NIL Midterms 2018 PDF

NEGOTIABLE INSTRUMENTS LAW (2018) MIDTERMS ATTY.
BERNARDINO AMAGO
Negotiable Instruments Law

MIDTERMS (AY 2018-2019)
Based on the Syllabus and Discussions of Atty. Bernardino Amago
Credits to EH 403 (2018), EH403 & EH404 Notes (2016-2017), EH403 Notes
(2017-2018), case digests online and other notes. :D
Introduction Consideration
A. Historical background of the NIL _____________________________________ 2 a. Presumption of consideration (Sec. 24) _________________________55
B. Application and purpose of the NIL ___________________________________2 b. What constitute value (Sec. 25) _______________________________55
C. Functions and importance of negotiable instruments (SMMM) ________________2 c. Holder for value (Sec. 26 and 27) ______________________________56
D. Characteristics or features of negotiable instruments _______________________2 d. Effect of want of consideration (Sec. 28) _________________________57
e. Accommodation party and its liabilities (Sec. 29) __________________58
Form and Interpretation

a. Formal requirements of negotiability in general (Sec 1) ______________4
Negotiation
i. Must be in writing _______________________________________________ 5
a. What constitute Negotiation (Sec. 30) __________________________60
ii. Must be signed by the maker or drawer (Sec 18, 19, 21, & 22) _________________5
b. How Indorsements is made (Sec. 31, 32, 40, 41, & 50) ______________62
iii. Must contain an unconditional promise or order to pay (Sec. 3) ________________8

c. Kinds of indorsement (Sec. 33) _______________________________63
iv. The instrument must be payable in sum certain in money (Sec. 2) _____________10 i. Special (Sec. 34 & 35) ____________________________________________63
v. Must be payable on demand or at a fixed or determinable future time (Sec. 4 & 7) __12 ii. Blank (Sec. 34 & 35) _____________________________________________64
vi. Must be payable to order or bearer (Sec. 8 & 9) __________________________ 15 iii. Restrictive (Sec. 36 & 37) _________________________________________65
vii. Drawee must be named _________________________________________19 iv. Qualified (Sec. 38) ______________________________________________66
b. Kinds of Negotiable Instruments _____________________________19
v. Conditional (Sec. 39) ____________________________________________66
1. Promissory Note (Sec. 184) ________________________________________19 Indorsement of instrument  
2. Bill of Exchange (Sec. 126) ________________________________________19 payable to bearer _____________________________________________67
3. Check (Sec. 185)_______________________________________________20 Instrument where payable to  
two or more persons ___________________________________________68
c. Additions and Omissions Not Affecting Negotiability _______________20
i. Terms used (Sec. 10) _____________________________________________ 20 d. Indorsement to a person as cashier (Sec. 42) _____________________69
II. Additions (Sec. 5, 11 & 12) ________________________________________21 e. Indorsement where name is misspelled (Sec. 43) __________________69
III. Omissions (Sec. 6) _____________________________________________ 22 f. Indorsement in representative capacity (Sec. 44) ___________________69
d. Parties ________________________________________________22
g. Time of indorsement (Sec. 45) _______________________________70
i. Holder in due course (Sec. 52, 58 & 59) ________________________________ 23 h. Place of indorsement (Sec.· 46)_______________________________70
II. Holder through a holder in due course ________________________________ 24 i. Continuation of negotiable character (Sec. 47) ____________________70
Presumption of holder in due course___________________________________25 j. Striking out indorsement (Sec. 48) _____________________________71
iiI. Holder not in due course (Sec. 53)___________________________________25 k. Transfer without indorsement (Sec. 49) _________________________71
iii. Referee in case of need (Sec. 131) ___________________________________26 L. Prior party that requires the instrument _________________________72
e. Defects (Sec. 65 & 66)______________________________________26
i. Undated (Sec. 13)_______________________________________________27

Summary of the Insertion of wrong date
ii. Incomplete but delivered (Sec. 14)___________________________________31
Summary of incomplete but delivered
iii. Complete but Undelivered (Sec. 16) _________________________________ 34
Summary of Complete but undelivered
iv. Incomplete and Undelivered (Sec. 15) ________________________________ 36
Summary of the rules (Incomplete & undelivered)
Questions & Clarifications — Part 1 _____________________________________38
v. Minors and Corporations (Sec. 21) ___________________________________40
vi. Material Alteration (Sec. 125 and 124) ________________________________ 40
Summary of the rules (Material Alteration)
Questions & Clarifications — Part 2 _____________________________________45
vii. Forgery (Sec. 23) ______________________________________________46
f. Ambiguity (Sec. 17) _______________________________________53
Cases for Forms and Interpretation ______________________________54
SUAN | FONTANOSA | DOLIENTE | KONG | ORTIZ PAGE 1 OF 72

NEGOTIABLE INSTRUMENTS LAW (2018) MIDTERMS ATTY. BERNARDINO AMAGO
2) Medium for exchange

INTRODUCTION ‣ A negotiable instrument is a representative of
money so it represents a value then.
A. HISTORICAL BACKGROUND OF THE NIL ‣ Transactions are perfected by the delivery or

The practice of using negotiable instrument started exchange of negotiable instruments
during the Pre-Christian era, or during the medieval

times.
3) Medium for immediate payment

1. English Bills of Exchange Act of 1882 (BEA) —
‣ Instead of bringing cash, you tender payment
This was the first law codified by the english
parliament.
through a check, there is payment supposedly.
‣ At least that payment in a sense that tender is

2. Uniform Negotiable Instruments Law of 1896
(UNIL) — which revised and codified the law made, not necessarily in the technical sense
merchant in the US as there was much confusion where it extinguishes an obligation but that’s
and lack of uniformity then in the court decisions.
another function to look at.
‣ We patterned our NIL to this law with very slight

modifications.
4) Medium of credit transaction
3. Uniform Commercial Code (UCC) — which seeks ‣ What is represented or the value of the negotiable
to simply and modernize the law of commercial instrument is the credibility of the person or his
transactions. Replaced in part by Article 3 and in credit
part by other articles of the Uniform Negotiable ‣ The value of the negotiable instrument is the
Instruments Act of US 1896.
credibility of the person who issues it or the credit
4. Code of Commerce — law governing negotiable standing of the person.
instruments before the passage of the Act No.

2031. All articles were repealed except those of
crossed checks.
D. CHARACTERISTICS OR FEATURES OF NEGOTIABLE
INSTRUMENTS
5. Act No. 2031 — our own Negotiable Instruments
Law, with the purpose to facilitate transactions in IMPORTANT FEATURES
commercial paper and to promote free flow of 1) Negotiability — refers to the quality or attribute of
credit.
an instrument to be transferrable from one person to
‣ Enacted on: February 3, 1911
another, and whoever holds that instrument, holds
‣ Published on: March 4, 1911
such against defenses of prior parties.
‣ Effectivity: June 2, 1911 (90 days after its 2) Accumulation of secondary contracts — as NI is
publication)
being transferred from one person to another, there
is added an additional party to the instrument.
B. APPLICATION AND PURPOSE OF THE NIL

1. The act applies only to:
1) NEGOTIABILITY
What is an important feature of a negotiable instrument?
a. Negotiable instruments
✏ A: Negotiability
b. Those instruments which meet the requirements

laid down in Section 1 of the law.
What is negotiability as a characteristic of a negotiable

2. The Civil code has no effect on its provisions except instrument?
to supply any deficiency in cases not covered by the (1) Can be transferred;
Act. (Art. 18 of the NCC)

(2) holder in due course free from personal defenses of
3. For the purpose of facilitating, not hindering or prior parties we
hampering transactions in commercial paper.

(3) person who receives may have prior rights than
previous holders
The NIL is the primary law governing negotiable

instruments. It finds its relevance that it’s convenient to Distinguish assignment from negotiability.
deal with it. There is less risk and better security ✏ You can only assign rights that you have thus if you
compared to dealing with cash.
don't have a right over the object you cannot assign
a right even if there is physical transfer
✏ Spring cannot rise higher than its source
C. FUNCTIONS AND IMPORTANCE OF NEGOTIABLE

INSTRUMENTS (SMMM)
I stole the mango of your classmate and then I gave it to
1) Substitute for money you, will you have rights over the mango?
✏ No, because the person who stole the mango did
‣ Instead of bringing with you loads of money, you
not have the rights to transfer such right to you.
can just bring with you a checkbook.
✏ You can only assign rights to what you have. I do

‣ Check still cannot be considered as legal tender. It
not have rights and so, what I transferred was theft.
is still not money that’s why it cannot have the

ability to extinguish obligation unless it is
encashed.

The negotiability of a negotiable instrument is as if the There are only two parties involved: the one who made
right is actually transferred to the person you give the NI the instrument (maker) and the one who should be paid
to. So he is free to deliver it to another person.
(payee).
2) ACCUMULATION OF SECONDARY CONTRACTS As opposed to a bill of exchange which is?

✏ What is another important feature? Sec. 126. Bill of exchange defined – A bill of exchange is an
✤ Accumulation of secondary contracts
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
As negotiable instrument is being transferred from one determinable future time a sum certain in money to order or
person to another, there is an added party. There are as to bearer.
many contracts and there are parties. Each contract There are three persons involved. The one who drafted
that he has is separate and distinct.
(drawer), the one to whom the order is addressed
(drawee), and the person who is supposed to see what
For example: I have a NI and transferred it to your was being ordered (payee).
classmate to negotiation by mere delivery (being

transferred to another 4x), how many contracts are What is the difference between the definition of the bill
created by such transfer? I made a contract when I exchange and promissory note?
transferred it to Polito, Polito made a contract when he ✏ Promissory note — Unconditional promise; only 2
transferred it to Salvacion, and Salvacion made a parties; maker & payee
contract when he transferred it to Torres, Torres to ✏ Bill of exchange — Unconditional order; 3 parties;
Perino, and Perino to Go. So how many contracts then? drawer, drawee, payee
5 contracts created.
Third common type is check. But it is only a special type

So as more parties are added in the line of negotiation, of negotiable instrument because it is a kind of bill of
there are as many contracts as there can be. And it gets exchange.
to be created separately because one may have better Sec. 185. Check defined. – A check is a bill of exchange
rights than the other.
drawn on a bank payable on demand. Except as herein
otherwise provided, the provisions of this Act applicable to
a bill of exchange payable on demand apply to a check.
Note: It’s because of these two features that NI

becomes an important medium in a business Why is it considered a special kind of bill of exchange?
transaction. It has also become a choice of medium for ✏ The Bank is always the drawee.
most businessmen. Because of such popularity, there is ✏ Another thing it makes it special is that it is always
a need to regulate that.
payable on demand.
How would you know what an instrument is negotiable

or not? INCIDENTS OF NEGOTIABLE INSTRUMENTS FROM ITS BIRTH
✏ General:
TO DEATH:
The first time of giving or delivery the negotiable
1. It is used in commercial transactions
instrument is called “issuance”. The subsequent deliver

2. It conforms to the requirements in Sec 1 of the NIL
or transfer or indorsement is called “negotiation”.
Although supposedly issuance is just another
Negotiable instrument — is one used in commercial negotiation, but there is just a specific term given to it.
transactions and which complies with all the elements

of negotiability provided for under Section 1 of the There is a need to distinguish the type of negotiable
Negotiable Instruments Law.
instrument. Once it is paid, discharge.
TYPES OF NEGOTIABLE INSTRUMENTS 1) PROMISSORY NOTE

What are common types of negotiable instruments? Preparation → Signing → Issued to payee → shown by
1) Promissory note
payee to maker → payment is made → extinguished
2) Bill of Exchange
3) Checks
2) BILL OF EXCHANGE
If it is a bill of exchange, there is an additional step
What can you understand of a promissory note? What is taken. It contains an order addressed to the drawee.
the codal definition? The drawee must be given the opportunity to accept.
Sec. 184. Promissory note defined. – A negotiable He will never be bound unless he knows about it and
promissory note within the meaning of this Act is an accepts to be bound by the drawer.
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 Preparation → Signing → Issued (first time) to payee →
money to order or to bearer. Where a note is drawn to the Payee has option: 1) present for acceptance to drawee
maker’s own order, it is not complete until indorsed by him.
OR 2) further negotiate → Present for payment to maker
→ instrument discharged

✏ What’s the reason for presenting the instrument for ✏ What happens to the order of the drawer?
acceptance to the drawee? ✤ Dishonored. When the instrument is dishonored,
✤ So that drawee will know that there is such an you will have to do certain processes.
order made by the drawer. And then drawee will

be given opportunity to accept or not accept the
negotiable instrument.
Since nobody knows it was dishonored, Ms. Limpangog
further negotiated it. So she negotiates it and it reaches
to Mr. Ybarita and he presents it for acceptance but
Good Situation: drawee still does NOT accept.
Atty A(drawer) issues a bill of exchange to Ms. Since the drawee did not accept, Mr. Ybarita must
Limpangug (payee).
follow the process and he must send notice of
dishonor to parties prior. If he fails to notify, the other
PAYEE MAY EITHER: parties of the instrument will be deemed discharged.
1) Present to drawee for acceptance

- So that the drawee will know that there is such an Even before the instrument has become matured, it is
order. Drawee be given the chance to accept or possible that it will be dishonored but it is only true in
not accept.
BOE because only BOEs is required to be presented
- Once the drawee accepts, he is considered an for acceptance.
acceptor and he holds himself primarily liable. He

stands in the shoes of the maker.
❏ Dishonor by non-payment — dishonored because it
- Ms. Limpangug (payee) can keep the instrument was not paid.
until maturity or further negotiate. After ❏ Dishonor by non-acceptance — dishonored

negotiating, they may present the instrument for because it was not accepted.
payment.
2) May further negotiate even before presenting to FORM AND INTERPRETATION

drawee for acceptance
- Before the instrument matures, bearer can present A. Formal Requirements of Negotiability in
the instrument for acceptance. Once the General (Sec 1)
instrument reaches maturity (either way whether
How do you draft a negotiable instrument? MEMORIZE!
in the hands of drawee or bearer), drawee will be
bound because he accepted.
Sec. 1. Form of negotiable instruments. - An instrument to
be negotiable must conform to the following requirements:
(W-U-P-P-A)
If the accepted NI was in the hands of the payee, payee (a) It must be in writing and signed by the maker or drawer;
has the option before the instrument matures to either
(b) Must contain an unconditional promise or order to pay

1. keep the instrument until it reaches maturity or
a sum certain in money;
2. further negotiate it
(c) Must be payable on demand, or at a fixed or
And when it reaches maturity in the hands of another determinable future time;
person, present the instrument for payment and drawee (d) Must be payable to order or to bearer; and
will make payment. The instrument is deemed

(e) Where the instrument is addressed to a drawee, he
discharged.
must be named or otherwise indicated therein with
reasonable certainty.
BAD SITUATION:
“But you see, life is not always rainbows and butterflies.” If you look at all the requisites, does it apply to all
The drawee might not accept the instrument. What negotiable instruments?
✏ No. Distinguish first if the negotiable instrument is
happens to the order of the drawer? It is dishonored.
promissory note or bill of exchange.
When an instrument is dishonored, you would have to

✏ Sec. 1 (a) to (d) applies to both promissory note and
do certain processes as provided under the law.
bill of exchange.
✏ Sed 1 (e) applies only to bill of exchange.
The law requires that if you want to hold the party

secondarily liable, you must follow certain processes
provided under the law.
REQUISITES FOR NEGOTIABLE PROMISSORY NOTE
a. It must be in writing and signed by the maker
If there are only three parties: drawer, drawee, payee. If b. Must contain an unconditional promise to pay a sum
the drawee does not accept the instrument, drawer will certain in money
be liable. But if you fail to give notice of dishonor to the c. Must be payable on demand, or at a fixed or
drawer, drawer will not be liable anymore.
determinable future time
d. Must be payable to order or to bearer
Illustration: There is a bill of exchange, it was drafted

and issued to Ms. Lipangug. She presents it for REQUISITES FOR NEGOTIABLE BILL OF EXCHANGE
acceptance to the drawee but he will NOT accept.
a. It must be in writing and signed by the drawer

b. Must contain an unconditional order to pay a sum MAKER VS DRAWER:

certain in money
• Maker — one who makes a promise to pay in a
c. Must be payable on demand, or at a fixed or promissory note. He is personally liable to pay.
determinable future time

• Drawer — one who issues a bill of exchange to order
d. Must be payable to order or to bearer
a payment to be made. He orders someone to make
e. Where the instrument is addressed to a drawee, he the payment.
must be named or otherwise indicated therein with

LOCATION OF THE SIGNATURE
Although the signature of the maker or drawer as a
general rule is placed at the lower right hand corner of
I. MUST BE IN WRITING the instrument, it may appear in any part thereof
FORM OF WRITING whether at the top, middle or bottom or at the margin.
Any form of writing will do. It can also be printed,

typewritten, or stamped, as long as there is a
manifestation in physical form the language of your It can be signed anywhere provided that such signature
obligation.
signifies the intention by the maker or drawer to be
bound by the instrument
MATERIAL What is important is that the signer has intended to

There is no requirement as to the material used. It can adopt the signature on the instrument as his own and
be on any material as long as it can be transferred from to obligate himself for its payment.
one hand to another.
Can I write the negotiable instrument on this table? TYPE OF SIGNATURE

✏ Negotiable because there is no hard and fast rule as There is no requirement, as long as there is intent to be
to where it can be written for as long as it can be bound.
transferred from one hand to another
✏ May however affect acceptability

Illustration 1:
✏ Writing may be made upon leather, cloth or any

I promise to Ms . Wee to pay Php 100,000.
substitute for paper as long as it is movable in
nature.
🦋

Is this a valid negotiable instrument?

It requires in writing, can I type it? ✏ Not valid
✏ Yes. It can be printed, stamped, etc. The only

requirement is that it must be in writing.
1) No words of negotiability (e.g. “payable to the order”)
2) First requisite is not complete. Only signature

There is no such thing as an oral negotiable (butterfly) is there. No name of the maker so how
would you know who is the maker.
instrument. An oral promise can make it difficult to

determine liability and create the danger of fraud.
Even if a cross is placed as a signature or a butterfly, it

still complies. What is important is that there is an
II. MUST BE SIGNED BY THE MAKER OR DRAWER intention to be bound by the signature.
(SEC 18, 19, 21, & 22)

Sec. 18. Liability of person signing in trade or assumed
name. - No person is liable on the instrument whose
LIABILITY OF PERSON SIGNING
signature does not appear thereon, except as herein Sec. 18. Liability of person signing in trade or assumed
otherwise expressly provided. But one who signs in a trade name. - No person is liable on the instrument whose
or assumed name will be liable to the same extent as if he signature does not appear thereon, except as herein
had signed in his own name.
otherwise expressly provided. But one who signs in a trade
or assumed name will be liable to the same extent as if he
Sec. 19. Signature by agent; authority; how shown. - The had signed in his own name.
signature of any party may be made by a duly authorized

agent. No particular form of appointment is necessary for ■ General Rule: Only persons whose signatures appear
this purpose; and the authority of the agent may be on an instrument are liable thereon.
established as in other cases of agency.

—Exception:
Sec. 21. Signature by procuration; effect of. - A signature 1. Where a person signs in a trade or assumed
by "procuration" operates as notice that the agent has but a name (Sec. 18 par. 2)
limited authority to sign, and the principal is bound only in

case the agent in so signing acted within the actual limits of a. It is necessary that the party who signed
his authority.
intended to be bound by his signature.
Sec. 22. Effect of indorsement by infant or corporation.- 2. The principal is liable if a duly authorized agent
The indorsement or assignment of the instrument by a signs on his own behalf (Sec. 19)
corporation or by an infant passes the property therein,

notwithstanding that from want of capacity, the corporation 3. In case of forgery (Sec. 23), the forger is liable
or infant may incur no liability thereon.
even if his signature does not appear on the
instrument

4. Where the acceptor makes his acceptance of a 2. Where agent acted with abuse of authority given:
bill on a separate paper (Sec. 134).
abuse of authority by the agent is not a defense
5. Where a person makes a written promise to against a bona fide holder for value.
accept a bill before it is drawn (Sec. 135)
TN: The general authority bestowed upon an agent to

transact the business of his principal does not imply an
SIGNATURE BY AGENT authority to accept or indorse bills so as to charge the
Sec. 19. Signature by agent; authority; how shown. - The principal. The power to make or indorse negotiable
signature of any party may be made by a duly authorized paper must be expressly granted.
agent. No particular form of appointment is necessary for

this purpose; and the authority of the agent may be
established as in other cases of agency.
What do you mean by signature by procuration?
AUTHORITY OF AGENT TO SIGN PRINCIPAL’S NAME Is it signing of an agent, which also serves as a
When it says that there is no required form it means that warning that the authority of the agent is limited, and
you are left in your own discretion on how you will sign that he can only bind the principal if he acts within the
the instrument.
limit of his authority.
For it to bind the principal, the following must be So it is not an ordinary agency but one which is limited.
complied with:
So that’s what pre procuration means. So you can sign
1) Indicate the name of the principal; and
of course as an agent and the requirement in signing as
an agent will have to be complied with otherwise he
2) The agent’s capacity for signing by using the words
becomes personally liable. And addition to that, his
“in behalf of” or “agent”
signature should also contain the words “Pre

Proc”which means that whoever is dealing instrument
The rule is that the person has to sign on the would know that this person is only signing based on a
instrument to be liable on that instrument. So that limited authority. And it requires him who is dealing with
when a maker signs to the instrument he renders the instrument to inquire as to the limit of his or her
himself liable on the instrument.
liability.
A drawer is likewise the same. When he signs on the • Signature based on an agency but one which is
instrument, he holds himself liable on the instrument.
limited in its authority
• You can sign of course as an agent and the

The reason also why you need to present the instrument requirements for such must be complied with
for acceptance to the drawee is so that he may be otherwise you become personally liable but in
informed of his possible obligation should he accept addition to that your signature must contain “pre
the instrument and this is indicated by the fact that he proc” so that whoever is dealing with the instrument
signs on the instrument.
will know that this person is only signing based on a
limited authority and it requires him who is dealing
Now, it is also possible that the person signs on the with the instrument to inquire into the limit of his or
instrument but he doesn’t hold himself liable to it. Is that her liability
possible? • Does not apply to general agency, only to one that has
Yes sir, it is possible.
a certain limit
• [Must have been a practice before but it is never used

And when is that possible? now]
When he is an agent of the maker/drawer
Example:
EFFECT OF SIGNATURE BY PROCURATION …..

Sec. 21. Signature by procuration; effect of. - A signature Doliente
by "procuration" operates as notice that the agent has but
a limited authority to sign, and the principal is bound only Per proc: Ybarita
in case the agent in so signing acted within the actual limits
of his authority.
- Agent has a limited authority.

EFFECT OF INDORSEMENT BY INFANT OR
CORPORATION
Procuration – there is a limited authority and that the Sec. 22. Effect of indorsement by infant or corporation.-
one who signed is an agent
The indorsement or assignment of the instrument by a
- the act by which a principal gives power to notwithstanding that from want of capacity, the corporation
another to act in his place as he could himself
EFFECT OF SIGNATURE BY PROCURATION: EFFECT OF INDORSEMENT BY INCAPACITATED PERSONS:

1. Where agent exceeded his authority: the principal 1. Minors – as a general rule, the contract is voidable
is not bound although agent acted within the

general scope of the agency.

a. The minor is not bound by his indorsement. He is, This is now considered as a proper signature of an
however, not incapacitated to transfer certain agent who can get away with the liability, GRANTING
rights.
that JG is duly authorized for this transaction and that
b. Minority is a defense personal to the minor thus XYZ Corp. has the authority to act in this capacity
cannot be raised by other parties.
c. The minor can disaffirm and recover the A corporation can only act in accordance in the primary
instrument from a holder in due course.
and secondary purpose as stated in its Articles of
d. A minor may be held bound by his signature in an Incorporation. And of course, there may be implied
instrument where he is guilty of actual fraud.
incidental powers of a corporation.
2. Other Incapacitated persons

If the corporation borrows money, if it can justify that it
a. Insane or demented persons
is incidental to its business then it has to act through
its BOD or depending on the amount together with the
stockholders and issue a RESOLUTION AUTHORIZING
Can a minor sign an instrument? such act. But let’s just say it only an ordinary loan for
Yes but he will not be liable or bound by the instrument.
the financing of a certain building.
Even if the instrument is a bearer instrument, where it If the corporation is required by the bank to issue a
gets negotiated from one hand to another? The
instrument is still considered invalid? If the minor did it promissory note, as a security, then the corporation will
and was able to get money out of it, still considered have to issue a board resolution authorizing a
invalid? particular person to engage in such transaction.
In that case, I think the instrument is valid but as to the It could state that:
minor, he cannot be held liable on the instrument.
The corporation hereby resolves that the

corporation shall enter into a loan transaction and
Okay, he cannot be held liable on the instrument even if execute a promissory note in the amount of Php1M.
he signs the on the instrument because he is a minor.
Resolved further, that the President Mr. X, is
authorized to sign for an on behalf of the
corporation in relation to the foregoing authority.
It’s different though when it comes to other parties. Even
it was signed by a minor and that instrument passed So in that case, there was an authority for the
through other parties who are actually of age and not corporation to enter into a loan in a promissory note
acting in good faith. They could still be held liable. More and it will be Mr. X who’s supposed to represent the
so if they know that the minor is a minor and still corporation.
accepted the instrument. There’s reason for them to be So if you are Mr. X, in order to get away with the liability
liable.
otherwise it will become a personal obligation, then you
will have to sign as an agent of the corporation.
But as to the minor himself he is not held liable. Can

corporation sign a negotiable instrument?
Yes, Sir. They can sign through its agent.
If he want to get away of this obligation, then he needs
to sign and put the name of the corporation plus his
capacity for signing. Otherwise, he may hold himself
Through an Agent. So what will it state? liable.
For example, Sir. It is stated signed by Janen Gabunada

as a President of a certain corporation
In all instances, if you’re signing as an agent you must

not only place the name of your principal (Sec. 20 of
So because a corporation has no physical body, it can NIL) but also your capacity for signing such an
only sign only through its representative or it could be
an agent but what is necessary for an agent to be able instrument. Otherwise, you will hold yourself personally
to get away with the liability on the instrument? liable.
He must mention therein on what capacity he is signing

therein. After his name, he can state that he is an agent Now of course, this will not happen with a representative
of a certain corporation.
of a corporation. It could just be a person representing
another person. So in that case you will have to place
Give me an example, just the portion on the signature the name of your principal and your signature
“XYZ Corp. through JG as representative”
including and specifying the certain terms which
could mean you are just signing as an agent or
Or you can just make it simple by saying:
representative. So those terms which can really inform
third parties that your are only signing as an agent.
…..
XYZ Corporation
AN INFANT OR MINOR
By: JG (sgd.)

Now as already mentioned, an infant or a minor is able
to sign an instrument BUT it will not hold himself
liable.

A Corporation as well may be able to sign the

instrument. But is such corporation is not authorized to Promise Order
engage in such a transaction, then it will also not be
liable. The one who gets to sign will be liable.
Pertains to a promissory Pertains to a bill of
note exchange.
So, in the example that I provided awhile ago, it so Parties – maker and payee. Parties – Drawer, Drawee,
and Payee.
happen that there really was a board resolution to enter
in such transaction.
It is the person primary liable Refers to a person directing
who obliges himself on the another person or himself to
BUT if the corporation did not issue any resolution to instrument pay on the instrument;
that effect but the president on his own acting for and in requires an additional act
on the person primarily
behalf of the corporation entered into a transaction liable — that is, by
involving a negotiable instrument, the corporation accepting the instrument
SHOULD NOT be held liable for it because it was not
authorized by the BOD or whoever is supposed to make
the authorization.
TERMS NOT AFFECTING UNCONDITIONAL LIABILITY
Although, the usual practice call is that president acts UNCONDITIONAL THOUGH COUPLED WITH:
1) An indication of a particular fund out of which
on its own when he owns the entire corporation and all reimbursement is to be made
the rest are just nominal stockholders to qualify as

members of the board. Iya nalang na ipa ratify later on. 2) A particular account to be debited with the amount
Kinsa man say mu question na siya man tagiya sa 3) A statement of the transaction which gives rise to
corporation. Ug malugi ang corporation kinsa man the instrument.
malugi? Siya lang. That is acceptable in practice.
1) INDICATION OF A PARTICULAR FUND OUT OF

But we have to be strict about it so to get away with the WHICH REIMBURSEMENT IS TO BE MADE
liabilities or the possibility or to lessen the risk later on,
Negotiable because the order to pay is not rendered
before a corporation can be held liable it must always
conditional. The drawee is not limited to the money in
be authorized first. And authorization can only be done
his hands belonging to the drawer.
by the BOD sometimes it needs to be ratified by the

stockholders.
The fund indicated is not the direct source of payment
but only the source of reimbursement which is an act
subsequent to the payment.
If you’re dealing with a corporation and it behooves you

to require the presentation of a board resolution or a
Secretary Cert. Sec. 22 meant that a Corporation or Illustration 1:
infant may incur no liability thereon, the corporation

there is one who did not authorize to engage in such a I promise to pay X or his order Php 10,000 on or
before 16 Aug. 2018.
transaction so whoever signs for and in behalf of the
corporation, who was not authorized to do so, is Sgd. CK
actually the one personally liable even if he put the
name of the corporation and put his capacity in signing. The condition given is a future event, granting that
So it will be considered an Ultra Vires act of the salary has not yet been distributed. It becomes non-
corporation meaning outside of the authority
negotiable since there might be circumstances that can
prevent him from receiving his salary. It doesn’t really
matter if you’re working or not. The fact that you’re not
III. MUST CONTAIN AN UNCONDITIONAL PROMISE working makes it a condition. But if you are working, it
OR ORDER TO PAY (SEC. 3) still doesn’t improve the situation. It is still possible that
you may not be able to receive your salary. For all you
Sec. 3. When promise is unconditional. - An unqualified
order or promise to pay is unconditional within the meaning know, the company will close and there are no funds
of this Act though coupled with:
anymore, and you will not be able to receive your salary.
So this is a condition and it will make the instrument
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to non-negotiable.
be debited with the amount; or
(b) A statement of the transaction which gives rise to the What is a condition?
instrument.
✏ Any future event which may or may not happen.
But an order or promise to pay out of a particular fund is not

unconditional.
Is it only applicable to future event? What if it was a past

■ Condition — Any future event which may or may not event?
happen. It could also refer to a past event not known ✏ It could also refer to a past event not known to the
to the parties which give rise to an obligation or parties which give rise to an obligation or
extinguishes an obligation.
extinguishes an obligation.
■ Unconditional — It is not contingent on the

happening of a future event; not subject to any Illustration 2:
condition.

I promise to pay X or his order Php 10,000 on or before I promise to pay X or his order Php 10,000 on or before
16 Aug. 2018 if I receive my salary. 16 Aug. 2018 and reimburse yourself from my salary.
Sgd. CK Sgd. CK

Is this negotiable? What if I change it into this statement (above), does it

✏ No. This is a non-negotiable instrument.
change anything?
✏ In this case, it makes the document negotiable. The
✏ It is made to depend on the sufficiency of the funds.
reimbursement is not based on the particular fund.

✏ It is conditional because payment of the promissory
It does not affect the promise. The reimbursement
note is dependent on the capacity or from the from the salary is just an additional act which will
existence and sufficiency of the salary to be able to not affect the promise to pay. So the promise to pay
cover the amount mentioned on the promissory is considered unconditional since you can still make
note
payment out of any funds.
✏ TN: What NIL is considered about is just the promise

An instrument payable out of a particular fund is non- to pay and not the reimbursement.
negotiable (Sec. 3, par. 2.) as it is not payable "in any

event" because the amount to be paid is made to
depend upon the adequacy or existence of the fund 2) INDICATION OF A PARTICULAR ACCOUNT TO BE
designated.
DEBITED WITH THE AMOUNT
An instrument which contains a direction to debit a
particular account is negotiable because the promise/
Metrobank vs CA order is not also made conditional. The payment does
Eduardo Gomez opened an account with Golden Savings and not depend upon the existence or adequacy of the
deposited 38 treasury warrants. The treasury warrants was
then indorsed by Mr. Gomez to Golden Savings, and then particular account to be debited.
Golden Savings (by their cashier Gloria) deposited to its

Savings account in Metrobank branch. They were sent for
clearance. Meanwhile, Gomez is not allowed to withdraw 3) STATEMENT OF TRANSACTION WHICH GIVES
from his account, later, however, exasperated over Gloria
repeated inquiries and also as an accommodation for a
RISE TO INSTRUMENT
valued client, Metrobank decided to allow Golden Savings to Illustration 4:
withdraw from the proceeds of the warrants even before it

was cleared.
I promise to pay X or his order Php 10,000 on or before
Relying on the confirmation of MetroBank that there was 16 Aug. 2018 based on the terms of our contract.
indeed a fund, Golden Savings allowed Mr. Gomez to make Sgd. CK
withdrawals. Subsequently, the treasury warrants were
dishonored by the Bureau of Treasury, which led MetroBank
to go after Golden Savings to collect the withdrawn money. What do you think of this instrument?
Apparently, it was dishonored because there was forgery on ✏ It is still a negotiable instrument.
the signatures on some of the payees. It was not a case of Mr.

✏ Basis: Sec. 3(b) The statement of the transaction
Gomez’ signature. There were certain treasury warrants that
were paid directly to Mr. Gomez but some were actually paid which gives rise to the instrument.
to some other persons but just indorsed to Mr. Gomez. ✏ This is different with the terms and conditions. In this
Nonetheless, we know that the treasury warrants were
considered dishonored by the Bureau of Treasury, being the document, it is merely stated that this was just a
supposed drawee.
statement or basis of an obligation.
HELD: The SC ruled that they were non-negotiable. The ✏ A statement of what gave rise of the obligation to
treasury warrants are not negotiable because (1) clearly pay does not render the order or the promise
stamped on their face is the word "NON-NEGOTIABLE". conditional.
Moreover, it is indicated that they are (2) payable from a

particular fund, to wit, FUND 501.
✏ This is still considered a negotiable instrument as I
am simply stating the reason why this promise is
So here you would see an instrument which was rendered
non-negotiable by the SC on the fact that there is a fund made and not made as a condition on the promise I
indicated out of which payment is to be made. That particular am making.
treasury warrant was payable from FUND 501.
Note: Not all treasury warrants are non-negotiable. It Illustration 5:
was just in this case that it was from a particular fund

which makes it non-negotiable.
I promise to pay X or his order Php 10,000 if I die.
Sgd. CK

TN: Treasury warrants were just indorsed to MetroBank

for clearing and not for something else. Nonetheless, This is a negotiable document. Death is unconditional.
this is the case of negligence. But don’t get the idea

that all treasury banks are non-negotiable. It just so Is death a condition?
happened that this particular treasury warrants are ✏ No. Death is not considered a condition because
payable from a particular fund. So don’t commit the everyone is certain to die. It is the exact time when
generalization that all treasury warrants are non- death will happen is uncertain but death itself is
negotiable.
certain. It is just a period.
Illustration 3:
Illustration 6:

So that is why it is important that when you define negotiable

I promise to pay X or his order Php 10,000 on or instruments law, you must say that IT IS USED IN
before 16 Aug. 2018 if I die. COMMERCIAL TRANSACTION because this case actually
Sgd. CK says, make it as a basis that the instrument, postal money
order, is not a negotiable instrument because it is not used in

the commercial transaction.
What do you think of this instrument?

✏ Non-negotiable. This is conditional because it is Second, postal money orders are generally subject to
restrictions which means, it cannot comply with the second
not sure if you die on that certain date.
requirement that it must contain an unconditional promise to
✏ While death is certain, it’s not certain that you will pay a sum certain in money.
die on August 16, 2018. If we all get to breathe ■ Postal money orders are subject to conditions.
tomorrow then that means that the condition has

■ Supposed procedure: You give money and then the
not happened.
post office will give the postal order. Instead of

✏ So here, if you put a particular day on when a
charging it to their account, they charged it to the
person is supposed to die, it will then make it a Bank of America. There was negligence on the part of
condition instead of a period.
Bank of America. Postal money orders are not
supposed to be negotiable instruments.
Illustration 6:
I promise to pay X or his order Php 10,000 if I

REASONS WHY POSTAL MONEY ORDER IS NOT A
die because of cancer.
NEGOTIABLE INSTRUMENT:
1) Government in this case is rendering service which is
Sgd. CK
NOT engaged in commercial transaction but in a

governmental function.
What if it says I die of cancer? 2) Postal Money orders are subject to conditions which
✏ Non-negotiable as it is conditional because it’s not
does not fall with Section 3.
certain whether you will die of cancer or not.
✏ Death is a period but the cause of death, the time of

What other instruments did the SC say that was not a
death, if indicated on the instrument makes it a negotiable instrument in our cases in the syllabus?
condition, and so it will render the instrument non- 1) Special withdrawal slips
negotiable.
2) Pawn Tickets
Philippine Educators Co vs Soriano IV. THE INSTRUMENT MUST BE PAYABLE IN SUM

A certain Montinola went to the Manila Post Office with the
intention to purchase 10 money orders worth P200.00 each. CERTAIN IN MONEY (SEC. 2)
Upon purchasing this money order, he informed the post
office that he will pay it out of his private check but it was Sec. 2. What constitutes certainty as to sum — The sum
denied because checks were not ordinarily accepted as payable is a sum certain within the meaning of this Act,
payment of money orders. The cashier advised him to see the although it is to be paid:
Chief of the Money Order Division, but instead of doing so, (a) with interest; or
Montinola left the building with his own check and the ten
money orders without the knowledge of the teller.
(b) by stated installments; or
Upon knowledge of the unpaid money orders, an urgent (c) by stated installments, with a provision that, upon default
message was sent to all postmasters and served to all banks in payment of any installment or of interest, the whole
instructing them not to pay anyone of the money orders if shall become due; or
presented for payment. This was also received by the Bank of (d) with exchange, whether at a fixed rate or at the current
America but 3 days after and despite such notice, the Bank of rate; or
America was still able to make payments out of the postal

money order. The said money orders were then deposited (e) with costs of collection or an attorney's fee, in case
with the Bank of America and thereafter the latter cleared it payment shall not be made at maturity.
with the Bureau of posts and received from the latter its face
value of P200.00.
Bank of America is now claiming from the Philippine postal THE SUM PAYABLE IS A SUM CERTAIN
office on the postal money order which they issued. If you can a. with interest; or
see there is transfer now, from the Philippine postal office to b. by stated installments; or
the hands of Montinola, from Montinola it went to the

Philippine Education, and then it went to the Bank of America, c. by stated installments, with a provision that, upon
from Bank of America it is now demanding payment from the default in payment of any installment or of interest,
Philippine postal office. So in other words there seems to be the whole shall become due; or
as semblance of negotiation of the instrument.
d. with exchange, whether at a fixed rate or at the

ISSUE: Whether or not the postal money order are considered current rate; or
negotiable instruments?
e. with costs of collection or an attorney's fee, in case

HELD: First, It is not disputed that our postal statutes were
patterned after statutes in force in the US. For this reason, payment shall not be made at maturity
ours are generally construed in accordance with the

construction given in the US. The reason behind this rule Sum certain in money — There is clarity as to the
being that, in establishing and operating a postal money order
system, the government is not engaging in commercial amount to be received by the holder of the instrument.
transactions but merely exercises a governmental power for The amount should be fixed and determinable without
the public benefit.
having to resort to extrinsic sources. You just have to be

able to determine how much is payable by just looking Is that negotiable?

at the face of the instrument.
✏ No. This is non-negotiable.
The basic test is whether the holder can determine by A payment maybe made in installment but it should
calculation or computation the amount payable when contain due dates. On the given example, it does not
the instrument is due.
contain any due dates. It should contain the exact
dates, the year, the month and the day of payment,
An instrument may contain certain terms though which along with the amount to be paid on each installment
may or may not affect the negotiability of the dates.
instrument.
Take note that when the law provides that it will not
render the instrument non-negotiable if it has stated
A. WITH INTEREST installments, two things must appear in relation to such
A provision for the payment of interest is a mere installments:
incident; it does not render the instrument non- (1) The interest of the installment which means the
negotiable because it does not make uncertain the sum amount of the installment; and
payable.
(2) The date when such installment is supposed to
be due
Illustration 1:
If you cannot find these two things on the instrument
and it mentions about paying it by installment, it renders
I promise to pay X or his order Php 10,000 on 25 the instrument non-negotiable because it renders the
December 2018 with interest. amount no longer a sum certain in money. If you want
Sgd. Y to make this negotiable then, you have to specify how

much it is supposed to be paid.
Is that negotiable?
✏ Yes. Even if there was indicated of how much To make it negotiable, it must be stated this way:
interest, it is presumed to be paid with the legal

interest of 6%
I promise to pay Mr. X or order P10,000 on two equal monthly
✏ Presumption that the interest that should be installments payable on September 16, 2018 and October 18, 2018.
applicable is the legal interest prevailing at that Sgd. Y
time.

If the instrument does not contain a date, is there no

Even if an interest rate is added it still complies with the presumption?
✏ Payable on demand
requirement that it is a sum certain in money because

additional statement with legal interest does not affect
the negotiability of the instrument.
C. AS TO DEFAULT IN PAYMENT OF INSTALLMENT

Illustration 3:
EFFECT IF INTEREST RATE IS NOT STATED

It is negotiable. A mere phrasing “with interest” is To BPI
deemed not to affect the character of the sum. It still Pay Ms Y or order Php 10,000 on equal installments on 1 Dec. 2018
renders the sum certain in money.
& 1 Jan 2019. Upon default, the entire amount must be paid.
If there is no specific legal interest rate, it is still a Sgd. Ms. V
common commercial knowledge that legal interest
rate is at 6%.
Is that negotiable?
✏ Yes. The instrument is negotiable. Even if it
B. AS TO INSTALLMENTS contains an acceleration clause, it doesn’t affect the
negotiability of the instrument.
The promise or order to pay "by stated installments"

does not affect negotiability.
ACCELERATION CLAUSE
Such a clause requires full payment of an instrument
As to installments, it should specify:
immediately upon default on any installment. It does not

1) interest of each installment (amount of installment)
make an instrument payable upon contingency (and so
2) specific due date of each installment
non-negotiable) since the time of payment will surely
come and the exact value of the instrument can be
Without it, it renders the instrument non-negotiable.
ascertained.
It does NOT affect the negotiability of the instrument.
Illustration 2:
EXTENSION
I promise to pay X or his order Php 10,000 on two (2) Opposite of acceleration clauses.
equal monthly installments

They appear in instruments with fixed future maturity
Sgd. Y date and provide that under certain circumstances, the

date shall be further extended.

E. AS TO ATTORNEY’S FEES
A clause stating that an extension to fulfill the obligation This will not affect the negotiability of the instrument
is allowed.
because when there is an imposition of attorney’s fee, it
presupposes that the obligation had already matured.
If the extension clause favors the payee or the holder of And once the instrument had already matured, it ceases
the instrument, it does not affect the certainty of the to be negotiable, thus the stipulation of attorney’s fee
sum. The sum remains certain even during the and collection cost is irrelevant for negotiability.
extension period. After all, it’s really up to the payee or

the holder of the instrument when he will make the Illustration 1: (wrong illustration)
demand. He can always make the demand on the date

of the maturity or even after. It’s up to him. That’s why To BPI
extension in favor of the holder or the payee doesn’t Pay Ms Y or order P10,000 based on the current
really affect the certainty of the sum.
exchange rate on 16 Aug 2018 and attorney’s fees.
Sgd. Ms. V

D. AS TO EXCHANGE This is non-negotiable. If you indicate an attorney’s

To be negotiable then you have to indicate what are the fees on the negotiable instrument without indicating
currencies involved.
that it is only due if the instrument is not paid upon
maturity, it can affect the negotiability of the instrument.
It should specify:
If you add it to the amount that is supposed to be paid, it
1) Foreign Currency
renders the amount uncertain already.
2) Exchange rate
Take Note: The attorney’s fees, if included as an

- The denomination or currency must be stated.
additional clause, will not render the instrument non-
negotiable, if it is only due after maturity of the
instrument. So, only then if the instrument is not paid
Illustration 1:
upon maturity will you have to pay the attorney’s fees.
To BPI
Pay Ms Y or order P10,000 based on the current So in all or any instances, indication of attorney’s fees
exchange rate on 16 Aug 18. renders the instrument non-negotiable. But it is
Sgd. Ms. V supposed to be due only after maturity date, it doesn’t

matter because after maturity date, the instrument is
Negotiable. What must be indicated is the currency that supposed to be non-negotiable in its commercial sense.
is supposed to be used and the rate. In this case, it

indicates the exchange rate which is P50:$1 and Illustration 2: (correct illustration)
indicates what currency. For as long as it indicates the

currency and the exchange rate, then that would To BPI
suffice.
Pay Ms. Y or order P10,000 on August 16, 2018 and 10%
attorney’s fees if not paid on maturity date.
Illustration 2: (wrong illustration)
Sgd. Ms. V

To BPI This is negotiable. The indication of attorney’s fees,

Pay Ms Y or order P10,000 based on the current exchange even if you don’t put a particular rate there, is not
rate on 16 Aug 18.
supposed to affect the certainty of the sum but only if it
Sgd. Ms. V is to be paid if not paid upon maturity date, or after

maturity. If the instrument is already after maturity, the
This is non-negotiable. It may comply with the current question of negotiability is a non-issue. After all, at the
exchange rate. However, there is no currency stated. It time the instrument is already matured, is not supposed
should be in reference to another currency.
to be negotiable anymore. So it doesn’t matter what
may happen thereafter.
Illustration 3: (correct illustration)
To BPI V. MUST BE PAYABLE ON DEMAND OR AT A FIXED

Pay Ms Y or order P10,000 based on the current exchange rate OR DETERMINABLE FUTURE TIME (SEC. 4 & 7)
on 16 Aug 18 rate of Philippine peso to US dollars. Sec. 4. Determinable future time; what constitutes. - An
Sgd. Ms. V instrument is payable at a determinable future

time, within the meaning of this Act, which is expressed to
Take note if it’s an exchange rate. There’s a requirement be payable:
for stated installments, there’s also a requirement for (a) At a fixed period after date or sight; or
exchange rate. The rate itself plus the currency is

involved.
(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
A. EXPRESSED TO BE PAYABLE ON DEMAND
time of happening be uncertain.
I promise to pay X or bearer Php 10,000 upon demand.

An instrument payable upon a contingency is not Sgd. Y
negotiable, and the happening of the event does not cure
the defect.

Sec. 7. When payable on demand. - An instrument is Negotiable. If you put upon demand, there’s no
payable on demand:
confusion at all as to when the instrument is supposed
(a) When it is so expressed to be payable on demand, or at to be paid. But even if you don’t indicate “upon
sight, or on presentation; or
demand” and just place a period right after the amount,
it will already be payable upon demand.
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when

overdue, it is, as regards the person so issuing, accepting,
or indorsing it, payable on demand.
B. AT SIGHT
Means payable as soon as soon it is seen by the party
primary liable (drawee).
PAYABLE ON DEMAND
■ Applies only to bill of exchange.
a. Expressed to be payable on demand, or
■ When it is presented to the drawee for acceptance.
b. At sight, or
c. On presentation; or
There is no need for the instrument to be accepted.

d. No time for payment is expressed
What it is required is it to be presented for acceptance.

e. Instrument is overdue (last paragraph)
Then it goes without saying that if the instrument is not
accepted that you can order the acceptance of such
Illustration 1:
instrument.
I promise to pay X or bearer 10,000.

At sight — it actually means upon presentation of the
Sgd. Y
instrument for acceptance. The moment you present

the instrument for acceptance to the drawee, it is also
Non-negotiable. There is no currency. What is this payable. So you can already demand payment for the
10,000? For all you know, it can be boyfriends. Would instrument the moment you present it for acceptance.
you have wanted it? Take note, that in the exam, I will It’s then hitting 2 birds with 1 stone because you
not give you only one defect on the instrument. Don’t present it for acceptance, it is also considered
get the idea that it will be just one defect for every presented for payment because the instrument is
question. It could be a combination of several defects. payable upon sight. When there is a term “at sight”, it
You have to determine whether it’s negotiable or not actually means acceptance to the drawee.
that’s why you have to memorize all the requirements

for negotiability.
C. ON PRESENTATION
In this case, there are 2 things you have to take note:
I promise to pay X or bearer Php 10,000 on presentation.
(1) there’s no date specified when the instrument is Sgd. Y
supposed to be paid. Then again, an instrument

could be payable upon demand, if not stated; and
■ Applies to both promissory note and bill of exchange.
(2) amount, it should be a sum certain in money.
When the negotiable instrument is presented to the

But then, it’s just 10,000 there. 10,000 could be
drawee or maker for payment.
anything. Good thing if you want it but what if you

don’t? So this is not a sum certain in money.
It is actually the easiest among all the period because

when it says upon presentation, it means presentation
Illustration 2:
for payment.
I promise to pay X or bearer Php 10,000.

Sgd. Y So you present the instrument for payment to the

person primarily liable (presentation to the drawee and
It is now negotiable. Even if there is no date stated, it is presentation to the maker). But in the case of a bill of
payable upon demand.
exchange, you have to make sure that what you’re
doing when you present an instrument is not
An instrument is payable on demand when there is no presentment for acceptance.
date specified in the instrument for when it should be

paid. In that case, the date of such payment would be
the date of the issuance of the instrument.
So what you do is first, present for acceptance and then
it has to be accepted by the drawee. Once the drawee
accepts it, you can do it right there and then —
presentment for payment. That’s why this is considered

payable upon demand because you present the demand. So, to the person who indorses the
instrument for payment, automatic you’re supposed to instrument, the instrument is already deemed payable
receive payment. There’s no period requirement to think on demand even if it indicates a date and not
about other than the act of presenting for payment.
necessarily on demand, at sight, or for presentation.
The instrument is considered overdue. The last holder
of the instrument, if not paid by the maker, can right
At sight On Presentation away go to you for payment because the instrument is
applies to bill of exchange applies to both promissory already considered payable on demand.
note and bill of exchange

Purpose of “at sight” is for it “Upon presentation” is for For example, the instrument went to A, B, C and D so
to be presented to the the purpose of payment. It the last holder will be D. D presented the instrument to
drawee for acceptance. is applicable to both
When it is accepted by the promissory notes and bill of Y but Y refuses to make payment. D went to A and say,
drawee, that’s when he exchange requiring payment “You pay me because there is dishonor on the part of
obliges himself to pay on from persons primarily Mr. Y.” Can A say, “The instrument is not yet due.” You
the instrument. liable.
really cannot say that as a defense because clearly, the
date indicated on the instrument has already elapsed so
you really have no defense in terms of the instrument
D. NO TIME FOR PAYMENT IS EXPRESSED has not yet matured. That’s the consequence of the
I promise to pay X or bearer Php 10,000. last paragraph – if the instrument is already overdue,
it can always be payable on demand. What else can
Sgd. Y
you think of that instrument to be payable on? It’s

nothing else but the date as indicated there and if it has
already elapsed, you cannot go back diba? Unless you
E. AN INSTRUMENT IS OVERDUE (LAST PARAGRAPH) are someone who has the power to go back in time,
then that may be different.
“Where an instrument is issued, accepted, or indorsed

when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand.”
PAYABLE AT A DETERMINABLE FUTURE TIME

a. At a fixed period after date or sight; or
It is payable on demand to those persons:
b. On or before a fixed or determinable future time

1) Issuing
specified therein; or
2) Accepting
c. On or at a fixed period after the occurrence of a

3) Indorsing
specified event which is certain to happen, though
the time of happening be uncertain.
Overdue — beyond its maturity date; always payable

on demand
A. AT A FIXED PERIOD AFTER DATE OR SIGHT

When someone negotiated this instrument now, I promise to pay X or bearer Php 10,000 30 days after date.
indorsed it, or in the case of the bill of exchange Sgd. Y
someone must have accepted it even the date stated

there has already elapsed then the instrument is

deemed payable on demand.
Negotiable. It need not actually indicate a specific date
but of course, no one is stopping you if you want to
place the date of the issuance.
An instrument is deemed overdue when it is already

beyond its maturity date. The date after its maturity
date, an instrument is already considered overdue. The After sight — means after the instrument is seen by the
moment it’s past midnight, the instrument is now drawee upon presentment for acceptance or accepted
deemed overdue because it’s beyond the maturity date. by the drawee.
So if ever there is a party who issues an instrument after

it is overdue, it’s always payable on demand because “Date” here means the date of the instrument.
anyone who will receive it can always already present it When there is no date stated, it pertains to the date
for payment.
when the instrument was issued.
Say for example, if I put here, I promise to pay X or However, it doesn’t render the instrument non-
bearer P10,000 on January 1, 2018. And today is negotiable if you do not put one. It will still be
already August 16, 2018, if you receive that instrument, negotiable but you have to put there the date of
can you present it right away for payment? Yes, and I issuance or at least, if the date of the issuance is the
am supposed to be compelled to pay that because the basis for counting the 30 days after date.
date indicated January 1, 2018. The instrument is

already deemed overdue.
B. ON OR BEFORE A FIXED OR DETERMINABLE FUTURE TIME

If that instrument is further negotiated, whoever Determinable future time — one which you have to
negotiates it holds the instrument as already payable on COMPUTE


We cannot really determine the time of death hence, it’s
not a determinable future time. The law only allows
I promise to pay X or order Php 10,000 on or before the start of “after”. There’s actually no question that 5 days before
next school semester. death is determinable but it would really cause an
Sgd. E absurd situation where the party thinks of a period

which is supposed to be in the future, only to find out
Non-negotiable. We have to look at another extrinsic later on that it is payable on demand.
document or source in order to find out when is the

start of next school semester.
Illustration 4:
It is too vague because it could be considered infinite.

There will always be a next school semester.
I promise to pay X or bearer P10,000 10 days after his death.
In order for it to be determinable, it should have stated Sgd. Y
“immediately the next school semester”.

So if before, dili pwede. but after, pwede na. The

Illustration 2:
instrument could still be payable and not considered
overdue because you can count. He will die on January
I promise to pay X or bearer P10,000 30 days after date. 1, 2019 and it is supposed to mature on January 11,
Sgd. NM 2019.
Negotiable. It need not actually indicate a specific date Illustration 5:
but of course, no one is stopping you if you want to

place the date of the issuance. However, it doesn’t I promise to pay X or bearer Php 10,000 5 days after his death
render the instrument non-negotiable if you do not put from malaria.
one. It will still be negotiable but you have to put there
the date of issuance or at least, if the date of the Sgd. Y
issuance is the basis for counting the 30 days after
date.
This is a non-negotiable instrument.
This sets a condition that he must die of malaria. The

death is qualified that it should be because of malaria
C. ON OR AT A FIXED PERIOD AFTER THE which is a contingency that could or could not happen.
OCCURRENCE OF A SPECIFIED EVENT WHICH IS

CERTAIN TO HAPPEN If the event is not certain, it sets a condition and it will
But a bill or note payable several days before the render the promise conditional already. Besides, the last
occurrence of the specified event is not negotiable, paragraph of Section 4 will tell you that if it is payable
since the date of maturity of the instrument can only be upon a contingency, the happening of such event will
ascertained after it has become overdue and, therefore, not even cure such a defect. Hence, it will not be
the time for payment is uncertain. Moreover, the law considered a determinable future time. But after all, it’s
says "on or at a fixed period after" and not "before."
not really a time but a condition.
Illustration 1:
VI. MUST BE PAYABLE TO ORDER OR BEARER (SEC. 8 & 9)
I promise to pay X or bearer Php 10,000 on or before 10 Dec 2018.
Sgd. Y Words of negotiability — serve as an expression of
consent that the instrument may be transferred
Negotiable. You indicate a particular date. Can you

change the date? You cannot. That’s the only date But the instrument need not follow the language of the
available.
law; any term which clearly indicates an intention to
conform with the legal requirements is sufficient.
Illustration 2:
CALTEX v. CA (1992)
I promise to pay X or bearer Php 10,000 15 days after his father’s death.
The negotiability or non-negotiability of an instrument is
Sgd. Y determined from the face of the instrument itself. The duty of

the court in such case is to ascertain, not what the parties
Negotiable. The date is determinable. The death of X’s may have secretly intended but what is the meaning of the
father is an event which is certain to happen.
words they have used.
Illustration 3:
PAYABLE TO ORDER:
Sec. 8. When payable to order. - The instrument is payable
I promise to pay X or bearer Php 10,000 5 days before his death. to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn
Sgd. Y payable to the order of:

(a) A payee who is not maker, drawer, or drawee; or
This is a non-negotiable instrument. The law states (b) The drawer or maker; or
“after the occurrence of a specified event”.

(c) The drawee; or

(d) Two or more payees jointly; or

Could be the drawer. [Sec. 8 (b)]
(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 A) PAYEE WHO IS NOT THE MAKER, DRAWER OR
named or otherwise indicated therein with reasonable DRAWEE
certainty.
The payee or that specified person could be another
person other than the drawer, maker or drawee.
PAYABLE TO ORDER:
a. A payee who is not maker, drawer, or drawee;
To: X
b. Drawer or maker; or
Pay to the order of P Php 10,000 on 30 Aug 2018.
c. Drawee; or
Sgd. J
d. Two or more payees jointly; or

e. One or some of several payees; or

Payee is the person different from the drawer and the
f. The holder of an office for the time being
drawee.
So when is an instrument payable to order? What form of order instrument?

An instrument is payable to order where it is drawn Payable to the order of a specified person.
payable to the order of a specified person or to him or

his order.
Who’s the specified person?
The drawer who is J. “My” there is J.
So how many forms of order instruments are there? Or you could also say “payable to the order of J” then
For bearer instrument, there are 5 mentioned in Sec. 9.
signed by J.
As to form of order instrument, there are 2:

B) PAYEE WHO IS THE DRAWER OR MAKER
1) Payable to the order of a specified person; or
You are the maker and at the same time the one who will
2) Payable to a specified person or his order
make the subsequent order.
BOTH Bill of exchange and promissory note can be DRAWER/BILL OF EXCHANGE

payable to order.
To: X
Pay to my order Php 10,000 on 30 Aug 2018.
Promissory note Payable to the order of a specified
person (PN) Sgd. J

I promise to pay to the order of X Php 10,000 on 30 Aug 2018. Payable to the order of specified person.
Sgd. Y

What form of order instrument?

Payable to the order of a specified person.
Bill of exchange payable to the order of a specified

person
Who’s the specified person?
To: X The drawer who is J. “My” there is J.
I promise to pay to the order of X Php 10,000 on 30 Aug 2018.

Or you could also say “payable to the order of J” then
Sgd. Y

signed by J.
Take note: These are the 2 forms of order instrument.

Either (1) payable to the order of a specified person, or MAKER/PROMISSORY NOTE
(2) payable to a specified person or his order. Unlike in a
bearer instrument where there could be 5 forms.
I promise to pay myself or order Php 10,000 on 30 Aug 2018.
Sgd. J
Either of these 2 forms though may contain a payee who
is not a maker, not a drawer or not a drawee. So in this You could also say “I promise to pay J or order”…
case, which one is that instrument? “myself” being J — the maker of this instrument
Illustration 1 — payee not the maker
Illustration 2 — payee not the drawer or drawee
C) ORDER OF A DRAWEE
This is an example of Sec. 8(a) where the payee
happens to be a person different from maker, just like To: X
this promissory note (illustration 1) OR a payee is Pay to the order of yourself Php 10,000 on 30 Aug 2018.
different from the drawer, and the drawee on this case Sgd. J
(illustration 2).

It could also be “pay yourself or order”…
But it is also possible that the one who could give the “yourself” being X — drawee of this instrument
order could be?

D) ORDER OF TWO OR MORE PAYEES JOINTLY (c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the person
The payees in this case are required to jointly make the making it so payable; or
indorsement.
(d) When the name of the payee does not purport to be the
We emphasize the conjunction which denotes that there name of any person; or
are two separate credits in this case.

(e) When the only or last indorsement is an indorsement in
blank.
PAYABLE TO BEARER:
I promise to pay A and B or order Php 10,000 on 30 Aug 2018. a. Expressed to be so payable; or
Sgd. J b. Person named therein or bearer; or

c. Order of a fictitious or non-existing person, and such
What’s the requirement if there is a joint payees? This fact was known to the person making it so payable
being an order instrument? d. Name of the payee does not purport to be the name
The requirement is that both A and B will make the of any person;
indorsement.
e. Only or last indorsement is an indorsement in blank.
E) ONE OR SOME OF SEVERAL PAYEES Bearer — means the person in possession of a bill or
The instrument is payable to either one of them or the note which is payable to bearer.
indorsement of any one is sufficient to pass title.
We emphasize the conjunction “or”.

A) EXPRESSED TO BE SO PAYABLE
“Pay to holder” — is payable to bearer and the term
ORDER OF ONE OR SOME OF SEVERAL PAYEES “holder” can be said to be equivalent to or of the same
import as the word “bearer”
To: X
Pay to the order of A, B or C Php 10,000 on 30 Aug 2018. I promise to pay P1,000 to bearer.
Sgd. J Sgd. Y

So because of the conjunction “or” it is considered that

there are several payees.
B) PERSON NAMED THEREIN OR BEARER
“An instrument payable to “holder or order” or “to the
order of P or bearer” has b been held to be payable to
F) THE HOLDER OF AN OFFICE FOR THE TIME BEING bearer.
The position must be occupied by only one person

otherwise it will render the payee undeterminable. If it is Illustration 1: (correct)
an order instrument, it is required that it must be

payable to a payee who is named or indicated with I promise to pay X or bearer P1,000.
Sgd. Y

Negotiable. Named or bearer.
To: X
So first, for a bearer instrument, it could be payable to
Pay to the order of the of internal revenue Php 10,000 on 30 bearer as expressly stated in the instrument.
Aug 2018.
Sgd. J

Illustration 2:
In that case, It is still considered a negotiable instrument

I promise to pay to bearer P1 M.
and still payable to order. Even if you don’t mention
Sgd. Y
what year it is, whoever the current holder of the
position gets the indorsement for the instrument.

So that is an instrument payable to bearer.
It can even be to a cashier, treasurer of any organization. The second possible example of a bearer instrument is
Position like president of lex circle. So long as the
when you name the specified person and then you add
person gets to be identified or at least the position gets
the word bearer.
to be identified.
Illustration 3:
PAYABLE TO BEARER:
I promise to pay X or bearer P1 M.
Sec. 9. When payable to bearer. - The instrument is payable Sgd. Y
to bearer:

(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; Illustration 4: (wrong)
or

It has to indicate words of negotiability. Yes, Superman

I promise to pay to bearer X P1M
is a fictitious person – but you wouldn’t know – it’s
Sgd. Y payable to the order of a fictitious person.
Non-negotiable. Bearer here is used as an adjective to

describe X. Not considered payable to bearer but Illustration 3:
payable to a specified person.
I promise to pay P1,000 to Superman or order.

Sgd. E
But how about the word bearer?
Still no because the word “bearer” there is used as an What type of instrument is this? Order or Bearer
adjective to describe X. So not considered payable to instrument?
bearer then but rather payable to a specified person S: Bearer instrument.
which is X. So there’s no way you can circulate it

around the market as a negotiable instrument because If you made this knowing or thinking that Superman
it’s payable specifically to X the bearer of the exists, will that change your answer?
instrument.
S: Yes. It becomes an order instrument.
Be mindful as well of the wordings used and the syntax Atty: It becomes a non-negotiable, even though you
of the language.
really intended to make a negotiable instrument.
The fact that there cannot be one who will make the
C) FICTITIOUS OR NON-EXISTING PERSON indorsement upon the issuance of this instrument, then
“Order of a fictitious or non-existing person, and such it cannot be considered negotiable.
fact was known to the person making it so payable”
In fact, you cannot be able to issue this instrument

■ “Person making it so” — refers to the maker or because to whom will you issue this one? When there is
drawer rather than the party actually executing the no superman.
instrument
■ Fictitious person — though named or specified as It will only be considered a bearer instrument if the
payee, has no right to it because maker or drawer so person who made this instrument thought that
intended and it matters not, whether the name of the superman does not really exist. So because he
payee used by him be living or dead or never existed
wanted to draft a negotiable instrument, then he just
■ Non-existing person — one who does not exist and wants it to be negotiated or circulated in the market, he
had never existed.
drafted it that way. The intention must be for it to be
able to be circulated. Otherwise, he would not have
Note that it must be an order instrument and that the mean the instrument payable to superman.
maker or drawer knows that Superman is fictitious or

non-existent. If B signed it believing that Superman So it is very important that the person making use of a
really existed (even if we all know that Superman does fictitious name for purposes of a negotiable instrument,
not really exist), then it will not become a bearer must know that that person doesn’t exist. Otherwise, it
instrument for failure to comply with Sec 9c. The will render the instrument non-negotiable. So be mindful
intention of the party making or drawing the instrument of the requirements in (c).
matters.

D) NAME OF THE PAYEE DOES NOT PURPORT TO BE
THE NAME OF ANY PERSON
I promise to pay Superman P1,000. “Pay to cash or order”
Sgd. Y “Pay to payroll or order”
“Pay to money or order”
Non-negotiable. It should be payable to the order of a

fictitious or non-existing person.
The instrument does not purport to designate a specific

payee. The maker intends the sam to be payable to
The difference between letter C (this section right now) bearer.
from letter B (payable to a person named therein or

bearer) is that in C, it should be to the order of a
fictitious person. Letter B means a name of a person Illustration 1: (wrong illustration)
then.
To: X
Pay to cash Php 1 million.
Illustration 2: (correct illustration)
Sgd. E
I promise to pay to the order of Superman P1,000.
Sgd. Y Non-negotiable. It does not contain any words of

negotiability. In order for it to be negotiable, it must
contain words of negotiability such as “or order”

VII. DRAWEE MUST BE NAMED

What (d) actually contemplates is an instrument that on APPLICABLE ONLY TO BILLS OF EXCHANGE
its face is payable to order and it doesn’t contain a This is because drawees are present only in bills of
word “order” on the instrument, so this cannot be exchange. There is no drawee in a promissory note.
considered as a negotiable instrument.
Where a bill is addressed to the “treasurer” of a

Although I understand that the book used this as an corporation, the drawee is sufficiently indicated.
example to describe (d) but you should understand, that

(d) there has to contain still words of negotiability.
And cash is not a word of negotiability.
TN: In effect, if it is a bill of exchange and there is no
drawee, the instrument is not negotiable.
Although there is this one case that talks about an

instrument that is payable to cash. But what is usually B. Kinds of Negotiable Instruments
practiced is if pro-forma check used in payment and 1. Promissory Note
contained as a payee is the word “cash” instead of the 2. Bill of Exchange
specific name of a person. The check actually starts

3. Checks
“pay to the order of”. So it contains the words of

negotiability. That’s what makes it negotiable.
1. PROMISSORY NOTE (SEC. 184)

This one (the illustration), though said in the book as an
example should not be considered as a negotiable Sec. 184. Promissory note, defined. - A negotiable
promissory note within the meaning of this Act is an
instrument. It must contain words of negotiability.
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
E) ONLY OR LAST INDORSEMENT IS AN money to order or to bearer. Where a note is drawn to the
INDORSEMENT IN BLANK maker's own order, it is not complete until indorsed by him.
An order instrument can be considered a bearer

instrument if the last indorsement is an indorsement
in blank.
2. BILL OF EXCHANGE (SEC. 126)

The last one (e) talks about the only or last indorsement
is an indorsement in blank, this happens once an Sec. 126. Bill of exchange, defined. - A bill of exchange is
an unconditional order in writing addressed by one person
instrument has already been negotiated.
to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a
I must have mentioned it when we were talking about fixed or determinable future time a sum certain in money to
order or to bearer.
the incidences on the life of a negotiable instrument that

if the instrument is payable to bearer, you can
negotiate it by mere delivery.
I. BILL NOT AN ASSIGNMENT OF FUNDS (SEC. 127)

Whereas, if it is an instrument that is payable to order, Sec. 127. Bill not an assignment of funds in hands of
drawee. - A bill of itself does not operate as an assignment
someone has to sign first, making his order that this is of the funds in the hands of the drawee available for the
to be paid to the person to whom he will negotiate the payment thereof, and the drawee is not liable on the bill
instrument. So in that case, it requires an indorsement unless and until he accepts the same.
prior to delivery to complete the negotiation.
A bill is not an assignment of funds. Even if the drawee

So, if at the back of the instrument, it no longer has enough funds in the name of the drawer. Until the
contains a specific person to whom the instrument drawee accepts the bill, he is not liable.
can be negotiated, that only means that this instrument

must be intended to become a bearer instrument.
Effect if drawee refuses to accept: he may be liable to
the drawer.
So an order instrument then can be converted to a

bearer instrument IF the last indorsement happens to
be in blank. But take note, that only happens when the II. BILL ADDRESSED TO MORE THAN ONE DRAWEE (SEC. 128)
LAST INDORSEMENT IS IN BLANK.
Sec. 128. Bill addressed to more than one drawee. - A bill
may be addressed to two or more drawees jointly, whether
they are partners or not; but not to two or more drawees in
So don’t get confused later on that the moment you see the alternative or in succession.
a blank instrument, automatic it becomes a bearer

instrument. NO. Only if the last indorsement is an
indorsement in blank. The operative term there is last. A bill of exchange may be addressed to two or more
So that’s when an instrument is payable to bearer.
drawees. But cannot be made in alternative nor in
succession.

Rationale: It would be difficult to determine the exact Parties to a PN and BOE

date of dishonor of the bill if made in alternative or in
succession. If you wouldn’t know the date of dishonor Promissory Note Bill of Exchange
then you wouldn’t also know when your cause of action
arises and also when the liabilities of the parties are to Maker
Drawer
accrue as well.
Payee
Drawee
Holder Payee
Holder
III. INLAND AND FOREIGN BILLS OF EXCHANGE (SEC. 129)
Sec. 129. Inland and foreign bills of exchange. - An inland Who is a holder?
bill of exchange is a bill which is, or on its face purports to Person who holds the instrument (may also be a party to
be, both drawn and payable within the Philippines. Any
other bill is a foreign bill. Unless the contrary appears on the the instrument)
face of the bill, the holder may treat it as an inland bill.
■ Inland Bill — drawing and paying of the instrument Can a PN be an order instrument? Can a BOE be a
happened within the Philippines.
bearer instrument?
■ Foreign Bill — If either the drawing or paying or both Yes on both. As defined in Section 1, “payable to order
happen abroad.
or to bearer”. Initially, the word “order” in the second
requirement and the “order” mentioned in the 4th
requirement are different.
IV. WHEN BILL MAY BE TREATED AS PROMISSORY NOTE (SEC. 130)

Sec. 130. When bill may be treated as promissory note. - Even if a BOE is the one referred to as the unconditional
Where in a bill the drawer and drawee are the same person order, the “order” mentioned in section 4 is the order to
or where the drawee is a fictitious person or a person not be made to the payee and whoever holds that
having capacity to contract, the holder may treat the instrument. The “order” under the 2nd requirement is
instrument at his option either as a bill of exchange or as a
promissory note.
the order to be made by the drawer of that instrument.
INSTANCES WHEN A BILL MAY BE TREATED AS A

PROMISSORY NOTE: 3. CHECK (SEC. 185)
1. The drawer and drawee are the same person.
Sec. 185. Check, defined. — A check is a bill of exchange

2. Where the drawee is a fictitious persona
drawn on a bank payable on demand. Except as herein
3. The drawee does not have the capacity to contract
otherwise provided, the provisions of this Act applicable to
a bill of exchange payable on demand apply to a check.
1. THE DRAWER AND DRAWEE ARE THE SAME PERSON

In a bill of exchange, the holder has to present the The drawee is always a bank. You cannot call it a check
instrument for acceptance whereas if it is a promissory if the drawee is not the bank and it is always payable on
note, it is not needed. So in this case, if that instrument demand.
will be considered a promissory note, it will allow the

holder to dispense with the presentation for Is there always a drawee?
acceptance.
Yes, which is a bank. One of the elements of a bill of
exchange is that “where the instrument is addressed to
Because if it is a bill of exchange and there is no a drawee, he must be named or otherwise indicated
presentation for acceptance, that means that the parties therein with reasonable certainty.” The drawee here is
are not yet liable. Those secondary parties cannot be always a bank, otherwise, it is most likely not a check.
considered liable just yet because if it is a bill of

exchange, you are supposed to present that for
acceptance, and only when the instrument is not
accepted can you proceed after the parties secondarily C. Additions and Omissions Not Affecting
liable.
Negotiability
I. TERMS USED (SEC. 10)
2. WHERE THE DRAWEE IS A FICTITIOUS PERSON Sec. 10. Terms, when sufficient. - The instrument need not
It has to be the intention of the person who drew it that follow the language of this Act, but any terms are sufficient
instrument must be negotiable instrument. He has which clearly indicate an intention to conform to the
knowledge when he put ‘the name’ there, he did not requirements hereof.
intend that this instrument must be presented for When are the terms considered sufficient?
acceptance.
You need not use the terms provided under Sec. 1. You
can have your own terms for as long as they have
3. THE DRAWEE DOES NOT HAVE THE CAPACITY TO similar phraseology and intent.
CONTRACT
There must be knowledge that the person will not be Example:
able to accept because he is incapacitated (e.g. minor).

The intention is not to bind the person who accepted it.
To: X
Please pay to P or order Php 10,000
Sgd. Y


Still negotiable as long as there are words of (B) AUTHORIZES A CONFESSION OF JUDGMENT IF
negotiability because you can always be polite with THE INSTRUMENT BE NOT PAID AT MATURITY
your order or demand. You can include “please” or
“kindly” because you can be polite in demanding This does not affect the negotiability of the instrument
something.
becomes the confession happens only after the
instrument’s maturity.
II. ADDITIONS (SEC. 5, 11 & 12) Is confession of judgment illegal?

Sec. 5. Additional provisions not affecting negotiability. - Confession of judgment as it stands now is illegal
An instrument which contains an order or promise to do any according to U.S. Jurisprudence because it bargains a
act in addition to the payment of money is not negotiable. person’s day in court and right to appeal. However, it
But the negotiable character of an instrument otherwise does not affect the negotiability of an instrument.
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
COGNOVIT ACTIONEM IS VALID
(b) authorizes a confession of judgment if the instrument be You confess guilt on the act alleged. You accept the
not paid at maturity; or
obligation and admitted that there was no payment
(c) waives the benefit of any law intended for the advantage made. You will do this after the action is filed in court.
or protection of the obligor; or
This is what happens actually during arraignment.
(d) gives the holder an election to require something to be

done in lieu of payment of money.
You don’t bargain your day in court. You simply give in
But nothing in this Sec. shall validate any provision or to the order to save expenses.
stipulation otherwise illegal.
Sec. 11. Date, presumption as to. - Where the instrument or RELICTA VERIFICATION IS VALID
an acceptance or any indorsement thereon is dated, such Here, the pleading is being abandoned. A confession of
date is deemed prima facie to be the true date of the
making, drawing, acceptance, or indorsement, as the case judgment by withdrawal of the defense. This is likewise
may be.
valid because you do the same after the action is filed
Sec. 12. Ante-dated and post-dated. - The instrument is in court.
not invalid for the reason only that it is ante-dated or post-

dated, provided this is not done for an illegal or fraudulent TN: Both happens after the case or action has been
purpose. The person to whom an instrument so dated is
delivered acquires the title thereto as of the date of delivery.
filed. The justification of the Supreme Court in the case
of PNB v. Manila Oil will not apply. You did not bargain
your day in court in both instances. After all, there is an
CCWE action filed.
(a) Authorizes sale of collateral securities;
(b) Authorizes confession of judgment if instrument not

paid at maturity;
(C) WAIVES THE BENEFIT OF ANY LAW INTENDED FOR
THE ADVANTAGE OR PROTECTION OF THE OBLIGOR
(c) Waives the benefit of any law intended for the
advantage or protection of the obligor; or
A debtor is in delay only when creditor makes demand.
(d) Gives holder election to require something to be That is for the benefit of the debtor because if there’s no
done in lieu of payment of money
demand yet, he cannot be in delay, thus, he is not liable
for payment of interest and damages.
(A) AUTHORIZES THE SALE OF COLLATERAL SECURITIES Example: When the obligor (debtor) waives the benefit of
IN CASE THE INSTRUMENT BE NOT PAID AT MATURITY the “No demand, no delay” principle under Obligations
Why will sale of collateral not affect the negotiability of an and Contracts.
instrument?
Because the sale of the collateral happens only after the
maturity of the instrument. It does not affect the WAIVE OF NOTICE OF DISHONOR
negotiability of the instrument as long as the requisites (D) GIVES THE HOLDER AN ELECTION TO REQUIRE
are still there.
SOMETHING TO BE DONE IN LIEU OF PAYMENT OF MONEY
A) If the option is with the holder — the instrument is
If the sale of the collateral happens before the maturity of negotiable
the instrument, can it affect the negotiability of the B) If the option is with the promisor — the instrument is
instrument?
Yes. It has to happen after, otherwise, the instrument non-negotiable (because the holder cannot compel
loses its character of negotiability because said him to make payment in money)
collateral could not be the same as the amount stated

when it is sold and it happens prior to maturity.
Negotiability affected, when instrument contains a
promise or order to do any act in addition to the
payment of money.

PNB v. MANILA OIL REFINING (1922)

In this case, the note contains a provision that in case that it If date not stated in calendar — nearest date of the
would not be paid at maturity, the "maker authorizes any month the date intended
attorney to appear and confess judgment thereon.”
The Court ruled that said judgment note is illegal and

inoperative as such is against public policy. It noted that it is PRESUMPTION IF NOT DATED
in derogation of the constitutional safeguards (a day in court). Sec. 11. Date, presumption as to. – Where the instrument
Such judgment note can only be valid if given express or an acceptance or any indorsement thereon is dated, such
legislative sanction.
date is deemed prima facie to be the true date of the
making, drawing, acceptance, or indorsement, as the case
may be.
III. OMISSIONS (SEC. 6) If not dated, the date when the instrument was issued is
presumed to be the true date. Presumption is you
Sec. 6. Omissions; seal; particular money. — The validity
and negotiable character of an instrument are not affected issued the instrument on the same day you made it.
by the fact that —
(a) It is not dated; or
OMISSION OF VALUE
(b) Does not specify the value given, or that any value had
been given therefor; or
The consideration is presumed for all instruments
(c) Does not specify the place where it is drawn or the issued, which means it does not render it non-
place where it is payable; or
negotiable.
(d) Bears a seal; or

The burden of proof that no consideration has been
given for the instrument is on the one alleging it.
(e) Designates a particular kind of current money in which

payment is to be made.
But nothing in this section shall alter or repeal any statute

requiring in certain cases the nature of the consideration to
OMISSION OF PLACE PAYABLE
be stated in the instrument.
When not specified
1) Presumed have been made where it is dated
DOES NOT AFFECT THE VALIDITY EVEN IF: 2) payable at the place of residence of the maker
(a) It is not dated; or

3) maker’s or drawer/s place of business or his home
(b) Does not specify the value given, or that any value
had been given therefor; or
(c) Does not specify the place where it is drawn or the BEARS A SEAL
place where it is payable; or
An instrument need not be notarized.
(d) Bears a seal; or

Seal is required in US practice.
(e) Designates a particular kind of current money in

which payment is to be made.
◦ Copied from the US; has no bearing on Philippine
instruments since an instrument to be negotiable need
not be notarized so it need not contain any seal
NOT DATED
◦ Presumption provided by law that the date is when
the instrument was issued PARTICULAR KIND OF CURRENT MONEY
Refers to the money which can be exchanged in relation
Omitted date here refers to the date when the to the value of the instrument. Simply, it is the exchange
instrument was drawn or made, and not the date rate of the currencies involved in the transaction.
when the instrument is supposed to be paid.
There is a presumption required by law.

◦ Refers to a foreign instrument issued abroad which is
payable in the Philippines thus there is a need to
Date is not necessary. It will not make the instrument exchange the currency into Philippine currency as
non-negotiable.
payment to payee or bearer of the instrument
◦ Does not mean that you need not indicate the currency
involved otherwise you will not know what to pay to
CASES WHERE DATE IS NECESSARY the payee of the instrument
1) Date is tied to the date of issue — after date or

◦ [No longer practiced because we are now allowed to
sight
make payment in whatever form depending on the

‣ e.g. “payable 10 days after”
agreement of the parties]

2) Where interest is stipulated
‣ for purpose of determining when interest is to run
3) PN — date of issue;   D. Parties

BoE — date of last negotiation
DIFFERENT TYPES OF HOLDERS
‣ for purpose of determining whether party acted 1. Holder in due course
within reasonable time in making presentment for 2. Holder through a holder in due course
payment
3. Holder not in due course

HOLDER IN DUE COURSE: [COFI] — MEMORIZE!!

(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was

overdue, and without notice that it has been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no

notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
(A) COMPLETE AND REGULAR UPON ITS FACE

I. HOLDER IN DUE COURSE (SEC. 52, 58 & 59) ■ Complete — complies with all the requirements in
Sec. 52. What constitutes a holder in due course. — A Section 1. It is not wanting in any material particular.
holder in due course is a holder who has taken the ■ Regular — when nothing on the face of the instrument
instrument under the following conditions:
will create a doubt in your mind that there is
(a) That it is complete and regular upon its face;
something wrong with the instrument.
(b) That he became the holder of it before it was overdue,

and without notice that it has been previously An instrument would appear irregular when there are
dishonored, if such was the fact;
alterations (e.g. erasures).
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no TN: “In writing and signed by the maker” — the maker
notice of any infirmity in the instrument or defect in the does not need to be the one to write the instrument; the
title of the person negotiating it.
maker only needs to sign.
Definition: Payee or indorsee of a bill or note who is in

possession of it, or the bearer thereof.
(B) HOLDER OF IT BEFORE IT WAS OVERDUE
When is an instrument overdue?
RIGHTS OF HOLDER (Sec. 51, NIL) An instrument is overdue after the date of maturity.
1. sue thereon in his own name

1. If the time provided already lapsed
2. payment to him in due course discharges   2. If payable on demand, date of maturity is date of
instrument
presentment
3. If an instrument is a promissory note, after the lapse

When a person is a holder in due course, he will hold the of reasonable time from its date of issuance
instrument free from any personal defenses of prior

parties, not all defenses, only PERSONAL DEFENSES.
FIRST REQUIREMENT (BEFORE THE INSTRUMENT IS OVERDUE):

■ If there is a date of maturity: You became the holder of
RIGHTS OF HOLDER IN DUE COURSE an instrument before maturity.
1) To sue on the instrument in his own name (Sec. 51,

NIL)
■ If payable on demand:
2) to receive payment on the instrument — discharges ❖ Promissory Note: must be negotiated to the
the instrument (Sec. 51, NIL)
holder within a reasonable time from the issuance.
3) holds instrument free of any defect of title of prior ❖ Bill of Exchange: must be negotiated to the
parties (Sec. 57, NIL)
holder within a reasonable time from the last
4) free from defenses available to prior parties among negotiation
themselves (Sec. 57, NIL)
5) may enforce payment of instrument for full amount, SECOND REQUIREMENT (WITHOUT NOTICE OF DISHONOR):
against all parties liable (Sec.57, NIL)
■ Applies only to Bill of Exchange
■ It is possible that an instrument is dishonored even

THREE KINDS OF HOLDER IN DUE COURSE before it becomes overdue, as when there is non-
1. DC under Sec 52
acceptance by a drawee.
2. HDC under Sec 58 : A holder who derives  

title to the instrument through a HDC has all the May be negotiated by:
rights of the latter even though he himself satisfies ■ Indorsement — not holder in due course
none of the requirements of due course holding

(Campos & Campos)
■ Delivery to the same extent as before maturity —
holder without notice can be a holder in due course
3. HDC under Sec 59 (presumption): every holder is

deemed prima facie to be a holder in due course
TN: A bill of exchange can be presented for acceptance

and need not be accepted. If it is not accepted, it will
not be reflected on the instrument so it can then be

further negotiated without those persons knowing that it 1) any infirmity in instrument
has actually been dishonored by non-acceptance. For 2) any defect in title of person
as long as the instrument has not been overdue, it can
still be presented for acceptance.
Reckoning point: at the time the instrument was

negotiated to the holder.
(C) TOOK IT IN GOOD FAITH AND FOR VALUE

■ PRESUMPTION — Every NI is deemed prima facie TITLE IS DEFECTIVE WHEN (SEC. 55, NIL):
issued for valuable consideration; and every person 1) instrument/signature obtained by fraud, duress,
whose signature appears thereon to have become a force or fear or other unlawful means OR for an
party thereto for value (Sec. 24, NIL)
illegal consideration; or
■ Value — any consideration sufficient to support a 2) instrument is negotiated in breach of faith, or

simple contract. An antecedent or pre-existing debt fraudulent circumstances
constitutes value, whether the instrument is payable

on demand or at a future time. (Sec.25, NIL)
NOTICE OF INFIRMITY OR DEFECT –
1) actual knowledge of the infirmity or defect OR
GOOD FAITH knowledge of such facts that his action in taking the
Holder must have taken the instrument in good faith and instrument amounted to bad faith (Sec.56, NIL)
that at the time it was negotiated to him he had no 2) Notice to an AGENT is chargeable against the
notice of any infirmity in the instrument or defect in the principal.
title of the person negotiating it.

3) Insufficient notice
4) RIGHT of a transferee who receives NOTICE of any

- refer only to the indorsee or transferee and NOT to the infirmity or defect BEFORE he has PAID THE FULL
seller of the negotiable instrument
amount for the instrument
- "honesty in fact in the transaction concerned”
- without knowledge or notice of any material fact INFIRMITY

which would render it dishonest to take the An instrument worth 100k on its face, but it was written
instrument
by your friend whom you know would issue an
- determined by a consideration of facts and instrument worth 10k. There was an alteration made in
circumstances of the particular case
the instrument. Alterations can be considered as an
infirmity.
BAD FAITH
- must have actual knowledge of the infirmity or defect DEFECT
or knowledge of such facts which render it dishonest 1. The instrument was negotiated to a person on
for him to take particular negotiable paper
account of murder. (This is a defect in the title)
2. When you pay for an instrument worth 1M but you

■ For value — When something is given in exchange for paid for it at 1,000pesos. (This is also a defect in
your title)
that instrument enough to support a simple contract
3. When you stole the instrument. (This is the most

common case)
Consolidated Plywood v.
IFC: A FINANCING COMPANY that is the indorsee of a note
issued by a buyer payable to the seller of goods is NOT a WHEN NOTICE OF INFIRMITY OR DEFECT MAKES ONE A
holder in good faith as to the buyer. In case the goods sold HOLDER NOT IN DUE COURSE
turn out to be defective, it cannot recover the purchase price Notice of any defect in the instrument will only affect the
of the goods from the buyer.
status as the holder in due course if it is acquired at the
In installment sales, the buyer usually issues a note payable to time the instrument was negotiated. If it is after that,
the seller to cover the purchase price.
then it will already be irrelevant.
Many times, pursuant to a previous arrangement with the

seller, a finance company pays the full price of the property
sold and the note is indorsed to it by the seller, subrogating it II. HOLDER THROUGH A HOLDER IN DUE COURSE
to the right to collect the price from the buyer.
Sec. 58. When subject to original defense. — In the hands

RULE — In such cases, the tendency of the courts is to of any holder other than a holder in due course, a
protect the buyer against the finance company in the event negotiable instrument is subject to the same defenses as if
that the goods sold turn out to be defective. The finance it were non-negotiable. But a holder who derives his title
company will be subject to the defense of failure of through a holder in due course, and who is not himself a
consideration and cannot recover the purchase price from the party to any fraud or illegality affecting the instrument, has
buyer.
all the rights of such former holder in respect of all parties
NOTE: Consolidated Plywood v. IFC — rule applied; Salas v. prior to the latter.
CA — rule not applied

Known as the “Shelter Principle”.
■ General Rule: In the hands of any holder other than a

(D) NO NOTICE OF ANY INFIRMITY HDC, NI is subject to same defenses as if it were non-
No notice of:
negotiable.

to the acquisition of such defective title. (Sec.59.,

—Exception: A holder who derives title through a NIL)
HDC and who is NOT himself A PARTY TO ANY

FRAUD or illegality has all rights of such former However, this presumption arises only in favor of a
holder in respect to all parties prior to the latter person who is a holder as defined in Section 191 of the
EVEN though he himself does not satisfy Sec.52
Negotiable Instruments Law, meaning a “payee or
indorsee of a bill or note, who is in possession of it, or
TWIN REQUIREMENTS TO BE A HOLDER THROUGH A the bearer thereof.” (Yang v CA, 2003)
HOLDER IN DUE COURSE:

1) acquired the title from holder in due course
PRESUMPTION
2) must not be a party to any illegality or fraud in the In absence of any information, one is presumed a holder
negotiation of the instrument.
in due course.
If one cannot prove that he is a holder in due course, at If another claims that he is not a holder in due course,
least if he is able to prove that he acquired title from a he can either prove that he himself is a holder in due
holder in due course, he can acquire the rights of such course or to prove that the person from whom he
holder in due course.
acquired the instrument is a holder in due course.
Thus, he can be considered as well as a holder in due When will the presumption not apply?
course. This is only for the purpose of considering The presumption that every holder is a holder in due
whether he is subject to personal defenses or not. But course does not apply whenever there is any defect in
he is never a holder in due course. He is only any of the title of the person who negotiated the
considered a holder through a holder in due course.
instrument. It need not be the person from whom he
acquired it.
Can a holder not in due course be able to acquire the

rights of a holder in due course and acquire the same Any defect automatically precludes the presumption.
status of a holder in due course?
Yes, pursuant to the shelter principle (Second sentence Burden of proof is now shifted to the person who claims
of Section 58)
that he acquired the title as a holder in due course.
Important: In order for the shelter principle to apply, the

PRESUMPTION OF HOLDER IN DUE COURSE holder does not have to prove that he is a holder in due
Sec. 59. Who is deemed holder in due course. — Every course. He just needs to prove that the person from
holder is deemed prima facie to be a holder in due course; whom he acquired the instrument is a holder in due
but when it is shown that the title of any person who has course and that he is not a party to any of the defect or
negotiated the instrument was defective, the burden is on the illegality or fraud.
the holder to prove that he or some person under whom he

claims acquired the title as holder in due course. But the
last-mentioned rule does not apply in favor of a party who Does he need to be a party to the defect or mere
became bound on the instrument prior to the acquisition of knowledge would suffice?
such defective title.
Knowledge will not affect the shelter principle. The
provision is clear that “he himself is not a party to any
■ General Rule: Prima facie presumption in favor of fraud or illegality”.
holder
—Exception: Burden is reversed (burden on holder

to prove that he or some person under whom he
III. HOLDER NOT IN DUE COURSE (SEC. 53)
claims acquired title as HDC) when it is shown Sec. 53. When person not deemed holder in due course. -
that the title of any person who has negotiated Where an instrument payable on demand is negotiated on
instrument was defective
an unreasonable length of time after its issue, the holder is
not deemed a holder in due course.
▻ Exception to exception: There will be no If one is not able to comply with all the requisites in
reversal if the party being made liable Section 52, he can never be considered a holder in due
became bound prior to the acquisition of course.
such defective title (i.e., where defense is not

his own) — presumption in favor of holder
HOLDER NOT IN DUE COURSE

A holder not in due course is a holder of an instrument
Every holder is deemed prima facie to be a holder in due
where any of the four conditions are not met.
course;
1) BURDEN SHIFTS when it is shown that the title of

any person who has negotiated the instrument was Distinction between a holder in due course and not a
holder in due course?
defective. Holder MUST PROVE that he or some
They differ on their rights.
person under whom he claims acquired the title as a

A. Holder in due course — holds the instrument free
from the personal defenses of prior parties.
2) But the last mentioned rule does not apply in favor of

a party who became bound on the instrument prior B. Holder not in due course — holds the instrument
not free from any defenses of prior parties. They are

subject to the same defenses as if it were non- However it should always be the person primarily liable
negotiable.
who is liable first. He is the first person from whom you
must demand payment.
Person’s primarily liable can always be sought after.

III. REFEREE IN CASE OF NEED (SEC. 131) Subject of course to their defenses.
Sec. 131. Referee in case of need. - The drawer of a bill

and any indorser may insert thereon the name of a person
to whom the holder may resort in case of need; that is to DEFENSES
say, in case the bill is dishonored by non-acceptance or
non-payment. Such person is called a referee in case of • REAL defense — attaches to instrument on the
need. It is in the option of the holder to resort to the referee principle that there was no contract at all; available
in case of need or not as he may see fit.
against ALL holders including holders in due course.
They are those which attach to the instrument itself
and generally, disclose an absence of one of the
E. Defects (Sec. 65 & 66) essential elements of a contract.
MEMORIZE THE FIRST TWO REMEDIES:

• PERSONAL defense — grows out of the agreement
1) That the instrument is genuine and in all respects or conduct of a particular person in regard to the
what it purports to be.
instrument which renders it inequitable FOR HIM,
2) That he has good title to it.
though holding the legal title, to enforce it against the
party sought to be made liable; not available against a
HDC.can be raised only against holders not on due
Also take note of the second paragraph of section 65.
course. Here, the true contract appears, but for some

Sec. 65. Warranty where negotiation by delivery and so reason, the defendant is excused from the obligation
forth. — Every person negotiating an instrument by delivery
or by a qualified indorsement warrants:
to perform.
(a) That the instrument is genuine and in all respects what it

purports to be;
DIFFERENT KINDS OF DEFECTS OF A NI:
(b) That he has a good title to it;
1 Insertion of a wrong date Personal Defense

(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would 2 Incomplete but delivered Personal Defense
instrument
impair the validity of the instrument or render it
valueless.
3 Complete but undelivered Personal Defense
But when the negotiation is by delivery only, the warranty instrument
extends in favor of no holder other than the immediate 4 Incomplete and undelivered Real Defense
transferee.
instrument
The provisions of subdivision (c) of this Sec. do not apply to a 5 Forgery of signature Real Defense
person negotiating public or corporation securities other
than bills and notes.
6 Material alteration Personal Defense
Sec. 66. Liability of general indorser. - Every indorser who 7 Minors and Corporations Real Defense personal
indorses without qualification, warrants to all subsequent to the minor
holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b),

and (c) of the next preceding Sec.; and
STEPS IN YOUR ANALYSIS
(b) That the instrument is, at the time of his indorsement, 1) What type of defect is committed
valid and subsisting;
2) What type of instrument is involved (bearer or order

And, in addition, he engages that, on due presentment, it instrument)
shall be accepted or paid, or both, as the case may be,

according to its tenor, and that if it be dishonored and the 3) What type of holder is involved
necessary proceedings on dishonor be duly taken, he will ‣ If holder in due course — personal defenses are
pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it.
not available
‣ If not a holder in due course — it may or may not

be available depending on whether the shelter
WARRANTY (GGCK) principle will apply or not
1) That the instrument is Genuine and in all respects

what it purports to be
2) That he has Good title to it
3) That prior parties have Capacity to contract
4) That he has no prior Knowledge of any fact that

would impair the validity of the instrument.
You can only go after the one who immediately

negotiated it to you, you cannot go after the others
because they did not give any warranty to you. The only
person who gave you a warranty is the one immediately
before you.

I. UNDATED (SEC. 13) Sec. 52 defines the conditions where one is a holder in
due course.
Sec. 13. When date may be inserted. - Where an

instrument expressed to be payable at a fixed period after
date is issued undated, or where the acceptance of an HOLDER IN DUE COURSE: [COFI] — MEMORIZE!!
instrument payable at a fixed period after sight is undated, (c) That it is complete and regular upon its face;
any holder may insert therein the true date of issue or

acceptance, and the instrument shall be payable (d) That he became the holder of it before it was
accordingly.
overdue, and without notice that it has been
The insertion of a wrong date does not avoid the previously dishonored, if such was the fact;
instrument in the hands of a subsequent holder in due (e) That he took it in good faith and for value;
course; but as to him, the date so inserted is to be (f) That at the time it was negotiated to him, he had no
regarded as the true date.
notice of any infirmity in the instrument or defect in

— Personal Defense — the title of the person negotiating it.
In these instances it is necessary to insert the date to If you are a holder in due course then personal defenses
know the date of maturity.
like insertion of a wrong date cannot be used against
you. (Sec. 13 NIL)
SEC 13. PAR (2)

Relates to Section 11: Where the instrument is dated, Failure to satisfy the requirements makes you a holder
such date is deemed prima facie to be the true date
not in due course and subject to personal defenses
(Sec. 58 NIL)
TWO INSTANCES WHEN AN INSTRUMENT IS UNDATED.

1) Payable at a fixed period after date.
Going back to Dela Cruz’s example of the holder having
2) Payable at a fixed period after sight.
knowledge of the insertion of the wrong date it fails to
satisfy not the first requirement since it only refers to the
The date is material to know when payment must be form of the instrument to which it fully complies rather it
made for it to be defective.
fails to satisfies the last requirement that he was aware
of any infirmity (THE WRONG INSERTION) in the
Only defective for determining maturity, not negotiability
instrument at the time it was negotiated to him.
EFFECT WHEN INSTRUMENT IS NOT DATED Atty A: Now you know the rule is that if there is a blank
The fact that an instrument is not dated does not affect on the instrument there is actually AN AUTHORITY TO
its negotiability. Besides, the law provides instances PUT THE DATE on the instrument if it is necessary to
when date may be inserted.
determine it’s maturity (either date of issue or date of
acceptance).
EFFECT OF INSERTION OF A WRONG DATE

What is the consequence of an insertion of a date in such TWO INSTANCES WHEN DATE MAY BE INSERTED
instrument?
1. When the instrument is payable at a fixed period
It becomes the true date (Sec. 13 in relation to Sec. 11
after date but was issued undated
of the NIL)
2. When the instrument is payable at a fixed period

after sight but the acceptance was undated
Insertion of a wrong date in the instrument will not

avoid the instrument in the hands of a Holder in Due
Course, because as to him, the date inserted in the TN: The date is inserted not for purposes of making the
instrument is the true date.
instrument negotiable, but simply to determine its
maturity date.
Is that always true for all parties?

NO. If the holder is NOT a holder in due course (sec. 52 THIS IS A PERSONAL DEFENSE
NIL) then the maker or drawer can set up the personal The fact that it will not avoid the instrument in the hands
defense of insertion of a wrong date (Sec. 13 NIL)
of a holder in due course tells us that this is a personal
defense. Thus, it cannot be raised as a defense against
him.
On Dela Cruz’s example of the maker refusing payment

simply because of a subsequent insertion from another
person basing on the ground that since the person
collecting knew about the supposed wrong insertion the
date of issuance should be the true date (Sec. 11)
ATTY countered that it is also in the provisions of the NIL

that any date inserted becomes the true date. (Sec. 13)
The appropriate legal basis is sec. 13 of the NIL in

relation to sec. 52.

I promise to pay X or order Php 10,000 7 days after date. Thus his knowledge of the fraud may not make him
qualify as a holder in due course under sec. 52 but he
Sgd. J
can still be a holder through a holder in due course
under sec. 58 because he is not a party with the one
Original Date: Aug 23, 2018 directly responsible for fraud, provided that the prior
Wrong date inserted: Aug. 20, 2018 person who negotiated the instrument to him was a
J→X→Y→Z
↓ A holder in due course or a holder through a holder in
Aug. 20, 2018 due course can also go after other parties aside from

the maker/drawer himself prior to the infirmity. If he is
What happens if there is insertion of wrong date? not such then the other parties can put against him the
It does not avoid the instrument in the hands of a personal defense of insertion of a wrong date.
subsequent holder in due course.
Avoid — will not render the instrument VOID

Ultimately, any kind of holder can go after the party who
In case of a holder in due course — it is regarded as the perpetrated the fraud because the law does not tolerate
true date.
(countenanced) fraudulent acts in commercial
transactions.
In all those instances if you receive such instrument that

does not contain a date you are supposed to put a They can also go after the parties subsequent to the
date. You have blanket authority but you must put fraud because every indorser is subject to the
the true date.
warranties under sec. 65 of the NIL.
But If you inserted the wrong date, it does not AVOID

(DILI MA VOID) the instrument in the hands of a Order instruments must be indorsed. (Except under the
SUBSEQUENT HOLDER IN DUE COURSE. (Sec. 13)
circumstances provided in sec.9 )
For a holder in due course the date inserted becomes What does every indorser warrant under sec. 65?
the true date of the instrument.
Sec. 65. Warranty where negotiation by delivery and so
forth. — Every person negotiating an instrument by delivery
or by a qualified indorsement warrants:
It is thus important to classify the holders in the (a) That the instrument is genuine and in all respects what it
application of sec. 13.
purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would

impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty

extends in favor of no holder other than the immediate
transferee.
The provisions of subdivision (c) of this Sec. do not apply to a

person negotiating public or corporation securities other
than bills and notes.
1) That the instrument is Genuine and in all respects

What type of defense and why? what it purports to be
Personal defense — cannot use against holders in due 2) That he has Good title to it
course and holder through a holder in due course. It 3) That prior parties have Capacity to contract
must be inferred by the particular provisions in the NIL.

4) That he has no prior Knowledge of any fact that
would impair the validity of the instrument.
SHELTER PRINCIPLE
“SHELTER PRINCIPLE” - The immediate subsequent TAKE NOTE: if it is a bearer instrument the warranty will
holder who derives his title from a holder in due course only apply to the prior immediate indorser.
and that HE IS NOT A PARTY TO ANY FRAUD OR

ILLEGALITY affecting the instrument has all the rights
of the prior holder as to any prior parties.
For now you just have to memorize the first warrant.
Even if the subsequent holder knew about the wrong In regards to it when you warrant that it is genuine, then
date as long as he is not party to the one directly it follows that it should bear the true date.
responsible for the fraud then he still is a holder through

the holder in due course.
In regards to the parties prior to the infirmity — you
cannot go after them and claim that they did not
comply with their warranty.

PERPETRATOR OF THE FRAUD:

In regards to the maker — he has a separate warranty B to Y — Y is the perpetrator of the fraud so he is
and the succeeding parties prior to the wrong ultimately liable and must be punished by law
insertion cannot be liable also since logically by the

time the instrument was in their hands it was still SUBSEQUENT PARTIES TO THE FRAUD:
genuine and valid.
B to Z & A — liable because they are subsequent
parties who warranted the instrument is genuine and in
Only when it reached the person who perpetrated the all respects of what it purports to be (Sec. 65)
fraud that it started to lose it’s genuineness and thus

only the subsequent parties could be liable for
breaching the warranty.
PRIOR PARTIES TO THE FRAUD:
B to J & X — can be compelled to pay because B is a
holder in due course and they cannot raise the personal
So to go after parties before the insertion of the defense of insertion of wrong date (Sec. 66)
wrong date, one can go after them by being a holder

in due course or a holder through a holder in due
course by relying on the provisions on sec. 13 that as ANTE-DATING AND POST-DATING
regards to them the date inserted becomes the true
Section 12. Ante-dated and post-dated. – The instrument
date.
is not invalid for the reason only that it is ante-dated or
post-dated, provided this is not done for an illegal or
fraudulent purpose. The person to whom an instrument so
On the other hand if one is not a holder in due course dated is delivery acquires the title thereto as of the date of
then they can only after the parties subsequent to delivery.
the fraud on the basis of breach of warranty under sec. It does not affect the negotiability and validity of the
65. Ultimately they can always go after the perpetrator instrument as long as it is not use for fraudulent
of the fraud, as the law does not tolerate fraudulent acts purposes. The remedy is it is as if it is inserted with the
in commercial transactions.
wrong date, you will have the same right.
Also there is a presumption that every holder is prima A. Antedated – instrument is dated earlier than the true
facie one is a holder in due course (sec. 59 NIL)
date of its issuance.
B. Postdated – instrument is dated later than the true

So if the facts in the case does not mention of any date of its issuance.
circumstance then apply the presumption.
■ General Rule: The antedating or postdating of an

ILLUSTRATION 1: instrument will not affect its validity or negotiability.
Type of instrument: Order instrument

—EXCEPTION: If the antedating or postdating was
I promise to pay X or order Php 10,000 7 days after date. made for an illegal or fraudulent purpose. Here,
Sgd. J the negotiability of the instrument is not affected,
however, it will invalidate the instrument.
Original Date: Aug 23, 2018

Wrong date inserted: Aug. 20, 2018 • Postdating: making it appear that the instrument was
issued at a date later than when it was actually issued
J→X→Y→Z→A→B
◦ EX. Today is August 23, but you made it appear
that the instrument was issued on August 30
A — holder in due course

B — holder through a holder in due course
• Antedating: making it appear that the instrument was
B — considered as a holder through a holder in due issued at a date earlier than when it was actually
issued
course even if he knew about the infirmity done by Y

(Sec. 58)
◦ EX. Today is August 23, but you made it appear
A — since it was not stated, he is presumed holder in that the instrument was issued on August 16
due course (Sec. 59)
Examples of illegal or fraudulent purpose

■ Illegal ante-dating — done to conceal the charge of
B to X — cannot be liable because he was a party prior
usurious interest; done to hasten the maturity of the
to the infirmity because when he negotiated, it was still
genuine
instrument in order to collect the money immediately.
■ Illegal post-dating — to issue a post-dated check in

payment of an obligation because of insufficiency of
B to J — cannot raise personal defense since B is a funds without intention to pay the person; done to
conceal the insufficiency of the funds.

If the act of antedating and postdating is done with the

taint of fraud or any illegality then it may be considered NOT A HOLDER IN DUE COURSE
invalid.
❖ Maker — cannot be compelled to pay because he
But take note that invalidity is different from negotiability can raise the personal defense of insertion of
of an instrument, which is determined by what is written wrong date
on it’s face and on the provisions of sec.1 of the NIL ❖ Prior & Subsequent parties to the defect —
law.
cannot be compelled to pay because they did not
extend any warranty that the instrument is genuine
SUMMARY OF THE INSERTION OF WRONG DATE
and in all respects what it purports to be.
❖ Immediate transferor — can be compelled

— Personal Defenses — because they warranted that the instrument is
PROMISSORY NOTE genuine and in all respects what it purports to be
❖ Perpetrator of the fraud — ultimately liable

■ ORDER INSTRUMENT because he caused the defect therefore he should
HOLDER IN DUE COURSE AND HTHDC be penalized under the law
❖ Primarily liable: Maker — can be compelled to pay

because he cannot raise the personal defense of
insertion of wrong date
BILL OF EXCHANGE
❖ Prior parties to the defect — can be compelled ■ ORDER INSTRUMENT
to pay because he cannot raise the personal HOLDER IN DUE COURSE AND HTHDC
defense of insertion of wrong date
❖ Primarily liable: Drawee-Acceptor — can be
❖ Subsequent parties to the defect — can be compelled to pay because he accepted the
compelled to pay because they warranted that the instrument and an acceptor will pay the
instrument is genuine and in all respects what it instrument according to the tenor of his
purports to be
acceptance.
❖ Perpetrator of the fraud — ultimately liable ❖ Prior parties to the defect — can be compelled
because he caused the defect therefore he should to pay because he cannot raise the personal
be penalized under the law
defense of insertion of wrong date
❖ Subsequent parties to the defect — can be

NOT A HOLDER IN DUE COURSE compelled to pay because they warranted that the
❖ Prior parties to the defect — cannot be instrument is genuine and in all respects what it
compelled to pay because he can raise the purports to be
personal defense of insertion of wrong date

❖ Subsequent parties to the defect — can be because he caused the defect therefore he should
compelled to pay because they warranted that the be penalized under the law
instrument is genuine and in all respects what it

purports to be
NOT A HOLDER IN DUE COURSE
❖ Perpetrator of the fraud — ultimately liable ❖ Drawee-Acceptor — can be compelled to pay
because he caused the defect therefore he should because he accepted the instrument and an
acceptor will pay the instrument according to the
tenor of his acceptance.
■ BEARER INSTRUMENT ❖ Prior parties to the defect — cannot be

compelled to pay because he can raise the
You can only go after the one who is primarily liable, personal defense of insertion of wrong date
who is the maker, the immediate transferor and the ❖ Subsequent parties to the defect — can be
perpetrator of the fraud. If a holder in not due course, compelled to pay because they warranted that the
maker cannot be liable.
purports to be
HOLDER IN DUE COURSE AND HTHDC ❖ Perpetrator of the fraud — ultimately liable
❖ Primarily liable: Maker — can be compelled to pay because he caused the defect therefore he should
because he cannot raise the personal defense of be penalized under the law
insertion of wrong date
❖ Prior & Subsequent parties to the defect —

cannot be compelled to pay because they did not ■ BEARER INSTRUMENT
extend any warranty that the instrument is genuine You can only go after the one primarily liable who is the
drawee, the i mmediate t ransf eror and th e
❖ Immediate transferor — can be compelled perpetrator of the fraud.
because they warranted that the instrument is

genuine and in all respects what it purports to be
❖ Perpetrator of the fraud — ultimately liable compelled to pay because he accepted the
because he caused the defect therefore he should instrument and an acceptor will pay the

instrument according to the tenor of his On the 2nd instance, it is only the amount that can be
acceptance.
inserted however you will see the instrument having
❖ Drawer — cannot be compelled to pay because only the signature and the amount inserted. If you will
he can raise the personal defense of insertion of read it literally, that is how the instrument will appear
wrong date and it would be non-negotiable if that is the case. So
❖ Prior & Subsequent parties to the defect — you look at the intention of the party for giving you the
cannot be compelled to pay because they did not blank instrument, it is for you to have a negotiable
warrant that the instrument is genuine and in all instrument. So, you still have to write “I promise to
respects what it purports to be.
pay…”

because they warranted that the instrument is If you are a holder in due course, the legal implication of
this is that it is valid and effectual for all purposes in his
❖ Perpetrator of the fraud — ultimately liable hands. However, if the holder is not a holder in due
course, it can be raised as personal defense against
because he caused the defect therefore he should
him.
WHEN TO FILL IN THE BLANKS OF THE INSTRUMENT

1) Within the authority given
II. INCOMPLETE BUT DELIVERED (SEC. 14) 2) Within the reasonable time
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 A PARTY HAS AUTHORITY TO FILL IN THE BLANKS IN THE
complete it by filling up the blanks therein. And a signature INSTRUMENT WHEN:
on a blank paper delivered by the person making the 1. The instrument is wanting in any material particular
signature in order that the paper may be converted into a 2. Person is in possession of a signature on blank
negotiable instrument operates as a prima facie authority to
fill it up as such for any amount.
paper intended to be a negotiable instrument
In order, however, that any such instrument when completed

may be enforced against any person who became a party TN: These 2 instruments in relation to Section 14 are
thereto prior to its completion, it must be filled up strictly in delivered. They are presumed to be delivered or
accordance with the authority given and within a reasonable negotiated. So we now have an incomplete but
time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual delivered instrument.
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.
THE INSTRUMENT IS WANTING IN ANY MATERIAL
PARTICULAR
— Personal Defense — There is an authority to fill up the instrument with
whatever is the missing material particular.
This is the instance when it was drafted but not

completely and subsequently it was negotiated.
SIGNATURE INSTRUMENT ON BLANK PAPER INTENDED TO
BE A NEGOTIABLE
In this instance, there was really an initial intention to There is an authority to fill up the instrument with any
issue a negotiable instrument, which is why the law amount. The authority to fill the blanks is only limited to
gives the authority to fill it out.
the amount but must be completed as a negotiable
instrument.
Two instances:
1) If the instrument is wanting of material particular, TN: The presumption is it is a pro-forma instrument, not
there is a prima facie authority to fill it in in just a blank paper with signature. It is deemed to be
accordance with the interest of the person who completed as a negotiable instrument so all that is to be
drafted the instrument;
added is the amount.
2) If the instrument contains a signature in a blank

paper with the intention to make it a negotiable REQUIREMENTS FOR INSERTING AMOUNT
instrument, the holder is allowed to fill it up in 1. Blank paper with signature
accordance with the authority given and in the 2. Intention to make the instrument negotiable
hands of a holder in due course, it is treated as if it

3. Delivery to person other than the drawer or maker
is filled in in accordance with the authority given.
The authority given must be in accordance with the THIS IS A PERSONAL DEFENSE
interest of the person who drafted the instrument. It This can be raised by parties prior to its completion,
should not be from the viewpoint of the holder.
when what is inserted in the incomplete instrument is
not what is intended by them who made it. After the
completion of the instrument, whatever is added is
On the 1st instance, it can be any material particular deemed to be added in accordance with the authority
like name of the payee.
given. And when it is in the hands of a holder in due
course, it is valid and effectual for all purposes.

NOTE: IN THE EXAM — You can say that the person

can be compelled to pay because:
1) he cannot assert the personal defense of wrong

NOT A HOLDER IN DUE COURSE (REAL)
insertion of amount OR
DRAWEE-ACCEPTOR
2) he cannot raise the personal defense that the D to X — can be compelled to pay because he
amount inserted was not strictly in accordance with accepted the instrument and an acceptor will pay the
the authority given OR
instrument according to the tenor of his acceptance.
3) he cannot raise the personal defense of incomplete

but delivered instrument (recommended by atty)
PRIOR PARTY OF THE DEFECT
D to R — cannot be compelled to pay because he can
raise the personal defense of incomplete but delivered
ILLUSTRATION 1: instrument
Bill of exchange; Order instrument

To: X SUBSEQUENT PARTIES OF THE DEFECT
Pay to Y or order _________. D to A,B,C — can be compelled to pay because they
Sgd. R warranted that the instrument is genuine and in all

respects what it purports to be
Generally, this is not a negotiable instrument. But if it is

with the intention of the drawer that it is a negotiable PERPETRATOR OF THE FRAUD
instrument, it will be deemed a negotiable instrument.
D to Y — ultimately liable because he caused the defect
therefore he should be penalized under the law
To: X
Pay to Y or order _________. ILLUSTRATION 2:
Sgd. R
Bill of exchange; Bearer instrument
R→Y→A→B→C→D To: X
↓ Php 100M Pay to bearer _________.
X (drawee/acceptor) Sgd. R
Real amount was Php 10M R→Y→A→B→C→D

Y inserted the amount of Php 100M. ↓ Php 100M

X (drawee/acceptor)
HOLDER IN DUE COURSE
Real amount was Php 10M
DRAWEE-ACCEPTOR Y inserted the amount of Php 100M.
D to X — can be compelled to pay because he
accepted the instrument and an acceptor will pay the

D to R — cannot be compelled to pay because he did
PRIOR PARTY OF THE DEFECT not extend any warranties to the holder
D to R — can be compelled to pay because he cannot

raise the personal defense of incomplete but delivered SUBSEQUENT PARTIES OF THE DEFECT
instrument
D to A & B — cannot be compelled to pay because they
did not extend any warrant to the holder
SUBSEQUENT PARTIES OF THE DEFECT

D to A,B,C — can be compelled to pay because they
warranted that the instrument is genuine and in all PERPETRATOR OF THE FRAUD
D to Y — ultimately liable because he caused the defect
PERPETRATOR OF THE FRAUD IMMEDIATE TRANSFEROR

D to Y — ultimately liable because he caused the defect D to C — can be compelled to pay because they
warranted that the instrument is genuine and in all
HOLDER THROUGH A HOLDER IN DUE COURSE

The shelter principle applies. Even if D is not a holder in
due course, D is considered a holder through a holder
in due course.
SAME RULES APPLY ABOVE because he acquires the

same rights as a holder in due course.

SUMMARY OF INCOMPLETE BUT DELIVERED

— Personal Defenses — ❖ Immediate transferor — can be compelled

PROMISSORY NOTE because they warranted that the instrument is
■ ORDER INSTRUMENT ❖ Perpetrator of the fraud — ultimately liable

HOLDER IN DUE COURSE AND HTHDC because he caused the defect therefore he should

because he cannot raise the personal defense of
incomplete but delivered instrument
BILL OF EXCHANGE
❖ Prior parties to the defect — can be compelled
to pay because they cannot raise the personal ■ ORDER INSTRUMENT
defense of incomplete but delivered instrument
HOLDER IN DUE COURSE AND HTHDC

❖ Subsequent parties to the defect — can be ❖ Primarily liable: Drawee-Acceptor — can be
compelled to pay because they warranted that the compelled to pay because he accepted the
instrument and an acceptor will pay the
purports to be
instrument according to the tenor of his

❖ Perpetrator of the fraud — ultimately liable acceptance.
because he caused the defect therefore he should ❖ Drawer & Prior parties to the defect — can be
compelled to pay because he cannot raise the

personal defense of incomplete but delivered
NOT A HOLDER IN DUE COURSE instrument
❖ Prior parties to the defect — cannot be ❖ Subsequent parties to the defect — can be
compelled to pay because he can raise the compelled to pay because they warranted that the
personal defense of incomplete but delivered instrument is genuine and in all respects what it
instrument
purports to be
❖ Subsequent parties to the defect — can be ❖ Perpetrator of the fraud — ultimately liable
compelled to pay because they warranted that the because he caused the defect therefore he should
instrument is genuine and in all respects what it be penalized under the law
purports to be
❖ Perpetrator of the fraud — ultimately liable NOT A HOLDER IN DUE COURSE

because he caused the defect therefore he should ❖ Drawee-Acceptor — can be compelled to pay
because he accepted the instrument and an

■ BEARER INSTRUMENT tenor of his acceptance.
❖ Drawer & Prior parties to the defect — cannot

You can only go after the one who is primarily liable, be compelled to pay because he can raise the
who is the maker, the immediate transferor and the personal defense of incomplete but delivered
perpetrator of the fraud. If a holder in not due course, instrument

compelled to pay because they warranted that the
HOLDER IN DUE COURSE AND HTHDC instrument is genuine and in all respects what it
❖ Primarily liable: Maker — can be compelled to pay purports to be
because he cannot raise the personal defense of ❖ Perpetrator of the fraud — ultimately liable
incomplete but delivered instrument
❖ Prior & Subsequent parties to the defect — be penalized under the law

■ BEARER INSTRUMENT
❖ Immediate transferor — can be compelled You can only go after the one primarily liable who is the
because they warranted that the instrument is drawee, the i mmediate t ransf eror and th e
perpetrator of the fraud.

because he caused the defect therefore he should ❖ Primarily liable: Drawee-Acceptor — can be
compelled to pay because he accepted the
NOT A HOLDER IN DUE COURSE instrument according to the tenor of his
❖ Maker — cannot be compelled to pay because he acceptance.
can raise the personal defense of incomplete but ❖ Drawer — cannot be compelled to pay because
delivered instrument
he can raise the personal defense of incomplete
❖ Prior & Subsequent parties to the defect — but delivered instrument

cannot be compelled to pay because they did not If the instrument is in the hands of a holder not in due
warrant that the instrument is genuine and in all course, what can be shown by a person who may be
respects what it purports to be.
required to pay?
1. Show that there was no authority to deliver (No
delivery)

2. If there was delivery, such delivery was conditional or
for a special purpose

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
III. COMPLETE BUT UNDELIVERED (SEC. 16) indorsing, as the case may be; and, in such case, the
delivery may be shown to have been conditional, or for
Sec. 16. Delivery; when effectual; when presumed. - Every
contract on a negotiable instrument is incomplete and a special purpose only, and not for the purpose of
revocable until delivery of the instrument for the purpose of transferring the property in the instrument.
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 Who’s interest will prove that there was no delivery?
or under the authority of the party making, drawing, Parties prior to the nondelivery. The one who should
accepting, or indorsing, as the case may be; and, in such prove that there was no delivery are the parties prior to
case, the delivery may be shown to have been conditional, the defect in other words. Those persons who actually
or for a special purpose only, and not for the purpose of
transferring the property in the instrument.
did not deliver the instrument. Or those who may have
delivered it but subject to a condition or that it is a
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 special purpose only. Or at all, there really was no
as to make them liable to him is conclusively presumed.
delivery in there hands.
And where the instrument is no longer in the possession of a

party whose signature appears thereon, a valid and So if the nondelivery happens to be the person who
intentional delivery by him is presumed until the contrary is drafted the instrument, it could be the drawer or the
proved.
maker, it will be them who have to prove. So the burden
— Personal Defense — of proof there is person who alleges that there was
no delivery because there is already a presumption of
There is a presumption of delivery when the instrument delivery.
is no longer in the hands of a person who drafted the

instrument.
INSTANCES THAT CAN REBUT THE PRESUMPTION OF A
VALID DELIVERY.
What happens if the instrument is complete but is not 1) It is not under the authority
delivered? What is the effect if there is a complete 2) The delivery is conditional
instrument but it is not delivered?

The contract is deemed incomplete and revocable until 3) The delivery is for a special purpose
it is delivered.
The second effect is that if the instrument is already in TN: you cannot raise these instances against a holder in
the hands a holder in due course, a valid delivery due course since there is conclusive presumption of
thereof by all parties prior to him so as to make them delivery for a holder in due course.
liable to him is conclusively presumed.
There is still presumption of delivery. So in other words,

CONDITIONAL AND SPECIAL DELIVERY
in all instances there’s always presumption of 1. For conditional delivery – Conditional delivery is
delivery. So even if you say that the instrument is one where there is an authority to deliver, however, it
complete but undelivered, the law actually would still is subject to a condition.
consider it as having been delivered.
Example: The maker issued an instrument in favor of

A subject to the condition that A should pass the
PRESUMPTION ON DELIVERY bar exams.
But in the hands of a…
• Holder in due course — a valid delivery thereof by all TN: The condition must not be stated in the
parties prior to him so as to make them liable to him is negotiable instrument otherwise it will place a
conclusively presumed; conclusive presumption of condition on the negotiable instrument making it
delivery
non-negotiable.
• Holder not in due course — a valid and intentional

delivery by him is presumed until the contrary is 2. For special purpose
proved; rebuttable presumption or Prima facie

presumption of valid delivery

Example: M is the maker. He kept it in his drawer. M ILLUSTRATION 2:

gave X the authority to give the instrument to A for
safekeeping.
Bill of exchange; Bearer instrument
To: X
Pay to Y or order Php 10 Million.
ILLUSTRATION 1: Sgd. R
Bill of exchange; order instrument
To: X R→Y-----A→B→C→D
Pay to Y or order Php 10 Million. ↓
Sgd. R X (drawee/acceptor)
R→Y-----A→B→C→D A — stole the instrument

↓
X (drawee/acceptor)
A — stole the instrument D to R, Y & X — cannot be compelled to pay because

he did not extend any warranty to the holder

DRAWEE-ACCEPTOR SUBSEQUENT PARTIES OF THE DEFECT
D to X — can be compelled to pay because he cannot D to A & B — cannot be compelled to pay because they
raise the personal defense of complete but undelivered did not extend any warrant to the holder
instrument
PERPETRATOR OF THE FRAUD

PRIOR PARTIES OF THE DEFECT D to A — ultimately liable because he caused the defect
D to R & Y— can be compelled to pay because he therefore he should be penalized under the law
cannot raise the personal defense of a complete but

undelivered instrument
IMMEDIATE TRANSFEROR
D to C — can be compelled to pay because he
SUBSEQUENT PARTIES OF THE DEFECT warranted that they have a good title to the instrument
D to A, B & C — can be compelled to pay because they

warranted that they have a good title to the instrument
SUMMARY OF COMPLETE BUT UNDELIVERED
PERPETRATOR OF THE FRAUD — Personal Defenses —

D to A — ultimately liable because he committed the
crime of theft therefore he should be penalized under PROMISSORY NOTE
the law
■ ORDER INSTRUMENT
HOLDER THROUGH A HOLDER IN DUE COURSE
The shelter principle applies. Even if D is not a holder because he cannot raise the personal defense of
in due course, D is considered a holder through a complete but undelivered instrument
❖ Prior parties to the defect — can be compelled

to pay because he cannot raise the personal
SAME RULES APPLY ABOVE because he acquires the defense of complete but undelivered instrument
same rights as a holder in due course.

NOT A HOLDER IN DUE COURSE (REAL) instrument is genuine and in all respects what it
PRIOR PARTY OF THE DEFECT purports to be
D to R,Y & X — cannot be compelled to pay because ❖ Perpetrator of the fraud — ultimately liable
they can raise the personal defense of a complete but because he caused the defect therefore he should
SUBSEQUENT PARTIES OF THE DEFECT NOT A HOLDER IN DUE COURSE

D to A, B & C — can be compelled to pay because they ❖ Maker & Prior parties to the defect — cannot be
warranted they warranted that they have a good title to compelled to pay because he can raise the
the instrument
personal defense of complete but undelivered
instrument
PERPETRATOR OF THE FRAUD ❖ Subsequent parties to the defect — can be

D to A — ultimately liable because he caused the defect compelled to pay because they warranted that the
purports to be


because he caused the defect therefore he should NOT A HOLDER IN DUE COURSE
❖ Drawee-Acceptor — can be compelled to pay
■ BEARER INSTRUMENT tenor of his acceptance.
You can only go after the one who is primarily liable, ❖ Drawer & Prior parties to the defect — cannot
who is the maker, the immediate transferor and the be compelled to pay because he can raise the
perpetrator of the fraud. If a holder in not due course, personal defense of complete but undelivered
instrument

HOLDER IN DUE COURSE AND HTHDC compelled to pay because they warranted that the
❖ Primarily liable: Maker — can be compelled to pay instrument is genuine and in all respects what it
because he cannot raise the personal defense of purports to be
complete but undelivered instrument

❖ Prior & Subsequent parties to the defect — because he caused the defect therefore he should
cannot be compelled to pay because they did not be penalized under the law

because they warranted that the instrument is You can only go after the one primarily liable who is the
drawee, the i mmediate t ransf eror and th e
❖ Perpetrator of the fraud — ultimately liable perpetrator of the fraud.

NOT A HOLDER IN DUE COURSE instrument and an acceptor will pay the
❖ Maker — cannot be compelled to pay because he instrument according to the tenor of his
can raise the personal defense of complete but acceptance.
❖ Drawer — cannot be compelled to pay because
❖ Prior & Subsequent parties to the defect — he can raise the personal defense of complete but
cannot be compelled to pay because they did not undelivered instrument
extend any warranty that the instrument is genuine ❖ Prior & Subsequent parties to the defect —
❖ Immediate transferor — can be compelled warrant that the instrument is genuine and in all
because they warranted that the instrument is respects what it purports to be.

❖ Perpetrator of the fraud — ultimately liable because they warranted that the instrument is
because he caused the defect therefore he should genuine and in all respects what it purports to be

BILL OF EXCHANGE
HOLDER IN DUE COURSE AND HTHDC IV. INCOMPLETE AND UNDELIVERED (SEC. 15)
❖ Primarily liable: Drawee-Acceptor — can be Sec. 15. Incomplete instrument not delivered. - Where an
compelled to pay because he accepted the incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid
instrument and an acceptor will pay the contract in the hands of any holder, as against any person
instrument according to the tenor of his whose signature was placed thereon before delivery.
acceptance.
— Real Defense —
❖ Drawer & Prior parties to the defect — can be
compelled to pay because he cannot raise the
personal defense of complete but undelivered THIS IS A REAL DEFENSE
instrument
Real defense because it mentions that it will not be a
valid contract in the hands of any holder (including
❖ Subsequent parties to the defect — can be holders in due course). Thus it can be raised against all
compelled to pay because they warranted that the parties even to a holder in due course.

purports to be
❖ Perpetrator of the fraud — ultimately liable Instrument will not, if completed and negotiated without
because he caused the defect therefore he should authority, be a valid contract in the hands of ANY
holder, as against any person whose signature was
placed thereon before delivery. (Sec. 15, NIL)

also violate the warranty that they have a good title to it.
How about if the instrument is both incomplete and Thus, if the issue is incomplete and undelivered
undelivered, what’s the effect? instrument, it is not enough that the warranty violated is
The effect of an incomplete and undelivered instrument the genuineness of the instrument. You must also
is invalidity in the hands of any holder.
mention that the warranty of having a good title to it is
being violated.
What defense is that?

A real defense because it says in the hands of any
holder.
ILLUSTRATION 1:
Promissory note
But only in relation to?
In relation to prior parties to the defect.
X----Y→A→B→C→D
Y — stole the instrument and inserted Php 100,000

Who may be estopped from raising the real defense
under Sec 15? PRIOR PARTY OF THE DEFECT

A drawee bank whose negligent custody of the checks, D to X — cannot be compelled to pay because he can
after partial execution, contributed to its escape
raise the real defense of an incomplete and undelivered
instrument
There was an intention to issue a negotiable instrument

but he did not deliver it. In his hands, it must have been
stolen and delivered it to someone else, whoever it may SUBSEQUENT PARTIES OF THE DEFECT
D to Y, A, B & C — can be compelled because they
be.
respects what it purports to be and they have a good
Common example: title to it.
So the usual situation there is here is a boss who drafted

an instrument, incomplete, has the signature, but
doesn’t bear the amount, place it in his drawer. And PERPETRATOR OF THE FRAUD
here is a secretary who stole it. Then the secretary D to Y — ultimately liable because he caused the defect
delivered it.
Will your answer change if D is not a holder in due

HOW WILL IT AFFECT THE RIGHTS OF THE PARTIES: course?
HOLDER IN DUE COURSE: No, because the shelter principle applies. D will be
A. Prior parties – Not liable
considered as a holder through a holder in due course.
B. Subsequent parties
1. Indorsers – liable because they warrant that the Will your answer change if the shelter principle will not
apply?
instrument is genuine and in all respects what it Still, no. Regardless of what type of a holder may be
purports to be AND they also warrant that they involved here, the answer will be the same if the defect
have good title to it.
is incomplete and undelivered instrument.
2. Person negotiating by delivery – liable if

immediate transferor because the warranty that
the instrument is genuine and in all respects SUMMARY OF THE RULES (INCOMPLETE & UNDELIVERED)
what it purports to be and that he has a genuine — Real Defense —

title over it only extends to the immediate
transferee (current holder).
3. Perpetrator – liable because we do not tolerate PROMISSORY NOTE

fraud in any commercial transactions.
HOLDER THROUGH A HOLDER IN DUE COURSE HOLDER IN DUE COURSE, HTHDC & NHDC
Same rules apply because he gets whatever rights the ❖ Primarily liable: Maker — cannot be compelled to
holder in due course have. (shelter principle)
pay because he can raise the real defense of an
incomplete and undelivered instrument

Same rules apply because this is a real defense.
compelled because they warranted that the
purports to be and they have a good title to it.
What warranties are violated by the indorser if the

instrument is not delivered? (SEC. 65 (b))
(b) That he has a good title to it
TN: In addition to the warranty that the instrument is

genuine and in all respects what it purports to be, they

■ BEARER INSTRUMENT what it purports to be and they have a good title

to it.
You can only go after the one who is primarily liable, ❖ Immediate transferor — can be compelled
who is the maker, the immediate transferor and the because they warranted that the instrument is
perpetrator of the fraud. If a holder in not due course, genuine and in all respects what it purports to be
and they have a good title to it.

HOLDER IN DUE COURSE, HTHDC & NHDC because he caused the defect therefore he should
❖ Primarily liable: Maker — cannot be compelled to be penalized under the law
pay because he can raise the real defense of an

incomplete and undelivered instrument
❖ Subsequent parties to the defect — cannot be

compelled to pay because they did not extend any QUESTIONS & CLARIFICATIONS — PART 1
warranty that the instrument is genuine and in all SITUATION BY MARLA:
respects what it purports to be and they have a
good title to it.
A---B→C→D→E---F→G→H→I→J
❖ Immediate transferor — can be compelled ↓ ↓ ↓
because they warranted that the instrument is stole & inserted amount stole minor
and they have a good title to it.
A — incomplete but undelivered
❖ Perpetrator of the fraud — ultimately liable B — stole the instrument and completes the amount
because he caused the defect therefore he should E — stole the instrument from D
H — a minor
TN: There are three infirmities here:
BILL OF EXCHANGE (1) Incomplete and undelivered from A to B;
■ ORDER INSTRUMENT (2) complete and undelivered from C-E; and
HOLDER IN DUE COURSE, HTHDC & NHDC (3) F as a minor.

compelled to pay because he accepted the HOLDER IN DUE COURSE
instrument and an acceptor will pay the J to A — J cannot go against A because A can raise the
instrument according to the tenor of his real defense of incomplete but undelivered instrument.
acceptance
❖ Drawer — cannot be compelled to pay because J to B — J can ultimately go against B because he is a

he can raise the real defense of an incomplete and perpetrator of the crime of theft and as indorser, he
warrants that the instrument is genuine and in all
❖ Subsequent parties to the defect — can be respects what it purports to be and that he has good
compelled because they warranted that the title to it.

purports to be and they have a good title to it.
J to C, D, E, F, G & I — J can go against C, D and E, F,
❖ Perpetrator of the fraud — ultimately liable G and I because as indorsers, they warrant that the
because he caused the defect therefore he should instrument is genuine and in all respects what it
purports to be and that they have good title to it.
■ BEARER INSTRUMENT J to H — J cannot go against H as H can raise the

defense of minority. 
You can only go after the one primarily liable who is the
drawe e, the im mediate transferor a nd th e J to E — J can ultimately go after E because he is a
perpetrator of the fraud.
perpetrator of the crime of theft and as indorser, he
warrants that the instrument is genuine and in all
❖ Primarily liable: Drawee-Acceptor — can be respects what it purports to be and that he has a good
compelled to pay because he accepted the title to it.

instrument according to the tenor of his TN: If there are two defects but it started with a real
acceptance.
defense, everything that follows will still be liable
❖ Drawer — cannot be compelled to pay because because there is a real defense from the very start.
he can raise the real defense of an incomplete and

❖ Subsequent parties to the defect — cannot be
compelled to pay because they did not warrant
that the instrument is genuine and in all respects

SITUATION BY ATTY G to B — G cannot go after B (secondarily liable) as he

can raise the real defense of incomplete but undelivered
A→B→C→D→E----F→G instrument.
↓
Php 100,000 G to C — G can go after C as he is the perpetrator of
the fraud and so he must be punished for it.
Instrument: Incomplete but delivered up to C

C — inserted Php 100,000 G to D & E — G cannot go after D and E as they can
Instrument: Complete but undelivered from F raise the defense of complete but undelivered
F — stole the instrument instrument.
Discuss the rights of G in relation to prior parties. G to F — G can go against F as he is the perpetrator of
the crime of theft and so he must be punished for it.
Defect: Incomplete but delivered and complete and

undelivered
Summary of the rules above:

Kind of defense: Real defense because if you treat it as
a whole, it is now an incomplete and undelivered A→B→C→D→E----F→G
instrument
HDC ✗ ✗ ✓ ✓ ✓ ✓
Type of holder: Holder in due course
NHDC ✗ ✗ ✓ ✗ ✗ ✓
HOLDER IN DUE COURSE ✗ — cannot be compelled to pay

✓ — can be compelled to pay
PRIOR PARTIES OF THE DEFECTS
G to A — G cannot go after A (primarily liable) as he can

raise the real defense of incomplete but undelivered TN: When you answer, the reasoning should be
instrument.
complete. You should segregate the reasoning in going
after a party because a holder has different reasons in
G to B — G cannot go after B (secondarily liable) as he going after them.
can raise the real defense of incomplete but undelivered For parties prior to the defect, it will always be based
instrument.
on their defenses which could be raised.
As for the subsequent parties, it’s always about the

There are two personal defenses of incomplete but warranty.
delivered and complete but undelivered so looking at If you just shorten your answer without clarifying the
the whole illustration, A & B now could raise the real reason why you could or could not go after them, you
defense. will not get the perfect points. But by all means, if you
want to shorten your answer, then do it but again, you
won’t get the perfect points.
SUBSEQUENT PARTIES OF THE DEFECTS

G to C, D, E & F — G can go after C, D, E and F
because as indorsers, they warrant that the instrument CLARIFICATION NI KUYA POL
is genuine and in all respects what it purports to be and
that they have good title to it.
BEARER INSTRUMENT
R (incomplete but delivered) – Y (inserted amount of
P100,000 instead of P10,000) – A then attempted to
PERPETRATOR OF THE FRAUD present it to X but X dishonored the instrument
G to C & F — G can ultimately go after C and F because

R→Y→A→B
they are the perpetrator of the fraud and theft
respectively, and they must be made liable for the ↓ ↓
offense. They also warrant that the instrument is Php 100k X
genuine and in all respects what it purports to be and
that they have good title to it.
Can B go after R?
HOLDER THROUGH A HOLDER IN DUE COURSE He cannot. Because R did not extend any warranties to
The shelter principle will not apply in this case him. What B must do here is to give a notice of
because the immediate transferor is the perpetrator of dishonor to A because the reason for the dishonor of
the crime of theft.
the instrument is not because of the defect, but
because X merely dishonored it. So B will give notice
of dishonor to A, and A in turn will give notice to Y
HOLDER NOT IN DUE COURSE and Y will give notice to R.
G to A — G cannot go after A (primarily liable) as he can

raise the real defense of incomplete but undelivered
instrument.
ORDER INSTRUMENT
If it were an order instrument, B can give notice to R, Y
and A, but merely giving notice of dishonor to R will

already suffice because then, you would already granted to it, incidental, implied or stated under its
benefit from the notice of dishonor.
charter documents or the Articles of Incorporation
So B can now go after any of them and compel them to submitted to SEC for the purpose of registration.
pay for the reason that there was no defense R could

raise against B who is a holder in due course.
Reason: In dealing with the corporation, it is incumbent
upon the clients to make inquiries as to the extent of
the authority granted to the representative. Good
V. MINORS AND CORPORATIONS (SEC. 21) practice suggests that clients must ask the notarized
SEC. 22. Effect of indorsement by infant or corporation. Board Resolution or Secretary Certificate attested by
— The indorsement or assignment of the instrument by a the President.

notwithstanding that from want of capacity, the corporation
PERSONAL TO THE PARTY CONCERNED
— Real Defense — The defense is peculiar in nature as it is personal to the
party. It can only be raised by such particular party only.
It is a real defense, in the sense that, it can be raised

against any type of holder (HDC, Holder through a TN: Parties subsequent to the minors or corporation can
HDC, and HNDC). And, they are special because the be held liable because they made a warranty that all
defense of Minority and Ultra Vires are personal to the prior parties have the capacity to contract.
Minor and Corporation, respectively. In other words,

they can only be raised by the minor or the corporation. VI. MATERIAL ALTERATION (SEC. 125 AND 124)
It is not a personal defense. The term “personal” is
referring to the fact that the defense of Minority and Sec. 124. Alteration of instrument; effect of. - Where a
Ultra vires can be raised personally by the minor or the negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as
corporation alone.
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

MINORS the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its
MINORITY AS A REAL DEFENSE original tenor.
■ General rule: Minority is a real defense but it can only

be raised by the minor himself. The holder of the Sec. 125. What constitutes a material alteration. - Any
alteration which changes:
instrument cannot make the minor liable.

(a) The date;
—Exception: The minor makes representation to (b) The sum payable, either for principal or interest;
the public that he is of legal age when in truth and (c) The time or place of payment:
in fact, he is a minor. The minor already (d) The number or the relations of the parties;
committed fraud and cannot be allowed to raise (e) The medium or currency in which payment is to be made;
the defense of minority.

(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,
REAL defense but available only to the incapacitated is a material alteration.
party (ex. minor or corporation); the indorsement or — Real Defense —

assignment of the instrument by a corp. or by an infant
passes the property therein, notwithstanding that from
want of capacity, the corp. or infant may incur no Material Alteration — it is an alteration of any material
liability thereon.
particular, which changes the liability of a party
TN: Sec. 124 refers to physical alteration. Thus for there

to be material alteration it must be a physical alteration.
CORPORATIONS
ULTRA VIRES ACTS CHECKS
A corporation cannot be held liable for the ultra vires So if you have a check and the check has a serial
acts of its representative. But the representative can be number and you erased the serial number is it a material
alteration?
held personally liable as he did the act beyond the NO. It does not fall under material alteration because it
scope of given authority.
doesn’t affect the liabilities of a party. It doesn’t change
the amount; the instrument continues to be what it is.
The representative of the corporation can only be

authorized through a Board Resolution from BOD. So in a case the Supreme Court held that a bank
Where acts of issuing negotiable instrument and couldn’t refuse to pay, just because there is an
negotiating such are not among those provided in the alteration in the serial number.
resolution, they are considered ultra vires or beyond the

scope of its authority.
But then again there could be regulations issued by a

regulatory government agency like the BSP, which
The act of the representative, even if approved by the justifies refusal or acceptance of a check.
Board of Directors, is itself ultra vires if the act of

negotiating the instrument is not one of those acts

What if the party changed it in good faith? AMOUNT

It does not change anything. There is still material
Decrease or increase in the amount is material. It will
alternation because the law does not distinguish
definitely change the liability.
between good faith and bad faith.
MA can be done by a person either a party to an TIME

instrument or one who is a stranger to such and it is This is synonymous to date. The place of payment
called SPOLIATION.
would require you to go somewhere. It is an additional
expense on the part of the debtor. It requires an
What if the party is a stranger? additional act on the debtor.
The law still does not distinguish whether the party
NUMBER OR THE RELATIONS OF THE PARTIES

What is the effect when there is a MA in the instrument?
It is avoided as to the parties PRIOR to the material Because there are more than one party, they could be
jointly liable so the demand of payment should be to
alteration, UNLESS they consented.
each of them. It could be altered from solidary and you

make it joint, or from joint and you make it solidary,
What type of a defense is MA? there is a different legal implication on whom you can
It is a real defense because it can be inferred in the par. demand payment from.
2 of sec. 124 that ASIDE from a holder in due course IT

CANNOT BE ENFORCED in it’s original tenor.
ADDING A PLACE WHERE NO SPACE IS SPECIFIED

Thus you cannot enforce the altered amount to ANY There is an additional act to be done by the party.
PARTY whether he is a holder in due course or not.
INSERTION OF A DATE ON A BLANK PORTION IS

Take note that parties subsequent to the material NOT MATERIAL ALTERATION
alteration can be compelled to pay but in the amount What will apply is Sec. 13 instead of Sec. 124 because
of the original tenor.
there is really an intention to put a date there. It just so
happens that there is no date placed. There will be
EFFECT OF MATERIAL ALTERATION material alteration if you change whatever was the date
■ General Rule: Avoids the instrument against all inserted.
parties and they can raise the real defense of material

defense as against any holder
NOT A MATERIAL ALTERATION:

❖ Invalid as to parties prior to the defect and those 1) Serial number
who did not assent to the alteration

2) Extending the period of payment
❖ HDC or HTHDC: can enforce payment as to its

original tenor
❖ HNDC: cannot enforce the instrument as it is REAL DEFENSE

avoided
This is because you cannot enforce the instrument as it
is. Prior parties to the material alteration can raise it as a
defense. They can make payment but it is not the
—EXCEPTION: Against a party who has himself payment based on the amount in the instrument
made, authorized, or assented to the alteration, presented to them. Instead, they can only be demanded
and subsequent indorsers
to pay the original tenor of the instrument.
□ Indorsers warrant that the instrument is

genuine and in all respects what it purports to An alteration is said to be material if it changes the
be
effect of the instrument. It means that an unauthorized
change in an instrument that purports to modify in any
MATERIAL ALTERATION: respect the obligation of a party or an unauthorized
1) The date
addition of words or numbers or other change to an
2) The sum payable
incomplete instrument relating to the obligation of a
party. (PNB v CA, 1996)
3) The time or place of payment
4) The number of the relations of the parties
A material alteration is one which changes the items

5) The medium or currency in which payment is to be
which are required to be stated under Section 1 of the
made
Negotiable Instruments Law. (Metrobank v Cabilzo,

2006)
DATE
It can affect the liability of a party in the sense that ORDER INSTRUMENT
payment is hastened.
A) RIGHTS OF A HOLDER IN DUE COURSE

- also applicable to a holder through a holder in due
course

- Can collect from:

4. Then to the next indorsers
• Prior parties: as to the original tenor because the

prior parties can raise the real defense of material
ASSOCIATED BANK v CA (1996)
alteration
The rule mandates that the checks be returned within twenty-

• Subsequent parties: as to the alteration; because four hours after discovery of the forgery but in no event
they warranted that the instrument is genuine beyond the period fixed by law for filing a legal action. The
and in all respects what it purports to be
rationale of the rule is to give the collecting bank (which
• Perpetrator of the fraud
indorsed the check) adequate opportunity to proceed against
the forger. If prompt notice is not given, the collecting bank
maybe prejudiced and lose the opportunity to go after its
TN: In case the holder was able to collect from the prior depositor.
parties according to the original tenor, he can still go

after the subsequent parties for the remainder.
ILLUSTRATION 1:
B) RIGHTS OF A HOLDER NOT IN DUE COURSE Bill of exchange; Order Instrument
- Can collect from:
To: X
• Subsequent parties: as to the alteration; because Pay Y or order Php 10,000
they warranted that the instrument is genuine Sgd. H
• Perpetrator of the fraud

H→Y→A→B→C
↓
- Cannot collect from:
Php 100,000
• Prior Parties: they can raise the real defense of ↓
material alteration
X

HOLDER IN DUE COURSE & HTHDC

A. Prior parties — liable only according to the original PRIMARILY LIABLE — DRAWEE
tenor
C to X— can be compelled to pay because he cannot
B. Subsequent parties:
raise the real defense of material alteration and because
as acceptor, he engages to pay according to the tenor
1. Indorser – liable
of his acceptance.
2. PNBD – liable if immediate transferor
3. Perpetrator – ultimately liable

PRIOR PARTIES TO THE DEFECT
C to H & Y — can be compelled to pay but only as to
HOLDER THROUGH HOLDER IN DUE COURSE the original tenor because the prior parties can raise the
Same
real defense of material alteration
HOLDER NOT IN DUE COURSE SUBSEQUENT PARTIES TO THE DEFECT

A. Prior parties — not liable
C to A & B — can be compelled as to the alteration
B. Subsequent parties:
(Php90k if prior parties paid Php10k) because they
1. Indorser – liable
2. PNBD – liable if immediate transferor

SEQUENCE FROM WHOM TO DEMAND OR C to A — ultimately liable because he committed the
ENFORCE PAYMENT defect therefore he should be penalized under the law
PROMISSORY NOTE
1. The holder must go first to the Maker, the person HOLDER NOT IN DUE COURSE
primary liable
PRIMARILY LIABLE — DRAWEE
2. If the maker is unable to pay, the holder must go to C to X— can be compelled to pay because he cannot
the person from whom it acquired the instrument, the raise the real defense of material alteration and because
immediate transferor or indorser of C, i.e., B.
as acceptor, he engages to pay according to the tenor
3. Then to the next indorsers A, then P.
of his acceptance.
BILL OF EXCHANGE PRIOR PARTIES TO THE DEFECT

1. The holder must go first to the drawee, the person C to H & Y — cannot be compelled to pay because the
primary liable
prior parties can raise the real defense of material
2. If the drawee dishonors the instrument, go to the alteration
drawer
3. If the drawer is unable to pay, then the holder can go

to the person from whom it acquired the instrument,
the immediate transferor or indorser

SUBSEQUENT PARTIES TO THE DEFECT E still cannot go after X & B for the entire amount but
C toA & B — can be compelled as to the alteration only to the original tenor as they can raise a real
(Php90k if prior parties paid Php10k) because they defense.

So the answer will be the same whether he is a holder in
due course, holder through a holder in due course or a
PERPETRATOR OF THE FRAUD holder not in due course. They are all the same if the
C to A — ultimately liable because he committed the defense is a real defense.
defect therefore he should be penalized under the law
Question of Hazel: If A paid P10,000 which is the original

tenor, can X & B still be liable?
What if C is not a holder in due course?
No because in that sense, E already accepted the
Determine if the shelter principle applies.
original tenor of the instrument. He can only go to C & D

If not then C cannot go after H and Y because they can for the remaining amount.
raise the real defense of MA. C can only compel X for

his liability as acceptor; A and B as to the warranty and They can always say that the P 10,000 is the original
tenor and it should be viewed in their favor because
ultimately against A for being the perpetrator of the
there is an alteration that happened.
fraud and must be penalized under the law.
So in this case, E cannot go after X & B anymore

because the original tenor has already been paid.
ILLUSTRATION 2:
Bill of exchange; Order Instrument What if it was only P9,000 that was paid, can E go after X
& B?
To: A Yes. In that case, X or B can still be liable but only for
Pay to the order of B Php 10,000 the remaining P1,000. While they can raise the real
Sgd. X defense of material alteration, they can still be liable for
the original tenor.
X → B → C → D → E
↓ ↓
P100,000 A (accepted)
ILLUSTRATION 3:
Bill of exchange; Order Instrument
C altered the amount to P 100,000 To: A
D presented to A (Drawee) who accepted such instrument Pay to the order of B Php 10,000

Sgd. X
PRIMARILY LIABLE — DRAWEE-ACCEPTOR
E to A— can be compelled to pay because he cannot
raise the real defense of material alteration and because X → B → C → D → E
as acceptor, he engages to pay according to the tenor ↓ ↓
of his acceptance.
A P100,000
C altered the amount to P 100,000

PRIOR PARTIES TO THE DEFECT B presented to A (Drawee) who accepted such instrument
E to X & B — can be compelled but only as to the
original tenor because the prior parties can raise the

SUBSEQUENT PARTIES TO THE DEFECT E to A— can be compelled to pay but only as to the
E to D — can be compelled as to the alteration (Php 90k original tenor because he can raise the real defense of
if prior parties paid Php10k) because they warranted material alteration and because as acceptor, he
that the instrument is genuine and in all respects what it engages to pay according to the tenor of his
purports to be
acceptance.
PERPETRATOR OF THE FRAUD PRIOR PARTIES TO THE DEFECT

E to C — ultimately liable because he committed the E to X & B — can be compelled but only as to the
original tenor because the prior parties can raise the
Holder not in due course — The answer does not

change because X & B are the only prior parties to the SUBSEQUENT PARTIES TO THE DEFECT
defect. A accepted the instrument after the alteration.
E to D — can be compelled to pay as to the alteration
(Php 90k if prior parties paid Php10k) because they
If E is not a holder in due course, will you answer warranted that the instrument is genuine and in all
change? respects what it purports to be
Whether the shelter principle will apply or not, the

answer will not change.

PERPETRATOR OF THE FRAUD alteration and because as acceptor, he engages to

E to C — ultimately liable because he committed the pay according to the tenor of his acceptance.

❖ Drawer & Prior parties to the defect — can be
compelled but only as to the original tenor
NOT A HOLDER IN DUE COURSE because the prior parties can raise the real
defense of material alteration

E to A— cannot be compelled to pay because the prior ❖ Subsequent parties to the defect — can be
parties can raise the real defense of material alteration
compelled to pay as to the amount of the
alteration because they warranted that the
PRIOR PARTIES TO THE DEFECT purports to be and they had a good title to the
E to X & B — cannot be compelled to pay because the instrument.
prior parties can raise the real defense of material ❖ Perpetrator of the fraud — ultimately liable
alteration
SUBSEQUENT PARTIES TO THE DEFECT be penalized under the law
E to D — can be compelled to pay the entire amount

because they warranted that the instrument is genuine
You can only go after the one primarily liable who is the
PERPETRATOR OF THE FRAUD drawee, the i mmediate t ransf eror and th e
E to C — ultimately liable because he committed the perpetrator of the fraud.

CLARIFICATION OF MARINO instrument and an acceptor will pay the
If E is a holder not in due course and the shelter instrument according to the tenor of his
principle does not apply, he cannot compel the prior acceptance.
parties to pay any amount because they can raise the ❖ Drawer — cannot be compelled to pay because
real defense of material alteration.
he can raise the real defense of material alteration

But as to C & D, E can go after them for the full amount.
Can the payment of A to E according to the full amount, extend any warranty that the instrument is genuine
inure to the benefit of C & D? and in all respects what it purports to be and they
Yes. If A covers the mount, it should inure to C & D.
had a good title to the instrument.
E can only get the amount of the instrument. It cannot ❖ Immediate transferor — can be compelled
be more otherwise it will amount to unjust enrichment.
If C, after altering the instrument, went to A for and they had a good title to the instrument.
acceptance, where A accepted the same, can A be

liable for the entire amount or the original tenor? ❖ Perpetrator of the fraud — ultimately liable
Since he accepted the amount of P100,000, he is then because he caused the defect therefore he should
liable for that amount because he engages to pay be penalized under the law
according to the tenor of his acceptance.

SUMMARY OF THE RULES (MATERIAL ALTERATION)
compelled to pay because he cannot raise the real
defense of material alteration because of the tenor
— Real Defense — of his acceptance
BILL OF EXCHANGE ❖ Drawer — cannot be compelled to pay because

he can raise the real defense of material alteration
■ ORDER INSTRUMENT ❖ Prior & Subsequent parties to the defect —
TN: In case the holder was able to collect from the prior parties cannot be compelled to pay because they did not
according to the original tenor, he can still go after the extend any warranty that the instrument is genuine
subsequent parties for the remainder.
and in all respects what it purports to be and they
had a good title to the instrument.
Note: Drawee-acceptor, depends when he accepted the

instrument. He is only compelled to pay to the amount ❖ Immediate transferor — can be compelled
according to the tenor of his acceptance.
and they had a good title to the instrument.
HOLDER IN DUE COURSE, HTHDC & NHDC ❖ Perpetrator of the fraud — ultimately liable
❖ Primarily liable: Drawee-acceptor — can be because he caused the defect therefore he should
compelled to pay but only as to the original tenor be penalized under the law
because he can raise the real defense of material

ILLUSTRATION 3:
QUESTIONS & CLARIFICATIONS — PART 2 INSTRUMENT WITH MULTIPLE DEFECTS
ILLUSTRATION 1 Bearer instrument
A → B → C----D → E → F
A → B → C→D→ E ↓
↓ wrong date
X (accepted)
B — inserted the wrong
A to B: undated or the date is blank
B inserted the wrong date and presented to X A then he negotiated it to B (undated), B inserted a
X accepted the instrument bearing the wrong date wrong date, then he negotiated it to C then stolen by D

then further negotiated it to E then to F.
From A to B there is already a defect, it’s blank since it

was not filled out yet in the hands of A to B. B inserted
the wrong date. After that he presented the instrument What are the Rights of F? Can F go after A?
to X. X then accepted the instrument bearing the wrong All personal defenses so if A is a HDC then they
date. Thereafter it was negotiated by B to C to D. Then cannot refuse.
your question now is if E can go after X?

Since E is a holder in due course, E can go after X
because he cannot raise the personal defense of What if sir what is involved was a personal defense and a
real defense? (material alteration nalang)
insertion of the wrong date and he engages to pay the
ILLUSTRATION 4
If E is not a holder in due course and the shelter principle Bearer instrument
does not apply, can E go after X?
A → B →C→ D → E → F
So IF X IS A PARTY AFTER THE DEFECT you can say
that he engages to pay in accordance with the tenor of ↓ ↓
his acceptance THAT IS HIS WARRANTY.
wrong date P100,000
B — inserted the wrong

IF X IS A PARTY PRIOR TO THE DEFECT you say the
D — altered the amount of Php 10,000 to Php 100,000
defenses.
In the hands of D he altered it say 100k instead of 10k?

Can F go after A?
ILLUSTRATION 2: Yes he can. While A has a real defense of material
Bearer instrument alteration, F can still enforce the instrument in it original
A →B → C→D→ E tenor.
↓
X (accepted) Can F go after B?
Yes for the full amount! Even if he did not alter the

amount because he is a perpetrator of the fraud thus he
Just a clarification, If C presents it to X and X accepts is liable for all the consequences of his acts.
and this is a bearer instrument and the defense of B

would be he did not warrant anything? Let’s just day it Can F go after C?
was D who altered something and it was C who No because C can raise the real defense of material
presented it for acceptance.
alteration.
So your question is if E can go after E if this is a bearer

instrument?

E cannot go after B (this is what is unique about an

instrument which is negotiated by mere delivery) so in
this case he can say he did not warrant anything. Kay
even if this was a bearer instrument and all the parties
indorsed the instrument, E can go after B because he
warranted. (This is a bearer instrument and the person
was not the immediate transferor)

VII. FORGERY (SEC. 23) instrument in favor of B but then it was really A
who misrepresented.
Sec. 23. Forged signature; effect of. - When a signature is

forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no FRAUD NOT CONSIDERED FORGERY
right to retain the instrument, or to give a discharge therefor, 1. Fraud in inducement – When there is an intention to
or to enforce payment thereof against any party thereto, can
be acquired through or under such signature, unless the sign a negotiable instrument but for a different
party against whom it is sought to enforce such right is consideration.
precluded from setting up the forgery or want of authority.
— Real Defense — PERSONS PRECLUDED FROM SETTING UP THE DEFENSE

1) Those who by their acts, silence, or negligence, are
SUMMARY OF THE RULES FOR FORGERY estopped from setting up the defense of forgery;
1) Determine first where the forgery happens, after 2) Those who warrant or admit the genuine of the
that you cut those parties before and after the signatures in question, namely:
forgery happens
1. indorsers
2) Parties before the forgery — cannot be held liable 2. acceptors
because they can raise the real defense of forgery.

3. persons negotiating by delivery
3) Parties after the forgery — can be held liable for

they warranted the instrument.
RULES IN RELATION TO FORGERY

Take note: Forgery is a real defense because it
EFFECTS OF FORGERY mentions any party. Also, being a real defense, the
status of the holder is immaterial, unless other defenses
1. Only the signature is inoperative and not the entire
instrument. All other indorsements are still valid and (personal) are also available. Thus, the rules below
apply to all types of holder – HDC, HTHDC, HNDC.
have effects.
2. It cuts off the liabilities of the parties prior to the

forgery.
LIABILITY OF DRAWEE BANK
3. Holder or Subsequent parties cannot have the right Between the drawee bank and the collecting bank, the
to retain the instrument.
one who is supposed to bear the loss would depend on
whose signature is forged.
4. There is no right to discharge therefore.
5. No right to enforce payment thereof against any

parties prior thereto.
Signature of the drawer
■ General Rule: Drawee bank is liable because they are
supposed to check the genuine of the signature of the
FORMS OF FORGERY drawer.
1. Fraud in factum or fraud in esse contractus

—Exception: If the drawer is guilty of contributory
(Fraud amounting to forgery) – Where the party
negligence, the liability has to be divided between
makes it appear that there was intention to issue a
the drawer and the drawee.
negotiable instrument through the signature of

another person. Here, there really was no intention
to issue a negotiable instrument, but there is a Signature of the indorser
person who makes it appear that there is a ■ General Rule: Collecting bank is liable because they
negotiable instrument.
are supposed to check the genuine of the signature of
‣ Person actually signed the instrument but there is the drawer.
no intention to make a negotiable instrument but —Exception: If there is negligence on the part of
in effect the law deemed it as forgery.
the drawee bank then the liability would have to
be distributed between the drawee bank and the
2. Fraud amounting to duress – When one is forced collecting bank.
to sign instrument out of force, threat, undue

influence etc.
EXCEPTION IS ALWAYS NEGLIGENCE.
‣ The signature is genuine but there was no intention Because negligence is one circumstance where prior
to make a negotiable instrument.
parties to the forgery is precluded from raising the real
defense of forgery.
3. Fraudulent Impersonation – When the person

issued a negotiable instrument by being made to STUDENT’S QUESTION:
believe that the person asking for the negotiable For example, you issue a china bank check and you
instrument is the person whom he really intends to encashed it in BPI, is BPI the collecting bank and
issue a negotiable instrument.
Chinabank drawee bank?
YES
‣ Person signed an instrument and there was an

intention but he gave it to someone else who
impersonated the real person.
But you cant present a check for encashment on
different bank than that of the drawee bank. What
‣ A represented himself as B and here is C who happens is you deposit that check to a different bank.
wanted to B so much. C drafted a negotiable

For example your bank is BDO and then here is a check and in all respects what it purports to be and that they
that your received for services rendered, BPI. Of course, have a good title it
you are not precluded from going to BPI and encase the
check. BUT at time you don’t really need the money so PERPETRATOR OF THE FRAUD
you just place is in your bank which is BDO and deposit D to X — ultimately liable because he caused the defect
it there. if BDO clears it BDO becomes the of forgery and he should be penalized under the law
COLLECTING bank and BPI remains as the DRAWEE

bank.
HTHDC & HNDC:

IF there is forgery who will be liable? - Does not matter because the same rules apply.
Depends if forged signature is the drawer or endorser.

Apply the rule as discussed awhile ago.
ILLUSTRATION 2:
Promissory note; Bearer Instrument
PROMISSORY NOTE I promise to pay X or order P10,000.
FORGED: SIGNATURE OF THE MAKER Sgd. Y
■ ORDER INSTRUMENT Y ⇢ X →A →B→C→D

❖ Maker — he is not liable because he can raise the
real defense of forgery
Forgery is in the signature of Y.

❖ Parties subsequent to the maker — liable
Forged by X.

and that they have a good title it
PRIOR PARTIES TO THE DEFECT
D to Y — cannot be compelled to pay because he can
❖ Forger — ultimately liable because he caused the raise the real defense of forgery
defect of forgery and he should be penalized

under the law
SUBSEQUENT PARTIES TO THE DEFECT

D to A & B — cannot be compelled to pay because they
■ BEARER INSTRUMENT did not extend any warranty that the instrument is
❖ Maker — he is not liable because he can raise the genuine and in all respects what it purports to be and
real defense of forgery
that they have a good title it
❖ Parties subsequent to the maker — not liable

because they did not warrant that the instrument
is genuine and in all respects what it purports to IMMEDIATE PARTY
be and that they have a good title it
D to C — can be compelled to pay because they
❖ Immediate transferor — liable because he respects what it purports to be and that they have a
warranted that the instrument is genuine and in all good title it
respects what it purports to be and that they have

a good title it
❖ Forger — ultimately liable because he caused the PERPETRATOR OF THE FRAUD

defect of forgery and he should be penalized D to X — ultimately liable because he caused the defect
under the law
of forgery and he should be penalized under the law
ILLUSTRATION 1: FORGED: SIGNATURE OF THE INDORSER

Promissory note; Order Instrument ■ ORDER INSTRUMENT
❖ Prior parties to the forgery — he is not liable
I promise to pay X or order P10,000. because he can raise the real defense of forgery
Sgd. Y ❖ Parties subsequent to the forgery — liable

Y ⇢ X →A →B→C→D genuine and in all respects what it purports to be
Forgery is in the signature of Y. ❖ Forger — ultimately liable because he caused the

Forged by X. defect of forgery and he should be penalized

under the law
MAKER
D to Y — cannot be compelled to pay because he can
raise the real defense of forgery
If holder in due course, maker is liable because he
is precluded from raising the defense of forgery
SUBSEQUENT PARTIES TO THE DEFECT because a forged signature is not necessary to the
D to X, A, B, C, & D — can be compelled to pay title of the holder in due course.
because they warranted that the instrument is genuine If holder not in due course, maker is not liable
because even if he is precluded from raising the real

defense of forgery, he can raise the personal defense respects what it purports to be and that they have a
of complete but undelivered instrument.
good title it
HOLDER IN DUE COURSE AND HTHDC PERPETRATOR OF THE FRAUD

❖ Maker — can be compelled to pay because he is D to F — ultimately liable because he caused the defect
precluded to raise the real defense of forgery of forgery and he should be penalized under the law
because forged signature is not necessary to the

title of the holder in due course
❖ Parties subsequent to the forgery — not liable ILLUSTRATION 4:

because they did not warrant that the instrument Promissory note; Bearer instrument
is genuine and in all respects what it purports to I promise to pay X or order P10,000.
be and that they have a good title it.
Sgd. Y
❖ Immediate transferor — liable because only him
warranted that the instrument is genuine and in all Y → X→A B→C→D
a good title it.
⇣ /
F
❖ Forger — ultimately liable because he caused the
under the law
F stole the instrument and forged the signature of A.


HOLDER NOT IN DUE COURSE MAKER
❖ Maker — cannot be compelled to pay even if he D to Y — can be compelled to pay because he is
cannot raise the real defense of forgery, he can precluded to raise the real defense of forgery because
raise the personal defense of a complete but forged signature is not necessary to the title of the
holder in due course
❖ Parties subsequent to the forgery — not liable

because they did not warrant that the instrument PRIOR PARTIES TO THE DEFECT
is genuine and in all respects what it purports to D to X & A — cannot be compelled to pay because they
be and that they have a good title it.
did not extend any warranty that the instrument is
❖ Immediate transferor — liable because only him genuine and in all respects what it purports to be and
warranted that the instrument is genuine and in all that they have a good title it

a good title it.
❖ Forger — ultimately liable because he caused the SUBSEQUENT PARTIES TO THE DEFECT
D to B — cannot be compelled to pay because they did
not extend any warranty that the instrument is genuine
under the law
and in all respects what it purports to be and that they

have a good title it
ILLUSTRATION 3:
Promissory note; Order instrument IMMEDIATE PARTY
I promise to pay X or order P10,000. warranted that the instrument is genuine and in all
Sgd. Y respects what it purports to be and that they have a
good title it
Y → X→A B→C→D
⇣ /
F D to F — ultimately liable because he caused the defect
F stole the instrument and forged the signature of A.

PRIOR PARTIES TO THE DEFECT NOT A HOLDER IN DUE COURSE

D to Y, X & A — cannot be compelled to pay because MAKER
they can raise the real defense of forgery
D to Y — cannot be compelled to pay even if he cannot
raise the real defense of forgery, he can raise the
personal defense of a complete but undelivered
SUBSEQUENT PARTIES TO THE DEFECT instrument

not extend any warranty that the instrument is genuine
and in all respects what it purports to be and that they PRIOR PARTIES TO THE DEFECT
D to X & A — cannot be compelled to pay because they
did not extend any warranty that the instrument is
genuine and in all respects what it purports to be and
IMMEDIATE PARTY that they have a good title it


SUBSEQUENT PARTIES TO THE DEFECT ILLUSTRATION 5:

not extend any warranty that the instrument is genuine Bill of exchange; Order Instrument
and in all respects what it purports to be and that they To: X
Pay Y or order P 5,000
Sgd. A
IMMEDIATE PARTY
D to C — can be compelled to pay because they A ⇢ Y → B → C→D
warranted that the instrument is genuine and in all ↓
respects what it purports to be and that they have a X (accepts)
good title it
Y forged A’s signature.

PERPETRATOR OF THE FRAUD X accepts the instrument
D to F — ultimately liable because he caused the defect

DRAWEE-ACCEPTOR
D to X — can be compelled to pay because he
BILL OF EXCHANGE instrument according to the tenor of his acceptance and
admits the genuineness of the signature of the drawer
FORGED: SIGNATURE OF THE DRAWER

■ ORDER INSTRUMENT DRAWER
❖ Drawer (prior party) — cannot be compelled to D to A — cannot be compelled to pay because he can
pay because he can raise the real defense of raise the real defense of forgery
forgery

because he accepted the instrument and an SUBSEQUENT PARTIES TO THE FRAUD
acceptor will pay the instrument according to the D to Y, B & C — can be compelled to pay because they
tenor of his acceptance and admits the
respects what it purports to be and that they have a
genuineness of the signature of the drawer
good title it
❖ Subsequent parties to the fraud — can be

instrument is genuine and in all respects what it PERPETRATOR OF THE FRAUD
purports to be and that they have a good title it
D to X — ultimately liable because he caused the defect
❖ Perpetrator of the fraud — ultimately liable of forgery and he should be penalized under the law
because he caused the defect of forgery and he

should be penalized under the law
ILLUSTRATION 6:
❖ Drawer (prior party) — cannot be compelled to To: X
pay because he can raise the real defense of Pay Y or order P 10,000
forgery
Sgd. A
❖ Drawee-Acceptor — can be compelled to pay A --- Y → B → C→D
because he accepted the instrument and an ⇣ ↓
acceptor will pay the instrument according to the F X
tenor of his acceptance and admits the
genuineness of the signature of the drawer
X accepted the instrument
❖ Subsequent parties to the fraud — cannot be F forges the signature of Y
compelled to pay because they did not warrant
that the instrument is genuine and in all respects DRAWEE-ACCEPTOR

what it purports to be and that they have a good D to X — can be compelled to pay because he
title it
❖ Immediate transferor — can be compelled to pay instrument according to the tenor of his acceptance and
because they warranted that the instrument is admits the genuineness of the signature of the drawer

DRAWER
❖ Perpetrator of the fraud — ultimately liable D to A — cannot be compelled to pay because he can
because he caused the defect of forgery and he raise the real defense of forgery
should be penalized under the law
SUBSEQUENT PARTIES TO THE FRAUD

D to Y, B & C — can be compelled to pay because they

respects what it purports to be and that they have a NOT A HOLDER IN DUE COURSE
good title it
he can raise the real defense of forgery
PERPETRATOR OF THE FRAUD ❖ Drawee-Acceptor — cannot be compelled to pay

D to Y — ultimately liable because he caused the defect because even if he cannot raise the real defense
of forgery, he is not precluded from raising the
personal defense of a complete and undelivered
instrument.
FORGED: SIGNATURE OF INDORSER ❖ Prior & Subsequent Parties to the fraud —

■ ORDER INSTRUMENT cannot be compelled to pay because they did not
1) Drawee accepted prior to the forgery (illustration 7) extend any warrant that the instrument is genuine
❖ Drawer & Prior Parties to the fraud — cannot be and in all respects what it purports to be and that
compelled to pay because he can raise the real they have a good title it
defense of forgery
❖ Immediate transferor — can be compelled to pay
❖ Drawee-Acceptor — cannot be compelled to pay because they warranted that the instrument is
because he can raise the real defense of forgery
❖ Subsequent parties to the fraud. — can be and that they have a good title it
compelled to pay because they warranted that the ❖ Forger — ultimately liable because he caused the
instrument is genuine and in all respects what it defect of forgery and he should be penalized
under the law

defect of forgery and he should be penalized 2) Drawee accepted after the forgery (illustration 9)
under the law
2) Drawee accepted after the forgery (illustration 8) ❖ Drawee-Acceptor — can be compelled to pay
❖ Drawer & Prior Parties to the fraud — cannot be because he is a party after the forgery, he
compelled to pay because he can raise the real accepted the instrument and an acceptor will pay
defense of forgery
the instrument according to the tenor of his
acceptance and the forged indorsement is not
necessary to the title of the holder in due course

❖ Prior & Subsequent Parties to the fraud —
tenor of his acceptance
extend any warrant that the instrument is genuine
❖ Subsequent parties to the fraud. — can be
and in all respects what it purports to be and that
compelled to pay because they warranted that the they have a good title it

❖ Forger — ultimately liable because he caused the because they warranted that the instrument is
defect of forgery and he should be penalized and that they have a good title it
under the law

■ BEARER INSTRUMENT under the law
1) Drawee accepted prior to the forgery (illustration 10)

❖ Drawer — cannot be compelled to pay because ILLUSTRATION 7:
❖ Drawee-Acceptor — can be compelled to pay To: X
because the forged indorsement is not necessary Pay Y or order P 5,000
to the title of the holder in due course
Sgd. A
❖ Prior & Subsequent Parties to the fraud — A → Y → B C→D
↓ ⇣ /
extend any warrant that the instrument is genuine
and in all respects what it purports to be and that X F
they have a good title it
X accepted the instrument

because they warranted that the instrument is F forges the signature of B


DRAWEE-ACCEPTOR
D to X — cannot be compelled to pay because he can
❖ Forger — ultimately liable because he caused the raise the real defense of forgery

under the law

DRAWER & PRIOR PARTIES TO THE FRAUD the tenor of his acceptance and the forged signature is
D to A, Y & B — cannot be compelled to pay because not necessary for the title of the order
DRAWER & PRIOR PARTIES

SUBSEQUENT PARTIES TO THE FRAUD D to A, Y & B — cannot be compelled to pay because
D to C — can be compelled to pay because they he can raise the real defense of forgery

respects what it purports to be and that they have a IMMEDIATE TRANSFEROR
good title it
PERPETRATOR OF THE FRAUD respects what it purports to be and that they have a
D to F — ultimately liable because he caused the defect good title it

ILLUSTRATION 8: D to X — ultimately liable because he caused the defect

To: X
ILLUSTRATION 10:
Sgd. A Bill of exchange; Bearer Instrument
A →Y→ B C→D To: X
⇣/↓ Pay Y or order P 5,000
F X Sgd. A
A →Y→ B---C→D
Y forges the signature of X (drawee) ↓ ⇣

X F
DRAWEE-ACCEPTOR
D to X — can be compelled to pay because he Y forges the signature of X (drawee)
instrument according to the tenor of his acceptance

Not a holder in due course and shelter principle does
DRAWER & PRIOR PARTIES not apply.
D to A, Y & B — cannot be compelled to pay because

DRAWEE-ACCEPTOR
D to X — cannot be compelled to pay because even if
SUBSEQUENT PARTIES TO THE FRAUD he cannot raise the real defense of forgery, he is not
D to C — can be compelled to pay because they precluded from raising the personal defense of a
warranted that the instrument is genuine and in all complete and undelivered instrument.
respects what it purports to be and that they have a

good title it
If the shelter principle does not apply, X is not
precluded from raising the personal defense of a
PERPETRATOR OF THE FRAUD complete and undelivered instrument.
D to X — ultimately liable because he caused the defect Yes, there may be forgery but the forgery was not
necessary for the title of D.
Since D was not a holder in due course and the shelter

principle does not apply, he is susceptible to the
ILLUSTRATION 9: personal defense of want of delivery.
Bill of exchange; Bearer Instrument

To: X Is it possible that the forgery may happen on the
signature of the acceptor?
Yes, It is possible. In that case there is no party
Sgd. A primarily liable because drawee was never a party to
A →Y→ B C→D the instrument. In any case, the drawer is always a
⇣/↓ party prior to the forgery because the instrument would
F X not be be presented for acceptance without the
issuance of the drawer.
Y forges the signature of X (drawee)

DRAWEE-ACCEPTOR SIGNATURE OF DRAWER

GENERAL RULE:
D to X — can be compelled to pay because he is a
Between the drawee bank and the collecting bank, the
party after the forgery and he accepted the instrument
one who is supposed to bear the loss would depend on
and an acceptor will pay the instrument according to whose signature is forged.

SIGNATURE OF THE DRAWEE IS FORGED

If the signature forged is that of the drawer, the rule is ■ ORDER INSTRUMENT
that the drawee bank is always held liable because ❖ Drawer & Prior Parties to the fraud — cannot be
the drawee bank is supposed to know the signature of compelled to pay because he can raise the real
the drawer.
defense of forgery
When it pays on an instrument bearing the forged ❖ Drawee— cannot be compelled to pay because
signature of the drawer actually included a warranty on he can raise the real defense of forgery
the genuine of the signature of the drawer. So, the one

who should bear the loss is the drawee-bank.
❖ Subsequent parties to the fraud. — can be
— EXCEPTION purports to be and that they have a good title it
If the drawer has committed negligence. In that case, ❖ Forger — ultimately liable because he caused the
the liability has to be divided between the drawer and
the drawee because of the contributory negligence of
under the law
the drawer.
SIGNATURE OF INDORSER ILLUSTRATION 11:

GENERAL RULE: Bill of exchange; Order Instrument
IF the signature being forged is that of the endorser,
between the drawee bank and the collecting bank, it To: X
should be the collecting bank who should be held Pay Y or order P 5,000
liable because the drawee bank doesn’t warrant any Sgd. A
signature of the indorser. It’s supposed to be the A →Y → B → C→D
collecting bank which looks into the indorsements of ⇣
the instrument. Besides when it collects on an X
instrument it warrants all prior endorsement.
Y forges the signature of X (drawee)

— EXCEPTION:
If there is negligence on the part of the drawee bank DRAWEE
then the liability would have to be distributed between D to X — cannot be compelled to pay because he can
the drawee bank and the collecting bank
raise the real defense of forgery
EXCEPTION IS ALWAYS NEGLIGENCE.

DRAWER
Because negligence is one circumstance where prior D to A — cannot be compelled to pay because he can
parties to the forgery is precluded from raising the real raise the real defense of forgery
defense of forgery.
SUBSEQUENT PARTIES TO THE FRAUD

STUDENT’S QUESTION: D to B — can be compelled to pay because they
For example, you issue a china bank check and you warranted that the instrument is genuine and in all
encashed it in BPI, is BPI the collecting bank and respects what it purports to be and that they have a
Chinabank drawee bank? good title it
YES

But you cant present a check for encashment on D to X — ultimately liable because he caused the defect
different bank than that of the drawee bank. What of forgery and he should be penalized under the law
happens is you deposit that check to a different bank.
For example your bank is BDO and then here is a check SAMSUNG CONSTRUCTION CO., INC. VS. FAR
that your received for services rendered, BPI. Of course, EAST BANK AND TRUST CO. AND CA (2004)
you are not precluded from going to BPI and encase the Consequently, if a bank pays a forged check, it must be
check. BUT at time you don’t really need the money so considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor. A bank is
you just place is in your bank which is BDO and deposit liable, irrespective of its good faith, in paying a forged check.
it there. if BDO clears it BDO becomes the

COLLECTING bank and BPI remains as the DRAWEE ■ General rule — it remains that the drawee who has paid
bank.
upon the forged signature bears the loss.
—Exception: arises only when negligence can be traced

IF there is forgery who will be liable? on the part of the drawer whose signature was forged,
Depends if forged signature is the drawer or endorser. and the need arises to weigh the comparative
Apply the rule as discussed awhile ago.
negligence between the drawer and the drawee to
determine who should bear the burden of loss.
Still, even if the bank performed with utmost diligence, the

drawer whose signature was forged may still recover from the

bank as long as he or she is not precluded from setting up the (d) Where there is a conflict between the written and printed
defense of forgery. After all, Section 23 of the Negotiable provisions of the instrument, the written provisions
Instruments Law plainly states that no right to enforce the prevail;
payment of a check can arise out of a forged signature. Since (e) Where the instrument is so ambiguous that there is doubt
the drawer, Samsung Construction, is not precluded by whether it is a bill or note, the holder may treat it as
negligence from setting up the forgery, the general rule should either at his election;
apply.
(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;
GEMPESAW v CA, PBC (g) Where an instrument containing the word "I promise to
While there is no duty resting on the drawer to look for forged pay" is signed by two or more persons, they are
indorsements on his cancelled checks, a depositor is under a deemed to be jointly and severally liable thereon.
duty to set up an accounting system and business procedure

as are reasonably calculated to prevent or render the forgery APPLICABLE ONLY IN CASE OF DOUBT
of indorsements difficult, particularly by the depositor’s own The rules in this section are applicable only when the
employees.
instrument in question is ambiguous, uncertain or when
As a rule the drawee bank who has paid the check with forged there are omissions. If the terms are clear, the
indorsement, cannot charge the drawer’s account for the instrument must be enforced as it reads.
amount of the said check. An exception to this rule is where

the drawer is guilty of such negligence which causes the bank
to honor the check.
(A) CONFLICT BETWEEN WORDS AND FIGURES
The words prevail because there is more effort to be
exerted in writing words than in writing figures. The
ASSOCIATED BANK v CA (1996) intention of the parties can be inferred more from when
By reason of the statutory warranty of a general indorser in one is writing words.
Section 66 of the Negotiable Instruments Law, a collecting

bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior Sums expressed in words and figures different
indorsements, including the forged indorsement. It warrants When there is a discrepancy between the sum
that the instrument is genuine, and that it is valid and expressed in words and sum expressed in figures, the
subsisting at the time of his indorsement. Because the former controls.
indorsement is a forgery, the collecting bank commits a

breach of this warranty and will be accountable to the drawee
bank. This liability scheme operates without regard to fault on Reason: It is easier to change the figures or to commit a
the part of the collecting/presenting bank. Even if the latter mistake on them than when the amount is written in
bank was not negligent, it would still be liable to the drawee
bank because of its indorsement.
words.
IF THERE ARE AMBIGUITIES IN THE WORDS

PCIB v. CA (2001) Reference to the numbers (figures) should be done.
... A bank which cashes a check drawn upon another bank,

without requiring proof as to the identity of persons
presenting it, or making inquiries with regard to them, cannot Words ambiguous or uncertain
hold the proceeds against the drawee when the proceeds of GR: Words outweigh figures.
the checks were afterwards diverted to the hands of a third —XPN: When the words are ambiguous or
party. In such cases the drawee bank has a right to believe
that the cashing bank (or the collecting bank) had, by the uncertain, reference may be had to the figures to
usual proper investigation, satisfied itself of the authenticity of determine the true amount.
the negotiation of the checks.
Thus, one who encashed a check which had been forged or (B) WHEN THERE IS NO MENTION AS TO WHEN INTEREST
diverted and in turn received payment thereon from the SHOULD START TO RUN
drawee, is guilty of negligence which proximately contributed
to the success of the fraud practiced on the drawee bank.
It should run from the date of the issuance of the
instrument. This goes back to the presumption that
when the instrument is not dated, it is presumed to be
dated at the time it was issued.
F. Ambiguity (Sec. 17)

Sec. 17. Construction where instrument is ambiguous. -
Where the language of the instrument is ambiguous or there (C) INSTRUMENT UNDATED
are omissions therein, the following rules of construction An undated instrument is considered dated as of the
apply:
date of its issue.
(a) Where the sum payable is expressed in words and also in

figures and there is a discrepancy between the two, the Issue – first delivery of the instrument complete in form,
sum denoted by the words is the sum payable; but if the
words are ambiguous or uncertain, reference may be to a person who takes it as holder.
had to the figures to fix the amount;
(b) Where the instrument provides for the payment of A. If the date when the stipulated interest is to run is
interest, without specifying the date from which interest not specified — the interest runs from the date of
is to run, the interest runs from the date of the the instrument
instrument, and if the instrument is undated, from the

issue thereof;
B. If undated — interest runs from the date of issue
(c) Where the instrument is not dated, it will be considered to C. If there is no rate of interest — legal rate of interest
be dated as of the time it was issued;
6% (Circular No. 799)

Cases for Forms and Interpretation

(D) CONFLICT BETWEEN THE WRITTEN AND PRINTED
PROVISIONS ON THE INSTRUMENT 1. Philippine Education Co. vs Soriano
The written provisions prevail.
2. Caltex Phil. vs. CA 212 SCRA 448, G.R. No. 97753,

August 10, 1992
Atty: What is contemplated here is a pro-forma 3. Metrobank vs. CA, 194 SCRA 168, G.R. No. 88866,
instrument where certain items are already printed and February 18, 199
there are blanks provided to be filled-up in writing.
4. Sesbreno vs. CA, 222 SCRA 466, G.R. No. 89252,

Marcy 24, 1993 March
In case of conflict between the written and printed 5. Firestone Tire and Rubber Co . vs. CA, 353 SCRA
provisions, the former prevail.
601 (GR No. 13236, 5,2001) ,
6. Serano vs. CA, 196 SCRA 107, G.R. No. 45125, April
Reason: The written words are deemed to express the 22, 991 L-l Bl 03,
true intention of the maker or drawer because they are 7. PNB vs. Manila Oil Refining & By-Products
placed there by himself. On the other hand, printed Company, Inc . G.R. No. 8 June 1922 .
forms are prepared without any particular contract in

8. Salas vs. CA, 181 SCRA 296, G.R. No. 76788,
view.
January 22, 1990
9. Consolidated Plywood Industries Inc. vs. lFC

(E) DOUBT AS TO WHETHER THE INSTRUMENT IS A BILL OR A Leasing & Acceptance Corp.,G.R. No. 72593, 30
NOTE April 1987
In case of doubt as to whether an instrument is a bill or

a note, the holder may treat either at his election.
10. Ang Tek Lian vs. CA, G.R. No. L-2516, September
25, 1950
11. Jiminez vs. Bucoy, G.R. No. L-10221, February 28,

Atty: This provision is different from that provision which 1958
provides when a bill of exchange should be treated as a

promissory note (Sec.130). In the latter, you have no 12. Francisco vs. CA, 319 SCRA 354 ( 1999)
option but to treat the instrument as a promissory note.

13. Republic Bank vs. Ebrada, 65 SCRA 680, G.R. No.
L-40796, July 31, 1975
14. MWSS vs. CA, 143 SCRA 20, G.R. No. 126000, Oct .
(F) WHERE A SIGNATURE IS PLACED UPON THE INSTRUMENT 7, 1998
THAT IT IS NOT CLEAR IN WHAT CAPACITY THE PERSON IS

SIGNING 15. Gempesaw vs. CA, 218 SCRA 682, G.R. No. 92244,
He is deemed to be an indorser.
February 9, 1993
If the person signed at the back of the instrument – He 16. Associated Bank vs. CA, 252 SCRA 620, G.R. No.
is considered an accommodation indorser.
107382, January 31, 1996
17. Republic Bank vs. CA, 196 SCRA I 00, G.R. No.
In case of doubt as to what capacity the person making 42725, Ap ril 22, 1991
the instrument intended to sign – he is to be deemed an 18. Philippine Commercial International Bank vs. ·CA;
indorser.
350 SCRA 446 (GR No.121413, January 29, 2001)
19. Ramon llusorio vs. CA, 393 SCRA 89 (GR No.

TN: This applies only when there is doubt due to the 139130, November 27, 2002)
ambiguous location of the signature.

20. Samsung Construction Co ., Phils.v s. FEBT C and
CA, GR No. 129015, August 13, 2004 .
(G) WHERE AN INSTRUMENT CONTAINING THE WORD “I 21. Cesar V. Areza, et al. vs. Express.Savings Bank,
PROMISE TO PAY” IS SIGNED BY TWO OR MORE PERSONS Inc ., G.R. No. 176697, 10 September 2014
They are solidarily liable.

22. Philippine National Bank vs. CA, 256 SCRA 491 .
23. Far East Bank & Trust Company vs. Gold Palace
An instrument with the words “I promise to pay” signed Jewellery Co., G.R. No.168274, 20 August 2008 ·
by two or more persons – gives rise to solidary liability. 24. Metrobank v. Cabilzo, 520 SCRA 259 (2006)
Thus, any one of the signers may be held liable for the 25. International Corporate Bank v. CA, 501 SCRA 20
whole amount of the instrument.
(2006),
26. BOO UNIBANK, INC.~- Et--JGRS.E LVINGL AO, GR.

TN: However, if “we promise to pay” and signed by two No. 227005, 19 June 2017
makers imparts only joint liability.
WHERE THE NAME OF THE PAYEE IS NOT A NAME OF A CONSIDERATION

PERSON CONSIDERATION
If the instrument says, I promise to pay to the order of P An inducement to a contract, that is, the cause, price or
or bearer 1M signed X. It should be treated as bearer impelling influence which induces a contracting party to
instrument because it is issued to the order of a name enter into a contract.
which is not purported to be a name of any person.

A. Presumption of Consideration (Sec. 24) donation. However, for the purposes of Negotiable
instrument law, they are not valuable considerations.
Sec. 24. Presumption of consideration. - Every negotiable

instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature PRE-EXISTING DEBT
appears thereon to have become a party thereto for value.
A pre-existing debt can be a valuable consideration. The
CONSIDERATION discharge of such debt is a valuable consideration for a
Any prestation sufficient to support any contract in favor negotiable instrument. It must be shown that the holder
of the party to an instrument, such as a maker or has given up the pre-existing debt or the right to sue.
indorser, and it may consist in giving, doing, or not

doing.
Future debt is not a valuable consideration
Future debt cannot be a considered as valuable
Prestation – obligation to give, to do or not to do.
consideration because at the moment you issue the
instrument, there is no consideration yet.
PRESUMPTION OF CONSIDERATION
If the negotiable instrument does not provide for a Pre-existing debt of an insolvent estate is not a
consideration, the instrument is still valid because valuable consideration
consideration is always presumed. It need not be stated If a widow of an insolvent estate issued a negotiable
in the negotiable instrument.
instrument to pay the debt of the decedent, the
instrument is not deemed issued for a consideration if it
TN: The presumption that consideration exists is only is issued against the insolvent estate because when the
prima facie. Thus, it can be rebutted by evidence to the estate is insolvent, it means that all pre-existing debts
contract. The evidence must be convincing to are cancelled. Debt is cancelled along with the death of
overthrow the presumption. It is not overcome by a the decedent.
mere denial of receipt of the consideration.
Whoever issued the instrument does not matter because

You are a holder for value as a presumption that you are with the insolvency of the estate, all pre-existing debts
a holder in due course.
are deemed cancelled.
You can place in the contract, “In consideration of our It doesn’t matter whether one has the capacity. What
contract, this instrument is issued.”
matters is the reason of the issuance of the instrument.
However, there’s no such need to specify that because The consideration is the reason why you are issuing the
there is a prima facie presumption that every negotiable instrument.
instrument is issued for a valuable consideration.
If you are issuing it for a pre-existing debt of an insolvent

There’s also a presumption that all parties are parties decedent, then the instrument is deemed not issued for
for value because there is a presumption that you are a a consideration for after all there is no debt to speak of.
holder in due course, in the absence of any information.
SECURITY FOR PRE-EXISTING DEBT

The transfer of negotiable instruments as security for
B. What Constitute Value (Sec. 25) pre-existing debt is a valuable consideration.
Sec. 25. Value, what constitutes. — Value is any

consideration sufficient to support a simple contract. An
antecedent or pre-existing debt constitutes value; and is Example: M owes P1, 000 payable today. M fails to pay
deemed such whether the instrument is payable on demand in cash. He issues a check for said amount to P who
or at a future time.
accepts the same. Here, the consideration for the check
VALUABLE CONSIDERATION is the pre-existing debt of M.
Sufficient to support assemble contract. Anything which

requires a party to give, to do or not to do as a If the negotiable instrument is issued to a person as a
condition for issuing a negotiable instrument.
security for a certain debt, while there is no negotiation
of a negotiable instrument (issued only as a security not
What constitutes value? negotiated in the sense of negotiation under the NIL) it
Money, property or services. It could also be pre- doesn’t mean that you can’t go after the negotiable
existing debt.
instrument after all this instrument was used as a
—However, it does not consider love or gratuitous security. You are not a party to the instrument but you
as a valuable consideration.
can have a claim to the instrument.
Example: If the instrument amounted to P1M, the debt is

Generosity cannot be a valuable consideration.
P500K, and there is a P1M promissory note used to

Love, affection or moral obligation is not a valuable secure the P500K debt, whoever is the creditor to
consideration. They are not considered as valuable whom this PN was delivered as security of such debt
consideration enough to support a negotiable can have a claim on the negotiable instrument but he is
instrument. But they can support a simple contract like not a party to the instrument.

3) For the application of certain defenses
After the obligation has matured, you can ask whoever - Want of consideration in the case of an
is the maker of the instrument to negotiate the accommodation party cannot be raised against a
instrument to you.
holder for value (Sec. 29).
Take note:
C. Holder for Value (Sec. 26 and 27)

1. The holder is deemed as such not only as regards the
Sec. 26. What constitutes holder for value. – Where value party to whom value has been given by him but also
has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who in respect to all those who became parties prior to
become such prior to that time.
the time when value was given.
Holder for value — one who has given a valuable 2. He is presumed a holder for value until the contrary is
consideration for the instrument issued or negotiated to shown.
him.
3. Absence of consideration is a personal defense (can
only lie against a holder not in due course)
For you to be considered a holder for value, the

presumption only applies as mentioned in Section 26: if,
at any time, you have given value for the instrument. LIEN CONSTITUTES HOLDER FOR VALUE
That goes without saying that if you gave property or Sec. 27. When lien on instrument constitutes holder for
money, there is a pre-existing obligation in exchange for value – Where the holder has a lien on the instrument,
the instrument that you receive, then you are arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.
considered a holder for value.
TN: Not all holders for value are holders in due If you are a holder for value, you are supposed to have a
lien on the instrument to the extent of the value
course. You can be a holder for value but you:
provided.
(1) did not receive the instrument as complete and

regular upon its face;
(2) became the holder of it when it was overdue; or

Q: If the instrument is worth P1,000,000 and you have a
pre-existing obligation of P800,000, how much is your
(3) you have notice of any infirmity in the instrument or lien over the instrument, if ever it was given to you?
defect in the title of the person negotiating it.
You are not supposed to be the owner of the entire
You may have violated all or some of these three (3) P1,000,000. Your lien is only up to the extent of the
requisites, except for taking the instrument in good faith value you have given – P800,000. The P200,000
and for value, but still be a holder for value.
excess is supposed to be held in trust for the person
who negotiated the instrument to you. You are only
considered a holder for value to the extent of the
All holders in due course considered can be considered consideration you have provided which is P800,000.
as holder for value.
But not all holder for value is considered as holder in

due course.
WHERE A HOLDER HAS LIEN ON INSTRUMENT
One who has taken a negotiable instrument as collateral
security for a debt has a lien on the instrument.
PRESUMPTIONS:
1) That an instrument is issued for a valuable
consideration even when there is no mention of such TN: As such holder of collateral security – he would be a
pledgee (governed by the provisions of the Civil Code)
consideration;
Atty: Even if the consideration is not expressly

mentioned, it does not affect the negotiability of the EXTENT OF LIEN
instrument as it is not a requisite under Sec. 1.
A. If the amount of the instrument is more than the debt
2) That a person is a holder for value.
secured by such instrument — the pledgee is a
holder for value to the extent of his lien. (The surplus
shall be delivered to the pledgor)
IMPORTANCE OF KNOWING IF ONE IS A HOLDER FOR B. If the amount of the instrument is less than or the
VALUE OR NOT:
same as the debt secured by such instrument — the
1) To determine if one is a holder in due course
pledgee is a holder for value for the full amount and

- A holder in due course is always a holder for value.
may thus recover all.
2) To know if one can retrieve the value he has given
- There may be instances where an instrument is

issued for a consideration but does not constitute RULES IN CASE DEFENSES ARE AVAILABLE
A. If there are existing defenses between the pledgor
negotiation.
and the party liable on the instrument — pledgee can
‣ E.g. Order instrument which was not indorsed. collect on the instrument only to the extent of the
In this case, one is considered a holder for amount of the debt.
value but not a holder in due course because B. If the defenses of the party liable on the instrument
there was never proper negotiation of an are real defenses — pledgee cannot recover anything
instrument. In this case, he can still collect

because he has given value.

D. Effect of Want of Consideration (Sec. 28) is supposed to be part of a commercial transaction and
you don’t trade love. :)
Sec. 28. Effect of want of consideration. — Absence or

failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of PRE-EXISTING DEBT
consideration is a defense pro tanto, whether the failure is A pre-existing debt is a valid consideration.
an ascertained and liquidated amount or otherwise.
If there is want of consideration, it gives rise to a

personal defense — “a matter of defense as against ABSENCE OR WANT OF CONSIDERATION
any person not a holder in due course.”
Total lack of any valid consideration for the contract, in
consequence of which the alleged contract must fall.
It could be partial or full want of consideration. But if

it’s partial failure of consideration, it is only a defense INSUFFICIENCY OF CONSIDERATION IS NOT A DEFECT IN
pro tanto.
THE INSTRUMENT
Example: The consideration is P1 for P100K negotiable
instrument. This can amount to a donation since it is not
Pro tanto – only to the extent that there really was no issued for a valuable consideration. But in that sense,
consideration
where the amount is so low that it can be deemed a
donation, it can amount to lack of consideration.
Example:
If the instrument is worth P1,000,000 and you’re only FAILURE OF CONSIDERATION

given P800,000, the person who has the right to raise a Failure or refusal of one of the parties to do, perform or
defense can only say you have no consideration to the comply with the consideration agreed upon. In other
extent of P200,000. Hence, he cannot also refuse to words, something was agreed upon as consideration
make payment of P800,000 because the P200,000 is but for some cause, such agreed consideration failed to
the only one which has no consideration.
materialize.
The law states that it is a matter of defense as against Example: You engage in a sale of parcel of land (ought
any person not a holder in due course which means to be inherited from parents) and then such was sold by
that this is a personal defense.
your parents days after your transaction.
An instrument can be issued without consideration.

A. This is want or lack of consideration because:
1. You cannot sell an inheritance
Effect: The personal defense of want of consideration 2. You don’t own the property. You cannot sell what
can be raised against a holder not in due course.
you do not own.
B. But, if you were authorized in the first place but it was

THIS IS A PERSONAL DEFENSE sold by another broker – there is only failure of
If ever there is lack of consideration as in the case where consideration.
the instrument is given freely to the payee, it can be

raised as a defense only against a person not a holder TN: Nonetheless, any of the two may still be considered
in due course.
as a personal defense.
Want or absence Failure of

of consideration Consideration
WANT OF CONSIDERATION
Failure or refusal of one If not authorized in the first place or there is really no
Total lack of any of the parties to do,
Definition valid perform, or comply valuable consideration or you issue a negotiable
consideration with the consideration instrument on the basis of love and affection, there is
agreed upon. want of consideration.
As to effect Treated as a Treated as a personal

or legal
implications personal defense defense FAILURE OF CONSIDERATION
You have the authority but after a condition is set and
■ Consideration (in general) — refers to the prestation you can’t deliver, there is failure of consideration.
or the reason why one enters into a contract. For

purposes of NIL, consideration would have to be one
which is valuable.
RULE IN CASE OF PARTIAL FAILURE OF CONSIDERATION
■ Valuable consideration — consideration sufficient to In case of partial failure of consideration, this would bar
which is support a simple contract.
recovery only pro tanto.
Example: If only 2/3 portion of the land was delivered,

LOVE AND AFFECTION
Love and Affection cannot be considered a valuable there would be a partial failure of consideration which
would bar recovery only pro tanto. Hence, P could
consideration because it is a matter of practice of
recover only 2/3 of the note as M is not liable to the
merchants. Love and affection cannot be used for
extent of the 1/3 which is the price of the undelivered
purposes of issuing negotiable instruments because it
portion.

E. Accommodation Party and its Liabilities (Sec. 29) because I did not receive value for the instrument. I
simple received value for the use of my name. What is
Sec. 29. Liability of accommodation party. — An prohibited for one to be an accommodation maker is
accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving the fact that you received value for the instrument.
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 It is important to know the difference between an
holder, at the time of taking the instrument, knew him to be accommodation party and accommodated party is
only an accommodation party.
because later on, when we discuss discharge of an
instrument, if the instrument is paid for by an
■ Accommodation party — is one who has
accommodated party, it will still have the effect of
discharging the instrument as if it was made by the
(a) signed the instrument as maker, drawer, person who accommodated him, especially the
acceptor, or indorser
accommodation party being principally liable.
(b) without receiving value for the signature, and
(c) for the purpose of lending his name to some If you’re an accommodation maker or accommodation
other person
drawee, it requires you to be the one primarily liable.
Under the law, only the payment of the person
Important: Issue on want of consideration is not a primarily liable can cause the discharge of an
defense available to an accommodation party against instrument. Another instance however, is when the
holders for value who are also holders in due course.
accommodated party pays the instrument as well.
That is the case because between the accommodation
Illustration: I am a good friend of Mr. X. Mr. X has a poor party and the accommodated party, with regard to third
credit standing and so, if he issues a negotiable parties, the one primarily liable is the accommodation
instrument, no one will accept it because supposedly, party. But as between themselves, it is the
what you are trying to circulate when you issue a accommodated party who is liable because the
negotiable instrument is just your credit or your honor.
So he doesn’t have much honor because he has poor accommodation party is simply trying to help the
credit standing but I happen to have good credit accommodated party for purposes of allowing to
standing. Upon his request, I issued an instrument in his engage in the transaction he wanted.
favor whereby I stated, “I promise to pay X P1,000,000

or order. Sgd. A” but I never received value for the
instrument. It was just an arrangement made by Mr. X
and I. In that case, I simply accommodated Mr. X. I did WITHOUT RECEIVING VALUE FOR THE SIGNATURE
not receive value for the instrument. But that instrument This pertains to receiving value for the issuance of the
was able to use by Mr. X to buy certain construction
materials on credit, on the force of the instrument instrument itself and not for the use of the name by way
drafted. Since I have good credit standing, if that will be of accommodation.
shown by Mr. X to the construction and supplies store,

they will receive it as payment for the instrument.
AN ACCOMMODATION PARTY WHO SIGNS AS
Who is liable on the instrument? MAKER, DRAWER, ACCEPTOR, OR INDORSER
As to third parties — Atty. Because he was the one
who signed the instrument. Mr. X just indorsed the
instrument to the supply store. Mr. X can be a party ACCOMMODATION ACCEPTOR — ACCOMMODATED PARTY IS
liable in that sense but only as an indorser.
THE DRAWER
For an accommodation acceptor, if there’s someone
who most likely would be accommodated, it must be
As between Mr. X and Atty — Mr. X because Atty is the drawer. Example would be for a purchase of
merely an accommodation party whereas Mr. X is the construction materials. Here is a hardware store who’s
accommodated party.
willing to accept order on credit from a person with a
good credit standing. EL here doesn’t have a good
IOW, the fact that I (Atty) did not receive value on the credit standing. But W on the other hand, has a good
instrument cannot use such fact as a defense that I credit standing. What will EL do is to issue a bill of
(Atty) should not be held liable against a holder in exchange that has to be accepted first by W. W, by his
due course or holders not in due course, as long as acceptance of the bill was able to accommodate and
they are holders for value. So take note.
lend his status having a good credit standing to EL to
purchase the construction materials.
An accommodation maker then, while it says “not

receiving value therefor”, the therefor there means ACCOMMODATION INDORSER — ACCOMMODATED PARTY IS
receiving value for the instrument. Hence, it is possible THE DRAWER/MAKER
that the accommodation party gets to have payment for An accommodation indorser signs the instrument before
services that he rendered, in the sense that he allowed the instrument is issued to the payee. He simply is
another person to make use of his name.
lending his name as an additional party to the
instrument.
Example:
As a general rule when the instrument is issued, there

While we are friends with Mr. X, I want him to pay me
P10,000 for the use of my name. I can still be ought to be a signature of the maker or the drawer.
considered as an accommodation maker in that sense

In this case however, when the instrument was received Accommodation Party Regular Party
by the payee, it contains not only the signature of the
drawer or the maker but another signature in the back Signs an instrument for the Does not sign for that
purpose of lending his purpose
of the instrument; the signature of the accommodation name to some other person
indorser. It lends a name because if there’s additional
May always show by parol Cannot disclaim or limit his
name in the instrument that means there is another evidence that he is only personal liability as
party that can be made liable.
such appearing on the instrument
by parol evidence
ACCOMMODATION PARTY’S DEFENSE OF WANT OF Cannot avail of the defense May avail of said defense
of absence or failure of against a holder not in due
CONSIDERATION consideration against a course
It is possible that one is a HNDC but is a holder for holder not in due course
value. One is a HNDC not for the reason that he did not After paying the holder, may May not sue any subsequent
receive value for the negotiable instrument but due to ask sue for reimbursement party for reimbursement
other reasons (i.e. taking the instrument when overdue). from the accommodated
party, although a
You are a holder for value but not a holder in due subsequent party
course.
In this case, an accommodation party may raise the ILLUSTRATION 1:

defense of want of consideration applying Sec. 28. (If Want of consideration; Order Instrument
there is want of consideration, you can raise it against a
holder not in due course) Sec. 29 is only applicable to X →Y→A→ B→ C→D
holders for value who are also holders in due course.
X was the god father of Y who issued an instrument in

consideration of his birthday.
MEANING OF “WITHOUT RECEIVING VALUE THEREFOR”
Means that no value has been received for the There is want of consideration.
negotiable instrument and not “without receiving

payment for lending his name”.

Being an accommodation party doesn’t mean that you MAKER
D to X — can be compelled to pay because he cannot
don’t accept any value at all. You don’t receive any
raise the personal defense of want of consideration.
value for negotiating the instrument but for purposes of

lending one’s name, you may.
SUBSEQUENT PARTIES
Example: M is given P1, 000 in consideration of lending D to Y, A, B & C — can be liable and can be compelled
his name, but not for the promissory note he signs, M because they warranted that they have good title to it.
does not lose his status as an accommodation party.

RIGHT TO PRESENT PAROL EVIDENCE TO PROVE MAKER
ACCOMMODATION D to X — cannot be compelled to pay because he can
One of the problems in this undertaking is that you may raise the personal defense of want of consideration.
not know if one is an accommodation party or not, thus

it is an established principle under NIL that an
accommodation party can present parol evidence.
ILLUSTRATION 2:
Failure of consideration; Order Instrument
The accommodation party is permitted to show by parol X →Y→A→ B→ C→D
evidence which party he accommodated. Otherwise, if
this was not allowed, an accommodated party may Y will deliver to X a diamond ring.
enforce payment of the instrument against the But Y only delivered a fancy ring.
accommodation party.

General rule: Negotiable instrument is a contract and
one can’t present parol or oral evidence. The contract MAKER
D to X — can be compelled to pay because he cannot
itself is already the evidence of what was agreed upon. raise the personal defense of failure of consideration.
A party is precluded from saying anything against the

stipulations of the contract.
—Exception: Parol evidence may be used to SUBSEQUENT PARTIES

present proof as an accommodation party.
D to (Y, A, B & C) — can be liable and can be compelled
because they warranted that they have good title to it.
Accommodation Party Regular Party

Signs an instrument without Signs the instrument for
receiving value therefor value


MAKER Transfer — the process by which property is delivered
D to X — cannot be compelled to pay because he can by one person to another.
raise the personal defense of failure of consideration.
Example: I will show you a check so you could see what

TN: In the exam, make sure to say it right whether there a check is but you started running away with it. There’s
is failure of consideration or want of consideration. no negotiation there because although there is transfer
There is failure of consideration when the consideration from one hand to another, there was no intention to let
that they have agreed upon did not materialize. There the person who ran away as a person as a holder. You
will only be want of consideration if in the first place, will only have negotiation if the intention is to
there was really no consideration contemplated on.
constitute the transferee as a holder.
ILLUSTRATION 3: Important: The term expresses the mode and effect of

the transfer of a NI. Thus, there is no negotiation of the
Illegal consideration = want; Order Instrument transfer does not make the transferee the holder of the
X →Y→A→ B→ C→D instrument.
Y paid X to be his mistress.

METHODS OF TRANSFERRING A NI
MAKER 1) Issue — the first delivery of the instrument,
D to X — can be compelled to pay because he is complete in form, to a person who takes it as holder.
estopped from saying that there is illegal consideration It is the first transfer of an instrument to a payee,
(want of consideration) since he was the one who where a NI’s legal life begins.
caused the illegality.

2) Negotiation — ordinarily involves indorsement, so
Otherwise, it would encourage people to buy their both terms are often used interchangeable.
mistresses and not be held liable for it. In effect, you’re Negotiation makes it possible for the transferee to
also tolerating the illegal act if you allow X to get away acquire a better right to a NI that the transferor had.
with the liability.

3) Assignment — the less usual method, which may or
may not involve an indorsement. Here, the assignee
D to Y — estopped from claiming the defense of illegal acquires the instrument subject to the rules
consideration (want of consideration) as he/she was applicable to non-negotiable paper.
privy to the illegal agreement
METHODS OF NEGOTIATION
SUBSEQUENT PARTIES
D to (A, B & C) — can be liable and can be compelled For purposes of negotiable instruments law, valid
because they warranted that they have good title to it.
negotiation depends on the type of negotiable
instruments, the promissory notes and bill of exchange
and further subdivided into bearer or order instruments.
If B is not a holder in due course and the shelter principle

does not apply, will your answer change?
No, it will be the same. It cannot be used already against How is an instrument negotiated?
a holder in due course and more so if he is a holder not It depends on the type of instrument.
in due course. In that sense, they are already estopped

from claiming the defense of want of consideration.
1) INSTRUMENT PAYABLE TO ORDER
This is just the same as forgery where the person who ■ Negotiated by indorsement of holder + delivery;
was negligent could still be held liable because there is ❖ Where the instrument is payable to order, there are
estoppel.
two steps required for its negotiation:
✦ first, an indorsement by the payee of present
NEGOTIATION holder, and
✦ secondly, its delivery to the next holder.
A. What Constitute Negotiation (Sec. 30)

Sec. 30. What constitutes negotiation. — An instrument is Important: Under Section 74, the instrument must be
negotiated when it is transferred from one person to another exhibited when presented for payment to the person
in such manner as to constitute the transferee the holder from whom payment is demanded. The party paying
thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the may thus judge the genuineness of the indorsements
holder completed by delivery.
and of the right of the holder to receive payment.
Mode of transfer of bill or note, in general.

What is Negotiation? 2) INSTRUMENT PAYABLE TO BEARER
When an instrument is transferred from one person to ■ Negotiated by delivery;
another in such manner as to constitute the transferee ❖ If the instrument is payable to bearer, it is
the holder thereof. Negotiation makes it possible for negotiated by mere delivery without indorsement.
the transferee to acquire a better right to a negotiable

instrument that the transferor had.

Bearer — the person in possession of a bill or note ASSIGNMENT

which is payable to bearer.
MEANING OF ASSIGNMENT
A transfer of the title to the instrument, with the assignee
Delivery means transfer of possession actual or generally taking only such title as his assignor has,
constructive, from one person to another.
subject to all defenses available against his assignor.
Type of Instrument Method of Negotiation ASSIGNMENT OF INSTRUMENT

Order Instrument Mere delivery A bill or note, whether negotiable or non-negotiable,
may be transferred by assignment.
Bearer Instrument Indorsement + Delivery
Important: While a thief or finder cannot acquire title to SESBREÑO v. CA (1993)

the instrument, by virtue of the theft, he can transfer title
A NI may, instead of being negotiated, ALSO be assigned or
to a subsequent innocent purchaser.
transferred. A non-NI may not be negotiated; but it may be
assigned or transferred, absent an express prohibition against
assignment or transfer written in the face of the instrument.
Example: Tanya issues a note payable to bearer. The

note was stolen from Tanya’s home by Feds who Absent an express prohibition against assignment or transfer
delivered the note to Bads. Feds’ acquisition of the note written on the face of a non-negotiable instrument, the same
may be assigned or transferred. Thus, a PN marked “non-
does not constitute delivery. There is no negotiation to negotiable” but not at the same time stamped “non-
Feds, because delivery must be voluntary. However, the transferable” or “non-assignable” may be assigned or
delivery to Bads who acted in good faith, constitutes transferred.
negotiation.
NEGOTIATION AND ASSIGNMENT DISTINGUISHED

Payment of instrument by drawee is not negotiation Negotiation is strictly the transfer of a NI to a holder.
The payment of a check or other bill by the drawee bank While a NI may be either negotiated or assigned, a non-
is not a negotiation and does not make the bank a
negotiable instrument can only be assigned, not
holder within Section 30. Payment effects a discharge negotiated.
of the instrument, not a transfer of title thereto.
The other distinctions include:
Here, the bank is neither the payee nor the indorsee.

The check is thus extinguished and cannot be put in Negotiation Assignment
circulation again so as to bind the drawer or indorser.
Refers only to negotiable Refers generally to an
instruments ordinary contract
Important: The writing of the name of the holder on the The transferee is a holder Transferee is an assignee
back of the check before surrendering the same for
payment to the drawee bank is not an indorsement. It HDC is subject only to real Assignee is subject to both
defenses real and personal defenses
merely serves as a receipt for the money.
HDC may acquire a better

title or greater right under An assignee merely steps into
Effect of delivery of order instrument without the instrument than those
possessed by the transferor the shoes of the assignor
indorsement or prior party
There is no negotiation, thus, the transferee would not
be the holder of the instrument. The transfer operates Assignor does not warrant
merely as an ordinary assignment and the assignee is the solvency of prior parties,
General indorser warrants the

merely placed in the position of the assignor, subject to solvency of prior parties — unless expressly stipulated
or the insolvency is
all defenses, real and personal, available against the known to him
assignor.
Indorser is not liable unless Assignor is liable even

there be presentment and without notice of dishonor
notice of dishonor
What is the remedy of the assignee?
To have the indorsement of the assignor. (Section 49) Governed by the NIL Governed by the Civil Code
When such indorsement is subsequently obtained, the (Arts 1624-1635)
transfer operates as a negotiation only as of the time
the indorsement is made.
Important: The distinction is not material if there is no
defense to the obligation and only the maker is sought
Important: The lack of any indorsement does not to be held. But whether the transfer of a bill or note is
preclude the assignee’s right to enforce the note. It by negotiation or assignment, the transfer may
merely prevents him from obtaining the status of the constitute a sale, exchange, pledge or gift.
holder, but he can still seek to collect from the maker as

an assignee and owner of the note.
Payment by means of instrument merely conditional
Whether the act involved is negotiation or assignment,
payment by means of PNs or BOEs and other
negotiable instruments is merely conditional – subject

to the condition that they be converted into cash at Important: Each indorsement generates an additional
maturity.
contract between the indorser and all subsequent
holders.
Take note: The rule is different in insurance, because

acceptance of a PN or check in payment of the An indorsement involves the certainty of two things:
premium by the insurer renders the policy immediately 1. The identity of the indorser (as being the payee or
operative, where the policy is silent as to the mode of true owner)
payment.
2. The genuineness of his signature
B. How Indorsements Is Made (Sec. 31, 32, 40, 41, & 50) TN: It is the duty of a person cashing or paying on an
instrument to ascertain both before paying.
Sec. 31. Indorsement; how made. — The indorsement must

be written on the instrument itself or upon a paper attached
thereto. The signature of the indorser, without additional Important: But the acceptor does not admit the
words, is a sufficient indorsement.
genuineness of the indorser’s signature.
Indorsement — The act of writing the signature of the Indorser generally enters into two contracts (Implied
indorser at the back of the instrument (Generally at the contracts by Indorser):
back of the instrument but can be anywhere).
1) sale or transfer of instrument
2) to pay instrument in case of default of maker
TN: Only requirement is signature of indorser. That is

why there are indorsements classified as blank and Indorsement must be of entire instrument (can’t be
classified as special, because, at the very least, a indorsement of only part of amount payable, nor can it
signature of an indorser is needed.
be to two or more indorsees severally. But okay to
indorse residue of partially paid instrument) (Sec. 32,
He can indorse the instrument to someone else and thus NIL)
become an indorser as well.
How is indorsement made?

By signing (indorsing) at the back of the instrument.
The indorsement must be written on the instrument itself

or on a paper attached thereto (allonge). The signature
of the indorser, without additional words, is sufficient Does it have to contain words of negotiability?
indorsement. (Sec.31, NIL)
No, it does not need to contain words of Negotiability.
Does that not affect the negotiability of the instrument?

PARTIES No, words of negotiability are only required on the face
1. Indorser — the payee by signing or indorsing the of the instrument. When making indorsement, there is
instrument and delivering it to another becomes an no need to add words of negotiability.
indorser.
2. Indorsee — the person who receives the

indorsement instrument.
EFFECT OF INDORSEMENT
In an order instrument, when the only or last
Important: Indorsement alone without delivery conveys indorsement is an indorsement in blank, it will convert
no title and creates no holder. It must be indorsement the instrument to a bearer instrument.
completed by delivery. It applies to both bills and notes.
Example
Where there is no signature of indorser but name of (Back of the instrument)
indorsee is placed
There is no valid indorsement because what is required To: X To: Z
is the signature of the indorser as provided under Sec. Sgd. Y Sgd. X
31.

An indorsement is not only a mode of transfer WORDS OF NEGOTIABILITY

It involves also a new contract and an obligation on the • Not required for indorsements
part of the indorser — an implied guaranty that the • Negotiability of an instrument is to be determined
instrument will be duly paid according to the terms merely on the face of the instrument (Caltex case)
thereof.
• In fact, an instrument which does not contain words of

negotiability on its face is not cured by the fact that
Effect to the indorser: By his indorsement, the indorser the indorsement contains words of negotiability
becomes a party to the instrument and may be held

liable for its payment even without receiving any
consideration therefor.

PLACEMENT OF INDORSEMENT ▫︎ Such as when the instrument is payable on

stated installments
• It is possible to indorse the instrument not at the back

of the said instrument but on another piece of paper
— allonge
Example: An instrument is payable in 12 months’ time.
◦ Instrument and allonge have to be attached During the second month, 20% has already been paid.
otherwise parties to the instrument will not know The remaining 80% can just be endorsed. It will not
who caused some indorsement on such require the indorsement of the full amount since a part
instrument
of it has already been paid for.
The indorsement may be written: C. Kinds of Indorsement (Sec. 33)

1. On the instrument itself Sec. 33. Kinds of indorsement. - An indorsement may be
❖ Indorsement is derived from the Latin word either special or in blank; and it may also be either
“indorsa” which literally means “writing on the restrictive or qualified or conditional.
back”. However, it may also be written on the face

thereof. The place is not essential.
KINDS OF INDORSEMENT
1) Special
2. Upon a paper attached thereto 2) Blank
❖ Where indorsement is on a slip of paper physically 3) Restrictive
attached to the instrument so as to become part 4) Qualified
of it — the paper is known as ALLONGE.
5) Conditional
Important: When it is not clear in what capacity a

person intended to sign, he shall be deemed an I. SPECIAL (SEC. 34 & 35)
indorser.
Sec. 34. Special indorsement; indorsement in blank. — A
special indorsement specifies the person to whom, or to
whose order, the instrument is to be payable, and the
USE OF ALLONGE FOR INDORSEMENT indorsement of such indorsee is necessary to the further
Whether an allonge can be used whether or not there is negotiation of the instrument. An indorsement in blank
still room in the instrument? specifies no indorsee, and an instrument so indorsed is
It is immaterial whether there is still room or not. Why payable to bearer, and may be negotiated by delivery.
should a space be material when some indorsements

are on an attached piece of paper?
Definition
One where the name of the payee is specified. It is also
INDORSEMENT MUST BE OF ENTIRE INSTRUMENT known as specific indorsement or indorsement in full.
Special and blank indorsements are “unqualified
SECTION 32. Indorsement must be of entire instrument. indorsements”.
— The indorsement must be an indorsement of the entire

instrument. An indorsement which purports to transfer to
the indorsee a part only of the amount payable, or which ■ Special — specifies the person to whom/to whose
purports to transfer the instrument to two or more indorsees
severally, does not operate as a negotiation of the order the instrument is to be payable; indorsement of
instrument. But where the instrument has been paid in part, such indorsee is necessary to further negotiation.
it may be indorsed as to the residue.

❖ A special indorser is liable to all subsequent
holders, unless the instrument is an originally
■ General Rule: Indorsement must be for the full bearer instrument, in which case he is liable only
amount. You cannot indorse an instrument partially.
to those who take title through his indorsement
(Sec 40, NIL)
Example: If the instrument is for the amount of P1

million, you cannot indorse it for the amount of P400k, SPECIAL INDORSEMENT
P500k or P600k. It has to be for the full P1 million.
If the name of the person to whom the instrument is
indorsed is present along with the signature of the
Indorser.
Important: The transferee of an instrument with a partial

indorsement is merely an assignee. He would not be
considered a holder but merely an assignee. TWO FORMS
Consequently, he would be subject to all defenses 1. One that specifies the person to whom the
available between the original parties.
instrument is payable (Pay to A)
2. One that specifies the person to whose order the

instrument is to be payable. (Pay to the order of A)
—Exception: Yes, provided the instrument is

already paid partially; an instrument may be paid TN: In either case, the indorsement must be followed by
in installments. Because it can be paid in the signature of the indorser.
installments, the instrument can be indorsed

partially provided the indorsed amount is also the
same as in the face of the instrument.

NO NEED FOR WORDS OF NEGOTIABILITY of the indorser in blank any contract consistent
It is not necessary to use the words of negotiability (i.e. with the character of the indorsement
“or order” or “to the order of” and their omission does ❖ An order instrument may be converted into a
not affect the negotiability of an instrument which is bearer instrument by means of a blank
negotiable on its face.
indorsement.
❖ But a bearer instrument remains as such whether it

Important: Once an instrument has become negotiable has been indorsed specially or in blank. It is the
because it has complied with Sec. 1, it will continue to liability of the indorser which is affected.
be negotiable
—Unless:
BLANK INDORSEMENT
1. Restrictively indorsed or
If only the signature of the indorser is shown on the
2. Discharged by payment or otherwise
instrument.
TN: In fact, any indorsement cannot affect the A blank indorsement may be changed to a special
negotiability of the instrument (except restrictive indorsement by adding the person to whom it was
indorsement which prohibits further negotiation of transferred in conformity with the intent of the indorser.
instrument)
EFFECT OF A BLANK INDORSEMENT

Atty. Amago: It is wrong to simply say “paid” or An instrument indorsed in blank becomes payable to
“payment” because an instrument can still be bearer. Thus, it may be negotiated by mere delivery
negotiable even if paid. It has to be discharged by regardless of whether the instrument is originally
payment or otherwise. So, for example, a person who is payable to bearer or not.
not primarily liable paid for the instrument, it does not

result to a discharge of the instrument.
BLANK INDORSEMENT CHANGED TO SPECIAL

Example: • Done by writing a contract consistent with what is
(Back of the instrument) intended by the indorser
• Effect: Instrument is reverted to its original nature

To: X To: Z which is an order instrument from a bearer instrument
Sgd. Y Sgd. X

As a rule, an instrument made payable to order

In the above example, it specified to whom the becomes payable to bearer if the only or last
instrument will be negotiated - X and Z, respectively
indorsement is in blank. However the holder may
protect himself from liability by changing the blank
SIGNIFICANCE OF DIFFERENCE BETWEEN BLANK AND indorsement to a special indorsement.
SPECIAL INDORSEMENT:
IF the instrument is an order instrument and the LAST How a blank indorsement is converted to blank
indorsement was in blank, the instrument may be indorsement
negotiated by mere delivery (transformed into a bearer By writing above the signature of the indorser a contract
instrument.)
consistent with the intention of the indorser.
Subsequent Special indorsements revert the document Example

to an order instrument. (Subject to the right of the
To: Z ____
person in possession of the instrument to strike out the
subsequent indorsements.)
Sgd. X Sgd. Z
“Once a bearer instrument, always a bearer instrument.” (blank indorsement)

II. BLANK (SEC. 34 & 35)

In this case if A receives the instrument from Z, A can
Sec. 35. Blank indorsement; how changed to special put “To: A” before Z’s signature to make the contract
indorsement. — The holder may convert a blank
indorsement into a special indorsement by writing over the consistent with the intention of the indorser.
signature of the indorser in blank any contract consistent Thus, this indorsement is now considered a special
with the character of the indorsement.
indorsement.
■ Blank — specifies no indorsee, instrument so Bearer instrument converted to order instrument

indorsed is payable to bearer, and may be negotiated An instrument payable to bearer by an indorsement in
by delivery
blank may be converted into an order instrument by
❖ a person who negotiates by mere delivery is liable writing over the signature of the indorser in blank any
only to his immediate transferee.
contract not inconsistent with the character of the
❖ the holder may convert a blank indorsement into a indorsement.
special indorsement by writing over the signature

III. RESTRICTIVE (SEC. 36 & 37) Can X make further negotiation?

No.
Sec. 36. When indorsement restrictive. — An indorsement

is restrictive which either:
Important: All other types of restrictive indorsement do

(a) Prohibits the further negotiation of the instrument; or
not have the same result of causing the instrument to

(b) Constitutes the indorsee the agent of the indorser; or
cease from being negotiable. The other types of
(c) Vests the title in the indorsee in trust for or to the use of restrictive indorsement restrict the negotiation of the
some other persons.
instrument but only to the limited extent.
But the mere absence of words implying power to negotiate

does not make an indorsement restrictive.
TN: The prohibition to transfer or negotiate must be
Sec. 37. Effect of restrictive indorsement; rights of written in express words at the back of the instrument,
indorsee. — A restrictive indorsement confers upon the so that any subsequent party may be forewarned that it
indorsee the right:
ceases to be negotiable.
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of

(B) CONSTITUTES THE INDORSEE AS AGENT
the indorsement authorizes him to do so.
◦ Instrument is not rendered non-negotiable
But all subsequent indorsees acquire only the title of the first ◦ Merely restricts the power of the indorsee to
indorsee under the restrictive indorsement.
negotiate the instrument
◦ Succeeding indorsers only get to negotiate based

TN: Only letter A of section 36 prohibits further on the authority given as the restriction trickles
negotiation.
◦ Has the rights provided in Section 37
Paragraphs B and C merely restrict the negotiation to Example

whatever was the authority provided by the indorser. (Back of the instrument)
Subsequent negotiations are allowed.
To: X
For collection
RESTRICTIVE INDORSEMENT Sgd. Y
It is true that the signature of the indorser without
additional words is a sufficient indorsement (blank So in this case, if X further negotiates the instrument, all
indorsement). However, appropriate words may be subsequent indorsees hold such for collection.
added which prohibit or limit the further negotiation of

an instrument.
(C) TITLE IN THE INDORSEE IN TRUST

Thus, a restrictive indorsement is one so worded that it ◦ Limited to whatever it was restricted
either:
◦ Instrument is not rendered non-negotiable
1. Prohibits entirely the further negotiation of an ◦ Subsequent indorsees become trustees as the
instrument
such negotiation is limited by the restriction
2. Restricts its further negotiation to a particular person ◦ Has the rights provided in Section 37
or for a particular purpose
3. Modifies the rights of the holders or the liabilities of Example

the indorser
(Back of the instrument)

LIMITS RIGHTS OF INDORSEE To: X
A restrictive indorsement notifies all prospective holders In my trust
that the indorsee has only the authority to deal with the Sgd. Y
instrument as thereby directed and that the indorsee
has only a restrictive title thereto.

In this case, if X will negotiate the instrument to Z then Z
will become a trustee of Y.
THREE CLASSES OF RESTRICTIVE INDORSEMENT RIGHTS OF AN INDORSEE UNDER RESTRICTIVE

(a) PROHIBITS THE FURTHER NEGOTIATION INDORSEMENT
1) He can receive payment
◦ Indorsee can no longer make a further order on

the instrument for negotiation
2) Sue thereon in his name
◦ Instrument becomes non-negotiable

3) Negotiate the instrument except when it is prohibited
in the indorsement
◦ Rights provided in Section 37 do not apply as the

restriction in this case prohibits further
negotiation
- This only applies to B and C.
◦ Prohibit — “Pay to only to X” or “Pay to X solely”
Important: The only kind of indorsement which stops

the further negotiation of an instrument is a restrictive

indorsement which prohibits the further negotiation In Section 66, there is a guarantee of solvency. It
thereof.
warrants that the person will pay.
In Section 65, they do not warrant solvency.
EFFECT OF ABSENCE OF WORDS OF NEGOTIABILITY

Mere absence of words implying power to negotiate ■ General Rule: A qualified indorser cannot be required
does not make an indorsement restrictive. Thus, “Pay to to pay if the reason for non-payment is insolvency.
A” is the same as “Pay to order of A” or “Pay to A or —Exception: he had knowledge of any fact that
order”.
would impair the validity of the instrument or
render it valueless.
Important: However, if a restrictive word such as “only”

is employed so as to prevent further negotiation, the TN: A qualified indorsement does not impair the
instrument is not only restrictively indorsed but it also negotiable character of the instrument unlike in the
ceases to be negotiable.
restrictive indorsement.
IV. QUALIFIED (SEC. 38) ■ General Rule: “without recourse”: ay na kog balika
❖ qualified indorser does not warrant solvency of the

Sec. 38. Qualified indorsement. — A qualified indorsement
constitutes the indorser a mere assignor of the title to the parties prior to him/her thus you cannot go to him
instrument. It may be made by adding to the indorser's for payment
signature the words "without recourse" or any words of ❖ persons negotiation by delivery also do not
similar import. Such an indorsement does not impair the
negotiable character of the instrument.
warrant solvency
Does not warrant solvency.
—EXCEPTION:
QUALIFIED INDORSEMENT ▫︎ Breach of warranties (Section 65) then you

One which constitutes the indorser a mere assignor of can go after the qualified indorser
the title of the instruments.

➢ Reason: Section 66 has an additional
provision (not found in Section 65 which
covers qualified indorsement and
Atty. Amago: Indorser is merely an assignor because in delivery) “engages that on due
this type of indorsement, he does not engage to pay the presentment, it shall be accepted or paid,
instrument in case the person primarily liable does not or both, as the case may be, according
pay. In other words, he does not guarantee the solvency to its tenor, and that if it be dishonored,
of the person primarily liable.
and the necessary proceedings on
dishonor be duly taken, he will pay the
An indorsement may be qualified by adding to the amount thereof to the holder, or to any
indorser’s signature the words like:
subsequent indorser who may be
1. Without recourse
compelled to pay it”
2. Sans recourse
3. At indorsee’s own risk

▫︎ At the time of qualified indorsement, it was
4. Indorser not holder
public knowledge that the indorser was
insolvent then the qualified indorser is liable
because there is a breach of warranty
Important: Parties subsequent to the qualified indorsee ➢ Section 65(d): That he has no knowledge
would know that the indorser does not intend to pay the
of any fact which would impair the
instrument in case the person primarily liable does not
validity of the instrument or render it
pay him
valueless
PURPOSE/RATIONALE ▫︎ At the time of qualified indorsement, the

When a person wants to transfer the instrument only in indorser had actual knowledge of
relation to his right and he doesn’t want any other insolvency
instances in which he may be required to pay. Once he

lets go of the instrument, he should not be required to
pay for the instrument anymore.
V. CONDITIONAL (SEC. 39)

Otherwise known as “sans recourse” or “without Sec. 39. Conditional indorsement. — Where an
recourse”, meaning you cannot go after him if the indorsement is conditional, the party required to pay the
instrument is not paid in the future.
instrument may disregard the condition and make payment
—BUT it’s not absolute because you still continue to to the indorsee or his transferee whether the condition has
been fulfilled or not. But any person to whom an instrument
warrant as an indorser under SECTION 65 (breach so indorsed is negotiated will hold the same, or the
of warranty).
Section 65 v. Section 66 —

proceeds thereof, subject to the rights of the person always hold the amount subject to the condition until he
indorsing conditionally.
passes the Bar but if the doesn’t pass then he must
TN: In an instrument, you cannot place any condition on return it to the person who indorsed the instrument to
the promise or order made but later on you can place him.
conditions as to the acquisition the title of the

instrument.
Further if the instrument was negotiated to A without a
condition and A presented the instrument to the maker
ABSOLUTE INDORSEMENT who paid it but then X failed the Bar, Y can go to X and
One which the indorser binds himself to pay, upon no demand reimbursement of the value of instrument as X
other condition than the failure of prior parties to do so, was merely holding it in trust.
and of due notice to him of such failure.
DIFFERENT COMBINATIONS OF INDORSEMENTS

CONDITIONAL INDORSEMENT
One by which the indorser imposes some other Special and restrictive “Pay to A only” (Sgd. P)
conditions to his liability or on the indorsee’s right to Special and qualified “Pay to A without recourse” (Sgd. P)
collect the proceeds of the instrument.
Special and conditional “Pay to A if he marries before he

reaches the age of 25” (Sgd. P)
• Does not render the instrument non-negotiable
because the instrument is found on the indorsement Blank and restrictive “For collective only” (Sgd. A)
and not on the face of the instrument
Blank and qualified “Without recourse” (Sgd. A)
• Payee receives the amount subject to the condition
Special, unrestrictive, “Pay to B” (Sgd. A)
unqualified
Conditional indorsee can further negotiate and need not
put a condition on the subsequent indorsement but the
first indorsee with the condition will have to answer to INDORSEMENT OF INSTRUMENT  
the indorser in case the condition is not fulfilled
PAYABLE TO BEARER
Sec. 40. Indorsement of instrument payable to bearer —
Important: This will not affect the negotiability of the Where an instrument, payable to bearer is indorsed
specially, it may nevertheless be further negotiated by
instrument. However, the condition must be on the delivery; but the person indorsing specially is liable as
indorsement and not on the instrument itself. Condition indorser to only such holders as make title through his
placed on the instrument will affect negotiability since indorsement.
Sec. 1 requires an unconditional promise or order to

pay.
TN: This is a provision, which gives us HOPE that naa
gyuy FOREVER <3 in NIL because…
Atty: nothing special as it does not affect the instrument

“Once a bearer instrument, always a bearer instrument.”
EFFECT OF CONDITIONAL INDORSEMENT Important: Article 40 applies only to instruments that

It has no effect on the further negotiation of the are originally bearer instruments. This cannot apply to
instrument. The party required to pay, if he chooses, an instrument which WAS originally an order instrument
may make payment, disregarding the condition without that became a bearer instrument.
incurring any liability because he is expressly authorized

to do so under Section 39. However, the person who
received payment will hold the proceeds subject to the A bearer instrument is not converted into an instrument
right of the conditional indorser.
payable to order by being indorsed specially. Therefore,
it can be negotiated even by mere delivery only.
Atty. Amago: In other words, if the party required to pay

the instrument decided to pay the holder despite the LIABILITY OF THE INDORSER
non-fulfillment of the condition, the holder will have to 1) Liable only to those holders who can trace their title
hold the proceeds of the payment in trust of the to the instrument by a series of unbroken
conditional indorser until the condition is fulfilled. indorsements from such special indorser.
Therefore, the parties may disregard the condition 2) His liability is that of a general indorser.
placed on the indorsement.
Atty. Amago: The person who specially indorses a

Example bearer instrument is liable just like any other indorser.
(Back of the instrument)
Usually, in a bearer instrument, a transferor will not be
liable to all parties but only to parties of immediate
Pay to X when he passes the bar. transferee because the transferor’s warranty only
Sgd. Y extends to his immediate transferee. But if the bearer

instrument is indorsed, the person making the
indorsement will be liable like any other indorser but
In this case, if the party primarily liable still paid X the only to parties who can trace their title to the
amount, before passing the Bar, the effect is that X will indorsement that was made.

must indorse unless the one indorsing has authority to

indorse for the others.
ILLUSTRATION 1:
Bearer instrument on its face In section 41, if there are 2 or more persons who will
(d) – delivery
make an indorsement, then both of them must have to
(i) – indorsement
make an indorsement unless one of the is authorized to
represent the other or they are partners where they can
X - (d) -> Y - (d) -> A - (i) -> B - (i) -> C – (i) -> D
represent the partnership.
X →Y→A⇥ B⇥ C⇥D
TWO OR MORE PAYEES OR INDORSEES JOINTLY
An instrument may be payable to the order of:
→ delivery
1. Two or more payees jointly (and)
⇥ indorsement

2. One or some of several payees
In this case, D goes to X for payment but X refuses to TN: All must indorse to effect negotiation.
pay because he is insolvent, can D go after A, B, and C?

Yes, because D can trace his title through the
indorsements as there is a series of unbroken Important: Section 41 does not apply to instruments
indorsements
payable to two (2) or more payees severally, like “Pay to
the order of P or A” for they are governed by Section 8
(3) and may be negotiated by any of such alternative
ILLUSTRATION 2: payees irrespective of the share corresponding to each
in the instrument.
X - (d) -> Y - (d) -> A - (i) -> B - (d) -> C – (i) -> D
JOINT INDORSEMENT BY ALL PAYEES OR INDORSEES

X →Y→A⇥ B→ C⇥D All must indorse in order for the transaction to operate
as a negotiation. If only one indorses, his indorsee
→ delivery would have no right of action for said instrument.
⇥ indorsement

—Exception:
1. Where the payees or indorsees are partners
Can D go after A?
No, because D can no longer trace his title to A as there 2. Where the payee or indorsee indorsing has
is already a break in the indorsements
authority to indorse for the others
HOW INDORSEMENT IS MADE SECTION 41 SHOULD BE INTERPRETED IN LIGHT OF

PARTNERSHIP LAW
When someone made the indorsement, their Under Partnership Law, a partnership has a separate
indorsement is extended to everyone subsequent to and distinct personality from the partners composing it.
them. It doesn’t matter whether that person received
Thus, an indorsement of an instrument payable to P and
that by mere delivery or by indorsement. Because you A as partners doing business under a firm name must
don’t put limit if you are indorsing.
be in the name of such firm, and not in the name of
both P and A. But of course, the partner indorsing must
Section 40 only applies to an instrument which is have authority, express or implied, to sign for the
originally a bearer instrument. partnership.
Here, originally, the instrument is an order instrument but PAYMENT OF AN INSTRUMENT OVER A MISSING
was only converted to bearer instrument, you don’t INDORSEMENT
apply section 40. Since it is an indorsement, the It is equivalent to:
warranty extends to all.

A. Payment on a forged instrument
B. Unauthorized indorsement in the case of joint

Only the means of negotiation was changed here but as payees
to the liability it stays the same.
Important: One who credits the proceeds of a check to

Though section 40 only talks of special indorsement, the account of the indorsing payee is liable in
however, it should include blank indorsement.
conversion to the non-indorsing payee for the entire
amount of the check.
INSTRUMENT WHERE PAYABLE TO  

TWO OR MORE PERSONS INDORSEMENT TO A CO-PAYEE
Indorsement and delivery of the instrument by one of the
Sec. 41. Indorsement where payable to two or more
persons.— Where an instrument is payable to the order of two joint payees to his co-payee may transfer full title to
two or more payees or indorsees who are not partners, all the latter.

Can you have an indorsement made to two or more Example: Cashier of USC
indorsees?
No. There cannot be joint or several indorsees, only joint
or several payees. You can only have joint indorsement This is an instrument to be given to the USC, just
if the instrument is payable to two or more payees represented by the cashier. Also, it can be negotiated
severally or jointly. You cannot have any other by the cashier or any representative by the USC
indorsement to two or more persons.
because it is supposed to be owned by the USC. The
cashier merely represents the entity where he or she is
working. He or she is the agent.
Important: There can only be joint payees, but not joint

indorsees.
CORPORATION
Not to include cities and towns, so that no authority is
REASONS: conferred upon a town treasurer to impose upon his
1. To avoid multiplicity of suits, and
town the liability of an indorser.
2. To discourage indorsement for partial amounts
Important: The presumption in this section may be

Example: An instrument with an amount of P1,000 is disproved by sufficient evidence to the contrary. It may
indorsed to two or more payees jointly. So, there are be shown that the instrument really belongs to the
joint indorsees. There is no stopping these indorsees cashier personally as the real creditor of the maker or
from indorsing only a part of what they owe.
drawer.
If one indorsee is the owner of 50% of the value of the

instrument, he has the legal right to indorse the
E. Indorsement Where Name Is Misspelled (Sec. 43)
instrument to the extent of P500. If the other indorsee Sec. 43. Indorsement where name is misspelled, and so
does not want to indorse the instrument just yet, then forth. — Where the name of a payee or indorsee is wrongly
designated or misspelled, he may indorse the instrument as
there will be a conflict between them. So the framers of therein described adding, if he thinks fit, his proper
the law, other than to avoid multiplicity of suits, intend signature.
to discourage partial indorsements of the instrument by

not allowing joint or several indorsees.
Atty: For as long as it can be inferred that there is

intention to negotiate the instrument to a particular
Important: You can only have joint indorsement if it person, but there is just a typographical error in the
refers to payees, but not to succeeding indorsers. writing of the indorsement, then you can always correct.
Indorsees referred in Sec. 41 would also be the same as This will not be applied anymore because now, any
payees. There will never be joint indorsees in a different mistake on the check will not be accepted by any bank.
sense because it would run counter to Sec. 32. Only If it involves other negotiable instruments, then it is
when there are joint or several payees where joint allowed.
indorsement is allowed.
Important: A person may correct a spelling error only if

D. Indorsement to a Person as Cashier (Sec. 42) the intention of the maker or drawer was that the
instrument should be payable to the person making the
Sec. 42. Effect of instrument drawn or indorsed to a correction. Any variance should be ignored if the payee
person as cashier — Where an instrument is drawn or
indorsed to a person as “cashier” or other fiscal officer of a and the indorser are the same person.
bank or corporation, it is deemed prima facie to be payable

to the bank or corporation, of which he is such officer; and
may be negotiated by either the indorsement of the bank or F. Indorsement in Representative Capacity (Sec. 44)
corporation, or the indorsement of the officer.
Sec. 44. Indorsement in representative capacity. — Where

any person is under obligation to indorse in a representative
Indorsement where instrument drawn or indorsed to capacity, he may indorse in such terms as to negative
personal liability.
a person as cashier
The cashier of a bank, president of a corporation, or any
other administrative officer, as secretary or treasurer, INDORSEMENT PER PROCURATION
may be:
The indorsement is subject to a limited authority. The
A. Expressly authorized to issue negotiable paper for other party dealing with this type of indorsement must
the corporation
inquire as to the scope of authority of the indorser.
B. May have such power from implication by reason of

having previously exercised the power.
It may be expressed as “per pro.” “per proc.” “P.P.” or
“PP.”
If indorsed to a cashier or fiscal officers of the bank or

corporation but it simply that the person can indorse by Indorsement can be made by an agent. In order for an
any of the bank or corporation or their representatives agent not to be held personally liable, the agent should
because the supposed indorsement there is really the sign, indicating the name of the principal and in what
corporation being represented by the officer.
capacity he is signing. This will have the same effect, as
if it was indorsed by the principal.

What must the agent do to not be bound principally If an In practice, the place is usually indicated before the
agent of a party does not want to be bound principally date. This is deemed to be the place of indorsement.
to the indorsement, he must specify:
1. The name of the principal and

Importance: because it is the law of the place which will
2. The capacity of the agent must be indicated.
govern the rights and obligations of the parties.
Otherwise, he will be held personally liable.

In default thereof, it would be the place where the
debtor or the person primarily liable may be found. TN:
Example: If Sir Amago is an agent of Dean Largo and he for purposes of the exam, the answer should be based
signs above her name without specifying his capacity on what the law says, which is that the instrument is
for acting as an agent, he will be personally liable.
deemed to be made where it is dated.
How do you negate your personal liability? I. Continuation of Negotiable Character (Sec. 47)
Section 20. The person must add to his signature words Sec. 47. Continuation of negotiable character. — An
indicating that he signs in behalf of the principal or that instrument negotiable in its origin continues to be
he is acting in a representative capacity.
negotiable until it has been restrictively indorsed or
discharged by payment or otherwise.
G. Time of Indorsement (Sec. 45) When the instrument ceases to be negotiable:

Sec. 45. Time of indorsement; presumption. — Except 1) If it is restrictively indorsed (only refers to Sec. 36(a);
where an indorsement bears date after the maturity of the or
instrument, every negotiation is deemed prima facie to have

been effected before the instrument was overdue.
2) If it is discharged by payment (payment in due
course)
Presumption: Instrument is made before its maturity.
There is a presumption that the instrument is negotiated Continuation of negotiable character of originally
negotiable instrument
before it became overdue.
■ General Rule: An instrument negotiable in origin is
always negotiable until paid.
TN: this applies only if there is no date indicated.
Important: This is true although the negotiable

Reason: To be consistent with the presumption that instrument has been dishonored, or is already overdue,
every holder is a holder in due course. Otherwise, the but any holder who acquires the instrument can no
parties after negotiation cannot become holder in due longer be a HDC. An instrument indorsed after it
course.
becomes overdue is considered payable on demand.
Presumption as to place of indorsement Indorsement is —Exception:
presumed to have been made at the place where the 1. When the instrument has been restrictively
instrument is dated. However, said presumption is indorsed, or
rebuttable.
2. When it has been discharged by payment or
otherwise
Important: The place of indorsement becomes

important where the law in different countries varies. In Important: Not every restrictive indorsement prohibits
such a case, an indorsement is governed by the law of the further negotiation of the instrument. Thus, the
the state where it is made although the instrument is words “restrictively indorsed” in this section should be
executed in a different state.
construed to refer only to such restrictive indorsement
as prohibits further negotiation of the instrument.
Example: Suppose a note is dated as follows: “Manila,

December 10, 2013”.
HOW INSTRUMENT IS DISCHARGED

If it is subsequently indorsed by the payee without A negotiable instrument is discharged:
indicating the place of indorsement, the presumption is (a) By payment in due course by or on behalf of the
that, the indorsement was made in Manila. He who principal debtor
alleges otherwise has the burden of proof.

(b) B y p a y m e n t i n d u e c o u r s e b y t h e p a r t y
accommodated, where the instrument is made or
accepted for his accommodation
H. Place of Indorsement (Sec.· 46) (c) By the intentional cancellation thereof by the holder
Sec. 46. Place of indorsement; presumption. — Except (d) By any other act which will discharge a simple
where the contrary appears, every indorsement is presumed contract for the payment of money
prima facie to have been made at the place where the

instrument is dated.
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.

TN: Mutilation of the instrument if intentional, is a form This applies to an ORDER instrument which is simply
of discharge.
delivered, without an indorsement. In such a case, there
is merely an assignment. The transferee cannot be
considered a holder but merely a assignee.
J. Striking Out Indorsement (Sec. 48)

Sec. 48. Striking out indorsement. — The holder may at What this section contemplates
any time strike out any indorsement which is not necessary
to his title. The indorser whose indorsement is struck out, Where the payee or indorsee delivers said instrument for
and all indorsers subsequent to him, are thereby relieved value without however indorsing it.
from liability on the instrument.
You can strike out indorsements (whether special or Effect: Equitable assignment and the transferee
blank indorsements) that are not necessary to your title. acquires the instrument subject to defenses and
If it has already been stricken out, whoever is the equities available among prior parties. He cannot
subsequent indorser, will no longer be held liable.
negotiate the same.
WHEN HOLDER MAY STRIKE OUT INDORSEMENT Important: The special indorsee should likewise indorse
it if he wants to negotiate it further.
A. AN INSTRUMENT PAYABLE TO BEARER ON ITS FACE

May be negotiated by mere delivery without
indorsement. Notwithstanding a special indorsement, it RIGHTS OF THE ASSIGNEE:
remains a bearer instrument and may be further • Rights of his transferor
negotiated by mere delivery.

• Right to demand indorsement in order to complete the
negotiation of the instrument
Important: The holder may strike out all intervening

indorsements or any of them for none of them is RIGHTS OF THE TRANSFEREE
necessary to his title. The persons whose indorsements 1. If the transferor had legal title, transferee acquires
were struck out, will be freed from liability.
such title
2. He has the right to have the indorsement of the

B. AN INSTRUMENT ORIGINALLY PAYABLE TO ORDER transferor
May be negotiated only by the indorsement of the payee 3. Right to maintain legal action against the maker or
completed by delivery.
acceptor or other party liable to the transferor.
(a) When indorsement is special — the indorsement of An assignee becomes a holder only at the time the
the special indorsee is necessary to the further indorsement is made. This is important because during
negotiation of the instrument.
the supervening period (between the delivery of the
(b) When the indorsement is in blank — the instrument instrument to its indorsement), the assignee might have
becomes payable to bearer and may be negotiated knowledge of any defect or infirmity which will make
by mere delivery.
him a holder not in due course.
Important: An instrument originally payable to order Before indorsement is made, transferee is not a
holder of the instrument
becomes payable to bearer when the only or last
indorsement is in blank. Hence, when a blank He is neither a holder because he is not a payee or
indorsement is followed by special indorsements, and indorsee, nor a bearer because the instrument is not
the holder strikes out all indorsements subsequent to payable to bearer. The negotiation takes effect as of the
the blank indorsement — the instrument would become time the indorsement is actually made.
payable to bearer.
Important: Section 49 speaks of transfer without

The special indorsements are not necessary to the indorsement of an instrument “for value”. Thus, if the
holder’s title as even without them, he could have transfer is gratuitous, the donee-transferee has no right
acquired title to the instrument by mere delivery.
to compel the donor-transferor to make the
indorsement, although as legal owner, he has the right
to sue thereon.
K. Transfer Without Indorsement (Sec. 49)

Sec. 49. Transfer without indorsement; effect of. — Where EFFECT OF INDORSEMENT AFTER TRANSFER
the holder of an instrument payable to his order transfers it The indorsement converts the transfer into a
for value without indorsing it, the transfer vests in the
transferee such title as the transferor had therein, and the “negotiation” and makes the assignee a “holder”, the
transferee acquires in addition, the right to have the indorsee of the instrument.
indorsement of the transferor. But for the purpose of

determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when the TIME FOR DETERMINING WHETHER HOLDER IN DUE
indorsement is actually made.
COURSE
As of the time of actual indorsement. Thus, if by that
time, the holder already had notice of the absence of
consideration, he cannot be a holder in due course.

L. Prior Party That Requires the Instrument

Sec. 50. When prior party may negotiate instrument. —
Where an instrument is negotiated back to a prior party,
such party may, subject to the provisions of this Act, reissue
and further negotiable the same. But he is not entitled to
enforce payment thereof against any intervening party to
whom he was personally liable.
The prior party who reacquires the instrument will only

revert back to his original position. His status at the
time he received the instrument for the first time,
will be his status as a holder. He cannot go after any
intervening party to whom he was liable.
REACQUIRER
Section 50 refers to a reacquirer or a holder who
negotiates an instrument and then subsequently
reacquires it.
Effect if a prior party reacquires an instrument before

maturity He may negotiate the same further. But after
paying the holder, he may not claim payment from any
of the intervening parties. The law, to avoid multiplicity
of suits, denies an action to a party thus situated.
—Exception:
1. If the instrument passed through his hands

without indorsement
2. It had been indorsed by him without recourse
Important: In these two cases, there could be no

objection founded on his prior holding or indorsement,
to the maintenance of an action by him against the
parties liable on the instrument.
LIMITATIONS ON RENEGOTIATION
■ General Rule: A prior party who reacquires the
instrument may further negotiate the same.
—Exception: A prior party cannot further negotiate

the instrument:
1. Where it is payable to the order of a third person,

and has been paid by the drawer.
2. W h e r e i t w a s m a d e o r a c c e p t e d f o r
accommodation and has been paid by the party
accommodated.
3. In other cases, where the instrument is

discharged when acquired by a prior party.
INTERVENING INDORSERS
These are the parties in between the prior party and the
party who again became the holder of the instrument.

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NEGOTIABLE INSTRUMENTS LAW (2018) MIDTERMS ATTY.

Negotiable Instruments Law

e. Accommodation party and its liabilities (Sec. 29) __________________58

Form and Interpretation

iii. Must contain an unconditional promise or order to pay (Sec. 3) ________________8

i. Undated (Sec. 13)_______________________________________________27

f. Ambiguity (Sec. 17) _______________________________________53

Cases for Forms and Interpretation ______________________________54

SUAN | FONTANOSA | DOLIENTE | KONG | ORTIZ PAGE 1 OF 72

2) Medium for exchange

A. HISTORICAL BACKGROUND OF THE NIL ‣ Transactions are perfected by the delivery or

during the Pre-Christian era, or during the medieval

3) Medium for immediate payment

‣ At least that payment in a sense that tender is

‣ We patterned our NIL to this law with very slight

instruments before the passage of the Act No.

B. APPLICATION AND PURPOSE OF THE NIL

b. Those instruments which meet the requirements

What is negotiability as a characteristic of a negotiable

Act. (Art. 18 of the NCC)

hampering transactions in commercial paper.

The NIL is the primary law governing negotiable

✏ Spring cannot rise higher than its source

C. FUNCTIONS AND IMPORTANCE OF NEGOTIABLE

can just bring with you a checkbook.

✏ You can only assign rights to what you have. I do

is still not money that’s why it cannot have the

SUAN | FONTANOSA | DOLIENTE | KONG | ORTIZ PAGE 2 OF 72

2) ACCUMULATION OF SECONDARY CONTRACTS As opposed to a bill of exchange which is?

classmate to negotiation by mere delivery (being

Third common type is check. But it is only a special type

Note: It’s because of these two features that NI

How would you know what an instrument is negotiable

instrument is called “issuance”. The subsequent deliver

transactions and which complies with all the elements

TYPES OF NEGOTIABLE INSTRUMENTS 1) PROMISSORY NOTE

unconditional promise in writing made by one person to

SUAN | FONTANOSA | DOLIENTE | KONG | ORTIZ PAGE 3 OF 72

order made by the drawer. And then drawee will

1) Present to drawee for acceptance

acceptor and he holds himself primarily liable. He

until maturity or further negotiate. After ❏ Dishonor by non-acceptance — dishonored

2) May further negotiate even before presenting to FORM AND INTERPRETATION

has the option before the instrument matures to either

(b) Must contain an unconditional promise or order to pay

will make payment. The instrument is deemed

When an instrument is dishonored, you would have to

✏ Sed 1 (e) applies only to bill of exchange.

The law requires that if you want to hold the party

d. Must be payable to order or to bearer

Illustration: There is a bill of exchange, it was drafted

SUAN | FONTANOSA | DOLIENTE | KONG | ORTIZ PAGE 4 OF 72

b. Must contain an unconditional order to pay a sum MAKER VS DRAWER:

determinable future time

must be named or otherwise indicated therein with

Any form of writing will do. It can also be printed,

MATERIAL What is important is that the signer has intended to

one hand to another.

Can I write the negotiable instrument on this table? TYPE OF SIGNATURE

transferred from one hand to another

✏ May however aﬀect acceptability

✏ Writing may be made upon leather, cloth or any

Is this a valid negotiable instrument?