Commercial Law Review
Negotiable Instruments Law
NEGOTIABLE INSTRUMENTS LAW (Act No. 2031)
PRELIMINARY CONSIDERATIONS:
A. Governing Laws
1. The Negotiable Instruments Law
2. The Code of Commerce
3. The New Civil Code
B. Concept of Negotiable Instrument
Negotiable Instruments is a written contract
for the payment of the 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.
C. Classes of Negotiable Instrument
1. Promissory Note
Sec. 184 of the Negotiable Instruments
Law provides that: “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.”
*Personal engagement on the part of the
maker.
2. Bill of Exchange
Sec. 126 of the Negotiable Instruments
Law provides that: “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.”
*There is only an order directing other
party to pay the instrument.
D. Functions of Negotiable Instrument
1. It operates as a substitute of money
*This is the main function of negotiable
instruments.
*Either negotiable or non-negotiable
instrument, it is a substitute for money.
Both are in lieu of money.
*relate this with legal tender
2. It is a means of creating and transferring
credit
3. It facilitates the sale of goods
4. It increases the purchasing medium in
circulation
Q: Which one is the best or better substitute
for money? Why?
A: Negotiable instrument.
Reasons:
1. Negotiability and
2. Accumulation of secondary contracts.
E. Characteristics of Negotiable Instrument
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.
*This attribute is very important.
2. Accumulation of secondary contracts –
secondary contracts are picked up and
carried along with them as they are
negotiated from one person to another,
or in the course of negotiation of a
negotiable instrument, a series of juridical
ties between the parties thereto arise
either by law or by privity.
*There must be further negotiation for
secondary contracts exist.
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*Converted to obligors because of their
indorsements
F. Negotiable Instruments compared with other
papers (document of title, letter of credit,
certificate of stock, pawn ticket, postal money
order, treasury warrant)
Document of title includes any bill of lading,
dock warrant, quedan, or warehouse receipt
or order for delivery of goods, or any other
document used in the ordinary course of
business in the sale or transfer of goods, as
proof of possession or control of goods, or
authorizing or purporting to authorize the
possessor of the document to transfer or
receive either by indorsement or by delivery,
goods represented by such document (Article
1636 of the New Civil Code)
Letter of Credit is an engagement by a bank
or other person made at the request of a
customer that the issuer will honor drafts or
other demands for payment upon compliance
with the conditions specified in the credit.
Certificate of Stock is a non-negotiable
instrument because it does not contain an
unconditional promise or order to pay a sum
certain in money.
Pawn Ticket is a non-negotiable document
because it does not represent money but the
pawned articles.
Postal Money Order is a non-negotiable
instrument because it is governed by postal
rules and regulations which may be
inconsistent with the Negotiable Instruments
Law and it can only be negotiated once.
Treasury Warrant is a non-negotiable
instrument because it is payable out of a
particular fund.
G. Legal tender character
Q: Does negotiable instrument has legal
tender power?
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Negotiable Instruments Law
A: NO.
Q: What is legal tender?
A: Legal tender is that kind of money that the
law compels a creditor to accept in payment
of his debt when tendered by the debtor in
the right amount.
*Coins/notes circulated by the Bangko Sentral
ng Pilipinas.
Q: What attribute that legal tender has that
negotiable instrument do not have?
A: Element of compulsion.
FORM AND INTERPRETATION OF NEGOTIABLE
INSTRUMENTS:
A. Requisites of negotiability
Sec. 1 of the Negotiable Instruments Law
provides that: “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.”
Q: What principle do we follow in determining
the instrument as negotiable or not?
A: Negotiability is shown on the face of the
instrument.
Requisites:
1. Must be in writing and signed by the
maker or drawer
Q: Why should it be in writing?
A: In order for the instrument to be used
for negotiation.
Rationale: For the achievement of the
purpose of the negotiable instrument law.
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*It must be signed by the maker or instrument. But an order or

drawer. Rationale: To be bound by the promise to pay out of a
contract. particular fund is not
2. Must contain an unconditional promise or unconditional.”
order to pay a sum certain in money ii. Source or payment or account
Rationale why the law requires that the to be debited
promise or order be unconditional:
Because no one will accept the same if Fund for Particular
Reimbursement Fund for
the transferee does not know the
Payment
certainty of the event that will happen. The drawee pays There is only
Hence, uncertainty will defeat the very the payee from one act – the
purpose of the negotiable instrument law, his own funds drawee pays
i.e., substitute for money. afterwards the directly from
*Mere recital does not negate drawee pays the particular
negotiability of the instrument. himself from the fund indicated
particular fund
Q: What is a condition?
Particular fund Particular fund
A: A contingent event, happening of indicated is not indicated is
which is uncertain, event which may or the direct source the direct
may not happen. of payment source of
*In alternative obligation, for negotiability payment
purposes, the option must be left in the *Particular fund for payment
hands of the creditor for it to be depends on the sufficiency of
negotiable. the funds
*If the option is left in the hands of the *Extrinsic and collateral
debtor, it is non-negotiable. matter negates negotiability.
a. Promise or order to pay must be b. Payable in sum certain in money
unconditional i. Provisions which do not affect
i. Reference to transaction certainty of sum payable
Sec. 3 of the Negotiable Sec. 2 of the Negotiable
Instrument Law provides Instrument Law provides
that: “An unqualified order or that: “The sum payable is a
promise to pay is sum certain within the
unconditional within the meaning of this Act, although
meaning of this Act though it is to be paid: (a) With
coupled with: (a) An interest; or (b) By stated
indication of a particular fund installments; or (c) By stated
out of which reimbursement installments, with a provision
is to be made or a particular that, upon default in payment
account to be debited with of any installment or of
the amount; or (b) A interest, the whole shall
statement of the transaction become due; or (d) With
which gives rise to the exchange, whether at a fixed

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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.”
ii. Payment of interest
Q: Why is there a need to pay
interest?
A: For the consumption of the
money owned by a person
but was not used by him.
iii. Payment by installments
Stated Installments – the
dates of each installment
must be fixed or at least
determinable and the amount
to be paid for each
installment must be stated.
Things to be written in the
negotiable instrument
regarding payment by
installments:
1. Amount of each
instalments
*must be determinable
2. Maturity Date
iv. Acceleration clause
Acceleration clause renders
whole debt due and
demandable upon failure of
the obligor to comply with
certain conditions.
*relate to doctrine of
indivisibility of contract.
v. Payment with exchange
*It must be the prevailing rate
of conversion or fixed rate
that is well known.
*Does not affect the
negotiability of the
instrument because the sum
remains certain.
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Negotiable Instruments Law
vi. Payment of attorney’s fees
*Due to the default of the
obligor, obligee was forced to
engage the services of a
lawyer.
3. Payable on demand or at a fixed or
determinable future time
a. When payable on demand
Sec. 7 of the Negotiable Instruments
Law provides that: “An instrument is
payable on demand: (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. 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.”
*It is the holder of the instrument
that has the call in case the negotiable
instrument is silent, i.e., it stated no
maturity date.
b. When payable at determinable future
time
Sec. 4 of the Negotiable Instruments
Law provides that: “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.”
With a With a Period
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Condition
Uncertain to Certain to
happen happen though
the date of
happening is
uncertain
*If the instrument is demandable
based on period the negotiability of
the instrument is still not affected.
*Paragraph (c) is one with a period.
4. Payable to order or bearer
*These are words of negotiability
Q: What is the implication of these
words?
A: There is a proper authorization for
further negotiation by the maker or
drawer.
a. When payable to bearer
Sec. 9 of the Negotiable Instrument
Law provides that: “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 (e) When the
only or last indorsement is an
indorsement in blank.”
Principle: Once a bearer always a
bearer instrument.
*This principle applies only to an
instrument that was originally issued
as bearer instrument.
i. Rule when instrument is
payable to a fictitious person
*Upon its face, it is an order
instrument but because it is
named to fictitious or non-
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Negotiable Instruments Law
existing person it is converted
to a bearer instrument.
*Fictitious person or non-
existing person cannot
endorse.
*The person to whose order
the instrument is made
payable may in fact be
existing but he is still fictitious
or non-existent under Sec.
9(c) of the negotiable
instrument law if the person
making it so payable does not
intend to pay the specified
person.
b. When payable to order
*The payee of instrument payable to
order must be a person in being,
natural or legal, and ascertained at
the time of issue.
i. To whose order the
instrument may be made
payable
Sec. 8 of the Negotiable
Instrument Law provides
that: “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
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therein with reasonable
certainty.”
 A payee who is not
maker, drawer, or drawee
*The payee may be a
juridical person.
Q: How can it be
negotiated further?
A: By indorsement of the
person authorized by the
corporation.
 The holder of an office for
the time being
*It is not necessary to
name the person holding
the position since it is
payable to the office itself
and not to the person
holding it.
5. Omissions that do not affect negotiability
Sec. 6 of the Negotiable Instrument Law
provides that: “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.”
 Does not specify the value given or
that any value had been given therefor
*Consideration is always presumed. Basis:
Sec. 24 of the Negotiable Instrument Law
provides that: “Every negotiable
instrument is deemed prima facie to have
been issued for a valuable consideration;
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Negotiable Instruments Law
and every person whose signature
appears thereon to have become a party
thereto for value.”
 Does not specify the place where it is
drawn or the place where it is payable
*The New Civil Code is applied
suppletorily.
 Bears a seal
*This is for authentication purposes.
 A particular kind of current money in
which payment is to be made
*It is still negotiable because it would still
be considered payable in money. Foreign
currency is convertible to Philippine
money which is legal tender in the
Philippines.
6. Additional provisions not affecting
negotiability
Sec. 5 of the Negotiable Instrument Law
provides that: “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.”
a. Sale of collateral securities
Q: Is the authority to sale includes the
authority to appropriate for himself?
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A: NO. It constitutes pactum
commissorium. It is an unjust
enrichment.
Q: What is the meaning of sale of
collateral securities?
A: Contemplates securities added to
the obligation to pay.
b. Confession of judgment
*This is void by reason of public policy
but still it is negotiable.
*In effect, such provision is
considered not existing.
*It waives his right to due process; his
right of a day in court.
Case: PNB v Manila Oil Refinery
c. Waiver of benefit
*Pertains to benefits granted by the
Negotiable Instrument Law.
Q: What are the benefits that can be
waived but the negotiability of the
instrument is not affected?
A: 1. Presentment for payment; 2.
Notice of dishonor; 3. Protest
d. Holder is given the option to do
something in lieu of payment of
money
*If it is the obligor or debtor is given
NEGOTIATION:
the option to choose what to be done
it is not negotiable because it is
conditional thus requisites for
negotiability is not complied with.
B. Rules to be followed in interpreting
negotiable instruments
Sec. 17 of the Negotiable Instrument Law
provides that: “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
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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. “
*This rule is applicable only in case of
ambiguity and there is doubt.
A. Modes of transfer
1. 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.
2. Assignment – a method of transferring a
non-negotiable instrument whereby the
assignee is merely placed in the position
of the assignor and acquires the
instrument subject to all defenses that
might have been set up against the
original payee.
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*If the instrument is a non-negotiable the
only transfer that can be made is by
assignment.
B. Concept of negotiation; distinguished from
assignment
Sec. 30 of the Negotiable Instrument Law
provides that: “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.”
Assignment Negotiation
Pertains to Pertains to
contracts in general negotiable
instruments
Assignee takes the Holder in due course
instrument subject takes it free from
to the defenses personal defenses
obtaining among available among the
the original parties parties
Assignee steps into Holder in due course
the shoes of the may acquire a better
assignor and merely right than the right
acquires whatever of the transferor
rights the assignor
may have
Governed by the Governed by the
Civil Code Negotiable
Instrument Law
C. Ways of negotiation (in case of order or
bearer instrument)
1. If payable to bearer, it is negotiated by
mere delivery
2. If payable to order, it is negotiated by
indorsement and delivery
Q: Why can’t indorsement be avoided by
original payee?
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A: Because by indorsement, it is the original
payee’s order to the maker to pay the
transferee.
Q: Why indorsement is not necessary in
bearer instrument?
A: Because the engagement is to pay the
amount of the instrument to holder or to any
subsequent holders.
Q: If the instrument is originally issued as an
order instrument and was subsequently
negotiated, does it always require
indorsement and delivery?
A: IT DEPENDS. If the indorsement is special,
it is necessary that there is indorsement and
delivery, however, if the indorsement is blank,
delivery alone is sufficient.
D. Concept of delivery
Sec. 16 of the Negotiable Instrument Law
provides that: “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.”
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Delivery is the transfer of possession of the
instrument by the maker or drawer with the
intention to transfer title to the payee and
recognize him as holder thereof.
*Delivery is always a common requirement.
E. Indorsement
1. Concept
Indorsement is a legal transaction
effected by the writing of one’s name at
the back of the instrument or upon a
paper (allonge) attached thereto with or
without additional words specifying the
person whom or to whose order the
instrument is to be payable whereby one
not only transfers legal title to the paper
transferred but likewise enters into an
implied guaranty that the instrument will
be duly paid.
*This is a mechanical act
2. How made
Sec. 31 of the Negotiable Instrument Law
provides that: “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.”
Sec. 32 of the Negotiable Instrument Law
provides that: “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.”
3. Kinds
*These words: specified, restrictive,
conditional, qualified are associated
words; they can be used interchangeably.
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 How further negotiation of an order
instrument be made:
a. Special
Sec. 34 of the Negotiable Instrument
Law provides that: “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.”
*In special indorsement, indorsement
and delivery is necessary.
Example:
FFr
Front (Back) Pay to C
Sgd B
b. Blank
Sec. 35 of the Negotiable Instrument
Law provides that: “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.”
*In blank indorsement, only delivery
is necessary.
Example”
Back
Front (Back)
Sgd B
 When is the indorsement effective:
a. Conditional
Sec. 39 of the Negotiable Instrument
Law provides that: “Where an
indorsement is conditional, the party
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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.”
Q: What is suspended?
A: The very indorsement is suspended
thus the right of the indorsee is made
to depend on the happening of the
event.
Example:
A → B ----› C
b. Unconditional
 What are the liabilities of an indorser:
a. Qualified
Sec. 38 of the Negotiable Instrument
Law provides that: “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.”
*This indorsement is confined to
warranties.
*In this kind of indorsement, Sec. 65
of the Negotiable Instrument is
applicable.
b. Unqualified
*Indorsement of this kind makes the
indorsee liable for warranties and
held the indorsee secondarily liable in
case of dishonor.
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*Sec. 66 of the Negotiable Instrument
Law is applicable in this kind of
consideration.
 What are the rights of indorsee:
a. Restrictive
Sec. 36 of the Negotiable Instrument
Law provides that: “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.”
*Prohibits the further negotiation of
the instrument
- the beneficial and legal title is both
on the indorser.
*Constitutes the indorsee the agent
of the indorser
- the indorser has the legal title while
the beneficial title remains with the
principal.
-the relationship exists here is
principal-agent relationship.
*Vests the title in the indorsee in trust
for or to the use of some other
persons
-the beneficial title belongs to other
person whereas the legal title remains
with the beneficiary.
-The relationship exists is a trustee-
trustor relationship.
Sec. 37 of the Negotiable Instrument
Law provides that: “A restrictive
indorsement confers upon the
indorsee the right: (a) to receive
payment of the instrument; (b) to
bring any action thereon that the
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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.”
*It does not follow that if the
instrument is restrictively indorsed
the liability is qualified.
b. Unrestrictive
4. Other rules on indorsement
a. in a representative capacity
Sec. 44 of the Negotiable Instrument
Law provides that: “Where any
person is under obligation to indorse
in a representative capacity, he may
indorse in such terms as to negative
personal liability.”
b. Presumption as to time of
indorsement
Sec. 45 of the Negotiable Instrument
Law provides that: “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.”
c. Place of indorsement
Sec. 46 of the Negotiable Instrument
Law provides that: “Except where the
contrary appears, every indorsement
is presumed prima facie to have been
made at the place where the
instrument is dated.”
d. Striking out of indorsement
Sec. 48 of the Negotiable Instrument
Law states that: “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
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him, are thereby relieved from
liability on the instrument.”
*The striking of indorsement is under
the discretion of the holder and not of
the indorser.
e. Transfer indorsement of an
instrument payable to bearer
Sec. 40 of the Negotiable Instrument
Law states that: “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.”
Example:
Note payable to bearer
A → B → C → D
B indorsed the instrument to C
Q: Does the indorsement affect the
instrument?
A: NO. Even if there is an
indorsement, it does not change the
fact that the instrument is a bearer
one thus it can be negotiated by mere
delivery.
Q: Is the indorser of the bearer
instrument liable? What is his
liability?
A: YES. He is liable in case of breach of
warranty. He is liable as indorser for
the fact that he indorses a bearer
instrument.
*Indorsement on a bearer instrument
does not affect the nature of the
instrument because a bearer
instrument is always a bearer
instrument.
*This section applies only to
instruments which are originally
payable to bearer.
11

Example: A issued to B a bearer note,
B wants to negotiate it to C. B asked
you how he can validly negotiate the
bearer instrument? The answer is by
mere delivery.
Q: Is there a change in the liabilities of
a person who indorses a bearer
instrument?
A: YES. He is liable as an indorser
under Sec. 67 of the Negotiable
Instrument Law.
Q: Is there any liability attaches to the
person who negotiates the
instrument by mere delivery?
A: YES. Sec 65 second paragraph but
confined to warranties only.
f. Where instrument is payable to 2 or
more persons
Sec. 41 of the Negotiable Instrument
Law states that: “Where an
instrument is payable to the order of
two or more payees or indorsees who
are not partners, all must indorse
unless the one indorsing has authority
to indorse for the others.”
g. Instrument is drawn or indorsed to a
person as cashier
Sec. 42 of the Negotiable Instrument
Law states that: “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.”
h. Where name of payee or indorsee is
misspelled
Sec. 43 of the Negotiable Instrument
Law states that: “Where the name of
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Negotiable Instruments Law
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.”
i. Indorsement of an order of
instrument without indorsement
Sec. 49 of the Negotiable Instrument
Law provides that: “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.”
Q: A issued an instrument payable to
the order of B, B wants to negotiate it
to C. How negotiation be validly
made?
A: Indorsement and delivery
Q: A issued an order instrument to B,
B transferred it to C only by delivery
without indorsing it. Is there any legal
implication on the gesture made by
B?
A: YES. Under Sec. 49 of the
Negotiable Instrument, there is an
equitable assignment.
Q: Does the holder of the instrument
has any other right?
A: YES. He has the right to have the
indorsement of the transferor. This
right is applicable only if the
instrument is negotiable. He can file a
case for specific performance.
12

Q: Why is the date of indorsement
material?
A: To determine the date of due
course holding.
Q: A issued a negotiable instrument
to B, B negotiated it to C. The delivery
took effect on May 1, 2008 and the
indorsement took effect on June 1,
2008. When was there a valid
negotiation?
A: At the time indorsement was
made. There is no retroactive effect.
*The requisites of a holder in due
course must be present up to the
actual and valid negotiation took
place.
5. Negotiation by a prior party
Sec. 50 of the Negotiable Instrument Law
states that: “Where an instrument is
negotiated back to a prior party, such
party may, subject to the provisions of
this Act, reissue and further negotiable
the same. But he is not entitled to enforce
payment thereof against any intervening
party to whom he was personally liable.”
HOLDERS:
A. General concept of holder
Sec. 191 of the Negotiable Instrument Law
states that: “"Holder" means the payee or
indorsee of a bill or note who is in possession
of it, or the bearer thereof.”
*If payable to bearer, “holder” means the
person who is in possession thereof.
Q: Can a named payee be called a holder?
A: YES. If the instrument is in his possession.
Presumption: There was a valid delivery.
Advantage of being a holder in due course:
Can give shelter/protection to the subsequent
holders.
B. Holder in due course
Commercial Law Review
Negotiable Instruments Law
Sec. 52 of the Negotiable Instrument Law
provides that: “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.”
*Requisites on Sec. 52 boils down to good
faith and innocence of the holder.
*This is equivalent to innocent buyer in good
faith under New Civil Code.
1. Instrument complete and regular
*Complete: all necessary details that
define the necessary rights thereto and all
the requisites of Sec. 1 must be present.
*Regular: there must be no visible
alterations/changes upon the face of the
instrument.
*These are alterations that are obvious in
the naked eye.
2. Taken before overdue
*If the instrument is overdue, it is also a
notice that it has been dishonored.
*An instrument is overdue after the date
of maturity.
*It is very unusual to negotiate an
instrument that has been matured
because such instrument should have
been discharged.
a. Rule in case of installment
instruments
*When the instrument contains an
acceleration clause, knowledge of the
holder at the time of acquisition
thereof that one installment or
interest, or both, as the case may be,
13

is unpaid, is notice that the
instrument is overdue.
*One who purchases in good faith an
instrument upon which the interest is
overdue is a holder in due course. But
where, by the terms of the
instrument, the principal was to
become due upon default of the
payment of interest, one who takes
the instrument upon which the
interest is overdue is not a holder in
due course.
b. Rule in case of demand instruments
Sec. 53 of the Negotiable Instrument
Law provides that: “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.”
*In demand instrument,
reasonableness test is applied. It is
the usage of trade or business
practice (if any), with respect to such
instruments, and the facts of the
particular case.
3. Notice of infirmity or defect
Sec. 54 of the Negotiable Instrument Law
provides that: “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.”
*There is defective in the title when there
is error in the indorsement and/or in
delivery.
Q: Even if the instrument suffer
infirmities, is there a possibility that the
holder be a holder in due course?
Commercial Law Review
Negotiable Instruments Law
A: YES. If he has no knowledge of the
infirmity.
Sec. 55 of the Negotiable Instrument Law
provides that: “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.”
Q: What are the circumstances that
render title defective?
A: When he obtained the instrument or
any signature thereto by: 1. Fraud; 2.
Duress; 3. Force and fear; 4. Other
unlawful means; 5. For an illegal
consideration; 6. Negotiate it in breach of
faith; and 7. Under such circumstances as
amount to a fraud.
Example:
A → B → C
On the part of A, the issuance of the
instrument is involuntary because of the
presence of any circumstances mentioned
in Sec. 55. thus making B’s title defective.
Q: Can C still be called a holder in due
course?
A: YES. As long as he has no knowledge of
the defect in the title of the person
negotiating it to him.
Sec. 56 of the Negotiable Instrument Law
provides that: “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.”
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Negotiable Instruments Law

*Infirmities must include things that are The instrument contains

wrong with the instrument itself. These all
are infirmities not visible to the naked necessary details except
eye. for the amount, A
*As long as he has knowledge of the instructed B to fill the
infirmity due course holding is not instrument of the any
present. amount but upto P50,000
Q: How can we reconcile the 1 st only. B inserted P80,000.
requirement and the 4th requirement? B negotiated it to C.
A: The first requirement pertains to Q: Can C detect the infirmity upon its
infirmities visible to the naked eye face?
whereas the fourth requirement pertains A: NO
to infirmities not visible to the naked eye. 4. Good faith
Example: 5. Holder for value

C. Presumption of due course holding

Sec. 59 of the Negotiable Instrument Law
provides that: “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 expressed in this section
arises only in favor of a person who is a holder
in the sense defined in Sec. 191 of the
Negotiable Instrument Law, i. e., a payee or
indorsee who is in possession of the draft, or
the bearer thereof.
Q: How important is the statutory
presumption?
A: The holder of the instrument need not
prove that he is a holder in due course.
*The burden to prove shifted to the other
party.

D. Rights of holders in due course

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Negotiable Instruments Law

Sec. 57 of the Negotiable Instrument Law Holder in due A person derived

provides that: “A holder in due course holds course title from a holder
the instrument free from any defect of title of in due course
prior parties, and free from defenses available Always a holder in Holder in due course
due course to all to all prior parties
to prior parties among themselves, and may
prior parties. Always except to the person
enforce payment of the instrument for the full with freedom who negotiated the
amount thereof against all parties liable against defenses instrument to him
thereon.” and defective title
Shelter rule is Shelter rule is not
E. Shelter Rule applicable applicable
Sec. 58 of the Negotiable Instrument Law General Rule: Equitable defenses can be
provides that: “In the hands of any holder interposed against a person not a holder in
other than a holder in due course, a due course.
negotiable instrument is subject to the same Exception: Shelter rule, i. e., Section 58 of the
defenses as if it were non-negotiable. But a Negotiable Instrument Law.
holder who derives his title through a holder LIABILITY OF PARTIES:
in due course, and who is not himself a party
to any fraud or illegality affecting the Q: What is your understanding of parties liable? When
instrument, has all the rights of such former do you say a party is liable?
holder in respect of all parties prior to the A: A person is liable when he in obligated to perform a
latter.” particular prestation.
Requisites: Q: What are the liabilities of the parties according to
1. That the holder derived his title from a its nature?
holder in due course. A: 1. Warranties; 2. Engagement to pay ( primary;
2. That he himself is not a party to any fraud secondary)
or illegality affecting the instrument.
Example: A. Primary and secondary liability, distinguished
Distinction:
A → B → C → D → E → F
E is a holder in due course Primary Liability Secondary Liability
E negotiated the instrument to F who is not a The engagement of An engagement by a
holder in due course. a party to an party to an
To subsequent holder, F is considered to be a instrument that on instrument that on
holder in due course because he was its due date he will its due presentment
sheltered by E who is a holder in due course. accept or pay, or it shall be accepted
both, the or paid or both as
*The determination of whether there is due
instrument to the the case may be
course holding or not is material only when payee or to any one according to its
there is a personal defense. to whom it is tenor and that if it
Q: Is it worth comparing the holders in due negotiated be dishonored and
course and the one who derived title from the according to its the necessary
holder in due course? tenor. proceedings on
A: YES. dishonor be duly
taken he will pay the
Advantages:
amount thereof to
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Negotiable Instruments Law

the payee or to *If the holder’s cause of action is

whom it is breach of warranty, due presentment
negotiated or to any and dishonor proceedings are
subsequent indorser irrelevant.
who may be
*If the holder’s cause of action is
compelled to pay it.
Absolutely liable Conditionally liable secondary engagement to pay, due
presentment and dishonor
B. Liability distinguished from warranty proceedings are relevant.
Warranty consists of a party’s undertaking Q: Is liability on warranties common
that at the time of his negotiation he had title to all?
to the instrument and it is valid and A: YES.
subsisting. Persons that had no engagement to
-This is an affirmation/assertion/admission pay:
that certain things are true. 1. Qualified Indorsers
Q: Are all parties had warranties? 2. Persons negotiating by delivery
A: YES.
Promissory Note Bill of Exchange
Q: Is engagement to pay common to all
Maker (Sec. 60) Drawer (Sec. 61)
parties? Acceptor (Sec.
A: NO. 62)
Distinction: Indorser Indorser
a. General a. General
Liability Warranties (Sec. 66) b. Qualifie
It is material to It is immaterial to b. Qualifie d
determine whether know whether the d (Sec.
the person is person is primarily 65)
primarily or or secondarily liable Persons Persons
secondarily liable negotiating by negotiating by
delivery (Sec. delivery
C. Liability and/or warranty of parties 65)
Liability in general Q: Can the drawee be forced to be
a. Warranty held liable?
b. Engagement to pay A: NO. As long as he do not accepts
the instrument.
Promissory Bill of *The drawee cannot be compelled to
Note Exchange accept the negotiable instrument.
Primary Maker Acceptor
*If the refusal amounted to tortious
Secondar General General
act, the drawee may be held liable but
y Indorser Indorser
and not based on contract.
drawer
1. Maker
*If the holder’s cause of action is
primary engagement, due Sec. 60 of the Negotiable Instrument Law
provides that: “The maker of a negotiable
presentment and dishonor
proceedings are irrelevant. instrument, by making it, engages that he
will pay it according to its tenor, and
17

admits the existence of the payee and his
then capacity to indorse.”
*Maker is primarily liable
2. Drawer
Sec. 61 of the Negotiable Instrument Law
provides that: “The drawer by drawing
the instrument admits the existence of
the payee and his then capacity to
indorse; and engages that, on due
presentment, the instrument will be
accepted or paid, or both, according to its
tenor, and that if it be dishonored and the
necessary proceedings on dishonor be
duly taken, he will pay the amount
thereof to the holder or to any
subsequent indorser who may be
compelled to pay it. But the drawer may
insert in the instrument an express
stipulation negativing or limiting his own
liability to the holder.”
*Due presentment means not only any
presentment but presentment in
accordance with law.
*Necessary proceedings on dishonor
means proceedings must be one within
accordance with law.
*Drawer is conditionally liable
a. Relationship with drawee
b. Relationship with collecting bank
3. Acceptor
Sec. 62 of the Negotiable Instrument Law
states that: “The acceptor, by accepting
the instrument, engages that he will pay it
according to the tenor of his acceptance
and admits: (a) The existence of the
drawer, the genuineness of his signature,
and his capacity and authority to draw the
instrument; and (b) The existence of the
payee and his then capacity to indorse.”
*Acceptor is primarily liable
Sec. 127 of the Negotiable Instrument
Law states that: “A bill of itself does not
Commercial Law Review
Negotiable Instruments Law
operate as an assignment of the funds in
the hands of the drawee available for the
payment thereof, and the drawee is not
liable on the bill unless and until he
accepts the same.”
4. Indorsers
a. General indorsers
Sec. 66 of the Negotiable Instrument
Law states that: “Every indorser who
indorses without qualification,
warrants to all subsequent holders in
due course: (a) The matters and
things mentioned in subdivisions (a),
(b), and (c) of the next preceding
section; and (b) That the instrument
is, at the time of his indorsement,
valid and subsisting; And, in addition,
he engages that, on due presentment,
it shall be accepted or paid, or both,
as the case may be, according to its
tenor, and that if it be dishonored and
the necessary proceedings on
dishonor be duly taken, he will pay
the amount thereof to the holder, or
to any subsequent indorser who may
be compelled to pay it.”
*General indorsers are liable for
warranties and they are secondarily
liable for engagement to pay.
b. Qualified indorsers
Sec. 65 of the Negotiable Instrument
Law states that: “Every person
negotiating an instrument by delivery
or by a qualified indorsement
warrants: (a) That the instrument is
genuine and in all respects what it
purports to be; (b) That he has a good
title to it; (c) That all prior parties had
capacity to contract; (d) That he has
no knowledge of any fact which
would impair the validity of the
instrument or render it valueless. But
18

when the negotiation is by delivery
only, the warranty extends in favor of
no holder other than the immediate
transferee. The provisions of
subdivision (c) of this section do not
apply to a person negotiating public
or corporation securities other than
bills and notes.”
*Qualified indorsers are liable for
warranties
c. Order of liability
Sec. 68 of the Negotiable Instrument
Law states that: “As respect one
another, 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.  Joint payees or joint
indorsees who indorse are deemed to
indorse jointly and severally.”
5. Parties negotiating by mere delivery
Sec. 65 of the Negotiable Instrument Law
provides that: “Every person negotiating
an instrument by delivery or by a qualified
indorsement warrants: (a) That the
instrument is genuine and in all respects
what it purports to be; (b) That he has a
good title to it; (c) That all prior parties
had capacity to contract; (d) That he has
no knowledge of any fact which would
impair the validity of the instrument or
render it valueless. But when the
negotiation is by delivery only, the
warranty extends in favor of no holder
other than the immediate transferee. The
provisions of subdivision (c) of this section
do not apply to a person negotiating
public or corporation securities other than
bills and notes.”
6. Other cases
a. Irregular indorser
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Negotiable Instruments Law
Sec. 64 of the Negotiable Instrument
Law states that: “Where a person, not
otherwise a party to an instrument,
places thereon his signature in blank
before delivery, he is liable as
indorser, in accordance with the
following rules: (a) If the instrument is
payable to the order of a third person,
he is liable to the payee and to all
subsequent parties.
(b) If the instrument is payable to the
order of the maker or drawer, or is
payable to bearer, he is liable to all
parties subsequent to the maker or
drawer. (c) If he signs for the
accommodation of the payee, he is
liable to all parties subsequent to the
payee.”
b. Indorser of bearer instrument
Sec. 67 of the Negotiable Instrument
Law provides that: “Where a person
places his indorsement on an
instrument negotiable by delivery, he
incurs all the liability of an indorser.”
c. Accommodation party
Sec. 29 of the Negotiable Instrument
Law states that: “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.”
*The liability of an accommodation
party depends on how they
participate in the instrument.
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d. Agents signing in behalf of the contractus blank

principal 5. Minority contrary to
Sec. 19 of the Negotiable Instrument 6. Insanity authority
7. Ultra vires given or not
Law provides that: “The signature of
acts of a within
any party may be made by a duly
corporation reasonable
authorized agent. No particular form 8. Want of time
of appointment is necessary for this authority of 5. Fraud in
purpose; and the authority of the agent inducement
agent may be established as in other 9. Illegality 6. Duress or
cases of agency.” 10.Forgery fear
11.Prescriptio 7. Illegal
DEFENSES: n consideratio
n
A. Real and Personal Defenses, distinguished 8. Negotiation
Distinctions: in breach of
faith
Real Defense Personal Defense 9. Mistake
Stronger defense Weakest defense 10. Ante-dating
Those that attach Those which are or post
to the instrument available only against dating for
itself and are a person not a holder illegal or
available against all in due course or a fraudulent
holders, whether in subsequent holder purposes
due course or not who stands in privity 11. Abuse of
but only by the with him (Equitable authority
parties entitled to defense) 12. Conditional
raise them delivery of
(Absolute defense) complete
Cannot be enforced Can be enforced instrument
by the holder because there is an Q: In a creditor-debtor relationship, who is
because there is no existing contract but interested in the existence of a defense?
contract to enforce subject to defense A: Debtor. Reason: Presence of a defense
The following are The following are exonerate the liability of the debtor.
real defenses: personal defences: Kinds:
1. Material 1. Absence or
1. Real defense
alteration failure of
2. Want of consideratio 2. Personal defense
delivery of n Q: Why are real defenses stronger than the
incomplete 2. Want of personal defense?
instrument delivery of A: Because there is no contract exists on his
3. Duress complete part.
amounting instrument
to forgery 3. Insertion of
B. Real defenses
4. Fraud in wrong date
factum or in an 1. Minority and ultra vires acts (Sec 22)
fraud in instrument Sec. 22 of the Negotiable Instrument Law
esse 4. Filling up of provides that: “The indorsement or

20

assignment of the instrument 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.”
Examples:
a. A, a minor, issued a promissory note
to B; B negotiated it to C; C to D then
D to E.
Q: What defense is available to A?
A: Minority
Q: Why is it a real defense?
A: Because of his lack of capacity.
Q: What recourse is available to the
holder?
A: Go after the indorsers
b. A issued a negotiable instrument to B,
a minor.
Q: Can A use minority as a defense?
A: NO. As maker, he admits the existence
of the payee and his then capacity to
indorse.
2. Non-delivery of an incomplete instrument
Sec. 15 of the Negotiable Instrument Law
provides that: “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.”
3. Fraud in factum
*The person who signs the instrument
lacks knowledge of the character or
essential terms of the instrument. But the
defense is not available if the party
involved had reasonable opportunity to
obtain such knowledge.
4. Forgery and want of authority
Sec. 23 of the Negotiable Instrument Law
provides that: “When a signature is forged
or made without the authority of the
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Negotiable Instruments Law
person whose signature it purports to be,
it is wholly inoperative, and no right to
retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature,
unless the party against whom it is sought
to enforce such right is precluded from
setting up the forgery or want of
authority.”
*What is inoperative is only the signature
and not the instrument.
Parties precluded from raising forgery as
defense:
1. Person negotiating by delivery
2. Prior parties/indorsers
a. Forgery of maker’s signature
*Maker cannot be held liable by any
holder.
Reason: The purported maker is not a
party to the instrument as his forged
instrument is inoperative and no right
to retain, enforce or discharge the
note may be acquired against him.
b. Of indorser’s signature
*The indorsement is inoperative thus
it cannot effect any transfer of any
rights to the holder.
Example:
A (maker) → B → C → D → E
B’s signature was forged
Q: Can A raise the defense of
Forgery?
A: YES.
Q: Can E go after B?
A: NO.
Recourse: Go after C or D
*Cut-off rule is applicable.
Indorsement is necessary for the
transfer of title.
Example:
21

X→A→B→C→D→E
Q: Can the acceptor admits the
genuineness of the signature of the
payee?
A: NO.
Q: Can a drawee refuse payment of a
bill of exchange bearing a forged
indorsement?
A: YES. Cut-off rule applies
Cases: Associated Bank v CA; PNB v
CA; Republic v Ebrada
c. Of drawer’s signature
*In cases involving a forged check,
where the drawer’s signature is
forged, the drawer can recover from
the drawee bank. No drawee bank
has a right to pay a forged check. If it
does, it shall have to re-credit the
amount of the check to the account of
the drawer.
Reason: The drawee bank is bound to
know the signature of the drawer
since the drawer is its customer.
Example:
X → A (drawer) → B → C → D → E
(holder)
Drawer’s signature was forged
Q: Can drawee accept a bill of
exchange bearing forged signature of
the drawer?
A: NO.
Q: What is the implication of
accepting bill of exchange bearing a
forged signature of the drawer?
A: Sec. 62 of the Negotiable
Instrument Law. Once accepted,
drawee cannot raise forgery as a
defense.
Recourse: Go after the last
holder/collecting bank.
*Collecting bank assumes the role of
an indorser.
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Negotiable Instruments Law
Case: Gempesaw v CA
*Cut-off rule is not applicable
General Rule: Drawee bank is liable
for the loss.
Exception: There is fault/negligence
on the part of the drawer
d. Forgery of bearer instruments
*In bearer instruments, the signature
of the payee or holder is unnecessary
to pass title to the instrument. Hence,
where the indorsement is a forgery,
only the person whose signature is
forged can raise the defense of
forgery against a holder in due
course.
5. Material alteration (partial real defense)
Sec. 124 of the Negotiable Instrument
Law provides that: “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.”
Q: Why is this a partial defense only?
A: Because the holder in due course may
still demand payment but according to its
original tenor.
Sec. 125 of the Negotiable Instrument
Law states that: “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;
22

(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.”
*The underlined phrase is what we call
“catch-all clause”
Q: What is the condition/term of the
instrument at the time it was altered?
A: The instrument is materially complete.
6. Extinctive prescription
C. Personal defenses
*Determination of whether the person is a
holder in due course or not is material.
Q: Why this defense is treated as a weak
defense?
A: Because only holders not in due course can
raise these defenses.
1. Ante-dating or post dating
Sec. 12 of the Negotiable Instrument Law
provides that: “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.”
2. Insertion of wrong date
Sec. 13 of the Negotiable Instrument Law
provides that: “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
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Negotiable Instruments Law
holder in due course; but as to him, the
date so inserted is to be regarded as the
true date.”
Principle: One who made possible to the
infirmity shall bear the loss
Example:
_______
10 days after date
The true date is June 1, 2008 maturity
date will be June 11, 2008
The date inserted is May 25, 2008 the
maturity date will be June 4, 2008
A→B→C→D→E
If E is a holder in due course and A is the
maker, though both E and A are innocent,
A shall suffer the consequence for he
made possible to the loss
If E is not a holder in due course and A is
the maker, E is not innocent but A is
innocent thus E cannot held A liable.
3. Filling up blanks beyond authority (Abuse
of Authority)
Sec. 14 of the Negotiable Instrument Law
states that: “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
23

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.”
*It is inequitable for a person to set up
this defense against more innocent party.
Q: Is there any recourse to the holder?
A: YES. To ran against the indorsers
*Subsequent indorsers cannot put up the
defense of good faith.
Example:
The amount is
___________
The authority to fill the amount is upto
P50,000 only
A→B→C→D→E
B inserted an amount of P80,000
Q: Is there a defense?
A: YES.
Q: Can it be used?
A: IT DEPENDS. Depending whether the
holder is a holder in due course or not.
*If holder in due course the defense
cannot be raised.
*If holder not in due course he can use it
as a defense.
Reason: The holder not in due course is
not an innocent party as far as the maker
is concern thus the contract is avoided.
Recourse: Go after the immediate
transferor in case of bearer instrument or
the indorsers in case of order instrument.
4. Want of delivery of a complete
instrument
Sec. 16 of the Negotiable Instrument Law
states that: “Every contract on a
negotiable instrument is incomplete and
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Negotiable Instruments Law
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.”
Example:
A issued a complete instrument but he
has no intention of negotiating it yet
B got the instrument accidentally
B negotiated it to C then C to D and D to E
E is a holder in due course
Q: Can C be a holder in due course?
A: YES. As long as he has no knowledge of
the infirmity
Q: Between E and A, can A raise the
defense?
A: NO. Because the defense is a personal
defense.
Principle: One who makes the infirmity
possible shall bear the loss.
Recourse: Go after the indorsers
Reason: Breach of warranty, i.e., that they
had good title to the instrument.
5. Absence or failure of consideration
24

Sec. 28 of the Negotiable Instrument Law
provides that: “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.”
*Defense pro tanto means that the
person is not totally exonerated from
liability; he is liable upto the amount he
benefited.
*Partial failure of consideration is a
personal defense and can be raised
against a holder not in due course.
*The general indorser is liable for breach
of warranty, i.e., his warranty that at the
time of his indorsement the instrument is
valid and existing.
*With regard to person negotiating by
delivery and qualified indorser, his liability
depends on whether or not he has
knowledge of the invalidity of the
instrument.
Example:
A issued a promissory note sans
consideration to B.
Q: Can B collect to A?
A: NO.
B indorsed the note to C then C to D and
D to E.
Q: Could C be a holder in due course?
A: YES. As long as he has no knowledge of
the fact that there was infirmity in the
instrument.
Q: Is a defense exists in favor of A? What
kind of defense?
A: YES. It is a personal defense
Q: Can A successfully raise it? Why?
A: NO. One who made the infirmity
possible shall bear the loss.
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6. Simple fraud, duress, intimidation, force
or fear, illegality of consideration, breach
of faith
Sec. 55 of the Negotiable Instrument Law
provides that: “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.”
Sec. 56 of the Negotiable Instrument Law
states that: “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.”
Sec. 57 of the Negotiable Instrument Law
provides that: “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.”
ENFORCEMENT OF LIABILITY:
A. Parties primarily liable and parties secondarily
liable
Primarily Liable Secondarily Liable
Maker Drawer
Acceptor General Indorsers
Qualified Indorsers
B. General steps in enforcing liability
1. Presentment
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2. Dishonor
 Promissory Note
1. Presentment for payment must be
made within the required period to
the maker (Sec. 70)
2. Notice of Dishonor (Sec. 89)
Example:
M→A→B→C→D→E
Q: In a case where the cause of action is
for payment, is presentment and dishonor
essential?
A: YES.
Q: If the holder is running after the
indorsement for breach of warranty, is
presentment and dishonour essential?
A: NO.
 Bill of Exchange
1. Presentment for acceptance or
negotiation within a reasonable time
after it was acquired (Sec. 143)
2. If dishonored by non-acceptance:
2.1. Notice of dishonor should be
given to the indorsers and drawer
2.2. If the bill is a foreign bill, there
must be a protest for dishonor by
non-acceptance
3. If the bill is accepted:
3.1. Presentment for payment to the
acceptor should be made
3.2. If the bill is dishonored upon
presentment for payment:
3.2.1. Notice of dishonor upon
presentment for payment
3.2.2. If the bill is a foreign bill,
protest for dishonor by
non-acceptance must be
made
C. Presentment for payment
1. Concept of presentment
Presentment is the production of a bill of
exchange to the drawee for his
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Negotiable Instruments Law
acceptance or to the drawee or acceptor
for payment or the production of a
promissory note to the party liable for the
payment of the same.
2. Requisites for sufficiency
Sec. 72 of the Negotiable Instrument Law
provides that: “Presentment for payment,
to be sufficient, must be made: (a) By the
holder, or by some person authorized to
receive payment on his behalf; (b) At a
reasonable hour on a business day; (c) At
a proper place as herein defined; (d) To
the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.”
a. Date of presentment
Sec. 71 of the Negotiable Instrument
Law states that: “Where the
instrument is not payable on demand,
presentment must be made on the
day it falls due. Where it is payable on
demand, presentment must be made
within a reasonable time after its
issue, except that in the case of a bill
of exchange, presentment for
payment will be sufficient if made
within a reasonable time after the last
negotiation thereof.”
i. Rule in determining maturity
date
Sec. 85 of the Negotiable
Instrument Law provides
that: “Every negotiable
instrument is payable at the
time fixed therein without
grace. When the day of
maturity falls upon Sunday or
a holiday, the instruments
falling due or becoming
payable on Saturday are to be
presented for payment on the
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next succeeding business day
except that instruments
payable on demand may, at
the option of the holder, be
presented for payment before
twelve o'clock noon on
Saturday when that entire day
is not a holiday.”
ii. Rule in computing time
Sec. 86 of the Negotiable
Instrument Law provides
that: “When the instrument is
payable at a fixed period after
date, after sight, or after that
happening of a specified
event, the time of payment is
determined by excluding the
day from which the time is to
begin to run, and by including
the date of payment.”
iii. Rule in if payable at a bank
Sec. 75 of the Negotiable
Instrument Law states that:
“Where the instrument is
payable at a bank,
presentment for payment
must be made during banking
hours, unless the person to
make payment has no funds
there to meet it at any time
during the day, in which case
presentment at any hour
before the bank is closed on
that day is sufficient.”
b. Place of presentment
Sec. 73 of the Negotiable Instrument
Law provides that: “Presentment for
payment is made at the proper place:
(a) Where a place of payment is
specified in the instrument and it is
there presented; (b) Where no place
of payment is specified but the
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Negotiable Instruments Law
address of the person to make
payment is given in the instrument
and it is there presented; (c) Where
no place of payment is specified and
no address is given and the
instrument is presented at the usual
place of business or residence of the
person to make payment; (d) In any
other case if presented to the person
to make payment wherever he can be
found, or if presented at his last
known place of business or
residence.”
i. Rule in if payable at a special
place
Sec. 70 of the Negotiable
Instrument Law states that:
“Presentment for payment is
not necessary in order to
charge the person primarily
liable on the instrument; but
if the instrument is, by its
terms, payable at a special
place, and he is able and
willing to pay it there at
maturity, such ability and
willingness are equivalent to a
tender of payment upon his
part. But except as herein
otherwise provided,
presentment for payment is
necessary in order to charge
the drawer and indorsers.”
c. Presentment to the party primarily
liable
i. How presentment made
Sec. 74 of the Negotiable
Instrument Law states that:
“The instrument must be
exhibited to the person from
whom payment is demanded,
and when it is paid, must be
27

delivered up to the party
paying it.”
ii. Rule in case party primarily
liable is already dead
Sec. 76 of the Negotiable
Instrument Law states that:
“Where the person primarily
liable on the instrument is
dead and no place of
payment is specified,
presentment for payment
must be made to his personal
representative, if such there
be, and if, with the exercise of
reasonable diligence, he can
be found.”
iii. Presentment to partners
Sec. 77 of the Negotiable
Instrument Law provides
that: “Where the persons
primarily liable on the
instrument are liable as
partners and no place of
payment is specified,
presentment for payment
may be made to any one of
them, even though there has
been a dissolution of the
firm.”
iv. Presentment to joint debtors
Sec. 78 of the Negotiable
Instrument Law states that:
“Where there are several
persons, not partners,
primarily liable on the
instrument and no place of
payment is specified,
presentment must be made
to them all.”
3. Instances where presentment is excused
Sec. 79 of the Negotiable Instrument Law
provides that: “Presentment for payment
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Negotiable Instruments Law
is not required in order to charge the
drawer where he has no right to expect or
require that the drawee or acceptor will
pay the instrument.”
Sec. 80 of the Negotiable Instrument Law
states that: “Presentment is not required
in order to charge an indorser where the
instrument was made or accepted for his
accommodation and he has no reason to
expect that the instrument will be paid if
presented.”
Sec. 82 of the Negotiable Instrument Law
states that: “Presentment for payment is
excused: (a) Where, after the exercise of
reasonable diligence, presentment, as
required by this Act, cannot be made; (b)
Where the drawee is a fictitious person;
(c) By waiver of presentment, express or
implied.”
4. When delay in presentment excused
Sec. 81 of the Negotiable Instrument Law
provides that: “Delay in making
presentment for payment is excused
when the delay is caused by
circumstances beyond the control of the
holder and not imputable to his default,
misconduct, or negligence. When the
cause of delay ceases to operate,
presentment must be made with
reasonable diligence.”
D. Notice of dishonor
1. When dishonor of the instrument occurs:
a. Dishonor by non-payment
Sec. 83 of the Negotiable Instrument
Law states that: “The instrument is
dishonored by non-payment when:
(a) It is duly presented for payment
and payment is refused or cannot be
obtained; or (b) Presentment is
excused and the instrument is
overdue and unpaid.”
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Q: What are the implications of the
notices sent to drawer/general
indorsers?
A: Secondary liability
Example:
A→B→C→D→E
E sent notice of dishonor to D alone
Q: What is the effect of notice given
to D?
A: Others are discharge.
Principle: Parties not given a notice
are discharge.
b. Dishonor by non-acceptance
Sec. 149 of the Negotiable
Instrument Law provides that: “A bill
is dishonored by non-acceptance: (a)
When it is duly presented for
acceptance and such an acceptance
as is prescribed by this Act is refused
or can not be obtained; or (b) When
presentment for acceptance is
excused and the bill is not accepted.”
2. Who should give notice
a. Holder
Sec. 90 of the Negotiable Instrument
Law provides that: “The notice may
be given by or on behalf of the holder,
or by or on behalf of any party to the
instrument who might be compelled
to pay it to the holder, and who, upon
taking it up, would have a right to
reimbursement from the party to
whom the notice is given.”
b. Agent
Sec. 91 of the Negotiable Instrument
Law states that: “Notice of dishonor
may be given by any agent either in
his own name or in the name of any
party entitled to given notice,
whether that party be his principal or
not.”
c. Party who may be compelled to pay
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Sec. 90 of the Negotiable Instrument
Law provides that: “The notice may
be given by or on behalf of the holder,
or by or on behalf of any party to the
instrument who might be compelled
to pay it to the holder, and who, upon
taking it up, would have a right to
reimbursement from the party to
whom the notice is given.”
3. Form of Notice
Sec. 96 of the Negotiable Instrument Law
states that: “The notice may be in writing
or merely oral and may be given in any
terms which sufficiently identify the
instrument, and indicate that it has been
dishonored by non-acceptance or non-
payment. It may in all cases be given by
delivering it personally or through the
mails.”
4. To whom notice is given
a. Party secondarily liable or agent
Sec. 97 of the Negotiable Instrument
Law provides that: “Notice of
dishonor may be given either to the
party himself or to his agent in that
behalf.”
b. Notice where party is dead
Sec. 98 of the Negotiable Instrument
Law states that: “When any party is
dead and his death is known to the
party giving notice, the notice must
be given to a personal representative,
if there be one, and if with reasonable
diligence, he can be found. If there be
no personal representative, notice
may be sent to the last residence or
last place of business of the
deceased.”
c. Notice to partners
Sec. 99 of the Negotiable Instrument
Law provides that: “Where the parties
to be notified are partners, notice to
29

any one partner is notice to the firm,
even though there has been a
dissolution.”
d. Notice to persons jointly liable
Sec. 100 of the Negotiable
Instrument Law provides that:
“Notice to joint persons who are not
partners must be given to each of
them unless one of them has
authority to receive such notice for
the others.”
e. Notice to bankrupt
Sec. 101 of the Negotiable
Instrument Law states that: “Where a
party has been adjudged a bankrupt
or an insolvent, or has made an
assignment for the benefit of
creditors, notice may be given either
to the party himself or to his trustee
or assignee.”
5. When notice is excused
Sec. 109 of the Negotiable Instrument
Law provides that: “Notice of dishonor
may be waived either before the time of
giving notice has arrived or after the
omission to give due notice, and the
waiver may be expressed or implied.”
Sec. 110 of the Negotiable Instrument
Law states that: “Where the waiver is
embodied in the instrument itself, it is
binding upon all parties; but, where it is
written above the signature of an
indorser, it binds him only.”
Sec. 111 of the Negotiable Instrument
Law states that: “A waiver of protest,
whether in the case of a foreign bill of
exchange or other negotiable instrument,
is deemed to be a waiver not only of a
formal protest but also of presentment
and notice of dishonor.”
Sec. 112 of the Negotiable Instrument
Law states that: “Notice of dishonor is
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Negotiable Instruments Law
dispensed with when, after the exercise of
reasonable diligence, it cannot be given to
or does not reach the parties sought to be
charged.”
Sec. 114 of the Negotiable Instrument
Law provides that: “Notice of dishonor is
not required to be given to the drawer in
either of the following cases:
(a) Where the drawer and drawee are the
same person;
(b) When the drawee is fictitious person
or a person not having capacity to
contract;
(c) When the drawer is the person to
whom the instrument is presented for
payment;
(d) Where the drawer has no right to
expect or require that the drawee or
acceptor will honor the instrument;
(e) Where the drawer has countermanded
payment.”
Sec. 115 of the Negotiable Instrument
Law provides that: “Notice of dishonor is
not required to be given to an indorser in
either of the following cases:
(a) When the drawee is a fictitious person
or person not having capacity to contract,
and the indorser was aware of that fact at
the time he indorsed the instrument;
(b) Where the indorser is the person to
whom the instrument is presented for
payment;
(c) Where the instrument was made or
accepted for his accommodation.”
6. When there is delay in giving notice
Sec. 113 of the Negotiable Instrument
Law states that: “Delay in giving notice of
dishonor is excused when the delay is
caused by circumstances beyond the
control of the holder and not imputable
to his default, misconduct, or negligence.
When the cause of delay ceases to
30

operate, notice must be given with
reasonable diligence.”
DISCHARGE OF INSTRUMENTS:
A. Concept of Discharge
Discharge means 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.
*Applies to the instrument or to the source of
liability.
B. How instrument is discharge
Sec. 119 of the Negotiable Instrument Law
provides that: “A negotiable instrument is
discharged: (a) By payment in due course by
or on behalf of the principal debtor; (b) By
payment in due course by the party
accommodated, where the instrument is
made or accepted for his accommodation; (c)
By the intentional cancellation thereof by the
holder; (d) By any other act which will
discharge a simple contract for the payment
of money; (e) When the principal debtor
becomes the holder of the instrument at or
after maturity in his own right.”
1. Payment in due course
Sec. 88 of the Negotiable Instrument Law
provides that: “Payment is made in due
course when it is made at or after the
maturity of the payment to the holder
thereof in good faith and without notice
that his title is defective.”
a. By the principal debtor
Sec. 119 (a) of the Negotiable
Instrument Law states that: “A
negotiable instrument is discharged:
(a) By payment in due course by or on
behalf of the principal debtor; x x x”
b. By the accommodated party
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Sec. 119 (b) of the Negotiable
Instrument Law provides that: “A
negotiable instrument is discharged: x
x x (b) By payment in due course by
the party accommodated, where the
instrument is made or accepted for
his accommodation; x x x”
2. Intentional cancellation
a. Rule in case of unintentional
cancellation
Sec. 123 of the Negotiable
Instrument Law states that: “A
cancellation made unintentionally or
under a mistake or without the
authority of the holder, is inoperative
but where an instrument or any
signature thereon appears to have
been cancelled, the burden of proof
lies on the party who alleges that the
cancellation was made
unintentionally or under a mistake or
without authority.”
3. Any act that discharge simple contracts
*The law on Obligations and Contracts
will apply.
Article 1231 of the New Civil Code
provides that: “Obligations are
extinguished: (1) By payment or
performance: (2) By the loss of the thing
due: (3) By the condonation or remission
of the debt; (4) By the confusion or
merger of the rights of creditor and
debtor; (5) By compensation; (6) By
novation. Other causes of extinguishment
of obligations, such as annulment,
rescission, fulfillment of a resolutory
condition, and prescription, are governed
elsewhere in this Code.”
*Although these ways discharge the
instrument as between immediate
parties, they will not do so in the hands of
a holder in due course.
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4. Principal debtor becomes a holder Not drawn on a It is necessary that a

deposit. It is not check is drawn on a
C. Discharge of persons secondarily liable necessary that a previous deposit.
drawer of a Bill of Otherwise, there
Sec. 120 of the Negotiable Instrument Law
Exchange should would be fraud.
provides that: “A person secondarily liable on
have funds in the Always bank as a
the instrument is discharged: (a) By any act hands of the drawee, need not
which discharges the instrument; (b) By the drawee. be presented for
intentional cancellation of his signature by the Exist for circulation acceptance. Exist for
holder; (c) By the discharge of a prior party; immediate payment
(d) By a valid tender or payment made by a Death of the drawer Death of the drawer
of a Bill of Exchange of a check, with the
prior party; (e) By a release of the principal
with the knowledge knowledge by the
debtor unless the holder's right of recourse
of the bank, does bank, revokes the
against the party secondarily liable is not revoke the authority of the
expressly reserved; (f) By any agreement authority of the banker to pay.
binding upon the holder to extend the time of banker to pay.
payment or to postpone the holder's right to May be presented Must be presented
enforce the instrument unless made with the for payment within for payment within
a reasonable time a reasonable time
assent of the party secondarily liable or unless
after its last after its issue.
the right of recourse against such party is
negotiation. Checks become
expressly reserved.” stale after 6 months
from issue.
CHECKS:

A. Checks defined C. Relationship between drawer, drawee and

Sec. 185 of the Negotiable Instrument Law
provides that: “A check is a bill of exchange
drawn on a bank payable on demand. Except
as herein otherwise provided, the provisions
of this Act applicable to a bill of exchange
payable on demand apply to a check.”
*Checks need not be presented for
acceptance
*Checks are always payable on demand
*Checks are always drawn against a bank
*In case of refusal by drawee bank, payee or
holder cannot compel drawee bank to pay
because there is no privity of contract.
Recourse: Serve notice of dishonour to
drawer; ran after the drawer
B. Distinguished from Draft
Other Bill of Check
Exchange
payee
Drawer – is a secondarily liable; admits the
existence of a payee and his capacity to
indorse and engages that the instrument will
be accepted or paid by the party primarily
liable and engages that if the instrument is
dishonored and proper proceedings are
brought he will pay to the party entitled to be
paid.
Drawee – primarily liable; engages to pay
according to the tenor of his acceptance;
admits the existence of the drawer, the
genuineness of his signature and his capacity
and authority to draw the instrument and
admits the existence of the payee and his
capacity to indorse.
Payee – the person who is named to received
the payment. The one who can indorse for
further negotiation.

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D. Kinds of check
1. Cashier’s and manager’s check a bill of
exchange drawn by a bank upon itself,
and is accepted by its issuance.
*Treated as good as cash.
*The drawee and the drawer are one and
the same.
BSP Circular 259 series of 2000 provides
that: “Pursuant to Monetary Board
Resolution No. 1494 dated 1 September
2000, additional anti-money laundering
rules and regulations for banks are hereby
issued as follows: Section 1. Issuance of
Cashier’s, Manager’s or Certified Checks.
Banks shall not issue cashier’s, manager’s
or certified checks or other similar
instruments payable to cash, bearer,
fictitious payee or numbered account.
When the person purchasing the above-
mentioned instruments is not a regular
bank client, the issuing bank shall require
the purchaser to present his/her proof of
residence together with his/her driver’s
license, passport, employment I.D. or
other photo identification card. A register
for cashier’s, manager’s or certified
checks issued shall be maintained by the
bank. Section 2. Sanction. Any violations
of the provision of this Circular shall be
subject to a fine of P30,000 per
transaction.”
BSP Circular No. 291 series 2001 provides
that: “The Monetary Board, in its
Resolution No. 707 dated 10 May 2001
decided to authorize the issuance of
cashier’s, manager’s or certified checks or
other similar instruments in blank or
payable to cash, bearer or numbered
account as an exception from the
provisions of Circular no. 259, subject to
the following conditions:  a.  That the
Commercial Law Review
Negotiable Instruments Law
amount of each check shall not exceed
P10,000.00; b.  That the buyer of the
check is properly identified as required
under Circular No. 259 dated 29
September;  c.  That a register of said
checks shall be maintained with the
following minimum information: 1. Date
issued; 2. Amount; 3. Name of buyer; 4.
Date paid; 5. If the aggregate instruments
purchased by the same person within any
thirty (30) day period amounts to at least
fifty thousand pesos (P50,000), the
purpose of the buyer should be stated.;
d.  That banks which issue as well as those
which accept as deposits, said cashier’s,
manager’s or certified checks or other
similar instruments issued in blank or
payable to cash, bearer or numbered
account shall take such measure(s) as may
be necessary to ensure that said
instruments are not being used/resorted
to by the buyer or depositor in
furtherance of a money-laundering
activity;  e.  That the deposit of said
instruments shall be subject to the same
requirements/scrutiny applicable to cash
deposits; f.  That transactions involving
said instruments should be accordingly
reported to the Bangko Sentral ng
Pilipinas if there is reasonable ground to
suspect that said transactions are being
used to launder funds of illegitimate
origin.”
2. 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.
*There is a guarantee that upon
presentment it will be accepted.
*It is accepted in advance.
*Certification is equivalent to acceptance.
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*It is forbidden to issue a stop order
payment.
Sec. 187 of the Negotiable Instrument
Law provides that: “Where a check is
certified by the bank on which it is drawn,
the certification is equivalent to an
acceptance.”
Sec. 188 of the Negotiable Instrument
Law provides that: “Where the holder of a
check procures it to be accepted or
certified, the drawer and all indorsers are
discharged from liability thereon.”
Sec. 189 of the Negotiable Instrument
Law provides that: “A check of itself does
not operate as an assignment of any part
of the funds to the credit of the drawer
with the bank, and the bank is not liable
to the holder unless and until it accepts or
certifies the check.”
3. Crossed Check done by writing two
parallel lines diagonally on the left top
portion of the checks.
Article 541 of the Code of Commerce
provides that: “The maker of any legal
holder of a check shall be entitled to
indicate therein that it be paid to a certain
banker or institution, which he shall do by
writing across the face the name of said
banker or institution, or only the words
"and company".
a. Effects of crossing a check
1. The check may not be encashed
but only deposited in the bank
2. The check may be negotiated only
once – to one who has an account
with the bank
3. The act of crossing serves as a
warning to the holder that the
check has been issued for a
definite purpose so that he may
inquire if he has received the
check pursuant to that purpose.
Commercial Law Review
Negotiable Instruments Law
4. Memorandum and traveller’s check
Memorandum Check is in the form of an
ordinary check, with the word
“memorandum”, “memo” or “mem”
written across its face, signifying that the
maker or drawer engages to pay the bona
fide holder absolutely, without any
condition concerning its presentment.
Such check is an evidence of debt against
the drawer, and although it may not be
intended to be presented, has the same
effect as an ordinary check, and if passed
to a third person, will be valid in his hands
like any other check.
Traveller’s Check instruments purchased
from banks, express companies, or the
like, in various denominations, which can
be used like cash upon second signature
by the purchaser. It has the characteristics
of a cashier’s check of the issuer. It
requires the signature of the purchaser at
the time he buys it and also at the time he
uses it – that is when he obtains the check
from the bank and also at the time he
delivers the same to the establishment
that will be paid thereby.
E. When required to be presented for payment
Sec. 186 of the Negotiable Instrument Law
provides that: “A check must be presented for
payment within a reasonable time after its
issue or the drawer will be discharged from
liability thereon to the extent of the loss
caused by the delay.”
F. Effect of death of drawer
*In case of death of the drawer, the bank may
refuse payment provided that there was a
proper notice of the death of the drawer
given to bank.
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Negotiable Instruments Law

G. Pertinent Philippine Clearing House

Corporation rules

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