GENERAL CONSIDERATIONS

Q: What is a negotiable instrument?

A negotiable instrument is a written contract for the payment of money which complies with the
requirements of Section 1, NIL; which by its form and on its face is intended as a substitute for
money and passes from hand to hand as money so as to give the holder in due course the right
to hold the instrument free from personal defenses available to prior parties.

Q: What are the stages in the life of a negotiable instrument?

BILL OF EXCHANGE PROMISSORY NOTE

1. the mechanical act of writing 1. preparation and signing (writing)
2. issuance, first delivery to the payee 2. issuance, first delivery to the payee
3. negotiation, transfer from one 3. negotiation
person to another so as to constitute 4. presentment for payment or
the transferee a holder dishonor by non-payment
4. presentment for acceptance, 5. notice of dishonor
applicable only to CERTAIN TYPES of 6. discharge
bills of exchange, presentment to the **presentment for acceptance is not
drawee in order for him to signify his necessary in promissory notes because
assent to the order of the drawer the drawer already knows that he is
5. acceptance or dishonor by non- liable to pay, and his liability is primary
acceptance in character.
*drawee either accepts or dishonors
the bill
6. presentment for payment or
dishonor by non-payment
*drawee either pays the bill or refuses
to pay it
7. notice of dishonor
*in case of dishonor, notice of
dishonor is required to be given to
persons secondarily liable, informing
them that the maker or
drawer/acceptor refused to pay or
accept the instrument
8. protest (required only for FOREIGN
bills of exchange)
9. discharge

Q: How is negotiability determined?

1. By considering only what appears on the face of the instrument
2. By ascertaining the presence/absence of the requisites under sec.1, NIL
3. By considering the whole of the instrument

*NB: if what appears on the face of the instrument is ambiguous, the provisions of Sec.17, NIL
should be followed

Q: Does the phrase ‘a sum certain in money’ mean the same thing as a ‘certain sum of money’?
No, they don’t mean the same thing. ‘A sum certain in money’ refers to a fixed amount, whereas
‘A certain sum of money’ makes no reference to a fixed amount.

Q: would an additional fee to the principal amount payable and stated on the face of the
instrument affect negotiability?

No, the instrument is still negotiable as per sec.2, NIL

Q: what are the requirements for the said installments?

1. The number of installments must be stated

2. The maturity dates for each installment must be stated

Q: Suppose the 2nd installment’s maturity date wasn’t fixed?

The instrument is still negotiable, the installment shall be payable on demand

Q: The instrument says ‘I promise to pay Juan P100,000 from my salary in UPHSL. Is it
negotiable?

No, the promise is conditional (on the availability of funds), it contravenes sec.1, NIL

Q: Is there a difference between the phrase ‘bearer, Juan dela Cruz’ and ‘Juan dela Cruz or
bearer?

Yes, the former phrase employs the word ‘bearer’ as an adjective, the latter, a noun.
Consequently, the former phrase would make an instrument non-negotiable.

Q: What is the effect should the payee fail to give notice of dishonor to an endorser?

The endorser is discharged

Q: Suppose the instrument gives the holder an option to require something to be done instead
of demanding payment in money, is the instrument negotiable?

Yes, if the HOLDER is the one given the option. If, on the other hand, it is the
DRAWER/MAKER who can choose to do anything other than pay the holder in money, the
instrument is not negotiable. *see: sec.3(d), NIL

Q: Correlating sec.9(e) and sec.40, NIL, what conclusion can be drawn?

The cardinal rule in negotiable instruments: once a bearer instrument, always a bearer
instrument.

*If the only or last endorsement is an endorsement in blank, the instrument is payable to bearer
under sec.9(e). Sec.40, on the other hand, states that ‘where an instrument, payable to bearer,
is endorsed specially, it may nevertheless be further negotiated by delivery xxx’. This means
that once an instrument is endorsed in blank, it becomes payable to bearer, and even if a
subsequent endorser endorses it specially, the instrument is NOT CONVERTED into an order
instrument, but remains a bearer instrument which can ‘be further negotiated by delivery’.
Q: If an instrument has a stipulation as to the CURRENCY which would be used for payment, is
it rendered non-negotiable?

No, by ‘sum certain in money’, sec.1 does NOT equate ‘money’ with ‘legal tender’. Parties can
therefore validly agree that the ‘money’ may be paid in currency other than pesos.

Q: Is the phrase ‘pay to X or order’ the same as ‘pay to the order of X’?

Not quite. ‘pay to X or order’ means that the instrument is to be paid either to (a) X, the bearer
or (b) to whoever X might want to be paid (i.e.: his order). On the other hand ‘pay to the order of
X’ does not, at face value, include X as a payee but rather the person/s whom X might
order to be paid.

However, it MAY mean the same thing, if X intends to endorse the instrument to himself, make it
payable to himself. In that event, the distinction between the two phrases disappears.

Q: If it is not clear whether the instrument is a bill or not, what can the holder do?

The holder can treat the instrument as either one or the other at his election (sec.17[e])

Q: Suppose there is ambiguity as to whether the instrument is a note or a bill. What is more
advantageous to the holder – to treat it as a note, or as a bill?

As a promissory note, because of the primary liability of the maker, and the relatively more
expedient steps in obtaining the discharge of the instrument.

Q: What is meant by ‘negotiation’?

The transfer of the instrument from one person to another so as to constitute the transferee the
holder thereof (Sec.191)

Q: How is negotiation effected?

Depending on the type of instrument involved –
1. An ORDER instrument is negotiated by endorsement,
completed by delivery
2. A BEARER instrument is negotiated by mere delivery

Q: What is an endorsement?
An endorsement is a transaction effected by writing on the instrument or on an attached paper
thereto (i.e.: an allonge) of one’s own name and signature, specifying to whom or to whose
order the instrument is to be payable (sec.30, NIL)
Q: What are the types of endorsements?
BASIC TYPES OF ENDORSEMENTS
*see: sec.9(e); sec.40; sec.34, sec.35
1. SPECIAL
-specifies the person to whom or to whose
order the instrument is to be payable
-legal effect: for subsequent negotiations, the
instrument requires the endorsement of the
person so specified
2. BLANK
-does not specify any person to whom or to
whose order the instrument is payable
-legal effect: the instrument is payable to
bearer (if it was originally an order
instrument, it ceases to be payable to order
and becomes payable to bearer.
After this, it REMAINS a bearer instrument,
even if a subsequent endorser endorses it
specially)
**important:
an instrument that STARTED OUT as a
BEARER instrument may be converted
to an order instrument and reconverted again
to a bearer instrument; but once this is done
i.e.: once an order instrument becomes a
bearer instrument , it stays a bearer
instrument. The only way to simplify it is that
a bearer instrument may only become an
order instrument ONCE – that is, when it was
originally made as a bearer instrument and
subsequently endorsed specially. If it became
a bearer instrument because of an
endorsement in blank, it can’t be converted to
an order instrument.
Point of no return, reached.
 OTHER TYPES OF ENDORSEMENTS
*see: sec.36, sec.38, sec.39,
3. RESTRICTIVE
-the endorsement either (a) prohibits further
negotiation; (b) constitutes the endorsee the
agent of the endorser; or (c) constitutes the
endorsee a trustee; if it prohibits further
negotiation, the instrument ceases to be
negotiable

4. CONDITIONAL
-payment is conditioned by either the
happening or non-happening of an event
-legal effect: the party required to pay may
disregard the condition and go ahead and
pay, however, the person who is paid must
hold the payment or its proceeds IN TRUST,
and wait for the event to happen or not. It
does, or doesn’t, the endorsee/trustee must
return the money or its proceeds.

5. QUALIFIED
-the endorser negatives personal liability by
writing the words ‘without recourse’ or ‘sans
recourse’ or others of like import on the
instrument
-legal effect: the endorser becomes a mere
assignor of the title to the instrument, but
negotiability of the same is not impaired

Q: Under sec.40, what is meant by a ‘fictitious person’? Is this to be interpreted literally?

No, there is still a person involved, except that this person does not have any right to the
instrument. This is what is meant ‘fictitious’

Q: Who is a holder in due course?

A holder in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue and without notice that it has
previously been dishonored, if such was the fact;
(c) That he took it in good faith and for value; and
(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. (sec.52, NIL)

*The prima facie presumption is that every holder of negotiable paper is a HDC (sec.59),
however, the same presumption may be refuted and in such an event, it becomes incumbent
upon the holder to prove that he or some person under whom he claims acquired the title as
HDC.

Q: May a payee be considered a holder in due course, considering that the instrument was
simply issued to him and not endorsed? Yes
*cross refer sec.52 with sec.191 – sec 191 defines a ‘holder’ as the payee or endorsee of a bill
or note who is in possession of the same, or one who is a bearer of the same. ‘Holder’ under
sec.52 must be read in the light of sec.191’s definition, thus a payee may be a holder, and since
a holder of a negotiable instrument may become a holder in due course, a payee may logically
become a HDC as well.

Q: what are the rights of a HDC?

1. To take the instrument free from personal defenses between prior parties
2. To enforce payment for the full amount against all parties liable thereon (sec.57)

Q: What is the Shelter Rule?

It is the doctrine which allows a holder who derives his title through a holder in due course, and
who is not himself a party to any fraud or illegality affecting the instrument to have all the rights
of the HDC in respect of all parties prior to the latter. (Sec.58)

*NB: the shelter rule allows an innocent holder to derive his title from a holder in due course.
The scenario contemplated by the law is one where the negotiation of an instrument was tainted
by fraud or illegality before it came into the hands of the present holder. The present holder,
therefore, who had nothing to do with the infirmity in the instrument, may derive his title from the
HDC before him, and will himself be deemed a HDC.

Q: Are the primary and secondary liabilities the same as the liabilities for warranties?

No, The primary and secondary liabilities of the parties stem from their obligations to pay the
sum certain in money stated in the instrument. The liabilities for warranties stem from the
warranties made by the parties to an instrument, which warranties are separate and ancillary
contracts to the principal one involving the sum payable stated in the instrument.

PARTY WARRANTIES
ACCEPTOR 1. The existence of the drawer, the
genuineness of his signature and
his capacity and authority to draw
the instrument;
2. The existence of the payee and
his then capacity to endorse
*sec.62
GENERAL ENDORSER 1. That the instrument is genuine
and in all respects what it
ENDORSER OF A BEARER purports to be;
INSTRUMENT 2. That he has good title to it;
3. That all prior parties had capacity
to contract;
4. That the instrument is, at the time
of his endorsement, valid and
subsisting
*secs.66, 67
QUALIFIED ENDORSER 1. That the instrument is genuine
and all respects what it purports
PERSON NEGOTIATING BY MERE to be;
DELIVERY 2. That he has good title to it;
3. That all prior parties had capacity
 to contract;
4. That he has no knowledge of any
fact which would impair the
validity of the instrument or
render it valueless
*sec.65

Q: May a corporation be held liable when one of its officers signs as an accommodation party?

It depends. If the officer was specifically authorized to do so, the corporation is liable. If not, the
act was one ultra vires for which the corporation cannot be held liable.

Q: What is the liability of an agent who signs a negotiable instrument on behalf of another
person?

The agent is NOT personally liable if he signs in the manner prescribed under sec.20, that is if
he:
1. Adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity; and
2. Discloses his principal

Failure of an agent to sign in this manner would operate to make him personally liable, as if he
had signed the instrument on his own.

Q: What is the legal effect of a signature per procuration?

It operates as notice that the agent has but a limited authority to sign and the principal is bound
only in case the agent so signing acted within the actual limits of his authority *see: sec.21

Q: When is a party deemed an accommodation party?

When the person meets the following requisites –

1. He must be a party to the instrument, signing as maker, drawer, acceptor or endorser;
2. He must not receive value therefor;
3. He must sign for the purpose of lending his name or credit to some other person

Q: May a person who does not sign the instrument be held liable?

GENERALLY, No. But there are exceptions where a person who did not actually sign the
instrument may be held liable –
1. One who signs in a trade or assumed name (sec.18)
2. One who signs through an agent or authorized person(sec.19)
3. Incapacitated persons who sign through their legal guardians
4. Forgers of signatures (sec.23)
5. Persons whose signatures were forged but who are precluded from setting up the defense of
forgery (sec.23)
6. In case of constructive acceptance (sec.137)
7. Endorsers who sign on an allonge
8. Persons who negotiate by mere delivery (sec.65)
Q: When is presentment for payment unnecessary?

1. As far as the DRAWER goes, when he has no right to expect or require that the drawee or
acceptor will pay the instrument (sec.79)
2. As regards the ENDORSER, 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)
3. Where, after the exercise of reasonable diligence, presentment cannot be made (sec.82)
4. Where the drawee is a fictitious person (sec.82)
5. When presentment has been waived, either expressly or impliedly (sec.82)

Q: What is acceptance?

The signification by the drawee of his assent to the order of the drawer to pay a sum certain in
money embodied in a bill of exchange

Q: What are the requisites of acceptance?

1. It must be in writing;
2. Must be signed by the drawee;
3. Drawee must assent to paying a sum certain in money and not by any other means

Q: When is presentment for acceptance required?

1. 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;
2. Where the bill expressly stipulates that it shall be presented for acceptance;
3. Where the bill is drawn payable elsewhere than at the residence or place of business of the
drawee (sec.145)

Q: How is presentment for acceptance made?

1. By or on behalf of the holder;

2. At a reasonable hour;
3. On a business day or before the bill is overdue;
4. At the proper place;
5. To the drawee or the person authorized to accepted or
refuse acceptance on his behalf
6. If the bill is addressed to 2 or more drawees who are not partners, presentment must be
made to all of them unless one has the authority to accept or refuse acceptance on their behalf
in which case presentment must be made to that person only;
7. Where the drawee is dead, presentment may be made to his personal representative;
8. Where the drawee has been adjudged a bankrupt or an insolvent, or has made an
assignment for the benefit of creditors, presentment may be made to him or to his
trustee or assignee (secs.144, 145, 146, 72, 85, 73)

Q: when is presentment for acceptance unnecessary or excused?

1. Where the drawee is dead, or has absconded, or is a

fictitious person or a person not having capacity to contract by bill;
2. Where, after the exercise of reasonable diligence, presentment cannot be made;
3. Where, although presentment has been irregular, acceptance has been refused on some
other ground (sec.149)

Q: What is constructive acceptance?

Acceptance by provision of law, whereby the drawee is deemed to have accepted the
instrument should either of the following circumstances arise:

1. The bill was delivered to the drawee and he destroys the same;
2. The bill was delivered to the drawee but he refuses to pay within 24 hours or within such
other period as the holder may allow to return the bill either as accepted or non-accepted (i.e.:
drawee unduly retains the bill) (sec.137)

Q: What is a notice of dishonor?

A notice which informs the secondary parties that the instrument was either dishonored by non-
acceptance or non-payment, and that the holder of the instrument so dishonored intends to
enforce the liabilities of the persons so notified.

Q: When is an instrument considered dishonored by non-payment?

1. When it is duly presented for payment and payment is refused or cannot be obtained; or
2. Presentment is excused and the instrument is overdue and unpaid (sec.83)

Q: When is a bill dishonored by non-acceptance?

1. When it is duly presented for acceptance and such acceptance is refused or cannot be
obtained;
2. When presentment for acceptance is excused and the bill is not accepted (sec.149)

Q: What is protest?

A formal statement in writing made by a notary public at the instance of the holder declaring that
the instrument has been presented for payment or for acceptance but the same was
dishonored. It is generally indispensable only for foreign bills of exchange, however, the need
for it may also be waived.

Q: when is there an acceptance for honor?

When the original drawee refuses to accept a bill of exchange and there is a need to save the
credit of certain parties. A third person or stranger to the instrument accepts the instrument for
honor thereby making himself liable to all parties to the bill subsequent to the party for
whose honor he accepted
Q: What is the nature of the liability of the acceptor for honor?

Secondary, because his engagement is to pay only if the bill is not paid by the drawer and
provided that it has been duly presented for payment and protested for non-payment and that
notice of dishonor is given to him.
Q: Who may make a payment for honor?
Any person, for the honor of any person liable on the instrument or for the honor of the drawer
(sec.171)

Q: What is the right of recourse of the parties to a forged check where the signature forged
belonged to the payee?

The short-cut rule holds that the payee whose signature was forged can go directly to the
collecting bank, regardless of whether or not the checks were actually delivered to the payee.

Q: What is a personal defense?

One which involves the relationships of the parties between and amongst themselves, wherein
there is a true and valid underlying contract but where, for various reasons (i.e.: fraud, duress,
mistake, prior breach of contract by the holder, etc.), the defendant is excused from his
obligation to perform.

Q: What is a real defense?

One which involves the instrument or the underlying contract itself, wherein there is an absence
of one or more of the essential elements of a contract or where the admitted contract is vitiated

Q: What defenses may be raised against a HDC?

Only real defenses – those which call into question the instrument or the underlying contract.

REAL DEFENSES PERSONAL DEFENSES

1. Minority (available only to the 1. Failure or Absence of consideration
minor) 2. Illegal consideration
2. Forgery 3. Non-delivery of a complete
3. Non-delivery of an incomplete instrument Instrument
4. Material Alteration 4. Conditional delivery of a complete
5. Ultra Vires act of a corporation instrument
6. Fraud in Fact 5. Fraud in inducement
7. Illegality 6. Filling up blanks without authority
8. Vicious force or violence to do so
9. Lack of authority 7. Duress of intimidation
10. Prescription 8. Filling up blanks beyond a
11. Discharge in insolvency reasonable time
9. Transfer in breach of faith
10. Mistake
11. Ante-dating or post-dating for
illegal or fraudulent purposes
Q: What is delivery?

The transfer of possession of the negotiable instrument by one person to another with the
intention to transfer title to the instrument
Q: What is the effect if an instrument which is not complete was delivered?

The delivery will not effect a valid contract in the hands of any holder as against any person
whose signature was placed thereon prior to delivery (sec.15)

Q: When may delivery be deemed valid?

When it is made either by or under authority of the person making, drawing, accepting or
endorsing the instrument (sec.16)

Q: What are the rules with regard to filling up blanks in a negotiable instrument?

1. A person in possession of such an instrument has prima facie authority to complete the
instrument by filling it up strictly in accordance with the authority given and within a reasonable
time;
2. If a person delivers a blank paper which contains his signature and which he intends to
convert into a negotiable instrument, the person to whom it is delivered has prima facie authority
to fill it up for any amount in accordance with the authority given and within a reasonable time;
3. If the holder of the instrument, after it was filled up, is a HDC, the holder may enforce the
instrument as if it were filled up with the proper authority and within a reasonable time (sec.14)

Q: when is fraud a real defense? When is it merely a personal one?

FRAUD IN EXECUTION/ FRAUD IN INDUCEMENT

FRAUD IN FACTUM
-person is induced to sign an
instrument without knowing its
character as a note or bill
-a REAL defense
-persons who signs the same is aware
that he is signing a negotiable
instrument, and intends to sign it, but
was only induced to do so through
fraud, his consent having been vitiated
by it
-a PERSONAL defense

Q: When may an alteration become a defense?

When it is material (sec.1, 125)

Q: Is material alteration a complete defense?

No, only a partial one. A HDC who is in possession of a materially altered instrument and who is
not a party to the alteration may enforce payment thereof according to its original tenor sec.124)

Q: what is the effect of forgery?

A forged signature is wholly inoperative and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to be enforce such
a right is precluded from setting up the forgery or the want of authority (sec.23)

TYPE OF INSTRUMENT PARTY WHOSE EFFECTS

SIGNATURE WAS
FORGED
PROMISSORY NOTE Maker Maker is not liable on
the instrument to all
subsequent parties
whether the instrument
is an order or a bearer
instrument
Endorsers Still secondarily liable
because they warrant
that the instrument is
genuine and in all
respects what it
purports to be
If the note is payable to
BEARER, the forged
signatures may not be
set up as a defense,
because the signature of
the endorser is
unnecessary to pass title
to the instrument – the
maker is still primarily
liable on the note.

Drawer Endorsers Drawer is not liable on

BILL OF EXCHANGE the instrument to all
subsequent parties
whether the bill is an
order or bearer bill

Subsequent holder
cannot enforce payment
against the drawer,
drawee or payee

Endorsers prior to the

forgery may set up the
real defense of forgery
Endorsers subsequent to
the forgery are still liable

Endorsers precluded
from setting up forgery
as a defense are liable,
despite having endorsed
 the bill prior to the act
of forgery

If the bill is a BEARER bill

of exchange, the holder
may still recover from
the drawer because the
forged signature is
unnecessary for his title.

Q: How does the ‘Cut-ff Rule’ operate?

Parties prior to the forged signature are cut-off from the parties after the forgery and cannot be
held liable for the forgery. These parties may validly set up the defense of forgery against any
holder, including a HDC.

Q: What is discharge?

Release from further liability –

1. AS TO THE PAPER ITSELF: the end of a contractual obligation
2. AS TO THE PARTIES: the release of some or all of them from further obligation and liability
under the instrument

Q: Is there such a thing as partial discharge?

Yes, as when the instrument (i.e.: the contractual obligation it represents) is not yet discharged,
and only part or some of the obligors are released.

Q: Suppose all the obligors are released, what happens to the instrument?

The instrument is deemed released as well

Q: How is an instrument discharged?

1. By payment in due course by or on behalf of the principal debtor
2. By payment in due course by the party accommodated, where the instrument is made or
accepted for his accommodation;
3. By the intentional cancellation thereof by the holder;
4. By any other act which will discharge a simple contract for the payment of money;
5. When the principal debtor becomes the holder of the instrument at or after maturity in his own
right (sec.119)

Q: What is meant by payment in due course?

Payment is said to have been made in due course when it is made at or after maturity date of
the instrument to the holder thereof in good faith and without notice that his title is defective
(sec.88)

Q: What is a check?
A bill of exchange drawn on a bank, payable on demand (sec.185)
Q: When should a check be presented for payment?

Within a reasonable time after its issue (sec.186)

Q: Is a drawee liable upon the issuance of a check?

No, the drawee is not liable just because he happens to be the drawee. A check does not
operate as an assignment of any part of the funds to the credit of the drawer with the bank, the
bank is not liable to the holder unless and until he accepts the same, in which case, the drawee
becomes an acceptor (sec.189)