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LECTURE NOTES ON NEGOTIABLE INSTRUMENTS

Act No. 2031

APPLICABILITY OF THE LAW

It applies only to negotiable instruments that meet the requirements laid down in
Section 1 of the law. Otherwise, any case not provided for shall be governed by
the provisions of existing legislation, or in default thereof, by the rules of the law
merchant (Under Section 196, the law merchant refers to the custom of
merchants or rules that have been developed under common law, consisting of
primarily of usages of trade previously proven in court or ratified by legal
decisions. It is also known as the Custom of Merchants). Thus, the Civil Code,
the Bouncing Check Law and the Revised Penal Code provisions on Estafa
applies only to supply any deficiencies in cases not covered by the Act.

1. In the case of GSIS vs. Court of Appeals, 170 SCRA 533, the Supreme
Court on the issue as to whether private respondents were accommodation
parties under Section 29, it said that the arguments were misplaced as the
promissory note executed was not negotiable because it was not payable to
order or to bearer.

WHAT IS A NEGOTIABLE INSTRUMENT

It is a transferable instrument containing an unconditional promise or order to pay

to a holder or to the order of a holder upon issue, possession, demand or at a
specified time.

COMMON KINDS OF NEGOTIABLE INSTRUMENTS

1. 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 or to bearer. The
ORIGINAL parties to a promissory note are the maker (one who makes the
promise and signs the instrument ), the payee ( party to whom the promise is
made or instrument is payable), and SUBSEQUENTLY, the holder ( as defined in
Section 191 is the person to whom the instrument is delivered to, he may be
payee or any subsequent person holding the note (or bill) by delivery or by
delivery and endorsement.

2. Bill of Exchange under Section 126 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
period of time a sum certain in money to order or bearer. The ORIGINAL parties
are the drawer ( he draws up the bill and gives the order to pay money to a third
party) drawee ( the party upon whom the bill is drawn. He is the person to whom
the bill is addressed and is ordered to pay. Under Section 62, he becomes an
ACCEPTOR when he indicates a willingness to accept responsibility for the
payment of the bill), and the payee ( the partying whose favor the bill is drawn or
is payable to) SUBSEQUENTLY, the holder ( as defined in Section 191 is the
person to whom the instrument is delivered to, he may be payee or any
subsequent person holding the note (or bill) by delivery or by delivery and
endorsement.

2.1 Note that a check is not another kind of negotiable instrument, rather it is a
form of a bill of exchange.
Table of Differences between Negotiable Instruments
PN
2 parties: maker and payee
Promise to pay
Maker is primarily liable
Secondarily liable: indorsers and
persons negotiating by mere delivery
Maker is liable primarily and NO
conditions precedent is required
No need to present for acceptance
Life of a promissory note: issue,
negotiation, indorsements,
presentment for payment, dishonor by
non-payment, notice of dishonor and
discharge
If payable on demand, it must be
presented for payment within a
reasonable time after its issuance
BOE
2
BOE
3 parties: drawer, payee,
drawee/acceptor
Order to pay
Drawee/acceptor is primarily liable
Secondary liable: drawer, indorsers and
persons negotiating by mere delivery
Drawers liability is secondary and
attaches ONLY upon compliance with
conditions precedent:
a) Presentment
b) Dishonor
c) Proceedings (for dishonoring)
Needs to be presented for acceptance
in some cases as required by law
Life of a bill of exchange: issue,
negotiation, indorsements,
presentment for acceptance, dishonor
by non-acceptance, presentment by
payment, dishonor by non-payment,
notice of dishonor and discharge
If payable on demand, it must be
presented for payment within a
reasonable time from it last negotiation
Check
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Drawee may be any person Always drawn upon a bank

Payable on demand or at fixed or
determinable future time
It is necessary that it be presented for
acceptance
It is not necessary that drawer has
money with the drawee
Must be presented for payment within
a reasonable time after last negotiation
Always payable on demand
Not necessary that it be presented for
acceptance (it is presented at once for
payment)
Drawn on deposit
Must be presented for payment within
a reasonable time after its issue (6
mos.)

FUNCTIONS AND IMPORTANCE OF NEGOTIABLE INSTRUMENTS

1. While not legal tender (Article 1249, Civil Code and Section 52 of the New
Central Bank Act, RA 7653 which provides that only notes and coins issued by it
possess legal tender power, and as for coins up to PHP 50.00 for denominations
of 25 centavos and above and up to PHP 10.00 for denominations of 10
centavos and below), they are recognized substitutes for money as its
negotiability allows it be transferred from one hand to another, subject however to
the financial ability of the parties to honor the instrument.

1.1 Note though that in Fortunado vs. Court of Appeals, 196 SCRA 26, the
delivery of checks is sufficient in the exercise of the right of redemption. The right
of redemption is a privilege and is not an ordinary obligation. Hence Article 1249
does not apply.

2. They constitute, checks particularly, as the media of exchange for most

commercial transactions. The ability to purchase is thereby increased without
need for actual money to be produced and delivered.

3. They serve as a medium of credit transaction. They enable the transaction

of business as the party to whom they are delivered can treat the promises
contained therein as cash.

3.1 Note also Section 60 of RA 7653 that states that checks representing
demand deposits do not have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option of the creditor.
Provided, however, that a check which has been cleared and credited to the
account of the creditor shall be equivalent to delivery to the creditor of cash.

TWO DISTINCTIVE FEATURES OF NEGOTIABLE INSTRUMENTS

1. Negotiability which allows instruments, negotiable in character to be

transferred from one person to another so as to constitute the transferee as a
holder.

2. Accumulation of secondary contracts because the indorsers of the

instrument become secondarily liable not only to their immediate transferee but
also to any holder, subject to valid defenses.

There is thus greater security brought upon the instrument as whoever takes it
has greater chances of recovery as more people are liable on the instrument and
consequently, raises its level of acceptability.
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FORMAL REQUISITES OF NEGOTIABLE INSTRUMENTS

A negotiable instrument is primarily a contractual obligation to pay money, whose

negotiability depends on its form and content as dictated by Section 1 which
provides for the formal requisites of a negotiable instrument, thus:

1. It must be in writing;

2. It must be signed by maker or drawer;

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

money;

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

5. It must be payable to order or to bearer; and

6. Where it is a bill of exchange, drawee must be named or otherwise

indicated therein with reasonable certainty.

The basic GUIDING PRINCIPLE as laid down in Section 10 is that the instrument
need not follow the language of the law, but the terms must be sufficient to
clearly indicate an intention to conform to the requirements of the law. Hence,
the use of a foreign language or grammatical errors does not destroy
negotiability.

NOTE THOUGH the EXCEPTION FOUND IN SECTION 8 pertaining to an

instrument payable to order, where literal compliance with the law is necessary

Illustrations:

1. The following promissory note is not negotiable because it is neither

payable to order or to bearer:

Received P10,000.00 payable after

World War II.
(Sgd.) B

SEE: Jimenez v. Bucoy 103 Phil. 40 (1958)

2. Conformity with all requirements of NIL makes an instrument a bill of

exchange, even if acceptance is not made since the latter is important only in
determination of liabilities of parties. SEE: Phil. Bank of Commerce v. Aruego 102
SCRA 530 (1981)

A. INSTRUMENT MUST BE IN WRITING

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1. Physical integrity of Whole Instrument the negotiability of an instrument

must be determined only from the face of the document itself and not elsewhere.
(Des Moines Savings Bank v. Arthur, 163 la. 205, 143 NW 556)

2. A commercial transaction may be verbal unless the law requires a written

document for its validity. Writing is required for negotiable instruments. Hence,
there can be no verbal promissory note nor a verbal bill of exchange. In short,
the requisites for the validity of a negotiable instrument are: (a) consent, (b)
consideration, (c) subject matter, and (d) form.

3. As a general rule, bills, notes and other instruments of similar nature are
not subject to be varied or contradicted by parol or extrinsic evidence pursuant to
the rule that long experience that written evidence is so much more certain and
accurate than that which rests in fleeting memory only, that it would be unsafe,
when parties have expressed the terms of their contract in writing, to admit
weaker evidence to control and vary the stronger and to show that the parties
intended a different contract from that expressed in the writing signed by them
BUT if there is an allegation of fraud in the execution of promissory note, such as
when the note having a face value of P50,000.00 was alleged to have been
signed by the makers at only P5,000.00, where parol contemporaneous
agreement was the inducing and moving cause of the written contract, it may be
shown by parol evidence; but it must be established by clear and convincing
evidence, mere preponderance of evidence not even being adequate. (Inciong v.
Court of Appeals, 257 SCRA 578)

B. IT MUST BE SIGNED BY MAKER OR DRAWER

1. Any inscription or even stamping will suffice provided that it is meant to

function as the signature of the party.

2. Persons who write their names on the face of a note are makers and are
liable as such, and their solidary liability is made certain by the presence of the
phrase joint and several. (Republic Planters Bank v. CA, 216 SCRA 738)

C. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO

PAY A SUM CERTAIN IN MONEY

1. An unconditional promise or order to pay is required because the purpose

of a negotiable instrument is to take the place of money. Hence, if the instrument
may or may not mature, no one will have faith on negotiable instrument
embodying it. Thus, the promise or order must be ABSOLUTE.

2. Any word equivalent to an order would suffice, and words of courtesy

would not be inconsistent with the order; however, a mere request or
authorization would not be enough.

3. The promise must be found in the instrument itself; the mere existence of
a debt does not amount to a promise. The use of the word order is deemed
equivalent to promise.

4. An acknowledgment of debt becomes a promise to pay by addition of

words implying a promise of payment, such as payable on a given day,
payable on demand, paid when called for, I.O.U. (Jimenez v. Bucoy, 103
Phil. 40 [1958]).

5. Nature of Condition (Art. 1179, Civil Code) A distinction must be made

between a condition (a future and uncertain event which may or may not happen)
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and a period (one that is certain to happen though the time when it will happen is
not known). An instrument embodying an obligation that is subject to a condition
is non-negotiable; whereas, that with an obligation subject to a period is
negotiable.

Illustrations:

1.

Pay to A or order P500 if it rains on 28

June 2002.
(Sgd.) B

If it rains on 28 June 2002 is a condition, one which may or may not happen.
The instrument is non-negotiable. Under the last sentence of Sec. 4, if it indeed
rains on 28 June 2002 and the condition is thereby fulfilled, the instrument which
was originally conditional and non-negotiable does not thereby become
negotiable by the fulfillment of the condition.

10 days after X dies, pay A or order P500.

(Sgd.) B

When X will die is not certain, but X is sure to die. This is a period. The
instrument is negotiable.

2. Under Sec. 39, a condition in the endorsement would not destroy

negotiability of the instrument. Thus:

Pay A or order P500.

(Sgd.) B

[At the back:]

Pay to X if it rains on 28 June

2002.
(Sgd.) A

B, upon presentment for payment, may pay immediately ignoring whether the
condition is fulfilled. Should B choose to pay immediately and the condition is not
fulfilled, then the quasi-contract of solutio indebiti arises. (Article 2154, Civil
Code).

3. Under Section 3(a) an indication of a particular account to be debited with

the amount does not make the promise or order conditional. We have to
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distinguish between the use of the words fix and indicate. If the instrument
fixes the fund from where payment has to be made, so that payment cannot be
made from other funds, the instrument is not negotiable. But if the instrument
merely indicates the fund from where payment is to be made, so that the obligor
will still be liable even if the indicated fund is depleted, then the instrument is
negotiable. NOTE: (a) A check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank, and the bank is not
liable to the holder, unless and until it accepts or certifies the check. (Section
189) (b) A treasury warrant is not a negotiable instrument because it is to be paid
from a particular fund. (Abubakar v. Auditor General, 81 Phil. 359 [1948]) (c)
Indication of a particular fund out of which reimbursement is to be made. (d) A
statement of the transaction which gives rise to the instrument under Section 3(b)
like:

Pay to A or order P500 arising from our rice

deal.
(Sgd.) B

SEE: Elizalde & Co., Inc. v. Bian Trans. Co. (CA) 58 O.G. 5886 (1960)

Reference in a promissory note to some extrinsic agreement, in order to destroy

its negotiability, must be such as to indicate unmistakably that the paper is to be
burdened with conditions of that agreement. When the reference is a simple
recital of the consideration for which the paper was given, or is a mere mention of
origin of the transaction, its negotiability is not affected.

D. TO PAY A SUM CERTAIN IN MONEY:

1. The sum is certain when what is to be paid is a fixed amount of money or

alternatively, if from the face of the instrument it can be mathematically
computed. Under Section 2, the sum is still certain even when it is (a) With
interest stipulated THOUGH Usury Law now ineffective. (Liam Law v. Olympic
Sawmill Co., 129 SCRA 439 [1984]; CB Circular No. 905, s. 1982, 78 OG 7336).
(b) By stated installments, though the installments must not only be stated, but
the maturity of each installment must be fixed or determinable. (c) By stated
installments, with Acceleration Clause (d) With either fixed or current rate of
exchange, or payable in foreign exchange (Uniform Currency Law, R.A. 529,
repealed by R.A. 8183). (e) With costs of collection or attorneys fees, in cases
where payment is not made at maturity NOTE THOUGH that at maturity, the
instrument is no longer fully negotiable since any transferee acquiring it would
not be a holder in due course under Sections 52 and 58.

2. Section 2 illustrates instances where the sum payable is still a sum

certain. This must be correlated with Section 5 which provides that an
instrument which contains an order or promise to do any act in addition to the
payment of money is not negotiable. Thus, in the following illustration, the
instrument is not negotiable, to wit:

Pay A or order P500 or 5 sacks of rice.

(Sgd.) B

However, under Sec. 5(d), the instrument is not rendered non-negotiable if it is

the holder who is given an election to require something to be done in lieu of
payment of money. Thus, in the following illustration, the instrument if negotiable
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because the obligation of the maker/acceptor to pay in a sum certain, if the

holder so chooses, is still absolute, to wit:

Pay A or order P500 but the holder may demand

delivery of 5 sacks of rice.
(Sgd.) B

Illustrations

As provided for under Sec. 2, the following are still negotiable instruments, to
wit:

1.
Pay to A or order P500 with interest at 12% per
annum.

2.
Pay to A or order P500 payable in monthly
installments of P100.

3.

Pay to A or order P500 in monthly installments of

P100 and failure to pay one installment will make
the entire fall due immediately.

4.
Pay to A or order P500 and in the event of
litigation, I agree to pay court costs and attorneys
fees.

5.
Pay A or order $500.

The paragraph of Section 2 on foreign exchange is deemed to have been

amended by Rep. Acts 529 and 4100. The instrument is valid but what is void is
the obligation to pay in foreign currency. SEE: Arrieta v. NARIC, 10 SCRA 79
[1964]).

While the agreement to pay in foreign exchange is declared null and void and of
no effect, what the law specifically prohibits is payment in currency other than
legal tender; it does not defeat a creditors claim for payment, but to be made in
lawful Philippine legal tender. SEE: Ponce v. Court of Appeals 90 SCRA 533
(1979)

Where the parties stipulate payment in foreign currency, the rate of exchange is
determined not at the time of making of the instrument but at the time of
payment, and not the rate at the time the obligation was incurred. SEE: Kalalo v.
Luz 34 SCRA 337 (1970)
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E. IT MUST BE PAYABLE ON DEMAND, OR AT A FIXED OR

DETERMINABLE FUTURE TIME

1. Under Section 7, an instrument is payable on demand (a) when

expressed to be payable on demand, or at sight, or on presentation (b) when no
time for payment is expressed (c) Special Rule: When an instrument is issued,
accepted, or endorsed when overdue, it is, as regards the person so issuing,
accepting or indorsing it, payable on demand.

2. Illustrations on payable on demand :

(a) On demand pay to A or order P500.

(b) At sight pay to A or order P500. (This applies only to a bill of exchange.)
(c) On presentation pay to A or order P500. (This applies only to a bill of
exchange.)
(d) Pay to A or order. (No date expressed.)
(e) 10 days after date (16 April 2002) pay to A or order P500. (Provided,
That this instrument is issued, accepted or endorsed when overdue, as far as the
person issuing, accepting or indorsing is concerned, the instrument is payable on
demand.)

3. A DETERMINABLE FUTURE TIME as provided by Section 4 is:

(a) At a fixed period after date or sight.

10 days after date pay to A or order P500.

(Sgd.) B

10 days after sight pay to A or order P500.

(Sgd.) B

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

On or before 9 July 2004 pay to A or order

P500.
(Sgd.) B

(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.

10 days after X dies pay to A or order P500.

(Sgd.) B

The specification before a specified event, would render the instrument non-
negotiable because the date of maturity can be determined only after the note
has become overdue.

A stipulation that the instrument shall be paid when my means permit me to do

so although by law would constitute a period would still render the instrument
non-negotiable because the instrument is not deemed payable at a fixed or
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determinable future since the term of the period would have to be set by the
courts under Articles 1180 and 1197, Civil Code.

(d) Instrument payable upon a contingency is not negotiable, and the

happening of the event does not cure the defect. (West Point Banking Co. v.
Gaunt, 34 ALR 862).

F. IT MUST BE PAYABLE TO ORDER OR TO BEARER:

1. An instrument is payable to order under Section 8 when:

(a) Drawn payable to the order of a specified person or to him or his order.
The payee is not the maker, drawer or drawee.

Pay to A or order P500.

(Sgd.) B
[A is neither maker, drawer or drawee.]

(b) Drawn payable to the drawee as payee. Here being both the drawee and
the payee, the drawee can pay himself upon maturity from the funds belonging to
the drawer in his possession: once accepted is equivalent to a promissory note in
favor of the drawer.

Pay to C or order P500.

(Sgd.) B

To: C

[B can demand C to pay himself because

B has money or credit with C.]

(c) Maker as payee. Here the maker promises as follows I promise to pay to
the order of myself, 10,000 : the instrument is not complete until the maker
endorses under Section 184.

Pay to B or order P500.

(Sgd.) B

[Under Sec. 184, this instrument is not

[Check] by maker.]
complete until endorsed

(d) Pay
Drawer as payee: this to B or order
authorizes P500. to pay himself/drawer.
the drawee
(Sgd.) B

To: PNB

[This means that B has a deposit with

PNB and he wants to withdraw the
amount indicated.]
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(e) Two or more payees jointly, or one or more several payees.

Pay to A and X or order P500.

(Sgd.) B

[Since the conjunction and is used in

the above-illustrated instrument, then
the endorsements of both A and X are
necessary for the negotiation of the
instrument.]

Pay to A or X or order P500.

(Sgd.) B

[Since the conjunction or is used,

then the endorsement of either A or X
will be sufficient for the negotiation of
the instrument.]

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

Pay to City Treasurer of Baguio City

or order
P500.

(Sgd.) B
In case the instrument is endorsed, then it will be like this:
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City Treasurer of Baguio City

By:__________

(g) When the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty. This requirement is
imposed as if there is no payee, there is NOBODY WHO COULD GIVE THE
ORDER OR AUTHORITY TO COLLECT. THERE IS NO ONE WHO CAN
ENDORSE THE DOCUMENT AND CAN THUS BE SAID TO BE NOT
NEGOTIABLE.

It would seem in Equitable Banking Corp. v. IAC, 161 SCRA 518 (1988), the
contravention of this rule (such as when the check is payable to Equitable
Banking Corporation order of A/C of Cavilled Enterprises, Inc.) would not render
the instrument non-negotiable but would merely place the burden of ambiguity to
the person who caused it under Art. 1377 of the Civil Code.

2. Subject to the rules in Sections 13, 14 and 15 on incomplete instruments,

leaving the payee blank may make the instrument non-negotiable. This is
because an instrument payable to order may be negotiated only by
endorsement and delivery.

3. There are only two ways to make an instrument payable to order, as

provided under Sec. 8

Pay to A or order.

(Sgd.) B
Pay to the order of A.

(Sgd.) B

4. Under Section 9, a negotiable instrument is payable to bearer:

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

Pay to bearer P500.

(Sgd.) B

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

Pay to A or bearer P500.

(Sgd.) B
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(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:

Pay to John Doe or order P500.

(Sgd.) B

The clause and such fact is known to the person making it so payable, does not
require that it should be the maker himself who is chargeable with the notice.
Otherwise, the whole provisions would be ineffective in practically every case
where the purpose of the person drawing the check was fraudulent. (Mueller &
Martin v. Liberty Ins. Bank, 219 S.W. 465, 187 Ky 44 [1920]).

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

Pay to cash or order P500.

(Sgd.) B

There is no need to use order or equivalent word to qualify the instrument. A

check payable to the order of cash is payable to bearer and the bank may pay it
to the person presenting it for payment without the drawers endorsement. (Ang
Tek Lian v. CA, 87 Phil. 383 [1950]).

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

Pay to A or order P500.

(Sgd.) B

(And the only or last endorsement

at the back is a blank.)

5. Bearer means the person in possession of a bill or a note which is payable

to bearer. (Sec. 191). A person who steals an instrument payable to bearer is a
bearer. (Mass. Nat. Bank v. Marshall, 25 Pac. 214).

(a) Words equivalent to bearer are: Assignee, holder (Wilson County v.

Third Nat. Bank of Nashville, 103 US 770); Possessor; on return of this
certificate properly endorsed (Felton v. Commercial Nat. Bank, 177 NE
52);Order of the bearer (American National Bank v. Kerley, 220 Pac 116, 32
ALR 262).

(b) Words unaccepted as equivalent to bearer: To X or his collector; To X

or his agent; To bearer B. (Weaver v. Scott, 32 Iowa 22)
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6. A bearer instrument may be negotiated by mere delivery. When a bearer

instrument is not delivered for purposes of negotiation but physically delivered
merely as security for another obligation, there is no negotiation in the sense of
transfer of legal title to the instrument and would constitute the subsequent
holder merely as a holder for value and not a holder in due course. Accordingly,
a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition
of such security, in the event of non-payment of the principal obligation, must be
contractually provided for. SEE: Caltex (Phils.) v. Court of Appeals 212 SCRA 448
(1992)

G. IN BILLS OF EXCHANGE, DRAWEE MUST BE NAMED OR

OTHERWISE INDICATED THEREIN WITH REASONABLE CERTAINTY

1. The purpose of this requirement is to enable the payee or the holder to

know upon whom he has to call for acceptance or payment.

2. Note however, that under Section 14, the omission of drawee may be filled
in later on.

WHAT PROVISIONS IN A NEGOTIABLE INSTRUMENT DO NOT AFFECT

NEGOTIABILITY

The general rule under Section 5 is that an instrument is rendered non negotiable
if it contains a promise or order to do anything in addition to the payment of
money as what transpires is that while the promise or order to pay money, the
other thing would have to be assigned BUT BY WAY OF EXCEPTION, the
following provisions do not affect negotiability

1. Authorizes the sale of collateral securities in case the instrument be not

paid at maturity. The additional act is to be done after the date of maturity of the
instrument and when it is no longer negotiable.

2. Authorizes a confession of judgment if the instrument be not paid at

maturity.

Confession of judgment clauses are void as being against public policy to give a
person his day in court; however, such nullity does not affect the negotiability of
the instrument. SEE: National Bank v. Manila Oil Refining Co., 43 Phil. 444
[1922].

Where an agreement stipulates for the confession of judgment prior to any actual
litigation the stipulate is void for being contrary to public policy. However, if the
creditor sues, the debtor can go to court and only then confess judgment. This is
valid if done by the debtor himself. SEE: In Traders Insurance v. Dy Eng Biok,
104 Phil. 806 (1958)

3. Waives the benefit of any law intended for advantage or protection of

obligor. Examples: Waiver of Notice of Dishonor under Section 110, Waiver of
Protest under Section111, Presentment for Payment under Section 70

4. Gives holder an election to require something to be done in lieu of

payment of money.
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BUT nothing in Section 5 shall be validate a provision or stipulation that is

otherwise illegal.

The TEST: The test of negotiability is whether or not the promise would give rise
to a cause of action for breach of contract if the additional act is not done. If it
does, the instrument is rendered non-negotiable.

WHAT OMISSIONS IN A NEGOTIABLE INSTRUMENT DO NOT AFFECT

VALIDITY AND NEGOTIABILITY

The following omissions do not affect the validity and negotiability of an

instrument

1. Non-dating of instrument.

2. Non-specification of value given, or that any value has been given.

3. Non-specification of place where it is drawn or place where it is payable.

4. Bears a seal.

5. Designation of particular kind of currency in which payment is to be made.

Under Sec. 52, a requisite for a holder in due course is that instrument is
complete and regular on its face. Section 6 therefore provides for certain
omissions that do not destroy completeness or regularity, as other portions of the
law supplement these omissions. Thus:

Pay to A or order P500.

(Sgd.) B:

This instrument has omissions: (a) no date; (b) no place of payment; and (c) no
statement of value received.

Note Date: This is supplied by Sec. 17(c) which states that where instrument is
not dated, it will be considered dated as of time it was issued.

No Place of Payment: This is supplied by Sec. 73 which provides:Where no

place of payment is specified, but the address of person to make the payment is
given in the instrument and it is there presented;

Where no place of payment is specified and no address is given and instrument

is presented at usual place of business or residence of person to make payment;

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.

No Statement of Value Received: Supplied by Sec. 24 which provides that

every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration and every person whose signature appears thereon to
have become a party for value.
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WHAT ARE THE RULES OF CONSTRUCTION COVERING NEGOTIABLE

INSTRUMENTS

Under Section 17, the following rules of construction are provided:

1. The sum expressed in words takes precedence over the sum expressed in
numbers; except where the words are ambiguous or uncertain, then reference to
the figures should be made.

2. Where interest is stipulated, without specification of the starting date, the

interest runs from the date of the instrument, and if undated, from the issue
thereof.

3. An undated instrument is considered to be dated as of time it is issued.

4. Written provisions prevail over printed provisions of instrument.

5. Where the instrument is ambiguous as to whether it is a note or a bill, the

holder may treat it as either at his election.

6. When the capacity of signatory is not clear, he is to be deemed an

endorser. The signature of the maker is usually affixed at the lower right hand
corner while that of the drawee is at the lower left hand corner, the holder
negotiates by signing at the back thereof. If a doubt arises, he is deemed an
endorser an assumes the least liability.

7. I promise to pay when signed by two or more persons is deemed to be

jointly and severally signed, i.e., solidary liability.

I promise to pay A or order P500.

(Sgd.) B
(Sgd.) C

Liability of B and C is solidary.

(a) BAR QUESTION: What is the liability of B and C?

Promise to pay A P500.00.

(Sgd.) B & C

ANSWER: Joint because the above instrument is not a negotiable instrument,

thus the general rule under civil law of joint liability applied in the absence of
stipulation that liability should be solidary.

(b) If the instrument reads:

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I/We promise to pay A or order P500.00.

(Sgd.) B & C

Held: B and C are liable solidarily since I dominates. SEE: PNB v. Concepcion
Mining, 5 SCRA 745 (1962)

STEPS IN THE ISSUANCE OF A NEGOTIABLE INSTRUMENT

The steps in the issuance of a negotiable instrument are:

1. The act of writing the instrument completely and in accordance with

Section 1 of the NIL.

2. The delivery of the complete instrument by the maker or the drawer to the
payee or holder with the intention of giving effect to it

FORM, INTERPRETATION AND ISSUANCE OF NEGOTIABLE INSTRUMENTS

A. PRESUMPTION AS TO DATE:

1. Importance of Date of Instrument: Determining when instrument,

endorsement or acceptance is due (maturity); and Determining prescription of a
cause of action.

2. Date is not an essential element for negotiability.

3. An undated instrument is considered to be dated as of the time it was

issued under Section 17.

4. Where an instrument or acceptance or endorsement thereon is dated,

such date is deemed prima facie to be the true date of the making, drawing,
acceptance, or endorsement, as the case may be under Section 11, to be read
with Sections 53 and 71.

This is important especially in an instrument that is payable on demand (Section

71), in order to determine whether holder is a holder in due course since one of
the requisites of such is that he became holder thereof before it was overdue.
(See Section 53).

5. The instrument is not invalid for the reason only that it is ante- dated or
post-dated, provided this is not done for illegal or fraudulent purpose. The person
to whom instrument so dated is delivered acquires the title thereto as of the date
of delivery under Section 12.
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Ante-dating is when the instrument contains a date earlier than the true date of
issuance, while post-dating is when the instrument contains a date later than the
true date of issuance.

6. WHEN HOLDER IS AUTHORIZED TO PUT A DATE ON THE

INSTRUMENT- under Section 13, 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.

Illustrations:

(a) When instrument is expressed to be payable at a fixed period after date,

but it is issued undated:

10 days after date pay A or order P500.

(Sgd.) B

The holder of such an instrument is authorized to insert the correct date. But if
the holder inserts the wrong date, the maker shall be liable on wrong date as
penalty for his neglect in leaving the instrument undated.

(b) Where acceptance of instrument payable at a fixed period after sight is

undated:

10 days after sight, pay A or order P500.

(Sgd.) B

To: C
Accepted
(Sgd. C)

Holder is authorized to insert the proper date of acceptance. But if he inserts

wrong date, acceptor shall be liable on this wrong date as a penalty for his
neglect in leaving his acceptance undated.

DOES NOT APPLY TO an instrument payable on demand, although undated, for

its maturity is already fixed NEITHER to an undated bill of exchange payable at a
fixed period after sight (Example: 30 days after sight) BUT if it is the acceptance
that is undated, the insertion is necessary because the period is to be counted
from sight not date of issue.

The RATIONALE for the rule is that if the true date is not allowed to be inserted,
one will not know when the instrument will be due.

ALSO, the insertion of the 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. The insertion of wrong date avoids the instrument as
to person making such insertion. (Bank of Houston v. Day, 145 Mo. Appl. 410,
122 SW 756). The reason being that the one who signs such instrument
furnishes the means of fraud and is thus estopped to deny liability thereon.
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B. CONCEPT OF DELIVERY:

1. Before a discussion of Sections 14, 15, and 16, the concept of delivery
must be understood because the making, drawing , accepting , and indorsing of
an instrument has for one of its common elements THE DELIVERY OF THE
INSTRUMENT FOR THE PURPOSE OF NEGOTIATION, and the other is,
VALUABLE CONSIDERATION.

LIKE SO:

Making B prepares a promissory note, he assumed the liability of

maker. When will Bs liability as maker arise? B is not liable unless he receives
valuable consideration and before B can be liable as maker, he must sign the
instrument and deliver it to A for negotiation. If the instrument is not delivered, he
is not liable.

Drawing When is B liable as drawer? B must sign the instrument,

receive valuable consideration and deliver the instrument to A for the purpose of
negotiation.

Acceptance C, before he signs, is a mere drawee, and has no liability

because his signature does not appear on the instrument. He must sign in order
to be liable, and his status is then changed from a mere drawee to an acceptor. C
is not liable as an acceptor unless he receives valuable consideration, signs the
instrument and delivers it to the holder for the purpose of negotiation.

Indorsement The position of the indorser is similar with that of a

guarantor. A, as indorser, must receive valuable consideration, sign and deliver
the instrument, for the purpose of negotiation before he can be made liable.

2. Delivery means transfer of possession of instrument by the maker or

drawer, with intent to transfer title to the payee and recognize him as holder
thereof. Therefore, where checks have not yet been delivered to payee, they do
not belong to him and cannot be the subject of garnishment by payees creditors.
SEE: De la Victoria v. Burgos 62 SCAD 112, 245 SCRA 374 (1995)

3. Every contract on negotiable instrument is incomplete and revocable until

delivery of the instrument for the purpose of giving effect thereto.

Issue is the first delivery of the instrument complete in form, to a person who
takes it as a holder. (Sec. 191).

Delivery is the transfer of possession, actual or constructive, from one person to

another (Sec. 191), e.g., mailing the note with proper address, etc.

Where instrument is no longer in possession of a party whose signature appears

thereon, a valid and intentional delivery by him is presumed until the contrary is
proved under Section 16. However, in the hands of holder in due course, a valid
delivery thereof by all prior parties is conclusively presumed.

4. 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
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by or under the authority of party making, drawing, accepting, or indorsing, as the

case may be. In such cases, delivery may be shown to have been conditional, or
for a special purpose only, and not for purpose of transfer.

Immediate parties are those who are immediate in the sense of knowing or
being held to know the conditions or limitations placed upon delivery of
instrument. (Liberty Trust Co. v. Tilton, 105 NE 605). It means privity, no
proximity. (Howard Nat. Bank v. Wilson, 120 Atl. 889).

5. For 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. (Sec. 16).

Illustrations:

Pay to A or order P500. [At the back]

(Sgd.) B (1) Pay to X.

(Sgd.) A (4)

Pay to A or order P500.

To C: B (2)

Accepted

(Sgd.) C (3)

Under Sec. 14, an incomplete instrument is delivered but the amount

thereof is left in blank. Thus:

Pay to A or order P_______.

(Sgd.) B

If the above instrument has been delivered by B to A for the purpose of

negotiation, then A or any subsequent holder has the authority to insert any
amount. On the other hand, should no such delivery have taken place, such an
authority to fill the blank does not exist. Nevertheless, if after the amount is filled
(whether with or without authorization), 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 filed up strictly in accordance with the authority given and within a
reasonable time. Thus, Sec. 14 gives only a personal, not real defense.

Under Sec. 15, if an incomplete instrument is not delivered (for the

purpose of negotiation), it will not, if completed and negotiated, without authority,
be a valid contract in the hands of any holder (even in the hands of a holder in
due course), as against any person whose signature was placed thereon before
delivery. Thus, Sec. 15 gives a real defense.

Section 16 provides that once instrument (which is complete) is in the

hands of holder in due course, delivery is conclusively presumed.
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CATEGORIZING HOLDERS

1. HOLDER- under Section 191, he is the PAYEE or INDORSEE of a biil or

note, who is in possession of it, or the BEARER thereof. Under Section 51, the
rights of a holder are to sue on the instrument in his name, and receive payment ,
and if payment is in due course (Under Section 88 when made at or after
maturity of the instrument to the holder thereof in good faith and without notice
that title is defective. NOTE the TIME OF PAYMENT and that the maker or
acceptor be in GOOD FAITH) discharges the instrument. Example: Pledgee of an
instrument .

2. HOLDER FOR VALUE- Under Section 26, he is one who has given a
valuable consideration for the instrument issued or negotiated to him. He is such
not only as regards the party to whom value has been given but also in respect to
all those who became parties prior to the time when value is given. Example: If
the maker issues a note to the payee without consideration, it is subsequently
endorsed by the payee to another without consideration, and is subsequently
indorsed with consideration, the last endorsee is deemed to be a holder for value
not only as to his indorser, but all other parties subsequent to the indorsement.

EFFECT IS: If the holder for value is also a holder in due course, he may enforce
payment on the instrument against all parties. IF NOT, prior parties can set up
the defense of absence of consideration.

3. HOLDER IN DUE COURSE- Under Section 52, he is one who has taken
the instrument under the following conditions:

a. That it is complete and regular on its face. Complete means that the
instrument is not wanting in any material particular, while Regular means that
there is no visible or apparent alteration on the face of the instrument

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. Before it is overdue
means before maturity.

c. That he took it in good faith and for value. Good faith means that he has
no knowledge of the facts which render it dishonest for him to take the negotiable
paper BUT the knowledge required is not that necessary to show exact truth but
such that tends to show that there was something wrong with the transaction.

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 title of the
person negotiating it is defective when he obtains (OR ACQUIRES) the
instrument or any signature thereto by FRAUD, DURESS, OR FORCE OR FEAR
OR OTHER UNLAWFUL MEANS, OR FOR AN ILLEGAL CONSIDERATION-
OR- when he NEGOTIATES the instrument in BREACH OF FAITH (Example:
negotiation after he has been paid) or CIRCUMSTANCES AMOUNTING TO
FRAUD (Example: negotiation with knowledge that it will not be paid)

Under Section 53- A PERSON WHO IS THE HOLDER OF AN INSTRUMENT

PAYABLE ON DEMAND WHO NEGOTIATES IT AFTER AN UNREASONABLE
LENGTH OF TIME IS NOT DEEMED A HOLDER IN DUE COURSE. What is
reasonable time is determined with regard to the nature of the instrument, usage
of trade or the business, and the facts of each particular case under Section 193.
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Under Section 59, there is a prima facie presumption that every holder is a holder
in due course BUT the burden of proof shifts when it is shown that the title of the
person negotiating the instrument is defective BUT it does not apply to a party
who became bound on the instrument prior to the acquisition of defective title.

PARTIES MAY BE IMMEDIATE, REMOTE OR PRIOR

Parties are immediate when they are in direct contractual relationship with each
other, they are remote if they are not in direct contractual relation to each other,
and they are prior parties if they became such prior to a subsequent party.

AVAILABLE DEFENSES WHICH MAY BE INTERPOSED TO AN ACTION

UPON A NEGOTIABLE INSTRUMENT

There are two basic kinds of defenses that may be interposed, they are:

REAL DEFENSES- they are those available against all parties, both immediate
or remote, including holders in due course. They are such because they attach to
the instrument itself.
Examples of real defenses:

a. Incapacity as far as the incapacitated person is concerned (see Art. 1327,

ibid.);

b. Illegality of contract when declared by law (see Art. 1409, ibid.); except
where the maker or drawer is himself a party to the illegality; thus, a note for a
gambling debt (an illegal consideration) is a mere personal defense (see Sec.
55);

c. Want of delivery of incomplete instrument (Sec. 15);

d. Forgery (Sec. 23);

e. Want of authority, apparent and real (ibid.);

f. Duress amounting to forgery as where one takes the hands of another and
forces him to sign his name (Espy v. Bank, 18 Wall. 604; First Nat. Bank v.
Northwestern Bank, 28 N.E. 729);

g. Fraud in factum or fraud in esse contractus (Sec. 14);

h. Fraudulent alteration b holder (Secs. 124, 1 st sentence; 125.);

i. Prescription (see Arts. 1140-1142, 1144-1147, Civil Code.);

j. Other infirmities appearing on the face of the instrument (Sec. 52.); and

k. Discharge at or after maturity. (Secs. 88, 118, 121, 122.)

PERSONAL DEFENSES - are those which grow out of the agreement or conduct
of a particular person in regard to the instrument which renders it inequitable for
him, though holding the legal title, to enforce it against the party sought to be
made liable but which are not available against a holder in due course. (see Sec.
55). They are called personal defenses because they are available only
against that person or subsequent holder who stands in privity with him. (Ogden,
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op.cit., p. 309). In other words, they can used only between original parties or
immediate parties or against one who is not a holder in due course.

Examples of personal defenses:

a. Filling of wrong date (Sec. 13);

b. Filling up of blanks not in accordance with the authority given and within
reasonable time (Sec. 28);

c. Want of delivery of complete instrument (Sec. 16);

d. Absence or failure of consideration (Sec. 28);

e. Simple fraud or fraud in inducement (Sec. 55);

f. Acquisition of instrument (not signature) by duress, or force and fear (ibid);

g. Acquisition of instrument by unlawful means (ibid);

h. Acquisition of instrument for an illegal consideration (ibid);

i. Negotiation of breach of faith (ibid);

j. Negotiation under circumstances that amounts to fraud (ibid);

k. Innocent alteration or spoliation. (see Secs. 124 [last sentence], 125).

Spoliation is an alteration made by a stranger to an instrument. If the original
meaning can be ascertained, the holder in due course may recover according to
its original tenor;

l. Set-off between immediate parties (see Sec. 58);

m. Discharge by payment or renunciation or release before maturity (Secs.

50, 121, 122);

n. Discharge of party secondarily liable by discharge of prior party (Sec.

20[c]);

o. Usury because the contract of loan itself is not void but only the agreed
interest (see Sec. 7, Usury Law; Art. 1413, Civil Code; and

p. Want of authority but agent has apparent authority. (see Art. 1869, ibid)

NEGOTIABLE INSTRUMENT THAT IS INCOMPLETE WHICH HAS BEEN

DELIVERED

Section 14 applies to an incomplete instrument which has been delivered by the

maker or drawer to the payee or the holder, the rules related thereto are:

1. Where the instrument is lacking in any material particular, person in

possession thereof has prima facie authority to complete it by filling-up the blanks
therein. A MATERIAL PARTICULAR is any particular proper to be inserted in a
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negotiable instrument to make it complete, like blanks for date, due date, name
of the payee, amount, or rate of interest

2. The signature on a blank paper delivered by person making the

signature in order that paper may be converted into a negotiable instrument
operates as prima facie authority to fill it up as such for any amount. It MUST BE
SHOWN that the purpose of delivery was to convert the said blank paper into a
negotiable instrument. If such purpose is absent, the person whose signature
appears thereon will not be liable, even to a holder in due course.

3. In order that any such instrument when completed may be enforced

against any person who became a party thereto prior to its completion, it must
be: (a) filled-up strictly in accordance with the authority given; and (b) within a
reasonable time IN THIS CASE, ONE MUST DISTINGUSH BETWEEN ONE
WHO IS NOT A HOLDER IN DUE COURSE AND ONE WHO IS A HOLDER IN
DUE COURSE. Note that if not a holder in due course, there can be enforcement
only if both (a) and (b) are present. If a holder in due course, the defense that it
was filled contrary to the authorization is not available. It is thus only a
PERSONAL DEFENSE.

NOTE: In all the above cases, there is an intention to issue a negotiable

instrument. But if a signature on a paper is given only for autograph purposes
and the same is converted into a negotiable instrument, this will amount to
forgery, constituting thus a valid defense even against a holder in due course.

Whether or not the instrument is filled up in accordance with the authority given,
remember that endorsers are liable on their warranties.

INCOMPLETE INSTRUMENT NOT DELIVERED

Section 15 applies to an instrument that is incomplete and undelivered.

1. 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.

2. With regards parties whose signature appeared prior to delivery, the non-
delivery of an incomplete instrument is a valid defense, not only between the
original parties but also against a holder in due course. It is therefore a real
defense, available even against a holder in due course.

3. With regards parties whose signature appeared after delivery, the

instrument is valid and enforceable.

Example:

A makes a note, with the name of the payee in blank. X steals the note and
inserts his name as payee. He then indorses it to Y, then Y to Z, who is a holder
in due course. Z cannot enforce the note as it is not a valid contract in the hands
of any holder.

Considering that As signature was placed thereon before delivery, he does not
assume any responsibility whatsoever. Such is a REAL DEFENSE- ALTHOUGH
A must rebut the prima facie presumption of delivery by proof to the contrary.
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X is liable as an indorser and as the party responsible for the theft, completion
and negotiation of the instrument.

Y is also liable as an indorser as his signature appears on the instrument after

delivery.

4. The maker or drawer may however be estopped from claiming the above
defense if there should be negligence on his part.

5. It was ruled that while drawer of a check owed a duty to the bank on which
the check was drawn to guard against the escape of a check signed in blank
which had been stolen, he owed no such duty to the purchaser of the check and
therefore, the drawer cannot be held liable to such purchaser provided that the
incomplete instrument was not yet delivered. (Linicks v. Nuttwig & Co., 140 App.
Div. 265).

MECHANICALLY COMPLETE BUT UNDELIVERED (Sec. 16):

Section 16 applies to an instrument that is mechanically complete but is not

delivered:

1. Every contract on a negotiable instrument is incomplete and revocable

until delivery of the instrument for the purpose of giving effect thereto.

2. 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. (The term immediate parties refers to persons who know or are
presumed to know the conditions or limitations placed upon the delivery of the
instrument, excluding a holder in due course.)

3. The delivery may be shown to have been conditional, or for a special

purpose only, and not for the purpose of transferring the property (title) in the
instrument.

4. Where instrument is in the hands of 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.

5. Where the instrument is no longer in possession of the party whose

signature appears thereon, a valid and intentional delivery by him is presumed
until the contrary is proved.

NOTE: Delivery of an instrument need not be actual; it may be constructive.

Thus, is has been held that depositing a note by mail with intent to transmit it to
payee in the usual way is a delivery in contemplation of law.

Example:

Maker/Drawer makes/draws a note or a bill, payable to the order of the payee. It

is complete in all respects.

If there is no delivery, there is no contract. No liability is incurred, the payee does

not acquire any right
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If the note/bill is stolen by the payee, who endorses it to A, who in turn endorses
it to B, who in turn endorses it to C.

If C is aware of the theft, as against him and the payee, the maker/drawer may
prove that there was no delivery or that delivery was not authorized as they are
immediate parties against whom a claim that delivery to be effectual must be
made either by or under the authority of the person making, drawing, or indorsing
as the case may be

If the note/bill was delivered or authorized, it may be shown to have been

conditional, or for a special purpose AND NOT for transferring title.

If the maker/drawer delivers to the payee, under a condition that it is for

safekeeping only. The payee cannot enforce the note. THIS DOES NOT APPLY
TO ONE WHO IS NOT AN IMMEDIATE PARTY, like an indorsee, who may now
enforce the note/bill as against the maker/drawer. The same is true, if the
maker/drawer delivers the note/bill to an agent, who in turn does not inform the
payee of the condition.

If the note/bill is in the hands of a holder in due course, the maker/drawer cannot
prove the theft or delivery under a condition, as there is a conclusive presumption
of delivery. NOTE: THE PHRASE- until delivery of the instrument for the purpose
of giving effect thereto WOULD TEND TO EXCUSE THE MAKER/DRAWER IF
THERE WAS NO ACTUAL DELIVERY FOR ANY PURPOSE OF THE
INSTRUMENT AND ABSENT ANY FAULT OR NEGLIGENCE, EQUITY
DICTATES THAT HE NOT BE HELD LIABLE.

As far as signatures, if the instrument is no longer in the possession of a party

whose signature appears thereon, a valid and intentional delivery is presumed
until the contrary is proven.

6. Where the debtor who drew two checks payable to his creditor but never
delivered them, but that a third-party was able to collect the proceeds of the
checks by forging the endorsement of the creditor-payee, the creditor did not
gain standing against any person to recover on the checks since he acquired no
interest over them by reason of delivery. SEE: Development Bank of Rizal v.
Sim Wei, 219 SCRA 736 (1993)

SIGNATURES AND FORGERY

The rules to determine liability as far as signatories and in cases of forgery are as
follows:

1. The GENERAL RULE: Under Section 18, no person is liable upon an

instrument whose signature does not appear thereon. The EXCEPTIONS ARE:

a. Trade Name One who signs using a trade or assumed name will be
liable to the extent as if he had signed in his own name under Section 18

b. Rules on Signature of Agent Signature of any party may be made by a

duly authorized agent. No special form of agency is required under Section 19.
The rule is if the instrument contains or a person adds to his signature that he
signs for or in behalf of a principal, or in a representative capacity, HE IS NOT
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LIABLE IF HE WAS DULY AUTHORIZED BUT THE MERE ADDITION OF SUCH

WORDS OR INDICATION OF SUCH DOES NOT EXEMPT HIM FROM
PERSONAL LIABILITY IF THE PRINCIPAL IS NOT DISCLOSED. Note: That a
signature by procuration (e.g., Juan de la Cruz, per procuration: Pedro de la
Cruz) operates as notice that the agent has but limited authority to sign, and
principal is bound only in case agent in so signing acted within the actual limits of
his authority under Section 21.

B by X Principal is disclosed. So long as agent X signed within the scope of

his authority, he is not personally liable on the instrument.

by X Agent X signs for an undisclosed principal, the agent becomes

personally liable but he can evade his personal liability by disclosing his principal
and so long as he signed within the scope of his authority. If X does not disclose
his principal, he is personally liable.

B pp X Agent signs by procuration. This is notice to the whole world that the
agent is signing with very limited authority.

c. Under Section 134 Acceptance of a bill of exchange on a separate piece

of paper.

d. Under Section 135 Unconditional promise in advance to accept a bill of

exchange before it is drawn; the promise must be in writing.

NOTE;Under Section 22, an indorsement or assignment of instrument by

corporation or by infant passes the property therein, notwithstanding that from
want of capacity, the corporation or infant may incur no liability thereon.

The contract of endorsement of an infant is not void, and that his endorse has the
right to enforce payment from all parties prior to the infant endorser; the
incapacity of the infant cannot be availed of by prior parties. (Murray v.
Thompson, LRA 1917B 1172, 188 SW 578). However, it does not destroy the
right of such an infant endorser to disaffirm under rules of infancy. (Ibid.)

In both instances, endorsements are voidable valid until annulled so that they
pass good title. Therefore, parties prior to minor or corporation cannot escape
liability by setting up as defense the incapacity of one of endorsers.

Before a discussion of the rules, it is best to classify the kinds of forgeries that
can take place , they are:

1. IN A PROMISSORY NOTE: forgery of the makers signature and forgery of

an indorsement.

2. IN A BILL OF EXCHANGE: forgery of the drawers signature, either with

acceptance by the drawee or without acceptance but is paid by the drawee and
forgery of an indorsement in the bill

THE EFFECTS ARE:

1. The instrument is not declared totally void nor are the genuine signatures
thereon rendered inoperative. IT IS ONLY THE FORGED SIGNATURE THAT IS
DECLARED INOPERATIVE. Hence: rights still exist and may be enforced by
virtue of the instrument as between parties whose signatures were not forged.
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2. A forged instrument just prevents any subsequent party from acquiring any
rights as against any party whose name appears prior to the forgery. Rights will
exist and may be enforced as between subsequent parties BUT no one can
acquire a right as against parties prior to the forgery, who also have rights and
may enforce them as against each other.

Example:

M makes a note payable to the order of P. P indorses it to A. X Obtains

possession of the note fraudulently and indorses it to B, by forging As signature.
B indorses to C. Thus, the indorsements are as follows:

Pay to A

(Sgd.) P

Pay to B
(Sgd.) A (forged by X)

Pay to C
(Sgd.) B

a. C cannot enforce the instrument against M and P because Cs right

against them are cut off by the forged signature of A which is wholly inoperative.
C could acquire rights against M or P to the instrument only through the forged
signature of A.

b. Neither can C enforce the note against A because As signature is wholly

inoperative. A has no privity with C. Under Section 23, C acquired no right to
retain, discharge, or enforce payment of the note under the forged signature of A.

c. But C may go against B whose signature is genuine and, therefore,

operative. B is a general indorser who wanted to C that the instrument is
genuine and was valid and subsisting at the time of Bs indorsement. (see Sec.
65 and 66.)

d. Of course, B or C has a right of recourse against X, the forger;

e. A can recover from M and P because his rights against them were not
affected by the forgery. The signatures of M and P are genuine and they are liale
to A on their contract.

3. The rights of the parties in cases of forged indorsements are:

a. Where note payable to order. the party whose indorsement is forged is

not liable to any holder even a holder in due course. The indorsement being
forged, it is inoperative.

The other parties, including the maker, prior to the party whose signature is
forged are not also liable to any holder. The instrument being payable to order, it
can be negotiated only by indorsement completed by delivery. But since the
indorsement is forged, it is inoperative and, therefore, it cannot operate to
transfer any right or title over the instrument.
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Holder did not acquire any rights to retain the note, give discharge
therefore, or enforce payment as against party whose signature is
forged and parties prior to him, including maker.

Any transferee of forger merely acquires whatever rights he had against prior
parties, hence, transferee likewise acquires no rights against prior parties

b. Where note payable to bearer. Where the note, mechanically complete,

is originally payable to bearer, the party whose indorsement is forged is liable to
a holder in due course, but not to one who is not a holder in due course. The
other parties, including the maker, prior to the party whose signature is forged,
may also be held liable by one who is not a holder in due course.

The reason is that the instrument being originally payable to bearer, it can be
negotiated by mere delivery. (Section 30.). In other words, indorsement is not
necessary to the title of the holder. Hence, even if the indorsement is forged, the
forgery may be disregarded. The forged indorsement does not prevent the
transfer of title since the holder may just strike out the forged indorsement. (Sec.
48). The only defense available is want of delivery but this defense can be raised
only against a holder not in due course. (Sec. 16).

c. Where bill payable to order. Where the bill is payable to order, the party
whose indorsement is forged, is not liable to any holder even a holder in due
course. The forged indorsement is wholly inoperative.

Where the signature of the payee was forged, the collecting bank is liable to the
payee and must bear the loss because it is its legal duty to ascertain that the
payees endorsement was genuine before cashing the check.

If the drawee pays under a forged indorsement, the drawer is not liable on the bill
and the drawee may not debit the drawers account. If it does, it shall have to
recredit the amount of the check to the account of the drawer. A bank is bound
to know the signature of its customers (drawers), and if it pays a forged check it
must be considerd as making the payment out of its own funds and cannot
ordinarily charge the amount so paid to the account of the depositor (see Sec.
189).

Where, however, the checks are received merely for collection and deposit, the
bank, as agent, cannot be expected to know or ascertain the genuineness of al
prior indorsements. (Jai-Alai Corp vs. Bank of P.I., 66 SCRA 29 [1975].) But by
stamping on checks accepted by it for deposit its guarantee that all prior
endorsements and/or lack of endorsements guaranteed, a collecting/presenting
bank thereby makes the assurance that it has ascertained the genuineness of all
prior indorsements. (Associated Bank vs. Court of Appeals, supra.) So even if
the indorsement on the check deposited by the collecting banks client is forged,
the collecting bank is bound by its warranties as an indorser and cannot set up
the defense of forgery as against the drawee-bank. (Associated Bank vs. Court
of Appeals, supra.)

Apropos, the matter of forgery in indorsements, the collecting bank, or last

indorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the indorsements.
(see Philippine National Bank vs National City Bank, 63 Phil. 711 [1936]
 30

Where the drawer of a check delivers it to an impostor mistakenly believing him

to be the payee named in the check, the indorsement of the check by the
impostor is not a forgery, and the drawer is liable to a bona fide holder or any
subsequent indorser who may be compelled to pay it. (Burrows vs. Wester Union
Tel. Co., 86 Minn. 499, 90 N.W. 1111; see Sec. 61)

d. Where bill payable to bearer. In case the bill is originally payable to

bearer, the drawee may debit the drawers account in spite of the forged
indorsement. The reason is that the forged indorsement is not necessary to the
title of the holder. The drawee cannot recover from the holder.

e. The endorser is liable on the instrument although the signature of the

payee is forged because the endorser by his endorsement guaranteed that the
instrument is genuine, therefore, impliedly, that the instrument is valid, otherwise,
there would be nothing for the endorser to guarantee. SEE: Republic Bank v.
Ebrada 65 SCRA 680 (1975)

5. The exceptions to the rule are:

a. Is when a party is precluded from setting up forgery as a defense under

Section 23. The parties precluded from setting up the defense of forgery are:

1. Those who by their acts, silence or negligence, are ESTOPPED from

setting up the defense of forgery.

2. Those who warrant or admit the genuineness of the signature in question

(i.e., endorsers, persons negotiating by delivery, and acceptors of bills of
exchange);

b. When forged signature is unnecessary to the title of the holder as when

the endorsement is forged on an instrument payable to bearer.

Facts: Two (2) of the Companys Citibank checks were prepared made payable
to the Commissioner of Internal Revenue (CIR), which were both crossed
checks. The checks were turned around by the Companys confidential
employees and were forged to facilitate deposit with PCIBank in exchange for
PCIBank managers checks, in collusion with an organized syndicate. PCIBank
now wants to hold Company liable for the forged checks, the act of fraud being
facilitated by its confidential employees.

Held: Although the employees of Company initiated the transactions attributable

to an organized syndicate, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of Companys negligence,
if any, could not be characterized as the proximate cause of injury to the
parties.The Companys Board of Directors did not confirm the request to recall
forged Citibank Checks No. SN-04867, and the instruction to replace the said
checks with PCIBanks managers check was not in the ordinary course of
business which could have prompted PCIBank to validate the same.Given these
circumstances, the mere fact that was committed by the drawer-payors
confidential employee, who by virtue of his position has unusual facilities for
perpetrating the fraud and imposing the forged paper upon the bank, does not
entitle PCIBank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer. This rule likewise applied to
 31

checks fraudulently negotiated or diverted by confidential employees who hold

them in their possession. PCI Bank v. Court of Appeals 350 SCRA 446 (2001)

6. Section 23 on forgery only covers forged signature, or signature

made without the authority of the person whose signature it purports to be.
Forgeries that consist of other alterations are covered by Sec. 124.

(c) Effects of Forgery under Sec. 23 of NIL

Associated Bank v. Court of Appeals

67 SCAD 487, 252 SCRA 620 (1996)

Checks having forged indorsements should be

differentiated from forged checks or checks bearing
the forged signature of the drawer. Under Sec. 23 of
NIL, a forged signature, whether it be that of the
drawer or the payee, is wholly inoperative and no one
can gain title to the instrument through it. A person
whose signature was forged was never a party and
never consented to the contract which allegedly gave
rise to such instrument. Section 23 does not avoid the
instrument but only the forged signature. Therefore, a
forged indorsement does not operate as the payees
endorsement.

The exception to the general rule in Sec. 23 is

where a party against whom it is sought to enforce a
right is precluded from setting up the forgery or want
of authority. Parties who warrant or admit the
genuineness of the signature in question and those,
who by their acts, silence or negligence are estopped
from setting up the defense of forgery, are precluded
from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors
of the genuineness of the signature on the instrument.

In bearer instruments, signature of payee or

holder is unnecessary to pass the title to the
instrument; hence, when the indorsement is a forgery,
only the person whose signature is forged can raise
the defense of forgery against a holder in due course.

PNB v. Court of Appeals

25 SCRA 693 (1968)

When in a check the signature of the drawer is

forged, as between the drawee and collecting bank,
the drawee bank shall sustain the loss, since the
collecting bank does not guarantee the signature of
the drawer, and in fact the payment of the check by
the drawee bank constitutes the proximate negligence
since it was the primary duty of the drawee bank to
know the signature of its client-drawer.
 32

Manila Lighter Transportation, Inc. v. CA

182 SCRA 251 (1990)

A collecting bank is not guilty of negligence

over a forged indorsement on checks for it has no
way of ascertaining the authority of the endorsement
and when it caused the checks to pass through the
clearing house before allowing withdrawal of the
proceeds thereof.

Republic Bank v. Court of Appeals

196 SCRA 100 (1991)

When drawee bank therefore fails to return a

forged or altered check to collecting bank within the
24-hour clearing period, collecting bank is absolved
from liability.

Associated Bank v. Court of Appeals

67 SCAD 487, 252 SCRA 620 (1996)

In cases involving a forged check, where

drawers signature is forged, drawer can recover from
the drawee bank. No drawee bank has a right to pay
a forged check. If it does, it shall have to recredit the
amount of check to the account of drawer. The liability
chain ends with drawee bank whose responsibility it is
to know the drawers signature since the latter is its
customer.

NOTE: It must be remembered that the foregoing

rules are qualified by the rules precluding the setting
up of the defense of forgery by warranty, as in the
case of parties negotiating an instrument subsequent
to forgery, or by estoppel, as in the case of
negligence. Parties negotiating by endorsement and
delivery, or by mere delivery subsequent to the
forgery are precluded from setting up the defense of
forgery and may be held liable under their warranties
stated under Secs. 65 and 66.

(b) Forgery of Indorsement:

(1) Drawers account cannot be charged by

drawee, and if charged, drawer can recover
from the drawee bank. (Galino v. PNB, [CA] 51
OG 410).

(2) Drawer has no cause of action against

collecting bank, since the duty of collecting
bank is only to payee. Also, drawer suffers no
damage since drawer can recover amount paid
from drawee bank, which has no right to
charged drawers account.

(3) Even with sending of bank statement by

drawee bank to drawer, the latter is not
 33

estopped since it would be a case where the

drawers own signature was forged in one of its
checks and therefore the receipt of the
statement would be an appraisal of the forgery.

(4) Drawee bank can recover from the

collecting bank. (Great Eastern Life Ins. Co. v.
Hongkong & Shanghai Bank, 43 Phil. 678
[1922]).

(5) Payee can recover from drawer as he still

retained his claim of debt against drawer.

(6) Payee can also recover from recipient of

payment, such as collecting bank.

(7) Collecting bank is liable to payee. The

possession of check on forged or unauthorized
indorsement is wrongful and when the money
had been collected on the check, the bank or
other person or corporation can be held as for
moneys had or received, and proceeds are
held for the rightful owners of payment and
may be recovered by them.

(8) Payee cannot collect from drawee bank,

unless the latter shall accept or certify the
check, without such specification or
acceptance there is no privity of contract
between the drawee bank and the payee.

(9) Collecting bank bears the loss but can

recover from person to whom it has paid
check.

Gempesaw v. Court of Appeals

218 SCRA 682 (1993)

Although as a rule a drawee-bank which has

paid a check on which an indorsement has been
forged cannot charge drawers account for the
amount of said check, an exception to such rule
applies where drawer was guilty of such negligence
which causes the bank to honor such a check, as
when the drawer negligently or fails either to discover
or to report promptly the fact of such forgery to the
drawee-bank.

(c) Delineating Liability for Forged

Indorsements on Checks Payable to Order:

Associated Bank v. Court of Appeals, 252

SCRA 620 (1996), laid down the following rules
delineating the consequences, rights and liabilities of
parties in case of forged indorsements on checks
payable to order, thus:
 34

(1) When instrument is payable to order at the

time of forgery, the signature of its rightful
holder is essential to transfer title to the same
instrument. When holders indorsement is
forged, all parties prior to the forgery may raise
the real defense of forgery against all parties
subsequent thereto.

(2) An indorser of an order instrument warrant

that the instrument is genuine and in all
respects what it purports to be; that he has a
good title to it; that all prior parties had capacity
to contract; and that the instrument is at the
time of his endorsement valid and subsisting.
He cannot interpose the defense that
signatures prior to him are forged.

(3) The collecting bank where a check is

deposited and which endorses the check upon
presentment with drawee bank, is such an
indorser. So even if the indorsement on the
check deposited by the banks client is forged,
collecting bank is bound by its warranties as an
indorser and cannot set up defense of forgery
as against drawee bank.

(4) The bank on which a check is drawn

(drawee bank) is under strict liability to pay the
check to the order of the payee. The drawers
instructions are reflected on the face and by
the terms of the check. Payment under a
forged endorsement is not to the drawers
order. When drawee bank pays a person other
than the payee, it does not comply with the
terms of the check and violates its duty to
charge its customers (drawer) account only for
properly payable items. Since drawee bank did
not pay a holder or other person entitled to
receive payment, it had no right to
reimbursement from the drawer. The general
rule then is that the drawee bank may not debit
the drawers accound and is not entitled to
indemnification from drawer. The risk of loss
must perforce fall on drawee bank.

(5) However, if drawee bank can prove a failure

by customer/drawer to exercise ordinary care
that substantially contributed to the making of
forged signature, drawer is precluded from
asserting forgery.

(6) If at the same time drawee bank was also

negligent to the point of substantially
contributing to the loss, then such loss from the
forgery can be apportioned between the
negligent drawer and the negligent bank.
 35

(7) The chain of liability does not end with

drawee bank. The drawee bank may not debit
the account of drawer but may generally pass
liability back through the collection chain to the
party who took from forger and, of course, to
forger himself, if available. In order words,
drawee bank can seek reimbursement or a
return of the amount it paid from the presentor
bank or person.

(8) Theoretically, presentor bank or person can

demand reimbursement from the person who
endorsed the check to it and so on. The loss
falls on the party who took the check from the
forger, or on the forger himself.

Since a forged indorsement is inoperative, the collecting

bank had no right to be paid by the drawee bank. The former must
necessarily return the money paid by the latter because it was paid
wrongfully.

More importantly, by reason of the statutory warranty of a

general indorser in Sec. 66 of NIL, a collecting bank which indorses
a check bearing a forged endorsement and presents it to the
drawee bank guarantees all prior indorsements, including the
forged indorsement. It warrants that the instrument is genuine, and
that it is valid and subsisting at the time of his indorsement.
Because endorsement is a forgery, collecting bank commits a
breach of this warranty and will be accountable to drawee bank.
This liability scheme operates without regard to fault on the part of
collecting/presenting bank. Even if the latter bank was not
negligent, it would still be liable to drawee band because of its
endorsement.

7. NEGLIGENCE DISCUSSED:

(a) The depositors negligence or conduct which

would stop him must be the proximate cause of
the payment by depository upon forged
indorsement.

(b) A depositor (drawer) is generally under a duty to

his depository (drawee) to examine returned
vouchers notify it within reasonable time of any
mistakes or inaccuracies in amounts of checks or
forgeries of depositors signature.

(c) Doctrine of Comparative Negligence

Constructive negligence of the bank if overcome
by the active negligence of paying banks in not
using the ordinary precautions which are used by
banks, namely, demanding identifications of
person presenting the check, etc.

(d) Basic Rule in Estoppel by Negligence Where

the loss, which must be borne by one of the two
parties alike innocent of forgery can be traced to
 36

the neglect or fault of either, it is reasonable that

one through whose name the fraud was
committed must bear the loss, even if he is
innocent of the fraud.

(e) Indorsers warrant genuineness of prior

indorsements. But drawee is not entitled to the
benefit of endorsements warranty because e is
held not to be a holder in due course. As to him, it
is as if there is no indorsement, but the instrument
was payable to bearer, and the ordinary rules
apply depending upon the presence or absence of
negligence.

xxx
1. Where the signature on the instrument is affixed by one who
does not claim to act as an agent and who has no authority to bind
the person whose signature he has forged; and
2. Where the signature is affixed by one who purports to be an
agent but has no authority to bind the alleged principal.
In both cases, the signature is wholly inoperative and so no
right can be acquired through the forged signature. Payment made
through or under such forged signature is ineffectual and does not
discharge the Instrument. A person whose signature was forged as
maker, drawer, payee or indorsee of a note or check was never a
party or never gave his consent to the contract which gave rise to
the instrument. Since his signature does not appear in the
instrument, he cannot be held liable thereon by anyone.
(Gempesaw vs. Court of Appeals, 218 SCRA 682 [1993].) Forgery
is, therefore, a real defense even against a holder in due course.
(see Sec. 58)

EFFECT OF A MATERIAL ALTERATION

Under Section 124, 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.
 37

CONSEQUENTLY, the effects of an alteration of the instrument are:

(1) Alteration by a party. The effect of a material alteration by the holder is

to discharge the instrument and all prior parties thereto who did not give their
consent to such alteration. Since no distinction is made, it does not matter
whether it is favorable or unfavorable to the party making the alteration.

The law however makes certain exceptions as to the effect of material alteration.
It does not discharge the instrument as against: (a) a party who has made the
alteration, and (b) a party who authorized or assented to the alteration, and (c)
indorsers who indorsed subsequent to the alteration.

EXAMPLE:

M makes a promissory not for P3,000.00 payable to P or order. P

negotiates the note to A who, with the consent of P, raises the amount to
P8,000.00 and thereafter indorses it to B, B to C, and C to D, under
circumstances which make D not a holder in due course.

The note is discharged as against M; hence, D cannot enforce it as

against M even for the original tenor. A, however, would be liable to D for
P8,000.00 as he is the party who himself made the alteration although D is not a
holder in due course. Moreover, as indorser, A warrants that the instrument is
genuine and in all respects what it purports to be. (Secs. 65 and 66.)

P would also be liable to D for P8,000.00 as he authorized the alteration

B and C are liable to D because they are subsequent indorsers.

(2) Alteration by a stranger. When the material alteration of the instrument is

made by a stranger, it is called spoliation.

(3) Right of holder in due course. A material alteration avoids the instrument
in the hands of one who is not a holder in due course as against any prior party
who has not assented to the alteration. But if an altered instrument is negotiated
to a holder in due course, he may enforce payment thereof according to its
original tenor regardless of whether the alteration was innocent or fraudulent.
(see Sec. 62.)

EXAMPLE:

In the example given, if D were a holder in due course, he could enforce

the instrument against M for P3,000.00, its original tenor. (see Sec. 14.) Of
course, D can recover from P, A, B, or C P8,000.00 should M dishonor the
instrument.

WHEN ALTERATION IS MATERIAL

Section 125 defines what will constitute a material alteration. It is 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 or the 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
change or addition which alters the effect of the instrument in any respect, is a
material alteration.
 38

CONSIDERATION FOR THE ISSUANCE OF A NEGOTIABLE INSTRUMENT

1. Under Section 24, every negotiable instrument is deemed prima facie to

have been issued for valuable consideration, and every person whose signature
appears thereon to have become a party thereto for value.

2. Under Section 25, value is any consideration sufficient to support a simple

contract. An anteceded or pre-existing debt constitutes value; and is deemed
such whether the instrument is payable on demand or at a future time.

3. Under Section 27, where a holder has a lien on the instrument, arising
from a contract or by implication of law, he is deemed a holder for value to the
extent of his lien. HE IS ONE WHO HAS TAKEN A NEGOTIABLE INSTRUMENT
AS COLLATERAL SECURITY FOR A DEBT

The effects are:

1. If the amount of the instrument is more than the debt secured by such
instrument, the pledge is a holder for value to the extent of his lien. He can
collect the full value of the instrument, and apply the same to the payment of the
debt but he must deliver the surplus to the pledgor. (see Art. 2118, Civil Code.)

Example:

M makes a promissory note for P1,000.00 to the order of P who pledges it

to A to secure the payment of Ps debt of P800.00. The note is indorsed and
delivered by P to A. (see Art. 2095, ibid.)

In this case, A is a holder for value to the extent of P800.00 which is also
the extent of his lien. On the maturity of the note, even if the debt of P800.00 is
not yet due (see Art. 2118, ibid.), A may recover the full amount of P1,000.00,
holding the surplus for P, the pledgor.

2. If, between the pledgor and the party liable on the instrument, there are
existing defenses, then the pledgee can collect on the instrument only to the
extent of the amount of the debt.

Example:

If M has defenses against P, indorser, such as absence or failure of

consideration (Sec. 28), A can collect only P800.00 on the note even if he is a
holder in due course. As the note in the hands of M is void, all that ought to be
recovered by A is the amount due on the loan.

3. If the amount of the instrument is less than or the same as the debt
secured by such instrument, the pledge is a holder for value for the full amount
and may, therefore, recover all.

Example:

Supposing that the amount of the instrument is P700.00 then A is a holder

for value for the full amount of P700.00 and is entitled to recover to that extent.
 39

4. If the defenses of the party liable on the instrument are real defenses, then
the pledgee can recover nothing upon the instrument.

Example:

If the signature of M is a forgery, A can collect nothing from M because Ms

signature is inoperative. As against M, A acquired no right to enforce payment of
the note. (Sec. 23.) Forgery is a real defense. (see Sec. 57)

WHEN CONSTITUTES BEING A HOLDER FOR VALUE

Under Section 26, a HOLDER FOR VALUE is one who has given a valuable
consideration for the instrument issued or negotiated to him. He is such not only
as regards the party to whom value has been given but also in respect to all
those who became parties prior to the time when value is given. Example: If the
maker issues a note to the payee without consideration, it is subsequently
endorsed by the payee to another without consideration, and is subsequently
indorsed with consideration, the last endorsee is deemed to be a holder for value
not only as to his indorser, but all other parties subsequent to the indorsement.

WHAT IS THE EFFECT OF WANT OF CONSIDERATION

The 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.

Meaning of absence or want of consideration.

Absence of consideration means a total lack of any valid consideration for the
contract, in consequence of which the alleged contract must fall. (Klein v.
Roteman, 6 Ohio App. 145.)

Example:

M makes a promissory note to P in payment for a parcel of land which

does not exist.

As between the parties, there can be no recovery on the note a there is

absence of consideration. But if P indorses the note to A, a holder in due course,
A can recover from M because absence of consideration is only a personal
defense not available against a holder in due course.

Meaning of failure of consideration.

Failure of consideration means the failure or refusal of one of the parties to do,
perform or comply with the consideration agreed upon. In other words,
something was agreed upon as consideration but for some cause, such agreed
consideration failed to materialize.

WHO IS AN ACCOMODATION PARTY

Section 29 provides that an accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value
 40

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.

1. Accommodation bill or note is one to which the accommodation party has

put his name, without consideration, for the purpose of accommodating some
other party who is to use it, and is expected to pay it. (Brown Carriage Co. v.
Dowd, 71 S.E. 721.) In other words, it is a loan of ones credit. (Burr vs. Beckler,
106 N.E. 206)

An accommodation paper creates no obligation upon delivery to the

accommodated party and is of no legal efficacy and creates no obligation until
delivered or negotiated to a holder for value.

2. Accommodated party is one in whose favor a person, without receiving

value therefor, signs an instrument for the purpose of lending his credit and
enabling said party to raise money upon it. (Sec. 29) He impliedly agrees to take
up the instrument at maturity and to indemnify the accommodation party against
the consequences of non-payment.

Liability of accommodation party to a holder.

1. Absence of consideration not a defense . Section 29, by clear mandate

makes the accommodation party liable on the instrument to a holder for value
notwithstanding such holder at the time of taking the instrument knew him (the
signatory) to be only an accommodation party, in whatever capacity he signed
the instrument, whether primarily or secondarily. This means that absence of
consideration between the accommodation party and the accommodated party
does not of itself constitute a valid defense against a holder for value even
though he knew of it when he became a holder. (see Ang Tiong vs. Lorenzo Ting,
22 SCRA 713 [1968]; Republic Bank vs. Ebrada, 65 SCRA 680 [1975]

2. Accommodation party in effect a surety. In lending his name to an

accommodated party, the accommodation party is, in effect, a surety. (Philippine
Bank of Commerce vs. Aruego, 102 SCRA 530 [1981]). However, unlike in a
contract of suretyship, the liability of the accommodation party remains not only
primary but also unconditional to a holder for value such that even if the
accommodated party receives an extension of the period for payment without the
consent of the accommodation party, the latter is still liable for the whole
obligation an such extension does not release him because as far as a holder for
value is concerned, he is a solidary co-debtor. (Prudencio vs. Court of Appeals,
103 SCRA 7 [1986]; see People vs. Maniego, 148 SCRA 30 [1987].)

It will then be noted that Section 29 is an exception to Section 28. But

Section 29 should not be construed as to allow a holder for value, not otherwise
a holder in due course, to recover against an accommodation party in the light of
other sections (Secs. 16, 55, 58) of the Negotiable Instruments Law. In other
words, except the defense of absence of consideration between the
accommodation party and the accommodated party, the accommodation party is
liable to a holder in due course.

Rights of accommodation party.

1. Right to revoke accommodation since a signature for accommodation is

gratuitous, it may be revoked or rescinded by cancellation or by notice to those
interested at any time before the instrument ha been negotiated for value. But
 41

once the instrument has been negotiated for value, the accommodation party is
liable according to the face of his undertaking, the same as if he were financially
interested in the transaction.

2. Right to reimbursement from accommodated party after making

payment to the holder, the accommodation party has a right to obtain
reimbursement from the accommodated party. The relation between them is, in
effect, that of principal and surety, the accommodation party being the surety.
(Phil. National Bank vs. Maza and Macenas, 48 Phil. 207 [1915]; People vs.
Maniego, 148 SCRA 31 [1987]; Caneda Jr. vs. Court of Appeals, 181 SCRA 762
[1990]. As between the accommodation party and the accommodated party, the
latter is expected to pay the instrument directly to the holder. The
accommodated party is the real debtor. Hence, the cause of action is not on the
instrument but on an implied contract of reimbursement.

3. Right to contribution from other solidary accommodation maker where

the solidary accommodation maker paid to the bank, the balance due on a
promissory note, he may seek contribution from the other solidary
accommodation makers in the absence of a contrary agreement between them,
and subject to the conditions imposed by law. This right springs from an implied
promise between the accommodation makers to share equally the burden
resulting from the execution of the note. They are joint guarantors of the
principal debtor. (Sadaya vs. Sevilla, supra; see Art. 2073, Civil Code; Sec. 196.)

KINDS OF ACCOMODATION PARTIES

An accommodation party is one who has signed the instrument as maker,

drawer, acceptor, or indorser. (Sec. 29)

Examples:

1. Accommodation maker M, as accommodation party, issues a promissory

note payable to P who may then negotiate it to A.

2. Accommodation drawer M, as accommodation party, signs a bill of

exchange with P as payee, and P may indorse the same to A.

3. Accommodation acceptor M, as accommodation party, accepts a bill

drawn on him by P in favor of himself and P may indorse the same to A.

4. Accommodation indorser M, as a accommodation party, simply signs as

an indorser in blank, the bill or note made by P in favor of A, before it is delivered
to A. (see Sec. 63)

ACCOMMODATION PARTY AND REGULAR PARTY DISTINGUISHED

The following are the differences:

1. An accommodation party signs an instrument without receiving value

therefor, while a regular party signs the instrument for value (Sec. 24);
2. An accommodation party signs an instrument for the purpose of lending
his name to some other person (Sec. 29), while a regular party does not sign for
that purpose;

3. An accommodation party may always show by parol evidence that he is

only such, while a regular party cannot disclaim or limit his personal liability as
 42

appearing on the instrument by parol evidence (see Maulini vs. Serrano, 28 Phil.
640 [1914]; Velasco vs. Liuan & Co., 43 Phil. 195 [1922]);

4. An accommodation party cannot avail of the defense of absence or failure

of consideration against a holder not in due course, while a regular party may
avail of said defense against a holder not in due course; and

5. An accommodation party, after paying the holder, may sue for

reimbursement the accommodated party, although a subsequent party, while a
regular party may not sue any subsequent party for reimbursement. (Phil.
National Bank vs. Maza & Macenas, 48 Phil. 207 [1925])

NEGOTIATION

CONCEPT OF NEGOTIATION

Under Section 30 an instrument is negotiated when it is transferred from one

person to another in such a manner as to constitute the transferee the holder of
the instrument.

A holder means the payee or endorsee of a bill or note who is in possession of

it or the bearer thereof.

MANNER OF TRANSFER OF INSTRUMENTS

1. By Assignment Generally for non-negotiable instruments. In

assignment, the assignee is merely placed in the position of the assignors and
acquires the instrument subject to all the defenses that might have been set up
against original payee.

2. By Operation of Law Such as by succession, by insolvency. Upon the

death of a joint payee or indorsee, in which case the general rule is that title
vests at once in the surviving payee or indorsee.

3. By Negotiation

METHODS OF NEGOTIATION

Negotiable Instruments may be negotiated by:

1. By indorsement and delivery if payable to order

2. By delivery if payable to bearer

WHAT IS AN INDORSEMENT

It is the writing of the name of the indorser on the instrument with the intent to
transfer title to the same.

Indorsement is not only a mode of transfer, it is also a contract. Every indorser is

a new drawer and the terms are found on the face of the bill or note, with the
additional obligation that if the instrument is dishonored by non-payment or non-
acceptance, and notice is given to the endorser, the latter will pay for it.
 43

WHERE IS SHOULD AN INDORSEMENT BE CONTAINED

1. Under Section 31, 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.

2. An indorsement is usually written at back of instrument and may be made

any form (eg. print, typewritten, rubber stamp) as long as meant to be an
endorsement.

3. Under Section 32, the indorsement must be of the entire instrument.

Otherwise, the indorsement is not valid, but would only constitute a valid
assignment binding between the parties. The REASON is that the instrument
must be delivered and there cannot be partial delivery of an instrument.

Also, when an indorsement purports to transfer the instrument to two or more

indorsees severally (instead of jointly), the same is not valid endorsement. The
REASON is that the cause of action on the instrument will be split or divided.

THE EXCEPTION is when an instrument has already been paid in part, it may
be endorsed to the residue.

NOTE: That an indorsement which purports to transfer to the indorsee a part only
of the amount payable does not operate as a negotiation of the instrument; it
operates merely as an assignment. SEE: Montinola v. PNB, 88 Phil. 178 [1951]

KINDS OF INDORSEMENTS

1. SPECIAL INDORSEMENT it qualifies the person to whom or to whose

order the instrument is payable, and the indorsement of such endorsee is
necessary to the further negotiation of the instrument (Section 34)

Pay to X.

(Sgd.) A

a. If X (the endorsee) wants to further negotiate the instrument, he must sign

it at the back.

b. However, when the instrument is originally payable to bearer, it can further

be negotiated by mere delivery, even if the original bearer negotiated it by special
endorsement but the person indorsing specially shall be liable as endorser to
only such holders as make title through his endorsement (Section 40).

This rule does not apply to instruments originally payable to order, but because
the only or last indorsement is an indorsement in blank.

Section 40, when read with Section 9, shows that of the five (5) kinds of bearer
instruments discussed under Sec. 9, Section 40 applies only to the first four
types, those that are payable to bearer on their face. These four types of bearer
instrument, even if endorsed specially, they retain their character as bearer
 44

instrument and may still be negotiated by mere delivery; the special endorsement
may be ignored.

NOTE: Under Sec. 67, where an instrument payable to bearer is negotiated by

indorsement and delivery, the person signing (through his signature was not
necessary for negotiation) is liable as a special endorser.

2. BLANK INDORSEMENT it specifies no endorsee, and the instrument so

endorsed is payable to bearer and may be negotiated by mere delivery. (Section
34)

a. The holder may convert a blank indorsement into a special indorsement

by writing over the signature of the endorser in blank any contract consistent with
the character of the endorsement.

3. ABSOLUTE INDORSEMENT one by which the endorser binds himself

to pay, upon no other condition than the failure of prior parties to do so and of
due notice to him of such failure.

4. CONDITIONAL INDORSEMENT the party required to pay the instrument

may disregard the condition and make payment to the endorsee or his transferee
whether the condition has been fulfilled or not. But any person to whom an
instrument so endorsed is negotiated will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally. (Section 39)

Illustration:

Pay to X PHP500 if it rains on 28 June

2002.
(Sgd.) B

X may present the instrument for payment before 28 June 2002, but B may tell X
to: Wait for 28 June 2002 OR Pay X PHP500; but if it does not rain on 28 June
2002, X must return the money on the principle of solution indebiti.

5. RESTRICTIVE INDORSEMENT such indorsement either: (a)Prohibits

further negotiation of instrument (b)Constitutes endorsee the agent of endorser
(c)Vest title in endorsee in trust for or to the use of some other person.But mere
absence or words implying power to negotiate does not make an indorsement
restrictive. (Section 36)

a. EFFECT OF RESTRICTIVE INDORSEMENT: It confers upon the

endorsee the right (a) To receive payment of the instrument;(b)To bring any
action thereon that the endorser could bring;(c) To transfer his rights as such
endorsee, where the form of the indorsement authorizes him to do so. (Section
37)

But all subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement.

Illustrations:
 45

(a) Pay to X only

(b) Pay to X as agent
(c) Pay to X in trust

Under letter (a), it completely destroys the negotiable character of the instrument
and it may no longer be negotiated.

Under letter (b), the rights of X to negotiate is limited because the same must be
within the scope of his authority as agent.

Under letter (c), X may negotiate the instrument only within the scope of his
authority as trustee.

b. Section 47 must be correlated with Sec. 36 (restrictive indorsement), Sec.

88 (payment) and Sec. 119 (discharge of an instrument)

Illustration:

One year from date, pay to

A or order PHP500.

June 28, 2002 (Sgd.) B

General Rule: An instrument which is negotiable in origin continues to be

negotiable until it has been:

(a) restrictively endorsed;

(b) paid at or after maturity.

When referring to restrictive indorsement, we refer only to the first kind: Pay to
X only; because this is the only type of restrictive indorsement that completely
destroys the negotiability of the instrument.

When referring to payment, this must be understood to be payment made at or

after maturity of the negotiable instrument. Because if payment is made before
maturity thereof, the person so paying can still renegotiate or reissue the
instrument. In other words, payment before maturity does not destroy
negotiability.

6. QUALIFIED INDORSEMENT constitutes endorser a mere assignor of the

title to the instrument. It may be made by adding to the endorsers signature the
words without recourse or sans recourse or other terms of similar import.
(Section 38)

a. Without recourse means without resort to a person who is secondarily

liable after the default of person who is primarily liable.

b. Qualified endorser has limited liability, i.e., he is liable if the instrument is

dishonored by non-acceptance or nonpayment due to:
- Forgery
- Lack of good title on the part of the endorser;
- Lack of capacity to endorse on the part of the prior parties;
- The fact that at the time of the endorsement, the instrument was
valueless or not valid, and he knew of that fact.

Illustration:
 46

Pay to X PHP500 without recourse.

(Sgd.) A

The qualified endorser guarantees only the genuineness of the instrument but
does not guarantee its payment. He will be liable only if signature of the maker
turns out to be a forgery. He will not be liable if maker refuses to pay.

In case of qualified endorsement, the consideration is less than in general

endorsement. For an instrument of PHP500 for example, the qualified endorser
may have paid only PHP200. If Bs (maker) signature is forged, he will be liable
for PHP200 only as he paid that much only to guarantee genuineness. This is
the difference between general and qualified endorsements.

When Warranties of Qualified Endorser Cannot Prevail:

Bank of P.I. v. Court of Appeals

326 SCRA 641 (2000)
Facts: Depositor, by way of accommodation, allowed the deposit of a
check in his savings account after he had endorsed the same. He executed a
blank withdrawal slip to allow the accommodated party to withdraw the amount of
the check deposited as soon as it has been cleared and upon presentation of the
passbook. The amount were withdrawn prior to the clearance of the check,
which turned out alter to be counterfeit. The bank seeks to recover from the
depositor on the basis of his endorsement of the check which the bank relied
upon in servicing the withdrawal before there was an actual clearance thereof.

Held: The bank cannot be allowed to recover against the depositor. While
ordinarily, the depositor could have been held liable on the basis of his
warranties, since a person negotiating an instrument by delivery or by qualified
endorsement are: (a) that the instrument is genuine and in all respects what it
purports to be; (b) that he has a good title to it; and (c) that all prior parties had
capacity to contract.

Nevertheless, the circumstances of the case shows that the immediate

cause for the loss was the failure of the bank to exercise the extraordinary
diligence required of banks when dealing with the accounts of their depositors,
especially in allowing withdrawal of the amount prior to the clearing of the check
and without the presentation of the passbook.

7. JOINT INDORSEMENT is where an instrument is payable to the order of

two or more payees or indorsees who are not partners, all must endorse, unless
the one indorsing has authority to endorse for the others. (Section 41)

a. This rule does not apply to indorsements payable to two or more payees
severally (e.g., Pay to the order of A or B), which under Section 8(c) may be
negotiated by the endorsement of one payee.

Illustration:

[Indorsements at the back]

Pay to X or Y. Pay to X P200 to Y P300.

(Sgd.) A (Sgd.) A
 47

Both of these indorsements are prohibited.

Compare this with Sec. 8: Pay to A or X or order P500, which may be indorsed
by A alone or by X alone. The instrument may be payable in the alternative but
the endorsement to two or more persons is void. If payable in the alternative on
its face, the instrument is less confusing; but when the indorsement is alternative
there would be confusion.

b. Section 41 states but who are not partners but this clause should be
ignored because it contemplates the American Law on Partnership, where the
partners are solidarily liable and hence only one partner may be made liable to
collect the whole amount so that only one needs to sign the indorsement.

This is different from Philippine Law which provides that partners are jointly
liable; hence, both must sign the endorsement.

8. IRREGULAR INDORSEMENT is where a person, not otherwise a party to

an instrument, places thereon his signature in blank before delivery, he is liable
as an endorser. (Section 64)

EFFECTS OF STRIKING OUT AN INDORSEMENT

A holder may at any time strike out any endorsement which is not necessary to
his title. The endorser whose endorsement is truck out, and all endorsees
subsequent to him, are thereby relieved from liability on the instrument. (Section
48)

EFFECT OF A TRANSFER WITHOUT AN INDORSEMENT

Any transfer of an instrument without an indorsement shall have the following

effects:

1. Transferee acquires only the rights of transferor, the defense available

against the transferor will also be available against the transferee.

2. Transferee has also the right to require the transferor to endorse the
instrument.

3. The time for determining whether the transferee is a holder in due course
is as of the time of actual endorsement, not at the time of delivery. (Section 49)

OTHER INDORSEMENTS

1. Payable to Cashier where the 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 the 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. (Section 42)

2. Misspelling where the name of a payee or endorsee is wrongly

designated or misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature. (Section 43)
 48

3. 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 (i.e., disclose his principal or sign the principals name) (Section
44)

TIME, PLACE, CONTINUATION OF NEGOTIATION

1. Time of Indorsement 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. (Section 45). This presumption is
rebuttable.

2. Place of Indorsement except where the contrary appears, every

indorsement is presumed prima facie to have been made at the place where the
instrument is dated. (Section 46)

3. Continuation of Negotiable Character an instrument negotiable in origin,

continues to be negotiable until it has been restrictively endorsed or discharged
by payment or otherwise. (Section 47)
4. When Prior Party May Negotiate 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. (Section 50)

RIGHTS OF A HOLDER

1. The rights of a SIMPLE HOLDER are: (a)He may sue thereon in his own
name (b) payment to him in due course will discharge the instrument

2. The rights of a HOLDER IN DUE COURSE are: (a) He may sue on the
instrument (b) to receive payment on the instrument and payment in due course
will discharge the instrument(c) Under Section 57, he holds the instrument free
from any defect in title of prior parties (d) he holds the instrument free from
defenses available to prior parties among themselves (e) enforce payment on the
instrument to the full amount against all parties liable thereon.

LIABILITIES OF THE MAKER

1. The liabilities of the MAKER are: (a) he will pay the note according to its
tenor (b) the payee exists, and (c) the payee has capacity to endorse. The maker
is thus PRECLUDED from setting up the defenses that the payee is fictitious or
that payee was insane, a minor or a corporation acting ultra vires (Section 60).

2. The nature of the liability of the maker is primary and unconditional.

3. If there are joint makers, their liability is solidary.

LIABILITIES OF THE DRAWER

1. By signing his name on the bill as DRAWER, he ADMITS that (a) the
payee exists (b) payee has capacity to endorse (c) drawee will accept or pay or
both according to the tenor of the bill (d) in case of non-acceptance or non-
payment, the drawer will pay (Section 61)
 49

2. NOTE that the drawers obligation to pay is not absolute. The bill must be
dishonored and the necessary proceedings of dishonor must be duly taken.

3. He may insert an express stipulation negativing or limiting his own liability.

4. The nature of the drawers liability is thus secondary in favor of (a) the
holder, and (b) any of the endorsers intervening between the holder and the
drawer who is compelled to pay by the holder.

LIABILITIES OF THE ACCEPTOR

1. The ACCEPTOR by accepting ( Under Section 132 mean assent to the

order of the drawer) the instrument (a) engages that he will pay it according to
he tenor of his acceptance NOT the tenor of the instrument BUT if the tenor of
the acceptance is GENERAL, under Sections 139 and 140, the tenor of the bill is
the same as that of the acceptance. (b) admits the existence of the drawer,
genuineness of the signature of the drawer, capacity and authority of the drawer
to draw the instrument, and the existence and capacity to endorse of the payee.
CONSEQUENTLY, he is precluded from setting up the defenses that the drawer
is non-existent or fictitious, that drawers signature is a forgery, and want of
consideration between him and the drawer

2. In case of an alteration before acceptance, the prevailing view is that he is

liable only up to the original tenor of the bill prior to acceptance. The basis is
Section 132.
3. The nature of the liability of the acceptor is primary.

LIABILITIES OF AN INDORSER

1. An indorser is one who has placed his signature upon an instrument other
than as the maker, drawer or acceptor UNLESS he clearly indicates by
appropriate words his intention to be bound in some other capacity.

2. An IRREGULAR INDORSER ( one who places his signature in blank

before delivery) is liable as follows: (a) in an order instrument, he is liable to the
payee and to all subsequent parties (b) in a bearer instrument, or payable to
order of the maker or drawer, he is liable to all parties subsequent to the maker
or drawer (c) if he signs for accommodation of the payee, he is liable to all parties
subsequent to the payee (Section 64)

3. A QUALIFIED INDORSER (one who endorses without recourse), warrants

that: (a) That the instrument is genuine (does not guaranty payment). (b) That he
had 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.

NOTE: These liabilities of a qualified endorser are the same as those of a

person who negotiates an instrument payable to bearer by delivery alone. But
when the negotiation, is by delivery only, the warranty extends in favor of no
holder other than the immediate transferee.

Illustration:

Payable to A or bearer P500.00

(Sgd.) B
 50

This is delivered physically to X, X delivers it to Y. X is liable to Y alone but Xs

liability refers to the four items above mentioned. He is not liable for payment
because under Sec. 18, in as much as Xs signature does not appear, he is not
liable thereon.

4. A GENERAL INDORSER (one who endorses without qualification,

warrants to all subsequent holders in due course: (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 the instrument is at the
time of his endorsement valid and subsisting. This warranty does not run in favor
of holders who are parties of the illegal transaction. (Burke v. Smith, 75 Atl. 114)
(e) He engages that on due presentment, the instrument shall be accepted or
paid, or both, as he 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 endorser who may be
compelled to pay it.

5. Where a person places his endorsement on an instrument negotiable by

delivery he incurs all liabilities of an endorser. (Sec. 67)

6. ORDER IN WHICH INDORSERS ARE LIABLE as respect one another,

indorsers are liable prima facie in the order in which they endorse; but evidence
is admissible to show that as between or among themselves they have agreed
otherwise. Joint-payees or joint-endorsees who indorse are deemed to endorse
jointly and severally. (Sec. 68) (a) The foregoing rules does not apply to a holder
in due course, to whom the indorsers are liable in any order (b) Every indorser is
liable to all endorsers subsequent to him, but not those indorsers prior to him.

Illustration:

Pay to A or order P500.00 [Indorsements:]

_________________
(Sgd.) B Pay to X.

(Sgd.) A (1)
_________________
Pay to Y.
(Sgd.) X (2)
_________________
Pay to Z.
(Sgd. Y (3)

Z as holder of the instrument may present payment.

If B refuses to pay, Z can ask Y to pay; Y can collect from others in the
order in which they endorse.
Under Sec. 84, where the instrument is dishonored by non-payment, an
immediate right of recourse to all parties secondarily liable thereon accrues to the
holder. There is no need to follow the order of endorsements.
When is the order of endorsement followed? When not?

1. Before dishonor: accessory, subsidiary

2. After dishonor: (a) principal
 51

(b) solidary

1. Before dishonor, the obligation of an endorser is only accessory. Z, the

holder, must seek payment from B first. But if B refuses to pay, he dishonors the
instrument.

2. After dishonor by non-payment, Sec. 84 provides that an immediate right

of recourse to all parties secondarily liable thereon accrues to the holder. Hence,
A, X and Y are now liable principally, Z, the holder, can choose to go after any or
all of them. After dishonor, the liability of A, X and Y becomes joint and several.
Z, at his option, may sue any or all of them. Sec. 68 provides that if Z goes after
X alone and X pays the P500, it is the right of X to ask A and Z to reimburse, and
who is liable to one another in the order in which they are endorsed.

PROCEDURE TO MAKE PERSONS SECONDARILY LIABLE TO PAY

1. The parties primarily liable are the Maker in a promissory note and the
Acceptor in a bill of exchange.

2. The parties who are secondarily liable are the Drawer and an Indorser.

To make parties secondarily liable requires (a) presentment for payment to the
Maker or the Acceptor and (b) notice of dishonor. The absence of either will
discharge persons secondarily liable.

PRESENTMENT FOR PAYMENT

It is defined as: (a) the production of a bill of exchange to the drawee for his
acceptance, or to the drawee or acceptor for payment; or (b) the production of a
promissory note to the party liable for its payment. (Windham Bank v. Norton, 22
Conn. 213, 56 Am. Dec. 297).

1. Presentment for payment is not necessary in order to charge the person

primarily liable on the instrument (The person primarily liable on the instrument
is the person who by the terms of the instrument is absolutely required to pay the
same under Section 192). This pertains to the maker of a promissory note and
the acceptor of a bill of exchange.

2. But if instrument is, by its terms, payable at a special place and the person
primarily liable is able and willing to pay it there at maturity, such ability and
willingness are equivalent to tender of payment on his part. (Section 70). This
pertains to a situation where the instrument is payable at a particular institution or
office, such as a bank and not when the instrument is payable in a certain
locality.

3. Presentment for payment is necessary to charge the drawer and

endorsers. (Section 70). Without presentment, the persons secondarily liable are
discharged.

3. For Promissory Notes: it is necessary that: Presentment for payment must

be made to the person primarily liable (Sec. 71);
 52

If the note is dishonored by nonpayment, notice of dishonor by

nonpayment must be given to the person secondarily liable (Sec. 80),
unless excused.

4. In All Other Cases: it is necessary that

Protest for nonpayment by drawee is necessary to charge an acceptor

for honor (Sec. 167);

Protest for nonpayment by the acceptor for honor is also required.

(Sec. 170).

GENERAL PROCEDURES TO CHARGE PERSON SECONDARILY LIABLE:

1. In the three cases required by law, presentment for acceptance to the drawee
or negotiation within a reasonable time after acquisition is required (Secs. 143
and 144), unless excused. (Sec. 148). In all other cases, there is no need for
presentment for acceptance.

2. If bill is dishonored by non-acceptance: (a) notice of dishonor by non-

acceptance must be given to persons secondarily liable (Sec. 80) unless
excused (Sec. 117); and (b) in case of foreign bills, protest for dishonor by non-
acceptance must be made, unless excused. (Secs. 117 and 159).

3. But if the bill is accepted, or if the bill is not required to be presented for
acceptance, it must be presented for payment to the persons primarily liable
(Sec. 71), unless excused. (Sec. 82).

4. If the bill is dishonored by nonpayment then:

A notice of dishonor by nonpayment must also be given to persons

secondarily liable (Sec. 80), unless excused; and

In case of foreign bill a protest for dishonor by nonpayment must be

made (Sec. 152), unless excused.

WHEN PRESENTMENT MUST BE MADE

1. Instrument on a Fixed or Determinable Future Time Presentment must

be made on the day it falls due. Presentment before maturity is improper.

(a) Every negotiable instrument is payable at the time fixed therein without grace.
(Sec. 85).

(b) When the day of maturity falls upon a Sunday or a holiday, the instrument is
payable on the next succeeding business day. (Sec. 85).

(c) When the day of maturity is on a Saturday, presentment for payment shall be
made on the next succeeding business day; except that demand instrument may,
at the option of the holder, be presented for payment before 12:00 oclock noon
on Saturday when that entire day is not a holiday. (Sec. 85).

(d) Where the instrument is payable at a fixed period after date, after sight, or
after the 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. 86).
 53

Illustration:

18 June 2002
Present this on 28
10 days after date June 2002 for payment
Pay A or order P500. because that is its due
date.
(Sgd.) B

GENERAL RULE: Presentment for payment must

be made on due date of
instrument.

EXCEPTION: If the due date falls on a

Saturday, present instrument on
Monday next.

REASON: Obligor is entitled to the full day

to make payment. But since
Saturday is half day work and the
banks would be closed in the
afternoon, and the following day
is a Sunday, he should have until
Monday to pay. The law wants to
give the person primarily liable
one whole day to look for money.

EXCEPTION TO EXCEPTION: If the instrument is payable on

demand, the instrument can be
presented on a Saturday. The
reason is that the holder could
have presented it on any day.

2. Instrument Payable on Demand:

(a) In case of note, it must be presented for payment within a reasonable

time from issue;

(b) In case of a bill of exchange, it must be presented for payment within a

reasonable time from last negotiation.

The last negotiation is the last transfer for value. Subsequent

transfers between banks for purposes of collection are not negotiations
within this section.

WHAT CONSTITUTES SUFFICIENT PRESENTMENT (Sec. 72):

Presentment for payment, to be sufficient, must be made

1. By the holder, or by some person authorized to receive payment on his behalf.

(a) Presentment for payment of a promissory note by a bank having it for

collection is sufficient. (Caine v. Foreman, 289 Pac. 929).

(b) Instrument must be exhibited to the person from whom payment is

demanded, and when it is paid must be delivered up to the party
 54

paying it. (Sec. 74). Demand over the telephone therefore cannot
constitute proper presentment.

First Acceptance v. Dimayuga

11 car 114 (1967)

The instrument must be exhibited in order that the maker or

the acceptor may be able to determine the genuineness of the
instrument, the right of the holder to receive payment, and so that
he may immediately reclaim possession upon paying the amount.
Non-exhibition or surrender would not constitute due presentment
to charge drawer and endorsers.

(c) The makers right to exhibition of a note is waived when he does not
demand to see the note and he refuses payment on some other
grounds. (Greensteen v. Kucharski, 140 Atl. 482; Foster East Jordan
Realty Co., 177 N.W. 987).

2. At a reasonable hour on a business day.

5. 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 or 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 by law, it will be sufficient, though not sent in accordance
with the requirement of this section. (Sec. 108).

TO WHOM NOTICE GIVEN: Notice of dishonor may be given either to the party
himself or to his agent in that behalf. (Sec. 97).

1. When notice is given to an agent, he must be duly authorized to receive

notice of dishonor; otherwise, the notice is not valid.

2. Notice to Party Dead: When a party is dead, and his death is known to the
party giving notice, notice must be given to 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 deceased. (Sec. 98).

3. 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
dissolution. (Sec. 99).
 55

4. Notice of Persons Jointly Liable: Notice to joint parties who are not
partners must be given to each of them, unless one of them has authority
to receive notice for the others. (Sec. 100).

5. Notice of 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. (Sec.
101).

H & BC v. Peoples Bank

35 SCRA 140 (1970)

The period within which to clear checks at the

clearing house of the Central Bank was 24 hours (i.e.,
any forgery must be discovered and reported within
24 hours). Hongkong and Shanghai Banks
representative whether the check was in fact genuine.

Shanghai Bank said yes. This had to be done

within 24 hours. Two months later, the forgery was
discovered and Hongkong and Shanghai Bank sought
to recover, but this was denied by the court. Because
the period of clearing has been extended to 180 days,
but once any alteration is discovered, the same must
be reported within 24 hours after discovery.

TIME WITHIN WHICH NOTICE GIVEN:

1. Notice may not be given before the maturity of the instrument. Notice may
be given on the date of maturity, provided that instrument has been
presented for payment and it has been dishonored.

2. Where Parties Reside in Same Place: Where the person given and the
person to receive notice reside in the same place, notice must be given
within the following periods:

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

(b) If given by mail it must be deposited in the post office in time to reach
him in usual course on the day following. (Sec. 103).

Same place refers to the corporate limits of a town or city where

the presentment is made or where the holder resides.

3. Where Parties Reside in Different Place: Where the person giving and the
person to receive notice reside in different place, the notice must be given
within the following periods:

(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 the dishonor, or if there be no mail at
a convenient hour or that day, by the next mail thereafter;

(b) If given otherwise than through post office, then within the time that
notice would have been received in due course of mail, if it had been
deposited in post office within the time specified. (Sec. 104).
 56

NOTE: These provisions are similar to Art. 54 of the Code of

Commerce which provides: Contracts entered into through
correspondence shall be perfected from the time an answer
is made accepting the propositions by which the latter may
be modified.

4. 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. 107).

WAIVER OF NOTICE:

1. Notice of dishonor may be waive, either before the time of giving notice
has arrived or after the omission to given due notice, and the waiver may
be expressed or implied. (Sec. 109).

2. Whom Affected by Waiver: Where the waiver is embodied in the

instrument itself, it is binding upon all parties; but where it is written above
the signature of an endorser, it binds him only. Sec. 110).

3. Waiver of Protest: A waiver of protest, whether in the case of foreign bill of

exchange or other negotiable instrument, is deemed to be a waiver not
only of a formal protest but also of presentment and notice of dishonor.
(Sec. 111).

4. When Notice is Dispensed With: Notice of dishonor is dispensed with

when, after exercise or reasonable diligence, it can not be given to or does
not reach parties sought to be charged. (Sec. 112).

5. When Delay in Notice Allowed: Delay in giving notice of dishonor 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 cause of delay ceases to operate, notice must be given with
reasonable diligence. (Sec. 113).

6. When Notice Need Not Be Given to Drawer: Notice of dishonor is not

required to be given to the drawer in any of the following cases;

(a) Where the drawer and drawee are the same person;

(b) When the drawee is a 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 not right to expect or require that the drawee or
acceptor will honor the instrument;

(e) Where the drawer has countermanded payment. (Sec. 114).

7. When Notice Need Not Be Given to Endorser: Notice of dishonor is not

required to be given to an endorser in either of the following cases:

(a) When the drawee is a fictitious person or does not have capacity to
contract and the endorser was aware of this at the time of
endorsement;
 57

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

(c) Where the instrument was made or accepted for his accommodation.
(Sec. 115).

8. Where due notice of dishonor by non-acceptance has been given, notice

of subsequent dishonor by nonpayment is not necessary unless in the
meantime instrument has been accepted. (Sec. 116).

9. Effect of Omission to Give Notice of Non-Acceptance: An omission to give

notice of dishonor by non-acceptance does not prejudice the rights of a
holder in due course subsequent to the omission. (Sec. 117).

PROTEST:

1. Where any negotiable instrument has been dishonored, it may be

protested for non-acceptance or nonpayment, as the case may be. (Sec.
118).

2. But protest is not required except in the case of foreign bills of exchange.
(Sec. 118).

3. Distinctions Between Inland Bill and Foreign Bill:

An inland bill of exchange is a bill which is or on its face, purports to

be, both drawn and payable within the Philippines. Any other bill is a
foreign bill which is one which is, or on its face purports to be drawn or
payable outside the Philippines. (Sec. 129).

A foreign bill of exchange is one:

(a) Drawn in the Philippines but payable outside the Philippines.

(b) Payable in the Philippines but drawn outside the Philippines.

NOTE: Unless the contrary appears on the face of the bill of

exchange, the holder may treat it as an inland bill of
exchange.

4. Under Sec. 118, verbal notice of dishonor is sufficient in case of

promissory note and inland bill of exchange. But with respect to a foreign
bill of exchange, a protest is needed.

DISCHARGE OF NEGOTIABLE INSTRUMENTS

A. DEFINITION: It is the release of all parties, whether primary or secondary,

from the obligation on the instrument; discharge renders the instrument
non-negotiable.

B. HOW NEGOTIABLE INSTRUMENTS DISCHARGED. (Sec. 119). A

negotiable instrument is discharged:

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

2. By payment in due course by the party accommodated, where the

 58

instrument is made or accepted for accommodation;

3. By the intentional cancellation of the instrument by the holder thereof;

4. By any other act which will discharge a simple contract for the payment
of money: (a) remission; (b) novation; (c) confusion or merger.

As to the other modes: payment is already in (a) and (b); loss of a

negotiable instrument will not extinguish liability; compensation is not
available so long as an obligation is evidenced by a negotiable instrument.

PRESUMPTION: When the principal debtor becomes the holder of the

instrument at or after maturity in his own right. If a private
document evidencing an obligation is in the possession of
the debtor, the presumption is that the debtor has paid such
an obligation.

State Investment House v. CA

217 SCRA 32 (1993)

The fact that post-dated checks were issued

merely as security is not a ground for the discharge of
the checks as against a holder in due course.

The intentional cancellation contemplated

under Sec. 119 on NIL for the discharge of an
instrument is the cancellation effected by destroying
the instrument either by tearing it up, burning it, or
writing the work cancelled on the instrument, and
certainly requires the element in the holder in
intentionally canceling it. Cancellation cannot be
presumed by failure to recover the instrument.

The discharge of the instrument would

necessarily carry with it the discharge of the persons
primarily liable thereon.

C. WHEN PERSONS SECONDARILY LIABLE ON INSTRUMENT ARE

DISCHARGED (Sec. 120):

1. By any act which discharges the instrument.

2. By the intentional cancellation of his signature by the holder.

(a) No consideration is necessary to support a discharge by intentional

cancellation of an endorsers signature by holder.

3. By discharge of a prior party.

(a) Discharge of a party by intentional cancellation of his signature also

operates to discharge parties subsequent to the party discharged.
 59

(b) The rule only applies to discharge by the act of the holder and not to
discharges by operation of law, such as insolvency.

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

5. By a release of the principal debtor, unless the holders right of recourse

against the party secondarily liable is expressly reserved.

6. By any agreement binding upon the holder to extend the time of payment
or to postpone the holders right to enforce the instrument.

EXCEPT: (a) When made with the consent of other party

secondarily liable;

(b) Unless the right of recourse against such party

is expressly reserved.

7. In the discharging of persons secondarily liable:

(a) The liability of a party secondarily liable is subsidiary.

(b) His liability is similar (but not exactly the same) to that of a guarantor.

(c) Endorsers are liable in the order in which they endorse.

D. PAYMENT BY PARTY SECONDARILY LIABLE: Where the instrument is

paid by a party secondarily liable thereon, the instrument is not
discharged. However, the party so paying is remitted to his former rights
as regards all prior parties, and he may strike out his own and all
subsequent endorsements, and again negotiate the instrument.

EXCEPT: (a) Where it is payable to the order of a third

person, and had been paid by the drawer; and

(b) Where it was made or accepted for

accommodation and has been paid by the
party accommodated. (Sec. 121).

1. The party secondarily liable who pays will have the effect of discharging
the party paying.

2. The party paying is remitted to his former rights against parties prior to
him; if he was formerly a holder in due course, even if at the time of
payment he already had notice of the defects of title, he can enforce his
rights against any of the prior parties free from defenses.

E. RENUNCIATION BY HOLDER: Holder may expressly renounce his rights

against any party to the instrument before, at, or after its maturity. (Sec.
122).

1. An absolute and unconditional renunciation of his rights against the

principal debtor made at or after the maturity of the instrument discharges
the instrument. (Sec. 122).

2. A renunciation does not affect the rights of a holder in due course without
notice. (Sec. 122).
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3. A renunciation must be in writing, except when the instrument is delivered

up to the person primarily liable thereon. (Sec. 122).

F. UNINTENTIONAL CANCELLATION: A cancellation made unintentionally,

or under a mistake or without the authority of the holder, is inoperative.
(Sec. 123).

1. 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. (Sec. 123).