Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
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OVERVIEW
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Origin
Act 2031, otherwise known as the
Law on Negotiable Instruments was enacted
on February 3, 1911 to provide an easier
way to perform commercial transaction in
the era of trade and commerce.
Since its inception, the Law never
underwent any significant changes, which is
why many legal experts regard it as the
perfect law.
Currently, the Law is considered by
many to be outdated. Only certain
provisions with regards to checks are being
practiced today, and even still said
transactions are being intentionally limited
in order to combat theft and fraud which are
rampant in the country.
Is the Law on Negotiable Instruments a
sub – form of the Law on Obligations and
Contracts?
No. The Law on Negotiable
Instruments is a special law that deals
specifically with negotiable instruments.
The Law on Obligations and
Contracts is a general law that deals partly
with contracts in general.
Although negotiable instruments are
contracts, the Law on Negotiable
Instruments will apply to it first. If there are
vague or inexistent provisions in the law,
then the Law on Obligations and Contracts
will step in. This is why the Law on
Obligations and Contracts will act in a
suppletory or supporting manner to the Law
on Negotiable Instruments.
What is a negotiable instrument?
A negotiable instrument is a written
contract for the payment of money which is
1
intended as a substitute of money, in such a
manner as to give the holder in due course
the right to hold the instrument free from
defenses available to prior parties.
Imagine possessing a gift certificate
of P200.00 which you can use on any store
and on any transaction involving money.
When redeeming (the act of using) the gift
certificate, no actual physical money passed
from one hand to another. Only the
instrument passes hands.
Warning. We cannot immediately
consider the gift certificate mentioned in the
previous paragraph as a negotiable
instrument. In order for the same to be
considered as such, it must satisfy all the
requisites provided by Section 1 of the
Negotiable Instruments Law (NIL).
What are the salient features of
negotiable instruments?
1. It operates as a substitute for money,
2. It is a means of creating and
transferring credit.
3. It facilitates the sale of goods.
4. It increases the purchasing medium
in circulation.
It operates as a substitute for money.
Negotiable instruments replace
money in commercial transactions. For
example, assuming gift certificates are
considered as negotiable instruments, you
can use them to pay for products or services
instead of money. The product / service
provider would accept them as a substitute
for the money they would have received
from you. In this situation, no actual money
transfers from you to the provider.
It is a means of creating and transferring
credit.
Credit is the ability to borrow money
or access goods or services with the
understanding that the principal debtor will
pay later (wikipedia.org).
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
When a person creates a negotiable
promissory note for example, the note
becomes a substitute for money. It serves as
a credit or debt on the part of the maker
while it is considered as a credit or
receivable on the part of the payee. In short,
credit can be considered as liability on the
part of the maker, while income on the part
of the payee (or current holder).
The credit can also be transferred to
the next set of parties by means of
negotiating the promissory note.
It facilitates the sale of goods.
Usually negotiable instruments are
used for commercial transactions. This
implies that there is an exchange of goods or
services for the instrument negotiated. Thus,
negotiable instruments assist in these
transactions when paying with money is not
an option or an inconvenient one.
It increases purchasing medium in
circulation.
Since negotiable instruments create
credit and does not involve money in the
initial stage, it creates a new method of
payment, known as ‘purchasing medium’.
While the common mediums are
paying in cash and applying for credit,
negotiable instruments not only apply for
credit, but also can be transferred to another
person in a unique way. This unique method
is called negotiation.
Are negotiable instruments legal tender?
No, they are not. Negotiable
instruments are substitute for money. They
are not money.
Legal tender is limited to Philippine
peso bills and coins. In addition, Philippine
peso coins are considered legal tender up to
P1,000.00 only with regard to P10.00,
P5.00, and P1.00 coins, and P100.00 with
regard to centavos.
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What are the characteristics of negotiable
instruments?
1. Negotiability
2. Accumulation of secondary
contracts.
Negotiability
Negotiability is what makes
negotiable instruments different from other
commercial documents.
It is that quality or attribute of the
instrument whereby it may pass from one
person to another similar to money, so as to
give the holder in due course the right to
collect on the instrument the sum payable
for himself free from any defect in the title
of any of the prior parties or defenses
available to them among themselves.
Negotiability is determined by
Section 1 of the NIL. If any of the requisite
in the said section is missing, then the
instrument is not negotiable.
In short, negotiability is the transfer
to any holder of an instrument that satisfies
the requisites of Section 1 of the NIL and
gives the holder in due course immunity
from personal defenses which may be raised
by the party liable.
Accumulation of secondary contracts.
While not exclusive to negotiable
instruments alone, accumulation of
secondary contracts transpires during
negotiation of the instrument.
For example, the issuing of the
instrument by the maker or drawer to the
payee is considered as one contract. Should
the payee negotiate the instrument to another
person, it will be considered as another
contract. Should that person negotiate it to a
different person, it counts as another
contract and so on. All these contracts are
secondary contracts subsequent to the
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
original one between the maker / drawer and
the payee.
What is a holder in due course?
A holder in due course is exclusive
to the Law on Negotiable Instruments.
A holder is a holder in due course if
he satisfies Section 52 of the NIL, to wit:
Section 52. What constitutes a holder
in due course. – A holder in due course is a
holder who has taken the instrument under
the following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
before it was overdue, and without notice
that it had been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him he had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
That it is complete and regular upon its
face.
The instrument need not be free from
irregularities. What this requirement means
is that as to the holder, no blank was left
unfilled and any irregularity, alteration,
forgery or the like is not noticeable to said
holder.
Scenario: Aila negotiated a negotiable
instrument to Bing. Unknown to Bing,
Aila altered the amount from P10,000.00
to P100,000.00. Is Bing a holder in due
course?
Yes. Bing is a holder in due course.
The problem shows that he is unaware that
the instrument was altered by Aila. As to
him, the instrument is complete and regular
upon its face.
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That he became the holder of it before it
was overdue, and without notice that it
had been previously dishonored, if such
was the fact.
The NIL requires that the instrument
should be negotiated within a reasonable
time. Checks should be negotiated within six
months from date of issue, else they become
stale and cannot be converted to cash.
If the instrument has a due date (date
up to which it is valid), then the lapse of
such date will make it overdue. While the
instrument being overdue does not affect the
negotiability of an instrument, it may be
used as a defense by the maker, drawer or
drawee in order to avoid liability.
Scenario: An instrument reads “I promise
to pay the bearer P20,000.00 on or before
December 15, 2019.” On December 16,
2019, Doriedel, the current holder,
negotiated the instrument to Jojie. Is Jojie
a holder in due course?
No. Under Section 52, the holder
must take the instrument before it becomes
overdue in order to be a holder in due
course. Here, Jojie became the holder after
the instrument became overdue. Hence, she
cannot be considered as a holder in due
course.
That he took it in good faith and for
value.
Every holder is presumed to have
taken the instrument in good faith and for
value unless it is otherwise shown.
Section 25 of the NIL defines value
as any consideration sufficient to support a
simple contract. Hence, if it can be proven
that there was no consideration or
insufficient consideration on the part of the
holder, then that holder cannot be
considered as a holder in due course and a
personal defense may be raised by the
person liable against him.
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
Scenario: Layla negotiated a negotiable
instrument to Momo. The negotiable
instrument did not state the consideration
of the contract. Is Momo a holder in due
course?
Yes. Momo is a holder in due course.
Every negotiable instrument is presumed to
have been issued for a consideration unless
proven otherwise. At the same time, every
holder is presumed to have taken the
instrument in good faith unless the contrary
is shown. Here, Momo enjoys said
presumptions since the facts did not state
any matter which would put her in bad faith
and / or show that she did not take the
instrument for value.
That at the time it was negotiated to him
he had no notice of any infirmity in the
instrument or defect in the title of the
person negotiating it.
This presupposes that the holder had
no knowledge of any defect in the
instrument before it was negotiated to him.
If he acquires such knowledge after he
became the holder, he will still be a holder
in due course because the provision states
that knowledge should have been acquired
prior to becoming a holder in order for him
to not be considered as a holder in due
course.
Scenario: Before Mojo Jojo became a
holder to the negotiable instrument, his
friend verbally informed him of the
defects of said instrument. Is Mojo Jojo a
holder in due course?
No. He obtained knowledge of
defects of the negotiable instrument before
he became a holder to the same. Hence, he
cannot be considered as a holder in due
course.
Important things to consider:
1. All the requisites in Section 52 must
be present for a holder to be considered as a
holder in due course.
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2. Section 59 provides that every holder
is deemed prima facie to be a holder in due
course unless it is otherwise shown.
Scenario: Alex negotiated a negotiable
instrument to Benny. Benny also
negotiated the same to Carol who took it
in good faith and for value. Is Carol a
holder in due course?
Not correct: Yes, Carol is a holder in due
course because she took it in good faith and
for value.
Correct: Yes. Carol is a holder in due
course. Every person is deemed to be a
holder in due course unless it is otherwise
shown.
Can a holder not in due course be
considered as a holder in due course?
No. A holder not in due course can never be
a holder in due course.
However, if that holder derives his title
through a holder in due course and who is
not a party to any fraud or illegality
affecting the instrument, he will have all the
rights available as if he is a holder in due
course (Section 58).
Scenario: Blossom, a holder in due
course, negotiated the negotiable
instrument to Bubbles. Bubbles knows of
a defect in the instrument but is not a
party to such defect. Is Bubbles a holder
in due course?
No. Bubbles is not a holder in due
course because she had notice of a defect in
the title as provided by Section 52 (d).
However, Bubbles will gain the
rights of a holder in due course because she
derived her title to the instrument from
Blossom who is a holder in due course and
is not a party to the defect of the instrument.
Hence, she is free from personal
defenses which can be raised against her.
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
Scenario: Supposed in the previous
problem, Bubbles negotiated the
instrument to Buttercup who also has
knowledge of the defect but is not a party
to the same. Will Buttercup acquire the
rights of a holder in due course as per
Section 58 of the NIL?
No. Buttercup derived her title to the
instrument from Bubbles who is not a holder
in due course.
Just because Bubbles is enjoying the
rights of a holder in due course by virtue of
Section 58 does not mean that she is also
considered as a holder in due course and that
the title derived from her will allow the next
holder, Buttercup, to enjoy rights of a holder
in due course.
What’s so special about being a holder in
due course?
Being a holder in due course will
make you immune from personal defenses
which may be raised by those liable in the
negotiable instruments, and hence give you
the right to demand from them despite of
said defenses raised.
A holder in due course, however, is
not immune from real defenses.
What are real defenses and personal
defenses?
Real defenses are those that can be
asserted against all holders, including
holders in due course.
Personal defenses are those that can
be asserted against holders who are not
holders in due course.
The effect of raising the defenses is
that, if proper, it will bar the holder
demanding payment from receiving it from
the person who raised the defense.
5
Scenrio: Poh is the current holder of a
negotiable instrument. He demanded
payment from Lala, the maker. Lala
raised the real defense of forgery of her
signature. Will Lala be made liable on the
instrument?
No. Regardless of whether Poh is a
holder in due course or not, Lala’s real
defense will bar all holders from demanding
payment from her. Thus, she cannot be held
liable in this case.
Scenario: Suppose from the previous
scenario that Lala raised the personal
defense that the note was incomplete but
delivered, will she be made liable?
Yes. Lala can still be made liable by
the holder in due course despite her raising a
defense.
Personal defenses will not bar a
holder in due course from demanding
payment.
Here, Poh is deemed to be a holder
in due course (Section 59) since the problem
did not show that he is not a holder in due
course. Thus, the personal defense of
incomplete but delivered instrument will not
bar him from demanding payment.
However, if Poh is a holder not in
due course, then the said personal defense
will bar him from demanding payment.
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CYCLE OF NEGOTIABLE
INSTRUMENTS
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1. Agreement of Parties
2. Making or Drawing of Instrument
3. Issuance of Instrument
4. Acceptance by Drawee of Bill of
Exchange
5. Negotiation of Instrument
6. Presentment for Payment
7. Dishonor
8. Discharge
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
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AGREEMENT OF PARTIES
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Negotiable instruments are contracts.
Always remember that negotiable
instruments are contracts, and therefore
requires consent of the parties in order to be
valid.
If there is incapacity to contract, the
contract is valid but voidable. The same is
true when the consent is vitiated.
If no authority was given or if the
agent acted beyond authority, the contract is
valid but unenforceable.
Incapacity to contract.
Incapacity to contract may either be
due to minority, mental incapacity, or legal
incapacity.
Incapacity to contract is a real
defense that can be raised ONLY by the
person suffering the said incapacity or their
guardians. Other persons cannot raise the
defense of incapacity of another.
Scenario: Maldita, a minor, issued a
negotiable promissory note to Pasikat.
Pasikat negotiated the note to Suplada.
Suplada now demands payment from
Maldita. Can Maldita be made liable on
the negotiable instrument?
No, Maldita cannot be made liable
on the instrument by reason that she is a
minor and minority is a real defense. Even if
Suplada is a holder in due course, the
defense will bar her from demanding
payment from Maldita.
(Take note however that if Pasikat
will be made liable, she can still sue
Maldita through her parents for damages
under the Law on Obligations and
Contracts.)
6
Scenario: Suppose in the previous
scenario, Pasikat also raised the defense
of minority of Maldita. Will the defense
prosper?
No, it will not. The defense of
incapacity to contract can only be raised by
the person suffering from said incapacity or
their legal guardians.
Here, Pasikat is neither a person
suffering from incapacity nor a legal
guardian to Maldita. Hence, she cannot raise
the defense of incapacity to contract.
What are other instances that a person is
incapacitated to contract?
1. When the person is insane or
demented;
2. When the person is a deaf – mute
who do not know how to write;
3. When the person is under the state of
drunkenness or hypnotic spell; and
4. When the person is convicted of a
crime involving moral turpitude.
Violence.
There is violence when in order to
wrest consent, serious or irresistible force is
employed (Article 1335, Oblicon).
The force must be serious or
irresistible. If it is not, then the force cannot
be considered as violence, and hence cannot
be considered to have vitiated consent.
Scenario: Kitana is being coerced by
Mileena to issue a negotiable instrument
in favor of the latter. Every time the
former refuses, Mileena would slightly
pinch her cheeks. Finally, Kitana relents
and issued the instrument. Mileena then
negotiated the same to Tanya. Tanya now
demands payment from Kitana. Can
Kitana raise the defense of violence in
order to avoid liability?
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
No. In order for violence to be
present, the force employed must be serious
or irresistible. Here, the force employed by
Mileena which is slightly pinching Kitana’s
cheeks is neither serious nor irresistible.
Hence, no violence is present and Kitana
cannot raise the same as a defense.
Scenario: Suppose in the previous
scenario, Mileena would instead hit
Kitana’s cheeks with a metal fan. Can
Kitana raise the defense of violence even
though Tanya is a holder in due course?
Yes. Kitana may raise the defense of
violence. The force employed by Mileena is
serious and irresistible this time.
Also, since violence is a real defense,
it can be raised against a holder in due
course. Here, Tanya, a holder in due course,
cannot go after Kitana because the real
defense of violence will bar her from doing
so.
Scenario: Can Mileena raise the defense
of violence if Tanya would demand
payment from her?
No. She cannot. Only the person
suffering from the violence employed can
raise the real defense in order to escape
liability.
Intimidation.
There is intimidation when one of
the contracting parties is compelled by a
reasonable and well – grounded fear of an
imminent and grave evil upon his person or
property, or upon the person or property of
his spouse, descendants or ascendants, to
give his consent (Article 1335, Oblicon).
In order for intimidation to be
considered, the following elements must be
present:
1. It must produce a reasonable and
well – grounded fear of an evil;
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2. The evil must be imminent and
grave;
3. The evil must be upon his person or
property, or that of his spouse,
descendants, or ascendants; and
4. It is the reason why he enters into a
contract (De Leon).
Scenario: Clover wants Mandy to issue a
negotiable promissory note in favor of
her. The former threatens the latter that
if she does not comply, she will destroy all
of Mandy’s expensive make – up
collection. Scared, Mandy issues a
negotiable instrument to Clover. Clover
negotiates the same to Sam, and Sam to
Alex. Alex finally negotiate the note to
Jerry, a holder in due course. Jerry now
demands payment from Mandy. Can
Mandy raise the defense of intimidation?
Yes. Mandy can raise the defense of
intimidation. All of the elements of
intimidation are present in this case.
First, the threat produced a
reasonable and well – grounded fear of an
evil, which is the fear of destruction of
personal property.
Second, the evil must be imminent or
grave. Here, the evil is grave because
Mandy’s make – up collection is expensive,
hence cannot be easily replaced.
Third, the evil must be upon her
person or her property, or that of her spouse,
descendants, or ascendants. Here, the evil is
upon Mandy’s property.
Finally, it is the reason why she
enters into the contract.
Since intimidation is a real defense,
it can be raised against holders in due
course. Thus, Jerry cannot make Mandy
liable in this case.
Fraud in Factum / Fraud in Esse
Contractus / Fraud in Execution
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
It exists in those cases in which a
person, without negligence, has signed an
instrument which was, in fact, a negotiable
instrument, but was deceived as to the
character of the instrument and without
knowledge of it (De Leon).
There is fraud in factum where the
person has no intention of making, issuing
or signing a negotiable instrument.
Fraud in factum is a real defense.
Scenario: Taylor Swift is visiting Iloilo
City for her concert tour. Selena, a fan of
hers, asked for an autograph. Because of
the commotion, Taylor Swift signed the
bottom of the paper provided by Selena.
Seeing an opportunity, the latter wrote a
negotiable instrument on the upper
portion of the paper with her or her order
as payee. She then demanded payment
from Taylor Swift. What defense can
Taylor Swift raise in this case?
Taylor Swift can raise the defense of
fraud in factum.
There is fraud in factum if a person
has signed an instrument without the
intention of making, issuing or signing a
negotiable instrument.
Here, she had no intention of signing
a negotiable instrument. She only signed her
name on the blank paper as an autograph.
Hence, Taylor Swift can raise the defense of
fraud in factum.
Note: Only the person defrauded can raise
the defense of fraud in factum.
Important: Incapacity to contract, violence,
intimidation and fraud in factum need not
occur in the initial stages of the life of a
negotiable instrument. It may also occur in
other stages like negotiation.
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MAKING OR DRAWING OF
INSTRUMENT
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8
What are the kinds of negotiable
instruments?
1. Promissory note
2. Bill of exchange
What is a promissory note?
A negotiable promissory note within
the meaning of this Act is an unconditional
promise in writing made by one person to
another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable
future time, a sum certain in money to order
or to bearer (Section 184).
Who are the parties to a promissory note?
1. Maker – the person who makes and
issues the promissory note.
2. Payee – the person in whose favor
the promissory note was issued.
What is a bill of exchange?
A bill of exchange is an
unconditional order in writing addressed by
one person to another, signed by the person
giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or
determinable future time a sum certain in
money to order or to bearer (Section 126).
Who are the parties to a bill of exchange?
1. Drawer – the person who draws and
issues the bill of exchange.
2. Drawee – the person being ordered
by the drawer to pay on the bill of
exchange.
3. Payee – the person in whose favor
the bill of exchange was issued.
What is a check?
A check is a bill of exchange drawn
on a bank payable on demand (Section 185).
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
Certified check.
Where a check is certified by the
bank on which it is drawn, the certification
is equivalent to an acceptance (Section 187).
This is because the check is
guaranteed to be cashed upon demand for
payment. Usually, checks are certified in
order to find out if there are sufficient funds
on the account. Should there be sufficient
funds, the bank set aside these funds in order
to guarantee a successful encashment later
on.
When can a bill of exchange be treated as
a promissory note?
Where in a bill the drawer and
drawee are the same person or where the
drawee is a fictitious person, or a person not
having the capacity to contract, the holder
may treat the instrument, at his option, either
as a bill of exchange or a promissory note
(Section 130).
To simplify, the holder may treat the
bill of exchange as such or as a promissory
note when:
1. The drawer and drawee are the same
person;
2. The drawee is a fictitious person; or
3. The drawee has no capacity to
contract.
Scenario: Prince Charming issued a bill
of exchange in favor of Snow White and
placed himself as the drawee. What is the
consequence of this action?
Snow White can treat the bill as a
bill of exchange or a promissory note at her
option.
The NIL provides that if the drawer
and the drawee are the same person, the
holder can opt to treat the bill as a bill of
exchange or a promissory note.
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Scenario: Jack issued a bill of exchange in
favor of Rose and placed John Wick as
the drawee. John Wick is a character of a
movie under the same name. What is the
consequence of this action?
Rose can treat the bill as a bill of
exchange or a promissory note at her option.
The NIL provides that if the drawee
is a fictitious person, the holder can opt to
treat the bill as a bill of exchange or a
promissory note.
Here the drawee John Wick is a
character of a movie, hence he is fictitious.
Therefore, Rose can treat the bill as a bill of
exchange or a promissory note at her option.
Scenario: Lynai issued a bill of exchange
in favor of Gian and placed Mikoy as the
drawee. Mikoy is only 5 months old.
What is the consequence of this action?
Gian can treat the bill as a bill of
exchange or a promissory note at his option.
The NIL provides that if the drawee
has no capacity to contract, the holder can
opt to treat the bill as a bill or exchange or a
promissory note.
Here, Mikoy is only five months old.
Hence, he has no capacity to contract for
being a minor. Thus, Gian can treat the bill
as a bill of exchange or a promissory note at
his option.
What is the importance of Section 130?
The importance of Section 130 is to
give the holder a means to easily demand
payment for the instrument.
The holder will have difficulty in
collecting payment should the drawee turn
out to be fictitious or incapacitated.
Therefore, he can treat the bill of
exchange as a promissory note to make the
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
drawer primarily liable on the instrument
instead.
Take note that the option to treat the
bill as a promissory note is given to the
holder and not to the drawer.
What are the differences between a
promissory note and a bill of exchange?
AS TO PARTIES. There are only
two parties to a promissory note (maker and
payee) while there are three parties to a bill
of exchange (drawer, drawee, and payee).
AS TO NATURE. A promissory
note is an unconditional promise by the
maker to pay money. A bill of exchange is
an unconditional order by the drawer to the
drawee to pay money.
AS TO LIABILITY. The maker is
primarily liable to a promissory note. The
drawer is secondarily liable to a bill of
exchange. The drawee is the one who is
primarily liable to a bill of exchange if he
should accept the same.
AS TO APPLICABILITY OF
SECTION 1 OF THE NIL. The first four
requisites are applicable to a promissory
note. All the requisites of Section 1 are
applicable to a bill of exchange.
AS TO PRESENTMENT. Only one
presentment is made in a promissory note
which is presentment for payment. There are
two presentment made in a bill of exchange
which are presentment for acceptance by the
drawee and presentment for payment.
What are the elements or requisites of
negotiability?
An instrument to be negotiable must
conform to the following requirements:
1. It must be in writing and signed by
the maker or drawer;
10
2. It must contain an unconditional
promise or order to pay a sum certain
in money;
3. It must be payable on demand or at a
fixed or determinable future time;
4. It must be payable to order or to
bearer; and
5. Where the instrument is addressed to
a drawee, he must be named or
otherwise indicated therein with
reasonable certainty (Section 1).
The first four elements must be
present in a promissory note and all five
elements must be present in a bill of
exchange for both instruments to be
negotiable.
Are all promissory notes / bills of
exchange negotiable instruments?
No. Only those that satisfy the
elements provided in Section 1 are
considered negotiable instruments.
It must be in writing and signed by the
maker or drawer.
1. It is not necessary that the instrument
should be written on paper. What’s
necessary is that it should be in writing.
Therefore, there is no such thing as an oral
negotiable instrument
.
2. A negotiable instrument can be
written on any solid surface with any writing
medium. It does not have to be handwritten.
3. It is not necessary that the maker or
drawer would be the ones to make or draw
the instrument, so long as they are the ones
who sign the same.
4. If the maker or drawer are unable to
affix their signature, they can authorize
someone to sign in behalf of them or to
assist them in affixing their thumbmark on
the instrument.
5. The maker or drawer can affix a
signature other than his usual signature on
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
the negotiable instrument so long as he
intends that signature to be his own when
signing said instrument.
6. The parties to the instrument may
use any language so long as they could
understand it. They may use any terms or
wordings that are sufficient which clearly
indicate an intention to conform to the
requirements of the NIL (see Section 10)
It must contain an unconditional promise
or order to pay a sum certain in money.
1. Any word, term, or phrase may be
used as long as it signifies a promise (for
promissory notes) or order (for bills of
exchange) to pay a sum certain in money.
2. An order is not a mere request, but a
demand from the drawee to pay the payee
(De Leon).
3. The instrument must be
unconditional, that is, it must not be subject
to any condition or contingency (unless
allowed by law). In other words, the note or
bill must be payable absolutely (De Leon).
4. The law speaks of “a sum certain in
money”, not legal tender. Therefore, foreign
currencies are applicable in negotiable
instruments.
5. The total amount involved must
appear on the instrument, or at least be
determinable or capable of being correctly
ascertained.
Scenario: The amount that appear on the
instrument is “twelve months worth of
the Philippine minimum wage”. Is the
instrument negotiable?
No, the instrument is not negotiable
because the sum is not certain in money.
The Philippine minimum wage
varies between regions. Since the region to
be applied was not specified, the exact
11
amount on the instrument cannot be
ascertained.
Scenario: The instrument reads:
“Darling, pay P10,000.00 to Paul or his
order. Then reimburse yourself from my
BDO account. Signed, Darwin.” Is the
promise or order unconditional?
Yes. The order is unconditional.
An unqualified order or promise to
pay is unconditional though coupled with an
indication of a particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount
(Section 3(a)).
Here, Darling, the drawee, is
required to pay Paul, the payee, with the
money in her possession first before
reimbursing herself with the paid amount
from the account of Darwin, the drawer.
Scenario: The instrument reads: “I
promise to pay P10,000.00 to Pauline or
bearer. This agreement stems from a
previous loan I borrowed from her
involving the same amount. Signed,
Madeline.” Is the promise or order
unconditional?
Yes, the promise is unconditional.
An unqualified order or promise to
pay is unconditional though coupled with a
statement of the transaction with gives rise
to the instrument (Section 3(b)).
Here the instrument is coupled with
the statement “this agreement stems from a
previous loan I borrowed from her involving
the same amount” which is a statement of
the transaction which gives rise to the
instrument.
Scenario: “Deedee S., pay P10,000.00 to
P. Noi or his order using the funds from
my Land Bank account. Signed, Duter
T.” Is the promise or order
unconditional?
 Hua Siong College of Iloilo
COMPACT REVIEWER
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No. The order is NOT unconditional.
An order or promise to pay out of a
particular fund is not unconditional (Section
3, last paragraph).
Here, the order of Duter T. to
Deedee S. is to pay P. Noi directly using
funds from the former’s bank account. Thus,
the said order is an order to pay out of a
particular fund and renders the order NOT
unconditional.
Scenario 1: “I promise to pay P10,000.00
to Patricia or her order. This transaction
is in accordance with the terms and
conditions of the contract we executed on
December 1, 2019. Signed, Mason” Is the
promise or order unconditional?
Yes, the promise is unconditional.
The statement “this transaction is in
accordance with the terms and conditions of
the contract we executed on December 1,
2019” does not require the parties any
additional action on their part.
In fact, it may be considered as a
statement of transaction which gives rise to
the instrument
Scenario 2: “I promise to pay P10,000.00
to Patricia or her order. This transaction
is subject to the terms and conditions of
the contract we executed on December 1,
2019. Signed, Mason.” Is the promise or
order unconditional?
No, the promise is NOT
unconditional.
The statement “this transaction is
subject to the terms and conditions of the
contract we executed on December 1, 2019”
requires the parties to additionally conform
to the terms and conditions of their previous
contract.
12
This additional act is tantamount to a
condition which makes the promise or order
NOT unconditional.
What’s the difference of the statement in
Scenario 1 than that of Scenario 2?
The statement in Scenario 1 is an
affirmation that the parties have complied
with the terms and conditions of their
previous contract when executing the
negotiable instrument. Hence, no additional
action is needed.
The statement in Scenario 2 is an
agreement to conform with the terms and
conditions of the previous contract. This
would require an additional action when
certain provisions of the instrument, it
issuance, its negotiation, or other process
runs contrary to the provisions of the
previous contract. This makes the promise
or order NOT unconditional since it is
subject to a condition.
Can a sum still be considered certain
when it is subject to additional
provisions?
Yes.
The sum payable is a sum certain
although it is to be paid:
1. With interest; or
2. By stated installments; or
3. By stated installments with a
provision that, upon default in
payment of any installment or of
interest, the whole shall become due;
or
4. With exchange, whether at a fixed
rate or at the current rate; or
5. With costs of collection or attorney’s
fee, in case payment shall not be
made at maturity (Section 2).
Discussion for Section 2.
1. The interest rate need not be stated in
the instrument. Should the note or bill state
 Hua Siong College of Iloilo
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that it is subject to interest but no interest
rate is provided, the legal interest of 6% will
apply.
2. Stated installments, within the
meaning of this section, means that: (a) the
interest of each installment, and (b) the due
date of each installment must be fixed in the
instrument (De Leon).
3. In addition to No. 2, the amount of
each installment must be fixed in the
instrument or can be ascertained (like when
it states that the amount shall be payable in
three equal installments on certain dates).
4. The addition of an acceleration
clause which is a provision that, upon
default in payment of any installment or of
interest, the whole shall become due does
not affect the negotiability of the instrument.
5. The acceleration clause must not be
at the option of the holder, else the
instrument will be considered as non –
negotiable.
6. A negotiable instrument can involve
certain currencies with exchange rates of
another currency. For example, the
negotiable instrument may provide for the
payment of $10,000.00 but to be converted
to Philippine peso.
7. The exchange rate may either be
fixed or current. Fixed rate is the rate agreed
by the parties like when the parties agree to
an exchange rate of $1.00 = Php50.00.
Current rate is the actual market value of the
certain currency as of a specific time or
period. For example, the current rate is
$1.00 = Php51.10 as of 1:49 p.m.,
November 3, 2019.
8. The additional provision of costs of
collection, attorney’s fees and penalties after
maturity of the instrument will not affect the
negotiability of the same.
13
What are other additional provisions
which do not affect the negotiability of the
instrument?
An instrument which contains an
order or promise to do any act in addition to
the payment of money is not negotiable. But
the negotiable character of an instrument
otherwise negotiable is not affected by a
provision which –
(a) Authorizes the sale of collateral
securities in case the instrument be
not paid at maturity; or
(b) Authorizes a confession of judgment
if the instrument be not paid at
maturity; or
(c) Waives the benefit of any law
intended for the advantage or
protection of the obligor; or
(d) Gives the holder an election to
require something to be done in lieu
of payment of money.
But nothing in this section shall
validate any provision or stipulation
otherwise illegal (Section 5).
In a way, these provisions are
exceptions to the rule that the promise or
order must be unconditional. These
provisions are conditional in nature, but the
NIL allows them to be placed in negotiable
instruments without affecting negotiability.
Discussion for Section 5.
1. Confession of judgment is illegal in
the Philippines, hence, Section 5 will not
make it legal. The last paragraph of the
section will step in.
2. A confession of judgment is where
the lawyer of the obligor will confess that
his client is indeed liable on the transaction.
This is not allowed in the Philippines
because lawyers are tasked to protect their
client’s rights, not put them ‘under the bus’.
3. If the instrument gives the holder the
right to choose something to be done in lieu
 Hua Siong College of Iloilo
COMPACT REVIEWER
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of payment of money, then the instrument is
still negotiable.
4. If the instrument gives the maker,
drawer, or drawee the said option, then the
instrument is not negotiable because the
holder might have taken the instrument on
the assumption that money will be paid to
him. If those liable will be given the option
to escape monetary liability, it will defeat
the whole purpose of negotiable instruments.
5. Certain rights may be waived like the
right against future negligence. But any
waiver of an action for future fraud is void
(see Article 1171, Oblicon).
It must be payable on demand or at a
fixed or determinable future time.
An instrument is payable on demand
– 4. “After date” means after the passage
(a) Where it is expressed to be payable
on demand, or at sight, or on
presentation; or
(b) In which no time for payment is
expressed.
When an instrument is issued,
accepted, or indorsed when overdue, it is, as
regards the person so issuing, accepting, or
indorsing it, payable on demand (Section 7).
An instrument is payable at a
determinable future time, 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 (Section 4).
14
Discussion for Section 4.
1. The time must be certain so that the
holder will know when he may enforce the
instrument, and that the person liable may
know when he may be required to pay (De
Leon).
2. If the instrument is payable on
demand, the time need not be affixed since
the instrument is payable immediately.
3. “After sight” means after the
instrument is seen by the drawee upon
presentment for acceptance. Presentment for
acceptance is when the holder present the
instrument to the drawee in order for the
latter to accept the same and thereby become
primarily liable on the instrument.
of a certain date that appears on the
instrument. This may be the issue date or
another specified date.
5. The time may depend upon the
happening of the event which is certain to
happen. If the time depends upon a future
and uncertain event, then the instrument is
not negotiable.
6. A future and uncertain event is
otherwise known as a contingency under
NIL. It is more commonly known as a
condition under Oblicon.
7. The happening of the contingency
will not cure the non – negotiability of the
instrument.
Scenario: A negotiable instrument will
become payable ten days after the death of
the Maker’s father. Is the added provision a
contingency?
No, it is not a contingency.
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
A contingency is a future event
which is uncertain to happen, thereby
making the instrument not negotiable.
Here, the death of the Maker’s father
is certain to happen, although when it will
exactly happen is uncertain.
Therefore, the added provision is not
a contingency and does not affect the
negotiability of the instrument.
It must be payable to order or 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 (Section 9).
The instrument is payable to order
where it is drawn payable to the order of a
specified person or to him or his order
(Section 8).
What is a bearer instrument?
A bearer instrument is that which
entitles the possessor of the same the right to
demand payment from those liable on the
said instrument. A possessor can be anyone
who holds the instrument without the need
of an indorsement from the prior holder or
possessor.
A bearer instrument is negotiated by
mere delivery.
What are the examples of bearer
instruments?
15
1. “I promise to pay the bearer
P10,000.00. Signed, Maker.”
2. “To Drawee, pay Payee or bearer
P10,000.00. Signed, Drawer.”
3. “I promise to pay P10,000.00 to the
order of Hannah Montana. Signed, Maker.”
(Maker in this case must know that the
payee Hannah Montana does not exist or is
fictitious. This example refers to an order
instrument which is considered by law as a
bearer instrument because of the fictitious
or non – existent payee.)
4. “To Drawee, pay P10,000.00 to
Cash. Signed, Drawer.” (Even if the
instrument is not blatantly payable to bearer
or to a specified person or bearer, under
Section 9, it is still considered as a bearer
instrument because the name of the payee
does not purport to be the name of any
person.)
5. “I promise to pay P10,000.00 to
Payee or order. Signed, Maker.
Indorsements: (1) Pay to Arnold, signed
Payee. (2) Pay to Ben, signed Arnold. (3)
__________, signed Ben.” (Here the last
indorsement is an indorsement in blank.
Under Section 9, the order instrument will
transform into a bearer instrument.)
What is an order instrument?
An order instrument is that made or
drawn to the order of a specified person,
usually the payee. A possessor cannot
simply demand from those liable unless he
shows that the instrument was indorsed and
delivered to him.
An order instrument is negotiated by
indorsement of the previous holder and
delivery of the same.
What are examples of order instruments?
1. “I promise to pay Juan dela Cruz or
his order P10,000.00. Signed, Maker.”
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
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2. “I promise to pay to the order of Juan
dela Cruz P10,000.00. Signed, Maker.”
Since a bill of exchange is an
unconditional order to pay a sum certain
in money, does it mean that it is an order
instrument?
No. A bill of exchange can either be
a bearer or an order instrument.
A bill of exchange is an order made
by the drawer to the drawee to pay the payee
or holder of the instrument.
An order instrument is an order made
by the payee or the holder of the instrument
(as long as it is indorsed to him) and
directed to the drawee to pay the same.
An example of a bearer bill of
exchange is:
“Drawee, I order you to pay Payee or
bearer P10,000.00. Signed, Drawer.”
Examples of an order bill of
exchange are:
“Drawee, I order you to pay to the
order of Payee P10,000.00. Signed,
Drawer.”
“Drawee, I order you to pay Payee or
his order P10,000.00. Signed, Drawer.”
Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable
certainty.
1. This requirement applies to a bill of
exchange only since the drawee is not a
party to the promissory note.
2. It is not necessary for the drawee’s
name to appear in the instrument so long as
he is indicated in the same with reasonable
certainty.
16
3. If the bill of exchange is not
addressed to a drawee, even if the same is
fictitious, it cannot be considered as a bill of
exchange. It cannot also be considered as a
promissory note since it is not an
unconditional promise, nor does the law
provide for instances where a bill that does
not address a drawee is treated as a note.
4. In cases of when a bill of exchange
can be treated as a promissory note, see
Section 130.
Scenario: Phineas issued a bill of
exchange which reads: “Brother, pay
P10,000.00 to Candice or her order.
Signed, Phineas.” Is the instrument
negotiable?
The instrument is negotiable if
Phineas only has one brother.
Under the NIL, the bill of exchange
is negotiable if the drawee is indicated
therein with reasonable certainty.
If Phineas only has one brother, then
the term “brother” is enough to satisfy the
requirement since he could be indicated with
reasonable certainty.
If Phineas has more than one brother,
then the instrument is not negotiable since
the intended drawee is not indicated in the
bill with reasonable certainty.
Scenario: Nani intended to make a
negotiable instrument in favor of her
sister Lilo for the latter’s birthday. She
downloaded a sample form from her
computer, signed it, and kept it in her
cabinet. While Lilo was playing, she saw
the instrument. Seeing an opportunity,
she filled in the blanks and negotiated the
same to Stitch (a human). Stitch later on
demanded payment on the instrument
from Nani. Can Nani be made liable on
the same?
No, Nani cannot be made liable.
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
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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 (Section 15).
Here, Nani did not complete and
deliver the negotiable instrument. Hence,
she could raise this as a real defense
(incomplete and undelivered instrument)
against all holders, including holders in due
course.
Scenario: Suppose in the previous
scenario, Nani completed the instrument,
but kept it in her cabinet. Lilo found it
and negotiated it to Stitch, a holder in due
course. Can Nani raise the defense that it
was not delivered to Lilo?
No, Nani cannot raise the defense
that the instrument was complete but
undelivered.
xxx 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 (Section 16).
Here, Stitch is a holder in due
course. Hence, as to him, there is a
conclusive (irrebuttable) conclusion that
there was a valid delivery of the complete
instrument. Hence, the personal defense of
complete but undelivered instrument cannot
be raised against him.
Take note however that if Stitch was
a holder not in due course, the defense may
be raised and Nani will not be made liable.
Scenario: Suppose in the previous
scenario, Nani completely filled up the
contents of the negotiable instrument but
did not sign it. Lilo got a hold of it, forged
Nani’s signature and negotiated the same
to Stitch, a holder in due course. Can
Nani be made liable on the instrument?
17
No. Nani cannot be made liable on
the instrument.
When a signature is forged or made
without the authority of the person whose
signature it purports to be, it is wholly
inoperative, and no right to retain the
instrument, or to give a discharge therefor,
or to enforce payment thereof against any
party thereto, can be acquired through or
under such signature unless the party against
whom it is sought to enforce such right is
precluded from setting up forgery or want of
authority (Section 23).
Here, Nani’s signature was forged.
Therefor, that signature is wholly
inoperative and she cannot be made liable
on the same, even against a holder in due
course.
Take note that Section 23 talks about
Forged Signature and Want of Authority,
both of which are real defenses.
Scenario: Maker issued a promissory note
to Payee. Alpha stole the note from Payee,
forged the latter’s signature, indorsed the
note in favor of him and negotiated it to
Beta. Beta then negotiated the same to
Charlie. Can Charlie demand payment
from Maker?
No, he cannot.
Section 23 provides that no right can
be acquired through or under the forged
signature.
Here, it was Payee’s signature that
was forged. Hence, Payee and parties prior
to him (Maker) cannot be made liable by
reason of forgery, a real defense.
However, Charlie may go after
Alpha, the forger, or Beta, a party
subsequent to the forged signature.
Scenario: Suppose in the previous
scenario, Alpha forged the signature of
Payee, but did not indorse the same in
 Hua Siong College of Iloilo
COMPACT REVIEWER
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favor of him. Instead he made it appear
that it was Payee who negotiated the same
to Beta which led Beta to negotiate it to
Charlie. Can Alpha, the forger, be held
liable to the instrument even though he is
not a party to the same?
Before we answer, please be aware
that the flow of the instrument is Maker >
Payee > Beta > Charlie. Alpha is not a party
to the instrument.
The answer is yes. NIL provides that
the forger can be held liable on the
instrument even though he is not a party to
the same.
Fraud in Factum vs. Want of Authority
Let’s go back to the scenario in page
8 where Taylor Swift signed an autograph
for Selena and the latter turned it to a
negotiable instrument.
Can Taylor Swift raise want of
authority instead of fraud in factum? Yes,
she can. Want of authority simply means
that a person is not authorized to use the
signature of another person.
Want of authority usually happens
when a person has access to another’s
signature (like a stamp or electronic
signature). It could also happen when a
person signs a document, like an autograph,
and a negotiable instrument is later placed
on top of it.
Fraud in factum on the other hand is
more specific. The person must have signed
the document without intention of signing a
negotiable instrument.
So which one is better to use in the
Taylor Swift scenario? Personally, fraud in
factum is the better defense to raise, but
want of authority is also a valid real defense.
Scenario: Dr. Fred Noblez is the president
of Central Pinipig University, an
educational corporation. In his capacity
18
as President, he issued a memorandum of
agreement wherein the university
promises to pay P1,000,000.00 to Iskam
Corporation or its order as payment for
the latter’s services. Issuing a negotiable
instrument is not one of the acts of
administration that a president could do.
In addition, the board of trustees deed not
give him authority to issue the said
instrument. Can the university be held
liable for the acts of Dr. Noblez?
No, the university cannot be held
liable for the acts of its president in this
case.
The indorsement or assignment of
the instrument by a corporation xxx passes
the property therein, notwithstanding that
from want of capacity, the corporation xxx
may incur n liability thereon (Section 22).
In simple terms, the corporation
cannot be held liable on an instrument
issued by one of its officers if said officer
acted beyond authority given to him or
without authority in the first place. These
acts are considered “ultra vires” or “beyond
the scope of authority”.
Here, the university did not authorize
its president to issue a negotiable
instrument. Worse, it is clearly stated that
the president has no power to issue said
instrument.
Therefore, the university can raise
the defense of ultra vires acts of the
corporation, a real defense, in order to
escape liability. Dr. Noblez will be the one
personally liable for the transaction.
Fraud in Inducement.
This exists when a person has the
intention to make or draw and issue a
negotiable instrument, but was deceived as
to the contents of the document that he is
signing.
 Hua Siong College of Iloilo
COMPACT REVIEWER
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It is that which relates to the quality,
quantity, value, or character of the
consideration of the instrument. It implies
that the signer knew what he was signing but
that he was induced by fraud to sign.
Fraud in inducement is a personal
defense and cannot be raised against a
holder in due course.
An example would be the Maker
who issues an instrument involving
P100,000.00 in exchange for a Rolex watch.
What he did not know is that the watch is
Class A when he expects a genuine one. He
can be made liable to pay on the instrument
since fraud in inducement is a personal
defense under the NIL. However, he can still
sue the defrauder for breach of contract or
fraud under Oblicon.
Illegality of Instrument.
If the contract is illegal or void, then
it is not negotiable. An illegal contract can
never become legal, even with consent of
both parties.
Since negotiable instruments are
contracts, the illegality thereof will render
the whole instrument non – negotiable and
void.
Hence, illegality of instrument is a
real defense. Take note however that guilty
parties can be made liable under Oblicon.
Illegal Consideration.
An illegal consideration will
technically make the contract void under
Oblicon. However, under NIL, illegal
consideration is only a personal defense
which cannot be raised against a holder in
due course.
Want of Consideration / Failure of
Consideration.
19
Absence or failure of consideration
is a matter of defense as against any person
not a holder in due course xxx (Section 28).
Every negotiable instrument is
deemed prima facie to have been issued for
a valuable consideration, and every person
whose signature appears thereon to have
become a party thereto (Section 24).
Want of consideration, if it was
proven that no actual consideration was
involved, is merely a personal defense
which cannot be raised against a holder in
due course.
The same is true with failure of
consideration or where the consideration of
the contract was not complied with. Such is
a personal defense.
Scenario: The consideration of a
negotiable instrument is the love and
affection of the payee towards the maker
or drawer. Is there valuable
consideration?
No. There is no valuable
consideration.
Value is any consideration sufficient
to support a simple contract (Section 25).
Here, love and affection cannot be
considered as value since it is outside the
commerce of men.
Thus, there is no valuable
consideration in this case.
Can an agent sign the negotiable
instrument as a party to the same in favor
of his principal?
Yes, the agent can perform such acts.
Where the instrument contains or a
person adds to his signature words
indicating that he signs for or on behalf of a
principal, or in a representative capacity, he
is not liable on the instrument if he was duly
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
authorized; but the mere addition of words
describing him as an agent or as filling a
representative character, without disclosing
his principal, does not exempt him from
personal liability (Section 20).
Scenario: Mickey authorized Minnie to
create a negotiable instrument in favor of
Donald or bearer. Minnie issued the
instrument and indicated at the bottom of
her name that she is acting in a
representative capacity only. Is Minnie
liable on the note?
Yes, she is liable.
In order for the agent to be exempted
from liability, she must satisfy the following
requirements:
1. She must be duly authorized by her
principal;
2. She must indicate in the instrument
her capacity as an agent or
representative; and
3. She must disclose in the said
instrument the name of her principal.
Here, Minnie failed to disclose the
name of her principal. Hence, she will be
made personally liable on the instrument.
Accommodation Party.
An accommodation party is one who
has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving
value therefor and for the purpose of lending
his name to another party (De Leon).
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 (Section 29).
Scenario: P wanted to make a negotiable
with A, but the latter does not trust him.
The former managed to convince his
friend M to draft a promissory note in his
favor so who he could use M’s reputation
20
for his transaction with A. In the current
setting, M is the maker, P is the payee,
and A is the current holder. A knows that
M is only an accommodation party. Can
he still hold M liable?
Yes, A can still hold M liable.
Under the NIL, an accommodation
party will still be liable to a holder for value
regardless of whether or not the latter knows
that he is an accommodation party.
Here, M will still be primarily liable
on the instrument, but he may go after P, the
accommodated party, later on.
XXXXXXXXXXXXXXXXXXXXXXXX
ISSUANCE OF INSTRUMENT
XXXXXXXXXXXXXXXXXXXXXXXX
What is issuance?
Issuance simply means the delivery
of the instrument to the payee.
Can the payee be considered as a holder?
A holder in due course?
While there are many arguments to
the issue, it is submitted that the payee is in
fact the first holder of the instrument.
So, yes, a payee can be considered as
a holder under NIL.
Scenario: Nani issued a negotiable
instrument without putting in the name of
the payee and delivered the same to Lilo.
Lilo placed her name as payee and
negotiated the instrument to Stitch. Can
Nani be made liable by Stitch despite the
fact that the instrument was incomplete
when she delivered it to Lilo?
Yes, Nani can be made liable.
An incomplete but delivered
instrument is only a personal defense and
cannot be raised against a holder in due
course (See Section 14).
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
Here, Stitch is deemed a holder in
due course by virtue of Section 59.
Also, the instrument being
incomplete when delivered to Lilo does not
affect the negotiability of the same.
Is it necessary that the negotiable instrument
be dated?
No. Under Section 6, the validity and
negotiable character of the instrument is
unaffected by the fact that it was issued
undated.
In fact, the following also do not
affect the validity and negotiable character
of the instrument:
(a) It is not dated; or
(b) Does not specify the value given, or
that any value has been given
therefor; or
(c) Does not specify the place where it is
drawn or the place where it is
payable; or
(d) Bears a seal; or
(e) Designates a particular kind of
current money in which payment is
to be made (Section 6).
What happens if the instrument is issued
undated, but it requires the date of issue
or date of maturity to determine its
effectivity?
Where an instrument expressed to be
payable at a fixed period after date is issued
undated, or where the acceptance of an
instrument payable at a fixed period after
sight is undated, any holder may insert
therein the true date of issue or acceptance,
and the instrument shall be payable
accordingly (Section 13).
Take note that Section 13 gives any
holder the authority to insert the true date, if
they know. They do not have the authority
to insert any date as they please.
21
What happens if the wrong date is
inserted?
The insertion of a wrong date does
not avoid the instrument in the hands of a
subsequent holder in due course; but as to
him the date so inserted is to be regarded as
the true date (Section 13).
Hence, insertion of wrong date is a
personal defense that cannot be raised
against a holder in due course.
If the maker or drawer left blanks in the
instrument when they delivered the same
how can they 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 (Section 14,
Statements 1 and 2).
This provision gives the holder
authority to fill in the blanks with the
intended agreement.
Can the holder decide to put in any
amount as he please should the amount
involved is left blank?
No, he cannot.
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
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
within a reasonable time (Section 14,
Statements 3 and 4).
Scenario: Can the Maker be made liable
on the instrument he delivered to the
Payee while leaving the amount involved
blank if the Payee inserted P100,000.00
instead of P10,000.00?
He will not be liable to the Payee for
the insertion of wrong amount because it is a
personal defense that can be raised against a
holder not in due course. Here, the Payee is
a holder not in due course because he knows
of the infirmity of the instrument. In fact, he
is guilty of such infirmity. Hence, the Maker
cannot be made liable to the same.
Take note however that if the one
demanding payment is a holder in due
course, then he can enforce the whole
amount of P100,000.00 against the Maker.
The latter’s only recourse is to sue the Payee
for the excess amount of P90,000.00.
Scenario: Suppose in the previous
scenario the Payee negotiated the
instrument to Albert without filling in the
blank, but in consideration of P10,000.00.
It was Albert who inserted the amount of
P100,000.00 which is beyond the intended
amount. Can Albert demand payment
from the Maker? How about from the
Payee?
No. He cannot.
Albert is not a holder in due course
because he is guilty of the infirmity of the
instrument by inserting the wrong amount.
Thus, the Maker can raise the personal
defense of filling in blanks beyond authority
against Albert who is a holder not in due
course.
Albert cannot also make the Payee
liable. Under Section 14, all parties prior to
the insertion of the wrong amount may raise
the personal defense against a holder not in
due course. Since the Payee is a party prior
to the insertion of the wrong amount, he is
22
entitled to raise the said personal defense
against a holder not in due course.
XXXXXXXXXXXXXXXXXXXXXXXX
ACCEPTANCE BY DRAWEE OF
BILL OF EXCHANGE
XXXXXXXXXXXXXXXXXXXXXXXX
Is the Drawee automatically liable on the
bill of exchange upon issuance by the
drawer?
No. He cannot be made liable until
he accepts the responsibility under the bill of
exchange.
How is the acceptance by the Drawee
made?
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 payment
of money (Section 132).
The holder of a bill presenting the
same for acceptance may require that the
acceptance be written on the bill, and if such
request is refused, may treat the bill as
dishonored (Section 133).
Can a promise to accept a bill be
considered as actual acceptance?
An unconditional promise in writing
to accept a bill before it is drawn is deemed
an actual acceptance in favor of every
person who, upon the faith thereof, receives
the bill for value (Section 135).
Is there a time limit for the Drawee to
accept the instrument?
The drawee is allowed 24 hours after
presentment in which to decide whether or
not he will accept the bill; but the
acceptance, if given, dates as of the day of
presentation.
Constructive Acceptance.
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
Where the drawee to whom a bill is
delivered for acceptance destroys the same,
or refuses within 24 hours after such
delivery, or within such other period as the
holder may allow, to return the bill accepted
or unaccepted to the holder, he will be
deemed to have accepted the same (Section
137).
There is constructive acceptance in
the following situations:
1. The drawee destroys the bill;
2. The drawee refuses to return the bill
to the holder within 24 hours after
presentment or within the time given
by the latter;
3. The drawee returned the bill after the
24 – hour time limit (or that time
provided by the holder).
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
(Section 139).
A general acceptance is an
acceptance without any additional
restrictions to the same. An acceptance to
pay at a particular place is a general
acceptance, unless expressly states that the
bill is to be paid only at that particular place
(See Section 140).
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;
23
(c) Local, that is to say, an acceptance to
pay only at a particular place;
(d) Qualified as to time;
(e) The acceptance of some one or more
of the drawees, but not all (Section
141).
What are the rights of the Holder if the
Drawee gives a qualified acceptance?
The holder may refuse to take a
qualified acceptance and if he does not
obtain an unqualified acceptance, he may
treat the bill as dishonored by non –
acceptance (Section 142, Statement 1).
What happens when a qualified
acceptance is taken by the holder?
Where a qualified acceptance is
taken, the drawer and indorsers are
discharged from liability on the bill, unless
they have expressly or impliedly authorized
the holder to take a qualified acceptance or
subsequently assent thereto (Section 142,
Statement 2).
Is there an implied assent to the taking of
qualified acceptance by the holder?
When the drawer or an indorser
receives notice of a qualified acceptance, he
must, within a reasonable time, express his
dissent to the holder, or he will be deemed to
have assented thereto (Section 142,
Statement 3).
XXXXXXXXXXXXXXXXXXXXXXXX
NEGOTIATION
XXXXXXXXXXXXXXXXXXXXXXXX
When is an instrument negotiated?
An instrument is negotiated when it
is transferred from one person to another in
such a manner as to constitute the transferee
the holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it
is negotiated by the indorsement of the
holder completed by delivery (Section 30).
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
How is an order instrument indorsed?
The indorsement must be written on
the instrument itself or upon a paper
attached thereto. The signature of the
indorser, without additional words, is a
sufficient indorsement (Section 31).
The 2nd statement means that if the
indorsement is worded as “Pay to A. Signed,
P” instead of “Pay to A or order. Signed P”,
it will still count as a valid indorsement and
will still make the instrument negotiable.
(Also see Section 32)
What are the kinds of indorsements?
An indorsement may be either
special or in blank; and it may also be either
restrictive or qualified or conditional
(Section 33).
A special indorsement specifies the
person to whom, or to whose order, the
instrument is to be payable, and indorsement
of such indorsee is necessary to the further
negotiation of the instrument (Section 34).
An indorsement in blank specifies no
indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by
delivery (Section 34).
(See Section 36 for Restrictive
Indorsement, Section 37 for Qualified
Indorsement, and Section 38 for Conditional
Indorsement)
How do you turn a bearer instrument into
an order instrument and vice versa?
You can convert a bearer instrument
into an order instrument by indorsing the
same to a specified person and delivering
said instrument to that person.
You can convert an order instrument
into a bearer instrument by indorsing it in
blank and effecting delivery to the chosen
bearer.
24
“Once a Bearer, Always a Bearer”
Doctrine
When an instrument, payable to
bearer, is indorsed specially, it may
nevertheless be further negotiated by
delivery xxx (Section 40).
This presupposes that if the
instrument is originally a bearer instrument
and then converted into an order instrument,
it can be converted back to a bearer
instrument without the need of indorsing it
in blank. Mere delivery to the chosen bearer
is enough to convert it back to a bearer
instrument.
This is not applicable when the
instrument is originally an order instrument.
Striking Out of Indorsements.
The holder may strike out any
indorsement which is not necessary to his
title. The indoser whose indorsement is
struck out, and all indorsers subsequent to
him, are thereby relieved from liability on
the instrument (Section 48).
For example, the flow of the
negotiable instrument is as follows:
M>P>A>B>C>D>E
If E, the current holder, will strike
out the indorsement of C, then C and
subsequent indorsers (which is D in this
case) are relieved from liability on the
instrument. If E will strike out the
indorsement of A, then he can only go after
M and P.
If E will strike out the indorsement
of P, the payee, in an order instrument then
the instrument will lose its negotiable
character because the indorsement of P is
necessary in an order instrument.
If he will strike out the indorsement
of P, the payee, in a bearer instrument then
the instrument will still be negotiable
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
because the indorsement of P is not
necessary in a bearer instrument.
Can a prior party negotiate the
instrument?
Where an instrument is negotiated
back to a prior party such party may, subject
to the provisions of this Act, reissue and
further negotiate the same. But he is not
entitled to enforce payment thereof against
any intervening party to whom he was
previously liable (Section 50).
For example, the flow of the
negotiable instrument is as follows:
M>P>A>B>C>D>E>F>B
Here, B may choose to negotiate it
further or enforce payment from M. If M
dishonors the instrument, B can go after P or
A. He cannot go after C, D, E and F because
he was previously liable to them.
Material Alteration
Where a negotiable instrument is
materially altered without 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 (Section 124,
Paragraph 1)
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 (Section 124,
Paragraph 2).
For example, the flow of the
negotiable instrument is as follows:
M>P>A>B>C>D>E
When C received the instrument, he
altered the amount from P10,000.00 to
P1,000,000.00. If E is the current holder,
then M, P, A, and B can raise the real
25
defense of material alteration to escape
from liability.
However, material alteration is a
special kind of real defense since it gives the
holder in due course an option to enforce the
payment according to its original tenor.
Here, E can enforce payment from
M, P, A, or B in the amount of P10,000.00
and enforce the remaining difference to C,
the alterer, or D, the subsequent party. P, A,
and B can raise the defense because the
provision includes all the parties prior to the
alteration.
What constitutes 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 of relations of the
parties;
(e) The medium or currency in which
payment is to be made; or (f) which
adds a place of payment where no
place of payment is specified, or (g)
any other change or addition which
alters the effect of the instrument in
any respect, is a material alteration
(Section 125).
XXXXXXXXXXXXXXXXXXXXXXXX
DISHONOR
XXXXXXXXXXXXXXXXXXXXXXXX
What are the types of dishonor?
1. Dishonor by non – payment;
2. Dishonor by non – acceptance.
There is dishonor by non – payment
when the instrument is presented to the
person primarily liable for collection and the
same refuses to pay on the said instrument
by reason of real or personal defenses.
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona
There is dishonor by non – acceptance
when the instrument is presented to the
drawee for acceptance and the same refuse
to do so.
What happens if there is dishonor?
Subject to the provisions of this Act,
when the instrument is dishonored by non –
payment, an immediate right of recourse to
all parties secondarily liable thereon accrues
to the holder.
Take note however that you cannot
automatically go after the parties
secondarily liable. You must first give
notice of the said dishonor to them. Only
then can you go after the said parties.
As to the holder seeking collection
on the instrument, no order is required to be
followed as to who he will demand first.
However, if it can be shown that the
indorsers have agreed to a certain order of
liability, then that order must be followed.
Notice of dishonor can either be in
writing or oral.
XXXXXXXXXXXXXXXXXXXXXXXX
DISCHARGE OF NEGOTIABLE
INSTRUMENT
XXXXXXXXXXXXXXXXXXXXXXXX
How can the instrument be 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
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;
26
(e) When the principal debtor becomes
the holder of the instrument at or
after maturity in his own right
(Section 119).
Is discharge of negotiable instrument a
defense?
Yes, it is a real defense that can be
raised since it essentially extinguishes the
contract by reason of those acts mentioned
in Section 119 (See also Sections 120).
Renunciation by Holder (Section 122).
The holder may expressly renounce
his rights against any party to the instrument
before, at or after its maturity.
An absolute and unconditional
renunciation of his rights against the
principal debtor made at or after the
maturity of the instrument discharges the
instrument.
But a renunciation does not affect the
rights of a holder in due course without
notice.
A renunciation must be in writing,
unless the instrument is delivered up to the
person primarily liable thereon.
Important Note: If a holder renounces his
rights on the instrument but negotiates it to a
holder in due course who has no knowledge
of the renunciation, then that holder in due
course can still demand payment from the
parties liable because the renunciation will
have no effect as to him.
Unintended Cancellation by Holder
A cancellation made unintentionally,
or under a mistake without the authority of
the holder, is inoperative; but where an
instrument or any signature thereon appears
to have been cancelled, the burden of proof
lies on the party who alleges that the
cancellation was made unintentionally, or
 Hua Siong College of Iloilo
COMPACT REVIEWER
THE LAW ON NEGOTIABLE INSTRUMENTS
Prepared by Atty. Marc Lovel C. Bedona

under a mistake or without authority

(Section 123).

Is prescription a defense?

Prescription is a real defense.

Prescription is the role that the

passage of time plays in the making and
extinguishing of certain rights and privileges
(yourdictionary.com).

Written contracts prescribed in 10

years. Hence, if negotiable instruments are
not yet cashed after the passing of the
period, then the holder cannot anymore
demand payment from the parties liable.

Also take into consideration that

bank checks become stale after 6 months,
hence, the bank can refuse payment on the
check should the period lapse.

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END
XXXXXXXXXXXXXXXXXXXXXXXX

27