OVERVIEW • Any instrument which has the requisites of
enumerated therein is negotiable and is
INTRODUCTION
• Instruments are negotiable when they
conform to all the requirements prescribed
by the Negotiable Instruments Law (NIL) -
Act 2031 enacted February 3, 1911.
Kinds of negotiable instruments
• Two main groups:
o Promissory note (Sec. 184); and
 Evidences a promise to pay
money
 E.g. normal promissory note,
certificate of deposit and the
bond
o Bill of Exchange (Sec. 126)
 An order made by one
person to another to pay
money to third person
 E.g. checks, draft
LEGISLATIVE HISTORY OF THE NIL
• Verbatim reproduction of Uniform
Negotiable Instruments Law of US (1896)
o This statute was patterned after
English Bill of Exchange Act (1882)
• Since 1911, no amendment to the NIL has
been made
APPLICABILITY OF NIL
• NIL applies only to negotiable instruments
i.e. to those instruments which conform
with the requisites laid down in Sec. 1.
NEGOTIABLE INSTRUMENTS; DEFINITIONS
Section 1
Form of negotiable instruments.
An instrument to be negotiable must conform to
the following requirements:
(a) It must be in writing and signed
by the maker or drawer;
(b) Must contain an unconditional
promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or
at a fixed or determinable future time;
(d) Must be payable to order or to
bearer; and
(e) Where the instrument is
addressed to a drawee, he must be
named or otherwise indicated therein
with reasonable certainty.
• In effect gives definition of a negotiable
instrument
governed by the NIL. All other instruments
are non-negotiable.
• Note that the fact that an instrument does
not meet the requisites will not affect its
validity. Only consequence is that it will not
be governed by the NIL but by the general
law on contracts (New Civil Code).
Functions of Negotiable Instruments
• A negotiable instrument may serve any of
the following functions:
o As a substitute for money in
payment for property or services;
o As a means of creating and
transferring credit; and
o To facilitate sale of goods
KINDS OF NEGOTIABLE INSTRUMENTS &
PARTIES
Section 126
Bill of exchange, defined.
A bill of exchange is an unconditional order in
writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer.
Section 184
Promissory note, defined.
A negotiable promissory note within the
meaning of this Act is an unconditional promise
in writing made by one person to another,
signed by the maker, engaging to pay on
demand, or at a fixed or determinable future
time, a sum certain in money to order or to
bearer. Where a note is drawn to the maker's
own order, it is not complete until indorsed by
him.
Parties and the Nature of their Liability
Parties and the nature of their liabilities
• Two parties to a promissory note:
o Maker – the promissory
o Payee – the person to whom the
promise to pay is made
• Three parties in a bill of exchange:
o Drawer – the person who gives the
order to pay in a bill of exchange
o Drawee – the addressee of the
order
o Payee – person to whom the
payment is to be made
 Note that when the payee of
an instrument transfers it to
 another by signing it at the
back, 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, by such negotiation
becomes the holder of the
instrument.
• As to nature of liabilities:
o Primary party – is the one who is
absolutely and unconditionally
required to pay the instrument
when it falls due.
 The maker is the person
primarily liable in a of the possession or control of the goods, or
promissory note
 No person is primarily liable
in a bill of exchange, until
and unless the drawee
accepts the order of the
drawer to pay. If drawee
accepts, he becomes an
acceptor who is absolutely
bound to pay on the date
specified on the bill. The
drawer of a bill of exchange
and the indorsers of either a
note or a bill are the
secondary parties.
ROLE OF NEGOTIABLE; LEGAL TENDER
Section 52, RA 7653
Legal Tender Power.
All notes and coins issued by the Bangko Sentral
shall be fully guaranteed by the Government of
the Republic of the Philippines and shall be legal
tender in the Philippines for all debts, both public
and private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins
shall be legal tender in amounts not exceeding
Fifty pesos (P50.00) for denominations of
Twenty-five centavos and above, and in amounts
not exceeding Twenty pesos (P20.00) for
denominations of Ten centavos or less.
• Does not constitute as a legal tender but
often take place of money as a means of
payment.
• A 1249 of CC states that a “delivery of
promissory notes payable to order or bills
of exchange and other mercantile
documents shall produce the effect of
payment only when they have been cashed
or when through the fault of the creditor
they have been impaired…”
• Tender of a check is sufficient to compel
redemption of foreclosed property since
such redemption is not an obligation but a
right. However, such tender is not in itself
payment that relieves the redemptioner
from his liability to pay the redemption
price.
NEGOTIABLE NON-NEGOTIABLE
INSTRUMENTS
Warehouse Receipts
Document of Title
Article 1636, CC
"Document of title to goods" includes any bill of
lading, dock warrant, "quedan," or warehouse
receipt or order for the delivery of goods, or any
other document used in the ordinary course of
business in the sale or transfer of goods, as proof
authorizing or purporting to authorize the
possessor of the document to transfer or receive,
either by endorsement or by delivery, goods
represented by such document.
Letter of Credit
Certificate of Stocks
Certificate of Deposit
• Is an instrument issued by a bank reciting a
deposit of certain sum of money, payable
either at a fixed time or on demand, to the
depositor named therein.
Other instruments:
• Bond – is an evidence of indebtedness
issued by a corporation, public or private,
payable at a definite date in the future,
usually for a long term. It is in effect a
written promise of the corporation to pay a
definite sum of money.
• Draft – is a form of bill of exchange used
mainly in transactions between persons
physically remote from each other. It is an
order made by one person (e.g. buyer of
goods) addressed to a person having in his
possession funds of such buyer, ordering
addressee to pay the purchase price to the
seller of goods.
o Where irder is made by one bank to
another bank it is referred to as a
bank draft.
NON-NEGOTIABLE; EXCEPTION
Estoppel – see Banco de Oro v Equitable Bank
 CHAPTER 2
FORMS AND INTERPRETATION
WRITTEN AND DULY SIGNED
Section 18
Liability of person signing in trade or assumed
name. - No person is liable on the instrument
whose signature does not appear thereon,
except as herein otherwise expressly provided.
But one who signs in a trade or assumed name
will be liable to the same extent as if he had
signed in his own name.
Section 19
Signature by agent; authority; how shown. - The
signature of 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 agent may be established
as in other cases of agency.
• In writing includes print and includes not
only what is written with pen or pencil, but
also what has been typed.
• Signature is binding whether it is one’s
handwriting, or printed, engraved,
lithographed or photographed, as long as it
is intended or adopted as the signature of
the signer or made with his authority.
• Signature may appear on any part of the
instrument (usually appears at lower right
hand corner)
• If signature is so placed upon an
instrument that it is not clear in what
capacity the person intended to sign, he is
deemed an indorser (Sec. 17f)
UNCONDITIONAL ORDER OR PROMISE TO PAY
Section 3
When promise is unconditional. - An unqualified
order or promise to pay is unconditional within
the meaning of this Act though coupled with:
(a) An indication of a particular fund
out of which reimbursement is to be
made or a particular account to be
debited with the amount; or
(b) A statement of the transaction
which gives rise to the instrument.
But an order or promise to pay out of a
particular fund is not unconditional.
• Mere acknowledgement of debt does not
constitute a promise. There should be an
express promise on the face of the
instrument to pay the money.
• In a bill of exchange, words which are
equivalent to an order are sufficient. Order
is a command or imperative direction. Mere
request or authority to pay does not
constitute an order. But mere use of polite
words does not deprive the instrument its
characteristics as an order.
When unconditional
• The promise or order to pay to be
unconditional must be unqualified.
o Rationale: realty increases the
ability of a negotiable instrument to
pass freely from one person to
another.
• On bills of exchange, mere indication of the
particular fund out of which reimbursement
is to be made, or an indication of a
particular account to be debited with the
amount will not render an order
unconditional.
o Reimbursement also presupposes
previous disbursement.
o Note that reimbursement and debit
refers to a separate transaction
between the drawer and the drawee
(Vasquez)
o As a rule, unless reference to the
fund clearly indicates an intention
that such fund alone should be the
source of payment, courts usually
decide in favour of negotiability.
• Recital of the transaction for which the
instrument was issued does not make the
promise or order unconditional unless:
o It appears through the recital that it
qualifies the time of payment or the
sum to be paid (Powell v Greenleaf)
• The fact that the condition appearing on
the instrument has been fulfilled will not
convert it to a negotiable one (Sec. 4)
CERTAIN SUM PAYABLE
Section 2
What constitutes certainty as to sum. - The sum
payable is a sum certain within the meaning of
this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a
provision that, upon default in payment
of any installment or of interest, the
whole shall become due; or
(d) with exchange, whether at a
fixed rate or at the current rate; or
with costs of collection or an attorney's fee, in
case payment shall not be made at maturity.
• The amount payable must be certain.
• Rationale: An instrument cannot function
properly as a substitute for money unless
 the amount for which it stands for is
specified and definite.
• An agreement to pay interest does not
render the sum uncertain.
o Exact amount thereof can be
computed without looking beyond
the instrument.
• Stipulation to pay higher rate of interest if
the note is not paid at maturity or a lower
rate if it is paid on or before maturity does
not render the instrument non-negotiable
since it is entirely without force until either
the maturity thereof or is payment before
maturity.
• Sum is certain although payable in
instalments as long as the latter are stated
i.e. the amount of each instalment and its
due date are fixed in the instrument.
• Acceleration provision based on default will
not render sum uncertain.
• An instrument expressed in a foreign
currency may contain a provision that the
same is payable in Philippine currency at a
fixed rate of exchange or at the rate
current at the time payment is made. This
provision does not affect the negotiability
of the instrument.
• A provision in an instrument or attorney’s
fees, but leaving the amount thereof blank,
amounts to a promise to pay a reasonable
sum as attorney’s fees and does not make
instrument non- negotiable. Such amount
may be fixed by the court.
Payable in money
• In order to be negotiable, an instrument
must be payable in money.
• Rationale: negotiable instruments are
intended to be substitutes for money, to
properly perform such function they must
necessarily be capable of being
transformed into money if holder so
wishes.
• Money – as used in the law – means not
only legal tender but any kind of current
money.
• An instrument which contains an order or
promise to do an act IN ADDITION to the
payment of money is NOT negotiable. (Sec.
5)
o Rationale: Retain simplicity of form
which is absolutely necessary to the
free use of negotiable instruments
in the place of money.
• But if the order or promise gives the holder
an election to require something to be
done IN LIEU of payment of money, an
instrument otherwise negotiable would not
be affected thereby.
o Should be given to PAYEE not to
MAKER or the person primarily
liable
PAYABLE TO ORDER OR TO BEARER
Section 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 or his
order. It may be drawn payable to the order of:
(a) A payee who is not maker,
drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees;
or
(f) The holder of an office for the
time being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
Section 9
When payable to bearer. - The instrument is
payable to bearer:
(a) When it is expressed to be so
payable; or
(b) When it is payable to a person
named therein or bearer; or
(c) When it is payable to the order of
a fictitious or non-existing person, and
such fact was known to the person
making it so payable; or
(d) When the name of the payee
does not purport to be the name of any
person; or
When the only or last indorsement is an
indorsement in blank.
Section 184
Promissory note, defined.
A negotiable promissory note within the
meaning of this Act is an unconditional promise
in writing made by one person to another,
signed by the maker, engaging to pay on
demand, or at a fixed or determinable future
time, a sum certain in money to order or to
bearer. Where a note is drawn to the maker's
own order, it is not complete until indorsed by
him.
• Instrument in order to be negotiable must
contain the “words of negotiability” – i.e.
must be payable to order or bearer.
• These words serve as an expression of
consent that the instrument may be
transferred.
• Note that the instrument need not follow
the language of the law, but any term
 which clearly indicates an intention to
conform to the legal requirements is
sufficient (Sec. 10)
When instrument payable to order
• Two ways by which an instrument may be
made payable to order:
o It is drawn payable to the order of a
specified person; and
o It is drawn payable to the order of a
specified person or his order.
• Without the words “to order” or “to the
order of,” the instrument is payable only to
the person designated therein and is
therefore non-negotiable.
o Subsequent purchaser mere
assignor not holder.
When instrument payable to bearer
Examples:
Sec. 9(a)
• I promise to pay bearer/ holder the sum of
P100
Sec 9(b)
• Pay to Jose Reyes or bearer
Sec 9(c)
• Pay to John Doe or order
• A name is fictitious when it is feigned or
pretended
• Requisite:
o The fact that the payee is a
fictitious or non-existing person
must be known to the maker or
drawer
o 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 the
instrument to be transferred by
mere delivery
• If the maker or drawer is no aware that the
person he named as payee is fictitious or
non-existent, then the instrument is not a
bearer instrument but an order one.
• A note payable to the order of an estate of
a person still alive at the time of the
execution of the note has been held to
constitute a valid bearer paper, since it is
payable to a non-existing person.
• A note payable to the order of the estate of
an already deceased person, although not
an order note because the name of the
payee does not purport to be the name of
any person.
Sec. 9(d)
• Pay to cash or pay or sundries.
• It is presumed that the maker or drawer, by
using an impersonal payee, intends the
instrument to be payable to bearer.
Sec. 9(e)
• When the last or only indorsement is an
indorsement in blank, the instrument
becomes payable to bearer even if
originally payable to order of a specified
person.
• A blank instrument cannot however convert
a non-negotiable note to a negotiable one.
NOTE: Only instruments under Sec. 9 a and b are
expressly made payable to bearer.
CERTAIN DESIGNATION OF PARTIES
• Maker of a note or the drawer of a bill must
sign the instrument (usually at lower right-
hand corner)
• Drawee’s name – lower left hand corner,
although in checks the bank’s name
sometimes appears across the top
• The payee and successive indorsees
negotiate the instrument by signing on the
back
• As long as parties to the bill or note comply
with these long established and recognized
customs, it would be clear in what capacity
the parties signed. However, once a party
to an instrument deviates from the
commercial usage with respect to the place
of signature, and 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 and not as a maker
or drawer.
Section 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 or his
order. It may be drawn payable to the order of:
(g) A payee who is not maker,
drawer, or drawee; or
(h) The drawer or maker; or
(i) The drawee; or
(j) Two or more payees jointly; or
(k) One or some of several payees;
or
(l) The holder of an office for the
time being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
An instrument may be made payable to anyone of
the following as payees:
• to the order of payee who is not a maker,
drawer, or drawee
• to the order of maker or the drawer
• to the order of the drawee
• to two or more payees jointly
o Pay to the order of Juan Cruz and
Jose Santos (jointly not alternative)
• to one or some of several payees in
alternative
o Pay to the order of Juan Cruz or Jose
Santos
o Only one of them may demand
payment for the full amount
o Only one of them need to indorse
when negotiating the instrument
• to the holder of an office for the time being
o Campos views this as a floating
promise – the payee may be the
person who happens to be secretary
at any particular moment
Section 128
Bill addressed to more than one drawee.
A bill may be addressed to two or more
drawees jointly, whether they are partners or
not; but not to two or more drawees in the
alternative or in succession.
Section 130
When bill may be treated as promissory note.
Where in a bill the drawer and drawee are the
same person or where the drawee is a fictitious
person or a person not having capacity to
contract, the holder may treat the instrument at
his option either as a bill of exchange or as a
promissory note.
• When instrument is addressed to a drawee,
he must be name or otherwise indicated
therein with reasonable certainty.
• May be addressed to two or more drawees
jointly i.e. To Juan Cruz and Jose Reyes
• But not to two or more drawees in the
alternative or in succession
• Where drawer and drawee are the same
person, or where the drawee is a fictitious,
or a person having no capacity to contract,
the holder may treat the instrument either
as a bill or a note because otherwise no
one can ever be made primarily liable on
the bill
CERTAIN TIMES OF PAYMENT
Section 4
Determinable future time; what constitutes. -
An instrument is payable at a determinable
future time, within the meaning of this Act,
which is expressed to be payable:
(a) At a fixed period after date or
sight; or
(b) On or before a fixed or
determinable future time specified
therein; or
(c) On or at a fixed period after the
occurrence of a specified event which is
certain to happen, though the time of
happening be uncertain.
An instrument payable upon a contingency is
not negotiable, and the happening of the event
does not cure the defect.
Section 11
Date, presumption as to. - Where the
instrument or an acceptance or any
indorsement thereon is dated, such date is
deemed prima facie to be the true date of the
making, drawing, acceptance, or indorsement,
as the case may be.
Section 17
Construction where instrument is ambiguous. -
Where the language of the instrument is
ambiguous or there are omissions therein, the
following rules of construction apply:
(a) Where the sum payable is
expressed in words and also in figures
and there is a discrepancy between the
two, the sum denoted by the words is the
sum payable; but if the words are
ambiguous or uncertain, reference may
be had to the figures to fix the amount;
(b) Where the instrument provides
for the payment of interest, without
specifying the date from which interest is
to run, the interest runs from the date of
the instrument, and if the instrument is
undated, from the issue thereof;
(c) Where the instrument is not
dated, it will be considered to be dated
as of the time it was issued;
(d) Where there is a conflict between
the written and printed provisions of the
instrument, the written provisions
prevail;
(e) Where the instrument is so
ambiguous that there is doubt whether it
is a bill or note, the holder may treat it as
either at his election;
(f) Where a signature is so placed
upon the instrument that it is not clear in
what capacity the person making the
same intended to sign, he is to be
deemed an indorser;
Where an instrument containing the word "I
promise to pay" is signed by two or more
persons, they are deemed to be jointly and
severally liable thereon.
PROVISIONS AFFECTING NEGOTIABILITY
Section 5
Additional provisions not affecting negotiability.
- An instrument which contains an order or
promise to do any act in addition to the
payment of money is not negotiable. But the
negotiable character of an instrument otherwise
negotiable is not affected by a provision which:
(a) authorizes the sale of collateral securities
in case the instrument be not paid at
maturity; or
(b) authorizes a confession of judgment if
the instrument be not paid at maturity; or
(c) waives the benefit of any law intended
for the advantage or protection of the
obligor; or
(d) gives the holder an election to require
something to be done in lieu of payment
of money.
But nothing in this section shall validate any
provision or stipulation otherwise illegal.
OMISSIONS
Section 6
Omissions; seal; particular money. - The validity
and negotiable character of an instrument are
not affected by the fact that:
(a) it is not dated; or
(b) does not specify the value given, or that
any value had been given therefor; or
(c) does not specify the place where it is
drawn or the place where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current
money in which payment is to be made.
But nothing in this section shall alter or repeal
any statute requiring in certain cases the
nature of the consideration to be stated in the
instrument.
DATES OF INSTRUMENT
Section 11
Date, presumption as to. - Where the
instrument or an acceptance or any
indorsement thereon is dated, such date is
deemed prima facie to be the true date of the
making, drawing, acceptance, or indorsement,
as the case may be.
Section 12
Ante-dated and post-dated. - The instrument is
not invalid for 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 instrument so dated is delivered
acquires the title thereto as of the date of
delivery.
Section 13
When date may be inserted. - Where an
instrument expressed to be payable at a fixed
period after date is issued undated, or where
the acceptance of an instrument payable at a
fixed period after sight is undated, any holder
may insert therein the true date of issue or
acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong
date does not avoid the instrument in the hands
of a subsequent holder in due course; but as to
him, the date so inserted is to be regarded as
the true date.
BLANKS; WHEN FILED
Section 14
Blanks; when may be filled. - Where the
instrument is 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
he may enforce it as if it had been filled up
strictly in accordance with the authority given
and within a reasonable time.
INCOMPLETE INSTRUMENTS
Section 15
Incomplete instrument not delivered. - Where
an incomplete instrument has not been
delivered, it will not, if completed and
negotiated without authority, be a valid
contract in the hands of any holder, as against
any person whose signature was placed
thereon before delivery.
CONSTRUCTION
Section 17
Construction where instrument is ambiguous. -
Where the language of the instrument is
ambiguous or there are omissions therein, the
following rules of construction apply:
(g) Where the sum payable is
expressed in words and also in figures
and there is a discrepancy between the
two, the sum denoted by the words is the
sum payable; but if the words are
ambiguous or uncertain, reference may
be had to the figures to fix the amount;
(h) Where the instrument provides
for the payment of interest, without
 specifying the date from which interest is
to run, the interest runs from the date of
the instrument, and if the instrument is
undated, from the issue thereof;
(i) Where the instrument is not
dated, it will be considered to be dated
as of the time it was issued;
(j) Where there is a conflict between
the written and printed provisions of the
instrument, the written provisions
prevail;
(k) Where the instrument is so
ambiguous that there is doubt whether it
is a bill or note, the holder may treat it as
either at his election;
(l) Where a signature is so placed
upon the instrument that it is not clear in
what capacity the person making the
same intended to sign, he is to be
deemed an indorser;
Where an instrument containing the word "I
promise to pay" is signed by two or more
persons, they are deemed to be jointly and
severally liable thereon.
CHAPTER 3
CONSIDERATION
PRESUMPTION
Section 24
Presumption of consideration. - Every
negotiable instrument is deemed prima facie to
have been issued for a valuable consideration;
and every person whose signature appears
thereon to have become a party thereto for
value.
VALUE
Section 25
Value, what constitutes. — Value is any
consideration sufficient to support a simple
contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether
the instrument is payable on demand or at a
future time.
HOLDER FOR VALUE
Section 26
What constitutes holder for value. - Where
value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time.
LIEN HOLDER; HOLDER FOR VALUE
Section 27
When lien on instrument constitutes holder for
value. — Where the holder has a lien on the
instrument arising either from contract or by
implication of law, he is deemed a holder for
value to the extent of his lien.
EFFECT OF WANT OF CONSIDERATION
Section 28
Effect of want of consideration. - Absence or
failure of consideration is a matter of defense
as against any person not a holder in due
course; and partial failure of consideration is a
defense pro tanto, whether the failure is an
ascertained and liquidated amount or
otherwise.
ACCOMMODATION PARTY
Section 29
Liability of accommodation party. - An
accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and
for the purpose of lending his name to some
other person. Such a person is liable on the
instrument to a holder for value,
notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accommodation party.
CHAPTER 4
TRANSFER AND NEGOTIATION
ISSUANCE AND DELIVERY
Section 16
Delivery; when effectual; when presumed. -
Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect
thereto. As between immediate parties and as
regards a remote party other than a holder in
due course, the delivery, in order to be
effectual, must be made either by or under the
authority of the party making, drawing,
accepting, or indorsing, as the case may be;
and, in such case, the delivery may be shown to
have been conditional, or for a special purpose
only, and not for the purpose of transferring the
property in the instrument. But where the
instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties
prior to him so as to make them liable to him is
conclusively presumed. And where the
instrument is no longer in the possession of a
party whose signature appears thereon, a valid
and intentional delivery by him is presumed
until the contrary is proved.
Section 191
Definition and meaning of terms. - In this Act,
unless the contract otherwise requires:
"Acceptance" means an acceptance
completed by delivery or notification;
"Action" includes counterclaim and set-off;
"Bank" includes any person or association of
persons carrying on the business of banking,
whether incorporated or not;
"Bearer" means the person in possession of a
bill or note which is payable to bearer;
"Bill" means bill of exchange, and "note"
means negotiable promissory note;
"Delivery" means transfer of possession,
actual or constructive, from one person to
another;
"Holder" means the payee or indorsee of a bill
or note who is in possession of it, or the bearer
thereof;
"Indorsement" means an indorsement
completed by delivery;
"Instrument" means negotiable instrument;
"Issue" means the first delivery of the
instrument, complete in form, to a person who
takes it as a holder;
"Person" includes a body of persons, whether
incorporated or not;
"Value" means valuable consideration;
"Written" includes printed, and "writing"
includes print.
NEGOTIATION; HOLDER
Section 30
What constitutes negotiation. - An instrument is
negotiated when it is transferred from one
person to another in such manner as to
constitute the transferee the holder thereof. If
payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the
indorsement of the holder and completed by
delivery.
INDORSEMENT
By Signature on Instrument or On Allonge
Section 31
Indorsement; how made. - The indorsement
must be written on the instrument itself or upon
a paper attached thereto. The signature of the
indorser, without additional words, is a
sufficient indorsement.
Where Name is Misspelled
Section 43
Indorsement where name is misspelled, and so
forth. - Where the name of a payee or indorsee
is wrongly designated or misspelled, he may
indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
INDORSEMENT MUST BE ENTIRE
INSTRUMENT
Section 32
Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the
entire instrument. An indorsement which
purports to transfer to the indorsee a part only
of the amount payable, or which purports to
transfer the instrument to two or more
indorsees severally, does not operate as a
negotiation of the instrument. But where the
instrument has been paid in part, it may be
indorsed as to the residue.
KINDS OF INDORSEMENTS
Section 33
Kinds of indorsement. - An indorsement may be
either special or in blank; and it may also be
either restrictive or qualified or conditional.
Special and Blank Indorsements
Section 34
Special indorsement; indorsement in blank. - A
special indorsement specifies the person to
whom, or to whose order, the instrument is to
be payable, and the indorsement of such
indorsee is necessary to the further negotiation
of the instrument. An indorsement in blank
specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be
negotiated by delivery.
Section 35
Blank indorsement; how changed to special
indorsement. - The holder may convert a blank
indorsement into a special indorsement by
writing over the signature of the indorser in
blank any contract consistent with the
character of the indorsement.
Payable to Bearer
Section 40
Indorsement of instrument payable to bearer. -
Where an instrument, payable to bearer, is
indorsed specially, it may nevertheless be
further negotiated by delivery; but the person
indorsing specially is liable as indorser to only
such holders as make title through his
indorsement.
Restrictive Indorsement
Section 36
When indorsement restrictive. - An indorsement
is restrictive which either:
(a) Prohibits the further negotiation of the
instrument; or
(b) Constitutes the indorsee the agent of the
indorser; or
 (c) Vests the title in the indorsee in trust for
or to the use of some other persons.
But the mere absence of words implying power
to negotiate does not make an indorsement
restrictive.
Section 37
Effect of restrictive indorsement; rights of
indorsee. - A restrictive indorsement confers
upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the
indorser could bring;
(c) to transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
indorsement.
QUALIFIED INDORSEMENTS
Section 38
Qualified indorsement. - A qualified
indorsement constitutes the indorser a mere
assignor of the title to the instrument. It may be
made by adding to the indorser's signature the
words "without recourse" or any words of
similar import. Such an indorsement does not
impair the negotiable character of the
instrument.
CONDITIONAL INDORSEMENT
Section 39
Conditional indorsement. - Where an
indorsement is conditional, the party required
to pay the instrument may disregard the
condition and make payment to the indorsee or
his transferee whether the condition has been
fulfilled or not. But any person to whom an
instrument so indorsed is negotiated will hold
the same, or the proceeds thereof, subject to
the rights of the person indorsing conditionally.
INDORSEMENT TO OR BY COLLECTING BANK
UNINDORSED INSTRUMENTS
Section 49
Transfer without indorsement; effect of. - Where
the holder of an instrument payable to his order
transfers it for value without indorsing it, the
transfer vests in the transferee such title as the
transferor had therein, and the transferee
acquires in addition, the right to have the
indorsement of the transferor. But for the
purpose of determining whether the transferee
is a holder in due course, the negotiation takes
effect as of the time when the indorsement is
actually made.
CANCELLATION OF INDORSEMENTS
Section 48
Striking out indorsement. - The holder may at
any time strike out any indorsement which is
not necessary to his title. The indorser whose
indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from
liability on the instrument.
INDORSEMENT BY AGENT
Section 44
Indorsement in representative capacity. -
Where any person is under obligation to indorse
in a representative capacity, he may indorse in
such terms as to negative personal liability.
Section 20
Liability of person signing as agent, and so
forth. - Where the instrument contains or a
person adds to his signature words 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 duly authorized; but
the mere addition of words describing him as
an agent, or as filling a representative
character, without disclosing his principal, does
not exempt him from personal liability.
PRESUMPTION AS TO INDORSEMENTS
Time
Section 45
Time of indorsement; presumption. - Except
where an indorsement bears date after the
maturity of the instrument, every negotiation is
deemed prima facie to have been effected
before the instrument was overdue.
Place
Section 46
Place of indorsement; presumption. - Except
where the contrary appears, every indorsement
is presumed prima facie to have been made at
the place where the instrument is dated.
Payee
Section 42
Effect of instrument drawn or indorsed to a
person as cashier. - Where an instrument is
drawn or indorsed to a person as "cashier" or
other fiscal officer of a bank or corporation, it is
deemed prima facie to be payable to the bank
or corporation of which he is such officer, and
may be negotiated by either the indorsement of
the bank or corporation or the indorsement of
the officer.
CONTINUATION OF NEGOTIABLE CHARACTER
Section 47
Continuation of negotiable character. - An
instrument negotiable in its origin continues to
be negotiable until it has been restrictively
indorsed or discharged by payment or
otherwise.

CHAPTER 5
HOLDER IN DUE COURSE

HOLDER
Section 191
"Holder" means the payee or indorsee of a bill
or note who is in possession of it, or the bearer
thereof;

HOLDER FOR VALUE

Section 26
What constitutes holder for value. - Where
value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time.

HOLDER IN DUE COURSE

Section 52
What constitutes a holder in due course. - A
holder in due course is a holder who has taken
the instrument under the following conditions:
(a) That it is complete and regular upon its
face;
(b) That he became the holder of it before it
was overdue, and without notice that it
has been previously dishonored, if such
was the fact;
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to him,
he had no notice of any infirmity in the
instrument or defect in the title of the
person negotiating it.
Section 53
When person not deemed holder in due course.
- Where an instrument payable on demand is
negotiated on an unreasonable length of time
after its issue, the holder is not deemed a
holder in due course.
Rights
• A holder in due course can acquire a better
title than his predecessors because he
takes the instrument free from any defect
of title of prior parties.
• He is also free from defenses available to
prior parties among themselves.
Defenses
• A holder NOT in due course takes
instrument subject to all defenses because
he is treated as a transferee of a non-
negotiable paper.
• Real defenses which attach to the
instrument itself would be available even
against a holder in due course.
Negotiability
• The fact that a holder is not a holder in due
course will not affect the negotiability of
the instrument.
o Only affects such holder’s rights
and does not necessarily prevent
subsequent holders from acquiring
the status of due course holders
NOTE: Question of WON a holder is a holder in due
course is significant only when there is existing
defense between prior parties. If there is no such
defense and the instrument is completely valid,
then it will not matter WON a holder is a holder in
due course.
HOLDER FOR VALUE
Section 24
Presumption of consideration. - Every
negotiable instrument is deemed prima facie to
have been issued for a valuable consideration;
and every person whose signature appears
thereon to have become a party thereto for
value.
Section 25
Value, what constitutes. — Value is any
consideration sufficient to support a simple
contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether
the instrument is payable on demand or at a
future time.
Section 26
What constitutes holder for value. - Where
value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time.
Section 27
When lien on instrument constitutes holder for
value. — Where the holder has a lien on the
instrument arising either from contract or by
implication of law, he is deemed a holder for
value to the extent of his lien.
What constitutes value
Value
• means valuable consideration
• any consideration sufficient to support a
simple contract
• VASQUEZ: includes liberality
BUT CAMPOS: In cases where a negotiable
instrument is given as a gift to the indorsee or
transferee, whatever defenses that can be set up
against the transferor can also be set up against
the transferee.
Value and consideration are generally convertible
terms. But:
Consideration is more proper term when the payee
of the note sues the maker, or the payee of a bill
sues the drawer, or an indorsee sues his
immediate indorser.
Value is more appropriate where a holder sues any
party to the instrument with whom he himself has
not dealt
Value need not be full and a holder will be one for
value even if he gave less than the face value of
the instrument, provided that the intention of the
transferor is to transfer the fill amount
represented by the instrument.
Bank credit as value
When the holder of a check deposits it with his
bank (assuming it is not the drawee bank) and the
bank credits it to his account, is the bank at this
stage a holder for value?
CAMPOS: Most courts hold that it is not on the
theory that the bank has parted with nothing and
that the crediting is a mere bookkeeping entry.
The bank becomes a holder for value only when
the depositor withdraws the amount of the
deposited instrument.
VASQUEZ: If bank credits in advance prior to
clearing – a holder. If waits for clearing – not a
holder.
IN GOOD FAITH
Section 55
When title defective. - The title of a person who
negotiates an instrument is defective within the
meaning of this Act when he obtained the
instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when
he negotiates it in breach of faith, or under
such circumstances as amount to a fraud.
Section 56
What constitutes notice of defect. - To
constitutes notice of an infirmity in the
instrument or defect in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of
the infirmity or defect, or knowledge of such
facts that his action in taking the instrument
amounted to bad faith.
In order to constitute notice, the holder must have
ACTUAL not merely constructive knowledge of the
defect, or he must have acted in bad faith.
Gross negligence in itself would not constitute
notice since it is not the equivalent of bad faith nor
actual knowledge.
Notice, bad faith
Test established in Sec. 56 is subjective.
Bad faith being a state of mind can only be proven
by circumstantial evidence.
• It is a question of fact which must be
determined in accordance with the
particular circumstances of each case.
Article 1338, CC
There is fraud when, through insidious words or
machinations of one of the contracting parties,
the other is induced to enter into a contract
which, without them, he would not have agreed
to. (1269)
Article 1344, CC
In order that fraud may make a contract
voidable, it should be serious and should not
have been employed by both contracting
parties.
Incidental fraud only obliges the person
employing it to pay damages. (1270)
Holder must have taken the instrument in good
faith and that at the time it was negotiated to him
he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.
Due course holding is NOT affected by the holder’s
acquisition of knowledge AFTER he has taken the
instrument.
Crossing a Check; Bad Faith
Financing Company; Holder in Good faith
Tendency of courts is to protect the buyer against
the finance company in the event that the goods
sold turn out to be defective. The finance company
will be subject to the defense of failure of
consideration and cannot recover the purchase
price from the buyer.
NOTE: Article 146 of Consumer’s Act - Sale of
Consumer Products On Instalment Payment.
– In a consumer credit sale other than one
pursuant to an open-end credit plan, the obligation
of the consumer to whom credit is being extended
shall be evidenced by a single instrument which
shall include, in addition to the disclosures
required by this act, the signature of the seller and
the person to whom credit is extended, the date it
was signed, a description of the property sold and
a description of any property transferred as a
trade-in. The instrument evidencing the credit
shall contain a clear and conspicuous typewritten
notice to the person to whom credit is being
extended that:
a) he should not sign the instrument if it
contains any blank space;
b) he is entitled to a reasonable return of the
precomputed finance charge if the balance
is prepaid; and
c) he is entitled to an exact, true copy of the
agreement.
In cases where the instrument will be sold at a
discount to a bank, financing company or other
lender, the said transferee shall be subject to
all claims and defenses which the debtor could
assert against the seller of consumer products
obtained hereto or with the proceeds thereof.
Postdating a Check
Section 12
Ante-dated and post-dated. - The instrument is
not invalid for 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 instrument so dated is delivered
acquires the title thereto as of the date of
delivery.
Antedated instruments
• If an instrument bears a date earlier than
the date of its actual issuance
Postdated
• If an instrument contains a date later than
the date of its issuance
The instrument is not only valid but negotiable
though it is antedated or postdated.
A holder thereof can therefore be holder in due
course, and he is not put on inquiry by the mere
fact of its being antedated or postdated.
e.g. an instrument which is antedated in order to
evade the effects of the Usury Law
• Illegal under this section
Suspicious circumstances
Negligence in tracking down a suspicious
circumstance which would put a prudent man on
inquiry is not of itself sufficient to prevent
recovery, though it may properly be admitted
together with other circumstances as evidence of
bad faith.
But where the suspicious circumstances are so
cogent and obvious that to remain passive would
amount to bad faith, the holder would be subject
to defences.
There is difference between the existence of
suspicious circumstances and actual suspicion of
the purchaser.
• If he does in fact suspect and fails to make
investigation lest it disclose a defense, he
is not a purchaser in good faith.
In order to show that the defendant had
“knowledge of such facts that his action in taking
the instrument amounted to bad faith” it is not
necessary to prove that the defendant knew the
exact fraud that was practiced upon the plaintiff
by the defendant’s assignor, it being sufficient to
show that the defendant had notice that there was
something wrong about his assignor’s acquisition
of title, although he did not have notice of the
particular wrong that was committed.
Bad faith may under certain circumstances be
imputed from knowledge of the purchaser of other
suspicious transactions of the transferor.
Effect of Purchase at a Discount
The purchase of an instrument at a discount does
not, of itself, constitute bad faith.
• In most cases a purchaser at a discount is
influenced by the financial condition of the
issuer of the instrument rather than by the
possibility that it was obtained subject to
defense.
However, if the instrument is purchased at a
heavy discount, this fact together with other facts,
may be taken into account in deciding the issue of
purchase in good faith.
Eg. Purchase at a discount although maker is
known to be:
• Solvent,
• Note is amply secured
• Or is taken from a total stranger
These additional circumstances taken with the fact
of heavy discount might prove bad faith.
Effect of Notice Not Sufficient
Section 54
Notice before full amount is paid. - Where the
transferee receives notice of any infirmity in the
instrument or defect in the title of the person
negotiating the same before he has paid the full
amount agreed to be paid therefor, he will be
deemed a holder in due course only to the
extent of the amount therefore paid by him.
Notice of defenses to a purchaser before he has
acquired title and before he has paid any portion
of the purchase price is fully operative to prevent
him from being a holder in due course.
But where he receives such notice after he has
partially paid the instrument, he is a holder in due
course as to such amount paid by him.
Should he pay the remainder despite notice he
cannot thereafter recover such amount from the
maker because to that extent, he will be subject to
the defences which the maker may have.
Constructive Notice Not Sufficient
Just as a purchaser of a negotiable instrument is
not put on inquiry, neither he is charged with
notice of defenses or equities disclosed by public
records nor is he affected by the doctrine of lis
pendens.
Notice to agent is chargeable against the principal
Notice of Accommodation Not Notice of
Defect
Section 29
Liability of accommodation party. - An
accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and
for the purpose of lending his name to some
other person. Such a person is liable on the
instrument to a holder for value,
notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accommodation party.
A holder’s title is not rendered defective by his
knowledge that the party sought to be held liable
was an accommodation party. Also it does not
prevent such holder from being a holder in due
course.
COMPLETE AND REGULAR; MATERIAL
ALTERATION
Section 124
Alteration of instrument; effect of. - Where a
negotiable instrument is materially altered
without the assent of all parties liable thereon,
it is avoided, except as against a party who has
himself made, authorized, or assented to the
alteration and subsequent indorsers.
But when an instrument has been materially
altered and is in the hands of a holder in due
course not a party to the alteration, he may
enforce payment thereof according to its
original tenor.
Holder must have taken the instrument complete
and regular on its face.
• If a purchaser of a negotiable paper takes
prior to completion or contemporaneously
with the act of completion, he is not a
holder in due course.
• Mere failure to affix revenue stamps as
required by law does not render the
instrument incomplete.
• An instrument payable in __(blank)___ days
after date is NOT complete and regular on
its face.
• Where it specifies the date but not the year
of maturity, it is also not complete.
• Also when it is blank as to the payee,
although the holder can sue on the said
instrument without filling in the payee’s
name (?)
• Where the instrument is executed in blank
and is subsequently filled up and issued to
the first holder who has no knowledge of
execution in blank, the holder is a holder in
due course.
• If the first holder takes the instrument
complete in form with knowledge of
original execution in blank, he is not a
holder in due course, although he actually
took it complete.
• Taking of an incomplete instrument lets in
all defenses and equities, WON connected
with the execution in blank.
• Same rule when holder takes and
instrument irregular on its face:
o E.g. alteration which is apparent on
the instrument.
Section 125
What constitutes a material alteration. - Any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or
interest;
(c) The time or place of payment:
(d) The number or the relations of the
parties;
(e) The medium or currency in which
payment is to be made;
(f) Or which adds a place of payment where
no place of payment is specified, or any
other change or addition which alters
the effect of the instrument in any
respect, is a material alteration.
See Sec. 124:
• If alteration is apparent on the instrument,
it renders the instrument irregular within
Sec. 52(a), even if the change may have
been authorized or assented.
• And this puts the purchaser on inquiry as to
all defenses and equities, WON connected
with the alteration.
• If the unauthorized alteration is BOTH
APPARENT and MATERIAL, then not only is
the holder deprived of the rights of a holder
in due course, but the instrument is
entirely void and is a real defense against
enforcement.
Sec 52 (a) – deals with matters evidencing bad
faith which are to be found on the instrument
Sec 52 (c) and (d) and Sec 56 – deal with the
issues of bad faith where the evidence thereof is
not on the face of the instrument, but lies in
extrinsic circumstances.
HOLDER AT OR AFTER MATURITY AND
WITHOUT NOTICE OF DISHONOR
Section 53
When person not deemed holder in due course.
- Where an instrument payable on demand is
negotiated on an unreasonable length of time
after its issue, the holder is not deemed a
holder in due course.
• Under Sec 52(b) a holder in order to be a
holder in due course must become a holder
of the instrument before it is overdue and
without notice that it has been previously
dishonoured if such was the fact.
• The fact that the instrument is overdue is a
strong indication that it was dishonoured
and the law puts the potential holder on
inquiry as to whether it was dishonoured
and the reason therefor.
• An instrument may be dishonoured:
o By Non-acceptance
 Can refer only to a bill of
exchange
 takes place when the
drawee refuses to accept the
order of the drawer as stated
in the bill. This may occur
even before the date of
maturity of the bill.
o By non-payment
 Occurs at the time of
maturity
 When the party primarily
liable i.e. the maker of the
note, or the acceptor of the
bill, fails to pay the
instrument at the date of
maturity.
NOTE: An instrument is not overdue on the day of
its maturity.
If instrument is payable after sight
• The date of maturity is fixed by the date of
presentment
If instrument is payable on the occurrence
• The date of the instrument is fixed by the
happening of the event
Purchase made outside reasonable time
• If the purchase of a demand instrument is
made outside of the reasonable time after
issue, the purchase is one of an overdue
instrument.
• Usage of time
o Sec 193 provides that “regard is to
be had to:
 the nature of the instrument,
 the usage of trade or
business with respect to
such instrument and
 the fact of the particular
case”
o With regard to the nature of the
instrument, it is the function of the
instrument which must be noted in
determining whether reasonable
time has elapsed or not.
o Evidence as to usage of trade or
business is admissible to show lapse
of reasonable time, and it is not
sufficient that such usage is general
but it should be local in the sense
that it may not be the same in all
localities.
o Facts of the particular case will vary
in each case.
Payment of interest may be an important factor in
determining reasonableness of time
With respect to instruments with a fixed maturity
but subject to acceleration, either automatically or
at the option of the holder, the ultimate date of
maturity is the date of maturity for the purpose of
determining whether a purchaser is a holder in
due course, UNLESS such purchaser had
knowledge of earlier maturity at the time he
acquired title.
RIGHTS OF A HOLDER IN DUE COURSE
Section 57
Rights of holder in due course. - A holder in due
course holds the instrument free from any
defect of title of prior parties, and free from
defenses available to prior parties among
themselves, and may enforce payment of the
instrument for the full amount thereof against
all parties liable thereon.
Section 58
When subject to original defense. - In the hands
of any holder other than a holder in due course,
a negotiable instrument is subject to the same
defenses as if it were non-negotiable. But a
holder who derives his title through a holder in
due course, and who is not 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 the latter.
EFFECT OF QUALIFIED CONDITIONAL AND
RESTRICTIVE INDORSEMENTS
• The status of a holder as a holder in due
course is not affected by his taking under
qualified indorsement.
o Does not necessarily imply that
there is a defect in the instrument
or in the title of any prior party
• Conditional indorsement does not by itself
deprive the conditional indorsee or any
subsequent holder of the rights of a holder
in due course.
 o The fact that a condition is imposed
on the indorsee does not
necessarily mean that there is some
defect in the title or infirmity in the
instrument. It merely subjects him
to the rights of the conditional
indorser should he receive payment
before condition is fulfilled.
• Restrictive indorsement which prohibits
further negotiation will not prevent the
indorsee from being a holder in due course.
However, should he violate the prohibition
and indorse the instrument to another,
then the latter cannot be a holder in due
course.
o There is no valid negotiation.
Transferee will never be a holder
o The restrictive indorsement serves
as a notice to any prospective
purchaser of the instrument of the
prohibition to negotiate
• A restrictive indorsement which constitutes
the indorsee as an agent of the indorser
can vest the former with the rights of a
holder in due course, if his principal, the
restrictive indorser, is a holder in due
course. If restrictive indorser is not a holder
in due course, neither is the restrictive
indorsee, since he merely is an agent of
the indorser.
o Any subsequent holder from the
indorsee-agent will have the same
rights as the latter. But such
subsequent holder can never
acquire rights which are
antagonistic to the indorser-
principal, for he is merely a sub-
agent of the latter.
• Where the restrictive indorsement vests
title in the indorsee in trust for a third
person can be a holder in due course,
regardless of the status of the restrictive
indorser.
PAYEE AS HOLDER IN DUE COURSE
GR: A payee cannot be a holder in due course
because he has dealt directly with the maker or
drawer and thus must have knowledge of facts
which may create defense.
XPN: Circumstances which he is insulated from the
maker or drawer by a third party, such as a
remitter. Hence provided he meets requirement in
Sec. 52, weight of authority considers him a holder
in due course.
RIGHTS OF A PURCHASER FROM A HOLDER
IN DUE COURSE
Section 58
When subject to original defense. - In the hands
of any holder other than a holder in due course,
a negotiable instrument is subject to the same
defenses as if it were non-negotiable. But a
holder who derives his title through a holder in
due course, and who is not 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 the latter.
A holder who derives title to the instrument
through a holder in due course has all the rights of
the latter even though he himself satisfies none of
the requirements of due course holding.
• A purchaser with notice of defect in title
who takes from a holder in due course,
acquires all the rights of the latter and is
free from defenses.
• A purchaser after maturity from a holder in
due course, WON he took with notice
acquires all the rights of the latter and is
free from defenses.
• A holder not for value who takes from a
holder in due course, WON he takes the
instrument before maturity and with or
without notice, acquires all the rights of the
latter and is free from defenses.
• RATIO: If a holder in due course cannot
invest his transferee with the rights which
come with his improved position, his status
as a holder in due course would oftentimes
lose its significance because the
marketability of the instrument would be
seriously hampered.
NOTE:
• If the purchaser from a holder in due
course is party to the fraud or illegality
affecting the instrument, he does not
acquire the rights of his predecessor.
• A payee whose title was defective at the
time the instrument was issued to him
cannot better it by selling the instrument to
a holder in due course and buying it back
again.
• A person not an original party to the
instrument but who was a party to the
fraud in procuring it, cannot later recover
on the instrument, even if he purchased it
from a holder in due course.
PRESUMPTION IN FAVOR OF DUE COURSE
HOLDING
Section 59
Who is deemed holder in due course. - Every
holder is 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 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 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 title.
The presumption established by this provision
applies in favour of holders only and not to other
kinds of transferees.
Before the presumption can be availed of by the
plaintiff, he must prove:
• That he is a holder
• The genuineness of the maker’s or
drawer’s signature to establish, at least
presumptively, the existence of the
obligation
• The genuineness of all indorsements
necessary to his title, to establish his link to
the maker and thus his status as a holder.
Once the plaintiff proves that he is a holder, then
the presumption that he is a holder in due course
arises.
• If the defendant claims to have a personal
defense, he will have to prove it. Should he
succeed in doing so, the burden of proving
due course holding will be on the plaintiff-
holder.
• The law, however, in the second sentence
of Sec. 59, establishes an exception to the
last mentioned rule where the defendant’s
defense is not his own i.e. the burden of
proving due course holding will not be on
the plaintiff if the defendant became bound
on the instrument prior to the acquisition of
the defective title.
The presumption refers only to the status of the
present holder and not to any previous holder.
• Thus if the present holder’s rights depend
on a previous holder’s status as a holder in
due course, he would have to prove such
fact and cannot rely on the presumption
because the latter is no longer the holder.
TRANSFER OF UNINDORSED INSTRUMENT
Section 49
Transfer without indorsement; effect of. - Where
the holder of an instrument payable to his order
transfers it for value without indorsing it, the
transfer vests in the transferee such title as the
transferor had therein, and the transferee
acquires in addition, the right to have the
indorsement of the transferor. But for the
purpose of determining whether the transferee
is a holder in due course, the negotiation takes
effect as of the time when the indorsement is
actually made.
WON transferee under this section would acquire
the rights of holder in due course under Sec. 58 if
his transferor is a holder in due course:
Two views:
• 1st view: Since Sec. 58 favors a holder, it
cannot apply to one who is not a holder like
a transferee without indorsement. Sec. 49
grants such transferee the title but not
necessarily the all the rights of the
transferor. In order to acquire the rights of
a prior holder in due course, the transferee
must first acquire the latter’s indorsement.
• 2nd view: Sec. 49 and 58 taken together
give him the title of the previous holder in
due course free from defences and equities
of prior parties.
o The Uniform Commercial Code has
settled the conflict in favour of the
latter view in the jurisdictions which
have adopted it. It provides that the
transfer without indorsement vests
in the transferee such rights as the
transferor had therein.
If the transferor who did not indorse was not a
holder in due course, then his transferee is subject
to all defenses as if the instrument were non-
negotiable, although he himself may satisfy the
requirements of Sec. 52, unless he obtains the
former’s indorsement.
However, if at the time of such indorsement, the
transferee already knew of the defense or he
obtains the indorsement after maturity, such
indorsement will not improve his status since his
being a holder in due course is determined as of
the time of indorsement.
An intention by both parties at the time of the
transfer to have the paper indorsed is not enough
for it is the actual act of indorsement which
constitutes the negotiation.
Campos, further states, that in the absence of
proof of the time of the subsequent indorsement,
the presumption of Sec. 45 that every negotiation
is prima facie deemed effected before the
instrument was overdue, can probably apply.