NEGOTIABLE

INSTRUMENTS LAW
Negotiable Instrument
• It is a written contract for the payment of money which
is :
• intended as a substitute for money and
• passes from one person to another as money,
• in such a manner as to give a holder in due course the
right to hold the instrument free from defenses
available to prior parties
Laws governing Negotiable
Instruments
• NIL - For instruments which meet the requisites of
negotiability.

• New Civil Code (NCC) – Applies suppletorily in cases

of assignment and demand for payment of an NIL.

• Code of Commerce (CC) – Applies suppletorily to

NIL in cases of crossed checks.
Characteristics or features of a negotiable
instrument

• Negotiability –
• The note may pass from hand to hand similar to money
so as to give the holder in due course (HIDC) the right
to hold the instrument and collect the sum payable for
himself free from any infirmity in the instrument or
defect in the title of any of the prior parties or defenses
available to them among themselves.
• Accumulation of secondary contracts–
• A characteristic of a negotiable instrument where
additional parties become involved as they are
transferred from one person to another. Once an
instrument is issued, additional parties can become
involved
 Incidents in the life of a negotiable
instrument
1. Issue – first delivery of the instrument to the payee;
2. Negotiation – transfer from one person to another so as
to constitute the transferee a holder;
3. Presentment for acceptance (in certain kinds of
Bills of Exchange) (NIL., Sec. 143)
4. Acceptance – written assent of the drawee to the order;
5.Dishonor by non-acceptance – refusal to accept by
the drawee;
6. Presentment for payment – the instrument is
shown to the maker or drawee/ acceptor for him to pay;
7. Dishonor by non-payment – refusal to pay by the
maker or drawee/ acceptor
8. Notice of dishonor – notice to the persons
secondarily liable that the maker or the drawee/ acceptor
refused to pay or to accept instrument;
9. Protest
10. Discharge
Negotiable Instruments are not legal
tender
• Negotiable instruments are neither money nor legal
tender; they are mere substitutes for money (NCBA,
Sec. 60).
• GR: The delivery of a negotiable instrument does not
by itself produce the effect of payment
• XPNs: Negotiable instruments shall produce the effect
of payment when:
• When they have been cashed, or when through the fault
of the creditor they have been impaired (NCC, Art.
1249).
• If a check representing demand deposit has been
cleared and credited to the account of the creditor, such
shall be equivalent to delivery to the creditor of cash
(NCBA, Sec. 60).
• Negotiable instruments are used as substitutes for
money, which means :

• When negotiated, negotiable instruments can be

used to pay indebtedness.
Rules governing the use of phrases in the
Negotiable Instruments
• As to promissory note
• The word “promise” need not be used. Any expression
equivalent to a promise is sufficient.
• Mere acknowledgment of a debt is not a promissory
note.
• Language used must indicate a written undertaking to
pay.
• As to bill of exchange
• It must contain an order for payment as distinguished
from a mere request.
• The order is not invalidated because it contains words
of civility. Thus, insertion of polite words like “please”
does not alter the character of the instrument; as long as
the language expresses the drawer’s will that the
money be paid.
Rules of construction in case of
ambiguities in a Negotiable Instrument
• Words prevail over figures.
• If date from which interest is to run is unspecified,
interest runs from the date of the instrument;
• if undated, from the issue thereof.
• If undated, instrument is considered dated as of the
time it was issued.
• Written provisions prevail over printed.
• If there is doubt whether it is a bill or note, the holder may
treat it as either at his election.

• When not clear in what capacity it was signed,deemed

signed as an indorser.

• When two or more persons signed a negotiableinstrument

stating "I promise to pay,"in case of liability, they shall be
deemed to be jointly and severally liable (NIL, Sec. 17).
Factors to determine the negotiability (FRI)

• Words that appear on the Face of negotiable instrument

• Requirements enumerated in Section 1 of NIL
• Intention of the parties by considering the whole of the
instrument.
 BASIS NEGOTIABL NON-
E NEGOTIABL
INSTRUMEN E
T
Governing Law NIL. The Civil Code or
pertinent special
laws should apply
Manner of Can be transferred Can be transferred
Transfer by negotiation or only by
by assignment. assignment
Status of Transferee The transferee can The transferee can
be a holder in due never be a holder in
course if all the due course but
requirements of remains to be an
Section 52 of the assignee.
NIL are complied
with.
Defenses Available Only Real Defenses All defenses
are available against available to prior
a HIDC parties may be raised
against the last
transferee.
 Requisites of Negotiability ( WUPOA)
• It must be in Writing and signed by the maker or drawer;
• Must contain an Unconditional promise or order to pay a
sum certain in money;
• Must be Payable on demand, or at a fixed or determinable
future time;
• Must be payable to Order or to bearer; and
• Where the instrument is Addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty (NIL, Sec.1).
Unconditional promise or order to pay
• An unqualified order or promise to pay is unconditional
though coupled with: An indication of particular fund
out of which reimbursement is to be made or a particular
account to be debited with the amount; or A statement of
the transaction which gave rise to the instrument.

• But an order or promise to pay out of a particular fund is

conditional (NIL, Sec 3).
 Certainty as to sum
• The sum payable is a sum certain within the meaning of this Act,
although it is to be paid: (ISDEA)
• With Interest; or By Stated installments; or
• By stated installments, with a provision upon
• Default in payment of any installment or of interest, the whole
shall become due ( acceleration clause);
• With Exchange, whether at a fixed rate or at the current rate;
• With cost of collection or an Attorney’s fees, in case payment
shall not be made at maturity requires mathematical computation
Payment with interest
• Interest at fixed rate or at increased or reduced rate will
not destroy negotiability because the presence of such
interest does not make uncertain the sum payable.
• In the absence of a date as to which interest is to run, it
shall be from the date of instrument, or in the absence
thereof, at the date of issue. In the absence of interest
rate, it shall be the legal rate.
Payment by installment
• Payment by installment is certain if the dates of each
installment are fixed and the amount to be paid for each
installment is stated
•Discuss the negotiability or
non-negotiability:
• Manila, June 3, 1993 P10,000.00
• For value received, I promise to pay Sergio Dee or
order the sum of P10,000.00 in five (5) installments,
with the first installment payable on October 5, 1993
and the other installments on or before the fifth day of
the succeeding month or thereafter

• (Sgd.) Lito Villa

• A: The instrument is negotiable because it complied
with the requirements provided by section 1 of the NIL.
• The fact that it is payable in installments does not make
the instrument non-negotiable as long as the dates of
each installment is fixed or at least determinable and
the amount to be paid for each installment is stated
• I promise to pay A or bearer the sum of Php100,000 if
A passes the 2012 bar exams.

• NON-NEGOTIABLE. The instrument is not an

unconditional promise or order to pay a sum certain in
money since payment depends upon the happening of
an event.
• I promise to pay A or bearer the sum of Php100.000 on or before
December 30, 2012.
• NEGOTIABLE. There is certainty in payment since it is payable on or
before a fixed or determinable future time specified.
• I promise to pay A or bearer the sum of Php100,000

• NEGOTIABLE. It is a bearer instrument that is payable

upon demand
Effect if a bill or note is payable other than
in money
• GR: The note or bill must be payable in money. If
payable in goods, wares, or merchandise, or in property,
the same is not negotiable.

• XPNs: Negotiability is not affected if the note contains

an additional provision which: (SECo Law)
• Authorizes the sale of collateral Securities in case the
instrument be not paid at maturity; or
• Gives the holder an Election to require something to be
done in lieu of payment of money; or
• Authorizes a Confession of judgment if the instrument
be not paid at maturity; or
• Waives the benefit of any Law intended for the
advantage or protection of the obligor (NIL, Sec. 5).
• A. MP bought a used cell phone from JR.
• JR preferred cash but MP is a friend so JR accepted
MR‘s promissory note for P10,000. JR thought of
converting the note into cash by endorsing it to his
brother KR.
• The promissory note is a piece of paper with the
following hand-printed notation: ― MP WILL PAY
JR TEN THOUSAND PESOS IN PAYMENT FOR
HIS CELLPHONE 1 WEEK FROM TODAY.
• Below this notation MP‘s signature with ―8/1/00 next
to it, indicating the date of the promissory note.
• When JR presented MP‘s note to KR, the latter said it
was not a negotiable instrument under the law and so
could not be a valid substitute for cash.
• JR took the opposite view, insisting on the note‘s
negotiability. You are asked to referee. Which of the
opposing views is correct?
• The view of KR is correct. The note is payable to a
specific person hence it is not negotiable. The law
provides that for an instrument to be negotiable, it must
comply with the requirements of section 1 of the NIL
pertaining to the part that a note must be payable to
order or bearer.
• In the given case, there were no words of negotiability
and it is silent as to whether it is payable to order or
bearer. Hence, the instrument is non-negotiable.
Antonio issued the following instrument:
August 10, 2013 Makati City
P100,000.00
Sixty days after date, I promise to pay Bobby or his designated
representative the sum of ONE HUNDRED THOUSAND
PESOS (P100,000.00) from my BPI Acct. No. 1234 if, by this
due date, the sun still sets in the west to usher in the evening and
rises in the east the following morning to welcome the day.
• (Sgd.) Antonio Reyes
Explain each requirement of negotiability
present or absent in the instrument
• A: The instrument contains a promise to pay and was
signed by the maker, Antonio Reyes (NIL, Sec. 1[a]).
• The promise to pay is unconditional insofar as the
reference to the setting of the sun in the west in the
evening and its rising in the east in the morning are
concerned. These are certain to happen (NIL, Sec. 4[c).
• The promise to pay is conditional, because the money
will be taken from a particular fund, the BPI Account
No. 1234. The instrument contains a promise to pay a
sum certain in money, P100,000.00 . The money is
payable at a determinable future time, sixty days after
August 10, 2013. The instrument is not payable to order
or to bearer
Fictitious-Payee rule
• The fictitious-payee rule contemplates that the payee is
fictitious or not intended to be true recipient of the
proceeds. The check is considered a bearer instrument
negotiable by delivery alone.
• The underlying theory is that the maker of the check
knew that the fictitious payee cannot indorse the
instrument so that he must have intended for it to be
negotiated by mere delivery
Provisions that do not affect the
negotiability of an instrument
• Omission of date
• Non-specification of value given or that any value had
been given
• Non-specification of place where it is drawn or payable
• Bears a seal
• Designation of particular kind of currency in which
payment is to be made. (Sec. 6, NIL.)
• Q: B borrowed Php1 million from L and offered to
him his BMW car worth Php 1 Million as collateral.
• B then executed a promissory note that reads: “I, B,
promise to pay L or bearer the amount of Php1 Million
and to keep my BMW car (loan collateral) free from
any other encumbrance. Signed, B.”

• Is this note negotiable?

• A: NO, since it contains a promise to do an act in addition to the
payment of money.

• NOTE: What will not affect the negotiability of the instrument is an

additional provision which gives an election to require something to be
done in lieu of payment of money.
• A writes a promissory note in favor of his creditor, B. It says: “Subject
to my option, I promise to pay B Php1 Million or his order or give Php1
Million worth of cement or to authorize him to sell my house worth
Php1 Million. Signed, A.” Is the note negotiable?
• A: NO, because the exercise of the option to pay lies
with A, the maker and debtor.

• NOTE: In order not to affect the negotiability of the

instrument, the option must be with the holder/creditor.
Negotiable or Not?
• Postal Money Order

• A certificate of time deposit which states

“This is to certify that bearer has deposited in this bank
the sum of FOUR THOUSAND PESOS (P4,000) only,
repayable to the depositor 200 days after date.”
• Letters of Credit
• Warehouse Receipts
• Treasury warrants payable from a specific fund
• Certificate of Indebtedness
• Electronic messages
• Postal money order is not a negotiable instrument
because, as held in Phil. Education Co. vs Soriano, there
are many restrictions which make them incompatible
with concepts of negotiable instruments, thereby
making the order conditional, in contrast to Sec. 1 of the
NIL. Furthermore, such is governed by postal rules and
regulation and it may only be negotiated once.
• The certificate of time deposit is a negotiable
instrument because it is an acknowledgement in
writing by the bank of the amount of deposit with a
promise to repay the same to the depositor or bearer
thereof at a specific time
• A letter of credit is not negotiable because it is
generally conditional and has limited negotiability - it
is issued in favor of a specific person. But the Supreme
Court held in Lee vs. Court of Appeals, that the drafts
issued in connection with the letters of credit are
negotiable instruments.
• A warehouse receipt is not a negotiable instrument
because the obligation of a warehouseman is not to pay
but to deliver the goods under the warehouse receipt
which fails to comply with the requirements set forth
under Sec. 1 of the NIL. It is merely considered as a
negotiable document that does not result in the
accumulation of contracts.
• A treasury warrant is non-negotiable because it
requires appropriations from the national government
which means that the particular fund may or may not
exists which renders it conditional, thereby non-
negotiable.
• Not negotiable. A certificate of indebtedness merely
acknowledges to pay a sum of money to a specified
persons or entity. Since a certificate of indebtedness
which is not payable to order or bearer but is payable to
a specific person is not negotiable, the assignee takes it
subject to the defect in the title of the assignor. Thus,
when the person who signed the deed of assignment was
not authorized by the board of directors, the assignor
had no title to convey to the assignee
• The electronic messages are not signed by the
investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional
order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account
of the investor- clients; and, they are not payable to
order or bearer but to a specifically designated third
party.
• Thus, the electronic messages are not bills of
exchange
Steps in the issuance of a negotiable
instrument
• The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of NIL.
• Delivery - The transfer of possession, actual or
constructive, from one person to another (NIL, Sec.
191), with the intent to transfer title to payee and
recognize him as holder thereof.
• Q: Jun was about to leave for a business trip. As his usual
practice, he signed several blank checks. He instructed
Ruth, his secretary, to fill them as payment for his
obligations. Ruth filled one check with her name as
payee, placed P30,000.00 thereon, endorsed and
delivered it to Marie. She accepted the check in good
faith as payment for goods she delivered to Ruth.
• Eventually, Ruth regretted what she did and apologized
to Jun. Immediately he directed the drawee bank to
dishonor the check. When Marie encashed the check it
was dishonored.
• A. Is Jun liable to Marie?
• B. Supposing the check was stolen while in Ruth's
possession and a thief filled the blank check, endorsed
and delivered it to Marie in payment for the goods he
purchased from her, is Jun liable to Marie if the check is
dishonored?
• A. YES. When a delivered instrument is wanting in any
material particular (NIL, Sec. 14), the person in
possession thereof has prima facie authority to complete
it by filling up the blanks.
• But if it was not filled up strictly in accordance with the
authority given, it cannot be enforced against any
person who became party thereto prior to its completion.
• However, if it is negotiated to a holder in due course,
then it is valid and effective for all purpose in his hands
because the defense of not filling it up in accordance
with the authority given is only a personal defense that
cannot be raised against a holder in due course. Based
on the foregoing, Jun is liable to Marie, being a holder
in due course, for the incomplete instrument which he
delivered to Ruth.
• B. NO. The check is an incomplete instrument not
delivered in contemplation of law. An incomplete
instrument not delivered is not a valid contract in the
hands of any holder as against any person whose
signature was placed thereon before delivery. As such,
Jun is not liable to Marie since he does not assume any
responsibility whatsoever upon the said check
 INSERTION OF DATE
GR: The date is not essential to the negotiability of the instrument
(not one of the requirements under Sec. 1).
• XPNs: Date is important to determine maturity:
• Where the instrument is payable within a specified period after date,
or after sight.
• When the instrument is payable on demand, date is necessary to
determine whether the instrument was presented within a
reasonable time from issue, or from the last negotiation.
• When the instrument is an interest-bearing one, to determine when
the interest starts to run.
Ante-dating or post-dating an instrument
• If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided it
is not done for illegal or fraudulent purpose
Q: Can a bill of exchange or a promissory note qualify
as a negotiable instrument if:
• A. it is not dated;
• B. or the day and the month, but not the year of its
maturity, is given; or
• C. it is payable to ―cash
• D. it names two alternative drawee
• A. YES. Date is not an essential requirement for the negotiability of an
instrument as provided for in section 1 of the NIL.

• B. NO. Since the year is not determined, the time for payment is not
determinable.
• C. YES. When the name of the payee does not purport to be the name
of any person, the law provides in section 9d of the NIL that the maker
or drawer intends the same to be payable to bearer, hence the instrument
qualifies as a negotiable instrument.
• D. NO. When the bill is addressed to two or more payees in the
alternative, the law provides in section 128 of the NIL that it is
conditional and therefore non-negotiable.
• Q: To secure certain advances from the bank, X and Y
executed several promissory notes. When the
obligation became due, X and Y failed to pay the same
despite repeated demands.
• To evade their liability, they claimed that they signed
the promissory notes in blank and they had not
received the value of said notes. Is their defense
tenable?
• A: NO. It is no defense that the promissory notes were
signed in blank as Section 14 of the Negotiable
Instruments Law concedes the prima facie authority of
the person in possession of negotiable instruments to
fill in the blanks
Effect if a completed instrument was
negotiated to a holder in due course
• After completion, the completed instrument which was
subsequently negotiated to an HIDC, is valid and effectual for
all purposes in his hands, and he may enforce it as if it had been
filled up strictly in accordance with the authority given and
within a reasonable time .
• NOTE: Hence, the defense that the blanks were filled up
beyond the authority given and/ or beyond the reasonable time,
is not available as against a HIDC. This defense is merely a
personal one.
Non-delivery of complete instrument is a
personal defense.
• Lorenzo signed several blank checks instructing Nicky, his
secretary, to fill them as payment for his obligations. Nicky
filled one check with her name as payee, placed P30,000.00
thereon, endorsed and delivered it to Evelyn as payment for
goods the latter delivered to the former. When Lorenzo found
out about the transaction, he directed the drawee bank to
dishonor the check. When Evelyn encashed the check, it was
dishonored. Is Lorenzo liable to Evelyn?
• YES. This covers the delivery of an incomplete
instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was prima
facie authority on the part of Nicky to fill-up any of the
material particulars thereof. Having done so, and when
it is first completed before it is negotiated to an HIDC
like Evelyn, it is valid for all purposes, and she may
enforce it within a reasonable time, as if it had been
filled up strictly in accordance with the authority given.
• Q: AX, a businessman, was preparing for a business trip
abroad. As he usually did in the past, he signed several checks
in blank and entrusted them to his secretary with instruction to
safeguard them and fill them out only when required to pay
accounts during his absence.
• OB, his secretary, filled out one of the checks by placing her
name as the payee. She filled out the amount, endorsed and
delivered the check to KC, who accepted it in good faith for
payment of gems that KC sold to OB. Later, OB told AX of
what she did with regrets. AX timely directed the bank to
dishonor the check. Could AX be held liable to KC? Answer
and reason briefly
• A: YES. AX could be held liable to KC.
• This is a case of an incomplete check, which has been
delivered. Under Section 14 of the NIL, KC, as a holder
in due course, can enforce payment of the check as if it
had been filled up strictly in accordance with the
authority given by AX to OB and within a reasonable
time.
• PN makes a promissory note for P5,000.00, but leaves
the name of the payee in blank because he wanted to
verify its correct spelling first. He mindlessly left the
note on top of his desk at the end of the workday.
When he returned the following morning, the note was
missing. It turned up later when X presented it to PN
for payment. Before X, T who turned out to have
filched the note from PN’s office, had endorsed the
note after inserting his own name in the blank space as
the payee.
• PN dishonored the note, contending that he did not authorize
its completion and delivery. But X said he had no
participation in, or knowledge about the pilferage and
alteration of the note and therefore he enjoys the rights of a
holder in due course under the Negotiable Instruments Law.
• A. Who is correct and why?

• B. Can the payee in a promissory note be a “holder in due

course” within the meaning of the Negotiable Instruments
Law (Act 2031)? Explain your answer
• Since the negotiable instrument is still incomplete and
has not yet been delivered, PN is correct in
dishonoring the said instrument.
• Sec. 15 of Act 2031 provides that where an incomplete
instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any
person whose signature was placed thereon before
delivery. Thus, under this section, it is a real defense
that can even be interposed against a holder in due
course.
FORGERY
• It is the counterfeit making or fraudulent alteration of
any writing. It happens when a signature is affixed by
one who does not claim to act as an agent and who has
no authority to bind the person whose signature he has
forged (NIL, Sec. 23).
Burden of proof in proving forgery
• Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery
• Pay to P or order P10,000 30 days after sight.

(Sgd)D, (forged by P)

• To X
• P presented the instrument for acceptance.
• X accepted the instrument without detecting the forgery.
P then indorses the bill to A, A to B, B to C, the present
holder.

• In this case, if after 30 days the holder presented the

instrument to X for payment the latter is liable despite
the forgery, because by preclusion, the acceptor admits
the genuineness of the drawer’s signature (NIL, Sec. 62)
• A payee may sue the collecting bank for the amount of
the checks it paid under a forged indorsement even
when the instrument has not been delivered to the
payee
• The collecting bank is liable to the payee and must bear
the loss because it is its legal duty to ascertain that the
payee’s indorsement (signature), its customer, was
genuine before cashing the check. That there was no
delivery yet and therefore he never became the owner of
the check is immaterial since the payee merely used one
action to reach, by desirable shortcut, the person who
ought in any event to be ultimately liable as among the
innocent persons. The payee is allowed to directly
recover from the collecting bank to simplify proceedings
Effects of forgery
It does not avoid the instrument but only the forged
signature.
The signature is wholly inoperative.
In other words, rights may still exist and be enforced by
virtue of such instrument as to those signatures thereto
are found to be genuine.
• XPNs:
• If the party against whom it is sought to enforce such
right is precluded from setting up forgery or want of
authority (NIL, Sec. 23).
• Where the forged signature is not necessary to the
holder’s title, in which case, the forgery may be
disregarded (NIL, Sec. 48)
Persons precluded from setting up the
defense of forgery
• Those who admit or warrant the genuineness of the
signature such as indorsers, persons negotiating by
delivery and acceptor; (NIL, Sec 56).
• Those who by their acts, silence, or negligence, are
estopped from claiming forgery;
• A holder of a bearer instrument who subsequently
negotiates such instrument with a prior forged
indorsement (forged indorsement is not necessary to his
title it being a bearer instrument).
Cut-off Principle
• In order instruments, parties prior to forgery are
relieved or cut-off of liability. They cannot be held
liable by any holder, including a holder in due course.

• Liabilities of the parties to a negotiable instrument

where an indorsement is forged
• If the instrument is payable to order and the
indorsement of one of the indorsers is forged, C can
enforce the note against X and B but not against M, P or
A, because were it not for the forgery of X the
instrument will not reach the possession of C

• If the instrument is payable to bearer, the indorsement

of X is not necessary to vest title to C because
negotiation on bearer instrument requires only delivery.
Legal consequences when a bank honors
a forged check
• When drawer's signature is forged
• GR: Drawee bank is liable because the bank is bound
to know the signature of its customers and if it pays a
forged check, it must be considered as making the
payment out of its own funds and cannot ordinarily
charge the amount so paid to the account of the
depositor whose name was forged.
• It is also in a superior position to detect the forgery
because it has a specimen of the signature of the maker.
• Lastly, by accepting the instrument, it becomes an
acceptor who admits the genuineness of the drawer’s
signature
• XPN: When the drawer is guilty of negligence, he
should bear the loss.
• He is precluded from setting up forgery because the
proximate cause of the loss is his own negligence
• When the payee’s signature is forged
• GR: Drawee bank is liable because it owes to the
drawer-depositor an absolute and contractual duty to
pay the check only to the person to whom it is made
payable. Drawee bank, in such case, should credit back
and restore to drawer’s account the value of the check
wrongfully encashed
• XPN: When the drawer is guilty of negligence, he
should bear the loss. He is precluded from setting up
forgery because the proximate cause of the loss is his
own negligence
When the indorser’s signature is forged
• GR: Drawee bank bears the loss as it is under strict
liability to pay the check to the order of the payee.
Payment under forged indorsement is not to the
drawer’s order.
• Ensuingly, if the drawee bank pays a check bearing
forged signature of indorser, it does so at its own peril
• However, the drawee bank may pass the liability to the
collecting bank who cannot interpose the defense of forgery.
The collecting
• bank is an indorser who warrants that the instrument is
genuine and in all respect what it purports to be (NIL, Sec.
16). The collecting bank had no right to be paid by the
drawee bank since the forged indorsement is inoperative. The
collecting bank my ultimately recover from the forger

• XPN: When the drawee bank is guilty of negligence, he must

bear the loss
• Q: X Corporation opened an account with Y Bank with
its President and Secretary/Treasurer as signatories.
While they are abroad, several checks bearing their
signatures were presented to and approved by the bank.
The amount of these checks were then debited against
the account of corporation. Upon noticing the deductions
in their account, they requested the bank to credit back
the same amount, claiming that the deductions were
unauthorized and fraudulently made. The bank refused
to restore the amount.
• Who should bear the loss?
• A: As between a bank and its depositor, where the
bank’s negligence is the proximate cause of the loss
and the depositor is guilty of contributory negligence,
the greater proportion of the loss shall be borne by the
bank. The bank was negligent because it did not
properly verify the genuineness of the signatures in the
applications for manager’s checks while the depositor
was negligent because it clothed its
accountant/bookkeeper with apparent authority to
transact business with the Bank and it did not examine
its monthly statement of account and report the
discrepancy to the Bank
• X fraudulently obtained possession of the check and
forged P’s signature and then indorsed and deposited
the check with XYZ bank which honored the check
and placed the amount thereof to his credit. Thereafter,
XYZ Bank indorsed the check to the drawee bank-
ABC bank which paid it and charged the account of
the drawer.
• Illustrate the liability of a drawer and a drawee- bank in
an
• 1) instrument payable to order and in an
• 2) instrument payable to bearer
• in case of a forgery on payee’s signature.
Pay to P or order P10,000

Sgd. D

To ABC Bank
If the instrument is payable to order:
• The drawee bank is liable to the drawer for the amount
of the check and his account cannot be charged because
the indorsement of the payee is a forgery.
• Hence, it is wholly inoperative and therefore, ABC
Bank has no right to ask the drawer for its payment.
• XYZ Bank is however, liable to the drawee bank
because of his warranty as an indorser. (NIL, Sec. 66)

• D, the drawer, is not liable on the check because its

order is to pay P or his order and not to any other
person.
2. If the instrument is payable to bearer:
• ABC Bank, the drawee-bank, may charge the amount
thereof to the account of the drawer because the forged
indorsement did not prevent the transfer of title. The
remedy of the drawer is against the forger.
• Drawer has no cause of action against collecting bank,
since the duty of collecting bank is only to the payee.
• The drawee-bank can recover from the collecting bank
because even if the indorsement on the check
deposited by the bank's client is forged, collecting
bank is bound by its warranties as an indorser and
cannot set up defense of forgery as against drawee
bank .
• P sold to M 10 grams of shabu worth Php5,000.00. As
he had no money at the time of the sale, M wrote a
promissory note promising to pay P or his order
Php5,000.00. P then indorsed the note to X (who did
not know about the shabu), and X to Y. Unable to
collect from P, Y then sued X on the note. X set up the
defense of illegality of consideration. Is he correct?
• A: NO, since X, a general indorser, warrants that the
note is valid and subsisting.
• Q: X entrusted his check books, credit cards,
passbooks, bank statements and cancelled checks to his
secretary.
• He also introduced the secretary to the bank for
purposes of reconciliation of his accounts.
• Subsequently, X’s secretary forged his signature on the
checks and was able to withdraw his money. Is the
drawee bank liable for the amounts withdrawn by the
secretary?
• A: NO, he is precluded from setting up the forgery
due to his own negligence in entrusting to his
secretary his credit cards and check book including
the verification of his statements of account
• Q: The drawer’s signature was forged. There is,
however, a provision in the monthly bank statement that
if the drawer’s signature was forged, the drawer should
report it within 10 days from receipt of the statement to
the drawee. The drawer, however, failed to do so.
• What will be its effect insofar as the drawer’s right is
concerned?
• A: The failure of the drawer to report the forgery within
ten days from receipt of the monthly bank statement
from the drawee bank does not preclude the drawer
from questioning the mistake of the drawee bank
despite the provision
• Q: If forgery was committed by an employee of the
drawer whose signature was forged, does the
relationship amount to estoppel such that the drawer is
precluded in recovering from the drawee bank?
• A: The bare fact that the forgery was committed by an
employee of the party whose signature was forged
can not necessarily imply that such party’s
negligence was the cause of the forgery in the
absence of some circumstances raising estoppel
against the drawer
KINDS OF INDORSEMENT
• Indorsement - It is the signing of the name of the
indorser on the instrument with the intent to transfer
title to the same.

• GR: Indorsement must be of the entire instrument (NIL,

Sec. 32).
• XPN: When the instrument has been paid in part.
• Indorsement to two or more indorsees severally does
NOT operate as a negotiation of the instrument.
• Indorsement should be placed:
• On the instrument itself; or
• On a separate piece of paper attached to the instrument
called “allonge” (NIL, Sec. 31)
Kinds of indorsement
• Special (NIL, Sec. 34) – Specifies the person to whom
or to whose order the instrument is to be payable. It is
also known as specific indorsement, or indorsement in
full.
• An instrument payable to bearer indorsed specially may
nevertheless be negotiated by delivery (once a bearer
always a bearer) (NIL, Sec. 40).
• Blank (NIL, Sec. 34) –Specifies no indorsee.
• Instrument is payable to bearer and may be negotiated by
delivery;

• May be converted to special indorsement by writing over

the signature of the indorser in blank any contract consistent
with the character of indorsement (NIL, Sec. 35).
• Restrictive (NIL, Sec. 36)–When the instrument:

• Prohibits further negotiation of the instrument (it

destroys the negotiability of the instrument);
• Constitutes the indorsee the agent of the indorser;
• Vests the title in the indorsee in trust for or to the use
of some persons.
• Qualified (NIL, Sec. 38) – Constitutes the indorser a
mere assignor of the title to the instrument made by
adding to the indorser’s signature words like, without
recourse, sans recourse or at the indorsee’s own risk
(this serves as an ordinary equitable assignment)

• Absolute – The indorser binds himself to pay:

• Upon no other condition than failure of prior parties
to do so;
• Upon due notice to him of such failure
• Conditional (NIL, Sec. 39)–Right of the indorsee is
made to depend on the happening of a contingent
event. The party required to pay may disregard the
conditions.
• NOTE: The condition refers to the indorsement not on
the instrument itself.
• Joint (NIL, Sec. 41) – Indorsement made payable to 2
or more persons who are not partners.
• All of them must indorse unless the one indorsing has
authority to indorse for the others.
• Irregular (NIL, Sec. 64) – A person who, not
otherwise a party to an instrument, places thereon his
signature in blank before delivery.
• Facultative –Indorser waives presentment and notice
of dishonor, enlarging his liability and his indorsement.
• Successive – Indorsement to two persons or more in
succession. Any of them can indorse to effect
negotiation of the instrument.
RIGHTS OF A HOLDER

• Holder
• The payee or indorsee of a bill or note who is in
possession of it or the bearer thereof (NIL, Sec. 191)
• In general, a holder has the right to sue and to receive
payment (NIL, Sec. 51).
HOLDER IN DUE COURSE (HIDC
To be considered as a HIDC, the requisites under Sec. 52 of the
NIL must be complied with: (COFI)
1. That is Complete and regular upon its face;
2. Became the holder before it was Overdue, and without notice
that it has been previously dishonored, if such was the fact;
3. Took it in good Faith and for value;
4. 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. (NIL, Sec. 52)
R issued a check for P1M which he used to pay S for
killing his political enemy.

• A. Does S have a cause of action against R in case of

dishonor by the drawee bank?

• B. If S negotiated the check to T, who accepted it in

good faith and for value, may R be held secondarily
liable by T?
• A. NO. S does not have a cause of action against R in
case of dishonor by the drawee bank.
• S is not a holder in due course, thus, R can raise the
defense that the check was issued for an illegal
consideration.
• B. YES. R may be held liable by T since T is a holder
in due course of the instrument. The unlawful
consideration of the check is only a personal defense
that cannot be interposed to a holder in due course who
receives the check free from the defect of title of S.
• X borrowed money from Y in the amount of Php 1
Million and as payment, issued a check. Y then
indorsed the check to his sister Z for no consideration.
When Z deposited the check to her account, the check
was dishonored for insufficiency of funds. Is Z a holder
in due course? Explain your answer.
• A: NO. 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. All of the four conditions
must concur in order for a holder to qualify as a holder
in due course.
• In the case at hand, Z did not acquire the instrument for
value. As such she cannot be considered as a holder in
due course.
A holder is presumed to be an HIDC
• GR: Every holder is deemed prima facie to be an HIDC.
• XPN: When it is shown that the title of any person who
has negotiated the instrument was defective. But this is
only as regards a party who became such after the
acquisition of the defective title
 DEFENSES AGAINST THE HOLDER
• The defenses available against the holder are classified as
follows:
• Real or Absolute Defenses – those that are attached to the
instrument itself and are available against all parties, both
immediate and remote, including holders in due course.

• Personal or Equitable Defenses –defenses which are only

available against a holder not in due course. Those which grow
out of the agreement or conduct of a particular person which
renders it inequitable for him, though holding the legal
 REAL DEFENSES (IM In Ultra. AFForD
PODIF)
• 1. Incomplete and undelivered instrument
2. Minority (available only to the minor)
3.Incapacity as far as incapacitated persons are
concerned
4. Ultra –vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration
• 7. Forgery
8. Duress amounting to Forgery
9. Prescription
10. Other infirmities appearing on the face of the
instrument
11. Discharge in insolvency
12. Illegal Contract
13. Fraud in Factum or Esse Contractus
PERSONAL DEFENSES
(InnocentS2 ADD FUn In Fraud)
1. Innocent alteration or spoliation
2. Discharge of party Secondarily liable by discharge of
prior party.
3. Set-off between immediate parties
4.Filling up of blanks not in accordance with the
Authority given
5. Acquisition of instrument by Duress or force and fear;
unlawful means or for an illegal consideration
6.Discharge by payment or renunciation or release
before maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
• Fraud in factum exists in those cases in which a
person, without negligence, has signed an instrument,
but was deceived as to the character of the instrument
and without knowledge of it, as where a note was
signed by one under the belief that he was signing as a
witness to a deed.
• This kind of fraud is a real defense because there is no
contract, since the person did not know what he was
signing
• Fraud in inducement relates to the quality, quantity,
value or character of the consideration of the
instrument. Here, deceit is not in the character of the
instrument but in its amount or terms.
• This exists when a person is induced to sign a note for
the price of a worthless stock which was fraudulently
represented by the payee as to its value. Such type of
fraud is only a personal defense because it does not
prevent a contract