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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
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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 BOE
2 parties: maker and payee 3 parties: drawer, payee,
drawee/acceptor
Promise to pay Order to pay
Maker is primarily liable Drawee/acceptor is primarily
liable
Secondarily liable: indorsers Secondary liable: drawer,
and persons negotiating by indorsers and persons
mere delivery negotiating by mere delivery
Maker is liable primarily and NO Drawers liability is secondary
conditions precedent is required and attaches ONLY upon
compliance with conditions
precedent:
a) Presentment
b) Dishonor
c) Proceedings (for dishonoring)

No need to present for Needs to be presented 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
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
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BOE
Drawee may be any person
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
Check
Always drawn upon a bank
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
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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.

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.
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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

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
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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) 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.
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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 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
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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
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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 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.
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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)

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
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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 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.]
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(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

complete until endorsed by maker.]

(d) Drawer as payee: this authorizes the drawee to pay

himself/drawer.

[Check]

Pay to B or order P500.

(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:

City Treasurer of Baguio City

By:__________
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(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).
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(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)

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.
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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.

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.
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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.

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.
 19

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:

 20

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).
 21

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.

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.
 22

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.

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.
 23

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 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:
 24

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.
 25

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
 26

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.

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);

 27

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, 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);

 28

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
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
 29

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.
 30

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.
 31

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

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
 32

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 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.
 33

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.

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
 34

(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.

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.
 35

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
 36

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]

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.
 37

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 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
 38

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.

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
 39

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
 40

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 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
 41

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:

(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.
 42

(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.

(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.
 43

(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
 44

alike innocent of forgery can be traced

to 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)
 45

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.

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.
 46

(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.

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:

 47

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.

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
 48

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.
 49

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 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
 50

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 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)
 51

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 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
 52

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.

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.
 53

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
 54

if endorsed specially, they retain their character as bearer

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)
 55

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:

(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
 56

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:

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.
 57

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

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
 58

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)

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)
 59

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

 60

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)

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
 61

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

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
 62

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
(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
 63

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);

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);
 64

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
 65

time is to begin to run, and by including the date of payment.

(Sec. 86).

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.
 66

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 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
 67

(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).

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.
 68

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).

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
 69

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;
 70

(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;

(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.
 71

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
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)
 72

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.

(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.
 73

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).
 74

2. A renunciation does not affect the rights of a holder in due

course without notice. (Sec. 122).

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).