NEGOTIABLE INSTRUMENTS LAW

I. INTRODUCTION

A. GOVERNING LAWS – ACT No. 2031 effective June 2, 1911 (which amended some of the provisions of the Rules of the Law
Merchant), the Code of Commerce and the Civil Code.

B. APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW – the Act applies only to negotiable instruments or those that meet the
requirements under Sec. 1 of Act No. 2031.

C. CONCEPT OF NEGOTIABLE INSTRUMENTS

1. DEFINITION: Negotiable Instruments are written statements signed by the maker or drawer containing an unconditional
promise or order to pay a sum certain money, payable on demand or at a fixed or determinable future time, to order
or to bearer.

2. FUNCTIONS OF NEGOTIABLE INSTRUMENTS

a. Substitute for money - although they are not considered legal tender. One of its distinct characteristics is
its negotiability which allows it to go from hand to hand in the commercial markets and to take the part of
money in commercial transactions free from all personal defenses available against the original owner.
b. Media of exchange – they thus increase the purchasing medium in circulation. They are a safe and convenient
means of doing business that eliminate the risk of dealing in cash.
c. Medium of credit transactions – they allow men of undoubted credit (such as those with illiquid properties) to
carry on business enterprise upon their promissory notes, bills of exchange and checks knowing that other
businessmen will treat these promises as cash.

Checks are primarily used for immediate payment (substitute for money); while ordinary bill of exchange and the
promissory note are intended for the circulation of credits (credit instruments)

3. LEGAL TENDER – Sec. 52 of the New Central Bank Act provides that only notes and coins issued by the BSP are
considered legal tender. Section 60 of the same law provides that checks are not legal tender and its acceptance is
at the option of the creditor.

Under Art. 1249 of the Civil Code, the payment through a negotiable instrument produces the effect of payment only
when:
1. It is encashed; or
2. Its value becomes impaired through the fault of the creditor.

D. CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

1. NEGOTIABILITY – is that quality or attribute of a bill or note whereby it may pass from one person to another
similar to money, so as to give the holder in due course the right to collect on the instrument the sum payable for
himself free from any defect in the title of any of the prior parties or defenses available to them among themselves.
2. ACCUMULATION OF SECONDARY CONTRACTS – as they are transferred from one person to another. Once an instrument is
issued, additional parties can become involved.

E. INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTE BILL OF EXCHANGE

Preparation & Signing
Issuance
Negotiation
Presentment for Acceptance
Acceptance
Dishonor by Non-acceptance
Presentment for payment
Dishonor by Non-payment
Notice of Dishonor
Payment
Discharge

F. KINDS OF NEGOTIABLE INSTRUMENTS

1. PROMISSORY NOTES (Sec. 184, NIL) – An unconditional promise in writing mace 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.
a. Parties to a Negotiable Promissory Note are (1) Maker and (2) Payee;
b. Kinds of Negotiable Promissory Note include certificates of deposits, bank notes, due bills and bonds.

2. BILLS OF EXCHANGE (Sec. 126, 185, NIL) – 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 bearer.
a. Parties to a Bill of Exchange are (1) Drawer, (2) Payee and (3) Drawee;
b. Kinds of Bills of Exchange include drafts, trade acceptances and banker’s acceptances.

G. WHEN BILLS TREATED AS NOTES

1. The drawer and the drawee are the same person
2. The drawee is a fictitious person
3. The drawee has no capacity to contract
 4. When 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

H. BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTES BILLS OF EXCHANGE

2 parties – Maker and Payee
There is unconditional PROMISE by the maker
Presentment for payment without prior acceptance
Liability of the maker is primary and absolute
3 parties – Drawer, Payee and Drawee
There is unconditional ORDER by the drawer to the drawee
Some Bills need prior acceptance by the drawee before
presentment for payment
Liability of the drawer is secondary and conditional

I. SOME NON-NEGOTIABLE INSTRUMENTS

1. Document of Title – like a certificate of stock, bill of lading and warehouse receipt (non-negotiable because there
is no unconditional promise or order to pay a certain sum in money);
2. Letter of Credit – a letter from a merchant or bank or banker in one place, addressed to another, in another place
or country, requesting the addressee to pay money or deliver goods to a third party therein named, the writer of
the letter undertaking to provide him the money for the goods or to repay him. It is a letter requesting one person
to make advances to a third person on the credit of the writer. (It is in favor of a certain person and not to
order)
3. Treasury Warrant - it is a government warrant for the payment of money such as that issued in favor of a public
officer or employee covering payment or replenishment of cash advances for official expenditures. (It is payable
out of a specific fund or appropriation)
4. Postal Money Order – subject to conditions and restrictions imposed by law.
5. Certificate of stock - Not contain an unconditional promise or order to pay a sum certain in money
6. Warehouse receipt - Not contain an unconditional promise or order to pay a sum certain in money.
7. Quedan - Not contain an unconditional promise or order to pay a sum certain in money.
8. Now account - Not payable to order or bearer

II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS

A. HOW NEGOTIABILITY IS DETERMINED?

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that
is, from the fact of the instrument itself. (CALTEX VS. COURT OF APPEALS, GR No. 97753, Aug. 10, 1992)

To determine whether the instrument is negotiable or not, the following must be considered:
1. The whole of the instrument
2. Those only appear on the face of the instrument
3. Compliance with the requirement under Section 1 of the Act.

The instrument need not follow the language of the Negotiable Instruments Law, but any terms are sufficient which
clearly indicate an intention to conform to the requirements hereof.

B. REQUISITES OF NEGOTIABILITY (WUPOA)

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.

(a) It must be in writing and signed by the maker or drawer;

“Written” includes printed, and “writing” includes print. (Section 191)

Signature of the maker or drawer is usually written, preferably with the full name or at least the surname. However,
initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or
drawer intends to be bound by it.

Signature is presumed valid, the person denying and to whom the signature operates must provide evidence of its
invalidity.

General Rule: No person is liable on the instrument whose signature does not appear thereon (Sec. 18)
Exceptions:
1. One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own
name. (Sec 18, (2))
2. The principal is bound by the signature of his duly authorized agent (Sec 19)
3. Forgery (Sec 23)
4. Acceptance by the acceptor in a separate paper (Sec 134)
5. Written promise by a person to accept the bill before it is drawn. (Sec 135)

(b) Must contain an unconditional promise or order to pay a sum certain in money;

Money is the medium of exchange authorized or adopted by a domestic or foreign government as part of its currency.
In a literal sense, the term means “cash”. It includes all legal tender.

1. Promise or Order to Pay

 Clear intention of the parties – the substance of the transaction rather than the form is the criterion of
negotiability. Instead of “promise” the words “bind myself” may be used; instead of “on demand”, the words “on call”
may be used and instead of “bearer”, the word “holder” may be used.

Mere defect in language or grammatical error – The words “himself order” may be construed as “himself or order” and
thus not render the instrument non-negotiable.

2. Promise or Order to Pay Must be Unconditional

Condition – Resolutory or Suspensive - In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes
the condition (Art. 1181, NCC)

Period – As opposed to a condition, is when the event is certain to happen or come.

3. When is a promise unconditional?

Promissory Notes:
It is not essential that the word “promise” be used. Any words equivalent to a promise or assumption of responsibility
for the payment of the note (like “payable”, “to be paid”, “I agree to pay”, “I guarantee to pay”, “M obliges
himself to pay”, “good for”, “due on demand”, etc.) are sufficient to constitute a “promise to pay”.

However, bare acknowledgements like “IOU”, “Due P1,000” or “for value received” do not constitute promise to pay
and are non-negotiable, unless words constituting a promise to pay is added, like “IOU (or Due) P1,000 to be paid
on Jan. 8”.

Bills of Exchange:
It is not necessary to use the word “order”. Any other words like “Let the bearer” or “Drawer obliges the drawee to
pay P or order” are sufficient.

An order is a command or imperative direction and, therefore, a mere request, supplication, or authority (like “I
request you to pay”, or “I hope you will pay” or “I authorize you to pay”) is not sufficient. However, the use of
polite words like “please” does not convert an order to a request.

Indication of a Particular Fund:

a. Out of which reimbursement can be had – is valid. Since the reimbursement is an act subsequent to the fact of
payment.
b. Out of which payment may be had – is conditional. Since the payment would depend on the existence or sufficiency
of the fund.

4. Provisions which do not affect certainty of sum

The Basic Test: is whether the holder can determine by calculation or computation the amount payable when the
instrument is due.

The sum payable is a sum certain, although it is to be paid:

a. with interest; or
b. by stated installments – although as a requirement, both the amount and the due date of each installment must
be stated or determinable.
c. by stated installments, with a provision that, upon default in payment of any installment or of interest, the
whole shall become due;

Stated instalments with acceleration clause:

Acceleration clause – requires the debtor to pay off the balance sooner than the due date if some specified
event occurs, such as failure to pay an instalment.
Insecurity clause – allows the creditor to demand immediate and full payment of the loan balance if the creditor
has reason to believe that the debtor is about to default, as when the debtor suddenly loses a significant
source of income.
Extension clause – allows additional time for the payment of the loan due.

d. with exchange, whether at a fixed rate or at the current rate; or

e. with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

Additional provision NOT affecting negotiability: as a rule, the performance of an act in addition to the payment
of money renders the instrument non-negotiable, EXCEPT in the following cases:
1. If the doing of the act is at the option of the holder – here the holder can still require the payment of money
2. If the act is to be done after the payment:
i. Authorize the sale of collaterals
ii. Authorize confession of judgment
1) Warrant of attorney – to confess judgment, however, are not authorized nor contemplated by our law
because under these instruments, the promisor bargains away his right to a day in court. (PNB vs. MANILA
OIL REFINING)
2) Cognovit Actionem – “he has confessed the action”
3) Relicta Verificationem – “his pleading being abandoned”; a confession of judgment accompanied by a
withdrawal of the plea.
iii. Waiver of benefits under the law intended for the obligor (waiver of notice of dishonor)

(c) Payable on demand or at a fixed or determinable future time

Time must be certain so that the holder will know when he may enforce the instrument, and the person liable – maker,
drawee, or acceptor – when he may be required to pay, or the secondary parties – drawer, indorser or accommodation
 party – when his obligation will arise.

Determinable Future Time: when it is payable

a. At a fixed period after date or sight, e.g., 60 days after Feb. 5, 2018
b. On or before a fixed or determinable future time specified, e.g. on or before Feb. 5, 2018
c. On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time
of the happening be uncertain, e.g., “upon the death of X” or “20 days after the death of X”

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

(d) Payable to order or bearer

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 the order of:
a. A payee who is not maker, drawer, or drawee; or
b. The drawer or maker; or
c. The drawee; or
d. Two or more payees jointly; or
e. One or some of several payees; or
f. The holder of an office for the time being.

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 an indorsement in blank

(e) Identity of the drawee

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.

To enable the holder to know to whom the Bill of Exchange shall be presented for acceptance/payment.

Multiple Drawees:
1. Two or more drawees jointly – allowed. (e.g., D1 and D2)
2. Two or more drawees in the alternative or succession – not allowed. (e.g., D1 or D2) (Sec. 128)

C. OMISSIONS THAT DO NOT AFFECT NEGOTIABILITY

1. it is not dated; or
2. does not specify the value given, or that any value had been given therefor; or
3. does not specify the place where it is drawn or the place where it is payable; or
4. bears a seal; or
5. designates a particular kind of current money in which payment is to be made.

D. INTERPRETATION OF INSTRUMENTS

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

1. 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;
2. 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;
3. Where the instrument is not dated, it will be considered to be dated as of the time it was issued;
4. Where there is a conflict between the written and printed provisions of the instrument, the written provisions
prevail;
5. 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;
6. 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;
7. 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

III. ISSUE, TRANSFER AND NEGOTIATION

A. ISSUANCE/DELIVERY OF NEGOTIABLE INSTRUMENTS

"Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder

“Delivery" means transfer of possession, actual or constructive, from one person to another.

B. NEGOTIATION DEFINED
 1. Instruments payable to ORDER: two steps are required for negotiation: (a) indorsement and (b) delivery.
2. Instruments payable to BEARER: delivery alone without indorsement.

An instrument payable to bearer is not converted into an instrument payable to order by being indorsed specially.
However, the person who indorsed specially is liable only to those holders who can trace their title to the instrument
by a series of unbroken indorsements from such special indorser.

Incomplete negotiation of an order instrument – delivered only without indorsement. This will be subject to the following
rules:
a. the transferee is a mere assignee
b. He acquires the right to have the indorsement of the transferor (Sec. 49)
c. For the purpose of determining whether the transferee is a HIDC, the negotiation takes effect as of the time when
indorsement is actually made.

Example: M was induced fraudulently by P to make a promissory note payable to his order. P then delivered the
instrument to A on Feb. 5, 2020, without indorsing it. A asked for the indorsement of P which was placed on Feb 15,
2020.
• If A knew of the fraud on Feb 10, 2020 – he is not a HIDC because at the time of the negotiation was complete
he already had knowledge of the defect in the title of P.
• If he knew of the fraud after the indorsement – he is a HIDC

C. ASSIGNMENT AND NEGOTIATION DISTINGUISHED

Assignment is the transfer of the title to an instrument, with the assignee generally taking only such title or rights as
his assignor has, subject to all defenses available against his assignor. It is the less usual method which may or may not
involve an indorsement in the sense of writing on the back of the instrument.

NEGOTIATION ASSIGNMENT
Applicable Law Negotiable Instruments Law Civil Code of the Philippines
Type of transaction or Negotiable instruments only Contracts in general or assignable rights
instrument:
Nature of the transferee: Transferee is a holder who may be a holder Transferee is a mere assignee and can never be
in due course a holder in due course
Rights acquired: The transferee-holder may acquire more Transferee cannot acquire more rights than the
rights than the transferor if he is a transferor because he merely steps into the
holder in due course shoes of the transferor
Availability of personal Transferee-holder may be free from Transferee is always subject to personal
defenses personal defenses if he is a holder in defenses
due course

D. INDORSEMENTS

Indorsement is the writing of the name of the payee on the instrument with the intent either to transfer the title to
the same, or to strengthen the security of the holder by assuming a contingent liability for its future payment, or
both.

1. Where:
a. On the instrument itself; or
b. Separate piece of paper attached to the instrument called allonge.
2. Amount: should be entire instrument. An instrument for P15,000 cannot be indorsed for less like P5,000 only – will
be treated as mere assignment.

Except: when there was already partial payment and what is being indorsed is the balance.
3. 2 or more indorsees severally: considered only as an assignment.
4. Kinds:
a. Blank Indorsement– no indorsee is indicated and indorser indicates only his signature; converts the instrument
into a bearer instrument.
b. Special indorsement – designates the indorsee e.g. Pay to X.

A holder may convert the blank indorsement to a special indorsement by writing over the signature of the indorser
in blank any contract consistent with the character of indorsement. (Sec. 35)

c. Qualified indorsement – “without recourse”

• constitutes the indorSER a mere assignee
• does not impair the negotiable character of the instrument
• Not liable to subsequent indorsees
• does not free the indorser of liability if the warranties under Sec. 65 are not met.
d. Conditional indorsement – Pay to X if he passes the board exam
• Party required to pay (Drawee or maker) can disregard the condition since he is not a party to the same
• The indorsee holds the payment in trust for the indorser if the condition is not met.
e. Restrictive indorsement
i. Prohibits further negotiation – pay to X only – instrument is no longer negotiable
ii. Constitute the indorsee as an agent – pay to X for collection
iii. Constitute the indorsee as a trustee – pay to X in trust for Y

In the first type, the instrument will cease to be negotiable. In the other two, the instrument is still
negotiable.

Rights of restrictive indorsees:

 • Receive payment
• Bring any action on the instrument that the indorser can bring
• Transfer his rights as such indorsee, where authorized. All subsequent indorsees acquire only the title of
the first indorsee under restrictive indorsement.

Joint Indorsement: Where an instrument is payable to the order of two or more payees or indorsees who are not
partners, all must indorse unless the one indorsing has authority to indorse for the others.

5. Negotiation by prior party (Successive Indorsement)

EXAMPLE: M to P, P to A, to B, to C, to P again.

The effects of such re-negotiation would be:

• P may still reissue again the instrument
• P cannot enforce payment against any intervening party to whom he is personally liable
• P may strike out intervening indorsements because they are not necessary for his title and he is liable to them
because of his initial indorsement.

6. 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.

E. STRIKING OUT OF INDORSEMENT

The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement
is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.

IV. DEFECTIVE INSTRUMENTS

A. Incomplete But Delivered Instruments:

1. If there are blanks or the instrument is wanting of any material particular – the person in possession has prima
facie authority to complete it
2. Signature of a blank piece of paper – for the purpose of converting it into a negotiable instrument – there is prima
facie authority to fill it up as such for any amount.

But in order to bind parties prior to completion: the instrument must be filled up:
a. Strictly in accordance with the authority given
b. Within a reasonable time

3. After completion, if negotiated to a holder in due course, valid and effectual for all purposes in his hands and
may enforce it as if it had been filled up in accordance with the authority given and within a reasonable time.

If not a HIDC, as if the instrument is materially altered and cannot be enforced against parties prior to completion,
if it was not filled-up strictly in accordance with the authority given or not within a reasonable time.
.
B. Incomplete Undelivered Instruments

Sec. 15 provides that if an instrument is both INCOMPLETE (as wanting in any material particular) AND UNDELIVERED, it
is not a valid contract in the hands of ANY holder. This is why this constitutes a real defense available even against
a holder in due course.

Example: M had a blank signed check in his drawer, P, his secretary stole the same and indicated his name as the payee
and put the amount P10,000 and then indorsed it to A, then A to B, B to C.

C cannot enforce the check against M whether or not he is a holder in due course

C. Complete Undelivered Instruments

Delivery is essential to the validity of any negotiation (whether PN or BOE) (Sec. 30). Moreover, prior to delivery an
instrument is revocable.

Delivery may be:

1. For the purpose of negotiation; or
2. Conditional, for a specific purpose and not for the purpose of transferring title.

However, in the hands of a HIDC, valid delivery by all parties prior to him is conclusively presumed.

V. HOLDERS

A Holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof (Sec. 191), who
may sue on his own name (Sec. 51).

Holder NOT in due course can still collect on the instrument: The Negotiable Instruments Law does not provide that a holder,
who is not a holder in due course, may not in any case, recover on the instrument. If B purchases an overdue negotiable
promissory note signed by A, he is not a holder in due course; but he may recover from A, if the latter has no valid excuse
for refusing payment. The only disadvantage of holder who is not a holder in due course is that the negotiable instrument
is subject to defense as if it were non- negotiable. (CHAN WAN VS. TAN KIM, G.R. No. L-15380; September 30, 1960)

A. HOLDER IN DUE COURSE

A holder in due course is a holder who has taken the instrument under the following conditions (COVN):
1. That it is complete and regular upon its face;
2. 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;
3. That he took it in good faith and for value;
4. 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.

Holder - the first requisite is that he should be a “holder” as defined under Sec. 191. If a possessor of a negotiable
instrument is not a holder (i.e., he is neither payee nor indorsee or bearer of a bearer instrument), he can NEVER be
a holder in due course.

Presumption: 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)

1. Instrument Complete and Regular

Complete - it is complete when it is not wanting of any material particular or particular proper to be inserted in
a negotiable instrument without which the same will not be complete. Examples of material particulars are name of
payee, amount, signature of maker or drawer, or rates of interest, if any.

Regular – It is regular upon its face when it does not contain any material alterations or if there are, they are
not apparent or visible on the face of the instrument.

A Holder upon receiving an instrument which is incomplete or irregular (containing visible and apparent alterations)
must be put on inquiry why it is such. If he fails to do so, he takes the instrument subject to all defenses.

2. Taken Before Overdue and Before Notice of Dishonor

Overdue – an instrument is overdue after the date of maturity fixed therein or upon happening of an event certain,
and a person taking an overdue instrument must be put on inquiry why the instrument is still in circulation

Dishonor may be by non-acceptance (bills of exchange) under Sec. 149 or by non-payment (promissory notes and bills
of exchange) under Sec. 83. A holder who has knowledge that the instrument was previously dishonored is not a holder
in due course.

3. Good Faith

General Rule: every holder is presumed to be in good faith and no inquiry is required to determine such. EXCEPT: if
the holder acquires a negotiable instrument under circumstances which should have put him in inquiry, he should do
so. Otherwise, he may not be considered in good faith for gross neglect.

4. Value

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.

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.

Note that taking the instrument for value is only one requisite for a holder in due course. As such, all Holders
in Due Course are Holders for Value; but not all Holders for Value are Holders in Due Course.

5. Notice of Infirmity or Defect

Infirmity means any irregularity in the instrument. Thus, notice of an alteration which is apparent is notice of an
infirmity in the instrument, as well as notice of forgery in the maker or drawer’s signature. Sec. 56 provides what
constitutes notice of defect.

Notice before full payment: Where the transferee receives notice of any infirmity in the instrument or defect in
the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will
be deemed a holder in due course only to the extent of the amount therefore paid by him.

EXAMPLE: M makes a note for P100,000 payable to the order of P, P indorsed it to A, B stole the note, and forged
A’s signature, B then indorsed it to C who paid P50,000 before knowing that A’s signature was forged. In this case,
C is a holder in due course up to P50,000 only.

B. RIGHTS OF A HOLDER IN DUE COURSE – Sec. 57

A holder in due course:

1. holds the instrument free from any defect of title of prior parties, and free from defenses available to prior
parties among themselves, and
 2. may enforce payment of the instrument for the full amount thereof against all parties liable thereon

Accommodation party: An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable
on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him
to be only an accommodation party

C. PAYEE AS HOLDER IN DUE COURSE

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof. Sec. 52 defines a holder in due course as "a holder who has taken the instrument under the conditions enumerated
therein. ”Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first
clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder
in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p.
543). (VICENTE DE OCAMPO VS. ANITA GATCHALIAN)

D. SHELTER RULE

If a Holder is not a holder in due course, he is subject to personal defenses as between prior parties. The only
exception is an ordinary holder who derived his title from a holder in due course, this is known in American case law
as “Shelter Rule”.

This is because if a holder who derives his title through a holder in due course, and who is not himself a party to any
fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior
to the latter.

Example: M issued a promissory note to P and authorized the latter to fill-up P1,000. However, P inserted P5,000 and
indorsed it to A, then to B, then to C. A, B and C had no knowledge that the instrument was filled-up in excess of the
authority given. C then issued it to X who had knowledge. Can X enforce payment of P5,000 from M?

Yes. Sec. 14, in the hands of a HIDC, the instrument is valid and effectual and has been filled-up in accordance with
the authority given. Though he is not a HIDC, he derived title from a HIDC and has all the rights of the same. Note
that X had no participation in the breach of trust committed by P.

E. RIGHTS OF HOLDER OF BILLS IN SET

Bills in Set involve one bill although drawn in set. The problem arises when different parts of the set are negotiated
to separate persons who are holders in due course.

Rules Applicable to Bills in Set

1. Each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes
one bill.
2. Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first
accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of
a person who, in due course, accepts or pays the parts first presented to him.
3. Where the holder of a set indorses two or more parts to different persons, he is liable on every such part, and
every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate
bills.
4. The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than
one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as
if it were a separate bill.

VI. PARTIES WHO ARE LIABLE

A. PRIMARY AND SECONDARY LIABLE DISTINGUISHED

Active Subject in the negotiable instrument is the holder. He is given the right to demand the performance of the obligation
reflected in the negotiable instrument, that is, the obligation to pay a sum certain in money.

Passive Subject is the one against whom the holder can enforce the right presented by the instrument who may be primary or
secondarily liable (Sec. 192).

Liability of 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 negating or limiting his own liability to the holder

Primary and Secondary Liability, in general:

Instrument Primary Secondary

Promissory Note Maker General Indorsers
Bill of Exchange Acceptor Drawer and General Indorsers

B. LIABILITY DISTINGUISHED FROM WARRANTIES

The primary and secondary liability makes the parties liable to pay the sum certain in money stated in the instrument.
While warranties are affirmations of fact on the part of the parties that impose no direct obligation to pay in the
absence of breach thereof.

In case of breach of warranties, the person who breached the same may (1) either be liable; or (2) he may be barred
 from asserting a particular defense.

Unlike secondary liability which requires a notice of dishonor, an action based on breach of warranty is not so
conditioned, the latter occurring as it does at the time of the transfer, may be brought at any time.

C. LIABILITY AND/OR WARRANTIES OF PARTIES

1. Maker – primary and unconditional. 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.
2. Drawer – secondary liability. But the drawer may insert in the instrument an express stipulation negating or limiting
is own liability to the holder (see Sec. 61)
1. Relationship with Drawee – there is a contractual relation between the drawer and the drawee. Thus, a drawer
may have drawn the bill against the drawee because the latter is holding an amount in trust for the drawer, or
the drawee may have extended credit to the drawer and agreed to honor any bill drawn by the drawer against said
drawee.
2. Relationship with Collecting Bank – the privity of contract is between the holder-depositor and the collecting
bank. There is no privity of contract between the drawer and the collecting bank.
3. Acceptor – it is only from the moment the drawee accepts the bill or certifies the check that the drawee becomes
primarily liable. (see Sec. 127). He becomes liable to the holder by his unconditional acceptance (Westminster
Bank vs. Torres & K. Nassor, Inc., GR No. L-38139; Oct. 27, 1932)

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.

3. Indorsers – secondary liability.

Order of liability: 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

Qualified Indorser and persons who negotiate by mere Delivery:

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

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate
transferee.

General Indorser: Every indorser who indorses without qualification, warrants to all subsequent holders in due
course: same as a to c above for qualified indorsers, and as a fourth warranty - that the instrument is, at the
time of his indorsement, valid and subsisting.

In addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

Accommodation Party: He receives no part of the consideration for the instrument but assumes liability to the other
parties thereto. He is liable to a holder for value as if the contract was not for accommodation. It is not a valid
defense that the accommodation party did not receive any valuable consideration. Nor is it correct to say that the
holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that
the indorser was only an accommodation party.

VII. DEFENSES

A. REAL AND PERSONAL DEFENSE DISTINGUISHED

Real Defenses may be raised against all holders even against a holder in due course and attaches to the instrument itself.
Personal Defenses (also called equitable defenses) may be raised only against holders who are not holders in due course
which are brought out of conduct of persons and makes it inequitable to impose payment.

REAL DEFENSES AND PERSONAL DEFENSES

REAL DEFENSES PERSONAL DEFENSES

Minority (available only to the minor)
Forgery
Incomplete and Undelivered Instrument
Material Alteration
Fraud in Factum or in Esse Contractus
Ultra Vires act of Corporation
Illegality – if declared void for any purpose
Vicious Force or Violence
Want of authority
Prescription
Discharge in Insolvency
Failure or Absence of Consideration
Illegal Consideration
Complete but Undelivered Instrument
Non-Delivery/Conditional Delivery of a Complete Instrument
Fraud in Inducement
Filling up blank not within authority
Filling up blank beyond reasonable time
Duress or Intimidation
Transfer in breach of faith
Mistake
Insertion of wrong date
Ante-dating or Post-dating for illegal or fraudulent purpose

B. REAL DEFENSES
1. MINORITY - the defense of minority is real and may be enforced against all holders but is only available to the minor
himself.

2. ULTRA VIRES ACTS - are acts done beyond the power conferred upon a corporation by law and such want of authority may
be raised as a real defense but the negotiation of the corporation may pass title to the instrument.

3. NON-DELIVERY OF INCOMPLETE INSTRUMENT - Where an incomplete instrument has not been delivered, it will not, if completed
and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature
was placed thereon before delivery.

4. FRAUD IN FACTUM (or Fraud in execution or Fraud in esse contractus) - It is present when a person is induced to sign
an instrument not knowing its character as a note or a bill. The person signing does not know that he is signing a
negotiable instrument and may be used as a defense even against a holder in due course.

5. FORGERY AND WANT OF AUTHORITY - When a signature is forged or made without the authority of the person whose signature
it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority

A forged signature, whether it be that of the drawer, maker, payee or any other party, is wholly inoperative and no one
can gain title to the instrument through such forged signature against parties prior to the forgery.

a. Forgery of Maker’s Signature – the maker is not liable to all subsequent parties whether the instrument is an order
or bearer instrument. However, indorsers after the forgery are still secondarily liable to the holder by virtue of
their warranty.

b. Forgery of Indorser’s Signature in a promissory note payable to ORDER – Where the instrument of the payee is forged
in a note payable to order, the instrument cannot be enforced against the payee and the maker (parties prior to the
forgery). But the indorsers after the forgery are liable because they warrant that they have good title to the
instrument.

Example: M made a note payable to the order of P who indorsed it to A. F stole the note and indorsed it to C who
indorsed it to D, present holder.

1. D, even if he is a holder in due course, cannot recover from parties prior to the forgery. Thus, he cannot
recover from A, P and M. Because F forged the signature of A, D did not acquire any right against A, P and M
because A did not transfer his right over the instrument;
2. D, however, can enforce the instrument against C, who is an indorser after the forgery and is secondarily liable
to subsequent parties due to their warranties;
3. Later on, C can recover what he paid from the forger, F, who becomes principal debtor because of his wrongful
act of forging a signature in the note.
4. A, whose signature was forged, has a remaining equity of ownership, hence, his right to recover from either M
who is still primarily liable or P who is secondarily liable in case M dishonors the note.

c. Forgery of Indorser’s Signature in a promissory note payable to BEARER – the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, the maker may still be liable to a holder in due course even if
an indorsement was forged after the issuance of the note since according to Sec. 60 he is to pay the instrument
“according to its tenor” and considering that the “tenor” of the instrument is that he engages to pay any bearer of
the instrument. However, if the holder is not a holder in due course, the person whose signature is forged may raise
the defense of non-delivery of a complete instrument.

Example: M made a note payable to P or bearer, P delivered the note to A, who indorsed it specially to B. F stole
the note and forged B’s signature and later on indorsed it to C, who in turn delivered it to H.

1. H can collect from M since the liability remains that he will pay the bearer of the instrument.
2. P, A and B cannot be liable since under Sec. 40, they will only be liable to those who can trace their title to
the indorsements, notwithstanding the fact that B’s signature was forged.
3. If, however C indorsed it to H, a holder in due course, the latter may recover from A considering that he can
trace his title to A. But B, whose signature was forged, may raise the defense of forgery even against a holder
in due course.
4. If H is not a holder in due course, M, A and B may raise the defense of non-delivery of a complete instrument
as a defense.

d. Forgery of Drawer’s Signature – barring gross negligence on the part of the drawer where his signature is forged,
he is not liable whether or not the instrument is payable to bearer or order because the drawer was never a party
to the instrument – he did not promise to pay anybody.

e. Forgery of Indorser’s Signature in a bill of exchange payable to ORDER – subsequent holders cannot enforce payment
against the drawee, drawer, payee or the indorser whose signature was forged, or those parties prior to the forged
indorsement. Indorsers AFTER the forgery are still secondarily liable because of their warranties. See BDO vs.
Equitable Banking Corp

f. Forgery of Indorser’s Signature in a bill of exchange payable to BEARER – same rule with bearer promissory note.

g. Situation with a COLLECTING BANK

1. Payee can claim against Collecting Bank – a payee whose signature is forged may directly proceed against the
collecting bank (Westmont Bank vs. Eugene Ong);
2. Drawer and Collecting Bank – the drawer cannot opt to recover from the collecting bank since there is no privity
of contract between him and the collecting bank (Associated Bank vs. CA);
3. Warranty of Collecting Bank
 • The collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held
liable therefor. (Traders Royal Bank vs. RPN);
• An EXCEPTION is when the issuance of the check itself was attended with negligence.
• Collecting Bank, for having indorsed the checks, is solely liable when the checks were deposited in an
account other than that of the payees on the strength of forged instruments (Republic Bank vs. Ebrada; BDO
vs. EBC; Traders Royal Bank vs. RPN);
• In other cases, the collecting bank and the drawee bank were made to share in the liability because of the
relative negligence that they exhibited (BPI vs. CA);

4. Recourse of Collecting Bank – the collecting bank may recover from its depositor who had not given value for
the money paid to him.

6. MATERIAL ALTERATION - A material alteration is only a partial real defense because the holder in due course can enforce
it according to its original tenor.

Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided,
except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.

But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its original tenor.

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.

C. PERSONAL DEFENSES

1. ANTEDATING OR POST-DATING - The instrument is not invalid for the reason only that it is ante-dated or post-dated,
provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery.

2. INSERTION OF A WRONG DATE - Where an instrument expressed to be payable at a fixed period after date is issued undated,
or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein
the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date
does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted
is to be regarded as the true date.

3. FILLING UP BLANKS BEYOND AUTHORITY (INCOMPLETE BUT DELIVERED INSTRUMENTS)

a. Filling up in excess of the authority given as provided in Sec. 14 is only a personal defense.
b. Signed blank piece of paper – (1) there must delivery of the instrument to another person; (2) the paper that was
delivered was a blank paper containing the signature of the person who will deliver; and (3) there must be intention
to convert it to a negotiable instrument.

4. SIMPLE FRAUD, DURESS, INTIMIDATION, FORCE OR FEAR, ILLEGALITY OF CONSIDERATION, BREACH OF FAITH
a. DURESS AND INTIMIDATION
1. Generally, duress and/or intimidation exerted against a person gives the latter a personal defense and is
available even if there is some form of consideration.
2. To constitute duress, there must be an actual or threatened exercise or power possessed by the party benefited
thereby, for the purpose of obtaining the note (or bill), such as to deprive the maker of the quality of mind
essential to making of a contract.
3. Duress is relative, hence threats to a feeble and old person might be duress to one while it may not be so to
another.
4. Duress is a real defense if it is vicious or if it is what is referred to as duress amounting to forgery, like
when a person who exerted the same is practically writing the note itself by holding the hands of another.
b. ILLEGALITY
1. Generally, illegality of the transaction that gave rise to a particular transaction is only a personal defense.
For example, if a check was issued as payment for marijuana, the transaction involved is illegal but the same
cannot be raised against a holder in due course.
2. Exception to the rule is when the law which declares the transaction or document issued in connection thereto
is void against any party.

VIII. ENFORCEMENT OF LIABILITY

A. PARTIES PRIMARILY AND SECONDARILY LIABLE

As to persons primarily liable (i.e., maker and acceptor), presentment for payment will be done to enforce liability,
unless it is excused. Note that the maker and acceptor have already undertaken that they will pay according to the
instrument’s tenor or the tenor of acceptance, respectively.

B. GENERAL STEPS IN ENFORCING SECONDARY LIABILITY

1. Promissory Notes

a. Presentment for payment must be made within the required period to the maker;
 b. Notice of dishonor should be given, if promissory note is dishonored by non-payment by the maker, unless it is
excused;

2. Bills of Exchange

a. Presentment for Acceptance – must be made:

i. 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
ii. Where the bill expressly stipulates that it shall be presented for acceptance; or
iii. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

ACCEPTANCE OF A BILL is the signification by the drawee of his assent to the order of the drawer. The acceptance
must be (1) in writing and (2) signed by the drawee. (3) It must not express that the drawee will perform his
promise by any other means than the payment of money.

Kinds of Acceptance:
i. Conditional – payment by the acceptor is dependent on the fulfillment of the condition.
ii. Partial – acceptance to pay a part only of the amount for which the bill is drawn
iii. Local – acceptance to pay at a particular place.
iv. Qualified as to time
v. Acceptance of some, on or more of the drawees but not of all

Unqualified acceptance: 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 a drawer or indorsee receives notice of a qualified acceptance he must, within a reasonable time, express his
dissent thereto or he will be deemed to have assented thereto.

When Presentment for Acceptance is Excused - Presentment for acceptance is excused and a bill may be treated as
dishonored by non-acceptance in either of the following cases:
i. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract
by bill.
ii. Where, after the exercise of reasonable diligence, presentment cannot be made.
iii. Where, although presentment has been irregular, acceptance has been refused on some other ground.

b. Notice of Dishonor
c. Presentment for Payment - In presentment for payment, the holder exhibits the instrument to the maker or the acceptor
to demand payment of the amount reflected in the negotiable instrument or whatever balance that is due.

When Presentment is NOT NECESSARY to charge liability:

i. Drawer: where he has no right to expect or require that the drawee or acceptor will pay the instrument
ii. Indorser – when the instrument is made or accepted for his accommodation and he has no reason to expect that
the instrument will be paid if presented.

When Presentment for payment is excused:

i. Where, after the exercise of reasonable diligence, presentment cannot be made;
ii. Where the drawee is a fictitious person;
iii. By waiver of presentment, express or implied.

C. DISHONOR

Dishonored by Non-Acceptance - A bill is dishonored by non-acceptance:

1. When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot
be obtained; or
2. When presentment for acceptance is excused and the bill is not accepted.

Dishonored by Non-Payment - The instrument is dishonored by non-payment when:

1. It is duly presented for payment and payment is refused or cannot be obtained; or
2. Presentment is excused and the instrument is overdue and unpaid.

Notice of Dishonor - when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of
dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given
is discharged.

Who should give notice:

1. The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might
be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party
to whom the notice is given.
2. Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all
prior parties who have a right of recourse against the party to whom it is given.
3. Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder
and all parties subsequent to the party to whom notice is given.

EXAMPLE: If M issued a note to P or his order, who indorsed it to A, A to B, B to C, C to D, present holder, and M
dishonors the instrument, D may notify C, who in turn may notify B, A and P. B may notify A and P and A may notify
P.
 If D gave notice of dishonor to P, A, B and C need not notify P, because the notice by the holder inures to the
benefit of all prior parties who have the right of recourse against the party to whom it is given.

On the other hand, if D notified only C but C, in turn, notified P, A and B; D can already hold P, A and B liable
because notice by an indorser inures to the benefit of the holder. Additionally, P need not be notified by A and B
because the notice given by C inures to the benefit of all parties subsequent to the party to whom notice is given.

Waiver of Notice - Notice of dishonor may be waived either before the time of giving notice has arrived or after the
omission to give due notice, and the waiver may be expressed or implied.

Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above
the signature of an indorser, it binds him only

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.

PROTEST is a formal statement in writing made by a notary public at the instance of the holder declaring that the
instrument has been presented for payment or for acceptance but the same was dishonored.

When Necessary:
a. In case of a foreign bill dishonored by non-acceptance or non-payment
b. If a stranger to a bill will accept the instrument for honor
c. If the bill will be presented for payment to acceptor for honor or referee in case of need; and
d. When the bill is dishonored by the acceptor for honor
.

IX. DISCHARGE

Discharge means release from further liability, obligation, or from the binding effect of the negotiable instrument.
1. As to the paper itself, it puts an end to it as a contractual obligation;
2. As to the parties to the instrument, it operates as a release of some or all of them from further obligation and
liability under the instrument although the instrument may not be discharged, as where only part of the obligors
are released.

A. HOW INSTRUMENT IS DISCHARGED - A negotiable instrument is discharged:

1. By payment in due course by or on behalf of the principal debtor;
2. By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation;

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.

a. By Whom Made:
1. Primary Party Liable, i.e., a maker or acceptor;
2. Surety for the principal debtor, signing as a secondary party;
3. A person paying “on behalf of the principal debtor” also discharges the instrument under the principles of
the law on agency;

b. Payment by Person Secondarily Liable does not discharge the instrument; EXCEPT Payment done by
1. Drawer; or
2. Accommodated party

3. By the intentional cancellation thereof by the holder;

The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity.
An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity
of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course
without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily
liable thereon.

Unintentional Cancellation: A cancellation made unintentionally or under a mistake or without the authority of the
holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden
of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without
authority

4. By any other act which will discharge a simple contract for the payment of money;
5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

B. Discharge of Persons SECONDARILY LIABLE - A person secondarily liable on the instrument is discharged:
 1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
4. By a valid tender or payment made by a prior party;
5. By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is
expressly reserved;
6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce
the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against
such party is expressly reserved.

X. CHECKS AND RELATED CRIMES

A. CHECKS DEFINED - 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.

A check is a special kind of bill of exchange, which is unique because:

1. The drawee is a bank
2. It is always payable on demand
3. There is a presumption that the drawer has an account with the bank
4. Death of the drawer, if known to the bank, is a valid ground to dishonor the same.

B. KINDS OF CHECK

1. Cashier’s check – drawn by a bank upon itself, and is acceptance by its issuance. A manager’s check is of the same
nature, although instead of being signed by the cashier, it is the manager who signs the same for the bank.
2. Certified check – drawn by a depositor upon funds to his credit in a bank which is certified by the proper officer
of the bank will be paid when duly presented for payment.
a. Certification is equivalent to acceptance
b. When the holder of the check is the one who procures the certification – the drawer and all indorsers are
discharged from liability
3. Crossed check – done by writing 2 parallel lines diagonally on the top left portion of the check
a. If the name of a company is inserted between the parallel lines, payment can only be made with the intervention
of that company
b. If general:
i. Cannot be encashed and should be deposited only
ii. may be negotiated only once
iii. the crossing serves as a warning that the check has been issued for a specific purpose so that the
holder must inquire if he has received the check pursuant to that purpose.
4. Memorandum check – with the words “memorandum”, “memo” or “mem” written across its face, signifying that the maker
or drawer engages to pay the bona fide holder absolutely without condition concerning its presentment.
5. Traveler’s checks – purchased from banks, express companies, or the like, which can be used like cash upon second
signature by the purchaser.

It has the characteristics of a cashier’s check of the issuer.

It requires the signature of the purchaser at the time he buys it and also at the time he uses it – that is when he
obtains the check from the bank and also at the time he delivers the same to the establishment that will be paid
thereby.

C. COLLECTION OF CHECKS

1. The holder of the check may either present it for payment or he may deposit it in his account with his bank known
as the depositary bank or collecting bank.
2. The depositary bank will then make a provisional credit to his account in the amount of the check.
3. The check thereafter goes through the process of clearing through the “clearinghouse”
4. The clearinghouse is defined as “an association of banks or other payors for the purpose of settling accounts with
each other on a daily basis. Each member of the clearinghouse forwards all deposited checks drawn on other members
and receives from the clearinghouse all checks drawn on it. Balances are adjusted and settled each day.”
5. It is only after the check has been cleared and collected from the drawee bank that final credit is made in the
payee-depositor’s account.
6. The normal bank policy is to disallow withdrawal from the account of the amount covered by the check. IN some cases,
the collecting bank may be held liable for damages if it allows withdrawal of deposit even if the check has not yet
been cleared by the drawee bank.

D. CRIMES INVOLVING CHECKS

1. BOUNCING CHECKS LAW

Elements of Violation of Bouncing Checks Law (BP 22):

1. The making, drawing, and issuance of any check to apply for account or for value;
2. The knowledge* of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of the check in full upon its presentment; and
3. (a) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or (b) would have
been dishonored for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.

*Knowledge of the maker/drawer: The making, drawing and issuance of a check payment of which is refused by the drawee
because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the
check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer
pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of such check
within (5) banking days after receiving notice that such check has not been paid by the drawee.
 EFFECT OF ACQUITTAL ON CIVIL LIABILITY: An acquittal does not entail the extinguishment of the civil liability for the
dishonored checks. An acquittal based on lack of proof beyond reasonable doubt does not preclude the award of civil
damages. (Mateo v. People, GR 200090, March 6, 2013)

PENALTY:
1. Imprisonment – not less than 30 days but not more than 1 year
2. Fine – not less than but not more than double the amount of the check, which fine shall not exceed the amount of
P200,000; or
3. Both, at the discretion of the court.

2. ESTAFA BY ISSUING OR POSTDATING A WORTHLESS CHECK

By post-dating a check, or issuing a check in payment of an obligation when the balance in the account was not sufficient
to cover the amount of the check. The failure of the drawer of the check to deposit the amount necessary to cover his
check within three (3) days from receipt of notice from the bank and/or the payee or holder that said check has been
dishonored for lack of insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or
fraudulent act.

ELEMENTS:
1. Postdating or issuance of a check in payment of an obligation contracted at the time the check was issued;
2. Lack or insufficiency of funds to cover the check; and
3. Damage to the payee thereof.

GOOD FAITH IS A DEFENSE: So that when the accused who issued the check believing that he would be able to make the
corresponding deposit, informed the complainant, when he sensed that he could not make the deposit, not to present the
check to the bank for cancellation, he could not be held liable for Estafa. (See People vs. Villapando) By informing
the payee, there is no deceit. (Firestone Tire and Rubber Co. of the Philippines vs. Ines Chavez)

PRE-EXISTING OBLIGATION: If the check is in payment of a pre-existing obligation there is no deceit and hence, the
crime of Estafa cannot exist.

LIABLE FOR BOTH ESTAFA AND BP 22: Under Sec. 5 of BP Blg. 22, the prosecution thereof shall be without prejudice to any
liability for violation of any provision of the RPC. It is now well settled that a single act can give rise to Estafa and
at the same time to violation of BP Blg. 22.

EXAMPLE (ESTAFA AND BP 22): A drew a check for P10,000 and issued the same to B for the payment of a pre-existing obligation.
B then issued said check to C representing the same to be a good check. The check was later on dishonored for insufficient
funds.

A: would not be liable for Estafa since the check was issued for the payment of a pre-existing obligation. But he is liable
for BP Blg. 22 for the making and issuance of a worthless check.

If, however, C presented the check for cancellation, deposit or encashment on the 91st day from the date indicated thereon,
A would not be liable anymore.