The Negotiable Instruments Law (Act No.

2031)
CONCEPTS, CHARACTERISTICS AND FUNCTIONS

Effectivity date of Act No. 2031: June 2, 1911

Applicability: The Negotiable Instruments Law applies only to Negotiable Instruments, or those that comply
with Section 1 of the Negotiable Instruments Law.

Functions:

1. Operates as a substitute for money

2. It is a means of creating and transferring credit

3. It facilitates the sale of goods

4. It increases the purchasing medium in circulation

TWO IMPORTANT FEATURES:

1. NEGOTIABILITY – the ability to pass from hand to hand similar to money so as to give the holder in due
course the right to collect the sum payable for himself free from defenses personal to the parties prior
to him.

2. ACCUMULATION OF SECONDARY CONTRACTS – each negotiation is a contract in itself.

COMMON FORMS

KINDS OF NEGOTIABLE INSTRUMENTS:

1. BILL OF EXCHANGE – an unconditional order in writing addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or
determinable future time a sum certain in money to order or bearer.

2. PROMISSORY NOTE – an unconditional promise in writing, made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in
money to order or bearer.

STAGES IN THE LIFE OF A NEGOTIABLE INSTRUMENT

PROMISSORY NOTE BILL OF EXCHANGE

P r e p a r a t i o n   &   S i g n i n g

Issuance

Negotiation

  Presentment for Acceptance

  Acceptance

  Dishonor by Non-acceptance

P r e s e n t m e n t   f o r   p a y m e n t

D i s h o n o r   b y   N o n – p a y m e n t

N o t i c e   o f   D i s h o n o r

  Protest

Discharge
 WHEN A BILL IS TREATED AS A PROMISSORY NOTE:

1. The drawer and the drawee are the same person

2. The drawee is a fictitious person

3. The drawee has no capacity to contract

4. When 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

BILL OF EXCHANGE VS. PROMISSORY NOTE

PROMISSORY NOTE BILL OF EXCHANGE

Unconditional Promise Unconditional order

2 parties 3 parties

Drawee primarily liable;

Maker primary liable
drawer secondarily liable

Generally 2 presentments:
Only one presentment for acceptance and
payment.

REQUISITES OF NEGOTIABILITY

A. It must be in writing and signed by the maker/drawer

1. It must be in writing – may be printed, in ink or in pencil and it may be written in paper or any material
that substitutes paper.

2. Signed by the maker/drawer – preferably his full signature. If he leaves only a mark, or a single letter,
it is still valid as long as (a) he intends it to be a substitute for his signature; and (b) he intends to be
bound on the instrument by such mark.

B. It must contain an unconditional promise or order to pay a sum certain in money

1. Promise – is the undertaking made by the maker

2. Order – is a command made by the drawer addressed to the drawee that the later pay a sum certain in
money

The words “promise” or “order” need not be stated, words that connote the same satisfies the requirement.

Use of the words “hope” or “authorize” do not connote command since it appears that the drawer is merely
asking the drawee to pay and payment is discretionary on the part of the drawee.

Use of words of courtesy such as “Please” or “kindly” does not affect negotiability as long as there is a
command for the drawee to pay.

3. Unconditional – the promise/order must not be subject to any condition such as passing the board exam.

“when the debtor’s means permit him to do so” while considered as one with a term in Civil Law, is considered
a condition for purposes of the Negotiable Instruments Law.

Particular Fund

a. Out of which reimbursement can be had – is valid. Since the reimbursement is an act
subsequent to the fact of payment.

b. Out of which payment may be had – is conditional. Since the payment would depend on the
existence or sufficiency of the fund.

 
4. Sum certain in money – even if it will require mathematical computation.

Certainty of sum is not affected by:

1. Interest

2. By stated installments – the requirement is that the (1) amount and (2) date of each
installment must be indicated

3. Acceleration clause, insecurity clause or extension clause

4. Exchange, whether fixed or at the current rate

5. With costs of collection or an attorney’s fees in case payment shall not be made at
maturity.

Additional acts in addition to payment of money

a. General Rule: it affects negotiability, since the act must likewise be assigned.

b. Exceptions:

1. If the doing of the act is at the option of the holder – here the holder can still
require the payment of money

2. If the act is to be done after the payment:

i. Authorize the sale of collaterals

ii. Authorize confession of judgment

iii. Waiver of benefits under the law intended for the obligor (waiver of
notice of dishonor)

C. It must be payable on demand, or at a fixed, or determinable future time

1. Payable on demand (Sec. 7)

a. Expressly stated

b. No time is expressed

c. When overdue and it was issued, accepted or indorsed – it is considered payable on demand
as to the person so issuing, accepting or indorsing.

2. Payable on a fixed date – a specific date is provided, e.g., September 1, 2020

3. Payable on a determinable future time (Sec. 4)

a. At a fixed period after date or sight, e.g., 60 days after September 1, 2020

b. On or before a fixed or determinable future time specified, e.g. on or before September 1,

2020

c. On or at a fixed period after the occurrence of a specified event which is certain to happen,
though the time of the happening be uncertain, e.g., “upon the death of X” or “20 days after
the death of X”

D. It must be payable to order or bearer

1. Payable to Order (Sec. 8)

a. Order of a specified person – Order of P

b. Specific person or order – P or order

When it is payable to order – there must be a payee or otherwise indicated with reasonable certainty. Without
a payee, nobody can give the order/authority to collect.

Payees:

a. Payee who is not the maker, drawer or drawee

b. Drawer or maker

c. Drawee

d. 2 or more drawees jointly (A and B)

e. One or more several payees (A or B)

f. The holder of a specific office for the time being

2. Payable to Bearer (Sec. 9)

a. Expressly stated

b. Person named and or bearer

c. Order of a fictitious person or non-existing person

d. Name of the payee does not purport to be the name of any person (cash)

e. When the last indorsement is blank

E. Where it is addressed to a drawee, he must be named therein or otherwise indicated with reasonable
certainty

To enable the holder to know to whom the BOE shall be presented for acceptance/payment.

1. One or more drawees jointly – allowed. D1 and D2

2. One or more drawees in the alternative or succession – not allowed. D1 or D2. (Sec. 128)

Omissions that do not affect negotiability

a. Date

 Sec 11 provides for presumption of validity of date indicated

 Sec 12: ante-dating or post-dating: does not invalidate the instrument. Person to
whom an instrument is delivered acquires title as of date of delivery.

 Sec 13: When date may be inserted:

1. Payable at a fixed period after issuance

2. Payable at a fixed period after acceptance

Any holder may insert the date of issuance or acceptance

Insertion of a wrong date will not invalidate the instrument in the hands of a HIDC. Date so inserted is
regarded as true date.

b. does not specify the value given, or that any value had been given therefor; or

c. does not specify the place where it is drawn or the place where it is payable; or
d. bears a seal; or

e. designates a particular kind of current money in which payment is to be made.

CONSTRUCTION OF NEGOTIABLE INSTRUMENTS

Where the language of the instrument is ambiguous or there are omissions therein, the following rules of
construction apply:

a. Sum in words vs. sum in numbers – words; if words are ambiguous and uncertain, reference may be
had to the figures to fix the amount.

b. With interest but no date from when interest is to run – date of instrument or if undated, the
issuance.

c. Note dated – dated as of the date of issuance

d. written vs. printed – written

e. Ambiguity as to whether it is a bill or note – the holder may treat it as either at his election.

f. signature is place not sure of capacity – indorser

g. “I promise to pay” signed by 2 or more – solidary liability.

TRANSFER AND NEGOTIATION

Types of transfers:

1. Negotiation – to constitute the transferee a holder

2. Assignment – the transferee merely steps into the shoes of the transferor (example: when an order
instrument is merely delivered)

Issue: is the first delivery of the instrument complete in for to a person (usually the payee) who takes it as a
holder.

Delivery: the transfer of possession of the instrument by the maker or drawer with the intention to transfer
title and recognize the transferee as a holder.

Negotiation: transfer of possession with the intention to constitute the transferee a holder.

Payable to bearer – by mere delivery

Payable to holder – indorsement completed by delivery

Once a bearer instrument, always a bearer instrument (Sec. 40)

 Even if indorsed specially, it can be further negotiated by mere delivery

 Any person indorsing specially is liable as indorser only to such holders as make title
through his indorsement.

Incomplete negotiation of an order instrument – delivered only without indorsement:

 the transferee is a mere assignee

 He acquires the right to have the indorsement of the transferor (Sec. 49)

 For the purpose of determining whether the transferee is a HIDC, the negotiation
takes effect as of the time when indorsement is actually made.

e.g. M was induced fraudulently by P to make a promissory note payable to his order. P then delivered the
instrument to A on Feb. 5, 2018, without indorsing it. A asked for the indorsement of P which was placed on
Feb 15, 2018.
  If A knew of the fraud on Feb 10, 2018 – he is not a HIDC because at the time of the
negotiation was complete, he already had knowledge of the defect in the title of P.

 If he knew of the fraud after the indorsement – he is a HIDC

INDORSEMENT

Where:

 On the instrument itself; or

 Separate piece of paper attached to the instrument called allonge.

At what amount

Entire instrument. An instrument for P15,000 cannot be indorsed for less like P5,000 only – will be treated as
mere assignment.

Except: when there was already partial payment.

Kinds of indorsements:

1. Blank – no indorsee is indicated and indorser indicates only his signature; converts the instrument into a
bearer instrument.

2. Special indorsment – designates the indorsee e.g. Pay to X.

A holder may convert the blank indorsement to a special indorsement by writing over the signature of the
indorser in blank any contract consistent with the character of indorsement. (Sec. 35)

3. Qualified indorsement – “without recourse”

 constitutes the indorser a mere assignee

 does not impair the negotiable character of the instrument

 Not liable to subsequent indorsees

 does not free the indorser of liability if the warranties under Sec. 65 are not met.

4. Conditional indorsement – Pay to X if he passes the board exam

 Party required to pay (Drawee or maker) can disregard the condition since he is not a
party to the same

 The indorsee holds the payment in trust for the indorser if the condition is not met.

5. Restrictive indorsement

 Prohibits further negotiation – pay to X only – instrument is no longer negotiable

 Constitute the indorsee as an agent – pay to X for collection

 Constitute the indorsee as a trustee – pay to X in trust for Y

In the first type, the instrument will cease to be negotiable. In the other two, the instrument is still negotiable.

 
Rights of restrictive indorsees:

 Receive payment

 Bring any action on the instrument that the indorser can bring

 Transfer his rights as such indorsee, where authorized. All subsequent indorsees
acquire only the title of the first indorsee under restrictive indorsement.

Negotiation by prior party – M to P, P to A, to B, to C, to P again.

 P may reissue against the instrument

 He cannot enforce payment against any intervening party to whom he is personally

liable

 He may strike out intervening indorsements because they are not necessary for his
title and he is liable to them because of his initial indorsement.

DEFECTIVE NEGOTIABLE INSTRUMENTS

1. Incomplete Instruments: Sec. 14: Blanks, when may be filled:

 Instrument wanting of any material particular – the person in possession has prima
facie authority to complete it

 Signature of a blank piece of paper – for the purpose of converting it into a negotiable
instrument – prima facie authority to fill it up as such for any amount.

 In order to bind parties prior to completion: the instrument must be filled up:

o Strictly in accordance with the authority given

o Within a reasonable time

 after completion, negotiated to a holder in due course, valid and effectual for all
purposes in his hands and may enforce it as if it had been filled up in accordance with
the authority given and within a reasonable time.

If not a HIDC, as if the instrument is materially altered and cannot be enforced against parties prior to
completion.

2. Incomplete Undelivered Instruments

Sec. 15 covers Incomplete and Undelivered Instruments which is a real defense against ANY holder.

Example: M had a blank signed check in his drawer, P, his secretary stole the same and indicated his name as
the payee and put the amount P10,000. He then indorsed it to A, then A to B, B to C.

C cannot enforce the check whether or not he is a holder in due course. This is because an incomplete
undelivered instrument is not a valid contract in the hands of any holder.

3. Complete Undelivered Instruments

Delivery is essential to the validity of any negotiation (whether PN or BOE) (Sec. 30). Moreover, prior to
delivery an instrument is revocable.
Delivery may be:

a. Negotiation

b. Conditional, for a specific purpose and not for the purpose of transferring title.

In the hands of a HIDC – valid delivery by all parties prior to him is conclusively presumed.

HOLDERS IN DUE COURSE, REQUISITES AND RIGHTS

1. HOLDERS – a payee or indorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191)

2. HOLDER IN DUE COURSE – a holder who has taken the instrument under the following conditions: (COVN)

 That it is complete and regular upon its face

 That he became the holder of it before it as overdue and without notice that it has
been previously dishonored, if such was the fact

 The he took it in good faith and for value

 The 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.

3. HOLDER NOT IN DUE COURSE: if any of the above are not present, the holder is not a holder in due course.

 He can still enforce payment on the instrument

 Payment to him discharges the instrument

 However, he is subject to personal defenses of prior party, as if the instrument is non-

negotiable.

4. PAYEE AS A HOLDER IN DUE COURSE: Note that the definition of a holder in due course is “a holder” and a
holder is defined as a “payee or indorsee or the bearer thereof”. So the payee, who takes the instrument
under the above circumstances can be considered a HIDC.

Example: D is indebted to C for P100,000. In order to raise money, he sold his car to X and asked that the
check be issued in the name of C for payment of his debt. Not known to D and C, the car was already burned.

C is still holder in due course because all the requirements are present and nothing in the case would raise
suspicion on his part as to the issuance of the check.

De Ocampo vs. Gatchalian: Gatchalian issued a check to Manuel Gonzales for the purchase of a car belonging
to de Ocampo, of the Ocampo Clinic, in the amount of P600,000 for the purpose of showing good faith; that
the check would be returned together with its registration certificate for presentation to Gatchalian.

Gonzales then used the check as payment for the hospitalization of his wife amounting to P158,250

When Gonzales did not appear at the meeting place, Gatchalian issued a stop payment.

SC: A payee can be a holder in due course. Every holder is deemed prima facie to be a holder in due course
(Sec. 59)

Not in this case, because:

 Requirement: “no notice of any defect in the title of the person negotiating it”

 The drawer, Gatchalian had no account with Ocampo clinic

 Check is crossed check which is issued for a specific purpose and for deposit only

 The amounts were not the same

 As holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title, and for this
 reason the presumption that it is a holder in due course or that it acquired the
instrument in good faith does not exist.

 In the case at bar as the payee acquired the check under circumstances which should
have put it to inquiry, why the holder had the check and used it to pay his own
personal account, the duty devolved upon it, plaintiff-appellee, to prove that it
actually acquired said check in good faith

5. CROSSED CHECKS – a person who takes a crossed check without making further inquiries is not a holder in
due course.

The act of crossing a check serves as warning to the holder that the check has been issued for definite purpose
so that he must inquire if he has received the check pursuant to that purpose.

6. HOLDER FOR VALUE – a consideration sufficient to support a simple contract.

Partial payment – HIDC only to the extent of the amount paid if he received notice or infirmity prior to making
full payment.

7. RIGHTS OF A HOLDER IN DUE COURSE – a holder in due course holds the instrument free from any defenses
personal to the prior parties.

Inquiry – is not required of the holder. Only when circumstances indicate defect, then the holder has to
inquire, such as in the case of De Ocampo vs. Gatchalian and in case of crossed-checks.

8. SHELTER RULE: a holder who is not a holder in due course but derives his title from a holder in due course
(Sec. 58) has all the rights of such former holder in respect of all parties prior to the latter.

Example: M issued a promissory note to P and authorized the latter to fill-up P1,000. However, P inserted
P5,000 and indorsed it to A, then to B, then to C. A, B and C had no knowledge that the instrument was filled-
up in excess of the authority given. C then issued it to X who had knowledge. Can X enforce payment of P5,000
from M?

Yes. Sec. 14, in the hands of a HIDC, the instrument is valid and effectual and has been filled-up in accordance
with the authority given. Though he is not a HIDC, he derived title from a HIDC and has all the rights of the
same. Note that X had no participation in the breach of trust committed by P.

DEFENSES

REAL DEFENSES – attach to the instrument and are available against ALL holders, only by the party or parties
entitled to raise them.

 Minority - the defense of minority is real and may be enforced against all holders but
is only available to the minor himself.

 Forgery (Sec. 23) - A forged signature, whether it be that of the drawer, maker, payee
or any other party, is wholly inoperative and no one can gain title to the instrument
through such forged signature against parties prior to the forgery

 Non-delivery of Income Instrument (Sec. 15)

 Material Alteration (Sec. 124)

 Ultra vires acts of a corporation - acts done beyond the power conferred upon a
corporation by law and such want of authority may be raised as a real defense but the
negotiation of the corporation may pass title to the instrument.
  Fraud in factum or in esse contractus - It is present when a person is induced to sign
an instrument not knowing its character as a note or a bill. The person signing does
not know that he is signing a negotiable instrument and may be used as a defense
even against a holder in due course.

 Illegality – if declared void for any purpose

 Viscous force or violence

 Want of authority

 Prescription

 Discharge in insolvency

PERSONAL DEFENSES – are those available only against the holder who stands in privity with the party who is
entitled to set up or those who are not HIDCs.

 Failure or absence of consideration

 Illegal consideration

 Non-delivery of complete instrument

 Conditional delivery of complete instrument

 Fraud in inducement

 Filling-up of blanks not within authority or beyond reasonable time

 Duress or intimidation

 Transfer in breach of faith

 Mistake

 Insertion of a wrong date

 Ante-dating or post-dating for illegal or fraudulent purposes.

FORGERY

A forged signature, whether it be that of the drawer, maker, payee or any other party, is wholly inoperative
and no one can gain title to the instrument through such forged signature against parties prior to the forgery.

1. Only the forged signature is wholly inoperative NOT THE INSTRUMENT itself and not the genuine
signatures

2. In case of forgery of an indorsement, the party whose signature and those prior to him are not liable.
Payment under a forged indorsement is not to the drawer’s order.

3. Despite the forgery, there may be parties who shall be precluded from setting up the defense of
forgery:

a. Those who warrants like the acceptors/indorsers

b. Those who ratified the forgery expressly/impliedly

c. Those who were negligent.

Example: DR had his blank checks with his secretary, P, including his credit cards and the latter is also the one
who does the verification and reconciliation of his accounts. P used one of DR’s checks and forged the latter’s
signature. She then indorsed the check to A, who deposited it in his account.

DR was not allowed to recover because the proximate cause of the loss was his negligence.

4. Forgery of an indorsement in a promissory note payable to BEARER – maker is still liable since Sec. 60
provides that he is to pay the instrument according to its tenor and the “tenor” thereof is that he
engages to pay the bearer.
However, the payee can set-up the defense of non-delivery of a complete instrument if the holder is not a
HIDC.

M issued a PN payable to P or bearer. P delivered it to X. X lost it and was found by F who indorsed X’s
signature and delivered it to X, who then delivered it to Z, present holder.

 If Z is a holder in due course, he can still enforce payment against M

 If Z is not a holder in due course, M, P and X can raise the defense of P’s non-delivery
of a complete instrument.

 P and X cannot be held liable because they are not parties immediate to A and A
cannot trace title to them.

5. Forgery of drawer’s signature – without any negligence on his part, he is not liable since he is not
primarily liable on the instrument.

6. Collecting Bank – is liable due to his indorsement and must reimburse the drawee bank and as a rule
cannot collect from the drawer, except if the latter is negligent and was the proximate cause of the
loss.

7. Drawee Bank – as a rule, the drawee bank must not allow collection on a check where the drawer’s
signature is forged. If it does, it violates is duty to ascertain the signature of its depositors for which it
is charged with the knowledge of.

DISHONOR

ACCEPTANCE - is the signification of the drawee of his assent to the order of the drawer.

Requisites:

1. It must be in writing

2. Signed by the drawee

3. Drawee must assent to the promise to pay a sum certain in money and not by any other
means.

Where:

1. The instrument itself or

2. in an allonge.

But under Sec. 133, the holder may require the acceptance to be on the bill, and if such request is refused, the
bill may be treated as dishonored.

The acceptance on an allonge does not bind the acceptor except in favor of a person:

1. To whom it is shown; and

2. Receives the bill for value.

When deemed accepted:

1.

1. When the bill is delivered to the drawee and he destroys the bill

2. The bill is delivered to the drawee but the drawee refuses within 24 hours or within such
period as the holder may allow to return the bill accepted or non-accepted. (137)

Sec. 136:

a. Gives the drawee 24 hours to accept or not the bill;

b. If accepted, it shall be deemed accepted as of the day of presentation

Future bills (135): an acceptance issued before a bill is drawn is deemed an actual acceptance in favor of every
person who, upon the faith thereof, receives the bill for value.

Kinds of Acceptance:

1. Conditional – payment by the acceptor is dependent on the fulfillment of the condition.

2. Partial – acceptance to pay a part only of the amount for which the bill is drawn

3. Local – acceptance to pay at a particular place.

4. Qualified as to time

5. Acceptance of some, on or more of the drawees but not of all

Unqualified acceptance: the holder may refuse to take a qualified acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as dishonored by non-acceptance.

Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless
they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent
thereto.

When a drawer or indorsee receives notice of a qualified acceptance he must, within a reasonable time,
express his dissent thereto or he will be deemed to have assented thereto.

NOTICE OF DISHONOR

Who should give:

1.

1. Holder

2. Agent or representative of the holder;

3. Any party who may be compelled to pay like indorsers

4. Agent of any party who may compelled.

Who will benefit (those no longer required to give notice)

1. Given by or on behalf of the holder – to the benefit of all subsequent holders (to the one given notice) and
all prior parties (to the holder) who have a right of recourse against the party to whom it is given.

M to P to A to B to C to H. If H gives notice to P, it inures to the benefit of A, B and C, such that they need not
provide notice to P also.

2. Given by the indorser who may be compelled to pay – inures to the benefit of the holder and parties
subsequent to the party to whom notice is given.

M to P to A to B to C to H. If notice is given by B to A, it inures to the benefit of C and H as well.

Effect of Notice: immediate recourse against the indorsers arise. It is as if the indorsers become primarily liable
in the payment in the sense that the holder need not claim payment from the person primarily liable.

Time of giving notice:

A. Parties reside in the same place:

1. Business place – before close of business hours on the day following

2. Residence – before usual hours of rest on the day following

3. Sent by mail – deposited in the post office in time t reach him in the usual course on the day
following
 

B. Parties reside in different places

1. Sent by mail –

 deposited in the post office in time to go by mail the day following the day of dishonor

 if there is no mail at a convenient hour on the last day, by the next mail thereafter

2. otherwise – within the time that notice would have been received in due course of mail if it would have
been deposited in the post office.

When not required: After the exercise of reasonable diligence, it cannot begiven to or does not reach the
parties sought to be charged.

Drawer

 When the drawer and the drawee are the same person

 When the drawee is a fictitious person or a person not having capacity to contract

 When the drawer is the person to whom the instrument is presented for payment

 Where the drawer has no right to expect or require that the drawee or acceptor will honor the
instrument

 Where the drawer has countermanded payment (e.g., when a stop payment order is issued)

Indorser

 When the drawee is a fictitious person or person not having capacity to contract, and the indorser was
aware of that fact at the time he indorsed the instrument;

 Where the indorser is the person to whom the instrument is presented for payment;

 Where the instrument is made or accepted for his accommodation (he is ultimately the one liable on
the instrument)

PROTEST

is a formal declaration, drawn and signed by a notary, that the foreign bill has been presented for acceptance
or payment and that the acceptance or payment is refused.

When Necessary:

1. In case of a foreign bill dishonored by non-acceptance or non-payment

2. If a stranger to a bill will accept the instrument for honor

3. If the bill will be presented for payment to acceptor for honor or referee in case of need; and

4. When the bill is dishonored by the acceptor for honor

Requisites:

1. The protest must be made by a notary public or any respectable resident of the place where the bill is
dishonored;

2. Made in front of two witnesses

3. It must be annexed to the bill or must contain a copy thereof;

 4. It must be under the hand and seal of the notary making the protest

5. The protest must specify the following:

a. Time and place of presentment;

b. The fact that presentment was made;

c. Cause or reason for protest; and

d. Demand was made and the answer given, if any, or that the drawee or acceptor cannot be
found.

ACCEPTANCE FOR HONOR

1. is an undertaking by a stranger to a bill

2. after protest

3. for the benefit of:

a. any party liable thereon or

b. for the honor of the person for whose account the bill was drawn

4. which acceptance inures also the benefit of all parties subsequent the person for whose honor it is
accepted and

5. conditioned to pay the bill when it becomes due if the original drawee does not pay it.

PAYMENT FOR HONOR

1. Made by a person, whether party to the bill or not,

2. After it has been protested for non-payment,

3. For the benefit of any party liable thereon or of the person for whose account it was drawn

BILLS IN SET

There is only one bill that is composed of several parts, each part being numbered and containing a reference
to the other parts.

Purpose: in cases when a bill had to be sent to a distant place through some conveyance. If each part is sent by
different means of conveyances, the chance that at least one part of the set would reach its destination would
be greater.

Liability of Acceptor: he is bound to accept only one part. If different parts of abill are negotiated separately
and both are holders in due course, the holder whose title first accrues is considered the true owner of the
bill.

If he accepts more than one part, he is liable to all the holders of the parts he accepted.

Obligations of the transferors: when the holder indorses two or more parts of the bill in set:

1. The person shall be liable on every such part;

2. Every indorser subsequent to him is liable on the part he himself indorsed, as if such parts were
separate bills.

 
 DISCHARGE

How made:

1. Payment in due course by or in behalf of the principal debtor;

2. Payment in due course by the party accommodated, where the instrument is made or accepted for his
accommodation;

3. By the intentional cancellation thereof by the holder

4. By any other act which will discharge a simple contract for the payment of money

5. When the debtor becomes the holder of the instrument at or after maturity in his own right.

Payment in due course – payment made:

1. At or after the maturity of the instrument;

2. To the holder thereof;

3. In good faith; and

4. Without notice that his title is defective.

Discharge of persons secondarily liable:

1. Any act which discharges the instrument

2. Intentional cancellation of his signature by the holder (Striking out)

3. Discharge of a prior party

4. By a valid tender of payment made by a prior party

5. Release of the principal debtor – unless the holder’s right of recourse against the party secondarily
liable is expressly reserved – this is because the indorsers are deprived of their right of recourse

6. Any agreement binding upon the holder to extend the time of payment or to postpone the holder’s
right to reinforce the instrument – unless

a. made with the assent of the party secondarily liable or

b. the right of recourse against such party is expressly reserved

CHECKS

A check is a bill of exchange drawn on a bank payable on demand.

CHECK BILL OF EXCHANGE

May or may not be drawn against a bank or a
Always drawn against a bank or a banker
banker
May be payable on demand or at a fixed or
Always payable on demand
determinable future time
Presentment for acceptance is required in certain
Presentment for acceptance is not required
cases
Drawer must have funds in the hands of the
Drawer need not have funds with the drawee
drawee
When payable on demand, it must be presented
Must be presented for payment within a
for payment within a reasonable time after the
reasonable time after issue
last negotiation
Death of the drawer of the check revokes the
Death of the drawer
bank’s authority to pay
 

KINDS:
1. Cashier’s check – drawn by a bank upon itself, and is acceptance by its issuance. A manager’s check is of the
same nature, although instead of being signed by the cashier, it is the manager who signs the same for the
bank.

2. Certified check – drawn by a depositor upon funds to his credit in a bank which is certified by the proper
officer of the bank will be paid when duly presented for payment.

a. Certification is equivalent to acceptance

b. When the holder of the check is the one who procures the certification – the drawer and all
indorsers are discharged from liability 

3. Crossed check – done by writing 2 parallel lines diagonally on the top left portion of the check

a. If the name of a company is inserted between the parallel lines, payment can only be made
with the intervention of that company

b. If general:

 Cannot be encashed and should be deposited only

 may be negotiated only once

 the crossing serves as a warning that the check has been issued for a specific purpose
so that the holder must inquire if he has received the check pursuant to that purpose.

4. Memorandum check – with the words “memorandum”, “memo” or “mem” written across its face, signifying
that the maker or drawer engages to pay the bona fide holder absolutely without condition concerning its
presentment.

5. Traveler’s checks – purchased from banks, express companies, or the like, which can be used like cash upon
second signature by the purchaser.

 It has the characteristics of a cashier’s check of the issuer.

 It requires the signature of the purchaser at the time he buys it and also at the time he
uses it – that is when he obtains the check from the bank and also at the time he
delivers the same to the establishment that will be paid thereby.