NEGOTIABLE INSTRUMENTS 3. Civil Code – Applies suppletorily.

LAW Functions of Negotiable Instruments:

Negotiable Instrument
It is a written contract for the payment of money and
passes from one person to another as money, in
such manner as to give a holder in due course the
right to hold the instrument free from defenses
available to prior parties (SUNDIANG & AQUINO,
Reviewer on Commercial Law (2013), p.5)
[hereinafter SUNDIANG & AQUINO, Reviewer].
1. It operates as a substitute for money.
2. It is a medium of exchange.
3. It is a credit instrument that increases credit
circulation.
4. It increases the purchasing power in circulation.
5. It is a proof of transaction (AQUINO, Notes and
Cases on Banking Laws and Negotiable
Instruments Law (2009), p.7 [hereinafter
AQUINO, Negotiable Instruments]).

Requisites: (WU-POA) A negotiable instrument is not a legal tender

1. Must be in Writing and signed by the maker or
drawer;
2. Must contain an Unconditional promise or order
to pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
determinable future time;
4. Must be payable to Order or to bearer; and
5. When the instrument is Addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty (NEGOTIABLE
INSTRUMENTS LAW, Sec.1 [hereinafter NIL]).
Governing Laws:
1. N.I.L. (Act No. 2031) – Negotiable Instruments
Law. The provisions of the NIL apply ONLY to
negotiable instruments.
Note: If the instrument is not negotiable, the
pertinent provisions of the Civil Code or pertinent
special laws should apply (GSIS v, CA, G.R. No.
L-40824, February 23, 1989).
2. Code of Commerce – Negotiable instruments
are also governed by the provisions of the Code
of Commerce that were not impliedly repealed by
the NIL.
The provisions on crossed checks are still in
force because there is no provision in the NIL
that deals with crossed checks (Chan Wan v. Tan
Kim, G.R. L-15380, September 30, 1960).
Legal Tender – (Without referring to a particular
country): It is that kind of currency which the law
compels a creditor to receive in payment of a debt,
be it public, or private, provided it is tendered in the
right amount.
All notes and coins issued by the Bangko Sentral
shall be fully guaranteed by the Government of the
Republic of the Philippines and shall be the legal
tender in the Philippines for all debts, both public
and private as provided for under Sec. 52, New
Central Bank Act R.A. 7653 and BSP Circular No.
537, series of 2006.
Pursuant to the law stated above, the maximum
amount of coins to be considered as legal tender is
adjusted as follows:
a. One thousand pesos (P1,000) for denominations
of 1-Peso, 5-Peso and 10-Peso coins; and
b. One hundred pesos (P100) for denominations of
1-centavo, 5-centavo, and 25-centavo coins.
Checks representing demand deposits do not have
legal tender power and their acceptance in the
payment of debts, both public and private, is at the
option of the creditor: Provided, however, that a
check which has been cleared and credited to the
account of the creditor shall be equivalent to a
delivery to the creditor of cash in an amount equal to
the amount credited to his account (R.A. 7653, Sec.
60).

EXECUTIVE COMMITTEE SUBJECT COMMITTEE MEMBERS

SYLVESTER AUSTRIA overall chairperson, LARA ANGELA MAGULTA subject chair, Jeffrey Bajita, Mark Julius Batugal,
REYNOLD ORSUA chairperson for JOSE AMELITO BELARMINO II assistant Frances Juliene Buendia, Dan Yunus
academics, JOE VINCENT AGUILA subject chair, CAMILLE MAY MEDINA Cabrera, Jennel Chu, Edgar Cruz,
chairperson for hotel operations, LYNDON edp, ROWNEYLIN SIA negotiable Charles De Belen, Jennyllette
RUTOR vice-chairperson for operations, instruments law, ALFREDERICK Dignadice, Clarissa Heromina Esguerra,
RODEL JAMES PULMA vice-chairperson ARANETA insurance law, YVETE MARIE Pamela Faller, Hanna Sharleen
Florendo, Celine-Maria Janolo,
for secretariat, DENISE DIANNE SOLA, transportation law, LOWELL
Charlotte King, Lorena Lerma Lunar,
MAGBUHOS vice-chairperson for finance, FREDRICK MADRILENO, corporation
Rosecellini Mamaclay, Jasmine Rose
IAN DANIEL GALANG vice-chairperson for law, LE BON EIRRES PASCUA, law on Maquiling, Florianne Marzan, Rose
electronic data processing, intellectual property, KHARIS Anne Menor, Trixie Jane Neri,
JOMARC PHILIP DIMAPILIS vice- MANAHAN, banking law, REI-ANNE Charmagne Pedrozo, Louisa Marie
chairperson for logistics SANTOS, special laws Quintos, Toni Faye Tan, Patricia Ester
ALBERTO RECALDE, JR. vice-chairperson Verzosa
for membership

Impairment Clause: The delivery of a note payable
to order or a bill of exchange or any other mercantile
document shall produce payment only when they
have been encashed or through the fault of creditor,
the value is impaired (CIVIL CODE, Art. 1249).
Features of a Negotiable Instrument:
1. Negotiability – It is that attribute or property
whereby a bill or note or check 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 to collect the sum payable for
himself free from defenses.
2. Accumulation of Secondary Contracts – When
negotiable instruments are transferred through
negotiation, secondary contracts are
accumulated because the indorsers become
secondarily liable not only to their immediate
transferees, but also to any holder or any party.
These indorsers are liable to said holder or
whoever may be compelled to pay the
instruments (AQUINO, Negotiable Instruments,
supra at 11).
KINDS OF NEGOTIABLE
INSTRUMENTS
I. Promissory Note (PN)
It is an unconditional promise, in writing, made by
one person to another, signed by the maker
engaging to pay, on demand or at a fixed or
determinable future time, a sum certain in money,
to order or to bearer (NIL, Sec. 184).
Parties
1. Maker – person who makes the promissory note
and promises to pay the amount stated therein;
2. Payee – person who is to receive payment.
May 1, 2013
Payee Manila
P10,000
Ten (10) days after date, I promise to pay to
Mr. A or order the sum of ten thousand pesos
(10,000).
Maker Sgd. Mr. B
Kinds of Promissory Notes:
1. Certificate of deposit – a form of promissory
note which is a written acknowledgment of a
bank of its receipt of a certain sum with a promise
to repay the same.
2. Bond – certificate or evidence of a debt on which
the issuing company or governmental body
promises to pay the bondholders a specified
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amount of interest for a specified length of time
and to repay the loan on expiration date.
3. Debenture – is a promissory note backed by
general credit of a corporation and usually not
secured by a mortgage or lien on any specific
property.
4. Bank note – promissory note of the issuing bank
which is payable to bearer on demand (AQUINO,
Negotiable Instruments, supra at 14).
II. Bill of Exchange (BE)
An unconditional order, in writing, addressed by
one person to another, signed by the person
giving it, requiring the person to whom it is
addressed to pay, on demand or at a fixed or
determinable future time, a sum certain in money,
to order or to bearer (NIL, Sec. 126).
Parties
1. Drawer – person who draws the bill of exchange
and orders the drawee to pay a sum certain in
money;
2. Drawee – the person to whom the order to pay is
addressed in a bill of exchange. He becomes the
acceptor when he accepts the order to pay made
by the drawer. It is only when he becomes an
acceptor that he becomes primarily liable
(SUNDIANG & AQUINO, Reviewer supra at 13).
Thus, prior to the acceptance of a bill of
exchange, there is no party primarily liable.
Legal Basis: A bill of itself does not operate as
an assignment of funds in the hands of the
drawee available for payment thereof, and the
drawee is not liable until and unless he accepts
the same (NIL, Sec. 127).
3. Payee – party in whose favor the bill is drawn or
is payable.
May 1, 2013
Payee Manila
P10, 000
Ten (10) days after date, pay Mr. A or order
the sum ten thousand pesos (10,000).
Drawer Sgd. Mr. B
To: Mr. Z Drawee / Acceptor
President, XYZ Corp
Mendiola, Manila
The parties need not all be distinct persons. Indeed,
a bill will be valid where there is only one party to it,
for one may draw on himself payable to his own
order, that is, the two parties to the bill can be the
same person (DE LEON, The Philippine Negotiable

Instruments Law (and allied laws) Annotated (2013), Instances when a BILL OF EXCHANGE may be
p.23 [hereinafter DE LEON, Negotiable Instruments treated as a PROMISSORY NOTE at the election
Law]). of the HOLDER: (CALFS)
1. Drawee does not have the Capacity to contract
Kinds of Bills of Exchange:
(NIL, Sec. 130);
1. Time draft – payable at a fixed date.
2. Where the bill is Ambiguous (NIL, Sec.17[e]);
2. Sight or demand draft – payable when the
3. Where the bill is drawn on a person who is
holder presents it for payment.
Legally absent;
3. Trade acceptance – the seller (as drawer)
4. Drawee is a Fictitious person (NIL, Sec. 130);
orders the buyer (as drawee) to pay a sum
5. The drawer and the drawee are the Same person
certain to the same seller (payee).
(NIL, Sec. 130);
4. Banker’s acceptance – a time draft across the
face of which the drawee bank has written the
Distinctions between a Bill of Exchange and
word “accepted.” The bank is normally an
Check
accommodation payor that lends it credit to the
Bill of Exchange Check
buyer, who in return, will pay the bank
When payable
commissions and other charges.
5. Clean bill of exchange – no document is May be payable on
attached when presentment for payment or demand or at a fixed or Always payable on
acceptance is made. determinable future demand
time
6. Documentary bill of exchange – document/s
is/are attached when presented for payment or Presentment
acceptance. Need not be presented
7. Check – it is the most common form of bill of for acceptance.
Must be presented for
exchange. It is a bill of exchange drawn on a However, if the holder
acceptance (NIL, Sec.
bank payable on demand (NIL, Sec. 185) requests and the
143)
(AQUINO, Negotiable Instruments Law, supra at banker desires, banker
13). may accept
Drawn on deposit
Distinctions between Promissory Note and Bill Need NOT be drawn on
of Exchange a deposit, hence it is
Promissory not necessary that the Drawn on deposit,
Bill of Exchange drawer of a bill of otherwise, there would
Note
Nature exchange should have be fraud
Unconditional promise Unconditional order funds in the hands of
the drawee
Number of parties
When presentment made
Involves three (3)
parties May be presented for Must be presented for
payment within payment within a
Involves two (2) parties reasonable time after reasonable time after
However, a drawee is
not a party until he its last negotiation its issuance
accepts the bill. Effect of acceptance/ certification
Liability of creator If certified - drawer/
If accepted - drawer/
Drawer is only indorsers are
Maker is primarily liable indorser remains liable
secondarily liable discharged
Presentment Effect of drawer’s death
May involve two (2) Death of a drawer of a
Death of the drawer of
Only one (1) presentments: BOE, with the
a check, with the
presentment: for 1) for acceptance (in knowledge of the bank,
knowledge of the bank,
payment cases provided in Sec. does not revoke the
revokes the authority of
143) and 2) for payment authority of the drawee
the banker to pay
Right to limit liability to pay
Drawer may insert in the
Maker of note may not Other parties to a negotiable instrument:
instrument an express
insert an express
stipulation limiting or 1. Indorser – a person placing his signature upon
stipulation limiting or
negating his own liability an instrument other than as maker, drawer, or
negating his own liability
to the holder (NIL, Sec. acceptor; a person who transfers or negotiates
to the holder
61)

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an instrument by indorsement completed by instrument as a negotiable one. It is merely a simple
delivery. contract in writing and is evidence of such intangible
2. Indorsee, in the case of instrument payable to rights as may have been created by the assent of
order; the parties (DE LEON, Negotiable Instruments Law,
3. Persons negotiating by mere delivery; supra at 17).
4. Persons to whom the instrument is negotiated by
mere delivery, in case the instrument is payable Distinctions between Negotiable Instruments
to bearer. and Non-Negotiable Instruments
5. Holder – payee or indorsee of a bill or note who Negotiable Non-Negotiable
is in possession of it or the bearer thereof (NIL, Instruments Instruments
Sec. 191). Applicable law
6. Acceptor – a drawee who accepts the order to Only NI is governed by Application of the NIL
pay made by the drawer. It is only when a the NIL is only by analogy
drawee becomes an acceptor that he is primarily Transferability
liable. Transferable by Transferable only by
7. Referee in case of need (NIL, Sec.131) – a negotiation or by Assignment
person who may be designated in the instrument assignment
as the person who may be resorted to by the Transferee
parties in case of dispute (SUNDIANG & The transferee can be a
AQUINO, Reviewer, supra at 13). The transferee
HDC if all the
8. Accommodation Party – one who has signed remains to be an
requirements under
the instrument as maker, drawer, acceptor or assignee and can
Sec. 52 are complied
indorser, without receiving value therefore, and never be a HDC
with
for the purpose of lending his name to some Defenses
other person (NIL, Sec. 29). A holder in due course All defenses available
takes the NI free from to prior parties may be
Incidents in the Life of a Negotiable Instrument: personal defenses and raised against the last
(PIN-PAD-PND-PD) defects in title transferee
1. Preparation and signing complete with all the
Nature of title
requisites provided for in Section 1 of the NIL
Requires clean title,
2. Issuance - first delivery of the instrument to the
one that is free from
payee
any infirmities in the Transferee acquires a
3. Negotiation - transfer from one person to another
instrument and defects derivative title only
so as to constitute the transferee a holder
of title of prior
4. Presentment for acceptance, in certain kinds of
transferors
Bills of Exchange
Solvency of the debtor
5. Acceptance - written assent of the drawee to the
Solvency of debtor is in
order
a sense guaranteed by
6. Dishonor by non-acceptance - refusal to accept
the indorsers because Solvency of debtor is
by the drawee
they engage that the not guaranteed under
7. Presentment for payment - the instrument is
instrument will be Art. 1628 of the CC
shown to the maker or drawee/acceptor for him
accepted, paid or both unless expressly
to pay
and that they will pay if stipulated
8. Notice of dishonor - notice to persons secondarily
liable that the maker or the drawee/acceptor the instrument is
refused to pay or to accept the instrument dishonored
9. Dishonor by non-payment - refusal to pay by the
maker or drawee/acceptor Examples of non-negotiable instruments:
10. Protest 1. Treasury Warrant – it is payable out of a
11. Discharge (AQUINO, Negotiable Instruments, particular fund of the national treasury
supra at 20-21). (Metrobank v. CA, G.R. No. 88866, February 18,
1991).
2. Postal Money Orders
N O N -N E G O T I A B L E a. Regulations or restrictions are imposed on
postal money orders which are inconsistent
INSTRUMENTS with the character of a NI. The rules provide for
Non-negotiable instruments – those which does not more than one indorsement and that
not meet the requirements laid down to qualify an payment may be withheld under a variety of
circumstances;

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b. The post office is not run by the government for
commercial profit, but for public service
(Philippine Education Co., Inc. v. Soriano, G.R.
No. L-22405, June 30, 1971).
3. Letters of Credit – it does not contain an
unconditional promise or order to pay because
payment or advancement made by the entity
(bank) requested to pay should be made only if
the third person (seller) presents certain
documents. In addition, it is payable to a
specified person and not to order.
4. Trust Receipt – it is not negotiable under the NIL
because it is an evidence of ownership of goods
not money (SUNDIANG & AQUINO, Reviewer,
supra at 12).
5. Negotiable Document of Title, Bill of Lading
and Warehouse Receipt – it is not a negotiable
instrument because it represents goods, not
money.
6. Certificate of Stocks – it is not negotiable
because there is no order or promise to pay. It is
a written evidence of shareholdings of a person
in a corporation. Thus, it does not represent an
obligation to pay a sum certain in money
(AQUINO, Negotiable Instruments, supra at 39).
7. Cash Disbursement Voucher – it is not a
negotiable instrument because it is nothing more
than a receipt evidencing payment by borrowers
of the loans previously extended to them.
8. Negotiable Order of Withdrawal – it is not
negotiable because it is payable to a specified
person.
NEGOTIABILITY
Factors that affect the determination of
negotiability of instruments: (WART)
1. The Whole of the instrument shall be considered;
2. Only what Appears on the face of the instrument
shall be considered;
3. Requisites enumerated in Sec.1 of the NIL; and
4. Should contain words or Terms of negotiability
such as “order” or “bearer” (AQUINO, Negotiable
Instruments, supra at 23).
Requisites of Negotiability: (WU-POA)
1. It must be in Writing and signed by the maker
or drawer
a. Writing
Section 1 of the NIL does not specify the
materials that should be used in writing the
instrument nor the material on which the
writing should be made. Hence, the writing
may be printed, in ink or in pencil, and it may
be written on any material that substitutes
paper. Section 191 of the NIL provides that
the word “written” includes printed, and the
“writing” includes print (AQUINO, Negotiable
Instruments, supra at 28).
b. Signature
May be in one’s own handwriting, or it may be
printed, engraved, lithographed or
photographed, so long as the signature is
affixed by the one signing with the intent to
authenticate the writing (AQUINO, Negotiable
Instruments, supra at 28).
Signature is prima facie evidence of his
intention to be bound as either maker or
drawer. However, if the signature is so placed
upon the instrument that it is not clear in what
capacity the person intended to sign, he is
deemed an indorser (NIL, Sec. 17[f]) and not
a maker or drawer.
One who signs under a trade or assumed
name shall be liable to the same extent as if
he had signed in his own name (NIL, Sec. 18).
2. It must contain an Unconditional promise or
order to pay a sum certain in money
a. Unconditional Promise or Order to pay
The word “promise” or “order” need not
appear in the instrument to satisfy the
requirements of Section 1. Any word/s
equivalent to a promise or assumption of
responsibility for the payment of the note (like
“payable”, “I agree to pay”, etc.) on the face of
an instrument is/are sufficient to constitute a
“promise to pay.”
There is no “promise” if there is a mere
acknowledgement of debt (Jimenez v. Bucoy,
G.R. No. L-10221, February 28, 1958).
Mere authority and/or request to pay render
the instrument non-negotiable because it does
not contain an order to pay.
The promise or order is conditional if the
promise or order is made to depend on a
contingent event. Even if the contingent event
occurs, the instrument is not converted into a
negotiable instrument. Under Articles 1173
and 1181 of the Civil Code, a condition is a
future and contingent event, or a past event
unknown to parties, the happening or non-
happening of which will either give rise to an
obligation or extinguish existing obligations.
Thus, the negotiability of an instrument is
destroyed if it contains a resolutory or
suspensive condition (AQUINO, Negotiable
Instruments, supra at 31).
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An unqualified order or promise to pay is drawee may not be fully (AQUINO, Negotiable
unconditional though coupled with: reimbursed (AQUINO, Instruments, supra at
i. An indication of a particular fund out of Negotiable Instruments, 34).
which reimbursement is to be made, or a supra at 33).
particular account to be debited with the
amount; or Subject to another transaction (non-
ii. A statement of the transaction which gives negotiable)
rise to the instrument. But an order or The instrument is rendered non-negotiable
promise to pay out of a particular fund is not when the promise or order is subject to the
unconditional (NIL, Sec. 3). terms and conditions of the transaction stated,
(VILLANUEVA, Commercial Law Review,
Fund for Reimbursement v. Particular Fund (2004)) [hereinafter VILLANUEVA,
for Payment Test Commercial Law]. Even if the separate
Does the instrument carry the general credit contract is not in itself conditional, the fact that
of the drawer or the maker, or only the credit the instrument is burdened by the restrictions
of a particular fund (GUEVARRA, Handbook of the separate contract makes it conditional
th
of Commercial Law, 10 ed., p.354) and thus, non-negotiable.
[hereinafter GUEVARRA, Commercial Law].
Reference to another transaction
Distinctions between Fund for Reimbursement (negotiable)
and Particular Fund for Payment Reference to another transaction or document
Fund for Particular Fund for must be descriptive rather than restrictive. It
Reimbursement Payment must only give information that it was issued
Acts Involved in connection with a particular transaction or
There is only one act- document and not make the order or promise
the drawee pays dependent on or burdened by the other
Drawee pays the payee transaction (AQUINO, Negotiable Instruments,
directly from the
from his own funds; supra at 32).
particular fund
afterwards, the drawee
indicated. Payment is
pays himself from the b. Payable in sum certain in money
subject to the condition
particular fund indicated A sum is certain if the amount to be
that the fund is
sufficient unconditionally paid by the maker or drawee
Nature of Fund Indicated can be determined on the face of the
Particular fund instrument, and it is not affected by the fact
that the exact amount is arrived at only after a
indicated is not the
Particular fund mathematical computation (AQUINO,
direct source of
indicated is the direct Negotiable Instruments, supra at 45).
payment but only the
source of payment
source of
The certainty is not affected although it is
reimbursement
to be paid: (ISA-Ex-Co)
Effect
i. With Interest; or
Unconditional Conditional
ii. By Stated installments;
Example
For the amount to be certain:
Pay to the order of A Pay to the order of A 1. The amount of each installment is
P10, 000 and debit the P10, 000 out of my indicated; and
same from my account account with you 2. The due date is fixed or at least
Sgd. B Sgd. B determinable.
Note: This is negotiable Note: This is not iii. By stated installments with a statement that
because the order is negotiable because upon default in payment of any installment
unconditional. What is payment is subject to or interest, the whole shall become due
reflected is an absolute the condition that the (Acceleration clause);
obligation to pay the account from which iv. With Exchange, whether at a fixed rate or at
amount of P10,000.00. payment is to be made a current rate; or
If the funds in the has sufficient funds. No v. With cost of Collection or attorney’s fees, in
account are insufficient, payment will be made if case payment shall not be made at maturity
there would still be an the amount in the (NIL, Sec. 2).
obligation to pay the account contains less
payee although the than P10,000.00

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An instrument which contains an order or
promise to do any act in addition to payment of
money is not negotiable. But the negotiable
character of an instrument otherwise negotiable
is not affected by a provision which gives the
holder an election to require something to be
done in lieu of payment of money (e.g. either
deliver 2, 000 Pesos or 2 sacks of rice) (NIL, Sec.
5). This is because there still remains to be an
absolute obligation to pay a sum certain in money
(AQUINO, Negotiable Instruments, supra at 44).
An instrument is still negotiable although the
amount to be paid is expressed in currency that
is not legal tender so long as it is expressed in
money (PNB v. Zulueta, G.R. No. L-7271,
August 30, 1957).
Under Section 1 of RA 8183, all monetary
obligations shall be settled in the Philippine
currency which is the legal tender in the
Philippines. However, the parties may now, not
only in the case of negotiable instrument, but any
contract involving payment of debt in money,
validly agree that payment should be made in a
foreign currency under R.A. 8183 which repealed
the Uniform Currency Act or R.A. 529.
3. Payable on demand or at a fixed or
determinable future time
a. When Payable on Demand
i. When expressed to be payable on demand,
at sight or on presentation;
The word “sight” means upon
presentment.
ii. In which no time for payment is expressed;
Where an instrument is issued, accepted or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand (NIL, Sec. 7).
4. Payable to Order or Bearer
b. Payable at a Fixed or Determinable Future
Time
i. At a fixed period after date or sight;
After sight – means after the drawee has
seen the instrument upon the presentment
for acceptance;
ii. On or before a fixed or determinable future
time specified therein; or
iii. On or at a fixed period after the occurrence
of a specified event which is certain to
happen, though the time of happening is
uncertain (NIL, Sec. 4).
An instrument payable upon a contingency is
not negotiable, and the happening of the
event does not cure the defect (NIL, Sec. 4).
Acceleration Clause
The negotiability of an instrument is not
affected even if it is to be paid by stated
installments, with a provision, that upon
default in payment of any installment or of
interest, the whole shall become due (NIL,
Sec. 2).
Insecurity Clause
Provisions in the contract which allow the
holder to accelerate payment “if he deems
himself insecure” renders the instrument non-
negotiable because the holder’s whim and
caprice prevail without the fault of the maker
(AQUINO, Negotiable Instruments, supra at
50).
Extension Clause
An instrument is payable at a definite time if
by its terms, it is payable at a definite time
subject to extension at the option of the
holder, or to extension to a further definite
time at the option of the maker or acceptor or
automatically upon or after a specified event
or act (e.g. payable after 2 years from date
subject to extension for another year at the
option of the maker) (SUNDIANG & AQUINO,
Reviewer, supra at 21).
Payment on Installments
If the instrument states that the amount shall
be paid in two equal installments, the second
being payable on a fixed date, the instrument
can be considered negotiable since the first
installment would then be payable on demand
(VITUG, Pandect of Commercial Law and
Jurisprudence, (2006)) [hereinafter, VITUG,
Commercial Law].
This means that an instrument, to be negotiable,
must contain words of negotiability. These words
are indispensable because it serves as an
expression of consent that the instrument may be
transferred by negotiation. The consent is
indispensable since a maker assumes greater
risk under a negotiable instrument than under a
non-negotiable instrument (AQUINO, Negotiable
Instruments, supra at 51).
a. Payable to Order (NIL, Sec. 8)
The instrument is payable to order where it is
drawn payable to the order of a specified
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person, or to him or his order. It may be drawn
payable to the order of:
i. A payee who is not the maker, drawer or
drawee;
The payee must be named or otherwise
indicated therein with reasonable certainty
(NIL, Sec 8).
If there is no payee, in an instrument that is
payable to order, no one could indorse the
instrument.
Subject to the rules in Sec. 13, 14, and 15 on
incomplete instruments, leaving the payee
blank may make the instrument non-
negotiable because an instrument payable
to order may be negotiated ONLY by
indorsement AND delivery.
iv. When the name of the payee does Not
ii. The drawer or maker;
A note payable to the order of the maker is
not complete until indorsed by him (NIL,
Sec. 184).
Where the instrument is payable to the
order of the drawer and it is accepted by the
drawee, the instrument is equivalent to a
promissory note made by the acceptor in
favor of the drawer (AGBAYANI,
Commercial Laws of the Philippines, (1992)
[hereinafter AGBAYANI, Commercial
Laws]).
v. When the Only or last indorsement is an
iii. The drawee;
iv. Two or more payees jointly;
v. One or some of several payees; or
vi. The holder of an office for a time being.
b. Payable to Bearer
A negotiable instrument is payable to bearer
when: (EPF-NO)
i. When it is Expressed to be so payable; or
ii. When it is payable to a Person named
therein or to bearer;
iii. 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 (NIL, Sec. 9);
Fictitious Payee Rule
An actual, existing, and living payee may
also be “fictitious” if the maker of the check
did not intend for the payee to in fact
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receive the proceeds of the check. This
usually occurs when the maker places a
name of an existing payee on the check for
convenience or to cover up an illegal activity
(PNB v. Rodriguez, G.R. No. 170325,
September 26, 2008).
In a fictitious-payee situation, the drawee
bank is absolved from liability and the
drawer bears the loss. When faced with a
check payable to a fictitious payee, it is
treated as a bearer instrument that can be
negotiated by delivery. One cannot expect a
fictitious payee to negotiate the check by
placing his indorsement thereon. Since the
maker knew this limitation, he must have
intended for the instrument to be negotiated
by mere delivery (PNB v. Rodriguez, G.R.
No. 170325, September 26, 2008).
purport to be the name of any person such
as pay to cash or pay to the order of money;
A check that is payable to the order of cash
is payable to bearer (Ang Tek Lian v. CA,
G.R. L-2516, September 25, 1950).
Reason: In this case, the payee named is
one who does not exist and has never
existed. Since indorsement is obviously
impossible, the manifest intention of the
drawer is to make the instrument a bearer
paper negotiable by delivery.
indorsement in blank (NIL, Sec. 9).
An order instrument is negotiated by
delivery and indorsement. Indorsement can
either be special or blank indorsement.
When negotiation is made through an
indorsement in blank coupled with delivery,
it converts the order instrument into a bearer
instrument and may further be negotiated by
delivery only. ONCE A BEARER
INSTRUMENT ALWAYS A BEARER
INSTRUMENT even if indorsed specially
(NIL, Sec. 40).
Only instruments under subsections A and
B are bearer instruments on its face. Those
under subsections C, D, and E are order
instruments on its face.

Distinctions between Instruments Payable to d. Gives the holder an election to require
Order and those Payable to Bearer something to be done in lieu of payment of
Instruments payable Instruments payable money (NIL, Sec. 5).
to order to bearer
Payee 2. Omissions (DVP-SM)
a. It is not Dated – The date referred is the date
The payee must be The payee need not be of the making or drawing of the instrument. If
named or indicated with indicated. It is enough the instrument is not dated, it will be
reasonable certainty. that it is expressed to
considered to be dated as of the time it was
be payable to bearer.
issued (NIL, Sec. 17 [c]).
Negotiation
It is negotiated by It is negotiated by mere However, Section 13 of NIL provides that
indorsement coupled delivery. where an instrument expressed to be payable
with delivery. at a fixed period after date is issued undated,
Conversion or where the acceptance of an instrument is
Instrument originally Instrument originally payable at a fixed period after sight is
payable to order can be payable to bearer undated, any holder may insert therein the
converted into a bearer cannot be converted true date of issue or acceptance, and the
instrument through into order instrument. A instrument shall be payable accordingly. The
blank indorsement. bearer instrument is insertion of a wrong date does not avoid the
always a bearer instrument in the hands of a subsequent
instrument and can be holder in due course; but as to him, the date
negotiated by mere so inserted is to be regarded as the true date.
delivery even if
specially indorsed. Where the instrument is dated, such date is
deemed prima facie to be the true date of the
5. When the instrument is Adressed to a drawee, making, drawing, acceptance, or indorsement,
he must be named or otherwise indicated as the case may be (NIL, Sec. 11).
therein with reasonable certainty
This requirement is applicable only to a bill of b. It does not specify the Value given or that any
exchange. However, omission of drawee may be value has been given;
filled later on (NIL, Sec. 14). Reason: Every negotiable instrument is
deemed prima facie to have been issued with
A bill may be addressed to 2 or more drawees valuable consideration (NIL, Sec. 24).
jointly, whether they are partners or not, but NOT
to 2 or more drawees in the alternative or in c. It does not specify the Place where it is drawn
succession (NIL, Sec. 128). or where it is payable;

Provisions and Omissions that do not affect the
Negotiability of Instruments
1. Provisions which:
a. Authorizes the sale of collateral securities in
case the instrument is not paid at maturity;
b. Authorizes a confession of judgment if the
instrument is not paid at maturity;
Confession of judgment is authority given in
advance by the obligor to another to confess
judgment in case of future litigation. It does
not affect the negotiability of instruments
(AQUINO, Negotiable Instruments, supra at
68).
3. Acceptance
c. Waives the benefit of any law intended for the
advantage or protection of the obligor; or
In case no place for payment is indicated in
the instrument, the place of presentment shall
be:
i. The address of the person who will make
the payment if his address is indicated in the
instrument; or
ii. If no address is indicated, the usual place of
business or residence of the person who will
make payment (NIL, Sec. 73).
d. It bears a Seal;
e. It designates a particular kind of current
Money in which payment is to be made (NIL,
Sec. 6).
The acceptance of a bill of exchange is not
important in the determination of its negotiability.
The nature of acceptance is important only on the
determination of the kind of liabilities of the

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parties involved (PBCom v. Aruego, G.R. Nos. L-
25836-37, January 31, 1981).
4. Indorsement
The presence of an indorsement of the
instrument does not affect the negotiability of the
instrument.
The ambiguity is taken contra proferentem, that
is, construed against the party who caused the
ambiguity and could have avoided it by the
exercise of a little more care (Equitable Banking
Corporation v. Intermediate Appellate Court, G.R.
No. L-74451, May 25, 1988).

However, where a note is drawn to the maker’s TRANSFER

own order, it is not complete until indorsed by
him (NIL, Sec. 184).
If an instrument is negotiable, it may be transferred
through (1) negotiation; (2) assignment or (3) by
Moreover, an indorser may prohibit further
operation of law.
negotiation of the instrument, (restrictive
indorsement) in which case, subsequent
1. Negotiation
transferees can no longer be considered holders
It is the transfer of the instrument from one
(NIL, Sec. 36).
person to another so as to constitute the
transferee the holder thereof (NIL, Sec. 191).

INTERPRETATION OF 2. Assignment
NEGOTIABLE INSTRUMENTS It is a method of transferring a negotiable or non-
negotiable instrument whereby the assignee
merely steps into the shoes of the assignor and
The rules in this section are applicable only when acquires the instrument subject to all defenses
the instrument is ambiguous or uncertain or when that may be set up against the transferor.
there are omissions therein. If the terms are clear,
the instrument must be enforced as it reads. A person taking a negotiable instrument by
assignment in a separate piece of paper takes it
Where the meaning is doubtful, the courts have subject to the rules applying to assignment. And
adopted the policy of resolving in favor of the where the holder of the bill payable to order
negotiability of the instrument. transferred it without indorsement, it operates as
an equitable assignment.
Rules:
1. Words prevail over figures. However, the amount If an instrument is not negotiable, it can still be
in numbers will control if the amount in words is transferred but only through assignment.
not clear.
2. Interest stipulated runs from the date of the Distinctions between Negotiation and
instrument or, if undated, from its issue. Assignment
3. If undated, the instrument is deemed dated at its Negotiation Assignment
issue. Applicable Law
4. Written words prevail over printed provisions. Governed by the NIL
5. When a person writes something on a document (Sesbreño v. CA, G.R. Governed by the Civil
that already contains printed words, the No. 89252, May 24, Code
presumption is that the written words or figures 1993)
represent the real intent of the person who is Type of Transaction
writing. It can be inferred that his intention is to Pertains to contracts in
Pertains to NI
modify what is printed on the document. general
6. When there is doubt whether the instrument is a Nature of the Transferee
bill or note, the holder, at his election, may treat it The transferee is a
as either as a bill or as a note. The transferee is a
holder who may be a
7. When it is not clear in what capacity a person mere assignee
holder in due course
signs, he is deemed an indorser; As to possibility of becoming holder in due
8. When two or more persons sign “We promise to course
pay,” their liability is joint (each liable for his part)
but if they sign “I promise to pay,” the liability is The transferee can be a The transferee can
solidary (each can be compelled to comply with holder in due course in never be a holder in
the entire obligation). proper cases due course
Availability of defenses

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Holder in due course Assignee takes the
may be free from instrument subject to
personal defenses the defenses obtaining
available among the among the original
parties parties
Rights Acquired
Assignee steps into the
Holder in due course
shoes of the assignor
may acquire a better
and merely acquires
right than the right of
whatever rights the
the transferor
assignor may have
The distinction between negotiation and
assignment is immaterial to the holder when:
a. There is no available defense between the
parties;
b. It is also immaterial between immediate or
contracting parties or privies because defenses
may always be raised against each other
based on their contract.
3. By operation of law
a. By the death of holder, where the title vests in
his personal representatives;
b. By the bankruptcy of the holder, where the
title vests in his assignee or trustee;
c. Upon the death of a joint payee or indorsee, in
which case the title vests in the surviving
payee or indorsee in general (AGBAYANI,
Commercial Laws, supra).
NEGOTIATION
How Negotiation takes place:
1. Issuance – It is the first delivery of the
instrument, complete in form, to a person who
takes it as a holder (NIL, Sec. 191).
Note: Issuance to the payee is negotiation
because the transfer constitutes the payee the
holder of the instrument (AQUINO, Negotiable
Instruments, supra at 96).
It can be inferred from the definition of the word
“issue” that delivery is the final act essential to
the consummation of the instrument as an
obligation. Without delivery, the instrument
cannot be deemed as issued (AQUINO,
Negotiable Instruments, supra at 97).
Steps:
a. Mechanical act of writing the instrument
completely and in accordance with the
requirements of Sec. 1; and
b. The delivery of the complete instrument by the
maker or drawer to the payee or holder with
the intention of giving effect to it (DE LEON,
Negotiable Instruments Law).
Delivery – is the transfer of possession with
intent to transfer title (NIL, Sec. 15 & 16). It is the
transfer of possession of the instrument by the
maker or drawer with the intention to transfer title
to the payee and recognize him as holder thereof
(De la Victoria v. Burgos, G.R. No. 111190, June
27, 1995).
2. Subsequent Negotiation – an instrument is
negotiated when it is transferred from one person
to another in such a manner as to constitute the
transferee the holder thereof (NIL, Sec. 30).
a. If payable to bearer, a negotiable instrument
may be negotiated by mere delivery.
b. If payable to order, a NI may be negotiated
by indorsement completed by delivery.
Incomplete negotiation of ORDER instrument
It exists when the holder of an instrument,
payable to his order, transfers it for value without
indorsing it. The transfer vests in the transferee
the following rights:
a. Title which the transferor had therein; and
b. Right to have the indorsement of the
transferor.
The instrument is, in effect, merely assigned to
the transferee. It is only at the time of
indorsement that the transferee acquires all the
rights of a holder. The requisites of a HDC must,
therefore, be present at the time of such
indorsement and not at the time of delivery.
The transaction is an equitable assignment. The
transferee acquires the instrument subject to
defenses and equities available among prior
parties. Thus, the transferee acquires the legal
title of the transferor, the right to have the
indorsement of the transferor and the right, as
holder of legal title, to maintain legal action
against the maker or acceptor or other party
liable to the transferor (BPI v. CA, G.R. No.
136202, January 25, 2007).
Transferees in this situation do not enjoy the
presumption of ownership in favor of holders.
Mere possession of a negotiable instrument does
not in itself conclusively establish either the right
of the possessor to receive payment, or of the
right of one who has made payment to be
discharged from liability (BPI v. CA, G.R. No.
136202, January 25, 2007).
For the purpose of determining whether the
transferee is a holder in due course, the
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negotiation takes effect as of the time when the
indorsement is made. Hence, before the
indorsement, the transferee is not a holder (NIL,
Sec. 49).
3. Indorsement – the writing of the name of the
indorser on the instrument with the intent either to
transfer the title to the same, or to strengthen the
security of the holder by assuming a contingent
liability for its future payment, or both.
INDORSEMENT
How Indorsements are Made
The indorsement must be written:
1. On the instrument itself; or
2. Upon a paper attached thereto (allonge). The
signature of the indorser without additional words
is sufficient (NIL, Sec. 31).
Where the indorsement is written in an allonge, the
same must be tacked or pasted on the instrument so
as to become part of it; otherwise, it cannot be
considered an allonge.
The signature of the indorser, without any additional
words, is a sufficient indorsement (NIL, Sec. 30).
Indorsement may be made in any form, as long as it
is meant to be an indorsement.
Nature: An indorsement is not only a mode of
transfer, it is also a contract.
Indorsement as a contract
Unless the indorsement is qualified (NIL, Sec. 65),
every indorser is a new obligor and the terms are
found on the face of the bill or note, with the
additional obligation that if the instrument is
dishonored by non-payment or non-acceptance, and
notice is given to the indorser, the latter will pay for
it.
Kinds of Indorsement
1. As to the methods of negotiation (special/
blank)
a. Special – Specifies the person to 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 (NIL, Sec. 34).
If the instrument is originally payable to order,
and it is negotiated by the payee by special
indorsement, the indorsement of the indorsee
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is necessary to further negotiate the
instrument (NIL, Sec. 34).
If the instrument is originally payable to
bearer, it may nevertheless be further
negotiated by mere delivery even if the
original bearer indorsed it specially (NIL, Sec.
40).
b. Blank – Specifies no person to whom or to
whose order the instrument is to be payable
(NIL, Sec. 34).
Rules on Blank Indorsement:
i. If originally payable to order and negotiated
by special indorsement, it can be further
negotiated by indorsement completed by
delivery;
ii. If originally payable to order and negotiated
by blank indorsement, it can be negotiated
further by mere delivery; or
iii. 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 (NIL, Sec. 35).
2. As to presence or absence of limitations
(absolute/conditional)
a. Absolute – One by which the indorser binds
himself to pay, upon no other condition than
failure of prior parties to do so; and upon due
notice to him of such failure (DE LEON, Law
on Negotiable Instruments, supra at 176).
b. Conditional – One by which the indorser
imposes some other conditions to his liability
or on the indorsee’s right to collect the
proceeds of the instrument (Id. at 176).
If an indorsement is conditional, the party
required to pay the instrument may disregard
the condition. He may make payment to the
indorsee or his transferee whether the
condition has been fulfilled or not. But any
person to whom the instrument so indorsed is
negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person
indorsing conditionally (NIL, Sec. 39).
Conditional indorsement does not render an
instrument non-negotiable but if the condition
is on the face of the instrument, the condition
renders it non-negotiable as the promise or
order therein would not be unconditional (DE
LEON, Law on Negotiable Instruments, supra
at 176).

3. As to the kind of title transferred:
Restrictive Indorsement
General Rule: An instrument negotiable in its
ORIGIN continues to be negotiable.
Exception: When the instrument had been
restrictively indorsed or discharged by payment
or otherwise (NIL, Sec. 47).
An instrument is restrictive when it: (PAT)
a. Prohibits further negotiation of the
instrument; or
b. Constitutes the indorsee as the Agent of the
indorser (e.g. indorsement for deposit); or
c. Vests the Title in the indorsee in trust for or
to the use of some other persons (NIL, Sec
36).
For the second and third type of restrictive
indorsement, the instrument may still be
negotiated by the indorsee but the
subsequent indorsee will also be an agent or
trustee. Since the title of the first indorsee is
that of an agent or trustee, he can only
transfer the same title of an agent or trustee
to the subsequent transferee (AQUINO,
Negotiable Instruments, supra at 116).
Effects of Restrictive Indorsement: (RAT)
Confers upon the indorsee the right to:
a. Receive payment of the instrument;
b. Bring any Action thereon that the indorser
could bring;
c. Transfer his rights as such indorsee, where
the form of the indorsement authorizes him to
do so (NIL, Sec. 37).
Mere absence of words implying power to
negotiate does not make an indorsement
restrictive (NIL, Sec. 36). It must clearly indicate
that further negotiation is prevented (AQUINO,
Negotiable Instruments, supra at 115).
4. As to scope of liability of indorser
Qualified – Constitutes the indorser a mere
assignor of the title to the instrument (NIL, Sec.
38). It is made by adding to the indorser's
signature words like "sans recourse,” “without
recourse", "indorser not holder", "at the indorser's
own risk", other terms of similar import.
“Without Recourse”– means without resort to a
person secondarily liable after the default of the
person primarily liable.
Qualified indorsement is usually resorted to if the
indorser wants to transfer his rights over the
instrument but does not want to assume
responsibilities under the secondary contract.
Effects of Qualified Indorsement:
a. A qualified indorser has limited liability, i.e., he
is secondarily liable for breach of warranties
as an indorser under Section 65 unless such
indorsement specifically excludes such
warranties. Thus, he is liable if the instrument
is dishonored by non- acceptance or non-
payment due to:
i. Forgery – warranty as to genuineness;
ii. Lack of good title on the part of the indorser
– warranty as to good title;
iii. Lack of capacity to indorse on the part of the
prior parties – warranty as to capacity to
contract; or
iv. Fact that at the time of the endorsement, the
instrument was valueless or not valid, and
he knew of the fact – warranty as to
ignorance of certain facts.
b. A qualified indorsement does not impair the
negotiable character of the instrument (NIL,
Sec. 38);
c. A qualified indorser is liable to all the parties
who derive their title through his indorsement.
5. Other kinds of indorsement (joint / irregular)
a. Joint Indorsement – All must indorse when
an instrument is payable to the order of two or
more payees or indorsees who are not
partners, all must indorse (NIL, Sec. 41).
Reason: To make it an indorsement of the
entire instrument because if only one
indorses, he passes only his part of the
instrument.
Exceptions:
i. Where the payee or indorsee are partners;
and
ii. Where the payee or indorsee indorsing has
authority to indorse for the others.
b. Irregular – A person who, not otherwise a
party to an instrument, places thereon his
signature in blank before delivery (NIL, Sec.
64).
Liability of Irregular Indorser:
i. If the instrument is payable to the order of a
third person, he is liable to the payee and to
all subsequent parties.
ii. If the instrument is payable to the order of
the maker or drawer, or is payable to
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bearer, he is liable to all parties subsequent
to the maker or drawer.
iii. If he signs for the accommodation of the
payee, he is liable to all parties subsequent
to the payee.
Rules on Indorsement:
1. The indorsement must be of the entire
instrument. An indorsement which purports to
transfer to the indorsee a part only of the amount
payable, or which purports to transfer the
instrument to two or more indorsees severally,
does not operate as a negotiation of the
instrument (NIL, Sec. 32).
Exception: When the instrument had been paid
in part, it may be indorsed as to the residue.
2. 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 an officer, and may be negotiated by either
indorsement of the bank or corporation or
indorsement of the officer (NIL, Sec.42).
Nevertheless the cashier or the treasurer may
prove that the instruments were in fact indorsed
to them in their personal capacities and not to the
corporations. They can prove that they own the
instruments.
3. 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 (NIL,
Sec.43).
4. Where a person is under obligation to indorse in
a representative capacity, he may indorse in
such terms as to negate personal liability (NIL,
Sec. 44).
a. He must add words describing himself as
agent;
b. He must disclose his principal;
c. He must be duly authorized in writing.
Presumptions as to time and place of
indorsement
As to Time of Indorsement
General Rule: Negotiation is deemed prima facie to
have been effected before the instrument is
overdue.
Exception: If the indorsement bears a date after the
maturity of the instrument (NIL, Sec. 45).
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If the indorsement bears a date, the presumption
would be that the date written is the true date (NIL,
Sec. 11).
As to Place of Indorsement
Except where the contrary appears, every
indorsement is presumed to have been made at the
place where the instrument is dated (NIL, Sec. 46).
Negotiation by a prior party
Where an instrument is negotiated back to a prior
party, such party may 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 (NIL, Sec. 50).
Reason: To avoid circuitousness of suits.
Where the instrument is paid by a party secondarily
liable thereon, it is not discharged; but the party so
paying it is remitted to his former rights as regards
all prior parties, and he may strike out his own and
all subsequent indorsements, and again negotiate
the instrument except
a. Where it is payable to the order of a third person,
and has been paid by the drawer; and
b. Where it was made or accepted for
accommodation, and has been paid by the party
accommodated (NIL, Sec. 121).
Reason for the exceptions: The ones who made
payment are those who are ultimately liable to pay
the obligation.
Striking out of Indorsement
The holder may at any time strike out any
indorsement which is not necessary to his title (NIL,
Sec. 48).
Effect: The indorser whose indorsement is struck
out, and all indorsers subsequent to him are thereby
relieved from liability on the instrument (NIL, Sec.
48).
If the instrument is negotiated by special
indorsement, the holder has no right to strike out
such indorsement nor can he convert the special
indorsement into a blank indorsement.
When holder may strike out indorsement:
1. Instrument originally payable to bearer
By virtue of Sec. 48, the holder may strikeout all
intervening indorsement or any of them for none
of them is necessary to his title.
2. Instrument originally payable to order
When a blank indorsement is followed by special
indorsement and the holder strikes out all

indorsements subsequent to the blank
indorsement, the instrument would become
payable to bearer as the last indorsement would
be in blank. The special indorsements are not
necessary to the holder’s title as he could have
acquired title to the instrument by mere delivery
(DE LEON, Law on Negotiable Instruments).
The indorser may not strikeout the payee’s
indorsement since the instrument is payable to
order, it can’t be validly negotiated without his
indorsement.
HOLDER
Holder
A holder is a payee or indorsee of a bill or note who
is in possession of it or the bearer thereof (NIL, Sec.
191, par. 7). The holder of an order instrument is the
payee or indorsee while the holder of a bearer
instrument is the payee or bearer (SUNDIANG &
AQUINO, Reviewer, supra at 32).
Classes of Holders:
1. Holders In Due Course – one who has taken the
instrument under the conditions of Sec. 52 and
holds the instrument free from personal defenses
available to prior parties.
2. Simple Holders Or Holders Not In Due Course
– one who became a holder without any, some or
all of the requisites under Sec. 52. He holds the
instrument subject to the same defenses as if it
were non-negotiable. He may enforce the
instrument and receive payment therefore.
3. Holders For Value – where value has at anytime
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 (NIL,
Sec.26).
Importance of the Classification
Each class of holders has defenses which are
available to one class and which may not be
available to other classes (DE LEON, Law on
Negotiable Instruments, supra).
If there are no defenses, the distinction between a
HDC and one who is not a HDC is immaterial
(AQUINO, Negotiable Instruments, supra).
Holder in Due Course (HDC)
A holder in due course is a holder who has taken the
instrument under the following conditions: (COVI)
1. That the instrument is Complete and regular
upon its face;
a. Complete
An instrument is incomplete when it is wanting
in any material particular proper to be inserted
in a negotiable instrument without which the
same will not be complete (NIL, Sec. 14). BUT
if the omission is not an important particular,
such omission will not deprive the holder of
the right of a holder in due course.
Reason: The taking of an incomplete
instrument puts the purchaser on inquiry as to
why it is incomplete. If he fails to do so, he
takes the instrument subject to all defenses.
b. Regular on its face
To render the instrument irregular under sec
52(a), the alteration must be visible or
apparent on the face of the instrument, for if it
is not apparent, the matter is governed solely
by section 124 which renders the instrument
void (DE LEON, Law on Negotiable
Instruments, supra at 200).
2. That he has become a holder of it before it
was Overdue and without notice that it had
been previously dishonored, if such was the
fact;
a. Before overdue
A holder who takes an overdue instrument is
put on inquiry although he is not actually
aware of any existing defense of a prior party
(AQUINO, Negotiable Instruments, supra at
126).
Date of maturity
i. The date of maturity is the time fixed
therein.
ii. If it is payable on demand, the date of
maturity is determined at the time of
presentment.
Note: Under the law, presentment must be
made within a reasonable time after its
issue, if it is a promissory note, or after the
last negotiation thereof, it is a bill of
exchange (NIL, Sec. 71).
iii. If the instrument is payable on the
occurrence of a specified event which is
certain to happen, the date of maturity is
fixed by the happening of the event (NIL,
Sec 4 [c]).
An overdue instrument may still be
negotiated, but the holder cannot be holder
in due course.
Demand Instruments
Where an instrument payable on demand is
negotiated on an unreasonable length of time
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after its issue, the holder is not deemed a HDC
(NIL, Sec. 53).
What can be considered as “unreasonable” is
relative. Section 193 of the NIL provides that “in
determining what is ‘reasonable time’ or an
‘unreasonable time,’ regard is to be had in the:
a. Nature of the instrument;
b. Usage of trade or business (if any) with
respect to such instruments; and
c. The facts of the particular case.
Without notice of dishonor
A dishonored instrument may still be negotiated
and the holder without notice can be holder in
due course.
3. That he has taken it in good faith and for
Value;
4. That at the time of its negotiation to him, he
a. Good faith
Although good faith on the part of the holder is
presumed, such presumption is destroyed if
the payee or the indorsee acquired
possession of the instrument under
circumstances that should have put him to
inquiry as to the title of the holder who
negotiated the instrument. The burden now is
on the part of the holder to show that
notwithstanding the suspicious circumstances,
it acquired the check in actual good faith (De
Ocampo v. Gatchalian, et al., G.R. No. L-
15126, November 30, 1961).
Good faith refers to the indorsee or
transferee, not to the indorser or transferor of
the instrument.
Bad faith – means that the indorsee or
transferee must have knowledge of facts
which render it dishonest for him to take a
particular piece of negotiable paper (DE
LEON, Law on Negotiable Instruments, supra
at 206).
Proof of bad faith – it is not necessary to
show knowledge of exact truth. It is sufficient
that such knowledge tends to show that there
was something wrong with the transaction (Id.
at 206).
b. For Value
Every NI is deemed prima facie to have been
issued for a valuable consideration. Every
person whose signature appears thereon is
presumed to have become a party thereto for
value (NIL, Sec. 24).
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Consideration is not relevant to the
negotiability of an instrument but is significant
on the question of whether or not one is a
holder in due course.
Value – 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 (NIL, Sec. 25).
It is not necessary that the consideration
should be adequate (CIVIL CODE, Art. 1355),
but consideration founded on love and
affection or upon gratitude is good
consideration but does not constitute such
valuable consideration as is sufficient of itself
to support the obligation of a bill or a note.
had no notice of any Infirmity in the
instrument or defect in the title of the person
negotiating it.
Infirmity
It pertains to any irregularity in the instrument
(AQUINO, Negotiable Instruments, supra at 127).
Defective Title
The title of a person who negotiates the
instrument is defective when he obtained the
instrument or any signature thereto by
a. Fraud;
b. Force, duress or fear;
c. Other unlawful means;
d. For an illegal consideration.
Or when he negotiates it in
e. Breach of faith; or under
f. Such circumstances that amount to fraud
(NIL, Sec. 55).
Effects of notice of defect:
a. It destroys the status of holder as a holder in
due course;
b. The holder is open to all defenses and not
merely those relating to defect of which he
had notice (NIL, Sec. 58).
What Constitutes Notice of Infirmity or Defect
To constitute notice of an infirmity in the
instrument or defect in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual or chargeable
knowledge of the infirmity or defect, or knowledge
of such facts that his action in taking the
instrument amounted to bad faith (NIL, Sec.56).
Where the transferee receives notice of infirmity in
the instrument or defect in the title of the person

negotiating the same before he has paid the full
amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent
of the amount therefor paid by him (NIL, Sec. 54).
Note: Every holder is deemed prima facie to be a
HDC; but when it is shown that the title of any
person who has negotiated the instrument was
defective, the burden is on the holder to prove
that he or some person under whom he claims
acquired the title as HDC. However, the last-
mentioned rule does not apply in favor of a party
who became bound on the instrument prior to the
acquisition of such defective title (NIL, Sec. 59).
A payee can be a HDC so long as he complies
with the requirements of Sec. 52 of the NIL. It
was explained that Sec. 191 of the NIL defines
“holder” as the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof.
Hence, the word “holder” in the first clause of
Sec. 52 and in the second subsection thereof
may be replaced by the definition in Sec. 191 so
as to read “a HDC is a payee or an indorsee in
possession, etc.” (AQUINO, Negotiable
Instruments, supra at 135).
Rights of a HDC (SPFP)
1. May Sue on the instrument in his own name
(even when he holds the instrument merely in a
representative capacity such as a holder for
collection only or a pledgee of a note);
2. May receive Payment and if payment is in due
course, the instrument is discharged;
3. Holds the instrument Free from any defect of title
of prior parties and free from personal defenses
available to parties among themselves; and
4. May enforce Payment of the instrument for the
full amount thereof against all parties liable
thereon (NIL, Sec. 51 and Sec. 57).
Exceptions to the right to enforce payment:
a. When the holder is a holder for value only to
the extent of his lien – HDC only to that extent
(NIL, Sec. 27);
b. When the holder acquired notice of any
infirmity in the instrument or defect in the title
of the person negotiating the same before he
has paid the full amount agreed to be paid
therefor – HDC only to the extent of the
amount paid (NIL, Sec. 54);
c. In case of alteration as to amount – HDC may
enforce payment only according to its original
tenor (NIL, Sec. 124).
Holder Not in Due Course
He is one who became a holder of an instrument
without any, some or all of the requisites under Sec.
52 of the NIL.
General Rule: If a holder is not a holder in due
course, he is subject to the same defenses as if it
were non-negotiable. In other words, a holder not in
due course is subject to both real and personal
defenses available to parties primarily or secondarily
liable.
Exception: Shelter Rule – If he derives his title
through a holder in due course and if he is not a
party to any fraud or illegality affecting the
instrument, he has all the rights of such former
holder in respect of all parties prior to the latter (NIL,
Sec. 58).
Exception to the Exception: The rule under Sec.
58 does not apply if the holder was a previous
holder not in due course who had subsequently
repurchase the instrument either personally or
through an agent.
Reason: A holder who is not a holder in due course
cannot improve his situation by reacquiring the
instrument (Fossum v. Fernandez, G.R. No. L-
19461, March 28, 1923).
Rights of a Holder NOT In Due Course: (SPD-SR)
1. He may Sue on the instrument in his own name;
2. He may receive Payment and if the payment is in
due course, the instrument is discharged;
3. He holds the instrument subject to the same
Defenses as if it were non-negotiable; and
Thus, prior parties can avail against him any
defense available among these prior parties and
prevent the said holder from collecting in whole
or in part the amount stated in the instrument.
4. Shelter Rule is applicable.
Distinctions between a HDC and not HDC
Holder in due course Not HDC
Compliance with Requisites
All the circumstances One, or some or all of
under Sec. 52 of NIL the requisites or
are present. circumstances under
Sec. 52 is/are absent.
Real Defenses
His rights can be His rights can be
defeated by real defeated by real
defenses. defenses.
Personal Defenses
His rights cannot be His rights can be
defeated by personal defeated by personal
defenses. defenses.
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Rights
He has right to enforce He has right to enforce
payment, sue in his payment, sue in his
own name, and own name, and
negotiate the negotiate the
instrument. instrument.
Bills in Set
One composed of several parts, each part being
numbered and containing a reference to the other
parts, the whole of the parts constituting but one bill
(NIL, Sec. 178).
Purpose: It is usually availed of in cases where 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.
Rights of holders where parts are negotiated
separately:
1. If both are HDC, the holder whose title first
accrues is considered the true owner of the bill.
2. But the person who accepts or pays in due
course shall not be prejudiced (NIL, Sec. 179).
Obligations of holder who indorses 2 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 has himself indorsed, as if such parts were
separate bills (NIL, Sec. 180).
L IABILITIES OF P ARTIES
A CCORDING TO N ATURE
I. Warranties; or
II. Engagement to Pay
1. Primary liability; or
2. Secondary liability.
I. Warranties
Warranties are affirmations of fact on the part of the
parties that impose no direct obligation to pay in the
absence of breach thereof.
Parties are held liable when there is breach of
warranties.
Breach of warranty – when the facts which the
parties represent to be true are actually false.
Liability for breach of warranty is not conditioned
on presentment and notice of dishonor.
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Action for breach of warranty, occurring as it does at
the time of the transfer, may be brought at any time.
(CAMPOS & LOPEZ-CAMPOS, Negotiable
Instruments Law [1994]).
Effect of breach of warranties
The party who committed the breach may be:
1. Held liable; or
2. Barred from asserting a particular defense.
Warranties of parties
1. Maker (NIL, Sec. 60)
a. Existence of the payee
b. Payee’s capacity to indorse
2. Drawer (NIL, Sec. 61)
a. Existence of the payee
b. Payee’s capacity to indorse
3. Acceptor (NIL, Sec. 62)
a. Existence of the drawer
b. Genuineness of the drawer’s signature
c. Drawer’s capacity and authority to draw
d. Existence of the payee
e. Payee’s capacity to indorse
An acceptor does not admit the genuineness
of the indorser’s signature because it is only
the signature of the drawer that he warrants.
Sec. 62 applies to the drawee that paid
without accepting the check.
Payment of a negotiable instrument includes
acceptance. The High Court explained that
the drawee bank’s actual payment of the
amount in the check implies not only his
assent to the order of the drawer and a
recognition of his corresponding obligation to
pay the sum stated in the check, but also, his
clear compliance with that obligation. Actual
payment by the drawee is greater than his
acceptance, which is merely a promise in
writing to pay (Far East Bank and Trust
Company v. Gold Palace Jewelry Company,
G.R. No. 168274, August 20, 2008).
4. Qualified person or every person negotiating
an instrument by delivery (NIL, Sec. 65) or a
person indorsing a bearer instrument (Velasco
v. Tan Liuan, G.R. No. L-17230, March 17, 1922)
a. That the instrument is genuine and in all
respects what it purports to be;
b. That he has good title to it;
c. That all prior parties had capacity to contract;
and

d. That he has no knowledge of any fact which The liability of the maker is primary and
would impair the validity of the instrument or unconditional. He cannot shift his liability to
render it valueless. any person without the payee’s consent.

To whom warranty extends
a. Qualified indorsement – to all parties who
derive their title through his indorsement
b. Person negotiating by delivery – to immediate
transferees only
5. General Indorser (NIL, Sec. 66)
a. That the instrument is genuine and in all
respects what it purports to be;
b. That he has good title to it;
c. That all prior parties had capacity to contract;
and
d. That the instrument is, at the time of his
indorsement, valid and subsisting.
II. Engagement to Pay
Makes the parties liable to pay the sum certain in
money stated in the instrument.
Conditioned on presentment and notice of dishonor.
Action cannot be brought until maturity
instrument.
He promises to pay not only the payee but
also any subsequent holder who is legally
entitled to the instrument.
Due presentment for payment (NIL, Sec. 70)
and due notice of dishonor (NIL, Sec. 89) are
not necessary for the purpose of charging the
maker with liability. These are necessary,
however, to fix the liability of any drawer or
indorser.
b. Acceptor (NIL, Sec. 62)
It is only from the moment the drawee accepts
the bill or certifies the check that the drawee
becomes primarily liable to the holder by his
unconditional acceptance (Westminter Bank v.
Torres & Nasoor Inc., G.R. No. L-38139,
October 27, 1932). This is true even if the
drawee did not receive any consideration from
the drawer. Such absence of consideration is
only an issue between the drawer and the
of acceptor (AQUINO, Negotiable Instruments,
supra at 172).

Primary liability Secondary liability Acceptor engages to pay according to the

Liability tenor of his acceptance, which may not be the
The person who, by the The person who, by the same as the tenor of the bill itself because the
terms of the instrument, terms of the instrument acceptance may be qualified.
is absolutely required to is not absolutely
pay the same (NIL, required to pay the Like the maker of a promissory note, neither
Sec. 192). same. presentment for payment nor notice of
Unconditionally bound Conditionally bound to dishonor is necessary to charge him with
to pay. pay as when the person liability.
primarily liable refuses
or fails to pay. 2. Parties Secondarily Liable
When To Pay
Upon maturity. After the following a. Drawer (NIL, Sec. 61)
conditions have been
fulfilled: He engages to pay after the following
1. Due presentment for conditions are met:
payment or i. The bill is presented for acceptance (NIL,
acceptance of Sec. 143) or for payment (NIL, Sec. 70) as
primary party; the case maybe to the drawee;
2. Dishonor by such ii. The bill is dishonored by non-acceptance or
party; or non-payment, as the case may be; and
3. Taking of necessary iii. The necessary proceedings of dishonor are
proceedings on duly taken:
dishonor. 1)Notice of dishonor is given to the drawer;
or
1. Parties Primarily Liable 2)In case of foreign bills, protest is made.
a. Maker (NIL, Sec. 60)
The maker engages to pay according to the
tenor of the instrument.

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The drawer is secondarily liable to the holder
or to any subsequent indorser (intervening
indorsers) who may be compelled to pay.
Sec. 61 allows the drawer to negative or limit
his liability by express stipulation.
There is a contractual relation between the
drawer and the drawee.
A drawer may not unilaterally discharge
himself from liability on checks issued by him
as security and not for value and negotiated to
a holder in due course by the mere
expediency of withdrawing his funds from the
drawee bank (State Investment House Inc. v
CA, G.R No. 101163, January 11, 1993).
b. General Indorser/Unqualified Indorser (NIL,
Sec. 66)
A general indorser is one who indorses the
instrument without any qualification (unlike a
qualified indorsement or conditional
indorsement).
Qualified indorser
His qualified indorsement transfers title
without rendering him secondarily liable.
Warrants that he has no knowledge of any
fact which would impair the validity of the
instrument or render it valueless.
A general indorser is secondarily liable to the
holder or to any subsequent indorser who may
be compelled to pay.
He engages that on due presentment, it shall
be accepted or paid, or both, as the case may
be, according to its tenor.
He engages to pay after the following
conditions are met:
i. Due presentment for payment or
acceptance must be made; and
ii. If dishonored, the proceedings on dishonor
are duly taken.
By indorsing the instrument, the indorser
enters into a contract with certain fixed and
definite terms, which may not be varied or
contradicted by parole evidence (Routier v.
Williams, 52 N.D. 793, 204, N.W. 678 [1925]).
Oral testimony is not admissible to establish
that an unqualified indorsement is in fact
qualified (Velasco v. Tan Liuan, G.R. No. L-
17230, March 17, 1922).
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c. Irregular Indorser (NIL, Sec. 64)
An indorser is considered an irregular indorser
when the following conditions are present:
i. A person must not be a party to the
instrument;
ii. He must have signed the instrument in
blank; and
iii. He must have signed before delivery.
Where a person puts his signature after
delivery, this section does not apply. Section
17(f) and Sec. 63 shall apply.
The party is called an “irregular” or an
“anomalous” indorser because he indorses in
an unusual, singular or peculiar manner. His
name appears where we would naturally
expect another name.
Although the law does not state that all
irregular indorsers are accommodation
parties, they are usually accommodation
parties.
Liability of Irregular indorser
a. An irregular indorser is liable as a general
indorser because he indorses without
qualification.
b. He is liable as indorser, in accordance with
the following rules:
1. If the instrument is payable to the order of
a third person, he is liable to the payee
and to all subsequent parties.
2. If the instrument is payable to the order of
the maker or drawer, or is payable to
bearer, he is liable to all parties
subsequent to the maker or drawer.
3. If he signs for the accommodation of the
payee, he is liable to all parties
subsequent to the payee.
Indorsers who are not Secondarily Liable
1. Qualified Indorser;
2. Person Negotiating by Delivery; and
3. Indorser of Bearer Instrument
Note: These indorsers are liable for breach of
warranties as stated above.
However, an indorser of a bearer instrument may
incur all the liability of an indorser (NIL, Sec. 67) but
only with respect to parties who acquire title from his
indorsement (AQUINO, Negotiable Instruments,
supra at 185).
Order of Liability of Indorsers
There is no order of liability among the indorsers as
against the holder. He is free to choose to recover

from any indorser in case of dishonor of the
instrument (AQUINO, Negotiable Instruments, supra
at 183).
As respect one another, indorsers are liable prima
facie in the order in which they indorse unless
evidence is produced to show that as between or
among them, they have agreed otherwise (NIL, Sec.
68).
When a person signing an instrument is not
deemed as an indorser:
1. The person who signed the instrument has
clearly indicated by appropriate words his
intention to be bound in some other capacity
(NIL, Sec. 63).
2. A person signs for the purpose of identifying a
person only and not for the purpose of incurring
any liability (American Bank v. Macondray & Co.,
G.R. No. 1808, August 23, 1905).
3. A person only guarantees prior endorsements
(PNB v. CA, G.R. No. L-26001, October 29,
1968).
Liability of an Agent
A maker, drawer, acceptor or indorser may act
through an agent. However, he must do the
following acts in order that such agent may avoid
personal liability:
1. Disclose the name of his principal;
2. Disclose the fact that he is acting only as an
agent (NIL, Sec. 69); and
3. Act in accordance with the authority given to him.
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 (NIL, Sec. 20).
Signature by Procuration
It operates as notice that the agent has but a limited
authority to sign and the principal is bound only in
case the agent in so signing, acted within the actual
limits of his authority (NIL, Sec. 21).
Liability to the Instrument
General Rule: A person whose signature does not
appear on the instrument is not liable (NIL, Sec. 18).
Exceptions: (PITACA-DF)
1. Persons whose signatures were forged but who
are Precluded from setting up the defense of
forgery (NIL, Sec. 23);
2. Incapacitated persons who sign through their
legal guardians;
3. One who signs in a Trade or assumed name
(NIL, Sec. 18);
4. One who signs through an Agent or authorized
representative (NIL, Sec. 19);
5. In case of Constructive acceptance (NIL, Sec.
137);
6. Indorsers who sign on a separate piece of paper
(Allonge);
7. Persons who negotiate by mere Delivery. They
are liable for breach of warranty although they did
not sign (NIL, Sec. 65); and
8. Forgers of signature (NIL, Sec. 23).
ACCOMMODATION PARTY
Accommodation
A legal arrangement under which a person called
the accommodation party, lends his name and credit
to another called the accommodated party, without
any consideration.
Accommodation Party
1. He must be a party to the instrument, signing as
maker, drawer, acceptor, or indorser;
2. He must not receive value therefor; and
3. He must sign for the purpose of lending his name
or credit to some other person (NIL, Sec. 29).
Without receiving value therefor means “without
receiving value by virtue of the instrument” and not,
as it apparently is supposed to mean, “without
receiving value for lending his name” (Clark v.
Sellner, G.R. No. L-16477, November 22, 1921).
Liability of an Accommodation Party
An accommodation party is “liable according to the
face of his undertaking, the same as if he were
himself financially interested in the transaction”
(PNB v. Maza, G.R. No. L-24224, November 3,
1925).
He is liable to the holder for value of the instrument
in the capacity that he signed. He is not liable to the
accommodated party.
The liability is direct and immediate. It is a settled
rule that a surety is bound equally and absolutely
with the principal and is deemed an original
promisor and debtor from the beginning (Garcia v.
Llamas, G.R. No. 154127, December 8, 2003).
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. Hence, as regards, an
th
accommodation party, the 4 condition, i.e. lack of
notice of infirmity in the instrument or defect in the
title of the persons negotiating it, has no application
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(Stelco Marketing Corp. v. Court of Appeals, G.R. 1. A joint and several accommodation party such as
No. 96160, June 17, 1992). an accommodation maker may demand from the
principal debtor reimbursement for the amount
The corporation is not liable of its acts as an that he paid to the payee;
accommodation party. This is because the issue or 2. A joint and several accommodation maker who
indorsement of negotiable paper by a corporation pays on the said promissory note may directly
without consideration and for the accommodation of demand reimbursement from his co-
another is ultra vires. Hence, one who has taken the accommodation maker without first directing his
instrument with knowledge of the accommodation action against the principal debtor provided that:
nature thereof cannot recover against a corporation a. He made the payment by virtue of a judicial
where it is only an accommodation party (Crisologo- demand; or
Jose v. CA, G.R. No. 80599, September 15, 1989). b. The principal debtor is insolvent (Sadaya v.
Sevilla, G.R. No. L-17845, April 27, 1967).
The relation between an accommodation party and
the party accommodated is, in effect, one of Distinctions between an Accommodation Party
principal and surety- the accommodation party being and a Regular Party
the surety. It is a settled rule that a surety is bound Accommodation Party Regular Party
equally and absolutely with the principal and is Purpose for Signing
deemed an original promissory and debtor from the
beginning. The liability is immediate and direct Signs instrument for the Does not sign for that
purpose of lending his purpose in which the
(Aglibot v. Santia, G.R. No. 185945, December 5,
name or credit to some accommodation party
2012).
other person (NIL, Sec. did.
29).
Liability of an Accommodated Party
The accommodated party must reimburse the Value Received
accommodation party if the latter is held liable by the Signs instrument without Signs instrument for
holder for value. receiving value therefor. value.
Availability of Parole Evidence
By lending his name, the accommodation party is in May always show by Cannot disclaim or limit
effect, a surety of the accommodated party. Thus, parole evidence that he his personal liability as
the accommodation party cannot make the holder is only an appearing on the
recover directly from the accommodated party. His accommodation party. instrument by parole
only recourse is to seek reimbursement from the evidence (Maulini v.
accommodated party. It should be noted, however, Serrano, G.R No. L-
that while he is in effect a surety of the 8844, December 16,
accommodated party, the accommodation party is 1914; Velasco v. Tan
not exactly a surety in a contract of suretyship in all Liuan, G.R. No. 17230,
respects. Unlike in a contract of suretyship, the March 17, 1922.)
liability of the accommodation party remains not only Availability of Absence or Failure of
primary but also unconditional to a holder for value” Consideration as a Defense
(People v. Maniego, G.R. No. L-30910, February 27, Cannot avail of the Can avail of said
1987). defense of absence or defense against a
failure of consideration person not a holder in
Specific Rights of Accommodation Party: against a holder not in due course.
1. Right to revoke accommodation; due course.
2. Right to reimbursement from an accommodated Right to sue
party after making the payment (Agro After paying the holder, May not sue any
Conglomerates Inc. v. CA, G.R. No. 117660, may sue for subsequent party for
December 18, 2000); and reimbursement the reimbursement (Phil.
Right to contribution from other solidary accommodated party. National Bank v. Maza,
accommodation parties, if any. G.R. No. L-24224,
November 3, 1925).
Rules on Solidary Accommodation Parties
A solidary accommodation party may seek
reimbursement from the accommodated party or DEFENSES
other accommodation parties subject to the following
rules:
The right of the holder to enforce payment of a
negotiable instrument may be defeated by the

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defenses that may be raised by the person primarily 10. Ultra Vires Act of a 6. Filling up blank
or secondarily liable. Corporation; beyond Reasonable
11. Discharge in time (NIL, Sec. 14);
The defenses that may be raised are either real or Insolvency; 7. Absence or failure of
personal. Real defenses may be raised against all 12. Fraud in Factum or consideration,
holders even against a holder in due course. Fraud Esse whether partial or
Personal or equitable defenses may be raised only Contractus or Fraud total (NIL, Sec. 28);
against holders who are not holders in due course. in Execution; 8. Illegal consideration
13. Execution of (NIL, Sec. 55);
These defenses should be distinguished from instrument between 9. Filling up blank Not
equities of ownership which are raised by persons public Enemies; and within authority (NIL,
who may have legal claim over the instrument. 14. Marriage in the case Sec. 14);
Although they are similar, they are invoked for of a wife. 10. Want of authority of
different purposes. Defenses are invoked to resist a agent where he has
claim for payment, while equities of ownership are Note: An instrument apparent authority;
invoked to claim the instrument (AQUINO, subject to real defense 11. Fraud in
Negotiable Instruments, supra at 210). cannot be enforced Inducement;
against the person to 12. Acquisition by
Distinctions between Real and Personal whom the defense is Force, duress or
Defenses available but it can be fear (NIL, Sec. 55);
Real Defenses Personal Defenses enforced against those 13. Intoxication;
Nature whom such defense is 14. Mistake;
Absolute defenses Equitable defenses not available such as 15. Insanity where
Those that attach to the Those which are under Sec. 23. there is no notice of
instrument itself and available only against a insanity on the part
are available against all person not a holder in of the one
holders, whether in due due course or a contracting with the
course or not, but only subsequent holder who insane person;
by the parties entitled stands in privity with 16. Negotiation under
to raise them. him. Circumstances that
Status of contract amount to fraud
Void Voidable (NIL, Sec. 55); and
Availability against HDC 17. Acquisition of the
instrument by
Not available against
Available against HDC Unlawful means
HDC
(NIL, Sec. 55).
Defenses
PAID-WIFI-MUD-FEM CUBIC-RAIN-WIFI- Effects of Certain Defenses
1. Prescription; MICU 1. Minority and other Causes of Incapacity
2. Material Alteration 1. Non-delivery of A minor is not incapacitated to pass property
(NIL, Sec. 124); Complete instrument through indorsement or assignment of the
3. Illegality – if (NIL, Sec. 16); instrument. From want of capacity, the
declared void for 2. Ultra vires acts of corporation or infant may incur no liability thereon
any purpose; corporations where (NIL, Sec. 22). Furthermore, under Sections 60,
4. Duress amounting the corporation has 61, and 62, the maker, drawer and acceptor, by
to forgery; the power to issue making, drawing and accepting the instrument,
5. Want of authority of negotiable paper but admits the capacity of the payee to indorse.
agent; the issuance was not
6. Non-delivery of authorized for the Minority is a real defense. However, such
Incomplete; particular purpose for defense is personal to the minor and cannot be
Instrument (NIL, which it was issued; invoked by other parties.
Sec. 15); 3. Negotiation in Breach
7. Forgery (NIL, Sec. of faith (NIL, Sec. 55); The minor shall be liable under the following
23); 4. Insertion of wrong circumstances:
8. Insanity where the date in an instrument a. The minor actively misrepresents his age and
insane person has a (NIL, Sec. 13); it appears that he is physically of such age
guardian appointed 5. Conditional Delivery (estoppel);
by the court; of Complete
9. Minority; instrument;

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b. A minor may be held bound by his signature in
an instrument where he is guilty of actual
fraud committed by specifically stating that he
is of age when, in fact he is not (Mercado v.
Espiritu, G.R. No. L-11872, December 1,
1917); and
c. The minor kept the fruits or benefits.
Other Incapacitated Persons
Insane, demented persons and deaf-mutes who
do not know how to write or those persons who
have no capacity to give consent (CIVIL CODE,
Art. 1327), their capacity is a real defense as far
as such person is concerned. It is available
against a HDC.
2. Ultra Vires Act
The negotiation by a corporation may pass title to
the instrument. However, a corporation may raise
want of authority as a REAL DEFENSE.
Ultra vires act – one committed outside the
object for which a corporation is created as
defined by the law of its organization and
therefore beyond the power conferred upon it by
law. It is merely voidable which may be enforced
by performance, ratification, or estoppel (Atrium
Management Corporation v. CA, G.R. No.
109491, February 28, 2001).
3. Incomplete but Delivered Negotiable
Instrument (NIL, Sec. 14) - Personal defense
a. Prima Facie Authority to Complete the
Instrument
i. Want of a material particular in the
instrument;
Material particular:
1. Requisites under Sec. 1 of NIL;
2. Matters stated under Sec. 125 of the NIL;
and
3. Any important detail that affects the tenor
of the instrument or rights of the parties
(AQUINO, Negotiable Instruments, supra
at 222).
ii. Possession thereof by a person; and
iii. That such person had authority to fill up the
bank:
1. Strictly in accordance with the authority
given; and
2. Within a reasonable time.
b. Prima Facie Authority to Fill It Up for Any
Amount
i. Signature on a blank paper;
ii. Person signing in blank delivers it to
another; and
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iii. Delivery was for the purpose of converting
it into a negotiable instrument
Although the first sentence of Sec. 14 of the NIL
may give the impression that only the authority to
complete is presumed, in reality, it is also
presumed that the instrument was completed in
accordance with the authority that was given
(AQUINO, Negotiable Instruments, supra at 223).
If the holder of the instrument, after it was filled
up, is a holder in due course, the holder may
enforce the instrument as if it has been filled up
strictly in accordance with the authority given and
within a reasonable time.
Note: There is a view, however, that the HDC
cannot recover from the purported maker
because there was no intention on the part of
such maker to issue such note. The maker is
deemed to be a victim of fraud in factum, a real
defense.
4. Incomplete and Undelivered Negotiable
Instrument (NIL, Sec. 15)
Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands
of any holder, as against any person whose
signature was placed thereon before delivery.
This is a real defense which belongs to the
drawer (or parties, if any, prior to the delivery of
the instrument to the payee) against “any holder.”
Reason: The law does not make any distinction
between a holder in due course and one who is
not a holder in due course.
There is no prima facie authority to fill up the
incomplete instrument because there was no
delivery.
Where an 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.
5. Complete but Undelivered Negotiable
Instrument (NIL, Sec. 16)
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 remote
parties who are not holders in due course, it may
be established that:
a. The delivery is conditional or for a special
purpose and not for the purpose of
transferring title;
b. That there was no delivery at all of the
complete instrument; or
c. That the delivery is not authorized.
Reason: The holder is a stranger as regards the
transaction between the drawer and the drawee,
and if the holder has 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.

Immediate parties – refers to persons who are 7. Prescription

familiar with the circumstances regarding the Refers to extinctive prescription and may be
transfer. raised even against a holder in due course.
Under the Civil Code, the prescriptive period of
When the instrument is in the hands of a holder an action based on a written contract is 10 years
in due course, a valid delivery thereof by all the from accrual of cause of action.
parties prior to him so as to make them liable to
him is conclusively presumed. In case of checks, the action of the depositor
against his drawee bank commences to run from
When the instrument is no longer in possession the time he is given notice of payment, which is
of the party whose signature appears thereon, a ordinarily when the check is returned to the
valid and intentional delivery by him is presumed alleged drawer as a voucher with his statement of
until the contrary is proved. account (Philippine Commercial International
Bank v. CA, G.R. No. 121413, January 29, 2001).
6. Absence or Failure of Consideration (NIL, Sec.
28) The failure of the payee to encash a check for
Absence or failure of consideration is a personal more than 10 years “undoubtedly resulted in the
defense. It is a valid defense between the drawer impairment of the check through his
and payee. unreasonable and unexplained delay” (Myron C.
Papa v. A. U. Valencia et. al., G.R. No. 105188,
Partial failure of consideration is a defense pro January 23, 1998).
tanto, whether the failure is an ascertained and
liquidated amount or otherwise. Note: The SC held that the delivery of
promissory notes payable to order, or bills of
Defense pro tanto – not totally exonerated from exchange or drafts or other mercantile document
liability; liable up to the amount the party shall produce the effect of payment only when
benefited realized, or when by the fault of the creditor, the
privileges inherent in their negotiable character
Absence of Failure of have been impaired (NAMARCO v. F.U.N.D.,
Consideration Consideration G.R. No. L-22578, January 31, 1973).
Definition
It is the neglect or The delivery of promissory notes payable to
failure of one of the order, or bills of exchange or other mercantile
No consideration is documents shall produce the effect of payment
parties to give or to do
given or the only when they have been cashed, or when
or to perform the
consideration is illegal. through the fault of the creditor they have been
consideration agreed
upon. impaired (CIVIL CODE, Art. 1249).
Type of transactions involved
Implies that the giving The clause of Article 1249 is applicable only to
Embraces transactions of valuable instruments executed by third persons and
where no consideration consideration was delivered by the debtor to the creditor, and does
was intended to pass. contemplated but that it not apply to instruments executed by the debtor
failed to pass. himself and delivered to the creditor.

Non-availability of the Defense to a Drawee
The drawee, by accepting unconditionally the bill,
becomes liable to the holder, and therefore
cannot allege want of consideration between him
and the drawer.
The contractual obligation remains even if the
check is not presented for payment (International
Corporate Bank v. Sps. Gueco, G.R. No. 141968,
February 12, 2001).

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8. Fraud
a. Fraud in Execution or Fraud in Factum or
Fraud Esse Contractus - Real Defense
The person who signs the instrument lacks
knowledge of the character or essential terms
of the instrument. But the defense is not
available if the party involved had reasonable
opportunity to obtain such knowledge.
Factors in determining the presence of
reasonable opportunity
i. Age and sex of the obligor;
ii. His intelligence, education, and business
experience;
iii. His ability to read and understand the
language used;
iv. The representations made to him and his
reason to rely on the or to have confidence
in the person making them;
v. The presence or absence of any third
person who might read or explain the
instrument to him, or any other information;
and
vi. The apparent necessity, or lack of it, for
acting without delay (AQUINO, Negotiable
Instruments, supra at 227).
An essential element is that the maker or
indorser must have exercised ordinary
diligence and in no manner contributed
negligently to the imposition.
Fraud in Inducement - Personal Defense
The person who signs the instrument intends
to sign the same as a negotiable instrument
but was induced to do so only by fraud; his
consent to issue a negotiable instrument was
vitiated by fraud. This type includes fraud
committed in the performance of a collateral
obligation (AQUINO, Negotiable Instruments,
supra at 226).
9. Material Alteration
An alteration is said to be material if it alters the
effect of the instrument. In other words, a material
alteration is one which changes the items which
are required to be stated under Sec. 1 of the
Negotiable Instruments Law (NIL, Sec. 124 and
Sec. 125; PNB v. CA, G.R. No. L-26001, October
29, 1968).
Note: The alteration must be material before it can
be considered as a defense. If the alteration is not
material, it is neither a personal nor a real
defense.
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Material alteration is a “partial” real defense
because a holder in due course can enforce it
according to its original tenor.
It refers to any alteration which changes the:
a. Date;
b. Sum payable, either for principal or interest;
c. Time or place of payment;
d. Number or relations of the parties;
e. Medium or currency in which payment is to be
made;
f. That which adds a place of payment where no
place of payment is specified; and
g. Any other change or addition which alters the
effect of the instrument in any respect (NIL, Sec.
125).
Innocent Alteration
It refers to changes on items other than those
required under Sec. 1 of the NIL, and spoliation
which refers to alterations done by a stranger, will
not avoid the instrument but the holder may
enforce it only according to its original tenor (PNB
v. CA, G.R. No. L-26001, October 29, 1968).
Illustration:
The check was altered so that the amount was
increased from P1,000.00 to P91,000.00 and the
date was changed from 24 November 1994 to 14
November 1994. Apparently, since the entries
altered were among those enumerated under
Section 1 and 125, namely, the sum of money
payable and the date of the check, the instant
controversy therefore squarely falls within the
purview of material alteration (Metrobank v.
Cabilzo, G.R. No. 154469, December 6, 2006).
A serial number is an item which is not an
essential requisite for negotiability under Sec. 1
of the NIL and which does not affect the rights of
the parties, hence, its alteration is not material
(PNB v. CA, G.R. No. L-26001, October 29,
1968).
An alteration of the date of the check constitutes
a material alteration in accordance with Sec.125
of the NIL. The bank, given the fiduciary nature of
its relationship with the depositor, should have
exerted every effort to safeguard and protect her
money which was deposited and entrusted with it
(Westmont Bank v. Dela Rosa-Ramos, G.R. No.
160260, October 24, 2012).
Effects:
a. Alteration by a party – Avoids the instrument
except as against the party who (1) made, (2)
authorized, or (3) assented to the alteration,
and (4) subsequent indorsers. However, if an

altered instrument is negotiated to a holder in
due course, he may enforce payment thereof
according to its original tenor regardless of
whether the alteration was innocent or
fraudulent (NIL, Sec. 124).
Since no distinction is made, it does not
matter whether it is favorable or unfavorable
to the party making the alteration. The intent
of the law is to preserve the integrity of the
negotiable instruments.
b. Alteration by a stranger (spoliation) – the
effect is the same as where the alteration is
made by a party in which case a holder in due
course can recover on the original tenor of the
instrument.
Liabilities of Parties in case of Material
Alteration
As between the drawee bank and the collecting
bank, it is the collecting bank that shall be
responsible for the loss in case of alteration. The
collecting bank’s right of recourse is against the
depositor-payee (holder) (Metrobank v.
Cabilzo, G.R. No. 154469, December 6, 2006).
10. Ante-dating or Post-dating (NIL, Sec. 12)
Ante-dating – when a date earlier than the date
of issuance is placed on the instrument.
Post-dating – when a date later than the date of
issuance is placed on the instrument.
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.
11. Insertion of a wrong date (NIL, Sec. 13)
Any holder may insert in the instrument the true
date of issue or acceptance and the instrument
shall be payable accordingly, in the following
instances:
a. Where an instrument expressed to be
payable at a fixed period after date is issued
undated; or
b. Where the acceptance of an instrument
payable at a fixed period after sight is
undated.
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.
12. Duress and Intimidation
Duress as a Personal Defense
When there is an actual or threatened exercise
or power possessed by the party benefited
thereby, for the purpose of obtaining the note (or
bill), such as to deprive the maker of that quality
of mind essential to making of a contract
(AQUINO, Negotiable Instruments, supra at
249).
Duress as a Real Defense
When duress is vicious or if it is what is referred
to as “duress amounting to forgery” wherein the
person who exerted the same is practically
writing the note itself by holding the hands of
another (AQUINO, Negotiable Instruments,
supra at 249).
When an instrument or any signature thereto
was obtained by fraud, duress, or force and fear
or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach
of faith, or under such circumstances as to
amount to fraud, the title of such person is
defective.
13. Illegality
Illegality as a Personal Defense
The illegality of the transaction that gave rise to
a particular transaction.
Illegality as a Real Defense
When the law which declares the transaction
illegal likewise declares that the negotiable
instrument or document issued in connection
thereto is void against any party (AQUINO,
Negotiable Instruments, supra at 250).
14. Forgery
FORGERY
Forgery
It is a real defense
A party whose signature to an instrument was
forged was never a party and never gave his
consent to the contract which gave rise to the
instrument. Since his signature does not appear in
the instrument, he cannot be held liable thereon by
anyone, not even by a holder in due course
(Gempesaw v. CA, G.R. No. 92244, February 9,
1993).
It is basic, however, that whoever alleges forgery
must prove such fact. Forgery cannot be presumed,
it must be duly established (MWSS v. CA, G.R. No.
L-62943, July 14, 1986).
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Effects:
1. When a signature is forged or made without
the authority of the person whose signature it
purports to be, that signature (not the
instrument itself and the genuine signatures)
is wholly inoperative.
b. Those who by their acts, silence, or
Cut-off Rule
Parties prior to the forged signature are cut-
off from the parties after the forgery in the
sense that prior parties cannot be held liable
and can raise the defense of forgery. The
holder can only enforce the instrument against
parties who became such after the forgery.
c. Negligence
Exception: When the prior parties are
precluded from setting up the defense of
forgery either because of their warranties,
representation or negligence (AQUINO,
supra at 252).
Illustration:
C forged then indorsed to D
M ---- A ---- B ---- C ---- D ---- E ---- H
A and B can raise the defense of forgery for
being parties prior to the forgery as against
C, D, E and H unless precluded from setting
up the forgery.
H can enforce the instrument only against C,
the forger, D, E, and M, the maker unless
precluded from setting up the forgery.
2. No right to retain the instrument, or to give
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired.
Exception: Unless the party against whom it
is sought to enforce such right is precluded
from setting up the forgery or want of authority
(NIL, Sec. 23).
Persons precluded from setting up defense of
forgery
a. Persons who warrant or admit the
genuineness of the signature in question.
Warrantors of genuineness include:
i. Indorsers;
It is only the negotiation based on the forged
or unauthorized signature which is
inoperative. The indorsers can be held liable
because of their breach of warranty that the
instrument is genuine and in all respect
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what it purports to be (Republic Bank v.
Ebrada, G.R. No. L-40796, July 31, 1975).
ii. Persons negotiating by mere delivery; and
iii. Acceptors.
negligence, are estopped from setting up the
defense of forgery. These include acts or
omission that amounts to ratification, express
or implied. Ratification by the party whose
signature was forged likewise precludes the
said party from raising the defense.
Where a depositor (drawer) is using its own
personalized checks, its failure to provide
adequate security measures to prevent
forgeries of checks constitutes gross
negligence and bars it from setting up the
defense of forgery (MWSS v. CA, G.R. No. L-
62943, July 14, 1986).
However, the mere fact that a check had been
removed and stolen in a checkbook without
the knowledge and consent of the owner
cannot be considered negligence (PNB v.
Quimpo, G.R. No. L-53194, March 14, 1988).
If there was no negligence on part of the
drawer, the drawee bank bears the risk of
loss in case of forged check.
Reason: The drawee bank should have
known that the signature was forged
considering that the signature appearing on
the check was even compared with the
specimen signature of the authorized
signatory of the corporation (Samsung
Construction Co. Phil. v. Far East Bank and
Trust Company, G.R. No. 129015, August 13,
2004).
But if there is a collecting bank, the collecting
bank bears the loss.
Reason: The collecting bank or last
indorser generally suffers the loss because it
has the duty to ascertain the genuineness of
all prior indorsements 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 indorsements (Banco
De Oro Savings and Mortgage Bank v.
Equitable Banking Corporation, G.R. No.
74917, January 20, 1988).

to forgery are liable liable to those persons
The general rule is that in the case of forgery because of their who obtain title through
of the indorsement of the payee of the check, warranties. their indorsements.
the drawee bank cannot debit the drawer’s Indorser’s signature forged
account and that loss shall be borne by the Maker, payee and Maker is liable.
drawee bank. The depositary or collecting indorser whose Indorsement is not
bank is liable to the drawee bank in case of signature was forged necessary to pass title
forged indorsement because it guarantees all are not liable. and the maker engages
prior indorsements. But, this is subject to the to pay any bearer of the
qualification that the drawee himself was not instrument.
negligent or guilty of such conduct as would Indorsers subsequent Only the indorser
estop him from asserting the forged character to forgery are liable whose signature was
of the indorsement as against the drawer because of their forged can raise the
(SUNDIANG & AQUINO, Reviewer, supra at warranties. defense of forgery
42). against a HDC.

24-Hour Clearing Rule Rules on Forgery as to Bills of Exchange

When the drawee bank fails to return a forged Order Instrument Bearer Instrument
check or altered check to the collecting bank Drawer’s signature forged
within the 24-hour clearing period, the collecting Drawer is not liable Same.
bank is absolved from liability (Republic Bank v. because he was never
CA, G.R. No. 42725, April 22, 1991). a party to the
instrument.
Rules on Forgery Drawee-acceptor is Drawee-acceptor is
liable if it paid (no liable if it paid. Drawee
a. In all cases, the forger is liable. recourse to drawer) cannot recover from
because he admitted the collecting bank
b. Instruments payable to bearer the genuiness of the because it is bound to
The liability of maker is absolute if the drawer’s signature. know the drawer’s
instrument involved is a payable to bearer. If signature since the
the instrument is payable to bearer, the Drawee cannot latter is its depositor.
forgery of the indorsement is immaterial since recover from the
it is negotiable by mere delivery. collecting bank The drawee may
because there is no recover from the
c. Instruments payable to order privity between the drawer when the
In case of forgery of an indorsement of an collecting bank and the latter’s negligence is
instrument payable to order, it is not only the drawer. The latter does the proximate cause of
person whose signature was forged who not give any warranty the loss or contributed
would not be liable but also the parties prior to regarding the signature thereto (Gempesaw v.
such person. Payment under a forged of the drawer CA, G.R. No. 92244,
indorsement is not the drawer’s order (Associated Bank v. February 9, 1993).
(SUNDIANG & AQUINO, supra at 41). CA, G.R. No. 107382,
January 31, 1996).
Rules on Forgery as to Promissory Notes Indorsers subsequent Indorsers may be made
Order Instrument Bearer Instrument to forgery (such as liable to those persons
Maker’s signature forged collecting bank or last who obtain title through
Maker is not liable Same. endorser) liable. their indorsements.
because he never Payee’s signature forged
became a party to the
instrument.
Indorsers subsequent Indorsers may be made
to forgery are liable liable to those persons
because of their who obtain title through
warranties. their indorsements.
Payee’s signature forged
Maker and payee not Maker is liable.
liable.
Indorsers subsequent Indorsers may be made

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Drawer, drawee and Drawer is liable (his
payee not liable. indorsement is not
necessary to pass title).
Cut-off Rule applies.
Drawee is liable (No
privity between drawer
and payee because
indorsement of payee
is not necessary) (Ang
Tek Lian v. CA, G.R.
No. L-2516, September
25, 1950).
Payee is not liable.
Indorsers subsequent Collecting bank is
to forgery (such as liable because of
collecting bank) are warranty.
liable without prejudice
to their right to proceed But it may recover from
against the forger. the person who forged
the indorsement on the
check and deposited or
encashed the same
(Jai-Alai Corp. v. BPI,
G.R. No. L-29432,
August 6, 1975).
Indorser’s signature forged
Drawer, payee and Drawer is liable even if
indorser whose special indorsement
signature was forged was forged because
not liable. indorsement is not
necessary to title.
Cut-off rule does not
apply.
Drawee is liable if it Drawee is liable.
paid.
Indorsers subsequent Indorser whose
to forgery (such as signature was forged is
collecting bank) are liable because
liable. indorsement is not
necessary to title.
ENFORCEMENT OF LIABILITY
Primary Liability
1. Maker – the unconditional promise attaches the
moment the maker makes the instrument.
2. Acceptor – the acceptor’s assent to the
unconditional order attaches the moment he
accepts the instrument.
Note: No further act is necessary in order for the
liability to accrue. What is necessary only is for the
holder to enforce such liability by presenting it for
payment.
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Secondary Liability
1. Indorser
2. Drawer
Their liability cannot be immediately enforced. There
are necessary steps which should be taken in order
to charge these persons. Unless the holder is
excused from taking any of the steps, the persons
secondarily liable are discharged.
Steps in Promissory Note
1. Presentment for payment to the maker, unless
excused (NIL, Sec. 70); and
2. If dishonored by non-payment by the maker,
notice of dishonor should be given to the
persons secondarily liable, unless excused (NIL,
Sec. 89).
Steps in Bill of Exchange
1. Presentment for acceptance
The holder must either present the bill for
acceptance or negotiate it within a reasonable
time; otherwise, the drawer and all indorsers are
discharged (NIL, Sec. 144).
2. If dishonored by non-acceptance:
a. Notice of dishonor given to drawer and
indorsers, unless excused (NIL, Sec. 89); or
b. Protest for dishonor by non-acceptance in
case of a foreign bill, unless excused (NIL, Sec.
159).
b. If bill is accepted:
a. Presentment for payment to the acceptor
should be made, unless excused under the
following circumstances under Sec. 82:
i. Where, after the exercise of reasonable
diligence, presentment, as required by this
Act, cannot be made;
ii. Where the drawee is a fictitious person;
iii. By waiver of presentment, express or
implied.
b. If dishonored upon presentment for payment:
i. Notice of dishonor to persons secondarily
liable; or
ii. Protest for dishonor by non-payment in
case of foreign bill.
Steps in order to charge persons secondarily
liable in other cases:
1. Protest for non-payment by drawee in order to
charge an acceptor for honor (NIL, Sec. 165 and
167) or a referee in case of need (NIL, Sec. 167);
and
2. Protest for non-payment by the acceptor for
honor is also required (NIL, Sec. 17).

PRESENTMENT
Presentment
It is the production of a bill of exchange to the
drawee for his acceptance or to the drawee or
acceptor for payment or the production of a
promissory note to the party liable for the payment
of the same.
Instances
I. Presentment for Payment
II. Presentment for Acceptance
I. Presentment for Payment
Requisites for sufficiency of presentment:
(HH-PP-E)
1. Must be made by the Holder or any person
authorized to receive payment on his behalf;
2. At a reasonable Hour on a business day;
3. At a proper Place;
4. Must be to the person Primarily liable, or if he is
absent or inaccessible, to any person found at
the place where the presentment is made (NIL,
Sec. 72).
5. The instrument must be Exhibited to the person
from whom it is demanded and upon payment
must be delivered to the person paying it (NIL,
Sec. 74).
When presentment should be made:
Instrument When Payable
Within reasonable time
PN payable on demand
after its issue
BOE payable on Within reasonable time
demand after its last negotiation
Payable on a specified On the date it falls due
date (NIL, Sec. 71)
In determining what reasonable time is, the
following must be considered:
(FUN)
1. The Facts of the particular case;
2. The Usage of trade or business with respect to
such instruments;
3. Nature of the instrument (NIL, Sec. 193).
How Computed
The time of payment is determined by excluding the
day from which the time is to begin to run, and by
including the date of payment (NIL, Sec. 86).
Time of Maturity
Every negotiable instrument is payable at the time
fixed therein without grace.
When the day of maturity falls upon Saturday,
Sunday or a holiday, the instrument is payable on
the next succeeding business day.
Exception: The instruments which is payable on
demand may, at the option of the holder, be
presented for payment before twelve (12) o'clock
noon on a Saturday when that entire day is not a
holiday (NIL, Sec. 85).
Proper Place of Presentment: (NIL, Sec. 73)
(FLABS)
1. In any other case, presented is to be made to the
person to make payment wherever he can be
Found, or presented at his Last known place of
business or residence.
2. Where no place of payment is specified but the
Address of the person to make payment is given
in the instrument, it is there presented;
3. Where no place of payment is specified and no
address is given, the instrument is presented at
the usual place of Business or residence of the
person to make payment.
4. Where a place of payment is Specified in the
instrument, it is there presented;
If the instrument is, by its terms, payable at a
special place, and the person primarily liable is able
and willing to pay it there at maturity, such ability
and willingness are equivalent to a tender of
payment upon his part (NIL, Sec. 70).
Instrument Payable at a Bank – Must be made
during banking hours, unless there are no funds to
meet it at any time during the day, presentment at
any hour before the bank is closed on that day is
sufficient (NIL, Sec. 75).
To whom presented:
1. To the person primarily liable;
2. If the person primarily liable is absent, to any
capacitated person found at the place where
presentment is made;
When no place of payment is specified and:
a. Person liable is dead – presentment must be
made to his personal representative, if there
be one, and if he can be found (NIL, Sec.76).
b. Persons liable are partners – presentment
must be made to any of the partners, even if
their partnership has been dissolved (NIL,
Sec.77).
c. Persons liable are joint debtors – presentment
must be made to all of them (NIL, Sec.78).
Exhibition
The instrument must be exhibited to the person from
whom payment is demanded, and when it is paid,
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must be delivered up to the party paying it (NIL, Sec.
74).
Even if the rule requires that the instrument must be
exhibited to determine its genuineness, this is
rendered unnecessary not only by the omission to
contest it, but also by the admission of the
authenticity of the note implicit from the averment
that substantial payments were made thereon and
by the express waiver of “demand, presentment,
protests and notice of protest and non-payment” in
the note (Jose Ma. Ansaldo v. Court of Appeals,
G.R. No. 47696, August 29, 1989).
Presentment for payment is not necessary in order
to charge the person primarily liable but it is
necessary in order to charge the drawer and
indorser, except:
1. As to the drawer, where he has no right to expect
or require that the drawee or acceptor will pay the
instrument (NIL, Sec.79);
2. As to the indorser, where the instrument was
made or accepted for his accommodation and he
has no reason to expect that the instrument will
be paid if presented (NIL, Sec.80);
Note: Only the drawer and the indorser referred
to in these sections are not discharged but all
other parties secondarily liable are relieved of
their liability.
3. Where, after the exercise of reasonable
diligence, presentment cannot be made (NIL,
Sec.82);
4. Where the drawee is a fictitious person (NIL,
Sec.82);
5. By waiver of presentment, express or implied
(NIL, Sec.82); or
6. When the instrument has been dishonored by
non-acceptance.
When excused:
1. When debtor does not demand to see the
instrument but refuses payment on some other
grounds; and
2. When the instrument is lost or destroyed.
When delay in making presentment or of giving
notice is excused:
a. When caused by circumstances beyond the
control of the holder; and
b. Not imputable to his default, misconduct, or
negligence (NIL, Sec.81).
II. Presentment for Acceptance
Presentment for Acceptance is not necessary in
order to render any party to the bill liable.
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When required: (SMS-E)
1. Where the bill is payable after Sight, or when it is
necessary in order to fix the Maturity of the
instrument;
2. Where the bill expressly Stipulates that it shall be
presented for acceptance;
3. Where the bill is drawn payable Elsewhere than
at the residence or place of business of the
drawee (NIL, Sec.143)
Note: It is not necessary to present a check for
acceptance. The holder of a check may go directly
to the drawee bank to encash the check
(SUNDIANG & AQUINO, Reviewer, supra at 62).
How made:
1. Must be made by or on behalf of the holder;
2. At a reasonable hour on a business day;
3. Before the bill is overdue; and
4. To the drawee or some person authorized to
accept or refuse to accept on his behalf (NIL,
Sec.145).
The holder of a bill who is required to present it for
acceptance must either present it or negotiate it
within a reasonable time; if he fails to do so, the
drawer and all indorsers are discharged (NIL,
Sec.144).
When excused:
1. Where the drawee is dead, or has absconded, or
is a fictitious person or a person not having
capacity to contract by bill;
2. After exercise of reasonable diligence,
presentment cannot be made; or
3. Although presentment has been irregular,
acceptance has been refused on some other
ground (NIL, Sec.148).
Note: In the above-cited cases, the bill may be
treated as dishonored by non-acceptance.
When Delay is Excused
When a bill is drawn payable elsewhere than at the
place of business or the residence of the drawee
and the holder, with the exercise of reasonable
diligence, failed to present the bill for acceptance
before presenting it for payment on the day that it
falls due, the delay caused by presenting the bill for
acceptance before presenting it for payment is
excused and does not discharge the drawers and
indorsers (NIL, Sec.147).
Rules:
1. Where a bill is addressed to two or more drawees
who are not partners, presentment must be made
to them all unless one has the authority to accept

or refuse acceptance for all, in which case
presentment may be made to him only.
2. Where the drawee is dead, presentment may be
made to his personal representative.
3. Where the drawee has been adjudged bankrupt
or insolvent or has made an assignment for the
benefit of creditors, presentment may be made to
him or to his trustee or assignee (NIL, Sec.145).
A bill may be presented for acceptance on any day
on which NI’s may be presented for payment under
Secs.72 and 85 of the NIL.
ACCEPTANCE
Acceptance
It is the act by which the drawee manifests his
consent to comply with the request contained in the
bill of exchange directed to him.
Payment v. Acceptance
Payment is not acceptance. Acceptance is “a
promise to perform an act” while the payment is the
“actual performance” thereof (PNB v. CA, G.R. No.
L-26001, October 29, 1968).
Form:
1. Must be in writing;
2. Signed by the drawee; and
3. Must not express that the drawee will perform his
promise by any other means than the payment of
money (NIL, Sec.132).
The holder of a bill presenting the same for
acceptance may require that the acceptance be
written on the bill, and if such request is refused,
may treat the bill as dishonored (NIL, Sec.133).
Kinds:
1. General / Unqualified / Absolute
Assents without qualification to the order of the
drawer.
Acceptance is presumed to be unqualified or
absolute.
2. Qualified
It is which in express terms varies the effect of
the bill as drawn.
Types:
a. Conditional – makes payment by the
acceptor dependent on the fulfillment of a
condition therein stated;
b. Partial – an acceptance to pay part only of the
amount for which the bill is drawn;
c. Local – an acceptance to pay only at a
particular place;
d. Qualified as to time
e. The acceptance of some one or more of the
drawees but not of all (NIL, Sec.141).
Effect of Qualified Acceptance
The drawer and indorsers are discharged unless
(1) they have expressly or impliedly authorized
the holder to take qualified acceptance or (2)
subsequently assented thereto.
Thus, a subsequent party which caused the
dishonor of the check through its qualified
indorsement cannot hold prior indorsers liable on
the instrument (Melva Theresa Gonzales v.
RCBC, G.R. No. 156294, November 29, 2006).
The holder has the right to require the drawee to
accept the bill without qualification, if the latter
refused; he can treat the bill as dishonored by
non-acceptance (NIL, Sec. 142).
3. Implied/ Constructive Acceptance
The drawee is allowed 24 hours after
presentment in which to decide whether or not he
will accept the bill (NIL, Sec.136).
If after 24 hours, the drawee destroys the bill or
refuses to return it, he is deemed to have
accepted the instrument (NIL, Sec.137).
Acceptance in the sense used in NIL is not
required for checks for the same are payable on
demand.
4. Extrinsic
When acceptance is made on a paper other than
the bill.
When acceptance is written on a separate
instrument, it does not bind the acceptor except
in favor of a person to whom it is shown and who,
on the faith thereof, receives the bill for value
(NIL, Sec.134).
5. Virtual
It contemplates the situation where an
acceptance is made on a bill that has not yet
been drawn (NIL, Sec.135).
DISHONOR
An instrument may be dishonored by non-payment
or non-acceptance.
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Dishonor by Non-Payment
1. Payment is refused or cannot be obtained after
due presentment for payment; or
2. Presentment is excused and the instrument is
overdue and unpaid (NIL, Sec.83).
There is an immediate right of recourse by the
holder against persons secondarily liable (NIL,
Sec.84). However, notice of dishonor is
generally required.
Dishonor by Non-Acceptance
1. When it is duly presented for acceptance and
such an acceptance is refused or cannot be
obtained; or
2. When presentment for acceptance is excused,
and the bill is not accepted (NIL, Sec.149).
Where a bill is duly presented for acceptance and
is not accepted within the prescribed time, the
person presenting it must treat the bill as
dishonored by non-acceptance or he loses the
right of recourse against the drawer and
indorsers (NIL, Sec. 150).
An immediate right of recourse against the
drawer and indorsers accrues to the holder and
no presentment for payment is necessary (NIL,
Sec.151).
Notice of Dishonor
Notice given by holder or his agent to party or
parties secondarily liable that the instrument was
dishonored by non-acceptance by the drawee of a
bill or by non-payment by the acceptor of a bill or by
non-payment by the maker of a note.
Purpose: to enforce secondary liability
By whom given:
1. By or on behalf of the holder;
2. By or on behalf of any party who may be
compelled to pay it to the holder and who would
have a right of reimbursement from the party to
whom notice is given;
3. Any agent, either in his own name or in the name
of any party entitled to give notice (NIL, Sec. 90).
An agent may give notice when the instrument is
dishonored in his hands, either by:
a. Directly giving notice to persons secondarily
liable thereon; or
b. Giving notice to his principal. In such case, he
must give notice within the time allowed by
law as if he were the holder (NIL, Sec.94).
To whom given
1. Party himself, or;
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2. His agent (NIL, Sec.97).
Other Rules:
1. Party is dead – (a) personal representative; (b) if
no personal representative; notice may be sent to
the last residence or place of business (NIL,
Sec.98).
2. Partners – notice to any one partner is notice to
the firm, even though there has been dissolution
(NIL, Sec.99).
3. Persons jointly liable who are not partners –
notice must be given to each one of them unless
one of them has authority to receive such notice
for the other (NIL, Sec.100).
4. Party adjudged as bankrupt or insolvent – notice
must be given either to the party himself or to his
trustees or assignees (NIL, Sec.101).
Note: Where a party receives notice of dishonor, he
has, after the receipt of such notice, the same time
for giving notice to antecedent parties that the holder
has after the dishonor (NIL, Sec.107).
How given:
Whether written or oral, the notice must contain the
following:
1. Sufficient description of the instrument to identify
it;
2. A statement that it has been presented for
payment or for acceptance and that it has been
dishonored;
3. A statement that the party giving notice intends to
look for the party addressed for payment; and
4. A statement that the instrument was protested if
required (AQUINO, Negotiable Instruments,
supra at 351).
When Given: As soon as the instrument is
dishonored (NIL, Sec.102).
If the parties reside in same places, the notice
must be given within:
1. If given at the place of business of the person to
receive notice, it must be given before the close
of business hours on the day following.
2. If given at his residence, it must be given before
the usual hours of rest on the day following.
3. If sent by mail, it must be deposited in the post
office in time to reach him in usual course on the
day following. (NIL, Sec. 103)
If parties reside in different places, the notice
must be given within:
1. If sent by mail, it must be deposited in the post
office in time to go by mail the day following the
day of dishonor.
2. If there is no mail at a convenient hour on the last
day, by the next mail thereafter.

3. If given otherwise than through the post office,
then within the time that notice would have been
received in due course of mail. (NIL, Sec. 104)
After Receipt of Notice: A party who receives
notice of dishonor, has the same time for giving
notice to antecedent parties that the holder has after
the dishonor (NIL, Sec. 107).
Due notice has been given: Where notice of
dishonor is duly addressed and deposited in the
post office, the sender is deemed to have given due
notice, notwithstanding any miscarriage in the mails
(NIL, Sec. 105).
Notice is deemed to have been deposited in the
post-office when deposited in any branch post
office or in any letter box under the control of the
post-office department (NIL, Sec. 106).
Where Given: Where a party has added an address
to his signature, notice of dishonor must be sent to
that address; but if he has not given such address,
then the notice must be sent as follows:
1. Either to the post-office nearest to his place of
residence or to the post-office where he is
accustomed to receive his letters; or
2. If he lives in one place and has his place of
business in another, notice may be sent to either
place; or
3. If he is sojourning in another place, notice may be
sent to the place where he is so sojourning.
But where the notice is actually received by the
party within the time specified in this Act, it will be
sufficient, though not sent in accordance with the
requirement of this section. (NIL, Sec.108)
To whose benefit does notice of dishonor inure:
1. When given by or on behalf of a holder:
a. All parties prior to the holder, who have a right
of recourse against the party to whom the
notice is given; and
b. All holders subsequent to the holder giving
notice (NIL, Sec.92).
2. When given by or on behalf of a party entitled to
give notice:
a. The holder; and
b. All parties subsequent to the party to whom
notice is given (NIL, Sec.93).
Effect of lack of notice of dishonor on NI which
is payable in installments:
1. Without acceleration clause
Failure to give notice of dishonor on a previous
installment does not discharge drawers and
indorsers as to succeeding installments.
2. With acceleration clause
a. Automatic - failure to give notice of dishonor
as to a previous installment will discharge the
persons secondarily liable as to the
succeeding installments.
b. Optional - if not exercised, the rule would be
the same as where there is no acceleration
clause. If it is exercised, the rule would be the
same as where the installment contains an
automatic acceleration clause (AGBAYANI,
Commercial Law, supra).
When Notice of Dishonor is excused:
1. When notice is waived (expressed/implied):
a. Before the time of giving notice, or
b. After the omission to give due notice
As to who are affected by an express waiver
depends on where the waiver is written:
a. If it appears in the body or on the face of the
instrument, it binds all parties; but
b. If it is written above the signature of an
indorser, it binds him only (NIL, Sec.110).
2. When dispensed with under NIL, Sec. 112 (after
the exercise of reasonable diligence, it cannot be
given to or does not reach the parties sought to
be charged);
3. As to drawer under NIL, Sec. 114;
When Notice of Dishonor need not be given to
the drawer: (SPEC-FC)
a. When the drawer and the drawee are the
Same person;
b. When the drawer is the person to whom the
instrument is Presented for payment;
c. The drawer has no right to Expect or require
that the drawee or acceptor will honor the
instrument;
d. Where the drawer has Countermanded
payment; and
e. When the drawee is a Fictitious person or a
person not having Capacity to contract.
4. As to indorser, under NIL, Sec. 115;
When notice need not be given to indorser:
(FPA)
a. Drawee is a Fictitious person or does not have
the capacity to contract, and indorser was
aware of that fact at the time he indorsed the
instrument;
b. Indorser is the person to whom the instrument
is Presented for payment; and
c. Instrument was made or accepted for his
Accommodation.
5. Where due notice of dishonor by non-acceptance
has been given;
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6. As to the holder in due course without notice. Purposes:

If an instrument is not accepted by the drawee,
there is no sense presenting it again for payment,
and notice of dishonor must at once be given. If
there was acceptance, presentment for payment
is still required and if payment is refused, there is
a need for notice of dishonor (NIL, Sec.116).
1. For uniformity in international transactions;
2. To furnish an authentic and satisfactory evidence
of dishonor.
Protest is necessary only in case of foreign bills of
exchange, which have been dishonored by non-
acceptance or non-payment (NIL, Sec.118).

An omission to give notice of dishonor by non- Effect of Non-protest

acceptance does not prejudice the rights of a The drawer and indorsers are discharged.
holder in due course subsequent to the omission
(NIL, Sec.117). Protest is Necessary:
1. If a foreign bill has been dishonored by non-
Foreign Bill of Exchange acceptance (NIL, Sec.152);
One which is or on its face purports to be: 2. If a foreign bill which was not previously
1. Drawn in the Philippines but payable outside the presented for acceptance has been dishonored
Philippines; or by non-payment (NIL, Sec.152);
2. Payable in the Philippines but drawn outside the 3. If a stranger to a bill will accept the instrument for
Philippines. honor (NIL, Sec.161 );
4. Before a bill can be presented for payment to the
Inland Foreign acceptor for honor or the referee in case of
A bill which is, or on its One which is, or on its need, (NIL, Sec.167);
face purports to be, face purports to be, 5. When the bill is dishonored by the acceptor for
both drawn and drawn or payable honor (NIL, Sec.170;); and,
payable WITHIN the OUTSIDE the 6. Before a bill can be paid for honor, it must be
Philippines. Philippines. protested by the holder for non-payment by any
party liable thereon (NIL, Sec.171).

When a bill is lost or destroyed or is wrongly

PROTEST detained from the person entitled to hold it, protest
may be made on a copy or written particulars
Protest thereof (NIL, Sec.160).
The formal instrument executed usually by a notary
public certifying that the legal steps necessary to fix When Made: On the day of dishonor unless delay is
the liability of the drawee and the indorsers have excused.
been taken.
Where Made: At the place where it is dishonored
Requisites: except where the bill is payable at a place other than
1. Must be made by the residence of the drawee.
a. notary public; or
b. any respectable resident of the place where Distinctions between Protest and Notice of
the bill is dishonored, in the presence of 2 or Dishonor
more credible witnesses (NIL, Sec.154,); Protest Notice of Dishonor
2. Must be annexed to the bill, or must contain a When required
copy thereof; Required in foreign bill Required in inland bill
3. Must be under the hand and seal of the notary Form
making it; Always written May be oral or written
4. Must specify By whom made
a. The time and place of presentment; Made by a notary
b. The fact that presentment was made and the
public or a respectable May be made by a party
manner thereof;
c. The cause or reason for protesting the bill; resident in the or agent
and presence of witness
d. The demand and the answer given, if any or When made
the fact that the drawee or acceptor could not On the day of Usually within 1 day after
be found (NIL, Sec.153). dishonor dishonor

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Where made 2. It has been protested for non-payment;
Made in the place of Made in residence of 3. Payment supra protest (another term for payment
dishonor parties for honor because prior protest for non-payment
is required) is made by any person, even by a
party thereto;
Protest for Better Security 4. The payment is attested by a notarial act of honor
It is one made by the holder of a bill after it has been which must be appended to the protest or form
accepted but before it matures, against the drawer an extension of it; and
and indorsers, where the acceptor has been
5. The notarial act must be based on the declaration
adjudged a bankrupt or an insolvent, or has made
made by the payor for honor or his agent of his
an assignment for the benefit of the creditors (NIL, intention to pay the bill for honor and for whose
Sec.158). honor he pays.
Purpose: To give the acceptor the opportunity to In payment for honor, the payee cannot refuse
perform an act that will ensure payment. payment. If he refuses, he cannot recover from the
parties who would have been discharged had he
ACCEPTANCE AND PAYMENT accepted the same.
FOR HONOR In acceptance for honor, the holder’s consent is
necessary.
Acceptance for Honor
An undertaking by a stranger to a bill after protest Right of Payor for Honor
for the benefit of any party liable thereon or for the To receive both the bill and the protest to enable him
honor of the person for whose account the bill is to enforce his rights against the parties who are
drawn which acceptance inures also to the benefit of liable to him.
all parties subsequent to the person for whose honor
it is accepted, and conditioned to pay the bill when it Distinctions between Ordinary Acceptance and
becomes due if the original drawee does not pay it Acceptance for Honor
(NIL, Sec.161-170). Ordinary Acceptance Acceptance for Honor
Necessity of protest
Requisites: Previous protest is not Previous protest is
1. The bill must have been protested for dishonor by required required
non-acceptance or for better security; Consent of holder
2. The acceptor for honor must be a stranger to the Implied Required
bill; Liability of acceptor
3. The holder must consent to the acceptance for Primary Secondary
honor; By whom accepted
4. Bill must not be overdue; and Drawee is acceptor Acceptor must be
5. Must follow the formalities prescribed in Sec. stranger to the bill
162, to wit: Number of acceptors
a. Must be in writing; No acceptors in the There may be several
b. Must indicate that it is an acceptance for alternative or in acceptors for honor for
honor; succession different parties in the bill
c. Signed by the acceptor for honor; Number of acceptors
d. Must contain an express or implied promise to No acceptors in the There may be several
pay money; and alternative or in acceptors for honor for
e. The accepted bill for honor must be delivered succession different parties in the bill
to the holder. For whose benefit
Benefits parties
Benefits the holder and subsequent to party for
Payment for Honor
all prior parties whose honor the bill is
Payment made by a person, whether a party to the
accepted
bill or not, after it has been protested for non-
Effect of payment
payment, for the benefit of any party liable thereon
Instrument is discharged Bill is not discharged
or for the benefit of the person for whose account it upon payment by the upon payment by
was drawn (NIL, Sec.171-177). acceptor acceptor for honor

Requisites:
1. The bill has been dishonored by non-payment;

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Distinctions between Acceptance for Honor and
Payment for Honor DISCHARGE
Acceptance for Honor Payment for Honor
Bill Discharge of Negotiable Instrument
Bill must be overdue Bill may be overdue A release of all parties, whether primary or
Protest secondary, from the obligations arising thereunder.
Previous protest for Previously protested for It renders the instrument without force and effect
non-acceptance or for non-payment and, consequently, it can no longer be negotiated.
better security
Consent of holder How a Negotiable Instrument is Discharged:
Consent of holder is Consent of holder is not (DAC-SP)
necessary necessary 1. By payment in Due course by or on behalf of the
Liability principal debtor;
Acceptor is secondarily Acceptor is primarily 2. Payment by Accommodated party;
liable liable 3. Intentional Cancellation by the holder;
4. By any act which will discharge a Simple contract
By whom made
for the payment of money; or
Made by a stranger or Made by any person
5. When the Principal debtor becomes the holder of
party not liable on the whether a party or
the instrument at or after maturity in his own right
bill stranger to the bill
(NIL, Sec.119).
Notarial act
Notarial act of honor Notarial act of honor I. Payment in Due Course
not necessary necessary Requisites: (MHG)
Effects 1. Payment must be made at or after Maturity;
Secs. 164, 165 Secs. 175, 177 2. Payment must be made to the Holder; and
3. Payment must be made in Good faith and without
Distinctions between Payment by Person notice that the holder’s title is defective (NIL,
Primarily Liable and Payment for Honor Sec.88).
Payment by Person Payment for Honor
Primarily Liable By whom made:
Necessity of protest 1. By maker or acceptor; or (selected
No need to protest for There is a need to accommodation party)
non-payment or non- protest for non-payment 2. Surety, if a primary party; or
acceptance 3. By an agent on behalf of the principal
Party Liable
The make or the May be a party or a II. Payment by Accommodated Party
drawee-acceptor stranger Payment by the accommodated party causes
In whose favor payment is made discharge because he is the one ultimately liable on
In favor of a specified the instrument.
person and the law
In favor of specific requires that there is a III. Cancellation
parties statement of the person 1. Intentional Cancellation
for whose honor It includes the act of tearing, erasing, obliterating,
payment is made or burning. It is not limited to writing of the word
Notarial act “cancelled”, or “paid”, or drawing of criss-cross
Not necessary Necessary lines across the instrument. It may be made by
Payment in due course any other means by which the intention to cancel
Cannot be payment in the instrument may be evident.
due course and Requisites of Intentional Cancellation:
payment discharges a. Intentionally done;
Discharges the b. By the holder thereof; and
only the parties after
instrument c. By writing the word “cancelled” or “paid” on
the party in whose favor
payment for honor is the face of the instrument; or if the instrument
made is torn up, burned, mutilated or destroyed.

2. Unintentional Cancellation
A cancellation made unintentionally or under
mistake or without the authority of the holder.

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Effect:
The cancellation is inoperative but party who
alleges that cancellation was made
unintentionally, or under a mistake or without
authority has the burden of proof (NIL, Sec.123).
IV. By any other Act which Discharges the
Instrument
The Law on Obligations and Contracts will apply.
Article 1231 of the Civil Code provides that
obligations are extinguished by payment or
performance, loss of thing due, condonation or
remission of debts, confusion or merger of the rights
of the creditor and debtor, compensation, novation,
annulment, rescission, fulfillment of resolutory
condition and prescription.
However, although such ways discharge the
instrument as between immediate parties, they will
not do so in the hands of a holder in due course.
The instrument must be surrendered to the payor. If
the instrument is not surrendered, it may fall in the
hands of a holder in due course who may have the
right to enforce the instrument despite the previous
payment.
V. Principal debtor becomes the holder
An instrument is discharged when the principal
debtor becomes the holder of the instrument at or
after maturity date in his own right.
In his Own Right
Construed as to exclude a case where a maker
acquires the instrument in a purely representative
capacity. (Sigler v. Sigler, 98 Kans. 524, 158 p. 864
[1916], citing Bank v. Drayden, 91 Kan. 216, 137
Pac. 928)
The note is not discharged when the maker acquires
it as agent of another. Nor it is discharged when the
maker becomes the holder, like as executor or
administrator. (Sigler v. Sigler, 98 Kans. 524, 158 p.
864 [1916], citing Bank v. Drayden, 91 Kan. 216,
137 Pac. 928)
Surrender of the Instrument
The instrument must be surrendered to the payor
whenever discharge is by payment by or in behalf of
the principal debtor, payment by the accommodated
party, by renunciation or by any other ground that
discharges simple contract.
Discharge of Persons Secondarily Liable:
(DIVARA)
1. By the Discharge of a prior party;
Discharge must be through an act of the creditor
and not by operation of law (AQUINO, Negotiable
Instruments, supra at 408).
2. By the Intentional cancellation of his signature by
the holder;
3. By a Valid tender or payment made by a prior
party;
4. By any Act which discharges the instrument;
Tender of Payment
It means the act by which one produces and
offers to a person holding a claim against or
demand against him the amount of money which
he considers and admits to be due, in satisfaction
of such claim or demand without any stipulation
or condition.
5. By the Release of the principal debtor, unless the
holder’s right of recourse against the party
secondarily liable is expressly reserved;
The reservation will not release the secondary
parties only if they accede to the release of the
principal debtor (NIL, Sec.120); and
6. By any Agreement binding upon the holder to
extend the time of payment or to postpone the
holder’s right to enforce the instrument (NIL,
Sec.120).
Instances when the agreement to extend the
time of payment does not discharge a party
secondarily liable:
1. Where the extension of time is consented to by
such party; and
2. Where the holder expressly reserves his right of
recourse against such party.
Effects of Payment by Parties Secondarily
Liable:
1. Instrument is not discharged;
2. It cancels his liability and that of the parties
subsequent to him; and
3. He may strike out his own and all subsequent
indorsements and again negotiate the instrument
except: (a) where it is payable to the order of a
third person and has been paid by the drawer;
and (b) where it was made or accepted for
accommodation and has been paid by the party
accommodated (NIL, Sec.121).
Renunciation by Holder
The holder may expressly renounce his rights
against any party to the instrument before, at, or
after its maturity (NIL, Sec.122).
Requisites:
1. Absolute and unconditional;
2. Made in favor of the person primarily liable;
3. Made at or after maturity; and
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4. Unless the instrument is delivered, it must be
expressly provided for in writing (NIL, Sec.122).
Effects:
1. A renunciation in favor of the principal debtor
may be effected at or after maturity. The effect is
to discharge the instrument and all parties thereto
provided the renunciation is made unconditionally
and absolutely.
2. A renunciation in favor of a secondary party may
be made by the holder before, at or after maturity
of the instrument. The effect is to discharge only
such secondary party and all parties subsequent
to him but the instrument itself remain in force.
Note: In either case, renunciation does not affect
the rights of a holder in due course without
notice.
CHECKS
A bill of exchange drawn on a bank payable on
demand (NIL, Sec.185).
Checks are not mere contracts but:
1. A representation of funds on deposit;
2. Representation of credit stated in monetary
value;
3. Substitute for cash; and
4. As payment for an obligation.
But a check of itself does not operate as an
assignment of any part of the funds to the credit of
the drawer with the bank. The bank is not liable to
the holder, unless and until it accepts or certifies the
check (NIL, Sec.189).
Types of Check
1. Cashier’s Check
One drawn by the cashier of a bank, in the name
of the bank against the bank itself payable to a
third person. It is a primary obligation of the
issuing bank and accepted in advance upon
issuance (Tan v. CA, G.R. No. 108555,
December 20, 1994).
2. Manager’s Check
A check drawn by the manager of a bank in the
name of the bank itself payable to a third person.
It is similar to the cashier’s check as to the effect
and use.
In issuing a manager’s check, the bank assumed
the liabilities of an acceptor under Section 62 of
the Negotiable Instruments Law (Equitable PCI
Bank v. Rowena Ong, G.R. No. 156207,
September 15, 2006).
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Note: A manager’s check stands on the same
footing as a certified check.
3. Certified Check
A check drawn by a depositor upon funds to his
credit in a bank which a proper officer of the bank
certifies will be paid when duly presented for
payment (AQUINO, Negotiable Instruments,
supra at 417).
Certification
An agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future
time when presented for payment.
Effects:
a. Equivalent to acceptance and is the operative
act that makes banks liable (NIL, Sec.187);
b. Assignment of the funds of the drawer in the
hands of the drawee (NIL, Sec.189); and
c. If obtained by the holder, the persons
secondarily liable are discharged thereon
(NIL, Sec.188).
Iron Clad Rule
Prohibits the countermanding of payment of
certified checks (Republic v. PNB, G.R. No. L-
16106, December 30, 1961).
The holder must be a holder in due course so
that the stop-payment order may not be
successfully invoked against him (Mesina v. IAC,
G.R. No. 70145, November 13, 1986).
4. Memorandum Check
One in the form of an ordinary check with the
word “memorandum”, “memo” or “mem” written
across its face, signifying that the maker or
drawer engages to pay the bona fide holder
absolutely, without any condition concerning its
presentment.
Such a check is an evidence of debt against the
drawer, and although it may not be intended to
be presented, has the same effect as an ordinary
check, and if passed to a third person, will be
valid in his hands like any other check
(SUNDIANG & AQUINO, Reviewer, supra at 75).
5. Traveler’s Check
Instruments purchased from banks, express
companies, or the like, in various denominations,
which can be used like cash upon the second
signature of the purchaser. It requires the
signature of the holder to appear twice; one to be
affixed by him at the time it is issued and the
second, to be affixed by him in the presence of
the payee before it is paid, otherwise, it is

incomplete (AQUINO, Negotiable Instruments,
supra at 426).
6. Crossed Check
A crossed check is one where two parallel lines
are drawn on the left top portion of the check.
Kinds of Crossed Checks:
1. Special – The name of a particular bank or
company is written or appears between the
parallel lines in which case the drawee bank must
pay the check only upon presentment by such
bank or company (Chan Wan v. Tan Kim G.R.
No. L-15380,September 30, 1960) on penalty of
being made to pay again by the rightful owner
should the first payment prove to have been
erroneous.
2. General – Only the words “and Co.”, “for payee’s
account only” or nothing is written between the
parallel lines, the drawee should not encash the
same but merely accept the same for deposit.
Effects of Crossing of Checks:
1. It may not be encashed, but may only be
deposited in the bank;
2. It may be negotiated only once -- to one who has
an account with the bank; and
3. It serves as a warning to the holder that the
check has been issued for a definite purpose so
that he must inquire if he received the check
pursuant to that purpose; otherwise, he is not a
holder in due course (Go v. Metropolitan Bank
and Trust Co., G.R. No. 168842, August 11,
2010).
The NIL is silent with respect to crossed checks,
although the Code of Commerce makes reference to
such instrument. Nonetheless, this Court has taken
judicial cognizance of the practice that a check with
2 parallel lines in the upper left hand corner means
that it could only be deposited and not converted
into cash. The effects of crossing a check thus,
relates to the mode of payment, meaning that the
drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein
(Cely Yang v. CA, G.R. No. 138074, August 15,
2003).
Presentment for Payment of Checks
A check must be presented for payment within
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the
loss caused by the delay (NIL, Sec.186 ).
Collection of Checks
On the check’s due date, a holder of a check may
either proceed directly to the drawee bank and
present the same for payment or he may deposit it
in his account with his bank known as the depositary
bank or collecting bank.
It is only after the check has been cleared and
collected from the drawee bank that final credit is
made in the payee-depositor’s account.
Clearing of checks
When a check is sent to the clearinghouse, the
collecting bank acts as the agent of the depositor.
The collecting bank does not become the owner of
the amount covered by the check as the same is
only being collected from the drawee bank for the
principal, the depositor (Bank of the Philippine
Islands v. CA, G.R. No. 112392, February 29, 2000).
Refusal of Drawee Bank to Pay a Check
General Rule: If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections
185 and 189 of the Negotiable Instruments Law, sue
the bank. The payee should instead sue the drawer
who might in turn sue the bank.
Reason: No privity of contract exists between the
drawee bank and the payee (Sincere Villanueva v.
Marlyn Nite, G.R. No. 148211, July 25, 2006).
Exception: If the drawer himself ordered the bank
to pay and such drawer has sufficient funds therein
Cases When Drawee Bank May Refuse Payment
1. The bank is insolvent;
2. The drawer’s deposit is insufficient or he has no
account with the bank or said account had been
closed or garnished;
3. The drawer is insolvent and proper notice is
received by the bank;
4. The drawer dies and proper notice is received by
the bank;
5. The drawer has countermanded payment;
6. The holder refuses to identify himself; or
7. The bank has reason to believe that the check is
forgery.
A bank is under no obligation to make partial
payment on a check up to the amount of the
drawer’s funds as where the check is drawn for an
amount larger than what the drawer has on deposit.
In case of partial payment, the check holder could
not be called upon to surrender the check and the
bank would be without a voucher affording a certain
means of showing payment (Moran v. CA, G.R. No.
105836, March 7, 1994).
Crimes Involving Checks
1. Check Kiting
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It is the wrongful practice of taking advantage of
the float, the time that elapses between the
deposit of the check in one bank and its
collection at another. The depositary bank will
honor the checks even if it has not yet been
cleared. In anticipation of the dishonor of the
check that was deposited, the conspirators will
replace the original check with another worthless
check (AQUINO, Negotiable Instruments, supra
at 453).

2. Estafa
It is done by postdating a check or issuing a
check in payment of an obligation when the
offender had no funds in the bank, or his funds
therein were not sufficient to cover the amount of
the check (RPC, Art. 315, par. 2[d]).

3. Batas Pambansa Blg. 22 (Bouncing Checks

Law)
a. By making or drawing and issuing a check to
apply on account or for value knowing at the
time of issue that the check is not sufficiently
funded; or
b. By having sufficient funds in or credit with the
drawee bank at the time of issue but failing to
keep sufficient funds therein or credit with said
bank to cover the full amount of the check
when presented to the drawee bank within a
period of 90 days.

Note: An accused acquitted of the criminal

charges under BP Blg. 22 may he still be held
civilly liable for the checks he issued.

Upon issuance of a check, in the absence of

evidence to the contrary, it is presumed that the
same was issued for valuable consideration.
Under the Negotiable Instruments Law, it is
presumed that every party to an instrument
acquires the same for a consideration or for
value. As the drawer alleged that there was no
consideration for the issuance of the subject
checks, it devolved upon him to present
convincing evidence to overthrow the
presumption and prove that the checks were in
fact issued without valuable consideration (Engr.
Jose E.Cayanan v. North Star International
Travel, Inc., G.R. No. 172954, October 5, 2011).

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COMPARATIVE CHART OF S E C T I O N S 14, 15 AND 16

Section 14 Section 15 Section 16

Delivery
Delivered Undelivered Undelivered
Completeness
Wanting in Blank paper
any material with signature Mechanically incomplete Mechanically complete
particular
Authority of person in possession
Prima facie Signature No authority to complete and/or May negotiate if delivered to him
authority to operates as a negotiate instrument by or under the authority of the
complete it by prima facie party making, indorsing, drawing
filling up the authority to fill it or accepting, as the case may be.
blanks therein up as such for
any amount
When enforceable
If filled up strictly in accordance When delivery is made by or
with authority given and within a under authority of the party
Not enforceable
reasonable time making, indorsing, drawing or
accepting, as the case may be.
Kind of defense
Personal Real Personal
Rights of holder
1. If HDC, he can enforce the None in the hands of any holder. Can enforce the instrument.
instrument as completed However, the invalidity of the here the instrument is in the hands
against parties prior or instrument is only with reference of a HDC, a valid delivery thereof
subsequent to the to parties whose signatures by all parties prior to him so as to
completion appear on the instrument after make them liable to him is
2. If not a HDC, he can enforce delivery, the instrument is valid. conclusively presumed. Where the
the instrument as completed instrument is no longer in the
only against parties possession of a party whose
subsequent to the signature appears thereon, a valid
completion but not against and intentional delivery to him is
those prior thereto. presumed until the contrary is
proved.

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COMPARATIVE CHART FOR ENFORCEMENT
Presentment for Payment Presentment for Acceptance
Nature of instrument
Sec.143 (SMS-E)
Bill is payable after Sight or when it
is necessary in order to fix the
Promissory Notes Maturity of the instrument
Bills of Exchange
Checks Bill expressly Stipulates
Bill is drawn payable Elsewhere
than at the residence or place of
business of the drawee
By whom
Holder / Agent Holder / Agent
To whom
Maker / Drawee Drawee / Agent with authority to
accept or reject
Secs. 76, 77, 78 (because acceptance gives rise to
If debtor is dead, to his personal a liability on the part of the
representative drawee.)
If liable as partners, presentment Sec. 145
may be made to any one of If there are two or more drawees
them who are not partners, to all of them
unless one has authority to accept
If joint debtors, presentment or refuse for all.
must be made to all of them
If drawee is dead, to his personal
Any person found at the place of representative.
presentment (Substituted
Presentment) If adjudged bankrupt or insolvent or
has made an assignment, to him,
his trustee or assignee.
How made
Sec. 74 By producing the bill (because the
By exhibiting the instrument bill will be stamped by the word
“accepted”)
When made
Secs. 72 & 85 If payable on a future determinable
If instrument is payable on a time, it must be presented before it
future determinable time, must is overdue or at maturity
be presented on due date, next
business day If payable on demand, the bill must
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OF LIABILITY
Notice of Dishonor
Promissory Notes
Bills of Exchange
Checks
Secs. 90 & 91
Holder / Agent; or
By or on behalf of any party who
might be compelled to pay it to the
holder and who have a right of
reimbursement from the party to
whom the notice is given
Secs. 89 & 97
Drawer and each indorser or any
person secondarily liable or his
Agent.
Secs. 98 – 101
If dead, to his personal
representative.
If partners, notice to any one
partner is sufficient.
If jointly liable, to each of them
unless one has authority to
receive notice for the others.
If adjudged bankrupt or insolvent
or an assignment was made, to
him, his trustee or assignee
Either verbally or in writing
must describe the instrument and
state the fact of presentment and
the fact of dishonor.
If living in the same area, notice
must be given within 24 hours
from dishonor
If living in different area, the

Sec. 85 / 194
If instrument is payable on
demand, it must be made w/in
reasonable time
Checks – 6 months after issue
including Saturday up to 12
noon
Sec. 73
1. Place specified
2. If none, at the address of the
maker / acceptor as stated
3. If none, at his residence or
office
4. If none, any place where he is
found
Secs. 79 – 82
When the drawer has no right to
expect or require that the
drawee or acceptor will pay the
instrument
Where the instrument was made
or accepted for his
accommodation and he has no
reason to expect that the
instrument will be paid if
presented
When the delay is caused by
circumstances beyond the
control of the holder and not
imputable to his default,
misconduct or negligence.
Even after the exercise of due
diligence, presentment cannot
be made
Drawee is a fictitious person
Waiver, express or implied
be presented w/in a reasonable
time from last negotiation including
Saturdays up to 12 noon.
Where made
No requirement because it is
immaterial. What is important is
that the bill was accepted.
How excused
Sec. 148
Drawee is dead, absconded, a
fictitious person or a person not
having the capacity to contract by
bill
After the exercise of due diligence,
presentment cannot be made
Although presentment was
irregular, acceptance has been
refused on some other ground
2014 CENTRALIZED BAR OPERATIONS
dropping of letter in a mailbox is
sufficient compliance.
Address of party indicated / added
in his instrument
If none, at his residence or office
If none, where he is sojourning
Secs. 112 - 114 (DRAWER)
After the exercise of due
diligence, it cannot be given to or
does not reach the parties sought
to be charged
Delay is caused by circumstances
beyond the control of the holder
and not imputable to his default,
misconduct or negligence
Drawer and drawee is the same
person
Drawee is a fictitious person or a
person not having the capacity to
contract
Drawer is the person to whom the
instrument is presented for
payment
Drawer has no right to expect or
require that the drawee or
acceptor will honor the instrument
Drawer has countermanded
payment
Sec. 115 (INDORSER)
When the drawee is a fictitious
person or a person not having the
capacity to contract and the
indorser was aware of that fact at
the time he indorsed the
instrument
Indorser is the person to whom
the instrument was presented for
payment
When the instrument was made or
accepted for his accommodation
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