NEGOTIABLE INSTRUMENTS LAW

6. release of principal debtor, unless

holders right of recourse vs. 2ndary
party reserved
7. any agreement binding upon
holder to extend time of payment,
or to postpone holders right to
enforce instrument, unless made
with assent of party secondarily
liable, or unless right of recourse
reserved.
8. Failure to make due presentment
(sec. 70, 144)
9. failure to give notice of dishonor
10. certification of check at instance of
holder
11. reacquisition by prior party

Memory Aid
Based on the Outline of the 1994 Edition of Campos &
Campos

DISCHARGE
1.
2.

Of the Instrument
payment in due course by or on behalf
of principal debtor
Payment in due course:
1. made at or after maturity
2. to the holder thereof
3. in good faith and without notice
that his title is defective
4. payment in due course by party
accommodated where party is
made/ accepted for
accommodation
5. intentional cancellation by holder

If unintentional or under mistake or

without authority of holder, inoperative.
Burden of proof on party which alleges it
was unintentional, etc.
1. any other act which discharges a
simple contract
2. principal debtor becomes holder of
instrument at or after maturity in his
own right
3. renunciation of holder:

holder may expressly renounce his rights

vs. any party to the instrument, before or
after its maturity

absolute and unconditional renunciation

of his rights vs. principal debtor made at or
after maturity discharges the instrument

Renunciation does not affect rights of

HDC w/o notice.

Renunciation must be in writing unless

instrument delivered up to person primarily
liable thereon

1.

where instrument negotiated back to a

prior party, such party may reissue and
further negotiate, but not entitled to
enforce payment vs. any intervening party
to whom he was personally liable

where instrument is paid by party

secondarily liable, its not discharged, but
1. the party so paying it is remitted to
his former rights as regard to all prior
parties
2. and he may strike out his own and
all subsequent indorsements, and
again negotiate instrument, except

LIABILITIES OF PARTIES
1.

PRIMARY PARTIES

1.

material alteration (sec. 124: material

alteration w/o assent of all parties liable
avoids instrument except as against party
to alteration and subsequent indorsers)
1. Of secondary parties
2. any act which discharges the
instrument
3. intentional cancellation of
signature by holder
4. discharge of prior party
5. valid tender of payment made by
prior party

where its payable to order of 3rd party

and has been paid by drawer
where its made/accepted for
accommodation and has been paid by
party accommodated.

Liability of Maker

Person primarily liable: person who by

the terms of the instrument is
absolutely required to pay the same.
Sec. 70 (effect of want of demand on
principal debtor)

Promises to pay it according to its

tenor
admits existence of payee and his
then capacity to indorse

Status of drawee prior to acceptance or

payment

sec. 127 (bill not an assignment of

funds in hands of drawee)
sec. 189 (when check operates as
assignment)

2.

Liability of Acceptor

Promises to pay instrument according

to its tenor
Admits the following:
1. existence of drawer
2. genuineness of his signature
3. his capacity and authority to
draw the instrument
4. existence of payee and his then
capacity to endorse

sec. 191, 132, 133, 138 formal

requisites of acceptance
sec. 136, 137, 150 constructive
acceptance
sec. 134, 135 acceptance on a
separate instrument
Kinds of Acceptance:
1) general
2) qualified
a. conditional
b. partial
c. local
d. qualified as to time
e. not all drawees

amount thereof to the holder or to

an subsequent indorser who may be
compelled to pay it

drawer may insert in the instrument an

express stipulation negativing / limiting his
own liability to holder

1.

Liability of Indorsers:
Qualified Indorser and one
Negotiating by Delivery
1. Instrument genuine, in all
respects what it purports to be
2. good title
3. all prior parties had capacity to
contract
4. he had no knowledge of any fact
w/c would impair validity of
instrument or render it valueless

2. Liability of a General or Unqualified

Indorser

* sec. 142 (rights of parties as to qualified

acceptance)

2.

1. instrument genuine, good title,

capacity of prior parties
2. instrument is at time of
indorsement valid and subsisting
3. on due presentment, it shall be
accepted or paid, or both,
according to tenor
4. if it be dishonored, and necessary
proceedings on dishonor be duly
taken, he will pay the amt. To
holder, or to any subsequent
indorser who may be compelled
to pay it

Certification: Principles
1. when check certified by bank on
which its drawn, equivalent to
acceptance
2. where holder of check procures it to
be accepted/certified, drawer and
all indorsers discharged from al
liability
3. check not operate as assignment of
any part of funds to credit of drawer
with bank, and bank is not liable to
holder, unless and until it accepts or
certifies check
4. certification obtained at request of
drawer: secondary parties not
released
5. bank which certifies liable as an
acceptor
6. checks cannot be certified before
payable
SECONDARY PARTIES
1. Liability of Drawer
2. Admits existence of payee and his
then capacity to endorse
3. Engages that on due presentment
instrument will be accepted, or paid,
or both, according to its tenor and
that
4. If it be dishonored, and the
necessary proceedings on dishonor
be duly taken, he will pay the

in case of negotiation by delivery only,

warranty only extends in favor of
immediate transferee

Order of Liability among Indorsers

1. among themselves: liable prima
facie in the order they indorse,
but proof of another agreement
admissible
2. but holder may sue any of the
indorsers, regardless of order of
indorsement
3. joint payees/indorsees deemed
to indorse jointly and severally

Liability of Accomodation Party

Definition: one who signed instrument as
maker/drawer/acceptor/ indorser w/o
receiving value thereof, for the purpose
of lending his name to some other
person
AP liable on the instrument to holder for
value even if holder, at time of taking
instrument, knew he was only an AP
Liability of Irregular Indorser

 Where a person not otherwise a party to

an instrument, places thereon his
signature in blank before delivery, hes
liable as an indorser, in accordance w/
these rules:

I. Presentment For Acceptance

1. bill payable after sight, or in other

cases where presentment for
acceptance necessary to fix
maturity
2. where bill expressly stipulates that it
shall be presented for acceptance
3. where bill is drawn payable
elsewhere than at residence /
place of business of drawee

1.

Instrument payable to order of

rd
3 person: liable to payee and
to all subsequent parties
2.
Instrument payable to the
order of maker/drawer, or
payable to bearer: liable to all
parties subsequent to
maker/drawer
3.
Signs for accommodation of
payee, liable to all parties
subsequent to payee

Sadaya v Sevilla Rules:

1. a joint and several accommodation
maker of a negotiable promissory
note may demand from the principal
debtor reimbursement for the amt.
That he paid to the payee
2. a joint and several accommodation
maker who pays on the said
promissory note may directly
demand reimbursement from his coaccommodation maker without first
directing his action vs. the principal
debtor provided:
1. he made the payment by
virtue of a judicial demand
2. or the principal debtor is
insolvent

Liability of an Agent

Signature of any party may be made by

duly authorized agent, establish as in
ordinary agency
Where instrument contains or a person
adds to his signature words indicating that
he signs for or on behalf of a principal, he
is not liable on the instrument if he was
duly authorized, but the mere addition of
words describing him as an agent without
disclosing his principal, does not exempt
from personal liability.
Signature per procuration operates as
notice that the agent has but a limited
authority to sign, and the principal is
bound on ly in case the agent in so signing
acted within the actual limits of his
authority
Where a broker or agent negotiates an
instrument without indorsement, he incurs
all liabilities in Sec. 65, unless he discloses
name of principal and fact that hes only
acting as agent

When presentment for acceptance must

be made

When failure to present releases

drawer/indorser
Failure to present for acceptance of
negotiate bill of exchange within
reasonable time
Reasonable Time
Must consider
1. nature of instrument
2. usage of trade or business with
respect to instrument
3. facts of each case

How and When Made Sec. 145, 146, 147

When Excused Sec. 148
Dishonor and Effects

sec. 149 (when dishonored by nonacceptance)

sec. 150 (duty of holder where bill not

accepted)

sec. 151 (rights of holder where bill not

accepted)

sec. 89 (to whom notice of dishonor must

be given)

sec. 117 (effect of omission to give notice

of non-acceptance)
II. For Payment
Where necessary Sec. 70
Where not necessary Sec. 79, 80, 82, 151, 111
Date and time of presentment of instrument
bearing fixed maturity Sec. 71, 85, 86, 194
Date of presentment

Where instrument not payable on

demand: presentment must be made on
date it falls due
Where payable on demand:
presentment must be made within
reasonable time after issue, except that in
case of a bill of exchange, presentment
for payment will be sufficient if made
within a reasonable time after last
negotiation (but note: though reasonable
time from last negotiation, it may be
unreasonable time from issuance thus
holder may not be HDC under sec. 71)

Check must be presented for payment

within reasonable time after its issue or
drawer will be discharged from liability
thereon to extent of loss caused by delay

Delay excused Sec. 81

Manner Sec. 74, 72, 75
Place Sec. 73
To Whom Sec. 72, 76, 77, 78
Dishonor by nonpayment Sec. 83, 84
Notice of Dishonor
General rule: to drawer and to each
indorser, and any drawer or indorser to whom
such notice is not given is discharged
Form, Contents, Time Sec. 95, 96, 102,
103, 104, 105, 106, 108, 113
By Whom Given

By or on behalf of the holder or any party

to the instrument who may be compelled
to pay it to the holder, and who, upon
taking it up, would have a right to
reimbursement from the party to whom
the notice is given
Notice of dishonor may be given by an
agent either in his own name or in the
name of any party entitled to give notice,
whether that party be his principal or not
Where instrument has been dishonored in
hands of agent, he may either himself give
notice to the parties liable thereon, or he
may give notice to his principal (as if
agent an independent holder)

In whose favor notice operates

1.

when given by/on behalf of holder:

insures to benefit of:
1.
2.

all subsequent holders and

all prior parties who have a right
of recourse vs. the party to whom
its given

2.

where notice given by/on behalf of a

party entitled to give notice: insures for
benefit of a. holder , and
3.
all parties subsequent to party to whom
notice given
Waiver Sec. 109, 110
Where not necessary to charge drawer
1.
drawer/drawee same person
2.
drawee fictitious, incapacitated
3.
drawer is person to whom instrument is
presented for payment
4.
drawer has no right to expect/require
that drawee/acceptor will honor
instrument
5.
drawer countermanded payment

Where not necessary to charge indorser

1.
drawee fictitious, incapacitated, and
indorser aware of the fact at time of
indorsement
2.
indorser is person to whom instrument
presented for payment
3.
instrument made/accepted for his
accommodation
Protest
Definition: testimony of some proper person that
the regular legal steps to fix the liability of drawer
and indorsers have been taken
When necessary: sec. 152,
Form and contents: sec. 153
By whom made: sec. 154
Time and Place: sec. 155, 156
For better security: sec. 158
Excused: sec. 159
Waiver: sec. 111
Acceptance for Honor
Sec. 161, 131, 171
Bills in Set: 178-183
DEFENSES AND EQUITIES
KINDS OF DEFENSES
1.
real defense attaches to instrument; on
the principle that the right sought to be
enforced never existed/there was no
contract at all
2.
personal defense growing out of
agreement; renders it inequitable to be
enforced vs. defendant
DEFENSES
1) INCAPACITY: real; indorsement/assign by
corporation/infant: passes property but
corporation /infant no liability
2) ILLEGALITY: personal, even if no K because
void under CC 1409
3) FORGERY: real (lack of consent):
1.
forged
2.
made without authority of person
whose signature it purports to be.
General Rule:
1.
wholly inoperative
2.
no right to retain instrument, or give
discharge, or enforce payment vs. any
party, can be acquired through or under
such signature (unless forged signature
unnecessary to holders title)
Exception:
unless the party against whom it is sought to
enforce such right is precluded from setting up
forgery/want of authority
Precluded from setting up FORGERY:

1.

parties who make certain warranties, like

a general indorser or acceptor
2.
estopped/negligent parties
* Note rules on Acceptance/Payment Under
Mistake as applied to:
1. overdraft
2. stop payment order
3. forged indorsements
MATERIAL ALTERATION
Where NI materially altered w/o assent
of all parties liable thereon, avoided,
except as vs. a party who has himself
made, authorized or assented to
alteration and subsequent indorsers.
But when an instrument has been
materially altered and is in the hands
of a HDC not a party to the alteration,
HDC may enforce payment thereof
according to orig. tenor
Material Alteration
1. change date
2. sum payable, either for
principal or interest
3. time of payment
4. number/relations of parties
5. medium/currency of
payment, adds place of
payment where none
specified, other
change/addition altering
effect of instrument in any
respect.
*material alteration a personal defense when
used to deny liability according to org. tenor of
instrument, but real defense when relied on to
deny liability according to altered terms.

signature was placed thereon before

delivery
3. INCOMPLETE, DELIVERED
Personal defense (sec. 14)
2 Kinds of Writings:
1. Where instrument is wanting
in any material particular:
person in possession has
prima facie authority to
complete it by filing up blanks
therein
2. Signature on blank paper
delivered by person making
the signature in order that the
paper may be converted into
a NI: prima facie authority to
fill up as such for any amount

1.

2. FRAUD
1. fraud in execution: real defense
(didnt know it was NI)
2. fraud in inducement: personal
defense (knows its NI but deceived
as to value/terms)
3. DURESS
1. Personal, unless so serious as to give
rise to a real defense for lack of
contractual intent
1.

2.

COMPLETE, UNDELIVERED INSTRUMENT

Personal defense (sec. 16)
If instrument not in poss. Of party
who signed, delivery prima facie
presumed
If holder is HDC, delivery conclusively
presumed
INCOMPLETE, UNDELIVERED INSTRUMENT
Real defense (sec. 15)
Instrument will not, if completed and
negotiated without authority, be a
valid contract in the hands of any
holder, as against any person whose

In order that any such instrument,

when completed, ma be enforced
vs. any person who became a party
thereto prior to its completion:
1. must be filled up strictly in
accordance w/ authority
given
2. within a reasonable time

but if any such instrument after

completion is negotiated to HDC, its
valid for all purposes in his hands, he
may enforce it as if it had been filled
up properly.
HOLDER IN DUE COURSE

HOLDER (Sec. 191)

RIGHTS OF HOLDER
1.
sue thereon in his own name
2.
payment to him in due course discharges
instrument
HOLDER IN DUE COURSE: REQUISITIES
1.
complete and regular upon its face
sec. 124 (effect of alteration)
sec. 125 (what constitute material
alterations)
2. holder became such before it was
overdue, without notice of any previous
dishonor
sec. 53 (demand inst. nego after
unreasonable length of time: not HDC)
sec. 12 (effect antedating/postdating)
3. taken in good faith and for value
sec. 24 (presumption of consideration)
sec 25 (definition. of value)
sec. 26 (definition. holder for value)
sec. 27 (lien as value)
4. at time negotiated to him, he had no
notice (sec. 56-def; 54-notice before full
amt. paid) of

1.
2.

infirmity in instrument
defect in title of person
negotiating
1.
instrument/signature
obtained through fraud, etc.,
illegal consideration/means,
or
2.
instrument negotiated in
breach of faith, or fraudulent
circumstances

RIGHTS OF HOLDER IN DUE COURSE:

1.
holds instrument free of any defect of
title of prior parties
2.
free from defenses available to prior
parties among themselves
3.
may enforce payment of instrument for
full amount, against all parties liable
* if in the hand of any holder (note definition of
holder) other than a HDC, vulnerable to same
defenses as if non-negotiable
RIGHTS OF PURCHASER FROM HOLDER IN DUE
COURSE:
General Rule: in the hands of any holder
other than a HDC, NI is subject to same defenses
as if it were non-negotiable.
Exception: holder who derives title
through HDC and who is not himself a party to
any fraud or illegality has all rights of such former
holder in respect to all parties prior to the latter.
WHO DEEMED HDC

prima facie presumption in favor of

holder

but when shown that title of any person

who has negotiated instrument was
defective (sec. 55when title defective):
burden reversed (now with holder)

but no reversal if party being made liable

became bound prior to acquisition of
defective title (i.e., where defense is not
his own)
TRANSFER
DELIVERY

NI incomplete and revocable until

delivery for the purpose of giving effect
thereto

as between:
1. immediate parties
2. a remote party other than holder
in due course

delivery, to be effectual, must be made

by or under the authority of the party
making/drawing/accepting/indorsing

in such case delivery may be shown to

have been conditional, or for a special
purpose only, and not for the purpose of
transferring the property in the instrument.

PRESUMPTION OF DELIVERY
Where the instrument is no longer in the
possession of a party whose signature appears
thereon, a valid and intentional delivery by him is
presumed until the contrary is proved (*if in the
hands of a HDC, presumption conclusive)
NEGOTIATION

When an instrument is transferred from

one person to another as to constitute the
transferee the holder thereof.

If payable to BEARER, negotiated by

delivery; if payable to ORDER, negotiated
by indorsement of holder + delivery
INDORSEMENT

Indorser generally enters into two

contracts:
1. sale or assignment of instrument
2. to pay instrument in case of default
of maker

Sec. 31 (how indorsement made)

Sec. 41 (where payable to two or more)

Sec. 43 (indorsement where name

misspelled)

Sec. 48 (cancellation of indorsement)

Sec. 45, 46 (presumptions)

Indorsement must be of entire instrument.

(Cant be indorsement of only part of
amount payable, nor can it be to two or
more indorsees severally. But okay to
indorse residue of partially paid
instrument)

Sec. 67 (liability of indorser where paper

negotiable by delivery)

Sec. 63 (when person deemed indorser)

KINDS OF INDORSEMENT
1. as to manner of future method of
negotiation
special specifies the person to whom/to
whose order the instrument is to be
payable; indorsement of such indorsee
is necessary to further negotiation.
Blank specifies no indorsee, instrument
so indorsed is payable to bearer, and
may be negotiated by delivery
the holder may convert a blank
indorsement into a special
indorsement by writing over the
signature of the indorser in blank
any contract consistent with the
character of the indorsement
2. as to kind of title transferred
restrictive
prohibits further negotiation of
instrument,
constitutes indorsee as agent of
indorser, or
vests title in indorsee in trust for
another
rights of indorsee in restrictive ind.:
receive payment of inst.

Bring any action thereon that

indorser could bring
Transfer his rights as such
indorsee, but all subsequent
indorsees acquire only title of
first indorsee under restrictive
indorsement

non-restrictive
as to kind of liability assumed by
indorser
qualified-constitutes indorser as
mere assignor of title (eg. without
recourse)
unqualified

3. as to presence/absence of express
limitations put by indorser upon primary
obligors privileges of paying the holder

conditional additional condition

annexed to indorsers liability.
Where an indorsement is
conditional, a party required to
pay the instrument may disregard
the condition, and make
payment to the indorsee or his
transferee, whether condition has
been fulfilled or not
Any person to whom an
instrument so indorsed is
negotiated will hold the
same/proceeds subject to rights
of person indorsing conditionally
Unconditional

INDORSEMENT OF BEARER INSTRUMENT:

Where an instrument payable to bearer is

indorsed specially, it may nevertheless be
further negotiated by delivery

Person indorsing specially liable as

indorser to only such holders as make title
through his indorsement

2. unconditional promise or order to pay

unqualified order or promise to pay is

unconditional though coupled with
1. an indication of a particular fund
out of which reimbursement to be
made, or a particular account to
be debited with amount, or
2. a statement of the transaction
which gives rise to the instrument

an order or promise to pay out of a

particular fund is not unconditional
3. a sum certain in money

even if stipulated to be paid

1. with interest, or
2. by stated installments, or
3. by stated installments with a
provision that upon default in
payment of any installment/interest,
the whole shall become due, or
4. with exchange, whether at a fixed
rate or at the current rate, or
5. with costs of collection or an
attorneys fee, in case payment not
made at maturity
4.

payable on demand,
when expressed to be payable on
demand, or at sight, or on presentation;

when no time for payment expressed, or

where an instrument is issued, accepted

or indorsed when overdue, it is, as regards
the person so issuing, accepting, or
indorsing it, payable on demand

5.

UNINDORSED INSTRUMENTS

Where holder of instrument payable to

his order transfers it for value without
indorsing, transfer vests in transferee:
1. such title as transferor had therein
2. right of tranferee to have
indorsement of transferor

for purposes of determining HDC

negotiation effective upon actual
indorsement
NEGOTIABILITY
REQUISITES:
1. in writing and signed by maker or drawer

no person liable on the instrument whose

signature does not appear thereon (
subject to exceptions)

one who signs in a trade or assumed

name liable to the same extent as if he
had signed in his own name
signature of any party may be made by
a duly authorized agent, no particular
form of appt. necessary

or at a fixed or determinable future time

when its expressed to be payable at a
fixed period after date or sight, or
on or before a fixed or determinable
future time fixed therein, or
on or at a fixed period after the
occurrence of a specified event which is
certain to happen, though the time of
happening be uncertain
an instrument payable upon a
contingency not negotiable, and
happening of event doesnt cure it

* relate to sec. 11 ( presumption as to date)

and sec. 17 (construction where instrument
ambiguous)
* note effect of acceleration provisions, p. 30
Campos
* note effect of provisions extending time of
payment, p. 40 Campos

6.

payable to order
where it is drawn payable to the order of
a specified person or to him or his order.
May be drawn payable to order of
when the instrument is payable to order
the payee must be named or otherwise
indicated therein with reasonable
certainty
1. a payee not the
maker/drawer/drawee, or
2. drawer or maker, or
3. drawee, or
4. two or more payees jointly, or
5. holder of an office for time being

give the holder in due course the right to hold

the same and collect the sum due

7.

or bearer,
when expressed to be so payable
when payable to person named therein
or bearer
when payable to order or fictitious/nonexistent person, and such fact known to
the person making it so payable, or
when name of payee doesnt purport to
be the name of any person, or
when the only/last indorsement is in blank

8. where addressed to drawee: such drawee

named/ indicated therein with reasonable
certainty
bill may be addressed to two or more
drawees jointly, whether partners or not,
but not to two or more drawees in the
alternative or in succession
bill may be treated as a PN, at option of
holder, where
1. drawer and drawee are same
person
2. drawee is fictitious/incapacitated

PROMISSORY NOTE

BILL OF EXCHANGE

EFFECT OF ADDITIONAL PROVISIONS

Gen. Rule: order/promise to do any act in
addition to the payment of money renders instrument
non-negotiable.
Exception: negotiability not affected by
provisions w/c
1. authorize sale of collateral security
if instrument not paid at maturity
2. authorize confession of
judgment
3. waives benefit of any law
intended for
advantage/protection of obligor
4. give holder election to require
something to be done in lieu of
money
CONTINUATION OF NEGOTIABLE CHARACTER
Until
1.
restrictively indorsed
2.
discharged by payment or otherwise

DEFINITIONS
NEGOTIABLE INSTRUMENT

Written contract for the payment of money,

by its form intended as substitute for money
and intended to pass from hand to hand to

unconditional promise in writing made by one

person to another signed by the maker
engaging to pay on demand, or at a fixed or
determinable future time a sum certain in
money to order or to bearer
where a note is drawn to the makers own
order, it is not complete until indorsed by him

unconditional order in writing addressed by

one person to another signed by the person
giving it
requiring the person to whom its addressed
to pay on demand or at a fixed or
determinable future time a sum certain in
money to order or to bearer
check: bill of exchange drawn on a bank
payable on demand. Kinds of checks:
1. personal check
2. managers/cashiers check
drawn by a bank on itself.
Issuance has the effect of
acceptance
3. memorandum check memo is
written across its face, signifying
that drawer will pay holder
absolutely without need of
presentment
4. crossed check
effects:
1. check may not be encashed but
only deposited in bank
2. may be negotiated only once, to
one who has an acct. with a bank
3. warning to holder that check has
been issued for a definite purpose
so that he must inquire if he
received check pursuant to such
purpose, otherwise not HDC
kinds:
1. general (no word between lines,
or co between lines)
2. special (name of bank appearing
between parallel lines)

BEARER Person in possession of a bill/note payable to

bearer
HOLDER Payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof.
THE LIFE OF A NEGOTIABLE INSTRUMENT:
1.
issue
2.
negotiation
3.
presentment for acceptance in certain bills
4.
acceptance
5.
dishonor by on acceptance
6.
presentment for payment
7.
dishonor by nonpayment
8.
notice of dishonor
9.
protest in certain cases
10. discharge