Negotiable Instruments Law
to hold the instrument and collect the sum
I. Introduction to Negotiable
Instruments Law
Negotiable Instruments
- Public instruments
- Notarized (however not indicated by law)
Nature of Negotiable Instruments
A. Money
- It can be considered as substitute for
money, but it cannot be considered as legal
tender.
- Money is valuable, but negotiable
instruments should be freely accepted like
money without question in commercial
transactions.
B. Proof of Ownership of Money or Property
- It is considered as a substitute for money
then this would mean as proof that you
have money because a negotiable
instrument is a substitute for money.
C. Commercial Instruments
- Negotiable papers like checks, constitute
the media of exchange for most
commercial transactions.
D. Commercial Contract
- Negotiable instruments can be used in
commercial obligations.
Features of Negotiable Instruments
a. Negotiability (Sec. 47)
- An instrument negotiable in its origin
continues to be negotiable until it has been
restrictively indorsed or discharged by
payment or otherwise (sec. 47, NIL)
- It is the quality or attribute of a bill or note
that it may be passed on from one person
to another similar to money.
- It gives the holder in due course the right
payable for himself free from infirmity.
b. Accumulation of Secondary Contracts
- It is an important feature because as
negotiable instruments are transferred
from one person to another additional
parties can become involved.
Negotiability v. Validity of Instruments
- A valid instrument is not necessarily
negotiable and a negotiable instrument
may be voidable, unenforceable, or void.
- Negotiable instruments are presumed to
be contracts but not all contracts are
negotiable instruments.
- It is the form of the instrument that
determines if it is negotiable or not.
Kinds of Negotiable Instruments
a. Promissory Notes
- It is an unconditional promise in writing
made by one person to another, signed by
the maker, engaging to pay on demand, or
a fixed or determinable future time, a sum
certain in money to order or to bearer.
Where a note is drawn to the maker’s own
order, it is not complete until indorsed by
him (sec. 184, NIL)
b. Bill of Exchange
- It is an unconditional order in writing
addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable
future time a sum certain in money to order
or bearer.
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 Process of Negotiation

Drawing/Making Issuance Delivery

Acceptance Presentment Payee

Indorsee Negotiation
Payment

Delivery
Indorser
Indorsement
Discharge
with delivery

A. Drawing or Making
- Drawee and maker of the instrument
creates it.
B. Issuance
- First negotiation of the instrument
C. Delivery
- Deliver to payee
- Operative act that transfers ownership
over the instrument
D. Payee
- Has the choice of either presenting the
instrument to the Drawee (for the case of
a bill of exchange) or Maker (for the case of
a promissory note) for acceptance,
payment or discharging of the instrument
or to negotiate the instrument either by
delivery or indorsement with delivery.
-
- The negotiation of the original payee
constitutes a secondary contract.
- Indorsement with delivery would mean
that whoever holds the instrument is
entitled to payment
- Indorsee is new payee who may present
the instrument to the drawer or maker for
acceptance and payment.
E. Discharge
- Once the drawer or maker accepts the
instruments and enacts payment the
instrument is discharged and it loses its
validity.

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 Parties to a Negotiable Instrument
A. According to the Instrument
a. Promissory Note
 Promisor – one who makes the
instrument and one who promises
to pay
 Promisee – one to whose favor the
promise is made
b. Bill of Exchange
 Drawer – primary debtor
 Drawee – person ordered to pay
the payee
 Payee – person to receive payment
B. According to Liability
a. Primary Liability
 one who has the original obligation
to pay
 In a promissory note the promisor
is both the primary debtor and
primarily liable.’
 In a bill of exchange no one is
primarily liable.
 The drawee may either accept or
reject the instrument, if the
drawee rejects then the drawer
becomes liable he is considered
secondarily liable.
**If the drawee accepts the instrument he now
becomes the acceptor only then can he become
primarily liable. If rejected or dishonoured he
becomes still as a drawee but not anymore liable.
b. Secondary Liability
 If the drawee rejects the
instrument the payee may demand
payment from the drawer because
he is secondarily liable.
**If the drawee accepts the instrument he now
becomes the acceptor only then can he become
primarily liable.
Holder in Due Course
Section 52. What constitutes a holder in due
course – A holder in due course is a holder who has
taken the instrument under the following
conditions:
a. That it is complete and regular upon its
face;
 Complete when all the material
particulars are present.
 The taking of an incomplete
instrument raises the question why
is it incomplete.
 If omission is not important it will
not deprive holder to be holder in
due course.
 Alteration, tampering, or erasure
must be visible or apparent for it to
give a sufficient warning to the
holder that he is not a holder in due
course.
b. That he become the holder of it before it
was overdue, and without notice that it
had been previously dishonoured, if such
was the fact;
 An instrument is overdue after its
maturity.
 Date of maturity is fixed therein,
but if on demand then maturity is
upon presentment.
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.
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**A holder is not a holder in due course if he does
not have at least one of the conditions
enumerated in Sec. 52
**A holder is not a holder in due course if an
instrument is payable on demand and is
negotiated an unreasonable length of time after
its issue (Sec. 53).
Rights of a Holder in Due Course
- He may sue on the instrument in his own
name.
- He may receive payment and if the
payment is in due course, the instrument is
discharged.
- He holds the instrument free from any
defect of title of prior parties
- He holds the instrument free from
defenses available to prior parties among
themselves
- He may enforce payment of the instrument
for the full amount thereof against all
parties liable.
Rights of a Holder not in Due Course
- He holds the instrument subject to defects
of the title and defenses of prior parties
- He can only enforce payment depending
on what amount his transferor was entitled
to.
II. Negotiable Instruments
Proper
Section 1. Form of negotiable instruments. – An
instrument to be negotiable must conform to the
following requirements.
a. It must be in writing and signed by the
maker or drawer;
 The document must exist
 Electronic instruments cannot be
negotiable
 Signed by the maker or drawer
 A handwritten statement on the body
of the instrument will be considered as
the maker or drawer’s signature. The
signature is a prima facie evidence of
the intention to be bound as drawer or
maker.
 The instrument need not follow the
language of the law, but any terms are
sufficient which clearly indicate an
intention to conform to the
requirements (Sec. 10, NIL).
o As long as intention of the
parties to make instrument as
negotiable are clear it has force
and effect
o An instrument may be
negotiable though written in
foreign language
o Mere defect does not destroy
negotiability
b. Must contain an unconditional promise or
order to pay a sum certain in money;
 Negotiable instruments are an
absolute undertaking to pay rather
than mere acknowledgment of an
obligation
 Implied promise to pay gives the
instrument effect
 The promise to pay must be
unconditional and not subject to any
condition or contingency to allow
negotiation and to allow circulation of
instrument freely.
 Indication of a particular fund out of
which reimbursement is to be made
(Sec. 3, NIL)
o It is valid because it only
mentions the fund where the
reimbursement comes from
and not the payment itself.
 Indication of a particular fund out of
which payment is to be made (Sec. 3,
NIL)
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 o Conditional because the event does not cure the defect
payment is subject to the (Sec. 4, NIL)
availability of the funds where
the payment is to come from. d. Must be payable to order or bearer;
 Acts addition to payment of money is
generally makes instrument non-  Must contain the words of negotiability
negotiable except;
o Authorizes sale of a e. Where the instrument is addressed to a
COLLATERAL SECURITIES in drawee, he must be named or otherwise
case instrument be not paid at indicated therein with reasonable
maturity; or certainty.
o Authorizes a confession of
judgment if the instrument be Completeness of the Instrument
not paid at maturity; or
o Waives the benefit of any law Material Particulars of an Instrument
intended for the advantage of - An instrument is complete if all MATERIAL
protection of obligor; or PARTICULARS are present.
o Gives the holder an election to - RULES
require something to be done o An instrument must contain all
in lieu of payment of money. material particulars to be
o Any illegal provision or complete
stipulation is still illegal (Sec. 5, o An instrument MUST NOT be
NIL) issued or negotiated if incomplete
 To assure clarity and certainty in o If the instrument is issued or
determining the value the sum certain negotiated while incomplete:
in money must be fixed; with interest at  The TRANSFEROR MUST
a fixed rate; sum paid by instalments REQUIRE THE
should include the due date of each. TRANSFEREE TO
COMPLETE IT;
c. Must be payable on demand, or at a fixed  The TRANSFEREE MUST
or determinable future time; COMPLETE THE
INTRUMENT
 Must be paid at a determinable future  Strictly in
time; accordance with
o At a fixed period after date or the instructions
sight; or AND
o On or before a fixed or  Within reasonable
determinable future time time
specified; or o If the Transferor does not require
o On or at a fixed period after completion, the instrument is
the occurrence of a SPECIFIED INVALID
EVENT CERTAIN TO HAPPEN, o If the Transferee disobeys the
though the time of happening instructions of the Transferor:
is uncertain;  The instrument cannot be
o Payment on contingency is used against any party
non-negotiable, happening of before completion

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  The instrument is not a
valid instrument in the
hands of the transferee
BUT
 If the instrument is later
negotiated to HOLDER IN
DUE COURSE then he can
demand from the parties
primarily and secondarily
liable the full amount in
the instrument.
When is the Instrument Incomplete?
a. Issued undated
- If the instrument expressed to be payable
at a fixed period after date is issued
undated, or when 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
the wrong date does not void 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 true
date (Sec. 13, NIL)
- If the instrument or an acceptance or any
indorsement is dated then the date is prima
facie the true date of the making, drawing,
acceptance, or indorsement (Sec. 11, NIL)
b. Issued ante-dated or post-dated
- Ante-dated – it contains a date earlier than
the true date of issuance.
- Post-dated – it contains a date later than
the true date of issuance.
- An instrument is not invalid if the date was
ante or post-dated as long as it is not for
any fraudulent purpose (Sec. 12, NIL)
c. Issued with blanks
- Two steps in the issuance of a negotiable
instrument:
o Mechanical act of writing the
instrument completely
o Delivery of instrument
- Those with obvious blanks upon issuance
should be filled up
- Complete on its face but written matter
does not fully occupy the paper as to
preclude addition of words. (Sec. 14, NIL)
- Blank check with authority is valid
- Blank check without authority invalid
- RULES if instrument is INCOMPLETE
o Authority to fill up blanks, whoever
is the holder is presumed to have
authority to fill up blanks
o Authority to put any amount, a
signature on a blank paper
delivered in order for it to be
converted into a negotiable
instrument is prima facie authority
to fill it up.
o Instrument may only be enforced
against a party prior to completion
if filled up according to authority
given within a reasonable time.
d. Incomplete instrument delivered
- If undelivered 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
place before delivery (Sec. 15, NIL)
- Completed without authority because
there was no delivery at all
e. Incomplete instrument which is
undelivered
- All negotiable instruments are revocable
until delivery of the instrument for the
purpose of giving effect. For it to be
effectual it must be made either by or
under authority of the party making,
drawing, accepting, or indorsing and that
delivery must be shown to have been
conditional or for a special purpose.
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 - If the instrument is in the hands of a holder
in due course then a valid delivery is
presumed to all parties prior to him.
- If the instrument is no longer in the
possession of a party whose signature is
on the instrument then a valid and
intentional delivery is presumed until
contrary is proved (Sec. 16, NIL).
- Delivery is transfer of possession, actual or
constructive.
- Issue is the first delivery of the instrument.
**Completed and negotiated without authority –
not a valid instrument in the hands of a holder as
against any person who signed the instrument
before delivery.
Material Alteration v. Immaterial Alteration
a. Material Alteration
- Any change in the instrument which affects
or changes the liability of parties in any
way.
- If by a party – discharge instrument
- If by a party but with authority and consent
– do not discharge
- Alteration is apparent – burden is on the
holder to explain the alteration that he had
no part therein.
- Alteration by a stranger – it is called
spoliation and has no effect.
- A material alteration avoids the instrument
in the hands of a holder NOT in due course.
(Sec. 124)
- Alteration is material if a change occurs in
the following:
o The date;
o Sum payable, either for principal or
interest;
o Time or place of payment;
o Number or the relations of the
parties;
o Medium or currency in which
payment is to be made;
o Or which adds a place of payment
where no place of payment was
specified or any change or addition
that alters the effect of the
instrument (Sec. 125, NIL)
Payability of Instruments
When is it payable?
a. Payable on Demand
- When expressed to be payable on demand
or at sight, or on presentation, or in which
no time for payment is expressed. If it is
issued, accepted, or indorsed, when
overdue, it is, as regard the person issuing,
or accepting, or indorsing it, payable on
demand. (Sec. 7, NIL).
- Note stating that it is payable on maker’s
convenience is payable on demand.
b. Payable on Maturity
- If a specific date has be expressed.
To Whom Payable?
a. Payable to Order
- It is payable to order where it is drawn
payable to order of a specified person or to
him or his order. It may be drawn or
payable to the order of –
o A payee who is not maker, drawer,
or drawee; or
o Drawer or maker;
o Drawee;
o Two or more payees jointly;
o One or more several payees;
o The holder of an office for the time
being.
o If the instrument is payable to
order the payee must be named or
otherwise indicated with
reasonable certainty (Sec. 8, NIL)
b. Payable to Bearer
- Payable to bearer –
o Expressed to be so payable;
o Payable to person name therein or
bearer
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 o Payable to the order of a fictitious
name or non-existing person, and
such fact was known to the person
making it so payable;
o The name of the payee does not
purport to be the name of any
person;
o Only or last indorsement is an
indorsement in blank.
**Payable to order can be converted to payable to
bearer, but if it is originally payable to bearer then
it will always be payable to bearer even if
indorsed.
Rules of Construction of Instruments When
Ambiguous
- If sum payable is expressed in words and
figures and there is a discrepancy in the
figures then the words would prevail.
- If the instrument provides for interest
without the date specified then interests’
runs from the date the instrument and if
undated then the day the instrument was
issued.
- If instrument is undated then it is presumed
as dated from the time it was issued.
- If there is conflict between written and
printed provisions, written shall prevail
because of intent of the maker or drawer.
- If instrument is ambiguous and doubt
exists if it is a bill or a note then the holder
may treat it as he chooses.
- If a signature is placed in the instrument
and there is no designation on the capacity
of the signor then he is an indorser.
- If the instrument states that “I promise to
pay” and signed by two or more person
then they are jointly and severally liable.
Rules on Signatures
As a rule, only persons whose signatures appear
on the instrument are liable.
a. Intent to give consent
- Applying the rules of consent with regard
to contracts because negotiable
instruments fall within the law on
contracts.
- Only sign with consent that is valid and this
is not bound by technical rules regardless
of how it appears.
- Consent must be freely, wilfully, and
voluntarily given to be valid.
b. Form of signature
- The form of signature is not important as
long as the person signing the instrument
signed it with the intent of having it bound
to him.
c. Trade or Assumed Name
- Only persons whose signatures appear on
the instrument are liable except persons
who signs in trade or assumed name (Sec.
18, NIL)
- Business name or other names used to
pertain to a trade or business other than
the personal name of the signatory.
- A person who signs in a trade name or
assumed name has the liability of a person
who signed the instrument in his own
name.
- It is necessary that the party intended to be
bound to it.
- Assumed name may refer to an alias, or an
alternative, false or fictitious name.
d. Agency
- It is a contract where one person performs
an act in representation of another. The
agent must disclose identity of his principal
except:
o Causes damage or injury to the
principal
o Puts the principal at risk
o Be in violation of lawyer-client
privilege
o Be in violation of the Data Privacy
Act
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- SPA is given since the execution may be
construed as an act of strict dominion.
- Only persons whose signatures appear on
the instrument are liable except if a duly
authorized agent signs on behalf of the
principal (Sec. 19, NIL)
- Authority of agent must be shown to have
been given orally or in writing.
- Written power of attorney is only an
evidence of authority
e. Signature by Procuration
- Operates as notice that the agent has but
limited authority to sign, and the principal
is bound only in case the agent in so signing
acted within the actual limits of his
authority (Sec. 21, NIL).
- Principal is not bound if agent exceeded his
authority. If agent acted with abuse of his
authority then the abuse is not a defense
against a bona fide holder for value.
- “ultra vires” – beyond authority
- “intra vires” – within authority
f. Signature Despite Want of Capacity
- Indorsement or assignment of the
instrument by a corporation or an infant
passes the property notwithstanding that
from want of capacity the corporation or
infant may incur no liability thereon (Sec.
22, NIL).
- Contracts entered into by minors are
voidable and minors are not bound by the
indorsements that they make.
- A corporation who has acted ultra vires is
not liable.
g. Forgery and its Effects
- If a signature is forged or made without
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, or to enforce payment against
any party 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 (Sec. 23, NIL).
- FORGERY – the counterfeit-making or
fraudulent alteration of a writing, and may
consist in the signing of another’s name or
the alteration of an instrument in the name,
amount, description of the person and the
like with intent to defraud.
- Only the signature is inoperative, but the
instrument remains valid and negotiable.
- Effects of Forged Signature
o By drawer/maker – void
o Acceptor – as if it was not yet
accepted
o Indorser – invalid indorsement
o Produces no right to return or give
a discharge.
- Even a holder in due course is affected.
Accommodation Party
- A party who signed the instrument as
maker, drawer, acceptor, or indorser,
without receiving value of the instrument
and for the purpose of lending his name to
some other person and such
accommodation party is liable on the
instrument to a holder for value even if the
holder at the time of taking the instrument
knew him to be an accommodation party
only (Sec. 29, NIL).
- He does not receive value for the
accommodation.
- Purpose of lending a creditable name to
the maker, drawer, acceptor, or indorser
who may not possess good credit standing.
- Accommodated party is one in whose favor
a person signs an instrument for the
purpose of lending his credit.
Consideration
- Every negotiable instrument is deemed
prima facie to have been issued for a
valuable consideration and every person
whose signature appears on it is a party for
value (Sec. 24, NIL).
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 - Consideration is an inducement to a
contract that is the cause, price or
impelling influence which induces a
contracting party to enter into a contract.
- Maker/Drawer – fulfillment of an
obligation
- Payee – receipt of the amount payable
Value
- 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
(Sec. 25, NIL)
- A valuable consideration need not be
adequate. It is sufficient if it is a valuable
one.
III. Negotiation of Instruments
Process of Negotiation
- An instrument is negotiated when it is
transferred form one person to another in
such a manner as to constitute the
transferee the holder thereof. If payable to
bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the
indorsement of the holder completed by
delivery (Sec. 30, NIL).
- If an instrument is payable to bearer and is
indorsed specially, then it may be further
negotiated by delivery; but the person
specially indorsing is liable as indorser to
only such holders as make title through his
indorsement (Sec. 40, NIL)
- Non-negotiable instruments cannot be
negotiated, but may be transferred by Sale,
Donation, Succession, Assignment, and
other applicable modes of acquisition of
property.
- The title to the money does not pass to
transferee if non-negotiable instruments
has been transferred by negotiation or if
improperly negotiated.
Indorsement of Instruments
- Indorsements must be written on the
instrument itself or upon a paper attached
thereto. The signature of the indorser,
without additional words, is a sufficient
indorsement (Sec. 31, NIL)
- The indorsement of the instrument must
be in its entirety any instrument purporting
to transfer only partial part of the
instrument is void unless the partial
transfer is on account of the remaining
value to be paid (Sec. 32, NIL).
Kinds of Indorsements
1. Special Indorsements
- Indorsements that specifies the name of
the person to whom or to whose order the
instrument is to be payable is a special
indorsement (Sec. 34, NIL).
- It specifies the indorsee and saves the
transferee the use of the instrument.
2. Blank Indorsements
- Indorsements that specifies no indorsee
and an instrument indorsed is payable to
bearer and may be negotiated by delivery
(Sec. 34, NIL).
- No specification of recipient. Transform
instruments to bearer instrument.
3. Restrictive Indorsements
- An indorsement is restrictive if it:
o Prohibits further negotiation of
the instrument
o Constitutes the indorsee the agent
of the indorser
o Vest the title in the indorsee in
trust for or to the use of some
other person
Mere absence of words implying
power to negotiate does not make an
indorsement restrictive (Sec. 36, NIL).
- It is a special indorsement because it
specifies the payee.
- It ends the negotiability of the instrument.
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 4. Qualified Indorsements
- It constitutes the indorser as a mere
assignor of the title to the instrument. It
does not impair the negotiability of the
instrument (Sec. 38, NIL).
- It negates the liability of the indorser.
- It merely transfer the rights of the holder.
- A qualified indorser does not become
secondarily liable.
5. Conditional Indorsements
- An indorsement where the indorser
imposes some other conditions to his
liability or on the indrosee’s right to collect
the proceeds of the instrument.
- It has no effect on the further negotiation
of the instrument and is binding only
between the indorser and indorsee.
- If it is conditional, a party required to pay
the instrument may disregard the
condition and make the payment to the
indorsee or his transferee whether the
condition has been fulfilled or not, but any
person to whom the instrument is
negotiated will hold the same or the
proceeds subject to the rights of the
person indorsing conditionally (Sec. 39,
NIL).
Indorsement of a multi-payee instrument
- If the instrument is payable to two or more
persons and it is payable to order of two or
more payees or indorsees who are not
partners, all must indorse unless one
indorsing has authority to indorse for
others (Sec. 41, NIL).
Indorsement in favor of an Officer
- An instrument drawn or indorsed to a
person as an officer of a bank or
corporation is deemed prima facie payable
to the bank or corporation of which the
person is an officer and may be negotiated
by the bank or corporation or by the officer
(Sec. 42, NIL).
**When the name of the payee or indorsee is
wrongly designated or misspelled, he may indorse
the instrument as described by adding his proper
signature if he/she sees fit (Sec. 43, NIL).
Indorsement of an Agent
- Any person under the obligation to indorse
in a representative capacity, he may
indorse in such terms as to negative
personal liability (Sec. 44, NIL).
Indorsement of a Bill in Set
- A bill in set is one composed of several
parts, each part, being numbered and
containing a reference to the other parts,
the whole of the parts constituting but one
bill.
- If a bill is drawn is set, each part is
numbered and contains reference to the
other parts, the whole of the parts
constitutes one bill (Sec. 178, NIL).
- Purpose is to avoid the difficulties which
would arise in case of loss or miscarriage on
the way of the bill.
- All copies are intended to be part of a
group of a bills on a set.
- If not numbered then you have several bills
of exchange.
- All pieces of the bill of exchange must be
delivered if issued and delivered if
negotiated. If all parts are not delivered on
negotiation the holder may demand it.
- If two or more parts of the set are
negotiated to different holders in due
course, the holder WHOSE TITLE FIRST
ACCRUES is as between holders the true
owner of the bill, but it does not affect the
rights of a person, who in due course
accepts or pays the part first presented to
him (Sec. 179, NIL).
- Where the holder indorses two or more
parts to a different person then he is liable
on each part and every indorser
subsequent to him is liable on the part that
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 they indorsed as if it were all separate bills
(Sec. 180, NIL).
- Acceptable of a bill drawn in sets may be
written on any part and it must be written
ON ONE PART ONLY. If the drawee accepts
more than one part then drawee is liable on
every part as if it were a separate bill (Sec.
181, NIL).
- All documents must be original.
- If one part is paid then all other
instruments are discharged.
- If the acceptor of a bill in set pays without
requiring the part with his acceptance be
delivered up to him and that part is with a
holder in due course upon maturity then he
is liable to the holder in due course (Sec.
182, NIL).
Presumption of Time of Indorsement
- An indorsement is presumed to have been
made at the place where the instrument is
dated (Sec. 45, NIL).
- The place is important if there are different
laws in place such as it was indorsed
abroad.
Dishonor of Instrument
- An instrument can be dishonour if
(promissory note) there was a violation of
the promise to pay or refusal to honor
promise to pay; if (bill of exchange) refusal
of the drawee to consent to the order of
the drawer to pay or dishonor by non-
acceptance.
- If there is refusal of the acceptor to pay
after instrument is accepted then it is
dishonor by non-payment.
Notice of Dishonor
- It should contain:
o Address of the person secondarily
liable
o That instrument is dishonoured
o Demand for payment within 5 days
**actual notification is needed
- An immediate right of recourse/alternative
remedy
- Without notice of dishonor the person
secondarily liable will be discharged.
IV. Presentment of Instruments
Presentment for Payment
- It is meant as the presentment of an
instrument (promissory note or bill of
exchange) to the person primarily liable for
the purpose of demanding and receiving
payment.
- Presentment for payment is not necessary
in order to charge the person primarily
liable on the instrument;
o Presentment and demand for
payment are not necessary in
order to charge the person
primarily liable, the maker or
acceptor because his liability is
absolute.
- If the instrument is payable at a special
place, and he is able and willing to pay it
there at maturity, such ability and
willingness are equivalent to a tender of
payment upon his part;
o The ability and the willingness of
the part of the primary party to pay
there at maturity are equivalent to
a tender or offer of payment on his
part so that if the instrument is not
paid and is overdue, then he will
not be considered in delay and he
will not be liable for costs and
interest, but he is not relieved
from making the payment.
o If presentment is required by the
terms of the instrument the
presentment will not be necessary
to charge the maker or acceptor.
The failure to make presentment
will not put him in default.
o For notes payable on demand,
presentment for payment is not
12 | P a g e
 necessary to charge the person may be done on the next
primarily liable. succeeding secular or business day
o If presentment is not made, the (Sec. 194, NIL).
debt is not affected, the risk is - Date of presentment would depend on
assumed by the holder in case whether the instrument is payable at a
presentment is not made within a fixed or determinable future time.
reasonable time. o If payable at a fixed or
- Presentment for payment to person’s determinable future time,
secondarily liable is necessary. presentment must be made on the
o The drawer and indorsers require date it falls due without period of
presentment because they only grace. Presentment made before
undertake to pay when the maturity is not effective. Notice to
instrument is dishonored. the makers before the date of
Presentment and demand for maturity as reminder is not proper
payment must first be made upon presentment.
the person primarily liable. o If instrument is payable on demand
o If presentment is not made for a it would depend on the note:
person secondarily liable then he is
discharged from liability. If the Promissory Note Bill of Exchange
instrument is not presented to the - Presentment is - Presentment
person primarily liable then the made to the for payment to
drawer and indorsers are maker within a the drawee or
discharged from liability unless the reasonable acceptor must
presentment is excused. time after its be made
issue and within a
delivery. reasonable
Presentment, when to be made
time after the
- Where the instrument is not payable on
last
demand, presentment must be made on negotiation of
the day it falls due. Where it is payable on the
demand, presentment must be made instrument.
within a reasonable time after its issue,
except in the case of a bill of exchange, How is presentment made?
presentment for payment will be sufficient - Presentment for payment, to be sufficient,
if made within a reasonable time after the must be made –
last negotiation (Sec. 71, NIL). o By the holder, or by some person
o In determining reasonable time or authorized to receive payment on
an unreasonable time, regard is to his behalf;
be had to the nature of the  The holder as the owner
instrument the usage of trade or should present. Any person
business with respect with such authorized by the holder is
instruments, and the facts of the a proper party to present
particular case (Sec. 193, NIL). the instrument and the
o Where the day, or the last day, for authorization need not be
doing any act herein required or in writing.
permitted to be done falls on  Crossing a check means
Sunday or on a holiday, the act that the drawer intends the
13 | P a g e
 same for deposit only by
the rightful person.
o At a reasonable hour on a business
day;
 The term reasonable hour
on a business day means
during business hour.
 If the bank, then
banking hours;
 If place of business
then business
hours;
 If residence, then
usual hours of
rising and retiring.
o At a proper place as herein
defined;
 Presentment must be
made at the proper party
to the maker in case of
promissory note, or to the
acceptor in case of an
accepted bill. If check is
payable on demand,
presentment must be
made to the drawee
although he is not liable on
the bill.
o To the person primarily liable on
the instrument, or if he is absent or
inaccessible, to any person found
at the place where the
presentment is made (sec. 72, NIL).
 If person primarily liable is
absent or inaccessible,
presentment is made to
any person of sufficient
discretion at the proper
place of presentment.
- Presentment for payment is made at the
proper place:
o Where a place of payment is
specified in the instrument and it is
there presented;
o Where no place of payment is
specified, but the address of the
person to make the payment is
given in the instrument and it is
there presented;
o Where no place of payment is
specified and no address is given
and the instrument is presented at
the usual place of business or
residence of the person to make
payment;
o In any other case if presented to
the person to make payment
wherever he can be found, or if
presented at his last known place
of business or residence (Sec. 73,
NIL).
- Proper place of payment is the
enumeration specified in the order of
enumeration.
- Presentment of a note payable at a
specified place where the payee resides, at
a different place which was the domicile
and place of business of the maker, is not
sufficient to charge indorsers.
- The instrument must be exhibited to the
person from whom payment is demanded,
and when it is paid must be delivered up to
the party paying it (Sec. 74, NIL).
o The purpose is to enable the
debtor:
 To determine the
genuineness of the
instrument and the
indorsements and the right
of the holder to receive
payment;
 To enable him, upon
payment, to take
possession of it to guard
against a lawsuit by
subsequent holder.
- If the instrument is not exhibited, the
presentment would be ineffectual as the
debtor is entitled to see the instrument and
demand its surrender upon payment.
14 | P a g e
- Presentment without exhibition would be
ineffectual as the debtor is entitled to see
the instrument and demand its surrender.
- Informal demand without presentment is
not sufficient to put the note in dishonor.
- Instrument need not be exhibited if the
make waives the right.
- Where the instrument is payable at a bank,
presentment for payment must be made
during banking hours, unless the person to
make payment has no funds there to meet
it at any time during the day, in which case
presentment at any hour before the bank
is closed on that day is sufficient (Sec. 75,
NIL).
- Where the person primarily liable on the
instrument is dead, and no place of
payment is specified, presentment for
payment must be made to his personal
representative, if such there be, and if,
with the exercise of reasonable diligence
(Sec. 76, NIL).
- Where the persons primarily liable on the
instrument are liable as partners, and no
place of payment is specified,
presentment for payment may be made to
any one of them, even though there has
been a dissolution of the firm (Sec. 77,
NIL).
- Where there are several persons, not
partners, primarily liable on the
instrument, and no place of payment is
specified, presentment must be made to
them all (Sec. 78, NIL).
- Presentment for payment is not required
in order to charge the drawer where he
has no right to expect or require that the
drawee or acceptor will pay the
instrument (Sec. 79, NIL).
- All other parties secondarily liable will be
discharged unless presentment for
payment is made to fasten their liability.
- Neither is presentment required where the
drawer and the drawee is considered a
maker, he is liable without presentment.
- Presentment for payment is not required
to charge the indorsers where the
instrument was made or accepted for his
accommodation and he has no reason to
expect that the instrument will be paid if
presented (Sec. 80, NIL).
- Delay in making presentment for payment
is excused when the delay is caused by
circumstance beyond the control of the
holder and not imputable to his default,
misconduct or negligence. When the cause
of delay ceases to operate, presentment
must be made with reasonable diligence
(Sec. 81, NIL).
- Presentment is not required:
o When after the exercise of
reasonable diligence,
presentment, as required cannot
be made;
o Where drawee is a fictitious
person;
o By waiver of presentment, express
or implied (Sec. 82, NIL).
Presentment for Acceptance
- It is the production or exhibition of a bill of
exchange to the drawee for his acceptance
or payment.
- Presentment for acceptance must be
made –
o 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
o Where the bill expressly stipulates
that it shall be presented for
acceptance; or
o Where the bill is drawn payable
elsewhere than at the residence or
place of business of the drawee.
- In no other is presentment for acceptance
necessary in order to render any party to
the bill liable (Sec. 143, NIL).
- Bills payable on demand or on sight and
time bills or bills payable at a day certain or
15 | P a g e
 at a fixed time after its date, or upon other
certain event need not be presented for
acceptance but only for payment in order
to charge drawer or indorsers.
- The holder of a bill which is required to be
presented for acceptance must either
present it for acceptance or negotiate it
within a reasonable time. If he fails to do
so, the drawer and all indorsers are
discharged (Sec. 144, NIL).
- The drawers and indorsers have a right in
having the bills accepted immediately in
order to shorten the time of payment and
thus put a limit to the period of their
liability.
- Presentment for acceptance must be
made by or on behalf of the holder at a
reasonable hour, on a business day and
before the bill is overdue, to the drawee or
some person authorized to accept or
refuse acceptance on his behalf; and
o Where a bill is addressed to two or
more drawee who are not
partners, presentment must be
made to them all, unless one has
authority to accept or refuse
acceptance for all, in which case
presentment may be made to him
only;
o Where the drawee is dead,
presentment may be made to his
personal representative;
o Where the drawee has been
adjudged a bankrupt or an
insolvent or has made an
assignment for the benefit of his
creditors, presentment may be
made to him or his trustee or
assignee (Sec. 145, NIL).
V. Acceptance of Instruments
Acceptance
- Consent of the drawee to the order of the
drawer to pay.
- The act by which the drawee manifests his
consent to comply with the request
contained in the bill of exchange directed
to him and it contemplates engagement or
promise to pay.
- Acceptance only applies to a bill of
exchange and not a promissory note.
When acceptance must be made
- The drawee is allowed 24 hours after
presentment in which to decide whether or
not he will accept the bill; but the
acceptance, if given, dates as of the day of
presentation.
Requisites of Acceptance
 It must be in writing
o Acceptance made orally is not
binding on the drawee.
o It must be written it is the
sound public policy requires
some substantial and tangible
evidence of the contract and
more reliable in its nature than
the statement or recollection
of witnesses.
 Signed by the drawee
o It is also required that the
acceptance must be signed by
the drawee, without the
signature he would not be
liable.
 Express a promise to pay money
o The acceptance must be
expressed
 Delivered to the Holder
o The acceptance is still
incomplete until the acceptor
has delivered the bill back to
the holder. Before delivery the
acceptor may revoke or cancel
his acceptance.
16 | P a g e
How made?
- The acceptance of a bill is the signification
by the drawee of his assent to the order of
the drawer. The acceptance must be in
writing and signed by the drawee. It must
not express that the drawee will perform
his promise by any other means than the
payment of money (Sec. 132, NIL).
- Acceptance is usually made by writing
across the face of the instrument the word
“ACCEPTED” under which the drawee
signs his name, with the date also written.
Points to Remember
 Civil capacity
 Rule of consent shall generally apply
 Acceptance must be written and
signed
 Most promise the payment of money
 Express and never implied acceptance
 Drawee must act on the instrument
within 24 hours or any period of time
granted.
IMPLIED ACCEPTANCE IS NOT ALLOWED
- Acceptance is the consent of drawee to
drawer’s order to pay another person.
- If the contract involves a 3rd person who
must not be affected by any issue between
the drawer and drawee.
- The bill of exchange being an order to pay,
then the law must protect the payee from
any disagreement between the drawer and
drawee.
- The acceptance of instrument must be
definite and unequivocal for protection
and benefit of the payee.
Express v. Implied Acceptance
- If acceptance is written on paper other
than the bill itself, it does not bind the
acceptor except in favor of a person to
whom it is shown and who, on the faith
thereof, receives the bill for value (Sec.
134, NIL).
- If the acceptance is written on a paper
other than the bill itself, in order to bind the
acceptor: 1) The acceptance be shown to
the person to whom the instrument is
negotiated; and 2) such person must take
the bill for value on the faith of such
acceptance.
- An unconditional promise in writing to
accept a bill before it is drawn is deemed
an actual acceptance in favor of every
person who, upon the faith thereof,
receives the bill for value (Sec. 135, NIL).
- The promise to accept a future non-
existing bill must be unconditional and in
writing.
- Where the drawee to whom the bill is
delivered for acceptance destroys the
same, or refuses within 24 hours after such
delivery, or within such other period as the
holder may allow, to return the bill
accepted or non-accepted to the holder,
he will be deemed to have accepted the
same (Sec. 137, NIL).
- Mere retention without refusal to return
for more than 24 hours constitutes
constructive acceptance.
- If a bill is not accepted within the
prescribed time, the holder must treat it as
dishonoured to preserve his rights of
recourse against secondary parties.
KINDS OF ACCEPTANCE
Constructive Acceptance
- No acceptance of instrument
- Drawee actually rejects the instrument and
in rejecting the instrument, payee will
suffer damages thus the drawer is liable
- Constructive acceptance is used as a
punishment to the drawee who abuses his
right or authority as payee.
- Despite rejection it is still deemed
accepted.
- There is constructive acceptance if: 1)
Where the drawee to whom a bill is
delivered for acceptance destroys it; 0r 2)
17 | P a g e
 Where the drawee refuses, within 24 hours
after delivery or within such period as is
given to him, to return the bill, accepted or
non-accepted.
- Inaction after 24 hours after valid
presentment.
o Instrument must be in the hands of
the holder
o Instrument must have been
properly presented
o Person to whom the instrument is
presented does not act on the
presentment within 24 hours from
presentment.
- Destroying the bill after valid presentment
o Instrument must be in the hands of
the holder
o Instrument must have been
properly presented
o The person to whom the
instrument is presented wilfully
and voluntarily destroys the
instrument (intention to destroy
instrument)
 if there is no overt act there
is no destruction.
Actual Acceptance
- The bill is accepted by signing the drawee’s
acceptance on the face of the instrument
or done on a separate page.
- Holder has the right to require an
acceptance written on the face of the
instrument or otherwise he may treat it as
dishonoured.
General Acceptance
- Giving total acceptance of the order of the
drawer
- There is no change in the tenor of the
instrument
- Drawee consents to pay to payee full
amount at the time indicated.
Qualified Acceptance
- Changing the tenor of the order of the
drawer because the acceptor is primarily
liable then the acceptor has authority to
alter the instrument.
- Drawee does not fully consent.
- Drawee alters order of drawer
- Qualified as to condition such as partiality
of amount payable, place of payment, and
time of payment.
- Drawee may insert a condition and the
condition must be complied with by the
payee before payment.
- Valid because condition does not appear at
the tenor of the instrument.
- If condition is immoral then it’s as if there
was no condition.
**Qualified Amount Payable
- Drawee may accept only a portion
- If drawer does not have sufficient funds
with drawee
**Place of Payment
- Accept the instrument with requirement
that it will be paid at a particular place
- If drawee is an establishment then at the
business practice.
**Time of Payment
- Particular date and time
- Period of time is required for funds to be
available
- In any other case what drawee expects to
be able to pay the payee only at a
particular date or time?
Is holder bound by qualified acceptance?
No, because the right to require general
acceptance and right to reject qualified
acceptance and drawee does not give general
then the holder may treat the instrument as
dishonoured.
18 | P a g e
Holder takes qualified acceptance effect?
- Parties secondarily liable discharged from
liability.
- Parties secondarily liable if they expressly
authorized the holder to take a qualified
acceptance.
- If not authorized, but they did not object
upon finding out.
VI. Dishonor of Instrument
Concept of Dishonor
- An instrument can be dishonored if
(promissory note) there was a violation of
the promise to pay or refusal to honor
promise to pay; if (bill of exchange) refusal
of the drawee to consent to the order of
the drawer to pay or dishonor by non-
acceptance.
- If there is refusal of the acceptor to pay
after instrument is accepted then it is
dishonor by non-payment.
Kinds of Dishonor
a. Dishonor by Non-Acceptance
- A bill is dishonored by non-acceptance:
o When it is duly presented for
acceptance and such an
acceptance as is prescribed by the
law is refused or cannot be
obtained; or
o When presentment for acceptance
is excused, and the bill is not
accepted (Sec. 149, NIL).
b. Dishonor by Non-Payment
- The instrument is dishonored by non-
payment when:
o It is duly presented for payment
and payment is refused or cannot
be obtained; or
o Presentment is excused and the
instrument is overdue and unpaid
(Sec. 89, NIL).
Effect of Dishonor
- When a bill is dishonored by non-
acceptance, an immediate right of
recourse against the drawer and indorsers
accrues to the holder and no presentment
for payment is necessary (Sec. 151, NIL).
- If the bill was dishonored then the holder
may immediately proceed against the
drawer and indorsers for the value of the
bill without waiting for the date of
maturity.
- Payment can no longer be expected after
acceptance has been refused.
- When the instrument is dishonored by
non-payment, an immediate right of
recourse to all parties secondarily liable
thereon accrues to the holder (Sec. 84,
NIL).
- If the instrument is dishonored by non-
payment, the persons secondarily liable
become the principal debtors and the
holder need not proceed against the
person primarily liable.
- The right will ONLY ACCRUE AFTER GIVING
DUE NOTICE OF DISHONOR (Sec. 89, NIL).
- To hold a secondary party liable, the holder
must prove the following; a) presentment
was properly made; b) the primary party
dishonored the instrument; and c) notice
of dishonor was properly given to the
secondary party.
Primary v. Secondary Liability
- The person primarily liable on an
instrument is the person who by the terms
of the instrument is absolutely required to
pay the same. All other parties are
secondarily liable (Sec. 192, NIL).
- The principal and surety are primarily liable.
An accommodation maker is a person
primarily liable even though it is only for
surety.
19 | P a g e
Notice of Dishonor
Concept of a 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 each indorser, and any
drawer or indorser to whom such notice is
not given is discharged (Sec. 89, NIL).
- It is the act of bringing, either verbally or in
writing, to the knowledge of the drawer or
indorser of an instrument, the fact that a
specified negotiable instrument, upon
proper proceedings taken, has not been
accepted or has not been paid and that the
party notified is expected to pay it.
- It informs the parties secondarily liable that
the make or acceptor, as the case may be,
has failed to meet his engagement; and to
advise such parties that they will be
required to make payment.
- Failure to give a notice of dishonor will
discharge any person not notified, but the
person discharged is still liable for breach
of warranties pertaining to the instrument.
- The burden to prove notice is given falls on
the holder.
- Indorsers are entitled to a notice of
dishonor regardless of kind, but a qualified
indorser is not affected by the lack of
dishonor.
- Only the drawer and indorsers or their
agents are entitled to notice of dishonor.
The maker and acceptor do not have to be
notified because they are the very ones
who dishonored the instrument.
Form of Notice
- A written notice need not be signed, and
an insufficient written notice may be
supplemented and validated by verbal
communication. A misdescription of the
instrument does not vitiate the notice
unless the party to whom the notice is
given is in fact misled thereby (Sec. 95,
NIL).
- The notice may be in writing or merely oral
and may be given in any terms which
sufficiently identify the instrument and
indicate that it has been dishonored by
non-acceptance or non-payment. It may in
all cases be given by delivering it
personally or through the mails (Sec. 96,
NIL).
- Notice of Dishonor may be given by
telephone as long as it is clearly shown that
it was truly communicated.
- Contents of a Notice:
o Identity of the Instrument
o The fact that it has been
dishonored by non-acceptance or
non-payment; and
o A statement that the party giving
notice intends to look to the party
addressed for payment.
- Notice of Dishonor may be given:
o By personal delivery; or
o By mail
Defect in Notice
 Lack of signature or insufficiency
o Lack of signature would not
invalidate it and such
insufficiency may be
supplemented by
communication.
 Misdescription of Instrument
o Misdescription as to the
amount, date, or the name of
the parties does not invalidate
a notice of dishonor.
 Lack of Statement of Recourse to
Indorser
o A notice of dishonor need not
state that the sender looks to
the indorser for payment.
To Whom Given?
- Notice of Dishonor may be given either to
the party himself or to his agent in that
behalf (Sec. 97, NIL).
20 | P a g e
- The agent to whom notice is given must be
authorized to receive notice for the drawer
or indorser concerned and not merely an
agent for a specified purpose.
- The agent giving the notice of dishonor
need not be authorized by the principal.
- When any party is dead, and his death is
known to the party giving notice, the
notice must be given to a personal
representative, if there be one, and if with
reasonable diligence he can be found. If
there be no personal representative,
notice may be sent to the last residence or
last place of business of the deceased (Sec.
98, NIL).
- If the party to whom notice must be given
is dead then the notice must be given to his
personal representative provided that:
o His death is known to the party,
giving notice;
o There is personal representative;
and
o If with reasonable diligence the
said representative could be found.
- Notice to a personal representative is not
required if:
o If the death is not known to the
party giving the notice; or
o Although the fact of death is
known, the decedent has no
personal representative; or
o If there be one but with reasonable
diligence, he cannot be found.
- Where the parties to be notified are
partners, notice to any one partner is
notice to the firm even though there has
been a dissolution (Sec. 99, NIL).
- Notice to joint parties who are not
partners must be given to each of them
unless one of them has authority to
receive such notice for others (Sec. 100,
NIL).
- Where a party has been adjudged a
bankrupt or an insolvent, or has made an
assignment for the benefit of creditors,
notice may be given either to the party
himself or to his trustee or assignee (Sec.
101, NIL).
By Whom Given?
- The notice may be given:
o By the holder; or
o Another in behalf of the holder; or
o By a party to the instrument who
may 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; or
o Another person in behalf of such
party (Sec. 90, NIL).
When Drawer does not need to be notified?
- Notice need not be given to the drawer in
the following cases:
o Where the drawer and drawee are
the same person;
o When the drawee is fictitious
person or a person not having
capacity to contract;
o When the drawer is the person to
whom the instrument is presented
for payment;
o Where the drawer has no right to
expect or require that the drawee
or acceptor will honor the
instrument;
o Where the drawer has
countermanded payment (Sec. 114,
NIL).
- Under the first two options the holder is
given opportunity to treat the bills as a
promissory note.
When notice is not given to indorser?
- Notice of dishonor is not required to be
given to an indorser in either of the
following cases:
o When the drawee is a fictitious
person or a person not having
capacity to contract, and the
indorser was aware of the fact at
21 | P a g e
 the time he indorsed the behalf of the principal
instrument; debtor; at or after its
o Where the indorser is the person maturity to the holder
to whom the instrument is thereof in good faith and
presented for payment; without notice of the
o Where the instrument was made holder’s defective title.
or accepted for his o By payment in due course by the
accommodation (Sec. 115, NIL). party accommodated, where the
instrument is made or accepted
for accommodation;
VII. Discharge of Instruments
o By the intentional cancellation
thereof by the holder;
Discharge
o By any other act which will
- Discharge of an instrument means a
discharge simple contract for the
release of all parties, whether primary or
payment of money;
secondary, from the obligations arising
 By payment or
thereunder. It renders the instrument
performance;
without force and effect, and it can no
 By the loss of the thing due;
longer be negotiated.
 By the condonation or
- Discharge of the instrument includes the
remission of the debts;
discharge of the person or persons
 By the confusion or merger
primarily liable and a person secondarily
of the rights of the creditor
liable is discharged by an act which
and debtor;
discharges the instrument.
 By compensation; or
 By novation.
Modes of Discharge
o When the principal debtor
- A negotiable instrument is discharged –
becomes the holder of the
o By payment in due course by or on
instrument at or after maturity in
behalf of the principal debtor;
his own right (Sec. 119, NIL).
 Payment or satisfaction of
- A person secondarily liable on the
the instrument by the
instrument is discharged:
primary party is the most
o By any act which discharges the
common type of discharge.
instrument (Sec. 119);
 It discharges all liability of
o By the intentional cancellation of
the instrument.
his signature;
 Payment must be ordinarily
 If the holder intentionally
made with money and in
strikes the signature of a
other forms as long as
person secondarily liable,
agreed by the parties.
the effect is to discharge
 When an instrument upon
that person as if he has
several are liable primarily
never been a party to the
or secondarily is paid by the
instrument.
person who is primarily
o By the discharge of the prior party;
liable then a complete
 Intentional cancellation of
discharge is proper.
the signature of the prior
 Payment in due course. It
party discharges the
must be made by or on
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 instrument on account of
the prior party only.
 A valid tender of payment
made by a prior party
would result in the
discharge of the prior party
and necessarily of all
parties subsequent to him.
 Refusal to accept the
tender does not operate to
discharge the debt, but the
tender stops running of the
interest.
o By a release of the principal
debtor, unless the holder’s right of
recourse against the party
secondarily liable is reserved;
 Release of the principal
debtor discharges the
instrument and all
secondary parties unless
the holder reserved his
right of recourse against
the subsequent parties.
o By any agreement binding upon
the holder to extend 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 (Sec. 120, NIL).
 Agreement between the
holder and the principal
debtor.
 Agreement to extend time
for payment does not
discharge the indorsers
and for it to be valid it must
be only for a definite
period.
 Agreement to extend time
does not discharge a party
if: a) the extension was
consented by such party;
and b) the holder expressly
reserves his right of
recourse against such
party.
- 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 (Sec. 122, NIL).
o Renunciation is the act of
surrendering a right or claim with
or without recompense.
o Express renunciation must be
made by the holder or it should
accompany the surrender of the
instrument to the person primarily
liable thereon.
o Effects of renunciation:
 A renunciation in favor of a
secondary party may be
made by the holder before,
at, or after maturity and
this discharges only the
secondary party and all
parties subsequent to him,
but the instrument remains
in force.
 A renunciation in favor of
the principal debtor may be
effected at or after
maturity and discharges
the instrument and all
parties provided that the
renunciation is
unconditional and
absolute.
- A cancellation made unintentionally, or
under a mistake or without authority of
the holder, is inoperative; but where an
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 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 (Sec. 123, NIL).
o Cancellation is the act of cancelling
the instrument. It is not limited to
writing the word cancelled or paid
or crisscross line. It involves
tearing, erasure, obliteration or
burning.
o If the cancellation was made 1)
unintentionally; 2) by mistake or
through fraud; or 3) without
authority, then it is inoperative.
o Cancellation is presumed to have
been intentional.
- 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 the holder in due
course, not a party to the alteration, he
may enforce payment according to its
original tenor (Sec. 124, NIL).
VIII. Warranties of the Parties
Liability
- Refers to the obligation of a party to a
negotiable instrument to pay the same
according to its terms.
Warranty of the Maker, Drawer, and Acceptor
- 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 (Sec. 60, NIL).
o Liability is unconditional because
he is the one whom the holder will
look first for payment and the one
who is expected to pay.
o He engages to pay the note
according to its terms.
o He promises to pay not only to the
payee but to any subsequent
holder who is legally entitled to the
instrument at its maturity date
even if there was no demand.
o He remains fully liable even if the
instrument is presented for
payment late until prescription has
run.
o He admits the existence of the
payee and then capacity to indorse.
- 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, paid, or both, according to its
tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be
duly taken, he will pay the amount thereof
to the holder, or to any subsequent
indorser who may be compelled to pay it.
But the drawer may insert in the
instrument an express stipulation
negativing or limiting his own liability to
the holder (Sec. 61, NIL).
o Liability is conditional because he
will only pay if: a) the bill is
presented for acceptance or
payment; b) the bill is dishonored
by non-acceptance or non-
payment; c) the necessary
proceedings of dishonor (notice of
dishonor to the drawer and foreign
bills protest) are duly taken.
o The drawer is then only liable to the
holder, or to any subsequent
indorser who may be compelled to
pay it.
- The acceptor by accepting the instrument
engages that he will pay it according to the
tenor of his acceptance; and admits –
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 o The existence of the drawer, the
genuiness of his signature, and his
capacity and authority to draw the
instrument; and
 The drawee of a bill is not
liable until there is
acceptance.
o The existence of the payee and his
then capacity to indorse (Sec. 62,
NIL).
Warranty of the Indorsers
- An person placing his signature upon an
instrument otherwise than as maker,
drawer or acceptor is deemed to be an
indorser, unless he clearly indicates by
appropriate words his intention to be
bound in some other capacity (Sec. 63,
NIL).
- Every indorser who indorses without
qualification, warrants to all subsequent
holders in due course –
o The matters and things mention in
section 65.
 That the instrument is
genuine and in all respects
what it purports to be;
 That he has a good title to
it;
 That all prior parties had
capacity to contract.
o That the instrument is at the time
of his indorsement valid and
subsisting.
- And in addition he engages that on due
presentment the instrument will be
accepted, 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
(Sec. 66, NIL).
- Where a person places his indorsement on
an instrument negotiable by delivery he
incurs all the liabilities of an indorser (Sec.
67, NIL).
Warranty of one who negotiates by Delivery
- Every person negotiating an instrument
by delivery or by a qualified indorsement
warrants –
o That the instrument is genuine and
in all respects what it purports to
be;
o That he has a good title to it;
o That all prior parties had capacity
to contract;
 This applies only to persons
negotiating public or
corporation securities,
other than bills and notes.
o 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 (Sec. 65, NIL).
- Negotiation be delivery means that
indorsement is not necessary because the
instrument is payable to bearer.
~Nothing Follows~
God is good, if not he is still
good.
~ Daniel 3:18
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