Negotiable

Instruments Law
NOTES FOR RECITATION

By: Adjceline L. Amilhamja

Faculty of Civil Law- University of Santo Tomas
2A (2020-2021)

Disclaimer: Errors/mistakes are solely due to the

maker of this reviewer. Please use with due diligence
and caution.
Negotiable Instruments 1. Promissory note- It is an unconditional promise in
– written contracts for the payment of money; by its writing made by one person to another, signed by the
form, intended as a substitute for money and intended maker, engaging to pay on demand, or at a fixed or
to pass from hand to hand, to give the holder in due determinable future time, a sum certain in money to
course the right to hold the same and collect the sum order or to bearer (Sec. 184, NIL)
due. 2. Bill of Exchange- is an unconditional order in
-It is a written contract for the payment of money writing addressed by one person to another, signed by
which is intended as a substitute for money and passes the person giving it, requiring the person to whom it is
from one person to another as money, in such a addressed to pay on demand or at a fixed or
manner as to give a holder in due course the right to determinable future time a sum certain in money to
hold the instrument free from defenses available to order or to bearer. (Sec. 126, NIL)
prior parties (Sundiang Sr. & Aquino, 2011). 3. Check- is a bill of exchange drawn on a bank
-transferred by negotiation payable on demand. Except as herein otherwise
Negotiation- is the mode of transfer; transfer provided, the provisions of this Act applicable to a bill
of instrument from 1 person to another in such a way of exchange payable on demand apply to a check.
as to make transferee a holder of the inst (Sec. 185, NIL)
-Transferor must make transferee a holder otherwise
he will be a mere assignee ; Assignment -Negotiability- merely a matter of form; If an
instrument possesses all the above requisites, it
How is a negotiable instrument negotiated and who is becomes negotiable even though it may be void,
considered the holder of NI? voidable, unenforceable or uncollectible.
1. If the negotiable instrument is originally an order -Test: Whether or not the promise or order would give
instrument, it can be negotiated by proper indorsement rise to a separate cause of action for breach of contract
plus delivery? rule if the additional act is not performed or done.
2. If the negotiable instrument is originally a bearer See below: Effect if a bill or note is payable other than
instrument it can only be negotiated by mere delivery in money
3. Holder in due course -one who is both the indorsee
and possessor of the NI NI only produces payment when they have been
encashed
Kinds of Negotiable instrument and parties
Kinds Laws governing Negotiable Instruments
Promisso Maker- Payee- Holder 1. Negotiable Instruments Law (NIL) – For
r-y note (debtor) (creditor) instruments which meet the requisites of negotiability.
Primaril Note: 2. New Civil Code (NCC) – Applies suppletorily in
y liable The cases of assignment and demand for payment of an
payee NIL.
and all 3. Code of Commerce (CC) – Applies suppletorily to
other NIL in cases of crossed checks.
succeedin
g Functions
indorsers -facilitate sale of goods
are -serve as proof of transaction
parties
secondari Purpose of NI
ly liable -NI allows men of undoubted credit to carry on a
Bill of Drawer Payee- Drawee Indors business enterprise on strength of NI which they issue
Exchang - (Creditor) Party e-rs or negotiate knowing that other businessmen will
e (debtor) primaril accept NI as cash
y liable -checks are issued or intended for immediate payment
Check Drawer Payee- Drawee
-person creditor - The Q: Are NI’s considered legal tender?
issuing of the bank A: No. NI’s are not money but mere substitutes for
check drawer to where money. Nor are they legal tender. (Sec. 60, New
whom the the Central Bank Act [NCBA], RA 7653).
bank drawer
must pay has a GR: The delivery of a negotiable instrument
the check deposit does not by itself produce the effect of payment

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(Roman Catholic Bishop of Malolos vs. IAC, G.R. No. 10. Discharge
72110, November 16, 1990).
XPNs: Negotiable instruments shall produce the effect Forms and Interpretation:
of payment when: Q: What are the rules of construction in case of
1. They have been cashed (Art. 1249, NCC); ambiguities in a negotiable instrument?
2. Through the fault of the creditor they have A:
been impaired (ibid); or 1. Words prevail over figures
3. A check representing demand deposit has 2. Interest runs from the date of the instrument, if date
been cleared and credited to the account of the from which interest is to run is unspecified; if undated,
creditor. (Sec. 60, NCBA) from the issue thereof.
-Negotiable instruments are neither money nor legal 3. If undated, instrument is considered dated as of the
tender; they are mere substitutes for money. (Sec. 60, time it was issued.
NCBA) 4. Written provisions prevail over printed.
5. If there is doubt whether it is a bill or note, the
Q: Negotiable instruments are used as substitutes for holder may treat it as either at his election.
money, which means--- (2012 Bar) 6. When not clear in what capacity it was signed,
a) that they can be considered legal tender. deemed signed as an indorser.
b) that when negotiated, they can be used to pay 7. "I promise to pay" when signed by two or more
indebtedness. persons are deemed to be jointly and severally liable.
c) that at all times the delivery of the instrument (Sec. 17)
is equivalent to delivery of the cash.
d) that at all times negotiation of the instruments Rules governing the use of phrases in the Negotiable
requires proper indorsement. Instruments
Suggested Answer: B 1. As to promissory note:
a. The word “promise” need not be used. Any
Characteristics of Negotiable Instruments: (NA) expression equivalent to a promise is sufficient.
a. Negotiability – the NI may pass from hand to hand b. Mere acknowledgment of a debt is not a
similar to money so as to give the “HIDC” the right to promissory note.
hold the instrument and collect the sum payable for c. Language used must indicate a written
himself free from any infirmity in the instrument or undertaking to pay.
defect in the title of any of the prior parties or defenses 2. As to bill of exchange
available to them among themselves. a. It must contain an order for payment as
– Right of transferee to hold the distinguished from a mere request.
instrument and collect the sum due b. The order is not invalidated because it
b. Accumulation of secondary contracts – instrument is contains words of civility. Thus, insertion of polite
negotiated from person to person words like “please” does not alter the character of the
-a characteristic where additional instrument; as long as the language expresses the
parties become involved as the NI is transferred from drawer’s will that the money be paid.
one person to another.
Requisites of negotiability:
Incidents in the life of NI Factors to determine the negotiability (FRI)
1. Issue – first delivery of the instrument to the payee; 1. Words that appear on the Face of negotiable
2. Negotiation – transfer from one person to another so instrument
as to constitute the transferee a holder; 2. Requirements enumerated in Section 1 of
3. Presentment for acceptance (in certain kinds of Bills NIL
of Exchange) (Sec. 143, NIL) 3. Intention of the parties by considering the
4. Acceptance – written assent of the drawee to the whole of the instrument
order;
5. Dishonor by non-acceptance – refusal to accept by
the drawee;
6. Presentment for payment – the instrument is shown
to the maker or drawee/ acceptor for him to pay;
7. Dishonor by non-payment – refusal to pay by the
maker or drawee/ acceptor
8. Notice of dishonor – notice to the persons
secondarily liable that the maker or the drawee/
acceptor refused to pay or to accept instrument;
9. Protest

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 person making the same intended to sign, he is to be
Section 1. Form of negotiable instruments. - An deemed an indorser. [Sec. 17 (f), NIL]
instrument to be negotiable must conform to the -The signature is valid and binding as long as
following requirements: it appears that a person intended to make the
(a) It must be in writing and signed by the maker or instrument his own. The signature is prima facie
drawer; evidence of a person’s intention to be bound as either
(b) Must contain an unconditional promise or order maker or drawer.
to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or 2. Unconditional promise or order to pay
determinable future time; -If the payment of the amount is subject to fulfillment
(d) Must be payable to order or to bearer; and of a condition or the happening of a contingency, the
(e) Where the instrument is addressed to a drawee, he promissory note or bill of exchange becomes non-
must be named or otherwise indicated therein with negotiable
reasonable certainty. -An unqualified order or promise to pay is
unconditional though coupled with:
An instrument to be negotiable must conform to the
1. An indication of particular fund out of
following requirements: (WU-POA)
which reimbursement is to be made or a particular
1. It must be in Writing and signed by the maker or
account to be debited with the amount; or
drawer;
Example: Pay to the order of B Php 100,000 on June
2. Must contain an Unconditional promise or order to
30, 1995 and you may reimburse yourself from the sale
pay a sum certain in money;
of my car
3. Must be Payable on demand, or at a fixed or
ToL X (Sgd. A)
determinable future time;
2. A statement of the transaction which gave
4. Must be payable to Order or to bearer; and
rise to the instrument. But an order or promise to pay
5. Where the instrument is addressed to a drawee, he
out of a particular fund is conditional. (Sec 3, NIL)
must be named or otherwise indicated therein with
NOTE: The word “promise” or “order” need not
reasonable certainty. (Sec.1, NIL,)
appear in the instrument to satisfy the requirements of
NOTE: The requirements stated in Sec. 1 must appear
Section 1(b) of the NIL (Sundiang Sr. & Aquino,
on the face of the instrument otherwise the instrument
2014).
would not be negotiable. A NI need not follow the
-The promise or order to pay must not be subject to
exact language of NIL, as long as the terms are
any condition or contingency.
sufficient which clearly indicate an intention to
-An instrument payable upon a contingency is
conform to the requirements of the law. (Sec. 10, NIL)
not negotiable even if the condition thereon has been
fulfilled.
Discussion:
1. The instrument must be in writing
Certainty as to sum
-It must be in writing, otherwise they cannot
The sum payable is a sum certain within the meaning
be negotiated from one person to another. There is no
of this Act, although it is to be paid: (ISDEA)
particular form or type of writing as it may be
1. With Interest;
typewritten, printed or handwritten. No particular
2. By Stated installments;
writing material is required.
3. By stated installments, with a provision
-It must be reduced in writing or in tangible
upon Default in payment of any installment or of
form. The negotiability or non-negotiability of an
interest, the whole shall become due ( acceleration
instrument is determined from the writing on the face
clause);
of the instrument itself (De Leon, 2010).
4. With Exchange, whether at a fixed rate or at
-The instrument must be signed by the maker
the current rate; or
or drawer
5. With cost of collection or an Attorney’s
-It is placed at the lower right hand corner of
fees, in case payment shall not be made at maturity.
the instrument. Nonetheless, it may appear in any part
(Sec. 2, NIL)
of the instrument whether at the top, middle or bottom
NOTE: A sum is certain within the contemplation of
or at the margin. (De Leon, 2010).
Section 1(b) of the NIL if the amount that is to be
-Signature is preferably in his regularly
unconditionally paid by the maker or drawee can be
accepted signature as long as he intends to be bound by
determined on the face of the instrument even if it
such signature. If the maker or drawer is illiterate, his
requires mathematical computation (Sundiang Sr. &
signature such as a thumbmark will be sufficient to
Aquino, 2014).
bind him on the instrument.
NOTE: Where a signature is so placed upon the
Payment with interest
instrument that it is not clear in what capacity the

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

-sum payable as stated in the instrument is considered 2. Where acceleration is at the option of the holder and
the sum certain although interest on the amount is can only be exercised upon the happening of the
chargeable. specified event – NEGOTIABLE
-Interest at fixed rate or at increased or reduced rate 3. Where the holder’s right to accelerate is
will not destroy negotiability because the presence of unconditional, the time of payment is rendered
such interest does not make uncertain the sum payable. uncertain – NON-NEGOTIABLE
In the absence of a date as to which interest is to run, it
shall be from the date of instrument, or in the absence Extension Clause
thereof, at the date of issue. In the absence of interest -Extension Clauses are provisions extending the time
rate, it shall be the legal rate. [Sec. 17 (b), NIL] of payment.
GR: An extension clause does not affect the
Payment by installment negotiability of the instrument.
-payment by installments will be valid and will still be XPN: Where a note with a fixed maturity provides that
negotiable if the amount and maturity of each the maker has the option to extend time of payment
installments are expressed established or can be until the happening of a contingency, the date is
ascertained from the instrument. uncertain and the instrument is non-negotiable. The
-Payment by installment is certain if the dates of each time for payment may never come at all.
installment are fixed and the amount to be paid for
each installment is stated. (Sundiang Sr. & Aquino, NOTE: If the right is given to the holder, the time of
2009) payment need not contain a new fixed maturity date or
the length of extension does not have to be specified.
Q: Discuss the negotiability or non-negotiability:
Manila, June 3, 1993 The reason is that the holder is free to demand
P10,000.00 payment at maturity date or any time after said date.
For value received, I promise to pay Sergio Dee or On the other hand, if the obligor is the one given the
order the sum of P10,000.00 in five (5) installments, right to extend payment, the interest of the extension
with the first installment payable on October 5, 1993 must be specified to keep the instrument negotiable,
and the other installments on or before the fifth day for of the right to extend is without limit, it cannot be
of the succeeding month or thereafter. determined with absolute certainty when the holder
(Sgd.) Lito Villa (1993 Bar) will have the absolute right to be paid. Thus, where the
A: The instrument is negotiable because it complied maker of the note is given the right to extend the time
with the requirements provided by Section 1 of the of payment “for no longer than a reasonable time”
NIL. The fact that it is payable in installments does not after maturity date, the note is nonnegotiable because
make the instrument non-negotiable as long as the the definite time requirement is not met. (De Leon,
dates of each installment is fixed or at least 2010)
determinable and the amount to be paid for each
installment is stated (NIL, Sec. 2[b]). Sum to be paid with exchange
The exchange is the charge for the expense of
Payment with an acceleration clause providing funds at the place where the instrument is
-Escalation clause or Acceleration clause is a common payable to cover such instrument which is issued at
provision in commercial transactions by installments another place. It may be at a fixed rate or at the current
which means that the whole indebtedness becomes due rate. It is applicable only to foreign bills. (De Leon,
and demandable upon default of one or two successive 2010)
installments or of full interest.
-The clause does not affect the negotiability of the Payable in Philippine Peso
instrument as the principal amount payable is still a -The “money” referred into may be our legal tender or
sum cetain in money. foreign currency. An instrument is still negotiable
-Acceleration clause is a provision, that upon default in although the amount to be paid is expressed in
payment of any installment or interest, the whole shall currency that is not legal tender so long as it is
become due. [Sec. 2(c), NIL] expressed in money. [Sec. 2(d); PNB v Zulueta, G.R.
NOTE: Negotiability of an instrument with an No., L-7271, August 30, 1957)
acceleration clause, depends on who has the option to NOTE: Under RA 8183, an agreement to pay in
exercise the same. foreign currency is valid.
1. If the option to accelerate the maturity is on the
maker, whether such option is absolute or conditional Sum to be paid with costs of collection and/or
– NEGOTIABLE attorney’s fees.
-a stipulation will not render the instrument non-
negotiable as the total costs of collection are merely

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added to the principal obligation and does not alter the any time and the refusal of the holder to accept
amount of sum certain payable payment shall stop the running of interest should there
-It does not affect the certainty of the amount payable be any, but obligation to pay the note subsist.
at maturity since the increase in the amount due, even
if uncertain, takes place after maturity when the Sec. 7- Payable on demand- An instrument is payable
instrument ceases to be negotiable in the full on demand:
commercial sense. [Sec. 2 (e), NIL; De Leon 2010] a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
Effect if a bill or note is payable other than in money b. In which no time for payment is expressed
GR: The note or bill must be payable in money. If c. Where an instrument is issued, accepted, or
payable in goods, wares, or merchandise, or in indorsed when overdue, it is, as regards the person so
property, the same is not negotiable. issuing, accepting, or indorsing it, payable on demand.
XPNs: Negotiability is not affected if the note contains
an additional provision which: (SECo Law) -Note (Sec. 71, NIL)
1. Authorizes the sale of collateral Securities in case >PN- has become payable on demand, the holder may
the instrument be not paid at maturity; present the P/N for payment within a reasonable time
“I promise to pay B or order 5,000 on after issue
December 31 and in case I am unable to pay, he may >BoE- has become payable on demand, presentment
sell the diamond ring which I pledged to him as for payment by the holder must be within a reasonable
collateral and the proceeds thereof to be applied to the time after the last indorsement
payment of this note”
2. Gives the holder an Election to require something to 3.2. At a fixed time – A definite calendar date
be done in lieu of payment of money; expressed in the instrument; A term or time instrument
3. Authorizes a Confession of judgment if the is payable only upon the arrival of the time for
instrument be not paid at maturity; or payment.
-a confession of judgment is tantamount to a
voluntary admission of indebtedness and a provision to 3.3. At a determinable future time-An instrument is
this effect in the instrument will not affect its payable at a determinable future time which is
negotiability expressed to be payable: (Sec. 4, NIL).
“I promise to pay B or order 2,000 on May 31, 1995 a. At a fixed period after date or sight;
and if this note is not paid on maturity, I authorize any -after date- refers to a promissory note
attorney or a acompetent court to declare confession -after sight- refers to a bill of exchange
of judgment against me for the same amount of this (see notes below)
note including interests, costs and attorney’s fees. b. On or before a fixed or determinable future time
4. Waives the benefit of any Law intended for the specified therein; or
advantage or protection of the obligor. (Sec. 5, NIL) c. On or at a fixed period after the occurrence of a
-Voluntary waiver of any legal requirements specified event which is certain to happen, though the
intended for the benefit of the debtor or obligor will be time of happening be uncertain
valid, so that if the maker of a promissory note or
drawer or a bill of exchange or subsequent indorsers At a fixed period after date or sight;
voluntarily waive their rights to such requirements -Bill of exchange- first sight means first presentment
intended for their benefit and protection as for acceptance to be made by the holder to the drawee;
presentment for payment, notices of dishonor, protest if with fixed period, means to count from the fixed
and demand, the instrument remains negotiable period from the date of such presentment regardless of
“Pay to the order of BB the sum of 5,000 on whether or not the drawee accepts the bill
June 30, 1995. Notice of dishonor is hereby waived”
Note than an order to pay out of a particular fund is not
3. Payable on demand or at a fixed or determinable unconditional.
future time
-It is essential to establish the time of payment in the Indication of particular fund for reimbursement vs.
instrument so that the parties primarily liable will Indication of particular fund for payment
know definitely when they are expected to pay when FUND FOR FUND FOR
called upon to pay; the holder will know precisely REIMBURSEMENT PAYMENT
when to collect on the instrument, and the parties
secondarily liable will likewise have an idea when they The drawee pays the There is only one act -
may be called upon to pay the instrument payee from his own the
3.1. Payable on demand – The holder may call for funds. drawee pays directly
payment any time, likewise, the maker may also pay from the particular fund

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

 The drawee pays himself indicated.
from the particular fund Sec. 9. When payable to bearer. - The instrument is
indicated. payable to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
Particular fund indicated Particular fund indicated
bearer; or
is not the direct source of is the direct source of
(c) When it is payable to the order of a fictitious or
payment. payment.
non-existing person, and such fact was known to
the person making it so payable; or
Instrument is negotiable Instrument is
(d) When the name of the payee does not purport to
nonnegotiable. The fund
be the name of any person; or
specified is the direct
(e) When the only or last indorsement is an
source of payment;
indorsement in blank.
therefore, it is subject to
the availability of fund, Examples in payable to bearer(ENaF PaLa)
hence conditional. 1. When it is Expressed to be so payable; (e.g. I
(Sundiang Sr. & promise to pay to bearer P10,000.00)
Aquino, 2. When it is payable to a person Named therein or
2014). bearer; (e.g. Pay to P or bearer P10,000.00)
-expressed in 3 ways:
4. Payable to order or to bearer >payable to the order of (person)
Sec. 8. When payable to order. - The instrument is -“I promise to pay to the order of B”
payable to order where it is drawn payable to the order >payable to a specified person or order”
of a specified person or to him or his order. It may be -“I promise to pay B or order”
drawn payable to the order of: 3. When it is payable to the order of a Fictitious person
(a) A payee who is not maker, drawer, or drawee; or or non-existing person, and such fact was known to the
(b) The drawer or maker; or person making it so payable; (e.g. Pay to John Doe or
(c) The drawee; or order)
(d) Two or more payees jointly; or 4. When the name of the Payee does not purport to be
(e) One or some of several payees; or the name of any person; (e.g. Pay to cash)
(f) The holder of an office for the time being. 5. When the only or the Last indorsement is an
Where the instrument is payable to order, the payee indorsement in blank. (Sec 9,NIL)
must be named or otherwise indicated therein with
reasonable certainty. Fictitious-Payee rule
-It is important to know whether a negotiable -The fictitious-payee rule contemplates that the payee
instrument is payable “to order” or “to bearer” because is fictitious or not intended to be true recipient of the
each has a different means of negotiationg and passing proceeds. The check is considered a bearer instrument
title to the instrument. negotiable by delivery alone. The underlying theory is
GR: “payable to order” that the maker of the check knew that the fictitious
-it may be negotiated by proper indorsement payee cannot indorse the instrument so that he must
plus delivery have intended for it to be negotiated by mere delivery.
-no title can be passed on without such (PNB v. Rodriguez, G.R. No. 170325, September 26,
indorsement and delivery 2008)
GR: “payable to bearer”
-can be negotiated by Illustration:
1. mere delivery Back of NI (indorsement)
2. black indorsement plus delivery if the Pay to A Sgd. P
instrument is originally payable to order Pay to B Sgd. A
Sgd. B

A promissory note which does not have the words "or

order" or "or bearer" will render the promissory note
non-negotiable, and therefore the note can still be
assigned and the maker made liable. (2012 Bar)

5. Where the instrument is Addressed to a drawee, he

must be named or otherwise indicated therein with
reasonable certainty.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

-this requisite refers only to bill of exchange. The When drawee must be named with reasonable
drawer must name his drawee or else indicate or Certainty
describe him with such reasonable certainty in order to 1. In a bill of exchange, the drawee must be named or
make sure that the person he has named or indicated in otherwise designated with reasonable certainty (Sec.
his bill of exchange is the real person he has intended 1, NIL)
to be his drawee. 2. A bill may be addressed to two or more drawees
-A bill of exchange may be addressed to 2 or jointly, but not to two or more drawees in the
more drawees jointly or solidarily but not alternative or alternative or in succession (Sec. 127, NIL). Eg. An
in succession instrument may be addressed “to A and B” but not “to
A or B”.
Q: MP bought a used cell phone from JR. JR preferred 3. An instrument payable “to the order of the bearer”
cash but MP is a friend so JR accepted MR‘s has been held to be an instrument payable to “order”.
promissory note for P10,000. JR thought of converting (10 C.J.S. 575-576)
the note into cash by endorsing it to his brother KR.
The promissory note is a piece of paper with the Q: Indicate and explain whether the promissory note
following hand-printed notation: is negotiable or non-negotiable.
― MP WILL PAY JR TEN THOUSAND PESOS IN a. I promise to pay A or bearer Php100,000.00 from
PAYMENT FOR HIS CELLPHONE 1 WEEK FROM my inheritance which I will get after the death of
TODAY. Below this notation MP‘s signature with my father.
―8/1/00 next to it, indicating the date of the b. I promise to pay A or bearer Php100,000 plus the
promissory note. When JR presented MP‘s note to KR, interest rate of ninety (90) – day treasury bills.
the latter said it was not a negotiable instrument under c. I promise to pay A or bearer the sum of
the law and so could not be a valid substitute for cash. Php100,000 if A passes the 2012 bar exams.
JR took the opposite view, insisting on the note‘s d. I promise to pay A or bearer the sum of
negotiability. You are asked to referee. Which of the Php100.000 on or before December 30, 2012.
opposing views is correct? (2000 Bar) e. I promise to pay A or bearer the sum of
A: The view of KR is correct. The note is Php100,000. (2012 Bar)
payable to a specific person hence it is not negotiable. A:
The law provides that for an instrument to be a. NON-NEGOTIABLE. It is based on a contingency
negotiable, it must comply with the requirements of and not an unconditional promise or order to pay sum
section 1 of the NIL pertaining to the part that a note certain in money. [Sec. 1 (b), NIL)
must be payable to order or bearer. In the given case, b. NEGOTIABLE. The instrument is negotiable
there were no words of negotiability and it is silent as despite the inclusion of interest since the sum to be
to whether it is payable to order or bearer. Hence, the paid with said interest is still certain. [Sec. 2 (a), NIL)
instrument is non-negotiable. c. NON-NEGOTIABLE. The instrument is not an
unconditional promise or order to pay a sum certain in
Difference between having a check payable to a money since payment depends upon the happening of
fictitious payee and payable to a specified payee an event. [Sec. 1 (b), NIL)
1. If a check is payable to a specified payee – it as an d. NEGOTIABLE. There is certainty in payment since
order instrument, which requires indorsement from the it is payable on or before a fixed or determinable future
payee or holder before it may be validly negotiated. time specified. [Sec. 4 (b), NIL)
2. If a check is payable to the order of fictitious or non- e. NEGOTIABLE. It is a bearer instrument that is
existing person – it shall be considered as a bearer payable upon demand. ([Sec. 7 (b) and 9 (b), NIL)
instrument, provided such fact is known to the person
making it so payable. Thus, checks issued to “Prinsipe Q: Antonio issued the following instrument:
Abante” or “Si Malakas at si Maganda”, who are August 10, 2013
wellknown characters in Philippine mythology, are Makati City
bearer instruments. (De Leon, 2010) P100,000.00
Sixty days after date, I promise to pay Bobby or his
designated representative the sum of ONE HUNDRED
GR: In case of controversy, the drawer is liable and the THOUSAND PESOS (P100,000.00) from my BPI
drawee bank is absolved from liability. Acct. No. 1234 if, by this due date, the sun still sets in
XPN: When there is commercial bad faith, whereby the west to usher in the evening and rises in the east
the drawee bank acts dishonestly and is a party to the the following morning to welcome the day.
fraudulent scheme. The check is deemed payable to (Sgd.) Antonio Reyes. Explain each requirement of
order, and consequently, the drawee bank bears the negotiability present or absent in the instrument. (2013
loss (Ibid). Bar)
A: The instrument contains a promise to pay and was

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

signed by the maker, Antonio Reyes; the promise to PN as shown below and your corresponding answer,
pay is unconditional insofar as the reference to the either ―Affected or ―Not affected. Explain.
setting of the sun in the west in the evening and its a. The date of the PN is ―February 30, 2002.
rising in the east in the morning are concerned, these b. The PN bears interest payable on the last
are certain to happen; the instrument contains a day of each calendar quarter at a rate equal to five
promise to pay a sum certain in money, P100,000.00; percent (5%) above the then prevailing 91-day
the money is payable at a determinable future time, Treasury Bill rate as published at the beginning of such
sixty days after August 10, 2013; the instrument is not calendar quarter.
payable to order or to bearer; the promise to pay is c. The PN gives the maker the option to make
conditional, because the money will be taken from a payment either in money or in quantity of palay or
particular fund, the BPI Account No. 1234. equivalent value.
d. The PN gives the holder the option either to
Provisions that do not affect the negotiability of an require payment in money or to require the maker to
instrument (CD-VP) serve as the bodyguard or escort of the holder for 30
1. Omission of Date days. (2002 Bar)
2. Non-specification of Value given or that any value A:
had been given a. NOT AFFECTED. Date is not one of the
3. Non-specification of Place where it is drawn or requirements for negotiability therefore it is not
payable essential except when the date is necessary to
4. Bears a seal determine when the note is due
5. Designation of particular kind of Currency in which b. NOT AFFECTED. An instrument payable with
payment is to be made. (Sec. 6, NIL.) See discussion interest determinable at a fixed time is negotiable. The
below for this section law provides under section 2a of the NIL, a sum is still
considered as certain although it is to be paid within
Q: TH is an indorsee of a promissory note that simply interest. It does not make the promise unconditional
states: ― PAY TO JUAN TAN OR ORDER 400 c. AFFECTED. An option given to the maker makes
PESOS. The note has no date, no place of payment the promise conditional
and no consideration mentioned. It was signed by MK d. NOT AFFECTED. An option given to the holder
and written under his letterhead specifying the address, does not make the promise conditional
which happens to be his residence. TH accepted the
promissory note as payment for services rendered to Q: B borrowed Php1 million from L and offered to him
SH, who in turn received the note from Juan Tan as his BMW car worth Php 1 Million as collateral. B then
payment for a prepaid cell phone card worth 450 executed a promissory note that reads: “I, B, promise
pesos. The payee acknowledged having received the to pay L or bearer the amount of Php1 Million and to
note on August 1, 2000. A Bar reviewee had told TH, keep my BMW car (loan collateral) free from any
who happens to be your friend, that TH is not a holder other encumbrance. Signed, B.” Is this note
in due course under Article 52 of the Negotiable negotiable? (2011 Bar)
Instruments Law (Act 2031) and therefore does not A: NO, since it contains a promise to do an act in
enjoy the rights and protection under the statute. TH addition to the payment of money.
asks for our advice specifically in connection with the NOTE: What will not affect the negotiability of the
note being undated and not mentioning a place of instrument is an additional provision which gives an
payment and any consideration. What would your election to require something to be done in lieu of
advice be? (2000 Bar) payment of money.
A: The place and date are not essential to the
negotiability of the instrument except in certain cases Q: A writes a promissory note in favor of his creditor,
when [a] the date is necessary say to determine when B. It says: “Subject to my option, I promise to pay B
the note is due; or [b] the interest is to run when the Php1 Million or his order or give Php1 Million worth
payment of interest has been stipulated or whether the of cement or to authorize him to sell my house worth
holder is barred by the statute of limitations from Php1 Million. Signed, A.” Is the note negotiable?
enforcing the note. The fact that there is no mention of (2011 Bar)
consideration is not essential because it is presumed. A: NO, because the exercise of the option to pay lies
with A, the maker and debtor.
Q: Which of the following stipulations or features of a NOTE: In order not to affect the negotiability of the
promissory note (PN) affect or do not affect its instrument, the option must be with the holder/creditor.
negotiability, assuming that the PN is otherwise
negotiable? Indicate your answer by writing the Q: Distinguish a negotiable document from a
paragraph number of the stipulation or feature of the negotiable instrument (2005 Bar)

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

 BASIS NEGOTIABLE NEGOTIABLE As to liability Maker is Drawer is
INSTRUMENT DOCUMENT of primarily secondarily
Substitute for A written Held to be non- parties liable liable
money contract which negotiable in
is intended as a the technical As to number Only 1 2 presentments
substitute for sense of presentment (for acceptance
money like because they do Presentments (for payment) and for
promissory not have the needed is needed payment) are
notes requisites under generally
and bill of the NIL. needed
exchange.
Forms It may either be It has various A bill of exchange itself does not operate as an
a bill of forms such as assignment of the funds in the hands of the drawee
exchange or a but not limited available for the payment thereof, and the drawee is
promissory to not liable on the bill unless and until he accepts the
note. bill of lading, same. (Sec. 127, NIL)
stock
certificates, A bill of exchange may be addressed to two or more
warehouse drawees jointly, whether partners or not; but not to two
receipts and or more drawees in the alternative or in succession.
pawn tickets. (Sec. 128, NIL)
Subject Matter The subject Actually stands
matter is a sum for the goods it Inland Bill of Exchange vs. Foreign Bill of Exchange
certain in covers. -An inland bill of exchange is one which is, or on its
money. face purports to be, both drawn and payable within the
Capability of Capable of Not capable of Philippines. Any other bill is a foreign bill.
Accumulating accumulating accumulating -Unless the contrary appears on the face of the bill, the
Secondary secondary secondary holder may treat it as an inland bill. (Sec. 109, NIL)
Contracts contracts contracts
resulting from resulting from When a bill of exchange may be treated as promissory
indorsements at indorsements at note (2015 Bar)
the back the 1. Where in a bill the drawer and the drawee
thereof. back thereof. are the same person
2. The drawee is a fictitious person
To recall: 3. The drawee does not have the capacity to
Kinds of negotiable instruments contract
1. Promissory notes (PN) – An unconditional promise 4. When the instrument is so ambiguous that
in writing made by one person to another, signed by there is doubt whether it is a bill or a note, the holder
the maker, engaging to pay on demand, or at a fixed or may treat it either at his election (Sec. 130; Sec. 17(e),
determinable future time, a sum certain in money to NIL)
order or to bearer (NIL, Sec. 184).
2. Bill of exchange (BOE) – An unconditional order in Q: State and explain whether the following are
writing addressed by one person to another signed by negotiable instruments under the Negotiable
the person giving it, requiring the person to whom it is Instruments Law:
addressed to pay on demand or at a fixed or a. Postal Money Order
determinable future time a sum certain in money to b. A certificate of time deposit which states “This is
order or to bearer (NIL, Sec. 126). to certify that bearer has deposited in this bank
3. Check – A bill of exchange drawn on a bank the sum of FOUR THOUSAND PESOS (P4,000)
payable on demand (NIL, Sec. 185). only, repayable to the depositor 200 days after
date.”
Promissory note vs. Bill of exchange c. Letters of Credit
BASIS PROMISSORY BILL OF d. Warehouse Receipts
NOTE EXCHANGE e. Treasury warrants payable from a specific fund
f. Certificate of Indebtedness
Undertaking Promise to pay Order to pay g. Electronic messages
As to number 2 3 (upon A:
of acceptance of a. Postal money order is not a negotiable instrument
original parties the drawee) because, as held in Phil. Education Co. vs Soriano,

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

there are many restrictions which make them promise cannot
incompatible with concepts of negotiable instruments, and signs limit his
thereby making the order conditional, in contrast to the liability.
Sec. 1 of the NIL. Furthermore, such is governed by instrument.
postal rules and regulation and it may only be Payee The party
negotiated once. to whom
b. The certificate of time deposit is a negotiable payment is
instrument because it is an acknowledgement in originally
writing by the bank of the amount of deposit with a payable.
promise to repay the same to the depositor or bearer BOE Drawer The person Secondarily
thereof at a specific time (Caltex (Philippines), Inc. vs. who issues liable,
Court of Appeals and Security Bank and Trust and draws except
Company, G.R. No. 97753, August 10, 1992). the when
c. A letter of credit is not negotiable because it is bill. drawee
generally conditional and has limited negotiability - it refused to
is issued in favor of a specific person. But the accept; can
Supreme Court held in Lee vs. Court of Appeals, that limit his
the drafts issued in connection with the letters of credit liability by
are negotiable instruments. putting
d. A warehouse receipt is not a negotiable instrument “without
because the obligation of a warehouseman is not to pay recourse.”
but to deliver the goods under the warehouse receipt Drawee The party Not liable
which fails to comply with the requirements set forth upon until he
under Sec. 1 of the NIL. It is merely considered as a whom the becomes
negotiable document that does not result in the bill is acceptor.
accumulation of contracts. drawn.
e. A treasury warrant requires appropriations from the Payee The party The party
national government which means that the particular to whom to whom
fund may or may not exists which renders it payment is payment is
conditional, thereby non-negotiable. originally originally
f. Not negotiable. A certificate of indebtedness merely payable. payable.
acknowledges to pay a sum of money to a specified Acceptor The Primarily
persons or entity. Since a certificate of indebtedness acceptor is liable
which is not payable to order or bearer but is payable the drawee
to a specific person is not negotiable, the assignee who
takes it subject to the defect in the title of the assignor. accepts
Thus, when the person who signed the deed of the bill.
assignment was not
authorized by the board of directors, the assignor Referee in case of need
had no title to convey to the assignee (Traders Royal Referee in case of need is the person named by the
Bank vs. Court of Appeals, Filriters Guaranty drawer or indorser in the Negotiable Instrument as the
Assurance Corporation and Central Bank of the one to whom the holder may resort in case the BOE is
Philippines, G.R. No. 93397, March 3, 1997). dishonored by non-acceptance or non-payment. It is
g. The electronic messages are not signed by the the option of the holder to refer to the referee in case of
investor-clients as supposed drawers of a bill of need or not as he may see fit. (Sec. 131, NIL)
exchange; they do not contain an unconditional order
to pay a sum certain in money as the payment is When acceptance of the bill of exchange by the drawee
supposed to come from a specific fund or account of is an important requisite
the investor-clients; and, they are not payable to order The acceptance of a BOE is not important in the
or bearer but to a specifically designated third party. determination of its negotiability. The nature of
Thus, the electronic messages are not bills of acceptance is important only in the determination of
exchange.(Hongkong & Shanghai Banking Corp. v. the kind of liabilities of the parties involved
CIR, G.R. Nos. 166018 & 167728, 04 June 2014) (Philippine Bank of Commerce v. Aruego, G.R. Nos.
L-25836-37, Jan. 31, 1981).
Parties to a negotiable instrument and their liabilities
Basis Parties Function Liability Q: B borrowed Php1 million from L and offered to him
PN Maker One who Primarily his BMW car worth Php 1 Million as collateral. B then
makes the liable; executed a promissory note that reads: “I, B, promise
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
to pay L or bearer the amount of Php1 Million and to
keep my BMW car (loan collateral) free from any Q: A promissory note which does not have the words
other encumbrance. Signed, B.” Is this note "or order" or "or bearer" will render the promissory
negotiable? (2011 Bar) note non-negotiable, and therefore --- (2012 Bar)
a) it will render the maker not liable;
Suggested Ans.: No, since it contains a promise to do b) the note can still be assigned and the maker
an act in addition to the payment of money. made liable;
c) the holder can become holder in due course;
“Gives the holder an election to require something to d) the promissory note can just be delivered and
be done in lieu of payment of money”: the maker will still be liable.
Suggested Answer: B
Q: A writes a promissory note in favor of his creditor,
B. It says: “Subject to my option, I promise to pay B A. KINDS/REQUISITES OF NEGOTIABILITY
Php1 Million or his order or give Php1 Million worth 1. “Caltex vs. CA”, G.R. No. 97753, Aug. 10,
of cement or to authorize him to sell my house worth 1992
Php1 Million. Signed, A.” Is the note negotiable? 2. “Consolidated Plywood Ind. vs. IFC Leasing”,
(2011 Bar) G.R. No. 72593, Apr. 30, 1987
Suggested Ans.: No, because the exercise of the 3. “Traders Royal Bank vs. CA”, G.R. No.
option to pay lies with A, the maker/debtor. 93397, Mar. 3, 1997
4. “PNB vs. Erlando and Norma Rodriguez”,
Note: What will not affect the negotiability of the G.R. No. 170325, Sep. 26, 2008
instrument is an additional provision which gives an 5. “Nunelon Marquez vs. Elisan Credit Corp.”,
election in favor of the holder (creditor) to require G.R. No. 194642, April 6, 2015
something to be done in lieu of payment of money. 6. “People of the Philippines vs. Gilbert Reyes
Wagas”, G.R. No. 157943, September 4, 2013
Q: Is it required that the NI be payable in Philippine
Peso?
A: No. The “money” referred into may be our legal
tender or foreign currency. An instrument is still
negotiable although the amount to be paid is expressed
in currency that is not legal tender so long as it is
expressed in money. (PNB v Zulueta, 101 Phil 1071.)

Q: X issued a promissory note which states "I

promise to pay Y or bearer the amount of
HK$50,000 on or before December 30, 2013." Is
the promissory note negotiable? (2012 Bar)
a) No, the promissory note becomes invalid
because the amount is in foreign currency.
b) Yes, the promissory note is negotiable even
though the amount is stated in foreign currency.
c) No, the promissory note is not negotiable
because the amount is in foreign currency.
d) Yes, the promissory note is negotiable because
the Hong Kong dollar is a known foreign currency in
the Philippines.
Suggested Answer: B

Q: When is payment by installment certain?

A: Payment by installment is certain if the due date of
each installment is fixed AND the amount to be paid
for each installment is stated.

Q: What are the rules as to interest?

A: In the absence of a date as to which interest is to
run, it shall be from the date of instrument, or in the
absence thereof, at the date of issue. In the absence of
interest rate, it shall be the legal rate.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

 Note: If the NI is dated, such date is deemed a prima
Completion and delivery facie to be the true date of the making, drawing,
Steps in the issuance of a negotiable instrument acceptance or indorsement of the instrument. (Sec. 11)
1. The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of NIL. Q: When may a holder insert the date in an instrument?
2. Delivery of the complete instrument by the maker or A:
the drawer to the payee or holder with the intention of 1. Where an instrument expressed to be payable at a
giving effect to it. fixed period after date is issued undated, or
2. Where the acceptance of an instrument payable at a
Q: What is delivery? fixed period after sight is undated (Sec. 13)
A: Delivery refers to the transfer of possession, actual
or constructive, from one person to another (Sec. 191), Wrong date
with the intent to transfer title to payee and recognize -Personal defense
him as holder thereof. -The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due
course, but as to a HIDC, the date so inserted is to be
Sec. 11. Date, presumption as to. - Where the regarded as the true date. With respect to the person
instrument or an acceptance or any indorsement who inserted the wrong date, however, the instrument
thereon is dated, such date is deemed prima facie to is avoided. (Bank of Houston v. Day, 145 Mo. Appl.
be the true date of the making, drawing, 410, 122 SW 756)
acceptance, or indorsement, as the case may be.
Q: What is the effect of insertion of wrong date?
-This section states that the date appearing on the
A: The insertion of a wrong date does NOT avoid the
instrument as a date of making, drawing, acceptance or
instrument in the hands of a subsequent HIDC, to
indorsement is prima facie to be correct date.
whom the date so inserted is to be regarded as the true
-However, this is a mere presumption and evidence
date.
may be presented to prove that there was mistaken in
the date.
Sec. 12. Ante-dated and post-dated. - The
instrument is not invalid for the reason only that it
Sec. 13. When date may be inserted. - Where an
is ante-dated or post-dated, provided this is not
instrument expressed to be payable at a fixed
done for an illegal or fraudulent purpose. The
period after date is issued undated, or where the
person to whom an instrument so dated is delivered
acceptance of an instrument payable at a fixed
acquires the title thereto as of the date of delivery.
period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the -ante dating or post-dating is not illegal unless it is
instrument shall be payable accordingly. The done for fraudulent or illegal purposes. The person to
insertion of a wrong date does not avoid the whom the ante dated or post-dated instrument is
instrument in the hands of a subsequent holder in delivered acquires thereto as of the date of delivery
due course; but as to him, the date so inserted is to and not as of the written date.
be regarded as the true date. -Ante-dating or post-dating an instrument
-If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided it
(a) Insertion of date
is not done for illegal or fraudulent purpose. (NIL, Sec.
GR: The date is not essential to the negotiability of the
12)
instrument (not one of the requirements under Sec. 1).
XPNs: Date is important to determine maturity /
(b) does not specify the value given, or that any value
Instances when date may become necessary:
had been given
1. Where the instrument payable within a fixed period
-“it is a regular practice and customary that the phrase
after date is issued undated, or the acceptance of the
“for value received” is written on the instrument to
instrument payable at a fixed period after sight is
indicate that the promissory note or bill of exchange is
undated. (Sec. 13, NIL)
being issued in return for a consideration received by
2. When the instrument is payable on demand, date is
the maker or drawer. However, omission of these
necessary to determine whether the instrument was
words will not render the instrument as non-negotiable
presented within a reasonable time from issue, or from
because it is presumed that the contract between the
the last negotiation. [NIL, Secs. 71 and 143 (a)]
maker or drawer and the payee is for consideration.
3. When the instrument is an interest-bearing one, to
determine when the interest starts to run.
(c) does not specify the place where it is drawn or the
place where it is payable
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
-the law presumes that the payment shall be made at Sec. 14. Blanks; when may be filled. - Where the
the domicile of the maker instrument is wanting in any material particular,
-See: Sec. 73. Place of presentment. - Presentment for the person in possession thereof has a prima facie
payment is made at the proper place: authority to complete it by filling up the blanks
(a) Where a place of payment is specified in therein. And a signature on a blank paper delivered
the instrument and it is there presented; by the person making the signature in order that the
(b) Where no place of payment is specified but paper may be converted into a negotiable
the address of the person to make payment is given in instrument operates as a prima facie authority to
the instrument and it is there presented; fill it up as such for any amount. In order, however,
(c) Where no place of payment is specified and that any such instrument when completed may be
no address is given and the instrument is presented at enforced against any person who became a party
the usual place of business or residence of the person thereto prior to its completion, it must be filled up
to make payment; strictly in accordance with the authority given and
(d) In any other case if presented to the person within a reasonable time. But if any such
to make payment wherever he can be found, or if instrument, after completion, is negotiated to a
presented at his last known place of business or holder in due course, it is valid and effectual for all
residence. purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the
(d) bears a seal authority given and within a reasonable time.
-Sec. 1 does not require a seal. It may or may not be
used. In some cases, it is used as a sign of authenticity. -note:
Issue is an incident in the life of a negotiable
(e) designates a particular kind of current money in instrument.
which payment is to be made. 1. the preparation of the instrument complete in all
-see discussion above aspects as to conform with the essential requisites
mentioned in sec. 1
Q: Can a bill of exchange or a promissory note qualify 2. the issue of the instrument to the payee by the maker
as a negotiable instrument if: or drawer with the intention of giving effect to it and
a. it is not dated; constituting the payee the holder thereof.
b. or the day and the month, but not the year of its -however, the above section may be considered as an
maturity, is given; or exception because it considers an instrument still
c. it is payable to ―cash negotiable as to some material aspects, such as the
d. it names two alternative drawees (1997 Bar) date, the amount or sum payable, provided it is signed
A: by the maker or the drawer and voluntarily delivered to
a. YES. Date is not an essential requirement for the the payee who has the prima facie authority to fill up
negotiability of an instrument as provided for in the blanks correctly as to give effect to the
section 1 of the NIL. negotiability of the instrument and make him a holder
b. NO. Since the year is not determined, the time for thereof.
payment is not determinable.
c. YES. When the name of the payee does not purport Completion of blanks
to be the name of any person, the law provides in Material particular-It is any particular proper to be
section 9d of the NIL that the maker or drawer intends inserted in a negotiable instrument to make it
the same to be payable to bearer, hence the instrument complete.
qualifies as a negotiable instrument.
d. NO. When the bill is addressed to two or more Effects of wrongful insertion of blanks:
payees in the alternative, the law provides in section 1. the holder who makes the fraudulent or wrongful
128 of the NIL that it is conditional and therefore insertion cannot collect on the instrument
nonnegotiable. 2. the parties prior to the fraudulent or wrongful
insertion will not be liable to subsequent holders not in
due course
3. The holder in due course can collect from the party
who made the fraudulent insertion and from all
indorsers subsequent thereto
4. If a holder is a holder in due course, he can collect
from the party primarily liable and from all parties
secondarily liable whatever the amount has been filled
in. The personal defense of fraudulent insertion in an
incomplete but delivered instrument will not be valid
against a holder in due course
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
 indorsers in the case of a promissory note; and in the
Q: Who has the authority to fill up the blanks in an case of bill of exchange, we have the drawer, payee
incomplete but delivered instrument? and subsequent indorsers.
A: The holder has a prima facie authority to complete
it. Principal kinds of holder used in the negotiable
instrument law
Q: What is meant by material particular? 1. Holder for value – one who gives value or
A: Any particular to be inserted in a NI to make it consideration for the instrument issued or negotiated to
complete. him. He is a holder for the value in respect to all
parties who became such prior to that time
Q: What serves as a prima facie authority to fill up the >Sec. 26. What constitutes holder for value. - Where
blanks? value has at any time been given for the instrument,
A: A signature on a blank paper delivered by the the holder is deemed a holder for value in respect to all
person making the signature in order that the paper parties who become such prior to that time.
may be converted into a NI operates as a prima facie 2. Holder in due course- a holder who takes a valid
authority to fill it up as such for any amount. negotiable instrument in good faith, for value and in
regular course of trade; free from defenses between the
Q: What is the effect if such completed instrument was parties, and without notice of defects in the title to the
negotiated to a HIDC? instrument.
A: After completion, the completed instrument which 3. Holder
was subsequently negotiated to a HIDC, is valid and
effectual for all purposes in his hands, and he may Sec. 52. What constitutes a holder in due course. - A
enforce it as if it had been filled up strictly in holder in due course is a holder who has taken the
accordance with the authority given and within a instrument under the following conditions:
reasonable time. (a) That it is complete and regular upon its face
(b) That he became the holder of it before it was
Note: Hence, the defense that the blanks were filled up overdue, and without notice that it has been previously
beyond the authority given and/or beyond a reasonable dishonored, if such was the fact;
time, is not available against a HIDC. This defense is (c) That he took it in good faith and for value;
merely a personal one. (d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in
Parties to the instrument; brief discussion the title of the person negotiating it.
>Promissory note
1. Maker- maker of promissory note Defenses
2. Payee- the party to whom the promissory note is -are grounds available to the payor to refuse payment
payable to or escape liability from the holder of a negotiable
3. Holder instrument. Any valid reason which the payor may
>In a bill of exchange have for refusing to pay the holder of the instrument
1. Drawer- the party who draws the bill of exchange will constitute a defense.
2. Payee- the party to whom the bill is payable
3. Drawee- the party to whom the bill is addressed and Kinds of defenses:
being ordered to pay the payee 1) Personal defenses- those defenses available to prior
4. Indorsers- the subsequent parties to whom the parties among themselves and include all defenses to
instrument is further negotiated the contract which arises out of the relation of the
parties to the contract.
-In a matter of collection, drawee/ acceptor becomes -They do not include those defenses which go to the
the party primarily liable while the drawer,, the payee validity of the instrument as a contract or to the
and all the subsequent indorsers are the parties capacity of the parties.
secondarily liable. The last indorsee who is also the -also called “Equitable defenses”
possessor of he instrument becomes the holder. -As a rule, personal defenses are available against
-In all negotiable instruments, the holder must first holders for value but not against holders in due course.
collect from the party primarily liable at maturity, and Examples:
if the latter dishonors the instrument, the holder shall 1. Absence or failure of consideration; total or partial
have a right of recourse against the parties secondarily failure of consideration
liable after a notice of dishonor by non-payment has 2. Want of delivery of a complete instrument
been given by the holder to all the parties secondarily 3. Filling up of wrong date of instrument; where it is
liable within 24 hours after the dishonor. Parties payable at a fixed periof after date, or it is issued
secondarily liable are the payee and the subsequent undated

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

4. Filling up of blanks contrary to authority given, or
not within a reasonable time Requirements of an incomplete negotiable instrument
5. Fraud in inducement 1) the instrument is complete as to the date, the amount
6. Duress (unless extreme in nature) or sum payable
7. Illegality of consideration 2) the instrument is signed by the maker or drawer
8. Undue influence; intimidation or violence 3) The maker or drawer voluntarily delivers the
9. Negotiation in breach of faith instrument to the payee, giving the latter the authority
10. Acquisition by unlawful means to fill in the blanks properly
4) the payee must fill up blanks strictly in accordance
2) Real defenses- those defenses which go to the with such authority and within a reasonable time after
existence or validity of the instrument as a contract or receipt
to capacity of the parties. They are those attached to
the instrument itself and can be set up against all Reasonable time
holders in due course. Sec. 193. Reasonable time, what constitutes. - In
Examples: determining what is a "reasonable time" regard is to be
1. Material alteration had to the nature of the instrument, the usage of trade
2. Want of delivery of an incomplete instrument or business with respect to such instruments, and the
3. Contractual fraud or fraud in factum facts of the particular case.
4. Minority
5. Forgery NOTE: While under the law, the one in possession had
a prima facie authority to complete the check, such
Various situations involving negotiable instruments prima facie authority does not extend to its use (i.e.,
1. Incomplete instrument subsequent transfer or negotiation) once the check is
a. Delivered completed. (Patrimonio v. Gutierrez, G.R. No. 187769,
i. With forgery and alteration June 4, 2014)
ii. Without forgery and alteration
b. Not delivered Q: Who has the authority to fill up the blanks in an
i. With forgery and alteration incomplete but delivered instrument?
ii. Without forgery and alteration A: The holder has a prima facie authority to complete
2. Complete instrument it.
a. Delivered
i. With forgery and alteration Q: What serves as a prima facie authority to fill up the
ii. Without forgery and alteration blanks?
b. Not delivered A: A signature on a blank paper delivered by the
i. With forgery and alteration person making the signature in order that the paper
ii. Without forgery and alteration may be converted into a NI operates as a prima facie
NOTE: If an instrument is complete and delivered authority to fill it up as such for any amount.
without forgery and alteration, all parties are bound.
Q: What is the effect if such completed instrument was
1.a. Incomplete but delivered (Sec. 14) negotiated to a HIDC?
-Prima facie authority to fill up the blanks A: After completion, the completed instrument which
-A signature on a blank paper delivered by the person was subsequently negotiated to a HIDC, is valid and
making the signature in order that the paper may be effectual for all purposes in his hands, and he may
converted into a negotiable instrument operates as a enforce it as if it had been filled up strictly in
prima facie authority to fill it up as such for any accordance with the authority given and within a
amount. In order, however, that any such instrument reasonable time.
when completed may be enforced against any person Note: Hence, the defense that the blanks were filled up
who became a party thereto prior to its completion, it beyond the authority given and/or beyond a reasonable
must be filled up strictly in accordance with the time, is not available against a HIDC. This defense is
authoritnnny given and within a reasonable time. (NIL, merely a personal one.
Sec. 14)
>rule presumes that the maker or drawer gave the Q: To secure certain advances from the bank, X and Y
payee the authority to fill up the incomplete instrument executed several promissory notes. When the
is subsequently filled up with the unauthorized date obligation became due, X and Y failed to pay the same
and amount, the party primarily liable and all parties despite repeated demands. To evade their liability, they
prior to the wrongful insertion of the instrument will claimed that they signed the promissory notes in blank
not be liable to a holder for value but liable to a holder and they had not received the value of said notes. Is
in due course. their defense tenable? (2006 Bar)

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

A: NO. It is no defense that the promissory notes were NOTE: Non-delivery of an incomplete
signed in blank as Section 14 of the Negotiable instrument is a real defense which may be set up even
Instruments Law concedes the prima facie authority of against a holder in due course.
the person in possession of negotiable instruments to -Rule: Incomplete and undelivered instrument in the
fill in the blanks. (Quirino Gonzales Logging hands of the maker without delivery to any person is
Concessionaire vs. CA, G.R. No. 126568, April 30, NOT negotiable. It has no value and is not considered
2003) a property. But once the incomplete instrument is
subsequently completed and negotiated without
Enforcement of an incomplete but delivered authority of the maker and drawer, the holder can
instrument; effect if a completed instrument was enforce the instrument against persons who become
negotiated to a holder in due course parties to the instrument after its unauthorized
In order that any such instrument when completion and negotiation. However, the parties prior
completed may be enforced against any person who to the unauthorized negotiation including the maker
became a party thereto prior to its completion, it must will not be liable even to a holder in due course.
be filled up strictly in accordance with the authority
given and within reasonable time. Q: What is the rule when an instrument is incomplete
However, if such instrument, after completion, and undelivered?
is negotiated to a holder in due course, it is valid and A: Where an incomplete instrument has not been
effectual for all purposes in his hands, and he may delivered, the holder, whether HIDC or not, CANNOT
enforce it as if it had been filled up strictly in validly enforce such instrument against the party
accordance with the authority given and within whose signature was placed BEFORE delivery.
reasonable time. Hence, the defense that the blanks
were filled up beyond the authority given and/ or Q: What about the party whose signature was placed
beyond the reasonable time, is not available as against after delivery?
a HIDC A: The instrument can be validly enforced against the
NOTE: Non-delivery of complete instrument party whose signature was placed AFTER delivery
is a personal defense. (like an indorser because the indorser warrants the
instrument to be genuine and in all respect what it
Q: Lorenzo signed several blank checks instructing purports to be).
Nicky, his secretary, to fill them as payment for his
obligations. Nicky filled one check with her name as Note: Non-delivery of an incomplete instrument is a
payee, placed P30,000.00 thereon, endorsed and real defense available to be used by a party PRIOR to
delivered it to Evelyn as payment for goods the latter the unauthorized completion/delivery.
delivered to the former. When Lorenzo found out
about the transaction, he directed the drawee bank to Q: Jun was about to leave for a business trip. As his
dishonor the check. When Evelyn encashed the check, usual practice, he signed several blank checks. He
it was dishonored. Is Lorenzo liable to Evelyn? (2004, instructed Ruth, his secretary, to fill them as payment
2006 Bar) for his obligations. Ruth filled one check with her
A: YES. This covers the delivery of an incomplete name as payee, placed P30,000.00 thereon, endorsed
instrument, under Section 14 of the Negotiable and delivered it to Marie. She accepted the check in
Instruments Law, which provides that there was prima good faith as payment for goods she delivered to Ruth.
facie authority on the part of Nicky to fill-up any of the Eventually, Ruth regretted what she did and
material particulars thereof. Having done so, and when apologized to Jun. Immediately he directed the drawee
it is first completed before it is negotiated to an HIDC bank to dishonor the check. When Marie encashed the
like Evelyn, it is valid for all purposes, and she may check it was dishonored. Supposing the check was
enforce it within a reasonable time, as if it had been stolen while in Ruth's possession and a thief filled the
filled up strictly in accordance with the authority blank check, endorsed and delivered it to Marie in
given. payment for the goods he purchased from her, is Jun
liable to Marie if the check is dishonored? (2006 Bar)
1.b. Incomplete and undelivered instruments A: NO. The check is an incomplete instrument not
delivered in contemplation of law. An incomplete
instrument not delivered is not a valid contract in the
Sec. 15. Incomplete instrument not delivered. - hands of any holder as against any person whose
Where an incomplete instrument has not been signature was placed thereon before delivery. As such,
delivered, it will not, if completed and negotiated Jun is not liable to Marie since he does not assume any
without authority, be a valid contract in the hands responsibility whatsoever upon the said check (NIL,
of any holder, as against any person whose Sec. 15)
signature was placed thereon before delivery.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Q: PN makes a promissory note for P5,000.00, but
leaves the name of the payee in blank because he Delivery is a pre-requisite to liability
wanted to verify its correct spelling first. He Privity rather than proximity
mindlessly left the note on top of his desk at the end
of the workday. When he returned the following 2. b. Complete but undelivered
morning, the note was missing. It turned up later It is incomplete and revocable until delivery of the
when X presented it to PN for payment. Before X, T instrument for the purpose of giving it effect (NIL,
who turned out to have filched the note from PN’s Sec. 16).
office, had endorsed the note after inserting his own
name in the blank space as the payee. PN dishonored Q: What is the effect if a complete instrument is
the note, contending that he did not authorize its undelivered?
completion and delivery. But X said he had no A: It is incomplete and revocable until delivery of the
participation in, or knowledge about the pilferage instrument for the purpose of giving it effect. Delivery
and alteration of the note and therefore he enjoys the is essential to the validity of any negotiable instrument.
rights of a holder in due course under the Negotiable
Instruments Law. Who is correct and why? (2000 Bar) Note: The defenses of want of delivery of complete
instrument or that the delivery is conditional or for a
2.a. Complete and delivered special purpose only (and not for the purpose of
transferring title) are only PERSONAL defenses which
means that it is only available against a holder not a
Sec. 16. Delivery; when effectual; when presumed. HIDC.
- Every contract on a negotiable instrument is
incomplete and revocable until delivery of the Delivery is essential to the validity of any negotiable
instrument for the purpose of giving effect thereto. instrument (Sundiang Sr. & Aquino, 2009).
As between immediate parties and as regards a
remote party other than a holder in due course, the Where a debtor who drew two checks payable to his
delivery, in order to be effectual, must be made creditor never delivered the checks to his creditor and
either by or under the authority of the party a third party was able to collect the proceeds of the
making, drawing, accepting, or indorsing, as the checks by forging the endorsement of the creditor as
case may be; and, in such case, the delivery may be payee, the creditor has no cause of action against
shown to have been conditional, or for a special anyone on the basis of the checks, since the payee
purpose only, and not for the purpose of acquires no interest in the check until its delivery to
transferring the property in the instrument. But him (Development Bank of Rizal v. Sim Wei, G.R.
where the instrument is in the hands of a holder in No. 85419, March 9, 1993).
due course, a valid delivery thereof by all parties
prior to him so as to make them liable to him is NOTE: The defense of want of delivery of a complete
conclusively presumed. And where the instrument instrument is only a personal defense which means that
is no longer in the possession of a party whose it is only available against a holder NOT in due course.
signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is Issuance of an instrument
proved. The instrument is deemed issued upon the first
delivery of the instrument, complete in form, to a
Delivery person who takes it as holder. (NIL, Sec. 191)
-Sec. 191 delivery- means transfer of possession,
actual or constructive, from one person to another; Conditional delivery or delivery for a special purpose
with intent to transfer title to the instrument The delivery is made conditional or for a special
purpose if it was made not for the purpose of
Delivery of a negotiable instrument is indispensable transferring the property (title) to the instrument. In
for the holder to acquire title to the instrument such case, if the instrument lands in the hands of an
HIDC (one who does not know of the conditional
Negotiation of a negotiable instrument, whether “to delivery or of its special purpose), the instrument is
order” or to “bearer” is not complete until the treated as if there is no condition if such delivery was
instrument is delivered for the purpose of transferring made to a holder not in due course, prior parties are not
title thereto. Before delivery, the instrument is bound by the instrument.
inoperative and revocable. Although the instrument (NIL, Sec. 16)
received may have been properly indorsed but if it is NOTE: The law contemplates that the condition is
not yet delivered, the indorser still has the right to orally or verbally conveyed to the holder upon
revoke the instrument.
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
delivery, because of the rule that the negotiability is his principal and adding words to show he is merely
determined only upon the face of the instrument. signing in a representative capacity (NIL, Sec. 19, 20)
3. Forger (NIL, Sec. 23)
Presumption as to delivery 4. Acceptor, who makes his acceptance of a
If the instrument is in the possession of an HIDC, valid bill on a separate paper (NIL, Sec. 134)
delivery is conclusively presumed. If the instrument is 5. Person, who makes a written Promise to
in the possession of a party other than an HIDC, accept the bill before it is drawn (NIL, Sec. 135)
possession of such party constitutes only prima facie
presumption of delivery. However, a person’s signature may appear on a
negotiable instrument but the person cannot be held
Q: What is the presumption when the instrument is in liable
the possession of a HIDC and other than a HIDC? 1. A person whose forged signature may appear on the
A: HIDC - valid delivery is conclusively presumed; instrument will not be liable thereon (Sec. 23)
Other than a HIDC- valid delivery is only prima 2. Under sec. 15, the maker and all parties prior to the
facie presumed unauthorized delivery and fraudulent completion of an
undelivered and incomplete instrument will not be
Immediate parties liable even to a holder in due course.
-are persons having knowledge of the conditions or 3. Under Sec. 22, a minor who negotiates the
limitations placed upon the delivery of an instrument will not be liable although he can pass valid
instrument. It means privity, and not proximity. title.
-A payee who is a holder in due course is not an
immediate party in the sense of Section 16. (Liberty Where a signature is so placed upon the instrument
Trust Co. v. Tilton, 105 N.E. 05.) that it is not clear in what capacity the person signed,
he is deemed to be an indorser, not a maker or drawer.
Remote Parties [NIL, Sec. 17(f)]
-Persons without knowledge as to the conditions or
limitations placed upon the delivery of an instrument, Q: Juan borrowed P10,000.00 from Joe as evidenced
even if he is the next party physically or parties who by a promissory note. All other requisites of
are not in direct contractual relation to each other, but negotiability are present except that Juan did not affix
if they are chargeable, for example, with knowledge or his usual signature thereon as he was ailing at that time
notice of any infirmities in the instrument or defect in and was only able to put “X” in the blank space meant
the title of the person negotiating the same, they will for the signature of the maker. Is the requisite that the
be considered as immediate parties for purposes of instrument must be signed by the maker complied
Section16. with?
A: YES. The letter “X” is sufficient to comply with the
Signature requirement. It appears from the problem that such
-A party may use his full name, surname, initials or letter was adopted by Juan with the intent to
even any mark in signing a negotiable instrument to authenticate the instrument. It is not necessary that the
indicate his intention to bind himself. signature is the usual signature of the maker.
NOTE: A signature may be made in any
manner as long as the person signing has the intention Signing in trade name
to be bound. -a person may be liable on a NI if he intends to be
bound by the trade or assumed name he uses in signing
Q: What constitutes as a valid signature in an NI? the instrument.
A: A party may use his full name, surname, initials or -As a general rule, only persons whose signatures
even any mark in signing a NI, as long as the person appear on an instrument are liable thereon. But one
signing has the INTENTION TO BE BOUND. who signs in a trade or assumed name is liable as if he
signed his own name (NIL, Sec. 18). It is necessary
Persons liable on an instrument that the party who signs in a trade name intended to be
GR: Only persons whose signatures appear on an bound by his signature.
instrument are liable thereon. (NIL, Sec. 18) -example: Lady Gaga uses her name to sign NI is
XPNs: Notwithstanding the absence of their signatures liable
in their own names, the following persons are deemed
liable: (TraP FAP) Signature of agent
1. Per son who signs in Trade or assumed - Sec. 19. Signature by agent; authority; how shown. -
name (NIL, Sec. 18) The signature of any party may be made by a duly
2. Principal who signs through a duly authorized agent. No particular form of appointment is
authorized agent and such agent discloses the name of

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

necessary for this purpose; and the authority of the Q: Can a minor transfer his rights to an instrument?
agent may be established as in other cases of agency. A: Yes. While a minor is not bound by his indorsement
-Requisites for an agent to be exempt from liability for lack of capacity, he is however not incapacitated to
(AWDi) (NIL, Sec. 20). transfer rights.
1. He is duly Authorized by his principal\
2. He adds Words to his signature indicating Q: Can a minor be bound by his representation that he
that he signs as an agent/representative and or that he is of legal age?
is acting within the scope of his authority A: Yes. where he committed actual fraud by
3. He discloses the name of his principal specifically stating that he is of legal age, a minor can
be bound by his signature in an instrument (PNB v.
Legal effects of an agent’s signature CA, G.R. No. L-34404, June 25, 1980.)
-The agent’s signature, provided that the above
requisites are complied with, will bind his principal 2. Incapacitated person – An incapacitated person may
and he will be exempt from personal liability. also use as a real defense his incapacity to enter into a
-Sec. 20. Liability of person signing as agent, and so contract. Contract entered into by the incapacitated are
forth. - Where the instrument contains or a person adds voidable.
to his signature words indicating that he signs for or on Incapacitated persons include:
behalf of a principal or in a representative capacity, he a) insane or demented persons; and
is not liable on the instrument if he was duly b) deaf and blind who does not know how to
authorized; but the mere addition of words describing write.
him as an agent, or as filling a representative character,
without disclosing his principal, does not exempt him 3. Corporation- Issuance or indorsement of an
from personal liability. instrument by a corporation acting beyond its powers
(ultra vires) is a real defense.
Procuration
-means agency or proxy or power of attorney.; acting B. COMPLETION AND DELIVERY
for another with limited authority 1. “Ting Ting Pua vs. Sps. Benito Lo Bun Tiong,
- It is the act by which a principal gives power to et al.”, G.R. No. 198660, Oct. 23, 2013
another to act in his place as he could himself (Fink v. 2. “San Miguel Corp. vs. Puzon, Jr.”, G.R. No.
Scott, 143 S.E. 305). 167567, Sep. 22, 2010
-Sec. 21. Signature by procuration; effect of. - A 3. “Equitable Banking Corp. vs. Special Steel
signature by "procuration" operates as notice that the Products and Augusto Pardo”, G.R. No. 175350, June
agent has but a limited authority to sign, and the 13, 2012
principal is bound only in case the agent in so signing 4. “Samson Ching vs. Clarita Nicdao and CA”,
acted within the actual limits of his authority. G.R. No. 141181, Apr. 27, 2007
-example: 5. “Loreto Dela Victoria vs. Hon. Jose Burgos,
Peter griffin [Link].”, G.R. No. 111190, June 27, 1995
By: Lois Griffin, per proc

Indorsement by a minor or a corporation

1. Minor
GR: A contract entered into by a minor is voidable, at
the option of the minor. It is a real defense that can be
invoked only by the minor.
-Sec. 22. Effect of indorsement by infant or
corporation.- The indorsement or assignment of the
instrument by a corporation or by an infant passes the
property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no
liability thereon.
XPN: Where a minor committed actual fraud by
specifically stating that he is of legal age, a minor can
be bound by his signature in an instrument. (PNB v.
CA, G.R. No. L-34404, June 25, 1980)
NOTE: While a minor is not bound by his indorsement
for lack of capacity, he is however not incapacitated to
transfer his rights.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Forgery maturity? Fraud in inducement is only a
personal defense of A so thet if C is merely a
Sec. 23. Forged signature; effect of. - When a
holder for value, C cannot collect from A.
signature is forged or made without the authority of
However, if C is a holder in due course, he can
the person whose signature it purports to be, it is
collect because a personal defense is not valid
wholly inoperative, and no right to retain the
against a holder in due course.
instrument, or to give a discharge therefor, or to
3. Duress amounting to forgery- Example: This
enforce payment thereof against any party thereto,
takes place when B takes A’s hand and by
can be acquired through or under such signature,
sheer force, makes A sign his name in the PN
unless the party against whom it is sought to
B cannot collect from A on maturity as the
enforce such right is precluded from setting up the
note becomes inoperative
forgery or want of authority.
Forgery
-It is the counterfeit making or fraudulent alteration of Q: Who has the burden of proof in proving forgery?
any writing. It happens when a signature is affixed by A: Forgery, as any other mechanism of fraud must be
one who does not claim to act as an agent and who has proven clearly and convincingly, and the burden of
no authority to bind the person whose signature he has proof lies on the party alleging forgery. (Chiang Yia
forged. (NIL, Sec. 23) Min v. CA, G.R. No. 137932, Mar. 28, 2001.)
-It is the counterfeit making or fraudulent alteration of
any writing and may consist in the signing of another’s By preclusion, the acceptor admits the genuineness of
name, or the alternation of an instrument in the name, the drawer’s signature (NIL, Sec. 62)
amount, description of the person and the like with
intent thereby to defraud. A payee may sue the collecting bank for the amount of
-Forgery is a real or absolute defense by the party the checks it paid under a forged indorsement even
whose sign was forged when the instrument has not been delivered to the
-Note that this section refers only to the parties to the payee
instrument and not to the fraudulent alteration in the The collecting bank is liable to the payee and
amount of the instrument in which case Sec. 124 must bear the loss because it is its legal duty to
applies. Forgery takes place in the following manner ascertain that the payee’s indorsement (signature), its
1. Signing the name of a person without the customer, was genuine before cashing the check. That
latter’s consent and authority there was no delivery yet and therefore he never
2. When the signature is a counterfeit signature became the owner of the check is immaterial since the
of another payee merely used one action to reach, by desirable
3. When the signature is obtained by force or shortcut, the person who ought in any event to be
duress ultimately liable as among the innocent persons. The
payee is allowed to directly recover from the collecting
Q: When is there forgery? bank to simplify proceedings (Westmont Bank v. Ong,
A: When a signature is actually forged or affixed by supra).
one who has no authority to bind the person whose
signature he has forged. (Sec. 23) Rules of forgery of indorsements
a) When an indorsement is forged and the
Some forms of forgery instrument is payable to order, the party whose
1. Fraud in factum- Example: B made a indorsement is forged and all the parties prior
promissory note payable to himself as payee to him, including the maker, shall not be liable
for Php 1000 and signed the name of A as even to holder in due course. An instrument,
maker . Then B indorsed the promissory note payable to order can only be negotiated by
to C. proper indorsement plus delivery and since an
C cannot collect from A on maturity as the indorsement is forged, it is inoperative as to
signature of A was forged and as to him, the parties prior to the forged indorsement because
note was inoperative. C can collect from B, the a valid title is not transferred by the forged
forger of A’s signature since B’s signature is indorsement. However, all indorsers
genuine. A has real defense of forgery and it is subsequent to the forged indorsement whose
avalid even against a holder in due course. signatures are genuine, will be liable to the
2. Fraud in inducement- Example: A issued a PN holder of the instrument because as regular
to B as payee for php5,000 in payment of a indorsers, they warrant that the instrument is
piece of jewelry purportedly a genuine genuine and at the time of their indorsement.
diamond, but which an actual fact is only a b) If the note is originally payablr to bearer, the
paste or a fake [Link] B negotiated party prior to him, including the maker, whose
the note to C. Can C collect from A on
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
 indorsement is forged may be held liable by a enforce the note against X and B but not against M, P
holder in due course only, provided the or A, because were it not for the forgery of X the
instrument is mechanically complete before instrument will not reach the possession of C.
the forgery. The reason is that the forged b. If the instrument is payable to bearer, the
indorsement is not necessary to the title of the indorsement of X is not necessary to vest title to C
holder since an instrument payable to bearer because negotiation on bearer instrument requires only
can be negotiated by mere delivery only. delivery.

Effects of forgery Q: After securing a Pl million loan from B, A drew in

-It does not avoid the instrument but only the forged B's favor a bill of exchange with C as drawee. The bill
signature. In other words, rights may still exist and be reads: "October 1, 2016. Pay to the order of B the sum
enforced by virtue of such instrument as to those of P1 million. To: C (drawee). Signed,”A." A then
signatures thereto are found to be genuine. delivered the bill to B who, however, lost it. It turned
GR: As regard the signature that is forged, the same out that it was stolen by D’ B's brother. D lost no time
shall be wholly inoperative. in forging B's signature and negotiated it to E who
XPNs: acquired it for value and in good faith. May E recover
1. If the party against whom it is sought to on the bill from C, the drawee? Explain. (2016 Bar)
enforce such right is precluded from setting up forgery A: E cannot recover from C, the drawee. The forged
or want of authority; (NIL, Sec. 23) endorsement of B did not result in transfer of title in
2. Where the forged signature is not necessary favor of E as no right can be acquired under such
to the holder’s title, in which case, the forgery may be forged endorsement.
disregarded. (NIL, Sec. 48)
-However, a forged indorsement prevents any Legal consequences when a bank honors a forged
subsequent parties from acquiring any right against check
any party prior to the forgery. Such forged 1. When drawer's signature is forged
indorsement cuts off the rights against prior parties to -Drawee bank is liable because the bank is bound to
the forgery. know the signature of its customers and if it pays a
forged check, it must be considered as making the
Persons precluded from setting up the defense of payment out of its own funds and cannot ordinarily
forgery (2010 Bar) (SEA) charge the amount so paid to the account of the
1. Those who Admit or warrant the depositor whose name was forged. It is also in a
genuineness of the signature such as indorsers, persons superior position to detect the forgery because it has a
negotiating by delivery and acceptor specimen of the signature of the maker. Lastly, by
2. Those who by their acts, silence, or accepting the instrument, it becomes an acceptor who
negligence, are Estopped from claiming forgery admits the genuineness of the drawer’s signature.
3. A holder of a bearer instrument who 2. When the payee’s signature is forged
Subsequently negotiates such instrument with a prior -Drawee bank is liable because it owes to the drawer-
forged indorsement, because in bearer instrument, depositor an absolute and contractual duty to pay the
forged indorsement is not necessary to his title it being check only to the person to whom it is made payable.
negotiably by mere delivery. Drawee bank, in such case, should credit back and
restore to drawer’s account the value of the check
Cut-off Principle wrongfully encashed.
-In order instruments, parties prior to forgery are 3. When the indorser’s signature is forged
relieved or cut-off of liability. They cannot be held -Drawee bank bears the loss as it is under strict
liable by any holder, including a holder in due course. liability to pay the check to the order of the payee.
Payment under forged indorsement is not to the
Liabilities of the parties to a negotiable instrument drawer’s order. Ensuingly, if the drawee bank pays a
where an indorsement is forged check bearing forged signature of indorser, it does so
at its own peril.
However, the drawee bank may pass the
liability to the collecting bank who cannot interpose
the defense of forgery. Under Sec. 16 of NIL the
collecting bank is an indorser who warrants that the
instrument is genuine and in all respect what it
purports to be. The collecting bank had no right to be
paid by the drawee bank since the forged indorsement
a. If the instrument is payable to order and the is inoperative. The collecting bank my ultimately
indorsement of one of the indorsers is forged, C can recover from the forger.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

>NOTE: In all three cases, when the drawer is guilty Php5,000. P then indorsed the note to X (who did not
of negligence, he should bear the loss. He is precluded know about the shabu), and X to Y. Unable to collect
from setting up forgery because the proximate cause of from P, Y then sued X on the note. X set up the
the loss is his own negligence. (Pre-Week Reviewer in defense of illegality of consideration. Is he correct?
Commercial Law, Dimaampao and Escalante) (2011 Bar)
Suggested Answer: No, since X, a general indorser,
Q: Discuss the legal consequences when a bank honors warrants that the note is valid and subsisting.
a forged check.
Q: The drawer’s signature was forged. There is,
A: When drawer's signature is forged – Drawee-bank however, a provision in the monthly bank statement
by accepting the check cannot set up the defense of that if the drawer’s signature was forged, the drawer
forgery, because by accepting the instrument, the should report it within 10 days from receipt of the
drawee bank admits the genuineness of signature of statement to the drawee. The drawer, however failed to
drawer (BPI Family Bank v. Buenaventura, G.R. No. do so. What will be its effect insofar as the drawer’s
148196, Sept. 30, 2005; Secs. 23 and 62). right is concerned?
Unless a forgery is attributable to the fault or A: The failure of the drawer to report the forgery
negligence of the drawer himself, the remedy of the within ten days from receipt of the monthly bank
drawee-bank is against the party responsible for the statement from the drawee bank does not preclude the
forgery. Otherwise, drawee-bank bears the loss. A drawer from questioning the mistake of the drawee
drawee-bank paying on a forged check must be bank despite the provision. (BPI v. CASA Montessor,
considered as paying out of its funds and cannot G.R. No. 149454, May 28, 2004)
charge the amount to the drawer (Samsung
Construction Co. Phils, v. Far East Bank, G.R. No. Q: If forgery was committed by an employee of the
129015, Aug. 13, 2004). drawer whose signature was forged, does the
If the drawee-bank has charged drawer's relationship amount to estoppel such that the drawer is
account, the latter can recover such amount from the precluded in recovering from the drawee bank?
drawee-bank (Associated Bank v. CA, G.R. No. A: No. The bare fact that the forgery was committed
107382, Jan. 31, 1996; BPI v. Case Montessori by an employee of the party whose signature was
Internationale, G.R. No. 149454, May 28, 2004). forged can not necessarily imply that such party’s
However, the drawer may be precluded or negligence was the cause of the forgery in the absence
estopped from setting up the defense of forgery as of some circumstances raising estoppel against the
against the drawee-bank, when it is shown that the drawer. (Samsung Construction Co. v. Far East Bank
drawer himself had been guilty of gross negligence as and Trust Company, G.R. No. 129015, Aug. 13, 2004)
to have facilitated the forgery (Metropolitan
Waterworks v. CA, G.R. No. L-¬62943, July 14, As a general rule, a bank or corporation who has
1986). obtained possession of a check upon an unauthorized
or forged indorsement of the payee’s signature and
Q: The signature of X was forged as drawer of a check. who collects the amount of the check from the drawee,
The check was deposited in the account of Y and is liable for the proceeds thereof to the payee or other
when deposited was accepted by AAA Bank, the owner, notwithstanding that the amount has been paid
drawee bank. Subsequently, AAA Bank found out that to the person from whom the check was obtained. The
the signature of X was actually forged. Which theory of the rule is that the possession of the check on
statement is most accurate? (2012 Bar) the forged or unauthorized indorsement is wrongful
a) The drawee bank can recover from Y, because and when the money had been collected on the check,
the check was deposited in his account. the proceeds are held for the rightful owners who may
b) The drawee bank can recover from X, because recover them. The payee ought to be allowed to
he is the drawer even though his signature was forged. recover directly from the collecting bank, regardless of
c) The drawee bank is estopped from denying the whether the check was delivered to the payee or not.
genuineness of the signature of the X, the drawer of (Westmont Bank (formerly Associated Banking Corp.)
the check. vs. Eugene Ong, G.R. No. 132560, January 30, 2002)
d) The drawee bank can recover from Y because
as endorser he warrants the genuineness of the The possession of a check on a forged or unauthorized
signature. indorsement is wrongful, and when the money is
Suggested Answer: C collected on the check, the bank can be held ‘for
moneys had and received.’ The proceeds are held for
Q: P sold to M 10 grams of shabu worth Php5,000.00. the rightful owner of the payment and may be
As he had no money at the time of the sale, M wrote a recovered by him. The position of the bank taking the
promissory note promising to pay P or his order check on the forged or unauthorized indorsement is the

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

same as if it had taken the check and collected without transact business with the Bank and it did not examine
indorsement at all. The act of the bank amounts to its monthly statement of account and report the
conversion of the check. (Associated Bank and discrepancy to the Bank. The court allocated the
Conrado Cruz, vs. Hon. Court of Appeals, and Merle damages between the bank and the depositor on a 60-
V. Reyes, doing business under the name and style 40 ratio. (Philippine National Bank vs. FF Cruz and
"Melissa’s RTW," G.R. No. 89802, May 7, 1992) Company, G.R. No. 173259, July 25, 2011

It is a rule that when a signature is forged or made While its manager forged the signature of the
without the authority of the person whose signature it authorized signatories of clients in the application for
purports to be, the check is wholly inoperative and no manager’s checks and forged the signatures of the
right to retain the instrument, or to give a discharge payees thereof, the drawee bank also failed to exercise
therefor, or to enforce payment thereof against any the highest degree of diligence required of banks in the
party, can be acquired through or under such signature. case at bar. It allowed its manager to encash the
However, the rule does provide for an exception, Manager’s checks that were plainly crossed checks. A
namely: "unless the party against whom it is sought to crossed check is one where two parallel lines are
enforce such right is precluded from setting up the drawn across its face or across its corner. Based on
forgery or want of authority." In the instant case, it is jurisprudence, the crossing of a check has the
the exception that applies as the petitioner is precluded following effects: (a) the check may not be encashed
from setting up the forgery, assuming there is forgery, but only deposited in the bank; (b) the check may be
due to his own negligence in entrusting to his secretary negotiated only once — to the one who has an account
his credit cards and checkbook including the with the bank; and (c) the act of crossing the check
verification of his statements of account. (Ramon K. serves as a warning to the holder that the check has
Ilusorio vs. Hon. Court of Appeals, G.R. No. 139130, been issued for a definite purpose and he must inquire
November 27, 2002) if he received the check pursuant to this purpose;
otherwise, he is not a holder in due course. In other
A forged signature is a real or absolute defense, and a words, the crossing of a check is a warning that the
person whose signature on a negotiable instrument is check should be deposited only in the account of the
forged is deemed to have never become a party thereto payee. When a check is crossed, it is the duty of the
and to have never consented to the contract that collecting bank to ascertain that the check is only
allegedly gave rise to it. The counterfeiting of any deposited to the payee’s account. (Philippine
writing, consisting in the signing of another’s name Commercial International Bank vs. Balmaceda, G.R.
with intent to defraud, is forgery. (Bank of the No. 158143, September 21, 2011)
Philippine Islands vs. Casa Montessori Internationale
and Leonardo T. Yabut, G.R. No. 149454, May 28, Q: X fraudulently obtained possession of the check and
2004) forged P’s signature and then indorsed and deposited
the check with XYZ bank which honored the check
Even if the bank performed with utmost diligence, the and placed the amount thereof to his credit. Thereafter,
drawer whose signature was forged may still recover XYZ Bank indorsed the check to the drawee bank-
from the bank as long as he or she is not precluded ABC bank which paid it and charged the account of
from setting up the defense of forgery. After all, the drawer. Illustrate the liability of a drawer and a
Section 23 of the Negotiable Instruments Law plainly drawee-bank in an 1) instrument payable to order and
states that no right to enforce the payment of a check in an 2) instrument payable to bearer in case of a
can arise out of a forged signature. Since the drawer is forgery on payee’s signature.
not precluded by negligence from setting up the
forgery, the general rule should apply. (Samsung Pay to P or order P10,000.
Construction Company Philippines, Inc. vs. Far East (Sgd)D
Bank and Trust Company and Court of Appeals, G.R. To: ABC Bank
NO. 129015, August 13, 2004)
A:
As between a bank and its depositor, where the bank’s 1. If the instrument is payable to order:
negligence is the proximate cause of the loss and the a. The drawee bank is liable to the drawer for
depositor is guilty of contributory negligence, the the amount of the check and his account cannot be
greater proportion of the loss shall be borne by the charged because the indorsement of the payee is a
bank. The bank was negligent because it did not forgery. Hence, it is wholly inoperative and therefore,
properly verify the genuineness of the signatures in the ABC Bank has no right to ask the drawer for its
applications for manager’s checks while the depositor payment.
was negligent because it clothed its b. XYZ Bank is however, liable to the drawee
accountant/bookkeeper with apparent authority to bank because of his warranty as an indorser. (NIL, Sec.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

66)
c. D, the drawer, is not liable on the check Parties who cannot set up defense of forgery:
because its order is to pay P or his order and not to any 1. Drawee/Acceptor- shall be liable to the holder of the
other person. instrument even if the drawer’s signature is really
2. If the instrument is payable to bearer: forged, because at the time of making his acceptance,
a. ABC Bank, the drawee-bank, may charge he warrants that the drawer’s signature is genuine (Sec.
the amount thereof to the account of the drawer 62)
because the forged indorsement did not prevent the 2. Indorser- An indorser shall be liable because he
transfer of title. The remedy of the drawer is against warrants among other things the genuiness of the
the forger. signature of all prior parties at the time of his
b. Drawer has no cause of action against indorsement (Sec. 66)
collecting bank, since the duty of collecting bank is 3. Person negotiating by mere delivery- A person
only to the payee (Manila Lighter Transportation, Inc. negotiating an instrument payable to bearer shall be
v. CA, G.R. No. L-50373 February 15, 1990). The liable because he warrants that the instrument is
drawee-bank can recover from the collecting bank genuine and the forged signature is not necessary to
because even if the indorsement on the check the title of the holder.
deposited by the bank's client is forged, collecting
bank is bound by its warranties as an indorser and C. FORGERY
cannot set up defense of forgery as against drawee 1. “Associated Bank vs. Court of Appeals”, G.R.
bank (Associated Bank v. CA, supra). No. 107382, Jan. 31, 1996
2. “Westmont Bank (formerly Associated
Some forms of forgery: Banking Corporation) vs. Eugene Ong”, G.R. No.
1. Fraud in Factum- B made a promissory note payable 132560, Jan. 30, 2002
to himself as payee for P1,000 and signed the name of 3. “Allied Banking Corp. vs. Lim Sio Wan,
A as maker. Then B indorsed the PN to C. C cannot Metrobank and Producer’s Bank”, G.R. No. 133179,
collect on maturity from A. Note is inoperative. Mar. 27, 2008
2. Fraud in inducement- A issued a promissory note to 4. “Samsung Construction Co. Phils. vs. Far East
B as payee for P5,000 in payment of a piece of jewelry Bank”, G.R. No. 129015, Aug. 13, 2004
purportedly a genuine diamond but which in actual fact 5. “Phil. Commercial Int’l Bank vs. Balmaceda”,
is only a fake diamond. G.R. No. 158143, Sep. 21, 2011
3. Duress amounting to forgery- takes place when B 6. “Ramon K. Ilusorio vs. Hon. Court of
takes A’s hand and by sheer force makes A sign his Appeals”, G.R. No. 139130, November 27, 2002
name in the promissory note. B cannot collect from A 7. “Philippine National Bank vs. FF Cruz and
on maturity as the note becomes operative Company”, G.R. No. 173259, July 25, 2011
8. “Bank of the Philippine Islands vs. Casa
Rules on forgery of indorsements: Montessori Internationale and Leonardo T. Yabut,”
a. When an indorsement is forged and the instrument is G.R. No. 149454, May 28, 2004
payable to order, the party whose indorsement is
forged and all the parties prior to him, including the
maker, shall not be liable even to holder in due course.
An instrument, payable to order can only be negotiated
by proper indorsement plus delivery and since an
indorsement is forged, it is inoperative as to parties
prior to the forged indorsement because a valid title is
not transferred by the forged indorsement. However,
all indorsers subsequent to the forged indorsement
whose signatures are genuine, will be liable to the
holder of the instrument because as regular indorsers,
they warrant that the instrument is genuine at the time
of their indorsement.
b. If the note is originally payable to bearer, the party
prior to him, include the maker, whose indorsement is
forged may be held liable by a holder in due course
only, provided the instrument is mechanically
complete before the forgery. The reason is that the
forged indorsement is not necessary to the title of the
holder since an instrument “payable to bearer” can be
negotiated by mere delivery only

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Consideration affect the negotiability of the check as it merely
-It is an inducement to a contract that is the cause, constitutes a defect of title under Sec. 55 of the NIL.
price or impelling influence, which induces a party to
enter into a contract. Holder for value
NOTE: Every negotiable instrument is deemed prima -A holder for value is one who has given a valuable
facie to have been issued for a valuable consideration. consideration for the instrument. A holder for value is
(NIL, Sec. 24) deemed as such not only as regards the party to whom
the value has been given to by him but also in respect
-Cause or consideration is one of the essential elements to all those who became parties prior to the time when
of a contract and the absence or lack of it will render value was given.
the contract void. A NI is a contract between the maker -Example:
or drawer and the payee. There is a presumption that A, maker, issued a PN to B, payee , without receiving
there exists a “valuable consideration” between them value for it.. Then B indorses it to C who didn’t pay or
to make an instrument valid. give any valuable consideration for the indorsement to
him. C then negotiated it to D who gave C value for
-The burden of proof is on the party asserting absence the indorsement. D, therefore becomes a holder for
on failure of consideration. value with respect to A, B and C.

A check constitutes an evidence of indebtedness and is NOTE: Where the holder has a lien on the instrument
a veritable proof of an obligation. Thus, based on Sec. arising either from contract or by implication of law,
24 of the NIL, checks complete and delivered to a he is deemed a holder for value to the extent of his
person by another are sufficient by themselves to prove lien. (NIL, Sec. 27)
the existence of the loan obligation obtained by the Example: A executed PN in favor of B worth 5,000.
latter from the former. (Ting Ting Pua v. Spouses Later, B, borrowed 3,000 from C and as a collateral for
Tiong and Caroline Teng, G.R. No. 198660, October the loan, B indorsed the above PN note to C as
23, 2013, in Divina, 2014) follows:
“Pay to C for 3,000”
Q: Lorenzo drew a bill of exchange in the amount of -partial indorsement is not valid. The rule states that all
P100,000.00 payable to Barbara or order, with his indorsements must be full indorsements meaning the
wife, Diana, as drawee. At the time the bill was drawn, full amount payable in the negotiable instrument must
Diana was unaware that Barbara is Lorenzo’s be indorsed so as to avoid multiplicity of suits which is
paramour. Barbara then negotiated the bill to her sister, not contemplated by law.
Elena, who paid for it for value, and who did not know -C is only a holder for value to the extent of his lien of
who Lorenzo was. On due date, Elena presented the 3,000.
bill to Diana for payment, but the latter promptly
dishonored the instrument because, by then, Diana had Value
already learned of her husband’s dalliance. Does the -It is any consideration sufficient to support a simple
illicit cause or consideration adversely affect the contract. An antecedent or pre-existing debt constitutes
negotiability of the bill? Explain. (2009 Bar) value and is deemed such whether the instrument is
A:NO, the illicit cause or consideration does not payable on demand or at a future time. (NIL, Sec. 25)
adversely affect the negotiability of the bill, especially
in the hands of a holder in due course. Under Sec. 1 of Valuable consideration- may be said to consists in
the Negotiable Instruments Law, the bill of exchange some right, interest, profit or benefit accruing to the
is a negotiable instrument. Every negotiable instrument party who makes the contract such as the maker or
is deemed prima facie to have been issued for valuable drawer. Or it may be some forebearance, detriment,
consideration, and every person whose signature loss or labor, or service given, suffered by the other
appears thereon is deemed to have become a party party such as the payee.
thereto for value. ( Sec. 24, NIL)
Consideration not capable of pecuniary estimation are
Q: R issued a check for P1M which he used to pay S not considered valuable consideration such as
for killing his political enemy. Can the check be 1. love and affection
considered a negotiable instrument? (2007 Bar) 2. mere moral obligations
A: YES. The check can be considered as a negotiable 3. gratitude
instrument since it complied with the requirements of 4. service rendered out of kindness, without
negotiability under Sec. 1 of the Negotiable expectation of reward
Instruments Law. The unlawful consideration for the
issuance of the check is of no moment and will not Want or absence of consideration [Link] of
consideration (1996, 2007 Bar)

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

 Want or absence of Failure of consideration, When Z deposited the check to her
consideration consideration account, check was dishonored for insufficiency of
Total lack of any valid Failure or refusal of one funds. Is Z a holder in due course? Explain your
consideration for the of the parties to do, answer. (2012 Bar)
contract perform or comply with Suggested Answer: No. Z is NOT an HIDC. Under
the consideration agreed Sec. 52 (c), it is expressly provided that the instrument
upon must be acquired in good faith and for value to
consider her an HIDC.
Effect of want of consideration (See Sec. 28)
It is a matter of defense as against any person not a D. CONSIDERATION
holder in due course, thus, a personal defense. (NIL, 1. “Travel-On, Inc. vs. Court of Appeals and
Sec. 28) Arturo S. Miranda”, G.R. No. L-56169, June 26, 1992
2. “Remigio S. Ong vs. People of the Philippines
Q: What is the effect of want or failure of and Court of Appeals”, G.R. No. 139006, November
consideration? 27, 2000
A: It becomes a matter of defense as against any 3. “Cayanan v. North Star International Travel
person not a HIDC, thus, merely a PERSONAL Inc.”, G.R. No. 172954, October 5, 2011
defense. (Sec. 28)

Personal defenses about consideration:

1. Absence or lack of consideration-when there is lack
of consideration or when the consideration is not valid
2. Failure of consideration- it is the neglect, inability or
failure to give or perform the consideration agreed
upon by the parties.
3. Partial failure of consideration Partial failure of
consideration is a defense pro tanto, whether the
failure is an ascertained and liquidated amount or
otherwise. “pro tanto” means to such an extent, in
proportion or for so much. If the maker has the defense
pro tanto, the holder not in due course can collect on
the instrument only to the extent of the valid
consideration. However, if the holder is a holder in due
course, he can collect the full amount of the instrument
from the party primarily liable.

Example
1. Absence or lack of consideration -A issued a
PN to B for payment of stock certificated
which turned out to be fake. B cannot collect
from A on maturity. A has a personal defense
of absence or lack of consideration. IG B,
indorses the PN to C, can C collect if
a. He is only a holder for value- No
b. Holder in due course? Yes. A personal
defense if not valid against C as a
holder in due course

Inadequacy of consideration
GR: Inadequacy of consideration does not invalidate
the instrument.
XPN: There has been fraud, mistake or undue
influence. (NCC, Art. 1355)

Q: X borrowed money from Y in the amount of

Php1Million and as payment, issued a check. Y
then indorsed the check to his sister Z for no

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Accommodation party available to the AP with the exception of such defenses
as bankruptcy and lack of capacity
An accommodation party is one who has signed the
-A person who signs the instrument either as an
instrument as maker, drawer, acceptor, or indorser,
accommodation drawer or accommodation indorser
without receiving value therefor, and for the
becomes a party secondarily liable and becomes liable
purpose of lending his name to some other person.
on the instrument only after the instrument has been
Such person is liable on the instrument to a holder
dishonored by non-acceptance or non-payment. The
for value, notwithstanding such holder at the time
required notice of dishonor is given to all the parties
of taking the instrument knew him to be only an
secondarily liable
accommodation party (NIL, Sec. 29)
-SC: In lending his name to the accommodated party, Relationship between accommodated party and the
the accommodation party is in effect a surety for the accommodation party is that of a principal and a
latter. He lends his name to enable the accommodated surety.
party to obtain credit or to raise money. He receives no -The accommodated party being the principal and the
part of the consideration but assumes liability to the accommodation party, the surety and in determining
other parties thereto because he wants to accommodate their respective rights, the law on suretyship will
another. apply.

Accommodation instrument Q: Susan Kawada borrowed P500,000 from XYZ Bank

-Ordinarily a note or any other form of negotiable which required her, together with Rose Reyes who did
instrument is made for the purpose of enabling the not receive any amount from the bank, to execute a
payee to obtain credit and as such it has no validity promissory note payable to the bank, or its order on
until it passes into the hand of a holder for value stated maturities. The note was executed as so agreed.
-One to which the accommodation party has his name What kind of liability was incurred by Rose, that of an
without consideration for the purpose of accommodation party or that of a solidary debtor?
accommodating some other party who is to use it is Explain. (2003 Bar)
expected to pay it. A: Rose incurs the liability of an accommodation party
since she executed the promissory without receiving
Requisites to be an accommodation party (SNoL) value therefor and for the purpose of lending his name
1. Accommodation party must Sign as maker, drawer, to Susan Kawada, the accommodated party.
acceptor or indorser Nonetheless, as an accommodation maker, Rose is
2. No value is received by the accommodation party primarily and unconditionally liable on the promissory
from the accommodated party note to a holder for value, regardless of whether she
3. The purpose is to Lend the name; or that he is stands as a surety or solidary co-debtor since such
merely lending his name and credit to another person distinction would be entirely immaterial and
known as the accommodated party inconsequential as far as a holder for value is
4. That he becomes liable solidarily as a surety, and concerned.
can be held directly liable by the holder of the
negotiable instrument. Q: Juan Sy purchased from “A” Appliance Center one
NOTE: It does not mean, however, that one cannot be generator set on installment with chattel mortgage in
an accommodation party merely because he has favor of the vendor. After getting hold of the generator
received some consideration for the use of his name. set, Juan Sy immediately sold it without consent of the
The phrase “without receiving value therefor” only vendor. Juan Sy was criminally charged with estafa.
means that no value has been received “for the To settle the case extra judicially, Juan Sy paid the
instrument” and not “for lending his name.” sum of P20,000 and for the balance of P5,000.00 he
executed a promissory note for said amount with Ben
In a bill of exchange, the accommodation party may Lopez as an accommodation party. Juan Sy failed to
sign the instrument as pay the balance.
1. Accommodation drawer a. What is the liability of Ben Lopez as an
2. Accommodation acceptor accommodation party? Explain.
b. What is the liability of Juan Sy? (2003 Bar)
Liability of accommodation parties A:
-AP shall be held solidarily liable on the instrument on a. Section 29 of the Negotiable Instruments Law
the instrument although the holder thereof knows that provides that an accommodation party is liable on
he is only an accommodating party the instrument to a holder for value, notwithstanding
-A person who signs an instrument either as an AM or that such holder at the time of taking the instrument
AA becomes a party primarily liable on the instrument knew him to be only an accommodation party. As an
to subsequent holders but he acquires all defenses accommodation party, Ben Lopez is primarily and

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

unconditionally liable on the promissory note to a under COHLA for the unpaid periodic interest dues
holder for value as if the contract was not for from the loans of Gonzales and the spouses Panlilio.
accommodation. Gonzales, through counsel, wrote PCIB insisting that
b. Under Section 14 of the NIL, Juan Sy is primarily the check he issued had been fully funded, and
liable to the extent of P5,000 in the hands of a holder demanded the return of the proceeds of his FCD as
in due course. However, if Ben Lopez paid the note, well as damages for the unjust dishonor of the check.
Juan Sy has the obligation to reimburse the former to Was it proper for PCIB to dishonor the check issued by
the extent of the amount paid. Gonzales against the credit line under the COHLA?
A: NO. While a maker who signed a promissory note
Q: Dagul has a business arrangement with Facundo. for the benefit of his co-maker (who received the loan
The latter would lend money to another, through proceeds) is considered as an accommodation party, he
Dagul, whose name would appear in the promissory is, nevertheless, entitled to a written notice on the
note as the lender. Dagul would then immediately default and the outstanding obligation of the party
indorse the note to Facundo. Is Dagul an accommodated. There being no such written notice,
accommodation party? Explain. (2005 Bar) the Bank is grossly negligent in terminating the credit
A: NO. An accommodation note is one to which the line of the accommodation party for the unpaid interest
accommodation party has put his name, without dues from the loans of the party accommodated and in
consideration, for the purpose of accommodating some dishonoring a check drawn against such credit line
other party who is to use it and is expected to pay it. (Eusebio Gonzales v. Philippine Commercial and
The accommodation is not one to the person who takes International Bank, Edna Ocampo, and Roberto
the note — that is, the payee or indorsee, but one to the Noceda, G.R. No. 180257, February 23, 2011).
maker or indorser of the note. In this case, the indorser,
Dagul, in making the indorsement to the lender, Extent of liability of an accommodation party (R2C)
Facundo, was merely acting as agent for the latter or, 1. Right to Revoke accommodation – before the
as a mere vehicle for the transference of the naked title instrument has been negotiated for value.
from the borrower or maker of the note and was not 2. Right to Reimbursement from the accommodated
acting as an accommodation party. party – the accommodated party is the real debtor.
Hence, the cause of action is not on the instrument but
Accommodation party vs. Regular party on an implied contract of reimbursement.
Accommodation party Regular Party 3. Right to Contribution from other solidary
Signs an instrument Signs the instrument accommodation maker (Sadaya v. Sevilla, G.R. No. L-
without receiving value for value (NIL, Sec. 24) 17845, April 27, 1967).
therefor
Purpose of signing is to Not for that purpose Accommodation party cannot raise the defense of
lend his name to another absence or want of consideration
person An accommodation party who lends his name to
May always show, by Cannot disclaim enable the accommodated party to obtain credit or
parol evidence, that he is personal liability by raise money is liable on the instrument to a holder for
only such parol evidence value even if he receives no part of the consideration.
Cannot avail of the May avail of such He assumes the obligation to the other party and binds
defense of defense himself to pay the note on its due date. By signing the
absence/failure of note, the accommodation party thus became liable for
consideration against a the debt even if he had no direct personal interest in
holder not in due course the obligation or did not receive any benefit therefrom
May sue reimbursement May not use (Dela Rama v. Admiral United Savings Bank, G.R.
after paying the No. 154740, April 16, 2008).
holder/subsequent
party Holder for value may recover from an accommodation
party notwithstanding his knowledge that the
accommodation party is only signing as such
Q: PCIB granted a credit line to Gonzales through the
execution of the COHLA. Gonzales drew from said Q: For the purpose of lending his name without
credit line through the issuance of check. Gonzales receiving value therefor, Pedro makes a note for
issued a check in favor of Rene Unson, drawn against P20,000 payable to the order of X, who in turn
the credit line. However, upon presentment for negotiates it to Y, the latter knowing that Pedro is not a
payment by Unson of said check, it was dishonored by party for value.
PCIB due to the termination by PCIB of the credit line a. May Y recover from Pedro if the latter interposes
the absence of consideration?

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

b. Supposing under the same facts, Pedro pays the said The check was dishonored upon presentment on due
Php20,000.00 may he recover the same amount from date for insufficiency of funds.
X? (1990, 1996, 1998 Bar) a. Is Saad liable on the check as an accommodation
A: party?
a. YES, Y may recover from Pedro. Section 29 of the b. If it is not, who then, under the above facts, is/are
NIL provides that a person who has signed the liable? (1991 Bar)
instrument as maker, drawer, acceptor, or indorser, A:
without receiving value therefor, and for the purpose a. NO, Saad is not liable as an accommodation party.
of lending his name to some other person is liable on This is because the issue or indorsement of negotiable
the instrument to a holder for value, notwithstanding paper by a corporation without consideration and for
the fact that such holder at the time of taking the the accommodation of another is ultra vires. Hence,
instrument knew him to be only an accommodation one who has taken the instrument with knowledge of
party. Pedro, being an accommodation maker of a the accommodation nature thereof cannot recover
note, may thus be held primarily and unconditionally against a corporation where it is only an
liable therefor. accommodation party. While it may be legally possible
b. YES, Pedro may recover from X. When the for a corporation whose business is to provide financial
accommodation party makes payment to the holder of accommodations in the ordinary course of business,
the note, he has the right to sue the accommodated such as one given by
party for reimbursement, since the relation between a financing company, to be an accommodation party,
them is in effect that of principal and surety, the this situation, however, is not the case at bar.
accommodation party being the surety. Thus, after b. Considering that both the President and the Vice-
paying the holder, Pedro may seek reimbursement President were signatories to the accommodation, they
from X, the accommodated party. themselves can be subject to the liabilities on
accommodation parties to the instrument in their
Q: As a rule under the NIL, a subsequent party may personal capacity. (Crisologo-Jose v. CA, G.R. No.
hold a prior party liable but not vice-versa. Give 2 80499, September 15, 1989)
instances where a prior party may hold a subsequent
party liable. (2008 Bar) Effect of payment of the instrument:
A: A party may hold a subsequent party liable in the 1. By the accommodated party
following instances: (1) in case of an accommodated -the payment in due course made by the
party; and (2) in case of an acceptor for honor. An accommodation party discharges the instrument and
accommodation party may hold the party the accommodation party is likewise discharged (Se.
accommodated liable to him, even if the party 119)
accommodated is a subsequent party. The relation 2. By the accommodation party
between them is that of principal and surety. For the - If the accommodation party pays the instrument, he
same reason, an acceptor for honor may hold the party has the right to recover from the accommodated party
for whose honor he accepted a bill of exchange liable -If the accommodated party has given a collateral or
to him. A payer for honor is subrogated to the rights of security to the holder who has knowledge if the
the holder as regards the party for whose honor he paid accommodation, the accommodation party, after
and all parties liable to the latter. paying the holder is entitled to receive security from
the holder and keep it until the accommodated party
Accommodation made by a corporation has reimbursed him.
Q: On June 1, 1990, A obtained a loan of ₱100,000 -If the holder knows that the party primarily liable is
from B, payable not later than December 20, 1990. B an accommodation party, and he surrenders or returns
required A to issue him a check for that amount to be the collateral or security to the accommodated party
dated December 20, 1990. Since he does not have any without receiving payment from the latter, then the
checking account, A, with the knowledge of B, accommodation party will be discharged from his
requested his friend, C, President of Saad Banking liability to the extent of the value of the collateral or
Corporation (Saad) to accommodate him. C agreed, he security which the holder surrenders to the
signed a check for the aforesaid amount dated accommodated party
December 20, 1990, drawn against Saad’s account
with the ABC Commercial Banking Co. The By-laws Examples of accommodation party
of Saad requires that checks issued by it must be 1. In a promissory note
signed by the President and the Treasurer or the Vice- -As an accommodation maker
President. Since the Treasurer was absent, C requested B needs money and want to borrow from A. Wanting
the Vice-President to co-sign the check, which the to help and accommodate B, A executes a promissory
latter reluctantly did. The check was delivered to B. note in favor of B, payee. In this case, A is the
accommodation maker and B is the accommodated

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

payee. A is the party primarily liablel to the holder 5. Indorser- He will indore the instrument after
even if the holder knows that he is only an the indorsee has taken delivery of it but before
accommodation maker the indorsee negotiates it.
-As an accommodation co-maker
B wants to buy something from C but C does not want As a rule, the relationship between the accommodated
ot accept C’s credit. C is willing to accept a PN from B party and the accommodation party is that of a
if the latter will secure signature of A as his co-maker. principal and a surety. In determining their rights, the
“It promised to pay to the order of C the sum of 5,000 law on suretyship will apply.
30 days after the date.” A is the accommodation co-
maker of B and he will be solidarily liable to C or to E. ACCOMMODATION PARTY
any subsequent holder thereof. 1. “Ang Tiong vs. Lorenzo Ting (doing business
-As an accommodation indorser under Prunes Preserves) & Felipe Ang”, G. R. No.
B is willing to sell something to A and will accept A’s 26767, Feb. 22, 1968
promissory note for 30 days if A will have X as his 2. “GSIS vs. CA”, G.R. No. L-40824, Feb. 23,
accommodation indorser. So A executes a PN with B 1989
as payee but before A issues the note to B, he first 3. “Aglibot vs. Santia”, G.R. No. 185945, Dec. 5,
secures the signature of X in blank as the first indorser 2012
on the note.
“I promise to pay to the order of B php5,000 30 days
after date”
A issues the above PN to B with the signature of X in
the blank already affixed at the back of the note as the
first indorser. A is the accommodation indorser. X is
only a party secondarily liable.

2. In a bill of exchange
-As an accommodation drawer
“Pay to the order of B P1,000 on December 31, 1995”
Sgn A (drawee)
To X
Manila (drawee)B needs 1000 and A wants to help him
secure said amount by drawing the bill. A is the
ADrawer and B is th Apayee. A, the accommodation
drawer is a party secondarily liable
-As an accommodation drawee/acceptor
A draws a BOE in favor of B, payee, for a valuable
consideration against X, drawee. Although A has no
funds in his possession, when B presents the bill to X
for acceptance, X without receiving value from A,
accepts the bill merely to lend his name and credit to
A. In this case, A is the Aparty and C is the Aacceptor.
X is the party primarily liable.
-As an accommodation indorsee
A person may signa a negotiable instrument as an
accommodation indorser for the ff: circumstances
1. Maker- As discussed in the preceeding page,
the accommodation indorser will affix his
signature in the blank as the first indorser of
the PN before the maker issues it to the payee
2. Drawer- The accommodation indorser will
also sign his name in the blank as the first
indorser of the bill of exchange before the
drawee issues it to the payee.
3. Acceptor- he will indorse the instrument at the
time it is accepted.
4. Payee- he will indorse the instrument after it is
delivered to the payee but before the payee
negotiated it.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

1. Maturity of an updated instrument issued c) non-negotiable bec. the puoi, of each installment
payable 30 days after date is computed from: is not indicated
a) the last indorsement d) none of the above
b) date of issue
c) the first presentment of acceptance 9. “I promise to pay to the order of B P5,000 at
d) the date of the first indorsement 10% interest p.a. on Dec. 31, 2001”, the maker
will pay:
2. Maturity of an undated negotiable instrument a) P5,500 at the end of the year
payable 30 days after sight is computed from: b) P5,000 (principal) plus P500 (interest)
a) the date of issue c) 5,500 plus additional interest
b) the date of first indorsement d) none of the above.
c) the date of the instrument
d) the date of the first presentment for acceptance 10. "Pay to the order of B P10,000 out of the
rentals of my apartmentes on June 30, 2001
3. An instrument is made payable to bearer when: a) non-negotiable bec. payment will come from a
a) it is indorsed by mere delivery particular fund
b) it is properly indorsed plus delivery b) negotiable bec. payment is indicated
c) it is indorsed by a blank indorsement c) valid bec. payment will come from a particular
d) it is made by proper indorsement only fund
e) both (a) and (c) d) none of the above.
f) both (b) and (d)
11. "Pay to the order of B P10,000 10 days after
4. A N.I. payable to a fictitious or non-existing his father dies" is a B/E payable:
person, and such fact is known to the maker or a) on demand
drawer is payable to: b) at a determinable future time
a) the bearer c) subject to a condition
b) the maker or drawer himself d) non-negotiable because date of payment is
c) it is non-negotiable indefinite
d) none of the above
12. "Pay to the order of B P5,000 on Dec. 31,
5. The Holder in a negotiable instrument is one: 2001, and you may reimburse yourself from the
a) to whom the N.I. is indorsed but not delivered monthly rentals of my apartments"
b) to whom the N.I. is delivered but not indorsed a) Negotiable bec. reimbursement from a particular
c) who is both the last indorsee and possessor of fund
the N.I. b) non-negotiable bec. payment to B will come
d) to whom the N.I. is both indorsed and delivered from drawee's
own funds
6. An instrument is considered negotiable if it is: c) non-negotiable bec. payment will be by
a) payable in money and in kind installments
b) payable in kind only d) none of the above.
c) payable in money only
d) payable in money or in kind at the option of the 13. B sold to A a stolen Sony Betamax for which
holder A issued a negotiable instrument payable 30 days
e) both (a) and (b) after date:
f) both (c) and (d) a) B can collect from A in 30 days after the P/N
has been issued
7. "I promise,to pay B or Order P10,000 on b ) B cannot collect from A bec. there is failure of
Christmas" is: consideration
a) valid and negotiable c) B cannot collect bec. there is absence or lack of
b) non-negotiable consideration
c) payable on December 25, 1999 d) B can collect bec. as to A there is a valid
d) payable on Christmas eve. consideration.

8. "Pay to the order of 210,000 on installment" is: 14. A N.I. is payable on demand when:
a) payable in five installments of P2,000 per a) when the N.I. is so expressed to be payable on
installment demand
b) payable in whatever amount for installment b) when the N.I. is indorsed already overdue

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

c) when the last indorsementis a blank indorsement
d) all of the above

15. An instrument payable to bearer is negotiated

by:
a) assignment
b) operation of law
c) special indorsement
d) blank indorsement plus delivery

16. An accommodation party is one who:

a) signs the Instrument as a maker, drawer or
drawee
b) does not receive any part of the consideration
c) merely lends his name and credit to another
party
d) becomes liable as a Surety
e) all of the above
d) none of the above.

17. When Payee fails to deliver the agreed

consideration, payor may refuse to pay bec there
is:
a) Absencce or lack of consideration
b) jailure of consideration
c) partial failure of consideration
d) none of the above

18. "I promise to pay to the...order of B. C and. D.

P30,000 on Dec. 31, 2001." (sgd) X and Y.
a) X and Y will be personally liable to pay B, C, &
D P15,000 each.
b) X an Y will be solidarily liable to the Payees, B,
C and D.
c) X and Y will be jointly liable to B, C D.
d) none of the above.

19. A N.I. may be transferred from one person to

another by:
a) Assignment
b) Operation of Law
c) Negotiation
d) all of them
e) none of them.

20. Name and explain briefly the different kinds of

Indorsements
a) Special Indorsement
b) Blank Indorsement
c) Restrictive Indorsement
d) Qualified Indorsement
e) Conditional Indorsement
f) Facultative Indorsement

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Negotiation the assignor.
Negotiation is the transfer of an instrument from one As to liability and right of recourse
person to another so as to constitute the transferee the The holder can hold the The transferee has no
holder thereof. (NIL, Sec. 30) drawer and the right of recourse for
indorsers liable if the payment against
NOTE: A holder is the payee or indorsee of a bill or party primarily liable immediate parties.
note, who is in possession of it, or the bearer thereof. does not pay.
(NIL, Sec. 191) As to defenses available
Any defense available
Modes of transfer of an instrument: (similar below but against the transferor is
using different terms) available against the
1. By assignment transferee
-assignment by contract is in effect a sale by the As to notice
assignor to the assignee of the former’s rights under Notice is not necessary Notice of the assignment
the contract. to the debtor is required
-When the holder of negotiable instrument payable to
order transfer it to another person without the proper A negotiable instrument is an intangible personal
indorsement, such transfer operates as an equitable property which is generally transferred by negotiation
assignment and not a negotiable instrument (Sec. 49) and may be accomplished as follows:
2. By operation of law
-Title to an instrument may pass to another person, not Modes of Negotiation
by assignment or negotiation, but by operation of law If payable to bearer -Negotiated by mere
in the following instances: (Art. 1178 NCC) delivery or by blank
a. by death of the holder- his right to collection indorsement plus
on the instrument is passed on to his estate or personal delivery if originally
representative or heirs. payable to order
b. by bankruptcy of holder- if holder is If payable to order -Negotiated by the
adjudged bankrupt before the maturity of the indorsement of the
instrument, the title to the promissory note pasess to holder,
his trustee or assignee completed by delivery
3. By negotiation
- negotiation is the transfer of a negotiable instrument Remember: In both kinds of instrument, the
from one person to another in such a manner as to
negotiation is not complete until delivery is made.
constitute the transferee the holder of the instrument Indorsement alone without delivery conveys no title
and as previously stated, the indorser may still revoke
Methods of transferring an instrument: his indorsement. And delivery of an instrument
1. Issuance – first delivery of the instrument complete payable to order without the necessary indorsement
in form to a person who takes it as a holder. does not constitute a negotiation but merely an
2. Negotiation equitable assignment.
3. Assignment – transfer of the title to the instrument,
with the assignee generally taking only such title as his Q: Ligaray charged Wagas with estafa, alleging that
assignor has, subject to all defenses available against
Wagas placed an order of 200 bags of rice over the
the assignor. telephone with a post-dated check payable to cash as
payment. The seller Ligaray delivered the rice to
Negotiation Assignment Cañada, brother-in-law of Wagas. In turn Ligaray
As to the subject instrument received a post-dated check issued by Wagas, which
Only a negotiable Non-negotiable was later on dishonored due to insufficiency of funds.
instrument may be instrument may be During trial, Wagas averred that he issued the check to
negotiated. assigned absent any Cañada, and that it was the latter who had transacted
prohibition against with Ligaray. While admitting that he signed a letter
assignment written on its acknowledging his debt to Ligaray, Wagas insisted that
face. he signed the same just to accommodate the pleas of
As to rights acquired his sister and her husband Cañada. Is Wagas guilty of
The transferee, if he is a The transferee does not estafa?
HIDC may acquire become a holder and can A: NO. Under the NIL (Sec. 9 and Sec. 30), a check
better have no better right than made payable to cash is payable to the bearer and
rights than his his transferor; he merely could be negotiated by mere delivery without the need
transferor. steps into the shoes of of indorsement. This rendered it highly probable that
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
Wagas had issued the check not to Ligaray, but to Q: What is the effect when an order instrument was
somebody else like Cañada, his brother-in-law, who delivered without indorsement?
then negotiated it to Ligaray. A: The transfer operates as an ordinary assignment
It bears stressing that the accused, to be guilty (Sec.49). The transfer vests in the transferee such title
of estafa as charged, must have used the check in order as the transferor had therein and the transferee acquires
to defraud the complainant. What the law punishes is in addition the right to have the indorsement of the
the fraud or deceit, not the mere issuance of the transferor.
worthless check. The proof of guilt must still clearly Note: For the purpose of determining whether the
show that it had been Wagas as the drawer who had transferee is a HIDC, the negotiation takes effect at the
defrauded Ligaray by means of the check (People v. time when the indorsement is actually made. (ibid.)
Gilbert Wagas, G.R. No. 157943, September 4, 2013).
Delivery of an order instrument without indorsement
Delivery of negotiable instruments If an order instrument is not indorsed, the negotiation
-Delivery means transfer of possession, actual or is incomplete and the instrument is in effect merely
constructive, from one person or another. (NIL, Sec. assigned. The transferee acquires the right to have the
191) indorsement of the transferor. It is only at the time of
indorsement that negotiation takes effect and the
NOTE: Where the instrument is no longer in the transferee acquires the rights of a holder. (NIL, Sec.
possession of the party whose signature appears 49)
thereon, there is a prima facie presumption of a valid
and intentional delivery by him. (NIL, Sec. 16) Negotiation by a prior party
Bearer instrument is negotiated by indorsement and Where an instrument is negotiated back to a prior
delivery (“Once a bearer, always a bearer” rule) party, such party may reissue and further negotiate the
same.
A bearer instrument, even when indorsed specially,
may nevertheless be further negotiated by delivery, but However, he is not entitled to enforce payment thereof
the person indorsing specially is liable as indorser only against any intervening party to whom he was
to such holders who acquired title through his personally liable. (NIL, Sec. 50)
indorsement. (NIL, Sec. 40) This spawns the rule that NOTE: Notwithstanding the limitation under Sec. 50, a
A BEARER INSTRUMENT IS ALWAYS A prior party may strike out the intervening indorsements
BEARER INSTRUMENT. not necessary for his title. The indorser whose
indorsement is struck out, and all indorsers subsequent
Q: A makes a promissory note payable to bearer and to him, are thereby relieved from liability on the
delivers the same to B. B, however, endorses it to C in instrument. (NIL, Sec. 48)
this manner: e.g.“A”, the payee indorsed the instrument to B, then B
“Payable to C. Signed: B.” indorsed it to C, C to D, then D to B. B can further
Later, C, without indorsing the promissory note, negotiate the instrument. He may also strike out the
transfers and delivers the same to D. The note is indorsement of C and D (Sundiang Sr. & Aquino,
subsequently dishonored by A. May D proceed against 2014).
A for the note? (1998 Bar)
A: YES. D may collect from A. The note made by A is Limitations on re-negotiation
a bearer instrument. Where an instrument, payable to In the following cases, a prior party cannot further
bearer, is indorsed, it may nevertheless be further negotiate the instrument:
negotiated by delivery. Despite the special 1. Where it is payable to the order of a third person,
indorsement made by B, the note remained a bearer and it has been paid by the drawer. [NIL, Sec. 121 (a)]
instrument and can be negotiated by mere delivery. 2. Where it was made or accepted for accommodation
When C delivered and transferred the note to D, the and has been paid by the party accommodated. [NIL,
latter became a holder thereof. As such, D can proceed Sec. 121 (b)
against A. 3. In other cases, where the instrument is discharged
when acquired by a prior party. [NIL, Sec. 119 (e)]
Q: X executed a promissory note with a face value of
Php50,000.00, payable to the order of Y. Y indorsed Indorsement- It is the signing of the name of the
the note to Z, to whom Y owed Php30,000.00. If X has indorser on the instrument with the intent to transfer
no defense at all against Y, for how much may Z title to the same.
collect from X? (2011 Bar) GR: Indorsement must be of the entire instrument.
A: Php 50,000.00, but with the obligation to hold (NIL, Sec. 32)
Php20,000.00 for Y's benefit. XPN: When the instrument has been paid in part.
Indorsement to two or more indorsees severally does

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

NOT operate as a negotiation of the instrument. as specific indorsement, or “indorsement in full”.
Indorsement should be placed: (NIL, Sec. 34)
1. On the instrument itself; or NOTE: An instrument payable to bearer indorsed
2. On a separate piece of paper attached to the specially may nevertheless be negotiated by delivery
instrument called “allonge” (NIL, Sec. 31) (once a bearer always a bearer). (NIL, Sec. 40)

Sec. 31. Indorsement; how made. - The indorsement 2. Blank – Specifies no indorsee or when indorser
must be written on the instrument itself or upon a merely signs his name in blank without additional
paper attached thereto. The signature of the indorser, words.
without additional words, is a sufficient indorsement. a. Instrument is payable to bearer and may be
-Indorsement is a derivative of the latin word indorsa negotiated by delivery (NIL, Sec. 34)
and connotes a legal transaction betwwn the indorser b. May be converted to special indorsement by writing
and the indorsee effected by writing the indorse’s over the signature of the indorser in blank any contract
signature at the back of the instrument or in a separate consistent with the character of indorsement (NIL, Sec.
paper by which he 35)
1. transfers title of the instrument to the indorsee -An order instrument if indorsed in converted into a
2. enters into an implied guaranty that the note will be bearer instrument and may be further negotiated by
paid. mere delivery.

Sec. 32. Indorsement must be of entire instrument. - 3. Restrictive - When the instrument:
The indorsement must be an indorsement of the entire Classification:
instrument. An indorsement which purports to transfer a. Prohibits further negotiation of the instrument
to the indorsee a part only of the amount payable, or (it destroys the negotiability of the instrument);
which purports to transfer the instrument to two or -means that the restrictive indorsee can no
more indorsees severally, does not operate as a longer negotiate the instrument to other persons.
negotiation of the instrument. But where the Negotiability of the instrument ceases up to him only.
instrument has been paid in part, it may be indorsed as Ie. Pay to Pipay Kipay Only.
to the residue. b. Constitutes the indorsee the agent of the indorser; or
-“equitable assignment” -restrictive indorsee is holding the instrument
-An indorsement does not constitute a valid merely as an agent, for his principal, the restrictive
negotiation of a negotiable instrument if such indorse, what he is required to do under the restrictive
indorsement: indorsement.
1. Transfers to the indorsee only a part of the sum Ie. Pay to Pipay Kipay for collection only
payable c. Vests the title in the indorsee in trust for or to the
2. transfers the instrument to two or more indorsers use of some persons.
severally -the restrictive indorsee acquires title to the
The indorsement to be valid must transfer to the instrument not for himself but in trust for the benefit of
indorsee the full amount of the instrument so as to another.
avoid multiplicity of suits or what is to be indorsed is Ie. Pay to Pipay Kipay in trust for Macoy Dubs
only the remaining balance of the sum payable. NOTE: Mere absence of words implying power to
negotiate does not make an instrument restrictive.
Sec. 33. Kinds of indorsement. - An indorsement may (NIL, Sec. 36)
be either special or in blank; and it may also be either
restrictive or qualified or conditional. 4. Qualified– Constitutes the indorser a mere assignor
of the title to the instrument made by adding to the
Q: Can there be partial indorsement? indorser’s signature words like, “without recourse”,
A: GR: Yes, but it shall not be deemed as a “sans recourse” or “at the indorsee’s own risk”. The
negotiation, only assignment. (Indorsement must be of indoresement serves as an ordinary equitable
the entire instrument, for it to be deemed a valid assignment.
negotiation, Sec. 32) NOTE: Qualified indorsement does not impair the
XPN: When the instrument has been paid in part, there negotiable character of an instrument. (NIL, Sec. 38)
may be indorsement as to the residue.
Note: Indorsement to two or more indorsees severally 5. Absolute – The indorser binds himself to pay:
does NOT operate as a negotiation of the instrument. a. Upon no other condition than failure of prior
parties to do so;
Kinds of indorsement b. Upon due notice to him of such failure.
1. Special – Specifies the person to whom or to whose
order the instrument is to be payable. It is also known

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

6. Conditional - Right of the indorsee is made to Qualified indorsement
depend on the happening of a contingent event. The -A qualified indorsement does NOT impair the
party required to pay may disregard the conditions. negotiability of the instrument. It only means that the
(NIL, Sec. 39) qualified indorser is NOT liable when the maker is
NOTE: The condition refers to the indorsement not on insolvent. A qualified indorser is liable only if the
the instrument itself. instrument is dishonored by non-acceptance or
nonpayment due to:
7. Joint – Indorsement made payable to 2 or more 1. Forgery;
persons who are not partners; must be indorse by both 2. Lack of good title on the part of the indorser;
of them unless 1 party authorizes other to do so.; 3. Lack of capacity to indorse on the part of the prior
parties; or
8. Irregular – A person who, not otherwise a party to 4. The fact that at the time of the indorsement, the
an instrument, places thereon his signature in blank instrument was valueless or not valid at the time of
before delivery in which case he becomes liable or the indorsement which fact was known to him.
anomalous indorser (NIL, Sec. 64)
Forms of qualified indorsements:
9. Facultative –Indorser waives presentment and notice 1. “Pay to Juan Santos, without recouse” (sgd.) Pedro
of dishonor, enlarging his liability and his Cruz
indorsement. 2. Pay to Juan Santos, sans recour or srecors
3. Pay to Juan Santos at indorsee’s own risk
10. Successive – Indorsement to two persons or more 4. Pay to Juan Santos, indorser not liable.
in succession. Any of them can indorse to effect
negotiation of the instrument. Instances when the indorsement is considered only as
equitable assignment
Restrictive Indorsement 1. Indorsement of only a part of the amount of the
-Indorsee has the following rights in a restrictive instrument (NIL, Sec. 32)
indorsement: 2. In cases of qualified indorsement (NIL, Sec. 38)
1. To receive payment of the instrument; 3. Transfer of an instrument payable to order by mere
2. To bring any action thereon that the indorser could delivery (NIL, Sec. 49).
bring; and A qualified indorser shall be liable to the holder as a
3. To transfer his rights as such indorsee, where the party secondarily liable if he breaks or violates any of
form of the indorsement authorizes him to do so. the following warranties under Sec. 65
(NIL, Sec. 37,) a. The instrument is genuine and in all respects what it
purports to be
Discussion: b. That he has a good title to it
1. To receive payment of the instrument; (Right to c. That all prior parties had capacity to contract
receive payment) d. That he has no knowledge of any fact which would
-he has the right to collect from the party primarily impair the validity of the instrument or render it
liable and once paid, he must return the amount to the valueless.
indorser or deposit it to the account of the indorser,
because under restrictive indorsement No. 2, the Conditional Indorsement
indorsees is merely acting as an agent of the indorser. Sec. 39. Conditional indorsement. - Where an
2. To bring any action thereon that the indorser could indorsement is conditional, the party required to pay
bring; (Right to file action) the instrument may disregard the condition and make
3. To transfer his rights as such indorsee, where the payment to the indorsee or his transferee whether the
form of the indorsement authorizes him to do so (Right condition has been fulfilled or not. But any person to
to transfer his rights as restrictive indorsee whom an instrument so indorsed is negotiated will
hold the same, or the proceeds thereof, subject to the
All subsequent indorsees acquire only the title of the rights of the person indorsing conditionally.
1st indorsee under the restrictive indorsement. (NIL,
Sec. 37) Conditional indoresement
An instrument negotiable in origin is always -qualification of the conditional indorsee’s right
negotiable until paid, which is still true even if the NI against the conditional indorser
was dishonored or is already overdue, unless the
instrument has been restrictively indorsed or when Joint indorsement
discharged by payment or otherwise (NIL, Sec. 47) GR: All must indorse in order for the transaction to
operate as a negotiation. (NIL, Sec. 41)
XPN: Only one of them may indorse in case the:

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

1. Payees or indorsees are partners; and Sec. 50. When prior party may negotiate instrument. -
2. Payee or indorsee indorsing has authority to indorse Where an instrument is negotiated back to a prior
for the others. party, such party may, subject to the provisions of this
Act, reissue and further negotiable the same. But he is
Indorsing an instrument as cashier or other officers of not entitled to enforce payment thereof against any
a corporation intervening party to whom he was personally liable.
The negotiable instrument is deemed prima facie
payable to the corporation of which said person is such
an officer.

Sec. 42. Effect of instrument drawn or indorsed to a

person as cashier. - Where an instrument is drawn or
indorsed to a person as "cashier" or other fiscal officer
of a bank or corporation, it is deemed prima facie to be
payable to the bank or corporation of which he is such
officer, and may be negotiated by either the
indorsement of the bank or corporation or the
indorsement of the officer.

Sec. 43. Indorsement where name is misspelled, and so

forth. - Where the name of a payee or indorsee is
wrongly designated or misspelled, he may indorse the
instrument as therein described adding, if he thinks fit,
his proper signature.

Date of indorsement
GR: Every negotiation is deemed prima facie to have
been effected before the instrument was overdue.
XPN: Except where an indorsement bears date after
the maturity of the instrument. (NIL, Sec. 45)

Sec. 48. Striking out indorsement. - The holder may at

any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement
is struck out, and all indorsers subsequent to him, are
thereby relieved from liability on the instrument

Q: What is the period of negotiability of a NI?

A: GR: An instrument negotiable in origin is always
negotiable which is still true even if the NI was
dishonored or is already overdue.
XPNs:
1. When the instrument has been restrictively
indorsed;
2. When it is discharged by payment or
otherwise.(Sec. 47)

Sec. 49. Transfer without indorsement; effect of. -

Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer
vests in the transferee such title as the transferor had
therein, and the transferee acquires in addition, the
right to have the indorsement of the transferor. But for
the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of
the time when the indorsement is actually made.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Holder in due Course enforce against Larry the amount of P5,000.00 as this
To be considered as a HIDC, the requisites under Sec. case falls squarely under Sec 14 of the Negotiable
52 must be complied with. A HIDC takes the Instruments Law. As against a holder in due course,
instrument under the following conditions: (COFI) the instrument is always valid and enforceable to the
1. That is complete and regular up on its face; full extent. The defense of filing-up contrary to
Note: Absence of the required documentary stamp will authorization is a mere personal or equitable defense
not make the instrument incomplete. (It is not a (Villanueva, 2009).
requisite of negotiability under Sec. 1 and it is not a
material particular under Sec. 125) 2. That he became the holder before it was overdue
2. Became the holder before it was overdue, and An overdue instrument is still negotiable although it is
without notice that it has been previously dishonored, subject to defenses existing at the time of transfer. A
if such was the fact; negotiable instrument in circulation past its maturity
Note: If the instrument is payable on demand, the date date carries strong indication that it has been
of maturity is determined by the date of presentment, dishonored. An overdue instrument puts all person on
which must be made within a reasonable time after its notice that it might not have been paid because of a
issue, if it is a note, or after the last negotiation thereof, valid defense to such payment (De Leon, 2010).
if it is a bill of exchange. (Secs. 71 and 143[a])
3. Took it in good faith and for value; Without notice that it has been previously dishonored,
4. At the time it was negotiated to him, he had no if such was the fact
notice of any infirmity in the instrument or defect in An instrument may be dishonored either by:
the title of the person negotiating it. 1. Non-acceptance (refers to a bill of exchange); or
2. Non-payment.
1. Complete and regular on its face
An instrument is complete when it is not wanting in 3. That he took it in good faith and for value
any material particular and regular when there is no Good faith is the holder’s well founded or honest
alteration apparent on the face of the instrument. belief that the person from whom he received the
--- instrument was the owner thereof, with the right to
Q: R issued a check for P1M which he used to pay S transfer it (Duran v IAC, G.R. No. L-64159,
for killing his political enemy. September 10, 1985).
a. Does S have a cause of action against R in case of
dishonor by the drawee bank? Good faith means that the person taking the instrument
b. If S negotiated the check to T, who accepted it in has acted with due honesty with regards to the rights of
good faith and for value, may R be held secondarily the parties liable on the instrument; that at the time he
liable by T? (2007 Bar) took the instrument, the holder has no knowledge of
A: any defect or infirmity
a. NO. S does not have a cause of action against R in
case of dishonor by the drawee bank. S is not a holder Value may be some right, interest, profit or benefit to
in due course, thus, R can raise the defense that the the party who makes the contract or some forbearance,
check was issued for an illegal consideration. detriment, loan, responsibility, etc. to the other (BPI v.
b. YES. R may be held liable by T since T is a holder Roxas, G.R. No. 157833, October 15, 2007).
in due course of the instrument. The unlawful
consideration of the check is only a personal defense Q: X borrowed money from Y in the amount of Php 1
that cannot be interposed to a holder in due course who Million and as payment, issued a check. Y then
receives the check free from the defect of title of S. indorsed the check to his sister Z for no consideration.
When Z deposited the check to her account, the check
Q: Larry issued a negotiable promissory note to Evelyn was dishonored for insufficiency of funds. Is Z a
and authorized the latter to fill up the amount in blank holder in due course? Explain your answer. (2012
with his loan account in the sum of P1,000. However, Bar)
Evelyn inserted P5,000 in violation of the instruction. A:NO. A holder in due course is a holder who has
She negotiated the note to Julie who had no knowledge taken the instrument under the following conditions:
of the infirmity. Julie in turn negotiated said note to xxx ; (c) That he took it in good faith and for value;
Devi for value and who had no knowledge of the xxx. All of the four conditions must concur in order for
infirmity. Can Devi enforce the note against Larry and a holder to qualify as a holder in due course. In the
if she can, for how much? Explain. (1993 Bar) case at hand, Z did not acquire the instrument for
A: YES, Devi can enforce the note against Larry since value. As such she cannot be considered as a holder in
she is a holder in due course. Since the document due course.
delivered to Evelyn is in blank and she was authorized
to fill up the amount in the promissory note, Devi can

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

4. At the time it was negotiated to him, he had no clinic. The projected purchase did not materialize. Is
notice of any infirmity in the instrument or defect in the clinic considered a holder in due course?
the title of the person negotiating it A: NO, the rule that a possessor of the instrument is
The person to whom it is negotiated must have had prima facie a HIDC does not apply to the clinic
actual knowledge of such facts or knowledge of other because it cannot be said to have acquired the
facts that his action in taking the instrument amounted negotiable instrument in good faith for there was a
to bad faith (NIL, Sec. 56). defect in the title of the holder (agent), since the
instrument was not payable “to the agent or to bearer;”
Presence or absence of defect or infirmity must be also the drawer had no account with the clinic, the
determined at the time the instrument was negotiated agent did not show or tell the payee why he had the
to the holder. check in his possession and why he was using it for the
payment of his own account.
NOTE: Where the transferee receives notice of any As the holder’s title was defective or suspicious, it
infirmity in the instrument or defect in the title of the cannot be stated that the payee acquired the check
person negotiating the same before he had paid the full without knowledge of said defect in holder’s title, the
amount agreed to be paid, he will be deemed a holder presumption that the clinic is a HIDC does not exist
in due course only to the extent of the amount paid by (De Ocampo & Co. v. Gatchalian, G.R. No. L-15126,
him. (NIL, Sec. 54) November 30, 1961).
-this section means that the indorsee or holder becomes
a holder in due course only to the extent of what he has Q: Is a holder presumed to be a HIDC?
paid prior to his knowledge of the defect in the title of A: GR: Every holder is deemed prima facie to be a
the party negotiating it. HIDC.
XPN: When it is shown that the title of any person
Infirmity vs. Defect who has negotiated the instrument was defective. But
Infirmity Defect this is only as regards a party who became such after
Refers to those that Refers to how he the acquisition of the defective title. (Sec.59)
vitiate the instrument obtained the instrument
itself; connotes a thing or the signature thereto, Specifically, a holder is entitled to the following
or things that are wrong as by fraud, duress, or rights:(1998, 2007, 2009 Bar)
in the instrument itself. force and fear, or other 1. Hold the instrument free from defenses available to
unlawful means, or for parties among themselves;
an illegal consideration 2. Hold the instrument free from any defect of title of
or when he negotiates it prior parties;
in breach of faith, or 3. Receive payment;
under any other 4. Enforce payment of the instrument for the full
circumstances as amount amount thereof against all parties liable; and
to a fraud. (NIL, Sec. 5. Sue
55)
Q: What rights are available to a party who derives his
Instances when the title of a transferor is defective / title from a HIDC?
defect in title may be: A: A holder who derives his title through a HIDC, and
1. In its acquisition – When he obtained the who is not himself a party to any fraud or illegality
instrument, or any signature thereto, by fraud, duress, affecting the instrument, has all the rights of such
or force and fear, or other unlawful means, or for an former holder in respect to all parties prior to the
illegal consideration. latter.(Sec. 58)
-by acquisition is from the maker or drawer up to the
payee only Possession of a negotiable instrument after
-Fraud in factum vs Fraud in inducements presentment and dishonor
2. In the negotiation – When he negotiates it in breach It does not make the possessor a holder for value
of faith, or under such circumstances as amount to a within the meaning of the law. It gives rise to no
fraud. (NIL, Sec. 55) liability on the part of the maker or drawer or indorsers
-through breach of faith or under such circumstances (STELCO Marketing Corp. vs. CA, G.R. No. 96160,
tantamount to a fraud. June 17, 1992).

Q: A drawer issued a check for the payment of a car, Q: Is a corporation to which four crossed checks were
which check was delivered to the agent of the owner of indorsed by the payee corporation a holder in due
the car for safekeeping. The check was then used by course and hence entitled to recover the amount of the
the agent to pay the medical bills of his wife in a checks when the same had been dishonored for

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

the reason of “payment stopped”? 2. receive payment
A:NO. The checks were crossed checks and 3. hold the instrument free from any defect of title of
specifically indorsed for deposit to payee’s account prior parties
only. From the beginning, the corporation was aware 4. acquire the instrument free from defenses available
of the fact that the checks were all for deposit only to to prior parties among themselves
payee’s account. Clearly then, it could not be 5. may enforce payment for the full amount of the
considered an HIDC (Atrium Management Corp. v. instrument against all parties liable thereon.
CA, G.R. No. 109491, February 28, 2001).
Rights of a holder not a holder in due course
Payee as holder in due course The rights of a holder not an HIDC are similar to an
Every holder of a negotiable instrument is deemed assignee. The other rights are:
prima facie a holder in due course. However, this 1. He may receive payment and if the payment is in
presumption arises only in favor of a person who is a due course, the instrument is discharged;
“holder” as defined in Section 191 of the NIL, 2. He is entitled to the instrument but holds it subject
meaning a payee or indorsee of a bill or note, who is in to the same defenses as if it were non-negotiable;
possession of it, or the bearer thereof (Yang v. CA, 3. He may sue on the instrument in his own name.
G.R. No. 138074, August 15, 2003). (NIL, Sec. 51)

There can be no doubt that a proper interpretation of Sec. 58. When subject to original defense. - In the
Negotiable Instruments Law as a whole leads to the hands of any holder other than a holder in due course,
conclusion that a payee may be a holder in due course a negotiable instrument is subject to the same defenses
under the circumstances in which he meets the as if it were non-negotiable. But a holder who derives
requirements of Sec. 52 (De Ocampo v. Gatchalian, his title through a holder in due course, and who is not
supra). himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in
Drawee as holder in due course respect of all parties prior to the latter.
A drawee does not become a HIDC by simply paying a
bill. A holder refers to one who has taken the Shelter principle or Holder in Due Course by
instrument as it passes along in the course of Subrogration
negotiation; whereas a drawee, upon acceptance and Under the "shelter principle," the HIDC, by negotiating
payment, strips the instrument of negotiability and the instrument, to a party not an HIDC, transfers all his
reduces it to a mere voucher or proof of payment. rights as such holder to the latter and acquires the right
to enforce the instrument as if he was an HIDC. The
Persons not deemed a holder in due course principle applies to a "sheltered" holder who is not a
1. A holder who acquires the instrument after its date party to any fraud or illegality impairing the validity of
of maturity. the instrument.
2. Where an instrument payable on demand is
negotiated for an unreasonable length of time after its Q: Larry issued a negotiable promissory note to Evelyn
issue. (NIL, Sec. 53) and authorized the latter to fill up the amount in blank
NOTE: A note payable on demand is due when with his loan account in the sum of P1,000. However,
payment is demanded. A check becomes overdue when Evelyn inserted P5,000 in violation of the instruction.
it is not presented for payment within a reasonable She negotiated the note to Julie who had no knowledge
time, usually 6 months from date the thereof, of the infirmity. Julie in turn negotiated said note to
afterwards, it becomes a stale check. Devi for value and who had no knowledge of the
3. Where the instrument contains an acceleration infirmity. Supposing Devi endorses the note to Baby
clause, knowledge of the holder at the time of for value but who has knowledge of the infirmity, can
acquisition thereof that one installment or interest, or the latter enforce the note against Larry? (1993 Bar)
both, is unpaid is a notice that it is overdue A: Baby cannot enforce the note against Larry since
she is not a holder in due course because Larry could
Sec. 57. Rights of holder in due course. - A holder in interpose the real and personal defenses to defeat the
due course holds the instrument free from any defect claim of Baby. However, because of the shelter
of title of prior parties, and free from defenses principle in Negotiable Instruments Law, Baby could
available to prior parties among themselves, and may be elevated to a status of a holder in due course since a
enforce payment of the instrument for the full amount person not holder in due course steps in the shoes of
thereof against all parties liable thereon. the prior party. Therefore, Baby could enforce the note
against Larry the same way as Devi could enforce it.
Rights of a holder in due course include:
1. sue on the instrument in his own name

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Q: How does the “shelter principle” embodied in the Note: There is a contrary view on the matter, the HIDC
NIL operate to give the rights of a HIDC to a holder must have acquired the instrument through negotiation
who does not have the status of a HIDC? Briefly and an instrument is issued and not negotiated to a
explain. (2008 Bar) payee. (Sec 52 [4])
Suggested Ans.: Under the "shelter principle," the
HIDC, by negotiating the instrument, to a party not a Q: What are the rights of a holder, who is NOT a
HIDC, transfers all his rights as such holder to the HIDC?
latter and acquires the right to enforce the instrument A: The rights of a holder not a HIDC are similar to
as if he was a holder in due course. The principle those of an assignee who is subject to the same
applies to a "sheltered" holder who is not a party to any defenses as if the instrument were non-negotiable, i.e.,
fraud or illegality impairing the validity of the subject to the personal defenses available to prior
instrument. parties among themselves and to real defenses. (Sec.
58)
Q: When is an instrument complete and regular upon
its face? F. HOLDER IN DUE COURSE
A: An instrument is complete when it is not wanting in 1. “Vicente Ocampo & Co. vs. Anita Gatchalian,
any material particular and regular when there is no et al.”, G.R. No.15126, Nov. 30, 1961
alteration apparent on the face of the instrument. 2. “Juanita Salas vs. CA and First Finance and
Leasing Corp.”, G.R. No. 76788, Jan. 22, 1990
Q: Define good faith. 3. “Stelco Marketing Corp. vs. CA and Steelweld
A: Good faith is the holder’s well founded or honest Corp. of the Phil.”, G.R. No. 96160, June 17, 1992
belief that the person from whom he received the 4. “State Investment House vs. IAC”, G.R. No.
instrument was the owner thereof, with the right to 72764, July 13, 1989
transfer it. (Duran v IAC, 138 SCRA 489 [1985].) 5. “Bataan Cigar and Cigarette Factory vs. CA
and State Investment House”, G.R. No. 93048, Mar. 3,
Q: What constitutes value in an instrument? 1004
A: Value may be some right, interest, profit or benefit 6. “Atrium Management Corp. vs. CA, et al.”,
to the party who makes the contract or some G.R. No. 109491, Feb. 28, 2001
forbearance, detriment, loan, responsibility, etc. to the 7. “Cely Yang vs. CA, PCIB, Far East Bank,
other. (BPI v. Roxas, G.R. No. 157833, October 15, Equitable Bank, et al.”, G.R. No. 138074, Aug. 15,
2007.) 2003
8. “Alvin Patrimonio vs. Napoleon Gutierrez,
Q: What constitutes notice of defect (on the part of the [Link]”, G.R. No. 187769, June 4, 2014
transferee)?
A: The person to whom it is negotiated must have had
actual knowledge of such facts or knowledge of other
facts that his action in taking the instrument amounted
to bad faith. (Sec. 56)

Q: Is a corporation to which four crossed checks were

indorsed by the payee corporation a holder in due
course and hence entitled to recover the amount of the
checks when the same had been dishonored for the
reason of “payment stopped”?
A: The checks were crossed checks and specifically
indorsed for deposit to payee’s account only. From the
beginning, the corporation was aware of the fact that
the checks were all for deposit only to payee’s account.
Clearly then, it could not be considered an HIDC.
(Atrium Management Corp. v. CA, G.R. No. 109491,
Feb. 28, 2001)

Q: Can a payee be a HIDC?

A: Yes. A proper interpretation of NIL as a whole
leads to the conclusion that a payee may be a holder in
due course under the circumstances in which he meets
the requirements of Sec. 52. (De Ocampo v.
Gatchalian, supra.)

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Defenses against the holder 10. Fraud in inducement or simple fraud
The defenses available against a holder are classified
as follows: NOTE: Fraud in inducement relates to the quality,
1. Real or Absolute Defenses – those that are quantity, value or character of the consideration of the
attached to the instrument itself and are available instrument. Here, deceit is not in the character of the
against all parties, both immediate and remote, instrument but in its amount or terms. This exists when
including holders in due course. a person is induced to sign a note for the price of a
2. Personal or Equitable Defenses –defenses worthless stock which was fraudulently represented by
which are only available against a holder NOT in due the payee as to its value. Such type of fraud is only a
course. Those which grow out of the agreement or personal defense because it does not prevent a
conduct of a particular person which renders it contract. (De Leon, 2010)
inequitable for him, though holding the legal title, to
enforce it against the party sought to be made liable. Q: A bill of exchange has T for its drawee, U as
drawer, and F as holder. When F went to T for
Q: What are the real defenses available against a presentment, F learned that T is only 15 years old. F
holder? wants to recover from U but the latter insists that a
A: notice of dishonor must first be made, the instrument
1. Incomplete and undelivered instrument being a bill of exchange. Is he correct? (2011 Bar)
2. Minority (available only to the minor) Suggested Ans.: No, due to the minority of T, the
3. Incapacity as far as incapacitated persons are drawee, F can treat the BOE as a PN, thus, instead of
concerned 4. Ultra –vires acts of a corporation being merely a drawer, U can be treated as a maker.
5. Want of Authority, apparent and real
6. Fraudulent alteration NOTE: Where the drawee does not have the capacity
7. Forgery to contract, the holder may treat the bill as a PN (Sec.
8. Duress amounting to Forgery 130.)
9. Prescription
10. Other infirmities appearing on the face of the Q: Eva issued to Imelda a check in the amount of
instrument P50,000 post-dated Sept. 30, 1995, as security for a
11. Discharge in insolvency diamond ring to be sold on commission. On Sept. 15,
12. Illegal Contract 1995, Imelda negotiated the check to MT investment
13. Fraud in Factum or Esse Contractus which paid the amount of P40,000 to her.
Eva failed to sell the ring, so she returned it to Imelda
NOTE: Fraud in factum exists in those cases in which on Sept. 19, 1995. Unable to retrieve her check, Eva
a person, without negligence, has signed an instrument, withdrew her funds from the drawee bank. Thus, when
but was deceived as to the character of the instrument MT Investment presented the check for payment, the
and without knowledge of it, as where a note was drawee bank dishonored it. Later on, when MT
signed by one under the belief that he was signing as a Investment sued her, Eva raised the defense of absence
witness to a deed. This kind of fraud is a real defense of consideration, the check having been issued merely
because there is no contract, since the person did not as security for the ring that she could not sell. Does
know what he was signing. (De Leon, 2010) Eva have a valid defense? Explain. (1996 Bar)
A:NO, Eva does not have a valid defense. First, MT
Investment is a holder in due course and, as such,
Q: What are the personal defenses available against a holds the post-dated check free from any defect of title
holder? of prior parties and from defenses available to prior
A: parties among themselves. Eva can invoke the defense
1. Innocent alteration or spoliation of absence of consideration against MT only if the
2. Discharge of party Secondarily liable by discharge latter was a privy to the purpose for which the checks
of prior party. were issued and, therefore, not a holder in due course.
3. Set-off between immediate parties Second, it is not a ground for the discharge of the post-
4. Filling up of blanks not in accordance with the dated check as against a holder in due course that it
Authority given was issued merely as security. The only grounds for
5. Acquisition of instrument by Duress or force and the discharge of a negotiable instrument is enumerated
fear; unlawful means or for an illegal consideration in the Negotiable Instruments Law and none of those
6. Discharge by payment or renunciation or release grounds are available
before maturity
7. Failure or absence of consideration. Q: Brad was in desperate need of money to pay his
8. Undelivered complete instrument debt to Pete, a loan shark. Pete threatened to take
9. Insertion of a wrong date Brad’s life if he failed to pay. Brad and Pete went to

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

see Señorita Isobel, Brad’s rich cousin, and asked her
if she could sign a promissory note in his favor in the
amount of P10,000.00 to pay Pete. Fearing that Pete
would kill Brad, Señorita Isobel acceded to the request.
She affixed her signature on a piece of paper with the
assurance of Brad that he will just fill it up later. Brad
then filled up the blank paper, making a promissory
note for the amount of P100,000.00. He then indorsed
and delivered the same to Pete who accepted the note
as payment of the debt.
What defense or defenses can Señorita Isobel set up
against Pete? Explain. (2005 Bar)
A: Señorita Isobel may set up the defenses of:
a. Incomplete but delivered instrument. The authority
she gave Brad was to fill up the note for P10,000.00
only and not P100,000.00. This is a personal defense
that may be raised against Pete who is clearly not a
holder in due course.
b. Force and intimidation. Señorita Isobel was forced
and intimidated into writing and issuing the note as she
was threatened that Pete would kill Brad, her cousin if
the debt is not paid.

Q: X makes a promissory note for P10,000 payable to

A, a minor, to help him buy school books. A endorses
the note to B for value, who in turn endorses the note
to C. C knows A is a minor. If C sues X on the note,
can X set up the defenses of minority and lack of
consideration? (1998 Bar)
A: No. X cannot set up the defense of the minority of
A. Defense of minority is available to the minor only.
Such defense is not available to X. Also, X cannot set
up the defense of lack of consideration against C,
because lack of consideration is a personal defense
which is only available between the immediate parties
or against parties who are not holders in due course.
C’s knowledge that A is a minor does not prevent C
from being a holder in course. C took the promissory
note from a holder for value.

Q: A bill of exchange has T for its drawee, U as

drawer, and F as holder. When F went to T for
presentment, F learned that T is only 15 years old. F
wants to recover from U but the latter insists that a
notice of dishonor must first be made, the instrument
being a bill of exchange. Is he correct? (2011 Bar)
A: NO, since F can treat U as maker due to the
minority of T, the drawee.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Liability of parties must pay has a
Parties primarily liable (MAC) the check deposit
1. Maker – of a promissory note;
2. Acceptor – of a bill of exchange; and The drawee is not liable for payment of a bill of
3. Certifier of a check exchange
The mere issuance of a bill of exchange does not
Parties secondarily liable operate as an assignment of the funds in the hands of a
1. Drawer of a bill drawee. The drawee must accept the instrument (thus,
2. Indorser of a note or a bill becomes an acceptor) in order that he may be primarily
Negotiable instrument should be presented for liable for the payment of a bill of exchange.
payment to the party primarily liable. (NIL, Sec. 72[d])
Sec. 60. Liability of maker. - The maker of a
Primarily liable negotiable instrument, by making it, engages that he
-unconditionally bound will pay it according to its tenor, and admits the
-Absolutely required to pay the instrument upon existence of the payee and his then capacity to indorse
maturity
-The maker of a negotiable instrument, by making
Secondarily liable such instrument:
-those who may be called upon to pay the instrument 1. Engages that he will pay it according to its tenor,
in the vent the party primarily liable dishonors the and (original tenor shall mean the original sum payable
instrument. The holder must however first give notice he has placed on the instrument)
of dishonor to all parties secondarily liable before he 2. Admits the existence of the payee and his then
can collect from anyone of them at random capacity to indorse (NIL, Sec. 60; 1995, 2001 Bar).
-conditionally bound The maker is liable the moment he makes the NI. His
-Undertakes to pay only after the ff. conditions have liability is primary and unconditional.
been fulfilled:
1. Due presentment for payment or acceptance to Q: A issued a promissory note payable to B or bearer.
primary party; (NIL, Sec. 143) A delivered the note to B. B indorsed the note to C. C
2. Dishonor by such party; (NIL, Sec.70) placed the note in his drawer, which was stolen by the
3. Taking of proceedings required by law. (NIL, janitor X. X indorsed the note to D by forging C’s
Sec.152) signature. D indorsed the note to E who in turn
delivered the note to F, a holder in due course, without
Kinds indorsement. Discuss the individual
Promisso Maker- Payee- Holder Accept liabilities to F of A, B and C. (2001, 1997 Bar)
r-y note (debtor) (creditor) or – A: A is primarily and unconditionally liable to F as the
Primari Note: primar maker of the promissory note. Section 60 provides
ly The y liable that, by making the instrument, the maker obliges
liable payee himself to pay according to the tenor of the instrument.
and all He is liable to both payee and subsequent holder in due
other course. Despite the presence of the special
succeedi indorsements on the note, these do not detract from the
ng fact that a bearer instrument, like the promissory note
indorsers in question, is always negotiable by mere delivery,
are until it is indorsed restrictively “For Deposit Only.”
parties B as a general indorser is secondarily liable to F. By
secondari placing his signature on the bearer instrument, he
ly liable warrants that the instrument is genuine and in all
Bill of Drawer Payee- Drawee Indorse respects what it purports to be; that he has good title to
Exchang - (Creditor Party -rs it; that all prior parties had capacity to contract; that he
e (debtor) ) primari has no knowledge of any fact which would impair the
ly validity of the instrument or render it valueless; that at
liable the time of indorsement, the instrument is valid and
Check Drawer Payee- Drawee subsisting; and that on due presentment, it shall be
-person creditor - The accepted or paid, or both, according to its tenor, and
issuing of the bank that if it be dishonored and the necessary proceedings
check drawer to where on dishonor be duly taken, he will pay the amount
whom the thereof to the holder, or to any subsequent indorser
the bank drawer who may be compelled to pay.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

C, however, cannot be held liable because the compelled to pay it. But the drawer may insert in the
signature purporting to be his is a product of forgery. C instrument an express stipulation negativing or limiting
can raise the defense of forgery since it his signature his own liability to the holder.
that was forged.
-Drawer’s liability
Q: On the right bottom margin of a PN appeared the The drawer, by drawing the instrument:
signature of the corporation’s president and treasurer 1. Admits the existence of the payee and his then
above their printed names with the phrase “and in his capacity to indorse;
personal capacity.” The corporation failed to pay its 2. Engages that on due presentment the instrument will
obligation. Are the officers liable? be accepted or dishonored; and
A: YES, persons who sign their names on the face of 3. That if the necessary proceedings on dishonor be
promissory notes are makers and liable as such. As the duly taken, he will pay the amount thereof to the
promissory notes are stereotype ones issued by the holder, or to any subsequent indorser who may be
bank in printed form with blank spaces filled up as per compelled to pay it. (Sec. 61, NIL; 1991 Bar)
agreed terms of the loan, following customary
procedures, leaving the debtors to do nothing but read The drawer is secondarily liable to the holder or to any
the terms and conditions therein and to sign as makers subsequent indorser who may be compelled to pay.
or co-makers. The officers are co-makers and as such, But the drawer may insert in the NI an express
they cannot escape liability arising therefrom. stipulation negating or limiting his own liability to the
(Republic Planters Bank v. CA, G.R. No. 93073, holder.(NIL, Sec. 61)
December 21, 1992)
Q: A delivers a bearer instrument to B. B then
Q: Richard Clinton makes a promissory note payable specially indorses it to C and C later indorses it in
to bearer and delivers the same to Aurora Page. Aurora blank to D. E steals the instrument from D and, forging
Page, however, endorses it to X in this manner: the instrument of D, succeeds in "negotiating" it to F
"Payable to X. Signed: Aurora Page." who acquires the instrument in good faith and for
Later, X, without endorsing the promissory note, value.
transfers and delivers the same to Napoleon. The note a. If for any reason, the drawee bank refuses to honor
is subsequently dishonored by Richard Clinton. May the check, can F enforce the instrument against the
Napoleon proceed against Richard Clinton for the drawer?
note? (1998 Bar) b. In case of the dishonor of the check by both the
A: YES, Richard Clinton is liable for the promissory drawee and the drawer, can F hold any of B, C and D
note. Under Section 60 of the NIL, the maker of a liable secondarily on the instrument? (1997 Bar)
negotiable instrument, by making the same, engages A:
that he will pay according to its tenor, and admits the a. YES, F can proceed against the drawer, A, in case of
existence of the payee and his then capacity to indorse. dishonor by the drawee bank. Section 61 of the NIL
The liability of the maker is primary which means he is provides that by drawing the instrument, the drawer
absolutely and unconditionally required to pay. He engages that the instrument will be accepted or paid or
engages to pay the instrument according to its terms both according to its tenor. Not only is the drawer
without any condition. obliged to pay the amount of the instrument to the
holder, but he shall likewise be liable to the subsequent
He is not only liable to the payee but also to the indorser who was compelled to pay it. The forged
subsequent holder in due course. Since the instrument signature is unnecessary to presume the juridical
is a bearer instrument (which nature was not changed relation between or among the parties prior to the
even if it was specially indorsed by Aurora), Napoleon forgery and the parties after the forgery. Moreover, the
became a legal holder thereof by mere delivery from X only party who can raise the defense of forgery against
to him. Thus, as a legal holder of the promissory note, a holder in due course is the person whose signature is
he is entitled to proceed against the maker thereof, forged.
Richard Clinton. b. Only B and C can be held liable by F. According to
Section 67, when a person puts his signature on a
Sec. 61. Liability of drawer. - The drawer by drawing bearer instrument as a form of indorsement, he
the instrument admits the existence of the payee and becomes subject to all liabilities of an indorser. D
his then capacity to indorse; and engages that, on due cannot be held liable as an indorser because his
presentment, the instrument will be accepted or paid, signature is forged by E, hence, there was no consent
or both, according to its tenor, and that if it be from D. The forged signature is deemed inoperative
dishonored and the necessary proceedings on dishonor and no right can arise out of it. However, the effect of
be duly taken, he will pay the amount thereof to the being inoperative affects only the signature which is
holder or to any subsequent indorser who may be the product of forgery. It will not deem to affect other

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

signatures subscribed with knowledge and While both are primarily liable, the acceptor engages
voluntariness. Therefore, B and C are liable as to pay the negotiable instrument according to the tenor
indorsers. of his acceptance. On the other hand, the maker
engages to pay the negotiable instrument according to
Q: D draws a bill of exchange that states: “One month the tenor of the bill itself.
from date, pay to B or his order Php100,000.00.
Signed, D.” The drawee named in the bill is E. B Q: X draws a check against his current account with
negotiated the bill to M, M to N, N to O, and O to P. Bonifacio Bank in favor of B. Although X does not
Due to non-acceptance and after proceedings for have sufficient funds, the bank honors the check when
dishonor were made, P asked O to pay, which O did. it is presented for payment. Apparently, X has
From whom may O recover? (2011 Bar) conspired with the bank's bookkeeper so that his ledger
A: D, being the drawer. card would show that he still has sufficient funds. The
bank files an action for recovery of the amount paid to
Sec. 62. Liability of acceptor. - The acceptor, by B because the check presented has no sufficient funds.
accepting the instrument, engages that he will pay it Decide the case (1998 Bar).
according to the tenor of his acceptance and admits: A: The bank cannot recover the amount paid to B for
(a) The existence of the drawer, the genuineness of his the check. When the bank honored the check, it
signature, and his capacity and authority to draw the became an acceptor. As acceptor, the bank became
instrument; and primarily and directly liable to the payee/holder B.
(b) The existence of the payee and his then capacity to The recourse of the bank should be against X and its
indorse. bookkeeper who conspired to make X's ledger show
that he has sufficient funds.
Acceptor’s liability
The acceptor, by accepting the instrument: Sec. 63. When a person deemed indorser. - A person
1. Engages that he will pay the NI according to the Indorser
tenor of his acceptance; A person placing his signature upon an instrument
2. Admits the existence of the drawer, the genuineness otherwise than as maker or acceptor is deemed to be an
of his signature and his capacity and authority to draw indorser, unless he clearly indicates by appropriate
the instrument; and words his intention to be bound in some other capacity.
3. Admits the existence of the payee and his then (NIL, Sec. 63)
capacity to indorse. (NIL, Sec. 62, 1992; 1998 Bar) -When a person wants to be a party to an instrument,
he must clearly indicate in what capacity he intends to
Party who can accept the bill of exchange be bound by his signature.
GR: Only the drawee may accept. A stranger or
volunteer is not bound by the acceptance. NOTE: A person who places his indorsement on a
XPN: In case of a bill which is accepted for honor bearer instrument incurs all liabilities of an indorser.
supra protest (NIL, Sec. 161). (NIL, Sec. 67)

Honor supra protest or acceptance for honor is an Draver vs. Indorser

undertaking by a stranger to a bill after protest for the Drawer Indorser
benefit of any party liable thereon or for the honor of Party only to a bill Party either a bill or note
the person for whose account the bill is drawn which Makes admission as to No such admission
acceptance inures also to the benefit of all parties the existence of the
subsequent to the person for whose honor it is payee and his capacity to
accepted, and conditioned to pay the bill when it indorse
becomes due if the original drawee does not pay it. (De Makes no warranties, Has warranties
Leon, 2010) but engages to pay after
certain conditions are
NOTE: Drawee does not become liable until he complied with
accepts the instrument in which case he becomes an
acceptor. An acceptor engages to pay according to the Q: P sold to M 10 grams of shabu worth Php5,000.00.
tenor of his acceptance, which may not be the same as As he had no money at the time of the sale, M wrote a
the tenor of the bill itself because the acceptance may promissory note promising to pay P or his order
be qualified. Php5,000.00. P then indorsed the note to X (who did
not know about the shabu), and X to Y. Unable to
Difference between the liability of an acceptor or collect from P, Y then sued X on the note. X set up the
drawee-acceptor and a maker defense of illegality of consideration. Is he correct?
(2011 Bar)
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
A: NO, since X, a general indorser, warrants that the Not a party to the his signature in the
note is valid and subsisting. instrument but he instrument.
becomes one because of
Sec. 64. Liability of irregular indorser. - Where a his signature in the
person, not otherwise a party to an instrument, places instrument.
thereon his signature in blank before delivery, he is
liable as indorser, in accordance with the following Indorses the instrument Indorses before its
rules: after its delivery to the delivery to the payee
(a) If the instrument is payable to the order of a third payee
person, he is liable to the payee and to all subsequent Liable only to parties Liable to the payee and
parties. subsequent to him subsequent parties
(b) If the instrument is payable to the order of the unless he signs for the
maker or drawer, or is payable to bearer, he is liable to accommodation of the
all parties subsequent to the maker or drawer. payee in which case he
(c) If he signs for the accommodation of the payee, he is liable only to all
is liable to all parties subsequent to the payee. parties subsequent to the
payee
Sec. 65. Warranty where negotiation by delivery and NOTE: The holder or subsequent indorser who tries to
so forth. — Every person negotiating an instrument by claim under the instrument which had been dishonored
delivery or by a qualified indorsement warrants: for "irregular indorsement" must not be the irregular
(a) That the instrument is genuine and in all respects indorser himself who gave cause for the dishonor.
what it purports to be; (Gonzales v. Rizal Commercial Banking Corporation,
(b) That he has a good title to it; G.R. No. 156294, November 29, 2006)
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would Section 65 classifies two kinds of parties or indorsers
impair the validity of the instrument or render it who shall be liable for breach of any of the four
valueless. warranties mentioned:
But when the negotiation is by delivery only, the 1. The party who negotiates the instrument by delivery
warranty extends in favor of no holder other than the 2. Qualified indorser
immediate transferee.
The provisions of subdivision (c) of this section do not Qualified indorser
apply to a person negotiating public or corporation A qualified indorser is a person who indorses without
securities other than bills and notes. recourse. (NIL, Sec. 65)

Sec. 66. Liability of general indorser. - Every indorser Sec. 67. Liability of indorser where paper negotiable
who indorses without qualification, warrants to all by delivery. — Where a person places his indorsement
subsequent holders in due course: on an instrument negotiable by delivery, he incurs all
(a) The matters and things mentioned in subdivisions the liability of an indorser.
(a), (b), and (c) of the next preceding section; and
(b) That the instrument is, at the time of his Sec. 68. Order in which indorsers are liable. - As
indorsement, valid and subsisting; respect one another, indorsers are liable prima facie in
And, in addition, he engages that, on due presentment, the order in which they indorse; but evidence is
it shall be accepted or paid, or both, as the case may admissible to show that, as between or among
be, according to its tenor, and that if it be dishonored themselves, they have agreed otherwise. Joint payees
and the necessary proceedings on dishonor be duly or joint indorsees who indorse are deemed to indorse
taken, he will pay the amount thereof to the holder, or jointly and severally. robles virtual law library
to any subsequent indorser who may be compelled to
pay it. Order of liability among the indorsers
1. Among themselves – Liable prima facie in the order
Sec. 66, 1) warrants the instrument and 2) guarantees in which they indorse (NIL, Sec. 68)
payment 2. To the holder – In any order
Every indorser is liable prima facie to all indorsers
General Indorser Vs. Irregular indorser (2005 bar) subsequent to him, but not those indorsers prior to him.
General indorser Irregular indorser (NIL, Sec. 68)
A regular party to the Not a party to the
instrument and signs instrument but he Sec. 69. Liability of an agent or broker. - Where a
upon delivery of the becomes one because of broker or other agent negotiates an instrument without
document. indorsement, he incurs all the liabilities prescribed by
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
Section Sixty-five of this Act, unless he discloses the Warranties and liabilities of parties who are
name of his principal and the fact that he is acting only secondarily liable
as agent. Absolute liability Limited liability
>Drawer of a BOE >Qualified indorser
Liability of an agent or broker who negotiates an Warrants: Warrants that the:
instrument without indorsement a. The existence of a. Instrument is genuine;
He incurs all the liabilities prescribed to a general payee and his then b. He has good title to it;
indorser unless he discloses the name of his principal capacity to c. Capacity to contract of
and the fact that he is acting only as an agent (NIL, indorse; all prior parties; and
Sec. 69) b. That the instrument d. No knowledge of any
will be accepted or paid fact which would impair
NOTE: Parol evidence is NOT admissible to relieve an upon the
agent or broker whose endorsement brings him within due presentment by the validity of the
the above liability. party primarily liable instrument. (NIL,
according to its tenor; Sec.65)
Q: Can a collecting bank debit the account of the and NOTE: He is liable to all
depositor when the checks indorsed to it (bank) were c. That if dishonored, he parties who derive their
forged? will pay the party title through his
A: YES, because the depositor of a check as indorser entitled to indorsement.
warrants that it is genuine and in all respects what it be paid. (NIL, Sec. 61.)
purports to be. Thus, when the checks deposited had >General indorser Person negotiating by
forged indorsements and the collecting bank, as a delivery
consequence of such forgery, was made to pay the a. Warrants that: Same warranties as a
drawee bank, the collecting bank can debit the account i. Instrument is genuine qualified indorser. But
of the depositor for his breach of warranty. (Jai-Alai ii. He had good title to it unlike a qualified
Corporation of The Philippines v. BPI, G.R. No. L- iii. All prior parties had indorser, a person
29432, August 6, 1975) capacity to contract negotiating by mere
iv. Instrument, at the delivery is liable only to
Q: Phebean, the drawer issued a check to James. time of indorsement, his immediate transferee.
James, subsequently indorsed it to Trude. When Trude was valid (NIL, par. 2, Sec. 65)
is about to encash the check, the drawee Union Bank and subsisting; NOTE: Person
refused to encash it due to insufficiency of funds. b. On due presentment, negotiating by mere
Trude sued James for payment of money. James it shall be accepted or delivery and a qualified
alleged that the suit should be dismissed because paid, or both according indorser’s secondary
Phebean is an indispensable party. Does James’ to its tenor liability is limited,
argument hold water? c. If the instrument is namely, to their
A: NO, there is no privity between the drawer and the dishonored and the warranties
holder. The drawer is merely secondarily liable. As necessary proceedings
indorser, he warranted that upon due presentment, the on dishonor be duly
checks were to be accepted or paid, or both, according taken, he will pay the
to their tenor, and that in case they were dishonored, holder. (NIL, Sec. 66.)
she would pay the corresponding amount. After an >Irregular indorser
instrument is dishonored by non-payment, indorsers a. In an order
cease to be merely secondarily liable; they become instrument, liable to the
principal debtors whose liability becomes identical to payee and all subsequent
that of the original obligor. (Tuazon v. Heirs of parties
Bartolome Ramos, G.R. No. 156262, July 14, 2005) b. If bearer instrument or
payable to order of
Q: X is the holder of an instrument payable to him (X) maker or drawer, liable
or his order, with Y as maker. X then indorsed it as to all parties subsequent
follows: “Subject to no recourse, pay to Z. Signed, X.” to the maker or drawer
When Z went to collect from Y, it turned out that Y's c. If he signs for
signature was forged. Z now sues X for collection. accommodation of the
Will it prosper? (2011 Bar) payee, liable to all
A: YES, because X, irrespective of his qualified parties subsequent to
indorsement, is an indorser who warrants that the note payee. (NIL, Sec. 64.)
is genuine.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Warranties exhibit the instrument, which he cannot do because he
Qualified indorser and persons negotiating by delivery: is not in possession thereof.
1. That the instrument is genuine and in all respects
what it purports to be; Q: AB issued a promissory note for P1,000 payable to
2. That he has good title to it; CD or his order on September 15, 2002. CD indorsed
3. That all prior parties had capacity to contract; and the note in blank and delivered the same to EF. GH
4. That he has no knowledge of any fact which would stole the note from EF and on September 14, 2002
impair the validity of the instrument or render it presented it to AB for payment. When asked by AB,
useless. GH said CD gave him the note in payment for two
cavans of rice. AB therefore paid GH P1,000 on the
But when the negotiation is by delivery only, the same date. On September 15, 2002, EF discovered that
warranty extends to the immediate transferee only. the note of AB was not in his possession and he went
(NIL, Sec 65) to AB. It was then that EF found out that AB had
already made payment on the note.
NOTE: Indorser’s liability as warrantor is distinct a. Can EF still claim payment from AB? Why?
from his liability to pay the instrument. Even a b. As a sequel to the same facts narrated above, EF, out
qualified indorser may incur liability for breach of of pity for AB who had already paid P1,000 to GH,
implied warranties. As warrantor, his liability is decided to forgive AB and instead go after CD who
unconditional. indorsed the note in blank to him. Is CD still liable to
EF by virtue of the indorsement in blank?
General Indorser: Why? (2002 Bar)
1. That the instrument is genuine and in all respects A:
what it purports to be; a. Since the instrument became a bearer instrument, EF
2. That he has good title to it; could no longer claim payment from AB. EF is not a
3. That all prior parties had capacity to contract; and holder of the promissory note. To make the
4. That the instrument is at the time of his indorsement, presentment for payment, it is necessary to exhibit the
valid and subsisting. instrument, which EF cannot do because he is not in
possession thereof.
In addition, general indorser engages that on due b. NO, because CD negotiated the instrument by
presentment, it shall be accepted or paid, or both, as delivery.
the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor Necessity of presentment for payment
be duly taken, he will pay the amount thereof to the Presentment for payment is not necessary in order to
holder, or to any subsequent indorser who may be charge the person primarily liable on the instrument. It
compelled to pay it. (Sec. 66, NIL) is only necessary to charge persons secondarily
liable— drawer and indorsers. (NIL, Sec. 70)
PRESENTMENT FOR PAYMENT
It is the presentation of an instrument to the person Requisites for a sufficient presentment for payment
primarily liable for the purpose of demanding and (1994, 2002 Bar)
receiving payment. Presentment for payment, to be sufficient, must be
made:
Manner of presentment 1. By the holder, or his agent authorized to receive
GR: Instrument must be exhibited to the person from payment on his behalf;
whom payment is demanded; when paid, it must be 2. At a reasonable hour on a business day;
delivered to the person paying it. (NIL, Sec. 74) 3. At a proper place; and
XPNs: When exhibition is excused: 4. To the person primarily liable, or if he is absent or
1. Debtor does not demand to see the instrument and inaccessible, to any person found at the place where
refuses payment on some other grounds; or the presentment is made (NIL, Sec. 72).
2. Instrument is lost or destroyed.
If the instrument is, by its terms, payable at a special
The bank remains liable to the holder if it paid the place, and the person primarily liable is able and
certificate of deposit payable to bearer without willing to pay it there at maturity, such ability and
requiring its surrender (FEBTC v. Querimit, G.R. No. willingness are equivalent to a tender of payment upon
148582, January 16, 2002). his part. (Sec. 70, NIL)

Payee cannot claim payment for a promissory note Time for presentment for payment
which was stolen and as such is not in his possession. Instrument Time for presentment
To make presentment for payment, it is necessary to

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

 Payable at a GR: On the day it falls in presentment is excused and not the presentment
fixed or determinable due (NIL, Sec. 85) itself. Hence, as soon as the cause of delay ceases to
future time XPN: If the due date operate, presentment must be made with reasonable
falls on a Saturday, diligence. (NIL, Sec. 81)
presentment must be
made on the next Q: Is the bank liable to the payee for depositing and
Monday. encashing the crossed checks to an unauthorized
NOTE: If presentment person?
for payment is made A: YES, the effects of crossing a check relate to the
before maturity, it will mode of its presentment for payment. Under Sec. 72 of
not result to a discharge the NIL, presentment for payment, to be sufficient,
of the instrument. (NIL, must be made by the holder or by some person
Sec. 50) authorized to receive on his behalf. The checks here
Promissory note payable Within a reasonable time had been crossed and issued “for payee’s account
on demand after its issue. only.” This only signifies that the drawer had intended
Bill of exchange Within a reasonable time the same for deposit only by the person indicated.
after the last negotiation (Associated Bank v. CA, G.R. No. 89802, May 7,
thereof (NIL, Sec. 71). 1992)
Payable on demand NOTE: “Last
negotiation” means the Order of preference with regard to the place of
last transfer for value. presentment
Subsequent transfers 1. Specified place in the instrument
between banks for 2. Address of the person to make the payment if
purposes of collection given in the instrument
are not negotiations 3. Usual place of business or residence of the person to
within the meaning of make the payment
Sec. 71. 4. Wherever he can be found; or
“Reasonable time” 5. At his last known place of business or residence.
means not more than 6 (NIL, Sec. 73)
months from the date of
issue. Beyond said Instrument is payable at a bank
period, the check When the instrument is payable at bank, presentment
becomes stale and must be made during banking hours, unless the person
valueless and thus, to make payment has no funds there to meet it at any
should not be paid. time during the day, in which case presentment at any
hour before the bank is closed on that day is sufficient
NOTE: Every NI is payable at the time fixed therein (NIL, Sec. 75).
without grace.
Payment in due course (H&M)
Rules on presentment for payment when maturity date In order for payment to constitute payment in due
is fixed course,
Time of maturity of When to present for it must be made:
instrument payment 1. At or after the maturity of the instrument
On a Sunday or holiday On the next succeeding 2. To the holder thereof, in good faith and without
business day notice that his title is defective (NIL, Sec. 88).
On a Saturday On the next succeeding
business day Parties to whom presentment for payment should be
If instrument which falls Before 12:00 noon on made
due on a Saturday is Saturday, or on Monday, GR: Presentment for payment must be made to the:
payable on demand at the option of the 1. The maker in case of a promissory note, or
holder 2. The acceptor in case of an accepted bill. If the bill of
exchange or check is payable on demand, the
Delay in making presentment is excused presentment must be made to the drawee although
1. When caused by circumstances beyond the control he is not automatically liable on the bill.
of the holder; and XPNs: Where the person/s primarily liable is/are:
2. It is not imputable to his default, misconduct, or 1. Dead – presentment for payment must be made to
negligence. his personal representative. (NIL, Sec. 76)
Only the delay 2. Liable as partners and no place of payment

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

specified – presentment for payment may be made to immediate right of recourse to all parties secondarily
any of them though there has been dissolution of the liable thereon accrues to the holder. (NIL, Sec. 84)
firm. (NIL, Sec. 77)
3. Several persons, not partners, and no place of
payment is specified – presentment for payment must Instances when an instrument is dishonored by non-
be made to all of them. (NIL, Sec. 78) payment
4. If the person primarily liable is absent or Non payment upon due Non-payment without
inaccessible - presentment for payment must be made presentation presentation
to any person of sufficient discretion at the proper The instrument is duly Presentment is excused
place of presentment. (NIL, Sec. 72[d]) presented for payment to and the instrument is
party primarily liable overdue and unpaid
Dispensation with presentment for payment and it is either refused or
GR: Drawer and the indorsers are discharged from cannot be obtained
their secondary liability when presentment is not made.
XPNs: Notice of dishonor
1. Presentment for payment is not required to charge It is a notice given by the holder to the parties
drawer and indorser when: secondarily liable, drawer and each indorser, that the
a. Drawer- when he has no right to expect or instrument was dishonored by non-payment or non-
require that the drawee or acceptor will pay the acceptance by the drawee/maker.
instrument (NIL, Sec. 79).
b. Indorser – When the NI was made or accepted Persons primarily liable need not be given notice of
for his accommodation and he has no reason to dishonor because they are the ones who dishonored the
expect that the instrument will be paid if instrument.
presented (NIL, Sec. 80).
2. When presentment for payment is dispensed with Purposes for requiring notice of dishonor
under Sec. 82, NIL: 1. To inform parties secondarily liable that the maker
a. Where, after the exercise of reasonable diligence, or acceptor has failed to meet his engagement; and
presentment for payment cannot be made; 2. To advise them that they are required to make
b. Where the drawee is fictitious person; or payment.
c. By waiver of presentment, express or implied.
3. When the BOE has been dishonored by non- Q: Notice of dishonor is not required to be made in all
acceptance, since no Presentment for Payment for is cases. One instance where such notice is not necessary
necessary (NIL, Sec. 151). is when the indorser is the one to whom the instrument
is supposed to be presented for payment.
Q: Gemma drew a check on September 13, 2010. The The rationale here is that the indorser (2011 Bar)
holder presented the check to the drawee bank only on A: Already knows of the dishonor and it makes no
March 5, 2012. The bank dishonored the check on the sense to notify him of it.
same date. After dishonor by the drawee bank, the
holder gave a formal notice of dishonor. Time of giving the notice of dishonor
a. What is meant by reasonable time as applied to GR: As soon as instrument was dishonored (NIL, Sec.
presentment? 102.)
b. Is Gemma still liable to the holder? XPN: Delay is excused (NIL, Sec. 113,).
A: NOTE: An instrument cannot be dishonored by non-
a. Reasonable time is relative. Regard is to be had to payment until after the maturity.
the facts of each case, usage of business and trade, and
the nature of the instrument. With respect to checks, Place of giving the notice of dishonor
current banking practice dictates that the check 1. Parties reside in the same place
becomes stale if it is not presented for payment within a. Place of business – Before close of business hours
6 months from issuance. on the day following
b. NO. Gemma is discharged from secondary liability b. Residence – Before the usual hours of rest on the
under the check because presentment and notice of day following
dishonor were made after an unreasonable length of c. By mail – Deposited in the post office in time to
time. The check was already stale at the time of reach him in the usual course on the day following
presentment. (NIL, Sec. 103)
2. Parties reside in different places
Dishonor by non-payment a. By mail – Deposited in the post office in time to
Subject to the provisions of the law, when the
instrument is dishonored by non-payment, an

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

go by mail (actual departure in the course of mail from 1. To the parties secondarily liable – Within the time
the post office in which the notice was deposited) the fixed by Secs. 102-104, and 107, otherwise, they are
day following the day of dishonor. discharged.
b. If no mail – At a convenient hour (of the sender) on 2. To his principal – The principal must give notice to
that day, by the next mail thereafter parties secondarily liable as if his agent were an
c. Other than by post office (e.g. personal messenger) – independent holder. (NIL, Sec. 94)
Within the time that notice would have been received A party who receives notice of dishonor is entitled to
in due course of mail, if it has been deposited in the give notice of such dishonor to prior parties within the
post office within the time specified in Sec. 104(a). same period of time that the holder has after the
(NIL, Sec. 104) dishonor, as if he were the said holder. (NIL, Sec. 107)
3. Time of notice to antecedent parties – Same time for
giving notice that the holder has after the dishonor Parties who may give notice of dishonor
(NIL, Sec. 107). The parties who may give notice of dishonor
NOTE: Actual receipt of the party within the time 1. Holder
specified by law is sufficient though not sent in the 2. Another in behalf of the holder
places specified above. (NIL, Sec. 108) 3. Any party to the instrument, who may be compelled
to pay and who, upon taking it up, would have a right
Instances when a negotiable instrument is considered to reimbursement from the party to whom notice is
dishonored given. (NIL, Sec. 90)

For BOE: Effects of notice of dishonor

1. If not accepted when presented for acceptance; or Notice of dishonor, if given by or on behalf of the
2. If presentment for acceptance is excused and the bill holder, inures to the benefit of:
is not accepted. (NIL, Sec. 149) 1. All holders subsequent to the holder who has given
notice; and
For PN: 2. All parties prior to the holder but subsequent to the
1. Not paid (that is, payment is refused or not obtained) party to whom notice has been given and against
when presented for payment at maturity; or whom they may have a right of recourse. (NIL, Sec.
2. Where presentment is excused or waived and the 92)
instrument is overdue and unpaid. (NIL, Sec. 83) Notice of dishonor if given by party entitled thereto,
inures to the benefit of:
Liability of a person secondarily liable when the 1. The holder; and
instrument is dishonored 2. All parties subsequent to the party to whom notice is
After the necessary proceedings for dishonor had been given. (NIL, Sec. 93)
duly taken, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder. (NIL, Forms of notice
Sec. 84) Form and contents of a notice of dishonor
1. Oral
Parties to be notified 2. In writing
Parties to whom notice must be given 3. It may be given by personal delivery, or by mail
Notice of dishonor should be given to: (NIL,
1. The drawer Sec. 96)
2. Indorser 4. Must contain the following:
3. His agent (NIL, Sec. 97) a. Description of the instrument;
4. Where party is dead – to a personal representative or b. Statement that it has been presented for
sent to the last residence or last place of business of the payment or for acceptance and that it has been
deceased (NIL, Sec. 98) dishonored (If protest is necessary, notice must also
5. When the parties to be notified are partners – notice contain a statement that it has been protested); and
to any one partner though there has been a dissolution c. Statement that the party giving the notice intends to
(NIL, Sec. 99) look for the party addressed for payment.
6. Notice to joint parties who are not partners must be
given to each of them (NIL, Sec. 100) NOTE: A written notice need not be signed, and an
7. Where a party has been adjudged a bankrupt – to the insufficient notice may be supplemented or validated
party himself or to his trustee or assignee (NIL, Sec. by verbal communication. A misdescription of the
101) instrument does not vitiate the notice unless the party
to whom the notice is given is in fact misled thereby.
In case the instrument was dishonored in the hands of (NIL, Sec. 95)
the agent, notice of dishonor should be given:

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Waiver from the bank can hold the drawer liable even if no
It is the willingness on the part of the drawer or notice of dishonor was given to the drawer, since the
indorser to be bound as such even without due notice drawer had no right to expect that the drawee bank
of dishonor. would honor the checks. (SIHI vs. CA, G.R. No.
101163, January 11, 1993)
Waiver of notice maybe given:
1. Before the time of giving notice has arrived; or Q: P authorized A to sign a negotiable instrument in
2. After the omission to give due notice. (NIL, Sec. his (P’s) name. It reads: “Pay to B or order the sum of
109) Php1 million. Signed, A (for and in behalf of P).” The
Ways to give a waiver of notice instrument shows that it was drawn on P. B then
1. Express; or indorser to C, C to D,and D to E. E then treated it as a
2. Implied (e.g. Payment by an indorser after he learns bill of exchange. Is presentment for acceptance
of the default of the maker; admission of liability after necessary in this case? (2011 Bar)
dishonor). (NIL, Sec. 109) A: NO, since the drawer and drawee are the same
person.
Parties affected by the waiver of notice
1. All parties - if embodied on the face of the Q: Juben issued to Y two post-dated checks as security
instrument for pieces of jewelry to be sold. Y negotiated the check
2. Particular indorser - if written above the signature of to S. When Juben failed to sell the jewelry, he
such indorser. (NIL, Sec. 110) withdrew all his funds from the drawee bank. After
dishonor, Juben contends that the holder failed to give
Waiver of protest him a notice of dishonor. Is notice of dishonor
It is the waiver of the formal instrument executed necessary?
usually by a notary public certifying that the legal A: NO, Juben was responsible for the dishonor of his
steps necessary to fix the liability of the drawee and checks, hence, there was no need to serve him notice
the indorsers have been taken. Thus, it is deemed to be of dishonor (SIHI v. CA, supra.).
a waiver not only of a formal protest but also of
presentment and notice of dishonor. (NIL, Sec. 111) Instances when it is not necessary to give a notice of
dishonor to the indorser
Dispensation with notice 1. Drawee is fictitious or has no capacity to contract,
Instances when notice of dishonor is not necessary and indorser was aware of these facts at the time he
1. Waiver of notice (NIL, Sec. 109) indorsed the instrument
2. Waiver of protest (NIL, Sec. 111) 2. Indorser is person to whom the instrument is
3. When notice is dispensed with when after exercise presented for payment
of reasonable diligence, notice cannot be given or does 3. Instrument was made or accepted for his
not reach the parties sought to be charged (NIL, Sec. accommodation. (NIL, Sec. 115)
112)
4. Drawer in cases under Sec. 114, NIL. Effect of failure to give notice
5. Indorser in cases under Sec. 115, NIL.; and GR: Any person to whom such notice is not given is
6. Where due notice of dishonor by non-acceptance discharged, but he will still be liable for breach of
has been given (notice of dishonor by non-payment not warranties pertaining to the instrument.
necessary). (NIL, Sec. 116.)
XPNs:
Instances when a notice of dishonor to the drawer may 1. Waiver (NIL, Sec. 109)
be dispensed with 2. Notice is dispensed with (NIL, Sec. 112)
1. When drawer and drawee is the same person 3. Notice not necessary to drawer (NIL, Sec. 114)
2. Drawee is fictitious or does not have the capacity to 4. Notice not necessary to indorser (NIL, Sec. 115)
contract
3. Drawer is the person to whom the instrument is NOTE: Holder is not required to notify all indorsers,
presented for payment (he is the one who dishonored he may select to hold only one or more indorsers.
the instrument) Indorsers who are discharged from liability by reason
4. Drawer has no right to expect or require that the that no notice of dishonor was given to them is still
drawee or acceptor will honor the instrument. liable for breach of warranties as to the NI.
5. Drawer has countermanded the payment (e.g. stop
payment order). (NIL, Sec. 114.) Effect of the omission of a previous holder to give
notice of dishonor by non-acceptance
NOTE: The holder of two checks which were It does not prejudice the rights of a holder in due
dishonored because the drawer withdrew her funds course subsequent to the omission to present the

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

instrument to the drawee for acceptance and notify the which will discharge a simple contract for the payment
drawer and indorsers if acceptance is refused. (NIL, of money.” Is Bong correct? (2014 Bar)
Sec. 117) A: NO. Bong is not correct. While Section 119 of the
NIL in relation to Article 1231 of the Civil Code
Effect of lack of notice of dishonor on the instrument provides that one of the modes of discharging a
which is payable in installments negotiable instrument is by any other act which will
No acceleration clause – Failure to give notice of discharge a simple contract for the payment of money,
dishonor on a previous installment does not discharge such as novation, the acceptance by the holder of
drawers and indorsers as to succeeding installments. another check which replaced the dishonored bank
check did not result to novation.
Discharge of negotiable instrument There are only 2 ways which indicate the presence of
It is the release of all parties, whether primary or novation and thereby produce the effect of
secondary, from the obligations arising thereunder. It extinguishing an obligation by another which
renders the instrument without force and effect, and substitutes the same. First, novation must be explicitly
consequently, it can no longer be negotiated. stated and declared in unequivocal terms as novation is
never presumed. Secondly, the old and the new
Methods for discharge of instrument obligation must be incompatible on every point.
1. Payment by principal debtor: In the instant case, there was no express agreement that
a. By or on behalf of principal debtor; the holder’s acceptance of the replacement check will
b. At or after its maturity; discharge the drawer and endorser from liability.
c. To the holder thereof; and Neither is there incompatibility because both checks
d. In good faith and without notice that the were given precisely to terminate a single obligation
holder’s title is defective arising from the same transaction. (Anamer Salazar v.
2. Payment by accommodated party J.Y. Brothers Marketing Corp., G.R. No. 171998,
3. Intentional cancellation of instrument by the holder October 20, 2010, in Divina 2014)
(by expressly stating it in the instrument or when the
instrument is torn up, burned or destroyed) Q: Is a manager’s check as good as cash? Why or why
4. Any act which discharges a simple contract for the not? (2015 Bar)
payment of money under Art. 1231 of the NCC, A: YES, the Supreme Court held in various decisions
specifically remission, novation, and merger. that a manager’s check is good as cash. A manager’s
NOTE: Loss of the negotiable instrument will not check is a check drawn by the bank against itself. It is
extinguish liability; compensation is not available so deemed preaccepted by the bank from the moment of
long as an obligation is evidenced by a negotiable issuance. The check becomes the primary obligation of
instrument. (Villanueva, 2009) the bank which issues it and constitutes its written
5. Reacquisition by principal debtor in his own right. promise to pay. By issuing it, the bank in effect
Reacquisition must be: commits its total resources, integrity and honor behind
a. By the principal debtor; the check (Tan v. CA, 239 SCRA 310; International
b. In his own right; and Corporate Bank v. Gueco, 351 SCRA 516; Metrobank
c. At or after date of maturity v. Chiok, GR No. 172652, Nov. 26, 2014).
NOTE: If reaquisition is made before maturity, the
instrument is not discharge as it may be renegotiated. Discharge of parties secondarily liable
(NIL, Sec. 119) Methods of discharge of secondary parties (ACS
TReE)
Q: Bong bought 300 bags of rice from Ben for 1. Any Act which discharges the instrument;
P300,000. As payment, Bong indorsed to Ben a BPI 2. Intentional Cancellation of his signature by the
check issued by Baby in the amount of P300,000. holder
Upon presentment for payment, the BPI check was 3. Discharge of prior party which may be made when
dishonored because Baby’s account from which it was signature is Stricken out
drawn has been closed. To replace the dishonored 4. Valid Tender of payment by a prior party;
check, Bong indorsed a crossed DBP check issued also 5. Release of the principal debtor, unless holder
by Baby for P300,000. Again, the check was expressly reserves his right of recourse against the
dishonored because of insufficient funds. Ben sued said subsequent parties
Bong and Baby on the dishonored BPI check. Bong 6. Extension of time of payment, unless:
interposed the defense that the BPI check was a. Extension is consented to by such party
discharged by novation when Ben accepted the crossed b. Holder expressly reserves his right of recourse
DBP check as replacement for the BPI check. Bong against such party (NIL, Sec. 120)
cited Section 119 of the NIL which provides that a
negotiable instrument is discharged “by any other act

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Q: The rule is that the intentional cancellation of a was made unintentionally, or under a mistake or
person secondarily liable results in the discharge of the without authority. (NIL, Sec. 123)
latter. With respect to an indorser, the holder's
right to cancel his signature is: (2011 Bar)
A: Limited to the case where the indorsement is not
necessary to his title.

Effects of payment by persons secondarily liable

1. Instrument is not discharged
2. It only cancels his own liability and that of the
parties subsequent to him
3. Instrument may be renegotiated
4. Person paying is remitted to his former rights (as
regards prior parties) and he may strike out his own
and all subsequent indorsements. (NIL, Sec. 121)

Right of the party who discharged instrument

GR: The party (secondarily liable) so discharging the
instrument is remitted to his former rights as regards
all prior parties, and he may strike out his own and all
subsequent indorsements, and again negotiate the
instrument.
XPNs:
1. Where it is payable to the order of a third person,
and has been paid by the drawee; and
2. It was made or accepted for accommodation, and
has been paid by the party accommodated.
NOTE: The above exceptions have the same effect as
payment by the party primarily liable.

Renunciation by the holder

Renunciation
It is the act of surrendering a claim or right with or
without recompense. (De Leon, 2014)

Manner of making renunciation by the holder

1. Must be written
2. If oral, the instrument must be surrendered to the
person primarily liable (NIL, Sec. 122).

Effects of renunciation
1. Made in favor of principal debtor made at or after
the maturity (made absolutely and unconditionally) of
the instrument – discharges the instrument (NIL, Sec.
122).
2. Made in favor of a secondary party may be made by
the holder before, at or after maturity – discharges only
the secondary parties and all subsequent to him (NIL,
Sec. 122).
3. Renunciation does not affect the rights of a holder in
due course without notice. (NIL, Sec. 120).=

Rule regarding the cancellation of an instrument

It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the
authority of the holder. But where an instrument or any
signature appears to have been cancelled, the burden of
proof lies on the party alleging that the cancellation

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Material alteration
Q: What is a material alteration? 3. If alteration (because of their warranties). (2001
A: Any change in the instrument which affects or Bar)
changes the liability of the parties in any way. a. He cannot enforce payment against the person not a
-It is any change in the instrument which affects or party prior to the alteration.
changes the liability of the parties in any way. It means b. He may, however enforce payment according to the
an unauthorized change in an instrument that purports altered tenor from the person who caused the alteration
to modify in any respect the obligation of a party or an and from the indorsers. (NIL, Sec. 12)
unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the A drawee who accepts a materially altered check
obligation of a party. cannot recover from the holder and the drawer. (2011
Bar)
Q: What constitutes a material alteration?
A: Any alteration which changes:
1. Date; Acceptance
2. Sum payable, either for principal or interest; Definition
3. The time or place of payment; Acceptance of a bill
4. Number or the relations of the parties; It is a signification by the drawee of his assent to the
5. Currency in which payment is to be made; or order of the drawer. (NIL, Sec. 132)
6. Or which adds a place of payment where no place is
specified; Requisites for acceptance
7. Or any other change or addition which alters the 1. It must be in writing, except constructive acceptance
effect of the instrument.(Sec. 125) and to a foreign bill payable in another state (unless the
Note: The change in the date is not material where the other state requires for written acceptance)
date is not necessary to fix the maturity of the 2. Signed by the drawee
instrument. 3. Must express a promise to pay money
NOTE: There is no material alteration when the serial 4. Delivered to the holder.
number of a check had been altered. The alteration of
the serial number of a check did not change the NOTE: Before delivery or notification, acceptor may
relations between the parties nor the effect of the revoke or cancel his acceptance.
instrument. Hence, the alteration on the serial number Upon acceptance, the bill, in effect becomes a note.
of a check is not a material alteration (International The drawee who thereby becomes an acceptor assumes
Corporate Bank v. CA, G.R. No. 141968, February 12, the liability of the maker (who has primary liability)
2001). and the drawer, that of the first indorser.

Q: What is spoliation? Manner

A: It refers to material alteration of an instrument Manner of making an acceptance
done by a stranger. It has the same effect as alteration. Acceptance may be made
1. On the bill itself
Q: What are the effects of material alteration of a 2. On a separate paper:
negotiable instrument without the assent of all parties a. It may be acceptance as to an existing bill; or
liable thereon? b. It may be acceptance as to a non-existing bill.
A: NOTE: If the bill is non-existent, the acceptance on a
Material alteration of a negotiable instrument, without separate paper must comply with following
the assent of all parties liable thereon, has the requirements:
following effects: 1. The contemplated drawee shall describe the bill to
1. Avoids the instrument except against: be drawn and promise to accept it;
a. A party who has made the alteration; 2. Bill shall be drawn within a reasonable time after
b. A party who authorized or assented to the such promise is written; and
alteration; or 3. The holder shall take the bill upon the credit of the
c. The indorsers who indorsed subsequent to the promise.
2. If negotiated to an HIDC:
a. He may enforce the payment thereof according to its Kinds of acceptance
original tenor against the person not a party to the 1. General Acceptance -It assents without qualification
alteration. to the order of the drawer. (NIL, Sec. 139)
b. He may also enforce payment thereof against the 2. Qualified Acceptance - An acceptance which in
party responsible for the alteration for the altered express terms varies the effect of the bill as drawn
amount. negotiated to a holder not an HIDC: (ibid.).

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

NOTE: A holder may refuse to accept a qualified Time for acceptance
acceptance and if he does not obtain an unqualified The drawer has 24 hours after presentment to decide
acceptance, he may treat the bill as dishonored by non- whether or not he will accept the bill. The acceptance,
acceptance (NIL, Sec. 142). if given, dates as of the day of presentation. (NIL, Sec.
136)
Kinds of qualified acceptance NOTE: Drawee bank is not entitled to 24 hours to
1. Conditional – makes payment by the acceptor decide whether or not to pay a check since a check is
dependent on the fulfillment of a condition therein presented for payment, not acceptance.
stated. Q: Is there material alteration when the serial number
2. Partial – an acceptance to pay part only of the of a check had been altered?
amount for which the bill is drawn. A: No. An alteration is said to be material if it alters
3. Local – an acceptance to pay only at a particular the effect of the instrument. It means an unauthorized
place. change in an instrument that purports to modify in any
4. Qualified as to time– a bill is accepted to be paid on respect the obligation of a party or an unauthorized
or after a specified date. addition of words or numbers or other change to an
5. As to drawee - acceptance of some one or more of incomplete instrument relating to the obligation of a
the drawees but not of all. (NIL, Sec. 141) party. The alteration of the serial number of a check
did not change the relations between the parties nor the
Q: A bill of exchange states on its face: “One (1) effect of the instrument. Hence, the alteration on the
month after sight, pay to the order of Mr. R the amount serial number of a check is not a material alteration.
of Php 50,000.00, chargeable to the account of Mr. S. (International Corporate Bank vs. CA, G.R. No.
Signed, Mr. T.” Mr. S, the drawee, accepted the bill 141968, Feb. 12, 2001.)
upon presentment by writing on it the words “I shall
pay Php 30,000.00 three (3) months after sight.” May Rules of governing acceptance
he accept under such terms, which varies the command Effect of accepting an instrument with a qualified
in the bill of exchange? (2011 Bar) acceptance
A: YES, since a drawee is allowed to effect a qualified GR: When the holder takes a qualified acceptance the
acceptance in which case he shall be liable according drawer and indorsers are discharged from liability on
to the tenor of his acceptance. the bill.
XPNs:
Q: X, drawee of a bill of exchange, wrote the words: 1. When they have expressly or impliedly authorized
“Accepted, with promise to make payment within two the holder to take a qualified acceptance;
days. Signed, X.” The drawer questioned the 2. Subsequently assent thereto; or
acceptance as invalid. Is the acceptance valid? 3. Implied assent - when they did not express their
A: YES, because the acceptance is in reality a clear dissent to the holder within a reasonable time when
assent to the order of the drawer to pay. Qualified they received a notice of qualified acceptance.
acceptance as to time is allowed. [NIL, Sec. 141 (d)] NOTE: The holder may refuse to take a qualified
acceptance and if he does not obtain an unqualified
--- Other kinds of acceptance acceptance, he may treat the bill as dishonored by non-
1. Constructive/implied acceptance. (NIL, Sec. 142)
a. Drawee to whom the bill is delivered for
acceptance destroys it Acceptance of an incomplete bill
b. Drawee refuses, within 24 hours after such delivery, Acceptance may be made before the bill has been
or within such time as is given him, to return the bill signed by the drawer or while otherwise incomplete, or
accepted or non-accepted (NIL, Sec. 137) after it is overdue, or even after it has been dishonored
2. Extrinsic by non- acceptance or non-payment. (NIL, Sec. 138)
The acceptance is written on a paper other than the bill
itself. To be binding upon the acceptor: Effect of the certification by the drawee bank
a. Acceptance must be shown to the person to Certification implies that the check is drawn upon
whom the instrument is negotiated; and sufficient funds in the hands of the drawee, that they
b. Such person must take the bill for value on the have been set apart for its satisfaction and that they
faith of such acceptance. (NIL, Sec. 134) shall be so applied whenever the check is presented for
3. Virtual payment. Where a check is certified by the bank on
a. Unconditional promise in writing to accept a bill which it is drawn, the certification is equivalent to
b. Promise made before it is drawn acceptance. (NIL, Secs. 187, 189; New Pacific Timber
c. Any person who, upon faith thereof, receives the v. Seneris, G.R. No. L- 41764, December. 19, 1980)
bill for value. (NIL, Sec. 135)
Presentment for acceptance

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

It is the production or exhibition of a bill of exchange Failure to make such presentment will discharge the
to the drawee for his acceptance or payment. A drawer from liability or to the extent of the loss caused
presentment for acceptance includes presentment for by the delay. (NIL, Sec. 186; Republic of the
payment. Philippines vs. PNB, G.R. No. L-16106, December 30,
GR: Acceptance is not necessary to render any party to 1961)
the bill liable. (NIL, Sec. 143, par. 2) However, delay in presentment may be excused where
XPNs: the holder of a bill drawn payable elsewhere than at the
1. Where bill is payable after sight, or when it is place of business or the residence of the drawee has no
necessary in order to fix the maturity of the instrument time with the exercise of reasonable diligence, to
2. When bill expressly stipulates that it shall be present the bill for acceptance before presenting it for
presented for acceptance payment on the day that it falls due. (NIL, Sec. 147)
3. Where the bill is drawn payable elsewhere than at
the residence or place of business of the drawee. (NIL, Instances when presentment is excused
Sec. 143, par. 1) 1. Where the drawee is dead, or has absconded, or is a
In said exceptions, the holder must either present it for fictitious person not having capacity to contract by bill
acceptance or negotiate it within a reasonable time, 2. Where, after exercise of reasonable diligence,
otherwise, the drawer and all indorsers are discharged. presentment cannot be made
(NIL, Sec. 144) 3. Where, although presentment has been irregular,
acceptance has been refused on some other ground
Time/place/manner of acceptance (NIL, Sec. 148)
Proper presentment for acceptance
It must be made: Dishonor by non-acceptance
1. By or on behalf of the holder; Instances when a bill is dishonored by non- acceptance
2. At a reasonable hour on a business day; 1. When it is duly presented for acceptance and such
3. Before the bill is overdue; and an acceptance is refused or cannot be obtained
4. To the drawee or some person authorized to accept 2. When presentment for acceptance is excused, and
or refuse to accept on his behalf. (NIL, Sec. 145) the bill is not accepted. (NIL, Sec. 149)
It is not sufficient that presentment for acceptance is
When Presentment must be excused, it is also necessary that the bill remains not
made to accepted.
Bill addressed to 2 or All of them unless one
more drawees who are has authority to accept Duty of the holder where bill is not accepted
not partners or refuse acceptance for If within 24 hours after due presentment, the bill is not
all, in which case accepted, the person presenting it must treat the bill as
presentment may be dishonored by non-acceptance otherwise he will lose
made to him only. [NIL, the right of recourse against the drawer and indorsers.
Sec. 145(a)] (NIL, Sec. 150)
Drawee is dead Drawee's personal
representative [NIL, Sec. Rules when a bill is dishonored by non-acceptance
145(b)] 1. Right of recourse against all secondary party accrues
NOTE: Presentment is to the holder.
merely permissive since 2. No presentment for payment is necessary since
it is excused by. [NIL, dishonor of the instrument by non-payment is to be
Sec. 148(a)] expected.
Drawee is adjudged a To drawee or his trustee/ 3. If the instrument is accepted after it has been
bankrupt or insolvent or assignee. [NIL, Sec. dishonored by non-acceptance, presentment for
has made an assignment 145(c)] payment is necessary upon maturity.
for the benefit of 4. In case of non-payment, holder must give the
creditors corresponding notice of dishonor; otherwise,
secondary parties are discharged.

Q: A material alteration of an instrument without the Rights of a holder when bill is not accepted
assent of all parties liable thereon results in its When a bill is dishonored by non-acceptance, an
avoidance, EXCEPT against: (2011 Bar) immediate right of recourse against the drawer and
Suggested Ans.: Party who has made, authorized or indorsers accrues to the holder, and no presentment for
assented to the alteration and subsequent indorser. payment is necessary. (NIL, Sec. 151)

Effect of failure to make presentment Acceptance for honor

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

It is an undertaking by a stranger to a bill after protest 9. Collateral Note – it is used when the maker pledges
for the benefit of any party liable thereon or for the securities to the payee to secure the payment of the
honor of the person for whose account the bill is drawn amount of the note.
which acceptance inures to the benefit of all parties 10. Judgment Note – this is a note to which a power of
subsequent to the person for whose honor it is attorney is added enabling the payee to take judgment
accepted, and conditioned to pay the bill when it against the maker without the formality of a trial if the
becomes due if the original drawee does not pay it. note is not paid on its due date. (De Leon, supra)
(NIL, Sec. 161) Instances when a bill of exchange may be treated as a
promissory note (2015 Bar)
Requisites of acceptance for honor (WIS) 1. The drawer and the drawee are the same person
1. Must be in Writing 2. The drawee is a fictitious person
2. Must Indicate that it is an acceptance for honor 3. The drawee has no capacity to contract
3. Must be Signed by the acceptor for honor (NIL, Sec. 4. The instrument is so ambiguous that there is doubt
162) whether it is a bill or a note. (Sundiang Sr. & Aquino,
2014, citing NIL, Secs. 17[e] and 130)
Promissory note
An unconditional promise in writing made by one
person to another, signed by the maker, engaging to Q: What are the effects of material alteration of a
pay on demand, or at a fixed or determinable future negotiable instrument without the assent of all parties
time, a sum certain in money to order or to bearer. liable thereon?
(NIL, Sec. 184) A:
1. Avoids the instrument except against:
Special types of promissory notes a. A party who has made, authorized or assented
1. Certificate of deposit – a written acknowledgment to the alteration;
by a bank or banker of the receipt of a sum of money b. The indorsers who indorsed subsequent to the
on deposit which the bank or banker promises to pay to alteration (because of their warranties).
the depositor, to the order of the depositor, or to some 2. If negotiated to a HIDC, he may enforce the
other person or his order, whereby the relation of payment thereof according to its original tenor against
debtor and creditor between the bank and the depositor the person not a party to the alteration. He may also
is created. enforce payment thereof against the party responsible
NOTE: A document to be considered a certificate of for the alteration for the altered amount.
deposit need not be in a specific form. Thus, a 3. If negotiated to a holder not a HIDC, he cannot
passbook issued by a bank qualifies as a certificate of enforce payment against the person not a party prior to
deposit drawing interest because it is considered a the alteration. He may, however, enforce payment
written acknowledgement by a bank that it has according to the altered tenor from the person who
accepted a deposit of a sum of money from a caused the alteration and from the indorsers. (Sec. 124)
depositor. Thus, it is subject to documentary stamp tax.
(Prudential Bank v. CIR, G.R. No. 180390, July 27, Q: Is there material alteration when the serial number
2011, in Divina, 2014) of a check had been altered?
2. Bonds – an evidence of indebtedness issued by a
public or private corporation which constitutes a A: No. An alteration is said to be material if it alters
promise, under seal, to pay money. It runs for a longer the effect of the instrument. It means an unauthorized
period of time than a PN. change in an instrument that purports to modify in any
3. Registered Bond – one payable only to the person respect the obligation of a party or an unauthorized
whose name appears on the face of the certificate. addition of words or numbers or other change to an
4. Coupon Bond – one to which are attached coupons incomplete instrument relating to the obligation of a
which entitle the holder to interest when due. party. The alteration of the serial number of a check
5. Bank Note – instrument issued by a bank for did not change the relations between the parties nor the
circulation as money payable to bearer on demand. effect of the instrument. Hence, the alteration on the
6. Due Bill - PN which shows on its face that one serial number of a check is not a material alteration.
person acknowledges his indebtedness to another. The (International Corporate Bank vs. CA, G.R. No.
word “due” is commonly used. 141968, Feb. 12, 2001.)
7. Mortgage Note – an instrument secured by either a
real (REM) or personal property (Chattel). Q: A material alteration of an instrument without the
8. Title-Retaining Note – an instrument used to secure assent of all parties liable thereon results in its
the purchase price of goods. It ordinarily provides that avoidance, EXCEPT against: (2011 Bar)
title to the goods shall remain in payee’s name until the
note is paid in full.

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Suggested Ans.: Party who has made, authorized or
assented to the alteration and subsequent indorser.

G. DISCHARGE; MATERIAL ALTERATION

1. “Anamer Salazar vs. JY Bros. Marketing”,
G.R. No. 171998, Oct. 20, 2010
2. “Philippine National Bank vs. Court of
Appeals, Capitol City Development Bank, Philippine
Bank of Communications and F. Abante Marketing”,
G.R. No. 107508, April 25, 1996;
3. “Cesar Areza and Lolita Areza vs. Express
Savings Bank, Inc. and Michael Potenciano”, G.R. No.
176697, Sep. 10, 2014

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

Check Presentment Must be Must be
It is a bill of exchange drawn on a bank and payable on for Payment presented for presented for
demand. (NIL, Sec. 185) payment payment
A check must be presented for payment within a within a within a
reasonable time after its issue or the drawer will be reasonable reasonable
discharged from liability thereon to the extent of the time after its time after its
loss caused by the delay. issue(Sec.186) last
Essential characteristics of checks negotiation
1. They are drawn on a bank (Sec. 171)
2. Payable instantly on demand Discharge of When a check They remain
Checks, completed and delivered, are sufficient by Liability is accepted or liable despite
themselves to prove the existence of loan obligation. certified, the acceptance
The Court has expressly recognized that a check drawer & (Sec. 84)
constitutes an evidence of indebtedness and is a indorsers are
veritable proof of an obligation. This is the very same discharged
principle underpin Section 24 of the NIL which from liability
provides that “every negotiable instrument is deemed thereon (Sec.
prima facie to have been issued for a valuable 188)
consideration; and every person whose signature
appears thereon to have become a party for value.” Stopping payment
(2014 Bar; Pacheco v. CA citation) The drawer has the right to order the drawee to stop
payment of a check and this right flows from the rule
Q: What is a check? that the issuance of a check by itself is not an
A: It is a bill of exchange drawn on a bank and payable assignment of funds by the drawee. If a bank pays a
on demand.(Sec. 185) check after it has been notified to stop payment, it pays
in its own responsibility and will not be permitted to
Q: Tan maintained a current and savings account with charge the account. The drawer may countermand
PCIB, now EPCIB, with a balance of P35,147.59. He payment if he has a valid defense against the holder of
issued a post-dated PCIB check in favor of SLI in the the check. Thus, countermanding of a check is proper
amount of P34,588.72. After clearing, the amount of where the payee failed to deliver the goods that he was
the check was immediately debited by EPCIB from supposed to deliver. (Sundiang Sr. & Aquino, 2014,
Tan’s account thereby leaving him with a balance of citing Bataan Cigar and Cigarette Factory v. CA, GR.
only P558.87. He thereafter issued three (3) checks No. 93048, March 3, 1994)
payable to ASELCO, ANECO, and the other payable
in cash. When the latter were presented for payment, Q: A check was dishonored due to material alteration.
the three (3) checks were dishonored for being drawn The creditor then filed an action against drawee bank
against insufficient funds. As a result, the electric for the amount. Will the action prosper?
A: NO. If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the payee-
Q: Distinguish between a Check and an ordinary BOE. holder cannot, as provided under Sections 185 and 189
of the NIL, sue the bank. The payee should instead sue
Checks BOE the drawer who might in turn sue the bank. This is so
Drawee Always drawn May or may because no privity of contract exists between the
on a bank or not be drawn drawee-bank and the payee (Villanueva v. Nite, G.R.
banker against on a bank and No. 148211, July 25, 2006).
a previous need not be NOTE: A check of itself does not operate as an
deposit of drawn against assignment of any part of the funds to the credit of the
funds a deposit drawer with the bank, and the bank is not liable to the
Payability Always Either payable holder, unless and until it accepts or certifies the
payable on on demand or check. (NIL, Sec. 189)
demand at a fixed or
determinable Mere issuance of a worthless check holds the person
future time liable under BP 22 irrespective of intent (2014 Bar)
(Sec.4) The rule is that every act or omission punishable by
Function Ordinarily Intended for law has its accompanying civil liability. If the accused
intended for circulation as however, is not found to be criminally liable, it does
immediate instrument of not necessarily mean that he/she will not likewise be
payment credit held civilly liable because extinction of the penal

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

action does not carry with it extinction of civil action. A: Yes, Company X is entitled to reimbursement from
In cases of violation of BP 22, a special law, the intent the collecting bank. In a similar case, the Supreme
in issuing a check is immaterial. Thus, regardless of Court ruled that the drawer could recover the amount
intent, the accused remains civilly liable because the deducted from its account because it failed to ensure
act or omission, the making and issuing of the subject that the check be paid to the designated payee while
check, from which his/her civil liability arises. the collecting bank should share 1⁄2 of the loss because
its branch manager conspired in the fraud. (PCIB v.
Effect of erasure or alteration on checks CA, 350 SCRA 446 [2001])
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective January Kinds:
4, 2016, the following shall no longer be eligible or Special types of check:
acceptable for clearing: 1. Cashier’s Check – a BOE drawn by the bank upon
a. Any check that shows or indicates on its face erasure itself and is accepted at its issuance. It is usually
or alteration regardless of any signature or initials that signed by the cashier of the bank.
appear to indicate authorization of the alteration or 2. Manager’s Check – a BOE drawn by the bank upon
erasure; or itself and is accepted at its issuance and signed by a
b. Does not indicate the date, payee, amount payable in manager on behalf of a bank.
figures, amount payable in words, or signature of the NOTE: A manager’s check is as good as cash. It is a
drawer check drawn by the bank against itself. It is deemed
pre-accepted by the bank from the moment of
Effect of contributory negligence between the drawer issuance. The check becomes the primary obligation of
and collecting bank the bank which issues it and constitutes its written
Q: Company X issued a Bank A Check No. 12345 in promise to pay. By issuing it, the bank in effect
the amount of P500,000.00 payable to the Bureau of commits its total resources, integrity and honor behind
Internal Revenue (BIR) for the company's taxes for the the check (Metrobank and Trust Company vs Chiok,
third quarter of 1997. The check was deposited with GR No. 172652, November 26, 2014). (2015 Bar)
Bank B, the collecting bank with which the BIR has an 3. Certified Check – Drawn by a depositor upon funds
account. The check was subsequently cleared and the to his credit in a bank which an officer of a bank
amount of P500,000.00 was deducted from the certifies will be paid on presentation.
company's balance. Thereafter, Company X was 4. Crossed Check – Done by writing 2 parallel lines on
notified by the BIR of its non-payment of its unpaid the left top portion of the check. The marking signifies
taxes despite the P500,000.00 debit from its account. that the bank should pay only with the intervention of
This prompted the company to seek assistance from the company only.
the proper authorities to investigate on the matter. 5. Memorandum Check – A check with
The results of the investigation disclosed that unknown “Memorandum” written on its face. The writing
then to Company X, its chief accountant Bonifacio signifies that the drawer engages to pay the bona fide
Santos is part of a syndicate that devised a scheme to holder absolutely, without any condition concerning its
syphon its funds. It was discovered that though presentment.
deposited, the check was never paid to the BIR but was 6. Traveler’s Checks – Instruments purchased from
passed on by Santos to Winston Reyes, Bank B's banks or express companies which can be used like
branch manager and Santos' co-conspirator. Instead of cash upon the second signature by the purchaser. (De
bringing the check to the clearing house, Reyes Leon, supra)
replaced Check No. 12345 with a worthless check
bearing the same amount, and tampered documents to Crossed check
cover his tracks. No amount was then credited to the A crossed check is a check with two (2) parallel lines,
BIR. Meanwhile, Check No. 12345 was subsequently written diagonally on the upper right corner thereof. It
cleared and the amount therein credited into the is a warning to the drawee bank that payment must be
accounts of fictitious persons, to be later withdrawn by made to the right party; otherwise the bank has no
Santos and Reyes. authority to use the drawer's funds deposited with the
Company X then sued Bank B for the amount of bank.
P500,000.00 representing the amount deducted from The purpose is to insure payment to the payee. It can
its account. Bank B interposed the defense that only be deposited but may not be converted into cash
Company X was guilty of contributory negligence by the drawer. Crossing a check does not destroy its
since its confidential employee Santos was an integral negotiability but the check may be negotiated only
part of the scheme to divert the proceeds of Check No. once – to one who has an account with the bank (De
12345. Is Company X entitled to reimbursement from Ocampo v. Gatchalian, G.R. No. L-15126, November
Bank B, the collecting bank? Explain. (2016, BAR) 30, 1961).

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

The effects of crossing a check are:
1. That the check may not be encashed but only Q: What is the purpose of crossing a check?
deposited in the bank; A: To insure payment to the payee. It can only be
2. That the check may be negotiated only once -- deposited but may not be converted into cash by the
to one who has an account with a bank; drawer. Crossing a check does not destroy its
3. That the act of crossing the check serves as a negotiability but the check may be negotiated only
warning to the holder that the check has been issued once – to one who has an account with the bank. (De
for definite purpose so that he must inquire if he has Ocampo vs. Gatchalian,3 SCRA 596[1961])
received the check pursuant to the purpose. Otherwise,
he is not a HIDC. (State Investment House vs. IAC, Q: What is a stale check and what is its effect?
175 SCRA 310 [1989].) A: A check which has not been presented for payment
within a reasonable time after its issue. It is valueless
Q: What are the special types of checks? and thus, should not be paid. A check becomes stale 6
A: months from date of issue. The drawer and all
1. Cashier’s Check – a check drawn by the bank upon indorsers are discharged from liability thereon.
itself and is accepted at its issuance. It is usually
signed by the cashier of the bank. Q: Po Press issued in favor of Jose a postdated crossed
2. Manager’s Check – a check drawn by the bank check, in payment of newsprint which Jose promised
upon itself and is accepted at its issuance and signed to deliver. Jose sold and negotiated the check to Excel
by a manager on behalf of a bank. Inc. at a discount. Excel did not ask Jose the purpose
of crossing the check. Since Jose failed to deliver the
Q: In payment for his debt in favor of X, Y gave X a newsprint, Po ordered the drawee bank to stop
Manager's Check in the amount of Php 100,000 dated payment on the check. Efforts of Excel to collect from
May 30, 2012. Which phrase best completes the Po failed. Excel wants to know from you as counsel:
statement --A Manager's Check: (2012 Bar) a. Whether as second indorser and holder of the
a) is a check issued by a manager of a bank for his own crossed check, is it a holder in due course?
account. b. Whether Po’s defense of lack of consideration as
b) is a check issued by a manager of a bank in the against Jose is also available as against Excel? (1994,
name of the bank against the bank itself for the account 1995, 2005 Bar)
of the bank. A:
c) is like any ordinary check that needs to be presented a. Excel Inc. is not a holder in due course. The act of
for payment also. crossing the check imposes upon the holder thereof the
d) is better than a cashier's check in terms of use and duty to ascertain the indorser’s, title to the check or the
effect. nature of his possession or the purpose for which it
Suggested Ans.: B was issued. Excel is guilty of gross negligence
amounting to legal absence of good faith for its failure
4. Crossed Check – a check which contains 2 parallel to inquire from Jose the purpose for which the three
lines on the left top portion of the check. checks were crossed despite such warning, hence, it is
Q: What is a crossed check? What are the effects of not deemed a holder in due course.
crossing a check? Explain. (2005 Bar) b. YES, the defense of lack of consideration as against
Suggested Ans.: A crossed check is a check with two Jose is also available as against Excel. For not being a
(2) parallel lines, written diagonally on the upper left holder in due course, Excel is subject to personal
corner thereof. It is a warning to the drawee bank that defenses as if the check were non-negotiable, such as
payment must be made to the right party; otherwise the lack of consideration between Po Press and Jose. In
bank has no authority to use the drawer's funds this case, Jose’s failure to deliver the newsprint
deposited with the bank. resulted in the absence of consideration for the
issuance of the check. Consequently, Po Press cannot
The effects of crossing a check are: be made liable to pay the face value of the check.
1. That the check may not be encashed but only
deposited in the bank; Q: PCIB filed an action against Balmaceda, it alleging
2. That the check may be negotiated only once -- that between 1991 and 1993, by taking advantage of
to one who has an account with a bank; his position as branch manager, he fraudulently
3. That the act of crossing the check serves as a obtained and encashed 31 Managers checks in the
warning to the holder that the check has been issued P10,782,150.00. PCIB moved to be allowed to file an
for definite purpose so that he must inquire if he has amended complaint to implead Rolando Ramos as one
received the check pursuant to the purpose. Otherwise, of the recipients of a portion of the proceeds from
he is not a HIDC. (State Investment House vs. IAC, Balmacedas alleged fraud. Since Balmaceda did not
175 SCRA 310 [1989].) file an Answer, he was declared in default. On the

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

other hand, Ramos filed an Answer denying any Moises 2,000 bales of tobacco. Chelsea issued to
knowledge of Balmacedas scheme. The RTC issued a Moises two crossed checks postdated 15 Mar 94 and
decision in favor of PCIB. On appeal, the CA 15 Apr 94 in full payment therefor. On 19 Jan 94
dismissed the complaint against Ramos. According to Moises sold to Dragon Investment House at a discount
the CA, the mere fact that Balmaceda made Ramos the the two checks drawn by Chelsea in his favor. Moises
payee in some of the Managers checks does not suffice failed to deliver the bales of tobacco as agreed despite
to prove that Ramos was complicit in Balmacedas Chelsea’s demand. Consequently, on 1 Mar 94 Chelsea
fraudulent scheme. Is PCIB itself at fault as employer? issued a “stop payment” order on the 2 checks issued
A: YES. While its manager forged the signature of the to Moises. Dragon, claiming to be a holder in due
authorized signatories of clients in the application for course, filed a complaint for collection against Chelsea
manager’s checks and forged the signatures of the for the value of the checks. Rule on the complaint of
payees thereof, the drawee bank also failed to exercise Dragon. Give your legal basis. (1995 Bar)
the highest degree of diligence required of banks in the A: The complaint should be dismissed. The act of
case at bar. It allowed its manager to encash the crossing the check imposes upon the holder thereof the
manager’s checks that were plainly crossed checks. A duty to ascertain the indorser’s, in this case Moises’
crossed check is one where two parallel lines are title to the check or the nature of his possession.
drawn across its face or across its corner. Based on Failing in this respect, Dragon cannot be deemed a
jurisprudence, the crossing of a check has the holder in due course and as such, Moises is subject to
following effects: (a) the check may not be encashed personal defenses as if the check were non-negotiable,
but only deposited in the bank; (b) the check may be such as lack of consideration between Chelsea and
negotiated only once — to the one who has an Moises for Moises’ failure to deliver the bales of
account with the bank; and (c) the act of crossing the tobacco. There being no consideration for the issuance
check serves as a warning to the holder that the check of the check, Chelsea cannot thus be made liable to
has been issued for a definite purpose and he must pay the face value of the check and this constitutes a
inquire if he received the check pursuant to this defense not only against Moises but even against
purpose; otherwise, he is not a holder in due course. In Dragon who is not a holder in due course.
other words, the crossing of a check is a warning that
the check should be deposited only in the account of Q: On March 1, 1996, Pentium Company ordered a
the payee. When a check is crossed, it is the duty of the computer from CD Bytes, and issued a crossed check
collecting bank to ascertain that the check is only in the amount of P30,000 post-dated Mar 31, 1996.
deposited to the payee’s account. In complete Upon receipt of the check, CD Bytes discounted the
disregard of this duty, PCIB’s systems allowed check with Fund House. On April 1, 1996, Pentium
Balmaceda to encash 26 manager’s checks which were stopped payment of the check for failure of CD Bytes
all crossed checks, or checks payable to the “payee’s to deliver the computer. Thus, when Fund House
account only.” (PCIB v. Balmaceda and Ramos) deposited the check, the drawee bank dishonored it. If
Fund House files a complaint against Pentium and CD
Crossed check with notation Account payee only Bytes for the payment of the dishonored check, will
Q: What is the purpose of crossing a check? the complaint prosper? Explain (1996 Bar)
A: To insure payment to the payee. It can only be A: The case will prosper as against the CD Bytes, the
deposited but may not be converted into cash by the immediate indorser but not as against Pentium
drawer. Crossing a check does not destroy its Company. The effect of crossing a check relates to the
negotiability but the check may be negotiated only
mode of its presentment for payment which must be
once – to one who has an account with the bank. (De
Ocampo vs. Gatchalian,3 SCRA 596[1961]) made by the holder, or by some person authorized to
receive payment on his behalf. Thus, in the absence of
Q: Distinguish clearly crossed checks from cancelled due presentment, as in this case where the check was
checks (2004 Bar) not presented by the payee (CD Bytes) or the proper
A: A crossed check is one with two parallel lines party authorized to make presentment of the checks,
drawn diagonally on the left portion of the check. On the drawer (Pentium Company) cannot be held liable.
the other hand, a cancelled check is one marked or
However, Fund House may recover from the
stamped "paid" and/or "cancelled" by or on behalf of a
drawee bank to indicate payment thereof. A crossed immediate indorser, if the latter has no valid excuse for
check may not be encashed but only deposited in the refusing payment.
bank. While the payee or bearer of a cancelled check
may be refused encashment. Stale check
A check which has not been presented for payment
Q: On Oct 12, 1993, Chelsea Straights, a corporation within a reasonable time after its issue. It is valueless
engaged in the manufacture of cigarettes, ordered from and thus, should not be paid. A check becomes stale 6
months from date of issue.
Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag
 Q: X and Y are disputing over a property. To settle the
Memorandum check dispute, they entered into a compromise agreement by
A memorandum check is an evidence of debt against which they agreed to have the property in dispute be
the drawer and although may not be intended to be sold. X bought the property and delivered a manager’s
presented, has the same effect as an ordinary check and check to Y. Y refused to accept the same,
if passed on to a third person, will be valid in his hands hence it was consigned with the court. Y later accepted
like any other check (People v. Nitafan, G.R. No. the check and three years after acceptance, he filed an
75954, October 22, 1992). action alleging that the check payment did not amount
to legal tender and that he never even
When drawer of check discharged from liability encashed the check. Is the contention of Y tenable?
1. The check is not presented within a reasonable time A: NO. It is true that a check is not a legal tender and
after its issue; while delivery of a check produces the effect of
2. The drawer suffers loss; and payment only when it is encashed, the rule is otherwise
3. The loss suffered by the drawer is attributable to the if the debtor (X) was prejudiced by the creditor’s (Y)
delay (De Leon, 2010). unreasonable delay in presentment. Acceptance of a
check implies an undertaking of due diligence in
Presentment for payment presenting it for payment. If no such presentment was
Time made, the drawer cannot be held liable irrespective of
A check must be presented for payment within a loss or injury sustained by the payee. Payment will be
reasonable time after its issue. (NIL, Sec. 186) deemed effected and the obligation for which the
Effect when a bank allows the withdrawal of the value check was given as conditional payment will be
of a check prior to its clearing discharged (Pio Barretto Realty
Development Corp. vs. CA, G.R. No. 132362, June 28,
Q: Ofelia Camacho Cheah accommodated a friend’s 2001).
friend to deposit and encash a check issued by the
Bank of America. The check was deposited to Ofelia’s Q: To ensure payment and as a business practice, SMC
account in PNB. A US dollar denominated check is required Puzon to issue postdated checks equivalent to
normally subject to a 15-day clearing period. However, the value of the products purchased on credit before
12 days after the check’s deposit, the bank informed the same were released to him. Said checks were
Ofelia that the check was cleared and credited to her returned to Puzon when the transactions covered by
account. Hence, Ofelia immediately withdrew the these checks were paid or settled in full. Puzon
check’s amount and the accommodated friend was able purchased products on credit and issued to SMC, two
to take entire amount. It was only days after said (2) BPI checks to cover the said transaction. During
withdrawal that PNB was informed by its one of his visits to the SMC Paranaque Sales Office,
correspondent bank of the insufficiency of funds to he allegedly requested to see BPI Check No. 17657.
which the check was drawn. At that time, it was too However, when he got hold of BPI Check No. 27903
late to recover the money withdrawn. Is PNB liable for which was attached to a bond paper together with BPI
the money lost on the said transaction? Check No. 17657, he allegedly immediately left the
A: Yes. The payment of the amounts of checks without office with his accountant, bringing the checks with
previously clearing them with the drawee bank them. SMC sent a letter to Puzon, demanding the
especially so where the drawee bank is a foreign bank return of the said checks. Puzon ignored the demand
and the amounts involved were large is contrary to hence SMC filed a complaint against him for theft. The
normal or ordinary banking [Link] investigating prosecutor recommended the dismissal of
provides that when the bank allowed the withdrawal of the case for lack of evidence. On appeal, the CA
the value of a check prior to its clearing, before the agreed with the prosecutor. Were the prosecutor and
check shall have been cleared for deposit, the the DOJ correct in finding no probable cause for theft?
collecting bank can only ‘assume’ at its own risk that A: Yes. If the subject check was given by Puzon to
the check would be cleared and paid out. (PNB v. SMC in payment of the obligation, the purpose of
Spouses Cheah, G.R. No. 170895 & 170892, April 25, giving effect to the instrument is evident thus title to or
2012, Del Castillo, J.) ownership of the check was transferred upon delivery.
However, if the check was not given as payment, there
Effect of delay being no intent to give effect to the instrument, then
1. The drawer will be discharged from liability thereon ownership of the check was not transferred to SMC.
to the extent of the loss caused by the delay. (ibid.) (SMC v. Puzon, G.R. No. 167567, September 22,
2. The indorser shall be discharged from liability (PNB 2011)
vs. Seeto, G.R. No. L-4388, August 13, 1952)

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag

H. BP 22; CHECKS: NATURE/EFFECT OF
PAYMENT
1. “Jaime Dico vs. CA and People”, G.R. No.
141669, Feb. 28, 2005
2. “BPI Card Corp. vs. CA”, G.R. No. 120639,
Sep. 25, 1998
3. “Associated Bank and Conrado Cruz vs. CA
and Merle Reyes, doing business under the name and
style “Melissa’s RTW”, G.R. No. 89802, May 7, 1992
4. “People vs. Nitafan”, G.R. No. 75954, Oct. 22,
1992
5. “Tan vs. CA”, G.R. No. 108555, Dec. 20,
1994
6. “Teddy Pabugais vs. Dave Sahijiwani”, G.R.
No. 156846, Feb. 23, 2004
7. “PNB vs. Sps. Chea Chee Chong”, G.R. No.
170865, Apr. 25, 2012
8. “Philippine Airlines vs. Court of Appeals”,
G.R. No. 49188, January 30, 1990
9. “Roman Catholic Bishop of Malolos vs.
Intermediate Appellate Court”, G.R. No. 72110,
November 16, 1990
10. “Alfaro Fortunado vs Court of Appeals,” G.R.
No. 78556. April 25, 1991
11. “Tibajia, Jr. vs. Court of Appeals”, G.R. No.
100290, June 4, 1993
12. “International Corporate Bank vs. Sps. Francis
S. Gueco and Ma. Luz E. Gueco”, G.R. No. 141968,
February 12, 2001

Elle Woods- 2A- 2020-2021 - Negotiable Instruments Law- Atty. Tayag