NEGOTIABLE INSTRUMENTS LAW
NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031, 3 February 1911)
I. GENERAL CONCEPTS
Negotiable Instrument - a written contract for the
payment of money which is intended as a substitute
for money and passes from one person to another as
money, in such a manner as to give a holder in due
course the right to hold the instrument free from
defenses available to prior parties. The instrument
must comply with Section 1 of the Negotiable
Instruments Law, (Reviewer on Commercial Law,
Sundiang and Aquino, 2014 Ed.)
Functions of Negotiable Instrument:
1. Substitute for money
2. Medium of exchange
3. Credit instrument which increases credit
circulation
4. Increase purchasing medium in circulation
5. Evidence of transaction
Two Distinctive Features/Characteristics of NI:
1. Negotiability - it is that attribute or property
whereby a bill or note or check may pass from
hand to hand similar to money, so as to give the
holder in due course the right to hold the
instrument and to collect the sum payable for
himself free from defenses.
2. Accumulation of Secondary Contracts - secondary
contracts are picked up and carried along with
Negotiable Instruments as they are negotiated
from one person to another; or in the course of
negotiation of negotiable instruments, a series of
juridical ties between the parties thereto arise
either by law or by privity. The indorsers become
secondarily liable to the holder.
Kinds of Negotiable Instruments:
1. Promissory Note (PN) – 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 (Sec. 184).
2. Bill of Exchange (BE) - 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 (Sec. 126).
3. Check - a bill of exchange drawn on a bank payable
on demand (Sec. 185).
Kinds:
• Manager’s / Cashier’s Check – drawn by a
bank on itself and therefore, it is a primary
obligation of the bank.
o It is accepted in advance by the act of its
issuance and is not subject to
countermand by the payor after
indorsement.
o The bank’s manager signs manager’s
check while cashier’s check is signed by
the bank cashier.
• Memorandum Check – it is like an ordinary
check except that the word “memorandum,”
“mem” or “memo” is written upon the face of
the check, signifying that the drawer engages
to pay the bona fide holder absolutely, and
not upon a condition to pay upon
presentment at maturity and if due notice of
the presentment and non-payment should be
given. This check is not to be presented for
payment, but will be redeemed by the drawer
himself.
• Certified Check – one drawn by a depositor
upon funds to his credit in a bank which a
proper officer of the bank certifies will be paid
when duly presented for payment
• Traveler’s check – one upon which the
purchaser’s signature must appear twice – at
the time he buys it and also at the time he
uses it. It has the characteristics of a cashier’s
check of the issuer.
• Crossed check – done by writing 2 parallel
lines diagonally on the left top portion of the
check. If the name of a bank/company
appears between the parallel lines, the check
is said to be specially crossed, and payment
should be made only if with the intervention
of that bank/company. If no name appears
between the parallel lines, the check is said to
be generally crossed, and the drawee should
not encash the same but merely accept the
check for deposit.
 Effects of crossing a check:
a. That the check may not be encashed
but only deposited in the bank;
b. That the check may be negotiated
only once to one who has an
account with a bank; and
c. That the act of crossing the check
serves as a warning to the holder
that the check has been issued for a
definite purpose so that he must
inquire if he has received the check
pursuant to that purpose.
• Stale check – one which has not been
presented for payment within a reasonable
time after its issue.
Iron Clad Rule: Prohibits the countermanding of
payment of certified checks (Republic of the Philippines
v. PNB, G.R. No. 16106, December 1, 1961 ). But the
holder must be a HIDC (Mesina v. IAC, 145 SCRA 497)
The payment of manager’s and cashier’s checks is not
subject to the condition that the payee should comply
with his obligations to the purchaser of the checks.
Also, the purchaser of the manager’s and cashier’s
checks has no right to have the checks
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cancelled by filing an action for rescission of its BILLOF EXCHANGE CHECK

contract with the payee (MBTC v. Chiok, G.R. No. 4.May be payable on 4. Always payable on
172662, 26 November 2014). demand or at a fixed demand
or determinable
Bills in Set: one composed of several parts, each part future time
numbered and containing a reference to the other 5. Presentment for 5. Need not be
parts, the whole of the parts constituting but one bill. acceptance may be presented for
required (Sec. 143) acceptance
Rights of holders where parts are negotiated
separately: Other Forms of Negotiable Instruments
1. If both are HIDC, the holder whose title first 1. Certificate of deposit issued by banks, payable to
accrues is considered the true owner of the bill. the depositor or his order, or to bearer
2. But the person who accepts or pays in due course 2. Trade acceptance
shall not be prejudiced. 3. Bonds, which are in the nature of promissory
notes
Obligations of holder who indorses 2 or more parts of
4. Drafts, which are bills of exchange drawn by
the Bill in Set:
one bank upon another
1. The person shall be liable on every such part. § All of these must comply with Sec. 1, NIL Note:
2. Every indorser subsequent to him is liable on the Postal Money Order, Treasury Warrant, Certificate of
part he has himself indorsed, as if such parts were Stock, Letter of Credit, Bill of Lading and Warehouse
separate bills. Receipts are not negotiable instruments.

Legal Tender
PROMISSORY BILL OF EXCHANGE
That kind of money that the law compels a creditor to
NOTE
accept in payment of a debt when tendered by the
1.Unconditional 1.Unconditional order debtor in the right amount. Under Sec. 52 of RA 7653,
promise all notes and coins issued by the BSP shall be legal
2. Involves 2 parties 2.Involves 3 parties on tender in the Philippines.
on its face its face
3. Person who issues 3. Person who issues is Legal Tender Power of:
is the maker the drawer Notes – no limit as to amount
4. Maker is primarily 4. Drawer is only Coins –
liable secondarily liable a. P1, P5 & P10 – up to P1,000
5. Party primarily liable 5. Party primarily liable b. P0.25, P0.10, P0.05 & P0.01 – up to P100 (BSP
is the maker is the acceptor Circular No. 537, Series of 2006)
6. One presentment 4. Could be two
only: for payment presentments: for Note: A negotiable instrument (including check)
acceptance and for although intended to be a substitute for money, is not
payment legal tender.

SEC. 60. Legal Character. _ Checks representing

When a BILL may be treated as a NOTE:
demand deposits do not have legal tender power and
1. Drawer and drawee are the same person. their acceptance in the payment of debts, both public
1. Drawee is a fictitious person. and private, is at the option of the creditor: Provided,
2. Drawee has no capacity to contract. however, That a check which has been cleared and
3. When instrument is so ambiguous, the holder may credited to the account of the creditor shall be
treat it either as a BILL or a NOTE. equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to
BILLOF EXCHANGE CHECK his account. (RA 7653)
1.Not necessarily drawn 1.It is necessary that a
on a deposit. The check is drawn on a bank Incidents in “Life” of Negotiable Instrument
drawee need not be a deposit. The drawee is 1. Preparation and signing
bank. always a bank. 2. Issue
2.Death of the drawer of 3. Negotiation
2.Death of a drawer a check, with the 4. Presentment for acceptance, in certain kinds of
of a BOE, with the knowledge of the bank, bills of exchange
knowledge of the revokes the authority of 5. Acceptance
bank, does not revoke the banker to pay 6. Dishonor by non-acceptance
the authority of the 7. Presentment for payment
drawee to pay 3. Must be presented 8. Dishonor by non-payment
3. May be presented for payment within a 9. Notice of dishonor
for payment within a reasonable time after its 10. Protest, in some cases
reasonable time after issue. 11. Discharge
its last negotiation
because it may be Issue - the first delivery of the instrument, complete in
further negotiated form, to a person who takes it as a holder.

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Delivery - transfer of possession, actual or constructive, When promise or order unconditional

from one person to another.
Holder – refers to the:
a. If ORDER instrument - The payee or indorsee
of a bill or note who is in possession of it, or
b. If BEARER instrument - The bearer thereof
(sec.191)
An unqualified order or promise to pay is unconditional
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.

Bearer - the person in possession of a bill or note Ø Mere acknowledgment insufficient.

which is payable to bearer. Ø An order or promise to pay out of a particular fund
is not unconditional because, in effect, it is subject
II. NEGOTIABILITY to the condition that the fund is sufficient.

Requisites of Negotiability (Sec. 1, NIL)

a. It must be in writing and signed by the maker or FUND FOR PARTICULAR FUND
drawer; REIMBURSEMENT FOR PAYMENT
b. Must contain an unconditional promise or order to 1. Drawee pays the 1. There is only one
pay a sum certain in money; payee from his own act-the drawee pays
c. Must be payable on demand, or at a fixed or funds; afterwards, the directly from the
determinable future time; drawee pays himself particular fund
d. Must be payable to order or to bearer; and from the indicated.
e. Where the instrument is addressed to a drawee, particular fund Payment is subject
he must be named or otherwise indicated therein indicated. to the condition
with reasonable certainty. that the fund is
Note: Do not be confused with the word “order” under sufficient.
“b” and “d” 2. Particular fund 2. Particular fund
indicated is NOT the indicated is the
1. Must be in writing, signed by the maker or direct source of direct source of
drawer; payment but only payment.
- Otherwise it cannot be a substitute for money. the source of
- Signature may be in any form like initial or reimbursement.
mark. No particular location.

2. Must contain an unconditional promise or order to 3. Payable on demand or at a fixed or determinable

pay a sum certain in money; future time;

Certainty of sum payable Certainty of time of payment

The sum payable is a sum certain 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
e. With costs of collection or an attorney's fee, in
case payment shall not be made at maturity. (sec.
2)
Ø Interest stipulated but not specified – legal
interest.
Ø Interest not stipulated – legal interest will be paid
when the debtor incurs in delay (Art. 2209, NCC)
Ø Interest due shall earn legal interest from the time
it is judicially demanded (Art. 2212, NCC)
BSP Circular No. 799, Series of 2013 – “The rate of
interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in
the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.”
(Effective 1 July 2013)
Note: NI need not be payable in legal tender.
An instrument is payable at a determinable future time
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.
Ø After sight means after the drawee has seen the NI
upon presentment for acceptance.
Ø The event must necessarily happen. If conditional,
not negotiable.
Ø An instrument payable upon a contingency is not
negotiable, and the happening of the event does
not cure the defect. (Sec. 4)
Ø A promise to pay “when able,” “as soon as I can”,
etc., without specification of an absolute date is
not negotiable. However, there is a difference of
opinion as to whether it is a conditional promise
or an absolute promise to pay at an unreasonable
time:
a. Under the first view, negotiability is destroyed
both by the condition and by want of a fixed
time for payment;
b. Under the second view, by the general
principle that a promise to pay within a
reasonable time is not so certain as to render
an instrument negotiable.

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Aftersight Draft - payable only after the expiration of
the stipulated period from acceptance (legal sight).
Acceleration Notes
- provisions which make it possible for the maker to
pay the NI at an earlier date or make it possible for the
holder to require payment of the NI at an earlier date.
1st Class – On or before a certain date
2nd Class –
a. renders whole debt due and demandable
upon failure of obligor to comply with certain
conditions (Acceleration Clause)
b. Maker shall supply additional collateral in case
of depreciation of the value of the original
deposit, and upon default, the note shall
become due.
c. Contains provisions for acceleration where
holder deems himself insecure (Insecurity
Clause)
Extension Clause
- Clause in NI that extend the maturity dates. “An
instrument is payable at a definite time if by its terms it
is payable at a definite time subject to extension at the
option of the holder, or to extension to a further
definite time at the option of the maker or acceptor or
automatically upon or after a specified act or event.”
(Subsection 3-109(1)(d) of the Uniform Commercial
Code of the United States; Aquino, Timoteo B., Notes
and Cases on Negotiable Instruments Law and Banking
Law, 2018 Ed., pp. 58-59.)
- Different from Sec. 120(f)
When payable on demand (Sec. 7):
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed.
Note: Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the person so
issuing, accepting, or indorsing it, payable on demand.
4. Payable to order or to bearer
When payable to order (Sec. 8)
The instrument is drawn payable:
a. To the order of a specified person or
b. To him or his order.
Ø The payee must be named or otherwise indicated
therein with reasonable certainty.
Ø 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 (“AND”); or
e. One or some of several payees (“OR”); or
f. The holder of an office for the time being.
When payable to bearer (Sec. 9)
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
e. When the only or last indorsement is an
indorsement in blank.
Fictitious Payee Rule
- If an actual, existing and living payee is not the
intended recipient of the proceeds of the check,
the payee is considered a “fictitious” payee and
the check is a bearer instrument. Hence, even if
the signature of the payee was forged, the
collecting bank and drawee bank are relieved of
liability.
- Theory: One cannot expect a fictitious payee to
indorse. Hence, the issuer must have intended for
the NI to be negotiated by mere delivery.
- The loss falls on the drawer.
- Burden: The check is presumed to be an order
instrument and it is up to the person making
the contrary allegation to prove otherwise.
(PNB v. Rodriguez, et al. G.R. No. 170325, 26
September 2008)
- In the US, the rule is used to counteract the effect
of forged indorsements on the right of the holder
to enforce payment against the drawer or maker.
- The rule intends to remove the group of cases
involving a dishonest employee from the tradition
“forged indorsement doctrine” and imposes the
loss on the employer who hires and fails to
properly control the dishonest agent, rather than
on banks which collect and pay checks with forged
indorsement.
- Bad Faith Exception: A showing of commercial bad
faith on the part of the drawee bank, or any
transferee will work to strip it of this defense.
5. Identification of the drawee
Ø Where the instrument is addressed to a drawee
(meaning in a bill of exchange), he must be named
or otherwise indicated with reasonable certainty.
The holder must know to whom he should present
it for acceptance and/or payment; otherwise, the
purpose of negotiable instrument as a tool in
commercial dealings will be greatly hampered.
(Reviewer on Commercial Law, Sundiang and
Aquino)
Ø A bill may be addressed to more than one drawee
jointly, whether they are partners or not; but not
to two or more drawees in the alternative or in
succession. (Sec. 128)
Factors that Determine Negotiability:
1. The whole instrument itself
2. Only what appears on the face of the instrument
3. Provisions of the NIL, Sec.1
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 NEGOTIABLE INSTRUMENTS LAW
Additional provisions not affecting
negotiability
General Rule: the instrument is non-negotiable if it
contains a promise or order to do any act in addition to
the payment of money.
Test: If the promise would give rise to a cause of action
for breach of contract if the additional act is not done,
the instrument is not negotiable.
Exceptions:
a. authorizes the sale of collateral securities in case
the instrument be not paid at maturity;
b. authorizes a confession of judgment if the
instrument be not paid at maturity;
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.
§ Confession of judgment – a written statement
signed by the defendant, setting forth the basis of
liability and authorizing the entry of judgment
thereon.
§ Kinds of confession of judgment
a. cognovit actionem – literally means “he has
confessed action.” It is a written confession of
action by the defendant acknowledging his
indebtedness to the plaintiff after the action
has been filed. It is given after the action is
brought to save expenses.
b. relicta verificationem – literally means “his
pleadings being abandoned.” It is confession
of judgment by withdrawal of the defense.
Note: However, warrants of attorney to confess
judgment before action is begun, are not authorized
nor contemplated by our law. They are void as against
public policy because: [i] they enlarge the field for
fraud; [ii] the promisor bargains away his right to a day
in court; and [iii] the effect is to strikedown the right of
appeal accorded by statute. The NIL does not sanction
nor validated any provision otherwise illegal.
Omissions and Provisions that do not affect
Negotiability (Sec. 6)
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 therefore; 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.
Ø if it is not dated, the instrument will be considered
to be dated as of the time it was issued.
Cases where date is important:
a. If necessary to fix the date of maturity of NI
b. If NI is payable on demand – to determine W/N
the NI was presented within a reasonable period
of time from issue/last negotiation
c. If NI is interest bearing
Ø consideration for the instrument is presumed.
(Art. 154 NCC & Sec. 25 NIL)
Ø Sec. 73 specifies where presentment for payment
should be made when the place of payment is not
specified
Ø In common law, a sealed instrument is not
negotiable & is governed contracts under seal
Rules of construction:
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;
g. 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.
Consideration
 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.
Ø Value - 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.
Ø Holder for value – one who has given a valuable
consideration for the instrument issued or
negotiated to him.
• 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.
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• where the holder has a lien on the instrument Methods of negotiation

arising either from contract or by implication
of law, he is deemed a holder for value to the
extent of his lien.
Ø Effect of want of consideration: 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.
Absence of consideration – total lack of any valid
consideration for the contract is only a personal
defense.
1. Order Instrument –Indorsement AND Delivery.
2. Bearer Instrument – Delivery only.
Indorsement - legal transaction effected by the writing
of one's own name at the:
a. back of the instrument or
b. upon a paper (allonge) attached thereto.
Ø General Rule: indorsement must be of the entire
instrument (but partial indorsement may
constitute a valid assignment binding between the
parties).
Exception: where instrument has been paid in
part, it may be indorsed as to the residue.

Failure of consideration – failure or refusal or one Negotiable: Pay to X AND Y; Pay to X OR Y

party to do, perform or comply with the Not Negotiable: Pay to X P600 and to Y P400
consideration agreed upon is also only a personal
defense. Ø Kinds of indorsement:
a. Special - specifies the person to whom or to
III. TRANSFER AND NEGOTIATION whose order, the instrument is to be payable
(sec. 34)
Types of transfers: b. Blank - specifies no indorsee:
1. Assignment - transfer of title to the instrument, • Instrument is payable to bearer and may
with the assignee generally taking only such title be negotiated by delivery (sec. 34)
as his assignor has, subject to all defenses • May be converted to special indorsement
available against his assignor; by writing over the signature of indorser
2. Negotiation - transfer of a negotiable instrument in blank any contract consistent with
from one person to another made in such a character of indorsement.
manner as to constitute the transferee the holder c. Restrictive - when the indorsement either:
thereof i. Prohibits further negotiation of the
3. By Operation of Law – such as by succession, by instrument; or
insolvency. ii. Constitutes the indorsee the agent of the
indorser; or
Distinctions between Negotiation and iii. Vests the title in the indorsee in trust
Assignment
for or to the use of some other persons.
NEGOTIATION ASSIGNMENT But mere absence of words implying
1. Refers only to 1. Refers generally to power to negotiate does not make an
negotiable an ordinary contract; indorsement restrictive.
instruments; 2. The transferee is an § All subsequent indorsees acquire only the
2. The transferee is a assignee; title of the first indorsee under the
holder; 3. An assignee is subject restrictive indorsement. (sec. 37)
3. A holder in due to both real d. Qualified - constitutes the indorser a mere
course is subject and personal assignor of the title to the instrument. (sec.
only to real defenses; 38)
defenses; 4. Generally,an  made by adding to the indorser's signature
4. A holder in due assignee merely steps words like "sans recourse,” “without
course may acquire a into the shoes of the recourse", "indorser not holden", "at the
better right than that assignor; indorser's own risk", etc.
of a prior party 5. An assignor does not  The purpose of this kind of indorsement is
5. A general indorser warrant the solvency to transfer title without guaranteeing
warrants the of prior payment by the primary party.
solvency of prior parties unless
parties; expressly stipulated  It does not mean, however, that the
or the insolvency is qualified indorser incurs no liability at all.
known to him; The effect is merely to limit his
6. An assignor is liable liability. He is liable for breach of is
6. An indorser is not even without notice warranties as an indorser under Sec. 65.
liable unless there be of dishonor; Thus, he is liable if the instrument is
presentment and dishonored by NON-ACCEPTANCE
notice of dishonor; 7. Governed by Arts. or NON-PAYMENT due to:
7. Negotiation is 1624 to 1635 (on a. forgery;
assignment of credits) b. lack of good title to the instrument
governed by the NIL.
of the Civil Code. indorsed;

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 NEGOTIABLE INSTRUMENTS LAW
c. lack of capacity to contract on the
part of prior parties; or
d. the fact that the instrument was
valueless or not valid at the time of
the indorsement which fact was
known to him.
e. Conditional - right of the indorsee is made to
depend on the happening of a contingent
event
• Party required to pay may disregard the
conditions.
• This kind of indorsement has no effect on
the further negotiation of the instrument.
The party required to pay, if he chooses,
may make payment, disregarding the
condition without incurring any liability
because he is expressly authorized to do
so under Sec. 39. But the person who
received payment will hold the proceeds
subject to the right of the conditional
indorser.
f. Absolute - one by which indorser binds
himself to pay:
i. upon no other condition than failure of
prior parties to do so; and
ii. upon due notice to him of such failure.
g. Joint - indorsement of instrument payable to 2
or more persons; all must indorse in order for
the transaction to operate as a negotiation.
 Pay to X AND Y; Both must indorse
 Pay to X OR Y: any one
 Exceptions to the rule requiring joint
indorsement:
a. Where the payees or indorsees are
partners; and
b. Where the payee or indorsee
indorsing has authority to indorse for
the others.
h. Irregular - a person who, not otherwise a
party to an instrument, places thereon his
signature in blank before delivery.
Ø Rules on Indorsements:
• Effect of transfer without indorsement:
a. transfer vests in the transferee such title as
the transferor had therein (assignment), and
b. the right to have the indorsement of the
transferor.
ú 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.
ú Applicable only to order instruments
• Indorsement of a bearer instrument: 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.
Note: The rule only applies to originally bearer
instruments. If it is originally a BEARER
instrument, it will always be a BEARER instrument.
As opposed to an original order instrument
becoming payable to bearer, if the same is
indorsed specially, it can NO LONGER be
negotiated further by mere delivery, it has to be
indorsed.
• Striking out indorsements: 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.
ú If the instrument is payable to bearer on its
face, then whether or not there are
indorsements on the back of the instrument
would be immaterial to the title of the bearer,
who is presumptively the owner and holder by
his mere possession of such instrument. None
of the indorsement would be necessary to it’s
title since mere delivery would have been
sufficient to transfer title from one holder to
another.
ú Where the instrument is payable to order on
its face, the situation is different. First, the
indorsement of a special indorsee is necessary
for the further negotiation of the instrument.
Second, the last indorsement controls the
method of further negotiation.
• When prior party (reacquirer) may negotiate:
where an instrument is negotiated back to a prior
party, such party may reissue and further
negotiate the same. But he is not entitled to
enforce payment thereof against any intervening
party to whom he was personally liable.
ú In the following cases, a prior party cannot
further negotiate the instrument:
1. Where it is payable to the order of a third
person, and has been paid by the drawer;
2. Where it was made or accepted for
accommodation and has been paid by the
party accommodated;
3. In other cases, where the instrument is
discharged when acquired by a prior
party.
IV. HOLDERS
Classes of holders:
1. simple holder (sec. 51)
2. holder for value (sec. 26)
3. holder in due course (sec.52, 57)
Holder in Due Course (1996, 1998, 2000 Bar Exams)
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;
/ Page 7 of 15
 NEGOTIABLE INSTRUMENTS LAW
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.
Ø When title defective - The title of a person who
negotiates an instrument is defective when he:
I. obtained the instrument or any signature
thereto, by/for (manner of acquisition):
a. fraud
b. duress, or force and fear
c. other unlawful means
d. illegal consideration
II. negotiates the NI (manner of negotiation)
e. in breach of faith
f. under such circumstances amounting to
fraud.
Ø What constitutes notice of defect. - The person to
whom it is negotiated must have:
a. actual knowledge of the infirmity or
defect, or
b. knowledge of such facts that his action in
taking the instrument amounted to bad
faith. (sec. 56)
Ø 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, he will be deemed a
holder in due course only to the extent of the
amount paid by him.
Ø When person not deemed a 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.
 Reasonable time, what constitutes. - regard is to
be had to the
a. nature of the instrument,
b. the usage of trade or business with
respect to such instruments, and the
c. facts of the particular case.
• Effect: 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
Ø General Rule: every HOLDER is deemed prima facie
to be a holder in due course. But holder must
prove first that he is a holder.
Exception: 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 (shifting
of burden of proof).
Limitation: 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 (Burden not Shifted) (Sec. 59).
Ø Rights of a holder in due course:
a. he may sue on the instrument in his own
name;
b. he may receive payment and if payment is in
due course, the instrument is discharged.
c. holds the instrument free from any defect of
title of prior parties,
d. holds the instrument free from defenses
available to prior parties among themselves,
and
e. may enforce payment of the instrument for
the full amount thereof against all parties
liable thereon.
Ø Payment in due course is payment made:
a. at or after the maturity of the instrument
b. to the holder thereof
c. in good faith and without notice that his title
is defective.
Ø Shelter Rule:
a. A HNIDC who derives his title from a
HIDC, AND
b. 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.
Ø Rights of a Holder NOT in Due Course
1. He may sue on the instrument in his own
name;
2. He may receive payment and if the payment is
in due course, the instrument is discharged;
3. He is entitled to the instrument but holds it
subject to the same defenses as if it were non-
negotiable; and
4. He has all the rights of the holder in due
course from whom he derived his title in
respect of all parties prior to such holder,
provided he is not himself a party to any fraud
or illegality affecting the instrument.
Can a finance company be a HIDC?
No – Consolidated Plywood & Industries, Inc. v. IFC
Leasing and Acceptance Corporation, 149 SCRA 448
(1987)
Yes – Juanita Salas v. CA, 181 SCRA 296 (1990)
No – Great Asian Sales Center Corporation v. Court of
Appeals, G.R. No. 105774, 25 April 2002 (The SC said
the solution is for FC to make the consumer sign a
separate contract and to enforce the obligation based
on contract instead of the NI)
(Effectively) No – Art. 146, RA 7394 (Consumer Act,
1992), at least insofar as consumer loans are
concerned
“ARTICLE 146. Sale of Consumer
ProductsOn Installment 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,
/ Page 8 of 15
 NEGOTIABLE INSTRUMENTS LAW
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.” (emphasis
supplied.)
“ARTICLE 4. Definition of Terms. — For
purposes of this Act, the term:
“xxx xxx xxx
“n) ‘Consumer’ means a natural person who is a
purchaser, lessee, recipient or prospective purchaser,
lessor or recipient of consumer products, services or
credit.
“o) ‘Consumer credit’ means any credit extended
by a creditor to a consumer for the sale or lease of any
consumer product or service under which part or all of
the price or payment therefor is payable at some
future time, whether in full or in installments.
“xxx xxx xxx
“q) ‘Consumer products and services’ means
goods, services and credits, debts or obligations which
are primarily for personal, family, household or
agricultural purposes, which shall include but not
limited to food, drugs, cosmetics, and devices.
“xxx xxx xxx
“s) ‘Consumer transaction’ means (1) (i) a sale,
lease, assignment, award by chance, or other
disposition of consumer products, including chattels
that are intended to be affixed to land, or of services,
or of any right, title, or interest therein, except
securities as defined in the Securities Act and contracts
of insurance under the Insurance Code, or (ii) a grant
of provision of credit to a consumer for purposes that
are primarily personal, family, household or
agricultural, or (2) a solicitation or promotion by a
supplier with respect to a transaction referred to in
clause (1).”
V. LIABILITIES OF PARTIES
Persons primarily liable on instrument: the person
who, by the terms of the instrument, is absolutely
required to pay the same. All other parties are
"secondarily" liable.
LIABILITY WARRANTY
1. Conditioned on 1. Not conditioned.
presentment &
notice of dishonor.
2. Action accrues only 2. Action accrues
upon maturity/ once thereis
dishonor. breach.
1. Parties Primarily Liable
a. Maker (Sec. 60)
• engages to pay according to the tenor of
the instrument; and
• admits the existence of the payee and his
then capacity to indorse at the time of
the making of the note.
• A person placing his name on the face of
a note is prima facie a maker and liable as
such; and he is presumed to have acted
with care and to have signed the
instrument with full knowledge of its
contents.
b. Acceptor (Sec. 62)
• engages to pay according to the tenor of
his acceptance;
• admits:
1. the existence of the drawer,
2. the genuineness of his signature and
3. his capacity and authority to draw
the instrument; and
4. the existence of the payee and his
then capacity to indorse.
Important: The drawee is not liable to the
payee or holder until he accepts the
instrument, or certifies the check (Secs. 127 &
189).
Exception: In HSBC v. Catalan, 440 SCRA 498
(2004), the Supreme Court ruled that
although the payee may not sue the drawee
based on the check, the payee may sue the
drawee based on tort under Art. 19 of the
NCC. The payee may sue for abuse of right so
long as he can prove:
(a) that there is a legal right or duty; (b)
which is exercised in bad faith; and (c) for the
sole intent of prejudicing or injuring another.
According to the Supreme Court, the
allegations in Catalan’s amended complaint
warrant an action for tort, particularly:
a. the unwarranted failure of the bank to
pay the checks despite the repeated
assurance of the drawer as to the
authenticity of the checks and frequent
directives to pay the value thereof to
Catalan; and
b. the bank failed to inform the payee of the
reasons for its continued inaction and
non-payment.
Note: The bank was not sued on the value of
the checks, but for how it acted in relation to
Catalan’s claim for payment.
/ Page 9 of 15
 NEGOTIABLE INSTRUMENTS LAW

 Acceptor admits the genuineness of • If instrument payable to order of maker

drawer’s signature, not indorsers’. or drawer, he is liable to all parties
 Where a check is certified by a bank, it is subsequent to the maker or drawer.
equivalent to an acceptance. Since • If he signs for accommodation of the
certification is equivalent to acceptance, a payee, he is liable to all parties
bank which has certified a check whether subsequent to the payee.
at the request of the holder or of a drawer,
has the same liabilities and
makes the same warranties as an GENERAL INDORSER IRREGULAR
acceptor. It cannot, after certification, INDORSER
question the genuineness of the 1. Makes either a blank 1. Always makes a
drawer’s signature. If it discovers that or special indorsement; blank indorsement;
such signature is forged subsequent to 2. Indorses the 2. Indorses before its
certification but prior to payment, it instrument after its delivery;
cannot refuse to pay on the check. If its delivery to the payee;
discovery comes after it has paid the 3. Liable only to parties 3. Liable to the payee
check, it cannot recover back what it subsequent to him and subsequent parties
paid on the ground of mistaken payment unless he signs for the
unless the holder is guilty of fraud or accommodation of the
negligence. payee in which case he is
 If a drawee-bank accepts or pays a check liable only
despite a stop payment order from the to all parties subsequent
drawer, through oversight or otherwise, it to the payee.
cannot refuse to pay the holder or
recover what has been paid;
neither may it debit the drawer’s account 3. Parties with Limited Liability (sec. 65; Metropol
unless the acceptance or payment was Financing v. Sambok, 120 SCRA 864)
made prior to the receipt of the order. c. Qualified Indorser - warrants that:
 The liabilities of an acceptor applies to a ú instrument is genuine and in all respects
drawee who pays without accepting the what it purports to be;
instrument. ú he has good title to it;
ú all prior parties had capacity to contract;
2. Parties Secondarily Liable ú he has no knowledge of any fact which
a. Drawer (Sec. 61) would impair the validity of the
 admits the existence of the payee and instrument or render it valueless.
his capacity to indorse;
 engages that the instrument will be d. Persons Negotiating by Delivery
accepted or paid or both according to ú warranties same as those of qualified
its tenor; and indorsers, but extend to immediate
 engages that if the instrument is transferee only.
dishonored and proper proceedings
are brought, he will pay to the party 4. Other parties who may be liable
entitled to be paid.
General Rule: One whose signature does not appear on
b. General Indorser (Sec. 66) the instrument shall not be liable thereon (Sec. 18).
 Warrants:
1. genuineness of the instrument; Parties who may be liable although his signature does
2. his good title to it; not appear on the NI:
3. capacity to contract of prior 1. The principal who signs through an agent
parties; and 2. One who signs his assumed or trade name is liable
4. instrument is valid and subsisting. 3. The forger
 engages that the instrument will be 4. Persons whose signatures were forged, but are
accepted or paid or both according to precluded from setting up the defense of forgery
its tenor; and 5. One who indorses in a separate instrument
 engages that if the instrument is (allonge)
dishonored and proper proceedings 6. A person negotiating by delivery (as in the case of
are taken, he will pay to the party a bearer instrument) is liable to his immediate
entitled to be paid. indorsee.
7. In the case of constructive acceptance
c. Irregular Indorser – a person, not
otherwise a party to an instrument, places
his signature thereon in blank before
delivery.
Rules:
 If instrument payable to the order of a
3rd person, he is liable to the payee
and subsequent parties.
/ Page 10 of 15
 NEGOTIABLE INSTRUMENTS LAW
Parties who are not liable although his signature
appear on the NI:
1. Persons covered by Sec. 15 (Incomplete and
undelivered NI)
2. Minor or incapacitated persons
3. Agent
4. Person whose signature was forged.
Requisites for an Agent to escape liability:
1. must be duly authorized;
2. add words to his signature indicating that he signs
as an agent, that is, for or on behalf of a principal,
or in a representative capacity; and
3. disclose his principal.
Ø A signature by “procuration” operates as notice
that the agent has but a limited authority to sign,
and the principal is bound only in case the agent in
so signing acted within the actual limits of his
authority. (sec. 21)
Ø Indorsement or assignment of the NI by a
corporation or by an infant passes the property
therein, notwithstanding that from want of
capacity, the corporation or infant may incur no
liability thereon. (sec. 22)
Accommodation Party
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.
Ø Can receive payment for lending his name.
Ø Indorser must lend his name to the maker, and not
to the holder (Maulini v. Serrano, 28 Phil. 640)
Ø Liability: 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.
Ø Effects:
1. accommodation party is generally regarded as
a surety for the party accommodated;
2. When accommodation party makes payment
to holder of the note, he has the right to sue
the accommodated party for reimbursement.
Ø Rights of accommodation parties as against each
other: the other may demand contribution from
his co-accommodation party without first directing
his action against the principal debtor provided:
1. he made the payment by virtue of judicial
demand; or
2. the principal debtor is insolvent.
(Sadaya v. Sevilla, 19 SCRA 924; Art. 2073, NCC)
Note: A corporation cannot act as an accommodation
party. The issuance or indorsement of negotiable
instrument by a corporation without consideration and
for the accommodation of another is ultra vires.
(Crisologo v. CA, 117 SCRA 594).
Order of liability of indorsers:
1. among themselves – indorsers are liable prima
facie in the order in which they indorse; but
evidence is admissible to show that, as between or
among themselves, they have agreed otherwise
(sec. 68)
2. The holder – indorsers are liable in any order
VI. DEFENSES
1. Real/Absolute Defenses - those that attach to the
instrument itself and are available against all
holders, whether in due course or not.
Examples:
1. Alteration
2. Non-delivery of incomplete instrument
3. Duress amounting to forgery (when signature
is acquired by duress)
4. Fraud in factum or fraud in esse contractus
5. Minority
6. Marriage in the case of a wife
7. Insanity where the insane person has a
guardian appointed by the court (Ogden)
8. Ultra vires acts of a corporation, where the
corporation is absolutely prohibited by its
charter or statute from issuing any
commercial paper under any circumstances
(Foreign case)
9. Want of authority of agent
10. Execution of instrument between public
enemies (Ogden)
11. Illegality of contract where it is the contract or
instrument itself which is expressly made
illegal by statute
12. Forgery
13. Prescription
14. Discharge in insolvency
2. Personal/Equitable Defenses – those which are
available only against a person not a holder in due
course or a subsequent holder who stands in
privity with him.
Examples:
1. Absence or failure of consideration
2. Want of delivery of complete instrument
3. Insertion of wrong date in an instrument,
where it is payable at a fixed period after date
and it is issued undated or where it is payable
at a fixed period after sight and the
acceptance is undated
4. Filling up of blank contrary to authority given
or not within reasonable time, where the
instrument is delivered
5. Fraud in inducement
6. Acquisition of instrument by force, duress, or
fear
7. Acquisition of the instrument by unlawful
means
8. Acquisition of the instrument for an illegal
consideration
9. Negotiation in breach of faith
10. Negotiation under circumstances that amount
to fraud
11. Mistake
12. Intoxication (according to better authority);
13. Ultra vires acts of corporations where the
corporation has the power to issue
/ Page 11 of 15
 NEGOTIABLE INSTRUMENTS LAW
negotiable paper but the issuance was not
authorized for the particular purpose for
which it was issued
14. Want of authority of agent where he has
apparent authority
15. Insanity where there is no notice of insanity
on the part of the one contracting with the
insane person
16. Illegality of contract where the form or
consideration is illegal
Ø Defenses available to solidary debtor (Art. 1222,
NCC):
a. Those derived from the nature of the
obligation
b. Those that are personal to him
c. Those that personally belong to the others
(partial defense)
Ø Fraud in factum v. Fraud in inducement
Ø Effects of Defenses:
1. Minority is a real defense, but personal to the
minor
2. Incomplete but delivered instrument (Sec. 14;
1997, 2004 Bar Exams)
• Situations contemplated:
a. 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. Material particular: those
that can or cannot affect negotiability
b. A signature on a blank paper delivered by
the person making the signature in order
that the paper may be converted into a NI
operates as a prima facie authority to fill
it up as such for any amount
• To hold parties prior to completion liable by a
HNIDC: NI must be filled up strictly in
accordance with the authority given AND
within a reasonable time
• If requisites not met, can HNIDC enforce the
NI against a party prior to completion?
b. No (better view)
c. Yes, according to authorized tenor
• if any such instrument, after completion, is
negotiated to a HIDC, 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
3. Incomplete and undelivered instrument (Sec. 15)
• 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.
• However, subsequent indorsers are liable.
• In the hands of a HIDC, there is prima facie
presumption of delivery
4. Complete and undelivered instrument (Sec. 16)
• as between immediate parties and as regards
a remote party other than a holder in due
course, the delivery must be authorized in
order to be effectual
• “Immediate” means privity, not proximity
• As against a HNIDC, it may be proved that:
a. No delivery was made
b. Delivery was not authorized
c. Delivery was conditional or for a special
purpose
Rules on delivery of NI (Sec. 15 & 16)
1. Delivery is essential to the validity of any NI
2. Delivery must have been with the intention of
passing title
3. An incomplete and undelivered NI is invalid as to
any party before delivery in the hands of ANY
holder, even a HIDC
4. NI mentioned in #3, there is prima facie
presumption of delivery (if HIDC)
5. Delivery to the agent is sufficient (if HIDC)
6. There is a prima facie presumption of delivery of a
complete NI (if HNIDC)
7. There is conclusive presumption of delivery of a
complete instrument (if HIDC)
8. Delivery of the NI may be made on a parol
condition or for a special purpose (only against a
HNIDC)
5. Prescription
• Under the NCC, 10 years from accrual of the
cause of action
• In the case of checks, the action of the
depositor against his drawee bank
commences to run from the time he is given
notice of payment (PCIB v. CA, 350 SCRA 446
[2001])
• In Papa v. Valencia, 284 SCRA 643 (1998), the
SC said that the failure of the payee to encash
the check for more than
10 years ”undoubtedly resulted in the
impairment of the check through his
unreasonable and unexplained delay.” This is
contrary to NAMARCO v. F.U.N.D.,
49 SCRA 238 (1973) where it was held that
the rule that delivery of a mercantile
document shall produce the effect of payment
when impaired by the creditor’s fault has no
application to a check issued by the debtor
himself. There will be no prejudice to the
drawer-debtor because he is supposed to
maintain his funds in his account.
Nonetheless, it is submitted that the SC could
have arrived at the same conclusion reached
in the Papa Case if it relied on prescription.
6. Alteration (1995, 1996, 1999 Bar Exams)
• The instrument is avoided
• Exceptions:
1. against a party who has himself made,
authorized, or assented to the alteration
2. subsequent indorsers
/ Page 12 of 15
 NEGOTIABLE INSTRUMENTS LAW
3. holder in due course not a party to the
alteration - he may enforce payment
according to its original tenor
• Changes constituting material alteration:
a. date;
b. sum payable, either for principal or
interest;
c. time or place of payment
d. number or relations of the parties;
e. medium or currency in which payment is
to be made;
f. that which adds a place of payment
where no place of payment is specified;
and
g. any other change or addition which alters
the effect of the instrument in any
respect.
Note: a material alteration is one that alters the
effect of the instrument; one which changes the
items required to be stated under Sec. 1, NIL.
• Spoliation – alteration made by a stranger to
the instrument. Sec. 124 is the American
doctrine of spoliation.
• The general rule denies the drawee bank’s
right to charge against the drawer’s account
the amount of an altered check. However, the
latter’s negligence, before or after the
alteration, may estop him from setting such
alteration as against an innocent drawee bank
who has paid the check.
Note: Alteration is only a partial real defense
because a holder in due course can still enforce it
according to its original tenor.
Original Tenor is altered before acceptance 1st
View: Altered tenor is tenor of acceptance
2nd View: Original tenor is tenor of acceptance.
Acceptance is the signification by the drawee of
his assent to the order of the drawer. The order of
the drawer is the original tenor, not the altered
tenor. What “tenor of his acceptance” means is
whether the same is general or qualified
acceptance (Sec. 139).
FEBTC v. Gold Palace Jewelry Co., 562 SCRA 604
(2008)
The collecting bank cannot debit the account of
the payee who is a holder in due course if the
collecting bank returned the amount of the altered
check to the drawee bank. It is the drawee bank
that should bear the loss. If collecting bank
reimbursed the drawee bank, it is considered as
acting on its own because:
- Payment of check by the drawee includes
acceptance under Sec. 62, NIL.
- Tenor of acceptance is determined by the terms
of the bill as it is when the drawee accepts.
- HIDC who relied on the drawee’s clearance and
payment is protected by Sec. 62.
- Drawee, compared to the HIDC, is in a better
position to verify with the drawer the matters
stated in the bill.
- The view in common law that drawee bank may
recover from the person to whom payment was
made by mistake is not applicable since our laws
have no similar provision.
- The principal-agent relationship between the
payee and collecting bank had ceased.
- The collecting bank cannot be considered to
have acted as representative of the drawee
bank when it debited payee’s account.
- The collecting bank cannot invoke the warranty
of payee who indorsed the NI for collection
since it’s restrictive under Sec. 36 (no transfer of
title to collecting bank). The warranties under
Sec. 66 are based upon a transfer of title.
Comments on the FEBTC Case
- The protection of a HIDC should be in
accordance with Sec. 124; hence, entitled to the
original amount.
- When the collecting bank returned the amount
to the drawee bank, it was not a mere voluntary
act, but dictated by law and jurisprudence. The
obligation of the collecting bank is based on the
doctrine that it has warranties of a general
indorser, and Rules of the Philippines Clearing
House Corporation and BSP Supplementary
Rules on Regional Clearing.
- The warranties of the collecting bank, as agent
of the payee, extends in favor of the drawee.
The act of the agent is the act of the principal.
- The principal will not escape liability upon
termination of the principal-agent relationship
for acts done when the agency was still in
existence.
- There are SC decisions that support the view
that the payee will shoulder the loss since he
has the same warranties of a general indorser.
- Payment by mistake is recognized under Art.
2154, NCC (solutio indebiti).
(Aquino, Timoteo B., Notes and Cases on
Negotiable Instruments Law and Banking Law,
2018 Ed.)
Note: Effective January 4, 2016, any check with
erasure, alteration and/or deficiency—regardless of
any signature or initial to indicate authorization of
erasures and alterations—shall no longer be eligible or
acceptable for clearing pursuant to Philippine Clearing
House Corporation policy CHOM No. 15-460, as
amended.
7. Forgery (1995, 2006, 2010 Bar Exams)
• Effects:
1. signature is wholly inoperative
2. 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
/ Page 13 of 15
 NEGOTIABLE INSTRUMENTS LAW
3. Some parties are precluded from setting
up the defense of forgery
• Extent of Effects:
1. Only the forged signature is inoperative,
not the NI, not the genuine ones
2. The NI can be enforced by holders whose
title does not depend on the forged
signature (bearer instruments)
3. Can be enforced against those who are
precluded from setting up the forgery,
like:
a. Those who by their acts, silence, or
negligence, are estopped from
setting up the defense of forgery
b. Those who warrant or admit the
genuineness of the signature in
question. These include acts or
omissions that amount to
ratification, express or implied
(indorser, acceptor, person
negotiating by mere delivery).
Note: Persons precluded from setting up the
defense of forgery may still recover damages
under the NCC provisions on quasi-delicts.
Cut-Off Rule
General Rule: Parties prior to the forged signature
are cut-off from the parties after the forgery in the
sense that prior parties cannot be held liable and
can raise the defense of forgery. The holder can
only enforce the instrument against parties who
became such after the forgery.
Exception: When the prior parties are precluded
from setting up the defense of forgery.
Forgery of Indorsement
A. PN payable to order
- The party whose signature was forged and
parties prior to him are not liable
B. PN or Bill payable to bearer
- Only the person whose signature was
forged can raise forgery
- To HIDC: Liable. Indorsement is not
necessary to pass title
- To HNIDC: Not liable. Defense is want of
delivery of a mechanically complete
instrument (the instrument must be
complete before the forgery)
C. Bill Payable to order
- Drawee cannot charge the account of the
drawer
- Drawer cannot recover from the collecting
bank
- Drawee can recover from the collecting
bank (BUT if it is the drawer’s signature
which was forged, drawee cannot recover
from the collecting bank)
- Payee can recover from the drawer
- Payee can recover from recipient of
payment
- Payee cannot recover from the drawee
- Collecting bank bear’s the risk of loss, but
can recover from the person to whom it is
paid
Forgery of Drawer’s Signature
- Drawee bank that paid is liable. It cannot
go after the collecting bank. Recourse is
against the forger
Double Intent in Fraudulent Impersonation
1. Maker or drawer intends to make the
instrument payable to the person before
him
2. He intends to make the instrument
payable to the person whom he believes
the stranger to be.
Note: The 1st is not forgery, but signature of
an assumed name.
• Loss is thrown upon the issuer:
1. Theory of actual intent
2. Theory of estoppel/negligence
VII. NOTICE OF DISHONOR
Notice of Dishonor - bringing, either verbally or in
writing, to the knowledge of the drawer and indorser
the fact that a NI, upon proper proceedings taken, has
not been accepted or paid and the party notified is
expected to pay it.
Ø Effect of failure to give notice: parties secondarily
liable are discharged
Ø Not necessary for qualified indorser or person who
negotiated the NI by delivery.
Ø Requisites:
1. Given by holder (or his agent), or by any party
who may be compelled by the holder to pay
(or his agent);
2. Given to secondary party or his agent;
3. Given within the periods provided by law;
4. Given at the proper place.
Ø When notice of dishonor dispensed with:
1. when party to be notified knows about the
dishonor, actually or constructively;
2. if waived; and
3. when after due diligence, it cannot be given.
Ø Notice of dishonor given by or on behalf of a
holder inures to the benefit of:
a. all parties prior to the holder, who have a
right of recourse against the party to whom
the notice is given; and
b. all holders subsequent to the holder giving
notice.
Ø Notice of dishonor given by or on behalf of a party
entitled to give notice inures to the benefit of:
a. the holder; and
b. all parties subsequent to the party to whom
notice is given.
Ø Where an instrument is dishonored in the hands of
an agent, he can do either of the ff.:
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 NEGOTIABLE INSTRUMENTS LAW

a. directly give notice to persons secondarily
liable thereon; or
b. give notice to his principal.
Ø Notice of dishonor is not required to be given to
the drawer in any of the ff. cases:
1. drawer and drawee are the same;
2. drawee is a fictitious person or not having the
capacity to contract;
3. drawer is the person to whom the instrument
is presented for payment;
4. the drawer has no right to expect or require
that the drawee or acceptor will honor the
instrument;
5. where the drawer has countermanded
payment.
4. By a valid tender or payment made by a prior
party;
5. By the release of the principal debtor, unless the
holder’s right of recourse against the party
secondarily liable is expressly reserved;
6. By any agreement binding upon the holder to
extend the time of payment or to postpone the
holder’s right to enforce the instrument.
Ø In the following cases, the agreement to extend
the time of payment does not discharge a party
secondarily liable:
a. where the extension of time is consented to
by such party;
b. where the holder expressly reserves his right
of recourse against such party.

Ø Notice of dishonor is not required to be given to Ø Payment at or after maturity by a party

an indorser in the ff. cases:
1. drawee is a fictitious person or does not have
the capacity to contract, and indorser was
aware of that fact at the time he indorsed the
instrument;
2. indorser is the person to whom the
instrument is presented for payment;
3. instrument was made or accepted for his
accommodation.
Ø If an instrument is not accepted by the drawee,
there is no sense presenting it again for payment,
and notice of dishonor must at once be given. If
there was acceptance, presentment for payment is
still required and if payment is refused, there is a
need for notice of dishonor.
Ø An omission to give notice of dishonor by non-
acceptance does not prejudice the rights of a
holder in due course subsequent to the omission.
VIII. DISCHARGE
Discharge of instrument - a release of all parties,
whether primary or secondary, from the obligations
arising thereunder. It renders the instrument without
force and effect and, consequently, it can no longer be
negotiated.
secondarily liable does not discharge the
instrument. It only cancels his own liability and
that of the parties subsequent to him.
Effects of Renunciation:
1. A renunciation in favor of a secondary party may
be made by the holder before, at or after maturity
of the instrument. Effect: only such secondary
party is discharged and all parties subsequent to
him but the instrument itself remains in force.
2. A renunciation in favor of the principal debtor may
be effected at or after maturity. Effect: the
instrument is discharged and all parties thereto
provided the renunciation is made unconditionally
and absolutely.
Note: In either case, renunciation does not affect the
rights of a holder in due course without notice.
Ø Cancellation of an instrument includes tearing,
erasure, obliteration, or burning. It is not limited
to writing of the word ‘cancelled”, or “paid”, or
drawing of criss-cross lines across the instrument.
—oOo—

Instances:
1. By payment in due course by or on behalf of the
principal debtor;
2. Payment by accommodated party, where the
instrument is made or accepted for his
accommodation;
3. Intentional cancellation by the holder;
4. By any act which will discharge a simple contract
for the payment of money;
5. When the principal debtor becomes the holder of
the instrument at or after maturity in his own
right.

When persons secondarily liable on the instrument

are discharged:
1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by
the holder;
3. By the discharge of a prior party;

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