Professional Documents
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Negotiable Instruments and BP Blg. 22
Negotiable Instruments and BP Blg. 22
05
INTRODUCTION
A. GOVERNING LAWS – ACT No. 2031 effective June 2, 1911 (which amended some of the provisions of the Rules of
the Law Merchant), the Code of Commerce and the Civil Code.
B. APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW – the Act applies only to negotiable instruments or
those that meet the requirements under Sec. 1 of Act No. 2031.
1. DEFINITION: Negotiable Instruments are written statements signed by the maker or drawer containing an
unconditional promise or order to pay a sum certain money, payable on demand or at a fixed or determinable future
time, to order or to bearer.
Checks are primarily used for immediate payment (substitute for money); while ordinary bill of exchange and the
promissory note are intended for the circulation of credits (credit instruments)
3. LEGAL TENDER – Sec. 52 of the New Central Bank Act provides that only notes and coins issued by the BSP are
considered legal tender. Section 60 of the same law provides that checks are not legal tender and its acceptance
is at the option of the creditor.
Under Art. 1249 of the Civil Code, the payment through a negotiable instrument produces the effect of payment
only when:
a. It is encashed; or
b. Its value becomes impaired through the fault of the creditor.
D. DETERMINING NEGOTIABILITY
To determine whether the instrument is negotiable or not, the following must be considered:
1. The whole of the instrument
2. Those only appear on the face of the instrument
3. Compliance with the requirement under Section 1 of the Act.
The instrument need not follow the language of the Negotiable Instruments Law, but any terms are sufficient which clearly
indicate an intention to conform to the requirements hereof.
1. NEGOTIABILITY – is that quality or attribute of a bill or note whereby it may pass from one person to another similar to
money, so as to give the holder in due course the right to collect on the instrument the sum payable for himself free
from any defect in the title of any of the prior parties or defenses available to them among themselves.
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2. ACCUMULATION OF SECONDARY CONTRACTS – as they are transferred from one person to another. Once an
instrument is issued, additional parties can become involved.
1. PROMISSORY NOTES (Sec. 184, NIL) – An unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or
to bearer.
2. BILLS OF EXCHANGE (Sec. 126, 185, NIL) – An unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or bearer.
To: Aquaman
Pay P or order P100,000 and reimburse yourself from my account with you
Sgd. D
3. Treasury Warrant - it is a government warrant for the payment of money such as that issued in favor of a public officer
or employee covering payment or replenishment of cash advances for official expenditures. (It is payable out of a
specific fund or appropriation)
4. Postal Money Order – subject to conditions and restrictions imposed by law.
5. Certificate of stock - Not contain an unconditional promise or order to pay a sum certain in money
6. Warehouse receipt - Not contain an unconditional promise or order to pay a sum certain in money.
7. Quedan - Not contain an unconditional promise or order to pay a sum certain in money.
8. Now account - Not payable to order or bearer
NEGOTIABLE NON-NEGOTIABLE
Requires compliance with Sec. 1 of the NIL Did not comply with the requirements of Sec. 1 of the NIL
Transfer can be by negotiation or assignment Transfer can only be made by assignment
Holder in due course acquires the instrument free from Transferee does not acquire title better than the
defenses personal to the prior parties transferor. Hence, subject to personal defenses of prior
parties
Prior parties have a warranty as to payment Prior parties warrant only that they have legal title
Governed by NIL NIL only applies by analogy
Only real defenses are available against holder in due Both real and personal defenses are available against the
course assignee
L. INTERPRETATION OF INSTRUMENTS
Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:
1. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum
denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the
figures to fix the amount;
2. Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the
interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;
3. Where the instrument is not dated, it will be considered to be dated as of the time it was issued;
4. Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail;
5. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at
his election;
6. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same
intended to sign, he is to be deemed an indorser;
7. Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be
jointly and severally liable thereon
REQUISITES OF NEGOTIABILITY
SAMPLE QUESTION: Which of the following requisites of negotiability does not apply to a promissory note?
A. It must be in writing and signed by the maker or drawer
B. Must contain an unconditional promise or order to pay a sum certain in money
C. Must be payable on demand, or at a fixed or determinable future time
D. Must be payable to order or to bearer
E. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.
SAMPLE QUESTION: Which of the following is not a requisite of negotiability of a promissory note:
A. That the instrument is written and signed by the drawer
B. That the instrument contains an unconditional promise to pay a sum certain in money
C. That the instrument is payable on demand or at a fixed or determinable future time
Signature of the maker or drawer is usually written, preferably with the full name or at least the surname. However, initials
or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be
bound by it.
Signature is presumed valid, the person denying and to whom the signature operates must provide evidence of its
invalidity.
General Rule: No person is liable on the instrument whose signature does not appear thereon (Sec. 18)
Exceptions:
1. One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. (Sec
18, (2))
2. The principal is bound by the signature of his duly authorized agent (Sec 19)
3. Forgery (Sec 23)
4. Acceptance by the acceptor in a separate paper (Sec 134)
5. Written promise by a person to accept the bill before it is drawn. (Sec 135)
(b) Must contain an unconditional promise or order to pay a sum certain in money;
Simply, the requirement is that the promise or order to pay is not subject to any condition which may or may not
happen.
The Basic Test: is whether the holder can determine by calculation or computation the amount payable when the
instrument is due.
Additional provisions:
General Rule: the performance of an act in addition to the payment of money renders the instrument non-negotiable,
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.
Payable on demand:
a. When it is so expressed to be payable on demand, or at sight, or on presentation; or
b. In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting,
or indorsing it, payable on demand.
Payable to ORDER: The instrument is payable to order where it is drawn payable to:
1. the order of a specified person (order of P); or
2. to him or his order (P or order).
PAYEE: the payee in an order instrument can be the maker, the drawer, the drawee or a person who is not amongst
such parties, it may likewise be an office for the time being (e.g., Commissioner of Internal Revenue)
Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable
certainty.
Multiple Payees: whether in the alternative (P1 or P2) or joint (P1 and P2) is allowed.
Importance of Distinction: It is important to distinguish a bearer and an order instrument because they are negotiated in
different manners. A bearer instrument may be negotiated by mere delivery, while an order instrument requires
indorsement coupled with delivery.
ILLUSTRATION: In need of immediate cash, Mr. X delivered a check payable to the order of “cash” to Mr. Y, saying
that the banks are already closed, and that he can just deposit the same. The following day, Mr. Y deposited the check
but it was dishonored for insufficient funds. Mr. Y then sued Mr. X for estafa and as a defense, Mr. X claims that Mr. Y
should not have deposited the check without his indorsement. Is Mr. X correct?
This requisite pertains only to a Bill of Exchange since a Promissory Note does not have a Drawee.
Purpose: To enable the holder to know to whom the Bill of Exchange shall be presented for acceptance/payment.
Multiple Drawees:
1. Two or more drawees jointly – allowed. (e.g., D1 and D2)
2. Two or more drawees in the alternative or succession – not allowed. (e.g., D1 or D2) (Sec. 128)
OMISSIONS; SEAL; PARTICULAR MONEY THAT DO NOT AFFECT NEGOTIABILITY – the negotiability of an instrument
is not affected by the fact that:
1. it is not dated; or
2. does not specify the value given, or that any value had been given therefor; or
3. does not specify the place where it is drawn or the place where it is payable; or
4. bears a seal; or
5. designates a particular kind of current money in which payment is to be made.
NEGOTIATION
"Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder
“Delivery" means transfer of possession, actual or constructive, from one person to another.
B. NEGOTIATION DEFINED
1. Instruments payable to ORDER: two steps are required for negotiation: (a) indorsement and (b) delivery.
2. Instruments payable to BEARER: delivery alone without indorsement.
Assignment is the transfer of the title to an instrument, with the assignee generally taking only such title or rights as his
assignor has, subject to all defenses available against his assignor. It is the less usual method which may or may not involve
an indorsement in the sense of writing on the back of the instrument.
NEGOTIATION ASSIGNMENT
Applicable Law Negotiable Instruments Law Civil Code of the Philippines
Type of transaction or Negotiable instruments only Contracts in general or assignable rights
instrument:
Nature of the transferee: Transferee is a holder who may be a holder Transferee is a mere assignee and can never be a
in due course holder in due course
Rights acquired: The transferee-holder may acquire more Transferee cannot acquire more rights than the
rights than the transferor if he is a holder in transferor because he merely steps into the shoes
due course of the transferor
Availability of personal Transferee-holder may be free from Transferee is always subject to personal defenses
defenses personal defenses if he is a holder in due
course
Liability: The warranties of a person who negotiates by mere delivery extends in favor of no holder other than the
immediate transferee. (Sec 65)
ILLUSTRATION: A made a promissory note payable to B or bearer. B negotiated the note by indorsing it to B specially; C
likewise indorsed and delivered the note to D.
Pay to C,
Sgd. B
A B C D E
Pay to D,
Sgd. C
If E negotiated the note to F (additional party), and it was dishonored, who can F go against for the payment of the
note?
Incomplete negotiation of an order instrument – delivered only without indorsement. This will be subject to the following
rules:
a. the transferee is a mere assignee
b. He acquires the right to have the indorsement of the transferor (Sec. 49)
c. For the purpose of determining whether the transferee is a HIDC, the negotiation takes effect as of the time when
indorsement is actually made.
Example: M was induced fraudulently by P to make a promissory note payable to his order. P then delivered the instrument
to A on Feb. 5, 2020, without indorsing it. A asked for the indorsement of P which was placed on Feb 15, 2020. Can A be
considered a holder in due course?
F. INDORSEMENTS
Indorsement is the writing of the name of the payee on the instrument with the intent either to transfer the title to the same,
or to strengthen the security of the holder by assuming a contingent liability for its future payment, or both.
1. Where:
a. On the instrument itself; or
b. Separate piece of paper attached to the instrument called allonge.
2. Amount: should be entire instrument. An instrument for P15,000 cannot be indorsed for less like P5,000 only – will be
treated as mere assignment.
Except: when there was already partial payment and what is being indorsed is the balance.
3. 2 or more indorsees severally: considered only as an assignment.
4. Kinds:
a. Blank Indorsement– specifies no indorsee.
Effects:
i. The instrument becomes a bearer instrument;
ii. But the holder may convert the blank indorsement into a special indorsement by writing over the signature of
the indorser in blank any contract consistent with the character of the indorsement.
b. Special indorsement – specifies the person to whom, or to whose order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the further negotiation of the instrument. E.g. Pay to X.
c. Qualified indorsement – may be made by adding to the indorser's signature the words "without recourse" or any
words of similar import. E.g., “Pay to X without recourse”
Effects:
i. Such an indorsement does not impair the negotiable character of the instrument.
ii. A qualified indorser is generally not liable to subsequent holders except only if there is a breach of any of
the warranties.
iii. A qualified indorser is subject to the same warranties as that of a person who negotiates by mere delivery under
Sec. 65.
ILLUSTRATION: M made a promissory note payable to P or order. P negotiated the note to A, A then indorsed the
note to B in this manner “Pay to B without recourse”. B then negotiated the note to C. If the note is dishonored in
the hands of C, can he collect from A?
d. Conditional indorsement – a condition is placed in the indorsement. “Pay to X if he passes the board exam”
Effects:
i. This does not impair the negotiability of the instrument.
ii. The party required to pay the instrument may disregard the condition and make payment to the indorsee or his
transferee whether the condition has been fulfilled or not.
iii. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally.
ILLUSTRATION: M made a promissory note payable to P or order. P negotiated the note to A and indorsed in this
manner “Pay to A if he passes the CPALE.”. In this case,
• A becomes the holder and may negotiate the note further.
• M may nevertheless pay A even if the condition has not been fulfilled.
• If M paid and the condition is not fulfilled, A (or any subsequent holder) is required to remit the payment received
to P.
In the first type, the instrument will cease to be negotiable. In the other two, the instrument is still negotiable.
5. Negotiation by prior party (Successive Indorsement) – when an instrument is negotiated back to a prior party.
d. Such party may also strike-out the indorsements of the intervening parties since they are no longer necessary
for his title.
SAMPLE QUESTION: M issued a promissory note payable to P or order for P10,000. P negotiated the note to
A, the A to B then B to P. In this case,
A. The note is discharged by confusion or merger
B. A and B are no longer liable to P being intervening parties
C. P can no longer further negotiate the instrument
D. M is not liable to P anymore since he was the payee and now the holder
6. Joint Indorsement: Where an instrument is payable to the order of two or more payees or indorsees:
Exceptions:
a. If they are partners
b. The one indorsing has authority to indorse for the others.
7. Irregular Indorser
Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he
is liable as indorser, in accordance with the following rules:
a. If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent
parties.
b. If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all
parties subsequent to the maker or drawer.
c. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.
G. SIGNATURE BY PROCURATION
A signature by "procuration” operates as notice that the agent has but a limited authority to sign, and the principal is bound
only in case the agent in so signing acted within the actual limits of his authority.
The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement
is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument as such indorsers.
COMPLETENESS DELIVERY
Incomplete but delivered X √ Personal Defense
Complete but undelivered √ X Personal Defense
Incomplete and undelivered X X Real Defense
But in order to bind parties prior to completion: the instrument must be filled up:
a. Strictly in accordance with the authority given
b. Within a reasonable time
3. After completion, if negotiated to a holder in due course, valid and effectual for all purposes in his hands and may
enforce it as if it had been filled up in accordance with the authority given and within a reasonable time.
SAMPLE QUESTION: A issued a negotiable promissory note to B with the amount in blank, but with authority given to
B to fill up the blank for PhP100,000. B filled it up for P400,000 and negotiated it to C. If C is a holder in due course,
how much can he collect from either A or B?
A B
A. P100,000 P400,000
B. P100,000 P100,000
C. P400,000 P400,000
D. P400,000 P100,000
Material Alteration:
What constitutes a material alteration. – A material alteration is any alteration which changes:
1. The date;
2. The sum payable, either for principal or interest;
3. The time or place of payment:
4. The number or the relations of the parties;
5. The medium or currency in which payment is to be made;
6. Or which adds a place of payment where no place of payment is specified, or
7. Any other change or addition which alters the effect of the instrument in any respect.
Effect: General Rule: Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it
is avoided, Except as against a party who has himself made, authorized, or assented to the alteration and subsequent
indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its original tenor
SAMPLE QUESTION: Assuming in the preceding question that B filled it up in accordance with the authority given, i.e.,
P100,000, and negotiated it to C, who changed the amount to P400,000 and later on negotiated the instrument to H who
took it in good faith and for value, how much can H collect?
A/B C
A. P100,000 P400,000
B. P100,000 P100,000
C. P400,000 P400,000
D. P400,000 P100,000
Delivery is essential to the validity of any negotiation (whether PN or BOE) (Sec. 30). Moreover, every contract on a
negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto.
However, in the hands of a HIDC, valid delivery by all parties prior to him is conclusively presumed.
ILLUSTRATION: M who was bored during a class, made a promissory note payable to P or order for P10,000, his crush.
M left for the toilet and P found the note. P, then indorsed the note to A for value, her crush. In this case, can A collect from
M?
Sec. 15 provides that if an instrument is both INCOMPLETE (as wanting in any material particular) AND UNDELIVERED, it
is not a valid contract in the hands of ANY holder. This is why this constitutes a real defense available even against a
holder in due course.
ILLUSTRATION: M who was bored during a class, made a promissory note that reads: “I promise to pay _______, my
crush, or order, P10,000.” P found the note and assumed she is the crush of M placed her name then negotiated the note
to A who took in good faith and for value. Can A collect from M?
HOLDERS
A Holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof (Sec. 191), who may
sue on his own name (Sec. 51).
Holder NOT in due course can still collect on the instrument: The only difference between a holder in due course and
a holder not in due course is that the latter is subject even to defenses personal to prior parties.
If B purchases an overdue negotiable promissory note signed by A, he is not a holder in due course; but he may recover
from A, if the latter has no valid excuse for refusing payment. The only disadvantage of holder who is not a holder in due
course is that the negotiable instrument is subject to defense as if it were non- negotiable. (CHAN WAN VS. TAN KIM, G.R.
No. L-15380; September 30, 1960)
A holder in due course is a holder who has taken the instrument under the following conditions (COVN):
1. That it is complete and regular upon its face;
2. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if
such was the fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it.
Holder - the first requisite is that he should be a “holder” as defined under Sec. 191. If a possessor of a negotiable instrument
is not a holder (i.e., he is neither payee nor indorsee or bearer of a bearer instrument), he can NEVER be a holder in due
course.
Example: an order instrument was delivered without any indorsement. In this case, the transferee is a mere assignee and
not a holder. It follows that he cannot be a holder in due course.
Presumption:
General Rule: Every holder is deemed prima facie to be a holder in due course.
Except: if he obtained title from a person whose title is defective, the burden is on the holder to prove that he acquired the
title as holder in due course.
The exception does not apply to parties prior to the acquisition of the defective title.
Complete - it is complete when it is not wanting of any material particular to be inserted in a negotiable instrument without
which the same will not be complete.
Regular – It is regular upon its face when it does not contain any material alterations or if there are, they are not apparent
or visible on the face of the instrument.
A Holder upon receiving an instrument which is incomplete or irregular (containing visible and apparent alterations) must
be put on inquiry why it is such. If he fails to do so, he takes the instrument subject to all defenses.
Overdue – an instrument is overdue after the date of maturity fixed therein or upon happening of an event certain, and a
person taking an overdue instrument must be put on inquiry why the instrument is still in circulation
Dishonor may be by non-acceptance (bills of exchange) under Sec. 149 or by non-payment (promissory notes and bills of
exchange) under Sec. 83. A holder who has knowledge that the instrument was previously dishonored is not a holder in
due course.
3. Good Faith
General Rule: every holder is presumed to be in good faith and no inquiry is required to determine such. EXCEPT: if the
holder acquires a negotiable instrument under circumstances which should have put him in inquiry, he should do so.
Otherwise, he may not be considered in good faith for gross neglect.
4. Value
Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and
is deemed such whether the instrument is payable on demand or at a future time.
Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties
who become such prior to that time.
Note that taking the instrument for value is only one requisite for a holder in due course. As such, all Holders in Due Course
are Holders for Value; but not all Holders for Value are Holders in Due Course.
Infirmity means any irregularity in the instrument. Thus, notice of an alteration which is apparent is notice of an infirmity in
the instrument, as well as notice of forgery in the maker or drawer’s signature. Sec. 56 provides what constitutes notice of
defect.
Notice before full payment: Where the transferee receives notice of any infirmity in the instrument or defect in the title of
the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder
in due course only to the extent of the amount therefore paid by him.
EXAMPLE: M makes a note for P100,000 payable to the order of P, P indorsed it to A, B stole the note, and forged A’s
signature, B then indorsed it to C who paid P50,000 before knowing that A’s signature was forged. In this case, C is a holder
in due course up to P50,000 only.
C. ACCOMMODATION PARTY
An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to
a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation
party.
The accommodaTED party will be treated as the party ultimately liable on the instrument.
Corporations: as a rule, cannot act as an accommodation party since it is not part of its powers. As such, acting as an
accommodation party will be considered ultra vires.
ILLUSTRATION: Unable to borrow funds, P asked M to make a promissory note payable to him for the amount of P10,000.
P then negotiated the note to A. In this case,
1. M is the accommodation party
2. P is the accommodated party
3. A can be considered a holder in due course and M remains liable on the note to A despite knowledge that M is only an
accommodation party.
4. If M is made to pay, M can collect from P since the accommodated party is the one ultimately liable on the instrument.
“holder” is defined as a payee or indorsee in possession of the instrument or the bearer thereof. As such, payees can
likewise be considered a holder in due course if they obtained the instrument under the four circumstances provided under
Sec. 52.
E. SHELTER RULE
GENERAL RULE: A holder who derives his title through a holder in due course, has all the rights of such former holder in
respect of all parties prior to the latter.
ILLUSTRATION: M issued a promissory note to P and authorized the latter to fill-up P1,000. However, P inserted P5,000
and indorsed it to A, then to B, then to C. A, B and C had no knowledge that the instrument was filled-up in excess of the
authority given. C then issued it to X who had knowledge. Can X enforce payment of P5,000 from M?
Bills in Set involve one bill although drawn in set. The problem arises when different parts of the set are negotiated to
separate persons who are holders in due course.
LIABILITY OF PARTIES
The primary and secondary liability makes the parties liable to pay the sum certain in money stated in the instrument. While
warranties are affirmations of fact on the part of the parties that impose no direct obligation to pay in the absence of breach
thereof.
In case of breach of warranties, the person who breached the same may (1) either be liable; or (2) he may be barred from
asserting a particular defense.
Unlike secondary liability which requires a notice of dishonor, an action based on breach of warranty is not so conditioned,
the latter occurring as it does at the time of the transfer, may be brought at any time.
2. Drawer – secondary liability. But the drawer may insert in the instrument an express stipulation negating or limiting is
own liability to the holder (see Sec. 61)
a. Relationship with Drawee – there is a contractual relation between the drawer and the drawee. Thus, a drawer
may have drawn the bill against the drawee because the latter is holding an amount in trust for the drawer, or the
drawee may have extended credit to the drawer and agreed to honor any bill drawn by the drawer against said
drawee.
b. Relationship with Collecting Bank – the privity of contract is between the holder-depositor and the collecting
bank. There is no privity of contract between the drawer and the collecting bank.
Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor
of his acceptance and admits:
a. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument;
and
b. The existence of the payee and his then capacity to indorse.
Order of liability: As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence
is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees
who indorse are deemed to indorse jointly and severally
Warranties of indorsers:
*Person who negotiates by mere delivery: will have the same warranties as a qualified indorser. But when the negotiation
is by delivery only, the warranty extends in favor of no holder other than the immediate transferee.
ILLUSTRATION: M made a promissory note for P10,000 payable to P or order. P changed the amount to P40,000 carefully
and it was not noticeable before he negotiated the note to A; then A to B. When B presented the note for payment, it was
dishonored by M.
a. Is A liable to B if he is a qualified or a general indorser?
b. Instead of alteration, X stole the note from P and indorsed it to A by forging the signature of P, is A liable to B if the
former is a qualified or a general indorser?
c. If it turns out that M is a minor, can A be liable to B if he is a qualified or a general indorser?
ILLUSTRATION: M made a promissory note for P10,000 payable to P or order for the purchase of goods. P negotiated the
note to A then A to B. P never delivered the goods. If M dishonors the note, what is the liability of A to B if he is a
a. Qualified indorser?
b. General indorser?
4. Accommodation Party: He receives no part of the consideration for the instrument but assumes liability to the other
parties thereto.
He is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that the
accommodation party did not receive any valuable consideration. Nor is it correct to say that the holder for value is not a
holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an
accommodation party.
DEFENSES
Real Defenses may be raised against all holders even against a holder in due course and attaches to the instrument itself.
Personal Defenses (also called equitable defenses) may be raised only against holders who are not holders in due course
which are brought out of conduct of persons and makes it inequitable to impose payment.
B. REAL DEFENSES
1. MINORITY - the defense of minority is real and may be enforced against all holders but is only available to the minor
himself.
2. ULTRA VIRES ACTS - are acts done beyond the power conferred upon a corporation by law and such want of authority
may be raised as a real defense but the negotiation of the corporation may pass title to the instrument.
3. NON-DELIVERY OF INCOMPLETE INSTRUMENT - Where an incomplete instrument has not been delivered, it will
not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person
whose signature was placed thereon before delivery.
4. FRAUD IN FACTUM (or Fraud in execution or Fraud in esse contractus) - It is present when a person is induced to
sign an instrument not knowing its character as a note or a bill. The person signing does not know that he is signing a
negotiable instrument and may be used as a defense even against a holder in due course.
Fraud in Inducement: is present when a person was induced by a cause or consideration to make a negotiable
instrument when in fact the cause or consideration is defective or non-existing and is considered only a personal
defense.
Difference is in the intention: In the former, there is no intention to make a negotiable instrument at all, in the latter, there
is fraud only as to the cause or consideration, but there is intention to make a negotiable instrument.
ILLUSTRATION: X a fan of Liza Soberano asked for her autograph. Liza then signed a blank piece of paper. In need
of money, X wrote on the paper “I promise to pay X or order P10,000 on December 31,2020”. Is Liza liable on the note?
ILLUSTRATION: B bought a diamond ring from S for P10,000 and paid by issuing a negotiable promissory note. S then
negotiated the note to A. It turns out that the diamond ring was fake. Can A enforce the note against B?
5. FORGERY AND WANT OF AUTHORITY - When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority
A forged signature, whether it be that of the drawer, maker, payee or any other party, is wholly inoperative and no one
can gain title to the instrument through such forged signature against parties prior to the forgery.
Effect:
a. As a rule, parties prior to the forgery, whether they be the maker, drawer, payee or indorser, are not liable on the
instrument.
b. Except: in case of a bearer instrument, which can be negotiated by mere delivery, the forgery of an indorsement
(even if it is to be treated as wholly inoperative) will not affect the negotiation.
ILLUSTRATION: M made a note payable to the order of P who indorsed it to A. F stole the note and indorsed it to C by
forging A’s signature, and indorsed it to D, present holder.
M P A C D
c. Forgery of Drawer’s Signature – barring gross negligence on the part of the drawer where his signature is forged,
he is not liable whether or not the instrument is payable to bearer or order because the drawer was never a party
to the instrument – he did not order to pay anybody.
ILLUSTRATION: P, knowing the combination to the lock of DR’s drawer, took a BPI check and indicated his
name as payee and forged DR’s signature.
6. MATERIAL ALTERATION - A material alteration is only a partial real defense because the holder in due course can
enforce it according to its original tenor.
Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except
as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its original tenor.
C. PERSONAL DEFENSES
1. ANTEDATING OR POST-DATING - The instrument is not invalid for the reason only that it is ante-dated or post-dated,
provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery.
2. INSERTION OF A WRONG DATE - Where an instrument expressed to be payable at a fixed period after date is issued
undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may
insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly.
The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but
as to him, the date so inserted is to be regarded as the true date.
4. ILLEGALITY OF CONSIDERATION
a. Generally, illegality of the transaction that gave rise to a particular transaction is only a personal defense. For
example, if a check was issued as payment for marijuana, the transaction involved is illegal but the same cannot
be raised against a holder in due course.
b. Exception to the rule is when the law which declares the transaction or document issued in connection thereto is
void against any party.
ENFORCEMENT OF LIABILITY
As to persons primarily liable (i.e., maker and acceptor), presentment for payment will be done to enforce liability, unless it
is excused. Note that the maker and acceptor have already undertaken that they will pay according to the instrument’s tenor
or the tenor of acceptance, respectively.
a. Presentment for payment must be made within the required period to the maker (see Bill of Exchange below for
rules on presentment for payment);
b. Notice of dishonor should be given, if promissory note is dishonored by non-payment by the maker, unless it is
excused;
2. Bills of Exchange
ACCEPTANCE OF A BILL is the signification by the drawee of his assent to the order of the drawer.
The acceptance must be (1) in writing and (2) signed by the drawee. (3) It must not express that the drawee will
perform his promise by any other means than the payment of money.
When required
i. Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in
order to fix the maturity of the instrument; or
ii. Where the bill expressly stipulates that it shall be presented for acceptance; or
iii. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
Kinds of Acceptance:
i. Conditional – payment by the acceptor is dependent on the fulfillment of the condition.
ii. Partial – acceptance to pay a part only of the amount for which the bill is drawn
Unqualified acceptance: the holder may refuse to take a qualified acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as dishonored by non-acceptance.
Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill,
EXCEPT:
i. They have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent
thereto.
ii. Receives a notice of a qualified acceptance he must but did not express dissent within a reasonable time.
When Presentment for Acceptance is Excused - Presentment for acceptance is excused and a bill may be
treated as dishonored by non-acceptance in either of the following cases:
i. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to
contract by bill.
ii. Where, after the exercise of reasonable diligence, presentment cannot be made.
iii. Where, although presentment has been irregular, acceptance has been refused on some other ground.
b. Notice of Dishonor
c. Presentment for Payment - In presentment for payment, the holder exhibits the instrument to the maker or the
acceptor to demand payment of the amount reflected in the negotiable instrument or whatever balance that is due.
C. DISHONOR
Notice of Dishonor - when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of
dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is
discharged.
Who should give notice: The notice may be given by or on behalf of the holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement
from the party to whom the notice is given.
Example: M to P to A to B to C to H. If H gives notice to P, it inures to the benefit of A, B and C, such that they need not
provide notice to P also.
2. Given by or on behalf of a party who may be compelled to pay – it inures to the benefit of the holder and all parties
subsequent to the party to whom notice is given.
Waiver of Notice - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission
to give due notice, and the waiver may be expressed or implied.
When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the
following cases:
a. Where the drawer and drawee are the same person;
b. When the drawee is fictitious person or a person not having capacity to contract;
c. When the drawer is the person to whom the instrument is presented for payment;
d. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument;
e. Where the drawer has countermanded payment.
When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of
the following cases:
a. When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that
fact at the time he indorsed the instrument;
b. Where the indorser is the person to whom the instrument is presented for payment;
c. Where the instrument was made or accepted for his accommodation.
PROTEST is a formal statement in writing made by a notary public at the instance of the holder declaring that the instrument
has been presented for payment or for acceptance but the same was dishonored.
When Necessary:
a. In case of a foreign bill dishonored by non-acceptance or non-payment
b. If a stranger to a bill will accept the instrument for honor
c. If the bill will be presented for payment to acceptor for honor or referee in case of need; and
d. When the bill is dishonored by the acceptor for honor
.
DISCHARGE
Discharge means release from further liability, obligation, or from the binding effect of the negotiable instrument.
1. As to the paper itself, it puts an end to it as a contractual obligation;
2. As to the parties to the instrument, it operates as a release of some or all of them from further obligation and liability
under the instrument although the instrument may not be discharged, as where only part of the obligors are released.
Payment in Due Course - Payment is made in due course when it is made at or after the maturity of the payment
to the holder thereof in good faith and without notice that his title is defective.
a. By Whom Made:
1. Primary Party Liable, i.e., a maker or acceptor;
2. Surety for the principal debtor, signing as a secondary party;
3. A person paying “on behalf of the principal debtor” also discharges the instrument under the principles of
the law on agency;
b. Payment by Person Secondarily Liable does not discharge the instrument; EXCEPT Payment done by
1. Drawer; or
2. Accommodated party
The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An
absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the
instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without
notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon.
Unintentional Cancellation: A cancellation made unintentionally or under a mistake or without the authority of the
holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden
of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without
authority
4. By any other act which will discharge a simple contract for the payment of money;
5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.
B. Discharge of Persons SECONDARILY LIABLE - A person secondarily liable on the instrument is discharged:
1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
4. By a valid tender or payment made by a prior party;
5. By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is
expressly reserved;
6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce
the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against
such party is expressly reserved.
CHECKS
A. CHECKS DEFINED - A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise
provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.
B. KINDS OF CHECK
1. Cashier’s check – drawn by a bank upon itself, and is acceptance by its issuance. A manager’s check is of the
same nature, although instead of being signed by the cashier, it is the manager who signs the same for the bank.
2. Certified check – drawn by a depositor upon funds to his credit in a bank which is certified by the proper officer
of the bank will be paid when duly presented for payment.
a. Certification is equivalent to acceptance
b. When the holder of the check is the one who procures the certification – the drawer and all indorsers are
discharged from liability
3. Crossed check – done by writing 2 parallel lines diagonally on the top left portion of the check
4. Memorandum check – with the words “memorandum”, “memo” or “mem” written across its face, signifying that
the maker or drawer engages to pay the bona fide holder absolutely without condition concerning its presentment.
5. Traveler’s checks – purchased from banks, express companies, or the like, which can be used like cash upon
second signature by the purchaser.
It requires the signature of the purchaser at the time he buys it and also at the time he uses it – that is when he
obtains the check from the bank and also at the time he delivers the same to the establishment that will be paid
thereby.
C. COLLECTION OF CHECKS
1. The holder of the check may either present it for payment or he may deposit it in his account with his bank known as
the depositary bank or collecting bank.
2. The depositary bank will then make a provisional credit to his account in the amount of the check.
3. The check thereafter goes through the process of clearing through the “clearinghouse”
The clearinghouse is defined as “an association of banks or other payors for the purpose of settling accounts with
each other on a daily basis. Each member of the clearinghouse forwards all deposited checks drawn on other members
and receives from the clearinghouse all checks drawn on it. Balances are adjusted and settled each day.”
4. It is only after the check has been cleared and collected from the drawee bank that final credit is made in the payee-
depositor’s account.
5. The normal bank policy is to disallow withdrawal from the account of the amount covered by the check. In some cases,
the collecting bank may be held liable for damages if it allows withdrawal of deposit even if the check has not yet been
cleared by the drawee bank.
*Knowledge of the maker/drawer: The making, drawing and issuance of a check payment of which is refused by the
drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date
of the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit.
Valid Defense – payment; Requirement of Notice: Such maker or drawer will not be liable if he pays the holder thereof
the amount due thereon, or makes arrangements for payment in full by the drawee of such check within (5) banking days
after receiving notice that such check has not been paid by the drawee.
EFFECT OF ACQUITTAL ON CIVIL LIABILITY: An acquittal does not entail the extinguishment of the civil liability for the
dishonored checks. An acquittal based on lack of proof beyond reasonable doubt does not preclude the award of civil
damages. (Mateo v. People, GR 200090, March 6, 2013)
PENALTY:
1. Imprisonment – not less than 30 days but not more than 1 year
2. Fine – not less than but not more than double the amount of the check, which fine shall not exceed the amount of
P200,000; or
3. Both, at the discretion of the court.
Prescriptive period: Prescriptive period of BP 22 Violation of B.P. Blg. 22 prescribes in four (4) years from the
commission of the offense or, if the same be not known at the time, from the discovery. thereof
a. GOOD FAITH IS A DEFENSE IN ESTAFA: So that when the accused who issued the check believing that he
would be able to make the corresponding deposit, informed the complainant, when he sensed that he could not
make the deposit, not to present the check to the bank for cancellation, he could not be held liable for Estafa. (See
People vs. Villapando) By informing the payee, there is no deceit. (Firestone Tire and Rubber Co. of the Philippines
vs. Ines Chavez)
In BP Blg. 22, even if the check is issued to pay a pre-existing obligation, there may still be liability.
c. ESTAFA MAY BE COMMITTED BY MERELY ISSUING A WORTHLESS CHECK – unlike in BP Blg. 22 which
requires that the accused BOTH drew and issued the check.
d. PERIOD TO MAKE GOOD THE CHECK – is only 3 days in estafa, but 5 banking days in BP Blg. 22.
LIABLE FOR BOTH ESTAFA AND BP 22: Under Sec. 5 of BP Blg. 22, the prosecution thereof shall be without prejudice
to any liability for violation of any provision of the RPC. It is now well settled that a single act can give rise to Estafa and at
the same time to violation of BP Blg. 22.
ILLUSTRATION (ESTAFA AND BP 22): A drew a check for P10,000 and issued the same to B for the payment of a pre-
existing obligation. B then issued said check to C representing the same to be a good check. The check was later on
dishonored for insufficient funds.
A: would not be liable for Estafa since the check was issued for the payment of a pre-existing obligation. But he is liable for
BP Blg. 22 for the making and issuance of a worthless check.
If, however, C presented the check for cancellation, deposit or encashment on the 91st day from the date indicated thereon,
A would not be liable anymore.
B: on the other hand, may be liable for estafa but not for BP Blg. 22 since he is the drawer of the check but merely issued
it.