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NEGOTIABLE INSTRUMENTS LAW
Historical Background
1. English Bills of Exchange Act of 1882 (BEA)
2. Uniform Negotiable Instruments Law (UNIL) of
1896 of the US - This was based from the English BEA
which revised and codified the law merchant in the US as
there was much confusion and lack of uniformity then in
US court decisions.
3. Uniform Commercial Code (UCC) - Art 3 of the UCC
specifically states that the UNIL should only govern
negotiable instruments.
4. Code of Commerce – the local law governing negotiable
instruments before the passage of the Act No. 2031.
5. Act 2031 or Negotiable Instruments Law (NIL) – the
governing law for negotiable instruments in the PH.
• Enacted on February 3, 1911.
• Published in the Official Gazette (OG) on March 4,
1911.
• Took effect on June 2, 1911, 90 days after
publication.
What is the significance of knowing that the history of
our NIL?
• In cases not covered wholly by our own NIL, we can make
reference to cases decided by the US courts. In fact, there
are some cases where the US courts have applied, by
analogy, its NIL to electronic fund transfers (more relevant
topic under banking laws).
If the NIL doesn’t is silent, what law can you resort to?
• According to Section 196 of the NIL, “Any case not
provided for in this Act shall be governed by the provisions
of existing legislation or in default thereof, by the rules of
the law merchant.”
• Thus, in cases that the NIL is silent, your resort will be
other local legislations like the New Civil Code or the
Code of Commerce (specifically, for crossed checks).
• If the existing legislations are not enough, we can rely
on the law merchant or lex mercatoria. The law
merchant are the principles used by merchants which
evolved as a system of custom and practice in
international trade.
Application and Purpose of the NIL
• The act applies only to negotiable instruments or
those instruments which meet the requirements laid down
in Section 1 of the NIL.
• It was intended to facilitate, not hinder or hamper
transactions in commercial paper.
What are the functions of negotiable instruments?
1. It is a substitute for money
• A negotiable instrument, while it is not money, is a
substitute for money, which makes transactions more
convenient as you can use it in the exchange of goods and
services.
• It must be emphasized that negotiable instruments
are NOT legal tender. Checks, even manager’s checks,
are not legal tender. In Philippine law, only money is legal
tender. But checks will have the effect of payment
once it is encashed.
• Exception: When there is negligence on the part of the
person to whom the check was issued, to encash the check
within a reasonable time, and the check is impaired
through no fault of the one who issued it, then there is
already the effect of payment.
• Example: The bank has already closed down and gone
bankrupt, and the payee failed to encash the check.
2. It is a medium of exchange
• You get to transfer a negotiable instrument and
conveniently get the goods that you wanted.
• Instead of bringing a lot of cash with you, and risk bringing
money, you get to have the goods that you want.
3. It is a credit instrument
• The instrument is a representation of one’s credit because
it takes into account one’s ability to pay, one’s wealth or
reputation.
• The value of a negotiable instrument is dependent on a
person’s ability to make good of the promise or order,
hence, the negotiable instrument represents his credit.
4. It is a means of making immediate payment
• More or less the same with exchange.
• Instead of you paying cash, you can use a check to pay for
the goods or services that you want to avail.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• However, this is not true for small transactions like when
you’re paying only 5 pesos, because it would be more
burdensome for the payee to encash the check, and on
your end, you might be paying more documentary stamp
taxes (DST) than the amount of your payment.
5. It is an evidence or proof of transactions
• The fact that you have issued a check from your
checkbook, for example, is proof that you have already
made payment.
Characteristics or Features of a Negotiable Instrument
1. Negotiability
• The attribute of an instrument to be transferable from one
person to another, and whoever holds that instrument,
holds such against defenses of prior parties (persons
before you)
• Example: Assume that I wrote a check payable “to cash or
order,” so that is a bearer instrument. I left it on the table,
and somebody stole it and gave it to you. Do you have
the right over that negotiable instrument? Yes,
because one of the salient features of negotiability is that
you cannot invoke personal defenses against the prior
holders of the negotiable instrument hence, the defense of
theft cannot be used against the person who is holding the
instrument right now.
• That is the concept of negotiability in NIL where you get to
transfer the instrument from one hand to another, and the
person who accepts it, accepts it free from the
personal defenses of prior parties.
• Even if the check was stolen and it was negotiated to
someone else, the person who receives it will have better
rights than prior parties. Because the person who holds it,
assuming that he is a holder in due course (will be
discussed later, see Sec. 52 of the NIL for the
requirements), will receive it free from defenses of prior
parties. Whatever may be the defect the title of the prior
party, it will not be transferred to someone else when it is
negotiated.
Negotiability vs. Assignment
• Assignment is a mere transfer.
• You can only assign rights that you have. Thus, if you don't
have a right over the object, you cannot assign a right
even if there is physical transfer.
• In assignment, the spring cannot rise higher than its
source.
• This, however, is not the case in negotiable instruments
because it can happen that the last holder of the
instrument has better rights than the older parties before
him.
2. Accumulates Secondary Contracts
• As a negotiable instrument is being transferred from one
person to another, there is added an additional party to
the instrument.
• As one person takes possession of the instrument, he gets
to have a contract separate from all others. That’s why you
have different rights and you can have better rights than
the persons before you.
• Secondary contracts are accumulated because the
indorsers become secondarily liable not only to their
immediate transferees, but also to any holder.
• There is, therefore, greater security because whoever
takes the instrument has a greater chance of recovery
because more people are liable under the instrument,
Types of Negotiable Instruments
1. Promissory Notes
• A PN is a written unconditional promise, signed by the
maker, to pay a sum certain in money, payable upon
demand, in a fixed time or in a determinable future time,
payable to bearer or order.
• Preparation → Signing → Issuance → Presented by payee
to maker → payment is made → instrument discharged.
2. Bills of Exchange
• It is a written unconditional order, signed by the person
making it (drawer), requiring the person to whom it is
addressed (drawee), to pay a sum certain in money,
payable upon demand or at a fixed or determinable future
time, payable to bearer or order.
• If it is a bill of exchange, there is an additional step
taken. It contains an order addressed to the drawee.
• The drawee must be given the opportunity to accept. He
will never be bound unless he knows about it and accepts
to be bound by the drawer.
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• Preparation → Signing → Issuance → Payee has option: 1) Thus, a bill of exchange may be dishonored in two ways:
present for acceptance to drawee OR 2) further negotiate • Dishonored by non-payment - dishonored because it
→ Present for payment to drawee → instrument was not paid.
discharged. • Dishonored by non-acceptance - dishonored because it
➢ It has to be presented for acceptance to the drawee was not accepted.
so that the drawee will know that there is such an
order. Form and Interpretation of Negotiable Instruments
➢ The drawee be given the chance to accept or not. Negotiable instrument - is one used in commercial
➢ Once the drawee accepts, he is considered an transactions and which complies with all the elements of
acceptor and he holds himself primarily liable. He negotiability provided for under Section 1 of the Negotiable
stands in the shoes of the maker. Instruments Law.
➢ Once the instrument reaches maturity (either way
whether in the hands of drawee or bearer), drawee How do you know that an instrument is negotiable?
will be bound because he accepted. Sec. 1. From of Negotiable Instruments. An instrument to
• Checks are a special form of bills of exchange where be negotiable must conform to the following requirements:
the drawee is a bank and bank and is payable on demand. a) It must be in writing and signed by the maker or drawer;
b) It must contain an unconditional promise or order to pay
Promissory Note vs. Bill of Exchange a sum certain in money;
c) It must be payable on demand, or at a fixed or
PROMISSORY BILL OF EXCHANGE
determinable future time;
NOTE
d) It must be payable to order or to bearer; and
Form In writing In writing
e) Where the instrument is addressed to a drawee, he must
Signed by Maker Drawer
be named or otherwise indicated therein with reasonable
Contents Unconditional Unconditional order certainty.
promise to to pay a sum certain
pay a sum in money Comments:
certain in • Sec. 1 (a) to (d) applies to both a promissory note and a
money bill of exchange.
Number of Two parties: Three parties: • Sec 1 (e) applies only to bill of exchange.
parties Maker and Drawer, Drawee, and
Payee Payee Requirement #1: It must be in writing and signed by the
When payable On demand, or On demand, or at a maker or drawer.
(3rd requirement at a fixed or fixed or determinable Form of Writing
of sec 1 of the determinable future time • Any form of writing will do. It can be printed, typewritten,
nil) future time or stamped, as long as there is a manifestation in physical
Payable to (4th Order or Order or bearer form the language of your obligation.
requirement of bearer
sec 1 of nil) Material
As to the 5th Not required Drawee must be • There is no requirement as to the material used.
requirement of named or otherwise • It can be on any material as long as it can be transferred
sec 1 of nil indicated therein with from one hand to another.
reasonable certainty
Illustrations:
Incidences in the Life of a Negotiable Instrument 1. Written on a grain of rice – OK (as long as the payee
• A negotiable instrument begins with the preparation of has the means to read what is written in the grain of rice)
the instrument itself and signing. 2. Written on a rock/boulder – OK
• After it is prepared and signed, you want to make use of it 3. Written with invisible ink – OK (as long as the payee
for a commercial transaction, so there is issuance. has the means to read what is written using the invisible
• If you want to explore its negotiability, you negotiate to ink)
other parties. You need to involve other persons. Over the 4. Written through an e-mail – Not OK (Electronic
course of its life, it can go through many other parties. message cannot be considered as negotiable instruments
• Once it reaches its maturity, you can ask (presentment) because the NIL contemplates manual
for payment directly if it is a promissory note, or you tradition/physical delivery. But it’s a different story if
have to first present it to the drawee for acceptance the computer or laptop is the one being transferred to
before presenting it for payment if it is a bill of another, then it now complies with section 1)
exchange.
Comments:
Example: • While the examples above seem to be absurd, they comply
A (drawer) issues a bill of exchange ordering B (drawee) to with the requirements of Section 1. No matter the
pay to the order of C (payee) or to bearer. language, as long as it can be perceived.
• C may either: • The above illustrations are negotiable for as long as they
a. keep the instrument until it reaches maturity or are in tangible form and can be preserved in the material
b. further negotiate it with the exception of #4 since the law at the time did not
• The payee or holder, as the case may be, can now present contemplate electronic messages (a reason for which Atty.
it to B (drawee) for acceptance. Amago believes that the NIL should be amended).
➢ This is done in order for the drawee to know that there • Is acceptance a requirement for negotiability? No.
is such an order. The drawee can either accept or not. Refer to Section 1 of the NIL.
➢ If the drawee accepts, he is considered an acceptor • There is no such thing as an oral negotiable
and he holds himself primarily liable. He stands in the instrument. An oral promise can make it difficult to
shoes of the maker. determine liability and create the danger of fraud.
• When it reaches maturity, the bearer/holder can now
present the instrument for payment and the drawee Location of the Signature
will make payment. • Although the signature of the maker or drawer is usually
• After the drawee pays, the instrument is deemed placed at the lower right hand corner of the instrument, it
discharged. may appear in any part thereof whether at the top,
middle, bottom, or at the margin.
However, it’s not always rainbows and butterflies, my dear.
• A situation may arise where the drawee would refuse to Illustration:
accept the instrument. In such case, the instrument is
dishonored by non-acceptance. I promise to pay X or bearer P1,000,000.
• You have to follow a certain process when it is dishonored
(to be discussed in a later topic – notice, etc.);
• Now, if you still believe that there is still good in this world,
even after the drawee’s non-acceptance of the instrument, Is the above illustration negotiable?
you may still try and push your luck, and, this time, • It is negotiable since it conforms to all the requirements
present it to the drawee for payment. in Sec. 1 of NIL. If by putting a diamond, he puts it as a
• If the drawee still refuses to pay (and there’s a high chance representation of his name showing intention to be
that we won’t since he didn’t accept it, to begin with), the
instrument is dishonored by non-payment.

Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20 2|Page
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
 bound, then that will conform to the requirement as
regards the signature.
Comments:
• It can be signed anywhere provided that such signature
signifies the intention by the maker or drawer to be
bound by the instrument.
• What is important is that the signer has intended to
adopt the signature on the instrument as his own and to
obligate himself for its payment.
• There is no hard and fast rule in making signature. You are
left to your own devices to know how your signature looks
like.
• However, while this may not affect negotiability, it may
affect acceptability. In making an instrument, take into
consideration its acceptability.
• If your signature is easy to copy, no one will believe it. It
will lose its acceptability. Conform to the traditional way of
signing.
• If you look at Section 1, it does not mention acceptability
as part of the requirements.
Liability of Person Signing
Sec. 18. Liability of person signing in trade or assumed
name. - No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly
provided. But 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.
General Rule: Only persons whose signatures appear on an
instrument are liable thereon.
Exceptions:
1. Where a person signs in a trade or assumed name (Sec.
18 par. 2)
• It is necessary that the party who signed intended
to be bound by his signature.
2. The principal is liable if a duly authorized agent signs on
his own behalf (Sec. 19)
3. In case of forgery (Sec. 23), the forger is liable even if his
signature does not appear on the instrument
4. Where the acceptor makes his acceptance of a bill on a
separate paper (Sec. 134).
5. Where a person makes a written promise to accept a bill
before it is drawn (Sec. 135)
Signature by Agent
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for this
purpose; and the authority of the agent may be established as
in other cases of agency.
Illustration:
To: X
Pay to Y or order P10,000.
Sgd. Agent A
In behalf of Principal Z
Comments:
• When it says that there is no required form, it means that
you are left in your own discretion on how you will sign the
instrument.
• For it to bind the principal, the following must be complied
with:
a. Indicate the name of the principal; and
b. The agent’s capacity for signing by using the words
“in behalf of” or “agent”
• The general rule is that the person has to sign on the
instrument in order to be liable on that instrument. Thus,
when a maker signs to the instrument, he renders himself
liable on the instrument.
• A drawer is likewise the same. When he signs on the
instrument, he holds himself liable on the instrument. You
need to present the instrument for acceptance to the
drawee so that he may be informed of his possible
obligation should he accept the instrument, and this is
indicated by the fact that he signs on the instrument.
• Now, it is also possible that the person signs on the
instrument, but he doesn’t hold himself liable to it?
➢ Yes, when he merely signs as an agent.
➢ If an agent signs in behalf of the principal, it is
required for that agent to be duly authorized by the
principal and for the agent to further indicate that he
is with authority, and that he is signing the instrument
in behalf of a specific principal.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Signature by Procuration
Sec. 21. Signature by procuration; effect of. - 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.
Signature Per Procuration
• The act by which a principal gives power to another to act
in his place but with limited authority.
• Constitutes a warning that an agent has a limited authority
• A person who takes the instrument so signed is bound at
his peril to inquire into the extent and nature of the agent’s
authority, and this applies to every person.
• A sample signature would be “Timoteo Aquino, Per
Procuration: Hector De Leon” where Timoteo Aquino is the
principal while Hector De Leon is the agent.
Indorsement of Minor or Corporation
Sec. 22. Effect of indorsement by infant or corporation.-
The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the corporation or
infant may incur no liability thereon.
Effects of Indorsement by an Incapacitated Person
• The contract is generally voidable.
• As far as the minor is concerned, he cannot be liable to the
instrument so long as that he did not represent himself to
be a person who passed the age of minority.
• The minor is not bound by his indorsement. He is,
however, not incapacitated to transfer certain rights. And
such indorsement or the signing of the negotiable
instrument passes full title to a subsequent party. Thus, a
minor can pass title to an instrument.
• A minor may be held bound by his signature in an
instrument where he is guilty of actual fraud.
• If a minor indorses an instrument, the indorsee acquires
title to it and can enforce it against the maker or acceptor
or other parties prior to the minor.
• Such prior parties cannot escape liability by setting a
defense the incapacity of the indorser.
• Minority is a defense personal to the minor, thus, it
cannot be raised by other parties.
• Also applies to other incapacitated persons.
Comments:
• As far as a corporation is concerned, it has to sign through
its representative.
• A corporation can only act in accordance in the primary
and secondary purpose as stated in its Articles of
Incorporation as well as implied incidental powers of a
corporation.
• If the corporation borrows money, if it can justify that it
is incidental to its business, then it has to act through its
BOD through a board resolution authorizing such act.
• So, the signature could be “XYZ Corporation By: A (sgd),”
granting that A is duly authorized for this transaction and
that XYZ Corp. has the authority to act in this capacity.
• But, if XYZ Corp. is not authorized to engage in such a
transaction, then it will also not be liable. It is the one who
gets to sign will be liable.
Requirement #2: Must contain an unconditional promise
or order to pay a sum certain in money.
Sec. 3. When promise is unconditional. - An unqualified
order or promise to pay is unconditional within the meaning of
this Act though coupled with:
a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to be
debited with the amount; or
b) A statement of the transaction which gives rise to the
instrument.
But an order or promise to pay out of a particular fund is not
unconditional.
• Condition - Any future event which may or may not
happen. It could also refer to a past event not known to
the parties which give rise to an obligation or extinguishes
an obligation.
• Unconditional - It is not contingent on the happening of
a future event; not subject to any condition.
Comments:
• There can only be a condition when it is attached to
an obligation. It can either give rise or extinguish an
obligation. Whether there is a future event or past event,
it remains to be that, not a condition.
3|Page
 Promise Order • What spells the difference is that what is covered by the
account is only the reimbursement of X who happens
Pertains to a promissory note Pertains to a bill of exchange.
to make the payment.

Parties – maker and payee. Parties – Drawer, Drawee, and To: X

Payee. Pay to Y or order P10,000 pursuant to our contract of lease.
It is the person primary liable Refers to a person directing Sgd. Z
who obliges himself on the another person or himself to pay
instrument on the instrument; requires an • This is negotiable. Section 3 of the NIL provides that an
additional act on the person instrument is negotiable even if it only imposes statements
primarily liable — that is, by of the transaction.
accepting the instrument • It will not matter whether it is a present or future
event. Statement as to the consideration does not
render the instrument, non-negotiable.
Are these conditions?
• It remains unconditional for the reason that it’s merely a
A. Christmas Day
descriptive of the source of the obligation.
B. Birthday Last Year
C. Birthday this Year
To: X
• All of these are not conditions. They are periods since
I promise to pay X or bearer P1,000,000 subject to our
these occur regardless of a happening of an event or not.
contract of lease.
It is certain to occur.
Sgd. Z
Suspensive vs. Resolutory Condition
• This is non-negotiable.
• A suspensive condition is a condition that gives rise to
• This binds the payment to the terms of the contract of
an obligation upon its occurrence.
lease; thus, it is subject to a condition.
• A resolutory condition, on the other hand, is a condition,
• If it is merely a statement of the transaction, it is
the happening of which, extinguishes the obligation.
negotiable.
• If you need to look at another contract, it is non-negotiable
Terms Not Affecting Unconditional Liability (Still
since you cannot merely rely on the face of the instrument.
Unconditional)
• If the promise or order is “subject to or governed by the
1. An indication of a particular fund out of which
terms and conditions of our contract of lease”, the
reimbursement is to be made
instrument is not negotiable because the obligation to pay
• Negotiable because the order to pay is not rendered
is burdened with the terms and conditions of another
conditional. The drawee is not limited to the money in
contract, subjecting recovery on the instrument to
his hands belonging to the drawer.
defenses available under the contract.
• The fund indicated is not the direct source of
payment, but only the source of reimbursement
Cases:
which is an act subsequent to the payment.
#3 Metrobank vs. CA
2. A particular account to be debited with the amount
• Eduardo Gomez opened an account with Golden Savings
• An instrument which contains a direction to debit a
and deposited 38 treasury warrants. The treasury
particular account is negotiable because the promise
warrants was then indorsed by Mr. Gomez to Golden
or order is not also made conditional.
Savings, and then Golden Savings (by their cashier Gloria)
• The payment does not depend upon the existence or
deposited to its Savings account in Metrobank branch.
adequacy of the particular account to be debited.
They were sent for clearance.
3. A statement of the transaction which gives rise to
• Meanwhile, Gomez is not allowed to withdraw from his
the instrument.
account, later, however, exasperated over Gloria
• Mere recital of consideration for instrument/origin of
repeated inquiries and also as an accommodation for
the transaction does not make it conditional.
a valued client, Metrobank decided to allow Golden
• Such kind of reference has no adverse legal effect on
Savings to withdraw from the proceeds of the
the negotiability of the instrument.
warrants even before it was cleared.
• Relying on the confirmation of MetroBank that there was
Illustrations:
indeed available funds, Golden Savings allowed Mr. Gomez
to make withdrawals.
To: X
• Subsequently, the treasury warrants were dishonored by
Pay to Y or order from my salary.
the Bureau of Treasury, which led MetroBank to go after
Sgd. Z
Golden Savings to collect the withdrawn money.
• Apparently, it was dishonored because there was forgery
• The above illustration is not negotiable.
on the signatures on some of the payees
• The phrase “from my salary” indicates that the salary is
the only specific fund that is to be taken out of. The
Supreme Court Ruling
payment would depend on the sufficiency or insufficiency
• The treasury warrants in question are not negotiable
of the specific fund.
instruments. Clearly stamped on their face is the word
• An instrument payable out of a particular fund is non-
"non-negotiable."
negotiable as it is not payable "in any event" because
• Moreover, it is indicated that they are payable from a
the amount to be paid is made to depend upon the
particular fund, to wit, Fund 501.
adequacy or existence of the fund designated.
• The indication of Fund 501 as the source of the payment
to be made on the treasury warrants makes the order or
promise to pay "not unconditional" and the warrants
To: X
themselves non-negotiable. There should be no
Pay to Y or order and debit my account with you.
question that the exception on Section 3 of the Negotiable
Sgd. Z
Instruments Law is applicable in this case.
• Metrobank exhibited extraordinary carelessness.
• The above illustration is negotiable. The payment here
The amount involved was not trifling — more than one and
is not dependent on the existence of a specific fund; the
a half million pesos (and this was 1979).
second phrase merely refers to where the drawee will get
• There was no reason why it should not have waited until
his reimbursement.
the treasury warrants had been cleared; it would not have
• The relationship between bank and depositor is a
lost a single centavo by waiting.
debtor-creditor relationship. Hence, when you deposit
• Yet, despite the lack of such clearance — and
money to the bank, it will be “credited” to your account, if
notwithstanding that it had not received a single centavo
you withdraw, it will be “debited” from your account.
from the proceeds of the treasury warrants, as it now
• Since the bank is a debtor, when you (creditor/depositor)
repeatedly stresses — it allowed Golden Savings to
deposit to the bank, it forms part of its obligations or
withdraw — not once, not twice, but thrice — from the
liabilities. In accounting, when we increase a liability, we
uncleared treasury warrants in the total amount of
record it in the “credit” side. Additionally, when we
P968,000.00.
decrease a liability, we record it in the “debit” side.
• It is setting aside this from the account of the
Comments:
depositor/drawer. In layman’s term, you can call it “charge
• Not all treasury warrants are non-negotiable.
it to my account” instead of “debit to my account.”

Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20 4|Page
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• It was just in this case that payment for it was from a
particular fund (Fund 501), which makes it non-
negotiable.
#1 Philippine Education Co. vs Soriano
• A certain Montinola went to the Manila Post Office with the
intention to purchase 10 money orders worth P200.00
each. Upon purchasing this money order, he informed the
post office that he will pay it out of his private check but
it was denied because checks were not ordinarily accepted
as payment for money orders.
• The cashier advised him to see the Chief of the Money
Order Division, but instead of doing so, Montinola left the
building with his own check and the ten money orders
without the knowledge of the teller.
• Upon knowledge of the unpaid money orders, an urgent
message was sent to all postmasters and served to
all banks instructing them not to pay any one of the
money orders if presented for payment.
• This was also received by the Bank of America 3 days after
and despite such notice, the Bank of America was still
able to make payments out of the postal money
order. The said money orders were then deposited with
the Bank of America and thereafter the latter cleared it
with the Bureau of posts and received from the latter its
face value of P200.00.
• Bank of America is now claiming from the Philippine Postal
Corporation on the postal money order which they issued.
Supreme Court Ruling
• It is not disputed that our postal statutes were patterned
after statutes in force in the US. For this reason, ours are
generally construed in accordance with the construction
given in the US.
• The reason behind this rule being that, in establishing
and operating a postal money order system, the
government is not engaging in commercial
transactions but merely exercises a governmental
power for the public benefit.
• When you define negotiable instruments law, you must say
that it is used in commercial transactions, thus, a
postal money order is not a negotiable instrument because
it is not used in the commercial transaction.
• It is to be noted in this connection that some of the
restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the
character of negotiable instruments that it must
contain an unconditional promise to pay a sum
certain in money.
Comments:
• If you can see there is transfer now, from the Philippine
postal office to the hands of Montinola, from Montinola it
went to the Philippine Education, and then it went to the
Bank of America, from Bank of America it is now
demanding payment from the Philippine postal office.
• So in other words there seems to be a semblance of
negotiation of the instrument, but it is not a
negotiable instrument.
• Postal money orders are not negotiable instruments.
Government is not engaged in commercial transactions,
but merely exercises governmental power for the public
benefit.
• Restrictions imposed on the postal money orders are
inconsistent with the character of negotiable
instruments. This is because negotiable instruments
are supposed to be not subject to conditions.
• Specific regulation mentioned which negates negotiable
character of money order - There cannot be more than 1
indorsement.
• What other instruments did the SC say that was not
a negotiable instrument in our cases in the syllabus?
➢ Special withdrawal slips (#10 Firestone vs. CA)
➢ Pawn tickets (#6 Serrano vs. CA)
What is a sum certain in money?
• It is one where the amount supposed to be received can
be determined or ascertained from the face of the
instrument alone.
• There is clarity as to the amount to be received by the
holder of the instrument. The amount should be fixed and
determinable without having to resort to extrinsic sources.
• The basic test is whether the holder can determine by
calculation or computation the amount payable
when the instrument is due.
• An instrument may contain certain terms though which
may or may not affect the negotiability of the instrument.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Sec. 2. What constitutes certainty as to sum — The sum
payable is a sum certain within the meaning of this Act,
although it is to be paid:
a) with interest; or
b) by stated installments; or
c) by stated installments, with a provision that, upon default
in payment of any installment or of interest, the whole
shall become due; or
d) with exchange, whether at a fixed rate or at the current
rate; or
e) with costs of collection or an attorney's fee, in case
payment shall not be made at maturity.
a. With Interest
• A provision for the payment of interest is a mere incident;
it does not render the instrument non- negotiable because
it does not make uncertain the sum payable.
• If the interest rate is not stated, it is still negotiable. A
mere phrasing “with interest” is deemed not to affect the
character of the sum. It still renders the sum certain in
money.
• If there is no specific legal interest rate, it is still a common
commercial knowledge that legal interest rate is at 6%.
Illustration (with interest):
To: X
Pay to Y or order P10,000 and interest.
Sgd. Z
• It is negotiable and complies with the requirements
of the NIL. Even if the interest rate is not indicated
therein, we can presume that the interest rate is the
current legal rate – 6%.
• The interest begins to run from the date of issuance,
where it is computed from such date up until its
maturity. When a rate is given, if the problem is silent, it
is expressed on a per annum basis.
• In the above example, since there is no maturity date
stated in the face of the instrument, it is payable on
demand. Thus, if you compute the interest due,
remember the basic formula for interest: Interest = PRT
or Principal x Rate x Time.
• Thus, in the above example, the interest is prorated,
depending on when you presented it for payment following
the date of its issuance.
• So, if you presented it for payment 100 days after its
issuance, the interest will be computed as: P10,000 * 6%
* (100 days/365 days).
b. by stated installments
• The promise or order to pay "by stated installments" does
not affect negotiability.
• As to installments, it should specify:
a) interest of each installment (amount of installment)
b) specific due date of each installment
• Without it, it renders the instrument non-negotiable.
Illustration (installments):
To: X
Pay to Y or order P10,000 payable in 5 installments.
Sgd. Z
• It is not negotiable. The law requires the instrument to
specify the amount of each installment and the due date
of each installment. In this case, as to how much and when
cannot clearly be ascertained from the instrument.
• When the sum is stated in installments, the certainty
of the sum will now be based on the “per
installment” basis. To be considered “stated installment”
you have to state the amount due per installment as well
as the due date of each installment.
Presented below is a correct example of a negotiable
instrument on an installment basis:
To: X
Pay to Y or order P10,000 payable in 5 equal installments
due on September 1, 2019, October 1, 2019, November
1, 2019, and January 1, 2020.
Sgd. Z
c. as to default in payment of installment
Acceleration Clause
• A clause or covenant which states that in the event of
defaults in payment of any amount due, either for
5|Page
 capital or interest, the whole balance shall
automatically become due and payable.
• If the acceleration clause for stated installments is
dependent on some act or default of the maker, it
does not affect its negotiability as the rule against
uncertainty of maturity is not violated.
• However, if the acceleration clause for stated
installments at the option of the holder, it is now
non-negotiable. This is so because it contradicts the
requirements on stated installments because the holder
may act upon his own whim or caprice, hence, it is no
longer payable at fixed or determinable future time. It is
akin to that of an insecurity clause.
Insecurity Clause
• From the term insecurity, it is when the creditor no longer
feels safe or secure with his credit and he feels that the
person primarily liable is not able to pay, so he will already
demand payment even before it matures. This clause
allows the holder to accelerate payment if he deems his
credit insecure.
• If the holder is not confident in the paying capacity of the
maker, he uses this clause as a safeguard. It would be
incumbent on the holder on how much to be paid or due
to him.
• This type of acceleration clause at the option of the
holder is an example of an insecurity clause. This makes
the instrument non-negotiable for the same reason stated
above.
Extension Clause
• It is a clause stated on the face of the instrument that
fixes a maturity date and allows a grace period for
extension of the period of payment.
• If the extension clause is at the option of the holder, it
is negotiable. If the extension clause is at the option of
the person primarily liable, it is not negotiable.
• If it is at the option of the holder, even if you extend it,
it does not really affect the sum certain. The sum remains
certain even during the extension period. After all, it’s
really up to the payee or the holder of the instrument when
he will make the demand.
• If it is at the option of the one primarily liable, without
stating the amount of time, it does not have a specific time
when the holder of the instrument can get the amount due
to him, the one primarily liable can, at his option, pay it
whenever he pleases. It makes it non-negotiable.
• Also, as a clarification to what is stated in De Leon’s
book, if the extension clause is at the option of the one
primarily liable and the amount of time extension is stated
in the instrument, it can still be negotiable as long as it can
be determined with certainty when the extension would
be.
• Basically, if it is stated on the face of the instrument, that
it is at the option of the holder. It will not affect
negotiability. If he does not want to be paid yet, it is at his
option. If it is at the option of primarily liable person, there
may be no maturity date at all or due. If you connect that
to installments, that will render the sum no longer certain.
d. as to exchange, whether at a fixed rate or at the
current rate
• A provision on payment on current exchange rates may
also be added but it has to be certain what currencies
are involved.
Illustration (exchange rates):
To: X
I promise to pay X or bearer $1,000,000 based on current
exchange.
Sgd. Z
• It is not negotiable. It is uncertain as to what amount
he is to receive since there is no mention of the current
exchange rate it would be based on.
A current exchange rate can now refer to any
exchange rate, not merely the US Dollar – Philippine
currency. It may actually be referring to a Philippine
carabao.
Presented below is a correct example of a negotiable
instrument with exchange rate:
To: X
I promise to pay X or bearer $1,000,000 based on current
exchange rate of USD to PHP on August 29, 2019.
Sgd. Z
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
e. with costs of collection or attorney’s fees
• A provision on collection costs and attorney’s fees may also
be added provided that they are only due after the
instrument has been due.
• This will not affect the negotiability of the instrument
because when there is an imposition of attorney’s
fee, it presupposes that the obligation had already
matured.
• And once the instrument had already matured, it ceases
to be negotiable, thus the stipulation of attorney’s fee and
collection cost is irrelevant for negotiability.
Illustration
To: X
Pay to Y or order P10,000 plus attorney’s fees upon default.
Sgd. Z
• Negotiable. The attorney’s fees do not affect the
sum certain in money which the payee or holder
would demand from the maker or drawee if such would
be paid upon the due date.
• The attorney’s fees would only affect if the payment would
not be paid at the due date.
• The requirement that the sum certain in money is
only up to the date of maturity of the instrument.
• The character of the negotiability is only up to the date of
maturity.
Requirement #3: It must be payable on demand or at a
fixed or determinable future time.
Payable on Demand
An instrument payable on demand is when:
a. it is expressly so payable on demand,
b. at sight,
c. on presentation,
d. no time for payment is expressed, or
e. it is overdue.
Illustration (payable on demand):
I promise to pay Kristine or order P1,000 on demand.
Sgd. Cavalida
Illustration (payable at sight):
To: X
Pay to Y or order P10,000 at sight
Sgd. Z
Comments:
• The two are not synonymous. “At sight” pertains to a
situation wherein the instrument is presented for an
acceptance, thus, this applies to a Bill of Exchange
only.
• “On presentation” may be for a Bill of Exchange or
promissory note.
• If “at sight,” it means it is presented for acceptance
to the drawee for him to accept. If he accepts, he is
obligated to pay.
➢ At sight – presentment for acceptance ONLY.
➢ On Presentation – presentment for acceptance or
presentment for payment.
Illustration
To: X
Pay to Y or order P10,000.
Sgd. Z
• It is negotiable since it is payable upon Y’s demand.
According to Sec. 7 of the NIL, when an instrument does
not provide for a date, it is deemed payable on
demand.
• When is an instrument payable at a fixed or
determinable future time?
➢ If an instrument is payable after a fixed date, it is
considered a fixed future time.
Illustration (fixed time):
I promise to pay Kristine or order P1,000 on August 31, 2019.
Sgd. Cavalida
6|Page
Illustration (determinable future time):
To: X
Pay to Y or order P10,000 upon my death.
Sgd. Cavalida
• Both are negotiable since the stipulation of death is
determinable. It is merely uncertain as to when the death
will occur.
Illustration:
To: X
Pay to Y or order P10,000 10 days before my death.
Sgd. Cavalida
• The above illustration is no longer negotiable because it
is no longer determinable when that 10 days before death
will occur.
• While death is a certain, the 10 days before that are
not. You wouldn’t be able to compute and determine when
that would be.
• The instrument will ALWAYS BE overdue after the death of
the person. The 10 days have already lapsed before you
know when the maturity date is.
Correct example:
To: X
Pay to Y or order P10,000 10 days after my death.
Sgd. Cavalida
Illustration (fixed period on or before a determinable
future time):
To: X
Pay to Y or order P10,000 30 days on or before the date of
the issuance of the instrument.
Sgd. Z
• If the example instead stated “on or before my death from
malaria,” it is not negotiable since death is contingent on
its cause. He may, in fact, die from an accident rather than
malaria.
Instrument is overdue
• 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.
• Overdue — beyond its maturity date; always payable on
demand.
• It is payable on demand to those persons:
a. Issuing
b. Accepting
c. Indorsing
Comments:
• An instrument is deemed overdue when it is already
beyond its maturity date. On the date after its maturity
date, an instrument is already considered overdue.
• So if ever there is a party who issues an instrument after
it is overdue, it’s always payable on demand because
anyone who will receive it can always already present it for
payment.
• Say for example, if I put here, I promise to pay X or
bearer P10,000 on January 1, 2019. And today is
already August 29, 2019, if you receive that
instrument, can you present it right away for
payment?
➢ Yes, and I am supposed to be compelled to pay that
because the date indicated January 1, 2019. The
instrument is already deemed overdue.
➢ If that instrument is further negotiated, whoever
negotiates it holds the instrument as already payable
on demand.
Requirement #4: It must be payable to order or to
bearer.
• These words of negotiability serve as an expression of
consent that the instrument may be negotiated.
• The instrument need not follow the language of the law;
any term which clearly indicates an intention to conform
with the legal requirements is sufficient.
Payable to order
Sec. 8. When payable to order. - The instrument is payable
to order where it is drawn payable to the order of a specified
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
person or to him or his order. It may be drawn payable to the
order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable
certainty.
a. Payable to the order of a payee who is not maker,
drawer, or drawee
• The payee or that specified person could be another person
other than the drawer, maker or drawee.
Illustration:
I promise to pay to the order of X P10,000.
Sgd. Z
b. Payable to the order of the drawer or maker
• You are the maker and at the same time the one who will
make the subsequent order.
Illustration (Payable to the order of Maker):
I promise to pay to the order of myself P10,000.
Sgd. Z
c. Payable to the order of the drawee
Illustration:
To: X
Pay to X or order P10,000.
Sgd. Z
• It is negotiable. It does not matter if the payee is a
drawee. It may be parties mentioned from letter (a) to
letter (f) under Section 8.
d. Payable to the order of two or more payees jointly
• The payees in this case are required to jointly make the
indorsement.
• We emphasize the conjunction “and” which denotes that
there are two separate credits in this case.
Illustration:
To: Jinggoy
Pay to the order of Jinggay and Jima P10,000.
Sgd. Z
• What’s the requirement if there is are joint payees,
this being an order instrument?
➢ The requirement is that both A and B will make the
indorsement
e. Payable to the order of one or some of several payees
• The instrument is payable to either one of them or the
indorsement of any one is sufficient to pass title.
• We emphasize the conjunction “or”
Illustration:
To: Jinggoy
Pay to the order of Jinggay or Jima P10,000.
Sgd. Z
To: Jinggoy
Pay to the order of Jinggay, Jima, Ernie, or two of them
P10,000.
Sgd. Z
f. Payable to the order of the holder of an office for the
time being
• The position must be occupied by only one person
otherwise it will render the payee undeterminable.
• If it is an order instrument, it is required that it must be
payable to a payee who is named or indicated with
reasonable certainty.
Illustration:
To: Jinggoy
Pay to the order of the BIR Commissioner P10,000.
Sgd. Z
7|Page
• It can even be to a cashier or president of any
organization, long as the person gets to be identified or
at least the position gets to be identified.
Illustration: Bearer/Order Instrument; Negotiable/Non-
Negotiable?
I promise to pay bearer X the amount of P10,000.
Sgd. Z
• It is a non-negotiable instrument.
• The instrument is considered to be paid to a specific person
rather than to a bearer. The term “bearer” in this case
is simply used to describe X.
Payable to Bearer
Sec. 9. When payable to bearer. - The instrument is payable
to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer;
or
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the person
making it so payable; or
(d) When the name of the payee does not purport to be the
name of any person; or
(e) When the only or last indorsement is an indorsement in
blank.
Comments:
• While Section 9 of the NIL specifies five (5) types of bearer
instruments, there are only 2 bearer instruments on
its face, namely (a) and (b).
• The other types (c) to (e) are, on its face, payable to
order of a specified payee, but defective.
a. When it is expressed to be so payable
• It expressly states hat the instrument is payable to bearer.
Illustration:
I promise to pay to bearer Php15,000.
Sgd. K
b. When it is payable to person named therein or bearer
Illustration:
To Raki:
Pay to bearer or Kristine Php 15,000.
Sgd. K
• Negotiable. It doesn’t matter which comes first, it could
be the “bearer or the specified person” or “specified person
or bearer”
Payable to the order of bearer
Illustration: Bearer Instrument or Order Instrument?
To Raki:
Pay to the order of bearer Php 15,000.
Sgd. K
• According to De Leon, referencing a US case saying that
this is an order instrument (see page 62, last paragraph),
it is a bearer instrument, because the parties
intended to negotiate it by mere delivery.
• In the US case cited by De Leon, the decision was based
on the intention of the parties which was to make it an
order instrument.
• Atty. Amago agrees with De Leon that, notwithstanding
the US case, this kind of instrument is ordinarily a bearer
instrument.
• Here, you intend the bearer to make the order, thus, your
intention is to negotiate it by mere delivery.
• Let’s say a check for example, where there is already a
template stating “pay to the order of _______” and you
put “bearer” in the blank, it would be a bearer instrument
on its face. Because, then, the parties are expected to
intend that the instrument will just be negotiated by
mere delivery.
• Why would one have to put there bearer if the original
intention is to make the payee indorse the instrument? So,
on its face, it really is a bearer instrument.
c. Payable to the Order of a Fictitious or Non-Existing
Person, and Such Fact was Known to the Person Making
It So Payable
• For this to apply, the drawer/maker must know of the non-
existence or the person.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Illustration:
I promise to pay to the order of Michael Jackson P10,000.
Sgd. Z
• This is considered a bearer instrument since it is one
dedicated to a fictitious person. It does not matter if he is
dead or alive.
• However, the fact of it being fictitious or non-existent
has to be known to the party making it so payable.
Example: Allan, Ted’s (the drawer) grandfather died
June 15, and he knows of that fact.
Situation 1: Dated June 15, 2019, due on August 30,
2019
June 15, 2019
To: Rocky
Pay to the order of Allan P10,000 on August 30, 2019.
Sgd. Ted
Situation 2: Dated June 10, 2019 (before death), due on
August 30, 2019
June 10, 2019
To: Rocky
Pay to the order of Allan P10,000 on August 30, 2019.
Sgd. Ted
• Here, if not negotiated by the deceased Allan, it still
remains negotiable, and his estate can claim the proceeds.
Comments:
• What is controlling is the knowledge of the person
making or drawing the instrument, regardless of the
circumstance of the payee named therein.
• If it is his intention to write the name of a non-
existing or dead person because he doesn’t want
that instrument to be further indorsed but just to be
delivered, or just to give honor to that dead person,
then that could be considered as a bearer
instrument. Otherwise, it remains to be an order
instrument.
Example: Payable to the order of a fictitious person
(Batman), with the maker thinking he is alive, but is, in
reality, non-existent:
To: Rocky
Pay to the order of Batman P10,000 on August 30, 2019.
Sgd. Z
• Intention is for the instrument to be circulated, but
you are of the belief that Batman is alive. It cannot be
a bearer under letter (c) because it doesn’t have the
knowledge of the person making so payable, it also cannot
be a bearer instrument, because no one can endorse it.
• Debatable: It might be delivered to someone not Batman,
and he or she might make an endorsement. Ofcourse, the
instrument was never issued since it was not transferred
to Batman, it was just negotiated. In this case, you can
argue that it is negotiable.
• Atty. Amago’s position: It’s non-negotiable since
Batman never really existed. It’s different from the
previous examples (Allan/Gina Lopez), since the payee
used to be alive, so you really cannot consider this as a
non-negotiable. No one can make the order if he is not
really alive.
d. Payable to the Order of a Payee That Does Not Purport
to Be the Name of Any Person
I promise to pay to cash P10,000.
Sgd. Z
• There’s an old SC case which held this as a negotiable
instrument payable to a bearer, even if there are no
words of negotiability as it does not state that it should be
“paid to the order of cash.”
• It should be understood now in the context of a check’s
template, when you write “cash” in the blank space, and
that can be negotiated.
• The general rule still is that for it to be negotiable, there
has to be words of negotiability.
8|Page
Presented below is another variation:
I promise to pay to cash or order P10,000.
Sgd. Z
Illustration:
I promise to pay Michael Jackson P10,000.
Sgd. Z
• This is non-negotiable because it doesn’t have words of
negotiability.
• Remember, (c) to (e) in the enumeration are
originally made payable to order. It should be payable
to the order of a fictitious or non-existent person, etc.
e. only or last indorsement is an indorsement in blank
• An order instrument can be considered a bearer instrument
if the last indorsement is an indorsement in blank.
• The last one (e) talks about the only or last
indorsement in blank, this happens once an instrument
has already been negotiated.
• Remember that if the instrument is payable to bearer, you
can negotiate it by mere delivery, whereas, if it is an
instrument that is payable to order, someone has to sign
first, making his order that this is to be paid to the person
to whom he will negotiate the instrument (indorsement
with delivery). So in that case, it requires an indorsement
prior to delivery to complete the negotiation.
• So, if at the back of the instrument, it no longer contains
a specific person to whom the instrument can be
negotiated, that only means that this instrument
must be intended to become a bearer instrument.
• Once a bearer instrument, it is always a bearer
instrument IF originally a bearer instrument on its
face, BUT an order instrument can become a bearer
instrument if the last indorsement is in blank.
Requirement #5: The drawee must be named or
otherwise indicated therein with reasonable certainty.
• This is applicable only to bills of exchange because
drawees are present only in bills of exchange. There is no
drawee in a promissory note.
• There’s no specific provision in the law which provides for
as to how you’re supposed to indicate that this is
addressed to the drawee. It simply means that you
indicate the drawee whenever you make the bill of
exchange.
• You should be able to identify the person required to pay.
The reason why this is required is because, if you want
an instrument to have commercial value, you should
be able to go to a person primarily liable.
• This would most likely refer to a position of the drawee.
• Where a bill is addressed to the “treasurer” of a
corporation, the drawee is sufficiently indicated.
• In effect, if it is a bill of exchange and there is no drawee,
the instrument is not negotiable.
What does that mean that if he is not named, at least he
can be indicated with reasonable certainty?
• It means anything that distinguishes him from the rest of
the general public.
• Usually it is the position of the person. It cannot be the full
name because that is when he is named. When indicated
with reasonable certainty, at least one which is indicative
that this person is truly that person.
Illustration:
To: The Current Dean of UST Law
Pay to the order of the BIR Commissioner P10,000.
Sgd. Z
Kinds of Negotiable Instruments
1. Promissory Note
2. Bill of Exchange
• Checks are a special kind of bills of exchange.
PROMISSORY NOTE
Sec. 184. Promissory note, defined. - A negotiable
promissory note within the meaning of this Act is 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. Where a note is drawn to the maker's
own order, it is not complete until indorsed by him.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
BILL OF EXCHANGE
Sec. 126. Bill of exchange, defined. - A bill of exchange 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 to
bearer.
Bill Not an Assignment of Funds
Sec. 127. Bill not an assignment of funds in hands of
drawee. - A bill of itself does not operate as an assignment of
the funds in the hands of the drawee available for the payment
thereof, and the drawee is not liable on the bill unless and until
he accepts the same.
Comments:
• If a bill of exchange is issued, whether accepted or not, it
will not amount to acceptance of funds. It remains to be
a general credit.
• Even if the drawee has enough funds in the name of the
drawer, until the drawee accepts the bill, he is not
liable.
• What’s the consequence of the fact that there is no
assignment of funds?
➢ If it does not amount to an assignment of funds,
a holder of that instrument cannot sue the
drawee bank if the bank will not encash the
check.
➢ Rather, the holder can sue the person whom he
received the check from. BUT, the drawer can hold
the drawee liable assuming that he has funds
available in the drawee.
➢ Exceptions: Manager’s, cashier’s, and certified
checks. In these instances, the funds are already
set aside for the payment of that particular
check.
• The same goes for any type of instrument. Since it does
not amount to an assignment of funds, the holder
cannot sue the drawee. Although, the drawee can
already be liable for it if he accepted it (this will not
be the case for a check). Any holder cannot sue the
drawee. He can sue the drawer and the drawer then can
sue the drawee for not accepting the instrument.
• Effect if drawee refuses to accept: He may be liable to
the drawer.
Example:
Ms. B had money with Mr. A. Ms. B gave a bill of
exchange requiring Mr. A to pay Mr. C. Does that mean
that the funds of Ms. B with Mr. A are already set aside
for the payment of the negotiable instrument that Ms. B
made?
• No, Mr. A can refuse the order made by Ms. B, but then it
will subject him to damages later on because Ms. B has
funds with Mr. A which she can use anytime, supposedly.
Bill Addressed to More Than One Drawee
Sec. 128. Bill addressed to more than one drawee. - A bill
may be addressed to two or more drawees jointly, whether
they are partners or not; but not to two or more drawees
in the alternative or in succession.
Comments:
• A bill of exchange may be addressed to two or more
drawees. But cannot be made in alternative nor in
succession.
• Sec. 128 is different from Sec. 8d (Two or more payees
jointly) and e (One or some of several payees).
• Sec. 8 talks about the PAYEE and Sec. 128 talks about the
DRAWEE.
• There can be 2 or more payees, not drawees.
Illustration:
To: A and B
Pay to the order of the C P10,000.
Sgd. Z
• In Sec. 8 – It can be “or” or “and.”
• In Sec. 128 – It can be “and” and never “or.”
Why is it that there cannot be a several or a solidary
DRAWEE in case of a negotiable instrument?
• The problem here is the determination of when the
instrument is accepted or if not accepted, dishonored.
• It will cause a doubt as to when the instrument was
dishonored. Because if you will go to A and he will not
9|Page
 accept, you can still go to B and determine if he will accept
it or not.
• If you wouldn’t know the date of dishonor, then you
wouldn’t also know when your cause of action arises and
also when the liabilities of the parties are to accrue as well.
Inland and Foreign Bills of Exchange
Sec. 129. Inland and foreign bills of exchange. - An inland
bill of exchange is a bill which is, or on its face purports to be,
both drawn and payable within the Philippines. Any other bill
is a foreign bill. Unless the contrary appears on the face of the
bill, the holder may treat it as an inland bill.
• Inland Bill – The drawing and paying of the instrument
happened within the Philippines.
• Foreign Bill — If either the drawing or paying or both
happen abroad.
When Bill May Be Treated as Promissory Note
Sec. 130. When bill may be treated as promissory note.
- Where in a bill the drawer and drawee are the same person
or where the drawee is a fictitious person or a person not
having capacity to contract, the holder may treat the
instrument at his option either as a bill of exchange or as a
promissory note.
Instances when a bill may be treated as a promissory
note:
1. The drawer and drawee are the same person.
• In a bill of exchange, the holder has to present the
instrument for acceptance, whereas, if it is a
promissory note, no presentment for acceptance is
necessary.
• In this case, if that instrument will be considered a
promissory note, it will allow the holder to dispense
with the presentation for acceptance.
• Reason: Because the person whom you are going
to present it to for acceptance and payment are
one the same. (I am ordering myself to make
payment, and I will also be the one to make payment).
2. Where the drawee is a fictitious person.
• Note that it has to be the intention of the person
who drew it that instrument must be negotiable
when he put the fictitious drawee in the instrument.
• Because he has knowledge that the drawee is
fictitious, he did not intend that this instrument
must be presented for acceptance.
• In a way, this is to penalize the drawer for
putting a fictitious person as a drawee.
• This, if treated as a PN, the drawer will be the
one held primarily liable.
3. The drawee does not have the capacity to contract.
• There must be knowledge that the person will
not be able to accept because he is incapacitated
(e.g. minor). The intention is not to bind the person
who accepted it.
• Here, the drawer did not intend that this
instrument must be presented for acceptance.
• This is again to penalize the drawer for putting
a person who does not have a capacity to be
bound as a drawee.
• Thus, if treated as a PN, the drawer will be the
one held primarily liable.
What if the drawer did not know that the drawee did
not have the capacity to contract?
• Even if the drawer did not know, if the he is in a
position to know that the drawee is incapacitated, to
an innocent holder, the instrument can still be
treated as a PN so that there will be a person
primarily liable.
• You will see that as a primary reason by the SC every time.
The person who is primarily liable should be the one
who caused the defect to arise.
• Since you as a drawer caused the instance that a person
who is incapacitated to contract to become the drawee,
then you should be held liable such.
Illustration:
To: Superman
Pay to the order of the C P10,000.
Sgd. Z
• It has something to do with in fact with the intention of
the person who drew the instrument. The intention of
that person is to make a negotiable, and so it should be
treated as one.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• But when he placed a fictitious person (Superman),
he must have known that there was no intention to
have the instrument presented for acceptance when
he knows for a fact that this person does not exist.
CHECK
Sec. 185. Check, 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.
• The drawee is always a bank. You cannot call it a check
if the drawee is not the bank and it is always payable on
demand.
Example of a Crossed Check:
• There are two parallel lines placed on the side of the
instrument.
• A crossed check means that:
1. The check may be negotiated only once – to one who
has an account with the bank.
2. The check may not be encashed but only
deposited in the bank.
3. The act of crossing the check serves as warning
to the holder that the check has been issued for
a definite purpose so that he must inquire if he
has received the check pursuant to that purpose,
otherwise, he is not a holder in due course.
Parties to a Negotiable Instrument
Rights of a Holder (Sec. 51, NIL)
1. To sue thereon in his own name
2. To receive payment to him in due course discharges
instrument
Rights of a Holder in Due Course
1. To sue on the instrument in his own name (Sec. 51, NIL)
2. To receive payment on the instrument — discharges the
instrument (Sec. 51, NIL)
3. Holds the instrument free of any defect of title of prior
parties (Sec. 57, NIL)
4. Free from defenses available to prior parties among
themselves (Sec. 57, NIL)
5. May enforce payment of instrument for full amount,
against all parties liable (Sec.57, NIL)
Comment:
• When a person is a holder in due course, he will hold the
instrument free from any personal defenses of prior
parties, not all defenses, only PERSONAL DEFENSES.
Different Types of Holders
1. Holder in due course
2. Holder through a holder in due course
3. Holder not in due course
Holder in Due Course
Sec. 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 (C-O-F-I):
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 been previously
dishonored, if such was the fact;
c) That he took it in good faith and for value;
d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
At what point do you determine that the holder is a
holder in due course or not?
• At the time that the person became a holder of the
instrument. After this point, it will not matter anymore.
a. Complete and Regular Upon Its Face
• Complete – when, on its face, it contains all of the
requirements of a negotiable instrument under Sec 1.
10 | P a g e
• Regular – when the face of the instrument does not
give any doubts as to its authenticity.
Comments:
• An instrument would appear irregular when there are
alterations (i.e. erasures, superimpositions, and even
blanks).
• If the alteration is not apparent on its face, is the
instrument still regular?
➢ Yes! As long as there are no apparent alterations
on its face that would cast doubt upon its
authenticity.
• “In writing and signed by the maker or drawer” – the
maker or drawer does not need to be the one to write the
instrument; he only needs to sign.
b. Holder Of It Before It Was Overdue and without notice
that it has been previously dishonored
An instrument is overdue after the date of maturity.
1. If it is with a fixed term, the time provided has already
lapsed.
2. If payable on demand, distinguish between a promissory
note and a bill of exchange:
• Promissory Note: must be negotiated to the holder
within a reasonable time from the issuance.
• Bill of Exchange: must be negotiated to the holder
within a reasonable time from the last negotiation.
No notice of any fact that an instrument has been
previously dishonored, if such was a fact
• This can happen when it is a bill of exchange and there is
dishonor by non-acceptance.
• If it was not accepted, it will not be added to that
instrument thus that fact might not be known to you.
Comments:
• To be a holder in due course, if there is a date of maturity,
you must become the holder of an instrument before
maturity.
• What if it is payable on demand? When do you know
that it is already overdue?
➢ Promissory Note: must be negotiated to the holder
within a reasonable time from the issuance.
➢ Bill of Exchange: must be negotiated to the holder
within a reasonable time from the last
negotiation.
➢ Reason for distinction: For a BOE, the last
opportunity that you will know who the person liable
is, or the last chance to present it for acceptance, is
at the maturity date (for term instruments) or at the
last negotiation (if a demand instrument).
➢ See Sec. 193 on the definition of reasonable time – a
question of fact.
• As regards the second requirement of not having a
notice of dishonor, it is possible that an instrument is
dishonored even before it becomes overdue, as when
there is non-acceptance by a drawee. So, if you had notice,
you cannot be a HDC, if you had none, you are still a HDC.
• A bill of exchange can be presented for acceptance and it
need not be accepted. If it is not accepted, it will not
be reflected on the instrument so it can then be
further negotiated without those persons knowing
that it has actually been dishonored by non-
acceptance.
• For as long as the instrument has not been overdue,
it can still be presented for acceptance.
Sec. 193. Reasonable Time, What Constitutes. — In
determining what is a "reasonable time" or an "unreasonable
time," regard is to be had to the nature of the instrument, the
usage of trade or business (if any) with respect to such
instruments, and the facts of the particular case.
c. In good faith and for value
• In good faith – simply absence of bad faith.
• For value – when there is a consideration sufficient to
support a simple contract.
• Presumption: Every NI is deemed prima facie issued for
valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value
(Sec. 24, NIL)
• Value — any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes
value, whether the instrument is payable on demand or at
a future time. (Sec.25, NIL)
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Good Faith
• "honesty in fact in the transaction concerned”
• without knowledge or notice of any material fact
which would render it dishonest to take the
instrument
• Determined by a consideration of facts and circumstances
of the particular case.
• There can be instances where you cannot be in good
faith if you fail to ask questions. Those instances
that require a prudent person to inquire, but he did
not.
• Holder must have taken the instrument in good faith and
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.
• This refers only to the indorsee or transferee and NOT to
the seller of the negotiable instrument.
Bad Faith
• Has actual knowledge of the infirmity or defect or
knowledge of such facts which render it dishonest for him
to take particular negotiable paper.
Comments:
• Can generosity be a basis for consideration?
➢ No, you cannot be considered a holder in due course
if you did not accept the instrument for value and
generosity is not considered a valuable
consideration.
• How about love and affection? Is it a valuable
consideration?
➢ No, because love and affection for purposes of
consideration is not valuable enough to make
one a holder in due course.
• But it does not mean that if a check was given and you are
not a holder in due course that you cannot use it. If it is
considered as a good instrument, then you can use it.
• So, this would tell us that all holders in due course are
holders for value, but not all holders for value are
holders in due course (as when they are not in good
faith).
• It is always a requisite that for one to be a holder in due
course to be a holder for value.
Cases:
#9 Consolidated Plywood vs. IFC Leasing
• Consolidated Plywood Industries Inc. (CPII) is a
corporation engaged in the logging business. It needed 2
additional units of tractors so it bought the same from IPM.
• IPM issued the sales invoice for the 2 units of tractors. At
the same time, the deed of sale with chattel mortgage with
promissory note was executed.
• Barely 14 days had elapsed after their delivery when one
of the tractors broke down and after another 9 days, the
other tractor likewise broke down. They tried to repair it,
but it was no longer serviceable.
• IFC: A financing company that is the indorsee of a note
issued by a buyer payable to the seller of goods.
• IFC is now suing CPI for the payment of the promissory
note assigned to it by IPM. CPI refuses to pay.
Supreme Court Ruling
• The promissory note in question is not a negotiable
instrument, hence petitioner may raise against the
respondent all defenses available to it as against the
seller-assignor PM.
• The pertinent portion of the note is as follows: FOR VALUE
RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of (P
1,093,789.71, Philippine Currency, the said principal sum,
to be payable in 24 monthly installments starting July 15,
1978 and every 15th of the month thereafter until fully
paid.
• The instrument in order to be considered negotiable must
contain the so called 'words of negotiability' or must be
payable to 'order' or 'bearer.'
• These words serve as an expression of consent that the
instrument may be transferred.
• Thus, IFC is NOT a holder in good faith as to the
buyer. In case the goods sold turn out to be
defective, it cannot recover the purchase price of
the goods from the buyer.
#8 Salas vs. CA
• Salas bought a motor vehicle from the Violago Motor Sales
Corporation (VMS) for P58,138.20 as evidenced by a
promissory note.
11 | P a g e
• This note was subsequently endorsed to Filinvest Finance
& Leasing Corporation (private respondent) which financed
the purchase.
• Petitioner defaulted in her installments allegedly due to a
discrepancy in the engine and chassis numbers of the
vehicle delivered to her and those indicated in the sales
invoice, certificate of registration and deed of chattel
mortgage, which fact she discovered when the vehicle
figured in an accident.
• Filinvest filed a collection suit. RTC and CA decided in its
favor.
• Salas argues that in the light of the provision of the law on
sales by description which she alleges is applicable here,
no contract ever existed between her and VMS and
therefore none had been assigned in favor of private
respondent.
Supreme Court Ruling
• The promissory note is negotiable. Petitioner is liable.
• Petitioner's liability on the promissory note, the due
execution and genuineness of which she never denied
under oath is, under the foregoing factual milieu, as
inevitable as it is clearly established.
• The records reveal that involved herein is not a simple case
of assignment of credit as petitioner would have it appear,
where the assignee merely steps into the shoes of, is open
to all defenses available against and can enforce payment
only to the same extent as, the assignor-vendor.
• A careful study of the questioned promissory note
shows that it is a negotiable instrument, having
complied with the requisites under the law as follows:
[a] it is in writing and signed by the maker Juanita Salas;
[b] it contains an unconditional promise to pay the amount
of P58,138.20; [c] it is payable at a fixed or determinable
future time which is "P1,614.95 monthly for 36 months
due and payable on the 21 st day of each month starting
March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d]
it is payable to VMS corp , or order and as such, [e] the
drawee is named or indicated with certainty.
• It was negotiated by indorsement in writing on the
instrument itself payable to the order of Filinvest Finance
and Leasing Corporation and it is an indorsement of the
entire instrument.
• Under the circumstances, there appears to be no
question that Filinvest is a holder in due course,
having taken the instrument under the following
conditions: [a] it is complete and regular upon its face; [b]
it became the holder thereof before it was overdue, and
without notice that it had previously been dishonored; [c]
it took the same in good faith and for value; and [d] when
it was negotiated to Filinvest, the latter had no notice of
any infirmity in the instrument or defect in the title of VMS
Corporation.
• Accordingly, Filinvest holds the instrument free from
any defect of title of prior parties, and free from
defenses available to prior parties among
themselves, and may enforce payment of the instrument
for the full amount thereof.
• This being so, Salas cannot set up against respondent
the defense of nullity of the contract of sale between
her and VMS.
Comments:
• In installment sales, the buyer usually issues a note
payable to the seller to cover the purchase price.
• Many times, pursuant to a previous arrangement with the
seller, a financing company pays the full price of the
property sold and the note is indorsed to it by the seller,
subrogating it to the right to collect the price from the
buyer.
• RULE — In such cases, the tendency of the courts is to
protect the buyer against the finance company in the event
that the goods sold turn out to be defective. The finance
company will be subject to the defense of failure of
consideration and cannot recover the purchase price from
the buyer.
• NOTE: Consolidated Plywood v. IFC — rule applied (since
it was not negotiable); Salas v. CA — rule not applied
(since it was negotiable).
• Atty. Amago: Regardless of the opinion of Aquino in his
textbook, for me, I believe that a financing company
can still be a holder in due course. Just look at the
circumstances surrounding the case in deciding
whether or not the company is a holder in due
course.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
d. no notice of any infirmity in the instrument or defect
in the title of the person negotiating
• The reckoning point is the time the instrument was
negotiated to the holder.
• Although it talks about notice, it also refers to actual or
chargeable knowledge at the time it was negotiated.
Title is Defective When (Sec. 55, NIL):
1. Instrument/signature obtained by fraud, duress, force or
fear or other unlawful means or for an illegal
consideration; or
2. Instrument is negotiated in breach of faith, or fraudulent
circumstances
Notice of Infirmity or Defect
1. Actual knowledge of the infirmity or defect or knowledge
of such facts that his action in taking the instrument
amounted to bad faith (Sec.56, NIL)
2. Notice to an AGENT is chargeable against the principal.
3. Insufficient notice
4. RIGHT of a transferee who receives NOTICE of any
infirmity or defect BEFORE he has PAID THE FULL amount
for the instrument
Example of an Infirmity
• An instrument worth P100,000 on its face, but it was
written by your friend whom you know would issue an
instrument worth P10,000. There was an alteration made
in the instrument, an infirmity.
Examples of Defects in Title
1. The instrument was negotiated to a person on account of
murder.
2. When you pay for an instrument worth P1,000,000 but you
paid for only P1,000.
3. When you stole the instrument. (This is the most common
case)
No notice of infirmity on the instrument
• If you know any infirmities in the instrument, then you are
no longer a holder in due course. The reckoning point is
at the time the instrument was negotiated to you.
Comments:
• All these four conditions must concur for the holder to be
consider as a holder in due course.
• Absence of one will render one to be a holder not in due
course, but there is still the “shelter principle.”
When Notice of Infirmity or Defect Makes One A Holder
Not In Due Course
• Notice of any defect in the instrument will only affect
the status as the holder in due course if it is acquired
at the time the instrument was negotiated.
• If it is acquired after that, then it will already be
irrelevant.
Example:
M→P→A→B→C→D
Situation 1
There was an instrument issued by M to P. From P, it ended up
in A’s hands, then A to B, and lastly B to C. C knew that A
stole the instrument. But, C negotiated the instrument to D.
D does not know about the theft involving this
instrument. However, the day after D received the
instrument, he was notified that the instrument was
actually stolen by A.
Can D be considered a holder in due course?
• Yes, because he knew about the defect after the
negotiation of the instrument.
• You will only become a holder in due course or not a holder
in due course at the time you accepted the instrument.
If it is a bearer instrument, can A, the person who stole
the instrument, be considered as a holder in due course?
• No, it will go into his title that he took the instrument
not for value. He is not a holder in due course.
• So, he is a holder not in due course.
Situation 2 (continuation)
D knew about the infirmity in the instrument and yet he
still further negotiated the instrument to E. Is D
considered a holder in due course?
• For purposes of the law, he is still considered a holder in
due course because he knew about it after the negotiation.
12 | P a g e
• Because what you looked at is the circumstance when
he took the instrument.
• In the absence of any information, a holder is considered
as a holder in due course. Therefore, the burden of proof
in showing that the holder is not a holder in due course is
with the person who alleges.
Holder Through A Holder In Due Course
Sec. 58. When subject to original defense. — In the hands
of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-
negotiable. But a holder who derives his title through a holder
in due course, and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of such
former holder in respect of all parties prior to the latter.
• This is known as the “Shelter Principle.”
• General Rule: In the hands of any holder other than a
holder in due course (HDC), NI is subject to same defenses
as if it were non- negotiable.
• Exception: A holder who derives title through a holder
in due course AND who is NOT himself a party to any
fraud or illegality has all rights of such former holder
in respect to all parties prior to the latter even though
he himself does not satisfy Sec. 52
Twin requirements to be a holder through a holder in due
course:
1. Acquired the title from holder in due course
2. Must not be a party to any illegality or fraud in the
negotiation of the instrument (knowledge is okay).
Comments:
• If one cannot prove that he is a holder in due course, at
the very least, if he is able to prove that he acquired title
from a holder in due course, he can acquire the rights of
such holder in due course.
• Thus, he can be considered as well as a holder
through a holder in due course (HTHDC), but this is
only for the purpose of considering whether he is
subject to personal defenses or not. But he is never a
holder in due course. He is only considered a HTHDC.
• Can a holder not in due course be able to acquire the
rights of a holder in due course and acquire the same
status of a holder in due course?
➢ Yes, pursuant to the shelter principle (Second
sentence of Sec. 58)
• Here, what matters is that you must not be a party
to any fraud or illegality affecting the instrument.
Knowledge to such fraud or illegality is of no matter,
the shelter principle will still apply.
• In order for the shelter principle to apply, the holder
does not have to prove that he is a holder in due
course. He just needs to prove that the person from
whom he acquired the instrument is a holder in due
course and that he is not a party to any of the defect
or the illegality or fraud.
• Does he need to be a party to the defect or mere
knowledge would suffice?
➢ Knowledge will not affect the shelter principle.
➢ The provision is clear that “he himself is not a party
to any fraud or illegality”.
Presumption of Holder in Due Course
Sec. 59. Who is deemed holder in due course. — Every
holder is deemed prima facie to be a holder in due course; but
when it is shown that the title of any person who has negotiated
the instrument was defective, the burden is on the holder to
prove that he or some person under whom he claims acquired
the title as holder in due course. But the last-mentioned rule
does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title.
• General Rule: Prima facie (rebuttable) presumption in
favor of holder.
• Exception: Burden is reversed (burden on holder to
prove that he or some person under whom he claims
acquired title as HDC) when it is shown that the title of
any person who has negotiated instrument was
defective or when there is infirmity in the
instrument.
• Exception to the exception: There will be no reversal if
the party being made liable became bound prior to the
acquisition of such defective title (i.e., where defense is
not his own) — presumption in favor of holder.
Comment:
• A holder through a holder in due course gets to
exercise the same rights as a holder in due course (his
immediate transferor).
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Every holder is deemed prima facie to be a holder in due
course
• The BURDEN SHIFTS when it is shown that the title of any
person who has negotiated the instrument was defective.
The holder MUST NOW PROVE that:
1. he is actually a holder in due course; OR
2. that he acquired the instrument from a holder in
due course and that he is not a party to any fraud
or illegality in the instrument, in which case he
will now be a holder through a holder in due
course and the shelter principle will apply.
• But the last mentioned rule does not apply in favor of a
party who became bound on the instrument prior to the
acquisition of such defective title. (Sec.59., NIL)
• However, this presumption arises only in favor of a
person who is a holder as defined in Section 191 of
the Negotiable Instruments Law, meaning a “payee or
indorsee of a bill or note, who is in possession of it,
or the bearer thereof.” (Yang vs. CA, 2003)
Comments:
• In absence of any information, one is presumed a holder
in due course.
• If another claims that he is not a holder in due course, he
can either prove that he himself is a holder in due course
or to prove that the person from whom he acquired the
instrument is a holder in due course.
• When will the presumption not apply?
➢ The presumption that every holder is a holder in due
course does not apply whenever there is any
defect in any of the title of the person who
negotiated the instrument. It need not be the
person from whom he acquired it.
➢ Any defect automatically precludes the presumption.
The burden of proof is now shifted to the person who
claims that he acquired the title as a holder in due
course.
• Will mere knowledge of fraud or illegality bar the
application of the shelter principle?
➢ Knowledge will not affect the shelter principle.
➢ The provision is clear that “he himself is not a party
to any fraud or illegality.”
Example:
M → P → A* → B → C → D → E
*A stole the instrument.
In here, the defect is with A (he stole it). If M questions
the authenticity of the right of E as a holder in due
course or questions E for not being a holder in due
course, who has the burden of proof?
• It will be E who has to prove it, if the one who
questions it is a party prior to the defect (M & P).
• But, if (A, B, C, & D) these are the parties who will question
him (E) being a holder in due course, they (A to D) will
have to prove that E is not a holder in due course.
• If they will be able to prove that there is a defect in the
title, then it turns around, again the burden of proof will
be on E to prove that there was no defect in his title.
➢ If D is able to prove that the instrument was stolen, E
now has to prove that he has taken the instrument in
good faith and for value and that he has no knowledge
of the fact that it was stolen.
• But if it is M who will question E’s status as a HDC,
being a party prior to the defect, then E has to be the
one to prove that he is a HDC.
• If E is unable to prove to M that he is a HDC, what
does E have prove, instead?
➢ That the person from whom he acquired the
instrument (D) is a holder in due course for the shelter
principle to apply.
• What benefit would it give E if he is able to prove
that D is a HDC? Will E now be considered as a HDC?
➢ No, he will still not be a HDC.
➢ BUT, if E is able to prove that D is a HDC, then he
can be considered as a holder through a HDC,
and he can acquire the benefits of the Shelter
Principle under Section 58.
Holder Not In Due Course
Sec. 53. When person not deemed holder in due course.
- Where an instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not
deemed a holder in due course.
• If one is not able to comply with ALL of the requisites in
Section 52, he can never be considered a holder in due
course.
13 | P a g e
Holder Not In Due Course
• A holder not in due course is a holder of an instrument
where any of the four conditions in Sec. 52 are not
met.
Distinction between a holder in due course and not a
holder in due course
• Holder in due course — holds the instrument free from
the personal defenses of prior parties.
• Holder not in due course — holds the instrument not
free from any defenses of prior parties. They are subject
to the same defenses as if it were non-negotiable
(assignment of credits).
Referee in Case Of Need
Sec. 131. Referee in case of need. - The drawer of a bill
and any indorser may insert thereon the name of a person to
whom the holder may resort in case of need; that is to say, in
case the bill is dishonored by non-acceptance or non-payment.
Such person is called a referee in case of need. It is in the
option of the holder to resort to the referee in case of need or
not as he may see fit.
• It’s just another person referred to by the drawer to
whom the holder can demand payment or
acceptance in case of dishonor.
Additions and Omissions Not Affecting Negotiability
Terms Used
Sec. 10. Terms, when sufficient. - The instrument need not
follow the language of this Act, but any terms are sufficient
which clearly indicate an intention to conform to the
requirements hereof.
When are the terms considered sufficient?
• You need not use the terms provided under Sec. 1.
• You can have your own terms for as long as they have
similar phraseology and intent.
Illustration:
To: X
Please pay to Y or order Php 10,000
Sgd. Z
• Still negotiable as long as there are words of negotiability.
• You can always be polite with your order or demand. You
can include “please” or “kindly” because you can be polite
in demanding something.
Comments:
• For EXAMPLE, instead of providing the term “bearer”, you
can make use of the term “holder” or “possessor.”
• Instead of using “I promise to pay”, you can use “I obligate
myself to pay.”
• There can be terms that you can use for as long as they
have a similar import to what the law provides, and that
will not affect the negotiability of the instrument.
Additions
Sec. 5. Additional provisions not affecting negotiability.
- An instrument which contains an order or promise to do any
act in addition to the payment of money is not negotiable. But
the negotiable character of an instrument otherwise negotiable
is not affected by a provision which:
a) authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
b) authorizes a confession of judgment if the instrument be
not paid at maturity; or
c) waives the benefit of any law intended for the advantage
or protection of the obligor; or
d) gives the holder an election to require something to be
done in lieu of payment of money.
But nothing in this Sec. shall validate any provision or
stipulation otherwise illegal.
Sec. 11. Date, presumption as to. - Where the instrument
or an acceptance or any indorsement thereon is dated, such
date is deemed prima facie to be the true date of the making,
drawing, acceptance, or indorsement, as the case may be.
Sec. 12. Ante-dated and post-dated. - 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.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
a. authorizes the sale of collateral securities in case the
instrument be not paid at maturity
Why will sale of collateral not affect the negotiability of
an instrument?
• Because the sale of the collateral happens only after the
maturity of the instrument.
• It does not affect the negotiability of the instrument as
long as the requisites are still there.
• The reckoning point for purposes of determining
negotiability is only until maturity.
If the sale of the collateral happens before the maturity
of the instrument, can it affect the negotiability of the
instrument?
• Yes. It has to happen after, otherwise, the instrument
loses its character of negotiability because said
collateral could not be the same as the amount
stated when it is sold, and it happens prior to maturity.
Illustration:
I promise to pay X or order 1M pesos on Dec. 1, 2016. In case
the instrument is not paid at maturity, he can sell the ring
which is pledged as a security for this instrument.
Sgd. Z
• This is negotiable. The additional provision does not affect
the negotiability of the instrument because the sale of the
collateral will only happen after maturity (just like
attorney’s fees upon default).
• The moment the maturity period has lapsed, the
instrument becomes non-negotiable in its full commercial
sense. Thus, any sale of collateral thereafter is irrelevant.
• Since we are talking about an instrument which has
already matured, it does not matter whether that
instrument is negotiable or not.
• Whoever may receive the instrument already matured can
never be considered as a holder in due course because in
the ordinary course of things you are supposed to
negotiate and receive an instrument which has not yet
matured because it will defeat the purpose of setting a
date for its maturity if can still be negotiated.
• In these instances provided in Sec 5 (a and b), you always
notice that it is done on or after maturity.
b. authorizes a confession of judgment if the instrument
be not paid at maturity
• This does not affect the negotiability of the instrument
becomes the confession happens only after the
instrument’s maturity.
Is confession of judgment illegal?
• Confession of judgment as it stands now is illegal
because it bargains a person’s day in court and right
to appeal. However, it does not affect the negotiability of
an instrument.
#7 PNB vs. Manila Oil Refining
• In this case, the note contains a provision that in case that
it would not be paid at maturity, the "maker authorizes
any attorney to appear and confess judgment thereon.”
Supreme Court Ruling
• The Court ruled that said judgment note is illegal and
inoperative as such is against public policy. It noted that it
is in derogation of the constitutional safeguards (a day in
court). Such judgment note can only be valid if given
express legislative sanction.
• The SC talks about the validity of a confession of
judgment. This provision is considered void because it is
against public policy.
• Why is confession of judgment considered evil for
purposes of public policy?
a) Bargains your right to a day in court - Once you
have confessed a judgment, you can no longer go to
court and refute that you did not do such a thing. You
have already accepted that you have done it.
b) Strike down the right to appeal - How? You cannot
go to court, more so, appeal on the matter because
you have already admitted that you have done so.
c) It enlarges the field of fraud - Any person on
whose favor that confession of judgment may have
been given to, can just go to court and say that this
person has not paid yet even if the person has actually
paid already.
14 | P a g e
Comments:
• Example: parties involved are X and Y. Y gave a provision
which confesses a judgment in favor of X.
• X can always go to court and Y cannot refute anymore for
he has already confessed a judgment.
There are two types of confession of judgment which the
law deems valid:
1. Cognovit Actionem - Confession of judgment when the
case has already been filed. It is just like plea-bargaining.
2. Relicta Verficationem - There is still a case filed but you
decided to withdraw the pleadings you have filed. In effect,
you no longer want to fight the contention of the adverse
party. You admit all the allegations in relation to the action
filed against you.
Cognovit Actionem in Relation to Negotiable
Instruments
• You confess guilt on the act alleged. You accept the
obligation and admitted that there was no payment made.
• You will do this after the action is filed in court. This is what
happens actually during arraignment.
• You don’t bargain your day in court. You simply give in to
the order to save expenses.
Relicta Verification in Relation To Negotiable
Instruments
• Here, the pleading is being abandoned. A confession of
judgment by withdrawal of the defense.
• This is likewise valid because you do the same after the
action is filed in court.
Comments:
• In these two instances, there is already a case filed
before the court.
• It is just in the nature of a compromise agreement.
• The justification of the Supreme Court in the case of PNB
v. Manila Oil will not apply. You did not bargain your day
in court in both instances. After all, there is an action filed.
c. waives the benefit of any law intended for the
advantage or protection of the obligor
• A debtor is in delay only when creditor makes demand.
That is for the benefit of the debtor because if there’s no
demand yet, he cannot be in delay, thus, he is not liable
for payment of interest and damages. If they waive that,
they become automatically liable even if there is no
demand.
• This is called a facultative instrument when there is
a waiver of rights.
• Example: When the obligor (debtor) waives the benefit of
the “No demand, no delay” or waiver of notice of dishonor.
Illustration:
I promise to pay X or order P1,000,000. Notice of dishonor
is waived
Sgd. Z
• In the incidents of a life of negotiable instrument, an
instrument can be dishonored. For parties secondarily
liable to be held liable for the instrument, the holder of the
instrument has to give notice of dishonor to the parties
secondarily liable, otherwise, they will be discharged from
their liabilities.
• If on its face, the negotiable instrument provides that
there is “waiver of the notice of dishonor,” then all
parties secondarily liable will be bound by it.
• That means, even if no notice of dishonor is given to a
party, she or he will still be considered liable. This is very
convenient on the part of the holder.
• However, on the part of the person secondarily liable, he
is actually waiving a right under the law that favors him.
• Had there been a requirement of notice of dishonor and
there was none given, he would not have been held liable.
• The same goes for demand. There is no delay absent
demand. If demand is waived, you will still be considered
in default even without demand.
• Once the obligation matures, there is no need for demand.
Automatically, the person primarily liable is supposed to
pay.
d. gives the holder an election to require something to
be done in lieu of payment of money
• If the option is with the holder — the instrument is
negotiable
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• If the option is with the promisor — the instrument is
non-negotiable (because the holder cannot compel him to
make payment in money)
Illustrations:
“I promise to pay bearer P100,000 and P100,000 valued parcel
of land”
Sgd. Z
• Non-negotiable since the additional imposition by the
maker cannot be subject to negotiation, but only
subject to assignment.
I promise to pay bearer P100,000 or P100,000 valued parcel of
land, at the holder’s election.
Sgd. Z
• This is negotiable since it is at the option of the holder. If
the holder does not want to accept the sum certain
in money and accept instead the alternative, that
does not make the sum uncertain. It remains certain,
you just wanted some other form of payment.
• In this case, the holder has the choice. The instrument is,
therefore, negotiable as it is as good as an instrument
payable in money.
• Similarly, the negotiability is not affected by a
provision which gives the payee the right to
repossess the property sold for which the note was
given should payment not be made on time.
• If the option is with the promisor, the instrument is non-
negotiable because the holder cannot compel him to make
payment in money.
Why is this considered valid when supposedly an action
other than payment in money renders the instrument
non-negotiable? How come payment through service or
any other act like giving a parcel of land still be
considered negotiable even with this conditional act?
• Because it is the holder who has the choice.
• The holder can always opt for the payment in money,
so it will not render then the sum uncertain.
• The amount will still be considered a sum certain in money
on the part of the holder because the holder can always
require payment in money.
What if the option is given to the debtor, maker, or
drawee?
• The maker or the drawee can always opt to give you
anything other than cash.
• That’s why it can render the instrument non-
negotiable.
Omissions
Sec. 6. Omissions; seal; particular money. — The validity
and negotiable character of an instrument are not affected by
the fact that —
a) It is not dated; or
b) Does not specify the value given, or that any value had
been given therefor; or
c) Does not specify the place where it is drawn or the place
where it is payable; or
d) Bears a seal; or
e) Designates a particular kind of current money in which
payment is to be made.
But nothing in this section shall alter or repeal any statute
requiring in certain cases the nature of the consideration to be
stated in the instrument.
a. It is not dated
• A presumption is provided by law that the date of the
instrument, if not written, is deemed to be the date
when the instrument was issued. The omitted date
here refers to the date when the instrument was drawn or
made, and not the date when the instrument is supposed
to be paid.
• Writing the date of issue is not necessary. It will not make
the instrument non-negotiable.
• Also, when it does not state the date of maturity, the
presumption is that it is payable on demand.
Sec. 11. Date, presumption as to. - Where the instrument
or an acceptance or any indorsement thereon is dated, such
date is deemed prima facie to be the true date of the making,
drawing, acceptance, or indorsement, as the case may be.
Sec. 12. Ante-dated and post-dated. - The instrument is
not invalid for the reason only that it is ante-dated or
15 | P a g e
postdated, 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.
Instances Where Date Is Necessary
1. Date is tied to the date of issue — after date or sight
• e.g. “payable 10 days after”
2. Where interest is stipulated
• For purpose of determining when interest is to run
(but remember the presumptions in case the
instrument is not dated)
3. PN — date of issue; BoE — date of last negotiation
• For purpose of determining whether party acted within
reasonable time in making presentment for payment
b. Does not specify the value given, or that any value had
been given therefor
• The consideration is presumed for all instruments
issued, which means it does not render it non-negotiable.
• The burden of proof that no consideration has been given
for the instrument is on the one alleging it.
c. Does not specify the place where it is drawn or the
place where it is payable
When not specified
1. Presumed have been made where it is dated
2. payable at the place of residence of the maker
3. maker’s or drawer/s place of business or his home
d. Bears a seal
• An instrument need not be notarized. Seal is required in
UK practice.
• Copied from the UK; has no bearing on Philippine
instruments since an instrument to be negotiable need not
be notarized so it need not contain any seal.
e. Designates a particular kind of current money in
which payment is to be made
• The requirement of a particular currency to which payment
is to be made is supposedly void before because
transactions here in the Philippines used to be valid only
in Philippine currency.
• But that has already been scrapped. Now, you can
already provide for a transaction not necessarily in
Philippine currency. We are now allowed to make
payment in whatever form depending on the agreement of
the parties.
Can you not indicate a currency in which the instrument
is to be paid?
• It does not mean that you don’t indicate a currency.
What it actually means is that you need not indicate
a particular currency.
• You can state PHP or USD, depending on your will. It will
not render the instrument non-negotiable
What if there is an omission of value given?
• There is no consideration stated for the issuance of the
instrument. It will not affect the negotiability since it
is always presumed that value is given.
Defects
• The rights of the parties will depend on whether the holder
in due course or not.
• In addition, the parties have certain warranties and it is
important to know these warranties.
Sec. 65. Warranty where negotiation by delivery and so
forth. — Every person negotiating an instrument by delivery
or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it
purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty
extends in favor of no holder other than the immediate
transferee.
The provisions of subdivision (c) of this Sec. do not apply to a
person negotiating public or corporation securities other than
bills and notes.
Sec. 66. Liability of general indorser. - Every indorser who
indorses without qualification, warrants to all subsequent
holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b),
and (c) of the next preceding Sec.; and
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
(b) That the instrument is, at the time of his indorsement,
valid and subsisting;
And, in addition, he engages that, on due presentment, it shall
be accepted or paid, or both, as the case may be, according to
its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may
be compelled to pay it.
Warranties (GGCN)
1. That the instrument is Genuine and in all respects what it
purports to be
2. That he has Good title to it
3. That prior parties have Capacity to contract
4. That he has No prior knowledge of any fact that would
impair the validity of the instrument.
Comments:
• Bearer instrument: You can only go after the one who
immediately negotiated it to you, you cannot go after the
others because they did not give any warranty to you. The
only person who gave you a warranty is the one
immediately before you.
• However, it should always be the person primarily liable
who is liable first. He is the first person from whom you
must demand payment.
• Persons primarily liable can always be sought after,
subject of course to their defenses.
Defenses
1. Real Defense
• They are those which attach to the instrument itself
and generally, disclose an absence of one of the
essential elements of a contract.
• Available against ALL holders including holders in due
course.
2. Personal Defense
• Grows out of the agreement or conduct of a particular
person in regard to the instrument which renders it
inequitable FOR HIM, though holding the legal title, to
enforce it against the party sought to be made liable.
• This is not available against a holder in due course.
This can be raised only against holders not in due
course.
• Here, the true contract appears, but for some reason,
the defendant is excused from the obligation to
perform.
Defects in Negotiable Instrument
DEFECT KIND OF DEFENSE
1. Insertion of a wrong date Personal Defense
2. Incomplete but delivered Personal Defense
instrument
3. Complete but undelivered Personal Defense
instrument
4. Incomplete and Real Defense
undelivered instrument
5. Forgery of signature Real Defense
6. Material alteration Personal Defense
7. Minors and Corporations* Real Defense personal to
the minor/corporation
*Minors and corporations not among those discussed by Atty.
Amago.
How to Analyze Defects
1. Determine what type of defect is committed
2. Determine what type of instrument is involved (bearer
or order instrument)
3. Determine what type of holder is involved
• If holder in due course — personal defenses are not
available
• If not a holder in due course — it may or may not be
available depending on whether the shelter principle
will apply or not
I. Insertion of a Wrong Date - PERSONAL
Sec. 13. When date may be inserted. - 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.
• From the last sentence of Section 13, you can see that this
is just a personal defense.
16 | P a g e
Effect When Instrument Is Not Dated
• It depends on the type of instrument. The date is material
to know when payment must be made for it to be
defective. BUT, the date still has to be inserted if the
date is necessary to determine the maturity of the
instrument.
• The fact that an instrument is not dated does not
affect its negotiability. Besides, the law provides
instances when date may be inserted.
Illustration:
I promise to pay 1 million pesos to Y or order 5 days from date.
Sgd. Z
• The instrument does not bear any date.
• What is your remedy here?
➢ Since the date is needed to determine the maturity a
date has to be inserted here.
➢ Sec. 13 will tell us that there is an authority to insert
a date.
➢ The date is inserted not for purposes of making the
instrument negotiable, but simply to determine its
maturity date.
When may a date be inserted? (Sec. 13)
1. When the instrument is payable at a fixed period after
date, but was issued undated
2. When the instrument is payable at a fixed period after
sight, but the acceptance was undated
Comment:
• In these two instances, a date is necessary in order to
determine the maturity date of the instrument.
When is a date necessary?
1. The instrument is undated, and there is a need to
determine the maturity of the instrument
2. Where interest is stipulated, and the instrument is
undated, in order for you to determine the amount of the
interest.
3. Where date is necessary to determine when reasonable
time has elapsed. For PN — date of issue; for BoE — date
of last negotiation
Comment:
• If there is interest, the date is necessary in order to
determine when interest will run, but why are you not
allowed to insert a date in this instance?
➢ Because of the presumption in Sec. 17 (presumption
when interest will run).
Effect of Insertion Of A Wrong Date
• The consequence of an insertion of a date in an
instrument is that it becomes the true date (Sec. 13
in relation to Sec. 11 of the NIL)
• However, if the wrong date was inserted, it will not
avoid the instrument in the hands of a Holder in Due
Course, because as to him, the date inserted in the
instrument is the true date.
• What about if the holder is not a holder in due
course?
➢ If the holder is NOT a holder in due course (sec. 52),
then the maker or drawer can set up the personal
defense of insertion of a wrong date (Sec. 13).
Comments:
• If the maker refuses payment simply because of a
subsequent insertion of a wrong date from another
person basing on the ground that since the person
collecting knew about the supposed wrong insertion, the
date of issuance should be the true date (Sec. 11), there
is also a provision of the NIL saying that any date
inserted becomes the true date. (Sec. 13)
• The appropriate legal basis is sec. 13 of the NIL, in relation
to Sec. 52.
• If you are a holder in due course, then personal
defenses like insertion of a wrong date cannot be
used against you. (Sec. 13)
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• Failure to satisfy the requirements pf Sec. 52 makes you a
holder not in due course and subject to personal defenses
(Sec. 58), unless if the shelter principle applies.
• So, the holder having knowledge of the insertion of
the wrong date is not a holder in due course as he
fails to satisfy the last requirement that he was
aware of any infirmity (the wrong date) in the
instrument at the time it was negotiated to him.
Illustration (PN, order instrument):
I promise to pay Y or order P10,000 ten (10) days after date.
Sgd. X
Instrument: Promissory note payable to order
Defect: Insertion of a wrong date by B
X–Y–A–B–C-D
Step 1: Identify the defect – Insertion of wrong date
Step 2: Determine what type of instrument is involved – PN,
order instrument
Step 3: Determine what type of holder is involved
• In this example, D is the holder. Determine whether D is
a holder in due course or not.
• Can D go after X (maker) and demand payment?
➢ If you look at Sec. 13, the insertion of a wrong date
does not avoid (make it void) the instrument in the
hands of a subsequent holder in due course, but as to
him (one who inserted the wrong date), the date so
inserted is to be regarded as the true date.
Scenario 1: D is a holder in due course
• In the absence of any information, D is presumed to be a
holder in due course (Sec. 59).
• D, being a holder in due course, can successfully demand
payment from X, because X cannot raise the defense of
insertion of the wrong date (personal defense).
• A personal defense is a type of defense which cannot be
raised against a holder in due course, but it can be raised
against a holder not in due course.
• What if X does not pay the instrument? If the
instrument is dishonored, what do you do?
➢ Notice of dishonor.
• Granting it’s already done, why would you send a
notice of dishonor?
➢ In order to go after the parties secondarily liable.
• Who are these parties secondarily liable in this case?
➢ Y, A, B, and C (the prior indorsers)
• If D will go to Y, can Y raise a defense? Can he in fact
go to Y in this case?
➢ Because this is an order instrument, all parties prior
to him gave a warranty to him.
• But when you are a party prior to a defect, what are
available to you are defenses? In the case of Y, can
Y (a party prior to the defect) raise a defense against
D?
➢ He cannot because, D is a holder in due course. Y can
still be compelled to pay. The same is true with A.
• How about C? Can D go after C (a party after the
defect)?
➢ Yes, because they are subsequent parties who
warranted the instrument is genuine and in all
respects of what it purports to be (Sec. 65a).
➢ You can go after him in relation to his warranty.
• What did he warrant?
➢ He warranted under Sec. 66 because this is an order
instrument.
➢ There is an insertion of the wrong date so there is an
issue with the genuineness of the instrument. So then,
you can go after C as he warrants that the instrument
is genuine and in all respects what it purports to be.
• Ultimately, D can also go after B for being the party at fault
who should be punished by the law.
Scenario 2: D is a holder through a holder in due course
(silent as to the status of C)
• If D knew that the instrument was wrongly dated, he is no
longer a holder in due course.
• However, the shelter principle can still apply if he acquired
it from a holder in due course. Absent any information
that C is not a holder in due course, the presumption
is that he is, and the shelter principle will apply.
• In order for the shelter principle to apply, D must derive
his title from a holder in due course (C), and he must not
be a party to any fraud or illegality affecting the instrument
has all the rights of the prior holder as to any prior parties.
• Even if D knew about the wrong date, as long as he
is not party or the one directly responsible for the
17 | P a g e
 fraud, then he still is a holder through a holder in
due course and the shelter principle will apply.
• Thus, your answer should be the same as scenario 1 since
D would acquire the rights of his immediate transferor (C)
who is a holder in due course.
Scenario 3: D and C are both not holders in due course
• Now, will your answer change if both D and C are not
holders in due course?
➢ Yes, because D, not being a holder in due course and
not being qualified to avail of the shelter principle,
cannot successfully demand payment from X, Y, and
A because they can raise the personal defense of
insertion of wrong date against him.
➢ However, D can go after C (and B) because C (and B)
warranted to him that the instrument is genuine and
in all respects what it purports to be but ultimately.
➢ Ultimately, D can also go after B for being the party
at fault who should be punished by the law.
• Why can C and D, not being holders in due course,
still go after B, but not X, Y and A?
➢ They can still go after B (the malefactor), but D cannot
successfully demand payment from X, Y and A (parties
prior to the defect) because C (his prior indorser) is
not a holder in due course.
➢ Parties prior to the defect (X, Y and A) can all raise
the personal defense of “insertion of a wrong date”
against D because he is not a holder in due course.
• What if there’s B, C, D and then there’s also E
(subsequent indorsee), and E is a holder in due
course. What’s his right after the defect?
➢ E can successfully demand payment from X, Y, and A,
because, being a holder in due course, he is not
susceptible to any personal defenses including that of
an insertion of a wrong date.
➢ E can go after B, C and D because they are indorsers
and they warranted that the instrument is genuine
and in all respects what it purports to be.
➢ But ultimately, E can go after B. Being the malefactor,
he should be punished for his actions.
Comments:
• A holder in due course or a holder through a holder
in due course can also go after other parties, in
addition to the maker/drawer himself, prior to the
infirmity.
• If he is not a HDC, then the other parties can put up
against him the personal defense of “insertion of a wrong
date.”
• Ultimately, any kind of holder can go after the party
who perpetrated the fraud because the law does not
tolerate fraudulent acts in commercial transactions.
• They can also go after the parties subsequent to the fraud
because every indorser is subject to the warranties under
sec. 65 of the NIL.
Illustration (BOE, order instrument):
To: Z
Pay X or order P10,000 ten (10) days after date.
Sgd. Drawer
Instrument: Bill of Exchange, to order
Defect: Insertion of a wrong date by C
X – Y – A – B – C* – D - E - F
Z (drawee)
*C inserted the wrong date.
• From X, the instrument went to Y, then it went to A. A
presented the instrument to Z, the drawee, who accepted
it then returned the instrument to A, who negotiated it
further to B then to C.
• C inserted the wrong date. Then the instrument went to D,
to E, and then to F.
• Since the instrument was already previously accepted by
Z, the other parties don’t have to present it again for
acceptance because it has been previously accepted.
Scenario 1: F is a holder in due course
• What are the rights of F in relation to prior parties?
Who will F go to first?
➢ Z. This should always be included in the
presentation of your answer – who to go to first
– the party primarily liable.
➢ The person you should go first should be the person
who is primarily liable.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
➢ F can successfully demand payment from Z (drawee),
who is the person primarily liable because he cannot
raise the personal defense of insertion of a wrong date
and he is bound by the tenor of his acceptance.
➢ F can also go after the drawer as he is secondarily
liable for the drawee’s dishonor and he cannot raise
the personal defense of insertion of a wrong date.
➢ F can also go after X, Y, A and B (parties prior to the
defect) because they cannot raise the personal
defense of insertion of a wrong date given that F is a
holder in due course.
➢ Moreover, F can go after C, D, and E (parties after the
defect) for being indorsers because they warranted
that the instrument is genuine and in all respects what
it purports to be.
➢ But ultimately, F can go after C (malefactor). Being
the malefactor, he should be punished for his actions.
Scenario 2: F is not a holder in due course (silent as to
the status of E)
• Will your answer change if F is NOT a holder in due
course?
➢ No. Because as a holder through a holder in due
course, F has acquired the rights of the holder in due
course before him (shelter principle).
Comments:
• Since it is silent whether E is a HDC, the presumption of a
HDC applies. So, F is a holder through a HDC!
• That being the case, the shelter principle will apply!
Scenario 3: F and E are not holders in due course
• If E and F are not holders in due course, will your
answers change?
➢ Yes. F and E, not being holders in due course, means
that F is not qualified to avail of the “shelter principle”
and he cannot successfully demand payment from Z
(drawee), because Z can raise the personal defense of
an insertion of a wrong date (note that he accepted
the instrument before the insertion of the defect).
➢ F cannot also go after the drawer as he can raise the
personal defense of insertion of a wrong date.
➢ Also, F cannot successfully demand payment from X,
Y, A and B (parties prior to the defect) because they
can also raise the personal defense of an insertion of
a wrong date against him.
➢ However, F can successfully demand payment from C,
D, and E (parties after the defect) for being indorsers,
they warranted that the instrument is genuine and in
all respects what it purports to be.
➢ Ultimately, F can go after C (malefactor), being the
malefactor, he should be penalized under the law.
Comments:
• The reason is because when they (parties after the
defect) negotiated the instrument, that instrument
already bears the wrong date, but they still
warranted that the instrument is genuine and in all
respects what it purports to be.
• They (indorsers) basically represented to F that the
instrument is bears the correct date.
• When you warrant that it is genuine, then it follows
that it should bear the true date.
• But if it is a bearer instrument, the warranty will
only apply to the immediate indorser.
• As to the parties prior to the infirmity — you cannot
go after them and claim that they did not comply
with their warranty.
• As to the drawer — he has a separate warranty and
the succeeding parties prior to the wrong insertion
cannot be liable also since logically by the time the
instrument was in their hands, it was still genuine
and valid. Only when it reached the person who
perpetrated the fraud that it started to lose its
genuineness, and thus, only the subsequent parties
could be liable for breaching the warranty.
• So to go after parties before the insertion of the
wrong date, one should be a holder in due course or
a holder through a holder in due course by relying on
the provisions on Sec. 13 that as regards to them the date
inserted becomes the true date.
• If one is not a holder in due course then they can
only run after the parties subsequent to the fraud,
on the basis of breach of warranty under Sec. 65.
• However, ultimately, they can always go after the
perpetrator of the fraud, as the law does not tolerate
fraudulent acts in commercial transactions.
18 | P a g e
• Also there is a presumption that every holder is prima facie
one is a holder in due course (sec. 59 NIL) So, if the facts
in the case does not mention of any circumstance, then
apply the presumption.
Illustration (BOE, order instrument):
To: Z
Pay Y or order P10,000 ten (10) days after date.
Sgd. Drawer
Instrument: Bill of Exchange, to order
Defect: Insertion of a wrong date by A
Y – X – A* – B – C – D
| purports to be under Sec. 66.
Z (drawee)
*A inserted the wrong date of Sept. 1, 2019, instead of the
correct date of Sept. 15, 2019.
Y – X – A (inserted the wrong date) – B – C (presented to Z for
acceptance – here after the wrong date na) – D.
Comments:
• Here, Z is bound by his warranty as he warrants the
tenor of his acceptance (he accepted after the
insertion of the wrong date).
Scenario 1: Presumption - D is a HDC
• Drawee-Acceptor: Z — D can go after Z because he is
bound by the tenor of his acceptance (note that he
accepted the instrument after the defect).
• But if Z refuses, what are the rights of D (assuming
he is a holder in due course) as regards prior
parties?
➢ Parties Prior to the Defect: Y and X - D can
demand payment from Y and X since they cannot raise
the personal defense of insertion of a wrong date since
D is a holder in due course.
➢ Drawer – D can also go after the drawer as he is
secondarily liable for the drawee’s dishonor and he
cannot raise the personal defense of insertion of a
wrong date.
➢ Parties Subsequent to the Defect: B and C – D can
run after them since they have warranted that the
instrument is genuine and in all respects what is
purports to be.
➢ Perpetrator: A – D can run after him since he is
ultimately liable for causing the defect.
Scenario 2: D is a HDC (Silent as to C)
• If you are told that D is not a holder in due course, absent
any information that C is not a holder in due course, D is
a HTHDC — the answer is the same.
Scenario 3: D and C are not HDCs
• Drawee-Acceptor: Z — Since he accepted the instrument
after the defect, he can be compelled to pay because an
acceptor will pay the instrument according to the tenor of
his acceptance and he is now estopped from raising the
personal defense of insertion of a wrong date (note that
this is different from other illustration where Z accepted
the instrument before the defect).
• Prior parties to the defect: Y and X — cannot be
compelled to pay because they can raise the personal
defense of insertion of wrong date.
• Subsequent parties to the defect: B and C — can be
compelled to pay because they warranted that the
instrument is genuine and in all respects what it purports
to be.
• Perpetrator of the fraud: A — ultimately liable because
he caused the defect therefore he should be penalized
under the law
• The prior parties to the defect can use the personal
defense of insertion of the wrong date.
Summary of The Insertion of Wrong Date - PERSONAL
PROMISSORY NOTE
a. Order instrument
• Holder In Due Course And HTHDC
➢ Primarily liable: Maker — can be compelled to pay
because he cannot raise the personal defense of
insertion of wrong date.
➢ Prior parties to the defect — can be compelled to
pay because he cannot raise the personal defense of
insertion of wrong date.
➢ Subsequent parties to the defect — can be
compelled to pay because they warranted that the
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
instrument is genuine and in all respects what it
purports to be.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
• Not a Holder In Due Course
➢ Primarily liable: Maker — cannot be compelled to
pay because he can raise the personal defense of
insertion of wrong date.
➢ Prior parties to the defect — cannot be compelled
to pay because he can raise the personal defense of
insertion of wrong date.
➢ Subsequent parties to the defect — can be
compelled to pay because they warranted that the
instrument is genuine and in all respects what it
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
b. Bearer instrument
• You can only go after the one who is primarily liable
(maker), the immediate transferor, and the
perpetrator of the fraud.
• If not a holder in due course and without the shelter
principle, the maker cannot be held liable.
• Holder In Due Course And HTHDC
➢ Primarily liable: Maker — can be compelled to pay
because he cannot raise the personal defense of
insertion of wrong date.
➢ Prior & Subsequent parties to the defect —
Cannot be compelled to pay because they did not
extend any warranty that the instrument is genuine
and in all respects what it purports to be and since
under Sec. 65 only the immediate party can be held
liable.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
• Not A Holder In Due Course
➢ Primarily liable: Maker — cannot be compelled to
pay because he can raise the personal defense of
insertion of wrong date.
➢ Prior & Subsequent parties to the defect —
cannot be compelled to pay because they did not
extend any warranty that the instrument is genuine
and in all respects what it purports to be.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
BILL OF EXCHANGE
a. Order instrument
• Holder In Due Course And HTHDC
➢ Primarily liable: Drawee-Acceptor — can be
compelled to pay because he accepted the instrument
and an acceptor will pay the instrument according to
the tenor of his acceptance. He cannot raise the
personal defense of insertion of a wrong date.
➢ Drawer – He can be made liable because, as a
drawer, he warrants that it will be paid if not paid by
the drawee. He cannot raise the personal defense of
the insertion of a wrong date.
➢ Prior parties to the defect — can be compelled to
pay because they cannot raise the personal defense
of insertion of a wrong date (because they became
parties prior to the insertion of the wrong date).
➢ Subsequent parties to the defect (including the
fraudster) — can be compelled to pay because they
warranted that the instrument is genuine and in all
respects what it purports to be under sec. 66.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
• Not a Holder In Due Course
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay
according to the tenor of his acceptance.
➢ Drawer – He cannot be made liable he can raise the
personal defense of the insertion of a wrong date.
19 | P a g e
 ➢ Prior parties to the defect — cannot be compelled
to pay because he can raise the personal defense of
insertion of wrong date.
➢ Subsequent parties to the defect — can be
compelled to pay because they warranted that the
instrument is genuine and in all respects what it
purports to be.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
b. Bearer instrument
• You can only go after the one primarily liable (drawee), the
immediate transferor, and the perpetrator of the fraud.
• Holder In Due Course And HTHDC
➢ Primarily liable: Drawee-Acceptor — can be
compelled to pay because he accepted the instrument
and an acceptor will pay the instrument according to
the tenor of his acceptance.
➢ Prior & Subsequent parties to the defect
(including drawer) — cannot be compelled to pay
because, not being an immediate party and
considering that this is a bearer instrument, only the
immediate transferor is liable to pay; they did not
warrant that the instrument is genuine and in all
respects what it purports to be.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be under Sec. 65.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
• Not A Holder In Due Course
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay
according to the tenor of his acceptance.
➢ Prior & Subsequent parties to the defect
(including drawer) — cannot be compelled to pay
because, not being an immediate party and
considering that this is a bearer instrument, only the
immediate transferor is liable to pay; they did not
warrant that the instrument is genuine and in all
respects what it purports to be.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be under Sec. 65.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
Illustration:
I promise to pay X or order P10,000.00 with interest.
Sgd. Y
Can you insert a date?
• Here, we concede that a date need not be inserted because
the issue date is deemed the date of the instrument and
6% is the legal interest.
But what if a wrong date was inserted? Will Sec. 13
apply?
• No, it will not, what will apply is Sec. 124 on material
alteration.
Ante-dating and Post-dating
Section 12. Ante-dated and post-dated. – 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
delivery acquires the title thereto as of the date of delivery.
• It does not affect the negotiability and validity of the
instrument as long as it is not use for fraudulent
purposes.
• The remedy will be as if it is inserted with the wrong date,
and you will have the same right.
• General Rule: The antedating or postdating of an
instrument will not affect its validity or negotiability.
• Exception: If the antedating or postdating was made for
an illegal or fraudulent purpose. Here, the
negotiability of the instrument is not affected,
however, it will invalidate the instrument.
Ante-dated
• When an instrument is dated prior to its actual issuance.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• Example: Today is September 5, but you made it appear
that the instrument was issued on September 1.
Post-dated
• When the instrument is dated after its actual issuance.
• Example: Today is September 5, but you made it appear
that the instrument was issued on September 8.
Examples of Illegal or Fraudulent Purposes
• Illegal ante-dating — done to conceal the charge of
usurious interest; done to hasten the maturity of the
instrument in order to collect the money immediately
(absent agreement).
• Illegal post-dating — to issue a post-dated check in
payment of an obligation because of insufficiency of
funds without intention to pay the person (you didn’t
inform them); done to conceal the insufficiency of the
funds..
Comments:
• Postdating and antedating are not invalid. However, when
these postdating and antedating are used to facilitate
fraud, that’s when it renders the instruments invalid,
but not necessarily non-negotiable.
• Invalidity is different from negotiability of an instrument,
which is determined by what is written on its face and on
the provisions of Sec. 1.
• For antedating, this is done when you want to hasten the
payment of interest or when you want to hasten the
maturity date of the instrument. However, this must be
agreed between the parties, and the instrument will
then be considered valid.
• If there’s agreement, then there’s no fraud to speak of
because it has been disclosed and they have agreed.
• Ante-dating and post-dating are acceptable commercial
practices.
Incomplete But Delivered - PERSONAL
Sec. 14. Blanks; when may be filled. - Where the
instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it
by filling up the blanks therein. And a signature on a blank
paper delivered by the person making the signature in order
that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any
amount.
In order, however, that any such instrument when completed
may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable
time.
But if any such instrument, after completion, is negotiated to a
holder in due course, it is valid and effectual for all purposes in
his hands, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a
reasonable time.
• This is the instance when it was drafted but not
completely, and subsequently, it was negotiated.
• In this instance, there was really an initial intention to
issue a negotiable instrument, which is why the law
gives the authority to fill it out.
Two instances:
1. If the instrument is wanting of material particular,
there is a prima facie authority to fill it in in accordance
with the interest of the person who drafted the instrument;
2. If the instrument contains a signature in a blank
paper with the intention to make it a negotiable
instrument, the holder is allowed to fill it up in accordance
with the authority given and in the hands of a holder in
due course, it is treated as if it is filled in in accordance
with the authority given.
• The authority given must be in accordance with the
interest of the person who drafted the instrument.
• It should not be from the viewpoint of the holder.
Comments:
• Here, there is prima facie authority to complete, but it
must be filled out within the authority given and within
reasonable time.
• These 2 instruments in relation to Section 14 are
delivered. They are presumed to be delivered or
negotiated. So we now have an incomplete but delivered
instrument.
• On the 1st instance, it can be any material particular
like name of the payee.
• On the 2nd instance, it is only the name or amount that
can be inserted (that is what is contemplated by the
20 | P a g e
 2nd instance; presupposes that the signed paper is
already a template) however you will see the instrument
having only the signature and the amount inserted. If you
will read it literally, that is how the instrument will appear
and it would be non-negotiable if that is the case. So you
look at the intention of the party for giving you the blank
instrument, it is for you to have a negotiable instrument.
So, you still have to write “I promise to pay…” If you are a
holder in due course, the legal implication of this is that it
is valid and effectual for all purposes in his hands.
However, if the holder is not a holder in due course, it can
be raised as personal defense against him.
Illustration:
Sgd. Y
If this was the paper given to you, what is your remedy?
What if this instrument is just an autograph?
• It is premised on the intent of the person who gave this to
you, so that you will convert it to a NI.
• It has to be premised on the intention whether the
person giving it to you so that you can convert it to
a negotiable instrument. This is pursuant to the 1st
instance as it is wanting in material particular (lacking
elements found in sec. 1)
• What is contemplated really in the 2nd instance is that there
is already a template wherein you will just insert the
amount. In reality, the example above is not really what is
intended by the 2nd instance in Sec. 14.
When to Fill In The Blanks Of The Instrument
1. Within the authority given
2. Within the reasonable time
A party has authority to fill in the blanks in the
instrument when:
1. The instrument is wanting in any material particular
2. Person is in possession of a signature on blank paper
intended to be a negotiable instrument
The Instrument Is Wanting in Any Material Particular
• There is an authority to fill up the instrument with
whatever is the missing material particular.
Signature Instrument on Blank Paper Intended To Be A
Negotiable
• There is an authority to fill up the instrument with any
amount. The authority to fill the blanks is only limited to
the amount but must be completed as a negotiable
instrument.
• TN: The presumption is it is a pro-forma instrument,
not just a blank paper with signature. It is deemed to
be completed as a negotiable instrument so all that is to
be added is the amount.
Requirements For Inserting Amount
1. Blank paper with signature
2. Intention to make the instrument negotiable
3. Delivery to person other than the drawer or maker
This Is A Personal Defense
• This can be raised by parties prior to its completion,
when what is inserted in the incomplete instrument
is not what is intended by them who made it.
• After the completion of the instrument, whatever is
added is deemed to be added in accordance with the
authority given. And when it is in the hands of a holder
in due course, it is valid and effectual for all purposes. (last
sentence of Sec. 14)
Illustration (PN, order instrument):
I promise to Pay X or order P __________.00 with interest.
Sgd. Y
Y-X-A-B-C
*A inserted P100,000.00
• Sec. 14 will apply and all that is to be inserted is the
amount.
• Suppose that Y negotiated it to X, who did not fill out the
amount and negotiated it to A, who put P100,000, and
then negotiated it to B and C.
Scenario 1: C is a holder in due course
Can C demand payment from Y? What are the rights of
C?
• As C is presumed to be a HDC, then C can run after Y
(maker) because he cannot raise the personal defense of
an incomplete but delivered instrument.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• C can also go after X (party prior to the defect) because
he cannot raise the defense of an incomplete but delivered
instrument.
• C can also go after B (and A; parties after the defect) as
indorsers because of the warranty that the instrument is
instrument is genuine and in all respects what it purports
to be.
• Ultimately, C can go after A because A is the one who
inserted the wrong amount and he should be penalized
therefor.
Comment:
• In the exam, since we haven’t discussed negotiation yet,
we presume that it is transferred (negotiated) by
indorsement if it is an order instrument.
• If it is a Bearer instrument, it is transferred (negotiated)
by delivery.
Scenario 2: C is not a holder in due course (silent as to
B)
What if C is not a HDC?
• If C is not a HDC, then my answer would be the same
because B is presumed to be a HDC, thus the shelter
principle will apply.
Scenario 3: C and B are holders in due course
What if C (and B) are not HDCs?
• If C and B are not HDCs, then C cannot run after Y (maker)
because he can raise the personal defense of an
incomplete but delivered instrument.
• C can also not hold X, a party prior to the defect liable,
because he can raise the personal defense of an
incomplete but delivered instrument.
• However, C can go after B (and A; parties after the defect)
as indorsers because of the warranty that the instrument
is genuine and in all respects what it purports to be.
• Ultimately, C can go after A (perpetrator) because A is the
one who inserted the wrong amount so he should be
penalized for his fraudulent act.
Illustration (BOE, order instrument):
If this is a bill of exchange, suppose instrument is presented by
X to Z, who accepted it, and then renegotiated it to A.
Y - X – A* - B - C
| |
Z P100,000
*A inserted P100,000 instead of just P10,000
Scenario 1: F is a holder in due course
• Primarily Liable: As to Z - As C is presumed to be a HDC,
C can successfully demand payment from Z because C is
a holder in due course and Z is primarily liable as the
drawee-acceptor and he cannot raise the personal defense
of filling in of an excessive amount in an incomplete but
delivered instrument.
• Secondarily Liable
➢ PRIOR PARTIES: As to X and Y - C can go after X
and Y because they cannot raise the personal defense
of filling in of an excessive amount in an incomplete
but delivered instrument.
➢ SUBSEQUENT PARTIES: As to A and B – C can go
after A and B because this is an order instrument and
as general indorsers, they warranted that the
instrument is genuine and in all respects what it
purports to be.
➢ PERPETRATOR OF THE FRAUD: As to A –
Ultimately, C can also demand payment from A
because A, having perpetrated the fraud, should be
penalized under the law.
Scenario 2: F is not a holder in due course (with shelter
principle)
• Same rule in a holder in due course because Shelter
Principle applies.
Scenario 3: C is NOT a holder in due course. (B is also
not a holder in due course)
• Primarily liable: As to Z – As C is not a HDC and the
shelter principle doesn’t apply, C cannot demand payment
from Z since Z can raise the personal defense of filling in
an excessive amount in an incomplete but delivered
instrument (note that he accepted this before the defect).
• Secondarily liable
➢ PRIOR PARTIES: As to X and Y – C cannot demand
payment since X and Y can raise the personal defense
of filling in an excessive amount in an incomplete but
delivered instrument.
21 | P a g e
 ➢ SUBSEQUENT PARTIES: As to A and B – C can
demand payment since they warranted that the
instrument is genuine and in all respects what it
purports to be.
➢ PERPETRATOR OF THE FRAUD: As to A –
Ultimately, C can also demand payment from A
because A, having perpetrated the fraud, should be
penalized under the law.
Illustration (BOE, bearer instrument):
To: X
Pay to A or bearer __________ on July 13, 2017.
Sgd. M
M – A – B* – C – D
| • Primarily Liable: As to X – As F is a HDC, F can
X (drawee)
*B inserted the amount of P2,000 when it was supposed to be
P1,000, and then he presented it to the drawee X.
Type of Instrument: Bearer instrument
Defect: Filling in of an excessive amount in an incomplete but
delivered instrument by B.
Scenario 1: D is a holder in due course
• Primarily Liable: As to X – As D is presumed to be HDC,
D can demand payment from X because X cannot raise the
personal defense of filling in of an excessive amount in an
incomplete but delivered instrument.
• Secondarily Liable
➢ PRIOR PARTIES: As to M and A - D cannot demand
payment from M and A because both M and A are not
immediate parties in relation to D and considering that
this is a bearer instrument, only the immediate
transferor gives a warranty on the instrument.
➢ IMMEDIATE TRANSFEROR: As to C – D can
demand payment because C being the immediate
transferor, he warranted that the instrument is
genuine and in all respects what it purports to be.
➢ PERPETRATOR OF THE FRAUD: As to B –
Ultimately, D can also demand payment from B
because B, having perpetrated the fraud, should be
penalized under the law.
Scenario 2: D is not a holder in due course
• The same rule applies as to a holder in due course because
the Shelter Principle applies.
Continuation of Illustration:
To: X
Pay to A or bearer __________ on July 13, 2017.
Sgd. M
M – A – B* – C – D – E – F
X (drawee)
*B inserted the amount of P2,000 when it was supposed to be
P1,000, and then he presented it to drawee X.
Type of Instrument: Bearer instrument
Defect: Filling in of an excessive amount in an incomplete but
delivered instrument by B.
Scenario 3: F is NOT a holder in due course. (E is also not
a holder in due course)
• Primarily Liable: As to X - F can compel X to pay
because he accepted the instrument and an acceptor will
pay the instrument according to the tenor of his
acceptance.
• Secondarily Liable
➢ PRIOR PARTIES: As to M and A – F cannot demand
payment from M and A because both M and A are not
immediate parties in relation to F and considering that
this is a bearer instrument, only the immediate
transferor gives a warranty on the instrument.
➢ SUBSEQUENT PARTIES: As to C and D – same as
M and A
➢ IMMEDIATE TRANSFEROR: As to E – F can demand
payment from E because E, being the immediate
transferor, has warranted that the instrument is
genuine and in all respects what it purports to be.
➢ PERPETRATOR OF THE FRAUD: As to B –
Ultimately, F can successfully demand payment from
B because B, having perpetrated the fraud, should be
penalized under the law.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Illustration (BOE, order instrument):
To: X
Pay to A or order __________ on July 13, 2017.
Sgd. M
M – A – B* – C – D – E – F
|
X (drawee)
*B inserted the amount of P2,000 when it was supposed to be
P1,000, and then he presented it to drawee X.
Type of Instrument: Order instrument
Defect: Filling in of an excessive amount in an incomplete but
delivered instrument by B.
Scenario 1: F is a holder in due course
successfully demand payment from X because he accepted
the instrument and an acceptor will pay the instrument
according to the tenor of his acceptance.
• Secondarily Liable
➢ DRAWER & PRIOR PARTIES: As to M and A - F can
go after M and A because F is a holder in due course.
M and A cannot raise the personal defense of filling in
of an excessive amount in an incomplete but delivered
instrument.
➢ SUBSEQUENT PARTIES: As to C, D, and E – F can
go after C, D, and E because this is an order
instrument and they warranted that the instrument is
genuine and in all respects what it purports to be.
➢ PERPETRATOR OF THE FRAUD: As to B –
Ultimately, F can also demand payment from B
because B, having perpetrated the fraud, should be
penalized under the law.
Scenario 2: F is not a holder in due course (with shelter
principle)
• Same rule in a holder in due course because Shelter
Principle applies.
Scenario 3: F is NOT a holder in due course. (E is also not
a holder in due course)
• Primarily liable: As to X – F can demand payment from
X because X accepted the instrument and an acceptor will
pay the instrument according to the tenor of his
acceptance.
• Secondarily liable
➢ DRAWER & PRIOR PARTIES: As to M and A – F
cannot demand payment since M and A can raise the
personal defense of filling in an excessive amount in
an incomplete but delivered instrument.
➢ SUBSEQUENT PARTIES: As to C, D and E – F can
demand payment since they warranted that the
instrument is genuine and in all respects what it
purports to be.
➢ PERPETRATOR OF THE FRAUD: As to B -
Ultimately, F can also demand payment from B
because B, having perpetrated the fraud, should be
penalized under the law.
Summary of Rules for Incomplete But Delivered -
PERSONAL
PROMISSORY NOTE
a. Order Instrument
• Holder In Due Course And HTHDC
➢ Primarily liable: Maker — can be compelled to pay
because he cannot raise the personal defense of
incomplete but delivered instrument.
➢ Prior parties to the defect — can be compelled to
pay because they cannot raise the personal defense
of incomplete but delivered instrument.
➢ Subsequent parties to the defect — can be
compelled to pay because they warranted that the
instrument is genuine and in all respects what it
purports to be
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not A Holder In Due Course
➢ Primarily liable: Maker — cannot be compelled to
pay because he can raise the personal defense of
incomplete but delivered instrument.
➢ Prior parties to the defect — cannot be compelled
to pay because he can raise the personal defense of
incomplete but delivered instrument
➢ Subsequent parties to the defect — can be
compelled to pay because they warranted that the
22 | P a g e
 instrument is genuine and in all respects what it
purports to be
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
b. Bearer Instrument
• You can only go after the one who is primarily liable
(maker), the immediate transferor and the perpetrator of
the fraud.
• If a holder in not due course and without the shelter
principle, the maker cannot be held liable.
• Holder In Due Course And HTHDC
➢ Primarily liable: Maker — can be compelled to pay
because he cannot raise the personal defense of
incomplete but delivered instrument
➢ Prior & Subsequent parties to the defect —
cannot be compelled to pay because they did not
extend any warranty that the instrument is genuine
and in all respects what it purports to be and since
under Sec. 65, only the immediate transferor can be
held liable.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not A Holder In Due Course
➢ Primarily liable: Maker — cannot be compelled to
pay because he can raise the personal defense of
incomplete but delivered instrument
➢ Prior & Subsequent parties to the defect —
cannot be compelled to pay because they did not
extend any warranty that the instrument is genuine
and in all respects what it purports to be.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
BILL OF EXCHANGE
a. Order Instrument
• Holder In Due Course And HTHDC
➢ Primarily liable: Drawee-Acceptor — can be
compelled to pay because he accepted the instrument
and an acceptor will pay the instrument according to
the tenor of his acceptance.
➢ Drawer & Prior parties to the defect — can be
compelled to pay because they cannot raise the
personal defense of incomplete but delivered
instrument
➢ Subsequent parties to the defect — can be
compelled to pay because they warranted that the
instrument is genuine and in all respects what it
purports to be
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not A Holder In Due Course
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay
according to the tenor of his acceptance.
➢ Drawer & Prior parties to the defect — cannot be
compelled to pay because he can raise the personal
defense of incomplete but delivered instrument
➢ Subsequent parties to the defect — can be
compelled to pay because they warranted that the
instrument is genuine and in all respects what it
purports to be
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
b. Bearer Instrument
• You can only go after the one primarily liable who is the
drawee , the immediate transferor, and the perpetrator of
the fraud.
• Holder In Due Course And HTHDC
➢ Primarily liable: Drawee-Acceptor — can be
compelled to pay because he accepted the instrument
and an acceptor will pay the instrument according to
the tenor of his acceptance.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
➢ Drawer — cannot be compelled to pay because he
can raise the personal defense of incomplete but
delivered instrument
➢ Prior & Subsequent parties to the defect
(including drawer) — cannot be compelled to pay
because, not being an immediate party and
considering that this is a bearer instrument, they did
not warrant that the instrument is genuine and in all
respects what it purports to be.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not A Holder In Due Course
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay
according to the tenor of his acceptance.
➢ Prior & subsequent parties (including drawer) to
the defect — cannot be compelled to pay because,
not being an immediate party and considering that
this is a bearer instrument, they did not warrant that
the instrument is genuine and in all respects what it
purports to be.
➢ Immediate transferor — can be compelled because
he warranted that the instrument is genuine and in all
respects what it purports to be
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
Incomplete And Undelivered - REAL
Sec. 15. Incomplete instrument not delivered. - 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.
This Is A Real Defense
• Real defense because it mentions that it will not be a
valid contract in the hands of any holder (including
holders in due course).
• Thus it can be raised against all parties even to a holder in
due course.
How about if the instrument is both incomplete and
undelivered, what’s the effect?
• The effect of an incomplete and undelivered instrument is
invalidity in the hands of any holder.
• It is a real defense because it says in the hands of any
holder, but only in relation to prior parties to the
defect.
Who may be estopped from raising the real defense
under Sec 15?
• A drawee bank whose negligent custody of the checks,
after partial execution, contributed to its escape.
Comments:
• There was an intention to issue a negotiable instrument,
but he did not deliver it. In his hands, it must have been
stolen and delivered it to someone else, whoever it may
be.
• The usual situation there is here is a boss who drafted an
instrument, incomplete, has the signature, but doesn’t
bear the amount, and placed it in his drawer. His secretary
then stole it and negotiated it.
Illustration: (PN, order instrument)
I promise to pay U or order _______ with interest.
Sgd. M
M – Z* – P – A – B – C - D
*M is the maker of the instrument incomplete on its face. It
was stolen by Z, who put an amount and negotiated the
instrument to P, P to A, B, C and D.
Type of instrument: Order Instrument
Primarily liable
• As to M – Cannot be compelled to pay as M can raise the
real defense of incomplete and undelivered instrument.
Secondarily liable
• PRIOR PARTIES: None.
23 | P a g e
• SUBSEQUENT PARTIES: As to P, A, B and C – D can
demand payment from them since they warranted that
the instrument is genuine and in all respects what it
purports to be AND they have good title over the
instrument.
• PERPETRATOR OF THE FRAUD: As to Z – Ultimately, D
can run after Z, as Z, being the perpetrator of the fraud,
must be punished under the law.
Comment:
• It does not matter whether the holder is in due course or
not because the defense being real, it can be raised against
any parties.
Illustration (BOE, order instrument):
To Z:
Pay to X or order P____.00
Sgd. Y
X stole the instrument, added the amount of P100,000
then presented the instrument to Z who accepted the
instrument and return it to X. X then negotiated it to A, to B
and finally to C.
Y - X* - A - B - C
| ➢ Immediate transferor — can be compelled because
Z he warranted that the instrument is genuine and in all
*X stole the instrument and presented it to Z for acceptance.
What are C’s rights in relation to prior parties?
Scenario 1: C as a HDC
• As C is presumed to be a HDC, C can go after Z since as a
drawee-acceptor, he can be liable as to the tenor of his
acceptance.
• X, A, and B can be compelled to pay by C, since as
indorsers, they extended the warranties that the
instrument is genuine and in all respects what it purports
to be and that they have good title to it.
• C cannot go after Y since Y can raise the real defense of
incomplete and undelivered instrument.
• C can go after X since he is ultimately liable for causing
the defect.
Scenario 2: C as not HDC
• Considering that the shelter principle applies, as C
acquired the instrument from B who is presumed to be a
HDC, and he himself is not a party to any fraud or illegality
in the instrument, he can be regarded as a HTHDC. As
such, he can exercise the rights of a HDC.
Scenario 3: B & C are not HDCs
• Actually, regardless of whatever the status of the holder
is, the answer will still be the same since the defense
of incomplete and undelivered instrument is a real
defense. It actually is the easiest of all defects.
How will it affect the rights of the parties (whether HDC,
HTHDC, or HNDC):
1. Prior parties – Not liable
2. Subsequent parties
➢ Indorsers – liable because they warrant that the
instrument is genuine and in all respects what it
purports to be AND they also warrant that they have
good title to it.
➢ Person negotiating by delivery – liable if
immediate transferor because the warranty that
the instrument is genuine and in all respects what it
purports to be and that he has a good title over it only
extends to the immediate transferee (current holder).
➢ Perpetrator – liable because we do not tolerate fraud
in any commercial transactions.
What warranties are violated by the indorser if the
instrument is not delivered? (SEC. 65 (b))
• That he has a good title to it.
Comments:
• In addition to the warranty that the instrument is genuine
and in all respects what it purports to be, they also violate
the warranty that they have a good title to it.
• Thus, if the issue is incomplete and undelivered
instrument, it is not enough that the warranty
violated is the genuineness of the instrument. You
must also mention that the warranty of having a
good title to it is being violated.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Summary of Rules for Incomplete and Undelivered –
REAL
PROMISSORY NOTE
a. Order instrument
• Holder In Due Course, HTHDC & NHDC
➢ Primarily liable: Maker — cannot be compelled to
pay because he can raise the real defense of an
incomplete and undelivered instrument.
➢ Subsequent parties to the defect — can be
compelled because they warranted that the
instrument is genuine and in all respects what it
purports to be AND that they have a good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
b. BEARER INSTRUMENT
• Holder In Due Course, HTHDC & NHDC
➢ Primarily liable: Maker — cannot be compelled to
pay because he can raise the real defense of an
incomplete and undelivered instrument.
➢ Subsequent parties to the defect — cannot be
compelled to pay because they did not extend any
warranty that the instrument is genuine and in all
respects what it purports to be AND that they have a
good title to it.
respects what it purports to be AND he have a good
title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
BILL OF EXCHANGE
a. Order instrument
• Holder in due course, HTHDC & NHDC
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay to
the amount according to the tenor of his
acceptance.
➢ Drawer — cannot be compelled to pay because he
can raise the real defense of an incomplete and
undelivered instrument.
➢ Subsequent parties to the defect — can be
compelled because they warranted that the
instrument is genuine and in all respects what it
purports to be AND that they have a good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
b. Bearer Instrument
• You can only go after the one primarily liable who is the
drawee, the immediate transferor, and the perpetrator of
the fraud.
• Holder in due course, HTHDC & NHDC
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay to
the amount according to the tenor of his
acceptance.
➢ Drawer — cannot be compelled to pay because he
can raise the real defense of an incomplete and
undelivered instrument
➢ Subsequent parties to the defect — cannot be
compelled to pay because they did not warrant that
the instrument is genuine and in all respects what it
purports to be AND that they have a good title to it.
➢ Immediate transferor — can be compelled because
they warranted that the instrument is genuine and in
all respects what it purports to be AND that they have
a good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law.
Complete But Undelivered – PERSONAL
Sec. 16. Delivery; when effectual; when presumed. -
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as
regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or
under the authority of the party making, drawing, accepting,
or indorsing, as the case may be; and, in such case, the
delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring
the property in the instrument.
24 | P a g e
But where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to him so as
to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved.
What happens if the instrument is complete but is not
delivered?
• The contract is deemed incomplete and revocable until it
is delivered.
• The second effect is that if the instrument is already in
the hands a holder in due course, a valid delivery
thereof by all parties prior to him so as to make them
liable to him is conclusively presumed.
• There is still presumption of delivery. So, in other words,
in all instances, there’s always presumption of delivery.
• Even if you say that the instrument is complete but
undelivered, the law actually would still consider it as
having been delivered.
Presumption of Delivery
• There is a presumption of delivery when the instrument is
no longer in the hands of a person who drafted the
instrument.
• Holder in due course – Conclusive presumption of
delivery.
• Holder not in due course – Rebuttable or prima facie
presumption (Example: Delivery but special conditional;
no authority to delivery).
Instances that can rebut the presumption of a valid
delivery.
1. It is not under the authority
2. The delivery is conditional
3. The delivery is for a special purpose
TN: you cannot raise these instances against a holder in due
course since there is conclusive presumption of delivery for a
holder in due course.
If the instrument is in the hands of a holder not in due
course, what can be shown by a person who may be
required to pay?
1. Show that there was no authority to deliver (No delivery).
2. If there was delivery, such delivery was conditional or for
a special purpose.
Comment:
• As between immediate parties and as regards a remote
party other than a holder in due course, the delivery, in
order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or
indorsing, as the case may be; and, in such case, the
delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of
transferring the property in the instrument.
Who must prove that there was no delivery?
• Parties prior to the non-delivery.
• In other words, the one who should prove that there was
no delivery are the parties prior to the defect. Those
persons who actually did not deliver the instrument. or
those who may have delivered it but subject to a condition
or that it is a special purpose only.
• If the non-delivery happens to be from the person who
drafted the instrument, it could be the drawer or the
maker, it will be them who have to prove.
• So the burden of proof there is person who alleges
that there was no delivery because there is already
a presumption of delivery.
Conditional And Special Delivery
1. For conditional delivery
• Conditional delivery is one where there is an authority to
deliver, however, it is subject to a condition.
• Example: The maker issued an instrument in favor of A
subject to the condition that A should pass the bar exams.
• The condition must not be stated in the negotiable
instrument, otherwise it will place a condition on the
negotiable instrument making it non-negotiable.
2. For special purpose
• Example: M is the maker. He kept it in his drawer. M gave
X the authority to give the instrument to A for
safekeeping.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Illustration (PN, order instrument):
I promise to pay U or order P10,000 with interest.
Sgd. M
M – Z* – P – A – B – C - D
*M is the maker of the instrument complete on its face stolen
by Z. Z negotiated the instrument and issued it to P, P to A, B,
C and D.
Type of Instrument: Order Instrument
Defect: Complete but undelivered
Scenario 1: D is a holder in due course.
• Primarily liable
➢ As to M – As D is presumed to be a holder in due
course, D can demand payment from M because M
cannot raise the personal defense of complete but
undelivered instrument.
• Secondarily liable
➢ PRIOR PARTIES: None.
➢ SUBSEQUENT PARTIES: As to P, A, B and C – D can
demand payment since they warranted that they
have a good title over the instrument.
➢ PERPETRATOR OF THE FRAUD: As to Z –
Ultimately, Z can be held liable because he is the
perpetrator of the fraud and he must be punished
under the law.
Scenario 2: D isn’t a holder in due course (silent as to C’s
status)
• Same rule applies above since Shelter Principle applies.
Scenario 3: D and C and are not holders in due course
• Primarily liable
➢ As to M – D cannot demand payment since M can
raise the personal defense of complete and
undelivered.
• Secondarily liable
➢ PRIOR PARTIES: None
➢ SUBSEQUENT PARTIES: As to P, A, B and C – D
can demand payment since they warranted that they
have a good title over the instrument.
➢ PERPETRATOR OF THE FRAUD: As to Z – he is the
perpetrator of the crime and must be punished under
the law.
Illustration (PN, bearer instrument):
I promise to pay U or bearer P10,000 with interest.
Sgd. M
M – Z* – P – A – B – C - D
*M is the maker of the instrument complete on its face stolen
by Z. Z negotiated the instrument and issued it to P, P to A, B,
C and D.
Type of Instrument: Bearer Instrument
Defect: Complete but undelivered
Scenario 1: D is a holder in due course
• Primarily liable
➢ As to M – D can demand payment since M is the
person primarily liable
• Secondarily liable
➢ PRIOR PARTIES: None
➢ SUBSEQUENT PARTIES: As to P, A and B – D
cannot demand since they are not the immediate
transferor and they did not extend any warranty
that they have good title to it.
➢ IMMEDIATE TRANSFEROR: As to C – D can
demand payment from C since, being the immediate
transferor, he warranted that he has good title to it.
➢ PERPETRATOR OF THE FRAUD: As to Z – Being the
perpetrator of the fraud, he is ultimately liable and
must be punished under the law.
Scenario 2: D isn’t a holder in due course (silent as to C’s
status)
• Same rule applies above since Shelter Principle applies.
Scenario 3: D and C and are not holders in due course
• Primarily liable
➢ As to M – D cannot anymore demand payment since
M can raise the personal defense of complete but
undelivered instrument.
• Secondarily liable
➢ PRIOR PARTIES: None
➢ SUBSEQUENT PARTIES: As to P, A and B – D
cannot demand payment from P, A, and B since the
25 | P a g e
 instrument is a bearer instrument. In a bearer
instrument, the party secondarily liable is the
immediate transferor.
➢ IMMEDIATE TRANSFEROR: As to C – D can
demand payment from C since, being the immediate
transferor, he warranted that he has good title to it.
➢ PERPETRATOR OF THE FRAUD: As to Z – Being the
perpetrator of the fraud, he is ultimately liable and
must be punished under the law.
Illustration (BOE, order instrument):
To: X
Pay to Y or order Php 10 Million.
Sgd. R
R → Y - - - - - A* → B → C → D
↓ of a complete but undelivered instrument.
X (drawee/acceptor)
*A — stole the instrument from Y.
Scenario 1: D is a holder in due course
• Primarily liable
➢ DRAWEE-ACCEPTOR: As to X — As D is presumed
to be a holder in due course, D can demand payment
from X because he accepted the instrument and an
acceptor will pay the instrument according to the
tenor of his acceptance
• Secondarily liable
➢ PRIOR PARTIES OF THE DEFECT: As to R and Y
— They can be compelled to pay because they cannot
raise the personal defense of a complete but
undelivered instrument
➢ SUBSEQUENT PARTIES OF THE DEFECT: As to A,
B and C — They can be compelled to pay because
they warranted that they have a good title to the
instrument
➢ PERPETRATOR OF THE FRAUD: As to A —
ultimately liable because he committed the crime of
theft, therefore, he should be penalized under the law
Scenario 2: D isn’t a holder in due course (silent as to C’s
status)
• Same rule applies above since Shelter Principle applies.
Scenario 3: D and C and are not holders in due course
• DRAWEE-ACCEPTOR: As to X — He cannot be compelled
to pay because he can raise the personal defense of a
complete but undelivered instrument (note that he
accepted the instrument prior to the defect).
• PRIOR PARTY OF THE DEFECT: As to R and Y — They
cannot be compelled to pay because they can raise the
personal defense of a complete but undelivered
instrument.
• SUBSEQUENT PARTIES OF THE DEFECT: As to A, B,
and C — They can be compelled to pay because they
warranted that they have a good title to the instrument
• PERPETRATOR OF THE FRAUD: As to A — ultimately
liable because he caused the defect, therefore, he should
be penalized under the law
Illustration (BOE, order instrument)
• An NI was placed in the table of Y. It was seen by X, who
then took it and negotiated the instrument to a third party.
• It now appears that Y issued an instrument to X, who
negotiated it to A.
• A then presented the instrument to Z, who accepted the
same and returned it to A.
• It was further negotiated to B and finally to C.
To: Z
Pay to X or order P1M
Sgd. Y
Y - X* - A - B - C
| accepted the instrument prior to the defect).
Z • PRIOR PARTY TO THE DEFECT: As to R and Y— They
*X stole and negotiated the negotiable instrument.
What are the rights of C in relation to prior parties?
Here, it is an order document.
Scenario 1: C as a HDC
• Primarily liable: C can go after Z, because as drawee-
acceptor, he is liable based on the tenor of his acceptance,
and he cannot raise the defense of complete but
undelivered instrument.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• C can go after Y since prior parties cannot raise the
personal defense of complete but undelivered instrument.
• C can go after X, A & B since as indorsers, they extended
the warranty that they have good title to it.
• Ultimately, C can go after X since he should be penalized
for causing the defect.
Scenario 2: C as not a HDC (silent as to B)
Take note of this since this is how Atty. Amago framed
his answer
“Considering that the shelter principle applies, as C acquired
the instrument from B who is presumed to be a HDC, and he
himself is not a party to any fraud or illegality in the instrument,
he can be regarded as a HTHDC. As such, he can proceed after
Z who is liable on the instrument based on the tenor of his
acceptance.
C can go after Y because Y cannot raise the personal defense
C can go after X, A, and B because as indorsers, they warrant
that they have good title to it.
Ultimately, C can go after X since he must be penalized for his
actions.”
Scenario 3: B and C are not HDCs
• C can go after Z who is liable based on the tenor of his
acceptance (note that he accepted it after the defect
already).
• C cannot go after Y since he can raise the personal defense
of complete but undelivered instrument.
• C can go after A, B and X since as indorsers, they have
warranted that they have good title to it.
• Ultimately, C can go after X since he should be penalized
for causing the defect.
Illustration (BOE, bearer instrument):
To: X
Pay to Y or bearer Php 10 Million.
Sgd. R
R → Y - - - - - A* → B → C → D
↓
X (drawee/acceptor)
*A — stole the instrument from Y.
Scenario 1: D is a holder in due course.
• Primarily liable
➢ DRAWEE-ACCEPTOR: As to X — He can be
compelled to pay because he accepted the instrument
and an acceptor will pay the instrument according to
the tenor of his acceptance.
• Secondarily liable
➢ PRIOR PARTY TO THE DEFECT: As to R and Y—
They cannot be compelled to pay because they are not
the immediate transferor and they did not extend any
warranty that they have good title to it.
➢ SUBSEQUENT PARTIES TO THE DEFECT: As to A
& B — They cannot be compelled to pay because they
are not the immediate transferor and they did not
extend any warranty that they have good title to it.
➢ IMMEDIATE TRANSFEROR: As to C — He can be
compelled to pay because he warranted that they
have a good title to the instrument.
➢ PERPETRATOR OF THE FRAUD: As to A —
ultimately liable because he caused the defect
therefore he should be penalized under the law
Scenario 2: D isn’t a holder in due course (silent as to C’s
status)
• Same rule applies above since Shelter Principle applies.
Scenario 3: D and C and are not holders in due course
• DRAWEE-ACCEPTOR: As to X — He cannot be compelled
to pay because he can raise the personal defense of a
complete but undelivered instrument (note that he
cannot be compelled to pay because they are not the
immediate transferor and they did not extend any
warranty that they have good title to it.
• SUBSEQUENT PARTIES TO THE DEFECT: As to A & B
— They cannot be compelled to pay because they are not
the immediate transferor and they did not extend any
warranty that they have good title to it.
• IMMEDIATE TRANSFEROR: As to C — He can be
compelled to pay because he warranted that they have a
good title to the instrument.
26 | P a g e
• PERPETRATOR OF THE FRAUD: As to A — ultimately
liable because he caused the defect therefore he should be
penalized under the law
Summary of Rules for Complete But Undelivered -
PERSONAL
PROMISSORY NOTE
a. Order Instrument
• Holder in due course and HTHDC
➢ Primarily liable: Maker — can be compelled to pay
because he cannot raise the personal defense of
complete but undelivered instrument
➢ Prior parties to the defect — can be compelled to
pay because he cannot raise the personal defense of
complete but undelivered instrument
➢ Subsequent parties to the defect (including the
perpetrator) — can be compelled to pay because
they warranted that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not a holder in due course
➢ Maker & Prior parties to the defect — cannot be
compelled to pay because he can raise the personal
defense of complete but undelivered instrument
➢ Subsequent parties to the defect (including the
perpetrator) — can be compelled to pay because
they warranted that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
b. Bearer Instrument
• You can only go after the one who is primarily liable
(maker), the immediate transferor, and the perpetrator of
the fraud. If a holder in not due course, maker cannot be
liable.
• Holder in due course and HTHDC
➢ Primarily liable: Maker — can be compelled to pay
because he cannot raise the personal defense of
complete but undelivered instrument
➢ Prior & Subsequent parties to the defect —
cannot be compelled to pay because they did not
extend any warranty that they have good title to it.
➢ Immediate transferor — can be compelled because
they warranted that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not a holder in due course
➢ Primarily liable: Maker — cannot be compelled to
pay because he can raise the personal defense of
complete but undelivered instrument
➢ Prior & Subsequent parties to the defect —
cannot be compelled to pay because they did not
extend any warranty that they have good title to it.
➢ Immediate transferor — can be compelled because
they warranted that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
BILL OF EXCHANGE
a. Order Instrument
• Holder in due course and HTHDC
➢ Primarily liable: Drawee-Acceptor — can be
compelled to pay because he accepted the instrument
and an acceptor will pay the instrument according to
the tenor of his acceptance and he cannot raise the
defense of complete but undelivered instrument.
➢ Drawer & Prior parties to the defect — can be
compelled to pay because he cannot raise the
personal defense of complete but undelivered
instrument
➢ Subsequent parties to the defect (including the
perpetrator) — can be compelled to pay because
they warranted that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not a holder in due course
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay
according to the tenor of his acceptance.
➢ Drawer & Prior parties to the defect — cannot be
compelled to pay because he can raise the personal
defense of complete but undelivered instrument
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
➢ Subsequent parties to the defect (including the
perpetrator) — can be compelled to pay because
they warranted that that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
b. Bearer Instrument
• You can only go after the one who is primarily liable
(maker), the immediate transferor, and the perpetrator of
the fraud.
• Holder in due course and HTHDC
➢ Primarily liable: Drawee-Acceptor — can be
compelled to pay because he accepted the instrument
and an acceptor will pay the instrument according to
the tenor of his acceptance and he cannot raise the
defense of complete but undelivered instrument.
➢ Drawer — cannot be compelled to pay because he
can raise the personal defense of complete but
undelivered instrument
➢ Prior & Subsequent parties to the defect— cannot
be compelled to pay because they did not warrant that
they have good title to it.
➢ Immediate transferor — can be compelled because
they warranted that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
• Not A Holder In Due Course
➢ Primarily liable: Drawee-Acceptor — For the
drawee-acceptor, it depends when he accepted
the instrument. He is only compelled to pay
according to the tenor of his acceptance.
➢ Prior & subsequent parties (including drawer) to
the defect — cannot be compelled to pay because,
not being an immediate party and considering that
this is a bearer instrument, they did not warrant that
that they have good title to it.
➢ Immediate transferor — can be compelled because
he warranted that they have good title to it.
➢ Perpetrator of the fraud — ultimately liable
because he caused the defect therefore he should be
penalized under the law
Minors and Corporations – REAL
SEC. 22. Effect of indorsement by infant or corporation.
— The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the corporation
or infant may incur no liability thereon.
• It is a real defense, in the sense that, it can be raised
against any type of holder (HDC, Holder through a HDC,
and HNDC).
• And, they are special because the defense of Minority
and Ultra Vires are personal to the Minor and
Corporation, respectively.
• In other words, they can only be raised by the minor
or the corporation. It is not a personal defense. The term
“personal” is referring to the fact that the defense of
Minority and Ultra vires can be raised personally by the
minor or the corporation alone.
Minority As A Real Defense
• General rule: Minority is a real defense, but it can only
be raised by the minor himself. The holder of the
instrument cannot make the minor liable.
• Exception: The minor makes representation to the public
that he is of legal age when in truth and in fact, he is a
minor. The minor already committed fraud and
cannot be allowed to raise the defense of minority.
Comments:
• It is a REAL defense, but it is only available only to
the incapacitated party (ex. minor or corporation)
• The indorsement or assignment of the instrument by a
corp. or by an infant passes the property therein,
notwithstanding that from want of capacity, the corp. or
infant may incur no liability thereon.
Corporation’s Ultra Vires Act
• Ultra vires acts are acts beyond the power of the
corporation.
• A corporation cannot be held liable for the ultra vires acts
(acts beyond the authority) of its representative, but the
representative can be held personally liable as he did the
act beyond the scope of given authority.
• The representative of the corporation can only be
authorized through a Board Resolution. Where acts of
27 | P a g e
 issuing negotiable instrument and negotiating such are not
among those provided in the resolution, they are
considered ultra vires or beyond the scope of its authority.
• The act of the representative, even if approved by the
Board of Directors, is itself ultra vires if the act of
negotiating the instrument is not one of those acts
granted to it, incidental, implied or stated under its
charter documents or the Articles of Incorporation
submitted to SEC for the purpose of registration.
• Reason: In dealing with the corporation, it is incumbent
upon the clients to make inquiries as to the extent of the
authority granted to the representative. Good practice
suggests that clients must ask the notarized Board
Resolution or Secretary Certificate attested by the
President.
• The defense is peculiar in nature as it is personal to the
party. It can only be raised by such particular party only.
• Parties subsequent to the minors or corporation can be
held liable because they made a warranty that all prior
parties have the capacity to contract.
Illustration (Minority):
M - P (minor) - A - B
If B goes after M, can the latter refuse payment on the
ground that P is a minor?
• No, M cannot refuse payment because the real defense of
minority is personal only to P, who is a minor.
If B goes after P because M doesn’t pay him, can P refuse
payment?
• Yes, P can refuse payment because he can raise the real
defense of Minority against B.
Illustration (Ultra-Vires Acts):
M (exceeded his authority as representative of X Crop.)- P - A
-B
If B goes after X Corp. and demanded payment in
representation that it was signed by M, Can X corp.
refuse payment?
• Yes, because M wasn’t authorized to make the instrument.
• So X corp. can raise the real defense of an ultra vires act
against B.
• Effect of the misrepresentation: You can be PERSONALLY
liable.
But can P and A use that defense (ultra vires act) as a
ground in order not to pay?
• No, they cannot. Because the real defense of ultra vires
act is personal to the Corporation.
Material Alteration – REAL
Sec. 124. Alteration of instrument; effect of. - 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.
Sec. 125. What constitutes a material alteration. - Any
alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment:
d) The number or the relations of the parties;
e) The medium or currency in which payment is to be made;
f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition
which alters the effect of the instrument in any respect,
is a material alteration.
Comments:
• Material Alteration is an alteration of any material
particular. It is any alteration which changes the liability
of a party.
• Sec. 124 refers to physical alteration. Thus, for there to be
material alteration, it must be a physical alteration.
Material alteration:
1. The date
2. The sum payable
3. The time or place of payment
4. The number of the relations of the parties
5. The medium or currency in which payment is to be made
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Not a material alteration:
1. Serial number
2. Extending the period of payment
Effect of Material Alteration
• General Rule: Avoids the instrument against all parties
and they can raise the real defense of material alteration
as against any holder.
• Invalid as to parties prior to the defect and those who did
not assent to the alteration
• HDC or HTHDC: can enforce payment as to its original
tenor
• HNDC: cannot enforce the instrument as it is avoided
• Exception: Against a party who has himself made,
authorized, or assented to the alteration, and subsequent
indorsers. Indorsers warrant that the instrument is
genuine and in all respects what it purports to be.
#25 International Corporate Bank vs. CA
• Material alteration is one which changes the items under
Sec. 1. That which changes the obligation of the party.
• Changing the serial number will not change the liability.
PNB should still have paid ICB.
Illustration:
To: Z
Pay to X or order P1,000,000.00
Sgd. Y
Supposing this instrument is the subject matter of a problem,
but initially, it has only the amount of P1M. It was issued
to X, presented to Z, accepted, negotiated by X to A - B
(changed amount from 1M to 10M), then further negotiated to
C then finally to D. Discuss rights of D in relation to prior
parties.
Y - X - A – B* - C - D
| |
Z P10M
*B changed P1M to P10M
Scenario 1: D is a holder in due course
• As it can be presumed that D is a holder in due course, D
can go after Z since as drawee-acceptor, he is primary
liable and he engaged to pay according to the tenor of his
acceptance, but only to the extent of the original
amount (P1M) of the instrument as he can raise the
real defense of material alteration.
• D can go after Y, X, A but only as to the original amount
(P1M) in the instrument since they can invoke the
real defense of material alteration.
• D can go after B and C for the entire amount (P10M) as
they warrant that the instrument is genuine and in all
respects what it purports to be.
• D can go after B for the entire amount (P10M) since he is
ultimately liable as perpetrator of the fraud and must be
penalized in accordance to the law.
Comments:
• Whoever are parties prior to alteration may raise it against
any holder. It is a real defense.
• What made it different from other real defenses is that
even if a party can raise the real defense, he can still
be held liable to the extent as to the original tenor
of the instrument.
• You can regard this as a hybrid defense (but don’t quote
that in the exam, and NEVER in the bar exam, just for
discussion purposes).
Scenario 2: D is not a holder in due course (silent as to
C)
• Absent any information to the contrary that C is not a
holder in due course, he is presumed to be a holder in due
course.
• Thus, the shelter principle applies, and the answer is the
same.
Scenario 3: D and C are not holders in due course
• As D is a mere holder not in due course and the shelter
principle doesn’t apply, D cannot go after Z since as
drawee-acceptor as he can raise the real defense of
material alteration.
• D cannot go after Y, X, A since they can invoke the
real defense of material alteration.
• However, D can go after B and C for the entire amount
because, as general indorsers, they warrant that the
28 | P a g e
 instrument is genuine and in all respects what it purports
to be.
• Ultimately, D can go after B since he is the perpetrator of
the fraud and must be penalized in accordance with law.
Summary of the Rights in Material Alteration
ORDER INSTRUMENT
a. Rights of a Holder In Due Course and HTHDC
• Can collect from:
➢ Prior parties: Liable only up to the original tenor
because the prior parties can raise the real defense of
material alteration.
➢ Subsequent parties: Liable up to the alteration
because they warranted that the instrument is
genuine and in all respects what it purports to be.
➢ Perpetrator of the fraud: Liable up to the alteration
because he is the perpetrator of the fraud and must
be penalized in accordance with law.
• In case the holder was able to collect from the prior
parties according to the original tenor, he can still
go after the subsequent parties for the remainder.
b. Rights Of A Holder Not In Due Course
• Can collect from:
➢ Subsequent parties: Liable up to the alteration
because they warranted that the instrument is
genuine and in all respects what it purports to be.
➢ Perpetrator of the fraud: Liable up to the alteration
because he is the perpetrator of the fraud and must
be penalized in accordance with law.
• Cannot collect from:
➢ Prior Parties: They can raise the real defense of
material alteration.
BEARER INSTRUMENT
• You can only go after the one primarily liable, the
immediate transferor, and the perpetrator of the fraud.
a. Rights of a Holder In Due Course and HTHDC
• Can collect from:
➢ Maker: Liable only up to the original tenor because
the prior parties can raise the real defense of material
alteration.
➢ Immediate transferor: Liable up to the alteration
because they warranted that the instrument is
genuine and in all respects what it purports to be.
➢ Perpetrator of the fraud: Liable up to the alteration
because he is the perpetrator of the fraud and must
be penalized in accordance with law.
• Cannot collect from:
➢ Prior and Subsequent Parties: cannot be
compelled to pay because they did not extend any
warranty that the instrument is genuine and in all
respects what it purports to be, and they had a good
title to the instrument.
b. Rights Of A Holder Not In Due Course
• Can collect from:
➢ Immediate transferor: Liable up to the alteration
because they warranted that the instrument is
genuine and in all respects what it purports to be.
➢ Perpetrator of the fraud: Liable up to the alteration
because he is the perpetrator of the fraud and must
be penalized in accordance with law.
• Cannot collect from:
➢ Prior and Subsequent Parties: They can raise the
real defense of material alteration.
Forgery – REAL
Sec. 23. Forged signature; effect of. - 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.
Forgery (in the context of NIL)
• Where a signature appears on the instrument without
authority of the person whose signature it purports to be,
and it is with intent to defraud.
• It cannot be the definition in RPC because this is specific
to signature for it to fall under Sec 23. It must be forgery
of signature only.
Summary of The Rules For Forgery
1. Determine first where the forgery happened.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
2. After that, you cut the parties before and after the
happening of the forgery.
3. Parties before the forgery — cannot be held liable
because they can raise the real defense of forgery.
4. Parties after the forgery — can be held liable for they
warranted the instrument.
Forms of Forgery
1. Fraud in factum or fraud in esse contractus (Fraud
amounting to forgery)
• Where the party makes it appear that there was
intention to issue a negotiable instrument through
the signature of another person.
• Here, there really was no intention to issue a negotiable
instrument, but there is a person who makes it appear that
there is a negotiable instrument.
• A person actually signed the instrument but there is no
intention to make a negotiable instrument but, in effect,
the law deems it as forgery.
2. Fraud amounting to duress
• When one is forced to sign instrument out of force,
threat, undue influence, etc.
• The signature is genuine but there was no intention
to make a negotiable instrument.
3. Fraudulent Impersonation
• When the person issued a negotiable instrument by being
made to believe that the person asking for the negotiable
instrument is the person whom he really intends to issue
a negotiable instrument.
• Person signed an instrument and there was an
intention, but he gave it to someone else who
impersonated the real person.
• A represented himself as B. C drafted a negotiable
instrument intended for B, but A got it, pretending that he
was B.
What is theory of actual intent?
• Where the drawee, who is supposed to be primarily liable,
but the person who made the NI, the drawer, was made
to issue the NI on the belief that he is issuing it to
somebody, when in fact it was not really that person,
is held liable if the drawee encashed the instrument.
• It is because between the drawer and the drawee, it
can be said that the drawee simply adopted the
intention of the drawer when he encashed the
instrument. It was the drawer who caused the drawee to
encash the NI.
What is theory of estoppel?
• Where the drawee is held liable since he accepted the
instrument, hence, he is estopped from claiming
otherwise.
Fraud by Inducement Not Considered Forgery
• Fraud in inducement – When there is an intention to sign
a negotiable instrument, but for a different consideration.
It does not go into the signature of the party.
• Example: Supposing X issued an instrument to Y in
exchange for bottles of high end wine, but what was
delivered was a bottle of tuba.
Effects of Forgery
1. Only the signature is inoperative and not the entire
instrument. All other indorsements are still valid and
have effects.
2. It cuts off the liabilities of the parties prior to the
forgery.
3. Holder or Subsequent parties cannot have the right to
retain the instrument.
4. There is no right to discharge.
5. There is no right to enforce payment thereof against
any parties prior thereto.
Comments:
• Under (1), what is wholly inoperative is the signature.
Whoever received that instrument through the forged
signature, since the signature is wholly inoperative, does
not have the right to retain the instrument, cannot
discharge the instrument and cannot enforce payment
against any party.
• For purposes of the exam, you can just say that
parties prior to the forgery can raise the real defense
of forgery.
• This defense can actually be used by any party provided
that he was a:
1. party prior to the forgery; and
29 | P a g e
 2. that they themselves are not precluded from raising
the defense of forgery.
Who are parties precluded from raising the defense of
forgery?
1. Estoppel – by their acts or omissions, they are precluded
from setting up the defense of forgery.
2. Unreasonable delay in setting up the defense of forgery.
3. Negligence in not setting up the defense of forgery.
4. Those who warrant or admit the genuineness of the
signatures in question, namely:
a. indorsers
b. acceptors
c. persons negotiating by delivery
Comments:
• By your own action, you ratify the forgery, like when you
say that it is genuine. Any act, omission, or negligence to
preclude you from raising defense of forgery.
• In one case involving the employee of the drawer, she was
precluded from raising defense of forgery since her
employee dealt with the bank.
• She was given all the statement of the bank and it took
her a long time to discover that there were an
unauthorized encashment of checks. In that case, there
was also failure on the part of the party to prove fraud.
• And there are parties subsequent to the forgery since they
are precluded from raising defense of forgery. Persons
negotiating by delivery or indorsers because they warrant
that it is genuine and in all respects what it purports
to be and that they have good title to it. An
instrument that is forged is also UNDELIVERED.
• Forgery is a real defense because it mentions “any
party.” Also, being a real defense, the status of the holder
is immaterial, unless other defenses (personal) are also
available.
• Thus, the rules below apply to all types of holder – HDC,
HTHDC, HNDC.
Liability of Drawee Bank
• Between the drawee bank and the collecting bank, the one
who is supposed to bear the loss would depend on whose
signature is forged.
• The signature of the drawer is forged
➢ General Rule: The drawee bank is liable because
they are supposed to check the genuine of the
signature of the drawer.
➢ Exception: If the drawer is guilty of contributory
negligence, the liability has to be divided between the
drawer and the drawee.
• The signature of the indorser is forged
➢ General Rule: The collecting bank is liable because
they are supposed to check the genuine of the
signature of the drawer.
➢ Exception: If there is negligence on the part of the
drawee bank then the liability would have to be
distributed between the drawee bank and the
collecting bank.
Comments:
• The exception is always negligence.
• Because negligence is one circumstance where prior
parties to the forgery is precluded from raising the real
defense of forgery.
• For example: You were given a China Bank check and you
want to encash it in your bank, BPI. Here, BPI is the
collecting bank and Chinabank the drawee bank. However,
you can’t present a check for encashment to a different
bank other than that of the drawee bank, so what happens
is you that you actually deposit that China Bank check to
BPI.
• So, you deposit it to BPI. If BPI clears it, BPI becomes the
COLLECTING bank and China Bank remains as the
DRAWEE bank.
• If there is forgery who will be liable?
• Depends if forged signature is the drawer or endorser.
Apply the rule above.
Illustration (PN, forgery of maker’s signature, 2019 403
recits)
I promise to pay Ervin or order P10,000.
[F] – forged (F forged X’s signature)
Supposing this instrument contained the signature of X (forged
by F), issued it to Ervin who in turn negotiated the instrument
to A, to B, and finally to C.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
X - Er - A - B – C
|
F* (forger)
F forged X’s signature, so he is not really a party to the
instrument.
What are the rights of C as regards prior parties?
• C will go after X since it was made to appear that he issued
the instrument, but C cannot compel X to pay because his
forged signature is inoperative, and he was never a party
to the instrument. He can set up the real defense of
forgery.
• C can go after Er, A, and B because as indorsers, they
warrant that the instrument is genuine and is in all respect
what it purports to be and that they have good title to it.
• C can ultimately go after F as he is the perpetrator of the
forgery, thus, he should be penalized.
Comment:
• As this is a real defense, it doesn’t matter whether holder
in due course, HTHDC, or HNDC. The answer would still be
the same.
If I change it to bearer instrument, how would that
change your answer?
• Only the immediate transferor (B) and perpetrator (F) can
be held liable. Er and A cannot be held liable since they did
not extend warranties to C.
• B can be held liable for the warranties he extended that
the instrument is genuine and in all respects what it
purports to be and that he has good title to it.
• F can be held liable for causing the defect.
• For X, in addition to the real defense of forgery, he can
also raise the personal defense of a complete but
undelivered instrument.
Illustration (PN, bearer instrument, indorsed and
indorser forged, signature subsequent to the maker is
forged, 403 2019 recits):
• F really signed this instrument and negotiated to Er.
• In the hands of Er, it was stolen b X who negotiated the
instrument to A then to B and then finally to C.
F - Er - A - B -C
| /
X
• It is a bearer instrument, but it was negotiated by
indorsement. It was indorsed, even if it didn’t need to be
indorsed.
What are the rights of C as regards prior parties?
• C can go after F (maker) since F is estopped from
raising the defense of forgery as the forged
signature is not necessary to the title of the
instrument (being a bearer instrument).
• C cannot compel Er to pay because Er has never indorsed
it, it was stolen from him, so he did not extend any
warranty to the holder
• C can go after A (also B) to pay because, since he indorsed
it even if it is a bearer instrument, he warranted that the
instrument is genuine and in all respect what it purports
to be an that he has good title to it. (Note that if A did not
indorse it and he merely delivered it, he cannot be held
liable as he did not extend any warranty).
• C can also go after B, the immediate transferor, as he
warranted that the instrument is genuine and in all respect
what it purports to be and that he has good title to it.
• Ultimately, C can go after X as he is the thief, thus, he
should be penalized.
Comments:
• The problem with Er is that he did not endorse, and
since he did not endorse, can you go after Er?
➢ No, he did not extend warranty to the holder.
➢ C can go after A and B as general indorsers that the
instrument is genuine and is in all respect what it
purports to be (because they indorsed even if it is a
bearer instrument).
• Had it been negotiated by just delivery, A then did not
extend warranty to C. However, I made it appear that
everyone endorsed.
• Had it been that it was negotiated by mere delivery except
X by Er, A cannot be held liable as you can only go after
the immediate transferor.
30 | P a g e
If C is not a holder in due course, would your answer
change?
• No as the shelter principle will apply.
If B and C are not holders in due course, would your
answer change?
• Yes. This time, the maker (F), although he cannot
raise the real defense of forgery, he can raise the
personal defense of complete but undelivered
instrument.
What about if this is an order instrument? Discuss the
rights of C in relation to prior parties.
• C cannot go after F and Er as they can raise the real
defense of forgery.
• C can go after A and B since as general indorsers, they
warranted to C that the instrument is genuine and in all
respects what it purports to be and that they have good
title to it.
• Ultimately, X is liable for causing the defect.
Comments:
• Again, it doesn’t matter if C is a HDC, HTHDC, or HNDC.
Illustration (BOE, Forgery of the drawer’s signature,
order instrument, 403 2019 recits):
To: E
Pay to the order of B of P1,000
Sgd. R
R-B-C-D
| /|
|/ |
X* E (drawee-acceptor)
*X forged R’s signature.
Supposing the signature of R is forged by X. Issued the
instrument to B who presented the instrument to E, accepted
the instrument, returned to B, B further negotiated to C, then
D.
• Primarily Liable: As to E – D can demand payment from
E because, as acceptor, he is bound by the tenor of his
acceptance and E admitted the genuineness of the
signature of the drawer (which was forged in this
case). Thus, he is precluded from raising the defense of
forgery
• Secondarily Liable
➢ PRIOR PARTIES: As to R – D cannot demand
payment since R was never a party to the instrument,
thus, he can raise the real defense of forgery. His
forged signature doesn’t give any effect as to him.
➢ SUBSEQUENT PARTIES: As to B and C –D can
demand payment from B and C because, as indorsers,
they warranted that the instrument is genuine in all
respects what it purports to be and that they have
good title to it.
• PERPETRATOR OF THE FRAUD: As to X – being the
perpetrator of the fraud, he is ultimately liable and should
be punished by law.
Comment:
• Take note that again, this is a real defense. no matter what
the status of the holder is (HDC, HTHDC or HNDC), the
answer will still be the same.
If I change it to bearer instrument, how would that
change your answer?
• Only B’s liability will change as he does not warrant that
the instrument is genuine in all respects what it purports
to be.
Illustration (Forgery of the indorser’s signature, bearer
instrument):
To: E
Pay to B or bearer of P1,000
Sgd. R
R - B -------- C – D - F
| | /
| | /
E (drawee) X*
*X forged C’s signature.
R issued the instrument to B who presented the instrument to
E, accepted the instrument, returned to B, B further negotiated
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
to C. It was stolen by X who forged the signature of C and
negotiated it to D, and then finally to F.
This is a bearer instrument, and the only indorsement is
that of C’s signature (forged by X)
• Primarily Liable: As to E – As F is presumed to be a
holder in due course, F can demand payment from E
because the forged indorsement is not necessary to the
title of the holder in due course.
• Secondarily Liable
➢ DRAWER: As to R – F cannot demand payment
because he can raise the real defense of forgery.
➢ PRIOR PARTIES: As to B and C – F cannot demand
payment from B and C because they did not warrant
that the instrument is genuine in all respects what it
purports to be. Furthermore, since C was never a
party to the instrument, thus, he can raise the real
defense of forgery. His forged signature doesn’t give
any effect as to him.
➢ IMMEDIATE TRANSFEROR: As to D - F can demand
payment from D because, as immediate transferor, he
warranted that the instrument is genuine in all
respects what it purports to be and that he has good
title to it.
• PERPETRATOR OF THE FRAUD: As to X – being the
perpetrator of the fraud, he is ultimately liable and should
be punished by law.
If F is not a holder in due course, would your answer
change?
• No as the shelter principle will apply.
If F and D are not holders in due course, would your
answer change?
• Yes. This time, the drawee-acceptor (E), although he
cannot raise the real defense of forgery, he can raise
the personal defense of complete but undelivered
instrument, thus he cannot be held liable.
Comment:
• In forgery, the instrument is also undelivered because the
person who forged the instrument is supposed to be not
allowed to deliver because he took the instrument without
authority.
• In this case, there is also an issue of non-delivery.
If this is an order instrument, would your answer
change?
• F cannot go after E since E can raise the real defense of
forgery.
• R, B and C are also not liable since they can raise the real
defense of forgery since they are parties prior to the
defect.
• F can go after D who warranted to him that the instrument
is genuine and in all respects what it purports to be and
that he has good title to it.
• Ultimately, F can go after X who caused the defect.
Comment:
• Take note that whatever the status of the holder (here F),
may he be a HDC, HTHDC or HNDC, the answer will not
change.
Illustration (BOE, order instrument, Forgery in the
Signature of Acceptor):
Situation: R negotiated the instrument to B who presented it
to E. E did not accept but what B did is that he forged the
signature of E. B negotiated the instrument to C and C to D
and then finally F.
R - B* - C - D - F
|
E(did not accept; signature forged)
What are the rights of F as regards prior parties?
• F cannot go after E since he can raise the real defense of
forgery.
• F cannot go after R as he can raise the real defense of
forgery.
• F can go after B, C and D since as general indorsers, they
warranted that the instrument is genuine and in all
respects what it purports to be and that they have good
title to it.
• Ultimately, F can go after B for causing the defect in the
instrument.
31 | P a g e
Comments:
• When you forge a signature of the acceptor, the
acceptor is not a party to the instrument.
• All parties prior to such forgery can always raise the real
defense of forgery. This is true even if the instrument is an
order/bearer instrument.
• As this is an order instrument (vs. a bearer instrument),
the signature of the indorser is always necessary to the
title of any of the parties. Parties subsequent to the forgery
are liable since they extended their warranties.
Summary Of the Rights in Relation to Forgery - REAL
PROMOSSORY NOTE
1) Forgery as to the signature of the maker
A. Prior party
• Maker – he is not liable because he can raise the real
defense of forgery
B. Subsequent parties
• Indorser – liable because they warrant that the
instrument is genuine and in all respects what it purports
to be
• Person Negotiating By Delivery (PNBD) – liable if
immediate transferor because he warrants to the
immediate transferee that it is genuine and in all respects
what it purports to be
• Forger – liable because forgery is penalized under the law
2) Forgery as to the signature of the indorser
A. Prior parties
• Order instrument – not liable because they can raise the
real defense of forgery
• Bearer instrument– liable because the forged
indorsement is not necessary to the title of a HDC or to
any holder for that matter.
• Note: When you forge the signature of the indorser in a
bearer instrument, it will not affect the nature of the
instrument being a bearer instrument. It can always be
negotiated by mere delivery. Thus, all prior parties may be
held liable as forgery is irrelevant in a bearer instrument.
B. Subsequent parties
• Acceptor – Not liable because he only warrants the
genuineness of the drawer’s signature and not the
indorser.
• Indorsers subsequent to the forgery – liable because
they warrant that the instrument is genuine and in all
respects what it purports to be
• PNBD – liable if immediate transferor because he warrants
that the instrument is genuine and in all respects what it
purports to be.
• Forger – liable because forgery is penalized by law
BILL OF EXCHANGE
1) Forgery as to the signature of the drawer
A. Prior party
• Drawer – not liable because the real defense of forgery can
be raised.
B. Subsequent parties
• Acceptor – liable (because he warrants the genuineness
of the signature of the drawer)
• Indorser – liable because they warrant that the
instrument is genuine and in all respects what it purports
to be
• PNBD – liable if immediate transferor because he warrants
to the immediate transferee that it is genuine and in all
respects what it purports to be
• Forger – liable because forgery is penalized under the law
2) Signature of Indorser is forged
A. Prior parties
• Order instrument – not liable because they can raise the
real defense of forgery.
• Bearer instrument– liable because the forged
indorsement is not necessary to the title of a HDC or to
any holder for that matter.
• When you forge the signature of the indorser in a bearer
instrument, it will not affect the nature of the instrument
being a bearer instrument. It can always be negotiated by
mere delivery. Thus, all prior parties may be held liable as
forgery is irrelevant in a bearer instrument.
B. Subsequent parties
• Acceptor – Not liable because he only warrants the
genuineness of the drawer’s signature and notthe
indorser.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• Indorsers subsequent to the forgery – liable because
they warrant that the instrument is genuine and in all
respects what it purports to be
• PNBD – liable if immediate transferor because he warrants
that the instrument is genuine and in all respects what it
purports to be.
• Forger – liable because forgery is penalized by law
IMPORTANT
• If the signature of an indorser is forged and the
holder is not a holder in due course (and he cannot
qualify for the shelter principle), aside from forgery,
there is always an issue of non-delivery.
• Thus, the maker or the drawee-acceptor can always
raise the personal defense of a complete but
undelivered instrument!
Drawer’s Signature Forged
#20 Samsung Construction v. FEBTC
• One check (owned by Samsung, signed by Jong - fogred)
was presented to FEBTC (drawee bank) by Gonzaga (the
payee).
• The check which was presented had the forged signature
of Jong who was the signatory of Samsung. This check was
claimed in the hands of Mr. Kyu.
• Gonzaga (payee) took hold of one of the checks of
Samsung purportedly bearing the signature of Jong who
went to FEBTC.
• FEBTC considered the check as valid since it bore the
signature of Mr. Jong.
• However, since the amount exceeded P100,000, the
approval of Samsung officers was required.
• FEBTC presented the check to Ms. Velez, Senior Assistant
Cashier, who tried to call Mr. Jong.
• They were not able to reach Mr. Jong, nonetheless, Ms.
Velez considered the instrument as one which bore the
genuine signature of Mr. Jong.
• The check was transferred to Syfu, another officer of
Samsung, who took hold of the check. She then saw
Sempio, the assistant accountant of Samsung, and asked
him about the signature on the check. Sempio confirmed
the signature.
• The check was supposedly for the purchase of equipment.
Supreme Court Ruling
• Samsung presented NBI as an expert, while FEBTC
presented PNP as an expert. RTC believed NBI over PNP as
its evaluation was more scientific, and SC affirmed that the
NBI is more experienced in the field of forgery detection.
• The party that should be liable is the drawee because
the latter warrants the genuineness of the signature
of the drawer absent the fact that the drawer is
negligent.
• The mere fact that the employee of the drawer was
the forger, does not mean that the drawer is
negligent since the latter do not possess the
preternatural gift of cognition as to the evil that may
lurk within the hearts and minds of their employees.
Comments:
• Mr. Jong himself stated that the signature in the check was
indeed forged. While it is self-serving for Mr. Jong to state
that his signature was forged, the SC stated that he had
to be believed because if there was any person to say if
there was forgery, it should have been the owner of the
signature being forged. Therefore, there is indeed forgery
in this case.
• The general rule was applied here. The drawee-acceptor is
liable in this case because the forgery is in the signature
of the drawer.
• As a rule, being the drawee-acceptor, you warrant the
genuineness of the signature of the drawer.
• An EXCEPTION is when the drawer, instead of the drawee,
will be held liable if the drawee can prove that the drawer
was negligent in this case.
• FEBTC was unable to prove that the drawer (Samsung)
was negligent.
Payee’s (indorser) Signature Forged
#15 Gempesaw vs. CA
• Gempesaw was a businessman who had several grocery
stores.
• He had a bookkeeper named Alicia Galang whom he
trusted that every time he had transactions, all he did was
sign a check and give it to Galang, entrusting her with it.
• Gempesaw signed the check prepared by Alicia Galang
along with the vouchers. The check is payable to various
suppliers (payees of the check).
32 | P a g e
• The signature of the payees were forged in favor of Alicia
Galang.
• After two years, Gempesaw found out with the bank that
there were several withdrawals from his account which he
did not approve.
• There were 82 checks which were more than the amount
of the obligations that were cleared and paid by the banks
to the indorsee.
• Gempesaw asked the bank to reimburse him with those
amounts that were not authorized to be withdrawn from
his account, so Gempesaw sued the bank for the amount
• The encashment was made as follows: Alicia Galang went
to Mr. Boon, chief accountant of the drawee bank. In
accordance with the internal rules of the PBC, only the
branch manager should accept a check if there is a second
indorsement.
Supreme Court Ruling:
• As a general rule, a drawee bank who has paid a
check on which an indorsement has been forged
cannot charge the drawer’s account for the amount
of said check.
• An exception to the rule is where the drawer is guilty
of such negligence which causes the bank to honor
such checks.
• Gempesaw did not exercise prudence in taking steps that
a careful and prudent businessman would take in
circumstances to discover discrepancies in her account.
• Her negligence was the proximate cause of her loss,
and under Section 23 of the Negotiable Instruments Law,
is precluded from using forgery as a defense.
• In light of any case not provided for in the Act that is to be
governed by the provisions of existing legislation, pursuant
to Section 196 of the Negotiable Instruments Law, the
bank may be held liable for damages in accordance with
Article 1170 of the Civil Code.
• The drawee bank, in its failure to discover the fraud
committed by its employee and in contravention
banking rules in allowing a chief accountant to
deposit the checks bearing second indorsements,
was adjudged liable to share the loss with
Gempesaw on a 50:50 ratio.
Comments:
• As a general rulee, forgery is a defense. However,
Gempesaw was guilty of negligence since if she did her due
diligence, she would have noticed there was a discrepancy
in the amount she dictated versus what was actually
disbursed.
• Thus, negligence is an exception to the defense of forgery.
• Nonetheless, there was contributory negligence on
the part of the drawee bank. It should ascertain
whether the check is genuine or not. If it notices such
infirmities, it should not accept the instrument.
• The chief accountant of the Buendia branch of the drawee
bank was in connivance with Alicia Galang that allowed the
check to be credited to the accounts of random people
(Romero and Lam)..
• Gempesaw – she just allowed Galang to prepare, encash
the check, along with the supporting documents, without
even checking it. If she did her due diligence, she would
have noticed there was a discrepancy in the amount she
dictated versus what was actually disbursed. It took her 2
years to check on the bank statements, even if these bank
statements were given to her on a monthly basis.
• Drawee bank - it violated its internal rules that second
endorsements are not to be accepted without the approval
of its branch managers and it did accept the same upon
the mere approval of Boon, a chief accountant, it
contravened the tenor of its obligation at the very least, if
it were not actually guilty of fraud or negligence.
• In this case, we are reminded of the duty of the drawer
whenever there is an alleged forged indorsement. You are
supposed to report the fact to the drawee bank promptly.
If ever he is negligent in determining or in discovering or
reporting promptly, drawer loses his right against the
drawee.
#13 Republic Banks vs. Ebrada
• On January 15, 1963, the Bureau of Treasury issued a back
pay check to Martin Lorenzo in the amount of P1,246.08.
The drawee named therein was Republic Bank.
• The check was subsequently indorsed to Ramon Lorenzo,
then to Dominguez and then to Mauricia Ebrada.
• Ebrada encashed the check with the Republic Bank.
• Republic Bank paid the amount of the check to Ebrada.
Ebrada, upon receiving the cash, gave it to Dominguez;
Dominguez in turn gave the cash to Ramon Lorenzo.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• Later, the Bureau of Treasury notified that the check was
a forgery because the payee named therein (Martin
Lorenzo) was actually dead 11 years ago before the check
was issued.
• Republic Bank refunded the amount to the Bureau of
Treasury, and then demanded Ebrada to refund it.
Supreme Court Ruling
• Ebrada, upon receiving the check in question from
Dominguez, was duty-bound to ascertain whether the
check in question was genuine before presenting it to
plaintiff Bank for payment.
• Based on the doctrine from Great Eastern Life Ins. Co. v.
Hongkong Shanghai Bank (1922), the drawee bank
should suffer the loss when it paid the amount of the
check in question to Ebrada, but it has the remedy
to recover from Ebrada the amount it paid.
• Drawee bank can recover because although drawee bank
was negligent in failing to detect the forgery, the cashier
had performed his duty, the forgery would have been
detected.
• In this case, there is forgery in the signature of the
indorser.
Comments:
• As a rule, if the forged signature is that of an indorser, the
person liable is the subsequent parties. Drawee and
drawee should not be held liable except when there is
negligence.
• In this case, the general rule is applied.
• Liability should be in the hands of the person who caused
the loss to happen.
• Under the rules, if the DRAWEE bank pays on a forged
signature, granting that it is not the signature of the
DRAWER, the DRAWEE bank can go after the person whom
the bank made payment.
• So in this case, the DRAWEE bank can go after Ebrada.
• However, Ebrada remitted the money right away to
Adelaida Dominguez. While Ebrada cannot go after drawer
and drawee bank, she can go after subsequent parties.
She can go after Dominguez from whom she received the
instrument.
• It follows that Dominguez could go after Ramon R.
Lorenzo, then Lorenzo to Martin Lorenzo (who in this case
already died for more than 11 years).
Sequence in Enforcement of Payment/Liability
Promissory note
1. The holder must go first to the Maker, the person primary
liable
2. If the maker is unable to pay, the holder must go to the
person from whom it acquired the instrument, the
immediate transferor or indorser
3. Then to the next indorsers
Bill of Exchange
1. The holder must go first to the drawee, the person primary
liable.
2. If the drawee dishonors the instrument, go to the drawer
3. If the drawer is unable to pay, then the holder can go to
the person from whom it acquired the instrument, the
immediate transferor or indorser.
4. Then to the next indorsers.
Comments:
• If it is an order instrument, the holder can just go to any
• of the indorsers. But in practice, the holder, after going to
the person primarily liable, should go to the person from
whom he acquired the instrument as he gave out a
consideration out of the instrument and yet it turns out to
be of no or less value
#26 BDO vs. Lao
• Although the rule on the sequence of recovery has been
deeply engrained in jurisprudence, there may be
exceptional circumstances which would justify its
simplification. Stated differently, the aggrieved party
may be allowed to recover directly from the person
which caused the loss when circumstances warrant.
• In Associated Bank v. Court of Appeals, the person
who suffered the loss as a result of the unauthorized
encashment of crossed checks was allowed to
recover the loss directly from the negligent bank
despite the latter's contention of lack of privity of
contract.
➢ The Court said: There being no evidence that the
crossed checks were actually received by the private
respondent, she would have a right of action against
33 | P a g e
 the drawer companies, which in turn could go against
their respective drawee banks, which in turn could sue
the herein petitioner as collecting bank.
➢ In a similar situation, it was held that, to simplify
proceedings, the payee of the illegally encashed
checks should be allowed to recover directly
from the bank responsible for such encashment
regardless of whether or not the checks were
actually delivered to the payee. We approve such
direct action in the case at bar.
➢ A peculiar circumstance in Associated Bank is the fact
that the drawer companies, which should have
been directly liable to the aggrieved payee, were
not impleaded as parties in the suit.
➢ In this regard, it is a fundamental principle in this
jurisdiction that a person cannot be prejudiced by
a ruling rendered in an action or proceeding in
which he has not been made a party.
➢ This principle conforms to the constitutional guarantee
of due process of law.
➢ To the mind of the Court, this principle was a foremost
underlying consideration for allowing the direct
recovery by the payee from the negligent
collecting bank.
• In this case, BDO was not impleaded as a party in
Union Bank's appeal before the CA. This is evident
from the title of the case before the CA, and the respective
briefs of Union Bank and Lao, which mentioned only Lao
and Union Bank as parties thereto.
• Moreover, in their respective briefs before the appellate
court, neither Lao nor Union Bank made any statement or
raised any issue on BDO's liability and its inclusion as a
party in the appeal.
• Consequently, because of Lao and Union Bank's
failure to appeal the July 9, 2012 Decision of the RTC
with respect to BDO's lack of liability, said decision
became final as to the latter.
• Thus, just like Associated Bank vs. CA, Lao must
collect directly from the one primarily liable
(Unionbank) and not anymore BDO.
Additional Case: Metrobank vs. Junnel
JMC (stolen) -> Bankcom -> presented for payment to MBTC
• Respondent Junnel's Marketing Corporation (JMC) is a
domestic corporation engaged in the business of selling
wines and liquors.
• It has a current account with Metropolitan Bank and Trust
Company (MBTC) from which it draws checks to pay its
different suppliers. Among JMC's suppliers are Jardine
Wines and Spirits (Jardine) and Premiere Wines
(Premiere).
• During an audit of its financial records, JMC discovered an
anomaly involving eleven (11) checks (subject checks) it
had issued to the orders of Jardine and Premier.
• The subject checks had already been charged against
JMC's current account but were, for some reason, not
covered by any official receipt from Jardine or Premiere.
• The subject checks were all crossed checks and
totalled to 1.4M.
• They were all deposited in an account with Bank of
Commerce (Bankcom), Dau Branch which neither
belonged to Jardine and Premiere.
• Delizo, a former accountant of JMC confessed that she
stole some checks and said checks were not given to their
respective payees, but instead, forwarded to Bituin.
• JMC filed a complaint for sum of money against Delizo,
Metrobank, and Bankcom. JMC alleged that the wrongful
conversion of the subject checks was caused by a
combination of the "tortious and felonious" scheme of
Delizo and the "negligent and unlawful acts" of Bankcom
and Metrobank.
• JMC prayed that Metrobank, Delizo and Bankcom be made
solidarily liable in its favor for the amount of the subject
checks.
• RTC Decision: RTC rendered a decision holding both
Bankcom and Metrobank liable to JMC-on a 2/3 to 1/3
ratio, respectively-for the amount of subject checks plus
interest as well as attorney's fees, but absolving Delizo
from any liability.
• Subject checks were complete and not forged. They were
stolen and were wrongfully encashed due to the negligence
of the two banks. Delizo’s confession in stealing the said
checks was made under duress and intimidation hence,
she must be absolved. Her link to the stolen checks were
not proven.
• Both banks appealed to CA.
• CA Decision: CA a ffirmed RTC decision with modification.
Metrobank's negligence consisted, not in its inability to
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
notice that Bankcom's ID band does not contain any
initials, but in its failure to ascertain that only four (4) out
of the 11 subject checks were stamped by Bankcom with
the express guarantees "ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENT GUARANTEED" and
"NON-NEGOTIABLE”
Supreme Court Ruling
• SC Modified the sharing of the liability.
• Instead of sharing it with a fixed ratio, SC said they
should be held sequentially liable for the entire
amount. Metrobank is liable to return to JMC the
entire amount, and then Bankcom to return the
entire amount to Metrobank.
• The case of Bank of America:
➢ The instant case involves the unauthorized payment
of valid checks, i.e., the payment of checks to persons
other than the payee named therein or his order.
➢ In cases involving the unauthorized payment of
valid checks, the drawee bank becomes liable to
the drawer for the amount of the checks but the
drawee bank, in turn, can seek reimbursement
from the collecting bank.
• Metrobank, as drawee bank, is under strict liability
to pay the check only to the payee or to the payee's
order. When the drawee bank pays a person other
than the payee named in the check, it does not
comply with the terms of the check and violates its
duty to charge the drawer's account only for properly
payable items.
• The liability of the collecting bank, here Bankcom, is
anchored on its guarantees as the last endorser of
the check.
• It has been repeatedly held that in check transactions, the
collecting bank generally suffers the loss because it has
the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the
party making the presentment has done its duty to
ascertain the genuineness of the endorsements.
• If any of the warranties made by the collecting bank turns
out to be false, then the drawee bank may recover from it
up to the amount of the check.
• It is clear that Bankcom had assumed the warranties
of an indorser when it forwarded the subject checks
to PCHC for presentment to Metrobank.
• Bankcom effectively guaranteed to Metrobank that the
subject checks had been deposited with it to an account
that has good title to the same.
• Recourse of Bankcom:
➢ The sequence of recovery in cases of unauthorized
payment of checks, however, does not ordinarily stop
with the collecting bank.
➢ The collecting bank can seek similar
reimbursement from the very persons who
caused the checks to be deposited and received
the unauthorized payments.
➢ Such persons are the ones ultimately liable for the
unauthorized payments and their liability rests on
their absolute lack of valid title to the checks that they
were able to encash.
• Doctrine of Comparative Negligence - relied upon by
RTC and CA but inapplicable in the present case.
➢ Glaring peculiarity in the cases of Bank of the
Philippine Islands and Allied Banking Corporation is
that the drawee bank — which is essentially also the
drawer in the scenario — is not only guilty of
wrongfully paying a check but also of negligence in
issuing such check.
Ambiguities
Sec. 17. Construction where instrument is ambiguous. -
Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction apply:
a) 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;
b) 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;
c) Where the instrument is not dated, it will be considered to
be dated as of the time it was issued;
d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions
prevail;
34 | P a g e
e) 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;
f) 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;
g) 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
Ambiguities (discussed during recits):
a) Amount in words vs. figures
• The amount in words shall prevail.
• It is easier to change the figures or to commit a mistake
on them than when the amount is written in words.
b) Date when interest to run not stipulate
• The interest should run on the date of the instrument.
c) If it does not specify a date
• It should run from the date of issuance.
d) Conflict between what is written and printed
• The one written shall prevail.
• What is contemplated here is a pro-forma instrument
where certain items are already printed and there are
blanks provided to be filled-up in writing.
• The written words are deemed to express the true
intention of the maker or drawer because they are placed
there by himself. On the other hand, printed forms are
prepared without any particular contract in view.
e) When in doubt if it is a BoE or PN
• It is at the election of the holder.
• Here, on its face, it is actually ambiguous, unlike in
Sec 130 where it is a BOE on its face that can be treated
as a PN.
f) Capacity in which a person signed in doubt
• At best, he is considered as an indorser.
g) Signed by two or more persons
• The liability of these persons is solidary.
Consideration
• An inducement to a contract, that is, the cause, price
or impelling influence which induces a contracting party to
enter into a contract.
• Any prestation sufficient to support any contract in favor
of the party to an instrument, such as a maker or
indorser, and it may consist in giving, doing, or not doing.
• Prestation – obligation to give, to do or not to do.
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
Comments:
• If the negotiable instrument does not provide for a
consideration, the instrument is still valid because
consideration is always presumed. It need not be
stated in the negotiable instrument.
• The presumption that consideration exists is only prima
facie. Thus, it can be rebutted by evidence to the contrary.
• The evidence must be convincing to overthrow the
presumption. It is not overcome by a mere denial of
receipt of the consideration.
• You can place in the contract, “In consideration of our
contract, this instrument is issued.”
• However, there’s no such need to specify that because
there is a prima facie presumption that every
instrument is issued for a valuable consideration.
• There’s also a presumption that all parties are parties
for value because there is a presumption that you are a
holder in due course, in the absence of any information.
Sec. 25. Value, what constitutes. — 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.
Valuable Consideration
• One which is sufficient to support a simple contract.
• Anything which requires a party to give, to do or not to do
(the prestation) as a condition for issuing a negotiable
instrument.
• Valuable consideration may in general terms, be said to
consist either in some right, interest, profit, or benefit
accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act,
or labor, or service given, suffered or undertaken by the
other aide.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• Simply defined, valuable consideration means an
obligation to give, to do, or not to do in favor of the party
who makes the contract, such as the maker or indorser.
(Ty vs. PP)
What constitutes value?
• Money, property, or services. It could also be a pre-
existing debt.
• However, love, affection, or generosity cannot be a
valuable consideration under the NIL. They are not
considered as valuable consideration enough to support a
negotiable instrument. They can support a simple contract
like donation. However, for the purposes of Negotiable
instrument law, they are not valuable considerations.
Pre-Existing Debt
• A pre-existing debt can be a valuable consideration.
• The discharge of such debt is a valuable consideration for
a negotiable instrument. It must be shown that the holder
has given up the pre-existing debt or the right to sue.
• Example: X entered into a commercial transaction with Y
for the purchase of construction materials on account or
on credit. 30 days after, when Y is already supposed to
pay, he issued a check in favor of X. In this case, there is
a consideration for the issuance of the instrument, and
that is the preexisting debt of Y in favor of X.
Future debt is not a valuable consideration
• Future debt cannot be a considered as valuable
consideration because at the moment you issue the
instrument, there is no consideration yet.
Pre-existing debt of an insolvent estate is not a valuable
consideration
• If a widow of an insolvent estate issued a negotiable
instrument to pay the debt of the decedent, the instrument
is not deemed issued for a consideration if it is issued
against the insolvent estate because when the estate is
insolvent, it means that all pre-existing debts are
cancelled. Debt is cancelled along with the death of
the decedent.
• Whoever issued the instrument does not matter because
with the insolvency of the estate, all pre-existing
debts are deemed cancelled.
• If you are issuing it for a pre-existing debt of an insolvent
decedent, then the instrument is deemed not issued for a
consideration for, after all, there is no debt to speak of.
Comments:
• If the negotiable instrument is issued to a person as a
security for a certain debt, while there is no negotiation of
a negotiable instrument (issued only as a security, not
negotiated in the sense of negotiation under the NIL), it
doesn’t mean that you can’t go after the negotiable
instrument. After all, this instrument was used as a
security.
• You are not a party to the instrument, but you can have a
claim to the instrument.
• Example: If the instrument amounted to P1M, the debt is
P500K, and there is a P1M promissory note used to secure
the P500K debt. Whoever is the creditor to whom this PN
was delivered as security of such debt can have a claim on
the negotiable instrument, but he is not a party to the
instrument.
• After the obligation has matured, you can ask whoever is
the maker of the instrument to negotiate the instrument
to you.
Sec. 26. What constitutes holder for value. – 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.
Holder for value
• One who has given a valuable consideration for the
instrument issued or negotiated to him.
• For you to be considered a holder for value, the
presumption only applies as mentioned in Section 26 if, at
any time, you have given value for the instrument.
Not all holders for value are holders in due course.
• All holders in due course considered can be considered as
holder for value, but not all holder for value is considered
as holder in due course.
• You can be a holder for value but you:
1) did not receive the instrument as complete and
regular upon its face;
2) became the holder of it when it was overdue; or
35 | P a g e
 3) you have notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
• You may have violated all or some of these three (3)
requisites, except for taking the instrument in good faith
and for value, but still be a holder for value.
Presumptions:
1. That an instrument is issued for a valuable consideration
even when there is no mention of such consideration
(Sec. 24);
• Even if the consideration is not expressly mentioned,
it does not affect the negotiability of the instrument
as it is not a requisite under Sec. 1.
2. That a person is a holder for value.
• The holder is deemed as such not only as regards
the party to whom value has been given by him
but also in respect to all those who became
parties prior to the time when value was given.
• He is presumed a holder for value until the contrary is
shown.
Why do we need to know if one is a holder for value or
not?
1. To determine if one is a holder in due course
• A holder in due course is always a holder for value.
2. To know if one can retrieve the value he has given
• There may be instances where an instrument is issued
for a consideration but doesn’t constitute negotiation.
• Example: Order instrument which was not indorsed.
In this case, one is considered a holder for value but
not a holder in due course because there was never
proper negotiation of an instrument. Thus, he can still
collect because he has given value.
3. For the application of certain defenses
• Want of consideration in the case of an
accommodation party cannot be raised against a
holder for value (Sec. 29).
Sec. 27. When lien on instrument constitutes holder for
value – Where the holder has a lien on the instrument, arising
either from contract or by implication of law, he is deemed a
holder for value to the extent of his lien.
• If you are a holder for value, you are supposed to have a
lien on the instrument to the extent of the value provided.
If the instrument is worth P1,000,000 and you have a
pre-existing obligation of P800,000, how much is your
lien over the instrument, if ever it was given to you?
• You are not supposed to be the owner of the entire
P1,000,000. Your lien is only up to the extent of the value
you have given – P800,000.
• The P200,000 excess is supposed to be held in trust
for the person who negotiated the instrument to
you.
• You are only considered a holder for value to the extent of
the consideration you have provided, which is P800,000.
When does a holder have a lien on the instrument?
• One who has taken a negotiable instrument as
collateral security for a debt has a lien on the
instrument.
• As such holder of collateral security – he would be a
pledgee (governed by the provisions of the Civil Code).
Extent of Lien
• If the amount of the instrument is more than the debt
secured by such instrument — the pledgee is a holder
for value to the extent of his lien (The surplus shall be
delivered to the pledgor).
• If the amount of the instrument is less than or the
same as the debt secured by such instrument — the
pledgee is a holder for value for the full amount and may
thus recover all.
Rules In Case Defenses Are Available
• If there are existing defenses between the pledgor
and the party liable on the instrument — The pledgee
can collect on the instrument only to the extent of the
amount of the debt.
• If the defenses of the party liable on the instrument
are real defenses — pledgee cannot recover anything.
Want of Consideration
Sec. 28. Effect of want of consideration. — Absence or
failure of consideration is a matter of defense as against
any person not a holder in due course; and partial failure
of consideration is a defense pro tanto, whether the failure is
an ascertained and liquidated amount or otherwise.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
• If there is want of consideration, it gives rise to a
personal defense — “a matter of defense as against any
person not a holder in due course.”
• It may be partial or total want of consideration. But,
if it’s partial failure of consideration, it is only a defense
pro tanto (only to the extent that there really was
no consideration).
Example:
If the instrument is worth P1,000,000 and you’re only given
P800,000, the person who has the right to raise a defense can
only say you have no consideration to the extent of P200,000.
Hence, he cannot also refuse to make payment of P800,000
because the P200,000 is the only one which has no
consideration.
• The law states that it is a matter of defense as against any
person not a holder in due course which means that this
is a personal defense.
• Thus, the personal defense of want of consideration
can be raised against a holder not in due course.
Absence of consideration a personal defense only
• Absence of consideration is a personal defense (can only
lie against a holder not in due course).
• If ever there is lack of consideration as in the case where
the instrument is given freely to the payee, it can be raised
as a defense, but only against a person not a holder in due
course.
Want or absence Failure of Consideration
of consideration
Failure or refusal of one of
Definition Total lack of any the parties to do, perform,
valid consideration or comply with the
consideration agreed upon.
As to legal effect Treated as a Treated as a personal
or implication personal defense defense
• Consideration (in general) — refers to the prestation or
the reason why one enters into a contract. For purposes of
NIL, consideration would have to be one which is valuable.
• Valuable consideration — consideration sufficient to
which is support a simple contract.
Love and Affection
• Love and affection cannot be used for purposes of issuing
negotiable instruments because it is supposed to be part
of a commercial transaction, and you don’t trade love.
• It cannot be considered a valuable consideration because
it is a matter of practice of merchants.
Pre-Existing Debt
• A pre-existing debt is a valid consideration.
Absence or Want of Consideration
• Total lack of any valid consideration for the contract, in
consequence of which the alleged contract must fail.
Insufficiency of Consideration Is Not A Defect In The
Instrument
• Example: The consideration is P1 for a P100K negotiable
instrument.
• This can amount to a donation since it is not issued for a
valuable consideration.
• But in that sense, where the amount is so low that it
can be deemed a donation, it can amount to lack of
consideration.
Want of Consideration
• If not authorized in the first place, or there is really no
valuable consideration or you issue a negotiable
instrument on the basis of love and affection, there is want
of consideration.
Failure of Consideration
• You have the authority but after a condition is set and you
can’t deliver, there is failure of consideration.
• Failure or refusal of one of the parties to do, perform or
comply with the consideration agreed upon.
• In other words, something was agreed upon as
consideration but for some cause, such agreed
consideration failed to materialize.
Example: You engage in a sale of parcel of land (ought to be
inherited from parents) and then such was sold by your parents
days after your transaction. This has want or lack of
consideration because:
• You cannot sell an inheritance
36 | P a g e
• You don’t own the property. You cannot sell what you do
not own.
Comments:
• But, if you were authorized in the first place, but it was
sold by another broker – there is only failure of
consideration.
• Nonetheless, any of the two may still be considered as a
personal defense.
Rule in case of partial failure of consideration
• In case of partial failure of consideration, this would bar
recovery only pro tanto ( pro-rated, meaning only to
the extent that there really was no consideration).
Example: If only 2/3 portion of the land was delivered, there
would be a partial failure of consideration which would bar
recovery only pro tanto. Hence, P could recover only 2/3 of the
note as M is not liable to the extent of the 1/3, which is the
price of the undelivered portion.
Accommodation Party
Sec. 29. Liability of 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.
Accommodation party
• One who has
a. signed the instrument as maker, drawer, acceptor,
or indorser
b. without receiving value for the signature, and
c. for the purpose of lending his name to some other
person
Without receiving value for the signature
• This pertains to receiving value for the issuance of the
instrument itself and not for the use of the name by
way of accommodation.
• Being an accommodation party doesn’t mean that you
don’t accept any value at all. You don’t receive any value
for negotiating the instrument, but for purposes of lending
one’s name, you may receive money.
• Thus, even if the accommodated party gives an amount or
any other consideration for borrowing the name of a
person, the latter will still be considered an
accommodation party because it is not a consideration for
the issuance of the instrument, but a consideration for the
use of the name.
Important: The issue on want of consideration is not a
defense available to an accommodation party against
holders for value who are also holders in due course.
Illustration:
I (Mr. A) am a good friend of Mr. X. Mr. X has a poor credit
standing and so, if he issues a negotiable instrument, no one
will accept it because supposedly, what you are trying to
circulate when you issue a negotiable instrument is just your
credit or your honor. So, he doesn’t have much honor because
he has poor credit standing, but I happen to have good credit
standing. Upon his request, I issued an instrument in his favor
whereby I stated, “I promise to pay X P1,000,000 or order.
Sgd. A” but I never received value for the instrument. It was
just an arrangement made by Mr. X and I.
In that case, I simply accommodated Mr. X. I did not receive
value for the instrument. But that instrument was used by Mr.
X to buy certain construction materials on credit, on the force
of the instrument drafted. Since I have good credit standing, if
that will be shown by Mr. X to the construction and supplies
store, they will receive it as payment for the instrument.
Who is liable on the instrument?
• As to third parties — Mr. A, the accommodation party,
because he was the one who signed the instrument. Mr. X
just indorsed the instrument to the supply store. Mr. X can
be a party liable in that sense but only as an indorser.
• As between Mr. X and Mr. A — Mr. X because Mr. A is
merely an accommodation party, whereas Mr. X is the
accommodated party. The fact that Mr. A did not receive
value on the instrument cannot be used as a defense
that Mr. A should not be held liable against a holder
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
in due course or holders not in due course, as long
as they are holders for value.
Comments:
• An accommodation maker then, while it says “not
receiving value therefor,” the “therefor” there means
receiving value for the instrument.
• Hence, it is possible that the accommodation party
gets to have payment for services that he rendered,
in the sense that he allowed another person to make
use of his name.
Example:
While Mr. A and Mr. X are friends, Mr. A asked Mr. X to pay him
P10,000 for the use of his name.
• Here, Mr. A can still be considered as an
accommodation maker because he did not receive
value for the instrument. He simply received value for
the use of his name.
• For one not to be an accommodation maker, he must
have received value for the instrument.
Comments:
• It is important to know the difference between an
accommodation party and accommodated party is because
later on, when we discuss discharge of an instrument,
because if the instrument is paid for by an
accommodated party, it will still have the effect of
discharging the instrument as if it was made by the
person who accommodated him, especially with the
accommodation party being principally liable.
• If you’re an accommodation maker or accommodation
drawee, it requires you to be the one primarily liable. Note
that under the law, only the payment of the person
primarily liable can cause the discharge of an
instrument.
• Ordinarily, between the accommodation party and
the accommodated party, with regard to third
parties, the one primarily liable is the
accommodation party. But as between themselves,
it is the accommodated party who is liable because
the accommodation party is simply trying to help the
accommodated party for purposes of allowing to engage
in the transaction he wanted.
An Accommodation Party Who Signs as Maker, Drawer,
Acceptor, Or Indorser
a. Accommodation maker
A–B–C–D–E
• A (accommodation party) issued a promissory note B
(accommodated party), indorsed it to C, D, and E who is a
holder in due course. Can A be compelled to pay?
Scenario 1: the holder is a HDC
• Yes. Section 29 makes the accommodation party “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.”
• After making payment to the holder, the
accommodation party may recover from the
accommodated party for reimbursement.
• Take note that absence of consideration between the
accommodation party and the accommodated party does
not of itself constitute a valid defense against a holder for
value even though he knew of it when he became a holder.
Scenario 2: The holder is not an HDC
• A can still be made liable because E can acquire the rights
of his prior party D who is a holder in due course and for
value (shelter principle).
Scenario 3: The holder and his immediate transferor are
not HDCs
• Qualify whether or not E is a holder for value, even if he is
not a HDC.
• Since D is not a holder in due course, E can no longer avail
of the shelter principle.
• If E is a holder for value: EL can be compelled to pay as
an accommodation party because even if E is not a HDC,
he is a holder for value.
• If E is not a holder for value: EL cannot be compelled
to pay E as EL can raise the personal defense of want of
consideration, being an accommodation party.
Comment:
• It is only when one is an accommodation party can he be
made liable on the instrument even if he is not a HDC,
as long as he is a holder for value.
37 | P a g e
b. Accommodation acceptor — accommodated party is
the drawer
• For an accommodation acceptor, if there’s someone who
most likely would be accommodated, it must be the
drawer.
• Example: Purchase of construction materials. Here is a
hardware store who’s willing to accept order on credit from
a person with a good credit standing. EL here doesn’t have
a good credit standing. But W, on the other hand, has a
good credit standing. What EL will do is to issue a bill of
exchange that has to be accepted first by W. W, by his
acceptance of the bill, was able to accommodate and lend
his status of having a good credit standing to EL to
purchase the construction materials. Can W be
compelled to pay?
➢ Yes. Section 29 makes the accommodation party
“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.”
➢ After making payment to the holder, the
accommodation party may recover from the
accommodated party for reimbursement.
➢ Take note that absence of consideration between the
accommodation party and the accommodated party
does not of itself constitute a valid defense against a
holder for value even though he knew of it when he
became a holder.
c. Accommodation indorser — accommodated party is
the drawer/maker
• An accommodation indorser signs the instrument
before the instrument is issued to the payee. He
simply is lending his name as an additional party to the
instrument.
• As a general rule, when the instrument is issued, there
ought to be a signature of the maker or the drawer.
• In this case, however, when the instrument was
received by the payee, it contains not only the
signature of the drawer or the maker but another
signature at the back of the instrument; the signature
of the accommodation indorser.
• He lends his name because if there’s an additional name
in the instrument, that means that there is another party
that can be (secondarily) made liable.
Right to present parol evidence to prove accommodation
• One of the problems in this undertaking is that you may
not know if one is an accommodation party or not, thus,
it is an established principle under NIL that an
accommodation party can present parol evidence.
• The accommodation party is permitted to show by parol
evidence which party he accommodated.
• Otherwise, if this was not allowed, an accommodated
party may enforce payment of the instrument
against the accommodation party.
• General rule: Negotiable instrument is a contract and one
can’t present parol or oral evidence. The contract itself is
already the evidence of what was agreed upon. A party is
precluded from saying anything against the stipulations of
the contract.
• Exception: Parol evidence may be used to present proof
as an accommodation party
Accommodation Party Regular Party
Signs an instrument without Signs the instrument for
receiving value therefor value
Signs an instrument for the Does not sign for that
purpose of lending his name to purpose
some other person
May always show by parol Cannot disclaim or limit his
evidence that he is only such personal liability as
appearing on the instrument
by parol evidence
Cannot avail of the defense of May avail of said defense
absence or failure of against a holder not in due
consideration against a holder course
not in due course
After paying the holder, may May not sue any subsequent
sue for reimbursement from the party for reimbursement
accommodated party, although
a subsequent party
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
Illustration (illegal consideration):
A and B agreed that B should kill A’s wife. In exchange, A will
give B a promissory note (worth P1M). Supposing B killed
the wife, can B compel A to pay?
• No, B cannot compel A to pay because B is not a HDC, as
such, A can raise the personal defense of want of
consideration.
B negotiated to C (not a HDC). Can C go to A and demand
payment?
• No, C cannot compel A to pay. Since C is not a HDC, A can
raise the personal defense of want of consideration.
Comment:
• So, here, we have a case where the guilty party cannot be
compelled to pay.
Illustration (Inadequacy of Consideration):
X–Y–A–B–C
X issued a negotiable instrument for the amount P1M because
he has an existing debt with Y of P600,000. The instrument
was issued and negotiated until it reached C.
If holder in due course:
• Primarily Liable: As to X – X can be compelled to Pay
P1million to C because there is inadequacy of
consideration, and not insufficiency of
consideration.
• Inadequacy of consideration cannot be used as a personal
defense because what is required is sufficiency of
consideration.
• As long as the excess amount is not secured by Y through
fraudulent acts or any illegalities, it is considered as
sufficient consideration, despite the excess of the amount
issued from the consideration given.
• Inadequacy of consideration is different from Insufficiency
of consideration.
• Note: Pre-existing debt is valuable consideration.
• Inadequacy of consideration is different from Insufficiency
of consideration.
• Here, the maker can go after Y for the P400,000 that
he held in trust for him. The lien that Y had on the
instrument is only up to P600,000, the amount of the
pre-existing debt.
Illustration (Want of Consideration):
X→ Y→ A→ B→ C→ D
X was the godfather of Y who issued an instrument in
consideration of his birthday.
Holder In Due Course & HTHDC
• MAKER: D to X — can be compelled to pay because he
cannot raise the personal defense of want of consideration.
• SUBSEQUENT PARTIES: D to Y, A, B & C — can be liable
and can be compelled because they warranted that they
have good title to it.
Not A Holder In Due Course
• MAKER: D to X — cannot be compelled to pay because he
can raise the personal defense of want of consideration.
#1 Ty vs. People
• Ty's mother and sister were confined at the Manila Doctors'
Hospital. The total hospital bills of the two patients
amounted to P1,075,592.95.
• Being the patient's daughter, Ty signed the
"Acknowledgment of Responsibility for Payment" in the
Contract of Admission.
• Ty executed a promissory note wherein she assumed
payment of the obligation in installments. To assure
payment of the obligation, she drew several postdated
checks against Metrobank payable to the hospital.
• The checks were all dishonored by the drawee bank and
returned unpaid to the hospital due to insufficiency of
funds, with the "Account Closed" advice.
• Thus, 7 charges for violation of BP 22 were filed against
her. The RTC found her guilty.
• Ty argued that the trial court erred in finding her guilty
when evidence showed there was absence of
valuable consideration for the issuance of the
checks and the payee had knowledge of the
insufficiency of funds in the account.
Supreme Court Ruling
• Valuable consideration may in general terms, be said to
consist either in some right, interest, profit, or benefit
accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act,
or labor, or service given, suffered or undertaken by the
38 | P a g e
 other aide. Simply defined, valuable consideration means
an obligation to give, to do, or not to do in favor of the
party who makes the contract, such as the maker or
indorser.
• In this case, Ty's mother and sister availed of the services
and the facilities of the hospital. For the care given to
her kin, Ty had a legitimate obligation to pay the
hospital by virtue of her relationship with them and
by force of her signature on her mother's Contract
of Admission acknowledging responsibility for
payment, and on the promissory note she executed in
favor of the hospital.
• As to her contention that the obligation to pay the
hospital bills was not her personal obligation
because she was not the patient, and therefore there
was no consideration for the checks, the case of
Bridges v. Vann, et al. tells us that it is no defense to an
action on a promissory note for the maker to say that
there was no consideration which was beneficial to
him personally; it is sufficient if the consideration
was a benefit conferred upon a third person, or a
detriment suffered by the promisee, at the instance
of the promissor.
• It is enough if the obligee foregoes some right or
privilege or suffers some detriment and the release
and extinguishment of the original obligation. This,
of itself, is sufficient consideration.
#2 Carino v. De Castro
• In this case, when the party is not entitled to receive any
payment, it is also a ground to consider that there was no
value for the issuance of the instrument.
• De Castro did issue the check to Carino. But since Carino
is not authorized to receive the instrument in the first place
since he is not to authorized to collect rent, the issuance
to Carino had no consideration. There is no obligation of
De Castro’s part.
Comments:
• Be careful in applying this case as it is true since there
are only 2 parties.
• If Carino negotiated to a third party, third party would
have been able to collect from De Castro if he is a holder
in due course or HTHDC. Who should prove want of
consideration? De Castro.
#3 Tan Tiong Tick v. PMC
• You have PMC issuing an instrument to TTT who was
supposed to negotiate to Macaraig.
• Instead, it went to CBC and encashed it.
• TTT is trying to make the court believe is that there was
an arrangement between it and Roldan, and he is just an
accommodating indorser. It did not fly as a defense.
• Court rather believed that there was an arrangement
between him and Roldan that they will divide the profits
for whatever materials are given by Macaraig. But it never
went to Macaraig, so how can she send the products over.
• It’s just trying to introduce to you the concept of
accommodation party and accommodation arrangement.
#4 Town Savings & Loan Bank v. CA and Hipolitos
• A case talking about accommodation arrangement.
• Sps. Hipolitos were trying to say they were
accommodating the Mr. Hipolito’s sister, Pilarita Reyes.
• Sps. Hipolitos claim that TSLB supposedly suggested to
sign the instrument in behalf of Villarita.
• The Supreme Court says it is absurd that the bank would
avail of a loan from a person and going so far as to
convince a third person.
• Here, as an accommodation party, the Sps. Hipolitos were
primarily liable. TLSB can actually go after them, without
prejudice of the Sps. Hipolitos going after Pilarita, the
accommodated party.
#5 Clark vs. Sellner
• It discussed what it means to receive “no value thereof”
for an accommodation part.
• The SC clarified that even if you receive consideration
for the use of your name, that does not discount the
fact that you are an accommodation party.
• What is being contemplated as consideration is the
consideration for the negotiation of the instrument,
so even if you received money for the use of your
name, you can still be held as an accommodation
party if you did not receive any consideration for the
negotiation.
Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino
#6 Sadaya vs. Sevilla
• There is nothing in the NIL governing the liabilities of co-
accommodation makers among each other, so apply the
New Civil Code suppletorily.
• Because Sevilla and Sadaya, in themselves, are but co-
guarantors of Varona, their case comes within the ambit
of Article 2073 of the Civil Code which reads: ART. 2073.
When there are two or more guarantors of the same debtor
and for the same debt, the one among them who has paid
may demand of each of the others the share which is
proportionally owing from him. If any of the guarantors
should be insolvent, his share shall be borne by the others,
including the payer, in the same proportion. The
provisions of this article shall not be applicable,
unless the payment has been made in virtue of a
judicial demand or unless the principal debtor is
insolvent.
• In this case, when one accommodation co-maker paid, it
was never shown that there was a judicial demand
on Sadaya to pay the obligation or that that Varona
(the principal debtor) was insolvent.
• Thus, Sadaya (accommodation co-maker) cannot
proceed against Sevilla (another accommodation co-
maker) for reimbursement.
• The recourse is to go after the accommodated party.
#6 BPI vs. CA
• Not included; Atty. Amago placed the wrong case citation
in the syllabus.
#7 Agro Conglomerates Inc v. CA
• Sec. 29. An accommodation arrangement is similar to a
contract of suretyship where the accommodation party is
the surety. Accommodation party is really a suretyship
agreement that in case the accommodated party cannot
pay, it is the accommodating party that can be held liable.
If accommodated party pays ahead, of course, the
obligation is extinguished.
• The principal is the accommodated party but
accommodating party is the surety.
QUESTIONS RAISED BY THE CLASS
Illustration
A (delivered a NI to B without the amount) → B (put the
amount of P100,000) → C → D → E (it was stolen by F from E)
----F→G
Should both the defects of incomplete but delivered and
complete but undelivered be combined in order to form
a real defense of incomplete and undelivered
instrument?
• No, each personal defense must be taken separately.
• You are not supposed to combine both and turn it into a
real defense.
Illustration:
A – B (changed the amount from 1 to 10) ---- C (stole it from
B; forged B’s signature) – D – E
What are the rights of E in relation to prior parties?
• E cannot collect from A as A can raise the real defense of
forgery and material alteration.
• E can go after B because he is a perpetrator of fraud in the
instrument. Amago: I can also take the answer that B
cannot be held liable, because, after all, henevr really did
anything, because even if he altered it, he didn’t deliver it
to anyone, so it was actually C caused the defect.
• C and F liable as indorsers; C ultimately liable as
perpetrator.
If this is a bearer instrument, can E go after A based on
the original tenor?
• Theoretically, yes. But again, I would say that there is no
material alteration.
Q: Extension clause at the option of the maker on the
face of the instrument itself, and it specified how long
the extension will be, negotiable or not?
• It will not render the instrument non-negotiable. In fact, it
is on the instrument itself, and all those who signed as
indorsers are deemed to agree to it.
39 | P a g e
SAMPLE EXAM QUESTION: • Their rights change. If after insertion of wrong date, they
Ichigo was in desperate need of money to pay his debt to can only raise material alteration since they are
Rukia, a loan shark. Rukia threatened to take Ichigo’s life if he subsequent.
failed to pay. Ichigo and Rukia went to see Orihime, Ichigo’s
rich cousin, and asked her if she could sign a promissory note
in his favor in the amount of P10,000 to pay Rukia. Orihime
acceded to the request and affixed her signature on a piece of
paper with the assurance that Ichigo will just fill it up later. “Learning is NOT a spectator sport.”
Ichigo then filled up the blank paper, making a promissory note
for the amount of P100,000. He then indorsed and delivered
– D. Blocher
the same to Rukia, who accepted the note as payment of the
debt. Can Orihime be legally compelled to pay Rukia? “Education is what survives when what
Orihime (incomplete but delivered) → Ichigo (put the wrong has been learned has been forgotten.”
amount) → Rukia – B. F. Skinner
SUGGESTED ANSWER FROM ATTY. AMAGO:
No, Orihime can raise the personal defense of incomplete “The purpose of learning is growth, and
instrument against Rukia, who is not a holder in due course for our minds, unlike our bodies, can continue
having then known of the limitation on the authority of Ichigo,
pursuant to Section 14 of the NIL. growing as long as we live.”
– Mortimer Adler
Comments:
• Rukia knows that there is an infirmity in the instrument,
from 10,000, it was filled up by Ichigo to P100,000. She
knows that because she was there when they went to see
Orihime, SO RUKIA IS NOT A HOLDER IN DUE COURSE.
PLEASE DO NOT POST THIS ON SCRIBD,
• The shelter principle does not apply because Ichigo himself
is also not a holder in due course. COURSEHERO, ACADEMIA, OR ANY OTHER NOTE-
SHARING PLATFORM ONLINE!!!
SAMPLE EXAM QUESTION:
Makarov issued the following instrument:

Aug. 9, 2017
To: LUCY
Kindly pay Gray or bearer P1 , 000.00 20 days after sight
Sgd. Makarov

Makarov delivered the instrument to Gray, who indorsed the

note to Julia indicating her name. 5 days after the issuance of
the draft, Julia presented the note to Lucy for acceptance who
favorably obliged without placing any date on the instrument.
She returned the instrument to Julia and the latter specially
indorsed the same to Zeref, who intentionally placed the date
of acceptance as Aug. 10, 2017 upon the prodding of Mavis,
his girlfriend. Zeref, then delivered the instrument to Erza, who
in turn indorsed the bill, especially to Jellal. Being risked
averse, Jellal indorsed the bill, especially to Happy. On the 10th
day from issuance, Happy indorsed the note in blank to Carla
but not without adding zero (0) after the figure one (1) on the
face of the instrument. Carla, then indorsed the instrument,
especially to Wendy, who made it a point to indorse the same,
especially to Mirajane in payment of her debt. Mirajane, then
used it to pay Mavis for the stuff she bought from her by
affixing her signature on the bill and delivering the same to
Mavis, who knew about the modification of the amount. May
prior parties be compelled by Mavis to pay the bill?

Lucy - Makarov - Gray (SI) - Julia (SI) - Zeref (insertion of

wrong date) - (D) - Erza (SI) - Jellal (Qualified Indorsement)
- Happy (Material Alteration, BI) - Carla (SI) - Wendy (SI) -
Mirajane (BI) - Mavis

SUGGESTED ANSWER FROM ATTY. AMAGO:

Yes, Mavis may compel prior parties to pay the bill, but
not all of them. Mavis, not a holder in due course, cannot
compel Lucy, Makarov, Gray, and Julia as they can raise the
real defense of material alteration in accordance with Sec. 124
of the NIL and the personal defense of the insertion of a wrong
date in accordance with Sec. 13 of the NIL.

Further, Mavis cannot compel Erza and Jellal as they too could
raise the defense of material alteration against her.

Nonetheless, Mavis can compel Carla, Wendy, and Mirajane

because they indorsed and warranted that the instrument is
genuine and in all respects what it purports to be.

Ultimately, Zeref and Happy, being the perpetrators of the

fraud, can be compelled to pay and should be penalized for
their illegal acts. However, Zeref may only be compelled to pay
according to the original tenor of the instrument.

Comments:
• I grouped the parties (1) before the insertion of wrong
date, (2) those before material alteration but after
insertion of wrong date, and (3) those after the material
alteration.

Negado, Ruiz, Vargas| EH403 | Negotiable Instruments Law | Atty. Amago | USC Law | 1st Sem., A.Y 19-20 40 | P a g e
Supplemental Sources: 403 17-18 Notes, 404 16-17 Notes, 404 17-18 Notes, and 403 18-19 Notes, De Leon, and Aquino