1

 NEGOTIABLE INSTRUMENT (NI)-Atong the Pogi

A written contract for the payment of money which complies with the requirements of Sec. 1 of
the Negotiable Instruments Law (NIL), which by its form and on its face, is intended as a
substitute for money and passes from hand to hand as money, so as to give the holder in due
course (HDC) the right to hold the instrument free from personal defenses available to prior
parties (Reviewer on Commercial Law, Jose R. Sundiang and Timoteo B. Aquino, 2006ed).

Requisites: (WU-POA)
1. Must be in Writing and signed by the maker or drawer;
2. Must contain an Unconditional promise or order to pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or determinable future time;
4. Must be payable to Order or to bearer; and
5. When the instrument is Addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty (Sec. 1, NIL).

Functions:
1. It operates as a substitute of money.
2. It is a means of creating and transferring credit.
3. It facilitates the sale of goods.
4. It increases the purchasing medium in circulation. (Reviewer on Commercial Law, Jose R.
Sundiang and Timoteo B. Aquino, 2006ed)

Note: A NI although intended to be a substitute for money, is NOT legal tender, hence, delivery
of instrument does not operate as payment.

 EFFECTS OF CERTAIN DEFENSES

A. Minority
Negotiation by a minor passes title to the instrument (Sec. 22). Furthermore, under secs. 60,
61 and 62, the maker, drawer and acceptor, by making, drawing and accepting the
instrument, admits the capacity of the payee to indorse. But the minor is not liable and the
defense is personal to him. Thus, other parties who are capacitated cannot invoke such
defense.

Note: However, the minor shall be liable under the following exceptions: (1) the minor
actively misrepresents his age and it appears that he is physically of such age (estoppel); (2)
the minor kept the fruits or benefits; and (3) the minor spent the money in good faith (Art.
1427, NCC).

B. Fraud
1. Fraud in Factum (Real Defense)
In case of FRAUD IN FACTUM, the person who signs the instrument lacks knowledge of
the character or essential terms of the instrument. But the defense is not available if the
party involved had reasonable opportunity to obtain such knowledge.

An essential element is that the maker or indorser must have exercised ordinary
diligence and in no manner contributed negligently to the imposition.

2. Fraud in Inducement (Personal Defense)

The person who signs the instrument intends to sign the same as a NI but was induced
by fraud.

C. Incomplete but Delivered NI (Sec. 14, NIL)

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 2

a. Prima Facie Authority to Complete the Instrument –

Requisites:
i. Want of a material particular in the instrument;
Note: Material particular includes the matters stated in Sec. 125 of the NIL.
ii. Possession thereof by a person;
iii. That such person had authority to fill up the bank:
(1) Strictly in accordance with the authority given; and
(2) Within a reasonable time

b. Prima Facie Authority to Fill It Up For Any Amount –

Requisites:
i.Signature on a blank paper;
ii. Person signing in blank delivers it to another;
iii. Delivery was for the purpose of converting it into a negotiable instrument.

c. If the holder of the instrument, after it was filled up, is a holder in due course, the
holder may enforce the instrument as if it has been filled up strictly in accordance with
the authority given and within a reasonable time (Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents, Aquino, 2006 ed).

D. Incomplete and Undelivered NI (Sec. 15, NIL)

Two steps in the execution of a negotiable instrument:
1. The act of writing the instrument completely and in accordance with Sec. 1; and
2. The delivery of the instrument with the intention of giving effect thereto.

Note: If completed and negotiated without authority, not a valid contract against a person
who has signed before delivery of the contract even in the hands of holders in due course
but subsequent indorsers are liable. This is a REAL defense which belongs to the drawer (or
parties, if any, prior to the delivery of the instrument to the payee) against “any holder”.

Reason: The law does not make any distinction between a holder in due course and one
who is not a holder in due course.

Where an INCOMPLETE and UNDELIVERED instrument is in the hands of a holder in due

course, there is a PRIMA FACIE presumption of delivery which the maker may rebut by
proof of non-delivery.

E. Complete but Undelivered NI (Sec. 16)

Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto.

F. Material Alteration
It is a “partial” real defense because a holder in due course can enforce it according to its
original tenor.

An alteration is said to be material if it alters the effect of the instrument. In other words, a
material alteration is one which changes the items which are required to be stated under
Sec. 1 of the Negotiable Instruments Law (PNB v. CA GR L-26001, October 29, 1968).

Note: The alteration mentioned herein is under sec. 124 must be distinguished from sec. 23.
The intent to defraud distinguishes forgery from innocent alterations and spoliation. Sec. 23
applies only to forged signatures or signatures made without the authority of the person

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 3

whose signature it purports to be. Consequently, if the forgery consists of alteration in the
amount, sec. 124 applies.(Agbayani, pg. 198)

Changes in the following constitute material alterations: (Sec. 125, NIL)

1. Date;
2. Sum payable, either for principal or interest;
3. Time or place of payment;
4. Number or relations of the parties;
5. Medium or currency in which payment is to be made;
6. That which adds a place of payment where no place of payment is specified; and
7. Any other change or addition which alters the effect of the instrument in any respect.

A serial number is an item which is not an essential requisite for negotiability under Sec. 1,
NIL, and which does not affect the rights of the parties, hence its alteration is not material
(PNB v. CA, 256 SCRA 491 cited in; International Corporate Bank v. CA & PNB, GR No.
129910, September 5, 2006).

In his work, “Pandect of Commercial Law and Jurisprudence," Justice Vitug opines that "an
innocent alteration (generally, changes on items other than those required to be stated
under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only according to its original tenor.

Also, change of name of the payee is NOT considered as a material alteration. This time,
however, it can’t be enforced according to its original tenor.

Effects:
a. Alteration by a party – Avoids the instrument EXCEPT as against the party who (1) made,
(2) authorized, or (3) assented to the alteration and (4) subsequent indorsers. However,
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.

Note: Since no distinction is made, it does not matter whether it is favorable or

unfavorable to the party making the alteration. The intent of the law is to preserve the
integrity of the negotiable instruments.

b. Alteration by a stranger (spoliation)- the effect is the same as where the alteration is
made by a party in which case a holder in due course can recover on the original tenor of
the instrument (Sec. 124).

G. Prescription
Refers to extinctive prescription and may be raised even against a holder in due course.
Under the Civil Code, the prescriptive period of an action based on a written contract is 10
years from accrual of cause of action.

In case of checks, the action of the depositor against his drawee bank commences to run
from the time he is given notice of payment (Philippine Commercial International Bank v.
CA, GR No. 121413, January 29, 2001).

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 4

The failure of the payee to encash a check for more than 10 years “undoubtedly resulted in
the impairment of the check through his unreasonable and unexplained delay.” (Myron C.
Papa v. A. U. Valencia et. al., GR No. 105188, January 23, 1998).

Note: This is contrary to NAMARCO vs F.U.N.D. (GR No. L-22578, January 31, 1973). In this
case, the SC held that the delivery of promissory notes payable to order, or bills of exchange
or drafts or other mercantile document shall produce the effect of payment only when
realized, or when by the fault of the creditor, the privileges inherent in their negotiable
character have been impaired. The clause of Article 1249 is applicable ONLY to instruments
executed by THIRD PERSONS and delivered by the debtor to the creditor, and does NOT
apply to instruments executed by the debtor himself and delivered to the creditor.

 HOLDER IN DUE COURSE (HDC): A holder who has taken the instrument under the
following conditions: (COVI)
1. That the instrument is complete and regular upon its face;

An instrument is incomplete when it is wanting in any material particular proper to be

inserted in a negotiable instrument (Sec. 14). BUT if the omission is not an important
particular, such omission will not deprive the holder the right of a holder in due course.

2. That he has become a holder of it before it was overdue and without notice that it
had been previously dishonored, if such were the case;

A holder who takes an overdue instrument is put on inquiry although he is not actually
aware of any existing defense of a prior party. A person taking an overdue instrument
should certainly question why the instrument is still in circulation even if it is overdue
(Notes and Cases on Banks, Negotiable Instruments and Other Commercial Documents,
Timoteo Aquino, 2006ed).

On the date of maturity, the instrument is not overdue and a holder who acquires the
instrument on that date is a holder in due course because the principal debtor has the
whole day to pay.

Installment Instruments
A purchaser after maturity of the first installment with notice that it was unpaid takes the
paper as overdue paper. Consequently, a purchaser of an installment note after an
installment is overdue may be a holder in due course as to the balance if he has NO notice
of the failure to pay the first installment.

Interest
Where by the terms of the instrument, the principal was to become due upon the default of
the payment of interest, one who takes the instrument upon which the interest is overdue
is NOT a holder in due course.
Demand Instruments (Sec. 53, NIL)
Where an instrument payable on demand is negotiated on an unreasonable length of time
after its issue, the holder is NOT deemed a holder in due course.

In determining what is unreasonable length of time regard must be given to the NATURE of
the instrument, the USAGE OF TRADE OR BUSINESS with respect to such instruments, and
the FACTS of the particular case (Sec. 193, NIL).

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 5

3. That he has taken it in good faith and for value;

Although good faith on the part of the holder is presumed, such presumption is destroyed if
the payee or the indorsee acquired possession of the instrument under circumstances that
should have put him to inquiry as to the title of the holder who negotiated the instrument.
The burden now is on the part of the holder to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith (De Ocampo vs. Gatchalian, et al.,
GR No. L-15126, November 30, 1961).

“Good faith” refers to the indorsee or transferee, not to the indorser or transferor of the
instrument.

Consideration for the Issuance and Subsequent Transfer

Every NI is deemed prima facie to have been issued for a valuable consideration. Every person
whose signature appears thereon is presumed to have become a party thereto for value (Sec.
24, NIL).

Consideration is not relevant to the “negotiability” of an instrument but is significant on the

question of whether or not one is a “holder in due course”.

Value
Any consideration sufficient to support a simple contract (Sec. 25, NIL).

It includes:
1. An antecedent or pre-existing debt;
2. Value previously given (Sec. 25, NIL);
3. Lien arising from contract or by operation of law but the holder is deemed a holder for
value to the extent of his lien (Sec. 27, NIL).

4. That at the time of its negotiation to him, he has had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it (Sec. 52, NIL).

“Notice” to holder covers only situations where the holder had actual or chargeable
knowledge of the infirmity or defect or must have acted in bad faith (Sec.56, NIL).

”Defects” in the title results from the acquisition or the negotiation of the instrument.

In the acquisition thereof, the title of a person becomes defective when he obtains the
instrument or any signature thereto by (1) fraud; (2) force, duress or fear; (3) other unlawful
means; (4) for an illegal consideration.

In the negotiation thereof, the title becomes defective when he negotiates it in (5) breach
of faith; or under (6) such circumstances that amount to fraud (Sec. 55, NIL).

“Infirmities” must include things that are wrong with the instrument itself as distinguished
from those things that are lacking in the contracts on the instruments. Such infirmities are
to be found in situations arising under Sec. 13, 14, 15, 16, 21 and 23 of the NIL.

Effect of acquiring notice of infirmity before payment of full amount of consideration:

Transferee will be deemed a holder in due course only to the extent of the amount therefor
paid by him (Sec. 54, NIL).

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 6

 WHO IS DEEMED A HOLDER IN DUE COURSE

Every holder of a negotiable instrument is deemed prima facie a holder in due course.
However, this presumption arises only in favor of a person who is a holder as defined in Sec.
191 of the NIL.

BUT when it is shown that the title of any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or some person under whom he claims
acquired the title as holder in due course. (Sec.59,NIL)

The PAYEE may be a holder in due course because Section 191 defines a holder as the payee or
indorsee of a bill or note who is in possession of it or the bearer thereof. Such payee may
either have acquired the note from another holder or he did not deal directly with the maker
thereof.

So if the payee satisfies the requirements of Section 52, that payee can be a HDC (Cely Yang v.
Court of Appeals, GR No. 138074, August 15, 2003).

Rights of a HDC (HERS)

1. May sue on the instrument in his own name;

Note: Even when he holds the instrument merely in a representative capacity; such as a
holder for collection only or a pledgee of a note.

2. May receive payment and if payment is in due course, the instrument is discharged;
3. Holds the instrument free from any defect of title of prior parties and free from personal
defenses available to parties among themselves;
4. May enforce payment of the instrument for the full amount thereof against all parties liable
thereon (Secs. 51 and 57, NIL).

Exceptions:
a. when the holder is a holder for value only to the extent of his lien - HDC only to that
extent (Sec. 27, NIL);
b. when the holder acquired notice of any infirmity in the instrument or defect in the title
of the person negotiating the same before he has paid the full amount agreed to be paid
therefor - HDC only to the extent of the amount paid (Sec.54, NIL);
c. in case of alteration as to amount - HDC may enforce payment only according to its
original tenor (Sec. 124, NIL).

 HOLDER NOT IN DUE COURSE

One who became a holder of an instrument without any, some or all of the requisites under
Sec. 52 of the NIL.

General Rule: If a holder is not a holder in due course, he is subject to the same defenses as if it
were non-negotiable. In other words, a holder not in due course is subject to both real and
personal defenses available to parties primarily or secondarily liable.

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 7

Exception (Shelter Rule): If he derives his title through a holder in due course and if he is not a
party to any fraud or illegality affecting the instrument, he has all the rights of such former
holder in respect of all parties prior to the latter. (Sec.58,NIL)
Exception to the Exception: The rule under Sec. 58 does not apply if the holder was a previous
holder NOT in due course who had subsequently repurchase the instrument either personally
or through an agent.

Reason: a holder who is not a holder in due course cannot improve his situation by reacquiring
the instrument (Fossum v. Fernandez GR No. L-20080 March 27, 1923).

Rights of a Holder NOT In Due Course: (HARS)

1. He may sue on the instrument in his own name;
2. He may receive payment and if the payment is in due course, the instrument is discharged;
3. He holds the instrument subject to the same defenses as if it were non-negotiable.

Note: Thus, prior parties can avail against him any defense available among these prior
parties and prevent the said holder from collecting in whole or in part the amount stated in
the instrument.

4. If he derives his title through a holder in due course and if he is not a party to any fraud or
illegality affecting the instrument, he has all the rights of such former holder in respect of all
parties prior to the latter. (Shelter Rule)

 ACCOMODATION

A legal arrangement under which a person called the accommodation party, lends his name and
credit to another called the accommodated party, without any consideration.

Accommodation Party (AP)

Requisites:
1. He must be a party to the instrument, signing as maker, drawer, acceptor, or indorser;
2. He must not receive value therefor; and
3. He must sign for the purpose of lending his name or credit (Sec. 29, NIL).

Note: “without receiving value therefor,” means without receiving value by virtue of the
instrument (Clark v. Sellner, GR 16477, November 22, 1921).

Relation between accommodation party and accommodated party

When the accommodation party makes payment to the holder of the note, it has the right to
sue the accommodated party for reimbursement since the relation between them is in effect
that of principal and surety, the accommodation party being the surety; the accommodation
party generally regarded as a surety for the party accommodated. However, the
accommodated party cannot recover from the accommodation party. As between them,
absence of consideration is a defense.

Liability of an Accommodation Party

Liable on the instrument to a holder for value notwithstanding such holder, at the time of the
taking of the instrument, knew him to be only an accommodation party. Hence, as regards, an
accommodation party, the 4th condition, i.e. lack of notice of infirmity in the instrument or

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 8

defect in the title of the persons negotiating it, has NO application (Stelco Marketing Corp. v.
Court of Appeals, GR No. 96160, June 17, 1992).

Note: The corporation is not liable of it acts as an accommodation party. This is because the
issue or indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who has taken the instrument with
knowledge of the accommodation nature thereof cannot recover against a corporation where it
is only an accommodation party (Crisologo- Jose v. CA, GR No. 80599, September 15, 1989).
Liability of an Accommodated Party
When the accommodation party make payment to the holder of the notes, they have the right
to sue the accommodated party for reimbursement since the relation between them is in effect
of a principal and sureties, the accommodation parties being the sureties.

Specific Rights of Accommodation Party:

1. Right to revoke accommodation;

2. Right to reimbursement from an accommodated party after making the payment (Agro
Conglomerates Inc. v. CA, GR No. 117660, December 18, 2000);
3. Right to contribution from other solidary accommodation parties, if any.

An accommodation party may demand contribution from his co-accommodation party

without first directing his action against the principal debtor PROVIDED:

a. He made the payment by virtue of judicial demand; or

b. The principal debtor is insolvent (Sadaya v. Sevilla, GR No. L-17845, April 27, 1967).

 PAYMENT IN DUE COURSE: 1.made at or after the maturity of the instrument, 2. To the
holder thereof, 3. In good faith and without notice that his title is defective
o On the date of its maturity, the instrument is not overdue, and a holder who
acquires the instrument on that date is a holder in due course (provided that the
other conditions are present) because the principal debtor has the whole day to
pay.
o Good faith means without dishonest purpose (honesty)
 A is a holder of a PN of 100k, but he got a bargain or discount of the PN for only 80k, is A a
HIDC as to the entire amount of 100k? Yes. A is still a HIDC as to the entire amount even if
there was a discount or bargain.
 Infirmities vs. Defects
o Infirmities – include things which are wrong with the instrument itself such as:
 Sec. 13, Wrong insertion of the date, Sec. 14, filling up of a blank
instrument not strictly in acc. with the authority given., sec. 15, filling up
and negotiating w/o authority an incomplete and undelivered
instrument., sec. 16, lack of valid and intentional delivery of mech.
Complete ins., sec. 23, for forgery, sec. 124 &125, Material alteration
o Defects – those that are lacking in the contracts on the instrument such as:
 Acquisition of the instrument by fraud, force, duress, unlawful means,
illegal consideration, etc.,
 If the purpose for delivering is for safe keeping apply sec. 16 – complete but undelivered ins.

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 9

 Real defenses those that attach to the instrument itself and can be set up against the whole
world while personal defenses are those which grows out of the agreement or conduct of a
particular person in regard to the instrument which renders it inequitable for him, they
cannot be set up against HIDC, they are available only against that person or a subsequent
holder who stands in privity with him.
o Incapacity is a real defense available only to incapacitated person, it is a SOLO
REAL DEFENSE
o Material Alteration is a special real defense because it does not completely
defeat the right of HIDC to collect, HIDC can still enforce the instrument
according to its original tenor. HIDC can collect as to the original tenor because
there is in fact an instrument but it was only altered, unlike if it is forgery or
undelivered & incomplete instrument no right to collect even if HIDC because
there was no instrument existing in reality.
 When are you going to present for payment if the Instrument payable on demand – it is
by human nature that you collect payment as soon as possible, you have to protect your
interest, collect immediately, - as to when you present for payment: immediately
 SUNDAY NOTES: made or drawn on Sundays.- it is not a defense against a HIDC where
nothing on the face of the instrument to indicate that fact.
 Indorser cannot set up the defense the forgery of the signature of the maker, drawer, or
indorsers prior or subsequent to him because of his warranties.
 SHELTER RULE (SEC. 58):Iin the hands of any holder other than a HIDC, a nego. ins. Is
subject to the same defenses as if it were non-negotiable. But a holder who derives his title
through a HIDC, and who is not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former in respect of all parties prior to the latter.
o In shelter rule, the law protects the right of the HIDC not the holder who derives
his right from HIDC, because without this rule the right of HIDC will be defeated
because eventually the holder will go after the HIDC.
 Even if you are a HIDC but you did not give consideration you cannot recover. (this is one of
the question in the midterm exam- about the donation to the orphanage.)
 Will the drawer’s liability as soon as the instrument is dishonored for non-payment
attaches? Yes. Provided that a notice of dishonor is send to him, for it is a settled rule of law
that without notice of dishonor no liability.
 If the acceptor accepts by qualified acceptance you can treat it as having been dishonored
by non-acceptance and you must send notice of dishonor to the drawer if you want to
collect the original tenor of the instrument.
 Liability of indorser and assignor compared. Qualified indorser- limited liability
o Like qualified indorser or person negotiating by delivery, but not like the general
indorser, an assignor is not responsible for the insolvency of the principal debtor
and will not be liable to the assignee if for that reason the assignee can not
collect from the principal debtor.
o On the other hand, unlike the qualified indorser, the assignor warrants the
existence and legality of the credit assigned and will therefore, be liable to the
assignee in case the assignee can not collect from the principal debtor where the
credit assigned is illegal or non-existent.

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 10

 Presentment- The production of a BE to the drawee for his acceptance, or to the drawee or
acceptor for payment or the production of a PN to the party liable for the payment of the
same (Sec. 70, NIL).
 Presentment for Payment Consists of:
o Personal demand for payment at the proper place; and
o Readiness to exhibit the instrument, if required, and
o To receive payment and to surrender the instrument if the debtor is willing to
pay.
Requisites:
o Made by the holder or any person authorized to receive payment on his behalf;
o At a reasonable hour on a business day;
o At a proper place;
o To the person primarily liable, or if he is absent or inaccessible, to any person
found at the place where the presentment is made (Sec. 72, NIL).

 Mere informal talk not accompanied by presentment is not sufficient. Demand on phone is
also not sufficient unless maker waives exhibition (implied or express) (Gilpin vs. Savage,
201 NY 167, 94 N.E. 656).
 If you will not present it for payment to party primarily liable you will not know if they will
pay it or not, if is not paid only then you can sent a notice of dishonor to party secondarily
liable in order to charge them. You cannot charge the party secondarily liable unless you
present it for payment.
 General Rule: Presentment for payment is NOT necessary in order to charge the person
primarily liable (Maker/Acceptor) but it is necessary in order to charge the drawer and
indorser, except as otherwise provided.
 When not Required:
 In order to charge the drawer - Where he has no right to expect or
require that the drawee or acceptor will pay the instrument (Sec. 79)
such as in case of a check where payment has been stopped;
 In order to charge an indorser- When the instrument was made or
accepted for his accommodation and he has no reason to expect that the
instrument will be paid if presented (Sec. 80, NIL). (ACCOMODATED
INDORSER the PAYEE in an Order instrument)
 Note: Only the drawer and the indorser referred to in these sections are not discharged but
all other parties secondarily liable are relieved of their liability.
 When to present for payment? (sec. 71)
o if payable on a fixed period – present it on the date of maturity, presentment
before maturity is not proper
o if PN payable on demand – present it w/n reasonable time after issue
o if BE payable on demand – present it for payment w/n reasonable time after last
negotiation (last transfer for value)
 Requisite of a sufficient presentment? It must be made-
o By the holder, or by some persons authorized to receive payment on his behalf;
o At a reasonable hour on a business day;
o At a proper place
o To the person primarily liable (MAKER if PN or ACCEPTOR if BE) on the
instrument, or if he is absent or inaccessible, to any person found at the place
where the presentment is made.

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 11

 If you will not know if there is a proper dishonor, you cannot send a proper notice of
dishonor to charge party secondarily liable. No proper presentment there can be no proper
notice of dishonor.
 Q: If you have the picture of the instrument or the photocopy of the instrument which is
almost completely the same replica of the instrument and you exhibited the picture or
copy of the instrument, will this comply with the exhibition of the instrument? No. You
need to present the original for purposes not only to determine the genuineness of the
instrument but for purposes of surrendering it in order for the other party to reclaim
possession upon payment.
 Sec. 79 (when presentment not required to charge the drawer)
o example:
Pay to the order of B P100K - C – D – E-holder

(sgd) A

To: X bank

A withdraw his funds, E need not present for payment to X to charge A because
A has a constructive notice/knowledge of dishonor, but E must present it to X in order to
charge the party secondarily liable, bcoz as to B,C&D the rule of notice of dishonor will
apply and still necessary to charge them.

 Sec. 80(when presentment not required to charge the indorser)

o example:
I promise to pay to the order of B P100K on March 15, 2015. - C- D - E - holder

( Sgd)A

If A signed for the accommodation of B, E, the holder need not present the instrument
to A in order to charge B, because B is in truth and in fact is the party primarily liable, he is the
principal debtor and as such he is already charged even if no present is made (he is the
accommodated indorser (payee in an order instrument) he has no reason to expect that the
note will be paid upon presentment ). But E, the holder needs to present the instrument to A in
order to charge C&D.

But sec. 80 will not apply if the party accommodated is not the first indorser(the
accommodated payee).

 Q: When delay for presentment for payment results to excuse for presentment for
payment? When the reason for the delay never ceased and when the presentment is
waived.
 Excuse vs. delay, delay in presentment for payment it is only the delay in presentment that
is excused, if the reason for the delay ceased you must present the instrument for payment.
When presentment is excused you need not have to present the instrument at all.
 Time of Maturity Time of Maturity- Every negotiable instrument is payable at the time
fixed therein without grace.
o When the day of maturity falls upon Sunday or a holiday- Instruments falling
due on Saturday(when it is payable on Saturday) or becoming payable on
Saturday(if date payable is Friday but it is holiday, the bill become payable on
Sat) are to be presented for payment on the next succeeding business day

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 12

Exception: The instruments which is payable on demand may, at the option of the holder, be
presented for payment before twelve o'clock noon on a Saturday when that entire day is not a
holiday (Sec. 85, NIL).

 You cannot present the instrument on Saturday except if it is payable on demand it can
be presented on Saturday but not after 12 noon, except if that Saturday is a holiday you
have to wait for the next business day. REASON: if you present it on Saturday it is an
improper presentment for payment and as such improper notice of dishonor, it will
discharge parties secondarily liable.
 Q: when can you be said to hold an instrument which is already dishonored by non-
payment even when the presentment for payment is excused? When you are holding an
instrument which is overdue and unpaid. (Sec. 83) to charge party secondary liable you have
to send him notice of dishonor.
 NB: Notice of Dishonor must be given to the DRAWER and to each INDORSER in order to
charged them, no notice of dishonor it will discharge them. (sec. 89)

 When Notice of Dishonor is not Required to be Given to –

Drawer Indorser
(Sec. 114) (Sec. 115)
Drawer and drawee are the same Drawee is a fictitious person or does not have
the capacity to contract, and indorser was
aware of that fact at the time he indorsed the
instrument
Drawee is a fictitious person or not having the Indorser is the person to whom the
capacity to contract instrument is presented for payment

Drawer is the person to whom the instrument Instrument was made or accepted for his
is presented for payment accommodation (Sec. 115).

The drawer has no right to expect or require

that the drawee or acceptor will honor the
instrument
Where the drawer has countermanded
payment (Sec. 114).

 NB: While notice of dishonor inures to the benefit of all of them it does not mean that they
are not discharged of their liability it is settled NO NOTICE OF DISHONOR NO LIABILITY, they
can be charged only if they have been sent notice of dishonor.
 Persons primarily liable need not be notified because they are the very ones who dishonor
the instrument.
 Persons secondarily liable after having sent notice of dishonor, they are charged and they
become principal debtors, as to the holder all of them are principal debtors to him. The
holder can sue any one of them not necessarily in the order of their endorsement.
 NB: Where presentment for payment is waived, notice of dishonor is also waived because
they are already charged. If B or C, the indorsers, waived notice of dishonor, that’s the only
time they can be charged without sending them notice of dishonor. But where notice of
dishonor is waived, presentment for payment is not waived. Reason: Bcoz the party
secondarily liable is not yet charge.?

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 13

 The holder cannot charge the party secondarily liable if there is no actual notice of
dishonor, you cannot be made liable if you have no actual notice of dishonor.

 Section 119. DISCHARGE OF NEGO. INSTRUMENTS.

A release of all parties, whether primary or secondary, from the obligations arising thereunder.
It renders the instrument without force and effect and, consequently, it can no longer be
negotiated (The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000
ed).

Instances:

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

2. Payment by accommodated party;
3. Intentional cancellation by the holder;
4. By any act which will discharge a simple contract for the payment of money;
5. When the principal debtor becomes the holder of the instrument at or after maturity in his
own right (Sec. 119).

A. Payment in Due Course

Requisites:
1. Payment must be made at or after maturity;
2. Payment must be made to the holder;
3. Payment must be made in good faith and without notice that the holder’s title is
defective (Sec. 88, NIL).

By whom made:
1. By maker or acceptor; or (selected accommodation party)
2. Surety, if a primary party; or
3. By an agent on behalf of the principal

B. Payment by Accommodated Party

Reason: He is the one ultimately liable on the instrument

C. Cancellation
It includes the act of tearing, erasing, obliterating, or burning. It is not limited to writing of
the word “cancelled”, or “paid”, or drawing of criss-cross lines across the instrument (Sec.
123, NIL). It may be made by any other means by which the intention to cancel the
instrument may be evident.

Intentional Cancellation
Requisites:
1. Intentionally done;
2. By the holder thereof; and
3. By writing the word “cancelled” or “paid” on the face of the instrument; or if the
instrument is torn up, burned, mutilated or destroyed.

Effect of unintentional cancellation, or under a mistake or without the authority of

holder: The cancellation is inoperative but party who alleges that cancellation was made
unintentionally, or under a mistake or without authority has the burden of proof (Sec.123,
NIL).

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 14

D. By any other Act which Discharges the Instrument

The Law on Obligations and Contracts will apply. Article 1231 provides how obligations are
extinguished (by payment or performance, loss of thing due, condonation or remission of
debts, confusion or merger of the rights of the creditor and debtor, compensation, novation,
annullment, rescission, fulfillment of resolutory condition and prescription). However,
although such ways discharge the instrument as between immediate parties, they will not
do so in the hands of a holder in due course.

Note: The instrument must be surrendered to the payor. If the instrument is not
surrendered, it may fall in the hands of a holder in due course who may have the right to
enforce the instrument despite the previous payment.

Discharge of Persons Secondarily Liable: (DIVARA)

1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
 The release of the principal debtor must be by the act of the holder and not by
operation of law.

4. By a valid tender or payment made by a prior party;

 Tender of Payment means the act by which one produces and offers to a person
holding a claim against or demand against him the amount of money which he
considers and admits to be due, in satisfaction of such claim or demand without any
stipulation or condition.

5. By the release of the principal debtor, unless the holder’s right of recourse against the
party secondarily liable is expressly reserved;
6. By any agreement binding upon the holder to extend the time of payment or to
postpone the holder’s right to enforce the instrument (Sec. 120, NIL).
Instances when the agreement to extend the time of payment does NOT discharge a party
secondarily liable:
1. where the extension of time is consented to by such party;
2. where the holder expressly reserves his right of recourse against such party.

Effects of Payment by Parties Secondarily Liable:

1. Instrument is not discharged.
2. It only cancels his own liability and that of the parties subsequent to him.
3. He may strike out his own and all subsequent indorsements and again negotiate the
instrument except (a) where it is payable to the order of a third person and has 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, NIL).

Renunciation (Sec. 122, NIL)

The act of surrendering a right or claim without recompense, but it can be applied with equal
propriety to the relinquishing of a demand upon an agreement supported by a consideration (1
Agbayani 1992 ed).

It must be with written declaration to that effect and if oral, must be accompanied by surrender
of the instrument to the person primarily liable thereon.

Requisites:
1. Absolute and unconditional;

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 15

2. Made in favor of the person primarily liable; and

3. Made at or after maturity

Effects:
1. A renunciation in favor of a secondary party may be made by the holder before, at or after
maturity of the instrument. The effect is to discharge only such secondary party and all
parties subsequent to him but the instrument itself remain in force.
2. A renunciation in favor of the principal debtor may be effected at or after maturity. The
effect is to discharge the instrument and all parties thereto provided the renunciation is
made unconditionally and absolutely.

 In either case, renunciation does not affect the rights of a holder in due course without
notice.

 PAYMENT in DUE COURSE BY PRINCIPAL DEBTOR

 Q:Will the payment made by the party primarily liable to the holder discharged the
instrument? No. It must be payment in due course made by Principal Debtor. NB:
payment in due course dapat, kasi pag payment lang pwedeng mgakaroon ng reacquisition
of the instrument.
 Q: Is it possible that the payment in due course made by the primarily liable will not
discharge the instrument? Yes. When he is not a principal debtor as in the case of
accommodation party, the accommodated payee is the principal debtor not the
accommodation maker. While he is a party primarily liable he is not a principal debtor. It
must be the PRINCIPAL DEBTOR not a party primarily liable.
 Q: may a party primarily liable discharge the instrument? Yes if he is also the principal
debtor and he paid it in due course.
 In what instance, when the discharge of a party secondarily liable also discharges the
instrument? When the accommodated party is discharged because even if he is a party
secondarily liable he is still the principal debtor.
 Q; On march 15 the BE is presented for acceptance, mar. 16 dishonor by non-acceptance,
on mar. 20 acceptance on a separate paper, mar. 30 presentment for payment, mar. 31
dishonor by non-payment. Should the holder send a notice of dishonor by non-payment
to the parties secondarily liable, does not notice of dishonor by non-acceptance on mar.
16 have the effect of charging parties secondarily liable? Yes. Holder should send notice of
dishonor by non-payment to charge the parties secondarily liable. There was an acceptance,
the previous notice of dishonor by non-acceptance is moot and academic because the
subsequent acceptance was made before the instrument becomes overdue. The
acceptance made on separate paper superseded the previous notice of dishonor by non-
acceptance.
 If you want a stranger to be an acceptor for honor, you have to send notice of dishonor to
parties secondarily liable and you have to protest also the bill.
 If you don’t want a stranger to be an acceptor for honor just send notice of dishonor to
parties secondarily liable.
 Q: can you refuse not to accept the stranger as acceptor for honor? Yes. Because the law
requires consent by the holder.
 NB: in local bill if you protest you are opening the bill for payor for honor. In foreign bills
regardless of form all foreign bill must be protested. Local bills only in instances provided
by law.

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 16

 NB: The only time you go to a respectable resident at the presence of two credible
witnesses to make a protest is when no notary public is available.
 Is a crossed check negotiable instrument? Yes. It can be negotiated because if not it
defeats section 1 of NIL. It can only indorse once- it pertains to the last indorsement to the
bank which is suppose to make collection to the drawee bank.

 TYPES OF CHECK

1. Cashier’s Check
One drawn by the cashier of a bank, in the name of the bank against the bank itself payable
to a third person. It is a primary obligation of the issuing bank and accepted in advance
upon issuance (Tan v. CA, GR No. 108555, December 20, 1994).

2. Manager’s Check
A check drawn by the manager of a bank in the name of the bank itself payable to a third
person. It is similar to the cashier’s check as to the effect and use.

Note: In issuing a manager’s check, the bank assumed the liabilities of an acceptor under
Section 62 of the Negotiable Instruments Law (Equitable PCI Bank v. Rowena Ong, GR No.
156207, September 15, 2006).

3. Memorandum Check
A check given by a borrower to a lender for the amount of a short loan, with the
understanding that it is not to be presented at the bank, but will be redeemed by the
maker himself when the loan falls due and which understanding is evidenced by writing the
word “memorandum”, “memo” or “mem” on the check.

4. Certified Check
An agreement whereby the bank against whom a check is drawn undertakes to pay it at
any future time when presented for payment (Sec. 187, NIL).

5. Traveler’s Check
It is one upon which the holder’s signature must appear twice; one to be affixed by him at
the time it is issued and the second, for counter-signature, to be affixed by him in the
presence of the payee before it is paid, otherwise, it is incomplete (Commercial Law
Review, Villanueva, 2004ed).

 Certification of Checks
An agreement whereby the bank against whom a check is drawn, undertakes to pay it at any
future time when presented for payment

Effects:
1. Equivalent to acceptance (Sec. 187, NIL) and is the operative act that makes banks liable;
2. Assignment of the funds of the drawer in the hands of the drawee (Sec. 189, NIL);
3. If obtained by the holder, discharges the persons secondarily liable thereon (Sec. 188, NIL).

 Where the holder of a check procures it to be accepted or certified, the drawer and all
indorsers are discharged from liability thereon (Sec. 186, NIL).

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 17

 Refusal of drawee bank to pay and certify –

General Rule: If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections 185 and 189 of the Negotiable Instruments
Law, sue the bank. The payee should instead sue the drawer who might in turn sue the bank.

Reason: No privity of contract exists between the drawee-bank and the payee (Sincere
Villanueva v. Marlyn Nite, GR No. 148211, July 25, 2006).

Exception: If the drawer himself ordered the bank to pay and such drawer has sufficient funds
therein

Crossed Check
A check which in addition to the usual contents of an ordinary check contains also the name of
a certain banker or business entity through whom it must be presented for payment.
Kinds:

1. Crossed Specially - The name of a particular bank or company is written or appears

between the parallel lines in which case the drawee-bank must pay the check only upon
presentment by such bank or company (Chan Wan vs. Tan Kim GR No. L-15380, September
30, 1960) on penalty of being made to pay again by the rightful owner should the first
payment prove to have been erroneous.
2. Crossed Generally - only the words “and Co.” are written between the parallel lines or
when none at all is written at all between said lines.

Effects:
1. It may not be encashed, but may only be deposited with the bank (Associated Bank v. CA,
GR No. 89802, May 7, 1992).
2. It may be negotiated only once to a person who has an account with the bank; and
3. It serves as a warning to the holder that the check has been issued for a definite purpose
(Bataan Cigar v. CA, GR No. 93048, March 3, 1994).

The NIL is silent with respect to crossed checks, although the Code of Commerce makes
reference to such instrument. Nonetheless, this Court has taken judicial cognizance of the
practice that a check with 2 parallel lines in the upper left hand corner means that it could only
be deposited and not converted into cash. The effects of crossing a check thus, relates to the
mode of payment, meaning that the drawer had intended the check for deposit only by the
rightful person, i.e., the payee named therein (Cely Yang v. Court of Appeals, GR No. 138074,
August 15, 2003).

Iron Clad Rule

Prohibits the countermanding of payment of certified checks (Republic of the Philippines v. PNB,
GR No. 16106, December 1, 1961).

Note: The holder must be a holder in due course so that the stop-payment order may not be
successfully invoked against him (Mesina v. IAC, GR No. 70145, November 13, 1986).

Check Kiting

It is the wrongful practice of taking advantage of the float, the time that elapses between the
deposit of the check in one bank and its collection at another.

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 18

Note: In anticipation of the dishonor of the check that was deposited, the conspirators will
replace the original check with another worthless check (Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents, Aquino, 2006ed).

Cases When Bank May Refuse Payment

1. The bank is insolvent;

2. The drawer’s deposit is insufficient or he has no account with the bank or said account had
been closed or garnished;

3. The drawer is insolvent and proper notice is received by the bank;

4. The drawer dies and proper notice is received by the bank;
5. The drawer has countermanded payment;
6. The holder refuses to identify himself;
7. The bank has reason to believe that the check is forgery.

 A bank is under no obligation to make partial payment on a check up to the amount of the
drawer’s funds as where the check is drawn for an amount larger than what the drawer
has on deposit. In case of partial payment, the check holder could not be called upon to
surrender the check and the bank would be without a voucher affording a certain means
of showing payment (Moran v. CA, GR No. 105836, March 1994).

Rules on Forgery
1. Promissory Notes

Order Instrument Bearer Instrument

Maker’s signature forged

a. Maker is not liable because he a. Maker is not liable.

never became a party to the
instrument.

b. Indorsers subsequent to b. Indorsers may be made liable to those persons who obtain title
forgery are liable because of through their indorsements.
their warranties.

c. Party who made the forgery is c. Party who made the forgery is liable.
liable.

Payee’s signature forged

a. Maker and payee not liable. a. Maker is liable.

b. Indorsers subsequent to b. Indorsement is not necessary to title and the maker engages to pay
forgery are liable. holder.

c. Party who made the forgery is c. Party who made the forgery is liable.

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 19

liable.

Indorser’s signature forged

a. Maker, payee and indorser a. Maker is liable. (indorsement is not necessary to title and the maker
whose signature was forged is engages to pay the holder).
not liable..

b. Indorsers subsequent to b. Indorser whose signature was forged not liable.

forgery are liable because of
their warranties.

c. Party who made the forgery is c. Party who made the forgery is liable.
liable.

2. Bills of Exchange
Order Instrument Bearer Instrument

Drawer’s signature forged

a. Drawer is not liable because he was never a party to the a. Drawer is not liable.
instrument.

b. Drawee is liable if it paid (no recourse to drawer) because he b. Drawee is liable if it paid.
admitted the genuiness of the drawer’s signature. Drawee cannot recover from the
collecting bank because it is
Drawee cannot recover from the collecting bank because there is
bound to know the drawer’s
no privity between the collecting bank and the drawer. The latter
does not give any warranty regarding the signature of the drawer signature since the latter is its
(Associated Bank v. CA, 208 SCRA 465). depositor.

The drawee may recover from

the drawer when the latter’s
negligence is the proximate
cause of the loss or contributed
thereto (Gempesaw v. CA, 218
SCRA 682).

c. Indorsers subsequent to forgery liable (such as collecting bank or

last endorser).

d. Party who made the forgery is liable c. Party who made the forgery is
liable.

Payee’s signature forged

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 

 20

a. Drawer, drawee and payee not liable. Cut-off Rule applies a. Drawer is liable (his indorsement
is not necessary to pass title).

Drawee is liable (No privity

between drawer and payee
because indorsement of payee is
not necessary) (Ang Tek Lian case,
GR L-2516, September 25, 1950)

Payee is not liable.

b. Indorsers subsequent to forgery are liable (such as collecting b. Collecting bank is liable because
bank). of warranty.

But it may recover form the

person who forged the
indorsement on the check and
deposited or encashed the same
(Jai-Alai Corp. v. Bank of PI, GR
No. L-29432, August 6, 1975).

c. Party who made the forgery is liable. c. Party who made the forgery is
liable.

Indorser’s signature forged

a. Drawer, payee and indorser whose signature was forged not a. Drawer is liable (indorsement not
liable. (Cut off rule does NOT apply) necessary to title).

b. Drawee is liable if it paid. b. Drawee is liable.

c. Indorsers subsequent to forgery are liable (such as collecting c. Indorser whose signature was
bank). forged is liable because
indorsement is not necessary to
title.

d. Party who made the forgery is liable. d. Party who made the forgery is
liable.

LORD THANK YOU FOR PASSING US BOTH IN NEGO..

NOTES FINALS: 2015 NIL: Margarita Concepcion N./atong the pogi 