OUTLINE IN NEGOTIABLE INSTRUMENTS LAW

Prepared by:

ATTY. ALEXIS R. AGMATA

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History of Act No. 2031

Act No. 2031 was patterned from the Uniform Negotiable Instruments Law of the United
States of America.

Where did the Americans pattern their Uniform Negotiable Instruments Law?
- They copied it from the Bills of Exchange Act of England wherein the same was merely
patterned from the LAW ON MERCHANTS which was later on codified and thereafter
incorporated with the said Bills of Exchange Act of England.
Date of enactment: February 3, 1911. To take effect 90 days following the completion of its
publication. (Publication was completed March 4, 1911)Thus, it is effective on June 2, 1911.

Functions:
1. It increases the medium of currency in circulation.
2. It is considered as a substitute for money.

Characteristics:

1. Negotiability
2. Accumulation of Secondary Contracts

Essential Requirements of Negotiable Instrument:

Requisites as to Negotiable Promissory Note:

1. It must be in writing and signed by the maker;
2. It must contain an unconditional promise or order to pay a sum certain in money;
3. It must be payable on demand, or at fixed or determinable future time; and
4. It must be payable to order or to bearer.

Requisites as to Negotiable Bill of Exchange:

1. It must be in writing and signed by the maker;
2. It must contain an unconditional order to pay a sum certain in money;
3. It must be payable on demand or at a fixed or determinable future time;
4. It must be payable to order or to bearer; and
5. The drawee must be named or otherwise indicated therein with reasonable certainty.

KINDS OF NEGOTIABLE INSTRUMENTS:

1. Promissory Note;
2. Bill of Exchange;
3. Check
INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT:
1. Issue
2. Negotiation
3. Presentment for Acceptance in certain kinds of bill of exchange
4. Acceptance
5. Dishnor by non-acceptance;
6. Presentment for payment;
7. Dishonor by non-payment;
8. Notice of dishonour
9. Protest in certain cases; and
10. Discharge

Section 1. An instrument to be negotiable must conform to the following requirements:

a. It must be in writing and signed by the maker (in cases of promissory note) or by the
drawer (in cases of bill of exchange);

- it implies that the instrument must be in “writing” – it may be written in ink, print or
pencil – and it may be written in a parchment, cloth, leather or any substitute of
paper.
- Signed – the full name may be written – at least the surname should appear and
usually the signature is by writing the initials is sufficient or even in numbers
provided that it can be shown he have adopted the same as his signature and he
intends to be bound as such.
- The signature is usually written at the bottom right hand corner of the instrument.
The location of the signature is immaterial.

E.g.
I, ALEXIS R. AGMATA, after date promise to pay Maria Lourdes L. Comtiag or
her order the sum of P100,000.00.

- This was held sufficient, as the signature appears in the body of the note.

b. Must contain an unconditional promise or order (Section 3) to pay a sum certain in

money (Section 2).
- there must be an order or promise to pay which is unconditional.

- Mere authority to pay is not sufficient.

I hereby authorize you to pay P1,000.00, on account, to the order of Maria

Lourdes Comtiag.
Sgd. Alexis R. Agmata

To. Rochelle Fallorin

- It is a non-negotiable note because there is NO order to pay. Mere

authorization to pay is not equivalent to an order to pay.

- Mere request to pay is not also sufficient.

 Please to let the bearer have P70.00 and place to my account and you will
oblige.
Sgd. Glenna Marie Nuñez

To. Alexis R. Agmata

- This note is non-negotiable because it does not contain an order to pay. It is

nothing but a mere request to pay.

- Words of civility will not affect the negotiable character of the instrument.

Atty. Alexis R. Agmata will oblige Miss Maria Lourdes L. Comtiag by paying Miss
Glenna Marie Nuñez or her order P100,000.00 on his account.
Sgd. Atty. Alexis R. Agmata

To. Miss Maria Lourdes L. Comtiag

- The instrument is negotiable. Words of civility or courtesy does not make it non-
negotiable. The words “by paying” are held sufficient to import an order to pay.

- it is required that the promise or order must be unconditional.

Section 3. When promise is unconditional.

- An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with –

a. An indication of a particular fund out of which reimbursement

is to be made or a particular account to be debited with the
amount, or

b. A statement of the transaction which gives rise to the

instrument.

But the order or promise to pay out of a particular fund is not

unconditional.

Notes:
Indication of a particular fund, explained.

In Section 3(a) – the particular fund indicated is not the direct source of payment. It is
only the source of reimbursement.

Pay to Malou or order P1,000.00 and reimburse yourself out of my money in your hands.
Sgd. Alexis

In the last paragraph Section 3 – the particular fund indicated is the direct source of
payment – non-negotiable.
 Pay to Malou or order P1,000.00 out of my part of the estate.
Sgd. Alexis

Fund for reimbursement and fund for payment, explained.

Fund for reimbursement:

a. The drawee pays the payee from his own funds; afterwards
b. The drawee pays himself from the particular fund indicated.

Fund for payment:

a. The drawee pays directly from the particular fund indicated.
- in this case the payment is subject to the condition that the funds indicated may or may
not be sufficient.

Pay to Malou or order P1,000.00 out of my money in your hands, if money in your hands
are suffient.

- The order here is conditional.

Note:

Whether a bill of exchange is negotiable or not does not depend upon the drawee;s
willingness and ability to pay. It depends upon the tenor of the order.

Illustrative cases:

The following are not negotiable because the order or promise to pay out of the particular fund
indicated:

1. Pay to Alex or order P100.00 out of my salary from SLU.

2. I promise to pay Malou or order P100,000.00 out of the proceeds of the mortgage loan.

I promise to pay Malou P10,000.00 out of my salary from SLU and the proceeds from the sale of
my car.

- In this case the instrument is NEGOTIABLE as it is NOT PAYABLE ONLY OUT OF A

PARTICULAR FUND.

Note: Even if the sum payable is to be paid out of a particular fund, if the payment is not
restricted to that fund, negotiability is not destroyed.

Particular account to be debited, explained.

- An instrument containing such a stipulation is not thereby rendered non-negotiable. In
this case, the instrument is to be paid first, and afterwards, the particular account indicated will
be debited. Hence, the payment is not subject to the sufficiency or adequacy of the sum to be
debited.
Pay to B or order P1,000.00 on account of contract between you and the SLU.
Sgd. A
- The instrument is negotiable – the order is not conditional notwithstanding the fact that
a particular account to be debited is indicated.

Statement of the transaction, explained.

- a statement of the transaction which gave rise to the issuance of the instrument will not render
the instrument non-negotiable.

I promise to pay Malou or order P200,000.00 in payment of the car I bought from her last
January 2, 2002.
Sgd. Alexis
Caveat:

However, where the promise or order is made SUBJECT TO THE TERMS AND CONDITIONS
of the transaction stated, the instrument is rendered non-negotiable.

I promise to pay Malou or order P1,000.00 subject to the terms of the stipulations
contained in the Deed of Sale executed by us last January 2, 2002.
Sgd. Alexis

Note: - unconditional promise or order.

Instead of the word promise the following words may be used:

“agree,” “will pay,” “shall pay,” and the like.

E.g. I agree to pay to the order of B, P1,000.00

Sgd. A

The foregoing is a promissory note, because although it did not use the word
“promise,” still the word “agree” means a promise to pay.

“Good” implies a promise to pay.

Good to X or order P1,000.00.
Sgd. A

The following will be considered a promise to pay because of the words “payable on demand”
necessarily imply a promise to pay.

E.g.
Due X or order P1,000.00, payable on demand.
Sgd. Y

Note:
 A mere acknowledgment of debt due is not sufficient because a promise cannot be
implied from the mere existence of a debt.

E.g. Due X P1,000.00

Sgd. A

“I do acknowledge myself to be indebted to X or order

in the sum of P1,000.00, to be paid on demand”
Sgd. A

In the above given example – the acknowledgment is a promise to pay because of the
words “to be paid” imply a promise.

Due X or order on demand P1,000.00.

Sgd. A

In the above example it was held to be a promise because the sense requires the words
“to be paid” to be supplied before the words “on demand”.

The following is considered to have a promise to pay because the words “payable on
June 18, 2002”, payable on demand” paid when called for” – naturally implies a promise to pay
even if the word promise cannot be seen on the instrument.

E.g. Received from Lex P1,000.00 payable six months after the
January 2, 2003, without interest.
Sgd. Malou

Sum payable must be definite and certain.

Section 2.What constitutes certainty as to sum.

The sum payable is a sum certain within the meaning of this act, although it is to be paid
–

a. With interest; or
b. By stated installments; or
c. By stated installments, with a provision that, upon default or any installment or of
interest, the whole shall become due; or
d. With exchange, whether at a fixed rate or at the current rate; or
e. With costs of collection or an attorney’s fees, in case payment shall not be made at
maturity.

Notes:
- the sum payable must be certain and in money only.
 I promise to pay Pinky or her order P10,000.00 in carabao.

- the instrument is not negotiable because the sum payable is not in money.

I promise to pay Rochelle or order P100,000.00 together with all the sums that may be
due to her on July 16, 2002.
Sgd. Alex
- the instrument is not negotiable because the sum is not certain.

With interest
- even if the sum payable is to be paid with interest – still the amount due can still be
computed easily.

I promise to pay Malou or order P100,000.00 with interest at 8% per annum, provided
however, that when paid after maturity, the interest shall be 10%.
Sgd. Alexis

Note.
When interest was stipulated but not specified, the interest shall be the legal rate –
which is 12% for loans or forbearance of money.

I promise to pay A or order P1,000.00 with interest.

Sgd. X

Escalation Clause – an agreement pertaining to a loan or forbearance of money, goods or

credits may stipulate that the rate of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by law or by the Monetary Board.

De-escalation Clause – an agreement pertaining to a loan or forbearance of money, goods or

credits may stipulate that the rate of interest agreed upon may be reduced in the event that the
applicable maximum rate of interest is decreased by law or by the Monetary Board.

The presence of an escalation clause or a de-escalation clause or both in the instrument does
not affect the negotiable character of the instrument.

By stated installments
The following requisites must concur:
a. The installment must be stated; and
b. The maturity of each installment must be fixed or determinable.

Illustrative cases:

I promise to pay B or order P1,000.00 in installments.

Sgd. A

- It is non negotiable because the sum payable is not certain – must be by stated
installments.
 I promise to pay B or order P1,000.00 in four equal monthly installments beginning July
16, 2002.
Sgd. A

I promise to pay B or order P1,000.00 in installment as follows:

a. June 20, 2002 – P250.00
b. July 12, 2002 – P750.00

By stated installments, with accelaration clause.

Acceleration clause - it is a provision that upon default in payment of any installment or

of interest, the whole shall become due.

I promise to pay B or order P1,000.00 in four equal monthly installments beginning July
16, 2002.

Upon default in the payment of any installment, the whole sum payable under this note
shall become due.

Sgd. A

- the last sentence is called the acceleration clause – because it hastens the
payment of the whole note.

With exchange
- While it is true that the rate of exchange is not always the same and while it is
technically true that the result must be had to extrinsic evidence to ascertain what it is, yet the
current rate of exchange between two places at a particular date is of common commercial
knowledge. Hence, it can always be ascertained easily.

Exchange – it is the difference in value of the same amount of money in different countries.

* Hence the provision on with exchange applies only to instruments drawn in one country
and payable in another.

Pay to B or order P1,000.00 with exchage at 1.2%.

Sgd. A
Stipulation as to payment of collection costs, attorney’s fees, etc. in case payment shall not be
made at maturity.

- Although such stipulation will not make the sum payable after maturity uncertain, it will
not affect the certainty of the sum payable at maturity and hence, it will not affect the
negotiability of the instrument in which it is stipulated.

I promise to pay B or order P1,000.00 in four equal monthly installments beginning July
16, 2002.
 If not paid when due and issued thereon, I hereby agree to pay collection and attorney’s
fees thereof.
Sgd. A

c. Must be payable on demand (Section 7), or at a fixed or determinable future time;

(Section 4).

- the instrument must be either:

a. payable on demand; or
c. payable at a fixed or determinable future time.

I promise to pay X or order P1,000.00 on or before July 16.

Sgd. A
- The instrument is not negotiable because the time of payment is not
determinable as the year is not stated.

Section 7. When payable on demand.

- An instrument is payable on demand -
a. When it is expressed to be payable on demand, or at sight or
presentation; or
b. In which no time for payment is expressed.

Where an instrument is issued, assigned or indorsed when overdue, it is as

regards the person so issuing, accepting, or indorsing it, payable on demand.

Illustrative cases.

I promise to pay on demand P1,000.00 to Malou or bearer.

Sgd. Alexis

Instead of the word “on demand” the words “on sight” or “on presentation” may be used.
The words “at sight”, however is not ordinarily used in promissory notes.

Pay to X or order P1,000.00

Sgd. A
To. B

- This is payable on demand because no time for payment is expressed.

- Where blank for time for payment is unfilled – the instrument can still be considered as
payable in demand.

________________________, after date I promise to pay x or bearer P100.00.

Sgd. A

Note. Illustrate example of last paragraph.

Pay to B or order P1,000.00 on December 31, 2001.
 Sgd. A
To X

1. Issued when overdue – issued by A on January 2, 2002.

2. Accepted when overdue – A issued on December 25, 2001 however X accepts only on
January 2, 2002.
3. Indorsed when overdue – A issued bill on December 25, 2002 before date pf maturity
but B indorses the instrument to C on January 2, 2002.

Section 4. Determinable future time.

- An instrument is payable at a determinable future time, within the meaning of
the Ac, which is expressed to be payable -

a. At a fixed period after date or sight;

b. On or before a fixed or determinable future time specified therein; or
c. On or at fixed period after the occurrence of a specified event which is certain
to happen, though the time of happening be uncertain.
An instrument which is payable upon a contingency is not negotiable and the happening
of the event does not cure the defect.

Illustrative cases:

a. 60 days after sight, pay to the order of Malou the sum of P1,000.00
Sgd. Alexis
To. Pinky

“After sight” – means after the drawee ahs seen the instrument upon
presentment for acceptance.

b. On or before January 2, 2003, I promise to pay X or order P1,000.00.

Sgd. A

c. On the death of X, I promise to pay B or order the sum of P1,000.00.

Sgd. A

d. 10 days after the death of X, I promise to pay B or order the sum of P1,000.00.
Sgd. A

e. 10 days BEFORE the death of X, I promise to pay B or order the sum of P1,000.00.
Sgd. A

- Non-negotiable because date of payment is uncertain.

f. I promise to pay to X or bearer P1,000.00 10 days after B passes the CPA Board.
Sgd. A
 - Non-negotiable because payable upon a contingency and the happening of the same
will not vest negotiability on the instrument. Hence, the instrument is still non-negotiable
even if B will actually pass the CPA Board. The contingency is deemed a condition.

e.g of contingency:
- contracting of marriage
- election of candidate
- graduation of student

d. Must be payable to order (Section 8) or bearer (Section 9).

- “order” or “bearer” considered as words of negotiability. Without? Instrument is non-

negotiable because the negotiable character of the instrument will be destroyed.

- unless the words order or bearer or words of similar import such as assigns, assignees,
holder, etc are used the instrument is non-negotiable.

Illustrative cases:

a. Pay to B or his assigns P1,000.00.

Sgd. A
To X
- this is negotiable because the word “assigns” is deemed equivalent to the word “order”.

b. Pay to Maria Lourdes L. Comtiag, manager, BPI –Baguio.

Sgd. PNB
- Non-negotiable because there is want of the words of negotiability.

c. Pay to X or his agent P10,000.00.

Sgd. A
- Non-negotiable because it is payable to a specified person. The word “agent” is the
same as the principal. The agent or collector is merely taking the place of the principal. Hence,
there is also an absence of the words of negotiability.

Section 8. When payable to order.

- The instrument is payable to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn payable to order of -
a. A payee who is not maker, drawer, or drawee; or
b. The drawer or maker; or
c. The drawee; or
d. Two or more payees jointly; or
e. One or some of several payees; or
f. The holder of an office for the time being.
 When the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

Meaning of “payable to order” –

I promise to pay B or order P1,000.00 on January 3, 2003.

Sgd. A

This means that A promises to pay to B or if not to B, to any body designated by B, or to

any person designated by the person designated by B and so on.

- In a bill of exchange, the drawee must be named and indicated therein with reasonable
certainty – the payee of an instrument payable to order must be a person in being, natural or
legal, and ascertained at the time of issue. If there is no payee, where the instrument is payable
to order no one could indorse the instrument. Consequently, it is useless to consider it
negotiable.

Pay to ________________________ or orded P1,000.00.

Sgd. A

- Where the blank name of payee is unfilled the instrument cannot be considered as
payable to order because the payee is not named or otherwise indicated therein with
reasonable certainty.

Illustrative cases:

a. Payee not maker.

I promise to pay to the order of B P100.l00
Sgd. A

b. Payee not drawer or drawee

Pay to the order of A P10,000.00
Sgd. B
To C.

c. Drawer as payee.
Pay to the order of ourselves P10,000.00
Sgd. B
To C.

- Where the instrument is payable to the order of the drawer and it is accepted by the
drawee, the instrument is equivalent to a promissory note made by the acceptor in favor
of the drawer.

d. Maker as payee
I promise to pay to the order of myself P100,000.00.
Sgd. A
 Under Section 184, the instrument is not completer until it is indorsed by the
maker.

e. Drawee as Payee
Pay to yourself or order P100,000.00
Sgd. A
To: X
- The effect of this instrument is to authorize the drawee to pay himself from
funds belonging to the drawer which are in the possession of the drawee.

f. Two or more payees jointly

I promise to pay A and B or order P1,000.00
Sgd. C

g. One or more of several payees

I promise to pay to the order of A or B P100.00.
Sgd. C

h. To the holder of an office for the time being

I promise to pay to the treasurer of SLU or order P1,000.00

Sgd. A

- The treasurer of SLU is the holder of the office for the time being.

Section 9. When payable to bearer.

The instrument is payable to bearer –
a. When it is expressed to be so payable; or
b. When it is payable to a person named therein or bearer; or
c. When it is payable to the order of a fictitious or non-existing person, and such
fact was known to the person making it so payable; or
d. When the name of the payee does not purport to be the name of any person;
or
e. When the only or last indorsement is and indorsement in blank.

Illustrative cases

1. When expressed to be so payable to bearer -

Pay to bearer P1,000.00

Sgd. A

Pay to possessor P1,000.00 on demand.

Sgd. A

- Instrument is considered payable to bearer – “possessor” is equivalent to “bearer”.

2. Payable to a specified person or bearer.

Pay to B or bearer P1,000.00

Sgd. A

Pay to bearer B P1,000.00.

Sgd. A

- Instrument is NON-NEGOTIABLE because the word bearer is merely

descriptive of B in effect therefore, the instrument is payable to a specific person.

3. Payable to the order of a fictitious or non-existing person, and such fact was known to the
person making it so payable;

Two requisites:

a. the payee named must be fictitious or non-existent; and

b. the one making the instrument so payable must know him to be fictitious or non-
existent.

“Fictitious person” – it is not limited to persons who has NO real existence.

- an existing person may be considered as a fictitious payee
depending upon the intention of the person making or drawing the
instrument.

Note:
- a name is fictitious if it is feigned or pretended
- a non-existent person is one does not exists in the sense that he was not
intended to be the payee by the drawer or maker.
- consider therefore the intent of the one making or drawing the
instrument.

Illustrative cases:

I promise to pay Superman or order P100.00.

Sgd. A

- payable to bearer because it is payable to a fictitious person.

I promise to pay “Maria Lourdes L. Comtiag” ororder P100.00 on demand.

Sgd. A

- in this case even if the payee is an existing person if she was not
intended to by the maker to be the payee – she will be considered
as non-existent, hence the instrument is payable to a non-existing
person – therefore instrument is payable to bearer.
- If the instrument was made payable to a non-exting payee, or one without interest, but
believed to be existing and thus intended to be the payee or to receive the proceeds – in this
case the instrument is not payable to bearer.

Illustration:
Suppose Malou, the agent of Alex, represented herself to Alex that he bought a
typewriter from ABC, a dead person or non-existing person. Alex believing him to be existing,
issues a check to ABC’s order. – The check is not payable to a fictitious person and, therefore,
is NOT payable to bearer.

4. Name of payee not name of a person -

Pay to cash.
Pay to the order of money.

5. Only or last indorsement in blank.

- What is contemplated here are the following:

a. There is only one indorsement and that indorsement is in blank;
b. There are several indorsements but the last indorsement is in blank.

Note:
- the note contemplated is one which is originally payable to order.

Illustration.

Pay to X or order P100.00

Sgd A
To B.
(Indorsement) (Sgd X)

Q? Is it possible to convert an instrument which is originally payable to order to an instrument

payable to bearer, without changing anything in the face of the instrument?

A. Yes, by making a blank indorsement.

Blank Indorsement – How made?

Section 34, NIL – “xxx (a)n indorsement in blank specifies NO indorsee and an
instrument so indorsed is payable to bearer and may be negotiated by delivery.”

e. The drawee must be named or otherwise indicated therein with reasonable certainty.

- this requirement is applicable only in case of bill of exchange but not to

promissory notes.

Section 2 – sum certain – discussed earlier

Section 3 – promise is unconditional - do –
Section 4 – determinable future time – do-

Section 5 – Additional provision NOT affecting negotiability.

- General Rule: - An instrument which contains an order or promise to do any act in

addition to the payment of money is not negotiable.

I promise to pay to bearer P100,000.00 and to deliver to him a motorcycle.

Sgd. A
- It is non-negotiable because it contains a promise other than the
payment of money.

Exceptions:
a. Authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or
b. Authorizes a confession of judgment if the instrument be not paid at maturity; or
c. Waives the benefit of any law intended for the advantage or protection of the obligor;
or
d. Gives the holder an election to require something to be done in lieu of the payment
of money.

Note:
But nothing in this section shall validate any provision or stipulation otherwise illegal.

- Confession of judgment – generally not allowed in the Philippines for being contrary to PUBLIC
POLICY such as when the confession is made before the filing of the case but a NOTE
AUTHORIZING THE PLAINTIFF TO SIGN JUDGMENT FOR A CERTAIN SUM AFTER SUIT IS
BROUGHT is valid (cognovit actionem).

Pay to B or order P10,000.00 or 15 cavanes of rice, at the option of the holder.

Sgd A
To X
- but where the choice lies with the debtor – the instrument is non-negotiable.

Section 6. Omissions
The validity and negotiable character of and instrument are not affected by the fact that
–

a. It is not dated – under Section 13, the date is essential NOT to determine whether the
instrument is negotiable or non-negotiable RATHER it is essential only to FIX THE
MATURITY.

b. Does not specify the value given, or that any value had been given therefore.

e.g. For value received, I promise to pay Malou or order P10,000.00 on demand.
(Sgd.) Alexis.
 - Note: Even in the absence of the phrase for value received the instrument is
negotiable. Under Section 24, NIL, it is provided that “(e)very negotiable
instrument is deemed prima facie to have been issued for a valuable
consideration; xxx”

c. Does not specify the place where it is drawn or the place where it is payable,

- e.g.
Flora, Apayao
August 11, 2001
Pay to the order of Malou P10,000, at BPI, Burnham Park Branch, Baguio
City, on demand.

To: Pinky (Sgd. Alexis)

Note:
The bill of exchange is drawn in Flora, Apayao and payable in Baguio
City. But even those places are not stated; still the instrument is not rendered
non-negotiable.

Section 73. Place of presentment.

a. Where a place for payment is specified in the instrument and it is there

presented;
b. Where NO place of payment is specified but the address of the person to
make payment is given in the instrument and it is there presented;
c. Where NO place of payment is specified and NO address is given and the
instrument is presented at the usual place of business or residence of the
person to make payment;
d. In any other case if presented to the person to make payment WHENEVER
he can be found, or if presented at his last known place of business or
residence.

d. Bears a seal. At common law, an instrument which bears a seal is non-negotiable.

Under the Negotiable Instrument s law, it is still negotiable.
e. Designates a particular kind of current money in which payment is to be made.
- e.g I promise to pay Malou or order US$10,000.00 on demand.
(Sgd. Alexis)

Section 7. When payable on demand. – discussed earlier

Section 8. When payable to order. – discussed earlier
Section 9. When payable to bearer - -do-
Section 10.
a.k.a. Doctrine of Substantial Compliance.
- the instrument need not follow the language of the Act, any terms which are sufficient
to clearly indicate the intention of the parties are sufficient.
Section 11. Date, presumption as to.
Where the instrument, or an acceptance or any indorsement thereon is dated, such date
is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement,
as the case may be.

Notes:
This Section implies three (3) cases:

1. the instrument contains the date of issue;

- the date place here is deemed prima facie to be the true date of making or drawing of
the instrument.

2. in an accepted bill of exchange, the acceptance is dated, such as, “accepted, January 2,
2002”;
- January 2, 2002, is deemed prima facie to be the true date of acceptance.

3. an instrument is indorsed, and the indorsement is dated, such as, “January 2, 2002, Pay to
Alexis, (Sgd. Malou)”.
- January 2, 2002 is deemed prima facie the true date of indorsement.

Prima facie - is an evidence which can support a conclusion for the time being but it
may be proven otherwise.

Section 12.
An instrument is not rendered NON-negotiable for the reason that it is ante-dated or post
dated UNLESS it is done for an illegal or fraudulent purpose.

The person to whom the instrument so dated is delivered acquires title thereto as of the
date of delivery. (Date of delivery NOT on the date inserted).

Notes:
- This section contemplates ante-dating or post dating upon the MUTUAL AGREEMENT
between the parties.

Ante-date – an instrument is ante-dated when the DATE WRITTEN thereon is EARLIER than
the true date of issuance.
e.g.

Flora, Apayao
August 11, 2001

I promise to pay Malou or order P10,000.00

(Sgd.) Alexis

Suppose the instrument was really issued on January 2, 2002, the instrument is ante-
dated because the date written is earlier than the true date of issuance or delivery.
Post-date – an instrument is post-dated when the DATE WRITTEN thereon is LATER than the
true date of its issuance or delivery.
e.g.

Flora, Apayao
August 11, 2002

I promise to pay Malou or order P10,000.00

(Sgd.) Alexis

Suppose the instrument was really issued on August 11, 2001, the instrument is post-
dated because the date written is later than the true date of issuance or delivery.

Limitation of ante-dating and post-dating of instruments:

- when it was done for an illegal or fraudulent purpose.

Section 13. When date may be inserted.

Instances when date may be inserted by ANY HOLDER OF THE INSTRUMENT.

1. Where an instrument expressed to be payable at a fixed period after date is issued undated.
2. Where the acceptance of an instrument payable at a fixed period after sight is undated.

Illustrations:

- Instrument payable at a fixed period after date.

(No date)
I promise to pay X or order P10,000.00, 60 days after date.
(Sgd.) A

- In this case, the date of the instrument is necessary to determine the date of maturity.
Under the section, the holder may insert the true date of issue.

- Instrument payable at a fixed period after date.

Pay to the order of X P10,000.00 60 days after sight.

(Sgd.) A
To. B (Wrote on the face of the instrument ACCEPTED (no date).

- The date of maturity of the foregoing bill cannot be determined unless the acceptance
is dated. Under this section, the holder may insert the true date of acceptance.

Note:
 Section 136, NIL. The drawee is allowed twenty-four (24) hours after presentment in
which to decide whether or not he will accept the bill; the acceptance of the bill if given,
dates as of the date of presentation.

Effects of inserting the wrong date.

1. Knowingly inserting the wrong date in an undated instrument will avoid the instrument as
to the party inserting the wrong date.

2. The insertion of a wrong date does not avoid the instrument in the hands of subsequent
holder in due course; but as to him, the date so inserted is to be regarded as the true date.

Section 14. Blanks;

When may be filled.

1. Where the instrument is wanting in material particular.

Requisites:
a. Want of material particular in the instrument.
b. Possession thereof by a third person.
c. That such person had the authority to fill up the blank.
NOTE:
The person in possession of this kind of instrument has PRIMA FACIE authority to fill the
blanks. NOTE that mere POSSESSION of this type of instrument is sufficient so that the one in
possession will fill the blanks. DELIVERY with the intention to convert the paper into negotiable
instrument is NOT required.

MATERIAL PARTICULAR -

The material particular referred to here may be:

i. A particular the omission of which will render the instrument non-
negotiable, such as, the name of the payee or the name of the drawer; or

ii. A particular the omission of which will NOT render the instrument non-
negotiable, such as the date, rate of interest, place of payment.

2. When a signature was made on a blank paper and was delivered by the person making the
signature in order that the paper may be converted into a negotiable instrument.

Requisites:
1. A signature was made on a blank paper;
e. That the person signing in blank delivers it in order that the paper may be converted
into a negotiable instrument.

NOTE:
In order that the aforesaid instruments when completed may be enforced against any
person who became a party thereto PRIOR TO ITS COMPLETION – the blanks must be –
 a. filled strictly in accordance with the authority given, and
b. within a reasonable time.

N.B. If ANY (whether filled properly or not) instrument after completion is negotiated to a holder
in due course – it is valid and effectual for ALL purposes in his hands as if it had been filled up
strictly in accordance with the authority given and within a reasonable time.

Hence, if the instrument was not properly filled up - one who is NOT a holder in due course
cannot enforce the instrument against a party PRIOR (BEFORE) the completion of the
instrument.

As a defense, it is merely a PERSONAL DEFENSE – because it is valid only as against

a party who is not a holder in due course. It is not a valid defense as against a holder in due
course because as to him it is presumed that the blanks were filled strictly in accordance with
the authority given and within a reasonable time.

Section 15. Incomplete instrument NOT delivered.

Where an incomplete instrument has not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in the hands of ANY holder, as a against any
person whose signature appears thereon before delivery.

NOTES:
a.k.a. “want of delivery of mechanically incomplete instrument”

It is a real defense – because if the incomplete and undelivered instrument was

completed and negotiated without authority it is a NON-NEGOTIABLE instrument as against a
party whose signature appears thereon before delivery – and regardless of whoever is enforcing
the instrument (holder in due course or not) – still non-negotiable.

Section 16. Delivery

Every contract on negotiable instrument is INCOMPLETE and REVOCABLE until

DELIVERY of the instrument for the purpose of giving effect thereto.

Delivery – means transfer of possession actual or constructive from one person to another.
(Article 191, NIL)

Immediate Party -
Remote Party - they shall NOT be understood to mean PROXIMITY or the distance between the
parties.
Rather they shall be understood to mean PRIVITY or on the existence of knowledge on
whether the instrument has a defect or not.

Immediate Party – if the person has knowledge on the defect in the instrument. Even if he is
physically remote (e.g. between maker and indorser) he can be considered as an immediate
party if he has knowledge on the defect in the instrument.
Remote Party – if the person has no knowledge of any defect in the instrument. Even if he is
physically immediate he can be considered as a remote party if he has no knowledge on the
defect on the instrument.

NOTE:
When the instrument is in the possession of a holder NOT in due course whether remote
or immediate the law presumes that the delivery is prima facie wherein the presumption that
there was a valid delivery can be overcome by proof that:
a. No delivery was made;
b. If there was delivey – the delivery was not authorized;
c. If there was delivery and the same was authorized – it can still be shown that the
delivery was
c.1. conditional; (Note: It is the DELIVERY that is conditional and not the
payment of the sum involved in the instrument, otherwise the note is non-
negotiable)

c.2. for a special purpose only and not for the purpose of transferring property in
the instrument.

When the instrument is in the possession of a HOLDER in DUE COURSE (Section 52,
NIL) the presumption of valid delivery by all prior parties is CONCLUSIVELY PRESUMED – it
cannot be rebutted by evidence to the contrary. “Where the instrument is in the hands of a
holder in due course, a valid delivery thereof by all parties to him is conclusively presumed” -
Section 16.

It is also known as “want of delivery of mechanically complete instrument” it is merely a

personal defense because it can only be interposed to immediate or remote parties who are
NOT holders in due course.

N.B. Conclusive presumption of delivery cannot be applied to INCOMPLETE and

UNDELIVERED instruments (Section 15, NIL) for the reason that in this case want of delivery is
a REAL DEFENSE – it can be interposed as against ANY HOLDER – whether holder in due
course or not holder in due course.

Section 52, NIL – Who are holders in due course.

A holder in due course is a holder who has taken the instrument under the following
conditions:

a. That it is complete and regular upon its face;

b. That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

Section 17. Construction where the instrument is ambiguous.

 Where the language of the instrument is ambiguous or there are omissions therein, the
following rules of construction apply:

a. Where the sum payable is expressed in words and also in figures and there is a
discrepancy between the two, the sum denoted by the words is the sum payable; but if
the words are ambiguous or uncertain, reference may be had to the figures to fix the
amount;
b. Where the instrument provides for the payment of interest, without specifying the date
from which interest is to run, the interest runs from the date of the instrument, and if the
instrument is undated, from the issue thereof;
c. Where the instrument is NOT dated, it will be dated as of the time it was issued;
d. Where there is a conflict between the written and printed provisions of the instrument,
the written provisions prevail;
e. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
f. Where a signature is so placed upon the instrument that it is not clear in what capacity
the person making the same intended to sign, he is to be deemed an indorser;
(NOTE: it applies only to cases of doubt arising out of the LOCATION of the signature).
g. Where an instrument containing the word “I promise to pay” is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.

Section 18. Liability of the person signing in trade or assumed name.

General Rule:
No person is liable on the instrument whose signature does NOT appear thereon.

Exception:
1. Where a duly authorized agent signs for a person, that person is liable; (Section 19,
NIL)
2. Where a person sought to be charged forges the signature of another person, the
forger is liable even if his signature does not appear thereon;
3. Where a person sought to be charged signs on a paper separate from the instrument
itself;
4. Where a person uses an assumed name or trade name;
5. Where the instrument was negotiated by delivery – the person negotiating by mere
delivery is liable to his immediate indorsee.

Section 19. Signature by agent.

The signature of any party may be made by a duly authorized agent. No particular form
of appointment is necessary for this purpose; and the authority of the agent may be established
as in other cases of agency.

NOTE:
The party may sign personally or through an agent. The authority of the agent may either
be written or in oral.

In agency if the agent was merely authorized to collect debts – he has no implied
authority to indorse checks he received in payment.
Section 20. Liability of person signing as agent.

Requisites to be followed so that agent signing in the instrument will not be held liable.
a. The agent must be duly authorized;
b. Add words to his signature indicating that he signs as an agent, that is, for or on
behalf of a principal or in a representative capacity; and
c. Disclose his principal.

Illustrations:
Alexis R. Agmata being the agent he must sign as follows:

a. Jaime A. Paredes, Jr.

By Alexis R. Agmata

b. Alexis R. Agmata
For Jaime A. Paredes, Jr.

c. Alexis R. Agmata
As Agent of Jaime A. Paredes, Jr.

NOTE: It is always required for the agent to disclose the name of the principal otherwise
the agent is personally liable in the instrument. (Philippine Bank of Commerce v. Aruego, 102
SCRA 530).

Note however, that the disclosure need not be made in the signature.
e.g.
Smart Communications, Phil.
July 15, 2002

I promise to pay Atty. Alexis R. Agmata, P100,000.00 on demand.

(Sgd.) Mr. Manny Pangilinan

President
Section 21. Signature by procuration.

A signature by “procuration” operates as notice that the agent has but a limited authority
to sign, and the principal is bound only in case the agent in so signing acted within the actual
limits of his authority.

NOTES:
Signature by Procuration - it constitutes as a warning that the agent has but a limited
authority to sign.

Signature by procuration, how done?

Alexis R. Agmata being the principal and Jaime A. Paredes, Jr. being the agent, signs as
follows:
 “Alexis R. Agmata, Per Procuration: Jaime A. Paredes, Jr.”

Instead of using the words per procuration – the following may be used: “per proc”;
“P.P.”; “Pp”.

Section 22. Effect of indorsement by infant or corporation.

- Indorsement or assignment of the instrument by the corporation or infant PASSES the
property therein NOTWITHSTANDING want of capacity.

- The corporation or infant may incur NO liability in the instrument.

NOTES:
- Infant – should be understood in the concept of a minor (below 18 years old) –
contracts entered into by him under the Civil Code is voidable for want of capacity. However,
under the NIL it is a valid contract.

- Corporation’s act beyond the scope of his authority is considered ultra vires hence,
void. But in NIL it is still a valid contract.

In Section 22, the indorsee acquires title in the instrument even if the indorser is a
MINOR or a CORPORATION and the indorsee can enforce the instrument as against a party
PRIOR to the MINOR or the CORPORATION because of they warrants the existence of the
payee and his then capacity to indorse. (See Sections 60, 61 and 62, NIL).

E.g. Give example

- This Section also embraces indorsements made by imbeciles, lunatics and other
incapacitated persons.

Section 23. Forgery.

Forgery – the counterfeit making or fraudulent alteration of any writing, and may consist in the
signing of another’s name, or the alteration of an instrument in the name, amount, description of
the person and the like, with intent to defraud.

- It is limited only to signatures.

NOTE:
Alterations of the amount is covered by Section 124, NIL.

Kinds of Forgery:
1. Ordinary forgery – give example
2. Other forms of forgery –
a. Fraud in factum, fraud un esse contractus or fraud amounting to forgery –
b. Duress amounting to forgery –
c. Fraudulent impersonation –
- If it was intended to the fraudulent payee – no forgery
 - If it was intended to the misrepresented payee – there is forgery

Effects of Forgery:

1. That the signature that was forged or made without authority is WHOLLY INOPERATIVE.

Note: It is the forged signature that is inoperative and NOT the instrument nor the
genuine signatures in the instrument.

2. That there is no right to retain the instrument, or to give discharge therefore, or to enforce
payment thereof against any party thereto, can be acquired through or under the such a
signature forged or made without authority.

3. That, nevertheless, as against a party precluded from setting up the forgery or want of
authority, the signature forged or made without authority is OPERATIVE, and the rights to retain
the instrument, to give discharge therefore, or to enforce the payment thereof, can be acquired
through or under the signature forged or made without authority.

CONSIDERATION

Section 24, NIL

Every negotiable instrument is deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon to have become a party
thereto for value.

NOTES:

When the maker issues a note to the payee in the amount of P1,000.00 it is disputably
presumed that the maker receives a valuable consideration of more or less P1,000.00 from the
payee.

- In an action based upon a negotiable instrument, it is unnecessary to aver or prove

consideration, for consideration is imported and presumed from the fact that it is a negotiable
instrument – such fact is one of the disputable presumptions under the Rules of Court (Rules on
Evidence). Hence, even if the words “for value received” was not indicated in the instrument –
the instrument is still presumed to have been issued for a valuable consideration.

Section 25, NIL

Value is any consideration sufficient to support a simple contract.

An antecedent or pre-existing debt constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.

NOTES:
Consideration means inducement to a contract that is, the cause, motive, price or
impelling influence which induces a contracting party to enter into a contract.
Simply stated, valuable consideration means an obligation to give, to do, or not to do, in
favor of the party who makes the contract, such as the maker or indorser.
 Love, affection or gratitude is a good consideration but does NOT constitute valuable
consideration.

The presumption that a negotiable instrument is issued for a valuable consideration is

only prima facie. It can be rebutted by proof to the contrary.

Section 26, NIL – What constitutes HOLDER FOR VALUE

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

NOTES:
HOLDER FOR VALUE – one who gives valuable consideration for an instrument issued
or negotiated to him.
It is not however limited to one who is known to have given valuable consideration for
the instrument he holds, It also refers to ANY HOLDER of an instrument for which value has
been given at any time.

Section 27, NIL

- Where a holder has a lien on the instrument arising either from contract or by
implication of law, he is deemed a holder for value to the extent of his lien.

APPLICATION:
Suppose that Alexis makes a note in the sum of P10,000.00 payable to the holder –
Malou. Malou owes Pinky P6,000.00. Malou indorses the note to Pinky to secure the payment of
his debt of P6,000.00 to Pinky. Pinky is said to have a lien on the note to the extent of
P6,000.00 and, to that extent, she is a holder for value. Can Pinky indorsee, collect the whole
amount of P10,000.00 from Alexis the maker, or only P6,000.00?
- It depends. If Alexis – maker, has defenses against Malou – indorser, such as absence
of consideration, Pinky, even if a holder in due course, can collect from Alexis only P6,000.00
the extent of her lien.
Reason: For the balance of P4,000.00 she is no longer a holder for value, and since
being a holder for value is one of the requisites of a holder in for course, she cannot be a holder
in due course as far as the P4,000.00 is concerned.
Section 28, NIL – Effect of want of consideration.
Absence or failure of consideration is a matter of defense as against any person NOT a
holder in due course; and
Partial failure of consideration is a defense pro-tanto, whether the failure is an
ascertained and liquidated amount or otherwise.

NOTES:
E.g of absence of consideration.
1. Where check was issued in payment of forged certificates of stocks.
2. A promissory note given for future illicit cohabitation;
3. Note by husband to his wife, upon promise of the wife to withdraw all oppositions\ to
proceedings for divorce instituted by him.

Failure of consideration - it is the neglect or failure of on e of the parties, to give, to do or to

perform the consideration agreed upon.
 Want or absence of Consideration v. Failure of Consideration
Want or absence of consideration embraces transactions where no consideration was
intended to pass, while failure of consideration implies that the giving of valuable consideration
was contemplated but that it failed to pass.

Want of Consideration is a PERSONAL DEFENSE – it is a valid defense only as against

a HOLDER NOT IN DUE COURSE.

Partial failure of consideration is a defense pro tanto - it means a proportionate defense.

NOTE: it is a proportionate defense only as against a holder NOT in due course because as to
a holder in due course want of consideration whether full or partial is NOT a valid defense.

Section 29, NIL – Accommodation Party

An accommodation party is one who 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.
The accommodation party is liable on the instrument to a holder for value –
notwithstanding such holder, at the time of taking the instrument, knew him to be a holder for
value.

NOTES:
Accommodation party – requisites:
1. He must be a party to the instrument, signing as maker, drawer, acceptor or indorser;
2. He must NOT receive value therefore; and
3. He must sign for the purpose of lending his name or credit.

An accommodation indorser is also known as an irregular indorser – Section 64, NIL.

Section 64, NIL – Liability of Irregular indorser
- Where a person, NOT otherwise a party to an instrument, places thereon his signature
in BLANK BEFORE DELIVERY, he is liable as an indorser, xxx

An accommodation acceptor is liable primarily – because under the Negotiable

Instruments Law – an acceptor is primarily liable.

Meaning of “without receiving value therefore.”

- if the accommodation party received a consideration for lending his name still – he did
not receive a value. Why? Because the phrase should be in the context of NOT having received
any value by virtue of the instrument.

E.g. Suppose that one who signs for the purpose of lending his name is given P250.00 for the
purpose of lending his name but NOT for the instrument he signs. Would he cease to be an
accommodation party? NO, he would still be an accommodation party because he did not
receive anything by virtue of the instrument. He received the said amount for the purpose of
lending his name.

Rights and legal position of accommodation party.

 1. The accommodation party is generally regarded as a surety for the party
accommodated.
2. When “the accommodation parties make payment to the holder of the notes, they
have the right to sue the accommodated party for reimbursement since the relation
between them is in effect that of principal and sureties, the accommodation parties
being the sureties.”

Accommodation party can interpose WANT OF CONSIDERATION as to a holder NOT

in due course. But as to a holder in due course he is liable because under the NIL – “the
accommodation party is liable on the instrument to a holder for value, notwithstanding such
holder at the time of the taking of the instrument knew him to be only an accommodation party.”
NOTE: to be holder in due course you must be a holder for value.

Corporations are NOT liable as accommodation parties EVEN TO HOLDERS FOR

VALUE because the issue or indorsement of negotiable paper by a corporation without
consideration and for accommodation of another is ultra vires.

Officers signing for corporation as accommodation party without authority to do so for

their individual debts or transactions are PERSONALLY LIABLE thereon.

III: NEGOTIATION
Modes of Transfer:
1. Assignment
2. By Operation of Law
3. Negotiation – a) Delivery alone
b) Indorsement completed by delivery

What constitutes NEGOTIATION?

- Sec 30

Is issuance of an instrument by the maker to the payee considered negotiation?

- First view: It is delivery and not negotiation
- Second view: It is negotiation – since Sec 30 in relation to Sec 191 – negotiation
refers to the delivery to the payee or to an indorsee

If payee presents a check to a drawee bank – is there negotiation?

-None, since the payee simply demands and receives payment from the bank.

INDORSEMENT – How made?

- Indorsement must be written on the instrument itself (DORSAL PORTION)
- or upon a paper attached thereto (ALLONGE).
- Note: Signature of indorser alone without any additional word is proper
indorsement (aka BLANK INDORSEMENT)

Indorsement by RUBBER STAMP?

- Allowed as the law does not prohibit indorsement by rubber stamp.

KINDS OF INDORSEMENTS:
a. Special indorsement – specifies the person to whom or to whose order the instrument is to be
payable.

Eg. FRONT PORTION

I promise to pay X or order P1M.

Sgd. M

BACK PORTION – This is where you place your

indorsement.
Pay to Y.
Sgd. X

b. Indorsement in blank – it specifies no indorsee.

Only the signature of the indorser without
additional words.

(Using the same FRONT of the

INSTRUMENT. At the back thereof you find the following:

Sgd. X

c. Conditional Indorsement – the indorsement (NOT

the PROMISE or ORDER) is subject to a
condition (event which may or may not happen).

Pay to Y if he will pass the CPA

Board.
Sgd. X

d. Restrictive Indorsement –
- i. Prohibits the further negotiation of
the instrument

Pay to Y ONLY.
Sgd. X

** - the word ONLY now restricts the

instrument to the payee only thereby
destroying the negotiable character of
the instrument.

** mere absence of the word only (e.g.

Pay to Y) does not create restrictive
indorsement.
 - ii. Constitutes the indorsee the agent of the indorser

Pay to Y, my agent.
Sgd. X

- iii. Vests title in the indorsee in trust for

or for the use of some other person

Pay to Y as trustee of Z.
Sgd. X

e. Qualified Indorsement – constitutes the

indorser a mere assignor of the title of the
instrument. (A mode of limiting the liability
of the indorser – does not negate the
liability. It merely limits liability)

Pay to Y, without recourse.

Sgd. X

Pay to Y, at indorsee’s risk.

Sgd. X

f. Facultative Indorsement – indorser enlarges his liability by waiving demand and notice of
dishonor.

Pay to Y. Notice of Dishonor,

waived.
Sgd. X

HYPOTHETICAL CASES:

I. Suppose that a note for P1K was indorsed, thus:

Pay to B for deposit only. (Sgd. A) and that B owes Y P1K.

a. May B transfer the note to Y for said debt?

Suppose B transfers the note to X for P1K.

b. Can B use the money for his personal expenses?

Answer:
a. No, the indorsement is restrictive and his authority is merely to collect.

b. No, he cannot also use the money for his personal expenses as his authority is mere to safe
keep the amount for deposit until A asks for the return thereof.
II. A negotiable promissory note with A, maker, and B, payee is indorsed, “Pay to Y, if
he passes the CPA Board.” Sgd. B.
a. May A pay to Y, even if the latter has not passed the CPA Board?
b. Suppose A pays to Y, without the latter fulfilling the condition of passing the CPA
Board, does Y acquire ownership over the amount paid?

ANSWER:
a. Yes, A may disregard the condition and pay Y. Such payment discharges A of
liability on the instrument.
b. No, Y does not acquire ownership over the sum until there is fulfillment of the
condition. He merely holds it as a mere trustee of A and in case the condition is
not fulfilled, he has to return the same to A.
(Note: Refusal of Y to return creates a case of Quasi-Contract –
specifically Solutio Indebitii).

III. The note is payable to “Ms. Dickie Gourdon”, but the real name is “Mr. Dick Gordon”.
May it be indorsed by the payee using the name “Mr. Dick Gordon”?
ANSWER: No – he must indorsed using the MISPELLED NAME or wrongfully
designated name – ADDING if he thinks fit the correct signature.

IV. Suppose A draws a bill for P1K payable to B’s order. It is indorsed as follows:
(Blank Indorsement): Sgd. B
It is delivered to C.
(Special Indorsement: Pay to D. (Sgd. C)
D, present holder.

FRONT

Pay to B or order P1K.

To. X Sgd. A

BACK

Sgd. B. (Then B delivered it to C)

Pay to D.
(Sgd.) C

a. May D strike out the indorsement of C? Why?

b. May D strike out the indorsement of B?

ANSWER:
 A. Yes, D may strike out the indorsement of C because it is not necessary to his
title.
B. No, D may not strike out the indorsement of B since it is necessary to his title.
The indorsement of B is a blank indorsement which is necessary to convert the
order instrument to a bearer instrument. As a bearer instrument it can be
negotiated by delivery.

SIMPLIFIED RULE of STRIKING OUT OF INDORSEMENT:

- The indorsee may at any time strike out any indorsement not necessary to his
title.

** Things to remember: FIRST is to IDENTIFY THE NATURE OF THE INSTRUMENT.

1. If BEARER – all INDORSEMENTS are not necessary to his title since a
bearer instrument can be negotiated by mere delivery.
2. If ORDER – look for a BLANK INDORSEMENT and all indorsements
AFTER the blank indorsement can be struck out. Why? Because a
blank indorsement has the effect of converting an ORDER instrument to
a BEARER instrument. Once the instrument is now bearer – it can now
be negotiated by mere delivery – thus, the subsequent indorsements
after the BLANK INDORSEMENT are no longer necessary to the title of
the indorsee.

V. Suppose that A makes a note for P1K with B as payee.

Indorsement from:
B to C
C to Jack; Jack to C
C to D
D to E
E to F
F back to Jack.
Can Jack renegotiate the note, say to Y? What is the effect?

SIMPLIFIED:

A – B – C – Jack – C – D – E- F – Jack.

Answer: Yes, Jack may further negotiate the instrument but cannot enforce the payment
of the note against C – D – E and F (note those parties between Jack and Jack --- see
illustration above) – to whom he is personally liable. This is to avoid circuity.

IV. RIGHTS OF HOLDER

WHO IS A HOLDER IN DUE COURSE?

Every holder is deemed prima facie to be a holder in due course; but when it is shown that the
title of any person who has negotiated the instrument was defective, the burden is on the holder
to prove that he or some person under whom he claims acquired the title as holder in due
course. But the last-mentioned rule does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title. (Sec 59)
WHEN IS A HOLDER OF A NEGOTIABLE INSTRUMENT A HOLDER IN DUE COURSE?
A holder in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

WHO IS A HOLDER FOR VALUE?

- A holder who has given a valuable consideration to an instrument. He is not
necessarily a holder in due course.

RIGHTS OF HOLDER IN GENERAL:

a. to sue in his own name;
b. to receive payment;

RIGHTS OF A HOLDER IN DUE COURSE:

a. to sue in his own name;
b. to receive payment;
c. holds the instrument free from any defect of title of prior parties,
d. holds the instrument free from defenses available to prior parties among themselves, and
e. may enforce payment of the instrument for the full amount thereof against all parties liable
thereon.

V. LIABILITIES OF PARTIES
PARTIES PRIMARILY LIABLE:
a. Maker;
b. Acceptor
 
LIABILITY OF MAKER.
The maker of a negotiable instrument, by making it, engages that he will pay it according to its
tenor, and admits the existence of the payee and his then capacity to indorse.
 
LIABILITY OF ACCEPTOR
The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of
his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.

PARTIES SECONDARILY LIABLE:

a. Drawer
b. Indorsers
i. Irregular
ii. General
iii. Qualified

LIABILITY OF A DRAWER:
The drawer by drawing the instrument admits the existence of the payee and his then capacity
to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or
both, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent
indorser who may be compelled to pay it. But the drawer may insert in the instrument an
express stipulation negativing or limiting his own liability to the holder.

LIABILITY OF IRREGULAR INDORSER

Where a person, not otherwise a party to an instrument, places thereon his signature in blank
before delivery, he is liable as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liable to the payee
and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or is payable to
bearer, he is liable to all parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent
to the payee.

WARRANTIES:
I. QUALIFIED INDORSER
A qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.

II. PERSON WHO NEGOTIATES BY DELIVERY

a. That the instrument is genuine and in all respects what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to contract;
d. That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.

Warranty extends in favor of no holder other than the immediate transferee.

III. GENERAL INDORSER:

a.That the instrument is genuine and in all respects what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to contract;
d. That the instrument is, at the time of his indorsement, valid and subsisting;
e. He engages that, on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or
to any subsequent indorser who may be compelled to pay it.
 
ORDER IN WHICH INDORSERS ARE LIABLE.
- As respect one another, indorsers are liable prima facie in the order in which they
indorse; but evidence is admissible to show that, as between or among themselves, they
have agreed otherwise.  Joint payees or joint indorsees who indorse are deemed to
indorse jointly and severally.

PRESENTMENT FOR ACCEPTANCE

 
WHEN PRESENTMENT FOR ACCEPTANCE MUST BE MADE.
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
 
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
 
(c) Where the bill is drawn payable elsewhere than at the residence or place of business
of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill
liable.
 
EFFECT OF FAILURE TO PRESENT THE INSTRUMENT FOR ACCEPTANCE:
-The drawer and all indorsers are discharged.

HOW IS PRESENTMENT FOR ACCEPTANCE MADE:

WHO: - Holder or duly authorized representative
TO WHOM: Drawee or any person who has the authority to accept or reject the instrument

(a) Where a bill is addressed to two or more drawees who are not partners, presentment
must be made to them all unless one has authority to accept or refuse acceptance for
all, in which case presentment may be made to him only;
 
(b) Where the drawee is dead, presentment may be made to his personal
representative;
 
(c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an
assignment for the benefit of creditors, presentment may be made to him or to his
trustee or assignee.

WHEN: Before overdue

DAY: Business Day
TIME: Reasonable Hour
 
WHERE PRESENTMENT IS EXCUSED
Presentment for acceptance is excused and a bill may be treated as dishonored by non-
acceptance in either of the following cases:
(a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not
having capacity to contract by bill.
 
(b) Where, after the exercise of reasonable diligence, presentment can not be made.
 
(c) Where, although presentment has been irregular, acceptance has been refused on
some other ground.

WHEN IS AN INSTRUMENT CONSIDERED DISHONORED BY NON-ACCEPTANCE?

- A bill is dishonored by non-acceptance:
(a) When it is duly presented for acceptance and such an acceptance as is prescribed
by this Act is refused or can not be obtained; or
 (b) When presentment for acceptance is excused and the bill is not accepted.

ACCEPTANCE
 
Acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.
The acceptance must be in writing and signed by the drawee. It must not express that the
drawee will perform his promise by any other means than the payment of money.

MANNER OF ACCEPTANCE:
a. ACTUAL – by writing the word accepted across the face of the instrument
b. CONSTRUCTIVE
Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within
twenty-four hours after such delivery or within such other period as the holder may allow, to
return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the
same.

NOTE:
The holder of a bill presenting the same for acceptance may require that the acceptance be
written on the bill, and, if such request is refused, may treat the bill as dishonored.
 
Acceptance by separate instrument (ALLONGE). - Where an acceptance is written on a paper
other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is
shown and who, on the faith thereof, receives the bill for value.
 
PROMISE TO ACCEPT - WHEN EQUIVALENT TO ACCEPTANCE
An unconditional promise in writing to accept a bill before it is drawn is deemed an actual
acceptance in favor of every person who, upon the faith thereof, receives the bill for value.
 
TIME ALLOWED DRAWEE TO ACCEPT
The drawee is allowed twenty-four hours after presentment in which to decide whether or not he
will accept the bill; the acceptance, if given, dates as of the day of presentation.
 
KINDS OF ACCEPTANCE

a. General acceptance. - An acceptance to pay at a particular place is a general acceptance

unless it expressly states that the bill is to be paid there only and not elsewhere.
 
b. Qualified acceptance. - An acceptance is qualified which is:
(a) Conditional; that is to say, which makes payment by the acceptor dependent on the
fulfillment of a condition therein stated;
 
(b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill
is drawn;
 
(c) Local; that is to say, an acceptance to pay only at a particular place;
 
(d) Qualified as to time;

(e) The acceptance of some, one or more of the drawees but not of all.
NOTE: The holder may refuse to take a qualified acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a
qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill
unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or
subsequently assent thereto. When the drawer or an indorser receives notice of a qualified
acceptance, he must, within a reasonable time, express his dissent to the holder or he will be
deemed to have assented thereto.

PRESENTATION FOR PAYMENT

 
WHAT CONSTITUTES A SUFFICIENT PRESENTMENT
Presentment for payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to
any person found at the place where the presentment is made.

PLACE OF PRESENTMENT
Presentment for payment is made at the proper place:
(a) Where a place of payment is specified in the instrument and it is there presented;
(b) Where no place of payment is specified but the address of the person to make
payment is given in the instrument and it is there presented;
(c) Where no place of payment is specified and no address is given and the instrument
is presented at the usual place of business or residence of the person to make payment;

(d) In any other case if presented to the person to make payment wherever he can be
found, or if presented at his last known place of business or residence.

WHEN PRESENTMENT FOR PAYMENT IS EXCUSED

Presentment for payment is excused:

(a) Where, after the exercise of reasonable diligence, presentment, as required by this
Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.

WHEN INSTRUMENT DISHONORED BY NON-PAYMENT

The instrument is dishonored by non-payment when:
(a) It is duly presented for payment and payment is refused or cannot be obtained; or
(b) Presentment is excused and the instrument is overdue and unpaid.

WHAT CONSTITUTES PAYMENT IN DUE COURSE

Payment is made in due course when it is made at or after the maturity of the payment to the
holder thereof in good faith and without notice that his title is defective.
 
NOTICE OF DISHONOR
 
TO WHOM NOTICE OF DISHONOR MUST BE GIVEN:
- Parties secondarily liable.
a. Drawer
b. Indorsers
c. Agent of the person secondarily liable

WHEN NOTICE NEED NOT BE GIVEN TO DRAWER. - Notice of dishonor is not required to be
given to the drawer in either of the following cases:
(a) Where the drawer and drawee are the same person;
 
(b) When the drawee is fictitious person or a person not having capacity to contract;
 
(c) When the drawer is the person to whom the instrument is presented for payment;

 
(d) Where the drawer has no right to expect or require that the drawee or acceptor
will honor the instrument;
 
(e) Where the drawer has countermanded payment.

WHEN NOTICE NEED NOT BE GIVEN TO INDORSER

Notice of dishonor is not required to be given to an indorser in either of the following cases:
(a) When the drawee is a fictitious person or person not having capacity to contract, and
the indorser was aware of that fact at the time he indorsed the instrument;
 
(b) Where the indorser is the person to whom the instrument is presented for payment;
 
(c) Where the instrument was made or accepted for his accommodation.

EFFECT OF FAILURE TO SERVE?

- The person secondarily liable who was NEVER served will now be discharged
from liability.

WHO CAN GIVE THE NOTICE OF DISHONOR?

a. Holder
b. Any person on behalf of the Holder
c. Person secondarily liable to the person whom he is also
liable
d. Any person on behalf of the Person secondarily liable to
the person whom he is also liable
e. Agent – who can serve it even to his principal. (NOTE if
this happens – the principal should treat it as if was served
by a person other than his agent).

DELAY IN GIVING NOTICE; HOW EXCUSED

Delay in giving notice of dishonor is excused when the delay is caused by circumstances
beyond the control of the holder and not imputable to his default, misconduct, or negligence.
When the cause of delay ceases to operate, notice must be given with reasonable diligence.
  
DISCHARGE OF NEGOTIABLE INSTRUMENTS

GROUNDS FOR THE DISCHARGE OF THE INSTRUMENT:

A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;
 
(b) By payment in due course by the party accommodated, where the instrument is
made or accepted for his accommodation;
 
(c) By the intentional cancellation thereof by the holder;
 
(d) By any other act which will discharge a simple contract for the payment of money;
 
(e) When the principal debtor becomes the holder of the instrument at or after maturity in
his own right.

INSTANCES WHEN A PERSON SECONDARILY LIABLE IS DISCHARGED:

A person secondarily liable on the instrument is discharged:
(a) By any act which discharges the instrument;
 
(b) By the intentional cancellation of his signature by the holder;
 
(c) By the discharge of a prior party;
 
(d) By a valid tender or payment made by a prior party;
 
(e) By a release of the principal debtor unless the holder's right of recourse against the
party secondarily liable is expressly reserved;
 
(f) By any agreement binding upon the holder to extend the time of payment or to
postpone the holder's right to enforce the instrument unless made with the assent of the
party secondarily liable or unless the right of recourse against such party is expressly
reserved.

WHAT CONSTITUTES A MATERIAL ALTERATION

Any alteration which changes:

(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect, is a
material alteration.

BILLS OF EXCHANGE
BILL OF EXCHANGE - an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a sum certain in money to order or to bearer.

INLAND BILL OF EXCHANGE is a bill which is, or on its face purports to be, both drawn and
payable within the Philippines.

FOREIGN BILL OF EXCHANGE -any bill other than inland.

WHEN BILL MAY BE TREATED AS PROMISSORY NOTE

- Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious
person or a person not having capacity to contract, the holder may treat the instrument at his
option either as a bill of exchange or as a promissory note.
 
REFEREE IN CASE OF NEED
The drawer of a bill and any indorser may insert thereon the name of a person to whom the
holder may resort in case of need; that is to say, in case the bill is dishonored by non-
acceptance or non-payment. Such person is called a referee in case of need. It is in the option
of the holder to resort to the referee in case of need or not as he may see fit.
 
PROTEST
PROTEST; HOW MADE
The protest must be annexed to the bill or must contain a copy thereof, and must be under the
hand and seal of the notary making it and must specify:
(a) The time and place of presentment;
(b) The fact that presentment was made and the manner thereof;
(c) The cause or reason for protesting the bill;
(d) The demand made and the answer given, if any, or the fact that the drawee or
acceptor could not be found.

WHO CAN MAKE THE PROTEST?

Protest may be made by:
(a) A notary public; or
(b) By any respectable resident of the place where the bill is dishonored, in the presence
of two or more credible witnesses.

WHEN MADE?
Protest must be made on the day of its dishonor unless delay is excused as herein provided.
When a bill has been duly noted, the protest may be subsequently extended as of the date of
the noting.
 
WHERE MADE?
A bill must be protested at the place where it is dishonored, except that when a bill drawn
payable at the place of business or residence of some person other than the drawee has been
dishonored by nonacceptance, it must be protested for non-payment at the place where it is
expressed to be payable, and no further presentment for payment to, or demand on, the drawee
is necessary.
 

ACCEPTANCE FOR HONOR

 
An acceptance for honor supra protest must be in writing and indicate that it is an acceptance
for honor and must be signed by the acceptor for honor.

PAYMENT FOR HONOR

The payment for honor supra protest, in order to operate as such and not as a mere voluntary
payment, must be attested by a notarial act of honor which may be appended to the protest or
form an extension to it.

WHAT IS NOTARIAL ACT OF HONOR?

The notarial act of honor must be founded on a declaration made by the payer for honor or by
his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he
pays.

BILLS IN SET

Where a bill is drawn in a set, each part of the set being numbered and containing a reference
to the other parts, the whole of the parts constitutes one bill.

PROMISSORY NOTES AND CHECKS

 
PROMISSORY NOTE:
A negotiable promissory note within the meaning of this Act is an unconditional promise in
writing made by one person to another, signed by the maker, engaging to pay on demand, or at
a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note
is drawn to the maker's own order, it is not complete until indorsed by him.
 
CHECK:
A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise
provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to
a check.

 
WHEN CHECK MUST BE PRESENTED FOR PAYMENT:
A check must be presented for payment within a reasonable time after its issue or the drawer
will be discharged from liability thereon to the extent of the loss caused by the delay.

CERTIFICATION OF CHECK:
Where a check is certified by the bank on which it is drawn, the certification is equivalent to an
acceptance.