Commercial Law Negotiable Instruments Law

1.
Negotiable Instruments written contracts for the payment of money; by its form,
intended as a substitute for money and intended to pass from hand to hand, to give the holder in
due course the right to hold the same and collect the sum due.
2.
Characteristics of Negotiable Instruments:
a.

negotiability right of transferee to hold the instrument and collect the sum due

b.

accumulation of secondary contracts instrument is negotiated from person to person

3.

Difference between Negotiable Instruments from Non-Negotiable Instruments:

Negotiable Instruments

Non-negotiable Instruments

Contains all the requisites of Sec. 1 of the

NIL

does not contain all the requisites of Sec.

1 of the NIL

Transferred by negotiation

transferred by assignment

Holder in due course may have better

rights than transferor

transferee acquires rights only of his

transferor

Prior parties warrant payment

prior parties merely warrant legality of

title

Transferee has right of recourse against

intermediate parties

transferee has no right of recourse

4.

Difference between Negotiable Instruments and Negotiable Documents of Title

Negotiable Instruments

Negotiable Documents of Title

Have requisites of Sec. 1 of the NIL

does not contain requisites of Sec. 1 of NIL

Have right of recourse against intermediate

parties who are secondarily liable

no secondary liability of intermediate parties

Holder in due course may have rights better

than transferor

transferee merely steps into the shoes of the

transferor

Subject is money

subject is goods

Instrument itself is property of value

instrument is merely evidence of title; thing

of value are the goods mentioned in the
document

5.
Promissory Note unconditional promise to pay in writing made by one person to anther,
signed by the maker, engaging to pay on demand or a fixed determinable future time a sum
certain in money to order or bearer. When the note is drawn to makers own order, it is not
complete until indorse by him. (Sec. 184 NIL)
Parties:
1. maker
2. payee

6.
Bill of Exchange unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126
NIL)
Parties:
1. drawer
2. payee
3. drawee/ acceptor

7.
8.

Check bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL)
Difference between Promissory Note and Bill of Exchange

Promissory Note

Bill of Exchange

Unconditional promise

unconditional order

Involves 2 parties

involves 3 parties

Maker primarily liable

drawer only secondarily liable

only 1 presentment for payment

generally 2 presentments for acceptance

and for payment

9.

Distinctions between a Check and Bill of Exchange

CHECK

BOE

always drawn upon a bank or banker

may or may not be drawn against a

bank

always payable on demand

may be payable on demand or at a fixed

or determinable future time

not necessary that it be presented for

acceptance

necessary that it be presented for

acceptance

drawn on a deposit

not drawn on a deposit

 the death of a drawer of a check, with

knowledge by the banks, revokes the
authority of the banker pay

the death of the drawer of the ordinary

bill of exchange does not

must be presented for payment within a

reasonable time after its issue (6
months)

may be presented for payment within a

reasonable time after its last negotiation.

10. Distinctions between a Promissory Note and Check

PN

CHECK

there are two (2) parties, the maker and

the payee

there are three (3) parties, the drawer,

the drawee bank and the payee

may be drawn against any person, not

necessarily a bank

always drawn against a bank

may be payable on demand or at a fixed

or determinable future time

-always payable on demand

a promise to pay

an order to pay

11. Other Forms of Negotiable Instruments:

a.

certificates of deposits

b.

trade acceptances

c.

bonds in the nature of promissory notes

d.

drafts which are bills of exchange drawn by 1 bank to another

e.

letters of credit

12. Trust Receipt a security transaction intended to aid in the financing of importers and
retailers who do not have sufficient funds to finance their transaction and acquire credit except to
use as collateral the merchandise imported
13. Requisites of a Negotiable Note (PN): (SUDO)
It must:
a.
be in writing signed by the drawer
b.
contains an unconditional promise or order to pay a sum certain in money
c.
be payable on demand or at a fixed determinable future time
d.
be payable to order or to bearer (Sec. 1 NIL)
14. Requisites of a Negotiable Bill (BOE): (SUDOC)

It must:
1.
2.
3.
4.
5.

be in writing signed by the drawer

contains an unconditional promise or order to pay a sum certain in money
be payable on demand or at a fixed determinable future time
be payable to order or to bearer
the drawee must be named or otherwise indicated with reasonable certainty (Sec. 1 NIL)

Notes on Section 1:

In order to be negotiable, there must be a writing of some kind, else there would be
nothing to be negotiated or passed from hand to hand. The writing may be in ink, print or pencil.
It may be upon parchment, cloth, leather or any other substitute of paper.

It must be signed by the maker or drawer. It may consist of mere initials or even numbers,
but the holder must prove that what is written is intended as a signature of the person sought to
be charged.

The Bill must contain an order, something more than the mere asking of a favor.

Sum payable must be in money only. It cannot be made payable in goods, wares, or
merchandise or in property.

A drawees name may be filled in under Section 14 of the NIL

15. Determination of negotiability

1. by the provisions of the Negotiable Instrument Law, particularly Section 1 thereof
2. by considering the whole instrument
3. by what appears on the face of the instrument and not elsewhere

*In determining is the instrument is negotiable, only the instrument itself and no other, must be
examined and compared with the requirements stated in Sec. 1. If it appears on the instrument
that it lacks one of the requirements, it is not negotiable and the provisions of the NIL do not
govern the instrument. The requirement lacking cannot be supplied by using a separate
instrument in which that requirement which is lacking appears.
16. Sum is certain even if it is to be paid with:
a.

interest

b.

in installments

c.

in installments with acceleration clause

d.

with exchange

e.

costs of collection or attorneys fees (Sec. 2 NIL)

17. General Rule: The promise or order should not depend on a contingent event. If it is
conditional, it is non-negotiable.
Exceptions:
a.

indication of particular fund from which the acceptor disburses himself after payment

b.

statement of the transaction which gives rise to the instrument. (Sec. 3 NIL)

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

Notes on Section 3

The particular fund indicated should not be the direct source of payment, else it becomes
unconditional and therefore non-negotiable. The fund should only be the source of
reimbursement.

A statement of the transaction does not destroy the negotiability of the instrument.
Exception: Where the promise to pay or order is made subject to the terms and conditions of the
transaction stated.
18. Instrument is payable upon a determinable future time if:
a.

there is a fixed period after sight/date

b.

on or before a specified date/fixed determinable future time

c.
on or at a fixed date after the occurrence of an event certain to happen though the exact
date is not certain (Sec. 4 NIL)
Notes on Section 4

If the instrument is payable upon a contingency, the happening of the event does not cure
the defect (still non-negotiable)
19. General Rule: If some other act is required other than the payment of money, it is nonnegotiable.
Exceptions:
a.

sale of collateral securities

b.

confession of judgment

c.

waives benefit of law

d.

gives option to the holder to require something to be done in lieu of money (Sec. 5 NIL)
Notes of Section 5

Limitation on the provision, it cannot require something illegal.

There are two kinds of judgements by confession: a) cognovit actionem b) relicta

verificatione

Confessions of judgement in the Philippines are void as against public policy.

If the choice lies with the debtor, the instrument is rendered non-negotiable.

20. The validity and negotiability of an instrument is not affected by the fact that:
1.
2.
3.
4.
5.

it is not dated
does not specify the value given or that any had been given
does not specify the place where it is drawn or payable
bears a seal
designates the kind of current money in which payment is to be made (Sec. 6 NIL)

21. Instrument is payable upon demand if:

a.

it is expressed to be so payable on sight or upon presentation

b.

no period of payment is stipulated

c.

issued, accepted, or endorsed after maturity (Sec. 7 NIL)

Where an instrument is issued, accepted or indorsed when overdue, it is, as regards to the person
so issuing, accepting, or indorsing it, payable on demand.
Notes on Section 7
if the time for payment is left blank (as opposed to being omitted), it may properly be
considered as an incomplete instrument and fall under the provisions of Sec. 14, 15, or 16
depending on how the instrument is delivered.
22. Instrument is payable to order:

where it is drawn payable to the order of a specified person or

to a specified person or his order

It may be drawn payable to the order of:

1.
2.
3.
4.
5.
6.

a payee who is not a maker, drawer, or drawee

the drawer or maker
the drawee
two or more payees jointly
one or some of several payees
the holder of an office for the time being
(Sec. 8 NIL)

Notes on Section 8

The payee must be named or otherwise indicated therein with reasonable certainty.

If there is no payee, there would be no one to indorse the instrument payable to order.
Therefore useless to be considered negotiable.

Joint payees in indicated by the conjunction and. To negotiate, all must indorse.

Being several payees is indicated by the conjunction or.

23. Instrument is payable to bearer :

a.

when it is expressed to be so payable

b.

when payable to the person named or bearer

c.

payable to order of fictitious or non-existent person and this fact was known to drawer

d.

name of payee not name of any person

e.

only and last indorsement is an indorsement in blank (Sec. 9 NIL)

Notes on Section 9

fictitious person is not limited to persons having no legal existence. An existing person
may be considered fictitious depending on the intention of the maker or the drawer.

fictitious person means a person who has no right to the instrument because the maker
or drawer of it so intended. He was not intended to be the payee.

where the instrument is drawn, made or prepared by an agent, the knowledge or intent of
the signer of the instrument is controlling.

Where the agent has no authority to execute the instrument, the intent of the principal is
controlling
24. The date may be inserted in an instrument when:
1. an instrument expressed to be payable at a fixed period after date is issued undated

2. where acceptance of an instrument payable at a fixed period after sight is undated (Sec. 13 NIL)

Effects:

any holder may insert the true date of issuance or acceptance

the insertion of a wrong date does not avoid the instrument in the hands of a subsequent
holder in due course

as to the holder in due course, the date inserted (even if it be the wrong date) is regarded
as the true date.
25. Subsequent Holder in Due Course not affected by the following deficiencies:
a.

incomplete but delivered instrument (Sec. 14 NIL)

b.

complete but undelivered (Sec. 16 NIL)

c.
complete and delivered issued without consideration or a consideration consisting of a
promise which was not fulfilled (Sec 28 NIL)
26. Holder in Due Course Affected by Abnormality/Deficiency:
a.

incomplete and undelivered instrument (Sec. 15 NIL)

b.

maker/drawers signature forged (Sec. 23 NIL)

27. Incomplete but Delivered Instrument:

1. Where an instrument is wanting in any material particular:
a.

Holder has prima facie authority to fill up the blanks therein.

b.
It must be filled up strictly in accordance with the authority given and within a reasonable
time.
c.
If negotiated to a holder in due course, it is valid and effectual for all purpose as though it
was filled up strictly in accordance with the authority given and within reasonable time. (Sec. 14
NIL)
2. Where only a signature on a blank paper was delivered:
1. It was delivered by the person making it in order that it may be converted into a negotiable
instrument
2. The holder has prima facie authority to fill it up as such for any amount. (Sec. 14 NIL)

Notes on Section 14

if the instrument is wanting in material particular, mere possession of the instrument is

enough to presume prima facie authority to fill it up.

material particular may be an omission which will render the instrument non-negotiable
(e.g. name of payee), an omission which will not render the instrument non-negotiable (e.g. date)

in the case of the signature in blank, delivery with intent to convert it into a negotiable
instrument is required. Mere possession is not enough.
28. Incomplete and Undelivered Instrument:
General Rule: 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 against any
person who signed before delivery. (Sec. 15 NIL)
Notes on Section 15

it is a real defense. It can be interposed against a holder in due course.

delivery is not conclusively presumed where the instrument is incomplete

defense of the maker is to prove non-delivery of the incomplete instrument.

29. Complete but Undelivered:

General Rule: Every contract on a negotiable instrument is incomplete and revocable until
delivery for the purpose of giving effect thereto.
a.
If between immediate parties and remote parties not holder in due course, to be effectual
there must be authorized delivery by the party making, drawing, accepting or indorsing. Delivery
may be shown to be conditional or for a special purpose only
b.

If the holder is a holder in due course, all prior deliveries conclusively presumed valid

c.
If instrument not in hands of drawer/maker, valid and intentional delivery is presumed until
the contrary is proven (Sec. 16 NIL)
Rules on delivery of negotiable instruments:
1)

delivery is essential to the validity of any negotiable instrument

2) as between immediate parties or those is like cases, delivery must be with intention of
passing title

3) an instrument signed but not completed by the drawer or maker and retained by him is
invalid as to him for want of delivery even in the hands of a holder in due course
4) but there is prima facie presumption of delivery of an instrument signed but not completed
by the drawer or maker and retained by him if it is in the hands of a holder in due course. This
may be rebutted by proof of non-delivery.
5) an instrument entrusted to another who wrongfully completes it and negotiates it to a holder
in due course, delivery to the agent or custodian is sufficient delivery to bind the maker or
drawer.
6) If an instrument is completed and is found in the possession of another, there is prima facie
evidence of delivery and if it be a holder in due course, there is conclusive presumption of
delivery.
7) delivery may be conditional or for a special purpose but such do not affect the rights of a
holder in due course.
30. General rule: a person whose signature does not appear on the instrument in not liable.
Exception:
1. one who signs in a trade or assumed name (Sec. 18)
2. a duly authorized agent (Sec. 19)
3. a forger (Sec. 23)

31. General rule: an agent is not liable on the instrument if he were duly authorized to sign for
or on behalf of a principal.
Requisites:
1. he must be duly authorized
2. he must add words to his signature indicating that he signs as an agent
3. he must disclose his principal (Sec. 20 NIL)

Notes on Section 20

if an agent does not disclose his principal, the agent is personally liable on the instrument.

32. Per Procuration operates as notice that the agent has a limited authority to sign.
Effects:

the principal in only bound if the agent acted within the limits of the authority given


the person who takes the instrument is bound to inquire into the extent and nature of the
authority given. (Sec. 21 NIL)
33. General rule: Infants and corporations incur no liability by their indorsement or assignment of
an instrument. (Sec. 22 NIL)
Effects:

no liability attached to the infant or the corporation

the instrument is still valid and the indorsee acquires title

34. General rule: a signature which is forged or made without authority is wholly inoperative.
Effects:
1. no right to retain
2. no right to give a discharge
3. no right to enforce payment can be acquired.

(Sec. 23 NIL)

Exception:

the party against whom it is sought to be enforced is precluded from setting up the forgery
or want of authority.
Notes on Section 23

Section 23 applies only to forged signatures or signatures made without authority

Alterations such as to amounts or like fall under section 124

Forms of forgery are a) fraud in factum b) duress amounting to fraud c) fraudulent

impersonation

Only the signature forged or made without authority is inoperative, the instrument or
other signatures which are genuine are affected

The instrument can be enforced by holders to whose title the forged signature is not
necessary

Persons who are precluded from setting up the forgery are a) those who warrant or admit
the genuineness of the signature b) those who are estopped.

Persons who are precluded by warranting are a) indorsers b) persons negotiating by

delivery c) acceptors.

drawee bank is conclusively presumed to know the signature of its drawer

if endorsers signature is forged, loss will be borne by the forger and parties subsequent
thereto

drawee bank is not conclusively presumed to know the signature of the indorser. The
responsibility falls on the bank which last guaranteed the indorsement and not the drawee bank.

Where the payees signature is forged, payments made by the drawee bank to collecting
bank is ineffective. No debtor/creditor relationship is created. An agency to collect is created
between the person depositing and the collecting bank. Drawee bank may recover from collecting
bank who may in turn recover from the person depositing.
Rules on liabilities of parties on a forged instrument
In a PN

a party whose indorsement is forged on a note payable to order and all parties prior to him
including the maker cannot be held liable by any holder

a party whose indorsement is forged on a note originally payable to bearer and all parties
prior to him including the maker may be held liable by a holder in due course provided that it was
mechanically complete before the forgery

a maker whose signature was forged cannot be held liable by any holder

In a BOE

the drawers account cannot be charged by the drawee where the drawee paid

the drawer has no right to recover from the collecting bank

the drawee bank can recover from the collecting bank

the payee can recover from the drawer

the payee can recover from the recipient of the payment, such as the collecting bank

the payee cannot collect from the drawee bank

the collecting bank bears the loss but can recover from the person to whom it paid

if payable to bearer, the rules are the same as in PN.

if the drawee has accepted the bill, the drawee bears the loss and his remedy is to go
after the forger


if the drawee has not accepted the bill but has paid it, the drawee cannot recover from
the drawer or the recipient of the proceeds, absence any act of negligence on their part.
35. Every negotiable instrument is deemed prima facie to have been issued for a valuable
consideration. (Sec. 24 NIL)
Effects:

every person whose signature appears thereon is a party for value

presumption is disputable

36. Where value has at any time been given for the instrument, the holder is deemed a holder
for value in respect to all parties who become such prior to that time. (Sec. 26 NIL)
37. Effect of want of consideration:
1. Absence or failure of consideration may be set up against a holder not a holder in due course
(personal defense)
2. Partial failure of consideration is a defense pro tanto (Sec 28 NIL)

Notes on Section 28

absence of consideration is where no consideration was intended to pass.

failure of consideration implies that consideration was intended by that it failed to pass

the defense of want of consideration is ineffective against a holder in due course

a drawee who accepts the bill cannot allege want of consideration against the drawer

38. An accommodation party is one who signs the instrument as maker, drawer, acceptor, or
indorser without receiving value therefor and for the purpose of lending his name to some other
person.
Effects:

an accommodation party is liable to the holder for value notwithstanding that such holder
knew that of the accommodation. (Sec. 28 NIL)
Notes on Section 28

the accommodated party cannot recover from the accommodation party

want of consideration cannot be interposed by the accommodation party


an accommodation maker may seek reimbursement from a co-maker even in the absence
of any provision in the NIL; the deficiency is supplied by the New Civil Code.

he may do this even without first proceeding against the debtor provided:

a.

he paid by virtue of judicial demand

b.

principal debtor is insolvent

39. An instrument is negotiated when:

1. it is transferred from one person to another
2. that the transfer must be in a manner as to constitute the transferee a holder

For a bearer instrument by delivery

For payable to order by indorsement and delivery (Sec. 30 NIL)
40. Indorsement to be must be:
1. written
2. on the instrument itself or upon a piece of paper attached (Sec. 31 NIL)

Notes on Section 31

the paper attached with the indorsement is an allonge

an allonge must be attached so that it becomes a part of the instrument, it cannot be

simply pinned or clipped to it.
41. Kinds of Indorsements:
1.
2.
3.
4.
5.

Special (Sec. 34)

Blank (Sec. 35)
Restrictive (Sec. 36)
Qualified (Sec. 38)
Conditional (Sec. 39 NIL)

42. Effects of indorsing an instrument originally payable to bearer:

it may further be negotiated by delivery

the person indorsing is liable as indorser to such persons as to make title through his
indorsement (Sec. 40 NIL)
Notes on Section 40

Section 40 applies only to instruments originally payable to bearer

It cannot apply where the instrument is payable to bearer because the only or last
indorsement is in blank.
43. A holder may strike out any indorsement which is not necessary to his title.
Effects:

An indorser whose indorsement is struck out is discharged

All indorsers subsequent to such indorser who has been discharged are likewise relieved.
(Sec. 48 NIL)
44. Effects of a transfer without endorsement:

the transferee acquires such title as the transferor had

the transferee acquires the right to have the indorsement of the transferor

negotiation takes effect as of the time the indorsement is actually made (Sec. 49 NIL)

45. Rights of a holder:

a holder may sue in his own name

a holder may receive payment.

Effects:

if in due course it discharges the instrument (Sec. 51 NIL)

46. Requisites for a Holder in Due Course (HDC):

a.

receives the instrument complete and regular on its face

b.
became a holder before it was overdue and had no notice that it had been previously
dishonored if such was the fact
c.

takes the instrument for value and in good faith

d.
at time he took the instrument, no notice of infirmity in instrument or defect in the title of
the person negotiating it (Sec. 52 NIL)
Notes on Section 52

every holder is presumed to be a HDC (Sec. 59)

the person who questions such has the burden of proof to prove otherwise

if one of the requisites are lacking, the holder is not HDC

an instrument is considered complete and regular on its face if a) the omission is

immaterial b) the alteration on the instrument was not apparent on its face

an instrument is overdue after the date of maturity.

on the date of maturity, the instrument is not overdue and the holder is a HDC

acquisition of the transferee or indorsee must be in good faith

good faith means lack of knowledge or notice of defect or infirmity

47. A holder is not a HDC where an instrument payable on demand is negotiated at an

unreasonable length of time after its issue (Sec. 53 NIL)
48. Rights of a HDC:

holds the instrument free from any defect of title of prior parties

free from defenses available to prior parties among themselves (personal/ equitable
defenses)

may enforce payment of the instrument for the full amount against all parties liable(Sec.
57 NIL)
Notes on Section 57

Personal or equitable 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 through legal
title to enforce it. Can be set up against holders not HDC

Legal or real defenses are those which attach to the instrument itself and can be set up
against the whole world, including a HDC.

Personal Defenses

Real Defenses

1. absence or failure of consideration

Alteration

2. want of delivery of complete

instrument

Want of delivery of incomplete

instrument

3. insertion of wrong date where payable

at a fixed period after date and issued
undated; or at a fixed period after sight
and acceptance is undated

Duress amounting to forgery

4. filling up the blanks contrary to

authority given or not within reasonable
time

Fraud in factum or in esse contractus

5. fraud in inducement

Minority

6. acquisition of the instrument by force,

duress or fear

Marriage in case of a wife

7. acquisition of the instrument by

unlawful means

Insanity where the insane person has a

guardian appointed by the court

8. acquisition of the instrument for an

illegal consideration

Ultra vires acts of a corporation where its

charter or by statue, it is prohibited from
issuing commercial paper

9. negotiation in breach of faith

Want of authority of agent

10. negotiation under circumstances

amounting to fraud

Execution of instrument between public

enemies

1. Mistake
12. intoxication

Illegality of contract made by statue

Forgery

13. ultra vires acts of corporations

14. want of authority of the agent where
he has apparent authority
15. illegality of contract where form or
consideration is illegal
16. insanity where there is no notice of
insanity

49. A instrument not in the hands of a HDC is subject to the same defenses as if it were nonnegotiable.
Exception:


a holder who derives his title through a HDC and is not a party to any fraud or illegality
affecting the instrument, has all the rights of such HDC in respect to all parties prior. (Sec. 58 NIL)

Rights of a holder not a HDC

may sue in his own name

may receive payment and if it is in due course, the instrument is discharged

holds the instrument subject to the same defenses as if it were non-negotiable

if he derives his title through a HDC and is not a party to any fraud or illegality thereto,
has all the rights of such HDC
50. General rule: every holder is deemed prima facie to be a holder in due course.
Exception:

where it is shown that the title of any person who has negotiated the instrument is
defective, the burden is on the holder to prove that he is a HDC or that a person under whom he
claims is a HDC (Sec. 59 NIL)
51. A maker is primarily liable:
Effects of making the instrument, the maker:
a.

engages to pay according to tenor of instrument

b.

admits existence of payee and his capacity to indorse (Sec. 60 NIL)

Notes on Section 60

a makers liability is primarily and unconditional

one who has signed as such is presumed to have acted with care and to have signed with
full knowledge of its contents, unless fraud is proved

the payees interest is only to see to it that the note is paid according to its terms

when two or more makers sign jointly, each is individually liable for the full amount even
if one did not receive the value given


the maker is precluded from setting up the defense of a) the payee is fictional, b) that the
payee was insane, a minor or a corporation acting ultra vires
52. A drawer is secondarily liable
Effects of drawing the instrument, the drawer:
1. admits the existence of the payee,
2. the capacity of such payee to indorse
3. engages that on due presentment, the instrument will be accepted or paid or both according to
its tenor.

If the instrument is dishonored, and the necessary proceedings on dishonor duly taken
1. the drawer will pay the amount thereof to the holder
2. will pay to any subsequent indorser who may be compelled to pay it. (Sec. 61 NIL)

Notes on Section 61

a drawer may insert an express stipulation to negative or limit his liability

53. An acceptor is primarily liable

By accepting the instrument, an acceptor:

engages that he will pay according to the tenor of his acceptance

admits the existence of the drawer, the genuineness of his signature and his capacity and
authority to draw the instrument

the existence of the payee and his then capacity indorse

54. Irregular Indorser a person not otherwise a party to an instrument places his signature in
blank before delivery is liable as an indorser in the following manner:
1. if payable to order of a third person liable to the payee and to all subsequent parties
2. if payable to order of the maker or drawer liable to all parties subsequent to the maker or
drawer
3. if payable to bearer liable to all parties subsequent to the maker or drawer
4. if signs for an accommodation party liable to all parties subsequent to the payee (Sec. 64 NIL)

55. Warranties where negotiating by delivery or qualified endorsement:

1.
2.
3.
4.

the instrument is genuine and in all respect what it purports to be

the indorser has good title to it
all prior parties had the capacity to contract
indorser has no knowledge of any fact that would impair the validity or the value of the
instrument.

Limitations of warranties:
-if by delivery extends only to immediate transferee
-warranty of capacity to contract does not apply to persons negotiating public or corporate
securities (Sec. 65 NIL)
Notes on Section 65

a qualified indorser is one who indorses without recourse or sans recourse

recourse resort to a person secondarily liable after default of person primarily liable

a qualified indorser cannot raise the defense of a) forgery b) defect of his title or that it is
void c) the incapacity of the maker, drawer or previous indorsers.

a qualified Indorsement makes the indorser mere assignor of title of instrument, relieves
him of general obligation to pay if instrument is dishonored, but he is still liable for the warranties
arising from instrument only up to warranties of general indorser

the warranty is to the capacity of prior parties at the time the instrument was negotiated.
Subsequent incapacity does not breach the warranty.

lack of knowledge of the indorser as to any fact that would impair the validity or the value
of the instrument must be subsisting all throughout.

a person Negotiating by Delivery warrants same as those of qualified indorser and extends
to immediate transferees only
56. Warranties of a general indorser:
1.
2.
3.
4.

the instrument is genuine and in all respect what it purports to be

the he has good title to it
all prior parties had the capacity to contract
that the instrument at the time of his indorsement was valid and subsisting (Sec. 66 NIL)

In addition:

engages that the instrument will be accepted or paid or both according to its tenor on due
presentment

engages to pay the amount thereof if it be dishonored and the necessary proceedings on
dishonor are taken

Notes on Section 66

the indorser under Section 66 warrants the solvency of a prior party

the indorser warrants that the instrument is valid and subsisting regardless of whether he
is ignorant of that fact or not.

warranties extend in favor of a) a HDC b) persons who derive their title from HDC c)
immediate transferees even if not HDC

the indorser does not warrant the genuineness of the drawers signature

general indorser is only secondarily liable

57. General rule: Presentment for payment is not necessary to charge persons primarily liable on
the instrument. Presentment for payment is necessary to charge the drawer and indorsers. (Sec 70
NIL)
Notes on Section 70

presentation for payment production of a BOE to the drawee for his acceptance, or to a
drawee or acceptor for payment. Also presentment of a PN to the party liable for payment of the
same.

consists of a) a personal demand for payment at a proper place b) the bill or note must be
ready to be exhibited if required and surrendered upon payment.

parties primarily liable persons by the terms of the instrument are absolutely required to
pay the same. E.g maker and acceptors. They can be sued directly.

if payable at the special place, and the person liable is willing to pay there at maturity,
such willingness and ability is equivalent to tender of payment.

presentment is necessary to charge persons secondarily liable otherwise they are

discharged

Acts needed to charge persons secondarily liable: a) presentment for payment/acceptance

b) dishonor by non-payment/non-acceptance c) notice of dishonor to secondary parties

Acts needed to charge persons secondarily liable in other cases: a) Protest for nonpayment by the drawee b) protest for non-payment by the acceptor for honor
58. Proper presentment:
1. by the holder or an authorized person

2. at a reasonable hour on a business day

3. at a proper place
4. to the person primarily liable or if absent to any person found at the place where presentment is
made (sec. 72 NIL)

Notes on Section 72

only the holder or one authorized by him has the right to make presentment for payment

presentment cannot be made on a Sunday or holiday

presentment for payment is made to the maker, or acceptor. Not to the person secondarily
liable.

if the instrument is payable on demand a) if it is a note presentment must be made

within reasonable time after issue b) if it is a bill presentment must be made within reasonable
time after last negotiation.
59. Presentment not required to charge the drawer:
1. he has no right to expect
2. he has no right to require

that the drawee or acceptor will pay (Sec 79 NIL)

60. Presentment not required to charge the indorser where:
1. the instrument was made or accepted for his accommodation
2. he has no reason to expect that the instrument will be paid if presented (Sec. 80 NIL)

61. General rule: Presentment for payment necessary to charge persons secondarily liable
otherwise they are discharged:
Exception:

Section 79 and 80
Notes on Section 79 and 80

only the drawer or indorser are not discharged. All other parties secondarily liable are
discharged.
62. Presentment for payment excused if:
a.

after due diligence, presentment cannot be made

b.

presentment is waived

c.

the drawee is a fictitious person (Sec 82 NIL)

Notes on Section 82

what is excused is the failure to make presentment. There is no need to make any
presentment versus under section 81 (delay in presentment) presentment for payment is still
required after the cause of delay has ceased.
63. Summary of rules as to presentment for payment:
1. presentment not necessary to charge persons primarily liable
2. necessary to charge persons secondarily liable except:

the drawer under Sec. 79

the indorser under Sec. 80

when excused under Sec. 82

when the instrument has been dishonored by non-acceptance under Sec. 83

64. How dishonored by non-acceptance:

the instrument was duly presented but payment is refused or cannot be obtained

presentment is excused and the instrument is overdue and unpaid (Sec. 83 NIL)

65. Effects of dishonor by non-payment:

an immediate right of recourse to all parties secondarily liable accrues to the holder. (Sec.
84 NIL)
Notes on Section 84

parties cease to be secondarily liable and become principal debtors.

Liability becomes the same as that of the original obligors.

66. Requisites for payment in due course:

1.
2.
3.
4.

made at or after the maturity of the instrument

to the holder
in good faith
without notice of any defect in the holders title (sec. 88 NIL)

Notes on Section 88

payment must be made to the possessor of the instrument

possession of the note by the maker is presumptive evidence that it has been paid

67. Notice of Dishonor may be given:

1. by or on behalf or the holder
2. by or on behalf of any party who:

is a party to the instrument and might be compelled to pay the instrument

to a holder who having taken it up would have a right of reimbursement from the party to
whom notice is given. (Sec. 90 NIL)
68. Notice:
1. may be written or oral (Sec. 96)
2. written notice need not be signed or may be supplemented by verbal communication (Sec. 95)
3. may be by personal delivery or by mail (Sec. 96)

69. Notice may be waived either expressly or implied:

1. before the time of giving notice has arrived
2. after the omission to give due notice (Sec. 109 NIL)

70. Protest may be waived:

Effects:

deemed a waiver of presentment and notice of dishonor as well (Sec. 111 NIL)
Notes on Section 111

Where notice is waived, presentment is not waived

Where presentment is waived, notice is also waived

Where protest is waived, notice and presentment is waived

71. Notice of Dishonor given by the holder to the parties secondarily liable, drawer and each
indorser, that the instrument was dishonored by non-acceptance or non-payment by the
drawee/maker
General rule: Any drawer or indorser to whom such notice is not given is discharged.
Exceptions:
1. Waiver (Sec. 109)
2. Notice is dispensed (Sec. 112)
3. Not necessary to Drawer (Sec. 114)

4. Not necessary to Indorser (Sec. 115)

if notice is delayed, delay may be excused (Sec. 113)

72. Instances when Notice of Dishonor Not Necessary to Drawer
a.

drawer and drawee same person

b.

drawee is a fictitious/incapacitated person

c.

drawer is the person to whom presentment for payment is made

d.
NIL)

drawer has no right to expect that the drawee will accept/pay the instrument (Sec. 114

73. Instances when Notice Not Required to Indorser

a.
drawee was a fictitious/incapacitated person and the indorser was aware of such at the
time of indorsement
b.

indorser is the person to whom instrument was presented for payment

c.

instrument made/accepted for his accommodation (Sec. 115 NIL)

74. Omission to give notice of dishonor by non-acceptance doe not prejudice a HDC (Sec. 117
NIL)
75. Protest only necessary for a foreign bill of exchange. Protest for other negotiable instruments
is optional. (Sec. 118 NIL)
76. Causes of Discharge of the Instrument
a.

payment by the debtor

b.

payment by accommodated party

c.

intentional cancellation by holder of instrument

d.

any other act discharging a simple monetary obligation

e.

debtor becomes holder of the instrument at/after maturity in his own right ( Sec 119 NIL)
Notes on Section 119

discharge of the instrument discharges all the parties thereto

payment must be in due course, and by the principal debtor or on his behalf

if payment is not made by the principal debtor, payment only cancels the liability of the
payor and those obligated after him but does not discharge the instrument.

payment by an accommodation party does not discharge the instrument.

77. Discharge of Secondary Parties:

a.

any act discharging the instrument

b.

cancellation of indorsers signature by indorsers

c.

discharge of prior party

d.

tender of payment by prior party

e.

release of principal debtor

f.
extension of payment by the holder/postponement of right to enforce without assent of
secondary parties and without reservation of right of recourse against secondary parties (Sec 120
NIL)
78. Rights of a party secondarily liable who pays:

the instrument is not discharge

the party is remitted to his former rights as to all prior parties

the party may strike out his own and all subsequent indorsements

the party may negotiate the instrument again

Exception:

an instrument cannot be renegotiated where it is payable to order of a 3rd person and has
been paid by the drawer

and instrument cannot be renegotiated where is was made or accepted for accommodation
and it has been paid by the party accommodated.
78. Renunciation by a holder discharges an instrument when:
1. it is absolute and unconditional
2. made in favor of a person primarily liable

3. made at or after maturity of the instrument

4. in writing or the instrument is delivered up to the person primarily liable (Sec. 122 NIL)

Notes on Section 122

if renounced in favor of a party secondarily liable, only he is exonerated from liability and
all parties subsequent to him

discharge by novation is allowed

79. General rule: When materially altered, without the consent of all parties liable, the
instrument is avoided except as against:
1. the party who has made the alteration
2. the party who authorized or assented to the alteration.
3. subsequent indorsers

Exception:

if in the hands of a HDC, may be enforced according to its original tenor

Notes on Section 124

there is no distinction between fraudulent and innocent alteration

80. Material Alteration an alternation is said to be material if it alters the effect of the
instrument.
Under Section 125 the following changes are considered material alterations:
1.
2.
3.
4.
5.
6.
7.

dates
the sum payable
time and place of payment
number or relations of the parties
medium or currency for payment
adding a place of payment where no place is specified
any other which alters the affect of the instrument

81. Instances where a BOE may be treated as a PN:

1. where the drawer and the drawee are one and the same
2. where the drawee is a fictitious person
3. where the drawee has no capacity to contract (Sec. 130 NIL)

The holder has the option to treat it as a BOE or a PN

82. Acceptance is the signification by the drawee of his assent to the order of the drawer. It is
an act by which a person on whom the BOE is drawn assents to the request of the drawer to pay
it. (Sec. 132 NIL)
Acceptance may be:
1.
2.
3.
4.

actual
constructive
general (Sec. 140)
qualified (Sec. 141)

Requisites of actual acceptance:

in writing

signed by the drawee

must not express the drawee will perform his promise by any other means than payment of
money

communicated or delivered to the holder

7.
1.
2.
8.
1.
2.

A holder has the right:

require that acceptance be written on the bill and if refused, treat it as if dishonored (Sec. 133)
refuse to accept a qualified acceptance and may treat it as dishonored (Sec. 142)
Constructive Acceptance:
where the drawee to whom the bill has been delivered destroys it
the drawee refuses within 24 hrs after such delivery or within such time as is given, to return
the bill accepted or not.
(Sec. 137 NIL)

Notes on Section 137

drawee becomes primarily liable as an acceptor.

mere retention is equivalent to acceptance

9.
1.
2.
3.

When presentment for acceptance is necessary:

if necessary to fix the maturity of the bill
if it is expressly stipulated that it shall be presented for acceptance
if the bill is drawn payable elsewhere than the residence or place of business of the drawee
(Sec. 143 NIL)

Notes on Section 143

Presentment is the production of a BOE to the drawee for his acceptance

in on order case is presentment necessary to make parties liable.

90. Summary on presentment for acceptance of Bills of Exchange:

a.

to make the drawee primarily liable and for the accrual of secondary liability (Sec. 144)

b.
necessary to fix maturity date, where bill expressly stipulates presentment, bill payable
other than place of drawee (Sec. 143)
c.
when presentment is excused: drawee is dead, hides, is fictitious, incapacitated person,
after due diligence presentment cannot be made, presentment is refused on another ground
although presentment is irregular (Sec. 148)
1. General rule: Protest is required only for foreign bills

Exception:

inland bills and notes may also be protested if desired

Protest is required:
1. where the foreign bill is dishonored by non acceptance
2. where the foreign bill is dishonored by non-payment
3. where the bill has been accepted for honor, it must be protested for non-payment before it is
presented for payment to the acceptor for honor
4. where the bill contains a referee in case of need, it must be protested for non payment before
presentment for payment to the referee in case of need (Sec. 152)

Notes on Section 152

Protest formal statement in writing made by a notary under his seal of office at the
request of the holder, in which it is declare that the some was presented for payment or
acceptance (as the case may be) and such was refused.

it means all steps or acts accompanying the dishonor of a bill or note necessary to charge
an indorser

required when the instrument is a foreign bill of exchange.

it must be made on the same date of dishonor, by a notary/respectable citizen of the

place in the presence of 2 credible witnesses so recourse to secondary parties
1. Acceptance for Honor (Sec. 161 NIL) an acceptance of a bill made by a stranger to it before
maturirty, where the drawee of the bill has:
1. refused to accept it
2. and the bill has been protested for non-acceptance
3. or where the bill has been protested for better security

Requisites for acceptance for honor:

the bill must have been previously protested a) for non-acceptance b) or for better
security

the bill is not overdue at the time of the acceptance for honor

the acceptor for honor must be a stranger to the bill

the holder must give his consent

Notes on Acceptance for Honor

Purpose: to save the credit of the parties to the instrument or some party to it as the
drawer, drawee, or indorser or somebody else.

Acceptor for honor is liable to the holder and to all the parties to the bill subsequent to
the party for whose honor he has accepted (Sec. 164)
2.
1.
2.
3.

How acceptance for honor is made:

in writing and indicated that it is an acceptance for honor
signed by the person making the acceptance (Sec. 162 NIL)
Payment for Honor payment made through a notarial act of honor of a party liable/stranger to
the bill after bill has been dishonored by non-payment by the acceptor and protested for nonpayment by the holder

Requisites:
a.

protest for non-payment

b.

any person may pay supra protest

Form for payment of honor:

1. payment must be attested by notarial act appended to the protest, or form an extension to it.
2. notarial act of honor must be based on a declaration by the payer for honor

4. Bills in Set bill of exchange drawn in several parts, each part of the set being numbered and
containing a reference to the other parts, the whole of the parts just constituting one bill (Sec
178 NIL)

DISCHARGE

1.
2.

1.
2.
3.
4.
5.

1.
2.
3.

1.

1.
2.
3.
4.
5.
6.
7.

8.
9.
10.
11.

1.
2.

Of the Instrument
payment in due course by or on behalf of principal debtor
Payment in due course:
made at or after maturity
to the holder thereof
in good faith and without notice that his title is defective
payment in due course by party accommodated where party is made/ accepted for
accommodation
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.
any other act which discharges a simple contract
principal debtor becomes holder of instrument at or after maturity in his own right
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
material alteration (sec. 124: material alteration w/o assent of all parties liable avoids
instrument except as against party to alteration and subsequent indorsers)
Of secondary parties
any act which discharges the instrument
intentional cancellation of signature by holder
discharge of prior party
valid tender of payment made by prior party
release of principal debtor, unless holders right of recourse vs. 2ndary party reserved
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.
Failure to make due presentment (sec. 70, 144)
failure to give notice of dishonor
certification of check at instance of holder
reacquisition by prior party
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
the party so paying it is remitted to his former rights as regard to all prior parties
and he may strike out his own and all subsequent indorsements, and again negotiate instrument,
except

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.

LIABILITIES OF PARTIES
1. PRIMARY PARTIES
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)

1. Liability of Maker
2. Promises to pay it according to its tenor
3. admits existence of payee and his then capacity to indorse
1. 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)
1.

1.
2.
3.
4.

1.
2.

Liability of Acceptor
Promises to pay inst according to its tenor
Admits the following:
existence of drawer
genuineness of his signature
his capacity and authority to draw the instrument
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:
general
qualified
1. conditional
2. partial
3. local
4. qualified as to time
5. not all drawees

* sec. 142 (rights of parties as to qualified acceptance)

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
1.
2.
3.
4.

SECONDARY PARTIES
Liability of Drawer
Admits existence of payee and his then capacity to endorse
Engages that on due presentment instrument will be accepted, or paid, or both, according to its
tenor and that
5. If it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder or to an subsequent indorser who may be compelled to pay it

1.

1.
2.
3.
4.

1.
2.
3.
4.

drawer may insert in the instrument an express stipulation negativing / limiting his own liability
to holder
Liability of Indorsers:
Qualified Indorser and one Negotiating by Delivery
Instrument genuine, in all respects what it purports to be
good title
all prior parties had capacity to contract
he had no knowledge of any fact w/c would impair validity of instrument or render it valueless
in case of negotiation by delivery only, warranty only extends in favor of immediate transferee
Liability of a General or Unqualified Indorser
instrument genuine, good title, capacity of prior parties
instrument is at time of indorsement valid and subsisting
on due presentment, it shall be accepted or paid, or both, according to tenor
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

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
1. 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:
1. Instrument payable to order of 3rd 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 co-accommodation 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
1. 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

I. Presentment For Acceptance

When presentment for acceptance must be made
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

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 non-acceptance)

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. all subsequent holders and
2. 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

b. all parties subsequent to party to whom notice given

Waiver Sec. 109, 110
Where not necessary to charge drawer
1.
2.
3.
4.
5.

drawer/drawee same person

drawee fictitious, incapacitated
drawer is person to whom instrument is presented for payment
drawer has no right to expect/require that drawee/acceptor will honor instrument
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 paymt
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 corp/infant: passes property but corp/infant no
liability
1. ILLEGALITY: personal, even if no K because void under CC 1409
1. 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:
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. 1.
2. 2.
3. 3.
1.

1.
2.

1.
2.
3.
4.
5.

overdraft
stop payment order
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
change date
sum payable, either for principal or interest
time of payment
number/relations of parties
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.
1.
2.
3.
1.

1.

1.

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

10. 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
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.

1.

1.

1.

complete and regular upon its face

sec. 124 (effect of alteration)
sec. 125 (what constitute material alterations)
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)
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)
at time negotiated to him, he had no notice (sec. 56-def; 54-notice before full amt. paid) of
1. infirmity in instrument
2. 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. 55
when 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

1.
2.

NI incomplete and revocable until delivery for the purpose of giving effect thereto
as between
immediate parties
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

1.
2.

Indorser generally enters into two contracts:

sale or assignment of instrument
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
2. special specifies the person to whom/to whose order the instrument is to be payable;
indorsement of such indorsee is necessary to further negotiation.
3. 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

1.
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
1. non-restrictive

1. as to kind of liability assumed by indorser

2. qualified-constitutes indorser as mere assignor of title (eg. without recourse)
3. unqualified

1. as to presence/absence of express limitations put by indorser upon primary obligors privileges

of paying the holder
2. 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
1. unconditional

INDORSEMENT OF BEARER INST.

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

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. 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

1. 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
1. 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

a sum certain in money

1.
2.
3.

even if stipulated to be paid

with interest, or
by stated installments, or
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
1. 3.

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

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
1. 4.

1.
2.
3.
4.
5.

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
a payee not the maker/drawer/drawee, or
drawer or maker, or
drawee, or
two or more payees jointly, or
holder of an office for time being

or bearer,

when expressed to be so payable

when payable to person named therein or bearer
when payable to order or fictitious/non-existent 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
1. 5. 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

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.
2.
3.
4.

authorize sale of collateral security if instrument not paid at maturity

authorize confession of judgment
waives benefit of any law intended for advantage/protection of obligor
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 give the holder in due course the right to hold the same
and collect the sum due

PROMISSORY NOTE

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

BILL OF EXCHANGE

1.
2.
3.
4.

1.
2.
3.

1.
2.

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:
personal check
managers/cashiers check drawn by a bank on itself. Issuance has the effect of acceptance
memorandum check memo is written across its face, signifying that drawer will pay holder
absolutely without need of presentment
crossed check
effects:
check may not be encashed but only deposited in bank
may be negotiated only once, to one who has an acct. with a bank
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:
general (no word between lines, or co between lines)
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.
2.
3.
4.
5.
6.
7.
8.
9.
10.

issue
negotiation
presentment for acceptance in certain bills
acceptance
dishonor by on acceptance
presentment for payment
dishonor by nonpayment
notice of dishonor
protest in certain cases
discharge