ACT NO.

2031

Negotiable
Instruments Law
Reviewer by:

Allyssa Mae M. Yuson

BC School of Law

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
 o Negotiable instruments can only produce the effect of
payment when it has been encashed.
NATURE AND COVERAGE OF NEGOTIABLE INSTRUMENT FUNCTIONS OF NEGOTIABLE INSTRUMENTS.
LAW. - Acts as a substitute for money.
- NIL applies only to negotiable instruments and covers the o It is however not a legal tender.
entire subject of negotiable instruments and must be treated as o General Rule: The delivery of negotiable instrument
a complete body of law upon the subject and controlling on all does not by itself produce the effect of payment.
cases to which it is applicable  EXCEPTIONS:
 When they have been cashed, or
Negotiable Instrument, is a written contract for the payment when through the fault of the
of money, by its form intended as substitute for money and intended to creditor they have been impaired.
pass from hand to hand to give the holder in due course the right to  If a check representing demand
hold the same and collect the sum due. deposit has been cleared and credited
- The negotiable instrument is transferred by negotiation. to the account of the creditor, such
o Negotiation is the transfer of instrument from one shall be equivalent to delivery t the
person to another in such a way as to make the creditor of cash.
transferee the holder of instrument. - It increases the purchasing medium in circulation.
 The transfer must make the transferee a - It facilitates the sale of goods.
holder, otherwise he will be a mere assignee. - It serves as a medium of credit
 In assignment the assignee is merely - It serves as a proof of transaction.
place in a position of the assignor.
Hence, the assignee has no better PURPOSE OF NEGOTIABLE INSTRUMENT.
rights than what the assignor have - It allows men of undoubted credit to carry on a business
and he acquires the instrument enterprise on the strength of their negotiable instrument which
subject to all defenses that may have they issue or negotiate knowing that other businessmen will
been set up against the original accept the negotiable instrument as cash.
payee.
- Negotiable instruments are neither money nor legal tender,
they are mere substitutes for money.

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
 CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS - FACTS: This suit to collect eleven checks totalling
P4,290.00. Such checks payable to "cash or bearer" and drawn
- Negotiability it is the quality or attribute wherein negotiable by Tan Kim, "were all dishonored and returned to him unpaid
instrument may pass from hand to hand as money, in order to due to insufficient funds and/or causes attributable to the
give the holder in due course the right to hold the instrument drawer." In view of such circumstances, the court declined to
free from personal defenses available from prior parties and to order payment because Chan Wan failed to prove he was a
collect the sum due of the instrument. holder in due course.
- Accumulation of secondary contracts, as an instrument - ISSUE: WON Chan Wan can recover on the checks.
passes from one person to another by negotiation, each - RULING: Yes. Chan Wan can recover on the checks.
negotiation produces a contract, hence there can be several The Negotiable Instruments Law regulating the
contracts in the life of one negotiable instrument. issuance of negotiable checks, the rights and the
liabilities arising therefrom, does not mention
HOW TO DETERMINE IF AN INSTRUMENT IS A "crossed checks". It does not follow as a legal
NEGOTIABLE proposition, that simply because he was not a holder
in due course Chan Wan could not recover on the
- First, consider the whole of the document and what appears on checks. The Negotiable Instruments Law does not
its face. provide that a holder who is not a holder in due
- Second, if it complies with the following course, may not in any case, recover on the
o It must be in writing and signed by the maker or instrument. If B purchases an overdue negotiable
drawer; promissory note signed by A, he is not a holder in due
o Must contain an unconditional promise or order to course; but he may recover from A, if the latter has no
pay a sum certain in money; valid excuse for refusing payment. The only
o Must be payable on demand, or at a fixed or disadvantage of holder who is not a holder in due
determinable future time; course is that the negotiable instrument is subject to
o Must be payable to order or to bearer; and defense as if it were non- negotiable
o Where the instrument is addressed to a drawee, he Metropolitan Bank Trust Co. vs. CA, GR No. 88866, February 18,
must be named or otherwise indicated therein with 1991
reasonable certainty. - FACTS: n January 1979, a certain Eduardo Gomez opened an
account with Golden Savings and Loan Association and
CASES (Governing Law) deposited over a period of two months 38 treasury warrants
which were drawn by the Philippine Fish Marketing
Chan Wan vs Tan Kim, GR NO. L-15380 Sept. 30, 1960 Authority. Six of these were directly payable to Gomez while
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 the others have been endorsed by their respective payees, or promise to pay “not unconditional” and the warrants
followed by Gomez as second endorser. All these warrants themselves non-negotiable.
were subsequently endorsed by Gloria Castillio as cashier of
Golden Savings and deposited to its savings account with GSIS vs CA, Gr No. L-40824 February 23, 1989
Metrobank.. They were then sent for clearing by Metrobank - FACTS: Mr. and Mrs. Racho executed a 2 deed of mortgage
branch office to its principal office which forwarded them to in favor of GSIS in connection with two loans granted by the
the Bureau of Treasury for special clearing. More than two latter. A parcel of land co-owned by said mortgagor spouses,
weeks after the deposits, Gloria Castillo went to Metrobank was given as security under the aforesaid two deeds. They
branch several times to ask whether the warrants had been also executed a 'promissory note"
cleared and she was told to wait. Meanwhile, Gomez was not “... for value received, we the undersigned ...
allowed to withdraw from his account. Metrobank, JOINTLY, SEVERALLY and SOLIDARILY, promise
exasperated over the persistent inquiries of Gloria Castillo to pay the GOVERNMENT SERVICE INSURANCE
about the clearance and also wanting to accommodate a valued SYSTEM the sum of . . . (P 11,500.00) Philippine
client, allowed Golden Savings to withdraw from the Currency, with interest at the rate of six (6%) per
uncleared treasury warrants. In turn, Golden Saving centum compounded monthly payable in . . .
subsequently allowed Gomez to make withdrawals from his (120)equal monthly installments of . . . (P 127.65)
own account. each.”
- ISSUE: Whether or not treasury warrants are negotiable - ISSUE: WON the executed deed of sale and promissory note
instruments. are a negotiable instrument.
- RULING: No, The treasury warrants are not negotiable. An - RULING: No, The executed deed of sale and promissory
instrument to be negotiable must contain an unconditional note are not a negotiable instrument. The promissory note
promise or order to pay a sum certain in money. An hereinbefore quoted, as well as the mortgage deeds subject of
unqualified order or promise to pay is unconditional within this case, are clearly not negotiable instruments. These
the meaning of the Negotiable Instruments Law though documents do not comply with the fourth requisite to be
coupled with (a) an indication of a particular fund out of considered as such under Section 1 of Act No. 2031 because
which reimbursement is to be made or a particular account they are neither payable to order nor to bearer. The note is
to be debited with the amount; or (b) a statement of the payable to a specified party, the GSIS. Absent the aforesaid
transaction which gives rise to the instrument. But an order requisite, the provisions of Act No. 2031 would not apply;
or promise to pay out of a particular fund is not governance shall be afforded, instead, by the provisions of the
unconditional. The indication of Fund 501 as the source of the Civil Code and special laws on mortgages.
payment to be made on the treasury warrants makes the order
Kauffman vs PNB, Gr No. 16454 September 29, 1921
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 - FACTS: Kaufmann, President of Philippine Fiber and viewed in the light of a negotiable instrument, although it
Produce Company was entitled to dividend from the said affords complete proof of the obligation actually assumed by
company. The treasurer of the company Cabled transfer the the bank.
said dividends through PNP to New York, thereafter, upon the
confirmation of the receipt of the funds, the NY branch Borromeo vs Sun Gr No. 75908 October 22, 1999
communicated the said receipt to Kaufmann informing the - FACTS: Amando Sun brought an action against F.O.B, Inc. to
availability of the fund. Subsequently, the PNP NY decided to compel the transfer to his name in the books of F.O.B., Inc.,
withhold the said funds denying Kaufmann of its access. 23,223 shares of stock registered in the name of Federico O.
Kaufmann questioned the action of the PNB NY in the court. Borromeo, as evidenced by a Deed of Assignment. Federico
PNB argued that the plaintiff has not cause of action because O. Borromeo disclaimed any participation in the execution of
he is not a party in the contract of transferring funds and the the Deed of Assignment, theorizing that his supposed
transaction will not fall under the provisions of the Negotiable signature thereon was forged
Instrument Law - ISSUE: WON the signature is forged.
- ISSUE: WON Kauffman has cause of action in with respect to - RULING: Pertinent records reveal that the subject Deed of
the Negotiable Instrument Law? Assignment is embodied in a blank form for the assignment of
- RULING: No. Kauffman has no cause of action with respect shares with authority to transfer such shares in the books of
to the NIL. The very threshold of the discussion it can be the corporation. It was clearly intended to be signed in blank
stated that the provisions of the Negotiable Instruments Law to facilitate the assignment of shares from one person to
can come into operation there must be a document in another at any future time. This is similar to Section 14 of the
existence of the character described in section 1 of the Law; Negotiable Instruments Law where the blanks may be filled
and no rights properly speaking arise in respect to said up by the holder, the signing in blank being with the
instrument until it is delivered. In the case before us there was assumed authority to do so.
an order, it is true, transmitted by the defendant bank to its
New York branch, for the payment of a specified sum of KINDS OF NEGOTIABLE INSTRUMENT.
money to George A. Kauffman. But this order was not made - Promissory note.
payable "to order or "to bearer," as required in subsection (d) o It is an unconditional promise in writing made by one
of that Act; and inasmuch as it never left the possession of the person to another signed by the maker, engaging to
bank, or its representative in New York City, there was no pay on demand or at a fixed or determinable future
delivery in the sense intended in section 16 of the same Law. time a sum certain in money to order or to bearer.
In this connection it is unnecessary to point out that the  It is a promise to pay a sum of money.
official receipt delivered by the bank to the purchaser of the o Example of a promissory note:
telegraphic order, and already set out above, cannot itself be June 4, 2020
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 Manila o It is an instrument in writing, containing an
P1,000.00 unconditional order, signed by the maker (depositor),
directing a certain banker to pay a certain sum of
I promise to pay X or bearer, one thousand money to the bearer of that instrument.
pesos on or before July 4, 2020. - Bill of Exchange
o It is an unconditional order in writing addressed by
(SGD.) Y
one person too another, signed by the person giving it,
 The maker is Y.
requiring the person to whom it is addressed to pay on
 The payee is X, or the person who will
demand or at a fixed or determinable future time a
receive the funds by virtue of the instrument.
sum certain in money to order or to bearer.
o Parties in a promissory note. - There are originally
 It is essentially an order made by one person
two parties.
to another to pay money to a third person.
 Maker, or the one who signed. He is the
o Example of Bill of Exchange.
party who executes the written promise to
June 4, 2020
pay.
Manila
 The maker warrants that he is P1,000.00
engages to pay according to the
tenure of the instrument. Thirty days after date, pay to X or his order
 The maker warrants the existence of one thousand pesos.
the payee and the capacity of the (SGD) Y
payee to indorse. To: Z
 Liability of the maker: Primary Makati
and unconditional, hence, he cannot  Y is a drawer
shift his liability to any other person  Z is a drawee
without the consent of the payee and  X is a payee
he promises to pay not only the  In bill of exchange, the drawer is directing
payee but any subsequent holder. the drawee to pay the payee.
 Payee is the person who will receive the o Parties to a bill of exchange. - A bill of exchange
funds. requires in its inception at least three parties – the
- Checks drawer, the drawee, and the payee.
o A check is a bill of exchange drawn on a bank and
payable on demand.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  The holder of the instrument may be the  Before the bill is accepted, there is
payee or, when there has been a negotiation no party primarily liable yet, because
thereof, a party subsequent to the payee. a bill does not operate as an
 Liability of the drawer: Secondarily liable assignment of funds in the hands of a
to the holder or any subsequent indorser who drawee available for payment
is compelled to pay. thereof, and the drawee is not liable
 He does not promise to pay the bill until and unless he accepts the bill.
absolutely.  Once he accepts and signs the bill,
 He does not make any warranty but he become an acceptor.
he engages to pay the bill after o The drawee has to become
certain conditions are complied with, an acceptor before he can be
namely: held liable on the bill.
o The bill is accepted for o The acceptance by the
acceptance or for payment drawee may be qualified.
to the drawee  Effect of acceptance by the drawee:
o The bill is dishonored by Acceptance by the drawer means that he
non-acceptance or non- admits the existence of the drawer and the
payment payee, and the capacity of the latter to
o The necessary proceedings indorse the instrument
of dishonor are duly taken. o Where a bill of exchange may be treated as a
 The notice of promissory note AT THE OPTION OF THE
dishonor must be HOLDER.
given to the drawer.  If the drawee is a fictitious person or is
 In case of foreign legally absent.
bills, the same must  Reason: Nobody can accept the bill
be protested. of exchange, and acceptance is made
 However, the drawer may limit his impossible through the fault of the
liability by express stipulation. drawer.
 Liability of drawee: The drawee only  If the draweee does not capacity to contract
assumes liability once he accepts the bill and (e.g., minor, insane)
signs his name on the bill.  In case the drawer and drawee is the same
person.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  When the bill is ambiguous BILL OF EXCHANGE CHECK
A bill of exchange may be A check is always drawn on a
PROMISSORY NOTE and BILL OF EXCHANGE distinguished. drawn on any one, including a banker.
PROMISSORY NOTE BILL OF EXCHANGE banker.
It is an unconditional promise It is an unconditional order in A bill of exchange may be A check can only be drawn
in writing made by one person to writing addressed by one person drawn payable on demand, or on payable on demand.
another signed by the maker, too another, signed by the the expiry of certain period after
engaging to pay on demand or at person giving it, requiring the date or sight.
a fixed or determinable future person to whom it is addressed A bill of exchange must be A check does not require
time a sum certain in money to to pay on demand or at a fixed accepted before payment can be acceptance and is intended for
order or to bearer or determinable future time a demanded. immediate payment.
sum certain in money to order or
to bearer. NEGOTIABLE INSTRUMENTS and NON-NEGOTIABLE
There are two parties – the There are three parties to a bill INSTRUMENT distinguished.
maker and the payee. of exchange – the drawer, the NEGOTIABLE NON-NEGOTIABLE
- The maker is the one drawee, and the payee. INSTRUMENT INSTRUMENTS
who makes die promise - The drawer is the It is a written contract for the It is an instrument which is not
and signs the person who issues and payment of money, by its form negotiable, that is, it does not
instrument. draws the order bill. intended as substitute for money meet the requirements laid down
- The payee is the one - The drawee is the party and intended to pass from hand to qualify an instrument as a
whom the promise is upon whom the bill is to hand to give the holder in due negotiable one, or an instrument
made. drawn. course the right to hold the same which in its inception was
- The payee is the party and collect the sum due. negotiable but has lost its quality
in whose favor the bill of negotiability.
is originally drawn or is (i.e., check payable only to a
payable. specified person)
The maker is primarily liable. The drawer is secondarily Governed by NIL Governed by the Civil Code or
liable. other pertinent laws.
Only one presentment is needed. Two presentment are generally
- For payment needed. It is merely a simple contract in
- For acceptance and for writing.
payment. Can be transferred by Can be transferred only by
negotiation or by assignment. assignment.
.BILL OF EXCHANGE and CHECK distinguished
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 Persons who transfer or assign (b) Must contain an unconditional promise or order to pay
contractual or non-negotiable a sum certain in money;
rights pass only the rights that (c) Must be payable on demand, or at a fixed or
they had. determinable future time;
The transferee can be a holder in The transferee can never be a (d) Must be payable to order or to bearer; and
due course. holder in due course but remains (e) Where the instrument is addressed to a drawee, he must
to be an assignee. be named or otherwise indicated therein with reasonable
certainty.
NEGOTIABILITY DETERMINED BY THE TEXT OF THE The CTDs in question undoubtedly meet the requirements of
INSTRUMENT (Cases) the law for negotiability. Under the Negotiable Instruments
Law, an instrument is negotiated when it is transferred from
Caltex (Phil) Inc. vs CA and Security Bank and Trust Company one person to another in such a manner as to constitute the
GR No. 97753 August 10, 1992 transferee the holder thereof, and a holder may be the payee
- FACTS: On various dates, SBTC, through its Sucat Branch or indorsee of a bill or note, who is in possession of it, or the
issued 280 certificates of time deposit in favor of Angel dela bearer thereof.
Cruz who later lost them. Upon compliance with some formal
requirements, he was issued replacements. Thereafter, he
secured a loan from the bank where he assigned the
certificates as security. Caltex, however, averred that the Traders Royal Bank vs CA, Filriters Guaranty Assurance Corp.
certificates were not actually lost but were given as Gr No. 93397 March 3, 1997
security for payment for fuel purchases. The bank demanded - FACTS: Filriters Guaranty Assurance Corporation (Filriters)
some proof of the agreement but the Caltex failed to comply. executed a “Detached Assignment”, unto Philippine
The loan matured and the time deposits were terminated and Underwriters Finance Corporation (Philfinance) all its rights
then applied to the payment of the loan. Petitioner demands and title to Central Bank Certificates of Indebtedness (CBCI).
the payment of the certificates but to no avail. - ISSUE: WON the CBCI a negotiable instrument.
- ISSUE: WON the certificate of time deposits are negotiable - RULING: No. The CBCI is not a negotiable instrument.
instruments. admittedly, the subject CBCI is not a negotiable instrument in
- RULING: Yes. The CTDs are negotiable instruments. the absence of words of negotiability within the meaning of
Section 1 Act No. 2031, otherwise known as the Negotiable the negotiable instruments law (Act 2031) The language of
Instruments Law, enumerates the requisites for an negotiability which characterize a negotiable paper as a
instrument to become negotiable: credit instrument is its freedom to circulate as a substitute
(a) It must be in writing and signed by the maker or drawer; for money. Hence, freedom of negotiability is the touchtone
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 relating to the protection of holders in due course, and the - FACTS: HSBC’s investor-clients maintain Philippine peso
freedom of negotiability is the foundation for the protection and/or foreign currency accounts, which are managed by
which the law throws around a holder in due course. This HSBC through instructions given through electronic messages.
freedom in negotiability is totally absent in a certificate The said instructions are standard forms known in the banking
indebtedness as it merely to pay a sum of money to a specified industry as SWIFT, or “Society for Worldwide Interbank
person or entity for a period of time. Financial Telecommunication.” Pursuant to the electronic
messages of its investor-clients, HSBC purchased and paid
Phil. Education Co. [Link] Mauricio Soriano June 30, 1971 Documentary Stamp Tax (DST)
- FACTS: Enrique Montinola sought to purchase from the - ISSUE: WON electronic messages are negotiable instruments.
Manila Post Office ten (10) money orders each payable to E.P. - RULING: No. Electronic messages are not negotiable
Montinola. He offered them with private checks that were not instruments. Electronic messages “cannot be considered
generally accepted in payment of money order. Apparently, he negotiable instruments as they lack the feature of
managed to leave with the money orders. After the discovery negotiability, which, is the ability to be transferred” and that
of the disappearance of the unpaid money orders, a message the said electronic messages are “mere memoranda” of the
was sent to all postmasters instructing them not to pay anyone transaction consisting of the “actual debiting of the
that holds the orders. The Bank of America received a copy of [investor-client-payor’s] local or foreign currency account in
said notice three days later. It debited appellant’s account with the Philippines” and “entered as such in the books of
the same amount and gave it advice thereof by means of a account of the local bank,” HSBC.
debit memo.
- ISSUE: WON the money orders are negotiable instruments. NEGOTIATION vs. ASSIGNMENT (Case)
- RULING: No. Postal money orders are not negotiable
instruments, because in establishing and operating a postal NEGOTIATION ASSIGNMENT
money order system, the government is not engaging in Governed by NIL Governed by the Civil Code
commercial transactions but merely exercises a Pertains to negotiable Pertains to contracts
governmental power for the public benefit. It is to be noted in instruments
this connection that some of the restrictions imposed upon
The transferee is a holder The transferee is a mere
money orders by postal laws and regulations are inconsistent
with the character of negotiable instruments.
and may be a holder in due assignee
course
Hongkong and Shanghai Banking Corporation vs Com. of Internal The holder in due course The assignee is merely place
Revenue Gr No. 166018 and 167728 June 4, 2014 may have a better right than in the position of the
the transferor assignor, and acquires no
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 better right than the latter. asking for the physical delivery of the underlying promissory
The holder in due course The assignee is subject to note. Pilipinas did not deliver the Note, nor any certificate of
takes the instrument free real and personal defenses. participation in respect thereof, to petitioner.
from any personal defenses - ISSUE: WON non-negotiable instruments are transferrable.
- RULING: YES. A non-negotiable instrument may, obviously,
available among prior
not be negotiated; but it may be assigned or transferred, absent
parties.
an express prohibition against assignment or transfer written
in the face of the instrument. It is important to bear in mind
The holder is only subject to
that the negotiation of a negotiable instrument must be
real defenses. distinguished from the assignment or transfer of an instrument
The general indorser The assignor does not whether that be negotiable or non-negotiable. Only an
warrants the insolvency of warrant the insolvency of instrument qualifying as a negotiable instrument under the
prior parties. prior parties, unless if it was relevant statute may be negotiated either by indorsement
stipulated or he knows of the thereof coupled with delivery, or by delivery alone where the
insolvency. negotiable instrument is in bearer form. A negotiable
An indorser is not liable The assignor is liable even instrument may, however, instead of being negotiated, also
unless there has been without notice of dishonor. be assigned or transferred. The legal consequences of
presentment and there is a negotiation as distinguished from assignment of a negotiable
notice of dishonor. instrument are, of course, different.

Sesbreno vs CA Gr No. 89252 May 24, 1993 SPECIFIC INSTRUMENTS COVERED (Cases)
- FACTS: Raul Sesbreño made a money market placement in
the amount of P300,000.00 with the “Philfinance”. The latter Abubakar vs Auditor General Gr No. L-1405 July 31, 1948
issued a Certificate of Confirmation of Sale “without - FACTS: Treasury Warrant A-2867376 was issued in favor of
recourse” from Delta Motors Corporation Promissory Note, a Placide S. Urbanes on 10 December 1941 for P1,000, but is
Certificate of securities indicating the sale to petitioner, with now in the hands of Benjamin Abubakar. The Auditor refused
the notation that the said security was in custodianship of to authorize the payment of the treasury warrant. Abubakar
Pilipinas Bank, and post-dated checks payable with petitioner contends that he is a holder in good faith and for value and
as payee, Philfinance as drawer. Petitioner approached private thus, entitled to the rights and privileges of a holder in due
respondent Pilipinas Bank and handed her a demand letter course
informing the bank that his placement with Philfinance had - ISSUE: Whether or not a treasury warrant is a negotiable
remained unpaid and outstanding, and that he in effect was instrument.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 - RULING: No. A treasury warrant is not a negotiable o The provisions of NIL.
instrument; it being an order for payment out of a - A negotiable instrument is, in reality, a special kind of written
“particular fund”, and is not unconditional and does not contract which serves as an instrument of trade or credit and
fulfill one of the essential requirements of a negotiable transferable from hand-to-hand like money.
instrument. Therefore, a holder of a treasury warrant cannot o It is intended to take the place of money to be paid in
argue that he is a holder in good faith and for value of a all events.
negotiable instrument and thus entitled to the rights and
privileges of a holder in due course, free from defenses. - REQUISITES of Negotiability: (WU- POA)
(a) It must be in writing and signed by the maker or
PERSONS INVOLVED drawer;
 Oral negotiable instrument is prohibited,
- Drawer – is the person who issues and draws the order bill. because an oral promise make it difficult to
o He gives the order to pay money to a third party. (Bill determine liability and create the danger of
of exchange) fraud.
- Drawee – is the person to whom the bill is addressed and who  The signature is the prima facie evidence of
is ordered to pay. (bill of exchange) his intention to be bound as either maker or
- Payee – is the party in whose favor the bill is originally drawn drawer.
or is payable. (bill of exchange and promissory note.)  If the signature is so placed upon the
- Maker – is the person who makes or executes the note instrument that it is not clear in what
promising to pay the amount stated therein. (promissory note) capacity the person intended to sign,
he is an indorser.
 Where the genuineness of the
signature of the maker or drawer is
denied, the signature is nevertheless
CONCEPTS AND REQUISITES OF NEGOTIABILITY presumed valid.
(b) Must contain an unconditional promise or order to
FORMAL REQUIREMENTS OF NEGOTIABILITY pay a sum certain in money;
 The instrument must contain an
- In determining the negotiability of an instrument, the unconditional promise if it is a promissory
following must be considered: note.
o The whole of the instrument
o Only what appears on the face of the instrument.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  The instrument must contain an o It is so expressed to be
unconditional order if it is a bill of payable on demand.
exchange. o It is so expressed to be
 The term money properly includes all legal payable at sight.
tender. o It is so expressed to be
 Money is the medium of exchange payable on presentation.
authorized or adopted by a  An instrument payable at a fixed or
government as part of its currency. determinable future time means that the
 It literal sense, money means “cash” instrument is payable only when the period
 The sum certain requirement is met if the arise.
holder can determine from the instrument  The time must be certain so that the
itself the amount he is entitled to receive at holder will know when will he
maturity. enforce his right under the
 The sum is certain when the holder instrument and compel payment, and
can determine by calculation or so that the person who is liable in the
computation the amount payable instrument will know when he will
when the instrument is due. be required to pay.
 the sum is still certain even in the  An instrument is payable at a fixed
following cases: or determinable future time, when:
o with interest o If it is payable at a fixed
o stated installments period after date or sight.
o with exchange o If it is payable on or before
o with costs of collection or a fixed or determinable
an attorney’s fee future time.
(c) Must be payable on demand, or at a fixed or o If it is payable on or before
determinable future time; a fixed period after the
 An instrument is payable on demand, it occurrence of a specified
means that the holder may call the payment event which is certain to
at any time. happen.
 An instrument is payable on (d) Must be payable to order or to bearer; and
demand, when:  An instrument is payable to order, when:

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
  It is drawn payable to the order of a  The name of the payee does not
specified person or to him or his purport to be the name of any person
order.  The only or last indorsement is an
 It is drawn payable to a payee, who indorsement in blank
is not the maker, drawer, or drawee. (e) Where the instrument is addressed to a drawee, he
 It is drawn payable to the drawer must be named or otherwise indicated therein with
himself, or maker himself. reasonable certainty.
o But it must be indorse by  Only applicable to bills of exchange and
the maker, otherwise, it will checks
be an incomplete  A bill may be addressed to 2 or more
instrument. drawees jointly, whether they are
 It is made payable to the drawee. partners or not.
 It is made payable to two or more o It cannot apply to 2 or more
payees jointly. drawees in the alternative.
 It is made payable to one or some of o It cannot apply in
several payees succession
 It is made payable to the order of a  Reason: To enable the payee or holder to
holder of an office for the time know upon whom he is to call for acceptance
being. or payment.
NOTE: The payee must be named or
indicated therein with reasonable certainty, UNCONDITIONAL PROMISE TO PAY THE SUM DUE
otherwise there will be no one who can
indorse the instrument, and the negotiable - An unqualified order or promise to pay is unconditional.
purpose of the instrument will be defeated. o It is till unconditional though coupled with:
 An instrument is payable to bearer, when:  An indication of a particular fund out of
 It is so expressed to be payable to which reimbursement is to be made, or a
bearer particular account to be debited with the
 It is payable to a person named amount.
therein or bearer  A statement of the transaction which gives
 It is payable to the order of a rise to the instrument.
fictitious or non-existing person - An order or promise to pay out of a particular fund is
conditional.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 - UNCONDITIONALITY OF THE PROMISE OR ORDER  In this case, payment is not confined
TO PAY. in that fund, but is to be made
o It is not enough that there be a promise or order. whether it should fail or otherwise,
 It must be unconditional, that is, it must not and it is mentioned only for the
be subject to any condition or contingency, purpose on informing the drawee, as
EXCEPT implied conditions of presentment, to his means of reimbursement.
and notice of dishonor.  There is only one act – the draw pays directly
 In other words, it must be payable from the particular fund.
absolutely. - Particular fund indicated is the source of payment.
 Reason: The fact that the liability is o But an order or promise to pay out of a particular
unconditional greatly enhances the ability of fund is conditional.
the instrument to circulate freely from one - TEST OF NEGOTIABILITY: The test of negotiability is
person to another whether or not the instrument carries the general personal
o The mere indication of the particular fund out of credit of the maker or drawer.
which reimbursement is to be made, or an o If it does, the instrument is negotiable.
indication of particular account to be debited with o If it carries only the credit of a particular fund, the
the amount does not render a promise or order instrument is non-negotiable.
conditional.
 Additional terms appearing on an instrument, PAYABLE TO ORDER v. PAYABLE TO BEARER
do not make the promise or order conditional PAYABLE TO ORDER PAYABLE TO BEARER
if the duty to pay is unaffected by such terms. The payee must be named or The payee need not be indicated,
- SOURCES OF PAYMENT. indicated with reasonable because it is enough that it states
certainty. “payable to bearer”
o The fund indicated is NOT the direct source of
It can be negotiated by It can be negotiated by mere
payment but only the source of reimbursement
indorsement coupled with delivery
which is an act subsequent to the payment. delivery
o An instrument payable out of a particular fund is non- Can be converted to bearer Cannot be converted to an order
negotiable as it is not payable "in any event" because instruments through a blank instrument.
the amount to be paid is made to depend upon the indorsement
adequacy or existence of the fund designated. Once a bearer instrument,
 But and instrument which is simply always a bearer instrument, and
chargeable to a particular account is it can be negotiated by delivery
negotiable. even if it is indorsed specially.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  Confession of judgment is a written
statement signed by the defendant of his debt
PROVISIONS THAT DOES NOT AFFECT NEGOTIABILITY or liability. It enables the holder to obtain a
judgment without delay as it eliminates the
- General Rule: the instrument is not negotiable if it contains a necessity of a trial.
promise or order to do any act in addition to the payment of  In Philippine jurisdiction, a
money. confession of judgment is void as it
- EXCEPTIONS: is contrary to public policy.
o Acceptance, because it only determines the liability of  EXCEPTION: If the confession of
the drawee. judgment is given after the case has
o Indorsement, except: already been filed, then it is valid.
 In case a promissory is payable to order of o Waives the benefit of any law intended for the
maker, then the maker must indorse the advantage or protection of the obligor.
instrument.  Example: The waver for presentment of
 In case of a restrictive indorsement, which acceptance, or notice of dishonor.
prohibits further negotiation. o Gives the holder an election or option to require
o Authorizes the sale of collateral securities in case something to be done in lieu of payment of money.
the instrument is not paid on maturity. o When it is undated.
 Example: A ring is pledge as security for the  Reason: The date is unnecessary.
fulfillment of principal obligation, and the  If the instrument is undated, it is considered
pledge of such ring contains an authorization dated at the time the instrument is issued.
to sell such at public auction in case of  When it is dated, such date is prima
failure to pay the principal obligation. facie to be the true date of the
 This does not affect the negotiability making, drawing, acceptance, or
of the instrument, because the act of indorsement, as the case may be.
selling the ring is an act which will  The date may be inserted under the
occur when the instrument is no following:
longer negotiable because the it is  Where the instrument is expressed to
already matured, the due date is be payable at a fixed period after
already over. date but is issued undated.
o Authorizes a confession of judgment if the
instrument be not paid at maturity.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  Where an instrument is payable at a o Omission of the place where the instrument is drawn,
fixed period after sight but the or where it is payable.
acceptance is undated. o Where the designation of the particular kind of
 Effect of insertion of wrong date: currency in which payment is to be made.
Any holder may insert the true date,
and the insertion of the wrong date
will only be void as to the party who CONFESSION OF JUDGMENT (Case)
made the wrong date, or anyone
claiming under him. PNB vs Manila Oil Refining and By- products Co., Inc , No. 18103
o The instrument will be valid June 8, 1992
- FACTS: The manager and the treasurer of the defendant
and binding in the hands of
executed and delivered to the complainant Philippine National
subsequent holder in due
Bank a written instrument with a judgment note on demand,
course.
PNB brought an action and filed a motion confessing
o In the hands of a holder in
judgment.
due course, the date
- ISSUE: Whether or not a judgment note or a provision in a
inserted, even if wrong, is to
promissory note whereby in case the same is not paid at
be regarded as the true date.
maturity, the maker authorizes any attorney to and confess
o When the instrument is ante-dated or post-dated.
judgment thereon for the principal amount with interest, costs
 EXCEPT: If the ante-dating and post-dating
and attorney’s fees, and waives all errors, rights to inquisition,
is for fraud or illegal purpose.
and appeal, and all property exemptions. Will it affect the
 An instrument is ante-dated when it contains
negotiable character of the instrument?
a date earlier that the true date of its issuance.
- RULING: No, a judgment note will not affect the negotiable
 Example: An instrument issued at character of the instrument. However, judgment note is not
July 30, 2020 but is dated July 15, valid and effective. Warrants of attorney to confess judgment
2020. are void as against public policy because they enlarge the field
 An instrument is post-dated when it contains for fraud, under these instruments the promissor bargains
a date later than the true date of its issuance. away his right a day in court, and the effect of instrument is to
 Example: An instrument issued July strike down the right of appeal accorded by statute.
15, 2020 but dated July 30, 2020
o Omission to specify the actual value that was given. CASES ON NEGOTIABILITY
 Reason: Because consideration is presumed.

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
Jimenez vs Bucoy Gr No. L010221 February 28, 1958 - ISSUES:
- FACTS: - RULING:
- ISSUES:
- RULING: Ponce vs CA Gr No. L-49494 May 31, 1979
- FACTS:
Firestone Tire and Rubber Co vs CA Gr No. 113236 March 5, 2001 - ISSUES:
- FACTS: - RULING:
- ISSUES:
- RULING: Kalalo vs Luz Gr No. L0 27782 July 31, 1979
- FACTS:
PNP vs Zulueta 101 Phil 1071 - ISSUES:
- FACTS: - RULING:
- ISSUES:
- RULING: National Bank vs Manila Oil Refining Co 43 Phil 444
- FACTS:
Inciong vs Ca Gr No. 96405 June 26, 1996 - ISSUES:
- FACTS: - RULING:
- ISSUES:
- RULING: CASES ON NEGOTIATION BY INDORSEMENT VS. BY MERE
DELIVERY
Republic Planters vs CA 216 Scra 738
- FACTS: Metropolitan Bank and Trust vs CA Gr No. 166260 February 18,
- ISSUES: 2009
- RULING: - FACTS:
- ISSUES:
Elizalde and Co, Inc vs Binan Trans Co - RULING:
- FACTS:
- ISSUES: Development Bank vs Sim Wei GR No. 85419 March 9, 1993
- RULING: - FACTS:
- ISSUES:
Arrieta vs NARIC 10 Scra 79 - RULING:
- FACTS:
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
Metropolitan Bank and Trust Co vs. BA Finance Corp. GR No. o It is the first transfer of negotiable instrument to a
179952 December 04, 2009 payee
- FACTS: - Negotiation: Negotiation is the transfer from one person to
- ISSUES: another in such a manner as to constitute the transferee as the
- RULING: holder of the instrument.
o If payable to order – negotiation is made by
RULES TO SIGNATURE indorsement coupled with delivery.
o If payable to bearer – negotiation is made by delivery
- The signature must be done in any manner, as long as there is - Presentment for acceptance: it is the production of the bill of
intent to be bound by the signature. exchange to the drawee for his acceptance.
o If it is not clear in what capacity the party intended to o General Rule: Presentment for acceptance is not
sign, then he is deemed to be an indorser. necessary to render any party on the instrument to be
- General Rule: Only persons whose signature appear on an liable.
instrument is liable thereon. o EXCEPTIONS:
- EXCEPTIONS:  When the bill is payable after sight or any
o Where a person signs in a trade or assumed name. other case where presentment for acceptance
 Liability: He is liable to the same extent as if is necessary to fix the maturity or due date of
he had signed his own name. the instrument
o The principal is liable of a duly authorized agent  If the bill of exchange expressly stipulates
signs in his own behalf. that it must be presented for acceptance
o In case of forgery, the forger is liable even if his  If the bill is payable elsewhere
signature does not appear on the instrument.
o Where the acceptor makes his acceptance of a bill Section 14. BLANKS, WHEN MAY BE FILLED. (Delivery of
on a separate paper. incomplete instruments)
o Where a person makes a written promise to accept a
bill before it is drawn. - Steps in issuance of negotiable instrument.
o The mechanical act of writing the instrument
LIFE OF A BILL OF EXCHANGE completely and in accordance with the requirement of
- Preparation Stage: Completing the requisites required in Section 1.
section 1 and cap it all off with his signature. o The delivery of the complete instrument by the maker
- Issuance: Issue, is the first delivery of the instrument, or the drawer to the payee or holder with the intention
complete in form to a person who takes it as a holder. of giving effect to it.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 - This section applies only to INCOMPLETE INSTRUMENT  So, the holder has no authority to
which has been delivered by the maker or the drawer to the change the amount after it has been
payee or holder. filled in or to insert the words “or
o In considering this section, it is important to bear in order” or “or bearer” after the name
mind the distinction between the classes of of the payee.
instrument: o If a blank paper is delivered by the person making the
 Those in which obvious blanks are left at the signature, the holder has the prima facie authority to
time they are made or indorsed, of such a fill it up for any amount if the person making the
character as manifestly to indicate that the signature intended to convert it into a negotiable
instruments are incomplete until such blank instrument.
shall be filled up.  Presumption: The blank is filled up in
 The one who signs or indorses is accordance with the authority given and
liable to bona fide holders thereof on within a reasonable time.
the doctrine of implied authority. o The instrument may be enforced only against a party
 Those which are apparently complete, prior to completion if filled up strictly in accordance
containing blanks only because the written with authority given and within a reasonable time.
matter does not fully occupy the entire paper o Example: Suppose that M authorized P to put in the
as to preclude the insertion of additional blank only P10,000.00. However, P inserts the sum of
words or figures, or both. P2,000.00 and then indorses the note to A, from A to
 The liability for the amount of the B, and from B to C.
instrument which has been increased  If C is not a holder in due course C can
by filling up unoccupied spaces collect nothing from M.
therein is placed upon the doctrine of  Reason: When one or both
negligence. requisites are absent, the holder not
- RULES where instrument is INCOMPLETE but in due course cannot recover
DELIVERED.  If C is a holder in due course the defense
o The holder or the person in possession has prima facie that P exceeded his authority will not avail
authority to complete an incomplete instrument by against C.
filling up the blanks.  Reason: The note is valid and
 The authority to complete is not the authority effective for all purposes in his
to alter. hands and he may enforce it as if it
has been filled up strictly in
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 accordance with the authority given o The invalidity of the instrument is only with reference
and within a reasonable time. to the parties whose signatures appear on the
- This section merely raises a personal defense. instrument before and not after the delivery.
 Example: In the same example, the
CASE: Instrument delivered in blank instrument can be enforced against P, A, B,
and C because, as indorsers, they warrant that
Alvin Patrimonio vs Napoleon Gutierrez and Octavio Marasigan the instrument is genuine and in all respects
III, GR. No. 187769 June 4, 2014 what it purports to be.
- FACTS:  In the case of P, he is liable not
- ISSUE: merely because he is an indorser but
- RULING: also because he is the one
responsible for the theft, and the
Section 15. INCOMPLETE INSTRUMENT, NOT DELIVERED. completion and negotiation of the
instrument.
- An incomplete instrument, not delivered, if completed and
negotiated without authority is not a valid contract in the CASE: Section 15 distinguished from Section 16
hands of any holder.
- RULES. Bank of America NT and SA vs Philippine Racing Club Gr No.
o The fact that an incomplete instrument, completed 150228, July 30, 2009
without authority, has not been delivered, is a defense - FACTS:
against a holder in due course. - ISSUE:
 Example: Suppose M makes a note for - RULING:
P1,000.00 with the name of the payee in the
blank and keeps it in his drawer. P steals the Section 16. DELIVERY; WHEN INEFFECTUUAL, WHEN
note and insert his name as payee and then PRESUMED
indorse it to A, A to B, B to C, and C to D, a
holder in due course. D cannot enforce the - General Rule: A negotiable instrument like any written
note against M, because the law is specific contract, has no legal inception or existence, as such until it
that the instrument is not a valid contract in has been delivered in accordance with the purpose and intent
the hands of any holder. of the parties.
o Without the initial delivery of the instrument, there
can be no liability thereon.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 o Example: M makes a note payable to the order of P delivery by him is presumed until the
and keeps it in his drawer. contrary is proved.
 In the absence of delivery, the instrument  When delivery is made, it is presumed to be
though complete in all its particulars, there is made with the intention to transfer ownership
no contract. of the instrument to the payee.
- Delivery is the transfer of possession or actual or constructive, o ISSUE VS DELIVERY
from one person to another with intent to transfer title thereto.  Delivery is the transfer of possession or
o The delivery of the instruments is the final act actual or constructive, from one person to
essential to its consummation as an obligation. another with intent to transfer title thereto.
o It may be made either by the maker or drawer himself  Issue is the first delivery of the instrument,
or through a duly authorized agent. complete in form, to a person who takes it as
o ISSUANCE OF AN INSTRUMENT: a holder.
 The instrument is deemed issued upon the  Issue and delivery are used
first delivery of the instrument, complete in interchangeably.
form, to a person who takes it as holder.
 Holder, is the payee or indorsee of a CASE: Application of Section 16
bill or note who is in possession of
it, or the bearer thereof. Development Bank of Rizal vs Sima Wei GR No. 85419 March 3,
o WHEN EFFECTUAL: 1993
 The delivery in order to be effectual, must be - FACTS:
made either by or under the authority of the - ISSUE:
party making, drawing, accepting, or - RULING:
indorsing as the case may be.
 In such case, the delivery may be CASE: Rules on Signature
shown to have been conditional, or
for special purposes only, and not for Republic Bank vs Ebrada Gr No. L0 40796 July 31, 1975
the purpose of transferring the - FACTS:
property in the instrument. - ISSUE:
o PRESUMPTION OF DELIVERY - RULING:
 Where the instrument is no longer in the
possession of a party whose signature Republic Planters Bank vs CA Gr No. 93073 December 21, 1992
appears thereon, a valid and intentional - FACTS:
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 - ISSUE:  If the ambiguity is between words and
- RULING: numbers, the words control, if they are clear.
o Date when stipulated interest to run not specified.
- Francisco vs CA Gr No. 116320 November 29, 1999  If the date when the stipulated interest is to
FACTS: run is not specified, the interest runs from the
- ISSUE: date of the instrument or if undated, form the
- RULING: date of issue.
o Instrument undated.
Section 17. RULES ON CONSTRUCTION  An undated instrument is considered dated as
of the date of issue.
- The rules in this section are applicable only when the  Issue, is the first delivery of the
instrument in question is ambiguous or uncertain or where instrument complete in form, to a
there are omissions therein. person who takes it as a holder.
o If the terms are clear, the instrument must be enforced  Example: If the promissory note has no date
as it reads. but it was delivered to the payee on October
- RULES: 15, 2016, then the note is considered dated as
o Sum expressed in words and figures. of the same time.
 When there is discrepancy between the sum o Written and printed provisions in conflict.
expressed in words and sum expressed in  In case of conflict between the written and
figures, the sum expressed in words prevails. printed provisions, the written provisions
 Reasons: prevail.
 The figures are simply an  Reason: the written words are deemed to
abridgement of the amount payable express the true intention of the maker or
for convenience or reference. drawer because they are placed there by
 It is easier to change the figures or to himself.
commit a mistake on them than o Whether instrument bill or note in doubt.
when the amount is written in words.  In case of doubt as to whether an instrument
 Words ambiguous or uncertain. is a bill or note, the holder may treat either
 When the words are ambiguous or at his election.
uncertain, or do not make sense, o Capacity in which person signed in doubt.
reference may be had to the figures
to determine the true amount.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  In case of doubt as to what capacity the
person making the instrument intended to Section 19. SIGNATURE BY AN AGENT.
sign, he is to be deemed an indorser.
 Applies only when there is doubt - General rule: Only persons whose signatures appear on an
due to ambiguous location of the instrument are liable thereon.
signature. o EXCEPTIONS:
o Instrument signed by two or more persons.  Where a person signs in a trade name or
 An instrument with the words ”I promise to assumed name.
pay” signed by two or more persons gives  The principal is liable if a duly authorized
rise to solidary liability. agent signs in his own behalf.
 This means that anyone of the signers may be  REQUISITES to exempt an agent
held liable for the whole amount of the from liability:
instrument. o He is duly authorized.
o He adds words to his
Section 18. LIABILITY OF PERSON SIGNING IN TRADE OR signature indicating that he
ASSUMED NAME. signs as an agent or
representative.
- General rule: Only persons whose signatures appear on an o He discloses the name of his
instrument are liable thereon. principal.
o EXCEPTIONS:  The agent’s signature, provided that
 Where a person signs in a trade name or the above requisites are complied
assumed name. with, will bind his principal and he
 One who signs in a trade or assumed will be exempt from personal
name is liable as if he signed his liability.
own name.  In case of forgery.
 The principal is liable if a duly authorized  Where the acceptor makes his acceptance of
agent signs in his own behalf. a bill on a separate paper.
 In case of forgery.  Where a person makes a written promise to
 Where the acceptor makes his acceptance of accept a bill before it is drawn.
a bill on a separate paper.
 Where a person makes a written promise to Section 20. LIABILITY OF PERSON SIGNING AS AN AGENT.
accept a bill before it is drawn.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 - REQUISITES to exempt an agent from liability: oIt operates as notice that the agent has but limited
o He is duly authorized. authority to sin, and the principal is bound only in
o He adds words to his signature indicating that he case the agent in so signing acted within the actual
signs as an agent or representative. limits of his authority.
o He discloses the name of his principal. o It gives a warning that the agent has but a limited
 If the agent signs a note or bill in his own authority, so that it is duty of the person dealing with
name and discloses no principal, he is him to inquire into the extent of his authority.
personally bound, and evidence to the - EFFECT.
contrary may not be admitted to relieve him o If the agent exceeded his authority, the principal is
from personal liability. not bound.
- The agent’s signature, provided that the above requisites are o If the agent acted with abuse of authority given.,
complied with, will bind his principal and he will be exempt such authority is not a defense against a bona fide
from personal liability. holder for value.

CASE: Liability for person signing as an agent. Section 22. EFFECT OF INDORSEMENT BY INFANT OR
CORPORATION.
Phil Bank vs Aruego Jan. 31, 1981
- FACTS: - Minors.
- ISSUE: o General Rule: Contracts entered into by minors are
- RULING: voidable.
 The indorsement of a minor or infant is not
Astro Electronics Corp. and Peter Roxas vs Phil. Export and void and that his incapacity is not a defense
Foreign Loan Guarantee Corporation Gr No. 136729 in favor of prior parties, and does not take
September 23, 2009 411 SCRA 462 away the infant’s right to disaffirm his
- FACTS: indorsement and recover the instrument even
- ISSUE: against an innocent indorsee or subsequent
- RULING: holder for value.
 Minority is not a personal defense which may
Section 21. SIGNATURE BY PROCURATION. set up by the parties. But it is a real defense
available to a minor.
- Procuration is the act by which a principal gives power to
another to act in his place as he could himself.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 o Same rule applies in case of other incapacitated  If the party against whom it is sought
person (e.g., insane, demented, and deaf mutes who to enforce such right is precluded
do not know how to write.) from setting up the forgery or want
of authority.
Section 23. FORGERY.  Where the forged signature is not
necessary to the holder’s title in
Forgery is the counterfeit-making or fraudulent alteration of a which case the forgery may be
writing, and may consist in the signing of another’s name or the disregarded.
alteration of an instrument in the name, amount, description of the - Proof of forgery: Forgery must be proven clearly and
person and the like, with intent thereby to defraud. convincingly.
- Applicability of forgery under Section 23. - Persons precluded from setting up the defense of forgery.
o Forgery under Section 23 applies only to a forged o Those who by their acts, silence, or negligence, are
signature of the maker, drawer, acceptor, indorser, or estopped from setting up the defense of forgery.
of an accommodation party. o Those who warrant or admit the genuineness of the
- Application of Section 23: signatures in question, namely:
o Where the signature on the instrument is affixed by  Indorsers
one who does not claim to act as an agent and who  Acceptors
has no authority to bind the person whose signature  Person negotiating by delivery.
he has forged. - CUT-OFF PRINCIPLE
o Where the signature is affixed by one who purports to o In order instruments, parties prior to forgery are
be an agent but has no authority to bind the alleged relieved or cut-off of liability. They cannot be held
principal. liable by any holder, including a holder in due course.
- Effect of forgery on negotiability of the instrument:  A forged indorsement prevents any
o General Rule: The instrument is not totally void, it is subsequent party from acquiring any right as
only the forged or unauthorized signature that is against any party whose name appears prior
declared to be inoperative. to forgery.
 Hence, rights may still exist and be enforced o Example:
by virtue of such instrument as to those
whose signatures thereto are found to be
genuine.
 EXCEPTIONS:

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
 o RULE: When a maker’s signature is forged, the
maker is not liable to all subsequent parties whether
the instrument is an order or a bearer instrument.
 Reason: The maker’s forged signature is
wholly inoperative and no rights to enforce
payment against the maker is obtained by any

If the instrument is payable to order and the
holder.
indorsement of one of the indorsers is forged,
 However, indorsers after the forgery
C can enforce the note against X and B but
are still secondarily liable to holder.
not against M P or A, because were it not for o Reason: These indorsers
the forgery of X the instrument will not reach
warrant that the instrument
the possession of C.
is genuine in all respect it
 If the instrument is payable to bearer, the
purports to be.
indorsement of X is not necessary to vest title
 Applicability of the Rule: Applies to both
to C because negotiation on bearer
ORDER and BEARER instrument.
instrument requires only delivery.
o Example: Suppose P makes a promissory note
- RIGHTS AND LIABILITIES in specific case of forgery.
payable to his own order forging M’s signature, as
o Forgery with respect to promissory note, includes:
maker. Then P indorses it to A, who later indorsed the
 Forgery of the maker’s signature.
note to B.
 Forgery of the indorser’s signature.
 Can B claim against M? No. B cannot claim
o Forgery with respect to bill of exchange, includes:
against M. Under NIL, when a maker’s
 Forgery of the drawer’s signature where the signature is forged, the maker is not liable to
bill is yet to be accepted. all subsequent parties whether the instrument
 Forgery of drawer’s signature where the bill is an order or a bearer instrument. Here,
has been accepted. since M’s signature was forged by P, M’s
 Forgery of indorser’s signature. signature is wholly inoperative, thus no
 Forgery of acceptor’s signature. rights may exist or can be enforced against
M. Therefore, B cannot claim against M.
Forgery in PROMISSORY NOTE.  Can B claim against A? Yes. B can claim
against A. Under NIL, an indorser warrants
- Forgery of MAKER’s SIGNATURE. that the instrument is genuine in all respect it
purports to be. Here, since A is an indorser
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 of the note after the forgery, A is secondarily forgery, he cannot be held liable by
liable to B. Hence, B can claim against A. Z. Hence, M is not liable to Z.
- Forgery of the INDORSER’s signature.  Can Z instead claim against A?
o If note payable to order. No. Z cannot claim against A. Under
 When there is forgery in a note payable to NIL, in order instruments, parties
order, the forged signature is wholly prior to forgery are relieved or cut-
inoperative. off of liability. Here, since A is a
 The forged signature or indorsement party prior to the forgery, he cannot
cannot and will not transfer any right be held liable by Z. Hence, Z still
to the transferee nor neither acquire cannot claim against A.
any right to the note or to the  Suppose Z is a holder in due
proceeds thereof course, can Z claim against M?
 Reason: A note payable to order is No. Z cannot claim against M.
negotiated only by indorsement Under NIL, in order instruments,
completed by delivery. parties prior to forgery are relieved
 RULE: In order instruments, parties prior to or cut-off of liability. They cannot be
the forgery are relieved or cut-off of liability. held liable by any holder. Here,
 Effect: They are not liable even in a even if Z is a holder in due course,
holder in due course. he cannot claim against M.
 Example: Supposed M issues a promissory  Can Z claim against Y? Yes. Z can
note payable to the order of A. A indorses it claim against Y. Under NIL, an
to B, then X later obtain the possession of the indorser warrants that the
note, who forged B’s signature (B’s instrument is genuine in all respect
indorsement) and indorses it to Y, and Y to it purports to be. Here, since Y is an
Z. Z now claims payment of the note against indorser after the forgery, he is
M, the maker. secondarily liable to Z. hence, Z can
 Is M liable to Z? No. M is not liable claim against Y.
to Z. Under NIL, in order o If note payable to bearer.
instruments, parties prior to forgery  RULE: When there is a forgery of
are relieved or cut-off of liability. indorsement in a note payable to bearer, the
Here, since M is a party prior to the indorsement is unnecessary to pass title to the
instrument, hence the maker may still be held
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 liable to a holder in due course even if the - Forgery of DRAWER’s signature where the bill has been
indorsement was forged after the issuance of accepted.
the note. o RULE: If the drawer’s signature where the bill has
 Example: Supposed a note payable to bearer been accepted is forged the drawer is not liable
issued by M to P, then P indorsed the note to whether or not the instrument is payable to order or
A, X obtained possession of the note and bearer.
indorsed it to B, forging A’s signature. B  There is no right to enforce payment against
indorsed the note to C, who later indorsed to the drawer under the forged signature,
D, a holder in due course. because the drawer is never a party to the
 Can A be held liable to D? Yes. A instrument.
can be held liable to D. Under NIL,  Applicability: Applied to both order and
a note payable to bearer is bearer instrument.
completed by mere delivery, thus, o Example: Supposing B forged the signature of A, the
the forged indorsement is not drawer in the bill of exchange payable to B’s order
necessary to vests title to a holder. and drawn against X. Then X indorsed the bill to C, C
Here, the indorsement of X is not presented the bill to X to accept to the same.
necessary to vest to D. therefore, A Thereafter, X discovered the forgery of A’s signature.
can be held liable to D.  Is X, the drawee, bound to pay C? Yes. X is
 Can M, the maker, be held liable bound to pay C. X having accepted the bill,
to D? Yes. M can be held liable to unconditionally committed to pay the
D. Under NIL, in a note payable to instrument according to the tenor of its his
bearer, parties prior to the forgery acceptance. The forgery of A’s signature did
are still liable to a holder in due not negate such liability. Thus, X must pay C.
course, because an indorsement is The recourse of X is to go against the forger.
unnecessary to vest title to the  Does X have a recourse against B, the
instrument. Here, since M is the forger? Yes. X have a recourse against B.
maker of the note and a party prior  Is A obliged to reimburse X? No. A is not
to the forgery, he is still liable to D, obliged to reimburse X. Under NIL, If the
a holder in due course. drawer’s signature where the bill has been
accepted is forged the drawer is not liable,
Forgery in BILL OF EXCHANGE. because the drawer the drawer is never a
party to the instrument. Here, since A’s
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 signature was forged, his signature is wholly must make restitution, because the drawer is
inoperative. Thus, A is not obliged to contractually bound to ascertain the
reimburse X. genuineness of the signature of the drawer.
- Forgery of the DRAWER’s signature where the bill is yet to  Can X recover from D? No. X cannot
be accepted.. recover from D. The rule is that, between two
o RULE: If the drawer’s signature is forged where the equally innocent persons, the drawee who
bill is yet to be accepted, the drawer is not liable pay the check against the forged signature of
whether or not the bill is payable to order or bearer. the drawer cannot recover from a holder in
 There is no right to enforce payment against due course. Here, since D was not aware of
the drawer under the forged signature. the forgery, he is presumed to be a holder in
 Applicability: Applies to both bearer and due course. Therefore, X cannot recover
order instrument. form D.
 Reason: The drawer was never a party to the - Forgery of INDORSER’s signature.
instrument. o If the instrument is payable to order.
o Example: Supposed B forged A’s signature on a bill  RULE: If the instrument is payable to order
of exchange payable to B or order and drawn against at the time of the forgery, such as the checks
X. Then X indorsed the bill to C, and C indorsed the in this case, the signature of its rightful
bill to D, and D presented the bill to X for payment. X holder is essential to transfer title to the
paid D the value of the bill. Neither C or D was aware same instrument.
of the forgery.  When the holder's indorsement is
 Supposing X, the drawee, already pay D. forged, all parties prior to the forgery
Is A liable to X for the amount paid? No. A may raise the real defense of forgery
is not liable to X for the amount paid. Under against all parties subsequent
the NIL. If the signature of the drawer is thereto.
forged, it is wholly inoperative. Here, since  An indorser of an order instrument warrants
A’s signature was forged by B, A’s signature "that the instrument is genuine and in all
is wholly inoperative thus no rights can be respects what it purports to be; that he has a
enforced against A. Therefore, A is not liable good title to it; that all prior parties had
to X for the amount paid. capacity to contract; and that the instrument
 Can X, the drawee debit A’s account? No, is at the time of his indorsement valid and
X cannot debit has no right to debit because subsisting."
A’s signature was forged. If X debited, X
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  Example: Supposed A issued a check the check was unauthorized, because
payable to B or order, with BPI as the Y has no right to collect the
drawee. Y stole the check from B, then proceeds of the check. Further, the
forged the indorsement of B, and deposited collecting bank has the legal duty to
the check into his account with PNB as the ascertain the genuineness of the
collecting bank. PNB, subsequently indorsed payee’s indorsement.
the check to BPI for collection. BPI honored  Can B, the payee, recover the
the check and paid the proceeds from PNB. amount of the check from A, the
PNB credited the account of Y. Thereafter, Y drawer? Yes. B can still recover the
withdrew the money from his account with amount of the check from A, because
PNB and disappeared. there is a contractual obligation
 Can BPI charged or debit the between A and B.
account of A for the amount of the o If the instrument is payable to bearer.
check? No. BPI cannot debit or  RULE: In bearer instruments, the signature
charged the account of A for the of the payee or holder is unnecessary to pass
amount of the check it paid to PNB. title to the instrument. Hence, when the
If BPI debited, A may recover from indorsement is a forgery, only the person
BPI because, the drawee owes the whose signature is forged can raise the
drawer. An absolute and contractual defense of forgery against a holder in due
duty to pay the check only to the course.
payee or his order upon genuine - Forgery of ACCEPTOR’s signature.
indorsement.
 Can A, the drawer, recover the Section 24. PRESUMPTION OF CONSIDERATION.
amount of the check from PNB?
No. A cannot recover the amount of Consideration is an inducement to a contract, that is, the
check from the PNB. cause, price or impelling influence which induces a contracting party to
 Can BPI, the drawee bank, enter into the contract.
recover from PNB, the collecting - It is the essential or more proximate purpose a party has in
bank? Yes. BPI can recover from view at the time of entering into the contract.
the PNB, because PNB is a - Presumption: It has been issued for a valuable consideration
collecting agent for Y, the forger. that every person whose signature appears thereon has become
PNB’s collection of the proceeds of
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 a party thereto for value, whether the words “value received” - One who has taken a negotiable instrument as collateral
appear in it or not. security for a debt has lien on the instrument.
o Being presumed, it need not be alleged and proved by o If the amount of the instrument is more than the debt
the holder. secured by such instrument, the pledgee is a holder
o Lack of consideration may be used only against the for value to the extent of his lien.
payee.  He can collect the full value of the
instrument, and apply the same to the
Section 25. VALUE. payment of the debt but he must deliver the
surplus to the pledger.
- Value mean valuable consideration. o If the amount of the instrument is less than or the
o It may consist either some right, interest, profit or same as the debt secured by such instrument, the
benefit accruing to the party who makes the contract, pledgee is a holder for value for the full amount and
or some forbearance, detriment, loss, responsibility, may, therefore, recover all.
act, labor or service, on the other side. o If, between the pledger and the party liable on the
- A valuable consideration need not be adequate. instrument, there are pre-existing defenses, then the
o It is sufficient if it is a valuable one. pledgee can collect on the instrument only to the
extent of the amount of the debt.
Section 26. WHAT CONSTITUTES HOLDER FOR VALUE  If the defenses of the party liable on the
instrument are real defenses, then the pledgee
- A holder for value is one who has given a valuable can recover nothing upon the instrument.
consideration for the instrument issued or negotiated to him.
o The holder is deemed as such not only as regards the Section 28. EFFECT OF WANT OF CONSIDERATION
party whom value has been given by him but also in
respect to all those who became parties prior to the - Absence of consideration means total lack of any valid
time when value was given. consideration for the contract, in consequence of which the
o A holder of a negotiable instrument is presumed to be alleged contract must fall.
a holder for value until the contrary is shown. - Failure of consideration means the failure or refusal of one of
the parties do, perform, or comply with the consideration
Section 27. WHEN LIEN ON INSTRUMENT CONSTITUTES agreed upon,
HOLDER FOR VALUE. o Something has been agreed upon as a consideration,
but for some cause, such agreed consideration failed
to materialize.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 o If payable to order it is negotiated by the indorsement
Section 29. LIABILITY OF ACCOMODATION of the holder completed by delivery.
- Transfer is the process by which property is delivered by one
- Accommodation note or bill is one to which accommodation person to another.
party has put his name, without consideration for the purpose o The transfer of a negotiable instrument is by delivery
of accommodating, some other party who is to use it and is or by indorsement and delivery.
expected to pay it. - METHODS OF TRANSFERRING A NEGOTIABLE
o An accommodation party is one who has signed the INSTRUMENT.
instrument as maker, drawer, acceptor, or indorser, o Issue. – It is the first delivery, complete in form, to a
without receiving value for the signature and for the person who takes it as a holder.
purpose of lending his name to some other person. o Negotiation. – It makes it possible for the transferee
 In lending his name to the accommodated to acquire a better right to a negotiable instrument that
party, the accommodation party is, in effect, the transferor had.
a surety for the former.  It involves indorsement.
 Liability: An accommodation party is  Methods of negotiation.
“liable on the instrument to a holder for  If payable to order by indorsement
value notwithstanding such holder at the and delivery
time of taking the instrument knew him to be  If payable to bearer by mere
only an accommodation party.” In whatever delivery
capacity he signed the instrument, whether o Assignment. - It may or may not involve an
primarily or secondarily. indorsement.
o An accommodated party is one in whose name favor - INCOMPLETE NEGOTIATION OF ORDER
a person, without receiving value therefor, signs an INSTRUMENT
instrument for the purpose of lending his credit and o Equitable assignment happens when the current
enabling said party to raise money upon it. holder of the instrument transfer the instrument
without indorsing such instrument.
Section 30. WHAT CONSTITUTES NEGOTIATION o Effect: The transferee only gets the title of the
transferor. Hence, the transferee is a mere assignee
- An instrument is negotiated when it is transferred from one
and he acquires the instrument subject to the defenses
person to another in such a manner as to constitute the
available to prior party.
transferee the holder thereof.
o If payable to bearer it is negotiated by delivery.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 o The negotiation will only happen when the transferee strengthen the security of the holder by assuming a contigent liability
was able to get the indorsement. Hence, it will only for its future payment, or both.
from that time that the transferee will become the - The payee by signing (indorsing) the instrument and
holder. delivering it to another person becomes an indorser.
- NEGOTIATION and ASSIGNMENT Distinguished. - Indorsement alone without delivery conveys no titles and
NEGOTIATION ASSIGNMENT creates no holder.
Refers only to negotiable Refers generally to ordinary - Indorsement involves a new contract and an obligation on the
instruments contracts part of the indorser – an implied guaranty that the instrument
The transferee is a holder The transferee is an assignee will be duly paid according to the terms thereof.
A holder in due course is An assignee is subject to o Rach indorsement generates additional contract
subject only to real defenses both real and personal between the indorse and all subsequent holders.
defenses o Effect of indorsement: The indorser becomes a party
A holder in due course may An assignee merely steps to the instrument, and may be held liable for its
acquire a better title or into the shoes of the
payment even without receiving any consideration
greater rights under the assignor
instrument than those therefor.
possessed by the transferor - Indorsement involves the certainty of two things:
or prior party o The identity of the indorser
A general indorser warrants An assignor does not o The genuineness of his signature.
the solvency of prior parties warrants the solvency of - Form of Indorsement:
prior parties unless o It must be written
expressly stipulated or the o Blank indorsement: where the signature of the
solvency is known to him indorse, without additional words.
An indorse is not liable An assignor is liable even o Special indorsement: where the indorser add words
unless there be presentment without notice of dishonor
which prohibit or limit the further negotiation of the
and notice of dishonor
Governed by NIL Governed by Civil Code instrument.
- Presumption: Delivery is presumed from possession, - Place of indorsement: The place is not essential.
o The instrument may be written on the back or front if
Section 31. INDORSEMENT, HOW MADE the instrument.
o Reason: The law looks at the intention of the parties
Indorsement is the writing the name of the payee on the rather than to the form as to indorsement.
instrument with the intent either to transfer the title to the same, or to
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 o Indorsement in allonge: It is where the indorsement - As to the methods of negotiation.
is on a slip of a paper physically attached to the o Special
instrument so as to become part of it. o Blank
- As to the kind of title transferred
Section 32. INDORSEMENT MUST BE OF THE ENTIRE o Restrictive
INSTRUMENT o Non-restrictive
- As to scope of liability of indorser
- General Rule: Indorsement must be an indorsement of the o Qualified
entire indorsement. o Unqualified or general
o Reason: The instrument must be delivered to the - As to presence or absence of limitations
indorsee, and there cannot be partial delivery of one o Conditional
instrument or piecemeal payments to several persons. o Unconditional
 To avoid multiplicity of suits.
- Other kinds of indorsement
o EXCEPTION:
o Joint
 When the indorsees are joint.
o Successive
 Illustration: Pay to A and B
o Irregular or anomalous
 When the indorsees are alternative
o Facultive
 Illustration: Pay either A or B
 Where there is a partial indorsement, or when
Section 34. SPECIAL INDORSEMENT; INDORSEMENT IN
part of the amount has already been paid.
BLANK
 The unpaid balance may be
indorsed.
Special indorsement is one where the name of the payee is
specified.
CASE: Indorsement must be of entire instrument
- Also known as specific indorsement or indorsement in full.
- Forms:
Montinola v. PNB, GR No. L – 2861, Feb. 26, 1951
o One that specifies the person to whom the instrument
- FACTS:
is payable.
- ISSUE:
 Illustration: Pay to A
- RULING:
o One that specifies the person to whose order the
instrument is to be payable.
Section 33. KINDS OF INDORSEMENT

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
  Illustration: Pay to the order of A or Pay to o It destroys the negotiability of the instrument and bars
A or order further negotiation to a holder in due course.
Note: In either case, the indorsement must be followed by the o All subsequent indorsees acquire only the title of the
signature of the indorser. first indorsee.
- Three classes of restrictive indorsement:
Blank indorsement is one which specifies no particular o Prohibits further negotiation
indorsee. o Constitutes indorsee agent of indorse
- It generally consists only of the signature of the payee or o Vests title in indorsee for the benefit of the indorse ir
indorse on the back of the indorsement. a third party.
- Effect of blank indorsement: To make the instrument
payable to bearer. Section 37. RIGHTS OF INDORSEE UNDER RESTRICTIVE
INDORSEMENT
Section 35. BLANK INDORSEMENT, HOW CHANGED TO
SPECIAL INDORSEMENT - A restrictive indorsement confers upon the indorsee the right:
o To receive payment of the instrument
- An instrument made payable to bearer by an indorsement in o To bring any action thereon that the indorser could
blank may be converted into an order instrument by writing
bring
over the signature of the indorser in blank any contract not
o To transfer his rights as such indorsee, where the form
inconsistent with the character of the indorsement.
of the indorsement authorizes him to do so.
- Effect of restrictive indorsement: All subsequent indorsees
Section 36. WHEN INDORSEMENT IS RESTRICTIVE
acquire only the title of the first indorsee
Restrictive indorsement is an indorsement that contains words
Section 38. QUALIFIED INDORSEMENT
which prohibit or limit the further negotiation of an instrument or
restrict its further negotiation to a particular person of for a particular
Qualified indorsement is where the indorse makes a
purpose; or modifies the rights of the holders or the liabilities of the
qualification.
indorser.
- It constitutes the indorse a mere assignor of the title to the
- This type of indorsement limits the general negotiability of the
instrument
instrument.
o An indorsement may be qualified by adding to the
- It transfers the possession of the instrument but reserves to the
indorser the proceeds of the same. indorser’s signature the words:
 without recourse
- Effects of restrictive indorsement:
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  it shows unwillingness to be Conditional indorsement is one by which the indorse imposes
answerable for the solvency of prior some other conditions to his liability or on the indorsee’s right to
parties. collect the proceeds of the instrument.
 sans recourse - It is in nature of special indorsement
 indorsee’s own risk - It does not prohibit the further negotiation of the instrument
 indorser not holder regardless of whether the condition has been fulfilled or not.
- Effect of qualified indorsement: o However, a condition appearing on the face of the
o To transfer title without guaranteeing payment by the instrument renders the instrument non-negotiable.
primary party. - The conditional indorsement is binding only between the
 It makes the indorser a mere assignor to the indorser and the indorsee.
instrument.
o To limit the liability of the indorser. Section 40. INDORSEMENT OF INSTRUMENT PAYABLE TO
 He is secondarily liable for breach of his BEARER
warranties as an indorser.
 Warranty liability is still present even if the - An instrument payable to bearer is not converted into an
indorsement is qualified. instrument payable to order by being indorsed specially.
 EXCEPT: such indorsement o Therefore, the indorsee may further negotiate the
specifically excludes warranties. instrument by mere delivery.
 The qualified indorser is not liable to the o In such case, the person indorsing specially is liable
indorsee if the instrument is dishonored for only to those holders who can trace their title to the
some other reason. instrument by a series of unbroken indorsements from
o It does not impair the negotiable character of the such special indorser.
instrument. - Applicability: Applies only to instruments originally payable
to bearer.
Section 39. CONDITIONAL INDORSEMENT
Section 41. INDORSEMENT PAYABLE TO TWO OR MORE
Absolute indorsement is one by which the indorser binds PERSONS
himself to pay, upon no other condition than the failure of prior parties
to do so, and of due notice to him of such failure. - General Rule: Where an instrument is payable to the order of
two or more payees or indorsees who are not partners, all must
indorse.
o EXCEPTION:
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
  Where the payees or indorsees are partners - General rule: Every negotiation is deemed prima facie to
 Where the payee or indorsee indorsing has have been effected before the instrument was overdue.
authority to indorse for others o EXCEPTION: where an indorsement bears date after
Section 42. EFFECT OF INSTRUMENT DRAWN OR the maturity of the instrument.
INDORSED TO A PERSON AS CASHIER o Presumption:
 If the indorsement bears a date, the
- It is deemed prima facie to be payable to the bank corporation, presumption is that it is the true date.
of which he is such officer.  If the instrument is without date, the
- It may be negotiated by either the indorsement of the bank or presumption is that it was negotiated before
corporation, or the indorsement of the officer. maturity.

Section 43. INDORSEMENT WHERE THE NAME IS Section 46. PRESUMPTION AS TO PLACE OF INDORSEMENT
MISPELLED,
- General Rule: Every indorsement is presumed prima facie to
- Where the name of a payee or indorsee is wrongly designated have been made at the place where the instrument is dated.
or misspelled, he may indorse the instrument as therein o EXCEPTION: where the contrary appears.
described, adding, if he thinks fit, his proper signature.
o The person may correct a spelling error only if the Section 47. CONTINUATION OF NEGOTIABLE INSTRUMENT
intention of the maker or drawer was that the
instrument should be payable to the person making - General Rule: An instrument negotiable when issued us
the correction. always negotiable until paid, irrespective of the form of
indorsement on the instrument.
Section 44. INDORSEMENT IN REPRESENTATIVE o EXCEPTIONS:
CAPACITY  When the instrument has been restrictively
indorsed
- Where any person is under the obligation to indorse in a  When it has been discharged by payment or
representative capacity, he may indorse in such terms as to otherwise
negative personal liability. o An instrument indorsed after it become overdue is
considered payable on demand
Section 45. TIME OF INDORSEMENT
Section 48. STRIKING OUT INDORSEMENT

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
 - The holder may at any time strike out any indorsement which - This section contemplates a situation where the payee or
is not necessary to his title. indorsee delivers said instrument for value without indorsing
o Effect: The indorse whose indorsement is struck out, it.
and all indorsers subsequent to him, are thereby o The transaction operates as an equitable assignment
relieved form liability on the instrument. and the transferee acquires the instrument subject to
o RULE: defenses and equities available among prior parties.
 An indorsee will derive his title through the  He cannot negotiate it.
person on whom he derived it.
 In case of bearer instrument, it does Section 50. WHEN PRIOR PARTY MAY NEGOTIATE
not matter, because it is effected by INSTRUMENT
mere delivery.
 In case of order instrument, the - This section refers to a reacquirer or a holder who negotiates
holder has no right to strike out such an instrument and then subsequently reacquire it.
indorsement, nor he can convert - RULE: If a party reacquires an instrument before maturity, he
such instrument into a blank may negotiate the same further.
instrument. - Limitation on renegotiation: In the following, a prior party
o Cases where indorsement may be stricken-out: cannot further renegotiate the instrument:
 If payable to bearer on its face. o Where it is payable to the order of a third person, and
 If payable to order, only in case of: has been paid by the drawer
 When it is re-acquired by a prior o Where it was made or accepted for accommodation
party and has been paid by the party accommodated.
 When the order instrument becomes o In other cases, where the instrument is discharged
a bearer instrument. when acquired by a prior party.

Section 49. TRANSFER WITHOUT INDORSEMENT; EFFECT

OF. RIGHTS OF THE HOLDER

- Applicable only to an instrument payable to order. Section 51. RIGHTS OF HOLDER TO SUE; PAYMENT.

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law
 Holder is the payee or indorsee of a bill or note who is in  The date of maturity is the time fixed
possession of it, or the bearer thereof. therein.
- A person who qualifies as a holder but does not meet all the  If the instrument is payable on
conditions to qualify as a holder in due course is called demand, the maturity is determined
ordinary holder or mere holder. by the date of presentment.
- Classes of holder:  An instrument may be dishonored by non-
o Holders simply acceptance or non-payment.
o Holders for value  Dishonor by non-acceptance refers
o Holders in due course to BOE
o May occur even before date
Section 52. HOLDER IN DUE COURSE. of its maturity.
 Dishonor by non-payment can only
- Presumption: Every holder is presumed to be a holder in due take place at the time of maturity.
course.  An overdue or dishonored instrument may
- REQUISITE of a holder in due course: (CaR-OD-GfV-ID) still be negotiated by indorsement or
o That it is complete and regular upon its face delivery.
 An instrument is not complete and regular on  In indorsement the holder cannot be
its face when a mere inspection of an a holder in due course.
instrument shows that:  In delivery a holder without notice
 It has been altered. can be a holder in due course.
 It has not been completed o That he took it in good faith and for value.
 It gives indication of any irregularity  Good faith is the honesty in fact in the
that it was not issued in the usual transaction concerned.
course of business.  It means that the person is without
 Effect: The holder is not a holder in due knowledge or notice of any material
course. fact which would render it dishonest
o That he became the holder of it before it was to take the instrument.
overdue, and without notice that it had been o That at the time it was negotiated to him he had no
previously dishonored, if such was the fact. notice of infirmity in the instrument or defect in the
 An instrument is overdue after the date of title of the person negotiating it.
maturity.  Bad faith of agent: Knowledge of an agent
acting within the scope of his authority is a
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 constructive knowledge of the principal, and
will render the principal not a holder in due - This article is intended to define the situation in which the
course. holder must protect himself by refusing to make further
- All of the foregoing conditions must concur in order to qualify payments.
the person as a holder in due course. - Applicability: It is applicable only where the obligation
o If any one of them is absent, the person cannot be incurred by the holder of a bill or note is such that upon
considered a holder in due course, but a mere assignee discovering the infirmity in the instrument, he is relieved from
of a contract. all further legal obligations to make further payments.
- PAYEE, as a holder in due course. o Effect: He will be deemed a holder in due course to
o A payee who receives a negotiable promissory note, the extent of the amount theretofore paid by him.
in good faith, for value, before maturity, and without
any notice of any infirmity, from a holder, not the Section 55. WHEN TITLE IS DEFECTIVE.
maker to whom it was negotiated as a completed
instrument, is a holder in due course within the - An instrument is defective when the person obtained the
purview of a Negotiable Instruments law. (De instrument, or any signature thereto by the following:
Ocampo v. Gatchalian) o By fraud
- DRAWEE, as a holder in due course. o By duress
o A drawee is not a holder in due course. o By force
o By fear
Section 53. PERSON NOT A HOLDER IN DUE COURSE o Through other unlawful means
o For an illegal consideration
- Applicability: Applies to an instrument payable at a fixed or o When he negotiates it in breach of faith
determinable future time.
o If the negotiation of a demand instrument is made Section 56. NOTICE OF DEFECT
outside of reasonable time after its issue, the holder
cannot be a holder in due course. - In order to constitute a notice, the transferee must have an
 Reason: The instrument has been in actual knowledge of the infirmity in the instrument or defect
circulation for such a length of time givers that his action in taking the instrument amounted to bad faith.
rise to a strong indication that it has already o Notice is to be determined by the simple test of
been dishonored. honesty and good faith and not be speculative issue as
to the indorsee’s negligence.
Section 54. NOTICE BEFORE FULL AMOUNT PAID.
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 o Incomplete instrument not delivered
Section 57. RIGHTS OF A HOLDER IN DUE COURSE o Forgery
o Fraud
- RIGHTS OF A HOLDER IN DUE COURSE. o Alteration
o He may sue on the instrument in his own name o Prescription
o He may receive payment and if the payment is in due Personal defenses are those which outgrow out of the
course, the instrument is discharged. agreement or conduct of a particular person in regard to the instrument
o He holds the instruments free from defects of title of which renders it inequitable for him, though holding the legal title, to
prior parties enforce it against the party sought to be made liable but which are not
o He holds the instrument free from defenses available available against a holder in due course.
to prior parties among themselves. - Example:
o He may enforce payment of the instrument for the full o Filing of wrong date
amount thereof against all parties liable thereon. o Complete instrument not delivered
- Only real defenses may be set up against a holder in due o Simple fraud
course. o Absence of failure of consideration
o On the other hand, a holder NOT in due course o Acquisition of instrument by force, duress or fear
acquires the instrument subject to all defenses, o Acquisition of instrument by unlawful means
whether real or personal, because he is treated as a o Innocent alteration
mere assignee of a non-negotiable instrument.
- RIGHTS OF A HOLDER NOT IN DUE COURSE
Section 58. SUBJECT TO ORIGINAL DEFENSES
o He may sue on the instrument in his own name
o He may receive payment and if the payment is in due
Defenses are grounds or reason pleaded or offered by the
course, the instrument is discharged.
defendant in a case, showing why the plaintiff, as matter of law or fact,
o He is entitled to the instrument but holds it subject to
should not be given the relief he seeks.
the same defenses as it were non-negotiable
Real defenses are those that are available against all parties o He has all the rights of the holder in due course from
both immediate and remote, including holders in due course or holders whom he derives his title in respect of all parties prior
through the latter. to such holder, provided he is not himself a party to
- Examples: any fraud or illegality affecting the instrument.
o Incapacity of the person
o Illegality of the contract
NEGOTIABLE INSTRUMENTS LAW Reviewer.
By: Allyssa Mae M. Yuson
BC School of Law
 - The only disadvantage of a holder not in due course is that the Liability is the obligation of a party to a negotiable instrument
negotiable instrument is subject to defenses as if it were non- to pay the same according to its terms.
negotiable. - Primary liable:
o The maker of the promissory note
Section 59. WHO IS DEEMED A HOLDER IN DUE COURSE o The acceptor of the bill of exchange
o The certifier of the check
- Presumption: Every holder is deemed prima facie a holder in - Secondarily liable:
due course. o The drawer of a bill
o When it is shown that the title of any person who has o The indorser of the note or a bill
negotiated the instrument was defective - Not liable:
 The burden is on the holder to prove that he o The drawee until he accepts the instrument in which
or some person under whom he claims case he comes an acceptor.
acquired the title as a holder in due course. - A person becomes a party to the instrument by signing his
 Example: P obtained the note of M through name thereon.
simple fraud, and negotiates it to A, A to B, o General Rule: No person is liable on an instrument
B to C, and C to D, the present holder.
unless his signature appears thereon.
 In the case, the presumption is that D
is a holder in due course. But once
M proves the fraud committed by P,
the burden is shifted to D to prove
that he is a holder in due course or
that C, from where he acquired the
title is a holder in due course.
 EXCEPTION: When a party who became
bound on the instrument prior to the
acquisition of such defective title.

LIABILITY OF PARTIES

Section 60. LIABILITY OF MAKER.

NEGOTIABLE INSTRUMENTS LAW Reviewer.

By: Allyssa Mae M. Yuson
BC School of Law