Republic of the Philippines

TARLAC STATE UNIVERSITY

School of Law
G. Romulo Boulevard, Tarlac City 2300

Final Requirement in the course

Negotiable Instruments Law

Presented By:

Ray John Dorig

Presented To:

Atty. Mykedox Cuchapin

TABLE OF CONTENTS

I. General Principles……………………. …..………………………………………..1

II. Consideration…………………. ……………………………………………………8

III. Negotiation…………………………………………………………. ………….…..9

IV. Rights and Liabilities of Parties…........………………………………..………...12

V. Presentment for Payment………………………..………………………………..15

VI. Notice of Dishonor………………………………….……………………………..17

VII. Discharge of Negotiable Instrument……………………………………………21

VIII. Bill of Exchange vs. Promissory Note……………………………………….…..24

IX. Acceptance & Presentment for Acceptance…………………………….……….26

X. Acceptance for Honor & Payment for Honor……………………………..…….29

XI. Case Digests…………………………………………..…………………………..…3

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I - GENERAL PRINCIPLES

Negotiable Instruments are NOT legal tender

Although Negotiable instruments are substitute for money, the same are
not legal tender. Delivery of negotiable instruments does not produce the effect of
payment.

Such Instrument produce the effect of payment only when, they have been
cashed or through the fault of the creditor they have been impaired.

Features of a negotiable instrument

1. Negotiability – may pass from hand to hand giving the current holder
the right to collect the amount payable and is free from any infirmity or
defect in the title of any prior party
2. Accumulation of secondary contracts – additional parties may become
involved through further negotiation of the instrument

I-A. Elements of a negotiable instrument (Section 1)

1. It must be in writing and signed by the maker or drawer

The instrument must be in a tangible form for it to be negotiated
from hand to hand. The signature of the maker or drawer may appear
anywhere on the face of the instrument and such signature is binding as
long as the person intended to make the instrument as his own.

2. It must contain an unconditional promise or order to pay

Promise to pay in promissory notes and order to pay in bills of
exchange. Both must be unconditional. It should be noted that it is not
essential that the word “promise” should be used as long as there is
assumption of full responsibility for the payment.

A promise or order to pay is unconditional although coupled with:

a. an indication of a particular fun out which reimbursement is to

be made
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Ex. “Pay to Andrea or order Php 2,999.000 and

reimburse yourself from the debt you owe me last
month”
b. a statement of the transaction which give rise to the instrument
Ex. “I promise to pay to the order of Bart Php 5,000 for
the price of an artifact delivered to my house”
c. it should be noted that an order or promise to pay out of a
particular fund is not negotiable
Ex. “I promise to pay with my salary this coming
month to Cath or bearer”

An option also does not affect negotiability unless such right is given to the
promissor.

Ex. “I promise to pay Dodong or bearer Php 15,000 or

a brand new phone at the option of the holder”

3. It must be payable in a sum certain in money

Money includes all legal tender. A sum certain in money means that
the holder can determine form the instrument the amount he is entitled.

Certainty of the sum is not affected even if:

a. Sum is with interest; or
b. By stated installment; or
c. Installments with acceleration clause; or
d. With exchange, whether at a fixed or current rate; or
e. With cost of collection or an attorney’s fee, in case
payment shall not be made at maturity.

Ex.

“I promise to pay Andrea or bearer 1,000 pesos with legal interest”

“I promise to pay Bart or order 10,000 in ten monthly installments

and if I failed to pay an installment, the whole debt shall become due.”

An extension clause also does not affect the negotiability of the

instrument unless such right to extend is lies with the person primarily
liable.
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4. It must be payable on demand, or at a fixed or determinable future time

It may be at a fixed period after sight or date, on or before a fixed or
determinable future time 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.
Ex.
“2 months after sight”
“on or before Christmas 2020”
“a week after the ECQ has been lifted”

An instrument is payable on demand if it expressly indicates that it

is indeed payable on demand or if no time for payment is expressed. If it is
payable on demand, it is due and demandable immediately after delivery.

5. It must be payable to order or to bearer

An instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order.
Ex.
“Pay to the order of Andrea 1,000 pesos”
“Pay to Bart or order …”
“I PROMISE TO PAY 1,000 PESOS TO THE ORDER
OF DODONG (SGD.) CATH”

An instrument is payable to bearer when it is expressed to be so

payable to the bearer, when it is payable to a person named or bearer, when
it is payable to the order of a fictitious person and such fact is known to the
person making it so payable, when payee is not aperson or when the last
indorsement is in blank.

Ex.

“I promise to pay Bear or bearer Php 1000.”

“Pay to John Doe or order Php 1000”

“Pay to the order of God”

“Pay to cash”
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“(sgd.) Bart *at the back of the instrument*”

6. If addressed to a drawee, he must be named or otherwise indicated therein with

reasonable certainty.
This last requirement applies to bills of exchange. Sufficient certainty means
as long as the drawee could be known from what is written in the bill.
Ex.
“to Andrea Agaton”
“to Bart’s brother”
“to the owner of the tibetan mastiff named Doug”

I-B. Omissions

The validity and negotiability of an instrument are not affected by the fact
that:

a. It is not dated
The omission of the date is immaterial. In such case the
instrument will be considered as dated as of the time it was
issued. Further, the holder may insert the true date pursuant
to section 13.
b. Omission of the value given
Consideration is always presumed.
c. Omission of the place
Section 1 does not require the indication of the place where
the instrument is made or where it is payable.

I-C. Ante-dated and post-dated

An ante-dated and post-dated instrument is not void or invalid as long as such

dating is not done for an illegal or fraudulent purposes. (section 12)

I-D. Insertion of date when the date is necessary

Section 13 provides that true date may be inserted when an instrument is payable
at a fixed period after date or when an instrument is payable at a fixed period after sight
but is undated.
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If the wrong date is inserted, even if the true date is known will avoid the
instrument against as to the one who inserted the date and any subsequent holder but
not as to a holder in due course. The insertion of a wrong date constitutes a material
alteration pursuant to Section 125.

I-E. Blanks (Incomplete and delivered instruments)

Pursuant to Section 14, if the instrument is wanting any material particular, the
holder has the prima facie authority to fill in the blanks therein. In this case, if an
incomplete instrument is delivered to a payee or holder, such party is presumed
authorized to complete the instrument. Thus, a signature on a blank paper operates as a
prima facie authority to put up any amount. It should be noted, however, that in order
for it to bind a person who became party to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time.

If a completed instrument was negotiated to a holder in due course, it is valid and

effectual for all purposes in his hands. The defense that the blanks was filled up without
authority is a mere personal defense.

I-F. Incomplete and undelivered (Section 15)

Non-delivery of an incomplete instrument is a real defense which may be set up

against ANY holder and thus a real defense.

However, it should be noted that if there is contributory negligence on the part of

the drawer or maker, he may still be liable to a holder in due course

Ex.

Andrea makes a note and the name of the payee was left in blank. Bart stole
said note and completed it by writing his name as payee. Bart further indorses it
to Cath a holder in due course.

In this case, Cath cannot enforce the note against Andrea because the note
was undelivered and is incomplete even Cath is a holder in due course.
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I-G. Complete but undelivered (Section 16)

An instrument is incomplete and revocable until delivery for the purpose

of giving it effect. However, if a holder in due course possesses an instrument, there
is conclusive presumption of valid delivery and a possession of a party other than a
holder in due course constitutes only a prima facie presumption of delivery. Thus, the
defense of want of delivery is merely a personal one.

I-H. Ambiguity

Pursuant to Section 17:

a. Sum in words is preferred over the sum denoted in numbers if there is

discrepancy between the two. If the words are uncertain, then the
figures shall be the sum payable
Ex. “one hundred thousand pesos” > “P 1,000”
b. If interest is to paid but no date is specified from which the interest is to
run, the interest shall run from the date of the instrument. If undated,
from the issue.
c. Written provision prevails over printed ones.
d. If it cannot be ascertained whether the instrument is a note or a bill, the
holder may treat it as either
e. A signature shall be deemed to be a signature of an indorser the capacity
of the person making the same is in doubt
f. If the words “I promise to pay” is signed by two persons, they deemed
to be joint and severally liable and “we promise” pertain to joint liality.

I-I. Signature of an Agent

A signing agent is exempt from personal liability as long as:

1. He is duly authorized;
2. He indicates that he merely signs as an agent or a representative;
3. He discloses the name of his principal.

Procuration occurs when a principal gives power to another to act in his place as
he could himself. Thus, it warns any third person that the agent has but a limited
authority to sign and the principal is bound only if he signed it within the authority
given to him.
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I-J. Indorsement by minor

A minor is not bound by his indorsement but he not incapacitated to transfer

certain rights. His incapacity may not be set up by any parties other than the minor
himself.

Ex.

Andrea issues a note payable to Baby (a minor) or order. Baby indorses the
instrument to Cath.

In this case, despite the incapacity of the indorser, said indorsement is not
without effect. Andrea cannot invoke the incapacity of Baby against Cath hence,
is still liable. If Andrea cannot pay, and Cath sues Baby, the latter may raise the
defense of incapacity or minority.

I-K. Forged Signature

A forged signature is wholly inoperative, and no right can be acquired through

the forged signature. Forgery is an absolute defense even against a holder in due course.

Forgery does not avoid the instrument completely. Rights which did not arise
from the forgery may still exist.

“Cut-off Principle” - parties prior to the forgery are cut-off and thus, cannot be
held liable by any holder.

Ex.

Andrea issues a note payable to the order of Bart. Bart indorses the note to
Cath. Dodong acquires the note fraudulently, forges Cath’s signature and indorses
it to Egul. Egul further indorses the note to Fatso.

Andrea(maker) – Bart – Cath – (through Dodong’s Forgery) – Egul – Fatso

In this case, Cath’s signature is wholly inoperative and thus no right can
arise from it. Hence, Fatso cannot enforce the instrument against Andrea, Bart and
Cath because the former has acquired o right to enforce.
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Fatso may go against Egul because the latter warranted that the instrument
is genuine or vaild. And lastly, both Egul and Fatso has a right of recourse against
the slick forger, Dodong.

Suppose the instrument is an original bearer instrument? In this case, the

forgery is not necessary to vest title to Fatso because negotiation on bearer
instrument requires delivery only.

II - CONSIDERATION

II-A. What is Consideration?

Generally, consideration is the cause which induces a contracting party to enter

into a contract. Consideration is any prestation sufficient to support any contract in favor
of the party to an instrument.

II-B. Is there presumption of Consideration?

Yes. Pursuant to Section 24 of the NIL, it is presumed that all negotiable

instruments are deemed to have been issued for a valuable consideration. Thus, the
consideration need not be alleged in the instrument itself.

Ex:

Provided in the promissory note: “I promise to pay Andrea or order Php

10,000.000 (Sgd.) B”

The back of the note reads: “Pay to C. (Sgd.) A”

In this case the promissory note does not mention any consideration received by
A, the indorser, from C. Nevertheless, the transaction is valid because it is presumed that
the indorser received some valuable consideration from the payee.

II-C. When is consideration adequate?

A consideration must be a valuable one. Section 25 of the NIL also provides that a
pre-existing debt may be a valuable consideration.

Ex:

If Andrea delivers a car to Bart worth Php 750,000.000 and in turn, Bart issues a
promissory note in favor of Andrea for Php 800,000.000. In this case, inadequacy of the
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consideration is not a sufficient ground for relief because a valuable consideration is

sufficient. Unless of course, if there is vitiated consent.

II-D. What if there is absence of consideration?

Section 28 of NIL provides that absence or failure of consideration is a matter of

defense 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
otherwise.

Absence of consideration is a total absence of a valid consideration while failure

means the failure or refusal of one party to comply with his obligation agreed upon. Thus,
pursuant to the provision of law mentioned, lack of consideration is only a personal
defense and is not available against a holder in due course.

Ex.

Andrea issues a promissory note to Bart for payment of a parcel of land which
does not exist. Bart then indorses said note to Cath, a holder in due course. In this case,
Cath may still recover from Andrea because lack of consideration is a mere personal
defense and is not available against a holder in due course.

III – NEGOTIATION

III-A. How is a negotiable instrument transferred?

A negotiable instrument may be transferred by:

1. Isssuance – first delivery of a complete instrument to a holder.

2. Negotiation – ordinarily involves indorsement (or mere delivery)
3. Assignment – transfer of the title to an assignee, subject to all defenses available
against the assignor.

III-B. Negotiation

Section 30 of the NIL provides that a negotiable instrument may be transferred

from one person to another through negotiation and said transfer makes the transferee a
“holder” of the instrument.

If the instrument is “payable to bearer”, it is negotiated by mere delivery. If it is

“payable to order”, it is negotiated by delivery with the necessary indorsement.
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Ex.

A. “I promise to pay Andrea or bearer Php 1,000.000…”

Since the note is payable to bearer, it may be negotiated by mere delivery to

another holder.

B. “Pay to the order of Andrea Php 1,000.00…”

In this case, the instrument is payable to order, thus it may be negotiated by a

proper indorsement usually at the back of the instrument.

III-C. Assignment

In assignment, the instrument’s title is merely transferred to an assignor. In this

case, the assignee merely steps into the shoes of the assignor.

There is assignment if the transfer does not make the transferee the holder of the
instrument. Thus, if a negotiable instrument payable to order is merely delivered without
indorsement, there is no negotiation but only assignment.

III-D. Indorsement

Indorsement is the writing of the name of the payee on the instrument with the intent to
transfer the title to the same or strengthen the security of the holder by assuming liability
for its future payment, or both. Section 31 of the NIL provides that indorsement must be
written on the instrument itself or on a paper (allonge) attached thereto.

Indorsement may be:

A. Special or specific – where the name of the payee is specified in the instrument.
Ex. “Pay to Maria”, “Pay to the order of Maria or order”
B. Blank – where the indorser merely attaches his signature without mentioning a
particular indorsee.
Ex. A makes a note payable to B or order. B then negotiates it to C by simply
writing his signature on the back of the note. C then becomes the bearer of the
note. C then may further negotiate the instrument either by mere delivery or by
converting the blank indorsement into special indorsement.
C. Restrictive – where the indorsement prohibits further negotiation or limits rights
of indorsee.
Ex. “Pay to Ray only”, “Pay to Maria’s eldest brother and to no other person”
D. Qualified – mere assignment of the instrument
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Ex. “Pay to Ray or order without recourse on me” or by the use of “sans
recourse”,”indorser not holder” and the like
E. Conditional – the indorser imposes conditions to his liability or on the indorsee’s
right to collect.

III-F. Indorsement must be of the entire instrument

The indorsement must be for the entire instrument. If the indorsement purports to
transfer only a part of the amount payable or purports to transfer the instrument to two
or more indorsees severally, said indorsement does not operate as a negotiation. The only
time when partial indorsement is allowed is when a part of the amount has already been
paid in such case the unpaid balance may be indorsed. (Section 32)

III-G. If payable to two or more persons

If an order instrument is indorsed to several person jointly, all of the indorsees must
indorse. If the, however, the indorsement is in favor of several persons severally, any of
such indorsee may indorse.

Ex.

1. “Pay to Andrea and Bart” – The indorsement must be made by both Andrea and
Bart.
2. “Pay to Andrea or Bart” – The indorsement may be made by either of the two.

III-H. Once a bearer always a bearer

An instrument which is originally a bearer instrument, even if indorsed specially,

may further be negotiated by mere delivery. The person who specially indorsers the
instrument is only liable to those holders who can trace their title to the instrument from
such special indorser.

Ex.

Andrea issued a note payable to bearer in favor of Bart. Bart delivered the note to
Cath. Cath specially indorsed the note to Dodong.

In this case, since the note is originally a bearer instrument, it may still be further
negotiated by mere delivery even if it was specially indorsed. Thus, D may negotiate the
note to another by mere delivery and treat the note as a bearer instrument.

III-I. Striking out indorsement

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Section 48 of the NIL provides that the holder may at any time strike out any
indorsement which is not necessary to his title. Those struck out and those subsequent to
him are thereby relived from liability.

Ex.

1. Andrea issues note payable to bearer to Bart. Bart indorsed the note to Cath. Cath
indorsed the note to Dodong. Dodong delivered the note to Egul. In this case, since
the instrument is a bearer instrument and by virtue of Section 48, Egul may strike
out the indorsment made by Bart, Cath and Dodong because none of them is
necessary of his title.
2. Suppose Andrea issues a note payable to order of Bart. Bart signed the note and
delivered it to Cath. Cath indorsed the note to Dodong. Dodong indorsed the note
to Egul. In this case, the indorsement of Cath and Dodong are not necessary to
Egul’s title by virtue of the blank indorsement of Bart. If Dodong striked out said
indorsements the note would become a bearer instrument because what remains
is the blank indorsement.

IV – RIGHTS AND LIABLITIES OF PARTIES

IV-A. Who are the parties?

1. Holder – one who holds a negotiable instrument and is entitled to receive the
amount payable. May be a payee, an indorsee or a bearer.
2. Holder in due course – a holder who holds the instrument under the following
conditions:
a. the instrument is regular and complete on its face
b. he became the holder before it is overdue and without notice of a previous
dishonor
c. he took the instrument in good faith
d. he had no notice of any infirmities or defect in the title (Section 52)
e. if the instrument is payable on demand, and it was negotiated on an
unreasonable length of time after its issue, the holder cannot be considered as
a holder in due course. (Section 53)

3. Holder for Value – where value has at any time has been given for the
instrument, the holder is a holder for value in respect to all parties who become
such prior to that time (Section 26)

4. Drawer – one who draws a bill of exchange.

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5. Maker – one who make a promissory note

6. Indorser – one who signs in his name and negotiates the bill to an indorsee

IV-B. Rights of:

1. Holder:
a. Right to receive payment in due course
b. Right to sue
c. Entitled to the instrument but holds it subject to the same defenses
as if the instrument were non-negotiable
2. Holder in due course:
a. Right to receive payment in due course
b. Right to sue
c. Personal defense cannot be invoked against a holder in due course
and may hold the instrument and treat it as free from any defect of
title of prior parties
d. He may enforce payment thereof against all liable parties

It should be noted however that there is a presumption that a holder of a

negotiable instrument is a holder in due course. Thus, the burden of proving otherwise
lies in the person who questions said presumption. (Section 59) (State Investment House
Inc. v. Court of Appeals)

Ex.

1. Andrea sold his car to Bart for Php 750,000.000. Bart issued a negotiable
promissory note for the said car in favor of Andrea. Andrea indorsed the note
to Cath which is a holder in due course. If the car turns out to be defective, Cath
may still recover the full amount from the note despite the breach of contract
by Andrea with Bart.
2. Check

IV-C. Liabilities:

1. Maker guaranties that:

a. he will pay it according to its tenor;
b. admits the existence the payee;
c. his capacity to indorse (Section 60)
2. Drawer guaranties that:
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a. Admits the existence of the payee;

b. His capacity to indorse;
c. On due presentment, the instrument will be accepted or paid, or both,
according to its tenor;
d. If dishonored, he will pay the amount thereof to the holder or to any
subsequent indorser unless he limits his liability
3. Acceptor by accepting:
a. Guaranties that he will pay according to the tenor of acceptance;
b. Admits the existence of the drawer, genuineness of his signature, and hiss
capacity to draw;
c. Admits the existence of the payee and his capacity to indorse
4. A general indorser warrants:
a. That the instrument is genuine;
b. That he has good title to it;
c. That all prior parties had capacity to contract;
d. That he has no knowledge of any defects and infirmities
e. That the instrument shall be honored (Sections 65 & 66)
Ex.
Andrea issues a bearer note and delivers it to Bart. Bart negotiates it to Cath.
If the instrument is actually forged, Bart is liable for said defect because he
warrants the genuineness of the instrument pursuant to section 65. The
same is true if the instrument was stolen, or if Andrea concealed the fact of
her insolvency because Bart warrants that he has no knowledge of any
defects or infirmities.

It should be noted however that in order to enforce liabilities from a general

indorser, the following must concur: a) due presentment for payment or acceptance must
be made and b) the instrument was dishonored

5. A qualified indorser warrants only items “a” to “d” of the preceding number.
(Section 65) In this case, a qualified indorser does not mean that he doesn’t
incur liability no matter what the situation is. A qualified indorser still
warrants the instrument’s genuineness, his valid title to it, his capacity and his
awareness that the instrument is free from defects. A qualified indorser is still
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liable to all subsequent holders who make title through his indorsement for
breach of any of his warranties under section 65.
Ex.
In the previous example, the note was dishonored because of Andreas’
insolvency. In this case, Bart is not liable for such insolvency if he is a qualified
indorser unless he knows said insolvency from the start. A qualified indorser
only warrants those provided for under Section 65 and not those under section
66.

V – PRESENTMENT FOR PAYMENT

Presentment is presenting the instrument to the person who is primarily liable for
the purpose of demanding and receiving payment.

V-A. Presentment for payment not necessary to charge a person primarily liable

If the instrument provides for the date of maturity, the holder can sue the maker
even if there is no demand made by the former as soon as the date for payment has passed.
In this case, the liability of person primarily liable is absolute. Because the setting of a
date and / or place of payment indicates the person’s willingness and ability to pay and
may be considered as tender of payment. The same rules applies if the note is payable on
demand.

V-B. Presentment Necessary to make drawer and indorsers liable

In this case, to charge a person secondarily liable, presentment must be made

because they undertake to pay only if the instrument is dishonored.

If there was dishonor but no notice of dishonor was given to the drawer and indorsers,
they shall be released from their liabilities. (Section 89)

V-C. Date of presentment when instrument is payable on demand and when there is a
fixed date

If the instrument is payable on demand, presentment must be made within a

reasonable time after its delivery or after the last negotiation. If there is a fixed date, on
the date it falls due.

V-C. “Sufficient Presentment”

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For presentment to be sufficient, is must be:

1. Made by the holder (or authorized person);

2. At a reasonable time;
3. At a proper place and;
4. To the person primarily liable or to his agent/representative. (Section 72)

The instrument must be physically exhibited to the person from whom the
payment is demanded. If no exhibition occurred, the presentment is ineffectual.

The place of presentment must be at the place specified in the instrument and if
no place was specified, at the address or usual place of business of the person making
the payment. In any other case, where said person is to be found.

V-D. how presentment is made:

1. If the instrument is payable at a bank, it must be made during banking hours

and at maturity.
2. If the person primarily liable is dead, to his representative.
3. If the principal debtor are partners, presentment may be made to any one of
them.
4. If persons liable are joint debtors, presentment must be made to all debtors.

V-E. Can delay in making presentment be excused?

Yes. Delay in presentment may be excused when the delay is caused by factors
beyond the control of the holder and with no default, misconduct or negligence. It should
be noted however that presentment must still be made after these inevitable conditions
passes.

Ex.

“Extreme weather conditions”, “war” and any other fortuitous event

V-F. When presentment be dispensed with

Pursuant to Section 82, presentment may be dispensed with if even after

reasonable diligence has been exercised, presentment cannot be made or if the proper
place of presentment cannot be determined.

Same rule applies if the drawee is fictitious and if presentment was waived
expressly or impliedly.
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V-G. When is presentment no longer necessary to charge the drawer and the indorser.

Presentment is not required to charge the drawee where he has no funds with the
drawee or generally, when the drawer has no right to expect or require the drawee to
accept or pay the instrument.

On the other hand, presentment is no longer required if the indorser was merely
accommodated by another party. In this case, the real debtor is actually the
accommodated indorser.

V-H. Dishonor by non-payment

There is dishonor by non-payment if the instrument is duly presented for payment

and the payment was refused or cannot be made. There may be dishonor by non-payment
without presentation only if presentment is excused, pursuant to Section 79, 80 and 82,
or if the instrument is already overdue.

V-I. What is the effect of dishonor?

As to the holder, the person secondarily liable becomes the principal debtor. The
immediate recourse however may be validly made after giving of valid notice of dishonor
to said persons.

V-J. When is payment considered as payment in due course?

A payment is a payment in due course when it is made at or after the maturity of

the instrument and to the holder. The payment must be in money because the promise or
order is to pay a sum certain in money. Also, the payment must be in good faith without
notice of the holder’s title is defective.

Ex.

Andrea issues an order instrument to Bart. Bart signed the note and delivered it to
Cath. Dodong then obtained the instrument by through fraud and issues the same to
Andrea. Andrea, pays the instrument in good faith without knowing said defect. Thus,
said payment is considered as a payment in due course which discharges the instrument.

VI – NOTICE OF DISHONOR

VI-A. When is an instrument considered dishonored?

A negotiable instrument is considered to be dishonored if: a) it is not accepted

when presented; b) if it is not paid when presented at maturity or; c) when presentment
is excused or waived and the instrument is unpaid and overdue.
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VI-B. What is a notice of dishonor and its purpose?

Notice of dishonor is informing the drawer or indorse, whether verbally or in

writing, the fact that a negotiable instrument has not been accepted or has not been paid
by the person primarily liable and that the party being notified is expected to pay it.

Thus, said notice must be given to a DRAWER and INDORSERS. Any indorser or
drawer to whom such notice is not given is discharged. Its purpose is to inform the parties
secondarily liable and advise said parties that they will be required to make payment. It
should be noted however that although the indorser to whom notice is not given is
discharged, he is still liable for any breach of warranties under Section 65 and 66. (Section
89)

Ex. Andrea issued an instrument payable to the order of Bart wherein Cath is the
drawee. Bart presented the bill to Cath but the latter did not accept the bill. No notice of
dishonor was given to Andrea. In the meantime, Cath indorsed the bill to Dodong who
had no knowledge of the dishonor. Dodong presented the bill but Bart again dishonored
the same. Dodong gave notice of dishonor to Andrea.

In this case, Andrea is discharge only as against Bart but not as against Dodong
because the latter is an innocent indorser who has no knowledge that the bill has been
previously dishonored.

It should be noted that indorsers are entitled to notice of dishonor. Mere

knowledge by the indorser of non-payment is not sufficient.

VI-B. By whom notice of dishonor given?

Section 90 provides that the notice may be given by or on behalf of the holder, by
a party to the instrument who may be compelled to pay it or another person in behalf of
such party, or by an agent.

Where notice is given by a holder or on his behalf, it inures to the benefit of all
subsequent holders and all parties prior to the holder who have a right of recourse
against the party to whom the notice is given.

Ex.

Andrea issues a note payable to Bart or order. Bart indorses the note to Cath. Cath
indorses it to Dodong and Dodong, to Egul, the present holder. If Egul gives notice to
Bart, it shall operate to the benefit of Cath and Dodong, although they themselves have
not notified Bart.
 19

VI-C. What if the instrument has been dishonored in the hands of an agent?

Pursuant to Section 94, he may give notice to the principal or directly to the parties
secondarily liable.

VI-D. When is notice considered as sufficient?

A notice may be made in writing or orally as long as said notice is communicated

with the party to be notified. It must identify the instrument and indicate that the same
has been dishonored by non-acceptance or non-payment.

Lack of signature does not invalidate the notice. Neither does a misdescription or
other formal defects affects its validity unless it was made to mislead the party to whom
it is to be sent.

Lastly, the notice shall be given to the party himself, of course, or to his agent and
if already dead, to his representative. If the death is not known, if the decedant has no
representative, or his whereabouts are unknown, notice may be sent to the last residence
or place of business of the deceased.

VI-F. Time within which notice must be given

Notice may be given as soon as the instrument is dishonored. Where the person
giving and the person receiving the notice reside in the same place notice must be given
at business hours, at the hours when members of the household are attending to their
ordinary affairs the day following the dishonor, or if by mail, must be deposited in the
post office

If the parties reside in different places, either by mail through depositing the notice
in the post office or in some other ways to deliver the same.

It must be noted that the act of depositing the notice in the post office or any of its
branch creates a presumption that the notice was given on time as long as the notice was
properly addressed, stamped and mailed.

VI-G. Effect of receipt of Notice of dishonor

The instrument is considered dishonored in the hands of a party who receives a

notice from the holder on the date he receives such notice and not the date the instrument
is dishonored in the hands of the holder.

VI-H. How to waive giving of the notice of dishonor

 20

Waiver may be given expressly or impliedly. Also, the notice may be waived
before the time of giving of notice or after the failure to give due notice.

Examples of implied waiver: “payment of the interest by an indorser after he

learns of the default”, “a promise to pay if the maker does not pay”

A waiver of protest is a deemed to be a waiver not only of a formal protest, but

also of presentment and notice of dishonor.

VI-I. When can a notice of dishonor be dispensed?

After the exercise of reasonable diligence, the notice still cannot be given or does
not reach the parties sought to be notified and charged, notice of dishonor may be
dispensed with. (Section 112)

Ex.

Andrea is the current holder of a negotiable instrument. After examining

the telephone directory for the address, she claims that she could not find the
address of the indorsers. In this case, the notice cannot be dispensed with because
there was no exercise of reasonable diligence to notify the indorsers. Diligent
efforts must be proven to warrant the dispensation of the notice.

VI-J. When is delay in giving noticed excused?

Section 113 provides that the delay in giving notice may be excused in case there
exists circumstances which are beyond the control of the holder and there are no
contributory negligence or misconduct made by him.

VI-K . When can notice need not be given:

1. To the drawer:
a. Where the drawer and drawee are the same person;
b. Where the drawee is fictitious and having no capacity to contract;
c. When the instrument was presented to the drawer;
d. Where the drawee has no right to require the drawee to honor the
instrument;
e. Where the drawer countermanded or has given a stop payment order.

Under items “a” and “b”, the holder may treat the bill as a promissory note, since
the drawee has no capacity to transact or non-existent. Thus, the drawer shall me
regarded as the maker.
 21

Ex.

Andrea is the drawee and her agent is the drawer. In this case, notice need
not be given because the bill was, actually drawn by Andrea herself.

Under item “c”, no notice is needed because the Drawer himself has
dishonored the instrument. The presentment already constitutes as a notice of
dishonor.

Under item “d”, the drawer knew from the very beginning that the bill
would be dishonored.

2. To the indorser:
a. When the drawee is fictitious or a person having no capacity to contract,
and the indorser was aware of such fact at the time of his indorsement;
b. Where the instrument was presented to the indorser himself and;
c. The indorser is in fact the principal or an accommodated party.

VI-L. Where notice of dishonor by non-acceptance has been given

When a bill is dishonored by non-acceptance and a notice has been given, it is no

longer necessary to give a subsequent notice of dishonor by non-payment unless the
instrument has been accepted after the first notice was given.

Ex.

Andrea is the drawer, Bart is the drawee and Cath is the payee. It was then
successively indorsed by Dodong, Egul. Fatso, the current holder presented the
bill to Bart who refuses to accept the bill. Fatso then gave notice of dishonor to
Andrea, and the indorsers. In this case, notice of subsequent dishonor by non-
payment of Bart is no longer necessary.

If Bart accepts the bill, and upon presentment still refuses to pay, then a second
notice of dishonor by non-payment must be made.

VI-M. Failure of give notice of dishonor by non-acceptance does not prejudice the
rights of a holder in due course subsequent to the omission. If the dishonor was by non-
payment, there can be no holder in due course because it appears in the face of the
instrument that the instrument has already matured.

VII – DISCHARGE OF NEGOTIABLE INSTRUMENT

VII-A. “Discharge”
 22

Discharge is the release of all parties, secondary and primary, from their obligation
and the discharge of the instrument itself. It renders the instrument without legal
existence hence, can no longer be negotiated.

VII-B. How is a negotiable instrument discharged?

1. By payment in due course at or after its maturity by:

a. the person primarily liable or by his representative
b. accommodated party or the real principal debtor
2. By intentional cancellation by the holder
3. By any act which will discharge simple contract for the payment of money

Any form of extinguishment of an obligation i.e. performance, loss of the thing

due, remission, compensation, novation, fulfillment of a resolutory condition etc.

4. When the principal debtor becomes the holder of the instrument at or after the
date of maturity (Section 119)

VII-C. When are persons secondarily liable discharged?

1. If the instrument is discharged under Section 119. The discharge of the instrument
releases the parties secondarily liable since the instrument ceases to have force and
effect.
2. If the holder intentionally strikes out a signature of a person secondarily liable as
long as such discharged party is not necessary to the holder’s title.
3. By the discharge of a prior party by act of holder
4. Valid tender of payment made by a prior party if accepted, would discharge said
party and all parties subsequent to him. If the holder refuses to accept without
justifiable reasons should still discharge subsequent parties.
5. The release of the principal debtor likewise discharges all secondary parties unless
the holder made reservation.

Ex.

Andrea issued a note payable to order of Bart. Bart indorsed it to

Cath. Cath indorsed it to Dodong and Dodong to Egul.

If Egul released Andrea, the primary liable, all the secondary parties
shall be released. It should be noted however that Egul may expressly
reserve his right against any secondary parties.
 23

6. Extending the time of payment, or postponing the holder’s right to enforce the
instrument without the permission of the person/s secondarily liable would
discharge the latter.

Thus, if made with permission of persons secondarily liable or when the holder
expressly reserves his right of recourse against said parties, said parties shall not
be discharged.

It should also be noted that mere failure of the holder to demand for payment does
not constitute as an extension of time of payment that would discharge parties
secondarily liable.

VII-D. Effect of reacquisition of the negotiable instrument by a prior party

The act of payment by a prior party would not discharge the instrument but only
cancels his own liability and that of parties subsequent to him. He then shall be remitted
to his former position and may again negotiate the instrument.

The right to renegotiate the instrument by a reacquirer cannot be exercised if the

instrument is payable to the order of a third person, and has been paid by the drawer and
where it was made or accepted for accommodation and has been paid by the
accommodated party.

Ex.

Andrea is the drawer, Bart is the drawee, and the payee is Cath. Cath
indorsed the bill to Dodong. Dodong indorsed it to Egul and Egul to Fatso.

If Dodong, a prior party, pays the bill, the bill is not discharged. The
payment only releases him, Egul and Fatso. Now, Dodong is the holder again and
Cath is the immediate indorser. Dodong may strike out all the subsequent
indorsement and he may renegotiate the instrument to another.

If the one who paid is Andrea or if Bart is a mere accommodation party, Andrea,
by virtue of the Second and Third paragraph of Section 121, cannot renegotiate the bill.

VII-E. Renunciation and its effects

The holder may renounce expressly his rights against any party to the instrument.
Mere expression of an intention to renounce is not sufficient.
 24

A renunciation in favor of a secondary party discharges said party from his

liabilities. Such discharge carries with it the discharge of other parties subsequent to the
said discharged party and the instrument remains in force.

On the other hand, a renunciation of a person primarily liable releases all parties
unless with reservation.

Ex.

Andrea is the maker and Bart is the current holder. The instrument was
indorsed successively by Cath, Dodong, and Egul.

If Bart renounced his rights against Dodong, then Dodong and Egul are
released or discharged.

If the renunciation is in favor of the maker Andrea, then all parties are released. If
after said renunciation, Bart negotiates the instrument to Fatso, a holder in due course.
Fatso can still enforce the instrument because renunciation does not affect the rights of
holders in due course.

VII-F. Material Alteration

Pursuant to Section 125, there is material alteration of a negotiable instrument if

there is a change in:

1. Date
2. Sum payable (principal or interest)
3. Time or place of payment
4. Number or relations of parties
Ex. Addition of co-maker, changing of payee, etc.
5. Currency or medium of payment
6. Which adds material details not in the original instrument

VII-G. Effect of Material Alteration of the Instrument

Material alteration is any change in the instrument which affects the liabilities of
any party in the instrument. If said alteration was without permission of all parties liable,
the instrument is avoided and would discharge said parties, except against the party who
altered the instrument, any party who permitted said alteration, and indorsers who
indorsed the instrument subsequent to the alteration.
 25

Ex.

Andrea issues a note payable Bart or order for Php 1,999.000. Bart
negotiates the note to Cath. Cath negotiates the note to Dodong. Dodong, with
Cath’s consent, then alters the amount and increased it to Php 2000.000 and further
negotiates it to Egul. Egul also negotiates the same to Fatso.

In this case, the alteration of Dodong released Andrea and Bart from their
liabilities since they did not permit the alteration. Thus, Egul cannot enforce it to
both Andrea and Bart, unless the former is a holder in due course.

VIII – BILL OF EXCHANGE vs. PROMISSORY NOTE

xxx BILL of EXCHANGE PROMISSORY NOTE

UNDERTAKING Order to pay Promise to pay

3 original parties 2 original parties

ORGINAL PARTIES (drawer, drawee, payee) (maker, payee)

PERSON PRIMARILY
LIABLE
drawee (after acceptance) maker

WHO ISSUES THE drawer maker

INSTRUMENT

Presentment for payment Generally, presentment for

acceptance and
PRESENTMENT
presentment for payment

1. Promissory note – an unconditional promise to pay in writing made by one person

to another, signed by the maker who promises to pay on demand or at a fixed or
determinable future time, a sum certain in money to order or bearer.
If a note is payable to the maker’s own order, the instrument is not complete until
indorsed by him.

Ex.
 26

December 1, 2020

Tarlac

P 5,000.000

I promise to pay the very beautiful Andrea A. Agaton or order the sum of five
thousand pesos on January 2, 2021.

(Sgd.) Bart B. Barabas

Ako, si Bart Barabas, ay nangangakong magbabayad kay Andrea Agaton o kung

sino mang may hawak ng instrumenting ito ng halagang limang libong piso.

(Sgd.) Bart B. Barabas

2. 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 a sum certain in
money to order or bearer. If the bill is accepted by the drawee, the acceptance
signifies a promise to pay.

2.1) A bill may be treated as a promissory note when the drawee and the drawer
are the same person. The same rule applies if the drawee is a fictitious person, or
a person not having the capacity to contract.
Ex.

December 1, 2020

Php 34,870

1460 hours after date, pay to Andrea Agaton or order the sum of thirty-four
thousand eight hundred seventy pesos.

(Sgd.) Bart Barabas

To: Catherine Katakutan

 27

IX – ACCEPTANCE & PRESENTMENT FOR ACCEPTANCE

IX-A. Presentment for Acceptance

Presentment for Acceptance is the exhibition of a bill to a drawee for the purpose
of his

Php 150,000.000

Pay to the order of Andrea wampipty thousand pisos.

(sgd.) Bart Barabas

To: Catherin Natakot

acceptance or payment.

1. When presentment for acceptance necessary.

a. When the bill is payable after sight or when it is essential to fix the
maturity date of the bill;
b. When the bill expressly provides that it shall presented for acceptance;
c. When there is a need to inform the drawee of the existence of the bill or
when the bill is payable elsewhere other than the drawee’s residence or
place of business.

2. When the presentment for acceptance is necessary, it must be made within a

reasonable time otherwise, the drawer and all indorsers shall be discharged.

3. When is presentment not necessary?

If the bill is payable on demand, payable at a day certain, or upon
happening of certain conditions need not be presented for acceptance but
only for payment.

4. How is presentment made?

A proper presentment is:
a. Made by or on behalf of the holder;
b. At a reasonable hour or on a business day;
 28

c. Before the bill is overdue;

d. To the drawee or his representative authorized to accept;
e. If addressed to two or more drawees, presentment to all is mandatory
unless they are partners or if one is authorized by the other;
f. If the drawee is dead, presentment is excused and;
g. If the drawee is bankrupt or has made an assignment for the benefit of
creditors, presentment may be made to his trustee or assignee;
h. On any day pursuant to Sections 72 and 85.

5. Delay in presentment may be excused and does not discharge the drawer and
indorsees only when such delay is caused by presenting the bill for acceptance
at a place other than the place where the bill is payable and even after
reasonable diligence, the bill could not be presented at the required period.
Ex.
When the residence of the Drawee is in Batanes and the bill stipulates that it
must be presented for payment at a bank in Sulu 24 hours after sight.

6. When is presentment Excused?

a. Where the drawee is dead;
b. Where the drawee absconded;
c. Where the drawee is fictitious;
d. Where even after the exercise of reasonable diligence, presentment
could not be made and;
e. Although presentment has been irregular, acceptance has been refused
on some other ground.

IX-B. Acceptance

Acceptance signifies the drawee’s assent to the order of the drawer. It means that
the drawee is willing and able to comply with the request pursuant to the tenor of the bill
and at the same time admits the validity of the bill. Acceptance applies to bills of exchange
and not to promissory notes.

It should be noted that, the drawee is only bound after he accepts. Until said
acceptance, the drawee is not yet a party liable to the instrument and the drawer remains
the principal debtor.
 29

Also, mere acceptance of the bill is not sufficient. The formal acceptance must be
delivered to the holder.

1. Formal requisites of acceptance:

a. It must be in writing to serve as evidence of the fact of acceptance;
b. It must be signed by the drawee;
c. It must express the drawee’s promise to pay in money and;
d. It must be delivered to the holder.

2. Right of the Holder to acceptance on face of the bill

The holder upon presenting the bill to the drawee may require the
latter that the acceptance be written on the bill and if said request is refused,
said refusal may be treated as an act of dishonor.
If the acceptance is in a separate paper, it must be shown and
delivered to the drawee for it to be binding.

3. Does a promise to accept equivalent to an acceptance?

Yes. As long as said promise is unconditional, in writing, and was

made before the bill was drawn.

4. When must acceptance be made?

Section 136 specifically provides that the drawee has 24 hours after
presentment to decide whether or not he will accept the bill. If he decides
to accept the bill, the acceptance shall be dated as of the day of presentation.

5. Is there a constructive acceptance?

Yes. When the drawee destroys the bill or refuses to return the bill after 24
hours or any period agreed upon, by virtue of Section 137, there is constructive
acceptance of the bill.
 30

6. Acceptance may be General or Qualified.

a. A general acceptance is the acceptance of the bill without any
qualification.
b. A qualified acceptance on the other hand may be conditional, partial,
local, depending on time or on someone.

It should be noted, however, that the holder may refuse to take a

qualified acceptance and may treat the bill as dishonored by non-
acceptance.

If a qualified acceptance has been accepted, the holder then must

give notice to the drawer and indorsers. The drawer and indorsers may
dissent or assent to said qualified acceptance. If they expressly dissent,
they are discharged from their liabilities.

7. Dishonor by non-acceptance
a. When duly presented and is refused or cannot be obtained and;
b. When the presentment is excused pursuant to Section 148, and the bill
is not accepted.
8. Duty and right of the holder in case of non-acceptance
The holder must treat it as dishonored by non-acceptance. He must have
the bill protested and/or give notice of dishonor to the drawers and
indorsers otherwise, he loses the right of recourse against said parties.

X – ACCEPTANCE FOR HONOR & PAYMENT FOR HONOR

X-A. Acceptance for Honor

Where a bill has been protested for dishonor, and is not overdue, a stranger may,
with the consent of the holder, accept the bill for the honor of any party liable thereon, or
for the honor of the person for whose account the bill is drawn.

It must be in writing. It must contain an express acceptance for honor or promise

to pay money and signed by the acceptor for honor. Also, jurisprudence provides that
the acceptor for honor must appear before a notary public and declare his intention to
accept the protested bill for the honor of the parties thereon.

It should be noted that the undertaking of the acceptor for honor is deemed only
as a collateral and is required to pay only if the drawee does not. He is merely secondarily
 31

liable and is bound to pay only if the bill has been duly presented for payment, not have
been paid by the drawer, have been protested for non-payment and notice of dishonor is
given to him.

Section 163 provides that in case the acceptance for honor does not provide for
whose honor it is made, it is deemed to be for the honor of the drawer.

1. Liability of the acceptor for honor

He is liable to the holder and to all parties subsequent to the party for whose
honor he has accepted.

2. If the bill is payable after sight and is accepted for honor, its maturity shall be
from the date of the noting for acceptance and not from the date of the
acceptance for honor.

3. How is presentment for payment to acceptor for honor is made

If it is to be presented in the place where the protest for non-payment
was made, it must be presented not later than the day following its
maturity.
If in some other place, then it must be forwarded within the time
specified in Section 104.

4. If the acceptor for honor does not pay the bill, the holder must protest the bill
for non-payment by the acceptor for honor.

X-B. Payment for honor

Payment of honor may be made by a stranger or a party to the bill after it has been
protested for non-payment for the benefit of the person for whose account it was drawn.

1. When is payment of honor valid?

To operate as a valid payment of honor:
a. The bill must have been dishonored by non-payment;
b. It has been protested for non-payment;
c. Made by any person;
 32

d. Attested by a notarial act which is based on the declaration made by the

payer for honor of his intention to pay the bill for honor and whose
honor he pays.

2. If several parties are offering to pay for honor

The payment which will discharge the greatest number of parties to the bill
is given the preference.

Ex.
Andrea is the drawer, Bart is the drawee and Cath is the payee.
Dodong, Egul, Fatso, are successive indorsers and Gargo is the current
holder.

Hinga offers to pa supra protest for honor of Dodong and Ingot

offers for Egul. In this case, Hinga’s offer shall be preferred because it would
release Egul, Fatso and Gargo. Ingot’s payment would only release Fatso
and Gargo.

3. What if the holder refuses to receive payment supra protest?

Refusal to accept by the holder would release and thus he has no recourse
against those parties who would have been discharged had he accepted the
same.

4. Rights of the Payer for honor

The payer is given the right to receive the bill and the protest to enable him
to go against the parties who are liable to him.

XI – Case Digests

Roman Catholic Bishop of Malolos v.

IAC, Robes Francisco Realty & Development Corp
G.R. no. 72110, November 16, 1990
 33

Facts:
The Roman Catholic Bishop of Malolos sold its property to the private respondent
represented by its president. Their contract provides that the vendee shall pay a
downpayment of P 23,930 and the balance of P 100,000 and 12% percent interest shall be
paid within 4 years from the execution of the contract. Said period of payment expired,
thus, the new president of the respondent corporation requested that the company be
allowed to pay the principal amount in three equal installments but said request was
denied and the petitioner gave a grace period of five days to settle the payment otherwise
the contract shall be cancelled.
The petitioner refuses to execute a deed of absolute sale due to respondent’s failure
to pay and it further alleged that the private respondent did not make any tender of
payment whatsoever within the grace period. Thus the petitioner cancelled the contract.
On the other hand, the private respondent claimed that a certified personal check was
allegedly tendered as payment.
Issue:
Whether an offer of a check a valid tender of payment of an obligation.
Ruling:
No. It is not legal tender nor the currency stipulated in the contract, therefore,
cannot constitute valid tender of payment.
A negotiable instrument is only a substitute for money. Thus, delivery of such does
not, by itself, operate as payment. Hence, since there was no valid tender of payment
within the grace period, the offer was validly refused and the consignation did not
discharge the private respondent from its obligation to the petitioner.

Philippines Airlines Inc. vs. CA

G.R. no. L-49188, January 30, 1990
Facts:
In 1967, CFI has granted relief to Amelia Tan against herein petitioner. Several
years after said judgement has been rendered, Tan did not receive any compensation
form the petitioner. The petitioner allegedly did not issue the check intended to Tan in
her name.
Tan went to court and the CFI issued an alias writ of execution against the
petitioner. Now the petitioner alleges that a payment in check had already been effected
to the sheriff which satisfies the judgment.
Issue:
Whether or not payment by check to the sheriff satisfies the judgment debt.
Ruling:
No. A check is not legal tender. The payment must be in cash or in legal tender to
satisfy the debt. Also, the check where not payable to Tan but to the sheriff. Thus, the
acceptance of the sheriff of the checks does not operate as a discharge of the judgment
debt.
Further, negotiable Instruments are only substitute for money and mere delivery
of such does not discharge the obligation under a judgment. Thus, the obligation is not
 34

extinguished and remains suspended until the payment by commercial document is

actually realized.

Philippines National Bank vs. Jose Zulueta

G.R. no. L-7271, August 30, 1957
Facts:
PNB sued the defendant upon a letter of credit and a draft for the amount of $ 14,
449.15. The draft is drawn in New York, payable here but it is indicated therein that the
amount payable is expressed in dollars.
The respondent argues that, pursuant to the negotiable instrument, he had
promised to pay the sum in dollars, hence, he must be ordered to pay the sum in dollars.
Issue:
Whether the change in the medium of payment affects negotiability of the
instrument.
Ruling:
No. The court pronounced that although the amount payable is expressed in
dollars, it is still negotiable, for it may be discharged with pesos of equivalent amount.
On the other hand, the argument of the defendant is untenable. He had not
promised to pay in dollars. He, in fact, agreed to pay the equivalent of $ 14,419.15 dollars,
in Philippines currency. The application for a letter of credit party read as:
“IN CONSIDERATION THEREOF, I/we promise and agree to pay you at
maturity in Philippines Currency, the equivalent of the above amount…..”

Philippine National Bank vs. Erlando T. Rodriguez, et al.

G.R. no. 170325, September 26, 2008
Facts:
Herein respondents maintained a savings and demand/checking accounts with
PNB. The respondents are engaged in an informal lending business and had a
discounting arrangement with Petitioner’s employees (PNB Employees Savings and
Loan Association or PEMSLA) which likewise maintains a current and savings account
with the PNB. PEMSLA regularly granted loans to its members and in case PEMSLA was
short of funds the respondents would rediscount the postdated checks issued and the
spouses would replace the outdated checks with their own checks in the name of the
members. Thus arrangement allowed the respondents to make profit by issuing
rediscounted checks, while the officers of PEMSLA would be able to claim loans despite
the fact that they were disqualified for one reason or another. They were able to achieve
this conspiracy by using other members who had loaned lesser amounts of money or had
not applied at all. The respondents’ checks were deposited directly by PEMSLA to its
Savings account without any indorsement.
PNB claims that the checks are bearer instruments that the payees in checks were
fictitious because they were not the intended payees at all and thus the bank does not
bear the loss. The respondents however argued that the checks were payable to order.
Issue:
 35

Whether the instruments are bearer or order instruments.

Held:
The checks are presumed order instruments because PNB failed to present
evidence to defeat the claim of the respondents that the named payees were intended
recipients of the check’s proceed. The bank failed to satisfy a requisite condition of a
fictitious-payee situation- that the maker of the check intended for the payee to have in
interest in the transaction.
Thus, the bank bears the loss.

Philippine Education Co. Inc. vs. Soriano

G.R. no. L-22405, June 30 1971
Facts:
On 1985, Enrique Montinola sought to purchase from Manila Post Office 10 money
orders. He offered to pay for them with a private check but was advised to see the Chief
of the money division. Instead of doing so, he left the building without the knowledge of
the teller.
Upon discovery of the said act, a notice was sent to all postmasters and banks
involving the unpaid money orders. One of the money orders was received by herein
plaintiff. It was deposited by the plaintiff with the Bank of America, which cleared it with
the Bureau of Post. The postmaster informed the bank of the irregular issuance of the
money order. The bank debited the apellant’s account with the same account and gave it
advice thereof by means of a debit memo.
Issue:
Whether the postal money orders are negotiable instruments.
Ruling:
No. In United States, postal money orders are not negotiable instruments, the same
rule applies in the Philippines. The reason behind this is that in establishing and
operating a postal money order system, the government is not engaging in commercial
transactions but merely exercises a governmental power for the public benefit.
It is to be noted that money orders by postal laws and regulations are inconsistent
with the character of negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of money orders may be
withheld under a variety of circumstances.

Metropolitan Bank & Trust Co. vs. CA

G.R. no. 88866, February 18, 1991
Facts:
Gomez opened an account with Golden Savings and deposited thirty-eight
treasury warrants. Said warrants were indorsed by Gloria Castillo as Cashier of Golden
Savings and deposited it with herein petitioner. Said warrants are payable from fund 501.
Golden Savings allowed Gomez to make withdrawals from his own account.
Metrobank informed the Golden Savings that 32 of the warrants had been dishonored by
 36

the Bureau of Treasury and demanded refund by Golden Savings of the amount it had
previously withdrawn to make up the deficit in its account.
Issue:
Whether the treasury warrants are negotiable instruments
Ruling:
No. The treasury warrants are payable from a particular fund. An instrument to
be negotiable must represent the general credit of a party, hence, must be an
unconditional promise or order to pay a sum certain in money.
In this case, the. Promise to pay is rooted from the existence of Fund 501. Thus,
fund 501 is the source of the payment to be made and made the instrument nn-negotiable.

Traders Royal Bank vs. CA. Filriters Guaranty Assurance Corp. and Central Bank of
the Phil
G.R. no. 93397, March 3, 1997
Facts:
In 1979, the Filriters sold and delivered unto the Philfinance all its rights and title
to Central Bank Certificates of Indebtedness with an aggregate value of P 3,500,000(CBCI).
In 1981, petitioner (TRD) entered into a repurchase agreement with Philfinance
whereby in consideration of the sum of P 500,000. Philfinance sold a CBCI with face valu
of P 500,000.
PhilFinance failed to repurchase on the agreed date. Philfinance transferred and
assigned its right to said CBCI to TRD. Respondents claims that Philfiance acquired no
title or rights under CBCI and the instrument is only payable only to Filriters the
registered owner and is not negotiable.
Issue:
Whether the CBCI is a negotiable instrument
Ruling:
No. The CBCI lacks words of negotiability which makes an instrument negotiable
within the meaning of the negotiable instruments law.
The CBCI is a mere acknowledgement of debt or a certificate of indebtedness.
Philfinnance merely borrowed the CBCI from Filrites, a sister corporation. For it to be a
negotiable instrument, mere acknowledgment of debt is unsufficient, there must be a
unconditional promise or order to pay a sum certain in money.

Firestone Tire & Rubber Co. of the Phil vs. CA, Luzon Development Bank
G.R. no. 113236. March 5, 2001
Facts:
Fojas-Arca Enterprises Co. (Fojas) maintains a special savings account with the
defendant bank. The latter authorized withdrawals of funds therefrom through
withdrawal slips.
 37

Fojas entered into an agreement with plaintiff whereby the former has the
privilege to purchase on credit and sell plaintiff’s products. Fojas purchased on credit and
it delivered to plaintiff 6 withdrawal slips drawn upon defendant bank as payment. These
were deposited by the plaintiff with the Citibank and the latter presented the slips for
payment to respondent bank and was honored.
Fojas again purchased on credit and the corresponding withdrawal slips were
drawn upon defendant and delivered to the plaintiff. This time, 2 were dishonored and
not paid for the reason “NO ARRANGEMENT”. That information came about 6 months
from Fojas’ purchase using said withdrawal slips. Thus, Plaintiff suffered damages after
Citibank debited the amount from its. account.
Plaintiff claims that respondent bank should be held liable for damages suffered
by it due to the defendant banks belated notice of non-payment of the subject withdrawal
slips.
Issue:
Whether the acceptance of. The withdrawal slips give the impression that it is a
negotiable instrument?
Ruling:
No. The rules on immediate giving of immediate notice of dishonor do not apply
in this case because the instrument was non-negotiable. The essence of negotiability
which characterizes a negotiable paper as a credit instrument itself lies in its freedom to
circulate freely as a substitute for money. The withdrawal slips ins question lacked this
character even though it was prior accepted and honored. The fact that other withdrawal
slips were honored was no license for Citibank to presume that the slips would be
honored and paid immediately.
Citibank should not have accepted said slips as a valid mode of deposit.

Quirino Gonzales Logging Concessionaire vs. CA, Republic Planters Bank

G.R. no. 126568, April 30, 2003
Facts:
Petitioners, to secure advances from the bank, executed promissory notes in favor
the latter for the payment. Petitioners defaulted in payment despite repeated demands.
Thus, the bank filed a complaint for sum of money.
Petitioners claim that they signed the promissory notes in blank and they had not
received the value of the said note. Thus, they raise want of consideration.
Issue:
Whether the petitioner could escape liability because of want of consideration
Ruling:
No. Since the note appear to be negotiable as they meet the requirements of Act
2031, there is prima facie presumption that the notes were issued for consideration. The
petitioners presented no sufficient evidence to rebut its validity.
Also in any case, it is no defense that the promissory notes were signed in blank
because Act 2031 concedes the prima facie authority of the person in possession of
negotiable instruments to fill in the blanks.
 38

Development Bank of Rizal vs. Sima Wei, et al

G.R. no. 85419, March 9, 1993
Facts:
Herein Sima wei executed and delivered to petitioner bank a promissory note for
the payment of her obligation amounting to P 1,820,000.
To settle his obligation, Wei issued two crossed checks upon China Banking Corp.
payable to the petitioner bank. The checks were not delivered to the Petitioner payee bank
but instead, for reasons not shown, it was delivered to one of the herein respondents Lee
Kian Huat, who in turn deposited the checks to the account of Plastic Corporation with
Producers Bank without Wei’s indorsement (forged or otherwise).
Despite the fact that the check was payable to petitioner ban and other
irregularities, the check was accepted for deposit and was credited to the account of
Plastic Corp. Thus, petitioner bank anchors its cause of action in the said two checks.
Issue:
Whether the Petitioner Bank has a cause of action against any or all of the
defendants founded on said checks
Ruling:
None. Without delivery of said checks to the petitioner banks, the same did not
acquire any right or interest therein and cannot therefore assert any cause of action
founded on said checks. Filling up of the check and signing it does not give rise to any
liability until said check is delivered to the payee or his representative. Negotiable
instruments must be delivered to the payee in order to evidence its existence as a binding
contract. Thus, the bank has no cause of action against any of the respondent who
acquired the said check.
It should be noted that Sima wei is not relieved from her liability evidenced by the
promissory notes unless she proves that the obligation has already been satisfied.

Westmont Bank (formerly Associated Banking Corp.) vs. Eugene Ong

G.R. no. 132560, January 30, 2002
Facts:
Ong sold certain shares of stocks to Island Securities Corporation. To pay Ong,
Island Sec. purchased 2 Pacific Banking Corp. manager’s checks issued in the name of
Ong as payee. Before Ong could get hold of the checks, his friend Tanlimco got hold of
them, forged Ong’s Signature and deposited these with petitioner bank. Although Ong’s
signature was on file, petitioner accepted and credited both checks to Tanlimcos’s account
without verifying Ong’s signature as indorser. Tanlimco of course withdrew the money
and absconded, very nice.
Petitioner then demanded with the petitioner bank the value of the two checks and
alleged that he never authorized the great Tanlimco to receive the money. The bank
simply contended that since Ong never received the checks, he never acquired ownership
of these checks. Thus, petitioner argued that Ong never became the holder, had no legal
personality to sue and cannot sue in his own name.
 39

Issue:
Whether Ong has cause of action against the petitioner
Ruling:

No. The argument of the petitioner bank is misplaced. When a signature is forged
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.
Since there was a forgery, Ong’s signature should be deemed inoperative and
ineffectual. The collecting bank is liable to the payee and must bear the loss because it is
its legal duty to ascertain that the payee’s indorsement was genuine before cashing the
check.
Petitioner’s claim that since there was no delivery yet and respondent has never
acquired possession of the checks, respondent’s remedy is with the drawer and not with
petitioner bank. Petitioner relies on the view to the effect that where there is no delivery
to the payee and no title vests in him, he ought not to be allowed to recover on the ground
that he lost nothing because he never became the owner of the check and still retained his
claim of debt against the drawer. However, another view in certain cases holds that even
if the absence of delivery is considered, such consideration is not material. The rationale
for this view is that in said cases the plaintiff uses one action to reach, by a desirable short
cut, the person who ought in any event to be ultimately liable as among the innocent
persons involved in the transaction. In other words, the payee ought to be allowed to
recover directly from the collecting bank, regardless of whether the check was delivered
to the payee or not.
Banks are engaged in a business imbued with public interest, thus, they have the
obligation to treat every transaction with the highest degree of care.

Manila Lighter Transportation Inc. vs. CA, China Banking Corp.

G.R. no L-50373. February 15, 1990
Facts:
A complaint for recovery of the value of several checks with alleged forged
indorsements of the payee was filed by herein petitioner against China Banking. Checks
were allegedly issued by customers of petitioner for payment of services rendered and
forged signatures were placed on the checks for them to be transferred to the accounts of
third person in the respondent bank.
Respondent bank denied liability for the loss and alleged that petitioner should be
entirely liable.
Issue:
Should the respondent bank should be held liable?
Ruling:
No. Although there is forgery, the respondent bank had no way of ascertaining
authenticity of petitioner’s indorsements because the latter did not maintain an account
in said bank.
 40

The drawer has no cause of action against the collecting bank, since the duty of
collecting bank is only to the payee.

Ting Ting Pua vs. Sps. Benito Lo Bun Tiong & Caroline Siok Ching Teng
G.R. no. 198660, October 23, 2013
Facts:
A complaint for sum of money was filed by petitioner against the respondents.
Petitioner alleged that the check was given by respondents to pay loans the respondents
obtained from her. 17 checks were issued and all were dishonored upon presentment.
Respondent demanded for payment but respondents did not comply. Petitioner,
also lowered the debt, upon request of the respondents.
Respondents issued a check bearing the lowered amount and demanded the
return of the dishonored checks but said request was rejected. Again, the issued check
was dishonored.
One of the respondent however denied having issued said checks and argued that
no consideration was given for the said check. The RTC ruled that there is a presumption
of consideration. The CA reversed the ruling and ruled that petitioner has failed to prove
the existence of respondent’s indebtedeness to her.
Issue:
Whether there is proof of the debt
Ruling:
Yes, it has been held that a check constitutes an evidence of indebtedness and is
veritable proof of obligation. Hence, it can be used in lieu of and for the same purpose as
a promissory note.
The 17 original checks are sufficient by themselves to prove existence of the loan
obligation of the respondents to the petitioner. Sec 16 of Act 2031 provides that when an
instrument is no longer in possession of the person who signed it and is complete in its
terms “a valid and intentional delivery by him is presumed until the contrary is proved”.

Engr. Jose Cayanan vs. North Star International Travel Inc.

G.R. no. 172954, October 5, 2011
Facts:
Upon the instruction of the petitioner, the general manager of herein private
respondent sent an amount of $ 60,000 to View Ventures Ltd from her personal account
in Citibank Makati. The general manager again sent another & 40,000 to View Sea
Ventures with the $ 15,000 coming from the petitioner.
To cover payment, petitioner issued 5 checks to North Star and when presented
for payment, two of the checks were dishonored for insufficiency of funds and the
petitioner issued a stop payment order for the other three. North Star demanded for
payment but to no avail.
Thus, private respondent sued petitioner for violation of the Bouncing Checks law.
 41

In his defense, petitioner contends that the money was not sent for the account of
North star but for the general managers account as her investment. Petitioner further
claimed that private respondent did not give any valuable consideration for the checks
since the money was taken from the general manager’s personal account and not private
respondent’s corporate funds.
Issue:
Whether the petitioner’s contention is tenable.
Ruling:
No. The court ruled that upon issuance of a negotiable check it is presumed that
the same was issued for valuable consideration. It is presumed that all party to an
instrument acquires the same for a consideration or for value.
Thus, the burden of proving that there was no consideration lies with the
petitioner. To overthrow the presumption, convincing evidence must be presented.
Since no credible evidence was presented, the checks are presumed issued as
payment for the $ 85,000 debt of the petitioner to the private. Respondent and not to the
manager who facilitated the fund transfer.

Philippine Bank of Commerce vs. Jose M. Aruego

G.R. no. L-25836-37, January 31, 1981
Facts:
Herein respondent obtained a credit accommodation from the Petitioner Bank to
fund the printing of a periodical called “World Current Events”. A draft was drawn upon
the bank and sent to Aruego for acceptance by the printing agency for every printing of
the said periodical.
Upon failure to receive payment, the petitioner bank instituted an action against
respondent to recover the cost of printing. Respondent, on the other hand, argues that he
merely signed the bills of exchange only as an agent of the Philippine Education
Foundation Company where he is the President.
Issue:
Whether respondent should be held liable for the checks he allegedly signed as
agent?
Ruling:
Yes. For an agent to be relieved from liability he must indicated that he is merely
signing as an agent, he is authorized to do so and he must disclose his principal. In this
case the Respondent did not disclose in any if the drafts that he accepted that he was
merely signing as a representative or an agent of the Philippine Education Foundation
Company nor did he disclose the name of his principal.
Mere addition of the words agent or representative could relieve him if his
obligation pursuant to Act 2031.

Natividad Gempesaw vs. CA, Philippine Bank of Communications

G.R. no. 92244, February 9, 1993
 42

Facts:
Petitioner issued checks, which was prepared by her bookkeeper, a total of 82
checks for payment of certain supplies. Unknown to the petitioner, most of the checks
exceeds the actual amount of the actual obligation. It was only after the laps of more than
2 years did the petitioner discovered the corresponding fraudulent manipulations of the
bookkeeper. Thus the checks were brought to the chief accountant of the Philippine Bank
of Commerce who deposited them in the accounts of Romero and Lim. Gempsaw made
demands but was denied.
Issue:
Whether Petitioner should bear the loss
Ruling:
Yes. As a rule, a drawee bank who has paid a check on which an indorsement has
been forged cannot charge the drawer’s account for the check. The only exception is
where the drawer s guilty of negligence which causes the bank to honor said checks.
In this case, Petitioner did not exercise due diligence that a prudent businessman
would take in preventing fraudulent acts. Petitioner’s negligence was the proximate
cause of her loss and thus should bear the loss and under Act 2031, is now precluded
from using such forgery as a defense.

Samsung Construction Co. Phil. Inc. vs CA, Far East Bank

G.R. no. 129015, August 13, 2004
Facts:
Petitioner maintains an account with respondent bank. A check worth P 900,000
was presented by a certain Gonzaga in the respondent bank and said check was certified
to be true by the petitioner’s assistant accountant. Said check was cashed out.
However, it was discovered that no such check was ever approved by the
petitioner’s head accountant and the president of the Petitioner never signed said check.
Herein respondent claims that it is not liable for the reimbursement the encashed check.
Issue:
Whether respondent should be held liable to reimburse to Samsung for Cashing
out the forged check
Ruling:
Yes. The Negotiable Instruments Law provides that a forged signature is wholly
inoperative and no rights should arise from it. A bank is bound to know its depositor’s
signature and in this case the petitioner maintains an account with herein respondent
bank.
Since the signature was forged, no rights where transferred to Robert Gonzaga
since his right arouse from the forged signature.

Ernestina Crisologo-Jose vs. CA, Ricardo Santos as Vice president of Mover Enterpises
G.R. no. 80599, September 15, 1989
Facts:
 43

Benares, president of Mover Ent., in accommodation of his clients, issued a check

drawn against Traders Royal Bank and payable to petitioner. The check was under the
account of Mover Ent and was signed by the president and in lieu of the treasurer, the
VP herein respondent. The check was issued to petitioner in consideration of a waiver
quitclaim by the same over a property which the GSIS agreed to sell to the said clients
earlier.
The check was replaced with another check and was signed by the president and
VP but when deposited, it was dishonored for insufficiency of funds.
Petitioner claims that the accommodation party in this case is Mover Ent and not
the Santos the Vice president and hence he is not liable under Act 2031.
Issue:
Whether or not Mover Ent may be held liable on thee check
Ruling:
No. The petitioner has knowledge that the check was issued at the instance and
for the personal account of the president. The issue of a negotiable paper by a corporation
without consideration and for accommodation is ultra vires. By way of exception, said
issuance is possible if authorized.
In this case, since the petitioner has knowledge of the accommodation nature and
still took the instrument cannot therefor recover against a corporation where it is only an
accommodation party.

Juanita Salas vs. Court of Appeals and Filinvest Financee & Leasing Corp.
G.R. No. 76788, January, 22, 1990
Facts:
Petitioner bought a motor vehicle from VMS Corp as evidenced by a promissory
note. The note was then indorsed to herein private respondent.
Petitioner defaulted in her installments which prompted private respondent to
initiate a case for sum of money against the petitioner.
Petitioner contends that private respondent should proceed against VMS
instead because there is no contract that existed between her and VMS for the latter’s
alleged fraud and bad faith. VMS allegedly brought the wrong motor vehicle to Petitioner.
The petitioner contends that the transfer was merely an assignment. Private respondent
on the other hand contends that all available defense of the petitioner could not be
invoked against the private respondent.
Issue:
Whether the private respondent’s contention is correct
Ruling:
Yes. The basis of private respondent’s claim against the petitioner is a promissory
note which bears all the earmarks of negotiability. It was negotiated by indorsement in
writing in the instrument and payable to the order of private respondent. Thus, it is not
a mere assignment of credit.
The private respondent is a holder in due course, thus, petitioner cannot set up
against respondent the defense of nullity of the contract of sale between her and VMS.
 44

Vicente de Ocampo & Co. vs. Anita Gatchalian, et al

G.R. no. L-15126, November 30, 1961
Facts:
Manuel Gonzales is looking for a buyer of a car owned by Ocampo Clinic.
Gatchalian requested that Manuel Gonzales to bring the car with certificate of registration.
Manuel Gonzales advised that the owner will not be willing to give the certificate unless
there is showing that she is interested in buying. Thus, Gatchalian issued a check and to
be kept only for safekeeping of Manuel Gonzales and is to be returned the following day.
Gonzales then delivered the check to Ocampo Clinic in payment of the fees arising from
the hospitalization of his wife. Thus Ocampo clinic accepted the check.
On the following day Manuel Gonzales failed to show thus Gatchalian issued a
stop payment order. Said order was issued without previous notice to plaintiff not being
known Gatchalian and who furthermore had no reason to know that the check was given
to plaintiff.
Respondents contends that the petitioner is not a holder in due course and
transferred the check merely for safekeeping thus there was no delivery.
Issue:
Whether petitioner is a holder in due course
Ruling:
No. The respondents had no obligation or liability to Ocampo Clinic, the amount
did not correspond exactly with Gonzales’ debt to Ocaampo Clinic, and there was an
indication that the check could only be deposited but not converted into cash – all these
circumstances should have put the petitioner to inquiry as to why and wherefore the
possession of the check by Gonzales and why he used it to pay. It was the payee’s duty
to ascertain the nature of the holder’s title. Thus, the petitioner is guilty if negligence and
is not a holder in due course.
In this case, the rule that a possessor is prima facie holder in due course does not
apply because there was a defect in the title of the holder because the instrument is not
payable to him or to bearer.