Negotiable

Instruments Law
with Bouncing
Checks Law
ACT No. 2031 and Batas Pambansa Blg. 22
Notes of Gino Carlo Cruz

DYCBANil413
BSBA 4th Year | 1st Semester 2021-2022

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 CONTENTS

A. Preliminary Considerations

1. Governing law

2. Concept of negotiable instrument

3. Classes of negotiable instrument

a. Promissory note
b. Bill of Exchange

4. Functions of a negotiable instrument

5. Characteristics of negotiable instrument

a. Negotiability
b. Accumulation of secondary contracts

6. Negotiable instruments compared with other papers (document of title, letter of credit,
certificate of stock, pawn ticket, postal money order, treasury warrant)

7. Legal Tender character

B. Form and Interpretation of Negotiable Instruments

1. Requisites of Negotiability (Sec 1, NIL)

a. Must be in writing and signed by the maker or drawer

b. Must contain an unconditional promise or order to pay a sum certain in

money
i. Promise or order to pay must be unconditional
1. Reference to transaction (Sec 3, NIL)
2. Source of payment or account to be debtited
ii. Payable in sum certain in money
1. Provisions which do not affect certainty of sum payable
2. Payment of interest (Sec 2, NIL)
3. Payment by installments (Sec. 2, NIL)
4. Acceleration clause (Sec 2, NIL)
5. Payment with exchange (Sec 2, NIL)
6. Payment of attorney’s fees (Sec. 2, NIL)

c. Payable on demand or at a fixed or derminable future time

i. When payable on demand (Sec. 7, NIL)
ii. When payable at a determinable future time (Sec. 4, NIL)

d. Payable to order or bearer

i. When payable to bearer (Sec. 9, NIL)
1. Rule when instrument is payable to a fictitious person
ii. When payable to order
1. To whose order the instrument may be made payable (Sec.
8, NIL)

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 e. Omissions that do not affect the negotiability (Sec. 6, NIL)

f. Additional provisions not affecting negotiability (Sec 5, NIL)

i. Sale of collateral securities
ii. Confession of judgement
iii. Waiver or benefit
iv. Option to require something in lieu of payment

2. Rules to be followed in interpreting negotiable instruments (Sec. 17, NIL)

C. Negotiation

1. Mode of transfer

2. Concept of negotiation (Sec 30, NIL); distinguished from assignment

3. Ways of negotiation (in case of order or bearer instruments)

4. Concept of delivery

5. Indorsement
a. Concept
b. How made (Sec, 31 & 32, NIL)
c. Kinds
i. Special and blank (Sec. 34 & 35, NIL)
ii. Conditional (Sec. 39, NIL)
iii. Qualified (Sec. 38, NIL)
iv. Restrictive (Sec. 36 & 37, NIL)
d. Other rules on indorsement
i. Indorsement of an instrument payable to bearer (Sec. 40, NIL)
ii. Where instrument is payable to two or more persons (Sec. 21,
NIL)
iii. Instrument is drawn or indorsed to a person as cashier (Sec. 42,
NIL)
iv. Where the name of payee or indorsee is misspelled (Sec, 43, NIL)
v. Indorsement is a representative capacity (Sec 44, NIL)
vi. Presumption as to the time of indorsement (sec 45, NIL)
vii. Place of indorsement (Sec 46, NIL)
viii. Striking out of indorsement (Sec. 48, NIL)
ix. Transfer of an order instrument without indorsement (Sec 49,
NIL)

6. Negotiation by a prior party (Sec. 50, NIL)

D. Holders

1. General Concept of a Holder

2. Holder in due course (requisites) (Sec. 52, NIL)

1. Instrument complete and regular
2. Taken before overdue
i. Rule in case of installment instrument
ii. Rule in case of demand instrument (Sec. 53, NIL)
3. Notice of infirmity or defect (Sec 56 & 57, NIL see also Sec. 54, NIL)
4. Good faith
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 5. Holder for value

3. Presumption of due course holding (Sec. 59, NIL)

4. Rights of holder in due course (Sec. 57, NIL)

5. Shelter rule

E. Liability of Parties

1. Primary and secondary liability distinguished

2. Liability from warranties

3. Liability and/or warranties of parties

a. Maker (Sec. 60, NIL)
b. Drawer (Sec. 61, NIL)
i. Relationship with drawee
ii. Relationship with collecting bank
c. Acceptor (Sec. 127 and 62, NIL)
d. Indorser
i. General Indorsers (Sec. 66, NIL)
ii. Qualified indorser (Sec 65, NIL)
iii. Order of liability
e. Parties negotiating my mere delivery (Sec. 65, NIL)
f. Other cases
i. Irregular indorser (Sec. 64, NIL)
ii. Indorse or bearer instrument (Sec. 67, NIL)
iii. Accommodation party (Sec. 29, NIL)
iv. Agents signing in behalf of the principal

F. Defenses

1. Real and personal defenses, distinguished

2. Real defenses
a. Minority and ultra vires acts (Sec. 22, NIL)
b. Non-delivery of an incomplete instrument (Sec. 15, NIL)
c. Fraud in factum
d. Forgery and want of authority (Sec. 23, NIL)
i. Forgery of the maker’s signature
ii. Of indorser’s signature
iii. Of drawer’s signature
iv. Forgery of bearer instruments
v. Material alteration (partial real defense) (Sec. 124 & 125, NIL)
vi. Extinctive prescription

3. Personal defenses:
a. Ante-dating or post-dating (Sec. 12, NIL)
b. Insertion of wrong date (Sec. 13, NIL)
c. Filling-up blanks beyond authority (Sec. 14, NIL)
d. Lack of delivery of a complete instrument (Sec. 16, NIL)
e. Absence or failure of consideration (Sec. 28, NIL)

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 f. Simple fraud, duress, intimidation, force or fear, illegality of
consideration, breach of faith (Sec. 55, 56 & 57, NIL)

G. Enforcement of Liability

1. Parties primarily liable and parties secondarily liable

2. General steps in enforcing liability

a. Promissory notes
i. Presentment for payment (Sec. 70, NIL)
ii. Notice of dishonor (Sec. 89, NIL)
b. Bill of exchange
i. Presentation for acceptance (Sec. 143, NIL)
1. How made (Sec. 132-135 & 137, NIL)
2. Time to accept (Sec. 136, NIL)
3. Rule when incomplete bill is accepted (Sec. 138, NIL)
4. Kinds of acceptance (Sec. 139-142, NIL)
ii. If dishonored by non-acceptance
1. Notice of dishonor (Sec. 89, NIL)
2. Rule in case of foreign bills (see provisions of protest)
iii. If accepted
1. Presentment for payment to acceptor
2. Rule if dishonored upon presentment for payment
3. Rule in case of foreign bill

3. Presentment for payment

a. Concept of presentment
b. Requisites for sufficiency (Sec. 72, NIL)
i. Date of presentment (Sec. 71, NIL)
1. Rule in determining maturity date (Sec. 85, NIL)
2. Rule computing time (Sec. 86, NIL)
3. Rule if payable at a bank (Sec. 75, NIL)
ii. Place of presentment (Sec. 73, NIL)
1. Rule if payable at a special place (Sec. 70, NIL)
iii. Presentment to the party primarily liable
1. How presentment made (Sec. 74, NIL)
2. Rule in case party primarily liable is already dead (Sec. 76,
NIL)
3. Presentment to partners (Sec. 77, NIL)
4. Presentment to joint debtors (Sec. 78, NIL
c. Instances when presentment is excused (Sec. 79 & 82, NIL)
d. When delay in presentment excused (Sec. 81, NIL)

4. Notice of dishonor
a. When dishonor of instrument occurs
i. Dishonor by non-payment (Sec. 83, NIL)
ii. Dishonor by non-acceptance (Sec. 149, NIL)
b. Who should give notice
i. Holder
ii. Agent
iii. Party who may be compelled to pay
c. Form of notice (Sec. 43 & 44, NIL)
d. To whom notice is given
i. Party secondarily liable or agent (Sec. 97, NIL)
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 ii. Notice where party is dead (Sec. 98, NIL)
iii. Notice to partners (Sec. 99, NIL)
iv. Persons jointly liable (Sec. 100, NIL)
v. Notice to bankrupt (Sec. 101, NIL)
e. Time and place of notice (Sec. 103-108, NIL)
f. When notice is excused or unecessary (Sec. 109-112, 114-115, NIL)
g. When delay in giving notice excused (Sec. 113, NIL)

H. Discharge of instruments

1. Concept of discharge
2. How instrument is discharged (Sec. 119, NIL)
a. Payment in due course (Sec. 88, NIL)
i. By the principal debtor (Sec. 119[a])
ii. By the accommodated party (Sec. 119[b])
b. Intentional cancellation
i. Rule in case of unintentional cancellation (Sec. 123, NIL)
c. Any act that discharges simple contracts
d. Principal debtor becomes a holder
3. Discharge of secondarily liable (Sec. 120, NIL)

I. Checks

1. Checks defined (Sec. 185, NIL)

2. Distinguished from Draft
3. Relationship between a drawer, drawee and payee
4. Kinds of checks
a. Cashier’s and manager’s check (See BSP Circular 259, series of 2000 & BSP
circular 291, series of 2001
b. Certified check (Sec. 187-189, NIL)
c. Crossed check (Article 541, Code of Commerce)
i. Effect of crossing a check
ii. Memorandum and traveler’s check
5. When required to be presented for payment (Sec. 185, NIL)
6. Effect of death of drawer
7. Bouncing Checks Law (Batas Pambansa Blg. 22)

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 NEGOTIABLE INSTRUMENTS LAW
Course Outline

A. Preliminary Considerations

1. Governing law
o Act No. 2031 that governs negotiable instrument in this jurisdiction
o Code of commerce- in addition to Act Number 2031 otherwise known as the Negotiable
Instrument Law, negotiable instruments are governed by the provisions of the Code of
Commerce that were not completely repealed.
-e.g. Code of commerce provision and cross checks are still in force because there is
no provision in the NIL that deals with cross checks
o The new Civil Code apply suppletory
Applicability of the NIL
o The provisions of the NIL are not applicable if the instrument involved is not negotiable
before the provisions of the NIL and come to operation there must be a document in
existence of the character described in section one of that law.
History of the NIL
o The provisions of the NIL were copied from the American uniform negotiable instrument
law in turn the latter law was based largely on the bill of Exchange Act of 1882 hence the
decision of the courts in the United States and in England based on the American uniform
negotiable instrument law and the bill of Exchange Act of 1882 can be applied in this
jurisdiction.
2. Concept of negotiable instrument
Negotiable Instrument - it is a written contract for the payment of money which is intended as a
substitute for money and passes from one person to another as money in such a manner as to give
a holder in due course the right to hold the instrument free from defense is available to prior
parties the instrument must comply with section one of the negotiable instruments law to be
considered negotiable
3. Classes of negotiable instrument

a. Promissory note
- a negotiable promissory note is an unconditional promise in writing made by one person to
another, signed by the maker engaging to pay on demand or at a fixed or determinable future
time, a sum certain in money to order or to bearer.
b. Bill of Exchange
 A bill of exchange is an unconditional order in writing addressed by one person to another
signed by the person giving it requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a sum certain in money to order or to bearer
4. Functions of a negotiable instrument
2 Main Functions
a. Substitute for Money
b. They serve as credit instruments
* they can also be considered as proof of the existence of a transaction because they may state
the transaction that gave rise to the issuance of the instrument.
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In particular the functions of a negotiable instrument may be enumerated as follows
 It is a substitute for money
 it is a medium of exchange
 it is a credit instrument which increases credit circulation
 it increases purchasing power in circulation
 it is proof of transaction

5. Characteristics of negotiable instrument

a. Negotiability
- it is that attribute or property whereby a bill or note or cheque may pass from hand to hand
similar to money so as to give the holder in due course the right to hold the instrument and to
collect the sum payable for himself free from defenses.

- this characteristic of negotiable instrument as a credit instrument gives it freedom to circulate

as a substitute for money

b. Accumulation of secondary contracts

 Secondary contracts are picked up and carried along with them as they are negotiated from
one person to another or in the course of negotiation of a negotiable instrument, a series of
juridical ties between the parties there to arise either by law or by privity.

Parties to a Negotiable Instruments

The original party in a promissory note are the maker and the payee. the maker is the person who
promises to pay according to the tenor of the note while the payee is the person who is to receive
payment from the maker.

The parties who appear on the face of a bill of exchange or the drawer, drawee and the payee.
The drawer is the person who draws the bill and orders the drawee to pay the payee a sum certain
in money.
- the drawee is the one being commanded to pay the instrument. However, in reality, the drawer
is not a party unless he accepts the bill. If he accepts, that drawer, now called the acceptor,
assents to the order made by the drawer.
Other persons who may become parties after the issuance of the instrument are the endorsers and
the holders. Endorsers are persons who transferred or negotiate an instrument by endorsement
completed by delivery. holder means the payee or endorsee of a bill or note who is in possession
of it or the bearer thereof.
6. Negotiable instruments compared with other papers (document of title, letter of credit,
certificate of stock, pawn ticket, postal money order, treasury warrant)

7. Legal Tender character

Not a Legal Tender
- Section 52 of the New Central Bank Act, Republic Act No. 7653 provides that only notes and
coins issued by the Bangko Sentral ng Pilipinas are considered legal tender.
- Section 60 of the same law expressly provides that checks are not legal tender. Section 60
provides the checks representing demand deposit do not have legal tender power and their
acceptance in the payment of debts both public and private is at the option of the creditor,
provided however that a check which has been cleared and credited to the account of the creditor
shall be equivalent to the delivery to the creditor of cash in an amount equal to the amount
credited to his account.
Coins as Legal Tender
Maximum amount of coins to be considered as legal tender is adjusted as follows:
a. Php 1,000 for denominations of 1 Peso, 5 Peso and 10 Peso
b. Php 100 for denominations of 1 centavo, 5 centavos, 10 centavos and 25 centavos coins.

B. Form and Interpretation of Negotiable Instruments

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 * negotiability of an instrument is determined by ascertaining if all the requirements of Section 1
appears on the face of the instrument.
* in other words, the factors that affect the determination of the negotiability of the instruments
are:
1) the whole of the instrument shall be considered;
2) only what appears on the face of the instrument shall be considered; And
3) the provisions of the NIL, especially section 1 thereof, shall be applied.
* acceptance of a bill of exchange is not important in the determination of its negotiability.
* The presence of an endorsement of the instrument or lack thereof does not affect the
negotiability of the instrument.
1. Requisites of Negotiability (Sec 1, NIL)

Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the

following requirements:
(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.

a. Must be in writing and signed by the maker or drawer

o The writing may be printed, in ink or pencil and it may be written in any material that
substitutes like paper cloth, leather or parchment. Section 191 of the NIL provides that
the word written includes printed, and writing includes print.
o With respect to the signature of the maker or the drawer, the rule is that the signature
maybe in one's handwriting, printed, engraved, lithograph or photograph so long as they
are adopted as the signature of the signer.
 What is important is that the maker or the drawer used what he affects as his own
signature for authentication.
b. Must contain an unconditional promise or order to pay a sum certain in money
i. Promise or order to pay must be unconditional
* a negotiable promissory note contains a promise to pay while a bill of exchange
contains an order to pay.
- The "promise" in a promissory note is the undertaking made by the maker to pay a sum
certain in money to the payee or to the holder.
- The "order" in a bill of exchange is a command made by the drawer addressed to the
drawee ordering the latter to pay the payee or the holder a sum certain in money
* words that are equivalent to the word "promise" may be used in a promissory note
o The negotiability of the instrument is destroyed if the same, on its face, contains either a
resolutory or suspensive condition. Thus, a promissory note is not negotiable if the maker
promises to pay the payee or his order if the city of Manila becomes an independent
Republic.
1. Reference to transaction (Sec 3, NIL)

Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within
the meaning of this Act though coupled with:
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to
be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional

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 The instrument must only give information that it was issued in connection with a
o
particular transaction or document. It must not make the order or promise dependent on
or burdened by the other transaction.
o The negotiability of the instrument is affected the moment the holder is required to go
beyond the instrument by requiring him to check the terms and conditions of another
contract
o If the instrument is restricted by the terms and conditions of another transaction, contract
or agreement, by incorporating the agreement or a portion thereof as part of the other, the
said instrument is not negotiable. Consequently, a note that is subject to the provisions of
another contract or document is not negotiable.
2. Source of payment or account to be debited
o The negotiability of the instrument is affected if what is specified in the account or fund
out of which payment is to be made.
 Hence, the instrument is not negotiable if it states: Pay to the order of John 10,000
pesos out of my account with you. This instrument is conditional because the
obligation to pay is subject to the condition that the funds in the account are
sufficient. The order to pay is not absolute because no payment will be made if the
amount in the account is less than 10,000 pesos.
 If the instrument specifies the account from which payment is to be debited, the
instrument is still negotiable.
 The instrument is negotiable if it states pay to the order of John P10,000 and debit
the same from my account. The order is still unconditional because what is
reflected is an absolute obligation to pay the amount of 10,000 pesos. The
specified account is only the source of reimbursement after payment. If the funds
in the account are insufficient, there would still be an obligation to pay the payee
although the drawing may not be fully reimbursed.
Fund for reimbursement indicating particular fund
A 1. the drawee paste the payee from his own C. there is only one act--
fund; Afterwards the drawee pays directly
2. the drawee pays himself from the from the particular fund
particular fund indicated indicated
Particular fund indicated is not the direct Particular fund indicated is the direct source of
source of payment payment
ii. Payable in sum certain in money
Money contemplated in Section 1B is not equivalent to legal tender. 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. Thus, and instrument that is payable in yen or dollar
is still negotiable as it is also payable in money.

o Payment cannot be through gold ingots or diamonds even if delivery of these precious
stones in payment of obligations is prevalent in the market. There is even no compliance
with the law if the obligor like the maker is given the option to deliver something in lieu
of money.

1. Provisions which do not affect certainty of sum payable

Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or
promise to do any act in addition to the payment of money is not negotiable. But the negotiable character
of an instrument otherwise negotiable is not affected by a provision which:
(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or

(b) authorizes a confession of judgment if the instrument be not paid at maturity; or

(c) waives the benefit of any law intended for the advantage or protection of the obligor; or

(d) gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.

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  Under the above quoted provision, an instrument that states that the maker promises to
deliver 1000 pesos or one sack of sugar is not negotiable. If the option to choose either 1000
pesos or one sack of sugar belongs to the holder, the instrument is still negotiable. The
difference if the option belongs to the holder is that in this case there is an absolute obligation
to pay the sum certain in money. The maker may be compelled to pay 1000 pesos. If the
choice belongs to the maker, he is not absolutely required to deliver money because he can
satisfy its obligation by delivering one sack of sugar.

2. Payment of interest (Sec 2, NIL)

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of
this Act, although it is to be paid:
(a) with interest; or

(b) by stated installments; or

(c) by stated installments, with a provision that, upon default in payment of any installment or of interest,
the whole shall become due; or

(d) with exchange, whether at a fixed rate or at the current rate; or

(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

o A sum certain within the meaning of section 1B of the NIL is if the amount that is to be
unconditionally paid by the maker or drawee can be determined on the face of the
instrument. The certainty of the sum is not affected if the exact amount can be determined
by after mathematical computation. However, the computation should be made on the
basis of what is stated in the instrument.
3. Payment by installments (Sec. 2, NIL)
o Stated installments mentioned in Section 2, paragraph C means that the date of each
installment must be fixed or at least determinable as well as the amount to be paid for
each installment.
 Thus, the negotiability will be affected if the instrument merely states that the total
amount shall be paid in five installments without stating when each installment
should be paid and how much should be paid. The amount to be paid for each
installment will be uncertain and there is no certainty when payment will be made.
4. Acceleration clause (Sec 2, NIL)
o Section 2 of the NIL provides that the certainty of the amount to be paid is not affected if
it is to be paid by stated installments, with a provision that, upon default or in payment of
any installment or of interest, the whole shall become due. What is contemplated in this
provision is a typical acceleration clause
5. Payment with exchange (Sec 2, NIL)
6. Payment of attorney’s fees (Sec. 2, NIL)

c. Payable on demand or at a fixed or determinable future time

i. When payable on demand (Sec. 7, NIL)

Sec. 7. When payable on demand. - An instrument is payable on

demand:
(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or

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

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand.

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 o When an instrument is payable on demand, the person liable may be required to pay at
any time that the holder may resolve request. The instrument should be paid the moment
it is presented for payment
ii. When payable at a determinable future time (Sec. 4, NIL)

Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future
time, within the meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein; or

(c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the
time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure
the defect.
Acceleration clauses. The negotiability of the instrument is not affected even if it is to be
o
paid by stated installments, with a provision that, upon default in payment of any
installment or interest, the whole shall become due.
o Insecurity clauses. Provisions in the contract which allows the holder to accelerate
payment “if he deems himself insecure.” the instrument is rendered non negotiable.
o Extension clauses. An instrument is payable at a definite time if by its terms it is payable
at a definite time subject to extension at the option of the holder, or to extension to offer
their definite time at the option of the maker or acceptor or automatically upon or after a
specified act or event.
d. Payable to order or bearer
o An instrument payable to a specified person or entity is not negotiable because the N I L
requires that the instrument must be payable to order or to bearer.
o The rule has always been that the instrument in order to be considered negotiable must
contain the so called “words of negotiability" I.e. must be payable to “order” or “bear”.
These words serve as an expression of consent that the instrument may be transferred by
negotiation. This consent is indispensable since a maker assumes greater risk under a
negotiable instrument than under a non negotiable one.
i. When payable to bearer (Sec. 9, NIL)

Sec. 9. When payable to bearer. - The instrument is payable to

bearer:
(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact was
known to the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any
person; or

(e) When the only or last indorsement is an indorsement in blank.

o Section 9D is applicable to cases involving instruments that are originally ordered

instruments, that is, instruments that are payable to order from the time of issuance. An
order instrument may be negotiated by delivering a duly endorsed instrument to the
transferee. Such endorsement maybe a special endorsement or a blank endorsement ( 1
where no transferee is specified). A blank endorsement effectively converts the order
instrument to a bearer instrument and may then be negotiated by mere delivery.
o
1. Rule when instrument is payable to a fictitious person

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 Fictitious Payee Rule
o An instrument is a bearer instrument if it is payable to the order of a fictitious or non
existing person and such fact is known to the person making it so payable. Hence, an
instrument that is intended to be issued by the maker although he made it payable to the
order of Maria makiling is a bearer instrument. However, it is not necessary that that the
person referred to in the instrument is really non-existent or fictitious. The person to
whose order the instrument is made payable may in fact be existing but he is still
fictitious or nonexistent under paragraph C of section 9 of the NIL if the person making it
so payable does not intend to pay the specified person.

ii. When payable to order

oThere are only two ways by which an instrument can be made payable to order under
Section 8 of the NIL. The instrument can either be payable to the order of a specified
person (pay to the order of Juan Delacruz) or to specified person or his order (Pay to Juan
Delacruz or order)
1. To whose order the instrument may be made payable (Sec. 8, NIL)

Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order
of a specified person or to him or his order. It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with
reasonable certainty.

e. Omissions that do not affect the negotiability (Sec. 6, NIL)

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are
not affected by the fact that:
(a) it is not dated; or

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

(c) does not specify the place where it is drawn or the place where it is payable; or

(d) bears a seal; or

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

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

f. Additional provisions not affecting negotiability (Sec 5, NIL)

i. Sale of collateral securities
o A statement of the transaction that gave rise to the obligation does not make the
instrument non negotiable. In the same manner, a statement that in the instrument that the
same is secured by a collateral does not make the promise or order conditional. In fact,
section 5(a) even declares that the instrument is negotiable even if it authorizes the sale of
collateral securities in case of default. Thus, an instrument is still negotiable even if it
states that it is secured a by a chattel mortgage which can be foreclosed pursuant to the
pertinent law if the maker defaults in the payment of his obligation.” it should be

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 reiterated however that the instrument must not be subject to the provisions of the
separate contract
ii. Confession of judgement
o Confession of judgment is an authority given in advance by the obligor to another to
confess judgment in case of future litigation it has been ruled that this type of warrant of
attorney is void for being contrary to public policy.
 A stipulation allowing confession of judgment does not affect the negotiability of the
instrument.
iii. Waiver or benefit
o waiver of the obligor of the benefit of any law for his advantage or protection does not
affect the negotiability of the instrument. Thus, and order may be waived the benefit of
any provision of the NIL that is designed for his benefit. For instance, the law makes the
endorser liable only if the necessary proceeding on this owner is duly taken. However,
section 109 of the NIL provides that “notice of dishonor may be waived either before the
time of giving notice has arrived or after the omission to give due notice, and waiver may
be expressed or implied.” an express waiver given ahead of time is made when there is a
statement in the instrument that notice of this honor is waived
iv. Option to require something in lieu of payment

2. Rules to be followed in interpreting negotiable instruments (Sec. 17, NIL)

Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is
ambiguous or there are omissions therein, the following rules of construction apply:
(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain,
reference may be had to the figures to fix the amount;

(b) Where the instrument provides for the payment of interest, without specifying the date from which
interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from
the issue thereof;

(c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

(d) Where there is a conflict between the written and printed provisions of the instrument, the written
provisions prevail;

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may
treat it as either at his election;

(f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person
making the same intended to sign, he is to be deemed an indorser;

(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.

C. Negotiation

1. Mode of transfer
oNegotiation is defined as the transfer of the instrument from one person to another so as
to constitute the transferee the holder thereof.
 The essence of negotiability which characterizes our negotiable paper as a credit
instrument lies in its freedom to circulate freely as a substitute for money.
Non-Negotiable Instrument
o If an instrument is not negotiable, it can still be transferred but only through assignment.
o The transferee is an assignee who merely steps into the shoes of the transferor. The
transferee cannot be a holder in due course and he is therefore subject to the defenses of
prior parties.

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Negotiable instrument
o if the instrument is negotiable, voluntary transfer thereof can be affected either through
negotiation or through assignment. If the instrument is merely assigned, the transferee
does not become a holder and he merely steps into the shoes of the transferor.
o Any defense available against the transferor is available against the transferee. This may
happen for instance, if the prescribed formal requirements for negotiation are not
complied with as in the case where endorsement is required is absent.
o It should be emphasized however, that the distinction between negotiation and
assignment of negotiable instruments is immaterial to the holder where there is no
available defense between the parties.
o There would still be an effective transfer of credit to the transferee even if the transfer is
by way of assignment and the assignee can recover from the person liable.
o It should also be pointed out that there are also warranties even if the mode of transfer is
assignment. The transferor also gives warranties at that time he assigned the instrument.
Assignment is in the nature of sale and the assignor is therefore bound by certain
warranties in favor of the assignee.
Issuance
o The first incident in the life of negotiable instrument is its preparation, complete with all
the requirements of negotiability under section one.
o This incident is followed by its transfer to the payee, the process known as issuance.
Section 191 of NIL defines issue as the first delivery of the instrument complete in form
to a person who takes it as a holder.
 Issuance to the Payee is negotiation because the transfer constitutes the payee the
holder of the instrument.
o Delivery - the transfer of possession of the instrument by the maker or drawer with the
intention to transfer title to the payee and recognize him as a holder thereof.
2. Concept of negotiation (Sec 30, NIL); distinguished from assignment

Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it
is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and
completed by delivery.

o If the instrument is merely assigned, the transferee does not become a holder and he merely steps
into the shoes of the transfer order.
o Any defense available against the transferor is available against the transferee. Example where
the instrument is payable to Order was merely delivered without endorsement.
3. Ways of negotiation (in case of order or bearer instruments)
o A negotiable instrument that is payable to BEARER may be negotiated by mere delivery. No further
other than delivery is necessary in order to negotiate the instrument and to make the transferee a
holder.
o On the other hand, an ORDER instrument may be negotiated by endorsement completed by delivery.
Without endorsement, the negotiation is incomplete and the transferor does not become a holder.
o In both cases, delivery must be intended to give effect to the transfer of the instrument
o It should likewise be noted that a bearer instrument can also be negotiated by endorsement and
delivery. Although endorsement is not necessary, the NIL does not prohibit such endorsement.
4. Concept of delivery
oDelivery is defined as the transfer of possession of the instrument by the maker or drawer
with the intention to transfer title to the payee and recognize him as holder thereof.
o Delivery must be intended to give effect to the transfer of the instrument. Section 16 of
the NIL provides that “as between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual, must be made either by
or under the authority of the party making, drawing, accepting, or endorsing, as the case
may be; and, in such case, the delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring the property in the
instrument.”
5. Indorsement

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6. Concept
Incomplete negotiation of order instrument
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.

*If the negotiation of an order instrument is incomplete because of the absence of endorsement, the
instrument is effectively merely assigned to the transferee. It is only at that time of endorsement that the
transferee acquires all the rights of a holder.

7. How made (Sec, 31 & 32, NIL)

Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a
paper attached thereto. The signature of the indorser, without additional words, is a sufficient
indorsement.

Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the
entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount
payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate
as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as
to the residue.

o Endorsement is necessary to complete the negotiation of an order instrument.

o It is most often written at the back of the instrument itself. However, an endorsement on the face
of the instrument is equally effective. In fact, if there is doubt as to the nature of the signature
appearing in the instrument, the presumption is that the person of fixing the same did so as an
endorser.
o Endorsement must be for the entire instrument. Example an instrument for 5000 pesos cannot be
endorsed for less than 1000 pesos. Exception when there was a previous partial payment
o Section 32 of the NIL disallows negotiation to two or more endorsees severally. Example
endorsement of a 20,000 pesos note that states pay to Jose Cruz 15,000 pesos and Peter Santos
5000 pesos is not considered negotiation although it may be considered as an assignment
8. Kinds
9. Special and blank (Sec. 34 & 35, NIL)
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to
whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is
necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and
an instrument so indorsed is payable to bearer, and may be negotiated by delivery.

Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank
indorsement into a special indorsement by writing over the signature of the indorser in blank any contract
consistent with the character of the indorsement.

o In a blank endorsement, no endorsees specified in it is done by affixing the endorsers signature.

o A special endorsement on the other hand, designates the endorsee. In other words, the endorser
identifies the person to whom he intends to make the instrument payable.
o An order instrument is converted into a bearer instrument if the endorsement is in blank.
o If the endorsement is a blank endorsement, the risk of loss from theft is increased because the
taker need not need not commit any forgery before he can validly negotiate the same. All he
needs to do is to deliver it to an innocent transferee in the latter may become a holder in due
course.
o To prevent this eventuality, the law allows the holder of the instrument to convert the blank
endorsement to a special endorsement. This is section 35
10. Conditional (Sec. 39, NIL)
o An endorsement that states that the payment should be made only when a specified
shipment of goods reaches Manila is a conditional endorsement
o In an endorsement of this nature, there is no legal obligation to pay until the arrival of the
goods; The endorsement is subject to a suspensive condition. However, section 39 of the

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 NIL allows payment by the obligor even before the happening of the event that serves as
a suspensive condition.
Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the
instrument may disregard the condition and make payment to the indorsee or his transferee whether the
condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will
hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally.

11. Qualified (Sec. 38, NIL)

Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the
title to the instrument. It may be made by adding to the indorser's signature the words "without recourse"
or any words of similar import. Such an indorsement does not impair the negotiable character of the
instrument.

o Secondary contracts are accumulated whenever an instrument is endorsed because the endorser
becomes secondarily liable. Thus, an endorser by placing his endorsement in the instrument is
actually entering into 2 contracts:
1) the contract for the assignment or transfer of his rights over the instrument and
2) the secondary contract where he assumes secondary liability.
o If the endorser wants to transfer his rights over the instrument but does not want to assume
responsibilities under the secondary contract, he may do so by resorting to what is known as
qualified endorsement.
o But he is qualified endorsement, the endorser disclaims his liability to any holder or any
subsequent party who might be compelled to pay by another,
o He is only liable for breach of warranties under section 65 of the NIL.
o He negatives liability by placing annotation "without recourse" or "sans recourse" on his special
or blank endorsement
12. Restrictive (Sec. 36 & 37, NIL)
Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or

(b) Constitutes the indorsee the agent of the indorser; or

(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement restrictive.

Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon
the indorsee the right:
(a) to receive payment of the instrument;

(b) to bring any action thereon that the indorser could bring;

(c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement.

o Section 47 of the NIL provides that “and instrument negotiable in its origin continues to be
negotiable until it has been restrictively endorsed or discharged by payment or otherwise.”
restrictive endorsements and their effects are provided for in section 36 and 37 of the NIL
o An endorsement that states “pay to Mr Juan Francisco only, signed Mr Edgar Fernando” is a
restrictive endorsement that prevents further negotiation of the instrument.

13. Other rules on indorsement

14. Indorsement of an instrument payable to bearer (Sec. 40, NIL)
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is
indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders as make title through his indorsement.

o A bearer instrument is always a bearer instrument

15. Where instrument is payable to two or more persons (Sec. 21, NIL)

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Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the
order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing
has authority to indorse for the others.

16. Instrument is drawn or indorsed to a person as cashier (Sec. 42, NIL)

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.

17. Where the name of payee or indorsee is misspelled (Sec, 43, NIL)
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.

18. Indorsement is a representative capacity (Sec 44, NIL)

Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to negative personal liability.
19. Presumption as to the time of indorsement (sec 45, NIL)
Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity
of the instrument, every negotiation is deemed prima facie to have been effected before the instrument
was overdue.

20. Place of indorsement (Sec 46, NIL)

Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is
presumed prima facie to have been made at the place where the instrument is dated
21. Striking out of indorsement (Sec. 48, NIL)
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.
22. Transfer of an order instrument without indorsement (Sec 49, NIL)
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.
6. Negotiation by a prior party (Sec. 50, NIL)
Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior
party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But
he is not entitled to enforce payment thereof against any intervening party to whom he was personally
liable.

o Where an instrument is negotiated back to a prior party, such party may reissue and further
negotiate the same. But he is not entitled to enforce payment thereof against any intervening party
to whom he was personally liable. However, he may strike out the intervening endorsements
because they are not necessary for his title and he is liable to them because of his initial
endorsement.
o Example letter P indorsed the instrument to B then B endorsed it to C,C to D then D back to B. B
can further negotiate the instrument. He may also strike out the endorsement of C&D
D. Holders

1. General Concept of a Holder

o A holder means the payee or endorsee of a bill or note who is in possession of it or the bearer
thereof. In other words, the payee or endorses is the holder of an order instrument while the
payee or the bearer is the holder of a bearer instrument.
o Every holder of a negotiable instrument may sue their own in his own name; And payment to
him in due course discharge is the instrument.
o It is not necessary that the holder is a holder in due course before he can enforce payment
especially if there are no defenses available for parties.
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 o If there are no defenses, the distinction between a holder in due course and one who is not is
immaterial.
2. Holder in due course (requisites) (Sec. 52, NIL)
Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it has been previously
dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it.
* the first requirement under section 52 is that the person who claims to be a holder in due course
must be a holder.
*If a possessor of a negotiable instrument is not a holder, then he can never be a holder in due
course. Hence, a possessor of a check payable to the order of a different person is not a holder in
due course if it is not endorse to him. The holding suffers from the infirmity of not having been
properly negotiated.
o A payee can be a holder in due course. Section 191 defines holder as the payee or
endorsee of a bill or note, who is in possession of it, or the bearer thereof. Hence, the
word holder in the first clause of section 52 and in the second subsection thereof may be
replaced by the definition in section 191 so as to leave a holder in due course is a payee
or an endorsee in possession.
o This even applies to cross checks where the page was not involved in the underlying
transaction.

1. Instrument complete and regular

o An instrument is not complete and regular on its face if it contains material alteration
o Sam, a holder cannot be a holder in due course if he took the instrument at the time when
the amount to be paid appears to have been altered by increasing the same.
2. Taken before overdue
o A holder who takes an overdue instrument is put on inquiry although he is not actually
aware of any existing defence of a prior party. A person taking an overdue instrument
should certainly question why the instrument is still in circulation even if it is overdue.
i. Rule in case of installment instrument
o With respects to instruments that are payable in installments, “a purchaser after the
maturity of the first installment with notice that it was unpaid takes the note as an
overdue paper.”
o Consistently a purchaser of an installment note after an installment is over due may be a
holder in due course as to the balance if he has no notice or failure to pay the first
installment.
ii. Rule in case of demand instrument (Sec. 53, NIL)
Demand Instruments
o Where an instrument payable on demand is negotiated after an unreasonable length of
time after its issue, the holder is not deemed the holder in due course.
o What can be considered unreasonable is relative. Section 193 of the NIL provides that in
determining what is reasonable time or an unreasonable time, regardless to be had in the
nature of the instrument, the usage of the trade or business if any with respect to such
instrument, and the fact of the particular case.

3. Notice of infirmity or defect (Sec 56 & 57, NIL see also Sec. 54, NIL)
Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or
defect in the title of the person negotiating the same, the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounted to bad faith.

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Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect
of title of prior parties, and free from defenses available to prior parties among themselves, and may
enforce payment of the instrument for the full amount thereof against all parties liable thereon.

o Notice of an infirmity in the instrument or defect in the title of a prior party will destroy due
course holding period
o To constitute notice of an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such fact that his action in taking the instrument amounted to
bad faith.
o Infirmity in the instrument means any irregularity in the instrument. First, notice of an alteration
which is apparent is notice of an infirmity in the instrument
4. Good faith
oGood faith on the part of the holder is presumed, such presumption is destroyed if the
payee or endorsee “acquired possession of the instrument under circumstances that
should have put him to inquiry as to the title of the holder who negotiated the instrument”
the burden is now on the part of the holder to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith
o A person who takes a crossed cheque without making further inquiry is not a holder in
due course. The act of crossing a check serves as warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose.
5. Holder for value
Value- a consideration sufficient to support a simple contract.
o The holder is a holder for value only to the extent that the consideration agreed upon has
been paid, delivered or performed.
o Faliure of performance of the obligation will give rise to partial or full defense of failure
of consideration as the case may be
o Where the transferee receives notice of any infirmity in the instrument or defect in the
title of the person negotiating the same before he has paid the full amount agreed to be
paid therefore, he will be the holder in due course only to the extent of the amount paid
therefore by him
6. Presumption of due course holding (Sec. 59, NIL)
o The presumption is that every holder is a holder in due course and it is up to the person
who is resisting the claim to prove that the holder is not a holder in due course.
o The presumption cannot operate however if a demand instrument it's negotiated for an
unreasonable length of time
7. Rights of holder in due course (Sec. 57, NIL)
o A holder in due course holds the instrument free from any defects of title of prior parties,
and free from defenses available to prior parties among themselves, and maybe enforce
payment of the instrument for the full amount thereof against all parties liable their own.
Next line in other words, a holder in due course is free from personal defenses. The
person primarily or secondarily liable cannot refuse payment if his defense is only a
personal defenses.
o However, a holder in due course is not free from real defenses.
o In other words, the claim of a holder in due course can still be defeated by the person
primarily or secondarily liable if the latter has in his own favor real defenses.

8. Shelter rule
Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who
derives his title through a holder in due course, and who is not himself a party to any fraud or illegality
affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.

E. Liability of Parties

1. Primary and secondary liability distinguished

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 The active subject in a negotiable instrument is the holder.
o
The holder is the person or entity who is given the right to demand the performance of
o
the obligation reflected in the instrument, that is, the obligation to pay a sum certain in
money.
o The holder therefore is the owner of the intangible personal property evidenced by the
instrument.
o The passive subject against whom the holder can enforce the right represented by the
instruments are the person who are primarily liable and the person secondarily liable.
o Section 192 of the NIL defines persons primarily liable as the person, who, by the same
terms of the instrument, is absolutely required to pay the same.
o On the other hand, a person is secondarily liable if he “engages that, on due presentment,
the instrument shall be accepted or paid, or both, as the case may be, according to its
tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any subsequent endorsers who
may be compelled to pay it.”
o in other words, the person secondarily liable promises to pay if the person primarily
liable refuses or fails to pay.
2. Liability from warranties
o The primary or secondary liability of the party should be distinguished from their
warranties.
o The primary or secondary liability of the parties makes them liable to pay the sum certain
in money stated in the instrument.
o This is not true in the case of warranties. Warranties are affirmations of fact on the part of
the parties that impose no direct obligation to pay in the absence of breach thereof.
o in case of breach of warranties, the person who breached the same may either be liable or
he may be barred from asserting a particular defense.
o Unlike secondary liability which requires notice of this owner, an action based on breach
of warranty is not so conditioned.

3. Liability and/or warranties of parties

a. Maker (Sec. 60, NIL)
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay
it according to its tenor, and admits the existence of the payee and his then capacity to indorse.
The liability of the maker is primary and unconditional.
o
He cannot shift his liability to any person without the payee's consent.
o
Two or more persons can be joint makers. However, Section 17 (G) provides that “where
o
an instrument contains the word I promise to pay is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.”
b. Drawer (Sec. 61, NIL)
Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee
and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or
paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who
may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing
or limiting his own liability to the holder.

i. Relationship with drawee

o Usually, there is a contractual relation between the drawer and the drawee. Thus, a driver
may have drawn the bill against the drawee because the latter is holding an amount in
trust for the former.
o The order to pay may also be addressed to the drawee because the drawee may have
extended credit to one person and there is an agreement between them that the drawee
will honor any bill drawn by the drawer against the said drawee. For instance, a bank that
issues a letter of credit in favor of the seller upon the application of the buyer, may
undertake to honor any bill of exchange drawn by the buyer in favor of the seller or to
honor any build drawn by the seller.
ii. Relationship with collecting bank
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 oHolders of checks may obtain payment from the Drawee bank by presenting it for
payment directly with the bank or by depositing it in his account in another bank known
as the collecting bank or depositary bank.
o When the holder deposits his check with the collecting bank, the nature of the
relationship created at this at that stage is one of agency, that is, the bank is to collect
from the drawee of the check the corresponding proceeds.
o Thus, the privity of contract is between the holder depositor and the collecting bank.
There is no privity of contracts between the drawer and the collecting bank.
c. Acceptor (Sec. 127 and 62, NIL)
Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill of itself does not operate as an
assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is
not liable on the bill unless and until he accepts the same.

Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw
the instrument; and

(b) The existence of the payee and his then capacity to indorse.
o A drawer does not become liable until he accepts the bill or unless he certifies the check.
o It is only from the moment the drawee accepts the bill or certifies the check that the
drawee becomes primarily liable. He becomes liable to the holder by his unconditional
acceptance.
o This is true even if, in fact, no obligation is owed by the drawee to the drawer to honor
the bill or the check or even if they draw we did not receive any consideration from the
drawee.
o Such absence of consideration is only an issue between the drawer and the acceptor. It is
not a defence of an acceptor against the holder in due course.
o If they accept and the holder, the recourse of the drawee in case he paid the payee is to
seek reimbursement from the drawer.
o The acceptor is precluded from setting up certain defenses by reason of his warranties.
Thus, the acceptor is precluded from setting up the defense that the driver is a minor or
the signature of the driver is forged by reason of his warranties in the first paragraph of
section 62.

d. Indorser
Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise
than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate
words his intention to be bound in some other capacity.

o An endorser is a person who negotiates the instrument through endorsement completed

by delivery.
o If there is doubt as to the nature of the signature of a person in the instrument, such
person is deemed an endorser.
o The endorsement can be made through an agent. If it is established that the endorsement
was made by a duly authorized attorney in fact, the principle is liable as the endorser.
o Two or more persons can simultaneously endorse the instrument. Section 68 provides
that joint payees or joint endorsees who endorses are deemed to endorse jointly and
severally. Hence, if A&B jointly endorses an instrument, they are solidarity liable to the
holder.
i. General Indorsers (Sec. 66, NIL)
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all
subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and

(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case
may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be

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 duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
o A general endorser is one who endorses the instrument without any qualification.
o He is secondarily liable to the holder or any subsequent endorsers who may be compelled
to pay the instrument on account of his engagement under section 66 of the Negotiable
Instruments Law.
o Thus, by endorsing the instrument, the endorser is entering into a contract with certain
fixed and definite terms, and that the terms of such contract may not be valid or
contradicted by parole evidence.
ii. Qualified indorser (Sec 65, NIL)
Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument
by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

(d) That he has no knowledge of any fact which would impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the
immediate transferee.

The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation
securities other than bills and notes.
oA qualified endorser is not secondarily liable. His qualified endorsement transfer title
without rendering him secondary reliable. However, he is liable for the warranty to all
subsequent holders as mentioned in section 65
o The first three warranties of a qualified endorser are the same as those of the general
endorser. The difference lies in the last warranty.
o While a general endorser warrants that the instrument is valid in subsisting at the time of
his endorsement, a qualified endorser only warrants that he has no knowledge of any fact
which would impair the validity of the instrument or render it valueless.
o in other words, even if the validity of the instrument was in fact already impaired at the
time of negotiation, the qualified endorser does not breach his warranty if he has no
knowledge of such a fact.
iii. Order of liability
o The holder is free to choose to recover from any endorser if the maker dishonors the
instrument. There is no order of liability among the endorsers as against the holder.
o however, as respect one another, endorsers are liable in the order in which they endorse.
e. Parties negotiating my mere delivery (Sec. 65, NIL)
Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument
by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

(d) That he has no knowledge of any fact which would impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the
immediate transferee.

o A person negotiating by delivery is not secondarily liable. However, he has the same
warranties as a qualified endorser.
o However, there is a difference between a qualified endorser and a person negotiating by
mere delivery. While qualified endorser warrants all subsequent holders, the warranties

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 of the person negotiating by mere delivery extends only in favor in his immediate
transferee.
f. Other cases
i. Irregular indorser (Sec. 64, NIL)
Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following
rules:
(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all
subsequent parties.

(b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to
all parties subsequent to the maker or drawer.

(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.

o The irregular endorser is one who endorses the instrument in an unusual, singular or
peculiar manner; It is irregular and an anomaly in the law his name appears where he
would naturally expect another name.
o Their regular endorser is liable as a general endorser because he endorses without
qualification. However, as between themselves, the regular endorser together with other
endorsers are liable prima facie in the order in which they endorse.
ii. Indorser of bearer instrument (Sec. 67, NIL)
Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his
indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser.
o The endorser of a better instrument is liable only to those holders who make title through
his endorsement.
iii. Accommodation party (Sec. 29, NIL)
Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose
of lending his name to some other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation
party.
The accommodation party lends his name to the accommodated party. He lends his name
o
to enable the accommodated party to obtain credit or to raise money. He receives no part
of the consideration for the instrument but assumes liability to the other parties thereto.
o An accommodation party is “liable according to the face of his undertaking, the same as
if he were himself financially interested in the transaction.” the consideration which
supports the promise of the accommodation party is that parted with by the person taking
the notes and received by the accommodated party.
o The accommodation party is liable to a holder for value as if the contract was not for
accommodation. It is not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument. Nor is it correct to say that
the holder for value is not a holder in due course merely because at the time he acquired
the instrument, he knew that the endorser was only an accommodation party.
iv. Agents signing in behalf of the principal
o A maker, drawer, acceptor or endorser may act through an agent.
o However, an agent incurs all liability such as such maker, drawer, acceptor or endorser
unless he discloses the name of his principal and the fact that he is acting only as an
agent.
o The same rule applies to purported agents of corporations. The agent when so signing for
the corporation should indicate that he is merely signing on behalf of the principal and
must disclose the name of his principal, otherwise, he shall be held personally liable.
Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument
whose signature does not appear thereon, except as herein otherwise expressly provided. But one who
signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.

Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly
authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the

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agent may be established as in other cases of agency.

Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person
adds to his signature words indicating that he signs for or on behalf of a principal or in a representative
capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words
describing him as an agent, or as filling a representative character, without disclosing his principal, does
not exempt him from personal liability.

Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the
agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing
acted within the actual limits of his authority.

F. Defenses

1. Real and personal defenses, distinguished

oThe right of the holder to enforce payment of a negotiable instrument may be defeated by
the defenses that may be raised by the person primarily liable or person secondarily liable
these defenses may be either personal or real defenses.
o Real defenses may be raised against all holders even against a holder in due course.
o Personal or equitable defenses may be raised only against holders who are not holders in
due course.
o Real defenses are those wherein the facts disclose an absence of one or more of the
essential elements of a contract or where they admitted contract is vitiated for all
purposes for reasons of public policy.
o Personal defenses are those wherein the facts present a true contract but where, for
various reasons, such as fraud, duress, mistake, prior breach of contract by the holder,
discharged before maturity, and the like, the defendant is excused from his obligation to
perform.
2. Real defenses
a. Minority and ultra vires acts (Sec. 22, NIL)
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.
Minority
o Negotiation by a minor passes title to the instrument. The minor himself is not liable and
the defense is available only to the minor himself.
o If the minor negotiates the instrument to other capacitating persons, the same capacitated
persons or previous parties who are equally capacitating persons cannot raise
the defence of minority.
Corporation
o An ultra vires act is one committed outside the object for which a corporation is created
as defined by the law or its organization and therefore beyond the power conferred upon
it by law.
o A corporation may raise want of authority as a real defense but the negotiation of the
corporation may pass title to the instrument. The corporation may claim that the act is an
ultra vires act of the corporation and may raise this defense even against a holder in due
course.
b. Non-delivery of an incomplete instrument (Sec. 15, NIL)
Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it
will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as
against any person whose signature was placed thereon before delivery.
o The important circumstances that are present in this situation contemplated in this section
are as follows:
1) the instrument is incomplete and
2) the incomplete instrument has not been delivered
o In section 14 of the NIL, there is a prima facie authority to fill up the incomplete
instrument because there was delivery. In section 15, no such authority is presumed
because there was no delivery.
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 oDelivery under section 16 as well as section 15 means transfer of possession of the
negotiable instrument by one person to another with the intention to transfer title to the
instrument this is involved in the issuance of the instrument, negotiation of the instrument
and in other forms of transfer
o The delivery of the negotiable instrument for purposes of issuance or negotiation may be
made personally by the person who is supposed to transfer like the maker, drawer or
endorser.
o delivery of the instrument may be made by an authorized agent or representative.
o If a person is not authorized to deliver the instrument the contract of transfer of the
instrument is still incomplete.
o It must be understood however that if the instrument is no longer in the hands of the
maker or the drawer, he is presumed to have already delivered the instrument to another
for the purpose of issuing the same.
c. Fraud in factum
o Fraud in execution is present when a person is induced to sign and instrument not
knowing its character as a note or a bill.
o The person who signs the instrument does not know that he is signing a negotiable
instrument. Example a blind person was made to sign a piece of paper he believes to be a
credit application although it is really a promissory note.
o Fraud in inducement, the person who signs the instrument intends to sign the same as a
negotiable instrument but was induced to do so only through fraud; his consent to issue a
negotiable instrument was vitiated by fraud
o Fraud in execution is a real defense while fraud in inducement is a personal defense.
d. Forgery and want of authority (Sec. 23, NIL)
Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or
to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
o A person whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such instrument.
o Section 23 does not avoid the instrument and only the forged signature is inoperative.
o Hence, according to what is known as the cut of rule, the parties prior to the forged
signature are cut off from the parties after the forgery in the sense that the prior parties
cannot be held liable and can raise the defence of forgery.
o The holder can enforce the instrument against the parties who became such after the
forgery.
Persons precluded from setting up defense of forgery
o Parties who warrant or admit the genuineness of the signature in question; and
o Those who, by their acts, silence, or negligence or estopped from setting up defenses of
forgery, are precluded from using this defense. These include acts or omission that
amounts to ratification, express or implied
i. Forgery of the maker’s signature
o Where the maker's signature is forged, the maker is not liable to all subsequent parties
whether the instrument is an order instrument or better instrument.
o However, endorsers after the forgery are still secondarily liable to the holder. Because
these endorsers warrant that the instrument is genuine and in all respects what it purports
to be. Hence, they can no longer claim that the instrument is not genuine.
ii. Of indorser’s signature
Order Instrument
o Where the endorsement of the payee is forged in a note payable to order, the instrument
cannot be enforced against the payee and the maker.
o The forged signature is wholly inoperative and no right to enforce payment can be
obtained against any party prior to the forgery.
o The endorsers after the forgery are liable because they warrant that they have good title to
the instrument.
Bearer Instrument
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 o In bearer instruments, the signature of the holder is unnecessary to pass title to the
instrument. Hence, the maker may still be liable to a holder in due course even if an
endorsement was forged after the issuance of the note.
o The rule is still consistent with section 60 of the NIL because the same law provides that
the undertaking of the maker is to pay the instrument “according to its tender.”
o The "tenor” of the instrument is that he engages to pay any better of the instrument.
iii. Of drawer’s signature
o Where the drawer's signature is forged, the drawer is not liable whether or not the
instrument is payable to better or payable to order. There is no right to enforce payment
against the drawer under the forged signature. This is true even if the instrument is a
bearer instrument because the drawer was never a party to the instrument.
o For the same reason, the drawer's account cannot be debited if his signature in a check
was forged. A drawee is bound to know the signature of its client, the drawer. Hence, the
drawee bank is liable if it in cash its checks bearing the forged signature of the driver.
o in such cases, the drawee has no recourse against the collecting bank.
iv. Forgery of bearer instruments
o The same rule is applicable to forged endorsement in a bearer promissory note applies to
forged endorsement and a bearer bill of exchange, the holder of a bearer instrument can
still recover from the drawer if a special endorsement was forged because the forged
signature is unnecessary for his title.
v. Material alteration (partial real defense) (Sec. 124 & 125, NIL)
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment thereof according to its original tenor.

Sec. 125. What constitutes a material alteration. - Any alteration which changes:
(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment:

(d) The number of relations of the parties;

(e) The medium or currency in which payment is to be made;

(f) or which adds a place of payment where no place of payment is specified, or any other changes or
addition which alters the effect of the instrument in any respect, is a material alteration.
o An alteration is set to be material if it alters the effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an incomplete instrument relating
to the obligation of the party. In other words, a material alteration is one which changes the items
in which are required to be stated under section one of the negotiable instruments law
vi. Extinctive prescription
o Extinctive prescription is considered a real defense that may be raised even against the
holder in due course.
o The prescriptive. For the filing of a claim based on negotiable instrument is 10 years from
the time the cause of action accrued.
o in a case the payee did not in cash the check for more than 10 years from the issuance
thereof. The Supreme Court ruled that failure of the payee to in cash the check for more
than ten years “undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay”
o The court invoked article 1249 of the Civil Code stating that acceptance by the payee “of
the check implies an undertaking of due diligence in presenting it for payment, and if he
from whom it is received sustains loss by want of such diligence, it will be held to
operate as actual payment of the debt or obligation for which it was given”

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3. Personal defenses:
a. Ante-dating or post-dating (Sec. 12, NIL)
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated
or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the date of delivery.
o If the post dating or antedating is for an illegal or fraudulent purpose, a personal defense
is available against the holder.
b. Insertion of wrong date (Sec. 13, NIL)
Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period
after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight
is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.
o If a wrong date is inserted, the holder in due course has the right to regard the wrongfully
inserted date as the truth.
c. Filling-up blanks beyond authority (Sec. 14, NIL)
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority to complete it by filling up the blanks therein.
And a signature on a blank paper delivered by the person making the signature in order that the paper may
be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any
amount. In order, however, that any such instrument when completed may be enforced against any person
who became a party thereto prior to its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time. But if any such instrument, after completion, is negotiated
to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if
it had been filled up strictly in accordance with the authority given and within a reasonable time.
o a person in possession of an instrument that is lacking in a material particular has
authority to complete it by filling up the blanks there in strictly in accordance with the
authority given and within a reasonable time
o If a person delivers a blank paper to another person containing his signature for the
purpose of converting it into a negotiable instrument, the person to whom the instrument
is delivered has prima facie authority to fill it up for any amount
o If the holder of the instrument, after it was filled up, is a holder in due course, the holder
may enforce the instrument as if it has been filled up strictly in accordance with the
authority given and within a reasonable time.
o If the maker or drawer delivers an instrument to the payee although it is wanting in
material particular, the payee is deemed to have prima facie authority to fill it up. The
moment the instrument is completed the presumption is that the instrument was
completed with prior authority from the maker to or the drawer and that the person who
completed the instrument did not exceed his authority.
o The moment the payee inserted the amount, the burden of proving that there was no
authority or that the authority granted was exceeded is placed on the person questioning
such authority.
Signed blank piece of paper
o Three things must be present in order for the presumption to operate
 There must be delivery of the paper to the another person
 The paper that was delivered was a blank paper containing the signature of the person
who will deliver
 The delivery was for the purpose of converting the paper into a negotiable
instrument.
d. Lack of delivery of a complete instrument (Sec. 16, NIL)
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As
between immediate parties and as regards a remote party other than a holder in due course, the delivery,
in order to be effectual, must be made either by or under the authority of the party making, drawing,
accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been
conditional, or for a special purpose only, and not for the purpose of transferring the property in the
instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by
all parties prior to him so as to make them liable to him is conclusively presumed. And where the

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instrument is no longer in the possession of a party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is proved.
The Rules:
o Section 16 involves a complete but undelivered negotiable instrument. In other words, it
has all the matters specified in section 1 and other material particulars that are necessary
to complete the instrument.
o negotiable instrument must be delivered. If the instrument has not been delivered, the
contract concerning the instrument is incomplete and revocable
o Delivery must be either by or under the authority of the party making, drawing, accepting
or endorsing the instrument.
o If the instrument is no longer in the hands of a maker or the drawer, he is presumed to
have already delivered the instrument to another for the purpose of issuing the same. If
the instrument is no longer in the hands of the indorser, he is presumed to have delivered
the same to the endorsee for purposes of transferring title.
o As between immediate parties and remote parties who are not holders in due course, the
delivery of complete instrument may be established to be conditional or for a special
purpose and not for the purpose of transferring title.
o As between immediate parties and remote parties who are not holders in due course, it
may be established that there was no delivery at all of the complete instrument.
o As to the holders in due course, it cannot be established there was no delivery. Delivery is
conclusive as to the holder in due course if he is in possession of a complete instrument.
o As to holders in due course, it cannot be established that the delivery was conditional or
for a special purpose as to him, delivery is conclusively presumed to be unconditional
and for the purpose of transferring title without any reservation or condition.
e. Absence or failure of consideration (Sec. 28, NIL)
Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as
against any person not a holder in due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise.
oAbsence or failure of consideration is a matter of defense as against any person not the
holder in due course.
o The personal defense of failure of consideration is present if the seller who received the
negotiable instrument because of his promise to deliver goods, failed to comply with such
promise.
f. Simple fraud, duress, intimidation, force or fear, illegality of consideration, breach of faith
(Sec. 55, 56 & 57, NIL)
Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force
and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of
faith, or under such circumstances as amount to a fraud.

Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or
defect in the title of the person negotiating the same, the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounted to bad faith.

Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect
of title of prior parties, and free from defenses available to prior parties among themselves, and may
enforce payment of the instrument for the full amount thereof against all parties liable thereon.
G. Enforcement of Liability

1. Parties primarily liable and parties secondarily liable

o The maker is liable the moment he makes the instrument. Section 60 of the NIL provides
that the maker by making the promissory note “engages to pay the instrument according
to its tender.”
o A drawee becomes liable the moment he accepts the instrument. Section 62 provides that
“the acceptor, by accepting the instrument, engaged that he will pay it according to the
tenor of his acceptance.”

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 2. General steps in enforcing liability
a. Promissory notes
Step 1: Presentment for payment must be made within the required period to the maker
Step 2: Notice of Dishonor should be given if promissory note is dishonored by non-payment by
the maker
i. Presentment for payment (Sec. 70, NIL)
Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in
order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable
at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for
payment is necessary in order to charge the drawer and indorsers.
Date of presentment
Fixed Date
o If the maturity date is fixed in the instrument, the instrument should be presented for
payment on the set fixed date. Thus, if the instrument is payable on June 2 2006, the
instrument should be presented for payment on such date.
Payable on Demand
o If the instrument is payable on demand, presentment must be made within a reasonable
time after its issue, except that in the case of a bill of exchange, presentment for payment
will be sufficient if made within a reasonable time after the last negotiation thereof. If the
instrument is not presented for payment within a reasonable time after issue or last
negotiation, the person secondarily liable or discharge.

Time of Maturity
Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein
without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling
due or becoming payable on Saturday are to be presented for payment on the next succeeding
business day except that instruments payable on demand may, at the option of the holder, be
presented for payment before twelve o'clock noon on Saturday when that entire day is not a
holiday.

Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after
sight, or after that happening of a specified event, the time of payment is determined by
excluding the day from which the time is to begin to run, and by including the date of payment.

Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a
bank, it is equivalent to an order to the bank to pay the same for the account of the principal
debtor thereon.
o If the instrument is payable on a fixed day, it should be paid on such date. For example, if
the instrument is payable on December 12, 2025, it should be paid on December 12,
2025.
o If the maturity day falls on a Sunday, Saturday or a holiday, the instrument is payable on
the next succeeding business day. For instance, the instrument is payable on December 4
2025. December 4 2025 is a Sunday, hence, the instrument is payable on December 5
2025 which is a Monday and not the holiday.
o If the instrument is payable on demand, the instrument may at the option of the holder,
may be presented for payment before 12 noon on a Saturday when the entire day is not a
holiday.
Place of presentment
Sec. 73. Place of presentment. - Presentment for payment is made at the proper place:
(a) Where a place of payment is specified in the instrument and it is there presented;

(b) Where no place of payment is specified but the address of the person to make payment is
given in the instrument and it is there presented;

(c) Where no place of payment is specified and no address is given and the instrument is
presented at the usual place of business or residence of the person to make payment;
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(d) In any other case if presented to the person to make payment wherever he can be found, or if
presented at his last known place of business or residence.

o The holder must present the instrument for payment in the places mentioned in section
73. The holder must present it in the order enumerated in section 73. In other words, the
first place where the instrument must be presented is the place stipulated in the
instrument as provided for in section 73. It is only when there is no stipulated place
where the instrument can be presented in the address of the person given in the
instrument itself as provided for in section 73(B).

To whom presented
o The instrument must be presented to the person primarily liable in the instrument, or if he
is absent or inaccessible, to any person found at the place where the presentment is made.
Necessarily, the person found at the place of presentment must be capacitated person.
This rule is subject to the following:
i. Where the person primarily liable on the instrument is dead a new place of payment is
specified, presentment for payment must be made to his personal representative, if
such there be, and if with the exercise of reasonable diligence, he can be found (Sec
76)
ii. Where the person primarily liable on the instrument are liable as partners in no place
of payment specified, presentment for payment may be made to any one of them,
even though there has been a dissolution of the firm. (Sec. 77)
iii. Where there are several persons, not partners, primarily liable on the instrument and
no place of payment is specified, resentment must be made through them all. (Sec.
78)
o In partnership, each partner is, under the law, and agent of the other partners. Thus, each
partner may represent the partnership that may bind the other partners. Consistently,
presentment may be made to any of the partners under section 77. However, there are two
requirements before presentment can be made to either of the persons primarily liable:
i. The person is primarily liable must be partners.
ii. There is no place of payment that is specified.
o If the debtors are joint debtors, each death or is liable only for their respective shares in
the obligation. There must be presentment to all of them.

Instrument Exhibited
o The instrument must be produced by the holder or any person who is presenting for
payment. The person from whom payment is demanded should not pay unless the
instrument is surrendered. If the instrument is not surrendered and cancelled, there is a
danger that it may fall in the hands of other persons who might claim rights over the
instrument.

When Presentment not necessary or excused

o Delay in making presentment for payment is excused when the delay is caused by
circumstances beyond the control of the holder and not imputable to his default,
misconduct, or negligence. When the horse of delay ceases to operate, presentment must
be made with reasonable diligence.
o However, there are cases where the drawers and endorsers can still be charged even if
there is no presentment for payment. presentment for payment is not necessary or
excused in the following instances:
i. The drawer where he has no right to expect or require that the drawee or acceptor will
pay the instrument (section 79)
ii. Where the instrument was made or accepted for his accommodation and he has no
reason to expect that the instrument will be paid if presented (Section 80)
iii. Where, after the exercise of reasonable diligence, presentment, as required by this act,
cannot be made (section 82)
iv. Where the drawee is a fictitious person (Section 82)
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ii. Notice of dishonor (Sec. 89, NIL)
b. Bill of exchange
i. Presentation for acceptance (Sec. 143, NIL)
Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance must be
made:
(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance
is necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the
drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill
liable.

Sec. 144. When failure to present releases drawer and indorser. - Except as herein otherwise
provided, the holder of a bill which is required by the next preceding section to be presented for
acceptance must either present it for acceptance or negotiate it within a reasonable time. If he
fails to do so, the drawer and all indorsers are discharged.

o Presentment or acceptance is not indispensable in all cases. Section 143 provides only three
instances when presented for payment is required.
o In the other case is presentment for acceptance necessary in order to render any parties would
be liable.
o However, the holder of a bill which is required by section 143 to present the bill for
acceptance must either present it for acceptance or negotiate it within a reasonable time. If he
if he fails to do so, the drawer and all the endorsers are discharged.
o Consequently, it is not necessary to present a check for acceptance.

How Presentment for acceptance is made:

o Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour,
on the business day and before the bill is overdue, to the drawee or some person authorized to
accept or refuse acceptance on his behalf. The following rules should likewise be observed:
a. Where the bill is addressed to two or more drawees who were not partners, presentment
must be made to them all unless one has authority to accept or refuse acceptance for all,
in which case presentment may be made only to him
b. Where the drawee is dead, present that may be made to his personal representative
c. Where the drawee has been adjudged bankrupt or an insolvent or has made an assignment
for the benefit of creditors, presentment may be made to him or to his trusty or assignee.
o When Delay or Presentment is excused
o Where the holder of a bill drawn payable elsewhere than at the place of business or the
residents of the drawee has no time, with the exercise of reasonable diligence, to present the
bill for acceptance before presenting it for payment on the day it falls due, the delay caused
by presenting the bill for acceptance before presenting it for payment is excused and does not
discharge the drawers and the indorsers (Sec. 147)
o Presentment for acceptance is excused and the bill may be treated as dishonored by non
acceptance in either of the following cases:
 Where the drawee is dead, or has absconded, or is a fictitious person or a person not
having capacity to contract by bill
 Where, after the exercise of reasonable diligence, presentment cannot be made.
 Where, although presentment has been irregular, acceptance has been refused on
some other grounds. Section 149
ii. How made (Sec. 132-135 & 137, NIL)
Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the
drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the
drawee. It must not express that the drawee will perform his promise by any other means than the
payment of money.
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 Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for
acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat
the bill as dishonored.

Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the
bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the
faith thereof, receives the bill for value.

Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to
accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the
faith thereof, receives the bill for value.
Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom a bill is delivered
for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such
other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be
deemed to have accepted the same.
o Upon acceptance, a bill of exchange becomes in effect a promissory note, they accept or
standing in the place of the maker, and becoming primarily liable.

Where indicated
o The written acceptance may be in the instrument itself or in a separate instrument. However,
section 133, “the holder of a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused, may treat the bill
dishonored.”

iii. Time to accept (Sec. 136, NIL)

Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in
which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of
presentation.
iv. Rule when incomplete bill is accepted (Sec. 138, NIL)
Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by
the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored
by a previous refusal to accept, or by non payment. But when a bill payable after sight is
dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence
of any different agreement, is entitled to have the bill accepted as of the date of the first
presentment.
v. Kinds of acceptance (Sec. 139-142, NIL)
Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance
assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the
effect of the bill as drawn.

Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a particular place is a general
acceptance unless it expressly states that the bill is to be paid there only and not elsewhere.

Sec. 141. Qualified acceptance. - An acceptance is qualified which is:

(a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a
condition therein stated;

(b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn;

(c) Local; that is to say, an acceptance to pay only at a particular place;

(d) Qualified as to time;

(e) The acceptance of some, one or more of the drawees but not of all.
Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified
acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from
liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified
acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified

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 acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to
have assented thereto.

Kinds
o General
 A general acceptance without qualification to the order of the drawer.
o Qualified
 Qualified acceptance is in express terms varies the effect of the bill as drawn.
However, and acceptance to pay at a particular place is in general acceptance unless it
is expressly stated that the bill is to be paid there only enough elsewhere.

vi. If dishonored by non-acceptance

vii. Notice of dishonor (Sec. 89, NIL)
viii. Rule in case of foreign bills (see provisions of protest)
ix. If accepted
x. Presentment for payment to acceptor
xi. Rule if dishonored upon presentment for payment
xii. Rule in case of foreign bill

xiii. Notice of dishonor

Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a
negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must
be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given
is discharged.
o When a negotiable instrument has been dishonored by non acceptance or non payment,
notice of dishonor must be given to the drawer and to each endorser, and any drawer or
endorser to whom such notice is not given is discharged

Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment
when:
(a) It is duly presented for payment and payment is refused or cannot be obtained; or

(b) Presentment is excused and the instrument is overdue and unpaid.

Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of
this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder.
Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance:
(a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused
or can not be obtained; or

(b) When presentment for acceptance is excused and the bill is not accepted.

xiv. Who should give notice

xv. Holder
o The notice may be given by or on behalf of the holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to the holder, and who, upon taking it up, would
have arrived to reimbursement from the party to whom the notice is given.
o Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent
holders and all prior parties will have a right of recourse against the party to whom it is
given. If the notice is given by the endorser who may be compelled to pay, such notice inures
to the benefit of the holder and all parties subsequent to the party to whom notice is given.
o Thus, M, maker, issued negotiable note to P, the payee, payable to P or his order. P indorsed
the instrument to A, then A to B, B to C, and C to D, the present holder. If M dishonors the
instrument, D may notify C since he may be compelled to pay D. C, in turn may notify
person who may be secondarily liable to him, that is B, A and P. B may notify A and P and A
may notify P.

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  If D gave notice of dishonor to P, A, B and C, the latter C need not notify P, A and B
again because notice by the holder inures to the benefit of all parties who have the
right of recourse against the party to whom it is given.
xvi. Agent
o Notice of dishonor may be given by any agent either in his own name or in the name of any
party entitled to give notice.
o The phrase “the party be his principal or not” means that a person may effectively give notice
for another even if he is not authorized to do so.
o On the other hand, if the agent is authorized, he may give such notice in his own name as in
the case of collecting banks
Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an
agent, he may either himself give notice to the parties liable thereon, or he may give notice to his
principal. If he gives notice to his principal, he must do so within the same time as if he were the holder,
and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the
agent had been an independent holder.
xvii. Party who may be compelled to pay
xviii. Form of notice (Sec. 95 & 96, NIL)*
Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice
may be supplemented and validated by verbal communication. A misdescription of the instrument does
not vitiate the notice unless the party to whom the notice is given is in fact misled thereby.

Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any terms
which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or
non-payment. It may in all cases be given by delivering it personally or through the mails.
The notice of dishonor may be verbal or in writing. But whether verbal or in writing, the
o
notice must take the following:
 sufficient description of the bill or note
 A statement that the instrument has been dishonored upon presentment for acceptance
or for payment
 A statement that the instrument has been protested if protest is required
 An announcement of the intention to look the party address for payment.
o Section 95 provides that a written notice need not be signed.
o If the notice of dishonor is in writing, section 96 provides that it can be delivered personally
to the person to whom note they should be given or it may be sent to him by mail.
xix. To whom notice is given
Notice may be given to:
o The party himself, meaning the endorsers or the drawer themselves or
o In the agent of the endorser or the drawer
xx. Party secondarily liable or agent (Sec. 97, NIL)

xxi. Notice where party is dead (Sec. 98, NIL)

Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving
notice, the notice must be given to a personal representative, if there be one, and if with reasonable
diligence, he can be found. If there be no personal representative, notice may be sent to the last residence
or last place of business of the deceased.
xxii. Notice to partners (Sec. 99, NIL)
Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is
notice to the firm, even though there has been a dissolution.
xxiii. Persons jointly liable (Sec. 100, NIL)
Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be given to
each of them unless one of them has authority to receive such notice for the others.
xxiv. Notice to bankrupt (Sec. 101, NIL)
Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or
has made an assignment for the benefit of creditors, notice may be given either to the party
himself or to his trustee or assignee.
xxv. Time and place of notice (Sec. 103-108, NIL)
Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice
reside in the same place, notice must be given within the following times:

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 (a) If given at the place of business of the person to receive notice, it must be given before the close of
business hours on the day following.

(b) If given at his residence, it must be given before the usual hours of rest on the day following.

(c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day
following.
Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive
notice reside in different places, the notice must be given within the following times:
(a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day
of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter.

(b) If given otherwise than through the post office, then within the time that notice would have been
received in due course of mail, if it had been deposited in the post office within the time specified in the
last subdivision.
Sec. 105. When sender deemed to have given due notice. - Where notice of dishonor is duly addressed and
deposited in the post office, the sender is deemed to have given due notice, notwithstanding any
miscarriage in the mails.

Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-
office when deposited in any branch post office or in any letter box under the control of the post-office
department.

Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after
the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after
the dishonor.

Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of
dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as
follows:
(a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed
to receive his letters; or

(b) If he lives in one place and has his place of business in another, notice may be sent to either place; or

(c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning.
But where the notice is actually received by the party within the time specified in this Act, it will be
sufficient, though not sent in accordance with the requirement of this section.

xxvi. When notice is excused or unecessary (Sec. 109-112, 114-115, NIL)

o Waiver means the person who is making the waiver renounces the benefit of the act or matter
in his favor.
Types of waiver
o the waiver of notice of dishonor may either be expressed or implied
o The waiver may either be written in the instrument itself, or written above the signature
of the endorser
o Waiver maybe before the time of giving of notice, or after the failure to give notice
xxvii. When delay in giving notice excused (Sec. 113, NIL)
Drawer
o Notice of this owner is no longer necessary to be given to the drawer in the situations
contemplated under section 114 because the drawer was actually already notified or the
dishonor was actually his fault.
o In section 114 paragraph A, notice of dishonor is not required to be given to the drawer if he
is in the same person as the drawee. If the drawee and drawer is the same person, the drawer
is actually already aware of the dishonor.
o If the drawee is non existent, there is nobody to dishonor the instrument hence, the
instrument need not be presented for payment. Notice of dishonor need not be given because
it actually the drawer who was at fault for placing the fictitious drawee. On the other hand, if
the drawee is a minor, the drawer cannot also expect that the drawee will honor the
instrument.
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 o Paragraph C is different from paragraph A because paragraph C contemplates a situation
where the drawer is not the drawee but the person to whom the instrument was presented in
behalf of the drawee is the drawer. For example if the drawer is the authorized agent or
representative of the drawee who dishonored the instrument, the notice of dishonor need not
be given to the drawer.
o And an example of paragraph D section 114 is a situation where the drawer closed this
account with the drawee bank. Hence, the drawer has not reason to expect that the drawee
bank will honor the check that he issued.
o The drawer has countermanded the payment of the bill of exchange. If a stop payment order
was given by the drawer to the drawee bank, the drawer has no reason to expect that the
drawee bank will honor the check he should.

Indorser
Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the
drawer in either of the following cases:
(a) Where the drawer and drawee are the same person;

(b) When the drawee is fictitious person or a person not having capacity to contract;

(c) When the drawer is the person to whom the instrument is presented for payment;

(d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the
instrument;

(e) Where the drawer has countermanded payment.

Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to
an indorser in either of the following cases:
(a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was
aware of that fact at the time he indorsed the instrument;

(b) Where the indorser is the person to whom the instrument is presented for payment;

(c) Where the instrument was made or accepted for his accommodation.

xxviii. Discharge of instruments

1. Concept of discharge
o This charge means release from further liability, obligation, or from the binding effect of the
negotiable instrument. “as to the paper itself, it puts an end to it as a contractual obligation.
As to the parties to the instrument, it operates as a release of some or all of them from further
obligation and liability under the instrument although the instrument may not be discharged,
as where only part of the obligors are released.
2. How instrument is discharged (Sec. 119, NIL)
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument is made or accepted for
his accommodation;

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the payment of money;

(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

a. Payment in due course (Sec. 88, NIL)

Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or
after the maturity of the payment to the holder thereof in good faith and without notice that his title is
defective.

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i. By the principal debtor (Sec. 119[a])

ii. By the accommodated party (Sec. 119[b])

b. Intentional cancellation
i. Rule in case of unintentional cancellation (Sec. 123, NIL)
Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or
under a mistake or without the authority of the holder, is inoperative but where an instrument or
any signature thereon appears to have been cancelled, the burden of proof lies on the party who
alleges that the cancellation was made unintentionally or under a mistake or without authority.
c. Any act that discharges simple contracts
d. Principal debtor becomes a holder
3. Discharge of secondarily liable (Sec. 120, NIL)
Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily
liable on the instrument is discharged:
(a) By any act which discharges the instrument;

(b) By the intentional cancellation of his signature by the holder;

(c) By the discharge of a prior party;

(d) By a valid tender or payment made by a prior party;

(e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily
liable is expressly reserved;

I. Checks

1. Checks defined (Sec. 185, NIL)

o Check is defined under the NIL as a bill of exchange payable on demand drawn on a bank.
Checks are used between banks and bankers and their customers, and are designed to
facilitate banking operations. In it is of the essence to be payable on demand, because the
contract between the banker and the customer is that the money is needed on demand.
2. Distinguished from Draft
3. Relationship between a drawer, drawee and payee
4. Kinds of checks
a. Cashier’s and manager’s check (See BSP Circular 259, series of 2000 & BSP circular 291,
series of 2001
o A cashier's check is a bill of exchange drawn by a bank upon itself, and is accepted by its
issuance. A managers check is of the same nature, although intended of being signed by the
cashier, it is the manager signs the same for the bank
o Essentially, the bank is both the drawer and the drawee of the cashier's check. It should be
noted however, that in one case, the Supreme Court considered the purchaser of the check as
the drawer there of.
b. Certified check (Sec. 187-189, NIL)
o A certified check is one drawn by a depositor upon funds to his credit in a bank which a
proper officer of the bank certifies will be paid when duly presented for payment.
o It is analogous to a certificate of deposit of a certifying bank. Certification is similar to
acceptance but different in the essence that 1) certification at the instance of the holder
discharges while there is no discharge in an ordinary acceptance 2) in certification, the bank
debits the drawers account at the time of certification and sets aside funds out of drawers
control.
o Thus, the effect of certification is the same as though the money had been paid by the bank to
the holder and redeposited by him in his own credit.
c. Crossed check (Article 541, Code of Commerce)
i. Effect of crossing a check
o Under the accepted banking practice, crossing a check is done by writing two parallel lines
diagonally on the left a portion of the checks.

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AD USUM PRIVATUM STUDENTIUM DR. YANGA’S COLLEGES, INC.
COLLEGE OF BUSINESS ADMINISTRATION
 o The crossing special where the name of a bank or a business institution is written when the
two parallel lines, which means that the draw we should pay only to the in with intervention
of that company. The crossing is general where the words written between two parallel lines
are “and Co” or “for base account only”
ii. Memorandum and traveler’s check
5. When required to be presented for payment (Sec. 185, NIL)
6. Effect of death of drawer
7. Bouncing Checks Law (Batas Pambansa Blg. 22)
Purpose
o The law was devised to safeguard the interest of the banking system in the legitimate
public checking account user. It did not intend to shelter or favor nor encourage users of
the system to enrich themselves through manipulation enter convention of the noble
purpose and objective of the law
o The primordial intention of the law is to ensure the stability and commercial value of
checks as virtual substitutes for currency.
o To stop the nefarious practice can very well pollute the channels of trade and commerce,
injured the banking system and eventually hurt the welfare of society and the public
interest.

Two ways of committing BP 22

a. By making or drawing and issuing a check to apply on account or for value knowing that
at the time of issue that the check is not sufficiently funded.
b. by having sufficient funds in or credit with the drawee bank at that time of issue but
failing to keep sufficient funds in them or credit with said bank to cover the full amount
of the check when presented to the drawee bank within a period of 90 days from the date
thereof.
1 mode of Commission:
st

o The drawer knows that he does not have sufficient funds to cover the check at the time of
issuance.
o The check involved in the first offense is worth less is worth less at the time of issuance
since the drawer had neither sufficient funds in nor credit with the drawee bank at that
time.

Elements of the crime

i. The making, drawing and issuance of any check to apply on account or for value
 Issue means the first delivery of a check, complete informed, to a person who
takes it as a holder, and who is a Payee in possession thereof
 The payee of a check need not be the obligee of the obligation in consideration for
which the check has been issued, as when the check is issued in favor of a person
who used it to pay his obligation to another person, to hold the drawer liable for
the dishonor of the check.
 “account” includes that, transaction, claim or demand growing out of contract,
and obligation to pay. The phrase “value” refers to any consideration sufficient to
support a simple contract, as well as an antecedent or pre-existing death in section
24 of the NIL presumes that a check is issued for reconsideration.
ii. The maker, drawer or issuer knows that the time of issuance he does not have
sufficient funds in or credit withdraw bank for the payment of such check in full upon
its presentment
 Section 2 creates a presumption that the drawer has knowledge of the
insufficiency of his funds at the time of issue, where its requirements are shown
namely:
o the check is presented for payment within 90 days from issue
o The check is dishonored for insufficiency of funds or credit
o The driver is given written notice of the dishonor of that check

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AD USUM PRIVATUM STUDENTIUM DR. YANGA’S COLLEGES, INC.
COLLEGE OF BUSINESS ADMINISTRATION
 o The drawer fails, within five days from receipt of such written notice, to pay
the full value of the check or to make arrangements with the bank for its full
payment.
 If the check is not presented for payment within 90 days from its issue but was
presented only after the 90 day., there will be no presumption of insufficiency of
funds or credit.
 There will also be no presumption if the notice of non payment by the drawee
bank is not sent to the drawer of the bump check, or if there is no proof as to when
such notice was received by the drawer, since there would be no way of reckoning
the crucial five day. For the drawer to make good the check.
iii. The check is subsequently dishonored by the drawee bank for insufficiency of funds
or credit or would have been dishonored for the same reason had not the drawer,
without any valid reason, ordered the bank to stop payment
 If the drawee has sufficient funds or credit with the bank at the time he issued the
check, and the check is dishonored for some other reason or reasons, the third
element is lacking in the accused may be acquitted I quit then. But he may still be
convicted under the second way of committing the crime, if he fails to maintain
sufficient funds or credit within 90 days from the date of issue of the check, as the
reason for the dishonor thereof.
iv. The drawer is given written notice of dishonor of the check and he fails to pay the
face value thereof or make arrangements with the bank for its full payment, within
five days from receipt of the written notice of dishonor.
 The fourth element is a requirement of due process and is intended to give the
drawer the opportunity to prevent prosecution by paying the face value of the
check within five days from receipt of the notice of this owner of the check.
 Notice of dishonor is a requirement of due process, so that the failure of the
prosecution to show that the written notice of this owner has been sent to and
received by the drawer and the date when the latter received such notice entitles
the accused to an acquittal.
 The payment of the value of the check either by the drawer or by the drawback
within five banking days from notice of the dishonor given to the drawer is a
complete defense.
2 mode of Commission
nd

Elements
i. The making, drawing and issuance of any check to apply on account or for value,
which is similar to the first way of committing the offense
ii. The check is deposited or presented to that drove bank for payment within 90 days
from date of issue
iii. The check is subsequently on this owner by the drawee bank for failure to keep
sufficient funds or to maintain bank credit within the 90 day. From the date of issue
of the check.
iv. Written notice of this owner of the check is given the drawer in failure on his part to
pay the face value of the check or to make arrangements with the bank for its full
payment within five days from receipt of the notice of this owner of the check
 In the second situation the 90 day period to present the check for payment to the
drawee bank from its date of issue then element of the offense. Hence, if he has
maintained sufficient funds within the 90 day. And thereafter he withdraws his funds,
leaving no funds or insufficient amount over the value of the check, the presentment
for payment after the 90 day period from its issue and in some sequence this owner
may not render the driver liable under the second way of committing the offense.
 The check involved in the second situation is good when it should, as the driver has
sufficient funds in or credit with the drawback when he issued the check, but he fails
to maintain sufficient funds or credit within 90 days from the date of issue of the
check, as the reason for the dishonor of that check. The dishonor makes the drawer
liable.
 If a driver has sufficient funds at the drawee bank at that time he issues a check, but
the payee presents it for payment only after 90 days from its issue, the dishonor of the
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AD USUM PRIVATUM STUDENTIUM DR. YANGA’S COLLEGES, INC.
COLLEGE OF BUSINESS ADMINISTRATION
 check thereafter for insufficiency or lack of funds does not render him liable under
the second way of committing the offense.
 Presentment of the check to the drawee back within 90 days from its issue is an
element of the 2nd way of committing it, and failure to do so renders the drawer free
and harmless from criminal liability but not from civil liability on the check if the
check is dishonored.
 The presumption arises only when the following requests are complied with namely
one resentment within 90 days from the date of the check, and to the dishonor of the
check and the failure of the maker to make arrangement for the payment in full within
five banking days after notice thereof.
 In Danao versus Court of Appeals it was held at the absence of notice of dishonor to
the drawer accused entitles the latter to an acquittal

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AD USUM PRIVATUM STUDENTIUM DR. YANGA’S COLLEGES, INC.
COLLEGE OF BUSINESS ADMINISTRATION
References:

The Negotiable Instruments Law, ACT No. 2031(February 3, 1911) (Phil.)

An Act Penalizing the Making or Drawing and Issuance of a Check without Sufficient Funds or
Credit and for Other Purposes, Batas Pambansa Blg. 22 (April 3, 1979) (Phil)

Reviewer on Commercial Law (2019 Ed.) Sundiang, Jose & Aquino, Timoteo (2019). Reviewer
on Commercial Law (2019 Edition). Rex Printing Company Incorporated.

The Law on Negotiable Instruments – With Documents of Title (13th Edition)

de Leon, H. M., Jr., & de Leon, H. S. (2016). The Law on Negotiable Instruments (With
Documents of Title) (13th edition). Rex Printing Company, Incorporated.

Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents (2nd Ed.)
Aquino, Timoteo B (2006). Notes and Cases on Banks, Negotiable Instruments and Other
Commercial Documents. Rex Printing Company, Incorporates

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AD USUM PRIVATUM STUDENTIUM DR. YANGA’S COLLEGES, INC.
COLLEGE OF BUSINESS ADMINISTRATION