Negotiable Instruments Law Reviewer PDF

NEGOTIABLE INSTRUMENTS LAW
PROFESSOR SEBASTIAN
A REVIEWER BY
LEX SOCIETAS
VERITAS. VNITAS. VIRTVS .
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW
which the law was enacted, since it was impossible for the commercial purchaser
INTRODUCTION in any state to know all the details affecting the negotiability of paper governed by
the laws of all the other states.
ORIGIN
2) To preserve the law as nearly as possible as it then existed.
Agbayani: The Negotiable Instrument Law is a creature of the law merchant,
from which it was imported into England and crystallized in the English common Sebatian: Rules in Negotiable Instruments Law are universally the same. Thus,
law. It was codified in that country in 1882 by what is known as the Bills of it enables trade with other people anywhere he goes or transacts.
Exchange Act.
CONCEPT OF NEGOTIABILITY
In the United States there was, prior to the drafting of the Negotiable Instrument
Law, a codification of the law in some states but there was nothing looking Sebastian: An instrument is negotiable when it transfers from one hand to
towards a codification for all the states of the Union. The earliest codification for another. It is not just a mere transfer but a deliberate and with intention to give
an individual state is found in the California Code of 1372. or transfer. Where there is proper negotiation, the person who holds it as a
consequence of delivery is called a “holder”. Therefore, negotiation is the transfer
At a conference of commissioners from nineteen states held in 1895, a resolution of a negotiable instrument for the purpose of making the transferee the holder of
was adopted requesting the committee on commercial laws to procure a draft bill the negotiable instrument.
relating to commercial paper based on the Bill of Exchange Act. In 1896, the
draft, as amended, was adopted by the conference and recommended for general Non-Negotiable Instrument Negotiable Instrument
enactment by the state Legislatures. to specified person to order or bearer
transfer by assignment transfer by negotiation
Campos: The use of negotiable instruments originated from the merchants and Transferee is assignee. Assignee is Transferee is holder. Unlike an
traders of the Middle Ages, more specifically among the Florentine and Venetian similar to a subrogee. Therefore, assignee, a holder is in due course is
merchants along the Adriatic Sea. The bill of exchange was devised to facilitate assignee only acquires the totality of free from all personal defenses
the contract of cambium and to avoid the risks of transporting money. the right of the transferor. available among the parties. Thus,
one of the big advantages of a holder
Sebastian: The Negotiable Instrument Law is a compilation of commercial is that he can get rights better or
practice developed in Europe. It was necessary for traders to come up with a superior to those rights of his
substitute medium of exchange because trade was flourishing. There was hardly immediate transferor.
enough government coins to sustain the production of mint. In those days, bank
notes (or paper bills) were non-existent. Due to scarcity of coins, promissory Assignability Negotiability
notes and bills of exchange came about. more comprehensive term and pertains only to a special class of
pertains to contracts in general contracts – negotiable instruments
This compilation of rules have evolved from ancient trading practices. In 1882, subject to the defenses obtaining takes it free from personal defenses
UK enacted the Bill of Exchange Act. On or about that time, the US also codified a among the original parties available among the parties
verbatim reproduction of the Uniform Negotiable Instrument Law. it is necessary to allege and prove consideration is presumed and need
consideration to maintain an action not be alleged and proved
The Americans brought the Negotiable Instrument Law to the Philippines which on a common law instrument
we copied verbatim. It has not been amended since 1911.
Indorser is not liable on his
indorsement unless there be
PURPOSE
presentation for payment at maturity
and prompt notice of dishonor in case
Agbayani:
of dishonor
1) To produce uniformity in the laws of the different states upon this important
assignor in good faith does not A general indorser is secondarily
subject, so that the citizens of each state might know the rules which would be
warrant the solvency of the debtor liable for any cause for which the
applied on their notes, checks and other negotiable paper in every other state in
LEX SOCIETAS 1
VERITAS. VNITAS. VIRTVS.
unless it has been expressly stipulated party primarily liable on a negotiable Campos: The Negotiable Instruments Law divides negotiable instruments into
or unless the insolvency was prior to instrument does not or cannot pay. two main groups: the promissory note and the bill of exchange. The first
the assignment and of common He warrants the solvency of the evidences a promise to pay money, while the bill of exchange is an order made by
knowledge person primarily liable. The qualified one person to another to pay money to a third person. The most commonly used
indorser and the person negotiating for of bill of exchange is the check, wherein the one who issued it order his bank
by mere delivery have limited to pay the person named on the check. A check is always payable on demand.
secondary liability.
Promissory Note – A negotiable promissory note is an unconditional promise
There are two contracts in a negotiable instrument. First there is the issuance of a in writing made by one person to another, signed by the maker, engaging to pay
negotiable instrument and the second is the underlying transaction. The on demand or at a fixe or determinable future time, a sum certain in money to
underlying transaction is the reason for the issuance of the negotiable order or to bearer. (Sec. 184)
instrument. However, in transferring the negotiable instrument, you only look at
the issuance of the negotiable instrument and there is no need to consider the Agbayani: A promissory note is essentially a promise in writing to pay on
underlying transaction. demand or at a fixed or determinable future time a sum certain in money.
APPLICATION OF THE LAW Non-Negotiable Negotiable

I promise to pay X P 100.00 on I promise to pay X, or order P 100.00
Ang Tiong v. Ting – Having arisen from a bank check which indisputably a September 1, 2012. on September 1, 2012.
negotiable instrument, the present case is, therefore, in so far as the indorsee is (sgd.) (sgd.)
concerned vis-à-vis the indorser, governed by the Negotiable Instrument law (see Maker Maker
Secs. 1 and 185). Article 2071 of the new Civil Code is hereby completely In this note the person paid is This note can pass from hand to hand;
irrelevant and can have no application whatsoever. specified. and was intended to circulate. This
note can be negotiated by X prior to
Agbayani: An instrument which does not comply with the requirement of the due date. X may indorse this note by
Negotiable Instrument Law is a simple contract in writing and is merely an writing “Pay to Y or order. (sgd.) X”.
evidence of such intangible rights as may have been created by the assent of the
parties. If, however, it conforms to the requirements of the Negotiable Campos: There are usually two parties to a promissory note: the promissor,
Instruments Law, the instrument is itself the contract and not just a mere called the maker; and the payee, the person to whom the promise to pay is made.
evidence of rights. It is a mercantile specialty.
Bills of Exchange – A bill of exchange is an unconditional order in writing
Campos: The Negotiable Instruments law applies only to negotiable addressed by one person to another signed by the person giving it, requiring the
instruments, to those instruments which conform with the requisites laid down person to whom it is addressed to pay on demand or at a fixed or determinable
by section one of the law. Should any of said requisites be absent the instrument future time a sum certain in money to order or to bearer. (Sec. 126)
would not be negotiable and would therefore not governed by the Negotiable
Instruments Law but by general law on contracts. Agbayani: A bill of exchange is essentially an order or a command in writing
addressed to someone requiring him to pay a sum certain in money. (Agbayani)
Sebastian: For the Negotiable Instrument Law to apply, the instrument must
comply with the requisites under Section 1. Otherwise, the Civil Code shall apply. Campos: The person who gives the order to pay in a bill of exchange is referred
to as the drawer; the addressee of the order is the drawee, and the person to
TYPES OF NEGOTIABLE INSTRUMENTS whom the payment to be made is the payee.
Agbayani: The Negotiable Instruments Law deals with three kinds of Sebastian: A bill of exchange is similar to a promissory note with one
negotiable instruments, namely: (1) promissory notes, (2) bills of exchange, and difference, it is an order to pay. The function of a bill of exchange is that it is a
(3) checks, which are also bills of exchange, but of a special kind. substitute for money. It allows making payment without even touching the actual
money.
LEX SOCIETAS 2
Checks – A check is a bill of exchange drawn on a bank payable on demand. GENERAL PROVISIONS
(Sec. 185)
Sec. 190. Short title. - This Act shall be known as the Negotiable
Sebastian: A check is only one of the many types of bills of exchange. Rules Instruments Law.
governing bills of exchange are slightly modified when we talk of checks.
Sec. 191. Definition and meaning of terms. - In this Act, unless the
Another type of bill of exchange is a draft which is exactly like a check; however, contract otherwise requires:
it need not be directed to a bank. It is an order to pay given to a person which is "Acceptance" means an acceptance completed by delivery or
not necessarily a bank. Therefore, a check is a special draft which is directed to a notification;
bank.
"Action" includes counterclaim and set-off;
DISTINCTIONS AMONG VARIOUS TYPES OF INSTRUMENTS
"Bank" includes any person or association of persons carrying on
Bill of Exchange Promissory Note the business of banking, whether incorporated or not;
an order or command to pay a promise to pay
an order not because it is payable to a promissory note does not become a "Bearer" means the person in possession of a bill or note which is
order but because, by its terms, it bill by reason that it is payable to order payable to bearer;
orders or commands the drawee to pay
money to a payee or bearer "Bill" means bill of exchange, and "note" means negotiable
promissory note;
Bill of Exchange Checks
may not be drawn against a bank always drawn upon a bank or banker "Delivery" means transfer of possession, actual or constructive,
may be payable on demand or at a always payable on demand from one person to another;
fixed or determinable future time
must be presented for acceptance not needed to be presented for "Holder" means the payee or indorsee of a bill or note who is in
acceptance possession of it, or the bearer thereof;
need not drawn on a deposit drawn on a deposit
death of a drawer of an ordinary bill of death of a drawer of a check, with "Indorsement" means an indorsement completed by delivery;
exchange does not revoke the authority knowledge by the banks, revokes the
of the banker to pay authority of the banker to pay "Instrument" means negotiable instrument;
may be presented for payment within a must be presented for payment within
reasonable time after its last a reasonable time after its issue "Issue" means the first delivery of the instrument, complete in
negotiation form, to a person who takes it as a holder;
CONCEPT OF REAL AND PERSONAL DEFENSES "Person" includes a body of persons, whether incorporated or not;
Sebastian: A real defense is one raised against all persons, including holders in "Value" means valuable consideration;
due course. While a personal defense is one that can be raised except against a
holder in due course. "Written" includes printed, and "writing" includes print.
Sec. 192. Persons primarily liable on instrument. - The person

"primarily" liable on an instrument is the person who, by the terms
of the instrument, is absolutely required to pay the same. All other
parties are "secondarily" liable.
LEX SOCIETAS 3
Sec. 193. Reasonable time, what constitutes. - In determining what is FORMS OF NEGOTIABLE INSTRUMENTS
a "reasonable time" regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such Sec. 1. Form of negotiable instruments. - An instrument to be
instruments, and the facts of the particular case. negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
Sec. 194. Time, how computed; when last day falls on holiday. - (b) Must contain an unconditional promise or order to pay a sum
Where the day, or the last day for doing any act herein required or certain in money;
permitted to be done falls on a Sunday or on a holiday, the act may be (c) Must be payable on demand, or at a fixed or determinable future
done on the next succeeding secular or business day. time;
(d) Must be payable to order or to bearer; and
Sec. 195. Application of Act. - The provisions of this Act do not apply (e) Where the instrument is addressed to a drawee, he must be
to negotiable instruments made and delivered prior to the taking named or otherwise indicated therein with reasonable
effect hereof. certainty.
Sec. 196. Cases not provided for in Act. - Any case not provided for in Promissory
Bill of Exchange
this Act shall be governed by the provisions of existing legislation or Note
in default thereof, by the rules of the law merchant. 1) it must be in 1) it must be in writing and signed by the drawer
writing and 2) it must contain an unconditional order to pay a sum
Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent signed by the certain in money
with this Act are hereby repealed. maker 3) it must be payable on demand, or at a fixed or
2) it must determinable future time
Sec. 198. Time when Act takes effect. - This Act shall take effect ninety contain an 4) it must be payable to order or bearer
days after its publication in the Official Gazette of the Philippine unconditional 5) the drawee must be named or otherwise indicated
Islands shall have been completed. promise to with reasonable certainty
pay a sum
certain in Agbayani: The name of the person on whom a bill is
money drawn should appear on its face. Otherwise the
3) it must be instrument would not be negotiable. But under Section 14,
payable on the drawee’s name may be omitted and be filled in under
demand, or at implied authority like any other blank. And, an acceptance
a fixed or may supply the omission of a designation.
determinable
future time Sebastain: If the instrument is addressed to a drawee,
4) it must be he must be named or otherwise indicated with reasonable
payable to certaintly. This suggests that there are two types of
order or to negotiable instruments. This requirement is only applied
bearer in bills of exchange where there is a drawee.
The authority to pay is different from a direct instruction

to pay. Therefore, “I authorize (drawee) to pay…” is a non-
negotiable instrument.
LEX SOCIETAS 4
Agbayani: The formalities required are essential for the security of mercantile must prove that what is written is intended as a signature of the person sought to
transactions. They distinguish the negotiable instrument from the ordinary non- be charged.
transferrable written contract.
The name may be printed, typewritten, stamped, engraved, photographed or
The negotiability of an instrument is to be determined: (1) by Section 1; (2) by lithographed. But in such case, it must be shown to have been adopted and used
considering the whole of the instrument; and (3) by what appears on the face of by the party as his signature.
the instrument and not elsewhere. In other words, to determine whether an
instrument is negotiable or not, only the instrument itself, and no other, must be Campos: The signature is binding whether it is in one’s handwriting, or printed,
examined and compared with the requirements of Section 1. If it appears on the engraved, lithographed or photographed, so long as it is intended or adopted as
instrument that it lacks one of the requirements, it is not negotiable. The the signature of the signer or made with his authority. It will be valid and binding
requirement lacking cannot be supplied by using a separate instrument in which so long as the intention to make the instrument the maker’s or drawer’s is shown.
that requirement which is lacking appears. The maker of a note or the drawer of a bill must sign the instrument and his
signature is usually written at the lower right hand corner thereof. The drawee’s
Campos: The fact that an instrument does not meet the foregoing requisites will name is usually written on the lower left hand corner, although in checks the
not affect its validity, the only consequence being that it will be governed not by bank’s name sometimes appears across the top. The payee and the successive
the Negotiable Instruments Law but by the general law on contracts. indorsees negotiate the instrument by signing on the back. As long as the parties
to the bill or note comply with these long established and recognized customs, it
Sebastian: In civil law, form is not an essential ingredient for the validity of a would be clear in what capacity the parties signed. However, once a party to an
contract. However, in a negotiable instrument, which is also a contract, form is instrument deviates from the commercial usage with respect to the place of
an essential ingredient for its negotiability. signature, and it is not clear from the instrument in what capacity he signs,
ambiguity arises. The law solves this by considering such a person as an indorser,
MUST BE IN WRITING and not as a maker or drawer.
Agbayani: In order to be negotiable, there must be a writing of some kind, for, Sebastian: Identification of the maker or drawer is not an element of
if the instrument were not in writing, there would be nothing to be negotiated negotiability. Thus, only the customary signature, at least, of the maker or drawer
from hand to hand. is necessary.
Campos: “In writing” includes “print” and it includes not only what is written Garcia v Lacuesta (90 Phil 489) – Where a cross appearing in a document is
with pen or pencil, but also what has been typed. not the usual signature of a person, that cross cannot be considered as a valid
signature.
Sebastian: If the instrument is not in writing, there would be nothing to be
negotiated or passed from hand to hand. Delivery is necessary; no delivery, no Sebastian: An electronic signature is equivalent to the functional signature,
issuance. Therefore, the medium of the negotiable instrument should be subject to the precautions set by law.
transferrable from hand to hand. Thus, it is only logical that the negotiable
instrument is in writing in such a way that it can be transferrable from hand to Legal Recognition of Electronic Documents. – Electronic documents shall have
hand. the legal effect, validity or enforceability as any other document or legal writing,
and -
The reason for this requisite is not limited to the presentation of an instrument (a) Where the law requires a document to be in writing, that requirement is
that can be passed from hand to hand. The drawer/maker would also want met by an electronic document if the said electronic document
evidence of the note or the bill or evidence of an indorsement. maintains its integrity and reliability and can be authenticated so as to
be usable for subsequent reference, in that -
SIGNATURE (i) The electronic document has remained complete and unaltered,
apart from the addition of any endorsement and any
Agbayani: The full name may be written. At least, the surname should appear authorized change, or any change which arises in the normal
and, generally, the signature usually is by writing the signers’ name. But it may course of communication, storage and display; and
consist of initials or even numbers. But, where the name is not signed, the holder (ii) The electronic document is reliable in the light of the purpose for
LEX SOCIETAS 5
which it was generated and in the light of all the relevant signing or approving the electronic document unless the person relying
circumstances. on the electronically signed electronic document knows or has notice of
(b) Paragraph (a) applies whether the requirement therein is in the form of an defects in or unreliability of the signature or reliance on the electronic
obligation or whether the law simply provides consequences for the signature is not reasonable under the circumstances. (Sec. 9, Electronic
document not being presented or retained in its original form. Commerce Act of 2000)
(c) Where the law requires that a document be presented or retained in its
original form, that requirement is met by an electronic document if - Agbayani: The signature of the maker or drawer is usually written at the
(i) There exists a reliable assurance as to the integrity of the bottom right hand corner. The location of the signature is not material. What is
document from the time when it was first generated in its final important is that it appears therefrom that the person intended to make it his
form; and own.
(ii) That document is capable of being displayed to the person to
whom it is to be presented: Provided, That no provision of this PROMISE TO PAY AND ORDER TO PAY
Act shall apply to vary any and all requirements of existing laws
on formalities required in the execution of documents for their Agbayani:
validity.
Promise to Pay Order to Pay
For evidentiary purposes, an electronic document shall be the functional The promise to pay must be on the instrument A bill is an instrument
equivalent of a written document under existing laws. itself, although it is not necessary to use the word demanding a right. It is,
“promise.” It is enough (1) that the words of however, not necessary
This Act does not modify any statutory rule relating to the admissibility of equivalent meaning are used, or (2) that the that the word “order” be
electronic data messages or electronic documents, except the rules relating to promise is implied from promissory words used. Any words which
authentication and best evidence. (Sec. 7, Electronic Commerce Act of 2000) contained in the instrument. But a promise to pay are equivalent to an
cannot be implied from the mere existence of a order or which show the
Legal Recognition of Electronic Signatures. - An electronic signature on the debt. drawer’s will that the
electronic document shall be equivalent to the signature of a person on a written money should be paid,
document if that signature is proved by showing that a prescribed procedure, not Instead of promise, the words “agree,” “will pay,” are sufficient to make the
alterable by the parties interested in the electronic document, existed under “shall pay,” “good,” “due” and the like may be used. instrument a bill of
which - exchange.
(a) A method is used to identify the party sought to be bound and toindicate A mere admission that the debt is due is not
said party’s access to the electronic document necessary for his consent sufficient because such admission it only evidences A mere authorization to
or approval through the electronic signature; the existence of a debt. pay or request to pay is
(b) Said method is reliable and appropriate for the purpose for which the not negotiable because it
electronic document was generated or communicated, in the light of all In addition to the acknowledgement of gives a discretion to the
the circumstances, including any relevant agreement; indebtedness, there must be other words drawee to pay or not to
(c) It is necessary for the party sought to be bound, in order to proceed further expressing the intention to pay or from which may pay.
with the transaction, to have executed or provided the electronic be implied such as an intention to pay.
signature; and
(d) The other party is authorized and enabled to verify the electronic signature The words “order” and “bearer” are usually referred
and to make the decision to proceed with the transaction authenticated to as words of negotiability. However, they may also
by the same. (Sec. 8, Electronic Commerce Act of 2000) be used to imply a promise.
Presumption Relating to Electronic Signatures. - In any proceedings involving Campos: The instrument must contain a promise or an order to pay. Mere
an electronic signature, it shall be presumed that - acknowledgement of a debt does not constitute a promise. There should be an
(a) The electronic signature is the signature of the person to whom it express promise on the face of the instrument to pay the money. However, the
correlates; and
(b) The electronic signature was affixed by that person with the intention of
LEX SOCIETAS 6
word “promise” is not absolutely necessary. Any expression equivalent to a money if the holder so wishes. Thus, an instrument is not negotiable if payable in
promise is sufficient. personal property like merchandise, or shares of stock, or even gold.
In a bill of exchange, words which are equivalent to an order are sufficient. A If a contract contains a stipulation that payment is to be made in a currency other
mere request or authority to pay does not constitute an order. The instrument is than Philippine currency, such stipulation will be ineffective and the obligation
by its nature demanding a right. can be discharged only in legal tender. But the negotiability of such instrument
will not be affected by such stipulation.
Sebastian: A promise to pay is a written commitment of the maker to pay a sum
of money to the payee or payee’s order. It constitutes an obligation. On the other An instrument which contains an order or promise to do an act in addition to the
hand, order to pay is a directive to pay/settle an obligation but, in fact, it instructs payment of money is not negotiable. This rule helps to retain simplicity of form
another person to make the payment. The bill makes an order for the settlement which is absolutely necessary to the free use of negotiable instrument in the place
of an obligation. In this case, the drawee of the bill is the debtor to the drawer. of money. But if the order or promise gives the holder an election to require
something to be done in lieu of money, an instrument otherwise negotiable would
Under the Civil Code, creditors are not required to accept payments from third not be affected thereby.
parties. Under the Negotiable Instruments Law, creditors may be required.
Sebastian: “a sum certain” is a definite amount. It must definite because
CONCEPT OF A SUM CERTAIN IN MONEY negotiable instruments are substitutes for money. Thus, it must be for a specified
amount of money.
Agbayani: The amount of money to be paid must be determinable by
inspection and must be stated plainly on the phase of the instrument, and, like One cannot draw a negotiable instrument that is not payable in money.
the denomination of money, must be stated in the body of the instrument.
A negotiable instrument must be equal to money, not a commodity.
A note or bill, if it is to be negotiable, cannot be made payable in goods, wares, or
merchandise, or in property, or in labor or services. So also, an instrument is not However, where an instrument entitles holder to demand something else in lieu
negotiable if it is made payable in bonds, corporate stock, state paper, scrip, of money, negotiable character is not affected because it remains to be payable in
checks, foreign bills. money. In this case, the conversion should not have been made by the obligor.
Once conversion is made, the instrument ceases to be negotiable.
The real reason for the requirement that negotiable instruments must be payable
in money is obviously is that money is the one standard of value in actual Sec. 2. What constitutes certainty as to sum. - The sum payable is a
business. All other commodities may rise and fall in value but in theory, at least, sum certain within the meaning of this Act, although it is to be paid:
money always remain measures this rise and fall and remains the same. (a) with interest; or
(b) by stated installments; or
Campos: The amount payable must be certain. An instrument cannot function (c) by stated installments, with a provision that, upon default in
properly as a substitute for money unless the amount for which it stands for is payment of any installment or of interest, the whole shall
specified and definite. An agreement to pay interest does not however render the become due; or
sum uncertain. The exact amount thereof can be computed without looking (d) with exchange, whether at a fixed rate or at the current rate; or
beyond the instrument. (e) with costs of collection or an attorney's fee, in case payment
shall not be made at maturity.
The sum is certain although it is payable in installments as long as the latter are
“stated” – (1) the amount of each installment and (2) due date of each Payment of Interest and the Usury Law (Act 2655)
installment. Neither will an acceleration provision based on default render the
sum uncertain. Agbayani: The addition of interest does not make the sum uncertain because,
by mere mathematical computation, the amount to be paid on the maturity is
In order to be negotiable, an instrument must be payable in money. Since ascertainable.
negotiable instruments are intended to be substitutes for money, to properly
perform such function they must necessarily be capable of being transformed into
LEX SOCIETAS 7
Sebastian: Payment of interest does not make the sum uncertain because it can In Negotiable Instruments Law, what matters in the value of money, not the
be calculated arithmetically. certainty of amount. Thus, fluctuation of the exchange rate does not make the
sum represented uncertain.
Default Interest
Unlike the Civil Code, in Negotiable Instruments Law, you can write an
Interest due shall earn legal interest from the time it is judicially instrument ordering to pay a sum in foreign currency. Enforcement of such
demanded, although the obligation may be silent upon this point. currency should also be paid in foreign currency. If the drawer cannot produce
(Art. 2212, Civil Code) the foreign currency, the instrument is considered to be dishonored/defaulted.
But if the currency is not available, it can be converted to legal tender.
Agbayani: When interest is stipulated but not specified, the interest shall be the
legal rate, which is 12% for loans and forbearance of money. Where interest is not After the Uniform Currency Law, all foreign currency obligations are
stipulated, the legal interest will be paid when the debtor incurs delay. automatically converted to legal tender. But this was repealed by RA 8183.
Therefore, undertaking to pay an obligation in foreign currency, you can be made
Sebastian: If no interest is specified in the instrument, civil law will apply. to pay in foreign currency with only a single defense available – stipulation to pay
in a currency that is not locally available.
Currency of Payment
With Exchange
Agbayani: A bill or note may be made payable in denominations of foreign
money, currency or coins. However, the instrument should express the specific Agbayani: The sum payable is a sum certain even if it is to be paid with
denomination of money when it is payable in the money of a foreign country in exchange, whether at a fixed rate or at the current rate because the rate of
order that the courts may be able to ascertain its equivalent value; otherwise, it is exchange between two places at a particular date is a matter of common
not negotiable. commercial knowledge, or at least easily ascertained by any one so that the
parties can always, without difficulty, ascertain the exact amount necessary to
Foreign Currency Uniform Currency Act discharge the paper. Exchange is the difference in value of the same amount of
money in different countries. The exchange may be at the current rate or at a
All monetary obligations shall be settled in the Philippine fixed rate. The provision on payment with exchange naturally applies only to
currency which is legal tender in the Philippines. However, the instruments drawn in one country and payable in another. Where an instrument
parties may agree that the obligation or transaction shall be is drawn and payable in the same country, there can be no exchange, so a
settled in any other currency at the time of payment. (R. A. 8183) provision for payment of exchange may be disregarded.
Legal Tender Sebastian: A promise to pay in one currency but the medium of payment is
another does not make the amount payable uncertain because, at any point, you
The payment of debts in money shall be made in the currency can determine how much you will pay simply by computing for it.
stipulated, and if it is not possible to deliver such currency, then
in the currency which is legal tender in the Philippines. (Art. 1249, Effect of Installment Payments
Civil Code)
Agbayani: The sum payable is a sum certain within the meaning of this act,
Sebastian: Payment under the Negotiable Instruments Law can be in any legal although it is to be paid by stated installments. Consequently, an instrument
currency, unlike in the Civil Code where monetary obligations may only be settled containing such a stipulation would not thereby render non-negotiable. But the
by paying in legal tender. installments: (1) must be stated and (2) the maturity of each installment must be
fixed or determinable. This last qualification is required in order to comply with
A negotiable instrument can be denominated in any currency, although the the requisite that the instrument, if not payable on demand, must be payable at a
fulfillment of the instrument can be frustrated. Nonetheless, the lack of source of fixed or determinable future time.
currency is not a ground for the negotiable instrument to lose its negotiability.
LEX SOCIETAS 8
An acceleration clause is a provision that upon default in payment of any But in the absence of stipulation, attorney’s fees and expenses other than judicial
installment or of interest, the whole shall become due. An instrument containing costs, cannot be recovered, subject to the exceptions provided in the law.
an acceleration clause would not render it non-negotiable.
Legal Tender
Sebastian: Payment in installments does not destroy negotiability of the
instrument because certainty is not destroyed. However, when writing an The delivery of promissory notes payable to order, or bills of
installment note, the installment schedule should clearly be stated. When the exchange or other mercantile documents shall produce the effect of
installment is to paid and how much the installment should be specified. payment only when they have been cashed, or when through the fault
of the creditor they have been impaired.
Installments do not need to be equal. It can be in various amounts per
installments. What is important is that there is no doubt on the due date and In the meantime, the action derived from the original obligation shall
amount due on each installment and the total amount due at the end. be held in the abeyance. (Art. 1249, Civil Code)
Heffron: When the installment payments should start should also be specified. Agbayani: Legal tender is that kind of money which the law compels a creditor
to accept in payment of his debt when tendered by the debtor in the right
Effect of Payment of Unliquidated Amounts amount.
A check, whether a manager’s check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a valid tender of payment and may be
Payment of Attorney’s Fees refused receipt by the obligee or creditor. The obligation is not extinguished and
remains suspended until payment by commercial document is actually realized.
Agbayani: An instrument may stipulate that cost of collection and/or attorney’s
fees shall be paid by the debtor in addition to the principal in case the instrument In the absence of an agreement, either express or implied, payment means the
shall not be paid at maturity. The legality of such a stipulation is expressly discharge of a debt or obligation in money and unless parties so agree, a debtor
recognized in Section 2, and impliedly in the New Civil Code. Such a stipulation is has no right, except at his own peril, to substitute something in lieu of cash as
not void as usurious, even when added to a contract for the payment of the medium of payment of his debt.
highest rate of interest permissible. It may, of course, be made to conceal usury.
But that is a matter of proof to be determined in each case. The purpose of a Even treasury certificates are not legal tender except for those payment of taxes
stipulation in the note for reasonable attorney’s fee is to safeguard the lender and public debts.
against future loss or damage by being compelled to retain counsel to institute
judicial proceedings to collect his debt. The validity and negotiable character of an instrument are not affected by the fact
that it designates a particular kind of current money in which payment is to be
Although such stipulation will make the sum payable after maturity uncertain, it made. But where the instrument is made payable in the paper or currency of a
will not affect the certainty of the sum payable at maturity and, therefore will not particular bank, specifically and absolutely, and without reference to the currency
affect negotiability of the instrument in which it is stipulated. or value of the paper, it is held not to be for the payment of money and is not
negotiable.
After the date of maturity, the instrument will no longer be negotiable, in the
sense that any transferee acquiring it would not be a holder in due course, as he UNCONDITIONALITY OF PROMISE OR ORDER TO PAY
would acquire the instrument after it is overdue. Since the tranferee would not be
a holder in due course, he would hold the instrument subject to defenses, as if it Agbayani: It is not enough that there be a promise or an order. The promise or
were non-negotiable. Consequently, even if the amount to be paid after the date order must also be unconditional or absolute. This means that it must not be
of maturity becomes uncertain by the payment of attorney’s fees and costs of subject to a condition. A condition is (1) a future event that may or may not
collection, the negotiability will not be impaired as the uncertainty occurs after happen, or (2) a past event which is unknown to the parties. It is distinguished
maturity. from an even that is certain to happen, even though the time of its happening is
not known. Thus, an instrument subject to an event that is certain to happen is
negotiable.
LEX SOCIETAS 9
There are two cases: (1) the drawee There is only one act, namely, (1) the
Campos: As a rule, unless the reference to the fund clearly indicates an pays the payee from his own funds; drawee pays directly from the
instrument that such fund alone should be the source of payment, courts usually afterwards (2) the drawee pays particular fund indicated.
decide in favor of negotiability. Neither does the recital of the transaction for himself from the particular fund
which the instrument was issued make the promise or order conditional. The indicated.
latter is not expressly qualified by such transaction. Information is merely given
that the instrument was issued in connection with the transaction. Where the payment to the payee is directly from the funds indicated, the payment
is subject to the condition that the funds indicated are sufficient. But the funds
The fact that the condition appearing on the instrument has been fulfilled will not indicated may or may not by sufficient. In other words, when a particular fund is
convert it into a negotiable one. indicated out of which the payment is to be directly made, the order would be
conditional. On the other hand, where the fund is merely for purpose of
Sebastian: An instrument is a substitute for money and must, therefore, subsequent reimbursement, the order or promise is not subject to the sufficiency
operate like money. of the funds. The order or promise is upon the general credit of the drawee or
maker. It may, however, be argued that, if the drawer has no money in the hands
A condition is a future or uncertain event, or a past event unknown to the parties of the drawee out of which reimbursement could be made, the drawee may refuse
which could either give rise to an obligation or it could terminate/resolve an to accept or pay the bill. This is true. But whether a bill of exchange is negotiable
obligation. or not does not depend upon the drawee’s willingness and ability to pay. It
depends upon the tenor of the terms of the order. If the bill absolutely requires
The promise/order to pay can never be conditional be cause if there is a the drawee to pay, then the order in the bill is unconditional.
condition, the instrument may or may not become a substitute for money. Thus,
it is no longer negotiable. If a promise to pay is unconditional, it means that there Sebastian: Reimbursement does not affect negotiability because it has nothing
are no “ifs” or “buts”. A note is an outright and direct promise to pay. to do with the note. Reimbursement here refers to whoever pays the holder of the
instrument (i.e. in a bill the drawer instructs the drawee to pay the payee). By
Sec. 3. When promise is unconditional. - An unqualified order or simply identifying the source of reimbursement, the instrument is still negotiable
promise to pay is unconditional within the meaning of this Act though because the existence of the source of reimbursement is not conditional. The
coupled with: instrument is still negotiable but the lack of funds will mean that the drawee will
(a) An indication of a particular fund out of which reimbursement refuse payment.
is to be made or a particular account to be debited with the
amount; or But if the instrument stipulates a specific account as source of payment, this will
(b) A statement of the transaction which gives rise to the be non-negotiable because the instrument becomes conditional, i.e. the existence
instrument. of the account or its sufficiency is the condition. Meaning, the instrument will
only be paid if the account exists or if it is sufficiently funded.
But an order or promise to pay out of a particular fund is not
unconditional. Van Tassel v. McGrail –
Source of Funding or Reimbursement Agbayani: After making a note which was negotiable in form, the parties signed
the following written agreement on the same paper: “It is herein provided and
Agbayani: An unqualified order or promise to pay is unconditional though agreed that the above note is to be paid from the proceeds obtained from the sale
coupled with an indication of a particular fund out of which reimbursement is to of lots in the town of Vanors, and that one-forth of the proceeds of al sales of the
be made. But an order or promise to pay out of a particular fund is conditional. In lots are to be applied to the payment of said note and interest and until the same
the first case, the particular fund indicated is not the direct source of payment. It is paid.” The promise to pay is unconditional.
is only the source of reimbursement. In the second case, the particular fund
indicated is the direct source of payment. Sebastian: The US Court said that the promise to pay is unconditional because
the provision was not considered to be part of the note which had a separate
Fund for signature.
Fund for Payment
Reimbursement
LEX SOCIETAS 10
Keck v. Yakima Savings –
Sebastian: To be negotiable, there must be a definite day on which one will be
Agbayani: A country bond payable “out of Yakima County Road Refunding able to collect on an instrument. A determinable future time is expressed under
Bond Fund and secured to be paid by taxes and assessments,” etc., was held (a), (b) and (c).
negotiable because it was not restricted to the road fund.
Ideally, a negotiable instrument should be payable on a fixed date but it may be
Sebastian: Theoretically, the security, e.g. taxes, will never run out of money. payable at a determinable future time. The test whether it is payable at a
However, to be safe, the instrument in this case is non-negotiable because the determinable future time is when the time to pay is ascertainable without the
instrument specified the source of payment. need to negotiable further with the maker as to the date.
Particular Account to be Debited Sec. 4. Determinable future time; what constitutes. - An instrument
is payable at a determinable future time, within the meaning of this
Agbayani: An instrument containing an indication of a particular account to be Act, which is expressed to be payable:
debited with the account is not rendered non-negotiable because the instrument (a) At a fixed period after date or sight; or
is to be paid first and, afterwards, the particular account indicated will be (b) On or before a fixed or determinable future time specified
debited. therein; or
(c) On or at a fixed period after the occurrence of a specified event
Sebastian: Even if reimbursement of the payment is to be debited from a which is certain to happen, though the time of happening be
particular account, negotiability is not impaired because “debiting is merely the uncertain.
source of payment.”
An instrument payable upon a contingency is not negotiable, and the
Statement of Underlying Transaction happening of the event does not cure the defect.
Agbayani: As a rule, instruments are not issued without any transaction upon Payable After Date or After Sight
which they are based. However, the mere fact that a transaction gives rise to the
instrument is stated in the instrument will not make the promise or order Agbayani: After sight means after the drawee has seen the instrument upon
conditional. But where the promise or order is made subject to the terms and presentation for acceptance. If the instrument is a promissory note, the date of
conditions of the transaction stated, then, the instrument is rendered non- maturity is determined by counting the period from the date of its issuance.
negotiable. To destroy negotiability of the instrument, the reference to the
collateral contract must show that the obligation to pay is burdened with the Sebastian: After sight refers to a bill of exchange. Presentment is necessary
condition of the contract. because it is essential to check if the signature of the maker/drawer is authentic
and the drawee has every right to scertain wether or not the order to pay is
Sebastian: A note that tells the maker is a debtor and the payee is a creditor genuine. From the time the drawee sees the instrument, he can either accept the
does or that the maker makes a promise to pay based on a loan agreement does instrument or reject it. By accepting it, the order of the maker was accepted and
not destroy its negotiability. becomes the party liable on the bill of exchange. The drawee is not a party to the
transaction until the instrument is accepted.
CONCEPT OF FUTURE OR DETERMINABLE FUTURE TIME
A usance draft is an instrument payable at a fixed period after sight. This is used
Agbayani: An instrument, to be negotiable, must be payable either (1) on in banks.
demand or (2) at a fixed or determinable future time. If it is not either, the
instrument is not negotiable. A bank or drawee is not liable to an instrument until it accepts it. A bank may
dishonor an instrument for insufficient funds but it may still honor it, resulting in
Campos: The requirement as to certainty of time of payment is for the purpose an overdraft facility.
of informing the holder of the instrument of the date when he may enforce the
payment thereof. Before such time, he cannot compel the maker of the note or On or Before a Specific Date
the acceptor of the bill to pay, unless there is a valid acceleration provision.
LEX SOCIETAS 11
Sebastian: The phrase “on or before” gives the person liable a chance to pay on
any other day before the due date. Payment date is still certain because it merely Security Bank of Sioux City v. Gunderson – The promissory note in suit
stipulates the debtor has the option to make a pre-payment at any time before the contains the following language:
absolute due date.
“The makers, indorsers, guarantors of this note, and the sureties hereon severally
Rehabilitation Finance Corporation v. CA – At the outset, it should be waive presentment for payment, protest and notice of dishonor, and consent that
noted that the makers of the promissory note quoted above promised to pay the the time of its payment may be extended without notice, all defenses on the
obligation evidenced thereby “on or before October 31, 1951.” Although the full ground of any extension of time of payment being hereby expressly waived.”
amount of said obligation was not demandable prior to October 31, 1951, in view
of the provision of the note relative to the payment in ten (10) annual In First National Bank of Pomeroy v. Buttery, the Court held that this phrase
installments, it is clear, therefore, that the makers or debtors were entitled to does not express an agreement to extend time, but leaves the matter of extension
make a complete settlement of the obligation at any time before said date. optional with the holder, and not obligatory upon him, and the note of its face
fixes the time when it becomes due. The obvious purpose of the provision taken
Fixed Period After the Occurrence of a Specified Event as a whole was merely to relieve the holder of the paper from the burdens made
necessary by the rigid requirements of the mercantile law in order to secure the
Sebastian: The phrase “on or after” means it cannot be on or before. The event continued liability of the indorsers and sureties upon the paper. Therefore what
described herein is that it will certainly happen but you just don’t know when (i.e. was meant by the stipulation as to the extension of time was simply that in case
death). the holder and the maker should agree upon an extension, the sureties and
indorsers should not be discharged. The holder and maker of any note may at
Extension of Due Date anytime agree upon an extension; therefore the fact that they have that right does
not affect the negotiability of the paper.
Sebastian: By simply not making a demand for the presentment of the
negotiable instrument, the instrument is no longer negotiable in its full Sebastian: Time extension does not destroy negotiability provided that it is at
commercial sense because the holder can no longer be a holder in due course the option of the holder/creditor. What destroys negotiability is the option of
since there is already a default (i.e. the note is already past due). extension being given to the debtor because the certainty of the date is made
uncertain.
State Bank of Halstad v. Bilstad – The notes in suit provided for an
extension of time for one year on the condition therein named. The time at which Effect of Acceleration Clause and Material Adverse Change Clause
they eventually become due was therefore fixed and certain. The only uncertainty (MAC)
as to the time or fact of payment was whether they should be paid at a particular
time in one year, or at the date named in the next year. Agbayani: There are certain notes containing acceleration provisions. These
provisions (1) make it possible for the maker to pay the instrument at an earlier
Section 3060-a4 expressly says that a note that is payable at a determinable date or (2) make it possible the holder to require payment of the instrument at an
future time, or that is payable on or before a fixed period after the occurrence of a earlier date.
specified event, which is certain to happen, is negotiable. These provisions clearly
provide for flexibility in fixing the time of payment, provided only that there shall An illustration of the first class is the so-called ‘payable on or before a certain
certainly come a time when the note is, by its terms, due. In other words, they date’ note. Illustrations of the latter class are those instruments that:
recognize the right of the parties to an instrument to contract for their mutual 1) contain acceleration clauses on the maker’s default in payment of
benefit, and say in effect that, if the contract is made certainly to be performed at installments or of interest, or on the happening of an extrinsic event;
some definite time in the future, its negotiability is not destroyed. A determinable 2) contain, in notes secured by collateral, a provision that the maker shall
future time as used in the second, can mean nothing else than a time that can be supply additional collateral in case of depreciation in the value of the
certainly determined after the execution of the note. The contingency will render original deposit, with the holder’s right to declare the note due
a note non-negotiable under the last clause of the section clearly means an even immediately on failure to make good the depreciation; or
which may or may not happen. A contingency is, in law, an uncertain future 3) contain provisions for acceleration where holder deems himself
event, and, as a contingency may never happen, a note payable only upon the insecure.
happening thereof may never come due.
LEX SOCIETAS 12
The first is covered by Section 2(b). missed. It is used to deter a default. Once there is default, one loses the benefit of
the term.
There is a conflict of authority with regards to the second. The better view of the
two maintain that the stipulation in question does not render the instrument However, default is not the only source of accelerating the obligation. It is also
containing it non-negotiable because from the standpoint of expediency as possible that the note is current but the acceleration clause is triggered by a
encouraging circulation and of business custom on account of their common collateral default. A note secured by a mortgage, it does not lose negotiability
acceptance by the commercial world, such clauses should be interpreted as not because the collateral arrangement is a separate undertaking from the obligation
affecting negotiability. under the note. The function of the mortgage is to strengthen the enforceability of
the note. Where there is a breach of the collateral arrangement, there will be a
There is also a conflict of authority with regards the third. The better view of the breach of the note. But negotiability is not destroyed by acceleration of the
two maintain that these cases holding an instrument payable at a fixed time but collateral. In effect, one will be required to pay the obligation immediately and
accelerable at the option of the payee or holder still negotiable because such lose the benefit of the term.
instruments are certainly payable on or before a fixed time specified therein.
It is not unusual to find a negotiable instrument with an acceleration clause that
Campos: Where the option to accelerate the maturity of the instrument is on the is triggered by a mere feeling of insecurity on the part of the creditor. When
maker, the negotiability of the instrument is not affected, whether such option is somebody lends money, his concern is to recover what he lent. Recourse against
absolute or conditional. But where the acceleration is at the option of the holder, the collateral is secondary, but gives a higher level of comfort that you can still
whether such acceleration provision renders the instrument non-negotiable recover in case of default. The longer the period of the payment, the greater is the
depends on the nature of the provision. risk taken by the creditor.
If the option can be exercised by the holder only upon the happening of a If at any time there is a material adverse change in the nature of the undertaking,
specified event or act over which he has no control, then the negotiable character a creditor has right to accelerate. This is known as Material Adverse Change
of the instrument is not affected. Clause (MAC). When the change in circumstance is adverse, creditor is entitled to
call in the obligation. If a negotiable instrument carries an acceleration clause
Where the holder’s right to exercise the option is unconditional, the time of where the ground is a MAC, its negotiability is not impaired because, with or
payment is rendered uncertain and the instrument would not be negotiable. without the MAC clause, there is still a due date of the instrument. It merely gives
the holder to make a pre-emptive strike to collect the value of the note before
However, where the option given to the holder to accelerate the maturity of an things go sour.
installment note upon failure of the maker to pay any installment when due does
not affect the negotiability of the instrument. In summary, an acceleration clause, a collateral default or an insecurty of the
holder will not affect negotiability.
Acceleration of the maturity of the instrument by operation of law does not affect
its negotiability. For instance a note is payable at a future time and the maker dies today. The
holder may file a claim against the estate of the deceased regardless of the due
Sebastian: Every time we use an acceleration clause, it refers to an obligation date on the note. The rule is that an acceleration by operation of law also does not
that is suspended by a term. The obligation is not immediately to be performed, affect negotiability.
but at some future time. Its function is to accelerate/advance the performance of
obligation prior to the stipulated due date. In many cases, it is used when the PAYABLE TO ORDER OR TO BEARER
obligation is to be performed in installments. It is used to accelerate installments
payable when there is default in payment of one of the installments. Agbayani: An instrument is not negotiable unless made payable to a person or
his “order” or to “bearer” or unless words of similar or equivalent import are used
The theory behind an acceleration clause is this: when a payment obligation is such as “assigns” or “assignees,” or “holder.” Where the instrument is payable
staggered on a monthly/ installment basis, default of one installment is indicative only to a specified person, it is not payable to order.
of inability to continue with further payments on a timely basis. If one
installment is missed, there is a probability that the other installments will be Campos: The instrument in order to be considered negotiable must contain the
so called “words of negotiability” – must be payable to order or bearer. These
LEX SOCIETAS 13
words serve as an expression of consent that the instrument may be transferred.
This consent is indispensable since the maker assumes greater risks under a Sebastian: In a negotiable instrument, there must be no obligation other than
negotiable instrument than under a non-negotiable one. Under Sec. 10 however, the payment of money. When it is conjunctive, and the other is not in the nature
the instrument need not follow the language of the law, but any term which of payment of a sum of money, the negotiability is impaired.
clearly indicates an intention to conform to the legal requirements is sufficient.
Negotiability of Secured Instruments
Sebastian: “order” or “bearer” are critical words that define negotiability. These
words connote that the instrument is transferrable from one person to another. Agbayani: A promise of the maker to furnish additional collateral will render
Order means payable to payee or who payee identifies. Bearer means payable to the note non-negotiable, as that would be an additional act to the promise to pay
whoever has possession of the instrument. If the person is specified without these money. However, they are to be distinguished from those instruments in which
words, the instrument is non-negotiable but not necessarily void. the holder may demand collateral and, failure to furnish it accelerates the
instrument which are clearly negotiable, being merely accelerable on the non-
PROVISIONS NOT AFFECTING NEGOTIABILITY performance of an optional act.
Sec. 5. Additional provisions not affecting negotiability. - An The negotiable character of an instrument otherwise negotiable is not affected by
instrument which contains an order or promise to do any act in a provision which authorizes the sale of collateral securities in case the
addition to the payment of money is not negotiable. But the negotiable instrument is not paid be paid at maturity because the additional act to be
character of an instrument otherwise negotiable is not affected by a performed is to be executed after the date of maturity, when the instrument
provision which: ceases to be negotiable in the full commercial sense. Before the date of maturity,
(a) authorizes the sale of collateral securities in case the no additional act is to be performed except the payment of the money. Hence,
instrument be not paid at maturity; or before and until the date of maturity, the promise to pay is to pay money only.
(b) xxx Otherwise, the instrument would be non-negotiable.
(c) waives the benefit of any law intended for the advantage or
protection of the obligor; or Campos: The negotiable character of an instrument otherwise negotiable is not
(d) gives the holder an election to require something to be done in affected by a provision which authorizes the sale of collateral securities in case
lieu of payment of money. the instrument be not paid at maturity. Thus, not only may the instrument state
that the note is secured by the pledged or mortgaged property, but also that the
But nothing in this section shall validate any provision or stipulation collateral may be sold for discharging the instrument itself. An authorization
otherwise illegal. however, which empowers the holder to sell the collateral before the maturity of
the note renders it non-negotiable because it gives the holder an option to
Agbayani: The general rule is that an instrument must not contain an order or accelerate the maturity of the instrument, thus rendering the time of payment
promise to do ay act in addition to the payment of money. Otherwise, the uncertain.
instrument would be rendered non-negotiable, for then the instrument would be
payable not in money only but in money and the additional act promised or Sebastian: Consider this: “I promise to pay X or order P1,000,000 subject to
ordered to be performed. the terms and conditions of the mortgage.” Under this note, the payment is
subject to the terms of the mortgage; hence, non-negotiable. When you introduce
Test of Negotiability a collateral default in a negotiable instrument, bear in mind that the payment
obligation in the negotiable instrument must never be subject to the conditions of
Agbayani: The test of negotiability is whether or not the promise would give the mortgage. The moment there is union between the negotiable instrument and
rise to a cause of action for breach of contract if the additional act is not done. If the mortgage, negotiability is impaired.
it does, the instrument is rendered non-negotiable.
On the other hand, an isntrument will still be negotiable if it merely says that is
Sebastian: If he breach if the additional act results to a cause of action for secured by a mortgage or holder has a right to accelerate in case colateral default.
breach of contract, the instrument is no longer negotiable.
The sale of collateral securities in case the instrument is not paid at maturity
Effect of Conjunctive Obligations enhances the enforcement of the instrument. This is a separate undertaking and
LEX SOCIETAS 14
has nothing to do with the enforcement of the instrument. Thus, foreclosure of a Benefits intended for the advantage or protection of the obligor are the rights to
security has nothing to do with negotiability. (1) presentment for payment, (2) notice of dishonor, and (3) protest. All of these
may be waived.
When the note is secured by a collateral, the payment obligation under the note
should not be based on the collateral, otherwise negotiability is destroyed. Acts Exercisable at Option of the Holder
Confession of Judgment Agbayani The last exception to the general rule is that the negotiable character
of an instrument otherwise negotiable is not affected by a provision which gives
Sebastian: Confession of judgment has 2 forms: the holder an election to require something to be done in lieu of payment of
1) cognotiv actionem – a stipulation whereby defendant authorizes plaintiff or money. Under this, even if there is an additional act, the instrument still remains
his counsel to confess judgment for the sum being claimed by the plaintiff. In to be negotiable provided that the right to choose between payment of money or
this case, the decision is rendered by the court immediately because the the performance of the additional act is in the hands of the holder. But if the
debtor is empowered to confess to a judgment on his behalf. choice to pay money or to do the additional act is in the hands of the debtor, the
2) relicta verificatione – after a plea of not guilty is made, one withdraws it and instrument is rendered non-negotiable.
judgment is immediately promulgated.
Sebastian: If the option is given to the holder, the instrument is still negotiable.
Confession of judgments are void under Philippine Law. Thus, a holder can demand novation provided that option was given to him. It
must be remembered that the holder must make sure that the other act that will
PNB v Manila Oil Refining and By-Products Co. Inc. (43 Phil 444) – substitute payment of money is not illegal.
Section 5(b) of the Negotiable Instrument Law providing that the negotiable
character of an instrument otherwise negotiable is not affected by a provision OMISSION IN A NEGOTIABLE INSTRUMENT
which authorizes a confession of judgment if the instrument cannot be paid at
maturity, cannot be taken to sanction judgments by confession because it is a Sec. 6. Omissions; seal; particular money. - The validity and
portion of a uniform law which merely provides that, in jurisdictions were negotiable character of an instrument are not affected by the fact that:
judgment notes are recognized, such clauses shall not affect the negotiable (a) it is not dated; or
character of the instrument. Moreover, the same section of the Negotiable (b) does not specify the value given, or that any value had been
Instruments Law concludes with these words: “But nothing in this section shall given therefor; or
validate any provision or stipulation otherwise illegal.” (c) does not specify the place where it is drawn or the place where it
is payable; or
The judgment note was held to be void as against public policy, because they (d) bears a seal; or
enlarge the field of fraud, because under these instruments the promissory (e) designates a particular kind of current money in which payment
bargains away his right to a day in court, and because of the effect of the is to be made.
instrument is to strike down the right of appeal accorded by statute.
But nothing in this section shall alter or repeal any statute requiring
The Court was of the opinion that warrants of attorney to confess judgment are in certain cases the nature of the consideration to be stated in the
not authorized nor contemplated by our law. We are further of the opinion that instrument.
provisions in notes authorizing attorneys to appear and confess judgments
against makes should not be recognized in this jurisdiction by implication and Sebastian: If something is not included in Section 1, their omission will not
should only be considered as valid when given express legislative sanction. affect the negotiability of the instrument.
Waiver of Debtor’s Rights Effect of Omission of Date
Agbayani: Another exception is that the negotiable character of an instrument Agbayani: Even where the instrument is not dated, still the instrument is not
otherwise negotiable is not affected by a provision which waives the benefits of rendered non-negotiable. There are, however, cases where the date is necessary
any law intended for the advantage or protection of the obligor. to fix the date of maturity.
LEX SOCIETAS 15
Campos: The validity and negotiable character of an instrument are not affected Effect of Omission of Place
by the fact that it is not dated. A date in a bill or note is not essential to make it
negotiable. If it is not dated, and the date is necessary to fix the maturity of the Campos: The purpose of specifying a certain place of payment is to fix the place
instrument, the law fills in the gap and considers the date of issue as the date of at which the holder must present the instrument for payment. It is an important,
the instrument, and allows any holder to insert the true date. though not essential, feature of the instrument. If no place is mentioned, the law
again fills in the gap by providing that presentment should be made at the
Sebastian: Even if the date is not an element of negotiability, this does not address of the person who is to pay, if such address is stated; if not, at the place of
mean that the date is irrelevant. Regardless, whether or not the instrument is business or residence of the person to make payment.
negotiable, one may still determine the due date. Relate this provision with
Section 13 where the date is necessary to fix the date of maturity. Thus, if the Sebastian: Place of issuance is important to know so that one will know where
instrument is negotiable, the remedy to the missing date of issuance is under to file a criminal case. It is also important to know so that one does not have to
Section 13. The holder has the authority to insert a date in the instrument but the look for the person who issued the check. However, even assuming there is no
date must be the true date of issue, which means that such date was on which the place of payment written, Section 73, whichpertains to presentment, says that
instrument was delivered to him by the drawer or maker. you can present at the (1) address of the person who is to make payment if such is
indicated; or (2) if there is no address, make presentment at the usual place of
If the holder was a holder in due course, the written date is conclusively business or residence; or (3) make presentment wherever you can find him or last
presumed to be the date of issue on the instrument. Thus, as to a holder in due known address.
course, the false date will be conclusively be a correct date. However, if the
instrument was transferred to another person past the due date of the Where Instrument Bears a Seal
instrument, the holder may not be considered a holder in due course.
Agbayani: At common law, a sealed instrument is rendered non-negotiable and
If the holder is not a holder in due course, the drawee may interpose personal becomes subject to the rule governing contracts under seal. Under the Negotiable
defenses. If he is, the drawee cannot use personal defenses. Instrument Law, however, that is no longer true. Hence, even if the instrument is
sealed, the fact alone will not make non-negotiable.
If the instrument is non-negotiable, the Civil Code provision will apply, where in
the court will fix the date of issuance under Article 1197 of the Civil Code. Sebastian: Whether or not an instrument is sealed will not affect its
negotiability because a seal is irrelevant in our jurisdiction since we do not have
Effect of Omission of Value any law on seals.
Agbayani: Usually, all that is stated in the instrument is that it is being issued Particular Kind of Current Money
for “value received,” without specifying what the value is. Nevertheless, even
where the value given is not specified, still the instrument is not rendered non- Agbayani: As already stated under Section 1, even if the money in which the
negotiable. As a matter of fact, it is not even necessary to state that value has been instrument is to be payable is not legal tender, provided that it is current money
received because consideration is presumed. or foreign money which has a fixed value in relation to the money of the country
in which the instrument is payable, still the negotiability of the instrument is not
Under paragraph (b), the law authorizes that the value given need not be affected, as the instrument would still be considered payable in money.
specified. However, under the last paragraph of this section, where a statute
requires that a particular contract specify the value given, the value given under INSTRUMENTS PAYABLE ON DEMAND
such contract must be specified. There seems, however, to be no statute of this
kind in the Philippines. Sec. 7. When payable on demand. - An instrument is payable on
demand:
Sebastian: Looking at Section 24, there is a presumption that for every issuance (a) When it is so expressed to be payable on demand, or at sight, or
of an instrument, value was given. This presumption persists until proven on presentation; or
otherwise. Consideration in Civil Law likewise applies: “the cause need not be (b) In which no time for payment is expressed.
stated in the contract. It is presumed to exist unless otherwise shown.”
Where an instrument is issued, accepted, or indorsed when overdue,
LEX SOCIETAS 16
it is, as regards the person so issuing, accepting, or indorsing it, (c) The drawee; or
payable on demand. (d) Two or more payees jointly; or
(e) One or some of several payees; or
Agbayani: Instead of “on demand” the words “on sight” or “on presentation” (f) The holder of an office for the time being.
may be used. The words “at sight”, however, are not ordinarily used in
promissory notes. Where the instrument is payable to order, the payee must be named
or otherwise indicated therein with reasonable certainty.
When a promissory note expresses “no time for payment,” it is deemed payable
on demand. Agbayani: Among others, the instrument in order to be considered negotiable
must contain so-called words of negotiability. Under this section, there are only
Where a blank for time for payment is unfilled, the instrument has been held to two ways by which an instrument may be made payable to order. There must
be payable on demand. However, it may properly be considered an incomplete always be a specified person named in the instrument and the bill or note is to be
instrument and may fall under the provisions of Sections 14, 15 or 16, depending paid to the person designated in the instrument or to any person whom he has
upon how the instrument is delivered. Moreover, a note payable “on ______” indorsed and delivered the same. Without the words “or order” or “to the order
was held payable on demand. of”, the instrument is payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the
It must be remembered that after the date of maturity, the instrument can no advantages of being a holder of a negotiable instrument, but will merely “step
longer be negotiated as to make the parties who acquire the instrument after the into the shoes” of the person designated in the instrument and will thus be open
date of maturity holders in due course because they become holders thereof with to all defenses available against the latter.
notice that it is already overdue, as this can be determined from the face of the
instrument itself. The last paragraph of Section 7 means that the instrument is Campos: There must always be a specified person named in the instrument. It
payable on demand only as between the immediate parties. means the bill or note is to be paid to the person designated in the instrument or
to any person to whom he has indorsed or delivered the same. Without the words
Sebastian: An instrument payable on demand is payable at any time on “to order” or “to the order of” the instrument is payable only to the person
demand of the payee or holder. In a bill of exchange, before the drawee can be designated therein and is therefore non-negotiable.
liable, he must accept it. If he does not accept the instrument, that instrument is
dishonored by non-acceptance. At that particular time, drawer will become liable Sebastian: When an instrument is payable to order, the promise to pay is
to the payee or holder. The drawer’s liability is secondary and he can only be ran towards the payee or at his instruction. This indicates that the ultimate payee of
after if the drawee dishonored the instrument. the instrument need not be the payee because he can transfer his rights to
another person. This indicates the negotiability of the instrument and if this is
If the drawee accepts, the payee or holder must make a demand before he is paid. missing, the instrument cannot be negotiable. As far as the maker is concerned,
When the payee or holder demands for payment, it is essential that he brings the he issues an instrument that is intended to pass from hand to hand.
instruments. If he fails to, the drawee may dishonor his demand. The moment the
payee or holder brings the instrument to the drawee, the latter must inspect the Designation of Payee
instrument and check if it is genuine. Then he should pay.
Agbayani: Under the last paragraph of this section, the law requires that the
A negotiable instrument is a substitute for money and the due date need not be payee must be named or otherwise indicated with reasonable certainty. The
expressed. payee of an instrument payable to order must be a person in being, natural or
legal, and ascertained at the time of issue. If there is no payee, where the
INSTRUMENTS PAYABLE TO ORDER instrument is payable to order, no one could indorse the instrument.
Consequently, it is useless to consider it negotiable.
Sec. 8. When payable to order. - The instrument is payable to order
where it is drawn payable to the order of a specified person or to him Where blank for name of payee is unfilled, the instrument is not payable to order
or his order. It may be drawn payable to the order of: because the payee is not named, neither is he designated with reasonable
(a) A payee who is not maker, drawer, or drawee; or certainty. However, it may be considered by Sections 14, 15 and 16, depending
(b) The drawer or maker; or upon how it is delivered.
LEX SOCIETAS 17
Campos: In Sec. 8(f), the payee is certain. Such an instrument is capable of 3 Bearer instruments need not to be indorsed because it is negotiated by mere
interpretations: (3) xxx The payee may be the person who happens to be delivery. Thus, forgery of an indorsement cannot be raised as a defense by the
secretary at any particular moment – thereby making the instrument a “floating maker or drawer.
promise.” The third view is the most acceptable because the payee is certain and
easily determinable and such interpretation is most probably what the lawmaker When the last indorsement is an indorsement in blank, the instrument becomes
had in mind in using the words “for the time being.” bearer instrument.
The name of the payee being misspelled or wrongly designated does not affect the Concept of a Fictitious Person
negotiability of the instrument. Under Sec. 43, it is provided that “where the
name of the payee is wrongly designated or misspelled, he may indorse the Agbayani: The words “fictitious person” are not limited to persons having no
instrument as therein described, adding, if he thinks fit, his proper signature.” real existence. An existing person may be considered a fictitious payee,
depending upon the intention of the one making or drawing the instrument. The
Sebastian: An instrument wherein the maker/drawer and the payee are one in words “fictitious person” mean to be a person who has no right to the instrument
same person is not void under the Negotiable Instruments Law. If the instrument because the drawer or maker of it so intended, and, therefore, it does not matter
is a note, that person is ultimately liable for the note and, as an indorser, also whether the name of the payee used by the drawer or maker be that of one living
warrants that if he cannot pay, he will pay as an indorser. If the instrument is a or dead, or one who never existed. The name is fictitious when it is feigned or
bill, the person is in effect telling the drawee to pay him. Until the drawee pretended and a non-existent person is one who does not exist in the sense that
accepts, the drawee is not liable for the instrument. Assuming there is he was not intended to be the payee by the drawer.
acceptance, if the drawee cannot pay, the drawer, who is the payee and indorerser
at the same time, will be liable primarily and secondarily. Thus, in both instances, Campos: That the payee is a fictitious or non-existing person must be known to
there are 2 liabilities created – one as maker and one as indorser. the maker or drawer. The theory is that since the payee is not capable of
indorsing and since the maker or drawer knew of this fact, he must have intended
When the instrument is made payable to the holder for the time being, the person the instrument to be transferred by mere delivery.
who can indorse such instrument is the incumbent person occupying the office at
a particular time. If the maker or drawer is not aware that the person he named as payee is
fictitious or non-existent, then the instrument is not a bearer instrument but an
If the name of the payee was wrongly spelled, one must write the misspelled order one. Obviously, there is no one who can indorse it, so in effect it cannot be
name and there after indorse it to the correctly spelled name. validly negotiated.
INSTRUMENTS PAYABLE TO BEARER Sebastian: The concept of a fictitious person is not limited to a fictional person
or a person who does not exist at all. A person who actually exists can be
Sec. 9. When payable to bearer. - The instrument is payable to construed as a fictitious person depending on the intention of the maker or
bearer: drawer. A fictitious person can include one who actually exists but has no right to
(a) When it is expressed to be so payable; or the instrument simply because the drawer or maker did not intend that person
(b) When it is payable to a person named therein or bearer; or did not intend for that person to have a right to that instrument. Thus, the true
(c) When it is payable to the order of a fictitious or non-existing test of fictitious person arises not from the existence of the individual, but it will
person, and such fact was known to the person making it so depend on the intention of the drawer or maker. When a transaction arose from a
payable; or feigned transaction, the intention of the issuer controls.
(d) When the name of the payee does not purport to be the name of
any person; or A check payable to a deceased person is not necessarily a check issued to a
(e) When the only or last indorsement is an indorsement in blank. fictitious person. If the maker/drawer believes that the payee is alive, the payee is
not considered fictitious. Clearly, drawer intended that the payee will have a right
Sebastian: When an instrument is payable to bearer, it is payable to who is in to the instrument. As a consequence, not issued to a fictitious person, it is not
physical possession. Who is in physical possession of the instrument can indorse, payable to bearer.
present for payment and collect the proceeds of the instrument.
LEX SOCIETAS 18
If the instrument is made payable to the estate of a deceased person, it is an 2) in an accepted bill of exchange and the acceptance is dated – the date placed
instrument payable to order. is deemed prima facie the true date of acceptance
3) in an indorsed instrument and the indorsement is dated – the date placed is
Limjoco v. Intestate Estate of Fragante – Within the philosophy of the deemed prima facie the true date of indorsement
present legal system and within the framework of the Constitution, the estate of
Pedro O. Fragante should be considered an artificial or juridical person for the Sebastian: The date on the instrument is presumed to be the true and correct
purposes of the settlement and distribution of his estate, which of course, include date. However, this is a disputable presumption and any person who has an
the exercise during the juridical administration thereof of those rights and the interest in that instrument is free to dispute such presumption. But as to a holder
fulfillment of those obligations of his which survived after his death. in due course, this presumption is conclusive.
Agbayani: The estate of a deceased person is a juridical person in a limited way. Ante-dating and Post-dating of Instrument
Nazareno v. Court of Appeals – The estate of a deceased person is a juridical Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for
entity that has a personality of its own. the reason only that it is ante-dated or post-dated, provided this is not
done for an illegal or fraudulent purpose. The person to whom an
Sebastian: I do not like how this statement was phrased by the Supreme Court. instrument so dated is delivered acquires the title thereto as of the
date of delivery.
EXACT WORDS OF LAW NEED NOT BE USED
Agbayani: An instrument is ante-dated when the date written thereon is earlier
Sec. 10. Terms, when sufficient. - The instrument need not follow the than the true date of its issuance or delivery. An instrument is post-dated when
language of this Act, but any terms are sufficient which clearly the date written thereon is later than the true date if its issuance or delivery. An
indicate an intention to conform to the requirements hereof. ante-dated or post-dated instrument is not rendered invalid or non-negotiable by
that fact alone. It may be negotiated before or after the date given as long as it is
Agbayani: It is advisable to use the words of the law in order to avoid not negotiated after its maturity.
uncertainty and doubt. However, it is not necessary to use the exact words of law.
Indeed, an instrument may be valid and negotiable though written in a foreign The only limitation is that the ante-dating or post-dating is not done for illegal
language. and fraudulent means, such as, evading the Usury Law.
Sebastian: Although the law does not require that a negotiable instrument be in The person to whom the instrument is delivered acquires title or ownership over
a document written in the language known to the drawer or maker, an it, not as of the date written on the instrument, but as to the date of actual
instrument needs to be in a language known to the drawer or maker because all delivery.
contracts require an intelligent consent. Therefore, signing a note written in a
foreign language not known to the drawer or maker may be a personal defense. Triphonoff v. Sweeney – It makes no difference whether a check be postdated
or antedated, it is still payable according to its express terms. The drawing of a
DATE OF A NEGOTIABLE INSTRUMENT postdated check is an everyday occurrence in the commercial world, and the
uniform understanding of the parties is that, when a check is postdated, it is
Relevance payable on the day it purports to be drawn, even though it be negotiated
beforehand. The contention of the defendants is that the instrument was not a
Sec. 11. Date, presumption as to. - Where the instrument or an check, for the reason that it was not payable on demand and that the same was
acceptance or any indorsement thereon is dated, such date is deemed not negotiable. We incline to the belief that the instrument was a check, payable
prima facie to be the true date of the making, drawing, acceptance, or on demand on or after April 15, 1911. This conclusion is in harmony with cases
indorsement, as the case may be. wherein it is held that a postdated instrument of this nature is a check, and not a
bill of exchange, which would authorize the holder to present the same for
Agbayani: This legal provision applies to three cases: acceptance prior to the time when it would be payable.
1) the instrument contains the date of issue – the date placed is deemed prima
facie the true date of the making or drawing of the instrument
LEX SOCIETAS 19
Sebastian: Ante/postdating a check does not affect negotiability unless its
objective is unlawful. COMPLETION AND DELIVERY OF INSTRUMENTS
Insertion of Date Agbayani: There are two steps in the execution of a negotiable instrument,
namely: (1) the act of writing the instrument completely and in accordance with
Sec. 13. When date may be inserted. - Where an instrument Section 1, and (2) the delivery of the instrument with the intention of giving effect
expressed to be payable at a fixed period after date is issued undated, to it.
or where the acceptance of an instrument payable at a fixed period
after sight is undated, any holder may insert therein the true date of Campos: Delivery of the instrument means transfer of possession, actual or
issue or acceptance, and the instrument shall be payable accordingly. constructive, from one person to another. It may thus be accomplished by
The insertion of a wrong date does not avoid the instrument in the manual transfer of possession or by any other act manifesting intent to transfer of
hands of a subsequent holder in due course; but as to him, the date so possession. Without the initial delivery of the instrument from the maker to the
inserted is to be regarded as the true date. payee, there can be no liability on said instrument. Moreover, such delivery must
be intended to give effect to the instrument. Thus, if the maker gives the
Agbayani: Under Section 6, the date is not necessary for the negotiability of the instrument to another for mere safekeeping, there is no delivery within the
instrument. However, the date may be necessary to determine the date of meaning of the above provision. However, once the instrument is no longer in the
maturity. possession of the person who has signed it, a valid delivery by him is presumed,
until the contrary is proved, and as to the holder in due course, the presumption
Sebastian: The date of the instrument is not essential for negotiability. The two is conclusive, provided the instrument is complete.
instances when date is critical is when the instrument is payable after a fixed date
or payable after sight. If there is no date, one will never know when the due date The first delivery of the instrument complete in form, to a person who takes it as
is. a holder, is called the issue or issuance of the instrument.
Filling in the missing element of date is delegated to the holder.
Sebastian: there are two steps necessary to make a negotiable instrument. The
Take note that this section only refers to a missing date. It does not refer to any first step is to write the instrument. Having written the instrument and complied
other element of a negotiable instrument. The date here pertains to the due date with Section 1, the negotiable instrument is not yet complete. The second step is
of the instrument. delivery. This is the more important step in giving life to the negotiable
instrument. There are two types of delivery. It is called issuance when the
In the case of the dishonesty committed by the author of the dishonesty, the delivery is from the author to the first transferor. Upon delivery, the instrument
instrument is avoided as to him. If the instrument is avoided as to the author of comes to life. Is called deliveries when the delivery is from the payee to the first
the dishonesty, he can recover from the maker because only the negotiability of endorser.
the instrument is avoided but not the whole instrument. The instrument may
then be enforced as a debt instrument under the Civil Code. INCOMPLETE BUT DELIVERED INSTRUMENTS
As to a holder in due course, the date appearing on the instrument is conclusively Sec. 14. Blanks; when may be filled. - Where the instrument is
the date of issuance. wanting in any material particular, the person in possession thereof
has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up
as such for any amount. In order, however, that any such instrument
when completed may be enforced against any person who became a
party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But
if any such instrument, after completion, is negotiated to a holder in
due course, it is valid and effectual for all purposes in his hands, and
LEX SOCIETAS 20
he may enforce it as if it had been filled up strictly in accordance with the instrument, the usage of trade or business (if any) with respect to such
the authority given and within a reasonable time. instruments, and the facts of the particular case.” However, it should be noted
that whether unreasonable time has elapsed or not would be immaterial, if the
Agbayani: Bills and notes are sometimes executed in blank and delivered to used had expressly fixed the time within which completion may be made.
another to fill in and negotiate either for his own benefit or that of the maker.
Such instruments are, therefore, incomplete but delivered. Sebastian: The missing element here must be a material particular. Either one
of the missing material particulars may be corrected by Section 14. An instrument
Campos: This provision merely raises a personal defense. It covers two kinds of that is non-negotiable at inception may become negotiable because of Section 14.
writings: (1) incomplete instruments, and (2) a blank paper or a paper so far However, the correction of the missing date cannot be corrected by Section 14,
incomplete that it does not constitute an instrument within the meaning of the but may be corrected by Section 13.
definition of this term, but signed. The first kind involves a writing which
although containing blanks, is so far completed that it is an instrument, i.e., Authority to Complete the Instrument
where the writing recites enough of the formalities to make evident the intention
to make the writing operate as negotiable instrument. In such case, “any person Agbayani: The material particular referred to here may be: (1) a particular
in possession thereof has a prima facie authority to complete it by filling up the omission of which will render the instrument non-negotiable (e.g. name of the
blanks therein.” This contemplates a delivered instrument, and not an payee or the name of the drawer); or (2) a particular omission of which will not
undelivered instrument which is covered by Section 15. render the instrument non-negotiable (e.g. date, rate of interest, place of
payment).
The second kind of writing is one which is so far incomplete that it is not an
instrument. in this case, two conditions must be present before the presumption The law presumes from two facts: (1) want of a material particular in the
of authority to complete may arise: (1) delivery of the instrument, and (2) the instrument, and (2) possession thereof by a person, a third fact (3) that such
delivery must have been for the purpose of converting it into a negotiable person had authority to fill up the blank.
instrument. Thus if the paper or writing is delivered without such intention, its
subsequent conversion into a negotiable instrument will not render the person It will be noted that the law does not seem to require the delivery of the
signing liable to anybody, not even a holder in due course. The presence of such instrument with intent to have it converted into a negotiable paper. The law
intention must be proven by the possessor of the instrument. merely requires that it be in the possession of a person other than the drawer or
maker, and from such possession, together with the fact that the instrument is
As to a signed blank paper, the law provides that there is prima facie authority to wanting in a material particular, the law presumes agency to fill up the blanks.
fill it up for any amount. It is believed that it includes authority to fill in other
blanks, specially to all missing requirements necessary to make it a negotiable The law thus presumes the existence of the authority to fill the instrument up to
instrument, since otherwise it would not be such an instrument. Whether it is an any amount from the following two facts: (1) a signature on a blank paper and (2)
incomplete instrument or a mere signed blank paper therefore, the authority that the person signing in blank delivers it in order that the paper may be
extends to the insertion of the date, place of payment, the amount, the name of converted into a negotiable instrument. Mere possession by a person is not
the payee, and the time of payment. While Sec. 14 is broad enough to include the enough.
matter of filling in blanks for the time of payment, Sec. 13 deals with more
particularity on some aspects of this right. Sebastian: The holder is presumably given the authority to fill the missing
element. What is presumed is given that the instrument is incomplete, the maker
The insertion of a wrong date, by one having knowledge of the true date of issue, or drawer made a delivery. Consequently, the person to who it is delivered is
will avoid the instrument as to him, but the innocent party may enforce the same presumed given the authority to fill it up.
notwithstanding the improper date. The authority to fill in the blanks or to
complete the instrument is limited as to time. According to Sec. 14, in order to be Rights of a Holder in Due Course
enforceable against a party prior to completion, it must be filled in within a
reasonable time. Such “reasonable time” must be reckoned from the time of the Agbayani: Under this section, the defense of parties prior to completion is that
issuance of the instrument and not from the time of each successive negotiation, it is not filled up within a reasonable time. However, such defense is available
because the interest involved is that of the issuer. In determining what is only against holders who are not holders in due course. The defense is not
reasonable time, Section 193 provides that “regard is to be had to the nature of available against a holder in due course because under the law, in the hands of
LEX SOCIETAS 21
such a holder, the complete but delivered instrument is “valid and effective for all Agbayani: An incomplete instrument is not valid against the party before its
purposes in his hands, and he may enforce it as if it had been filled up strictly in delivery. The non-delivery of an incomplete instrument is a valid defense, not
accordance with the authority given and within a reasonable time.” The defense only between the original parties but also against a holder in due course. The law
is, therefore, a personal or equitable defense. does not make any distinction between a holder in due course and who is not
because the law used the phrase “any holder” which includes a holder in due
Sebastian: A holder in due course can enforce the instrument against parties course. The defense of “want of delivery of a mechanically incomplete
prior to completion regardless of the validity of the elements filled up by the prior instrument” is, thus, a real defense.
holders. Thus, this is a personal defense.
However, the invalidity of the instrument is only with reference to the parties
Instruments Delivered in Blank whose signatures appear on the instrument prior to delivery. As to parties whose
signatures appear on the instrument after delivery, the instrument may be valid.
Agbayani: One who is not a holder in due course cannot enforce the instrument
against a party prior to the completion of the instrument if the instrument is not Under Section 16, the delivery is conclusively presumed where an instrument is
filled up strictly in accordance with the authority given and within reasonable in the hands of the holder in due course. The provision of Section 16 that a valid
time. The law provides that in order that one who is not a holder in due course delivery is in the hands of a holder in due course must be read in connection with
may enforce mechanically incomplete but delivered instrument, the two Section 15, and Section 16 does not apply in the case of an incomplete instrument
requisites must exist. The implication is that when one or both of the requisites completed and negotiated without authority. Section 16 applies to a mechanically
are absent, the instrument may not be enforced. completed instrument not delivered, while Section 15 applies to a mechanically
incomplete instrument not delivered.
Although an instrument was completed not in accordance with the authority
given, the parties negotiating after completion are liable on the completed But where an incomplete and undelivered instrument is in the hands of a holder
instrument because they are estopped or precluded from claiming that the note in due course, there is a prima facie presumption of delivery which the maker
was not filled up strictly in accordance with the authority given. may rebut by proof of non-delivery. This presumption must, however, be
distinguished from the presumption where an undelivered mechanically
In determining what is a “reasonable time” or an “unreasonable time,” regard is complete instrument is in the hands of a holder in due course, in which the
had to the nature of the instrument, the usage of trade or business (if any) with presumption of valid delivery is note merely prima facie but conclusive.
respect to such instrument and the facts of the particular case. In other words, Furthermore, where the custody of the incomplete instrument has been entrusted
the term is very relative. to another, who wrongfully completes and negotiates it to a holder in due course,
delivery to the agent or custodian is a sufficient delivery to bin the drawer or
Sebastian: Another incomplete instrument in this section is a blank piece of maker.
paper that is signed. It may be filled up in accordance with the instructions and
within a reasonable time. After which, the instrument may be enforced againt Campos: This contemplates an instrument which is not only undelivered but
prior parties; otherwise, the instrument cannot be enforced. also incomplete. In this case, a real defense exists and not even a holder in due
course can recover on the instrument, for the law is specific that it is not a valid
The requirements for a blank sheet to become a negotiable instrument is that (1) contract in the hands of any holder. The conclusive presumption of delivery
the maker must sign a blank sheet of paper, (2) with intent to convert to a under Sec. 16 cannot apply, although possession of an incomplete instrument
negotiable instrument, and (3) must deliver the sheet. raises prima facie presumption of delivery.
INCOMPLETE AND UNDELIVERED INSTRUMENTS If an instrument contains all the requisites for making it a negotiable one, it
should be considered as complete though it in fact may have blanks as to non-
Sec. 15. Incomplete instrument not delivered. - Where an incomplete essentials, so as to give rise to a conclusive presumption of delivery in favor of a
instrument has not been delivered, it will not, if completed and holder in due course.
negotiated without authority, be a valid contract in the hands of any
holder, as against any person whose signature was placed thereon Sebastian: This is a real defense.
before delivery.
LEX SOCIETAS 22
As a rule, one cannot enforce the instrument whose signature appeared before Linick v A.J. Nutting & Co. – The delivery of a promissory note by the maker
delivery. But if the incompleteness is cured by the authority given by the maker to is necessary to a valid inception of the contract. The possession of such a note by
an agent, Section 15 will not be applicable. the payee or indorsee is prima facie evidence of delivery, but if it appears that the
note has never been actually delivered, and that without any confidence, or
Also, there are cases where Section 15 is not applied where the doctrine of negligence, or fault of the maker, but by force of fraud, it was put in circulation,
estoppel is involved. there can be no recovery upon it, even when in the hands of an innocent holder.
Pavilis v Farmers Union Livestock Commission – The check in COMPLETE BUT UNDELIVERED
controversy was an incomplete instrument when stolen and cannot be enforced INSTRUMENTS
in the absence of conduct on the part of the drawer creating an estoppel.
Sec. 16. Delivery; when effectual; when presumed. - Every contract on
While there can be no question that the provisions of the Negotiable Instruments a negotiable instrument is incomplete and revocable until delivery of
Law do not prevent an inquiry into the question of the negligent custody of an the instrument for the purpose of giving effect thereto. As between
incomplete instrument, and, that, if as a result of negligence such instrument immediate parties and as regards a remote party other than a holder
comes into the hands of a holder in due course, the latter may recover, yet we in due course, the delivery, in order to be effectual, must be made
cannot say under the facts and circumstances of the instant case that defendant either by or under the authority of the party making, drawing,
was negligent. The loss did not result from completion and negotiation of the accepting, or indorsing, as the case may be; and, in such case, the
check by one entrusted with its possession, and we are not concerned with a delivery may be shown to have been conditional, or for a special
breach of duty as between a depositor and drawee. It does not appear that that purpose only, and not for the purpose of transferring the property in
the defendant company had reason to mistrust its employee and anticipate the the instrument. But where the instrument is in the hands of a holder
wrongful taking by him of a check signed in blank, the subsequent completion in due course, a valid delivery thereof by all parties prior to him so as
and negotiation. The drawer owes the duty to use due care in the execution of to make them liable to him is conclusively presumed. And where the
checks, but it does not follow as a legal conclusion that signers of checks in blank instrument is no longer in the possession of a party whose signature
assume the risk of liability in all cases where such instruments are wrongfully appears thereon, a valid and intentional delivery by him is presumed
taken, completed and negotiated. To hold that a person is negligent in having in until the contrary is proved.
his possession a check signed in blank would require something more than the
exercise of ordinary care. Agbayani: The law provides that every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of
Weiner v Pennsylvania Co. – In the instant case the plaintiff signed the giving effect thereto. And no rights, properly speaking, arise in respect to an
check in blank, thus putting it in the power of an unauthorized person to fill it in instrument until it is delivered.
and present it for payment. The depositor’s act made the loss possible and caused
it, and enabled the thief to commit the fraud. The depositor-plaintiff’s acts in this Issue is the first delivery of the instrument, complete in form, to a person who
respect are a bar and an estoppel in her suit against the drawee bank, thus takes it as a holder. Delivery and issuance are used interchangeably. Delivery and
preventing any recovery on her part. To hold otherwise would require the bank to issuance may be made either by the maker or drawer himself or through a duly
communicate with the drawer as each check was presented, in order to find out if authorized agent, and may be made either to the payee himself or to his duly
delivery was intended. This is too much to be expected; and to place the burden authorized agent.
of loss or its chance on the depository if it does not interview the maker, is
neither fair nor compatible with public interest. Before delivery, the maker or drawer can revoke, cancel or tear up the
instrument. The payee named in the instrument acquires no right until the
Campos: How does this case compare with Pavilis case? The court in effect instrument is delivered to him.
holds that mere signing of a check in blank is negligence which will make the
drawer liable to the drawee bank in case it is successfully encashed without The term immediate parties is confined to those who are immediate, in the sense
having been validly delivered. Is this holding inconsistent with the last sentence of knowing or being held to know the conditions or limitations placed upon the
in the Pavilis case? delivery of the instrument. It means privity, not proximity. In other words, the
criterion is whether or not the party in question knows of the conditions or
limitations placed upon the delivery or the fact that the instrument was not
LEX SOCIETAS 23
delivered but stolen. If the party in question knows, he is an immediate party due course, it is a personal defense. What is conclusive is only the delivery. It
even if he is physically remote. On the other hand, if he does not know, he is not does not preclude the maker from interposing any other defenses.
an immediate party even if he is the next party physically.
This provision is subject to the application of estoppel.
Under the law where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional delivery by him is Delivery Subject to Conditions
presumed until the contrary is proved. However, as against an immediate party
who is not a holder in due course, the presumption will exist in his favor only Agbayani: The following is an example of a conditional delivery: “A makes a
until the contrary is proven. In other words, the presumption is rebuttable as complete note in favor of B, with the understanding that it is not to become
against an immediate party or a remote party who is not a holder in due course binding on A until it is also signed by C. If B files an action on the note without
and, as against him, it may proved that: any additional proof, the presumption is that it was delivered validly and
1) no delivery was made; intentionally. But as B knows of the condition placed upon the delivery, he is an
2) if the delivery was made, it was not authorized; immediate party. Consequently, the presumption is rebuttable, and A can show
3) if the delivery was made or authorized, the delivery was conditional or for a that the delivery was conditional and if the condition is not fulfilled, he cannot be
special purpose and not for the purpose of transferring the property in the held liable by B.”
instrument.
It is to be noted that what is conditional here is the delivery, not the promise or
Campos: Non-delivery of a complete instrument is only a personal defense. order to pay. Otherwise, the instrument is rendered non-negotiable.
Delivery of an instrument is a prerequisite for liability. If the instrument is Delivery for Special Purposes
complete in all its particulars, but is not delivered, there is no contract. However,
if the instrument is no longer in the possession of a party who has signed it, a Agbayani: The following is an example of delivery for a special purpose: “A
delivery is presumed until the contrary is proved. If the holder is a holder in due delivers a complete note payable to bearer signed by him to B for (1) safekeeping
course, the instrument is not merely prima facie deemed delivered, but this fact is or (2) for collection only. B cannot enforce the note against A, as A can prove that
conclusively presumed. Thus, if a complete instrument is stolen from the maker the note was delivered only for a special purpose.
or drawer, and negotiated to a holder in due course, such maker or drawer cannot
set up a defense of non-delivery because it is a personal defense available only Presumption of Delivery as to Holder In Due Course
between immediate parties and as regards remote parties who are not holders in
due course. Agbayani: Where the instrument is in the hands of a holder in due course, a
valid delivery thereof by all parties to him is conclusively presumed. A
Sebastian: Delivery is the transfer of possession, actual or constructive, from presumption is said to be conclusive when contrary proof is barred.
one person to another. For delivery to be effectual, must be done by making or
endorsing under the authority of the person making, endorsing, drawing or It must be remembered that the bills or notes dealt with in this section are
accepting. When a person delivers an instrument, the delivery can be conditional, mechanically complete. As already stated, under Section 15, an incomplete and
unconditional or for a specific purpose only. undelivered instrument is not valid even in the hands of a holder in due course as
against a party prior to delivery.
As a general rule, when the instrument is no longer in the possession of the party
who signed, there is a prima facie presumption that the party who signed it In Re Marten’s Estate – Every contract on a negotiable instrument for the
intentionally delivered it. In respect to a holder in due course, there is already a purpose of giving effect thereto. This was the common law rule.
conclusive presumption of delivery. However, for immediate and remote parties,
to be effectual, delivery must be made by the drawer, maker, acceptor or Obviously, the note here sued upon could not be made the basis of a valid claim
endorser, or under their authority. Immediate parties are those parties who has against the estate unless there was a legal delivery of same, during the lifetime of
knowledge of the circumstances surrounding the delivery of the instrument. They the decedent. Our decisions, relative to the analogous situations, are reviewed in
are remote when they have no knowledge and there is no privity of contract. The the recent case of Orris v. Whipple, where in we state: “All there is to show
presumption may be raised against remote parties because of the guaranties delivery in the case is that the deed was prepared and executed by Miss Aken;
made under Section 65 and 66. In so far as this provision protects the holder in that she told others that she wanted the plaintiffs to have the property and that
LEX SOCIETAS 24
she prepared papers for providing. She put the deeds in her safety deposit box
and retained the key. We do not think these admitted facts show a legal delivery SUMMARY OF RULES ON DELIVERY OF NEGOTIABLE
of the deed in question.” INSTRUMENTS
The position taken by this court in the Orris case is controlling here. Sebastian: Delivery of a negotiable instrument is necessary. Between
immediate parties, delivery must be made with intention to pass title. Where the
intention is for some other things, then it is not the delivery contemplated by law.
incomplete but delivered

HIDC NOT HIDC
Holder can enforce the Holder can enforce
instrument as completed instrument as completed
against parties prior or only against parties
subsequent to completion. subsequent to the
completion but not against
those prior thereto.
incomplete and undelivered
Holder can enforce instrument as contemplated only
against parties subsequent to the delivery but not against
those prior thereto.
Possession gives rise to a Possession does not give
prima facie presumption of rise to any presumption of
delivery which the maker or delivery.
drawer may rebut by proof
of non-delivery.
complete but undelivered
Possession gives rise to a Possession gives rise to a
conclusive presumption of prima facie presumption of
delivery. delivery which the maker or
drawer may rebut by proof
of non-delivery.
LEX SOCIETAS 25
RULES OF CONSTRUCTION LIABILITY OF PERSONS SIGNING AN INSTRUMENT
Sec. 17. Construction where instrument is ambiguous. - Where the SIGNING UNDER A TRADE OR ASSUMED NAME
language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply: Sec. 18. Liability of person signing in trade or assumed name. - No
(a) Where the sum payable is expressed in words and also in person is liable on the instrument whose signature does not appear
figures and there is a discrepancy between the two, the sum thereon, except as herein otherwise expressly provided. But one who
denoted by the words is the sum payable; but if the words are signs in a trade or assumed name will be liable to the same extent as if
ambiguous or uncertain, reference may be had to the figures he had signed in his own name.
to fix the amount;
(b) Where the instrument provides for the payment of interest, Agbayani: The rule stated here is that a person whose signature does not
without specifying the date from which interest is to run, the appear on the instrument is not liable Thus, a drawee who has accepted the bill of
interest runs from the date of the instrument, and if the exchange is not liable on the instrument. Thus, also, one whose name does not
instrument is undated, from the issue thereof; appear on the note cannot be held liable thereon even though the payee knew at
(c) Where the instrument is not dated, it will be considered to be the time of making the note that the obligation was that of a person other than
dated as of the time it was issued; the maker. So also, where a note was signed by one individual, a person
(d) Where there is a conflict between the written and printed associated with him in a joint oil enterprise for the benefit of which money was
provisions of the instrument, the written provisions prevail; borrowed, was not liable on the note since undisclosed principal may not be held
(e) Where the instrument is so ambiguous that there is doubt liable on negotiable paper executed by the agent in his own name.
whether it is a bill or note, the holder may treat it as either at
his election; The following are the exceptions to the general rule:
(f) Where a signature is so placed upon the instrument that it is not 1) where a duly authorized agent signs for a person, that person is liable.
clear in what capacity the person making the same intended to 2) Where a person sought to be charged forges the signature of another person,
sign, he is to be deemed an indorser; the forger is liable even if his signature does not appear thereon.
(g) Where an instrument containing the word "I promise to pay" is 3) Where a person sought to be charged signs on a paper separate from the
signed by two or more persons, they are deemed to be jointly instrument itself, as an allonge, although the allonge may be considered as
and severally liable thereon. part of the instrument; or where an acceptance is written on a paper other
than the bill itself, under Section 134 and 135.
Agbayani: The rules stated in this section shall not be availed of if the terms of
the instrument in question are clear and admit of no doubt. It is only when the Sebastian: As a rule, if there is no signature, there can be no liability. Another
instrument in question is ambiguous, doubtful or obscure, or when there are exception is where the person uses an assumed name or trade name – one may
omissions therein that the rules stated in the section apply. become a party to a negotiable instrument by any designation he desires.
Continental Illinois Bank v. Clement – The Negotiable Instruments Law SIGNING AS AN AGENT
provides that where an instrument containing words “I promise to pay” is signed
by two or more persons, they are deemed to be jointly and severally liable Sec. 19. Signature by agent; authority; how shown. - The signature of
thereon. any party may be made by a duly authorized agent. No particular form
of appointment is necessary for this purpose; and the authority of the
If an instrument worded in a singular is executed by several, the obligation is a agent may be established as in other cases of agency.
joint and several one.
Agbayani: As already stated, the party may sign personally or through an agent.
The agency may be oral or written. There is no particular form required by the
law and the agency may be proved by oral or written evidence, unless specific
provisions of the general law, such as, the statute of frauds, require otherwise.
LEX SOCIETAS 26
Sebastian: If the agent had authority to issue the instrument, the intention of signed by the agent, it is possible that the agent may or may not have the
the agent is the intention of the principal. If the agent did not have authority, he obligation to disclose his principal.
cannot bind the principal and his transaction will become unenforceable unless
the principal ratifies it. SIGNATURE BY PROCURATION
Insular Drug v. PNB (58 Phil 684) – The right of an agent to indorse Sec. 21. Signature by procuration; effect of. - A signature by
commercial paper is a very responsible power and will not be lightly inferred. A "procuration" operates as notice that the agent has but a limited
salesman without authority to collect money belonging to his principal does not authority to sign, and the principal is bound only in case the agent in
have implied authority to indorse the checks received in payment. Any person so signing acted within the actual limits of his authority.
taking checks made payable to a corporation which can act only by agents, does
so at his peril and must abide by the consequences if the agent who indorses the Agbayani: A signature per procuration constitutes a warning that the agent has
same is without authority. but a limited authority, and, therefore, a person who takes the instrument is
bound at his peril to inquire into the extent and nature of the agent’s authority,
When a bank accepts the indorsements on checks made out to a drug company of and this applies to every person.
a salesman of the drug company and the indorsements of the saleman’s wife and
clerk, and credits the checks to the personal account of the salesman and his wife, INDORSEMENT BY
permitting them to make withdrawals, the bank makes itself responsible to the INFANT OR CORPORATION
drug company for the amounts represented by the checks, unless it is pleaded
and proved that after the money was withdrawn from the bank, it passed to the Sec. 22. Effect of indorsement by infant or corporation. - The
drug company which thus suffered no loss. indorsement or assignment of the instrument by a corporation or by
an infant passes the property therein, notwithstanding that from
Sec. 20. Liability of person signing as agent, and so forth. - Where want of capacity, the corporation or infant may incur no liability
the instrument contains or a person adds to his signature words thereon.
indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was Agbayani: Ordinarily, a minor cannot give consent to contracts and a contract
duly authorized; but the mere addition of words describing him as an entered to him is voidable. In the case of corporations, [directors and officers]
agent, or as filling a representative character, without disclosing his cannot perform acts beyond the scope of their authority. Such acts would be ultra
principal, does not exempt him from personal liability. vires acts. Nevertheless, if a minor or a corporation indorses an instrument, the
indorsee acquires title to it and can enforce it against the maker or acceptor or
Agbayani: In order to escape personal liability on the instrument, an agent other parties prior to the minor. Such prior parties cannot escape liability by
must: setting up a defense the incapacity of the indorser.
1) be duly authorized;
2) adds words to his signature indicating that he signs as an agent, that is, for This section is also applicable to indorsements by lunatics, imbeciles, and other
or on behalf of a principal, or in a representative capacity; and incapacitated persons.
3) disclose his principal.
Sebastian: An indorsement by corporations or minors pass property regardless
Officers of the government and other public corporations are not held to the same of lack of capacity but there will be no liability incurred. They may give
rule of agency by which, in exceeding their authority, they bind themselves; ownership, but no liability.
everyone having dealings with a public officer is supposed to know the legal
limitations of his agency so that when the public officer, in innocent mistake of Murray v. Thompson – In stipulating that the indorsement of the instrument
law, makes an unauthorized contract in the name of the public corporation, by an infant “passes property therein,” it was meant to provide that the contract
neither he nor the corporation is bound. of indorsement is not void, and that his indorsee has the right to enforce payment
from all parties prior to the infant indorser. Incapacity of the minor cannot be
Sebastian: Under this section an agent is under the obligation to disclose the availed of by prior parties.
identity of his principal. Therefore, depending on the nature of the instrument
The purchaser and indorsee of a not is not a bona fide holder as against an infant
LEX SOCIETAS 27
indorser, and that the latter may disaffirm and recover the note from the
possession of the former, who takes with constructive notice of the incapacity. FORGERY
Sec. 23. Forged signature; effect of. - When a signature is forged or

made without the authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument,
or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
Agbayani: By forgery is meant the counterfeit making or fraudulent alteration

of any writing. It may consist in the signing of another’s name, or the alteration of
an instrument in the name, amount, description of the person and the like, with
intent to defraud. The intent to defraud distinguishes forgery from innocent
alterations and spoliation. Section 23 applies only to forged signatures or
signatures made without the authority of the person whose signature purports to
be. Consequently, if the forgery consists of alteration in the amount, Section 23
does not apply. Such alterations are covered by Section 124.
It is not necessary that the forger attempt to imitate or simulate the signature
being forged.
Campos: Forgery is a real defense. A person whose signature to an instrument

was forged was never a party and never consented to the contract which allegedly
gave rise to such instrument. Since his signature does not appear on the
instrument, he cannot be held liable thereon by anyone, not even by a holder in
due course.
Section 23 deals with two sets of situations:

1) Where the signature on the instrument is affixed by one who purports to be
an agent, but who does not have the authority to bind the alleged principal;
and
2) Where the signature is affixed by one who does not claim to act as an agent
and who has no authority to bind the apparent signer.
The signature in both cases is “wholly inoperative” and no one can gain title to
the instrument through it.
Sebastian: Forgery is the affixing of the counterfeit signature of maker, drawer,

indorser, or drawee; or a material alteration of an instrument, particularly to the
amount or name of the payee. In some cases, alteration of date can be a forgery as
when making it appear that the instrument is not yet past due. Material alteration
are those alterations made to material elements or those that are important to an
instrument.
LEX SOCIETAS 28
Fraudulent alteration is merely one of the two forms of forgery. Although, Where a signature is affixed on a blank paper w/o intent to create an instrument,
generally, what is usually forged is the signature. The maker/drawer, drawee and and something is written to make it appear that the signatory is a drawer, maker,
indorser are the only people who can sign in the negotiable instrument. Any other indorser, or payee, there is fraud in factum.
person’s signature that is forged is irrelevant.
FRAUD IN INDUCEMENT
The two general types of forgeries are the (1) counterfeiting of signature, and (2)
material alteration under Section 124. Material alteration is a form of forgery. Agbayani: Fraud in inducement does not amount to forgery and is only a
personal defense. The following is an illustration of fraud in inducement: A sells
The counterfeiting of the signature may be done (1) by an authorized agent of the to B what he represents to be as a diamond ring, which in fact is only glass. B
person whose signature is forged, or (2) by a person who is a total stranger. If it is issues to A a check. The check is not a forgery. The fraud here is in inducing B to
done by an authorized agent, it must be determined if the agent acted within or issue the check. Here, there is an intention of B to issue an instrument.
outside the scope of his authority. When an agent affixes the signature of the
person to an instrument without being empowered to do so, then there is forgery FRAUD IN CIVIL LAW
by an agent. This is a functional equivalent of unenforceable contract in Civil
Law. If it is not done by an agent, the person does not even represent himself to There is fraud when, through insidious words or machinations of one
be the agent of the person whose signature is forged. Thus, such person cannot of the contracting parties, the other is induced to enter into a contract
claim any authority to affix any signature. which, without them, he would not have agreed to. (Art. 1338, Civil
Code)
Forgery can be invoked even if the signature is authentic.
DURESS AMOUNTING TO FORGERY
FRAUD IN FACTUM
Agbayani: Ordinarily, duress is merely a personal defense. But where it
Agbayani: Fraud in factum or fraud in esse contractus amounts to forgery and amounts to forgery, it is a real defense, as where A takes B’s hand and forces him
is a real defense. The following is an illustration of fraud in factum: B obtains the to sign his name.
signature of A by telling A that it is only for autograph instrument. The fraud here
amounts to fraud. Here, there is no intention to issue an instrument. Sebastian: There must be violence or intimidation that results in the affixing of
a genuine signature to an instrument. While the signature was genuine, it was
Sebastian: There is fraud in factum if there was no intention to issue an surrounded by circumstances with violence or intimidation. In this case, there
instrument. Although the signature is mechanically genuine, there is want of was want of intention to execute an instrument or to indorse.
intent. Fraud in factum, however, will never apply to a check because when you
sign a check, you know for what purpose is that signature. FRAUDULENT IMPERSONATION
Fraud in factum is a real defense. However, one cannot raise this defense if he is Agbayani: Suppose that X represents himself to be Juan Cruz, when in fact he
charged with negligence. Thus, an essential element is that the person whose is not. By this misrepresentation, X obtains from Y a note payable to the order of
signature appears on the instrument should have exercised ordinary diligence Juan Cruz. Then X indorses the note, signing “Juan Cruz.” This is forgery
and did not contribute to the imposition of the forgery. The test is whether or not depending upon whom Y intended to pay. If Y intended that proceeds of the note
the signature is procured in such manner as to be voluntary by the maker. If it is, will go to X, the person dealing with him, named at that time Juan Cruz, then X’s
then there is liability. The person raising the defense must present competent signature of the name “Juan Cruz” is not a forgery. But if Y intended that the
proof that the signature affixed was without negligence on his part. proceeds of the note will go to the real Juan Cruz and not X, but to whom Y
issued the note on the belief that X was Juan Cruz, then X’s signature of “Juan
An indorsee is not obliged to ask the genuineness of the note because his Cruz” would be a forgery.
protection is the warranty of an indorser. The indorser can also claim under this.
He is not primarily laible but will still be covered under the warranties under Sebastian: In fraudulent impersonation, there is no intention to issue the
Section 66. instrument to the person to who it was given to. Thus, what is controlling is that
one though the person in front of him is the person entitled to the instrument.
LEX SOCIETAS 29
The person raising this defense must demonstrate that he is not guilty of
negligence or that it was not his negligence that allowed the commission of the Sebastian: Fraudulent inducement is not a form of forgery and is merely a
forgery. personal defense.
Theory of Double Intent Procedural Requirement in Proving Forgery
Agbayani: In these fraudulent impersonation cases, the maker or drawer of the Sebastian: The person raising the defense of forgery must deny the document
instrument may be said to have a double intent. First, he intends to make the under oath. If he forgets to deny it under oath, the genuineness of the instrument
instrument payable to the person before him or to the person writing at the other is conclusively admitted.
end of the line, in case the negotiation is by correspondence. Second, he intends
to make the instrument payable to the person who he believes the stranger to be. EFFECTS OF FORGERY
To use the illustration, Y here may be said to have a double intent. First, he
intends to make the instrument payable to X, the person before him. And, Agbayani: Section 23 lays down three fundamental rules as to the effect of a
second, he intends to make the instrument payable to Juan Cruz who he believes forged signature:
X, the stranger, to be. 1) that the signature forged or made without authority is wholly inoperative;
2) that no right (1) to retain the instrument, (2) to give discharge therefore or (3)
The first is the controlling intent except where the name of the payee was already to enforce payment thereof against any party thereto, can be acquired through
known to the maker or drawer, or was more particularly identified, by some or under such signature forged or made without authority; and
designation, description or title, in which case the second becomes the 3) that, nevertheless, as against a party precluded from setting up the forgery or
controlling intent. Consequently, in the illustration, it would ordinarily be held want of authority, the signature forged or made without authority:
that X is the indented payee, and therefore, X’s signature of “Juan Cruz” would a) the signature forged or made without authority is operative, and
ordinarily not constitute a forgery but the signature of an assumed name. b) rights can be acquired trough or under the signature forged or made
without authority.
The theory commonly invoked in throwing the loss on the drawer is that the
drawee, in paying the paper, or the holder, in taking it upon the indorsement of Sebastian: When there is forgery, the signature becomes wholly inoperative
the impostor in the name of which the payee was described, carries out the and there can be no right to retain, no right to discharge the instrument or right
intention that the drawer entertained at the time of the delivery of the paper to to enforce payment, except if the party is precluded from interposing the defense
the impostor, although that intention was conceived in consequence of fraud of of forgery.
the impostor as to his identity and ownership of the property which represented
the consideration. (Theory of Actual Intent) The person whose signature is forged, incurs no liability under that instrument
because the signature is wholly inoperative. A negotiable instrument is a contract
Another theory invoked is the maxim that as between two innocent persons, the between 2 or more people. It is axiomatic that one does not become a party
one whose act was the cause of the loss should bear the consequences. (Theory of unless consent is given to a contract; thus, no rights or liabilities are incurred. If
Estoppel) the signature is completely inoperative, then the intended beneficiary of the
instrument does not acquire anything under the counterfeit signature.
There is a distinction between cases where the paper is delivered to the impostor
as payee and cases where the paper is delivered to the impostor upon his There must be an unbroken chain of legitimate transactions and any forgery
representation, in the belief that he is agent of the person named as payee, breaks the legitimate transactions. When the signature is wholly inoperative,
although the latter is a fictitious person, or at least a person who has no anybody whose signature appears prior to the forgery cannot be held liable by the
connection with the transaction. In the absence of negligence on the drawer’s last person who holds the instrument.
part, as between the drawer and drawee or between the drawer and a holder in
due course, the loss falls on the drawee or the purchaser, as the case may be, A holder in due course can then enforce payment under breach of warranties
ratherthan on the drawer, where the impostor represented himself to be the under Section 66 against the indorsers after the forgery. His action is one for
agent of the payee, and not the payee himself. The doctrine of actual intent does specific performance. A holder in due course’s action against the forger is not
not apply because the drawer did not regard the individual to whom he delivered limited to Section 66.
the check as the payee but merely as the agent of the payee.
LEX SOCIETAS 30
EXTENT OF EFFECTS OF FORGERY
Sebastian: By merely affixing your signature, one becomes a general indorser
Agbayani: It must be noted, however, that: and warrants that the instrument is genuine in all respect what it purports to be
1) Only the signature forged or made without authority is stated by law to be under Section 66.
inoperative but neither the instrument itself is, nor the genuine signatures
are, rendered inoperative. Persons Negotiating by Delivery
2) The instrument can be enforced by holders to whose title over the instrument
the forged signature is not necessary, such as, an indorsement of an Agbayani: Persons negotiating by mere delivery also warrant the instrument
instrument which on its face is payable to bearer. negotiated by them is genuine in all respects what it purports to be.
3) The instrument can be enforced against those who are precluded from setting
up the defense of forgery, even against those whose signatures are forged. Sebastian: Unlike an indorser, the warranties made are under Section 65 or
warranties made by a qualified indorser. These warranties are given by persons
Sebastian: negotiating the instrument by mere delivery (i.e. bearer instruments).
1) Only the forged signature or made without authority is wholly inoperative
and the other signatures are vaild. Acceptors
2) The insturment can be enforced by the holder whose title to the instrument
does not require the forged signature. Meaning, the holder can enforce the Agbayani: Under Section 62, a drawee, by accepting the bill, admits the
instrument against a person whose signature is not neessary for the genuineness of the signature of the drawer.
instrument. Remember that to a holder in due course, a valid delivery to all
prior parties is conclusively presumed. Campos: An acceptor is precluded from claiming that the drawer’s signature is
forged because under Sec. 62, he warrants its genuineness.
Forgery of an irrelevant signature is not a defense, while forgery of a relevant
signature is a real defense. A bank is bound to know the signatures of its customers; and if it pays a forged
check, it must be considered as making the payment out of its own funds, and
3) While a forged signature is wholly inoperative, the person against whom it is cannot ordinarily charge the amount so paid to the account of the depositor
sought to be enforced must not be precluded from claiming forgery, such as, whose name was forged.
(1) the forgery was committed thru their negligence or (2) they delayed in
notifying the forgery to the parties involved. Sebastian: By way of Section 62, an acceptor admits the genuineness of the
signature.
PARTIES BARRED FROM SETTING UP THE DEFENSE OF FORGERY
Representations and warranties enhance the acceptability of the instrument. By
Sebastian: Persons who are precluded from setting up the defense of forgery making them, the instrument becomes more like money and more acceptable.
are (1) those who warrant or admit the instrument’s genuineness and (2) those Warranties need not to be stated in the instrument.
who are barred on account of silence, acts or negligence.
Persons in Estoppel
The common rule to all is that he who made the loss happen should bear the risk
and loss. Agbayani: The rule of estoppel as stated in the New Rules of Court, applied to
forgery in negotiable instruments may be stated thus: Whenever a party has, by
Indorsers his own declaration, act, or omission, intentionally and deliberately led another
to believe that his or another’s signature in an instrument is genuine, and to act
Agbayani: Indorsers, whether qualified or general, warrant that the instrument upon such belief, he cannot, in any litigation arising out of such declaration, act,
indorsed by them is genuine in all respects what it purports to be. or omission, be permitted to set up the forgery of such signature or signatures.
Campos: A general indorser subsequent to the forgery warrants among other Unreasonable delay, after his discovery of the forgery, uon the part of one having
things that the instrument is genuine, and that it is valid and subsisting at the the opportunity and duty to speak, in disclosing the forgery upon commercial
time of his indorsement. paper to the one who ought to be apprised thereof, estops the former from
LEX SOCIETAS 31
thereafter asserting the forgery as against the latter where the latter is prejudiced Agbayani: Where the indorsement is forged and the note is payable to order,
by such delay or failure. The requisites are (1) that the delay be unreasonable and the party whose indorsement is forged and parties prior to him including the
(2) that the one who ought to be apprised of the forgery must have been maker cannot be held liable by the holder, whether that holder is a holder in due
prejudiced. course or not.
Sebastian: Estoppel may arise from declaration, act or omission. Because of Sebastian: Normally, the holder must first collect from his immediate indorser
these, you are precluded from using forgery as a defense. and the latter must first collect from his immediate indorser and so on and so
forth until it reaches the forger. However, because of the forgery, the law allows a
The basis of the rule of estoppel is that one cannot lead another to believe that his shortcut where the holder can go after forger. His cause of action would be
or another’s signature in an instrument is genuine, and to act upon such belief, he enforcement of warranites under Section 66 or a criminal action for falsification
cannot deny in any litigation arising out of such declaration. Not every of commercial document. In fact, the holder can file an action to all parties after
declaration puts a person in estoppel. It must be meant to be relied upon for the the forgery in one suit.
person to make the declaration to be “estoppable.” In this case, the declaration
was suppose to make the instrument more acceptable and negotiable. Forged Indorsement of Note Payable to Bearer
Estoppel may also apply when there is unreasonable delay on the part of the Agbayani: In case the note is originally payable to bearer, the party whose
person who suffered the loss due to forgery and failed to report that the indorsement is forged and parties prior to him including the maker, may be held
instrument was forged. It is the responsibility of the person who incurred the loss liable by a holder in due course provided that the note was mechanically
due to forgery to report it within reasonable time because had the forgery been complete before the forgery.
reported as early as possible, the transfer of the instrument could have been
prevented. Sebastian: A bearer instruments need not be signed because they only need to
be delivery to be negotiated. Warranties under Section 65 will apply. By mere
Persons Guilty of Negligence in Delivery delivery a holder is already a holder in due course even if there was no
indorsement. Thus, the holder can enforce the note against the maker because an
Agbayani: The omission may consist in negligence in the delivery of the indorsement is irrelevant in a bearer instrument.
instrument. Thus, a drawer may be precluded from a defense of forgery of the
payee’s indorsement if delivery by him to the payee is negligent. However, when the check is stolen the holder cannot make a claim against the
maker because the instrument was not properly discharged. But theft is only a
Sebastian: Negligence in delivery may also result to estoppel. personal defense and cannot be used against a holder in due course. Instead, the
holder can go after forger civilly for recovery of sum of money and/or criminally
FORGERY OF NOTES for theft or qualified theft.
Agbayani: Forgery of promissory notes may be further subdivided into forgery FORGERY OF BILLS OF EXCHANGE
of an indorsement in the note and forgery the maker’s signature.
Forged Indorsement of a Bill Payable to Order
Forgery of Maker’s Signature
Agbayani: Where the indorsement is forged and the bill is payable to order, in
Agbayani: Where the maker’s signature is forged, he cannot be held liable by the absence of preclusion from setting up forgery by warranty as in the case of
any holder, whether the holder is in due course or not. The reason is that the indorserers or by estoppel as in the case of negligence, the following are the rights
purported maker is not a party to the instrument as his forged signature is and liabilities of the parties:
inoperative and no right to retain, enforce or discharge the note, may be acquired
against him. drawer’s account cannot be debited
Forged Indorsement of Note Payable to Order Agbayani: In an action by the drawee against the drawer for the amount
charged by the drawee against the account of the drawer where the drawee
paid a check on a forged indorsement, the drawee has no defense against the
LEX SOCIETAS 32
drawer, and the drawer may recover from the drawee for an instrument paid
on a forged instrument. payee can recover from drawer
This is on the theory that the drawer owes the drawee an absolute and Agbayani: Payee can still recover from the drawer on the basis of his claim
contractual duty to pay the check only to the person to whom it is made of debt upon which the check in the first place had been issued.
payable or upon his genuine indorsement. And the depository cannot relieve
himself of this duty by an amount or degree of care he may have exercised to Sebastian: Since the payee did not receive the proceeds of the check because
determine the indorsement is the genuine indorsement of the payee. In such of the forged indorsement, his claim against the drawee subsists and he can
cases, the drawer authorizes and directs the drawee to pay only to the payee recover from the latter. It must be remembered that when payment is made
or to the order of payee. It does not authorize or direct the drawee to pay the by way of a negotiable instrument, the debt is not extinguished until the
check to any other person. The drawee bank has no legal right to pay the instrument is encashed except if the instrument lost its value on account of
money of the drawer on deposit with it to anyone except the drawer or its the creditor’s fault.
order.
payee can recover from recipient of payment
Sebastian: Drawee has an obligation to pay payee or order only. There is
breach of contract if drawee does not. In this case, drawee cannot even raise Agbayani: According to the general rule, a bank or other corporation or an
the defense that he exercised extraordinary diligence because the cause of individual, who has obtained possession of a check, upon an unauthorized or
action of the drawer against the drawee is breach of contract, not negligence. forged indorsement of the payee’s signature and who collects the amount of
the check from the drawee, is liable for the proceeds thereof to the payee or
drawer cannot recover from collecting bank other owner, notwithstanding that they have been paid to the person whom
the check was obtained.
Agbayani: The drawer has no right to recover the amount paid from the
collecting bank because the duty of the collecting bank to exercise care in collecting bank is liable to payee
collection is due only to the payee and the drawer suffers no damage since it
can recover the amount paid from the drawee bank. Agbayani: The possession of the check on the forged or unauthorized
indorsement is wrongful, and when the money had been collected on the
Sebastian: The drawer cannot recover from the collecting bank because check, the bank or other person or corporation, can be held as for the moneys
there is no privity of contract between them. had and received, and the proceeds are held for the rightful owners of the
payment and may be recovered by them. The position of the bank or other
drawee can recover from collecting bank corporation or person taking the check on the forged or unauthorized
indorsement is the same as if he had taken the check and collected the money
Agbayani: The drawee may recover from the recipient of the payment, such without indorsement at all, and the act of the bank amounts to conversion of
as the collecting bank, under a forged indorsement. The reason for this is the the check.
same as for the rule allowing the payee to recover from the recipient of the
payment under a forged indorsement. Payment to depositor of forged signature of the payee, or the drawee bank on
the same forged signature gave rise to an obligation to return the amounts
Sebastian: The drawee can recover from the collecting bank if the latter was received.
the forger’s bank because the collecting bank is the agent of the forger. Since
the drawee can also run after the forger, he can also run after the collecting Sebastian: The collecting bank is liabile to the payee because when the
bank because the legal standing of the agent cannot stand higher that that of collecting bank collected the instrument, it had no authority to do so. It’s
the principal. However, if the collecting bank’s principal was a holder in due authority to collect the check is based on the validity of the instrument.
course, the drawee cannot collect from collecting bank because the former is
already a party after the forgery. payee cannot recover from drawee
On this same ground, the payee can also recover from the forger. Since theft Agbayani: The general rule is that an action cannot be maintained by a
of the check is a criminal offence, the thief is required to make restitution. payee of the check against the drawee bank it is drawn unless the check has
LEX SOCIETAS 33
been certified or accepted by the drawee bank. Without acceptance or The only defense of the drawer, if ever, is that the instrument was not delivered.
certification, there is no privity of contract between the drawee bank and the However, this defense is only a personal defense; thus, not available against a
payee, or holder of the check. Neither is there an assignment pro tanto of the holder in due course. A holder in due course can claim against the drawee
funds where the check is not drawn on a particular fund, or does not show on because delivery is conclusively presumed.
its face that it is an assignment of a particular fund.
Forged Signature of Drawer with Acceptance
Sebastian: Payee cannot recover from the drawee because there is no privity
of contract. But there can be one created if the drawee bank certified the Agbayani: The drawee cannot set up the defense of forgery because when he
check. By certification the drawee undertakes to pay the check but does not accepted the bill, he admitted the genuineness of the signature of the drawer, and
accept it, the bank debits from drawers account and the drawer becomes therefore, he cannot be thereafter be heard to say that the signature is a forgery.
liable to pay the bank. Through certification, the check becomes a promissory Consequently, he stands to bear the loss and his remedy is against the forger.
note of the drawee because it makes an undertaking to pay the instrument.
The purported drawer is not liable as his signature is inoperative and, therefore,
Campos: No exception lies in the case of the drawee’s acceptance or payment of he is not a party to the bill. No right to retain the bill, give discharge therefor or
a genuine bill where only an indorsement has been forged. The drawee can enforce payment thereon may be acquired against him by any holder. Further
recover the amount paid out by him since he makes no warranty as to the more, since his signature is inoperative, his signature does not really appear on
genuineness of any indorsement. However, when he learns about the forgery, he the bill, and, therefore, he is not liable thereon.
should notify the holder to whom he paid as promptly as possible. Should he do
so his right of recovery will not be affected by his subsequent knowledge of the Campos: Where the drawer’s signature is forged on a bill or check, the drawee
forgery. But should he fail to act promptly, he may lose his right to recover who pays it without having detected the forgery cannot charge the amount
against the holder if his negligent delay operates to the latter’s prejudice. thereof to the drawer’s account. The forged signature is wholly inoperative and
does not give the drawee the right to discharge it.
Where the negligence of the drawee bank is the proximate cause of a collecting
bank’s payment of a check with a forged indorsement, the former may be held We do not think that he who accepts a forged signature of a payee deserves that
liable to the latter bank. preferred treatment. It is his neglect or error in accepting the forger’s signature
which occasions the loss. He should be allowed to shift that loss to the drawee
The real and underlying reasons why negligence of the drawer constitutes no only on a clear showing that the drawee’s delay in notifying him of the forgery
defense to the collecting bank are that there is no privity between the drawer and caused him damage.
the collecting bank and the drawer owes to that bank no duty of vigilance.
Sebastian: By acceptance, drawee becomes liable to pay. Until the drawee
While the drawer generally owes no duty of diligence to the collecting bank, the accepts, the liability is determined under Section 66. Once drawee accepts, a
law imposes a duty of diligence on the collecting bank to scrutinize checks holder can collect from him since an acceptor cannot raise the defense of forgery
deposited with if for the purpose of determining their genuineness and regularity. being a party after the forgery. A holder can also claim from the forger.
The collecting bank, being primarily engaged in banking holds itself out to the
public as the expert and the law holds it to a high standard of conduct. Forgery of the drawer’s signature is not a defense available to the drawee bank.
Likewise, the drawee bank cannot run after parties subsequent to the forgery.
Forged Indorsement of Bill Payable to Bearer Instead, the drawee bank may run after the forger.
Agbayani: The rules are the same as in forged indorsements of promissory Forged Signature of Drawer without Acceptance
notes.
Agbayani: As between equally innocent persons, the drawee, who pays money
Sebastian: In this case, if the drawee pays a forged bearer instruent, he is not on a check or draft the signature to which is forged, cannot recover from the one
liable for breach of contract with drawer because the instruction was pay to who received it.
bearer. If drawee dishonors, a holder in due course can sue drawer, the
forger/indorser under warranties in Section 65 and the drawee bank. The drawee so paying is considered as being constructively negligent. This rule is
absolutely necessary to the circulation of drafts and checks and is based upon the
LEX SOCIETAS 34
presumed negligence of the drawee in failing to meet its obligation to know the If the stop order comes after the bank has certified or accepted the check, the
signature of its correspondent. Conditions would be intolerable if the retiring of bank is under legal duty to pay the holder and will not be liable to the drawer for
commercial paper, through its payment by the drawee, did not close the doing so.
transaction but it was possible at an indefinite time in the future to reopen the
matter and recover the money, if the paper proved to have been forged. No one Sebastian: Drawee here is a party after the forgery. Drawee does not have a
would dare handle it, and it would pass out of use regardless of its convenience or liability to pay but he paid.
necessity as a part of the life of business. There is nothing inequitable in such
rule. If the paper comes to the opportunity of ascertaining its character, PNB v. Quimpo – The prime duty of a bank is to ascertain the genuineness of
pronounces it valid and pays it, it is not only a question of payment under the signature of the drawer or the depositor on the check being encashed. It is
mistake but payment in neglect of duty which the commercial law places upon expected to use reasonable prudence in accepting and cashing a check presented
him, and the result of his negligence must rest upon him. to it. Obviously, petitioner was negligent in encashing said forged check without
carefully examining the signature which shows marked variation from the
The basis of the general rule is not that the drawee is precluded from setting up genuine signature of private respondent.
forgery because, by paying the check, it has accepted the check and therefore
admitted the genuineness of the drawer’s signature. The basis is that by paying Agbayani: Where the drawee bank encashed a check in which the drawer’s
the check, the drawee is presumed negligent or deemed constructively negligent. signature is forged which shows marked variations from the genuine signature of
the supposed drawer, said bank is negligent, and should return to the drawer
Campos: The drawee who had paid an accepted bill as well as a non-accepted what it has debited the latter’s account.
bill, each of which bore the forged signature of the drawer, could not recover the
money paid out on either bill. The drawee is bound to know the signature of the Sebastian: In this case, we should focus on which party should the effect of
drawer and must therefore bear the loss in case it turns out to be forged. negligence fall.
“Acceptance” and “payment” are essentially different things, for the former is a National Bank v National City Bank –
promise to perform an act, whereas the latter is the actual performance thereof.
The acceptance of a bill is the signification by the drawee of his assent to the Agbayani: If the drawee accepts the paper after seeing it and then permits it to
order of the drawer. Actual payment of the amount of a check implies not only an go into circulation as genuine, on all the principles of estoppel, he ought to be
assent to said order of the drawer and recognition of the drawee’s obligation to prevented from setting up forgery to defeat liability to one who has taken the
pay the aforementioned sum, but also, a compliance with such obligation. paper on the faith of the acceptance or certification.
When one or two innocent persons must suffer by the wrongful act of a third In the case of the payment of a forged check even without former acceptance, the
person, the loss must be borne by the one whose negligence was the proximate drawee cannot recover from a holder in due course not chargeable with any act or
cause of the loss or who put it into the power of the third person to perpetrate the negligence or disregard of duty.
wrong.
But the payment of a forged check does not include or imply its acceptance in the
The rule creating an exception to the doctrine of payment under mistake, has sense that this word is used in Section 62. Payment is the final act which
been extended by the courts to cover the drawee of a bill who honors an extinguishes a bill. Acceptance is a promise to pay in the future and continues the
overdraft. An overdraft occurs when a check is issued for an amount more than life of the bill.
what the drawer has in deposit with the drawee bank.
Campos: The responsibility of the drawee who pays a forged check, for the
The test which determines whether a recover may be had is whether the genuineness of the drawer’s signature, is absolute only in favor of one who has
defendant in equity and good conscience is entitled to retain the money to which not, by his own fault or negligence, contributed to the success of the fraud or to
the plaintiff asserts claim. It is also a general rule that the failure of the payor to mislead the drawee.
exercise ordinary care to avoid mistake will not as a matter of law defeat his
recovery. Sebastian: In this case, the negligence of the drawer was the proximate cause of
the forgery, and thus, he is estopped from raising forgery as a defense.
LEX SOCIETAS 35
San Carlos Milling v BPI –
Payee’s Negligence in Forgery of Drawer’s Signature
Agbayani: A bank is bound to know the signature of its customers; and if it
pays a forged check, it must be considered as making the payment out of its own Agbayani: The payee in a check or draft may be supposed to have knowledge of
funds and cannot ordinarily charge the amount so paid to the account of the the circumstances under which it is drawn and, generally, of the person drawing
depositor whose name was forged. it, and is in a better situation to judge the genuineness of the paper than are
indorsees. And there is a tendency to place a greater responsibility upon him and
Qualifications to the Foregoing Rules he is much more likely to be required to return the proceeds of paper than are the
indorsees. Without a doubt, the same necessities of business which require the
Agbayani: It must be remembered that the foregoing rules are qualified by the drawee to know the signature of the drawer, and prevent his recovering money
rules precluding the setting up the defense of forgery by warranty or by estoppel. paid to an innocent holder of the paper, require one who first negotiatest the
paper to take some precautions to learn whether or not it is genuine, and if he,
Campos: The bank is freed from liability only if the proximate cause of its through indifference, or worse, assists the forger in committing the fraud, he
wrongful payment is the negligence of the drawer, but not otherwise. should not be permitted to retain the proceeds of the draft from the drawee
whose sole fault was that he did not discover the forgery before he paid the draft.
Liability of Party Negotiating After Forgery
Agbayani: Parties negotiating by indorsement and delivery, or by mere delivery

subsequent to the forgery, are precluded from setting up the defense of forgery
and may be held liable under their warranties or liabilities stated in Sections 65
or 66.
Negligence of Drawer in Forgery of Indorsement Other than a Check
Agbayani: The negligence of drawers in making possible forged indorsements

by their swindling clerks, and not discovering or reporting them promptly, barred
recovery from the drawee bank by the drawers, as where there is negligence in
delivery. Likewise, unreasonable delay in giving notice will bar recovery by the
drawer from the drawee bank.
Negligence of Drawer in Forgery of Indorsement of a Check
Agbayani: But with a few possible exceptions the courts are generally agreed
that the depositor’s duty does not extend to the examination and verification of
the genuineness of the indorsements on the checks, or to the discovery of
forgeries therein because a depositor is not required and may not be expected to
know the signatures of the payee and of the various indorsers. Therefore, even if
the cancelled checks were examined by him, the examination would not disclose
forgery; that duty of verifying the genuiness of the indorsements rests on the
depository cashing the check, and the depositor may rely upon its proper
performance of this duty at least in the absence of evidence that he was familiar
with the signature of the payee.
Campos: If due to the drawer’s negligence, the forgery is not discovered until it
is too late for the bank to recover from the holder or the forger, then the drawee
may properly charge the amount against the drawer’s account.
LEX SOCIETAS 36
SUMMARY OF RIGHTS AND LIABILITIES IN RELATION TO FORGERY
FORGERY OF PROMISSORY NOTES FORGERY OF BILLS OF EXCHANGE
Forgery of Maker’s Signature Forgery of Payee’s Signature Forgery of Drawer’s Signature
Rule The maker is not liable to any holder. Drawer vs. Drawee Bill Accepted
Reason The maker, whose signature is forged,
is not a party to the transaction. Rule Drawee Bank suffers the loss and must Rule Reason
Exception He may be made liable if the doctrine reimburse the account of Drawer. Drawee/Acceptor must By accepting the check,
of estoppel finds application. Reason Drawer instructed Drawee Bank to pay pay the check. an acceptor undertakes
Caveat If the note is negotiated nevertheless Payee and no one else. If Payee is not to pay the instrument in
by subsequent endorsement and paid, Drawee Bank did not obey the accordance with the
delivery, the endorsers may be held instruction. tenor of his acceptance.
liable on their statutory warranties. Drawer is not liable for A forged signature is
Drawee vs. Collecting Bank the value of the check. totally inoperative.
Forgery of Indorser’s Signature
Rule Drawee Bank may recover from Bill Not Accepted
Note Payable to Order Collecting Bank because Collecting
Bank had no authority to pay the Rule Reason
Rule Endorser whose signature is forged proceeds of the check to Forger. Drawee Bank cannot Drawee Bank should
and all prior parties, including the Reason Collecting Bank has the legal duty to recover the proceeds of have detected the forgery
maker are not liable to any holder. ascertain that the payee’s endorsement the check from Holder if of Drawer’s signature
Reason The signature of the endorser and the is genuine. he is a holder in due because Drawer is its
delivery of the note are necessary to course. client.
transfer title to the note. Since an Drawer vs. Collecting Bank Endorser is liable to An endorser is liable
endorser’s signature is forged, the Holder, if Drawee Bank under his warranties in
transfer of title to a subsequent Rule Drawer has no cause of action against dishonored the check Section 66.
endorsee is inoperative. Collecting Bank.
Reasons There is no privity of contract between Drawer generally enjoys A forged signature is
drawer and collecting bank. The duly to protection against wholly inoperative.
observe due care is owed by the forgery. However, he
collecting bank to the payee. must not be guilty of
negligence; i.e., the
Payee vs. Drawer forgery must not have
been caused by his own
negligence. Also, he must
Rule Payee may recover from Drawer.
discover the forgery
Reason The claim of Payee against Drawer
within a reasonable
remains unpaid.
period of time.
LEX SOCIETAS 37
Note Payable to Bearer Payee vs. Recipient of Payment
Rule Endorser whose endorsement is Rule Payee may recover from Forger.
forged and all prior parties including Reason Forger is not entitled to the proceeds of
the maker ARE LIABLE TO A the check. At best, Forger holds the
HOLDER IN DUE COURSE, provided proceeds of the check in trust for Payee.
the note is mechanically complete
before the forgery. (f) Payee vs. Collecting Bank
Reason The endorsement is not necessary to
transfer title. The only defense Rule Payee may recover from the Collecting
available to resist the claim is want of Bank.
delivery of a mechanically complete Reason Collecting Bank’s collection of the
instrument under Section 16. proceeds of the check is unlawful, and
Exception Section 16 is a defense available only Collecting Bank therefore holds the
against a holder who is not a holder in funds in trust for the payee. A forged
due course, because a valid and endorsement is totally inoperative.
intentional delivery of the note is Collecting Bank’s collection of the
presumed by law as regards a holder proceeds of the check amounts to a
in due course. conversion – i.e., the unauthorized
Qualificati If the note is incomplete, Section 14 assumption and exercise of rights of
on would apply, in which case the ownership over goods and chattels
possessor of the note must complete belonging to another.
the instrument strictly in accordance
with the authority given and within a Payee vs. Drawee
reasonable time. But if upon
completion the note is negotiated to a Rule Payee has no cause of action against
holder in due course, the note is valid Drawee Bank unless the check has been
and effectual for all purposes in his certified or accepted by the latter.
hands and he may enforce the note as Reason There is no privity of contract between
if it was strictly filled up in accordance the payee and the drawee.
with the authority given, and within a
reasonable period of time. Collecting Bank vs. Forger
If the note is incomplete and Rule C (Collecting Bank) has a cause
undelivered, then Section 15 will apply of action against Y (forger) for
and it will not be valid in the hands of the recovery of the proceeds of
any holder unless completed and the check.
negotiated with authority. Reason C was prejudiced by the
withdrawal of funds by Y, which
amount must be reimbursed by C
to either the Payee or the
Drawee.
LEX SOCIETAS 38
its original tenor, provided that he
ALTERATION was not a party to the alteration.
Sec. 124. Alteration of instrument; effect of. - Where a negotiable The instrument is avoided except
instrument is materially altered without the assent of all parties liable against the party who has himself
thereon, it is avoided, except as against a party who has himself made, made, authorized or assented to the
authorized, or assented to the alteration and subsequent indorsers. alteration and subsequent indorsers.
Forgery is a real defense and parties Material alteration is a personal
But when an instrument has been materially altered and is in the prior to the forgery cannot be held defense to deny the liability according
hands of a holder in due course not a party to the alteration, he may liable. to the original tenor of the
enforce payment thereof according to its original tenor. instrument. It is a real defense when
relied to deny liability according to
Sec. 125. What constitutes a material alteration. - Any alteration the altered terms.
which changes: The instrument may only be enforced
(a) The date; up to the original tenor of the
(b) The sum payable, either for principal or interest; instrument.
(c) The time or place of payment:
(d) The number or the relations of the parties; WHAT CONSTITUTES MATERIAL ALTERATION
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is Agbayani: An alteration is said to be material if it alters the effect of the
specified, or any other change or addition which alters the instrument.
effect of the instrument in any respect, is a material
alteration. Campos: Section 125 specifies and defines what constitutes a material
alteration. Any other alteration not mentioned under Sec. 125 would be non-
DEFINITION material and would not affect the liability of any prior party on the instrument.
Thus, the addition of words implied the by law, or changing marginal figures to
Campos: A material alteration changes the contract of the parties. make them conform to the sum expressed in words, is not a material alteration
because it does not change the legal effect of the instrument.
Sebastian: Material alteration is any change in the details of the instrument
that results in a change in the effect of such instrument. Changing the payee’s name is obviously a material alteration. It may consist in
erasing the original payee’s name and writing the name of another. Where the
Both forgery and alteration are changes made to an instrument. instrument is payable to joint payees, the alteration may consist in erasing the
word “and” between the names of two payees, and by replacing it with “or”,
FORGERY ALTERATION making the instrument payable to alternative payees. But where the erasure is
The kinds of forgery are (1) The forms of alteration are defined made before the issuance by the maker or drawer, there being no other signatures
mechanical falsification, (2) fraud in under Section 125. The enumeration at such time, there is no material alteration. The instrument has nolegal existence
factum, (3) duress amounting to therein is exclusive. prior to such issuance. If the payee’s name is altered after the issunace, no
forgery and (4) fraudulent purchaser, though innocent, can derive title as regards the payee and prior
impersonation. If the signature is altered, it is no parties.
longer alteration.
As to effect, the forged signature The instrument does not becomes The addition of a name, either as a primary party or as second party, is a material
becomes wholly inoperative. wholly inoperative. alteration. Spoilation or a material alteration by a stranger, id not avoid the
instrument under common law. Section 124 does not distinguish, but the cases
A holder in due course may still that have been arisen under the Negotiable Instruments Law have continued to
enforce the instrument according to
LEX SOCIETAS 39
apply the common law rule – the spoliation does not affect the instrument, Material alteration is therefore a personal defense when used to deny liability
provided the original meaning can be ascertained. according to the original tenor of the instrument. It is a real defense when relied
on to deny liability according to altered terms.
Sebastian: Material alterations are changes in the contractual relationship of
the parties. Thus, one who altered the note making it a bearer instrument, even if Since Section 124 made no distinction, the instrument will be avoided whether
the instrument was already made a bearer instrument by a blank indorsement, is the material alteration was made with or without fraudulent intent, and whether
guilty of materially altering the instrument because the original contractual it proves beneficial or prejudicial to the interests of prior parties.
relations of the original parties are changed as to the warranties made.
General rule denies the drawee bank’s right to charge against the drawer’s
EFFECTS OF MATERIAL ALTERATION account the amount of an altered check. However, the drawer’s negligence, before
or after alteration, may estop him from setting up such alteration as against an
Agabayani: Where a negotiable instrument is materially altered, it is avoided innocent drawee bank who has paid the check. Thus, where the drawer of a check
in the hands of one who is not a holder in due course as against any prior party who in filling it out negligently leaves spaces, making it possible for another to
who has not assented to the alteration. However, the law makes certain alter the amount by inserting words and figures therein, the drawer cannot
exceptions. The instrument is not avoided as against: complain should the bank pay and charge the amount as altered against his
1) a party who has made the alteration; account. It was his negligence which proximately caused its payment. However,
2) a party who authorizes or assented to the alteration; and there is a conflict of opinion as to whether such estoppel can apply in favor of a
3) subsequent indorsers. holder in due course. Some courts refuse to apply such estoppel against the
drawer in favor of a holder in due course, who, in spite of the drawer’s negligence
But when an instrument has been materially altered and is in the hands of a is allowed to recover only the original amount. The basis given for the difference
holder in due course not a party to the alteration, he may enforce payment lies in the fact that since a bank has the duty of honoring checks drawn against it
thereof according to its original tenor. by its depositors, the drawer owes a corresponding duty to his bank to fill in his
checks carefully. On the other hand, one to whom a check is negotiated is under
A holder in due course can enforce the instrument according to its original tenor not duty to take it. The drawer therefore owes him no duty of diligence. The
regardless of whether the alteration was innocent or fraudulent because the law Uniform Commercial Code rejects this view and provides that the drawer is liable
does not make any distinction. to a holder in due course for the terms as altered.
Campos: A material alteration avoids the instrument and discharges all parties, Where the negligence of the drawer consists in failing to discover alterations
unless they authorized or consented to the alteration. A subsequent indorser is previously made, the rule is similar to that applicable to a forged check. Thus, in a
excepted from this rule because by the indorsement he warrants, among other series of alterations of several checks, if the drawer could have discovered the
things, that the instrument is in all what it purports to be and that it was valid alterations by a comparison between his cancelled checks and his check stubs, or
and subsisting at the time of his indorsement. On the other hand, a holder in due by a diligent observation of his record, and could thus have prevented the drawee
course may enforce the altered instrument according to its original tenor. This bank from subsequently cashing other altered checks, the latter can charge the
presupposes that the alteration is not apparent on the face of the instrument, subsequent checks against the negligent drawer’s account.
otherwise it would be irregular and no holder thereof could be a holder in due
course. Where the alteration is of the amount, the holder in due course may Suppose a drawee bank has cashed a check on which the amount has been
recover the original sum. The drawee bank can likewise charge the drawer’s altered, can it recover back from the recipient-holder in due course the difference
account with the original amount. If the holder is not one in due course, he between the original and altered amount? Similarly, if the drawee bank has paid a
cannot recover anything and the drawee bank cannot charge any part of the check on which the payee’s name was changed, can it recover back the money it
amount against the drawer’s account. Where the interest rate is altered, the paid? The prevailing view, which was the common law rule, allows recovery by
holder in due course can recover the principal sum with the original rate of the drawee bank on the ground that the amount paid is under mistake and under
interest. Where the date of payment is changed, the original date of maturity Section 124, a holder in due course can recover only according to the original
controls in determining whether or not a holder is a holder in due course. amount and not the altered tenor of the instrument. The opposite view however
asserts that under Section 62, the acceptor engages to pay according to the tenor
of his acceptance and is therefore estopped from recovering.
LEX SOCIETAS 40
The arguments set forth by the majority view find strong support in the legal A drawee bank is bound to know the signature of its depositors, so when it honors
provisions. Acceptance is defined by Sec. 132 as the “signification of the drawee of checks on which the drawer-depositor’s signature is forged, it has no excuse for
his assent to the order of the drawer.” Sec. 62 should be related to this definition. later trying to recover from the collecting bank. And even in the case where the
“Assent to the order of the drawer” means assent to the actual not the apparent forgery is so skillfully done that the drawee could not have detected it, still the
order of the drawer. In like manner, Section 139 in defining general and qualified drawee would be estopped from recovering because under Sec. 62 the drawee
acceptance provides: “A general acceptance assents without qualification to the bank by accepting or paying a check admits the genuineness of the drawer’s
order of the drawer. A qualified acceptance in express terms varies the effect of signature. As earlier stated, the justification for this rule is that payment on a
the bill as drawn.” In both these provisions, acceptance is definitely associated check must at some time or another become final. Any other rule would affect the
with the order of the drawer and not with what appears to be the drawer’s order stability of commercial transactions.
after the alteration. The words “according to the tenor of his acceptance” should
thus be construed to mean the kind of acceptance – whether qualified, or general. Alteration of the payee’s name or of any other material terms of the check is an
Furthermore, Section 124 avoids the instrument “except as against a party who entirely different matter. If the altreation is not apparent on the face of the check,
has himself made, authorized or assented to the alteration and subsequent the drawee banks would not disvoer the alteration until it is informed by the
indorsers.” An acceptor has not assented to the alteration because “assent” can drawer after the latter has received the cancelled check. Then, because of Section
only mean assent with knowledge of the facts. Neither is he a subsequent 124, it would have to recredit the drawer with the amount of the check. When it
indorser. The final and perhaps strongest legal argument is that Sec. 124 receives an altered check through the clearing house, the check looks regular on
expressly provides that a holder in due course can recover only according to the its face. There would be absolutely nothing to warn it about the defect, and thus
original tenor of the instrument. There is however one important and desirable all it would do and should be expected to do is to check the sufficiency of the
effect of the minority view cannot be ignored – denying recovery to the drawee drawer’s funds and the genuineness of his signature. It would be highly
bank would tend to give stability to checks. Furthermore, as between the holder impractical to require the bank to check with each drawer the correctness of the
and the drawee bank, it seems that the latter is in a better financial position to terms of the check he has issued, even in the cases where his signature is
shoulder the loss, since it can and probably should insure itself against such admittedly genuine and his deposit is sufficient to cover the check. Yet this is in
eventualities. effect the burden which the HSBC case places on drawee banks. But would it be
possible for them to do this with all checks drawn daily against them within the
It will be recalled that the rule in forgery of the drawer’s signature is that the short period allowed by the clearing house rule referred to in the case?
drawee bank cannot recover from the holder in whose favor it cashed such check.
The basis of this rule is that a s between the holder and the drawee bank, the An acceptor of a bill of exchange, by acceptance, only admits the genuineness of
latter is in much better position to know the signature of the drawee since the the signature of the drawer, and does not admit the genuineness of the
latter is its customer. It is for this reason that Section 62 incorporates the indorsements, whether of the drawee of the same bill, or of any other person
acceptor’s warranty of the genuineness of the drawer’s signature. In the case of whose name appears upon it, or any other part of the bill, is sustained by an
the altered check however, there can be no similar basis for holding the drawee unbroken current of authority.
bank responsible for non-apparent alterations. Although it is bound to know the
drawer’s signature, it would be unfair to burden it with knowledge of the drawer’s When the bill is presented for acceptance, the acceptor looks to the handwriting
handwriting. And many times checks are not filled in by hand but by typewriter of the drawer with which he is presumed to be acquainted, and he affirms its
or in print. Payment by the drawee bank of the altered check would therefore genuineness by giving credit to the bill, by his acceptance in favor of the legal
indeed be a mistake, and should be effective only to the extent of the original and holder thereof.
not the altered tenor of the instrument.
The drawee bank which has paid an altered check to a collecting bank bears the
Our Supreme Court has in effect come to the same conclusion as the minority loss only if it is itself negligent in failing to return the check promptly after
view but on an entirely different basis. The drawee bank was denied recovery discovery. Recovery of the the difference between the original and the altered
based on a Central Bank Circular regulating clearing of checks and limiting the amount from a holder in due course may be made.
period within which a drawee bank may return a spurious check. No mention of
Section 62 or of Section 124 or of any provision of the Negotiable Instruments Sebastian: Parties prior to alterations cannot be made liable on the altered
Law was made. The Circular has since been amended. instrument. The instrument cannot be voided because Section 124 says that it is
not avoided against subsequent holders. Meaning, there can be subsequent
parties after the alteration that had nothing to do with the alteration.
LEX SOCIETAS 41
When a drawer of a bill or the maker of a note has himself, by careless execution
When you change the contractual relationship of the parties, the instrument is of the instrument, left room for any alteration to be made, either by insertion or
avoided as to parties prior to the alteration and thereby released from liability. erasure, without defacing it or exciting the suspicion of a careful man, and the
But as to parties subsequent, they already saw the alteration and thus it cannot be opportunity which he has afforded has been embraced, and the instrument filled
avoided as to them. up with a larger amount of different terms than those which it bore at the time he
signed it, he will be liable upon it as altered to any bona fide holder without
Banco Atlantico v Auditor General – Payment of checks by foreign bank to notice. In the hands of such holder a negotiable instrument may be enforced if a
payee without previously clearing said checks by foreign bank to payee without sum in excess of that authorized by the maker is inserted in a bank left for the
previously clearing said checks with the drawee bank is contrary to normal and amount of the instrument.
ordinary banking practice especially where drawee bank is a foreign bank and the
amounts involved are large and bars recovery. Sebastian: Since Foutch was negligent, he should bear the loss.
Agbayani: Paying bank must clear check with drawee bank before paying. Saving Bank of Richmond v National Bank of Goldsboro –
Banco Atlantico was not a holder in due course as defined in Section 52 because it Campos: The liability against the drawer of the draft as forged exists only for the
was obvious that it had knowledge of the infirmity or defect of the check. original amount thereof. The language of the statute and its obvious purpose and
intent are too manifest to leave room for cavil or doubt as to its meaning, and we
Sebastian: This case boils down to the doctrine of estoppel by negligence. It was should so take it, if left alone to our judgment thereof.
the negligence of Banco Atlantico (collecting bank) that gave rise to the loss. Its
negligence were manifested by paying cash to a check which was not cleared by Recovery could only be had against the defendant for the original face value of
the drawee bank. The collecting bank was not a holder in due course becase it was the draft; that where a negotiable note was delivered in completed form, the
obvious that it had knowledge of the infirmity or defect of the check. Had the possibility that it might be raised or altered by the willful fraud or forgery of
collecting bank been a holder in due course, it would have been able to at least another was too remote to afford the basis of an action either in tort or in
recover the original amount of the check. contract; that suit as upon a contract should not be maintained upon the note in
its forged and altered state, because it was not the contract of the maker of the
Since Banco Atlantico was not a holder in due course, it may not even enforce instrument; and that in such case, the issuing of the note could in no sense be
payment according to the instrument’s original tenor. considered the proximate cause of the loss.
Foutch v Alexandria Bank – We call attention to a distinction of essential Sebastian: In this case, the maker was not held liable because the check was
importance recognized generally between bank checks and negotiable delivered complete in all its part. The Court said that it was the duty of the bank
instruments of the note and bill class. This distinction is strongly emphasized to verify the check. This case was covered by the law of the State of California
because one who purchases a note is under no manner of compulsion and acts which says that the holder in due course may only enforce an instrument only up
purely at his option or election, under which circumstances it is not inappropriate to the original tenor of the instrument.
to apply, by analogy, the caveat emptor rule; whereas the Bank is under a direct
and peculiar delicate obligation, which requires prompt discharge, usually with Critten v Chemical National Bank –
little opportunity for investigation, to pay the check of its depositor, upon
presentation, or subject itself to the risk of damages. Furthermore, the depositor, Campos: The relation existing between a bank and a depositor being that of
on the other hand, owes to his bank the duty to exercise care in drawing his debtor and creditor, the bank can justify a payment on the depositor’s account
checks in order to avoid possible loss. only upon the actual direction of the depositor. The question of negligence cannot
arise unless the depositor has in drawing his check left blanks unfilled, or by
Campos: That duty is so to fill up his check as that when it leaves his hands as a some affirmative act of negligence has facilitated the commission of a fraud by
signed document, it shall be properly and fully filled up so that tampering with its those into whose hands the check may come.
contents or filling in a sum different from what the customer meant it to cover
shall be prevented. The rule is settled that the depositor owes his bank the duty of a reasonable
verification of the returned checks. It would prevent the successful commission of
continuous frauds by exposing the first forgeries.
LEX SOCIETAS 42
As to the liability of the collecting bank on its clearing house endorsement, such
Sebastian: This case modifies the whole theory of negligence. The liability for an indorsement must be read together with the 24-hour regulations on clearing
the damages are directly attributable to the negligence that caused it. House Operations of the Central Bank. Once that 24-hour period is over, the
liability on such an indorsement has ceased.
Marine National Bank v National City Bank – An acceptor of a bill of
exchange by acceptance only admits to the genuineness of the signatures of the Agbayani: Banks are bound by 24-hour clearing house rule, and must notify
drawer, and does not admit the genuineness of the indorsements, whether of the collecting banks within 24 hours of alteration of checks.
drawee of the same bill, or of any other person whose name appears upon it, or
any other part of the bill. The reason for this is when the bill is presented for Republic v CA – The 24-hour clearing house rule is a valid rule applicable to
acceptance the acceptor looks to the handwriting of the drawer with which he is commercial banks. When an indorsement is forged, the collecting bank or last
presumed to be acquainted, and he affirms its genuineness by giving credit to the indorser, as a general rule, bears the loss. But the unqualified indorsement of the
bill, by his acceptance in favor of the legal holder thereof. But the acceptor cannot collecting bank on the check should be read together with the 24-hour regulation
be presumed to have such knowledge of the other facts upon which the rights of on clearing house operation. Thus, when the drawee bank fails to return a forged
the holder may depend. or altered check to the collecting bank within 24-hour clearing period, the
collecting bank is absolved from liability.
24-HOUR CLEARING RULE
Agbayani: When drawee bank fails to return a forged or altered check to the
Campos: Under Section 1 of the Circular, the clearing is conducted at 4:00 pm collecting bank within the 24-hour clearing period, collecting bank is absolved for
every business day. Therefore, defective items must be returned by the drawee liability.
bank not later than 4:00 pm the next business day after the questioned check was
presented for clearance. But as to altered checks and checks with forged Campos: It is true that when an indorsement is forged, the collecting bank or
indorsements, an exception is made. As to these, the drawee bank can still return last indorser, as a general rule, bears the loss. But the unqualified indorsement of
them even after 4:00 pm of the next day provided it does so within 24 hours from the collecting bank on the check should be read together with the 24-hour
its discovery of the alteration or forged indorsement, but in no case may return be regulation on clearing house operation. Thus, when the drawee bank fails to
made beyond the usual prescriptive period prescribed by law, which would be 10 return a forged or altered check to the collecting bank within the 24-hour clearing
years since the relationship between drawee bank and collecting bank would period, the collecting bank is absolved from liability.
normally be evidenced by some written document. Thus, if the drawer discovers
the alteration or forged indorsement say, one year after the check’s clearing, he Unless an alteration is attributable to the fault or negligence of the drawer
should notify and return the defective check to the collecting bank not later than himself, such as when he leaves spaces on the check which would allow the
4pm of the next business day after it receives notice of the defect. Otherwise, the fraudulent insertion of additional numerals in the amount appearing thereon, the
collecting bank will not be liable to return the amount to the drawee bank. remedy of the drawee bank that negligently clears a forged and/or altered check
for payment is against the party responsible for the forgery or alteration.
Sebastian: Regardless of forgery/alteration or lack thereof, under banking laws,
when a check is deposited and the drawee bank does not act within 24 hours, the
drawee bank is considered to have conclusively honored the check. This is
irreversible.
Metropolitan Bank v HSBC – In this case, the check was not returned to the
collecting bank in accordance with the 24-hour clearing house period, but was
cleared by the drawee bank. Failure of the drawee bank, therefore, to call the
attention of the collecting bank to the alteration of the check in question until
after the lapse of nine days, negates whatever right it might have against the
collecting bank. Its remedy is not against the collecting bank, but against the
party responsible for the alteration.
LEX SOCIETAS 43
In onerous contracts the cause is understood to be, for each
CONSIDERATION OF NEGOTIABLE INSTRUMENTS contracting party, the prestation or promise of a thing or service by
the other; in remuneratory ones, the service or benefit which is
Sebastian: Consideration in the Civil Code is the same in Negotiable remunerated; and in contracts of pure beneficence, the mere
Instruments Law. And every contract must be supported by a valuable liberality of the benefactor. (Art. 1350, Civil Code)
consideration.
Agabayani: Consideration means inducement to a contract that is, the cause,
PRESUMPTION OF CONSIDERATION AND HOW REBUTTED motive, price or impelling influence which induces a contracting party to enter
into a contract. Valuable consideration means an obligation to give, to do or not
Sec. 24. Presumption of consideration. - Every negotiable instrument to do, in favor of the party who makes the contract, such as the maker or
is deemed prima facie to have been issued for a valuable indorser.
consideration; and every person whose signature appears thereon to
have become a party thereto for value. Sebastian: In Negotiable Instruments Law, consideration is defined in Section.
25. Consideration should be sufficient to support the contract. It should be
Agbayani: The presumption is disputable in the sense that the said valuable and has monetary equivalent. One can deny liability under a check if it
presumption is satisfactory if not contradicted. Thus, in an action based upon an was issued without valuable consideration.
instrument, it is unnecessary to aver or prove consideration, for consideration is
imported and presumed from the fact that it is a negotiable instrument. Mere Liberality as a general rule cannot support a civil contract because consideration
introduction of the instrument sued on in evidence prima facie entitles the is measurable in money.
plaintiff of a recovery and unless it is overcome by evidence produced by the
defendant the plaintiff is entitled to recover. This means that the person claiming Those that are purely emotional cannot support a simple contract. If the
the that a payee or an indorsee did not give valuable consideration for an instrument was given as a gift, the instrument was not validly issued because
instrument must prove that there really was no valuable consideration given. there was no consideration.
Sebastian: The existence of consideration is only a prima facie presumption. But if the gift check was issued by a bank, it is considered as a manager’s check. If
The burden of proof is on the challenger that there was no valuable the gift check is not a personal check but one issued by the bank, it is unlikely to
consideration. This is usually the person who is being held liable under the be dishonored because the check was drawn by the bank against itself. This gift
instrument. check, when delivered, while there may not be any value that you paid for them,
the party who is obligated under the gift check is the issuing bank itself.
Persons whose signature is on the instrument are the (1) maker/drawer, who is Therefore, can the issuing bank cannot raise the defense of want of consideration
presumed to have received value, (2) drawee, who accepted the instrument when it is encahsed becaudr it received full value for the amount of the check
because maker/drawer received value, and (3) indorser, who also accepted the when it was issued.
instrument for the same reason as the drawee.
Consideration for an instrument can be insufficient because Inadequacy does not
The issuance, negotiation and acceptance of a negotiable instrument is not an create a defect of the contract. Lesion is not a ground to set it aside except in
exception to the law that there must be consideration. In writing and issuing a Article 1361 of the Civil Code. Other than that, inadequacy of consideration does
negotiable instrument, consideration is presumed. not create a defect in the contract.
WHAT CONSTITUTES “VALUE” HOLDER FOR VALUE
Sec. 25. Value, what constitutes. - Value is any consideration Sec. 26. What constitutes holder for value. - Where value has at any
sufficient to support a simple contract. An antecedent or pre-existing time been given for the instrument, the holder is deemed a holder for
debt constitutes value; and is deemed such whether the instrument is value in respect to all parties who become such prior to that time.
payable on demand or at a future time.
Agbayani: One who gives valuable consideration for an instrument issued or
negotiated to him is a holder for value. But the term is not limited to the one who
LEX SOCIETAS 44
is known to have given valuable consideration for the instrument he holds. It holder in due course; and partial failure of consideration is a defense
refers also to any holder of an instrument for which value has been given at any pro tanto, whether the failure is an ascertained and liquidated
time. amount or otherwise.
Sebastian: When a holder deposits and indorses a check, the bank did not Agbayani:
become holder for value because when it received the check, it did not have to pay
for the check. However, in the Philippines, this is wrong. Because of Article 1980 Lack of Consideration Failure of Consideration
of the Civil Code, when a depositor deposit money in the bank, he is lending the total lack of any valid consideration neglect or failure of one of the parties
bank. The bank is the borrower and the depositor is the lender. This is why all to give, to do or to perform the
deposits are mutuum. If the bank and depositer is related within the context of consideration agreed upon
borrower and lender, the bank who receives deposit becomes owner of the embraces transactions where no implies that the giving of valuable
money. In exchange, the bank promises that upon demand, it will pay the amount consideration was intended to pass consideration was contemplated but
of your deposit. Thus, there is consideration when you deposit the check (i.e. the that it failed to pass
promise of the bank to pay you back). While checks are negotiable instrument, remedy is to annul the instrument Remedies are (1) rescission of the
the relationship between depositor and bank, it is governed by Article 1980 of instrument as to value that was failed
Civil Code. to receive or (2) specific performance
When instrument is received and value was given for it, the holder is holder for Campos: This provision reiterates the rule laid down by Section 24 that every
value. Once a holder pay for consideration for an instrument, he is a for value for instrument is deemed prima facie to have been issued for a valuable
all parties. consideration. It is also consistent with the provision that the validity and
negotiable character of an instrument is not affected by the fact that it does not
Lien Holder specify that any value has been given therefor. Under these rules, the defendant
has the burden of proving that there was no consideration for the instrument.
Sec. 27. When lien on instrument constitutes holder for value. -
Where the holder has a lien on the instrument arising either from Absence of consideration means total lack of consideration. For example, A
contract or by implication of law, he is deemed a holder for value to makes a promissory note payable to B as a gift; there is absence of consideration.
the extent of his lien. As between A and B, there can be no recovery on the note. But if B negotiates it to
C, a holder in due course, C can recover against A, because A’s defense of absence
Agbayani: The reason for this seems to be that the holder who has a lien on the of consideration is personal.
instrument is a holder in due course only up to the extent of his lien. Thus, a
holder who has a lien on the instrument can only up to the extent of his lien if Failure of consideration means that something was agreed upon as consideration
there are personal defenses (i.e. lack of consideration) against him but he cannot for a contract but for some reason the consideration did not materialize. For
collect at all if there are real defenses available against him. However, he can still example, A enters into a contract to sell certain merchandise to B. In
collect the whole amount of the instrument if there are no defenses at all. consideration of this merchandise, B makes a promissory note payable to A as
advance payment thereof. A fails to deliver the merchandise. There is a failure of
Sebastian: Person who has a lien is considered to be a holder for value to the consideration, so that A cannot recover from B. If B negotiates the note to C, who
extent of his lien over the instrument. This is important because the knew that A failed to deliver, neither can C recover from A. If C were ignorant of
consideration for the negotiation of the note does not have to be paid such defense and is a holder in due course, C can recover from A.
simultaneously with the delivery of the note. The person who has a lien is only a
holder for value up to the extent of his lien because he was never meant to be the Partial failure of consideration means simply that part of the consideration did
owner of the instrument. not materialize. In the example above, if A delivered part of the merchandise and
failed to deliver the rest, there is a partial failure of consideration which may be
WANT OF CONSIDERATION VS FAILURE OF CONSIDERATION set up as a defense pro tanto by B against A or a holder not in due course (i.e. B is
not liable to the extent of the price of the undelivered portion).
Sec. 28. Effect of want of consideration. - Absence or failure of
consideration is a matter of defense as against any person not a
LEX SOCIETAS 45
Sebastian: In lack of consideration, there is no considration at all. While in However, failure of consideration was not necessary to proive since the holder
failure of consideration, there was meant to be a consideration but it was never cannot renegotiate the note.
fulfilled. In the latter, there was intent to consummate a contract and there was
an instrument issued for the fulfillment of the contract. There was only failure of consideration in this case.
Osorio v Montenegro vda. de Papa – NATURE OF DEFENSE
Agbayani: When it is shown that a promissory note is executed without just, Agbayani: Whether total or partial, can be interposed as a defense only against
real or legal consideration, and “that it was executed so that the supposed persons not holders in due course but not against holders in due course.
creditor may help the supposed debtor protect the latter’s properties in the event Therefore, Want or failure of consideration are only personal defenses.
of an expected litigation to be commenced by a third person against said debtor,
the same is without any effect and the payment of said note is not demandable.” Campos: Section 28 goes farther for it in effect provides that absence or failure
of consideration is a personal defense available only against holders not in due
Sebastian: In this case, it was proven that there was no valuable consideration course. In the hands of a holder in due course therefore, the presumption of
other than to protect the person from the claims of other persons. Thus, the consideration is conclusive. The acceptability of negotiable instrument would be
instrument was void for lack of vlauable consideration. greatly restricted if prospective purchasers were burdened with the need of
determining whether such instruments are supported by consideration.
Elgin National Bank v Goecke – Plaintiffs in error, as accommodation
parties and indorsers of the notes in question, indorsed the same for purpose of LIABILITY OF AN ACCOMMODATION PARTY
lending their names and credit to the brewing company. They are therefore liable
to the defendant in error on the notes, although the defendant in error at the time Sec. 29. Liability of accommodation party. - An accommodation
of taking the instrument knew plaintiffs in error to be accommodation parties, if party is one who has signed the instrument as maker, drawer,
the defendant in error is a holder for value, as the notes were indorsed to it before acceptor, or indorser, without receiving value therefor, and for the
maturity and without notice of their restricted use and purpose. purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such
An indorsee of a negotiable note who has taken it, before its maturity, as holder, at the time of taking the instrument, knew him to be only an
collateral security for a pre-existing debt and without any express agreement, is accommodation party.
deemed a holder for a valuable consideration, and that he holds it free from latent
defenses on the part of the maker. Agbayani: The following are the requisites for an accommodation party: (1) he
must be a party to the instrument; (2) he must not receive value therefor; and (3)
Dougherty v Salt – The note was the voluntary and unenforceable promise of he must sign for the purpose of lending his name or credit.
an executory gift.
It should be noted that the phrase ‘without value thereof’ means without
Sebastian: There was no consideration in this case because the check was receiving value by virtue of the instrument and not without receiving payment for
meant to be a gift. Even if the note said that it was issued for valuable lending his name. An accommodation note showing on the face in express terms
consideration, this was merely a disputable presumption. This case is a clear case that it has been issued for no consideration would be of little or not use to the
of want of consideration. payee, and for that reason, practically all accommodation notes are so drawn as
to either express or imply a valuable consideration prima facie.
William Barco & Sons v Forbes – One who gives a note in renewal of
another note, with knowledge at the time of partial failure of the consideration Sebastian: An accommodation party does not lend his name but lends his
for the original note, or of false representations by the payee, waives such defense credit because he exposes himself to liability so the accommodated party can get
and cannot set it up to defeat or to reduce the discovery on the renewal note. credit.
Sebastian: In this case, the note was issued for the purchase of fertilizers. Also, Maulini v Serrano – An accommodation party is one who has signed an
there was no actual finding of failure of consideration and this was only assumed. instrument as maker, drawer, acceptor or indorser without receiving value
therefor and for the purpose of lending his name to some other person. The
LEX SOCIETAS 46
accommodation to which reference is made in [Section 29] is not one to the
person who takes the note but one to the maker or indorser of the note. In cases Sebastian: For accommodation makers, each of them is the maker and each of
of accommodation indorsement, the indorser makes the indorsement for the them made a warranty. Each accommodation maker is individually liable for the
accommodation of the maker. Such an indorsement is generally for the purpose instrument. The accommodation party who paid for the whole instrument cannot
of better securing the payment of the note – that is, he lends his name to the seek reimbursement from the other accommodation parties.
maker, not to the holder. An accommodation note is one to which the
accommodation party has put his name, without consideration, for the purpose of Reimbursement rights of accommodating parties are not governed by the
accommodating some other party who is to use it and is expected to pay it. The Negotiable Instruments Law because the instrument has already been discharged
credit given to the accommodation party is sufficient consideration to bind the and, therefore, Article 2073 of the Civil Code comes in.
accommodation maker. Where, however, an indorsement is made as a favor to
the indorsee, who requests it, not the better to secure payment, but to relieve When there are two or more guarantors of the same debtor and for
himself from a distasteful situation, and where the only consideration for such the same debt, the one among them who has paid may demand of each
indorsement passes from the indorser to the indorsee, the situation does not of the others the share which is proportionally owing from him.
present one creating an accommodation indorsement, nor one where there is a
consideration sufficient to sustain an action on the indorsement. If any of the guarantors should be insolvent, his share shall be borne
by the others, including the payer, in the same proportion.
Sebastian: The broker was not an accommodating party because he never lent
his credit line to the borrower so that the latter can borrow money from the The provisions of this article shall not be applicable, unless the
lender. payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent. (Art. 2073, Civil Code)
Ang Tiong v Ting – An accommodation party liable to a holder for value as if
the contract was not for accomodation. It is not a valid defense that the In case an accommodating party cannot recover reimbursement from his co-
accommodation party did not receive any valuable consideration when he accomodating parties, he can still recover from the accommodated party because
executed the instrument. Nor is it is not correct to say that the holder for value is he is the principal debtor.
not a holder in due course merely because at the time he acquired the instrument,
he knew that the indorser was only an accommodation party. Sadaya v Sevilla – (1) A joint and several accommodation maker of a
negotiable promissory note may demand from the principal debtor
Sebastian: An accommodation party is not liable as a surety. He may look like reimbursement for the amount that he paid to the payee; and (2) a joint and
one but he cannot invoke the protection of the surety under the Civil Code. several accommodation maker who pays on the said promissory note may
directly demand reimbursement from his co-accomodation maker without first
RIGHTS OF ACCOMMODATION PARTIES AMONGST THEMSELVES directing his action against the principal debtor provides that (a) he made the
payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.
Agbayani: (1) The accommodation party is generally regarded as a surety for
the party accommodated. APPLICATION OF “HOLDER FOR VALUE”
(2) When “the accommodation parties make payment to the holder of the notes, Agbayani: In instruments which are not accommodation papers, the effect of
they have the right to sue the accommodated party fore reimbursement since the this notice of want of consideration is to render the holder for value not a holder
relation between them is in effect that of principal and sureties, the in due course because he has notice of a defense of prior parties, namely, want of
accommodation parties being the sureties. consideration, which is a defense under Section 28. However, because of the
provisions of Section 29, an accommodation party cannot interpose the defense
The accommodated party cannot recover from the accommodation party. As of want of consideration between him and the accommodated party against a
between them, the understanding is that he accommodation party either is (1) to holder for value even if the holder for value has notice of the fact that he is an
reimburse the amount which the accommodation party may be obliged to pay, or accommodation party and therefore, has notice that he did not receive any
(2) to pay the instrument directly to the holder. The real debtor is the consideration for the instrument which he signed.
accommodated party. As between the accommodated party and accommodation
party, the latter is secondary liable.
LEX SOCIETAS 47
Sebastian: Holder for value must be a holder in due course other than for the
fact that he knew the accommodation party signed the instrument without NEGOTIATION
receiving value therefor. But other than that, a holder for value must meet the
elements under Section 52. WHAT CONSTITUTES NEGOTIATION
Acuña v Veloso and Javier – Where one of the signers of a joint and several Sec. 30. What constitutes negotiation. - An instrument is negotiated
promissory note affixes his signature thereto for the accommodation of a co- when it is transferred from one person to another in such manner as
maker and a third person advances the face value of the note to the to constitute the transferee the holder thereof. If payable to bearer, it
accommodated party at the time of the creation of the note, the consideration for is negotiated by delivery; if payable to order, it is negotiated by the
the note, as regards both makers, is the money so advanced to the accommodated indorsement of the holder and completed by delivery.
party; and it cannot be said that the note is lacking consideration as to the
accommodating party because he himself received none of the money It is Agbayani: There are three methods of transfer, namely: (1) by assignment, (2)
enough that value was given for the note at the time of its creation. by operation of law, (3) by negotiation, which may either be by indorsement
completed by delivery or by mere delivery.
Campos: A negotiation is the transfer of a negotiable instrument made in such

manner that the transferee becomes a holder and thus possibly a holder in due
course capable of acquiring a better title to the instrument than that of his
transferor.
Transfer is a broader term than negotiation. If an instrument is transferred

without negotiation, the transfer is a mere assignment which constitutes the
transferee as a mere assignee, not a holder, subject to all defenses existing among
prior parties. Transfer thus includes both an ordinary assignment and a
negotiation.
A negotiation may be for value as in a sale, or by way of a gift. In either case, there
will be a valid transfer. However, the rights acquired by the transferee in each
case may be different.
Sebastian: A transfer equivalent to negotiation is when it makes a transferee a

holder of the instrument. A holder is a payee or indorsee of a bill or not who is in
possession of it, or the bearer thereof. The initial issuance of the instrument
constitutes negotiation pursuant to Sections 30 and 191.
Under the Negotiable Instruments Law, the mode of transfer is by negotiation

which has two forms: (1) if it is a bearer instrument, by mere delivery; and (2) if it
is an order instrument, its is by indorsement then delivery.
DIFFERENCE FROM ASSIGNMENT
Agbayani: Assignment is the method of transferring a non-negotiable

instrument whereby the assignee is merely placed in the position of the assignor
and acquires the instrument subject to all defenses that might have been set up
against the original payee.
LEX SOCIETAS 48
The effect of assignment is that the party holding the right drops out of the and to every other person to whom the instrument may afterwards be
contract and another takes his place. The assignee and every subsequent person transferred, exactly similar to that which is implied by drawing a bill except that,
to whom the instrument comes by assignment is substituted in the place of the in the case of drawing a bill, the stipulations with respect to the drawer’s
assignor. Hence, if the original assignor said or did something which under the responsibility and undertaking do not apply. Thus, the general indorser, in effect,
ordinary law of such contract would prevent him from enforcing the contract or states to every person who follows him: “This instrument will be paid by the
asserting his right against the other party to the original contract, the assignee, maker, if a note, or accepted by the drawee or paid by the acceptor, if a bill. If it is
although he knows nothing of the original transaction, may be deemed to have dishonored by non-payment or non-acceptance and you give me notice thereof, I
said and done the same things. And further, if any subsequent assignee from will pay it.” This, in effect, is the contract of the general indorser.
whom, as an assignor, the holder in turn derives the contract, has done anything
to prevent its enforcement against the original party, the said holder cannot Campos: When the payee of an instrument transfers it to another by signing at
enforce it against the original party. the back thereof he is said to have negotiated or indorsed the same and thereby
becomes an indorser. The person to whom he negotiates it is the indorsee, who,
A person taking a negotiable instrument by assignment in a separate piece of by such negotiation becomes the holder of the instrument.
paper takes it subject to the rules applying to assignment. And where the holder
of a bill payable to order transfers it without indorsement, it operates as an As to the nature of their liability, the parties to a negotiable instrument are either
equitable assignment. primarily or secondarily liable. The primary party is the one who is absolutely
and unconditionally required to pay the instrument when it falls due. The maker
TRANSFERS BY OPERATION OF LAW is the person primarily liable on a promissory note. In a bill of exchange, there is
no person primarily liable to pay until and unless the drawee accepts the order of
Agbayani: The fill title to an instrument may pass without either assignment, the drawer to pay. Before he accepts such drawee is not liable on the instrument
indorsement, or delivery, that is, by operation of law, (1) by death of the holder, and he cannot be compelled by the holder to accept or pay it. But if and when the
where the title vests in his personal representative, or (2) by bankruptcy of the drawee accepts, he becomes an acceptor who is absolutely bound to pay on the
holder, where title vests in his assignee or trustee, or (3) upon the death of a joint date specified on the bill.
payee or indorsee, in which case the general rule is that the title vests at once in
the surviving payee or indorsee. The drawer of a bill of exchange and the indorsers of either a bill or note are the
parties secondarily liable thereon, and they can be held responsible should the
INITIAL DELIVERY OF INSTRUMENT primary parties fail to pay. Their liability is conditioned on 2 factors: (1) that a
demand or presentment be duly made on the primary party and (2) should the
Agbayani: Under Section 3o and 191, an instrument is negotiated when it is said party dishonor such instrument, that a notice of such dishonor be given to
delivered to the payee or to an indorsee. Negotiation is not confined to transfer the secondary party sought to be charged.
after delivery to the payee. A holder is a payee or an indorsee who is in possession
of an instrument payable to order. Consequently, when an instrument payable to An indorser by indorsing the bill or note impliedly enters into 2 contracts: (1) he
order is delivered to the payee thereof, the payee becomes a holder or he becomes is selling or transferring the instrument to his indorsee, thus assuming liabilities
thereby a payee in possession of the instrument. In short, the delivery to him of similar to that of a seller or transferor of personal property; and (2) he warrants
the instrument constitutes him the holder thereof. And since negotiation is that he will pay the instrument when the two conditions for his liability
defined being such transfer of an instrument as to constitute the transferee the mentioned above have been fulfilled. The holder can therefore hold any indorser
holder thereof, such a delivery to the payee is negotiation. liable should the maker or acceptor fail to pay, provided these two conditions are
complied.
INDORSEMENT
An instrument payable to order requires for its negotiation, first, an indorsement
Agbayani: An indorsement is not only a mode of transfer. It is also a contract. by the payee or present holder, and second, its delivery to the transferee or
Every indorser is a new drawer and the terms are found on the face of the indorsee, who now becomes the holder. An indorsement consists of the signature
instrument. There is an added obligation upon the instrument aside from what of the indorser usually on the back of the instrument. An indorsement has double
appears upon the face of the instrument. The indorsement of an instrument significance:
implies an undertaking from the indorser to the person in whose favor it is made 1) It constitutes a transfer or sale of the instrument to the indorsee or
transferee
LEX SOCIETAS 49
2) It signifies the agreement of the indorser to answer for the amount Sebastian: Negotiation at the back of the instrument is only true in the case of a
represented by the instrument in case of default of the maker or the party check. In promissory notes, indorsement does not necessarily have to be at the
primarily liable. back for they can be made below the note.
An instrument payable to bearer can be negotiated by mere delivery. It is a Generally, an indorsement is a signature. The first indorsement of an instrument
common practice, however, to indorse a bearer instrument whenever it is is by the payee. When you put something else in addition to the signature, it can
transferred. It does not impair the negotiation but serves as an additional qualify the nature of the indorsement.
security to the transferee, since he can hold the indorser liable as such. One who
negotiates by mere delivery, although he assumes the liabilities of a seller or ALLONGE
transferor of the note or bill, does not warrant that he will pay in case the primary
party fails to pay. Agbayani: The use of an allonge is allowable only when there is a physical
impossibility of writing the indorsement on the instrument itself, and an
A transfer of a negotiable instrument is effected otherwise than by negotiation indorsement on a separate piece of paper where there is sufficient space on the
when an order instrument is delivered by the payee or special indorsee without instrument for indorsements will be considered as mere assignment, not a
his indorsement or where the indorsement is not made properly as required by negotiation.
law.
Campos: An allonge can be validly used only when there is no longer any room
HOW MADE on the instrument for further indorsements, otherwise the transfer will not be
sufficient to constitute the transferee a holder. He will thus be subject to defenses
Sec. 31. Indorsement; how made. - The indorsement must be written such as failure of consideration. A contrary rule would open the door to fraud.
on the instrument itself or upon a paper attached thereto. The
signature of the indorser, without additional words, is a sufficient Sebastian: If the instrument no longer has space for indorsements, signatures
indorsement. may be placed on an allonge. An allonge is a paper attached to a document for
receiving indorsements too numerous to be written on the bill itself. It only
Agbayani: If written on the indorsement itself, the indorsement is usually relates to an instrument payable to order because indorsements are not needed in
written on the back of back thereof. But the indorsement may be written on the bearer instruments. Its purpose is to provide more space for indorsements. Thus,
face of the instrument. Where the inorsement is written on a paper attached to it must be attached permanently to the instrument. It is important to attach the
the instrument, such paper is called an “allonge.” But the allonge must be tacked allonge to the instrument in order to determine the order of in which the
or pasted on the instrument so as to become a part of it, and where the separate instrument was indorsed. This helps determine the order of liability of the
paper is only temporarily attached, as when clipped or pinned, it cannot be indorsers. It is important to know the order from who the instrument came from
considered an allonge. because each indorsement made by a general indorser carries the warranty of
solvency of all prior parties.
Campos: If an instrument is payable to the order of A and B, either as payees or
indorsees, both must indorse in order for the transaction to operate as a If there was supposed to be an allonge and the instrument was presented by the
negotiation. A and B will then be jointly and severally liable and an action will lie holder without it, the maker has the right to dishonor payment because there was
against any of them individually. If one of them should pay, the other is prima lack of proof of the holder that he was the lawful holder of the instrument.
facie liable to contribute his share to the paying indorser. If only one indorses, his
indorsee can have no right of action on the instrument because this would be An allonge is permanently attached to the instrument when, once there is
violating the rule against splitting of actions. detachment, it would be evident.
If one of several joint payees or joint indorsees indorses his own name and Clark v Thompson – A written transfer of a note, made on a separate paper to
without authority from his co-obligee, indorses the latter’s name and delivers the which it was pinned, there being room on the back of the note itself of the
instrument to a purchaser, such transaction does not constitute a negotiation of transfer, was an assignment merely, not a commercial indorsement. Whether the
the instrument. But it has been held that one of two joint payees, by indorsement note was pinned not, we are constrained to treat its transfer as a common-law
and delivery of the instrument to his co-payee, may transfer full title to the latter. assignment merely, and to hold that respondent was not a holder in due course.
LEX SOCIETAS 50
Sebastian: Subrogation happens when a creditor is substituted through
novation. Sebastian: The indorsement of must be an indorsement of the entire
instrument. An indorsement which purports to transfer to the instrument to two
INDORSEMENT FOR THE FULL INSTRUMENT or more indorsees severally does not operate as a negotiation of the instruments.
The law states that the indorsement does not operate as a negotiation and
Sec. 32. Indorsement must be of entire instrument. - The suggests that it is entirely inoperative.
indorsement must be an indorsement of the entire instrument. An
indorsement which purports to transfer to the indorsee a part only of Off-setting cannot take place under the Negotiable Instruments Law but and
the amount payable, or which purports to transfer the instrument to could only be done outside of it.
two or more indorsees severally, does not operate as a negotiation of
the instrument. But where the instrument has been paid in part, it KINDS OF INDORSEMENT
may be indorsed as to the residue.
Sec. 33. Kinds of indorsement. - An indorsement may be either special
Agbayani: An indorsement of a part of the instrument does not operate as or in blank; and it may also be either restrictive or qualified or
negotiation. But it may constitute a valid assignment binding between the parties. conditional.
The person to whom the instrument is indorsed would not be considered an
indorsee but merely an assignee and would therefore take the instrument subject Campos: Indorsements containing such additional words are classified into
to the defenses available between the original parties. special, restrictive, qualified, and conditional. Where only the signature of the
indorser appears, it is called a blank indorsement.
Campos: The purpose of this provision is to protect the obligors from more than
one action on the instrument. The maker and all the prior parties, in assuming The basis of classification of indorsements are:
liability, took the risk of only one cause of action against them. 1) Special and blank – future method of negotiation, whether by indorsement
and delivery or by delivery alone
The provision does not cover a situation where part of the amount of the 2) Restrictive and non-restrictive – the kind of title transferred
instrument has been paid, in which case, it may be negotiated for the balance. 3) Qualified and unqualified – the scope of the liability assumed by the indorser
Thus, in a note payable by installments, where some installments have been paid, 4) Conditional and unconditional – presence or absence of express limitations
the instrument may still be negotiated for the remaining unpaid installments. put by the indorser upon the primary obligor’s privileges of paying the holder
Neither does the provision prohibit a transaction where the indorsee pays the Sec. 34. Special indorsement; indorsement in blank. - A special
indorser less than the face amount of the instrument, title transferring to the indorsement specifies the person to whom, or to whose order, the
indorsee. This is what is called a “discount” of the instrument. The discount is instrument is to be payable, and the indorsement of such indorsee is
given in consideration of the period during which the purchaser has to wait necessary to the further negotiation of the instrument. An
before he can cash the instrument with the maker or acceptor, which can be done indorsement in blank specifies no indorsee, and an instrument so
only at the maturity of the instrument. indorsed is payable to bearer, and may be negotiated by delivery.
When an indorsement does not comply with Sec. 32, the transfer is not Agbayani: Where the instrument is originally payable to order and it is
necessarily void. It remains valid, not as a negotiation, but as a mere assignment negotiated by the special indorsement, it can be further negotiated by the
which subjects the holder to all defenses on the instrument. indorsee by indorsement completed by delivery.
Sebastian: An instrument must be indorsed in full in order to determine the Where the instrument is originally payable to order and it is negotiated by the
holder of the instrument. payee by blank indorsement, it can be further negotiated by the holder by mere
delivery. The reason is that the effect of a blank indorsement is to make the
Blake v Weiden – When there has been a purported indorsement of the whole instrument payable to bearer.
instrument, in separate parts to two or more trasferees, the purported indorsees
take legal title to their several shares and may sue together, or any one or more Where the instrument is originally payable to bearer it can be further negotiated
may sue provided all the other indorsees are brought in as parties. by mere delivery, even if the original bearer negotiated it by special indorsement.
LEX SOCIETAS 51
Sebastian: When there is a blank indorsement, the instrument becomes a
Campos: There are two forms of special indorsement: “Pay X” or “Pay X or bearer instrument. The holder may then treat the instrument as a bearer
order” followed by the signature of the indorser. An indorsement need not instrument.
contain the words of negotiability as long as these appear on the face of the
instrument. In either case of special indorsement, the indorsement of the special RESTRICTIVE INDORSEMENT
indorsee is necessary for the further negotiation of the instrument.
Sec. 36. When indorsement restrictive. - An indorsement is restrictive
A person who negotiates by mere delivery is liable only to his immediate which either:
transferee. A special indorser however is liable to subsequent holders, unless the (a) Prohibits the further negotiation of the instrument; or
instrument is an originally bearer instrument, in which case he is liable only to (b) Constitutes the indorsee the agent of the indorser; or
those who take title through his indorsement. (c) Vests the title in the indorsee in trust for or to the use of some
other persons.
An indorsement in blank specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery. But the mere absence of words implying power to negotiate does not
make an indorsement restrictive.
Sebastian: An indorsement is special when the name of the indorsee is written
in the indorsement. Agbayani: While the omission of words of negotiability in the indorsement
does not affect the negotiability of the instrument, such omission in the body will
Sec. 35. Blank indorsement; how changed to special indorsement. - render the instrument non-negotiable.
The holder may convert a blank indorsement into a special
indorsement by writing over the signature of the indorser in blank Campos: A restrictive indorsement either restricts the right of the indorsee to
any contract consistent with the character of the indorsement. further negotiate the instrument or reserves beneficial interest therein in the
indorser or in a third person. In the latter case, although the instrument may be
Agbayani: The holder must not write any contract not consistent with the further negotiated, all subsequent indorsees take subject to the rights of the
indorsement, that is, the contract so written must not change the contract of the restrictive indorser or the third person, as the case may be.
blank indorser. The following have been held to be contracts inconsistent with
the character of the indorsement: Sebastian: A restrictive indorsement limits the title of the indorsee. It implies
1) “Pay to X and Y.” that there is a limitation on what the indorsee can do.
2) “Demand and notice waived.”
3) “I guaranty payment.” This will make the indroser a garantor and deprive him Indorsement that Kill Negotiability
thereby of his right to demand notice.
Sebastian: An indorser would want to kill negotiability so (1) that he would not
Campos: A blank indorsement may be converted into a special indorsement by be liable to a holder in due course later on and (2) that he may have a personal
writing over the signature of the indorser in blank any contract consistent with defense.
the character of the indorsement.
Indorsement “as agent for”
An instrument payable to order on its face may be converted into a bearer
instrument by means of a blank indorsement, and may later be reconverted into Agbayani: Under this restrictive indorsement, the indorsee does not acquire
an order instrument by a subsequent special indorsement, the last indorsement title over the instrument as against the indorser. He merely becomes the agent of
always controlling the means of further negotiation. On the other hand, an the indorser. Hence, any action the indorsee may file is subject to defenses
instrument payable to bearer on its face always remains a bearer instrument. An available against the indorser, such as lack of consideration.
indorsement of a bearer instrument does not convert it to an instrument payable
to order. An indorsement for deposit constitutes the indorsee the agent of the indorser.
Sebastian: An indorsee makes a restrictive indorsement to an agent or a trustee

because he is dealing with an agent or trustee and not the principal or
LEX SOCIETAS 52
beneficiary. This protects himself because the restrictive indorsement acts as a (c) to transfer his rights as such indorsee, where the form of the
constructive notice to subsequent indorsees that his immediate indorsee is acting indorsement authorizes him to do so.
as a mere agent or trustee.
But all subsequent indorsees acquire only the title of the first
While the indorsee is entitled to enforce the instrument, the person is not the indorsee under the restrictive indorsement.
beneficial owner of the proceeds. Indorsee will be paid the amount but, upon
receipt of payment, it is for the account of someone else. The person for whom Agbayani: The indorsement passes the legal title over the note to the indorsee
the collection or enforcement being made is the one protected in this nature of so as to enable him to demand and receive payment of the value of the
the instrument since each indorsee will be charged with the fidelity of an agent or instrument. This is true under any of the forms of restrictive indorsement.
trustee.
In a restrictive indorsement “for deposit,” the indorsee can bring an action
Granado v Riverdale – against the indorser if the indorser received value for said indorsement.
Agbayani: The notation “for deposit” is a restrictive indrosement and indicates The words ‘until it has been restrictively indorsed’ in Section 47 do not
that the indorsee bank is an agent for collection and not the payee. Indorsement contemplate every restrictive indorsement but a restrictive indorsement that
for a check by the payee “for deposit” does not thereby render it negotiable but prohibits the further negotiation of the instrument under Section 36(a).
prohibits further negotiation for any purpose except for collection for deposit in
the payee’s account in the bank selected by the payee. By adding the notation, Where the indorsement is “Pay to C only,” the instrument becomes non-
title to the check remained in the name of the firm. negotiable. But an indorsement for collection does not destroy transferability and
it can be reindorsed so that the indorsee can sue in his own name. Neither does
Indorsement “in trust for” an indorsement “for deposit only” destroy the transferability of the instrument,
but the restrictive indorsee cannot transfer the instrument for his own debt or for
Sulbrason-Dickenson Co. v Hopkins – his own benefit.
Agbayani: An indorsement to A for the benefit of B was held restrictive making QUALIFIED INDORSEMENT
the indorsee or his successors subject to good defenses against the restrictive
indorser. Sec. 38. Qualified indorsement. - A qualified indorsement constitutes
the indorser a mere assignor of the title to the instrument. It may be
Atlantic v Comm. Lumber Co. – made by adding to the indorser's signature the words "without
recourse" or any words of similar import. Such an indorsement does
Agbayani: The indorsee of a check indorsed in trust for a third person who is a not impair the negotiable character of the instrument.
holder in due course could recover from the drawer who had a defense of failure
of consideration for while the restrictive indorsement creating a trust gives notice Effects of Qualified Indorsement
of this trust to subsequent purchasers, it did not give notice of defenses obtaining
between prior parties. Agbayani: A qualified indorsement constitutes the indorser as a mere assignor
of the title to the instrument. ‘Without recourse’ means without resort to a person
White v National Bank – who is secondarily liable after the default of the person who is primarily liable. In
effect, any one who indorses without recourse states that “all parties to the paper
Leonardi v Chase National Bank – are genuine; I am the lawful holder of that paper, and I have title to it and know
of no reason why you could not recover on it as a valid instrument; but I do not
EFFECTS OF RESTRICTIVE INDORSEMENT guarantee the financial responsibility of the parties on that paper but I do say
that I hold title to it just the same as any other personal property.”
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A
restrictive indorsement confers upon the indorsee the right: Liability of Qualified Indorser
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
LEX SOCIETAS 53
Agbayani: The qualified indorser is not entirely free from secondary liability. whom an instrument so indorsed is negotiated will hold the same, or
He is secondarily liable on his warranties as an indorser under Section 65. He is the proceeds thereof, subject to the rights of the person indorsing
liable if the instrument is dishonored by non-acceptance or non-payment due to conditionally.
(1) forgery, (2) lack of good title on the part of the indorser, (3) lack of capacity to
indorse on the part of the prior parties, or (4) the fact, at the time of the Agbayani: A conditional indorsement is an indorsement subject to the
indorsement, that the instrument was valueless or not valid and knew of that fact. happening of a contingent event, that is, an event that may or may not happen, or
a past event unknown to the parties.
Campos: An indorser by his indorsement impliedly enters into two contracts:
(1) a contract of sale or assignment of the instrument and (2) a contract to pay the A conditional indorsement does not render an instrument non-negotiable. But if
instrument if the maker is unable to pay on maturity. By adding the words the condition is on the face of the instrument, the condition renders it non-
“without recourse” above his signature, he expressly rids himself of the second nengotiable as the promise or order therein would not be unconditional.
contract.
Campos: An indorser is liable to pay the instrument in two conditions: (1) that
A qualified indorser therefore merely assumes the first contract and agrees due demand or presentment be made on the party primarily liable on the date of
merely to transfer legal title to the instrument. This is what the law means when imaturity, and (2) that should the latter fail to pay on such presentment, a notice
it says that he is a “mere assignor of the title of the instrument.” The transfer of dishonor be promptly sent to the indorser. An indorsement without any other
would still be negotiation and the transferee would still be a holder capable of condition upon which liability is based is referred to as an unconditional or
acquiring a title free from defenses of prior parties. The only effect of the absolute indorsement. A conditional indorsement is one where an additional
qualified indorsement is to relieve the qualified indorser of his liability to pay the condition is annexed to the indorser’s liability. An indorsement does not affect
instrument should the maker be unable to pay at maturity. the negotiability of the instrument because the original promise or order remains
unconditional. But all holders subsequent to the conditional indorsement take
In the absence of clear and unmistakable language qualifying liability, an subject to the condition.
indorser will be liable on both his contracts. His liability cannot be limited by
implication. Sebastian: A conditional indorsement implies that there is a condition where, if
not fulfilled, the indorsement would not be complete. In other words, the
Sebastian: Unlike a general indorser, the qualified indorser does not warrant indorsement becomes condition if the transfer is subject to the fulfillment of a
the solvency of the maker/drawer. An indorser indorses qualifiedly if he is not condition.
sure if he can guarantee the payment of the liability or the solvency of the
maker/drawer. The value of indorsements is merely supportive of the liability of If the indorsement is conditional, the person obliged may ignore the condition
the person primarily liable. If the person primary liable has the ability to pay, and pay it; or dishonor the instrument and wait until the condition is fulfilled.
then the responsibility of the indorsers are not as significant as they should be. The option of paying or not paying pertains to the maker/drawee. There is
nothing stopping the holder from presenting the instrument to the maker/
By making a qualified indorsement, one makes an off balance sheet transaction. drawee.
Fay v Witte – Refusal to pay of the maker/ drawer will not constitute dishonor if the condition
has not yet been fulfilled. But as far as the maker is concerned he can choose to
Copeland v Burke – ignore the conditions because he is not a party to the conditions. The law gives
the maker the choice to pay the instrument regardless if the condition was not
Hutson v Rankin – fulfilled.
CONDITIONAL INDORSEMENT The other option is to look at the indorsement and hold the payment of the
instrument until the fulfilment of the condition. Holder may not be entitled
Sec. 39. Conditional indorsement. - Where an indorsement is because the indorsment is conditional. But once the condition is fufilled, the
conditional, the party required to pay the instrument may disregard maker/drawee should pay.
the condition and make payment to the indorsee or his transferee
whether the condition has been fulfilled or not. But any person to
LEX SOCIETAS 54
If the condition is resolutory, the maker/drawee has no choice but to pay the indorsement prior to him but the special indorsments made will still have
instrument on due date. warranties under Section 66.
But if after due date, the resolutory condition was breached, can we say that the Assuming that the instrument was originally an order instrument which had a
person who was paid was merely holding the proceeds of the note in trust for the blank indorsement, the holder may still cancel the prior special indorsements
previous indorser who indorsed with condition? This is questionable. When the because the blank indorsement already made it a bearer instrument.
maker pays, the instrument is discharged and it ceases to exist. Once it ceased to
exist, the effect is that Negotiable Instruments Law no longer applies. Then we INDORSEMENT TO TWO OR MORE PERSONS
enter to the agreement between indorser indorsee which is attached to the
agreement which no longer exists as a negotiable instrument. The instrument Sec. 41. Indorsement where payable to two or more persons. - Where
now becomes a simple contract. At the time of maturity, resolutory condition was an instrument is payable to the order of two or more payees or
not breached. As far as maker, he has to pay. The only time he can refuse is if indorsees who are not partners, all must indorse unless the one
there was breach at the time of presentment. indorsing has authority to indorse for the others.
We already know that if breach happened after the payment of the instrument, it
is no longer a negotiable instrument. But the fact remains that there was an Agbayani: Section 41 applies only to instruments payable to two or more
agreement between the indorser and indorsee where the payment was based on a payees jointly. It does not apply to instruments to two or more payees severally
resolutory condition. In their case, there was breach of contract and the remedy is because these fall under Section 8(c) and such instrument so payable may be
specific performance or rescission. negotiated by the indorsement of one payee.
Agbayani is wrong because there can be no trust since there was no trustor and If only one payee indorses, he passes only his part of the instrument. Such an
trustee, and no beneficiary. He failed to show the fluidity of transition from indorsement would not operate as such because it would not be an indorsement
Negotiable Instrumetns Law to contract laws. of the entire instrument. But the following are exceptions to the rule requiring
joint indorsement:
INDORSEMENT OF BEARER INSTRUMENT 1) where the payee or indorsee indorsing has authority to indorse for the
others, and
Sec. 40. Indorsement of instrument payable to bearer. - Where an 2) where the payees or indorsees are partners.
instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person Campos: Where the instrument is payable or indorsed to A and B, they are joint
indorsing specially is liable as indorser to only such holders as make payees and an indorsement by either A or B only will not constitute a valid
title through his indorsement. negotiation so as to free the instrument from defenses, unless the one indorsing
is authorized by the other.
Agbayani: Section 40 applies only to instruments which are originally payable
to bearer. It does not apply to instruments originally payable to order, even when INDORSEMENT TO A CORPORATE OFFICIAL
they become payable to bearer because the only or last indorsement is in blank.
Sec. 42. Effect of instrument drawn or indorsed to a person as
An instrument which is originally payable to bear is always payable to bearer. cashier. - Where an instrument is drawn or indorsed to a person as
Hence, even when specially indorsed, it can be negotiated by mere delivery. "cashier" or other fiscal officer of a bank or corporation, it is deemed
prima facie to be payable to the bank or corporation of which he is
A special indorser of an originally payable to bearer instrument is not liable to a such officer, and may be negotiated by either the indorsement of the
holder who became a holder through delivery because delivery was sufficient to bank or corporation or the indorsement of the officer.
transfer title. However, a special indorser is liable to special indorsee/s because
they acquire their title over the instrument through the special indorsement as Sebastian: By indicating the limited capacity of the indorser, he does not
they can trace their title through a series of unbroken indorsements. become a general indorser that warrants under Section 66.
Sebastian: Special indorsements do not convert the original bearer instrument Johnson v Buffalo Bank –
to an order instrument. The holder in due course can cancel the special
LEX SOCIETAS 55
Agbayani: Where S was the cashier of the C bank, a certificate of deposit issued be just like payment. Where the holder deposits the check with a bank other than
by the C bank to the order of “S, Cashier” was indorsed “S, Cashier,” and came to the drawee, he would in effect be negotiating the check to such bank, since he
the plaintiff, a holder in due course, it was held that the indorsement was that of would have to indorse the check before the bank will accept it for deposit.
the bank, and that it was competent for the bank to show that S acted in his own
interest and in violation of his duty to the bank. Whatever kind of indorsement is made by the holder, the bank in fact is only a
collecting agent. As a rule, the indorsement made by the depositor of a check
MISSPELLED NAME OF INDORSEE would be in blank, just his signature without any other words. The instrument
will therefore not show any restriction to the collecting bank’s title and – to all
Sec. 43. Indorsement where name is misspelled, and so forth. - appearances, title has transferred to it.
Where the name of a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein described TIME AND PLACE OF INDORSEMENT
adding, if he thinks fit, his proper signature.
Sec. 45. Time of indorsement; presumption. - Except where an
Campos: The indorsement should be made by the holder in the manner he was indorsement bears date after the maturity of the instrument, every
designated, otherwise the signature will prima facie not be a valid indorsement of negotiation is deemed prima facie to have been effected before the
the instrument. instrument was overdue.
INDORSEMENT BY A REPRESENTATIVE Agbayani: If the indorsement bears a date, the presumption in this section
would not arise. The presumption would be that stated in Section 11, namely, that
Sec. 44. Indorsement in representative capacity. - Where any person the date written is the true date.
is under obligation to indorse in a representative capacity, he may
indorse in such terms as to negative personal liability. This provision becomes important in connection with Section 52(b). In order that
one may be a holder in due course, the instrument must be negotiated to him
Agbayani: A representative must indorse in the same manner as an agent of the before it becomes overdue. The indorsement without date establishes a prima
maker, drawer or acceptor should in order to escape personal liability under facie presumption that the instrument was negotiated before maturity, and one
Section 20. In short, (1) he must add words describing himself as an agent; and who denies that the holder of such instrument is a holder in due course has the
(2) at the same time disclose his principal. Of course, (3) he must be duly burden of proof.
authorized.
The fact that an indorsement appears to be in fresher ink than the face of a
It has been held that an agent may indorse by merely signing the name of the demand note is not sufficient to overcome the presumption that it was indorsed
principal. before it was overdue.
Campos: An instrument may be indorsed either personally or through an agent. Sec. 46. Place of indorsement; presumption. - Except where the
And the authority of the agent need not be in writing. In so signing, an agent contrary appears, every indorsement is presumed prima facie to have
should make it plain that he is merely signing in behalf of the principal, otherwise been made at the place where the instrument is dated.
he may be held personally liable. The most common form of indorsement by an
agent is “Pedro Reyes by Jose Santos, agent.” Sebastian: This provision has no sense in the Philippines because there is only
one Negotiable Instruments Law here.
INDORSEMENT TO OR BY COLLECTING BANK
CONTINUATION OF NEGOTIABILITY
Campos: A holder of a check may either cash it with the drawee bank, or may
deposit it to his credit either in the drawee bank or in another bank. Should he Sec. 47. Continuation of negotiable character. - An instrument
cash it directly with the drawee bank, then payment to him by the latter would negotiable in its origin continues to be negotiable until it has been
discharge the instrument and terminate all rights and liabilities of the parties restrictively indorsed or discharged by payment or otherwise.
thereto. Should he deposit it in the drawee bank without immediately cashing it,
such bank will credit the amount of the check to his account and the effect would Agbayani: The mercantile character (1) of the instrument as a negotiable paper
LEX SOCIETAS 56
and (2) of the contracts of several parties to it, continues after its maturity and STRIKING OUT OF INDORSEMENT
until it is paid except (3) that an indorsee or a tranferee after maturity takes the
instrument subject to the defenses between original parties, because after Sec. 48. Striking out indorsement. - The holder may at any time strike
maturity such subsequent parties take the instrument after it becomes overdue, out any indorsement which is not necessary to his title. The indorser
and therefore, they are not holders in due course. In short, after maturity, an whose indorsement is struck out, and all indorsers subsequent to
instrument originally negotiable continues to be negotiable in the sense that the him, are thereby relieved from liability on the instrument.
contracts of the parties to it continue and are governed by the Negotiable
Instruments Law. However, the instrument ceases to be negotiable in the sense Agbayani: Where an instrument is transferred by a special indorsement, the
that a transferee after maturity is not a holder in due course, and, therefore, is holder has no right to strike out the name of the person mentioned in such
not free from defenses obtaining between prior parties. Transfer to such indorsement and insert his own name in place; nor can he strike out such name
transferees would be equivalent to a mere assignment and subject to defenses. and convert such special indorsement into a blank indorsement. The holder who
acquires title subsequent to the succeeding special indorsement must trace his
The position of a holder who takes a bill when over due is that he is a holder with title not only through the blank indorsement but through the special indorsement
notice. He may or may not be a holder for value and his rights will be regulated as well.
accordingly. He is a holder with notice because he takes a bill which, on the face
of it, ought to have been paid. He is therefore bound to make two inquiries: An indorsement is not necessary when mere delivery is sufficient to vest
1) Has the bill been discharged? If not, why not? ownership in the indorsee.
2) Was the title of the person who held it at maturity defective?
If the title to the instrument was complete, it is immaterial that for some The following are effects of striking out:
collateral reason he could not have enforced the bill against some or one more of 1) indorser whose indorsement is struck out is relieved from liability on the
the parties liable thereon. instrument; and
2) all subsequent indorsers are also relieved from their liability on the
It does not follow that simply because one is not a holder in due course he cannot instrument.
recover on the checks in his possession. The Negotiable Instruments Law does
not provide that the holder who is not a holder in due course, may not, in any Campos: If the instrument is payable to bearer on its face, then whether or not
case, recover on the instrument. The only disadvantage is that the instrument is there are indorsements on the back of the instrument would be immaterial to the
subject to defenses as if it were non-negotiable. title of the bearer, who is presumptively the owner and holder by his mere
possession of such instrument. None of the indorsements would be necessary to
Campos: A negotiable instrument, although overdue, retains its negotiability his title since mere delivery would have been sufficient to transfer title from one
unless it has been paid or restrictively indorsed so as to prohibit further holder to another. The holder, thus have a right to cancel any or all indorsements.
negotiation. Other forms of restrictive indorsements do not destroy negotiability,
for Section 37 recognizes the right of the restrictive indorsee to further negotiate Where the instrument is payable to order on its face, the situation is different. If
the instrument. all the indorsements appearing on the back of the instrument are special, then all
of them would be necessary to the holder’s title.
The fact that the instrument is overdue does not affect the right of the holder to
further negotiate it if he wishes to, but merely prejudices the status of subsequent TRANSFERS WITHOUT INDORSEMENT
holders as they cannot be considered holders in due course.
Sec. 49. Transfer without indorsement; effect of. - Where the holder
Although indorsements after maturity are good to transfer title, they prevent a of an instrument payable to his order transfers it for value without
holder from becoming a holder in due course, thus subjecting him to defenses, if indorsing it, the transfer vests in the transferee such title as the
any. The presumption that every negotiation was effected before the instrument transferor had therein, and the transferee acquires in addition, the
was overdue is therefore significant, since indorsements are usually not dated. right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the
The law of the place of dating will govern any controversy should there be conflict negotiation takes effect as of the time when the indorsement is
of laws. actually made.
LEX SOCIETAS 57
Agbayani: Section 49 applies only to instruments payable to order. This subject to the provisions of this Act, reissue and further negotiable
contemplates a case where there is delivery and payment of value but no the same. But he is not entitled to enforce payment thereof against
indorsement. There is, therefore, one element lacking for the negotiation of the any intervening party to whom he was personally liable.
instrument, namely, indorsement by the payee or indorsee. This operates as an
equitable assignment.
The following are the rights of the transferee for value:

1) the transferee acquires only the rights of the transferor. This means that if a
defense is available against the transferor, that defense is also available
against the transferee.
2) The transferee has also the right to require the transferor to indorse the
instrument.
The time for determining whether the transferee is a holder in due course is as of
the time of actual indorsement, not at the time of the delivery. The reason is that
negotiation is completed at the time of indorsement, not at the time of delivery.
Campos: If his predecessor had legal title, the transferee of an unindorsed

instrument acquires such, subject however to hte defenses and equities available
among prior parties.
It is the exception rather than the rule for a payee of an order instrument or a
special indorsee to transfer the instrument without indorsement, and therefore
since the situation is abnormal, it is only fair to the maker and to prior holders to
require the possessor to prove without the aid of an initial presumption in his
favor, that he came into possession by virtue of a legitimate transaction with the
last holder.
But the transferee of an unindorsed instrument may become a holder by

obtaining the indorsement of his transferor. It is only at this time that the
instrument can be considered as having been negotiated. As to what kind of
indorsement such transferee is entitled to, the majority view is that, unless there
is proof of an agreement to the contrary, he has a right to an unqualified and not
merely a qualified indorsement.
There can be no apparent reason therefore why an unindorsed instrument should

not also be the subject of gift, passing title to the donee. However, such a donee,
although he has a right to sue on an instrument as a legal owner thereof, does not
have the right to compel the indorsement of his donor. This is the only difference
in the effect which Section 49 should have on a gratuitous transfer as contrasted
with the transfer “for value.”
NEGOTIATED BACK TO PRIOR PARTY
Sec. 50. When prior party may negotiate instrument. - Where an

instrument is negotiated back to a prior party, such party may,
LEX SOCIETAS 58
without notice that it has been previously dishonored, if such
RIGHTS OF A HOLDER was the fact;
IN GENERAL (c) That he took it in good faith and for value;
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable (d) That at the time it was negotiated to him, he had no notice of
instrument may to sue thereon in his own name; and payment to him any infirmity in the instrument or defect in the title of the
in due course discharges the instrument. person negotiating it.
Agbayani: A holder in due course may (1) sue on the instrument in his own Negotiable Instruments Law Civil Code
name; and (2) receive payment and if the payment is in due course, the holder in due course holder in good faith and for value
instrument is discharged. Acquires the instrument free of all Acquires nothing but the rights and
personal defenses. obligations of the transferor.
A possessor of an unendorsed instrument payable to order may sue in his own May acquire even superior to that of May only acquire everything that the
name if the transferor could have done so. Under Section 49, a transfer for value, the immediate transferor. transferor has.
but without indorsement, of an instrument which is payable to order vests in the
transferee such title as the transferor had therein. ELEMENTS
The payment in due course to the holder of an instrument discharges the Agbayani: Any holder proved to have taken an instrument with one of the
instrument. Payment in due course is payment made (1) at or after the maturity conditions enumerated in this section lacking is not a holder in due course.
of the instrument (2) to the holder thereof (3) in good faith and (4) without notice
that his title is defective. Complete and Regular Upon its Face
Sebastian: To sue in his own name means to enforce a negotiable instrument. Sebastian: If the instrument can be paid without controversy, then the
This presupposes that there was a dishonor or a default payment. A holder here instrument is complete and regular upon its face.
refers to the payee or indorsee of the instrument in possession thereof.
A forgery that is not apparent is not considered against a holder in due course.
A pledgee of an instrument is a holder who may sue because when you pledge an When the forgery was invisible to the naked eye, the holder may be considered as
instrument, it must be indorsed to the pledgee. In a contract of pledge, you a holder in due course.
cannot constitute a pledge without delivering to the pledgee the thing that is
pledged. Thus, pledgee must be in possession of the instrument, making the Receipt Before Instrument is Overdue
pledgee a holder as far as the Negotiable Instruments Law is concerned.
Agbayani: One taking a past due paper is chargeable with notice of all equities
However, a pledgee has limited rights. He has no right to demand payment when between the original parties, but not with equities between intermediate
instrument is due. His right is to have a lien on the instrument when it becomes indorsers. Moreover, if the instrument is overdue, it is also a notice that it has
due. When a pledgee receives payment, it is by way of the lien constituted by the been dishonored.
pledge.
An instrument is overdue after the date of maturity. On the date of maturity, the
HOLDER IN DUE COURSE instrument is not overdue, and a holder who acquires the instrument on that date
is a holder in due course because the principal debtor has the whole day to pay.
Sec. 52. What constitutes a holder in due course. - A holder in due
course is a holder who has taken the instrument under the following When the instrument contains an acceleration clause, knowledge of the holder at
conditions: the time of acquisition thereof that one installment or interest, or both is unpaid,
(a) That it is complete and regular upon its face; is notice that the instrument is overdue.
(b) That he became the holder of it before it was overdue, and
LEX SOCIETAS 59
Where, by the terms of the instrument, the principal was to become due upon Absence of knowledge of a defense, when the instrument was taken, is
default of the payment of the interest, one who takes the instrument upon which essential element in the matter of good faith.
the interest is overdue is not a holder in due course.
Campos: One of the important requisites of due course holding is that the
Campos: A holder in order to be a holder in due course must become a holder of holder must have taken the instrument in good faith and that at the time it
the instrument before it is overdue and without notice that it has been previously was negotiated to him, he had no notice of any infirmity in the instrument or
dishonored if such was the fact. The fact that the instrument is overdue is a defect in the title of the person negotiating it. Note that due course holding is
strong indication that it was dishonored and the law puts the potential holder on not affect by the holder’s acquisition of knowledge after he has taken the
inquiry as to whether it was dishonored and the reason therefor. instrument.
Sebastian: An instrument past due is technically a default instrument. Sebastian: There is good faith when the holder has no knowledge of fact
which renders it dishonest for him to take the instrument. As a rule, you do
As far as a check is concerned, due date is any date from date of issue. Also, a not need to make an inquiry on the title of the indorser. Knowledge here
reasonable time for demanding payment of a check is 180 days from issue. A means actual knowledge of facts which render the instrument to be
check presented for payment after such time can be dishonored by the drawee dishonoest. Suspicion or speculation is not enough.
bank for being stale.
Failure to Make Inquiry
In the case of a time draft presented for acceptance, it can be dishonored twice,
presentment prior to due date or on due date. Agbayani: Ordinarily, failure to inquire after notice of facts merely
sufficient to cause a person of ordinary prudence to make inquiry as to an
Montinola v PNB – Montinola cannot be considered a holder in due course infirmity in a negotiable instrument and defect in holder’s title, is not
because Section 52 defines a holder in due course as a holder who has taken the evidence of purchaser’s bad faith so as to bar him from recovery. The test for
instrument under certain conditions, one of which is that he became a holder determining whether a holder acquires an instrument in good faith is not
before it was overdue. When he received the check, it was long overdue. whether he was negligent, such as in failing to make inquiries, but whether
his purpose was dishonest. Even gross negligence in purchasing a negotiable
Agbayani: One who took the check two and a half years after it became payable instrument from a holder whose title was defective does not establish bad
is not a holder in due course. By then, the check was stale. faith. In short, the test is subjective test of honesty, not an objective test of
due care.
Without Notice of Prior Dishonor
However, it has been held that failure to make inquiry, when circumstances
Sebastian: There are 3 ways of dishonoring an instrument. strongly indicate defect, renders the holder not a holder in due course. A
willful failure of one purchasing a note, with actual knowledge of suspicious
Holder in Good Faith circumstances, to make inquiries, may amount to bad faith. And suspicious
facts and circumstances and grossly inadequate price may properly be
Agbayani: “Good faith” refers to the indorsee or transferee, not to the considered in determining whether a purchaser acquired notes in bad faith.
seller of the paper. Even if the seller is in bad faith, the transferee may still be
a holder in due course. Taking in good faith means that if the holder does not Vicente R. de Ocampo & Co. v Anita Gatchalian – The stipulation of
take in bad faith, his good faith is sufficiently shown, and bad faith, under facts expressly states that plaintiff was not aware of the circumstances under
Section 56, means that he must have knowledge of facts which render it which the check was delivered to Manuel Gonzales, but we agree with the
dishonest for him to have a particular piece of negotiable paper. Knowledge, defendants that the circumstances indicated by them in their briefs, such as
not surmise, suspicion, or fear, is necessary; not knowledge of the exact truth the fact:
but of some truth that would prevent action by those commercially honest 1) that appellants had no obligation or liability to the Ocampo Clinic;
men for whom the law is made. 2) that the amount of the check did not correspond exactly with the
obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and
Holder in good faith means a holder without knowledge or notice of equities
of any sort which could be set up against a prior holder of the instrument.
LEX SOCIETAS 60
3) that the check had two parallel lines in the upper left hand corner, which
practice means that the check could only be deposited but may not be Value need not be full and a holder will be one for value even if he gave less than
converted into cash. the face value of the instrument, provided that intention of the transferor is to
All these circumstances should have put the plaintiff to inquiry as to the why transfer the full amount represented by the instrument.
and wherefore of the possession of the check by Manuel Gonzales, and why
he used it to pay Matilde's account. It was payee's duty to ascertain from the The bank becomes a holder for value only when the depositor withdraws the
holder Manuel Gonzales what the nature of the latter's title to the check was amount of the deposited instrument. And where such withdrawal takes place
or the nature of his possession. Having failed in this respect, we must declare before maturity and before the bank receives notice of any defense on the
that plaintiff was guilty of gross neglect in not finding out the nature of the instrument, the bank is a holder in due course against whom such defense would
title and possession of Manuel Gonzales, amounting to legal absence of good be unavailable.
faith, and it may not be considered as a holder of the check in good faith.
The mere fact that the present holder paid for nothing for a note or is not a holder
The rule that a possessor of the instrument is prima facie a holder in due for value does not preclude recovery, but only lets in all defenses, if any, that
course does not apply because there was a defect in the title of Manuel might be urged against the original payee.
Gonzales and the instrument is not payable to him or to bearer.
If a negotiable instrument is given as collateral for a debt, the holder has a lien on
Under the circumstances of this case, instead of the presumption that the the instrument. If the amount called for by the instrument is less than the
payee was a holder in good faith, he fact is that it acquired possession of the principal debt secured by such instrument, the pledgee is a holder for value for
instrument under circumstances that should have put it to inquiry as to the the full amount and may therefore recover all. If the debt secured by the
title of the holder who negotiated the check to it. The burden was, therefore, instrument is less than the sum for which the instrument is issued, and there are
placed upon it to show that notwithstanding the suspicious circumstances, it no existing defenses, the pledgee can still recover all, but the excess over the debt
acquired the check in actual good faith. he holds in trust for whomsoever is entitled to it.
Sebastian: This case is an exception to the no inquiry rule. In this case, the Whether or not the words “for value received” appear in an instrument is
instrument was a crossed check and that generally indicates restrictions on immaterial. In their absence, the presumption fills in the gap. On the other hand,
negotiability. However, it does not destroy negotiability but it means that it their presence will not preclude evidence to show lack of consideration. The
may only be negotiated once, which is to “payee’s account only” and can only presumption is prima facie and may be rebutted by proof to the contrary.
be encashed.
DEFECTS OF TITLE
ACQUISITION FOR VALUE
Agbayani: The Negotiable Instruments Law, in defining things that may be
Agbayani: Where the holder gave no valuable consideration for the transfer of wrong with an instrument uses three terms, namely (1) defenses, (2) infirmities,
the instrument to him, he cannot be a holder in due course. But the fact that a and defect of title. Defect of title are defined by Section 55 to cover all those
note is purchased at a discount does not of itself raise an inference that the situation which at common law were known as equitable defenes, and also to
purchaser is buying a tainted instrument. cover those equities of ownership where there was breach of faith in negotiation.
The defective title of a person over an instrument may result from the following:
While inadequacy of consideration is not of itself a sufficient ground for either 1) acquisition of the instrument by fraud;
legal or equitable relief, yet it may be shown as evidence of fraud. 2) acquisition of the instrument by force, duress or fear;
3) acquisition of the instrument by unlawful means;
An amount paid for an instrument, if a trifling sum, may itself establish notice. 4) acquisition of the instrument for an illegal consideration;
5) negotiation of the instrument in breach of faith; and
Campos: A negotiable instrument may be given as a gift to the indorsee or 6) negotiation of the instrument under circumstances that amount to fraud.
transferee. In such cases whatever defenses can be set up against the transferor
can also be set up against the transferee. But where the holder gave valuable One acquiring an instrument with knowledge of any of the foregoing defects of
consideration for the note and the other requisites of Section 52 are present, he title of the person negotiating is not a holder in due course.
will be free from such defenses.
LEX SOCIETAS 61
DEFENSES NOTICE OF INFIRMITY OR DEFECT OF TITLE
Agbayani: Defenses include common law defenses outside those covered in Sec. 54. Notice before full amount is paid. - Where the transferee
Section 55. They include: receives notice of any infirmity in the instrument or defect in the title
1) mistake; of the person negotiating the same before he has paid the full amount
2) absence and failure of consideration; agreed to be paid therefor, he will be deemed a holder in due course
3) minority and other forms of incapacity to contract; only to the extent of the amount therefore paid by him.
4) lack of authority of an agent; and
5) others. WHAT CONSTITUTES “DEFECTIVE TITLE”
One acquiring an instrument with knowledge of any of the foregoing defenses is Sec. 55. When title defective. - The title of a person who negotiates an
not a holder in due course. instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud, duress,
INFIRMITIES OF AN INSTRUMENT or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith, or under
Agbayani: Infirmities include things that are wrong with the instrument itself such circumstances as amount to a fraud.
as distinguished from those that are lacking in contracts on the instrument. Such
infirmities are to be found in situations arising under: Agbayani: Title of a person in an instrument becomes defective either in the
1) wrong date inserted where the instrument is expressed to be payable at a acquisition or in the negotiation.
fixed period after sight is undated;
2) filling up a blank instrument not strictly in accordance with the authority Sebastian: Those things enumerated are the first things that can go wrong on
given or not within reasonable time, where it was delivered wanting in a the instrument.
material particular;
3) filling up and negotiating without authority an incomplete and undelivered WHAT CONSTITUTES “NOTICE OF DEFECT”
instrument;
4) lack of valid and intentional delivery of a mechanically complete instrument; Sec. 56. What constitutes notice of defect. - To constitutes notice of an
5) agent signing per procuration beyond the scope of his authority; infirmity in the instrument or defect in the title of the person
6) forgery; and negotiating the same, the person to whom it is negotiated must have
7) material alteration. had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounted to bad faith.
Accordingly, notice by the holder of an instrument of any of the foregoing, at the
time of negotiation of the instrument to him, would render him not a holder in Agbayani: To constitute notice of defect or infirmity, the transferee must have
due course. actual knowledge, either (1) of the defect or infirmity, or (2) of such facts that his
action in taking the instruments amounts to bad faith.
HOLDER NOT IN DUE COURSE
Actual knowledge of facts is necessary to constitute bad faith. Nevertheless,
Sec. 53. When person not deemed holder in due course. - Where an knowledge and bad faith may be established by circumstantial evidence. Section
instrument payable on demand is negotiated on an unreasonable 56 does not wholly eliminate the duty of inquiry. The circumstantial evidence
length of time after its issue, the holder is not deemed a holder in due may be so strong and decisive that to ignore it would not only be negligence but
course. an act of bad faith.
Agbayani: The section applies to instruments which are payable on demand. Knowledge is required, not mere suspicion, surmise or fear. But knowledge of the
exact truth is not necessary. Knowledge of some truth as would prevent the
Practically no authority hold that a reasonable time for negotiating a demand taking of the instrument by commercially honest men is enough. Knowledge of
note could be extended beyond a year. agent is knowledge by principal.
LEX SOCIETAS 62
Where there is knowledge of suspicious circumstances, coupled with means of Agbayani: A holder not in due course:
verifying them, taking the instrument may amount to bad faith. 1) may sue on the instrument in his own name;
2) may receive payment and if the payment is in due course, the instrument is
Campos: Under Section 56, in order to constitute notice, the holder must have discharged;
actual and not merely constructive knowledge of the defect, or he must have 3) holds the instrument subject to the same defenses as if it were non-
acted in bad faith. Gross negligence in itself would not constitute notice since it is negotiable;
not the equivalent of bad faith nor of actual knowledge. Anything short of either 4) but a holder not in due course who derives his title through a holder in due
actual knowledge or bad faith therefore, will not constitute notice. course and who is not himself a party o any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect to the parties
Sebastian: What constitutes notice of defect does not depend on diligence but prior to the latter.
on actual knowledge as modified by De Ocampo v. Gachalian.
The general rule that equitable defenses can be interposed against a person not a
RIGHTS OF A HOLDER IN DUE COURSE holder in due course has this exception, that a person who derives his title
through a holder in due course and who is not himself a party to any fraud or
Sec. 57. Rights of holder in due course. - A holder in due course holds illegality affecting the instrument, has all the rights of a such former holder in
the instrument free from any defect of title of prior parties, and free respect to all parties prior to the latter. In other words, though he is not himself a
from defenses available to prior parties among themselves, and may holder in due course, equitable defenses cannot be interposed against him by
enforce payment of the instrument for the full amount thereof against parties prior to the holder in due course from whom he derived his title. But of
all parties liable thereon. course, real defenses can be interposed against him. It will be noted that there are
two requisites, namely
Agbayani: A holder in due course: 1) that he derived his title from a holder in due course, and
1) may sue on the instrument in his own name; 2) that he was not himself a party a party to any fraud or illegality affecting the
2) may receive payment and if payment is in due course, the instrument is instrument.
discharged;
3) holds the instrument free from any defect of title of prior parties and free In order that a holder who derives his title from a holder in due course may
from defenses available to prior parties among themselves; and recover on the instrument, it is incumbent upon him to show that the person
4) may enforce payment of the instrument for the full amount thereof against all through whom he derives his title was a holder in due course; and this must be
parties liable thereon. proven as an independent matter of fact.
Campos: A holder in due course can acquire a better title than his predecessors Campos: The fact that a holder is not in due course will in no way affect the
because he takes the instrument free from any defect of title of prior parties. He is negotiability of the instrument. It only affects such holder’s rights, and does not
furthermore free from defenses available to prior parties among themselves. necessarily prevent subsequent holders from acquiring the status of due course
holders.
Sebastian: Additional rights of a holder in due course are that (1) he holds the
instrument free from defenct and defenses and (2) he may enforce payment Sebastian: If there is an intervening holder in due course, the subseqent
against all prior parties. A holder in due course is only immune to personal holders also become holders in due course. If an instrument is in the possession
defenses but will yield to real defenses. is one who is not a holder in due course, but derives his title from a holder in due
course, the former is called a holder in due course by osmosis. In an indorsement,
Sec. 58. When subject to original defense. - In the hands of any holder you acquire everything that belongs to the superior provided that such holder is
other than a holder in due course, a negotiable instrument is subject not involved in the defect of the instrument. Ifyou are claiming title under a
to the same defenses as if it were non-negotiable. But a holder who holder in due course, you are under a legal duty to prove that the prior holder is a
derives his title through a holder in due course, and who is not holder in due course.
himself a party to any fraud or illegality affecting the instrument, has
all the rights of such former holder in respect of all parties prior to Fossum v Fernandez Hermanos – If a person not a holder in due course
the latter. reacquires from a holder in due course, the instrument becomes subject to the
same defenses to which it would have been subject as if the paper had never
LEX SOCIETAS 63
passed through the hands of a holder in due course. The same is true where the instrument instrument
instrument is retransferred to the agent of a person not a holder in due course. 3) insertion of wrong date when 3) duress amounting to forgery
necessary 4) fraud in factum or fraud in esse
REAL AND PERSONAL DEFENSES 4) filling up of a blank contrary to contractus
authority given or not within 5) minority
Agbayani: The defenses referred to in Section 57, from which the holder in due reasonable time 6) marriage in case of a wife
course is free, are equitable (personal) defenses only, not legal (real) defenses, 5) fraud in inducement 7) insanity where the insane person
which latter class of defenses can be set up against a holder in due course. 6) acquisition of instrument by force, has a guardian appointed by court
duress, fear, fraud, mistake, 8) ultra vires act of corporation
Personal defenses are those which grow out of the agreement or conduct of a intoxication, unlawful means or where there is an absolute
particular person in regard to the instrument which renders it inequitable for for an illegal consideration prohibition
him, though holding legal title, to enforce it against the defendant, but which are 7) negotiation in breach of faith or 9) want of authority of agent
not available against bona fide purchases for value without notice. They can be under circumstances amounting 10) execution between public enemies
set up against persons not holders in due course but not against holders in due to fraud 11) illegality of contract
course. They are called personal defenses because they are available only against 8) ultra vires acts of corporations
that person or a subsequent holder who stands in privity with him. 9) want of authority of agent where
he has apparent authority
In real defenses, the right sought to be enforced has never existed or ceased to 10) insanity where there is no notice
exist. It is a defense against everybody. The case of the real defense is presented of insanity on the part of the one
where (1) the contract was void, not voidable only, as to the defendant in its contracting with insane person
inception, as where: 11) form or consideration is illegal
1) his signature was forged or unauthorized;
2) he was legally incapable of making the contract; Campos: It should be kept in mind that the question of whether a holder is a
3) his signature was secured by misrepresentation of the kind of paper he was holder in due course or not is significant only when there is an existing defense
signing; between prior parties.
4) the contract was void under an invalidating statute;
or (2) the contract has lost its vitality by the occurrence of a subsequent event by: Sebastian: Alteration is neither a real or personal defense. It is better to say
1) material alteration without defendant’s consent; neither than to say it is both. Niether means it can be real or personal, or
2) lapse of time or something totally different.
3) discharge by payment in due course;
4) bankcruptcy proceedings or otherwise. The defesne of minority can only be used by the minor and other indorsers may
not claim minority of the indorser. But if there was misrepresentation of the
An instrument subject to real defense cannot be enforced against the person to minor’s age, the minor will be held liable.
whom the legal defense is available but it can be enforced against those to whom
such a defense is not available. Between the parties to the underlying transaction, illegality of the underlying
transaction is a real defense. But as to remote parties, the instrument is valid. A
Where the action is against joint makers, a defense belong personally to one of holder unaware of the nature of the note may be a holder in due course.
them will not be available to the other co-makers; but where the defense of the
defendant goes to the merits of the case defeating plaintiff’s right to recover, it is If the illegality of the instrument is by virtue of a statutory provision, it is a real
available to the benefit of the other defendant. The last statement seems to mean defense. Otherwise, it is only a personal defense.
defenses which are derived from the nature of the obligation.
PRESUMPTION IN FAVOR OF HOLDER IN DUE COURSE
Personal Defenses Real Defenses
1) absence or failure of consideration 1) forgery Sec. 59. Who is deemed holder in due course. - Every holder is
2) want of delivery of complete 2) want of delivery of incomplete deemed prima facie to be a holder in due course; but when it is shown
that the title of any person who has negotiated the instrument was
LEX SOCIETAS 64
defective, the burden is on the holder to prove that he or some person
under whom he claims acquired the title as holder in due course. But LIABILITIES OF PARTIES
the last-mentioned rule does not apply in favor of a party who became
bound on the instrument prior to the acquisition of such defective Campos: From the point of view of liability, parties to a negotiable instrument
title. are classified into: (1) primary party, and (2) secondary party. The parties
primarily liable are (1) the maker of a promissory note and (2) the acceptor of a
Agbayani: The presumption expressed in this section arises only in favor of a bill. The drawee is not a party liable on the instrument until and unless he
person who is a payee or indorsee who is in possession of the draft or the bearer accepts; in such case he becomes an acceptor, and is primarily liable on the bill.
thereof. Under this definition, in order to be a holder, one must be in possession The parties secondarily liable are: (1) the indorser of both a note and a bill, and
of the note or the bearer thereof. However, when the instrument is not payable to (2) the drawer of a bill.
the holder thereof or to bearer, there is said to be a defect in the title of the holder
and the rule that possessor of the instrument is prima facie a holder in due The main difference between a primary party and a secondary party is that the
course does not apply. Furthermore, the presumption does not apply in favor of a former is unconditionally liable when the latter is conditionally liable. Being
person who is no longer in possession of the instrument. unconditionally liable, the primary party is duty bound to pay the holder at the
date of maturity, whether or not the holder demands payment from him, and he
Before the presumption arises, he must prove that he is the holder of the is not relieved from liability even if the instrument should become overdue due to
instrument, that is, that he is the indorsee in possession of the instrument, as it is the failure of the holder to make such demand. On the other hand, a party
payable to order. secondarily liable is not bound to pay unless the following conditions have been
fulfilled: due presentment or demand to the primary party for payment or
But when it is shown that the title of any person who has negotiated the acceptance, its dishonor by such party, and the taking of proceedings required by
instrument was defective, the burden is on the holder to prove that he or some law after dishonor – i.e., notice of dishonor to the secondary party and, in cases
under whom he claims, acquired the title as holder in due course. of foreign bills of exchange, protest of the bill.
Asia Banking Corporation v Ten Sen Guan y Sobrinos – The reason for Sebastian: Parties who are primarily laible on an instrument are the maker and
this salutary rule given by the courts in innumerable decision is that the guilty the acceptor. It must be noted that a drawee is not even liable on the instrument.
maker or holder of an instrument vitiated by fraud or illegality will naturally seek Parties who are secondarily liable on an instrument are the drawer and indorsers.
to put it in the hands of some other person in order to cut off the defense to which
the instrument is subject, and a presumption arises against the bona fides of the LIABILITY OF MAKER
transfer. The law therefore requires the holder of such paper to manifest the most
complete can do and show exactly the circumstances under which the paper was Sec. 60. Liability of maker. - The maker of a negotiable instrument,
acquired. by making it, engages that he will pay it according to its tenor, and
admits the existence of the payee and his then capacity to indorse.
But the shifting of the burden of proof to the holder where it is shown that there
is a defect in the title of any person who negotiated it does not apply in favor of a Agbayani: The engagement of the maker is to pay absolutely the note according
party who became bound on the instrument prior to the acquisition of such to its tenor. The maker’s liability is primarily and unconditional. And one who
defective title. has signed a maker is presumed to have acted with care and to have signed the
document in question with full knowledge of its contents unless, of course, fraud
is proved.
Maker must pay according to terms of the note.
Aside from engaging to pay the instrument according to its tenor, the maker also
admits the existence of the payee and his then capacity to indorse. Thus, without
expressly stating it in the note, the maker, by merely signing his name in a note as
such, without more, represents to the world that the payee is an existing person
with the then capacity to indorse. The maker consequently is precluded from
LEX SOCIETAS 65
setting up the following defenses: (1) that the payee is a fictitious person because, Sebastian: This case explains what liability one incurs if he signs an
by making the note, he admits that the payee exists; and (2) that the payee was instrument. In this case, the maker was held liable because when he signed as a
insane, a minor, or a corporation acting ultra vires because, by making the note, maker, he became a person primarily liable who undertook to make payment
he admits the then capacity of the payee to indorse. according to its tenor.
Campos: Under Section 60, a maker is undoubtedly a party primarily liable as Araneta v Perez – Under Section 60 of the Negotiable Instruments Law, the
defined in Section 192, for he engages to pay the note according to its tenor, maker of a promissory note cannot escape liability by alleging that he spent the
subject to no condition whatever. money for the medical treatment of his daughter, the beneficiary of the trustee
who is the payee of the note, since it is not the payee’s concern to know how said
The term maker applies only to the promissory note. By executing a note, a maker proceeds should be spent, inasmuch as that is the sole concern of the maker, and
warrants that the payee as named in the instrument is existing. He cannot the payee’s interest is merely to see that the note be paid according to its terms.
therefore deny his liability on the ground that no such payee in fact exists. Thus,
he cannot be heard to question, for example, the corporate existence of the payee. Sebastian: There was no off set because the parties to the note and the parties
to the trust were different. The responsibility of the trustee was between the
Sebastian: The maker is liable to pay according to its tenor because the maker trustor and the beneficiary. A civil liability cannot be off set from a liability that
wrote it, that is why he will pay the instrument according to its tenor. He is the arose from a breach of trust.
primary obligor and it is incumbent upon him to honor his commitment.
Republic v vda. de Yulo –A perusal of the promissory notes attached to the
When the instrument after it has been issued by the maker is materially altered, complaint shows that the appellee signed some of them merely as an agent of one
the commitment to pay according to its tenor will not apply to the note because it of his co-defendant. The complaint itself alleges that on several occasions the
is no longer the tenor of his obligation. latter, for herself and through other defendants, including appellee, obtained
several loans from the former Bank of Taiwan. That it was solely said defendant,
A maker must admit the existence of a payee and his capacity to indorse so he who owed the loans, is further corroborated by the allegation that the chattel
cannot deny his liability on the ground that no such payee in fact exists. A mortage to secure them was signed by her and was constituted on her exclusive
negotiable instrument is substitute for money andsomething acceptable to property. Upon these facts, it is held that the complaint, as against appellee, was
strangers to the underlying transaction of the instrument. Therefore, each step of correctly dismissed for lack of sufficient cause of action.
the way, the person negotiating is making representation with respect to prior
transactions. On each step, someone assures the holder that the instrument is Parot v Gemora – When a promissory note is signed by two or more persons,
good. By the last holder, he will have every protection available from the promising to pay the amount of the sad note juntos o separadamente, such
indorsers to the maker. In effect, the maker is saying that “I pass the instrument comakers are individually liable for the payment of the full amount of the
to the payee and he can pass it to you; and when he passes it to you, I am willing obligation of such contract.
to pay.”
Clark v Sellner – The fact that a joint and several note has been signed by one
PNB v Maza and Macenas – The accommodation party can claim no benefit or various makers thereof for the accommodation by one or more of his or their
as such, but he is liable according to the face of his undertaking, the same as if he comakers, does not render him or them an accommodation maker or makers
were himself financially interested in the transaction. To fasten liability upon with respect to the creditor who, upon the receipt of the note, pays the full value
him, it is not necessary that any consideration should move to him. thereof. In such a case the payment by the creditor of the value of the note upon
the latter passing into his hands, renders all the signers of the note liable thereon;
After making payment to the holder, the accommodation party may sue the and is of no importance that one or more of the signers has or have not received
accommodated party for reimbursement, since the relation between them is in absolutely any part of the consideration.
effect that of principal and surety, the accommodation party being the surety.
Mere delay on the part of the creditor, after maturity of the note, in enforcing the
TanTua Sia v Yu Biao Sontua – There being no evidence of fraud, and the guaranty given to secure the payment of said note, does not affect the liability of
appellant having admitted the genuineness of his signature on the promissory the maker, and the latter is not released by the fact that by the lapse of time the
note in question, the same must be given its legal effects. guaranty has becomes worthless.
LEX SOCIETAS 66
Sebastian: In this case, the principle of laches did not apply. What is only when: (1) it is dishonored; (2) and the necessary proceedings of dishonor are
controlling is the liability of the maker, accommodation or otherwise, who duly taken. The liability of the drawer is therefore, subject to these two conditions
undertakes to pay the instrument. and attaches only upon their fulfillment. Thus, without expressly stating it in the
bill, the drawer, by merely drawing the bill and signing his name in the bill as
LIABILITY OF A DRAWER such drawer, without more, impliedly engages to be so secondarily liable, as if he
has incorporated the provisions of Section 61 in the bill. Accordingly, if a bill is
Sec. 61. Liability of drawer. - The drawer by drawing the instrument not paid, the drawer becomes liable for the payment of its value to the holder
admits the existence of the payee and his then capacity to indorse; provided that notice of dishonor is given. In the absence of due presentment, the
and engages that, on due presentment, the instrument will be drawer is not liable. And a person in whose favor a bank sells a telegraphic
accepted or paid, or both, according to its tenor, and that if it be exchange on a foreign bank may, in case payment is refused by the bank of
dishonored and the necessary proceedings on dishonor be duly taken, destination, maintain an action against the bank selling the exchange, without
he will pay the amount thereof to the holder or to any subsequent regard to whether such payee was an immediate party to the purchase of the
indorser who may be compelled to pay it. But the drawer may insert exchange or not.
in the instrument an express stipulation negativing or limiting his
own liability to the holder. Liability for Unaccepted Bill
Sebastian: The drawer warrants the existence of the payee and his capacity to Agbayani: Is drawer of unaccepted bill primarily liable? It has been held that
indorse. until the bill ahs been accepted, the drawer is the primary debtor and after
acceptance, the drawee of acceptor is the principal debtor and the drawer
There is no warranty on the existence of the drawee because the drawee is not yet becomes secondarily liable. His liability is the as that of a first indorser. It may be
a party to the instrument. The presumption is that every bill of exchange is drawn pointed out, however, that under Section 61, whether the bill is accepted or not,
on account of some indebtedness from the drawee to the drawer, and that the the drawer is not absolutely required to pay. Therefore, strictly speaking, under
acceptance is an appropriation of the funds of the latter in the hands of the Section 192, which defines a person primarily liable as one “who by the terms of
former. the instrument is absolutely required to pay the same,” the drawer is not
primarily liable thereon even if the bill is unaccepted.
Drawer may be held liable on the basis of his liability based on his contractual
obligation and his statutory undertaking as the drawer of the instrument. Ability to Deflect Liability
Kauffman v PNB – A person whose favor a bank sells telegraphic exchange on Agbayani: The law allows the drawer to negative or limit his liability by express
a foreign country may, in case payment is refused by the bank of destination, stipulation, as by adding to his order to pay the words: (1) “without recourse,” (2)
maintain an action against the bank selling the exchange, without regard to “I shall not be liable in case of non-payment or non-acceptance.”
whether such payee was an immediate party to the purchase of the exchange or
not. Reimbursement Obligation of Drawer
Sebastian: The instrument in this case was not negotiable; in fact, there was no PNB v Court of Appeals (1982) – Drawer of checks should pay their value to
written instrument at all. the bank who paid for them in case said checks were lost and thus were not
debited against the drawer’s current account is consistent with the doctrine of
To Whom Drawer is Liable preventive unjust enrichment.
Agbayani: The secondary liability of the drawer is in favor of: (1) the holder, or Sebastian: The checks in this case were never dishonored because they were
(2) if any of the indorsers intervening between the holder and the drawer is never presented. However, to argue that the check was never dishonored would
compelled to pay by the holder, the drawer will be liable to that indorser so result in unjust enrichment.
compelled to pay.
STATUS OF DRAWEE PRIOR TO ACCEPTANCE
The drawer does not engage to pay the bill absolutely. He engages merely that the
bill will be accepted or paid or both, according to its tenor and that he will pay
LEX SOCIETAS 67
Campos: The drawee is the person on whom a bill of exchange or check is
drawn and who is ordered to pay it. He is not liable on the instrument until he (3) Neither can the drawee escape liability by alleging want of consideration
accepts it, and even a holder in due course cannot sue him on the instrument between him and the drawer as, by accepting the bill, he admits the capacity and
before his acceptance. The mere issuance of the bill does not make the drawee authority of the drawer to draw the bill. For the same reason, the better rule
liable thereon because it does not operate as an assignment of the funds of the seems to be that the acceptor is liable on the bill even if the drawer has
drawee. Once the bill is accepted, the acceptor becomes primarily liable on the overdrawn his account.
instrument under Sec. 62. The presumption is that every bill of exchange is
drawn on account of some indebtedness from the drawee to the drawer, and that Campos: Negotiable instruments are payable either immediately or at some
the acceptance is an appropriation of the funds of the latter in the hands of the future time. If a bill of exchange is payable immediately, it will be presented to
former. the drawee for payment; on the other hand, if payable at some future time, the
bill of exchange may be presented to the drawee for acceptance before its due
A bill of exchange presupposes a debtor-creditor relationship between the drawer date. A drawee has no liability on the bill until and unless he accepts the same.
and the drawee. Thus, although a drawee is not liable to the holder until and Once he accepts, he becomes primarily liable on the instrument, for then he
unless he accepts, the drawee who refuses to accept may, under some engages to pay it according to the tenor of his acceptance, subject to no condition
circumstances, be made liable to the drawer for breach of contract or for damages whatever. He cannot refuse to pay a holder in due course on the ground of forgery
based on tort. If the drawee, for a certain consideration, had previously promised of the drawer’s signature since he admits its genuineness. Neither can he refuse
the drawer that he would honor the latter’s bill, unjustified refusal to accept will to pay a holder in due course on the ground of absence of consideration or other
be a breach of the promise. Thus, if a bank refuses without just reason to honor a personal defense exiting between the acceptor and the drawer.
check of one of its depositors although the latter has sufficient funds with it to
cover the check, the drawer may recover from the bank damages for any injury Sebastian: An acceptor will pay the instrument according to the tenor of his
suffered by him, including that to his credit or reputation. acceptance, not according to the tenor of the instrument. Acceptor may choose to
accept the instrument on terms that are different from what was written on the
LIABILITY OF AN ACCEPTOR instrument. When you agree to pay, you are bound to the instrument.
Sec. 62. Liability of acceptor. - The acceptor, by accepting the There a warranty with regards to the drawer because when the acceptor accepts,
instrument, engages that he will pay it according to the tenor of his he cannot question the existence, capacity, and authority of the drawer, and the
acceptance and admits: genuineness of the signature of the drawer. If there is no warranty, the
(a) The existence of the drawer, the genuineness of his signature, acceptance will have no point, because he can still deny payment to the payee.
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse. Warranty of the payee’s existence is necessary because it was only upon
acceptance that the acceptor became a party. After acceptance, acceptor is
Agbayani: The acceptor, by his acceptance, admits: (1) the drawer’s existence, directly and primarily liable to the payee although initially there was no liability.
(2) the genuineness of the drawer’s signature; and (3) the capacity and authority
of the drawer to draw the instrument. But he does not admit the genuineness of Acceptor Primarily Liable
the indorser’s signature. Thus, without adding any word to his acceptance, the
acceptor, by signing the bill as such, represents that the drawer exists, that his Agbayani: The acceptor engages to pay absolutely according to the tenor of his
signature is genuine and that he has the capacity and authority to draw the bill. acceptance. His liability is not subject to any condition. Thus, without expressly
stating it on the bill, the acceptor, by merely signing the bill as such, engages to
Effect of acceptor’s admissions: pay unconditionally the bill according to the tenor of is acceptance. It is to be
noted, however, that as already stated, the acceptor is a drawee who accepts the
(1) The acceptor is consequently precluded from setting up the defense that the bill. Before acceptance, the drawee is not liable on the bill. “The drawee by
drawer is non-existent or fictitious because of his admission of the drawer’s acceptance becomes liable to the payee or his indorsee, and also to the drawer
existence; himself.” His acceptance immediately places a legal liability on him for the
payment of the bill in favor of one who became a holder thereof after acceptance
(2) Neither can he claim that the drawer’s signature is a forgery because he and if he wants to escape liability, it is up to him to show that he is a mere agent
admits the genuineness of the drawer’s signature. of the drawer, or allege and prove any other defense which he has to the liability.
LEX SOCIETAS 68
days after sight.” He engages to pay the bill “60 days after sight,” which is tenor of
The prevailing view is that the same rule found in Section 62 applies in the case his acceptance, not “30 days after sight,” the tenor of the bill. Suppose that the
of a drawee who pays a bill without having previously accepted it. bill is for ₱1,000 and the acceptor accepts it for ₱600, he would be liable only for
₱600, the tenor of his acceptance, not ₱1000, the tenor of the bill.
Sebastian: By acceptance, acceptor warrants that he is primarily liable.
Sebastian: If nagbago ung tenor nung instrument, the holder may consider
PNB v Picornell – The drawee, by accepting unconditionally the bill, becomes the instrument dishonored.
liable to the holder, and cannot allege want of consideration between him and the
drawer. The holder is a stranger as regards the transaction between the drawer Alteration Before Acceptance
and the drawee, and if he has given value to the drawer and has no knowledge of
any equity between the drawer and drawee, he is in the same situation as an Agbayani: Suppose the bill is originally for ₱1,000. Before the drawee X accepts
indorsee in good faith. Hence in an action brought by the holder against the it, it is altered by the payee B to ₱4,000. Then X accepts it. How much is X liable
acceptor it is no defense that the merchandise sent by the drawer and which to a holder in due course? Before the adoption of the Negotiable Instruments
constituted the consideration for the drawing of the bill, is of inferior quality than Law, at common law, an acceptor was liable according to the tenor of the bill.
was ordered by the drawee to such a degree that is not worth the value of the bill. Since the adoption of the Negotiable Instruments Law, a diversity of opinion has
arisen as to the effect of Section 62.
Sebastian: An acceptor, upon acceptance, detaches himself from the underlying
transaction. He assumes liability under the instrument and independent from the According to one view, X is liable for ₱4,000 not ₱1,000. The reason is that the
underlying trasaction of the instrument. Thus, defects in the underlying tenor of X’s acceptance is for ₱4,000. “since an acceptor, by Section 62 engages to
transaction does not affect the acceptor. pay the bill ‘according to the tenor of his acceptance,’ he must pay to the innocent
payee or subsequent holder the amount called for by the time he accepted, even
Effect of Mortgage though larger than the original amount ordered by the drawer. Moreover, he
would be a party who has himself assented tot the alteration.”
Asia Banking Corporation v Lacson Company, Inc. – Where being
unable to pay certain bills of exchange which the drawee has accepted, the latter A learned writer takes the opposite view and he is supported by some decisions.
makes a mortgage in favor of the holder of said bills upon certain merchandise He suggests that the Illinois view overlooks other pertinent sections of the
the value of which is sought to be collected through said bills, in order to secure Negotiable Instruments Law and that Section 62 should be paraphrased to state
the payment of said amount if the merchandise is sold and the integrity thereof the liability of the acceptor depends upon the terms of his acceptance, that is,
while the sale is not effected, the execution of said mortgage does not constitute whether it is a general acceptance, or a qualified acceptance or an acceptance for
any novation of the obligation represented by said accepted bills, unless it is so honor. He suggests that all three of these acceptance contracts are within the
expressly stated in said mortgage. purview of the provision of Section 62 that the acceptor, by accepting the
instrument, engages that he will pay it not according to the tenor of the bill since
Sebastian: Even if an instrument is secured by a mortgage, the mortgage will this would deny him the right to qualify the acceptance or to accept for honor but
not operate to novate the liability of an acceptor. Subsequent constitution of the according to the tenor of his acceptance.
mortgage does not novate the liability of an acceptor.
Under the first view, what is the effect of Section 124 which provides that a holder
Payment According to Tenor of Acceptance in due course can recover only the original tenor of the instrument? It seems that
this refers to the original tenor of the instrument taken from the standpoint of the
Agbayani: Acceptor to pay according to tenor of his acceptance. It is to be person principally liable, in the first illustration, from X’s standpoint. In other
noted that while the maker of a note engages to pay according to the tenor of the words, the original tenor of the instrument is ₱4,000, which is the tenor of X’s
note, an acceptor engages to pay according to the tenor of his acceptance, not of acceptance. If after his acceptance, a subsequent indorsee alter the bill to read
the bill he accepts. This is an important distinction for the tenor of the acceptor’s ₱9,000, then X could be liable only for ₱4,000, the original tenor of his
acceptance may be different from the tenor of the bill, as the acceptor may accept acceptance, even as to a holder in due course.
the bill with qualifications. But, of course, if his acceptance is general, the tenor of
the bill is the same tenor as the tenor of his acceptance. Thus, suppose that the LIABILITY OF AN INDORSER
bill is payable “30 days after sight” and the drawee accepts it but payable “60
LEX SOCIETAS 69
Who is Deemed an Indorser Sec. 64. Liability of irregular indorser. - Where a person, not
otherwise a party to an instrument, places thereon his signature in
Sec. 63. When a person deemed indorser. - A person placing his blank before delivery, he is liable as indorser, in accordance with the
signature upon an instrument otherwise than as maker, drawer, or following rules:
acceptor, is deemed to be indorser unless he clearly indicates by (a) If the instrument is payable to the order of a third person, he is
appropriate words his intention to be bound in some other capacity. liable to the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or
Agbayani: In the absence of any indication in what capacity a person whose drawer, or is payable to bearer, he is liable to all parties
signature is written on the instrument intends to be bound, he shall be deemed subsequent to the maker or drawer.
an indorser. But one making a note payable to his own order does not, by (c) If he signs for the accommodation of the payee, he is liable to all
indorsement thereof, assume liability as indorser. parties subsequent to the payee.
And one who signs otherwise than as maker, drawer, or acceptor, will not be Agbayani: Where a person puts his signature on the instrument after delivery,
deemed an indorser if he indicates by appropriate words his intention to be this section does not apply. It is Section 17 (f) and Section 63 which apply. This
bound in some other capacity. Accordingly, an indorser upon a promissory note section applies where the signature in blank is placed on the instrument before
or bill of exchange who indorses for the purpose of incurring any liability as to delivery. And this section deals only with the liability of the irregular indorser to
the payment of such promissory note or bill of exchange, incurs no liability. This the payee but does not fix the rights of various irregular indorsers as between
indorsement or guaranty, however, must clearly indicate that it is for the purpose themselves which shall be governed by Section 68, under which evidence is
of identification only. admissible as to the order in which they are to be liable.
But anyone who assumes the responsibility of identifying the payee of a check is Definition of “Irregular Indorser”
answerable to the bank cashing the check if the bank pays its amount to such
payee so identified. But where a party signed his name on the back of the check Agbayani: Based on the first sentence of Section 64, an irregular or anomalous
below the clause “for identification of payee’s signature and payment indorser is a person who, “not otherwise a party to an instrument, places thereon
guaranteed,” stamped immediately after a signature appearing thereon as last his signature in blank before delivery.” In order, therefore, that a person may be
indorsee, and thereafter the agents of the bank encashed the check in favor of the considered an irregular indorse, the following three requisites must be present:
drawee and not in favor of the person so identified, such agents are guilty of (1) he must not otherwise be a party to the instrument, that is, he must not be a
negligence, and the bank is liable to the drawer for the amount of check. maker, drawer, acceptor or regular indorsee thereon; (2) he must sign the
instrument in blank; and (3) he must sign before delivery.
Sebastian: Under this section, the person placing his signature upon an
instrument who does not signify how is to be bound is deemed an Such a party so signing is called an irregular or anomalous indorser because he
accommodation indorser and liable under Section 66. An accommodation indorses in an unusual, singular or peculiar manner. His name appears where we
indorser does not receive any consideration but signs it nonetheless. would naturally expect another name. thus, where an instrument is payable to B
or order, B’s name should appear on the back of the instrument as the first
A deemed indorser indorses after the instrument is delivered, while an irregular indorser, but instead, we find the name of say Y as the first indorser. In such a
indorser indorses before delivery. case, Y is an irregular indorser.
American Bank v Macondray & Co. – An indorser upon a promissory note Sebastian: An irregular indorser signs the instrument even before issuance.
or bill of exchange who indorses for the purpose of indentifying the person only Like a deemed indorser, an irregular indorser is also an accommodation indorser.
and not for the purpose of incurring any liability as to the payment of such He accommodates the maker/drawer. An accommodation party can never claim
promissory note or bill of exchange incurs no liability. This indorsement or lack of consideration. Since an accommodation party does not have any liability
guaranty, however, must clearly indicate that it is for the purpose of to the payee or the subsequent parties, Section 64 makes the accommodation
identification only. party liable because subsequent parties relied in good faith on the signature of
the accommodation party. Thus, subsequent parties may look to the
CONCEPT OF AN IRREGULAR INDORSER accommodation party for payment.
LEX SOCIETAS 70
Meaning of “Before Delivery” cannot obtain payment form the person primarily liable by reason of the fact that
any of the warranties of the person negotiating by delivery is or becomes false.
Agbayani: Does this mean the initial delivery or every delivery from one party
to another in the curse of the negotiation of the instrument? In dealing with Suppose that he instrument is altered or the maker’s signature is forged, for
irregular indorsers, Ogden uses the word “initial” to modify “delivery.” On the which reason the holder cannot collect from the maker. The party negotiating by
other hand, under a case “delivery” seems to include not only the original delivery mere delivery is liable to the holder because he warrants that “the instrument is
to the payee but also every delivery from the party accommodated to a genuine and in all respects what it purports to be.”
subsequent party.
Suppose that the maker is a minor, a lunatic or other cases of incompetency, a
LIABILITY OF PERSON NEGOTIATING BY DELIVERY married woman, or a corporation acting ultra vires, for which reason the holder
cannot collect from the maker. The party negotiating by delivery is liable to the
Sec. 65. Warranty where negotiation by delivery and so forth. — holder because he warrants that “prior parties have capacity to contract.”
Every person negotiating an instrument by delivery or by a qualified
indorsement warrants: But under the last paragraph, “a party negotiating public or corporation securities
(a) That the instrument is genuine and in all respects what it other than bills and notes, do not warrant the capacity of prior parties to
purports to be; contract.”
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract; Suppose that the maker was insolvent at the time of the negotiation of the
(d) That he has no knowledge of any fact which would impair the instrument. This fact renders the instrument valueless, and for this reason, the
validity of the instrument or render it valueless. holder cannot collect on the instrument against the insolvent maker. (1) If the
party negotiating by delivery knew that the maker was insolvent, and he
But when the negotiation is by delivery only, the warranty extends in concealed that fact, he would be liable because he warrants that he is ignorant of
favor of no holder other than the immediate transferee. any fact that would render the instrument valueless, and it turns out that he
knew. But if the party negotiating did not know of the maker’s insolvency, he
The provisions of subdivision (c) of this section do not apply to a would not be liable. (2) The party negotiating by delivery would also be liable, if
person negotiating public or corporation securities other than bills he knew but concealed that the instrument is not valid for want of consideration
and notes. because he warrants that he does not know of any fact which would impair the
validity of the instrument. But if he did not know that fact, he would not be liable,
Agbayani: This section treats of the warranties or liabilities of: (1) a person as he does not warrant that the instrument is valid.
negotiating by mere delivery, and (2) a person negotiating by qualified
indorsement. It is, of course, to be understood that one negotiating by qualified The four warranties expressed in this section are not exclusive but may be
indorsement completes the process with delivery. The first refers to the extended by analogy to like situations. So that, when as indorser, without
instrument payable to bearer, either originally or when the only or last recourse of a note secured by a lien, released the lien after he had indorsed it to
indorsement is in blank. But one indorsing in blank is not referred to here, as he the holder, said indorser is liable for breach of warranty. The Negotiable
negotiations by indorsement (although blank) completed by delivery, not by Instruments Law, Section 65, does not state the only warranties and under said
delivery only. The second refers to instrument payable to order. Thus, suppose section, by analogy, the person negotiating by delivery or indorsing qualifiedly
that A makes note payable to B or order. Then B negotiates it by a qualified warrants also that “he will do no act to prevent the indorsee from collecting the
indorsement to C. the liabilities incurred by B by so negotiating the note are also note.”
stated in this section.
The qualified indorser has the same warranties as those of a person negotiating
Suppose that A makes a note payable to bearer and delivers the same to B. then B by mere delivery. The only difference is that, while the person negotiating by
negotiates the note to C by mere delivery. What is the liability of B in so mere delivery is liable only to his immediate transferee, the person negotiating by
negotiating? By merely delivering the instrument to C, without saying more, B qualified indorsement is liable to all parties who derive their title though his
warrants all the matters and things mentioned in paragraphs (a), (b), (c), and (d) indorsement.
of Section 65 and his liability is limited only to these warranties. Thus, a person
negotiating by mere delivery becomes liable to the holder only when the holder
LEX SOCIETAS 71
It is clear form the foregoing that a qualified indorser or a person negotiating by
mere delivery are secondarily liable, and that their secondary liability is limited, Sec. 66. Liability of general indorser. - Every indorser who indorses
namely, to their warranties. In other words, they are secondarily liable only when without qualification, warrants to all subsequent holders in due
the person primarily liable cannot pay because of a violation of any of the four course:
warranties but they will not be liable if the person primarily liable cannot pay for (a) The matters and things mentioned in subdivisions (a), (b), and
any other reason than the violation of the four warranties. (c) of the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and
Campos: A qualified indorsement is made by adding the words “without subsisting;
recourse” or words of similar import, to the indorser’s signature, and constitutes
the indorser a mere assignor of the title of the instrument. And, in addition, he engages that, on due presentment, it shall be
accepted or paid, or both, as the case may be, according to its tenor,
Negotiation by delivery presupposes that no indorsement is necessary because and that if it be dishonored and the necessary proceedings on
the instrument is payable to bearer and therefore refers to the holder who passes dishonor be duly taken, he will pay the amount thereof to the holder,
the instrument in the same condition in which he received it, making no or to any subsequent indorser who may be compelled to pay it.
indorsement at all. Even if he did not sign the instrument, he would be liable
under Section 65. Agbayani: This section deals with the liability or warranties of one negotiating
by general indorsement, as distinguished from qualified indorsers or persons
A qualified indorser and one who negotiates by mere delivery, do not undertake negotiating by mere delivery. It has been held that this section includes an
to pay the instrument in the event of its dishonor. The purpose of the negotiator indorser for collection. This holding seems correct where the indorser for
in these two cases is to pass title to the instrument without incurring liability for collection receives value from the bank so that he can be considered a seller.
its payment. Like an assignor, he gives no assurance that the parties primarily Under such circumstances, the restrictive nature of the indorsement should not
liable will or can pay the instrument. He is in fact merely assigning the credit and negative the usual warranties of a seller of an instrument, for, on correct
is not a party secondarily liable. principles, it merely adds the promise that on presentation, it will be honored,
and is an obligation to protect subsequent holders for value from loss in he
As a general rule, therefore, the warranties in Section 65(a) could cover most real manner as if there was no trust.
defenses as would fall within the meaning of “genuine” and “in all respects what
it purports to be.” The qualified indorser cannot plead any of these defenses In addition to his four (4) warranties, a general indorser, by merely signing his
because they are covered by the warranties implied from his sale of the negotiable name as such on an instrument and without expressly stating it on the
instrument. instrument, “engages that, on due presentment, it shall be accepted or paid, or
both, as the case may be, according to its tenor, and that if it be dishonored and
Sebastian: A person liable under Section 65 does not guarantee of solvency of the necessary proceedings of dishonor be duly taken, he will pay the amount to
the person primarily liable for the payment of the instrument. Thus, if the reason the holder, or to any subsequent indorser who may be compelled to pay it.” This
for non-payment of instrument is not about the solvency of the person primarily is similar to the secondary liability of the drawer.
liable, the indorser may still be held liable.
The general indorser is secondarily liable. Under the last paragraph, his
LIABILITY OF RESTRICTIVE INDORSER secondary liability is not limited only to the four warranties. He is liable if, for
any reason, the person primarily liable cannot pay, as distinguished from the
Campos: The liability of a restrictive indorser would depend on what kind of limited secondary liability of the qualified indorser or of the person negotiating
restrictive indorsement he made. If it prohibits the further negotiation of the by mere delivery under Section 65. This is to say that he is secondarily liable if the
instrument, the instrument ceases to be negotiable. Nevertheless, the restrictive instrument is dishonored. And, in a Philippine case, it has been held that the law
indorser is liable to his immediate indorsee as an unqualified indorser, unless he does not require that the reason for the dishonor be established. It is sufficient
otherwise indicates. However, any subsequent transferee cannot acquire the that there was dishonor. Moreover, being a holder in due course does not defeat
rights of a holder because the instrument has become non-negotiable, and his the liability of an indorser and his warranties as set forth in Sections 65 and 66.
rights, if any, will be merely that of an ordinary assignee.
Where the person primarily liable is insolvent, the general indorser is liable, even
LIABILITY OF GENERAL INDORSER if he neither knew nor concealed that fact because he engages to pay if the person
LEX SOCIETAS 72
primarily liable cannot pay. Accordingly, “where a person makes an unqualified contract of indorsement. As a vendor, his liability is similar to that of the
indorsement of a promissory note, the Negotiable Instruments Law specifies and qualified indorser and the transferor by delivery. His liability on the special
defines his liability and parol testimony is not admissible to explain or defeat contract of indorsement is similar to that of the drawer and is expressed in the
such liability. second paragraph of Section 66 – he engages that the instrument upon
presentment, will be paid or accepted, or both, and if dishonored he engages to
Summary of distinctions between liabilities of persons negotiating: pay the holder, if proper proceedings on dishonor are duly taken. In this lies the
fundamental difference between a qualified and a general indorser. The latter is a
(1) As to the party negotiating by delivery, his warranties extend only to the party secondarily liable.
immediate transferee, while as to the qualified indorser and the general indorser,
they extend to parties subsequent to them. As between a qualified indorser and a Section 66(b) imposes liability on the general indorser, if the instrument is not
general indorser, the warranties of the first extend to all subsequent parties who valid and subsisting at the time of his indorsement, whether or not he was
acquire title through his indorsement regardless of whether they are holders in ignorant of the cause thereof.
due course or not, while as to the second, his warranties extend only to
subsequent holders in due course, subsequent parties deriving their title from Under Section 65, the warranties of one who negotiates by delivery “extends in
holders in due course and his immediate transferee. favor of no holder other than the immediate transferee.” Under this section the
liability of the qualified indorser, by implication, runs to all subsequent holders
(2) Under Section 65, the party negotiating by delivery or by qualified whether holders in due course or not.
indorsement warrants not only that he is ignorant of any fact which would impair
the validity of the instrument or render it valueless, while under Section 66, the In Section 66 however, the warranties of an unqualified indorser run “to all
general indorser warrants that the instrument is valid and subsisting. subsequent holders in due course.” The implication being that they do not run in
favor of holders not in due course. It has been suggested that this phrase be
(3) Under Section 65, the party negotiating by delivery or qualified indorsement interpreted to mean merely that the indorsee should not have had knowledge of
does not engage to pay the instrument if it is dishonored by non-acceptance or the breach of warranty at the time the instrument is indorsed to him.
non-payment except when such dishonor arises from his four warranties. in other
words, his secondary liability is limited. Under Section 66, the general indorser To validly negotiate an instrument payable to bearer on its face, it need not be
engages to pay the holder or any intervening party who may be compelled by the indorsed. There is nothing however to prevent the holder from so doing if he
holder to pay if the instrument is dishonored either by non-acceptance or non- wishes. If he does, his liability will no longer be governed by Section 65, but by
payment, whether such dishonor arises from the warranties or from other causes Section 66, but his liability runs only in favor of those holders who make title
such as insolvency. In other words, his secondary liability is not limited to the through his indorsement, if this is special. He may be relieved from liability
four warranties. however, if the holder chooses to exercise his right to strike out the indorsement,
which is actually not necessary to holder’s title.
It will be seen that, ordinarily, like the qualified indorser or person negotiating by
delivery, but not like the general indorser, an assignor is not responsible for the Sebastian:
insolvency of the principal debtor and will not be liable to the assignee if for that
reason the assignee can not collect from the principal debtor. On the other hand, Section 65 Section 66
unlike the qualified indorser and person negotiating by delivery, but like the There is no mention of the validity of There is a categorical statement that
general indorser, the assignor warrants the existence and legality of the credit the instrument but only a warranty the instrument is valid and subsisting.
assigned and will therefore, be liable to the assignee in case the assignee can not that he has no knowledge of any fact
collect from the principal debtor where the credit assigned is illegal or non- that would impair the instrument’s
existent. As in the case of general indorser, this liability of the assignor exists validty or render it valuless.
whether or not he knows of the illegality or non-existence of the credits he Warranty is only for the immediate Warranty is for all persons deriving
assigned. transferee. title from the general indorser.
Indorser has knowledge of the origin
Campos: The general indorser makes two contracts: an assignment or sale of of the instrument.
the instrument, and a special contract of indorsement. Unlike the qualified Privity of relationship is established.
indorser, he is liable not only as a vendor or assignor of a credit, but also on his
LEX SOCIETAS 73
Sebastian:
Limitation of Application of the 4th Warranty
Person
General Qualified
Agbayani: The fourth warranty of the general indorser is different from that of Negotaties by
indorser indorser
a qualified indorser or person negotiating by delivery. While the qualified Delivery
indorser or person negotiating by delivery warrants that he is ignorant of any fact Extends to all subsequent all subsequent immediate
that will render the instrument valueless or impair its validity, the general parties. parties who transferee.
indorser warrants that the instrument he is indorsing is valid and subsisting acquire title
regardless of whether he is ignorant of that fact or not. But the fourth warranty of through his
a general indorser does not run in favor of holders who are parties to the illegal indorsement.
transaction. 4th Warranty Warrants that the Warrants that he has no knowledge of
instrument is any fact that would impair the
Beneficiaries of the Warranties valid and instrument’s validty or render it
subsisting. valuless.
Agbayani: The law extends the warranties only to subsequent holders in due Engages to pay the holder or Doesn’t engage to pay the instrument if
course. But a person negotiating by delivery is liable only to his immediate any intervening it is dishonored by non-acceptance
transferee, while a qualified indorser is liable to all parties who can trace their party if the except when such dishonor arises from
title to his indorsement, whether such parties are holders in due course or not. instrument is the found from his four warranties.
However, an opinion is expressed that there seems to be no reason why the dishonored either
warranties of a general indorser should not run in favor of any person to whom by non-
the instrument Is negotiated as in Section 65. The law does not use the word acceptance or
“only”. Thus, it is silent as to the rights of a holder not in due course. Accordingly, non-payment.
the warranties of a general indorser extend to the following: (1) Subsequent
holders in due course; (2) Persons who derive their title from holders in due LIABILITY OF INDORSER OF A BEARER INSTRUMENT
course; (3) Immediate transferees, even if they are not holders in due course.
Otherwise, the transferee of a qualified indorser would have greater rights than Sec. 67. Liability of indorser where paper negotiable by delivery. —
the transferee of a general indorser. Where a person places his indorsement on an instrument negotiable
by delivery, he incurs all the liability of an indorser.
The indorser of a check does not warrant the genuineness of the drawer’s
signature to the drawee who pays it since the drawee is not a holder in due course Sebastian: Signing a bearer instrument makes the indorser liable under Section
under section 52 not a holder under Section 191. The warranties provided for in 66.
Sections 65 and 66 do not run in favor of the drawee in respect to the
genuineness of the drawer’s signature but only in favor of subsequent holders in ORDER IN WHICH INDORSERS ARE LIABLE
due course, inasmuch as the drawee is not such holder nor is the presentation for
payment to him a negotiation. Sec. 68. Order in which indorsers are liable. - As respect one another,
indorsers are liable prima facie in the order in which they indorse;
PNB v Court of Appeals (1968) – With respect to the warranty on the back of but evidence is admissible to show that, as between or among
the check, the PCIB guaranteed only “all prior indorsements,” not the themselves, they have agreed otherwise. Joint payees or joint
authenticity of the signatures of the officers of the GSIS who signed on its behalf, indorsees who indorse are deemed to indorse jointly and severally.
because the GSIS is not an indorser of the check, but its drawer. Said warranty is
irrelevant, therefore, to the PNB’s alleged right to recover from PCIB. It could not Agbayani: This rule applies only with respect to an indorser as against another
have been availed of by a subsequent indorsee or a holder in due course but not as against a holder in due course. Under this rule, every indorser is liable
subsequent to the PCIB, but, the PNB is neither. Upon payment by the PNB, as to all indorsers subsequent to him but not those prior to him whom he in turn
drawee, the check ceased to be a negotiable instrument, and became a mere makes liable. This section contemplates successive negotiations of the instrument
voucher of proof of payment.
LEX SOCIETAS 74
and successive indorsements. It does not determine the order of liability of joint To avoid liability, two things must be disclosed, namely: (1) identify one’s self as
indorsers among themselves. an agent and (2) identify his principal.
The rule that indorsers are liable in the order they indorse is only as between or
among themselves but not a against the holder. As to the holder, they are liable in
any order.
One of the joint indorsers cannot escape liability because proper notice of
dishonor was not given to his join indorser. Consequently, when the holder
expressly releases the first indorser, the second indorser will be discharged.
However, if one of the joint indorsers pays the instrument, the second joint
indorser is prima facie liable to contribute and the burden of proof to show
release from such liability is upon the second indorser. Under the New Civil Code,
in joint and several obligations, “he who made the payment may claim from his
co-debtors only the share which corresponds to each, with interest for the
payment already made.”
Campos: Among themselves, indorsers are liable prima facie in the order they
indorse. Section 68 does not bind the holder, and he may sue any of the
indorsers, regardless of the order of their indorsement.
Sebastian: Even if the law provides that an injured party can go against any of
the indorsers, the action must still comply with the Rules of Court and sue all of
them as indispensable parties.
LIABILITY OF AGENT OR BROKER
Sec. 69. Liability of an agent or broker. - Where a broker or other

agent negotiates an instrument without indorsement, he incurs all the
liabilities prescribed by Section Sixty-five of this Act, unless he
discloses the name of his principal and the fact that he is acting only
as agent.
Agbayani: This section seems to refer to instruments which are payable to

bearer. The liability and warranties of the agent are those stated in Section 65. To
escape personal liability as a party negotiating by delivery, the agent must (1)
disclose his principal; and (2) state that he is acting only as an agent. But parol
evidence is not admissible to relieve an agent whose indorsement brings him
within this section.
Sebastian: This section is referring to a bearer instrument. To escape personal

liability as a party, as a party negotiating by delivery, the agent must disclose his
principal and state that he is acting only as an agent. As agent of the principal,
there are no warranties. Rather it is actually the agent’s principal that gives
warranty.
LEX SOCIETAS 75
SUMMARY OF WARRANTIES, UNDERTAKINGS, DEFENSES BARRED AND BENEFICIARIES
GENERAL (IRREGULAR)
MAKER DRAWER ACCEPTOR QUALIFIED INDORSER
INDORSER
Section 60 61 62 65 66 (64)
Warranties payee's payee is a payee's payee is a drawer’s drawer is a instrument is forgery and instrument is forgery and
- Defenses existence fictitious existence fictitious existence fictitious or genuine and material genuine and material
Barred person or person or non-existent in all respects alteration in all respects alteration
non-existent non-existent person what it what it
person person drawer’s forgery of purports to be purports to be
genuine drawer’s
signature signature
payee's payee is a payee's payee is a drawer’s drawer is a he has good he has no title he has good he has no title
capacity minor or an capacity minor or an capacity minor or an title to the to the title to the to the
to insane to insane insane person instrument instrument instrument instrument
indorse person or indorse person or or otherwise because he because he
otherwise otherwise incapacitated stole it or he stole it or he
incapacitated incapacitated in the case of procured it procured it
a corporate through fraud through fraud
payee, the
transaction is
ultra vires
drawer’s drawer lacks all prior a prior party all prior a prior party is
authority of authority parties have is a minor or parties have a minor or an
to draw to draw capacity to an insane capacity to insane person
the instrument contract person or contract or otherwise
instrument (e.g. want of otherwise incapacitated
consideration incapacitated
or amount
drawn is in
excess of
drawer’s
funds)
in case of a in the case of payee’s payee is a in the case of in the case of a
corporate a corporate existence fictitious a corporate corporate
payee, the payee, the person or prior party, prior party,
transaction transaction is non-existent the the
is ultra vires ultra vires person transaction is transaction is
ultra vires ultra vires
payee’s payee is a no knowledge if the the illegality of the
capacity to minor or an of fact that insolvency of instrument is, note because
endorse insane person would impair the maker at at the time of of illegal
or otherwise the validity of the time of his consideration
incapacitated the negotiation is endorsement
LEX SOCIETAS 76
in the case of instrument or known to the is valid and
a corporate would render endorser, he subsisting
payee, the it valueless would be
transaction is liable for a
ultra vires breach of this
warranty
Beneficiaries by delivery qualified Warranties extend to all holders
of indorsement in due course as well as to the
Warranties Warranties Warranties transferee of a holder in due
extend to extend to all course. The secondary
immediate subsequent obligation to pay is not limited
transferee parties to a dishonor resulting from a
only. deriving title breach of the warranties.
through the
qualified
endorsement,
whether or
not such
subsequent
party is a
holder in due
course. No
undertaking
to pay the
instrument
except if
dishonor
results in a
breach of any
of the 4
warranties.
Undertakings Unconditional and If bill is dishonored and Pay the bill according to the If instrument is dishonored, and proceedings for dishonor are
principal obligation to proceedings for dishonor tenor of his acceptance; taken, he will pay holder or any endorser who pays it; obligation is
pay according to tenor of taken, he will pay the bill obligation is principal. secondary.
instrument. to holder or endorser who
may be compelled to pay
it; obligation to pay is
secondary and
conditional.
LEX SOCIETAS 77
Sebastian: There are two types of presentment. If it is for payment, its
PRESENTMENT FOR PAYMENT functional equivalent is demand for payment. If it is for acceptance, it is only
necessary in cases of bills of exchange which are payable at sight or within a
Sebastian: A promissory note is presented once while, as a rule, a bill of certain number of days after sight. When holder presents the draft, he wants the
exchange is presented twice. Checks and a bill that stipulates that presentment is drawee to accept so that he will become liable. If the drawee dishonors, the
waived may be presented once. holder can go back to the drawer and hold him liable under Section 61.
The equivalent of presentment in Civil Law is demand. The rule is no In time bill or usance bill, upon acceptance, the drawee indicates that he is willing
presentment, no payment, unless waived or excused. to pay the instrument according to its tenor. The holder You does not get paid
until the lapse of the specific time/date indicated in the instrument. Acceptor is
DEMAND ON THE PRINCIPAL DEBTOR ultimately obligated to pay but may make use the period of time to pay; during
such time, he may use the instrument.
Sec. 70. Effect of want of demand on principal debtor. - Presentment
for payment is not necessary in order to charge the person primarily Demand for Payment
liable on the instrument; but if the instrument is, by its terms, payable
at a special place, and he is able and willing to pay it there at maturity, Agbayani: Presentment for payment is not necessary in order to charge the
such ability and willingness are equivalent to a tender of payment person primarily liable. This rule applies to instruments payable on demand.
upon his part. But except as herein otherwise provided, presentment
for payment is necessary in order to charge the drawer and indorsers. It cannot be validly claimed that it is the presentment for payment of the bill to
the acceptor which is the operative act that makes the acceptor liable under his
Definition of Presentment acceptance. Before he accepts, the drawee is a stranger to the bill but from the
moment he accepts, he becomes bound as a party primarily liable on the
Agbayani: Presentment is meant the production of a bill of exchange to the instrument. He is bound according to the tenor of his acceptance and he cannot
drawee for his acceptance, or to the drawee or acceptor for payment or the show, as against the payee, that the drawer modifying the terms of the
production of a promissory note to the party liable for payment of the same. It acceptance.
consists of a (1) personal demand for payment at the proper place (2) with the bill
or note in readiness to exhibit it if required, and to receive payment and If the bill is payable at a special place it is not necessary to make presentment for
surrender it if the debtor is willing to pay. payment to the person primarily liable. The only effect is that if, the person
primarily liable is able and willing to pay the bill at the special place at maturity,
Campos: Presentment for payment is the presentation of the instrument to the it is equivalent to a tender of payment to him, and the holder loses his right to
person primarily liable for the purpose of demanding and obtaining payment recover interest due subsequent to maturity and cost of collection but can still
thereof. hold the former liable.
Sebastian: Presentment is the physical brining of the instrument to the person Campos: Presentment for payment need not be made to charge the primary
primarily liable and making presentment on due date of the instrument. When party. The maker and acceptor are obliged to pay the instrument although no
there is presentment for payment, and payment is not made, the instrument is demand has been made on them on its due date and they remain liable even
dishonored by non-payment. With the dishonor of the instrument by non- when it is already overdue.
payment, the party holding the instrument must make a notice of dishonor.
Sebastian: It is not the presentment that creates the liability for persons
In presentment for payment, the negotiable instrument is brought to verify the primarily liable because the liability is already there but the
authenticity, to check if it is due and to avoid double presentment. Then there presentment/demand will make it due and payable (demandable).
will be a demand for payment of the instrument.
If there is no demand, then there is no default arising from delay.
Nature of Presentment
Demand on Persons Secondarily Liable
LEX SOCIETAS 78
Agbayani: Presentment for payment to the person primarily liable is necessary Presentment is excused in Section 148.
to charge persons secondarily liable. Otherwise, they are discharged except as
otherwise provided for. If the drawee dishonors, holder must serve of dishonor telling the drawer that the
instrument was declined, thus holding drawer liable to his warranties. Secondary
Section 71 read in connection with the last sentence of Section 70 simply means liable persons are only required to pay upon notice that the person primarily
that the instrument must be presented for payment on the date and period liable had dishonored or declined to pay the instrument. As a rule, notice of
therein mentioned to charge the persons secondarily liable. And the instrument dishonor must be given to all persons secondarily liable. Person not given notice
must be presented on the date of maturity, (1) if it is payable on a fixed date, (2) is discharged and released from liability. After giving notice, holder must give the
within a reasonable time after issue, if it is a promissory note, (3) or within a dishonored instrument to the person secondarily liable and demand for payment
reasonable time after last negotiation, if it is a bill of exchange. Otherwise, the under Section 61 or 65.
drawer and indorsers are discharged from liability.
PROCEDURE TO HOLD PERSONS SECONDARILY LIABLE ON A
Sections 79 and 80 give two exceptions to the general rule that if no presentment NOTE
for payment is made, the person secondarily liable are discharged. However, the
exceptions herein stated are relative. Only the drawer or indorser referred to in Agbayani:
these sections are relived of their liability. 1) Presentment for payment must be made within the period required to the
person primarily liable unless excused; and
2) If the note is dishonored by non-payment, notice of dishonor by non-payment
PROCEDURE TO HOLD PERSONS SECONDARILY LIABLE ON A BILL must be given to the person secondarily liable unless excused.
OF EXCHANGE
PRESENTMENT OF INSTRUMENTS PAYABLE/NOT PAYABLE ON
Agbayani: If one of the steps is not taken, the persons secondarily liable are DEMAND
discharged and only the person primarily liable is left to answer for the payment
of the instrument: Sec. 71. Presentment where instrument is not payable on demand
1) In the three cases required by law, presentment for acceptance to the drawee and where payable on demand. - Where the instrument is not
or negotiation within a reasonable time after acquisition unless excused. In payable on demand, presentment must be made on the day it falls
other cases aside from the three, there is no need for presentment for due. Where it is payable on demand, presentment must be made
acceptance. within a reasonable time after its issue, except that in the case of a bill
2) If the bill is dishonored by non-acceptance: of exchange, presentment for payment will be sufficient if made
1) notice of dishonor by non-acceptance must be given to persons within a reasonable time after the last negotiation thereof.
secondarily liable unless excused and
2) in case of foreign bills, protest for dishonor by non-acceptance must be Agbayani: Where the instrument is payable on demand, the time for
made unless excused. presentment depends upon whether the instrument is a bill or a note.
3) But if the bill if accepted, or if the bill not required to be presented for
acceptance, it must be presented for payment to the person primarily liable Last negotiation means the last transfer for value, and subsequent transfers
unless excused. between banks for purposes of collections are not negotiations within this
4) If the bill is dishonored by non-payment: section. Consequently, the requirement of reasonable time for a bill begins to run
a) notice of dishonor by non-acceptance must be given to persons form the last taking for value.
secondarily liable unless excused and
b) in case of foreign bills, protest for dishonor by non-acceptance must be Campos: Different rules apply to demand notes and to demand bills of
made unless excused. exchange. As regards demand notes the time at which the reasonable time begins
to run is the date of issue of the note and not the date on which the individual
Sebastian: Present (for acceptance) instrument to drawee. Presentment is indorser signed, so that the liability of all indorsers of a demand note expires at
necessary when (Section 143): (1) bill is payable at sight or necessary to fix the same time.
maturity; (2) bill specifically stipulates; and (3) bill is drawn payable at a certain
place. Other than these cases, presentment for acceptance is not necessary.
LEX SOCIETAS 79
While a demand note must be presented for payment within a reasonable time effective. Thus, a notice to the makers before maturity, reminding them of the
after issue, a demand bill of exchange should be presented within a reasonable date when the note would fall due, is not a proper presentment. If made after
time after the last negotiation thereof. The time within which a check should be maturity, it is too late and unless delay is excused by law, the secondary parties
presented for payment is governed by Section 186. will be discharged.
Under Section 71, the liability of the drawer and indorsers of a demand bill can be WHAT CONSTITUTES “REASONABLE TIME”
preserved indefinitely, provided presentment is made within a reasonable time
from the last negotiation. However, under Section 53, where an instrument Agbayani: The term reasonable time is relative or based on accepted
payable on demand is negotiated an unreasonable length of time after its issue, commercial practice.
the holder is not a holder in due course. Thus, although reasonable time may not
have elapsed between the last negotiation and the presentment for payment of a Sebastian: Reasonable time for a check is from 6 month from issuance.
demand bill, and the secondary parties thus remain liable, the holder who takes
the instrument after the laps of a reasonable time from its issue, will be subject to SUFFICIENCY OF PRESENTMENT
personal defenses.
Sec. 72. What constitutes a sufficient presentment. - Presentment for
A check is intended for immediate use. Hence, a special rule with respect to payment, to be sufficient, must be made:
presentment for payment applies to checks. Unlike in ordinary bills of exchange, (a) By the holder, or by some person authorized to receive payment
the transfer of a check to successive holders, where it is drawn and delivered in on his behalf;
the place where the drawee bank is located, does not extend the time for (b) At a reasonable hour on a business day;
presentment. (c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is
However, the drawer is discharged by delay in presentment only to the extent of absent or inaccessible, to any person found at the place where
any loss caused by such delay. If no such loss is shown by the drawer, he remains the presentment is made.
liable despite the unreasonable delay. The most frequent cause of loss to the
drawer which could have been prevented by a prompt presentment is the Agbayani: If the presentment does not comply with any of these requisites, it is
subsequent insolvency of the drawee bank at a time when the drawer had not sufficient. The effect is the same as if no presentment is made, namely, the
sufficient funds on deposit to pay the check. persons secondarily liable are discharged.
What constitutes reasonable time is determined by Sec. 193. It is well settled that Presentment for payment cannot be made on a Sunday or holiday.
when the drawer, drawee and payee al reside or are located in the same city,
presentment of a check should be made on the business day next succeeding that Presentment for payment is to be made to the maker, if a note, or to the acceptor,
on which it was issued. In order that the holder may charge the drawer, if a bill, and not to the person secondarily liable.
presentment to the drawee bank should be made within a reasonable time, the
check remains effective as an order of the drawer to the drawee bank to pay the PLACE OF PRESENTMENT
holder and if the bank does pay, it can debit the amount against the drawer’s
account. Sec. 73. Place of presentment. - Presentment for payment is made at
the proper place:
PRESENTMENT OF INSTRUMENT PAYABLE AT A FIXED OR (a) Where a place of payment is specified in the instrument and it is
DETERMINABLE FUTURE TIME there presented;
(b) Where no place of payment is specified but the address of the
Agbayani: Where the instrument is payable at a fixed or determinable future person to make payment is given in the instrument and it is
time, the presentment must be made on the date of maturity. A presentment there presented;
before maturity is not proper. (c) Where no place of payment is specified and no address is given
and the instrument is presented at the usual place of business
Campos: If an instrument has a fixed date of maturity, presentment must be or residence of the person to make payment;
made on the day the instrument falls due. If made before maturity, it is not (d) In any other case if presented to the person to make payment
LEX SOCIETAS 80
wherever he can be found, or if presented at his last known Agabayani: Presentment for payment may be made to the executor or
place of business or residence. administrator if there be one, and if he can be found. The holder must use
diligence to find the personal representative, if there be one. Although the
Agbayani: Sections 76 to 78 are inapplicable if there is a place specified. Thus, indorser himself be the personal representative, presentment has been held
presentment should be made at the place specified. necessary.
PRESENTMENT OF INSTRUMENT PRESENTMENT TO PARTNERS
Sec. 74. Instrument must be exhibited. - The instrument must be Sec. 77. Presentment to persons liable as partners. - Where the
exhibited to the person from whom payment is demanded, and when persons primarily liable on the instrument are liable as partners and
it is paid, must be delivered up to the party paying it. no place of payment is specified, presentment for payment may be
made to any one of them, even though there has been a dissolution of
Purpose of Presentment the firm.
Agbayani: Presentment includes not only demand for payment but also the Agbayani: In case of death of one of the makers who are partners, presentment
exhibition of the instrument. The purpose of exhibition is to enable the debtor: shall not be made to his personal representative but to the surviving partner.
1) to determine the genuiness of the instrument and the right of the holder to
receive payment; and PRESENTMENT TO JOINT DEBTORS
2) to enable him to reclaim possession upon payment.
Sec. 78. Presentment to joint debtors. - Where there are several
Exception to Rule Requiring Exhibition of Instrument persons, not partners, primarily liable on the instrument and no
place of payment is specified, presentment must be made to them all.
Agbayani: Actual exhibition is not necessary in the following cases:
a) When he debtor does not demand to see the instrument but refuses payment Agabayani: But if the persons primarily liable are not partners, presentment
on some other grounds; and must be made to all of them. Of course, if one of them is duly authorized by the
b) When the instrument is lost or destroyed. others for the purpose, presentment to him would be sufficient.
PRESENTMENT OF INSTRUMENT PAYABLE AT BANK PRESENTMENT TO DRAWER NOT REQUIRED
Sec. 75. Presentment where instrument payable at bank. - Where the Sec. 79. When presentment not required to charge the drawer. -
instrument is payable at a bank, presentment for payment must be Presentment for payment is not required in order to charge the
made during banking hours, unless the person to make payment has drawer where he has no right to expect or require that the drawee or
no funds there to meet it at any time during the day, in which case acceptor will pay the instrument.
presentment at any hour before the bank is closed on that day is
sufficient. Agabayani: Under this section, only the other parties secondarily liable are
discharged. The drawer would not be discharged from his liability.
Sebastian: Relate this provision with Section 87.
Campos: This section gives an instance where the drawer will not be discharged
PRESENTMENT WHERE PRINCIPAL DEBTOR IS DEAD in spite of lack of presentment to the primary party. The absence of a right in the
drawer to require and of a right to expect the drawee or acceptor to pay is not
Sec. 76. Presentment where principal debtor is dead. - Where the identical in meaning. A right to require payment means that there is a pre-
person primarily liable on the instrument is dead and no place of existing contract between the drawer and drawee which makes it a duty on the
payment is specified, presentment for payment must be made to his part of the drawee or acceptor to pay. A drawer may have the right to expect that
personal representative, if such there be, and if, with the exercise of the drawee will pay when, although there is no contractual duty then owed by the
reasonable diligence, he can be found. drawee to the drawer to pay, a course of dealing between the drawer and drawee
LEX SOCIETAS 81
justifies the reasonable expectation on the part of the drawer that the drawee will to his default, misconduct, or negligence. When the cause of delay
pay. ceases to operate, presentment must be made with reasonable
diligence.
Where the drawer has no funds with the drawee, or where his bank balance is less
than the amount of his check, or if he stopped payment thereof, the drawer would Agbayani: What is excused here is not the making of presentment but only the
have no right to require or expect payment and presentment is therefore not delay in making presentment. After the cause of delay ceases, presentment must
necessary to charge him. Similarly, where the drawee and the drawer are the be made within reasonable time. Excusable circumstances are those events which
same person, presentment is not required because under Section 130, the holder could not be foreseen, or which though foreseen, are inevitable.
may treat such instrument as a note. The drawer-drawee thus becomes a maker, a
primary party who is liable even without presentment. PRESENTMENT FOR PAYMENT EXCUSED
Where the drawee is insolvent at the time a check is issued, and the drawer Sec. 82. When presentment for payment is excused. - Presentment for
knows of it, presentment and notice are not required to charge him because he payment is excused:
would not have the right to expect payment. (a) Where, after the exercise of reasonable diligence, presentment,
as required by this Act, cannot be made;
PRESENTMENT TO INDORSER NOT REQUIRED (b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Sec. 80. When presentment not required to charge the indorser. -
Presentment is not required in order to charge an indorser where the Agbayani: Under this section, what is excused is the failure to make
instrument was made or accepted for his accommodation and he has presentment for payment.
no reason to expect that the instrument will be paid if presented.
Reasonable diligence implies active search. In other words, the holder must take
Agbayani: Under this section, only the other parties secondarily liable are all steps likely to discover the whereabouts of the party to whom presentment is
discharged. Hence, the accommodation payee-indorser, being the person to be made.
primarily liable, is not discharged even if no presentment for payment is made
because he did not give value for it; thus, he has no reason to expect that the note Presentment is not required where the drawee is a fictitious person because there
will be paid upon presentment. is no one to whom presentment is to be made.
Campos: This section refers only to an indorser. In the usual case the indorser is Implied waiver of presentment may be manifested by any language or conduct or
entitled to presentment to the primary party because the latter is normally the agreement between the parties reasonably calculated to lead the holder to believe
principal debtor. In the situation covered by the above provision, however, the that presentment is waived or to mislead to prevent him from treating the bill as
principal debtor is the indorser and thus has no right to demand payment from he otherwise would.
the accommodation maker or acceptor.
Campos: The fact that the drawee bank was closed by the government dispenses
To excuse presentment, two conditions must concur (1) The instrtment was made with presentment. But insolvency of the party upon whom presentment should be
or accepted for the indorser’s accommodation; and (2) he has no reason to expect made does not. Where the drawee of a bill is a fictitious person, then no
its payment. Thus, where the instrument was not made or accepted for his presentment can possibly be made and no secondary party can insist on it as a
accommodation, knowledge on the part of an indorser that the primary party is condition to his liability. Furthermore, in such a case, the holder may treat the
insolvent at the date of maturity does not free the holder from his duty to present, instrument as a bill or a note and hold the drawer liable as a maker who as a
though he would have no reason to expect its payment. primary party is not entitled to presentment.
DELAY IN PRESENTMENT EXCUSED Circumstances under which waiver of presentment may be implied are varied. It
may be implied from any conduct or act of the drawer which misleads or prevents
Sec. 81. When delay in making presentment is excused. - Delay in the holder from treating the bill as he otherwise would. Thus, if the drawer
making presentment for payment is excused when the delay is caused promises from time to time to pay the bill, or makes part payment knowing that
by circumstances beyond the control of the holder and not imputable the bill has not been presented to the drawee, presentment is deemed waived.
LEX SOCIETAS 82
Likewise, consent given by an indorser to the holder before maturity that the time payable on Saturday are to be presented for payment on the next
of payment may be extended to the maker constitutes a waiver. succeeding business day except that instruments payable on demand
may, at the option of the holder, be presented for payment before
To bind the indorser or drawer, his waiver must be with knowledge of the facts twelve o'clock noon on Saturday when that entire day is not a holiday.
which release him, so that if he pays in ignorance of the fact that demand was not
made and notice not give, he can recover back the money so paid. However, Campos: Presentment for payment cannot be made on a Sunday or legal
ignorance as to their legal effect will not relieve him from liability in the absence holiday, and if the note matures on such a day, since the maker cannot be
of fraud. compelled to pay sooner than he promised, the note or bill will have to be
presented on the next business day.
WHEN INSTRUMENT IS DISHONORED BY NON-PAYMENT
COMPUTATION OF TIME
Sec. 83. When instrument dishonored by non-payment. - The
instrument is dishonored by non-payment when: Sec. 86. Time; how computed. - When the instrument is payable at a
(a) It is [1] duly presented for payment and [2] payment is refused fixed period after date, after sight, or after that happening of a
or cannot be obtained; or specified event, the time of payment is determined by excluding the
(b) Presentment is [1] excused and the instrument is [2] overdue day from which the time is to begin to run, and by including the date
and [3] unpaid. of payment.
LIABILITY OF PERSONS SECONDARILY LIABLE ON DISHONORED Campos: In determining the proper date for presentment, the date from which
INSTRUMENT the time is to run is excluded and the date of payment included. Section 86, in
providing that a specified event may be used as a point of time from which the
Sec. 84. Liability of person secondarily liable, when instrument period is to run, means any kind of event which under Section 4 will not destroy
dishonored. - Subject to the provisions of this Act, when the negotiability.
instrument is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues to the INSTRUMENTS PAYABLE AT BANK
holder.
Sec. 87. Rule where instrument payable at bank. - Where the
Agbayani: As to the holder, after an instrument is dishonored by non-payment, instrument is made payable at a bank, it is equivalent to an order to
the persons secondarily liable thereon ceases to be secondarily liable. They the bank to pay the same for the account of the principal debtor
become principal debtors and their liability becomes the same as that of the thereon.
original debtor, provided that notice of dishonor is given to them. If no notice of
dishonor is given to them, they are discharged. In other words, notice of dishonor Agbayani: This section applies where the instrument is payable at a particular
must be given to them first, after which the holder can bring an action against named bank. This is equivalent to an order to pay addressed to the bank by the
any one of them, without necessity of first bringing an action against the person maker. The bank may charge the amount of the note from the account of the
primarily liable. But where persons secondarily liable are charged by dishonor maker without further authority from the latter.
and notice, while it is true that they become principal debtors as to the holder, yet
among themselves, persons secondarily liable are presumed liable in the order The maker is not discharged if the holder fails to make a presentment for
they become parties to the instrument. payment at the bank because the maker is primarily liable.
Sebastian: What about the rule on non-joinder of an indispensable party? Sebastian: Under this section, the payor must know that there was in fact a
theft. Otherwise, he will still be required to pay.
RULE ON INSTRUMENT MATURING ON SATURDAY OR SUNDAY
PAYMENT IN DUE COURSE
Sec. 85. Time of maturity. - Every negotiable instrument is payable at
the time fixed therein without grace. When the day of maturity falls Sec. 88. What constitutes payment in due course. - Payment is made
upon Sunday or a holiday, the instruments falling due or becoming in due course when it is [1] made at or after the maturity of the
LEX SOCIETAS 83
payment [2] to the holder thereof [3] in good faith and without notice Payment to a prior holder will not discharge the instrument unless he is
that his title is defective. authorized by the present holder either expressly, impliedly or by estoppel, to
receive payment in his behalf.
Agbayani: If the payment is made before maturity, it would constitute a
negotiation back to the person primarily liable and he can re-negotiate it. The Payment must be made to the holder at or after maturity in order to operate as a
payment does not discharge the instrument. discharge of the instrument. If paid before maturity and the instrument is
negotiated to a holder in due course, the latter may recover on the instrument.
Payment to the indrosee who is not in possession of the instrument is not
payment in due course, as he is not a holder. The party paying must insist on the If the payor at the time he pays knows that the holder’s title is defective, payment
presentment of the instrument by the party demanding payment in order to make by him even at or after maturity, will not be payment in due course under Section
sure that it is at the time in his possession and not outstanding in another. The 88 and therefore, will not operate as a discharge of the instrument. He can still be
possession of notes by the maker is presumptive evidence that the notes are paid made liable thereon by the true owner of the instrument. However, if the payor
but the payee’s possession of the instrument raises the presumption that they are did not know or did not have notice of the defective title, his payment will operate
not paid. to discharge the instrument. Thus, if the instrument is payable to bearer and was
stolen from the payee, the maker or acceptor, who pays without knowledge of
The maker of the note or the acceptor of a bill must satisfy himself, when it is such loss, pays in due course. The original holder from whom it was stolen cannot
presented for payment, that the holder traces his title through genuine subsequently claim payment against the maker or acceptor on the ground that he
indorsements, and if there is a forged instrument, it is a nullity and no right is the real owner of the instrument. As far as the maker or acceptor is concerned,
passes by it. the instrument was discharged upon his payment. The remedy of the original
holder is against the thief.
When payment of an instrument is made by giving another instrument, as a
general rule, such payment will not be considered absolute until the paper given On the other hand, if the party demanding payment is a holder in due course and
in payment has been itself paid except where the parties expressly or impliedly the defect in the instrument or in the title thereto does not give rise to a real
agree that the claim shall be discharged by such payment. A new instrument defense, the maker or acceptor is liable to pay, and if he does pay, it is still
given in renewal of an old one retained by the payee constitutes but a suspension payment in due course, although the latter may have known of the infirmity. Any
of the old one until the new one is paid. The taking of a renewal note is not a party prejudiced by such payment will have a remedy against the guilty party.
payment of the original.
The maker or acceptor must satisfy himself, when the instrument is presented to
A bank to which a note is sent for collection is the agent of the owner. It is him for payment, that the holder traces his title through genuine indorsements; if
immaterial that the maker requested the holder to send the note to this bank for there is a forged indorsement, no right can pass by it, and payment by him will
collection. not effect a discharge of the instrument.
Where a check is presented by the payee or holder to the bank on which it is If the holder presents a check over the counter of the drawee bank, it is clear that
drawn, and received as a deposit and credited to his account, this amounts, in the the check is paid or discharged as soon as the holder receives the cash. But a
absence of fraud, to a payment of the checks, just as if currency had been paid holder may prefer to deposit the amount in his own account in the drawee bank.
over the counter and immediately redeposited. In such a case, in the absence of any other agreement between the parties, if the
bank credits the amount of the check to the depositor’s account, it is equivalent to
Campos: Payment in order to discharge the instrument must be in due course. paying the money to the depositor, and receiving the cash again for deposit. The
In order to be in due course, it must be made to the holder, whether he is the check will then be deemed discharged. Likewise, where the drawee bank charges
beneficial owner or merely a non-beneficial owner under a restrictive the check to the account of the drawer, it shows its intention to honor the check
indorsement. Payment to one of several payees or indorsees in the alternative and it will be deemed paid whether or not a credit entry has been made to the
discharges the instrument but payment to one of several joint payees or joint holder. However, entry of a credit by the clearing house does not constitute
indorsers, is not a discharge unless the party receiving payment had authority payment and the drawee bank still has the right to reject the check when it
from the others to receive payment on their behalf. reaches it from the clearing house.
SUMMARY OF RULES ON PRESENTMENT FOR PAYMENT

LEX SOCIETAS 84
Agbayani: Presentment for payment is not necessary to charge persons NOTICE OF DISHONOR
primarily liable. But it is necessary to charge persons secondarily liable, except:
a) as to the drawer, under Section 79; TO WHOM GIVEN
b) as to the indorser, under Section 80;
c) when dispensed with under Section 82; and Sec. 89. To whom notice of dishonor must be given. - Except as herein
d) when the instrument has been dishonored by non-acceptance. otherwise provided, when a negotiable instrument has been
dishonored by non-acceptance or non-payment, notice of dishonor
Sebastian: Presentment for payment is necessary so that persons secondarily must be given to the drawer and to each indorser, and any drawer or
liable can be made liable. It is made by (1) exhibiting instrument and (2) indorser to whom such notice is not given is discharged.
demanding payment. If paid, must be surrendered to person liable to enable
person to check genuineness and to retrieve upon payment. Sebastian: Parties not notified are discharged from their liability. Assuming
that all indorsers were notified, the following are the effects: (1) Notice to an
antecedent party benefits subsequent parties and (2) service of notice of dishonor
makes all indorser co-obligors.
Parties secondarily liable who receives notice becomes an unconditional debtor to

the party serving such notice. This will not apply to a drawer sans recourse
because a drawer may limit or negate liability under Section 61.
MEANING OF “NOTICE”
Agbayani: By notice of dishonor is meant bringing whether verbally or by

writing, to the knowledge of a drawer or indorser of an instrument, the fact that a
specified negotiable instrument, upon proper proceeding taken, has not been
accepted or has not been paid, and that the party notified is expected to pay it.
When an instrument is dishonored by (1) non-acceptance of a bill or (2) non-

payment of a bill or note, notice of such dishonor must be given to persons
secondarily liable, namely, the drawer and indorsers. Otherwise, such parties are
discharged.
Persons primarily liable need not be given notice of dishonor in order to charge
them because they are the very ones who dishonor the instrument. Thus, a joint
maker and an accommodation maker is not entitled to notice.
Campos: Notice of dishonor is bringing either verbally or in writing, to the

knowledge of the drawer or the indorser of the instrument, the fact that a
specified negotiable instrument, upon proper proceedings taken, has not been
accepted, or has not been paid, and that the party notified is expected to pay it.
The purpose is to notify the drawer and/or the indorsers that the holder is
enforcing his right against them under their contract to pay should the
instrument not be paid or accepted at maturity. Without this notice, no secondary
party may be held liable, except in the cases where the law provides otherwise.
LEX SOCIETAS 85
Under Section 66, the indorser engages to pay only if the instrument is c) as to drawer, under Section 114;
dishonored and the “necessary proceedings” on dishonor are duly taken. d) as to indorser, under Section 115;
“Necessary proceedings” on dishonor means notice of dishonor and in case of e) where due notice of dishonor by non-acceptance has been given (Section 116);
foreign bills of exchange, an additional requirement of protest. Hence, his and
liability is conditional, among other things, on notice of dishonor and if such f) as to a holder in due course without notice (Section 117).
notice is not given, he is discharged.
BY WHOM GIVEN
Sebastian: Notice of dishonor is notice given to persons secondarily liable,
bringing to their attention the fact that the instrument was presented to person Sec. 90. By whom given. - The notice may be given by or on behalf of
primarily liable, and that person declined to make payment. It is required the holder, or by or on behalf of any party to the instrument who
because when you seek to recover from persons secondarily liable, you must first might be compelled to pay it to the holder, and who, upon taking it up,
tell them that the person primarily liable had defaulted. Thus, you are calling would have a right to reimbursement from the party to whom the
upon them to pay pursuant to the warranties they made under Sections 66, 65, notice is given.
and 62.
Agbayani: Notice of dishonor may be given by:
BURDEN OF PROOF 1) the holder;
2) another in behalf of the holder;
Asia Banking Corporation v Juan Javier – If, after a negotiable 3) any party to the instrument who may be compelled to pay the holder.
instrument is dishonored for non-acceptance or non-payment, the indorser is not However, such a party cannot give notice of dishonor to everybody. He can
notified of the fact in the time and manner prescribed by law, said indorser is only give notice to another party against whom he has a right of
released from all liability upon the document. reimbursement should such party giving notice pay the instrument; and
4) another person in behalf of such party.
Under the law on procedure, it will be incumbent upon the plaintiff who seeks to
enforce the defendant’s liability upon a negotiable instrument as indorser to Campos: A holder, whether he is the owner of the instrument or not, may give
establish liability by proving that notice was given to the defendant within the notice of dishonor. Thus, a restrictive indorsee who is a trustee for the benefit of
time and in the manner required by the law that the instrument in question has another, or an indorsee for collection, can give a binding notice. It may also be
been dishonored. Where these facts are not proven, the plaintiff does not given by one duly authorized by the holder to collect though he himself is not a
sufficiently establish the defendant’s liability. Where there is no proof in the holder. This group would include notaries and attorneys. A prior indorser may
record tending to show that plaintiff gave any notice whatsoever to the defendant give notice to parties prior to him because he is a party who might be compelled
that the instrument in question has been dishonored, said plaintiff has not to pay the instrument to the holder and upon so paying would have a right of
established its cause of action. reimbursement from the party notified.
Campos: To charge the indorser, the complaint must allege and prove Notice given by the maker is not binding unless he has been authorized, either
presentment to the maker and notice of dishonor, or that the same are dispensed expressly or impliedly, to give such notice. Thus, the showing to the indorser by
with under Sections 82 and 109, respectively, or is not required under Section the maker of a telegram demanding payment of the maker is not sufficient notice.
118. And the burden of proving due notice or that notice was waived or excused is
on the holder. The indorser’s knowledge that the maker was in default on a note Sebastian: The person who will give notice is the holder or any person in behalf
does not dispense with notice of dishonor, and failure to notify the indorser of the holder. In case of service of notice, the agent does not need to have
discharges his obligation. authority to serve notice of dishonor.
EXCEPTIONS TO THE RULES REQUIRING NOTICE NOTICE BY AGENT
Agbayani: Notice of dishonor to persons secondarily liable is necessary to Sec. 91. Notice given by agent. - Notice of dishonor may be given by
charge them except: any agent either in his own name or in the name of any party entitled
a) when notice is waived (Section 109); to given notice, whether that party be his principal or not.
b) when dispensed with under Section 112;
LEX SOCIETAS 86
Agbayani: Notice of dishonor may be given by an agent and it is not necessary party to whom notice is given.
that the agent be authorized by the principal.
Agbayani: The principle involved here is the same as under Section 92. The
Sec. 94. When agent may give notice. - Where the instrument has notice, however, is given, not by the holder but by a party entitled to give notice
been dishonored in the hands of an agent, he may either himself give under Section 90, namely, by a party to the instrument who might be compelled
notice to the parties liable thereon, or he may give notice to his to pay it to the holder, and who, upon taking it up, would have a right of
principal. If he gives notice to his principal, he must do so within the reimbursement from the party to whom notice is given.
same time as if he were the holder, and the principal, upon the receipt
of such notice, has himself the same time for giving notice as if the SUFFICIENCY OF NOTICE
agent had been an independent holder.
Sec. 95. When notice sufficient. - A written notice need not be signed
Agbayani: If the agent chooses to give notice to his principal, he must give and an insufficient written notice may be supplemented and validated
notice within the time allowed by law as if he were a holder. The principal has by verbal communication. A misdescription of the instrument does
also the same time to give notice to the parties secondarily liable. not vitiate the notice unless the party to whom the notice is given is in
fact misled thereby.
Campos: A typical example of an agent under the above section is the bank with
whom a check has been deposited by the holder for collection. Assuming the Campos: The notice must (1) identify the instrument and (2) make known the
check is dishonored by the drawee bank, the collecting bank should notify either fact that it has been dishonored either by non-acceptance or non-payment. A
the drawer directly or his principal (the holder) of such dishonor within the time mere recital in a notice that the instrument was not paid would be sufficient to
specified by Sections 103 and 104. Should he decide to notify the holder, the constitute a statement that it was dishonored. To constitute compliance with the
latter has the same time to notify the secondary parties, as if the collecting bank rule, it must be accompanied by language will inform the party addressed that the
were an independent holder. instrument had been duly presented.
Sebastian: In the case of the agent of the indorser, receipt of the notice creates Sebastian: An insufficient notice makes the notice defective. But whatever
a liability. In the case of an agent giving notice, you are not creating liability, insufficiency it has, it may be cured.
rather you are seeking to enforce a right.
FORM OF NOTICE
Notice by agent is governed by 2 provisions. Under Section 94, the instrument
that was dishonored is in the possession of the agent. He must serve notice of Sec. 96. Form of notice. - The notice may be in writing or merely oral
dishonor to the indorsers and to the holder himself. and may be given in any terms which sufficiently identify the
instrument, and indicate that it has been dishonored by non-
NOTICE OF NOTICE acceptance or non-payment. It may in all cases be given by delivering
it personally or through the mails.
Sec. 92. Effect of notice on behalf of holder. - Where notice is given by
or on behalf of the holder, it inures to the benefit of all subsequent Agbayani: Whether written or oral, the notice must contain the following:
holders and all prior parties who have a right of recourse against the 1) sufficient description of the instrument to identify it;
party to whom it is given. 2) a statement that it has been presented for payment or acceptance, and that it
has been dishonored; and
Agbayani: The benefit referred to here is the right to charge the person 3) a statement that the party giving notice intends to look for the party
secondarily liable who received the notice. In other words, the party to whom this addressed for payment.
benefit inures can charge the party receiving the notice of dishonor, even he
himself did not give the notice. The word “may” in the last sentence is held to mean that a choice is allowed for
the service of notice. In a personal service, the evidence must show either actual
Sec. 93. Effect where notice is given by party entitled thereto. - personal service, or an ordinarily intelligent, diligent effort to make personal
Where notice is given by or on behalf of a party entitled to give notice, service upon the indorser.
it inures to the benefit of the holder and all parties subsequent to the
LEX SOCIETAS 87
Campos: Notice may be given orally or in writing. Notice may thus be given by liable. If you serve notice not to the person himself, but to a person who is
telephone provided it be clearly shown that the party to be notified is fully supposedly an agent of the person secondarily liable, you must ascertain that the
identified as the party at the receiving end of the line. Notice may also be sent by agent is properly authorized. If he is not authorized to receive notice of dishonor,
telegraph. And notice by service of process against the indorsers has been held then service is fatally defective and secondarily liable parties are discharged. This
sufficient where process was served within the time prescribed by law. only applies if the holder/server of notice know that he is dealing with an agent.
Otherwise, service is required to ascertain if the agent is authorized to receive
Sebastian: A notice does not have to be in writing. It may be verbally made. notice. Receipt of notice of dishonor must be within the power of the agent. This
What is necessary is to give details of the dishonored instrument, describe in a suggests that the power of attorney of the agent must state he has the power to
manner sufficient to inform persons secondairly liable which instrument was in receive notice. But Article 1878 of the Civil Code does not include receipt of notice
fact dishonored. The notice must state that it was presented for payment and the of dishonor as one of the instances where a special power of attorney is required.
fact that payment was refused. It must contain that you are holding the person
secondarily liable for the value of the instrument. To ascertain that the agent is authorized to receive notice of dishonor, you must
ask for a power of attorney. If there was no power of attoney, a special power of
TO WHOM NOTICE IS GIVEN attorney is necessary because when an agent receives notice of dishonor, by
merely receiving the notice, the contingent liability of the indorser becomes a real
Sebastian: Notice of dishonor is given to parties secondarily liable. Parties liability. Therefore, receipt creates an obligation on the part of the indorser to
primarily liable are not entitled to notice. Persons primarily liablen include an make good his warranty under Section 66, which is not within the scope of a
accommodation maker, joint makers, or joint acceptors. general power of attorney.
In a case of installment note that is defaulted, service of notice depends on the When you know you are dealing with an agent, you must establish his authority.
circumstances. Installment notes w/o acceleration clauses are deemed to be But when you are trying to serve the person itself, and he is unavailable, you don’t
separate notes with respect to each installment. Thus, service of notice of need to establish the agency if you will leave the notice to any person available. If
dishonor is only for the amount defaulted. You can run after indorser only up to there were diligent efforts to serve notice, there was no agent or anyone else in
the amount default because the entire balance is not yet due. But for Installment charge, it is deemed that the notice of dishonor is waived.
notes with an acceleration clause, default in one installment results to the entire
balance becomes due. A single notice of dishonor to persons secondarily liable for Sec. 98. Notice where party is dead. - When any party is dead and his
the entire amount, upon default of one payment. death is known to the party giving notice, the notice must be given to a
personal representative, if there be one, and if with reasonable
Sec. 97. To whom notice may be given. - Notice of dishonor may be diligence, he can be found. If there be no personal representative,
given either to the party himself or to his agent in that behalf. notice may be sent to the last residence or last place of business of the
deceased.
Agbayani: Accordingly, an accommodation indorser is entitled to notice. An
irregular indorser must also be given notice if he is to be charged. And if notice is Agbayani: When the person to be given notice of dishonor is dead, notice must
given to an agent, he must be duly authorized to receive notice of dishonor. If he be given to his personal representative, provided that:
is not, the notice is not valid. 1) his death is known to the party giving notice;
2) there is a personal representative; and
Notice to agent must be distinguished from notice attempted to be given to the 3) if with reasonable diligence he could be found.
party himself where he is absent at his place of business or residence. In the
latter, the notice may be left with anyone found in charge therein. But although the party is dead, (1) if his death is not known to the party giving
notice, (2) or although his death is known to the party giving notice but there is
Campos: Not every agent of the party sought to be charged would be a proper no persona representative, or (3) if there be one but he cannot be found with
agent within this section, because it is clear therefrom that an agent to be reasonable diligence, then notice may be sent to the last residence or last place of
competent to receive notice of dishonor must be an agent “in that behalf.” business of the deceased.
Sebastian: Section 97 says that service does not need to be directly to the Campos: If the party’s death is known to the holder, he is put on inquiry to find
parties secondarily liable. It may be served on the agent of the party secondarily out whether there is a personal representative or not. If he neglects to make
LEX SOCIETAS 88
inquiry and the personal representative could have been found with reasonable
diligence, notice to the last resident or place of business of the deceased would be Sebastian: In Section 68, joint payees and joint indorsees are deemed to have
ineffective to charge the estate. On the other hand, if the fact of death is not indorsed jointly and severally. Thus, this rule will not apply to joint payees and
known to the holder, although he could have discovered such fact with the joint indorsees because notice to one is notice to all.
exercise of reasonable diligence, Section 98 does not impose on him the duty to
notify the personal representative. Sec. 101. Notice to bankrupt. - Where a party has been [1] adjudged a
bankrupt or an insolvent, or has [2] made an assignment for the
Sebastian: Section 98 implies that the contingent liability of the secondarily benefit of creditors, notice may be given either to the party himself or
liable persons is not extinguished by their death. Thus, the holder must serve to his trustee or assignee.
notice to his personal representative, if there is one and can be found with
reasonable diligence. An administrator or executor is not considered as the WHEN NOTICE IS GIVEN
personal representative of the deceased becaise an administrator or executor
represents the court, the creditors, and the heirs, not the estate. Sec. 102. Time within which notice must be given. - Notice may be
given as soon as the instrument is dishonored and, unless delay is
Sec. 99. Notice to partners. - Where the parties to be notified are excused as hereinafter provided, must be given within the time fixed
partners, notice to any one partner is notice to the firm, even though by this Act.
there has been a dissolution.
But where the notice is actually received by the party within the time
Agbayani: The reason for this rule is that each partner is an agent of the specified in this Act, it will be sufficient, though not sent in
partnership of which he is a member. Accordingly, notice to one is notice to the accordance with the requirement of this section.
others.
Agbayani: The time for giving notice is fixed in Sections 103, 104 and 107.
Campos: Notice to one partner is notice to firm although it was fraudulently
suppressed by the partner who received it. Notice of dishonor may not be given before the date of maturity because an
instrument cannot be said to be dishonored for non-payment unless presented,
Sec. 100. Notice to persons jointly liable. - Notice to joint persons and presentment must be made on the date of maturity, unless, of course,
who are not partners must be given to each of them unless one of presentment is excused. But even in such cases, the instrument cannot be said to
them has authority to receive such notice for the others. be dishonored by non-payment unless it is overdue and unpaid. Notice of
dishonor can be given only after the instrument has been actually dishonored,
Agbayani: The provisions of this section do not apply to joint payees or joint and notice given before the paper becomes due is premature and insufficient,
indorsees who indorse as such joint indorsers to whom notice of dishonor has regardless of the indorser’s knowledge that the maker was in default.
been given are not discharged by reason of failure to give notice to the other joint
indorsers. Accordingly, this section applies to joint parties other than joint payees Notice of dishonor may be given on the date of maturity, provided that the
and joint indorsees who indorse, such as, to drawers who sign a bill jointly, or to instrument has been presented for payment and it has been dishonored. But if
joint accommodation indorsers who are not solidarily liable under Section 68 as t the instrument is payable at a bank, it is not dishonored if the maker deposits the
hey are neither payees nor indorsee. amount of the instrument before the close of banking hours. Hence, notice of
dishonor must be given after the close of banking hours on the date of maturity.
Campos: This section should be interpreted with Section 68 under which joint
payees or joint indorsees are deemed to indorse jointly and severally. Thus, a The purpose of giving prompt notice is to give the persons secondarily liable
notice to only one of them is sufficient to charge the notified indorser and the every opportunity to secure themselves such as, to enable the party to be charged
failure to notify the others, although it will discharge the latter, will not discharge to preserve and protect his rights against prior parties.
the former. But where the joint parties are not jointly and severally liable, such as
joint drawers, Sec. 100 applies and notice to each of them is necessary to charge Campos: The earliest time at which a notice of dishonor may be sent is
any of them, unless the one notified was given authority to receive for the others. immediately after dishonor, and a notice of dishonor by non-payment before
Thus, if only one of such joint parties is notified, all of them are discharged. Their maturity of the instrument is premature and ineffective. The latest time at which
liability under Section 100 is conditioned upon notice to each of them. a notice of dishonor may be given depends in part on whether the party to give
LEX SOCIETAS 89
notice and the party to be notified are in the same place or in different places. At receive notice resides in different places.
any rate, if a notice is not given within the time fixed by Sections 103 and 104, the
notice is inoperative and the secondary party so notified is discharged. The same place refers to the corporate limits of a town or city where the
presentment is made or where the holder resides.
Where the time for giving or sending notice falls on a Sunday or a holiday, the act
may be done on the next succeeding business day under Section 194. However, Unless excused, notice given out of time would be considered not to have been
should a notice be given on a Sunday or holiday, it is sufficient. given. Hence, the party to receive notice would be discharged.
Sebastian: Notice must be served within 24 hours unless there is excusable Sec. 108. Where notice must be sent. - Where a party has added an
delay. The holder serves notice to secondarily liable persons when the person address to his signature, notice of dishonor must be sent to that
primarily laible refuses to pay. Their contingent liability will be converted to an address; but if he has not given such address, then the notice must be
actual liability. Immediate notice must be served. Requiring them to pay means sent as follows:
they will ask reimbursement from the person primarily liable. The sooner the (a) Either to the post-office nearest to his place of residence or to
holder holds them liable, the sooner they can make a claim against the person the post-office where he is accustomed to receive his letters;
primarily liable. Thus, notice of dishonor is served to protect the holder and in or
turn, those secondarily liable, may be able to preserve their claim against the (b) If he lives in one place and has his place of business in another,
person primarily liable. notice may be sent to either place; or
(c) If he is sojourning in another place, notice may be sent to the
WHERE NOTICE IS GIVEN place where he is so sojourning.
Sec. 103. Where parties reside in same place. - Where the person Campos: The sending of a notice to an address designated by the indorser will
giving and the person to receive notice reside in the same place, be sufficient even though the address is an incorrect one. Where notice is sent to
notice must be given within the following times: an address other than the one designated, the notice may be binding upon proof
(a) If given at the place of business of the person to receive notice, it by the sender of its actual receipt. In this case, mailing will not give rise to the
must be given before the close of business hours on the day presumption of receipt, rebuttable or conclusive. The burden of proof of actual
following. receipt of the notice will rest upon the party who gave it.
(b) If given at his residence, it must be given before the usual hours
of rest on the day following. WHEN NOTICE IS DEEMED GIVEN
(c) If sent by mail, it must be deposited in the post office in time to
reach him in usual course on the day following. Sec. 105. When sender deemed to have given due notice. - Where
notice of dishonor is duly addressed and deposited in the post office,
Sec. 104. Where parties reside in different places. - Where the person the sender is deemed to have given due notice, notwithstanding any
giving and the person to receive notice reside in different places, the miscarriage in the mails.
notice must be given within the following times:
(a) If sent by mail, it must be deposited in the post office in time to Campos: Notice of dishonor is duly addressed under Section 105 when a letter
go by mail the day following the day of dishonor, or if there be or post card has been written by the sender and properly stamped, containing the
no mail at a convenient hour on last day, by the next mail information required by Section 96, and which notice bears the name of the party
thereafter. to whom notice is to be sent and the designation of the proper place. Thus, where
(b) If given otherwise than through the post office, then within the the president of the corporation and the corporation were both indorsers, a
time that notice would have been received in due course of mailed notice of non-payment addressed to the corporation, attention to the
mail, if it had been deposited in the post office within the time president, was held not to be duly addressed to the individual indorser so as to
specified in the last subdivision. give rise to the presumption of due notice.
Agbayani: The law provides a different period for giving notice of dishonor Sec. 106. Deposit in post office; what constitutes. - Notice is deemed
depending upon whether (1) the party giving notice and the party to receive to have been deposited in the post-office when deposited in any
notice resides in the same place, or (2) the party giving notice and the party to branch post office or in any letter box under the control of the post-
LEX SOCIETAS 90
office department. Sebastian: Waiver is the abandonment/relinquishment of an existing right.
Thus, a person waiving must have the right to notice of dishonor. Consequently,
Agbayani: The notice must be properly addressed, stamped and mailed. only parties secondarily liable may waive notice of dishonor.
Otherwise, the notice, even though mailed, is not proper. It has been held that
when the notice by letter is duly stamped, addressed and mailed, the sender is A waiver is valid when (1) you own the right you are waiving, (2) the right exists
deemed to have given due notice which is presumed to be received by the (not expected or inchoate), (3) it is deliberate and (2) it did not result from vice of
addressee, notwithstanding any miscarriage in the mails, and the addressee’s consent.
(indorsers) evidence that he had not receive the notice will be excluded. But
where copy of the protest is sent by mail in good season addressed to the drawer, A waiver is embodied in the note itself. It is binding upon all parties. If you place
“the presumption is now conclusive that the latter received it, not having been the waiver outside the instrument, it cannot bind the other parties secondarily
rebutted, or at least, contradicted. It would see, therefore, that the presumption is liable.
conclusive if not rebutted, or at least, contradicted.
Time of Making a Waiver of Notice
The letter box must be under the control of the post-office department.
Otherwise, notice would not deemed to have been deposited in the post-office. Campos: Waiver may be made before or after maturity of the instrument.
NOTICE TO ANTECEDENT PARTIES Sebastian: Waiver of notice of dishonor may be waived before due date or after
it has been committed. In other words, waiver may be done at any time prior to
Sec. 107. Notice to subsequent party; time of. - Where a party receives payment.
notice of dishonor, he has, after the receipt of such notice, the same
time for giving notice to antecedent parties that the holder has after Types of Waiver of Notice
the dishonor.
Campos: Waiver may either be express or implied.
WAIVER OF NOTICE
PERSONS AFFECTED BY WAIVER OF NOTICE
Sec. 109. Waiver of notice. - Notice of dishonor may be waived either
before the time of giving notice has arrived or after the omission to Sec. 110. Whom affected by waiver. - Where the waiver is embodied
give due notice, and the waiver may be expressed or implied. in the instrument itself, it is binding upon all parties; but, where it is
written above the signature of an indorser, it binds him only.
What Constitutes Waiver of Notice
Agbayani: The persons affected by waiver depends upon whether the waiver is
Agbayani: Waiver is the intentional abandonment of a right. It may be in the instrument itself or is written above the signature of an indorser. If the
expressed or implied. waiver is embodied in the instrument itself, it is binding upon all parties. If the
waiver is written above the signature of the indorser, it binds him only.
Campos: A letter from the indorser to the holder after dishonor, admitting
liability, is a waiver of lack of notice. Similarly, when a note is dishonored and no A printed waiver on the back of the instrument above the indorsements is a
notice is given to indorsers, but the indorsers procure the holder to consent to an waiver embodied in the instrument itself. The effect is to make all the subsequent
extension of time of payment and accept a renewal note, there is a waiver of indorsers unconditionally liable and, in this sense, unconditional debtors. But
notice on the original note. such a waiver does not make the indorsers liable as co-makers since their
obligation to pay is still a contingent liability. Accordingly, all indorsers
The burden of proof is on the holder to show waiver of notice, and it will not be appearing below it are bound and the holder need not give them notice to hold
inferred from doubtful acts of language of the indorser, but must be proved by them liable.
clear and unequivocal evidence.
WAIVER OF PROTEST
Sec. 111. Waiver of protest. - A waiver of protest, whether in the case

LEX SOCIETAS 91
of a foreign bill of exchange or other negotiable instrument, is capacity to contract;
deemed to be a waiver not only of a formal protest but also of (c) When the drawer is the person to whom the instrument is
presentment and notice of dishonor. presented for payment;
(d) Where the drawer has no right to expect or require that the
Agbayani: Where protest is waived, presentment and notice of dishonor are drawee or acceptor will honor the instrument;
deemed waived also. But where notice of dishonor is wavied, presentment is not (e) Where the drawer has countermanded payment.
waived.
Sec. 115. When notice need not be given to indorser. — Notice of
DISPENSING NOTICE OF DISHONOR dishonor is not required to be given to an indorser in either of the
following cases:
Sec. 112. When notice is dispensed with. - Notice of dishonor is (a) When the drawee is a fictitious person or person not having
dispensed with when, after the exercise of reasonable diligence, it capacity to contract, and the indorser was aware of that fact at
cannot be given to or does not reach the parties sought to be charged. the time he indorsed the instrument;
(b) Where the indorser is the person to whom the instrument is
Campos: Reasonable diligence depends upon the circumstances of the case. presented for payment;
Thus, where the holder examined a telephone directory for the address of the (c) Where the instrument was made or accepted for his
defendant and, failing to find it, mailed the notice to a co-indorser whose address accommodation.
he knew, but failed to inquire of the co-indorser, it was held that reasonable
diligence had not been exercised. Similarly, where notice is sent to a town where Agbayani: As to a particular person secondarily liable on an instrument, such
the indorser had never lived, and which was not received, it is ineffective. as the drawer or an indorser, notice of dishonor to him is not necessary:
1) where he has knowledge of the dishonor by means other than through a
On the other hand, in a case where the holder inquired of the payee and mailed formal notice, as when he is both the drawee and drawer or when
the notices to the address given by such payee, then later he learned of the presentment is made him; and
indorser’s address and mailed a second set of notices, it was held that reasonable 2) where the drawee is fictitious or without capacity to contract.
diligence had been exercised. These sections apply only to the drawer or indorser concerned. Failure to give
due notice to the other parties secondarily liable will discharge them.
DELAY IN GIVING NOTICE OF DISHONOR
Campos: The reason for not requiring notice under paragraphs (a) and (b) is
Sec. 113. Delay in giving notice; how excused. - Delay in giving notice that in each of these cases, the holder is given the option under Section 130 of
of dishonor is excused when the delay is caused by circumstances treating the instrument as a promissory note, thus considering the drawer a
beyond the control of the holder and not imputable to his default, “maker” and a primary party.
misconduct, or negligence. When the cause of delay ceases to operate,
notice must be given with reasonable diligence. The reason for non-requirement of notice under paragraph (c) is because such
demand for payment, of itself, constitutes notice of dishonor of the bill. The case
Sebastian: If the basis is beyond control of the person serving the notice of referred to must be one where presentment has been made upon the drawee who
dishonor, not due to negligence or misconduct, delayed service is excused. If dishonors the bill, or a case where for some reasons presentment is not required
there is excuse for delay, there must be service as soon as the cause of the delay is or is dispensed with, and the holder demands payment from the drawer within
gone. such time that he should give notice of dishonor to the drawer.
DISPENSING NOTICE OF DISHONOR Under paragraph (d), where there is no antecedent contractual relation between
the drawer and drawee under which the drawee is bound to accept or pay, notice
Sec. 114. When notice need not be given to drawer. - Notice of of dishonor is not required because the drawee has no right to require that the
dishonor is not required to be given to the drawer in either of the drawee accept or pay. Thus, where the drawer of a check has no account or no
following cases: sufficient funds with the drawee bank, he is not entitled to notice of dishonor.
(a) Where the drawer and drawee are the same person; However, the absence of contractual relation between the drawer and drawee will
(b) When the drawee is fictitious person or a person not having not always operate to free the holder from the duty to give notice to the drawer,
LEX SOCIETAS 92
who may have a reason to “expect” that despite such absence, the drawee may
accept or pay. DISCHARGE OF NEGOTIABLE INSTRUMENTS
Notice of dishonor is not required where the drawer has countermanded payment Campos: The discharge of the instrument effects the extinguishment of the
because it is his own act which causes the dishonor of the instrument. obligations arising thereunder. It relives all parties. Whether primary or
“countermanding payment” is the same as a “stop order” and means ordering the secondary, from further liability on the instrument.
drawee bank not to pay the check issued by the drawer.
Functional equivalent in civil law is the extinguishment of the contract.
NOTICE OF NON-PAYMENT
Sebastian: In a negotiable instrument, the only obligation meant to be
Sec. 116. Notice of non-payment where acceptance refused. - Where discharged is that for payment for a sum of money. Performance of the obligation
due notice of dishonor by non-acceptance has been given, notice of a in the instrument is the payment of the sum of money by the person primarily
subsequent dishonor by non-payment is not necessary unless in the liable to the holder of the instrument and the discharge of the monetary
meantime the instrument has been accepted. obligation to the person liable discharges the instrument.
Campos: A dishonor by non-acceptance confers upon the holder an immediate HOW INSTRUMENTS ARE DISCHARGED
right against all secondary parties. If the holder then gives due notice of dishonor,
he may enforce his rights against them by an action. If he fails to give notice of Sec. 119. Instrument; how discharged. - A negotiable instrument is
dishonor by non-acceptance, his rights against secondary parties are lost and discharged:
such rights will not be revived by a subsequent presentment for payment. (a) By payment in due course by or on behalf of the principal
debtor;
OMISSION OF NOTICE OF NON-ACCEPTANCE (b) By payment in due course by the party accommodated, where
the instrument is made or accepted for his accommodation;
Sec. 117. Effect of omission to give notice of non-acceptance. - An (c) By the intentional cancellation thereof by the holder;
omission to give notice of dishonor by non-acceptance does not (d) By any other act which will discharge a simple contract for the
prejudice the rights of a holder in due course subsequent to the payment of money;
omission. (e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
Sebastian: This section is not an exception to give notice.
By Principal Debtor
DISPENSING PROTEST OF FOREIGN BILLS
Agbayani: In order to discharge the instrument, the payment must be (1) a
Sec. 118. When protest need not be made; when must be made. - payment in due course; (2) a payment made by the principal debtor.
Where any negotiable instrument has been dishonored, it may be
protested for non-acceptance or non-payment, as the case may be; but If payment is made before the date of maturity, the instrument is not discharged
protest is not required except in the case of foreign bills of exchange. as the payment is not in due course. It will merely constitute a negotiation back to
the principal debtor who can renegotiate the instrument.
Agbayani: Protest is necessary for foreign bills of exchange, while protest for
other negotiable instruments is optional. Where the payment is made by a party who is not the primary obligor or an
accommodation party, his payment only conceals his own liability and those
obligated after him. All prior parties primarily liable or secondarily liable to the
bill, are liable to such payer, and the payer may cancel indorsements subsequent
to his own and re-issue the paper, and it will be valid against the prior parties.
LEX SOCIETAS 93
The term “principal debtor” refers to the person ultimately bound to pay the debt.
This is true whether he is a party to the instrument or not, or whether he appears By Third Person
to be liable primarily or secondarily in the instrument.
The creditor is not bound to accept payment or performance by a
Campos: Payment is the most usual way of discharging a bill or note. Since a third person who has no interest in the fulfillment of the obligation,
negotiable instrument must contain an unconditional promise or order to pay a unless there is a stipulation to the contrary.
sum certain in money, payment should be in money in order to effect its
discharge. If the parties agree to discharge the instrument by a renewal note, it Whoever pays for another may demand from the debtor what he has
would be discharged not by payment strictly speaking, but by novation or by paid, except that if he paid without the knowledge or against the will
agreement, which modes are expressly recognized under Section 119 (d). of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor. (Art. 1236, Civil Code)
Payment must be made by or on behalf of the principal debtor, otherwise it would
constitute a purchase or negotiation, and the instrument would remain Whoever pays on behalf of the debtor without the knowledge or
outstanding. “Principal debtor” would include the maker and the acceptor. against the will of the latter, cannot compel the creditor to subrogate
Although the drawee is not a party until he accepts and payment by him is him in his rights, such as those arising from a mortgage, guaranty, or
literally not a discharge under Section 119, he fulfills the representation made by penalty. (Art. 1237, Civil Code)
the drawer and by the indorsers and therefore payment by him will also discharge
the instrument. Agabayani: If payment is made by a third person, the instrument is not
discharged because payment is not made by the person principally liable. When
Sebastian: As a rule, there must be payment in due course by on or behalf of a one who is not a party to a negotiable paper pays his money for it and takes up
principal debtor. It may also be made by a accommodation party. the paper, the presumption is that he has bought it and not paid it off. It must be
understood that not any one who desires may pay the instrument and then
In civil law, a creditor is not compelled to accept a third party payment. But in recover of the maker. He must be a person who has in some way made himself
Negotiable Instruments Law, it is possible. If a holder refuses to accept payment liable for the payment of the instrument. There is however one exception to this,
from a person who could be made to pay, that person and all subsequent parties and that is where an instrument has been protested and some one voluntarily
are discharged. A third party payment can be made by a total stranger (i.e. makes ‘payment supra protest’ or ‘for honor’. And if the intention was to give the
payment for honor). money in payment, the instrument is discharged. Under the New Civil Code, a
third person can make payment for an obligor.
Performance of the obligation has to be plain and simply the payment of money.
As a rule, a negotiable isntrument is discharged by payment. However, not all Sebastian: When the instrument is paid by a third party, not a party to the
payments discharges an instrument. There are people who can make payment instrument or a virtual stranger, the instrument cannot be presumed to have
that will not discharge the instrument. been paid.When a person makes a payment and he is not the party obligated to
pay, there is a presumption that the instrument was negotiated to him. This
Not all types of payment will discharge the instrument. It must be payment in presumption can be overturned when there is expressed that the payment is to
due course. Under Section 88 payment must be made at or after maturity. If not discharge the instrument.
at or after maturity, it will be considered a negotiation of the instrument. This is
because the instrument can still be renegotiated. When the person primarily
liable on the instrument pays it before due date, it is not payment in due course, By Accommodated Party
but it can still still extinguished because of confusion or merger of the rights of
the debtor and creditor. Agbayani: As between the accommodation party and the accommodated party,
the latter is the one ultimately liable on the accommodation instrument. Hence,
Payment must be made to the holder, otherwise, the instrument is not his payment in due course discharges the instrument as if payment was made by
discharged. the principal debtor.
Payment must be made in good faith and without notice of the defect of the title
of the holder.
LEX SOCIETAS 94
Campos: Payment by the accommodated party if the instrument is made or (2) That both debts consist in a sum of money, or if the things due are
accepted for his accommodation is actually payment by the principal debtor, consumable, they be of the same kind, and also of the same quality if
whether or not he appears to be a party to the instrument. the latter has been stated;
(3) That the two debts be due;  
Cancellation by Holder (4) That they be liquidated and demandable;  
(5) That over neither of them there be any retention or controversy,
Agbayani: The cancellation must be intentional and made by the holder. commenced by third persons and communicated in due time to the
Cancellation may be done by tearing the instrument, burning it or writing across debtor. (Art. 1279, Civil Code)
it the word “cancelled.”
Extension of Time of Payment
There must be an intention to cancel the negotiable instrument by the holder
thereof as such intention is an essential element of discharge on a negotiable Agbayani: An extension of time granted by the holder to the debtor will not
instrument and a negotiable note in a torn condition is presumed cancelled by discharge the instrument because this ground is not omitted in Section 120 and it
the holder thereof. Thus, the instrument is not discharged where the cancellation is omitted in Section 119.
is made under a mistaken belief that it has been fully paid when as a matter of
fact there is a failure of such payment, or where cancellation is induced by fraud. Sebastian: Extension of time without consent of parties secondarily liable will
discharge them. This makes the obligation of the parties secondarily liable more
Sebastian: What is important here is that cancellation must be intentional. onerous. In altering the tenor of the instrument, there must be consent of the
Only the holder can do this. In this case, the presumption is that he does not person primarily liable and all parties secondarily liable.
intend to recover from the party primarily liable on the instrument. This
presupposes that the holder gave consent to the cancellation. It is not enough to Principal Debtor Acquires Instrument
say that the cancellation was intentional. It is equally important to say that
cancellation was not only intentional, but it must be a cancellation that is free Agbayani: In order to discharge an instrument under paragraph (e),
from any vice of consent. When you cancel an instrument, the presumption is reacquisition mmust be (1) by the principal debtor, (2) in his own right, and (3) at
that it is intentional. To enforce the instrument, you must prove that the or after the date of maturity.
cancellation was unintentional.
In his own right means not in a representative capacity.
By Acts that Discharge a Money Debt
Reacquisition by the principal debtor in his own right but before maturity will not
Agbayani: Novation would discharge the instrument. discharge the instrument. It will merely constitute a negotiation back to the
principal debtor who, under authority of Section 50, may renegotiate the
However, it has been opined that paragraph (d) of Section 119 is meaningless and instrument.
inoperative in light of the other provisions of Section 119, and that consequently
the provision has not altered the unwritten rule as to discharge of negotiable Discharge by Operation of Law
instruments, either as between the parties or with respect to holders in due
course. Agbayani: An instrument may be discharged by operation of law. If a judgment
is obtained on a bill or a note, the bill or note is thereby extinguished and merged
By Merger or Legal Compensation in the judgment. But the judgment alone, without actual satisfaction, is not
extinguishment as between the plaintiff and other parties not jointly liable with
The obligation is extinguished from the time the characters of the original defendant, whether those parties be prior or subsequent to the
creditor and debtor are merged in the same person. (Art. 1275, Civil defendant.
Code)
A discharge in bankruptcy, unless otherwise provided by statute, releases a
In order that compensation may be proper, it is necessary: bankrupt from all his provable debts, and therefore will discharge the bankrupt
(1) That each one of the obligors be bound principally, and that he be on all bills accepted, or notes made by him but will not discharge the other
at the same time a principal creditor of the other; parties.
LEX SOCIETAS 95
A discharge (1) of a party not given due notice of dishonor or (2) by the Statute of Agbayani: The intentional cancellation of a prior party also discharges the
Limitation is a discharge by operation of law. subsequent parties thereto because if the latter were not discharged, and he is
made to pay be the holder, he would not be able to enforce his right of recourse
Sebastian: Discharge of the person by operation of law does not discharge the against the prior party who has been discharged by the holder.
instrument. When a person primarily liable is excused by the law from payment
of the instrument, there is a discharge by operation of law. Take note, the By Valid Tender of Payment
instrument is not yet discharged.; only the person. Persons secondarily liable will
remain liable as indorsers. Thus, when the party primarily liable is discharged by Agbayani: Tender of payments means the act by which one produces and offers
operation of law, the instrument is not discharged because parties secondarily to a person holding a claim or demand against him the amount of money which
liable are still required to pay. he considers and admits to be due, in satisfaction of such claim or demand
without any stipulation or condition. But where an instrument is payable at a
In execution of judgment, the instrument is not discharged because it is not the bank and the indorser waived protest, the fact that the maker had money on
instrument that you are paying; it is the judgment of the court that is being deposit in the bank at maturity was held not sufficient tender under Section 70
executed. and 87 to discharge an indorser. Notice of that fact must be brought to the holder.
DISCHARGE OF PERSONS SECONDARILY LIABLE Sebastian: When a party secondarily liable offers to pay the holder and the
latter declines payment, that party as well as all subsequent parties are
Sec. 120. When persons secondarily liable on the instrument are considered discharged because it is not fair that if the holder fails to collect from
discharged. - A person secondarily liable on the instrument is the person he wanted, the holder goes back to the persons secondarily liable who
discharged: already offered to pay the instrument. Subsequent parties must also be
(a) By any act which discharges the instrument; discharged because if the holder comes after them, they will eventually go after
(b) By the intentional cancellation of his signature by the holder; the original secondarily liable person.
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party; If an indorser goes to the place of payment and he is able and willing to discharge
(e) By a release of the principal debtor unless the holder's right of the instrument, and the holder refuses to take it from him, there is a valid tender
recourse against the party secondarily liable is expressly of offer which was declined. Under the principles of the Negotiable Instruments
reserved; Law, mere presence is equivalent to a tender of payment.
(f) By any agreement binding upon the holder to extend the time of
payment or to postpone the holder's right to enforce the There is no discharge if the bank failed to inform the holder that there were
instrument unless made with the assent of the party insufficient funds for the bank to pay the instrument.
secondarily liable or unless the right of recourse against such
party is expressly reserved. In civil law, if the creditor is in mora accipienti, he suffers the following:
By Discharge of Instrument 1) If obligation is for delivery of a particular thing, the responsibility of the debtor
is diminished to responsibility arising from fraud and gross negligence.
Agbayani: Any of the acts that will discharge an instrument under Section 119
will discharge the parties secondarily liable thereon, such as, by payment in due 2) If the thing is lost, the creditor bears the loss.
course by the maker. This discharges the indorsers of the note.
3) If the thing is declined by the creditor requires expenses for preservation, the
By Intentional Cancellation expenses is bourn by the creditor.
Agbayani: No consideration is necessary to support a discharge by intentional The creditor will cease to have title to the instrument for refusing to accept a valid
cancellation of an indorser’s signature by the holder. tender of payment.
By the Discharge of Prior Party By Release of Principal Debtor

LEX SOCIETAS 96
Agbayani: If the holder releases the principal debtor, the persons secondarily Agbayani: The first effect is that the instrument is not discharged but it
liable are also discharged as (1) this discharges the instrument and (2) deprives discharges the party paying.
them of their right of recourse against the principal debtor. But if on releasing the
principal debtor, the holder reserves his right of recourse against the parties The second effect is that the party paying is remitted to his former rights against
secondarily liable, they are not discharged. The reason is that the effect of such parties prior to him. If he was formerly a holder in due course, even if at the time
reservation is the implied reservation of their right of recourse against the of payment he already had notice of defects of title, he can enforce his rights
principal debtor. In other words, while the holder cannot hold the person against any of the parties prior to him free from defenses, as he is remitted to his
principally liable, he can hold the parties secondarily liable, but they in turn can former rights. But it is a well-known rule of law that if the original payee of a
hold the principal debtor should any of them be made to pay the holder. This note, unenforceable for lack of consideration, repurchases the instrument after
reservation of the right of recourse cannot be implied from acts and conduct but transferring it to a holder in due course, the paper again becomes subject in the
must be express. payee’s hands to the same defenses to which it would have been subject if the
paper never passed through the hands of a holder in due course. This is also true
The release must be a voluntary act of the holder, not by operation of law. where the instrument is retransferred to an agent of the payee.
If the release is not for value, it is not a discharge of secondary parties. The third effect is that the party paying can strike out his indorsement and
subsequent indorsements.
As to an accommodation maker or acceptor, the general rule is that he is not
discharged by the holder’s release of the principal debtor even if the release be The fourth effect is that the party paying can renegotiate the instrument.
made with knowledge of the true relation of the parties and, conversely, the
release of an accommodation maker or acceptor does not discharge the principal Where there is a slight ambiguity in this section on this point, the exceptions
debtor though the latter occupies the position of a party “secondarily liable” on would seem to apply only to the right to negotiate but not to the rule that the
the instrument. instrument is not discharged. Accordingly, where a drawer of a certified check
was required to take up the check because of the failure of the drawee bank, the
By Extension of Time instrument is not discharged and he is subrogated to the rights of the payee. In
the following cases, the party secondarily liable who pays cannot negotiate the
Agbayani: If the holder agrees to extend the time of payment, the indorsers are instrument:
discharged. The following, however, are exceptions: 1) If the drawer pays as the bill is payable to the order of a payee, he can no
1) where the extension of time is consented to by the party secondarily liable, longer negotiate the instrument.
he is not discharged, and 2) If the payee is an accommodated party and pays, he cannot negotiate the bill
2) where the holder reserves his right of recourse against the party secondarily because he is the ultimate person to pay it and he does not have a right of
liable, recourse against either the drawee or drawer.
the latter is not discharged.
Campos: Payment by an indorser at maturity, not on behalf of the principal
PAYMENT BY PERSON SECONDARILY LIABLE debtor but in discharge of his own liability, does not discharge the instrument but
constitutes the indorsee a holder of the instrument, which remains a continuing
Sec. 121. Right of party who discharges instrument. - Where the obligation against the primary party. Neither does payment by drawer discharge
instrument is paid by a party secondarily liable thereon, it is not the instrument.
discharged; but the party so paying it is remitted to his former rights
as regard all prior parties, and he may strike out his own and all Sebastian: If payment is made by parties secondarily liable, the instrument is
subsequent indorsements and against negotiate the instrument, not discharged. The party who paid may still run after the persons primarily
except: liable. Basically, the right of enforcement merely goes up until it reaches the
(a) Where it is payable to the order of a third person and has been person primarily liable. Party who pays the instrument, even if technically not a
paid by the drawer; and holder in due course, is restored to his status from the time he originally held the
(b) Where it was made or accepted for accommodation and has instrument.
been paid by the party accommodated.
LEX SOCIETAS 97
RENUNCIATION BY HOLDER cancellation made unintentionally or under a mistake or without the
authority of the holder, is inoperative but where an instrument or any
Sec. 122. Renunciation by holder. - The holder may expressly signature thereon appears to have been cancelled, the burden of proof
renounce his rights against any party to the instrument before, at, or lies on the party who alleges that the cancellation was made
after its maturity. An absolute and unconditional renunciation of his unintentionally or under a mistake or without authority.
rights against the principal debtor made at or after the maturity of the
instrument discharges the instrument. But a renunciation does not Agbayani: Cancellation signifies not only the drawing of criss-cross lines but
affect the rights of a holder in due course without notice. A also tearing, obliterations, erasures, or burning. It may be made by any other by
renunciation must be in writing unless the instrument is delivered up means by which the intention to cancel the instrument may be evident.
to the person primarily liable thereon.
Cancellation is inoperative (1) when made unintentionally, (2) when made under
Agbayani: This section, considered in connection with Sections 119 and 120, a mistake, or (3) when made without authority of the holder.
applies only to renunciation by a unilateral act of the holder without
consideration and in cases where the instrument is not delivered up to the person Where an instrument or signature thereon appears to have been cancelled, the
intended to be realeased. Section 119(e) would cover the case of an oral release party claiming that the cancellation is inoperative must prove his allegations.
with consideration. Thus, where it appeared that the date and the signature of the maker of the note
where destroyed by burning, the presumption was that the burning was
Sebastian: Renunciation is, in effect, a debt condonation. intentional and done for the purpose of cancelling the instrument, and the
burden was on the holder to prove the contrary.
Definition of Renunciation
Sebastian: The requisites for cancellation are basically the same as those of
Agbayani: Renunciation is the act of surrendering a right or claim without renunciation.
recompense but can be applied with equal propriety to the relinquishing of a
demand upon an agreement supported by a consideration. Therefore, this term
includes the release of a claim by virtue of an accord and satisfaction as well as a
gratuitous waiver of liability.
Form of Renunciation
Agbayani: The renunciation must be express and in writing. However, if the

instrument is delivered to the person primarily liable, the renunciation may be
oral. This section does not apply to, or prevent discharge by, oral novation under
which the obligation of other persons is accepted in lieu of that of the maker of a
note. Similarly, it does not prevent an oral gift of an indebtedness by the payee to
the makers coupled with an intentional destruction of the notes.
Requisites of Renunciation
Agbayani: Renunciation discharges the instrument when it is:

1) absolute and unconditional;
2) it is made in favor of the person primarily liable; and
3) it is made at or after maturity.
EFFECT OF UNINTENTIONAL CANCELLATION
Sec. 123. Cancellation; unintentional; burden of proof. - A

LEX SOCIETAS 98
in a transaction where goods are bought from a wholesaler and the latter, instead
BILLS OF EXCHANGE of taking the buyer’s promissory note, executes a time bill on the buyer, who
writes “Acceptance” across the bill’s face and signs it. Its use is generally limited
DEFINITION OF BILL OF EXCHANGE to domestic transactions.
Sec. 126. Bill of exchange, defined. - A bill of exchange is an Banker’s Acceptance

unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is Agbayani: A draft or bill of exchange of which the acceptor is a bank or banker
addressed to pay on demand or at a fixed or determinable future time engaged generally in the business of granting banker’s acceptance credit. A
a sum certain in money to order or to bearer. banker’s acceptance is similar to a trade acceptance, the fundamental difference
being that the banker’s acceptance is drawn against a bank instead of the buyer.
Sebastian: Once a bill is signed and accepted by the drawee, the draft becomes
an acceptance. Campos: A banker’s acceptance is a negotiable time draft or bill of exchange
drawn on and accepted by a commercial bank. It is more versatile and more
TYPES OF BILLS OF EXCHANGE popular than the trade acceptance as it is used not only in domestic transactions
but even more so in international trade for financial, import and export
Drafts transactions. Unlike the trade acceptance, which is accepted by the buyer, a
banker’s acceptance, which is accepted by the bank. Like the trade acceptance, it
Agbayani: A common term for all bills of exchange and they used differs from other bills in that it specifies the transaction which gave rise to it.
synonymously.
Trust Receipts
In bank drafts, drawer and drawee bank are liable to purchaser of draft for not
complying with his instructions. Treasury Warrant
Trade Acceptance Money Orders
Agbayani: (1) A bill of exchange payable to order and at a certain maturity, Agbayani: A species of draft drawn by the post office upon another for an
drawn by a seller against the purchaser of goods as drawee, for a fixed sum of amount money deposited at the first office by the person purchasing the money
money, showing on its face the acceptance of the purchaser of goods and that it order and payable at the second office to a payee named in the order. They are of
has arisen out of a purchase of goods by the acceptor; (2) A draft or bill of limited negotiability because they may only be indorsed once.
exchange drawn by the seller on the purchaser of goods sold and accepted by
such purchaser. Clean and Documentary Bill of Exchange
Trade Acceptance Bill of Exchange Agbayani: “Clean bill of exchange: is one to which are not attached documents
states upon its face that the obligation does not state upon its face that the of title to be delivered to the person against whom the bill is drawn when he
of the acceptor arises out of purchase obligation of the acceptor arises out of either accepts or pays the bill.
of goods from the drawer purchase of goods from the drawer
confined to credit obligations arising cover various kinds of transactions “Documentary bill of exchange” is one to which are attached documents of title to
from the sale of goods be delivered and surrendered to the drawee when he accepts or pays the bill.
must have a definite maturity may be payable on demand, at sight,
or at the end of a stated time D/P and D/A Bills of Exchange
Campos: A trade acceptance is a draft or bill of exchange with a definite Agbayani: “Documents against payment bill (D/P Bill)” is a sight or time bill to
maturity, drawn by a seller on a buyer for the purchase price of goods, bearing which are attached to documents to be delivered and surrendered to the drawee
across its face the acceptance of the buyer. It is usually payable to order. It is used when he has paid the corresponding bill.
LEX SOCIETAS 99
“Documents against acceptance bill (D/A Bill)” is a time bill to which are attached
to documents to be delivered and surrendered to the drawee when he accepts the INLAND AND FOREIGN BILLS
bill.
Sec. 129. Inland and foreign bills of exchange. - An inland bill of
Time or Usance Bills exchange is a bill which is, or on its face purports to be, both drawn
and payable within the Philippines. Any other bill is a foreign bill.
Agbayani: “Sight bills” are bills which are payable upon presentation or at sight Unless the contrary appears on the face of the bill, the holder may
or on demand. Time or usance bills” are bills which are payable at a fixed future treat it as an inland bill.
time or at a determinable future time.
Distinction
Bills in Set
Agbayani:
Inland and Foreign Bills
Inland Bill Foreign Bill
LIABILITY OF DRAWEE a bill which is, on its face purports to a bill which is, on its face purports to
be, both drawn and payable within be, both drawn and payable outside
Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill the Philippines the Philippines
of itself does not operate as an assignment of the funds in the hands of not required to be protested required to be protested
the drawee available for the payment thereof, and the drawee is not
liable on the bill unless and until he accepts the same. A bill is foreign if, on its face, it purports (1) to be drawn in the but payable
outside thereof; or (2) to be payable in the Philippines but drawn outside thereof.
Agbayani: Where the drawee has not accepted the bill drawn against him, the
holder cannot enforce it against him, even if the drawer has sufficient funds in Conflict Rule
the hands of the drawee to pay for the bill. Thus, an unaccepted draft cashed by a
bank at the drawer’s request is not an assignment of the drawer’s funds in the BILL TREATED AS A NOTE
hands of the drawee. And a holder in due course of a dishonored bill has no cause
of action against the drawee either at law or in equity as an assignee of the Sec. 130. When bill may be treated as promissory note. – [1] Where
drawer’s contractual rights underlying the bill. in a bill the drawer and drawee are the same person or [2] where the
drawee is a fictitious person or [3] a person not having capacity to
Sebastian: A bill does not operate as an assignment of funds in the hands of the contract, the holder may treat the instrument at his option either as a
drawee. Instead there is an agreement of the drawee to make payment for the bill of exchange or as a promissory note.
drawer either because the drawer has money with the drawee or the drawee
agrees to lend the drawer money. This does not mean there is earmarking of Agbayani: In all these cases, notice of dishonor need not be given to the drawer
funds. When a bill of exchange is accepted, even if the drawer has funds with the to charge him. Treating the bill as a note would constitute the drawer, the maker.
drawee, there is no preference of one bill over another. Thus, the “drawer” would then be a party primarily liable on the instrument to
whom notice of dishonor need not be given. Futhermore, the holder need not
BILLS DRAWN ON MULTIPLE DRAWEES prove presentment for payment or present the bill to the drawee for acceptance.
Sec. 128. Bill addressed to more than one drawee. - A bill may be Sec. 130
addressed to two or more drawees jointly, whether they are partners  Drawer and drawee is the same person – treated as a promissory note
or not; but not to two or more drawees in the alternative or in  If the drawer and drawee is the same person
succession. o Drawer instructs himself to pay the payee
 Same if the drawee is fictitious
Sebastian: The liability of two or more acceptors is joint and solidary. If there
 Same if the drawee is incapacitated
are 2 or more acceptors, they cannot end up pointing to each other kung sinong
magbabayad and demand on one or either is a demand for the whole amount.  Enforcement of the instrument as BOE or PN depends on the holder.
LEX SOCIETAS 100
REFEREE ACCEPTANCE
Sec. 131. Referee in case of need. - The drawer of a bill and any DEFINITION
indorser may insert thereon the name of a person to whom the holder
may resort in case of need; that is to say, in case the bill is dishonored Sec. 132. Acceptance; how made, by and so forth. - The acceptance of
by non-acceptance or non-payment. Such person is called a referee in a bill is the signification by the drawee of his assent to the order of the
case of need. It is in the option of the holder to resort to the referee in drawer. The acceptance must be in writing and signed by the drawee.
case of need or not as he may see fit. It must not express that the drawee will perform his promise by any
other means than the payment of money.
Agbayani: If the referee pays, he may recover the amount from the drawer or
indorser who has named him as referee in case of need. Agbayani: Acceptance is the signification of the drawee of his assent to the
order of the drawer. It is an act by which a drawee assents to the request of the
Sebastian: If the instrument is not paid and indorser is being made to pay and drawer to pay it.
he cannot perform his liability, the holder has the option to go to the person in
case of need.Such person is not obligated to pay because he did not affix his Acceptance Payment
signature on the instrument. But if the referee in case of need makes good on the a promise to perform an act actual performance thereof
obligation of the indorser, the referee is substituted to the rights of the indorser
and may go after the other indorsers or the maker. Campos: Acceptance only applies to bills of exchange and its object is to bind
the drawee and make him an actual and bound party to the instrument.
Sebastian: Acceptance is not required for all bills of exchange. It is only

required only if it is a time draft. In the case of a draft payable on demand, no
need to go to a drawee to accept. You merely go to the drawee for payment. It is
the same when the bill is a sight draft. The moment it is presented to you, the
obligation to pay arises.
KINDS OF ACCEPTANCE
Actual
Sebastian: A simple signature will not constitute acceptance because the law
provides that signature without indication in what capacity is deemed to be an
indorser.
Constructive
Sec. 137. Liability of drawee returning or destroying bill. - Where a

drawee to whom a bill is delivered for acceptance destroys the same,
or refuses within twenty-four hours after such delivery or within such
other period as the holder may allow, to return the bill accepted or
non-accepted to the holder, he will be deemed to have accepted the
same.
LEX SOCIETAS 101

Agbayani: There is constructive acceptance (1) where the drawee to whom the
bill is delivered for acceptance destroys it; or (2) where the drawee refuses, within Sec. 139. Kinds of acceptance. - An acceptance is either general or
24 hours after such delivery, or within such time as is given him, to return the bill qualified. A general acceptance assents without qualification to the
accepted or not accepted. In any of theses cases, the drawee will be deemed to order of the drawer. A qualified acceptance in express terms varies
have accepted the bill even if there is no actual written acceptance by him. the effect of the bill as drawn.
Accordingly, the drawee will be primarily liable as an acceptor.
Sec. 140. What constitutes a general acceptance. - An acceptance to
The drawee is not entitled to keep the bill while he makes up his mind. The bill is pay at a particular place is a general acceptance unless it expressly
at all times the property of the holder and he is entitled to have it when he wants states that the bill is to be paid there only and not elsewhere.
it. If the holder should demand its return before twenty-four hours, the drawee
would be required to comply on pain of being held as an acceptor; but return Agbayani: A general acceptance is one that assents without qualification to the
within twenty-four hours unaccepted would not be a dishonor. The drawee could order of the drawer.
still accept by notification within twenty-four hours. Here, an extrinsic
acceptance would play an important part. If the drawee, after returning the bill, The mere fact that the acceptance is to pay at a particular place does not make the
still refused to act after the expiration of the time allowed, the holder then would acceptance qualified but to say that to pay only at a particular place makes the
be required to treat the bill as dishonored or lose his right against prior parties. acceptance qualified.
Mere failure to return the bill within twenty-four hours is acceptance. Thus, the Campos: Section 140 provides that a general acceptance is an acceptance to pay
presentation for acceptance is a demand for acceptance which, if the bill is at a particular place, unless it expressly states that the bill is to be paid there only
retained by the drawee, implies a demand for its return if acceptance is declined. and not elsewhere.
Further, under Section 185 a check was subject to the same rules and that failure
to return within twenty-four hours a check sent to a drawee bank for payment Sebastian: In general acceptance, the drawee agrees to the order of the drawer
was an acceptance upon which the holder could recover against the bank, without any other qualification.
although the delay was due to the neglect of a third person.
Qualified
Sections 136 and 137 expressly cover only presentment for acceptance and
presentment for payment is not covered. But it does not necessarily follow that Sec. 141. Qualified acceptance. - An acceptance is qualified which is:
because the law is silent as to be presented for payment that the result should be (a) Conditional; that is to say, which makes payment by the
different from the case of presentment for acceptance. The consideration acceptor dependent on the fulfillment of a condition therein
involved in both cases are the same. stated;
(b) Partial; that is to say, an acceptance to pay part only of the
Campos: The drawee has 24 hours after presentment within which to make up amount for which the bill is drawn;
his mind whether to accept the bill or not. The 24-hour period is counted from (c) Local; that is to say, an acceptance to pay only at a particular
delivery and not from demand for the return of the bill. Should he return it place;
unaccepted within 24 hours, the bill is not necessarily dishonored because he can (d) Qualified as to time;
still accept it until the expiration of the 24th hour. Should he return it before the (e) The acceptance of some, one or more of the drawees but not of
24-hour period, and fails to accept within such period or within such other period all.
as the holder may allow, the holder must treat the bill as dishonored or else he
will lose his right against prior parties. If the drawee returns it with a statement Agbayani: A qualified acceptance is one which in express terms varies the effect
of refusal to accept, then even if the 24 hour period has not lapsed, the bill should of the bills as drawn.
then be considered dishonored.
Campos: Under Section 141, the following are qualified acceptance:
Sebastian: There is constructive acceptance when upon presentment, the 1) Conditional – The condition does not qualify the order to pay but only the
drawee destroys the bill or failed to act on presentment after 24 hours. acceptance. Thus, the instrument is still negotiable and does not violate
Section 1(b).
General
LEX SOCIETAS 102
2) Partial – A partial acceptance does not affect the negotiability of the performed other than payment of money. And lastly, it must communicated and
instrument, unlike a partial indorsement which under Section 32 does not delivered to the holder. Until there is delivery, the drawee/acceptor has every
operate as a negotiation of the instrument. right to revoke the acceptance. Such peron has the time until delivery before the
3) Local – Acceptance is qualified as to place of payment. acceptance becomes permanent. Take note that if the drawee/acceptor asks for
4) As to Time time to decide whether or not he will accept the instrument, he cannot hold the
5) As to Drawee – If the bill is addressed to more than one drawee and only one instrument. He must return the instrument to the holder and say when to come
of them should accept, it is treated as qualifiedly accepted. back for the decision.
A holder need not take a qualified acceptance but instead may insist on a general FORM OF ACCEPTANCE
or unqualified acceptance, and upon his failure to obtain the latter, may treat the
bill as dishonored. However, if he agrees to a qualified acceptance, he should give ACCEPTANCE OF CHECKS
notice thereof to the drawer and indorsers, otherwise the latter will be discharged
from liability. If notified and they do not express their dissent within a reasonable Agbayani: In general, acceptance is not required for checks because they are
time, they remain liable on the instrument. payable on demand. Payment of a check does not include or imply its acceptance
in the sense that this word is used in Section 62. In the words of the law, the
Although the acceptance of a bill may be conditional, an acceptance of a future acceptance of a bill the signification by the drawee of his assent to the order of the
bill must be unconditional, otherwise it will not be considered an acceptance. drawer, which, in the case of a check, is the payment on demand of the sum of
Thus, a collateral writing stating that the defendant is authorizing A to make money. Upon the other hand, actual payment of the amount of a check implies
sight drafts if necessary for commissions due from time to time as they accrue, is not only an assent to said order of the drawer and recognition of the drawee’s
not an acceptance under Section 135, because the agreement is conditional. obligation to pay the aforementioned sum, but also a compliance with such
obligation.
Sebastian: If the acceptance seeks to change the agreement between the payee
and the drawer, the acceptance is qualified. A holder may treat the bill as SIGNATURE OF DRAWEE
dishonored and must give notice of dishonor to all parties secondarily liable. For
a foreign bill, the additional process of protest must be complied. However, A Agbayani: Without the signature of the drawee, he would not be bound,
qualified acceptance does not always result to a dishonored bill. pursuant to the principle enunciated in Section 18.
REQUISITES OF ACTUAL ACCEPTANCE DELIVERY OF ACCEPTANCE
Agbayani: Actual acceptance must be (1) in writing, and (signed by the drawee. Agbayani: The acceptance is incomplete until delivery or notification. And the
In addition, (3) it must not express that the drawee will perform his promise by acceptor or drawee who has not communicated his acceptance or transmitted the
another means than the payment of money and (4) it must be communicated or accepted bill to the holder, may revoke an acceptance before delivery and cancel
delivered to the holder. the written acceptance.
The acceptance cannot be made orally because sound public policy requires some EFFECTS OF ACCEPTANCE
substantial and tangible evidence of contract, and more reliable in its nature than
the statement or recollection of witnesses. An oral acceptance is not binding on Agbayani: Upon acceptance, the drawee becomes liable on the bill. The bill
the drawee. becomes in effect a note, the acceptor standing in the place of the maker, and the
drawer, in the place of the first indorser. But should the drawee refuse to accept,
Campos: Under Section 132, the requisites for a valid acceptance are: (1) it must the payee or other holder has no recourse against him but only against the drawer
be in writing; (2) it must be signed by the drawee, and (3) it must not change the and indorsers, if any.
implied promise of the acceptor to pay only in money.
Campos: Acceptance, if given, will retroact to the date of presentation. Thus, if a
Sebastian: An acceptance must be in writing to avoid relying on the recollection bill is payable 10 days after sight, and it is presented at 10:00 am on June 1, the
of the parties with regard to their liabiity on the insturment. It must be signed by drawee has up to 10:00 am June 2 to accept the bill. If he accepts the bill on June
the drawee to manifest his consent. It must not express that the obligation will be 2, the date of maturity will fall on June 11 and not on June 12.
LEX SOCIETAS 103
Campos: An acceptance in order to be binding need not be written on the
ACCEPTANCE OF BILL ON ITS FACE instrument itself, but may be written on a separate instrument as in a letter or by
a telegram. An acceptance on a separate paper may be either an acceptance of an
Sec. 133. Holder entitled to acceptance on face of bill. - The holder of existing bill or an acceptance of a future bill. The first is sometimes referred to as
a bill presenting the same for acceptance may require that the an “extrinsic acceptance” and the second is a “virtual acceptance.” To be
acceptance be written on the bill, and, if such request is refused, may operative, it must identify the bill to which the acceptance refers, and must be
treat the bill as dishonored. clear and unequivocal.
Agbayani: The holder has a right to require that the acceptance must be written Sebastian: When an acceptance is made on a separate instrument, it is deemed
on the bill itself. If the drawee refuses, the holder may treat the bill as to be an acceptance only with respect to people who saw and relied on the
dishonored, and he must, therefore, give notice of dishonor. Otherwise, persons acceptance.
secondarily liable are discharged. This section is not confined to sight bills but is
applicable to all bills of exchange. PROMISE TO ACCEPT
How acceptance made Sec. 135. Promise to accept; when equivalent to acceptance. - An
 Generally written on the instrument itself. unconditional promise in writing to accept a bill before it is drawn is
o To avoid creating doubt on the acceptance deemed an actual acceptance in favor of every person who, upon the
 Acceptance by means of telegram faith thereof, receives the bill for value.
o According to agbayani, this will do.
o AMS: this creates a lot of risk. The law gives the holder the Agbayani: The variance in wording between Sections 134 and 135 should,
right to demand that the acceptance be made on the however, be noted. Section 134 provides that an extrinsic acceptance must be in
instrument, otherwise, he may consider the instrument writing and is good only to persons to whom it is shown; while Section 135
dishonored. provides that a promise to accept is good to any person who upon “faith thereof
receives the bill for value.” Accordingly, under Section 135, it does not seem
ACCEPTANCE BY SEPARATE INSTRUMENT necessary that the separate acceptance be shown. It is enough that the bill is
received on faith of the separate acceptance.
Sec. 134. Acceptance by separate instrument. - Where an acceptance
is written on a paper other than the bill itself, it does not bind the Sebastian: This section contemplates that the bill is accepted even before it
acceptor except in favor of a person to whom it is shown and who, on could be written. The acceptance here is binding on all persons who relied on the
the faith thereof, receives the bill for value. acceptance even if they have not seen the instrument. For there to be an
acceptance, the following must concur:
Agbayani: Acceptance may be made (1) on the bill itself, or (2) on a separate 1) the acceptance must refer to a bill yet to be drawn;
paper. If it is made on a separate paper (a) it may be accepted as to existing bill or 2) the acceptance is in writing and describes the bill to be accepted;
(b) it may be an acceptance as to a non-existing bill. If the bill is non-existent, the 3) there is a promise to accept the bill
acceptance on a separate paper must comply with the following requirements: 4) the bill is executed within a reasonable period of time because advance
1) that the contemplated drawee shall describe the bill to be drawn, and acceptance is worthless without the bill being made; and
promise to accept it; 5) the holder takes the bill on the faith of the forward acceptance.
2) that the bill shall be drawn within a reasonable time after such promise is
written; and TIME TO ACCEPT (24-HOUR RULE)
3) that the holder shall take the bill upon the credit of the promise.
Sec. 136. Time allowed drawee to accept. - The drawee is allowed
If the acceptance is on a separate paper, it binds only those to whom it was shown twenty-four hours after presentment in which to decide whether or
and who, on faith thereof, receive the bill for value. not he will accept the bill; the acceptance, if given, dates as of the day
of presentation.
LEX SOCIETAS 104

Agbayani: The time allowed begins from the time of delivery and not after Sec. 142. Rights of parties as to qualified acceptance. - The holder
demand for a return of the bill and the time for returning the bill to the holder may refuse to take a qualified acceptance and if he does not obtain an
does not begin to run from the demand for its return but from the date of unqualified acceptance, he may treat the bill as dishonored by non-
delivery. acceptance. Where a qualified acceptance is taken, the drawer and
indorsers are discharged from liability on the bill unless they have
A drawee bank is not entitled to 24 hours to decide whether to pay a check or not expressly or impliedly authorized the holder to take a qualified
because a check is presented for payment, not acceptance. But of course, if the acceptance, or subsequently assent thereto. When the drawer or an
check is presented for certification, this ruling will not apply, as certification is indorser receives notice of a qualified acceptance, he must, within a
equivalent to acceptance. reasonable time, express his dissent to the holder or he will be
deemed to have assented thereto.
Sebastian: As a rule, a drawee has 25 hours to accept or not. However, the
drawer is not prohibited from giving the drawee a longer period of time to decide. Agbayani: The holder has a right to require the drawee to accept the bill
When the drawee accepts at a later date, the belated acceptance retroacts to the without qualification. If the drawee refuses, the holder can treat the bill as
date of presentment. Without this, failure of the drawee to accept within 24 hours dishonored by non-acceptance. Accordingly, the holder must give notice of
is deemed an acceptance. dishonor.
As a rule, acceptance should be done at the due date. However, nothing prevents Where the holder takes a qualified acceptance, the drawer and indorsers are
an instrument from being discharged by payment. Thus, a drawee can accept the discharged because the drawer and the indorsers warrant that the bill would be
bill at any time prior to the instrument being discharged by payment. paid as drawn, or as indorsed by them, and a qualified acceptance would vary
their contract without their consent.
ACCEPTANCE OF INCOMPLETE BILL
But if the drawer and the indorsers expressly or impliedly give their consent to
Sec. 138. Acceptance of incomplete bill. - A bill may be accepted the qualified acceptance, they are not discharged. And a drawer or an indorser
before it has been signed by the drawer, or while otherwise will be considered to have consented if, after receiving notice of qualified
incomplete, or when it is overdue, or after it has been dishonored by a acceptance, he does not express his dissent thereto within a reasonable time.
previous refusal to accept, or by non payment. But when a bill payable
after sight is dishonored by non-acceptance and the drawee
subsequently accepts it, the holder, in the absence of any different
agreement, is entitled to have the bill accepted as of the date of the
first presentment.
Agbayani: Acceptance may be made (1) before the bill has been signed by the
drawer; (2) even when the bill is otherwise incomplete; (3) even when the bill is
over due; or (4) even after it has been dishonored by non-acceptance or by non-
payment.
Campos: Although a bill is usually accepted a reasonable time after execution,

Section 138 allows acceptance to be made while it is incomplete. This section
does not mean that one to whom the bill is transferred while incomplete may
become a holder in due course. Under the same section, a bill may be accepted
even after it is overdue or dishonored, since an instrument does not lose its
negotiability by the mere fact that its maturity date has passed or that the drawee
has refused to accept or pay it.
RIGHTS OF PARTIES AS TO QUALIFIED ACCEPTANCE
LEX SOCIETAS 105

Campos: Checks are not meant to be presented for acceptance or certification
PRESENTMENT FOR ACCEPTANCE and if so presented and certification refused, they will not be deemed dishonored.
The same rule applies to bills payable on demand.
PRESENTMENT DEFINED
Sebastian: As a rule, presentment for acceptance is not necessary in order to
Agbayani: It is the production of a bill of exchange to the drawee for his make a person liable on the instrument. This is different in contract laws where
acceptance. demand is necessary to make a person liable to pay and there are specific
instances where demand is waived.
Presentment for acceptance is not necessary to render any party liable except in
the three cases enumerated in Section 143. In those three cases, to charge persons WHEN PRESENTMENT IS EXCUSED
secondarily liable, it is necessary (1) to make presentment for acceptance or (2) to
negotiate the bill within reasonable time. Sec. 148. Where presentment is excused. - Presentment for
acceptance is excused and a bill may be treated as dishonored by non-
So, even when no presentment for acceptance is made, if the bill is negotiated acceptance in either of the following cases:
within a reasonable time, the persons secondarily liable thereon are not (a) Where the drawee is dead, or has absconded, or is a fictitious
discharged. person or a person not having capacity to contract by bill.
(b) Where, after the exercise of reasonable diligence, presentment
Of course, there is nothing wrong in making a presentment for acceptance in the can not be made.
other cases. Indeed, it is a usual course to present such bills for acceptance. And if (c) Where, although presentment has been irregular, acceptance
the bill is dishonored by non-acceptance, the holder may treat the bill as if it had has been refused on some other ground.
required acceptance.
Agbayani: Where presentment cannot be made notwithstanding the exercise of
Campos: Presentment for acceptance refers to bills of exchange only. It means reasonable diligence, presentment is excused.
the production or exhibition of the bill of exchange to the drawee for the purpose
of obtaining his acceptance or his assent to the order of the drawer. An irregular presentment in which acceptance is refused on some other ground is
where presentment is made on a Sunday, and therefore, it is irregular but the
Sebastan: When you present a bill for acceptance, it means the physical acceptance is refused on the ground that the drawer has no funds in the hands of
production of the bill where you produce and show it to the person whom you are the drawee.
requesting to accept. Therefore, presentment for acceptance is always to the
drawee of the bill. Campos: A delay of the mails is sufficient excuse for omission to immediately
present a bill for acceptance, and a presentment immediately after its reception is
WHEN PRESENTMENT IS REQUIRED in time to charge the indorsers.
Sec. 143. When presentment for acceptance must be made. - When a bill is presented after business hours or on a holiday, and the drawee
Presentment for acceptance must be made: refuses to accept because the drawer has no funds with him, although the
(a) Where the bill is payable after sight, or in any other case, where presentment may have been irregular, the bill may be treated as dishonored
presentment for acceptance is necessary in order to fix the under Section 148(c).
maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for Sebastian: If the drawee absconded there is no more need for presentment.
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence Presentment is also not needed if the drawee is a fictitious person.
or place of business of the drawee.
Presentment is also excused when it cannot be made even with reasonable
In no other case is presentment for acceptance necessary in order to diligence.
render any party to the bill liable.
RELEASE OF DRAWER AND INDORSER
LEX SOCIETAS 106
limitations set forth in our partnership law. Under Section 141(e), acceptance by
Sec. 144. When failure to present releases drawer and indorser. - one drawee where there are two or more is a qualified acceptance.
Except as herein otherwise provided, the holder of a bill which is
required by the next preceding section to be presented for acceptance Paragraph (b) of Section 145 seems to be merely permissive since, by Section
must either present it for acceptance or negotiate it within a 148(a), presentment is excused where the drawee is dead.
reasonable time. If he fails to do so, the drawer and all indorsers are
discharged. As to paragraph (c), since there is no section which excuses presentment in case
the drawee has been adjudged bankrupt or an insolvent or has made an
Sec. 147. Presentment where time is insufficient. - Where the holder assignment for the benefit of the creditors, the word “may” in said paragraph
of a bill drawn payable elsewhere than at the place of business or the indicates merely a permission to adopt either one of the two alternative methods
residence of the drawee has no time, with the exercise of reasonable of presentment stated—not permission to omit it altogether.
diligence, to present the bill for acceptance before presenting it for
payment on the day that it falls due, the delay caused by presenting Campos: Unlike the presentment for payment, the law does not prescribe the
the bill for acceptance before presenting it for payment is excused and place where presentment for acceptance should be made. It would seem therefore
does not discharge the drawers and indorsers. that as long as such presentment is made to the proper person/s in accordance
with Sec. 145, it would not matter where it takes place.
Sebastian: If presentment is required it must be done within reasonable time to
protect persons secondarily liable. By delaying, you are prolonging agony of the Where the drawee is dead, presentment for acceptance to his personal
drawer. By presenting on time, you will know whether or not the drawee will representative is merely permissive, since Section 148(a) excuses presentment.
accept. Thus, the sooner that you know he declines, the earlier you can prepare
claim against parties from whom you are entitled to reimbursement. REASONABLENESS OF TIME OF PRESENTMENT
PRESENTMENT HOW MADE N.O. Behn Meyer & Co. v HSBC – In this case, the instrument was presented
for acceptance more than a month. It was held that there was unreasonable delay
Sec. 145. Presentment; how made. - Presentment for acceptance must which discharges parties secondarily liable.
be made by or on behalf of the holder at a reasonable hour, on a
business day and before the bill is overdue, to the drawee or some ACCEPTANCE OF JOINT DRAWEES
person authorized to accept or refuse acceptance on his behalf; and
(a) Where a bill is addressed to two or more drawees who are not Sebastian: If there are 2 or more drawees, presentment must be made to all of
partners, presentment must be made to them all unless one them. This is the rule when drawees are not partners. If they are partners,
has authority to accept or refuse acceptance for all, in which presentment to one is good enough.
case presentment may be made to him only;
(b) Where the drawee is dead, presentment may be made to his RULE IF DRAWEE IS DEAD
personal representative;
(c) Where the drawee has been adjudged a bankrupt or an insolvent Agbayani: Where the drawee is dead, presentment for acceptance is not
or has made an assignment for the benefit of creditors, necessary. Hence, it seems that under Section 145(b), the presentment mentioned
presentment may be made to him or to his trustee or assignee. there to be made to the personal representative of the deceased drawee is merely
optional. Presentment is excused in this case an in case the drawee has
Agbayani: Presentment for acceptance must be made: (1) before the bill is absconded, or is fictitious or a person not having capacity to contract because it
overdue, and (2) within reasonable time after acquisition thereof. would then be futile.
Generally, presentment must be made to the drawee or some person authorized Sebastian: Presentment for acceptance to a deceased drawee is not mandatory.
to accept or refuse acceptance on his behalf. Where there are two or more Presentment to personal representative cannot be construed as a mandatory
drawees, presentment must be made to both of them unless (1) one is duly requirement of law.
authorized to accept or refused acceptance, or (2) they are partners, subject to the
Presentment for Acceptance Presentment for Payment
LEX SOCIETAS 107
presentment to representative is presentment to representative is that he wants no liability, it is equally clear that he is not willing to pay. Thus,
optional madatory once the instrument is declined for non-acceptance, there is no need to present
the liabilities of parties secondarily failure to do so would discharge parties the instrument to the drawee for payment.
liable are preserved secondarily liable
DUTY OF HOLDER OF A DISHONORED BILL
RULE IF DRAWEE IS INSOLVENT
Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly
DAYS PRESENTMENT CAN BE MADE presented for acceptance and is not accepted within the prescribed
time, the person presenting it must treat the bill as dishonored by
Sec. 146. On what days presentment may be made. - A bill may be nonacceptance or he loses the right of recourse against the drawer
presented for acceptance on any day on which negotiable instruments and indorsers.
may be presented for payment under the provisions of Sections
seventy-two and eighty-five of this Act. When Saturday is not Agbayani: Where the bill is dishonored by non-acceptance, the holder must
otherwise a holiday, presentment for acceptance may be made before give notice of dishonor and protest, when required. Otherwise, the drawer and
twelve o'clock noon on that day. the indorsers will be discharged.
Agbayani: The only difference between Section 72 and 85 is that under Section Notice of Dishonor
146, there is no distinction between instruments payable at a fixed or
determinable future time and instruments payable on demand. Where Protest
presentment is for acceptance, it may be made for all kinds of bills before 12 noon
on Saturday provided that day is not a holiday. RIGHT OF RECOURSE
Sebastian: There is no difference between bill payable on demand and bill Sec. 151. Rights of holder where bill not accepted. - When a bill is
payable on future determinable time. Presentment must be done within dishonored by nonacceptance, an immediate right of recourse against
reasonable time. Otherwise, parties secondarily laible will be discharged. the drawer and indorsers accrues to the holder and no presentment
However, tardiness or delay in presentment can be excused if you did not have for payment is necessary.
sufficient time to do it.
Agbayani: When a bill is dishonored by non-acceptance, there is no necessity of
DISHONOR BY NON-ACCEPTANCE making a presentment of the bill for payment. But, of course, if after the previous
non-acceptance, the bill is subsequently accepted, presentment for payment is
Sec. 149. When dishonored by nonacceptance. - A bill is dishonored necessary. And when the bill has been accepted for honor, to charge the acceptor
by non-acceptance: for honor, presentment for payment is also necessary.
(a) When it is duly presented for acceptance and such an
acceptance as is prescribed by this Act is refused or can not be The holder, after giving notice of dishonor, and protesting when required, can
obtained; or immediately file an action against the parties secondarily liable on the bill. This is
(b) When presentment for acceptance is excused and the bill is not true even when the bill is payable at a fixed or determinable future time and the
accepted. date of maturity has not yet arrived. The holder need not wait for that day to
arrive.
Campos: When a bill is dishonored by non-acceptance there is no need to
present the instrument again for payment, and the holder acquires an
“immediate right of recourse against the persons secondarily liable,” provided of
course he gives them the notice of dishonor as prescribed by Section 89.
Sebastian: When an instrument is dishonored by non-acceptance, it is clear

that the drawee is not willing to be liable for it. If the drawee has made it clear
LEX SOCIETAS 108

Agbayani: Protest is required only for foreign bill, but not for inland bills or
PROTEST notes. However, they may also be protested if desired. Omission of protest, where
protest is required, will discharge the drawer and the indorsers.
PROTEST DEFINED
Protest is required: (1) where the foreign bill is dishonored by non-acceptance;
Agbayani: “By protest is meant a formal statement in writing made by a notary (2) where the foreign bill is dishonored by non-payment it not having been
under his seal of office at the request of the holder of a bill or note, in which it is previously dishonored by non-acceptance; (3) where the bill has been accepted
declared that the same was on a certain day presented for payment (or for honor, it must be protested for non-payment before it is presented for
acceptance as the case may be), and such payment (or acceptance) was refused, payment to the acceptor for honor; (4) where the bill contains a referee in case of
whereupon the notary protests against all parties to such instrument and declares need, it must be protested for non-payment before it is presented for payment to
that they will be held responsible for all loss or damage arising from its the referee in case of need.
dishonor.” In its popular sense, “it means all the steps or acts accompanying the
dishonor of a bill or note necessary to charge an indorser.” Protest is required: (1) for uniformity in international transactions because most
countries require it and (2) in order to furnish authentic and satisfactory
Campos: Protest is the testimony of some proper person, usually a notary and evidence of the dishonor to the drawer who, from his residence abroad, may
usually in the form of an affidavit, that the regular legal steps to fix the liability of experience difficulty in verifying the matter and may be forced to rely on the
drawer and indorsers have been taken. This is done on the day of dishonor. representations of the holder.
Sebastian: Protest is actually a notarial act; a written certificate signed by the Sebastian: Protest is necessary when (1) the foreign bill is dishonored by non-
notary public which was meant to be a statement which is made at the request of acceptance or by non-payment, or was accepted for honor but was not paid; (2)
the holder of an instrument. The protests states that a bill was presented for or there is a referee in case of need.
payment or acceptance, that it was refused. The notary protests against all
parties, and the holder reserves the right to hold all parties liable. Sec. 157. Protest both for non-acceptance and non-payment. - A bill
which has been protested for non-acceptance may be subsequently
In protest, the holder goes to notary public, shows him that the bill of exchange protested for non-payment.
was due, it was presented on that same day, and it was dishonored. Then the
notary will write a certificate of protest which states that presentment was made Agbayani: Where a bill has already been protested for non-acceptance, protest
and it was declined, and that all parties secondarily liable are put on notice. for non-payment is merely optional. Under Section 151, after the bill has been
dishonored by non-acceptance, presentment for payment is not necessary.
This is mandatory for foreign bills because protest ensures that there was
compliance with foreign laws applicable. For inland bills, protest is optional. Campos: In addition to due presentment, dishonor and due notice of dishonor,
Thus, part of due diligence is to determine whether the bill was inland or foreign formal protest of dishonored foreign bills is a condition precedent to the holder’s
to determine if protest is needed. right of recovery from secondary parties. In the absence of such protest, the
secondary parties will be discharged. The necessity of protest is confined to
NECESSITY OF PROTEST foreign bills of exchange which under Section 185 include foreign checks. It is not
necessary in foreign promissory notes because in the case of a note, the maker is
Sec. 152. In what cases protest necessary. - Where a foreign bill unconditionally liable, while in an unaccepted bill no party is liable unless there
appearing on its face to be such is dishonored by nonacceptance, it has been due notice of dishonor.
must be duly protested for nonacceptance, by nonacceptance is
dishonored and where such a bill which has not previously been HOW MADE
dishonored by nonpayment, it must be duly protested for
nonpayment. If it is not so protested, the drawer and indorsers are Sec. 153. Protest; how made. - The protest must be annexed to the bill
discharged. Where a bill does not appear on its face to be a foreign or must contain a copy thereof, and must be under the hand and seal
bill, protest thereof in case of dishonor is unnecessary. of the notary making it and must specify:
(a) The time and place of presentment;
(b) The fact that presentment was made and the manner thereof;
LEX SOCIETAS 109
(c) The cause or reason for protesting the bill;
(d) The demand made and the answer given, if any, or the fact that Agbayani: After the notary protests the instrument, he sends notice to all the
the drawee or acceptor could not be found. parties on the instrument. He can do this in several ways. He might send it to the
person who sent the paper in for collection. Then the notary public would send
Agbayani: Where the instrument is presented for payment and payment is his notice of protest for the other parties on the instrument, to the last person on
refused, the instrument may be taken by a notary public to the party and the the instrument, to the last person on the instrument, and he would say “Notices
party may state that he refuses to pay it; the notary makes a statement to that enclosed herewith to be sent to the other parties.”
effect and attaches his seal that it has been dishonored, and that he has protested
it for non-payment. The notary keeps this or he may send his sworn statement, If the holder has sent notice to all the parties he is entitled to come in and recover
one copy to one person and one to the other. This is the protest. It is not the because he has performed his contract. He has sent notice to all the parties on the
notice of protest. The protest is a solemn declaration made by the notary public instrument that he intends to recover against them.
that the paper has been dishonored.
BY WHOM MADE
Campos: In the above provision, protest means the certificate of the notary or
other person attesting to the acts constituting protest. Sec. 154. Protest, by whom made. - Protest may be made by:
(a) A notary public; or
The certificate of protest is the same as a deposition. It is admissible as evidence (b) By any respectable resident of the place where the bill is
of the facts set forth in its terms and its production does away with the necessity dishonored, in the presence of two or more credible
of proving these facts by witnesses in court. The main purpose therefore is to witnesses.
furnish to the holder legal testimony of presentment, demand and notice of
dishonor, to be used in actions against the drawer and indorsers. However, it is Campos: In making a formal protest, the notary public acts in a different
merely prima facie evidence and all facts stated therein may be disproved by capacity from that in which he acts when making acknowledgment. In the latter
competent evidence showing the statements to be false. case, the notary attests to the fact that the affiant made a statement under oath.
He is not concerned with the truth or falsity of the statement.
Evidence of Protest
Where the person making the protest is not a notary, it must be made in the
Agbayani: When suit is brought on the paper, it is absolutely necessary that presence of two witnesses.
proof be shown. So when one comes to prove his case as the holder of an
instrument, he must prove that there has been a protest of the instrument that it WHEN MADE
has been presented for payment or acceptance to the person liable and that it has
been refused. That is part of his case. And at the trial, this statement of the Sec. 155. Protest; when to be made. - When a bill is protested, such
protest by the notary is part of his case. It is the same as a deposition It can go in protest must be made on the day of its dishonor unless delay is
as evidence anywhere and will prove the case, just as the same as a deposition. excused as herein provided. When a bill has been duly noted, the
protest may be subsequently extended as of the date of the noting.
The certificate is generally accepted as evidence of the facts set forth in its terms,
and its production obviates the necessity of proof of these facts by witness in Agbayani: By the term “duly noted” is meant that the notary public jots down a
open court. The main purpose of the protest, therefore, is to furnish to the holder note on the bill, or a paper attached thereto, or in his registry book, consisting of
legal testimony of presentment, demand, and notice of dishonor, to be used in an his initials or signature and those matters required to be stated in Section 153.
action against the drawer and indorsers. The noting must be made on the day of dishonor but it may be extended into a
formal protest afterwards. The protest may even be made at the trial. Thus,
And the notary’s certificate of protest is only evidence of those facts which are suppose that a bill is dishonored on April 26, 1950. The protest need not be made
stated therein which it is the duty of the notary to note in making presentment on April 26, 1950. But it must at least be “noted.” After that is done, the formal
and demand for payment. Collateral facts noted by the certificate must be proved protest may be made on May 10, 1950.
by other evidence.
Campos: The protest must be made on the day of dishonor. The notation is for
Notice of Protest the purpose of requiring the commitment of the facts to writing while they are
LEX SOCIETAS 110
fresh in the mind of the notary. He does not have to make the formal certificate of When the acceptor is declared bankrupt, he probably would not be able to pay for
protest on the same day the instrument is protested by him, if he makes a the bill. The protest for better security is to give notice to the drawer and the
notation on the bill to show that the instrument was dishonored and on what indorsers of this fact in order to enable them to make the necessary arrangements
date. so that they will not be held liable thereon and prevent loss of re-exchange.
Sebastian: If protest is delayed, it is possible that it will be excused if it can be Campos: Nothing in the section indicates that failure to protest for better
premised on circumstances beyond the control of the holder. Thus, protest does security would deprive the holder of any rights; neither does it indicate that the
not amount to actual dishonor. holder acquires any additional rights. The purpose of the section must therefore
be merely to inform the drawer of the failure of the acceptor to enable the former
WHERE MADE to arrange for the payment of the bill at maturity, as for example, for its
acceptance for honor.
Sec. 156. Protest; where made. - A bill must be protested at the place
where it is dishonored, except that when a bill drawn payable at the Sebastian: If acceptor is declared insolvent without having the instrument
place of business or residence of some person other than the drawee presented to him, the holder can immediately protest the bill based on the
has been dishonored by nonacceptance, it must be protested for non- insolvency of the acceptor. Protest will be given to persons secondarily liable.
payment at the place where it is expressed to be payable, and no This is called “protest for better security”.
further presentment for payment to, or demand on, the drawee is
necessary. WHEN PROTEST IS DISPENSED
Agbayani: Generally, the protest must be made at the place where the Sec. 159. When protest dispensed with. - Protest is dispensed with by
instrument is dishonored. The exception is where the bill is payable at a place any circumstances which would dispense with notice of dishonor.
other than the residence of the drawee. Delay in noting or protesting is excused when delay is caused by
circumstances beyond the control of the holder and not imputable to
Sebastian: Protest is made in the place where the bill was dishonored. But if the his default, misconduct, or negligence. When the cause of delay
bill is payable at the place which is not the place or residence of the drawee, then ceases to operate, the bill must be noted or protested with reasonable
make the protest at the place where it is payable. diligence.
PROTEST FOR BETTER SECURITY Campos: The excuses for delay in making protest and the circumstances which
dispense with it are the same as those in notice of dishonor. It is also believed
Sec. 158. Protest before maturity where acceptor insolvent. - Where that Section 159 incorporates not only Section 122 but also, by implication,
the acceptor has been adjudged a bankrupt or an insolvent or has Sections 114 and 115 which set forth the circumstances when notice is not
made an assignment for the benefit of creditors before the bill necessary to charge the drawer and indorser.
matures, the holder may cause the bill to be protested for better
security against the drawer and indorsers. LOST OR DESTROYED BILLS
Agbayani: One made by the holder against the drawer and indorsers where the Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or
acceptor has been adjudged a bankrupt or an insolvent or has made an destroyed or is wrongly detained from the person entitled to hold it,
assignment for the benefit of creditors before the bill matures. Such a protest is protest may be made on a copy or written particulars thereof.
not necessary to charge the drawer and the indorsers. It is optional on the part of
the holder. Agbayani: Loss or destruction of the bill does not excuse the making of protest.
A protest for better security must be made: (1) after acceptance; (2) but before the Campos: This provision is in consonance with the general principle that the loss
date of maturity; (3) when the acceptor has been adjudged bankrupt or insolvent of an instrument does not affect the rights and liabilities of parties thereto, and
or has made an assignment for the benefit of creditors. the contents of the instrument may be proven as in other cases of lost documents.
LEX SOCIETAS 111

Sebastian: The burden of evidence is on the part of holder to prove existence of
the instrument and the right to collect based on the instrument. ACCEPTANCE FOR HONOR
Campos: Acceptance for honor is proper only after a bill has been protested for
dishonor by non-acceptance or for better security. It is made to save the credit of
some party or parties to an instrument. If the name of a referee in case of need is
inserted in the bill, the holder may resort to him in case of dishonor, and his
acceptance would be an acceptance for honor.
The general effect of an acceptance for honor is to make the acceptor liable on the
bill to the holder and all parties subsequent to the party for whose honor he
accepted. However, his liability is not absolute but merely conditioned on the
drawee’s failure to pay upon presentment at maturity, after which a protest must
be made and a notice of dishonor be given to the acceptor for honor.
Another effect of an acceptance for honor is that the holder’s rights against
secondary parties are postponed until the following conditions take place:
1) Presentment for payment to the drawee
2) Dishonor by such drawee
3) Dishonor to the acceptor for honor and secondary parties
4) Protest
5) Presentment to the acceptor for honor
6) Dishonor by him
7) Notice of dishonor to the secondary parties
The acceptor for honor, should he suffer damages due to his acceptance, has a
right of recourse against the party for whose honor he accepted and all parties
against whom the latter would have recourse.
Sebastian: Acceptance for honor is made to save the credit of a particular party
on a particular instrument. The risk of non-payment is greatly diminished
because a new party comes in who is presenting to pay the instrument.
ACCEPTANCE FOR HONOR DEFINED
Sec. 161. When bill may be accepted for honor. - When a bill of
exchange has been protested for dishonor by non-acceptance or
protested for better security and is not overdue, any person not being
a party already liable thereon may, with the consent of the holder,
intervene and accept the bill supra protest for the honor of any party
liable thereon or for the honor of the person for whose account the
bill is drawn. The acceptance for honor may be for part only of the
sum for which the bill is drawn; and where there has been an
acceptance for honor for one party, there may be a further acceptance
by a different person for the honor of another party.
LEX SOCIETAS 112

Agbayani: An acceptance of a bill made by a stranger to it before maturity,
where the drawee of the bill has refused to accept it, and the bill has been Agbayani: It is essential that the acceptor for honor appear before a notary
protested for non-acceptance, or where the bill has been protested for better public and declare that he accepts the protested bill in honor of the drawer or
security. Such an acceptance is also called acceptance “supra protest.” This is a indorser, as the case may be, and that he will pay it at the appointed time. An
peculiar kind of acceptance. It most frequently happens when the original drawee acceptance for honor then, is properly made by the acceptor appearing before a
refuses to accept the bill, in which case a stranger may accept the bill for the notary public and declaring his intention to accept for the honor of some one or
honor of some one of the parties thereto, which acceptance will insure the benefit more of the parties and subscribing to some such expression of his intention as
of all the parties subsequent to him for whose honor it was accepted. “accepted for the honor of A”
An acceptance for honor is done “to save the credit of the parties to the Sebastian: An acceptance for honor is made by executing a written instrument
instrument or some party to it, as the drawer, drawee, or indorser, or somebody saying that the acceptor is accepting for honor and for the benefit of a party to the
else. Someone desires to save the credit of another on the bill and he does so by instrument. Failure to to identify in whose honor, the acceptance is deemed for
writing “accepted” on the bill. The court holds that consideration is presumed the honor of the drawer. It must be signed. Lastly, it must declare that the protest
and the presumption is that he does have funds or money of the party for whose bill is accepted.
honor he accepts.
Payment by the acceptor for honor does not discharge the instrument. Until the
Requisites drawer reimburses the acceptor for honor, the instrument still subsists. Unless
the acceptor for honor discharges the instrument himself.
Agbayani: The following are the four requisites established by law in order that
an acceptance for honor may be validly made: There can even be several acceptors for honor for one person.
1) The bill must have been previously protested (a) for non-acceptance or (b) for
better security. Requisites
2) The bill is not overdue at the time of the acceptance for honor.
3) The acceptor for honor must be a stranger to the bill. If he is a party, his Agbayani: Like an ordinary acceptance, acceptance for honor must be:
acceptance for honor would not give any additional security to the holder, as 1) In writing and indicate that it is an acceptance for honor and
such a party is already liable thereon. 2) Signed by the person making the acceptance.
4) The holder must give his consent.
FOR WHOSE BENEFIT
Sebastian: Acceptane for honor is made only if the instrument has been
dishonored by non-acceptance. If the instrument is a foreign bill, dishonor by the Sec. 163. When deemed to be an acceptance for honor of the drawer. -
drawee must have been protested. It must be made before the bill becomes Where an acceptance for honor does not expressly state for whose
overdue. If it is already overdue, payment for honor is the only way to save the honor it is made, it is deemed to be an acceptance for the honor of the
credit of the drawee. drawer.
For there to be accepatance for honor, the acceptor for honor must be a total Sebastian: Acceptance for honor is made for the the person it was made and all
stranger to the instrument. Meaning he must have no liability on the instrument. subsequent parties.
An acceptor for honor is a new party that is being made liable on the instrument.
LIABILITY OF ACCEPTOR
Valuable consideration is presumed Otherwise, the transaction will be considered
a donation. Sec. 164. Liability of the acceptor for honor. - The acceptor for honor
is liable to the holder and to all parties to the bill subsequent to the
HOW MADE party for whose honor he has accepted.
Sec. 162. Acceptance for honor; how made. - An acceptance for honor Acceptor does not have to accept FULL responsibility.
supra protest must be in writing and indicate that it is an acceptance  At the end of the day, the acceptor is not the one with the utang.
for honor and must be signed by the acceptor for honor.
LEX SOCIETAS 113
WARRANTIES OF ACCEPTOR FOR HONOR or referee.
Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, PRESENTMENT FOR PAYMENT HOW MADE
by such acceptance, engages that he will, on due presentment, pay the
bill according to the terms of his acceptance provided it shall not have Sec. 168. Presentment for payment to acceptor for honor, how made.
been paid by the drawee and provided also that is shall have been duly - Presentment for payment to the acceptor for honor must be made as
presented for payment and protested for non-payment and notice of follows:
dishonor given to him. (a) If it is to be presented in the place where the protest for non-
payment was made, it must be presented not later than the
Agbayani: The liability of an acceptor for honor is secondary, not primary or day following its maturity.
absolute. He agrees to pay if: (1) presentment for payment has been made; (2) the (b) If it is to be presented in some other place than the place where
drawee does not pay; (3) the bill is protested for non-payment; and (4) notice of it was protested, then it must be forwarded within the time
dishonor is given to him. specified in Section one hundred and four.
Sebastian: Sebastian: Presentment must be made the day following the maturity date. It
must be noted that presentment to acceptor for honor is presentment for
Section 165 Section 60 payment.
According to the tenor of his According to the tenor of his
acceptance, provided: acceptance. DELAY IN PRESENTMENT
1) it shall not have been paid by the
drawee Sec. 169. When delay in making presentment is excused. - The
2) it shall have been duly presented for provisions of Section eighty-one apply where there is delay in making
payment and protested for non- presentment to the acceptor for honor or referee in case of need.
payment
3) Notice of dishonor given to him. DISHONOR OF THE BILL
Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is
PROTEST REQUIRED dishonored by the acceptor for honor, it must be protested for non-
payment by him.
Sec. 166. Maturity of bill payable after sight; accepted for honor. -
Where a bill payable after sight is accepted for honor, its maturity is Agbayani: The holder must protest for non-payment by the acceptor for honor
calculated from the date of the noting for non-acceptance and not in order to fix the liabilities of the indorsers.
from the date of the acceptance for honor.
Sebastian: Noting here means in preparation of protest. This section

presupposes that the bill is foreign.
Sec. 167. Protest of bill accepted for honor, and so forth. - Where a
dishonored bill has been accepted for honor supra protest or contains
a referee in case of need, it must be protested for non-payment before
it is presented for payment to the acceptor for honor or referee in
case of need.
Sebastian: Try to collect first before going after acceptor for honor. Also,
protest for non-payment must first be made before going after acceptor for honor
LEX SOCIETAS 114

Sebastian: For there to be payment for honor, there must be intent to discharge
PAYMENT FOR HONOR the insturmement and it is made at maturity. Also, it must identify the party for
whose account you are making payment.
Agbayani: Instead of simple negotiation to the person desiring to pay, payment
for honor may be availed of when the holder does not want to indorse the bill and Reasonable period of time to notify person for whose honor you are paying.
thereby incur the liabilities of an indorser or of one negotiating by mere delivery. Otherwise, payment will only be considered a voluntary payment thus giving the
payor right to be reimbursed.
Campos: Under Sections 171 to 177, only a bill which has been protested can be
paid for honor and in order not to operate as a mere voluntary payment, it has to PROCEDURE FOR PAYMENT FOR HONOR
be made before a notary after a declaration by the payor of his intention to pay
for honor and for whose honor he pays. Sec. 172. Payment for honor; how made. - The payment for honor
supra protest, in order to operate as such and not as a mere voluntary
A payment for honor is not confined to an acceptor for honor but may be made by payment, must be attested by a notarial act of honor which may be
anyone as long as the requisites are complied with. The effect of a payment for appended to the protest or form an extension to it.
honor is to discharge all parties subsequent to the party for whose honor it was
paid. Therefore, the holder who refuses such payment loses his right of recourse Sec. 173. Declaration before payment for honor. - The notarial act of
against any party who would have been discharged by such payment. The payor honor must be founded on a declaration made by the payer for honor
for honor is subrogated to all the rights and duties of the holder as regards the or by his agent in that behalf declaring his intention to pay the bill for
party for whose honor he pays and all parties liable to the latter. honor and for whose honor he pays.
The purpose therefore of a payment for honor is to free some party to the bill Sec. 174. Preference of parties offering to pay for honor. - Where two
from the obligation to make immediate payment on maturity. The holder gets or more persons offer to pay a bill for the honor of different parties,
satisfaction, but the party for whom payment is made is not discharged and the person whose payment will discharge most parties to the bill is to
remains liable to the payor for honor. be given the preference.
Sebastian: Payment for honor will only make payment only when the party Sec. 175. Effect on subsequent parties where bill is paid for honor. -
being protected is summoned to pay the instrument. Where a bill has been paid for honor, all parties subsequent to the
party for whose honor it is paid are discharged but the payer for
REQUISITES honor is subrogated for, and succeeds to, both the rights and duties of
the holder as regards the party for whose honor he pays and all
Sec. 171. Who may make payment for honor. - Where a bill has been parties liable to the latter.
protested for non-payment, any person may intervene and pay it
supra protest for the honor of any person liable thereon or for the Agbayani: The following is the procedure in making payment for honor:
honor of the person for whose account it was drawn. 1) The payer or his agent goes to a notary public and declares his intention
to pay the bill and for whose honor he pays.
Agbayani: The following are the requisites established by law in order that a 2) The notary then records the declaration in the protest or in a separate
payment for honor may validly be made: (1) the bill has been protested for non- paper attached to it.
payment; and (2) any person, even a party thereto may pay supra protest. This is 3) The payor then notifies the person for whose honor he pays within
distinguished from acceptance for honor in which the acceptor must be a stranger reasonable time
to the bill.
If these formalities are not followed, the payment will operate as a mere
(1) The payment must be attested by notarial act appended to the protest, or form voluntary payment and the payor acquires only the rights stated in Articles 1236
an extension to it; and (2) the notarial act must be based on a declaration by the to 1237 of the NCC and not those stated in Section 175.
payer for honor.
Sebastian: Before payment for honor the bill must have been protested (if
inland bill, notice of dishonor is enough).
LEX SOCIETAS 115
HOLDER REFUSES PAYMENT BILLS IN SET
Sec. 176. Where holder refuses to receive payment supra protest. - Campos: The reason for drawing bills in a set was to obviate the difficulties
Where the holder of a bill refuses to receive payment supra protest, which would arise in case of miscarriage of the bill, since the means of
he loses his right of recourse against any party who would have been communication and transportation then were irregular and not very dependable.
discharged by such payment. It was thought that if drawn in set and each part sent by different means, chances
that one of the set would reach the payee or its destination would be greater. The
Sebastian: If the payee refused to be paid, all parties who would have benefited use of such bills in sets must have diminished since because of the facility and
from the payment will be discharged. As compared to the rule under the Civil regularity of our modern means of communication.
Code, refusal of the creditor to accept payment will not discharge all parties
liable. All rules applicable to bills of exchange generally are applicable to bills issued in
sets. But there are special rules rendered necessary because of the nature of bills
RIGHTS OF PAYOR FOR HONOR so issued. Problems arise at a point where a party transfers two or more parts of
the same bill to different persons.
Sec. 177. Rights of payer for honor. - The payer for honor, on paying
to the holder the amount of the bill and the notarial expenses DEFINITION
incidental to its dishonor, is entitled to receive both the bill itself and
the protest. Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a
set, each part of the set being numbered and containing a reference to
Agbayani: (1) He acquires the rights of the holder under Section 175, and in the other parts, the whole of the parts constitutes one bill.
addition, (2) the payer for honor has also the right to receive both the bill and the
protest. This is to enable him to enforce his rights against those who are liable to Agbayani: One composed of various part, each part being numbered, and
him under Section 175. containing a reference to the other parts, all of which parts constitute but one bill.
Sebastian: When someone makes payment for honor, that person is entitled to Bills in set are for the purpose of increasing the probability of the bill reaching its
reimbursement. destination. For this reason, each part is sent by different conveyances.
RIGHTS OF HOLDER
Sec. 179. Right of holders where different parts are negotiated. -

Where two or more parts of a set are negotiated to different holders
in due course, the holder whose title first accrues is, as between such
holders, the true owner of the bill. But nothing in this section affects
the right of a person who, in due course, accepts or pays the parts first
presented to him.
LIABILITY OF HOLDER WHO INDORSES TO DIFFERENT PERSONS
Sec. 180. Liability of holder who indorses two or more parts of a set
to different persons. - Where the holder of a set indorses two or more
parts to different persons he is liable on every such part, and every
indorser subsequent to him is liable on the part he has himself
indorsed, as if such parts were separate bills.
ACCEPTANCE OF BILLS IN SET

LEX SOCIETAS 116
Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be PROMISSORY NOTES AND CHECKS
written on any part and it must be written on one part only. If the
drawee accepts more than one part and such accepted parts PROMISSORY NOTE DEFINED
negotiated to different holders in due course, he is liable on every
such part as if it were a separate bill. Sec. 184. Promissory note, defined. - A negotiable promissory note
within the meaning of this Act is an unconditional promise in writing
PAYMENT BY ACCEPTOR 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
Sec. 182. Payment by acceptor of bills drawn in sets. - When the money to order or to bearer. Where a note is drawn to the maker's
acceptor of a bill drawn in a set pays it without requiring the part own order, it is not complete until indorsed by him.
bearing his acceptance to be delivered up to him, and the part at
maturity is outstanding in the hands of a holder in due course, he is Sebastian: Section 184 is nothing but a definition.
liable to the holder thereon.
You can make a promissory note payable to yourself. If the note was a non-
DISCHARGE OF BILL negotiable instrument, it would be a complete nullity because you cannot have a
contract with one party.
Sec. 183. Effect of discharging one of a set. - Except as herein
otherwise provided, where any one part of a bill drawn in a set is TYPES OF PROMISSORY NOTES
discharged by payment or otherwise, the whole bill is discharged.
Agbayani: The following are special types of promissory notes: (1) certificate of
Agbayani: Subject to the exceptions in Sections 180, 181, and 182, if one part is deposit; (2) bonds (3) bank notes; and (4) due bills.
discharged, the whole bill is discharged. The reason is that the bill constitutes
only one bill. A promise, under seal, to pay money. But since all bonds of a single issue are
grouped together under a supplemental agreement known as trust indenture or
bond indenture, bonds may be defined as a series of instruments representing
units of indebtedness regarded as parts of one entire debt. The bond certifies that
the issuing company is indebted to the bondholder for the amount specified on
the face of the bond, and contains an agreement of the company to pay the sum at
a specified time in the future, and meanwhile, to pay a specified interest on the
principal amount at regular intervals, generally six months apart. Bonds are
negotiable if they conform with the Negotiable Instruments Law, particularly
Section 1 thereof.
Bonds are evidences of indebtedness of the issuer and are usually sold to raise
capital. They are really elaborate promissory notes. The following are distinctions
between an ordinary promissory note and a bond: (1) a bond is more formal in
character than the ordinary promissory note; (2) a bond runs for a longer period
of time than an ordinary promissory note; and (3) a bond is issued under
different legal circumstances.
There are various method of classifying bonds. The most important seems to be
according to the security of the bond, as it is in this that bonds differ
fundamentally among themselves. Based on the bond security, some of the
important classes of bonds are: (1) mortgage bonds; (2) equipment bonds; (3)
collateral trust bonds; (4) guaranteed bonds; (5) debentures; (6) income bonds.
LEX SOCIETAS 117
In addition, it may be stated that like shares, bonds may also be (7) convertible; income return, and are convertible at the owner’s request and under clearly
(8) redeemable; (9) registered bonds, and (10) coupon bonds. specified conditions into some less secure, more speculative form of security,
carrying a possibility of an increased income return. Accordingly, bonds are made
Mortgage bond – Those that are secured by a mortgage constituted on corporate convertible into preferred and common stocks, secured bonds into debenture
physical property. The property is conveyed to a trustee for the benefit of the bonds and stocks, preferred stocks into common stocks.
bondholders in case the interest or principal is defaulted.
Redeemable bonds – Those that give the privilege to the issuing corporation to
Equipment bond – Those that are secured by a mortgage or pledge of corporate pay off the bonds even before the date of maturity. Without a provision for
movable equipment, such as, in the case of railroads, their rolling stock. This is a redemption, the debtor corporation would have no right to pay off the bonds and
form of special lien bonds employed for the most part by railroads in order to get rid of the restrictions of the mortgage or indenture before the bonds fell due.
obtain money at low rates by pledging their movable equipment.
Registered bonds – Those which are issued to a specified person named therein
Collateral trust bonds – Those that are not secured by lien on physical property of and the fact of issuance to him is registered in the books of the issuing
the corporation but by a lien on securities deposited with a trustee as collateral. corporation. They are payable only to the person whose name is thus registered
Such securities may consist of shares or bonds issued by the subsidiaries of the and transferred only on presentation at the obligor’s office with a written
corporation issuing the collateral trust bonds. It may also consist of bonds of assignment duly executed by the registered owner. They are therefore generally
small operating company which the issuing holding corporation controls. Finally, not negotiable.
it may consist of shares or binds of any corporation issuing the collateral trust
bond. Coupon bonds – Those to which are attached a sheet of dated, numbered and
similarly printed coupons which the bondholder may cut off when due or
Guaranteed bonds – One that is secured by the guaranty of a corporation other thereafter. Such coupons may be served and deposited in a bank, negotiated
than the one issuing it. It implies therefore, a double obligation, that of the before the maturity of the interest they represent, and transferred just like any
issuing corporation and that of the guaranteeing corporation. commercial paper. They are negotiable promissory notes if they conform to the
requirements of the Negotiable Instruments Law.
Debentures – Those that are not secured by any specific mortgage, lien or pledge
on specific corporate property but by general credit of the corporation and Bank notes are the promissory notes of the issuing bank payable to bearer on
restrictive agreement. They are usually issued under a trust indenture and for a demand and intended to circulate as money. They are regarded as cash ansd pass
shorter term than mortgage bonds. The disadvantage of debenture bonds is that from hand to hand without any evidence of title in the holder than that which
they rest on the general credit of the corporation rather than on the security of arises from possession. However, they are not money.
specific corporate assets. Frequently they are protected by “negative pledge”
clauses which are agreements against new mortgages on the corporate assets or A due bill is an instrument whereby one person acknowledges his indebtedness to
those of subsidiary companies which do not equally secure the debenture. another.
Income bonds – One the principal of which may or may not be secured by a It is a device of clearing house associations to save inconvenience and labor
mortgage but the interest is payable only out of the net profit. The interest is incident to the setting of balances between the members of the association. The
payable only out of net profit. The interest on income bonds which is payable out certificates of due bills are issued, instead of the actual payment of money, by one
of earnings only, may be cumulative or non-cumulative. It is thus seen that the member of the association to another. They are not merely certificates of deposit
position of the holder of an income bond resembles that of the holder of preferred creating a contract of bailment but are as negotiable as checks payable to bearer,
shares, and that income bonds are the weakest of all obligations resting on or as promissory notes payable to order or bearer. Another term used is clearing
general credit. house certificate.
Convertible bonds – One which confers on the holder the option of exchanging it CHECK DEFINED
for a more speculative class of security, such as, for preferred shares or common
shares. The convertible bond and the convertible share are classed together as Sec. 185. Check, defined. - A check is a bill of exchange drawn on a
“convertible securities.” Generally speaking, convertible securities are issued in a bank payable on demand. Except as herein otherwise provided, the
more secure and less speculative form, a form of security with a fixed or limited provisions of this Act applicable to a bill of exchange payable on
LEX SOCIETAS 118
demand apply to a check. The whole theory and use of a check points to its immediate payability. A
depositor places money with his bank or banker, where it is subject at any time to
Agbayani: Subject to the exceptions in Sections 180, 181, and 182, if one part is his order; and by his check or order, he desires to appropriate so much of it to
discharged, the whole bill is discharged. The reason is that the bill constitutes another person, and the bank or banker, in consideration of its temporary use of
only one bill. the money, agrees to pay it in whole, or in parcels, to the depositor’s order when
demanded. But he does not agree to contract to pay at a future day by acceptance
Unlike a promissory note, a check is note a mere undertaking to pay an amount and the depositor cannot require it. Although under Section 185, a check is a bill
of money. It is an order addressed to a bank and partakes of a representation that of exchange payable on demand, it is intended for immediate use and not to
the drawer has funds on deposit against which the check is drawn, sufficient to circulate as promissory note. Therefore, the transfer of a check to successive
ensure payment upon its presentation to the bank. There is therefore an element holders, where it is drawn and delivered in the place where the drawee bank is
of certainty or assurance that the instrument will be paid upon presentation. For located, does not extend the time for presentment. If the check is delivered on
this reason, checks have become widely accepted as a medium of payment in one day and is not presented before the close of banking hours the next business
trade and commerce. Although not legal tender, checks have come to be day, the drawer is discharged to the extent of any loss suffered from the failure to
perceived as convenient substitutes for currency in commercial and financial present.
transactions. The basis or foundation of such perception is confidence. If such
confidence is shaken, the usefulness of checks as currency substitutes would be Test for reasonable time: Did the payee employ such diligence as a prudent man
greatly diminished or may become nil. Any practice therefore tending to destroy exercises in his own affair?
that confidence should be deterred, for the proliferation of worthless checks can
only create havoc in trade circles and the banking community. Check Section 81 of the Negotiable Instruments Law provides that delay in
making presentment for payment is excused when the delay is caused by
Campos: A check is an instrument which is in the form and nature of a bill of circumstances beyond the control of the holder, and not imputable to his default,
exchange, but unlike an ordinary bill it is always payable on demand and always misconduct, or negligence.
drawn on a bank. If it is not drawn on a bank or is not payable on demand, it is
not a check. A depositor places money in his bank under an agreement that it PRESENTMENT FOR PAYMENT
may be withdrawn anytime by his order. The order is evidenced by the check
which he draws and by which he expresses his desire to appropriate s much of his Delay in Presentment
money in the bank to the payee named therein. If negotiable in form, then a
check is a negotiable instrument subject to the same rules as the latter. Agbayani: A stale check is not presented for payment within a reasonable time
after its issue.
TYPES OF CHECKS Under the law, when a check is not presented for payment within a reasonable
time after its issue, the drawer is discharged but only to the extent of the loss
The following are special types of checks: (1) cashier’s check; (2) manager’s caused by the delay. Hence, if no loss or injury is shown, the drawer is not
check; (3) memorandum checks; (4) certified checks; (5) crossed checks. discharged. The only injury which would be sustained by the drawer in case of
presentment was not made within a reasonable time would be caused by the
Republic v PNB – A cashier’s or manager’s check is a primary obligation of the failure of the bank subsequent to the delivery and prior to the presentement of
bank which issues it and constitutes its written promise to pay upon demand. the check.
CROSS CHECKS AND ITS IMPLICATIONS If a bank or banker still remains in good credit and is able to pay the check, the
drawer will still remain liable to pay the same, notwithstanding many months
Sec. 186. Within what time a check must be presented. - A check must may have elapsed since the date of the check and before the presentment for
be presented for payment within a reasonable time after its issue or payment and notice of dishonor. So, if the drawer, at the date of the check or at
the drawer will be discharged from liability thereon to the extent of the time of the presentment of it for payment, had no funds in the bank or
the loss caused by the delay. banker’s hands, or if, after drawing the check and before its presentment for
payment and dishonor, he had withdrawn his funds, the drawer would remain
Agbayani: A check must be presented within a reasonable time after its issue. liable to pay the check, notwithstanding the lapse of time.
LEX SOCIETAS 119
funds of the drawer in the hands of the drawee bank, and (3) if obtained by the
Of course, where the check is dishonored by non-payment and the drawer is not holder, it discharges persons secondarily liable.
given notice of dishonor, the drawer is totally discharged from liability on the
instrument. But the drawer may be held liable by the payee on the basis of the Certification is equivalent to acceptance in that the drawee bank is bound on the
original consideration between him and said payee. instrument upon certification. And it is immaterial to such liability in favor of a
holder in due course whether the drawer had funds or not in the bank or the
The maturity of the check for purpose of presentment for payment and of drawer was indebted to the bank for more than the amount of the check. Thus, a
dishonor in order to bind parties to it, is not identical with the maturity which certifying bank has all the liabilities stated in Section 62.
will charge subsequent holders with notice of defect of title or infirmities in the
instrument. In applying the rule, the courts are disposed to be governed rather by By the law merchant, the certificate of the bank of a check is equivalent to
the circumstances under which the plaintiff received the check than by the acceptance. It implies that the check is drawn upon sufficient funds in the hands
precise age of the instrument—that is good or bad faith exercised the prime of the drawee, that they have been set apart for its satisfaction, and that they shall
consideration. The result is that the plaintiff has been treated as a holder in due be so applied whenever the check is presented for payment. It is an
course of checks transferred several months after issue. understanding that the check is good then, and shall continue good, and this
agreement is binding on the bank as its notes on circulation, a certificate of
Delay in the presentment of a check for payment will discharged the indorsers deposit payable to the order of the depositor, or any other obligation it can
thereon, whether or not he is injured by the delay as the law presume that he is assume. The object of certifying a check, as regards both parties, is to enable the
prejudiced. The bases of this statement are Section 84 and 186 of the Negotiable holder to use it as money. The transferee takes it with same readiness and sense
Instruments Law. It was further held that Section 143 and 144 of the Negotiable of security that he would take the notes of the bank. It is advisable to perform its
Instruments Law are not applicable to checks because these provisions have to do important function until, in the course of business, it goes back to the bank for
with the presentment for acceptance of ordinary bills of exchange. redemption and is extinguished by payment. It cannot be doubted that the
certifying bank intended these consequences and it is liable accordingly. To hold
CERTIFICATION OF CHECKS otherwise would render these important securities only a snare and a delusion. A
bank incurs no greater risk in certifying a check and in giving a certificate of
Sec. 187. Certification of check; effect of. - Where a check is certified deposit. In well-regulated banks, the practice is at once to charge the check to the
by the bank on which it is drawn, the certification is equivalent to an account of the drawer, to credit it in a certified check account, and, when the
acceptance. check is paid, to debit that account with the amount. Nothing can be simpler or
safer than this process.
Agbayani: A certification is an agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future time when presented for The bank virtually says, that check is good, we have the money of the drawer here
payment. But a bank is not obligated to the depositor to certify checks. And the ready to pay it. We will pay it now if you will receive it. The holder says “No, I will
drawee is not liable to the holder for refusal of the bank to certify checks. The not take the money; you may certify the check and retain the money for me until
refusal of a bank does not dispense with the requirement of presentment for this check is presented.
payment since a check is of right presentable only for payment at the bank on
which it is drawn. The certification of a check is a means in constant and extensive use in the
business of banking and its effects and consequences are regulated by the law
No particular form is required but it must be in writing. A telegram sent by a merchant. Checks drawn upon banks or bankers, thus marked and certified, enter
bank that it would pay a certain check has been held to be a certification. largely into the commercial and financial transactions of the country; they pass
Stamping of the word “certified,” or “good” with the date of certification and the from hand to hand, in the payment of debts, the purchase of property, and in the
signature of the officer of the bank authorized to certify checks, has been held as transfer of balances form one house and one bank to another. In the great
sufficient certification. But the letters “O.K.” with the initials of the cashier of the commercial center, they make up no inconsiderable portion of the circulation and
bank do not constitute a sufficient certification under modern banking practice. thus performed as useful, valuable, and an almost indispensible office.
Certification (1) is equivalent to acceptance and is the operative act that makes To impart strength and credit to the paper by obtaining an acknowledgement
the drawee bank liable. Furthermore, (2) it operates as an assignment of the from the certifying bank that the drawer has funds therein sufficient to cover the
check and securing the engagement of the bank that the check will be paid upon
LEX SOCIETAS 120
presentation. A certified check has a distinctive character as a species of
commercial paper and performs important functions in banking and commercial Where the certification is not obtained by the holder but by others such as the
business. When a check is certified, it ceases to possess the character, or to drawer and indorsers, they are not discharged. Thus, in the following cases, the
perform the functions, of a check, and represents so much money on deposit, drawers and indorsers are not discharged:
payable to the holder on demand. The check becomes a basis of credit—an easy 1) Where the certification is obtained by the drawer, even when the drawer
mode of passing money from hand to hand and answers the purposes of money. procures the certification at the instance of the payee
2) Where the certification is obtained by a person who is neither holder nor
The drawer of a check contracts that it will be paid on presentment but not that it drawer.
will be certified. This is the theory on which the law discharging the drawer and
indorsers upon certification is based. Accordingly, certification differs from LIABILITY OF DRAWEE BANK
acceptance in that the refusal of the drawee bank to certify does not amount of a
dishonor of the check. There is therefore no necessity of notice of dishonor by Sec. 189. When check operates as an assignment. - A check of itself
non-acceptance or non-certification, and it is still necessary to make presentment does not operate as an assignment of any part of the funds to the
for payment which is not necessary in the case of a non-acceptance. credit of the drawer with the bank, and the bank is not liable to the
holder unless and until it accepts or certifies the check.
Acceptance and payment—are entirely different. If the drawee accepts the paper
after seeing it, and then permits it to go into circulation as genuine, on all the Agbayani: When the holder procures the check to be certified “the check
principles of estoppel, he ought to be prevented from setting up forgery to defeat operates as assignment of a part of the funds to the credit of the drawer bank.
liability to one who has taken the paper on the faith of the acceptance, or
certification. On the other hand, mere payment of the paper at the termination of As stated, by the certification of a check, the funds represented by the check are
its course does not act as an estoppel. Payment is the final act which extinguish a transferred from the credit of the drawer to that of the payee or holder, and for all
bill. Acceptance is a promise to pay in the future and continues the life of the bill. intents and purposes, the payee or holder becomes the depositor of the drawee
Payment of a check do not amount to an acceptance so as to make the bank liable bank with rights of one is such relation. But where the certification states the
to the payee. check is to be void if not presented in 90 days from the date of acceptance, the
transfer of the corresponding funds from the credit of the depositor to that of the
Panlilio v David – The letters “O.K.” with the initials of the cashier of a bank payee is co-extensive with the life of the check, which in this case is 90 days. If
written upon the face of a check drawn on that bank is not under modern banking the check is not presented for payment within the period, it becomes invalid and
practice. Certifications of check are not made in such manner. the funds are automatically restored to the credit of the drawer though not as a
current deposit but as a special deposit.
OBJECTIVE AND EFFECTS OF CERTIFICATION
A check of itself is not an assignment of the funds of the drawer in the bank. A
Sec. 188. Effect where the holder of check procures it to be certified. - check drawn upon the bank in the usual form, not accepted or certified by its
Where the holder of a check procures it to be accepted or certified, cashier to be good, does not constitute a transfer of any money to the credit of the
the drawer and all indorsers are discharged from liability thereon. holder.
Agbayani: When the certification is obtained by the holder, the drawer and the Before acceptance or certification, the bank is not liable and the holder has no
indorsers are discharged. The certification has the same effect as if the holder had right to sue the drawee bank on the check. Without acceptance or certification, as
drawn the money re-deposited it and taken a certificate of deposit for it. Only the provided by the statute, there is no privity of contract between the drawee bank
indorsers at the time of the certification are discharged. Indorsers subsequent to and the payee, or holder of the check.
the certification are not discharged. In the Philippines, the practice is to certify
only at the request of the drawer. The contract between a banker and a depositor is that of deposit. It is a separate
contract from that stated in the check that may be drawn by the depositor
The reason for the rule that a certification obtained by the holder discharges the agaisnat the depository bank. In this connection, it has been held that the relation
drawer and indorsers is that the moment the check is certified the funds cease to existing between a depositor and a bank is that of a creditor and debtor. The
be under the control of the original depositors and the pass under the control of implied contract between them being that the bank shall discharge the
the person who procures the certification of the check drawn in his favor
LEX SOCIETAS 121
indebtedness by honoring such checks as the latter may draw upon it and cannot
debit the depositor’s account with payment not made by his order or direction. Where a drawer of a check has prepared his check so negligently that it can be
easily altered without giving the instrument a suspicious appearance and
By virtue of the contract of deposit between a banker and its depositor, the alterations are afterwards made, he can blame no one but himself and in such
banker agrees to pay checks drawn by the depositor provided that the said case he cannot hold the bank liable for the consequences of his own negligence in
depositor has money in the hands of the bank. And as to a depositor who has that respect; but negligence of the depositor in drawing a check will not excuse
funds sufficient to meet payment of a check drawn by him in favor of a 3rd party, the paying bank unless it is misled by such negligent act, and, if the drawer of a
it has been held that he has a right of action against the bank for its refusal to pay check is first in fault and if his negligence contributes directly to its wrongful and
such check in the absence of notice to him that the bank has applied the funds fraudulent appropriation, he is not entitled to recover.
deposited in extinguishment of past due claims held against him. And the
depositor may maintain an action against the bank not only for a breach of When a depositor’s passbook has been written up and returned to him with
contract but also for a tort. cancelled checks which have been charged to his account, it is his duty to examine
such checks which have been charged to his account, it is his duty to examine
The drawee is not liable on a check as until accepted or certified by him, he is not such checks within a reasonable time, and if they disclose forgeries and
a party to instrument. However, on the basis of the contractual relation between alterations, to report them to the bank, and failing in which he cannot, if his
him as a drawee (depository) and the drawer (depositor), the drawee is obligated failure results in detriment to the bank, dispute the correctness of payments
to pay the persons designated by the drawer to be paid by the drawee. thereafter made by it on similar checks. This rule, however, assumes that the
Accordingly, if the drawee dishonors the check issued by the drawer, without bank itself has not been guilty of negligence in making the payment for when, by
justifiable cause, the drawee is liable to the drawer for damages. the exercise of proper care, it could have discovered the alteration or forgery, it
must bear the loss notwithstanding that the depositor failed in his duty to
But where a drawer issues a check that is dishonored by the drawee bank upon a examine the accounts.
mistake but rectifies it within 4 hours and the payee was paid in full, the drawer
is not entitled to moral damages. Temperate and moderate damages are proper As a check of itself does not operate as an assignment of the funds to the credit of
not for indemnification of loss suffered but for the vindication or recognition of a the drawer, the latter may countermand payment before its acceptance or
right violated or invaded. certification. The order to stop payment must be communicated to the bank
before the check to which it refers has been paid; and in the absence of a rule of
But a bank is under no obligation to make part payment to the amount of the the bank that stop orders must be in writing, a verbal notice is sufficient.
funds on deposit, on a check drawn by the depositor for an amount in excess of
such funds, nor has the payee of such a check any right to the actual balance on Gregorio Araneta, Inc. v Tuason de Paterno – Under banking laws and
deposit to the credit of the drawer. All of the checks presented to a bank for practice, by certification the funds represented by check were transferred from
payment in a bundle through a clearing house must be paid, or none, and, if the credit of the maker to that of the payee or holder, and, for all intents and
funds to pay all are insufficient, the payer bank may not select checks for purposes, the latter became the depositor of the drawee bank with rights and
payment, thus permitting preference. duties of one in such relation; the transfer of the corresponding funds from the
credit of the depositor to that of the payee had to be co-extensive with the life of
Where the drawee bank refuses to certify, or accept, or pay a check: the checks, which in this case was 90 days. If the checks were not presented for
1) The holder has no action against it as a check is of itself not an assignment of payment within that period, they became invalid and the funds were
the funds of the drawer in the hands of the drawee bank, and the drawee bank automatically restored to the credit of the drawer though not as a current deposit
is not liable on the check until it has accepted or certified it. but as special deposit. Where the checks were never collected and the amount
2) Neither has the holder a right of action against the drawer where the drawee against which they were drawn was not used or claimed, and since the account
bank refuses to accept or certify the check but he has a right of action against “was opened during the Japanese occupation and in Japanese currency,” the
the drawer where the drawee bank refuses to pay. checks became “obsolete as the account subject thereto is considered null and
3) And while the holder has no right of action against the drawee bank which void in accordance with Executive Order No. 49 of the President of the
refuses to pay, accept or certify a check, the drawer has a right of action Philippines.”
against the drawee bank so refusing. Such right of action, however, is not
based on the check drawn but on the original contract of deposit between - END OF REVIEWER -
them.
LEX SOCIETAS 122

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NEGOTIABLE INSTRUMENTS LAW

APPLICATION OF THE LAW Non-Negotiable Negotiable

Sec. 192. Persons primarily liable on instrument. - The person

The authority to pay is different from a direct instruction

Waiver of Debtor’s Rights Effect of Omission of Date

incomplete but delivered

RULES OF CONSTRUCTION LIABILITY OF PERSONS SIGNING AN INSTRUMENT

Sec. 23. Forged signature; effect of. - When a signature is forged or

Agbayani: By forgery is meant the counterfeit making or fraudulent alteration

Campos: Forgery is a real defense. A person whose signature to an instrument

Section 23 deals with two sets of situations:

Sebastian: Forgery is the affixing of the counterfeit signature of maker, drawer,

Theory of Double Intent Procedural Requirement in Proving Forgery

Agbayani: Parties negotiating by indorsement and delivery, or by mere delivery

Negligence of Drawer in Forgery of Indorsement Other than a Check

Agbayani: The negligence of drawers in making possible forged indorsements

Negligence of Drawer in Forgery of Indorsement of a Check

SUMMARY OF RIGHTS AND LIABILITIES IN RELATION TO FORGERY

FORGERY OF PROMISSORY NOTES FORGERY OF BILLS OF EXCHANGE

Forgery of Maker’s Signature Forgery of Payee’s Signature Forgery of Drawer’s Signature

Note Payable to Bearer Payee vs. Recipient of Payment

WHAT CONSTITUTES “VALUE” HOLDER FOR VALUE

Osorio v Montenegro vda. de Papa – NATURE OF DEFENSE

Campos: A negotiation is the transfer of a negotiable instrument made in such

Transfer is a broader term than negotiation. If an instrument is transferred

Sebastian: A transfer equivalent to negotiation is when it makes a transferee a

Under the Negotiable Instruments Law, the mode of transfer is by negotiation

DIFFERENCE FROM ASSIGNMENT

Agbayani: Assignment is the method of transferring a non-negotiable

Sebastian: An indorsee makes a restrictive indorsement to an agent or a trustee

The following are the rights of the transferee for value:

Campos: If his predecessor had legal title, the transferee of an unindorsed

But the transferee of an unindorsed instrument may become a holder by

There can be no apparent reason therefore why an unindorsed instrument should

NEGOTIATED BACK TO PRIOR PARTY

Sec. 50. When prior party may negotiate instrument. - Where an

IN GENERAL (c) That he took it in good faith and for value;

Maker must pay according to terms of the note.

LIABILITY OF AGENT OR BROKER

Sec. 69. Liability of an agent or broker. - Where a broker or other

Agbayani: This section seems to refer to instruments which are payable to

Sebastian: This section is referring to a bearer instrument. To escape personal

SUMMARY OF WARRANTIES, UNDERTAKINGS, DEFENSES BARRED AND BENEFICIARIES

PRESENTMENT OF INSTRUMENT PRESENTMENT TO PARTNERS

PRESENTMENT OF INSTRUMENT PAYABLE AT BANK PRESENTMENT TO DRAWER NOT REQUIRED

SUMMARY OF RULES ON PRESENTMENT FOR PAYMENT

Parties secondarily liable who receives notice becomes an unconditional debtor to

Agbayani: By notice of dishonor is meant bringing whether verbally or by

When an instrument is dishonored by (1) non-acceptance of a bill or (2) non-

Campos: Notice of dishonor is bringing either verbally or in writing, to the

EXCEPTIONS TO THE RULES REQUIRING NOTICE NOTICE BY AGENT

Sec. 111. Waiver of protest. - A waiver of protest, whether in the case

By the Discharge of Prior Party By Release of Principal Debtor

Agbayani: The renunciation must be express and in writing. However, if the

Agbayani: Renunciation discharges the instrument when it is:

EFFECT OF UNINTENTIONAL CANCELLATION

Sec. 123. Cancellation; unintentional; burden of proof. - A

Sec. 126. Bill of exchange, defined. - A bill of exchange is an Banker’s Acceptance

Trade Acceptance Money Orders

Sebastian: Acceptance is not required for all bills of exchange. It is only

Sec. 137. Liability of drawee returning or destroying bill. - Where a

LEX SOCIETAS 101

REQUISITES OF ACTUAL ACCEPTANCE DELIVERY OF ACCEPTANCE