THE NEGOTIABLE INSTRUMENTS LAW

Act No. 2031 (February 03, 1911 )

larry p. ignacio ©

1.       Negotiable Instruments – written contracts for the payment of money; by its form,
intended as a substitute for money and intended to pass from hand to hand, to give the holder in
due course the right to hold the same and collect the sum due.

2.       Characteristics of Negotiable Instruments:

a.       negotiability – right of transferee to hold the instrument and collect the sum due
b.       accumulation of secondary contracts – instrument is negotiated from person to person

3.       Difference between Negotiable Instruments from Non-Negotiable Instruments:

Negotiable Instruments Non-negotiable Instruments 

Contains all the requisites of Sec. 1 does not contain all the requisites of
of the NIL Sec. 1 of the NIL

Transferred by negotiation transferred by assignment

Holder in due course may have transferee acquires rights only of his
better rights than transferor transferor 

prior parties merely warrant legality of

Prior parties warrant payment title

Transferee has right of recourse

against intermediate parties transferee has no right of recourse 

4.       Difference between Negotiable Instruments and Negotiable Documents of Title

Negotiable Instruments Negotiable Documents of Title 

Have requisites of Sec. 1 of the NIL does not contain requisites of Sec. 1 of NIL

Have right of recourse against

intermediate parties who are no secondary liability of intermediate
secondarily liable parties

Holder in due course may have rights transferee merely steps into the shoes of
better than transferor the transferor

Subject is money subject is goods

instrument is merely evidence of title; thing

of value are the goods mentioned in the
Instrument itself is property of value document

5.       Promissory Note – unconditional promise to pay in writing made by one person to another,
signed by the maker, engaging to pay on demand or a fixed determinable future time a sum
certain in money to order or bearer. When the note is drawn to maker’s own order, it is not
complete until indorse by him. (Sec. 184 NIL)

Parties:

1. maker
2. payee

6.       Bill of Exchange – unconditional order in writing addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126 NIL)

Parties:
1
 1. drawer
2. payee
3. drawee/ acceptor

7.       Check – bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL)

8.       Difference between Promissory Note and Bill of Exchange

Promissory Note Bill of Exchange 

Unconditional promise unconditional order

Involves 2 parties involves 3 parties

Maker primarily liable drawer only secondarily liable

generally 2 presentments – for acceptance

only 1 presentment – for payment and for payment

9.       Distinctions between a Check and Bill of Exchange

CHECK BOE

- always drawn upon a bank or - may or may not be drawn against a

banker bank

- may be payable on demand or at a

- always payable on demand fixed or determinable future time

- not necessary that it be presented - necessary that it be presented for

for acceptance acceptance

- drawn on a deposit - not drawn on a deposit

- the death of a drawer of a check,

with knowledge by the banks,
revokes the authority of the banker - the death of the drawer of the ordinary
pay bill of exchange does not

- must be presented for payment - may be presented for payment within

within a reasonable time after its a reasonable time after its last
issue   (6 months) negotiation.

10.   Distinctions between a Promissory Note and Check

PN CHECK

- there are two (2) parties, the - there are three (3) parties, the drawer,
maker and the payee the drawee bank and the payee

- may be drawn against any

person, not necessarily a bank - always drawn against a bank

- may be payable on demand or at

a fixed or determinable future time -always payable on demand

- a promise to pay - an order to pay

11.   Other Forms of Negotiable Instruments:

a.       certificates of deposits

b.       trade acceptances
c.       bonds in the nature of promissory notes
d.       drafts which are bills of exchange drawn by 1 bank to another
e.       letters of credit

2
12.   Trust Receipt – a security transaction intended to aid in the financing of importers and
retailers who do not have sufficient funds to finance their transaction and acquire credit except to
use as collateral the merchandise imported

13.   Requisites of a Negotiable Note (PN): (SUDO)

It must:

a.       be in writing signed by the maker

b.       contains an unconditional promise or order to pay a sum certain in money
c.       be payable on demand or at a fixed determinable future time
d.       be payable to order or to bearer (Sec. 1 NIL)

14.   Requisites of a Negotiable Bill (BOE): (SUDOC)

It must:

1. be in writing signed by the drawer

2. contains an unconditional promise or order to pay a sum certain in money
3. be payable on demand or at a fixed determinable future time
4. be payable to order or to bearer
5. the drawee must be named or otherwise indicated with reasonable certainty (Sec. 1 NIL)

Notes on Section 1:

-          In order to be negotiable, there must be a writing of some kind, else there would be
nothing to be negotiated or passed from hand to hand. The writing may be in ink, print or pencil. It
may be upon parchment, cloth, leather or any other substitute of paper.

-          It must be signed by the maker or drawer. It may consist of mere initials or even numbers,
but the holder must prove that what is written is intended as a signature of the person sought to
be charged.

-          The Bill must contain an order, something more than the mere asking of a favor.

-          Sum payable must be in money only. It cannot be made payable in goods, wares, or
merchandise or in property.

-          A drawee’s name may be filled in under Section 14 of the NIL

15.   Determination of negotiability

1. by the provisions of the Negotiable Instrument Law, particularly Section 1 thereof

2. by considering the whole instrument
3. by what appears on the face of the instrument and not elsewhere

*In determining is the instrument is negotiable, only the instrument itself and no other, must be
examined and compared with the requirements stated in Sec. 1. If it appears on the instrument
that it lacks one of the requirements, it is not negotiable and the provisions of the NIL do not
govern the instrument. The requirement lacking cannot be supplied by using a separate
instrument in which that requirement which is lacking appears.

******
SUBSTITUTE WORDS TO CONNOTE “ORDER”

1) Credit a named person or order

2) Let the bearer have
3) The drawee will much oblige the drawer by paying to a named person

SUBSTITUTE WORDS SUFFICIENT TO CONSTITUTE A PROMISE TO PAY

1) This is to certify that I have to pay
2) Pedro obliges himself to pay
3) Paid when called for
4) I guaranty to pay
5) Good for
6) Holden for
3
 7) To pay or cause to be paid

Negotiable instruments:

I hereby authorize you to pay P1,000.00 on our account, to the order of Pedro.
(sgd) Dario
To Wally

Not negotiable. It is not an order to pay. It is a mere authorization to pay. By its terms, the
bill gives a discretion to the drawee to pay or not to pay.

Manila, 03 October 2016

I, Mario (with signature on top of name), after date promise to pay Petra or her order the sum of
P10,000.00
(not signed at the bottom)

Negotiable. The signature may be made on any part of the instrument.

Please let the bearer have P10,000.00 and place to my account and you will oblige.
(sgd) Roger
To Darwin
2067 XXX Bldg., Ayala Ave.

Not negotiable. It does not contain an order to pay. It is nothing but a request to pay.

Doris will oblige Dennis by paying Petra or order P1,000.00 on her account.
(sgd) Dennis
To: Doris

Negotiable. The mere fact that is contains words of civility or courtesy does not make it
non-negotiable. In spite of the words of courtesy of civility, the bill still contains an order to pay.
The words “by paying” are held sufficient to import an order to pay.

Promissory notes?

I agree to pay to the order of Pedro, P10,000.00

(sgd) Maria

Yes. Although it does not use the word “promise,” still the word “agree” means a promise
to pay

Good to Pablo or order P10,000.00

(sgd) Juan

Yes. It contains a promise to pay because the word “good” implies a promise to pay.

Due Peter or order P10,000.00 payable on demand.

(sgd) Jose

Yes. It contains a promise to pay because the words “payable on demand” necessarily
imply a promise to pay.

Due Juan P10,000.00.

(sgd) Arthur

No. It is nothing but an acknowledgment of a debt. It is merely an evidence of debt not a

promissory note.

I do acknowledge myself to be indebted to Peter or order in the sum of P10,000.00, to be paid on

demand.
(sgd) Darwin

4
 Yes. There are other words expressing the intention to pay or from which may be implied
such intention to pay. The words “to be paid” imply a promise to pay.

Pay to Edgar or bearer P10,000.00 if he marries Edgarda.

(sgd) Marta

Not negotiable. It is conditional; it is subject to the condition that Edgar marries Edgarda,
which is future and uncertain to happen.

I promise to pay Popoy or order P10,000.00, ten (10) days after the death of Solomon.
(sgd) Miguel

Negotiable. The death of Solomon is certain, and therefore there is no condition but a
mere suspensive period.

I promise to pay Pedro or order US$10,000.00.

(sgd) Marites

Negotiable. Althought payable in foreign currency, the amount has a fixed value and can
by simple mathematical calculation be expressed in the value of our peso.

I promise to pay Patricia or order P10,000.00 thirty (30) days from this date, at 6% interest.
(sgd) Marty

Negotiable. The addition of the interest does not make the sum uncertain. The sum due
can be computed.

I promise to pay Perla or order P10,000.00 together with all the sums that may be due on
November 30, 2016.
(sgd) Melody

Not negotiable. The sum is not certain. It includes all sums by November 30, 2016 which
is not stated and unknown until that date.

I promise to pay Phoebe or order P10,000.00 in gold ring.

(sgd) Mark

Not negotiable. The instrument is not payable in money as required by law.

I promise to pay Pamela or order P10,000.00 on or before October 25.

(sgd) Matthew

Not negotiable. The time of payment is not determinable as the year is not stated. Neither
is it payable on demand as it is to be paid at a certain time, October 25.

Pay to Petrus or his assigns P10,000.00

(sgd) Mark

Negotiable. It is payable to order. Instead of the word “order”, the word “assigns” is used,
which is equivalent to the word “order.”

I promise to pay to the order of bearer P10,000.00.

(sgd) Bobby

Negotiable. It is payable to order. The payee is the bearer and it can be negotiated only
by his indorsement.

I promise to pay bearer Juan P10,000.00.

(sgd) Lyndon

5
 Not negotiable. It is not a bearer instrument. The word “bearer” is merely descriptive of
Juan, or it is nothing but a modifier of Juan. The instrument is payable to a specified person
named Juan, who is a bearer.

Pay to Pandora or order P10,000.00 and reimburse yourself out of my money in your hands.
(sgd) Maricel

Negotiable. The indication of the particular fund—my money in your hands—is merely a
source of reimbursement and not a fund for direct payment. (Sec. 3)

Pay to the order of Pedro P10,000.00 out of the rentals of my car.

(sgd) Deo

Not negotiable. The particular fund—the rentals of my car—is the source of direct
payment, and is considered conditional because the particular fund may or may not be enough.
Pay Pamela or order P10,000.00 on account of a contract between you and the Torre de Manila
Construction, Inc.
(sgd) Mario

Negotiable. The instrument will be paid first and afterwards, the particular fund—the
account of a contract with Torre de Manila, Inc.—will be debited.

I promise to pay Patricio or order P10,000.00 in payment of a ring I bought from him the other
day.
(sgd) Matias

Negotiable. The statement of the transaction—the payment of a sale of a ring sold the
other day—which gave rise to the instrument does not destroy the unqualified promise of Matias
to pay Patricio.

I promise to pay Patricia or order P10,000.00 subject to the stipulations in the Deed of Sale
executed by us.
(sgd) Maria

Not negotiable. The payment is conditioned on the Deed of Sale. It will likewise require
the determination of a separate instrument—the Deed of Sale—in determining the negotiability of
the instrument in violation of the fundamental rule that the negotiability must be determined only
from the document itself and not elsewhere.

Ten (10) days before the death of Solomon, I promise to pay bearer P10,000.00.
(sgd) Mario

Not negotiable. The time of payment is uncertain. The word used is “before” and the date
of maturity of the instrument can be determined only after the note has become due.

I promise to pay Portia or bearer P10,000.00 ten (10) days after Juan passes the 2016 Bar
Examinations.
(sgd) Roland

Not negotiable. It is conditional. Although the payment is a fixed period after a specified
event —the passing of the 2016 Bar Examinations—such event is not certain to happen.

Suppose Juan passes the 2016 Bar, will it make the note negotiable?

No. The happening of the condition will not cure the defect (Sec. 4)

Mark issues a promissory note payable to the order of Pedro payable in twenty-peso bills of the
BSP. Is the note negotiable?

Yes. The validity and negotiable character of an instrument and are not affected by the
fact that it designates a particular kind of current money in which payment is to be made (Sec. 6).

Pay Ruben or order P10,000.00 or ten (10) sacks of rice, at the option of the holder.
(sgd) Bles

6
 Negotiable. The option to pay money OR performance of an act—the delivery of 10 sacks
of rice—is given to the holder.

Pay Ruben or order P10,000.00 or ten (10) sacks of rice, at my option.

(sgd) Bles

Not negotiable. If the option to perform an additional act belongs to the maker, the
instrument is not negotiable. The holder cannot demand the payment of money or the delivery of
the ten sacks of rice.

IF the instrument is SILENT as to whose option the performance of an additional act, it is

presumed to belong to the maker.

I promise to pay Perla or order P10,000.00 on October 25, 2016. If not paid at maturity, Perla
may sell the ring I pledged to her and apply the proceeds to the value of this note.

Negotiable. The performance of an additional act—the selling of the ring that was pledge
—will not render the note non-negotiable.
The additional act shall be performed after the date of the maturity of the note, when it is
no longer negotiable in the full commercial sense. Before the date of maturity, no additional act
is to be performed except the payment of money.

PAYABLE TO ORDER (Sec. 8)

“Payable to order” means that the maker promises to pay the payee or if not the payee, to
anybody designated or ordered by the payee to whom the maker must pay or to anybody
designated by the indorsee of the payee, to be paid and so on. The designation is made by
indorsement.

*An instrument payable to the “order of bearer” is an order instrument.

PAYABLE TO BEARER (Sec. 9)

a) when expressed to be so payable (Pay to bearer);
b) when payable to a person named therein or bearer (Pay to Pedro or bearer);
c) when payable to the order of a fictitious or non-existing person and such fact was known to the
person making it so payable (Pay to the order of Malakas);
d) when the name of payee does not purport to be the name of an person (Pay to Cash); or
e) when the last indorsement is an indorsement in blank.

THE FICTITIOUS PAYEE RULE

FICTITIOUS PAYEE/PERSON: It is not limited to persons having no real existence. An existing

person may be considered a fictitious payee, depending upon the intention of the one making or
drawing the instrument. The words “fictitious person” mean to be a person who has no right to the
instrument because the drawer or the maker of it so intended, and, therefore, it does not matter
whether the name of the payee used by the drawer or maker be that of one living or dead, or one
who never existed. The name is fictitious when it is feigned or pretended and a non-existent
person is one who does not exist in the sense that he was not intended to be the payee by the
drawer (Commonwealth v Globe Indemnity Co., 1323 PA 261, 185 Atl 796).

A check that is payable to a specified payee is an order instrument. However, under Section 9(c)
of the NIL, a check payable to a specified payee may nevertheless be considered as a
bearer instrument if it is payable to the order of a fictitious or non-existing person, and
such fact is known to the person making it so payable. Thus, checks issued to Prinsipe
Abante or Si Malakas at si Maganda, who are well-known characters in Philippine mythology, are
bearer instruments because the named payees are fictitious and non-existent. (PNB v.
Rodriguez, 566 SCRA 513 [2008])

The fictitious payee rule (PNB v. Rodriguez, 566 SCRA 513 [2008])

As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument.

An actual, existing, and living payee may also be fictitious if the maker of the check did
not intend for the payee to in fact receive the proceeds of the check. This usually occurs
when the maker places a name of an existing payee on the check for convenience or to
cover up an illegal activity. Thus, a check made expressly payable to a non-fictitious and
7
 existing person is not necessarily an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is considered a fictitious payee
and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer
bears the loss. When faced with a check payable to a fictitious payee, it is treated as a
bearer instrument that can be negotiated by delivery. The underlying theory is that one
cannot expect a fictitious payee to negotiate the check by placing his indorsement
thereon. And since the maker knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery.

When the person making the check so payable did not intend for the specified payee to
have any part in the transactions, the payee is considered as a fictitious payee. The
check is then considered as a bearer instrument to be validly negotiated by mere
delivery.

The fictitious-payee rule extends protection even to non-bank transferees of the checks.

THE COMMERCIAL BAD FAITH RULE

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing
of commercial bad faith on the part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to
the fraudulent scheme.

Must a check payable to the order of cash be still indorsed by the person presenting it for
payment?

No. The check is payable to bearer and need not be indorsed. (Ang Tek Lian v. CA, 87
Phil 383 [25 Sept. 1950])

*Sec. 130: A bill of exchange may be treated as a promissory note at the option of the holder in
the following:

1) Where the drawer and the drawee are one and the same person.
2) Where the drawee is a fictitious person.
3) Where the drawee is a person not having capacity to contract.

SIGNATURE:

A person whose signature appears on the instrument is liable thereon. So that a person whose
signature does not appear on the instrument is not liable thereon.

Exception—instances where a person whose signature does not appear on the instrument but is
still liable:

1) The principal is liable if an agent signs in his behalf (Sec. 19).

2) In case of forgery, the forger is liable eve if his signature does not appear on the
instrument.
3) In case the person sought to be charged on the instrument signs on an allonge (Secs.
134 & 135).
4) Where a person uses an assumed name or trade name (Sec. 18).

Exception—instances where a person’s signature appears on the instrument and yet is NOT
liable:

1) In case of an undelivered and incomplete instrument (Sec. 16).

2) In case of indorsement or assignment by a minor or incapacitated person, the latter shall
not incur any liability on the instrument although such indorsement or assignment passes
title over the instrument (Sec. 22).
3) In case of a signature of an authorized agent (Sec. 18).
FORGERY: Forgery of negotiable instrument, except in case of ratification or estoppel, nullifies
the instrument as to all parties against whom forgery is committed, and is a defense by such
parties even against holders in due course. In other words, the doctrine of bona fide holder does
not apply if the negotiable instrument is not genuine or it was executed without authority from its
supposed maker (8 Am. Jur. 318).
8
By forgery is meant that the counterfeit making or fraudulent alteration of any writing, and may
consist in the signing of another’s name, or the alteration of the instrument in the name, amount,
description of the person and the like, with the intent to defraud (Filipinas Manufaturer’s Bank v.
Manlar Rice Mill, CV-68472, 28 February 1986).

Fraud amounting to forgery

If the blank paper with signature is delivered for autograph purposes but the person to whom it is
delivered converts it into a negotiable instrument, the same amounts to a forgery which is a
defense even against a holder in due course. This is known as the FRAUD IN FACTUM or
FRAUD IN ESSE CONTRACTUS. It is a real defense.

This is different from a situation where the blank paper is delivered with signature but with the
intention of converting the same into a negotiable instrument. If this paper is filled up or
completed beyond authority given by the issuer, the latter may raise the defense of lack of
authority to complete against any holder than holder in due course. In other words, the legal
consequences in case of no authority to complete a negotiable instrument are far different from
the legal consequences in case of no authority to convert a paper into a negotiable instrument.

Fraud in inducement (a personal defense)

When A sells to B what he represents to the latter as a diamond ring which is in fact made of
glass only. B issues a check of a promissory note. Is there forgery? Is a holder in due course of
such instrument protected?

There is fraud but is does not amount to forgery. The fraud is a fraud in inducement. There being
an intention to issue a negotiable instrument, a holder in due course is protected.

Representation amounting to forgery

X represents himself as Juan Cruz, when in fact he is not. By his misrepresentation, X obtains
from M a note payable to the order of Juan Cruz. Then X indorses the note, signing “Juan Cruz.”
Is there a forgery?

NO. If M intends that the proceeds of the note to be paid to X regardless of his name or even if he
misrepresented himself as Juan Cruz.
YES. If Juan Cruz not X is the intended payee. Here, M intends the proceeds of the note to the
real Juan Cruz and not X, but to whom M issued a note on the belief that X was Juan Cruz.

Effects of forgery

1) Only the signature forged or made without authority is stated by law to be inoperative but
neither the instrument itself is, nor the genuine signatures are, rendered inoperative.

2) The instrument can be enforced by holders to whose titles over the instrument the forged
signature is not necessary, such as, a forged indorsement of a bearer instrument.

3) The instrument ca be enforced against those who are precluded from setting up defense of
forgery, even against those whose signature are forged.

Parties precluded

a) Indorses (qualified or general): they warrant that the instrument indorsed is genuine, valid and
subsisting and in all respects what it purports to be (Secs. 65 and 66).

b) Person negotiating by mere delivery: he warrants that the instrument is genuine and in all
respects what it purports to be. The warranty extends only to the immediate transferee (Sec. 65).

c) Acceptor: by accepting the bill, he admits the genuineness of the signature of the drawer (sec.
62).
d) Those who are estopped. Like in case of silence or negligence or failure to repudiate the
forgery within a reasonable time.

*Doctrine of comparative negligence.

INDORSEMENT: From the Latin term “in dorsa” meaning writing on the back.
9
The act of signing one’s name on a negotiable instrument payable to order indicating the intent to
transfer ownership of the instrument to another. It creates a contract between the indorser and his
transferee. The law does not require that indorsement be made on a particular side of the
instrument, but they are usually written at the back for purposes of convenience.

If an indorsement is payable to bearer, an indorsement is not required for its negotiation but the
transferee may demand that it be indorsed for purposes of security and the identification of the
transferor of the instrument.

IMMEDIATE PARTIES: The term is confined to those who are ‘immediate,’ in the sense of
knowing or being held to know the conditions or limitations placed upon the delivery of the
instrument. It means PRIVITY, not proximity.

The criterion is whether or not the party in question knows of the conditions or imitations placed
upon the delivery or the fact that the instrument was not delivered but stolen. If the party in
question knows, he is an immediate party even if he is not the next party physically.

ACCOMMODATION PARTY: One who has signed the instrument as maker, drawer, acceptor or
indorser, without receiving value therefore, and for the purpose of lending his name to some other
person (Sec. 29).

An accommodation party is only liable to a holder for value notwithstanding that “such holder, at
the time of taking the instrument knew him to be only an accommodation party.”

An accommodation party receives no part of the consideration for the instrument but he assumes
liability to the other parties thereto because he wants to accommodate another.

The relation between an accommodation party and the party accommodated is one of principal
and surety. The liability is immediate and direct (Aglibot v. Santia, GR No. 185945, 05 December
2012).

The liability of the accommodation party is primary and unconditional (Aglibot v. Santia, GR No.
185945, 05 December 2012; Tomas Ang v. Associated Bank, GR No. 146511, 05 Sept. 2007).
Payment in due course by the party accommodated discharges the instrument (Sec. 119).

Payment by the accommodation party will not discharge the instrument because he has a
recourse or can recover from the accommodated party.

INDORSEMENT: From the Latin term “in dorsa” meaning writing on the back.

The act of signing one’s name on a negotiable instrument payable to order indicating the intent to
transfer ownership of the instrument to another. It creates a contract between the indorser and his
transferee. The law does not require that indorsement be made on a particular side of the
instrument, but they are usually written at the back for purposes of convenience.

If an indorsement is payable to bearer, an indorsement is not required for its negotiation but the
transferee may demand that it be indorsed for purposes of security and the identification of the
transferor of the instrument.

Pedro is the payee-holder of a check executed by Juan drawn against ABCbank, which refuses to
pay the check notwithstanding sufficiency of funds. Can Pedro sue ABCBank for such refusal?
No. A check does not operate as an assignment of funds to the credit of the drawer with
the bank, and the bank is not liable to the holder unless and until it accepts the check.

P sold to M 10 grams of shabu worth Php5,000.00. As he had no money at the time of the sale, M
wrote a promissory note promising to pay P or his order Php5,000. P then indorsed the note to X
(who did not know about the shabu), and X to Y. Unable to collect from P, Y then sued X on the
note. X set up the defense of illegality of consideration. Is he correct?
No, since X, a general indorser, warrants that the note is valid and subsisting.
A bill of exchange has T for its drawee, U as drawer, and F as holder. When F went to T for
presentment, F learned that T is only 15 years old. F wants to recover from U but the latter insists
that a notice of dishonor must first be made, the instrument being a bill of exchange. Is he
correct?
No, since F can treat U as maker due to the minority of T, the drawee.

10
Arnold, representing himself as an agent of Brian for the sale of Brian's car, approached Dennis
who appeared interested in buying the car. At Arnold's prodding, Dennis issued a crossed check
payable to Brian for P25,000.00 on the understanding that the check would only be shown to
Brian as evidence of Dennis' good faith and interest in buying the car. Instead, Arnold used the
check to pay for the medical expenses of his wife in Brian's clinic after Brian, a doctor, treated
her. Is Brian a holder in due course (HDC)?
No, Brian is not a HDC because Brian should have been placed on notice: the check was
crossed in his favor and Arnold was not the drawer.

ISSUE: the first delivery of the instrument, complete in form to a person who takes it as a holder
(Sec. 191).

DELIVERY: the transfer of possession, actual or constructive, from one person to another with
intent to transfer title (Sec. 191).

NEGOTIATION: the transfer of an instrument from person to another as to constitute the

transferee the holder of the instrument.

If the instrument is payable to bearer, it may be negotiated by mere delivery although the law
does not prohibit negotiation by indorsement completed by delivery.

If the instrument is payable to order, it must be negotiated by indorsement completed by delivery.

(Sec. 30)

HOLDER: the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof
(Sec. 190).
A bearer is defined as the person in possession of a bill or note which is payable to bearer.

ACCEPTANCE OF A BILL: the signification by the drawee of his assent to the order of the
drawer. This is usually done by writing across the face of the bill the word “accepted,” followed by
the signature of the drawee (Sec. 132).

Acceptance is NOT the same as receive.

DISHONOR BY NON-ACCEPTANCE: Where the bill is presented for acceptance, and

acceptance is refused by the drawee, or cannot be obtained, or where presentment for
acceptance is legally excused, and the bill is not accepted, it is said to be dishonored by non-
acceptance (Sec. 149).

PRESENTMENT FOR PAYMENT: It consists of exhibiting the instrument to the person primarily
liable thereon and demanding payment from him on the date of maturity. This is required for all
kinds of negotiable instruments (Secs. 70 & 74).

DISHONOR BY NON-PAYMENT: Where the instrument is presented for payment, and payment
is refused or cannot be obtained, or where presentment for payment is excused and the
instrument is overdue and unpaid, it is said to be dishonored by non-payment (Sec. 183).

NOTICE OF DISHONOR: When the instrument has been dishonored by non-acceptance or non-
payment, a notice of dishonor must be given to the drawer and to each indorser, and any drawer
or indorser, to whom such notice is not given is discharged (Sec. 189).

The purpose is to notify the drawer and the indorsers that the instrument has not been accepted
by the drawee, or that it has not been paid by the acceptor, in the case of bills, or by the maker, in
the case of notes.

*****

11