By: Joyce Briones notes from Agbayani; with case doctrines

Victor Ramos
2C 2004-2005
Negotiable Instruments Law • bill of exchange - an order in writing addressed to someone
Midterms Reviewer requiring him to pay a sum certain in money

INTRODUCTION Bill of Exchange

3 kinds of negotiable instruments: P10,000.00 Manila, Philippines

1. promissory notes
2. bills of exchange
3. checks
• if an instrument does not comply with the requirements of the
Negotiable Instruments Law, it is a simple contract in writing and
is merely in evidence of such intangible rights as may have been
created by the assent of the parties
o otherwise, the instrument is itself a contract and not a
mere evidence of rights; it is a mercantile specialty
General characteristics of a promissory note:
August 1, 1949
Thirty days after sight, pay to the order of
Juan Soriano the sum of Ten Thousand Pesos
(P10,000.00), Philippine Currency. Value received and
charge the same to the account of
(Sgd.) Ernesto Reyes
To Augustino Tolentino
215 Regina building
• acceptance does not determine whether a negotiable paper is bill
or not; it merely determines the kind of liabilities

P10,000.00 Manila, Philippines

General characteristics of a bill of exchange:
August 1, 1949 1. order or command to pay, “Pay to” – order or command to pay
2. signature – corresponds to the maker of the PN
For value received, I promise to pay to the 3. name - one ordered or commanded to pay a sum certain in money
order of Pedro Reyes the sum of Ten Thousand Pesos
(P10,000.00) on or before December 31, 1949, at the Bill of Exchange v. Promissory Note
Philippine National Bank, Manila.

(Sgd.) Exequiel Ferrer Bill of Exchange Promissory Note

order or command - orders promise
or commands the drawee
1. figures - to indicate the amount of the note to pay money to a payee
2. place - where the contract to pay is executed or bearer
3. date - to determine when the note is due or to fix the time when payable to order or bearer payable to order or bearer
interest is to run or whether or not the collection of the instrument
is barred by the statute of limitations • check – bill of exchange drawn on a bank payable on demand
4. date of maturity – time when the promise to pay is to be fulfilled o bill of exchange of a special kind
5. promise – absolute promise to pay o general characteristics: same as those of a bill of
6. “to the order of” – means that the promise is to pay as ordered or exchange
as commanded by the payee
7. name – person to whose order or command the money is
promised to be paid
8. signature – one who promises to pay it at the first instance
9. place of payment – where the note is to be paid; not necessary
10. amount – sum to be paid
11. consideration “for value received” – consideration given for the
note
By: Joyce Briones
Victor Ramos
2C 2004-2005
Check v. Bill of Exchange
Check
always drawn upon a bank or
banker
always payable on demand
presentment for acceptance is not
necessary
not to be accepted but presented at
once for payment
but if holder requests and banker
desires, he may accept
drawn on a deposit
i.e., necessary that drawer should
have funds in the hands of the
drawee
o otherwise: fraud
death of drawer, with knowledge by
banks, revokes authority of banker
to pay
must be presented for payment w/in
a reasonable time after issue
An instrument may be made or drawn payable to:
(1) bearer or
(2) order or
(3) specified person
When payable to bearer: (in general)
1. when it is expressed to be so payable
2. when it is payable to a person named therein or bearer or
e.g.
Pay to B or bearer P1,000
notes from Agbayani; with case doctrines
Bill of Exchange
may or may not be drawn against a
bank
may be payable on demand or at a
fixed or determinable future time
presentment for acceptance is
necessary
not drawn on a deposit
i.e., not necessary that drawer
should have funds in the hands of
the drawee
death of drawer of the ordinary bill
of exchange does not (some
decisions to the contrary)
may be presented for payment w/in
a reasonable time after its last
negotiation
(Sgd.) A
2
When payable to order:
1. when it is expressed to be payable
2. to a specified person or his order
e.g. instrument payable to the order of a specified person
I promise to pay to the order of B P1,000
(Sgd.) A
e.g. instrument payable to a specified person or his order
I promise to pay to B or his order P1,000
(Sgd.) A
e.g. instrument payable to a specified person – not negotiable
I promise to pay to B P1,000
(Sgd.) A
Parties to a promissory note:
1. maker – person who executes the written promise to pay
2. payee, if instrument is payable to order – person in whose favor
the PN is made payable
3. bearer, if instrument is payable to order - person in possession of
a bill or note which is payable to bearer
Parties to a bill of exchange:
1. drawer – person who executes the written order to pay
2. payee, if instrument is payable to order and bearer, if instrument
is payable to bearer
o person in whose favor a bill of exchange is drawn
payable;
o if bearer – no payee is designated
3. acceptor – person who is commanded or ordered by the drawer to
pay a certain sum in money and signifies his assent to the order of
the drawer
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
o drawee - person is commanded or ordered by the
drawer to pay a certain sum in money; only when he
accepts the bill that he becomes a party and liable
o acceptance – usually signified by writing across the
bill the word “accepted” with the signature of the
drawee
Parties to a check:
• same as parties in ordinary bill of exchange
• difference: check is usually certified to, not accepted by, the
drawee bank
• certification is equivalent to acceptance
Other parties to negotiated instruments:
• in case of instruments payable to order
1. indorser
2. indorsee
• in case of instruments payable to bearer
1. persons negotiating by mere delivery
2. persons to whom the instruction is negotiated by mere delivery
Indorser and indorsee, explained
Indorser – one who negotiates by indorsement
Indorsee – one to whom the instrument is negotiated by indorsement
• where the instrument is payable to bearer, it can be negotiated by
mere delivery without necessity of indorsement
o such a party may be designated as “person negotiating
by delivery”
o the person to whom the instrument payable to bearer is
negotiated – “person to whom an instrument is
negotiated by delivery”
Holder – payee or indorsee of a bill or note, who is in possession of it, or
the bearer thereof (Sec. 190)
Bearer – person in possession of a bill or note which is payable to bearer
• meaning of “holder” depends upon kind of instrument involved:
1. if payable to order:
a. person who is the payee or indorsee and
b. who is in possession thereof
2. if payable to bearer: person who is in possession thereof
3
Incidents in “life” of negotiable instrument:
1. issue
2. negotiation
3. presentment of acceptance, in certain kinds of bills of exchange
4. acceptance
5. dishonor by non-acceptance
6. presentment for payment
7. dishonor by non-payment
8. notice of dishonor
9. discharge
Issue – first delivery of the instrument, complete in form to a person who
takes it as a holder
Delivery – transfer of possession with intent to transfer title
• consists of placing the transferee in possession of the instrument,
but it must be accompanied by the intent to transfer title
• essential as “every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto”
Negotiation – such transfer of an instrument from 1 person to another as
to constitute the transferee the holder of the instrument
• mode of transferring an instrument
• effect: to make the transferee the holder of the instrument
• how an instrument is to be negotiated depends on whether it is
payable to bearer or to order
o payable to bearer – may be by mere delivery, although
the law does not prohibit indorsement completed by
delivery
by delivery, the transferee is placed in
possession of the instrument, and the moment
the transferee is in possession, he is constituted
the holder thereof since the holder of an
instrument payable to the bearer is the one in
possession of it
o payable to order – by indorsement completed by delivery
indorsement is necessary to make the transferer
the indorsee
delivery is necessary to place the transferee in
possession of the instrument
if there is indorsement but no delivery, the
transferee would be merely an indorsee but not
in possession
Indorsement – legal transaction, effected by writing of one’s own name on
the back of the instrument or upon a paper attached thereof, with or
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By: Joyce Briones notes from Agbayani; with case doctrines 4
Victor Ramos
2C 2004-2005
without additional words specifying the person to whom or to whose order
the instrument is to be payable whereby one not only transfers one’s full Presentment for acceptance – exhibiting the bill to the drawee and
legal title to the paper transferred but likewise enters into an implied demanding that he accept it, that is, signify his assent to the order or
guaranty that the instrument will be paid command of the drawer

• consists of a signature of the one indorsing • required only in certain kinds of bills
• usually at the back of the instrument
“After sight” - after presentment for acceptance, whether it has been
• 2 principal kinds: accepted or not
1. special – specifies the person to whom or to whose order the
instrument is to be payable Acceptance – signification by the drawee of his assent to the order of the
drawer; usually done by writing across the bill “accepted,” followed by the
signature of the drawee; not equivalent to receive
Pay to Pedro Reyes. • as to checks, they are generally certified instead of being
accepted; the certification of a check is usually done by stamping
(Sgd.) Ernesto Rodriguez on the check the word “certified” and underneath it is written the
signature of the proper officer of the bank

2. blank – does not specify the person to whom or whose order the Dishonor by non-acceptance – where the bill is presented for acceptance,
instrument is to be payable and acceptance is refused by the drawee or cannot be obtained, or where
presentment for acceptance is excused and the bill is not accepted

(Sgd.) Ernesto Rodriguez presentment for payment – consists of exhibiting the instrument to the
person primarily liable thereon and demanding payment from him on the
date of maturity; required for all kinds of negotiable instruments
Negotiation, indorsement, delivery, compared
Dishonor by payment – where the instrument is presented for payment,
Negotiation Indorsement Delivery and payment is refused or cannot be obtained, or where presentment for
1st step in negotiating 2nd step in negotiating payment is excused and the instrument is overdue and unpaid
an instrument which is an instrument which is
payable to order payable to order Notice of dishonor – when a negotiable instrument has been dishonored by
non-acceptance or non-payment, a notice of dishonor must be given to the
Sec. 191: indorsement drawer and to each indorser, and any drawer or indorser to whom such
completed by delivery notice is not given is discharged; purpose: to notify the drawer and the
where the instrument indorsers that the instrument has not been accepted by the drawer, or that
is payable to order: it has not been paid by the acceptor or maker
not equivalent to
negotiation Discharge – a negotiable instrument is discharged usually “by payment in
due course by or on behalf of the principal debtor”
mere delivery, without
indorsement, is Parties primarily liable – person who by the terms of the instrument is
equivalent to absolutely required to pay the same
assignment
Where the instrument Parties secondarily liable – all other parties
is payable to bearer:
equivalent to In bills of exchange
negotiation

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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
• the acceptor is primarily liable because under Sec. 62, he is
absolutely required to pay the instrument as he engages that he
will pay it according to the tenor of his acceptance; does not say
that he will pay it if someone does not pay
• by mere drawing of a bill, the drawer, the qualified or general
indorsers, and the person negotiating by mere delivery are
secondarily liable under Sec. 61; he is not absolutely required to
pay the bill such that it is only when the drawee does not pay that
he will be required to pay
• by indorsing an instrument, an indorser assumes all liability stated
in Sections 65 and 66 i.e., the general tenor of the liability of the
indorser is that he will pay the instrument if the person primarily
liable will not pay; it is only when the person primarily liable fails
to pay that he may be required to pay
• a check while not regarded as legal tender is normally, under
commercial usage, a substitute for cash
• secondary liability of one negotiating by delivery
• by merely delivering an instrument payable to bearer, a
person negotiating by mere delivery assumes the liability
stated in Sec. 65 i.e., the general tenor of the liability of a
person negotiating by delivery is similar to that of an indorser
In promissory notes
• maker is primarily liable
• the qualified or general indorser and person negotiating by
mere delivery are secondarily liable
• under Sec. 60, the agreement of the maker is that he will pay
the instrument according to its tenor; does not say that he
will pay it if somebody does not pay
Function of negotiable instruments
• substitute for money
• increase the purchasing medium in circulation
• check is used for immediate payment while the ordinary bill of
exchange and the promissory notes are intended for circulation of
credits
Payment by negotiable instruments
• whether or not the giving and taking of a promissory note or bill of
exchange is prima facie absolute payment as in the case of money
or merely a prima facie conditional payment
• in the Philippines, rule: the delivery of promissory notes payable
to order, or bills of exchange or other mercantile documents shall
5
produce the effect of payment only when they have been cashed,
or when, through the fault of the creditor, they have been
impaired; in the meantime, the action derived from the original
obligation shall be held in abeyance
Principal features of negotiable instruments
1. negotiability
2. accumulation of secondary contracts as they are transferred from
one person to another
Negotiability – attribute or property whereby a bill, note or check passes or
may pass from hand to hand similar to money, so as to give the holder in
due course the right to hold the instrument and collect the sum payable for
himself free from defense
• purpose: to allow bills and notes to go from hand to hand
in the commercial markets and to take the part of money
in commercial transactions; to allow bills and notes the
effect which money, in the form of government bills or
notes, supplies in the commercial world
• defenses from which a holder in due course is free are
personal defenses but he is not free from real defenses
Accumulation of second contracts – party to whom it is offered may not
know anything about the original parties on their solvency and can afford
to take the paper only if the party with whom he is dealing with adds his
credit
• advantage: the more indorsements, the more debtors there will
be, and the more debtors there are, the greater are the chances
that the holder has to collect the amount payable on the
instrument
Negotiability distinguished from Assignability
Negotiability Assignability
pertains only to negotiable pertains to contracts in general
instruments
person who takes an instrument by person who takes an instrument by
negotiation takes it free from the assignment takes it subject to the
personal defenses available among defenses obtaining among the
the parties original parties
consideration is presumed and need
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By: Joyce Briones notes from Agbayani; with case doctrines 6
Victor Ramos
2C 2004-2005
not be alleged and proved (b) Must contain an unconditional promise or order to pay a
indorser is not liable on his sum certain in money;
indorsement unless there be
presentment for payment at (c) Must be payable on demand, or at a fixed or
maturity and prompt notice of determinable future time;
dishonor in case of dishonor
general indorser is secondarily liable assignor in good faith does not (d) Must be payable to order or to bearer; and
for any cause for which the party warrant the solvency of the debtor
primarily liable on a negotiable unless it has been expressly (e) Where the instrument is addressed to a drawee, he
instrument does not or cannot pay stipulated or unless the insolvency must be named or otherwise indicated therein with
was prior to the assignment and of reasonable certainty.
the qualified indorser and the common knowledge
person negotiating by mere delivery - the instrument must be signed by the maker or drawer
have a limited secondary liability merely warrants the existence and o but it may consist of mere initials or even numbers, such
legality of the credit assigned at the as, 1, 2 8
time of the assignment o but where the name is not signed, the holder must prove
that what is written is intended as a signature of the
person sought to be charged
- location of signature
o usually written at the bottom right hand corner. The
location of the signature is not material
Sec. 126. Bill of exchange, defined. - A bill of exchange is an
- if a bill, it must contain an order to pay
unconditional order in writing addressed by one person to another,
o bill: an instrument demanding right
signed by the person giving it, requiring the person to whom it is
o any words which are equivalent to an order or which
addressed to pay on demand or at a fixed or determinable future
show the drawer’s will that the money should be paid,
time a sum certain in money to order or to bearer.
are sufficient to make the instrument a bill of exchange
- effect of mere authority to pay
Sec. 184. Promissory note, defined. - A negotiable promissory note
o it is not negotiable because it is not an order to pay; it is
within the meaning of this Act is an unconditional promise in
a mere authorization to pay
writing made by one person to another, signed by the maker,
- effect or mere request to pay
engaging to pay on demand, or at a fixed or determinable future
o the bill is not negotiable because it does not contain an
time, a sum certain in money to order or to bearer. Where a note is
order to pay; it is nothing but a mere request to pay
drawn to the maker's own order, it is not complete until indorsed
- effect of mere words of civility
by him.
o negotiable; words of civility or courtesy does not make it
non-negotiable
Sec. 185. Check, defined. - A check is a bill of exchange drawn on a
- where instrument is a note, it must contain promise to pay
bank payable on demand. Except as herein otherwise provided, the
o it is enough
provisions of this Act applicable to a bill of exchange payable on
that words of equivalent meaning are used
demand apply to a check.
that the promise is implied from promissory
words contained in the instrument
Sec. 1. Form of negotiable instruments. - An instrument to be
- words of equivalent meaning
negotiable must conform to the following requirements:
o agree
o will pay
(a) It must be in writing and signed by the maker or
o shall pay
drawer;
- effect of mere acknowledgment of debt
o not sufficient
o a promise to pay cannot be implied from the mere
existence of a debt

6
By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
- when acknowledgement of debt is a promise
o in addition to the acknowledgement of indebtedness,
there must be other words expressing the intention to
pay or from which they may be implied such an intention
to pay
- effect of words of negotiability
o “order” and “bearer”
- promise or order to pay must be unconditional
- Art 1179: a condition is
o A future event that may or may not happen OR
o Past event which is unknown to the parties
- Effect of sum not certain
o Non-negotiable
- Reason for requirement that instrument be paid in money
o Money is the one standard of value in actual business
o Money always measures this rise and fall and remains the
same
- Legal tender
o Kind of money which the law compels a creditor to accept
in payment of his debt when tendered by the debtor in
the right amount
o The Philippine peso and half peso, Philippine treasury
certificates, Philippine subsidiary coins of 20 centavos
shall be legal tender in amounts not exceeding 20 pesos.
Philippine minor coins of nickel and copper shall be legal
tender in amounts not exceeding 2 pesos
o All notes and coins issued by the central bank guaranteed
by the government
o New victory series of the Philippine treasury certificates
and Philippine coins identical to pre-war issue now in
circulation
- Checks not legal tender
o This is true even as to manager’s check or whether the
check is certified or not
o A consignation by check is not binding upon the creditor
unless accepted by him
o RULE applies to ordinary checks. Certified checks and
probably similarly situated checks as manager’s checks –
that a creditor cannot refuse to receive as payment a
certified check, it being equivalent to cash
o Recent cases: a negotiable instrument is only a substitute
for money and not money, the delivery of such
instrument does NOT operate as payment
- But if authorized by law or consent of creditor, cash may be
substituted by other means, or may be check
o Unless the parties so agree, a debtor has no rights,
except at his own peril to substitute something in lieu of
cash as medium of payment of his debt
7
- Redemption by manager’s check where accepted, or not objected
on the ground is valid
- Creditor cannot refuse payment of his credit by certified check it
being equivalent to cash (new pacific timber v Seneris)
- Treasury certificates not legal tender for all purposes
- Instrument need not be payable in legal tender
o Validity and negotiable character of an instrument are
not affected by the fact that it designates a particular
kind of current money in which payment is to be made.
o But where the instrument is made payable in the paper
or currency of a particular bank, specifically and
absolutely, and without reference to the currency or
value of the paper, it is held not to be for the payment of
money and is not negotiable
- Instrument payable in foreign money
o Denominations of foreign money, currency or coins such
as pound or lire
o Negotiable
- Instrument must specify denomination
o Should express the specific denomination of money when
it is payable in the money of a foreign country in order
that the courts may be able to ascertain its equivalent
value; otherwise it is NOT negotiable
- RA 529
o What the law declares to be void is to require payment in
gold or in foreign money. the obligation or instrument
containing the void provision remains valid itself
o It seems also that the obligation or instrument containing
the void provision in question becomes payable in Phil
money which at the time of the payment is legal tender
o Since an instrument payable in foreign money is
converted into an instrument payable in Phil money, such
an instrument would be negotiable if it otherwise
complies with all the requirements of Sec 1 of NIL
o For obligations incurred after the enactment of RA 529
the rate of exchange shall be that prevailing at the time
of payment
- Only agreement to pay in foreign exchange is void but creditor’s
claim for payment is not defeated
- “order” = “assigns”; “bearer” = “possessor”
- where payable to a specified person
o non-negotiable
o also non-negotiable if payable to a specified person or his
agent
- drawee must be named
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
- importance of formalities
o essential for the security of mercantile transactions
o distinguish a negotiable instrument from the ordinary
non-transferrable written contract
- determination of negotiability
o sec 1 of NIL
o considering the whole of the instrument
o appears on the face of the instrument and not elsewhere
Cebu International v. CA
• Since a negotiable instrument is only a substitute for money and
not money, the delivery of such an instrument does not, by itself,
operate as payment. A check, whether a manager’s check or
ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not valid tender of payment and may be
refused receipt by the obligee or creditor. Mere delivery of checks
does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until
payment by commercial document is actually realized. (PAL v.
CA)
Roman Catholic Bishop of Malolos v. IAC
• A certified personal check is not legal tender nor currency
stipulated, and therefore, can not constitute valid tender of
payment. Hence, where the tender of payment by the private
respondent (debtor) was not valid for failure to comply with the
requisite payment in legal tender or currency stipulated within the
grace period and as such, was validly refused receipt by the
petitioner (creditor), the subsequent consignation did not operate
to discharge the former from its obligation to the latter.
BPI Express Card Corp. v. CA
• A check is only a substitute for money and not money, the
delivery of such instrument does not, by itself operate as
payment. This is especially true in the case of a postdated check.
Development Bank v. Sima Wei
• A negotiable instrument, of which is a check is, is not only a
written evidence of a contract right but is also a species of
property. A negotiable instrument must be delivered to the payee
in order to evidence its existence as a binding contract. The
payee of a negotiable instrument acquires no interest with respect
thereto until its delivery to him. Delivery of an instrument means
transfer of possession, actual or constructive, from one person to
another.
8
C. F. Sharp v. Northwest Airlines, Inc.
• Time of payment doctrine: Obligations in foreign currency may be
discharged in Philippine currency based on the prevailing rate at
the time of payment.
Tibajia v. CA
• A check is not legal tender and a creditor may validly refuse
payment by check, whether it be a manger’s, cashier’s or personal
check.
Caltex v. CA
• The negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the
instrument. In the construction of a bill or note, the intention of
the parties is to control, if it can be legally ascertained. While the
writing may be read in the light of surrounding circumstances in
order to more perfectly understand the intent and meaning of the
parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words
are to be added to it or substituted in its stead. The duty of the
court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used.
• In order to become a holder in due course, there must be
negotiation. Accordingly, a negotiation for such purpose cannot
be effected by mere delivery of the instrument since, necessarily
the terms thereof and the subsequent disposition of such security,
in the event of non-payment of the principal obligation, must be
contractually provided for.
Traders Royal Bank v. CA
• The language of negotiability which characterizes a negotiable
paper as a credit instrument is its freedom to circulate as a
substitute for money. Hence, freedom of negotiability is the
touchstone relating to the protection of holders in due course, and
the freedom of negotiability is the foundation for the protection
which the law throws around a holder in due course. This freedom
in negotiability is totally absent in a certificate of indebtedness as
it merely acknowledges to pay a sum of money to a specified
person or entity for a period of time.
Inciong v. CA
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
• For parol evidence to apply, a written contract need not be in any
particular form, or be signed by both parties. As a general rule,
bills, notes and other instruments of a similar nature are not
subject to be varied or contracted by parol or extrinsic evidence.
Firestone Tire & Rubber Co. v. CA
• The essence of negotiability which characterizes a negotiable
paper as a credit instrument lies in its freedom to circulate freely
as a substitute for money. The withdrawal slips in question lacked
this character.
Sesbreño v. CA
• Only an instrument qualifying as a negotiable instrument under
the relevant statute may be negotiated either by indorsement
thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer from. A negotiable instrument
may, however, instead of being negotiated, also be assigned or
transferred. A non-negotiable instrument may, obviously, 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.
Serrano v. CA
• The circumstance that the pawn ticket stated that the pawn was
redeemable by the bearer, did not dissolve that duty (to hold the
things pledged and to give notice to petitioner and the police of
any effort to redeem them). The pawn ticket was not a negotiable
instrument under the Negotiable Instruments Law nor a
negotiable document of title under Articles 1507 et seq. of the
Civil Code.
Sec. 2. What constitutes certainty as to sum. - The sum payable is a
sum certain within the meaning of this Act, although it is to be
paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon
default in payment of any installment or of interest, the
whole shall become due; or
9
(d) with exchange, whether at a fixed rate or at the current
rate; or
(e) with costs of collection or an attorney's fee, in case
payment shall not be made at maturity.
- interest stipulated, not specified: 12% for loans and forbearance
of money
- no interest stipulated: 12% upon default
- when interest shall earn interest: interest due shall earn legal
interest from the time it is judicially demanded, although the
instrument may be silent upon this point
- installments
o must be stated
o the maturity of each installment must be fixed or
determinable
- with exchange
o whether at a fixed rate or at the current rate
- exchange applicable only to foreign bills
- with costs and atty’s fees
o shall not be paid upon maturity
- stipulation as to atty’s fees not usurious
o it may be used to conceal usury. But that is a matter of
proof to be determined in each case
- stipulation as to atty’s fees will not make sum uncertain
- overdue instrument not fully negotiable:
o after the date of maturity, the instrument will no longer
be negotiable in the full commercial sense, that is in the
sense that any transferee acquiring it would not be a
holder in due course as he would acquire the instrument
after it is overdue
o since the transferee would not be a holder in due course,
he would hold the instrument subject to defenses as if it
were non-negotiable
- atty’s fees must be reasonable
- atty’s fees not ordinarily recoverable
Medel v. CA
• The stipulated rate of interest at 5.5% per month on the P500K
loan is excessive, iniquitous, unconscionable and exorbitant.
However, we can not consider the rate “usurious” because this
Court has consistently held that Circular No. 905 of the Central
Bank, adopted on December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law and that the Usury
Law is now “legally inexistent.” Nevertheless, we find the interest
at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or unconscionable, and,
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
hence, contrary to morals (“contra bonus mores”), if not against
the law. The stipulation is void.
Radiowealth Finance v. International Corporate Bank
• Even with the presence of an agreement between the parties, the
court may nevertheless reduce attorney’s fees though fixed in the
contract when the amount thereof appears to be unconscionable
or unreasonable.
• The law recognizes the validity of stipulations included in
documents such as negotiable instruments and mortgages with
respect to attorney’s fees in the form of penalty provided that
they are not unreasonable or unconscionable. There is no
mistake, however, that the reasonableness of attorney’s fees,
though seemingly a matter of fact which takes into account the
peculiar circumstances of the case, is a question of law where the
facts are not disputed at all.
Bachrach v. Golingco
• Where no special agreement is made by the parties with reference
thereto the courts are authorized to determine the amount to be
paid to an attorney as reasonable compensation for his
professional services, and even where the parties have made a
written agreement as to the fee, the courts have the power to
ignore the contract, if the amount fixed is unconscionable or
unreasonable, and to limit the fee to a reasonable amount.
• The courts have the same power to limit the amount recoverable
under a special provision in the promissory note whereby the
debtor obligates himself to pay a specified amount, or certain per
centum of the principal debt, in satisfaction of the attorney’s fee
for which the creditor would become liable in suing upon the note.
10
(b) A statement of the transaction which gives rise to the
instrument.
But an order or promise to pay out of a particular fund is not
unconditional.
• problem to be resolved by this section: whether or not the
indication of a particular fund or particular account, or the
statement of the transaction which gives rise to the instrument,
would make the promise or order conditional
o if it does: non-negotiable
o if it doesn’t: negotiable
Indication of a particular fund
• first case - not the direct source of payment; only source of
reimbursement; unconditional because the fund is merely for the
purpose of subsequent reimbursement, the order or promise is not
subject to the sufficiency of funds
• second case – direct source of payment; conditional because the
payment is subject to the condition that the funds indicated are
sufficient
Fund for reimbursement
e.g.
Pay to B or order P100 and reimburse
yourself out of my money in your hands.
(Sgd.) A

• The lawful purpose to be accomplished by a stipulation for • negotiable because the order to pay is not rendered conditional
attorney’s fees is to permit the creditor to receive the amount due
without the deduction of the expenses caused by the delinquency Fund for direct payment
of the debtor. It must not be used as a cloak for an exorbitant e.g.
exaction.

Sec. 3. When promise is unconditional. Pay to B or order P100 out of my part of the
estate.
An unconditional order or promise to pay is unconditional within
the meaning of this Act though coupled with --- (Sgd.) A
To X
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to be • non-negotiable as payment is to be made directly from the
debited with the amount; or particular fund indicated

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Victor Ramos
2C 2004-2005
Particular account to be debited
• instrument is to be paid first and afterwards, the particular
account indicated will be debited
• payment is not subject to the sufficiency or adequacy of the
particular account to be debited
Statement of transaction
• mere fact that the purchase and sale which gives rise to the
instrument is stated in the instrument will not make the promise
or order conditional
e.g.
I promise to pay B or order P200 in payment
for a horse I bought from him the other day.
(Sgd.) A
When statement of transaction will make instrument non-negotiable
• where the promise or order is made subject to the terms and
conditions of the transaction stated, then, the instrument is
rendered non-negotiable
e.g.
I promise to pay B or order P1,000
subject to the terms and stipulations
contained in the Deed of Sale executed by us
to date.
(Sgd.) A
• “as per contract” notes do not affect the negotiability of the
instrument
• PN given for a chattel and stipulating that the title to the chattel
shall remain in the vendor-payee until the notes is paid, is not
conditional
• the fact that a note contains conditional sales agreement does not
destroy its negotiability
• an instrument secured by a mortgage - provisions in the mortgage
do not affect the negotiability of the instrument it secures
• provisions in the note itself will render the note non-negotiable
because of uncertainty of amount or when such provisions become
11
part of the note, even though they are not in the note itself, the
instrument, is also rendered non-negotiable
Abubakar v. Auditor General
• A treasury warrant “payable from the appropriation for food
administration,” is actually an order for payment out of a
“particular fund,” and is not unconditional, and does not fulfill one
of the essential requirements of a negotiable instrument. In the
United States, government warrants for the payment of money
are not negotiable instruments nor commercial paper.
Metropolitan Bank v. CA
• The indication of Fund 501 as the source of payment to be made
on the treasury warrants makes the order or promise to pay “not
unconditional” and the warrants themselves non-negotiable.
Sec. 4. Determinable future time; what constitutes. - An instrument
is payable at a determinable future time, within the meaning of this
Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
specified therein; or
(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though the time
of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and
the happening of the event does not cure the defect.
At a fixed period after date or sight – means the drawee has seen the
instrument upon presentment for acceptance
e.g.
6o days after sight, pay to the order
of Jose Soriano the sum of P1,000.
(Sgd.) A
To C
On or before a fixed or determinable time
e.g.
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By: Joyce Briones notes from Agbayani; with case doctrines 12
Victor Ramos
2C 2004-2005

On or before December 31, 1950 I

promise to pay X or order P1,000

(Sgd.) Y

Last sentence (upon contingency)

• maker has the option to pay on December 31, 1950 or before said e.g.
date

Acceleration notes I promise to pay X or bearer P1,000

• make it possible for the maker to pay the instrument at an earlier
date or make it possible for the instrument at an earlier date or
make it possible for the holder to require payment of the
instrument at an earlier date
o first class – “payable on or before a certain date” note
o second class
a. contain acceleration clauses on the maker’s
default in payment of installments or of
interest, or on the happening of the extrinsic
event
b. provision that the maker shall supply
additional collateral in case of depreciation in
the value of the original deposit, with the
holder’s right to declare the note due
immediately on failure to make good the
depreciation
c. contain provisions for acceleration where
holder deems himself insecure
On the occurrence of a specified event
• essential that the specified must be certain to happen although
the time of happening is uncertain, such as, death
e.g.
On the death of X, I promise to pay
B or order the sum of P1,000
(Sgd.) Y
After occurrence of a specified event
e.g.
10 days after B passes the bar examinations.
(Sgd.) A
• payable at a fixed period after a specified event but the event is
not certain to happen; hence, the promise is conditional
Sec. 5. Additional provisions not affecting negotiability. - An
instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable. But the
negotiable character of an instrument otherwise negotiable is not
affected by a provision which:
(a) authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the instrument
be not paid at maturity; or
(c) waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) gives the holder an election to require something to be
done in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
General Rule: An instrument must not contain or promise to do any act in
addition to the payment of money. Otherwise, the instrument would be
rendered non-negotiable, for then the instrument would be payable not in
money only but in money and the additional act promised or ordered to be
performed.
e.g.

10 days after the death of X, I I promise to pay to bearer P1,000

promise to pay B or order the sum of P1,000 and to deliver to him two cows.
(Sgd.) Y (Sgd.) A
12
To X
By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
• test for negotiability: WON the promise would give rise to a cause
of action for breach of contract if the additional act is not done
o if it does: the instrument is non-negotiable
Promise to furnish additional security
• would render the instrument non-negotiable as that would be an
additional act to the promise to pay money
• to be distinguished from instruments in which the holder may
demand collateral and failure to furnish it accelerates the
instrument which are clearly negotiable, being merely accelerable
on the non-performance of an optional act
Sale of collateral securities
e.g.
I promise to pay to B or order P1,000
on December 31, 1950, provided, however, that
if this note is not paid at the date of maturity,
the ring which I deliver to B by way of pledge to
secure the payment of my indebtedness to him
may be sold by B and the proceeds thereof
applied to the value of this note.
(Sgd.) A
• although this instrument contains an act to be performed in
addition to payment of money, nevertheless, according to the law,
the instrument is still negotiable
o additional act to be performed is to be executed after the
date of maturity, when the instrument ceases to be
negotiable in the full commercial sense
o before and until maturity, the promise to pay is to pay
money only
13
• stipulation authorizing sale of collateral securities even before the
date of maturity would render the instrument non-negotiable
Confession of judgment
e.g. cognovit or confession of judgment
“And to secure the payment of said sum I authorize, irrevocably, any
attorney of any court of record to appear for me in said court, in term time
or in vacation, at any time hereafter, and confess a judgment without
process in favor of the holder of this note …”
• additional act is to be performed after the date of maturity when
the instrument ceases to be negotiable in the full commercial
sense
• warrant of attorney – an instrument in writing addressed to 1 or
more attorneys named therein, authorizing them, generally, to
appear in any court, or in some specified court on behalf of the
person giving it, and to confess judgment in favor of some
particular person therein named in an action of debt
• a note which contains a provision authorizing confession of
judgment at any time thereafter, whether due or not, is not
negotiable
• power of attorney to confess judgment any time before maturity
renders a note non-negotiable
• in the Philippines: void “as against public policy”
1. because they enlarge the field for fraud
2. because under this instrument, the promissory bargains
away his right to a day in court
3. because the effect of the instrument is to strike down the
right of appeal accorded by statute
PNB v. Manila Oil Refining & By-Products Co.
• Warrants of attorney to confess judgment are void as against
public policy, because they enlarge the filed for fraud, because
under these instruments the promissory bargains away his right to
a day in court, and because the effect of the instrument is to
strike down the right of appeal accorded by statute.
Traders Insurance & Surety Co. v. Dy Eng Giok
• The provision in the indemnity agreement that any payment made
by the surety company on account of the bond shall be final and
incontestable, is void and unenforceable as against public policy
13
By: Joyce Briones notes from Agbayani; with case doctrines 14
Victor Ramos
2C 2004-2005
because they enlarge the field for fraud, because in these (d) bears a seal; or
instruments the promissory bargains away his right to a day in
court and because the effect of the instrument is to strike down (e) designates a particular kind of current money in which
the right of appeal accorded by the statute. payment is to be made.

Waiver of benefit But nothing in this section shall alter or repeal any statute
e.g. requiring in certain cases the nature of the consideration to be
stated in the instrument.

Six months after date, I promise to Sec. 7. When payable on demand. - An instrument is payable on
pay B or order P1,000, waiving the right to
demand:
appeal and all of valuation, appraisement,
stay and exemption laws.
(a) When it is so expressed to be payable on demand, or at
(Sgd.) A sight, or on presentation; or

(b) In which no time for payment is expressed.

• Other benefits intended for the advantage or protection of the
obligor that may be waived: Where an instrument is issued, accepted, or indorsed when
1. presentment for payment overdue, it is, as regards the person so issuing, accepting, or
2. notice of dishonor indorsing it, payable on demand.
3. protest
instead of “on demand” the words “on sight” or “on presentation” may be
Election of holder to require some other act used
• even if there is an additional act, the instrument still remains • payable on demand only as between immediate parties
negotiable provided that the right to choose between payment of
money or performance of the additional act is in the hands of the Sec. 8. When payable to order. - The instrument is payable to order
holder where it is drawn payable to the order of a specified person or to
him or his order. It may be drawn payable to the order of:
e.g. (a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

Pay to B or order P1,000 or 10
cavanes of palay, at the option of the holder. (c) The drawee; or

(Sgd.) A (d) Two or more payees jointly; or

To C
(e) One or some of several payees; or

Sec. 6. Omissions; seal; particular money. - The validity and (f) The holder of an office for the time being.
negotiable character of an instrument are not affected by the fact
that: Where the instrument is payable to order, the payee must be
(a) it is not dated; or named or otherwise indicated therein with reasonable certainty.

(b) does not specify the value given, or that any value had
been given therefor; or
(c) does not specify the place where it is drawn or the
place where it is payable; or
• must contain the words of negotiability i.e., must be payable to
“order” or “bearer”
• payable to order – there must always be a specified person in the
instrument and the bill or note is to be paid to the person
designated in the instrument or to any person to whom he has
indorsed and delivered the same

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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
• without the words “or order” or “to the order of” the instrument is
payable only to the person designated therein and is therefore
non-negotiable
• payee must be named or otherwise indicated with reasonable
certainty
• if there is no payee, where the instrument is payable to order, no
one could indorse the instrument and it is useless to consider it
negotiable
Where blank for name of payee unfilled
• not payable to order because payee is not named, neither is he
designated with reasonable certainty
• may be considered an incomplete instrument; may be covered by
Sections 13, 14 and 15, depending on how delivered
To whose order instrument may be made or drawn
1. payee who is not maker
2. payee who is not the drawer
3. payee who is not the drawee
4. drawer is payee
5. maker as payee
6. drawee as payee
7. 2 or more payees jointly
8. 1 or some of several payees
9. holder of an office of the time being
Salas v. CA
• Among others, the instrument in order to be considered
negotiable must contain the so-called “words of negotiability –
i.e., must be payable to ‘order’ or bearer.’” Under Section 8 of the
Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always be
a specified person named in the instrument and the bill or note is
to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the same. Without
the words “or order” or “to the order of”, the instrument is
payable only to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument, but
will merely “step into the shoes” of the person designated in the
instrument and will thus be open to all defenses available against
the latter.
• A holder in due course holds the instrument free from any defect
of title of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the
instrument for the full amount thereof.
15
GSIS v. CA
• Promissory notes and mortgage deeds that are neither payable to
order nor to bearer are non-negotiable when they are payable to a
specified party, because they do not comply with the fourth
requisite of Act No. 2301.
PECO v. Soriano
• Postal money orders are not negotiable instruments because in
establishing and operating a postal money order system, the
government is not engaging in commercial transactions but
merely exercises a governmental power for the public benefit.
Some of the restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the character of
negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of
money orders may be withheld under a variety of circumstances.
Consolidated Plywood Industries v. IFC Leasing and Acceptance
Corporation
• Without the words ‘or order’ or ‘to the order of’, the instrument is
payable only to the person designated therein and is therefore
non-negotiable.
Equitable Banking Corp. v. IAC
• The subject check was equivocal and patently ambiguous. By
making the check read; “Pay to the Equitable Banking Corporation
Order of A/C of Casville Enterprises, Inc.” the payee ceased to be
indicated with reasonable certainty in contravention of Section 8
of the Negotiable Instruments Law. That ambiguity is to be taken
contra proferentem that is, construed against Nell who caused the
ambiguity and could have also avoided it by the exercise of a little
more care.
Jimenez v. Bucoy
• An acknowledgment of a debt becomes a promise to pay by the
addition of words implying a promise to pay by the addition of
words implying a promise of payment, such as, “payable,”
“payable on a given day,” “payable on demand.”
Sec. 9. When payable to bearer. - The instrument is payable to
bearer:
15
By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer;
or
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the person
making it so payable; or
(d) When the name of the payee does not purport to be the
name of any person; or
(e) When the only or last indorsement is an indorsement in
blank.
When expressed to be so payable
e.g. “Pay to bearer P1,000.00, etc.”
Payable to person named or bearer
e.g. “Pay to B or bearer, etc.”
Payable to order of a fictitious or non-existing person
• 2 requisites:
1. payee named must be fictitious or non-existent
2. when such fact is known to the person making it so payable that
is, who is such person making it so payable
• fictitious person – a person who has no right to the instrument
because the drawer or the maker of it so intended, and therefore,
it does not matter whether the name of the payee used by the
drawer or maker be that of one living or dead, or one who never
existed
• non-existent person – one who does not exist in the sense that he
was not intended to be the payee by the drawer
• where the instrument is made payable to the name of a non-
existing person, or of a person having no interest in the
transaction, but the maker believes that such person exists and he
has an interest in the transaction and intends that he shall receive
the same or its proceeds, it is not payable to the fictitious person
or to bearer, and the negotiation of such paper under the forged
indorsement of the name designated thereon as the payee vests
in the purchaser no right to enforce the same as against the
maker or drawer
Ang Tek Lian v. CA
16
• Under the Negotiable Instruments Law, a check drawn payable to
the order of “cash is a check payable to bearer, and the bank may
pay it to the person presenting it for payment without the
drawer’s indorsement.
• If the bank is not sure of the bearer’s identity or financial
solvency, it has the right to demand identification and/or
assurance against possible complications, --- for instance, (a)
forgery of drawer’s signature, (b) loss of the check by the rightful
owner, (c) raising of the amount payable, etc. The bank may
therefore require, for its protection, that the indorsement of the
drawer --- or some other person known to it --- be obtained. But
where the Bank is satisfied of the identity and/or the economic
standing of the bearer who tenders the check for collection, it will
pay the instrument without further question; and it would incur no
liability to the drawer in thus acting.
Banco de Oro v. Equitable Banking Corporation
• The petitioner (collecting bank, BDO) having stamped its
guarantee of “all prior indorsements and/or lack of endorsements”
is now estopped from claiming that the checks under
consideration are not negotiable instruments. By such deliberate
and positive attitude of the petitioner it has for all legal intents
and purposes treated the said checks as negotiable instruments
and accordingly assumed the warranty of the endorser when it
stamped its guarantee of prior endorsements at the back of the
checks.
• The collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the
endorsements.
• While the drawer generally owes no duty of diligence to the
collecting bank, the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it for the
purpose of determining their genuineness and regularity. The
collecting bank being primarily engaged in banking holds itself out
to the public as the expert and the law holds it to a high standard
of conduct.
Sec. 10. Terms, when sufficient. - The instrument need not follow
the language of this Act, but any terms are sufficient which clearly
indicate an intention to conform to the requirements hereof.
16
By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
• instead of using “promise” may use “agree” or instead of “bearer,”
“holder”
• valid and negotiable though written in a foreign language
Sec. 11. Date, presumption as to. - Where the instrument or an
acceptance or any indorsement thereon is dated, such date is
deemed prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be.
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid
for the reason only that it is ante-dated or post-dated, provided
this is not done for an illegal or fraudulent purpose. The person to
whom an instrument so dated is delivered acquires the title thereto
as of the date of delivery.
• contemplates of instruments ante-dated or post-dated by the
parties in accordance with a mutual agreement to that effect
• ante-dated – date written thereon is earlier than the true date of
its issuance
e.g.
Manila, Philippines
January 1, 1950
I promise to pay to B or order P1,000
(Sgd.) A
- date written: January 1, 1950
- date delivered: January 15, 1950
• post-dated – date written thereon is later than the true date of its
issuance or delivery
e.g.
Manila, Philippines
January 1, 1950
I promise to pay to B or order P1,000
(Sgd.) A
- date written: January 1, 1950
- date delivered: December 15, 1950
• may be negotiated before or after the date as long as it is not
negotiated after its maturity
17
• ante-dating or post-dating invalidates an instrument when done
for illegal and fraudulent purposes
o e.g. evading the Usury Law
A - wants to charge 24% on a loan of P1K;
- may require borrower to make a PN and ante-date it by 1
year, to make it appear that the period for the payment is 2 years
and that the interest is 12% a year
• title is acquired as of the date of actual delivery
Sec. 13. When date may be inserted. - Where an instrument
expressed to be payable at a fixed period after date is issued
undated, or where the acceptance of an instrument payable at a
fixed period after sight is undated, any holder may insert therein
the true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not avoid
the instrument in the hands of a subsequent holder in due course;
but as to him, the date so inserted is to be regarded as the true
date.
• date is not necessary for negotiability under Sec. 6 but may be
necessary to determine the date of maturity
• date is also necessary:
1. where interest is stipulated, to determine when interest is to
run, but not to make the instrument negotiable
2. to determine whether a party has acted within reasonable
time but not to make the instrument negotiable
Instrument payable at a fixed period after date
e.g.
I promise to pay B or order P1,000, 60 days after date
• date of instrument is necessary to determine date of maturity
• holder may insert true date of issue
Instrument payable at a fixed period after sight
e.g.
I promise to pay B or order P1,000, 60 days after sight
across the instrument:
17
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Victor Ramos
2C 2004-2005
Accepted
(Sgd.) X
(no date)
• date of maturity cannot be determined unless acceptance is dated
• holder may insert true date of acceptance
Effect of insertion of wrong date
• i.e., to hasten maturity
1. As to the party that inserted the wrong date:
• knowingly inserting the wrong date in an undated instrument will
avoid it
• under Section 12, the instrument is void because it was ante-
dated for a fraudulent purpose
A gives instrument B who inserts the wrong date
Instrument is VOID as to B
1. placed the wrong date when he knew the right one
2. Sec 12: ante/post-dated for fraud
2. As to the party that subsequently became holder
• does not avoid the instrument
• date so inserted will be regarded as true date
A B who puts the wrong date C (a holder in due course)
• Instrument is not avoided as to C (subsequent holder in due
course)
• Fake date will be regarded as true date
• If C is NOT a holder in due course, can he collect? No. he is
aware of the defects of the wrong date (last sentence of the
provision)
Pacheco v. CA
• By mutual agreement of the parties, the negotiable character of a
check may be waived and the instrument may be treated simply
as proof of an obligation. A drawer who issues a check as security
or evidence of investment is not liable for estafa.
• A negotiable instrument is not rendered invalid by reason only
that it is antedated or postdated. It is not necessary to place the
date as to make the check evidence of indebtedness.
18
Betty King v. CA
• The claim that the petitioner did not issue the dishonored checks
because she merely signed them without indicating therein the
date and the amount involved is not meritorious. Petitioner
admitted that she signed those checks and no proof was adduced
to show that she merely signed them in blank, or that complainant
filled them up in violation of the former’s instructions or their
previous agreement.
• To create a prima facie presumption that the issuer knew of the
insufficiency of funds, it must be shown that he or she received a
notice of dishonor and, within 5 banking days thereafter, failed to
satisfy the amount of the check or make arrangement for its
payment.
Sec. 14. Blanks; when may be filled. - Where the instrument is
wanting in any material particular, the person in possession
thereof has a prima facie authority to complete it by filling up the
blanks therein. And a signature on a blank paper delivered by the
person making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima facie
authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against
any person who became a party thereto prior to its completion, it
must be filled up strictly in accordance with the authority given and
within a reasonable time. But if any such instrument, after
completion, is negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority given
and within a reasonable time.
- requisites to make the paper negotiable
o “delivered by maker in order that the paper may be
converted to a negotiable instrument”
o “fill up as such for any amount”
o “strictly in accordance with the authority given and within
reasonable time”
Steps in the execution of a negotiable instrument:
1. act of writing the instrument completely and in accordance with
Sec. 1 of the Negotiable Instrument Law
2. delivery of the instrument with the intention of giving effect to it
• blank instruments are sometimes executed and delivered to
another to fill in and negotiate either for his own benefit or
that of the maker
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Victor Ramos
2C 2004-2005

Prima Facie authority to fill up blanks Right of holder not in due course where blank wrongfully filled
e.g.
“material particular”:
1. a particular the omission of which will render the instrument non-
negotiable A B puts P10K, not P1K C D E (not a holder in due course)
e.g. name of payee or name of drawer
2. a particular the omission of which will not render the instrument Can E enforce the instrument?
non-negotiable
e.g. date, rate of interest, place of payment

Facts from which prima facie authority presumed:
1. want of a material particular in the instrument
2. possession thereof by a person, a third fact
3. that such person had authority to fill up the blank
• law merely requires that it be in the possession of a person
other than the drawer or maker
o presumed agency to fill up the blanks
B – puts in blank P10,000; indorses note to C, to D, and D to E, who is not
holder in due course
• 2 views:
1. one who is not a holder in due course cannot enforce the
instrument against a party prior to the completion of the
instrument e.g. A, if the instrument is not filled up strictly in
accordance with the authority given or within reasonable time

Prima facie authority to fill up to any amount i.e., E can collect nothing from A

• law presumes the existence of authority to fill the instrument 2. holder can enforce the instrument according to the authorized
up to any amount from the ff. 2 facts: tenor
1. a signature on a blank paper
2. person signing in blank delivers it in order that the paper may be i.e., B can collect from A P1,000
converted into a negotiable instrument
• better view is first one since the law requires the 2 requisites
Requisites to hold prior parties liable: to be met
1. blank must be filled up strictly in accordance with the authority
given Liability of parties negotiating after completion
2. it must be filled up within a reasonable time e.g.
A B puts P10K, not P1K C D E
e.g. • E can collect P10K from B,C,D
• Liability:
o B
A B placed the amount
A authorized B to put P1,000 in the blank indorser; if general indorser, that instrument is
valid and subsisting
o C&D
A – delivers mechanically incomplete note to B on April 6, 1951; authorized parties subsequent to the completion
B to put in blank only P1,000 indorsers who warrant the instrument is what it
• B, C and D are liable and purports to be E can enforce the
therefore
• in order that a subsequent holder who is not a holder in the instrument against them; if general indorsers,
estopped that the instrument
or precluded from is valid
due course may enforce the instrument against A: claiming that the noteand wassubsisting
not filled up strictly in accordance
• B,C,D: are estopped from claiming note was NOT filled up strictly in
withaccordance
the authority
with given
the authority given
1. blank must be filled up strictly in accordance with the authority
given i.e., P1,000
2. it must be filled up within a reasonable time

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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
o B – liable because he was the one who placed the
amount; as indorser, he warrants that the
instrument is in all respects what it purports to be;
- if a general indorser, warranted that it is valid and
subsisting
20
1. where the holder is a holder in due course, he can enforce the
instrument as completed against parties prior or subsequent to
the completion
2. where the holder is not a holder in due course, he can enforce the
instrument as completed only against parties subsequent to the
completion but not against those prior thereto

o C and D – liable because they are parties subsequent • holder of an instrument – plaintiff in an action on the
to completion; as indorsers, they warrant that the instrument; either:
instrument is in all respects what it purports to be; 1. payee
2. indorsee or
o if they are general indorsers, they warrant that the 3. bearer in possession
instrument is valid and subsisting
• debtor – defendant; either
Meaning of reasonable time
• relative 1. maker
• depends on: 2. acceptor
1. nature of instrument 3. drawer or
2. usage of trade or business with respect to such instrument 4. indorser
3. facts of the particular case
Republic Planters Bank v. CA
Rights of holder in due course
• Where the notes were complete in the sense that the spaces for
B – puts in blank P10,000; indorses note to C, to D, and D to E, who is the material particular had been filled up by the bank as per
holder in due course agreement, the notes were not incomplete and not delivered in
blank, Section 14 is not applicable.
• E can collect from A P10,000, under last sentence of this
section • Under the Negotiable Instruments Law, persons who write their
o note was negotiated after completion and he, being a names on the face of the promissory notes are makers and are
holder in due course, the instrument is valid and liable as such. By signing the notes, the maker promises to pay
effective for all purposes in his hands and he may to the order of the payee or any holder according to the tenor
enforce it as if it had been filled up strictly in thereof.
accordance with the authority given and w/in
reasonable time Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it will not, if
It is a personal defense completed and negotiated without authority, be a valid contract in
• defense of parties prior to completion: it is not filled up the hands of any holder, as against any person whose signature
strictly in accordance with the authority given or that it is not was placed thereon before delivery.
filled up within a reasonable time
o available only against holders who are not holders in • applies to incomplete and undelivered instruments
due course
o personal or equitable defense Instrument not valid as against party before delivery
e.g.
Summary of rules where instrument is incomplete but delivered
A has an incomplete and undelivered instrument
If instrument is incomplete and delivered, completed contrary to authority Stolen by B who fills up the blanks and indorses it to
given or not completed within reasonable time: C D E F

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Victor Ramos
2C 2004-2005
• F can’t enforce the instrument against A.
o As against A, whose signature was placed on the check
prior to the delivery, the instrument is not valid.
Where holder is in due course
e.g.
A has an incomplete and undelivered instrument
Stolen by B who fills up the blanks and indorses it to
C D E F (HIDC)
F cannot enforce against A because the instrument is NOT valid
• F can’t enforce the instrument against A.
• non-delivery of an incomplete instrument is a valid defense not
only between original parties but also against a holder in due
course
Indorsers, etc. are liable
• invalidity of the instrument is only with reference to parties
whose signatures appear on the instrument prior to the delivery
• as to parties whose signatures appear on the instrument after
delivery, the instrument may be valid
e.g.
B – steals blank check and fills up
- indorses it to C, C to D, D to E, and E to F
• F can enforce it against B, C, D and E.
o instrument is valid as to B - responsible for the
negotiation of the instrument; indorsers and warrants
that instrument is what it purports to be
o valid as to C, D and E – indorsers
It is a real defense
• possible defense of a party whose signature appears on an
instrument prior to delivery: as against him, the instrument is not
valid for having been incomplete and undelivered
o “want of delivery of a mechanically incomplete
instrument”
• can be interposed not only against one who is not a holder in due
course but also against a holder in due course
o law uses term “any holder”
21
Delivery is not conclusively presumed where instrument is incomplete
• under Section 16, delivery is conclusively presumed where an
instrument is in the hands of a holder in due course
o possession is prima facie evidence of delivery, the
presumption can be rebutted
• Section 16 must be read in connection with Section 15
• Section 16 does not apply in the case of an incomplete instrument
completed and negotiated without authority
But delivery presumed prima facie
• where in incomplete and undelivered instrument is in the hands of
a holder in due course, there is prima facie presumption of
delivery which the maker may rebut by proof of non-delivery
• where the custody of the incomplete instrument has been
entrusted to another who wrongfully completes and negotiates it
to holder in due course, delivery to the agent or custodian is a
sufficient delivery to bind the drawer or maker
Sec. 16. Delivery; when effectual; when presumed. - Every contract
on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto.
As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual,
must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such
case, the delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring the
property in the instrument. But where the instrument is in the
hands of a holder in due course, a valid delivery thereof by all
parties prior to him so as to make them liable to him is conclusively
presumed. And where the instrument is no longer in the possession
of a party whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved.
- for mechanically compelete but undelivered notes; NON-
DELIVERY, NO RIGHTS OF HOLDER
- delivery & Issue = synonymous
o issue: the first delivery of the instrument, complete in
form, to a person who takes it as holder
- RULES
o Delivery is essential for any negotiable instrument
o Immediate parties: must have intent of passing title
o Instrument signed by drawer + not completed + kept in
his (drawer) custody – NOT valid
o If such instrument in the preceding rule is in the hands of
a holder in due course prima facie delivery (rebuttable)
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
o Custody of incomplete instrument completed and
negotiated to holder in due course; DELIVERY TO
AGENT/CUSTODIAN BINDS DRAWEE / MAKER
o Drawer / maker makes a complete instrument in the
possession of another not a holder in due course; PRIMA
FACIE OF DELIVERY
o Such instrument in the preceding rule in the hands of a
holder in due course; CONCLUSIVE PRESUMPTION OF
DELIVERY
o Delivery of instrument for special purpose (not
inconsistent with writing); VALID but such condition
should NOT affect rights of holder in due course
Such condition ought to be a condition
precedent, not condition subsequent
Condition subsequent: the happening / non-
happening of which defeats/qualifies the
instrument
- Meaning of “immediate” and “remote”
o Literally: A B C;
A is immediate to B;
B immediate to C
A is not immediate to C
o Meaning in NIL:
Privity, not proximity: WON the party in
question knows of the conditions / limitations
placed upon delivery or the facts that the
instrument was not delivered but stolen
- Presumption of valid delivery as to immediate party / remote
party NOT a holder in due course
o Rebuttable: if may be proven that
No delivery was made
If there was delivery, was not authorized
If delivery with authorization: delivery was
conditional or for a special purpose and not for
the purpose of transferring the property in the
instrument
A B C D E F without his consent
• B stole A’s negotiable instrument
• F gets recovery from B,C,D,E
- Conditional delivery as seen in the illustration below
Manuel Lim v. CA
A B: Condition, C must sign for it to be binding on A
• B: files an action (with presumption of delivery)
• A: must show that delivery was conditional and WON such
condition was fulfilled
• NOTE: if promise / order to pay is conditional = non-
negotiable
22
- Delivery for special purpose
A complete note, payable to Bearer B
For (1) safe keeping; (2) collection only
B cannot enforce note since it was for a special purpose
- Presumption of delivery as to holder in due course
o CONCLUSIVE PRESUMPTION
o Maker cannot introduce evidence
o Not applicable to incomplete instrument
- Personal defense
o Name of defense: want for delivery of a mechanically
complete instrument
o Not a defense against a holder in due course
- Diligence of owner
o When note is lost, owner must inform all parties not to
pay the amount to any one except the loser / his order
o Drawee advised not to accept the same
- Right of finder
o No title to the lost bill/note vests in the finder and the
owner when he has indemnified it, may maintain trover
against the finder
- Discharge of party liability
o A party liable will not be discharged if he pays the
amount to the holder of the lost instrument before
maturity as such a payment is NOT made in the usual
course of business
- Theft of a negotiable instrument
o Taking of a negotiable instrument belonging to another
- Estafa
o Destruction or concealment of a negotiable instrument
• The place where the bills were written, signed, or dated does not
necessarily fix or determine the place where they were executed.
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Victor Ramos
2C 2004-2005
What is of decisive importance is the delivery thereof. The
delivery of the instrument is the final act essential to its
consummation as an obligation. An undelivered bill or note is
inoperative. Until delivery, the contract is revocable. And the
issuance as well as the delivery of the check must be to a person
who takes it as a holder, which means ‘the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof.’
Delivery of the check signifies transfer of possession, whether
actual or constructive, from one person to another with intent to
transfer title thereto.
• Knowledge on the part of the maker or drawer of the check of the
insufficiency of his funds is by itself a continuing eventuality,
whether the accused be within one territory or another.
People v. Grospe
• Estafa by postdating or issuing a bad check may be a transitory or
continuing offense, and its basic elements of deceit and damage
may arise independently in separate places.
• Delivery of instrument is the final act essential to the
consummation of an obligation. The rule is that the issuance as
well as the delivery of the check must be to a person who takes it
as a holder, which means “the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof.”
• Knowledge on the part of the maker or drawer of the check of the
insufficiency of his funds, which is an essential ingredient of the
offense, is by itself a continuing eventuality whether the accused
be within one territory or another.
De la Victoria v. Burgos
• Where checks due a government employee have not yet been
delivered to him, they do not belong to him and still have the
character of public funds. Before actual delivery, the payee has
no power over it; he cannot assign it without the consent of the
government.
• Being public fund, the checks may not be garnished to satisfy the
judgment. The rationale behind this doctrine is obvious
consideration of public policy i.e., the functions and public services
rendered by the State cannot be allowed to be paralyzed or
disrupted by the diversion of public funds from their legitimate
and specific objects, as appropriated by law.
Development Bank of Rizal v. Sima Wei
23
• A negotiable instrument, of which a check is, is not only a written
evidence of a contract right but is also a species of property. Just
as a deed to a piece of land must be delivered in order to convey
title to the grantee, so must be a negotiable instrument be
delivered to the payee in order to evidence its existence as a
binding contract.
• The payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him.
• The delivery of checks in payment of an obligation does not
constitute payment unless they are cashed or their value is
impaired through the fault of the creditor.
Sec. 17. Construction where instrument is ambiguous. - Where the
language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
(a) Where the sum payable is expressed in words and also
in figures and there is a discrepancy between the two, the
sum denoted by the words is the sum payable; but if the
words are ambiguous or uncertain, reference may be had
to the figures to fix the amount;
(b) Where the instrument provides for the payment of
interest, without specifying the date from which interest is
to run, the interest runs from the date of the instrument,
and if the instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered
to be dated as of the time it was issued;
(d) Where there is a conflict between the written and
printed provisions of the instrument, the written provisions
prevail;
(e) Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may treat it as
either at his election;
(f) Where a signature is so placed upon the instrument that
it is not clear in what capacity the person making the same
intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed to
be jointly and severally liable thereon.
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
- indicates that the promise is individual as to each other; meaning
payable sum expressed in words and figures and there is a
discrepancy
o priority: #1 words; #2 figures if words are ambiguous /
uncertain
- payment of interest and no date as to when it would run
o priority: #1 date of instrument, #2 date of issue
- no date in the instrument:
o date of issue is considered
- conflict on written and printed versions
o written prevails
- so ambiguous WON it’s a note or bill
o at the election of the holder
- no capacity of the one who signed
o deemed indorser
- “I promise to pay” with 2 signatures
o jointly and severally liable
People v. Romero
• The rule in the Negotiable Instruments Law is that when there is
ambiguity in the amount in words and the amount in figures, it
would be the amount in words that would prevail. This rule of
interpretation finds no application in a case where the agreement
was perfectly clear that at the end of 21 days, the investment of
P150K would become P1.2M, the amount in words was
P1,000,200 while the amount in figures was P1.2M.
PNB v. Concepcion Mining
• Under Section 17 (g) of the Negotiable Instruments Law and
Article 1216 of the Civil Code, where the promissory note was
executed jointly and severally by 2 or more persons, the payee of
the promissory note had the right to hold any one or any two of
the signers of the promissory note responsible for the payment of
the amount of the note.
Republic Planters Bank v. CA
• Persons who write their names on the face of the promissory
notes are makers and are liable as such. By signing as the notes,
the maker promises to pay to the order of the payee or any holder
according to the tenor thereof. Where an instrument containing
the words “I promise to pay” is signed by two or more persons,
they are deemed to be jointly and severally liable thereon. An
instrument which begins with “I”, “We” or “Either of us” promise
to pay, when signed by two or more persons, makes them
solidarily liable. The fact that the singular pronoun is used
24
that each of the co-signers deemed to have made an independent
singular promise to pay the notes in full.
Sec. 18. Liability of person signing in trade or assumed name. - No
person is liable on the instrument whose signature does not appear
thereon, except as herein otherwise expressly provided. But one
who signs in a trade or assumed name will be liable to the same
extent as if he had signed in his own name.
- RULE: no signature, no liability
- EXCEPTIONS
o Duly authorized agent – principal is liable
o One forges signature of another – forger is liable
o Person sought to be charged signed in another piece of
paper
o Used a trade / assumed name
Remo, Jr. v. CA
• As a general rule, a person whose signature does not appear in
the promissory note, cannot be held liable.
• Where a promissory note is signed by the President and Chairman
of a corporation, there is no cogent basis to pierce the corporate
veil of the corporation and hold its Director and shareholder
personally liable when he did not sign the promissory note.
Sec. 19. Signature by agent; authority; how shown. - The signature
of any party may be made by a duly authorized agent. No particular
form of appointment is necessary for this purpose; and the
authority of the agent may be established as in other cases of
agency.
- Agency may be oral / written; no form required
- Agency may be proven orally / written unless specified by law –
STATUTE OF FRAUDS
- Authority to collect is NOT = indorsement
Sec. 20. Liability of person signing as agent, and so forth. - Where
the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as
an agent, or as filling a representative character, without disclosing
his principal, does not exempt him from personal liability.
Requisites
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Victor Ramos
2C 2004-2005
o duly authorized
o add words to his signature indicating he signs as an
agent / representative capacity
o discloses his principal
- disclosure need not be in signature
Y & Co
Manila
We promise to pay X or order P1,000
(Sgd) Pedro Vega
We promise to pay X or order P1,000 for money loaned to Y & Co Inc
(Sgd) Pedro Vega, President
Juan Jose, Secretary
- Rules to government officers: bound by rules of agency if
exceeded authority
Insular Drug v. PNB
• The right of an agent to indorse commercial paper is a very
responsible power and will not be lightly inferred. A salesman
with authority to collect money belonging to his principal does not
have the implied authority to indorse checks received in payment.
Any person taking checks made payable to a corporation, which
can act only by agents does so at his peril, and must abide by the
consequences if the agent who indorses the same is without
authority.
Jai-Alai Corp. of the Phil. v. BPI
• Where the check is deposited with a collecting bank relationship
created is that of agency, not creditor-debtor; that is, the bank
was to collect from the drawee of the checks the corresponding
proceeds. Same rule follows where after drawee-bank paid the
collecting bank, it was found that signature of payee of check was
forged by one who previously encashed them.
25
• A forged signature in a negotiable instrument is wholly inoperative
and no right to discharge it or enforce its payment can be
acquired through or under the forged signature except against a
party who cannot invoke the forgery, it stands to reason, upon the
facts of record, that respondent, as a collecting bank which
indorsed the checks to the drawee-banks for clearing, should be
liable to the latter for reimbursement, the indorsements on the
checks had been forged prior to their delivery.
PNB v. Picornell
• The fact that the drawer was a commission agent of the drawee in
the purchase of the merchandise covered by the bill does not
necessarily make him an agent of the drawee in his obligations
emanating from the bill drawn by him. His acts in negotiating the
bill constituting a contract distinct from that made by his having
purchased the merchandise on behalf of the drawee, unless at the
time of the signing the bill he should have added to is signature
some expression to indicate it.
Philippine Bank of Commerce v. Aruego
• Where an inspection of the drafts accepted by Aruego shows that
nowhere has he disclosed that he was signing as a representative
of the Philippine Education Foundation Company, he is personally
liable for the drafts accepted by him and may not interpose as a
defense that he signed the drafts merely as an agent of the
Philippine Education Foundation Company of which he is
president.
Francisco v. CA
• Where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negative personal liability. An agent, when so signing, should
indicate that he is merely signing in behalf of the principal and
must disclose the name of his principal; otherwise he shall be held
personally liable.
Astro Electronics Corp. v. Phil. Export
• Where a person signed an instrument and a surety agreement
both in his official and personal capacity, he is solidarily liable for
the obligation not merely as an agent.
Sec. 21. Signature by procuration; effect of. - A signature by
"procuration" operates as notice that the agent has but a limited
authority to sign, and the principal is bound only in case the agent
25
By: Joyce Briones notes from Agbayani; with case doctrines 26
Victor Ramos
2C 2004-2005
in so signing acted within the actual limits of his authority.
1. B makes a promissory note, making himself the payee and forges the
- procuration: signature of A, making it appear that A made the note

2. A draws a bill of exchange against X, payable to the order of B. Y

Jose Cruz, Per procuration: Pedro Vega
fraudulently gets hold of the bill and signs the name of B, payee and
Jose Cruz, per proc.: Pedro Vega indorsing the bill to himself.
Jose Cruz, PP: Pedro Vega Cruz = principal
Jose Cruz, Pp: Pedro Vega Vega = agent Other forms of forgery:
1. fraud in factum
2. duress amounting to forgery
Sec. 22. Effect of indorsement by infant or corporation.- The 3. fraudulent impersonation in certain cases
indorsement or assignment of the instrument by a corporation or
by an infant passes the property therein, notwithstanding that from Fraud in factum
want of capacity, the corporation or infant may incur no liability
thereon. • fraud in esse contractus
• fraud amounting to forgery
- Indorsee can only enforce against parties prior to infant / • since fraud amounts to forgery, it has the effect of forgery such
corporation that it has a real defense

Example: B obtains the signature of A by telling A that it is only for

autograph purposes; writes above the signature a negotiable instrument
A B C D E (minor) F
• there is no intention to issue an instrument

Illustrative Cases:
- Section is also applicable to: lunatics, imbeciles, incapacitated 1. maker of a note is an old colored man who was almost blind and induced
persons to place his signature on a piece of paper without knowing that it was a
note and w/o negligence on his part
Sec. 23. Forged signature; effect of. - When a signature is forged or 2. defendant signed a note in blank, having been fraudulently induced to
made without the authority of the person whose signature it believe that he was signing a sales application
purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment Fraud in factum v. Fraud in inducement
thereof against any party thereto, can be acquired through or
under such signature, unless the party against whom it is sought to Fraud in factum Fraud in inducement
enforce such right is precluded from setting up the forgery or want fraud amounting to forgery fraud does not amount to
of authority. forgery

Forgery – counterfeit making or fraudulent alteration of any writing and Example of fraud in inducement: A sells to B what he represents to B as a
may consist in the signing of another’s name, or the alteration of an diamond ring which in fact is only glass. B issues to A a check.
instrument in the name, amount, description of the person and the like,
with intent to defraud • there is an intention of B to issue an instrument

• intent to defraud distinguishes it from innocent alterations and Duress amounting to forgery
spoilation
• Sec. 23 applies only to forged signatures, not alterations in • ordinarily, duress is a personal defense
amount which are covered by Sec. 124 o but: if duress amounts to forgery, it is a real defense

e.g.

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Example: A takes B’s hand and forces him to sign his name
Fraudulent impersonation in certain cases
Example
Y X
“Juan Cruz”
X represents himself to be Juan Cruz when he is not.
X obtains from Y a note payable to the order of Juan Cruz.
X indorses the note, signing “Juan Cruz.”
• if: Y intends that the proceeds of the note will go to X, the person
dealing w/ him, named at the time Juan Cruz, then it is not a
forgery
• if: Y intends that the proceeds of the note will go to the real Juan
Cruz and not X, but to whom Y issued the note on the belief that X
was Juan Cruz, X’s signature would be a forgery
Double intent of the maker or drawer in fraudulent impersonation:
1. to make the instrument payable to the person before him or to
the person writing at the other end of the line, in case the
negotiation is by correspondence
2. to make the instrument payable to the person whom he believes
the stranger to be
Example
Y X
“Juan Cruz”
X represents himself to be Juan Cruz when he is not
X obtains from Y a note payable to the order of Juan Cruz.
X indorses the note, signing “Juan Cruz.”
• in this example, Y has the double intent:
1. to make the instrument payable to X, the person before him
27
2. to make the instrument payable to Juan Cruz whom he believes to
be X, the stranger, to be
General rule in fraudulent impersonation:
• first intent is controlling (i.e., to make the instrument payable to
the person before him or to the person writing at the other end of
the line, in case the negotiation is by correspondence)
o except: where the name of the payee was already known
to the maker or drawer or was more particularly
identified in some manner
e.g. by some destination, description or title
Rule: The loss is thrown on the drawer in the absence of anything to show
that the drawer had any doubt as to identity of the person to whom he
delivered the paper as payee.
Reasons for this rule:
1. theory of actual intent
2. theory of negligence or estoppel
Theory of actual intent:
The drawee, in paying the paper, or the holder, in taking it upon the
indoresment of the impostor in the name of which the payee was
described, carries out the intention that the drawer entertained at the time
of the delivery of the paper to the impostor, although the intention was
conceived in consequence of fraud of the impostor as to his identity and
ownership of the property which represented the consideration.
Theory of negligence or estoppel: As between 2 innocent persons, the one
whose act was the cause of the loss should bear the consequences.
Rule if the impostor represents himself as agent of payee:
As between the drawer and drawee, or between the drawer and a holder in
due course, the loss falls on the drawee or the purchaser, as the case may
be, rather than on the drawer.
• the doctrine of actual intent does not apply because the drawer
did not regard the individual to whom he delivered the check a the
payee but merely as agent of the payee
Admission of genuineness and due execution
• when an action or defense is founded upon a written instrument,
such as a negotiable instrument, copied in or attached to the
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Victor Ramos
2C 2004-2005
corresponding pleading, the genuineness and due execution of the 1. If drawer’s signature is forged: drawee is liable because it should
instrument shall be deemed admitted know the signature of the drawer; the drawer may go after the
o unless: specifically denied under oath by the adverse forger
party 2. If payee’s signature is forged:
a. collecting bank is liable – should know the signature of
• “admission of the genuineness and due execution of a written the payee (usually its depositor)
instrument or document” = means that the party whose signature b. collecting bank is still liable - if indorsed
it bears admits: 3. If order instrument: can claim defense
a. party whose signature is forged
1. he signed it or that it was signed by another for him and w/ his b. those prior to him
authority 4. If bearer instrument: defense of forgery make by invoked only by
2. at the time it was signed, it was in words and figures exactly as the party whose signature was forged
set out in the pleading of the party relying upon it, and 5. If indorser subsequent to forgery – may be held liable because
3. any formal requisites required by law such as swearing and warranty as indorser i.e., warrants that everything in the
acknowledgment, or revenue stamp which it requires, are waived instrument is genuine
by him 6. Payee may recover from the collecting bank or drawer
7. If collecting bank guarantees, it is liable to the payee
o can go after the forger
Defenses cut off by admission of genuineness, etc. o if negligent, cannot recover (Metropolitan Bank case)
(defenses that cannot be invoked because of they are inconsistent with the
admission of genuineness, etc.) Rules as to the effect of forgery in general:
1. defense that the signature is a forgery
2. that it was unauthorized 1. signature forged or made without authority is wholly inoperative
2. no right to retain the instrument, or to give discharge therefor, or
e.g. agent signing for his principal to enforce payment thereof against any party thereto, can be
one signing in behalf of a partnership or a corporation acquired through or under such signature forged or made w/o
corporation was not authorized under its charter to sign the authority
instrument 3. as against a party precluded from setting up the forgery or want
3. that the party charged signed the instrument in some other of authority, the signature forged or made w/o authority is
capacity than that alleged in the pleading setting it out operative, and rights to retain the instrument, to give discharge
therefor, or to enforce payment thereof, can be acquired through
Defenses or New Matters which are not inconsistent with the admission of or under the signature forged or made w/o authority
genuineness, etc.:
1. payment Illustrations
2. statute of limitations 1.
3. illegality or want of consideration
B - C
4. fraud
“A” (HIDC)
5. mistake
6. compromise
7. estoppel
8. coercion B makes a note, making it appear that A is the maker thereof, by forging
9. imbecility the signature of A. B makes himself the payee and indorses the note to C,
a holder in due course.
Failure to identify promissory note will not necessarily defeat claim
• C cannot enforce the note against A because A’s signature is
Summary of Rules (based on lecture notes) inoperative and therefore did not operate to make A a party to the
instrument nor to bind him.

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2.
A X -C
“B”

A makes a note payable to the order of B. X obtains possession of the note
fraudulently and indorses it to C, by forging B’s signature.
• C cannot enforce the instrument against A because B’s signature
is inoperative and therefore, it did not operate to transfer the title
over the instrument to C.
3.
B–C
“A” (HIDC)
A makes a note payable to the order of B. Y obtains the note fraudulently
and indorses the note to C, by forging B’s signature. C indorses the note to
D. D can recover from C whose signature is genuine and therefore
operative.
• Since it is operative, C is bound as an indorser on the note. C has
aright of recourse against the forger.
Forged signature not necessary for the title of holder

• whether an indorsement on a note, not necessary to the plaintiff’s

B makes a note, making it appear that A is the maker thereof, by forging title, is genuine or forged, is immaterial to the plaintiff’s right to
the signature of A. B makes himself the payee and indorses the note to C, recover
a holder in due course.
A X --- C
C showed A the instrument before buying it and A tells C to go ahead and “B”
buy it as it is all right.

• By his declaration, A is precluded from setting up the forgery of A makes a note payable to B or bearer, and delivers the note to B. X
his signature. As against A, his signature is operative and C obtains possession of the note fraudulently and indorses the note to C, by
acquired the rights to retain the instrument, to give discharge forging the signature of B.
therefore, and to enforce payment thereof.
• C can hold A liable because instruments payable to bearer can be
Extent of the effect of forgery negotiated by mere delivery. The forged indorsement is not
1. only the signature forged or made w/o authority is stated by law necessary to the title of C.
to be inoperative
o neither instrument itself is nor the genuine signatures are Persons precluded from setting up defense of forgery
rendered inoperative
2. instrument can be enforced by holders to whose title over the 2 general classes:
instrument the forged signature is not necessary 1. those who warrant or admit the genuineness of the signature in
o e.g. indorsement of an instrument which on its face question
is payable to bearer 2. those who, by their acts, silence or negligence, are estopped from
3. instrument can be enforced against those who are precluded from setting up the defense of forgery
setting up the defense of forgery, even against those whose
signatures are forged • warrantors of genuineness include:
1. indorsers
Only forged signature inoperative 2. persons negotiating by delivery
3. acceptors
• proof that one of several signatures to a note was forged or
affixed without authority does not necessarily avoid the note as to Indorsers – warrant that the instrument indorsed by them is genuine in all
those whose signatures are genuine, it clearly would not render respects what it purports to be; cannot interpose the defense that
the note unenforceable against parties who actively procured the signatures prior to them are forged
forgery or acquiesced in it on full knowledge

A Y –-- C --– D
“B”

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• persons negotiating by mere delivery also warrant that the declaration, act or omission, be permitted to set up the forgery of
instrument negotiated by them is genuine and in all respects what such signature or signatures.
it purports to be
Estoppel may arise from:
X --- C --- D --- E --- F 1. declaration
“B” 2. an act
3. omission or negligence

X fraudulently obtains possession of the note. X then indorses the note to Example: A’s signature on note is forged. C wants to buy the note but
C, forging the signature of B, payee. C indorses the note to D, D to E, and before buying it, he asks A if the signature is A’s signature, and A says, “It
E to F, present holder. is all right.”

• F can enforce the note against C, d, and E, who, being indorsers,
cannot interpose the defense that B’s signature is forged since
they warrant that the note is genuine and in all respects what it
purports to be.
Acceptors – precluded from setting up the defense of the forgery of the
drawer’s signature
• drawee, by accepting the bill, admits the genuineness of the
signature of the drawer (Sec. 62)
Y --- X B – C --- D --- E --- F
“A”
A’s signature is really a forgery made by Y. On presentment for
acceptance, X accepts the bill. B then negotiates the bill to C, C to D, D to
E and E to F, present holder. When F demands payment from X, acceptor,
X refuses to pay on the ground that the drawer’s signature was forged.
• C can collect from A who is estopped from setting up the defense
of forgery.
Examples of estoppel by omission:
1. unreasonable delay in giving notice of forgery
2. negligence in delivery
Requisites of Unreasonable delay:
1. that the delay be unreasonable
2. that the one who ought to be apprised of the forgery must have
been prejudiced
Example: Y is the agent of B with power to sell goods and collect accounts
for B. He comes into possession of a check with B as the payee. Y indorses
and cashes the check. B delays in complaining to the collecting bank of
forgery for 3 years.
• B is barred by his delay of 3 years in complaining of forgery,
which amounts to ratification of the agent’s unauthorized acts.

• X cannot interpose the defense because by accepting the bill, he • “reasonably prompt notice” depends upon the circumstances of
admitted the genuineness of the drawer’s signature. the case

• “Precluded” – includes those cases where there are estoppels
against the party desiring to set up the forgery; includes
ratification
o usual argument against ratification: public policy –
applies to criminal and not civil liability
Estoppel by negligence in delivery
• omission may consist in negligence in delivery of the instrument
o thus, drawer may be precluded from a defense of forgery
of the payee’s indorsement if delivery by him to the
payee is negligent

Rule of Estoppel stated in the New Rules of Court: Example

• Whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe that his or
another’s signature in an instrument is genuine, and to act upon
such belief, he cannot, in any litigation arising out of such
A sold securities for Oklahoma B and drew a check against X in favor of
Oklahoma B but the check was, by mistake, mailed to Texas B who had no
right to the check. Texas B indorsed it to C and had the check cashed at Y
Bank. Oklahoma B then assigned whatever claims he had on the check to
A.

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Victor Ramos
2C 2004-2005
• A, drawer, cannot recover from Y Bank. A was estopped by its o defense: want of delivery
negligence in the delivery of the check to dispute the forgery, if it
existed. Right of parties in forgery of maker’s signature
• if maker’s signature is forged, he cannot be held liable by any
Cases of forgery: holder
1. forgery of promissory notes o reason: maker is not a party to the instrument as his
forged signature is inoperative and no right to retain,
a) forgery of an indorsement in the note enforce or discharge the note may be acquired against
b) forgery of the maker’s signature him

2. forgery of bills of exchange Rights of parties in forgery of indorsement in bill payable to order

a) forgery of an indorsement on the bill Example

b) forgery of the drawer’s signature
a. with acceptance by the drawee or X
b. without such acceptance but the bill is paid by the drawee bank
drawee
Y --- C
• if: indorsement is forged and note is payable to order --- party “B”
whose indorsement is forged and parties prior to him including the
maker cannot be held liable by the holder, whether that holder is Y fraudulently gets hold of the check and forges the signature of payee B.
a holder in due course or not Y then deposits it in C bank (collecting bank). C bank indorses the check to
o reasons: X drawee bank and collects from X drawee bank through the clearing
o indorsement is forged and therefore, inoperative and house. Y, forger, withdraws from C bank the proceeds of the check and
cannot be the basis of rights the holder has in the disappears.
note
• Rights of parties in this situation:
o law provides that no right to retain the note, give 1. drawer or A’s account cannot be charged by the drawee X for the
discharge therefore, or enforce payment thereof, amount paid and if his account is charged, the drawer A, can
could be acquired through and under the forged recover the amount from the drawee X
signature 2. drawer A has no right to recover from collecting bank C
3. drawee bank X can recover from the collecting bank C
Rights of parties in forgery of indorsement in note payable to bearer 4. payee B can recover from the drawer A as he still retained his
• party whose indorsement is forged and parties prior to him claim of debt against the drawer
including the maker: 5. or payees B can recover from the recipient of the payment, such
as collecting bank C
a) may be held liable by a holder in due course 6. C, collecting bank is liable to B, payee
o provided: note was mechanically complete before 7. payee B cannot collect from the drawee bank X
delivery 8. collecting bank C bears the loss but can recover from the person
reason: forged instrument is not necessary to to whom it has paid the check Y
the title of the holder since instruments payable
to bearer can be negotiated by mere delivery General rule:

o defense: want of delivery of a mechanically complete note
o but under Sec. 16, this cannot be a defense against
a holder in due course
b) may not be held liable by a holder in due course
Where an employee or agent fraudulently procures his employer or
principal to issue checks payable to fictitious persons not known to the
employer or principal to be fictitious, or to persons not having interest in
the proceeds of such checks, and cashes the same upon the forged

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Victor Ramos
2C 2004-2005
indorsement by him of the names of such persons, the loss falls upon the
depository (drawee) cashing it.
• reason: depository (drawee) owes to the depositor (drawer) an
absolute and contractual duty to pay the check only to the person
to whom it is made payable or upon his genuine indorsement
Drawer cannot recover from collecting bank
• reason:
o duty of collecting bank to exercise care in collection is
due only to the payee
o drawer suffered no damage
Drawee can recover from collecting bank
Payee can recover from drawer
Payee can recover from recipient of payment
• general rule: A bank or other corporation or an individual, who
has obtained possession of a check, upon an unauthorized or
forged indorsement of the payee’s signature and who collects the
amount of the check from the drawee is liable for the proceeds
thereof to the payee or other owner, notwithstanding that they
have been paid to the person whom the check was obtained.
Collecting bank liable to payee
• payment to depositor of forged signature of the payee, or to
drawee bank on the same forged signature gives rise to an
obligation to return the amounts received
o Sec. 2154 CC: if something is received when there is no
right to demand it and it was unduly delivered through
mistake, the obligation to return it arises
• the law imposes a duty of diligence on the collecting bank to
scrutinize the checks deposited with it for the purpose of
determining their genuineness and regularity
Conversion – an unauthorized assumption and exercise of the right or
ownership over goods or personal chattels belonging to another, to the
alteration of their condition or exclusion of the owner’s right
As affected by question of delivery to payee
• where there is no delivery to the payee and no title vests in him,
he ought not to be allowed to recover on the ground that he lost
32
nothing because he never became owner of the check and still
retained his claim of debt
• drawer could not recover from the bank and the latter from the
purchaser, such as the collecting bank
Payee cannot recover from drawee
• general rule: an action cannot be maintained by a payee of the
check against the bank on which it was drawn
o unless: the check has been certified or accepted by the
bank on which it was drawn
• the certification or acceptance establishes privity
of contract between drawee bank and payee or
holder of the check
Rights of parties in forgery of indorsement in bill payable to bearer
• in promissory notes, the holder can recover if he is a holder in due
course but not if he is not a holder in due course
Rights of parties in forgery of drawer’s signature where drawee has
accepted bill
A’s signature appears on a bill drawn against X, drawee bank. A’s signature
was forged by Y. B, payee, indorses the bill to C. C goes to X and presents
the bill for acceptance. X accepts. X discovers the forgery and when
required by C to pay, X refuses to pay on the ground that A’s signature is
forged.
• X cannot set up the defense of forgery because when he accepted
the bill, he admitted the genuineness of the signature of A, and
therefore, he cannot be heard to say that the signature is a
forgery.
• Drawer A is not liable as his signature is inoperative and
therefore, he is not a party to the bill.
Rights of parties in forgery of drawer’s signature where drawee has not
accepted bill but paid it
B forges the signature of A in a check, with A appearing as the drawer. The
drawee is X bank. B places himself as the payee and indorses to C, C to D.
D presents the check for payment to X and X pays D.
• In the absence of preclusion from setting up forgery by warranty
as in the case of indorsers, or by estoppel as in the case of
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Victor Ramos
2C 2004-2005
negligence, the drawee bank, X, cannot recover from the drawer
or the recipient of the proceeds such as D.
• rule: As between equally innocent persons, the drawee who pays
money on a check or draft the signature to which is forged, cannot
recover the money from the one who received it.
o reason: drawee so paying is considered as constructively
negligent; presumed negligent in failing to meet its
obligation to know the signature of its correspondent
o prime duty of a bank is to ascertain the genuineness of
the signature of the drawer or depositor on the check
being encashed; expected to use reasonable business
prudence in accepting and cashing a check presented to
it
• payment of a forged check does not include or imply its
acceptance referred to in Sec. 62
o payment – final act which extinguishes the act
o acceptance – promise to pay in the future and continues
the life of the bill
o by paying the check, the drawee is presumed negligent
or deemed constructively negligent
• parties negotiating by indorsement and delivery or by mere
delivery subsequent to forgery are precluded from setting up the
defense of forgery and may be held liable under their warranties
or liabilities stated in Sec. 65 and 66
Example
B --- C --- D --- E --- F
“A”
as maker
• F can hold B, C, D or E liable because as indorsers, they warrant
that the note is genuine and in all respects what it purports to be.
• If they are general indorsers, they warrant that the note is valid
and subsisting; therefore, they cannot be heard thereafter to deny
the genuineness of A’s signature.
Y --- C --- D --- E --- F
“B”
33
• F can hold B, C, D or E liable because as indorsers, they warrant
that the note is genuine and in all respects what it purports to be.
Negligence in forgery of indorsements in bill
• qualification to the general rule: the drawer himself was not
negligent or guilty of such conduct as would estop him from
asserting the forged character of the indorsement as against the
depository (drawee) and that if he was negligent or guilty of such
conduct, the loss must fall on him
• depositor’s negligence or conduct which would estop him must be
the proximate cause of the payment by the depository upon the
forged indorsement
1. negligence of drawers in making possible forged indorsements by
their swindling clerks, and not discovering or reporting them
promptly, barred recover from the drawee bank by the drawers as
where there is negligence in delivery
2. unreasonable delay in giving notice will bar recovery by the
drawer from the drawee bank
Where mere possession of check with forged signature does not make the
company officer possessing it guilty
• in Rañon v. CA, SC held that president of the company, being
president and general manager of the firm, was naturally the
possessor of the firm’s negotiable instruments and other
important business papers, creating doubts on his having been the
one who ordered the forging of the Treasurer’s signature
Extent of depositor’s duty
• duty of verifying the genuineness of the indorsements rests on the
depository (drawee) cashing the check
• depositor may rely upon the depository’s proper performance of
this duty at least in the absence of evidence that he was familiar
with the signature of the payee
• where a depository is using its own personalized checks, its failure
to provide adequate security measures to prevent forgeries of its
checks constitutes gross negligence and bars it from setting up
the defense of forgery (MWSS v. CA)
Failure of depositor to make prompt reconciliation of the monthly bank
statements furnished by the bank constitutes negligence for which the
bank cannot be blamed in case depositor’s checks are forged
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Victor Ramos
2C 2004-2005
• when a person opens a checking account with a bank, he is
given blank checks
• when issuing a check, he should fill out the check stub which
contains the number of the check, the date of its issue, the
name of the payee and the amount
• banks have the custom of sending to their depositors a
monthly statement of the status of their accounts
• the depositor has the duty to carefully examine the bank’s
statement, his cancelled checks, his check stubs and other
pertinent records w/in reasonable time and to report any
errors w/o any unreasonable delay
Drawer’s negligence in forgery of his signature
• a depositor (drawer) is generally under a duty toward his
depository (drawee) to examine the returned vouchers and notify
it w/in reasonable time of any mistakes or inaccuracies in the
amounts of the check or forgeres of the depositor’s signature
Drawer generally not negligent where his check is stolen (PNB v. Quimpo)
Payee’s negligence in forgery of drawer’s signature
• payee in a check or draft may be supposed to have knowledge of
the circumstances under which it is drawn and generally, of the
person drawing it, and is in a better situation to judge the
genuineness of the paper than are indorsees
Example
X “A” collecting bank
drawee bank
Y --- B
“A” collecting bank
Y forges the signature of A, making A appear as drawer in a check. B,
payee-bank, pays for the check to Y, who is a stranger to B, without
requiring proof as to identity or making inquiries in regards to Y. Then B
collects from X, drawee bank.
• X can recover from B bank which has been negligent.
• The doctrine of comparative negligence applies and the
constructive negligence of the drawee bank is overcome by the
active negligence of the payee bank in not using the ordinary
34
precautions which are used by banks e.g. demanding identification
of the person presenting the check and putting forth some inquiry
as to its genuineness.
Indorser’s negligence
• as between innocent persons, the loss must fall on the drawee
• in determining the relative rights of a drawee who, under a
mistake of fact, has paid, and a holder who has received such
payment, upon a check to which the drawer’s name was forged, it
is only fair to consider the question of diligence or negligence of
the parties in respect thereto
• if the one to whom payment was made was negligent in not doing
something which plain duty demanded and if done, would not
have entailed loss on anyone, he is not entitled to retain the
moneys paid through a mistake on the part of the drawee bank
Duty of purchaser of check or bill
• bound to satisfy himself that the paper is genuine
• by indorsing or presenting it for payment or putting it into
circulation before presentation, he impliedly asserts that he has
performed his duty and the drawee who has, without actual
negligence on his part, paid the forged demand, may recover the
money paid from such negligent purchaser
Example
X
drawee bank
Y --- B
Y forges the signature of A, making A appear as drawer in a check. B,
payee-bank, pays for the check to Y, who is a stranger to B, without
requiring proof as to identity or making inquiries in regards to Y. Then B
collects from X, drawee bank.
• Drawee X, while constructively negligent, must not be actually or
actively negligent while the recipient of the proceeds must be
actually negligent. In this case, the drawee can recover what it
has paid.
• Where the drawee X is not merely constructively negligent but is
also actively or actually negligent, its actual negligence will offset
the actual negligence of the recipient and leave effective the
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2C 2004-2005
constructive negligence of the drawee X. In this case, drawee
cannot recover from the recipient what it has paid.
Basic rule underlying estoppel by negligence:
Where loss, which must be borne by one of two parties alike innocent of
forgery, can be traced to the neglect or fault of either, it is reasonable that
the one through whose name it has succeeded, must bear the loss, even if
he is innocent of intentional fraud.
Forgery of both drawer’s and payee’s signature
• differences in opinion
• indorser guarantees the genuineness of prior indorsements and if
the indorsement of the payee is forged, the indorser is liable on
his warranty to all to whom it runs
• drawee is held not to be a holder in due course, and therefore is
not entitled to the benefit of the indorser’s warranty
• as far as the drawee is concerned, it’s as if the paper bore no
indorsements and ordinary rules apply, making the right to
recover depend on the presence or absence of negligence on the
part of the one who negotiated the paper and viewed in light of
subsequent negligence of the drawee
Other rules – change of position
• no matter how negligent the one receiving the proceeds has been,
he is entitled to receive prompt notice of the forgery as to enable
him to preserve whatever rights he may have against the forger
or other persons to whom he may be entitled to look for
reimbursement, and if the drawee is negligent in this respect, he
may be prevented from recovering his money
Paper forwarded for collection
• the mere fact that the paper bears an indorsement “for collection”
should warn the drawee that the responsibility of the genuineness
of the paper is placed upon it
Forgery of signature in instrument is falsification of private document
• any private person who shall counterfeit or imitate any
handwriting or rubric in any kind of commercial document, or
cause it to appear that persons are parties thereto when in fact
they are not, is guilty of falsification of private documents (Arts.
171 and 172 RPC)
• damage or intent to cause damage is not necessary
35
Swindling through post-dating of checks
• defrauding of another by post-dating a check or issuing a check in
payment of an obligation when the offender had no funds in the
bank or his funds deposited therein were not sufficient to cover
the amount of the check
• failure of the drawer of the check to deposit the amount necessary
to cover his check w/in 3 days from receipt of notice of dishonor =
prima facie evidence of deceit constituting false pretense or
fraudulent act
Forger need not imitate genuine signature
• not necessary that forger attempt to imitate or simulate the
signature being forged
• one who signs the name of another w/o the latter’s authority, as
drawer in a check, and thereby makes it appear falsely that the
alleged drawer of the check was real party thereto, when as a
matter of fact he did not participate in the transaction is guilty of
falsification
Encashment of check by impostor
• in an action to recover the face value of a check paid to a spurious
claimant for arrears in army pay against the person who identified
and guaranteed payment thereof, the Republic of the Philippines,
as a legal owner or possessor of the money delivered through
fraud, is the proper party in interest
• money paid through check to an impostor still belongs to the legal
owner or possessor thereof
• person who identifies an impostor to whom the amount of the
check is paid is a co-principal by direct participation in the
commission of the crime if he has guilty knowledge of the case
• stipulation: “Payee Identified Payment Witnessed and Guaranteed
if Erroneously Delivered Through Identification” does not create
the contract of guaranty
o what is guaranteed or warranted is the identity of the
payee by the identifier to the debtor
o where the payee is an impostor, the identifier becomes
primarily liable in view of the breach of his warranty
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Commercial documents or papers w/in the meaning of Art. 172 RPC –
documents or instruments which are used by merchants or businessmen to
promote or facilitate trade or credit transaction
- include:
1. letters of exchange
2. letters of credit
3. drafts
4. trade acceptance
5. checks
6. notes or papers issued in the course of a business
transaction
7. quedans
8. bonds
9. books of accounts
10. any negotiable instrument
San Carlos Milling v. BPI [forged indorsement]
• A bank is bound to know the signatures of its customers; and if it
pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was
forged.
Great Eastern Life v. HSBC [forged payee’s signature]
• The legal presumption is that the collecting bank would not have
honored a check that was not endorsed by the payee. Thus, the
drawer had the right to assume that the payee endorsed the
check. It was the collecting bank’s duty to know that the payee’s
endorsement was genuine before cashing the check.
PNB v. Quimpo [forged drawer’s signature]
• The prime duty of a bank is to ascertain the genuineness of the
signature of the drawer or the depositor on the check being
encashed. It is expected to use reasonable business prudence in
accepting and cashing a check presented to it.
PNB v. CA [forged drawer signature]
• When one of two innocent persons must suffer by the wrongful act
of a third person, the loss must be borne by the one whose
negligence was the proximate cause of the loss or who put into
the power of the third person to perpetrate the wrong.
MWSS v. CA [negligence by drawer]
36
• Where a depositor is using its own personalized checks, its failure
to provide adequate security measures to prevent forgeries of its
checks constitutes gross negligence and bars it from setting up
the defense of forgery.
• Failure of depositor to make prompt reconciliation of the monthly
bank statements furnished by the bank constitutes negligence for
which the bank cannot be blamed in case depositor’s checks are
forged.
• Depository bank cannot be blamed for not detecting fraudulent
checks where depositor uses its own personalized checks.
Republic v. Equitable Bank [negligence by drawee]
• Where the Treasury had not only been negligent in clearing its
own warrants, but had, also, thereby induced the two defendant
banks to pay the amounts thereof to their respective depositors,
and where, moreover, the irregularity of said warrants was
apparent on the face thereof from the viewpoint of the Treasury,
and said defendant banks had not been informed of said
irregularity until after the said warrants had been cleared and
honored, it is held that the loss of the amounts represented by
said warrants is mainly imputable to acts and omissions of the
Treasury, for which said banks should not and cannot be
penalized.
PNB v. National City Bank of New York [negligence by depositor and
collecting bank]
• When a depositor accepts the checks from unknown persons and
fails to detect the forgery, it is negligent.
• When the collecting bank did not exert reasonable prudence and
took the check from a stranger without other identification, it is
negligent.
• As a general rule, an action cannot be maintained by the payee
against the drawer bank unless the bank has accepted the check.
• As a rule, a drawee of a check, who is deceived by a forgery of the
drawer’s signature may recover the payment, unless his mistake
has placed an innocent holder of the paper in a worse position
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Victor Ramos
2C 2004-2005
than he would have been in if the discovery of the forgery had
been made on presentation.
• As a general rule, acceptance is not a necessary step in payment
of a check. Acceptance implies a subsequent negotiation of the
checks, whereas after payment, the check is no longer negotiable.
Acceptance under Sec. 191 means an acceptance “completed by
delivery or notification,” and this is incompatible with the idea of
payment, wherein no such delivery of the check or notification
occurs.
• As an exception, nothing says a check may not be presented for
accepted anyway before they are paid. In that case there is a
“certification” which is equivalent to acceptance. This certification
is an assent to the order of the drawer. In this case the Sec. 62
warranty will apply. When a check is certified the drawer and all
indorsers are discharged from liability.
• Where a check is accepted or certified by the bank on which it was
drawn, the bank is estopped to deny the genuineness of the
drawer’s signature and his capacity to issue the instrument.
Summary of Rules:
1. If check is certified by drawee bank:
• the bank is estopped to deny the genuineness of the drawer’s
signature and his capacity to issue the instrument
2. If check is certified by drawee bank then paid:
• it cannot recover from a holder who
a. did not participate in the forgery and
b. did not have actual notice thereof
3. Payment of a check does not include or imply its acceptance in the
sense that this word is used in Sec. 62 NIL.
4. If check is paid, whether accepted or not
• the drawee can not recover from
a. a holder in due course
b. not chargeable with any act of negligence or disregard of
duty
5. Holder of forged check can retain money if:
a. show that the duty to ascertain the genuineness of the
signature rested entirely upon the drawee, and
b. that the constructive negligence of such drawee in failing
to detect the forgery was not affected by
37
• any disregard of duty on the part of the
holder, or
• by failure of any precaution which, from his
implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to
believe he had taken;
6. Drawee without actual fault/negligence:
• his constructive fault in not knowing the signature of the drawer
and detecting the forgery will not preclude his recovery from one
a. who took the check under circumstances of suspicion and
without proper precaution or
b. whose conduct has been such as to mislead the drawee
or induce him to pay the check without the usual scrutiny
or other precautions against mistake or fraud;
7. Duty of purchaser of check:
• is bound to satisfy himself that the paper is genuine and
• that by indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that he
performed his duties;
8. Since the drawer was as much the customer of the collecting bank
as the drawee, the presumption that a drawee bank is bound to
know more than any indorser the signature of its depositor does
not hold.
9. Purchasing the papers from unknown persons without making any
inquiry as to the identity and authority of the persons negotiating
and indorsing them, acted negligently and contributed to the
constructive negligence in failing to detect the forgery.
10. Under the circumstances of this case, if the collecting bank is
allowed to recover, there will be no change of position as to the
injury or prejudice of the depositor.
Gempesaw v.CA [negligence by drawer and drawee]
• As a general rule, a drawee who paid forged check cannot charge
the drawer’s account; except when the drawer is guilty of such
negligence which causes the bank to honor the check and is thus
precluded from setting up forgery as a defense.
• When forger was a person not associated with the maker/drawer,
there is no duty on the part of the drawer to look for forged
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Victor Ramos
2C 2004-2005
endorsements on his cancelled checks but such drawer has the
duty to set up an accounting system/procedure to prevent the
forgery of indorsements. If the drawer learns of such forgery he
has the duty to report it to the bank. His negligence to discover
or report such forgeries make shim lose the right to recover from
the drawee. He is precluded from setting up the defense of
forgery.
• When forger was an agent of the drawer, the negligence of the
depositor (principal) to act as a prudent businessman e.g., did not
verify checks nor bank statements, will prevent recovery.
• A drawee cannot legally refuse to honor a check drawn against it
with more than one indorsement if there is nothing irregular with
the check. The drawee cannot be compelled by a mere holder to
honor the check but the drawee will be liable fro damages to the
drawer.
Banco de Oro v. Equitable Banking Corporation [liability of indorser]
• When the endorsement is forged, the collecting bank or last
endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior indorsements.
• While the drawer generally owes no duty of diligence to the
collecting bank, the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it for the
purpose of determining their genuineness and regularity. The
collecting bank being primarily engaged in banking holds itself
out to the public as the expert and the law holds it to a high
standard of conduct.
• Although the subject checks are non-negotiable the responsibility
of petitioner as indorser thereof remains. To countenance a
repudiation by the petitioner of its obligations would be contrary
to equity and would deal a negative blow to the whole banking
system of this country.
• In presenting the checks for clearing and payment, the collecting
bank’s express guarantee on the validity of “all prior
indorsements” serves as a clear warranty, without which the
drawee bank (in this case, also the drawer) would not have paid
the checks. If the warranty is proven to be false and inaccurate,
the collecting bank is liable for any damage arising out of the
falsity of the representation. The principle of estoppel effectively
prevents the collecting bank from denying liability for any
38
damage sustained by the drawee bank and effectively prevents
the collecting bank from denying the existence of the checks.
BPI v. CA [liability of drawee bank and collecting bank]
• As a general rule, the collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements.
• As a general rule, if the signature is forged, it is wholly inoperative
and payment made through or under such signature is ineffectual
or does not discharge the instrument except as against those
precluded from setting up the defense of forgery or want of
authority.
• Doctrine of Last Clear Chance: (inapplicable in this case but I’m
placing it here for reference)
o The test by which to determine the existence of
negligence in a particular case: did the defendant in
doing the alleged negligent act use that reasonable care
and caution which an ordinarily prudent person would
have used in the same situation? If not, then he is guilty
of negligence. (Picart v. Smith)
• Doctrine of Proximate Cause: (Vda. de Bataclan v. Medina)
o that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces
the injury, and without which the result would not have
occurred
o that acting first and producing the injury, either
immediately or by setting other events in motion, all
constituting a natural and continuous chain of events,
each having a close causal connection with its immediate
predecessor, the final event in the chain immediately
effecting the injury as natural and probable result of the
cause which first acted, under such circumstances that
the person responsible for the first event should, as an
ordinarily prudent and intelligent person have reasonable
ground to expect the moment of his act or default that an
injury to some person might probably result therefrom
Jai Alai Corp. of the Phil. v. BPI [liability of indorser]
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Victor Ramos
2C 2004-2005
• Lapse of 3 months after collecting from bank obtained proceeds of
checks from drawee-bank before it informed depositor of fact that
the checks were forged were not material where collecting bank
acted promptly upon being informed of forgery. Moreover,
depositor of a check as indorser warrants that it is genuine and in
all respects what it purports to be.
• One who accepts and encashes a check form an individual
knowing that the payee is a corporation does so at his peril.
• One who indorses a bearer instrument incurs liability of general
indorser that instrument is genuine.
Metropolitan Bank and Trust Company v. CA [negligence of collecting bank]
• The agent (collecting bank Metrobank) is responsible not only for
fraud, but also for negligence for having misled the depositor that
the it may withdraw from its account not only once or even twice
but three times when in reality, the treasury warrants have not
yet been cleared.
Republic Bank v. Ebrada [liability of last indorser]
• Only the negotiation based on the forged or unauthorized
signature which is inoperative. (Beam v. Farrel)
• The drawee of a check can recover from the holder the money
paid to him on a forged instrument. It is not supposed to be its
duty to ascertain whether the signatures of the payee or indorsers
are genuine or not. This is because the indorser is supposed to
warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to
holders in due course. (State v. Broadway Mutual Bank)
• The fact that the person who encashed the check wherein the
signature of the payee was forged turned over the proceeds to the
one who indorsed said check to the said holder would not exempt
the encasher from liability as by doing so he acted as an
accommodation party.
Manila Lighter v. CA [negligence of payee and collecting bank]
• When the payee allows a state of affairs where employees could
appropriate its checks and falsify the indorsement of its manager
with impunity, it is negligent.
Associated Bank v. CA [negligence of collecting bank]
39
• When the collecting bank permitted the encashment of crossed
checks by a person not duly authorized by the payee, it is
negligent.
Associated Bank v. CA [liability of drawer, collecting bank and drawee]
• The drawer is negligent when it allows its retired hospital
administrative officer to collect allotment checks when he had no
authority to do so at the time he collected them. The drawee bank
can rightly charge its account.
• The drawee bank is negligent when it breached its duty to pay
only according to the terms of the check.
• The collecting bank is liable because it is privy to the depositor
who negotiated the check. The bank knows him, his address, and
his history because he is their client. It is also in the better
position to detect forgery, fraud, or irregularity in the
endorsement. It is the last indorser and is bound by its
warranties as an indorser and cannot set up defense of forgery as
against bank.
PCIB v. CA [liability of drawer, collecting bank and drawee]
• Banks are liable for the wrongful/tortuous acts and declaration or
negligence of its officers and agents in the scope and course of
their employment.
• The collecting bank is liable when instead of remitting the
proceeds to the payee, it prepared 2 manager’s checks which
enabled the syndicate to encash them, failed to verify the
authority of the drawer’s employee to negotiate the checks and
diverted funds for the payee without the payee’s authority.
Westmont Bank v. Ong [liability of collecting bank]
• The duty of the collecting bank is to ensure that the amount gets
to the rightful payee or to his order, and a breach of that duty
because of a blatant act of negligence on its part which violated
the payee’s rights.
• As a general rule, the bank who has obtained possession of a
check upon an unauthorized or forged endorsement of the payee’s
signature and who collects the amount of the check from the
drawee, is liable for the proceeds thereof to the payee or other
owner.
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
• The acts of the payee in contacting the family and the collecting
bank before filing the case 5 months later cannot be construed as
undue delay in or abandonment of assertion of his rights.
Traders Royal Bank v. RPN, IBC and BBC [liability of drawee/drawer]
• When a drawee/drawer bank paid crossed checks to a person
other than the payee indicated on the face of the checks, it is
liable because it has the duty to know or ascertain the endorser’s
title to the check.
Ilusorio v. CA and Manila Banking Corp. [negligence by drawer]
• When a drawer grants too much power to his secretary by
entrusting to her his credit cards and checkbook with blank
checks, and fails to check his statement of accounts, he is
negligent and therefore precluded from setting up forgery as a
defense.
Sec. 124. Alteration of instrument; effect of.
Where a negotiable instrument is materially altered without the
assent of all parties liable thereon it is avoided, except as against a
party who has himself made, authorized, or assented to the
alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the
hands of a holder in due course, not a party to the alteration, he
may enforce payment thereof according to its original tenor.
Rights of one not holder in due course
• an instrument that is materially altered is avoided in the hands of
one who is not a holder in due course as against any prior party
who has not assented to the alteration
e.g.
A – B – C- D – E – F
(not HIDC)
A makes a note for P1,000 payable to the order of B, who then negotiates
it to C. With the consent of B, C alters it to P4,000 and thereafter
negotiates if to D, D to E, and E to F, not a holder in due course
• F cannot collect on the instrument as it is avoided in his hands
against A
Where instrument not avoided as to holder not in due course
40
• exceptions:
o i.e., instrument is not avoided against
(1) a party who has made the alteration
(2) a party who authorized or assented to the alteration and
(3) subsequent indorsers
e.g.
A – B – C- D – E – F
(not HIDC)
A makes a note for P1,000 payable to the order of B, who then negotiates
it to C. With the consent of B, C alters it to P4,000 and thereafter
negotiates if to D, D to E, and E to F, not a holder in due course
• B would be liable for P4,000 to F – assented to alteration
• C is liable to F for P4,000 – party who made the alteration
• D and E are liable to F for P4,000 – subsequent indorsers
Rights of holder in due course
• may enforce payment according to its original tenor
e.g.
A – B – C- D – E – F
(HIDC)
A makes a note for P1,000 payable to the order of B, who then negotiates
it to C. With the consent of B, C alters it to P4,000 and thereafter
negotiates if to D, D to E, and E to F, a holder in due course.
• F could recover from A P1,000, the original tenor of the note
No distinction between fraudulent and innocent alteration
• Sec. 124 does not make a distinction between alteration
made fraudulently and alteration made innocently
o seems to include both such that a holder in due course
can enforce the instrument according to its original tenor
regardless was innocent or fraudulent
Right to collect on original consideration
• when the alteration was not made fraudulently, it will not relieve
the parties from their original obligation
Alteration as a crime
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
• Art. 172 RPC – penalty of prision correcional in the medium and
maximum periods and a fine of not more than P5,000 shall be
imposed upon any individual who commits any of the falsifications
enumerated in Art. 171 in any letter of exchange or any other
kind of commercial paper
• falsifications pertinent to alteration of negotiable instruments as
enumerated in Art. 171:
(2) causing it to appear the persons have participated in any act or
proceeding when they did not in fact so participate
(5) altering true dates
(6) making any alteration or intercalation in a genuine document which
changes its meaning
Where a drawee bank pays altered amount, drawer has a right to have his
account debited with correct amount only (Chief of Staff v. PNB)
• when a bank is guilty of negligence i.e., when, by proper exercise
of proper care, it would have discovered the forgery, it must bear
the loss, the fact that the depositor failed in his duty to examine
the statement of his account notwithstanding
Sec. 125. What constitutes a material alteration.
Any alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment;
d) The number or the relation of the parties;
e) The medium or currency in which payment is to be made;
f) Or which adds a place of payment where no place of payment
is specified, or any other change or addition which alters the
effect of the instrument in any respect, is material alteration.
• material if it alters the effect of the instrument
e.g.
1) substituting the words “or bearer” for “order”
2) writing “protest waived” above blank indorsements
3) a change in the date from which interest is to run
4) a check was originally drawn as follows:
“Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G. L.
or order $9 fifty cents CTR.”
41
o insertion of figure 5 before the figure 9
5) adding the words “with interest” with or without a fixed rate
Illustrative cases of Immaterial Alterations:
1) changing “I promise to pay” to “We promise to pay” where there
are 2 makers
2) adding the word “annual” after the interest clause
3) adding the date of maturity as a marginal notation
4) filling in the date of actual delivery where the makers of a note
gave it with the date in bank, “July …”
5) alteration of marginal figures of a note where the sum stated in
words in the body remain unchanged
HSBC v. People’s Bank [altered name of payee]
• The 24-hour rule is comprehensive and covers both forged and
altered checks.
• Whatever remedy the drawee has would not lie against the
collecting bank but as against the party responsible for changing
the name of the payee. Its failure to call the attention of the
collecting bank as to such alteration until after the lapse of 27
days would, in the light of the Central Bank’s 24-hour rule, negate
whatever right it might have had against collecting bank.
Atlantino v. Auditor General [altered amounts]
• Since the checks were fraudulently altered by the payee as to
their amounts, they are wholly inoperative. No right of payment
against any party could not have been acquired.
• Payment of checks by the collecting bank to payee without
previously clearing said checks with the drawee bank is contrary
to normal or ordinary banking practice especially where drawee
bank is a foreign bank and the amounts involved are large and
bars recovery.
PNB v. CA [serial number]
• An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument
that purports to modify in any respect the obligation of a party or
an unauthorized addition of words or numbers or other change to
an incomplete instrument relating to the obligation of a party. In
order words, a material alteration is one which changes the items
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
which are required to be stated under Section 1 of the Negotiable
Instruments Law.
• Alteration of a serial number is not material. The drawee bank
cannot refuse to accept a check on the ground that the serial
number of said check was altered, since the serial number is an
item which is not essential requisite for negotiability under Section
4 of the Negotiable Instruments Law.
American Bank v. Macondray [altered indorsement]
• In cases where material alteration is undertaken without the
consent of the obligor then the obligor is relieved from liability.
Montinola v. PNB
• The insertion of the words “Agent, Philippine National Bank,”
which converts the bank from a mere drawee to a drawer and
therefore changes its liability, constitutes a material alteration of
the instrument without the consent of the parties liable thereon,
and so discharges the instrument.
Republic Bank v. CA [altered amount]
• It is true that when an endorsement is forged, the collecting bank
or last endorser bears the loss. However, the general rule should
be read together with the 24-hour regulation on clearing house
operations. When the drawee bank fails to return a forged or
altered check to the collecting bank within 24-hour clearing
period, the collecting bank is absolved from liability.
• Unless an alteration is attributable to the fault of the drawer
himself, the remedy of the drawee bank that negligently clears a
forged and/or altered check for payment is against the party
responsible for the forgery or alteration, otherwise, it bears the
loss. It may not charge the amount so paid to the account of the
drawer, if the latter was free from blame, nor recover from the
collecting bank if the latter made payment after proper clearance
from the drawee.
II. Consideration
Sec. 24. Presumption of consideration.
Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person to whose
signature appears thereon to have become a party thereto for
value.
42
e.g. A makes and issues a note to the order of B in the sum of P1,000.
• presumption: A received from B some valuable consideration more
or less equivalent to P1,000
• the presumption is disputable
• unnecessary to aver or prove consideration in an action based
upon a negotiable instrument
• presumption exists whether or not the words “value received”
appear on the instrument
• any allegation which sets forth the existence of valuable
consideration for the transfer of an instrument by indorsement is
sufficient, notwithstanding the failure to allege specifically the
amount and nature of the consideration which was in fact paid to
the indorser
• mere introduction of the instrument sued on in evidence, prima
facie entitles the plaintiff of recovery, unless overcome by
evidence
• person claiming that a payee or indorsee did not give valuable
consideration for an instrument must prove that there really was
no valuable consideration given
• effect: PN executed is without just, real or legal consideration
o thus: payment of said not is not demandable
BPI v. Laguna Cocoanut Oil Co.
• Unless otherwise stated in the instrument, a negotiable
promissory note implies prima facie valuable consideration moving
to the maker, whether the words “value received” appear in it or
not.
Travel-on v. CA and Miranda
• Where a drawer claims to have issued checks for purposes of
accommodation, the drawer has the burden of proving that he had
indeed issued the checks without sufficient consideration.
Pineda v. Dela Rama
• Where the consideration for a promissory note is to influence
public officers in the performance of their duties, such
consideration is contrary to law and public policy and the
promissory note is void ab initio and no cause of action for the
collection cases can arise from it.
42
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Victor Ramos
2C 2004-2005
Sanson v. CA
5) third person’s existing debt
• The genuineness of the drawer’s (deceased’s) signature having 6) bank credits
been shown, he is prima facie presumed to have become a party
to the check for value and with the failure to rebut or contradict B, payee of a check, deposits the check in his bank.
this presumption, it has become conclusive. The bank credits his account for the amount of the check.

Sec. 25. Value, what constitutes. 7) exchange of negotiable papers

Value is any consideration sufficient to support a simple contract.
An antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on demand or at a
future time.
Consideration – inducement to a contract; cause, motive, price or
impelling influence which induces a contracting party to enter into
a contract
Valuable consideration – in general terms, consists either in some right,
interest, profit or benefit accruing to the party who makes the contract, or
some forbearance, detriment, loss or some responsibility to act, or labor,
or service given, suffered or undertaken by the other side
- obligation to give, to do or not to do, in favor of a party who makes the
contract, such as the maker or indorser
e.g.
1) obligation to give
A sells a piece of land to B. B gives a check.
o valuable consideration for the check: delivery of the land
to B
2) obligation to do
A repairs B’s car. B issues a check in favor of A.
o valuable consideration for the check: A’s repairing the car
A issues a note to B. B in return for the note, issues a check in favor of
A.
• consideration which supports the obligation as to the principal
debtor is sufficient consideration to support the obligation of the
surety or guarantor
• consideration founded on the ff. is good consideration but not
valuable consideration as sufficient to support the obligation of a
bill or note, as between the original parties:
1) love and affection, as between husband and wife, etc.
2) upon gratitude
3) mere moral obligation
• presumption of valuable consideration under Sec. 24 is prima facie
and can be rebutted (Pineda v. dela Rama)
Sec. 26. What constitutes holder for value.
Where value has at any time been given for the instrument, the
holder is deemed a holder for value in respect to all parties who
become such prior to that time.
Holder for value – one who gives valuable consideration for an instrument
issued or negotiated to him; - refers also to any holder of an instrument for
which value has been given at any time

3) obligation not to do e.g.

A promises not to put up a gasoline station w/in 1 km. from the 1) D indorses a note to E.
gasoline station of B. B gives a check for P5,000. E gives valuable consideration to D for the
indorsement of the note.
o sufficient consideration: undertaking not to put up
gasoline o E would be a holder for value

4) pre-existing debt 2)
A owes B P1,000 payable on Dec. 31, 1949. He fails to pay cash
and issues a check to B for that amount. A – B – C- D – E – F

o sufficient consideration: pre-existing debt

43
By: Joyce Briones notes from Agbayani; with case doctrines 44
Victor Ramos
2C 2004-2005
A, maker, negotiates a note to B, payee, B indorses to C, C to D, D to E, 1) A issues to B a P1,000 check in payment of forged certificates of
now holder an last indorsee. B gives A no valuable consideration. C is stock
known to have given valuable consideration to B for the indorsement of the 2) note given for future illicit cohabitation
note. It is not known whether D and E gave valuable consideration. 3) note by husband to his wife, upon promise of the wife to withdraw
all opposition to proceedings for divorce instituted by him
• under the law, as to A, B and C, E is a holder for value 4) note given in consideration of an agreement to stifle of hinder a
public prosecution for a felony
Sec. 27. When lien1 on instrument constitutes holder for value. 5) when the consideration for commercial paper is fraudulent
Where the holder has a lien on the instrument arising either from
contract or by implication of law, he is deemed a holder for value to Failure of consideration – neglect or failure of 1 of the parties to give, to do
the extent of his lien. or to perform the consideration agreed upon

e.g. A makes a note in the sum of P1,000 payable to the holder of B. e.g.
B owes C P600. C has a lien on the note to the extent of P600 and to that 1) A issues to B a P1,000 check in payment for certificates of stock
extent, is a holder for value. but B fails to deliver the stocks
2) A thinks he owns a certain piece of property but there is judgment
• If A, maker, has defenses against B, indorser (e.g. absence of against him and the execution has not been taken and A conveys
consideration), C, even if a holder in due course can collect from A that property for B’s note
only P600, the extent of his lien.
3) consideration for a bill or note for the use of an invention fails
• reason for rule: C is a holder in due course only for P600 because where the patent is not obtained
he is a holder for value only for that amount
Absence of consideration and failure of consideration, distinguished
o for the balance of P400, he is not a holder for value, and
since being a holder for value is 1 of the requisites for a Absence of consideration
holder in due course, he cannot be a holder in due course Failure of consideration
as far as the P400 is concerned embraces transactions implies giving of valuable
where no consideration consideration was
• If defenses of A are real defenses: C can collect nothing because A was intended to pass contemplated but that it
can interpose those defenses against C as to the whole amount of failed to pass
the instrument
• both are defenses as against any person not a holder in due
• If A, maker has no defenses at all against B, indorser: C can course but not against a holder in due course
collect from A the whole P1,000 but has the obligation to hold the
balance of P400 for the benefit of the indorser e.g. A makes a note for P1,000 issued by him to B or order for and in
consideration of 10 forged shares of stock. B indorses the note to C who
Sec. 28. Effect of want of consideration. knows 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 • A can interpose the defense of want of consideration against C
consideration is a defense pro tanto, whether the failure is an because C is not a holder in due course. Therefore, C cannot
ascertained and liquidated amount or otherwise. collect.

Absence of consideration – total lack of any consideration Effect of want of consideration between drawer and acceptor as to holder
e.g. • drawee, by accepting unconditionally the bill, becomes liable to
the holder, and cannot allege want of consideration between him
and the drawer
1
Lien – claim, encumbrance, or charge on property for payment of some
debt, obligation or duty (Sullins v. Sullins) (Black’s Law Dictionary)

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• if the holder has been given value to the drawer and has no
knowledge of any equity between the drawer and the drawee, he
is in the same situation as an indorsee in good faith
Partial failure of consideration
e.g.
B, payee, gave to A, maker, valuable consideration to the extent of P400.
A can interpose want of consideration only pro tanto or proportionate, that
is, to the extent only of P600.
• If C were not a holder in due course: he can collect from A only
P400
• If C were a holder in due course: he can collect P1,000 only
because failure or absence of consideration, whether full or
partial, is not available against a holder in due course
Effect of inadequacy of consideration
• inadequacy of consideration is not a sufficient ground for either
legal or equitable relief, yet it may be shown as evidence of fraud
(and therefore boost one’s claim under Art. 1355 CC: “except in
cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or
undue influence”)
Sec. 29. Liability of accommodation party.
An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
Requisites in order that a party may be considered an accommodation
party:
1. he must be a party to the instrument, signing as maker, drawer,
acceptor or indorser
2. he must not receive value therefore
3. he must sign for the purpose of lending his name or credit
• it is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the
instrument
Accommodation maker
45
e.g.
B needs P1,000 but nobody would lend him because he has no property
which he can give as security. Upon request of B, his rich friend A makes a
note for P1,000 payable to B without receiving any consideration for the
note, but in order to lend his name or credit to B.
B indorses the note to PNB which will now discount the note because of A’s
credit.
1. A – signed as maker
2. without consideration
3. to enable B to raise money
Accommodation indorser
e.g.
A asks his friend B, a rich man and of high credit standing, to
accommodate him by indorsing his note. A makes a note in favor of the
bank, and before delivering the same to the bank, B signs as an indorser in
blank at the back of the instrument, without value therefor.
• B – accommodation indorser
• An accommodation note is one to which the accommodation party
has put his name, without consideration, for the purpose of
accommodating some other party who is to use it and is expected
to pay it. The credit given to the accommodation party is
sufficient consideration to the accommodation maker (Maulini v.
Serrano).
Accommodation drawer
e.g.
A signs as drawer in a bill of exchange with B as payee, without any
valuable consideration being given by B to A, the purpose merely being to
lend A’s credit to B.
Accommodation acceptor
e.g.
A asks C to accept a bill drawn by A in favor of himself.
C accepts without any valuable consideration but in order to lend his credit
to A. A indorses the bill to PBN which discounts it.
Meaning of “without receiving value therefor”
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Victor Ramos
2C 2004-2005
• “without receiving value therefore” = “without receiving value by
virtue of the instrument”
o not “without receiving payment for lending his name
o i.e., one who signs for the purpose of lending his name is
given P150 for and in consideration of lending his name
but not for the instrument he signs = still an
accommodation party
Effect of placing “value received”
• will not negative the character of the notes as an accommodation
paper
• practically all accommodation notes are so drawn as to either
express or imply a valuable consideration prima facie
Right and legal position of accommodation party
1. generally regarded as surety for the party accommodated
2. when accommodated parties make payment to the holder of the
notes, they have the right to sue the accommodated party for
reimbursement
o since the relation between them is in effect that of
principal and sureties
Accommodated party cannot recover from accommodation party
• as between them:
o absence of consideration is a defense
o the understanding is that the accommodation party either
is:
1. to reimburse the amount which the accommodation party may be
obliged to pay
2. to pay the instrument directly to the holder
• real debtor is the accommodated party
• as between the accommodated party and the accommodation
party: accommodation party is secondarily liable
Liability of Accommodation party
• The accommodation party is liable on the instrument to a holder
for value, notwithstanding such holder at the time of the taking of
the instrument knew him to be only an accommodation party.
• Where the holder for value knows or has notice of the fact that the
accommodation party did not receive valuable consideration for
the instrument, he is nevertheless considered a holder in due
course.
46
• an accommodation party cannot interpose the defense of want of
consideration between him and the accommodated party against a
holder for value even if the holder for value has notice of the fact
that he is an accommodation party and therefore, has notice that
he did not receive any consideration for the instrument which he
signed
Liability of Accommodation Party (Ang Tiong v. Ting)
• the accommodation party is liable to a holder for value as if the
contract was not for accommodation
• it is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the
instrument
• the fact that an accommodation indorser may obtain security from
the maker to protect himself against the danger of insolvency of
the latter, cannot in any manner affect his liability to a holder in
due course
Corporations are not liable as accommodation parties even to holders for
value (Atrium Management Corp. v. CA)
• reason: issue or indorsement of negotiable paper by a corporation
without consideration and for the accommodation of another is
ultra vives
• one who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party
Officers signing for corporation as accommodation party without authority
to do so for their individual debts or transactions are personally liable
thereon
• an officer or agent of a corporation shall have the power to
execute or indorse a negotiable paper in the name of the
corporation for the accommodation of a third person only if
specifically authorized to do so
• corporate offices, such as the president and vice-president, have
no power to execute for mere accommodation a negotiable
instrument of the corporation for their individual debts or
transactions arising from or in relation to matters in which the
corporation has no legitimate concerns
• signatories to the accommodation paper shall be personally liable
as well as for consequences arising from their acts in connection
therewith
Rights of Accommodation Parties as Against Each Other (Sadaya v. Sevilla)
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• where the principal debtor failed to pay the balance due on a
promissory note, either one of the solidary accommodation
makers may be held liable for the said balance
• since the Negotiable Instruments Law does not define the right of
an accommodation maker, to seek reimbursement from another
accommodation maker, Art. 2073 CC applies: a solidary
accommodation maker
(1) may demand from the principal debtor reimbursement of the
amount which he paid on the promissory note
(2) he may demand contribution from his co-accommodation
maker without first directing his action against the principal debtor
provided that:
(a) he made the payment by virtue of a judicial demand or
(b) principal debtor is insolvent
Holder must otherwise be holder in due course
• must meet the requisites to be a holder in due course under Sec.
52 NIL, except notice of want of consideration:
o if taken the instrument under the ff. conditions:
1. that it is complete and regular on its face
2. that he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact
3. that he took it in good faith and for value
4. that at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it
where the holder is not otherwise a holder in due course, Sec. 28 will
govern and not Sec. 29
• rule that where accommodation paper is negotiated after
maturity, the accommodation party cannot be held liable thereon -
contemplates a case where the accommodation maker draws a
note payable to the accommodated payee and the payee first
negotiates the note after the date of maturity
Accommodation party can interpose defense of want of consideration
against one not holder in due course
47
Clark v. Sellner
• If a sum of money was received by virtue of the note, it is
immaterial, as far as the creditor is concerned, whether one of the
signers has or has not received anything in payment of the use of
his name.
• The words “without receiving any value therefore” means “without
receiving value by virtue of the instrument” and not as “without
receiving payment for lending his name.”
Caneda, Jr. v. CA [accommodation maker]
• An accommodating party is liable on the instrument to the holder
for value, notwithstanding the fact that such holder at the time of
taking the instrument knew him to be only an accommodation
party. After paying the holder, the accommodating party has
recourse against the party accommodated.
• When a third party advances the face value of the note to the
accommodated party at the time of the creation of the note, the
consideration or note as regards the maker is the money advance
to the accommodated party, and it cannot be said that the note is
lacking in consideration as to the accommodating party just
because he himself received none of the money. It is enough that
value was given for the note at the time of its creation.
Town Savings and Loan Bank, Inc. v. CA [accommodation maker]
• The accommodation makers are liable to the bank on the
promissory note that they signed to accommodate the party to
help raise her funds that she needed.
Acuña v. Veloso and Xavier [accommodation maker]
• Where one of the signers of a joint and several promissory note
affixes his signature thereto for the accommodation of a co-maker
and a third person advances the face value of the note to the
accommodated party at the time of the creation of the note the
consideration for the note, as regards both makers, is the money
so advanced to the accommodated party; and it cannot be said
that the note is lacking in consideration as to the accommodating
party because he himself received none of the money. It is
enough that value was given for the note at the time of its
creation.
PNB v. Maza and Macenas [accommodation makers]
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• An instrument given without consideration does not create any
obligation at law or in equity in favor of the payee. However, to
fasten liability upon an accommodation maker, it is not necessary
that any consideration should move him. The consideration that
supports the promise of the accommodation maker is that parted
with by the person taking the note and received by the person
accommodated.
Prudencio v. CA [accommodation makers]
• Unlike a contract of suretyship, the liability of accommodation
party remains not only primary but also unconditional to a holder
for value such that even if the accommodated party receives an
extension of the period of the payment without the consent of the
accommodation party, the latter is liable for the whole obligation.
STELCO Marketing Corp. v. CA
• A party cannot be considered a holder in due course when it is not
a holder of it before it was overdue and without notice that it had
been previously dishonored and when it did not take the check for
good faith and for value.
Ang Tiong v. Ting [accommodation indorser]
• An accommodation party is liable to a holder for value as if the
contract was not for accommodation. It is not a valid defense that
the accommodation party did not receive any valuable
consideration when he executed the instrument.
• The right of an accommodation party to obtain security from the
maker is a matter of concern exclusively between the
accommodation indorser and the accommodation party. It does
not affect the liability of the accommodation party to the creditor.
The liability of the accommodation party remains primary and
unconditional.
Sadaya v. Sevilla [right of reimbursement]
• Article 2073 of the Civil Code may be applied by analogy in a case
where there are two or more accommodation makers and one of
them has paid and seeks reimbursement from the other
accommodation makers. A joint and several accommodation
maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount to be paid to the
payee.
48
• A joint and several accommodation maker who pays on the
promissory note may directly demand reimbursement from his co-
accommodation maker without first directing his action against the
principal debtor provided that (a) he made the payment by virtue
of a judicial demand or (b) principal debtor is insolvent.
Gardose v. Tarroza
• The accommodation party is primarily and unconditionally liable to
the creditor without the need for the creditor to go after the
principal debtor/accommodated party because the relationship
between an accommodation party and the accommodated party is
in effect one of principal and surety.
Agro Conglomerates, Inc. and Soriano v. CA and Regent Savings
• After paying the holder, the accommodation party has the right to
obtain reimbursement from the party accommodated, since the
relations between them has in effect become one of principal and
surety, the accommodation party being the surety. The surety’s
liability to the creditor or promise for the principal is said to be
direct, primary and absolute.
Crisologo-Jose v. CA and Santos, Jr.
• The liability of an accommodation party under the Negotiable
Instruments Law does not include nor apply to corporations which
are accommodation parties. This is because the issue of
indorsement of a negotiable paper by a corporation without
consideration and for the accommodation of another is ultra vires.
• Corporate officers have no power to execute for mere
accommodation a negotiable instrument of the corporation for
their individual debts or transactions arising from or in relation to
matters in which the corporation has no legitimate concern. Since
such instruments cannot be enforced against the corporation, the
inescapable conclusion in law and in logic is that the signatories
thereof shall be personally liable thereof, as well as the
consequences arising from their acts in connection therewith.
• By way of exception, an officer or agent of a corporation shall
have the power to execute or indorse a negotiable paper in the
name of the corporation for the accommodation of a third person
only if specifically authorized to do so.
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Maulini v. Serrano
• Where the indorsement is made as a favor to the indorsee, who
requests it, not the better to secure payment, but to relieve
himself from a distasteful situation, and where the only
consideration for such indorsement passes fro he indorser to the
indorsee, the situation does not present one creating an
accommodating indorsement, nor one where there is a
consideration sufficient to sustain an action on the indorsement.
• In this case, parol evidence may be admitted to prove that there
was no real indorsement because this is not where the evidence
offered varies, alters, modifies or contradicts the terms of the
contract or indorsement admittedly existing.
Atrium Management Corp. v. CA
• An ultra vires act is one committed outside the object for which a
corporation is created as defined by law of its organization and
therefore beyond the power conferred upon it by law. The term
“ultra vires” is distinguished from an illegal act for the former is
merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be
validated.
• Although a corporate officer may be authorized to issue checks,
she may be held personally liable if negligent i.e., when she
signed a confirmation letter for rediscounting the crossed checks
knowing that such checks were strictly endorsed for deposit only
to the payee’s account and not to be further negotiated.
III NEGOTIATION
Sec. 30. What constitutes negotiation.
An instrument is negotiated when it is transferred from one person
to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the holder
completed by delivery.
Methods of transfer:
1. by assignment
2. by operation of law
3. by negotiation
a. by indorsement completed by delivery
b. by mere delivery
49
Assignment – method of transferring a non-negotiable instrument whereby
the assignee is merely placed in the position of the assignor and acquires
the instrument subject to all defenses that might have been set up against
the original payee
Mode of assignment – may be written either:
o on the instrument itself or
o on a separate piece of paper
Effect of assignment of non-negotiable instruments
• party holding the right drops out of the contract and another takes
his place
• assignee is substituted in the place of the assignor
• assignee and every subsequent person to whom the instrument
comes by assignment may be considered as the person who made
the instrument in the first instance and as having said and done
everything in making the instrument which the original assignor
said or did
• if any subsequent assignee from who, as an assignor, the holder
in turn derives the contract, has done anything to prevent its
enforcement against the original party, the said holder cannot
enforce it against the original party
• each assignee takes his chance as to the exact position in which
any party making an assignment of it stands
• assignee takes the contract subject to equities, that is, to
defenses to the contract which would avail in favor of the original
party up to the time the notice of the assignment is given to the
person against whom the contract is sought to be enforced
Assignment of negotiable instruments
• person taking a negotiable instrument takes it subject to the rules
applying to assignment
• where the holder of a bill payable to order transfers it without
indorsement, it operates as an equitable assignment
Transfer by operation of law
1. by the death of the holder, where the title vests in the personal
representative or
2. by the bankruptcy of the holder, where title vests in his assignee
or trustee or
3. upon death of a joint payee or indorsee, in which case the general
rule is that the title vests at once in the surviving payee or
indorsee
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Negotiation – transfer of an instrument from one person to another in such
manner as to constitute the transferee the holder thereof
• either by:
1. indorsement completed by delivery or
2. mere delivery
• where the instrument is payable to order – negotiated by the
indorsement of the holder completed by delivery
• where the instrument is payable to bearer – by mere delivery
• possible to have a negotiation by means other than these
• first sentence of Sec. 30 states the general method of negotiation
and the next sentence is only illustrative but not exclusive
Is delivery to payee negotiation?
• first view – issuance or delivery of an instrument to the payee is
not negotiation because negotiation refers to an existing
negotiable instrument and before delivery to the payee, the
instrument is incomplete
• second view – under this section and Sec. 191, an instrument is
negotiated when it is delivered to the payee or to an indorsee
o negotiation is not confined to transfer after delivery to
the payee
o better view
Argument in support of the second view
• under Sec. 1912, a holder is a payee (or an indorsee) who is in
possession of an instrument payable to order
• delivery to him of the instrument constitutes him the holder
thereof
• since negotiation under the first sentence of Sec. 30 as being such
transfer of an instrument as to constitute the transferee the
holder thereof, such a delivery to the payee is negotiation
Caltex v. CA
• In order to become a holder in due course, there must be
negotiation. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since,
especially, the terms thereof and the subsequent disposition
2
Sec. 191 – “Holder” means the payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof;
50
of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
Manuel Lim v. CA
• The place where the bills were signed or dated does not
necessarily fix the place where they were executed. What is
of decisive importance is the delivery thereof. Delivery must
be to a person who takes it as a holder. Delivery of the
instrument is the consummation of an obligation, signifying
transfer of possession from one person to another with the
intent to transfer title thereto.
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 words, is a sufficient indorsement.
Nature of indorsement
• not only mode of transfer but also a contract
• every indorser is a new drawer and the terms are found on the
face of the bill or note
• added obligation upon the instrument aside from what appears
upon the face of the instrument
• implies an undertaking from the indorser to the person in whose
favor it is made and to every other person to whom the bill or
note may afterwards be transferred, exactly similar to that which
is implied by drawing a bill except that, in the case of drawing a
bill, the stipulations with respect to the drawer’s responsibility and
undertaking do not apply
• general indorser, in effect, states to every person who follows
him: “This instrument will be paid by the maker, if a note, or
accepted by the drawee or paid by the acceptor, if a bill. If it is
dishonored by non-payment or non-acceptance and you give me
notice thereof, I will pay it.
o contract of the general indorser
Where instrument written:
1. on the instrument itself or
2. upon a paper attached thereto
• on the instrument itself – indorsement usually written at the back;
but may be written on the face of the instrument
• on a paper attached – such paper is called an “allonge”; must be
tacked or pasted on the instrument so as to become a part of it
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May allonge be used where there is room on instrument for indorsement?
• held that the use of the allonge is allowable only when there is
physical impossibility of writing the indorsement on the instrument
itself, and an indorsement on a separate piece of paper where
there is sufficient space on the instrument for indorsements will be
considered a mere assignment, not a negotiation
o this view is questionable – why should such space be
material when some indorsements are on the attached
piece of paper?
in neither case does leaving a space facilitate
fraud since nobody would gain any advantage by
inserting his name in the space and rendering
himself liable to those who indorsed below him
upon the note or the allonge
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e.g. “Pay to X P400. (Sgd.) b
• not valid negotiation of the instrument
Effect of partial indorsement when unauthorized
• does not operate as an indorsement
• may constitute a valid assignment between the parties
• person to whom the instrument is indorsed would not be
considered as indorsee but merely an assignee and therefore take
the instrument subject to defenses available between the original
parties
Exception: where the instrument has been paid it part, it may be indorsed
as to the residue
e.g. A, maker, has paid P600
B can indorse the instrument as to the balance, thus: “Pay to X P400”
(Sgd.) B”

How indorsement written Transfer to two or more indorsees severally

• includes: • does not operate as a negotiation of the instrument
o “print”
o may be typewritten e.g. note is for P1,000 payable to the order of B – indorsed as follows: “Pay
o made by rubber stamp to C P600 and to D P400. (Sgd.) B.”
• must be shown that the means was intended as an instrument • operates an indorsement: “Pay to X and Y. (Sgd.) B.”

Illustrative cases of indorsements Montinola v. PNB

1. words “payment approved” followed by the payee’s signature
2. “I hereby assign this note over to X this Nov. 1, 1910,” signed by • An indorsement which purports to transfer to the indorsee a
the payee on the back of the negotiable instrument part only of the amount payable does not operate as a
3. “I sign the within note to C” negotiation of the instrument.
4. “For value received, I hereby guarantee payment of the within
maturity xxx waiving demand, notice of payment, and protest.” Sec. 33. Kinds of indorsment.
5. “For value received, we hereby guarantee payment of the within An indorsement may be either special or in blank; and it may also
note, including interest and costs at maturity or at any time be either restrictive or qualified or conditional.
thereafter demanded.”
Kinds of indorsement
Sec. 32. Indorsement must be of entire instrument. 1. special
The indorsement must be an indorsement of the entire instrument. 2. in blank
An indorsement which purports to transfer to the indorsee a part 3. absolute
only of the amount payable, or which purports to transfer the 4. conditional
instrument to two or more indorsees severally, does not operate as 5. restrictive
a negotiation of the instrument. But where the instrument has been 6. qualified
paid in part, it may be indorsed as to the residue. 7. joint
8. successive
Indorsement must be of entire instrument 9. irregular
• General rule: indorsement must be of the entire instrument 10. facultative
• an indorsement of a part of the instrument does not operate as a
negotiation thereof Sec. 34. Special indorsement; indorsement in blank.

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A special indorsement signifies the person who whom or to whose
order, the instrument is to be payable, and the indorsement of such
indorsee is necessary to the further negotiation of the instrument.
An indorsement in blank specifies no indorsee and an instrument so
indorsed is payable to bearer and may be negotiated by mere
delivery.
How further negotiated
1. where the instrument is originally payable to order and negotiated
by the payee by special indorsement – by indorsement by
complete delivery
2. where the instrument is originally payable to order and negotiated
by payee by blank indorsement – by mere delivery
o effect of a blank indorsement: to make the instrument
payable to bearer
3. where the instrument is originally payable to bearer – by mere
delivery, even if the original bearer negotiated it by special
indorsement
Sec. 35. Blank indorsement; how changed to special indorsement
The holder may convert a blank indorsement into a special
indorsement by writing over the signature of the indorser in blank
any contract consistent with the character of the indorsement.
e.g. A makes a note with B as payee
indorsed: (indorsement in blank) (Sgd.) B Delivery to C, holder.
• C may place above the signature of B, “Pay to C,” so as to make
the indorsement thus: “Pay to C. (Sgd.) B”
Limitation upon conversion of blank indorsement
• holder must not write any contract not consistent with the
indorsement, that is, the contract so written must not change the
contract of the blank indorser
Contracts inconsistent with the character of the indorsement:
1. “Pay to X and Y.”
2. “Demand and notice waived.”
3. “I guaranty payment.”
4. Without recourse.
Sec. 36. When indorsement restrictive.
An indorsement is restrictive which either ---
(a) Prohibits the further negotiation of the instrument; or
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(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of
some other persons.
But the mere absence of words implying power to negotiate does
not make an indorsement restrictive.
Prohibition of further negotiation
Illustrations:
1. Pay to C only. (Sgd.) B
2. Pay to C and no other person. (Sgd.) B
Indorsee agent of indorser
• “agency” type of restrictive indorsement
e.g. Pay to C for collection
(Sgd.) B
• C does not acquire title over the instrument as against B. He
merely becomes agent of B and may present the paper, demand
and receive payment, and remit the proceeds.
• Any action the indorsee (agent) may file is subject to defenses
available against the indorser (principal) e.g. lack of consideration.
Indorsements for deposits
• an indorsement for deposit constitutes the indorsee the agent of
the indorser
e.g. “Pay to C for deposit (Sgd.) B.”
• indorsement constitutes a retention of title in the depositor in the
absence of any practice or agreement to the contrary
• restrictive indorsement of an instrument for collection or deposit,
or to the use of the indorser and for his benefit, in the absence of
any other circumstances, will not divest the indorser of his title
thereto until the money is paid
• indorsements for deposit are usually informal e.g. by means of
rubber stamp, typed indorsement
Illustrative Case
• as proof of payment to the employee, the employer presented a
check for P400 payable to “Francisco Granado,” the employee
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Victor Ramos
2C 2004-2005
• on the reverse side is Granado’s signature and immediately below
is the notation, “For deposit only Riverdale Inc.”
• SC: notation “for deposit’ is a restrictive indorsement and
indicates that the indorsee bank is an agent for collection and not
the payee
• indorsement for a check by the payee “for deposit” does not
thereby render it negotiable but prohibits further negotiation for
any purpose
o except: for collection for deposit in the payee’s account in
the bank selected by the payee
• by adding the notation, title to the check remained in the name of
the firm
Vests title in indorsee in trust for another
Illustrations on an indorsment which vests title in the indorsee in trust for
another
1. “Pay to X in trust for C”
2. “Pay to X for the use of C”
• transfer the title over the instrument to the indorsee
• “trust type” of restrictive indorsement
Is indorsee subject to defenses against indorser?
• Subrason-Dickenson Co. v. Hopkins – indorsment to A for the
benefit of B was held restrictive under Sec. 47 of NIL, making the
indorsee or his successors subject to good defenses against the
restrictive indorser
• some learned writers – this holdings is unsound; held that the
indorsee of a check indorsed in trust for a third person who is
holder in due course could recover from the drawer who had a
defense of failure of consideration for while the restrictive
indorsement creating a trust gives notice of this trust to
subsequent purchasers, it did not give notice of defenses
obtaining between prior parties
Presumption of consideration in restrictive indorsement
• general rule: an indorsement of a negotiable bill which purports to
pass the title to the bill to the indorsee, imports a consideration
and the burden of proving want of consideration rests upon the
party alleging it
53
• restrictive indorsements which are held to negative the
presumption are such as to indicate that they are not intended to
pass the title but merely to enable the indorsee to collect for the
benefit of the indorser
o such as indorsements “for collection” or
o others showing that ht indorser is entitled to the
proceeds
• indorser parts with his whole title to the bill and the presumption
is that he does so for a consideration
• only effect of such instrument, by way of restriction: to give notice
of the rights of the beneficiary named in the indorsement and
protect him against a misappropriation
Effect of omission of words of negotiability
• omission of words of negotiability in the indorsement does not
affect the negotiability of the instrument
• such omission in the body thereof will render the instrument non-
negotiable
Sec. 37. Effect of restrictive indorsement; rights of indorsee.
A restrictive indorsement confers upon the indorsee the right ---
(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 the
indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
Restrictive indorsee may receive payment
e.g. A is the maker of a note of P1,000 payable to B or his order.
indorsed thus: “Pay to X for deposit, (Sgd.) B.”
• indorsement passes legal title over the note to X so as to enable X
to demand and receive payment of the value of the note, P1,000,
from A, maker
Restrictive indorsee may bring any action
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By: Joyce Briones notes from Agbayani; with case doctrines
Victor Ramos
2C 2004-2005
e.g. A is the maker of a note of P1,000 payable to B or his order.
indorsed: “for deposit”
• Indorsee can bring an action against the indorser, such as A if the
indorser received value for said indorsement
Restrictive indorsee may transfer his rights
• fair interpretation of Sec. 47 (declaring a paper negotiable in its
origin to continue negotiable until it has been restrictively
indorsed): words “until it has been restrictively indorsed” do not
contemplate every restrictive indorsement but a restrictive
indorsement that prohibits the further negotiation of the
instrument under subdivision 1 of Sec. 36 NIL
• purpose of Sec. 47: to preserve as far as possible the negotiability
of the instrument negotiable in its origin and that the implication
of Sec. 47 should not be taken as destroying negotiability of an
instrument heretofore universally accepted as negotiable
Extent of negotiability after restrictive indorsement
Three propositions according to Bryant Smith:
1. that all 3 forms of restrictive indorsement impose some degree of
limitation of negotiability;
2. that they do not all impose the same degree of limitation;
3. that the indorsement itself discloses the extent of the limitation in
the particular case
Illustrative cases
e.g. “Pay to C only”
• instrument becomes non-negotiable
• indorsement for collection does not destroy the transferability of
the instrument and can be reindorsed so that the indorsee can sue
in his own name
“for deposit only”
• does not destroy transferability of the instrument
Limitation on transfer of right; illustrations
• all subsequent indorsees acquire only the title of the first indorsee
under the restrictive indorsement
Illustrations
“pay to A for collection”
54
• rights of subsequent indorsee are subject to the restrictive
indorsement
o can collect only
note for P1,000 is indorsed thus: “Pay to B for deposit only. (Sgd.) A” and
B owes Y P1,000
• B cannot use the P1,000 for personal expenses and must safely
keep the amount on deposit until A, the indorser, asks for the
return thereof
indorsement “to pay to A for account of B”
• title passes to A, the indorsement gives notice that the instrument
gives notice that the instrument cannot be negotiated by A for his
own debt or for his own benefit
Sec. 38. Qualified indorsement.
A qualified indorsement constitutes the indorser a mere assignor of
the title to the instrument. It may be made by adding to the
indorser’s signature the words “without recourse” or any words of
similar import. Such an indorsement does not impair the negotiable
character of the instrument.
How qualified indorsement made
• by adding to the indorser’s signature words
o “without recourse”
o “sans recours”
o “indorser not holden”
o “with intent to transfer title only, and not to incur liability
as indorser”
o “at the indorsee’s own risk”
Effect of qualified indorsement
• constitutes the indorser a mere assignor of the title to the
instrument
• “without recourse” = without resort to a person who is secondarily
liable after the default of the person who is primarily liable
• any one who indorses without recourses states that: “all parties to
the paper are genuine; I ma the lawful holder of that paper, and I
have title to it and know of no reason why you could not recover
on it as a valid instrument, but one thing I do not guarantee; I do
not guarantee the financial responsibility of the parties on that
paper but I do say that I hold title to it just the same as any other
personal property.”
Qualified indorser has limited secondary liability
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Victor Ramos
2C 2004-2005
• under Sec. 65 i.e., qualified indorser is liable if the instrument is
dishonored by non-acceptance or non-payment due to:
1. forgery
2. lack of good title on the part of the indorser;
3. lack of capacity to indorse on the part of the prior parties;
4. the fact that, at the time of the indorsement, the instrument was
valueless or not valid and he knew of that fact
Illustration
A makes a note payable to B or his order. B indorses note thus: “Sans
recours, Pay to C, (Sgd.) B.”
• If C cannot compel A to pay because A’s signature is forged – C
can recover from B, as B warrants the genuineness of A’s
signature
• If C cannot compel A to pay because A is not solvent and B did not
know of the fact at the time of negotiation – B cannot be held
liable because his indorsement is merely qualified one
Effect of qualified indorsement on negotiability
• does not impair the negotiable character of the instrument
Metropol v. Sambok Motors Co.
• A qualified indorsement constitutes the indorser a mere
assignor of the title of the instrument. It may be made by
adding to the indorser’s signature the words “without
recourse” or any words of similar import. Such an
indorsement relieves the indorser of the general obligation to
pay if the instrument is dishonored but not of the liability
arising from warranties on the instrument.
• The words “with recourse” does not make one a qualified
indorer but a general indorser who is secondarily liable. A
person who indorses without qualification engages that on
due presentment, the note shall be accepted or paid, or both
as the case may be, and that if it be dishonored, he will pay
the amount thereof to the holder.
Sec. 39. Conditional indorsement
Where an instrument is conditional, the party required to pay the
instrument may disregard the condition and make the payment to
the indorsee or his transferee whether the condition has been
fulfilled or not. But any person to whom an instrument so indorsed
is negotiated will hold the same, or the proceeds thereof, subject to
the rights of the person indorsing conditional.
55
Absolute indorsement – one by which the indorser binds himself to pay,
upon no other condition than the failure of prior parties to do so and upon
notice to him of such failure
Conditional indorsement – an indorsement subject to the happening of a
contingent event, that is, an event that may or may not happen, or a past
event unknown to the parties
e.g. note for P1,000 with A, maker and B, payee
indorsed as follows: “Pay to Y, if he passes the bar examinations (Sgd.) B.”
Right to disregard conditions
• under the first sentence – A, maker, can disregard the condition and
pay to Y, indorsee, even if Y has not passed the bar examinations
o such payment will discharge him from liability on the
instrument
Obligation of conditional indorsee
• second sentence – Y, indorsee, holds the note or the proceeds thereof,
if he is paid by A, subject to the rights of the indorser, B
• If A disregards the condition and pays Y the P1,000 without waiting for
the condition to be fulfilled, Y does not immediately acquire ownership
over the sum. Y must hold it in trust while the condition is not fulfilled.
• if not fulfilled, must turn over the P1,000 to B, the conditional indorser
Effect of conditional indorsement
• does not render an instrument non-negotiable
• if condition is on the face of the instrument, making the order or
promise to pay conditional, the condition renders it non-negotiable
as the promise or order therein would not be unconditional
Sec. 40. Indorsement of instrument payable to bearer.
Where an instrument, payable to bearer, is indorsed specially, it
may nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as
make title through his indorsement.
• applies only to instruments which are originally payable to bear
• does not apply to instruments originally payable to order, even
when they become payable to bearer because the only or last
indorsement is blank
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Victor Ramos
2C 2004-2005
o under Sec. 9 – note or bill which, upon its face, is
payable to order, becomes payable to bearer only when
the last indorsement is in blank
• when a blank indorsement is followed by a special indorsement –
the instrument is no longer within the terms of Sec. 9
e.g. if a check drawn to the order of A is indorsed in blank by the payee
and delivered to B, and B indorses it to the order of C, it is not payable to
bearer for the reason that the last indorsement is a special indorsement
Illustration
A makes a note payable to the order of B. B indorses the note in blank as
follows: “Sgd.) B.” and delivers the same to C. C specially indorses the
note to D as follows: “Pay to D (Sgd.) C”
• D cannot negotiate the instrument by mere delivery because Sec.
40 applies only to instruments originally payable to bearer.
Negotiation instrument payable to bearer but specially indorsed
• “where an instrument payable to bearer is indorsed, it may
nevertheless be further negotiated by delivery” = an instrument
which is originally payable to bearer is always payable to bearer
o even when specially indorsed, it can be negotiated by
mere delivery
Effect on liability of special indorser; illustration
• liable as indorser only to such holders as make title through his
indorsement
e.g. note for P1,000 payable to bearer
C, bearer, delivered the note made by A to D, D specially indorsed it to E,
indorsee, E specially indorsed it to F, indorsee, F delivered it to G, bearer
• D is not liable to G because he did not take title through D’s
indorsement but through the delivery of F.
• D is liable to E and F because they acquired their title over the
instrument through D’s indorsement as E and F can trace their
title through a series of unbroken indorsements from D, special
indorser.
Sec. 41. Indorsement where payable to two or more persons.
56
Where an instrument is payable to the order of two or more payees
or indorsees who are not partners, all must indorse, unless the one
indorsing has authority to indorse for the others.
• applies to instruments payable to 2 or more payees jointly
e.g. “Pay to the order of A and B”
• does not apply to instruments payable to 2 or more payees
severally
e.g. “pay to the order of A or B”
• fall under Section 8(c) and may be negotiated by the indorsement
of 1 payee
How indorsement of joint payees made
• all payees must each indorse in order to negotiate the instrument
• if only 1 indorses, he passes only his part of the instrument
o indosement would not operate as such because it would
not be an indorsement of the entire instrument (Sec. 32)
• exceptions to rule requiring joint indorsement:
1. where the payee or indorsee indorsing has authority to indorse for
the others
2. where the payee or indorsee are partners
Sec. 42. Effect of instrument drawn or indorsed to a person as
cashier.
Where an instrument is drawn or indorsed to a person as “cashier”
or other fiscal officer of a 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 corporation or the indorsement of the officer.
e.g. note for P1,000 is made payable “to the order of Cashier, Lyceum of
the Philippines”
• presumption: note is payable to the Lyceum of the Philippines, not
to the cashier personally
• note may be indorsed by any duly authorized office of the Lyceum
of the Philippines other than the cashier
Presumption is disputable
• proof may be adduced to show that the bill is payable to the
cashier personally as the real creditor to the maker
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Victor Ramos
2C 2004-2005
As to municipal or public corporations
• an instrument payable to the “Treasurer of the Town of F” – in
stands on the same footing as if payable to the town which is the
real payee
• town treasurer has no authority to indorse said instrument since
“corporation” in Sec. 42 does not include towns and cities
Sec. 43. Indorsement where name is misspelled, and so forth.
Where the name of a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
e.g. instrument drawn or indorsed to “Juan Dytuco”
real name is “Juan Dyjuco”
(1) Pay to Y
(Sgd.) Juan Dytuco
Juan Dytuco
or
(2) (Sgd.) Juan Dytuco
Illustrative Cases
Under Sec. 43, title passed by indorsement:
(1) payee on a note: Stutz Motor Car Co. of America, Inc.
indorsement by intended payee: Stutz Motor Car Co. of America, Inc. ;
Stutz Atlanta Motor Co. by Fred S. Wilson, State Distributor
(2) note where the name of payee: Cascade Country Club
indorsement: Cascade Country Club, Inc., W,. H. Emrick, Pres.
Sec. 44. Indorsement in representative capacity.
Where any person is under obligation to indorse in a representative
capacity, he may indorse in such term as to negative personal
liability.
How agent must indorse
1. he must add words describing himself as agent
2. at the same time disclose his principal
3. must be duly authorized
• held that an agent may indorse by merely signing the name of the
principal
Sec. 45. Time of indorsement; presumption.
57
Except where an indorsement bears date after the maturity of the
instrument, every negotiation is deemed prima facie to have been
effected before the instrument was overdue.
e.g. note payable 30 days after date is dated July 1, 1949
date of maturity: July 21, 1949
payee indorses it without dating the indorsement
• presumption: he indorsed the note on or before July 31, 1949 that
is, before note became overdue
• presumption is rebuttable or disputable
• burden of proof is on the person alleging indorsement after
maturity
• if indorsement bears date, presumption in this section would not
arise
o presumption stated in Sec. 11 – date written is the true
date
Importance of this provision
• important when considered in connection with Sec. 52 (b) – in
order the one may be a holder in due course, the instrument must
be negotiated to him before it becomes overdue
• indorsement without date establishes a prima facie presumption
that the instrument was negotiated before maturity and one who
denies that the holder of such instrument is a holder in due course
has the burden of proof
• the fact that the indorsement appears to be in such fresher ink
than the face of the demand note is not sufficient to overcome the
presumption
Sec. 46. Place of indorsement; presumption.
Except where the contrary appears, every indorsement is presumed
prima facie to have been made at the place where the instrument is
dated.
e.g. bill is dated thus: Manila, Philippines, July 1, 1949
subsequently endorsed by the payee without writing the place of
indorsement
• presumption: the indorsement was made in Manila
• rebuttable presumption
Importance of place of indorsement
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Victor Ramos
2C 2004-2005
• indorsement is governed by the laws of the state where it is
endorsed, although the instrument is drawn or made in a different
state
Sec. 47. Continuation of negotiable character.
An instrument negotiable in its origin continues to be negotiable
until it has been restrictively indorsed or discharged by payment or
otherwise.
When negotiable instrument rendered non-negotiable
1. restrictive indorsement
2. by a discharge thereof by payment or otherwise
• some learned writers opine that the words “until restrictively
indorsed” do not refer to every restrictive indorsement but only to
a restrictive indorsement that prohibits further negotiation of the
instrument under par. (a) of Sec. 36
• one writer offers answer that under Sec. 47, an instrument
restrictively indorsed ceases to be negotiable only to the extent of
the restriction indicated by the indorsement
Negotiability after date of maturity
• 2 contradictory views:
1. first view – negotiability ceases in the full commercial sense after
maturity; that negotiability ceases by the default of the maker in
his payment
2. second view – negotiability continues even after maturity
Reconciliation of conflicting views
• after maturity, an instrument originally negotiable continues to be
negotiable in the sense that contracts of the parties to it continue
and are governed by the NIL
• after maturity, the instrument ceases to be negotiable in the
sense that a transferee after maturity is not holder in due course,
and therefore, is not free from defenses obtaining between prior
parties
• transfer to such transferees would be equivalent to a mere
assignment and subject to defenses
Legal position of holder taking overdue instrument
• position of holder who takes a bill when overdue: holder with
notice; may or may not be a holder for value and his rights will be
regulated accordingly
58
• holder with notice for this reason: takes a bill which, on the face
of it, ought to have been paid
• bound to make 2 inquiries:
1. has what ought to have been done really done i.e., has the bill in
fact been discharged?
2. if not, why not? Is there any equity attaching thereto i.e., was the
title of the person who held it at maturity defective?
o if title to the instrument was complete – immaterial that
for some collateral reason, he could not have enforced
the bill against some one or more of the parties liable
thereon
Right of holder not in due course
• simply because one is not a holder in due course, he can not
recover on the checks in his possession
• only disadvantage of a holder who is not a holder in due course:
the negotiable instrument is subject to defenses as if it were non-
negotiable
Illustration
A issued a note to the order of B who acquired it by fraud in inducement
now in the hands of E
E negotiates it to F after the date of its maturity
• if E is not a holder in due course – right to note would be subject
to the defense of fraud; F, having acquired the note after maturity
is not a holder in due course and he gets only the rights of E,
which are subject to the defense of fraud
• if E were a holder in due course – F would also be free from the
defense of fraud; would be protected by the strength of his
transferor’s title
Sec. 48. Striking out indorsement.
The holder may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck
out, and all indorsers subsequent to him, are thereby relieved from
liability on the instrument.
When holder may or may not strike out indorsement
• holder may strike out any indorsement which is not necessary to
his title
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Victor Ramos
2C 2004-2005
• where an instrument is transferred by special indorsement –
holder has no right to strike out the name of the persons
mentioned in such indorsement and insert his own name nor can
he strike out such name and convert such special indorsement
into a blank indorsement
Where instrument is not necessary to title of holder; illustration
A makes a note for P1,000 payable to bearer
note is delivered to B
indorsements on the back of the note:
Pay to C, (Sgd.) B (Indorser)
Pay to D, (Sgd.) C (Indorser)
D delivers the note to E without indorsement
• E can strike out B’s and C’s indorsement
o indorsement of B and C are not necessary to vest
ownership of the note to E – mere delivery is sufficient
Where instrument is originally payable to order; illustration
A draws a bill for P1,000 payable to B’s order
indorsed as follows:
(Blank indorsement): (Sgd.) B
It is delivered to C.
(Special indorsement): Pay to D, (Sgd.) C
D, holder
• C’s indorsement is not necessary to D’s title
o even without it, C could have acquired ownership to the
bill by mere delivery since the last or only indorsement
would be in blank, thus: (Sgd.) B
• holder of a negotiable instrument may at any time strike out any
indorsement which is not necessary to his title
• he may strike out all intervening indorsements and aver that the
first blank indorser indorsed immediately to him
Effect of striking out
1. indorser whose indorsement is struck out is relieved from his
liability on the instrument
2. all subsequent indorsers are also relieved from their liability on
the instrument
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Sec. 49. Transfer without indorsement; effect of.
Where the holder of an instrument payable to his order transfers it
for value without indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the transferee acquires
in addition, the right to have the 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
indorsement is actually made.
• applies only to instruments payable to order
• contemplates a case where there is delivery and payment of value
but no indorsement
• one element lacking: negotiation of the instrument, namely,
indorsement by the payee or indorsee
• operates as an equitable assignment
Rights of transferee for value
1. transferee acquires only the rights of the transferor – if defense is
available against the transferor, the defense is available against
the transferee
2. transferee has also the right to require the transferor to indorse
the instrument
When transferee becomes holder in due course
• as of the time of actual payment, not at the time of delivery
• reason: negotiation is completed at the time of indorsement, not
at the time of delivery
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
negotiate the same. But he is not entitled to enforce payment
thereof against any intervening party to whom he was personally
liable.
Right of prior party to negotiate; illustration
A makes a note for P1,000 with B as payee
Indorsement from:
B to C
C to Jose Soriano; Jose Soriano to C
C to D
D to E
E to F
F back to Jose Soriano
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Victor Ramos
2C 2004-2005

• Jose Soriano can renegotiate the note e.g. to Yoingco and Co.

Effect of renegotiation to prior parties

• Jose Soriano cannot enforce the payment of the note against C, D,

E and F, to whom he is liable
o to avoid circuity of suits

60