I.

GENERAL CONCEPTS
NEGOTIABLE INSTRUMENT (NI)
A written contract for the payment of money which complies with the
requirements of Sec. 1 of the NIL, which by its form and on its face, is
intended as a substitute for money and passes from hand to hand as
money, so as to give the holder in due course (HDC) the right to hold the
instrument free from defenses available to prior parties. (Reviewer on
Commercial Law, Professors Sundiang and Aquino)
Functions: (Bar Review Materials in Commercial Law, Jorge Miravite,
2002 ed.)
1. To supplement the currency of the government.
2. To substitute for money and increase the purchasing medium.
Legal tender That kind of money which the law compels a
creditor to accept in payment of his debt when tendered by the debtor in the
right amount.
Note: A NI although intended to be a substitute for money, is not legal
tender. However, a check that has been cleared and credited to the account
of the creditor shall be equivalent to delivery to the creditor of cash. (Sec.
60, NCBA)
Features: (Reviewer on Commercial Law, Professors Sundiang and
Aquino)
1. Negotiability That attribute or property whereby a bill or note or
check may pass from hand to hand similar to money, so as to give
the holder in due course the right to hold the instrument and to
collect the sum payable for himself free from defenses.
The essence of negotiability which characterizes a
negotiable paper as a credit instrument lies in its freedom to
circulate freely as a substitute for money. (Firestone Tire vs.
CA, 353 SCRA 601)
2. Accumulation of Secondary Contracts Secondary contracts are
picked up and carried along with NI as they are negotiated from
one person to another; or in the course of negotiation of
negotiable instruments, a series of juridical ties between the
parties thereto arise either by law or by privity.
Applicability:
General Rule: The provisions of the NIL are not applicable if the
instrument involved is not negotiable.
Exception: In the case of Borromeo vs. Amancio Sun, 317 SCRA 176,
the SC applied Section 14 of the NIL by analogy in a case involving a Deed
of Assignment of shares which was signed in blank to facilitate future
assignment of the same shares. The SC observed that the situation is
similar to Section 14 where the blanks in an instrument may be filled up by
the holder, the signing in blank being with the assumed authority to do so.
The NIL was enacted for the purpose of facilitating, not hindering or
hampering transactions in commercial paper. Thus, the statute should not
be tampered with haphazardly or lightly. Nor should it be brushed aside in
order to meet the necessities in a single case. (Michael Osmea vs.
Citibank, G.R. No. 141278, March 23, 2004 Callejo J.)
Kinds of NI
1. PROMISSORY NOTE (PN)
An unconditional promise in writing 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. (Sec. 184)
2. BILL OF EXCHANGE (BE)
An unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed
to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer. (Sec. 126)
CHECK - A bill of exchange drawn on a bank payable on demand. (Sec.
185). It is the most common form of bill of exchange.
OTHER FORMS OF NI
1. Certificate of deposit issued by banks, payable to the depositor or his
order, or to bearer
2. Trade acceptance
3. Bonds, which are in the nature of promissory notes
4. Drafts, which are bills of exchange drawn by one bank upon another

5. Debenture
All of these must comply with Sec. 1, NIL.
Note: Letters of credit are not negotiable because they are issued to a
specified person.
Instances when a BE may be treated as a PN
a.
The drawer and the drawee are the same person; or
b.
Drawee is a fictitious person; or
c.
Drawee does not have the capacity to contract. (Sec. 130)
d.
Where the bill is drawn on a person who is legally absent;
e.
Where the bill is ambiguous (Sec. 17[e])
Parties to a NI
1. Promissory Note
a. Maker one who makes promise and signs the instrument
b. Payee party to whom the promise is made or the instrument is payable.
2. Bill of Exchange
a. Drawer one who gives the order to pay money to a third party
b. Drawee person to whom the bill is addressed and who is
ordered to pay. He becomes an acceptor when he indicates his
willingness to pay the bill
c. Payee party in whose favor the bill is drawn or is payable.
DISTINCTIONS
PROMISSORY
NOTE
Unconditional promise

BILL OF EXCHANGE
Unconditional order

Involves 2 parties

Involves 3 parties

Maker is primarily liable

Drawer is only secondarily

liable
Two presentments: for
acceptance and for payment

Only one presentment: for

payment
NEGOTIABLE INSTRUMENTS
Only NI are governed by
the NIL.
Transferable by negotiation
or by assignment.
A transferee can be a HDC
if all the requirements are
complied with
A holder in due course
takes the NI free from
personal defenses

Requires clean title,

one that is free from
any infirmities in the
instrument and defects
of
title
of
prior
transferors.
(Notes
and Cases on Banks,
Negotiable
Instruments and other
Commercial
Documents, Timoteo
B. Aquino)

NON-NEGOTIABLE
INSTRUMENTS
Application of the NIL is only by analogy.
Transferable only by
assignment
A transferee remains to be an assignee
and can never be a HDC
All defenses available to prior parties
may be raised against the last transferee

Transferee acquires a
derivative
title
only.
(Notes and Cases on
Banks,
Negotiable
Instruments and other
Commercial Documents,
Timoteo B. Aquino)

Solvency of debtor is
in
the
sense
guaranteed by the
indorsers
because
they engage that the
instrument
will
be
accepted, paid or both
and that they will pay if
the
instrument
is
dishonored.
(Notes
and Cases on Banks,
Negotiable
Instruments and other
Commercial
Documents, Timoteo
B. Aquino)

Solvency of debtor is not

guaranteed under Art.
1628 of the NCC unless
expressly
stipulated.
(Notes and Cases on
Banks,
Negotiable
Instruments and other
Commercial Documents,
Timoteo B. Aquino)

NEGOTIABLE
INSTRUMENT

NEGOTIABLE
OF TITLE

DOCUMENT

Subject is money

Subject is goods

Is itself the property

with value

The document is a mere

evidence of title the things of
value being the goods
mentioned in the document

Has all the requisites

of Sec. 1 of NIL

Does not have these requisites

A holder of NI may
run after the
secondary parties for
payment if dishonored
by the party primarily
liable.

Intermediate parties are not

secondarily liable if the
document is dishonored.

A holder, if a holder in
due course, may
acquire rights over the
instrument better than
his predecessors.

A holder can never acquire

rights to the document better
than his predecessors.

BILLOF EXCHANGE
Not necessarily
drawn
on a deposit. The drawee
need not be a bank

CHECK
It is necessary that a check be
drawn on a bank deposit.
Otherwise, there would be
fraud.

Death of a drawer of a
BOE, with the knowledge
of the bank, does not
revoke the authority of the
drawee to pay.
May be presented for
payment within reasonable
time after its last
negotiation.

Death of the drawer of a

check, with the knowledge of
the bank, revokes the
authority of the banker to pay.

May be payable on demand

or at a fixed or determinable
future time

Always payable on demand

Must be presented for

payment within a reasonable
time after its issue.

NEGOTIABLE
INSTRUMENT

NEGOTIABLE
WAREHOUSE RECEIPT

If originally payable to
bearer, it will always remain
so payable regardless of
manner of indorsement.

If payable to bearer, it will be

converted into a receipt
deliverable to order, if
indorsed specially.

A holder in due course may

obtain title better than that

The indorsee, even if holder

in due course, obtains only

of the one who negotiated

the instrument to him.

such title as the person who

caused the deposit had over
the goods.

ASSIGNMENT
Pertains to contracts in
general

NEGOTIATION
Pertains to NI

Holder takes the instrument

subject to the defenses
obtaining among the original
parties

Holder in due course takes it

free from personal defenses
available among the parties

Governed by the Civil Code

Governed by the NIL

II. NEGOTIABILITY
Form of NI: (Sec. 1) Key: WUPOA
1. Must be in Writing and signed by the maker or drawer;
2. Must contain an Unconditional promise or order to pay a sum certain in
money;
3. Must be Payable on demand, or at a fixed or determinable future time;
4. Must be payable to Order or to bearer; and
5. When the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
Determination of negotiability:
a. Whole instrument
b. What appears on the face of the instrument
c. Requisites enumerated in Sec.1 of the NIL
d. Should contain words or terms of negotiability. (Gopenco, Commercial
Law Bar Reviewer, cited in Aquino, p. 23)
In determining the negotiability of an instrument, the instrument in its
entirety and by what appears on its face must be considered. It must
comply with the requirements of Sec. 1 of the NIL. (Caltex Phils. v. CA, 212
SCRA 448)
The acceptance of a bill of exchange is not important in the determination
of its negotiability. The nature of acceptance is important only on the
determination of the kind of liabilities of the parties involved (PBCOM vs.
Aruego, 102 SCRA 530)
REQUISITES OF NEGOTIABILITY
a. It must be writing and signed by the maker or drawer
Any kind of material that substitutes paper is sufficient.
With respect to the signature, it is enough that what the maker or drawer
affixed shows his intent to authenticate the writing. (Notes and Cases on
Banks, Negotiable Instruments and other Commercial Documents, Timoteo
B. Aquino)
b. Unconditional Promise or Order to pay a sum certain in money
Unconditional promise or order
Where the promise or order is made to depend on a contingent event, it
is conditional, and the instrument involved is non-negotiable. The happening
of the event does not cure the defect.
The unconditional nature of the promise or order is not affected by:
a) An indication of a particular fund out of which reimbursement is to be
made, or a particular account to be debited with the amount; or
b) A statement of the transaction which gives rise to the instrument
Where the promise or order is subject to the terms and conditions of the
transaction stated, the instrument is rendered non-negotiable. The NI must
be burdened with the terms and conditions of that agreement to destroy its
negotiability. (Cesar Villanueva, Commercial Law Review, 2004 ed.)
But an order or promise to pay out of a particular fund is NOT
unconditional. (Sec. 3)

FUND FOR REIMBURSEMENT

PARTICULAR FUND FOR PA
Drawee pays the payee from his There is only one act- the drawee p
own funds; afterwards, the drawee the particular fund indicated. Paym
pays himself from the particular the condition that the fund is suffici
fund indicated.
Particular fund indicated is NOT the Particular fund indicated is the d
direct source of payment but only payment.
the source of reimbursement.
Postal money orders are not negotiable instruments. Some of the
restrictions imposed by postal laws and regulations are inconsistent with the

character of negotiable instruments. (Phil. Education Co. vs. Soriano, 39

SCRA 587)

payment is stated;
c. Where issued, accepted, or
indorsed after maturity (only
as
between
immediate
parties). (Sec. 7)

Treasury warrants are non-negotiable because there is an indication of

the fund as the source of payment of the disbursement. (Metrobank vs. CA,
194 SCRA 169)
Payable in sum certain in money
An instrument is still negotiable although the amount to be paid is
expressed in currency that is not legal tender so long as it is expressed in
money. (PNB vs. Zulueta, 101 Phil 1071, Sec.6 (e)).
The certainty is however not affected although to be paid:
a. With interest; or
b. By stated installments; or
c. By stated installments with an acceleration clause;
d. With exchange; or
e. With cost of collection or attorneys fees. (Sec. 2)
The dates of each installment must be fixed or at least determinable and
the amount to be paid for each installment.
A sum is certain if the amount to be unconditionally paid by the maker or
drawee can be determined on the face of the instrument and is not affected
by the fact that the exact amount is arrived at only after a mathematical
computation. (Notes and Cases on Banks, Negotiable Instruments and
other Commercial Documents, Timoteo B. Aquino)

c. On or at a fixed period aft

occurrence of a specified event, w
certain to happen, though the t
happening is uncertain. (Sec. 4)

If the day and the month, but not the year of payment is given, it is not
negotiable due to its uncertainty. (Pandect of Commercial Law and
Jurisprudence, Justice Jose Vitug, 1997 ed.)
d. Payable to Order or to Bearer
Payable to Order
The instrument is payable to order where it is drawn payable to the order
of a specified person, or to him or his order. (Sec. 8)
The payee must be named or otherwise indicated therein with
reasonable certainty.
The instrument may be made payable to the order of:
a. A payee who is not the maker, drawer or drawee
b. The drawer or maker
c. The drawee
d. 2 or more payees jointly
e. One or some of several payees
f.
The holder of an office for a time being

Payable to Bearer
The instrument is payable to bearer:
ACCELERATION
INSECURITY CLAUSE EXTENSION CLAUSE
a. When it is expressed to be so payable; or
CLAUSE
b. When it is payable to a person named therein or to bearer; or
A clause that renders
Provisions in the
Clauses in the face of c. When it is payable to the order of a fictitious or non-existing person,
whole debt due and
contract which
the instrument that
and such fact was known to the person making it so payable; or
demandable upon
allows the holder to
extend the maturity
d. When the name of the payee does not purport to be the name of any
failure of obligor to
accelerate payment
dates;
person; or
comply with certain
if he deems himself
a. At the option of the e. When the only or last indorsement is an indorsement in blank. (Sec. 9)
conditions.
insecure.
holder;
b. Extension to a
Note: An instrument originally payable to bearer can be negotiated by mere
further definite time at delivery even if it is indorsed especially. If it is originally a BEARER
the option of the
instrument, it will always be a BEARER instrument.
maker or acceptor
As opposed to an original order instrument becoming payable to bearer, if
c. Automa tically
the same is indorsed specially, it can NO LONGER be negotiated further by
upon or after a
mere delivery, it has to be indorsed.
specified act or event.
A check that is payable to the order of cash is payable to bearer. Reason:
Instrument is still
Instrument is
Instrument is still
The name of the payee does not purport to be the name of any person.
negotiable
rendered nonnegotiable (Notes
negotiable because
and Cases on Banks, (Ang Tek Lian vs. CA, 87 Phil. 383)
the holders whim
Negotiable
and caprice prevail
Instruments and other FICTITIOUS PAYEE RULE
without the fault and
Commercial
It is not necessary that the person referred to in the instrument is really
control of the maker
Documents, Timoteo non-existent or fictitious to make the instrument payable to bearer. The
B. Aquino)
person to whose order the instrument is made payable may in fact be
existing but he is till fictitious or non-existent under Sec. 9(c) of the NIL if the
person making it so payable does not intend to pay the specified persons.
(Reviewer on Commercial Law, Professors Sundiang and Aquino)
EXTENSION CLAUSE
EXTENSION UNDER SEC. 120(f)
e. Identification of Drawee
Stated on the face of the
Agreement binding the holder; Applicable only to a bill of exchange
instrument
a. To extend the time of payment
or A bill may be addressed to 2 or more drawees jointly whether they are
partners or not but not to 2 or more drawees in the alternative or in
b. Postpone the holders right to enforce
succession. (Sec. 128)
the instrument
Parties are bound because
they took the instrument
knowing that there is an
extension clause

c.

OMISSIONS & PROVISIONS

Binds the person secondarily liable
(and therefore cannot be discharged THAT DO NOT AFFECT
NEGOTIABILITY
from liabilities if:
a. He consents or
b. Right of recourse is expressly reserved.
(Notes and Cases on Banks, Negotiable
Instruments and other Commercial
Documents, Timoteo B. Aquino)

Payable on Demand or at fixed or determinable future time

PAYABLE ON DEMAND

PAYABLE AT A FIXED OR DETERMINABLE

FUTURE TIME

Where expressed to be
payable on demand, at sight
or on presentation;
Where no period of

At a fixed period after date or sight;

On
or
before
a
fixed
or
determinable future time specified
therein; or

ADDITONAL PROVISONS NOT AFFEC

NEGOTIABILITY

2. If payable to order, a NI may be negotiated by indorsement

completed by delivery
GENERAL RULE: If some other act is
required other than or in addition to Note: In both cases, delivery must be intended to give effect to the transfer
of instrument. (Development Bank vs. Sima Wei, 219 SCRA 736)
payment of money, the instrument is c.
notIncomplete negotiation of order instrument
Where the holder of an instrument payable to his order transfers it for
value has been given;
negotiable. (Sec. 5)
value without indorsing it, the transfer vests in the transferee such title as
c. It does not specify the
EXCEPTIONS:
place where it is drawn or
a. Authorizes the sale of collateral the transferor had therein and he also acquires the right to have the
indorsement of the transferor. But for the purpose of determining whether
where it is payable;
securities on default;
the on
transferee is a holder in due course, the negotiation takes effect as of
d. It bears a seal;
b. Authorizes confession of judgment
the time when the indorsement is made. (Sec. 49)
e. It designates a particular
default;
d. Indorsement
kind of current money in
c. Waives the benefit of law intended
to
Legal transaction effected by the affixing one's signature at the:
which payment is to be
protect the debtor; or
Back of the instrument or
made. (Sec. 6)
d. Allows the creditor the option toa.
require
b. Upon a paper (allonge) attached thereto with or without additional words
something in lieu of money.
specifying the person to whom or to whose order the instrument is to be
payable whereby one not only transfers legal title to
the paper
transferred but likewise enters into an implied guaranty that the instrument
will be duly paid (Sec. 31)
GENERAL RULE: Indorsement must be of the entire instrument.
EXCEPTION: Where instrument has been paid in part, it may be indorsed
as to the residue. (Sec. 32)
III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17)
a.
b.

It is not dated;
It does not specify the
value given or that any

a. Discrepancy between the amount in figures and that in words the

words prevail, but if the words are ambiguous, reference will be made to the
figures to fix the amount.
b. Payment for interest is provided for interest runs from the date of the
instrument, if undated, from issue thereof.
c. Instrument undated consider date of issue.
d. Conflict between written and printed provisions written provisions
prevail.
e. When the instrument is so ambiguous that there is doubt whether it is a bill or
note, the holder may treat it as either at his election;
f. If one signs without indicating in what capacity he has affixed his signature,
he is considered an indorser.
g. If two or more persons sign We promise to pay, their liability is joint (each
liable for his part) but if they sign I promise to pay, the liability is solidary
(each can be compelled to comply with the entire obligation). (Sec. 17)
IV. TRANSFER AND NEGOTIATION
INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.)
a. Issue
b. Negotiation
c. Presentment for acceptance, in certain kinds of Bills of Exchange
d. Acceptance
h. Dishonor by non-acceptance
i. Presentment for payment
j. Dishonor by non-payment
k. Notice of dishonor
l. Discharge
MODES OF TRANSFER
a. Negotiation the transfer of the instrument from one person to
another so as to constitute the transferee as holder thereof.
(Sec.30)
b. Assignment The transferee does not become a holder and he merely
steps into the shoes of the transferor. Any defense available against the
transferor is available against the transferee. (Notes and Cases on Banks,
Negotiable Instruments and other Commercial Documents, Timoteo B.
Aquino)
Assignment may be effected whether the instrument is negotiable or nonnegotiable. (Sesbreo vs. CA, 222 SCRA 466)
HOW NEGOTIATION TAKES PLACE
a. Issuance first delivery of the instrument complete in form to a person
who takes it as a holder. (Sec. 191)

Kinds of Indorsement:
A. SPECIAL Specifies the person to whom or to whose order, the
instrument is to be payable (Sec. 34)
B. BLANK Specifies no indorsee:
1. Instrument becomes payable to bearer and may be negotiated by
delivery (Sec. 34)
2.
May be converted to special indorsement by writing over the signature
of indorser in blank any contract consistent with character of
indorsement (Sec. 35)
C. ABSOLUTE One by which indorser binds himself to pay:
1. Upon no other condition than failure of prior parties to do so;
2. Upon due notice to him of such failure.
D. CONDITIONAL Right of the indorsee is made to depend on the
happening of a contingent event. Party required to pay may disregard the
conditions. (Sec. 39)
E. RESTRICTIVE An indorsement is restrictive, when it either:
a. Prohibits further negotiation of the instrument; or
b.

Constitutes the indorsee the agent of the indorser; or

c.

Vests the title in the indorsee in trust for or to the use of some
other persons. But mere absence of words implying power to
negotiate does not make an indorsement restrictive. (Sec. 36)

F. QUALIFIED Constitutes the indorser a mere assignor of the title to

the instrument. (Sec. 38)
It is made by adding to the indoser's signature words like "sans
recourse, without recourse", "indorser not holder", "at the indorser's own
risk", etc.
G. JOINT Indorsement payable to 2 or more persons (Sec. 41)
H. IRREGULAR A person who, not otherwise a party to an instrument,
places thereon his signature in blank before delivery (Sec. 64)
Other rules on indorsement;
1. Negotiation is deemed prima facie to have been effected before the
instrument is overdue except if the indorsement bears a date after the
maturity of the instrument. (Sec. 45)
2. Presumed to have been made at the place where the instrument is dated
except when the place is specified. (Sec. 46)
3. Where an instrument is payable to the order of 2 or more payees who are
not partners, all must indorse unless authority is given to one. (Sec. 41)
4. Where a person is under obligation to indorse in a representative
capacity, he may indorse in such terms as to negative personal liability.
(Sec. 44)

Steps:
1.
2.

Mechanical act of writing the instrument completely and in

accordance with the requirements of Section 1; and
The delivery of the complete instrument by the maker or
drawer to the payee or holder with the intention of giving
effect to it. (The Law on Negotiable Instruments with
Documents of Title, Hector de Leon, 2000 ed.)

b. Subsequent Negotiation
1. If payable to bearer, a negotiable instrument may be
negotiated by mere delivery.

RENEGOTIATION TO PRIOR PARTIES (Sec. 50)

Where an instrument is negotiated back to a prior party, such party may
reissue and further negotiate the same. But he is not entitled to enforce
payment thereof against any intervening party to whom he was personally
liable. Reason: To avoid circuitousness of suits.
STRIKING OUT INDORSEMENT
The holder may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck out, and all

indorsers subsequent to him, are thereby relieved from liability on the

instrument. (Sec. 48)

acquired the instrument in good faith does not exist. (De Ocampo vs.
Gatchalian, 3 SCRA 596)

CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT

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

2. Holder to whom cashiers check is not indorsed in due course and

negotiated for value is not a holder in due course. (Mesina v. IAC)

What constitutes value:

a. An antecedent or pre-existing debt
b. Value previously given

Rights of a holder not in due course:

1. It can enforce the instrument and sue under it in his own name.
2. Prior parties can avail against him any defense among these prior parties
and prevent the said holder from collecting in whole or in part the amount
stated in the instrument
Note: If there are no defenses, the distinction between a HDC and one who
is not a HDC is immaterial. (Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents, Timoteo B. Aquino)

c. Lien arising from contract or by operation of law. (Sec. 27)

V. HOLDERS
HOLDER
A payee or endorsee of a bill or note who is in possession of it or the
bearer thereof. (Sec. 191)
RIGHTS OF HOLDERS IN GENERAL
(Sec. 51)
a . May sue thereon in his own name
b. Payment to him in due course discharges the instrument
The only disadvantage of a holder who is not a holder in due
course is that the negotiable instrument is subject to defenses as if it were
non-negotiable. (Chan Wan vs. Tan Kim, 109 Phil. 706)

Holder In Due Course (HDC)

A holder who has taken the instrument under the following conditions:
KEY: C O V I
1.
2.
3.
4.

Instrument is complete and regular upon its face;

Became a holder before it was overdue and without notice that it had
been previously dishonored;
For value and in good faith; and
At the time he took it, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it. (Sec. 52)

Rights of a HDC:
1. May sue on the instrument in his own name;
2. May receive payment and if payment is in due course, the instrument is
discharged;
3.
4.

Holds the instrument free from any defect of title of prior parties and
free from defenses available to parties among themselves; and
May enforce payment of the instrument for the full amount thereof
against all parties liable thereon. (Secs. 51 and 57)

Every holder of a negotiable instrument is deemed prima facie a holder in

due course. However, this presumption arises only in favor of a person who
is a holder as defined in Section 191 of the NIL. The weight of authority
sustains the view that a payee may be a holder in due course. Hence, the
presumption that he is a prima facie holder in due course applies in his
favor. (Cely Yang vs. Court of Appeals, G.R. No. 138074, August 15, 2003)
Holder Not In Due Course
One who became a holder of an instrument without any, some or all of
the requisites under Sec. 52 of the NIL.
With respect to demand instruments, if it is negotiated an unreasonable
length of time after its issue, the holder is deemed not a holder in due
course. (Sec.53)
GENERAL RULE: Failure to make inquiry is not evidence of bad faith.
EXCEPTIONS:
1. Where a holders title is defective or suspicious that would compel a
reasonable man to investigate, it cannot be stated that the payee acquired
the check without the knowledge of said defect in the holders title and for
this reason the presumption that it is a holder in due course or that it

SHELTER RULE
A holder who derives his title through a holder in due course, and who is
not himself a party to any fraud or illegality affecting the instrument, has all
the rights of such former holder in respect of all prior parties to the latter.
(Sec. 58)
ACCOMMODATION
A legal arrangement under which a person called the accommodation
party, lends his name and credit to another called the accommodated
party, without any consideration.
Accommodation Party (AP)
Requisites:
1.

The accommodation party must sign as maker, drawer, acceptor, or

indorser;
He must not receive value therefor; and
The purpose is to lend his name or credit. (Sec. 29)

2.
3.
4.
Note: without receiving value therefor, means without receiving value by
virtue of the instrument. (Clark vs. Sellner, 42 Phil. 384)
Effects: The person to whom the instrument thus executed is
subsequently negotiated has a right of recourse against the accommodation
party in spite of the formers knowledge that no consideration passed
between the accommodation and accommodated parties. (Sec. 29)
Rights & Legal Position:
1. AP is generally regarded as a surety for the party accommodated;
2. When AP makes payment to holder of the note, he has the right to sue
the accommodated party for reimbursement. (Agro Conglomerates,
Inc. vs. CA, 348 SCRA 450)

Liability: Liable on the instrument to a holder for value notwithstanding

such holder at the time of the taking of the instrument knew him to be only
an accommodation party. Hence, As regards, an AP, the 4th condition, i.e.,
lack of notice of infirmity in the instrument or defect in the title of the persons
negotiating it, has no application. (Stelco Marketing Corp. vs. Court of
Appeals, 210 SCRA 51)
Rights of APs as against each other: May demand contribution from his
co-accommodation party without first directing his action against the
principal debtor provided:
a.
He made the payment by virtue of judicial demand; or
b.
The principal debtor is insolvent.
The relation between an accommodation party is, in effect, one of
principal and surety the accommodation party being the surety. It is a
settled rule that a surety is bound equally and absolutely with the principal
and is deemed an original promissory and debtor from the beginning. The
liability is immediate and direct. (Romeo Garcia vs. Dionisio Llamas, G.R.
No. 154127, December 8, 2003)
Well-entrenched is the rule that the consideration necessary to support a
surety obligation need not pass directly to the surety, a consideration need
not pass directly to the surety, a consideration moving to the principal alone
being sufficient. (Spouses Eduardo Evangelista vs. Mercator Finance Corp,
G.R. No. 148864, August 21, 2003)
VII. PARTIES WHO ARE LIABLE
PRIMARY AND
SECONDARY LIABILITY
OF PARTIES

WARRANTIES OF PARTIES

Makes the parties liable to

pay the sum certain in
money stated in the
instrument.

Conditioned on presentment
and notice of dishonor
(Campos and LopezCampos, Negotiable
Instruments Law, 1994 ed.)

the case may be,

according to its
tenor; and

Impose no direct obligation to pay

in the absence of breach thereof.
In case of breach, the person who
breached the same may either be
liable or barred from asserting a
particular defense.

C. If the
instrument is
dishonored and
necessary
proceedings on
dishonor be duly
taken, he will pay
to the party
entitled to be
paid.

Does not require presentment and

notice of dishonor. (Campos and
Lopez-Campos, Negotiable
Instruments Law, 1994 ed.)

1. Primarily Liable (Sec. 60 and 62, NIL)

MAKER
A. Engages to pay
according to the tenor of the
instrument; and
B. Admits the existence of
the payee and his capacity
to indorse.

ACCEPTOR OR DRAWEE
A. Engages to pay according to
the tenor of his acceptance;
B. Admits the existence of the
drawer, the genuineness of his
signature and his capacity and
authority to draw the instrument;
and
C. Admits the existence of the
payee and his capacity to indorse.
A bill of itself does not operate
as an assignment of funds in the
hands of the drawee available for
the payment thereof and the
drawee is not liable unless and
until he accepts the same
(Sec.127)

3.

Limited Liability (Sec. 65; Metropol

SCRA 864)

QUALIFIED INDORSER

Every person negotiating

instrument by delivery or by a
qualified endorsement warrants
that:
A. Instrument is genuine and in
all respects what it purports to
be;

Financing v. Sambok, 120

PERSON NEGOTIATING BY
DELIVERY

A. Warranties same as those

of qualified indorsers; and
B. Warranties extend to
immediate transferee only.

B. He has good title to it;

C. All prior parties had capacity
to contract;
D. He has no knowledge of any
fact which would impair the
validity of the instrument or
render it valueless.

2.

Secondarily Liable (Sec. 61, 64 and 66, NIL)

DRAWER

A. Admits the
existence of the
payee and his
capacity to
indorse;
B. Engages that
the instrument
will be accepted
or paid by the
party primarily
liable; and
C. Engages that if
the instrument is
dishonored and
proper
proceedings are
brought, he will
pay to the party
entitled to be
paid.

GENERAL
INDORSER

A. Warrants all
subsequent HDC a. That the
instrument is
genuine and in all
respect what it
purports to be
b. He has good
title to it;
c. All prior parties
had capacity to
contract
d. The instrument
is, at the time of
endorse-ment,
valid and
subsisting.
B. Engages that
the instrument will
be accepted or
paid, or both, as

IRREGULAR INDORSER

A person, not otherwise a

party to an instrument,
places his signature
thereon in blank before
delivery. (Sec. 64)
A. If instrument payable
to the order of a 3rd
person, he is liable to
the payee and
subsequent parties.

PERSON NEGOTIATING BY
MERE DELIVERY OR BY
QUALIFIED INDORSEMENT

GENERAL INDORSER

No secondary liability; but is

liable for breach of warranty

There is secondary liability,

and warranties

Warrants that he has no

knowledge of any fact which
would impair the validity of the
instrument or render it valueless

Warrants that the instrument

is, at the time of his
indorsement, valid and
subsisting

B. If instrument payable
to order of maker or
drawer or to bearer, he is
liable to all parties
subsequent to the maker ORDER OF LIABILITY
or drawer.
There is no order of liability among the indorsers as against the holder.
He is free to choose to recover from any indorser in case of dishonor of the
C. If he signs for
accommo-dation of the instrument. (Notes and Cases on Banks, Negotiable Instruments and other
payee, he is liable to all Commercial Documents, Timoteo B. Aquino)
parties subsequent to the As respect one another, indorsers are liable prima facie in the order in
which they indorse unless the contrary is proven (Sec.68)
payee.

GENERAL RULE: One whose signature does not appear on the

instrument shall not be liable thereon.
EXCEPTIONS:
1. The principal who signs through an agent is liable;
2. The forger is liable;
3. One who indorses in a separate instrument (allonge) or where an
acceptance is written on a separate paper is liable;
4. One who signs his assumed or trade name is liable; and
5. A person negotiating by delivery (as in the case of a bearer instrument)
is liable to his immediate indorsee.
VII. DEFENSES
REAL DEFENSES
Those that attach to the
instrument
itself
and
are
available against all holders,
whether in due course or not,
but only by the parties entitled
to raise them. (a.k.a absolute
defenses)
Material Alteration;
Want of delivery of
incomplete instrument;
Duress amounting to
forgery;
Fraud in factum or fraud in
esse contractus;
Minority (available to the
minor only);
Marriage in the case of a
wife;
Insanity where the insane
person has a guardian appointed
by the court;
Ultra vires acts of a
corporation
Want of authority of agent;
10.
Execution of instrument
between public enemies;
11.
Illegality if declared void
for any purpose
12.
Forgery.

PERSONAL DEFENSES

A real defense but the negotiation passes title to the instrument. (Sec.
22)
Note:
A corporation cannot act as an accommodation party. The
issuance or indorsement of negotiable instrument by a corporation without
consideration and for the accommodation of another is ultra vires.
(Crisologo-Jose v. CA, 117 SCRA 594)
C. INCOMPLETE AND UNDELIVERED NI (Sec. 15)
If completed and negotiated without authority, not a valid contract against
a person who has signed before delivery of the contract even in the hands
of HDC but subsequent indorsers are liable. This is a real defense.
D. INCOMPLETE BUT DELIVERED NI (Sec. 14)
1. Holder has prima facie authority to fill up the instrument.
2. The instrument must be filled up strictly in accordance with the authority
given and within reasonable time
3. HDC may enforce the instrument as if filled up according to no. 2.

Those which are available only

against a person not a holder in
E. COMPLETE BUT UNDELIVERED NI (Sec. 16)
due course or a subsequent
1. Between immediate parties and those who are similarly situated,
holder who stands in privity
delivery must be coupled with the intention of transferring title to the
with him. (a.k.a. equitable
instrument.
defenses)
2. As to HDC, it is conclusively presumed that there was valid delivery; and
3. As against an immediate party and remote party who is not a HDC,
presumption of a valid and intentional delivery is rebuttable.
1. Absence or failure of
consideration, partial or total; F. FRAUD

FRAUD IN FACTUM OR
FRAUD IN ESSES CONTRACTUS
2. Want of delivery of complete
FRAUD IN INDUCEMENT
OR FRAUD IN EXECUTION
instrument;
The person who signs the
The person is induced to sign an
3. Insertion of wrong date in an
instrument intends to sign
instrument not knowing its character
instrument;
the same as a NI but was
as a bill or note
4. Filling up of blank contrary
induced by fraud
to authority given or not within
reasonable time;
G. ABSENCE OR FAILURE OF CONSIDERATION (Sec. 28)
5. Fraud in inducement;
Personal defense to the prejudiced party and available against any
6. Acquisition of instrument by person not HDC.
force, duress, or fear;
7. Acquisition of the instrument H. PRESCRIPTION
by unlawful means;
Refers to extinctive prescription and may be raised even against a HDC.
8. Acquisition of the instrument Under the Civil Code, the prescriptive period of an action based on a written
for an illegal consideration;
contract is 10 years from accrual of cause of action.
9. Negotiation in breach of
faith;
I. MATERIAL ALTERATION
10. Negotiation under
Any change in the instrument which affects or changes the liability of the
circumstances that amount to parties in any way.
fraud;
Effects:
11. Mistake;
1. Alteration by a party Avoids the instrument except as against the party
12. Intoxication (according to
who made, authorized, or assented to the alteration and subsequent
better authority);
indorsers.
13. Ultra vires acts of
However, if an altered instrument is negotiated to a HDC, he may enforce
corporations where the
payment thereof according to its original tenor regardless of whether the
corporation has the power to alteration was innocent or fraudulent.
issue negotiable paper but the
issuance was not authorized for Note: Since no distinction is made, it does not matter whether it is favorable
the particular purpose for
or unfavorable to the party making the alteration. The intent of the law is to
which it was issued;
preserve the integrity of the negotiable instruments.
14. Want of authority of agent
where he has apparent
2. Alteration by a stranger (spoliation)- the effect is the same as where the
authority;
alteration is made by a party which a HDC can recover on the original
tenor of the instrument. (Sec. 124)
15. Insanity where there is no
notice of insanity on the part of
Changes in the following constitute material alterations:
the one contracting with the
a. Date;
insane person; and
b. Sum payable, either for principal or interest;
16. Illegality of contract where
c. Time or place of payment;
the form or consideration is
d. Number or relations of the parties;
illegal.
e. Medium or currency in which payment is to be made;
f.
That which adds a place of payment where no place of payment
is specified; and
EFFECTS OF CERTAIN DEFENSES
A. MINORITY
g. Any other change or addition which alters the effect of the
Negotiation by a minor passes title to the instrument. (Sec.22). But the
instrument in any respect. (Sec. 125) A serial number is an
minor is not liable and the defense is personal to him
item which is not an essential requisite for negotiability under Sec.
1, NIL, and which does not affect the rights of the parties, hence
B. ULTRA VIRES ACTS
its alteration is not material. (PNB vs. CA, 256 SCRA 491)