NEGOTIABLE INSTRUMENTS Important features or characteristics of a negotiable
instrument.
Negotiable Instruments Law – Act No. 2031
- Enacted on February 3, 1911
- Took effect on June 2, 1911
Definition
- It is a written contract for the payment of money
which by its form and on its face complies with Sec.
1 of the NIL.
- It is intended as a substitute for money and
passes from hand to hand as money so as to give
the holder in due course the right to hold the
instrument and to collect the sum for himself.
Functions
1. It Increases credit circulation;
2. It Enhances the purchasing power in circulation;
3. It is a Substitute for money.
Is it a legal tender?
- NO.
- The acceptance of a negotiable instrument as
payment of a debt is at the option of the creditor.
- Legal tender pertains to the valid currency that
may be offered in payment of a debt and that a
creditor must accept.
Are coins legal tender?
- YES.
- Unless otherwise fixed by the Monetary Board,
the maximum amount of coins to be considered as
legal tender is as follows:
a. In amounts not exceeding 1000php
for denominations of 1, 5, 10 php
coins.
b. In amounts not exceeding 100php for
denominations of 1, 5, 10, 25-centavo
coins.
Are checks legal tender?
- NO.
- Acceptance thereof as payment of debt is at the
option of the creditor.
- This rule covers all kinds of checks including
manager’s checks, cashier’s checks and certified
checks.
- However, a check which has been cleared and
credited to the account of the creditor shall be
equivalent to delivery of cash in an amount
equal to that credited to his account.
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• Negotiability – the negotiable instrument passes from
hand to hand as money so as to give the holder in due
course the right to hold the instrument and collect the
sum for himself.
• Accumulation of Secondary Contracts – contracts are
created as the instrument passes from one person to
another.
Three kinds of negotiable instruments
1. Promissory Note – 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.
2. Bill of Exchange – 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.
3. Check – a bill of exchange drawn on a bank payable on
demand.
Parties to a negotiable instrument
1. In a promissory note, the original parties are:
a. Maker – the debtor; the person who writes the
promissory note and gives the unconditional
promise to pay the amount stated therein. He is
primarily liable to pay the obligation.
b. Payee – the creditor to whom the promise to pay
is given. He is the person who shall receive the
payment.
2. In a bill of exchange, the original parties are:
a. Drawer – the debtor; the person who draws or
writes the bill of exchange. He gives the order to
pay a sum certain in money. His liability on the
instrument is secondary.
b. Drawee – the person to whom the order to pay is
addressed. He is ordered to pay from his own
pocket, and later reimbursed himself from the
funds of the drawer
- The drawee has no liability until and
unless he accepts the order to pay. Once he
accepts, he becomes the acceptor who is primarily
liable on the instrument.
- Before acceptance by the drawee, the
drawer is bound to pay the obligation.
c. Payee – the creditor in whose favor payment shall
be made.
3. The other persons who may become parties after the The electronic messages are not signed by the investor-
issuance of the instrument are: clients as supposed drawers of a bill of exchange; they
a. Indorser – party who transfers or negotiates the do not contain an unconditional order to pay a sum
instrument by indorsement coupled with certain in money as the payment is supposed to come
delivery. from a specific fund or account of the investor-clients;
b. Holder – the payee or indorsee of a bill or a note and, they are not payable to order or bearer but to a
who is in possession of it, or the bearer thereof. specifically designated third party.
Thus, the electronic messages are not bills of exchange.
What are the instances when an instrument may be As there was no bill of exchange or order for the
treated either as a bill of exchange or as a promissory payment drawn abroad and made payable here in the
note at the election of the holder? Philippines, there could have been no acceptance or
(AS-FIL) payment that will trigger the imposition of the DST
1. Where the instrument is so Ambiguous that there under Section 181 of the Tax Code.
is doubt whether it is a bill or note;
2. Where in a bill the drawer and the drawee are the Negotiable Instrument v. Non-negotiable document
Same person;
3. Where the drawee is a Fictitious person; Negotiable Instrument Non-negotiable
4. Where the drawee is a person Incapacitated to document
contract
5. Where the bill is drawn on a person who is Legally Governed by the NIL; NIL does not apply.
absent. (Application of NIL to non-
nego instruments is only
Caltex v. CA by analogy);
The accepted rule is that the negotiability or non- Can be transferred by Can be transferred only by
negotiability of an instrument is determined from the negotiation; assignment;
writing, that is, from the face of the instrument itself. A transferee of a nego The person who receives a
The CTDs in question are negotiable instruments as instrument may become a non-nego instrument can
they meet the requirements of the law for negotiability holder in due course if all never be a holder in due
as provided for in Section 1 of the Negotiable requirements under Sec. course, but a mere
Instruments Law. 52 of the NIL are complied assignee;
The documents provide that the amounts deposited with;
shall be repayable to the depositor. And according to The holder in due course of A transferee merely steps
the document, the depositor is the "bearer." a nego instrument acquires into the shoes of the
The documents do not say that the depositor is Angel rights better than that of transferor;
de la Cruz and that the amounts deposited are the transferor;
repayable specifically to him. Rather, the amounts are Personal defenses may not All defenses available to
to be repayable to the bearer of the documents or, for be raised against a holder prior parties may be raised
that matter, whosoever may be the bearer at the time of in due course. against the transferee of a
presentment. non-negotiable
instrument.
HSBC v. CIR
The Court favorably adopts the finding of the CTA that Negotiation Assignment
the electronic messages “cannot be considered Applies only to negotiable Applies to contracts in
negotiable instruments as they lack the feature of instruments; general including
negotiability, which, is the ability to be transferred” and negotiable instruments;
that the said electronic messages are “mere The transferee becomes a The transferee becomes a
memoranda” of the transaction consisting of the “actual
holder; mere assignee;
debiting of the [investor-client-payor’s] local or foreign
A person to whom an A person who takes an
currency account in the Philippines” and “entered as
instrument is negotiated instrument by assignment
such in the books of account of the local bank,” HSBC.
and becomes a holder in is subject to both real and
personal defenses
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 due course, is subject only obtaining among
to real defenses; original parties;
A general indorser An assignor does not
warrants the solvency of warrant the solvency of
prior parties; prior parties unless there
is a stipulation to the
contrary or he knows of
such insolvency;
Presentment and notice of The assignor is liable even
dishonor are required to without notice of dishonor;
make an indorser liable;
Governed by the NIL; Governed by the NCC on
assignment of credits.
Requirements for an instrument to be negotiable
Section 1 – Form of Negotiable Instruments – An
instrument to be negotiable must conform to the
following requirements:
(1) It must be in writing and signed by the maker
or drawer;
(2) It must contain an unconditional promise or
order to pay a sum certain in money;
(3) Must be payable on demand, or at a fixed or
determinable future time;
(4) Must be payable to order or to bearer;
Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with
reasonable certainty.
NOTE: The law does not require that the maker affix her
usual or customary signature in the promissory note.
When the instrument does not express the date of
payment:
- It is payable on demand. (Sec. 7, NIL)
- This means that the party liable must be given
reasonable time within which to pay the
obligation.
Regard is to be had to the following circumstances:
1. Nature of the instrument;
2. Usage of trade or business; and
3. Facts of each case.
- In case of a promissory note, presentment for
payment must be made within a reasonable time
after its issue.
- In a bill of exchange, presentment for payment
must be done within a reasonable time after the
last negotiation thereof.
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the When is an instrument 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 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.
When is an instrument 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.
Fictitious-payee Rule
- Contemplates that the payee is fictitious or not
intended to be the true recipient of the proceeds.
- The check is considered a bearer instrument
negotiable by delivery alone.
- Theory is that the maker of the check knew that
the fictitious payee cannot indorse the
instrument so that he must have intended for it to
be negotiated by mere delivery.
GR: In case of controversy, the drawer is liable, and
the drawee bank is absolved from liability in a
fictitious-payee situation.
XPN: When there is commercial bad faith whereby
the drawee bank acts dishonestly and is a party to the
fraudulent scheme
The check is deemed payable to order, and
consequently, the drawee bank bears the loss.
PNB v. Rodriguez
As a rule, when the payee is fictitious or not intended to
be the true recipient of the proceeds, the check is
considered as a bearer instrument.
A review of US jurisprudence yields that an actual,
existing, and living payee may also be "fictitious" if the
maker of the check did not intend for the payee to in fact
receive the proceeds of the check. If the payee is not the
intended recipient of the proceeds of the check, the
payee is considered a "fictitious" payee and the check is
a bearer instrument.
For the fictitious-payee rule to be available as a defense,
PNB must show that the makers did not intend for the
named payees to be part of the transaction involving
the checks. At most, the bank's thesis shows that the
payees did not have knowledge of the existence of the
checks. This lack of knowledge on the part of the
payees, however, was not tantamount to a lack of
intention on the part of respondents-spouses that the
payees would not receive the checks' proceeds.
Considering that respondents-spouses were
transacting with PEMSLA and not the individual payees,
it is understandable that they relied on the information
given by the officers of PEMSLA that the payees would
be receiving the checks.
Because of a failure to show that the payees were
"fictitious" in its broader sense, the fictitious-payee rule
does not apply. Thus, the checks are to be deemed
payable to order. Consequently, the drawee bank bears
the loss. PNB was remiss in its duty as the drawee bank.
It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named
payees. It bears stressing that order instruments can
only be negotiated with a valid indorsement.
Whether or not the following are negotiable:
1. Postal Money Order – not negotiable; it is governed by
postal rules and regulations.
2. Bill of lading – not negotiable; it represents goods
rather than money. A bill of lading is a form of
document of title issued by the carrier whereby
receipt of goods is acknowledged and the carrier
promises to deliver the goods to whoever is validly
holding it and who can present the bill of lading. It may
be considered a negotiable instrument of title under the
Civil Code, but it is not a negotiable instrument under
the NIL. (Aquino, 2009)
3. Pawn ticket – not negotiable; no unconditional
promise to or order to pay a sum certain in money and
is not payable to order or to bearer.
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4. Trust receipt – not negotiable; represents goods
rather than money.
5. Warehouse receipt – not negotiable; document of title
that represents title to and possession of goods.
(Aquino, 2009)
6. Trade acceptance – negotiable; a bill of exchange of
which the acceptor is a bank or banker engaged
generally in the business of granting banker’s
acceptance credit (a special type of BE). (Bonifacio,
1978)
7. Letter of Credit – not negotiable; because they do not
contain an unconditional order or promise to pay.
(Aquino, 2009)
8. Treasury Warrant – not negotiable; it is payable out of
a particular fund.
9. Certificate of Deposit – negotiable; it is a form of
promissory note which is a written
acknowledgment of a bank of its receipt of a certain
sum with a promise to repay the depositor or his order.
10. Debenture – negotiable – a promissory note or bond
backed by the general credit of a corporation and
usually not secured by a mortgage or lien on any
specific property.
FROM DISCUSSION:
"The Life of a Promissory Note"
"I promise to pay Jimin or order Php1,000 on
March 30, 2021 Signed, Jungkook"
After Jungkook signs, she now gives the instrument
to Jimin
Jimin has 2 options given by law, he can either:
o wait for maturity date and collect payment
of 1k from Jungkook OR 2. negotiate (page
2 ng pre week)
If #1 is chosen
o Jungkook pays Jimin = order is paid, but in
the words of NIL, the instrument is now
DISCHARGED
Payment is a mode of discharging an instrument
If #2 is chosen, the following will happen
o Jimin opted to negotiate
o Jimin > V > Suga > Jin
o Jimin is now an indorser (page 6 pre-
week) and V is the holder/indorsee
Jimin needs to convince V to accept the PN
For secondary liability to rise, 2 requisites must
concur
o 1. failure to pay by the person primarily
liable to the holder AND 2. delivery of
Notice of Dishonor is given by the holder
to the indorser
 So, the cycle continues si V naman naging
indorsee/holder na tapos if he negotiates with
Suga, V is now and indorser tas Suga is
indorsee/holder so on until umabot kay Jin
Who becomes secondarily liable in the PM?
Indorsers = Jimin, V, Suga
Finally, the PM is now with Jin (holder)
o Jin goes to Jungkook and presents to her
the NI for payment
o Goal: collect payment
- This stage is called Presentment of
Payment
Questions asked:
Who are the parties for promissory note?
Who are the parties for bill of exchange?
What are the two characteristics of negotiable
instrument?
1. Negotiability
2. Accumulation of secondary contracts
What are the two options of a holder?
1. He can wait until the maturity date and collect
payment
2. Indorse the instrument
She also mentioned warranty (pero di inexplain)
Principle of secondary liability - failure to pay of person
who is primarily liable
Incidents in the life of a negotiable instrument
1. Issue;
2. Negotiation;
3. Presentment for payment;
4. Dishonor by non- payment;
5. Notice of dishonor;
6. Discharge
(NOTE THE STAGES)
Requisite for the secondary liable to pay:
o NOTICE OF DISHONOR
If there is failure to send notice of dishonor, the
secondary liable cannot be liable. But you can send it for
reimbursement. (example: si D, C, B, and A ay secondary
liable. Naningil si E but si C hindi nasendan ng notice of
dishonor. Pwedeng sendan nung nagbayad kay E
(example si D), D can send a notice of dishonor to C for
C to be liable and for reimbursement.
Memorize: Sections 14, 15, 16, 23, 52, 65, 66, 124, 125
Incidents in the Life of a Negotiable Instrument
1. Issue – the first delivery of the instrument, complete in
form, to a person who takes it as holder
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2. Negotiation – the transfer of a negotiable instrument
from one person to another in such a manner as to
constitute the transferee the holder thereof.
a. If the instrument is payable to bearer – It may be
negotiated by mere delivery
b. If the instrument is payable to order – it may be
negotiated by indorsement completed by
delivery.
3. Presentment of Payment – the production of a
promissory note to the party primarily liable for the
payment of the same, or of a bill of exchange to the
drawee or acceptor for payment.
4. Dishonor by non-payment – an instrument is
dishonored by non-payment when:
a. It is duly presented for payment and payment is
refused or cannot be obtained; or
b. Presentment for payment is excused and the
instrument is overdue and unpaid.
5. Notice of dishonor – Notice of dishonor means
notifying the drawer and the indorsers that the
instrument has not been accepted by the drawee, or
that is has not been paid by the acceptor, in case of bills
of exchange, or by the maker, in case of promissory
notes.
6. Discharge – an instrument is discharged through any
of the following means:
a. By payment in due course by or on behalf of the
principal debtor;
b. By payment in due course by the party
accommodated, where the instrument was
made or accepted for his accommodation;
c. By the intentional cancellation of the
instrument by the holder;
d. By any other act which discharges a simple
contract for the payment of money;
e. When the principal debtor becomes the
holder of the instrument at or after maturity in
his own right.
PN Example:
10, 000 php Manila, Philippines
January 6, 2022
For value received, I promise to pay Jeon Jungkook
or order the sum of 1000php on September 1, 2022.
Signed – Lim Jaebom
Parties: NOTE: In a PN, there is no presentment for acceptance; it’s
1. Maker – JB only in BE.
2. Payee – Jungkook Acceptor either pays or not the holder. If not:
7. Dishonor by Non-Payment
FROM DISCUSSION: In a BE, there are 2 Kinds of Dishonor
“The Life of a Bill of Exchange” The instrument is discharged when payment is given by
BE Example: acceptor/primary liable.
o NO
Manila, Philippines o Once acceptor pays, the drawer must
January 6, 2022 reimburse him.
o Drawee pays from his pocket
Thirty days after date, pay to Jeon Jungkook or In a BE, drawee can refuse to accept since he has to pay
order 1000php. from his own pocket
GR: In BE (not a check), the acceptor pays from his own
Signed – Lim Jaebeom funds which is why the drawee can always refuse;
To: Doh Kyungsoo o Unlike in a check where drawee bank checks if
Batangas, Philippines the money in the account is enough to pay the
amount written in the check.
8. Notice of Dishonor
Drawee (DO) has NO liability until and unless he 9. Protest
accepts the order to pay Payment must be made by the principal debtor to
Drawers liability is never primary – always secondary discharge the instrument
Stages: o Principal debtor = drawer
1. Preparation – drawn by JB (drawer) 10. Discharge
2. Issuance Once the drawer pays/reimbursed the acceptor, the
3. Negotiate – to Jungkook (payee) instrument is FINALLY DISCHARGED.
o Options: negotiate the instrument OR wait for the
maturity date of the BE Section 1 – Form of Negotiable Instruments
o If no date is written = presumed that it’s payable
on demand Q: The husband (Erick) is married to Rosanna. Erick has a
4. Presentment for Acceptance mistress named Maria. Erick wrote a BE naming Maria as
Scenario: DO > A > B > C > D > E payee and Rosanna as drawee. Is the instrument
When will drawee (Kyungsoo) come into play? negotiable?
o Upon presentment for acceptance (PA) A: YES. As long as the requirements are complied with,
Who are the parties present? other considerations. (Paramour being against public
o Holder and draween policy) are immaterial
What does holder do during PA?
o He will present the bill to the drawee Q: Assume a PN is issued for shabu. <3 Is it negotiable?
o The holder will ask the drawee “you’ve been A: YES. Confine yourself to Sec. 1, even if the consideration
named, will you accept the order to pay?” is illegal (shabu), it is negotiable.
o OPTIONS of drawee:
- Acceptance NOTE: Always note what question is given. If the question is
- Dishonor by Non-acceptance “Is the instrument...?” – you do NOT consider any other
NOTE: Drawee (DO) is now the ACCEPTOR who is primarily consideration at all, because negotiability is confined only
liable to Section 1.
Acceptor (DO): “I accept order to pay, come back to me
after 1 week” NOTE: Negotiability is confined to the requisites of Section
Holder returned to acceptor to remind the latter that 1 always.
she will pay
5. Dishonor by Non-Acceptance
6. Presentment for Payment

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Incidents in the Life of a Bill of Exchange
1. Issue – the first delivery of the instrument, complete in
form, to a person who takes it as holder
2. Negotiation – the transfer of a negotiable instrument
from one person to another in such a manner as to
constitute the transferee the holder thereof.
a. If the instrument is payable to bearer – It may be
negotiated by mere delivery
b. If the instrument is payable to order – it may be
negotiated by indorsement completed by delivery.
3. Presentment for acceptance^ – the act of exhibiting
the BE to the drawee for his acceptance. It is required
only:
a. If the bill is payable at a fixed period after sight, or
in cases where it is necessary to fix the maturity
of the instrument; or
b. When the bill expressly stipulates that it shall be
presented for acceptance; or
c. When the BE is drawn payable elsewhere than at the
residence or place of business of the drawee.
4. Acceptance^ – the signification by the drawee of his
assent to the order of the drawer. The acceptance must
be in writing and signed by the drawee.
5. Dishonor by non-acceptance^ – a BE is dishonored by
non-acceptance:
a. When it is duly presented for acceptance and such
acceptance is refused or cannot be obtained; or
b. When presentment for acceptance is excused and
the bill is not accepted
6. Presentment of Payment – the production or of a bill
of exchange to the drawee or acceptor for payment.
7. Dishonor by non-payment – an instrument is
dishonored by non-payment when:
a. It is duly presented for payment and payment is
refused or cannot be obtained; or
b. Presentment for payment is excused and the
instrument is overdue and unpaid.
8. Notice of dishonor – Notice of dishonor means
notifying the drawer and the indorsers that the
instrument has not been accepted by the drawee, or
that is has not been paid by the acceptor, in case of bills
of exchange, or by the maker, in case of promissory
notes.
9. Protest^ – a formal written statement signed by a
notary stating that he presented a foreign bill of
exchange for acceptance or for payment and that it was
refused.
10. Discharge – an instrument is discharged through any
of the following means:
a. By payment in due course by or on behalf of the
principal debtor;
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b. By payment in due course by the party
accommodated, where the instrument was made
or accepted for his accommodation;
c. By the intentional cancellation of the instrument
by the holder;
d. By any other act which discharges a simple
contract for the payment of money;
e. When the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
UPSI Property Holdings, Inc. v. Diesel Construction, Inc.
Ito yung case na walang namention about nego pero sabi
ni judge basahin so idkkkk huhu
The rule is that in case of ambiguity or uncertainty in
the dispositive portion of a decision, the body of the
decision may be scanned for guidance in construing the
judgment.
After scrutiny of the subject decision, nowhere can it be
found that the Court intended to delete the award of
legal interest especially that, as Diesel argues, it was
never raised.
In fact, what the Court carefully reviewed was the
principal amount awarded as well as the liquidated
damages because they were specifically questioned.
Recall that the CA modified the awards granted by the
CIAC, but not the legal interest.
In finally resolving the controversy, the Court affirmed
the amount of unpaid balance of the contract price in
favor of Diesel but expressly deleted the award of
liquidated damages. There being no issue as to the legal
interest, the Court did not find it necessary anymore to
disturb the imposition of such.
Thus, contrary to UPSI’s argument, there is no
substantial variance between the March 24, 2008 final
and executory decision of the Court and the writ of
execution issued by the CIAC to enforce it. The Court’s
silence as to the payment of the legal interests in the
dispositive portion of the decision is not tantamount to
its deletion or reversal. The CA was correct in holding
that if such was the Court’s intention, it should have
also expressly declared its deletion together with its
express mandate to remove the award of liquidated
damages to UPSI.
FROM DISCUSSION:
Sec. 1 – Form of Negotiable Instruments
“It must be in writing and signed by the maker or the
drawee”
Q: Why must it be in writing?
A: p. 27-28 (Aquino)
Q: Where must it be written?
A: It can be written anywhere. Pursuant to Section 1, it is a
negotiable instrument, even if it be written on a person’s
forehead or on the wall as long as it is in writing.
“I promise to pay X or order 1000php.
Signed, Y
o Same as illegal considerations or those against
public policy (shabu/paramour); so long as it
complies with the requirements of Sec. 1, it is
negotiable.
o When there is doubt, always lean towards
negotiability.
Q: Why must it be signed?
A: Indicates that Maker or Drawer is bound to the obligation
he enters into which is to pay.
Example of BE:
Pay to X or order 1000php on April 1, 2021 and
reimburse yourself from the sale of the house.
To: Z
Signed, Y
o Even if proceeds of house are insufficient to pay
1000php, it does not matter because drawee will
pay from his pocket
o Is the order to pay subject to any condition?
- NO. Order to pay stands on its own, condition of
reimbursement has nothing to do with it.
Example of PN:
For services rendered, I promise to pay X or order
1000php
Signed, Y
o When there is no date to pay written, go to Section
7(b).
- “No time for payment is expressed”; “payable on
demand”
- Connect to Section 1 (c).
Q: Is the instrument negotiable?
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A: YES.
Q: What about “for services rendered”, will it affect
negotiability?
A: NO. Writing the reason for having an obligation to pay
does not affect its negotiability
Example: for painting Y’s house (service rendered)
Q: In Section 1(b), what do you mean by “sum certain in
money?”
A: Section 2.
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 instrument 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
Example for PN:
I promise to pay X or order 1000php subject to interest.
Signed, Y
“Subject to interest” – Sec. 2 (a); Sec 1 (b)
• Rivera v. Sps. Chua (2015)
- Parties were compadres and executed a loan with a
5% interest rate
- Central Bank Circ. 799 took effect on July 1, 2013
- The legal rate is now 6%
- Before July 1, 2013, the legal rate was 12% (arising
from loan, credit, forbearance of money, card
judgments which has attained finality/utang)
- BUT, if it does not fall under utang or “all other cases,”
the legal rate was 6%.
- Rate of interest to pay only applies if there is no
stipulation within parties.
Example of payment that did not arise from loan, etc.
(utang):
o Two buses collided, victims filed for damages and
court favored the latter.
- This falls under “all other cases”
Rule #1 – When it comes to interest, you can impose ANY
rate as long as it’s in writing.
Rule #2 – There is NO LIMIT as to the amount of interest
unless a court decision says it’s unconscionable/too high
Rule #3 – If interest has been agreed upon, but rate was not
stipulated by the parties, the legal rate will be 6% per
annum—beginning July 1, 2013.
Example: Loan between A and B.
o Date of obligation – January 1, 2012
o Date if judgment – January 1, 2021
Q: What rate of interest are you going to impose?
A: There is a proportionate computation.
- From January 1, 2012 to June 30, 2013, the legal rate
used is 12% BUT starting July 1, 2013 up to January 1,
2021 the legal rate to be used is 6%
- Magkaiba; July 1, 2013 is that variable that will be
considered in terms of determining which legal rate
will be used on a certain date.
Q: Is it still negotiable?
A: YES. You will impose the 6% per annum if the obligation
is contracted on OR after July 1, 2013.
1. In writing and signed by the maker or drawer
Brief history: During the ancient times, a debtor-creditor
relationship was necessarily personal, and no stranger
could acquire rights in it. There was also a belief that no
transfer of property could be made without manual
tradition. Debts are intangible and they couldn’t think of a
way to deliver them. Eventually the merchants found a
solution to this by having a debtor promise to perform to
the creditor or to anyone who could produce the paper
upon which the promise was written. Requiring the
promise to be on paper made it tangible and made it
possible to satisfy the demand that transfer of rights be
effectuated by physical delivery of something.
2. It must contain an unconditional promise or order to
pay a sum certain in money
2.1 Unconditional Promise or Order
Differentiate Condition and Period
o Condition – future and uncertain event, or a past event
unknown to the parties, the happening or non-
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happening of which may either give rise to an obligation
or may extinguish existing ones.
o Period, also known as a day certain – a future and
certain event which is sure to happen, although when it
will happen is not known.
Q: If there is a condition or a term, will the instrument be
negotiable?
A: If there is a condition, the instrument is non-negotiable.
If there is merely a term, the negotiability of the instrument
will not be affected.
2.2 Sum Certain
o Section 2
Q: From what period do you reckon the counting of
interest?
A: From the date expressly stipulated on the instrument
from which the interest will start to run. If there is no such
date, from the date of the instrument. If the instrument is
undated, interest shall start to run from the date of issue of
the instrument.
Q: What are the rules regarding interest?
A: (1) payment of interest must be clearly stated on the
instrument; otherwise interest shall not be chargeable; and
(2) if interest is payable but the rate is not specified, interest
shall be charged at the current legal rate of interest (which
has been reverted back to 6% through Monetary Board
Circular No. 799 effective July 1, 2013)
By stated installments: In order for stated installments to
be valid and consequently, render negotiability, the stated
installments must state the (1) maturity date of each
installment and (2) exact amount to be paid for each
installment.
By stated installments. With a provision that, upon
default in payment of any installment or of interest, the
whole shall become due:
Differentiate Escalation clause with Insecurity clause
o Insecurity clauses – provisions in the contract which
allow the holder to accelerate payment “if he deems
himself insecure.” In other words, he can demand
payment whenever he feels that there is a danger that
maker will not be able to pay on the due date of the
instrument.
o Escalation clauses or acceleration clauses – provisions
which state that the whole indebtedness automatically
 becomes due and demandable upon default of one or
two successive installments or of the interest.
Q: How does an escalation clause affect negotiability? How
about an insecurity clause?
A: An instrument with an escalation clause does not affect
negotiability because the certainty of the amount to be
paid is not affected. However, an instrument with an
insecurity clause is non-negotiable. Because the holder’s
whim and caprice prevail without the fault or control of the
maker.
With exchange, whether at a fixed rate or at the current
rate;
Q: What if the sum payable is in another currency? Is it
negotiable?
A: Yes. An instrument, whether payable “at a fixed exchange
rate or at the current rate” is deemed by the law to meet the
“sum certain” requirement.
With costs of collection or an attorney’s fee, in case
payment shall not be made at maturity.
2.3 Money
Q: “I promise to pay AE or order P10,000 or deliver my
IPAD.” Is this negotiable?
A: Non-negotiable because the choice belongs to the maker,
thus he is not absolutely required to deliver money because
he can satisfy his obligation by delivering one sack of sugar.
Q: How about add a statement saying, “at the holder’s
option.” Will it make the instrument negotiable?
A: Yes, because the option to choose belongs to the holder,
there is still an absolute obligation to pay in money.
3. Must be payable on demand or at a fixed or
determinable future time
Q: When is the maturity date of a negotiable instrument?
A: (1) On demand, (2) Fixed calendar date, (3)
Determinable future time
3.1 Payable on demand
o An instrument is payable on demand, pursuant to
Section 7 of the NIL
Sec. 7. When payable on demand. - An instrument is
payable on demand:
(a) When it is so expressed to be payable on demand, or
at sight, or on presentation; or
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(b) In which no time for payment is expressed.
(c) 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.
Q: When there is no time for payment, when is the maturity
date if the instrument is payable at a fixed period after date?
A: (FOR A PROMISSORY NOTE – “after date is usually used”)
If there is no time for payment, the maturity date is counted
from the date of the instrument. If the instrument is
undated, the maturity date is counted from the date of issue.
Q: When there is no time for payment, when is the maturity
date if the instrument is payable at a fixed period after
sight?
A: (FOR A BILL OF EXCHANGE – “after sight is usually used”)
It will not be counted from the date of the bill, nor from the
date of issue, but rather from the date of the first
Presentment for Acceptance to be made by the holder to the
Drawee.
Q: If there is no maturity date, when to pay?
A: The instrument is payable on demand if there is no
maturity date.
Q: When the instrument is payable on demand, when can
you demand payment?
A: Payment can be demanded within a reasonable time. In
determining reasonable time, Section 193 states that
regard is to be had as:
1. To the nature of the instrument;
2. To usage of trade and business, if any, with respect
to such instruments, and
3. The facts of the particular case.
If a bill of exchange, reasonable time from last
endorsement. If a promissory note, reasonable time
from date of issuance.
3.2 Fixed calendar date
o Fixed time is the definite calendar date expressed in the
instrument
3.3 Payable at a Determinable Future Time
o The instrument is payable at a determinable
future if, though no date is fixed, the exact date of
maturity is capable of being determined.
FROM DISCUSSION:
Sec. 1(b) – connect to Sec. 2
Example for PN:
I promise to pay A or order 10, 000php on April 1, 2021
in 5 installments.
Sgd. B
Q: Is this negotiable?
A: No.
I promise to pay A or order 10, 000 in 5 equal
installments or 2000 per installment on April 1, 2021
Sgd. B
o Aquino, p. 53
o THIS is negotiable.
Escalation Clause – Sec. 2(c) – whole amount is due and
demandable upon default of one or two successive
installments or of the interest.
- Same as Acceleration Clause
Two Concurring Requisites for Installments
1. State maturity date of each installment, and
2. State exact amount to be paid for each installment
Q: Is a sum still certain if the exchange rate is different?
A: YES (Ex. Yen to Peso) – Sec. 2 (d)
Q: Would Attorney’s fees/Cost of collection be shouldered
by the total? Is it still negotiable?
A: YES – Sec. 2 (e)
- It can be easily computed by agreement of the parties
stipulated in the instrument
- It will not make the sum payable uncertain
- will not render the instrument non-negotiable as the
total costs of collection are merely added to the
principal obligation and does not alter the amount of
the sum certain payable.
Sec. 1 (c) – must payable on demand, or at a fixed or
determinable future time
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Q: If there is no date mentioned in the instrument, is it
negotiable?
A: YES. According to Section 7(b), “Instrument is payable on
demand: In which no time for payment is expressed.”
Example of PN:
I promise to pay A or order 1 million php
Sgd. B
o Sum payable = 1M php
o No date – means it is payable on demand
Q: What does “payable on demand” mean? Is it based on the
will of the holder? (connect to Sec. 7)
A: Payment can be demanded within a reasonable time in
relation to Sec. 193, NIL. Determining:
1. Nature of the instrument;
2. Wage of trade and business, if any, with respect to such
instruments, and
3. Facts of each case
NOTE: Must give maker a chance to pay with reasonable
time. (Reasonable time is relative)
Sec. 4, NIL is connected
Sec. 4. Determinable future time; what constitutes. - An
instrument is payable at a determinable future time,
within the meaning of this Act, which is expressed to be
payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
specified therein; or
(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect.
Example of PN:
April 10, 2021
I promise to pay A or order 10, 000 php, ten days after
date. (sec. 4 a)
Sgd. B
Q: Is the instrument negotiable?
A: Yes.
Q: When is it payable? - “on or before” will note make the instrument non-
A: Look at the date of the instrument. Thus, count 10 days negotiable.
from April 10 = April 20, 2021.
Example of PN:
Q: But what if the instrument is not dated?
A: It will be payable 10 days after date of issuance if maker I promise to pay A or order 10, 000php ten days after C
made the PN today (March 24, 2021) then it’s payable on dies. (sec. 4 c)
April 3, 2021. Sgd. B

RULE: Q: Is it negotiable?
1. If dated, check date of instrument A: Yes.
2. If not dated, count from the date of issuance
Example of PN:
o “After date” – applicable to Promissory Note
I promise to pay A or order 10, 000php ten days after C
Example of BE dies from Covid-19.
April 10, 2021 Sgd. B

Pay to the order of X 10 000php, 10 days after sight. Q: Is it negotiable?

(sec. 4 a) A: NO. There is a specific condition.
To: Z
Sgd. Y Sec. 1 (d), NIL – must be payable to order or to bearer.

Presentment for Payment: o Order – order instrument

1. January 1, 2021 – first time holder visited Z to ask him o Bearer – bearer instrument
if he would accept the order to pay
2. January 8, 2021 – second time holder visited Z to ask NOTE: See Sec. 8 and 9 (NIL) to see when it’s payable to
him if he would accept the order to pay. order or to bearer.

RULE: Sec. 8. When payable to order. - The instrument is payable

1. If dated, no problem to order where it is drawn payable to the order of a
2. If undated, count from the first presentment for specified person or to him or his order. It may be drawn
payment by holder. In this case, Jan. 1, 2021 = after payable to the order of:
10 days – January 11, 2021. (a) A payee who is not maker, drawer, or drawee;
or
o “After sight” – applicable to Bill of Exchange (b) The drawer or maker; or
(c) The drawee; or
Example of PN: (d) Two or more payees jointly; or
(e) One or some of several payees; or
I promise to pay X or bearer 10, 000php on or before (f) The holder of an office for the time being.
April 1, 2021. (sec. 4 b) Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with
Sgd. Y reasonable certainty.

Q: Is the instrument negotiable?

A: YES.
Purpose of “on or before” – a benefit given to maker
(debtor) who has the option/right to pay any time BEFORE
the maturity date (early payment) which holder/creditor
CANNOT refuse.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
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.
Example: “To the order of A and B”
- Negotiable (order)
- Sec. 8 (d)
Example: “Payable to the order of Jungkook”
- Negotiable (bearer)
- Sec. 9 (c)
PNB v. Sps. Rodriguez (2008)
• Landmark case on Fictitious Payee Rule and
Commercial Bad Faith Exception
• Bearer instrument, Sec. 9 (c)
FACTS:
Spouses are in a lending business
PEMSLA cannot give loans to those with an outstanding
debt/balance
Scheme adopted by association: Money-making scheme
– they wrote in the checks different names of
employees who are in good standing (no outstanding
balance)
They forged checks and then are given to the spouses
wherein they offered rediscounted checks
For those who want to encash a check, instead of
waiting for 3 days, they just go to the spouses as they
issue checks immediately
But in order to earn, spouses lessen the check
o A loans 10, 000php
o You will immediately get a check worth 9, 800php
o 200php goes to spouses (that’s what they earn)
Spouses eventually deposited the checks under those
names in good standing
PNB dishonored checks → learned about the fraud
Bank teller → in conspiracy with association with
receive the checks and approve despite knowing the
fraud
Since all the checks in favor of the members of the
association were dishonored, spouses complained
because they did not know about the scheme.
RULING:
- PNB invoked the defense of Fictitious Payee Rule
- An instrument is a bearer instrument if it is payable to
the order of a (1) fictitious or non-existing person and
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(2) such fact is known to the person making it so
payable
Two kinds of Fictitious Payee
1. Non-existing person
2. Real, existing person, but did not know he was named
as payee. (not intentional)
Q: Who bears the loss?
A: As a General Rule, the drawer. But, in this case, it’s PNB.
XPN: Commercial Bad Faith – teller’s personality redounds
to the bank (p. 7 TNQ)
Example of Check:
Pay to the order of cash (payee) 1000php. (sec 9 d)
Sgd. A
Q: Is it negotiable?
A: YES. It is payable to order
Connect to Sec. 30:
Q: How to negotiate bearer instrument?
A: By mere delivery
Q: If order instrument?
A: By indorsement coupled with delivery
What is the Fictitious Payee Rule?
A fictitious payee rule contemplates that the payee is
fictitious or not intended to be the true recipient of the
proceeds. The check is considered a bearer instrument
negotiable by delivery alone. The underlying theory is that
the maker of the check knew that the fictitious payee cannot
indorse the instrument so that he must have intended for it
to be negotiated by mere delivery.
As a general rule, in case of controversy, the drawer is
liable, and the drawee bank is absolved from liability in a
fictitious-payee situation. The exception is when there is
commercial bad faith whereby the drawee bank acts
dishonestly and is a party to the fraudulent scheme. The
check is deemed payable to order, and consequently, the
drawee bank bears the loss.
FROM DISCUSSION:
Two kinds of Indorsement
1. Special Indorsement – names indorsee; signed by
indorser; no need for the words of indorsement
2. Indorsement In-blank – affixes his signature ONLY
Example:
X → negotiates the instrument to A → B → C
(special) (blank)
Q: How can B indorse the PN to C payable to order?
- Instrument is not payable to order
- Instrument is converted to bearer instrument
- Bearer instrument may be negotiated by DELIVERY
alone. Aside from delivery, the holder (B) can negotiate
it by indorsement coupled by delivery
- If originally bearer: nothing happens if specially
indorsed;
- This remains as a bearer instrument. A bearer
instrument is always a bearer instrument. *
Q: What if the bearer instrument is indorsed?
A: A bearer instrument is always a bearer. (Sec. 40) But an
order changes its nature depending on the indorsement.
Q: What if the order is not indorsed? Only delivery?
- This is not a complete indorsement.
- C does not become a holder. He is simply an assignee.
What happens is simply a transfer or assignment.
Particular right of the assignee – Right to demand
indorsement. (Sec. 49)
- C can always ask B for an indorsement.
Q: Will C become a holder in due course?
A: Yes. If on the day indorsement is made, he has all the
requisites under Sec. 52.
Q: What if bearer is not negotiated through indorsement
coupled by delivery?
A: It will not become an order instrument
Effect: B will become an indorser, C will become an
indorsee. (Relate this to Sections 65 warranties and 66
liabilities of general indorser)
Bearer:
o Liabilities (delivery): 4 → person negotiating has
warranties
o Liabilities (indorsement alone): 7 with Notice of
Dishonor → this has MORE warranties!
Section 1 (e) – Form of Negotiable Instruments.
Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with
reasonable certainty.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Q: What if drawee is more than one?
o “To A and B…” → DRAWEES; named jointly
o “To A or B…” → NOT DRAWEES named in the
alternative
o “To A or in his absence, B…” → NOT DRAWEES;
succession
o “I/We/Either of us promise to pay…” → solidary
liability
Doctrine of Substantial Compliance – for as long as there
is compliance, it is negotiable. But, there is also a right to
non-acceptance.
SIGNATURE
GR: A person whose signature does not appear in the
instrument is NOT liable.
XPN: FAT-ABC
1. Forgery – the person liable is the one who forged the
signature
2. Authorized Agent – principally liable if:
a. agent is duly authorized
b. discloses principal
c. agent acts within the scope and authority of the
principal
3. Trade name – if you signed using a trade name or alias,
you are liable as if you signed your real name; example:
Sharon Magdayao signed as Vina Morales.
4. Allonge – a separate paper for indorsement; if signed
on allonged, you are liable
5. Bearer Instrument – negotiated by a mere delivery,
there is no need to sign; there are still warranties.
6. Constructive Acceptance – upon presentment for
acceptance, drawee has 24 hours to decide whether or
not he will accept the instrument; counted from the
time of presentment. If he failed to accept/if refused by
negligence/omission upon lapse of the period, it is
constructively accepted.
GR: Actual acceptance → acceptance in writing
XPN: Constructive acceptance (when 24 hours lapses)
NOTE: Sec. 17(g) – solidary and “joint and several” are
synonyms
HOLDERS IN DUE COURSE *
Section 52 – What constitutes a holder in due course. - A
holder in due course is a holder who has taken the
instrument under the following conditions:
(1) That it is complete and regular upon its face;
(2) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
(3) That he took it in good faith and for value;
(4) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect
in the title of the person negotiating it.
Holder – person in possession of the instrument
o There is a presumption that every holder is a holder in
due course.
o Burden of proof for the contrary is upon who
alleges otherwise
AMBIGUITY
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;
(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.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
INCOMPLETE BUT DELIVERED INSTRUMENT
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.
Example
Y – maker → Authority is only 1000php
X – payee
A, B, C – holder in due course
o Personal defense – If “C” is not a holder in due course,
he cannot collect from “Y”
o Must be signed (prima facie right to fill it up on
whatever amount)
Q: How will this be binding?
A: Filled up strictly with the authority given.
Patrimonio v. Gutierrez
In order however that one who is not a holder in due
course can enforce the instrument against a party prior
to the instrument’s completion, two requisites must
exist: (1) that the blank must be filled strictly in
accordance with the authority given; and (2) it must
be filled up within a reasonable time.
If it was proven that the instrument had not been filled
up strictly in accordance with the authority given and
within a reasonable time, the maker can set this up as a
personal defense and avoid liability.
However, if the holder is a holder in due course, there
is a conclusive presumption that authority to fill it up
had been given and that the same was not in excess of
authority.
COMPLETE BUT NOT DELIVERED INSTRUMENT
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. 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.
o Personal defense
Example:
Y – maker (complete instrument already)
X – payee
Instead of delivering, Y hid it in his cabinet. Susan got the
instrument from the cabinet: Y x Susan → A → B → C
There is no delivery from Y to Susan.
Parties prior to the delivery: Y and X
Q: Can C collect from Y? Is C a holder in due course?
A: If C is a holder in due course, he can collect. But if not, he
cannot collect from Y but he can recover from Susan, A, and
B. Y cannot raise the defense of complete but not delivered
instrument.
INCOMPLETE AND NOT DELIVERED
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.
o Real defense
o A party prior to delivery may raise the defense of Sec.
15.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Q: Who are liable?
A: Parties after delivery.
HOLDER IN DUE COURSE
Section 52 – What constitutes a holder in due course. - A
holder in due course is a holder who has taken the
instrument under the following conditions:
(1) That it is complete and regular upon its face;
(2) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
(3) That he took it in good faith and for value;
(4) That at the time it was negotiated to him, he had
no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
Q: What do we mean when we say the instrument is
complete and regular?
A: The instrument is complete when it is not wanting in
any material particular. And it is regular if there are no
visible and apparent alterations on the face of the
instrument.
Good Faith – the person taking the instrument has acted
with due honesty in regard to the rights of the parties
liable on the instrument, that at the time he took the
instrument, the holder has no knowledge of any defect or
infirmity of the instrument.
Value – any consideration sufficient to support a simple
contract.
Infirmity – connotes a thing or things that are wrong with
the instrument itself.
Q: What is defect in title?
A: Defect can be had in two ways. Defect in the
acquisition which means the person obtained the
instrument or any signature thereto by fraud, duress, or
force and fear or other unlawful means, or for an illegal
consideration. Defect in the negotiation means the person
negotiated the instrument in breach of faith, or under such
circumstances as amount to fraud.
Rights of a holder:
1. Right to sue; and
2. Right to receive payment
- Proper payment to a holder discharges the instrument
- Sec. 57, NIL – prior parties is all-encompassing
- Full amount
Rights of a holder in due course: 10. Prescription 10. Mistake
1. To sue on the instrument on his own name; 11. Discharge in 11. Insertion of wrong date
2. To receive payment (payment in due course discharges Insolvency
the instrument); 12. Ante-dating or Post-
3. Hold the instrument free from any defect of title of prior dating for illegal or
parties; fraudulent purpose.
4. Acquire the instrument free from defenses available to
prior parties among themselves; Incapacity
5. May enforce payment for the full amount of the
instrument against all parties liable thereon. Minority (Real)
- Minority is a real defense personal to the minor. Only
Q: If holder is holding a stale check, may he be considered the minor can raise the defense of minority.
an HDC? - Maker is a minor
A: No, due to Sec. 52(b) → overdue check - May be set-up even against an HDC (Sec. 22, NIL)

Stale Check – under current bank practice, it is a check that Q: Was there a valid transfer of title even if maker is a
has not been encashed within 6 months/180 days. minor?
- If it exceeds 6 months, it cannot be encashed A: Yes, minors validly transfer title but incur no liability.
anymore.
Example:
Presumption – Every holder is a HDC so long as he/she o Maker dishonors instrument since he was a minor at
complies with Sec. 52’s requirements. that time.
- Free from defenses of prior parties (must qualify it) - E’s remedy is to give notice of dishonor to D, etc.
- Burden to prove he’s - E cannot collect from (minor) maker(?)
- D cannot raise the defense of minority. Such defense
Real Defense v. Personal Defense is personal only to the minor.
o Real or absolute defenses – those that attach to the - D may not use it for himself as he is not a minor.
instrument and are available against all holders, even a
holder in due course. Forgery
o Personal or equitable defenses – available only against - Counterfeit making or fraudulent alteration of any
the holder who stands in privy with the party who is writing, and may consist in the signing of another’s
entitled to set it up, or those who do not have the rights name, or the alteration of an instrument, in the name,
of a holder in due course. amount, description of the person and the like, with the
intent to defraud
Real Defenses Personal Defenses - Section 23 only applies to forged signatures or
1. Minority (available 1. Failure or Absence of signatures made without the authority of the person
only to the minor) Consideration whose signature purports it to be
2. Forgery 2. Illegal Consideration o Fraud Amounting to Forgery
3. Non-delivery of 3. Non-delivery of complete - Fraud in factum or fraud in esse contractus
Incomplete Instrument instrument - There is no intention to issue an instrument
4. Material Alteration 4. Conditional delivery of
complete instrument Difference between Fraud in Inducement and Fraud in
5. Ultra Vires act of 5. Fraud in inducement Factum
Corporation Fraud in Factum Fraud in Inducement
6. Fraud in Factum or 6. Filling up blank not within Amounts to forgery Does not amount to forgery
Esse Contractus authority Real defense Personal defense
7. Illegality – if declared 7. Duress or Intimidation A sells to B what he represents
void for any purpose as a diamond ring, when it is
8. Vicious Force or 8. Filling up blank beyond actually made of glass. B
Violence reasonable time issues a check.
9. Want of authority 9. Transfer in breach of faith
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
 The fraud is in inducing B to
issue the check.
Q: Is the instrument inoperative or ineffectual? Is it
rendered non-negotiable due to the forgery?
A: No, it is only the forged signature which is rendered
inoperative or ineffectual.
Q: Who are those precluded from setting up the defense of
forgery?
A: Those who warrant or admit the genuineness of the
signature in question:
(1) Drawee/Acceptor – shall be liable to the holder of
the instrument even if the drawer’s signature is
really forged, because at the time of making his
acceptance, he warrants that the drawer’s
signature is genuine, etc. (Order instrument where
the drawer’s signature is forged)
(2) Indorser – an indorser shall be liable because he
warrants among other things the genuineness of
the signature of all prior parties at the time of his
indorsement.
(3) Person negotiating by mere delivery – A person
negotiating an instrument “payable to bearer” shall
be liable because he warrants that the instrument
is genuine, and the forged signature is not
necessary to the title of the holder.
Vicious Force/Violence v. Duress/Intimidation
o Vicious Force/ Violence
- Threat is immediate and real
- Example: Gun pointed to your head
o Duress/ Intimidation
- Oral threat, not immediate
Crossed Check – one where 2 parallel lines are drawn
across the upper left corner thereof its face
Q: What are the effects of crossing a check?
A:
(a) the check may not be encashed but only deposited in
the bank;
(b) the check may be negotiated only once — to one who
has an account with a bank;
(c) and 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.
In other words, the holder is not a holder in due course
if he receives the check other than for the purpose it
was issued.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
NOTE: The failure of his person to inquire if he received the
check pursuant to the purpose it was issued constitutes to
bad faith—violating Sec. 52 (c).
Bataan Cigar & Cigarette Factory v. CA and SIHI
FACTS:
Bataan Cigar manufactures cigarettes, orders tobacco
from George King
Before the first transaction was consummated, they
ordered extra from George, but the latter did not send
(failure of consideration). *
George was dealing with SIHI and sold crossed checks
to SIHI
Bataan ordered a stop payment order on the crossed
checks they issued
SIHI was enforcing payment on Bataan but not honored
due to B’s personal defense of failure of consideration
ISSUE: W/N SIHI is an HDC.
RULING: NO.
SIHI did not inquire as to the specific purpose of the
check and SIHI was enforcing payment on the crossed
check and this is a gross negligence amounting to bad
faith.
The purpose of the check when issued was to pay the
tobacco
The purpose of the check when delivered/negotiated
was to pay state investments (discount checks)
o Personal defense for lack of consideration is valid
defense and can be enforced by Bataan to SIHI as
they are mere holders.
MBTC v. Junnel’s Marketing
In all cases, if the issue is on crossed checks, the rulings
are the same.
Most prominent is the third effect:
“The act of crossing a check serves as a 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
an HDC.”
Failure to do so constitutes to bad faith → violating Sec.
52 (c).
De Ocampo v. Gatchalian*
Anita Gatchalian was interested in buying a car and was
offered by Gonzales which was owned by De Ocampo.
Gonzales claimed he was authorized to sell DO’s car.
Gonzales ordered Gatchalian to issue a crossed check to
comply with the showing of an interest to buy the car.
 However, Gonzales never appeared after the agreement
so Gatchalian issued a stop payment order.
Gatchalian found out that Gonzales used the check to
pay his wife’s medical fees in De Ocampo hospital.
Payment of check is now being demanded.
ISSUE: W/N De Ocampo is an HDC.
RULING: NO.
The title of the holder is defective/suspicious, and it
cannot be stated that the payee acquired the check
without the knowledge of said defect in holder’s title.
Because of this, there’s a presumption that good faith is
absent
Shelter Principle – a holder in due course transfers his
rights to a holder not in due course (by negotiating the
instrument), and the latter will have the said rights to
enforce the instrument as if he was a holder in due course.
- This principle presupposes that the sheltered holder is
not a party to any fraud or illegality impairing the
validity of the instrument.
Example: Maker issued PN to A for payment of drugs.
o Negotiation: A → B → C → D → E
o B has knowledge; D has knowledge, no participation
D is protected, hence “shelter” – despite
knowledge, since he did not participate, and he
received it from a holder in due course, then D
may exercise the rights of an HDC. (HDC by
Subrogation)
Requirements to invoke Shelter Principle
(1) The holder must have received the instrument from a
holder in due course;
(2) Such holder may have knowledge of the defect or
infirmity;
(3) But such holder must not be party to the illegal
transaction.
Holder in Due Course by Subrogation – the holder who
has knowledge but no participation to any fraud or illegality
derives his title from a holder in due course
Q: Can you still collect if what is being raised is a Personal
Defense only? Can D be able to collect from the maker since
a particular defense (illegal consideration) was raised?
A: YES, because of the Shelter Principle. He acts as if he is an
HDC. If what’s being raised is only a personal defense, you
are an HDC therefore, you can collect.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Q: What is real defense (minority)?
A: NO, with more reason he cannot. HDC cannot collect in
real defense, with more reason an HDC with subrogation
cannot collect.
Q: What if D negotiates it to E?
A: E does not derive his rights from a real HDC because D is
only an HDC by subrogation. He is sheltered. In this case,
requirement #1 is wanting. Thus, E cannot practice all
rights as HDC by Subrogation.
NOTE: Requirement in Sec 52(d), no notice of any infirmity
in the instrument. Illegality may be considered an infirmity.
Although it will not detract the instrument from becoming
a negotiable instrument, still it will affect the instrument in
such a way that it has an infirmity, but it does not mean it’s
not negotiable.
→ Effect would be on the holder, because if he has notice
then he will not be considered a holder in due course.
Summary of Shelter Principle:
o Holder who is not a holder in due course is subjected to
the same defenses as if it were non-negotiable
o Holder NOT in due course derives his title from a holder
in due course and is free from (personal) defenses
o Holder must have received the instrument from an HDC
and may have knowledge of the defect/infirmity BUT
did not participate to the illegality → HDC by
Subrogation
o HDC by Subrogation → if he negotiates the instrument
to another party, the said party will not be a holder in
due course because Sec. 52 will be violated wherein he
has a notice of the instrument’s infirmity
o BUT, if he has no knowledge and no participation,
he will be a holder in due course, provided that all
other requisites under Sec. 52 are complied with.
CHECKS
Special Types of Checks
1. Cashier’s check – one drawn by the cashier of a bank in
the name of the bank against the bank itself payable to
a third person or order
2. Manager’s check – check drawn by the manager of a
bank in the name of the bank against the bank itself
payable to a third person
o Does not mean it’s the name of the manager/cashier
who will appear in the check
o A check you apply to the bank that you need a
manager’s check for (example) 1M php.
Q: What is the purpose of asking for a manager’s check
when you already have a personal check?
A: You’re asking the bank (manager/cashier) to guarantee
that you have money in your account, as in fact it’s the
manager who issues it in your favor.
NOTE: The reputation of the bank, in the person of the
manager/cashier is at stake
Once they issue a check, it is as if it’s an assurance that
they first checked if you have money in your account
before issuance
- Account exists
- Enough funds (otherwise check will not
be issued)
o Under banking practice, this check is considered good
as cash.
- Sure money, no problem
- Presumption of regularity
From discussion:
RCBC v. Odrada
Odrada’s argument: Manager’s checks should not be
dishonored because it is as good as cash.
Issue: May a manager’s check be countermanded
[dishonored]?
Ruling: YES. Personal defenses may still be raised by a
drawee bank against a holder not in due course.
Metrobank v. Chiok
Issue: Are MC/CCs still subject to clearing?
Ruling: YES. Mandatory!
SC: Bank (has two personalities) is drawer and drawee.
MC and CC are pre-accepted but does not mean that it
will not undergo clearing.
No question as to closed account; insufficiency of fund.
Purpose of clearing procedure: check if there is
material alteration; counterfeit check or genuine check.
- Usually at least 3 banking days.
Manager’s Checks
GR: Should not be countermanded
XPN: May be countermanded (1) RCBC – subject to personal
defense; (2) MB – subject to clearing
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
FORGERY – Sec. 23
- The signature that is forged or made without
authority is wholly inoperative/ineffectual.
Q: Which is inoperative?
A: The signature, NOT the instrument. The instrument
remains operative notwithstanding the forged signature
therein.
Other Effects [GR]:
1. That there is no right to retain the instrument;
2. No right to give a discharge therefor; and
3. That there is no right to enforce payment against
any party
XPN: Liable because of their specific warranties under
provisions of the NIL.
Q: Who are precluded from setting up the defense of
forgery?
1. Drawee-Acceptor [Sec. 62(a)] – shall be liable to the
holder of the instrument even if the drawer’s signature
is really forged, because at the time of making his
acceptance, he warrants that the drawer’s signature is
genuine, etc. (Order instrument where the drawer’s
signature is forged)
2. Indorser (Warranty) – an indorser shall be liable
because he warrants among other things the
genuineness of the signature of all prior parties at the
time of his indorsement.
a. Instrument is genuine and in all respects what
it purports to be
b. All prior parties
3. Person negotiated by mere delivery – A person
negotiating an instrument “payable to bearer” shall be
liable because he warrants that the instrument is
genuine, and the forged signature is not necessary to
the title of the holder.
a. Bearer instrument negotiated by mere delivery –
warranty 65 (a)
b. No indorsement - negotiated by mere delivery
- No need for signature
- Forged signature has no effect
Cut-Off Principle – In order instruments, parties prior to
forgery are relieved (cut-off) of liability. They cannot be
held liable by any holder, including a holder in due course.
However, parties after forgery are liable because they
warrant that they have good title to the instrument.
Q: When can the cut-off rule be invoked? What is the reason
for the cut-off rule?
A: The cut-off rule can be invoked in case of order
instruments. We cut them off because their signature is
need in order to acquire title. And since they did not affix
their signature, they did not transfer title to the instrument,
consequently, they cannot be held liable on an instrument
which they did not transfer title to. It cannot be invoked in
case of bearer instruments because signature is not
necessary to convey title.
Example:
I promise to pay B or order 1000 php
Sgd., A
FACTS: B → C → D → E → F
o A is the maker
o B is the payee
o E is the forger
o F is the holder
E stole the PN from D and forged the signature of D
E negotiated the instrument to F
On maturity date, F collects payment from A
o A can raise the defense of Forgery of D’s signature; A
refuses to pay
o Who are liable?
E and F. E as the main forger and F as the subsequent
o Who are relieved from liability?
A, B, and C.
NOTE: Forgery is a real defense, it can be raised against a
holder in due course.
Example (To order, same facts):
o What if B’s signature was forged and stolen by C who
negotiated it to D → E → F?
A and B are relieved from liability. They are parties
prior to the forgery.
Signature of B is necessary to transfer title
considering this is an order instrument and
indorsement is necessary to complete the
negotiation for the next subsequent party to acquire
title
In order instrument, indorsement of B is necessary
for there to be couple(?) negotiation, so next
subsequent party to acquire title over the
instrument
A and B were cut-off since there is no complete
negotiation. This is an order instrument.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
o Who is liable?
C, the main forger; D, and E
Sec. 65 for D and E because of their warranties as an
indorser (they warrant the signature as genuine)
→ one of the persons precluded from setting up the
defense of forgery
o What if it’s a bearer instrument?
Cut-off principle is inapplicable.
Apply the same facts:
o A is the maker
o B is the payee
o C is the forger/stole the instrument from B
C negotiates to D → E → F [holder]
On maturity date, A refuses to pay F as B’s signature
was forged
o What defense can B raise to not be liable?
SEC. 16 – undelivered, but complete instrument
F is not a holder in due course – F cannot claim
payment from B if he is not a holder in due course
since he is a it is a personal defense
B can set-up the provision of Sec. 16 as defense
because instrument was stolen by C – thus, there is
no valid delivery from B to C [where the problem lies]
HOWEVER, if F is a holder in due course, B can be
liable under Sec. 16 – Since 16 is a personal defense,
you have to check if F is a holder in due course or
not.
Personal defense – it cannot be invoked in a
holder in due course
F can claim payment from B if he’s a holder in due
course.
o Who are liable?
C as the main forger
D and E as based on their warranties under Sec. 65
D and E are liable as persons negotiating by delivery.
o Sec. 59 – Every holder is prima facie presumed to be a
holder in due course.
Suggested answer: Under the example, there is no
statement that would contradict the presumption in favor
of F. Thus, the proper answer would be that F can collect
from maker and payee.
o If it was the maker’s signature that is forged:
- Defense of forgery available to maker; he did not
sign and he’s(?) not part of the contract
- But B, C, D are liable as indorsers/forger (Sec. 65)
Process of Negotiation [collection] from Maker – once you
give a Notice of Dishonor to all, logically from F, he goes to
E then E goes to D
 - F, once he gives a Notice of Dishonor can
immediately claim from E (immediate
transferee/party) and E as a person negotiating by
delivery under Sec. 65, his warranty extends to his
immediate transferees (F)
Q: X issued a PN payable to the order of Y. A obtained the
instrument and forged Y’s signature thereon. A then
indorsed the note to B, B to C, and C to D. From whom can D
collect?
A: D can collect primarily from the forger A. D can also
collect from B and C because of their warranties as a general
indorser, as such, they are precluded from setting up the
defense of forgery. X and Y cannot be liable because they can
be brought under the scope of the cut-off rule, which means
that parties prior to the forgery are cut-off from liability.
Q: X issued a PN payable to bearer and negotiated it to Y. A
obtained the instrument and forged Y’s signature. A then
negotiated the note to B, B to C, C to D. Against whom can D
collect?
A: D can collect primarily from A because he is the forger. D
can also collect from A, B, and C because of their warranties.
If D is a holder in due course, he can collect from Y
notwithstanding the forgery. D can likewise collect from the
maker, X.
Q: What is the rule in case it is the drawer’s signature which
was forged?
A: Forgery of a drawer’s signature, drawer is not liable,
drawee bank is liable because the bank is in a superior
position to detect the forgery. (PNB v. Quimpo)
XPN: Negligence on the drawer’s part (Ilusorio v. CA)
Q: What is the rule in case it is the payee’s signature which
was forged?
A: As a rule, the drawer is not liable because the drawee
bank owes the duty to pay only to the order of the drawer.
The drawer, in effect, said “Pay to Y”. Why then, did the
drawee pay to A? Drawee bank violated its contractual
duty therefore, the drawee bank must credit back the
amount it debited from the drawer’s account.
XPN: When drawer is negligent.
FORGERY IN CHECKS
Q: Why is a signature needed by a bank?
A: To determine fraud/forged signatures in checks/other
instruments. The bank needs a specimen signature to verify
if the signature appearing on the check is genuine or not
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Q: If you’re a depositor and you issued a check, what are you
called?
A: Drawer
Q: Bank is the…?
A: Drawee bank
Q: Who is the payee?
A: Anyone you can transact with
NOTE: (1) Bank = debtor; (2) Me = creditor
Three Signatures that may be Forged
1. Drawer;
2. Payee;
3. Indorser
Example (PNB v. Quimpo):
Beyoncé’s best friend is Michelle.
They went on a drive and Beyoncé had to do an errand
for her Mom.
Beyoncé left the car to do such errand and Michelle saw
Beyoncé’s check. Michelle took 1 check from the
checkbook and filled it out.
She named herself as the payee (pretending to be
Beyoncé) so she forged her signature.
The amount was 15k. Clearly there is forgery.
Beyoncé upon checking her statement saw that 15k was
deducted knowing she did not issue it.
BPI asked Beyoncé who Michelle is when Beyoncé
questioned said encashed check.
Beyoncé told BPI that Michelle is her friend. BPI alleges
that maybe Michelle stole Beyoncé’s check and Beyoncé
says that it shouldn’t have been honored as she did not
sign it.
Q: Was the bank justified in deducting money from the
account of Beyoncé?
A: No. Bank has specimen signature from depositor and has
responsibility to prove the legitimacy of the signatures on
the check; has capacity to verify if genuine.
Q: Whose signature was forged?
A: Drawer
Q: What’s the rule when the drawer’s signature is forged?
A: As a general rule, the drawee bank is liable. (p. 48, PW)
Reasons:
1. Bank is bound to know the signature of its
clients/depositor;
 2. Drawee bank is in a superior position to detect
forgery as they have the specimen signature of
depositor;
3. Drawee bank is now an acceptor who admits the
genuineness of the drawer’s signature
NOTE: An acceptor is one of the persons precluded from
raising forgery as a defense.
Remember (ABI)
1. Acceptor
2. Bearer (person negotiating by mere delivery)
3. Indorser
XPN: When drawer himself is guilty of negligence, thus he
bears the loss. He is precluded from setting up forgery
because the proximate cause of the loss is his own
negligence.
Q: What’s the rule when the payee’s signature is forged?
A: As a general rule, the drawee bank is liable. The bank
has absolute and contractual duty to pay the check only to
the person to whom it is made payable. If bank paid
someone else, it is a breach of contract. The bank must
exercise the highest degree of diligence to ascertain that he
is paying to the right person; note the debtor-creditor
relationship of the bank and depositor.
XPN: Drawer is negligent; he bears the loss.
PNB v. Quimpo
- The general rule was applied
The act of leaving the checkbook in the car is not
negligent as sufficient excuse for defendant bank to be
free from liability because in the mind of Gozon, he
trusted Santos and would not have expected a friend if
his to forge a check.
He was not with a stranger but with a friend
This is NOT negligence on the part of drawer-depositor.
Ilusorio v. CA and MBC
FACTS:
Ilusorio is a rich businessman who frequently travels
He entrusts his credit checkbook to his secretary
(financial transactions)
Every month there’s a month of transaction that
Ilusorio doesn’t bother to check/verify
His business partner discovered that the secretary uses
his credit card
The bank then calls Ilusorio to verify the checks; calls
are answered by secretary
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Secretary says that she indeed issues them = no check
and balance
The Secretary was fired; Ilusorio filed Estafa
Ilusorio demanded the bank to credit value of the
checks as his signature was forged.
RULING:
- The exception was applied,
Ilusorio as the drawer is NEGLIGENT.
This trust towards the secretary was unusual when he
gave her unrestricted access to these financial accounts
(credit/check)
Ilusorio had all opportunities to verify his statement of
accounts, but he didn’t
There is no other person to blame, but Ilusorio for
failing to implement measures/double check his
dealings with issued checks.
Samsung Construction v. Far East Bank TC
FACTS:
Samsung is a juridical person
It’s the authorized authority who signs for them; thus,
the manager.
→ Samsung is the drawer
NBI examiner said there was forgery
PND Laboratory said signature is genuine
RTC: There was forgery
CA: Reversed RTC ruling
RULING:
- The general rule is applied
Q: Did the SC pinpoint in its ruling who specifically forged
the project manager’s signature?
A: NO. But there was a suspicion. It must have been an
employee of Samsung. The bank alleges that there is
negligence on Samsung because their employees were the
probable suspects. Thus, the fault redounds back to
Samsung.
Q: Bank’s goal…?
A: For the exception to apply (negligence of Samsung)
You cannot blame the employer for the employee’s
wrongdoing.
“Employers don’t have the preternatural gift of
commission to determine what lurks in the minds and
hearts of its employees.”
Just because you’re the employer and there’s a
suspicion that an employee caused forgery does not
mean you will hold the employer liable
Not automatic negligence
Q: What about the fact that there were 2 conflicting
government agencies with conflicting opinions?
A: Both are expert witnesses. Thus, a problem was
encountered. The SC favored NBI [forgery exists].
CA reversed RTC and said no forgery exists stating that
since there are 2 contradicting findings, there is then
doubt if forgery exists. If there is doubt, it should be in
favor of “no forgery”
SC sided with NBI because NBI was the better witness
SC analyzed the background of the 2 witnesses: PNP
gave no explanation as to how it came up with its
conclusion. Hence, SC goes to favor the witness who
was able to better explain.
Westmont Bank v. CA
Payee’s signature was forged
Westmont Bank – collecting bank
• Collecting bank – bank where the check was deposited
for encashment or clearance; no relationship between
depositor and collecting bank
- Drawer can seek reimbursement from drawee
bank → drawee can reimburse from collecting bank
- Acts as an indorser that warrants that the
instrument is genuine and in all respect what if
purports to be
• Drawee bank – under strict liability to pay the check to
the order of payee.
Q: What’s the rule when the payee’s signature is forged?
A: As a general rule, the drawee bank is liable. The drawee
bank is under strict liability to pay the check to the order of
payee → drawee bank passes liability to collecting bank.
- The collecting bank acts as an indorser that warrants
that the instrument is genuine and in all respect what it
purports to be (even if not negligent).
NOTE: The chain of liability (Assoc. Bank v. CA and Province
of Tarlac)
Three Rules in Forgery (Basic)
1. It can never be presumed;
2. Expert witnesses can help, but NOT mandatory;
3. Judge should make his/her own independent finding.
NOTE: (1) Determine what signature was forged; (2)
Determine if you will apply GR or XPN
Q: What are other signatures appearing on the check that
may be forged?
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
A: Payee
Q: What’s the GR when the payee’s signature is forged?
A: The GR is that the drawee bank is liable
Q: What’s the XPN?
A: When the drawer is negligent
GR and XPN – the same for forgery in a drawee and payee
signature, they only differ in REASON
Q: What is the REASON for GR in forgery in a payee’s
signature?
A: There is a contract between the depositor and the bank.
The bank has the duty to pay ONLY the depositor himself for
whoever the depositor names.
NOTE: Drawer fills up the check so there is no question to
the authenticity to the signature of drawer-depositor.
→ Stolen check from either drawer or payee
→ If drawer tells drawee bank to pay X (payee), drawee
bank must only pay X
→ Bank’s duty to pay only the person written in the check =
contractual duty.
FROM DISCUSSION:
Associated Bank v. CA, Tarlac
Checks are payable to order
No problem regarding the drawer’s signature and with
it being payable to the hospital
The problem was when the hospital was not receiving
the checks.
Tarlac sued PNB
PNB’s defense: Tarlac was negligent as it delivers the
checks to a retiree (Pangilinan)
Associated Bank argued: PNB must be solely liable
The drawee bank has the obligation to know the
drawer’s signature because D is the depositor of DB.
Thus, if D has no negligence, as a rule, DB is liable.
CB – acts as indorser: depositor is a client of CB and its
duty is to know if the signature of its indorser is
genuine.
As an indorser, it has warranties; precluded to raise
forgery as a defense.
ISSUE: Who is liable if there are checks bearing forged
banks?
RULING:
In case of forged indorsements, the drawee bank is
liable. But it can pass the liability to the collecting bank.
CB = indorser; admits that the instrument is genuine
and in all respect what it purports to be
Since it accepted the check, CB has the duty
If DB is guilty of delay, chances it won’t be able to
recover
o Delay in informing CB what there’s a problem with
checks
Associated Bank claimed that the stamp it put at the
back of the check is merely a customary bank practice.
The Court said that by stamping the check, the
collecting bank warrants the instrument as an indorser.
A collecting bank is not obliged to process the check
presented to it. It can exercise discretion. However,
Province of Tarlac was equally negligent. Thus, the
liability between it and PNB is 50-50.
Chain of Liability
- Does not end with DB
- DB can seek reimbursement from CB if it’s not
guilty of delay
- If drawer is not negligent, the DB must recredit the
amount of the forged check to account of drawer.
- However, DB can pass liability to CB
- CB can seek reimbursement from forger
- CB warrants the instrument as an indorser as a
general rule.
- Exception is when DB failed to promptly inform
collecting bank of forgery which describes the
latter of opportunity from going after the forger =
deemed negligent.
In this case, PNB was not guilty of delay.
Gempesaw v. CA and PBC
SC allocated liability within parties
Drawer cannot recover entire value of checks
MATERIAL ALTERATION
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.
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Effect of Alteration of Instrument
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.
Q: Special indorsement in a bearer instrument, will it
change the nature of the instrument?
A: No, it will not change the nature of the instrument. A
bearer instrument is always a bearer instrument.
Q: What is material alteration?
A: It is a defense which changes the liability of the parties or
the effect of the instrument.
NOTE: Alteration of a serial number material alteration
Q: Is material alteration a real or personal defense?
A: Real defense. Some authors would say it is a partial real
defense because a holder in due course may still be able to
collect according to the original tenor of the instrument. In
real defense there is usually no collection.
Example:
o A issued a check with B as payee and left the amount in
blank.
o B’s authority was to write P100,000.
o B did not follow and wrote P500,000.
o B→C→D
o Is it material alteration?
- NO. It is not material alteration but a case of Section
14, delivery of incomplete instrument. The amount
is left blank, there is a missing particular.
Example:
o X issued a check for P100,000 with Y as payee.
o Y changed the amount thereof to P500,000.
o Y→A→B→C
o Is it material alteration?
- YES. There were no blanks, there was really an
amount stated.
- Changing it from P100,000 to P500,000 constitutes
material alteration which changes the liability of
the parties.
Q: In the foregoing, against whom can C collect and not
collect? For how much?
A: C, presumed as a holder in due course, can collect
primarily from Y because he is the one authorized, made
or assented to the material alteration. C can likewise collect
from A and B because of their liabilities as an indorser.
And lastly, C can collect from X but only for the original
amount prior to the alteration.
Q: Is it important that the holder is a holder in due course?
Should you qualify first?
A: C should be a holder in due course before he can collect
from the party who did not assent to the alteration but only
according to its original tenor.
Q: If he is not a holder in due course, can he collect from
the party who did not assent to the material alteration? Can
he collect from Y, A and B?
A: No. As to Y, A and B, he can collect from Y because he is
the one who authorized, made or assented to the material
alteration and from A and B because as subsequent
indorsers they are liable for their warranties.
Q: May C collect from Y the balance of the instrument after
collecting P100,000 from X?
A: Once the instrument is paid by the party primarily liable,
the instrument is discharged.
Q: Why is the maker still liable as to the original tenor only?
(Rationale)
A: It’s because the maker had intent to pay in the first place
when he issued it
Q: Who is liable to the altered amount?
A: Payee, subsequent indorsers
Areza v. Express Savings Bank
There is Material Alteration; visible to the naked eye
Looking at the check, it can easily be detected
CB ultimately bears the loss as it’s the indorser of the
instrument
Rule in 24-hour Clearing in Altered Checks
- NOT applicable in this case (Areza)
- Prescriptive period is 10 years because it is a
written contract
- 1.8M php was returned to the Arezas. The
collecting bank bears the loss. It cannot pass
liability to Areza’s because there was no
negligence.
- Express and Equitable are solidarily liable
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Sec. 21. Special Return Items Beyond the
Reglementary Clearing Period – Items which have
been the subject of material alteration or items bearing
forged endorsement when such endorsement is
necessary for negotiation shall be returned by direct
presentation or demand to the Presenting Bank and
not through the regular clearing house facilities within
the period prescribed by law for the filing of a legal
action by the returning bank/branch, institution or
entity sending the same.
- Any check which should be refused by the drawee
bank in accordance with long standing and
accepted banking practices shall be returned
through the PCHC/local clearing office, as the case
may be, not later than the next regular clearing (24-
hour).
- The item need not be returned through the clearing
house but by direct presentation to the presenting
bank.
- In short, the 24-hour clearing rule does not apply
to altered checks.
WARRANTIES OF PARTIES
• Maker – he is primarily liable on the instrument. He
engages that he will pay it according to its tenor. He
admits the existence of the payee and his then capacity
to indorse. His warrant is according to its tenor.
• Drawer – he is secondarily liable on the instrument.
By drawing the instrument, he:
1. Admits the existence of the payee and his then
capacity to indorse;
2. Engages that, on due presentment, the
instrument will be accepted or paid, or both,
according to its tenor; and
3. 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.
• Acceptor – he is primarily liable on the instrument.
Until and unless he accepts the order to pay, he incurs
no liability. He engages that he will pay it according to
the tenor of his acceptance:
1. The existence of the drawer, the genuineness of
his signature, and his capacity and authority to
draw the instrument; and
2. The existence of the payee and his capacity to
indorse.
NOTE:
Maker – its tenor in the PN he made
Acceptor – tenor of his acceptance
Qualified Indorser and Persons Negotiating by
Delivery:
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.
NOTE: The warranty of persons negotiating by delivery
extends in favor of no holder than the immediate transferee.
• General Indorser – warrants to all holders, including
HIDC that:
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 the instrument is, at the time of his indorsement,
valid and subsisting;
e. 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.
ACCOMMODATION
• Accommodation Party – 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.
Q: Who is an accommodation party? Does he receive any
consideration? What is his liability? Is his liability primary
or secondary?
A: If an instrument is issued for value given for the benefit
of a party to the instrument ("accommodated party") and
another party to the instrument ("accommodation party")
signs the instrument for the purpose of incurring liability on
the instrument without consideration therefor, the
instrument is signed by the accommodation party "for
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
accommodation." His liability depends on the capacity in
which he signs the instrument. He may sign as a maker,
drawer, indorser, or acceptor.
Q: Who is the accommodated party?
A: The party in whose favor the credit is lent.
Q: What is the relationship of the accommodation party and
accommodated party?
A: Like a surety.
Q: What do we mean when we say that the accommodation
party acts as a surety?
A: The accommodation party has a right of recourse from
the accommodated party.
Q: What is the liability of an accommodation party?
A: It depends on the capacity he signs the instrument.
o Secondary: drawer and indorser
o Primary: maker and acceptor
Example:
o A bought goods from B. A executed a PN to pay the
goods
o C signed as accommodation maker to lend to A
o C did not receive any value
Q: On maturity date, can B go after C?
A: Yes. And C is solidarily liable with A.
Q: What happens if accommodation party pays the
instrument?
A: The instrument is not yet discharged because the
accommodation party still has a right to be reimbursed.
There is still a pending obligation, a right to be paid by the
accommodated party.
Q: May a corporation act as an accommodation party?
A: NO, it is an ultra vires act (beyond the powers) of the
corporation. It is the officer who is liable in his personal
capacity.
o XPN: There should a board resolution authorizing
such act. Otherwise, officers will be liable.
- Signing is not provided by law as a power of a
corporation
- Thus, a corporation does not incur liability. [Personal]
liability is with the officer who signed.
- Logic: A corporation has a personality distinct from its
officers
- Liabilities of a corporation and of an officer cannot mix.
o It will deplete the funds of the corporation
 o Trust fund – with the creditors (violates Trust
fund Doctrine
Q: May a holder be a holder in due course despite his
knowledge that the party who signs is an accommodation
party?
A: Yes.
INDORSERS
o Has a lot of warranties in a Negotiable Instrument
o One who transfers or negotiates the instrument by
indorsement coupled with delivery
- Presumably payable to order
Q: Differentiate how an order instrument is negotiated from
that of a bearer instrument.
A: An order instrument is negotiated by indorsement
completed by delivery. A bearer instrument is negotiated by
mere delivery.
Q: Should indorsement be for the entirety of the
instrument?
A: As a general rule, YES. The exception is when it’s been
paid in part or when a portion has been paid.
Q: Why must it be in its entirety?
A: It’s because the law abhors the splitting of causes of
action and multiplicity of suits.
Q: What do you mean by “indorsing the entire amount”?
A:
Example:
Pay to the order 10, 000php.
Pay to A 5000php
Pay to B 5000php
Sgd. C
- NOT a valid indorsement
Liabilities of General Indorser
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
section; and
(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.*
NOTE: In Sec. 66, do not be deceived by “to all subsequent
holders in due course” because even if the holder is not a
holder in due course, he is liable, not only holders in due
course.
Q: Who is a general indorser?
A: A person who negotiates without any conditions or
qualifications, the opposite of a qualified indorser.
✓ “Every indorser who indorses without qualification”
✗ “Warrants to all subsequent holders in due course”
→ Edit to “to all subsequent holders, NOT only to HDCs.
• Letters a, b, and c of Sec. 65
- Preclude defense of forgery and MA(?)
- Not infant, corporation (no capacity to contract)
• Valid and subsisting, at the time
• There is the BASIS of secondary liability
- In addition, there is a Notice of Dishonor
- “If they don’t pay, I will”

Pay to C and D Q: Is indorsement with parties?

Sgd. Y
A: Yes; parties are indorser and indorsee.
- VALID indorsement
- Jointly liable; ‘and’ is valid Q: What is the object of the contract?
A: “You’ll be paid by parties prior to me, if not then I’ll pay”
Pay to the order of A 1000php → Notice of Dishonor.
Sgd. B
Pay to D 500php Q: A – Indorser & B – Indorsee/holder
- NOT valid Pay to B without recourse
Sgd. A
A: Indorsement is valid. → Qualified Indorsement. (Sec. 65)

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NOTE: The presumption is that every indorser is a general Q: Can we hold C liable?
indorser. A: YES. Sec. 65 (a)

Qualified Indorsement Q: Dishonored due to Material Alteration?

Sec. 65. Warranty where negotiation by delivery and A: Warranty under Sec. 65 (a) also
so forth — Every person negotiating an instrument by
delivery or by a qualified indorsement warrant: Q: Minority as a defense?
(a) That the instrument is Genuine and in all respects A: Warranty under Sec. 65 (c)
what it purports to be;
(b) That he has a Good title to it; Q: Insolvency as a defense?
(c) That all prior parties had Capacity to contract; A: No warranty from Secs. 64, 65, or 66. In Sec. 65 (1) mere
(d) That he has No knowledge of any fact which would delivery → immediate transferee → qualified by the term
impair the validity of the instrument or render it “immediate” or (2) the qualified indorsement
valueless.
Restrictive Indorser
But when the negotiation is by delivery only, the o A restrictive indorsement:
warranty extends in favor of no holder other than the (a) Prohibits the further negotiation of the instrument; or
immediate transferee. (b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use
The provisions of subdivision (c) of this section do not of some other persons.
apply to a person negotiating public or corporation
securities other than bills and notes. Example:
Par. (a)
Q: What is a qualified indorsement? Pay to C only.
A: A qualified indorsement is one by which an indorser may Sgd. B
negate or limit his liability on the instrument by adding the - Puts an end to further negotiation
words “without recourse” or “sans recourse” to his - Payment has been limited by B to C only
indorsement.
Par. (b)
Q: What are the warranties of a qualified indorser? Pay to A, for deposit
A: Warranties of a party who negotiates by mere delivery or
and a qualified indorser: Pay to A, for collection
(1) That the instrument is genuine and in every respect
what it purports to be; Par. (c)
(2) That he has a good title to it; Pay to C, in trust for X.
(3) That all prior parties had capacity to contract;
(4) That he has no knowledge of any fact which would Q: Who is a special indorser?
impair the validity of the instrument or render it A: A special indorser is one who is so named by the
valueless. indorsee in the latter’s indorsement, coupled with the
latter’s signature.
Example:
Payable to order instrument Q: Who is a blank indorser?
o A – maker A: A blank indorser is one who is not so named by the
o B – Payee indorsee in the latter’s indorsement, there is only the
o Indorsed to C → D → E → F latter’s signature.
o D is the only immediate transferee
→ Applicable in striking out of instrument
Pay to D, without recourse
Sgd. C
- A dishonored the instrument due to forgery, all
other parties were given a Notice of Dishonor
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Examples of Section 65 (Qualified Indorser):
(a) Forgery
(b) Instrument was stolen
(c) Minority, Insanity
(d) Fraud, knowledge of any defense, this can
encompass any defense that the indorser can
disown knowledge of except those which are glaring
such as material alteration or incomplete but
delivered (there are blanks, you can see it)
NOTE: General indorser has so many liabilities. Section 66
(d) is our basis for attaching secondary liability, he cannot
disown knowledge, he cannot say there is forgery, or that
prior parties are minors, insane, etc.
Irregular Indorsement (Anomalous)
Sec. 64. Liability of irregular indorser. - Where a
person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable
as indorser, in accordance with the following rules:
a) If the instrument is payable to the order of a third
person, he is liable to the payee and to all
subsequent parties.
b) If the instrument is payable to the order of the
maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the maker or
drawer.
c) If he signs for the accommodation of the payee, he
is liable to all parties subsequent to the payee.
Q: Distinguish general indorser from irregular indorser.
A: A general indorser is liable even to holders in due course
or not in due course while an irregular indorser’s liability
extends only to those enumerated.
Q: Who are the parties primarily liable in a negotiable
instrument? What are the warranties of the maker and the
acceptor?
A:
Warranties of Maker:
(1) That he will pay the note according to its original
tenor to the payee, or to the holder, or to any
subsequent indorser who may be called upon to
pay the holder thereof.
(2) That he admits the existence of the payee and his
then capacity to indorse.
Warranties of Acceptor:
(1)
(a) the existence of the drawer
(b) the genuineness of the drawer’s signature
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(c) drawer’s capacity and authority to draw the
instrument
(2)
(a) the existence of the payee
(b) the payee’s capacity to indorse.
Other Indorsements:
o Joint – two or more indorsees
o Facultative – waiver of presentment, notice or
protest (holder need not give you notice of dishonor
for secondary liability)
Joint Indorsement – two indorsees or more negotiate the
instrument
Q: Is this multiplicity of suits?
A: No. So long as the amount involved is NOT split, even if
there are two or more indorsees, it’s alright.
Q: If they are both indorsees, should they both indorse?
A: Yes, as a general rule. The exceptions are that (1) they are
partners, and (2) on is authorized by the other to indorse.
Facultative Indorsement – enlarges liability by waiving
the right to notice of dishonor or right to undergo
presentment (Sec. 111, NIL)
Q: What happens if condition is not fulfilled?
A: Can waive condition and pay
Effects if:
(a) Order instrument is not indorsed
- Negotiation is incomplete and the instrument
is in effect merely signed;
- Transferee acquires the right to have
indorsement that negotiation takes effect and
the transferee purpose of determining whether
the transferee is a HDC, the requisites of Sec.
52, NIL must be present at the time of
indorsement
(b) Bearer instrument is specially indorsed
- It may be negotiated by delivery
- But the person indorsing specially is liable as
indorser to only such holders who acquired
title through his indorsement
Q: How do you negotiate an order instrument? What if an
order instrument is not indorsed, is there a valid
negotiation?
A: An order instrument is negotiated by indorsement plus
delivery. If an order instrument is not indorsed, there is no
valid negotiation but just a mere equitable assignment.
There is transfer but lesser rights.
Transferee merely steps into the shoes of the
transferor.
Q: Can the transferee demand that indorsement be made?
A: Yes, that is one of the rights of a transferee, to demand
indorsement, if what is assigned to him is an order
instrument which needs to be indorsed but is merely
delivered.
Q: May he be a holder in due course? The transferee?
A: Yes, he may be a holder in due course provided all the
requisites under Sec. 52 are present. If there are
circumstances which happened before indorsement was
made which constitute a violation of Section 52, he will not
become a holder in due course.
Striking Out Indorsement
Q: What indorsements may be stricken out?
A: Those which the holder thinks is not material to his title.
Example:
o From A to B it was specially indorsed and delivered.
o From B to C it was indorsed in blank coupled with
delivery.
o From C to D it was indorsed again in blank coupled with
delivery.
o From D to E it was merely delivered.
o From E to F it was also delivered.
Q: Was there proper negotiation of the order instrument?
A: Yes.
Q: What indorsements may be stricken out and what is the
effect of striking out an indorsement?
A: The indorsements in blank of B to C coupled with delivery
converted the instrument into a bearer instrument, thus,
the indorsement of C in blank coupled with delivery to
D is no longer needed because the instrument may be
negotiated by mere delivery, thus, it may be stricken out.
- The indorser whose indorsement is stricken out will be
relieved from liability and all subsequent indorsers,
C, as the person whose indorsement was stricken out,
and D, as a subsequent indorser, will be relieved from
liability. E is not relieved from liability because he
did not indorse, he merely delivered.
- Otherwise stated, the indorsement from C to D is no
longer needed because at the time B negotiated the
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instrument to C, the instrument became a bearer
instrument which may be negotiated by mere delivery,
the blank indorsement of C to D is not necessary.
NOTE: You need to indorse and deliver an order instrument.
If you strike out the indorsement of A, only delivery will be
left. There will be no proper negotiation because the
instrument is originally an order instrument and you
cannot negotiate an order instrument without
negotiation and delivery, A’s indorsement cannot be
stricken out. However, if it was a bearer instrument, there
is no problem in striking out those who indorsed specially
or generally (e.g. A) because the instrument may be
negotiated by mere delivery.
The problem with striking out indorsements, you will be
lessening the parties from whom you can demand payment.
Q: From whom can he collect?
A: A, B and E.
Example:
o A to B is special coupled with delivery.
o B to C is blank indorsement coupled with delivery.
o C to D is blank indorsement coupled with delivery.
o D to E is special indorsement coupled with delivery.
o E to F is blank indorsement coupled with delivery.
o From F to G merely delivered.
Q: Was there proper negotiation? What indorsements may
be stricken out?
A: From B to C it was converted into a bearer
instrument, the indorsement of C to D may be stricken
out because the instrument can be negotiated by mere
delivery. From D to E it was converted into an order
instrument. From E to F it was converted into a bearer
instrument. And from F to G it was negotiated by mere
delivery, thus there was proper negotiation.
Q: Who are relieved from liability?
A: C, the person whose indorsement was struck out, and D
and E as subsequent indorsers.
Q: From whom can G collect?
A: A, B, and F.
Example: Payable to order instrument.
• A→B→C→D→E→F
1) B indorsed specially to C
2) C indorsed in blank to D
3) D indorsed in blank to E
4) E delivered to F
Q: Is there an indorsement that may be stricken out?
A: YES. Strike out D to E. E merely delivered, therefore he is
not subsidiarily liable.
Sec. 48. Striking out indorsement. - The holder may at
any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement
is struck out, and all indorsers subsequent to him, are
thereby relieved from liability on the instrument.
Q: Who can strike out instruments?
A: Holder (Sec. 48, NIL)
Q: Whose indorsement may be stricken out?
A: Those not necessary to the title of the holder (Sec. 48.
NIL)
Q: What’s the effect if indorsement of a party has been
stricken out?
A: The indorser/s will be relieved from liability
#2 – C → D: converted it to a bearer instrument
#3 – D → E:
- D could have simply negotiated by delivery alone
- Mere delivery would have sufficed
- Since it is blank, if you remove that, what remains
is that it’s still delivered
#4 – E → F: F has the right to strike the indorsement
- As the holder, he presents the instrument for
payment and lessen the parties when he can
demand payment = relieve
- Intentionally cancel signature (“strike out”; not
expressly written)
NOTE: You need to know the instrument before striking out.
Whether it is an order or bearer?
NOTE: Only a holder can strike.
o In the end, he will suffer
o He can only claim from the parties he did not
strike/discharge
PRESENTMENT FOR PAYMENT
- Necessary in order to charge the drawer and indorsers.
It is not necessary to charge the persons primarily
liable on the instrument.
- Needed in order for the holder to preserve his right of
recourse against the party secondarily liable.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Requisites:
• By: the holder or his authorized representative
• To:
a) the party primarily liable (PPL) on the instrument,
or
b) if he is absent or inaccessible, to any person found
at the place where the presentment is made.
• At: The date of maturity. If the instrument is payable
on demand, presentment of payment must be made:
a) Within a reasonable time after issue in the case of
Promissory Note, and
b) Within a reasonable time after the last indorsement
or negotiation, if it is a Bill of Exchange.
NOTE: According to usual banking practice, if the
instrument is a check, presentment for payment must be
made six months from the date of the issuance of the
check or 180 days, otherwise, it will be deemed a stale
check.
• When: At a reasonable hour on a business day. If
maturity date falls on a Saturday, Sunday or holiday,
presentment must be made within a reasonable hour
on the next following business day.
- If the instrument is payable on demand, presentment
may be made until 12:00 noon Saturday, at the option
of the holder.
NOTE: If place of payment is a bank, presentment for
payment must be made within regular banking hours. If
payor has no funds in the bank, presentment before the
bank closes is sufficient.
RATIO: to give the person making payment the
opportunity to make his deposit
• Where:
a) Where a place of payment is specified in the
instrument and it is there presented, or (specified)
b) Where no place of payment is specified, but the
address of the person to make payment is given in
the instrument and it is there presented; (no
place)
c) Where no place of payment is specified and no
address is given, then at the usual place of business
or residence of the person to make payment; (no
place nor address)
d) Wherever the person to make payment can be
found or at his last known place of business or
residence (wherever payor found)
NOTE: If PPL expresses his ability and willingness to pay the
instrument at the special place specified in the instrument,
such is deemed a tender of payment. And includes the
presentation or exhibition of the negotiable instrument to
the PPL for verification purposes.
Effects of the foregoing – The holder need not make a
presentment for payment to charge the party primarily
liable because he can sue the latter directly in case of non-
payment. However, the effect of such non-presentment for
payment will discharge all the parties secondarily liable
inasmuch as their liability is premised on the dishonor of
the instrument by non-payment and the corresponding
Notice of Dishonor given to them.
Q: Who presents instrument for payment?
A: Holder
Q: To whom do you present it?
A: Depends on the negotiable instrument.
o Bill of Exchange – Acceptor
o Promissory Note – Payee
Q: When do you present the instrument for payment
A: General rule in on the maturity date, if given.
o Bill of Exchange – reasonable time after last
indorsement
o Promissory Note – reasonable time after issue
Q: Where do you present for payment?
A: If known, where the place of payment is specified in the
instrument and it is there presented
Example: PN with place of presentment
I promise to pay A or order 1000php at Sampaloc, Manila
Sgd. B
- If place is not specified presentment is made either to
the residence or business of person
Tender of Payment – PPL offers/expresses willingness
and ability to pay for the value of the instrument at the
special place specified in the instrument
Manner of Presentment
1. Presentment where principal debtor is dead
o If PPL is dead before maturity of the instrument and a
place of payment is specified, holder must make
presentment at the specified place.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
o If no place of payment specified, presentment must be
made to the personal representative of the deceased
PPL.
o If after reasonable diligence to locate him, the
personal representative cannot be found, presentment
for payment is excused.
o Or if there is no such personal representative, to the
estate of the deceased.
2. Presentment to persons liable as partners
o Presentment must be made:
a) To Anyone of the partners;
b) If there is a Dissolution of the partnership before
maturity date of the instrument, presentment may
still be made to any one of the partners;
c) If one of the partners Dies before maturity date,
presentment must be made to the surviving
partner;
d) If a place of payment is Specified, presentment
must be made at such specified place to any one of
the partners present thereat.
3. Presentment to joint debtors
o Presentment must be made:
a) To All of the joint debtors;
b) If one Joint debtor dies before maturity,
presentment must be made to the surviving joint
debtors;
c) If there is a Place of payment specified,
presentment must be made to ALL joint debtors at
such specified place of payment
XPN: One of the joint debtors is duly authorized to accept
the presentment for all of them.
When Excused
1. For both PN and BE:
a) Where after the exercise of reasonable diligence
presentment as required by this Act cannot be
made;
b) Where the drawee is a fictitious person;
c) Waiver of presentment, express or implied.
2. For PN:
a) Presentment for payment is not required in order to
charge an indorser or payee where the instrument
was made or accepted for his accommodation and
he has no reason to expect that the instrument will
be paid if presented.
b) Presentment for payment need no longer be made
to the accommodation maker.
3. For BE:
a) To charge drawer – The drawer, through some acts
of his, does not expect or require the drawee or
acceptor to pay the instrument, in which case, the
drawer becomes primarily liable on the
instrument. Presentment for payment need not be
made to the drawee in order to charge the drawer.
Examples: When the drawer stops payment of the check he
issued, when the drawer’s bank balance is less than the
amount of the check he issued, when the drawer commits
fraud by issuing a check knowing that he has no funds in the
bank to meet it
b) Waiver of protest – A waiver of protest, whether in
the case of a foreign bill of exchange or other
negotiable instrument, is deemed to be a waiver
not only of a formal protest, but also of
presentment and notice of dishonor.
c) Once the drawee dishonors the B/E by non-
acceptance, presentment for payment is no longer
necessary to hold the PSL liable.
Q: When is delay excused?
A: When due to fortuitous events or force majeure or
events which are not imputable to the fault, misconduct or
negligence of the holder, he cannot make a presentment
for payment to the party primarily liable on maturity
date, the holder is excused for his failure to make
presentment on due date, but he is obliged to make
presentment immediately as soon as the cause of the
delay ceases. Otherwise, the PSL will be discharged.
When Instrument Considered Dishonored and its
Effects
o The instrument is dishonored by non-payment when:
a) It is duly presented for payment and payment is
refused or cannot be obtained; or
b) Presentment is excused, and the instrument is
overdue and unpaid.
NOTE: In the foregoing cases, Notice of Dishonor by non-
payment to PSL is proper. The holder of a negotiable
instrument acquires the right of recourse against PSL only
after he has given Notice of Dishonor, either by non-
acceptance or non-payment, to all of them within 24 hours
after the dishonor by the PPL.
Effect of failure: PSL will be automatically
discharged.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
PAYMENT
General Rule: Payment in due course by on or behalf of
the principal debtor, or by the party accommodated, where
the instrument is made or accepted for accommodation,
will discharge the negotiable instrument.
Elements of a Payment in Due Course:
1. Must be made at or after maturity of the instrument
– Payment before maturity is not a payment in due
course and consequently, will not discharge the
instrument. Rather it is deemed a re-negotiation of the
instrument to the PPL who may choose to negotiate it
to new parties but not to parties subsequent to him.
2. To the holder thereof – Payment to a person other
than the holder is at the risk of the party so paying if the
person was not authorized by the holder to receive
payment. It is not a payment in due course.
3. Must be made in good faith and without notice that
the title of the holder is defective
NOTE:
a) It is the party making the payment who must be in
good faith
b) Payment by a maker of the note before maturity date
does not constitute payment in due course as to
discharge the instrument, but rather it gives the
maker the right to re-negotiate it to new parties but
not to subsequent parties.
c) Payment by PPL may be made to the authorized
representative of the holder as to discharge the
instrument. While possession of the instrument by
the maker is prima facie evidence of payment made
by him, such is controvertible when the facts show
that surrender of the instrument to the maker is
without authority
Instances When Presentment for Payment is Not
Required:
Sec. 79. When presentment not required to charge the
drawer. - Presentment for payment is not required in
order to charge the drawer where he has no right to
expect or require that the drawee or acceptor will
pay the instrument.
Sec. 80. When presentment not required to charge the
indorser. - Presentment is not required in order to charge
an indorser where the instrument was made or
accepted for his accommodation and he has no reason
to expect that the instrument will be paid if presented.
 Sec. 82. When presentment for payment is excused. -
Presentment for payment is excused:
(a) Where, after the exercise of reasonable diligence,
presentment, as required by this Act, cannot be
made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Purpose:
- Whether PPL will pay or not
- If not, then send Notice of Dishonor to PSL
PRESENTMENT FOR ACCEPTANCE:
Q: When required? (Sec. 143)
A:
a. Where the bill is payable after sight; or in any case
where presentment for acceptance is necessary in
order to fix the maturity of the instrument
b. Where the bill expressly stipulates that it shall be
presented for acceptance; or
c. Where the bill is drawn payable elsewhere than at the
residence of place of business of the drawee.
Q: When excused?
A:
Sec. 148. Where presentment is excused. - Presentment
for acceptance is excused and a bill may be treated as
dishonored by non-acceptance in either of the following
cases:
(a) Where the drawee is dead, or has absconded, or is
a fictitious person or a person not having
capacity to contract by bill.
(b) Where, after the exercise of reasonable diligence,
presentment cannot be made.
(c) Where, although presentment has been
irregular, acceptance has been refused on some
other ground.
Q: To whom?
A:
1. The drawee himself or to any person authorized to
accept or refuse acceptance on his behalf; or
2. If there are two or more drawees who are not partners,
presentment must be made to all of them, unless
a. One drawee has the authority to accept or refuse
acceptance for all; or
b. The drawees are partners, in which case
presentment may be made to any one of the
partners.
3. If the drawee is dead, presentment may be made to:
a. His personal representative, if there is one; or
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
b. Presentment may be excused under Sec. 148.
4. If the drawee is insolvent, presentment may be made to:
a. The insolvent drawee himself; or the drawee’s
trustee or assignee.
Q: When?
A: Within a reasonable hour on a regular business day and
before the bill is overdue.
Presentment of Acceptance may be made on a Saturday
under the following rules.
1. If the Saturday is a holiday – presentment for
acceptance may be made on the following business
day.
2. If Saturday is not a holiday – presentment for
acceptance may be made before 12 o’clock on that day.
Q: Where?
A:
1. At the place of business or residence of the drawee, if
known, or
2. If the residence is different from place of business,
presentment may be made at either place; or
3. If place of payment is designated on the bill, and
drawee’s residence or place of business is unknown,
presentment may be made at the place of payment.
ACCEPTANCE:
Q: What are the requisites?
A:
1. Acceptance must be in writing.
XPN: Constructive acceptance. (24 hour lapse)
2. It must be duly signed by the drawee; in which case he
becomes the acceptor.
3. It must not express that the drawee will perform his
promise by any other means than payment of money.
Sec. 132. Acceptance; how made, by and so forth. - The
acceptance of a bill is the signification by the drawee of
his assent to the order of the drawer. The acceptance
must be in writing and signed by the drawee. It must
not express that the drawee will perform his promise
by any other means than the payment of money.
Q: What if 24 hours lapses?
A: Constructive Acceptance – neglected, omitted by accident;
decision for acceptance was not presented within 24 hours.
Q: How made?
A:
1. On the face of the bill by writing the word “accepted”
and signed by the drawee
2. On a separate paper other than the bill itself
3. Separately even before the bill itself is drawn.
Kinds of Acceptance
1. Actual acceptance
2. Constructive Acceptance
3. General Acceptance
4. Qualified Acceptance
i. Conditional
ii. Partial
iii. Local
iv. Qualified as to time
v. Acceptance by one or more of the drawees, but not
all
→ The holder may treat the instrument as dishonored
because the rule is that acceptance must be unconditional.
→ However, holder must communicate his dissent within a
reasonable time.
Sec. 139. Kinds of acceptance. - An acceptance is either
general or qualified. A general acceptance assents
without qualification to the order of the drawer. A
qualified acceptance in express terms varies the effect of
the bill as drawn.
Sec. 140. What constitutes a general acceptance – An
acceptance to pay at a particular place is a general
acceptance unless it expressly states that the bill is to be
paid there only and not elsewhere.
Sec. 141. Qualified acceptance. – An acceptance is
qualified which is:
(a) Conditional; that is to say, which makes payment
by the acceptor dependent on the fulfillment of a
condition therein stated;
(b) Partial; that is to say, an acceptance to pay part only
of the amount for which the bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a
particular place;
(d) Qualified as to time;
Rights of Parties to Qualified Acceptance
1. The drawee – he may or may not accept the bill
drawn against him, but if he accepts it, he may impose
any condition on his acceptance, and he becomes
liable according to the tenor of his acceptance.
2. The holder – has the right to demand a general or
unqualified acceptance, and if the drawee insists in
making a qualified acceptance, the holder:
a) May treat the bill as dishonored and then give a
Notice of Dishonor by non-acceptance to PSL; or
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
b) May accept the qualified acceptance but MUST
immediately notify the PSL of such qualified
acceptance.
3. The parties secondarily liable – upon receipt of the
holder’s notice (as mentioned in the foregoing)
a) Expressly give their assent to the qualified
acceptance
Effect: they become liable to the holder if the
drawee/acceptor dishonors the bill by non-payment
b) Disagree to the qualified acceptance and MUST
notify the holder of their dissent within a
reasonable time after notice, otherwise they will
be deemed to have given their assent
NOTE: Failure of the holder to give notice by the holder of
the acceptance of drawee’s qualified acceptance to the PSL
will discharge the PSL from their liability.
DISHONOR:
Q: When is an instrument deemed dishonored?
A: The instrument is dishonored by non-payment when:
1. It is duly presented for payment and payment is refused
or cannot be obtained; or
2. Presentment is excused and the instrument is overdue
and unpaid.
The instrument is dishonored by non-acceptance when:
1. When it is duly presented for acceptance, and such an
acceptance as prescribed by this Act is refused or
cannot be obtained; or
2. When presentment for acceptance is excused, and the
bill is not accepted.
Q: If the instrument is for P1,000 and the drawee accepts it
only for P800, is the instrument deemed dishonored?
A: If there is a qualified acceptance, be it local, qualified as
to time, and the like, the holder may treat the instrument as
dishonored.
Q: Who may give a Notice of Dishonor?
A: The parties who may give a NoD are the following:
1. The holder himself – must give notice to all PSL within
24 hours after the dishonor.
2. By another party in behalf of the holder – may be the
holder’s agent or authorized representative, or a third
party.
3. By any of the Parties secondarily liable who may be
compelled to pay the holder – a PSL who received NoD
from the holder may, in turn, give NoD to all the PSL
prior to him within 24 hours after he receives the
Notice from the Holder.
NOTE: The NoD given by the PSL inures to the benefit of the
holder. The PSL cannot give notice to subsequent parties,
they are deemed discharged.
4. By any party in behalf of the PSL mentioned in #3
above.
Q: A, maker, issued a PN in favor of B, who negotiated it to
C, C to D, then D to E. E presented the instrument for
payment to A, however, A refused to pay on the ground of
insolvency. To whom shall E give the notice of dishonor?
A: E must furnish every party secondarily liable a notice of
dishonor.
Example: Bill of Exchange
A (maker) → B (payee) → C → D → E → F (holder demanding
payment) ; X (drawee, dishonors the instrument)
Q: To whom will F send NoD?
A: B, C, D, and E
Q: What if F as holder sends a NoD to D only?
A: D in turn may give a NoD to all the PSL prior to him within
24 hours after he receives the NoD from F (holder). D may
give a NoD to A, B, and C only as they are prior to him
(Sec.90)
→ Reimbursement is always backwards, thus, E is excluded.
NOTE: PSL cannot give NoD to subsequent parties (in this
example, letter E) they are deemed discharged.
NOTE: No NoD = discharged, excused from liability.
Q: When is the instrument discharged? *
A:
Sec. 119. Instrument; how discharged. - A negotiable
instrument is discharged:
(a) By payment in due course by or on behalf of the
principal debtor;
(b) By payment in due course by the party
accommodated, where the instrument is made or
accepted for his accommodation;
(c) By the intentional cancellation thereof by the
holder;
(d) By any other act which will discharge a simple
contract for the payment of money;
(e) When the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
KWEEN NOTES [2020-2021] – NEGOTIABLE INSTRUMENTS LAW [ESCALANTE]
Q: How will the principal debtor be the holder of the
instrument? (Sec. 119, e)
A: A → B → C → D → E → F (now the creditor); the principal
debtor becomes the holder at or after maturity in his own
right.
- In the person of A, he now becomes the debtor and
creditor.
- If for example, F brings the instrument to A for
acceptance of payment via a service he rendered.
Q: When is a PSL discharged?
A:
Sec. 120. When persons secondarily liable on the
instrument are discharged. - A person secondarily liable
on the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by
the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the
holder's right of recourse against the party
secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to
extend the time of payment or to postpone the
holder's right to enforce the instrument unless
made with the assent of the party secondarily liable
or unless the right of recourse against such party is
expressly reserved.