, it does not bind the acceptor.
separate instrument : If it is in favor of a person to whom it is shown and who receives the bill for value in faith of it.
Promise to accept An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every
equivalent to acceptance person who receives the bill for value.
Right of the holder to an unqualified acceptance:

1. Holder may refuse to take a qualified acceptance. If he does not obtain it, he may treat the bill as dishonored
by non-acceptance.
2. Drawer and indorsers will be discharged from liability on the bill, unless they have expressly or implied
authorized the holder to take a qualified acceptance, or subsequently approve to it.
a. If they receive a notice of qualified acceptance, they must express their dissent or they will be
deemed to have approved it.
3. However, acceptance is presumed to be unqualified or absolute.
Liability of drawee Where a drawee to whom a bill is delivered for acceptance shall be deemed to have accepted it when:
returning or destroying 1. He destroys the bill or refuses it within 24 hours after deilery.
the bill 2. He destroys the bill or refuses it within such other period meant for the holder to allow return the bill
(accepted or not) to him.
Acceptance of an Drawee/Acceptor may accept the bill:

incomplete bill 1. Before the bill has been signed by the drawer
2. While otherwise incomplete
3. When it is overdue
4. After it was dishonored by a previous refusal to accept, or by non payment.
However, when the bill is payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it,
the holder is entitled to have the bill accepted as of the date of the first presentment in the absence of any any different
agreement.
Rights of parties as to Holder 1. He may refuse to take the qualified acceptance.
qualified acceptance 2. If he does not obtain an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance.
Drawer and 1. They are discharged from liability on the bill, unless they have authorized the holder to
indorsers take a qualified acceptance or subsequently assent to it.
2. When either receives a notice of a qualified acceptance, he must express his dissent to
the holder within a reasonable time, or he will be deemed to have assented (approved)
to it.
Presentment for When necessary Only in the following cases:

Acceptance (Sec 143) 1. Bill is payable after sight, or in any other case, where presentment for acceptance is necessary to fix the maturity of the instrument.
2. Bill expressly stipulates that it shall be presented for acceptance.
3. Bill is drawn payable elsewhere than at the residence or place of business of drawee.
In any other case, presentment for acceptance is not needed.
Effect of Failure to Holder of a bill (which is required to be presented for acceptance) must either present it or negotiate it within reasonable time. If not, drawer and all
Make Presentment indorsers are discharged.
: Except otherwise provided
Dishonor by Non- An immediate right of recourse against drawer and indorsers accrues to the holder and no presentment for payment is necessary.
Acceptance
Promissory Notes Negotiable PN A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or
at a fixed or determinable future time, a sum certain in money to order or to bearer.
If the note is drawn on the maker’s own order, it is not complete until he indorses it.
Parties Maker—party who executes the written promise to pay

Payee—in whose favor the PN is made payable
Instances when BE 1. Drawee is a fictious person
may be treated as 2. Bill is drawn on person who is legally absent
PN at election of 3. Bill is ambiguous
holder 4. Drawee does not have capacity to contract
5. Drawer and drawee are the same persion
Checks Definition A check is a BE drawn on a bank payable on demand.

Notes:
1. They do not need to be presented for acceptance.
2. They are always payable on demand against the bank on which it is drawn. In case of refusal of drawee-bank, payee or holder cannot compel the
drawee bank to pay because there is no privity of contract.
a. RECOURSE: Serve a notice of dishonor to drawer or run after the drawer.
3. Bill vs. Check
Bill Check
Previous deposit It is not drawn on deposit. It is not necessary that the bill should Previous deposit is necessary. Othewise, there would be
have funds in the hands of the drawee. fraud.
It exists for circulation. It exists for immediate payment.
Death of drawer It does not revoke the authority of the bank to pay. It revokes the authority upon the bank’s knowledge.
Presentment for payment Within reasonable time after its last negotiation. Within reasonable time after its issue.
Checks become state after 6 months from issue.
Kinds Cashier’s check One drawn by the cashier of a bank, in the name of the bank against the bank itself. It is payable to a third person.
It is a primary obligation of the issuing bank and accepted in advance upon issuance.
Certified check Agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment.
Crossed check A check, which in addition to the contents of ordinary check, contains the name of certain banker or business entity through whom it
must be presented for payment.
Manager’s check Check drawn by the manager of a bank in the name of the bank itself for a third persion.
It is a primary obligation of the issuing bank and accepted in advance upon issuance.
Memorandum check Check given by borrower to lender for amount of a short loan.
It is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due.
This is evidenced by the word “memorandum, memo, mem” on the check.
Traveler’s check Instruments purchased from banks, express companies or the like in various denominations.
Notes on Cashier’s Check and Manager’s Check:

1. Cashier’s check and manager’s check
Cashier’s Check Manager’s Check
Definition Bank’s cashier draws a check upon the bank. Bank’s manager draws a check upon the bank.
Effect It is accepted in advance upon the act of its issue. Mere issuance is considered an acceptance of it.
In reality, it is really the bank’s own check and may be treated as an PN with the Bank as the maker.
2. Manager’s check is considered good as cash because it holds the same footing as a certified check.
3. Mere issuance of a manager’s check does not ipso facto work as an automatic transfer of funds to the account of the payee.
a. In case the procurer of the manager’s or cashier’s check retains custody of the instrument, does not tender it to the payee or fails to make an
effective delivery, no delivery of check has taken place.
b. Since there is no delivery, presentment to the bank for payment did not occur. An order to pay the debt was never made. As a result, the
assigned fund is deemed to remain party of the account of whoever procured the manager’s check.
c. Doctrine that the deposit represented by manager’s check automatically passes to the payee does not apply because the check remained
undelivered although accepted in advance.
Notes on Certified Checks:

Nature When a check is certified by the bank on which it is drawn, it is equivalent to acceptance.
This certification implies “that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check is presented for payment”.
It is an understanding that the check is good, and shall continue to be good, and this agreement is binding on the bank.
Effects of 1. It is equivalent to acceptance.
certification of 2. Warranty under Sec 62 exists.
checks a. Acceptor engages that he will pay it according to the tenor of its acceptance.
b. Drawer is existing, and he has capacity and authority to draw the instrument.
c. Payee is existing, and he has capacity to indorse.
3. When the holder procures the check to be accepted or certified:
a. Drawer and indorsers are discharged from liability.
b. Check operates as an assignment of part of funds to the credit of the drawer of the bank.
c. It only operates as an assignment of funds once it is accepted or certified.
Notes on Cross Checks:

Kinds Crossed specially Crossed generally
How done Name of particular bank or company is written or appears between Only the words “and Co” are written between
the parallel lines in which case, drawee-bank must pay the check parallel lines or when none at all is written.
only upon presentment buy such bank or company.
Effects of 1. Check may not be encashed. It cannot be converted to cash.
crossing checks 2. It may only be deposited.
3. It may ne negotiated only once—to the one who has an account with the bank.
4. It serves as a warning to the holder that the check has been issued for a definite purpose, so that he must inquire if he has
received the check pursuant to that purpose.
Crossing of check relates only to mode of its presentment for payment.

1. It does not extinguish the primary obligation.
2. This means the drawer has intended the check for deposit only by the right person (payee named therein).
3. Change in mode of paying the obligation cannot be used as a form of novation to discharge the instrument, because it is not a
change in any of the objects or principal condition.
Negotiability of check is also not affected by it being cross, whether generally or specially.
It may legally be negotiated from one person to another as long as:
1. The one who encashes the check with the drawee bank is another bank, or
2. It is specially crossed by the bank mentioned between parallel lines.
If the check was not delivered to the payee, a suit based on gross negligence may prosper on the grounds of Quasi-Delict, not failure to
assert right based on the undelivered check.
Presentment Time A check must be presented for payment within a reasonable time after its issue.
for Payment Effect of Delay Drawer will be discharged from liability to the extent of loss caused by delay.
Notes:
Check Kiting Practice of taking advantage of the float, the tie that elapses between deposit of check in one bank and its collection at another. In anticipation of dishonor of check
that was deposited, original check will be replaced with another worthless check.
“Account The notation of “account payee only” creates a reasonable expectation that the payee alone would receive the proceeds of the check and that diversion of checks
Payee Only” would be prevented.
1. This exception arises from the accepted banking practice that cross checks are intended for deposit in the named payee’s account only and no other.
2. The fact that the person other than the named payee of the crossed check for deposit should put the bank on guard. It should have verified if the payee
is the authorized holder to present it, or indorsed it to him.
3. Failure is tantamount to gross negligence, which is the absence of or failure to exercise even slight care or diligence, or entire absence of care, evidencing
a thoughtless regard of consequences without exerting any effort to avoid them.
24-Clearing Items which have been the subject of material alteration or items bearing forged indorsement shall be return by direct presentation or demand to the
House Rule Presenting Bank, and not through the regular clearing house facilities within the prescribed period by law for the filing of a legal action by the returning
bank/branch, institution or entity send the same (Sec 21, Philippine Clearing House Corporation Rules).
1. Rule that requires the drawee bank to return a defective check to the collecting bank within 24 hours to allow the drawee bank to recover from the
collecting bank does not apply to altered checks.
2. 24-Hour Clearing Rule does not apply to altered checks.
3. Under the 24-Hour Rule, the drawee bank looses right to claim against collecting/presenting bank if the check is not return at the next clearing day or
within 24 hours.
4. Any check which should be refused by the drawee bank shall be returned to the local clearing office not later than the next clearing day or 24 hours.
Modification to the rule: Items which have been subject to material alteration or bearing forged instruments may be returned even beyond 24 hours so long as it
is returned within prescriptive period fixed by law. Prescriptive period is 10 years because a check or indorsement is a written contract. Item does not need to be
returned through the clearing house but by direct presentation to the presenting bank.
Stop payment Drawer has the right to order the drawee to stop payment of a check.
1. This is based on the rule that issuance of check by itself is not an assignment of funds by the drawee.
2. If a bank passes a check after it was notified to stop payment, it pays on its own responsibility and will not be permitted to charge the account. Drawer
may countermand payment if he has a valid defense against the holder of the check. Thus, countermanding the check is roper whenthe payee failed to
deliver the goods that he was supposed to deliver.

Quick Look Negotiable Instruments Law .D

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Quick Look Negotiable Instruments Law .D

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Commercial Law

Quick Look (Second Reading)

III. Negotiable instruments Law

Requisites of Requisites are:

Sum certain 1. A sum is considered certain even though it is to be paid:

Payable on demand Payable on When it is expressed to be payable:

Payable to 1. Expressed to be payable to bearer

Kinds of Negotiable Promissory notes Bills of Exchange

Completion of Rules in the completion of blanks:

Incomplete and Non-delivery of an incomplete instrument is a real defense.

Notes: this is only a personal defense.

Notes on Ultra Vires Acts:

Rules on Forgery of PN:

Signature of payee or holder is unnecessary to pass title of the instrument.

Rules on Forgery of BE:

Failure of Neglect or failure to give, do or perform the consideration agreed upon.

Illicit consideration It is a persona defense.

There is no presumption of consideration in restrictive indorsements.

Effect of transfer of an instrument payable to order without indorsement:

EX: Instrument contains all necessary details except for the

Presumption of HDC Every holder is deemed prima facie to be HDC.

An instrument subject to real defenses cannot be enforced against

Fraud in execution Fraud in inducement Fraud in factum

Liabilities of Primary Primary liability Secondary liability

Qualified 1. Indorser is mere assignor of title of instrument.

3. Applicable to both person negotiating by mere delivery and qualified indorser:

Liabilities among indorsers:

Other forms of liabilities:

2. Difference of liability and warranty:

3. All parties have warranties.

A issued a PN payable to B or bearer. A is liable to F.

Alternative Answer: As a general indorser, B is secondarily liable to F.

Presentment for Enforcement of General steps in enforcing liability:

What constitutes It is made:

It must be made by the holder or an

Illustrative cases on place of payment:

Notice of Dishonor of Dishonor by non-payment Dishonor by non-acceptance

Effect of Given of notice has the following effects:

Defects of Misdescriptions or failure to state:

Notes on delivery of Notice of Defect to Person or his Representative:

Proof of Proof of acceptance may be the

Notes: Where cashier of drawee bank, which had

Notice to Presentment for payment Presentment for acceptance Notice of dishonor

Notes on Parties to Whom Presentment for Acceptance should be Made:

Notes on Parties to Whom Notice of Dishonor should be Made:

Where the drawer’s bank account was already close

Notice of Where due notice of dishonor by

Notes on when Presentation/Notice is Dispensed with, Excused or Waivered:

Application What is excused is delay. What is excused is failure to make presentment.

Note on grounds of discharge:

Any act which will Extinguishment of Obligations (Art 1231):

Material Concept (Sec Any alteration which changes:

Rules Governing Rules on Acceptance:

Right of the holder to an unqualified acceptance:

Acceptance of an Drawee/Acceptor may accept the bill:

Presentment for When necessary Only in the following cases:

Parties Maker—party who executes the written promise to pay

Checks Definition A check is a BE drawn on a bank payable on demand.

Notes on Cashier’s Check and Manager’s Check:

Notes on Certified Checks:

Notes on Cross Checks:

Effects of 1. Check may not be encashed. It cannot be converted to cash.

Crossing of check relates only to mode of its presentment for payment.